POSITIVE PHYSICIANS HOLDINGS,INC. (Form: S-1, Received: 01/22/2019 17:05:38)

As filed with the Securities and Exchange Commission on January 22, 2019.

Registration No. 333-______

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

POSITIVE PHYSICIANS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)



Pennsylvania	6331	83-0824448
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)

100 Berwyn Park, 850 Cassatt Road, Suite 220

Berwyn, PA 19312

(888) 335-5335

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Lewis S. Sharps, M.D.

Chief Executive Officer

Positive Physicians Holdings, Inc.

100 Berwyn Park, 850 Cassatt Road, Suite 220

Berwyn, PA 19312

(888) 335-5335

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:



Wesley R. Kelso, Esquire Stevens & Lee, P.C. 111 North 6th Street Reading, PA 19603 (610) 478-2242	James M. Connolly, Esquire Griffin Financial Group, LLC 100 Lennox Lane, Suite 200 Lawrenceville, NJ 08648 (973) 610-2010

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933, check the following box: x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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. (Check one):



Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	x
		Emerging growth company	x

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to section 7 (a) (2)(B) of the Securities Act. ¨

CALCULATION OF REGISTRATION FEE




Table of each class of securities to be registered	Amount to be registered	Proposed Maximum offering price per share	Proposed Maximum Aggregate offering price (2)	Amount of registration fee
Common Stock, no par value per share, to be offered by the issuer	4,830,000 shares	$10.00(1)	48,300,000 (2)	$5,854


(1)	Shares to be sold in the stock offering by the issuer have an offering price of $10.00.


(2)	Estimated solely for the purpose of calculating the registration fee.

This registration statement shall hereafter become effective in accordance with Section 8(a) of the Securities Act of 1933.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

PROSPECTUS

POSITIVE PHYSICIANS HOLDINGS, INC.

Up to 4,830,000 Shares of Common Stock

This is the initial public offering of Positive Physicians Holdings, Inc. (“the Company”). We are offering up to 4,830,000 shares of our common stock for sale at a price of $10.00 per share in connection with the conversion of each of Positive Physicians Insurance Exchange, or PPIX, Professional Casualty Association, or PCA, and Physicians’ Insurance Program Exchange, or PIPE, from a reciprocal insurance exchange to the stock form of organization. In connection with the conversions of PPIX, PCA and PIPE, we will acquire all of the shares of capital stock of these new insurance companies, and immediately thereafter, they will be merged together to form a single insurance company called Positive Physicians Insurance Company. PPIX, PCA, and PIPE caused the Company to be formed in order to facilitate the conversions.

We are offering shares of our common stock in two phases: a subscription offering phase and a community offering phase. The minimum number of shares that must be sold, the maximum number of shares that can be sold and the limit on the number of shares that any person may purchase apply to both phases of the offering taken together.

We are offering shares in the subscription offering phase to the policyholders of PPIX, PCA, and PIPE as of June 1, 2018. First priority to purchase shares is being granted to such policyholders of PPIX, PCA, and PIPE as required by the Pennsylvania Medical Professional Liability Reciprocal Exchange-to-Stock Conversion Act.

The subscription offering phase will end at noon, Eastern Time, on [.], 2019. Any shares of our common stock not sold in the subscription offering may be sold in the community offering phase, which will commence simultaneously with and end concurrently with the subscription offering phase unless extended by us. The community offering will end no later than [.], 2019. Certain stockholders of Diversus, Inc., or Diversus, which manages the three reciprocals through its subsidiaries, will have the right to purchase shares in the community offering. The total number of shares purchased by such Diversus stockholders (excluding Enstar Holdings (US) LLC) cannot exceed 5% of the total number of shares remaining to be sold in the community offering after satisfaction of all subscription offering orders.

Our ability to complete this offering is subject to certain conditions, including the sale of at least 3,570,000 shares of common stock in the offering, the approval of the plans of conversion by the policyholders of PPIX, PCA and PIPE, respectively, and receipt of all required approvals from the Pennsylvania Insurance Commissioner. See “The Conversions and The Offering - Conditions to Closing” herein. Until such time as these conditions are satisfied, all funds submitted to purchase shares will be held in escrow with Computershare Trust Company, N.A., as escrow agent. Purchasers of shares of common stock in this offering will not receive any interest with respect to any of the funds that are held in escrow.

We have entered into a standby stock purchase agreement with Insurance Capital Group, LLC, or ICG, whereby it has agreed to purchase such number of shares as will cause the minimum number of shares, which is 3,570,000, to be sold in the offering. We refer to Insurance Capital Group, LLC herein as the “standby purchaser.” Accordingly, the number of shares purchased by eligible subscribers of PPIX, PCA, and PIPE will not impact the condition to closing that at least 3,570,000 shares must be sold in the offering. If all of the conditions to ICG’s obligation to purchase sales in the offering are satisfied, the sale of the minimum number of shares is guaranteed. Accordingly, the sale of sufficient shares to meet the offering minimum of 3,570,000 shares does not indicate that sales have been made to investors who have no financial or other interest in the offering, and the sale of 3,570,000 shares in the offering should not be viewed as an indication of the merits of the offering.

ICG has agreed to permit Enstar Holdings (US) LLC, or “Enstar”, to purchase 30% of the shares that ICG would otherwise purchase in the offering. Because we are unable to predict with any certainty the number of shares that may be sold in the subscription offering, the percentage of shares owned by ICG and by Enstar after the offering may range from 0% to 66.5% and from 0% to 28.5%, respectively. We anticipate that ICG will own a majority of our outstanding shares of stock after completion of the conversions and the offerings and will obtain control of the Company. ICG and Enstar have entered into a governance agreement, and assuming that after the offering they collectively own a majority of our outstanding shares, they will be able to control the election of our board of directors. See “Risk Factors - The standby purchaser may obtain control over us and may not always exercise its control in a way that benefits our public shareholders.” As a result of the governance agreement between ICG and Enstar, and because it is likely that ICG and Enstar will collectively own a majority of our outstanding shares after completion of the offering, it is unlikely that we will undertake any significant corporate actions without the support of both ICG and Enstar.

The minimum number of shares that a person may subscribe to purchase is 50 shares. Except for purchases by Diversus stockholders, ICG, and Enstar, the maximum number of shares that a person may purchase in the offering is 5,000 shares.

Griffin Financial Group, LLC, which we refer to as Griffin Financial, will act as our placement agent and will use its best efforts to assist us in selling our common stock in the offering, but is not obligated to purchase any shares of stock that are being offered for sale. Any commissions paid in connection with the purchase of shares of common stock in this offering will be paid by us from the gross proceeds of the offering.

There is currently no public market for our common stock. We have applied for the quotation of our common stock on the Nasdaq Capital Market under the symbol “PPHI.” Our management and ICG are likely to seek to delist our shares from trading on the NASDAQ Stock Market in the future and end our public reporting obligations. This would greatly reduce the market for our common stock. See “Risk Factors - Our management and ICG are likely to seek to delist our shares from trading on the NASDAQ Stock Market and end our reporting obligations under the Securities Exchange Act of 1934.”

We intend to use $10,000,000 of the offering proceeds to make a payment to Diversus in exchange for Diversus agreeing to reduce the management fees paid by PPIX, PCA, and PIPE to Diversus Management, Inc. See “Description of Our Business - Management of Positive Insurance After the Conversions.” In addition, up to $6,000,000 of the offering proceeds may be used to make loans to Diversus. See “Use of Proceeds.”

We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements. This investment involves risk. For a discussion of the material risks that you should consider, see “Risk Factors” beginning on page 17 of this prospectu s.

OFFERING SUMMARY

Price: $10.00 per share



	Minimum		Midpoint		Maximum
Number of shares offered	3,570,000		4,200,000		4,830,000
Gross offering proceeds	$	35,700,000	$	42,000,000	$	48,300,000
Estimated offering expenses	$	1,000,000	$	1,000,000	$	1,000,000
Estimated selling agent fees and expenses (1)(2)	$	1,995,250	$	2,357,500	$	2,719,750
Estimated net proceeds	$	32,704,750	$	38,642,500	$	44,580,250
Estimated net proceeds per share	$	9.16	$	9.20	$	9.23

__________________

(1)

Represents the total of (i) the fees to be paid to Griffin Financial, which is equal to 3.5% of the gross proceeds from shares sold in the subscription offering and the community offering, and 5.75% of the gross proceeds from shares purchased by ICG and Enstar, and (ii) an estimate of the reimbursable expenses expected to be incurred by Griffin Financial in connection with the offering. See “The Conversions and The Offering - Marketing and Underwriting Arrangements.”


(2)	Assumes that 300,000 shares are sold to purchasers other than ICG and Enstar and that 3,270,000, 3,900,000 and 4,530,000 shares are sold to ICG and Enstar at the minimum, midpoint, and maximum of the offering range, respectively. See “The Conversions and The Offering - Marketing and Underwriting Arrangements.”

Neither the Securities and Exchange Commission, the Pennsylvania Insurance Department nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

For assistance, please call the Stock Information Center at (610) 205-6003.

Griffin Financial Group, LLC

The date of this prospectus is [.], 2019

TABLE OF CONTENTS



	Page
CERTAIN IMPORTANT INFORMATION	1
PROSPECTUS SUMMARY	2
RISK FACTORS	17
FORWARD-LOOKING INFORMATION	30
SELECTED FINANCIAL AND OTHER DATA OF PPIX	32
SELECTED FINANCIAL AND OTHER DATA OF PCA	35
SELECTED FINANCIAL AND OTHER DATA OF PIPE	38
USE OF PROCEEDS	41
MARKET FOR OUR COMMON STOCK	42
DIVIDEND POLICY	43
CAPITALIZATION	44
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION	45
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PPIX, PCA, AND PIPE	52
DESCRIPTION OF OUR BUSINESS	93
ACCOUNTING TREATMENT	124
THE CONVERSIONS AND THE OFFERING	125
FEDERAL INCOME TAX CONSIDERATIONS	144
MANAGEMENT	149
RESTRICTIONS ON ACQUISITION OF THE COMPANY	158
DESCRIPTION OF OUR CAPITAL STOCK	160
TRANSFER AGENT AND REGISTRAR	161
LEGAL MATTERS	161
EXPERTS	161
ADDITIONAL INFORMATION	161
INDEX TO FINANCIAL STATEMENTS OF POSITIVE PHYSICIANS INSURANCE EXCHANGE	F-1
INDEX TO FINANCIAL STATEMENTS OF PROFESSIONAL CASUALTY ASSOCIATION	G-1
INDEX TO FINANCIAL STATEMENTS OF PHYSICIANS’ INSURANCE PROGRAM EXCHANGE	H-1

CERTAIN IMPORTANT INFORMATION

You should rely only on the information contained in this prospectus. We have not, and Griffin Financial has not, authorized any other person to provide information that is different from that contained in this prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We and Griffin Financial are offering to sell and seeking offers to buy our common stock only in jurisdictions where such offers and sales are permitted. You should assume that the information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date. Information contained on our web site is not part of this prospectus.

Unless the context otherwise requires, as used in this prospectus:


•	“the Company,” “we,” “us” and “our” refer to the registrant, Positive Physicians Holdings, Inc. prior to completion of the conversions, and after completion of the conversions refer to Positive Physicians Holdings, Inc. and all of its subsidiaries;


•	the “conversions” refers to the transactions by which PPIX, PCA and PIPE will each convert from a reciprocal insurance exchange to a stock insurance company by merging with and into PPIX Conversion Corp., PCA Conversion Corp., and PIPE Conversion Corp., respectively, which will become wholly owned subsidiaries of the Company;


•	“eligible policyholder” or “eligible subscriber” refers to a policyholder of PPIX, PCA, or PIPE as of June 1, 2018;


•	“Enstar” means Enstar Holdings (US) LLC;


•	“exchange” means PPIX, PCA, or PIPE, and “exchanges” means PPIX, PCA, and PIPE collectively;


•	“Diversus Management” refers to Diversus Management, Inc., a wholly owned subsidiary of Diversus, Inc. which will be the surviving entity upon the merger of the attorneys-in-fact of PPIX, PIPE, and PCA with and into Diversus Management;

•

the “offering” and the “conversion offering” refer to the offering of up to 4,830,000 shares of our common stock to eligible policyholders of PPIX, PCA and PIPE in a subscription offering under their respective plans of conversion and to certain stockholders of Diversus and to ICG and Enstar in a community offering. We expect to conduct the subscription offering and the community offering simultaneously;


•	“PCA” refers to Professional Casualty Association, which as part of the conversions will merge with and into PCA Conversion Corp.;


•	“PIPE” refers to Physicians’ Insurance Program Exchange, which as part of the conversions will merge with and into PIPE Conversion Corp.;


•	“PPIX” refers to Positive Physicians Insurance Exchange, which as part of the conversions will merge with and into PPIX Conversion Corp.;


•	“Positive Insurance” refers to Positive Physicians Insurance Company, the stock insurance company that will be the surviving entity after the merger of PCA Conversion Corp. and PIPE Conversion Corp. with and into PPIX Conversion Corp., which will then change its name to Positive Physicians Insurance Company;


•	“standby purchaser” or “ICG” refers to Insurance Capital Group, LLC; and


•	“subscribers” refers to the policyholders of PPIX, PCA or PIPE, who are the named insureds under insurance policies issued by PPIX, PCA or PIPE, respectively.

PROSPECTUS SUMMARY

This summary highlights selected information from this prospectus and may not contain all of the information that is important to you. To understand the offering fully, you should read this entire prospectus carefully, including the financial statements and the notes to the financial statements included in this prospectus.

Overview of PPIX

PPIX is a reciprocal insurance exchange domiciled in Pennsylvania. PPIX writes medical professional liability insurance primarily for physicians, physician groups and allied healthcare providers such as physician assistants and certified registered nurse practitioners who are licensed to practice in Pennsylvania, Delaware, Maryland, New Jersey, and Ohio. At December 31, 2017, PPIX had a surplus of $17.5 million, and for the year ended December 31, 2017, PPIX had $15.3 million in direct written premiums and a net loss of $22,000. At September 30, 2018, PPIX had a surplus of $17.1 million, and for the nine months ended September 30, 2018, PPIX had $10.3 million in direct written premiums and net income of $194,000.

PPIX primarily markets its products through a network of over 45 independent producers in Pennsylvania, Delaware, Maryland, New Jersey, and Ohio. PPIX has not been assigned a rating by A.M. Best Company, Inc. (“A. M. Best”), but has been assigned an “A” rating by Demotech, Inc. (“Demotech”), a provider of financial stability ratings of insurance companies.

PPIX is managed by Specialty Insurance Services, LLC (“SIS”), the attorney-in-fact for PPIX. SIS, as the attorney-in-fact, has the power to direct the activities of PPIX that most significantly impact PPIX’s economic performance. SIS is owned by Diversus.

Overview of PCA

PCA is a reciprocal insurance exchange domiciled in Pennsylvania. PCA writes medical professional liability insurance primarily for physicians, physician groups and allied healthcare providers such as physician assistants and certified registered nurse practitioners who are licensed to practice in Pennsylvania and Michigan. At December 31, 2017, PCA had a surplus of $13.9 million, and for the year ended December 31, 2017, PCA had $7.7 million in direct written premiums and net income of $311,000. At September 30, 2018, PCA had a surplus of $11.4 million, and for the nine months ended September 30, 2018, PCA had direct written premiums of $4.2 million and a net loss of $2.1 million.

PCA primarily markets its products through a network of over 40 independent producers in Pennsylvania and Michigan. PCA has not been assigned a rating by A.M. Best, but has been assigned an “A” rating by Demotech.

PCA is managed by Professional Third Party, L.P. (“PTP”), the attorney-in-fact for PCA. PTP, as the attorney-in-fact, has the power to direct the activities of PCA that most significantly impact PCA’s economic performance. PTP, is owned by Diversus.

Overview of PIPE

PIPE is a reciprocal insurance exchange domiciled in Pennsylvania. PIPE writes medical professional liability insurance primarily for physicians, physician groups and allied healthcare providers such as physician assistants and certified registered nurse practitioners who are licensed to practice in Pennsylvania and South Carolina. At December 31, 2017, PIPE had a surplus of $12.3 million, and for the year ended December 31, 2017, PIPE had $3.6 million in direct written premiums and a net loss of $60,000. At September 30, 2018, PIPE had a surplus of $11.9 million, and for the nine months ended September 30, 2018, PIPE had direct written premiums of $3.0 million and net income of $85,000.

PIPE primarily markets its products through a network of over 20 independent producers in Pennsylvania and South Carolina. PIPE has not been assigned a rating by A.M. Best, but has been assigned an “A” rating by Demotech.

PIPE is managed by Physicians’ Insurance Program Management Company (“PIPE Management”), the attorney-in-fact for PIPE. PIPE Management, as the attorney-in-fact, has the power to direct the activities of PIPE that most significantly impact PIPE’s economic performance. PIPE Management is owned by Diversus.

Overview of Positive Physicians Holdings, Inc.

Positive Physician Holdings, Inc. is a newly created Pennsylvania corporation organized to be the stock holding company for Positive Insurance following the conversions of PPIX, PCA, and PIPE from reciprocal insurance exchanges to stock insurance companies. Positive Physician Holdings, Inc., which was incorporated on May 1, 2018, is not an operating company and has not engaged in any business to date. Our executive offices are located at 100 Berwyn Park, 850 Cassatt Road, Suite 220, Berwyn, PA 19312, and our phone number is 888-335-5335. Our web site address is www.positivephysicians.com. Information contained on our website is not incorporated by reference into this prospectus, and such information should not be considered to be part of this prospectus.

Positive Physicians Holdings, Inc. has no full time employees, and upon completion of the conversions and the offerings the day-to-day operations of the Company will be managed by Diversus Management pursuant to a management services agreement. See “Management - Executive Management.”

PPIX, PCA, and PIPE are subject to examination and comprehensive regulation by the Pennsylvania Insurance Department (the “Department”). As an insurance holding company, Positive Physician Holdings, Inc. will also be subject to examination and comprehensive regulation by the Department. See “Description of Our Business - Regulation.”

The Standby Stock Purchase Agreement

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 $10.00 per share such number of shares as is necessary 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. Accordingly, if all of the conditions to ICG’s obligation to purchase shares in the offering are satisfied, the sale of the minimum number of shares is guaranteed. ICG, as the standby purchaser, has agreed to permit Enstar Holdings (US) LLC to purchase 30% of the shares that ICG would otherwise purchase in the offering pursuant to a governance agreement entered into between ICG and Enstar. In connection with that governance agreement, Enstar agreed to dismiss litigation brought by Enstar against Diversus and its directors which sought to enjoin Diversus from entering into the transaction contemplated by the standby stock purchase agreement. We anticipate that ICG will own approximately 66% and Enstar will own approximately 28% of our outstanding shares after completion of the offering.

ICG has agreed to loan up to $750,000 to us to fund expenses we incur in connection with the conversion and the offerings. We have 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 our common stock at a price of $10.00 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. See “The Conversion and Offering ‑ Description of Standby Stock Purchase Agreement.” Enstar has agreed with ICG that Enstar will fund 30% of the advances made under the exchangeable note. On December 15, 2018, there was no outstanding principal balance under the exchangeable note. Accordingly, currently we do not anticipate issuing any shares upon the conversion of the exchangeable note upon completion of the offerings. See “The Conversions and the Offering - Standby Stock Purchase Agreement.”

In connection with closing under the standby stock purchase agreement, we will appoint Matthew T. Popoli and Craig A. Huff, the Managing Partners of ICG, to the Company’s board of directors. So long as ICG beneficially owns more than 50% of the outstanding shares of our common stock, ICG has the right to nominate and appoint a majority of the members of the board of directors of the Company and Positive Insurance.

ICG will be entitled to preemptive rights that would allow it to maintain its percentage ownership in certain subsequent offerings of our common stock or securities convertible into our common stock. This right will not apply to, and will terminate upon the earlier of (a) the first date upon which ICG no longer beneficially owns more than twenty percent (20%) of the outstanding shares of our common stock or (b) the date of any breach by ICG of any obligation under the standby stock purchase agreement that remains uncured after 30 days’ notice thereof.

For more information regarding the provisions of the standby stock purchase agreement, see “The Conversions and the Offering - Description of Standby Stock Purchase Agreement” and “Risk Factors - Risks Relating to Ownership of Our Common Stock - There will not be an active, liquid trading market for our common stock.”

Conflicts of interest may arise between ICG and the Company, and ICG and its representatives on our board of directors may at times take actions that are not in the best interests of our other shareholders. See “Risk Factors - Risks Relating to Ownership of Our Common Stock - The standby purchaser may obtain control over us and may not always exercise its control in a way that benefits our public shareholders.”

Insurance Capital Group LLC

ICG is a holding company that was organized on January 8, 2018, for the purpose of acquiring and making investments in insurance businesses across targeted sectors, with a focus on sponsored insurance company demutualizations and other complex conversion transactions. ICG currently owns interests in Capitol Insurance Company, a Pennsylvania non-standard auto insurance company that ICG acquired in the second quarter of 2018, and Federal Life Insurance Company, an Illinois life insurance company that ICG acquired in the fourth quarter of 2018.

ICG is controlled by its Chief Executive Officer, Matthew Popoli, and Managing Partner, Craig Huff. ICG’s board of directors has extensive experience investing in and operating insurance businesses, including two directors who were formerly Commissioners of Insurance in Illinois, Connecticut and Texas.

During the fourth quarter of 2018, ICG entered into certain financing transactions with affiliates of Bain Capital, LP providing financing to ICG as it completed previously announced transactions as well as the transactions contemplated by the standby purchase agreement described in the Positive Physicians Holdings, Inc. Registration Statement on Form S-1, filed as of January 22, 2019. As a result, of these financing transactions, Bain Capital or one of its affiliates may ultimately acquire, with any such acquisition(s) being subject to prior regulatory approval, common equity interests in ICG. Following the consummation of the Conversion and Offering, the board of directors of Positive Physicians Holdings, Inc. may elect to consider having the company enter into an investment advisory agreement with an affiliate or affiliates of Bain Capital.

ICG has advised us that it has sufficient funds to complete the offering.

Diversus, Inc.

Diversus, Inc. (“Diversus”) is the owner of the attorneys-in-fact of PPIX, PCA, and PIPE. Such attorneys-in-fact have the power to direct the activities that most significantly impact the economic performance of PPIX, PCA, and PIPE, respectively. Diversus is also the owner of Diversus Management, Inc., Gateway Risk Services, Inc. and Andrews Outsource Solutions, each of which provides services to PPIX, PCA, and PIPE. After completion of the conversions and the offerings, Diversus Management, Inc., a wholly-owned subsidiary of Diversus, will manage the day-to-day operations of Positive Insurance, which will be the successor to PPIX, PCA, and PIPE. Enstar is the largest stockholder of Diversus. Dr. Lewis Sharps is a director and the Chief Executive Officer of both Diversus and the Company. In addition, James Zech and Scott Penwell are currently directors of both Diversus and the Company, and after completion of the conversions and the offerings, Matthew Popoli, Paul Brockman, and Duncan McLaughlin will also be directors of both Diversus and the Company. Except for the agreements described in “The Conversions and the Offering - Transactions Related to the Conversions”, Diversus has no relationship to ICG.

Our Business Strategies and Offering Rationale

Market Overview and Strategy

Many medical professional liability insurance (“MPLI”) focused risk retention groups (“RRGs”) and reciprocal insurance exchanges were formed in the late 1990s and early 2000s primarily because of capacity constraints in the MPLI market that were then prevalent. The MPLI market is currently experiencing over-capacity due to the excess capital held by MPLI insurers. As a result, competition for business among MPLI carriers has led to a significant decrease in the rates charged for MPLI coverage over the last 10 years. In addition, the creation of very large physician practice groups and the acquisition of physician practices by hospitals, which are often self-insured, have reduced the number of available independent healthcare professionals requiring insurance. In addition, physician groups and

hospitals are increasingly utilizing physician assistants and other allied healthcare providers to reduce costs in response to changes in payments from health insurers designed to reduce the insurers’ costs. These factors have led to MPLI premium volume shrinking on a national basis and consolidation of medical professional liability (“MPL”) insurers. This declining premium volume, however, has been accompanied by reduced claim frequency, which has permitted MPLI carriers to generally remain quite profitable. The challenge for larger MPLI carriers is to seek new sources of premium growth, and increasingly they seek this growth through acquisition.

The Company believes these changes in the healthcare industry and the MPLI market will create consolidation opportunities for the Company, which, in turn, may become a target for larger MPLI insurers seeking premium growth. See “Description of Our Business - Operating Strategy.”

The conversion offering and the merger of PPIX, PCA, and PIPE and the consolidation of the three exchanges to form Positive Insurance will create a company with sufficient statutory surplus to enable growth and will create a stable insurance platform that will permit the Company to execute its business plan.

Based on current over-capacity and the soft market conditions in the MPLI market, the Company believes there is a significant opportunity to acquire risk-bearing entities focused on the MPLI market, including small RRGs, stock and mutual insurance companies, and reciprocal insurance exchanges and to enter into reinsurance transactions and loss portfolio transfers with such entities. Many of these entities are experiencing shrinking premium volume and declining profitability. The Company believes it can act as a consolidator of these smaller entities. RRGs are alternative market vehicles organized under the Federal Liability Risk Retention Act of 1986 (the “Federal Risk Retention Act”), which allows physicians to form insurance companies to insure their own medical malpractice risk. Over 250 RRGs have been formed since the introduction of the Federal Risk Retention Act, many of which are focused on the MPLI market. Reciprocal insurance exchanges are created under state law and are essentially contractual inter-indemnity agreements among policyholders, which are sometimes called subscribers. Another feature of a reciprocal insurance exchange is that it is managed by a separate company called an attorney-in-fact. SIS, PTP and PIPE Management are the attorneys-in-fact with respect to PPIX, PCA, and PIPE, respectively.

The completion of this offering will supply additional capital needed to support substantially increased premium volume that we expect to result from the implementation of our growth strategy.

Exit Strategy

Although we expect that our shares will initially be listed for trading on the Nasdaq Stock Market, we are aware that there will be limited liquidity for our stock. This is because the majority of our common stock will most likely be held by the standby purchaser. The Company is focused on creating shareholder value for our shareholders through a future liquidity event. The three principal methods we expect to consider to create future liquidity are:


•	Share repurchases;


•	A follow on offering of our common stock or the issuance of our stock in connection with acquisitions; or


•	A sale of the Company to a larger participant in the MPLI market or the insurance industry generally.

The Conversion Act provides that we cannot repurchase any shares for three years after the completion of the conversions and the offerings without the prior approval of the Pennsylvania Insurance Commissioner. Accordingly, no assurance can be given that we will engage in any share repurchases or that we will repurchase a significant number of shares. There is no limitation under the Conversion Act on ICG purchasing shares of our stock on the NASDAQ Stock Market or in privately negotiated transactions. Existing SEC regulations impose disclosure requirements with respect to actions that our management and ICG can take that would result in the Company going private and our common stock being delisted from trading on the NASDAQ Stock Market.

We will consider a follow on offering of our common stock to fund organic growth or acquisitions in furtherance of our growth strategy. We may also issue stock to shareholders of a company in connection with our acquisition of that company. A follow on offering or the issuance of stock in an acquisition would increase the number of outstanding shares not held by the standby purchaser. This could result in a broader market for our common stock that has more depth and liquidity, which would afford existing shareholders an opportunity to sell their shares in the market if they so choose.

We are also aware that there is excess capacity in the MPLI market, and, as a result, larger participants in the market are seeking premium growth through acquisitions. If we are successful in aggregating premium through the acquisition of small RRGs, stock and mutual insurance companies, and reciprocal insurance exchanges, we may become an attractive acquisition candidate for larger MPLI carriers. Moreover, larger companies typically trade at higher multiples in the market or upon sale than do smaller companies. A key element of our strategy is to buy small companies at a reasonable price, thereby aggregating premium, and achieve a higher multiple in the market or upon a sale of the Company. Although the Company is not actively seeking a buyer at this time and it does not expect to do so in the near term, our board of directors will continually evaluate its strategic options, including sale, with a view to maximizing shareholder value.

The Company’s ability to create a liquidity event will be based, in part, on the Company’s performance and economic and market conditions at that time. No assurance can be given that the Company will be able to achieve a liquidity event at a price or time that investors will view favorably.

The Conversion of PPIX, PCA, and PIPE from Reciprocal Insurance Exchanges to Stock Form

PPIX, PCA, and PIPE are reciprocal insurance exchanges. As such, they have no shareholders, but do have subscribers or members. The subscribers of PPIX, PCA, and PIPE are their policyholders. Unlike shareholders, the subscribers have 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 resides in the attorney-in-fact, which under the organizational documents of PPIX, PCA, and PIPE, can only be terminated with the mutual agreement of the attorney-in-fact and the exchange. The subscribers only have such voting rights as are 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 are not transferable and do not exist separate from the related insurance policy issued by the exchange. Therefore, these membership rights are extinguished when a policyholder cancels or does not renew its policy or the policy is otherwise terminated.

On June 1, 2018, PPIX’s attorney-in-fact adopted a plan of conversion by which PPIX will 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. will become 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 to be held on [.], 2019.

On June 1, 2018, PCA’s attorney-in-fact adopted a plan of conversion by which PCA will 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. will become 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 to be held on [.], 2019.

On June 1, 2018, PIPE’s attorney-in-fact adopted a plan of conversion by which PIPE will 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. will become 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 to be held on [.], 2019.

Immediately after the conversions, PIPE Conversion Corp. and PCA Conversion Corp. will merge into PPIX Conversion Corp. to form Positive Insurance, a single stock insurance subsidiary of the Company.

Pennsylvania Conversion Statute

PPIX, PCA, and PIPE are converting from reciprocal insurance exchanges to stock insurance companies under the Pennsylvania Medical Professional Liability Reciprocal Exchange‑to‑Stock Conversion Act (the “Conversion Act”). 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 Act defines “eligible subscriber” as a subscriber whose policy is in force on the date the plan of conversion is adopted (or the record date for voting on the plan of conversion if different than the adoption date). Therefore, policyholders of the converting company on the date the plan is adopted must have the first right to purchase shares in the offering, and collectively they must have the right to purchase all of the shares being offered.

The Conversion Act also requires that the plan of conversion provide that if the eligible subscribers do not purchase all of the shares being offered, the remaining shares must be sold in a public offering or a private placement with the approval of the Department. The Act states that the aggregate dollar value of the stock offered for sale in the offering must be equal to the estimated pro forma market value of the converted stock company, as successor to the reciprocal insurance exchange, based upon an independent valuation by a qualified expert. The pro forma market value may be the value that is estimated to be necessary to attract full subscription for the shares, as indicated by the independent valuations and may be stated as a range. Traditionally, as in mutual to stock conversions for both mutual insurance companies and mutual savings banks, the independent valuation expert selects a midpoint valuation and then sets the offering range, with the minimum being 15% below the midpoint valuation and the maximum being 15% above the midpoint. This results in a minimum dollar amount and a maximum dollar amount for the offering.

The Subscription and Community Offerings

As part of the conversions of PPIX, PCA, and PIPE, we are offering between 3,570,000 shares and 4,830,000 shares of our common stock for sale to the policyholders of PPIX, PCA, and PIPE as of June 1, 2018, which we refer to as the “eligible policyholders” or the “eligible subscribers”.

The eligible policyholders of PPIX, PCA, and PIPE have the right to purchase shares of common stock in the offering subject to the limitation that no eligible policyholder 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 described herein. We call the offering of the common stock to these constituents the “subscription offering.”

In the community offering phase, shares of common stock are being offered primarily to certain stockholders of Diversus and to ICG and Enstar. Unlike the subscription offering, except for ICG, Enstar, and certain stockholders of Diversus, 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. The stockholders of Diversus (excluding Enstar) collectively cannot purchase more than five percent of the total number of shares available after giving effect to the shares sold in the subscription offering.

ICG has agreed to purchase in the community offering such number of shares as will cause at least 3,570,000 shares to be sold in the offering. The standby purchaser’s right to purchase shares in the offering is subject to the rights of eligible policyholders to purchase in the subscription offering. Accordingly, 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. Moreover, 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 sold in the offering. Accordingly, ICG’s percentage ownership of the Company’s outstanding common stock after the offering could range from 0% to 66.5%.

Any of the 4,830,000 offered shares of common stock not subscribed for in the subscription offering may be sold in the community offering. However, except for any order submitted by stockholders of Diversus, or ICG and Enstar, to whom we are contractually committed to sell shares, we reserve the absolute right to accept or reject any orders in the community offering, in whole or in part. None of ICG, Enstar, or stockholders of Diversus has priority over the others with respect to its right to purchase shares in the community offering.

ICG and Enstar have each agreed not to transfer any shares that it purchases in the offering for at least six months after completion of the offering. ICG and Enstar are purchasing such shares for investment rather than resale.

The following table shows those persons that are eligible to purchase shares in the various phases of the offering and the shares available for purchase in each phase of the offering. We expect to conduct the subscription offering and the community offering simultaneously.



Offering	Eligible Purchasers	Shares Available for Purchase
Subscription Offering	Eligible policyholders of PPIX, PCA, and PIPE;	4,830,000 shares

Community Offering	Eligible stockholders of Diversus	4,830,000 shares, less shares subscribed for in the Subscription Offering. These persons and their affiliates may not purchase more than 5% of shares available after the Subscription Offering

	ICG and Enstar	4,830,000 shares, less shares subscribed for in the Subscription Offering (subject to the right of Diversus eligible stockholders to purchase up to 5% of any shares available after the Subscription Offering)

If the gross proceeds from the orders for shares in the offering do not fall within the valuation range determined from the combined valuations of PPIX, PCA, and PIPE performed by Feldman Financial, a firm engaged by us to provide valuation services, we may cancel the offering, or establish a new valuation range and hold a new offering. In either event, the funds of any person who submitted a subscription or order will be returned to such person promptly, without interest. If we proceed with a new offering using updated valuations, people who submitted subscriptions or orders will be promptly notified by mail of the updated valuations and revised offering range. In that case, people will be given an opportunity to place new subscriptions and orders. See “The Conversions and the Offering - Resolicitation.” Subscriptions and orders may not be withdrawn for any reason if the gross proceeds from orders for shares in the offering fall within the estimated valuation range. Feldman Financial will not update its valuations of PPIX, PCA, and PIPE prior to the completion of the offering.

Our Structure Prior to the Conversions

The current corporate structures of PPIX, PCA, and PIPE and the Company are shown in the following chart.

__________________


(1)	Manages the reciprocal insurance exchange pursuant to an attorney-in-fact agreement.

Our Structure Following the Conversions

The following chart shows our corporate structure following completion of the conversions.

__________________


(1)	ICG has agreed to purchase in the community offering such number of shares as will cause at least 3,570,000 shares to be sold in the offering. ICG has agreed to permit Enstar to purchase 30% of the shares that ICG would otherwise purchase in the offering. However, if the eligible

policyholders of PPIX, PCA and PIPE subscribe to purchase all of the shares being offered by the Company, ICG and Enstar may be unable to purchase any shares in the offering. Accordingly, the percentage ownership of the Company’s outstanding common stock after the offering by ICG and Enstar could range from 0% to 95%. We anticipate that ICG will own a majority of our outstanding shares after completion of the conversions and the offering and will have the right to appoint at least a majority of our directors.

Use of Proceeds

We expect the net proceeds of the offering to between $32.7 million and $44.6 million, after the payment of conversion and offering expenses. We intend to use the net proceeds from the offering as follows:



Net Proceeds
Gross proceeds	$	35,700,000	$	48,300,000
Conversion and offering expenses	1,000,000		1,000,000
Estimated selling agent fees and expenses	1,995,250		2,719,750
Net proceeds	$	32,704,750	$	44,580,250

Use of Net Proceeds
Payment to Diversus	$	10,000,000	$	10,000,000
General corporate purposes	15,504,750		27,380,250
Capital contribution to Positive Insurance	1,200,000		1,200,000
Line of credit to Diversus	6,000,000		6,000,000
Total	$	32,704,750	$	44,580,250

Upon completion of the offering, we will make a payment of $10,000,000 to Diversus in consideration for Diversus Management agreeing to enter into a new management agreement with Positive Insurance that provides for lower management fees. In addition, we will provide a credit facility of up to $6,000,000 to Diversus to provide Diversus with working capital in the event that Diversus experiences working capital shortfalls as a result of such reduction in the management fees. See “Description of Our Business - Transactions Related to the Conversions.” We have no other current specific plans for the use of a significant portion of the proceeds. Any remaining net proceeds retained by us will be used for general corporate purposes, including to fund possible future acquisitions of risk-based businesses in the MPLI industry and possibly to make stock repurchases and to pay cash dividends. Any proceeds retained at the holding company will be invested primarily in U.S. government securities, other federal agency securities, and other securities consistent with our investment policy until utilized. See “Use of Proceeds.”

How Do I Buy Stock in the Offering?

To buy common stock in the offering, sign and complete the stock order form that accompanies this prospectus and send it to us with your payment in the envelope provided so that it is received no later than noon, Eastern Time on [.], 2019. Payment may be made by personal check, cashier’s check or money order payable to “Computershare Trust Company, N.A. on behalf of Positive Physicians Holdings, Inc.” After you send in your payment, you have no right to modify your investment or withdraw your funds without our consent, unless we extend the offering to a date later than [.], 2019. See “The Conversions and The Offering - If Subscriptions Received in all of the Offerings Combined Do Not Meet the Required Minimum” and “The Conversions and The Offering - Resolicitation.” We may or may not consent to any modification or withdrawal request in our sole discretion. We may reject a stock order form if it is incomplete or not timely received. Except for any order received from ICG and Enstar, we may also reject any order received in the community offering, in whole or in part, for any or no reason.

Limits on Your Purchase of Common Stock

The minimum number of shares a person or entity may subscribe for in the offering is 50 shares ($500). The maximum number of shares that an eligible policyholder, together with his or her affiliates and associates as a group, may purchase in the subscription offering is 5,000 shares. Except for ICG and Enstar, which have received approval from the Department to acquire more than 5% of the total shares sold in the offering, the maximum number of shares

that a person or entity, together with any affiliate, associate or any person or entity with whom he or she is acting in concert, may purchase in the offering without the prior approval of the Department is 5% of the number of shares sold in the offering. For this purpose, an associate of a person or entity includes:


•	such person’s spouse;


•	relatives of such person or such person’s spouse living in the same house;


•	companies, trusts or other entities in which such person or entity holds 10% or more of the equity securities (excluding the Company);


•	a trust or estate in which such person or entity holds a substantial beneficial interest or serves in a fiduciary capacity; or


•	any person acting in concert with any of the persons or entities listed above.

Only those Diversus stockholders who had paid or provided other consideration for their shares of Diversus stock are eligible to purchase shares in the offering. Each holder of Diversus common stock will be permitted to purchase shares with an aggregate purchase price up to 33% of the purchase price such stockholder paid for such stockholder’s shares of Diversus common stock. Holders of Diversus preferred stock will be permitted to purchase shares with an aggregate purchase price up to 10% of the purchase price such stockholder paid for such stockholder’s shares of Diversus preferred stock, provided that if such stockholder voluntarily converts all of such stockholder’s shares of preferred stock to Diversus common stock prior to closing of the offerings, such stockholder will be permitted to purchase shares with an aggregate purchase price up to 33% of the purchase price such stockholder paid for such stockholder’s shares of Diversus preferred stock. Enstar and its affiliates will not be permitted to purchase shares in the offerings in its capacity as a stockholder of Diversus because it will purchase shares as a result ICG’s agreement with Enstar to permit Enstar to purchase 30% of the shares that ICG would otherwise purchase in the community offering. An eligible stockholder of Diversus, together with any associate of such stockholder, cannot purchase in excess of 25,000 shares in the offerings.

Oversubscription

If you are an eligible policyholder of PPIX, PCA or PIPE, and we receive subscriptions in the subscription offering for more than 4,830,000 shares, which is the maximum number of shares being offered, your subscription may be reduced. In that event, no shares will be sold in the community offering, and the shares of common stock will be allocated among the eligible policyholders of PPIX, PCA and PIPE.

The shares of common stock will be allocated so as to permit each eligible policyholder to purchase up to the lesser of their subscription or 1,000 shares (unless the magnitude of subscriptions does not permit such an allocation). Any remaining shares will be allocated among eligible policyholders with unfulfilled subscriptions in proportion to the respective amounts of unfilled subscriptions. For a more complete description of the allocation procedures in the event of an oversubscription, see “The Conversions and The Offering - Subscription Offering and Subscription Rights.”

If eligible policyholders of PPIX, PCA and PIPE subscribe for less than 4,830,000 shares, each eligible policyholder will be allowed to purchase the full amount of shares for which he or she subscribed; provided that no eligible policyholder, together with his or her associates and affiliates, may purchase more than 5,000 shares.

If we receive in the subscription offering subscriptions for less than 4,830,000 shares of common stock, but in the subscription and community offerings together we receive subscriptions and orders for more than 3,570,000 shares, we will sell to participants in the subscription offering the number of shares sufficient to satisfy their subscriptions in full, and then may accept orders in the community offering provided that the total number of shares sold in both offerings does not exceed 4,380,000 shares.

Undersubscription

If the number of shares purchased in the subscription and community offerings are collectively less than 3,570,000, then we will return all funds received in the offerings promptly to purchasers, without interest. In that event, we may

cause new valuations of PPIX, PCA and PIPE to be performed, and based on this valuation amend the registration statement of which this prospectus is a part and commence a new offering of the common stock. In that event, people who submitted subscriptions or orders will be permitted to submit new subscriptions or orders. See “The Conversions and The Offering - Resolicitation.” Because ICG has agreed to purchase sufficient shares to cause at least the minimum number of shares to be sold, if all of the conditions to ICG’s obligation to purchase shares in the offering are satisfied, the sale of the minimum number of shares is guaranteed.

Market for Common Stock

We have applied for listing on the Nasdaq Capital Market under the symbol “PPHI”, but development of an active trading market for our stock is unlikely. Griffin Financial intends to become a market maker in our common stock following the offering, but is under no obligation to do so. Neither we nor any market maker has any control over the development of an active public market. See “Market for Our Common Stock.” Our management and ICG are likely to seek to delist our shares from trading on the NASDAQ Stock Market in the future and end our public reporting obligations. This would greatly reduce the market for our common stock. See “Risk Factors - Our management and the standby purchaser are likely to seek to delist our shares from trading on the NASDAQ Stock Market and end our reporting obligations under the Securities Exchange Act of 1934.”

Management Purchases of Stock

Only those directors and executive officers of the attorneys-in-fact of PPIX, PCA and PIPE who are eligible subscribers or who are stockholders of Diversus will be permitted to purchase shares of common stock in the offering. Accordingly, it is unlikely that such directors and officers will purchase a significant number of shares in the offerings. The total shares purchased by all of the stockholders of Diversus as a group may not exceed 5% of the shares remaining to be sold in the offering after satisfaction of all orders in the subscription offering. See “The Conversions and The Offering - Proposed Management Purchases.”

Deadlines for Purchasing Stock

If you wish to purchase shares of our common stock in the offering, a properly completed and signed original stock order form, together with full payment for the shares, must be received (not postmarked) at the Stock Information Center no later than 12:00 noon, Eastern Time, on [.], 2019. You may submit your order form in one of three ways: by mail using the order reply envelope provided, by overnight courier to the address indicated on the stock order form, or by bringing the stock order form and payment to the Stock Information Center, which is located at 111 North 6th Street, Reading, PA 19601. The Stock Information Center is open weekdays, except bank holidays, from 10:00 a.m. to 4:00 p.m., Eastern Time. Once submitted, your order is irrevocable unless the offering is terminated or extended. We may extend the [.], 2019 expiration date, without notice to you. If we extend the subscription offering to a date later than [.], 2019, the stock orders will be canceled and all funds received will be returned promptly without interest. The subscription offering may not be extended to a date later than [.], 2019. The community offering may terminate at any time without notice, but no later than 45 days after the termination of the subscription offering. Although, we have provided a self-addressed envelope for the return of stock order forms, we are not responsible for slow or delayed delivery of first class mail by the United States Postal Service. In order to maximize the likelihood of timely delivery of any stock order form, people wishing to purchase stock in the offering should consider the use of an overnight delivery service.

Conditions That Must Be Satisfied Before We Can Complete the Offering and Issue the Stock

Before we can complete the offering and issue our stock, the eligible policyholders of PPIX must approve the PPIX plan of conversion, the eligible policyholders of PCA must approve the PCA plan of conversion, and the eligible policyholders of PIPE must approve the PIPE plan of conversion, and we must sell at least the minimum number of shares offered. In addition, completion of the conversions and the offering is subject to approval by the Department of ICG acquiring more than 10% of our outstanding common stock, which approval was received on [.], 2019.

No funds will be released from the escrow account until the offering has been completed and all of these conditions have been satisfied. If all of these conditions are not satisfied by March 31, 2019, the offering will be terminated and all funds will be returned promptly without interest.

Termination of the Offering

We have the right to cancel the offering at any time. If we cancel the offering, your money will be promptly refunded, without interest.

Dividend Policy

We currently do not have any plans to pay dividends to our shareholders. In addition, as a holding company, our ability to pay dividends will be dependent upon any proceeds from the offering retained at the holding company and the declaration and payment of dividends to us by Positive Insurance and any future subsidiaries. The payment of dividends by Positive Insurance may require the prior approval of the Department. For additional information regarding restrictions on our ability to pay dividends, see “Dividend Policy.”

Share Repurchases

We may engage in repurchases of our shares as a way to create liquidity for our shareholders or in connection with any effort we may take to delist our stock from NASDAQ in the future. See “Risk Factors - Our management and the standby purchaser are likely to seek to delist our shares from trading on the NASDAQ Stock Market and end our reporting obligations under the Securities Exchange Act of 1934.” The Conversion Act provides that we cannot repurchase any shares for three years after the completion of the conversions and the offerings without the prior approval of the Pennsylvania Insurance Commissioner. Accordingly, no assurance can be given that we will engage in any share repurchases or that we will repurchase a significant number of shares. There is no limitation under the Conversion Act on ICG purchasing shares of our stock on the NASDAQ Stock Market or in privately negotiated transactions. Existing SEC regulations impose disclosure requirements with respect to actions that our management and ICG can take that would result in the Company going private and our common stock being delisted from trading on the NASDAQ Stock Market. See “Market for Our Common Stock.”

Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, commonly known as the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and reduction of other obligations that are otherwise applicable generally to public companies. These provisions include:


•	a requirement to include in this prospectus only two years of audited financial statements, two years of selected financial information, and two years of related Management Discussion & Analysis;


•	exemption from the auditor attestation requirement on the effectiveness of our internal control over financial reporting;


•	reduced disclosure about our executive compensation arrangements; and


•	no stockholder non-binding advisory votes on executive compensation or golden parachute arrangements.

We may take advantage of these provisions until the earlier of five years or such time as we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenues, have more than $700 million in market value of our capital stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some but not all of these reduced compliance obligations.

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 intend to take advantage of the extended transition period.

Delivery of Prospectus

To ensure that each person receives a prospectus at least 48 hours before the offering deadline, we will not mail prospectuses any later than five days before such date or hand-deliver prospectuses later than two days before that date.

Stock order forms may only be delivered if accompanied or preceded by a prospectus. We are not obligated to deliver a prospectus or order form by means other than U.S. mail.

We will make reasonable attempts to provide a prospectus and offering materials to holders of subscription rights. The subscription offering and all subscription rights will expire at 12:00 noon, Eastern Time, on [.], 2019 whether or not we have been able to locate each person entitled to subscription rights.

Delivery of Shares of Common Stock

All shares of common stock of the Company sold in the subscription offering and community offering will be issued in book entry form and held electronically on the books of our transfer agent. Stock certificates will not be issued. A statement reflecting ownership of shares of common stock sold in the offering will be mailed by our transfer agent to the persons entitled thereto at the address noted by them on their stock order form as soon as practicable following consummation of the conversions. We expect trading in the stock to begin on the business day of or on the business day immediately following the completion of the conversions and stock offering. It is possible that until a statement reflecting ownership of shares of common stock is available and delivered to purchasers, purchasers might not be able to sell the shares of common stock that they ordered, even though the common stock will have begun trading . Your ability to sell the shares of common stock before receiving your statement will depend on arrangements you may make with a brokerage firm.

How You May Obtain Additional Information Regarding the Offering

If you have any questions regarding the stock offering, please call the Stock Information Center at 1-610-205-6003, Monday through Friday between 10:00 a.m. and 4:00 p.m., Eastern Time or write to us at Positive Physicians Holdings, Inc., 100 Berwyn Park, Suite 220, 850 Cassatt Road, Berwyn, PA 19312. Our Stock Information Center is located at 111 North 6th Street, Reading, PA 19601. Additional copies of the materials will be available at the Stock Information Center. The Stock Information Center will be closed on weekends and bank holidays.

Transactions Related to the Conversions

Management of Positive Insurance

Currently, each of the exchanges pays a management fee equal to 25% of its gross written premiums to its respective attorney-in-fact. The Company and Positive Insurance will enter into a management agreement with Diversus Management, Inc. that will be effective upon completion of the conversion and the offering. Pursuant to the management agreement, officers of Diversus Management will be responsible for the day to day management of the insurance operations of Positive Insurance. Under the management agreement, Diversus Management will provide solicitation and underwriting of applications for insurance, claims management, accounting, and other services to Positive Insurance. The agreement has 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 is always between six and seven years; however, each of Positive Insurance and Diversus Management can terminate the agreement under certain circumstances. The management agreement is subject to review and approval of the Department.

Under the management agreement, Positive Insurance will pay a base management fee based upon a percentage of Positive Insurance’s gross written premiums, less return premiums. In 2018, the percentage will be 25% of gross written premiums, less return premiums, and thereafter will decline to 12% in 2019, 11% in 2020, and 10% in 2021. At January 1, 2022, the percentage will thereafter be set at 9% of gross written premiums, less return premiums. If by December 31, 2019, the Company has not acquired one or more additional insurance entities with additional annual gross written premiums of at least $10,000,000 and that become subject to the management agreement, the reduction in fees scheduled to occur on January 1, 2020 will be deferred for one year. The agreement also provides for a performance management fee reflecting the profitability of Positive Insurance based upon the ratio of Positive Insurance’s losses and loss adjustment expenses and other underwriting expenses to net earned premiums. The quarterly performance management fee will be equal to the product of (x) 100 minus the combined ratio of Positive Insurance, (y) 0.0825, and (z) net earned premiums calculated on a rolling 12-month basis. The management agreement will apply to any insurance company, risk retention group, reciprocal exchange, or other risk bearing entity acquired or formed by the Company. See “Description of Our Business - Management of Positive Insurance After the Conversions.”

As consideration for Diversus agreeing to enter into the new management agreement at a materially reduced rate of compensation, upon completion of the conversions and the offerings, the Company will pay a one-time fee of $10,000,000 to Diversus.

Loan 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 anytime under such credit facility and may borrow additional amounts at any time after completion of the conversions and the offering. The loan will provide for monthly payments of interest at an annual rate of 8%, and the outstanding principal balance of the loan may be converted at the Company’s option into shares of Diversus common stock at a price of $1.00 per share. The Company and Diversus agreed upon the $1.00 price per share based upon their projection of the fair market value of Diversus common stock at the time that the loan is converted into Diversus common stock, which is anticipated to be the effective date of any merger of Diversus with a subsidiary of the Company. See “---- Option Agreement” and “The Conversions and the Offering - Transactions Related to the Conversions.”

Option Agreement

The Company and Diversus will enter into an option agreement whereby the Company and Diversus will each have the option to cause Diversus to merge with a wholly owned subsidiary of the Company. Under the terms of the agreement, the option may be exercised by either Diversus or the Company at any time (a) during the period beginning two years after completion of the conversions of PPIX, PCA, and PIPE and ending 54 months after completion of the conversions, or (b) if earlier than two years after completion of the conversions, such date on which the standby purchaser no longer has the right to appoint a majority of the members of the board of directors of the Company. In connection with any merger, the shareholders of Diversus will receive either cash, shares of common stock of the Company, or some combination thereof for their shares of Diversus stock. In connection with the merger, shares of Diversus preferred stock will be converted into such amount of cash or such number of shares of the Company’s common stock as if such shares of Diversus preferred stock had been converted into shares of Diversus common stock immediately prior to the effective date of the merger. The amount of cash or number of shares of common stock of the Company to be received for each share of Diversus capital stock will be determined by negotiation, or if the parties cannot agree upon the amount of cash or number of shares, by an appraisal process pursuant to the terms of the option agreement. Any such merger will be subject to approval by the stockholders of Diversus, but it is unlikely that any such merger would be subject to approval by the shareholders of the Company. See “The Conversions and the Offering - Transactions Related to the Conversions.”

Exchangeable Note

ICG has agreed to provide a $750,000 loan to the Company for the purpose of providing funding for the expenses incurred by the Company in connection with the conversions and the offerings. The loan is evidenced by an exchangeable note of the Company that will be due and payable on the first anniversary of the date of the note, and will bear interest at an annual rate of 8%. Upon completion of the conversions and the offerings, the unpaid principal balance of the exchangeable note will automatically be converted into shares of common stock of the Company at a price of $10.00 per share. 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 all advances made under the exchangeable note. At November 15, 2018, there were no outstanding borrowings under the exchangeable note.

Agreement between ICG and Enstar

Insurance Capital Group LLC, as the standby purchaser, and Enstar Holdings (US) LLC have entered into an agreement pursuant to which ICG has agreed to permit Enstar to purchase 30% of the shares of the Company’s common stock that ICG would otherwise purchase in the community offering. It is likely that after completion of the offerings ICG and Enstar will collectively own at least a majority of the Company’s outstanding common stock. ICG and Enstar have agreed upon the number of directors that will constitute the Company’s board of directors and the number of such directors that will be designated by ICG and the number that will be designated by Enstar. They have also agreed that the Company will not take certain actions without the written approval of both Enstar and ICG. See “Management -

Board Governance.” The interests of ICG and Enstar may from time to time conflict with the interests of the Company, and the requirement that Enstar and ICG must agree upon certain actions to be taken by the Company may prevent the Company from taking advantage of opportunities that may be in the best interest of the Company. See “Risk Factors - ICG and Enstar can prevent the Company from taking actions that may be in the Company’s best interest.”

Risk Factors

The Company and its businesses are subject to numerous risks as more fully described in the section of this prospectus titled “Risk Factors.” As part of your evaluation of our business and a possible investment in our common stock, you should consider the challenges and risks we face in implementing our business strategies, including the following:


•	The Company may not be able to grow its premiums either organically or through acquisitions of other business. The Company may be unable to identify and complete acquisitions on terms favorable to the Company, and integration of such businesses will entail various risks and may distract the Company’s management from the day to day operations of its businesses;


•	Changes in the healthcare industry and overcapacity in the MPLI market may impair the Company’s insurance company subsidiaries’ ability to increase premium revenues;


•	A significant percentage of the Company’s written premiums are concentrated geographically in Pennsylvania and New Jersey. Changes in the legal or regulatory environment in Pennsylvania or New Jersey would have a material adverse effect on the results of our MPLI insurance subsidiaries;


•	Because ICG and Enstar will likely own a majority of the Company’s outstanding shares after the offering, there will be little liquidity in the Company’s stock and they will control the Company;


•	It is likely that ICG will cause the Company to delist from the NASDAQ Stock Market, which will have a material and adverse effect on the liquidity of the Company’s stock, and to deregister its shares of common stock under the Securities Exchange Act of 1934, thereby terminating its public reporting obligations; and


•	The option agreement provides Diversus with the option of requiring the Company to acquire Diversus.

An investment in our common stock involves numerous additional risks. See “Risk Factors.”

RISK FACTORS

In addition to all other information contained in this prospectus, you should carefully consider the following risk factors in deciding whether to purchase our common stock. If any of these risks actually occur, our business, financial condition and results of operations could be materially adversely affected and the price of our common stock and the value of your investment in our common stock could decline substantially.

Risks Related to Our Industry

Our operations are concentrated in the MPLI industry, and our profitability may be adversely affected by current “soft market” conditions and any negative developments and cyclical changes in that industry.

All of our insurance premiums are generated within the MPLI industry. Because of our concentration in this line of business, negative developments in the business or economic, competitive or legal environments, or regulatory conditions affecting the MPLI industry, broadly or in our particular markets, could have a negative effect on our profitability and would have a more pronounced effect on us compared to more diversified companies. The MPLI industry historically is cyclical in nature, characterized by periods of significant price competition and excess underwriting capacity (a soft market) followed by periods of high premium rates and shortages of underwriting capacity (a hard market). The MPLI industry is currently operating under soft market conditions as a result of abundant capacity, with significant competition and pressure on premium rates following several years of overall favorable claims trends. During 2008 through 2016, premium rates declined in our core Pennsylvania and New Jersey markets, primarily as a result of competition for insureds and reduced claims frequency in the MPLI industry in our primary markets. During 2017 premium rates remained relatively at the same levels as in 2016. We cannot predict how market conditions will continue to change, or the manner in which, or the extent to which, any such changes may adversely impact our business or profitability. We anticipate, however, that the current soft market conditions will continue at least through 2018.

We operate in a competitive environment, and our success depends to a significant extent upon our ability to retain existing business and to develop new business.

PPIX, PCA and PIPE compete with MPL specialty insurers and alternative risk arrangements, as well as other large national property and casualty insurance companies that write MPLI. Their competitors include companies that have substantially greater financial resources and that have obtained financial strength ratings from A.M. Best. We may be at a competitive disadvantage if we decide not to pursue a financial strength rating of at least “A-” from A.M. Best for Positive Insurance after completion of the conversions. In addition, organizations, particularly stock insurance companies, mutual insurers, reciprocals, RRGs or trusts, may have lower return on capital objectives than we have, and start-up companies may aggressively seek market share by reducing the premiums they charge for insurance coverage. We also face competition from other insurance companies for the services and allegiance of independent producers, on whose services PPIX, PCA and PIPE depend in marketing their insurance products. PPIX, PCA and PIPE seek to compete based on quality and speed of service, but may not have the capital to engage in long term price competition with some of their competitors. Increased competition and other factors could adversely affect our ability to attract new business and to retain existing business at adequate prices, which could have a material adverse effect on our financial condition, results of operations or cash flows.

Competition in the MPLI business is based on many factors. These factors include the perceived financial strength of the insurer, premiums charged, policy terms and conditions, services provided, reputation, financial ratings assigned by independent rating agencies and the experience of the insurer in medical professional liability insurance. We will compete with stock insurance companies, mutual companies, RRGs, reciprocals, and other underwriting organizations. Many of these competitors have substantially greater financial, technical and operating resources than we have. In addition, medical professional liability insurance is currently subject to significant price competition. If our competitors price their products aggressively, our ability to grow or renew our business may be adversely affected. We pay producers on a commission basis to produce business. Some of our competitors may offer higher commissions or insurance at lower premium rates through the use of salaried personnel or other distribution methods that do not rely on independent producers. Increased competition could adversely affect our ability to attract and retain business and thereby reduce our profits from operations or cause us to increase the commissions we pay, which would increase our expenses.

Exposure to claims for extra-contractual obligations and losses in excess of policy limits, to the extent such claims exceed our reinsurance limits, and the unpredictability of court decisions could have a material adverse impact on our financial condition, results of operations or cash flows.

Within the geographic markets in which PPIX, PCA, and PIPE write medical professional liability insurance, while the frequency of extra-contractual liability and losses in excess of policy limits is low, the magnitude of payments has increased in recent years and is expected to continue to be a significant source of uncertainty. Our policy to defend claims made against our insureds that we consider unwarranted or claims where a reasonable settlement cannot be achieved, and the unpredictability of court decisions, may increase such exposure. An award for extra-contractual liability or a significant award or jury verdict, or a series of awards or verdicts, against one or more of our insureds could ultimately result in the payment by us of potentially significant amounts in excess of the related policy limits, reserves and reinsurance coverage and could have a material adverse impact on our financial condition, results of operations or cash flows.

Significant changes in the healthcare delivery system, through healthcare reform or otherwise, could materially affect our operations.

Future healthcare reform or other significant changes could alter the healthcare delivery system, raise the cost sensitivity of our insureds, or alter how healthcare providers insure their MPL risks. Federal healthcare reform legislation, known as the Affordable Care Act, was enacted in 2010, but proposals to amend or repeal the Affordable Care Act continue to be introduced in Congress. Accordingly, we cannot predict the ultimate terms of such legislation or future reform proposals, including possible federal medical malpractice reform proposals, or what effect such legislation or such proposals may have on our business.

Changes in the MPLI market have reduced the number of physicians and physician practices that purchase malpractice insurance, which may adversely affect our ability to grow our business.

The healthcare industry, and by extension the MPLI market, is undergoing rapid and fundamental change. Significant market-driven changes in the healthcare system have resulted in many medical professionals joining or becoming contractually affiliated with hospitals and other larger organizations. This likely will result in a decline in the pool of insurable physicians and therefore declining nationwide premium volume. This trend may also result in a significant decrease in the role of the physician in the MPLI purchasing decision and in a significant increase in the role of professional risk managers, who may be more price-sensitive and who may favor insurance companies that are larger and more highly rated than Positive Insurance. Also, larger healthcare organizations tend to retain more risk than independent professionals and are more likely to self-insure. For these reasons, consolidation in the healthcare industry could negatively affect our business. No assurance can be given that Positive Insurance will be able to maintain or increase premium volume in the face of changes in the MPLI marketplace. Moreover, RRGs and reciprocal insurance exchanges that appear to be good acquisition candidates may be subject to these same market forces, and the Company will continue to review for this potential for declining premium volume when identifying and pricing acquisitions.

Risks Related to Our Business

We may not be able to achieve the growth in revenues that we are targeting.

Our business plan envisions growth in direct and net premiums written by our MPLI subsidiaries. According to a study published by the National Association of Insurance Commissioners, the overall MPLI premiums written in the United States declined by approximately 25.3% from 2006 to 2017 and declined by 15.9% in Pennsylvania and by 32.0% in New Jersey during the same time period. We may not be able to significantly increase the direct and net premiums written by Positive Insurance in a declining MPLI market environment.

Our MPLI business is highly concentrated in Pennsylvania and New Jersey, and changes in the laws and regulations in those states affecting the MPLI business may have a significant impact on our financial performance.

The physicians and allied healthcare providers insured by our Positive Insurance will initially be located primarily in Pennsylvania and New Jersey. Accordingly, changes in the law in those states regarding claims against physicians

and other healthcare providers and changes in the regulations regarding the operations of MPL insurers in those states may have a significant effect on our results of operations. Because our MPLI insurance business is concentrated in a few states, adverse developments that are limited to a geographic area in which we do business may have a disproportionately greater effect on us than they would have if we were less geographically concentrated.

We will have no full time management and will rely on Diversus Management to manage our day-to-day insurance operations.

We and Positive Insurance will have no full time management and will rely solely on Diversus Management to manage our day-to-day insurance operations and to perform certain key management functions. Pursuant to a services agreement, Diversus Management will be responsible for providing financial accounting, SEC reporting, and other management functions for the Company. Similarly, pursuant to the management agreement between Diversus Management and the Company and Positive Insurance, key management functions of Positive Insurance, including financial accounting, solicitation and processing of applications for insurance, and claims management will be provided by Diversus Management. The key officers of Diversus Management who will perform these management functions include Dr. Lewis S. Sharps, Daniel Payne, Leslie Latta, and Kurt Gingrich. We do not have the ability to replace these officers and will depend on Diversus Management’s judgment with respect to the hiring of a qualified team to manage our MPLI business. Diversus Management has agreed that its senior officers will provide the services necessary for the day to day management of our MPLI business. See “Management - Executive Management.”

Conflicts of interest may cause Diversus Management to take actions that may not be in the best interest of the Company.

The Company and Positive Insurance will rely on Diversus Management for the day-to-day management of their business operations. Conflicts of interest may arise between Diversus Management and the Company or Positive Insurance, and Diversus Management may take actions that may not be in the best interest of the Company.

Our business could be adversely affected by the loss or consolidation of independent agents, agencies, or brokers or brokerage firms.

We heavily depend on the services of independent agents and brokers in the marketing of our insurance products. We face competition from other insurance companies for their services and allegiance. These agents and brokers may choose to direct business to competing insurance companies. During 2017, our largest producer accounted for approximately 31% of one of our companies of our gross written premiums and three other producers each accounted for at least 7% another one of the three companies of our gross written premiums. If one or more of these producers decided to represent other MPLI carriers, the loss of premium volume from such producers could have a material adverse effect on our results of operations.

Competition for potential acquisitions from other MPL insurers could increase the price that the Company will be required to pay in connection with future acquisitions of RRGs and reciprocal insurance exchanges.

Over-capacity in the MPLI market has led other market participants to seek acquisitions in order to generate revenue growth. This has included several transactions in which large MPLI carriers acquired comparatively small RRGs and reciprocals - entities that would otherwise be prospective acquisition targets for us. These market conditions may cause significant competition for acquisitions and increase the price for acquisitions. This competitive market could impede execution of our growth strategy.

Integration of future acquisitions may require a significant investment of management’s time and distract management from the day to day operations of our business.

Future acquisitions will require integration, and we will rely on our management team to integrate any companies that we acquire with our existing insurance business, and there can be no assurance that acquisitions will be successfully executed and integrated.

As part of our growth strategy, we will continue to evaluate opportunities to acquire other MPL insurers. Acquisitions that we may make or implement in the future entail a number of risks that could materially adversely affect our business and operating results, including:


•	Problems integrating the acquired operations with our existing business;


•	Operating and underwriting results of the acquired operations not meeting our expectations;


•	Diversion of management’s time and attention from our existing business;


•	Need for financial resources above our planned investment levels;


•	Difficulties in retaining business relationships with agents and policyholders of the acquired company;


•	Risks associated with entering markets in which we lack extensive prior experience;


•	Tax issues associated with acquisitions;


•	Acquisition-related disputes, including disputes over contingent consideration and escrows;


•	Potential loss of key employees of the acquired company; and


•	Potential impairment of related goodwill and intangible assets.

Our success depends on our ability to retain premiums while underwriting risks accurately and to price our products accordingly.

The nature of the insurance business is such that pricing must be determined before the underlying costs are fully known. This requires significant reliance on actuarial estimates and assumptions in setting prices. If we fail to assess accurately the risks that we insure, we may fail to charge adequate premium rates, which could impact our profitability and have a material adverse effect on our financial condition, results of operations or cash flows. Our ability to assess our policyholder risks and to price our products accurately is subject to a number of risks and uncertainties, including, but not limited to:


•	Competition from other providers of medical professional liability insurance;


•	Price regulation by insurance regulatory authorities;


•	Selection and implementation of appropriate rating formula or other pricing methodologies;


•	Availability of sufficient reliable data;


•	Uncertainties inherent in estimates and assumptions generally;


•	Adverse changes in claim results;


•	Incorrect or incomplete analysis of available data;


•	Our ability to predict policyholder retention, investment yields and the duration of liability for losses and loss adjustment expenses (“LAE”) accurately;


•	Unanticipated effects of court decisions, legislation, or regulation, including those related to tort and healthcare reform; and


•	Increasing severity of claims outcomes.

These risks and uncertainties could cause us to underprice our policies, which would negatively affect our results of operations, or to overprice our policies, which could reduce our competitiveness. Either such event could have a material adverse effect on our financial condition, results of operations and cash flows.

Our results and financial condition may be affected by a failure to establish adequate losses and loss adjustment expense reserves or by adverse development of prior year reserves.

PPIX, PCA, and PIPE maintain reserves to cover amounts they estimate will be needed to pay for insured losses and for the expenses necessary to settle claims. Estimating losses and loss expense reserves is a difficult and complex process involving many variables and subjective judgments. Liability for losses and loss adjustment expense reserves (also referred to as losses and LAE reserves) is the largest liability of insurance companies and represents the financial statement item most sensitive to estimation and judgment. In developing estimates of losses and loss adjustment expense reserves, we have evaluated and considered actuarial projection techniques based on our assessment of facts and circumstances then known, historical loss experience data and estimates of anticipated trends. This process assumes that past experience, adjusted for the effects of current developments, changes in operations and anticipated trends, constitutes an appropriate basis for predicting future events. While we believe that the losses and LAE reserves established by PPIX, PCA, and PIPE are appropriate, to the extent that such reserves prove to be inadequate or excessive in the future, our management would adjust them and incur a charge or credit to earnings, as the case may be, in the period the reserves are adjusted. Any such adjustment could have a material impact on our financial condition and results of operations. There can be no assurance that the estimates of such liabilities will not change in the future. For additional information on their respective losses and LAE reserves, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations of PPIX, PCA, and PIPE.”

The operations of the Company are dependent upon the availability, integrity and security of the technology infrastructure of Diversus Management and other third parties. Any significant disruption of these infrastructures could result in unauthorized access to Company data or reduce our ability to conduct business effectively, or both.

The Company is dependent upon the technology infrastructure of Diversus Management and other third parties to operate and report financial and other Company information accurately and timely. The Company evaluates the integrity and security of the technology infrastructure of Diversus Management and other third parties that process or store data that the Company considers to be significant. There is no guarantee, however, that measures taken to date by Diversus Management will completely prevent possible disruption, damage or destruction by intentional or unintentional acts or events such as cyber-attacks, viruses, sabotage, human error, system failure or the occurrence of numerous other human or natural events. Disruption, damage or destruction of any of Diversus Management’s systems or data could cause our normal operations to be disrupted or unauthorized internal or external knowledge or misuse of confidential Company data could occur, all of which could be harmful to the Company from both a financial and reputational perspective.

Our revenues and financial results may fluctuate with interest rates, investment results and developments in the securities markets.

Our insurance subsidiaries invest the premiums they receive from policyholders until cash is needed to pay insured claims or other expenses. Investment securities represent the largest component of their assets. The fair value of their investment holdings is affected by general economic conditions and changes in the financial and credit markets. They rely on the investment income produced by their respective investment portfolios to contribute to their profitability. Changes in interest rates and credit quality may result in fluctuations in the income derived from, the valuation of, and in the case of declines in credit quality, payment defaults on, their fixed-income securities. In addition, deteriorating economic conditions could impact the value of their equity securities. Such conditions could give rise to significant realized and unrealized investment losses or the impairment of securities deemed other-than-temporary. These changes could have a material adverse effect on our financial condition, results of operations or cash flows. The investment portfolios of our insurance subsidiaries are also subject to credit and cash flow risk, including risks associated with their investments in asset-backed and mortgage-backed securities. Because their investment portfolios are a multiple of their respective equity, adverse changes in economic conditions could result in other-than-temporary impairments that are material to their financial condition and operating results. Such economic changes could arise from overall changes in the financial markets or specific changes to industries, companies or municipalities in which they maintain investment holdings. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations of PPIX, PCA, and PIPE - Quantitative and Qualitative Information about Market Risk.”

The failure to obtain a A.M. Best rating for Positive Insurance could affect our ability to compete effectively in new geographic markets.

Ratings assigned by A.M. Best are an important factor influencing the competitive position of insurance companies. Financial strength ratings are used by producers and customers as a means of assessing the financial strength and quality of insurers. A.M. Best ratings, which are reviewed at least annually, represent independent opinions of financial strength and ability to meet obligations to policyholders and are not directed toward the protection of investors. We have no definitive plans to request the assignment of a financial strength rating for Positive Insurance from A.M. Best at the current time. To the extent that obtaining an A.M. Best financial strength rating proves to be important to retaining or obtaining new policyholders in new geographic markets, however, we will reconsider requesting the assignment of an A.M. Best rating.

Our ability to manage our exposure to underwriting risks depends on the availability and cost of reinsurance coverage.

Reinsurance is the practice of transferring part of an insurance company’s liability and premium under an insurance policy to another insurance company. PPIX, PCA, and PIPE use reinsurance arrangements to limit and manage the amount of risk they retain, to stabilize their underwriting results and to increase their underwriting capacity. The availability and cost of reinsurance are subject to current market conditions and may vary significantly over time. Any decrease in the amount of reinsurance maintained will increase our risk of loss. We may be unable to maintain our desired reinsurance coverage or to obtain other reinsurance coverage in adequate amounts and at favorable rates. If we are unable to renew the current coverage maintained by PPIX, PCA, and PIPE or obtain new coverage, it may be difficult for us to manage our underwriting risks and operate our insurance business profitably.

If our reinsurers do not pay our claims in accordance with our reinsurance agreements, we may incur losses.

Positive Insurance will be subject to loss and credit risk with respect to the reinsurers from whom PPIX, PCA, and PIPE currently purchase reinsurance because buying reinsurance does not relieve them of their liability to policyholders. If such reinsurers are not capable of fulfilling their financial obligations to PPIX, PCA, and PIPE, and subsequently Positive Insurance, insurance losses would increase. PPIX, PCA, and PIPE secure reinsurance coverage from the same reinsurer. The current A.M. Best rating issued to such reinsurer is “A” (Excellent), which is the second highest of fifteen ratings. See “Business - Reinsurance.”

Proposals to federally regulate the insurance business could affect our business.

Currently, the U.S. federal government does not directly regulate the insurance business. However, federal legislation and administrative policies in several areas can significantly and adversely affect insurance companies. These areas include financial services regulation, securities regulation, pension regulation, privacy laws and regulations, tort reform legislation and taxation. In addition, various forms of direct federal regulation of insurance have been proposed. These proposals generally would maintain state-based regulation of insurance, but would affect state regulation of certain aspects of the insurance business, including rates, producer and company licensing, and market conduct examinations. We cannot predict whether any of these proposals will be adopted, or what impact, if any, such proposals or, if enacted, such laws may have on our business, financial condition or results of operations.

If we fail to comply with insurance industry regulations, or if those regulations become more burdensome, we may not be able to operate profitably.

PPIX, PCA, and PIPE are currently regulated by the Pennsylvania Insurance Department, as well as, to a more limited extent, the insurance departments of other states in which they do business. Positive Insurance will also be regulated primarily by the Pennsylvania Insurance Department. Currently, a substantial percentage of the direct premiums written by PPIX, PCA, and PIPE originate from business written in Pennsylvania and New Jersey. Therefore, the cancellation or suspension of our license in any of those states, as a result of any failure to comply with the applicable insurance laws and regulations, would negatively impact our operating results.

Most insurance regulations are designed to protect the interests of policyholders rather than shareholders and other investors. These regulations relate to, among other things:


•	approval of policy forms and premium rates;


•	standards of solvency, including establishing requirements for minimum capital and surplus, and for risk-based capital;


•	classifying assets as admissible for purposes of determining solvency and compliance with minimum capital and surplus requirements;


•	licensing of insurers and their producers;


•	advertising and marketing practices;


•	restrictions on the nature, quality and concentration of investments;


•	assessments by guaranty associations and mandatory pooling arrangements;


•	restrictions on the ability to pay dividends;


•	restrictions on transactions between affiliated companies;


•	restrictions on the size of risks insurable under a single policy;


•	requiring deposits for the benefit of policyholders;


•	requiring certain methods of accounting;


•	periodic examinations of our operations and finances;


•	claims practices;


•	prescribing the form and content of reports of financial condition required to be filed; and


•	requiring reserves for unearned premiums, losses and other purposes.

The Pennsylvania Insurance Department conducts periodic examinations of the affairs of insurance companies and requires the filing of annual and other reports relating to financial condition, holding company issues and other matters. These regulatory requirements may adversely affect or inhibit our ability to achieve some or all of our business objectives. The last examination by the Pennsylvania Insurance Department of PCA was as of December 31, 2014, the last examination of PPIX was as of December 31, 2012, and the last examination of PIPE was as of December 31, 2012.

In addition, regulatory authorities have relatively broad discretion to deny or revoke licenses for various reasons, including the violation of regulations. Further, changes in the level of regulation of the insurance industry or changes in laws or regulations themselves or interpretations by regulatory authorities could adversely affect our ability to operate our insurance business.

We could be adversely affected by any interruption of our ability to conduct business at our current location.

Our business operations could be substantially interrupted by flooding, snow, ice, and other weather-related incidents, or from fire, power loss, telecommunications failures, terrorism, or other such events. In such an event, we may not have sufficient redundant facilities to cover a loss or failure in all aspects of our business operations and to restart our business operations in a timely manner. Any damage caused by such a failure or loss may cause interruptions in our business operations that may adversely affect our service levels and business. See “Business - Technology.”

Assessments and premium surcharges for state guaranty funds and other mandatory pooling arrangements may reduce our profitability.

Most states require insurance companies licensed to do business in their state to participate in guaranty funds, which require the insurance companies to bear a portion of the unfunded obligations of impaired, insolvent or failed insurance companies. These obligations are funded by assessments, which are expected to continue in the future. State guaranty associations levy assessments, up to prescribed limits, on all member insurance companies in the state based on their proportionate share of premiums written in the lines of business in which the impaired, insolvent or failed insurance companies are engaged. Accordingly, the assessments levied on us may increase as we increase our written premiums. See “Business - Regulation.”

Future changes in financial accounting standards or practices or future changes in tax laws may adversely affect our reported results of operations.

Financial accounting standards in the United States are constantly under review and may be changed from time to time. We would be required to apply these changes when adopted. Once implemented, these changes could materially affect our financial results of operations and/or the way in which such results of operations are reported. Similarly, we will be subject to taxation in the United States and a number of states. Rates of taxation, definitions of income, exclusions from income, and other tax policies are subject to change over time.

We face uncertainties related to the effectiveness of internal controls, particularly with regard to our operating subsidiaries’ financial reporting controls and information technology security.

It should be noted that any system of internal controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any internal control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of internal control systems, there can be no assurance that any design will achieve its stated goal under all potential future conditions, regardless of how remote. Deficiencies or weaknesses that are not yet identified could emerge, and the identification and correction of these deficiencies or weaknesses could have a material impact on our results of operations.

As a publicly traded company, we will be required to publicly report on deficiencies or weaknesses in our internal controls that meet a materiality standard as required by law. Management may, at a point in time, categorize a deficiency or weakness as immaterial or minor and, therefore, not be required to publicly report such deficiency or weakness. Such determination, however, does not preclude a change in circumstances such that the deficiency or weakness could, at a later time, become a material weakness that could have a material impact on our results of operations.

Risk Factors Relating to the Purchase of Our Common Stock

Our management and the standby purchaser are likely to seek to delist our shares from trading on the NASDAQ Stock Market and end our reporting obligations under the Securities Exchange Act of 1934.

Because our stock must be offered to over 2,000 policyholders under the Pennsylvania Conversion Act, we must conduct a public offering. After the offering, we will be obligated for approximately one year to file with the Securities and Exchange Commission, or SEC, annual and quarterly information and other reports that are specified in Section 13 of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We will also be required to prepare financial statements that are fully compliant with all SEC reporting requirements on a timely basis. This will require a significant commitment of additional expense and management resources. As a result, after the expiration of the one-year reporting period, our management and the standby purchaser are likely to seek to reduce the number of our shareholders of record to less than 300 by purchasing shares in the open market or directly from shareholders. This will permit us to cease filing annual and quarterly reports with the SEC after complying with our initial filing requirements. If we are no longer filing such reports with the SEC, we will not be eligible for listing on the NASDAQ Stock Market. This will substantially reduce the liquidity of our stock for any remaining shareholders.

If we do not obtain approval to list on the Nasdaq Capital Market, the price and liquidity of our stock may be adversely affected.

We have applied for listing on the Nasdaq Capital Market. In order to list, we must meet certain minimum requirements for our shareholders’ equity, net income, the market value and number of publicly held shares, the number of shareholders, and the market price of our stock. In addition, to initially list, we must have at least three market makers agree to make a market in our stock. Even if we are approved, an active trading market is not likely to develop, and similar minimum criteria are required for continued listing on the Nasdaq Capital Market, including having up to four market makers making a market in our stock under certain continued listing standards. The failure to receive approval to list or a subsequent delisting from the Nasdaq Capital Market may adversely affect the market price for our stock and reduce the liquidity of our common stock, and therefore, make it more difficult for you to sell our stock.

Because the standby purchaser has agreed to purchase in the offering such number of shares as are necessary to meet the minimum number of shares required to be sold in the offering, it is unlikely that we will need to sell shares to other investors.

The standby purchaser has agreed to purchase such number of shares as will result in at least the minimum number of shares being sold in the offering. Investors therefore should not expect that the sale of sufficient shares to reach the specified minimum, or in excess of the minimum, indicates that such sales have been made to investors who have no financial or other interest in the offering, or who otherwise are exercising independent investment discretion. Because the standby purchaser is likely to purchase a majority of the shares sold in the offering, no individual investor should place any reliance on the sale of the specified minimum as an indication of the merits of this offering. Each investor must make his own investment decision as to the merits of this offering.

Upon completion of the offerings, we may be a “controlled company” within the meaning of Nasdaq Stock Market (“Nasdaq”) rules, and as a result, would qualify for, and rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to shareholders of companies that are subject to such requirements.

If the standby purchaser acquires a majority of the shares of our common stock in the offering, the standby purchaser will control a majority of the voting power of our outstanding common stock and will hold a controlling interest in us. As a result, we would qualify as a “controlled company” within the meaning of the corporate governance rules of Nasdaq. “Controlled companies” under those rules are companies of which more than 50% of the voting power is held by an individual, a group or another company. If we become a “controlled company” upon the completion of the offerings, we will avail ourselves of the “controlled company” exception under the Nasdaq rules, in which event we will not be required to comply with certain corporate governance requirements, including:


•	the requirement that a majority of our board of directors consist of independent directors;


•	the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors, or otherwise have director nominees selected by vote of a majority of the independent directors;


•	the requirement that we have a compensation committee that is composed entirely of independent directors; and


•	the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.

If the standby purchaser acquires a majority of our shares in the standby offering and we become a “controlled company,” you will not have the same protections afforded to shareholders of companies that are subject to all of the Nasdaq corporate governance requirements.

The valuation of our common stock in the offering is not necessarily indicative of the future price of our common stock, and the price of our common stock may decline after this offering.

There can be no assurance that shares of our common stock will be able to be sold in the market at or above the $10.00 per share initial offering price in the future. The aggregate purchase price of our common stock in the offering is based upon an independent appraisal. The appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. The valuation is based on estimates and projections of a number of matters, all of which are subject to change from time to time. See “The Conversions and the Offering - The Valuation” for the factors considered by Feldman Financial in determining the appraisal.

The price of shares of our common stock may decline for many reasons, some of which are beyond our control, including among others:


•	quarterly variations in our results of operations;


•	announcements by third parties of claims against us;


•	changes in law and regulation;


•	results of operations that vary from those expected by investors;


•	future sales of shares of our common stock by investors;


•	actual or anticipated variations in our quarterly results, including per share results, of operations;


•	changes in market valuations of companies in the property casualty and MPLI business;


•	fluctuations in stock market prices and trading volumes;


•	our relatively small market capitalization and the anticipated relatively low trading volume of our shares; and


•	announcements by us or our competitors of acquisitions or strategic alliances.

The standby purchaser and our other shareholders may have conflicting interests, and no assurance can be given that the standby purchaser will not cause the Company to take actions that are not in the best interests of the Company’s other shareholders.

It is likely that the standby purchaser will own a majority of the outstanding shares of our common stock upon completion of the offering and will therefore be able to elect at least a majority of the members of the Company’s board of directors. As a result, the standby purchaser may cause the Company to take actions that favor the interests of the standby purchaser over the interests of the other shareholders. Such actions may include causing the Company to enter into transactions with the standby purchaser or other related parties on terms that are not as favorable to the Company as could be obtained from other third parties.

ICG and Enstar can prevent the Company from taking actions that may be in the Company’s best interest.

ICG and Enstar have entered into an agreement under which they have agreed that the Company will not take certain actions unless both ICG and Enstar have approved such actions in writing. See “Management - Board Governance.” If ICG and Enstar are unable to agree upon certain actions to be taken by the Company, the Company may be unable to take advantage of certain opportunities that may be in the Company’s best interest.

A merger involving Diversus and the Company may have a dilutive effect on the Company’s shareholders.

Diversus and the Company will enter into an option agreement upon the completion of the conversions and the offerings that gives each of them the right to cause Diversus to merge with a subsidiary of the Company during a period

specified in such agreement. If the Company and Diversus are unable to agree on the number of shares of common stock of the Company to be issued to Diversus stockholders in any such merger, the number of shares that will be issued in such merger will be determined by a process involving three appraisers as provided in the option agreement. The number of shares of Company common stock that are issued as a result of such process may result in book value and earnings per share dilution of the Company’s shareholders.

If the standby purchaser fails to purchase shares of our common stock in the offering, we will probably be unable to sell the minimum number of shares and the offering will not be completed.

If the standby purchaser is unable or unwilling to purchase the shares that it has agreed to purchase under the standby stock purchase agreement, it is likely that we will be unable to satisfy the requirement that at least 3,570,00 shares be sold in connection with the conversion. In that event, the offering will be terminated and the purchase price for shares received from each person who submitted a subscription or order for shares will have their money returned to them, without interest.

Statutory provisions and provisions of our articles and bylaws may discourage takeover attempts that you may believe are in your best interests or that might result in a substantial profit to you.

We are subject to provisions of Pennsylvania corporate and insurance law that hinder a change of control. Pennsylvania law requires the Pennsylvania Insurance Department’s prior approval of a change of control of an insurance holding company. Under Pennsylvania law, the acquisition of 10% or more of the outstanding voting stock of an insurer or its holding company is presumed to be a change in control. Approval by the Pennsylvania Insurance Department may be withheld even if the transaction would be in the shareholders’ best interest if the Pennsylvania Insurance Department determines that the transaction would be detrimental to policyholders.

Our articles of incorporation and bylaws also contain provisions that may discourage a change in control. These provisions include:


•	The prohibition of cumulative voting in the election of directors;


•	The requirement that nominations for the election of directors made by shareholders and any shareholder proposals for inclusion on the agenda at any shareholders’ meeting must be made by notice (in writing) delivered or mailed to us not less than 90 days prior to the meeting; and


•	The requirement that the provision of our articles of incorporation prohibiting cumulative voting can only be amended by an affirmative vote of shareholders entitled to cast at least 80% of all votes that shareholders are entitled to cast, unless approved by an affirmative vote of at least 80% of the members of the board of directors.

These provisions may serve to entrench management and may discourage a takeover attempt that you may consider to be in your best interest or in which you would receive a substantial premium over the current market price. These provisions may make it extremely difficult for any one person, entity or group of affiliated persons or entities to acquire voting control of the Company, with the result that it may be extremely difficult to bring about a change in the board of directors or management. Some of these provisions also may perpetuate present management because of the additional time required to cause a change in the control of the board. See “Description of Our Capital Stock.”

ICG is likely to own a majority of our outstanding common stock, which could make removal of the management difficult.

After completion of the conversions and the offerings, ICG is likely to own a majority of our outstanding shares of common stock. Accordingly, it is anticipated ICG will be able to control the outcome of the election of directors and any other shareholder vote. Therefore, ICG may cause us to take actions that nonaffiliated shareholders may deem to be contrary to the shareholders’ best interests. In addition, certain provisions of our articles of incorporation, such as the prohibition of cumulative voting for the election of directors will make removal of our management difficult.

There will not be an active, liquid trading market for our common stock.

Prior to the subscription offering, there has been no public market for our common stock. We cannot predict the extent to which an active trading market with adequate liquidity will develop, but we believe that development of such a market is unlikely. The liquidity of our common stock will be impacted by the fact that the shares purchased by ICG and Enstar will be purchased for investment and not for resale. The shares purchased by directors and officers of the attorneys-in-fact of PPIX, PCA, and PIPE will be subject to lockup periods for up to one year, and the shares purchased by ICG and Enstar will be restricted securities and subject to trading limitations under the standby stock purchase agreement and under applicable law. If an active trading market does not develop, you may have difficulty selling any of our common stock that you purchase and the value of your shares may be impaired.

We believe that subscription rights have no value, but the Internal Revenue Service may disagree, and therefore eligible subscribers may be deemed to have taxable income as a result of their receipt of the subscription rights.

The United States federal income tax consequences of the receipt, exercise or expiration of the subscription rights granted to eligible subscribers of PPIX, PCA, and PIP are uncertain. We intend to take the position that, for U.S. federal income tax purposes, eligible subscribers will be treated as transferring their membership interests in PPIX, PCA, and PIPE to the Company in exchange for subscription rights to purchase Company common stock, and that any gain realized by an eligible subscriber as a result of the receipt of a subscription right that is determined to have ascertainable fair market value on the date of such deemed exchange must be recognized and included in such eligible subscriber’s gross income for federal income tax purposes, whether or not such right is exercised.

Feldman Financial has advised us that it believes the subscription rights will not have any fair market value. Feldman Financial has noted that the subscription rights will be granted at no cost to recipients, will be legally nontransferable and of short duration, and will provide the recipient with the right only to purchase shares of our common stock at the same price to be paid by members of the general public in the community offering. Nevertheless, Feldman Financial cannot assure us that the Internal Revenue Service will not challenge its determination that the subscription rights will not have any fair market value or that such challenge, if made, would not be successful. You should consult your tax advisors with respect to the potential tax consequences to you of the receipt, exercise and expiration of subscription rights.

For more information see “Federal Income Tax Considerations - Tax Consequences of Subscription Rights” and “Federal Income Tax Considerations - Recent Tax Developments.”

Compliance with the requirements of the Securities Exchange Act and the Sarbanes-Oxley Act could result in higher operating costs and adversely affect our results of operations.

When the offering is completed, we will be subject to the periodic reporting, proxy solicitation, insider trading and other obligations imposed under the Securities Exchange Act. In addition, certain provisions of the Sarbanes-Oxley Act will immediately become applicable to us. Compliance with these requirements will increase our legal and accounting costs and the cost of directors and officer’s liability insurance, and will require management to devote substantial time and effort to ensure initial and ongoing compliance with these obligations. A key component of compliance under the Exchange Act is to produce quarterly and annual financial reports within prescribed time periods after the close of our fiscal year and each fiscal quarter. Historically, we have not been required to prepare such financial reports within these time periods. Failure to satisfy these reporting requirements may result in delisting of our common stock by the Nasdaq Capital Market, and inquiries from or sanctions by the SEC. These expenses as well as the additional management time and attention needed to comply with these requirements may have a material adverse effect on our financial condition and results of operations.

The Pennsylvania statute authorizing the conversions of PPIX, PCA, and PIPE was adopted in May 2015, and legal challenges to the law could lead to a significant delay in completion of the conversions and increase the legal and other costs related to the conversions.

The legislation pursuant to which PPIX, PCA, and PIPE will convert to stock form was enacted in May 2015. Therefore, to our knowledge, the conversion of a Pennsylvania reciprocal insurance exchange to stock form has never

occurred. Pennsylvania has had an analogous statute for approximately twenty years that provides for the conversion of a mutual insurance company to a stock company. When that statute was first used in a transaction, it was challenged in court on constitutional grounds. Although the challenge was ultimately unsuccessful, the challenge did cause the conversion to be delayed and resulted in substantial additional cost. That transaction was eventually completed and a number of subsequent transactions have been completed using the mutual to stock conversion statute. No assurance can be given that a similar challenge to this new statute will not be raised, which could result in a significant delay in the completion of the conversions and increase the legal and other costs related to the conversions. In addition, the conversions of PPIX, PCA, and PIPE will be a case of first impression for the Pennsylvania Insurance Department. As such, receipt of approval of the conversions may take longer and be more costly than anticipated.

Because Stevens & Lee is acting as legal counsel to us and is an affiliate of Griffin Financial, a conflict of interest exists which may adversely affect us.

Stevens & Lee is acting as our counsel in connection with this transaction. Griffin Financial, an indirect, wholly owned subsidiary of Stevens & Lee, is acting as our best efforts placement agent in connection with this transaction. Accordingly, conflicts of interest may arise because Stevens & Lee is acting as counsel to us and is the parent company of Griffin Financial. This could cause Stevens & Lee to provide advice in the best interests of Griffin Financial rather than providing advice that is in our best interests.

We are an “emerging growth company” and have elected in this prospectus, and may elect in future SEC filings, to comply with reduced public company reporting requirements, which could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined by the JOBS Act. For as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various public company reporting requirements. These exemptions include, but are not limited to, (i) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, (ii) reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements, and (iii) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In this prospectus, we have elected to take advantage of certain of the reduced disclosure obligations regarding financial statements and executive compensation. In addition, Section 107(b) 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. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are choosing to “opt in” to such extended transition period election under Section 107(b). Therefore, we are electing to delay adoption of new or revised accounting standards, and as a result, we may choose to not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result of such election, our financial statements may not be comparable to the financial statements of other public companies.

We could be an emerging growth company for up to five years after the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act, which such fifth anniversary will occur in 2024. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.0 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we would cease to be an emerging growth company prior to the end of such five-year period. We have taken advantage of certain of the reduced disclosure obligations regarding executive compensation in this prospectus and may elect to take advantage of other reduced burdens in future filings. As a result, the information that we provide to holders of our common stock may be different than you might receive from other public reporting companies in which you hold equity interests. We cannot predict if investors will find our common stock less attractive as a result of our reliance on these exemptions. If some investors find our common stock less attractive as a result of any choice we make to reduce disclosure, there may be a less active trading market for our common stock and the price for our common stock may be more volatile.

FORWARD-LOOKING INFORMATION

This document contains forward-looking statements, which can be identified by the use of such words as “estimate,” “project,” “believe,” “could,” “may,” “intend,” “anticipate,” “plan,” “may,” “seek,” “expect” and similar expressions. 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, including, among other things, the factors discussed under the heading “Risk Factors” 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 discussed under “Risk Factors” and 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;


•	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, and tax or accounting matters including 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.

SELECTED FINANCIAL AND OTHER DATA OF PPIX

The following table sets forth selected financial data for PPIX prior to the offering. You should read this data in conjunction with PPIX’s financial statements and accompanying notes, “Accounting Treatment,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations of PPIX, PCA, and PIPE,” and other financial information included elsewhere in this prospectus. The balance sheet data at December 31, 2017 and 2016 and the statements of operations data for the years ended December 31, 2017 and 2016 are derived from PPIX’s audited financial statements beginning at page F-1. The balance sheet data at September 30, 2018 and 2017, and the statements of operations data for the nine months ended September 30, 2018 and 2017 are derived from PPIX’s unaudited financial statements beginning on page F-28. These historical results are not necessarily indicative of future results.

PPIX evaluates its insurance operations by monitoring certain key measures of growth and profitability. In addition to GAAP measures, PPIX utilizes certain financial performance measures that it believes are valuable in managing its business and for providing comparisons to PPIX’s peers. These performance measures are its expense ratio, loss ratio, and combined ratio, written premiums, and net written premiums to statutory surplus ratio.



	For the Nine Months Ended September 30, (Unaudited)						For the Years Ended December 31,
	2018			2017			2017			2016
	(Dollars in thousands)						(Dollars in thousands)
Statement of Operations Data:
Revenue
Direct premiums written	$	10,349		$	10,307		$	15,327		$	13,799
Net premiums written	8,291			9,065			13,051			9,472
Net premiums earned	9,644			9,694			12,275			8,591
Net investment income	903			805			972			1,183
Total revenue	10,547			10,499			13,247			9,774
Expenses:
Losses and loss adjustment expenses	5,435			6,540			7,733			3,920
Other underwriting expenses	4,906			4,047			5,787			4,391
Interest expense	5			7			9			53
Total expenses	10,346			10,594			13,529			8,363

Income (loss) before income taxes	201			(95		)	(282		)	1,410
Income tax expense (benefit)	7			(170		)	(260		)	586
Net income (loss)	194			75			(22		)	824
Other comprehensive (loss) income	(666		)	658			672			(63		)
Comprehensive (loss) income	$	(472	)	$	733		$	650		$	761
Performance Ratios:
Losses and loss adjustment expenses ratio (1)	56.4		%	67.5		%	63.0		%	45.6		%
Expense ratio (2)	50.9		%	41.7		%	47.1		%	51.1		%
Combined ratio (3)	107.3		%	109.2		%	110.1		%	96.7		%
Return on average equity	1.1		%	0.4		%	(0.1		)%	5.0		%
Statutory Data:
Statutory net income (loss)	$	311		$	(254	)	$	(440	)	$	911
Statutory surplus	$	17,276		$	16,936		$	16,882		$	17,487
Ratio of net premiums written to statutory surplus	48.0		%	53.5		%	77.3		%	54.2		%

__________________


(1)	Calculated by dividing losses and loss adjustment expenses by net premiums earned.


(2)	Calculated by dividing amortization of deferred policy acquisition costs and net underwriting and administrative expenses by net premiums earned.


(3)	The sum of the losses and loss adjustment expenses ratio and the underwriting expense ratio. A combined ratio of less than 100% means a company is making an underwriting profit.



	September 30, 2018 (unaudited)		September 30, 2017 (unaudited)		December 31, 2017			December 31, 2016
	(Dollars in thousands)				(Dollars in thousands)
Balance Sheet Data (at period end):
Total investments, cash, and cash equivalents	$	50,138	$	50,591	$	52,819		$	48,827
Premiums and other receivables	4,736		4,511		5,712			4,142
Reinsurance receivable	6,588		6,044		6,117			8,670
Deferred acquisition costs	2,191		2,095		2,504			1,714
Deferred income taxes	148		78		(42		)	560
Other assets	—		115		50			150
Total Assets	$	63,801	$	63,434	$	67,161		$	64,063

Losses and loss adjustment expenses	$	37,417	$	36,985	$	38,029		$	34,814
Unearned and advance premiums	7,491		7,146		8,689			7,961
Note payable	143		202		187			782
Other liabilities	1,690		1,489		2,724			3,626
Total Liabilities	46,741		45,822		49,629			47,183

Surplus	17,060		17,612		17,532			16,880
Total Equity	17,060		17,612		17,532			16,880

Total Liabilities and Equity	$	63,801	$	63,434	$	67,161		$	64,063

SELECTED FINANCIAL AND OTHER DATA OF PCA

The following table sets forth selected financial data for PCA prior to the offering. You should read this data in conjunction with PCA’s financial statements and accompanying notes, “Accounting Treatment,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations of PPIX, PCA, and PIPE,” and other financial information included elsewhere in this prospectus. The balance sheet data at December 31, 2017 and 2016 and the statement of operations data for the years ended December 31, 2017 and 2016 are derived from PCA’s audited financial statements beginning at page G-1. The balance sheet data at September 30, 2018 and 2017, and the statements of operations data for the nine months ended September 30, 2018 and 2017 are derived from PCA’s unaudited financial statements beginning on page G-26. These historical results are not necessarily indicative of future results.

PCA evaluates its insurance operations by monitoring certain key measures of growth and profitability. In addition to GAAP measures, PCA utilizes certain financial performance measures that it believes are valuable in managing its business and for providing comparisons to PCA’s peers. These performance measures are its expense ratio, loss ratio, and combined ratio, written premiums, and net written premiums to statutory surplus ratio.



	For the Nine Months Ended September 30, (Unaudited)						For the Years Ended December 31,
	2018			2017			2017			2016
	(Dollars in Thousands)						(Dollars in Thousands)
Statement of Operations Data:
Direct premiums written	$	4,227		$	5,057		$	7,684		$	11,941
Net premiums written	3,913			4,141			6,323			9,842
Net premiums earned	4,475			5,753			7,480			13,310
Net investment income	561			410			584			623
Total revenue	5,036			6,163			8,064			13,933
Expenses:
Losses and loss adjustment expenses	5,052			2,646			4,012			6,550
Other underwriting expenses	2,579			2,725			3,500			6,091
Interest expense	—			31			31			—
Total expenses	7,631			5,402			7,544			12,641

(Loss) income before income taxes	(2,595		)	761			520			1,292
Income tax (benefit) expense	(515		)	225			209			671
Net (loss) income	(2,080		)	536			311			621
Other comprehensive (loss) income	(373		)	265			259			162
Comprehensive (loss) income	$	(2,453	)	$	801		$	570		$	783
Performance Ratios:
Losses and loss adjustment expenses ratio (1)	112.9		%	46.0		%	53.6		%	49.2		%
Expense ratio (2)	57.6		%	47.4		%	46.8		%	45.8		%
Combined ratio (3)	170.5		%	93.4		%	100.4		%	95.0		%
Return on average equity	(16.5		)%	3.9		%	2.3		%	4.8		%
Statutory Data:
Statutory net (loss) income	$	(1,863	)	$	814		$	566		$	1,673
Statutory surplus	$	11,635		$	13,938		$	13,591		$	13,619
Ratio of net premiums written to statutory surplus	33.6		%	29.7		%	46.5		%	72.3		%

__________________


(1)	Calculated by dividing losses and loss adjustment expenses by net premiums earned.


(2)	Calculated by dividing amortization of deferred policy acquisition costs and net underwriting and administrative expenses by net premiums earned.


(3)	The sum of the losses and loss adjustment expenses ratio and the underwriting expense ratio. A combined ratio of less than 100% means a company is making an underwriting profit.



	September 30, 2018 (unaudited)		September 30, 2017 (unaudited)		December 31, 2017		December 31, 2016
	(dollars in thousands)				(dollars in thousands)
Balance Sheet Data (at period end):
Total investments, cash, and cash equivalents	$	31,465	$	36,097	$	33,205	$	39,036
Premiums and other receivables	1,224		1,159		1,941		1,300
Reinsurance receivable	2,003		2,258		2,312		2,465
Deferred acquisition costs	882		778		1,189		1,219
Deferred tax assets	216		305		102		417
Other assets	407		799		810		841
Total Assets	$	36,197	$	41,396	$	39,559	$	45,278

Losses and loss adjustment expenses	$	19,915	$	20,845	$	18,585	$	23,002
Unearned and advance premiums	4,582		5,612		6,217		7,371
Notes payable	—		—		—		500
Other liabilities	298		854		903		1,122
Total Liabilities	24,795		27,311		25,705		31,994

Surplus	11,402		14,085		13,854		13,284
Equity	11,402		14,085		13,854		13,284

Total Liabilities and Equity	$	36,197	$	41,396	$	39,559	$	45,278

SELECTED FINANCIAL AND OTHER DATA OF PIPE

The following table sets forth selected financial data for PIPE prior to the offering. You should read this data in conjunction with PIPEs financial statements and accompanying notes, “Accounting Treatment,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations of PPIX, PCA, and PIPE,” and other financial information included elsewhere in this prospectus. The balance sheet data at December 31, 2017 and 2016 and the statement of operations data for the years ended December 31, 2017 and 2016 are derived from PIPE’s audited financial statements beginning at page H-1. The balance sheet data at September 30, 2018 and 2017, and the statements of operations data for the nine months ended September 30, 2018 and 2017 are derived from PIPE’s unaudited financial statements beginning on page H-28. These historical results are not necessarily indicative of future results.

PIPE evaluates its insurance operations by monitoring certain key measures of growth and profitability. In addition to GAAP measures, PIPE utilizes certain financial performance measures that it believes are valuable in managing its business and for providing comparisons to PIPE’s peers. These performance measures are its expense ratio, loss ratio, and combined ratio, written premiums, and net written premiums to statutory surplus ratio.



	For the Nine Months Ended September 30, (Unaudited)						For the Years Ended December 31,
	2018			2017			2017			2016
	(Dollars in thousands)						(Dollars in thousands)
Statement of Operations Data:
Revenue
Direct premiums written	$	3,028		$	3,224		$	3,647		$	4,172
Net premiums written	2,853			2,676			3,028			3,463
Net premiums earned	2,366			2,418			3,148			3,793
Net investment income	548			427			571			462
Total revenue	2,914			2,845			3,719			4,255
Expenses:
Losses and loss adjustment expenses	1,265			1,495			1,823			210
Other underwriting expenses	1,485			1,457			1,855			2,252
Interest expense	—			—			—			898
Total expenses	2,750			2,952			3,678			3,360

Income (loss) before income taxes	164			(107		)	41			895
Income tax expense (benefit)	80			(41		)	101			305
Net income (loss)	84			(66		)	(60		)	590
Other comprehensive (loss) income	(418		)	105			92			319
Comprehensive (loss) income	$	(334	)	$	39		$	32		$	909
Performance Ratios:
Losses and loss adjustment expenses ratio (1)	53.5		%	61.8		%	57.9		%	5.5		%
Expense ratio (2)	62.8		%	60.3		%	58.9		%	59.4		%
Combined ratio (3)	116.3		%	122.1		%	116.8		%	64.9		%
Return on average equity	0.7		%	(0.5		)%	(0.5		)%	5.0		%
Statutory Data:
Statutory net income	$	240		$	138		$	171		$	531
Statutory surplus	$	12,098		$	12,029		$	12,037		$	12,029
Ratio of net premiums written to statutory surplus	23.6		%	22.2		%	25.2		%	28.8		%

__________________


(1)	Calculated by dividing losses and loss adjustment expenses by net premiums earned.


(2)	Calculated by dividing amortization of deferred policy acquisition costs and net underwriting and administrative expenses by net premiums earned.


(3)	The sum of the losses and loss adjustment expenses ratio and the underwriting expense ratio. A combined ratio of less than 100% means a company is making an underwriting profit.



	September 30, 2018 (unaudited)		September 30, 2017 (unaudited)		December 31, 2017		December 31, 2016
	(Dollars in thousands)				(Dollars in thousands)
Balance Sheet Data (at period end):
Total investments, cash, and cash equivalents	$	22,963	$	24,997	$	25,017	$	26,092
Premiums and other receivables	218		538		680		645
Reinsurance receivable	285		282		156		91
Deferred acquisition costs	551		511		385		422
Deferred income taxes	189		172		152		331
Other assets	311		373		255		217
Total Assets	$	24,517	$	26,873	$	26,645	$	27,798

Losses and loss adjustment expenses	$	10,306	$	12,022	$	11,761	$	12,343
Unearned and advance premiums	2,032		2,087		2,211		2,643
Other liabilities	249		493		409		581
Total Liabilities	12,587		14,602		14,381		15,567

Surplus	11,930		12,271		12,264		12,231
Total Equity	11,930		12,271		12,264		12,231

Total Liabilities and Equity	$	24,517	$	26,873	$	26,645	$	27,798

USE OF PROCEEDS

Although the actual proceeds from the sale of our common stock cannot be determined until the offering is complete, we currently anticipate that the gross proceeds from the sale of our common stock will be between $35.7 million at the minimum and $48.3 million at the maximum of the offering range. We expect net proceeds from this offering to be between $32.3 million and $44.6 million, after payment of our offering expenses and the expenses of the conversions. See “Unaudited Pro Forma Financial Information - Additional Pro Forma Data” and “The Conversion and Offering - The Valuation” as to the assumptions used to arrive at such amounts. We expect to use the net proceeds from the offering as follows:



	Minimum		Maximum
Net Proceeds
Gross proceeds	$	35,700,000	$	48,300,000
Conversion and offering expenses	1,000,000		1,000,000
Estimated selling agent fees and expenses	1,995,250		2,719,750
Net proceeds	$	32,704,750	$	44,580,250
Use of Net Proceeds
Payment to Diversus	$	10,000,000	$	10,000,000
General corporate purposes	15,504,750		27,380,250
Capital contribution to Positive Insurance	1,200,000		1,200,000
Line of credit to Diversus	6,000,000		6,000,000
Total	$	32,704,750	$	44,580,250

Upon completion of the offering, we will make a payment of $10,000,000 to Diversus in consideration for the agreement by Diversus to enter into a new management agreement with respect to the management services to be provided by Diversus Management to Positive Insurance and to reduce the fees charged for such services. In addition, we will provide a credit facility of up to $6,000,000 to Diversus. We are providing the credit facility to Diversus to provide Diversus with working capital in the event that Diversus experiences working capital shortfalls as a result of the reduction in the management fees that will be charged to Positive Insurance Company.

We may use a portion of the net proceeds to pay cash dividends or to engage in share repurchases from time to time, but no assurance can be given that any cash dividends will be paid or that any repurchases of shares of our stock will occur, or that if any occur, that they will be continued. The Conversion Act provides that we cannot repurchase any shares for three years after the completion of the conversions and the offerings without the prior approval of the Pennsylvania Insurance Commissioner.

Any net proceeds contributed to the surplus of Positive Insurance will be used for general corporate purposes, which may include financing acquisitions of other medical professional liability insurers and related businesses. See “Description of Our Business - Acquisition Strategy.”

On a short-term basis, the net proceeds retained by us and any net proceeds contributed to Positive Insurance will be invested primarily in U.S. government securities, other federal agency securities, and other securities consistent with our investment policy. Net proceeds not contributed to Positive Insurance will be used for general corporate purchases, which may include acquisitions of additional risk-based companies such as MPLI-focused mutual and stock insurance companies, reciprocal insurance exchanges, and RRGs.

Except as described above, we currently have no specific plans, arrangements or understandings regarding the use of the net proceeds from this offering. The principal reason for the offering was to convert PPIX, PCA, and PIPE to stock form and to provide the exchanges’ subscribers with an opportunity to participate in any future growth and profitability of the Company.

MARKET FOR OUR COMMON STOCK

We have applied for listing of our common stock on the Nasdaq Capital Market under the symbol “PPHI,” subject to the completion of the offering.

We have never issued any capital stock to the public. Consequently, there is no established market for our common stock. The development of a public market having the desirable characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace of a sufficient number of willing buyers and sellers at any given time. Neither we nor any market maker has any control over the development of such a public market. Although we have applied to have our stock listed on the Nasdaq Capital Market, an active trading market is unlikely to develop. This is, in part, because the size of the offering is small. Furthermore, it is likely that a majority of the stock will be held by ICG, which will reduce the number of shares available for trading in the secondary market and reduce the liquidity of our stock.

One of the requirements for initial listing of the common stock on the Nasdaq Capital Market is that there are at least three market makers for the common stock. Griffin Financial intends to become a market maker in our common stock following the offering, but is under no obligation to do so. We cannot assure you that there will be three or more market makers for our common stock. Furthermore, we cannot assure you that you will be able to resell your shares of common stock for a price at or above $10.00 per share, or that approval for listing on the Nasdaq Capital Market will be granted, as contemplated.

We are seeking to list our common stock on the NASDAQ Capital Market in order to provide persons who purchase shares in the offering with greater liquidity if they desire to sell any of their shares after completion of the offering. Because compliance with the periodic reporting and other requirements imposed on publicly traded companies will increase our operating expenses, it is likely that our management and the standby purchaser will seek to delist our shares from trading on the NASDAQ Stock Market.

The Conversion Act provides that we cannot repurchase any shares for three years after the completion of the conversions and the offerings without the prior approval of the Pennsylvania Insurance Commissioner. Accordingly, no assurance can be given that we will engage in any share repurchases or that we will repurchase a significant number of shares. There is no limitation under the Conversion Act on ICG purchasing shares of our stock on the NASDAQ Stock Market or in privately negotiated transaction. Existing SEC regulations, however, impose disclosure requirements with respect to actions that our management and ICG can take that would result in the Company going private and our common stock being delisted from trading on the NASDAQ Stock Market.

Beginning one year after closing of this offering, our management and ICG are likely to seek to delist our shares from trading on the NASDAQ Stock Market. This would greatly reduce the market for our common stock. See “Risk Factors - Our management and the standby purchaser are likely to seek to delist our shares from trading on the NASDAQ Stock Market and end our reporting obligations under the Securities Exchange Act of 1934.”

DIVIDEND POLICY

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.

We initially will have no significant source of funds to pay dividends other than dividends from Positive Insurance, any net proceeds from the offering not used for other purposes, and the investment earnings on such remaining net proceeds of the offering. Therefore, the payment of dividends by us will depend significantly upon our receipt of dividends from Positive Insurance and any future subsidiaries and any remaining net proceeds.

Pennsylvania law sets the maximum amount of dividends that may be paid by Positive Insurance during any twelve-month period after notice to, but without prior approval of, the Pennsylvania Insurance Department. This amount cannot exceed the greater of (i) 10% of the company’s surplus as reported on the most recent annual statement filed with the Pennsylvania Insurance Department, or (ii) the company’s statutory net income for the period covered by the annual statement as reported on such statement. Based on the annual statements of PPIX, PCA, and PIPE as of December 31, 2017, the combined amount available for payment of dividends by those companies in 2018 without the prior approval of the Pennsylvania Insurance Department was approximately $4.3 million. We cannot assure you that the Pennsylvania Insurance Department would approve the declaration or payment by Positive Insurance of any dividends in excess of such amount to us. It is customary for the Department to prohibit a converted insurance company from making any distributions to shareholders for the three-year period following the completion of the conversion. See “Description of Our Business - Regulation.”

Even if we receive any dividends from Positive Insurance, we may not declare any dividends to our shareholders because of our working capital requirements. We are not subject to regulatory restrictions on the payment of dividends to shareholders, but we are subject to the requirements of the Pennsylvania Business Corporation Law of 1988. This law generally permits dividends or distributions to be paid as long as, after making the dividend or distribution, we will be able to pay our debts in the ordinary course of business and our total assets will exceed our total liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of holders of stock with senior liquidation rights if we were to be dissolved at the time the dividend or distribution is paid. In addition, any credit facilities that we enter into may prohibit the payment of dividends or impose other restrictions that may limit our ability to pay dividends.

CAPITALIZATION

The following table displays information regarding our historical and pro forma capitalization at September 30, 2018. The pro forma information gives effect to the sale of common stock at the minimum, midpoint, and maximum of the range of our estimated consolidated pro forma market value, as determined by the independent valuations of Feldman Financial. The various capital positions are displayed based upon the assumptions set forth under “Use of Proceeds.” For additional financial information, see the unaudited financial statements of PPIX, PCA, and PIPE and related notes beginning on pages F-28, G-26, and H-28 of this prospectus. The total number of shares to be issued in the offering will range from 3,570,000 shares to 4,830,000 shares. The exact number will depend on the number of shares purchased by the eligible policyholders of PPIX, PCA and PIPE. See “Use of Proceeds” and “The Conversions and The Offering - Stock Pricing and Number of Shares to be Issued.”

Unaudited Pro Forma Capitalization at September 30, 2018

(in thousands)



	PPIX, PCA, PIPE and PPHI Historical Capitalization (1)			Pro Forma Combined Capitalization (2)
	PPIX, PCA, PIPE and PPHI Historical Capitalization (1)			Minimum			Midpoint			Maximum
Shareholders’ Equity
Common stock, $0.01 par value per share	$	—		$	36		$	42		$	48
Additional paid-in capital	15,883			48,552			54,483			60,525
Retained earnings	24,518			24,518			24,518			24,518
Accumulated other comprehensive loss	(9		)	(9		)	(9		)	(9		)
Total equity	$	40,392		$	73,097		$	79,034		$	85,082

__________________


(1)	Combined historical capitalization of the Company, PPIX, PCA, and PIPE.

(2)

To give effect to the sale of common stock at the minimum, midpoint and maximum of the estimated range of the pro forma market value of Positive Insurance as a subsidiary of the Company, as determined by the independent valuations of Feldman Financial. The following table presents the estimated net proceeds at the minimum, midpoint, and maximum of the estimated valuation range (shares and dollars in thousands).



	Minimum		Midpoint		Maximum
Gross proceeds from the conversion	$	35,700,000	$	42,000,000	$	48,300,000
Less: offering expenses and commissions	2,995,250		3,357,500		3,719,750
Net proceeds from conversion	$	32,704,750	$	38,642,500	$	44,580,250

Total shares issued by the Company as a result of conversion	3,570,000		4,200,000		4,830,000



PPIX surplus	$	17,060
PCA surplus	11,402
PIPE surplus	11,930
Net assets transferred to Positive Physicians Holdings, Inc.	$	40,392

UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION

The following tables set forth our unaudited pro forma condensed balance sheet as of September 30, 2018, our pro forma condensed statement of operations for the nine months ended September 30, 2018, and our pro forma condensed statement of operations for the year ended December 31, 2017 to give effect to the following transactions (the “Transactions”):


(i)	the issuance and sale of 3,570,000 shares of common stock in this offering at an assumed public offering price of $10 per share, which is the minimum of the range listed on the cover page of this prospectus, after deducting commissions and estimated offering expenses payable by us, as if all such transactions had occurred on January 1, 2018 and 2017; and


(ii)	completion of the conversions on a pro forma basis to convert PPIX, PCA and PIPE each from a reciprocal insurance exchange to stock form of ownership and their merger to form Positive Insurance, a subsidiary of Positive Physicians Holdings, Inc., as if the conversion had occurred on January 1, 2018 and 2017.

The audited and unaudited pro forma financial information is based on the historical financial statements of PPIX, PCA, and PIPE and certain adjustments that we believe to be reasonable to give effect to these transactions, which are described in the notes to the financial statements of PPIX, PCA, and PIPE referenced below.

The audited and unaudited pro forma condensed consolidated financial statements are presented for informational purposes only and do not purport to represent the financial position and results of operations that would have been achieved had the conversions and the offering been completed as of the date indicated or our future financial position or results of operations. The pro forma adjustments are based on available information and certain assumptions that we believe are factually supportable and reasonable under the circumstances.

The following audited and unaudited pro forma condensed consolidated financial information should be read in conjunction with:


•	the unaudited financial statements of PPIX, PCA, and PIPE as of and for the nine months ended September 30, 2018 and 2017, and the notes related thereto, included elsewhere in this prospectus;


•	the audited financial statements of PPIX, PCA, and PIPE as of and for the years ended December 31, 2017 and 2016, and the notes related thereto, included elsewhere in this prospectus;


•	the sections entitled “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations of PPIX, PCA, and PIPE,” and “Accounting Treatment” included elsewhere in this prospectus.

The pro forma adjustments and pro forma amounts are provided for informational purposes only. Our consolidated financial statements will reflect the effects of the conversions and the offering only from the date they are completed.

The following is a brief description of the amounts recorded under each of the column headings in the unaudited pro forma condensed combined balance sheet and the unaudited pro forma condensed combined statement of operations:

PPIX, PCA, and PIPE Historical

The September 30, 2018 column reflects the combined historical financial position of PPIX, PCA, and PIPE as of and for the nine months ended September 30, 2018, and such amounts are derived from the unaudited financial statements of PPIX, PCA, and PIPE prior to any adjustments for the conversions. The December 31, 2017 column reflects the combined historical financial position of PPIX, PCA, and PIPE as of and for the year ended December 31, 2017, and such amounts are derived from the audited financial statements of PPIX, PCA, and PIPE prior to any adjustments for the conversions.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

SEPTEMBER 30, 2018

(IN THOUSANDS, EXCEPT PER SHARE DATA)



	PPIX Historical		PCA Historical			PIPE Historical			PPHI Historical		Pro Forma Adjustments				Positive Physicians Holdings, Inc. Pro Forma Consolidated
Assets

Total investments, cash, and cash equivalents	$	50,138	$	31,465		$	22,963		$	—	$	32,705		(1) (2)	$	137,271
Premiums and other receivables	4,736		1,224			218			—		—				6,178
Reinsurance receivable	6,588		2,003			285			—		—				8,876
Deferred acquisition costs	2,191		882			551			—		—				3,624
Deferred tax asset	148		216			189			—		—				553
Other assets	—		407			311			—		—				718
Total assets	$	63,801	$	36,197		$	24,517		$	—	$	32,705			$	157,220

Liabilities
Losses and loss adjustment expenses	37,417		19,915			10,306			—		—				67,638
Unearned and advance premiums	7,491		4,582			2,032			—		—				14,105
Note payable	143		—			—			—		—				143
Other liabilities	1,690		298			249			—		—				2,237
Total liabilities	46,741		24,795			12,587			—		—				84,123

Stockholders’ equity
Common stock	—		—			—			—		36			(1)	36
Additional paid-in capital	—		—			—			—		48,552			(2)	48,552
Contributed surplus	5,483		2,349			8,051			—		(15,883		)	(2)	—
Retained earnings	11,354		9,109			4,055			—		—				24,518
Accumulated other comprehensive income (loss)	223		(56		)	(176		)	—		—				(9		)
Total equity	17,060		11,402			11,930			—		32,705				73,097

Total liabilities and equity	$	63,801	$	36,197		$	24,517		$	—	$	32,705			$	157,220

Pro forma shareholders’ equity per share															$	20.48

__________________

(1)

The unaudited pro forma condensed consolidated balance sheet, as prepared, gives effect to the sale of common stock at the minimum of the estimated range of the pro forma market value of Positive Insurance as a subsidiary of the Company, as determined by the independent valuations of Feldman Financial. The following table presents the estimated net proceeds at the minimum, midpoint, and maximum of the estimated valuation range (shares and dollars in thousands).



	Minimum		Midpoint		Maximum
Gross proceeds from the conversion	$	35,700	$	42,000	$	48,300
Less: offering expenses and commissions	2,995		3,358		3,720
Net proceeds from conversion	$	32,705	$	38,642	$	44,580
Total shares issued by the Company as a result of conversion	3,570		4,200		4,830

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

SEPTEMBER 30, 2018

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(2)

Represents the conversions of PPIX, PCA, and PIPE from reciprocal insurance exchanges to stock insurance companies and their merger to form Positive Insurance as if the conversions had occurred on January 1, 2018. For accounting purposes, the exchange of ownership interests is considered an exchange between entities under common control and thus the merger is accounted for at historical cost without revaluation of the net assets as follows (in thousands):



PPIX surplus	$	17,060
PCA surplus	11,402
PIPE surplus	11,930
Net assets transferred to Positive Physicians Holdings, Inc.	$	40,392

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2018

(IN THOUSANDS, EXCEPT PER SHARE DATA)



	PPIX Historical		PCA Historical			PIPE Historical		PPHI Historical		Pro Forma and Other Adjustments			Positive Physicians Holdings, Inc. Pro Forma Consolidated (2)
Statement of Operations Data (amounts in thousands):
Revenue:
Net premiums earned	$	9,644	$	4,475		$	2,366	$	—	$	—		$	16,485
Net investment income	903		561			548		—		—		(1)	2,012
Total Revenue	10,547		5,036			2,914		—		—			18,497

Expenses:
Losses and loss adjustment expenses	5,435		5,052			1,265		—		—			11,752
Other underwriting expenses	4,906		2,579			1,485		—		—			8,970
Interest expense and fees	5		—			—		—		—			5
Total Expenses	10,346		7,631			2,750		—		—			20,727

Income (loss) before income taxes	201		(2,595		)	164		—		—			(2,230		)
Income tax expense (benefit)	7		(515		)	80		—		—			(428		)
Net income (loss)	$	194	$	(2,080	)	$	84	$	—	$	—		$	(1,802	)

Loss per share data:
Net loss per share of common stock													$	(0.50	)
Shares considered outstanding in calculating pro forma net loss per share (2)													3,570,000

__________________

(1)

Does not reflect any income from the investment of net proceeds available for investment and assumed to be received as of the beginning of each period in accordance with Article 11 of Regulation S-X. This income is not “factually supportable” as that term is used in the Securities and Exchange Commission’s rules and regulations. On a short-term basis, these proceeds will be invested primarily in U.S. government securities and other federal agency securities.

(2)

The unaudited pro forma condensed consolidated statements of operations, as prepared, give effect to the sale of common stock at the minimum of the estimated range of the pro forma market value of Positive Insurance as a subsidiary of the Company, as determined by the independent valuation of Feldman Financial. The following table provides a comparison between the sale of common stock at the minimum, midpoint, and maximum of the estimated valuation range (in thousands, except share and per share data).



	September 30, 2018
	3,570,000 Shares			4,200,000 Shares			4,830,000 Shares
Net loss	$	(1,802	)	$	(1,802	)	$	(1,802	)
Net loss per share of common stock	$	(0.50	)	$	(0.43	)	$	(0.37	)
Shares considered outstanding in calculating pro forma net loss per share	3,570,000			4,200,000			4,830,000

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 2017

(IN THOUSANDS, EXCEPT PER SHARE DATA)



	PPIX Historical			PCA Historical		PIPE Historical			PPHI Historical		Pro Forma and Other Adjustments			Positive Physicians Holdings, Inc. Pro Forma Consolidated (2)
Statement of Operations Data (amounts in thousands):
Revenue:
Net premiums earned	$	12,275		$	7,480	$	3,148		$	—	$	—		$	22,903
Net investment income	972			584		571			—		—		(1)	2,127
Total Revenue	13,247			8,064		3,719			—		—			25,030

Expenses:
Losses and loss adjustment expenses	7,733			4,012		1,823			—		—			13,568
Other underwriting expenses	5,787			3,500		1,855			—		—			11,142
Interest expense and fees	9			31		—			—		—			40
Total Expenses	13,529			7,544		3,678			—		—			24,750

(Loss) income before income taxes	(282		)	520		41			—		—			280
Income tax (benefit) expense	(260		)	209		101			—		—			50
Net (loss) income	$	(22	)	$	311	$	(60	)	$	—	$	—		$	230

Income per share data:
Net income per share of common stock														$	0.06
Shares considered outstanding in calculating pro forma net income per share (2)														3,570,000

__________________

(1)

(2)



	December 31, 2017
	3,570,000 Shares		4,200,000 Shares		4,830,000 Shares
Net income	$	230	$	230	$	230
Net income per share of common stock	$	0.06	$	0.05	$	0.05
Shares considered outstanding in calculating pro forma net income per share	3,570,000		4,200,000		4,830,000

NOTES TO UNAUDITED PRO FORMA

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Additional Pro Forma Data

The actual net proceeds from the sale of our common stock in the offering cannot be determined until the offering is completed. However, the offering net proceeds are currently estimated to be between $32.7 million and $44.6 million, based upon the following assumptions:


•	Expenses of the conversion and offering will be approximately $1.0 million; and


•	Underwriting commissions will equal 3.5% of the gross proceeds of the offering from shares not purchased by ICG or Enstar and 5.75% of the gross proceeds from shares purchased by ICG or Enstar and that 3,265,000 shares are sold to ICG and Enstar.

We have prepared the following table, which sets forth our historical net income and retained earnings prior to the offering and our pro forma net income and shareholders’ equity following the offering. In preparing this table and in calculating pro forma data, the following assumptions have been made:


•	Average weighted shares outstanding has been calculated as if our common stock had been sold in the offering on January 1, 2018;


•	Pro forma per share amounts have been calculated by dividing historical and pro forma amounts by the indicated number of shares of stock; and


•	Pro forma shareholders’ equity amounts, pro forma net income, and pro forma income per share have been calculated as if our common stock had been sold in the offering on September 30, 2018 and, accordingly, no effect has been given to the assumed earnings effect of the net proceeds from the offering.

The following pro forma information may not be representative of the financial effects of the offering at the date on which the offering actually occurs and should not be taken as indicative of future results of operations. The pro forma shareholders’ equity is not intended to represent the fair market value of the common stock and may be different than amounts that would be available for distribution to shareholders in the event of liquidation.

NOTES TO UNAUDITED PRO FORMA

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

The following table summarizes historical data and our pro forma data at September 30, 2018, based on the assumptions set forth above and in the table and should not be used as a basis for projection of the market value of the common stock following the completion of the offering.



Nine Months Ended September 30, 2018
(amounts in thousands, except share data)
	3,570,000 Shares sold at $10.00 per share (Minimum of range)			4,200,000 Shares sold at $10.00 per share (Midpoint of range)			4,830,000 Shares sold at $10.00 per share (Maximum of range)
Pro forma conversion offering proceeds
Gross proceeds of public offering	$	35,700		$	42,000		$	48,300
Less estimated offering expenses and underwriting commissions	2,995			3,358			3,720
Estimated net conversion proceeds	$	32,705		$	38,642		$	44,580
Pro forma shareholders’ equity
Historical equity of PPIX, PCA, and PIPE	$	40,392		$	40,392		$	40,392
Pro forma conversion proceeds	32,705			38,642			44,580
Pro forma shareholders’ equity	$	73,097		$	79,034		$	84,972
Pro forma outstanding shares
Total shares offered in conversion	3,570,000			4,200,000			4,830,000
Pro forma outstanding shares	3,570,000			4,200,000			4,830,000
Pro forma book value per share	$	20.48		$	18.82		$	17.59
Pro forma price to book value	48.8		%	53.1		%	56.9		%
Pro forma net income
Historical combined net loss	$	(1,802	)	$	(1,802	)	$	(1,802	)
Other pro forma adjustments	—			—			—
Pro forma net loss	$	(1,802	)	$	(1,802	)	$	(1,802	)

Weighted average shares outstanding	3,570,000			4,200,000			4,830,000

Pro forma loss per share (1)	$	(0.50	)	$	(0.43	)	$	(0.37	)
Pro forma price to net loss per share (1)	200x			250x			250x

__________________


(1)	Based on pro forma net loss for the nine months ended September 30, 2018.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF PPIX, PCA, AND PIPE

The following discussion and analysis of the financial condition and results of operations of PPIX, PCA, and PIPE should be read in conjunction with the financial statements and accompanying notes included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus constitutes forward-looking information that involves risks and uncertainties. Please see “Forward-Looking Information” and “Risk Factors” for more information. You should review “Risk Factors” for a discussion of important factors that could cause actual results to differ materially from the results described, or implied by, the forward-looking statements contained herein.

Overview of PPIX

PPIX is an unincorporated exchange organized on April 20, 2004 and is licensed by the Commonwealth of Pennsylvania as a reciprocal insurance exchange. PPIX provides medical professional liability insurance consisting of claims-made, tail occurrence, claims made plus, and occurrence policies to its subscribers (policyholders).

PPIX markets 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, 2017, PPIX had direct premiums written of $15.3 million, net premiums earned of $12.3 million, and net loss of $22,000. At December 31, 2017, PPIX had total assets of $67.2 million and a surplus of $17.5 million. For the year ended December 31, 2016, PPIX had direct premiums written of $13.8 million, net premiums earned of $8.6 million, and net income of $0.8 million. At December 31, 2016, PPIX had total assets of $64.1 million and a surplus of $16.9 million. The growth in PPIX direct premiums written of $1.5 million in 2017 is due to increased marketing outreach and referrals.

For the nine months ended September 30, 2018, PPIX had direct premiums written of $10.3 million, net premiums earned of $9.6 million, and net income of $194,000. For the nine months ended September 30, 2017, PPIX had direct premiums written of $10.3 million, net premiums earned of $9.7 million, and net income of $75,000. At September 30, 2018, PPIX had total assets of $63.8 million and a surplus of $17.1 million. There was no increase or decrease in PPIX direct premiums written during the first nine months of 2018.

PPIX 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 Attorney-in-Fact Agreement, as amended, SIS provides 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, has 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.

On the effective date of the conversions, PPIX will merge into PPIX Conversion Corp. Immediately thereafter, PPIX Conversion Corp. will issue its capital stock to the Company, change its name to Positive Physicians Insurance Company, and become a wholly-owned subsidiary of the Company. Immediately thereafter, PCA Conversion Corp and PIPE Conversion Corp. will merge into Positive Insurance, which will then be our single insurance company subsidiary and successor to PCA, PIPE and PPIX.

Overview of PCA

Professional Casualty Association is an unincorporated, reciprocal insurance association formed for the purpose of insuring its subscribers against loss due to the imposition of legal liability. PCA provides medical professional liability insurance consisting of claims-made, tail occurrence and occurrence policies to its subscribers (policyholders). PCA is 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, effective April 16, 2003.

PCA markets its medical professional liability insurance policies through independent producers primarily to doctors and allied healthcare providers who practice in Pennsylvania. PCA is not rated by A.M. Best. 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.

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. For the year ended December 31, 2016, PCA had direct premiums written of $11.9 million, net premiums earned of $13.3 million, and a net income of $0.6 million. At December 31, 2016, PCA had total assets of $45.3 million and a surplus of $13.3 million. 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.

For the nine months September 30, 2018, PCA had direct premiums written of $4.2 million, net premiums earned of $4.5 million, and net loss of $2.1 million. For the nine months ended September 30, 2017, PCA had direct premiums written of $5.1 million, net premiums earned of $5.8 million, and net income of $0.5 million. At September 30, 2018, PCA had total assets of $36.2 million and a surplus of $11.4 million. The loss in PCA direct premiums written of $0.9 million for the first nine months of 2018 is attributed to a decrease in extended reporting policies written and non-renewals of policies, and limited new business growth.

PTP is a Pennsylvania corporation formed to operate as the attorney-in-fact for PCA pursuant to the terms of an agreement between PTP Management and PCA. 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 PCA and pays certain expenses on behalf of PCA in exchange for 25% of the gross written premium. PTP, as the attorney-in-fact of PCA, has 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.

On the effective date of the conversions, PCA will merge into PCA Conversion Corp. and PCA Conversion Corp. will issue its capital stock to the Company and become a wholly owned subsidiary of the Company. Immediately thereafter, PCA Conversion Corp. and PIPE Conversion Corp. will merge into PPIX Conversion Corp., which will then change its name to Positive Insurance and be our single insurance company subsidiary and successor to PPIX, PCA and PIPE.

Overview of PIPE

PIPE is an unincorporated exchange organized on March 14, 2005, and is licensed by the Commonwealth of Pennsylvania as a reciprocal insurance exchange. PIPE provides medical professional liability insurance consisting of claims-made, tail occurrence and occurrence policies to its subscribers (policyholders).

PIPE markets 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, 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 $26.7 million and a surplus of $12.3 million. For the year ended December 31, 2016, PIPE had direct premiums written of $4.2 million, net premiums earned of $3.8 million, and a net income of $0.6 million. At December 31, 2016, PIPE had total assets of $27.8 million and a surplus of $12.2 million. 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.

For the nine months ended September 30, 2018, PIPE had direct premiums written of $3.0 million, net premiums earned of $2.4 million, and net income of $85,000. For the nine months ended September 30, 2017, PIPE had direct premiums written of $3.2 million, net premiums earned of $2.4 million, and a net loss of $66,000. At September 30, 2018, PIPE had total assets of $24.5 million and a surplus of $11.9 million. The loss in PIPE direct premiums written of $0.2 million during the first nine months of 2018 is attributable to non-renewals of policies and limited new business growth.

PIPE Management is 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 provides 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. PIPE Management, as the attorney-in-fact of PIPE, has 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.

On the effective date of the conversions, PIPE will merge into PIPE Conversion Corp. Immediately thereafter, PIPE Conversion Corp. will issue its capital stock to the Company and become a wholly-owned subsidiary of the Company. Immediately thereafter, PIPE Conversion Corp. will merge into PPIX Conversion Corp., which will then change its name to Positive Insurance and be our single insurance company subsidiary and successor to PPIX, PIPE and PCA.

Marketplace Conditions and Trends

The medical professional liability insurance (“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.

Principal Revenue and Expense Items

The exchanges derive their 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 exchanges’ policies typically have a term of twelve months. Thus, for example, for a policy that is written on July 1, 2017, one-half of the premiums would be earned in 2017 and the other half would be earned in 2018.

Net investment income and net realized gains (losses) on investments

The exchanges invest their surplus and the funds supporting their 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 on invested assets. Net realized gains and losses on invested assets are reported separately from net investment income. The exchanges 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. The exchanges’ portfolio of investment securities is managed by Wilmington Trust and the investment committee of each exchange, who have discretion to buy and sell securities in accordance with the investment policy approved by the exchange’s board of directors.

The exchanges’ 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.

Income taxes

The exchanges 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. 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

Each exchange evaluates its insurance operations by monitoring certain key measures of growth and profitability. In addition to reviewing its financial performance based on results determined in accordance with generally accepted accounting principles in the United States (GAAP), each exchange utilizes certain financial performance measures that are used in the property and casualty insurance industry and that it believes are valuable in managing its business and for comparison to its 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.

The exchanges 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. They 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. Each exchange 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 its overall underwriting profit. If the combined ratio is below 100%, the exchange is making an underwriting profit. If its combined ratio is at or above 100%, it is 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 the exchange’s exposure to pricing errors in its 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 exchange’s statements of operations.

Net income (loss) and return on average equity

Each exchange uses net income (loss) to measure its profit and return on average equity to measure its 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. Each exchange is required to make estimates and assumptions in certain circumstances that affect amounts reported in its financial statements and related footnotes. Each exchange evaluates these estimates and assumptions on an on-going basis based on historical developments, market conditions, industry trends and other information that it believes to be reasonable under the circumstances. There can be no assurance that actual results will conform to its 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. The exchanges believe the following policies are the most sensitive to estimates and judgments.

Losses and Loss Adjustment Expenses

Each exchange maintains 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 it, 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 the exchange’s attorney-in-fact, 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, each exchange maintains estimates of reserves for losses and loss adjustment expenses incurred but not reported (“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.

The exchanges utilize an independent actuary to assist with the estimation of its 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. The exchange’s attorney-in-fact 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. The attorney-in-fact may adjust the actuarial estimates based on this supplemental information in order to arrive at the amount recorded in the financial statements.

Each exchange accrues liabilities for unpaid losses and loss adjustment expenses based upon estimates of the ultimate amount payable. The exchange projects its 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.

•

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.

The exchange’s attorney-in-fact 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. The exchange 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, the exchange 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. Each exchange continually refines its loss reserve estimates in a regular ongoing process as historical loss experience develops and additional claims are reported and settled. The exchanges 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. Each exchange reflects adjustments to loss reserves in the results of operations in the period the estimates are changed.

Each exchange’s 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. The exchanges 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.

Each exchange’s 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 each exchange’s 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 the exchange used in its 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 September 30, 2018, December 31, 2017 and December 31, 2016.

As of September 30, 2018 (unaudited)



(dollars in thousands)	Case Reserves		IBNR Reserves		Total Reserves
Medical professional liability	$	12,229	$	19,217	$	31,446
Other	—		—		—
Total net reserves	12,229		19,217		31,446
Reinsurance recoverables	762		5,209		5,971
Gross reserves	$	12,991	$	24,426	$	37,417

As of December 31, 2017 (unaudited)



	Case Reserves		IBNR Reserves		Total Reserves		Actuarially Determined Range of Estimates
(dollars in thousands)	Case Reserves		IBNR Reserves		Total Reserves		Low		High
Medical professional liability	$	11,698	$	20,566	$	32,264	$	29,567	$	36,849
Other	—		—		—		—		—
Total net reserves	11,698		20,566		32,264		$	29,567	$	36,849
Reinsurance recoverables	1,314		4,451		5,765
Gross reserves	$	13,012	$	25,017	$	38,029

As of December 31, 2016 (unaudited)



	Case Reserves		IBNR Reserves		Total Reserves		Actuarially Determined Range of Estimates
(dollars in thousands)	Case Reserves		IBNR Reserves		Total Reserves		Low		High
Medical professional liability	$	9,541	$	20,218	$	29,759	$	26,296	$	34,501
Other	—		—		—		—		—
Total net reserves	9,541		20,218		29,759		$	26,296	$	34,501
Reinsurance recoverables	603		4,452		5,055
Gross reserves	$	10,144	$	24,670	$	34,814

At September 30, 2018, December 31, 2017 and December 31, 2016, PPIX’s total liability for losses and loss adjustment expenses was $37.4 million, $38.0 million and $34.8 million, respectively. During the years ended December 31, 2017 and 2016, PPIX had favorable developments of $2.6 million and $4.4 million, respectively, as a result of a reduction in ultimate loss reserves for prior years, principally due to additional information related to open cases at December 31, 2016 and 2015. There were no favorable or unfavorable developments for the nine months ended September 30, 2018.

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)	2013			2014			2015			2016			2017
As originally estimated	$	26,957		$	28,046		$	29,951		$	29,759		$	32,264
As estimated at December 31, 2017	20,837			21,091			24,159			27,138			32,264
Net cumulative redundancy (deficiency)	$	6,120		$	6,955		$	5,792		$	2,621		$	—
% redundancy (deficiency)	22.7		%	24.8		%	19.3		%	8.8		%	—		%

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, 2017 (dollars in thousands) (unaudited):



Reserve Range for Unpaid Loss and LAE	Aggregate Loss and LAE Reserve		Percentage Change in Equity (1)
Low End	$	29,567	10	%
Recorded	$	32,264	—
High End	$	36,849	(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 $4.6 million. This increase in reserves would have the effect of decreasing net income and equity as of December 31, 2017 by $3.0 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 $2.7 million with a corresponding increase in net income and equity of $1.8 million.

If the liability for losses and loss adjustment expenses reserves were to adversely develop to the high end of the range, approximately $4.6 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

The following table provides case and IBNR reserves for losses and loss adjustment expenses of PCA as of September 30, 2018, December 31, 2017 and December 31, 2016.

As of September 30, 2018 (unaudited)



	Case Reserves		IBNR Reserves		Total Reserves
(dollars in thousands)	Case Reserves		IBNR Reserves		Total Reserves
Medical professional liability	$	12,391	$	5,521	$	17,912
Other	—		—		—
Total net reserves	12,391		5,521		17,912
Reinsurance recoverables	924		1,079		2,003
Gross reserves	$	13,315	$	6,600	$	19,915

As of December 31, 2017 (unaudited)



	Case Reserves		IBNR Reserves		Total Reserves		Actuarially Determined Range of Estimates
(dollars in thousands)	Case Reserves		IBNR Reserves		Total Reserves		Low		High
Medical professional liability	$	8,937	$	8,180	$	17,117	$	15,756	$	19,551
Other	—		—		—		—		—
Total net reserves	8,937		8,180		17,117		$	15,756	$	19,551
Reinsurance recoverables	460		1,008		1,468
Gross reserves	$	9,397	$	9,188	$	18,585

As of December 31, 2016 (unaudited)



	Case Reserves		IBNR Reserves		Total Reserves		Actuarially Determined Range of Estimates
(dollars in thousands)	Case Reserves		IBNR Reserves		Total Reserves		Low		High
Medical professional liability	$	9,026	$	12,251	$	21,277	$	18,893	$	23,831
Other	—		—		—		—		—
Total net reserves	9,026		12,251		21,277		$	18,893	$	23,831
Reinsurance recoverables	189		1,536		1,725
Gross reserves	$	9,215	$	13,787	$	23,002

At December 31, 2016, PCA recorded the actuary’s midpoint estimate plus $400,000 to provide for any retroactive adjustment to its death, disability, and retirement reserves (“DDR”) related to any prospective change in the actuaries’ DDR factors that were not recognized in 2016.

At September 30, 2018, December 31, 2017 and December 31, 2016, PCA’s total liability for losses and loss adjustment expenses was $19.9 million, 18.6 million and $23.0 million, respectively. During the years ended December 31, 2017 and 2016, PCA experienced favorable developments of $0.4 million and $1.2 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 favorable development of $1.2 million during the year ended December 31, 2016 was primarily related to the favorable development related to the reduction in the ultimate loss reserves on claims-made policies for the 2013 and 2015 years. During the nine months ended September 30, 2018, PCA had an unfavorable development of $2.3 million that was primarily related to re-estimation of unpaid losses and loss adjustment expenses in the 2012, 2014 and 2015 policy years.

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)	2013			2014			2015			2016			2017
As originally estimated	$	29,401		$	26,526		$	25,675		$	21,277		$	17,177
As estimated at December 31, 2017	31,895			26,467			24,706			21,463			17,117
Net cumulative redundancy (deficiency)	$	(2,494	)	$	59		$	969		$	(186	)	$	—
% redundancy (deficiency)	(8.5		)%	0.2		%	3.8		%	(0.9		)%	—		%

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, 2017 (dollars in thousands) (unaudited):



Reserve Range for Unpaid Loss and LAE	Aggregate Loss and LAE Reserve		Percentage Change in Equity (1)
Low End	$	15,756	6	%
Recorded	$	17,117	—
High End	$	19,551	(12	)%

__________________


(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 $2.4 million. This increase in reserves would have the effect of decreasing net income and equity as of December 31, 2017 by $1.6 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, 2017 would be reduced by $1.4 million with a corresponding increase in net income and equity of $0.9 million.

If the liability for losses and loss adjustment expenses were to adversely develop to the high end of the range, approximately $2.4 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.

PIPE Actuarial Ranges

The following table provides case and IBNR reserves for losses and loss adjustment expenses of PIPE as of September 30, 2018, December 31, 2017 and December 31, 2016.

As of September 30, 2018 (unaudited)



	Case Reserves		IBNR Reserves		Total Reserves
(dollars in thousands)	Case Reserves		IBNR Reserves		Total Reserves
Medical professional liability	$	5,435	$	4,586	$	10,021
Other	—		—		—
Total net reserves	5,435		4,586		10,021
Reinsurance recoverables	54		231		285
Gross reserves	$	5,489	$	4,817	$	10,306

As of December 31, 2017 (unaudited)



	Case Reserves		IBNR Reserves		Total Reserves		Actuarially Determined Range of Estimates
(dollars in thousands)	Case Reserves		IBNR Reserves		Total Reserves		Low		High
Medical professional liability	$	6,369	$	5,236	$	11,605	$	10,727	$	13,308
Other	—		—		—		—		—
Total net reserves	6,369		5,236		11,605		$	10,727	$	13,308
Reinsurance recoverables	—		156		156
Gross reserves	$	6,369	$	5,392	$	11,761

As of December 31, 2016 (unaudited)



	Case Reserves		IBNR Reserves		Total Reserves		Actuarially Determined Range of Estimates
(dollars in thousands)	Case Reserves		IBNR Reserves		Total Reserves		Low		High
Medical professional liability	$	4,776	$	7,476	$	12,252	$	9,930	$	12,944
Other	—		—		—		—		—
Total net reserves	4,776		7,476		12,252		$	9,930	$	12,944
Reinsurance recoverables	—		91		91
Gross reserves	$	4,776	$	7,567	$	12,343

At September 30, 2018, December 31, 2017 and December 31, 2016, the total liability for losses and loss adjustment expenses was $10.3 million, $11.8 million and $12.3 million, respectively. During the year ended December 31, 2016, PIPE had favorable development in the amount of $2,332,000, which was primarily related to commutation of the 2012 and 2013 reinsurance treaty in the amount of $1,729,000 as well as a favorable development in the amount of $603,000 related to the reduction in the ultimate loss reserves for occurrence policies in 2013 and 2014. 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. During the nine months ended September 30, 2018, PIPE had a favorable development of $283,000 that was primarily related to re-estimation of unpaid losses and loss adjustment expenses in the 2009, 2010 and 2011 policy years.

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.

Recent Variabilities of the Liability for

Unpaid Losses and Loss Adjustment Expenses, Net of Reinsurance Recoverables



Dollars in thousands (unaudited)	2013			2014			2015			2016			2017
As originally estimated	$	13,661		$	15,797		$	14,888		$	12,252		$	11,605
As estimated at December 31, 2017	13,553			12,633			11,337			11,740			11,605
Net cumulative redundancy (deficiency)	$	108		$	3,164		$	3,551		$	512		$	—
% redundancy (deficiency)	0.8		%	20.0		%	23.9		%	4.2		%	—		%

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, 2017 (dollars in thousands) (unaudited):



Reserve Range for Unpaid Loss and LAE	Aggregate Loss and LAE Reserve		Percentage Change in Equity (1)
Low End	$	10,727	5	%
Recorded	$	11,605	—
High End	$	13,308	(9	)%

__________________


(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 $1.7 million. This increase in reserves would have the effect of decreasing net income and equity as of December 31, 2017 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 $0.9 million with corresponding increases in net income and equity of $0.6 million.

If the liability for losses and loss adjustment expenses reserves were to adversely develop to the high end of the range, approximately $1.7 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

Each exchange’s fixed maturity and equity securities investments are classified as available-for-sale and 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. Changes in unrealized investment gains or losses on 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). Investment income is recognized when earned, and capital gains and losses are recognized when investments are sold, or other-than-temporarily impaired.

Fair Value Measurements

Each exchange uses fair value measurements to record fair value adjustments to certain assets to determine fair value disclosures. Investment and mortgage-backed securities available for sale 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 markets

Level 2:	Quoted prices for similar assets in active markets, quoted prices for identical or similar assets in nonactive markets (few transactions, limited information, noncurrent prices, high variability over time, etc., inputs other than quoted prices that are observable for the asset (interest rates, yield curves, volatilities, default rates, etc., and inputs that are derived principally from or corroborated by other observable market data.

Level 3:	Unobservable inputs that cannot be corroborated by observable market data.

Under ASC Topic 820, each exchange bases its fair values 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 the exchange 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.

Each 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.

PPIX Investments

The fair value and unrealized losses for PPIX’s securities that were temporarily impaired as of September 30, 2018, December 31, 2017 and December 31, 2016 are as follows:



	Less than 12 months (dollars in thousands)				12 months or longer (dollars in thousands)				Total (dollars in thousands)
Description of securities	Fair Value		Unrealized losses		Fair Value		Unrealized losses		Fair Value		Unrealized losses
September 30, 2018 (unaudited):
U.S. Government and government agencies and authorities	$	6,680	$	67	$	4,913	$	158	$	11,593	$	225
Industrial and miscellaneous	15,932		323		7,529		381		23,461		704
Total fixed maturities	22,612		390		12,442		539		35,054		929
Common stocks, unaffiliated	448		188		517		157		965		345
Total temporarily impaired securities	$	23,060	$	578	$	12,959	$	696	$	36,019	$	1,274



	Less than 12 months (dollars in thousands)				12 months or longer (dollars in thousands)				Total (dollars in thousands)
Description of securities	Fair Value		Unrealized losses		Fair Value		Unrealized losses		Fair Value		Unrealized losses
December 31, 2017 (audited):
U.S. Government and government agencies and authorities	$	4,328	$	85	$	4,668	$	29	$	8,996	$	114
Industrial and miscellaneous	9,474		128		1,699		7		11,173		135
Total fixed maturities	13,802		213		6,367		36		20,169		249
Common stocks, unaffiliated	795		48		231		231		1,026		279
Total temporarily impaired securities	$	14,597	$	261	$	6,598	$	267	$	21,195	$	528



	Less than 12 months (dollars in thousands)				12 months or longer (dollars in thousands)				Total (dollars in thousands)
Description of securities	Fair Value		Unrealized losses		Fair Value		Unrealized losses		Fair Value		Unrealized losses
December 31, 2016 (audited):
U.S. Government and government agencies and authorities	$	8,146	$	146	$	4,183	$	29	$	12,329	$	175
Industrial and miscellaneous	6,613		193		3,768		18		10,381		211
Total fixed maturities	14,759		339		7,951		47		22,710		386
Common stocks, unaffiliated	400		10		445		193		845		203
Total temporarily impaired securities	$	15,159	$	349	$	8,396	$	240	$	23,555	$	589

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 September 30, 2018 (in thousands) (unaudited):



	Total		Level 1		Level 2		Level 3
Bonds	$	41,775	$	—	$	41,775	$	—
Common stocks	$	2,860	$	2,860	$	—	$	—

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 3
Bonds	$	43,786	$	—	$	43,786	$	—
Common stocks	$	2,807	$	2,807	$	—	$	—



	Total		Level 1		Level 2		Level 3
Bonds	$	39,155	$	—	$	39,155	$	—
Common stocks	$	2,491	$	2,491	$	—	$	—

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.

PPIX has evaluated each security and taken 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 has 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. PPIX’s fixed maturity portfolio is managed by the company’s 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 PPIX’s investment committee if such sale will result in a net realized loss.

PPIX monitors its investment portfolio and reviews 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, PPIX compares 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 PPIX identifies that an other-than-temporary impairment loss has occurred, PPIX then determines whether it intends to sell the security, or if it is more likely than not that PPIX will be required to sell the security prior to recovering the amortized cost basis less any current-period credit losses. If PPIX determines that it does not intend to sell, and it is not more likely than not that PPIX 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 PPIX determines that it intends to sell the security, or that it is more likely than not that PPIX 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 nine months ended September 30, 2018 and for the years ended December 31, 2017 and 2016, 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 requires 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 September 30, 2018, December 31, 2017 and December 31, 2016 are as follows:



	Less than 12 months (dollars in thousands)				12 months or longer (dollars in thousands)				Total (dollars in thousands)
Description of securities	Fair Value		Unrealized losses		Fair Value		Unrealized losses		Fair Value		Unrealized losses
September 30, 2018 (unaudited):
U.S. Government and government agencies and authorities	$	5,244	$	95	$	—	$	—	$	5,244	$	95
Industrial and miscellaneous	19,207		518		—		—		19,207		518
Total fixed maturities	24,451		613		—		—		24,451		613
Common stocks, unaffiliated	282		17		254		21		536		38
Total temporarily impaired securities	$	24,733	$	630	$	254	$	21	$	24,987	$	651



	Less than 12 months (dollars in thousands)				12 months or longer (dollars in thousands)				Total (dollars in thousands)
Description of securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2017 (audited):
U.S. Government and government agencies and authorities	$	2,508	$	5	$	4,806	$	65	$	7,314	$	70
Industrial and miscellaneous	7,514		58		3,212		32		10,726		90
Total fixed maturities	10,022		63		8,018		97		18,040		160
Common stocks, unaffiliated	187		5		214		4		401		9
Total temporarily impaired securities	$	10,209	$	68	$	8,233	$	101	$	18,441	$	169



	Less than 12 months (dollars in thousands)				12 months or longer (dollars in thousands)				Total (dollars in thousands)
Description of securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2016 (audited):
U.S. Government and government agencies and authorities	$	6,345	$	61	$	3,010	$	9	$	9,355	$	70
Industrial and miscellaneous	4,034		52		2,011		21		6,045		73
Total fixed maturities	10,379		113		5,021		30		15,400		143
Common stocks, unaffiliated	462		26		376		39		838		65
Total temporarily impaired securities	$	10,841	$	139	$	5,397	$	69	$	16,238	$	208

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 September 30, 2018 (in thousands) (unaudited):



	Total		Level 1		Level 2		Level 3
Bonds	$	25,587	$	—	$	25,587	$	—
Common stocks	$	3,324	$	3,324	$	—	$	—

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 3
Bonds	$	25,714	$	—	$	25,714	$	—
Common stocks	$	3,241	$	3,241	$	—	$	—



	Total		Level 1		Level 2		Level 3
Bonds	$	30,843	$	—	$	30,843	$	—
Common stocks	$	2,394	$	2,394	$	—	$	—

PCA has evaluated each security and taken 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 has 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. PCA’s fixed maturity portfolio is managed by the company’s 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 PCA’s investment committee if such sale will result in a net realized loss.

PCA monitors its investment portfolio and reviews 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, PCA compares 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 PCA identifies that an other-than-temporary impairment loss has occurred, PCA then determines whether it intends to sell the security, or if it is more likely than not that PCA will be required to sell the security prior to recovering the amortized cost basis less any current-period credit losses. If PCA determines that it does not intend to sell, and it is not more likely than not that PCA 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 PCA determines that it intends to sell the security, or that it is more likely than not that PCA 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 nine months ended September 30, 2018 and for the years ended December 31, 2017 and 2016, 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.

PIPE Investments

The fair value and unrealized losses for PIPE’s securities that were temporarily impaired as of September 30, 2018, December 31, 2017 and December 31, 2016 are as follows:



	Less than 12 months (dollars in thousands)				12 months or longer (dollars in thousands)				Total (dollars in thousands)
Description of securities	Fair Value		Unrealized losses		Fair Value		Unrealized losses		Fair Value		Unrealized losses
September 30, 2018 (unaudited):
U.S. Government and government agencies and authorities	$	1,928	$	24	$	1,869	$	87	$	3,797	$	111
Industrial and miscellaneous	7,571		215		4,071		190		11,642		405
Total fixed maturities	9,499		239		5,940		277		15,439		516
Common stocks, unaffiliated	251		15		223		23		474		38
Total temporarily impaired securities	$	9,750	$	254	$	6,163	$	300	$	15,913	$	554



	Less than 12 months (dollars in thousands)				12 months or longer (dollars in thousands)				Total (dollars in thousands)
Description of securities	Fair Value		Unrealized losses		Fair Value		Unrealized losses		Fair Value		Unrealized losses
December 31, 2017 (audited):
U.S. Government and government agencies and authorities	$	387	$	2	$	2,978	$	120	$	3,365	$	122
Industrial and miscellaneous	6,920		54		1,707		12		8,627		66
Total fixed maturities	7,306		56		4,685		132		11,992		188
Common stocks, unaffiliated	187		6		98		2		285		8
Total temporarily impaired securities	$	7,494	$	62	$	4,783	$	135	$	12,277	$	196



	Less than 12 months (dollars in thousands)				12 months or longer (dollars in thousands)				Total (dollars in thousands)
Description of securities	Fair Value		Unrealized losses		Fair Value		Unrealized losses		Fair Value		Unrealized losses
December 31, 2016 (audited):
U.S. Government and government agencies and authorities	$	4,705	$	105	$	520	$	43	$	5,225	$	148
Industrial and miscellaneous	1,458		15		1,937		26		3,395		41
Total fixed maturities	6,163		120		2,457		69		8,620		189
Common stocks, unaffiliated	602		20		—		—		602		20
Total temporarily impaired securities	$	6,765	$	140	$	2,457	$	69	$	9,222	$	209

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 September 30, 2018 (in thousands) (unaudited):



	Total		Level 1		Level 2		Level 3
Bonds	$	19,449	$	—	$	19,449	$	—
Common stocks	$	1,920	$	1,920	$	—	$	—

= 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 3
Bonds	$	21,229	$	—	$	21,229	$	—
Common stocks	$	1,820	$	1,820	$	—	$	—

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, 2016 (in thousands) (audited):



	Total		Level 1		Level 2		Level 3
Bonds	$	16,619	$	—	$	16,619	$	—
Common stocks	$	1,231	$	1,231	$	—	$	—

PIPE has evaluated each security and taken 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 has 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. PIPE’s fixed maturity portfolio is managed by its 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 PIPE’s investment committee if such sale will result in a net realized loss.

PIPE monitors its investment portfolio and reviews 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, PIPE compares 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 PIPE identifies that an other-than-temporary impairment loss has occurred, PIPE then determines whether it intends to sell the security, or if it is more likely than not that PIPE will be required to sell the security prior to recovering the amortized cost basis less any current-period credit losses. If PIPE determines that it does not intend to sell, and it is not more likely than not that PIPE 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 PIPE determines that it intends to sell the security, or that it is more likely than not that PIPE 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 nine months ended September 30, 2018 and for the years ended December 31, 2017 and 2016, 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.

Management of each exchange reviews the reasonableness of the pricing provided by the independent pricing service by employing various analytical procedures. 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 nine months ended September 30, 2018 and for the years ended December 31, 2017 and 2016; accordingly, no adjustments were made to the estimates provided by the pricing service for the nine months ended September 30, 2018 and for the years ended December 31, 2017 and 2016. 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 September 30, 2018, December 31, 2017 and December 31, 2016, PPIX’s deferred acquisition costs and the related unearned premium reserves were as follows (dollars in thousands):



	September 30, 2018		December 31, 2017		December 31, 2016
	(unaudited)		(audited)		(audited)
Deferred acquisition costs	$	2,191	$	2,504	$	1,714
Unearned premium reserves	$	7,373	$	8,211	$	7,435

At September 30, 2018, December 31, 2017 and December 31, 2016, PCA’s deferred acquisition costs and the related unearned premium reserves were as follows (dollars in thousands):



	September 30, 2018		December 31, 2017		December 31, 2016
	(unaudited)		(audited)		(audited)
Deferred acquisition costs	$	882	$	1,189	$	1,219
Unearned premium reserves	$	4,575	$	5,494	$	6,706

At September 30, 2018, December 31, 2017 and December 31, 2016, PIPE’s deferred acquisition costs and the related unearned premium reserves were as follows (dollars in thousands):



	September 30, 2018		December 31, 2017		December 31, 2016
	(unaudited)		(audited)		(audited)
Deferred acquisition costs	$	551	$	385	$	422
Unearned premium reserves	$	2,014	$	1,609	$	1,753

Reinsurance Recoverable

The exchanges cede reinsurance risk to other insurance companies. This arrangement allows the exchange to reduce the net loss potential arising from large risks. Reinsurance contracts do not relieve the exchange 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. The reinsurance contracts provide for return premium based on the actual loss experience of the written and reinsured business. Each exchange estimates the amounts to be recorded for return premium based on the terms set forth in the reinsurance contract.

Income Taxes

Each exchange uses 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.

Each exchange exercises significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require the exchange to make projections of future taxable income. The judgments and estimates the exchange makes in determining its 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 the exchange to record a valuation allowance against its deferred tax assets.

PPIX Deferred Tax Assets

PPIX had gross deferred tax assets of $0.9 million and $1.2 million at December 31, 2017 and December 31, 2016, respectively. PPIX had gross deferred tax assets of $0.8 million and $1.2 million at September 30, 2018 and 2017, respectively. A valuation allowance is required to be established for any portion of the deferred tax asset for which PPIX believes it is more likely than not that it will not be realized. PPIX believes 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, 2017 and December 31, 2016 as well as at September 30, 2018 and 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 has measured its deferred income taxes at September 30, 2018 and December 31, 2017 using a tax rate of 21%. The effect on surplus was a decrease of approximately $26,000 for the year ended December 31, 2017.

At September 30, 2018, December 31, 2017, and December 31, 2016, PPIX had no material unrecognized tax benefits or accrued interest and penalties. Federal tax years 2014 through 2017 are open for examination.

PCA Deferred Tax Assets

PCA had gross deferred tax assets of $0.5 million,and $0.8 million at December 31, 2017 and December 31, 2016, respectively. PCA had gross deferred tax assets of approximately $0.5 million and $0.7 million at September 30, 2018 and 2017, respectively. A valuation allowance is required to be established for any portion of the deferred tax asset for which PCA believes it is more likely than not that it will not be realized. PCA believes 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, 2017 and December 31, 2016 as well as at September 30, 2018 and 2017.

Although most of the provisions of the TCJA will 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 has measured its deferred income taxes at September 30, 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 September 30, 2018, December 31, 2017, and December 31, 2016, PCA had no material unrecognized tax benefits or accrued interest and penalties. Federal tax years 2014 through 2016 are open for examination.

PIPE Deferred Tax Assets

PIPE had gross deferred tax assets of $0.3 million and $0.5 million at December 31, 2017 and 2016, respectively. PIPE had gross deferred tax assets of $0.3 million and $0.5 million at September 30, 2018 and 2017, respectively. A valuation allowance is required to be established for any portion of the deferred tax asset for which PIPE believes it is more likely than not that it will not be realized. PIPE believes it is more likely than not that all of the deferred tax assets will be realized. Accordingly, no valuation allowance had been established at September 30, 2018, December 31, 2017, and December 31, 2016.

Although most of the provisions of the TCJA will 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 has measured its deferred income taxes at September 30, 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 September 30, 2018, December 31, 2017 and December 31, 2016, PCA had no material unrecognized tax benefits or accrued interest and penalties. Federal tax years 2014 through 2017 are open for examination.

Results of Operations of PPIX

PPIX’s 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.

PPIX 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 PPIX operates 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.

The major components of PPIX’s operating revenues and net income are as follows (dollars in thousands):



	Nine Months Ended September 30,						Year Ended December 31,
	2018			2017			2017			2016
	(unaudited)			(unaudited)			(audited)			(audited)
Revenues:
Net premiums earned	$	9,644		$	9,694		$	12,275		$	8,591
Total revenues	9,644			9,694			12,275			8,591
Expenses:
Losses and loss adjustment expenses	5,435			6,540			7,733			3,920
Underwriting expenses	4,906			4,047			5,787			4,391
Underwriting (loss) income	(697)			(893)			(1,245		)	280
Investment income, net of investment expense	873			769			1,038			1,145
Realized investment gains (losses), net	30			35			(66		)	38
Interest expense	(5		)	(7		)	(9		)	(53		)
Income (loss) before income taxes	201			(95		)	(282		)	1,411
Income tax expense (benefit)	7			(170)			(260		)	586
Net income (loss)	$	194		$	75		$	(22	)	$	825

Premiums Written and Premiums Earned

Direct written premium for the year ended December 31, 2017 was $15.3 million as compared to $13.8 million for the year ended December 31, 2016, or an 11% increase. Direct premium earned for the year ended December 31, 2017 was $14.6 million as compared to $12.9 million for the year ended December 31, 2016, or a 13% increase. Direct ceded premium earned for the year ended December 31, 2017 was $2.3 million as compared to $4.3 million during the year ended December 31, 2016.

Direct written premium for the nine months ended September 30, 2018 was $10.3 million as compared to $10.3 million for the nine months ended September 30, 2017, or a 0.4% increase. Direct premium earned for the nine months year ended September 30, 2018 was $11.2 million as compared to $10.7 million for the nine months ended September 30, 2017, or a 4.7% increase. Direct ceded premium earned for the nine months ended September 30, 2018 was $1.5 million as compared to $1.0 million during the nine months ended September 30, 2017.

Net Investment Income

The following table sets forth our average cash and invested assets and investment income for the reported periods (dollars in thousands) (unaudited):



	Nine Months Ended September 30						Year Ended December 31,
	2018			2017			2017			2016
Average cash and invested assets	$	51,479		$	49,709		$	50,823		$	48,351
Net investment income	873			769			1,038			1,145
Return on average cash and invested assets (1)	2.26		%	2.06		%	2.04		%	2.37		%

__________________


(1)	Return on average cash and invested assets is calculated on an annualized basis.

Investment Income, Net of Expenses

Net investment income for the year ended December 31, 2017 was $1.0 million as compared to $1.1 million for the year ended December 31, 2016. The average monthly net investment income decreased from $95,000 during the year ended December 31, 2016 to $87,000 during the year ended December 31, 2017.

Net investment income for the nine months ended September 30, 2018 was $0.9 million as compared to $0.8 million for the nine months ended September 30, 2017. The average monthly net investment income increased from $85,000 during the nine months ended September 30, 2017 to $97,000 during the nine months ended September 30, 2018. The increase in net investment income is due to an increase of $1.8 million in average cash and invested assets and a 20 basis point increase in the return earned on such assets when comparing the nine months ended September 30, 2018 to the same period in 2017.

Realized Investment Gains (Losses), Net

PPIX had a net realized investment loss of $(66,000) for the year ended December 31, 2017 as compared to a net realized investment gain of $38,000 for the year ended December 31, 2016. PPIX had a net realized investment gain of $30,000 for the nine months ended September 30, 2018 as compared to a net realized gain of $35,000 for the nine months ended September 30, 2017.

PPIX’s fixed maturity investments and equity investments are classified as available for sale because it will, from time to time, make sales of securities that are not impaired, consistent with its investment goals and policies. At December 31, 2017, PPIX had gross unrealized losses on fixed maturity securities of approximately $250,000 as compared to a gross unrealized losses on fixed maturity securities of $386,000 at December 31, 2016. At September 30, 2018, PPIX had gross unrealized losses on fixed maturity securities of approximately $929,000 as compared to a gross unrealized losses on fixed maturity securities of $161,000 at September 30, 2017. Most of these unrealized losses were attributable to fluctuations in interest rates. PPIX has evaluated each security and taken 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 believes 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 that it will not recover the entire amortized cost basis.

Underwriting Income (Loss)

As discussed above, PPIX evaluates its insurance operations by monitoring certain key measures of growth and profitability. In addition to using GAAP based performance measurements, PPIX also utilizes certain financial performance measures that are used widely in the property and casualty insurance industry and that it believes are valuable in managing its business and for comparison to its 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 63.0% for the year ended December 31, 2017 as compared to 45.6% for the year ended December 31, 2016. PPIX’s losses and loss adjustment expenses ratio was 56.4% for the nine months ended September 30, 2018 as compared to 67.5% for the nine months ended September 30, 2017.

During the years ended December 31, 2017 and 2016, PPIX had favorable developments of $2.6 million and $4.4 million, respectively. The positive development in both 2017 and 2016 was primarily a result of the settlement of known claims below the amount for which they had been previously reserved, as well as additional revisions to the Company’s estimate of its ultimate losses for the 2012 through 2015 accident years. During both 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, management 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.

During the nine months ended September 30, 2018 and 2017, PPIX had no favorable or unfavorable developments related to its loss reserves.

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 $5.8 million for the year ended December 31, 2017 as compared to $4.4 million for the year ended December 31, 2016. Total underwriting and administrative expenses, including amortization of deferred policy acquisition costs, were $5.4 million for the nine months ended September 30, 2018 as compared to $6.5 million for the nine months ended September 30, 2017. Administrative costs are directly tied to the amount of premiums written by PPIX in a given period, because the fees payable to SIS are equal to 25% of the premiums written by PPIX.

Income (Loss) Before Income Taxes

For the year ended December 31, 2017, PPIX had pre-tax loss of $(282,000) as compared to a pre-tax income of $1.4 million for the year ended December 31, 2016. For the nine months ended September 30, 2018, PPIX had pre-tax income of $201,000 as compared to a pre-tax loss of $(95,000) for the nine months ended September 30, 2017.

Income Tax Expense (Benefit)

The provision for income taxes for the year ended December 31, 2017 was a benefit of $(260,000) as compared to a provision for income tax expense of $586,000 for the year ended December 31, 2016. The provision for income taxes for the nine months ended September 30, 2018 was an expense of $7,000 as compared to a provision for income tax benefit of $(170,000) for the nine months ended September 30, 2017. PPIX’s effective tax rate for the years ended December 31, 2017 and 2016 was 34% and an effective tax rate of 21% for the nine months ended September 30, 2018.

Net Income (Loss)

For the year ended December 31, 2017, PPIX had net loss of $(22,000) as compared to a net income of $824,000 for the year ended December 31, 2016. For the nine months ended September 30, 2018, PPIX had net income of $194,000 as compared to net income of $75,000 for the nine months ended September 30, 2017.

Mandatory Assumed Reinsurance:

PPIX is required to participate in 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 (refund) of $(28,000) and $35,000 for the years ended December 31, 2017 and 2016, respectively. PPIX incurred assessment fee expense of $21,000 and $22,000 for the nine months ended September 30, 2018 and 2017, respectively.

Financial Position of PPIX

At December 31, 2017, PPIX had total assets of $67.2 million as compared to $64.1 million at December 31, 2016. The increase in total assets is primarily attributable to an increase in total cash and invested assets by $4.0 million from December 31, 2016 to December 31, 2017 due to timing of investment in securities and more premiums written in 2017 as compared to 2016, an increase in premiums receivable by $1.1 million, increase in deferred acquisition costs of $0.8 million, all of which were offset by a decrease in reinsurance receivables, which are attributable mainly to the timing of payments from reinsurers, of $2.6 million.

At September 30, 2018, PPIX had total assets of $63.8 million as compared to $63.4 million at September 30, 2017. The decrease in total assets from December 31, 2017 to September 30, 2018 is primarily attributable to an decrease in total cash and invested assets by $2.7 million due to timing of investment in securities, a decrease in premiums receivable by $1.0 million, a decrease in deferred acquisition costs of $0.3 million, and an increase in reinsurance receivables, which are attributable mainly to the timing of payments from reinsurers, of $0.5 million.

At December 31, 2017, PPIX had total liabilities of $49.6 million as compared to $47.2 million at December 31, 2016. The increase between December 31, 2016 to December 31, 2017 is primarily attributable to a $3.2 million increase in the liability for losses and loss adjustment expenses, a $1.2 million decrease in unearned and advance premiums, a decrease in other liabilities of $0.9 million, and repayment of surplus notes in the amount of $0.5 million.

At September 30, 2018, PPIX had total liabilities of $46.7 million as compared to $45.8 million at September 30, 2017. The decrease in total liabilities between December 31, 2017 to September 30, 2018 is primarily attributable to a $0.6 million decrease in the liability for losses and loss adjustment expenses, a $1.2 million decrease in unearned and advance premiums, and a decrease in other liabilities of $1.0 million.

At December 31, 2017, total equity was $17.5 million as compared to $16.9 million at December 31, 2016. The increase in equity during the year ended December 31, 2017 is attributable to comprehensive income of $650,000. At September 30, 2018, total equity was $17.1 million as compared to $17.6 million at September 30, 2017. The decrease in equity during the nine months ended September 30, 2018 is attributable to a comprehensive loss of $0.5 million.

Effect of Conversion on PPIX

As a result of the conversion, PPIX will merge with and into PPIX Conversion Corp., and PPIX will no longer exist as a separate company. Upon completion of the conversions of PPIX, PCA and PIPE, the combination of PPIX Conversion Corp., PIPE Conversion Corp., and PCA Conversion Corp., and the offering, the pro forma shareholders’

equity of Positive Insurance will be approximately $43.6 million assuming that no contribution to Positive Insurance of any of the net proceeds from the offering. See “Use of Proceeds.” This increased capitalization should permit Positive Insurance 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’s investment portfolio.

Liquidity and Capital Resources of PPIX

PPIX generates sufficient funds from its operations and maintains a high degree of liquidity in its investment portfolio to meet the demands of claim settlements and operating expenses. The primary sources of funds are premium collections, investment earnings and maturing investments.

PPIX maintains investment and reinsurance programs that are intended to provide sufficient funds to meet its obligations without forced sales of investments. PPIX maintains 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 September 30, 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 than 1 year		1-3 years		3-5 years		More than 5 years
Estimated gross losses & loss adjustment expense payments	$	28,213	$	636	$	6,735	$	15,191	$	5,650
Total Contractual Obligations	$	28,213	$	636	$	6,735	$	15,191	$	5,650

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 nine months ended September 30, 2018 and 2017 and for the years ended December 31, 2017 and 2016 were as follows (dollars in thousands):



	Nine Months Ended September 30,						Years Ended December 31,
	2018			2017			2017			2016
	(unaudited)			(unaudited)			(audited)			(audited)
Cash flows (used in) provided by operating activities	$	(1,687	)	$	1,444		$	3,741		$	1,221
Cash flows provided by (used in) investing activities	829			(4,086		)	(6,082		)	(1,544		)
Cash flows used in financing activities	(45		)	(580		)	(595		)	(55		)
Net decrease in cash and cash equivalents	$	(903	)	$	(3,222	)	$	(2,936	)	$	(378	)

For the year ended December 31, 2017, cash flows from operations were $3.7 million as compared to $1.2 million during the year ended December 31, 2016. The increase in cash flows from operating activities was primarily attributable to the timing of paid losses. For the year ended December 31, 2017, cash flows from investing activities were $(6.1) million as compared to $(1.5) million for the year ended December 31, 2016. The decrease in cash flows from investing activities is primarily attributable to the time necessary to reinvest maturing securities. For the year ended December 31, 2017, cash flows from financing activities were $(0.6) million as compared to $(55,000) for the year ended December 31, 2016. The larger negative cash flows from financing activities is attributable to repayment of long-term debt and surplus notes.

For the nine months ended September 30, 2018, cash flows from operations were $(1.7) million as compared to $1.4 million during the nine months ended September 30, 2017. The decrease in cash flows during the nine months ended September 30, 2018 from operating activities was primarily attributable to the timing of paid losses. For the nine months ended September 30, 2018, cash flows from investing activities were $0.9 million as compared to $(4.1) million for the nine months ended September 30, 2017. The increase in cash flows during the nine months ended September 30, 2018 from investing activities is primarily attributable to the time necessary to reinvest maturing securities. For the nine months ended September 30, 2018, cash flows from financing activities were $(45,000) as compared to $(580,000) for the nine months ended September 30, 2017. The smaller negative cash flows from financing activities during the nine months ended September 30, 2018 is attributable to repayment of long-term debt.

The Company’s principal source of liquidity will be dividend payments from Positive Insurance. Positive Insurance 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 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 as reported on its most recent annual statement filed with the Pennsylvania Insurance Department, or (ii) the statutory net income of Positive Insurance 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.

The amount available for payment of dividends from Positive Insurance after the conversions without the prior approval of the Pennsylvania Insurance Department is approximately $4.3 million based upon the estimated pro forma statutory surplus of Positive Insurance. Prior to its payment of any dividend, Positive Insurance 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 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, the Company will become a public company and will become 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 has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its 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. The exchanges have exposure to three principal types of market risk through their investment activities: interest rate risk, credit risk and equity risk. The exchanges’ primary market risk exposure is to changes in interest rates. None of the exchanges has 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 debt securities in the investment portfolios of PPIX, PCA, and PIPE at September 30, 2018 was 3.47 years, 3.22 years, and 4.02 years, respectively. Each exchange’s debt securities investments include 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 carries these investments as available for sale. This allows 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 advisers and 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 an exchange is required to sell these securities in a rising interest rate environment it may recognize losses.

As a general matter, each exchange attempts to match the durations of its assets with the durations of its liabilities. Each exchange’s investment objectives include maintaining adequate liquidity to meet its operational needs, optimizing its after-tax investment income, and its after-tax total return, all of which are subject to the exchange’s tolerance for risk.

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 September 30, 2018 (unaudited):



	Estimated Change in Fair Value			Fair Value
Hypothetical Change in Interest Rates	(Dollars in thousands)
200 basis point increase	$	(2,985	)	$	38,790
100 basis point increase	(1,491		)	40,284
No change				41,775
100 basis point decrease	1,482			43,257
200 basis point decrease	2,966			44,741

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 September 30, 2018 (unaudited):



	Estimated Change in Fair Value			Fair Value
Hypothetical Change in Interest Rates	(Dollars in thousands)
200 basis point increase	$	(1,828	)	$	23,759
100 basis point increase	(913		)	24,674
No change				25,587
100 basis point decrease	908			26,495
200 basis point decrease	1,817			27,404

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 September 30, 2018 (unaudited):



	Estimated Change in Fair Value			Fair Value
Hypothetical Change in Interest Rates	(Dollars in thousands)
200 basis point increase	$	(1,390	)	$	18,059
100 basis point increase	(694		)	18,755
No change				19,449
100 basis point decrease	690			20,139
200 basis point decrease	1,381			20,830

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 addresses this risk by investing primarily in fixed maturity securities that are rated at least “A” by Moody’s or an equivalent rating quality. Each exchange also independently, and through its outside investment manager, monitors the financial condition of all of the issuers of fixed maturity securities in the portfolio. To limit its exposure to risk, each exchange employs diversification rules that limit the credit exposure to any single issuer or asset class.

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. The exchanges, 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, the exchanges 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 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, regulation and changes in regulation, rising medical expenses, judicial trends, fluctuations in interest rates and other changes in the investment environment.

PCA 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 in which PCA operates, 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.

The major components of PCA’s operating revenues and net income are as follows (dollars in thousands):



	Nine Months Ended September 30,						Year Ended December 31,
	2018			2017			2017			2016
	(unaudited)			(unaudited)			(audited)			(audited)
Revenues:
Net premiums earned	$	4,475		$	5,753		$	7,480		$	13,310
Total revenues	4,475			5,753			7,480			13,310
Expenses:
Losses and loss adjustment expenses	5,052			2,646			4,012			6,550
Underwriting expenses	2,579			2,725			3,500			6,091
Underwriting (loss) income	(3,156		)	382			(33		)	669
Investment income, net of investment expenses	550			395			571			633
Realized investment gains (losses), net	11			15			13			(10		)
Interest expense	—			(31		)	(31		)	—
(Loss) income before income taxes	(2,595		)	761			520			1,292
Income tax (benefit) expense	(515		)	225			209			671
Net (loss) income	$	(2,080	)	$	536		$	311		$	621

Premiums Written and Premiums Earned

Direct written premium for year ended December 31, 2017 was $7.7 million as compared to $11.9 million for the year ended December 31, 2016, or a 36% decrease. Direct premium earned for the year ended December 31, 2017 was $8.9 million as compared to $15.7 million for the year ended December 31, 2016, or a 43% decrease. Direct ceded premium earned for the year ended December 31, 2017 was $1.4 million as compared to $2.4 million during the year ended December 31, 2016 or a 41% decrease.

Direct written premium for the nine months ended September 30, 2018 was $4.2 million as compared to $5.1 million for the nine months ended September 30, 2017, or a 16.4% decrease. Direct premium earned for the nine months year ended September 30, 2018 was $5.2 million as compared to $6.8 million for the nine months ended September 30, 2017, or a 24.8% decrease. Direct ceded premium earned for the nine months ended September 30, 2018 was $0.7 million as compared to $1.1 million during the nine months ended September 30, 2017.

Net Investment Income

The following table sets forth our average invested assets and investment income for the reported periods (dollars in thousands) (unaudited):



	Nine Months Ended September 30,						Year Ended December 31,
	2018			2017			2017			2016
Average cash and invested assets	$	32,335		$	37,566		$	36,120		$	42,845
Net investment income	550			395			571			633
Return on average cash and invested assets (1)	2.27		%	1.40		%	1.58		%	1.48		%

__________________


(1)	Return on average cash and invested assets is calculated on an annualized basis.

Investment Income, Net of Expenses

Net investment income for the year ended December 31, 2017 was $0.6 million as compared to $0.6 million for the year ended December 31, 2016. Net investment income held steady during the year ended December 31, 2017 as compared to the year ended December 31, 2016 despite a 15.7% decrease in average cash and invested assets. The average monthly net investment income was approximately $53,000 per month during the year ended December 31, 2016 and $48,000 per month during the year ended December 31, 2017.

Net investment income for the nine months ended September 30, 2018 was $0.5 million as compared to $0.4 million for the nine months ended September 30, 2017. The average monthly net investment income increased from $44,000 during the nine months ended September 30, 2017 to $61,000 during the nine months ended September 30, 2018 due to a 80 basis point increase in the return on average cash and invested assets.

Realized Investment Gains (Losses), Net

PCA had net realized gains of approximately $13,000 for the year ended December 31, 2017 as compared to net realized losses of approximately $(10,000) for the year ended December 31, 2016. PCA had a net realized investment gain of $11,000 for the nine months ended September 30, 2018 as compared to a net realized gain of $15,000 for the nine months ended September 30, 2017.

PCA’s fixed maturity investments and equity investments are classified as available for sale because it will, from time to time, make sales of securities that are not impaired, consistent with our investment goals and policies. At December 31, 2017, PCA had gross unrealized losses on fixed maturity securities of approximately $160,000 as compared to gross unrealized losses on fixed maturity securities of approximately $143,000 at December 31, 2016. At September 30, 2018, PCA had a gross unrealized loss on fixed maturity securities of approximately $613,000 as compared to a gross unrealized loss on fixed maturity securities of $81,000 at September 30, 2017. Most of these unrealized losses were attributable to an increase in interest rates. PCA has evaluated each security and taken 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 believes 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 that it will not recover the entire amortized cost basis.

Underwriting Income

As discussed above, PCA evaluates its insurance operations by monitoring certain key measures of growth and profitability. In addition to using GAAP based performance measurements, PCA also utilizes certain financial performance measures that are used widely in the property and casualty insurance industry and that it believes are valuable in managing its business and for comparison to its peers. 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.

Losses and Loss Adjustment Expenses

PCA’s losses and loss adjustment expenses ratio was 53.6% for the year ended December 31, 2017 as compared to 49.2% for the year ended December 31, 2016. PCA’s losses and loss adjustment expenses ratio was 112.9% as compared to 46.0% for the nine months ended September 30, 2017.

During the year ended December 31, 2017, PCA had a favorable development of $0.4 million that was primarily related to re-estimation of unpaid losses and loss adjustment expenses on all claims-made policy years. During the

year ended December 31, 2016, PCA had a favorable development of $1.2 million was primarily related to the favorable development related to the reduction in the ultimate loss reserves on claims-made policies for the 2013 and 2015 years.

The unfavorable development for the nine months ended September 30, 2018 of $2.3 million that was primarily related to re-estimation of unpaid losses and loss adjustment expenses in the 2012, 2014 and 2015 policy years. The unfavorable development for the nine months ended September 30, 2017 of $0.7 million was primarily related to re-estimation of unpaid losses and loss adjustment expenses on all claims-made policy years.

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 $3.5 million for the year ended December 31, 2017 and $6.1 million for the year ended December 31, 2016. PCA had $125,180 and $633,359 in initial public offering and conversion costs that were expensed in 2017 and 2016, respectively, and are included in underwriting and administrative expenses. Total underwriting and administrative expenses, including amortization of deferred policy acquisition costs, were $2.6 million for the nine months ended September 30, 2018 as compared to $2.7 million for the nine months ended September 30, 2017. Administrative costs are directly tied to the amount of premiums written by PCA in a given period, because the fees payable to PTP are equal to 25% of the premiums written by PCA.

Income Before Income Taxes

PCA had pre-tax income of approximately $0.5 million for the year ended December 31, 2017 as compared to a pre-tax income of approximately $1.3 million for the year ended December 31, 2016. For the nine months ended September 30, 2018, PCA had pre-tax loss of $2.6 million as compared to a pre-tax income of $0.8 million for the nine months ended September 30, 2017. The decrease in income before income taxes between the nine months ended September 30, 2018 and the same period in 2017 is primary related due to a reduction in net premiums earned of $1.3 million and an increase in loss and loss adjustment expenses of $2.4 million.

Income Tax Expense (Benefit)

For the year ended December 31, 2017, PCA had an income tax expense of approximately $0.2 million as compared to an income tax expense of $0.7 million for the year ended December 31, 2016. PCA had an income tax benefit of approximately $0.5 million for the nine months ended September 30, 2018 as compared to an income tax expense of approximately $0.2 million for the nine months ended September 30, 2017. PCA’s effective tax rate for the years ended December 31, 2017 and 2016 was 34% and the effective tax rate was 21% for the nine months ended September 30, 2018.

Net Income

For the year ended December 31, 2017, PCA had net income of approximately $0.3 million as compared to net income of approximately $0.6 million for the year ended December 31, 2016. For the nine months ended September 30, 2018, PCA had a net loss of $2.1 million as compared to net income of $0.5 million for the nine months ended September 30, 2017.

Mandatory Assumed Reinsurance

PCA is required to participate in the Pennsylvania Property and Casualty Insurance Guaranty Association (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 direct premiums written in Pennsylvania. PCA incurred assessment expense of $22,000 and $26,000 for the years ended December 31, 2017 and 2016, respectively. PCA incurred assessment fee expense of $9,000 and $18,000 for the nine months ended September 30, 2018 and 2017, respectively.

Financial Position of PCA

At December 31, 2017, PCA had total assets of $39.6 million as compared to total assets of $45.3 million at December 31, 2016. Total cash and invested assets decreased by $5.8 million from December 31, 2016 to December 31, 2017, due to the timing of receipt of reinsurance receivables and lower premiums written in 2017 as compared to 2016. Reinsurance receivables, which are attributable mainly to the timing of payments from reinsurers, decreased by approximately $0.1 million from December 31, 2016 to December 31, 2017, all of which was offset by an increase in premiums receivable by $0.6 million from December 31, 2016 to December 31, 2017.

At September 30, 2018, PCA had total assets of $36.2 million as compared to $41.4 million at September 30, 2017. The decrease in total assets from December 31, 2017 to September 30, 2018 is primarily attributable to an decrease in total cash and invested assets by approximately $1.7 million due to timing of investment in securities, a decrease in premiums receivable by $1.1 million, decrease in deferred acquisition costs of approximately $0.3 million, and a decrease in reinsurance receivables, which are attributable mainly to the timing of payments from reinsurers, of $0.3 million.

At December 31, 2017, PCA had total liabilities of $25.7 million as compared to $32.0 million at December 31, 2016. The decrease in total liabilities is primarily attributable to a $4.4 million decrease in the liability for losses and loss adjustment expenses, a $1.3 million decrease in unearned and advance premiums, a decrease in other liabilities of of $0.3 million, and a decrease in surplus note of $500,000.

At September 30, 2018, PCA had total liabilities of $24.8 million as compared to $27.3 million at September 30, 2017. The decrease in total liabilities between December 31, 2017 to September 30, 2018 is primarily attributable to a $1.3 million increase in the liability for losses and loss adjustment expenses, a $1.6 million decrease in unearned and advance premiums, and a decrease in other liabilities of $0.6 million.

At December 31, 2017, PCA had total equity was $13.9 million as compared to $13.3 million at December 31, 2016. The change in equity during the year ended December 31, 2017 was related to comprehensive income of $0.6 million. The change in equity during the year ended December 31, 2016 was related to comprehensive income of $0.8 million. At September 30, 2018, total equity was $11.4 million as compared to $14.1 million at September 30, 2017. The decrease in equity during the nine months ended September 30, 2018 is attributable to a comprehensive loss of $2.4 million.

Liquidity and Capital Resources of PCA

PCA generates sufficient funds from its operations and maintains a high degree of liquidity in its investment portfolio to meet the demands of claim settlements and operating expenses. The primary sources of funds are premium collections, investment earnings, and maturing investments.

PCA maintains investment and reinsurance programs that are intended to provide sufficient funds to meet its obligations without forced sales of investments. PCA maintains 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 September 30, 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 than 1 year		1-3 years		3 - 5 years		More than 5 years
Estimated gross losses and loss adjustment expense payments	$	19,915	$	1,056	$	7,687	$	7,767	$	3,405
Total Contractual Obligations	$	19,915	$	1,056	$	7,687	$	7,767	$	3,405

Cash flows from continuing operations for nine months ended September 30, 2018 and 2017 and for the years ended December 31, 2017 and 2016 were as follows (dollars in thousands):



	Nine Months Ended September 30,						Year Ended December 31,
	2018			2017			2017			2016
	(unaudited)			(unaudited)			(audited)			(audited)
Cash flows used in operating activities	$	(1,244	)	$	(2,727	)	$	(5,566	)	$	(7,731	)
Cash flows (used in) provided by investing activities	(752		)	(327		)	4,518			10,561
Cash flows used in financing activities	—			(500		)	(500		)	—
Net (decrease) increase in cash and cash equivalents	$	(1,996	)	(3,554		)	$	(1,548	)	$	2,830

For the year ended December 31, 2017, cash flows from operating activities were $(5.6) million as compared to $(7.7) million for the year ended December 31, 2016. This smaller negative cash flows from operating activities was mainly caused by the timing of paid losses and less premiums written in 2017 as compared to 2016. Cash flows from investing activities were $4.5 million for the year ended December 31, 2017 as compared to $10.5 million during the year ended December 31, 2016, primarily reflecting the time needed to reinvest funds from maturing securities. Cash flows from financing activities for the year ended December 31, 2017 were $(0.5) million as compared to $0.0 million for the year ended December 31, 2016. The negative cash flows from financing activities for the year ended December 31, 2017 was primarily attributable to repayment of a surplus note of $(0.5) million.

For the nine months ended September 30, 2018, cash flows from operations were $(1.2) million as compared to $(2.7) million during the nine months ended September 30, 2017. The smaller negative cash flows from operating activities during the nine months ended September 30, 2018 was primarily attributable to the timing of paid losses. For the nine months ended September 30 2018, cash flows from investing activities were $(0.7) million as compared to $(0.3) million for the nine months ended September 30, 2017. The larger negative cash flows during the nine months ended September 30, 2018 from investing activities is primarily attributable to the time necessary to reinvest maturing securities. For the nine months ended September 30, 2018, cash flows from financing activities were $0.0 million as compared to $(0.5) million for the nine months ended September 30, 2017.

Off-Balance Sheet Arrangements of PCA

PCA has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, results of operations, liquidity, capital expenditures, or capital reserves.

Results of Operations of PIPE

PIPE’s 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.

PIPE premium levels and underwriting results have been, and continue to be, influenced by soft market conditions.

The major components of PIPE’s operating revenues and net income are as follows (dollars in thousands):



	Nine Months Ended September 30,						Year Ended December 31,
	2018			2017			2017			2016
	(unaudited)			(unaudited)			(audited)			(audited)
Revenues:
Net premiums earned	$	2,366		$	2,418		$	3,148		$	3,793
Total revenues	2,366			2,418			3,148			3,793
Expenses:
Losses and loss adjustment expenses	1,265			1,495			1,823			210
Underwriting expenses	1,485			1,457			1,855			2,252
Underwriting (loss) income	(384		)	(534		)	(530		)	1,331
Investment income, net of investment expenses	492			367			521			645
Realized investment gains (losses), net	56			60			51			(184		)
Interest expense	—			—			—			(898		)
Income (loss) before income taxes	164			(107		)	42			894
Income tax expense (benefit)	80			(41		)	101			305
Net income (loss)	$	84		$	(66	)	$	(59	)	$	589

Premiums Written and Premiums Earned

Direct written premium for the year ended December 31, 2017 was $3.6 million as compared to $4.2 million for the year ended December 31, 2016, or a 13% decrease. Direct premium earned for the year ended December 31, 2017 was $3.8 million as compared to $4.3 million for the December 31, 2016, or a 12% decrease. Direct ceded premium earned for the year ended December 31, 2017 was $0.6 million as compared to $0.5 million during the year ended December 31, 2016. PIPE began using deposit accounting to account for reinsurance transactions under the reinsurance contract in December 2014, principally because the reinsurance contract lacked transfer of risk provisions. Deposit accounting requires the written ceded premium to be booked as an asset and amortized down as interest expense to the net realizable value at the expected date of commutation. Effective as of January 1, 2016, PIPE discontinued the use of the deposit method with all obligations under the previous reinsurance contract commutated as of that date. The reinsurance deposit related to the policy was terminated in September 2016. Approximately $0.9 million in interest expense was recorded for this amortization for the year ended December 31, 2016.

Direct written premium for the nine months ended September 30, 2018 was $3.0 million as compared to $3.2 million for the nine months ended September 30, 2017, or a 6.1% decrease. Direct premium earned for the nine months year ended September 30, 2018 was $2.6 million as compared to $2.9 million for the nine months ended September 30, 2017, or a 9.6% decrease. Direct ceded premium earned for the nine months ended September 30, 2018 was $0.3 million as compared to $0.5 million during the nine months ended September 30, 2017.

Net Investment Income

The following table sets forth our average cash and invested assets and investment income for the reported periods (dollars in thousands) (unaudited):



	Nine Months Ended September 30,						Year Ended December 31,
	2018			2017			2017			2016
Average cash and invested assets	$	23,990		$	25,545		$	25,555		$	26,279
Net investment income	492			367			521			645
Return on average cash and invested assets (1)	2.73		%	1.92		%	2.04		%	2.46		%

__________________


(1)	Return on average cash and invested assets is calculated on an annualized basis.

Investment Income, Net of Expenses

Net investment income for the year ended December 31, 2017 was $0.5 million as compared to $0.6 million for the year ended December 31, 2016. The average monthly net investment income decreased from $54,000 during the year ended December 31, 2016 to $43,000 during the year ended December 31, 2017.

Net investment income for the nine months ended September 30, 2018 was $0.5 million as compared to $0.4 million for the nine months ended September 30, 2017. The average monthly net investment income increased from $41,000 during the nine months ended September 30, 2017 to $55,000 during the nine months ended September 30, 2018 due to an 81 point basis increase in the return on average cash and invested assets in 2018.

Realized Investment Gains (Losses), Net

PIPE had net realized gain of approximately $51,000 for the year ended December 31, 2017 as compared to a net realized loss of $(184,000) for the year ended December 31, 2016. PIPE had a net realized investment gain of $56,000 for the nine months ended September 30, 2018 as compared to a net realized gain of $60,000 for the nine months ended September 30, 2017.

PIPE’s fixed maturity investments and equity investments are classified as available for sale because it will, from time to time, make sales of securities that are not impaired, consistent with its investment goals and policies. At December 31, 2017, PIPE had gross unrealized losses on fixed maturity securities of approximately $188,000 as compared to gross unrealized losses on fixed maturity securities of $189,000 at December 31, 2016. At September 30, 2018, PCA had a gross unrealized loss on fixed maturity securities of approximately $516,000 as compared to a gross unrealized loss on fixed maturity securities of $141,000 at September 30, 2017. Most of these unrealized losses were attributable to fluctuations in interest rates. PIPE has evaluated each security and taken 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 believes 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 that it will not recover the entire amortized cost basis.

Underwriting Income (Loss)

As discussed above, PIPE evaluates its insurance operations by monitoring certain key measures of growth and profitability. In addition to using GAAP based performance measurements, PIPE also utilizes certain financial performance measures that are used widely in the property and casualty insurance industry and that it believes are valuable in managing its business and for comparison to its 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.

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 57.9% for the year ended December 31, 2017 as compared to 5.5% for the year ended December 31, 2016. PIPE’s losses and loss adjustment expenses ratio was 53.5% as compared to 61.8% for the nine months ended September 30, 2017.

During the year ended December 31, 2017, PIPE had a favorable development of $0.3 million, which was primarily related to re-estimation of unpaid losses and loss adjustment expenses on all claims-made policy years. During the year ended December 31, 2016, PIPE had favorable development of $2.3 million, which was primarily related to a reduction in the ultimate loss reserves on claims-made policies for the 2013 and 2015 years.

The favorable development for the nine months ended September 30, 2018 of $0.3 million was primarily related to re-estimation of unpaid losses and loss adjustment expenses in the 2009, 2010 and 2011 policy years. The favorable development for the nine months ended September 30, 2017 of $0.2 million was primarily related to re-estimation of unpaid losses and loss adjustment expenses in the 2013 and 2014 policy years.

Amortization of Deferred Policy Acquisition Costs and Underwriting and Administrative Expenses

Total underwriting and administrative expenses, including amortization of deferred policy acquisition costs, were $1.9 million for the year ended December 31, 2017 as compared to $2.3 million for the year ended December 31, 2016. PIPE had $98,852 and $507,857 in initial public offering and conversion costs in 2017 and 2016, respectively, which are included in underwriting and administrative expenses. Total underwriting and administrative expenses, including amortization of deferred policy acquisition costs, were $1.5 million for the nine months ended September 30, 2018 as compared to $1.5 million for the nine months ended September 30, 2017. Administrative costs are directly tied to the amount of premiums written by PIPE in a given period, because the fees payable to PIPE Management are equal to 25% of the premiums written by PIPE.

Income (Loss) Before Income Taxes

For the year ended December 31, 2017, PIPE had pre-tax income of $41,000 as compared to a pre-tax income of $0.9 million for the year ended December 31, 2016. For the nine months ended September 30, 2018, PIPE had pre-tax income of $0.2 million as compared to a pre-tax loss of $107,000 for the nine months ended September 30, 2017.

Income Tax Expense (Benefit)

For the year ended December 31, 2017, PIPE had an income tax expense of $101,000 as compared to an income tax expense of $305,000 for the year ended December 31, 2016. PIPE had an income tax expense of $80,000 for the nine months ended September 30, 2018 as compared to an income tax benefit of $41,000 for the nine months ended September 30, 2017. PIPE’s effective tax rate for the years ended December 31, 2017 and 2016 was 34% and the effective tax rate was 21% for the nine months ended September 30, 2018.

Net Income (Loss)

For the year ended December 31, 2017, PIPE had a net loss of $60,000 as compared to net income of $0.6 million for the year ended December 31, 2016. For the nine months ended September 30, 2018, PIPE had net income of $85,000 as compared to a net loss of $66,000 for the nine months ended September 30, 2017.

Mandatory Assumed Reinsurance:

PIPE is required to participate in 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. PIPE incurred assessment expense of $27,000 and 18,000 for the years ended December 31, 2017 and 2016, respectively. PIPE incurred assessment fee expense of $3,000 and $0 for the nine months ended September 30, 2018 and 2017, respectively.

Financial Position of PIPE

At December 31, 2017, PIPE had total assets of $26.7 million as compared to $27.8 million at December 31, 2016. The decrease in total assets is primarily attributable to a decrease in total cash and invested assets by approximately $1.0 million from December 31, 2016 to December 31, 2017, due to the timing of the receipt of reinsurance receivables and higher premiums written in 2017 as compared to 2016, a decrease in premiums receivable by $105,000, and a decrease in deferred acquisition costs by approximately $37,000, all of which were offset by a decrease in reinsurance receivables, which are attributable mainly to the timing of payments from reinsurers, that decreased by approximately $61,000.

At September 30, 2018, PIPE had total assets of $24.5 million as compared to $26.9 million at September 30, 2017. The decrease in total assets from December 31, 2017 to September 30, 2018 is primarily attributable to an decrease in total cash and invested assets by approximately $2.1 million due to timing of investment in securities, a decrease in premiums receivable by $0.3 million, increase in deferred acquisition costs of approximately $0.2 million, and an increase in reinsurance receivables, which are attributable mainly to the timing of payments from reinsurers, of approximately $0.1 million.

At December 31, 2017, PIPE had total liabilities of $14.4 million as compared to $15.6 million at December 31, 2016. The decrease in total liabilities is primarily attributable to a $582,000 decrease in the liability for losses and loss adjustment expenses, a $432,000 decrease in unearned and advance premiums, and a decrease in other liabilities of $0.2 million.

At September 30, 2018, PIPE had total liabilities of $12.6 million as compared to $14.6 million at September 30, 2017. The decrease in total liabilities between December 31, 2017 to September 30, 2018 is primarily attributable to a $1.5 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 other liabilities of $0.1million.

At December 31, 2017, total equity was $12.3 million as compared to $12.2 million at December 31, 2016. The change in equity during the year ended December 31, 2017 was related to comprehensive income of $32,000. The change in equity during the year ended December 31, 2016 was related to comprehensive income of $0.9 million. At September 30, 2018, total equity was $11.9 million as compared to $12.3 million at September 30, 2017. The decrease in equity during the nine months ended September 30, 2018 is attributable to comprehensive loss of $0.3 million.

Liquidity and Capital Resources of PIPE

PIPE generates sufficient funds from its operations and maintains a high degree of liquidity in its investment portfolio to meet the demands of claim settlements and operating expenses. The primary sources of funds are premium collections, investment earnings and maturing investments.

PIPE maintains investment and reinsurance programs that are intended to provide sufficient funds to meet its obligations without forced sales of investments. PIPE maintains 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 September 30, 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 than 1 year		1-3 years		3-5 years		More than 5 years
Estimated gross losses & loss adjustment expense payments	$	10,306	$	536	$	1,762	$	3,689	$	4,319
Total Contractual Obligations	$	10,306	$	536	$	1,762	$	3,689	$	4,319

Cash flows from continuing operations for nine months ended September 30, 2018 and 2017 and for the years ended December 31, 2017 and 2016 were as follows (dollars in thousands):



	Nine Months Ended September 30,						Years Ended December 31,
	2018			2017			2017			2016
	(unaudited)			(unaudited)			(audited)			(audited)
Cash flows used in operating activities	$	(1,541	)	$	(1,226	)	$	(1,149	)	$	(542	)
Cash flows provided by (used in) investing activities	913			(1,692		)	(5,142		)	4,951
Cash flows provided by financing activities	—			—			—			—
Net (decrease) increase in cash and cash equivalents	$	(628	)	$	(2,918	)	$	(6,291	)	$	4,409

For the year ended December 31, 2017, cash flows from operations were $(1.1) million as compared to $(0.5) million during the year ended December 31, 2016. The larger negative cash flows from operating activities was primarily attributable to the timing of paid losses. For the year ended December 31, 2017, cash flows from investing activities were $(5.1) million as compared to $4.9 million for the year ended December 31, 2016. The larger negative cash flows from investing activities is primarily attributable to the time necessary to reinvest maturing securities. For the years ended December 31, 2017, there were no cash flows from financing activities.

For the nine months ended September 30, 2018, cash flows from operations were $(1.5) million as compared to $(1.2) million during the nine months ended September 30, 2017. The larger negative cash flows from operating activities during the nine months ended September 30, 2018 was primarily attributable to the timing of paid losses. For the nine months ended September 30 2018, cash flows from investing activities were $0.9 million as compared to $(1.7) million for the nine months ended September 30, 2017. The increase in cash flows during the nine months ended September 30, 2018 from investing activities is primarily attributable to the time necessary to reinvest maturing securities. For the nine months ended September 30, 2018 and 2017, there were no cash flows from financing activities.

Off-Balance Sheet Arrangements

PIPE has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, results of operations, liquidity, capital expenditures, or capital reserves.

DESCRIPTION OF OUR BUSINESS

Overview

The Company is a newly formed Pennsylvania business corporation that was formed for the purpose of acquiring PPIX, PCA, and PIPE in connection with the conversions. Prior to completion of the offering, the Company will have conducted no business and will have no assets. As a result of the conversions, the Company will become the holding company for Positive Insurance.

Positive Physicians Insurance Exchange.

PPIX was formed as a Pennsylvania reciprocal insurance exchange in 2004 to provide medical professional liability insurance to physicians. PPIX writes claims-made, claims-made plus, tail, and occurrence-based medical malpractice insurance for healthcare providers practicing in Delaware, Maryland, New Jersey, Ohio, and Pennsylvania and also issues tail coverage for holders of claims-made policies. SIS, as the attorney-in-fact for PPIX, manages and administers essentially all of the operations of PPIX under the terms of an attorney-in-fact agreement. Pursuant to the terms of the agreement, SIS provides underwriting and administrative services to PPIX in exchange for fees based on a percentage not to exceed 25.0% of gross written premiums, less return premiums. PPIX remains responsible for the payment of all claims and claims related expenses incurred under policies issued by PPIX and all sales commissions paid to producers.

At December 31, 2017, PPIX had total assets of $67.2 million and a surplus of $17.5 million. For the year ended December 31, 2017, PPIX had total revenues of $13.2 million and a net loss of $22,000. At December 31, 2016, PPIX had total assets of $64.1 million and a surplus of $16.9 million. For the year ended December 31, 2016, PPIX had total revenues of $9.8 million and net income of $0.8 million. At September 30, 2018, PPIX had total assets of $63.8 million and a surplus of $17.1 million. For the nine months ended September 30, 2018, PPIX had total revenues of $10.5 million and net income of $194,000. For the nine months ended September 30, 2017, PPIX had total revenues of $10.5 million and net income of $75,000.

Professional Casualty Association

PCA was formed as a Pennsylvania reciprocal insurance exchange in 2003 to provide medical professional liability insurance to physicians. In connection with its organization, PCA assumed all of the policies issued by Professional Risk Retention Group, a South Carolina corporation. Prior to November 1, 2015, all of PCA’s insureds were physicians practicing primarily in Pennsylvania. PCA became licensed to issue MPLI policies in Michigan in November 2015 and began to issue policies in Michigan in the fourth quarter of 2015.

PCA writes both claims-made and occurrence-based medical malpractice insurance for healthcare providers and also issues tail policies to former claims-made policyholders. PTP, as the attorney-in-fact for PCA, manages and administers essentially all of the operations of PCA under the terms of an attorney-in-fact agreement. Pursuant to the terms of the agreement, PTP provides underwriting and administrative services to PCA in exchange for 25% of PCA’s gross written premium. PCA remains responsible for the payment of all claims and claims related expenses incurred under policies issued by PCA and all commissions paid to producers.

At December 31, 2017, PCA had total assets of $39.6 million and a surplus of $13.9 million. For the year ended December 31, 2017, PCA had total revenues of $8.1 million and net income of $0.3 million. At December 31, 2016, PCA had total assets of $45.4 million and a surplus of $13.3 million. For the year ended December 31, 2016, PCA had total revenues of $13.9 million and net income of $0.6 million. At September 30, 2018, PCA had total assets of $36.2 million and a surplus of $11.4 million. For the nine months ended September 30, 2018, PCA had total revenues of $5.0 million and net loss of $2.1 million. For the nine months ended September 30, 2017, PCA had total revenues of $6.2 million and net income of $0.5 million.

Prior to 2017, PCA provided MPLI coverage to a large number of doctors employed by or affiliated with the Pennsylvania hospitals of Community Health System, which owns approximately 150 hospitals nationwide. PCA estimated that this relationship represented approximately 19 % of PCA’s annual written premium for the year ended

December 31, 2016. The policies for these hospitals were not renewed in August 2016 and January 2017 in the amounts of $3,394,516 and $1,177,294, respectively.

Physicians’ Insurance Program Exchange.

PIPE was formed as a Pennsylvania reciprocal insurance exchange in 2005 to provide medical professional liability insurance to physicians. PIPE writes claims-made and occurrence-based medical malpractice insurance for healthcare providers practicing in Pennsylvania and South Carolina and also issues tail coverage for holders of claims made policies. PIPE Management, as the attorney-in-fact for PIPE, manages and administers essentially all of the operations of PIPE under the terms of an attorney-in-fact agreement. Pursuant to the terms of the agreement, PIPE Management is responsible for providing underwriting and administrative services to PIPE in exchange for 25% of PIPE’s gross written premium. PIPE remains responsible for the payment of all claims and claims related expenses incurred under policies issued by PIPE and all sales commissions paid to producers.

At December 31, 2017, PIPE had total assets of $26.7 million and a surplus of $12.3 million. For the year ended December 31, 2017, PIPE had total revenues of $3.7 million and a net loss of $60,000. At December 31, 2016, PIPE had total assets of $27.8 million and a surplus of $12.2 million. For the year ended December 31, 2016, PIPE had total revenues of $4.3 million and net income of $0.6 million. At September 30, 2018, PIPE had total assets of $24.5 million and a surplus of $11.9 million. For the nine months ended September 30, 2018, PIPE had total revenues of $2.9 million and net income of $85,000. For the nine months ended September 30, 2017, PIPE had total revenues of $2.8 million and a net loss of $66,000.

PPIX, PCA, and PIPE are subject to examination and comprehensive regulation by the Pennsylvania Insurance Department. See “- Regulation.”

The executive offices of PPIX, PCA, and PIPE are located at 100 Berwyn Park, 850 Cassatt Road, Suite 220, Berwyn, PA 19312, and their telephone number is 888-335-5335. PPIX’s web site address is www.positivephysicians.com . PCA’s web site address is www.professionalcasualtyassociation.com . PIPE’s web site address is www.pipexchange.net. Information contained on such websites is not incorporated by reference into this prospectus, and such information should not be considered to be part of this prospectus.

Management of Positive Insurance after the Conversions

The conversions of PPIX, PCA, and PIPE will result in the elimination of the three attorneys-in-fact that currently manage those companies. Positive Insurance will be managed by Diversus Management Inc. (“Diversus Management”), a subsidiary of Diversus, Inc. Diversus Management currently provides the staff and resources to the attorneys-in-fact under intercompany arrangements. The attorneys-in-fact will be merged into Diversus Management and will cease to exist as separate entities. The insurance management operations will continue on without interruption. Diversus Management will continue to manage Positive Insurance under a new management services agreement and will use the same staff and systems of the attorneys-in-fact that currently service the business of PCA, PIPE, and PPIX.

Upon completion of the conversions, PPIX, PCA, and PIPE will be merged into a single stock insurance company called Positive Insurance Company. A new Management Agreement will be entered into between Diversus Management and Positive Insurance. The new Management Agreement will replace the current attorney-in-fact agreements, which will terminate. The Management Agreement will mimic the current form of attorney-in-fact agreement for PPIX, but with the following material changes:


•	Term : The Management Agreement will have a rolling seven-year term, as compared with the perpetual duration of the attorney-in-fact agreements.

•

Percentage Fee : The Management Agreement will have a base management fee based upon a percentage of Positive Insurance’s gross written premiums, less return premiums. The percentage will initially be 25% of gross written premiums, less return premiums, in 2018, and which will decline to 12% in 2019, 11% in 2020, and 10% in 2021. At January 1, 2022, the percentage will thereafter be set at 9% of gross written premiums, less return premiums. If by December 31, 2019, the Company has not acquired one or more additional insurance entities with additional annual gross written premiums of at least $10,000,000

that become subject to the management agreement, the reduction in fees scheduled to occur on January 1, 2020 will be deferred for one year. The fees paid under the attorney-in-fact agreements were 25% of gross written premiums, less return premiums. The management agreement will apply to any insurance company, risk retention group, reciprocal exchange, or other risk bearing entity acquired or formed by the Company


•	Incentive Fee : The Management Agreement will include a quarterly incentive fee payable to Diversus Management equal to the product of (x) 100 minus the combined ratio of Positive Insurance, (y) 0.0825, and (z) net premiums earned calculated on a rolling 12-month basis. The attorney-in-fact agreements have no incentive fee component.


•	Underwriting: All underwriting decisions will be made by the officers of Positive Insurance.


•	Enhanced Insurer Oversight: The board of directors of Positive Insurance will have enhanced oversight and approval rights over the services provided and some decisions to be made by Diversus Management. Currently PCA, PIPE, and PPIX do not have subscribers committees that oversee the services provided by the attorneys-in-fact.

Diversus’ agreement to reduce the existing percentage management fee and to institute a performance fee were requirements of ICG designed to enhance the financial performance of Positive Insurance. In consideration for Diversus’ agreement to reduce the management fee to Positive Insurance and make the other contractual changes, the Company will pay $10 million to Diversus at the closing. Diversus will utilize those funds to reduce its outstanding senior secured debt to its senior lender by $10 million.

Operating Strategy

The conversion offering and the merger of PPIX, PCA, and PIPE into Positive Insurance will create a company with sufficient statutory surplus to enable growth and will create a stable insurance platform that will permit Positive Insurance to write insurance on both an admitted and surplus lines basis. The Company believes that the conversion of PPIX, PCA, and PIPE into stock form creates the ability to grow premiums both organically and by acquiring or reinsuring policies issued by other stock and mutual insurance companies, RRGs and reciprocals.

Another component of our strategy relates to the risks we will seek to place or insure. As noted, MPLI premium volume has been shrinking nationally for a variety of reasons. In addition to competition among MPLI carriers with excess capital and capacity, the creation of very large physician practice groups and the acquisition of physician practices by hospitals have reduced the number of available independent healthcare professionals requiring insurance. We expect this trend to continue as federal and state governments and private health insurers seek to push delivery of healthcare services down to the lowest cost provider. We believe this risk selection focus will permit us to achieve organic growth separate from growth that may result from acquisitions.

Acquisition Strategy

We believe there is a significant opportunity to acquire risk-bearing entities or reinsure books of business of risk-bearing entities focused on the MPLI market, including stock and mutual insurance companies, RRGs and reciprocal insurance exchanges. Over 250 RRGs have been formed since the introduction of the Federal Risk Retention Act, many of which are focused on the MPLI market. The Company may also have the opportunity to acquire the attorney-in-facts of other reciprocal insurance exchanges, and these entities could ultimately be merged into Positive Insurance.

Many MPLI-focused companies were formed, frequently by physicians, in the late 1990s and early 2000s primarily because of capacity constraints in the market that were then prevalent. Beginning in the second half of the last decade, capacity in the MPLI market increased dramatically, and the market is currently experiencing excess capital and capacity. This, together with other systemic changes in the healthcare delivery market, has led to competitive conditions and declining pricing and premium volume. According to a study prepared by the National Association of Insurance Commissioners (“NAIC”), direct written premiums have declined by 25.3% on a national basis from 2006 to 2017 and have declined by 15.9% in Pennsylvania and by 32.0% in New Jersey during this same time period. This declining premium volume, however, has been accompanied by reduced claim frequency, and therefore MPLI carriers

generally remain quite profitable. The challenge for larger MPLI carriers is to seek new sources of premium growth, and increasingly they seek this growth through acquisition.

As a result of the excess capacity and capital now present in the MPLI market, physicians do not need the alternative market vehicles they capitalized in the past. In addition, many of the physicians that capitalized these entities are approaching retirement age. We believe that many would welcome a liquidity event in which they sell their RRG and unlock the capital that is trapped in these alternative market vehicles.

We intend to use the proceeds of this offering to seek additional acquisitions of risk bearing MPLI-focused companies subsequent to completion of the conversions. To fund future acquisitions, however, we may raise additional equity or a portion of the consideration paid to target shareholders may include shares of our common stock. The issuance of common stock will be dilutive to the percentage ownership interest of our then existing shareholders. Some acquisitions may be potentially dilutive to the book value per share of our common stock, depending upon the price we must pay in the acquisition and the mixture of cash and stock issued in the transaction.

Exit Strategy

Although we expect that our shares will be listed for trading on the Nasdaq Stock Market, we are aware that there will be limited liquidity for our stock. This is because a significant portion of our common stock will probably be held by ICG and Enstar. The Company is committed to creating shareholder value for our shareholders through a future liquidity event. The three principal methods we expect to consider to create future liquidity are:


•	Share repurchases;


•	A follow on offering of our common stock or the issuance of our stock in connection with acquisitions; or


•	A sale of the Company to a larger participant in the MPLI market or the insurance industry generally.

We may engage in repurchases of our shares as a way to create liquidity for our shareholders or in connection with any effort we may take to delist our stock from NASDAQ in the future. See “Risk Factors - Our management and the standby purchaser are likely to seek to delist our shares from trading on the NASDAQ Stock Market and end our reporting obligations under the Securities Exchange Act of 1934.” The Conversion Act provides that we cannot repurchase any shares for three years after the completion of the conversions and the offerings without the prior approval of the Pennsylvania Insurance Commissioner. Accordingly, no assurance can be given that we will engage in any share repurchases or that we will repurchase a significant number of shares. There is no limitation under the Conversion Act on ICG purchasing shares of our stock on the NASDAQ Stock Market or in privately negotiated transactions. Existing SEC regulations, however, impose disclosure requirements with respect to actions that our management and ICG can take that would result in the Company going private and our common stock being delisted from trading on the NASDAQ Stock Market.

We will consider a follow on offering of our common stock to fund organic growth or acquisitions in furtherance of our consolidation strategy. We may also issue stock to shareholders of a company in connection with our acquisition of that company. A follow on offering or the issuance of stock in an acquisition would increase the number of outstanding shares not held by ICG and Enstar. This could result in a broader market for our common stock that has more depth and liquidity, which would afford existing shareholders an opportunity to sell their shares in the market if they so choose.

We are also aware that there is excess capacity in the MPLI market, and, as a result, larger participants in the market are seeking premium growth through acquisitions. If we are successful in aggregating premium through the acquisition of small RRGs, stock and mutual insurance companies, and reciprocal insurance exchanges, we will become an attractive acquisition candidate for larger MPLI carriers. Moreover, larger companies typically trade at higher multiples in the market or upon sale than do smaller companies. A key element of our strategy is to buy small companies at a reasonable price, thereby aggregating premium revenue, and achieve a higher multiple in the market or upon a sale of the Company. Although we are not actively seeking a buyer at this time and do not expect to do so in the near term,

our board of directors will continually evaluate its strategic options, including sale, with a view to maximizing shareholder value.

Our ability to create a liquidity event will be based, in part, on our performance and economic and market conditions at that time. No assurance can be given that we will be able to execute a liquidity event at a price or time that investors will view favorably.

Products and Services

PPIX, PCA, and PIPE underwrite 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. 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.

We intend to develop and offer additional products to physicians and other healthcare providers when we believe a market for such products is attractive to Positive Insurance.

Marketing and Distribution

Our marketing philosophy is to sell profitable business in our core states, using a focused, cost-effective distribution system. Our MPLI products are currently sold through approximately 81 retail producers in our territories of Pennsylvania, New Jersey, Delaware, Maryland, Ohio, 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.

On a combined basis, for the year ended December 31, 2017, one of our producers was responsible for more than 30% of the direct premiums written by PPIX, PCA, and PIPE, and three additional producers accounted for more than 5% of direct premiums written.

Producers are compensated through a fixed base commission. Agents receive commission as a percentage of premiums (generally 8% to 10%) 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.

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 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.

Diversus Management, which will manage our day-to-day operations, has an underwriting staff that includes five employees who have extensive experience in MPLI underwriting. Final underwriting decisions will be made by the officers of Positive Insurance.

We strive to be disciplined in our pricing by pursuing rate increases to maintain or improve our underwriting profitability while still being able to attract and retain customers. We utilize pricing reviews that we believe will help us price risks more accurately, improve account retention, and support the production of profitable new business. Our pricing reviews involve evaluating our claims experience and loss trends on a periodic basis to identify changes in the frequency and severity of our claims. We then consider whether our premium rates are adequate relative to the level of underwriting risk as well as the sufficiency of our underwriting guidelines.

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. Our insurance subsidiaries are 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.

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 the 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, Inc. and Andrews Outsource Solutions, both of which are subsidiaries of Diversus, under which those companies provide claims processing and risk management services. Kurt Gingrich, the president of Gateway Risk Services, supervises a staff of seven experienced employees in processing MPLI claims.

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 all of the insurance operations of PIPX, PCA, and PIPE. Each of the exchanges has adopted a disaster recovery plan tailored to meet its 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 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.

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 of $1,000,000 for each claim and $3,000,000 of annual aggregate coverage in Maryland, Delaware, Ohio, New Jersey, 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 we cede all overage in excess of that to the reinsurer. In Michigan, each insured is required to maintain MPL insurance of at least $200,000. With respect to those policies we retain the first $100,000 of risk and cede the risk for the next $100,000 to the reinsurer. If an insured requests $1,000,000 of insurance, we retain the first $300,000 of coverage, and the reinsurer covers the excess up to $1,000,000.

We also purchase additional reinsurance coverage is provided for clash, loss in excess of policy limits and extra contractual obligation claims.

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. For the years ended December 31, 2017 and 2016, PPIX ceded to reinsurers $2.3 million and $4.3 million, respectively, of written premiums. For the years ended December 31, 2017 and 2016, PCA ceded to reinsurers $1.4 million and $2.1 million , respectively, of written premiums. For the years ended December 31, 2017 and 2016, PIPE ceded to reinsurers $0.6 million and $0.7 million, respectively, of written premiums.

For the nine months ended September 30, 2018 and 2017, PPIX ceded to reinsurers $2.1 million and $1.2 million, respectively, of written premiums. For the nine months ended September 30, 2018 and 2017, PCA ceded to reinsurers $0.3 million and $0.9 million, respectively, of written premiums. For the nine months ended September 30, 2018 and 2017, PIPE ceded to reinsurers $0.2 million and $0.5 million, respectively, of written premiums.

The chart below illustrates the reinsurance coverage under the excess of loss treaty maintained by PPIX, PCA, and PIPE for individual MPL risk in Pennsylvania with limits of $1.0 million:



	Claims with MCARE Coverage				Claims Without MCARE Coverage
Losses Incurred	Retained by PPIX/ PCA/PIPE		Ceded Under Reinsurance Treaty or MCARE		Retained by PPIX/ PCA/PIPE		Ceded Under Reinsurance Treaty
Up to $300,000	100	%	0	%	100	%	0	%
$700,000 in excess of $300,000	0	%	100	%	0	%	100	%
In excess of $1.0 million (limited to $2.0 million)	0	%	100	%	0	%	100	%

100

The chart below illustrates the reinsurance coverage under the excess of loss treaty maintained by PPIX and PIPE for individual MPL risks in Delaware, Maryland, New Jersey, Ohio, and South Carolina with limits of $1,000,000:



	Claims
Losses Incurred	Retained by PPIX/PIPE		Ceded Under Reinsurance Treaty
Up to $300,000	100	%	0	%
In excess of $300,000	0	%	100	%

The chart below illustrates the reinsurance coverage under the excess of loss treaty maintained by PCA for individual MPL risks in Michigan with limits of $1,000,000:



	Claims
Losses Incurred	Retained by PCA		Ceded Under Reinsurance Treaty
Up to $300,000	100	%	0	%
In excess of $300,000	0	%	100	%

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. PPIX’s, PCA’s and PIPE’s reinsurance providers, the majority of whom are longstanding partners that understand our business, are all carefully selected with the help of our reinsurance broker. PPIX, PCA, and PIPE both 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.”

The following table sets forth the amount of losses and loss adjustment expenses recoverable by PPIX from its reinsurers as of September 30, 2018 (dollars in thousands) and the reinsurer’s current A.M. Best rating as of September 30, 2018:

As of September 30, 2018 (unaudited):



Reinsurance Company	Losses & Loss Expense Recoverable On Unpaid Claims		Percentage of Total Recoverable		A.M. Best Rating
Catlin Underwriting Agencies Ltd. Lloyd’s Syndicate 2003	$	4,159	69.7	%	A (Excellent)
Catlin Insurance Company	154		2.6	%	A (Excellent)
Hannover Rueck SE	1,296		21.7	%	A+ (Superior)
American Safety Re	80		1.3	%	Not rated
Faraday Underwriting Ltd. Lloyd’s Syndicate 435	80		1.3	%	A (Excellent)
Aspen Insurance UK Ltd.	89		1.5	%	A (Excellent)
Barbican Syndicate 1955	64		1.1	%	A (Excellent)
BRIT Syndicate Ltd. 2987	24		0.4	%	A (Excellent)
Wellington Underwriting Agencies Lloyd’s Syndicate 2020	25		0.4	%	A (Excellent)
Total	$	5,971	100.0	%

101

The following table sets forth the amount of losses and loss adjustment expenses recoverable by PPIX from its reinsurers as of December 31, 2017 (dollars in thousands) and the reinsurer’s current A.M. Best rating as of December 31, 2017:

As of December 31, 2017 (unaudited):



Reinsurance Company	Losses & Loss Expense Recoverable On Unpaid Claims		Percentage of Total Recoverable		A.M. Best Rating
Catlin Underwriting Agencies Ltd. Lloyd’s Syndicate 2003	$	5,260	91.2	%	A (Excellent)
Catlin Insurance Company	136		2.4	%	A (Excellent)
American Safety Re	80		1.4	%	Not rated
Faraday Underwriting Ltd. Lloyd’s Syndicate 435	71		1.2	%	A (Excellent)
Aspen Insurance UK Ltd.	62		1.1	%	A (Excellent)
Barbican Syndicate 1955	63		1.1	%	A (Excellent)
Lexington Insurance Company	57		1.0	%	A (Excellent)
BRIT Syndicate Ltd. 2987	24		0.4	%	A (Excellent)
Wellington Underwriting Agencies Lloyd’s Syndicate 2020	12		0.2	%	A (Excellent)
Total	$	5,765	100.0	%

The following table sets forth the amount of losses and loss adjustment expenses recoverable by PCA from its reinsurers as of September 30, 2018 (dollars in thousands) and the reinsurer’s current A.M. Best rating as of September 30, 2018:

As of September 30, 2018 (unaudited):



Reinsurance Company	Losses & Loss Expense Recoverable On Unpaid Claims		Percentage of Total Recoverable		A.M. Best Rating
Hannover Rueck SE	$	1,063	53.1	%	A+ (Superior)
Scor Reinsurance	752		37.5	%	A (Excellent)
Tokio Millennium	188		9.4	%	A++ (Superior)
Total	$	2,003	100.0	%

102

The following table sets forth the amount of losses and loss adjustment expenses recoverable by PCA from its reinsurers as of December 31, 2017 (dollars in thousands) and the reinsurer’s current A.M. Best rating as of December 31, 2017:

As of December 31, 2017 (unaudited):



Reinsurance Company	Losses & Loss Expense Recoverable On Unpaid Claims		Percentage of Total Recoverable		A.M. Best Rating
Hannover Rueck SE	$	995	67.8	%	A+ (Superior)
Scor Reinsurance	329		22.4	%	A (Excellent)
XL Reinsurance American Incorporated	53		3.6	%	A (Excellent)
Ace Property & Casualty	27		1.8	%	A++ (Superior)
Tokio Millennium	64		4.4	%	A++ (Superior)
Total	$	1,468	100.0	%

The following table sets forth the amount of losses and loss adjustment expenses recoverable by PIPE from its reinsurers as of September 30, 2018 (dollars in thousands) and the reinsurer’s current A.M. Best rating as of September 30, 2018:

As of September 30, 2018 (unaudited):



Reinsurance Company	Losses & Loss Expense Recoverable On Unpaid Claims		Percentage of Total Recoverable		A.M. Best Rating
Hannover Rueck SE	$	285	100.0	%	A+ (Superior)
Total	$	285	100.0	%

The following table sets forth the amount of losses and loss adjustment expenses recoverable by PIPE from its reinsurers as of December 31, 2017 (dollars in thousands) and the reinsurer’s current A.M. Best rating as of December 31, 2017:

As of December 31, 2017 (unaudited):



Reinsurance Company	Losses & Loss Expense Recoverable On Unpaid Claims		Percentage of Total Recoverable		A.M. Best Rating
Hannover Rueck SE	$	156	100.0	%	A+ (Superior)
Total	$	156	100.0	%

Reinsurance Assumed . PPIX, PCA, and PIPE generally do not assume risks from other insurance companies. However, they are required by statute to participate in certain residual market pools. This participation requires PPIX, PCA, and PIPE to assume business for exposures that are not insured in the voluntary marketplace. PPIX, PCA and PIPE participate in these residual markets pro rata on a market share basis, and as of September 30, 2018 and December 31, 2017, their participation was not material.

103

Losses and Loss Adjustment Expenses

PPIX, PCA, and PIPE are each 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, PPIX, PCA, and PIPE each compute its estimated ultimate liability using their principles and procedures. 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.

104

The following tables provide a reconciliation of beginning and ending unpaid losses and loss adjustment expense reserve balances of each of PPIX, PCA, and PIPE for the nine months ended September 30, 2018 and 2017, prepared in accordance with GAAP (unaudited).



	PPIX				PCA				PIPE
	Nine Months Ended September 30,				Nine Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017		2018			2017
Balance at January 1 (in thousands)	$	38,029	$	34,814	$	18,585	$	23,002	$	11,761		$	12,343
Reinsurance recoverable on liability for losses and loss adjustment expenses	6,117		8,670		2,312		2,465		156			91
Reinsurance recoverable on claims paid	352		3,615		844		740		—			—
Net liability at January 1	32,264		29,759		17,117		21,277		11,605			12,252
Losses and loss adjustment expenses incurred, net:
Current periods	5,435		6,540		2,793		1,933		1,548			1,716
Prior periods	—		—		2,259		713		(283		)	(221		)
Total incurred losses and loss adjustment expenses	5,435		6,540		5,052		2,646		1,265			1,495
Less losses and loss adjustment expenses paid, net:
Current periods	256		351		107		207		73			49
Prior periods	5,997		3,751		4,150		4,712		2,776			1,958
Total losses and loss adjustment expenses paid	6,253		4,102		4,257		4,919		2,849			2,007
Net liability for liability for losses and loss adjustment expenses, at end of year	31,446		32,197		17,912		19,004		10,021			11,740
Reinsurance recoverable on liability for losses and loss adjustment expenses	6,073		5,795		2,003		2,258		285			282
Reinsurance recoverable on claims paid	102		1,007		—		417		—			—
Liability for losses and loss adjustment expenses, December 31	$	37,417	$	36,985	$	19,915	$	20,845	$	10,306		$	12,022

105

The following tables provide a reconciliation of beginning and ending unpaid losses and loss adjustment expense reserve balances of each of PPIX, PCA, and PIPE for the years ended December 31, 2017 and 2016, prepared in accordance with GAAP (audited).



	PPIX						PCA						PIPE
	Years Ended December 31,						Years Ended December 31,						Years Ended December 31,
	2017			2016			2017			2016			2017			2016
Balance at January 1 (in thousands)	$	34,814		$	36,069		$	23,002		$	27,552		$	12,343		$	14,888
Reinsurance recoverable on liability for losses and loss adjustment expenses	8,670			6,118			2,465			2,184			91			—
Reinsurance recoverable on claims paid	3,615			—			740			306			—			—
Net liability at January 1	29,759			29,951			21,277			25,674			12,252			14,888
Losses and loss adjustment expenses incurred, net:
Current year	10,378			8,346			4,435			7,769			2,163			2,542
Prior years	(2,645		)	(4,426		)	(423		)	(1,219		)	(340		)	(2,332		)
Total incurred losses and loss adjustment expenses	7,733			3,920			4,012			6,550			1,823			210
Less losses and loss adjustment expenses paid, net:
Current year	564			378			311			604			30			258
Prior years	4,664			3,734			7,861			10,343			2,440			2,588
Total losses and loss adjustment expenses paid	5,228			4,112			8,172			10,947			2,470			2,846
Net liability for liability for losses and loss adjustment expenses, at end of year	32,264			29,759			17,117			21,277			11,605			12,252
Reinsurance recoverable on liability for losses and loss adjustment expenses	6,117			8,670			2,312			2,465			156			91
Reinsurance recoverable on claims paid	352			3,615			844			740			—			—
Liability for losses and loss adjustment expenses, December 31	$	38,029		$	34,814		$	18,585		$	23,002		$	11,761		$	12,343

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).

106

Reconciliation of Reserves for Losses and Loss Adjustment Expenses

The following table sets forth information about PPIX’s incurred and paid loss development at December 31, 2017, net of reinsurance. The information about incurred and paid claims development for the years ended December 31, 2008 to December 31, 2016 is unaudited.



	Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance (in thousands)
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017
2008	$	4,216	$	4,758	$	4,708	$	5,085	$	4,666	$	4,011	$	3,774	$	3,473	$	2,798	$	2,276
2009			3,899		3,792		3,939		3,607		3,426		2,856		2,718		2,548		2,503
2010					4,875		4,191		4,961		4,521		4,158		3,671		3,265		2,937
2011							5,329		5,473		5,456		5,221		4,948		4,276		4,447
2012									6,258		5,956		5,946		5,643		5,405		6,410
2013											6,547		6,722		6,199		5,625		5,224
2014													6,353		6,034		5,562		4,278
2015															8,173		7,575		6,992
2016																	8,136		7,502
2017																			10,184
																			$	52,753

	Cumulative Paid Losses and Loss Adjustment Expenses, Net of Reinsurance (in thousands)
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017
2008	$	32	$	363	$	685	$	999	$	1,659	$	1,866	$	1,940	$	1,959	$	1,969	$	1,985
2009			58		312		530		829		1,291		1,577		1,656		1,573		1,602
2010					30		255		466		871		1,410		1,531		1,736		1,911
2011							69		366		903		1,959		3,400		2,988		3,273
2012									83		464		901		1,870		3,775		5,193
2013											50		236		950		2,306		2,617
2014													42		292		766		1,792
2015															79		381		1,162
2016																	193		807
2017																			400
																			$	20,742

					All outstanding liabilities before 2008, net of reinsurance														253

			Liabilities for losses and loss adjustment expenses, net of reinsurance																$	32,264

107

The reconciliation for the net incurred and paid loss development tables to the liability for losses and loss adjustment expenses for PPIX at December 31, 2017 in the accompanying balance sheet is as follows:



Net outstanding liabilities for losses and loss adjustment expenses:
Medical professional	$	32,264
Liabilities for losses and loss adjustment expenses, net of reinsurance	32,264

Reinsurance recoverable on unpaid claims:
Medical professional	5,765
Total reinsurance recoverable on unpaid claims	5,765

Total gross liability for losses and loss adjustment expenses	$	38,029

108

The following table sets forth information about PCA’s incurred and paid loss development at December 31, 2017, net of reinsurance. The information about incurred and paid claims development for the years ended December 31, 2008 to December 31, 2016 is unaudited.



	Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance (in thousands)
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017
2008	$	14,470	$	10,342	$	10,126	$	8,943	$	9,012	$	8,654	$	8,746	$	8,912	$	9,192	$	9,121
2009			13,591		11,440		10,624		9,767		9,791		9,712		10,438		11,064		11,196
2010					8,455		6,567		6,443		5,740		4,990		4,563		4,461		5,127
2011							9,459		9,537		9,471		11,602		11,928		11,982		12,428
2012									9,877		9,364		9,553		10,064		10,146		10,420
2013											7,818		7,057		6,270		5,536		5,040
2014													7,403		5,924		5,989		5,672
2015															8,374		7,292		6,500
2016																	7,529		7,873
2017																			4,378
																			$	77,755

	Cumulative Losses and Loss Adjustment Expenses, Net of Reinsurance (in thousands)
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017
2008	$	411	$	2,077	$	4,999	$	6,512	$	7,424	$	7,675	$	7,925	$	8,098	$	9,128	$	8,941
2009			408		1,605		4,028		7,214		7,956		8,282		9,507		10,240		11,057
2010					267		963		2,065		3,078		3,671		3,851		3,981		4,986
2011							398		1,132		2,802		8,926		10,356		11,098		11,795
2012									423		1,500		3,240		5,736		8,617		9,811
2013											406		1,336		2,715		4,191		4,435
2014													285		1,017		2,884		4,094
2015															381		1,802		3,197
2016																	512		2,475
2017																			302
																			$	61,093
					All outstanding liabilities before 2008, net of reinsurance														50

			Liabilities for losses and loss adjustment expenses, net of reinsurance																$	16,712

109

The reconciliation for the net incurred and paid loss development tables to the liability for losses and loss adjustment expenses for PCA at December 31, 2017 in the accompanying balance sheet is as follows:



Net outstanding liabilities for losses and loss adjustment expenses:
Medical professional	$	16,712
Liabilities for losses and loss adjustment expenses, net of reinsurance	16,712

Reinsurance recoverable on unpaid claims:
Medical professional	1,468
Total reinsurance recoverable on unpaid claims	1,468

Unallocated loss adjustment expenses	405

Total gross liability for losses and loss adjustment expenses	$	18,585

110

The following table sets forth information about PIPE’s incurred and paid loss development as of December 31, 2017, net of reinsurance. The information about incurred and paid claims development for the years ended December 31, 2008 to December 31, 2016 is unaudited.



	Incurred Losses and Loss Adjustment Expenses, Net of Reinsurance (in thousands)
Accident Year	2008		2009			2010			2011			2012		2013		2014		2015		2016		2017
2008	$	3,610	$	2,783		$	2,293		$	1,389		$	1,117	$	1,035	$	1,037	$	886	$	770	$	875
2009			4,299			3,801			4,603			4,624		4,687		5,501		6,253		6,663		7,421
2010						5,262			4,314			4,306		4,229		3,517		3,667		3,048		3,224
2011									4,736			3,773		3,664		4,352		4,203		4,772		4,454
2012												4,170		3,176		3,314		3,400		2,927		2,914
2013														3,388		3,100		2,750		2,063		1,183
2014																3,551		3,150		2,247		1,137
2015																		3,452		2,918		3,002
2016																				2,800		3,486
2017																						2,026
																						$	29,722

	Cumulative Losses and Loss Adjustment Expenses, Net of Reinsurance (in thousands)
Accident Year	2008		2009			2010			2011			2012		2013		2014		2015		2016		2017
2008	$	21	$	(1,085	)	$	(817	)	$	(50	)	$	341	$	481	$	519	$	617	$	722	$	739
2009			52			315			1,112			2,122		3,246		4,449		4,620		6,075		6,695
2010						167			503			1,631		2,363		1,802		2,392		2,611		2,724
2011									111			390		1,342		1,232		3,155		3,688		3,802
2012												496		657		1,496		2,166		1,984		2,361
2013														70		324		584		445		573
2014																90		367		419		562
2015																		63		293		827
2016																				239		536
2017																						26
																						$	18,845
						All outstanding liabilities before 2008, net of reinsurance																506

			Liabilities for losses and loss adjustment expenses, net of reinsurance																			$	11,383

111

The reconciliation for the net incurred and paid loss development tables to the liability for losses and loss adjustment expenses for PIPE at December 31, 2017 in the accompanying balance sheet is as follows:



Net outstanding liabilities for losses and loss adjustment expenses:
Medical professional	$	11,383
Liabilities for losses and loss adjustment expenses, net of reinsurance	11,383

Reinsurance recoverable on unpaid claims:
Medical professional	156
Total reinsurance recoverable on unpaid claims	156

Unallocated loss adjustment expenses	222

Total gross liability for losses and loss adjustment expenses	$	11,761

Investments

Each exchange’s investments in debt and equity securities are classified as available for sale and are carried at fair value with unrealized gains and losses reflected as a component of equity, net of taxes. The goal of the each exchange’s investment activities is to complement and support its overall mission. An important component of the operating results of each exchange has been the return on invested assets. The exchanges’ 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 its investment securities to reflect the maturities of its 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, the investment policies of the exchanges 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;


•	Foreign currency trading;


•	Venture-capital investments;


•	Securities lending;


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


•	Short selling.

In 2017, the three exchanges adopted a common investment policy. The Board of Directors of each exchange reviews and approves the investment policy annually.

The investment portfolios of the exchanges are managed by the investment committee of that exchange and Wilmington Trust, with the exception of certain direct investments representing approximately 4.7% and 4.1% of the total portfolio at September 30, 2018 and December 31, 2017, respectively.

112

PPIX’s Investments

The following table sets forth information concerning PPIX’s investments (dollars in thousands).



	September 30, 2018				December 31,
	September 30, 2018				2017				2016
	Cost or Amortized Cost (unaudited)		Estimated Fair Value or Equity Method Value (unaudited)		Cost or Amortized Cost (audited)		Estimated Fair Value or Equity Method Value (audited)		Cost or Amortized Cost (audited)		Estimated Fair Value or Equity Method Value (audited)
Agencies not backed by the full faith and credit of the U.S. government	$	4,808	$	4,685	$	7,416	$	7,323	$	8,191	$	8,092
U.S. Treasury securities	250		234		350		341		595		581
States, territories and possessions	915		910		1,202		1,213		1,224		1,222
Special revenue	9,910		9,853		9,738		9,881		9,998		10,016
Industrial and miscellaneous	26,774		26,093		24,991		25,028		19,360		19,244
Total debt securities	42,657		41,775		43,697		43,786		39,368		39,155
Equity securities	2,841		2,860		2,737		2,807		2,505		2,491
Total securities at fair value	45,498		44,635		46,434		46,593		41,873		41,646
Limited partnerships	3,150		4,296		3,150		4,116		1,850		2,135
Total	$	48,648	$	48,931	$	49,584	$	50,709	$	43,723	$	43,781

At December 31, 2017, PPIX has ownership interests in four limited partnerships. At December 31, 2016, PPIX had ownership interests in three limited partnerships. PPIX’s partnership interests are accounted for on the equity method, which approximates PPIX’s equity in the underlying net assets of the limited partnerships. At December 31, 2017, the carrying value and cost basis of these investments was $4.1 million and $3.1 million, respectively. At December 31, 2016, the carrying value and cost basis of these investments was $2.1 million and $1.8 million, respectively.

At September 30, 2018, PPIX has ownership interests in four limited partnerships. At September 30, 2018, the carrying value and cost basis of these investments was $4.3 million and $3.1 million, respectively.

The following table summarizes the distribution of PPIX’s 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 September 30, 2018 (dollars in thousands) (unaudited).



	September 30, 2018
Rating	Estimated Fair Value		Percent of Total (1)
Agencies not backed by the full faith and credit of the U.S. government	$	4,685	11.2	%
U.S. Treasury securities	234		0.6	%
AAA	2,278		5.5	%
AA	9,252		22.1	%
A	14,675		35.1	%
BBB	10,651		25.5	%
Total	$	41,775	100.0	%

__________________


(1)	Represents percent of fair value for classification as a percent of the total portfolio.

113

The table below sets forth the maturity profile of PPIX’s debt securities at September 30, 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).



	September 30, 2018
	Amortized Cost		Estimated Fair Value (1)
Less than one year	$	1,901	$	1,900
One through five years	27,358		26,957
Five through ten years	13,398		12,919
Greater than ten years	—		—
Total debt securities	$	42,657	$	41,775

__________________


(1)	Debt securities are carried at fair value in PPIX’s financial statements beginning on page F-28.

At September 30, 2018, the average maturity of PPIX’s fixed maturity investment portfolio was 4.00 years and the average duration was 3.47 years. As a result, the fair value of PPIX’s investments may fluctuate significantly in response to changes in interest rates. In addition, PIPE may experience investment losses to the extent our liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate environments.

PPIX’s average cash and invested assets, net investment income, and return on average cash and invested assets for the nine months ended September 30, 2018 and 2017 and for the years ended December 31, 2017 and 2016 were as follows (dollars in thousands) (unaudited):



	Nine Months Ended September 30,						Year Ended December 31,
	2018			2017			2017			2016
Average cash and invested assets	$	51,479		$	49,709		$	50,823		$	48,351
Net investment income	873			769			1,038			1,145
Return on average cash and invested assets (1)	2.26		%	2.06		%	2.04		%	2.37		%

__________________


(1)	Return on average cash and invested assets is calculated on an annualized basis.

114

PCA’s Investments

The following table sets forth information concerning PCA’s investments (dollars in thousands).



					December 31,
	September 30, 2018				2017				2016
	Cost or Amortized Cost (unaudited)		Estimated Fair Value or Equity Method Value (unaudited)		Cost or Amortized Cost (audited)		Estimated Fair Value (audited)		Cost or Amortized Cost (audited)		Estimated Fair Value (audited)
Agencies not backed by the full faith and credit of the U.S. government	$	1,249	$	1,239	$	1,225	$	1,212	$	3,827	$	3,816
U.S. treasury securities	2,848		2,766		5,468		5,415		9,522		9,477
Special revenue	844		841		915		913		1,520		1,517
Industrial and miscellaneous	21,252		20,741		18,186		18,175		16,055		16,033
Total debt securities	26,193		25,587		25,795		25,715		30,924		30,843
Equity securities	2,789		3,324		2,759		3,241		2,305		2,394
Total securities at fair value	28,982		28,911		28,554		28,956		33,229		33,237
Limited partnerships	150		150		—		—		—		—
Total	$	29,132	$	29,061	$	28,554	$	28,956	$	33,229	$	33,237

At September 30, 2018, PCA has an ownership interest in one limited partnership. PCA’s partnership interest is accounted for on the equity method, which approximates PCA’s equity in the underlying net assets of the limited partnerships. At September 30, 2018, the carrying value and cost basis of these investments was $150,000 and $150,000, respectively. There were no such investments of PCA as of and for the years ended December 31, 2017 and 2016.

The following table summarizes the distribution of PCA’s portfolio of fixed maturity investments as a percentage of total estimated fair value based on credit ratings assigned by Standard & Poor’s Corporation (S&P) at September 30, 2018 (dollars in thousands) (unaudited).



	September 30, 2018
Rating (1)	Estimated Fair Value		Percent Of Total (2)
Agencies not backed by the full faith and credit of the U.S. government	$	1,239	4.8	%
U.S. treasury securities	2,766		10.8	%
AAA	194		0.8	%
AA	3,594		14.0	%
A	11,263		44.0	%
BBB	6,129		24.0	%
Not rated	403		1.6	%
Total	$	25,587	100.0	%

__________________


(1)	The ratings set forth in this table are based on the ratings assigned by S&P. If S&P’s ratings were unavailable, the equivalent ratings supplied by Moody’s Investor Service, Fitch Investors Service, Inc. or the National Association of Insurance Commissioners (NAIC) were used where available.


(2)	Represents percent of fair value for classification as a percent of the total portfolio.

115

The table below sets forth the maturity profile of PCA’s debt securities at September 30, 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).



	September 30, 2018
	Amortize Cost		Estimated Fair Value (1)
Less than one year	$	1,584	$	1,571
One through five years	15,937		15,635
Five through ten years	8,672		8,381
Greater than ten years	—		—
Total debt securities	$	26,193	$	25,587

__________________


(1)	Debt securities are carried at fair value in PCA’s financial statements beginning on page G-26.

At September 30, 2018, the average maturity of PCA’s fixed maturity investment portfolio was 3.85 years and the average duration was 3.22 years. As a result, the fair value of PCA’s investments may fluctuate significantly in response to changes in interest rates. In addition, PCA may experience investment losses to the extent our liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate environments.

PCA’s average cash and invested assets, net investment income, and return on average cash and invested assets for the nine months ended September 30, 2018 and 2017 and for the years ended December 31, 2017 and 2016 were as follows (dollars in thousands) (unaudited):



	Nine Months Ended September 30,						Year Ended December 31,
	2018			2017			2017			2016
Average cash and invested assets	$	32,335		$	37,566		$	36,120		$	42,845
Net investment income	550			395			571			633
Return on average cash and invested assets (1)	2.27		%	1.40		%	1.58		%	1.48		%

__________________


(1)	Return on average cash and invested assets for interim periods is calculated on an annualized basis.

116

PIPE’s Investments

The following table sets forth information concerning PIPE’s investments (dollars in thousands).



	September 30, 2018				December 31,
	September 30, 2018				2017				2016
	Cost or Amortized Cost (unaudited)		Estimated Fair Value or Equity Method Value (unaudited)		Cost or Amortized Cost (audited)		Estimated Fair Value or Equity Method Value (audited)		Cost or Amortized Cost (audited)		Estimated Fair Value (audited)
Agencies not backed by the full faith and credit of the U.S. government	$	1,878	$	1,917	$	3,436	$	3,568	$	2,667	$	2,758
U.S. Treasury securities	1,537		1,490		1,505		1,476		3,385		3,428
States, territories and possessions	200		204		200		216		302		297
Special revenue	2,519		2,489		3,206		3,183		3,688		3,634
Industrial and miscellaneous	13,745		13,349		12,815		12,786		6,444		6,503
Total debt securities	19,879		19,449		21,162		21,229		16,486		16,619
Equity securities	1,702		1,920		1,580		1,820		1,197		1,231
Total securities at fair value	21,581		21,369		22,742		23,049		17,683		17,850
Limited partnerships	245		235		129		132		—		—
Total	$	21,826	$	21,604	$	22,871	$	23,181	$	17,683	$	17,850

At December 31, 2017, PIPE has an ownership interest in one limited partnership. PIPE’s partnership interest is carried on the equity method, which approximates PIPE’s equity in the underlying net assets of the limited partnership. At December 31, 2017, the carrying value and cost basis of this investment was $132,000 and $129,000, respectively. There were no similar investments in limited partnerships held by PIPE as of December 31, 2016.

At September 30, 2018, PIPE has ownership interests in two limited partnerships. At September 30, 2018, the carrying value and cost basis of these investments was $235,000 and $245,000, respectively.

117

The following table summarizes the distribution of PIPE’s 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 September 30, 2018 (dollars in thousands) (unaudited).



	September 30, 2018
Rating	Estimated Fair Value		Percent of Total (1)
Agencies not backed by the full faith and credit of the U.S. government	$	1,917	9.9	%
U.S. Treasury securities	1,490		7.7	%
AAA	803		4.1	%
AA	2,261		11.6	%
A	7,579		39.0	%
BBB	5,141		26.4	%
CCC	137		0.7	%
Not rated	121		0.6	%
Total	$	19,449	100	%

__________________


(1)	Represents percent of fair value for classification as a percent of the total portfolio.

The table below sets forth the maturity profile of PIPE’s debt securities at September 30, 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).



	September 30, 2018
	Amortized Cost		Estimated Fair Value (1)
Less than one year	$	1,520	$	1,509
One through five years	10,031		9,884
Five through ten years	6,863		6,603
Greater than ten years	1,465		1,453
Total debt securities	$	19,879	$	19,449

__________________


(1)	Debt securities are carried at fair value in PIPE’s financial statements beginning on page H-28.

At September 30, 2018, the average maturity of PIPE’s fixed maturity investment portfolio was 5.08 years and the average duration was 4.02 years. As a result, the fair value of PIPE’s investments may fluctuate significantly in response to changes in interest rates. In addition, PIPE may experience investment losses to the extent our liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate environments.

PIPE’s average cash and invested assets, net investment income, and return on average cash and invested assets for the nine months ended September 30, 2018 and 2017 and for the years ended December 31, 2017 and 2016 were as follows (dollars in thousands) (unaudited):



	Nine Months Ended September 30,						Year Ended December 31,
	2018			2017			2017			2016
Average cash and invested assets	$	23,990		$	25,545		$	25,555		$	26,279
Net investment income	492			367			521			645
Return on average cash and invested assets (1)	2.73		%	1.92		%	2.04		%	2.46		%

__________________


(1)	Return on average cash and invested assets is calculated on an annualized basis.

118

Each exchange uses quoted values and other data provided by independent pricing services as inputs in its process for determining fair values of its investments. The pricing services cover substantially all of the securities in the exchange’s 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.

The investment manager of each exchange provides it with pricing information that it utilizes, together with information obtained from independent pricing services, to determine the fair value of its fixed maturity securities. After performing a detailed review of the information obtained from the pricing service, no adjustment was made to the values provided.

Competition

The medical professional liability insurance market is highly competitive. We compete with stock and mutual insurance companies, 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.

The NAIC reports that in 2016 the total premiums written for MPLI was $683.9 million in Pennsylvania and $9.3 billion in the United States. The combined direct written premiums of PPIX, PCA, and PIPE were $26.7 million and $29.9 million for the years ended December 31, 2017, and 2016, respectively. The combined direct written premiums of PPIX, PCA, and PIPE for the nine months ended September 30, 2018 and 2017 was $17.6 million and $18.6 million, respectively. Accordingly, we believe we need to capture only a small percentage of the MPLI business nationwide to achieve our business plan.

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; reserve appropriately for unpaid claims; 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 PPIX, PCA, and PIPE to file financial statements with state insurance departments everywhere they do business, and the operations of PPIX, PCA, and PIPE and their respective accounts are subject to examination by those departments at any time. PPIX, PCA, and PIPE prepare statutory financial statements in accordance with accounting practices and procedures prescribed or permitted by Pennsylvania. Pennsylvania generally conforms to NAIC practices and procedures, so its examination reports and other filings generally are accepted

119

by other states. Positive Insurance will be subject to these laws, regulations and requirements after completion of the conversions.

Premium rate regulation varies greatly among jurisdictions and lines of insurance. In the states in which PPIX, PCA, and PIPE write insurance, premium rates for the various lines of insurance are subject to either prior approval or limited review upon implementation. Positive Insurance 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 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. PPIX last examined as of December 31, 2012, PCA was last examined as of December 31, 2014, and PIPE was last examined as of December 31, 2012. The past examinations did not result in any adjustments to the financial position of PPIX, PCA, or PIPE. In addition, there were no substantive qualitative matters indicated in the examination report that had a material adverse impact on the operations of either PPIX, PCA, or PIPE.

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 levels of PPIX, PCA, and PIPE have never triggered any of these regulatory capital levels. We cannot assure you, however, that the capital requirements applicable to Positive Insurance after the conversion 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. During each of the years ended December 31, 2017 and 2016, none of PPIX, PCA, or PIPE produced results outside the acceptable range for any of the IRIS tests.

120

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 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 PPIX, PCA, and PIPE are exempt from ORSA because of their size, Positive Insurance 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, 2017, PPIX, PCA, and PIPE incurred total assessment expense in the amount of $49,000 pursuant to state insurance guaranty association laws. For the year ended December 31, 2016, PPIX, PCA, and PIPE incurred total assessment expense in the amount of $80,000 pursuant to such laws. For the nine months ended September 30, 2018, PPIX, PCA, and PIPE incurred total assessment expense in the amount of $33,000 pursuant to state insurance guaranty association laws. For the nine months ended September 30, 2017, PPIX, PCA, and PIPE incurred total assessment expense in the amount of $40,000 pursuant to state insurance guaranty association laws.

PPIX, PCA, and PIPE each establish reserves relating to insurance companies that are subject to insolvency proceedings when they are notified of assessments by the guaranty associations. We cannot predict the amount and timing of any future assessments on Positive Insurance 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

121

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.

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 will become subject to most of the provisions of the SOX immediately after completion of this 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. PPIX, PCA, and PIPE have each 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.

We will remain an “emerging growth company” for up to five years following our IPO, 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.

122

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.

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 combined amount available for payment of dividends by PPIX, PCA, and PIPE, on a combined basis, in 2018 without prior approval is approximately $4.3 million. “Extraordinary dividends” in excess of the foregoing limitations may only be paid with prior notice to, and approval of, the Pennsylvania Insurance Department. See “Dividend Policy.”

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 at any time.

All transactions within our consolidated group affecting Positive Insurance must be fair and equitable. Notice of certain material transactions between Positive Insurance 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.

Legal Proceedings

PPIX, PCA and PIPE are each parties to litigation in the normal course of 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.

Properties

Our headquarters is located at 100 Berwyn Park, 850 Cassatt Road, Suite 220, Berwyn, PA 19312, and we will also maintain an office in Rome, Georgia for our accounting staff.

The headquarters of PPIX, PCA and PIPE are located at 100 Berwyn Park, 850 Cassatt Road, Suite 220, Berwyn, PA 19312, and its phone number is 888-335-5335.

We believe that the offices currently occupied are sufficient for our needs and any expected growth in the near future.

123

ACCOUNTING TREATMENT

In determining the appropriate accounting treatment under GAAP for conversion transactions, the Company evaluated the extent of common control that exists between the entities. The accounting treatment for common control transactions differs from business combinations. Combinations between entities under common control are excluded from the scope of business combinations in ASC 805. ASC 805 states that common control transactions are transfers and exchanges between entities that are under the control of the same parent or are transactions in which all of the combining entities are controlled by the same party or parties before and after the transaction and that control is not transitory (ASC 805-50-15-6). Generally, under GAAP, entities that are consolidated by the same parent or were required to be consolidated by the parent or the controlling party, are considered to be under common control.

Prior to the offering and through the attorney-in-fact agreements between Diversus’ wholly-owned subsidiaries, SIS, PTP, and PIPE Management, and PPIX, PCA, and PIPE, respectively, Diversus has the power to direct the activities of PPIX, PCA, and PIPE that most significantly impact PPIX’s, PCA’s, and PIPE’s economic performance by acting as the common attorney-in-fact and decision maker for the subscribers of PPIX, PCA, and PIPE.

You should read this section in connection with “Prospectus Summary - Our Structure Prior to the Conversions” and “- Our Structure Following the Conversions” included elsewhere in this prospectus. The accounting treatment that we have applied or intend to apply to the various acquisitions, merger and conversion transactions is summarized as follows:

Positive Physicians Holdings, Inc. Transaction

PPIX, PCA, and PIPE will undergo the process of demutualization or the conversion from subscriber-based entities to stock-based entities as discussed in ASC 944-805. In connection with the demutualization process, PPIX Conversion Corp., PCA Conversion Corp., and PIPE Conversion Corp. will be formed. The effect of the demutualization has been considered by management in accordance with ASC 944-805, but the full effect will not measurable until the transaction has been consummated. In connection with the merger, PCA Conversion Corp. and PIPE Conversion Corp. will be merged into PPIX Conversion Corp., which will change its name to Positive Insurance. Positive Insurance will own the insurance operations post-merger. Positive Insurance will be a wholly-owned subsidiary of the Company. ASC 805-50-15-6 indicates that if “an entity charters a newly formed entity and then transfers some or all of its net assets to that newly chartered entity,” that transaction qualifies as a common control transaction. We will account for the transfer of net assets by PCA and PIPE to Positive Insurance as transactions between entities under common control. Positive Insurance will receive the net assets and will initially recognize the assets, liabilities and non-controlling interests transferred at their carrying amounts in the accounts of the transferring entities, PCA and PIPE, at the date of the transfer. The non-controlling interests will be eliminated as a result of the conversions of PPIX, PCA, and PIPE.

Non-Controlling Interests

In connection with the conversion of PPIX, PCA, and PIPE, each subscriber (non-controlling interests) will have the opportunity to vote to approve or disapprove the conversions and to make or not make an equity investment in Positive Physicians Holdings, Inc. Upon completion of the conversions, each subscriber will cease to have any legal or economic interest whatsoever in PPIX, PCA, or PIPE as the case may be. Under the provisions of the Pennsylvania Medical Professional Liability Reciprocal Exchange-to-Stock Conversion Act, any voting rights and any right to share in the surplus of the reciprocal insurance exchange are extinguished upon the effective date of the conversion regardless of whether the policyholder exercises such subscription rights. Under GAAP, changes in ownership interest are treated as equity transactions, if control is maintained by the primary beneficiaries. Additional acquisitions of ownership interests (non-controlling interests) after control is obtained and disposal of an ownership interest that do not result in a company losing control are treated as equity transactions. The extinguishment of any continuing rights of the non-controlling interests in the conversions of PPIX, PCA, and PIPE will be accounted for as equity transactions and the related carrying value of the non-controlling interests will be recognized as additional paid in capital (“APIC”) in equity. The same accounting will apply in the consolidated financial statements of the Company, as the parent, and no gain will be recognized in the consolidated statement of operations.

124

THE CONVERSIONS AND THE OFFERING

As reciprocal insurance exchanges, PPIX, PCA, and PIPE do not have shareholders. They have subscribers. The subscribers of PPIX, PCA, and PIPE are their respective policyholders. The subscribers of PPIX, PCA, and PIPE do not have any voting rights except as are provided by Pennsylvania law, such as the right to approve the conversions. In addition, such subscribers do not have any economic interest in the assets or earnings of the exchanges absent a liquidation of an exchange, but do have the first right to purchase shares in this offering. In an insurance company organized as a stock institution, policyholders have no governance rights, which reside with shareholders, and instead have only contractual rights under their insurance policies.

General

On June 1, 2018, Specialty Insurance Services, LLC, as the attorney-in-fact of PPIX, adopted the plan of conversion of PPIX, subject to the approval of the Pennsylvania Insurance Commissioner. Approval by the Pennsylvania Insurance Commissioner, which was received on [.], 2019, is not a recommendation or endorsement of the offering. The plan of conversion of PPIX is also subject to the approval of the policyholders of PPIX as of June 1, 2018, by the affirmative vote of at least two-thirds of the votes cast at a special meeting to be held on [.], 2019.

On June 1, 2018, Professional Third Party, L.P., as the attorney-in-fact of PCA, adopted the plan of conversion of PCA, subject to the approval of the Pennsylvania Insurance Commissioner. Approval by the Pennsylvania Insurance Commissioner, which was received on [.], 2019, is not a recommendation or endorsement of the offering. The plan of conversion of PCA is also subject to the approval of the policyholders of PCA as of June 1, 2018, by the affirmative vote of at least two-thirds of the votes cast at a special meeting to be held on [.], 2019.

Similarly, on June 1, 2018, Physicians’ Insurance Program Management Company, as the attorney-in-fact of PIPE, adopted the plan of conversion of PIPE, subject to the approval of the Pennsylvania Insurance Commissioner. Approval by the Pennsylvania Insurance Commissioner, which was received on [.], 2019, is not a recommendation or endorsement of the offering. The plan of conversion of PIPE is also subject to the approval of the policyholders of PIPE as of June 1, 2018, by the affirmative vote of at least two-thirds of the votes cast at a special meeting to be held on [.], 2019.

The plans of conversion, as amended, provide that we will offer shares of our common stock for sale in a subscription offering to policyholders of PPIX, PCA, and PIPE as of June 1, 2018. In addition, we may elect to offer the shares of common stock not subscribed for in the subscription offering, if any, for sale in a community offering commencing during or upon completion of the subscription offering. See “- Subscription Offering and Subscription Rights” and “- Community Offering.” Except for any orders placed by ICG, we have the right to accept or reject, in whole or in part, any order to purchase shares of common stock received in the community offering.

The conversions will be accomplished by the filing of articles of merger with the Pennsylvania Department of State with respect to the mergers of PPIX with and into PPIX Conversion Corp, PCA with and into PCA Conversion Corp., and PIPE with and into PIPE Conversion Corp.

In connection with the conversions, all of the outstanding shares of common stock of PPIX Conversion Corp, PCA Conversion Corp., and PIPE Conversion Corp. will 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. Positive Insurance will then be the Company’s sole subsidiary. The conversion will be effected only if subscriptions and orders are received for at least 3,570,000 shares of common stock and the eligible policyholders of PPIX, PCA and PIPE approve their respective plans of conversion.

Copies of the PCA plan of conversion, the PPIX plan of conversion, and the PIPE plan of conversion are available by contacting our principal executive office located at 100 Berwyn Park, 850 Cassatt Road, Suite 220, Berwyn, PA 19312. A copy of the applicable plan also was sent to each eligible policyholder of PPIX, PIPE, and PCA along with the notice of their respective special meeting of eligible policyholders.

125

Copies of the plans also are filed as exhibits to the registration statement of which this prospectus is a part. Copies of the registration statement and exhibits may be obtained from the SEC. See “Additional Information.”

Offering of Common Stock

In connection with the conversions, we are offering shares of common stock to the eligible policyholders of PPIX, PCA, and PIPE. The offering to the eligible policyholders of PPIX, PCA, and PIPE, is referred to as the subscription offering because each of those constituents will receive subscription rights to purchase up to 5,000 shares of common stock in the offering.

We also plan to offer to sell shares of our common stock to certain existing stockholders of Diversus and to ICG and Enstar. Except for orders placed by ICG, Enstar, and certain stockholders of Diversus, no person has a right to purchase shares in the community offering. Existing stockholders of Diversus collectively may not purchase more than 5% of the number of shares available for purchase after purchases by policyholders in the subscription offering.

The completion of this offering is subject to market conditions and other factors beyond our control. If the offering is not completed, our capital structure will remain unchanged. In that event, PPIX, PCA and PIPE will continue to be reciprocal insurance exchanges, and all funds received with order forms will be promptly returned to purchasers without interest.

Effect of Offering on Policyholders of PPIX, PCA and PIPE

Upon completion of the conversions, Positive Insurance will be the successor to PPIX, PCA, and PIPE and all of the assets and rights of PPIX, PCA, and PIPE will vest in Positive Insurance. In addition, Positive Insurance will assume all of the obligations and liabilities of PPIX, PCA, and PIPE. All of the interests of the policyholders of PPIX, PCA, and PIPE as subscribers in such reciprocal insurance exchanges will be extinguished. However, the conversion will have no effect on the rights of the policyholders of PPIX, PCA, or PIPE under their respective insurance policies.

The subscribers of PPIX, PCA and PIPE have no right to vote for the election of directors or on any other corporate transactions except as provided by law. In addition, the interests of subscribers, unlike shares held by shareholders, have no market value because they cannot be separated from the underlying insurance policy and, in any event, are not transferable. The certificate of organization of PIPE provides that upon the liquidation of PIPE, any assets remaining after all obligations of PIPE have been satisfied are to be distributed to the policyholders based on the proportion that the premiums paid by each then current policyholder during the twelve months preceding the effective date of the liquidation bears to the total premiums paid by all current policyholders during such twelve-month period. The certificates of organization of PPIX and PCA contain no such provision.

If the plans of conversion are not approved by at least two-thirds of the votes cast by the eligible policyholders of PPIX, PCA and PIPE or if the conversions fail to be completed for any other reason, PPIX, PCA and PIPE will each continue as a reciprocal insurance exchange. In this case, the subscribers of PPIX, PCA and PIPE will retain their rights as subscribers described above.

Continuity of Insurance Coverage and Business Operations

The conversions will not change the insurance protection or premiums under insurance policies issued by PPIX, PCA or PIPE. During and after the conversions, the normal business of issuing insurance policies and handling claims will continue without change or interruption. After the conversions, Positive Insurance will continue to provide services to policyholders under current policies. Positive Insurance will be managed by the board of directors of Positive Insurance. Information on the officers and directors of the Company, which will be the parent corporation and sole shareholder of Positive Insurance, is set forth in this prospectus in “Management - Directors and Officers.”

Voting Rights

As subscribers, the policyholders of PPIX, PCA and PIPE have only such voting rights as are granted by Pennsylvania law. After the conversions, all of the voting rights of the policyholders of PPIX, PIPE and PCA will cease. Instead, voting rights in Positive Insurance will be held by the Company, which will own all of the outstanding capital stock of Positive Insurance. Voting rights in the Company will be held by the shareholders of the Company, subject to

126

the terms of the articles of incorporation and bylaws of the Company and to the provisions of Pennsylvania law. See “Description of Our Capital Stock - Common Stock” for a description of our common stock and “Restrictions on Acquisition of the Company” for a description of certain provisions of the Company’s articles of incorporation that affect the voting rights of shareholders of the Company.

Subscription Offering and Subscription Rights

In accordance with the plans of conversion, rights to subscribe for the purchase of our common stock have been granted to “eligible subscribers” (as they are referred to in the plans of conversion), which means a person or entity who is a named insured under an insurance policy issued by PPIX , PCA, or PIPE that is in force as of the close of business on June 1, 2018.

At June 1, 2018, PPIX had approximately 1722 eligible subscribers, PCA had approximately 819 eligible subscribers, and PIPE had approximately 336 eligible subscribers.

All subscriptions received will be subject to the availability of common stock and to the maximum and minimum purchase limitations set forth in the plan of conversion and as described below under “- Limitations on Purchases of Common Stock.”

Each eligible subscriber of PPIX, PCA and PIPE will receive, without payment, nontransferable subscription rights to purchase shares, subject to the overall purchase limitations. If there are not sufficient shares available to satisfy all subscriptions by eligible subscribers, shares will be allocated first among subscribing eligible subscribers so as to permit each such eligible subscriber, to the extent possible, to purchase the lesser of: (i) the number of shares for which he or she subscribed, or (ii) 1,000 shares. Any shares remaining after such allocation will be allocated among the subscribing eligible subscribers whose subscriptions remain unfilled on a pro rata basis based on the number of shares that each eligible subscriber subscribed to purchase that remains unfilled, provided that no fractional shares will be issued.

Community Offering

To the extent that shares remain available for purchase after satisfaction of all subscriptions received in the subscription offering described above, we may elect to accept offers received in the community offering to the extent of any remaining shares. Pursuant to the standby stock purchase agreement, we have agreed to accept any order submitted by ICG provided that we cannot sell more than 4,830,000 shares in the offering. ICG has agreed that certain stockholders of Diversus can purchase, in the aggregate, up to 5% of the shares remaining after the satisfaction of subscriptions received in the subscription offering. We may reject any other order received in the community offering. None of ICG, Enstar, or the stockholders of Diversus has priority over the others with respect to its right to purchase shares in the community offering.

ICG has agreed to purchase in the community offering at least such number of shares as is necessary to ensure that at least 3,570,000 shares are sold in the offering. ICG has agreed to permit Enstar to purchase 30% of the shares that ICG would otherwise purchase in the offering. ICG and Enstar have each agreed not to transfer any shares that it purchases in the offering for at least six months after completion of the offering. ICG and Enstar are purchasing such shares for investment and not for resale.

Except for the obligation to sell shares to ICG, Enstar and certain stockholders of Diversus, the opportunity to submit an order for shares of common stock in the community offering is subject to our right, in our sole discretion, to accept or reject any such orders in whole or in part either at the time of receipt of an order or as soon as practicable following the expiration of the community offering.

The community offering will commence simultaneously or shortly after with the subscription offering.

Standby Stock Purchase Agreement

General . On June 8, 2018, we entered into a standby stock purchase agreement with Insurance Capital Group, LLC, pursuant to which the standby purchaser agreed, subject to certain conditions, to acquire from the Company, at the subscription price of $10.00 per share, such number of shares of our common stock as would cause at least the

127

minimum number of shares to be sold in connection with the conversion. If the conversion is completed, the standby purchaser will also acquire shares of our common stock upon the conversion of the exchangeable note described below. Any shares issued in connection with the exchangeable note will be counted towards satisfaction of the minimum number of shares that must be sold in the offerings. See “- Exchangeable Note ”.

Exchangeable Note . In connection with entering into the standby stock purchase agreement, Insurance Capital Group, LLC has agreed to loan up to $750,000 to the Company to fund the costs of the conversions and the offerings. The Company will issue a $750,000 exchangeable note to the standby purchaser to evidence any advances made to the Company by the standby purchaser under such credit facility. The outstanding principal balance of the exchangeable note will automatically convert into shares of common stock of the Company at a price of $10.00 per share upon completion of the conversion. If the conversion is not completed, the outstanding principal balance and all unpaid, accrued interest under the exchangeable note will become due and payable. The Company may borrow under the exchangeable note from time to time, provided that the outstanding principal balance cannot exceed $750,000 at any time. The proceeds of the exchangeable note may be used by the Company to pay the costs that it has and will incur in connection with the conversion and the offerings. The exchangeable note will bear interest at an annual rate of 8.0% and is due and payable on the first anniversary of the date of the note, but the standby purchaser can accelerate the maturity of the exchangeable note if the Company’s board of directors decides to abandon the conversion or upon any event of bankruptcy or insolvency of the Company or the occurrence of any event that permits ICG to accelerate the maturity of the note. Enstar has agreed with ICG that Enstar will fund 30% of any advances under the exchangeable note.

Conditions to Closing . The standby stock purchase agreement contains customary representations and warranties of the Company and the exchanges, on the one hand, and the standby purchaser, on the other hand. The conditions to the standby purchaser’s closing obligations include, among other things:

•

the representations and warranties of the Company and the exchanges are true and correct as of the date of the standby stock purchase agreement and as of the date of the closing of the conversion as if made on that date, except where the failure to be true and correct (without regard to any materiality or material adverse effect qualifications contained in such representations) would not reasonably be expected to have, individually or in the aggregate, a material adverse effect (as defined in the standby stock purchase agreement), and provided that certain representations and warranties have to be true and correct in all respects;


•	the Company and the exchanges shall have performed in all material respects all of their respective obligations under the standby stock purchase agreement that are required to be performed prior to the closing;

•

as of the closing date none of the following shall be in effect: (a) trading in the Company’s common stock shall have been suspended by the SEC or trading in securities generally on the New York Stock Exchange or the NASDAQ Stock Market shall have been suspended or limited or minimum prices shall have been established on either such exchange, (b) a banking moratorium shall have been declared either by United States or New York state authorities, or (c) there shall have occurred any material outbreak or material escalation of hostilities, declaration by the United States of a national emergency or war, or other calamity or crisis which has a material adverse effect on the United States financial markets;


•	the gross proceeds from the offering, including the purchases by the standby purchaser, are equal to or greater than $35,700,000;


•	since the date of the standby stock purchase agreement, a material adverse effect shall not have occurred with respect to the exchanges and the Company and no change or event shall have occurred that would reasonably be expected to have, individually or in the aggregate, a material adverse effect with respect to the exchanges or the Company;


•	the standby purchaser has been granted the right to appoint a member of the board of directors of Diversus, Inc.; and

128


•	if requested by the standby purchaser, the exchanges have obtained adverse development coverage from a reinsurance company acceptable to the standby purchaser in the amount of $15,000,000 and at a cost not in excess of $6,000,000 and attaching at current reserve levels.

The conditions to the Company’s closing obligations include, among other things:


•	the representations and warranties of the standby purchaser are true and correct in all material respects as of the date of the standby stock purchase agreement and as of the date of the closing of the conversion as if made on that date (except for representations and warranties made as of a specified date, which shall be true and correct as of that specified date);


•	the standby purchaser shall have performed in all material respects all of its obligations under the standby stock purchase agreement that are required to be performed prior to the closing;

•


•	the gross proceeds from the offering, including the purchases by the standby purchaser, are equal to or greater than $35,700,000.

The obligation of both the Company and the standby purchaser to consummate the transactions contemplated by the standby stock purchase agreement are subject to the following conditions:


•	no judgment, injunction, decree, or other legal restraint shall be outstanding, nor shall any action, suit, claim, investigation, or other legal proceeding be pending that would reasonably be expected to prohibit, or have the effect of rendering unachievable, the consummation of the offerings or the transactions contemplated by the standby stock purchase agreement;

•

the registration statement of which this prospectus is a part shall have been declared effective by the SEC and no stop order suspending the effectiveness of such registration statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the SEC, and any request of the SEC with respect to such registration statement shall have been complied with;


•	at least two-thirds of the votes cast by the subscribers of each exchange voting at the special meeting of the subscribers of such exchange called for such purpose shall have voted to adopt and approve the plan of conversion of the exchange and the transactions contemplated thereunder;


•	all consents and approvals of the Department and any other regulatory body or agency necessary to consummate the transactions contemplated by the standby stock purchase agreement shall have been obtained and all notice and waiting periods required by law to pass after receipt of such approvals or consents shall have passed;


•	our shares of common stock shall have been authorized for listing on the NASDAQ Capital Market;


•	Diversus Management and Positive Insurance shall have both executed and delivered the new management agreement described herein under “Description of Business - Management of Positive Insurance After the Conversions” and the Company shall have made the $10,000,000 payment to Diversus in consideration of Diversus Management entering into the new management agreement;


•	the Company and Diversus shall have entered into credit agreements related to the $6,000,000 credit facility described herein under “The Conversions and the Offering - Transactions Related to the Conversions;”

129


•	Diversus, the Company, and Diversus’ lender shall have entered into an intercreditor agreement on terms and conditions that are reasonably acceptable to Diversus, the Company, and Diversus’ Lender; and


•	Diversus and the Company shall have both executed and delivered the option agreement described under “The Conversions and the Offering - Transactions Related to the Conversions.”

Board Designees . In connection with closing under the standby stock purchase agreement, we will appoint Matthew T. Popoli, Craig A. Huff, Scott Penwell, Stephen Johnson, Bill Hitselberger, and James Zech and Enstar will appoint Duncan McLaughlin and Paul Brockman to the board of directors of the Company. Lewis S. Sharps, as the Chief Executive Officer of the Company, will also be appointed to the board of directors of the Company. If and for so long as the standby purchaser beneficially owns more than 50.0% of the issued and outstanding shares of our common stock, the standby purchaser will have the right to nominate a majority of the members of the board of directors of the Company and Positive Insurance, and the Company has agreed to elect such nominees to the board of directors of Positive Insurance.

Preemptive Rights . The standby purchaser will be entitled to contractual preemptive rights that would allow it to maintain its percentage ownership in certain subsequent offerings of our common stock or securities convertible into our common stock. This right will not apply to, and shall terminate upon the earlier of (a) the first date upon which the standby purchaser no longer beneficially owns shares of our common stock representing more than twenty percent (20%) of the issued and outstanding shares of our common stock immediately prior to a subsequent issuance of our common stock or securities convertible into our common stock, or (b) the date of any breach by the standby purchaser of any obligation under the standby stock purchase agreement that remains uncured after thirty days’ notice thereof.

Drag Along Rights . The standby stock purchase agreement provides that if the standby purchaser or any other shareholder who owns 51% or more of the outstanding shares of common stock of the Company receives a bona fide offer from an unaffiliated third party purchaser to consummate, in one transaction or a series of transactions, a change of control, such shareholder will have the right to require Enstar, Lewis S. Sharps, Leslie Latta, and Kurt Gingrich to participate in such transaction by transferring such shareholder’s shares of common stock of the Company to the third party purchaser for the same consideration as will be received by the standby purchaser or other selling shareholder. No shareholder, however, will be required to participate in such transaction if the consideration to be received is other than cash or registered securities listed on an established United States securities exchange. Each shareholder will be required to vote in favor of the transaction and take all actions to waive any dissenters’ appraisal or similar rights in connection with such transaction. For purposes of the standby stock purchase agreement, “change of control” means any transaction or series of transactions (as a result of a tender offer, merger, consolidation, or otherwise) that results in, or that is in connection with (a) any third party purchaser or “group” of third party purchasers acquiring beneficial ownership, directly or indirectly, of a majority of the outstanding shares of common stock of the Company, or (b) the sale, lease, exchange, or other transfer of all or substantially all of the property and assets of the Company and its subsidiaries, on a consolidated basis, to any third party purchaser or “group” of third party purchasers (including any liquidation, dissolution, or winding up of the Company, or any other distribution made in connection therewith).

Tag Along Rights . The standby stock purchase agreement provides that if Lewis S. Sharps, M.D., Leslie Latta, and Kurt Gingrich, or any shareholder who owns 51% or more of the outstanding shares of common stock of the Company, proposes to transfer more than half of its shares of common stock of the Company to a third party purchaser and the selling shareholder has not elected to exercise its drag along rights as described above, each other shareholder of the Company will be permitted to participate in such transfer on the same terms and conditions as the selling shareholder.

Termination . The standby stock purchase agreement provides that it may be terminated by the standby purchaser only upon the occurrence of the following events:


•	a material breach of the agreement by us that has not been cured within fifteen days after written notice by the standby purchaser;


•	if, by action by the attorneys-in-fact of the exchanges, the exchanges shall have decided to abandon the plans of conversion;

130


•	if the plans of conversion shall have failed to receive the requisite approval of the Department or the requisite vote for approval and adoption by the subscribers of the exchanges who are eligible to vote on the plans of conversion;

•

if any governmental entity, including the Department, shall have issued an order, decree, or ruling or taken any other action permanently restraining, enjoining, or otherwise prohibiting the transactions contemplated by the standby stock purchase agreement and such order, decree, ruling, or other action shall have become final and nonappealable or if the removal or reversal of such order, decree, ruling or other action would result in a “burdensome condition” as defined in the standby stock purchase agreement; or

•

the conversion is not completed by March 31, 2019, unless the person seeking to terminate the agreement has failed to perform its obligations under the standby stock purchase agreement and such failure is the primary cause of the failure of the conversion to be completed by March 31, 2019, and provided that either the Company or the standby purchaser may extend such date for up to six months if any approvals necessary to proceed with or complete the conversion or the offerings have not been received by December 1, 2018.

Termination Fee. If the conversions are not completed solely because the transactions involving Diversus are not approved by the Diversus stockholders, then the Company and the exchanges are obligated to pay to ICG a termination fee equal to the costs incurred by ICG in connection with conducting due diligence and the negotiation of the standby stock purchase agreement and other related agreements, but such fee shall not exceed $500,000 (the “No Vote Termination Fee”). In the event the requisite Diversus stockholder approval is not received and the Company and the Exchanges enter into agreements with another party with respect to a transaction similar to the transactions described in the standby stock purchase agreement, the Company and the exchanges are obligated to pay to ICG a termination fee equal to the sum of (i) the No Vote Termination Fee, and (ii) an amount equal to 3.0% of the aggregate statutory surplus of the exchanges. In each case, the amount required to be paid shall be limited to an amount permitted by the Pennsylvania Insurance Department, if so required by the Department, and is subject to the formal approval of the Department.

Stock Pricing and Number of Shares to be Issued

The plans of conversion require that the aggregate purchase price of the common stock be based on the combined estimated pro forma market values of PPIX, PCA, and PIPE. The valuation must be in the form of a range consisting of a midpoint valuation, a valuation fifteen percent (15%) above the midpoint valuation and a valuation fifteen percent (15%) below the midpoint valuation. Based on the appraisals performed by Feldman Financial as of May 1, 2018, the combined estimated pro forma market value of PPIX, PCA, and PIPE is between $35,700,000 and $48,300,000.

We determined to offer the common stock in the offering at the price of $10 per share to ensure a sufficient number of shares are available for purchase by policyholders. In addition, Griffin Financial advised us that the $10 per share offering price is commonly used in conversions of mutual insurance companies and savings banks and savings associations that use the subscription rights model. These were the only factors considered by our board of directors in determining to offer shares of common stock at $10 per share. The purchase price will be $10 per share regardless of any change in the pro forma market values of PPIX, PCA, and PIPE, as determined by Feldman Financial.

We plan to issue between 3,570,000 and 4,830,000 shares of our common stock in the offering. This range was determined by dividing the $10.00 price per share into the range of the combined appraisals of PPIX, PCA, and PIPE by Feldman Financial. We cannot assure you that the market price for the common stock immediately following the offering will equal or exceed $10 per share.

There is a difference of approximately $12.6 million between the low end and the high end of the range of Feldman Financial’s combined valuations. As a result, the percentage interest in the Company that a subscriber for a fixed number of shares of common stock will have is greater if 3,570,000 shares are sold than if 4,830,000 shares are sold. In addition, assuming that the actual market value of the Company. will be within the broad estimated valuation range, this consolidated market value may be materially more or less than the total amount of subscriptions and orders received.

131

Therefore, purchasers, in total and on a per share basis, may pay more for the common stock than the actual market value.

If Subscriptions Received in the Subscription Offering Meet or Exceed the Maximum Number of Shares Offered

If, after the subscription offering, the number of shares subscribed for by eligible policyholders of PPIX, PCA, and PIPE in the subscription offering is equal to or greater than 3,570,000 shares, the offering will be promptly completed. We will, upon completion of the offering, issue shares of common stock to the subscribing participants. The number of shares of common stock issued will not exceed the 4,830,000 shares of common stock being offered. In the event of an oversubscription in the subscription offering, shares of common stock will be allocated among the subscribing participants in the priorities set forth in the plans of conversion. No fractional shares of common stock will be issued.

If Subscriptions Received in the Subscription Offering Meet or Exceed the Required Minimum, but not the Maximum Number of Shares Offered

If the number of shares of common stock subscribed for by eligible policyholders of PPIX, PCA, and PIPE in the subscription offering is equal to or greater than 3,570,000 shares, but less than 4,830,000 shares, then we may choose to promptly complete the offering. However, prior to doing so, we will have the right in our absolute discretion to accept, in whole or in part, or reject orders received from any or all persons in the community offering except the standby purchaser, which we are required to accept up to the maximum of the offering. We may, at our option, accept orders received from existing shareholders of Diversus before accepting orders from any other person. In any event, on the effective date we will issue to those persons purchasing in the subscription offering shares of common stock in an amount sufficient to satisfy the accepted subscriptions in full. No more than 4,830,000 shares of common stock will be issued in the offering. No fractional shares of common stock will be issued.

If Subscriptions and Orders Received in all Phases of the Offering Combined Do Not Meet the Required Minimum

If a condition in the standby purchase agreement to ICG’s obligation to purchase shares is not satisfied and ICG is relieved of its obligation to purchaser sufficient shares to reach the minimum of the offering, it is possible that we may not receive subscriptions and orders for 3,570,000 shares. In that event, we may choose to cancel this offering and return all funds received in the offering, without interest, or we may cause a new valuation of the consolidated pro forma market value of PPIX, PCA, and PIPE to be performed, and based on this valuation commence a new offering of the common stock. If we elect to commence a new offering, the funds received from each purchaser will be returned to such purchaser, without interest.

Resolicitation

In the event that updated valuations are provided by Feldman Financial that do not fall within the estimated valuation range, and we determine to proceed with the offering, we will return the funds received to the purchasers, without interest, and we will resolicit those who have previously subscribed for shares in the subscription and community offerings.

We will also resolicit purchasers in the event that the offering is extended beyond [.], 2019.

The Valuation

The plans of conversion require that the aggregate purchase price of the common stock must be based on the appraised estimated pro forma combined market value of the common stock, as determined on the basis of an independent valuation. This pro forma combined market value may be that value that is estimated to be necessary to attract full subscription for the shares, as indicated by the valuation. It also may be stated as a range of pro forma market values.

The plans of conversion require that the valuations of PPIX, PCA, and PIPE be made by an independent appraiser experienced in the valuation of insurance companies and that the purchase price of our common stock be based on the appraised estimated pro forma combined market value of PPIX, PCA, and PIPE, as determined on the basis of such independent valuations. On June 12, 2018, PPIX, PCA, and PIPE retained Feldman Financial to prepare valuations of

132

each individual exchange. Feldman Financial is engaged regularly in the valuation of insurance companies and other financial institutions. There is no pre-existing relationship between Feldman Financial and PPIX, PCA, or PIPE.

Feldman Financial will be paid fixed fees of $110,000 for its valuations of PPIX, PCA, and PIPE, plus out-of-pocket expenses. These fees are not contingent on the completion of the offering. We agreed, among other things, to indemnify Feldman Financial from and against any and all loss or expenses, including reasonable attorney’s fees, in connection with its appraisal and other services, except if such loss or expenses are the result of a lack of good faith or gross negligence on the part of Feldman Financial. In the event that Feldman Financial is required to update its valuations of PPIX, PCA, and PIPE, Feldman Financial is entitled to a fee of $7,500 from each of PPIX, PCA, and PIPE for each such update.

Feldman Financial performed its appraisals in reliance upon the information contained in this document and information provided by the attorneys-in-fact of PPIX, PCA and PIPE, including their respective financial statements. Feldman Financial also considered the following factors, among others:


•	the present and projected operating results and financial condition of PPIX, PCA, and PIPE and current economic conditions;


•	certain historical, financial and other information relating to PPIX, PCA, and PIPE;


•	a comparative evaluation of the operating and financial statistics of PPIX, PCA, and PIPE with those of other comparable publicly traded insurance companies located in the United States;


•	the size of offerings of common stock by PPIX, PCA and PIPE as determined by Feldman Financial;


•	the impact of the conversion offering on the net worth and earnings potential of PPIX, PCA, and PIPE as determined by Feldman Financial;


•	the trading market for securities of comparable companies and general conditions in the market for such securities; and


•	the values which Feldman Financial estimates to be necessary to attract a full subscription of offerings of common stock by PPIX, PCA, and PIPE.

In conducting its analysis of PPIX, PCA, and PIPE, Feldman Financial placed emphasis on various financial and operating characteristics of PPIX, PCA, and PIPE, including their line of business, competitive position in the industry, relative size and premium volume, operating results in recent years, and ratio of equity capital to total assets. In addition to the factors listed above, in its review of the appraisals provided by Feldman Financial, the boards of directors of PPIX, PCA, and PIPE reviewed the methodologies and the appropriateness of the assumptions used by Feldman Financial and determined that such assumptions were reasonable.

In preparing the appraisals, Feldman Financial visited the corporate headquarters of PPIX, PCA, and PIPE and conducted discussions with their management teams concerning their business and future prospects. Feldman Financial reviewed and discussed with their management the audited GAAP financial statements of PPIX, PCA ,and PIPE for the years ended December 31, 2017 and 2016 and the statutory financial data of PPIX, PCA, and PIPE for the years ended December 31, 2013 through December 31, 2017.

In deriving its estimate of the estimated pro forma market values of PPIX, PCA and PIPE, Feldman Financial utilized the comparative market valuation approach. The comparative market valuation approach estimates a value by reviewing the relevant market pricing characteristics of comparable companies that are publicly traded. Feldman Financial selected a group of publicly traded insurance companies based on criteria relating to asset size, equity level, marketability and liquidity of stock, market segment and product lines, among other factors. In determining the composition of the comparative group, Feldman Financial focused exclusively on publicly traded insurance companies. Feldman Financial utilized the asset size, equity level and market capitalization selection criteria to encompass a meaningful number of companies for inclusion in the comparative group. The size and market capitalization criteria considered companies included in the lower quartile of all publicly traded property and casualty/multiline insurance companies.

133

Feldman Financial reviewed the trading market price ratios of the comparable companies for the purpose of developing valuation ratio benchmarks to reach an estimate of value for PPIX, PCA, and PIPE. The principal valuation measure considered by Feldman Financial was the price-to-book value ratio. Feldman Financial also considered the price-to-earnings ratio. Based on the quantitative and qualitative comparisons of PPIX, PCA, and PIPE with the selected group of publicly traded companies, Feldman Financial applied adjusted market pricing ratios to the pro forma financial data to determine the estimated pro forma market values. The market pricing ratios determined by Feldman Financial took into account market value adjustments for earnings prospects, management, liquidity of the shares of common stock, subscription interest, stock market conditions, and the new issue discount warranted for an equity securities offering

134

The following table sets forth the publicly traded insurance companies used by Feldman Financial in its comparative market valuation approach and certain financial data reviewed by Feldman Financial regarding these companies and PPIX, PCA, and PIPE as of or for the last twelve months (LTM) ended December 31, 2017.



Company	Total Assets ($mil.)	Total Policy Reserves ($mil.)	Total Equity ($mil.)	LTM Total Revenue ($mil.)	Policy Reserves/Equity (%)		Cash & Invest./ Assets (%)		Total Equity/Assets (%)		Tangible Equity/Assets (%)
Positive Physicians Insurance Exchange	67.2	38.0	17.5	13.2	2.17	%	78.60	%	26.09	%	26.09	%
Professional Casualty Association	39.6	18.6	13.9	8.1	1.34	%	75.74	%	35.02	%	35.02	%
Physicians’ Insurance Program Exchange	26.6	11.8	12.3	3.7	0.96	%	93.89	%	46.03	%	46.03	%
Comparative Group Median	254.5	145.6	90.6	96.8	1.61	%	70.92	%	32.52	%	32.42	%
Comparative Group Mean	486.9	282.9	133.4	175.4	1.96	%	68.74	%	31.71	%	31.16	%
All Public P&C/Multiline Median	3,840.1	1,867.4	973.4	1,052.7	2.12	%	71.19	%	25.26	%	23.57	%
All Public P&C/Multiline Mean	42,539.1	17,550.5	11,144.3	9,664.3	2.42	%	67.35	%	28.43	%	26.72	%
Comparative Group
1347 Property Insurance Holdings	114.4	53.0	46.8	38.1	1.13	%	68.83	%	40.90	%	40.90	%
Atlantic American Corporation	343.2	173.6	113.0	181.1	1.54	%	79.26	%	32.92	%	32.42	%
Atlas Financial Holdings,Inc.	482.5	339.7	90.6	222.0	3.75	%	50.46	%	18.79	%	17.61	%
Baldwin & Lyons, Inc.	1,357.0	733.4	418.8	371.2	1.75	%	64.22	%	30.86	%	30.70	%
Conifer Holdings, Inc.	239.0	145.6	52.8	96.8	2.76	%	70.92	%	22.10	%	21.78	%
Federated National Holding Company	904.9	524.9	227.5	391.7	2.31	%	58.60	%	25.14	%	25.14	%
Hallmark Financial Services, Inc.	1,231.1	803.7	251.1	385.5	3.20	%	59.21	%	20.40	%	16.69	%
ICC Holdings, Inc.	152.3	77.6	64.1	48.2	1.21	%	73.53	%	42.08	%	42.08	%
Kingstone Companies, Inc.	254.5	115.9	94.6	92.8	1.23	%	73.67	%	37.16	%	36.90	%
National Security Group, Inc.	146.4	76.7	47.6	65.6	1.61	%	82.88	%	32.52	%	32.52	%
Unico American Corporation	130.3	67.8	59.9	36.8	1.13	%	74.57	%	46.01	%	46.01	%

__________________

Source: PPIX; PCA; PIPE; S&P Global Market Intelligence.

135

The following table sets forth for the publicly traded insurance companies used by Feldman Financial certain market valuation data reviewed by Feldman Financial regarding these companies based on closing market prices as of May 1, 2018.



Company	Total Assets ($mil.)	Total Market Value ($mil.)	Price/ Book Value (%)	Price/ Tang. Book (%)	Price/ LTM EPS (x)	Price/ Oper. EPS (x)	Price/ Total Revenue (x)	Price/ Total Assets (%)	Total Equity/ Assets (%)	Current Div. Yield (%)
Positive Physicians Insurance Exchange
Pro Forma Minimum	81.2	15.3	48.6	48.6	77.7	58.00	1.13	18.85	38.80	0.00
Pro Forma Midpoint	83.8	18.0	52.8	52.8	75.6	59.00	1.33	21.49	40.70	0.00
Pro Forma Maximum	86.4	20.7	56.4	56.4	74.2	59.80	1.52	23.96	42.50	0.00
Professional Casualty Association
Pro Forma Minimum	49.4	11.1	46.6	46.6	18.7	19.2	1.34	22.36	47.99	0.00
Pro Forma Midpoint	51.3	13.0	50.8	50.8	21.0	21.4	1.57	25.34	49.90	0.00
Pro Forma Maximum	53.2	15.0	54.4	54.4	23.0	23.5	1.79	28.11	51.67	0.00
Physicians’ Insurance Program Exchange
Pro Forma Minimum	34.9	9.4	45.6	45.6	55.7	79.9	2.41	26.82	50.33	0.00
Pro Forma Midpoint	36.5	11.0	49.8	49.8	57.0	77.5	2.81	30.17	52.36	0.00
Pro Forma Maximum	38.1	12.7	53.4	53.4	58.3	76.2	3.21	33.24	54.23	0.00
Comparative Group Median	254.5	66.3	84.5	87.0	18.7	40.5	0.61	26.47	31.16	0.00
Comparative Group Mean	486.9	123.5	97.8	101.3	20.5	40.5	0.84	30.21	37.01	0.99
Public P&C/Multiline Median	3,840.1	1,660.9	144.3	156.0	19.0	21.2	1.22	33.51	28.14	1.69
Public P&C/Multiline Mean	42,539.1	13,407.2	151.4	174.0	22.0	23.9	1.51	54.35	28.43	1.71
Comparative Group
1347 Property Insurance Holdings	114.4	40.7	87.0	87.0	NM	NM	1.07	35.56	40.90	0.00
Atlantic American Corporation	343.2	66.3	61.8	63.3	16.3	NM	0.37	19.32	32.92	0.62
Atlas Financial Holdings,Inc.	482.5	127.7	144.1	156.0	NM	NM	0.58	26.47	18.79	0.00
Baldwin & Lyons, Inc.	1,357.0	348.3	83.4	84.0	19.2	62.7	0.94	25.66	30.86	4.83
Conifer Holdings, Inc.	239.0	48.1	91.1	92.9	NM	NM	0.50	20.14	22.10	0.00
Federated National Holding Company	904.9	222.4	104.0	104.0	28.2	NM	0.57	24.57	25.14	1.89
ICC Holdings, Inc.	1231.1	187.6	75.0	95.8	NM	NM	0.49	15.23	20.40	0.00
Hallmark Financial Services, Inc.	152.3	52.6	84.5	84.5	NM	NM	1.09	34.56	42.08	0.00
Kingstone Companies, Inc.	254.5	183.8	193.4	195.4	18.3	18.3	1.98	72.19	37.16	2.33
National Security Group, Inc.	146.4	39.9	83.7	83.7	NM	NM	0.61	27.21	32.52	1.27
Unico American Corporation	130.3	40.9	68.2	68.2	NM	NM	1.11	31.36	46.01	0.00

____________________

Source: PPIX, PCA; PIPE; S&P Global Market Intelligence; Feldman Financial.

Feldman Financial determined that the price-to-earnings ratio was less relevant as a valuation metric due to the relatively low average returns on equity and assets in recent reporting periods for PPIX, PCA, and PIPE and the uneven earnings performance of PPIX, PCA, and PIPE. Thus, the price-to-book value ratio was assigned additional emphasis as a valuation metric. Feldman Financial also relied upon the price-to-assets and price-to-revenue ratios to confirm its valuation conclusion was reasonable. Based on its comparative analyses, Feldman Financial concluded that the estimated pro forma market value warranted a discount in the range of approximately 33% to 42% relative to the comparative group for PPIX, a discount in the range of approximately 36% to 45% for PCA, and a discount in the range of approximately 37% to 46% for PIPE based on the price-to-book value ratio.

Feldman Financial’s valuation appraisals of the estimated pro forma market values of PPIX, PCA, and PIPE were prepared as of May 1, 2018. Feldman Financial has agreed to update its valuations as requested by us. These updates will consider developments in general stock market conditions, current stock market valuations for selected insurance companies, and the recent financial condition and operating performance of PPIX, PCA, and PIPE.

On the basis of the foregoing, Feldman Financial gave its opinion, dated May 1, 2018, that the estimated pro forma market value of PPIX ranged from a minimum of $15,300,000 to a maximum of $20,700,000 with a midpoint of $18,000,000, that the estimated pro forma market value of PCA ranged from a minimum of $11,050,000 to a maximum

136

of $14,950,000 with a midpoint of $13,000,000 and that the estimated pro forma market value of PIPE ranged from a minimum of $9,350,000 to a maximum of $12,650,000 with a midpoint of $11,000,000. Accordingly, the pro forma combined market value of PPIX, PCA, and PIPE ranged from a minimum of $35,700,000 to a maximum of $48,300,000. We determined that the common stock should be sold at $10.00 per share, resulting in a range of 3,570,000 to 4,830,000 shares of common stock being offered in the offering. The offering range may be amended if required or if necessitated by subsequent developments in the financial condition of PPIX, PCA, and PIPE or market conditions generally.

Depending upon market or financial conditions, the total number of shares of common stock offered may be increased or decreased without a resolicitation of subscribers, provided that the aggregate gross proceeds are not below the minimum or more than the maximum of the offering range. In the event market or financial conditions change so as to cause the aggregate purchase price of the shares to be below the minimum of the offering range, purchasers will be resolicited and be permitted to continue their orders, in which case they will need to confirm their subscriptions prior to the expiration of the resolicitation offering or their subscription funds will be promptly refunded, or be permitted to modify or rescind their subscriptions. If the number of shares of common stock issued in the offering is increased due to an increase in the offering range to reflect changes in market or financial conditions, persons who subscribed for the maximum number of shares will be given the opportunity to subscribe for the adjusted maximum number of shares. See “- Limitations on Purchases of Common Stock.”

An increase in the number of shares of common stock as a result of an increase in the estimated pro forma combined market value would decrease both a purchaser’s ownership interest and the Company’s pro forma shareholders’ equity on a per share basis while increasing pro forma shareholders’ equity on an aggregate basis. A decrease in the number of shares of common stock would increase both a purchaser’s ownership interest and the Company’s pro forma shareholders’ equity on a per share basis while decreasing pro forma shareholders’ equity on an aggregate basis. The effect on pro forma net income and pro forma net income per share of any increase or decrease in the number of shares issued will depend on the manner in which we use the proceeds from the offering. See “Unaudited Pro Forma Financial Information.”

The appraisal reports of Feldman Financial are exhibits to the registration statement of which this prospectus is a part, and are available for inspection in the manner set forth under “Additional Information.”

The Department is not required to review or approve the valuation appraisals prepared by Feldman Financial in connection with this offering.

The valuations are not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing common stock. In preparing the valuations, Feldman Financial relied upon and assumed the accuracy and completeness of financial, statistical and other information provided to it by the attorneys-in-fact of PPIX, PCA, and PIPE. Feldman Financial did not independently verify the financial statements and other information provided to it by the attorneys-in-fact of PPIX, PCA, and PIPE, nor did Feldman Financial value independently their assets and liabilities. The valuations consider PPIX, PCA, and PIPE only as going concerns and should not be considered as an indication of the Company’s liquidation value. The valuations are necessarily based upon estimates and projections of a number of matters, all of which are subject to change from time to time. We cannot assure you that persons purchasing common stock will be able to sell such shares at or above the initial purchase price. Copies of the valuation reports of Feldman Financial setting forth the method and assumptions for its valuations are on file and available for inspection at our principal executive offices. Any subsequent updated valuation reports of Feldman Financial will be available for inspection.

Offering Deadline

The stock offering will expire at noon, Eastern Time, on [•], 2019, unless on or prior to that date our board of directors extends the offering, which we may do without notice to you. Subscription rights not exercised prior to the termination date of this offering will be void. If this offering is extended more than 45 days after the original expiration date, we will return all of the funds received from purchasers, without interest, and we will resolicit subscribers offering them the opportunity to submit new orders. We reserve the right in our sole discretion to terminate the offering at any time and for any reason, in which case we will cancel your order and return your payment without interest.

137

Subscriptions and orders for common stock will not be accepted by us until we receive subscriptions and orders for at least 3,570,000 shares of common stock. If we have not received subscriptions and orders for at least 3,570,000 shares of common stock by the expiration date of this offering, all funds delivered to us for the purchase of stock in this offering will be promptly returned to purchasers without interest.

Use of Order Forms in This Offering

Any person or entity who wants to subscribe for or order shares of common stock in this offering must sign and complete the stock order form and return it to us so that it is received (not postmarked) no later than noon, Eastern Time, on [.], 2019, together with full payment for all shares for which the order is made. The stock order form should be delivered in-person or mailed to the Stock Information Center at 111 North 6th Street, Reading, PA 19601. Payment by personal check, bank cashier’s check or money order must accompany the stock order form. Except for purchases by ICG and Enstar, no cash, wire transfers, or third party checks will be accepted in the subscription offering. All checks or money orders must be made payable to “Computershare Trust Company, N.A. on behalf Positive Physicians Holdings, Inc.” Unless the subscription offering is extended, all subscription rights under the offering will expire at noon, Eastern Time, on the termination date of this offering, whether or not we have been able to locate each person or entity entitled to subscription rights. Once tendered, orders to purchase common stock in the offering cannot be modified or revoked without our consent. Although, we have provided a self-addressed envelope for the return of stock order forms, we are not responsible for slow or delayed delivery of first class mail by the United States Postal Service. In order to maximize the likelihood of timely delivery of any stock order form, people wishing to purchase stock in the offering should consider the use of an overnight delivery service.

No prospectus will be mailed any later than five days prior to the termination date of this offering, or hand delivered any later than two days prior to such date. This procedure is intended to ensure that each purchaser receives a prospectus at least 48 hours prior to the termination of the offering in accordance with Rule 15c2-8 under the Securities Exchange Act of 1934. Execution of the stock order form will confirm receipt or delivery in accordance with Rule 15c2-8. Stock order forms will be distributed only with or preceded by a prospectus. Photocopies and facsimile copies of stock order forms will not be accepted.

A subscription right may be exercised only by the eligible subscriber to whom it is issued and only for his or her own account. The subscription rights granted under the plans of conversion are nontransferable. Each eligible subscriber subscribing for shares of common stock is required to represent that he or she is purchasing the shares for his or her own account. Each eligible subscriber also must represent that he or she has no agreement or understanding with any other person or entity for the sale or transfer of the shares. Except for shares purchased by ICG and Enstar, we are not aware of any restrictions that would prohibit persons who purchase shares of common stock in the offering and who are not executive officers or directors of Positive Physicians Holdings, Inc., PPIX, PCA, or PIPE from freely transferring shares after the offering. See “- Limitations on Resales” herein.

We shall have the absolute right, in our sole discretion, and without liability to any person, to reject any stock order form, including but not limited to a stock order form that is:


•	not timely received;


•	improperly completed or executed;


•	not accompanied by payment in full for the shares of common stock subscribed for in the form; or


•	submitted by a person who we believe is making false representations or who we believe may be violating, evading or circumventing the terms and conditions of the plan of conversion.

We may, but are not required to, waive any incomplete, inaccurate or unsigned stock order form. We also may require the submission of a corrected stock order form or the remittance of full payment for the shares of common stock subscribed for by any date that we specify. Our interpretations of the terms and conditions of the plans of conversion and determinations concerning the acceptability of the stock order forms will be final, conclusive and binding upon all persons. We (and our directors, officers, employees and agents) will not be liable to any person or entity in connection with any interpretation or determination.

138

Payment for Shares

When you submit a completed stock order form to us, you must include payment in full for all shares of common stock covered by such order form. Payment may be made by personal check, bank cashier’s check or money order in U.S. dollars and must be made payable to “Computershare Trust Company, N.A. on behalf of Positive Physicians Holdings, Inc.” Payments will be placed in an escrow account at Computershare Trust Company, N.A., who will serve as the escrow agent. The escrow account will be administered by the escrow agent. An executed stock order form, once received by us, may not be modified or rescinded without our consent. Funds accompanying stock order forms will not be released to us until the offering is completed.

Book Entry Shares

Stock Information Center

If you have any questions regarding the offering, please call the Stock Information Center at 1-610-205-6003, Monday through Friday from 10:00 a.m. to 4:00 p.m., Eastern Time or write to us at Positive Physicians Holdings, Inc., 100 Berwyn Park, 850 Cassatt Road, Suite 220, Berwyn, PA 19312. Our Stock Information Center is located at 111 North 6th Street, Reading, PA 19601. Additional copies of the materials will be available at the Stock Information Center. The Stock Information Center will be closed on weekends and bank holidays.

Marketing and Underwriting Arrangements

We have engaged Griffin Financial as a marketing agent in connection with the offering of the common stock in the offering. Griffin Financial has agreed to use its best efforts to assist us with the solicitation of subscriptions and purchase orders for shares of common stock in the offering.

Stevens & Lee is acting as our counsel in connection with the offering. Griffin Financial is an indirect, wholly owned subsidiary of Stevens & Lee. You should be aware that conflicts of interest may arise in connection with this transaction.

Stevens & Lee has agreed to perform its services in connection with the offering based on its hourly rates plus out-of-pocket expenses. Griffin Financial will receive an amount equal to 3.5% of the aggregate dollar amount of stock sold in the subscription and community offering and 5.75% of the aggregate dollar amount of stock sold to the standby purchaser, which shall be deemed a commission payable to Griffin for its services. We have agreed to reimburse Griffin for its accountable out-of-pocket expenses in an amount not to exceed $15,000.

In the event the offering is abandoned for any reason, we will pay Stevens & Lee its accrued and unpaid legal fees.

The following table sets forth commissions payable to Griffin Financial at the minimum and maximum number of shares sold in the offering, assuming that the standby purchaser purchases 3,265,000 shares in the offering:



	Minimum (3,570,000 shares)		Maximum (4,830,000 shares)
Commissions	$	1,995,250	$	2,719,750

139

Fees to Griffin Financial and to any other broker-dealer will be deemed to be underwriting fees. Griffin Financial and any other broker-dealers will be deemed to be underwriters. If the offering is not consummated or Griffin Financial ceases under certain circumstances to provide assistance to us, Griffin Financial will be reimbursed for its reasonable out-of-pocket expenses. Griffin Financial has no residual rights under the engagement letter to represent us or receive any payment from us in connection with any future financings, mergers, asset sales or any other transaction.

The Griffin Financial engagement letter also contains customary indemnification provisions. We have agreed to indemnify Griffin Financial for its liabilities, costs and expenses, including legal fees, incurred in connection with certain claims or litigation arising out of or based upon untrue statements or omissions contained in this prospectus, including liabilities under the Securities Act of 1933.

Griffin Financial is an indirect, wholly-owned subsidiary of Stevens & Lee, and the legal fees paid to Stevens & Lee in connection with the offerings may be deemed an item of value for purposes of Finra Rule 5110(a)(6). Stevens & Lee estimates that the total legal fees that it will receive from the Company in connection with the offerings will not exceed $200,000.

Computershare, Inc. will perform records management services and escrow agent services for us in the offering. Computershare, Inc. will receive a fee for this service, plus reimbursement of reasonable out-of-pocket expenses incurred in performing this service.

Lewis S. Sharps, M.D., our President and Chief Executive Officer, may participate in the solicitation of offers to purchase common stock in this offering. Questions from prospective purchasers will be directed to such officers or Griffin Financial. Our employees have been instructed not to solicit offers to purchase common stock or provide advice regarding the purchase of common stock. We will rely on Rule 3a4-1 under the Exchange Act, and sales of common stock will be conducted within the requirements of Rule 3a4-1, so as to permit Dr. Sharps to participate in the sale of common stock. None of our officers, directors or employees will be compensated in connection with his or her participation in this offering. In addition, any officers, directors or employees participating in the offering will perform substantial duties for us otherwise than in connection with the offering. None of such persons is or was a broker or dealer, or an associated person of a broker or dealer within the preceding 12 months, and none of such persons will participate in selling an offering of securities for any issuer more than once every 12 months other than in reliance on paragraph (a)(4)(i) or (iii) of Rule 3a4-1.

Limitations on Purchases of Common Stock

The plans of conversion provide for certain limitations on the purchase of shares in the offering:


•	No person or entity may purchase fewer than 50 shares of common stock in the offering;

•

Holders of Diversus common stock will be 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 preferred stock will be 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, provided that if such stockholder voluntarily converts all of such stockholder’s shares of preferred stock to Diversus common stock prior to closing of the offerings, such stockholder will be permitted to purchase shares with a purchase price equal to 33% of the purchase price such stockholder paid for such stockholder’s shares of Diversus preferred stock. Enstar is an existing stockholder of Diversus, but because Enstar is purchasing 30% of the shares that ICG has the right to purchase, neither Enstar Holdings (US) LLC nor any of its affiliates will be permitted to purchase shares in the offering in its capacity as a stockholder of Diversus;


•	The stockholders of Diversus, Inc. as a group may not purchase more than 5% of the total number of shares remaining to be sold in the offering after giving effect to the shares purchase in the subscription offering and no Diversus stockholder may purchase, together with his or her affiliates, more than 25,000 shares; and

140


•	Except for ICG, Enstar, and the stockholders of Diversus, Inc., no purchaser, together with such purchaser’s affiliates and associates or any group acting in concert, may purchase more than 5,000 shares of common stock in the offering.

Therefore, if any of the following persons purchase stock in the offering, their purchases when combined with your purchases cannot exceed 5,000 shares of common stock:


•	any corporation or organization (other than the Company or Diversus) of which you are an officer or partner or the beneficial owner of 10% or more of any class of equity securities;


•	any trust or other estate in which you have a substantial beneficial interest or as to which you serve as trustee or in a similar fiduciary capacity;


•	any of your relatives or your spouse, or any relative of your spouse, who lives at home with you;


•	any person or entity who you control, who controls you, or who together with you is controlled by the same third party;


•	any person or entity who is knowingly participating with you in a joint activity or interdependent conscious parallel action toward a common goal; or


•	any person or entity with whom you are combining or pooling voting or other interests in the securities of an issuer for a common purpose pursuant to any agreement or relationship.

There are approximately 1722 eligible subscribers of PPIX, 819 eligible subscribers of PCA, and 336 eligible subscribers of PIPE, as determined by reference to the number of policyholders of PPIX, PCA, and PIPE as of June 1, 2018. If subscriptions by eligible subscribers for common stock exceed the maximum of the estimated valuation range based on Feldman Financial’s valuations of PPIX, PCA, and PIPE, we will be obligated to sell to eligible subscribers the maximum number of shares offered. We are unable to predict the number of eligible subscribers that may participate in the subscription offering or the extent of any participation.

Shares of common stock to be purchased and held by ICG or Enstar will not be aggregated with shares of common stock purchased by any other purchaser of common stock in the offering for purposes of the purchase limitations discussed above.

Each person or entity purchasing common stock in the offering will be deemed to confirm that the purchase does not conflict with the purchase limitations under the plans of conversion or otherwise imposed by law. If any person or entity violates the purchase limitations, we will have the right to purchase from that person or entity, at the purchase price of $10.00 per share, all shares acquired by the person or entity in excess of the purchase limitation. If the person or entity has sold these excess shares, we are entitled to receive the difference between the aggregate purchase price paid by the person or entity for the excess shares and the proceeds received by the person from the sale of the excess shares. This right of the Company to purchase excess shares is assignable.

Except for orders submitted by the standby purchaser, we have the right in our sole and absolute discretion and without liability to any purchaser, underwriter or any other person or entity to determine which orders, if any, to accept in the community offering. Except for the order submitted by the standby purchaser, we have the right to accept or reject any order in whole or in part for any reason or for no reason.

Management Purchases

Because the directors and officers of the attorneys-in-fact of PPIX, PCA, and PIPE and directors of Positive Physicians Holdings, Inc. can only purchase shares in the offering if they are an eligible policyholder or are a shareholder of Diversus, we do not expect the purchase of a significant number of shares by our officers and directors.

Limitations on Resales

The common stock issued in the offering will be freely transferable under the Securities Act of 1933. However, the transfer of shares issued to the standby purchaser will be restricted for a period of six months from the effective

141

date of the offering. The directors and officers of Positive Physicians Holdings, Inc. also are subject to additional resale restrictions under Rule 144 of the Securities Act of 1933. Shares of common stock issued to directors and officers will bear a legend giving appropriate notice of these restrictions. We will give instructions to the transfer agent for the common stock regarding these transfer restrictions. Any shares issued to the directors and officers of Positive Physicians Holdings, Inc. as a stock dividend, stock split or otherwise with respect to restricted stock will be subject to the same restrictions. Shares acquired by the directors and officers after the completion of the offering will be subject to the requirements of Rule 144. See “Management - Directors and Officers.”

Amendment or Termination of Plans of Conversion

The plans of conversion may be amended or terminated at any time by the attorneys-in-fact of PPIX, PCA, and PIPE in their sole discretion.

Transactions Related to the Conversions

Option to Merge with Diversus

At the closing of the conversion transactions, ICG, the Company, and Diversus will enter into an option agreement pursuant to which both Diversus and the Company have the right to cause Diversus to merge with a newly formed subsidiary of the Company. In connection with such merger, were it to occur, the outstanding shares of Diversus capital stock will be exchanged for either cash or shares of Company common stock. If Diversus and the Company are unable to agree upon whether shares of Diversus capital stock will be exchanged for cash or shares of Company common stock, then the Company has the right to choose whether the Diversus shareholders will receive cash, shares of Company common stock, or some combination thereof in connection with the merger. The merger consideration will be determined based on the fair market value of the common equity of Diversus, and, if part or all of the merger consideration is to be paid in shares of Company common stock, the fair market value of a share of Company common stock. If the Company and Diversus are unable to agree upon such fair market values, each company shall appoint an appraiser and those two appraisers shall appoint a third appraiser. Those appraisers shall then determine the respective fair market values in accordance with the terms of the option agreement. If the consideration to be paid for each share of Diversus common stock in connection with the merger is at least $6.00 per share (as adjusted to take into account any stock splits, stock dividends, or stock combinations) and the Diversus board of directors or shareholders fail to approve the merger, then the Company has the right to terminate the option agreement.

If Diversus shareholders receive shares of common stock of the Company in connection with the merger, and within five years following the closing of the merger none of the following has occurred: (a) a public offering by selling shareholders of Company; (b) an acquisition of all of the assets or shares of the Company for cash or marketable securities; or (c) the acquisition of all of the shares of the Company held by Diversus shareholders (each a “Liquidity Event”); then the board of directors of the Company will, upon the written request of a majority of the Diversus shareholders (based upon the number of shares of Company common stock owned by Diversus shareholders), take such steps as may be necessary to cause a Liquidity Event (including, without limitation, the hiring of an investment bank to conduct such a process).

The option is exercisable at any time within a window of time beginning two years after the date of the closing on the conversions and four (4) years and six (6) months after the closing on the conversions; however, it may be exercised prior to the two years if ICG no longer has the right to appoint a majority of the members of the board of directors of the Company. In the event that ICG’s ownership decreased to less than a majority of our outstanding shares of common stock, it would no longer have the right to appoint a majority of the members of our board of directors. Any such merger is subject to approval by the Diversus board of directors and the required vote of the holders of Diversus capital stock , but it is unlikely that any such merger would be subject to approval by the shareholders of the Company.

Loan 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 anytime and may borrow additional amounts at anytime after completion of the conversions and the offering. The loan will bear interest at an annual rate of 8% and will be unsecured and subordinated

142

to any indebtedness of Diversus to its commercial lenders. The loan will be convertible into shares of Diversus common stock at a price of $1.00 per share at the option of the Company. The Company and Diversus believe that the $1.00 price per share reflects the projected fair market value of Diversus common stock at the time that the loan is converted into Diversus common stock.

143

FEDERAL INCOME TAX CONSIDERATIONS

The statements of United States federal income tax law, or legal conclusions with respect to United States federal income tax law, in the following discussion constitute the opinion of Stevens & Lee on the material federal income tax considerations with respect to:


•	PPIX, PCA, and PIPE upon the conversion of PPIX, PCA, and PIPE from reciprocal insurance exchanges to a stock company pursuant to a merger with and into PPIX Conversion Corp., PCA Conversion Corp. and PIPE Conversion Corp., respectively;

•

eligible subscribers that are U.S. Persons that hold their membership interests in PPIX, PCA, and PIPE as of June 1, 2018, respectively, as a capital asset within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (which we refer to as the Code), of the receipt, exercise and lapse of subscription rights to purchase shares of the common stock of Positive Physicians Holdings, Inc. (which we refer to as our common stock) in the subscription offering;


•	eligible subscribers that are U.S. Persons that purchase shares of our common stock in the subscription offering upon the exercise of subscription rights and hold their shares of our common stock as a capital asset within the meaning of Section 1221 of the Code, of the acquisition, ownership and disposition of shares of our common stock purchased in the subscription offering; and


•	other investors that are U.S. Persons that purchase shares of our common stock in the community offering and hold their shares of our common stock as a capital asset within the meaning of Section 1221 of the Code, of the acquisition, ownership and disposition of shares of our common stock purchased in the community offering.

The following discussion is based, primarily, on private letter rulings that have been issued by the Internal Revenue Service to certain corporations unrelated to the Company that have engaged in transactions that are analogous to the conversion. Under the Code, private letter rulings are directed only to the taxpayer that requested the rulings and they may not be used or cited as precedent by other taxpayers. In addition, some of the discussion below under “- Tax Consequences of Subscription Rights,” is outside the scope of the private letter rulings that have been issued by the Internal Revenue Service and is based on the Code, Treasury regulations promulgated under the Code, judicial authorities, published positions of the Internal Revenue Service and other applicable authorities, all as in effect on the date of this discussion and all of which are subject to change (possibly with retroactive effect) and to differing interpretations. No assurance can be given that the Internal Revenue Service would not assert, or that a court would not sustain, a position contrary to any part of the discussion under “- Tax Consequences of Subscription Rights,” below.

The following discussion is directed solely to eligible subscribers of PPIX, PCA, and PIPE that are U.S. Persons and hold membership interests in a qualifying policy as a capital asset within the meaning of Section 1221 of the Code and other investors that are U.S. Persons that purchase shares of our common stock in the community offering and hold their shares of our common stock as a capital asset within the meaning of Section 1221 of the Code , and it does not purport to address all of the United States federal income tax consequences that may be applicable to PPIX, PCA, and PIPE, or to the individual circumstances of particular categories of eligible subscribers of PPIX, PCA, or PIPE or other investors, in light of their specific circumstances. For example, if a partnership holds membership interests in a qualifying policy, the tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. If you are a partner of a partnership that holds membership interests in a qualifying policy, you should consult your tax advisor. In addition, the following discussion does not address aspects of United States federal income taxation that may be applicable to eligible subscribers of PPIX, PCA, or PIPE or other investors subject to special treatment under the Code, such as financial institutions, insurance companies, pass-through entities, regulated investment companies, real estate investment trusts, financial asset securitization investment trusts, dealers or traders in securities, or tax-exempt organizations, or any aspect of the U.S. alternative minimum tax or state, local or foreign tax consequences of the proposed transactions.

For purposes of this discussion, the term “U.S. Person” means (a) a citizen or resident of the United States, (b) a corporation, or entity treated as corporation, created or organized in or under the laws of the United States or any political subdivision thereof, (c) an estate the income of which is subject to United States federal income taxation

144

regardless of its source, (d) a trust if either (i) a court within the United States is able to exercise primary supervision over the administration of such trust and one or more U.S. Persons have the authority to control all substantial decisions of such trust or (ii) the trust has a valid election in effect to be treated as a U.S. Person for United States federal income tax purposes, or (e) any other person or entity that is treated for United States federal income tax purposes as if it were one of the foregoing.

This discussion does not constitute tax advice and is not intended to be a substitute for careful tax planning. Each eligible member is urged to consult its own tax advisor with respect to the U.S. federal, state, local and non-U.S. income and other tax consequences of the receipt, exercise and lapse of subscription rights to purchase shares of our common stock in the subscription offering. Each prospective purchaser of shares of our common stock is urged to consult its own tax advisor with respect to the U.S. federal, state, local and non-U.S. income and other tax consequences of the acquisition, ownership and disposition of shares of our common stock purchased pursuant to this offering.

The Conversion

For federal income tax purposes, it is the opinion of Stevens & Lee that:


•	the conversions of PPIX, PCA, and PIPE from reciprocal insurance exchanges to stock insurance companies pursuant to a merger with and into PPIX Conversion Corp., PCA Conversion Corp., and PIPE Conversion Corp., respectively, will be a reorganization within the meaning of Section 368(a)(1) of the Code;


•	PPIX, PCA, and PIPE, in their post-conversion stock form will constitute the same taxable entity as PPIX, PIPE and PCA in their pre-conversion reciprocal insurance exchange form;


•	none of PPIX, PCA, nor PIPE in their pre-conversion reciprocal insurance exchange form nor PPIX, PCA, nor PIPE in their post-conversion stock form will recognize gain or loss as a result of the conversion; and

•

the tax attributes of PPIX, PCA and PIPE in their pre-conversion reciprocal insurance exchange form will remain unchanged as tax attributes of PPIX Conversion Corp., PCA Conversion Corp., and PIPE Conversion Corp., respectively, in their post-conversion stock form. Thus, PPIX’s, PCA’s, and PIPE’s basis in their assets, holding period for their assets, net operating loss carryovers, if any, capital loss carryovers, if any, earnings and profits and accounting methods will not be changed by reason of the conversion.

Tax Consequences of Subscription Rights

Generally, the federal income tax consequences of the receipt, exercise and lapse of subscription rights are uncertain. They present novel issues of tax law that are not adequately addressed by any direct authorities. Nevertheless, based upon general principles of federal income tax law, it is opinion of Stevens & Lee that, for U.S. federal income tax purposes:


•	eligible subscribers will be treated as transferring their membership interests in PPIX, PCA, and PIPE to Positive Physicians Holdings, Inc. in exchange for subscription rights to purchase Positive Physicians Holdings, Inc. common stock;


•	any gain realized by an eligible member as a result of the receipt of a subscription right with a fair market value must be recognized, whether or not such right is exercised;


•	the amount of gain that must be recognized by an eligible subscriber as a result of the receipt of a subscription right will equal the fair market value of such subscription right;


•	any gain recognized by an eligible subscriber as a result of the receipt of a subscription right with a fair market value should constitute a capital gain, which will be long term capital gain if the eligible member has held its membership interest for more than one year; and

145

•

if an eligible subscriber is required to recognize gain on the receipt of a subscription right and does not exercise such subscription right, (i) the eligible subscriber should recognize a corresponding loss upon the expiration or lapse of such subscriber’s unexercised subscription right, (ii) the amount of that loss should equal the gain previously recognized upon receipt of the unexercised subscription right, and (iii) if the common stock that an eligible subscriber would have received upon exercise of the lapsed subscription right would have constituted a capital asset in the hands of that eligible subscriber, the resulting loss upon expiration of the subscription right should constitute a capital loss.

For purposes of determining gain, it is unclear how to determine the number of subscription rights that may be allocated to each eligible subscriber during the subscription offering.

Feldman Financial has advised us that it believes the subscription rights will not have any fair market value. Feldman Financial has noted that the subscription rights will be granted at no cost to recipients, will be legally nontransferable and of short duration, and will provide the recipient with the right only to purchase shares of our common stock at the same price to be paid by members of the general public in the community offering. Feldman Financial cannot assure us, however, that the Internal Revenue Service will not challenge Feldman Financial’s determination or that such challenge, if made, would not be successful. Since the determination of value is a factual, not a legal matter, Stevens & Lee renders no opinion regarding this issue. Nevertheless, eligible subscribers are encouraged to consult with their tax advisors about the U.S. federal, state, local and non-U.S. income and other tax consequences of the receipt, exercise and lapse of subscription rights to purchase shares of our common stock in the subscription offering. See also “- Recent Tax Developments” below.

Tax Consequences to Purchasers of Our Common Stock in the Offering

Basis and Holding Period. The adjusted tax basis of a share of our common stock purchased by an eligible subscriber pursuant to the exercise of a subscription right will equal the sum of the amount of cash paid for such share plus the basis, if any, of the subscription right that is exercised to purchase such share, taking into account the income and gain, if any, recognized by such eligible subscriber on the receipt of such subscription right, less any prior return of capital distributions in respect of such stock. In all other cases, a holder’s adjusted tax basis in its shares of our common stock generally will equal the U.S. holder’s acquisition cost less any prior return of capital distributions in respect of such stock. The holding period of a share of our common stock purchased by an eligible subscriber through the exercise of a subscription right will begin on the date on which the subscription right is exercised. In all other cases, the holding period of common stock purchased by an eligible subscriber or other investor in the community offering will begin on the date following the date on which the stock is purchased.

Dividends and Distributions . If we pay cash distributions to holders of shares of our common stock, such distributions generally will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions in excess of current and accumulated earnings and profits will constitute a return of capital that will be applied against and reduce (but not below zero) the holder’s adjusted tax basis in its shares of our common stock. Any remaining excess will be treated as gain realized on the sale or other disposition of its shares of our common stock and will be treated as described under “- Gain or Loss on Sale, Exchange or Other Taxable Disposition of Common Stock” below.

Dividends we pay to a U.S. holder that is a taxable corporation generally will qualify for the dividends received deduction if the requisite holding period is satisfied. With certain exceptions (including, but not limited to, dividends treated as investment income for purposes of investment interest deduction limitations), and provided certain holding period requirements are met, dividends we pay to a non-corporate U.S. holder generally will constitute “qualified dividends” that will be subject to tax at the maximum tax rate accorded to long-term capital gain plus, for such holders with a modified adjusted gross income in excess of specified amounts, the 3.8% tax on net investment income.

Gain or Loss on Sale, Exchange or Other Taxable Disposition of Common Stock . In general, a holder of shares of our common stock must treat any gain or loss recognized upon a sale, exchange or other taxable disposition of such shares (which would include a dissolution and liquidation) as capital gain or loss. Any such capital gain or loss will be long-term capital gain or loss if the holder’s holding period for its shares of our common stock so disposed of exceeds one year. In general, a holder will recognize gain or loss in an amount equal to the difference between (i) the sum of the amount of cash and the fair market value of any property received in such disposition and (ii) the holder’s adjusted

146

tax basis in its shares of our common stock so disposed of. Long-term capital gain realized by a non-corporate holder generally will be subject to a maximum federal income tax rate of 20% plus, for such holders with a modified adjusted gross income in excess of specified amounts, the 3.8% tax on net investment income. The deduction of capital losses is subject to limitations, as is the deduction for losses realized upon a taxable disposition by a holder of its shares of our common stock if, within a period beginning 30 days before the date of such disposition and ending 30 days after such date, such holder has acquired (by purchase or by an exchange on which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities.

Recent Tax Developments

We call to your attention that there is a conflict among the courts as to whether a policyholder has a tax basis in membership rights that gets transferred to shares of stock received by the policyholder in the course of a demutualization of an insurance company. In Eugene A. Fisher v. U.S . 102AFTR2d 2008-5608 (Ct Fed Cl 2008), aff’d 105 AFTR2d 2010-357 (CA Fed Cir 2009), the court held that the policyholder did have a basis in membership rights attributable to premium payments made by the policyholder and that the basis in the membership rights was transferred to the shares of stock received by the policyholder in a demutualization of the insurance company. The opinion in the Fisher case is contrary to the long-standing published position of the Internal Revenue Service that the basis of stock received by a policyholder in the course of a mutual insurance company’s demutualization in a series of transactions that constitute a reorganization within the meaning of Section 368(a) of the Code is zero. The Fisher decision is also based upon facts that may be peculiar to that case. In another case, the lower court held, similar to Fisher , that shares received in a demutualization acquired a basis from a portion of the payment of policy premiums by the policyholder prior to demutualization. See, Dorrance v. U.S ., 110 AFTR2d 2012-5176 (DC AZ 2012). However, that decision was recently reversed on appeal. See, Dorrance v. U.S ., 116 AFTR2d 2015-6992 (C.A. 9, Dec. 30, 2015). In addition, another case which had held that a portion of the taxpayer’s premium payments should be allocated to shares received in a demutualization was also recently reversed on appeal. See Reuben v. U.S ., 111 AFTR2d 2013-620 (C.D. Cal. 2013), reversed , 117 AFTR2d 2016-XXXX (CA 9, Jan. 1, 2016).

The legal precedents regarding whether a policyholder has a tax basis in membership rights are complex and conflicting, and may depend upon the facts applicable to the particular situation. Nevertheless, if the principles articulated by the court in Fisher above were determined to be applicable to the subscription offering: (a) eligible subscribers would not be required to recognize any income or gain upon the receipt of subscription rights with a fair market value if the fair market value of the subscription rights did not exceed the eligible policyholder’s cost basis in its insurance policy as a whole; and (b) the basis of the shares of our common stock purchased by an eligible subscriber pursuant to the exercise of subscription rights would equal the sum of the purchase price of the stock plus the eligible subscriber’s adjusted tax basis in the subscription rights that are exercised.

Based upon the weight of the above authority, it is the opinion of Stevens & Lee that, more likely than not, the tax basis of an eligible member in its membership interest would be determined to be zero, consistent with the position that the IRS has consistently espoused. However, due to the fact that the decisions regarding this matter are relatively recent, the authority is not necessarily directly on point, and there is some conflict in the authority, it is not possible to render a more definitive opinion regarding this issue. You should consult your tax advisors with respect to the potential tax consequences to you of the receipt, exercise and lapse of subscription rights and the determination of your adjusted tax basis in your shares of our common stock, based on your particular circumstances.

Information Reporting and Backup Withholding.

We must report annually to the Internal Revenue Service and to each holder the amount of dividends or other distributions we pay to such holder on its shares of our common stock and the amount of tax withheld with respect to those distributions, regardless of whether withholding is required.

The gross amount of dividends and proceeds from the disposition of shares of our common stock paid to a holder that fails to provide the appropriate certification in accordance with applicable U.S. Treasury regulations generally will be subject to backup withholding at the applicable rate (currently 24 percent).

147

Backup withholding is not an additional tax. Any amounts we withhold under the backup withholding rules may be refunded or credited against the holder’s U.S. federal income tax liability, if any, by the Internal Revenue Service if the required information is furnished to the Internal Revenue Service in a timely manner.

DUE TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH ELIGIBLE SUBSCRIBER AND EACH OTHER PROSPECTIVE PURCHASER OF SHARES OF OUR COMMON STOCK IN THE OFFERING IS URGED TO CONSULT HIS OR HER TAX AND FINANCIAL ADVISOR.

148

MANAGEMENT

Directors and Officers

Our board of directors consists of Stephen J. Johnson, William Hitselberger, Scott C. Penwell, Lewis S. Sharps, M.D., and James L. Zech, each of whom also will serve as a director of Positive Insurance. Each of the directors serve a term of one year, will be elected annually, and will hold office until their respective successors have been elected and qualified or until their earlier death, resignation or removal.

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. 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.

The following table sets forth certain information regarding our current directors.



	Age at December 1, 2018	Director Since (1)	Position with Positive Physicians Holdings, Inc.
Dr. Lewis S. Sharps, M.D.	69	2018	President, CEO, and Director
Scott C. Penwell	65	2018	Director
William Hitselberger	60	2018	Director
Stephen J. Johnson	63	2018	Director
James L. Zech	61	2018	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 Physicians of any unforeseen events and then working aggressively to resolve the issue.

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

149

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 principal 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).

William Hitselberger

William E. Hitselberger is the Chief Financial Officer of Sutton National Insurance Company, a property and casualty insurance company formed in 2018. Prior thereto, Mr. Histelberger 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

150

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.

Post Conversion Directors

Set forth is the biographical information with respect to the individuals who will be added to our board of directors after completion of the conversions and the offerings.

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.

Overview of Our Board Structure

If the standby purchase acquires a majority on our outstanding shares of common stock we would qualify as a “controlled company” within the meaning of the corporate governance rules of Nasdaq. “Controlled companies” under those rules are companies of which more than 50% of the voting power is held by an individual, a group or another company.

If we become a “controlled company” upon the completion of the offerings, we will avail ourselves of the “controlled company” exception under the Nasdaq rules and will not be subject to the Nasdaq listing requirements that would otherwise require us to have a board of directors comprised of a majority of independent directors, compensation of our executive officers determined by a majority of the independent directors or a compensation committee composed

151

solely of independent directors and director nominees selected, or recommended for the board of director’s selection, either by a majority of the independent directors or a nominating committee composed solely of independent directors.

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 not 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.

Under these criteria, all directors except Lewis S. Sharps are independent. If we are a controlled company, our board of directors is not required to consist of a majority of directors who meet the definition of independent under the Nasdaq listing requirements, but the Audit Committee will be required to consist of directors meeting the Nasdaq standards for independent audit committee members.

Pennsylvania insurance law requires that one-third of the members of each committee of the board of Positive Insurance be independent, except for the audit, nominating, and compensation committees, which may only include independent directors.

Board Governance

Insurance Capital Group LLC (“ICG”), the standby purchaser, and Enstar Holdings (US) LLC (“Enstar”) have entered into an agreement pursuant to which ICG has agreed to permit Enstar to purchase 30% of the shares that ICG would otherwise purchase in the offering. 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 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.

152

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, the exchanges, 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.

Director Compensation

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

153

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.

Committees of the Board of Directors after Completion of the Conversions and the Offerings

Compensation Committee . Our compensation committee will consist of Scott C. Penwell (Chair), William E. Hitselberger, and Stephen Johnson. All of the directors are independent under the criteria established under the NASDAQ listing standards. All of the directors are “non-employee directors,” as required under the Exchange Act. The compensation committee will:


•	review, evaluate and approve the compensation and benefit plans and policies of Company employees, including its officers;


•	review, evaluate and approve the compensation and benefit plans and policies for our officers and directors;


•	grant stock options and restricted stock and restricted stock unit awards to employees, management and directors under our proposed stock-based incentive plan;


•	be responsible for producing an annual report on executive compensation for inclusion in our proxy statement and for ensuring compliance of compensation and benefit programs with all other legal, tax and regulatory requirements; and


•	make recommendations to our board of directors regarding these matters.

If we are not a controlled company under the Nasdaq Marketplace Rules, each of the members of the nominating and governance committee will meet the definition of “independent director” under the Nasdaq Marketplace Rules and the Exchange Act.

Audit Committee . The Audit Committee will consist of William E. Hitselberger (Chair), Stephen Johnson, James L. Zech, and Scott C. Penwell. In addition, our 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 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) ). Except for Mr. Popoli, all of the directors of the Audit Committee are independent under this criteria. Mr. Popoli does not meet the definition of “independent director” under SEC Rule 10A-3, but qualifies for the exemption under paragraph (b)(iv) of Rule 10A-3.

The Audit Committee will:


•	be responsible for the selection, retention, oversight and termination of our independent registered public accounting firm;


•	approve the non-audit services provided by the independent registered public accounting firm;


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


•	approve the estimated cost of the annual audit;


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


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

154


•	review and approve all related party transactions and transactions raising potential conflicts of interest;


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


•	review 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;


•	review 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


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

Nominating/Governance Committee . The Nominating/Governance Committee of the board of directors will consist of Scott C. Penwell (Chair), Duncan McLaughlin, and Matthew T. Popoli. All of the directors are independent as defined under the NASDAQ listing standards. The Nominating/Governance Committee will:


•	make independent recommendations to the board of directors as to best practices for board governance and evaluation of board performance;


•	produce a Code of Ethics and submit it for board approval, and periodically review the Code of Ethics for necessary revisions;


•	identify suitable candidates for board membership, and in such capacity will consider any nominees recommended by shareholders;


•	propose to the board a slate of directors for election by the shareholders at each annual meeting; and


•	propose candidates to fill vacancies on the board based on qualifications it determines to be appropriate.

Transaction Committee

The Company will establish a transaction committee that will have responsibility for reviewing and recommending to the board of directors potential acquisition opportunities. The members of the committee will be Matthew T. Popoli, Lewis S. Sharps, M.D., and Duncan McLaughlin.

Compensation Committee Interlocks and Insider Participation

The members of the compensation committee of our board of directors will be Matthew T. Popoli (Chair), Scott C. Penwell, and Duncan McLaughlin.

The compensation committee does not include any current or former officers or current employees of the Company. None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee.

If we are not a controlled company under the Nasdaq Marketplace Rules, each of the members of the compensation committee will be required to meet the definition of an “independent director” under the Nasdaq Marketplace Rules and the Exchange Act.

Executive Management

The Company is a newly formed insurance holding company and currently does not have any employees. The Company has entered into a management services agreement with Diversus Management that will become effective upon completion of the conversions and the offerings. 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

155

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. The management services agreement is subject to review and approval of the Department.

Officers

Lewis S. Sharps is the President and Chief Executive Officer of PPIX and will be the President and Chief Executive Officer of the Company upon completion of the conversions.

Daniel Payne, age 50, is the Treasurer and Vice-President of Diversus, Inc. and will be the Chief Financial Officer of the Company upon completion of the conversions. He is also the Chief Financial Officer and Treasurer of Diversus Management, Inc., PPIX, PCA, and PIPE, and their respective attorneys-in-fact, and the Treasurer of Andrews Outsource Solutions LLC and Gateway Risk Services Inc., 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 has been working with PIPE since 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.

Compensation of Executive Officers

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 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 conversions and the 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 conversions and 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.

In addition, the Company has agreed to grant additional stock options to Dr. Sharps with respect to 3% of the number of shares of the Company that are outstanding immediately after completion of the conversions and the offering. One third of such options will vest upon achievement of each of the following milestones: (i) Positive Insurance attaining an “A-“ rating from A.M. Best, (ii) the completion of acquisitions by the Company, Positive Insurance, 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 conversions and the offering. The stock options granted to Dr. Sharps

156

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 conversions and the offering.

Transactions with related persons, promoters and certain control persons

Positive Physicians Holdings, Inc. and its subsidiaries intends to enter into a federal income tax allocation agreement, pursuant to which the Company will determine the amount of federal income tax liability attributable to each company in accordance with the regulations promulgated by the Internal Revenue Service. Each company will be required to pay to the Company the amount of federal income tax liability that is attributable to such company, and the Company will be responsible for paying to the Internal Revenue Service the federal income tax liability of the consolidated group. Similarly, if any subsidiary generates losses for federal or state income tax purposes, the Company will pay to that subsidiary an amount equal to the federal income tax savings attributable to that subsidiary.

Except for the transactions described above, 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, directors, and employees 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.

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.

157

RESTRICTIONS ON ACQUISITION OF THE COMPANY

The articles of incorporation and bylaws we intend to adopt prior to the offering contain provisions that are intended to encourage potential acquirers to negotiate directly with our board of directors, but which also may deter a non-negotiated tender or exchange offer for our stock or a proxy contest for control of the Company. Certain provisions of Pennsylvania law also may discourage non-negotiated takeover attempts or proxy contests.

All of these provisions may serve to entrench existing management. These provisions also may deter institutional interest in and ownership of our stock and, accordingly, may depress the market price for, and liquidity of, the common stock.

Following is a description of these provisions and the purpose and possible effects of these provisions. We do not presently intend to propose additional anti-takeover provisions for our articles of incorporation or bylaws. Because of the possible adverse effect these provisions may have on shareholders, this discussion should be read carefully.

Antitakeover Provisions of Our Articles of Incorporation and Bylaws and under Pennsylvania Law

1. No Cumulative Voting. Cumulative voting entitles a shareholder to multiply the number of votes to which the shareholder is entitled by the number of directors to be elected, with the shareholder being able to cast all votes for a single nominee or distribute them among the nominees as the shareholder sees fit. The Pennsylvania Business Corporation Law provides that shareholders are entitled to cumulate their votes for the election of directors, unless a corporation’s articles of incorporation provide otherwise.

Cumulative voting is specifically prohibited in the articles of incorporation because we believe that each director should represent and act in the interest of all shareholders and not any special shareholder or group of shareholders. In light of current acquisition techniques and activity, minority representation could be disruptive and could impair the efficient management of the Company for the benefit of shareholders generally. In addition, the absence of cumulative voting also will tend to deter greenmail, in which a substantial minority shareholder uses his holdings as leverage to demand that a corporation purchase his shares at a significant premium over the market value of the stock to prevent the shareholder from obtaining or attempting to obtain a seat on the board of directors. In the absence of cumulative voting, a majority of the votes cast in any election of directors can elect all of the directors of the class in any given year.

The absence of cumulative voting will also deter a proxy contest designed to win representation on the board of directors or remove management because a group or entity owning less than a majority of the voting stock may be unable to elect a single director. Although this will make removal of incumbent management more difficult, we believe deterring proxy contests will avoid the significant cost, in terms of money and management’s time, in opposing such actions. The provision of the articles prohibiting cumulative voting for directors can only be amended by an affirmative vote of shareholders entitled to cast at least 80% of all votes that shareholders are entitled to cast, or by an affirmative vote of 80% of the members of the board of directors and of shareholders entitled to cast at least a majority of all votes that shareholders are entitled to cast.

2. Nominations for Directors and Shareholder Proposals. Our bylaws require that nominations for the election of directors made by shareholders (as opposed to those made by the board of directors) and any shareholder proposals for the agenda at any annual meeting generally must be made by notice (in writing) delivered or mailed to the Secretary not less than 90 days prior to the meeting of shareholders at which directors are to be elected.

We believe that this procedure will assure that the board of directors and shareholders will have an adequate opportunity to consider the qualifications of all nominees for directors and all proposals, and will permit the shareholders’ meetings to be conducted in an orderly manner. It may have the effect, however, of deterring nominations and proposals other than those made by the board of directors.

158

Pennsylvania Fiduciary Duty Provisions

The Pennsylvania Business Corporation Law provides that:

(a) the board of directors, committees of the board, and directors individually, can consider, in determining whether a certain action is in the best interests of the corporation:

(1) the effects of any action upon any or all groups affected by such action, including shareholders, employees, suppliers, customers and creditors of the corporation, and upon communities in which offices or other establishments of the corporation are located;

(2) the short-term and long-term interests of the corporation, including benefits that may accrue to the corporation from its long-term plans and the possibility that these interests may be best served by the continued independence of the corporation;

(3) the resources, intent and conduct (past, stated and potential) of any person seeking to acquire control of the corporation; and

(4) all other pertinent factors;

(b) the board of directors need not consider the interests of any particular group as dominant or controlling;

(c) directors, absent any breach of fiduciary duty, bad faith or self-dealing, are presumed to be acting in the best interests in the corporation, including with respect to actions relating to an acquisition or potential acquisition of control, and therefore they need not satisfy any greater obligation or higher burden of proof with respect to such actions;

(d) actions relating to acquisitions of control that are approved by a majority of disinterested directors are presumed to satisfy the directors’ fiduciary obligations unless it is proven by clear and convincing evidence that the directors did not assent to such action in good faith after reasonable investigation; and

(e) the fiduciary duty of directors is solely to the corporation and not its shareholders, and may be enforced by the corporation or by a shareholder in a derivative action, but not by a shareholder directly.

One of the effects of these fiduciary duty provisions may be to make it more difficult for a shareholder to successfully challenge the actions of our board of directors in a potential change in control context. Pennsylvania case law appears to provide that the fiduciary duty standard under the Pennsylvania Business Corporation Law grants directors the almost unlimited statutory authority to reject or refuse to consider any potential or proposed acquisition of the corporation.

Other Provisions of Pennsylvania Law

The Pennsylvania Business Corporation Law also contains provisions that have the effect of impeding a change in control. As permitted by the Pennsylvania Business Corporation Law, we have elected to provide in our articles of incorporation that these provisions will not apply to us.

159

DESCRIPTION OF OUR CAPITAL STOCK

General

Our articles of incorporation authorize the issuance of 10,000,000 shares of common stock, no par value. In the offering, we expect to issue between 3,570,000 and 4,830,000 shares of common stock.

Common Stock

Voting Rights. The holders of common stock will possess exclusive voting rights in the Company. Each holder of shares of common stock will be entitled to one vote for each share held of record on all matters submitted to a vote of holders of shares of common stock. See “Restrictions on Acquisition of the Company - Antitakeover Provisions of Our Articles of Incorporation and Bylaws.” Shareholders are not entitled to cumulate their votes for election of directors.

Dividends. Under the Pennsylvania Business Corporation Law, we may only pay dividends if solvent and if payment of such dividend would not render us insolvent. Funds for the payment of dividends initially must come from either proceeds of this offering retained by us or dividends paid to us by Positive Insurance and our other subsidiaries. Therefore, the restrictions on Positive Insurance’s ability to pay dividends affect our ability to pay dividends. See “Dividend Policy” and “Business - Regulation.”

Transfer. Shares of common stock are freely transferable except for shares that are held by affiliates. Shares issued to our directors and officers in the offering will be restricted as to transfer for a period of six months from the effective date of the offering. Shares held by affiliates must be transferred in accordance with the requirements of Rule 144 of the Securities Act of 1933.

Liquidation. In the event of any liquidation, dissolution or winding up of Positive Insurance, the Company, as holder of all of the capital stock of Positive Insurance, would be entitled to receive all assets of Positive Insurance after payment of all debts and liabilities. In the event of a liquidation, dissolution or winding up of the Company, each holder of shares of common stock would be entitled to receive a portion of the Company’s assets, after payment of all of the Company’s debts and liabilities.

Other Characteristics. Holders of the common stock will not have preemptive rights with respect to any additional shares of common stock that may be issued. ICG has contractual preemptive rights under the provisions of the standby stock purchase agreement. The common stock is not subject to call for redemption, and the outstanding shares of common stock, when issued and upon our receipt of their full purchase price, will be fully paid and nonassessable.

160

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the common stock is Computershare Trust Company, N.A.

LEGAL MATTERS

The legality of our common stock will be passed upon for us by Stevens & Lee, P.C., King of Prussia, Pennsylvania. Griffin Financial Group, LLC is an indirect, wholly-owned subsidiary of Stevens & Lee, P.C.

EXPERTS

The financial statements of Professional Casualty Association as of December 31, 2017 and 2016 and for the years ended December 31, 2017 and 2016, Physicians’ Insurance Program Exchange as of December 31, 2017 and 2016 and for the years ended December 31, 2017 and 2016, and the financial statements of Positive Physicians Insurance Exchange as of December 31, 2017 and 2016 and for the years ended December 31, 2017 and 2016, have been included herein, in reliance upon the reports of Baker Tilly Virchow Krause, LLP, independent registered public accounting firm, appearing elsewhere herein, given on the authority of that Firm as experts in accounting and auditing.

The balance sheets of Positive Physicians Insurance Exchange 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, have been audited by EisnerAmper LLP, independent registered public accounting firm, as stated in their report which is incorporated herein. Such financial statements have been incorporated herein in reliance on the report of such firm given upon their authority as experts in accounting and auditing.

Feldman Financial has consented to the publication in this document of the summary of its reports to Positive Physicians’ Insurance Exchange, Professional Casualty Association, and Physicians Insurance Program Exchange setting forth its opinions as to the estimated pro forma market value of the common stock of PPIX, PCA, and PIPE to be outstanding upon completion of the offering and its opinion with respect to the value of the subscription rights.

ADDITIONAL INFORMATION

We have filed with the SEC a Registration Statement on Form S-1 under the Securities Act of 1933 with respect to the shares of our common stock offered in this document. As permitted by the rules and regulations of the SEC, this prospectus does not contain all of the information set forth in the Registration Statement. Such information can be examined without charge at the Public Reference Room of the SEC located at 100 F Street, N.E., Washington, D.C. 20549, and copies of such material can be obtained from the SEC at prescribed rates. The public may obtain more information on the operations of the Public Reference Room by calling the SEC at 1-800-732-0330. The registration statement also is available through the SEC’s website on the internet at http://www.sec.gov. The statements contained in this prospectus as to the contents of any contract or other document filed as an exhibit to the Registration Statement are, of necessity, brief descriptions thereof and are not necessarily complete.

In connection with the offering, we will register our common stock with the SEC under Section 12(b) of the Securities Exchange Act of 1934, and, upon such registration, we and the holders of our stock will become subject to the proxy solicitation rules, reporting requirements, restrictions on stock purchases and sales by directors, officers and shareholders with 10% or more of the voting power, the annual and periodic reporting requirements and certain other requirements of the Securities Exchange Act of 1934.

161

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

F-1

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

FINANCIAL STATEMENTS

(with report of independent auditors’)

YEARS ENDED DECEMBER 31, 2017 AND 2016

INDEX



	Page
INDEPENDENT AUDITORS’ REPORT	F-3
FINANCIAL STATEMENTS:
Balance sheets	F-4
Statements of operations and comprehensive income	F-5
Statements of subscribers’ surplus	F-6
Statements of cash flows	F-7
Notes to financial statements	F-8

F-2

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

F-3

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

BALANCE SHEETS

DECEMBER 31, 2017 AND 2016



	2017		2016
ASSETS
Investments in available-for-sale securities:
Bonds (Amortized cost of $43,696,584 and $39,368,291)	$	43,786,294	$	39,155,303
Common stocks (Cost of $2,737,328 and $2,505,194)	2,806,613		2,491,165
Other invested assets	4,115,892		2,134,822
Total investments	50,708,799		43,781,290
Cash and cash equivalents	2,110,000		5,045,589
Accrued investment income	302,788		277,588
Premiums receivable	4,835,002		3,731,615
Reinsurance recoverable	6,117,389		8,670,162
Income taxes recoverable	574,326		133,099
Deferred acquisition costs	2,504,001		1,713,784
Deferred income taxes	—		559,874
EDP equipment and software	50,000		150,000
Due from affiliate	350		—
TOTAL ASSETS	$	67,202,655	$	64,063,001
LIABILITIES AND SUBSCRIBERS’ SURPLUS
LIABILITIES:
Losses and loss adjustment expenses	$	38,028,709	$	34,814,118
Unearned premiums	8,211,480		7,435,311
Reinsurance payable	1,408,418		3,256,107
Accounts payable, accrued expenses, and other liabilities	1,341,324		885,090
Deferred income taxes	41,531		—
Note payable	187,222		244,767
Surplus note payable to affiliate	—		537,000
Due to affiliate	452,035		10,463
TOTAL LIABILITIES	49,670,719		47,182,856
SUBSCRIBERS’ SURPLUS:
Paid-in and contributed surplus	5,482,997		5,482,997
Unassigned surplus	11,160,278		11,358,997
Accumulated other comprehensive income	888,661		38,151
TOTAL SUBSCRIBERS’ SURPLUS	17,531,936		16,880,145
TOTAL LIABILITIES AND SUBSCRIBERS’ SURPLUS	$	67,202,655	$	64,063,001

See notes to financial statements.

F-4

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

YEARS ENDED DECEMBER 31, 2017 AND 2016



	2017			2016
REVENUES:
Net premium earned	$	12,274,965		$	8,590,608
TOTAL REVENUES	12,274,965			8,590,608
EXPENSES:
Losses and loss adjustment expenses	7,732,526			3,919,503
Other underwriting expenses	5,786,751			4,391,058
TOTAL EXPENSES	13,519,277			8,310,561
NET INVESTMENT INCOME	971,833			1,183,210
(LOSS) INCOME FROM OPERATIONS	(272,479		)	1,463,257
INTEREST EXPENSE	8,653			52,543
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES	(281,132		)	1,410,714
PROVISION FOR INCOME TAXES	(260,491		)	585,557
NET (LOSS) INCOME	(20,641		)	825,157
OTHER 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.

F-5

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

STATEMENTS OF SUBSCRIBERS’ SURPLUS

YEARS ENDED DECEMBER 31, 2017 AND 2016



	Paid-in and Contributed Surplus		Unassigned Surplus			Accumulated Other Comprehensive Income			Total Subscribers’ Surplus
Balance, January 1, 2016	$	5,482,997	$	10,533,840		$	101,021		$	16,117,858
Net income	—		825,157			—			825,157
Other comprehensive loss	—		—			(62,870		)	(62,870		)
Balance, December 31, 2016	5,482,997		11,358,997			38,151			16,880,145
Net loss	—		(20,641		)	—			(20,641		)
Other comprehensive income	—		—			672,432			672,432
Reclassification 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.

F-6

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2017 AND 2016



	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(20,641	)	$	825,157
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Deferred income taxes	206,755			108,516
Net realized losses (gains) on sales of investments	66,288			(57,709		)
Amortization of bond premiums	154,948			176,613
Depreciation expense	100,000			100,000
Changes 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	—			207,713
Income taxes recoverable	(441,227		)	(133,099		)
Deferred acquisition costs	(790,217		)	(153,299		)
Other assets	—			11,129
Due from affiliate	(350		)	—
Liability for losses and loss adjustment expenses	3,214,591			(1,255,186		)
Unearned premiums	776,169			880,813
Reinsurance payable	(1,847,689		)	3,256,107
Income taxes payable	—			(162,333		)
Accounts payable, accrued expenses, and other liabilities	456,234			470,081
Due to affiliate	441,572			(206,457		)
NET CASH PROVIDED BY OPERATING ACTIVITIES	3,740,619			1,221,017
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments:
Proceeds from sales and maturities	2,742,245			15,542,979
Purchases	(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			5,423,650
CASH AND CASH EQUIVALENTS, end of year	$	2,110,000		$	5,045,589
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid for the year	$	19,115		$	52,543
Income taxes paid for the year	$	—		$	792,000

See notes to financial statements.

F-7

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.

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

F-8

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

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.

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.

F-9

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

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.

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

F-10

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

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 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.

F-11

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016


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.


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.

F-12

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

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.

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:



	Amortized Cost/Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2017
U.S. government	$	7,765,977	$	138	$	101,417	$	7,664,698
States, territories, and possessions	1,202,008		10,979		—		1,212,987
Subdivisions of states, territories, and possessions	9,737,894		156,666		13,486		9,881,074
Industrial and miscellaneous	24,990,705		171,809		134,979		25,027,535
Total bonds	43,696,584		339,592		249,882		43,786,294
Common stocks	2,737,328		348,136		278,851		2,806,613
	$	46,433,912	$	687,728	$	528,733	$	46,592,907



	Amortized Cost/Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2016
U.S. government	$	8,785,743	$	998	$	113,466	$	8,673,275
States, territories, and possessions	1,224,034		4,254		5,934		1,222,354
Subdivisions of states, territories, and possessions	9,998,373		73,743		56,240		10,015,876
Industrial and miscellaneous	19,360,141		94,481		210,824		19,243,798
Total bonds	39,368,291		173,476		386,464		39,155,303
Common stocks	2,505,194		188,619		202,648		2,491,165
	$	41,873,485	$	362,095	$	589,112	$	41,646,468

F-13

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

At December 31, 2017, maturities of investments in bond securities are as follows:



	Amortized Cost/Cost		Fair Value
Due in less than one year	$	4,878,222	$	4,868,400
Due after one year to five years	20,829,218		20,794,915
Due after five years to ten years	17,989,144		18,122,979
	$	43,696,584	$	43,786,294

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		2016
Proceeds	$	2,742,245	$	15,542,979
Gross gains	54,887		135,826
Gross losses	121,175		78,117

The components of net investment income are as follows:



	2017			2016
Bonds	$	951,246		$	875,994
Cash and short-term investments	3,907			3,136
Common stocks	142,033			131,660
Limited partnerships	—			200,000
Net (loss) gain on sales of investments, net of tax of $0 and $19,621	(66,288		)	38,088
	1,030,898			1,248,878
Less investment expenses	59,065			65,668
Net investment income	$	971,833		$	1,183,210

F-14

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 Months
	Fair Value		Unrealized Losses
U.S. government	$	3,875,717	$	82,023
Subdivisions of states, territories, and possessions	452,316		3,780
Industrial and miscellaneous	9,474,229		128,102
Common stocks	795,147		47,812
	$	14,597,409	$	261,717

	Greater than 12 Months
	Fair Value		Unrealized Losses
U.S. government	$	3,779,791	$	19,394
Subdivisions of states, territories, and possessions	888,309		9,706
Industrial and miscellaneous	1,698,530		6,877
Common stocks	230,876		231,039
	$	6,597,506	$	267,016

	Totals
	Fair Value		Unrealized Losses
U.S. government	$	7,655,508	$	101,417
Subdivisions of states, territories, and possessions	1,340,625		13,486
Industrial and miscellaneous	11,172,759		134,979
Common 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 $267,017.

F-15

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016



	Less than 12 Months
	Fair Value		Unrealized Losses
U.S. government	$	4,005,510	$	96,442
States, territories, and possessions	650,944		5,934
Subdivisions of states, territories, and possessions	3,489,633		44,080
Industrial and miscellaneous	6,612,642		192,912
Common stocks	399,877		9,498
	$	15,158,606	$	348,866

	Greater than 12 Months
	Fair Value		Unrealized Losses
U.S. government	$	3,781,371	$	17,024
States, territories, and possessions	—		—
Subdivision of states, territories, and possessions	401,394		12,160
Industrial and miscellaneous	3,768,084		17,912
Common stocks	445,488		193,150
	$	8,396,337	$	240,246

	Totals
	Fair Value		Unrealized Losses
U.S. government	$	7,786,881	$	113,466
States, territories, and possessions	650,944		5,934
Subdivision of states, territories, and possessions	3,891,027		56,240
Industrial and miscellaneous	10,380,726		210,824
Common 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.

F-16

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 3
U.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 3
U.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.


6.	Deferred Acquisition Costs:

The following table summarizes the components of deferred acquisition costs for the years ended December 31, 2017 and 2016:



	2017		2016
Balance, beginning of year	$	1,713,784	$	1,560,485
Amount capitalized during the year	5,058,137		3,533,008
Amount amortized during the year	4,267,920		3,379,709
Balance, 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.

F-17

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

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.

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		2016
Premiums written:
Direct	$	15,327,496	$	13,798,821
Ceded	2,276,362		4,327,200
Premiums written, net of reinsurance	$	13,051,134	$	9,471,621
Premiums earned:
Direct	$	14,551,327	$	12,917,808
Ceded	2,276,362		4,327,200
Premiums earned, net of reinsurance	$	12,274,965	$	8,590,608
Losses and loss adjustment expenses incurred:
Direct	$	9,567,678	$	6,471,541
Ceded	1,835,152		2,552,038
Losses and loss adjustment expenses incurred, net of reinsurance	$	7,732,526	$	3,919,503

F-18

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016


8.	Equipment:

The Exchange’s equipment consisted of the following at December 31, 2017 and 2016:



	2017		2016
EDP equipment and software	$	300,000	$	300,000
Less 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.


9.	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			2016
Losses and loss adjustment expenses, beginning of year	$	34,814,118		$	36,069,304
Less: Reinsurance recoverable, beginning of year	8,670,162			6,118,442
Add: Reinsurance recoverable, claims paid, beginning of year	(3,614,905		)	(319		)
Losses and loss adjustment expenses, beginning of year	29,758,861			29,951,181
Incurred related to:
Current year	10,377,591			8,346,007
Prior years	(2,645,065		)	(4,426,504		)
Total incurred	7,732,526			3,919,503
Paid related to:
Current year	564,039			377,891
Prior years	4,663,743			3,733,932
Total paid	5,227,782			4,111,823
Losses and loss adjustment expenses, end of year - net	32,263,605			29,758,861
Add: Reinsurance recoverable, end of year	6,117,389			8,670,162
Less: 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 .

F-19

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, 2017
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017		Total of Incurred-But-Not-Reported Liabilities Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
2008	$	4,216	$	4,758	$	4,708	$	5,085	$	4,666	$	4,011	$	3,774	$	3,473	$	2,798	$	2,276	$	60	49
2009			3,899		3,792		3,939		3,607		3,426		2,856		2,718		2,548		2,503		518		57
2010					4,875		4,191		4,961		4,521		4,158		3,671		3,265		2,937		830		48
2011							5,329		5,473		5,456		5,221		4,948		4,276		4,447		380		55
2012									6,258		5,956		5,946		5,643		5,405		6,410		242		71
2013											6,547		6,722		6,199		5,625		5,224		912		57
2014													6,353		6,034		5,562		4,278		1,385		42
2015															8,173		7,575		6,992		4,219		32
2016																	8,136		7,502		4,175		68
2017																			10,184		7,744		53
																			$	52,753

	Cumulative Paid Losses and Loss Adjustment Expenses, Net of Reinsurance (in thousands)
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017
2008	$	32	$	363	$	685	$	999	$	1,659	$	1,866	$	1,940	$	1,959	$	1,969	$	1,985
2009			58		312		530		829		1,291		1,577		1,656		1,573		1,602
2010					30		255		466		871		1,410		1,531		1,736		1,911
2011							69		366		903		1,959		3,400		2,988		3,273
2012									83		464		901		1,870		3,775		5,193
2013											50		236		950		2,306		2,617
2014													42		292		766		1,792
2015															79		381		1,162
2016																	193		807
2017																			400
																			$	20,742
					All outstanding liabilities before 2008, net of reinsurance														253
			Liabilities for losses and loss adjustment expenses, net of reinsurance																$	32,264

F-20

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:



	2017
Net outstanding liabilities for losses and loss adjustment expenses:
Medical professional	$	32,263,605
Liabilities for losses and loss adjustment expenses, net of reinsurance	32,263,605
Reinsurance recoverable on unpaid claims:
Medical professional	5,765,104
Total reinsurance recoverable on unpaid claims	5,765,104
Total 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 10
Medical 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.

Future maturities of the note for the succeeding years are as follows at December 31, 2017:



Year ending December 31,
2018	$	59,909
2019	62,385
2020	64,928
	$	187,222

F-21

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			2016
Current provision	$	(467,246	)	$	477,041
Deferred 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 net (loss) income before income taxes for the years ended December 31, 2017 and 2016 is summarized as follows:



	2017			2016
Expected tax provision at federal statutory rate	$	(95,585	)	$	479,643
Tax exempt income, net of proration	(72,521		)	(73,087		)
Dividends received deduction	(7,204		)	(8,406		)
Correction of prior year’s amounts	(59,472		)	187,407
Change in enacted tax rates	(25,709		)	—
Net income tax provision	$	(260,491	)	$	585,557

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			2016
Deferred tax assets:
Discount of unearned premiums	$	344,882		$	505,601
Discount of advance premiums	20,054			35,738
Discount of losses and loss adjustment expenses	512,300			666,449
Total deferred tax assets	877,236			1,207,788
Deferred tax liabilities:
Deferred acquisition costs	525,840			582,687
Tax Act transitional adjustment	105,261			—
Unrealized gain on investments	287,666			65,227
Total deferred tax liabilities	918,767			647,914
Net 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.

F-22

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED 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 2015 through 2017.

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.

F-23

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

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 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%).

F-24

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.

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.

F-25

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

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			2016
Statutory net (loss) income	$	(439,756	)	$	911,171
Statutory 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			2016
Statutory surplus and other funds prescribed by the Department	$	16,882,485		$	17,487,422
State 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.


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.

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.

F-26

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

F-27

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017 (UNAUDITED)

F-28

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

INDEX



	Page
FINANCIAL STATEMENTS:
Balance sheets	F-30
Statements of operations and comprehensive (loss) income	F-31
Statements of members’ equity	F-32
Statements of cash flows	F-33
Notes to financial statements	F-34

F-29

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

BALANCE SHEETS

SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)



	Unaudited		Unaudited
	2018		2017
ASSETS
Investments in available-for-sale securities:
Bonds (Amortized cost of $42,657,383 and $42,062,293)	$	41,775,450	$	42,436,720
Common stocks (Cost of $2,841,327 and $2,901,117)	2,859,693		2,780,346
Other invested assets	4,295,798		3,550,642
Total investments	48,930,941		48,767,708
Cash and cash equivalents	1,207,492		1,823,424
Accrued investment income	341,674		310,788
Premiums receivable	3,840,306		3,779,490
Reinsurance recoverable	6,073,316		5,795,336
Reinsurance premiums receivable	514,531		248,447
Income taxes recoverable	553,949		420,479
Deferred acquisition costs	2,190,831		2,095,102
Deferred income taxes	148,342		77,674
Other assets	—		115,000
TOTAL ASSETS	$	63,801,382	$	63,433,448
LIABILITIES AND MEMBERS' EQUITY
LIABILITIES:
Losses and loss adjustment expenses	$	37,417,339	$	36,984,858
Unearned premiums	7,373,044		7,055,474
Reinsurance payable	1,088,624		842,389
Accounts payable, accrued expenses, and other liabilities	625,709		541,777
Note payable	142,502		201,837
Due to affiliates	94,297		194,940
TOTAL LIABILITIES	46,741,515		45,821,275
MEMBERS' EQUITY	$	17,059,867	$	17,612,173
TOTAL LIABILITIES AND MEMBERS' EQUITY	$	63,801,382	$	63,433,448

See notes to financial statements.

F-30

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)



	Unaudited			Unaudited
	2018			2017
REVENUES:
Net premium earned	$	9,644,090		$	9,693,624
TOTAL REVENUES	9,644,090			9,693,624
EXPENSES:
Losses and loss adjustment expenses, net	5,435,270			6,540,054
Other underwriting expenses	4,905,722			4,047,230
TOTAL EXPENSES	10,340,992			10,587,284
NET INVESTMENT INCOME	902,904			804,692
INCOME (LOSS) FROM OPERATIONS	206,002			(88,968		)
INTEREST EXPENSE	4,911			6,696
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES	201,091			(95,664		)
PROVISION FOR INCOME TAXES	7,461			(170,006		)
NET INCOME	193,630			74,342
OTHER COMPREHENSIVE (LOSS) INCOME:
Unrealized holding (losses) gains on available-for-sale securities, net of income tax benefit (expense) of $176,957 and $(338,807)	(635,784		)	693,122
Reclassification adjustments for net realized gain included in net income	(29,915		)	(35,436		)
TOTAL OTHER COMPREHENSIVE (LOSS) INCOME	(665,699		)	657,686
COMPREHENSIVE (LOSS) INCOME	$	(472,069	)	$	732,028

See notes to financial statements.

F-31

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

STATEMENTS OF MEMBERS' EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017



	Contributed Capital		Retained Earnings		Accumulated Other Comprehensive Income			Total Members' Equity
Balance, January 1, 2017	$	5,482,997	$	11,358,997	$	38,151		$	16,880,145
Net income	—		74,342		—			74,342
Other comprehensive income	—		—		657,686			657,686
Balance, September 30, 2017 (unaudited)	$	5,482,997	$	11,433,339	$	695,837		$	17,612,173
Balance, January 1, 2018	$	5,482,997	$	11,160,278	$	888,661		$	17,531,936
Net income	—		193,630		—			193,630
Other comprehensive loss	—		—		(665,699		)	(665,699		)
Balance, September 30, 2018 (unaudited)	$	5,482,997	$	11,353,908	$	222,962		$	17,059,867

See notes to financial statements.

F-32

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)



	Unaudited			Unaudited
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	193,630		$	74,342
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Deferred income taxes	(12,916		)	143,393
Net realized gains on sales of investments	(29,915		)	(35,436		)
Amortization of bond premiums	135,854			131,331
Depreciation expense	50,000			75,000
Changes in operating assets and liabilities:
Accrued investment income	(38,886		)	(33,200		)
Premiums receivable	994,696			(47,875		)
Reinsurance recoverable	44,073			(740,079		)
Reinsurance premiums receivable	(514,531		)	3,366,458
Income taxes recoverable	20,377			(287,380		)
Deferred acquisition costs	313,170			(381,318		)
Other assets	—			(40,000		)
Liability for losses and loss adjustment expenses	(611,370		)	2,170,740
Unearned premiums	(838,436		)	(379,837		)
Reinsurance payable	(319,794		)	(2,413,718		)
Accounts payable, accrued expenses, and other liabilities	(715,615		)	(343,313		)
Due to affiliates	(357,388		)	184,477
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES	(1,687,051		)	1,443,585
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments:
Proceeds from sales and maturities	5,240,080			2,301,383
Purchases	(4,410,817		)	(6,387,203		)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	829,263			(4,085,820		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note payable	(44,720		)	(42,930		)
Repayment of surplus note payable to affiliate	—			(537,000		)
NET CASH USED IN FINANCING ACTIVITIES	(44,720		)	(579,930		)
NET CHANGE IN CASH AND CASH EQUIVALENTS	$	(902,508	)	$	(3,222,165	)
CASH AND CASH EQUIVALENTS, beginning of period	2,110,000			5,045,589
CASH AND CASH EQUIVALENTS, end of period	$	1,207,492		$	1,823,424
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid for the period	$	4,911		$	17,159

See notes to financial statements.

F-33

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)


1.	Organization and Operations:

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

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

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.

F-34

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

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 (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.

Other Investments

The Exchange has ownership interests 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 (loss) income. The investments in the limited partnerships are presented as "other invested assets" in the accompanying balance sheets.

Deferred Acquisition Costs

Other Assets

Equipment, included in other assets, is recorded at cost. Depreciation and amortization was provided using the straight-line method over the estimated useful life of the assets. The estimated useful life of equipment was three years.

Liability for Losses and Loss Adjustment Expenses

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 Association policyholder for least five years. An extended reporting endorsement policy reserve is required to assure that premiums are not earned prematurely. The

F-35

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

Association has this reserve actuarially determined with the balance included in unearned premiums. The extended reporting endorsement policy reserve amounted to $1,125,000 and $875,000 at September 30, 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 included in "losses and loss adjustment expenses" in the accompanying balance sheets. The Exchange has not recorded any premium deficiency reserves as of September 30, 2018 or 2017. The analysis of premium deficiency reserves was completed as of September 30, 2018. The Exchange did not consider anticipated investment income when calculating the premium deficiency reserves.

Reinsurance

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 as further discussed in Note 12. Additionally, the Exchange has paid costs related to offering of securities by the planned parent company. These costs were charged to the Exchange and require reimbursement from the planned parent company. Such costs are expensed as incurred and included in "other underwriting expenses" in the accompanying statements of operations and comprehensive (loss) income.

Revenue Recognition

Comprehensive (Loss) Income

Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale investments, are reported as a separate component of members' equity of the accompanying balance sheets. Such items, along with net income, are components of comprehensive (loss) income and are reflected in the accompanying statements of operations and comprehensive (loss) income.

Income Taxes

F-36

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

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 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 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. 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

F-37

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

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 (loss) 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.


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, 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 September 30, 2018 and 2017. At September 30, 2018 and 2017, the Exchange had reinsurance recoverables due from reinsurers of $6,073,316 and $5,795,336, respectively. At September 30, 2018 and 2017, the Exchange had reinsurance payables due to reinsurers of $1,088,624 and $842,389, 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:

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 September 30, 2018 and 2017, there are no explicit or implicit arrangements that would require SIS to provide future financial support to the Exchange.


5.	Investments:

F-38

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

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.

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 September 30, 2018 and 2017 are as follows:



	Amortized Cost/Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2018
U.S. government	$	5,058,162	$	2	$	138,960	$	4,919,204
States, territories, and possessions	915,228		788		6,224		909,792
Subdivisions of states, territories, and possessions	9,909,760		23,796		80,480		9,853,076
Industrial and miscellaneous	26,774,233		23,359		704,214		26,093,378
Total bonds	42,657,383		47,945		929,878		41,775,450
Common stocks	2,841,327		363,131		344,765		2,859,693
	$	45,498,710	$	411,076	$	1,274,643	$	44,635,143

F-39

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)



	Amortized Cost/Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2017
U.S. government	$	7,770,638	$	315	$	74,923	$	7,696,030
States, territories, and possessions	1,207,632		27,597		—		1,235,229
Subdivisions of states, territories, and possessions	9,770,533		281,980		5,963		10,046,550
Industrial and miscellaneous	23,313,490		225,556		80,135		23,458,911
Total bonds	42,062,293		535,448		161,021		42,436,720
Common stocks	2,901,117		252,086		372,857		2,780,346
	$	44,963,410	$	787,534	$	533,878	$	45,217,066

At September 30, 2018, maturities of investments in bond securities are as follows:



	Amortized Cost/Cost		Fair Value
Due in less than one year	$	1,901,322	$	1,899,920
Due after one year to five years	27,357,824		26,956,549
Due after five years to ten years	13,398,237		12,918,981
	$	42,657,383	$	41,775,450

Realized gains and losses are determined using the specific identification method. During the nine months ended September 30, 2018 and 2017, proceeds from maturity and sales and gross realized gains and losses on securities are:



	2018		2017
Proceeds	$	5,240,080	$	2,301,383
Gross gains	45,720		49,950
Gross losses	15,805		14,514

The components of net investment income are as follows:



	2018		2017
Bonds	$	799,616	$	705,444
Cash and short-term investments	5,529		3,031
Common stocks	110,112		106,776
Net gain on sales of investments	29,915		35,436
	945,172		850,687
Less investment expenses	42,268		45,995
Net investment income	$	902,904	$	804,692

F-40

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)



	Less than 12 Months
	Fair Value		Unrealized Losses
U.S. government	$	448,529	$	1,413
States, territories, and possessions	635,640		6,224
Subdivisions of states, territories, and possessions	5,595,401		59,565
Industrial and miscellaneous	15,932,254		323,219
Common stocks	448,255		187,989
	$	23,060,079	$	578,410

	Greater than 12 Months
	Fair Value		Unrealized Losses
U.S. government	$	4,470,484	$	137,547
States, territories, and possessions	—		—
Subdivisions of states, territories, and possessions	442,722		20,915
Industrial and miscellaneous	7,528,668		380,995
Common stocks	516,916		156,776
	$	12,958,790	$	696,233

	Totals
	Fair Value		Unrealized Losses
U.S. government	$	4,919,013	$	138,960
States, territories, and possessions	635,640		6,224
Subdivisions of states, territories, and possessions	6,038,123		80,480
Industrial and miscellaneous	23,460,922		704,214
Common stocks	965,171		344,765
	$	36,018,869	$	1,274,643

At September 30, 2018, the Exchange had 112 securities in unrealized loss positions of less than 12 months with a combined gross unrealized loss of $578,410 and 50 securities in unrealized loss positions of greater than 12 months with a combined gross unrealized loss of $696,233.

F-41

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)



	Less than 12 Months
	Fair Value		Unrealized Losses
U.S. government	$	2,632,591	$	16,526
Subdivisions of states, territories, and possessions	460,016		5,963
Industrial and miscellaneous	7,374,295		42,212
Common stocks	272,531		27,148
	$	10,739,433	$	91,849

	Greater than 12 Months
	Fair Value		Unrealized Losses
U.S. government	$	5,048,982	$	58,397
Subdivisions of states, territories, and possessions	—		—
Industrial and miscellaneous	1,332,161		37,923
Common stocks	863,555		345,709
	$	7,244,698	$	442,029

	Totals
	Fair Value		Unrealized Losses
U.S. government	$	7,681,573	$	74,923
Subdivisions of states, territories, and possessions	460,016		5,963
Industrial and miscellaneous	8,706,456		80,135
Common stocks	1,136,086		372,857
	$	17,984,131	$	533,878

At September 30, 2017, the Exchange had 45 securities in unrealized loss positions of less than 12 months with a combined gross unrealized loss of $91,849 and 22 securities in unrealized loss positions of greater than 12 months with a combined gross unrealized loss of $442,029.

The unrealized losses on investments in U.S. government and agency securities, state securities, and corporate debt securities at September 30, 2018 and 2017 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 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 nine months ended September 30, 2018 and 2017.

F-42

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

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 September 30, 2018:



	Total		Level 1		Level 2		Level 3
U.S. government	$	4,919,204	$	—	$	4,919,204	$	—
States, territories, and possessions	909,792		—		909,792		—
Subdivisions of states, territories and possessions	9,853,076		—		9,853,076		—
Industrial and miscellaneous	26,093,378		—		26,093,378		—
Total bonds	41,775,450		—		41,775,450		—
Common stocks	2,859,693		2,859,693		—		—
	$	44,635,143	$	2,859,693	$	41,775,450	$	—

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 September 30, 2017:



	Total		Level 1		Level 2		Level 3
U.S. government	$	7,696,030	$	—	$	7,696,030	$	—
States, territories, and possessions	1,235,229		—		1,235,229		—
Subdivisions of states, territories and possessions	10,046,550		—		10,046,550		—
Industrial and miscellaneous	23,458,911		—		23,458,911		—
Total bonds	42,436,720		—		42,436,720		—
Common stocks	2,780,346		2,780,346		—		—
	$	45,217,066	$	2,780,346	$	42,436,720	$	—


6.	Deferred Acquisition Costs:

The following table summarizes the components of deferred acquisition costs for the nine months ended September 30, 2018 and 2017:



	2018		2017
Balance, beginning of period	$	2,504,001	$	1,713,784
Amount capitalized during the period	3,568,445		3,561,399
Amount amortized during the period	3,881,615		3,180,081
Balance, end of period	$	2,190,831	$	2,095,102


7.	Reinsurance:

For the period January 1, 2013 to January 1, 2015, the Exchange entered into a reinsurance agreement which

F-43

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

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, 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.

The effect of reinsurance on premiums written, amounts earned and losses and loss adjustment expenses incurred for the nine months ended September 30, 2018 and 2017 is as follows:



	2018		2017
Premiums written:
Direct	$	10,349,246	$	10,307,387
Ceded	2,058,123		1,242,048
Premiums written, net of reinsurance	$	8,291,123	$	9,065,339
Premiums earned:
Direct	$	11,187,682	$	10,687,225
Ceded	1,543,592		993,601
Premiums earned, net of reinsurance	$	9,644,090	$	9,693,624
Losses and loss adjustment expenses incurred:
Direct	$	5,731,721	$	5,321,199
Ceded	296,451		(1,218,855		)
Losses and loss adjustment expenses incurred, net of reinsurance	$	5,435,270	$	6,540,054

F-44

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)


8.	Equipment:

The Exchange’s equipment, included in other assets, consisted of the following at September 30, 2018 and 2017:



	2018		2017
EDP equipment and software	$	300,000	$	300,000
Less accumulated depreciation and amortization	300,000		225,000
	$	—	$	75,000

Depreciation and amortization expense for the nine months ended September 30, 2018 and 2017 was $50,000 and $75,000, respectively.


9.	Losses and Loss Adjustment Expenses:

Activity in the liability for losses and loss adjustment expenses for the nine months ended September 30, 2018 and 2017 are summarized as follows:



	2018		2017
Losses and loss adjustment expenses, beginning of period	$	38,028,709	$	34,814,118
Less: Reinsurance recoverable, beginning of period	6,117,389		8,670,162
Add: Reinsurance recoverable, claims paid, beginning of period	352,285		3,614,905
Losses and loss adjustment expenses, beginning of period	32,263,605		29,758,861
Incurred related to:
Current period	5,435,271		6,540,054
Prior periods	—		—
Total incurred	5,435,271		6,540,054
Paid related to:
Current period	255,667		351,389
Prior periods	5,997,141		3,751,222
Total paid	6,252,808		4,102,611
Losses and loss adjustment expenses, end of period - net	31,446,068		32,196,304
Add: Reinsurance recoverable, end of period	6,073,316		5,795,336
Less: Recoverable on claims paid	102,045		1,006,782
Losses and loss adjustment expenses, end of period - gross	$	37,417,339	$	36,984,858

The liability for losses and loss adjustment expenses at September 30, 2018 and 2017 were $37,417,339 and $36,984,858, respectively. For the nine months ended September 30, 2018 and 2017, $5,997,141 and $3,751,222, 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. There were no favorable or unfavorable developments for the nine months ended September 30, 2018 and 2017.


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 December 2020 with interest calculated on the unpaid principal balance at a rate of 4%. At September 30, 2018 and 2017, the balance of the note was $142,502 and $201,837, respectively. At September 30, 2018 and 2017, the Exchange was in compliance with all loan covenants.

F-45

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

Future maturities of the note for the succeeding years are as follows at September 30, 2018 :



Year ending September 30,
2019	$	61,758
2020	64,304
2021	16,440
	$	142,502


11.	Income Taxes:

The components of the Exchange’s income tax provision for the nine months ended September 30, 2018 and 2017 are as follows:



	2018			2017
Current provision	$	20,377		$	(313,399	)
Deferred tax provision	(12,916		)	143,393
	$	7,461		$	(170,006	)

The Exchange’s U.S. federal statutory income tax rate applicable to ordinary income was 21% and 34% for the nine months ended September 30, 2018 and 2017, respectively. The income tax provision differs from that computed by applying federal statutory rates to income (loss) before income taxes for the nine months ended September 30, 2018 and 2017 is summarized as follows:



	2018			2017
Expected tax provision at federal statutory rate	$	42,229		$	(32,526	)
Permanent and other differences	(40,016		)	(85,723		)
Deferred adjustments	5,248			(51,757		)
Net income tax provision	$	7,461		$	(170,006	)

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 September 30, 2018 and 2017, the components of the Exchange’s net deferred income taxes consisted of the following:



	2018		2017
Deferred tax assets:
Discount of unearned premiums	$	288,058	$	462,878
Discount of advance premiums	4,967		6,138
Discount of losses and loss adjustment expenses	502,012		733,037
Total deferred tax assets	795,037		1,202,053
Deferred tax liabilities:
Deferred acquisition costs	460,075		712,335
Tax Act transitional adjustment	85,525		—
Unrealized gain on investments	101,095		412,044
Total deferred tax liabilities	646,695		1,124,379
Net deferred tax asset	$	148,342	$	77,674

F-46

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

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 September 30, 2018 and 2017, 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 September 30, 2018 and 2017.

At September 30, 2018 and 2017, 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 nine months ended September 30, 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 nine months ended September 30, 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 nine months ended September 30, 2018 and 2017. The Exchange 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 affect corporate taxes paid in 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 Exchange has measured its deferred income taxes at September 30, 2018 and 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 uses 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, 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 a resulting difference amount of $105,261 at December 31, 2017, the gross amount of $501,242 is being amortized into taxable income beginning on January 1, 2018. For the nine months ended September 30, 2018, amortization of the transitional adjustment amount was $46,991, with a related tax effect of $9,868.


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 nine months ended September 30, 2018 and 2017 was $2,587,312 and $2,576,847, respectively. At September 30, 2018 and 2017, the Exchange owed to SIS $75,188 and $194,940, respectively, for these services which is included in “due to affiliates” in the accompanying balance sheets.

F-47

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

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 nine months ended September 30, 2018 and 2017 was $926,413 and $962,314; such amounts are included in "other underwriting expenses" in the accompanying statement of operations and comprehensive (loss) income.

As discussed in Note 4, SIS had surplus notes with the Exchange in the total amount of $537,000. 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 maturing 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 maturing on April 1, 2035. All of the surplus notes had been 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 Exchange, and all payments of interest and principal were subject to prior approval of the Commonwealth of Pennsylvania Insurance Department (the "Department"). 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 nine months ended September 30, 2017.

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 is subject to the approval of the Pennsylvania Insurance Commissioner. In connection with the proposed plans, the Exchange incurred conversion and securities offering costs of $189,233 during the nine months ended September 30, 2018. At September 30, 2018, the Exchange had a payable of $19,363 to Diversus related to these conversion costs; such amounts are included “due to affiliates” in the accompanying balance sheet.

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 $101,250 and $101,250 for the nine months ended September 30, 2018 and 2017, respectively. There was no amount due to Gateway at September 30, 2018 and 2017.

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 nine months ended September 30, 2018 and 2017, the Exchange incurred litigation management services of $401,400 and $298,700, respectively, related to this agreement. There was no amount due to AOS at September 30, 2018 and 2017.

During the nine months ended September 30, 2018 and 2017, Diversus, the parent company of SIS, Gateway, and AOS, and 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 September 30, 2018 and 2017 the total amounts due to Diversus/DMI was $1,413 and $0, respectively, and are included in “due to affiliates” in the accompanying balance sheets.

During the nine months ended September 30, 2018, the Exchange advanced funds to the Association and PIPE to cover certain operating costs. At September 30, 2018, the total amount due from the Association and PIPE was

F-48

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

$1,667; such amount is included in “due to affiliates” in the accompanying balance sheet. There were no similar advances made by the Exchange to the Association and PIPE at September 30, 2017.

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 reinsurer through commissions, and JLT, in turn, will pay a portion of the commissions to SIS. During the nine months ended September 30, 2018, there was no commission expense incurred by the Exchange related to this agreement with SIS.


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 $78,000 and $74,540, respectively, for the nine months ended September 30, 2018 and 2017. At September 30, 2018 and 2017, there was no amount due to SRS.


14.	Assessments:

Based upon the available information, the Exchange has provided a gross liability of $114,045 and $155,389 at September 30, 2018 and 2017. The Exchange has not recorded applicable premium tax credits at September 30, 2018 and 2017 related to guaranty assessments. Total guaranty fund expense, net of prior years’ refunds and premium tax credits, for the nine months ended September 30, 2018 and 2017 was $21,180 and $22,062, 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 September 30, 2018 and 2017, the Exchange had liabilities of $93,701 and $85,910, 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 September 30, 2018 and 2017, the Exchange had liabilities of $26,481 and $25,372, respectively, for amounts collected on behalf NJPIGA.


15.	Statutory Information:

F-49

POSITIVE PHYSICIANS INSURANCE EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

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.

Statutory net income (loss) and surplus and other funds of the Exchange as determined in accordance with SAP prescribed or permitted by the Department for the nine months ended September 30, 2018 and 2017 are as follows:



	2018		2017
Statutory net income (loss)	$	310,557	$	(254,076	)
Statutory surplus and other funds	17,276,244		16,935,891

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



	2018			2017
Statutory surplus and other funds prescribed by the Department	$	17,276,244		$	16,935,891
State prescribed practices:
Unearned management fees	(1,562,011		)	(1,543,239		)
Statutory surplus and other funds per NAIC statutory accounting practices	$	15,714,233		$	15,392,652

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 nine months ended September 30, 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 September 30, 2018 and 2017, the Exchange’s RBC exceeded minimum RBC requirements.


16.	Subsequent Events:

Subsequent events have been evaluated through January 22, 2019, which is the date the financial statements were available to be issued.

F-50

PROFESSIONAL CASUALTY ASSOCIATION

---------------

FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

G-1

PROFESSIONAL CASUALTY ASSOCIATION

---------------

FINANCIAL STATEMENTS

(with report of independent auditors)

YEARS ENDED DECEMBER 31, 2017 AND 2016



	Page
INDEPENDENT AUDITORS’ REPORT	G-3
FINANCIAL STATEMENTS:
Balance sheets	G-4
Statements of operations and comprehensive income	G-5
Statements of members’ equity	G-6
Statements of cash flows	G-7
Notes to financial statements	G-8

G-2

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 "Association") as of December 31, 2017 and 2016, the related statements of operations and comprehensive 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 Association as of December 31, 2017 and 2016, 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 Association’s management. Our responsibility is to express an opinion on the Association’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. 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.

/s/ Baker Tilly Virchow Krause, LLP

We have served as the Company's auditor since 2014.

Milwaukee, Wisconsin

January 22, 2019

Baker Tilly Virchow Krause, LLP trading as Baker Tilly is a member of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. © 2018 Baker Tilly Virchow Krause, LLP

G-3

PROFESSIONAL CASUALTY ASSOCIATION

---------------

BALANCE SHEETS

DECEMBER 31, 2017 AND 2016



	2017		2016
ASSETS
Investments in available-for-sale securities, at fair value:
Bonds (Amortized cost of $25,795,186 and $30,924,351)	$	25,714,469	$	30,843,401
Common stocks (Cost of $2,758,755 and $2,304,849)	3,240,787		2,394,169
Total investments	28,955,256		33,237,570
Cash and cash equivalents	4,250,022		5,797,935
Accrued investment income	139,058		136,384
Premiums receivable	1,447,712		780,933
Reinsurance recoverable	2,312,019		2,465,280
Unearned ceded premiums	549,304		603,847
Deferred acquisition costs	1,189,364		1,218,724
Income taxes recoverable	353,968		382,313
Deferred income taxes	102,362		416,896
Due from affiliates, net	—		147,754
Other assets	260,684		89,092
TOTAL ASSETS	$	39,559,749	$	45,276,728
LIABILITIES AND MEMBERS’ EQUITY
LIABILITIES:
Losses and loss adjustment expenses	$	18,584,712	$	23,001,791
Unearned premiums	5,494,355		6,706,108
Accounts payable, accrued expenses, and other liabilities	1,347,964		1,785,047
Subordinated notes payable to related parties	—		500,000
Due to affiliates, net	278,370		—
TOTAL LIABILITIES	25,705,401		31,992,946
MEMBERS’ EQUITY	13,854,348		13,283,782
TOTAL LIABILITIES AND MEMBERS’ EQUITY	$	39,559,749	$	45,276,728

See notes to financial statements.

G-4

PROFESSIONAL CASUALTY ASSOCIATION

---------------

STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

YEARS ENDED DECEMBER 31, 2017 AND 2018



	2017			2016
REVENUES:
Net premium earned	$	7,480,452		$	13,309,693
TOTAL REVENUES	7,480,452			13,309,693
EXPENSES:
Losses and loss adjustment expenses, net	4,012,280			6,549,536
Other underwriting expenses	3,500,447			6,090,810
TOTAL EXPENSES	7,512,727			12,640,346
NET INVESTMENT INCOME	584,026			623,028
INCOME FROM OPERATIONS	551,751			1,292,375
INTEREST EXPENSE	31,250			—
INCOME BEFORE PROVISION FOR INCOME TAXES	520,501			1,292,375
PROVISION FOR INCOME TAXES	209,278			670,579
NET INCOME	311,223			621,796
OTHER COMPREHENSIVE INCOME:
Unrealized holding gains on available-for-sale securities, net of income tax expense of $133,601 and $83,673	272,576			152,261
Reclassification adjustments for net realized (gain) loss included in net income	(13,233		)	10,163
TOTAL OTHER COMPREHENSIVE INCOME	259,343			162,424
COMPREHENSIVE INCOME	$	570,566		$	784,220

See notes to financial statements.

G-5

PROFESSIONAL CASUALTY ASSOCIATION

---------------

STATEMENTS OF MEMBERS’ EQUITY

YEARS ENDED DECEMBER 31, 2017 AND 2016



	Members’ Equity			Accumulated Other Comprehensive Income (Loss)			Total Members’ Equity
Balance, January 1, 2016	$	12,656,462		$	(156,900	)	$	12,499,562
Net income	621,796			—			621,796
Other comprehensive income	—			162,424			162,424
Balance, December 31, 2016	13,278,258			5,524			13,283,782
Net income	311,223			—			311,223
Other comprehensive income	—			259,343			259,343
Reclassification of tax effects from accumulated other comprehensive income related to passage of TCJA	(52,171		)	52,171			—
Balance, December 31, 2017	$	13,537,310		$	317,038		$	13,854,348

See notes to financial statements.

G-6

PROFESSIONAL CASUALTY ASSOCIATION

---------------

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2017 AND 2016



	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	311,223		$	621,796
Adjustments to reconcile net income to net cash used in operating activities:
Deferred income taxes	180,933			136,567
Net realized (gain) loss on sales of investments	(13,233		)	10,163
Amortization of bond premiums	87,129			123,177
Changes in operating assets and liabilities:
Accrued investment income	(2,674		)	73,627
Premiums receivable	(666,779		)	(32,515		)
Reinsurance recoverable	153,261			(281,676		)
Mcare assessment receivable	—			97,020
Income taxes recoverable	28,345			(382,313		)
Unearned ceded premiums	54,543			281,413
Deferred acquisition costs	29,360			829,190
Due from affiliates, net	147,754			(565,224		)
Other assets	(87,982		)	(89,092		)
Liability for losses and loss adjustment expenses	(4,417,079		)	(4,550,648		)
Unearned premiums	(1,211,753		)	(3,767,756		)
Reinsurance payable	—			(533,584		)
Income taxes payable	—			(98,879		)
Accounts payable, accrued expenses, and other liabilities	(437,083		)	397,875
Due to affiliates, net	278,370			—
NET CASH USED IN OPERATING ACTIVITIES	(5,565,665		)	(7,730,859		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments:
Proceeds from sales and maturities	16,725,323			17,352,897
Purchases	(12,123,961		)	(6,791,752		)
Other assets	(83,610		)	—
NET CASH PROVIDED BY INVESTING ACTIVITIES	4,517,752			10,561,145
CASH 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	$	(1,547,913	)	$	2,830,286
CASH AND CASH EQUIVALENTS, beginning of year	5,797,935			2,967,649
CASH AND CASH EQUIVALENTS, end of year	$	4,250,022		$	5,797,935
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid for the year	$	31,250		$	—
Income taxes paid for the year	$	—		$	1,051,324

See notes to financial statements.

G-7

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016


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 and Principles:

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, and valuation of deferred tax assets.

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

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 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.

G-8

PROFESSIONAL CASUALTY ASSOCIATION

---------------

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. 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, premium taxes, and management fees, are deferred, and amortized as premiums are earned over the applicable policy term.

Liability for Losses and Loss Adjustment Expenses

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 $2,263,158 and $3,154,073 at December 31, 2017 and 2016 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, 2017 or 2016. The analysis of premium deficiency reserves was completed as of December 31, 2017. The Association did 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

G-9

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

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. The reinsurance contracts provides for return premium based on the actual loss experience of the written and reinsured business. The Association estimates the amounts to be recorded for return premium based on the terms set forth in the reinsurance contract.

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 as further discussed in Note 10. Such costs are included in "other underwriting expenses" in the accompanying statements of operations and comprehensive 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 13), these costs have been written off and are included in "other underwriting expenses" in the accompanying statements of operations and comprehensive income.

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 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 income securities are reported as a separate component in the equity section in the accompanying balance sheets. Such items, along with net income, 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 (loss) are recorded in investment income in the accompanying statements of operations and comprehensive 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 income. Accrued interest and penalties are included within the related tax liability line in the accompanying balance sheets.

Recently Adopted Accounting Pronouncements

The Association adopted the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU” or “Update”) 2015-09, Disclosures about Short-Duration Contracts , addressing enhanced

G-10

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

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 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 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 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 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 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.


3.	Concentrations of Credit Risk:

Financial instruments which potentially expose the Association to concentrations of credit risk consist primarily

G-11

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

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 a significant portion 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.

Insureds consist of healthcare providers in which no one insured accounted over 20% of premiums receivable at December 31, 2017 and 2016. At December 31, 2017 and 2016, the Association had reinsurance balances recoverable of $2,312,019 and $2,465,280, respectively. At December 31, 2017 and 2016, there were no reinsurance payables to the reinsurers for unpaid losses and loss adjustment expenses, contingent commissions receivable, and unearned premiums due to five 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.

The Association is licensed to sell medical malpractice insurance in the Commonwealth of Pennsylvania and the State of Michigan and, therefore, the Association’s written premium is concentrated in those two states. In addition, the Association insured hospitals and all physicians employed by these hospitals. These hospitals are owned and operated by a large national publicly traded hospital group and policies written for this customer represented approximately 19% of the Association’s gross written premium for the year ended December 31, 2016. The customer determined not to renew their policies in August 2016 and in January 2017 in the amounts of $3,394,516 and $1,774,294, respectively. There were no amounts due from this customer at December 31, 2017 and 2016.


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 is owned by the Association, and PTP functions solely as the management entity.

PTP has not provided financial or other support to the Association for any of the reporting periods presented. At December 31, 2017 and 2016, there are no explicit or implicit arrangements that would require PTP to provide future financial support to the Association.


5.	Investments:

The Association’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 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.);

G-12

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016


•	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 bonds and common stocks 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 at December 31, 2017 and 2016 are as follows:



	Amortized Cost/Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2017
U.S. government	$	6,693,770	$	560	$	67,765	$	6,626,565
Subdivisions of states, territories, and possessions	915,000		—		1,912		913,088
Industrial and miscellaneous	18,186,417		78,498		90,099		18,174,816
Total bonds	25,795,187		79,058		159,776		25,714,469
Common stocks	2,758,755		491,752		9,720		3,240,787
	$	28,553,942	$	570,810	$	169,496	$	28,955,256

	Amortized Cost/Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2016
U.S. government	$	13,349,110	$	10,307	$	66,770	$	13,292,647
States, territories, and possessions	1,520,000		128		2,756		1,517,372
Industrial and miscellaneous	16,055,241		50,711		72,570		16,033,382
Total bonds	30,924,351		61,146		142,096		30,843,401
Common stocks	2,304,849		154,361		65,041		2,394,169
	$	33,229,200	$	215,507	$	207,137	$	33,237,570

G-13

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

At December 31, 2017, maturities of investments in bond securities are as follows:



	Amortized Cost/Cost		Fair Value
Due in less than one year	$	5,250,471	$	5,244,865
Due after one year to five years	10,643,617		10,552,132
Due after five years to ten years	9,901,099		9,917,472
	$	25,795,187	$	25,714,469



	2017		2016
Proceeds	$	16,725,323	$	17,352,897
Gross gains	46,147		30,935
Gross losses	32,914		41,098

The components of net investment income are as follows:



	2017		2016
Bonds	$	578,219	$	644,914
Cash and short-term investments	19,529		9,892
Common stocks	81,298		59,171
Net gain (loss) on sales of investments	13,233		(10,163		)
	692,279		703,814
Less investment expenses	108,253		80,776
Net investment income	$	584,026	$	623,038

G-14

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

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 Months
	Fair Value		Unrealized Losses
U.S. government	$	2,508,225	$	4,733
Subdivisions of states, territories, and possessions	—		—
Industrial and miscellaneous	7,514,041		58,048
Common stocks	186,528		5,446
	$	10,208,794	$	68,227

	Greater than 12 Months
	Fair Value		Unrealized Losses
U.S. government	$	3,893,144	$	63,032
Subdivisions of states, territories, and possessions	913,088		1,912
Industrial and miscellaneous	3,212,135		32,051
Common stocks	214,313		4,274
	$	8,232,680	$	101,269

	Totals
	Fair Value		Unrealized Losses
U.S. government	$	6,401,369	$	67,765
Subdivisions of states, territories, and possessions	913,088		1,912
Industrial and miscellaneous	10,726,176		90,099
Common 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.

G-15

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016



	Less than 12 Months
	Fair Value		Unrealized Losses
U.S. government	$	4,917,355	$	57,830
Subdivisions of states, territories, and possessions	1,427,243		2,756
Industrial and miscellaneous	4,034,492		51,832
Common stocks	461,879		26,057
	$	10,840,969	$	138,475

	Greater than 12 Months
	Fair Value		Unrealized Losses
U.S. government	$	3,010,130	$	8,940
Industrial and miscellaneous	2,011,194		20,738
Common stocks	376,054		38,984
	$	5,397,378	$	68,662

	Totals
	Fair Value		Unrealized Losses
U.S. government	$	7,927,485	$	66,770
Subdivision of states, territories, & possessions	1,427,243		2,756
Industrial and miscellaneous	6,045,686		72,570
Common stocks	837,933		65,041
	$	16,238,347	$	207,137

At December 31, 2016, the Association had 102 securities in unrealized loss positions of less than 12 months with a combined gross unrealized loss of $138,475 and 21 securities in unrealized loss positions of greater than 12 months with a combined gross unrealized loss of $68,662.

The unrealized losses on investments in U.S. government and agency securities, state securities, and corporate debt securities at December 31, 2017 and 2016 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 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, 2017 and 2016.

G-16

PROFESSIONAL CASUALTY ASSOCIATION

---------------

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 Association to estimate the fair value of assets disclosed on a recurring basis at December 31, 2017:



	Total		Level 1		Level 2		Level 3
U.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	$	—

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, 2016:



	Total		Level 1		Level 2		Level 3
U.S. government	$	13,292,647	$	—	$	13,292,647	$	—
Subdivisions of states, territories, and possessions	1,517,372		—		1,517,372		—
Industrial and miscellaneous	16,033,382		—		16,033,382		—
Total bonds	30,843,401		—		30,843,401		—
Common stocks	2,394,169		2,394,169		—		—
	$	33,237,570	$	2,394,169	$	30,843,401	$	—


6.	Deferred Acquisition Costs:

The following table summarizes the components of deferred acquisition costs for the years ended December 31, 2017 and 2016:



	2017		2016
Balance, beginning of year	$	1,218,724	$	2,047,914
Amount capitalized during the year	2,583,099		4,096,924
Amount amortized during the year	2,612,459		4,926,114
Balance, end of year	$	1,189,364	$	1,218,724


7.	Reinsurance:

In the ordinary course of business, the Association seeks to limit its exposure to loss on individual claims by entering into reinsurance contracts with other insurance companies. Insurance is ceded by the Association on excess of loss basis with the Association’s retention of $250,000 for policy year 2007 and $300,000 per occurrence for claims related to policy years 2008 through 2015.

Effective January 1, 2016, the Association and the Physicians’ Insurance Program Exchange (“Exchange”), 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

G-17

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

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.

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		2016
Premiums written:
Direct	$	7,683,787	$	11,940,718
Ceded	1,360,550		2,098,628
Premiums written, net of reinsurance	$	6,323,237	$	9,842,090
Premiums earned:
Direct	$	8,895,545	$	15,689,734
Ceded	1,415,093		2,380,041
Premiums earned, net of reinsurance	$	7,480,452	$	13,309,693
Loss and loss adjustment expenses incurred:
Direct	$	4,702,804	$	8,253,714
Ceded	690,524		1,704,178
Loss and loss adjustment expenses incurred, net of reinsurance	$	4,012,280	$	6,549,536


8.	Loss and Loss Adjustment Expenses:

Activity in the liability for losses and loss adjustment expenses for the years ended December 31, 2017 and 2016 is summarized as follows:



	2017			2016
Loss and loss adjustment expenses, beginning of year – gross	$	23,001,791		$	27,552,439
Less: Reinsurance recoverable, beginning of year	2,465,280			2,183,604
Add: Recoverable on claims paid	740,158			306,000
Loss and loss adjustment expenses, beginning of year – net	21,276,669			25,674,835
Incurred related to:
Current year	4,435,280			7,768,536
Prior years	(423,000		)	(1,219,000		)
Total incurred	4,012,280			6,549,536
Paid related to:
Current year	310,857			605,040
Prior years	7,861,111			10,342,662
Total paid	8,171,968			10,947,702
Loss and loss adjustment expenses, end of year – net	17,116,981			21,276,669
Add: Reinsurance recoverable, end of year	2,312,019			2,465,280
Less: Recoverable on claims paid – end of year	844,288			740,158
Loss and loss adjustment expenses, end of year – gross	$	18,584,712		$	23,001,791

The liability for losses and loss adjustment expenses at December 31, 2017 and 2016 were $18,584,712 and $23,001,791, respectively. At December 31, 2017 and 2016, $7,861,111 and $10,342,662, respectively, has been paid

G-18

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

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 $1,219,000 during the year ended December 31, 2016 was primarily related to the favorable development related to the reduction in the ultimate loss reserves on claims-made policies for the 2013 and 2015 years. 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.

Incurred and Paid Loss Development Information - Unaudited

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, 2017
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017		Total of Incurred-But-Not-Reported Liabilities Plus Expected Development on Reported Claims	Cumulative Number of Reported Claims
2008	$	14,470	$	10,342	$	10,126	$	8,943	$	9,012	$	8,654	$	8,746	$	8,912	$	9,192	$	9,121	62	108
2009			13,591		11,440		10,624		9,767		9,791		9,712		10,438		11,064		11,196		18	100
2010					8,455		6,567		6,443		5,740		4,990		4,563		4,461		5,127		13	70
2011							9,459		9,537		9,471		11,602		11,928		11,982		12,428		292	84
2012									9,877		9,364		9,553		10,064		10,146		10,420		287	98
2013											7,818		7,057		6,270		5,536		5,040		272	86
2014													7,403		5,924		5,989		5,672		487	68
2015															8,374		7,292		6,500		1,084	66
2016																	7,529		7,873		2,797	71
2017																			4,378		2,459	46
																			$	77,755

	Cumulative Losses and Loss Adjustment Expenses Paid, Net of Reinsurance (in thousands)
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017
2008	$	411	$	2,077	$	4,999	$	6,512	$	7,424	$	7,675	$	7,925	$	8,098	$	9,128	$	8,941
2009			408		1,605		4,028		7,214		7,956		8,282		9,507		10,240		11,057
2010					267		963		2,065		3,078		3,671		3,851		3,981		4,986
2011							398		1,132		2,802		8,926		10,356		11,098		11,795
2012									423		1,500		3,240		5,736		8,617		9,811
2013											406		1,336		2,715		4,191		4,435
2014													285		1,017		2,884		4,094
2015															381		1,802		3,197
2016																	512		2,475
2017																			302
																			$	61,093
					All outstanding liabilities before 2008, net of reinsurance														49
			Liabilities for losses and loss adjustment expenses, net of reinsurance																$	16,711

G-19

PROFESSIONAL CASUALTY ASSOCIATION

---------------

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:



	2017
Net outstanding liabilities for losses and loss adjustment expenses:
Medical professional	$	16,711,792
Liabilities for losses and loss adjustment expenses, net of reinsurance	16,711,792
Reinsurance recoverable on unpaid claims:
Medical professional	1,467,731
Total reinsurance recoverable on unpaid claims	1,467,731
Unallocated loss adjustment expenses	405,189
Total gross liability for losses and loss adjustment expenses	$	18,584,712

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, 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
Accident Year	Year 1		Year 2		Year 3		Year 4		Year 5		Year 6		Year 7		Year 8		Year 9		Year 10
Medical professional	5.3	%	15.2	%	23.4	%	27.0	%	12.0	%	5.3	%	6.7	%	9.3	%	9.3	%	(2.1	)%


9.	Income Taxes:

The components of the Association’s income tax provision for the years ended December 31, 2017 and 2016:



	2017		2016
Current provision	$	28,345	$	534,012
Deferred tax provision	180,933		136,567
	$	209,278	$	670,579

The Association’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 income before income taxes for the years ended December 31, 2017 and 2016 is summarized as follows:



	2017			2016
Expected tax provision at federal statutory rate	$	176,970		$	439,408
Permanent and other differences	27,124			231,171
Deferred adjustments	(58,182		)	—
Change in deferred income taxes due to change in enacted tax rates	63,366			—
Net income tax provision	$	209,278		$	670,579

G-20

PROFESSIONAL CASUALTY ASSOCIATION

---------------

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 Association’s assets and liabilities. At December 31, 2017 and 2016, the components of the Association’s net deferred tax assets consisted of the following:



	2017		2016
Deferred tax assets:
Discount of unearned premiums	$	207,692	$	414,954
Discount of advance premiums	30,365		45,180
Discount of losses and loss adjustment expenses	266,541		370,519
Guaranty fund assessment	16,757		—
Capital loss carryforward	—		3,455
Total deferred tax assets	521,355		834,108
Deferred tax liabilities:
Deferred acquisition costs	249,766		414,366
TCJA transitional adjustment	83,753		—
Other items	1,198		—
Unrealized gains on investments	84,276		2,846
Total deferred tax liabilities	418,993		417,212
Net deferred tax assets	$	102,362	$	416,896

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 Association in future years. Accordingly, the Association 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 of the Association available to offset future taxable income.

The Association 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 Association has evaluated its various tax positions taken during the years ended December 31, 2017 and 2016. 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 income for the years ended December 31, 2017 and 2016. 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.

G-21

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

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 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, 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 a resulting difference amount of $83,753, the gross amount of $398,825 which will be amortized into taxable income beginning in 2018.


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, 2017 and 2016 were $1,920,947 and $2,985,180, respectively. Additionally, during the years ended December 31, 2017 and 2016, the Association incurred commission expenses from services provided by PTP totaling $33,164 and $28,839, respectively. Management fee and commission expenses are included in “other underwriting expenses” in the accompanying statements of operations and comprehensive income. At December 31, 2016, the Association owed PTP $72,363 for these services and is included in “due from affiliates, net” in the accompanying balance sheet. At December 31, 2017, the Association owed PTP $267,045 for these services and is included in “due to affiliates, net” in the accompanying balance sheet.

At December 31, 2016, the Association had subordinated promissory notes to former owners of the Association in the total amount of $500,000, interest carried at 5%, and maturing on March 31, 2017. All of the subordinated promissory notes were issued in exchange for cash from the original note holders and the notes are 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, 2016, the Association did not receive approval from the Department to redeem these notes and to pay interest. 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, the Board of Managers of PTPGP, LLC adopted a plan of conversion (“Former Plan”) 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 (“Act”). Under the Former Plan, the Association would have merged with the Exchange and would have become a wholly-owned subsidiary of Professional Casualty Holdings, Inc., a newly formed Pennsylvania business corporation (“PCH”). As part of the Former Plan, as amended, 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. Under the Former Plan, it was expected that Diversus would have been a direct or indirect purchaser of common stock in the offering. The Former Plan was scheduled to be subject to the approval of the Pennsylvania Insurance Commissioner. In connection with the Former Plan, during the years ended December 31, 2017 and 2016 the Association incurred conversion costs of $21,057 and $369,427, respectively, and costs related to offering of securities of $104,123 and $263,932, respectively. At December 31, 2016, the Association had a payable of $34,534 to Diversus related to these costs and is included “due from affiliates, net” in the accompanying balance sheet. At December 31, 2017, the Association had a payable of $7,426 to Diversus related to these costs and is included “due to affiliates, net” in the accompanying balance sheet. As discussed in Note 13, a new plan of conversion was adopted and the aforementioned plan of conversion was terminated.

G-22

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

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, 2017 and 2016, the Association incurred litigation management services of $521,000 and $680,000 related to this agreement; such amounts are included in “losses and loss adjustment expenses” in the accompanying statements of operations and comprehensive income. At December 31, 2017 and 2016, there were no amounts 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 year ended December 31, 2017, the Association incurred services totaling $84,714 related to this agreement; such amount is included in “losses and loss adjustment expenses” in the accompanying statement of operations and comprehensive income. At December 31, 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 Positive Physicians Insurance Exchange (“PPIX”), a Pennsylvania reciprocal exchange and an affiliate of the Association, paid for certain expenses on behalf of the Association. Additionally, DMI makes cash disbursements on behalf of the attorney-in-fact subsidiaries 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; such amounts are included in “due to affiliates, net” in the accompanying balance sheet. There were no similar transactions during the year ended December 31, 2016.

During the year ended December 31, 2016, the Association paid for conversion costs on behalf of the Exchange. The amount due from the Exchange related to these services was $258,143 at December 31, 2016 and is included in “due from affiliates, net” in the accompanying balance sheet. There was no amount due from the Exchange related to such costs at December 31, 2017.

During the years ended December 31, 2017 and 2016, Healthcare Professional Services, Inc. (“HPSI”), a wholly-owned subsidiary of Diversus, provided wholesale brokerage services to the Association in the amounts of $39,273 and $38,872, respectively. The amount due to HPSI at December 31, 2016 related to these services was $3,492 and is included in “due from affiliates, net” in the accompanying balance sheet. There was no amount due to HPSI at December 31, 2017.

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 wholly-owned subsidiary of Diversus, co-brokered the contract. Guy Carpenter is compensated by the reinsurers through commissions, and Guy Carpenter, in turn, pays a portion of the commissions to ISBL. During the years ended December 31, 2017 and 2016, commission expense incurred by the Association related this arrangement with ISBL was $52,387 and $168,208, respectively. At December 31, 2017 and 2016, the amount due to ISBL related to this arrangement was $0 and $36,184, respectively; such amounts are included in “accounts payable and accrued expenses” in the accompanying balance sheets.


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 $79,793 and $63,659 at December 31, 2017 and 2016, respectively, for guaranty fund assessments. The Association has not recorded applicable premium tax credits at December 31, 2017 and 2016 related to guaranty assessments. Total guaranty fund expense, net

G-23

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

of prior years’ refunds and premium tax credits, for the years ended December 31, 2017 and 2016 was $21,663 and $26,499, 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 reported as amounts held for the accounts of others in the accompanying balance sheets, and no income is recognized by the Association. There were no MCARE receivables at December 31, 2017 and 2016. Additionally, the Association had liabilities of $250,000 and $223,089 for assessments at December 31, 2017 and 2016, respectively, 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 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 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; 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.

Statutory net 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, 2017 and 2016 are as follows:



	2017		2016
Statutory net income	$	566,493	$	1,673,176
Statutory surplus and other funds	13,590,555		13,618,932

G-24

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

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



	2018			2017
Statutory surplus and other funds prescribed by the Department	$	13,590,555		$	13,618,932
State prescribed practices:
Unearned management fees	(807,794		)	(888,005		)
Statutory surplus and other funds per NAIC statutory accounting practices	$	12,782,761		$	12,730,927

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, 2017 and 2016, 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, 2017 and 2016, the Association’s RBC exceeded minimum RBC requirements.


13.	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 Association and the Exchange entered into separate reinsurance contracts with JLT Re (North America), Inc (“JLT”). JLT and Specialty Insurance Services, LLC (“SIS”), a wholly-owned subsidiary of Diversus, co-brokered the contracts. JLT is to be compensated by the reinsurers through commissions, and JLT, in turn, will pay a portion of the commission to SIS. 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.

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 Positive Physicians Insurance Exchange ("PPIX"), a Pennsylvania reciprocal inter-insurance exchange, 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 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 is subject to the approval of the Pennsylvania Insurance Commissioner.

G-25

PROFESSIONAL CASUALTY ASSOCIATION

---------------

FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017 (UNAUDITED)

G-26

PROFESSIONAL CASUALTY ASSOCIATION

---------------

FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

INDEX



	Page
FINANCIAL STATEMENTS:
Balance sheets	G-28
Statements of operations and comprehensive (loss) income	G-29
Statements of members’ equity	G-30
Statements of cash flows	G-31
Notes to financial statements	G-32

G-27

PROFESSIONAL CASUALTY ASSOCIATION

---------------

BALANCE SHEETS

SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)



	Unaudited		Unaudited
	2018		2017
ASSETS
Investments in available-for-sale securities, at fair value:
Bonds (Amortized cost of $26,192,695 and $30,848,213)	$	25,586,773	$	30,920,179
Common stocks (Cost of $2,788,885 and $2,594,701)	3,324,114		2,932,322
Short-term investments	149,856		—
Other invested assets	150,129		—
Total investments	29,210,872		33,852,501
Cash and cash equivalents	2,253,760		2,244,309
Accrued investment income	160,556		169,634
Premiums receivable	367,247		856,628
Reinsurance recoverable	2,003,134		2,257,615
Income taxes recoverable	695,885		132,392
Unearned ceded premiums	191,531		427,213
Deferred acquisition costs	881,827		778,381
Deferred income taxes	216,028		305,445
Other assets	215,870		371,869
TOTAL ASSETS	$	36,196,710	$	41,395,987
LIABILITIES AND MEMBERS’ EQUITY
LIABILITIES:
Losses and loss adjustment expenses	$	19,915,481	$	20,845,494
Unearned premiums	4,574,517		4,917,089
Reinsurance payable	28,564		—
Accounts payable, accrued expenses, and other liabilities	195,832		1,451,257
Due to affiliates, net	80,042		97,154
TOTAL LIABILITIES	24,794,436		27,310,994
MEMBERS’ EQUITY	11,402,274		14,084,993
TOTAL LIABILITIES AND MEMBERS’ EQUITY	$	36,196,710	$	41,395,987

See notes to financial statements.

G-28

PROFESSIONAL CASUALTY ASSOCIATION

---------------

STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)



	Unaudited			Unaudited
	2018			2017
REVENUES:
Net premium earned	$	4,474,850		$	5,753,150
TOTAL REVENUES	4,474,850			5,753,150
EXPENSES:
Losses and loss adjustment expenses, net	5,051,713			2,645,892
Other underwriting expenses	2,578,932			2,724,767
TOTAL EXPENSES	7,630,645			5,370,659
NET INVESTMENT INCOME	561,328			410,125
(LOSS) INCOME FROM OPERATIONS	(2,594,467		)	792,616
INTEREST EXPENSE	—			31,250
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES	(2,594,467		)	761,366
PROVISION FOR INCOME TAXES	(515,278		)	224,958
NET (LOSS) INCOME	(2,079,189		)	536,408
OTHER COMPREHENSIVE (LOSS) INCOME:
Unrealized holding (loss) gains on available-for-sale securities, net of income tax benefit (expense) of $99,122 and $(136,414)	(361,074		)	280,148
Reclassification adjustments for net realized gain included in net (loss) income	(11,811		)	(15,345		)
TOTAL OTHER COMPREHENSIVE (LOSS) INCOME	(372,885		)	264,803
COMPREHENSIVE (LOSS) INCOME	$	(2,452,074	)	$	801,211

See notes to financial statements.

G-29

PROFESSIONAL CASUALTY ASSOCIATION

---------------

STATEMENTS OF MEMBERS' EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)



	Contributed Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Members' Equity
Balance, January 1, 2017	$	2,348,988	$	10,929,270		$	5,524		$	13,283,782
Net income			536,408			—			536,408
Other comprehensive income	—		—			264,803			264,803
Balance, September 30, 2017 (unaudited)	$	2,348,988	$	11,465,678		$	270,327		$	14,084,993
Balance, January 1, 2018	$	2,348,988	$	11,188,322		$	317,038		$	13,854,348
Net loss	—		(2,079,189		)	—			(2,079,189		)
Other comprehensive loss	—		—			(372,885		)	(372,885		)
Balance, September 30, 2018 (unaudited)	$	2,348,988	$	9,109,133		$	(55,847	)	$	11,402,274

See notes to financial statements.

G-30

PROFESSIONAL CASUALTY ASSOCIATION

---------------

STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)



	Unaudited			Unaudited
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(2,079,189	)	$	536,408
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Deferred income taxes	(14,544		)	(24,963		)
Net realized gain on sales of investments	(11,811		)	(15,345		)
Amortization of bond premiums	20,068			71,595
Amortization of other assets	19,429			—
Changes in operating assets and liabilities:
Accrued investment income	(21,498		)	(33,250		)
Premiums receivable	1,080,465			(75,695		)
Reinsurance recoverable	308,885			207,665
Income taxes recoverable	(341,917		)	249,921
Unearned ceded premiums	357,773			176,634
Deferred acquisition costs	307,537			440,343
Due from affiliate	—			258,143
Other assets	41,696			(226,212		)
Liability for losses and loss adjustment expenses	1,330,769			(2,156,297		)
Unearned premiums	(919,838		)	(1,789,019		)
Reinsurance payable	28,564			—
Accounts payable, accrued expenses, and other liabilities	(1,152,132		)	(333,790		)
Due to affiliates, net	(198,328		)	(13,235		)
NET CASH USED IN OPERATING ACTIVITIES	(1,244,071		)	(2,727,097		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments:
Proceeds from sales and maturities	7,273,891			7,487,918
Purchases	(8,009,771		)	(7,757,882		)
Other assets	(16,311		)	(56,565		)
NET CASH USED IN INVESTING ACTIVITIES	(752,191		)	(326,529		)
CASH 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	$	(1,996,262	)	$	(3,553,626	)
CASH AND CASH EQUIVALENTS, beginning of period	4,250,022			5,797,935
CASH AND CASH EQUIVALENTS, end of period	$	2,253,760		$	2,244,309
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid for the period	$	—		$	31,250

See notes to financial statements.

G-31

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)


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.

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 and Principles:

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, and valuation of deferred tax assets.

Cash and Cash Equivalents

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 (loss). 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.

G-32

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

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 (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.

Other Investments

The Association has an zownership interest in a limited partnership. The Association's partnership interest is carried on the equity method, which approximates the Association's equity in the underlying net assets of the partnership. Equity income or loss is credited or charged, as appropriate, to the accompanying statements of operations and comprehensive (loss) income. The investment in the limited partnership is 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 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

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 $2,263,158 and $2,404,073 at September 30, 2018 and 2017, respectively.

Premium Deficiency Reserves

G-33

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

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 included in "losses and loss adjustment expenses" in the accompanying balance sheets. The Association has not recorded any premium deficiency reserves as of September 30, 2018 or 2017. The analysis of premium deficiency reserves was completed as of September 30, 2018. The Association did 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. The reinsurance contracts provides for return premium based on the actual loss experience of the written and reinsured business. The Association estimates the amounts to be recorded for return premium based on the terms set forth in the reinsurance contract.

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 as further discussed in Note 10. Additionally, the Association has paid costs related to offering of securities by the planned parent company. These costs were charged to the Association and require reimbursement from the planned parent company. Such costs are expensed as incurred and included in "other underwriting expenses" in the accompanying statements of operations and comprehensive (loss) income.

Revenue Recognition

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 income 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 (loss) income, 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 (loss) income are recorded in investment income in the accompanying statements of operations and comprehensive (loss) income.

Income Taxes

G-34

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

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.

Recently Adopted Accounting Pronouncements

The Association 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. The adoption of this ASU for the year ended December 31, 2017 did not have material impact on the financial statements.

The Association 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 (loss) 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 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 (loss) 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

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.

G-35

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

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.


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 a significant portion 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.

Insureds consist of healthcare providers in which no one insured accounted over 20% of premiums receivable at September 30, 2018 and 2017. At September 30, 2018 and 2017, the Association had reinsurance recoverables due from reinsurers of $2,003,134 and $2,257,615, respectively. At September 30, 2018 and 2017, the Association had reinsurance payables due to reinsurers of $28,564 and $0, respectively, for unpaid losses and loss adjustment expenses, contingent commissions receivable, and unearned premiums due to five 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.


4.	Variable Interest Entity:

All medical professional liability insurance is owned by the Association, and PTP functions solely as the management entity.

PTP has not provided financial or other support to the Association for any of the reporting periods presented. At September 30, 2018 and 2017, there are no explicit or implicit arrangements that would require PTP to provide future financial support to the Association.


5.	Investments:

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.);

G-36

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)


•	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.

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 at September 30, 2018 and 2017 are as follows:



	Amortized Cost/Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2018
U.S. government	$	4,096,667	$	—	$	91,842	$	4,004,825
Subdivisions of states, territories, and possessions	844,406		—		3,647		840,759
Industrial and miscellaneous	21,251,622		7,245		517,678		20,741,189
Total bonds	26,192,695		7,245		613,167		25,586,773
Common stocks	2,788,885		572,729		37,500		3,324,114
	$	28,981,580	$	579,974	$	650,667	$	28,910,887



	Amortized Cost/Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2017
U.S. government	$	9,292,570	$	4,695	$	47,399	$	9,249,866
Subdivisions of states, territories, and possessions	1,430,000		51		128		1,429,923
Industrial and miscellaneous	20,125,643		148,679		33,932		20,240,390
Total bonds	30,848,213		153,425		81,459		30,920,179
Common stocks	2,594,701		364,193		26,572		2,932,322
	$	33,442,914	$	517,618	$	108,031	$	33,852,501

G-37

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

At September 30, 2018, maturities of investments in bond securities are as follows:



	Amortized Cost/Cost		Fair Value
Due in less than one year	$	1,582,995	$	1,570,843
Due after one year to five years	15,936,645		15,635,395
Due after five years to ten years	8,673,055		8,380,535
	$	26,192,695	$	25,586,773



	2018	2017
Proceeds	7,273,891	7,487,918
Gross gains	36,113	27,878
Gross losses	24,302	12,533

The components of net investment income are as follows:



	2018		2017
Bonds	$	466,548	$	429,126
Cash and short-term investments	36,033		6,639
Common stocks	73,885		58,310
Limited partnership	129		—
Net gain on sales of investments	11,811		15,345
	588,406		509,420
Less investment expenses	27,078		99,295
Net investment income	$	561,328	$	410,125

G-38

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)



	Less than 12 Months
	Fair Value		Unrealized Losses
U.S. government	$	4,004,824	$	91,842
Subdivisions of states, territories, and possessions	1,238,885		3,647
Industrial and miscellaneous	19,207,213		517,678
Common stocks	282,415		16,673
	$	24,733,337	$	629,840

	Greater than 12 Months
	Fair Value		Unrealized Losses
U.S. government	$	—	$	—
Subdivisions of states, territories, and possessions	—		—
Industrial and miscellaneous	—		—
Common stocks	254,405		20,827
	$	254,405	$	20,827

	Totals
	Fair Value		Unrealized Losses
U.S. government	$	4,004,824	$	91,842
Subdivisions of states, territories, and possessions	1,238,885		3,647
Industrial and miscellaneous	19,207,213		517,678
Common stocks	536,820		37,500
	$	24,987,742	$	650,667

At September 30, 2018, the Association had 182 securities in unrealized loss positions of less than 12 months with a combined gross unrealized loss of $629,840 and 16 securities in unrealized loss positions of greater than 12 months with a combined gross unrealized loss of $20,827.

G-39

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)



	Less than 12 Months
	Fair Value		Unrealized Losses
U.S. government	$	6,929,129	$	44,821
Subdivisions of states, territories, and possessions	914,872		128
Industrial and miscellaneous	5,282,734		29,463
Common stocks	312,249		18,424
	$	13,438,984	$	92,836

	Greater than 12 Months
	Fair Value		Unrealized Losses
U.S. government	$	997,700	$	2,578
Subdivision of states, territories, & possessions	—		—
Industrial and miscellaneous	1,302,750		4,469
Common stocks	60,548		8,148
	$	2,360,998	$	15,195

	Totals
	Fair Value		Unrealized Losses
U.S. government	$	7,926,829	$	47,399
Subdivision of states, territories, & possessions	914,872		128
Industrial and miscellaneous	6,585,484		33,932
Common stocks	372,797		26,572
	$	15,799,982	$	108,031

At September 30, 2017, the Association had 91 securities in unrealized loss positions of less than 12 months with a combined gross unrealized loss of $92,836 and 13 securities in unrealized loss positions of greater than 12 months with a combined gross unrealized loss of $15,195.

The unrealized losses on investments in U.S. government and agency securities, state securities, and corporate debt securities at September 30, 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 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 nine months ended September 30, 2018 and 2017.

G-40

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

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 September 30, 2018:



	Total		Level 1		Level 2		Level 3
U.S. government	$	4,004,825	$	—	$	4,004,825	$	—
Subdivisions of states, territories, and possessions	840,759		—		840,759		—
Industrial and miscellaneous	20,741,189		—		20,741,189		—
Total bonds	25,586,773		—		25,586,773		—
Common stocks	3,324,114		3,324,114		—		—
	$	28,910,887	$	3,324,114	$	25,586,773	$	—

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 September 30, 2017:



	Total		Level 1		Level 2		Level 3
U.S. government	$	9,249,866	$	—	$	9,249,866	$	—
Subdivisions of states, territories, and possessions	1,429,923		—		1,429,923		—
Industrial and miscellaneous	20,240,390		—		20,240,390		—
Total bonds	30,920,179		—		30,920,179		—
Common stocks	2,932,322		2,932,322		—		—
	$	33,852,501	$	2,932,322	$	30,920,179	$	—


6.	Deferred Acquisition Costs:

The following table summarizes the components of deferred acquisition costs for the nine months ended September 30, 2018 and 2017:



	2018		2017
Balance, beginning of period	$	1,189,364	$	1,218,724
Amount capitalized during the period	1,532,759		2,115,566
Amount amortized during the period	1,840,296		2,555,909
Balance, end of period	$	881,827	$	778,381


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.

G-41

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

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 and loss adjustment expenses incurred for the nine months ended September 30, 2018 and 2017 is as follows:



	2018		2017
Premiums written:
Direct	$	4,226,514	$	5,057,049
Ceded	313,729		916,289
Premiums written, net of reinsurance	$	3,912,785	$	4,140,760
Premiums earned:
Direct	$	5,146,353	$	6,846,074
Ceded	671,503		1,092,924
Premiums earned, net of reinsurance	$	4,474,850	$	5,753,150
Losses and loss adjustment expenses incurred:
Direct	$	6,244,953	$	3,056,295
Ceded	1,193,240		410,403
Losses and loss adjustment expenses incurred, net of reinsurance	$	5,051,713	$	2,645,892

G-42

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)


8.	Losses and Loss Adjustment Expenses:

Activity in the liability for losses and loss adjustment expenses for the nine months ended September 30, 2018 and 2017 is summarized as follows:



	2018		2017
Loss and loss adjustment expenses, beginning of period - gross	$	18,584,712	$	23,001,791
Less: Reinsurance recoverable, beginning of period	2,312,019		2,465,280
Add: Recoverable on claims paid	844,288		740,158
Losses and loss adjustment expenses, beginning of period- net	17,116,981		21,276,669
Incurred related to:
Current period	2,792,864		1,932,886
Prior periods	2,258,849		713,006
Total incurred	5,051,713		2,645,892
Paid related to:
Current period	107,281		206,998
Prior periods	4,149,066		4,710,480
Total paid	4,256,347		4,917,478
Losses and loss adjustment expenses, end of period - net	17,912,347		19,005,083
Add: Reinsurance recoverable, end of period	2,003,134		2,257,615
Less: Recoverable on claims paid	—		417,204
Losses and loss adjustment expenses, end of period - gross	$	19,915,481	$	20,845,494

The liability for losses and loss adjustment expenses at September 30, 2018 and 2017 were $19,915,481 and $20,845,494, respectively. For the nine months ended September 30, 2018 and 2017, $4,149,066 and $4,710,480, 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. The unfavorable development for the nine months ended September 30, 2017 of $713,006 was primarily related to re-estimation of unpaid losses and loss adjustment expenses on all claims-made policy years. The unfavorable development for the nine months ended September 30, 2018 of $2,258,849 was primarily related to re-estimation of unpaid losses and loss adjustment expenses in the 2012, 2014 & 2015 policy years.


9.	Income Taxes:

The components of the Association’s income tax provision for the nine months ended September 30, 2018 and 2017:



	2018			2017
Current provision	$	(500,734	)	$	249,921
Deferred tax provision	(14,544		)	(24,963		)
	$	(515,278	)	$	224,958

G-43

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

The Association’s U.S. federal statutory income tax rate applicable to ordinary income was 21% and 34% for the nine months ended September 30, 2018 and 2017, respectively. The income tax provision differs from that computed by applying federal statutory rates to (loss) income before income taxes for the nine months ended September 30, 2018 and 2017 is summarized as follows:



	2018			2017
Expected tax provision at federal statutory rate	$	(544,838	)	$	255,864
Permanent and other differences	22,920			32,664
Deferred adjustments	6,640			(63,570		)
Net income tax provision	$	(515,278	)	$	224,958

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 September 30, 2018 and 2017, the components of the Association’s net deferred tax assets consisted of the following:



	2018		2017
Deferred tax assets:
Discount of unearned premiums	$	184,085	$	305,312
Discount of advance premiums	301		47,238
Discount of losses and loss adjustment expenses	267,182		330,961
Guaranty fund assessment	13,304		25,844
Unrealized loss on investments	14,846		—
Total deferred tax assets	479,718		709,355
Deferred tax liabilities:
Deferred acquisition costs	185,184		264,650
TCJA transitional adjustment	75,901		—
Other items	2,605		—
Unrealized gain on investments	—		139,260
Total deferred tax liabilities	263,690		403,910
Net deferred tax assets	$	216,028	$	305,445

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 September 30, 2018 and 2017, management determined that it is more likely than not that all of 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 September 30, 2018 and 2017.

At September 30, 2018 and 2017, there were no unused operating loss carryforwards of the Association available to offset future taxable income.

The Association has applied the provisions of ASC 740, Income Taxes , for the nine months ended September 30, 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 nine months ended September 30, 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

G-44

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

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 nine months ended September 30, 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 affect corporate taxes paid in 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 September 30, 2018 and 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 uses 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, 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 a resulting difference amount of $83,753 at December 31, 2017, the gross amount of $398,825 is being amortized into taxable income beginning on January 1, 2018. For the nine months ended September 30, 2018, amortization of the transitional adjustment amount was $37,389, with a related tax effect of $7,852.


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 nine months ended September 30, 2018 and 2017 were $1,056,629 and $1,264,262, respectively. Additionally, during the nine months ended September 30, 2018 and 2017, the Association incurred commission expenses from services provided by PTP totaling $25,834 and $27,150, respectively. Management fee and commission expenses are included in “other underwriting expenses” in the accompanying statements of operations and comprehensive (loss) income. At September 30, 2018 and 2017, the Association owed PTP $53,601 and $97,004, respectively, for these services and is included in “due to affiliates, net” in the accompanying balance sheets.

At December 31, 2016, the Association had subordinated promissory notes to former owners of the Association in the total amount of $500,000, interest carried at 5%, and maturing on March 31, 2017. All of the subordinated promissory notes were issued in exchange for cash from the original note holders and the notes are 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. In April 2017, the Association received permission from the Department to pay principal and interest of $500,000 and $31,250, respectively.

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 Pennsylvania Medical Professional Liability Reciprocal Exchange-to-Stock Conversion Act (the "Act"). Under the Plan, the Association would merge with the Exchange and Positive Physicians Insurance Exchange ("PPIX"), a Pennsylvania reciprocal inter-insurance exchange, 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

G-45

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

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 is subject to the approval of the Pennsylvania Insurance Commissioner. In connection with the proposed plan, the Exchange incurred conversion and securities offering costs of $153,210 during the nine months ended September 30, 2018. At September 30, 2018, the Association had a payable of $25,906 to Diversus related to these conversion costs; such amounts are included “due to affiliates, net” in the accompanying balance sheet.

On July 27, 2015, as amended, 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 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 with PPIX in June 2018, the previous plan of conversion was discontinued. In connection with the previous plan, the Association incurred conversion and securities offering costs of $121,861 during the nine months ended September 30, 2017. At September 30, 2017, there was no payable to Diversus by the Association related to these conversion costs.

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, 2016, 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 nine months ended September 30, 2018 and 2017, the Association incurred litigation management services of $341,600 and $390,800 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 September 30, 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 nine months ended September 30, 2018 and 2017, the Association incurred services totaling $86,812 and $55,964 related to this agreement; such amount is included in “losses and loss adjustment expenses” in the accompanying statements of operations and comprehensive (loss) income. At September 30, 2018 and 2017, there was no amount due to Gateway related to these services.

During the nine months ended September 30, 2018 and 2017, Diversus Management, Inc. (“DMI”), a wholly-owned subsidiary of Diversus, paid for certain expenses on behalf of the Association. Additionally, DMI makes cash disbursements on behalf of the attorney-in-fact subsidiaries of Diversus and invoices the respective attorney-in-fact for these transactions. At September 30, 2018 and 2017, the amounts due to DMI by the Association was $0 and $150, respectively; such amounts are included “due to affiliates, net” in the accompanying balance sheets.

During the nine months ended September 30, 2018, the Association advanced funds to the Exchange to cover certain operating costs. The amount due from the Exchange related to these advances was $298 at September 30, 2018 and is included in "due to affiliates, net" in the accompanying balance sheet. There was no similar advance due from the Exchange at September 30, 2017.

During the nine months ended September 30, 2018, PPIX advanced funds to the Association to cover certain operating costs. At September 30, 2018, the total amount due to PPIX was $833; such amount is included in “due to affiliates, net” in the accompanying balance sheet. There were no similar advances due to PPIX at September 30, 2017.

G-46

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

ended September 30, 2017, HPSI provided total brokerage services of $26,102 to the Association. Effective as of January 1, 2018, Diversus sold its investment in HPSI to unrelated parties. There was no amount due to HPSI at September 30, 2017 related to these services.

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 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 nine months ended September 30, 2017, the Association incurred commission expense of $24,454 related this arrangement with ISBL. At September 30, 2017, there was no amount due to ISBL related to this arrangement. The arrangement was discontinued with the termination of the reinsurance contract on December 31, 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 nine months ended September 30, 2018, there was no commission expense incurred by the Association related to this agreement with SIS.


11.	Assessments:

Based upon the available information, the Association has provided a gross liability of $63,353 and $76,016 at September 30, 2018 and 2017, respectively, for guaranty fund assessments. The Association has not recorded applicable premium tax credits at September 30, 2018 and 2017 related to guaranty assessments. Total guaranty fund expense, net of prior periods’ refunds and premium tax credits, for the nine months ended September 30, 2018 and 2017 was $9,098 and $17,886, 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 reported as amounts held for the accounts of others in the accompanying balance sheets, and no income is recognized by the Association. There were no MCARE receivables at September 30, 2018 and 2017. Additionally, at September 30, 2018 and 2017 the Association had liabilities of $793 and $152,558, respectively, 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 Association are prepared in accordance with accounting practices prescribed by the Department.

G-47

PROFESSIONAL CASUALTY ASSOCIATION

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

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; 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.

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 nine months ended September 30, 2018 and 2017 are as follows:



	2018			2017
Statutory net (loss) income	$	(1,862,944	)	$	813,897
Statutory surplus and other funds	11,635,274			13,938,411

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



	2018			2017
Statutory surplus and other funds prescribed by the Department	$	11,635,274		$	13,938,411
State prescribed practices:
Unearned management fees	(577,840		)	(628,254		)
Statutory surplus and other funds per NAIC statutory accounting practices	$	11,057,434		$	13,310,157

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 nine months ended September 30, 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 September 30, 2018 and 2017, the Association’s RBC exceeded minimum RBC requirements.


13.	Subsequent Events:

Subsequent events have been evaluated through January 22, 2019, which is the date the financial statements were available to be issued.

G-48

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

H-1

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

FINANCIAL STATEMENTS

(with report of independent auditors)

YEARS ENDED DECEMBER 31, 2017 AND 2016

INDEX



	Page
INDEPENDENT AUDITORS’ REPORT	H-3
FINANCIAL STATEMENTS:
Balance sheets	H-4
Statements of operations and comprehensive income	H-5
Statements of members’ equity	H-6
Statements of cash flows	H-7
Notes to financial statements	H-8

H-2

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 "Exchange") as of December 31, 2017 and 2016, the related statements of operations and comprehensive 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 Exchange as of December 31, 2017 and 2016, 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 Exchange’s management. Our responsibility is to express an opinion on the Exchange’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.

/s/ Baker Tilly Virchow Krause, LLP

We have served as the Company's auditor since 2014.

Milwaukee, Wisconsin

January 22, 2019

H-3

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

BALANCE SHEETS

DECEMBER 31, 2017 AND 2016



	2017		2016
ASSETS
Investments in available-for-sale securities, at fair value:
Bonds (Amortized cost of $21,161,640 and $16,486,465)	$	21,229,056	$	16,619,228
Common stocks (Cost of $1,580,248 and $1,196,668)	1,819,637		1,230,653
Short-term investments	—		115,283
Other invested assets	131,798		—
Total investments	23,180,491		17,965,164
Cash and cash equivalents	1,836,204		8,127,243
Accrued investment income	136,854		122,873
Premiums receivable	353,793		458,795
Reinsurance recoverable	156,443		90,868
Income taxes recoverable	189,233		63,247
Unearned ceded premiums	171,573		194,834
Deferred acquisition costs	384,957		422,310
Deferred income taxes	151,578		330,612
Other assets	83,036		22,635
TOTAL ASSETS	$	26,644,162	$	27,798,581
LIABILITIES AND MEMBERS’ EQUITY
LIABILITIES:
Losses and loss adjustment expenses	$	11,761,133	$	12,343,048
Unearned premiums	1,609,252		1,752,671
Reinsurance payable	10,661		71,743
Accounts payable, accrued expenses, and other liabilities	922,001		1,070,290
Due to affiliates	77,470		329,574
TOTAL LIABILITIES	14,380,517		15,567,326
MEMBERS’ EQUITY	12,263,645		12,231,255
TOTAL LIABILITIES AND MEMBERS’ EQUITY	$	26,644,162	$	27,798,581

See notes to financial statements.

H-4

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

YEARS ENDED DECEMBER 31, 2017 AND 2016



	2017			2016
REVENUES:
Net premium earned	$	3,147,916		$	3,792,603
TOTAL REVENUES	3,147,916			3,792,603
EXPENSES:
Losses and loss adjustment expenses, net	1,823,071			209,626
Other underwriting expenses	1,855,102			2,252,055
TOTAL EXPENSES	3,678,173			2,461,681
NET INVESTMENT INCOME	571,463			461,772
INCOME FROM OPERATIONS	41,206			1,792,694
INTEREST EXPENSE	—			897,986
INCOME BEFORE PROVISION FOR INCOME TAXES	41,206			894,708
PROVISION FOR INCOME TAXES	101,394			305,491
NET (LOSS) INCOME	(60,188		)	589,217
OTHER COMPREHENSIVE INCOME:
Unrealized holding gains on available-for-sale securities, net of income tax expense of $104,314 and $164,152	143,108			134,927
Reclassification adjustments for net realized (gain) loss included in net (loss) income	(50,671		)	183,723
Total other comprehensive income	92,437			318,650
COMPREHENSIVE INCOME	$	32,249		$	907,867

See notes to financial statements.

H-5

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

STATEMENTS OF MEMBERS’ EQUITY

YEARS ENDED DECEMBER 31, 2017 AND 2016



	Members’ Equity			Accumulated Other Comprehensive Income (Loss)			Total Members’ Equity
Balance, January 1, 2016	$	11,531,843		$	(208,596	)	$	11,323,247
Subscription fees	141			—			141
Net income	589,217			—			589,217
Other comprehensive income	—			318,650			318,650
Balance, December 31, 2016	12,121,201			110,054			12,231,255
Subscription fees	141			—			141
Net loss	(60,188		)	—			(60,188		)
Other comprehensive income	—			92,437			92,437
Reclassification of tax effects from accumulated other comprehensive income related to passage of TCJA	(39,885		)	39,885			—
Balance, December 31 2017	$	12,021,269		$	242,376		$	12,263,645

See notes to financial statements.

H-6

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2017 AND 2016



	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(60,188	)	$	589,217
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Deferred income taxes	131,414			(625,702		)
Net realized (gain) loss on sales of investments	(50,671		)	183,723
Amortization of bond premiums	66,290			130,962
Changes in operating assets and liabilities:
Accrued investment income	(13,981		)	67,158
Premiums receivable	105,002			115,391
Reinsurance deposit	—			2,200,689
Reinsurance recoverable	(65,575		)	(90,868		)
Income taxes recoverable	(125,986		)	106,193
Unearned ceded premiums	23,261			(194,834		)
Deferred acquisition costs	37,353			49,604
Other assets	(9,391		)	(22,635		)
Liability for losses and loss adjustment expenses	(581,915		)	(2,545,259		)
Unearned premiums	(143,419		)	(134,987		)
Reinsurance payable	(61,082		)	(66,721		)
Accounts payable, accrued expenses, and other liabilities	(148,289		)	(395,252		)
Due to affiliates	(252,104		)	90,996
NET CASH USED IN OPERATING ACTIVITIES	(1,149,281		)	(542,325		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments:
Proceeds from sales and maturities	5,489,626			11,732,597
Purchases	(10,580,515		)	(6,781,453		)
Other assets	(51,010		)	—
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES	(5,141,899		)	4,951,144
CASH FLOWS FROM FINANCING ACTIVITIES:
Subscription fees received	141			141
NET CASH PROVIDED BY FINANCING ACTIVITIES	141			141
NET CHANGE IN CASH AND CASH EQUIVALENTS	$	(6,291,039	)	$	4,408,960
CASH AND CASH EQUIVALENTS, beginning of year	8,127,243			3,718,283
CASH AND CASH EQUIVALENTS, end of year	$	1,836,204		$	8,127,243
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid for the year	$	—		$	897,986
Income taxes paid for the year	$	215,406		$	825,000

See notes to financial statements.

H-7

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016


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 (the “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 and occurrence basis 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 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

Cash and Cash Equivalents

Investments

The Exchange has ownership interest in a limited partnership. The Exchange’s partnership interest is carried on the equity method, which approximates the Exchange’s equity in the underlying net assets of the partnership. Equity income or loss is credited or charged, as appropriate, to the accompanying statements of operations and comprehensive income. The investment in the limited partnership is presented as “other invested assets” in the accompanying balance sheets.

The Exchange considers short-term investments to be short-term, highly liquid investments that are less than

H-8

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

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 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 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 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. 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

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 $600,000 and $556,569 at December 31, 2017 and 2016, respectively.

Premium Deficiency Reserves

H-9

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 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 began using deposit accounting to account for reinsurance transactions under the reinsurance contract in December 2014 principally since the reinsurance contract lacked transfer of risk provisions. With the execution of the consolidated reinsurance contract with Professional Casualty Association (the “Association”), a Pennsylvania reciprocal inter-insurance exchange, effective as of January 1, 2016, the Exchange discontinued the use of the deposit method with all obligations under the previous reinsurance contract commutated as of that date. Under the consolidated contract with the Association, 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. The reinsurance contract provides 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.

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 as further discussed in Note 10. Such costs are included in "other underwriting expenses" in the accompanying statements of operations and comprehensive 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 13), these costs have been written off and are included in "other underwriting expenses" in the accompanying statements of operations and comprehensive income.

Revenue Recognition

Comprehensive 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 income securities are reported as a separate component in the equity section in 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.

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.

H-10

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

future reversal of existing taxable temporary differences, projected future taxable income, tax planning strategies, and recent financial operations.

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. The adoption of this ASU for the year ended December 31, 2017 did not have material impact on 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 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 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 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

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.

H-11

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

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


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, 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 Association 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 $156,443 and $90,868, respectively, and reinsurance payable to the reinsurer of $10,661 and $71,743, respectively, for unpaid losses and loss adjustment expenses, contingent commissions receivable, and unearned premiums due from 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, 2017 and 2016, there are no explicit or implicit arrangements that would require PIPMC to provide future financial support to the Exchange.


5.	Investments:

Level 1 - Quoted (unadjusted) prices for identical assets in active markets.

H-12

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

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.

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		Fair Value
December 31, 2017
U.S. government	$	4,940,661	$	147,753	$	44,877	$	5,043,537
States, territories, and possessions	200,490		15,866		—		216,356
Subdivisions of states, territories, and possessions	3,205,666		54,515		77,223		3,182,958
Industrial and miscellaneous	12,814,823		37,455		66,073		12,786,205
Total bonds	21,161,640		255,589		188,173		21,229,056
Common stocks	1,580,248		247,978		8,589		1,819,637
	$	22,741,888	$	503,567	$	196,762	$	23,048,693

H-13

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016



	Amortized Cost/Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2016
U.S. government	$	6,052,203	$	196,185	$	62,420	$	6,185,968
States, territories, and possessions	302,045		—		5,353		296,692
Subdivisions of states, territories, and possessions	3,688,403		26,111		80,719		3,633,795
Industrial and miscellaneous	6,443,814		99,761		40,802		6,502,773
Total bonds	16,486,465		322,057		189,294		16,619,228
Common stocks	1,196,668		53,869		19,884		1,230,653
	$	17,683,133	$	375,926	$	209,178	$	17,849,881

At December 31, 2017, maturities of investments in bond securities are as follows:



	Amortized Cost/Carrying Value		Fair Value
Due in less than one year	$	2,126,658	$	2,127,137
Due after one year to five years	10,716,159		10,758,992
Due after five years to ten years	7,496,987		7,487,401
Due after ten years	821,836		855,526
	$	21,161,640	$	21,229,056



	2017		2016
Proceeds	$	5,489,626	$	11,732,597
Gross gains	98,767		52,596
Gross losses	48,096		236,319

The components of net investment income are as follows:



	2017		2016
Bonds	$	510,632	$	656,342
Cash and short-term investments	26,662		24,180
Common stocks	58,073		19,898
Limited partnership	2,684		—
Net gain (loss) on sales of investments	50,671		(183,723		)
	648,722		516,697
Less investment expenses	77,259		54,925
Net investment income	$	571,463	$	461,772

H-14

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016



	Less than 12 Months
	Fair Value		Unrealized Losses
U.S. government	$	259,329	$	1,404
Subdivisions of states, territories, and possessions	127,479		646
Industrial and miscellaneous	6,919,636		53,723
Common stocks	187,070		6,100
	$	7,493,514	$	61,873

	Greater than 12 Months
	Fair Value		Unrealized Losses
U.S. government	$	2,087,424	$	43,473
Subdivisions of states, territories, and possessions	890,308		76,577
Industrial and miscellaneous	1,707,035		12,350
Common stocks	98,136		2,489
	$	4,782,903	$	134,889

	Totals
	Fair Value		Unrealized Losses
U.S. government	$	2,346,753	$	44,877
Subdivisions of states, territories, and possessions	1,017,787		77,223
Industrial and miscellaneous	8,626,671		66,073
Common 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.

H-15

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016



	Less than 12 Months
	Fair Value		Unrealized Losses
U.S. government	$	2,338,279	$	53,564
States, territories, and possessions	296,692		5,353
Subdivisions of states, territories, and possessions	2,069,714		46,572
Industrial and miscellaneous	1,458,496		14,600
Common stocks	602,086		19,884
	$	6,765,267	$	139,973

	Greater than 12 Months
	Fair Value		Unrealized Losses
U.S. government	$	403,669	$	8,856
Subdivision of states, territories, and possessions	116,822		34,147
Industrial and miscellaneous	1,937,346		26,202
	$	2,457,837	$	69,205

	Totals
	Fair Value		Unrealized Losses
U.S. government	$	2,741,948	$	62,420
States, territories, and possessions	296,692		5,353
Subdivision of states, territories, and possessions	2,186,536		80,719
Industrial and miscellaneous	3,395,842		40,802
Common stocks	602,086		19,884
	$	9,223,104	$	209,178

At December 31, 2016, the Exchange had 194 securities in unrealized loss positions of less than 12 months with a combined gross unrealized loss of $139,973 and 71 securities in unrealized loss positions of greater than 30 months with a combined gross unrealized loss of $69,205.

The unrealized losses on investments in U.S. government and agency securities, state securities, and corporate debt securities at December 31, 2017 and 2016 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 Exchange’s intent to sell the investment.

H-16

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

During the year ended December 31, 2015, two Exchange investments in industrial and miscellaneous bonds related to the oil and gas industry were determined to be other-than-temporarily impaired. Due to the economic conditions in the oil and gas industry, in general, and with these specific investments, management of the Exchange determined that these securities should be written down to their net realizable values. During the year ended December 31, 2015, a portion of the unrealized losses related to these securities totaling $69,761, net of income tax effect of $23,719, were recognized as realized losses of the Exchange. The fair value of these securities was $39,068 at December 31, 2015. During the year ended December 31, 2016, both of these investments were sold. Additionally, management of the Exchange determined that there were no other investment securities other-than-temporarily impaired as of and for 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 as of December 31, 2017:



	Total		Level 1		Level 2		Level 3
U.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	$	—

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, 2016:



	Total		Level 1		Level 2		Level 3
U.S. government	$	6,185,968	$	—	$	6,185,968	$	—
States, territories, and possessions	296,692		—		296,692		—
Subdivisions of states, territories and possessions	3,633,795		—		3,633,795		—
Industrial and miscellaneous	6,502,773		—		6,502,773		—
Total bonds	16,619,228		—		16,619,228		—
Common stocks	1,230,653		1,230,653		—		—
	$	17,849,881	$	1,230,653	$	16,619,228	$	—


6.	Deferred Acquisition Costs:

The following table summarizes the components of deferred acquisition costs for the years ended December 31, 2017 and 2016:



	2017		2016
Balance, beginning of year	$	422,310	$	471,914
Amount capitalized during the year	1,370,230		1,473,025
Amount amortized during the year	1,407,583		1,522,629
Balance, end of year	$	384,957	$	422,310

H-17

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016


7.	Reinsurance:

In 2014, the Exchange began using deposit accounting to account for reinsurance transactions under its reinsurance contract. This was due to the reinsurance contract with Wesco Insurance Company (“Wesco”) not meeting the transfer of risk requirements. The Exchange maintained reinsurance to ensure against the adverse economic impact of catastrophic claims. Reinsurance contracts do not relieve the Exchange from its obligations to subscribers. The reinsurance contract with Wesco was terminated effective January 1, 2016 with all obligations commutated as of that date. The reinsurance deposit related to the policy was terminated in September 2016. Interest expense incurred by the Exchange for the year ended December 31, 2016 was $897,986.

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.

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		2016
Premiums written:
Direct	$	3,647,265	$	4,172,025
Ceded	619,507		709,243
Premiums written, net of reinsurance	$	3,027,758	$	3,462,782
Premiums earned:
Direct	$	3,790,684	$	4,307,012
Ceded	642,768		514,409
Premiums earned, net of reinsurance	$	3,147,916	$	3,792,603
Losses and loss adjustment expenses incurred:
Direct	$	1,888,646	$	300,494
Ceded	65,575		90,868
Losses and loss adjustment expenses incurred, net of reinsurance	$	1,823,071	$	209,626

H-18

PHYSICIANS’ INSURANCE PROGRAM 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			2016
Losses and loss adjustment expenses, beginning of year - gross	$	12,343,048		$	14,888,307
Less: Reinsurance recoverable, beginning of year	90,868			—
Losses and loss expense reserves, beginning of year - net	12,252,180			14,888,307
Incurred related to:
Current year	2,163,071			2,541,626
Prior years	(340,000		)	(2,332,000		)
Total incurred	1,823,071			209,626
Paid related to:
Current year	29,623			257,951
Prior years	2,440,938			2,587,802
Total paid	2,470,561			2,845,753
Losses and loss adjustment expenses, end of year - net	11,604,690			12,252,180
Add: Reinsurance recoverable, end of year	156,443			90,868
Losses and loss adjustment expenses, end of year - gross	$	11,761,133		$	12,343,048

The liability for losses and loss adjustment expenses at December 31, 2017 and 2016 were $11,761,133 and $12,343,048, respectively. For the years ended December 31, 2017 and 2016, $2,440,938 and $2,587,802, 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. During the year ended December 31, 2016, the Exchange had a favorable development in the amount of $2,332,000 which was primarily related to commutation of the 2012 and 2013 reinsurance treaty in the amount of $1,728,613 as well as a favorable development in the amount of $603,387 related to the reduction in the ultimate loss reserves for occurrence policies in 2013 and 2014. 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.

Incurred and Paid Loss Development Information - Unaudited

The following information about incurred and paid loss development as of 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.

H-19

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

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, 2017
Accident Year	2008		2009			2010			2011			2012		2013		2014		2015		2016		2017		Total of Incurred-But-Not-Reported Liabilities Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
2008	$	3,610	$	2,783		$	2,293		$	1,389		$	1,117	$	1,035	$	1,037	$	886	$	770	$	875	$	29	23
2009			4,299			3,801			4,603			4,624		4,687		5,501		6,253		6,663		7,421		90		37
2010						5,262			4,314			4,306		4,229		3,517		3,667		3,048		3,224		54		34
2011									4,736			3,773		3,664		4,352		4,203		4,772		4,454		271		34
2012												4,170		3,176		3,314		3,400		2,927		2,914		328		22
2013														3,388		3,100		2,750		2,063		1,183		235		18
2014																3,551		3,150		2,247		1,137		222		20
2015																		3,452		2,918		3,002		908		27
2016																				2,800		3,486		1,229		26
2017																						2,026		1,604		10
																						$	29,722

	Cumulative Losses and Loss Adjustment Expenses Paid, Net of Reinsurance (in thousands)
Accident Year	2008		2009			2010			2011			2012		2013		2014		2015		2016		2017
2008	$	21	$	(1,085	)	$	(817	)	$	(50	)	$	341	$	481	$	519	$	617	$	722	$	739
2009			52			315			1,112			2,122		3,246		4,449		4,620		6,075		6,695
2010						167			503			1,631		2,363		1,802		2,392		2,611		2,724
2011									111			390		1,342		1,232		3,155		3,688		3,802
2012												496		657		1,496		2,166		1,984		2,361
2013														70		324		584		445		573
2014																90		367		419		562
2015																		63		293		827
2016																				239		536
2017																						26
																						$	18,845
						All outstanding liabilities before 2008, net of reinsurance																506
			Liabilities for losses and loss adjustment expenses, net of reinsurance																			$	11,383

H-20

PHYSICIANS’ INSURANCE PROGRAM 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:



	2017
Net outstanding liabilities for losses and loss adjustment expenses:
Medical professional	$	11,382,954
Liabilities for losses and loss adjustment expenses, net of reinsurance	11,382,954
Reinsurance recoverable on unpaid claims:
Medical professional	156,443
Total reinsurance recoverable on unpaid claims	156,443
Unallocated loss adjustment expenses	221,736
Total gross liability for losses and loss adjustment expenses	$	11,761,133

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, 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
Accident Year	Year 1		Year 2		Year 3		Year 4		Year 5		Year 6		Year 7		Year 8		Year 9		Year 10
Medical professional	5.2	%	(4.3	)%	21.4	%	20.8	%	15.0	%	15.1	%	4.0	%	11.4	%	10.2	%	1.9	%


9.	Income Taxes:

The components of the Exchange’s income tax provision for the years ended December 31, 2017 and 2016 are as follows:



	2017			2016
Current provision	$	(30,020	)	$	931,193
Deferred tax provision	131,414			(625,702		)
	$	101,394		$	305,491

H-21

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

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 income before income taxes for the years ended December 31, 2017 and 2016 is summarized as follows:



	2017			2016
Expected tax provision at federal statutory rate	$	14,010		$	304,201
Permanent and other items	5,242			159,258
Deferred adjustments	(15,955		)	(157,968		)
Alternative minimum tax	4,262			—
Change in deferred income taxes due to change in enacted tax rates	93,835			—
Net income tax provision	$	101,394		$	305,491



	2017		2016
Deferred tax assets:
Discount of unearned premiums	$	60,382	$	105,933
Discount of advance premiums	25,263		60,555
Discount of losses and loss adjustment expenses	177,136		278,219
Capital loss carryforward	41,774		86,184
Guaranty fund assessment	5,692		—
Total deferred tax assets	310,247		530,891
Deferred tax liabilities:
Deferred acquisition costs	80,841		143,585
TCJA transitional adjustment	12,425		—
Other items	410		—
Unrealized gain on investments	64,993		56,694
Total deferred tax liabilities	158,669		200,279
Net deferred tax asset	$	151,578	$	330,612

At December 31, 2017 and 2016, the Exchange had $198,923 and $253,483, respectively, of unused capital loss carryforwards available to offset future taxable income. Additionally, the Exchange had $4,262 in alternative minimum tax credits available to offset future taxable income.

H-22

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

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 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 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 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, 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 a resulting difference amount of $12,425, the gross amount of $59,167 which will be amortized into taxable income beginning in 2018.


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, 2017 and 2016 was $911,816 and $1,043,007 respectively. Management fee expense is included in “other underwriting expenses” in the accompanying statements of operations and comprehensive income. At December 31, 2017 and 2016, the Exchange owed PIPMC $73,365 and $21,814, respectively, for these services which is included in “due to affiliates” in the accompanying balance sheets.

On July 30, 2015, the Board of Directors of the Exchange adopted a plan of conversion (“Former 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 (“Act”). Under the Former Plan, 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 Former Plan, as amended, PCH would have offered and sold its common stock to subscribers of the Exchange and of the Association as well as to other interested investors. Under the Former Plan, it was expected that Diversus would have been a direct or indirect purchaser of common stock in the offering. The Former Plan was scheduled to be subject to the approval of the Pennsylvania Insurance Commissioner. In connection with the Former Plan, during the years ended December 31, 2017 and 2016, the Exchange incurred conversion costs of $39,813 and $166,535, respectively, and costs related to the offering of securities of $59,039 and $341,322, respectively. At December 31, 2017 and 2016, the Exchange had a payable of $7,425 and $37,576, respectively, to Diversus related to these conversion costs; such amounts are included in “due to affiliates” in the accompanying balance sheets. As discussed in Note 13, a new plan of conversion was adopted and the aforementioned plan of conversion was terminated.

H-23

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

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, 2017 and 2016, PTP provided services related to these contracts totaling $177,358 and $245,782 to the Exchange. Commission expense is included in “other underwriting expenses” in the accompanying statements of operations and comprehensive income. December 31, 2017 and 2016, the amounts due to PTP related to these services were $8,177 and $11,667, respectively; such amounts are included in “due to affiliates” in the accompanying balance sheets.

The Exchange and Andrews Outsource Solutions, LLC (“AOS”), an affiliate of PIPMC, 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, 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 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, 2017 and 2016, the Exchange incurred litigation management services of $303,900 and $312,000, respectively, related to this agreement; such amounts are included in “losses and loss adjustment expenses” in the accompanying statements of operations and comprehensive income. At December 31, 2017 and 2016, there were no amounts 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 year ended December 31, 2017, the Exchange incurred services totaling $42,335 related to this agreement; such amount is included in “losses and loss adjustment expenses” in the accompanying statement of operations and comprehensive income. At December 31, 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, 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; such amount is included in “due to affiliates” in the accompanying balance sheet. There were no similar transactions during the year ended December 31, 2016.

During the year ended December 31, 2017, Positive Physicians Insurance Exchange (“PPIX”), a Pennsylvania reciprocal exchange and an affiliate of the Exchange, collected premiums on behalf of the Exchange. At December 31, 2017, the amount due from PPIX was $15,046; such amount is included in “due to affiliates” in the accompanying balance sheet. There was no amount due from PPIX at December 31, 2016.

During the year ended December 31, 2016, the Association paid conversion costs on behalf of the Exchange. At December 31, 2016, the amount due to the Association related to these payments was $258,143; such amount is included in “due to affiliates” in the accompanying balance sheet. There was no amount due to Association related to such costs at December 31, 2017.

During the years ended December 31, 2017 and 2016, Healthcare Professional Services, Inc. (“HPSI”), a wholly-owned subsidiary of Diversus, provided wholesale brokerage services to the Exchange in the amounts of $4,629 and $2,611, respectively. The amounts due to HPSI at December 31, 2017 and 2016 related to these services was $0 and $374, respectively; such amounts are included in “due to affiliates” in the accompanying balance sheets.

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 wholly-owned subsidiary of Diversus, co-brokered the contract. Guy Carpenter is compensated by the reinsurer through commissions, and Guy Carpenter, in turn, pays a portion of the commissions to ISBL. During the years ended December 31, 2017 and 2016, commission expense incurred by the Exchange related this arrangement with ISBL was $73,458 and $13,846, respectively. At December 31, 2017 and 2016, there were no amounts due to ISBL related to this arrangement.

H-24

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016


11.	Assessments:

Based upon the available information, the Exchange has provided a gross liability of $27,106 and $0 for guaranty fund assessments 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 $27,106 and $18,251, 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 reported as amounts withheld for the accounts of others on the statutory admitted assets, liabilities, and capital and surplus, and no income is recognized by the Association. At December 31, 2017 and 2016, the MCARE receivable was $0 and $1,260, respectively. Additionally, the Exchange had a liability of $209,819 and $21,155 for Mcare assessments at December 31, 2017 and 2016, respectively, for amounts collected on behalf of MCARE.


12.	Statutory Information:

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 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; 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.

H-25

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

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 years ended December 31, 2017 and 2016 are as follows:



	2017		2016
Statutory net income	$	170,559	$	530,760
Statutory surplus and other funds	12,037,248		12,028,695

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



	2018			2017
Statutory surplus and other funds prescribed by the Department	$	12,037,248		$	12,028,695
State prescribed practices:
Unearned management fees	(252,313		)	(286,523		)
Statutory surplus and other funds per NAIC statutory accounting practices	$	11,784,935		$	11,742,172


13.	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 and the Association entered into separate reinsurance contracts with JLT Re (North America), Inc. JLT and Specialty Insurance Services, LLC (“SIS”), a wholly-owned subsidiary of Diversus, co-brokered the contracts. JLT is to be compensated by the reinsurer through commissions, and JLT, in turn, will pay a portion of the commissions to SIS. 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.

On June 1, 2018, PIPMC 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 Act. Under the Plan, the Exchange would merge with the Association and Positive Physicians Insurance Exchange ("PPIX"), a Pennsylvania reciprocal inter-insurance exchange, 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

H-26

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2017 AND 2016

stock in the offering. The Plan is subject to the approval of the Pennsylvania Insurance Commissioner.

H-27

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017 (UNAUDITED)

H-28

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

INDEX



	Page
FINANCIAL STATEMENTS:
Balance sheets	H-30
Statements of operations and comprehensive (loss) income	H-31
Statements of members’ equity	H-32
Statements of cash flows	H-33
Notes to financial statements	H-34

H-29

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

BALANCE SHEETS

SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)



	2018		2017
	(Unaudited)
ASSETS
Investments in available-for-sale securities, at fair value:
Bonds (Amortized cost of $19,879,355 and $17,886,058)	$	19,448,807	$	18,049,122
Common stocks (Cost of $1,702,254 and $1,451,066)	1,919,824		1,614,086
Short-term investments	149,856		—
Other invested assets	235,407		125,000
Total investments	21,753,894		19,788,208
Cash and cash equivalents	1,208,971		5,209,253
Accrued investment income	134,186		111,000
Premiums receivable	64,491		36,958
Reinsurance recoverable	284,563		282,127
Income taxes recoverable	19,744		390,085
Unearned ceded premiums	89,068		258,022
Deferred acquisition costs	551,383		511,079
Deferred income taxes	189,438		172,007
Other assets	222,388		113,898
TOTAL ASSETS	$	24,518,126	$	26,872,637
LIABILITIES AND MEMBERS’ EQUITY
LIABILITIES:
Losses and loss adjustment expenses	$	10,305,592	$	12,021,941
Unearned premiums	2,013,618		2,074,343
Reinsurance payable	69,826		171,027
Accounts payable, accrued expenses, and other liabilities	161,302		248,454
Due to affiliates	37,200		86,232
TOTAL LIABILITIES	12,587,538		14,601,997
MEMBERS’ EQUITY	11,930,588		12,270,640
TOTAL LIABILITIES AND MEMBERS’ EQUITY	$	24,518,126	$	26,872,637

See notes to financial statements.

H-30

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)



	2018			2017
	(Unaudited)
REVENUES:
Net premium earned	$	2,366,373		$	2,417,910
TOTAL REVENUES	2,366,373			2,417,910
EXPENSES:
Losses and loss adjustment expenses, net	1,265,303			1,495,332
Other underwriting expenses	1,484,759			1,457,426
TOTAL EXPENSES	2,750,062			2,952,758
NET INVESTMENT INCOME	548,086			427,489
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES	164,397			(107,359		)
PROVISION FOR INCOME TAXES	79,545			(41,442		)
NET INCOME	84,852			(65,917		)
OTHER COMPREHENSIVE (LOSS) INCOME:
Unrealized holding (losses) gains on available-for-sale securities, net of income tax benefit (expense) of $111,089 and $(54,175)	(361,808		)	165,422
Reclassification adjustments for net realized gain included in net income	(56,101		)	(60,261		)
Total other comprehensive (loss) income	(417,909		)	105,161
COMPREHENSIVE (LOSS) INCOME	$	(333,057	)	$	39,244

See notes to financial statements.

H-31

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

STATEMENTS OF MEMBERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017



	Contributed Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Members' Equity
Balance, January 1, 2017	$	8,050,709	$	4,070,492		$	110,054		$	12,231,255
Subscription fees	141		—			—			141
Net loss	—		(65,917		)	—			(65,917		)
Other comprehensive income	—		—			105,161			105,161
Balance, September 30, 2017 (unaudited)	$	8,050,850	$	4,004,575		$	215,215		$	12,270,640
Balance, January 1, 2018	$	8,050,850	$	3,970,359		$	242,376		$	12,263,645
Net income	—		84,852			—			84,852
Other comprehensive loss	—		—			(417,909		)	(417,909		)
Balance, September 30, 2018 (unaudited)	$	8,050,850	$	4,055,211		$	(175,533	)	$	11,930,588

See notes to financial statements.

H-32

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)



	2018			2017
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	84,852		$	(65,917	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Deferred income taxes	73,793			104,430
Net realized gain on sales of investments	(56,101		)	(60,261		)
Amortization of bond premiums	32,522			52,350
Amortization of other assets	11,449			—
Changes in operating assets and liabilities:
Accrued investment income	2,668			11,873
Premiums receivable	289,302			421,837
Reinsurance recoverable	(128,120		)	(191,259		)
Income taxes recoverable	169,489			(326,838		)
Unearned ceded premiums	82,505			(63,188		)
Deferred acquisition costs	(166,426		)	(88,769		)
Other assets	(142,928		)	(55,158		)
Liability for losses and loss adjustment expenses	(1,455,541		)	(321,107		)
Unearned premiums	404,366			321,672
Reinsurance payable	59,165			99,284
Accounts payable, accrued expenses, and other liabilities	(761,263		)	(821,836		)
Due to affiliates	(40,270		)	(243,342		)
NET CASH USED IN OPERATING ACTIVITIES	(1,540,538		)	(1,226,229		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments:
Proceeds from sales and maturities	4,717,398			5,148,036
Purchases	(3,796,220		)	(6,803,833		)
Other assets	(7,873		)	(36,105		)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	913,305			(1,691,902		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Subscription fees received	—			141
NET CASH PROVIDED BY FINANCING ACTIVITIES	—			141
NET CHANGE IN CASH AND CASH EQUIVALENTS	$	(627,233	)	$	(2,917,990	)
CASH AND CASH EQUIVALENTS, beginning of period	1,836,204			8,127,243
CASH AND CASH EQUIVALENTS, end of period	$	1,208,971		$	5,209,253
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid for the period	$	—		$	300,406

See notes to financial statements.

H-33

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)


1.	Organization and Operations:


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

Cash and Cash Equivalents

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 (loss). 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 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.

H-34

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

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 (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.

Other Investments

The Exchange has ownership interests in two 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 accompanying statements of operations and comprehensive (loss) 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 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

Premium Deficiency Reserves

H-35

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

over the remaining lives of the contracts, and are included in "losses and loss adjustment expenses" in the accompanying balance sheets. The Exchange has not recorded any premium deficiency reserves as of September 30, 2018 or 2017. The analysis of premium deficiency reserves was completed as of September 30, 2018. 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 provides 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.

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 as further discussed in Note 10. Additionally, the Exchange has paid costs related to offering of securities by the planned parent company. These costs were charged to the Exchange and require reimbursement from the planned parent company. Such costs are expensed as incurred and included in "other underwriting expenses" in the accompanying statements of operations and comprehensive (loss) income.

Revenue Recognition

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 income securities are reported as a separate component in the equity section in the accompanying balance sheets. Such items, along with net income, are components of comprehensive (loss) income and are reflected in the accompanying statements of operations and comprehensive (loss) income.

Income Taxes

H-36

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

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 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 (loss) 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 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 (loss) 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

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.

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 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 (loss) 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

H-37

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

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.


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, premiums receivable, and balances recoverable from reinsurer. 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 September 30, 2018 and 2017. At September 30, 2018 and 2017, the Exchange had reinsurance recoverables due from reinsurer of $284,563 and $282,127, respectively. At September 30, 2018 and 2017, the Exchange had reinsurance payables due to the reinsurer of $69,826 and $171,027, respectively, for unpaid losses and loss adjustment expenses, contingent commissions receivable, and unearned premiums due from one authorized reinsurer, which is domiciled outside of the United States of America.


4.	Variable Interest Entity:

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 September 30, 2018 and 2017, there are no explicit or implicit arrangements that would require PIPMC to provide future financial support to the Exchange.


5.	Investments:

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;

H-38

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)


•	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.

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		Fair Value
September 30, 2018
U.S. government	$	3,414,679	$	55,894	$	63,396	$	3,407,177
States, territories, and possessions	200,474		3,132		—		203,606
Subdivisions of states, territories, and possessions	2,518,718		18,073		48,232		2,488,559
Industrial and miscellaneous	13,745,484		8,624		404,643		13,349,465
Total bonds	19,879,355		85,723		516,271		19,448,807
Common stocks	1,702,254		255,519		37,949		1,919,824
	$	21,581,609	$	341,242	$	554,220	$	21,368,631

H-39

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)



	Amortized Cost/Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2017
U.S. government	$	5,112,397	$	174,097	$	34,604	$	5,251,890
States, territories, and possessions	200,495		16,117		—		216,612
Subdivisions of states, territories, and possessions	3,213,045		62,273		72,065		3,203,253
Industrial and miscellaneous	9,360,121		52,076		34,830		9,377,367
Total bonds	17,886,058		304,563		141,499		18,049,122
Common stocks	1,451,066		187,399		24,379		1,614,086
	$	19,337,124	$	491,962	$	165,878	$	19,663,208

At September 30, 2018, maturities of investments in bond securities are as follows:



	Amortized Cost/Carrying Value		Fair Value
Due in less than one year	$	1,520,123	$	1,508,590
Due after one year to five years	10,030,869		9,884,177
Due after five years to ten years	6,863,007		6,602,896
Due after ten years	1,465,356		1,453,144
	$	19,879,355	$	19,448,807



	2018		2017
Proceeds	$	4,717,398	$	5,148,036
Gross gains	83,090		94,854
Gross losses	26,989		34,593

The components of net investment income are as follows:



	2018		2017
Bonds	$	460,501	$	373,694
Cash and short-term investments	7,316		22,755
Common stocks	47,881		34,960
Limited partnerships	1,081		—
Net gain on sales of investments	56,101		60,261
	572,880		491,670
Less investment expenses	24,794		64,181
Net investment income	$	548,086	$	427,489

H-40

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)



	Less than 12 Months
	Fair Value		Unrealized Losses
U.S. government	$	582,176	$	3,104
Subdivisions of states, territories, and possessions	1,345,403		21,073
Industrial and miscellaneous	7,570,750		215,015
Common stocks	251,181		15,146
	$	9,749,510	$	254,338

	Greater than 12 Months
	Fair Value		Unrealized Losses
U.S. government	$	1,497,604	$	60,292
Subdivisions of states, territories, and possessions	371,858		27,159
Industrial and miscellaneous	4,071,274		189,628
Common stocks	222,651		22,803
	$	6,163,387	$	299,882

	Totals
	Fair Value		Unrealized Losses
U.S. government	$	2,079,780	$	63,396
Subdivisions of states, territories, and possessions	1,717,261		48,232
Industrial and miscellaneous	11,642,024		404,643
Common stocks	473,832		37,949
	$	15,912,897	$	554,220

At September 30, 2018, the Exchange had 81 securities in unrealized loss positions of less than 12 months with a combined gross unrealized loss of $254,338 and 67 securities in unrealized loss positions of greater than 12 months with a combined gross unrealized loss of $299,882.

H-41

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)



	Less than 12 Months
	Fair Value		Unrealized Losses
U.S. government	$	1,874,639	$	28,583
Subdivisions of states, territories, and possessions	449,594		1,232
Industrial and miscellaneous	4,088,446		22,978
Common stocks	273,648		20,983
	$	6,686,327	$	73,776

	Greater than 12 Months
	Fair Value		Unrealized Losses
U.S. government	$	462,256	$	6,021
Subdivision of states, territories, and possessions	80,080		70,833
Industrial and miscellaneous	790,724		11,852
Common stocks	25,212		3,396
	$	1,358,272	$	92,102

	Totals
	Fair Value		Unrealized Losses
U.S. government	$	2,336,895	$	34,604
Subdivision of states, territories, and possessions	529,674		72,065
Industrial and miscellaneous	4,879,170		34,830
Common stocks	298,860		24,379
	$	8,044,599	$	165,878

At September 30, 2017, the Exchange had 124 securities in unrealized loss positions of less than 12 months with a combined gross unrealized loss of $73,776 and 24 securities in unrealized loss positions of greater than 12 months with a combined gross unrealized loss of $92,102.

H-42

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

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 September 30, 2018:



	Total		Level 1		Level 2		Level 3
U.S. government	$	3,407,177	$	—	$	3,407,177	$	—
States, territories, and possessions	203,606		—		203,606		—
Subdivisions of states, territories and possessions	2,488,559		—		2,488,559		—
Industrial and miscellaneous	13,349,465		—		13,349,465		—
Total bonds	19,448,807		—		19,448,807		—
Common stocks	1,919,824		1,919,824		—		—
	$	21,368,631	$	1,919,824	$	19,448,807	$	—

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 September 30, 2017:



	Total		Level 1		Level 2		Level 3
U.S. government	$	5,251,890	$	—	$	5,251,890	$	—
States, territories, and possessions	216,612		—		216,612		—
Subdivisions of states, territories and possessions	3,203,253		—		3,203,253		—
Industrial and miscellaneous	9,377,367		—		9,377,367		—
Total bonds	18,049,122		—		18,049,122		—
Common stocks	1,614,086		1,614,086		—		—
	$	19,663,208	$	1,614,086	$	18,049,122	$	—


6.	Deferred Acquisition Costs:

The following table summarizes the components of deferred acquisition costs for the nine months ended September 30, 2018 and 2017:



	2018		2017
Balance, beginning of period	$	384,957	$	422,310
Amount capitalized during the period	1,138,511		1,204,055
Amount amortized during the period	972,085		1,115,286
Balance, end of period	$	551,383	$	511,079


7.	Reinsurance:

On January 1, 2016, the Exchange and Professional Casualty Association (the “Association”), 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

H-43

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

$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 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 and loss adjustment expenses incurred for the nine months ended September 30, 2018 and 2017 is as follows:



	2018		2017
Premiums written:
Direct	$	3,028,368	$	3,223,934
Ceded	175,124		547,540
Premiums written, net of reinsurance	$	2,853,244	$	2,676,394
Premiums earned:
Direct	$	2,624,002	$	2,902,262
Ceded	257,629		484,352
Premiums earned, net of reinsurance	$	2,366,373	$	2,417,910
Losses and loss adjustment expenses incurred:
Direct	$	1,393,423	$	1,686,591
Ceded	128,120		191,259
Losses and loss adjustment expenses incurred, net of reinsurance	$	1,265,303	$	1,495,332

H-44

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)


8.	Losses and Loss Adjustment Expenses:

Activity in the liability for losses and loss adjustment expenses for the nine months ended September 30, 2018 and 2017 are summarized as follows:



	2018			2017
Losses and loss adjustment expenses, beginning of period - gross	$	11,761,133		$	12,343,048
Less: Reinsurance recoverable, beginning of period	156,443			90,868
Losses and loss adjustment expenses, beginning of period - net	11,604,690			12,252,180
Incurred related to:
Current period	1,548,352			1,716,242
Prior periods	(283,049		)	(220,910		)
Total incurred	1,265,303			1,495,332
Paid related to:
Current period	73,330			49,142
Prior periods	2,775,634			1,958,556
Total paid	2,848,964			2,007,698
Losses and loss adjustment expenses, end of period - net	10,021,029			11,739,814
Add: Reinsurance recoverable, end of period	284,563			282,127
Losses and loss adjustment expenses, end of period - gross	$	10,305,592		$	12,021,941

The liability for losses and loss adjustment expenses at September 30, 2018 and 2017 were $10,305,592 and $12,021,941, respectively. For the nine months ended September 30, 2018 and 2017, $2,775,634 and $1,958,556, 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. The favorable development for the nine months ended September 30, 2017 of $220,910 was primarily related to re-estimation of unpaid losses and loss adjustment expenses in the 2013 and 2014 policy years. The favorable development for the nine months ended September 30, 2018 of $283,049 was primarily related to re-estimation of unpaid losses and loss adjustment expenses in the 2009, 2010 & 2011 policy years.


9.	Income Taxes:

The components of the Exchange’s income tax provision for the nine months ended September 30, 2018 and 2017 are as follows:



	2018		2017
Current provision	$	5,752	$	(145,872	)
Deferred tax provision	73,793		104,430
	$	79,545	$	(41,442	)

H-45

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)



	2018		2017
Expected tax provision at federal statutory rate	$	34,523	$	(36,502	)
Permanent and other items	21,583		11,550
Deferred adjustments	23,439		(16,490		)
Net income tax provision	$	79,545	$	(41,442	)



	2018		2017
Deferred tax assets:
Discount of unearned premiums	$	80,831	$	123,510
Discount of advance premiums	791		854
Discount of losses and loss adjustment expenses	153,493		266,584
Capital loss carryforward	31,050		65,695
Unrealized loss on investments	46,660		—
Guaranty fund assessment	4,540		—
Total deferred tax assets	317,365		456,643
Deferred tax liabilities:
Deferred acquisition costs	115,790		173,767
TCJA transitional adjustment	11,260		—
Other items	877		—
Unrealized gain on investments	—		110,869
Total deferred tax liabilities	127,927		284,636
Net deferred tax asset	$	189,438	$	172,007

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 September 30, 2018 and 2017, 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 September 30, 2018 and 2017.

At September 30, 2018 and 2017, the Exchange had $147,858 and $193,222, respectively, of unused capital loss carryforwards available to offset future taxable income. Additionally, at September 30, 2018, the Exchange had $4,262 in alternative minimum tax credits available to offset future taxable income.

H-46

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

months ended September 30, 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.

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 uses 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, 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 a resulting difference amount of $12,425 at December 31, 2017, the gross amount of $59,167 is being amortized into taxable income beginning on January 1, 2018. For the nine months ended September 30, 2018, amortization of the transitional adjustment amount was $5,547, with a related tax effect of $1,165.


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 nine months ended September 30, 2018 and 2017 was $757,092 and $805,983 respectively. Management fee expense is included in “other underwriting expenses” in the accompanying statements of operations and comprehensive (loss) income. At September 30, 2018 and 2017, the amount due to PIPMC related to these services was $4,746 was $77,486, respectively; such amounts are included in “due to affiliates” in the accompanying balance sheets.

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 Pennsylvania Medical Professional Liability Reciprocal Exchange-to-Stock Conversion Act (the "Act"). Under the Plan, the Exchange would merge with the Association and Positive Physicians Insurance Exchange ("PPIX"), a Pennsylvania reciprocal inter-insurance exchange, 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 is subject to the approval of the Pennsylvania Insurance Commissioner. In connection with the proposed plan, the Exchange incurred conversion and securities offering costs of $144,112 during the nine months ended September 30, 2018. At September 30, 2018, the Exchange had a payable of $25,906 to Diversus related to these conversion costs; such amounts are included “due to affiliates” in the accompanying balance sheet.

H-47

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

On July 30, 2015, as amended, PIPMC 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 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. ("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 Exchange and of the Association and to other interested investors. With the adoption of the new plan of conversion with PPIX in June 2018, the previous plan of conversion was discontinued. In connection with the previous plan, the Exchange incurred conversion and securities offering costs of $95,533 during the nine months ended September 30, 2017. At September 30, 2017, there was no amount due to Diversus by the Exchange related to these conversion costs.

In connection with the acquisition of PIPMC by Diversus on November 23, 2015, Diversus acquired through its wholly-owned subsidiary, Professional Third Party, LP ("PTP"), certain medical insurance accounts from affiliates of PIPMC. During the nine months ended September 30, 2018 and 2017, PTP provided services related to these contracts totaling $129,425 and $156,521, respectively, to the Exchange. Commission expense is included in “other underwriting expenses” in the accompanying statements of operations and comprehensive (loss) income. At September 30, 2018 and 2017, the amount due to PTP related to these services was $5,417 and $8,596, respectively; such amounts are included in “due to affiliates” in the accompanying balance sheets.

The Exchange and Andrews Outsource Solutions, LLC (“AOS”), an affiliate of PIPMC, 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, 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 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 nine months ended September 30, 2018 and 2017, the Exchange incurred litigation management services of $223,000 and $222,800, 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 September 30, 2018 and 2017, there were no amounts 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 nine months ended September 30, 2018 and 2017, the Exchange incurred services totaling $43,125 and $27,960, respectively, related to this agreement; such amounts are included in “losses and loss adjustment expenses” in the accompanying statement of operations and comprehensive (loss) income. At September 30, 2018 and 2017, there were no amounts due to Gateway related to these services.

During the nine months ended September 30, 2018 and 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 September 30, 2018 and 2017, the amounts due to DMI by the Exchange was $0 and $150, respectively.

During the nine months ended September 30, 2018, the Association and PPIX advanced funds to the Exchange to cover certain operating costs. At September 30, 2018, the total amount due to the Association and PPIX was $1,131; such amount is included in “due to affiliates” in the accompanying balance sheet. There were no similar advances during the nine months ended September 30, 2017.

During the nine months ended September 30, 2017, Healthcare Professional Services, Inc. ("HPSI") , a former wholly-owned subsidiary of Diversus, provided wholesale brokerage services to the Exchange. During the nine months ended September 30, 2017, HPSI provided total brokerage services of $4,074 to the Exchange. Effective as of January 1, 2018, Diversus sold its investment in HPSI to unrelated parties. There was no amount due to HPSI at September 30, 2017 related to these services.

H-48

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

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 nine months ended September 30, 2017, commission expense incurred by the Exchange related this arrangement with ISBL was $73,458. At September 30, 2017, there was no amount due to ISBL related to this arrangement. The arrangement was discontinued with the termination of the reinsurance contract on December 31, 2017.

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 commissions to SIS. During the nine months ended September 30, 2018, there was no commission expense incurred by the Exchange related to this agreement with SIS.


11.	Assessments:

Based upon the available information, the Exchange has provided a gross liability of $21,621 and $0 for guaranty fund assessments at September 30, 2018 and 2017. The Exchange has not recorded applicable premium tax credits at September 30, 2018 and 2017 related to guaranty assessments. Total guaranty fund expense, net of prior periods’ refunds and premium tax credits, for the nine months ended September 30, 2018 and 2017 was $2,939 and $0, 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 reported as amounts withheld for the accounts of others in the accompanying balance sheets, and no income is recognized by the Exchange. At September 30, 2018 and 2017, there were no MCARE receivables. Additionally, at September 30, 2018 and 2017 the Exchange had liabilities of $19,851 and $22,763, respectively, for amounts collected on behalf of MCARE.


12.	Statutory Information:

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, 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; and (6) ceded

H-49

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

---------------

NOTES TO FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED)

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.

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 nine months ended September 30, 2018 and 2017 are as follows:



	2018		2017
Statutory net income	$	239,542	$	138,219
Statutory surplus and other funds	12,097,689		12,029,390

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



	2018			2017
Statutory surplus and other funds prescribed by the Department	$	12,097,689		$	12,029,390
State prescribed practices:
Unearned management fees	(353,405		)	(379,444		)
Statutory surplus and other funds per NAIC statutory accounting practices	$	11,744,284		$	11,649,946

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 nine months ended September 30, 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 September 30, 2018 and 2017, the Exchange’s RBC exceeded minimum RBC requirements.


13.	Subsequent Events:

Subsequent events have been evaluated through January 22, 2019, which is the date the financial statements were available to be issued.

H-50

POSITIVE PHYSICIANS HOLDINGS, INC.

UP TO 4,830,000 SHARES OF COMMON STOCK

PROSPECTUS

GRIFFIN FINANCIAL GROUP, LLC

, 2019

Until , 2019, all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters.

PART II INFORMATION NOT REQUIRED IN PROSPECTUS


Item 13.	Other Expenses of Issuance and Distribution.

The following table sets forth the costs and expenses payable by us in connection with the registration of our common stock hereunder. All amounts are estimated, except for the SEC registration fee and the Nasdaq listing fee. We also expect to incur an estimated $200,000 in conversion expenses, which will include legal expenses, filing fees with the Pennsylvania Insurance Department, and printing, postage, and mailing charges. See “The Conversion and Offering” for a description of our obligation with respect to such expenses.



SEC registration fee	$	5,854
Nasdaq listing fee	115,000
Printing, postage and mailing	150,000
Finra filing fee	7,745
Legal fees and expenses	200,000
Accounting fees and expenses	250,000
Valuation fees and expenses	110,000
Transfer and offering agent fees and expenses	5,000
Miscellaneous	26,401
Total	$	870,000


Item 14.	Indemnification of Directors and Officers.

Pennsylvania law provides that a Pennsylvania corporation may indemnify directors, officers, employees, and agents of the corporation against liabilities they may incur in such capacities for any action taken or any failure to act, whether or not the corporation would have the power to indemnify the person under any provision of law, unless such action or failure to act is determined by a court to have constituted recklessness or willful misconduct. Pennsylvania law also permits the adoption of a bylaw amendment, approved by shareholders, providing for the elimination of a director’s liability for monetary damages for any action taken or any failure to take any action unless the director has breached or failed to perform the duties of his office, and the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness.

Our bylaws provide for (i) the indemnification of the directors, officers, employees, and agents of Positive Physicians Holdings, Inc. and its subsidiaries to the fullest extent permitted by Pennsylvania law and (ii) the elimination of a directors’ liability for monetary damages to the fullest extent permitted by Pennsylvania law unless the director has breached or failed to perform the duties of his or her office under Subchapter B of Chapter 17 of the Pennsylvania Business Corporation Law, and such breach or failure to perform constitutes self-dealing, willful misconduct or recklessness.

We also maintain an insurance policy insuring our directors, officers and certain other persons against liabilities and expenses incurred by any of them in certain stated proceedings and under certain stated conditions.

In the agency agreement with Griffin Financial, Griffin Financial agrees to indemnify our officers, directors and controlling persons against certain liabilities, including liabilities under the Securities Act of 1933 under certain conditions and with respect to certain limited information.


Item 15.	Recent Sales of Unregistered Securities.

None.

II-1


Item 16.	Exhibits and Financial Statement Schedules.

(a) Exhibits



1.1	Form of Agency Agreement among Positive Physicians Holdings, Inc., Positive Physicians Insurance Exchange, Professional Casualty Association, and Physician’s Insurance Program Exchange, and Griffin Financial Group, LLC

2.1	Amended and Restated Plan of Conversion from reciprocal insurance exchange to stock form of Professional Casualty Association, dated as of June 1, 2018

2.2	Amended and Restated Plan of Conversion from reciprocal insurance exchange to stock form of Physicians’ Insurance Program Exchange, dated as of June 1, 2018

2.3	Amended and Restated Plan of Conversion from reciprocal insurance exchange to stock form of Positive Physicians Insurance Exchange, dated as of June 1, 2018

3.1	Amended and Restated Articles of Incorporation of Positive Physicians Holdings, Inc.

3.2	Bylaws of Positive Physicians Holdings, Inc.

4.1	Form of certificate evidencing shares of common stock of Positive Physicians Holdings, Inc.

5.1	Opinion of Stevens & Lee regarding stock of Positive Physicians Holdings, Inc. being issued

8.1	Opinion of Stevens & Lee regarding certain United States federal income tax issues

10.1	Form of Management Agreement between Positive Physicians Insurance Company, Positive Physicians Holdings, Inc., Diversus Management, Inc., and Diversus, Inc.

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.

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.

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.

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.

10.6	Form of Option Agreement among Diversus, Inc., Insurance Capital Group, LLC, and Positive Physicians Holdings, Inc.

10.7	Form of Management Services Agreement between Positive Physicians Holdings, Inc. and Diversus Management Inc.

10.8	Medical Malpractice Working Excess Reinsurance Contract effective January 1, 2018 between Hannover Ruck Se and Positive Physicians Insurance Exchange.

10.9	Governance Agreement dated September 19, 2018 between Insurance Capital Group LLC and Enstar Holdings (US) LLC

10.10	Form of Loan Agreement between Positive Physicians Holdings, Inc. and Diversus, Inc.

10.11	Medical Malpractice Working Excess Reinsurance Contract effective January 1, 2018 between Hannover Ruck Se and Professional Casualty Association.

10.12	Medical Malpractice Working Excess Reinsurance Contract effective January 1, 2018 between Hannover Ruck Se and Physicians’ Insurance Program Exchange.

II-2



10.13	Term Sheet with respect to credit facility from Legacy Texas Bank to Positive Physicians Holdings, Inc.

21.1	Subsidiaries of Positive Physicians Holdings, Inc.

23.1	Consent of Baker Tilly Virchow Krause, LLP

23.2	Consent of Eisner Amper LLP

23.3	Consent of Feldman Financial Advisors, Inc. with respect to Pro Forma Valuation Appraisal Reports

23.4	Consent of Stevens & Lee (contained in Exhibits 5.1 and 8.1)

24.1	Power of Attorney (contained on signature page)

99.1	Pro Forma Valuation Appraisal Report, dated as of May 1, 2018, prepared for Professional Casualty Association by Feldman Financial Group LLC.

99.2	Pro Forma Valuation Appraisal Report, dated as of May 1, 2018, prepared for Physicians’ Insurance Program Exchange by Feldman Financial Group LLC.

99.3	Pro Forma Valuation Appraisal Report, dated as of May 1, 2018, prepared for Positive Physicians Insurance Exchange by Feldman Financial Group LLC.

99.4	Letter dated October 5, 2018, to Professional Casualty Holdings, Inc. from Feldman Financial Advisors, Inc. regarding fair market value of subscription rights

99.5	Stock Order Form

99.6	Question and Answer Brochure

99.7	Letters and statements to prospective purchasers of stock in offering

99.8	Form of Escrow Agreement among Positive Physicians Holdings, Inc., Griffin Financial Group, LLC and Computershare Trust Company, N.A.

99.9	Form of Professional Casualty Association Subscriber Proxy Materials

99.10	Form of Physicians Insurance Program Exchange Subscriber Proxy Materials

99.11	Form of Positive Physicians Insurance Exchange Subscriber Proxy Materials

99.12	Form of Proxy Card for Special Meeting of Professional Casualty Association subscribers

99.13	Form of Proxy Card for Special Meeting of Physicians Insurance Program Exchange subscribers

99.14	Form of Proxy Card for Special Meeting of Positive Physicians Insurance Exchange subscribers

99.15	Form of Lockup Agreement to be executed by Insurance Capital Group, LLC and Enstar Holdings (US) LLC

99.16	Consent of Matthew T. Popoli

99.17	Consent of Craig A. Huff

99.18	Consent of Paul Brockman

99.19	Consent of Duncan McLaughlin

(b) Financial Statement Schedules

II-3


Item 17 .	Undertakings.

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any fact or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

The undersigned hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the forgoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

The undersigned registrant hereby undertakes to supplement the prospectus, after the expiration of the subscription period, to set forth the results of the subscription offer, the transactions by the underwriters during the subscription period, the amount of unsubscribed securities to be purchased by the underwriters, and the terms of any subsequent reoffering thereof. If any public offering by the underwriters is to be made on terms differing from those set forth on the cover page of the prospectus, a post-effective amendment will be filed to set forth the terms of such offering.

II-4

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Philadelphia, Commonwealth of Pennsylvania, on January 22, 2019.



Positive Physicians Holdings, Inc.

By:	/s/ Lewis S. Sharps
	Lewis S. Sharps, President and
	Chief Executive Officer

II-5

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Lewis D. Sharps and Scott H. Spencer, Esquire, and each of them, his or her true and lawful attorney‑in‑fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post effective amendments) to this registration statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys‑in‑fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys‑in‑fact and agents, or any of them, or their or his or her substitutes or substitute, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.



Signature	Capacity	Date

/s/ Lewis S. Sharps	President and Chief Executive Officer (Principal Executive Officer), Director
Lewis S. Sharps		January 22, 2019

/s/ Scott C. Penwell	Director
Scott C. Penwell	Director	January 22, 2019

/s/ Stephen J. Johnson	Director
Stephen J. Johnson	Director	January 22, 2019

/s/ William Hitselberger	Director
William Hitselberger	Director	January 22, 2019

/s/ James L. Zech	Director
James L. Zech	Director	January 22, 2019

/s/ Daniel Payne	Chief Financial Officer (Principal Financial and Accounting Officer)
Daniel Payne		January 22, 2019

II-6

Exhibit 1.1

Positive Physicians Holdings, Inc.
Up to 4,830,000 Shares

COMMON STOCK
($0.01 Par Value)

Subscription Price $10.00 Per Share

AGENCY AGREEMENT

February , 2019

Griffin Financial Group, LLC
620 Freedom Business Center
2nd Floor
King of Prussia, Pennsylvania 10019

Ladies and Gentlemen:

Positive Physicians Holdings, Inc., a Pennsylvania business corporation (“HoldCo”), Positive Physicians Insurance Exchange (“PPIX”), Professional Casualty Association (“PCA”), and Physicians’ Insurance Program Exchange (“PIPE” and together with HoldCo, PPIX, and PCA, the “PPHI Parties”), hereby confirm, jointly and severally, their agreement (the “Agreement”) with Griffin Financial Group, LLC (the “Agent”), as follows:

1. The Offering . On June 1, 2018, the respective attorneys-in-fact of PPIX, PCA, and PIPE each adopted a Plan of Conversion (the “Plans”). The Plans provide for the conversion of each of PPIX, PCA, and PIPE from unincorporated reciprocal insurance exchanges to stock form (the “Conversions”). The Conversions will be accomplished by (a) the merger of PPIX into PPIX Conversion Corp., a Pennsylvania stock insurance company (“PPIX Conversion Corp.”), (b) the merger of PCA into PCA Conversion Corp., a Pennsylvania stock insurance company (“PCA Conversion Corp.”), and (c) the merger of PIPE into PIPE Conversion Corp., a Pennsylvania stock insurance company (“PIPE Conversion Corp.”). The Plans also provide that immediately after the Conversions, PIPE Conversion Corp. and PCA Conversion Corp. will merge with and into PPIX Conversion Corp. and PPIX Conversion Corp. will issue all of its common stock to HoldCo. In connection with Conversions, PPIX Conversion Corp. will change its name to “Positive Physicians Insurance Company” and become a wholly-owned subsidiary of HoldCo.

In connection with the Conversions, HoldCo is offering up to 4,830,000 shares (the “Shares”) of its common stock, $0.01 par value (the “Common Stock”), in (i) a subscription offering (the “Subscription Offering”), and (ii) a direct community offering (the “Community Offering”). The Subscription Offering and the Community Offering are herein sometimes collectively referred to as the “Offering.” Except for any shares of Common Stock issued under

any stock incentive plan adopted by HoldCo, the Shares will constitute 100% of the outstanding common stock of HoldCo after completion of the Offering.

HoldCo will issue the Shares at a purchase price of $10.00 per share (the “Purchase Price”). If the number of Shares is increased or decreased in accordance with the Plan, the term “Shares” shall mean such greater or lesser number, where applicable.

The shares of Common Stock to be offered in the Subscription Offering will be offered pursuant to nontransferable subscription rights (subject to limitations set forth in the Plan) to eligible subscribers of PPIX, PCA, and PIPE, who are the named insureds under policies of insurance issued by any one of PPIX, PCA, and PIPE that was in force on June 1, 2018 (the “Eligible Subscribers”)

HoldCo may offer shares of Common Stock for which subscriptions have not been received in the Subscription Offering to the following categories of purchasers (with no category of purchaser having priority over any other category of purchaser) in the Community Offering before offering them to the general public:


•	Certain stockholders of Diversus, Inc. (“Diversus”);


•	Insurance Capital Group LLC (“ICG”) and Enstar Holdings (US) LLC (“Enstar”); and


•	Such number of other persons as are necessary for HoldCo to have at least 300 round lot shareholders after completion of the Offering.

ICG has entered into a Standby Stock Purchase Agreement with the PPHI Parties dated June 8, 2018 (as amended, the “Standby Stock Purchase Agreement”), wherein ICG has agreed to purchase such number of shares as is equal to the difference between (x) 3,570,000 shares (the “Minimum Offering Amount”) and (y) the sum of the shares sold in the Subscription Offering and the shares sold to stockholders of Diversus. Stockholders of Diversus in the aggregate may not purchase more than 5% of the shares remaining available for purchase after all of the subscriptions in the Subscription Offering that have been accepted have been satisfied. ICG has agreed to permit Enstar to purchase thirty percent (30%) of the number of shares that ICG would otherwise purchase in the offering.

It is acknowledged that the purchase of Shares in the Offering is subject to maximum and minimum purchase limitations as described in the Prospectus, and that, subject to the provisions of the Plans and the Standby Stock Purchase Agreement, HoldCo may reject, in whole or in part, any subscription received in the Community Offering.

HoldCo has filed with the U.S. Securities and Exchange Commission (the “Commission”) a Registration Statement on Form S-1 (File No. 333-______) in order to register the Shares under the Securities Act of 1933, as amended (the “1933 Act”), and the regulations promulgated thereunder (the “1933 Act Regulations”) and has filed such amendments thereto as have been required to the date hereof (the “Registration Statement”). The term “Registration

Statement” shall include any documents incorporated by reference therein and all financial schedules and exhibits thereto, including post-effective amendments. The prospectus, as amended, included in the Registration Statement at the time it initially becomes effective is hereinafter called the “Prospectus,” except that if any prospectus is filed by HoldCo pursuant to Rule 424(b) or (c) of the 1933 Act Regulations differing from the prospectus included in the Registration Statement at the time it initially becomes effective, the term “Prospectus” shall refer to the prospectus filed pursuant to Rule 424(b) or (c) from and after the time such prospectus is filed with the Commission and shall include any supplements and amendments thereto from and after their dates of effectiveness or use, respectively.

Concurrently with the execution of this Agreement, HoldCo is delivering to the Agent copies of the Prospectus, dated [●], 2019, of HoldCo to be used in the Subscription Offering and Community Offering.

In accordance with Section 3502(c) of the Pennsylvania Medical Professional Liability Reciprocal Exchange-To-Stock Conversion Act (the “Conversion Act”), PIPX, PCA, and PIPE have filed with the Pennsylvania Insurance Department (the “Department”) an application for conversion and have filed such amendments thereto and supplementary materials as may have been required to the date hereof (such application, as amended to date, is hereinafter referred to as the “Conversion Application”), including copies of the respective Proxy Statements for the Special Meetings of the Eligible Subscribers of PPIX, PCA, and PIPE relating to the Conversions (the “Proxy Statements”), the Pro Forma Valuation Reports prepared by Feldman Financial Advisors, Inc. with respect to PPIX, PCA, and PIPE (the “Appraisals”), and the Prospectus. ICG has filed with the Department an application on Form A with respect to its purchase of Shares in the Offering.

2. Appointment of the Agent . Subject to the terms and conditions of this Agreement, the PPHI Parties hereby appoint the Agent as their exclusive financial advisor (i) to consult with and to advise and assist the PPHI Parties with respect to the sale of the Shares in the Offering, and (ii) to utilize its best efforts to solicit subscriptions for the Shares and to advise and assist HoldCo with respect to the sale of the Shares in the Offering.

It is acknowledged by the PPHI Parties that the Agent shall not be obligated to purchase any Shares and shall not be obligated to take any action that is inconsistent with any applicable law, regulation, decision or order. Except as provided in the last Paragraph of this Section 2 and Section 13, the appointment of the Agent hereunder shall terminate upon consummation of the Offering, but in no event later than forty-five (45) days after completion of the Subscription Offering (the “End Date”). All fees or expenses due to the Agent but unpaid will be payable to the Agent in same day funds at the earlier of the Closing Date (as hereinafter defined) or the End Date. In the event the Offering is extended beyond the End Date, the PPHI Parties and the Agent may agree to renew this Agreement under mutually acceptable terms.

3. Refund of Purchase Price . In the event that the Offering is not consummated for any reason, including but not limited to the inability of HoldCo to sell a minimum of 3,570,000 Shares during the Offering (including any permitted extension thereof) or such other minimum number of Shares as shall be established consistent with the Plans, this Agreement shall

terminate and any persons who have subscribed for or placed orders for any of the Shares shall have refunded to them the full amount that has been received from such person, without interest, as provided in the Prospectus. In the event the Offering is terminated for any reason not attributable to the action or inaction of the Agent, the Agent shall be paid the fees due to the date of such termination pursuant to Section 4(a) and (b) hereof.

4. Fees . In addition to the expenses specified in Section 9 hereof, as compensation for the Agent’s services under this Agreement, the Agent has received or will receive the following fees from the PPHI Parties:

(a) A success fee of 3.5% shall be paid based on the aggregate purchase price of Shares (i) sold in the Subscription Offering to Eligible Subscribers and (ii) shares sold to Diversus stockholders.

(b) A success fee of 5.75% shall be paid based on the aggregate purchase price of Shares sold in the Offering to (i) Insurance Capital Group LLC, Enstar Holdings (US) LLC, or any of their respective affiliates or assignees, including any amounts issued pursuant to the terms of the Exchangeable Note, and (ii) persons for the purpose of satisfying the NASDAQ listing requirement of having at least 300 round lot holders of Common Stock. The fees paid under paragraphs (a) and (b) of this Section 4 are collectively referred to as the “Success Fee.”

(d) The PPHI Parties will reimburse the Agent, upon request made from time to time, for its reasonable out-of-pocket expenses incurred in connection with its services under this Agreement in an amount not to exceed $15,000 without the written approval of HoldCo, including any legal and travel expenses. Any amounts paid to the Agent and related persons shall be repaid to the PPHI Parties to the extent any portion thereof is not actually incurred in compliance with FINRA Rule 5110(f)(2)(C).

If this Agreement is terminated in accordance with the provisions of Sections 3, 10, or 14, and the sale of Shares is not consummated, the Agent shall not be entitled to receive the fees set forth in Sections 4(a) and (b), and the Agent will return to the PPHI Parties any amounts advanced to the Agent to the extent not actually incurred by the Agent in accordance with FINRA Rule 5110(f)(2)(C).

5. Closing . If the minimum number of Shares required to be sold in the Offering pursuant to the Plans are subscribed for or ordered at or before the termination of the Offering, and the other conditions to the completion of the Offering are satisfied, HoldCo agrees to issue the Shares at the Closing Time (as hereinafter defined) against payment therefor by the means authorized by the Plans ; provided, however, that no funds shall be released to HoldCo until the conditions specified in Section 10 hereof have been complied with to the reasonable satisfaction of the Agent. HoldCo shall deliver written notice of the issuance of the Shares in accordance

with Section 1528(f) of the Pennsylvania Business Corporation Law (the “BCL”) in such authorized denominations and registered in such names as may be indicated on the subscription order forms directly to the purchasers thereof as promptly as practicable after the Closing Time. The Closing (the “Closing”) shall be held at the offices of Stevens & Lee, PC, 620 Freedom Business Center, King of Prussia, Pennsylvania, or at such other place as shall be agreed upon among the PPHI Parties and the Agent, at 9:00 a.m., Central Time, on the business day selected by HoldCo (the “Closing Date”), which business day shall be no less than two business days following the giving of prior notice by HoldCo to the Agent or at such other time as shall be agreed upon by HoldCo and the Agent. At the Closing, HoldCo shall deliver to the Agent by wire transfer in same-day funds the commissions, fees and expenses owing as set forth in Sections 4 and 9 hereof and the opinions and other documents required hereby shall be executed and delivered to effect the sale of the Shares as contemplated hereby and pursuant to the terms of the Prospectus ; provided, however, that all out-of-pocket expenses to which the Agent is entitled under Section 9 hereof shall be due and payable upon receipt by HoldCo of a written accounting therefor setting forth in reasonable detail the expenses incurred by the Agent. The hour and date upon which HoldCo shall release the Shares for delivery in accordance with the terms hereof is referred to herein as the “Closing Time.”

The Agent shall have no liability to any party for the records or other information provided by the PPHI Parties (or their agents) to the Agent for use in allocating the Shares. Subject to the limitations of Section 11 hereof, the PPHI Parties shall indemnify and hold harmless the Agent for any liability arising out of the allocation of the Shares in accordance with (i) the Plans generally, and (ii) the records or other information provided to the Agent by the PPHI Parties (or their respective agents).

6. Representations and Warranties of the PPHI Parties . The PPHI Parties jointly and severally represent and warrant to the Agent that, except as disclosed in the Prospectus:

(a)

Each of the PPHI Parties has and, as of the Closing Time, will have all such power, authority, authorizations, approvals and orders as may be required to enter into this Agreement, to carry out the provisions and conditions hereof and to issue and sell the Shares as provided herein and as described in the Prospectus. Subject to the receipt of regulatory approval, the execution, delivery and performance of this Agreement and the consummation of the transactions herein contemplated have been duly and validly authorized by all necessary corporate action on the part of each of the PPHI Parties that is a party thereto. This Agreement has been validly executed and delivered by each of the PPHI Parties and is a valid, legal and binding obligation of each of the PPHI Parties, enforceable in accordance with its terms, except as the legality, validity, binding nature and enforceability thereof may be limited by (i) bankruptcy, insolvency, moratorium, conservatorship, receivership or other similar laws relating to or affecting the enforcement of creditors’ rights generally; (ii) general equity principles regardless of whether such enforceability is considered in a proceeding in equity or at law; and (iii) the

extent, if any, that the provisions of Sections 11 or 12 hereof may be unenforceable as against public policy.

(b)

The Registration Statement, which was prepared by the PPHI Parties and filed with the Commission, was declared effective by the Commission on ___________, 2019, and no stop order has been issued with respect thereto and no proceedings therefor have been initiated or, to the knowledge of the PPHI Parties, threatened by the Commission. At the time the Registration Statement, including the Prospectus contained therein (including any amendment or supplement), became effective, at the Applicable Time (as defined in Section 6(d) hereof) and at the Closing Date, (x) the Registration Statement (including the Prospectus contained therein) complied and will comply in all material respects with the 1933 Act and the 1933 Act Regulations, and (y) the Registration Statement, including the Prospectus contained therein (including any amendment or supplement), and any information regarding the PPHI Parties contained in any Sales Information (as defined in Section 11(a) hereof) authorized by the PPHI Parties for use in connection with the Offering, (i) contained and will contain all statements required to be included therein in accordance with the 1933 Act and the 1933 Act Regulations, and (ii) did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. At the time any Rule 424(b) or (c) Prospectus was or is filed with the Commission and at the Closing Time referred to in Section 5, the Registration Statement, including the Prospectus contained therein (including any amendment or supplement thereto), and any state securities law application or any Sales Information authorized by the PPHI Parties for use in connection with the Offering did not and will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however , that the representations and warranties in this Section 6(b) shall not apply to statements or omissions made in reliance upon and in conformity with written information furnished to the PPHI Parties by the Agent regarding the Agent or the method of conducting the Offering expressly for use in the Registration Statement or Prospectus, which the parties hereto agree is limited to the information contained in the first three paragraphs under the caption “The Conversion and the Offering—Marketing and Underwriting Arrangements.”

(c)

At the time of filing of the Registration Statement and at the date hereof, HoldCo was not, and is not, an ineligible issuer, as defined in Rule 405. At the time of the filing of the Registration Statement and at the time of the use of any Issuer Free Writing Prospectus, as defined in Rule 433(h), HoldCo met the conditions required by Rules 164 and 433 for the use of a free writing prospectus. If required to be filed, HoldCo has filed any Issuer Free Writing

Prospectus related to the offered Shares at the time it is required to be filed under Rule 433 and, if not required to be filed, will retain such free writing prospectus in HoldCo’s records pursuant to Rule 433(g), and if any Issuer Free Writing Prospectus is used after the date hereof in connection with the offering of the Shares, HoldCo will file or retain such free writing prospectus as required by Rule 433.

(d)

As of the Applicable Time (as hereinafter defined), neither (i) the Issuer General Free Writing Prospectus(es) issued at or prior to the Applicable Time and the Statutory Prospectus, all considered together (collectively, the “General Disclosure Package”), nor (ii) any individual Issuer Limited-Use Free Writing Prospectus, when considered together with the General Disclosure Package, included any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The preceding sentence does not apply to statements in or omissions from any Prospectus included in the Registration Statement relating to the offered Shares or any Issuer Free Writing Prospectus based upon and in conformity with written information furnished to any of the PPHI Parties by the Agent specifically for use therein. As used in this Paragraph and elsewhere in this Agreement:

(i) “Applicable Time” means each and every date when a potential purchaser submitted a subscription or otherwise committed to purchase Shares.

(ii) “Statutory Prospectus” as of any time, means the Prospectus relating to the offered Shares that is included in the Registration Statement immediately prior to the Applicable Time, including any document incorporated by reference therein.

(iii) “Issuer Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433(h), relating to the offered Shares that is filed or is required to be filed with the Commission by HoldCo, or, if not required to be filed with the Commission, that is retained in HoldCo’s records pursuant to Rule 433(g). The term does not include any writing exempted from the definition of prospectus pursuant to clause (g) of Section 2(a)(10) of the 1933 Act, without regard to Rule 172 or Rule 173 under the 1933 Act Regulations.

(iv) “Issuer General Free Writing Prospectus” means any Issuer Free Writing Prospectus that is intended for general distribution to prospective investors.

(v) “Issuer Limited-Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is not an Issuer General Free Writing Prospectus. The term Issuer Limited-Use Free Writing Prospectus also includes any

“bona fide electronic road show,” as defined in Rule 433 under the 1933 Act Regulations, that is made available without restriction pursuant to Rule 433(d)(8)(ii) under the 1933 Act Regulations or otherwise, even though not required to be filed with the Commission.

(vi) “Permitted Free Writing Prospectus” means any free writing prospectus as defined in Rule 405 of the 1933 Act Regulations that is consented to by HoldCo and the Agent.

(e)

None of the PPHI Parties has directly or indirectly distributed or otherwise used and will not directly or indirectly distribute or otherwise use any prospectus, any “free writing prospectus” (as defined in Rule 405 of the 1933 Act Regulations) or other offering material (including, without limitation, content on HoldCo’s website that may be deemed to be a prospectus, free writing prospectus or other offering material) in connection with the offering and sale of the Shares other than any Permitted Free Writing Prospectus or the Prospectus or other materials permitted by the 1933 Act and the 1933 Act Regulations distributed by HoldCo and reviewed and approved in advance for distribution by the Agent. HoldCo has not, directly or indirectly, prepared or used and will not directly or indirectly, prepare or use, any Permitted Free Writing Prospectus except in compliance with the filing and other requirements of Rules 164 and 433 of the 1933 Act Regulations; assuming that such Permitted Free Writing Prospectus is so sent or given after the Registration Statement was filed with the Commission (and after such Permitted Free Writing Prospectus was, if required pursuant to Rule 433(d) under the Act, filed with the Commission), the sending or giving, by the Agent, of any Permitted Free Writing Prospectus will satisfy the provisions of Rules 164 and 433 (without reliance on subsections (b), (c) and (d) for Rule 164).

(f)

Each Issuer Free Writing Prospectus, as of its date of first use and at all subsequent times through the completion of the Offering and sale of the offered Shares or until any earlier date that HoldCo notified or notifies the Agent (as described in the next sentence), did not, does not and will not include any information that conflicted, conflicts or will conflict with the information contained in the Registration Statement, including any document incorporated by reference therein that has not been superseded or modified. If at any time following the date of first use of an Issuer Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer Free Writing Prospectus conflicted or would conflict with the information contained in the Registration Statement relating to the offered Shares or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances prevailing at that subsequent time, not misleading, HoldCo has notified or will notify promptly

the Agent so that any use of such Issuer Free-Writing Prospectus may cease until it is amended or supplemented, and HoldCo has promptly amended or will promptly amend or supplement such Issuer Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission. The foregoing two sentences do not apply to statements in or omissions from any Issuer Free Writing Prospectus based upon and in conformity with written information furnished to any of the PPHI Parties by the Agent specifically for use therein.


(g)	HoldCo will promptly file the Prospectus and any supplemental sales literature with the Commission. The Prospectus and all supplemental sales literature, as of the date the Registration Statement became effective and at the Closing Time referred to in Section 5, will have received all required authorizations for use in final form.

(h)

The Conversion Application, which was prepared by the PPHI Parties and filed with the Department, has been approved by the Department and the related Prospectus and Proxy Statement delivered or to be delivered to eligible subscribers of PPIX, PCA, and PIPE have been authorized for use by the Department. The Conversion Application complies in all material respects with the Conversion Act, except to the extent waived in writing by the Department, and did not and does not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.

(i)

No order has been issued by the Department, the Commission, or any other state or federal regulatory authority, preventing or suspending the use of the Registration Statement, the Prospectus, the Proxy Statement or any supplemental sales literature, and no action by or before any such government entity to revoke any approval, authorization or order of effectiveness related to the Offering is pending or, to the knowledge of the PPHI Parties, threatened.

(j)

The Plans have been duly adopted by the attorneys-in-fact of PPIX, PCA, and PIPE, and the offer and sale of the Shares will have been conducted in all material respects in accordance with the Plans, the Conversion Act (except to the extent waived or otherwise approved by the Department), and all other applicable laws, regulations, decisions and orders, including all terms, conditions, requirements and provisions precedent to the Offering imposed upon the PPHI Parties by the Department or the Commission and in the manner described in the Prospectus. To the knowledge of the PPHI Parties, no person has, or at the Closing Time will have, sought to obtain review of the final action of any state or federal regulatory authority with respect to the Plans or the Offering.


(k)	Feldman Financial Advisors, Inc., which prepared the Appraisals in connection with the Offering, has advised the PPHI Parties in writing that it is independent with respect to each of the PPHI Parties. The PPHI Parties believe that Feldman Financial Advisors, Inc. is an expert in preparing appraisals of insurance companies.

(l)

Baker Tilly Verchow Krause, LLP (“Baker Tilly”), which certified the financial statements of PCA and PIPE included in the Registration Statement, has advised the PPHI Parties that it is an independent registered public accounting firm within the meaning of the Code of Ethics of the American Institute of Certified Public Accountants (the “AICPA”), that it is registered with the Public Company Accounting Oversight Board (“PCAOB”), and that it is, with respect to each of PCA and PIPE, an independent certified public accountant within the meaning of, and is not in violation of the auditor independence requirements of the 1933 Act, the 1933 Act Regulations, the regulations of the PCAOB and the Sarbanes Oxley Act of 2002 (the “Sarbanes-Oxley Act”). Eisner Amper LLP (“Eisner”), which certified the financial statements of PPIX included in the Registration Statement, has advised the PPHI Parties that it is an independent registered public accounting firm within the meaning of the Code of Ethics of the American Institute of Certified Public Accountants (the “AICPA”), that it is registered with the Public Company Accounting Oversight Board (“PCAOB”), and that it is, with respect to PPIX, an independent certified public accountant within the meaning of, and is not in violation of the auditor independence requirements of the 1933 Act, the 1933 Act Regulations, the regulations of the PCAOB and the Sarbanes Oxley Act of 2002 (the “Sarbanes-Oxley Act”).

(m)

The consolidated financial statements, schedules and notes thereto that are included in the Registration Statement and that are a part of the Prospectus present fairly the consolidated financial condition and retained earnings of PPIX, PCA, and PIPE and their subsidiaries as of the dates indicated and the consolidated results of operations and cash flows for the periods specified. The financial statements comply in all material respects with the applicable accounting requirements of the 1933 Act Regulations, Regulation S-X of the Commission, and accounting principles generally accepted in the United States of America (“GAAP”) applied on a consistent basis during the periods presented except as otherwise noted therein, and present fairly in all material respects the information required to be stated therein. The other financial, statistical and pro forma information and related notes included in the Prospectus present fairly the information shown therein on a basis consistent with the audited and unaudited financial statements included in the Prospectus, and as to the pro forma adjustments, the adjustments made therein have been properly applied on the basis described therein.

(n)

Since the respective dates as of which information is given in the Registration Statement, including the Prospectus, other than disclosed therein: (i) there has not been any material adverse change in the financial condition or in the earnings, capital, properties, business affairs or prospects of any of the PPHI Parties or of the PPHI Parties taken as a whole, whether or not arising in the ordinary course of business (“Material Adverse Effect”); (ii) there has not been any material change in total assets of the PPHI Parties, nor have any of the PPHI Parties issued any securities or incurred any liability or obligation for borrowings other than in the ordinary course of business; and (iii) there have not been any material transactions entered into by any of the PPHI Parties, other than those in the ordinary course of business. The capitalization, liabilities, assets, properties and business of the PPHI Parties conform in all material respects to the descriptions thereof contained in the Prospectus, and none of the PPHI Parties has any material liabilities of any kind, contingent or otherwise, except as disclosed in the Registration Statement or the Prospectus.

(o)

HoldCo is a corporation duly incorporated and validly existing under the laws of the Commonwealth of Pennsylvania, with corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus, and is, and as of the Closing Date will be, qualified to transact business and in good standing in each jurisdiction in which the conduct of its business requires such qualification unless the failure to qualify in one or more of such jurisdictions would not have a Material Adverse Effect. As of the Closing Time, HoldCo will be in good standing under the laws of the Commonwealth of Pennsylvania and will have obtained all licenses, permits and other governmental authorizations required for the conduct of its business, except those that individually or in the aggregate would not have a Material Adverse Effect; and all such licenses, permits and governmental authorizations are in full force and effect, and HoldCo is, and as of the Closing Date will be, in compliance therewith in all material respects. There are no outstanding options, warrants or other rights to purchase any securities of HoldCo or any of the PPHI Parties except as disclosed in the Prospectus.

(p)

Each of PPIX, PCA, and PIPE is an unincorporated reciprocal insurance exchange organized under the laws of the Commonwealth of Pennsylvania and validly existing under the laws of the Commonwealth of Pennsylvania, with power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus, and is, and as of the Closing Date will be, qualified to transact business and in good standing in each jurisdiction in which the conduct of its business requires such qualification unless the failure to qualify in one or more of such jurisdictions would not have a Material Adverse Effect. As of the Closing Time, each of PPIX, PCA, and PIPE will be in good standing

under the laws of the Commonwealth of Pennsylvania and will have obtained all licenses, permits and other governmental authorizations required for the conduct of its business, except those that individually or in the aggregate would not have a Material Adverse Effect; and all such licenses, permits and governmental authorizations are in full force and effect, and each of PPIX, PCA, and PIPE is, and at the Closing Date will be, in compliance therewith in all material respects. None of PPIX, PCA, or PIPE has any subsidiary.


(q)	[Intentionally Omitted].

(r)

The authorized capital stock of HoldCo consists of 10,000,000 shares of Common Stock, $0.01 par value per share. Upon consummation of the Offering, the issued and outstanding Common Stock of HoldCo will be within the range set forth in the Prospectus under the caption “Capitalization” (except for subsequent issuances, if any, pursuant to reservations, agreements or employee benefit plans referred to in the Prospectus); and the shares of Common Stock to be subscribed for in the Offering have been duly and validly authorized for issuance and, when issued and delivered by HoldCo pursuant to the Plans against payment of the consideration calculated as set forth in the Plans and the Prospectus, will be duly and validly issued and fully paid and nonassessable; the issuance of the Shares is not subject to preemptive rights, except for the Subscription Rights granted pursuant to the Plans; and the terms and provisions of the Shares will conform in all material respects to the description thereof contained in the Prospectus. Upon issuance of the Shares against payment therefor in the Offering as set forth in the Plans and the Prospectus such shares will be duly authorized, fully paid, and nonassessable. No holder of Shares will be subject to personal liability by reason of being such a holder.

(s)

Upon consummation of the Conversion, the authorized capital stock of Positive Insurance Company will be 1,000,000 shares of common stock, $10.00 par value per share (the “Positive Insurance Company Common Stock”), and no shares of Positive Insurance Company Common Stock have been or will be issued prior to the Closing Time. The shares of Positive Insurance Company Common Stock to be issued to HoldCo will have been duly authorized for issuance and, when issued and delivered by Positive Insurance Company, will be duly and validly issued and fully paid and nonassessable, and all such Positive Insurance Company Common Stock will be owned beneficially and of record by HoldCo, free and clear of any security interest, mortgage, pledge, lien, encumbrance or legal or equitable claim; the certificates representing the shares of Positive Insurance Company Common Stock will conform with the requirements of applicable laws and regulations.


(t)	None of the PPHI Parties is and, as of the Closing Time, none of the PPHI Parties will be, in violation of its respective declaration of organization,

charter, certificate or articles of incorporation, certificate of organization, operating agreement or bylaws (collectively, the “Organizational Documents”), or in material default in the performance or observance of any obligation, agreement, covenant, or condition contained in any contract, lease, loan agreement, indenture or other instrument to which any of them is a party or by which any of them, or any of their respective properties, may be bound that would result in a Material Adverse Effect. The consummation of the transactions herein contemplated will not (i) conflict with or constitute a breach of, or default under, the Organizational Documents of any of the PPHI Parties, or materially conflict with or constitute a material breach of, or default under, any material contract, lease or other instrument to which any of the PPHI Parties is a party or bound, or any applicable law, rule, regulation or order that is material to the financial condition of the PPHI Parties, on a consolidated basis; (ii) violate any authorization, approval, judgment, decree, order, statute, rule or regulation applicable to the PPHI Parties except for such violations that would not have a Material Adverse Effect; or (iii) result in the creation of any material lien, charge or encumbrance upon any property of any of the PPHI Parties.

(u)

No default exists, and no event has occurred that with notice or lapse of time, or both, would constitute a material default on the part of any of the PPHI Parties, in the due performance and observance of any term, covenant or condition of any indenture, mortgage, deed of trust, note, bank loan or credit agreement or any other material instrument or agreement to which any of the PPHI Parties is a party or by which any of them or any of their property is bound or affected in any respect that, in any such case, is material to the PPHI Parties individually or considered as one enterprise, and such agreements are in full force and effect; and no other party to any such agreements has instituted or, to the knowledge of the PPHI Parties, threatened any action or proceeding wherein any of the PPHI Parties is alleged to be in default thereunder under circumstances where such action or proceeding, if determined adversely to any of the PPHI Parties, would have a Material Adverse Effect.

(v)

The PPHI Parties have good and marketable title to all assets that are material to the businesses of the PPHI Parties and to those assets described in the Prospectus as owned by them, free and clear of all material liens, charges, encumbrances, restrictions or other claims, except such as are described in the Prospectus or which do not have a Material Adverse Effect, and all of the leases and subleases that are material to the businesses of the PPHI Parties, as described in the Registration Statement or Prospectus, are in full force and effect.


(w)	The PPHI Parties are not in material violation of any directive from the Department, the Commission, or any other agency to make any material

change in the method of conducting their respective businesses; the PPHI Parties have conducted and are conducting their respective businesses so as to comply in all respects with all applicable statutes and regulations (including, without limitation, regulations, decisions, directives and orders of the Department and the Commission), except where the failure to so comply would not reasonably be expected to result in any Material Adverse Effect, and there is no charge, investigation, action, suit or proceeding before or by any court, regulatory authority or governmental agency or body pending or, to the knowledge of any of the PPHI Parties, threatened, that would reasonably be expected to materially and adversely affect the Offering, the performance of this Agreement, or the consummation of the transactions contemplated in the Plans as described in the Registration Statement, or that would reasonably be expected to result in a Material Adverse Effect.

(x)

The PPHI Parties have received an opinion of their counsel, Stevens & Lee P.C., with respect to the legality of the Shares and an opinion of Stevens & Lee, P.C. with respect to the federal income tax consequences of the Conversion and the Offering, as described in the Registration Statement and the Prospectus, and the facts and representations upon which such opinions are based are truthful, accurate and complete, and none of the PPHI Parties will take any action inconsistent therewith. All material aspects of the aforesaid opinions are accurately summarized in the Prospectus. None of the PPHI Parties has taken or will take any action inconsistent with such opinions.


(y)	The PPHI Parties have timely filed all required federal and state tax returns, have paid all taxes that have become due and payable in respect of such returns, except where permitted to be extended, have made adequate reserves for similar future tax liabilities, and no deficiency has been asserted with respect thereto by any taxing authority.

(z)

No approval, authorization, consent or other order of any regulatory, supervisory or other public authority is required for the execution and delivery by the PPHI Parties of this Agreement and the issuance of the Shares, except (i) for the approval of the Department (which will have been received as of the Closing Time), (ii) the non-objection of FINRA, and (iii) any necessary qualification, notification, or registration or exemption under the securities or blue sky laws of the various states in which the Shares are to be offered for sale.

(aa)None of the PPHI Parties has: (i) issued any securities within the last 18 months (except for notes to evidence bank loans or other liabilities in the ordinary course of business or as described in the Prospectus); (ii) had any dealings with respect to sales of securities within the 18 months prior to the date hereof with any member of FINRA except the Agent, or any person related to or associated with such member, other than discussions and

meetings relating to the Offering and purchases and sales of U.S. government and agency and other securities in the ordinary course of business; (iii) entered into a financial or management consulting agreement; or (iv) engaged any intermediary between the Agent and the PPHI Parties in connection with the Offering, and no person is being compensated in any manner for such services.

(bb)None of the PPHI Parties nor, to the knowledge of the PPHI Parties, any employee of the PPHI Parties, has made any payment of funds of the PPHI Parties as a loan to any person for the purchase of Shares or has made any other payment of funds prohibited by law, and no funds have been set aside to be used for any payment prohibited by law.

(cc)The PPHI Parties and their respective subsidiaries comply in all material respects with any applicable financial record keeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, and the regulations and rules thereunder. The PPHI Parties have established compliance programs and are in compliance in all material respects with the requirements of the USA PATRIOT Act and all applicable regulations promulgated thereunder, and there is no charge, investigation, action, suit or proceeding by or before any court, regulatory authority or governmental entity or body pending or, to the knowledge of the PPHI Parties, threatened regarding compliance by the PPHI Parties with the USA PATRIOT Act or any regulations promulgated thereunder.

(dd)The records of the subscribers of PPIX, PCA, and PIPE, including, without limitation, as to Eligible Subscribers, are accurate and complete in all material respects.

(ee)The PPHI Parties comply in all material respects with all laws, rules and regulations relating to environmental protection, and none of them has been notified or is otherwise aware that any of them is potentially liable, or is considered potentially liable, under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or any other federal, state or local environmental laws and regulations; no action, suit, regulatory investigation or other proceeding is pending or, to the knowledge of the PPHI Parties, threatened against the PPHI Parties relating to environmental protection, nor do the PPHI Parties have any reason to believe any such proceedings may be brought against any of them; and no disposal, release or discharge of hazardous or toxic substances, pollutants or contaminants, including petroleum and gas products, as any of such terms may be defined under federal, state or local law, has occurred on, in, at or about any facilities or properties owned or leased by any of the PPHI Parties.

(ff)None of the PPHI Parties maintains any “pension plan,” as defined in the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).

In addition, (A) the employee benefit plans, including employee welfare benefit plans, of the PPHI Parties (the “Employee Plans”) have been operated in compliance with the applicable provisions of ERISA, the Internal Revenue Code of 1986, as amended (the “Code”), all regulations, rulings and announcements promulgated or issued thereunder and all other applicable laws and governmental regulations, (B) no reportable event under Section 4043(c) of ERISA has occurred with respect to any Employee Plan of the PPHI Parties for which the reporting requirements have not been waived, (C) no prohibited transaction under Section 406 of ERISA, for which an exemption does not apply, has occurred with respect to any Employee Plan of the PPHI Parties and (D) all Employee Plans that are group health plans have been operated in compliance with the group health plan continuation coverage requirements of Section 4980B of the Code, except to the extent such noncompliance, reportable event or prohibited transaction would not have, individually or in the aggregate, a Material Adverse Effect. There are no pending or, to the knowledge of the PPHI Parties, threatened, claims by or on behalf of any Employee Plan, by any employee or beneficiary covered under any such Employee Plan or by any governmental authority, or otherwise involving such Employee Plans or any of their respective fiduciaries (other than for routine claims for benefits). Each of the PPHI Parties has fulfilled, in all material respects, its obligations, if any, under the minimum funding standards of Section 302 of the United States Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and the regulations promulgated thereunder with respect to any “plan” (as defined in Section 3(3) of ERISA and the regulations thereunder), that is maintained by any of the PPHI Parties for their employees, and any such plan is in compliance in all material respects with the presently applicable provisions of ERISA and the regulations thereunder. None of the PPHI Parties has incurred any unpaid liability under Title IV of ERISA to the Pension Benefit Guaranty Corporation (other than for the payment of premiums in the ordinary course) or to any such plan.

(gg)HoldCo has applied for approval, subject to completion of the Offering, to have the Shares listed on the NASDAQ Capital Market effective as of the Closing Time.

(hh)Except as disclosed in the Prospectus, all material reinsurance treaties or agreements to which any of the PPHI Parties is a party or is a named reinsured are in full force and effect. To the knowledge of the PPHI Parties, none of the PPHI Parties nor any other party thereto, is in default under any such agreement, and no party may terminate any such agreement by reason of the transactions contemplated by the Plans.


(ii)	HoldCo has filed a registration statement on Form 8-A to register the Common Stock under Section 12(g) of the Securities Exchange Act of 1934,

as amended (the “Exchange Act”), and pursuant to Form 8-A such registration statement shall be effective concurrent with the effectiveness of the Registration Statement.


(jj)	There is no contract or other document of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed as required.

(kk)The PPHI Parties maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (iii) access to cash and other liquid assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded ledger assets are compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The books, records and accounts and systems of internal accounting control of the PPHI Parties and their subsidiaries comply in all material respects with the requirements of Section 13(b)(2) of the Securities Exchange Act of 1934, as amended (the “1934 Act”). HoldCo has established and maintains “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the 1934 Act) that are effective in ensuring that the information it will be required to disclose in the reports it files or submits under the 1934 Act is accumulated and communicated to HoldCo’ management (including HoldCo’s chief executive officer and chief financial officer) in a timely manner and recorded, processed, summarized and reported within the periods specified in the Commission’s rules and forms. To the knowledge of the PPHI Parties, Baker Tilly, Eisner, and the Audit Committee of the Board of Directors have been advised of: (A) any significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that could adversely affect HoldCo’s ability to record, process, summarize, and report financial data; and (B) any fraud, whether or not material, that involves management or other employees who have a significant role in the internal accounting controls of the PPHI Parties and their subsidiaries.

(ll)

Except as described in the Prospectus, (i) there are no contractual encumbrances or contractual restrictions or regulatory restrictions on the ability of any of the PPHI Parties to pay dividends or make any other distributions on its capital stock, and (ii) there are no contractual encumbrances or contractual restrictions on the ability of the PPHI Parties (A) to pay any indebtedness owed to any of the PPHI Parties or (B) to make any loans or advances to, or investments in, any of the PPHI Parties, or (C) to transfer any of its property or assets to any of the PPHI Parties.

(mm)None of the PPHI Parties is required to be registered as an “investment company” under the Investment Company Act of 1940, as amended, or as an “investment advisor” under the Investment Advisor Act of 1940, as amended.

(nn)The PPHI Parties have taken all actions necessary to obtain at the Closing Time a blue sky memorandum from Stevens & Lee, PC.

(oo)The PPHI Parties carry, or are covered by, insurance in such amounts and covering such risks as the PPHI Parties deem reasonably adequate for the conduct of their respective businesses and the value of their respective properties.

(pp)The PPHI Parties have not relied upon the Agent for any legal, tax or accounting advice in connection with the Conversion.

(qq)The Standby Stock Purchase Agreement dated as of June 8, 2018, among the PPHI Parties and ICG (the “Standby Stock Purchase Agreement”) is in full force and effect.

(rr)

The statistical and market related data contained in any Permitted Free Writing Prospectus, the Prospectus and the Registration Statement are based on or derived from sources that the PPHI Parties believe were reliable and accurate at the time they were filed with the Commission. No forward-looking statement (within the meaning of Section 27A of the 1933 Act and Section 21E of the 1934 Act) contained in the Registration Statement, the Prospectus, or any Permitted Free Writing Prospectus has been made or reaffirmed without a reasonable basis or has been disclosed other than in good faith.


(ss)	None of the PPHI Parties, or any of their subsidiaries nor, to the knowledge of the PPHI Parties, any other person associated with or acting on behalf of the PPHI Parties or any of their subsidiaries has violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder.


(tt)	Except for rights of ICG under the Standby Stock Purchase Agreement, there are no persons with registration rights or other similar rights to have any securities of HoldCo registered for sale under the 1933 Act or otherwise registered for sale or sold by HoldCo under the 1933 Act.

(uu)There are no contracts or documents that are required to be described in the Registration Statement, the General Disclosure Package or the Prospectus or to be filed as exhibits to the Registration Statement that have not been so described or filed as required.

(vv)The PPHI Parties and their subsidiaries own or possess all material patents, copyrights, trademarks, service marks, inventions, trade names or other intellectual property (collectively, “Intellectual Property”), or have valid licenses to use such Intellectual Property necessary to carry on the business now operated by them, except where the failure to own or have the right to use such Intellectual Property, singularly or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. None of the PPHI Parties nor any of their subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property.

(ww)None of the PPHI Parties nor any of their subsidiaries or, to the knowledge of the PPHI Parties, any director, officer, or employee of any of them is an individual or entity currently the subject or target of any sanctions administered or enforced by the United States Government, including without limitation the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”).

(xx)None of the PPHI Parties is in violation in any material respect of the provisions of the Health Insurance Portability and Accountability Act of 1996.

Any certificates signed by an officer of any of the PPHI Parties and delivered to the Agent or its counsel that refer to this Agreement shall be deemed to be a representation and warranty by the PPHI Parties to the Agent as to the matters covered thereby with the same effect as if such representation and warranty were set forth herein.

7. Representations and Warranties of the Agent . The Agent represents and warrants to the PPHI Parties that:


(a)	The Agent is a limited liability company and is validly existing in good standing under the laws of the Commonwealth of Pennsylvania, with full power and authority to provide the services to be furnished to the PPHI Parties hereunder.

(b)

The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary action on the part of the Agent, and this Agreement is a legal, valid and binding agreement of the Agent, enforceable in accordance with its terms except as the legality, validity, binding nature and enforceability thereof may be limited by (i) bankruptcy, insolvency, moratorium, conservatorship, receivership or other similar laws relating to or affecting the enforcement of creditors’ rights generally; (ii) general equity principles regardless of whether such enforceability is considered in a proceeding in equity or at law; and (iii) the extent, if any, that the provisions of Sections 11 or 12 hereof may be unenforceable as against public policy.


(c)	Each of the Agent and its employees, agents and representatives who shall perform any of the services hereunder has, and until the Offering is completed or terminated shall maintain, all licenses, approvals and permits necessary to perform such services.


(d)	No action, suit, charge or proceeding before the Commission, FINRA, any state securities commission or any court is pending, or to the knowledge of Agent threatened, against the Agent that, if determined adversely to Agent, would have a material adverse effect upon the ability of the Agent to perform its obligations under this Agreement.


(e)	The Agent is registered as a broker/dealer pursuant to Section 15(b) of the 1934 Act and is a member of FINRA.

(f)

Any funds received in the Offering by the Agent from prospective purchasers of the Shares shall be delivered by the Agent to _____________________, as escrow agent (the “Escrow Agent”) for deposit in the escrow account established under the Escrow Agreement dated ________________, 2018, by and among PPIX, HoldCo, the Agent, and the Escrow Agent (the “Escrow Agreement”), by noon of the next business day after receipt by the Agent, together with a written account of each purchaser that sets forth, among other things, the name and address of the purchaser, the number of Shares purchased and the amount paid therefor. Any checks received by the Agent that are made payable to any party other than the Escrow Agent shall be returned to the purchaser who submitted the check and shall not be accepted. The Agent shall require any selected dealers agreements with Assisting Brokers to include provisions requiring such Assisting Brokers to comply with Rule 15c2-4 under the 1934 Act.

8. Covenants of the PPHI Parties . The PPHI Parties hereby jointly and severally covenant with the Agent as follows:

(a)

HoldCo will not, at any time after the date the Registration Statement is declared effective, file any amendment or supplement to the Registration Statement without providing the Agent and its counsel an opportunity to review such amendment or supplement or, except as may be required by law, file any amendment or supplement to which the Agent shall reasonably object. HoldCo will furnish promptly to the Agent and its counsel copies of all correspondence from the Commission with respect to the Registration Statement and HoldCo’s responses thereto.


(b)	HoldCo represents and agrees that, unless it obtains the prior consent of the Agent, and the Agent represents and agrees that, unless it obtains the prior consent of HoldCo, it has not made and will not make any offer relating to the offered Shares that would constitute an “issuer free writing prospectus,” as defined in Rule 433, or that would constitute a “free writing prospectus,” as

defined in Rule 405, required to be filed with the Commission. Any such free writing prospectus consented to by HoldCo and the Agent is hereinafter referred to as a “Permitted Free Writing Prospectus.” HoldCo represents that it has treated or agrees that it will treat each Permitted Free Writing Prospectus as an “issuer free writing prospectus,” as defined in Rule 433, and has complied and will comply with the requirements of Rule 433 applicable to any Permitted Free Writing Prospectus, including timely Commission filing where required, legending and record keeping. HoldCo need not treat any communication as a free writing prospectus if it is exempt from the definition of prospectus pursuant to Clause (a) of Section 2(a)(10) of the 1933 Act without regard to Rule 172 or 173.

(c)

The PPHI Parties will use commercially reasonable efforts to cause any post-effective amendment to the Registration Statement to be declared effective by the Commission and will immediately upon receipt of any information concerning the events listed below notify the Agent (i) when the Registration Statement, as amended, has become effective; (ii) of any request by the Commission or any other governmental entity for any amendment or supplement to the Registration Statement, or of any request for additional information; (iii) of the issuance by the Commission or any other governmental agency of any order or other action suspending the Offering or the use of the Registration Statement or the Prospectus or any other filing of the PPHI Parties under the 1933 Act, the 1933 Act Regulations, the 1934 Act, and the rules and regulations of the Commission promulgated under the 1934 Act (the “1934 Act Regulations”), the Conversion Act or any other applicable law, or the threat of any such action; or (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the initiation or threat of initiation of any proceedings for that purpose.

(d)

For a period of eighteen (18) months after the Closing Time, the PPHI Parties will comply in all material respects with any and all terms, conditions, requirements and provisions with respect to the Offering and the transactions contemplated thereby imposed by the Commission or the Department, by applicable state law and regulations (including without limitation the Conversion Act), and by the 1933 Act, the 1933 Act Regulations, the 1934 Act, and 1934 Act Regulations, FINRA, and the NASDAQ Stock Market, to be complied with prior to or subsequent to the Closing Time; and when the Prospectus is required to be delivered, the PPHI Parties will comply in all material respects, at their own expense, with all material requirements imposed upon them by the Commission or the Department, by applicable state law and regulations and by the 1933 Act, the 1933 Act Regulations, the 1934 Act, and the 1934 Act Regulations, in each case as from time to time in force, so far as necessary to permit the continuance of sales or dealing in the Shares

during such period in accordance with the provisions hereof and the Prospectus.

(e)

Each of the PPHI Parties will inform the Agent of any event or circumstances of which it is or becomes aware as a result of which the Registration Statement and/or Prospectus, as then supplemented or amended, would include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading. If it is necessary, in the reasonable opinion of counsel for the PPHI Parties and in the reasonable opinion of the Agent, to amend or supplement the Registration Statement or the Prospectus in order to correct such untrue statement of a material fact or to make the statements therein not misleading in light of the circumstances existing at the time of their use, the PPHI Parties will, at their expense, prepare and file with the Commission, as necessary under applicable federal and state rules and regulations, and furnish to the Agent a reasonable number of copies of an amendment or amendments of, or a supplement or supplements to, the Registration Statement and the Prospectus (in form and substance reasonably satisfactory to the Agent after a reasonable time for review) that will amend or supplement the Registration Statement and/or the Prospectus so that as amended or supplemented it will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances existing at the time, not misleading. For the purpose of this subsection, each of the PPHI Parties will furnish such information with respect to itself as the Agent may from time to time reasonably request.

(f)

Pursuant to the terms of the Plans, HoldCo will endeavor in good faith, in cooperation with the Agent, to register or to qualify the Shares for offer and sale or to exempt such Shares from registration and to exempt HoldCo and its officers, directors and employees from registration as broker-dealers, under the applicable securities laws of the jurisdictions in which the Offering will be conducted; provided, however , that HoldCo shall not be obligated to file any general consent to service of process, to qualify as a foreign corporation to do business in any jurisdiction in which it is not so qualified, or to register its directors or officers as brokers, dealers, salesmen, or agents in any jurisdiction. In each jurisdiction where any of the Shares shall have been registered or qualified as above provided, HoldCo will make and file such statements and reports as are or may be required by the laws of such jurisdiction as a result of, or in connection with, such registration or qualification.


(g)	HoldCo will not sell or issue, contract to sell or otherwise dispose of, for a period of 180 days after the date hereof, without the Agent’s prior written consent, which consent shall not be unreasonably withheld, any shares of Common Stock, any option, warrant, contract or other right to purchase shares

of Common Stock, or any security convertible into or exercisable or exchangeable for shares of Common Stock, other than in connection with any plan or arrangement described in the Prospectus.

(h)

For the period of three years from the date of this Agreement, HoldCo will furnish to the Agent upon request (i) a copy of each report of HoldCo furnished to or filed with the Commission under the 1934 Act or any national securities exchange or system or the NASDAQ Stock Market on which any class of securities of HoldCo is listed or quoted, (ii) a copy of each report of HoldCo mailed to holders of Common Stock or non-confidential report filed with the Commission, the Department, or any other supervisory or regulatory authority or any national securities exchange or system or the NASDAQ Stock Market on which any class of the securities of HoldCo is listed or quoted, (iii) each press release and material news item and article released by the PPHI Parties, and (iv) from time-to-time, such other publicly available information concerning the PPHI Parties as the Agent may reasonably request; provided that , any information or documents available on the Commission’s Electronic Data Gathering, Analysis and Retrieval System shall be considered furnished for purposes of this Section 8(h).


(i)	The PPHI Parties will use the net proceeds from the sale of the Shares in the manner set forth in the Prospectus under the caption “USE OF PROCEEDS.”


(j)	HoldCo will distribute the Prospectus or other offering materials in connection with the offering and sale of the Common Stock only in accordance with the 1933 Act, the 1933 Act Regulations, the 1934 Act and the 1934 Act Regulations, and the laws of any state in which the shares are qualified for sale.


(k)	Prior to the Closing Time, HoldCo shall register its Common Stock under Section 12(b) of the 1934 Act, as amended, and will request that such registration statement be effective as of the Closing Time. HoldCo will use commercially reasonable efforts to list, subject to notice of issuance, the Shares on the NASDAQ Capital Market.


(l)	[Intentionally Omitted].


(m)	HoldCo will report the use of proceeds of the Offering in accordance with Rule 463 under the 1933 Act.

(n)

The PPHI Parties will maintain appropriate arrangements for depositing with the Escrow Agent all funds received from persons mailing subscriptions for or orders to purchase Shares on a non-interest bearing basis as described in the Prospectus until the Closing Time and satisfaction of all conditions precedent to the release of HoldCo’s obligation to refund payments received from persons subscribing for or ordering Shares in the Offering, in accordance with

the Plans as described in the Prospectus, or until refunds of such funds have been made to the persons entitled thereto. The PPHI Parties will maintain, together with the Agent, such records of all funds received to permit the funds of each subscriber to be separately insured by the FDIC (to the maximum extent allowable) and to enable the PPHI Parties to make the appropriate refunds of such funds in the event that such refunds are required to be made in accordance with the Plans and as described in the Prospectus.


(o)	Until the Closing Time, the PPHI Parties will take such actions and furnish such information as are reasonably requested by the Agent in order for the Agent to ensure compliance with Rule 5130 of FINRA.


(p)	The PPHI Parties will conduct their businesses in compliance in all material respects with all applicable federal and state laws, rules, regulations, decisions, directives and orders, including all decisions, directives and orders of the Commission and the Department.

(q)

The PPHI Parties shall comply with any and all terms, conditions, requirements and provisions with respect to the Plans and the transactions contemplated thereby imposed by the Commission, the 1933 Act, the 1933 Act Regulations, the 1934 Act and the 1934 Act Regulations to be complied with subsequent to the Closing Time for so long as such terms, conditions, requirements and provisions are applicable. HoldCo will comply with all provisions of all undertakings contained in the Registration Statement until such undertakings are performed in full or are no longer applicable.


(r)	The PPHI Parties will not amend the Plans without the consent of the Agent, which consent shall not be unreasonably withheld or delayed.


(s)	HoldCo shall provide the Agent with any information necessary to assist with the allocation of the Shares in the Offering in the event of an oversubscription, and such information shall be accurate and reliable in all material respects.


(t)	HoldCo will not deliver the Shares until the PPHI Parties have satisfied or caused to be satisfied each condition set forth in Section 10 hereof, unless such condition is waived in writing by the Agent.


(u)	Immediately upon completion of the sale by HoldCo of the Shares contemplated by the Plans and the Prospectus, all of the issued and outstanding shares of capital stock of Positive Insurance Company shall be owned by HoldCo.


(v)	Prior to the Closing Time, the Plans shall have been approved by the voting subscribers of PPIX, PCA and PIPE in accordance with the provisions of the Conversion Act.

(w)

On or before the Closing Time, the PPHI Parties will have completed all conditions precedent to the Offering specified in the Plans and the offer and sale of the Shares will have been conducted in all material respects in accordance with the Plans and with all other applicable laws, regulations, decisions and orders, including all terms, conditions, requirements and provisions precedent to the Offering imposed upon any of the PPHI Parties by the Department, the Commission or any other regulatory authority and in the manner described in the Prospectus.


(x)	HoldCo shall notify the Agent when funds shall have been received for the minimum number of Shares.


(y)	The PPHI Parties shall cause each of the Persons listed on Schedule A attached hereto to execute and deliver to the Agent a lockup agreement substantially in the form of Exhibit B attached hereto.

9. Payment of Expenses . The PPHI Parties will pay for all expenses incident to the performance of this Agreement, including without limitation: (a) the preparation, printing, filing, delivery and shipment of the Registration Statement, including the Prospectus, and all amendments and supplements thereto, and all filing fees related thereto; (b) all filing fees and expenses in connection with the qualification or registration of the Shares for offer and sale by HoldCo under the securities or “blue sky” laws, including without limitation filing fees, reasonable legal fees and disbursements of counsel in connection therewith, and in connection with the preparation of a blue sky law survey; (c) the filing fees of FINRA related to the Agent’s fairness filing under Rule 5110 (or any successor rule of FINRA); (e) fees and expenses related to the preparation of the Appraisal; (f) fees and expenses related to auditing and accounting services; (g) all expenses relating to advertising, postage, temporary personnel, investor meetings and the operation of the stock information center; (h) transfer agent fees and costs of preparation and distribution of written notices under Conversion Act; and (i) fees and expenses of the PPHI Parties relating to presentations or meetings undertaken in connection with the marketing and sale of the Shares to prospective investors and the Agent’s sales forces, including expenses associated with travel, lodging, and other expenses incurred by the officers of the PPHI Parties; provided, however , that the Agent shall pay the fees and expenses of the Agent and any of its affiliates relating to presentations or meetings undertaken in connection with the marketing and sale of the Shares to prospective investors and the Agent’s sales forces, including expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations, travel, lodging and other expenses incurred by the officers of the Agent and any such consultants. In the event that the Agent incurs any expenses on behalf of the PPHI Parties, the PPHI Parties will pay or reimburse the Agent for such expenses in an amount not to exceed $15,000 (including travel and legal expenses) regardless of whether the Offering is successfully completed. Not later than two days prior to the Closing Time, the Agent will provide the PPHI Parties with a detailed accounting of all reimbursable expenses to be paid at the Closing.

10. Conditions to the Agent’s Obligations . The obligations of the Agent hereunder and the occurrence of the Closing are subject to the conditions that (i) all representations and warranties and other statements of the PPHI Parties herein contained are, at and as of the commencement of the Offering and at and as of the Closing Time, true and correct in all material respects, and (ii) the PPHI Parties shall have performed all of their obligations hereunder to be performed on or before such dates, and to the following further conditions:

(a)

The Registration Statement shall have been declared effective by the Commission, and no stop order or other action suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or, to any of the PPHI Parties’ knowledge, threatened by the Commission or any state authority and no order or other action suspending the authorization for use of the Prospectus or the consummation of the Conversion shall have been issued or proceedings therefor initiated or, to any of the PPHI Parties’ knowledge, threatened by the Department, the Commission, or any other governmental body. The Conversion Application shall have been approved by the Department.


(b)	At the Closing Time, the Agent shall have received:

(1) An opinion or opinions, dated as of the Closing Time, of Stevens & Lee, P.C., as counsel to the PPHI Parties, in form and substance satisfactory to counsel for the Agent, to the effect that:

(i)

HoldCo is a corporation duly incorporated and validly subsisting under the laws of the Commonwealth of Pennsylvania, with corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus, and, to its knowledge, is duly qualified to transact business and will be in good standing in each jurisdiction in which the conduct of its business requires such qualification and in which the failure to qualify would have a Material Adverse Effect.

(ii)

Prior to the Closing Time PPIX, PCA, and PIPE were unincorporated reciprocal insurance exchanges, and after the Closing Time Positive Insurance Company will be a duly incorporated and validly subsisting Pennsylvania stock insurance company with corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into this Agreement and perform its obligations hereunder, and, to its knowledge, is duly qualified to transact business and in good standing in each jurisdiction in which the conduct of its business requires such qualification and in which the failure to qualify would have a Material Adverse Effect.


(iii)	[Intentionally Omitted].

(iv)

The authorized capital stock of HoldCo consists of 10,000,000 shares of Common Stock, $0.01 par value per share, and HoldCo has no shares of capital stock issued and outstanding. Immediately upon consummation of the Offering, (a) the shares of Common Stock of HoldCo to be subscribed for or for which orders are placed in the Offering will have been duly and validly authorized for issuance, and when issued and delivered by HoldCo pursuant to the Plans against payment of the consideration calculated as set forth in the Plans, will be fully paid and nonassessable; and (b) the issuance of the shares of Common Stock of HoldCo will not be subject to preemptive rights under the articles of incorporation or bylaws of HoldCo, or arising or outstanding by operation of law or, to the knowledge of such counsel, under any contract, indenture, agreement, instrument or other document, except for the subscription rights under the Plans and the provisions of the Standby Stock Purchase Agreement.


(v)	The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the PPHI Parties; and this Agreement constitutes a valid and legal obligation of each of the PPHI Parties.


(vi)	The Plans have been duly adopted by the attorneys-in-fact of PPIX, PCA and PIPE in the manner required by the Conversion Act.

(vii)Upon consummation of the Offering, to the knowledge of such counsel, (a) the Offering was made in all material respects in accordance with the Plans, (b) all terms, conditions, requirements and provisions with respect to the Conversion and Offering imposed by the Commission or the Department were complied with by the PPHI Parties in all material respects or appropriate waivers were obtained, and (c) all notice and waiting periods were satisfied or waived; provided, however , that no opinion need be expressed concerning the state securities or blue sky laws or foreign securities laws of various jurisdictions in which the Shares will be offered.

(viii)The Registration Statement has become effective under the 1933 Act and, to such counsel’s knowledge after making inquiry of the Commission, and based upon representations made by staff of the Commission, no stop order suspending the effectiveness of the Registration Statement has been issued, and, to such counsel’s knowledge, no proceedings for that purpose have been instituted or threatened.


(ix)	The description of the shares of Common Stock of HoldCo contained in the Registration Statement and the Prospectus, insofar as such

statements purport to summarize certain provisions of the articles of incorporation and bylaws of HoldCo, provide a fair summary thereof.

(x)

At the time that the Registration Statement became effective, the Registration Statement, including the Prospectus contained therein, as amended or supplemented (other than the financial statements, notes to financial statements, financial tables or other financial and statistical data included therein and the appraisal valuation, as to which counsel need express no opinion), complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations.


(xi)	To such counsel’s knowledge, there are no legal or governmental proceedings pending or threatened (i) asserting the invalidity of this Agreement or (ii) seeking to prevent the offer, sale or issuance of the Shares.

(xii)The information in the Prospectus under the captions “BUSINESS — Regulation,” and “DESCRIPTION OF OUR CAPITAL STOCK,” to the extent that it constitutes summaries of legal matters, documents or proceedings, or legal conclusions, fairly presents in all material respects the information required to be presented in Form S-1.


(xiii)	None of the PPHI Parties is required to be registered as an investment company under the Investment Company Act of 1940, as amended.

(xiv)To such counsel’s knowledge, none of the PPHI Parties is in violation of its Organizational Documents as in effect at the Closing Time. In addition, to such counsel’s knowledge, the execution and delivery of and performance under this Agreement by the PPHI Parties, the incurrence of the obligations set forth herein and the consummation of the transactions contemplated herein will not result in any material violation of the provisions of the Organizational Documents of any of the PPHI Parties or any material violation of any applicable law, act, regulation, or to such counsel’s knowledge, order or court order, writ, injunction or decree.

In rendering such opinion, such counsel may rely as to matters of fact, without independent investigation, on certificates of responsible officers of the PPHI Parties (to the extent relevant) and public officials, provided copies of any such certificates are delivered to Agent together with the opinion to be rendered hereunder. Such opinion may be limited to the laws of the Commonwealth of Pennsylvania and the federal securities laws of the United States of America, and such opinion will not be deemed to be rendering any opinion or any other statements regarding the regulatory laws of any other state.

(2) A letter of Stevens & Lee, PC addressed to the Agent to the effect that during the preparation of the Registration Statement and the Prospectus, representatives of Stevens & Lee, PC participated in conferences with certain officers of and other representatives of the PPHI Parties, representatives of the independent public accounting firm for the PPHI Parties and representatives of the Agent at which the contents of the Registration Statement and the Prospectus and related matters were discussed, and although (without limiting the opinions provided pursuant to Section 10(b)(1)) Stevens & Lee, PC has not independently verified the accuracy, completeness or fairness of the statements contained in the Registration Statement and Prospectus, on the basis of the information obtained in the course of engagement as counsel, nothing has come to the attention of the representatives of Stevens & Lee, PC providing services to the PPHI Parties that caused them to believe that (i) the Registration Statement at the time it was ordered effective by the Commission, (ii) the General Disclosure Package as of the Closing Time, or (iii) the Prospectus, as of its date and as of the Closing Time, contained or contains any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that counsel need not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement, the General Disclosure Package and the Prospectus, and counsel need not express any belief with respect to the financial statements, schedules and other financial and statistical data included, statistical or appraisal or valuation methodology employed, or information concerning internal controls over financial reporting contained in, the Registration Statement, Prospectus or General Disclosure Package).

(3) A blue sky memorandum from Stevens & Lee, PC addressed to the PPHI Parties and the Agent relating to the Offering, including the Agent’s participation therein. The Blue Sky Memorandum will address the necessity of obtaining or confirming exemptions, qualifications or the registration of the Shares under applicable state securities law.


(a)	Concurrently with the execution of this Agreement, the Agent shall receive a letter from Baker Tilly, dated the date hereof and addressed to the Agent, in the form set forth in Exhibit A hereto, and a letter from Eisner dated the date hereof and addressed to the Agent, in the form set forth in Exhibit A hereto.

(b)

At the Closing Time, the Agent shall receive letters from Baker Tilly and Eisner dated the Closing Time, addressed to the Agent, confirming the statements made by its letter delivered by it pursuant to subsection (c) above, the “specified date” referred to in clause (iii)(C) and (D) thereof to be a date specified in such letter, which shall not be more than six business days prior to the Closing Time.

(c)

At the Closing Time, the Agent shall receive a certificate of the Chief Executive Officer and Chief Financial Officer of each of the PPHI Parties, dated as of the Closing Time, in form and substance satisfactory to the Agent to the effect that: (i) they have examined the Prospectus and at the time the Prospectus became authorized for final use, the Prospectus did not contain an untrue statement of a material fact or omit to state a material fact necessary in

order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) since the date the Prospectus became authorized for final use, no event has occurred that should have been set forth in an amendment or supplement to the Prospectus that has not been so set forth, including specifically, but without limitation, any material adverse change in the condition, financial or otherwise, or in the earnings, capital, properties or business of the PPHI Parties; (iii) since the respective dates as of which information is given in the Registration Statement, the General Disclosure Package and the Prospectus, there has been no material adverse change in the condition, financial or otherwise, or in the earnings, capital, properties or business of the PPHI Parties independently, or of the PPHI Parties considered as one enterprise, whether or not arising in the ordinary course of business; (iv) the representations and warranties contained in Section 6 of this Agreement are true and correct with the same force and effect as though made at and as of the Closing Time; (v) each of the PPHI Parties has complied in all material respects with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Time including the conditions contained in this Section 10; (vi) no stop order suspending the effectiveness of the Registration Statement has been issued or, to their knowledge, is threatened, by the Commission or any other governmental body; (vii) no order suspending the Offering, the Conversion or the use of the Prospectus has been issued and, to their knowledge, no proceedings for any such purpose have been initiated or threatened by the Department, the Commission, or any other federal or state authority; and (viii) to their knowledge, no person has sought to obtain review of the final action of the Director with respect to the Conversion Application.

(d)

Prior to and at the Closing Time, none of the PPHI Parties shall have sustained, since the date of the latest audited financial statements included in the Registration Statement and Prospectus, any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth in the Registration Statement and the Prospectus, and since the respective dates as of which information is given in the Registration Statement and the Prospectus, there shall not have been any material change, or any development involving a prospective Material Adverse Effect, otherwise than as set forth or contemplated in the Registration Statement and the Prospectus, the effect of which, in any such case described above, is in the Agent’s reasonable judgment sufficiently material and adverse as to make it impracticable or inadvisable to proceed with the Offering or the delivery of the Shares on the terms and in the manner contemplated in the Prospectus.


(e)	At or prior to the Closing Time, the Department shall have issued a letter or order to PPIX, PCA, and PIPE, which shall have the force of approving the

Conversion and Offering, and the Department shall have issued a letter or order to ICG, which shall have the force of approving the acquisition of control of HoldCo by ICG.

(f)

Subsequent to the date hereof, there shall not have occurred any of the following: (i) a suspension or limitation in trading in securities generally on the New York Stock Exchange or American Stock Exchange or in the over-the-counter market, or quotations halted generally on the Nasdaq Stock Market, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices for securities have been required by either of such exchanges or FINRA or by order of the Commission or any other governmental authority other than temporary trading halts (A) imposed as a result of intraday changes in the Dow Jones Industrial Average, (B) lasting no longer than until the regularly scheduled commencement of trading on the next succeeding business-day, and (C) which, when combined with all other such halts occurring during the previous five business days, total less than three; (ii) a general moratorium on the operations of federally-insured financial institutions or general moratorium on the withdrawal of deposits from federally-insured financial institutions declared by either federal or state authorities; or (iii) any outbreak of hostilities or escalation thereof or other calamity or crisis, including, without limitation, terrorist activities after the date hereof, the effect of any of (i) through (iii) herein, in the judgment of the Agent, is so material and adverse as to make it impracticable to market the Shares or to enforce contracts, including subscriptions or purchase orders, for the sale of the Shares.

All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are reasonably satisfactory in form and substance to the Agent. Any certificate signed by an officer of any of the PPHI Parties and delivered to the Agent shall be deemed a representation and warranty by the PPHI Parties to the Agent as to the statements made therein. If any condition to the Agent’s obligations hereunder to be fulfilled prior to or at the Closing Time is not fulfilled, the Agent may terminate this Agreement (provided that if this Agreement is so terminated but the sale of Shares is nevertheless consummated, the Agent shall be entitled to the reimbursement of all expenses to the extent contemplated by Section 14 hereof but shall not be entitled to any compensation provided for in Section 4(a) or (b) hereof) or, if the Agent so elects, may waive any such conditions which have not been fulfilled or may extend the time of their fulfillment.

11. Indemnification .


(a)	The PPHI Parties jointly and severally agree to indemnify and hold harmless the Agent, its officers, directors, agents, and employees and each person, if any, who controls the Agent within the meaning of Section 15 of the 1933 Act or Section 20(a) of the 1934 Act, against any and all loss, liability, claim, damage or expense whatsoever (including but not limited to settlement

expenses, subject to the limitation set forth in the last sentence of Paragraph (c) below), joint or several, that the Agent or any of such officers, directors, agents, employees and controlling Persons (collectively, the “Related Persons”) may suffer or to which the Agent or the Related Persons may become subject under all applicable federal and state laws or otherwise, and to promptly reimburse the Agent and any Related Persons upon written demand for any reasonable expenses (including reasonable fees and disbursements of counsel) incurred by the Agent or any Related Persons in connection with investigating, preparing or defending any actions, proceedings or claims (whether commenced or threatened) to the extent such losses, claims, damages, liabilities or actions: (i) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment or supplement thereto), the Prospectus (or any amendment or supplement thereto), the General Disclosure Package, the Conversion Application, any Issuer Free Writing Prospectus or any blue sky application or other instrument or document executed by any of the PPHI Parties or based upon written information supplied by any of the PPHI Parties filed in any state or jurisdiction to register or qualify any or all of the Shares under the securities laws thereof of to claim an exemption therefrom (collectively, the “Blue Sky Applications”), or any application or other document, advertisement, or communication (“Sales Information”) prepared, made or executed by or on behalf of any of the PPHI Parties with its consent or based upon written or oral information furnished by or on behalf of any of the PPHI Parties, whether or not filed in any jurisdiction in order to qualify or register the Shares under the securities laws thereof or to claim an exemption therefrom, (ii) arise out of or are based upon the omission or alleged omission to state in any of the foregoing documents or information, a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (iii) arise from any theory of liability whatsoever relating to or arising from or based upon the Registration Statement (or any amendment or supplement thereto), the Prospectus (or any amendment or supplement thereto), any Issuer Free Writing Prospectus, or any Blue Sky Applications or Sales Information or other documentation distributed in connection with the Offering; or (iv) result from any claims made with respect to the accuracy, reliability and completeness of the records of policyholders, including without limitation, Eligible Subscribers, or for any denial or reduction of a subscription or order to purchase Common Stock, whether as a result of a properly calculated allocation pursuant to the Plans or otherwise, based upon such records; provided, however , that no indemnification is required under this Paragraph (a) to the extent such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue material statements or alleged untrue material statements in, or material omission or alleged material omission from, the Registration Statement (or any amendment or supplement thereto) or

the Prospectus (or any amendment or supplement thereto), any Issuer Free Writing Prospectus, the Blue Sky Applications or Sales Information or other documentation distributed in connection with the Offering made in reliance upon and in conformity with written information furnished to the PPHI Parties by the Agent or its representatives with respect to the Agent expressly for use in any such document (or any amendment or supplement thereto); provided, that it is agreed and understood that the only information furnished in writing to the PPHI Parties, by the Agent regarding the Agent is set forth in the Prospectus in the first three paragraphs under the caption “The Conversion and the Offering—Marketing and Underwriting Arrangements”.

(b)

The Agent agrees to indemnify and hold harmless the PPHI Parties, their directors and officers, agents, and employees and each person, if any, who controls any of the PPHI Parties within the meaning of Section 15 of the 1933 Act or Section 20(a) of the 1934 Act against any and all loss, liability, claim, damage or expense whatsoever (including but not limited to settlement expenses, subject to the limitation set forth in the last sentence of Paragraph (c) below), joint or several which they, or any of them, may suffer or to which they, or any of them, may become subject under all applicable federal and state laws or otherwise, and to promptly reimburse the PPHI Parties and any such persons upon written demand for any reasonable expenses (including reasonable fees and disbursements of counsel) incurred by them in connection with investigating, preparing or defending any actions, proceedings or claims (whether commenced or threatened) to the extent such losses, claims, damages, liabilities or actions (i) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment of supplement thereto), the Prospectus (or any amendment of supplement thereto), any Issuer Free Writing Prospectus, or any Blue Sky Applications or Sales Information, or (ii) are based upon the omission or alleged omission to state in any of the foregoing documents a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however , that the Agent’s obligations under this Paragraph (b) shall exist only if and only to the extent that such untrue statement or alleged untrue statement was made in, or such material fact or alleged material fact was omitted from, the Registration Statement (or any amendment or supplement thereto), the Prospectus (or any amendment or supplement thereto), the Blue Sky Applications or Sales Information in reliance upon and in conformity with written information furnished to any of the PPHI Parties by the Agent or its representatives (including counsel) with respect to the Agent expressly for use therein; provided, that it is agreed and understood that the only information furnished in writing to the PPHI Parties, by the Agent regarding the Agent is set forth in the Prospectus in the first three paragraphs under the caption “The Conversion and the Offering—Marketing and Underwriting Arrangements”.

(c)

Each indemnified party shall give prompt written notice to each indemnifying party of any action, proceeding, claim (whether commenced or threatened), or suit instituted against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve it from any liability which it may have on account of this Section, Section 12 or otherwise, except to the extent that such failure or delay causes actual harm to the indemnifying party with respect to such action, proceeding, claim or suit. An indemnifying party may participate at its own expense in the defense of such action. In addition, if it so elects within a reasonable time after receipt of such notice, an indemnifying party, jointly with any other indemnifying parties receiving such notice, may assume the defense of such action with counsel chosen by it reasonably acceptable to the indemnified parties that are defendants in such action, unless such indemnified parties reasonably object to such assumption on the ground that there may be legal defenses available to them that are different from or in addition to those available to such indemnifying party. If an indemnifying party assumes the defense of such action, the indemnifying parties shall not be liable for any fees and expenses of counsel for the indemnified parties incurred thereafter in connection with such action, proceeding or claim, other than reasonable costs of investigation unless such indemnified parties reasonably object to such assumption on the ground that there may be legal defenses available to them that are different from or in addition to those available to such indemnifying party. In no event shall the indemnifying parties be liable for the fees and expenses of more than one separate firm of attorneys for all indemnified parties in connection with any one action, proceeding or claim or separate but similar or related actions, proceedings or claims in the same jurisdiction arising out of the same general allegations or circumstances. The indemnifying party shall be liable for any settlement of any claim against the indemnified party (or its directors, officers, employees, affiliates or controlling persons) made with the indemnifying party’s consent, which consent shall not be unreasonably withheld. The indemnifying party shall not, without the written consent of the indemnified party, settle or compromise any claim against the indemnified party based upon circumstances giving rise to an indemnification claim against the indemnifying party hereunder unless such settlement or compromise provides that indemnified party and the other indemnified parties shall be unconditionally and irrevocably released from all liability in respect of such claim.

12. Contribution . In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in Section 11 is due in accordance with its terms but is found in a final judgment by a court to be unavailable from the PPHI Parties or the Agent, the PPHI Parties and the Agent shall contribute to the aggregate losses, claims, damages and liabilities of the nature contemplated by such indemnification (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding, but after deducting any contribution received by the

PPHI Parties or the Agent from persons other than the other parties thereto, who may also be liable for contribution) in such proportion so that (i) the Agent is responsible for that portion represented by the percentage that the fees paid to the Agent pursuant to Section 4 of this Agreement (not including expenses) (“Agent’s Fees”) bear to the total proceeds received by the PPHI Parties from the sale of the Shares in the Offering, net of the Agent’s Fees, and (ii) the PPHI Parties shall be responsible for the balance. If, however, the allocation provided above is not permitted by applicable law, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative fault of the PPHI Parties on the one hand and the Agent on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions, proceedings or claims in respect thereof), but also the relative benefits received by the PPHI Parties on the one hand and the Agent on the other from the Offering, as well as any other relevant equitable considerations. The relative benefits received by the PPHI Parties on the one hand and the Agent on the other hand shall be deemed to be in the same proportion as the total proceeds from the Offering, net of the Agent’s Fees, received by the PPHI Parties bear to the Agent’s Fees. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the PPHI Parties on the one hand or the Agent on the other and the parties relative intent, good faith, knowledge, access to information and opportunity to correct or prevent such statement or omission. The PPHI Parties and the Agent agree that it would not be just and equitable if contribution pursuant to this Section 12 were determined by pro-rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 12. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or action, proceedings or claims in respect thereof) referred to above in this Section 12 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action, proceeding or claim. It is expressly agreed that the Agent shall not be liable for any loss, liability, claim, damage or expense or be required to contribute any amount that in the aggregate exceeds the amount paid (excluding reimbursable expenses) to the Agent under this Agreement. It is understood and agreed that the above-stated limitation on the Agent’s liability is essential to the Agent and that the Agent would not have entered into this Agreement if such limitation had not been agreed to by the parties to this Agreement. No person found guilty of any fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation. For purposes of this Section 12, each of the Agent’s and the PPHI Parties’ officers and directors and each person, if any, who controls the Agent or any of the PPHI Parties within the meaning of the 1933 Act and the 1934 Act shall have the same rights to contribution as the PPHI Parties and the Agent. Any party entitled to contribution, promptly after receipt of notice of commencement of any action, suit, claim or proceeding against such party in respect of which a claim for contribution may be made against another party under this Section 12, will notify such party from whom contribution may be sought, but the omission to so notify such party shall not relieve the party from whom contribution may be sought from any other obligation it may have hereunder or otherwise than under this Section 12, except to the extent that such failure or delay causes actual harm to the indemnifying party with respect to such action, proceeding, claim or suit. The obligations of the

PPHI Parties under this Section 12 and under Section 11 shall be in addition to any liability which the PPHI Parties and the Agent may otherwise have.

13. Survival . All representations, warranties and indemnities and other statements contained in this Agreement or contained in certificates of officers of the PPHI Parties or the Agent submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any termination or cancellation of this Agreement or any investigation made by or on behalf of the Agent or its controlling persons, or by or on behalf of the PPHI Parties and shall survive the issuance of the Shares, and any legal representative, successor or assign of the Agent, any of the PPHI Parties, and any indemnified person shall be entitled to the benefit of the respective agreements, indemnities, warranties and representations.

14. Termination .


(a)	Agent may terminate this Agreement by giving the notice indicated below in this Section at any time after this Agreement becomes effective as follows:

(i)

If any domestic or international event or act or occurrence has materially disrupted the United States securities markets such as to make it, in the Agent’s reasonable opinion, impracticable to proceed with the offering of the Shares; or if trading on the NYSE shall have suspended (except that this shall not apply to the imposition of NYSE trading collars imposed on program trading); or if the United States shall have become involved in a war or major hostilities or escalation thereof; or if a general banking moratorium has been declared by a state or federal authority which has a material effect on the PPHI Parties on a consolidated basis; or if a moratorium in foreign exchange trading by major international banks or persons has been declared; or if any of the PPHI Parties shall have sustained a material or substantial loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act, whether or not such loss shall have been insured; or, if there shall have been a material adverse change in the financial condition, results of operations or business of the PPHI Parties taken as a whole.

(ii)

In the event that (x) the Plans is abandoned or terminated by any one of PPIX, PCA, or PIPE, (y) HoldCo fails to consummate the sale of the minimum number of the Shares by _____, 2019, in accordance with the provisions of the Plans, or (z) the Agent terminates this relationship because there has been a Material Adverse Effect, this Agreement shall terminate and no party to this Agreement shall have any obligation to the other hereunder, except that (1) the PPHI Parties shall remain liable for any amounts due pursuant to Sections 3, 4, 9, 11 and 12 hereof, unless the transaction is not consummated due to the breach by the Agent of a warranty, representation or covenant and (2) the Agent shall remain liable for any amount due pursuant to Sections 11 and 12 hereof, unless the

transaction is not consummated due to the breach by the PPHI Parties of a warranty representation or covenant.

(iii)

If any of the conditions specified in Section 10 shall not have been fulfilled when and as required by this Agreement, or by the Closing Time, or waived in writing by the Agent, this Agreement and all of the Agent’s obligations hereunder may be canceled by the Agent by notifying the PPHI Parties of such cancellation in writing at any time at or prior to the Closing Time, and any such cancellation shall be without liability of any party to any other party except that (x) the PPHI Parties shall remain liable for any amounts due pursuant to Sections 3, 4, 9, 11 and 12 hereof, unless the transaction is not consummated due to breach by the Agent of a warrant, representation or covenant, and (y) the Agent shall remain liable for any amount due pursuant to Sections 11 and 12 hereof, unless the transaction is not consummated due to the breach by the PPHI Parties of a warranty representation or covenant.


(b)	If Agent elects to terminate this Agreement as provided in this Section, the PPHI Parties shall be notified by the Agent as provided in Section 15 hereof.


(c)	If this Agreement is terminated in accordance with the provisions of this Agreement, the PPHI Parties shall pay the Agent the fees earned pursuant to Section 4 and will reimburse the Agent for its reasonable expenses pursuant to Section 9.


(d)	Any of the PPHI Parties may terminate this Agreement in the event the Agent is in material breach of the representations and warranties or covenants contained in Section 5 and such breach has not been cured within a reasonable time period after the PPHI Parties have provided the Agent with notice of such breach.


(e)	This Agreement may also be terminated by mutual written consent of the parties hereto.

15. Notices . All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed by United States certified mail, return receipt requested, or sent by a nationally recognized commercial courier promising next business day delivery (such as Federal Express) or transmitted by any standard form of telecommunication (such as facsimile or email) with confirming copy sent by regular U.S. mail. Notices shall be sent as follows:


If to Agent:	Griffin Financial Group, LLC 620 Freedom Business Center 2nd Floor King of Prussia, Pennsylvania 19406 Attention: Jeffrey P. Waldron, Senior Managing Director Facsimile: (610) 371-7974 Email: jpw@griffinfingroup.com


If to the PPHI Parties:	Positive Physicians Holdings, Inc. 850 Cassatt Road, Suite 220 Berwyn, Pennsylvania 19312 Attention: Lewis S. Sharps Facsimile: Email: lsharpsmd@sharpsmd.com


With a copy to:	Stevens & Lee, PC 111 North 6 ^th Street Reading, Pennsylvania 19603 Attention: Wesley R. Kelso, Esquire Facsimile: (610) 236-4176 Email: wrk@stevenslee.com

Any party may change the address or other information for notices set forth above by written notice to the other parties, which notice shall be given in accordance with this Section 15.

16. Parties . This Agreement shall inure to the benefit of and be binding upon the Agent and the PPHI Parties and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the parties hereto and their respective successors and the controlling persons and officers, directors, agents and employees referred to in Sections 11 and 12 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provisions herein contained.

17. Partial Invalidity . In the event that any term, provision or covenant herein or the application thereof to any circumstances or situation shall be invalid or unenforceable, in whole or in part, the remainder hereof and the application of said term, provision or covenant to any other circumstance or situation shall not be affected thereby, and each term, provision or covenant herein shall be valid and enforceable to the full extent permitted by law.

18. Governing Law and Construction . This Agreement shall be construed in accordance with the laws of the Commonwealth of Pennsylvania applicable to contracts executed and to be wholly performed therein without giving effects to its conflicts of laws principles or rules.

19. Counterparts . This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. Any signature delivered by facsimile or email (including any delivery by PDF) shall bind the parties hereto with the same effect as the delivery of a manually signed signature page.

20. Entire Agreement . This Agreement, including schedules and exhibits hereto, which are integral parts hereof and incorporated as though set forth in full, constitutes the entire agreement between the parties pertaining to the subject matter hereof superseding any and all prior or contemporaneous oral or prior written agreements, proposals, letters of intent and understandings, and cannot be modified, changed, waived or terminated except by a writing which expressly states that it is an amendment, modification or waiver, refers to this Agreement and is signed by the party to be charged. No course of conduct or dealing shall be construed to modify, amend or otherwise affect any of the provisions hereof.

21. Waiver of Trial by Jury . Each of the Agent and the PPHI Parties waives all right to trial by jury in any action, proceeding, claim or counterclaim (whether based on contract, tort or otherwise) related to or arising out of this Agreement.

If the foregoing is in accordance with your understanding of our agreement, please sign and return to us a counterpart hereof, whereupon this instrument along with all counterparts will become a binding agreement between you and us in accordance with its terms.

Very truly yours,



POSITIVE PHYSICIANS HOLDINGS, INC.

By:
	Lewis S. Sharps, President

POSITIVE PHYSICIANS INSURANCE EXCHANGE

By:
	Lewis S. Sharps, President

PROFESSIONAL CASUALTY ASSOCIATION

By:
	Lewis S. Sharps, President

PHYSICIANS INSURANCE PROGRAM EXCHANGE

By:
	Lewis S. Sharps, President

[COUNTERPART SIGNATURE OF GRIFFIN ON FOLLOWING PAGE]

The foregoing Agency Agreement is hereby confirmed and accepted as of the date first set and above written.



GRIFFIN FINANCIAL GROUP, LLC

By:
	Jeffrey P. Waldron, Senior Managing Director

Schedule A

Persons Required to Enter into Lock-up Agreements

Insurance Capital Group LLC

Enstar Holdings (US) LLC

Exhibit A

Form of Comfort Letters from Baker Tilly Verchow Krause LLP and Eisner Amper LLP

Exhibit B

Form of Lockup Agreement

Exhibit 2.1

PROFESSIONAL CASUALTY ASSOCIATION

AMENDED AND RESTATED PLAN OF CONVERSION

FROM RECIPROCAL TO STOCK FORM

Adopted by the Attorney-in-Fact on September 17, 2018

PROFESSIONAL CASUALTY ASSOCIATION

AMENDED AND RESTATED PLAN OF CONVERSION
FROM RECIPROCAL TO STOCK FORM

1. GENERAL.

Professional Casualty Association (“PCA”) is a Pennsylvania domiciled reciprocal inter-insurance exchange. On June 1, 2018, the Attorney-in-Fact of PCA, after careful study and consideration, adopted a Plan of Conversion (the “Original Plan”).

On September 17, 2018, the Attorney-in-Fact of PCA, again after careful study and consideration, determined to make certain amendments to the Original Plan, generally with respect to the plan of distribution of stock in the Offering. Accordingly the Attorney-in-Fact has adopted this Amended and Restated Plan of Conversion (this “Plan” or the “Plan”). PCA does not have a subscribers’ advisory committee or equivalent governing body. Under this Plan, PCA will convert from reciprocal to stock form through the mechanism of a merger with and into a newly formed Pennsylvania corporation called “PCA Conversion Corp.” pursuant to the PCA Conversion Merger Agreement (as hereinafter defined). Immediately after the merger, PCA Conversion Corp. will issue shares of its common stock to, and will become a wholly owned subsidiary of, Positive Physicians Holdings, Inc., a newly formed Pennsylvania business corporation (“HoldCo”), as part of this Plan.

Physicians Insurance Program Exchange, a Pennsylvania reciprocal inter-insurance exchange (“PIPE”), will also convert from reciprocal to stock form simultaneously with the conversion of PCA. That conversion will be accomplished through the mechanism of a merger of PIPE with and into PIPE Conversion Corp., a Pennsylvania corporation. PIPE Conversion Corp. will also become a wholly owned subsidiary of HoldCo as part of the PIPE conversion.

Positive Physicians Insurance Exchange, a Pennsylvania reciprocal inter-insurance exchange (“PPIX”), will also convert from reciprocal to stock form simultaneously with the conversion of PCA. That conversion will be accomplished through the mechanism of a merger of PPIX with and into PPIX Conversion Corp., a Pennsylvania corporation. PPIX Conversion Corp. will also become a wholly owned subsidiary of HoldCo as part of the PPIX conversion.

Immediately after (i) PCA has merged into PCA Conversion Corp., (ii) PIPE has merged into PIPE Conversion Corp., and (iii) PPIX has merged into PPIX Conversion Corp., PIPE Conversion Corp. and PCA Conversion Corp. will merge with and into PPIX Conversion Corp., and PPIX Conversion Corp. will be renamed “Positive Physicians Insurance Company.” This resulting Positive Physicians Insurance Company, the stock insurance company that is successor by merger to PCA Conversion Corp., PIPE Conversion Corp. and PPIX Conversion Corp., is sometimes referred to as “Positive.”

On behalf of PCA, its Attorney-in-Fact has caused both PCA Conversion Corp. and HoldCo to be formed for purposes of this Plan. Neither corporation presently has issued any shares of its capital stock, has any assets or liabilities, or conducts any business operations.

Under this Plan, shares of HoldCo’s common stock, no par value (the “Common Stock”), will be offered and sold first to qualifying offerees under the Subscription Offering and then to qualifying offerees under the Community Offering (each as hereinafter defined).

The Attorney-in-Fact of PCA is Professional Third Party, L.P., a Pennsylvania limited partnership (“PTP”), which is vested with management and governance authority for PCA. PTP has determined that the merger conversion of PCA into stock form, including the potential for a higher and/or more successful Maximum Offering, will enhance PCA’s strategic and financial flexibility and is in the best interest of PCA and its subscribers.

Simultaneously with the conversion of PCA from reciprocal to stock form, PIPE will also convert from reciprocal to stock form. That conversion will be accomplished through the mechanism of a merger of PIPE with and into PIPE Conversion Corp., a Pennsylvania corporation, pursuant to a plan of conversion dated June 1, 2018, and also amended on September 17, 2018 (as amended, the “PIPE Plan of Conversion”). The PIPE Plan of Conversion was adopted by Physicians Insurance Program Exchange Management Company (“PIPMC”), the attorney-in-fact of PIPE. Under the Positive Merger Agreement, PIPE Conversion Corp. and PCA Conversion Corp. will be merged with and into PPIX Conversion Corp. to form Positive.

Simultaneously with the conversion of PCA from reciprocal to stock form, PPIX will also convert from reciprocal to stock form. That conversion will be accomplished through the mechanism of a merger of PPIX with and into PPIX Conversion Corp., a Pennsylvania corporation, pursuant to a plan of conversion dated June 1, 2018, and also amended on September 17, 2018 (as amended, the “PPIX Plan of Conversion”). The PPIX Plan of Conversion was adopted by Specialty Insurance Services, LLC (“SIS”), the attorney-in-fact of PPIX. Under the Positive Merger Agreement, PIPE Conversion Corp. and PCA Conversion Corp. will be merged with and into PPIX Conversion Corp. to form Positive.

Because this Plan involves the conversion of PCA from reciprocal to stock form, this Plan must be approved by the Pennsylvania Insurance Commissioner pursuant to the Medical Professional Liability Reciprocal Exchange-to-Stock Conversion Act (the “Conversion Act”).

This Plan is subject to the approval of the Voting Subscribers of PCA in accordance with Section 3(g) of the Conversion Act, as provided in Sections 12 and 13 hereof. Completion of the Offering described in this Plan and the conversion of PCA from reciprocal to stock form are also conditioned upon (i) the approval of the PIPE Plan of Conversion by the subscribers of PIPE in accordance with the PIPE Plan of Conversion, (ii) the approval of the PPIX Plan of Conversion by the subscribers of PPIX in accordance with the PPIX Plan of Conversion, and (iii) the approval of the Pennsylvania Insurance Commissioner pursuant to the Conversion Act.

2. DEFINITIONS.

Capitalized terms used in this Plan that are defined in Section 1 hereof shall have the meanings given to such terms wherever used in this Plan. In addition, as used in this Plan, the terms set forth below have the following meanings:

2.1. “Affiliate” means a Person who, directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common control with the Person specified or who is acting in concert with the Person specified.

2.2. “Application” means all of the documents to be filed with the Commissioner pursuant to and as required by §3 of the Conversion Act constituting PCA’s application for approval of the Conversion.

2.3. “Appraised Value” means the final estimated combined pro forma market values of PCA, PIPE and PPIX, each as determined by the Independent Appraiser in accordance with the Conversion Act and Section 4 hereof.

2.4. “Articles of Incorporation” means the proposed articles of incorporation of Positive in the form attached as Exhibit A to this Plan.

2.5. “Associate” when used to indicate a relationship with any Person, means (i) a corporation or organization (other than HoldCo or a majority-owned subsidiary of the same) of which such Person is a director, officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities; (ii) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity (exclusive of any Tax-Qualified Employee Stock Benefit Plan or Non-Tax Qualified Employee Stock Benefit Plan of HoldCo); (iii) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person; and (iv) any Person acting in concert with any of the Persons or entities specified in clauses (i) through (iii) above.

2.6. “Attorney-in-Fact” means Professional Third Party, L.P., the attorney-in-fact of PCA.

2.7. “Closing” means (i) the conversion of PCA pursuant to this Plan by the merger of PCA with and into PCA Conversion Corp. pursuant to the PCA Conversion Merger Agreement, (ii) the filing of the Statement of Merger in the Office of the Department of State of the Commonwealth of Pennsylvania in connection with the merger of PCA with and into PCA Conversion Corp., (iii) the filing of the Statement of Merger in the Office of the Department of State of the Commonwealth of Pennsylvania in connection with the merger of PIPE Conversion Corp. and PCA Conversion Corp. with and into PPIX Conversion Corp. to form Positive, and (iv) the closing of the Offering.

2.8. “Code” means the Internal Revenue Code of 1986, as amended.

2.9. “Commissioner” means the Insurance Commissioner of the Commonwealth of Pennsylvania.

2.10. “Community Offering” means the offering for sale by HoldCo of any shares of Common Stock not subscribed for in the Subscription Offering as set forth in Section 7 hereof, and includes any Public Offering. HoldCo may retain the assistance of a broker-dealer or syndicate of broker-dealers to assist it in connection with the sale of Common Stock in the Community Offering.

2.11. “Conversion” means: (i) the filing of the statement of merger in connection with the merger of PCA with and into PCA Conversion Corp. pursuant to the PCA Conversion Merger Agreement, and (ii) the offer and sale of Common Stock by HoldCo in the Offering.

2.12. “Conversion Statement of Merger” means the statement of merger to be filed with the Office of the Department of State of the Commonwealth of Pennsylvania in connection with the merger of PCA with and into PCA Conversion Corp.

2.13. “Director” means any Person who is (i) a director of the attorney-in-fact of PCA (for this purpose including the members of the management committee of the general partner of PTP), (ii) a director of the attorney-in-fact of PIPE, or (iii) a director of the attorney-in-fact of PPIX (for this purpose including the members of the management committee of SIS).

2.14. “Effective Date” means the date the Conversion Statement of Merger is filed in the office of the Department of State of the Commonwealth of Pennsylvania or such later date as may be specified in such Statement of Merger.

2.15. “Eligibility Record Date” means the close of business on June 1, 2018, which is the effective date of (i) the adoption of the Original Plan by the Attorney-In-Fact of PCA, (ii) the adoption of the original PIPE Plan of Conversion attorney-in-fact of PIPE, and (iii) the adoption of the original PPIX Plan of Conversion by the attorney-in-fact of PPIX.

2.16. “Eligible Stockholders of Diversus, Inc.” has the meaning given on Exhibit B to this Plan.

2.17. “Eligible Subscriber” means a Person who, on the Eligibility Record Date, is (i) a Person who is a named insured under a Qualifying Policy that is a group policy, or (ii) a Person who is a named insured under a Qualifying Policy that is an individual policy.

2.18. “Employee” means any natural person who is a full or part-time employee of (i) the attorney-in-fact of PCA at the Effective Date, (ii) the attorney-in-fact of PIPE at the Effective Date, or (iii) the attorney-in-fact of PPIX at the Effective Date.

2.19. “Gross Proceeds” means the product of (x) the Purchase Price and (y) the number of shares for which subscriptions and orders are accepted in the Offering and accepted by HoldCo.

2.20. “ICG” means Insurance Capital Group, LLC, a Delaware limited liability company.

2.21. “HoldCo” means Positive Physicians Holdings, Inc., a Pennsylvania corporation which will become the sole stockholder of Positive, which will issue shares of Common Stock in the Offering.

2.22. “Independent Appraiser” means Feldman Financial Advisors, Inc., the qualified expert independent investment banking firm experienced in the valuation of insurance companies that has been retained by PCA to determine the Valuation Range and any update required thereto.

2.23. “Maximum Offering” has the meaning given to such term in Section 4(c).

2.24. “MRP” means any restricted stock plan, such as a management recognition plan established or to be established by HoldCo or any of its affiliates.

2.25. “Positive Merger” means the merger of PIPE Conversion Corp. and PCA Conversion Corp. with and into PPIX Conversion Corp. to form Positive, with Positive as the surviving entity.

2.26. “Positive Merger Agreement” means the merger agreement dated on or about the Closing, by and among HoldCo, PCA Conversion Corp., PPIX Conversion Corp., and PIPE Conversion Corp. pursuant to which the Positive Merger will be effected.

2.27. “Non-Tax-Qualified Employee Stock Benefit Plan” means any defined benefit plan or defined contribution plan that is not qualified under Section 401 of the Code as from time to time in effect.

2.28. “Offering” means the offering of shares of Common Stock pursuant to this Plan, the PPIX Plan of Conversion, and the PIPE Plan of Conversion in the Subscription Offering and the Community Offering (including any Public Offering).

2.29. “Officer” means the chairman of the board of directors, president, vice-president (but not an assistant vice president, second vice president or other vice president having authority similar to an assistant or second vice president), secretary, treasurer or principal financial officer, controller or principal accounting officer and any other Person performing similar functions of the attorney-in-fact of PCA (including for this purpose persons holding such positions with the general partner of PTP), the attorney-in-fact of PIPE, or the attorney-in-fact of PPIX.

2.30. “Option Plan” means any stock option plan established or to be established by HoldCo or any of its subsidiaries.

2.31. “Order Form” means the form provided on behalf of HoldCo, containing all such terms and provisions as set forth in Section 10 hereof, to a Person by which Common Stock may be ordered in the Offering.

2.32. “Participant” means a Person to whom subscription rights are granted under this Plan, under the PIPE Plan of Conversion, or under the PPIX Plan of Conversion.

2.33. “PCA Conversion Merger” means the merger of PCA with and into PCA Conversion Corp., with PCA Conversion Corp. as the surviving entity, which is the mechanism by which PCA is converted from reciprocal to stock form pursuant to the Conversion Act.

2.34. “PCA Conversion Merger Agreement” means the merger agreement dated on or about the Closing, by and among HoldCo, PCA, and PCA Conversion Corp., pursuant to which the PCA Conversion Merger will be effected.

2.35. “Pennsylvania BCL” means the Pennsylvania Business Corporation Law of 1988, as amended.

2.36. “Person” means any individual, corporation, partnership, association, limited liability company, trust, or any other entity.

2.37. “PID” means the Pennsylvania Insurance Department.

2.38. “PIPE” means Physicians’ Insurance Program Exchange, a Pennsylvania reciprocal inter-insurance exchange.

2.39. “ PIPE Conversion Transaction ” means the conversion of PIPE into stock form under the Conversion Act by means of a merger of PIPE with and into PIPE Conversion Corp., which shall occur simultaneously with the Conversion hereunder and shall include the Positive Merger, pursuant to a separate plan of conversion to be approved by the subscribers of PIPE in accordance with the Conversion Act.

2.40. “PIPE Plan of Conversion” means the Plan of Conversion from Reciprocal to Stock Form adopted by the attorney-in-fact of PIPE on June 1, 2018, and any amendments thereto.

2.41. “PPIX” means Positive Physicians Insurance Exchange, a Pennsylvania reciprocal inter-insurance exchange.

2.42. “ PPIX Conversion Transaction ” means the conversion of PPIX into stock form under the Conversion Act by means of a merger of PPIX with and into PPIX Conversion Corp., which shall occur simultaneously with the Conversion hereunder and shall include the Positive Merger, pursuant to a separate plan of conversion to be approved by the subscribers of PPIX in accordance with the Conversion Act.

2.43. “PPIX Plan of Conversion” means the Plan of Conversion from Reciprocal to Stock Form adopted by the attorney-in-fact of PPIX on June 1, 2018, and any amendments thereto.

2.44. “Prospectus” means the one or more documents to be used in offering the Common Stock in the Subscription Offering and, to the extent applicable, the Community Offering, and for providing information to Persons in connection with the Offering.

2.45. “Public Offering” means an underwritten firm commitment or best efforts offering to the public through one or more underwriters or registered broker-dealers.

2.46. “Purchase Price” means the price per share at which the Common Stock is ultimately sold by HoldCo to Persons in the Offering in accordance with the terms hereof.

2.47. “Qualifying Policy” means a policy of insurance issued by PCA, PIPE, or PPIX and in force as of the close of business on the Eligibility Record Date.

2.48. “Registration Statement” means the registration statement filed or to be filed with the SEC by HoldCo under the Securities Act with respect to the offer and sale of shares of HoldCo common stock in connection with the Offering.

2.49. “SEC” means the U.S. Securities and Exchange Commission.

2.50. “Securities Act” means the Securities Act of 1933, as amended.

2.51. “Special Meeting of Subscribers” means the special meeting of Voting Subscribers to be called by PCA for the purpose of (i) submitting this Plan to Voting Subscribers for their approval, and (ii) submitting the PCA Conversion Merger Agreement to Voting Subscribers for their approval and adoption.

2.52. “Standby Purchaser” means any Person approved by the Board of Directors of HoldCo from time to time to act as a standby purchaser of shares of the Common Stock in the Offering, and may include Insurance Capital Group, LLC or an Affiliate thereof and Enstar Holdings Limited or an Affiliate thereof.

2.53. “Stock Purchase Agreement” means the Stock Purchase Agreement dated as of June 8, 2018, among HoldCo, PPIX, PCA, PIPE, and ICG, as amended September 17. 2018, and as may be further amended from time to time with the approval of the Board of Directors of HoldCo.

2.54. “Subscription Offering” means the offering of the Common Stock that is described in Section 6 hereof.

2.55. “Subscription Rights” means nontransferable rights to subscribe for Common Stock in the Subscription Offering granted to Participants pursuant to the terms of this Plan.

2.56. “Tax-Qualified Employee Stock Benefit Plan” means any defined benefit plan or defined contribution plan, such as an employee stock ownership plan, stock bonus plan, profit-sharing plan or other plan, that is established for the benefit of the Employees of HoldCo or any of its subsidiaries and which, with its related trust, meets the requirements to be qualified under Section 401 of the Code as from time to time in effect.

2.57. “Valuation Range” means the range of the combined estimated aggregate pro forma market value of PCA, PIPE, and PPIX as determined by the Independent Appraiser in accordance with Section 4 hereof.

2.58. “Voting Record Date” means the date established by the Board of Directors of the attorney-in-fact of PCA to determine subscribers eligible to vote at the special meeting of subscribers called to vote to approve the Plan, as provided in Section 13 hereof.

2.59. “Voting Subscriber” means a Person who, on the Voting Record Date, is (i) a Person who is a named insured under a Qualifying Policy issued by PCA that is a group policy, or (ii) a Person who is a named insured under a Qualifying Policy issued by PCA that is an individual policy.

3. APPLICATION.

As soon as practicable after adoption of this Plan by the Attorney-in Fact of PCA, PCA shall file an Application with the Commissioner, containing such materials as may be necessary, advisable or required by the Commissioner in connection with the Conversion.

After the filing of the Application, PCA will send a notice by first class mail to each PCA Eligible Subscriber (as such address appears on the records of PCA), which notice will: (i) advise each PCA Eligible Subscriber of the adoption of this Plan, (ii) advise each PCA Eligible Subscriber of the filing of this Plan with the PID, (iii) notify each PCA Eligible Subscriber of his or her right to provide comments on this Plan to the PID and to PCA, (iv) advise each PCA Eligible Subscriber of the procedure to be followed in providing comments on this Plan, (v) notify each PCA Eligible Subscriber of his or her right to request and receive a copy of this Plan, and (vi) disclose to such PCA Eligible Subscriber that the initial Plan is not the final approved Plan and that the Commissioner’s approval, if any, of the final Plan does not constitute or imply endorsement of this Plan or the Conversion by the Commissioner or the PID.

4. TOTAL NUMBER OF SHARES AND PURCHASE PRICE OF COMMON STOCK.

The number of shares of Common Stock required to be offered and sold by HoldCo in the Offering will be determined as follows:

(a) Independent Appraiser . The Independent Appraiser has been retained by PCA to determine the Valuation Range. The Valuation Range will consist of a midpoint valuation, a valuation fifteen percent (15%) above the midpoint valuation (the “Maximum of the Valuation Range”) and a valuation fifteen percent (15%) below the midpoint valuation (the

“Minimum of the Valuation Range”). The Valuation Range will be based upon the financial condition and results of operations of PCA, PIPE and PPIX, the adjusted statutory surplus of PCA, PIPE and PPIX on a combined basis as converted to a stock company, a comparison of PCA, PIPE and PPIX with comparable publicly-held insurance companies, and such other factors as the Independent Appraiser may deem to be relevant, including that value which the Independent Appraiser estimates to be necessary to attract a full subscription for the Common Stock. The Independent Appraiser will submit to PCA the Valuation Range and a related report that describes the data and methodology used to determine the Valuation Range.

(b) Purchase Price . The Purchase Price for Common Stock in the Offering will be $10.00 per share and will be uniform as to all purchasers in the Offering.

(c) Number of Shares of Common Stock to be Offered . The maximum number of shares of Common Stock to be offered in the Offering shall be equal to the Maximum of the Valuation Range divided by the Purchase Price (such number, the “Maximum Offering”).

(d) Number of Shares of Common Stock to be Sold . The Appraiser will submit to PCA the Appraised Value as of the end of the latest calendar quarter for which financial statements of PCA, PIPE, and PPIX are available prior to the adoption of this Plan. If the Gross Proceeds of the Offering do not equal or exceed the Minimum of the Valuation Range, then PCA may cancel the Offering and terminate this Plan, establish a new Valuation Range and extend, reopen or hold a new Offering, or take such other action as it deems to be reasonably necessary.

(e) If the Gross Proceeds of the Offering equal or exceed the Minimum of the Valuation Range, the following steps will be taken:

(i) Subscription Offering Exceeds Maximum . If the number of shares to which Participants subscribe in the Subscription Offering multiplied by the Purchase Price is greater than the Maximum Offering, then HoldCo on the Effective Date shall issue shares of Common Stock to the subscribing Participants; provided, however , that the number of shares of Common Stock issued shall not exceed the number of shares of Common Stock offered in the Offering. In the event of an oversubscription in the Subscription Offering, shares of Common Stock shall be allocated among the subscribing Participants as provided in Section 6 below; provided, however , that no fractional shares of Common Stock shall be issued.

(ii) Subscription Offering Meets or Exceeds Minimum, but does not Exceed Maximum . If the number of shares of Common Stock subscribed for by Participants in the Subscription Offering multiplied by the Purchase Price is equal to or greater than the Minimum of the Valuation Range, but less than or equal to the Maximum Offering, then HoldCo on the Effective Date shall issue shares of Common Stock to the subscribing Participants in an amount sufficient to satisfy the subscriptions of such Participants in full. To the extent that shares of Common Stock remain unsold after the subscriptions of all Participants in the Subscription Offering have been satisfied in full, HoldCo shall have the right in its absolute discretion to accept, in whole or in part, orders received from purchasers in the Community Offering (including without limitation orders

received from the Standby Purchaser pursuant to the Stock Purchase Agreement), including without limitation orders from the Standby Purchaser or from ICG pursuant to the Stock Purchase Agreement; provided, however , that the number of shares of Common Stock issued shall not exceed the Maximum of the Valuation Range; and, provided further , that no fractional shares of Common Stock shall be issued.

(iii) Subscription Offering Does Not Meet Minimum . If the number of shares of Common Stock subscribed for by Participants in the Subscription Offering multiplied by the Purchase Price is less than the Minimum of the Valuation Range, then in such event HoldCo may accept orders received from purchasers in the Community Offering, including without limitation orders from the Standby Purchaser or from ICG pursuant to the Stock Purchase Agreement. If the aggregate number of shares of Common Stock subscribed for in the Subscription Offering together with the orders for shares accepted in the Community Offering multiplied by the Purchase Price is equal to or greater than the Minimum of the Valuation Range, then on the Effective Date HoldCo shall: (A) issue shares of Common Stock to subscribing Participants in an amount sufficient to satisfy the subscriptions of such Participants in full, and (B) issue to purchasers in the Community Offering whose orders have been accepted such additional number of shares of Common Stock such that the aggregate number of shares of Common Stock to be issued to subscribing Participants and to purchasers in the Community Offering multiplied by the Purchase Price shall be equal to the Minimum of the Valuation Range; provided, however , that no fractional shares of Common Stock shall be issued. HoldCo may in its absolute discretion elect to issue shares of Common Stock to purchasers in the Community Offering in excess of the number determined by reference to clause (B) of the preceding sentence; provided, however , that the number of shares of Common Stock issued shall not exceed the Maximum of the Valuation Range.

(iv) Offering Does Not Meet Minimum . If the aggregate number of shares of Common Stock subscribed for in the Subscription Offering together with the orders for shares accepted in the Community Offering multiplied by the Purchase Price is less than the Minimum of the Valuation Range, then in such event HoldCo and PCA may (w) cancel the Offering and terminate this Plan, (x) establish a new Valuation Range, (y) extend, reopen or hold a new Offering, or (z) take such other action as they deem reasonably necessary. If a new Valuation Range is established and the Offering is extended, reopened or continued as part of a new Offering, Persons who previously submitted subscriptions or orders will be required to confirm, revise or cancel their original subscriptions or orders. If original subscriptions or orders are canceled, any related payment will be refunded (without interest).

If, following a reduction in the Valuation Range, the aggregate number of shares of Common Stock for which subscriptions and orders have been accepted in the Offering multiplied by the Purchase Price is equal to or greater than the Minimum of the Valuation Range (as such Valuation Range has been reduced), then HoldCo on the Effective Date shall: (i) issue shares of Common Stock to Participants in the Subscription Offering in an amount sufficient to satisfy the subscriptions of such subscribers in full, and (ii) issue to

purchasers in the Community Offering whose orders have been accepted such additional number of shares of Common Stock such that the aggregate number of shares of Common Stock to be issued multiplied by the Purchase Price shall be at least equal to the Minimum of the Valuation Range (as such Valuation Range has been reduced).

(v) Participant Eligibility . Notwithstanding anything to the contrary set forth in this Plan, PCA and HoldCo shall have the right in their absolute discretion and without liability to any subscriber, purchaser, underwriter, broker-dealer, or any other Person to determine which proposed Persons and which subscriptions and orders in the Offering meet the criteria provided in this Plan for eligibility to purchase Common Stock and the number of shares eligible for purchase by any Person. Subject to the provisions of the Stock Purchase Agreement, the determination of these matters by HoldCo and PCA shall be final and binding on all parties and all Persons. PCA and HoldCo shall have absolute and sole discretion to accept or reject, in whole or in part, any offer to purchase that is made or received in the course of the Community Offering, irrespective of a Person’s eligibility under this Plan to participate in the Community Offering.

5. GENERAL PROCEDURE FOR THE OFFERINGS.

As soon as practicable after the registration of the Common Stock under the Securities Act, and after the receipt of all required regulatory approvals, the Common Stock shall be first offered for sale in the Subscription Offering. It is anticipated that any shares of Common Stock remaining unsold after the Subscription Offering will be sold through a Community Offering. The purchase price per share for the Common Stock shall be a uniform price determined in accordance with Section 4(b) hereof.

6. SUBSCRIPTION OFFERING.

Subscription Rights to purchase shares of Common Stock at the Purchase Price will be distributed by HoldCo to the Participants in the following priorities:

(a) Eligible Subscribers (First Priority) . Each Eligible Subscriber shall receive, without payment, nontransferable Subscription Rights to purchase up to 5,000 shares of Common Stock sold in the Subscription Offering; provided, however , that the maximum number of shares that may be purchased by Eligible Subscribers in the aggregate shall be equal to the Maximum of the Valuation Range divided by the Purchase Price.

shares as to which all such Eligible Subscribers’ subscriptions remain unsatisfied; provided, however , that no fractional shares of Common Stock shall be issued. If, because of the magnitude of the oversubscription, shares of Common Stock cannot be allocated among subscribing Eligible Subscribers so as to permit each such Eligible Subscriber to purchase the lesser of 1,000 shares or the number of shares subscribed for, then shares of Common Stock will be allocated among the subscribing Eligible Subscribers in the proportion in which: (i) the aggregate number of shares subscribed for by each such Eligible Subscriber bears to (ii) the aggregate number of shares subscribed for by all Eligible Subscribers; provided, however , that no fractional shares of Common Stock shall be issued.

(b) Limitations on Subscription Rights . Subscription rights granted under this Plan will be nontransferable, nonnegotiable personal rights to subscribe for and purchase shares of Common Stock at the purchase price established hereunder. Subscription Rights under this Plan will be granted without payment, but subject to all the terms, conditions and limitations of this Plan. Any Person purchasing Common Stock hereunder will be deemed to represent and affirm to HoldCo and PCA that such Person is purchasing for his or her own account and not on behalf of any other Person.

7. COMMUNITY OFFERING AND PUBLIC OFFERING.

(a) If less than the total number of shares of Common Stock offered by HoldCo in connection with the Conversion are sold in the Subscription Offering, it is anticipated that remaining shares of Common Stock shall, if practicable, be sold by HoldCo in the Community Offering.

(b) Subject to the terms of the Stock Purchase Agreement, in the Community Offering, HoldCo may accept, in its sole and absolute discretion, orders received from Eligible Stockholders of Diversus, Inc., and from the Standby Purchaser before accepting orders from the general public.

(c) A Prospectus and an Order Form shall be furnished to such Persons as PCA and HoldCo may select in connection with the Community Offering. Subject to the rights of ICG under the Stock Purchase Agreement, each order for Common Stock in the Community Offering shall be subject to the absolute right of HoldCo to accept or reject any such order in whole or in part either at the time of receipt of an order or as soon as practicable following completion of the Community Offering. In the event of an oversubscription, subject to the preferences described above, the rights of ICGunder the Stock Purchase Agreement, and the right of HoldCo to accept or reject, in its sole discretion, any order received in the Community Offering, any available shares will be allocated so as to permit each purchaser whose order is accepted in the Community Offering to purchase, to the extent possible, the lesser of 1,000 shares and the number of shares subscribed for by such person. Thereafter, any shares remaining will be allocated among purchasers whose orders have been accepted but remain unsatisfied on a pro rata basis, provided no fractional shares shall be issued.

(d) HoldCo may commence the Community Offering concurrently with, at any time during, or as soon as practicable after the end of, the Subscription Offering, and the

Community Offering must be completed within 45 days after the completion of the Subscription Offering, unless extended by HoldCo.

(e) HoldCo may sell any shares of Common Stock remaining following the Subscription Offering and Community Offering in a Public Offering, if desired. The provisions of Section 9 shall not be applicable to the sales to underwriters for purposes of the Public Offering, but shall be applicable to sales by the underwriters to the public. The price to be paid by the underwriters in such an offering shall be equal to the Purchase Price less an underwriting discount to be negotiated among such underwriters and HoldCo, subject to any required regulatory approval or consent.

(f) If for any reason a Public Offering of shares of Common Stock not sold in the Subscription Offering and the Community Offering cannot be effected, or if the number of shares of Common Stock remaining to be sold after the Subscription Offering and Community Offering is so small that a Public Offering of those remaining shares would be impractical, HoldCo shall use its best efforts to obtain other purchases in such manner and upon such condition as may be necessary, including without limitation selling shares of Common Stock to the Standby Purchaser as described in Section 8 hereof.

8. STANDBY PURCHASER.

If for any reason the aggregate number of shares of Common Stock subscribed for in the Subscription Offering together with the orders for shares accepted in the Community Offering multiplied by the Purchase Price is less than the Maximum of the Valuation Range, then in such event HoldCo may sell to the Standby Purchaser at the Purchase Price such number of shares as the Standby Purchaser seeks to purchase; provided, however, that the total number of shares sold in the Offering shall not exceed the Maximum of the Valuation Range divided by the Purchase Price ; and provided further, that no fractional shares shall be issued. Subject to the terms of the Stock Purchase Agreement, any order submitted by the Standby Purchaser in the Community Offering may be accepted by HoldCo prior to accepting any other order received in the Community Offering. The Standby Purchaser will purchase an exchangeable promissory note issued by Positive in the principal amount of up to $750,000 (the “ Exchangeable Note ”). The outstanding principal balance of the Exchangeable Note will be converted into shares of Common Stock at the Effective Time at a price per share equal to the Purchase Price. The shares of Common Stock issuable upon conversion of the Exchangeable Note shall be considered part of the Offering and will be credited to the purchase requirements or rights of the Standby Purchaser hereunder.

9. LIMITATIONS ON SUBSCRIPTIONS AND PURCHASES OF COMMON STOCK.

The following additional limitations and exceptions shall apply to all purchases of Common Stock in the Offering:

(a) To the extent that shares are available, no Person may purchase fewer than the lesser of (i) 50 shares of Common Stock or (ii) shares of Common Stock having an aggregate purchase price of $500.00 in the Offering;

(b) Except for (i) the Standby Purchaser, and (ii) Eligible Stockholders of Diversus, Inc., no Person may purchase in the Offering more than 5,000 shares;

(c) Individual and aggregate limitations shall apply to purchases by the Eligible Stockholders of Diversus, Inc., as set forth in Exhibit B to this Plan and incorporated herein by reference.

(d) In addition to the other restrictions and limitations set forth herein, the maximum amount of Common Stock which any Person together with any Associate or group of Persons acting in concert may, directly or indirectly, subscribe for or purchase in the Offering (including without limitation the Subscription Offering and/or Community Offering), shall not exceed five percent (5%) of the total shares of Common Stock sold in the Offering, except that the Standby Purchaser may purchase such number of shares of Common Stock as provided in Section 8. The limit set forth in this section shall not be construed to increase any other purchase limit provided herein. Purchases of shares of Common Stock in the Offering by any Person other than the Standby Purchaser shall not exceed five percent (5%) of the total shares of Common Stock sold in the Offering irrespective of the different capacities in which such person may have received Subscription Rights under this Plan.

(e) For purposes of the foregoing limitations and the determination of Subscription Rights, (i) Directors, Officers, and Employees shall not be deemed to be Associates or a group acting in concert solely as a result of their capacities as such, and (ii) no Person shall be deemed to be an Associate of the Standby Purchaser.

(f) HoldCo may increase or decrease any of the purchase limitations set forth herein at any time; provided that in no event shall the maximum purchase limitation applicable to Eligible Subscribers be less than the maximum purchase limitation percentage applicable to any other class of subscribers or purchasers in the Offering other than the Standby Purchaser. In the event that either an individual or aggregate purchase limitation is increased after commencement of the Offering, any Person who ordered the maximum number of shares of Common Stock shall be permitted to purchase an additional number of shares such that such Person may subscribe for or order the then maximum number of shares permitted to be subscribed for by such Person, subject to the rights and preferences of any person who has priority rights to purchase shares of Common Stock in the Offering. In the event that either an individual or the aggregate purchase limitation is decreased after commencement of the Offering, the orders of any Person who subscribed for or submitted an order for the maximum number of shares of Common Stock shall be decreased by the minimum amount necessary so that such Person shall be in compliance with the then maximum number of shares permitted to be subscribed for or ordered by such Person.

sole discretion, deem necessary, appropriate or advisable in order to monitor and enforce the terms, conditions, limitations and restrictions contained in this Section and elsewhere in this Plan and the terms, conditions and representations contained in the Order Form, including, but not limited to, the absolute right of PCA and HoldCo to reject, limit or revoke acceptance of any order and to delay, terminate or refuse to consummate any sale of Common Stock that they believe might violate, or is designed to, or is any part of a plan to, evade or circumvent such terms, conditions, limitations, restrictions and representations. Any such action shall be final, conclusive and binding on all Persons, and HoldCo and PCA shall be free from any liability to any Person on account of any such action.

10. TIMING OF THE OFFERINGS, MANNER OF PURCHASING COMMON STOCK AND ORDER FORMS.

(a) The exact timing of the commencement of the Offering shall be determined by HoldCo in consultation with any financial or advisory or investment banking firm retained by it in connection with the Offering. HoldCo may consider a number of factors in determining the exact timing of the commencement of the Offering, including, but not limited to, its pro forma current and projected future earnings, local and national economic conditions and the prevailing market for stocks in general and stocks of insurance companies in particular. HoldCo shall have the right to withdraw, terminate, suspend, delay, revoke or modify the Offering at any time and from time to time, as it in its sole discretion may determine, without liability to any Person, subject to any necessary regulatory approval or concurrence.

(b) Subject to the rights of ICG under the Stock Purchase Agreement, PCA and HoldCo shall have the absolute right, in their sole discretion and without liability to any Person, to reject any Order Form, including, but not limited to, any Order Form that is (i) improperly completed or executed, (ii) not timely received, (iii) not accompanied by the proper payment, or (iv) submitted by a Person whose representations PCA or HoldCo believes to be false or who it otherwise believes, either alone, or acting in concert with others, is violating, evading or circumventing, or intends to violate, evade or circumvent, the terms and conditions of this Plan. HoldCo and PCA may, but will not be required to, waive any irregularity on any Order Form or may require the submission of corrected Order Forms or the remittance of full payment for shares of Common Stock by such date as PCA and HoldCo may specify. The interpretation of PCA and HoldCo of the terms and conditions of the Order Forms shall be final and conclusive. Once HoldCo receives an Order Form, the order shall be deemed placed and will be irrevocable; provided, however , that no Order Form shall be accepted until the Prospectus has been filed with the SEC and mailed or otherwise made available to the Persons entitled to Subscription Rights in the Offering, and any Order Form received prior to that time shall be rejected and no sale of Common Stock shall be made in respect thereof.

jurisdiction, (ii) the granting of Subscription Rights or the offer or sale of shares of Common Stock to such Persons would require HoldCo or its Directors, Officers or Employees, under the laws of such jurisdiction, to register as a broker or dealer, salesman or selling agent or to register or otherwise qualify the Common Stock for sale in such jurisdiction, or HoldCo would be required to qualify as a foreign corporation or file a consent to service of process in such jurisdiction, or (iii) such registration or qualification in the judgment of HoldCo would be impracticable or unduly burdensome for reasons of cost or otherwise.

11. PAYMENT FOR COMMON STOCK.

(a) Payment for shares of Common Stock ordered by Persons in the Offering shall be equal to the Purchase Price per share multiplied by the number of shares that are being ordered. Such payment shall be made by wire transfer, bank draft, check, or money order at the time the Order Form is delivered to HoldCo. Payment for all shares of Common Stock subscribed for must be received in full and collected by HoldCo or by any subscription agent engaged by HoldCo. All subscription payments will be deposited by HoldCo in an escrow account at a bank designated by HoldCo and PCA.

(b) Each share of Common Stock issued in the Offering shall be nonassessable upon payment in full of the Purchase Price.

12. CONDITIONS TO THE OFFERINGS.

Consummation of the Offering is subject to (i) the receipt of all required federal and state approvals for the issuance of Common Stock in the Offering, (ii) approval of the Plan by the Voting Subscribers of PCA as provided in Section 3(g) of the Conversion Act, and (iii) the sale in the Offering of such minimum number of shares of Common Stock within the Valuation Range as may be determined by the Board of Directors of the attorney-in-fact of PCA and the board of directors of HoldCo. In addition, consummation of the Offering is subject to there being a simultaneous closing of the PIPE Conversion Transaction and the PPIX Conversion Transaction.

13. SPECIAL MEETING OF SUBSCRIBERS.

Following the approval of this Plan by the PID, a special meeting of the subscribers of PCA will be held by PCA in accordance with the Conversion Act and applicable Pennsylvania law. The Board of Directors of the attorney-in-fact of PCA shall establish a record date for subscribers entitled to vote at the special meeting in accordance with the Conversion Act and applicable Pennsylvania law (the “Voting Record Date”). Notice of the special meeting will be given by PCA to Voting Subscribers by mailing (i) a notice of the special meeting, (ii) a proxy statement, (iii) a form of proxy by which Voting Subscribers may vote in favor of or against the Conversion and the Positive Merger, and (iv) a copy of this Plan as approved by the PID, to the address of each Voting Subscriber as such address appears on the records of PCA on the Voting Record Date.

Pursuant to Section 3(g) of the Conversion Act, this Plan and the Positive Merger must be approved by the affirmative vote of at least two-thirds of the votes cast by Voting Subscribers at

the special meeting. Voting may be in person or by proxy. PCA and HoldCo shall be promptly notified of the vote of the subscribers taken at the special meeting. Each Voting Subscriber shall be entitled to one vote on each matter properly presented at the Special Meeting, regardless of the number of policies on which such Voting Subscriber is a named insured.

14. STATEMENTS OF MERGER.

As part of the Conversion, (a) PCA and PCA Conversion Corp. shall file a Statement of Merger in connection with the PCA Conversion Merger, and (b) PCA Conversion Corp., PPIX Conversion Corp. and PIPE Conversion Corp. shall file a Statement of Merger in connection with the Positive Merger. The filing of the Statements of Merger shall occur on the Effective Date.

15. STATUS OF POLICIES IN FORCE ON THE EFFECTIVE DATE.

Each policy of insurance issued by PCA and in force on the Effective Date shall remain in force as a policy issued by Positive in accordance with the terms of such policy, except that, as of the Effective Date: (i) all voting rights (if any) of the holder of such policy shall be extinguished, (ii) all rights (if any) of the holder of such policy to share in the surplus of PCA or Positive shall be extinguished, (iii) any assessment provisions contained in such policy shall be extinguished, and (iv) in the case of a participating policy, Positive shall have the right on the renewal date of such policy to issue a nonparticipating policy as a substitute for the participating policy.

16. REQUIREMENT FOLLOWING OFFERING FOR REGISTRATION, MARKET MAKING AND STOCK EXCHANGE LISTING.

HoldCo shall either register the Common Stock pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, or register the proposed sale of the Common Stock under the securities laws of the applicable state or states where HoldCo determines that offerings of the Common Stock shall be made in accordance with the terms of this Plan. HoldCo shall use its best efforts to (i) encourage and assist a market maker to establish and maintain a market for that class of stock and (ii) list that class of stock on a national or regional securities exchange or to have quotations for that class of stock disseminated on the Nasdaq Stock Market.

17. RESTRICTIONS ON TRANSFER OF COMMON STOCK.

(a) All shares of the Common Stock which are purchased in the Offering by Persons other than Directors and Officers shall be transferable without restriction. Shares of Common Stock purchased by Directors and Officers in the Offering shall be subject to the restriction that such shares shall not be sold or otherwise disposed of for value for a period of one year following the date of purchase, except for any disposition of such shares following the death of the applicable Director or Officer. The shares of Common Stock issued by HoldCo to Directors, Officers and their Affiliates shall bear the following legend giving appropriate notice of such one-year restriction:

The shares represented by this Certificate may not be sold by the registered holder hereof for a period of one year from the date of the issuance printed hereon, except in the event of the death of the registered holder. This restrictive legend shall be deemed null and void after one year from the date of this Certificate.

(b) In addition, HoldCo shall give appropriate instructions to the transfer agent for its Common Stock with respect to the applicable restrictions relating to the transfer of shares issued to any Director or Officer. Any shares issued at a later date as a stock dividend, stock split or otherwise with respect to any such shares shall be subject to the same holding period restrictions as may then be applicable to such shares issued to a Director or Officer.

(c) The foregoing restriction on transfer shall be in addition to any restrictions on transfer that may be imposed by federal and state securities laws.

18. VOTING RIGHTS.

After consummation of the Conversion, exclusive voting rights with respect to Positive shall be vested in HoldCo, which will hold of all of Positive’s outstanding capital stock.

19. PURCHASES BY DIRECTORS, OFFICERS, AND ASSOCIATES FOLLOWING CONVERSION.

Without the prior approval of the Commissioner, directors and officers of Positive, PTP, and HoldCo, and their Affiliates, shall be prohibited for a period of three (3) years following the Effective Date from purchasing outstanding shares of HoldCo stock, except through a broker-dealer. Notwithstanding this restriction:

(a) Block purchases involving one percent (1.0%) or more of the then outstanding shares of HoldCo stock may be made without the use of a broker-dealer if approved in writing by the PID; and

(b) Purchases may be made by or for the account of an Officer or Director (i) pursuant to a Tax-Qualified Employee Stock Benefit Plan, or (ii) pursuant to, or in connection with, a Non-Tax-Qualified Employee Stock Benefit Plan approved by the shareholders of HoldCo pursuant to Section 10(b) of the Conversion Act.

20. REPURCHASES OF COMMON STOCK.

Without the prior approval of the PID, for a period of three (3) years after the Effective Date, neither HoldCo nor Positive shall repurchase any HoldCo Stock from any Person, except that this restriction shall not apply to either:

(a) A repurchase on a pro rata basis pursuant to an offer made to all shareholders of HoldCo; or

(b) A purchase in the open market by a Tax-Qualified or Non-Tax-Qualified Employee Stock Benefit Plan in an amount reasonable and appropriate to fund such Tax-Qualified or Non-Tax-Qualified Employee Stock Benefit Plan.

21. AMENDMENT OR TERMINATION.

This Plan may be substantively amended by the Attorney-in-Fact of PCA at any time prior to approval of the Plan by the Commissioner as a result of comments from regulatory authorities or otherwise. This Plan may be terminated at any time by the Attorney-in-Fact of PCA.

22. INTERPRETATION.

References herein to provisions of federal and state law shall in all cases be deemed to refer to the provisions of the same which were in effect at the time of adoption of this Plan by the Attorney-in-Fact of PCA and any subsequent amendments to such provisions. All interpretations of this Plan and application of its provisions to particular circumstances by the Attorney-in-Fact shall be final.

EXHIBIT A

ARTICLES OF INCORPORATION
OF
POSITIVE PHYSICIANS INSURANCE COMPANY

EXHIBIT B

ELIGIBLE STOCKHOLDERS OF DIVERSUS, INC.

For purposes of the Plan and these provisions “Eligible Stockholders of Diversus, Inc.” means any current holder of any class or series of common or preferred stock of Diversus, Inc., excluding (i) Enstar and its Affiliates and (ii) any stockholder who was granted all of their shares of common stock for no or nominal consideration.

Eligible Stockholders of Diversus, Inc. and their respective Associates will have the ability to purchase in the Community Offering an aggregate of up to five percent (5%) of the total shares purchased in the Offering after considering all purchases in the Subscription Offering.

Each Eligible Stockholder of Diversus, Inc., together with its Associates, is limited to a maximum of 25,000 shares of Common Stock.

Each Eligible Stockholder of Diversus, Inc. holding common stock of Diversus, together with its Associates, may purchase up to an amount of Common Stock equal to thirty three percent (33%) of the amount of actual consideration that such Person invested in Diversus common stock.

Each Eligible Stockholder of Diversus, Inc. holding preferred stock of Diversus, and its Associates, may purchase up to an amount of Common Stock equal to ten percent (10%) of the amount of actual consideration that such Person invested in Diversus preferred stock; provided that any such holder of preferred stock of Diversus who voluntarily converts all of such preferred stock into common stock prior to the closing of the Offering shall be subject to the thirty three percent (33%) limitation applicable to holders of common stock of Diversus.

For avoidance of doubt, several Eligible Stockholders of Diversus acquired shares of stock of Diversus in exchange for the sale of assets in acquisition transactions. In such cases, all shares of common stock and preferred stock of Diversus were issued at a price of Ten Dollars ($10.00) per share, and, accordingly, the “actual consideration” invested under such circumstances was the number of Diversus shares issued multiplied by Ten Dollars ($10.00) per share.

In the event of an oversubscription among Eligible Stockholders of Diversus, Inc., the number of shares issued to any one such Person shall be equal to the product of (i) the number of shares available for issuance to all such Persons, and (ii) a fraction, expressed as a percentage, the numerator of which is the number of shares to which the subscribing Person subscribed and the denominator of which is the total number of shares subscribed by all such Persons; provided, however , that no fractional shares of Common Stock shall be issued.

Exhibit 2.2

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

AMENDED AND RESTATED PLAN OF CONVERSION

FROM RECIPROCAL TO STOCK FORM

Adopted by the Attorney-in-Fact on September 17, 2018

PHYSICIANS’ INSURANCE PROGRAM EXCHANGE

AMENDED AND RESTATED PLAN OF CONVERSION
FROM RECIPROCAL TO STOCK FORM

1. GENERAL.

Physicians’ Insurance Program Exchange (“PIPE”) is a Pennsylvania domiciled reciprocal and inter-insurance exchange. On June 1, 2018, the Attorney-in-Fact of PIPE, each after careful study and consideration, adopted a Plan of Conversion (the “Original Plan”).

On September 17, 2018, the Attorney-in-Fact of PIPE, again after careful study and consideration, determined to make certain amendments to the Original Plan, generally with respect to the plan of distribution of stock in the Offering. Accordingly the Attorney-in-Fact has adopted this Amended and Restated Plan of Conversion (this “Plan” or the “Plan”). Under this Plan, PIPE will convert from reciprocal to stock form through the mechanism of a merger with and into a newly formed Pennsylvania corporation called “PIPE Conversion Corp.” pursuant to the PIPE Conversion Merger Agreement (as hereinafter defined). Immediately after the merger, PIPE Conversion Corp. will issue shares of its common stock to, and will become a wholly owned subsidiary of, Positive Physicians Holdings, Inc., a newly formed Pennsylvania business corporation (“HoldCo”), although only for a momentary period, as part of this Plan.

Professional Casualty Association, a Pennsylvania reciprocal inter-insurance exchange (“PCA”), will also convert from reciprocal to stock form simultaneously with the conversion of PIPE. That conversion will be accomplished through the mechanism of a merger of PCA with and into PCA Conversion Corp., a Pennsylvania corporation. PCA Conversion Corp. will also become a wholly owned subsidiary of HoldCo as part of the PCA conversion.

Immediately after (i) PIPE has merged into PIPE Conversion Corp., (ii) PCA has merged into PCA Conversion Corp., and (iii) PPIX has merged into PPIX Conversion Corp., PCA Conversion Corp. and PIPE Conversion Corp. will merge with and into PPIX Conversion Corp., and PPIX Conversion Corp. will be renamed “Positive Physicians Insurance Company.” This resulting stock insurance company that is the successor by merger to PCA Conversion Corp., to PIPE Conversion Corp. and to PPIX Conversion Corp., is sometimes referred to as “Positive.”

On behalf of PIPE, its Attorney-in-Fact has caused both PIPE Conversion Corp. and HoldCo to be formed for purposes of this Plan. Neither corporation presently has issued any shares of its capital stock, has any assets or liabilities, or conducts any business operations.

The Attorney-in-Fact of PIPE is Physicians’ Insurance Program Management Company, a Pennsylvania corporation (“PIPMC”), which is vested with management and governance authority for PIPE. The Board of Directors of PIPMC, after careful study and consideration, approved having the officers of PIPMC take these actions on behalf of PIPE. PIPMC has determined that the merger conversion of PIPE into stock form, including the potential for a higher and/or more successful Maximum Offering, will enhance PIPE’s strategic and financial flexibility and is in the best interest of PIPE and its subscribers.

Simultaneously with the conversion of PIPE from reciprocal to stock form, PCA will also convert from reciprocal to stock form. That conversion will be accomplished through the mechanism of a merger of PCA with and into PCA Conversion Corp., a Pennsylvania corporation, pursuant to a plan of conversion dated June 1, 2018, and also amended on September 17, 2018 (as amended, the “PCA Plan of Conversion”). The PCA Plan of Conversion was adopted by Professional Third Party, L.P. (“PTP”), the attorney-in-fact of PCA. Under the Positive Merger Agreement, PIPE Conversion Corp. and PCA Conversion Corp. will be merged with and into PPIX Conversion Corp. to form Positive.

Simultaneously with the conversion of PCA from reciprocal to stock form, PPIX will also convert from reciprocal to stock form. That conversion will be accomplished through the mechanism of a merger of PPIX with and into PPIX Conversion Corp., a Pennsylvania corporation, pursuant to a plan of conversion dated June 1, 2018, and also amended on September 17, 2018 (as amended, the “PPIX Plan of Conversion”). The PPIX Plan of Conversion was adopted by Specialty Insurance Services, LLC (“SIS”), the attorney-in-fact of PPIX. Under the Positive Merger Agreement, PCA Conversion Corp. and PIPE Conversion Corp. will be merged with and into PPIX Conversion Corp. to form Positive.

Because this Plan involves the conversion of PIPE from reciprocal to stock form, this Plan must be approved by the Pennsylvania Insurance Commissioner pursuant to the Medical Professional Liability Reciprocal Exchange-to-Stock Conversion Act (the “Conversion Act”).

This Plan is subject to the approval of the Voting Subscribers of PIPE in accordance with Section 3(g) of the Conversion Act, as provided in Sections 12 and 13 hereof. Completion of the Offering described in this Plan and the conversion of PIPE from reciprocal to stock form are also conditioned upon (i) the approval of the PCA Plan of Conversion by the subscribers of PCA in accordance with the PCA Plan of Conversion, (ii) the approval of the PPIX Plan of Conversion by the subscribers of PPIX in accordance with the PPIX Plan of Conversion, and (iii) the approval of the Pennsylvania Insurance Commissioner pursuant to the Conversion Act.

2. DEFINITIONS.

2.2. “Application” means all of the documents to be filed with the Commissioner pursuant to and as required by §3 of the Conversion Act constituting PIPE’s application for approval of the Conversion.

2.3. “Appraised Value” means the final estimated combined pro forma market values of PIPE, PCA and PPIX, each as determined by the Independent Appraiser in accordance with the Conversion Act and Section 4 hereof.

2.4. “Articles of Incorporation” means the proposed articles of incorporation of Positive in the form attached as Exhibit A to this Plan.

2.6. “Attorney-in-Fact” means Physicians’ Insurance Program Management Company, the attorney-in-fact of PIPE.

2.7. “Closing” means (i) the conversion of PIPE pursuant to this Plan by the merger of PIPE with and into PIPE Conversion Corp. pursuant to the PIPE Conversion Merger Agreement, (ii) the filing of the Statement of Merger in the Office of the Department of State of the Commonwealth of Pennsylvania in connection with the merger of PIPE with and into PIPE Conversion Corp., (iii) the filing of the Statement of Merger in the Office of the Department of State of the Commonwealth of Pennsylvania in connection with the merger of PIPE Conversion Corp. and PCA Conversion Corp. with and into PPIX Conversion Corp. to form Positive, and (iv) the closing of the Offering.

2.8. “Code” means the Internal Revenue Code of 1986, as amended.

2.9. “Commissioner” means the Insurance Commissioner of the Commonwealth of Pennsylvania.

2.11. “Conversion” means: (i) the filing of the statement of merger in connection with the merger of PIPE with and into PIPE Conversion Corp. pursuant to the PIPE Conversion Merger Agreement, and (ii) the offer and sale of Common Stock by HoldCo in the Offering.

2.13. “Director” means any Person who is (i) a director of the attorney-in-fact of PCA (for this purpose including the members of the management committee of the general partner of PTP), (ii) a member of the Board of Directors of the attorney-in-fact of PIPE, or (iii) a member of the Board of Directors of the attorney-in-fact of PPIX (for this purpose including the members of the management committee of SIS).

2.15. “Eligibility Record Date” means June 1, 2018, which is the effective date of the adoption of the Original Plan by the Board of Directors of the attorney-in-fact of PIPE, (ii) the adoption of the original PCA Plan of Conversion by the attorney-in-fact of PCA, and (iii) the adoption of the original PPIX Plan of Conversion by the Board of Directors of the attorney-in-fact of PPIX.

2.16. “Eligible Stockholders of Diversus, Inc.” has the meaning given on Exhibit B to this Plan.

2.19. “Gross Proceeds” means the product of (x) the Purchase Price and (y) the number of shares for which subscriptions and orders are accepted in the Offering and accepted by HoldCo.

2.20. “HoldCo” means Positive Physicians Holdings, Inc., a Pennsylvania corporation which will become the sole stockholder of Positive, which will issue shares of Common Stock in the Offering.

2.21. “ICG” means Insurance Capital Group, LLC, a Delaware limited liability company.

2.22. “Independent Appraiser” means Feldman Financial Advisors, Inc., the qualified expert independent investment banking firm experienced in the valuation of insurance companies that has been retained by PIPE to determine the Valuation Range and any update required thereto.

2.23. “Maximum Offering” has the meaning given to such term in Section 4(c).

2.24. “MRP” means any restricted stock plan, such as a management recognition plan established or to be established by HoldCo or any of its affiliates.

2.25. “Positive Merger” means the merger of PIPE Conversion Corp. and PCA Conversion Corp. with and into PPIX Conversion Corp. to form Positive, with Positive as the surviving entity.

2.28. “Offering” means the offering of shares of Common Stock pursuant to this Plan, the PCA Plan of Conversion, and the PPIX Plan of Conversion in the Subscription Offering and the Community Offering (including any Public Offering).

2.30. “Option Plan” means any stock option plan established or to be established by HoldCo or any of its subsidiaries.

2.32. “Participant” means a Person to whom subscription rights are granted under this Plan, under the PCA Plan of Conversion, or under the PPIX Plan of Conversion.

2.33. “PCA” means Professional Casualty Association, a Pennsylvania reciprocal inter-insurance exchange.

2.34. “ PCA Conversion Transaction ” means the conversion of PCA into stock form under the Conversion Act by means of a merger of PCA with and into PCA Conversion Corp., which shall occur simultaneously with the Conversion hereunder and shall include the Positive Merger, pursuant to a separate plan of conversion to be approved by the subscribers of PCA in accordance with the Conversion Act.

2.35. “PCA Plan of Conversion” means the Plan of Conversion from Reciprocal to Stock Form adopted by the attorney-in-fact of PCA on June 1, 2018, and any amendments thereto.

2.36. “Pennsylvania BCL” means the Pennsylvania Business Corporation Law of 1988, as amended.

2.37. “Person” means any individual, corporation, partnership, association, limited liability company, trust, or any other entity.

2.38. “PID” means the Pennsylvania Insurance Department.

2.39. “PIPE Conversion Merger” means the merger of PIPE with and into PIPE Conversion Corp., with PIPE Conversion Corp. as the surviving entity, which is the mechanism by which PIPE is converted from reciprocal to stock form pursuant to the Conversion Act.

2.40. “PIPE Conversion Merger Agreement” means the merger agreement dated on or about the Closing, by and among HoldCo, PIPE, and PIPE Conversion Corp., pursuant to which the PIPE Conversion Merger will be effected.

2.41. “PPIX” means Positive Physicians Insurance Exchange, a Pennsylvania reciprocal inter-insurance exchange.

include the Positive Merger, pursuant to a separate plan of conversion to be approved by the subscribers of PPIX in accordance with the Conversion Act.

2.43. “PPIX Plan of Conversion” means the Plan of Conversion from Reciprocal to Stock Form adopted by the attorney-in-fact of PPIX on June 1, 2018, and any amendments thereto.

2.45. “Public Offering” means an underwritten firm commitment or best efforts offering to the public through one or more underwriters or registered broker-dealers.

2.46. “Purchase Price” means the price per share at which the Common Stock is ultimately sold by HoldCo to Persons in the Offering in accordance with the terms hereof.

2.47. “Qualifying Policy” means a policy of insurance issued by PIPE, PCA or PPIX and in force as of the close of business on the Eligibility Record Date.

2.49. “SEC” means the U.S. Securities and Exchange Commission.

2.50. “Securities Act” means the Securities Act of 1933, as amended.

2.51. “Special Meeting of Subscribers” means the special meeting of Voting Subscribers to be called by PIPE for the purpose of (i) submitting this Plan to Voting Subscribers for their approval, and (ii) submitting the PIPE Conversion Merger Agreement to Voting Subscribers for their approval and adoption.

2.54. “Subscription Offering” means the offering of the Common Stock that is described in Section 6 hereof.

2.55. “Subscription Rights” means nontransferable rights to subscribe for Common Stock in the Subscription Offering granted to Participants pursuant to the terms of this Plan.

2.56. “Tax-Qualified Employee Stock Benefit Plan” means any defined benefit plan or defined contribution plan, such as an employee stock ownership plan, stock bonus plan, profit-sharing plan or other plan, that is established for the benefit of the Employees of the HoldCo or any of its subsidiaries and which, with its related trust, meets the requirements to be qualified under Section 401 of the Code as from time to time in effect.

2.57. “Valuation Range” means the range of the combined estimated aggregate pro forma market value of PCA, PIPE and PPIX as determined by the Independent Appraiser in accordance with Section 4 hereof.

2.58. “Voting Record Date” means the date established by the Board of Directors of the attorney-in-fact of PIPE to determine subscribers eligible to vote at the special meeting of subscribers called to vote to approve the Plan, as provided in Section 13 hereof.

2.59. “Voting Subscriber” means a Person who, on the Voting Record Date, is (i) a Person who is a named insured under a Qualifying Policy issued by PIPE that is a group policy, or (ii) a Person who is a named insured under a Qualifying Policy issued by PIPE that is an individual policy.

3. APPLICATION.

As soon as practicable after adoption of this Plan by the Attorney-in Fact, PIPE shall file an Application with the Commissioner, containing such materials as may be necessary, advisable or required by the Commissioner in connection with the Conversion.

After the filing of the original Application, PIPE will send a notice by first class mail to each PIPE Eligible Subscriber (as such address appears on the records of PIPE), which notice will: (i) advise each PIPE Eligible Subscriber of the adoption of this Plan, (ii) advise each PIPE Eligible Subscriber of the filing of this Plan with the PID, (iii) notify each PIPE Eligible Subscriber of his or her right to provide comments on this Plan to the PID and to PIPE, (iv) advise each PIPE Eligible Subscriber of the procedure to be followed in providing comments on this Plan, (v) notify each PIPE Eligible Subscriber of his or her right to request and receive a copy of this Plan, and (vi) disclose to such PIPE Eligible Subscriber that the initial Plan is not the final approved Plan and that the Commissioner’s approval, if any, of the final Plan does not constitute or imply endorsement of this Plan or the Conversion by the Commissioner or the PID.

4. TOTAL NUMBER OF SHARES AND PURCHASE PRICE OF COMMON STOCK.

The number of shares of Common Stock required to be offered and sold by HoldCo in the Offering will be determined as follows:

(a) Independent Appraiser . The Independent Appraiser has been retained by PIPE to determine the Valuation Range. The Valuation Range will consist of a midpoint valuation, a valuation fifteen percent (15%) above the midpoint valuation (the “Maximum of the Valuation Range”) and a valuation fifteen percent (15%) below the midpoint valuation (the “Minimum of the Valuation Range”). The Valuation Range will be based upon the financial condition and results of operations of PCA, PIPE, and PPIX, the adjusted statutory surplus of PCA, PIPE, and PPIX on a combined basis as converted to a stock company, a comparison of PCA, PIPE, and PPIX with comparable publicly-held insurance companies, and such other factors as the Independent Appraiser may deem to be relevant, including that value which the Independent Appraiser estimates to be necessary to attract a full subscription for the Common Stock. The Independent Appraiser will submit to PIPE the Valuation Range and a related report that describes the data and methodology used to determine the Valuation Range.

(b) Purchase Price . The Purchase Price for Common Stock in the Offering will be $10.00 per share and will be uniform as to all purchasers in the Offering.

(d) Number of Shares of Common Stock to be Sold . The Appraiser will submit to PIPE the Appraised Value as of the end of the latest calendar quarter for which financial statements of PCA, PIPE, and PPIX are available prior to the adoption of this Plan. If the Gross Proceeds of the Offering do not equal or exceed the Minimum of the Valuation Range, then PIPE may cancel the Offering and terminate this Plan, establish a new Valuation Range and extend, reopen or hold a new Offering, or take such other action as it deems to be reasonably necessary.

(e) If the Gross Proceeds of the Offering equal or exceed the Minimum of the Valuation Range, the following steps will be taken:

subscribing Participants in an amount sufficient to satisfy the subscriptions of such Participants in full. To the extent that shares of Common Stock remain unsold after the subscriptions of all Participants in the Subscription Offering have been satisfied in full, HoldCo shall have the right in its absolute discretion to accept, in whole or in part, orders received from purchasers in the Community Offering, including without limitation orders from the Standby Purchaser or from ICG pursuant to the Stock Purchase Agreement; provided, however , that the number of shares of Common Stock issued shall not exceed the Maximum of the Valuation Range; and, provided further , that no fractional shares of Common Stock shall be issued.

(iv) Offering Does Not Meet Minimum . If the aggregate number of shares of Common Stock subscribed for in the Subscription Offering together with the orders for shares accepted in the Community Offering multiplied by the Purchase Price is less than the Minimum of the Valuation Range, then in such event HoldCo and PIPE may (w) cancel the Offering and terminate this Plan, (x) establish a new Valuation Range, (y) extend, reopen or hold a new Offering, or (z) take such other action as they deem reasonably necessary. If a new Valuation Range is established and the Offering is extended, reopened or continued as part of a new Offering, Persons who previously submitted subscriptions or orders will be required to confirm, revise or cancel their original subscriptions or orders. If original subscriptions or orders are canceled, any related payment will be refunded (without interest).

If, following a reduction in the Valuation Range, the aggregate number of shares of Common Stock for which orders have been accepted in the Offering multiplied by the

Purchase Price is equal to or greater than the Minimum of the Valuation Range (as such Valuation Range has been reduced), then HoldCo on the Effective Date shall: (i) issue shares of Common Stock to Participants in the Subscription Offering in an amount sufficient to satisfy the subscriptions of such subscribers in full, and (ii) issue to purchasers in the Community Offering whose orders have been accepted such additional number of shares of Common Stock such that the aggregate number of shares of Common Stock to be issued multiplied by the Purchase Price shall be at least equal to the Minimum of the Valuation Range (as such Valuation Range has been reduced).

(v) Participant Eligibility . Notwithstanding anything to the contrary set forth in this Plan, PIPE and HoldCo shall have the right in their absolute discretion and without liability to any subscriber, purchaser, underwriter, broker-dealer, or any other Person to determine which proposed Persons and which subscriptions and orders in the Offering meet the criteria provided in this Plan for eligibility to purchase Common Stock and the number of shares eligible for purchase by any Person. The determination of these matters by HoldCo and PIPE shall be final and binding on all parties and all Persons. PIPE and HoldCo shall have absolute and sole discretion to accept or reject, in whole or in part, any offer to purchase that is made or received in the course of the Community Offering, irrespective of a Person’s eligibility under this Plan to participate in the Community Offering.

5. GENERAL PROCEDURE FOR THE OFFERINGS.

6. SUBSCRIPTION OFFERING.

Subscription Rights to purchase shares of Common Stock at the Purchase Price will be distributed by HoldCo to the Participants in the following priorities:

(a) Eligible Subscribers (First Priority) . Each Eligible Subscriber shall receive, without payment, nontransferable Subscription Rights to purchase up to 5,000 shares of Common Stock in the Offering; provided, however , that the maximum number of shares that may be purchased by Eligible Subscribers in the aggregate shall be equal to the Maximum of the Valuation Range divided by the Purchase Price.

initial allocation will be allocated among the subscribing Eligible Subscribers whose subscriptions remain unsatisfied in the proportion in which (i) the aggregate number of shares as to which each such Eligible Subscriber’s subscription remains unsatisfied bears to (ii) the aggregate number of shares as to which all such Eligible Subscribers’ subscriptions remain unsatisfied; provided, however , that no fractional shares of Common Stock shall be issued. If, because of the magnitude of the oversubscription, shares of Common Stock cannot be allocated among subscribing Eligible Subscribers so as to permit each such Eligible Subscriber to purchase the lesser of 1,000 shares or the number of shares subscribed for, then shares of Common Stock will be allocated among the subscribing Eligible Subscribers in the proportion in which: (i) the aggregate number of shares subscribed for by each such Eligible Subscriber bears to (ii) the aggregate number of shares subscribed for by all Eligible Subscribers; provided, however , that no fractional shares of Common Stock shall be issued.

(b) Limitations on Subscription Rights . Subscription rights granted under this Plan will be nontransferable, nonnegotiable personal rights to subscribe for and purchase shares of Common Stock at the purchase price established hereunder. Subscription Rights under this Plan will be granted without payment, but subject to all the terms, conditions and limitations of this Plan. Any Person purchasing Common Stock hereunder will be deemed to represent and affirm to HoldCo and PIPE that such Person is purchasing for his or her own account and not on behalf of any other Person.

7. COMMUNITY OFFERING AND PUBLIC OFFERING.

(c) A Prospectus and an Order Form shall be furnished to such Persons as PIPE and HoldCo may select in connection with the Community Offering. Subject to the rights of ICG under the Stock Purchase Agreement, each order for Common Stock in the Community Offering shall be subject to the absolute right of HoldCo to accept or reject any such order in whole or in part either at the time of receipt of an order or as soon as practicable following completion of the Community Offering. In the event of an oversubscription, subject to the preferences described above, the rights of ICG under the Stock Purchase Agreement, and the right of HoldCo to accept or reject, in its sole discretion, any order received in the Community Offering, any available shares will be allocated so as to permit each purchaser whose order is accepted in the Community Offering to purchase, to the extent possible, the lesser of 1,000 shares and the number of shares subscribed for by such person. Thereafter, any shares remaining will be allocated among purchasers whose orders have been accepted but remain unsatisfied on a pro rata basis, provided no fractional shares shall be issued.

(d) HoldCo may commence the Community Offering concurrently with, at any time during, or as soon as practicable after the end of, the Subscription Offering, and the Community Offering must be completed within 45 days after the completion of the Subscription Offering, unless extended by HoldCo.

8. STANDBY PURCHASER.

9. LIMITATIONS ON SUBSCRIPTIONS AND PURCHASES OF COMMON STOCK.

The following additional limitations and exceptions shall apply to all purchases of Common Stock in the Offering:

(b) Except for (i) the Standby Purchaser, and (ii) Eligible Stockholders of Diversus, Inc., no Person may purchase in the Offering more than 5,000 shares;

(c) Individual and aggregate limitations shall apply to purchases by the Eligible Stockholders of Diversus, Inc., as set forth in Exhibit B to this Plan and incorporated herein by reference.

sole discretion, deem necessary, appropriate or advisable in order to monitor and enforce the terms, conditions, limitations and restrictions contained in this Section and elsewhere in this Plan and the terms, conditions and representations contained in the Order Form, including, but not limited to, the absolute right of PIPE and HoldCo to reject, limit or revoke acceptance of any order and to delay, terminate or refuse to consummate any sale of Common Stock that they believe might violate, or is designed to, or is any part of a plan to, evade or circumvent such terms, conditions, limitations, restrictions and representations. Any such action shall be final, conclusive and binding on all Persons, and HoldCo and PIPE shall be free from any liability to any Person on account of any such action.

10. TIMING OF THE OFFERINGS, MANNER OF PURCHASING COMMON STOCK AND ORDER FORMS.

(b) Subject to the rights of ICG under the Stock Purchase Agreement, PIPE and HoldCo shall have the absolute right, in their sole discretion and without liability to any Person, to reject any Order Form, including, but not limited to, any Order Form that is (i) improperly completed or executed, (ii) not timely received, (iii) not accompanied by the proper payment, or (iv) submitted by a Person whose representations PIPE or HoldCo believes to be false or who it otherwise believes, either alone, or acting in concert with others, is violating, evading or circumventing, or intends to violate, evade or circumvent, the terms and conditions of this Plan. HoldCo and PIPE may, but will not be required to, waive any irregularity on any Order Form or may require the submission of corrected Order Forms or the remittance of full payment for shares of Common Stock by such date as PIPE and HoldCo may specify. The interpretation of PIPE and HoldCo of the terms and conditions of the Order Forms shall be final and conclusive. Once HoldCo receives an Order Form, the order shall be deemed placed and will be irrevocable; provided, however , that no Order Form shall be accepted until the Prospectus has been filed with the SEC and mailed or otherwise made available to the Persons entitled to Subscription Rights in the Offering, and any Order Form received prior to that time shall be rejected and no sale of Common Stock shall be made in respect thereof.

11. PAYMENT FOR COMMON STOCK.

(b) Each share of Common Stock issued in the Offering shall be nonassessable upon payment in full of the Purchase Price.

12. CONDITIONS TO THE OFFERINGS.

Consummation of the Offering is subject to (i) the receipt of all required federal and state approvals for the issuance of Common Stock in the Offering, (ii) approval of the Plan by the Voting Subscribers of PIPE as provided in Section 3(g) of the Conversion Act, and (iii) the sale in the Offering of such minimum number of shares of Common Stock within the Valuation Range as may be determined by the Board of Directors of the attorney-in-fact of PIPE and the Board of directors of HoldCo. In addition, consummation of the Offering is subject to there being a simultaneous closing of the PCA Conversion Transaction and the PPIX Conversion Transaction.

13. SPECIAL MEETING OF SUBSCRIBERS.

Following the approval of this Plan by the PID, a special meeting of the subscribers of PIPE will be held by PIPE in accordance with the Conversion Act and applicable Pennsylvania law. The Board of Directors of the attorney-in-fact of PIPE shall establish a record date for subscribers entitled to vote at the special meeting in accordance with the Conversion Act and applicable Pennsylvania law (the “Voting Record Date”). Notice of the special meeting will be given by PIPE to Voting Subscribers by mailing (i) a notice of the special meeting, (ii) a proxy statement, (iii) a form of proxy by which Voting Subscribers may vote in favor of or against the Conversion and the PIPE Conversion Merger, and (iv) a copy of this Plan as approved by the PID, to the address of each Voting Subscriber as such address appears on the records of PIPE on the Voting Record Date.

Pursuant to Section 3(g) of the Conversion Act, this Plan and the PIPE Conversion Merger must be approved by the affirmative vote of at least two-thirds of the votes cast by Voting Subscribers at the special meeting. Voting may be in person or by proxy. PIPE and HoldCo shall be promptly notified of the vote of the subscribers taken at the special meeting. Each Voting Subscriber shall be entitled to one vote on each matter properly presented at the Special Meeting, regardless of the number of policies on which such Voting Subscriber is a named insured.

14. STATEMENTS OF MERGER.

As part of the Conversion, (a) PIPE and PIPE Conversion Corp. shall file a Statement of Merger in connection with the PIPE Conversion Merger, and (b) PIPE Conversion Corp., PPIX Conversion Corp., and PCA Conversion Corp. shall file a Statement of Merger in connection with the Positive Merger. The filing of the Statements of Merger shall occur on the Effective Date.

15. STATUS OF POLICIES IN FORCE ON THE EFFECTIVE DATE.

Each policy of insurance issued by PIPE and in force on the Effective Date shall remain in force as a policy issued by Positive in accordance with the terms of such policy, except that, as of the Effective Date: (i) all voting rights (if any) of the holder of such policy shall be extinguished, (ii) all rights (if any) of the holder of such policy to share in the surplus of PIPE or Positive shall be extinguished, (iii) any assessment provisions contained in such policy shall be extinguished, and (iv) in the case of a participating policy, Positive shall have the right on the renewal date of such policy to issue a nonparticipating policy as a substitute for the participating policy.

16. REQUIREMENT FOLLOWING OFFERING FOR REGISTRATION, MARKET MAKING AND STOCK EXCHANGE LISTING.

17. RESTRICTIONS ON TRANSFER OF COMMON STOCK.

(c) The foregoing restriction on transfer shall be in addition to any restrictions on transfer that may be imposed by federal and state securities laws.

18. VOTING RIGHTS.

After consummation of the Conversion, exclusive voting rights with respect to Positive shall be vested in HoldCo, which will hold of all of Positive’s outstanding capital stock.

19. PURCHASES BY DIRECTORS, OFFICERS, AND ASSOCIATES FOLLOWING CONVERSION.

Without the prior approval of the Commissioner, directors and officers of Positive, PIPMC, and HoldCo, and their Affiliates, shall be prohibited for a period of three (3) years following the Effective Date from purchasing outstanding shares of HoldCo stock, except through a broker-dealer. Notwithstanding this restriction:

(a) Block purchases involving one percent (1.0%) or more of the then outstanding shares of HoldCo stock may be made without the use of a broker-dealer if approved in writing by the PID; and

(b) Purchases may be made by or for the account of an Officer or Director (i) pursuant to a Tax-Qualified Employee Stock Benefit Plan, or (ii) pursuant to, or in connection

with, a Non-Tax-Qualified Employee Stock Benefit Plan approved by the shareholders of HoldCo pursuant to Section 10(b) of the Conversion Act.

20. REPURCHASES OF COMMON STOCK.

(a) A repurchase on a pro rata basis pursuant to an offer made to all shareholders of HoldCo; or

21. AMENDMENT OR TERMINATION.

This Plan may be substantively amended by the Attorney-in-Fact of PIPE at any time prior to approval of the Plan by the Commissioner as a result of comments from regulatory authorities or otherwise. This Plan may be terminated at any time by the Attorney-in-Fact of PIPE.

22. INTERPRETATION.

References herein to provisions of federal and state law shall in all cases be deemed to refer to the provisions of the same which were in effect at the time of adoption of this Plan by the Attorney-in-Fact of PIPE and any subsequent amendments to such provisions. All interpretations of this Plan and application of its provisions to particular circumstances by the Attorney-in-Fact shall be final.

EXHIBIT A

ARTICLES OF INCORPORATION
OF
POSITIVE PHYSICIANS INSURANCE COMPANY

EXHIBIT B

ELIGIBLE STOCKHOLDERS OF DIVERSUS, INC.

Each Eligible Stockholder of Diversus, Inc., together with its Associates, is limited to a maximum of 25,000 shares of Common Stock.

Exhibit 2.3

POSITIVE PHYSICIANS INSURANCE EXCHANGE

AMENDED AND RESTATED PLAN OF CONVERSION

FROM RECIPROCAL TO STOCK FORM

Adopted by the Attorney-in-Fact on September 17, 2018

POSITIVE PHYSICIANS INSURANCE EXCHANGE

AMENDED AND RESTATED PLAN OF CONVERSION
FROM RECIPROCAL TO STOCK FORM

1. GENERAL.

Positive Physicians Insurance Exchange (“PPIX”) is a Pennsylvania domiciled reciprocal inter-insurance exchange. On June 1, 2018, the Attorney-in-Fact of PPIX, after careful study and consideration, adopted a Plan of Conversion (the “Original Plan”).

On September 17, 2018, the Attorney-in-Fact of PPIX, again after careful study and consideration, determined to make certain amendments to the Original Plan, generally with respect to the plan of distribution of stock in the Offering. Accordingly the Attorney-in-Fact has adopted this Amended and Restated Plan of Conversion (this “Plan” or the “Plan”). Under this Plan, PPIX will convert from reciprocal to stock form through the mechanism of a merger with and into a newly formed Pennsylvania corporation called “PPIX Conversion Corp.” pursuant to the PPIX Conversion Merger Agreement (as hereinafter defined). Immediately after the merger, PPIX Conversion Corp. will issue shares of its common stock to, and will become a wholly owned subsidiary of, Positive Physicians Holdings, Inc., a newly formed Pennsylvania business corporation (“HoldCo”), although only for a momentary period, as part of this Plan.

Professional Casualty Association, a Pennsylvania reciprocal inter-insurance exchange (“PCA”), will also convert from reciprocal to stock form simultaneously with the conversion of PPIX. That conversion will be accomplished through the mechanism of a merger of PCA with and into PCA Conversion Corp., a Pennsylvania corporation. PCA Conversion Corp. will also become a wholly owned subsidiary of HoldCo as part of the PCA conversion.

Physicians Insurance Program Exchange, a Pennsylvania reciprocal inter-insurance exchange (“PIPE”), will also convert from reciprocal to stock form simultaneously with the conversion of PPIX. That conversion will be accomplished through the mechanism of a merger of PIPE with and into PIPE Conversion Corp., a Pennsylvania corporation. PIPE Conversion Corp. will also become a wholly owned subsidiary of HoldCo as part of the PIPE conversion.

Immediately after (i) PIPE has merged into PIPE Conversion Corp., (ii) PCA has merged into PCA Conversion Corp., and (iii) PPIX has merged into PPIX Conversion Corp., PIPE Conversion Corp. and PCA Conversion Corp. will merge with and into PPIX Conversion Corp. and PPIX Conversion Corp. will be renamed “Positive Physicians Insurance Company.” This resulting stock insurance company that is the successor by merger to PCA Conversion Corp., PIPE Conversion Corp. and PPIX Conversion Corp., is sometimes referred to as “Positive.”

On behalf of PPIX, its Attorney-in-Fact has caused PPIX Conversion Corp. to be formed for purposes of this Plan. PPIX Conversion Corp. presently has not issued any shares of its capital stock, has no assets or liabilities, and conducts no business operations.

The Attorney-in-Fact of PPIX is Specialty Insurance Services, LLC (“SIS”), which is vested with management and governance authority for PPIX. SIS, after careful study and consideration, approved having the officers of PPIX take these actions on behalf of PPIX. SIS has determined that the merger conversion of PPIX into stock form, including the potential for a higher and/or more successful Maximum Offering, will enhance PPIX’s strategic and financial flexibility and is in the best interest of PPIX and its subscribers.

Simultaneously with the conversion of PPIX from reciprocal to stock form, PCA will also convert from reciprocal to stock form. That conversion will be accomplished through the mechanism of a merger of PCA with and into PCA Conversion Corp., a Pennsylvania corporation, pursuant to a plan of conversion dated June 1, 2018 and also amended on September 17, 2018 (as amended, the “PCA Plan of Conversion”). The PCA Plan of Conversion was adopted by Professional Third Party, L.P. (“PTP”), the attorney-in-fact of PCA. Under the Positive Merger Agreement, PIPE Conversion Corp. and PCA Conversion Corp. will be merged with and into PPIX Conversion Corp. to form Positive.

Simultaneously with the conversion of PPIX from reciprocal to stock form, PIPE will also convert from reciprocal to stock form. That conversion will be accomplished through the mechanism of a merger of PIPE with and into PIPE Conversion Corp., a Pennsylvania corporation, pursuant to a plan of conversion dated June 1, 2018 and also amended on September 17, 2018 (as amended, the “PIPE Plan of Conversion”). The PIPE Plan of Conversion was adopted by Physicians Insurance Program Management Company (“PIPMC”), the attorney-in-fact of PIPE. Under the Positive Merger Agreement, PIPE Conversion Corp. and PCA Conversion Corp. will be merged with and into PPIX Conversion Corp. to form Positive.

Because this Plan involves the conversion of PPIX from reciprocal to stock form, this Plan must be approved by the Pennsylvania Insurance Commissioner pursuant to the Medical Professional Liability Reciprocal Exchange-to-Stock Conversion Act (the “Conversion Act”).

This Plan is subject to the approval of the Voting Subscribers of PPIX in accordance with Section 3(g) of the Conversion Act, as provided in Sections 12 and 13 hereof. Completion of the Offering described in this Plan and the conversion of PPIX from reciprocal to stock form are also conditioned upon (i) the approval of the PIPE Plan of Conversion by the subscribers of PIPE in accordance with the PIPE Plan of Conversion, (ii) the approval of the PCA Plan of Conversion by the subscribers of PCA in accordance with the PCA Plan of Conversion, and (iii) the approval of the Pennsylvania Insurance Commissioner pursuant to the Conversion Act.

2. DEFINITIONS.

2.2. “Application” means all of the documents to be filed with the Commissioner pursuant to and as required by §3 of the Conversion Act constituting PPIX’s application for approval of the Conversion.

2.4. “Articles of Incorporation” means the proposed articles of incorporation of Positive in the form attached as Exhibit A to this Plan.

2.6. “Attorney-in-Fact” means Specialty Insurance Services, LLC, the attorney-in-fact of PPIX.

2.7. “Closing” means (i) the conversion of PPIX pursuant to this Plan by the merger of PPIX with and into PPIX Conversion Corp. pursuant to the PPIX Conversion Merger Agreement, (ii) the filing of the Statement of Merger in the Office of the Department of State of the Commonwealth of Pennsylvania in connection with the merger of PPIX with and into PPIX Conversion Corp., (iii) the filing of the Statement of Merger in the Office of the Department of State of the Commonwealth of Pennsylvania in connection with the merger of PIPE Conversion Corp. and PCA Conversion Corp. with and into PPIX Conversion Corp. to form Positive, and (iv) the closing of the Offering.

2.8. “Code” means the Internal Revenue Code of 1986, as amended.

2.9. “Commissioner” means the Insurance Commissioner of the Commonwealth of Pennsylvania.

syndicate of broker-dealers to assist it in connection with the sale of Common Stock in the Community Offering.

2.11. “Conversion” means: (i) the filing of the statement of merger in connection with the merger of PPIX with and into PPIX Conversion Corp. pursuant to the PPIX Conversion Merger Agreement, and (ii) the offer and sale of Common Stock by HoldCo in the Offering.

2.13. “Director” means any Person who is (i) a director of the attorney-in-fact of PCA (for this purpose including the members of the management committee of the general partner of PTP), (ii) a director of the attorney–in-fact of PIPE, or (iii) a director of the attorney–in-fact of PPIX (for this purpose including the members of the management committee of SIS).

2.15. “Eligibility Record Date” means June 1, 2018, which is the effective date of the adoption of the original PIPE Plan of Conversion by the attorney-in-fact of PIPE, (ii) the adoption of the original PCA Plan of Conversion by the attorney-in-fact of PCA, and (iii) the adoption of the Original Plan by the attorney-in-fact of PPIX.

2.16. “Eligible Stockholders of Diversus, Inc.” has the meaning given on Exhibit B to this Plan.

2.19. “Gross Proceeds” means the product of (x) the Purchase Price and (y) the number of shares for which subscriptions and orders are accepted in the Offering and accepted by HoldCo.

2.20. “ ICG ” means Insurance Capital Group, LLC, a Delaware limited liability company.

2.21. “HoldCo” means Positive Physicians Holdings, Inc., a Pennsylvania corporation which will become the sole stockholder of Positive, which will issue shares of Common Stock in the Offering.

2.22. “Independent Appraiser” means Feldman Financial Advisors, Inc., the qualified expert independent investment banking firm experienced in the valuation of insurance companies that has been retained by PPIX to determine the Valuation Range and any update required thereto.

2.23. “Maximum Offering” has the meaning given to such term in Section 4(c).

2.24. “MRP” means any restricted stock plan, such as a management recognition plan established or to be established by HoldCo or any of its affiliates.

2.25. “Positive Merger” means the merger of PIPE Conversion Corp. and PCA Conversion Corp. with and into PPIX Conversion Corp. to form Positive, with Positive as the surviving entity.

2.28. “Offering” means the offering of shares of Common Stock pursuant to this Plan, the PIPE Plan of Conversion, and the PCA Plan of Conversion in the Subscription Offering and the Community Offering (including any Public Offering).

2.30. “Option Plan” means any stock option plan established or to be established by HoldCo or any of its subsidiaries.

2.32. “Participant” means a Person to whom subscription rights are granted under this Plan, under the PIPE Plan of Conversion, or under the PCA Plan of Conversion.

2.33. “PCA” means Professional Casualty Association, a Pennsylvania reciprocal inter-insurance exchange.

2.35. “PCA Plan of Conversion” means the Plan of Conversion from Reciprocal to Stock Form adopted by the attorney-in-fact of PCA on June 1, 2018, and any amendments thereto.

2.36. “Pennsylvania BCL” means the Pennsylvania Business Corporation Law of 1988, as amended.

2.37. “Person” means any individual, corporation, partnership, association, limited liability company, trust, or any other entity.

2.38. “PID” means the Pennsylvania Insurance Department.

2.39. “PPIX Conversion Merger” means the merger of PPIX with and into PPIX Conversion Corp., with PPIX Conversion Corp. as the surviving entity, which is the mechanism by which PPIX is converted from reciprocal to stock form pursuant to the Conversion Act.

2.40. “PPIX Conversion Merger Agreement” means the merger agreement dated on or about the Closing, by and among HoldCo, PPIX, and PPIX Conversion Corp., pursuant to which the PPIX Conversion Merger will be effected.

2.41. “PPIX” means Positive Physicians Insurance Exchange, a Pennsylvania reciprocal inter-insurance exchange.

2.42. “ PIPE Conversion Transaction ” means the conversion of PIPE into stock form under the Conversion Act by means of a merger of PIPE with and into PIPE Conversion Corp., which shall occur simultaneously with the Conversion hereunder and shall include the Positive Merger, pursuant to a separate plan of conversion to be approved by the subscribers of PIPE in accordance with the Conversion Act.

2.43. “PIPE Plan of Conversion” means the Plan of Conversion from Reciprocal to Stock Form adopted by the attorney-in-fact of PIPE on June 1, 2018, and any amendments thereto.

2.45. “Public Offering” means an underwritten firm commitment or best efforts offering to the public through one or more underwriters or registered broker-dealers.

2.46. “Purchase Price” means the price per share at which the Common Stock is ultimately sold by HoldCo to Persons in the Offering in accordance with the terms hereof.

2.47. “Qualifying Policy” means a policy of insurance issued by PIPE, PCA or PPIX and in force as of the close of business on the Eligibility Record Date.

2.49. “SEC” means the U.S. Securities and Exchange Commission.

2.50. “Securities Act” means the Securities Act of 1933, as amended.

2.51. “Special Meeting of Subscribers” means the special meeting of Voting Subscribers to be called by PPIX for the purpose of (i) submitting this Plan to Voting Subscribers for their approval, and (ii) submitting the PPIX Conversion Merger Agreement to Voting Subscribers for their approval and adoption.

2.54. “Subscription Offering” means the offering of the Common Stock that is described in Section 6 hereof.

2.55. “Subscription Rights” means nontransferable rights to subscribe for Common Stock in the Subscription Offering granted to Participants pursuant to the terms of this Plan.

2.56. “Tax-Qualified Employee Stock Benefit Plan” means any defined benefit plan or defined contribution plan, such as an employee stock ownership plan, stock bonus plan, profit-sharing plan or other plan, that is established for the benefit of the Employees of the HoldCo or any of its subsidiaries and which, with its related trust, meets the requirements to be qualified under Section 401 of the Code as from time to time in effect.

2.58. “Voting Record Date” means the date established by the attorney-in-fact of PPIX to determine subscribers eligible to vote at the special meeting of subscribers called to vote to approve the Plan, as provided in Section 13 hereof.

2.59. “Voting Subscriber” means a Person who, on the Voting Record Date, is (i) a Person who is a named insured under a Qualifying Policy issued by PPIX that is a group policy, or (ii) a Person who is a named insured under a Qualifying Policy issued by PPIX that is an individual policy.

3. APPLICATION.

As soon as practicable after adoption of this Plan by the Attorney-in Fact of PPIX, PPIX shall file an Application with the Commissioner, containing such materials as may be necessary, advisable or required by the Commissioner in connection with the Conversion.

After the filing of the original Application, PPIX will send a notice by first class mail to each PPIX Eligible Subscriber (as such address appears on the records of PPIX), which notice will: (i) advise each PPIX Eligible Subscriber of the adoption of this Plan, (ii) advise each PPIX Eligible Subscriber of the filing of this Plan with the PID, (iii) notify each PPIX Eligible Subscriber of his or her right to provide comments on this Plan to the PID and to PPIX, (iv) advise each PPIX Eligible Subscriber of the procedure to be followed in providing comments on this Plan, (v) notify each PPIX Eligible Subscriber of his or her right to request and receive a copy of this Plan, and (vi) disclose to such PPIX Eligible Subscriber that the initial Plan is not the final approved Plan and that the Commissioner’s approval, if any, of the final Plan does not constitute or imply endorsement of this Plan or the Conversion by the Commissioner or the PID.

4. TOTAL NUMBER OF SHARES AND PURCHASE PRICE OF COMMON STOCK.

The number of shares of Common Stock required to be offered and sold by HoldCo in the Offering will be determined as follows:

(a) Independent Appraiser . The Independent Appraiser has been retained by PPIX to determine the Valuation Range. The Valuation Range will consist of a midpoint valuation, a valuation fifteen percent (15%) above the midpoint valuation (the “Maximum of the Valuation Range”) and a valuation fifteen percent (15%) below the midpoint valuation (the “Minimum of the Valuation Range”). The Valuation Range will be based upon the financial condition and results of operations of PCA, PIPE, and PPIX, the adjusted statutory surplus of PCA, PIPE, and PPIX on a combined basis as converted to a stock company, a comparison of PCA, PIPE, and PPIX with comparable publicly-held insurance companies, and such other factors as the Independent Appraiser may deem to be relevant, including that value which the Independent Appraiser estimates to be necessary to attract a full subscription for the Common Stock. The Independent Appraiser will submit to PPIX the Valuation Range and a related report that describes the data and methodology used to determine the Valuation Range.

(b) Purchase Price . The Purchase Price for Common Stock in the Offering will be $10.00 per share and will be uniform as to all purchasers in the Offering.

(d) Number of Shares of Common Stock to be Sold . The Appraiser will submit to PPIX the Appraised Value as of the end of the latest calendar quarter for which financial statements of PCA, PIPE, and PPIX are available prior to the adoption of this Plan. If the Gross Proceeds of the Offering do not equal or exceed the Minimum of the Valuation Range, then PPIX may cancel the Offering and terminate this Plan, establish a new Valuation Range and extend, reopen or hold a new Offering, or take such other action as it deems to be reasonably necessary.

(e) If the Gross Proceeds of the Offering equal or exceed the Minimum of the Valuation Range, the following steps will be taken:

Range, then in such event HoldCo may accept orders received from purchasers in the Community Offering, including without limitation orders from the Standby Purchaser or from ICG pursuant to the Stock Purchase Agreement. If the aggregate number of shares of Common Stock subscribed for in the Subscription Offering together with the orders for shares accepted in the Community Offering multiplied by the Purchase Price is equal to or greater than the Minimum of the Valuation Range, then on the Effective Date HoldCo shall: (A) issue shares of Common Stock to subscribing Participants in an amount sufficient to satisfy the subscriptions of such Participants in full, and (B) issue to purchasers in the Community Offering whose orders have been accepted such additional number of shares of Common Stock such that the aggregate number of shares of Common Stock to be issued to subscribing Participants and to purchasers in the Community Offering multiplied by the Purchase Price shall be equal to the Minimum of the Valuation Range; provided, however , that no fractional shares of Common Stock shall be issued. HoldCo may in its absolute discretion elect to issue shares of Common Stock to purchasers in the Community Offering in excess of the number determined by reference to clause (B) of the preceding sentence; provided, however , that the number of shares of Common Stock issued shall not exceed the Maximum of the Valuation Range.

(iv) Offering Does Not Meet Minimum . If the aggregate number of shares of Common Stock subscribed for in the Subscription Offering together with the orders for shares accepted in the Community Offering multiplied by the Purchase Price is less than the Minimum of the Valuation Range, then in such event HoldCo and PPIX may (w) cancel the Offering and terminate this Plan, (x) establish a new Valuation Range, (y) extend, reopen or hold a new Offering, or (z) take such other action as they deem reasonably necessary. If a new Valuation Range is established and the Offering is extended, reopened or continued as part of a new Offering, Persons who previously submitted subscriptions or orders will be required to confirm, revise or cancel their original subscriptions or orders. If original subscriptions or orders are canceled, any related payment will be refunded (without interest).

If, following a reduction in the Valuation Range, the aggregate number of shares of Common Stock for which orders have been accepted in the Offering multiplied by the Purchase Price is equal to or greater than the Minimum of the Valuation Range (as such Valuation Range has been reduced), then HoldCo on the Effective Date shall: (i) issue shares of Common Stock to Participants in the Subscription Offering in an amount sufficient to satisfy the subscriptions of such subscribers in full, and (ii) issue to purchasers in the Community Offering whose orders have been accepted such additional number of shares of Common Stock such that the aggregate number of shares of Common Stock to be issued multiplied by the Purchase Price shall be at least equal to the Minimum of the Valuation Range (as such Valuation Range has been reduced).

(v) Participant Eligibility . Notwithstanding anything to the contrary set forth in this Plan, PPIX and HoldCo shall have the right in their absolute discretion and without liability to any subscriber, purchaser, underwriter, broker-dealer, or any other Person to determine which proposed Persons and which subscriptions and

orders in the Offering meet the criteria provided in this Plan for eligibility to purchase Common Stock and the number of shares eligible for purchase by any Person. The determination of these matters by HoldCo and PPIX shall be final and binding on all parties and all Persons. PPIX and HoldCo shall have absolute and sole discretion to accept or reject, in whole or in part, any offer to purchase that is made or received in the course of the Community Offering, irrespective of a Person’s eligibility under this Plan to participate in the Community Offering.

5. GENERAL PROCEDURE FOR THE OFFERINGS.

6. SUBSCRIPTION OFFERING.

Subscription Rights to purchase shares of Common Stock at the Purchase Price will be distributed by HoldCo to the Participants in the following priorities:

(a) Eligible Subscribers (First Priority) . Each Eligible Subscriber shall receive, without payment, nontransferable Subscription Rights to purchase up to 5,000 shares of Common Stock in the Offering; provided, however , that the maximum number of shares that may be purchased by Eligible Subscribers in the aggregate shall be equal to the Maximum of the Valuation Range divided by the Purchase Price.

In the event of an oversubscription for shares of Common Stock pursuant to this Section 6(a), available shares shall be allocated among subscribing Eligible Subscribers so as to permit each such Eligible Subscriber, to the extent possible, to purchase a number of shares which will make his or her total allocation equal to the lesser of (i) the number of shares that he or she subscribed for or (ii) 1,000 shares. Any shares of Common Stock remaining after such initial allocation will be allocated among the subscribing Eligible Subscribers whose subscriptions remain unsatisfied in the proportion in which (i) the aggregate number of shares as to which each such Eligible Subscriber’s subscription remains unsatisfied bears to (ii) the aggregate number of shares as to which all such Eligible Subscribers’ subscriptions remain unsatisfied; provided, however , that no fractional shares of Common Stock shall be issued. If, because of the magnitude of the oversubscription, shares of Common Stock cannot be allocated among subscribing Eligible Subscribers so as to permit each such Eligible Subscriber to purchase the lesser of 1,000 shares or the number of shares subscribed for, then shares of Common Stock will be allocated among the subscribing Eligible Subscribers in the proportion in which: (i) the aggregate number of shares subscribed for by each such Eligible Subscriber bears to (ii) the aggregate number of shares subscribed for by all Eligible Subscribers; provided, however , that no fractional shares of Common Stock shall be issued.

(b) Limitations on Subscription Rights . Subscription rights granted under this Plan will be nontransferable, nonnegotiable personal rights to subscribe for and purchase shares of Common Stock at the purchase price established hereunder. Subscription Rights under this Plan will be granted without payment, but subject to all the terms, conditions and limitations of this Plan. Any Person purchasing Common Stock hereunder will be deemed to represent and affirm to HoldCo and PPIX that such Person is purchasing for his or her own account and not on behalf of any other Person.

7. COMMUNITY OFFERING AND PUBLIC OFFERING.

(b) Subject to the terms of the Stock Purchase Agreement, in the Community Offering, HoldCo may accept, in its sole and absolute discretion, orders received from Eligible Stockholders of Diversus, Inc. and from the Standby Purchaser before accepting orders from the general public.

(c) A Prospectus and an Order Form shall be furnished to such Persons as PPIX and HoldCo may select in connection with the Community Offering. Subject to the rights of ICG under the Stock Purchase Agreement, each order for Common Stock in the Community Offering shall be subject to the absolute right of HoldCo to accept or reject any such order in whole or in part either at the time of receipt of an order or as soon as practicable following completion of the Community Offering. In the event of an oversubscription, subject to the preferences described above, the rights of the ICG under the Stock Purchase Agreement, and the right of HoldCo to accept or reject, in its sole discretion, any order received in the Community Offering, any available shares will be allocated so as to permit each purchaser whose order is accepted in the Community Offering to purchase, to the extent possible, the lesser of 1,000 shares and the number of shares subscribed for by such person. Thereafter, any shares remaining will be allocated among purchasers whose orders have been accepted but remain unsatisfied on a pro rata basis, provided no fractional shares shall be issued.

8. STANDBY PURCHASER.

9. LIMITATIONS ON SUBSCRIPTIONS AND PURCHASES OF COMMON STOCK.

The following additional limitations and exceptions shall apply to all purchases of Common Stock in the Offering:

(b) Except for (i) the Standby Purchaser and (ii) Eligible Stockholders of Diversus, no Person may purchase in the Offering more than 5,000 shares;

(c) Individual and aggregate limitations shall apply to purchases by the Eligible Stockholders of Diversus, Inc., as set forth in Exhibit B to this Plan and incorporated herein by reference .

(d) In addition to the other restrictions and limitations set forth herein, the maximum amount of Common Stock which any Person together with any Associate or group of

Persons acting in concert may, directly or indirectly, subscribe for or purchase in the Offering (including without limitation the Subscription Offering and/or Community Offering), shall not exceed five percent (5%) of the total shares of Common Stock sold in the Offering, except that the Standby Purchaser may purchase such number of shares of Common Stock as provided in Section 8. The limit set forth in this section shall not be construed to increase any other purchase limit provided herein. Purchases of shares of Common Stock in the Offering by any Person other than the Standby Purchaser shall not exceed five percent (5%) of the total shares of Common Stock sold in the Offering irrespective of the different capacities in which such person may have received Subscription Rights under this Plan.

(g) Each Person who purchases Common Stock in the Offering shall be deemed to confirm that such purchase does not conflict with the purchase limitations under this Plan or otherwise imposed by law. PPIX shall have the right to take any action as it may, in its sole discretion, deem necessary, appropriate or advisable in order to monitor and enforce the terms, conditions, limitations and restrictions contained in this Section and elsewhere in this Plan and the terms, conditions and representations contained in the Order Form, including, but not limited to, the absolute right of PPIX and HoldCo to reject, limit or revoke acceptance of any order and to delay, terminate or refuse to consummate any sale of Common Stock that they believe might violate, or is designed to, or is any part of a plan to, evade or circumvent such terms, conditions, limitations, restrictions and representations. Any such action shall be final, conclusive and binding on all Persons, and HoldCo and PPIX shall be free from any liability to any Person on account of any such action.

10. TIMING OF THE OFFERINGS, MANNER OF PURCHASING COMMON STOCK AND ORDER FORMS.

(b) Subject to the rights of the ICG under the Stock Purchase Agreement, PPIX and HoldCo shall have the absolute right, in their sole discretion and without liability to any Person, to reject any Order Form, including, but not limited to, any Order Form that is (i) improperly completed or executed, (ii) not timely received, (iii) not accompanied by the proper payment, or (iv) submitted by a Person whose representations PPIX or HoldCo believes to be false or who it otherwise believes, either alone, or acting in concert with others, is violating, evading or circumventing, or intends to violate, evade or circumvent, the terms and conditions of this Plan. HoldCo and PPIX may, but will not be required to, waive any irregularity on any Order Form or may require the submission of corrected Order Forms or the remittance of full payment for shares of Common Stock by such date as PPIX and HoldCo may specify. The interpretation of PPIX and HoldCo of the terms and conditions of the Order Forms shall be final and conclusive. Once HoldCo receives an Order Form, the order shall be deemed placed and will be irrevocable; provided, however , that no Order Form shall be accepted until the Prospectus has been filed with the SEC and mailed or otherwise made available to the Persons entitled to Subscription Rights in the Offering, and any Order Form received prior to that time shall be rejected and no sale of Common Stock shall be made in respect thereof.

(c) HoldCo shall make reasonable efforts to comply with the securities laws of all jurisdictions in the United States in which Persons entitled to subscribe reside. However, HoldCo has no obligation to offer or sell shares to any Person under the Plan if such Person resides in a foreign country or in a jurisdiction of the United States with respect to which (i) there are few Persons otherwise eligible to subscribe for shares under this Plan who reside in such jurisdiction, (ii) the granting of Subscription Rights or the offer or sale of shares of Common Stock to such Persons would require HoldCo or its Directors, Officers or Employees, under the laws of such jurisdiction, to register as a broker or dealer, salesman or selling agent or to register or otherwise qualify the Common Stock for sale in such jurisdiction, or HoldCo would be required to qualify as a foreign corporation or file a consent to service of process in such jurisdiction, or (iii) such registration or qualification in the judgment of HoldCo would be impracticable or unduly burdensome for reasons of cost or otherwise.

11. PAYMENT FOR COMMON STOCK.

(b) Each share of Common Stock issued in the Offering shall be nonassessable upon payment in full of the Purchase Price.

12. CONDITIONS TO THE OFFERINGS.

Consummation of the Offering is subject to (i) the receipt of all required federal and state approvals for the issuance of Common Stock in the Offering, (ii) approval of the Plan by the Voting Subscribers of PPIX as provided in Section 3(g) of the Conversion Act, and (iii) the sale in the Offering of such minimum number of shares of Common Stock within the Valuation Range as may be determined by the attorney-in-fact of PPIX and the Board of Directors of HoldCo. In addition, consummation of the Offering is subject to there being a simultaneous closing of the PCA Conversion Transaction and the PIPE Conversion Transaction.

13. SPECIAL MEETING OF SUBSCRIBERS.

Following the approval of this Plan by the PID, a special meeting of the subscribers of PPIX will be held by PPIX in accordance with the Conversion Act and applicable Pennsylvania law. The attorney-in-fact of PPIX shall establish a record date for subscribers entitled to vote at the special meeting in accordance with the Conversion Act and applicable Pennsylvania law (the “Voting Record Date”). Notice of the special meeting will be given by PPIX to Voting Subscribers by mailing (i) a notice of the special meeting, (ii) a proxy statement, (iii) a form of proxy by which Voting Subscribers may vote in favor of or against the Conversion and the PPIX Conversion Merger, and (iv) a copy of this Plan as approved by the PID, to the address of each Voting Subscriber as such address appears on the records of PPIX on the Voting Record Date.

Pursuant to Section 3(g) of the Conversion Act, this Plan and the PPIX Conversion Merger must be approved by the affirmative vote of at least two-thirds of the votes cast by Voting Subscribers at the special meeting. Voting may be in person or by proxy. PPIX and HoldCo shall be promptly notified of the vote of the subscribers taken at the special meeting. Each Voting Subscriber shall be entitled to one vote on each matter properly presented at the Special Meeting, regardless of the number of policies on which such Voting Subscriber is a named insured.

14. STATEMENTS OF MERGER.

As part of the Conversion, (a) PPIX and PPIX Conversion Corp. shall file a Statement of Merger in connection with the PPIX Conversion Merger, and (b) PIPE Conversion Corp., PPIX Conversion Corp., and PCA Conversion Corp. shall file a Statement of Merger in connection with the Positive Merger. The filing of the Statements of Merger shall occur on the Effective Date.

15. STATUS OF POLICIES IN FORCE ON THE EFFECTIVE DATE.

Each policy of insurance issued by PPIX and in force on the Effective Date shall remain in force as a policy issued by Positive in accordance with the terms of such policy, except that, as of the Effective Date: (i) all voting rights (if any) of the holder of such policy shall be extinguished, (ii) all rights (if any) of the holder of such policy to share in the surplus of PPIX or Positive shall be extinguished, (iii) any assessment provisions contained in such policy shall be extinguished, and (iv) in the case of a participating policy, Positive shall have the right on the renewal date of such policy to issue a nonparticipating policy as a substitute for the participating policy.

16. REQUIREMENT FOLLOWING OFFERING FOR REGISTRATION, MARKET MAKING AND STOCK EXCHANGE LISTING.

17. RESTRICTIONS ON TRANSFER OF COMMON STOCK.

(c) The foregoing restriction on transfer shall be in addition to any restrictions on transfer that may be imposed by federal and state securities laws.

18. VOTING RIGHTS.

After consummation of the Conversion, exclusive voting rights with respect to Positive shall be vested in HoldCo, which will hold of all of Positive’s outstanding capital stock.

19. PURCHASES BY DIRECTORS, OFFICERS, AND ASSOCIATES FOLLOWING CONVERSION.

Without the prior approval of the Commissioner, directors and officers of Positive, SIS, and HoldCo, and their Affiliates, shall be prohibited for a period of three (3) years following the Effective Date from purchasing outstanding shares of HoldCo stock, except through a broker-dealer. Notwithstanding this restriction:

(a) Block purchases involving one percent (1.0%) or more of the then outstanding shares of HoldCo stock may be made without the use of a broker-dealer if approved in writing by the PID; and

20. REPURCHASES OF COMMON STOCK.

(a) A repurchase on a pro rata basis pursuant to an offer made to all shareholders of HoldCo; or

21. AMENDMENT OR TERMINATION.

This Plan may be substantively amended by the Attorney-in-Fact of PPIX at any time prior to approval of the Plan by the Commissioner as a result of comments from regulatory authorities or otherwise. This Plan may be terminated at any time by the Attorney-in-Fact of PPIX.

22. INTERPRETATION.

References herein to provisions of federal and state law shall in all cases be deemed to refer to the provisions of the same which were in effect at the time of adoption of this Plan by the Attorney-in-Fact of PPIX and any subsequent amendments to such provisions. All interpretations of this Plan and application of its provisions to particular circumstances by the Attorney-in-Fact shall be final.

EXHIBIT A

ARTICLES OF INCORPORATION
OF
POSITIVE PHYSICIANS INSURANCE COMPANY

EXHIBIT B

ELIGIBLE STOCKHOLDERS OF DIVERSUS, INC.

Each Eligible Stockholder of Diversus, Inc., together with its Associates, is limited to a maximum of 25,000 shares of Common Stock.

Exhibit 3.1

AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
POSITIVE PHYSICIANS HOLDINGS, INC.

A Business-Stock Domestic Corporation

The Articles of Incorporation of Positive Physicians Holdings, Inc., a Pennsylvania corporation, are hereby amended and restated to read as follows:

FIRST: The name of the corporation is: Positive Physicians Holdings, Inc. (the “ Corporation ”).

SECOND: The location and address of the Corporation’s registered office in this Commonwealth of Pennsylvania and the county of venue is: 100 Berwyn Park, 850 Cassatt Road, Suite 220, Berwyn, Pennsylvania 19312, Chester County.

THIRD: The purpose of the Corporation is to have unlimited power to engage in, and do any lawful act concerning, any or all lawful business for which corporations may be incorporated under the provisions of the Pennsylvania Business Corporation Law of 1988, as amended (15 Pa. C.S. §§ 1101, et seq. ) (the “ Business Corporation Law ”), specifically to act as an insurance holding company.

FOURTH: The term for which the Corporation is to exist is perpetual.

FIFTH:

A. Authorized Shares . The total number of shares of capital stock that the Corporation has authority to issue is 10,000,000 shares of Common Stock, par value $0.01 per share (the “ Common Stock ”).

The Corporation shall be entitled to treat the person in whose name any share of its stock is registered as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any other person, whether or not the Corporation shall have notice thereof, except as expressly provided by applicable law.

B. Preemptive Rights . No holder of capital stock of the Corporation shall have any preemptive, subscription, redemption, conversion or sinking fund rights with respect to the capital stock, or to any obligations convertible (directly or indirectly) into stock of the Corporation, whether now or hereafter authorized.

C. Voting Rights . Each holder of Common Stock shall have one vote for each share held by such holder on all matters voted upon by the shareholders of the Corporation, including for the election of directors.

D. Uncertificated Shares . Any and all classes or series of shares of capital stock of the Corporation, or any part thereof, may be represented by uncertificated shares to the extent determined by the Board, except as required by applicable law, including that shares represented by a certificate that is issued and outstanding shall continue to be represented thereby until the certificate is surrendered to the Corporation. Within a reasonable time after the issuance or transfer of uncertificated shares, the Corporation shall send to the registered owner thereof a written notice containing the information required

by applicable law to be set forth or stated on certificates. Except as otherwise expressly provided by law, the rights and obligations of the holders of uncertificated shares of the same class and series shall be identical.

SIXTH: In furtherance and not in limitation of the powers conferred by statute, the Board is expressly authorized to make, alter, amend or repeal the Bylaws of the Corporation.

SEVENTH: The shareholders of the Corporation shall not be entitled to cumulate their votes for the election of directors, and at each election for directors, every shareholder of the corporation entitled to vote at such election shall have the right to vote in person or by proxy the number of shares held by such shareholder for as many persons as there are directors to be elected.

EIGHTH: Shareholders of the Corporation may take action by written consent provided that the holders of at least such number of shares of capital stock of the Corporation having the right to vote with respect to such action as is necessary to approve such action have signed consents approving such action.

NINTH: The Corporation expressly elects not to be governed by the provisions contained in Subchapters E (Control Transactions), F (Business Combinations), G (Control-Share Acquisitions), H (Disgorgement by Certain Controlling Shareholders Following Attempts to Acquire Control), I (Severance Compensation for Employees Terminated Following Certain Control-Share Acquisitions) and J (Business Combination Transactions – Labor Contracts) of Chapter 25 of the Business Corporation Law.

TENTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles, or any amendment hereof, in the manner now or hereafter prescribed herein and by the laws of the Commonwealth of Pennsylvania, and all rights conferred upon shareholders herein are granted subject to this reservation ; provided that Articles Seventh, Tenth, Eleventh and Twelfth hereof can only be amended by the affirmative vote of eighty percent (80%) or more of the outstanding shares of common stock of the Corporation.

ELEVENTH: A director of the Corporation shall not be personally liable for monetary damages (including, without limitation, any judgment, amount paid in settlement, penalty, punitive damages or expense of any nature (including, without limitation, attorneys’ fees and disbursements)) for any action taken, or any failure to take any action, unless the director has breached or failed to perform the duties of his or her office and the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness.

TWELFTH: The Corporation shall indemnify any officer or director of the Corporation against any and all expenses, judgments, fines, amounts paid in settlement, and any other liabilities to the fullest extent permitted by the Business Corporation Law and may, at the discretion of the Board, purchase and maintain insurance, at the Corporation’s expense, to protect itself, the directors and officers of the Corporation, and any other persons against any such expense, judgment, fine, amount paid in settlement, or other liability, whether or not the Corporation would have the power to so indemnify such person under the Business Corporation Law.

THIRTEENTH: The name and post office address of the incorporator of the Corporation is: Melissa M. Zeiders, 17 North Second Street, 16th Floor, Harrisburg, PA 17101.

IN WITNESS WHEREOF, Positive Physicians Holdings, Inc. has caused these Amended and Restated Articles of Incorporation to be executed in its name by its duly authorized officer and this ____________, 2018.

Melissa M. Zeiders, Incorporator

Exhibit 3.2

BYLAWS

POSITIVE PHYSICIANS HOLDINGS, INC.

Article I

Meetings of Shareholders

Section 1.1. Annual Meetings . The regular annual meeting of the shareholders for the election of directors and the transaction of whatever other business may properly come before the meeting, shall be held at the main office of the Corporation, 100 Berwyn Park, 850 Cassatt Road, Suite 220, Berwyn, Pennsylvania, at 10:00 a.m., on the 4th Tuesday of May of each year, or at such other place on such date and at such time as the board of directors may in their discretion determine. The Chairperson of the Board shall preside at the annual meeting. Written notice stating the place, day, and hour of the meeting and, in case of a special meeting, the general nature of the business to be transacted, shall be delivered not less than five (5) nor more than fifty (50) days before the date of the meeting, or in case of a merger or consolidation not less than ten (10) nor more than fifty (50) days before the date of the meeting, either personally or by mail, by or at the direction of the President and Chief Executive Officer, or the Secretary, or the officer or persons calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at his address as it appears on the books of the Corporation or as supplied by him to the Corporation for the purpose of notice, with postage thereon prepaid.

Section 1.2. Special Meetings . Special meetings of the shareholders may be called only in accordance with the Pennsylvania Business Corporation Law (the “PABCL”). Upon written request to the President and Chief Executive Officer or the Secretary, sent by registered mail or delivered to such officer in person, of any person or persons entitled to call a special meeting of the shareholders, it shall be the duty of the Secretary to fix the time of the meeting, which shall be held not more than sixty (60) days after the receipt of the request, and shall give due notice thereof.

Section 1.3. Nominations for Directors . Nominations for election to the board of directors may be made by the board of directors or by any shareholder of any outstanding class of capital stock of the Corporation entitled to vote for the election of directors. Nominations, other than those made by or on behalf of the board of directors of the Corporation, or an appropriate committee thereof, shall be made in writing and shall be delivered or mailed by first class United States mail, postage prepaid, to the Chairperson of the Board not less than 90 days nor more than 120 days prior to any meeting of shareholders called for the election of directors. Each notice of nomination made by a shareholder shall set forth (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of capital stock of the Corporation that are beneficially owned by each such nominee, and (iv) any other

information with respect to such nominee required to be included in a proxy statement soliciting proxies for the election of directors under the rules and regulations of the United States Securities and Exchange Commission. The chairperson of the meeting may, if the facts warrant, determine and declare that a nomination was not made in accordance with the foregoing procedure, and such nomination shall be disregarded.

Section 1.4. Agenda for Shareholder Meetings . Matters to be placed on the agenda for consideration at annual meetings of shareholders may be proposed by the board of directors or by any shareholder entitled to vote for the election of directors. Matters to be placed on the agenda for consideration at special meetings of shareholders may be proposed only by the board of directors. Matters proposed for the annual meeting agenda by shareholders entitled to vote for the election of directors shall be made by notice in writing, delivered or mailed by first class United States mail, postage prepaid, to the Secretary of the Corporation not less than ninety (90) days nor more than one hundred and fifty (150) days prior to any annual meeting of shareholders; provided , however , that if less than twenty-one (21) days' notice of the meeting is given to shareholders, a shareholder's written notice of a proposed matter shall be delivered or mailed, as prescribed, to the Secretary of the Corporation not later than the close of the seventh day following the day on which notice of the meeting was mailed to shareholders. Notice of matters which are proposed by the board of directors shall be given by the Chairperson of the Board or any other appropriate officer. Each notice given by a shareholder shall set forth a brief description of the business desired to be brought before the annual meeting. The chairperson of the meeting of shareholders may, if the facts warrant, determine and declare to the meeting that a matter proposed for the agenda was not made in accordance with the foregoing procedure, and if the chairperson should so determine, he or she shall so declare to the meeting and the matter shall be disregarded.

Section 1.5. Election . Except as otherwise provided in the Articles of Incorporation or these Bylaws, directors of the Corporation shall be elected by the shareholders. In elections for directors, voting need not be by ballot unless required by vote of the shareholders before the voting for election of directors begins. The candidates receiving the highest number of votes, up to the number of directors to be elected, shall be elected.

Section 1.6. Proxies . Shareholders may vote at any meeting of the shareholders in person, or by proxy. Every proxy shall be executed in writing, or authenticated by the shareholder, or by their duly authorized attorney-in-fact and filed with or transmitted to the Secretary of the Corporation or its designated agent. A shareholder or its duly authorized attorney-in-fact may execute or authenticate a writing or transmit an electronic message authorizing another person to act for the shareholder by proxy. A telegram, telex, cablegram, datagram, e-mail, Internet communication or similar other means of electronic transmission from a shareholder or attorney-in-fact, or a photographic, facsimile or similar reproduction of a writing executed by a shareholder or attorney-in-fact may be treated as properly executed or authenticated. If the Corporation conducts voting by e-mail or other similar electronic transmission, the Corporation shall furnish to those shareholders voting by e-mail or other similar electronic transmission, a confidential and unique identification number or other type of mark to be used by the shareholder to vote at a particular meeting or transaction. Proxies, unless

otherwise provided, shall be valid for only the meeting specified therein, and any adjournments of such meeting. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided in the proxy. Proxies shall be dated and shall be filed with the records of the meeting.

Section 1.7. Quorum . A majority of the outstanding shares of capital stock entitled to vote, represented in person or by proxy, shall constitute a quorum at any meeting of shareholders, unless otherwise provided by law; but less than a quorum may adjourn any meeting, from time to time, and the meeting may be held, as adjourned, without further notice. A majority of the votes cast shall decide every question or matter submitted to the shareholders at any meeting at which a quorum is present, unless otherwise provided by law or by the Articles of Incorporation.

Section 1.8. Voting . Only persons in whose names shares appear on the share transfer books of the Corporation on the date on which notice of the meeting is mailed shall be entitled to vote at such meeting, unless some other date is fixed by the board of directors for the determination of shareholders of record, but such date shall not be less than ten (10) nor more than fifty (50) days before the date of the meeting. Unless otherwise provided in the Articles of Incorporation, every shareholder of the Corporation shall be entitled to one vote for each share outstanding.

Article II

Directors

Section 2.1. Board of Directors . The board of directors shall have the power to manage and administer the business and affairs of the Corporation. Except as expressly limited by law or required or directed by these Bylaws or by the Articles of Incorporation to be exercised by the shareholders, all corporate powers of the Corporation shall be vested in and may be exercised by the board of directors.

Section 2.2. Chairperson of the Board . The Chairperson of the board of directors of the Corporation shall preside at all meetings of the shareholders and of the directors at which he or she is present, and shall have such authority and perform such other duties as the board of directors may from time to time designate.

Section 2.3. Vice Chairperson . In the absence of the Chairperson of the Board, the Vice Chairperson shall preside at all meetings of the shareholders and of the directors at which he or she is present, and shall have such authority and perform such other duties as the board of directors may from time to time designate.

Section 2.4. Number, Selection and Term of Office . The board of directors of the Corporation shall consist of at least three (3) and not more than fifteen (15) directors, the exact number to be set from time to time by resolution of the board of directors. Each director shall be a natural person of full age and at least a majority of the directors shall be persons who are independent within the meaning of any applicable statute or any listing requirement of a stock exchange or over the counter market on which any security of the Corporation is admitted for

trading. A director having the attributes set forth in the immediately preceding sentence shall hereinafter be deemed an Independent Director. Each director shall hold office until the expiration of the term for which he or she was selected and until a successor has been selected and qualified or until his or her earlier death, resignation or removal. A decrease in the number of directors shall not have the effect of shortening the term of any incumbent director. The President and Chief Executive Officer shall be a member of the Corporation’s Board of Directors.

Section 2.5. Vacancies . Vacancies in the board of directors shall exist in the case of the happening of any of the following events: (i) the death or resignation of any director; (ii) if at any annual or special meeting of the shareholders at which directors are to be elected, the shareholders fail to elect the full authorized number of directors to be voted for at that meeting; (iii) an increase in the number of directors by resolution of the board of directors; (iv) the removal of a director by the affirmative vote of shareholders of the corporation in accordance with the Articles of Incorporation of the Corporation; or (v) the removal of a director by the board of directors or a court of competent jurisdiction in accordance with these Bylaws or otherwise in accordance with law. Vacancies in the board of directors, including vacancies resulting from an increase in the number of directors, may be filled by a majority vote of the remaining members of the board though less than a quorum, or by a sole remaining director, and each person so selected shall be a director to serve for the balance of the unexpired term and until his or her successor has been selected and qualified or until his or her earlier death, resignation or removal.

Section 2.6. Regular Meetings . The board of directors of the Corporation shall hold an annual meeting for the election of officers and the consideration of other proper business either as soon as practical after, and at the same place as, the annual meeting of shareholders of the Corporation, or at such time and place as may be fixed by the board of directors. No notice of regular meetings need be given.

Section 2.7. Special Meetings . Special meetings of the board of directors may be called by the Chairperson of the Board, the President and Chief Executive Officer, or at the request of three (3) directors, to be held at the principal place of business of the Corporation or such other place as designated by the person or persons calling such special meeting. Each member of the board of directors shall be given notice stating the time and place, by telephone, email, telegram, facsimile transmission, letter, or in person, of each such special meeting.

Section 2.8. Executive Sessions . Members of the board of directors who are Independent Directors shall meet in executive session at least twice a year. No notice of executive sessions need be given.

Section 2.9. Quorum . A majority of directors shall constitute a quorum at any meeting, except when otherwise provided by law; but a lesser number may adjourn any meeting, from time to time, and the meeting may be held, as adjourned, without further notice.

Section 2.10. Remuneration . No stated fee shall be paid to directors for their services, but by resolution of the board of directors a fixed sum and expenses of attendance, if any, may be

paid for attendance at each regular or special meeting of the board of directors; provided , that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefore. Members of standing or special committees may be compensated for attending committee meetings.

Section 2.11. Action by Directors Without a Meeting . Any action which may be taken at a meeting of the directors, or of a committee thereof, may be taken without a meeting if consent or consents shall be signed by such number of the directors as is required to approve such action at a meeting of the board of directors, or a majority of the members of the committee, as the case may be. Such consent shall have the same effect as a vote taken at a duly called meeting at which a quorum is present.

Section 2.12. Action of Directors by Communications Equipment . With the prior approval of the Chairperson of the Board, any action which may be taken at a meeting of directors, or of a committee thereof, may be taken by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time.

Section 2.13. Minutes . The board of directors and each committee hereinafter provided for shall keep minutes of its meetings. Minutes of the committees shall be submitted at the next regular meeting of the board of directors, and any action taken with respect thereto shall be entered in the minutes of the board of directors.

Article III

Committees of the Board

Section 3.1. Committees . The board of directors may, by resolution adopted by a majority of the directors in office, establish one or more committees. Each committee shall consist of at least two (2) members of the board of directors. The board may designate one or more directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of the committee or for purposes of any written action of the committee.

A committee, to the extent provided in the resolution of the board of directors creating it, shall have and may exercise all of the powers and authority of the board of directors except that a committee shall not have any power or authority regarding: (i) the submission to shareholders of any action requiring the approval of shareholders under the PABCL, as it may be amended, (ii) the creation or filling of vacancies in the board of directors, (iii) the adoption, amendment or repeal of these bylaws, and (iv) any action on matters committed by the bylaws or resolution of the board of directors to another committee of the board of directors.

Section 3.2. Audit Committee . There shall be a standing committee of the board of directors to be known as the Audit Committee. The members of the Audit Committee shall consist exclusively of Independent Directors. The Audit Committee shall: (i) engage the independent accountants for the Corporation, (ii) review with the independent accountants the

scope of their examination, (iii) receive the reports of the independent accountants and meet with the representatives of such accountants for the purpose of reviewing and considering questions relating to their examination and such reports, (iv) review the internal accounting and auditing procedures of the corporation, and (v) perform such other duties as may be deemed necessary from time to time to fulfill its obligations under applicable law and the listing requirements of any stock exchange or over the counter market on which any security of the Corporation is admitted for trading.

Section 3.3. Nominating and Corporate Governance Committee . There shall be a standing committee of the board of directors to be known as the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee shall consist exclusively of Independent Directors. The Nominating and Corporate Governance Committee shall nominate candidates for election as director and shall make recommendations to the board of directors with respect to qualifications of directors.

Section 3.4. Compensation Committee . There shall be a standing committee of the board of directors to be known as the Compensation Committee. The members of the Compensation Committee shall consist exclusively of Independent Directors. The Compensation Committee shall make recommendations to the board of directors with respect to the compensation of the executive officers of the Corporation.

Article IV

Officers and Employees

Section 4.1. Designations . The officers of the Corporation shall be the President and Chief Executive Officer, the Chief Financial Officer, the Treasurer, and the Secretary, who shall be elected for one year by the board of directors at their first meeting after the annual meeting of shareholders and who shall hold office until their successors are elected and qualify. Any two or more offices may be held by the same person, except the offices of Chairperson, President and Chief Executive Officer, and Chief Financial Officer.

Section 4.2. The President and Chief Executive Officer . The President and Chief Executive Officer shall have general supervision of all departments and business of the Corporation, and shall prescribe the duties of other officers and see to the performance thereof. The President and Chief Executive Officer shall also have and may exercise such further powers and duties as from time to time may be conferred upon or assigned to him or her by the board of directors. The President and Chief Executive Officer shall report directly to the board of directors of the Corporation.

The President and Chief Executive Officer shall have and may exercise any and all powers and duties pertaining by law, regulation, or practice to the office of President and Chief Executive Officer or imposed by these Bylaws. The President and Chief Executive Officer shall also have and may exercise such further powers and duties as from time to time may be conferred upon or assigned to him or her by the board of directors.

Section 4.3. Chief Financial Officer . The Chief Financial Officer shall have general supervision of the fiscal affairs of the Corporation. The Chief Financial Officer shall, with the assistance of the President and Chief Executive Officer, and the managerial staff of the Corporation: (a) see that a full and accurate accounting of all financial transactions is made; (b) invest and reinvest the capital funds of the Corporation in such manner as may be directed by the board of directors, unless that function shall have been delegated to a nominee or agent; (c) prepare any financial reports that may be requested from time to time by the board of directors; (d) cooperate in the conduct of any annual audit of the Corporation's financial records by certified public accountants duly appointed by the Audit Committee; and (e) in general perform all the usual duties incident to the office of Treasurer and such other duties as may be assigned to him or her by the board of directors or the President and Chief Executive Officer.

Section 4.4. Secretary . The board of directors shall appoint a secretary, who shall be the Secretary of the board of directors and of the Corporation, and shall keep accurate minutes of meetings. The Secretary shall attend to the giving of all notices required by these Bylaws to be given. The Secretary shall be the custodian of the corporate seal (if any), records, documents and papers of the Corporation. The Secretary shall have and may exercise any and all other powers and duties pertaining by law, regulation or practice to the office of Secretary or imposed by these Bylaws. The Secretary shall perform such other duties as may be assigned to him or her from time to time by the board of directors.

Section 4.5. Other Officers . The board of directors may appoint one or more Vice Presidents, one or more Assistant Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers found necessary for the orderly transaction of business. Such officers shall respectively exercise such powers and perform such duties as pertain to the respective officers or as may be conferred upon or assigned to them by the board of directors or the President and Chief Executive Officer.

Section 4.6. Clerks and Agents . The board of directors may appoint, from time to time, such agents or employees as it may deem advisable for the prompt and orderly transaction of the business of the Corporation. The board of directors may also define their duties, fix their salaries and dismiss them. Subject to the authority of the board of directors, the President and Chief Executive Officer may appoint and dismiss all or any agents or employees, prescribe their duties and the conditions of their employment, and from time to time, fix their compensation.

Section 4.7. Tenure of Offices . All officers shall hold office for the current year for which the board of directors was elected, unless they shall resign, become disqualified, or be removed; and any vacancy occurring in the office of the President and Chief Executive Officer shall be filled by the board of directors. In the event that the President and Chief Executive Officer is unable to act, the board of directors shall meet forthwith upon the call of the Chairperson of the Board, the Vice Chairperson, or any three directors to appoint a successor or replacement.

Section 4.8. Termination of Officers . Any officer of the Corporation may be terminated by the board of directors with or without cause, but such termination shall be without

prejudice to the contract rights, if any, of the person so terminated. Election or appointment of an officer shall not of itself create contract rights.

Article V

Authority of Officers

Section 5.1. Corporate Seal . If the Corporation adopts a corporate seal, the President and Chief Executive Officer, the Chief Financial Officer, any Vice President, and the Secretary shall each have authority to affix and attest the corporate seal of the Corporation.

Section 5.2. Other Powers . The President and Chief Executive Officer, the Chief Financial Officer, or any Vice President is authorized to perform such corporate and official acts as are necessary to carry on the business of the Corporation, subject to the directions of the board of directors.

The above-named officers are fully empowered, subject to policies and established board and/or committee approvals:

(a) To sell, assign and transfer any and all shares of stock, bonds or other personal property standing in the name of the Corporation or held by the Corporation either in its own name or as agent;

(b) To assign and transfer any and all registered bonds and to execute requests for payment or reissue of any such bonds that may be issued now or hereafter and held by the Corporation in its own right or as agent;

(c) To sell at public or private sale, lease, mortgage or otherwise dispose of any real estate or interest therein held or acquired by the Corporation in its own right or as agent, and to execute and deliver any instrument necessary to completion of the transaction;

(d) To receive and receipt for any sums of money or property due or owing to the Corporation in its own right or as agent and to execute any instrument of satisfaction therefore for any lien of record; and

(e) To execute and deliver any deeds, contracts, agreements, leases, conveyances, bills of sale, petitions, writings, instruments, releases, acquittance and obligations necessary in the exercise of the corporate powers of the Corporation.

Section 5.3. Checks and Drafts . Each of the President and Chief Executive Officer, the Chief Financial Officer, and other employees, as may from time to time be designated by the board of directors, shall have the authority to sign checks, drafts, letters of credit, orders, receipts, and to endorse checks, bills of exchange, orders, drafts, and vouchers made payable or endorsed to the Corporation subject to the policies of the board of directors.

Section 5.4. Loans . Each of the President and Chief Executive Officer, the Chief Financial Officer, and any Vice President designated by the board of directors, acting in

conjunction with any other of these designated officers may effect loans on behalf of the Corporation from any banking institution or other lender, executing notes or obligations and pledging assets of the Corporation therefor, subject to the policies of the board of directors.

Article VI

Section 6.1. Limitation of Liability . To the fullest extent permitted by Pennsylvania Law, a director of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director. No amendment, modification or repeal of this Section 6.1 nor the adoption of any provision inconsistent with this Section 6.1 shall adversely affect any right or protection of a director of the Corporation with respect to any act or omission that occurred prior to the time of such amendment, modification, repeal or adoption.

Section 6.2. Indemnification .

(a) The Corporation shall defend and shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed claim, action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director or officer of the Corporation, or is or was serving, at the request of the Corporation, as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), amounts paid in settlement, judgments, and fines actually and reasonably incurred by such person in connection with such claim, action, suit or proceeding to the fullest extent permitted by Pennsylvania law.

(b) Advance of Expenses . Expenses (including attorneys’ fees) incurred in defending a civil claim or a civil or criminal action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such claim, action, suit, or proceeding, upon receipt of a written statement by or on behalf of the director, officer, employee, or agent to repay such amount if it shall be ultimately determined that he or she is not entitled to be indemnified by the Corporation as authorized in this Article VI.

(c) Indemnification not Exclusive . The indemnification and advancement of expenses provided by this Article VI shall not be deemed exclusive of any other right to which persons seeking indemnification and advancement of expenses may be entitled under any agreement, vote of disinterested directors or otherwise, both as to actions in such persons’ official capacity and as to their actions in another capacity while holding office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors, and administrators of such person.

(d) Insurance, Contracts, Security . The Corporation may purchase and maintain insurance on behalf of any person, may enter into contracts of indemnification with any person, and may create a fund of any nature which may, but need not be, under the control of a trustee for the benefit of any person, and may otherwise secure in any manner its obligations with respect to indemnification and advancement of expenses, whether arising under this

Article VI or otherwise, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article VI.

Section 6.3. Effect of Amendment . Any repeal or modification of this Article VI shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation or any right of any person to indemnification from the Corporation with respect to any action or failure to take any action occurring prior to the time of such repeal or modification.

Section 6.4. Severability . If, for any reason, any provision of this Article VI shall be held invalid, such invalidity shall not affect any other provision not held so invalid, and each such other provision shall, to the full extent consistent with law, continue in full force and effect. If any provision of this Article VI shall be held invalid in part, such invalidity shall in no way affect the remainder of such provision, and the remainder of such provision, together with all other provisions of this Article VI, shall, to the full extent consistent with law, continue in full force and effect.

Article VII

Stock and Stock Certificates

Section 7.1. Transfers . Transfer of shares of stock of each class of the Corporation shall be made only on the books of the Corporation by the registered holder thereof, or by such holder’s attorney thereunto authorized by a power of attorney duly executed and filed with the Secretary or transfer agent for such stock, if any, and if such shares are represented by a certificate, upon surrender of the certificates therefor, endorsed by the person named in the certificate or by his attorney, lawfully constituted in writing. No transfer shall be made which is inconsistent with law.

Section 7.2. Shares . The shares of the Corporation shall be represented by certificates, or shall be uncertificated shares that may be evidenced by a book entry system maintained by the registrar of such stock, or a combination of both. To the extent that shares are represented by certificates, such certificates shall be in such form as shall be approved by the board of directors and shall state: (i) that the Corporation is incorporated under the laws of the Commonwealth of Pennsylvania, (ii) the name of the person to whom issued, and (iii) the number and class of shares and the designation of the series, if any, that the share certificate represents. The share register or transfer books and blank share certificates shall be kept by the Secretary or by any transfer agent or registrar designated by the board of directors for that purpose.

Section 7.3. Share Certificates . To the extent that shares are represented by certificates, such certificates shall be signed by the President and Chief Executive Officer and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, or by any one of their facsimile signatures, or in their absence by board-designated Officers and shall be signed by a transfer agent. The corporate seal shall appear on each share certificate and may be a facsimile, engraved or printed. In case any officer who has signed, or whose facsimile signature has been placed upon, any share certificate shall have ceased to be such officer because of death,

resignation or otherwise, before the certificate is issued, it may be issued with the same effect as if the officer had not ceased to be such at the date of its issue. The provisions of this section shall be subject to any inconsistent or contrary agreement at the time between the Corporation and any transfer agent or registrar.

Section 7.4. Shares of Another Corporation . Shares owned by the Corporation in another corporation, domestic or foreign, shall be voted by the President and Chief Executive Officer or such other officer, agent or proxy as the board of directors may determine.

Article VIII

Miscellaneous Provisions

Section 8.1. Fiscal Year . The Fiscal Year of the Corporation shall be the calendar year.

Section 8.2. Records . The Articles of Incorporation, the Bylaws and the proceedings of all meetings of shareholders, the board of directors, and standing committees of the board of directors, shall be recorded in appropriate minute books provided for the purpose. The minutes of each meeting shall be signed by the Secretary or other officer appointed to act as secretary of the meeting.

Section 8.3. Gender and Number . Where the context permits, words in any gender shall include any other gender, words in the singular shall include the plural and the plural shall include the singular.

Article IX

Bylaws

Section 9.1. Inspection . A copy of the Bylaws, with all amendments thereto, shall at all times be kept in a convenient place at the main office of the Corporation, and shall be open for inspection to all shareholders during normal business hours.

Section 9.2. Amendments . The authority to make, amend, alter, change or repeal these Bylaws of the Corporation is solely granted to and vested in the board of directors of the Corporation, subject to the power of the shareholders to change any such action by the affirmative vote of shareholders of the Corporation entitled to cast at least a majority of the votes which all shareholders are entitled to cast, except that Article Sixth of the Bylaws of the Corporation relating to limitations on directors’ liabilities and indemnification of directors and officers may not be amended to increase the exposure to liability for directors or to decrease the indemnification of directors and officers except by the affirmative vote of sixty-six and two thirds percent (66 2/3%) of the entire board of directors or by the affirmative vote of shareholders of the Corporation entitled to cast at least eighty percent (80%) of the votes which all shareholders are entitled to cast.

Exhibit 4.1



CUSIP NO.

COMMON STOCK CERTIFICATE NO.			COMMON STOCK SHARES

POSITIVE PHYSICIANS HOLDINGS, INC.

ORGANIZED UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA

[SPECIMEN]

is the owner of:

FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK,

PAR VALUE $0.01 PER SHARE, OF POSITIVE PHYSICIANS HOLDINGS, INC.

a Pennsylvania stock corporation.

The shares represented by this certificate are transferable only on the stock transfer books of Positive Physicians Holdings, Inc. (the “Company”) by the holder of record hereof, or by such holder’s duly authorized attorney or legal representative, upon the surrender of this certificate properly endorsed. This certificate and the shares represented hereby are issued and shall be held subject to all the provisions contained in the Company’s official corporate papers filed with the Department of State of the Commonwealth of Pennsylvania (copies of which are on file with the Transfer Agent), to all of the provisions the holder by acceptance hereof assents.

This certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar.

IN WITNESS WHEREOF, POSITIVE PHYSICIANS HOLDINGS, INC. has caused this certificate to be executed by the signatures of its duly authorized officers and has caused its corporate seal to be hereunto affixed.

Dated:

[SEAL]



Treasurer		President and Chief Executive Officer

The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:



TEN COM - as tenants in common	UNIF GIFTS MIN ACT -		custodian
TEN ENT - as tenants by the entireties		(Cust)		(Minor)
JT TEN - as joint tenants with right of survivorship and not as tenants in common		under Uniform Gifts to Minors Act
		(State)

Additional abbreviations may also be used though not in the above list.

FOR VALUE RECEIVED, __________ hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR

OTHER IDENTIFICATION NUMBER OF ASSIGNEE

[ ]




Please print or typewrite name and address including postal zip code of assignee.

__________________________________________________ shares of the common stock represented by this certificate and do hereby irrevocably constitute and appoint ______________________________________________________________________________, attorney, to transfer the said stock on the books of the within-named corporation with full power of substitution in the premises.

DATED
		NOTICE: The signature to this assignment must correspond with the name as written upon the face of the certificate in every particular without alteration or enlargement or any change whatever.

SIGNATURE GUARANTEED:
	THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION, (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15

Exhibit 5.1

STEVENS & LEE

LAWYERS & CONSULTANTS

111 North 6th Street

Reading, PA 16103
(610) 478-2000 Fax (610) 376-5610
www.stevenslee.com

January 21, 2019

Board of Directors

Positive Physicians Holdings, Inc.

100 Berwyn Park, Suite 220

850 Cassatt Road

Berwyn, PA 19312

Re: Registration Statement on Form S-1

Ladies and Gentlemen:

We have acted as counsel to Positive Physicians Holdings, Inc. (the “Company”) in connection with the Company’s proposed offering of up to 4,830,000 shares of the Company’s common stock, $0.01 par value per share (the “Common Stock”). This offering is covered by the Company’s Registration Statement on Form S‑1, filed with the Securities and Exchange Commission (the “Registration Statement”). In connection with delivering this opinion, we have reviewed the following documents:


1.	The Amended and Restated Articles of Incorporation of the Company as filed with the Secretary of State of the Commonwealth of Pennsylvania on January 4, 2019, as certified by the Secretary of the Company;


2.	The bylaws of the Company as presently in effect, as certified by the Secretary of the Company;


3.	The resolutions of the Board of Directors of the Company adopted by an action by unanimous written consent effective as of January 18, 2019, as certified by the Secretary of the Company;


4.	The Registration Statement, including the prospectus (the “Prospectus”) contained therein;


5.	The form of the certificate representing shares of the Common Stock filed as Exhibit 4.1 to the Registration Statement.

Philadelphia • Reading • Valley Forge • Lehigh Valley • Harrisburg • Lancaster • Scranton

Wilkes-Barre • Princeton • Charleston • New York • Wilmington

A PROFESSIONAL CORPORATION

STEVENS & LEE

LAWYERS & CONSULTANTS

Board of Directors

January 21, 2019

Page 2

Based upon our review of the documents listed above, it is our opinion that the shares of Common Stock covered by the Registration Statement have been duly authorized and, when issued and sold against payment therefor, pursuant to the terms described in the Registration Statement, will be legally issued by the Company and fully paid and nonassessable.

We consent to the filing of this opinion as an exhibit to the Registration Statement, and to the reference to us under the heading “Legal Matters” in the Prospectus. In giving this consent, we do not admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission thereunder.

Very truly yours,

STEVENS & LEE

/s/ Stevens & Lee

Exhibit 8.1

STEVENS & LEE

LAWYERS & CONSULTANTS

620 Freedom Business Center, Suite 200

King of Prussia, PA 19406
(610) 205-6000 Fax (610) 337-4374
www.stevenslee.com

January 21, 2019

Board of Directors

Positive Physicians Holdings, Inc.

100 Berwyn Park

850 Cassatt Rd., Suite 220

Berwyn, PA 19312


Re:	Professional Casualty Association, Physicians’ Insurance Program Exchange, and Positive Physicians Insurance Exchange - Conversion from Reciprocal Exchange to Stock Organization

Ladies and Gentlemen:

We have been requested to provide this opinion concerning matters of U.S. federal income tax law in connection with (1) the proposed conversion of Physicians’ Insurance Program Exchange, a Pennsylvania reciprocal insurance exchange (“PIPE”) to a stock company (the “PIPE Conversion”) pursuant to the Plan of Conversion from Reciprocal to Stock Form of PIPE adopted by the Attorney-in-Fact for PIPE on June 1, 2018 (the “PIPE Plan of Conversion”); (2) the proposed conversion of Professional Casualty Association, a Pennsylvania reciprocal insurance exchange (“PCA”) to a stock company (the “PCA Conversion”) pursuant to the Plan of Conversion from Reciprocal to Stock Form of PCA adopted by the Attorney-in-Fact for PCA on June 1, 2018 (the “PCA Plan of Conversion”); (3) the proposed conversion of Positive Physicians Insurance Exchange, a Pennsylvania reciprocal insurance exchange (“PPIX”) to a stock company (the “PPIX Conversion”) pursuant to the Plan of Conversion from Reciprocal to Stock Form of PPIX adopted by the Attorney-in-Fact for PPIX on June 1, 2018 (the “PPIX Plan of Conversion”); and (4) the issuance of all of the capital stock of PIPE, PCA, and PPIX to Positive Physicians Holdings, Inc., a Pennsylvania corporation (the Company”) and the issuance of shares of common stock by the Company in an initial public offering in accordance with the draft Form S‑1 Registration Statement filed by the Company on December 27, 2018, File No. 377-02283 (the “S‑1 Registration Statement”), and related exhibits thereto. This opinion is being provided solely in connection with the filing of the S‑1 Registration Statement with the Securities and Exchange Commission.

Allentown • Bala Cynwyd • Charleston • Cleveland • Fargo • Fort Lauderdale • Harrisburg • Lancaster
New York • Philadelphia • Princeton • Reading • Rochester • Scranton • Valley Forge • Wilkes-Barre • Wilmington

A PROFESSIONAL CORPORATION

STEVENS & LEE

LAWYERS & CONSULTANTS

January 21, 2019

Page 2

For purposes of this opinion letter, capitalized words and phrases that are used but not defined herein shall have the meanings given to such terms in the PIPE Plan of Conversion, the PCA Plan of Conversion, and the PPIX Plan of Conversion.

For purposes of providing this opinion, we have examined and are relying upon (without any independent verification or review thereof) the truth and accuracy, at all relevant times, of the statements, covenants, representations and warranties contained in the following documents (including all schedules and exhibits thereto):


1.	the S‑1 Registration Statement;


2.	the Certificates of Attorney-in-Fact provided to us by PIPE, PCA, and PPIX; and


3.	such other instruments and documents related to the Company and the PIPE Plan of Conversion, the PCA Plan of Conversion, and the PPIX Plan of Conversion as we have deemed necessary or appropriate.

In addition, in connection with providing this opinion, we have assumed (without any independent investigation thereof) that:


1.	original documents (including signatures) are authentic; documents submitted to us as copies conform to the original documents; and there has been (or will be by the Effective Date) due execution and delivery of all documents where due execution and delivery are prerequisites to the effectiveness thereof;


2.	any representation or statement referred to above made “to the best of knowledge” or otherwise similarly qualified is correct without such qualification, and all statements and representations, whether or not qualified, are true and will remain true through the Effective Date and thereafter where relevant; and


3.	all transactions that are related or incidental to the Pipe Conversion, the PCA Conversion, and the PPIX Conversion will be consummated pursuant to the Pipe Plan of Conversion, the PCA Plan of Conversion, and the PPIX Plan of Conversion, respectively, and will be effective under the laws of the Commonwealth of Pennsylvania and applicable federal and state insurance laws.

The opinion expressed herein is conditioned on the initial and continuing accuracy of the facts, information, representations and assumptions contained in the aforesaid documents or otherwise referred to above.

Based on the foregoing documents, materials, assumptions and information, and subject to the qualifications and assumptions set forth herein, if the PIPE Conversion, the PCA Conversion, and the PPIX Conversion are consummated in accordance with the provisions of the PIPE Plan of Conversion, the PCA Plan of Conversion, and the PPIX Plan of Conversion, respectively (and without any waiver, breach or amendment of any of the provisions thereof), it is our opinion that, under current law (i) the PIPE Conversion, the PCA Conversion, and the

STEVENS & LEE

LAWYERS & CONSULTANTS

January 21, 2019

Page 3

PPIX Conversion will each constitute a “reorganization” within the meaning of Code Section 368(a), and (ii) the statements made regarding U.S. federal income tax consequences set forth in the S‑1 Registration Statement under the heading “Federal Income Tax Considerations,” insofar as they constitute statements of law or legal conclusions, are the opinion of Stevens and Lee with respect to such matters.

_________________________________

The opinion set forth above is based on the existing provisions of the Code, Treasury Regulations (including Temporary Treasury Regulations) promulgated under the Code, published Revenue Rulings, Revenue Procedures and other announcements of the Internal Revenue Service (the “Service”) and existing court decisions, any of which could be changed at any time. Any such changes might be retroactive with respect to transactions entered into prior to the date of such changes and could significantly modify the opinion set forth above. Nevertheless, we undertake no responsibility to advise you of any subsequent developments in the application, operation or interpretation of the U.S. federal income tax laws.

As you are aware, no ruling has been or will be requested from the Service concerning the U.S. federal income tax consequences of the PIPE Conversion, the PCA Conversion, the PPIX Conversion, or the Offering. In reviewing this letter, you should be aware that the opinion set forth above represents our conclusion regarding the application of existing U.S. federal income tax law to the instant transaction. If the facts vary from those relied upon (or if any representation, covenant, warranty or assumption upon which we have relied is inaccurate, incomplete, breached or ineffective), our opinion contained herein could be inapplicable in whole or in part. You should be aware that an opinion of counsel represents only counsel’s best legal judgment, and has no binding effect or official status of any kind, and that no assurance can be given that contrary positions may not be taken by the Service or that a court considering the issues would not hold otherwise.

As stated above, this opinion is being delivered to the Board of Directors of the Company solely for the purpose of being included as an exhibit to the S‑1 Registration Statement. We consent to the filing of this opinion as an exhibit to the S‑1 Registration Statement and to the use of our name in the S‑1 Registration Statement wherever it appears. In giving this consent, however, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules or regulations promulgated thereunder

Very truly yours,

/s/ Stevens & Lee

STEVENS & LEE

Exhibit 10.1

Form of “Diversus Management Agreement”

Exhibit A to Standby Purchase Agreement

MANAGEMENT AGREEMENT

MANAGEMENT AGREEMENT (this “ Agreement ”) made as of June 8, 2018 (the “ Effective Date ”), between POSITIVE PHYSICIANS INSURANCE COMPANY, a Pennsylvania stock insurance company (“ Positive ”), and its parent POSITIVE PHYSICIANS HOLDINGS, INC., a Pennsylvania corporation (“ Holdings ”), solely with respect to Section 1 and Section 11 (Positive and Holdings together the “ Positive Parties ” and each a “ Positive Party ”), one the one hand, and DIVERSUS MANAGEMENT, INC., a Pennsylvania corporation (“ Management Company ”), and its parent DIVERSUS INC., a Delaware corporation (“ Diversus ”) (Management Company and Diversus together the “ Diversus Parties ” and each a “ Diversus Party ”), on the other hand.

W I T N E S S E T H:

WHEREAS, Positive is a stock insurance company that is engaged in the business of providing medical professional liability insurance to physicians and other healthcare providers in the Commonwealth of Pennsylvania and certain other jurisdictions.

WHEREAS, Management Company is in the business of providing insurance-related administrative and management services to related and unrelated insurance companies.

WHEREAS, Positive is a wholly-owned subsidiary of Holdings.

WHEREAS, Management Company is a wholly-owned subsidiary of Diversus.

WHEREAS, Positive is the successor to the businesses conducted by Positive Physicians Insurance Exchange, Professional Casualty Association, and Physicians’ Insurance Program Exchange (collectively, the “ Exchanges ”), each formerly a Pennsylvania reciprocal insurance exchange that converted into stock form and merged their operations into Positive ¹ .

WHEREAS, Management Company is the successor to the businesses conducted by Specialty Insurance Services, LLC, Professional Third Party, L.P., and Physicians’ Insurance Program Management Company (collectively, the “ AIF’s ”), which had provided insurance-related administrative and management services as attorneys-in-fact to the Exchanges and which merged their operations into the Management Company.

WHEREAS, the Positive Parties and the Diversus Parties desire to enter into this Agreement to (a) replace the attorney-in-fact agreements that formerly had been in place between the AIF’s and the Exchanges, and (b) set forth their mutual understanding and agreement regarding the terms and conditions upon which Positive will engage Management Company to provide insurance related

________________________

1 NTD: This Agreement will be entered into at the anticipated closing of the conversion of all three exchanges, including the closing of the offering by Holdings and the assumption of the agreed-upon debt by Holdings. This is the form agreement that is Exhibit [__] to the Standby Purchase Agreement. Entry into this Agreement is subject to the parties negotiating and coming to terms on the Service Levels that are to be included on Schedule C to this Agreement.

Form of “Diversus Management Agreement”

Exhibit A to Standby Purchase Agreement

administrative and management services for Positive, and Management Company will accept such engagement and provide such services for Positive.

NOW, THEREFORE, in consideration of the mutual covenants herein contained and intending to be legally bound hereby, the parties agree as follows:

1. Engagement to Provide Services; Acceptance of Engagement . Positive hereby engages Management Company to provide the Services (as defined in Section 2 ), and Management Company hereby accepts such engagement and agrees to provide the Services to Positive, in each case on the terms and conditions set forth in this Agreement. Holdings and Diversus each affirm the aforesaid engagement and covenant and agree that neither shall take any action or omit to take any action that would have the effect of interfering with the full and faithful performance of this Agreement by their respective subsidiary. For all Services performed by Management Company hereunder, Management Company shall identify the person providing the Services, including any subcontract party as provided in Section 13(f), and the nature of the Services provided by such person or subcontract party. Management Company shall obtain and maintain during the term of this Agreement all licenses and approvals required to be held by Management Company to perform the Services hereunder and shall make all required filings with the Pennsylvania Insurance Department and all other governmental authorities having regulatory authority over Management Company in connection with the performance of such Services. Management Company shall provide satisfactory evidence of such licensure to Positive within two (2) business days of Positive’s request therefor.

2. Services. Management Company agrees to provide sufficient personnel, equipment, computer software, and supplies, either directly or indirectly through outsource or subcontract parties as provided in Section 13(f), so that Management Company can perform or provide for the performance of the following administrative and management services which may be necessary or required in connection with the business and operations of Positive (collectively, the “ Services ”), subject to Positive’s rights as described in Section 9:

(a) , the administration and management of the day-to-day insurance business of Positive including, without limitation, administration and management of underwriting and claims;

(b) The solicitation, receipt and acceptance or rejection of applications for insurance and the investigation and passing upon of the desirability of risks involved with applications for insurance in accordance with the underwriting policies and standards (the “ Underwriting Policies and Standards ”) set forth on Schedule A attached hereto and incorporated herein by this reference, as such Schedule A may be modified, amended, restated, or supplemented, in writing, from time-to-time by the by the board of directors of Positive (the “ Positive Board ”);

(c) The underwriting, classification, rating and issuance of policies and binders of insurance for Positive in accordance with sound insurance practices and the Underwriting Policies and Standards; provided , however , that in all events Positive shall have the right to cancel or nonrenew any policy of insurance, subject to the applicable laws and regulations

Form of “Diversus Management Agreement”

Exhibit A to Standby Purchase Agreement

concerning the cancellation and nonrenewal of insurance policies and any policies or guidelines adopted by the Positive Board from time to time;

(d) The collection, receipt and accounting for all funds received as payments of insurance premiums, contributions to surplus and other receipts of Positive, which such funds shall be timely deposited (in no event more than five business days) in a bank account or bank accounts maintained in the name of Positive in accordance with such policies and standards as may be established from time to time by Management Company and approved by the Positive Board; the establishment and monitoring of loss reserves in accordance with sound insurance and actuarial practices and procedures and any policies or guidelines adopted by the Positive Board from time to time; the maintenance of all funds of Positive in accordance with applicable law and the investment of Positive’s investable assets in accordance with applicable legal requirements and the advice or instructions of any investment advisors retained from time to time by Management Company on behalf of Positive and any policies or guidelines adopted by the Positive Board or the investment committee thereof from time to time; provided , however , that in all events (i) Management Company will ensure that all funds payable to Positive are directed to an account owned by Positive and not deposited or held in any account of Management Company and (ii) will render accounts to Positive detailing all transactions, including providing a monthly report of all deposits into and withdrawals from each bank account maintained in the name of Positive on not less than a monthly basis or as requested by Positive from time to time

(e) The establishment and maintenance for Positive of all financial, accounting, and other business records required by applicable laws and regulations and generally accepted insurance and accounting practices and in accordance with such policies and standards as may be established from time to time by Management Company with the approval of the Positive Board, including an annual audit at the expense of Positive, in accordance with Generally Accepted Accounting Principles (“ GAAP ”) and applicable statutory accounting principles (“ SAP ”); and the preparation for and on behalf of Positive of all reports required by governmental and nongovernmental regulatory and supervisory authorities; provided , however , that in all events separate records of business written by Management Company will be maintained;

(f) Subject to Section 10, the placement of such reinsurance as is required by law or by sound and accepted insurance and business practices, the payment of premiums and commissions therefor at the expense of Positive, the maintenance for Positive of all necessary records in connection with such reinsurance, the submissions of claims to the reinsurers, and the taking of all actions required or permitted by such reinsurance;

(g) The provision and maintenance, directly or indirectly through a third party claims administrator pursuant to the terms of the Ancillary Agreements, of adequate claims administration and supervision and facilities for the oversight and timely processing of all claims, notices and proofs of loss against Positive and for the timely adjustment, settlement, and payment of claims on behalf of and at the expense of Positive subject to the policies and guidelines established by the Claims and Litigation Committee (defined below) and/or the Positive Board, including the employment or retention, on terms and conditions acceptable to Positive in its sole discretion, of a litigation manager or managers, claims adjusters, attorneys

Form of “Diversus Management Agreement”

Exhibit A to Standby Purchase Agreement

and such other professional and other personnel to handle claims on behalf of Positive, it being understood that all “Adjusting and Other Expense” (formerly called “unallocated loss adjustment expenses (ULAE)”) shall be borne by Management Company and all “Defense and Cost Containment Expense (formerly called “allocated loss adjustment expenses (ALAE)”) shall be borne by Positive. The aforesaid terms shall have the meanings assigned thereto in the National Association of Insurance Commissioners’ Accounting Practices and Procedures Manual (the “ NAIC Accounting Manual ”);

(h) The retention of investment advisors for and on behalf of Positive at the expense of Positive and on terms and conditions acceptable to the Positive Board or the investment committee thereof from time to time;

(i) The preparation of mailings, website, advertisements, newsletters and other promotional materials and related expenses for and on behalf of Positive and at the expense of Positive in accordance with such policies and standards as may be established from time to time by Management Company and/or the Positive Board;

(j) The monitoring of the legal affairs of Positive, including (i) compliance with applicable legal requirements and obtaining and maintaining all license and approvals required to be obtained and maintained by Positive, (ii) the making of all required filings with the Insurance Department of the Commonwealth of Pennsylvania and all other governmental authorities having jurisdiction over Positive and (iii) ensuring that the Management Company and all agents and other third party service providers to Positive have and maintain the necessary licenses or approvals required to performs the services required by such parties;

(k) The appointment, supervision and termination of agents on behalf of Positive and the payment to them from time to time of appropriate commissions, at the expense of Positive, for insurance coverages placed with Positive in such amounts as shall be determined by Management Company in accordance with the policies and guidelines adopted by the Positive Board from time to time, which shall include, without limitation, requirements that Positive’s agents meet the Service Levels (defined below) applicable thereto, it being understood that the Management Company or an affiliate thereof may itself act as an agent of Positive pursuant to the terms of the existing agent agreement between the Management Company and the Exchanges, as the same may be modified from time to time by mutual agreement of the parties;

(l) Subject to the oversight and direction of the Positive Board and/or the Claims and Litigation Committee, the commencement and defense, at the expense of Positive, of legal and administrative proceedings brought by or against Positive including acceptance of service of process on behalf of Positive, entering legal appearances on behalf of Positive and the compromise, prosecution, defense and settlement of losses and claims subject to Section 7;

(m) the provision of two officers of the Management Company acceptable to Positive in its sole and absolute discretion to serve as members of the claims and litigation committee of Positive (the “ Claims and Litigation Committee ”), which committee shall be comprised of two officers of the Management Company and two officers of Positive (one of which shall be the chairman of such committee and shall break any deadlocks among the

Form of “Diversus Management Agreement”

Exhibit A to Standby Purchase Agreement

members of such committee) and shall set the claims and litigation policies of Positive and oversee the administration of the claims and litigation process of Positive, subject to the oversight and direction of the Positive Board; and

(n) The taking of all such other actions and things as Management Company shall determine to be necessary, convenient, advisable, or proper in order to administer and manage Positive’s medical professional liability insurance business or to otherwise discharge properly and in good faith the responsibilities and duties of Management Company under this Agreement, subject to the limitations and approval rights set forth herein and the oversight and direction of the Positive Board.

3. Reserved Powers .

(a) Notwithstanding any other provision of this Agreement:

(i) Positive shall maintain oversight for all Services provided to Positive by Management Company and Positive shall monitor the provision of Services not less frequently than annually for quality assurance;

(ii) the Management Company shall not enter into any agreements with affiliates of the Management Company (A) on behalf of Positive and/or (B) the costs of which will be borne by Positive, unless the Positive Board shall have consented to such agreement in writing;

(iii) the Management Company shall, or shall cause AOS or any other litigation manager engaged on behalf of Positive to, cease to engage on behalf of Positive any law firms which Positive requests be removed from the panel of firms handling matters on behalf of Positive; and

(iv) the Management Company shall terminate any agreement with any agent or other third party service provider not Affiliated with Management Company which Positive requests be terminated following a determination of a majority of the Positive Board that such agent or other service provider has not met the components of the Service Level applicable to such party.

(b) In addition, notwithstanding any other provision of this Agreement to the contrary, Positive, through their officers and directors or other service providers, shall retain authority and responsibility for the functions, duties and responsibilities, and costs and expenses, set forth on Schedule B attached hereto and made a part hereof.

(c) Positive may suspend the authority granted to the Management Company hereunder if Positive reasonably believes that a material breach described in Section 8(d) (including, without limitation, a breach of any Service Level) has occurred or is imminent and until any such event has been cured pursuant to Section 8(d); provided, that during the suspension of any such authority Positive shall not have the right to provide a Deficiency Notice under Section 9(b) with respect to any Service Level in respect of the authority which has been

Form of “Diversus Management Agreement”

Exhibit A to Standby Purchase Agreement

suspended, and provided further that if the suspension of authority causes the Management Company to be unable to cure an asserted breach pursuant to Section 8(a), the cure period pursuant to Section 8(a) shall be tolled until the Management Company’s authority has been restored.

4. Management Fees .

(a) Fees Defined . As compensation for the Services to be performed by Management Company on behalf of Positive as set forth in Section 2 hereof, Positive agrees to pay to the Management Company fees composed of the sum of the following two components (collectively, the “ Management Fees ”), determined and paid as provided in this Section 4:

(i) Base Management Fee . A fee (the “ Base Fee ”) based upon a percentage of Positive’s gross written premiums, less return premiums, during the respective periods set forth in the following table.



Period	Percentage
From the Effective Date until December 31, 2018	Twenty Five percent (25%)
January 1, 2019 to December 31, 2019 ²	Twelve percent (12%)
January 1, 2020 to December 31, 2020	Eleven percent (11%)
January 1, 2021 to December 31, 2021	Ten percent (10%)
January 1, 2022 and thereafter	Nine percent (9%)

The reduction in the Base Fee that is scheduled to begin January 1, 2020 is the “ Base Fee Stepdown .” Notwithstanding the foregoing, if by December 31, 2019, Holdings has not closed upon the acquisition of one or more other insurance entities that become subject to this Agreement as provided in Section 11(b) below and that have total additional gross written premium of $10,000,000 on an annual basis, the Base Fee Stepdown will be deferred to begin on January 1, 2021 instead of January 1, 2020.

(ii) Performance Fee . A fee reflecting the profitability of Positive (the “ Performance Fee ”), which shall be based upon the combined ratio (as defined in the NAIC Accounting Manual) of Positive, computed on a rolling twelve-month basis and in accordance with “Modified SAP” (as defined below). Such Fee shall be paid quarterly as described in Section 4(d) below according to the following formula:

________________________

2 NTD: The 12% Base Fee doesn’t begin until the later of January 1, 2019 or the completion of all three conversions; and the further step downs on the anniversary of the initial implementation. The date in this chart assumes the conversions will have closed by 12/31/2018. These dates will be adjusted as necessary depending on the commencement of this Agreement.

Form of “Diversus Management Agreement”

Exhibit A to Standby Purchase Agreement

Performance Fee = 0.25 x 0.33 x (100 – CR*) x net earned premium

*CR = Positive’s combined ratio (to be calculated in accordance with SAP as adjusted as described in the definition of Modified SAP) for the relevant period prior to paying the Performance Fee. Positive’s combined ratio will be determined without regard for any benefit that Positive has realized or may realize under the adverse development reinsurance coverage procured by Positive in connection with the conversion of the Exchanges and their merger with and into Positive.

In determining the Performance Fee and applying the foregoing formula, the following rules shall apply:

(A) If the foregoing formula yields a negative number, then zero Performance Fee shall be due for such year, but the Management Company shall not owe the resulting negative number to Positive.

(B) Any New Holdings Insurer (as defined in Section 11 ) shall, from and after the closing of the acquisition of such New Holdings Insurer, be included in this Agreement as provided by Section 11(b) below and in the combined ratio calculations above, subject , however , to the adjustments in following paragraph (C).

(C) For purposes of determining the combined ratio of Positive, (i) in the event of an acquisition of a New Holdings Insurer (for purposes of this Section 4, a “ Target ”) in which Positive employs Target employees, assumes Target leases or real estate, or otherwise assumes all or a portion of the operating expenses of the Target (“ Target Overhead ”), or Target Overhead is maintained within the Target entity, and (ii) the expense ratio of Positive increases as the result of such acquisition, then for a period of one year after the closing of such acquisition, the combined ratio used in the Performance Fee formula shall utilize the expense ratio of Positive assuming the acquisition had not occurred (i.e. neither the revenues nor the Target Overhead relating to such Target will considered in calculating the combined ratio of Positive for such period).

(D) “Modified SAP” shall mean SAP as applied in the preparation of Positive’s NAIC annual statements with the following adjustments:

1. The Base Fee, which is paid as a percentage of gross written premium at the time of premium payment, will be recorded as an expense ratably as the premium is earned. The premium is earned using SAP over the policy “in force” period. The initial non-expensed management fee is recorded as a deferred asset on the Positive balance sheet and is amortized against earned premium.

2. Commissions paid to agents and brokers, which are paid as a percentage of gross written premium at the time of premium payment, will be recorded as an expense ratably as the premium is earned. The premium is earned using SAP over the policy “in force” period. The initial non-expensed commission is recorded as deferred acquisition cost on the Positive balance sheet and is amortized against earned premium.

Form of “Diversus Management Agreement”

Exhibit A to Standby Purchase Agreement

3. Premium Taxes paid at the time of the issuance of the insurance policy will be recorded as an expense ratably as the premium is earned. The premium is earned using SAP over the policy “in force” period. The initial non-expensed premium tax is recorded as a deferred tax asset on the Positive balance sheet and is amortized against earned premium.

(b) Impact of Additional Expenses . If (i) Holdings proposes to acquire a Target and in connection therewith Positive requests that Diversus and/or the Management Company employ any Target employees, assume Target leases or real estate, or otherwise assume any Target costs or overhead and Diversus and/or the Management Company agrees to employ such Target employees, assume such Target leases or real estate, or otherwise assume such Target costs or overhead (which Diversus and/or the Management Company may agree to do or decline to do in their sole discretion), and (ii) in the first full twelve months after the closing of the acquisition, the amount of such costs borne by the Diversus Parties following such acquisition exceeds the increase in Management Fees that the Management Company receives as a result of the acquisition (the “ New Business Deficit ”), then the Positive Parties shall pay to the Management Company, as additional Management Fees, the full amount of the New Business Deficit.

(c) Cost of Performing Services . Management Company shall pay all costs of providing the Services, including, without limitation by reason of specification, the salaries and benefit expenses of Management Company’s employees, rent and other occupancy expenses, supplies and data processing, but excluding any of the expenses of Positive referred to in Section 5 hereof or expenses that are the responsibility of Positive or Holdings as set forth on Schedule B. Management Company shall confirm all costs of providing the Services to be in accordance with the provisions of this Agreement or otherwise specifically set forth the method or methods to allocate such costs in writing as mutually agreed by Management Company and Positive.

(d) No Advances; Remittance and Payment of Fees .

(i) Positive shall not advance any funds to Management Company except to pay for Services defined in this Agreement.

(ii) Positive will pay the Base Fee to the Management Company monthly, by the 15 ^th day of each month, via wire transfer or intrabank transfer, in an amount based upon gross written premiums, less return premiums in the preceding month. Immediately after the end of each month Management Company shall provide Positive with a statement showing the amount of gross written premium for the period and calculating the Base Fee in accordance with this Agreement.

(iii) On a quarterly basis upon the completion of the quarterly financial statements the parties shall calculate the components of the Performance Fee and shall determine the Performance Fee for the preceding quarter utilizing the information in such quarterly financial statement. The quarterly payment shall be equal the Performance Fee calculated using the combined ratio and net earned premium for the twelve-month period ending on the last day of such calendar quarter, except (A) if the Effective Date of this Agreement occurs during a

Form of “Diversus Management Agreement”

Exhibit A to Standby Purchase Agreement

quarter, that quarter shall be ignored and no Performance Fee shall be payable for such quarter, and (B) the Performance Fee for the first, second, and third full quarters after the Effective Date shall be based upon the three, six, or nine month period, as the case may be; provided that (X) for the first quarter following the Effective Date, the “0.25” in the formula for the Performance Fee shall be “1.00”, (Y) for the second quarter following the Effective Date, the “0.25” in the formula for the Performance Fee shall be “0.50” and (Z) for the third quarter following the Effective Date, the “0.25” in the formula for the Performance Fee shall be “0.33”. Positive shall pay the provisional quarterly Performance Fee, if it is due, to the Management Company by the twentieth (20 ^th ) day after the delivery of the aforesaid quarterly financial statement.

(iv) The quarterly provisional Performance Fees shall be subject to adjustment and true up based upon Positive’s annual audited statutory financial statements, but with those adjustments made in accordance with Modified SAP. Within ten (10) days of the completion of Positive’s annual audited statutory financial statements, the parties shall calculate the components of the Performance Fee for the preceding year and shall determine the Performance Fee utilizing the information in such audit report (with appropriate modifications under Modified SAP). Positive shall pay any additional Performance Fee, if it is due, to the Management Company by the twentieth (20 ^th ) day after the delivery by the auditors of the aforesaid audit report. Conversely, the Management Company shall refund any overpayment of the Performance Fee to Positive by the twentieth (20 ^th ) day after the delivery by the auditors of the aforesaid audit report.

5. Payment of Expenses of Positive . Management Company, on behalf of Positive, shall utilize the funds of Positive to pay all of the expenses of Positive including, without limitation by reason of specification, losses, defense and cost containment expenses (f/k/a allocated loss adjustment expenses), commissions to producers, investment expense, damages, legal expenses, court costs, taxes, assessments, license fees, the fees of attorneys, actuaries, accountants and investment and other advisors, fees payable to other vendors approved by Positive, including AOS and Gateway, governmental fines and penalties, and surplus, reinsurance premiums and costs, audit fees, and guaranty fund assessments; provided, that, (a) the Management Company’s authority with respect to the payment of claims, losses, and defense and cost containment expenses shall be limited as otherwise provided in this Agreement, and (b) without the prior written consent of Positive, Management Company shall not pay any single expense in an amount in excess of $25,000.

6. Records; Right to Audit .

(a) Management Company shall keep sufficient records for the express purpose of recording therein the nature and details of the Services, including all transactions undertaken for Positive pursuant to this Agreement. All books and records developed or maintained by Management Company under or related to this Agreement (including, without limitation, all books and records that pertain in any way to the Services performed by Management Company pursuant to this Agreement) (collectively, “ Books and Records ”) shall be owned by Positive and the exclusive property of Positive, shall be held by Management Company for the benefit of Positive, and are subject in all respects to the control of Positive; provided , however , that the

Form of “Diversus Management Agreement”

Exhibit A to Standby Purchase Agreement

Management Company may retain copies of the Books and Records for the term of this Agreement and for five (5) years thereafter, following which time such Books and Records shall be destroyed unless otherwise instructed by Positive. When electronic claims files are in existence, data will be transmitted on a timely basis and in a form and format that is usable by Positive. Positive shall have access and the right to copy all accounts and the Books and Records related to its business in a form usable by Positive, and the Pennsylvania Insurance Department shall have access to all Books and Records and bank accounts of Management Company in a form usable to the Department. All Books and Records shall be retained according to the laws pertaining to the conduct of examinations. All rights to examine and audit Books and Records shall survive the termination of this Agreement and shall remain in effect for so long as either Management Company or Positive has any rights or obligations under this Agreement.

(b) The Management Company shall provide Positive with detailed calculations of the components of the Service Levels for each month, in a format acceptable to Positive, not later than ten (10) days following the end of such month.

(c) The Management Company shall provide such other information as may be requested by Positive from time to time (including, for avoidance of doubt, information necessary to review the components of the Service Levels) within five (5) business days of a request therefor.

7. Settlement of Claims . In connection with the Management Company’s activities under this Agreement in adjusting and settling claims on behalf of Positive:

(a) All claims must be reported to Positive in a timely manner, generally meaning making each member of the Claims and Litigation Committee aware of the claim within three (3) business days of Management Company becoming aware of same.

(b) A copy of the claim file shall be sent to Positive at its request or as soon as it becomes known that the claim:

(i) has the potential to exceed an amount determined by The Insurance Commissioner of the Commonwealth of Pennsylvania (the “ Commissioner”) ,

(ii) involves a coverage dispute,

(iii) has the potential to exceed Management Company’s claims settlement authority, as determined by the Positive Board or the Claims and Litigation Committees,

(iv) is open for more than six (6) months,

(v) is closed by payment of an amount set by the Pennsylvania Insurance Department or an amount set by the Positive Board or the Claims and Litigation Committee, whichever is less.

(c) All claim files shall be the joint property of Positive and Management Company. However, upon an order of liquidation of Positive, such files shall become the sole property of

Form of “Diversus Management Agreement”

Exhibit A to Standby Purchase Agreement

Positive or its estate. Management Company shall have reasonable access to and the right to copy the files on a timely basis.

8. Term and Termination.

(a) Term . The parties declare that the long-term continuity of the management relationship under this Agreement is of the utmost importance to the mutual business interests of Positive and the Management Company, and, therefore, this Agreement shall have a seven (7) year rolling term as further provided in this Section 8 (“ Term ”).

(b) Annual Extension of Term . Unless either Positive or the Management Company shall provide a timely Cutoff Notice sent in accordance with the provisions of Section 8(c) , on each anniversary of the Effective Date the Term of this Agreement shall automatically be extended for one (1) additional year such that the Term is again extended to a full seven (7) years from the date of such anniversary.

(i) By Positive . Beginning not more than ninety (90) or less than thirty (30) days prior to the second anniversary of the Effective Date, and annually thereafter no less than thirty (30) days prior to the anniversary of the Effective Date, the Positive board of directors (“ Positive Board”) shall review the performance of the Management Company under this Agreement. If the Positive Board on any such occasion shall by written resolution of a majority of the members thereof determine that Positive determines not to continue this Agreement beyond the remaining Term, then the Positive Board shall, prior to the anniversary of the Effective Date, send written notice (the “Cutoff Warning Notice ”) to the Management Company describing the basis for its determination. Representatives of the Diversus Parties shall have the right within fifteen (15) days of receipt of the Cutoff Warning Notice to personally appear before the Positive Board to address the concerns of the Positive Board. If, after due consideration of the views of the Management Company, the Positive Board nevertheless affirms its decision not to continue this Agreement beyond the remaining Term, it shall send the Management Company a further written notice (a “ Cutoff Notice ”) informing the Management Company of Positive’s definitive determination not to continue this Agreement beyond the remaining Term. Upon Diversus’ receipt of a Cutoff Notice, the automatic annual extension of the Term under Section 8(b) shall cease and no longer be effective, and the Term shall thereafter be a fixed term of seven (7) years beginning on the anniversary date immediately following Positive’s sending of the Cutoff Warning Notice.

(ii) By Diversus . The Diversus Parties shall have the right beginning not more than ninety (90) or less than thirty (30) days prior to the second anniversary of the Effective Date, and annually thereafter no less than thirty (30) days prior to the anniversary of the Effective Date, to decide not to continue this Agreement beyond the remaining Term, by sending to each of the Positive Parties a Cutoff Notice prior to the anniversary of the Effective Date informing the Positive Parties of Diversus’ determination not to continue this Agreement beyond the remaining Term. Upon Positive’s receipt of a Cutoff Notice, the automatic annual extension of the Term under Section 8(b) shall cease and no longer be effective, and the Term shall

Form of “Diversus Management Agreement”

Exhibit A to Standby Purchase Agreement

thereafter be a fixed term of seven (7) years beginning on the anniversary date immediately following Diversus’ sending of the Cutoff Notice .

(d) Termination for Cause .

(i) The Positive Parties shall have the right to terminate this Agreement on account of a material breach of a material provision of this Agreement by a Diversus Party, by giving not less than sixty (60) days prior written notice to the Diversus Parties specifying in reasonable detail the nature and extent of the breach; provided the breaching Diversus Party shall have the opportunity to cure such breach within such sixty (60) period, unless the Diversus Parties have previously cured two (2) or more material breaches of any material provision previously. If such breach is not cured within such sixty (60) day period, (or if any Diversus Party has previously cured two (2) or more such material breaches of any material provision of this Agreement prior to the receipt of such notice), the Positive Parties may by written notice to the Diversus Parties declare this Agreement immediately terminated; and if such breach is cured within such sixty (60) day period, the right to terminate on account of the noticed breach shall be null and void.

(ii) In addition, the Positive Parties shall have the right to terminate this Agreement:

A. Immediately if Management Company files a voluntary petition in bankruptcy, or makes an assignment for the benefit of creditors; or if a committee of creditors or other representative is appointed to represent its business; or

B. Immediately if an involuntary petition in bankruptcy is filed against it, and Management Company fails within thirty (30) days following the appointment of such committee or representative or the filing of such involuntary petition to cause the discharge of such committee or representative or the dismissal of such petition; or

C. Immediately if any Diversus Party is convicted of a felony and either (1) such felony is related to actions or omissions taken on behalf of Positive or any of its Affiliates or (2) relates to a breach of applicable laws or regulations governing the insurance industry; or

D. Upon ten (10) days prior written notice if any director, officer, or employee of a Diversus Party is convicted of a felony and either (1) such felony is related to actions or omissions taken on behalf of Positive or any of its Affiliates or (2), if such felony relates to a breach of applicable laws or regulations governing the insurance industry, provided, however , that the foregoing convictions shall not give rise to a right to terminate this Agreement if such officer, employee or director is terminated or has resigned as an officer, employee and/or director of all Diversus Parties prior to or within ten (10) days after the conviction;

E. Immediately if any Diversus Party by virtue of an action undertaken by two or more directors or officers, is found by a court of competent jurisdiction to have committed fraud or willful misconduct against Positive or any of its Affiliates; or

Form of “Diversus Management Agreement”

Exhibit A to Standby Purchase Agreement

F. Upon ten (10) days prior written notice if any director, officer or employee of a Diversus Party is found by a court of competent jurisdiction to have committed and/or caused Diversus to have committed fraud or willful misconduct against Positive or any of its Affiliates, provided, however , that the foregoing finding shall not give rise to a right to terminate this Agreement if such officer, employee or director is terminated or has resigned as an officer, employee, agent and/or director of all Diversus Parties prior to or within ten (10) days after the entry of the order or judgment by the court.

(iii) The Diversus Parties shall have the right to terminate this Agreement on account of a material breach of a material provision of this Agreement by a Positive Party, by giving not less than sixty (60) days prior written notice to the Positive Parties specifying in reasonable detail the nature and extent of the breach; provided the breaching Positive Party shall have the opportunity to cure such breach within such sixty (60) day period. If such breach is not cured within such sixty (60) day period, the Diversus Parties may by written notice to the Positive Parties declare this Agreement immediately terminated; and if such breach is cured within such sixty (60) day period, the right to terminate on account of the noticed breach shall be null and void. For the avoidance of doubt, Management Company does not have an automatic right to terminate this Agreement if Positive is placed in receivership under Article V of The Insurance Department Act of 1921 (40 P.S. §§221.1-221.63) (as amended, the “ The Insurance Department Act of 1921 ”).

(e) Termination by Mutual Agreement . Agreement may also be terminated at any time by mutual written agreement of the Positive Parties and the Diversus Parties.

9. Service Level Agreement .

(a) Service Levels . Schedule C attached hereto and made a part hereof sets forth certain specific levels of service that Management Company must observe in its performance of the Services (the “ Service Levels ”).

(b) Finding of a Deficiency . If the Positive Board has reviewed the performance of the Management Company under this Agreement as compared against the Service Levels, and has, by written resolution of a majority of the members of the Positive Board, determined that the performance of the Management Company in some material respect does not meet the Service Levels, such determination shall constitute an asserted “ Material Service Deficiency ”. The Material Service Deficiency shall not, except as otherwise provided in Section 9(c), constitute a material breach of a material provision of this Agreement pursuant to Section 8(d). Positive shall send written notice (the “ Deficiency Notice ”) to the Management Company describing in detail the Positive Board’s reasons for finding a Material Service Deficiency and, following the Deficiency Notice, the Management Company shall take such corrective action as may be necessary to cure such Material Service Deficiency within sixty (60) days of the date of such Deficiency Notice.

(c) Resolution of Material Service Deficiency . The Management Company shall have the opportunity to address its proposed corrective actions with the Positive Board and to discuss the extent to which its proposed corrective actions are consistent with the Service Levels

Form of “Diversus Management Agreement”

Exhibit A to Standby Purchase Agreement

and the standards of other medical malpractice insurance companies. If, after any such information is presented, in the reasonable judgement of the Positive Board absent manifest error, the Material Service Deficiency has not been cured within sixty (60) days of the date of such Deficiency Notice, Positive shall thereafter have the right to assert that the Management Company is engaging in a material breach of a material provision of this Agreement pursuant to Section 8(d) by virtue of continued asserted Material Service Deficiency, which assertion shall be resolved otherwise in accordance with the provisions of this Agreement (including but not limited to Section 8(d)) and applicable law.

10. Indemnification and Insurance .

(a) Positive shall indemnify, defend and hold harmless Management Company and each shareholder, officer, employee and agent thereof (each a “ Management Company Indemnified Person ”), from and against all claims, losses, damages, liabilities and expense (including, without limitation, settlement costs and any reasonable legal fees and expenses or other expenses for investigation and defending any actions or threatened actions) incurred by such Management Company Indemnified Person as a result of any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, relating to or arising out of the Services provided by Management Company hereunder, except to the extent the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted the fraud, negligence or willful misconduct of Management Company.

(b) Management Company shall indemnify, defend and hold harmless Positive and each shareholder, officer, employee and agent thereof (each a “ Positive Indemnified Person ”), from and against all claims, losses, damages, liabilities and expense (including, without limitation, settlement costs and any reasonable legal fees and expenses or other expenses for investigation and defending any actions or threatened actions) incurred by such Positive Indemnified Person as a result of any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, arising out of the fraud, negligence or willful misconduct on the part of Management Company.

(c) Management Company will obtain and maintain errors and omissions insurance (professional liability coverage) and directors and officers liability insurance, with combined liability limits in a minimum amount of $1,000,000 per claim and $2,000,000 in the aggregate. Management Company will provide Positive with certificates of insurance which reflect the maintenance of the foregoing.

11. Prohibited Acts . Management Company shall not:

(a) Bind reinsurance or retrocessions on behalf of Positive. Any reinsurance or retrocessions shall require the prior approval of the Positive Board and the signature of a duly-authorized officer of Positive.

(b) Commit the insurer to participate in insurance or reinsurance syndicates. Participation in any insurance or reinsurance syndicate shall require the prior approval of the Positive Board and the signature of a duly-authorized officer of Positive.

Form of “Diversus Management Agreement”

Exhibit A to Standby Purchase Agreement

(c) Appoint any agent without assuring that the agent is lawfully licensed to transact the type of insurance for which the agent is appointed.

(d) Without the prior approval of the Positive Board or the unanimous approval of Claims and Litigation Committee, pay or commit Positive to pay (i) any claim over policy limits, or (ii) any claim over $1,000,000, in each case, net of reinsurance.

(e) Collect any payment from a reinsurer or commit Positive to any claim settlement with a reinsurer without the prior approval of the Positive Board. If prior approval is given by the Positive Board, a report must be promptly forwarded to Positive. (It is understood this prohibited act applies to settling claims as between Positive and the reinsurers and does not apply to settling policy claims utilizing the proceeds of reinsurance).

(f) Permit its subagent to serve on the Positive Board.

(g) Jointly employ an individual who is employed by Positive, unless approved by the Pennsylvania Insurance Department and the Positive Board.

(h) Appoint a sub-managing general agent.

Any acts requiring the approval of the Positive Board under this Section 10 may be approved by a duly-constituted committee of the Positive Board; provided that no committee may override the decision of the Positive Board.

12. Protective Covenants, etc . Positive and Holdings jointly and severally make the following covenants and agreements for the protection of the Diversus Parties and their long-term interests under this Agreement:

(a) Defined Terms . For purposes of this Agreement, the following terms have the meaning specified:

(i) “Affiliate” means a person that directly or indirectly through one or more intermediaries controls or is controlled by, or is under common control with, the person specified.

(ii) “Control,” “controlling,” “controlled by” and “under common control with” (whether or not spelled with a capital “C”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise, unless the power is the result of an official position with or corporate office held by the person. Control shall be deemed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote or holds proxies representing fifty per centum (50%) or more of the votes that all shareholders would be entitled to cast in the election of directors (or analogous positions for non-corporate entities). Without limiting the generality of the foregoing, Holdings shall be deemed to control any person that is controlled by Positive or any other direct or indirect subsidiary of Holdings.

Form of “Diversus Management Agreement”

Exhibit A to Standby Purchase Agreement

(iii) “Change of Control” means (i) any sale or disposition by Holdings of any of its stock or equity interests in Positive or in any New Holdings Insurer which results in Holdings owning, directly or indirectly, less than 51% of the outstanding capital stock or other equity interests in Positive or in any New Holdings Insurer, (ii) any issuance of stock or other equity interests by Positive or by any New Holdings Insurer which results in Holdings owning, directly or indirectly, less than 51% of the outstanding capital stock or other equity interests in Positive or in any New Holdings Insurer, (iii) the sale, lease, transfer (including a loss portfolio transfer), exclusive license or other disposition, in a single transaction or series of related transactions, of more than 50% in value of the assets of Holdings, of Positive or of any New Holdings Insurer, each taken separately, or (iv) a merger, consolidation, or share exchange involving any of Holdings, Positive, or a New Holdings Insurer, as the case may be, which results in Holdings owning, directly or indirectly, less than 51% of the outstanding capital stock or other equity interests in Positive or in any New Holdings Insurer.

(iv) “New Holdings Insurer” means any stock insurance company, mutual insurance company, reciprocal exchange, risk retention group, or other form of risk bearing entity directly or indirectly formed by Holdings or with respect to which Holdings otherwise acquires control, directly or indirectly.

(b) Other Insurers . In the event that Holdings, either directly or indirectly through another entity it controls, forms or otherwise acquires control of a New Holdings Insurer, Positive and Holdings shall cause each New Holdings Insurer to join into this Agreement with Management Company (or, if joining into this Agreement is impracticable, shall cause the New Holdings Insurer to enter into an agreement with Management Company on terms as nearly identical to this Agreement as possible) such that Management Company shall have the benefit of managing the business of all insurance companies controlled by Holdings; and shall be entitled to be paid the Base Fee based upon the total gross written premium of, and the Performance Fee on the combined results of, all insurance companies controlled by Holdings as if all such insurance companies are combined with Positive under Section 4(a)(ii).

(c) Changes of Control, etc . The Positive Parties jointly and severally covenant and agree that they will not directly or indirectly engage or participate in a Change of Control with respect to Positive, or any New Holdings Insurer, or Holdings without the prior written consent of each of the Diversus Parties, which the Diversus Parties may withhold or condition in their sole and absolute discretion; provided , however , that if, in connection with a proposed Change of Control, proper and appropriate provisions are made for Management Company to be retained to continue to provide the services described herein in accordance with all of the terms and conditions hereof (as the same may be in effect as of the time of such Change of Control) to Positive and the New Holdings Insurers, or for this Agreement (as the same may be in effect as of the time of such Change of Control) to be assumed by a purchaser of the assets of such companies, or extended to the operations formerly conducted by such companies after such Change of Control to the same extent as if such Change of Control had not happened, then the consent of the Diversus Parties shall not be required.

Form of “Diversus Management Agreement”

Exhibit A to Standby Purchase Agreement

(d) Ancillary Agreements . Contemporaneously with the execution and delivery of this Agreement, Positive is entering into an agreement with Andrews Outsource Solutions, an Affiliate of Diversus (“ AOS ”), pursuant to which AOS will provide litigation management services to Positive, and an agreement with Gateway Risk Services, Inc., an Affiliate of Diversus, (“ Gateway ”), pursuant to which AOS will provide claims adjustment services to Positive, in each case, on terms and conditions acceptable to the Positive Board (such agreements, collectively, the “ Ancillary Agreements ”). Throughout the Term of this Agreement, Positive and Holdings shall keep the Ancillary Agreements in full force and effect, and furthermore shall cause them to be extended to and to apply to any New Holdings Insurer.

13. Miscellaneous .

(a) Management Company shall be an independent contractor, and its employees shall in no event be considered Positive’s employees. Except as expressly provided for herein, no agency or fiduciary relationship shall exist between the parties as a result of the execution of this Agreement or performance hereunder unless required by law or regulatory authority. Management Company does not act as an insurer for any insured, and this Agreement shall not be construed as an insurance policy or an undertaking by Management Company to act as, or accept responsibility as, an insurer.

(b) Nothing in the Agreement is intended to restrict, or shall be construed to restrict, either during or after the Term, the ability of a Diversus Party to conduct an insurance-related business, whether directly or through the provision of services to unrelated third parties, and whether or not any such business competes with the business of Positive, Holdings or any Affiliate of Holdings, nor shall any Diversus Party have any obligation to offer a business opportunity to Positive, Holdings or any Affiliate of Holdings. Notwithstanding the foregoing, during the Term, neither Diversus Party shall (i) hold a direct or indirect ownership interest in any risk-bearing insurance company or other form of risk-bearing insurance entity, other than an interest of less than 5% in the securities of a publicly-traded company or (ii) provide underwriting services to a business which competes with Positive in the markets in which Positive operates without Positive’s written consent.

(c) This Agreement shall be governed by and construed in accordance with the domestic, internal laws of the Commonwealth of Pennsylvania, without regard to its principles pertaining to the conflict of laws. As to any dispute, claim, or litigation arising out of or relating in any way to this Agreement, the parties hereby agree and consent to be subject to the exclusive jurisdiction of the United States District Court for the Eastern District of Pennsylvania. If jurisdiction is not present in federal court, then the parties hereby agree and consent to the exclusive jurisdiction of the state courts of Montgomery County, Pennsylvania. Each party hereto hereby irrevocably waives, to the fullest extent permitted by law, (i) any objection that it may now or hereafter have to laying venue of any suit, action or proceeding brought in such court, (ii) any claim that any suit, action or proceeding brought in such court has been brought in an inconvenient forum, and (iii) any defense that it may now or hereafter have based on lack of personal jurisdiction in such forum.

Form of “Diversus Management Agreement”

Exhibit A to Standby Purchase Agreement

(d) If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.

(e) This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. No party may delegate its duties and obligations under this Agreement to any other person, except for Management Company’s right to subcontract for the performance of various of the Services as more fully set forth in the following paragraph (f).

(f) Management Company shall have the right to outsource or subcontract the performance of some, but not substantially all, of the Services to Affiliated or non-Affiliated persons, provided, however , that any outsourced or subcontracted service provider shall maintain the same levels of service and performance required of the Management Company hereunder, and the subcontracting or outsourcing shall not relieve the Management Company of its primary responsibility to perform the Services.

(g) This Agreement constitutes the entire understanding and agreement between the parties, and supersedes all prior and contemporaneous agreements or understandings, written or oral, of the parties hereto, with respect to its subject matter. This Agreement may be modified, amended, or waived only in writing executed by all the parties.

(h) No failure or delay on the part of a party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude or require any other or further exercise thereof or the exercise of any other right, power or privilege. No party shall be deemed, by any act of omission or commission, to have waived any of its rights or remedies hereunder unless such waiver is in writing and signed by such party. A waiver with respect to one event shall not be construed as continuing or as a bar to or a waiver of any right or remedy with respect to a subsequent event. The rights and remedies herein provided to the parties are cumulative and not exclusive of any rights or remedies provided by law.

(i) Notwithstanding anything to the contrary set forth herein, all claims, transactions, and other matters hereunder shall be settled in a timely manner, not less frequently than on a quarterly basis. All transactions hereunder shall, to the extent applicable, be in compliance with the National Association of Insurance Commissioners’ Accounting Practices and Procedures Manual.

(j) If Positive is placed in receivership or seized by the Commissioner under The Insurance Department Act of 1921, (i) the rights of Positive under this Agreement extend to the receiver or the Commissioner and (ii) the Books and Records shall immediately be made available to the receiver or the Commissioner immediately upon the receiver or the Commissioner’s request. Management Company will continue to maintain systems, programs or other infrastructure notwithstanding a seizure by the Commissioner under The Insurance

Form of “Diversus Management Agreement”

Exhibit A to Standby Purchase Agreement

Department Act of 1921 and shall make them available to the receiver for as long as Management Company continues to receive timely payment for Services rendered.

REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOLLOWS

Form of “Diversus Management Agreement”

Exhibit A to Standby Purchase Agreement

IN WITNESS WHEREOF, the parties, intending to be legally bound hereby, have duly executed and delivered this Agreement as of the day and year first set forth above.



DIVERSUS MANAGEMENT, INC.

By:	/s/ Lewis S. Sharps
	Name: Lewis S. Sharps M.D.
	Title: CEO


DIVERSUS, INC.

By:	/s/ Lewis S. Sharps
	Name: Lewis S. Sharps M.D.
	Title: President


POSITIVE PHYSICIANS INSURANCE COMPANY

By:	/s/ Lewis S. Sharps
	Name: Lewis S. Sharps M.D.
	Title: President


POSITIVE PHYSICIANS HOLDINGS, INC.

By:	/s/ Lewis S. Sharps
	Name: Lewis S. Sharps M.D.
	Title: President

Schedule A

UNDERWRITING POLICIES AND STANDARDS

See attached underwriting manual.

Schedule B

POSITIVE RETAINED RESPONSIBILITIES AND COSTS

Positive is responsible for:

(a) the creation and oversight of investment, claims, and underwriting policy.

(b) the creation and oversight of risk management policies and procedures.

(d) choice of actuarial, tax, accounting, and audit service providers for Positive.

(e) reimbursing the Management Company for the cost of management time preparing the monthly Base Fee payment mechanics [in an amount not to exceed $1,000 per month]

(f) responsibility for, and costs associated with, the preparation of HoldCo financial statements, SEC compliance, SEC filings and shareholder relations.

Schedule C

SERVICE LEVELS

[The parties agree to work in good faith to document and establish service levels that are generally consistent with the service levels currently performed by the Management Company]

Exhibit 10.2

Execution Copy

STANDBY STOCK PURCHASE AGREEMENT

This STANDBY STOCK PURCHASE AGREEMENT (this “ Agreement ”), dated as of June 8, 2018, is entered into by and among Positive Physicians Holdings, Inc. a Pennsylvania corporation (the “ Company ”), Positive Physicians Insurance Exchange, a Pennsylvania domiciled reciprocal inter-insurance exchange (“ PPIX ”), Physician’s Insurance Program Exchange, a Pennsylvania domiciled reciprocal inter-insurance exchange (“ PIPE ”), and Professional Casualty Association, a Pennsylvania domiciled reciprocal inter-insurance exchange (“ PCA ”, and collectively with PPIX and PIPE, or each individually as the context requires, the “ Exchanges ”), and Insurance Capital Group, LLC (the “ Standby Purchaser ”).

W I T N E S S E T H:

WHEREAS, Professional Third Party, L.P., as the “attorney-in-fact” of PCA, has adopted a Plan of Conversion (the “ PCA POC ”) pursuant to which PCA will convert from reciprocal form to stock form in accordance with Pennsylvania law (the “ PCA Conversion ”); and

WHEREAS, Physicians’ Insurance Program Management Company, as the “attorney-in-fact” of PIPE, has adopted a Plan of Conversion (the “ PIPE POC ”) pursuant to which PIPE will convert from reciprocal form to stock form in accordance with Pennsylvania law (the “ PIPE Conversion ”); and

WHEREAS, Specialty Insurance Services, LLC, as the “attorney-in-fact” of PPIX, has adopted a Plan of Conversion (the “ PPIX POC ” and, collectively with the PCA POC and the PIPE POC, the “ Plans of Conversion ”) pursuant to which PPIX will convert from reciprocal form to stock form in accordance with Pennsylvania law (the “ PPIX Conversion ” and, collectively with the PCA Conversion and the PIPE Conversion, the “ Conversions ”); and

WHEREAS, the Conversions will be accomplished by the merger of each of the Exchanges into (a) in the case of PCA, PCA Conversion Corp., a Pennsylvania corporation (“ PCA Mergeco ”), (b) in the case of PIPE, PIPE Conversion Corp., a Pennsylvania corporation (“ PIPE Mergeco ”) and (c) in the case of PPIX, PPIX Conversion Corp., a Pennsylvania corporation (“ PPIX Mergeco ” and, collectively with PCA Mergeco and PIPE Mergeco, the “ Mergecos ”); and

WHEREAS, immediately following the mergers described above, PCA Mergeco and PIPE Mergeco will be merged into PPIX Mergeco, which will be the surviving entity in such merger and will be renamed as Positive Physicians Insurance Company, a Pennsylvania corporation (“ Positive ”), which will be a wholly-owned subsidiary of the Company; and

WHEREAS, in accordance with the Plans of Conversion, the Company proposes, as soon as practicable after the Registration Statement, as defined herein, becomes effective, to distribute to Eligible Subscribers, as defined herein, non‑transferable rights (the “ Rights ”) to subscribe for and purchase shares of Common Stock of the Company (the “ Shares ”) at a subscription price (the “ Subscription Price ”) of $10.00 per share (such offering, the “ Subscription Offering ”); and

Execution Copy

WHEREAS, contemporaneously with the Subscription Offering, the Company will offer the Shares to a limited group of persons at the Subscription Price (the “ Community Offering ”); and

WHEREAS, the Company has requested the Standby Purchaser to agree to purchase from the Company in the Community Offering any shares remaining after completion of the Subscription Offering and any orders accepted in the Community Offering by persons other than the Standby Purchaser, and the Standby Purchaser is willing to purchase Shares in the Community Offering on the terms and conditions provided herein.

NOW THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and intending to be legally bound, the parties hereto hereby agree as follows:

Section 1. Certain Other Definitions . The following terms used herein shall have the meanings set forth below:

“ Affiliate ” shall have the meaning set forth in Rule 12b‑2 under the Exchange Act and shall include Persons who become Affiliates of any Person subsequent to the date hereof. In the case of the Standby Purchaser, its “Affiliates” shall include entities which are controlled by a principal of the Standby Purchaser.

“ Agreement ” shall have the meaning given to such term in the preamble hereof.

“ Associate ” shall have the meaning set forth in Rule 12b‑2 under the Exchange Act and shall include Persons who become Associates of any Person subsequent to the date hereof.

“ Assumption of Debt Agreement ” shall mean the Assumption of Debt Agreement between the Company and Diversus, pursuant to which the Company will assume a principal amount of ten million dollars ($10,000,000) of Diversus’ senior debt on terms acceptable to the Company, Diversus, and the Standby Purchaser, each in its sole discretion

“ Bankruptcy and Equity Exception ” shall have the meaning given to such term in Section 3(b) hereof.

“ Board ” shall mean the board of directors of the Company.

“ Burdensome Condition ” shall have the meaning given to such term in Section 6(c) hereof.

“ Business Day ” shall mean any day that is not a Saturday, a Sunday or a day on which banks are required or permitted to be closed in the Commonwealth of Pennsylvania.

“ Change of Control ” shall mean any transaction or series of transactions (as a result of a tender offer, merger, consolidation or otherwise) that results in, or that is in connection with (a) any Third Party Purchaser or “group” (within the meaning of Section 13(d)(3) of the Exchange Act) of Third Party Purchasers acquiring beneficial ownership, directly or indirectly, of a majority of the then issued and outstanding Common Stock or (b) the sale, lease, exchange, conveyance, transfer, or other disposition (for cash, shares of stock, securities or other

Execution Copy

consideration) of all or substantially all of the property and assets of the Company and its Subsidiaries, on a consolidated basis, to any Third Party Purchaser or “group” (within the meaning of Section 13(d)(3) of the Exchange Act) of Third Party Purchasers (including any liquidation, dissolution, or winding up of the affairs of the Company, or any other distribution made in connection therewith).

“ Closing ” shall mean the closing of the purchase described in Section 2 hereof, which shall be held at 10:00 a.m. Eastern Time on the Closing Date at the offices of Stevens & Lee, 620 Freedom Business Center, King of Prussia, Pennsylvania 19406, or such other time and place as may be agreed to by the parties hereto.

“ Closing Date ” shall mean the date on which the closing of the sale of the Shares pursuant to the Offerings takes place.

“ Commission ” shall mean the United States Securities and Exchange Commission, or any successor agency thereto.

“ Common Stock ” shall mean the common stock of the Company, par value $0.01 per share.

“ Common Stock Equivalent ” shall mean any convertible debt instrument, option, warrant or other right to acquire Common Stock and shall include the number of shares of Common Stock that may be acquired upon exercise or conversion of such Common Stock Equivalent.

“ Community Offering ” shall have the meaning given to such term in the recitals hereof.

“ Company ” shall have the meaning given to such term in the preamble hereof.

“ Company Contracts ” shall have the meaning given to such term in Section 3(f) hereof.

“ Conversion Financing Proposal ” shall mean a bona fide written offer or proposal by any Person other than the Standby Purchaser, which offer or proposal has as a principal purpose and effect the financing of the transactions contemplated by the Plans of Conversion and which directly or indirectly provides sufficient financing for the purchase of all the Unsubscribed Shares, whether or not such offer or proposal has a structure similar to the structure of the transactions contemplated hereby.

“ Conversion Plan Approval ” shall mean the approval of each of the Plans of Conversion by the Department and the requisite vote of the Voting Subscribers.

“ Department ” shall mean the Pennsylvania Insurance Department.

“ Designated Securities ” shall have the meaning given to such term in Section 10(b) hereof.

“ Diversus ” means Diversus, Inc., a Delaware corporation.

Execution Copy

“ Diversus Management Agreement ” shall mean the Management Agreement to be entered into among the Company, Positive, Diversus Management, Inc. and Diversus, in substantially the form of attached as Exhibit A , with a completed Exhibit C thereto containing Service Levels (as defined therein) satisfactory to Diversus Management and the Standby Purchaser, each in its sole discretion.

“ Drag‑along Notice ” shall have the meaning given to such term in Section 11(b) hereof.

“ Drag‑along Sale ” shall have the meaning given to such term in Section 11(a) hereof.

“ Drag‑along Stockholder ” shall have the meaning given to such term in Section 11(a) hereof.

“ Dragging Stockholder ” shall have the meaning given to such term in Section 11(a) hereof.

“ Eligible Subscriber ” shall, for each of the Exchanges, have the meaning given to such term in the Plan of Conversion for such Exchange.

“ Equity Securities ” shall include (i) with respect to the Company, (a) any Common Stock, (b) any security convertible into or exercisable or exchangeable for, with or without consideration, shares of Common Stock (including any option to purchase such a convertible security), (c) any security carrying any warrant or right to subscribe to or purchase any shares of Common Stock, and (d) any such warrant or right and (ii) with respect to any Subsidiary of the Company, (a) any equity ownership interests, (b) any security convertible into or exercisable or exchangeable for, with or without consideration, equity ownership interests (including any option to purchase such a convertible security), (c) any security carrying any warrant or right to subscribe to or purchase any shares of equity ownership interests, and (d) any such warrant or right.

“ Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the Commission thereunder.

“ Exchangeable Note ” shall mean the exchangeable note to be entered into pursuant to Section 2(a), on terms acceptable to the Company and the Standby Purchaser, each in its sole discretion. ¹

“ Financial Statements ” shall have the meaning given to such term in Section 3(g) hereof.

“ GAAP ” shall mean accounting principles generally accepted in the United States of America, consistently applied by the Company with prior practice.

“ Griffin ” shall mean Griffin Financial Group, LLC.

_________________________

¹ Note: the proceeds of the Exchangeable Note will be re-loaned to Diversus under the Loan Agreement (and subject to the Intercreditor Agreement and the senior lender's approval). The Company will assign the Loan Agreement to ICG as security to ensure payment if the transaction does not close.

Execution Copy

“ Governmental Entity ” shall mean any federal or state court, administrative agency or commission or other governmental authority or instrumentality, other than the Department.

“ Gross Up Right ” shall have the meaning given to such term in Section 10(a) hereof.

“ Including ” shall mean including, without limitation.

“ Indebtedness ” means, with respect to any Person, (a) all obligations for borrowed money, (b) any other obligations owed by such Person under any credit agreement or facility, or evidenced by any note, bond, debenture or other debt security or instrument made or issued by such Person, (c) all obligations for the deferred purchase price of property or services with respect to which such Person is liable, contingently or otherwise, as obligor or otherwise, (d) all capitalized lease obligations, synthetic lease obligations and sale leaseback obligations, whether secured or unsecured, (e) all obligations under interest rate cap, swap, collar or similar transactions or currency or commodity hedging transactions (valued at the termination value thereof), (f) all obligations under conditional sale or other title retention agreements relating to any purchased property, (g) all letters of credit or performance bonds issued for the account of such Person, (h) all guarantees of such Person with respect to any of the foregoing of any other Person, (i) all interest, premium and prepayment penalties due and payable in respect of any of the foregoing and (j) all indebtedness referred to in clauses (a) through (i) above secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any encumbrance upon or in property (including accounts and contract rights) owned by such Person, even though such Person may not have assumed or become liable for the payment of such indebtedness, and including in clauses (a) through (i) above any accrued and unpaid interest or penalties thereon.

“ Intercreditor Agreement ” means the intercreditor agreement referred to in Section 8(c)(x) hereof.

“ Law ” shall have the meaning given to such term in Section 6(d) hereof.

“ Liability ” means any liability, debt, expense, claim, demand, loss, commitment, damage, deficiency, obligation or actions of any kind, character or description, whether asserted or not asserted, disputed or undisputed, known or unknown, joint or several, fixed or unfixed, liquidated or unliquidated, secured or unsecured, accrued or unaccrued, matured or unmatured, absolute, contingent, determined, determinable or otherwise, whenever or however arising (including, whether arising out of any contract or tort based on negligence or strict liability) and whether or not the same would be required by SAP to be reflected in financial statements or disclosed in the notes thereto, including all costs and expenses related thereto.

“ Liens ” means all pledges, liens (statutory or other), encumbrances, charges, claims, community property interests, conditions, deeds of trust, equitable interests, options, hypothecations, mortgages, easements, encroachments, burdens, rights of others, rights of way, rights of first refusal, rights of first offer, title defects, title retention agreements, leases, subleases, licenses, occupancy agreements, covenants, voting trust agreements, interests, negotiations or refusals, security interests of any kind, proxies or restrictions of any kind,

Execution Copy

including any restriction on use, voting, transfer, receipt of income or exercise of any other attribute of ownership or any applicable insurance Laws.

“ Loan Agreement ” shall mean the Loan Agreement between the Company and Diversus pursuant to which the Company agrees to make a credit facility of $6,000,000 available to Diversus at Closing as referenced in Section 8(c)(xi), on terms acceptable to the Company, Diversus and the Standby Purchaser, each in its sole discretion.

“ Material Action ” shall have the meaning given to such term in Section 3(i) hereof.

“ Material Adverse Effect ” shall mean (a) an event which has a material adverse effect on the financial condition, or on the earnings, operations, assets, business or prospects of the Company and its respective subsidiaries taken as a whole (including, for avoidance of doubt, the occurrence of a material excess claim to the extent the Company or its Subsidiaries do not have in place adverse development coverage sufficient to fund such claim), or (b) the failure of Dr. Lewis Sharps to serve as Chief Executive Officer of the Company, Diversus Management, Inc. and the Exchanges; provided , however , that in determining whether a Material Adverse Effect has occurred under clause (a), there shall be excluded any effect to the extent resulting from (i) actions or omissions of the Company expressly required or contemplated by the terms of this Agreement, (ii) changes after the date hereof in general economic conditions in the United States, including financial market volatility or downturn, (iii) changes after the date hereof affecting generally the medical malpractice insurance business in the United States, (iv) acts of war, sabotage or terrorism, military actions or the escalation thereof, or outbreak of hostilities, (v) any changes after the date hereof in applicable laws or accounting rules or principles, including changes in GAAP, or (vi) the announcement or pendency of the transactions contemplated by this Agreement; provided further , however , that any circumstance, event, change, development or effect referred to in clauses (ii), (iii), (iv) and (v) shall be taken into account in determining whether a Material Adverse Effect has occurred or would reasonably be expected to occur to the extent that such circumstance, event, change, development or effect has a disproportionate effect on the Company compared to other participants in the industries or markets in which the Company operates.

“ Maximum of the Valuation Range ” shall mean the total of the maximum of the valuation ranges of PPIX, PIPE, and PCA as determined in accordance the Plans of Conversion.

“ Mergecos ” shall have the meaning given to such term in the recitals hereof.

“ Minimum of the Valuation Range ” shall mean the total of the minimum of the valuation ranges of PPIX, PIPE, and PCA as determined in accordance the Plans of Conversion.

“ Non‑public information ” shall have the meaning given to such term in Section 6(d) hereof.

“ Offer Period ” shall have the meaning given to such term in Section 10(b) hereof.

“ Offerings ” shall mean, collectively, the Subscription Offering and the Community Offering.

Execution Copy

“ Offering Expiration Date ” shall mean the date on which the Offerings expire.

“ Option Agreement ” shall mean the Option Agreement between the Company and Diversus in the form of Exhibit B attached hereto.

“ Organizational Documents ” of a Person means, as applicable, the declaration and charter, certificate of incorporation, articles of incorporation, certificate of designation, bylaws, certificate of formation, operating agreement or any similar organizational or governing document or instrument of a Person.

“ PCA Conversion ” shall have the meaning given to such term in the recitals hereof.

“ PCA Mergeco ” shall have the meaning given to such term in the recitals hereof.

“ PCA POC ” shall have the meaning given to such term in the recitals hereof.

“ Permits ” shall have the meaning given to such term in Section 3(f) hereof.

“ Permitted Liens ” means (a) Liens for taxes that are not yet due and payable or are not delinquent and are being contested in good faith by appropriate proceedings for which adequate reserves are maintained, or (b) mechanics’, materialmens’, carriers’, workmens’, repairmens’, contractors’ and warehousemens’ Liens imposed by applicable Law, arising or incurred in the ordinary course of business.

“ Person ” shall mean individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a Governmental Entity.

“ PIPE Conversion ” shall have the meaning given to such term in the recitals hereof.

“ PIPE Mergeco ” shall have the meaning given to such term in the recitals hereof.

“ PIPE POC ” shall have the meaning given to such term in the recitals hereof.

“ Plans of Conversion ” shall have the meaning given to such term in the recitals hereof.

“ Positive ” shall have the meaning given to such term in the recitals hereof.

“ PPIX Conversion ” shall have the meaning given to such term in the recitals hereof.

“ PPIX Mergco ” shall have the meaning given to such term in the recitals hereof.

“ PPIX POC ” shall have the meaning given to such term in the recitals hereof.

“ Proposed Transferee ” shall have the meaning given to such term in Section 12(a).

“ Prospectus ” shall mean the final Prospectus included in the Registration Statement for use in connection with the Offerings.

“ Purchased Shares ” shall have the meaning given to such term in Section 2(a) hereof.

Execution Copy

“ Registration Statement ” shall mean the Company’s Registration Statement on Form S‑1 or such other appropriate form under the Securities Act, pursuant to which the shares of Common Stock to be issued in the Offerings will be registered pursuant to the Securities Act.

“ Rights ” shall have the meaning given to such term in the recitals hereof.

“ Sale Notice ” has the meaning given to such term in Section 12(b) hereof.

“ SAP ” shall mean the accounting practices prescribed or permitted by the Department.

“ Securities Act ” shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated by the Commission thereunder.

“ Selling Stockholder ” shall have the meaning given to such term in Section 12(a) hereof.

“ Senior Management Shareholders ” shall mean the President and the Chief Operating Officer of the Company and the Director of Claims and Litigation Management for Andrews Outsource Solutions, LLC and Gateway Risk Services, Inc.

“ Shares ” shall have the meaning given to such term in the recitals hereof.

“ Standby Purchaser ” shall have the meaning given to such term in the preamble hereof.

“ Statutory Financial Statements ” shall have the meaning given to such term in Section 3(h) hereof.

“ Stockholder ” shall mean any Person who is a record holder of Common Stock or any Common Stock Equivalent.

“ Subscription Agent ” shall have the meaning given to such term in Section 6(a)(vi) hereof.

“ Subscription Offering ” shall have the meaning given to such term in the recitals hereof.

“ Subscription Price ” shall have the meaning given to such term in the recitals hereof.

“ Subsidiary ” means, with respect to any Person, any corporation, limited liability company, general or limited partnership, limited liability partnership, joint venture, association or other Person that is a business entity, trust or estate of which (a) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof or (b) if a limited liability company, partnership, association or other business entity (other than a corporation), a majority of the partnership or other similar ownership interests thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more Subsidiaries of that Person or a combination thereof and for this purpose, a Person or Persons own a majority ownership interest in such a business entity (other than a corporation) if such Person or Persons shall be allocated a majority

Execution Copy

of such business entity’s gains or losses or shall be or control any managing director or general partner of such business entity (other than a corporation). The term “ Subsidiary ” shall include all Subsidiaries of such Subsidiary.

“ Superior Proposal ” shall mean any bona fide Conversion Financing Proposal that:

(A) the board of directors of the Company determines, pursuant to the standards in 15 Pa Cons. Stat. Ann Sections 1712 and 1715, in good faith and after considering all the relevant terms of such offer or proposal (including but not limited to the legal, financial and regulatory aspects of such proposal, the identity of the Person making such proposal, whether the financing for such proposal is fully committed and reasonably likely to be obtained and the conditions for completion of such proposal), (1) would, if consummated, result in a transaction that is more favorable to the Company than the transactions contemplated hereby (after giving effect to all Proposed Changed Terms) and (2) is reasonably expected to be consummated (if accepted); and

(B) the board of directors or the board of managers (as the case may be) of each of the Attorneys-in-Fact determines, pursuant to the standards in 15 Pa Cons. Stat. Ann Sections 1712 and 1715 or the provisions of the Pennsylvania Uniform Limited Liability Company Act of 2016, (as the case may be), in good faith and after considering all the relevant terms of such offer or proposal (including but not limited to the legal, financial and regulatory aspects of such proposal, the identity of the Person making such proposal, whether the financing for such proposal is fully committed and reasonably likely to be obtained and the conditions for completion of such proposal), (1) would, if consummated, result in a transaction that is more favorable to the Attorneys-in-Fact and the Exchanges than the transactions contemplated hereby (after giving effect to all Proposed Changed Terms) and (2) is reasonably expected to be consummated (if accepted).

“ Superior Proposal Termination End Date ” shall mean [DATE] ² ; provided that, if the foregoing date would be a date that is during a Notice Period with respect to the Company’s intention to terminate this Agreement pursuant to Section 13(a)(v) in order to enter into a definitive agreement with respect to a Superior Proposal, then the Superior Proposal Termination End Date shall be extended such that the date of the Superior Proposal Termination End Date is the last day of the last Notice Period (which, for the avoidance of doubt, could result in the Superior Proposal Termination End Date being extended on multiple occasions in connection with multiple Notice Periods).

“ Supplemental Agreement ” shall mean the Supplemental Agreement, dated on or about the date hereof, entered into by and among Diversus, Inc., a Delaware corporation (“Diversus”), the Exchanges and the Standby Purchaser.

“ Tag‑along Notice ” shall have the meaning given to such term in Section 12(c) hereof.

“ Tag‑along Period ” shall have the meaning given to such term in Section 12(c) hereof.

_________________________

² Insert a date that is 45 days from entry into this Agreement.

Execution Copy

“ Tag‑along Sale ” shall have the meaning given to such term in Section 12(a) hereof.

“ Tag‑along Stockholder ” shall have the meaning given to such term in Section 12(a) hereof.

“ Third Party Purchaser ” shall mean any Person who, immediately prior to the contemplated transaction does not directly or indirectly own or have the right to acquire any outstanding Common Stock.

“ Transfer ” shall mean directly or indirectly, purchase, sell, transfer, assign, lend, convey, gift, mortgage, pledge, encumber, hypothecate or otherwise dispose of, directly or indirectly.

“ Unsubscribed Shares ” shall mean the number of Shares not purchased in connection with the Subscription Offering.

“ Voting Subscriber ” shall, for each of the Exchanges, have the meaning given to such term in the Plan of Conversion for such Exchange.

Section 2. Standby Purchase Commitment .

(a) On the first date after the initial filing of a draft Registration Statement and the execution of the Loan Agreement and the Intercreditor Agreement, the Standby Purchaser shall purchase from the Company the Exchangeable Note with a maximum principal amount of $750,000, and the Company shall issue to the Standby Purchaser, the Exchangeable Note, and the Company shall deliver to the Standby Purchaser the original Exchangeable Note executed by Company. The Standby Purchaser shall pay the purchase price for the Exchangeable Note to the Company by a wire transfer of immediately available funds as and when Advances (as defined in the Exchangeable Note) are requested in accordance with the terms thereof, to an account designated by the Company.

(b) Subject to the terms, conditions and limitations of this Agreement and to the availability of Shares after purchases made in the Subscription Offerings, the Standby Purchaser agrees to purchase from the Company in the Community Offering, at the Subscription Price such number of Shares as shall result in the sale of Shares in the Offering equal to the number of Shares at the Minimum of the Valuation Range, after taking into account the Shares for which subscriptions have been accepted in the Subscription Offering and the Community Offering. In addition, the Standby Purchaser may purchase such additional Shares as shall result in the Standby Investor owning a number of Shares equal to the number of Shares at the Maximum of the Valuation Range minus the Shares for which subscriptions have been accepted in the Subscription Offering and the Community Offering (the number of Shares purchased by the Standby Purchaser are referred to herein as the “ Purchased Shares ”).

(c) Payment of the purchase price for the Purchased Shares shall be made by the Standby Purchaser, on the Closing Date, against delivery of certificates or a book entry statement evidencing the Purchased Shares, in United States dollars by means of a wire transfer of immediately available funds to the escrow account for the Offerings.

Execution Copy

Section 3. Representations and Warranties of the Company and the Exchanges . The Company as to itself and each of the Exchanges, and each of the Exchanges as to themselves, represent and warrant as of the date hereof and as of the Closing Date (except for the representations and warranties that are as of a specific date, which shall be made as of such date) to the Standby Purchaser as follows:

(a) each is (and each of the Mergecos and Positive will be) a business duly organized, validly existing and in good standing under the laws of Pennsylvania and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. Each is (and each of the Mergecos and Positive will be) a business duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. The copies of the Organizational Documents of the Company and the Exchanges that have been provided to the Standby Purchaser are (and the copies of the Organizational Documents of each of the Mergecos and Positive that will be provided to the Standby Purchaser will be) complete and correct and in full force and effect. The Company has no joint venture or similar arrangement, no subsidiaries, no significant assets or liabilities, and it is not engaged in any business. When formed, none of the Mergecos will have any joint venture or similar arrangement, and, until the Closing, none of them will have any subsidiaries, significant assets or liabilities, and will not be engaged in any business.

(b) This Agreement has been duly and validly authorized, executed and delivered by each of the Company and the Exchanges and constitutes a binding obligation of each of the Company and the Exchanges enforceable against each of them in accordance with its terms, subject to (i) the application of bankruptcy, receivership, conservatorship, reorganization, insolvency and similar laws affecting creditors’ rights generally and (ii) equitable principles being applied at the discretion of a court before which any proceeding may be brought (clauses (i) and (ii) collectively, the “ Bankruptcy and Equity Exception ”), and subject to the Conversion Plan Approvals.

(c) The authorized capital of the Company consists of (i) 1,000 shares of Common Stock, none of which shares were issued and outstanding as of the date of this Agreement, and (ii) zero shares of preferred stock, none of which preferred stock has been issued, as of the date hereof. Except for (i) the Rights, (ii) the rights of the Standby Purchaser under this Agreement, and (iii) equity awards to be granted to management upon completion of the Offerings as described in the Registration Statement, there are no options, warrants, subscriptions, calls, rights, convertible securities or other agreements or commitments obligating the Company to issue, transfer, sell, redeem, repurchase or otherwise acquire any shares of its capital stock. As of the date of this Agreement there are no authorized shares of capital stock of the Exchanges. At the Closing Date, all of the authorized capital stock of the Exchanges will be issued to and will be owned by the Company. There are no options, warrants, subscriptions, calls, rights, convertible securities or other agreements or commitments obligating the Exchanges to issue, transfer, sell, redeem, repurchase or otherwise acquire any shares of its capital stock.

(d) At the time the Registration Statement becomes effective, the Registration Statement will comply in all material respects with the requirements of the Securities Act and will not contain an untrue statement of a material fact or omit to state a material fact required

Execution Copy

to be stated therein or necessary to make the statements therein not misleading. The Prospectus, at the time the Registration Statement becomes effective and at the Closing Date, will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided , however , that the representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or the Prospectus made in reliance upon and in conformity with the information furnished to the Company in writing by the Standby Purchaser for use in the Registration Statement or in the Prospectus.

(e) All of the Shares, including the Purchased Shares, will have been duly authorized for issuance prior to the Closing (assuming the Conversion Plan Approval has been obtained), and, when issued and distributed as set forth in the Prospectus, will be validly issued, fully paid and non‑assessable; and none of the Shares will have been issued in violation of the preemptive rights of any security holders of the Company arising as a matter of law or under or pursuant to the Company’s Articles of Incorporation, the Company’s bylaws, or any agreement or instrument to which the Company is a party or by which it is bound.

(f) Neither the execution, delivery or performance of this Agreement or the Plans of Conversion by the Company or the Exchanges, nor the consummation by the Company or the Exchanges of the transactions contemplated hereby or thereby, will: (i) conflict with or result in any breach of any provisions of the Organizational Documents of the Company or the Exchanges; (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation, vesting, payment, exercise, acceleration, suspension or revocation) under, any of the terms, conditions or provisions of any note, bond, mortgage, deed of trust, security interest, indenture, license, contract, agreement, plan or other instrument or obligation to which the Company or the Exchanges is a party or by which it or any of their properties or assets may be bound (collectively, the “ Company Contracts ”); (iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Company, the Exchanges or any of their properties or assets; (iv) result in the creation or imposition of any Lien on any asset of the Company or the Exchanges; or (v) cause the suspension or revocation of any permit, license, governmental authorization, consent or approval necessary for the Company or the Exchanges to conduct its business as currently conducted (collectively, the “ Permits ”), except in the case of clauses (ii), (iii), (iv) and (v) for violations, breaches, defaults, terminations, cancellations, accelerations, creations, impositions, suspensions or revocations which would not individually or in the aggregate have or be reasonably likely to result in a Material Adverse Effect. Except for the Conversion Plan Approval, no vote of any member or holder of any other interest in the Exchanges (equity or otherwise), is required to consummate the transactions contemplated by this Agreement or the Plans of Conversion.

(g) each has delivered to the Standby Purchaser complete and correct copies of the Financial Statements. The Financial Statements have been derived from the accounting books and records of the Exchanges and have been prepared on a basis consistent with GAAP, subject, in the case of interim unaudited Financial Statements, only to normal recurring year‑end adjustments. The Financial Statements present fairly in all material respects the consolidated financial position of the Company and the Exchanges as at the date thereof, and

Execution Copy

the statements of income, cash flow and equity included in the Financial Statements present fairly in all material respects the results of operations, cash flows and consolidated equity of the Company and the Exchanges for the respective periods indicated. The term “ Financial Statements ” means the unaudited quarterly financial statements of the Company and the Exchanges as at and for each quarter of fiscal 2017 and the audited financial statements of the Company and the Exchanges as at and for the year ended December 31, 2017, including in each case a balance sheet and statements of income, cash flow and equity, as previously made available to the Standby Purchaser.

(h) The annual statements of each of the Exchanges for the years ended December 31, 2017, December 31, 2016 and December 31, 2015 and the quarterly statements of the Exchanges for the quarter ended March 31, 2018 as filed with the Department (collectively, together with all exhibits and schedules thereto, the “ Statutory Financial Statements ”) have been prepared in accordance with SAP, and such accounting practices have been applied on a consistent basis throughout the periods involved, except to the extent permitted by the Department and as expressly set forth in the notes, exhibits or schedules thereto, and the Statutory Financial Statements present fairly in all material respects the financial position and the results of operations for the Exchanges as of the dates and for the periods therein in accordance with such accounting practices. The Exchanges and/or the Company have made available to the Standby Purchaser true and complete copies of all examination reports of the Department and any insurance regulatory agencies delivered since June 28, 2014, relating to any of the Exchanges. The Exchanges and/or the Company have delivered to the Standby Purchaser true and complete copies of the Statutory Financial Statements.

(i) As of the date of this Agreement, since [December 31, 2017] , there has been no event or condition that, individually or in the aggregate, has had (or is reasonably likely to result in) a Material Adverse Effect, and the Company and the Exchanges have in all material respects conducted their businesses in the ordinary course consistent with past practice. Except (x) for actions taken in the ordinary course of business (including the settlement of undisputed claims) and (y) for such actions as are necessary for the completion of the Offerings and the transactions contemplated by this Agreement and the Plans of Conversion, since December 31, 2017, the Company has conducted no business other than such actions which are directly related to and which are necessary for the completion of the transactions contemplated herein and in the Plans of Conversion. In particular, except as contemplated or permitted by this Agreement, since December 31, 2017, except for (x) for actions taken in the ordinary course of business (including the settlement of undisputed claims) and (y) for such actions as are necessary for the completion of the Offerings and the transactions contemplated by this Agreement and the Plans of Conversion, there has not occurred any of the following actions or events (each, a “ Material Action ”):

(i) neither the Company nor any of the Exchanges have incurred Indebtedness or contracted for the extension or ability to incur Indebtedness (even if not yet incurred), or incurred any other material Liability;

(ii) neither the Company nor any of the Exchanges have modified or amended any Company Contracts;

Execution Copy

(iii) neither the Company nor any of the Exchanges have adopted a plan of complete or partial liquidation, rehabilitation or entered into any merger agreement;

(iv) neither the Company nor any of the Exchanges have created or acquired any Subsidiaries;

(v) neither the Company nor any of the Exchanges have undertaken or committed to make any capital expenditures;

(vi) neither the Company nor any of the Exchanges have acquired or leased, subleased, licensed or entered into agreements to occupy any Real Property;

(vii) neither the Company nor any of the Exchanges have mortgaged, pledged or otherwise encumbered or subjected to Lien any of its material assets or properties, tangible or intangible, other than Permitted Liens;

(viii) neither the Company nor any of the Exchanges have defaulted under any Indebtedness, or cancelled or compromised any Indebtedness or waived any material rights with respect thereto without receiving a realizable benefit of similar or greater value;

(ix) neither the Company nor any of the Exchanges have paid or prepaid any Liability, or discharged or satisfied any Lien, or settled any Liability, claim, dispute, proceeding, suit or appeal, pending or threatened against it or any of its assets or properties, other than short-term liabilities which have been paid prior to the contractual due date therefor in the ordinary course of business;

(x) neither the Company nor any of the Exchanges have purchased or otherwise acquired any debt or equity securities of any corporation, partnership, joint venture, firm or other entity other than investment securities in the ordinary course of business;

(xi) neither the Company nor any of the Exchanges have has effected any employee profit-sharing, stock option, stock purchase, pension, bonus, incentive, retirement, medical reimbursement, life insurance, deferred compensation, severance or termination agreements;

(xii) neither the Company nor any of the Exchanges have entered into any new line of business, introduced any new products or services or changed in any material respect existing products or services, except as may be required by applicable Law;

(xiii) neither the Company nor any of the Exchanges have abandoned, modified, failed to renew, waived, terminated or let lapse any Permits or have failed to timely file with any Governmental Entity all required annual and quarterly statutory financial statements and other insurance regulatory reports, statements, documents, registrations, filings or submissions; or

Execution Copy

(xiv) neither the Company nor any of the Exchanges have entered into any agreement or commitment, whether in writing or otherwise, to take any action described in this Section.

(j) Except as disclosed on Schedule 3(j) attached hereto and for insurance claims litigation arising in the ordinary course of business for which adequate reserves have been established, there is no suit, action, proceeding or investigation (whether at law or equity, before or by any Government Entity or before any arbitrator) pending or, to the knowledge of the Exchanges or the Company, threatened against or affecting any of them, the outcome of which would individually or in the aggregate have or be reasonably likely to result in a Material Adverse Effect or otherwise prohibit the Company or any of the Exchanges from entering into this Agreement or consummating the transactions contemplated herein and in the Plans of Conversion, nor is there any judgment, decree, injunction, rule or order of any Government Entity or arbitrator outstanding against the Exchanges or the Company that would individually or in the aggregate have or be reasonably likely to result in a Material Adverse Effect.

(k) The aggregate reserves of each of the Exchanges as recorded in the Financial Statements and Statutory Financial Statements have been determined in accordance with generally accepted actuarial principles consistently applied or the requirements of the Commonwealth of Pennsylvania (except as permitted by the Commonwealth of Pennsylvania and as set forth therein). The insurance reserving practices and policies of the Exchanges have not changed, in any material respect, since December 31, 2017, and the results of the application of such practices and policies are reflected in the Financial Statements and Statutory Financial Statements. All reserves of the Exchanges set forth in the Financial Statements and Statutory Financial Statements are fairly stated in accordance with sound actuarial principles and meet the requirements of the insurance laws of the Commonwealth of Pennsylvania, except where the failure to so state such reserves or meet such requirements would not have or be reasonably likely to result in a Material Adverse Effect.

(l) A true and correct copy of each of the Company Contracts which is material to the business and operation of the Exchanges (including, without limitation, each reinsurance contract to which any Exchange is a party) has been made available to the Standby Purchaser. Each of such Company Contracts is in full force and effect and no party thereto is in default of any of its obligations thereunder. No counterparty to any such Company Contract has given any Exchange or the Company notice that it intends to exercise any termination right under such Company Contract.

(m) No Exchange is currently subject to any claims for damages in excess of policy limits which is not covered by the Exchange’s prior or current reinsurance agreements.

Section 4. Representations and Warranties of the Standby Purchaser . The Standby Purchaser represents and warrants as of the date hereof and as of the Closing Date (except for the representations and warranties that are as of a specific date, which shall be made as of such date) to the Company and each of the Exchanges as follows:

Execution Copy

(a) The Standby Purchaser is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is organized and has the requisite organizational power and authority to enter into and perform its obligations under this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by the Standby Purchaser and performance by the Standby Purchaser of the transactions contemplated hereby have been duly authorized by all necessary limited liability company action on the part of the Standby Purchaser, and no further consent or authorization in connection therewith is required by the Standby Purchaser, its board of directors or its members. This Agreement has been duly executed by the Standby Purchaser, and when delivered by the Standby Purchaser in accordance with the terms of this Agreement and thereof, will constitute the legal, valid and binding obligations of the Standby Purchaser, enforceable against it in accordance with its respective terms, subject to the Bankruptcy and Equity Exception.

(b) The Standby Purchaser was contacted by the Company or Griffin with respect to a potential investment in the Shares. The Standby Purchaser understands that the Standby Purchaser is acquiring the Purchased Shares in the ordinary course of its business directly from the Company (and not from Griffin), as principal for its own account, with no present intention of dividing its participation with others or reselling or otherwise distributing the same in violation of the Securities Act or any applicable state securities laws. The Standby Purchaser does not presently have any agreement or understanding, directly or indirectly, with any Person to: (i) distribute any of the Purchased Shares; (ii) hold or to dispose of the Purchased Shares; or (iii) acquire any Shares from any other Person other than from the Company pursuant to this Agreement. Notwithstanding the foregoing, except as otherwise set forth in this Agreement, by making the representations herein, the Standby Purchaser does not agree to hold any of the Purchased Shares for any minimum or other specific term.

(c) The Standby Purchaser is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D. The Standby Purchaser is not a registered broker‑dealer under Section 15 of the Exchange Act, or an unregistered broker‑dealer engaged in the business of being a broker‑dealer. The Standby Purchaser is an experienced institutional investor, is knowledgeable regarding the medical malpractice insurance industry, and has experience in investing in medical malpractice insurance companies and medical malpractice insurance holding companies.

(d) The Standby Purchaser is not purchasing the Purchased Shares as a result of any advertisement, article, notice or other communication regarding the Purchased Shares published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general advertisement. The Standby Purchaser did not learn about the Offerings as a result of the Registration Statement.

(e) The Standby Purchaser understands that the Purchased Shares are being offered and sold to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and regulations.

Execution Copy

Section 5. Deliveries at Closing .

(a) At the Closing, the Company shall deliver to the Standby Purchaser the following:

(i) a certificate or certificates or a book entry statement representing the number of shares of Common Stock issued to the Standby Purchaser pursuant to Section 2 hereof; and

(ii) a certificate of an officer of the Company certifying on its behalf to the effect that the conditions set forth in Sections 8(a) and 8(c) have been satisfied on and as of the Closing Date.

(b) At the Closing, the Standby Purchaser shall deliver to the Company the following:

(i) payment of the Subscription Price of the Shares purchased by the Standby Purchaser, as set forth in Section 2(a) hereof; and

(ii) a certificate of the Standby Purchaser certifying to the effect that the conditions set forth in Sections 8(b) and 8(c) have been satisfied on and as of the Closing Date.

Section 6. Covenants .

(a) The Company as to itself and the Exchanges, and each of the Exchanges as to themselves, as applicable, agree as follows between the date hereof and the Closing Date:

(i) To, within four (4) weeks of the date hereof, file with the Commission the Registration Statement;

(ii) to use reasonable best efforts to cause the Registration Statement and any amendments thereto to become effective as promptly as practical;

(iii) to use reasonable best efforts to effectuate the Offerings;

(iv) as soon as reasonably practical after the Company is advised or obtains knowledge thereof, to advise the Standby Purchaser with a confirmation in writing, of (A) the time when the Registration Statement or any amendment thereto has been filed or declared effective or the Prospectus or any amendment or supplement thereto has been filed, (B) the issuance by the Commission of any stop order, or of the initiation or threatening of any proceeding suspending the effectiveness of the Registration Statement or any amendment thereto or any order preventing or suspending the use of any preliminary prospectus or the Prospectus or any amendment or supplement thereto, (C) the issuance by any state securities commission of any notice of any proceedings for the suspension of the qualification of the Shares for offering or sale in any jurisdiction or of the initiation, or the threatening, of any proceeding for that purpose, (D) the receipt of any comments from the Commission, and (E) any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information. The Company will use its reasonable best efforts to prevent the issuance of any such order or the imposition of any

Execution Copy

such suspension and, if any such order is issued or suspension is imposed, to obtain the withdrawal thereof as promptly as practical;

(v) except for actions taken in connection with the completion of the Offerings and the transactions contemplated by this Agreement and the Plans of Conversion, to operate the business of the Company and the Exchanges in the ordinary course of business consistent with past practice and to not, without the prior written consent of the Standby Purchaser, take any Material Action;

(vi) to notify, or to cause the subscription agent for the Subscription Offering (the “ Subscription Agent ”) to notify, the Standby Purchaser on each Friday during the exercise period of the Rights, or more frequently if reasonably requested by the Standby Purchaser, of the aggregate number of Shares known by the Company or the Subscription Agent to have been subscribed for or ordered in the Subscription Offering as of the close of business on the preceding Business Day or the most recent practical time before such request, as the case may be;

(vii) not to issue any shares of capital stock of the Company, or options, warrants, purchase rights, subscription rights, conversion rights, exchange rights, securities convertible into or exchangeable for capital stock of the Company, or other agreements or rights to purchase or otherwise acquire capital stock of the Company, except shares of Common Stock issuable in the Offerings and equity awards to management as described in the Registration Statement;

(viii) not to authorize any stock split, stock dividend, stock combination or similar transaction affecting the number of issued and outstanding shares of Common Stock or shares of the Company’s preferred stock;

(ix) not to declare or pay any dividends or repurchase any shares of Common Stock or shares of the Company’s preferred stock;

(x) not to incur any Indebtedness other than (A) the Exchangeable Note, (B) any Indebtedness that is assumed as contemplated in Section 8(a)(viii), and (C) trade payables or other similar Indebtedness incurred in the ordinary course of business consistent with past practice, or incurred in connection the completion of the Offerings and the transactions contemplated by this Agreement and the Plans of Conversion;

(xi) to discuss the orders received in the Community Offering (other than, for avoidance of doubt, any orders from the Standby Purchaser and any orders referred to in Section 6(a)(xv) hereof) with the Standby Purchaser and only accept such orders and in such amounts as are agreed to by both the Standby Purchaser, on the one hand, and the Company and the Exchanges, on the other hand; provided, however, that the Company and the Exchanges can accept such number of orders as is necessary (but no more than is necessary) for the Common Stock to qualify for listing on the NASDAQ stock exchange;

(xii) to not, without the prior written consent of the Standby Purchaser exercise the Company’s right to increase or decrease the purchase limitations set forth in the Plans of Conversion pursuant to Section 9(f) thereof;

Execution Copy

(xiii) if sufficient shares are available after accepting orders in the Subscription Offering and orders referred to in Section 6(a)(xv) hereof, to not exercise the Company’s or the Exchange’s right under Section 10(b) of the Plans of Conversion to reject any order for Shares placed by the Standby Purchaser in accordance with the terms of this Agreement;

(xiv) to not enter into any other standby purchase agreement or other agreement pursuant to which a Person is granted rights to take up any of the Shares not subscribed for in the Subscription Offering or Community Offering with any other party;

(xv) to not accept orders to purchase shares in the Community Offering from shareholders of Diversus and officers and directors of the attorneys-in-fact of the Exchanges in an aggregate amount that exceeds 10% of the total number of shares sold in the Offerings;

(xvi) to not file a Registration Statement that has not been approved by the Standby Purchaser or that imposes any additional limitations or restrictions on the transfer of the Purchased Shares;

(xvii) to not enter into any other agreement without the prior written consent of the Standby Purchaser which would imposes any additional limitations or restrictions on the transfer of the Purchased Shares;

(xviii) to use commercially reasonable efforts to enter into the Intercreditor Agreement; and

(xix) to not, prior to the execution of the Loan Agreement and Intercreditor Agreement, without the prior written consent of the Standby Purchaser, make any loan to Diversus.

(b) The Standby Purchaser agrees as follows between the date hereof and the Closing Date:

(i) it shall be a condition precedent to the obligations of the Company to complete the registration or qualification pursuant to Section 6(a) hereof that the Standby Purchaser shall timely furnish to the Company in writing such information regarding itself as shall be reasonably requested by the Company and as shall be required to effect such registration or qualification and shall timely execute such documents in connection with such registration as the Company may reasonably request;

(ii) to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of the Registration Statement and the qualification of the Shares offered for sale in the Offerings under applicable “blue sky” laws;

(iii) to, within four (4) weeks of the date hereof, file a form A in respect of the Standby Purchaser’s acquisition of the Purchased Shares with the Department; and

(iv) to execute and deliver the Loan Agreement and the Intercreditor Agreement.

Execution Copy

(c) Each of the Standby Purchaser and the Company will cooperate with the other and use commercially reasonable efforts to promptly prepare all necessary documentation, to effect all necessary filings and to obtain all necessary permits, consents, waivers, approvals and authorizations of the Commission, the Department and any other third parties or Governmental Entities, necessary or desirable to consummate the purchase of the Shares by the Standby Purchaser contemplated by this Agreement. The Standby Purchaser and the Company will furnish each other and each other’s counsel with all information concerning themselves, their subsidiaries, directors, officers and shareholders and such other matters as may be necessary or advisable in connection with any application, petition or any other statement or application made by or on behalf of the Standby Purchaser or the Company to the Department or any Governmental Entity in connection with the purchase of the Shares by the Standby Purchaser contemplated by this Agreement. The Standby Purchaser shall notify the Company promptly of the receipt of any comments of the Department or any Governmental Entity with respect to such filings. Notwithstanding anything to the contrary contained herein, between the date of this Agreement and the Closing Date, the Standby Purchaser shall not be obligated to take or refrain from taking or to agree to it or its Affiliates taking or refraining from any action or to suffer to exist any condition, limitation, restriction or requirement that, individually or in the aggregate with any other actions, conditions, limitations, restrictions or requirements, would or would reasonably be likely to result in a Burdensome Condition, and the Standby Purchaser shall not be required to seek review by a court, administrative or regulatory authority, agency, commission, board, tribunal or similar adjudicative body of any determination of any insurance regulatory authority, including in their capacity as a rehabilitator, conservator, liquidator or similar capacity. As used herein, “ Burdensome Condition ” means any condition that would: (A) have a material negative effect on the business or the Permits, assets, liabilities, properties, operations, results of operations or condition (financial or otherwise) of the Standby Purchaser, its Affiliates or the Company; (B) impose any material requirement relating to the contribution of capital, keep‑well or capital maintenance arrangements or maintaining risk‑based capital level or any material restrictions on dividends or distributions or the ability of the Company to operate its business, in each case, excluding any changes in applicable Law or the effects of any actions, conditions, limitations, restrictions or requirements that are, as of the date hereof, customary for the applicable Governmental Entity to impose in transactions of the type of transaction contemplated hereby; or (C) impose any requirement to modify this Agreement, the Plans of Conversion or other agreement entered or to be entered into in connection herewith or therewith in any manner that materially changes the rights, liabilities or obligations of the parties hereto or thereto.

(d) After the Closing, if and for so long as the Standby Purchaser beneficially owns more than twenty-five percent (25.0%) of the issued and outstanding shares of the Common Stock, the Company shall (i) provide the Standby Purchaser with reasonable opportunities upon reasonable notice and during regular business hours to discuss with the senior management of the Company at least on a quarterly basis, the business and operations of the Company, with at least one of those meetings each year to be held, if requested by the Standby Purchaser, in‑person at the Company’s offices or such other mutually agreeable location and (ii) provide, or cause Positive, each of the Exchanges and/or any of their respective auditors to provide, to the Standby Purchaser, promptly upon the Standby Purchaser’s request, copies of the work papers and other backup materials used by the Company, Positive, any of the

Execution Copy

Exchanges and/or any of their respective auditors in preparing the annual audits of such entities. The Standby Purchaser hereby acknowledges that it is aware, and it agrees that it will advise its representatives, agents, advisors, Affiliates and Associates who are informed as to the matters which are the subject of this provision (collectively, its “ Representatives ”), that the United States securities laws prohibit any Person who has received material, non‑public information concerning the Company or the matters which are the subject of this provision from purchasing or selling securities of the Company or from communicating such information to any other Person. The Standby Purchaser agrees, and shall instruct its Representatives, to (i) keep such non‑public information provided by the Company strictly confidential, (ii) use the same degree of care to protect such non‑public information as each would use to protect its own non‑public information of a similar nature, but in no event with less than reasonable care, and (iii) not disclose the non‑public information in any manner whatsoever to any Person, except with the specific prior written consent of the Company. As used in this Section 6(d), “non‑public information” shall not include information which (a) is or becomes public knowledge other than as a result of a breach of the obligations of the Standby Purchaser or its Representatives; (b) was known to the Standby Purchaser prior to the date of this Agreement; (c) becomes available without restriction from a third party not known by the Standby Purchaser to be under any confidentiality obligation to the Company with respect thereto; or (d) is developed by the Standby Purchaser or its Representatives without use of the Company’s non‑public information. In the event that the Standby Purchaser or any of its Representatives are requested or required by law, regulation, deposition, interrogatory, request for documents, subpoena, civil investigative demand, administrative regulatory requirement, order, decree or the rules of any applicable stock exchange or similar legal process (collectively, “ Law ”) to disclose any of the foregoing non‑public information, the Standby Purchaser shall (or will direct its Representatives to) provide the Company with prompt prior written notice of such requirement to the extent permissible under applicable Law and reasonably practicable under the circumstances in order to enable the Company to (A) seek, at its own cost, an appropriate protective order or other remedy or (B) waive compliance, in whole or in part, with the terms of this Agreement; and the Standby Purchaser or such Representative shall consult and reasonably cooperate with the Company, at the Company’s expense and upon its written request, with respect to taking steps to resist or narrow the scope of such request or requirement. If, in the absence of a protective order, the Standby Purchaser or such Representative are nonetheless, on the advice of counsel of such Standby Purchaser or such Representative, as applicable, required by applicable Law to disclose the foregoing non‑public information, the Standby Purchaser or such Representative shall (I) furnish only that portion of the foregoing non‑public information that, based upon advice of legal counsel, is legally required, (II) give advance notice to the Company of the information to be disclosed as far in advance as is legally permissible and practical, and (III) exercise commercially reasonable efforts, at the Company’s expense and upon its written request, to obtain reliable assurance that confidential treatment will be accorded such non‑public information. Notwithstanding anything to the contrary herein, without satisfying the other obligations of this paragraph, Standby Purchaser and its Representative may disclose such non‑public information to the extent such disclosure is requested or required in connection with routine audits or examinations by, or blanket document requests from, a Governmental Entity that does not specifically target the other parties, this Agreement or the transactions contemplated hereby.

Execution Copy

(e) The Company shall at all times reserve and hold available sufficient number of shares of Common Stock to satisfy its obligations under this Agreement.

(f) After the Closing, if and for so long as the Standby Purchaser beneficially owns more than fifty percent (50.0%) of the Purchased Shares, the Standby Purchaser shall have the right to nominate and appoint a majority of the members of the Board of the Company and the boards of directors of Positive and each of the Exchanges and the Company shall and shall cause Positive and each of the Exchanges to cause such individuals who are nominated by the Standby Purchaser from time to time to be elected to the Board of the Company and the boards of directors of Positive and each of the Exchanges.

(g) Notwithstanding any other provision of this Agreement, the Standby Purchaser acknowledges and agrees that during the period beginning on the date hereof and continuing until the Superior Proposal Termination End Date, the Company, the Exchanges, and/or Diversus, and their respective Representatives, shall have the right to directly or indirectly: (i) initiate, solicit and encourage, whether publicly or otherwise, Conversion Financing Proposals from any Person, including by way of providing access to non-public information pursuant to (but only pursuant to) one or more customary confidentiality agreements; provided that the Company shall promptly (and in any event within twenty-four (24) hours) provide to the Standby Purchaser any non-public information concerning the Company, the Exchanges, and Diversus, that is provided to any Person given such access and which was not previously provided to the Standby Purchaser; and (ii) enter into and maintain discussions or negotiations with respect to Conversion Financing Proposals with any Person or otherwise cooperate with or assist or participate in, or facilitate any inquiries, proposals, discussions or negotiations or the making of any Conversion Financing Proposal from any third party.

Section 7. Public Statements . Neither the Company nor the Standby Purchaser shall issue any public announcement, statement or other disclosure with respect to this Agreement or the transactions contemplated hereby without the prior consent of the other party hereto, which consent shall not be unreasonably withheld or delayed, except if such public announcement, statement or other disclosure is required by applicable law or applicable stock market rules, in which case the disclosing party shall consult in advance with respect to such disclosure with the other parties to the extent reasonably practicable.

Section 8. Conditions to Closing .

(a) The obligations of the Standby Purchaser to consummate the transactions contemplated hereunder are subject to the fulfillment, prior to or on the Closing Date, of the following conditions:

(i) (1) the representations and warranties of the Company and the Exchanges set forth in Sections 3(a), 3(b), 3(c), 3(e), 3(f)(i) and 3(i) shall be true and correct in all respects as of the date hereof and at and as of the Closing Date as if made on such date; provided that representations and warranties made as of a specified date shall be true and correct as of such date; and (2) the other representations and warranties of the Company and the Exchanges in Section 3 shall be true and correct in all respects as of the date hereof and at and as of the Closing Date as if made on such date, except where the failure to be true and correct (without

Execution Copy

regard to any materiality or Material Adverse Effect qualifications contained therein), would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; provided that representations and warranties made as of a specified date shall be true and correct as of such date;

(ii) the Company and the Exchanges shall have performed in all material respects all of their respective obligations under this Agreement required to be performed on or prior to the Closing Date;

(iii) as of the Closing Date, none of the following events shall have occurred and be continuing: (A) trading in the Common Stock shall have been suspended by the Commission or trading in securities generally on The New York Stock Exchange or The Nasdaq Stock Market shall have been suspended or limited or minimum prices shall have been established on either such exchange, (B) a banking moratorium shall have been declared either by U.S. federal or New York State authorities, or (C) there shall have occurred any material outbreak or material escalation of hostilities, declaration by the United States of a national emergency or war or other calamity or crisis which has a material adverse effect on the U.S. financial markets;

(iv) the gross proceeds from the Offerings, including the purchase of the Purchased Shares by the Standby Purchaser, is equal to at least the Minimum of the Valuation Range;

(v) since the date of this Agreement, a Material Adverse Effect shall not have occurred and no change or other event shall have occurred that would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect;

(vi) Senior Management Shareholders shall have agreed to be bound by tag along rights no less restrictive than those set forth in Section 12 hereof, in each case, pursuant to an agreement in form and substance satisfactory to Standby Purchaser;

(vii) the Exchanges having procured adverse development coverage from a reinsurer acceptable to the Standby Purchaser in the amount of $15,000,000 and at a cost not in excess of $6,000,000, and attaching at current reserve levels; and

(viii) the Standby Purchaser having been granted the right to appoint a member of the board of directors of Diversus;

(b) The obligations of the Company to consummate the transactions contemplated hereunder are subject to the fulfillment, prior to or on the Closing Date, of the following conditions:

(i) The representations and warranties of the Standby Purchaser in Section 4 shall be true and correct in all material respects as of the date hereof and at and as of the Closing Date as if made as of such date (except for representations and warranties made as of a specified date, which shall be true and correct in all material respects as of such specified date);

(ii) the Standby Purchaser shall have performed in all material respects all of its obligations under this Agreement required to be performed on or prior to the Closing Date;

Execution Copy

(iv) the gross proceeds from the Offerings, including the purchase of the Purchased Shares by the Standby Purchaser, is equal to at least the Minimum of the Valuation Range.

(c) The obligations of each of the Company and the Standby Purchaser to consummate the transactions contemplated hereunder in connection with the Offerings are subject to the fulfillment, prior to or on the Closing Date, of the following conditions:

(i) no judgment, injunction, decree or other legal restraint shall be outstanding, nor shall any action, suit, claim, investigation or other legal proceeding be pending that would reasonably be expected to prohibit, or have the effect of rendering unachievable, the consummation of the Offerings or the transactions contemplated by this Agreement;

(ii) the Registration Statement shall have been filed with the Commission and declared effective; no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and any request of the Commission for inclusion of additional information in the Registration Statement or otherwise shall have been complied with;

(iii) at least two‑thirds of the votes cast by the Voting Subscribers of each Exchange voting at the meeting of the Voting Subscribers for such Exchange called for such purpose shall have voted to adopt and approve the Plan of Conversion for such Exchange and the transactions contemplated thereunder;

(iv) all consents and approvals of the Department and any other regulatory body or agency necessary to consummate the transactions contemplated by this Agreement shall have been obtained and all notice and waiting periods required by law to pass after receipt of such approvals or consents shall have passed;

(v) the Superior Proposal Termination End Date shall have occurred;

(vi) the Shares shall have been authorized for listing on the Nasdaq Capital Market;

(vii) the Diversus Management Agreement (including, without limitation, the Service Levels included in Exhibit C thereto), shall have been duly executed and delivered by each of the parties thereto;

Execution Copy

(viii) the Assumption of Debt Agreement shall have been duly executed and delivered by each of the parties thereto;

(ix) the Loan Agreement shall have been duly executed and delivered by each of the parties thereto;

(x) an intercreditor agreement among Diversus’ lenders, the Company and Diversus with respect to the debt retained by Diversus and any advances made by the Company under the Loan Agreement, shall have been duly executed and delivered by each of the parties thereto, on terms and conditions that are reasonably acceptable to Diversus, the Company, and the Standby Purchaser

(xi) the Exchangeable Note shall have been entered into in accordance with Section 2(a); and

(xii) the Option Agreement shall have been duly executed and delivered by each of the parties thereto.

Section 9. Restrictions on Transfer . The Standby Purchaser understands and agrees that the Purchased Shares will bear a legend substantially similar to the legend set forth below in addition to any other legend that may be required by applicable law or by any agreement between the Company and the Standby Purchaser. Upon receipt of certifications from the Standby Purchaser reasonably satisfactory to the Company’s counsel, the Company shall cause the legend to be removed in accordance with, and pursuant to, Rule 144 promulgated under the Securities Act and any other applicable federal and state securities laws.

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR REGISTERED AND/OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND REGISTRATION AND/OR QUALIFICATION UNDER APPLICABLE STATE SECURITIES LAWS, (B) IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND REGISTRATION AND/OR QUALIFICATION UNDER APPLICABLE STATE SECURITIES LAWS PROVIDED THAT AT THE ISSUER’S REQUEST, THE TRANSFEROR THEREOF SHALL HAVE DELIVERED TO THE ISSUER AN OPINION OF COUNSEL (WHICH OPINION SHALL BE IN FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO THE ISSUER) TO THE EFFECT THAT SUCH SECURITIES MAY BE SOLD OR TRANSFERRED PURSUANT TO AN EXEMPTION FROM SUCH REGISTRATION, OR (C) SUCH SECURITIES MAY BE SOLD PURSUANT TO RULE 144 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

Execution Copy

Section 10. Post‑Closing Pre‑Emptive Rights .

(a) Subject to applicable securities laws, other than the Offerings, following the Closing Date, the Standby Purchaser shall have the right to purchase (its “ Gross Up Right ”) its pro rata share of all Equity Securities that the Company or any Subsidiary of the Company may, from time to time, propose to sell and issue after the date of this Agreement, other than the Equity Securities excluded by Sections 11(d) and 11(e) hereof. The Standby Purchaser’s pro rata share is equal to the ratio of (i) the total number of outstanding shares of the Common Stock that the Standby Purchaser is deemed to be a holder of immediately prior to the issuance of such Equity Securities to (ii) the total number of shares of the outstanding Common Stock (including all shares of the Common Stock issued or issuable upon conversion of any securities convertible into the Common Stock or upon the exercise of any outstanding warrants or options) immediately prior to the issuance of the Equity Securities.

(b) If the Company or a Subsidiary of the Company proposes to issue any Equity Securities, the Company shall give the Standby Purchaser written notice of its intention, describing the Equity Securities and the price and the terms and conditions upon which the Company or such Subsidiary proposes to issue the same. The Standby Purchaser shall have twenty (20) days from the receipt of such notice (the “ Offer Period ”) to notify the Company in writing that it intends to exercise its Gross Up Right and as to the amount of Equity Securities the Standby Purchaser intends to purchase, up to the maximum calculated in accordance with Section 10(a) hereof (the “ Designated Securities ”); provided , however , that if providing the Standby Purchaser twenty (20) days’ notice to respond is not practicable, the Company may provide an earlier deadline for the Standby Purchaser to respond to such notice by giving the Standby Purchaser the maximum number of days to respond as is practicable but in any event no fewer than ten (10) days’ notice. Such notice from the Standby Purchaser shall constitute a non‑binding indication of interest of the Standby Purchaser to purchase the amount of Designated Securities specified by the Standby Purchaser (or a proportionately lesser amount if the amount of Equity Securities to be offered if such offering of Equity Securities is subsequently reduced) at the price (or range of prices) and other terms set forth in the Company’s notice to it. The failure to respond during the Offer Period constitutes a waiver of its Gross Up Right in respect of such offering. The Standby Purchaser shall execute a binding agreement to purchase any such Equity Securities within thirty (30) days after expiration of the Offer Period, and any Equity Securities that the Standby Purchaser indicated it would purchase but that are not covered by a binding purchase agreement at such time may be sold to other Persons, unless the failure to execute such an agreement is attributable to actions of the Company or a Subsidiary of the Company, in which case the Company or such Subsidiary shall have the right to sell the Equity Securities to other Persons if the Standby Purchaser shall not have executed such an agreement within the later of (i) five (5) Business Days after the reason for such delay has been resolved or (ii) thirty (30) days after expiration of the Offer Period. Notwithstanding the foregoing, neither the Company nor such Subsidiary shall be required to offer or sell such Equity Securities to the Standby Purchaser if it would cause the Company or such Subsidiary to be in violation of applicable federal securities or insurance regulatory laws by virtue of such offer or sale.

(c) The Company or such Subsidiary shall have 90 days after expiration of the Offer Period to sell any Equity Securities in respect of which the Standby Purchaser’s Gross

Execution Copy

Up Rights were not exercised, at a price and upon general terms and conditions not materially more favorable to the purchasers thereof than specified in the Company’s notice to the Standby Purchaser pursuant to Section 10(b) hereof. If the Company or such Subsidiary has not sold such Equity Securities within such 90‑day period, neither the Company nor such Subsidiary shall thereafter issue or sell any Equity Securities without first offering such Equity Securities to the Standby Purchaser in the manner provided above.

(d) The Gross Up Rights provided by this Section 10 shall not apply to, and shall terminate upon the earlier of (a) the first date upon which the Standby Purchaser no longer beneficially owns shares of the Common Stock representing more than twenty percent (20%) of the issued and outstanding shares of the Common Stock immediately prior to an issuance contemplated under Section 10(a) hereof, or (b) the date of any breach by the Standby Purchaser of any material obligation under this Agreement that remains uncured after thirty (30) days’ notice thereof.

(e) The provisions in this Section 10 shall not apply to any issuance of Equity Securities by the Company (i) to employees, consultants, officers or directors of the Company or any of its subsidiaries for the primary purpose of soliciting or retaining their employment or services or in a transaction or pursuant to management or employee agreements, incentive programs or stock purchase or equity compensation plans approved by the Board (including any such programs or plans in existence on the date hereof), (ii) to a third party as consideration in connection with (but not in connection with raising capital to fund) (A) a strategic business combination or other merger, acquisition or disposition transaction, partnership, joint venture, strategic alliance or investment by the Company or similar non‑capital raising transaction approved by the Board, or (B) an investment by the Company or its subsidiaries approved by the Board in any party which is not prior to such transaction an Affiliate of the Company (whether by merger, consolidation, sale or exchange of stock, sale of assets or securities, or otherwise), (iii) as part of any offering registered under the Securities Act; provided, that the Standby Purchaser shall not be precluded by the Company, its underwriter(s) or its agent(s) in connection with such offering from purchasing in such offering, and the Company shall use commercially reasonable efforts to cause its underwriter(s) or agent(s) engaged in connection with such offering to allocate shares, on the same terms and conditions offered to the public, a sufficient number of Designated Securities, so as to maintain the Standby Purchaser’s pro rata share of all Equity Securities, (iv) upon the exercise, conversion or exchange of options, warrants or similar rights or other convertible securities, (v) the issuance of Equity Securities by a Subsidiary of the Company to the Company or one of its direct or indirect Subsidiaries and (vi) in connection with any stock split, stock dividend paid on a proportionate basis to all holders of the affected class of capital stock or recapitalization approved by the Board.

Section 11. Drag Along Rights .

(a) If a Stockholder who holds no less than 51% of the outstanding Common Stock of the Company (a “ Dragging Stockholder ”), receives a bona fide offer from a non‑affiliated Third Party Purchaser to consummate, in one transaction, or a series of related transactions, a Change of Control (a “ Drag‑along Sale ”), the Dragging Stockholder shall have the right to require that each other Stockholder (each, a “ Drag‑along Stockholder ”) participate in such

Execution Copy

Transfer in the manner set forth in this Section 11, provided , however , that no Drag‑along Stockholder shall be required to participate in the Drag‑along Sale if the consideration for the Drag‑along Sale is other than cash or registered securities listed on an established U.S. securities exchange or traded on the NASDAQ Stock Market. Notwithstanding anything to the contrary in this Agreement, each Drag‑along Stockholder shall vote in favor of the transaction and take all actions to waive any dissenters, appraisal or other similar rights.

(b) The Dragging Stockholder shall exercise its rights pursuant to this Section 11 by delivering a written notice (the “ Drag‑along Notice ”) to the Company and each Drag‑along Stockholder no later than 20 Business Days prior to execution of an agreement to effect a Drag‑along Sale. The Drag‑along Notice shall make reference to the Dragging Stockholder’s rights and obligations hereunder and shall describe in reasonable detail:

(i) the number of shares of Common Stock to be sold by the Dragging Stockholder, if the Drag‑along Sale is structured as a Transfer of Common Stock;

(ii) the identity of the Third Party Purchaser;

(iii) the proposed date, time and location of the closing of the Drag‑along Sale;

(iv) the per share purchase price and the other material terms and conditions of the Transfer, including a description of any non‑cash consideration in sufficient detail to permit the valuation thereof; and

(v) a copy of any form of agreement proposed to be executed in connection therewith.

(c) If the Drag‑along Sale is structured as a Transfer of Common Stock, then, subject to Section 11(d), the Dragging Stockholder and each Drag‑along Stockholder shall Transfer the number of shares equal to the product of (x) the aggregate number of shares of Common Stock the Third Party Purchaser proposes to buy as stated in the Drag‑along Notice and (y) a fraction (A) the numerator of which is equal to the number of shares of Common Stock and Common Stock Equivalents then held by such Dragging Stockholder or Drag‑along Stockholder, as the case may be, and (B) the denominator of which is equal to the number of shares of Common Stock and Common Stock Equivalents then held by all of the Stockholders (including, for the avoidance of doubt, the Dragging Stockholder).

(d) The consideration to be received by a Drag‑along Stockholder shall be the same form and amount of consideration per share of Common Stock to be received by the Dragging Stockholder (or, if the Dragging Stockholder is given an option as to the form and amount of consideration to be received, the same option shall be given) and the terms and conditions of such Transfer shall, except as otherwise provided in the immediately succeeding sentence, be the same as those upon which the Dragging Stockholder Transfers its Common Stock. Each Drag‑along Stockholder shall make or provide the same representations, warranties, covenants, and agreements as the Dragging Stockholder makes or provides in connection with the Drag‑along Sale (except that in the case of representations, warranties,

Execution Copy

covenants, and agreements pertaining specifically to the Dragging Stockholder, the Drag‑along Stockholder

Execution Copy

shall make the comparable representations, warranties, covenants, and agreements pertaining specifically to itself); provided , that all representations, warranties, covenants and indemnities shall be made by the Dragging Stockholder and each Drag‑along Stockholder severally and not jointly and further provided that no Drag‑along Stockholder shall be required to provide any indemnification to the Third Party Purchaser other than in respect of actions taken or defaults caused by such Drag‑along Stockholder.

(e) The fees and expenses of the Dragging Stockholder incurred in connection with a Drag‑along Sale shall be paid by the Dragging Stockholder and each Drag‑along Stockholder on a pro-rata basis based upon the amount of consideration received by such Person in such Drag-along Sale to the extent not paid or reimbursed by the Company or the Third Party Purchaser.

(f) Each Drag‑along Stockholder shall take all actions as may be reasonably necessary to consummate the Drag‑along Sale, including entering into agreements and delivering certificates and instruments, in each case consistent with the agreements being entered into and the certificates being delivered by the Dragging Stockholder.

(g) The Dragging Stockholder shall have 120 days following the date of the Drag‑along Notice in which to consummate the Drag‑along Sale, on the terms set forth in the Drag‑along Notice (which such 120 day period may be extended for a reasonable time not to exceed 180 days to the extent reasonably necessary to obtain any Government Approvals). If at the end of such period, the Dragging Stockholder has not completed the Drag‑along Sale, the Dragging Stockholder may not then effect a transaction subject to this Section 11 without again fully complying with the provisions of this Section 11.

Section 12. Tag Along Rights .

(a) Except for transfers effected on an Exchange, if a Senior Management Shareholder or a Stockholder who holds no less than 51% of the outstanding Common Stock of the Company (the “ Selling Stockholder ”) proposes to Transfer more than 50% of its Common Stock to a Third Party Purchaser (the “ Proposed Transferee ”) and the Selling Stockholder cannot or has not elected to exercise its drag‑along rights set forth in Section 11, each other Stockholder (each, a “ Tag‑along Stockholder ”) shall be permitted to participate in such Transfer (a “ Tag‑along Sale ”) on the terms and conditions set forth in this Section 12.

(b) Prior to the consummation of any such Transfer of Common Stock described in Section 12(a), the Selling Stockholder shall deliver to the Company and each other Stockholder a written notice (a “ Sale Notice ”) of the proposed Tag‑along Sale subject to this Section 12 no later than 10 Business Days prior to the execution of an agreement for a Tag‑along Sale. The Sale Notice shall make reference to the Tag‑along Stockholders’ rights hereunder and shall describe in reasonable detail:

(i) the aggregate number of shares of Common Stock the Proposed Transferee has offered to purchase.

(ii) the identity of the Proposed Transferee;

Execution Copy

(iii) the proposed date, time and location of the closing of the Tag‑along Sale;

(v) a copy of any form of agreement proposed to be executed in connection therewith.

(c) Each Tag‑along Stockholder shall exercise its right to participate in a Transfer of Common Stock by the Selling Stockholder subject to this Section 12 by delivering to the Selling Stockholder a written notice (a “ Tag‑along Notice ”) stating its election to do so and specifying the number of shares of Common Stock to be Transferred by it no later than five Business Days after receipt of the Sale Notice (the “ Tag‑along Period ”). The offer of each Tag‑along Stockholder set forth in a Tag‑along Notice shall be irrevocable, and, to the extent such offer is accepted, such Tag‑along Stockholder shall be bound and obligated to Transfer in the proposed Transfer on the terms and conditions set forth in this Section 12. The Selling Stockholder and each Tag‑along Stockholder shall have the right to Transfer in a Transfer subject to this Section 12 the number of shares of Common Stock equal to the product of (x) the aggregate number of shares of Common Stock the Proposed Transferee proposes to buy as stated in the Sale Notice and (y) a fraction (A) the numerator of which is equal to the number of shares of Common Stock and Common Stock Equivalents then held by the Selling Stockholder or such Tag‑along Stockholder, as the case may be, and (B) the denominator of which is equal to the number of shares of Common Stock and Common Stock Equivalents then held by all of the Stockholders (including, for the avoidance of doubt, the Selling Stockholder).

(d) Each Tag‑along Stockholder who does not deliver a Tag‑along Notice in compliance with Section 12(c) above shall be deemed to have waived all of such Tag‑along Stockholder’s rights to participate in such Transfer, and the Selling Stockholder shall (subject to the rights of any participating Tag‑along Stockholder) thereafter be free to Transfer to the Proposed Transferee its shares of Common Stock at a per share price that is no greater than the per share price set forth in the Sale Notice and on terms and conditions which are not materially more favorable to the Selling Stockholder than those set forth in the Sale Notice without any further obligation to the non‑accepting Tag‑along Stockholders.

(e) Each Tag‑along Stockholder participating in a Transfer pursuant to this Section 12 shall receive the same consideration per share as the Selling Stockholder after deduction of such Tag‑along Stockholder’s proportionate share of the related expenses in accordance with Section 12(g) below.

(f) Each Tag‑along Stockholder shall make or provide the same representations, warranties, covenants, and agreements as the Selling Stockholder makes or provides in connection with the Tag‑along Sale (except that in the case of representations, warranties, covenants, and agreements pertaining specifically to the Selling Stockholder, the Tag‑along Stockholder shall make the comparable representations, warranties, covenants, indemnities and agreements pertaining specifically to itself); provided , that all representations,

Execution Copy

warranties, and covenants shall be made by the Selling Stockholder and each Tag‑along Stockholder severally

Execution Copy

and not jointly and provided further that no Tag‑along Stockholder shall have any indemnification obligation to the Proposed Transferee other than in respect of actions taken or defaults caused by such Tag‑along Stockholder.

(g) The Selling Stockholder and each Tag‑along Stockholder shall be responsible for its own expenses.

(h) Each Tag‑along Stockholder shall take all actions as may be reasonably necessary to consummate the Tag‑along Sale, including entering into agreements and delivering certificates and instruments, in each case consistent with the agreements being entered into and the certificates being delivered by the Selling Stockholder.

(i) The Selling Stockholder shall have 120 Business Days following the expiration of the Tag‑along Period in which to Transfer the shares of Common Stock described in the Sale Notice, on the terms set forth in the Sale Notice (which such 120 Business Day period may be extended for a reasonable time not to exceed 180 Business days to the extent reasonably necessary to obtain any Government Approvals). If at the end of such 120 Business day period, the Selling Stockholder has not completed such Transfer, the Selling Stockholder may not then effect a Transfer of Common Stock subject to this Section 12 without again fully complying with the provisions of this Section 12.

(j) If the Selling Stockholder Transfers to the Proposed Transferee any of its shares of Common Stock in breach of this Section 12, then each Tag‑along Stockholder shall have the right to Transfer to the Selling Stockholder, and the Selling Stockholder undertakes to purchase from each Tag‑along Stockholder, the number of shares of Common Stock that such Tag‑along Stockholder would have had the right to Transfer to the Proposed Transferee pursuant to this Section 12, for a per share amount and form of consideration and upon the terms and conditions on which the Proposed Transferee bought such Common Stock from the Selling Stockholder, and without indemnity being granted by any Tag‑along Stockholder to the Selling Stockholder; provided , that , nothing contained in this Section 12 shall preclude any Stockholder from seeking alternative remedies against such Selling Stockholder as a result of its breach of this Section 12. The Selling Stockholder shall also reimburse each Tag‑along Stockholder for any and all reasonable and documented out‑of‑pocket fees and expenses, including reasonable legal fees and expenses, incurred pursuant to the exercise or the attempted exercise of the Tag‑along Stockholder’s rights.

Section 13. Termination .

(a) This Agreement may be terminated at any time prior to the Closing Date:

(i) by the Company on one hand or the Standby Purchaser on the other hand by written notice to the other party hereto, if there is a material breach of this Agreement by the other party that is not cured within fifteen (15) days after receipt of written notice of such breach by such breaching party;

(ii) if, by action of the Exchanges’ attorney’s-in-fact, the Exchanges shall have decided to abandon the Plans of Conversion;

Execution Copy

(iii) if the Plans of Conversion shall have been proposed for approval and adoption at a meeting of the Voting Subscribers and shall have failed to receive approval at such meeting or any adjournment thereof or if the Department shall have stated in writing that it does not approve or intend to approve the Plans of Conversion;

(iv) the Closing has not occurred by March 31, 2019 (the “ Outside Date ”), provided that the party seeking to terminate this Agreement pursuant to this clause (iv) shall not have failed to perform the covenants, agreements and conditions to be performed by it which has been the primary cause of, or resulted in, the failure of the Closing to occur by the Outside Date, and further provided that if any approvals necessary to proceed with or complete the Conversion or the Offerings have not been received by December 31, 2018, either the Company or the Standby Purchaser may extend the Outside Date for up to six months by giving written notice thereof to the other party, so long as, in the case of an extension sought by the Company, each of the Company and the Exchanges shall have performed the covenants, agreements and conditions to be performed by it;

(v) at any time prior to Superior Proposal Termination End Date, by the Company, if the Company or the Attorneys-in-Fact have determined to accept a Superior Proposal, subject to the terms and conditions of Section 13(c), and provided that substantially concurrently with, and in any event the same day of, such termination, definitive documentation in connection with the Superior Proposal is entered into; or

(vi) By the Standby Purchaser or the Company if any Governmental Entity shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and nonappealable or if the removal or reversal of such order, decree, ruling or other action should constitute a Burdensome Condition.

(b) In the event of termination of this Agreement pursuant to Section 13(a), written notice thereof shall as promptly as practicable be given to the other parties to this Agreement and this Agreement shall terminate and the transactions contemplated hereby shall be abandoned, without further action by any of the parties hereto. Subject to Section 13(c), if this Agreement is terminated pursuant to Section 13(a):

(i) there shall be no liability or obligation on the part of the parties hereto or their respective officers and directors, and all obligations of the parties hereto shall terminate, except for (A) the obligations of the parties pursuant to this Section 13(b), and the provisions of Sections 14 through 20 and Section 22, and (B) any liabilities for any breach by the parties of the terms and conditions of this Agreement prior to such termination; and

(ii) all filings, applications and other submissions made pursuant to the transactions contemplated by this Agreement shall, to the extent practicable, be withdrawn from any Governmental Entity to which made.

(c) Notwithstanding anything to the contrary contained in this Agreement, the Company shall not be entitled to terminate this Agreement pursuant to Section 13(a)(v) , unless

Execution Copy

(x) the Company shall have provided to the Standby Purchaser ten (10) Business Days’ (the “ Notice Period ”) prior written notice (the “ Superior Proposal Notice ”) advising the Standby Purchaser that the Company intends to so terminate this Agreement (and specifying, in reasonable detail, the reasons for such action and the terms and conditions of any such Superior Proposal, including the identity of the Person who has made such Superior Proposal) and providing to the Standby Purchaser a copy of the relevant proposed transaction agreement or the latest draft thereof (including any related financing commitments, fee letters and other transaction documents relating to the Superior Proposal) or, if no such agreement, draft commitments, letters or documents exist, a written summary of the material terms and conditions of such Superior Proposal and (y):

(i) during the Notice Period, if requested by the Standby Purchaser, the Company and the attorneys-in-fact of the Exchanges shall have engaged in good faith negotiations with the Standby Purchaser and with Diversus regarding improvements to the terms of this Agreement or any other agreement or proposal intended to cause such Conversion Financing Proposal to no longer constitute a Superior Proposal; and

(ii) the Company’s board of directors and the respective boards of the attorneys-in-fact shall have considered any improvements proposed in writing by the Standby Purchaser (the “Proposed Changed Terms”) no later than 11:59 p.m., Eastern time, on the last day of the Notice Period and shall all have determined in good faith that the Superior Proposal would continue to constitute a Superior Proposal if such Proposed Changed Terms were to be given effect.

(d) The parties acknowledge and agree that,

(i) if the Standby Purchaser makes Proposed Changed Terms during the Notice Period (or such shorter period as is specified in this Section 13(c) below) that, as reasonably determined in good faith by Company’s board of directors and the respective boards of the attorneys-in-fact, results in the applicable Conversion Financing Proposal no longer being a Superior Proposal, then the Company shall have no right to terminate this Agreement pursuant to Section 13(a)(v) as a result of such Conversion Financing Proposal (on such terms), and

(ii) any (1) revisions to the financial terms or any other material terms of a Superior Proposal or (2) revisions to the financial terms or any other material terms to a Conversion Financing Proposal that the boards pursuant to this Section 13(c) had determined no longer constitutes a Superior Proposal, shall constitute a new Conversion Financing Proposal and shall in each case require the Company to deliver to the Standby Purchaser a new Superior Proposal Notice and comply with this Section 13(c) and a new Notice Period shall commence thereafter.

(e) In the event of the termination of this Agreement pursuant to Section 13(a)(ii), Section 13(a)(v), or the Closing does not occur solely by reason of the failure of any of the Company or Diversus to enter into the Diversus Management Agreement, the Assumption of Debt Agreement (provided that the applicable lender’s consent and agreement is obtained), the Loan Agreement (provided that the Intercreditor Agreement is executed), or the Option Agreement, the Company and the Exchanges (subject to the formal approval of the

Execution Copy

Pennsylvania Department of Insurance), jointly and severally, shall be obligated to pay to the Standby Purchaser a termination fee (the “Termination Fee”) equal to (i) the amount of the Standby Purchaser’s costs incurred conducting diligence on the Company and the Exchanges and in connection with the negotiation of this Agreement and the other documentation entered into in connection herewith, which shall not exceed $500,000 plus (ii) an amount equal to three (3.0%) of the aggregate statutory surplus of the Exchanges; provided that the Exchanges’ liability with respect to any such amounts shall be limited to an amount permitted by the Department if so required by the Department and shall be subject to the formal approval of the Pennsylvania Department of Insurance. For purposes of measuring the amount due in the preceding clause (ii), the statutory surplus of the Exchanges shall be the amount reported on their respective December 31, 2017 audited financial statements. The parties acknowledge and agree that the payment of such fee is in consideration of, among other things, the Standby Purchaser’s efforts with respect to the transactions contemplated hereby and its commitment of resources to pursue this transaction, and to reimburse the Standby Purchaser for all expenses incurred and opportunities foregone as a result of its pursuit of the transaction, the value of which is difficult to ascertain as of the date of this Agreement. The Exchanges further covenant and agree that if the Exchanges proceed with a Superior Proposal or any transaction with respect to the conversion of one or more of the Exchanges to stock form, and if, as the result of such transaction, the Company is not the holding company of the Exchanges or the company which is the issuer of shares in the applicable conversion stock offering, then the documentation for such transaction (whether a plan of conversion or otherwise) shall provide that the holding company of one or more the Exchanges, or the company which is the issuer of shares in the applicable conversion stock offering shall assume the Company’s obligation to pay the termination fee pursuant to this Section 13(e) . Notwithstanding anything to the contrary set forth in this Agreement or in the Supplemental Agreement or in any agreement contemplated hereby or thereby, in the event this Agreement or the Supplemental Agreement is terminated solely due to the failure of Diversus to receive the Shareholder Approval (as defined in the Supplement Agreement), the Company and the Exchanges (subject to the formal approval of the Pennsylvania Department of Insurance), jointly and severally, shall be obligated to pay to the Standby Purchaser a termination fee (the “ No Vote Termination Fee ”) equal to the amount of the Standby Purchaser’s costs incurred conducting diligence on the Company and the Exchanges and in connection with the negotiation of this Agreement and the other documentation entered into in connection herewith, which shall not exceed $500,000; provided that the Company and the Exchanges (subject to the formal approval of the Pennsylvania Department of Insurance), jointly and severally, shall be obligated to pay to the Standby Purchaser the full Termination Fee (less the amount of any No Vote Termination Fee actually paid) in the event that the Company and/or the Exchanges enter in to documentation with respect to a transaction substantially similar to the transactions contemplated hereby within twelve (12) months of the termination hereof (the provisions of the foregoing sentence of this Section 13(e) shall apply to such obligation mutatis mutandis).

Section 14. Survival . The representations and warranties of the Company and the Standby Purchaser contained in this Agreement or in any certificate delivered hereunder shall survive the Closing hereunder.

Section 15. Notices . All notices, communications and deliveries required or permitted by this Agreement shall be made in writing signed by the party making the same, shall specify

Execution Copy

the Section of this Agreement pursuant to which it is given or being made and shall be deemed given or made (i) on the date delivered if delivered by hand, (ii) on the third (3rd) Business Day after it is mailed if mailed by United States registered or certified mail (return receipt requested) (with postage and other fees prepaid), or (iii) on the day after it is delivered, prepaid, to an overnight express delivery service promising next business day delivery that confirms to the sender delivery to the recipient on such day, as follows:



(a) If to the Company or the Exchanges, at:		Positive Physicians Holdings, Inc. 850 Cassatt Road, Suite 220 Berwyn, PA 19312 Attention: Lewis S. Sharps, M.D.
(b) If to the Standby Purchaser, at:		Insurance Capital Group, LLC c/o ICG Management, LLC 767 5 ^th Avenue New York, New York 10153 Attention: Matthew T. Popoli, Craig A. Huff

or to such other representative or at such other address of a party as such party hereto may furnish to the other parties in writing in accordance with this Section 15. If notice is given pursuant to this Section 15 of any assignment to a permitted successor or assign of a party hereto, the notice shall be given as set forth above to such successor or permitted assign of such party.

Section 16. Assignment . This Agreement will be binding upon, and will inure to the benefit of and be enforceable by, the parties hereto and their respective successors and assigns. No party to this Agreement may assign this Agreement or any of its rights or obligations under this Agreement without the prior written consent of the other party hereto; provided that the Standby Purchaser may assign its rights and obligations hereunder to an Affiliate of the Standby Purchaser (excluding Prosperity Life Insurance Group or any subsidiary thereof) if the Standby Purchaser gives written notice of such assignment to the Company within five (5) Business Days thereof and the Standby Purchaser guarantees performance by such Affiliate of the Standby Purchaser’s obligations under this Agreement.

Section 17. Entire Agreement . This Agreement, together with the Supplemental Agreement, embodies the entire agreement and understanding between the parties hereto in respect of the subject matter contained herein. Except as expressly set forth in the Supplemental Agreement, there are no restrictions, promises, warranties, or undertakings, other than those set forth or referred to herein, with respect to the transactions contemplated by this Agreement, andthis Agreement supersedes all prior agreements and understandings between the parties with respect to the subject matter of this Agreement.

Section 18. Governing Law; Venue . This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania (other than its rules of conflict of laws to the extent the application of the laws of another jurisdiction would be

Execution Copy

required thereby). The state courts of the County of Philadelphia, Pennsylvania and the United States District Court for the Eastern District of Pennsylvania shall have the exclusive jurisdiction over any and all claims, lawsuits and litigation relating to or arising out of this Agreement, the subject matter hereof or the transactions contemplated hereby. Each party hereto hereby irrevocably (a) submits to the personal jurisdiction of such courts over such party in connection with any litigation, proceeding or other legal action arising out of or in connection with this Agreement, and (b) waives to the fullest extent permitted by law any objection to the venue of any such litigation, proceeding or action which is brought in any such court.

Section 19. Severability . If any provision of this Agreement or the application thereof to any Person or circumstances is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to Persons or circumstances other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination, the parties shall negotiate in good faith in an effort to agree upon a suitable and equitable substitute provision to effect the original intent of the parties.

Section 20. Extension or Modification of Rights Offering . Without the prior written consent of the Standby Purchaser, the Company may (a) waive irregularities in the manner of exercise of the Rights, and (b) waive conditions relating to the method (but not the timing) of the exercise of the Rights.

Section 21. Most Favored Nation . Except as disclosed or set forth herein, during the period from the date of this Agreement through the Closing Date, neither the Company nor its subsidiaries shall enter into any additional, or modify any existing, agreements with any existing or future investors in the Company or any of its subsidiaries that have the effect of establishing rights, imposing restrictions or otherwise benefiting such investor in a manner more favorable in any material respect to such investor than the rights, restrictions and benefits established with respect to the Standby Purchaser in this Agreement, unless, in any such case, this Agreement has been amended to provide the Standby Purchaser with such additional rights and benefits or reduced restrictions.

Section 22. Miscellaneous .

(a) The obligations of the Company and the Exchanges under this Agreement shall be joint and several.

(b) The Company shall not after the date of this Agreement enter into any agreement with respect to its securities which is inconsistent with or violates the rights granted to the Standby Purchaser in this Agreement.

(c) The headings in this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning of this Agreement.

Execution Copy

(d) This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which, when taken together, shall constitute one and the same instrument. In the event that any signature is delivered by facsimile transmission, or by e‑mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile signature page were an original thereof.

[Remainder of this page intentionally left blank.]

Execution Copy

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written.



POSITIVE PHYSICIANS HOLDINGS, INC.


By:	/s/ Lewis S. Sharps
	Name: Lewis S. Sharps M.D
	Title: President



POSITIVE PHYSICIANS INSURANCE EXCHANGE


By:	/s/ Lewis S. Sharps
	Name: Lewis S. Sharps M.D

	Title: CEO



PHYSICIAN’S INSURANCE PROGRAM EXCHANGE


By:	/s/ Lewis S. Sharps
	Name: Lewis S. Sharps M.D
	Title: CEO



PROFESSIONAL CASUALTY ASSOCIATION


By:	/s/ Lewis S. Sharps
	Name: Lewis S. Sharps M.D
	Title: CEO



INSURANCE CAPITAL GROUP, LLC
By:	ICG Management, LLC, its managing member


By:	/s/ Craig A. Huff
Name: Craig A. Huff
Title: Co-Managing Member

By:	/s/ Matthew T. Popoli
Name: Matthew T. Popoli
Title: Co-Managing Member

Execution Copy

EXHIBIT A

Form of Diversus Management Agreement

[attached]

Execution Copy

EXHIBIT B

Form of Option Agreement

[attached]

Exhibit 10.3

Execution Copy

AMENDMENT TO STANDBY STOCK PURCHASE AGREEMENT

This AMENDMENT TO STANDBY STOCK PURCHASE AGREEMENT (this “ Agreement ”), dated as of September 21, 2018, is entered into by and among Positive Physicians Holdings, Inc. a Pennsylvania corporation (the “ Company ”), Positive Physicians Insurance Exchange, a Pennsylvania domiciled reciprocal inter-insurance exchange (“ PPIX ”), Physician’s Insurance Program Exchange, a Pennsylvania domiciled reciprocal inter-insurance exchange (“ PIPE ”), and Professional Casualty Association, a Pennsylvania domiciled reciprocal inter-insurance exchange (“ PCA ”, and collectively with PPIX and PIPE, or each individually as the context requires, the “ Exchanges ”), and Insurance Capital Group, LLC (the “ Standby Purchaser ”).

W I T N E S S E T H:

WHEREAS, the Company, the Exchanges and the Standby Purchaser entered into a Standby Stock Purchase Agreement dated as of June 8, 2018 (the “Standby Agreement”); and

WHEREAS, the Company, the Exchanges and the Standby Purchaser have agreed to amend certain provisions of the Standby Agreement.

NOW THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and intending to be legally bound, the parties hereto hereby agree as follows:

Section 1. Certain Other Definitions .

(a) Capitalized terms used in this Agreement without definition shall have the meanings ascribed to such terms in the Standby Agreement. The following terms used in the Standby Agreement are hereby amended and restated to read as follows:

“ Senior Management Shareholders ” shall mean Lewis S. Sharps, M.D., Leslie Latta, and Kurt Gingrich.

(b) Section 1 of the Standby Agreement is amended to add the following defined term:

“ Eligible Stockholder of Diversus ” shall mean any current holder of any class or series of common or preferred stock of Diversus, Inc., excluding (i) Enstar and its Affiliates and (ii) any stockholder who was granted all of their shares of common stock for no or nominal consideration.”

Section 2. Standby Purchase Commitment . Section 2(b) of the Standby Agreement is amended to add the following sentence at the end of Section 2(b):

“Shares acquired by the Standby Purchaser upon the conversion of the Exchangeable Note shall count towards the number of Shares that the Standby Purchaser is required or may purchase under this Section 2.”

Execution Copy

Section 3. Covenants .

(a) Section 6(a)(i) of the Standby Agreement is amended and restated to read as follows:

“(i) To use commercially reasonable efforts to file the Registration Statement with the Commission on or before October 1, 2018;”

(b) Section 6(a)(xv) of the Standby Agreement is amended and restated to read as follows:

“(xv) to not accept orders to purchase Shares in the Community Offering from (A) officers and directors of the attorneys-in-fact of the Exchanges who are not Eligible Stockholders of Diversus, (B) Enstar Holdings (US) LLC or any of its Affiliates (collectively, “ Enstar ”); provided that Enstar may subscribe for and purchase 30% of the aggregate number of Shares as the Standby Purchaser informs the Company are to be purchased by the Standby Purchaser and Enstar collectively, such aggregate number not be less than the number of Shares which the Standby Purchaser is committed to purchase hereunder, and (C) stockholders of Diversus who are not Eligible Stockholders of Diversus.”

“(iii) to use commercially reasonable efforts file a Form A in respect of the Standby Purchaser’s acquisition of the Purchased Shares with the Department on or before September 28, 2018;”;

(d) Section 6(g) of the Standby Agreement is deleted.

(e) A new Section 6(h) is added to the Standby Agreement that reads as follows:

“(h) The Company and the Exchanges shall not accept any order or subscription to purchase Shares in the Offerings from Eligible Stockholders of Diversus in excess of the limits set forth in Exhibit A attached hereto.”

Section 4. Conditions to Closing .

(a) Section 8(a)(vii) of the Standby Agreement is amended and restated to read as follows:

“(vii) if requested by the Standby Purchaser, the Exchanges shall have procured adverse development coverage from a reinsurer acceptable to the Standby Purchaser in the amount of $15,000,000 and at a cost not in excess of $6,000,000, and attaching at current reserve levels, or such lesser amount of coverage as requested by the Standby Purchaser; and”

Execution Copy

Section 5. Termination .

(a) Section 13(a)(v) and Section 13(c) are deleted.

(b) Section 13(e) is amended and restated to read as follows:

“(e) In the event of the termination of this Agreement pursuant to Section 13(a)(ii), or the Closing does not occur solely by reason of the failure of any of the Company or Diversus to enter into the Diversus Management Agreement, the Loan Agreement (provided that the Intercreditor Agreement is executed), or the Option Agreement, the Company and the Exchanges (subject to the formal approval of the Department), jointly and severally, shall be obligated to pay to the Standby Purchaser a termination fee (the “ Termination Fee ”) equal to (i) the amount of the Standby Purchaser’s costs incurred conducting diligence on the Company and the Exchanges and in connection with the negotiation of this Agreement and the other documentation entered into in connection herewith, which shall not exceed $500,000, plus (ii) an amount equal to three (3.0%) of the aggregate statutory surplus of the Exchanges; provided that the Exchanges’ liability with respect to any such amounts shall be limited to an amount permitted by the Department if so required by the Department and shall be subject to the formal approval of the Department. For purposes of measuring the amount due in the preceding clause (ii), the statutory surplus of the Exchanges shall be the amount reported on their respective December 31, 2017 audited financial statements. The parties acknowledge and agree that the payment of such fee is in consideration of, among other things, the Standby Purchaser’s efforts with respect to the transactions contemplated hereby and its commitment of resources to pursue this transaction, and to reimburse the Standby Purchaser for all expenses incurred and opportunities foregone as a result of its pursuit of the transaction, the value of which is difficult to ascertain as of the date of this Agreement. Notwithstanding anything to the contrary set forth in this Agreement or in the Supplemental Agreement or in any agreement contemplated hereby or thereby, in the event this Agreement or the Supplemental Agreement is terminated solely due to the failure of Diversus to receive the Shareholder Approval (as defined in the Supplemental Agreement), the Company and the Exchanges (subject to the formal approval of the Department), jointly and severally, shall be obligated to pay to the Standby Purchaser a termination fee (the “ No Vote Termination Fee ”) equal to the amount of the Standby Purchaser’s costs incurred conducting diligence on the Company and the Exchanges and in connection with the negotiation of this Agreement and the other documentation entered into in connection herewith, which shall not exceed $500,000; provided that the Company and the Exchanges (subject to the formal approval of the Department), jointly and severally, shall be obligated to pay to the Standby Purchaser the full Termination Fee (less the amount of any No Vote Termination Fee actually paid) in the event that the Company and/or the Exchanges enter into documentation with respect to a transaction substantially similar to the transactions contemplated hereby within twelve (12) months of the termination hereof (the provisions of the foregoing sentence of this Section 13(e) shall apply to such obligation mutatis mutandis).”

Section 6. Assignment . Section 16 of the Standby Agreement is amended to add the following sentence at the end of such Section 16.

Execution Copy

“Notwithstanding the foregoing, the Standby Purchaser may assign to Enstar Holdings (US) LLC or one of its Affiliates the right to purchase 30% of the aggregate number of Shares as the Standby Purchaser informs the Company are to be purchased by the Standby Purchaser and Enstar collectively, which may include any shares issued upon conversion of the Exchangeable Note.”

Section 7. Assumption of Debt Agreement . The Standby Agreement is amended as follows relating to the Assumption of Debt Agreement:

(a) The defined term “Assumption of Debt Agreement” is deleted from Section 1 of the Standby Agreement.

(b) Section 8(c)(viii) of the Standby Agreement is deleted.

“(v) The Company shall have made a payment of $10,000,000 in immediately available funds to Diversus on the Closing Date in consideration of Diversus agreeing to enter into the Diversus Management Agreement.”

Section 8. Survival of Standby Agreement . Except as amended by this Agreement, the Standby Agreement, together with the Supplemental Agreement, embodies the entire agreement and understanding between the parties hereto in respect of the subject matter contained herein. Except as expressly set forth in the Supplemental Agreement, there are no restrictions, promises, warranties, or undertakings, other than those set forth or referred to herein, with respect to the transactions contemplated by this Agreement, and this Agreement supersedes all prior agreements and understandings between the parties with respect to the subject matter of this Agreement.

Section 9. Governing Law; Venue . This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania (other than its rules of conflict of laws to the extent the application of the laws of another jurisdiction would be required thereby). The state courts of the County of Philadelphia, Pennsylvania and the United States District Court for the Eastern District of Pennsylvania shall have the exclusive jurisdiction over any and all claims, lawsuits and litigation relating to or arising out of this Agreement, the subject matter hereof or the transactions contemplated hereby. Each party hereto hereby irrevocably (a) submits to the personal jurisdiction of such courts over such party in connection with any litigation, proceeding or other legal action arising out of or in connection with this Agreement, and (b) waives to the fullest extent permitted by law any objection to the venue of any such litigation, proceeding or action which is brought in any such court.

Section 10. Miscellaneous .

(a) The headings in this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning of this Agreement.

Execution Copy

(b) This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which, when taken together, shall constitute one and the same instrument. In the event that any signature is delivered by facsimile transmission, or by e‑mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or “.pdf” signature page were an original thereof.

[Remainder of this page intentionally left blank.]

Execution Copy

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written.



POSITIVE PHYSICIANS HOLDINGS, INC.


By:	/s/ Lewis S. Sharps
	Name: Lewis S. Sharps M.D
	Title: CEO



POSITIVE PHYSICIANS INSURANCE EXCHANGE


By:	/s/ Lewis S. Sharps
	Name: Lewis S. Sharps M.D
	Title: CEO



PHYSICIAN’S INSURANCE PROGRAM EXCHANGE


By:	/s/ Lewis S. Sharps
	Name: Lewis S. Sharps M.D
	Title: CEO



PROFESSIONAL CASUALTY ASSOCIATION


By:	/s/ Lewis S. Sharps
	Name: Lewis S. Sharps M.D
	Title: CEO



INSURANCE CAPITAL GROUP, LLC
By:	ICG Management, LLC, its managing member


By:	/s/ Craig A. Huff
Name: Craig A. Huff
Title: Co-Managing Member

By:	/s/ Matthew T. Popoli
Name: Matthew T. Popoli
Title: Co-Managing Member

Execution Copy

EXHIBIT A

Eligible Stockholders of Diversus and their respective Associates will have the ability to purchase in the Community Offering an aggregate of up to five percent (5%) of the total shares purchased in the Offering after considering all purchases in the Subscription Offering.

Each Eligible Stockholder of Diversus, together with its Associates, is limited to a maximum of 25,000 shares of Common Stock.

Each Eligible Stockholder of Diversus holding common stock of Diversus, together with its Associates, may purchase up to an amount of Common Stock equal to thirty-three percent (33%) of the amount of actual consideration that such Person invested in Diversus common stock.

Each Eligible Stockholder of Diversus holding preferred stock of Diversus, and its Associates, may purchase up to an amount of Common Stock equal to ten percent (10%) of the amount of actual consideration that such Person invested in Diversus preferred stock; provided that any such holder of preferred stock of Diversus who voluntarily converts all of such preferred stock into common stock prior to the closing of the Offering shall be subject to the thirty-three percent (33%) limitation applicable to holders of common stock of Diversus.

In the event of an oversubscription among Eligible Stockholders of Diversus, the number of shares issued to any one such Person shall be equal to the product of (i) the number of shares available for issuance to all such Persons, and (ii) a fraction, expressed as a percentage, the numerator of which is the number of shares to which the subscribing Person subscribed and the denominator of which is the total number of shares subscribed by all such Persons; provided, however , that no fractional shares of Common Stock shall be issued.

Exhibit 10.4

Execution Copy

AMENDMENT #2 TO STANDBY STOCK PURCHASE AGREEMENT

This AMENDMENT #2 TO STANDBY STOCK PURCHASE AGREEMENT (this “ Agreement ”), dated as of December 6, 2018, is entered into by and among Positive Physicians Holdings, Inc. a Pennsylvania corporation (the “ Company ”), Positive Physicians Insurance Exchange, a Pennsylvania domiciled reciprocal inter-insurance exchange (“ PPIX ”), Physician’s Insurance Program Exchange, a Pennsylvania domiciled reciprocal inter-insurance exchange (“ PIPE ”), and Professional Casualty Association, a Pennsylvania domiciled reciprocal inter-insurance exchange (“ PCA ”, and collectively with PPIX and PIPE, or each individually as the context requires, the “ Exchanges ”), and Insurance Capital Group, LLC (the “ Standby Purchaser ”).

W I T N E S S E T H:

WHEREAS, the Company, the Exchanges and the Standby Purchaser entered into a Standby Stock Purchase Agreement dated as of June 8, 2018, and an Amendment to Standby Purchase Agreement dated as of September 21, 2018 (together, as amended, the “ Standby Agreement ”); and

WHEREAS, the Company, the Exchanges and the Standby Purchaser have agreed to amend certain provisions of the Standby Agreement.

NOW THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and intending to be legally bound, the parties hereto hereby agree as follows:

Section 1. Background . The Background provisions set forth above (including, but not limited to, the defined terms set forth therein) are hereby incorporated by reference into this Amendment and made a part hereof as if set forth in their entirety in this Section 1. Capitalized terms used in this Amendment which are not otherwise defined herein, but which are defined in the Standby Agreement, shall have the respective meanings given to such terms in the Standby Agreement.

Section 2. Exhibit A . The form of the “Diversus Management Agreement” as defined in Section 1 of the Standby Agreement and set forth at Exhibit A to the Standby Agreement is hereby replaced in its entirety with the form of Management Agreement attached to this Amendment as Exhibit A .

Section 3. Exhibit B . The form of the “Option Agreement” as defined in Section 1 of the Standby Agreement is attached as Exhibit B to the Standby Agreement. The form of the Option Agreement is hereby amended by removing Exhibit A to the Option Agreement (titled “Total Enterprise Value Determination”) and replacing it in its entirety with the restated form of Exhibit A to the Option Agreement attached hereto.

Section 4. Amendment to Section 14. Section 14(a) of the Standby Agreement shall be amended by deleting such paragraph (a) in its entirety and replacing the same with the following:

(a) After the occurrence of a Standstill Termination Event, if a Stockholder who holds no less than 51% of the outstanding Common Stock of the Company (a “Dragging

Execution Copy

Stockholder”), receives a bona fide offer from a non-affiliated Third Party Purchaser to consummate, in one transaction, or a series of related transactions, a Change of Control (a “Drag along Sale”), the Dragging Stockholder shall have the right to require that Enstar Holdings (US), Ltd. and each of the Senior Management Shareholders (each, a “Drag Along Stockholder”) participate in such Transfer in the manner set forth in this Section 14, provided, however, that no Drag along Stockholder shall be required to participate in the Drag along Sale if the consideration for the Drag along Sale is other than cash or registered securities listed on an established U.S. securities exchange or traded on the NASDAQ Stock Market. Notwithstanding anything to the contrary in this Agreement, each Drag along Stockholder shall vote in favor of the transaction and take all actions to waive any dissenters, appraisal or other similar rights.

Section 5. Survival of Standby Agreement . Except as amended by this Agreement, the Standby Agreement, together with the Supplemental Agreement, embodies the entire agreement and understanding between the parties hereto in respect of the subject matter contained herein. Except as expressly set forth in the Supplemental Agreement, there are no restrictions, promises, warranties, or undertakings, other than those set forth or referred to herein, with respect to the transactions contemplated by this Agreement, and this Agreement supersedes all prior agreements and understandings between the parties with respect to the subject matter of this Agreement.

Section 6. Governing Law; Venue . This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania (other than its rules of conflict of laws to the extent the application of the laws of another jurisdiction would be required thereby). The state courts of the County of Philadelphia, Pennsylvania and the United States District Court for the Eastern District of Pennsylvania shall have the exclusive jurisdiction over any and all claims, lawsuits and litigation relating to or arising out of this Agreement, the subject matter hereof or the transactions contemplated hereby. Each party hereto hereby irrevocably (a) submits to the personal jurisdiction of such courts over such party in connection with any litigation, proceeding or other legal action arising out of or in connection with this Agreement, and (b) waives to the fullest extent permitted by law any objection to the venue of any such litigation, proceeding or action which is brought in any such court.

Section 7. Miscellaneous .

(a) The headings in this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning of this Agreement.

[Remainder of this page intentionally left blank.]

Execution Copy

IN WITNESS WHEREOF, the parties have caused this Agreement #2 to be duly executed and delivered as of the date first above written.



POSITIVE PHYSICIANS HOLDINGS, INC.

By:
	Name: Lewis S. Sharps M.D.
	Title: CEO

POSITIVE PHYSICIANS INSURANCE EXCHANGE

By:
	Name: Lewis S. Sharps M.D.
	Title: CEO

PHYSICIAN'S INSURANCE PROGRAM EXCHANGE

By:
	Name: Lewis S. Sharps M.D
	Title: CEO

PROFESSIONAL CASUALTY ASSOCIATION

By:
	Name: Lewis S. Sharps M.D
	Title: CEO

INSURANCE CAPITAL GROUP, LLC
By: ICG Management, LLC, its managing member

By:
	Name: Craig A. Huff
	Title: Co-Managing Member

By:
	Name: Matthew T. Popoli
	Title: Co-Managing Member

Execution Copy

EXHIBIT A TO AMENDMENT #2

Restated Form of Diversus Management Agreement

See attached

Execution Copy

EXHIBIT B TO AMENDMENT #2

Restated Form of the Valuation Principles

(Exhibit A to Option Agreement)

See attached

Exhibit 10.5

Execution Copy

AMENDED AND RESTATED SUPPLEMENTAL AGREEMENT

This AMENDED AND RESTATED SUPPLEMENTAL AGREEMENT (this “ Agreement ”), dated as of September 21, 2018, is entered into by and among Diversus, Inc., a Delaware corporation (“ Diversus ”), Positive Physicians Holdings, Inc. a Pennsylvania corporation (the “ Company ”), Positive Physicians Insurance Exchange, a Pennsylvania domiciled reciprocal inter-insurance exchange (“ PPIX ”), Physician’s Insurance Program Exchange, a Pennsylvania domiciled reciprocal inter-insurance exchange (“ PIPE ”), and Professional Casualty Association, a Pennsylvania domiciled reciprocal inter-insurance exchange (“ PCA ”, and collectively with PPIX and PIPE, or each individually as the context requires, the “ Exchanges ”), and Insurance Capital Group, LLC (the “ Standby Purchaser ”).

W I T N E S S E T H:

WHEREAS, the parties hereto entered into a Supplemental Agreement dated June 8, 2018 (the “ Supplemental Agreement ”); and

WHEREAS, the Supplemental Agreement related to a certain Standby Purchase Agreement dated June 8, 2018 by and among the Exchanges, Diversus and the Standby Purchaser, which is being amended contemporaneously herewith pursuant to an Amendment to Standby Agreement (as amended, the “ Standby Agreement ”); and

WHEREAS, capitalized terms not otherwise defined in this Agreement shall have the meanings given to them in the Standby Agreement; and

WHEREAS, the parties wish to amend and restate the Supplemental Agreement to reflect the matters that are being amended in the Standby Agreement.

NOW THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and intending to be legally bound, the parties hereto hereby agree as follows:

Section 1. Diversus’ Agreements Relating to the Conversion .

(a) Diversus agrees to execute and deliver the Diversus Management Agreement and the Merger Option Agreement at the Closing and to cause Diversus Management, Inc. to execute and deliver the Management Agreement at the Closing.

(b) Diversus agrees to use good faith efforts to negotiate a modification of the terms of the debt of Diversus to its lenders that remains as an obligation of Diversus after giving effect to the repayment by Diversus of $10 million in principal amount of such indebtedness using the proceeds of the payment referenced in Section 8(b)(v) of the Standby Agreement, provided that the terms of such debt are acceptable to Diversus in its reasonable discretion.

(c) Diversus agrees to use good faith efforts to negotiate the terms of the Loan Agreement, provided the terms of the Loan Agreement are acceptable to Diversus in its sole discretion.

Execution Copy

(d) Diversus agrees to use commercially reasonable efforts to negotiate the Intercreditor Agreement and, provided such Intercreditor Agreement is successfully negotiated, to enter into the Intercreditor Agreement at the Closing.

Section 2. Amendments to the Standby Agreement . Without Diversus’ prior written consent and agreement, which such consent or agreement shall not be unreasonably withheld or delayed,

(a) no changes may be made to the form or terms of the Diversus Management Agreement or the Merger Option Agreement; and

(b) no amendments or changes may be made to the Standby Agreement that would (i) alter the terms of the Plans of Conversion, (ii) change the identity of the Standby Purchaser, or (iii) terminate the Standby Agreement other than pursuant to its self-operative terms.

Diversus hereby consents to the Amendment to Standby Stock Purchase Agreement in the form attached hereto as Exhibit A.

Section 3. Termination Rights .

(a) This Agreement will terminate automatically upon the termination of the Standby Agreement pursuant to its terms, subject to Section 2(b)(iii) hereof. In addition, Diversus shall have the right to terminate this Agreement prior to Closing if agreement is not reached on the terms of the amended or restated senior loan documents, the Loan Agreement, or the Intercreditor Agreement so long as Diversus shall have complied with its obligations to negotiate the terms thereof pursuant to Sections 1(b) through 1(d) hereof.

(b) Shareholder Approval. Notwithstanding anything to the contrary herein or in the Standby Agreement or any other agreement contemplated hereby or thereby, the parties hereto acknowledge and agree that the obligation of Diversus hereunder to consummate the transactions contemplated by this Agreement, the Standby Agreement or any other agreement contemplated by this Agreement or the Standby Agreement (such agreements, the “Transaction Agreements” and such transactions, the “Transactions”) shall be conditioned upon the receipt of the Shareholder Approval (as defined below). Diversus covenants to submit the applicable Transaction Agreements and the Transactions to its shareholders within ten (10) days of receipt of a copy of the “Litigation Termination” (defined below). If Diversus does not receive the Shareholder Approval prior to (i) if such matters are submitted to a vote of shareholders at a meeting thereof called for the purpose of seeking a vote on such matters, the final adjournment of such meeting, or (ii) if such matters are submitted to the shareholders for action by written consent in lieu of a meeting, the earlier of (x) the date, if any, on which Diversus receives written instruments dissenting from such matters such that the Shareholder Approval shall be incapable of being obtained or (y) the close of business on the 30th calendar day following the date on which Diversus first mails any consent solicitation statement or other similar document seeking shareholder action by written consent in lieu of a meeting. Notwithstanding anything to the contrary herein or in the Standby Agreement or any other agreement contemplated hereby or thereby, the parties hereto acknowledge and agree that, solely in the case that Shareholder Approval is not obtained for the transactions contemplated herein and in the Standby Agreement

Execution Copy

in accordance with the foregoing, Diversus shall have the right to terminate this Agreement without further liability, obligation, cost or penalty and all of the rights of the parties hereto under this Agreement and the Standby Agreement shall thereupon terminate (other than the right of the Standby Purchaser to receive payment of the No-Vote Termination Fee pursuant to and in accordance with Section 13(e) of the Standby Agreement. For purposes of this Agreement, the term “Shareholder Approval” shall mean, with respect to the approval of the applicable Transaction Agreements and Transactions, the affirmative vote or written consent of the holders of (i) a majority in voting power of the outstanding shares of capital stock of Diversus entitled to vote thereon and (ii) a majority of the outstanding shares of Series A Preferred Stock, par value $0.0001 per share, entitled to vote thereon. For purposes of this Agreement, the term “Litigation Termination” shall mean the voluntary dismissal without prejudice of the litigation styled as Enstar Holdings (US) LLC, a Delaware limited liability company, individually, and derivatively on behalf of Nominal Defendant Diversus, Inc., as Plaintiff, v. Gregory Campbell, Scott Penwell, Lewis Sharps, James Zech, ICG and Professional Casualty Holdings, Inc., as Defendants, and Diversus Inc., as Nominal Defendant, in the Court of Chancery of the State of Delaware, C.A. No. 2018-0211-JRS, which dismissal shall be with prejudice as of the Closing.

Section 4. Miscellaneous . This Agreement supersedes the original Supplemental Agreement. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which, when taken together, shall constitute one and the same instrument. In the event that any signature is delivered by facsimile transmission, or by e‑mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile signature page were an original thereof.

[Remainder of this page intentionally left blank.]

Execution Copy

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written.



DIVERSUS, INC.


By:	/s/ Lewis S. Sharps
	Name: Lewis S. Sharps M.D
	Title: President



POSITIVE PHYSICIANS HOLDINGS, INC.


By:	/s/ Lewis S. Sharps
	Name: Lewis S. Sharps M.D
	Title: CEO



POSITIVE PHYSICIANS INSURANCE EXCHANGE


By:	/s/ Lewis S. Sharps
	Name: Lewis S. Sharps M.D
	Title: CEO



PHYSICIAN’S INSURANCE PROGRAM EXCHANGE


By:	/s/ Lewis S. Sharps
	Name: Lewis S. Sharps M.D
	Title: CEO



PROFESSIONAL CASUALTY ASSOCIATION


By:	/s/ Lewis S. Sharps
	Name: Lewis S. Sharps M.D
	Title:

Execution Copy



INSURANCE CAPITAL GROUP, LLC
By:	ICG Management, LLC, its managing member


By:	/s/ Craig A. Huff
	Name: Craig A. Huff
	Title: Co-Managing Member


By:	/s/ Matthew T. Popoli
	Name: Matthew T. Popoli
	Title: Co-Managing Member

Exhibit 10.6

Form of “Option Agreement”

Exhibit B to Standby Purchase Agreement

OPTION AGREEMENT

This OPTION AGREEMENT (this “ Agreement ”) is entered into as of [●], 201__, among Insurance Capital Group, LLC, a Delaware limited liability company (“ ICG ”), ________________, ¹ a ________________ (“___” and, together with ICG, the “ Positive Shareholders ”), Diversus, Inc., a Delaware corporation (“ Diversus ”), and Positive Physicians Holdings, Inc., a Pennsylvania corporation (“ Positive ”).

WHEREAS, the parties hereto have agreed that, as part of a transaction to convert Positive Physicians Insurance Exchange, a Pennsylvania domiciled reciprocal inter-insurance exchange (“ PPIX ”), Physician’s Insurance Program Exchange, a Pennsylvania domiciled reciprocal inter-insurance exchange (“ PIPE ”), and Professional Casualty Association, a Pennsylvania domiciled reciprocal inter-insurance exchange (“PCA”, and collectively with PPIX and PIPE, or each individually as the context requires, the “ Exchanges ”) from reciprocal to stock form, each of Positive and Diversus shall have the option to cause Positive and Diversus to enter into a merger agreement pursuant to which Diversus will merge with a wholly owned subsidiary of Positive (“ Positive Merger Sub ”), on the terms and subject to the conditions contained herein.

NOW THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and intending to be legally bound, the parties hereto hereby agree as follows:

ARTICLE I - OPTIONS

Section 1.1. Option to Cause Merger . Each of (a) Positive, and (b) Diversus shall have the option, to be exercised in accordance with Section 1.2 , to cause Diversus to merge with Positive Merger Sub (the “ Merger ”), each shareholder of Diversus (a “ Diversus Shareholder ”) receiving either cash or shares of common stock of Positive in exchange for such Diversus Shareholder’s shares of Diversus capital stock. The amount of cash or number of shares of common stock of Positive that each Diversus Shareholder shall receive in the merger for each share of Diversus common stock or Diversus preferred stock shall be determined in accordance with Section 1.5 .

Section 1.2. Exercise Process . The option described in Section 1.1 may be exercised, if at all, at any time after either (a) ___________, 202_ ² until the date that is four (4) years and six (6) months following the date hereof, or (b) if earlier than _____, 202_ ³ , the date on which ICG no longer has the right to appoint a majority of the members of the board of directors of Positive. Such option may be exercised by either Positive or Diversus giving an irrevocable written notice (a “ Merger Notice ”) to the other that the person giving the Merger Notice is exercising its right to cause Positive and Diversus to enter into the Merger by a date to be set forth in such Merger Notice, which date shall not be later than six (6) months following the date of the Merger Notice; provided that the Merger shall have been approved by the Diversus board of directors and approved by the required vote of holders of Diversus capital stock.

Section 1.3. Merger Documents .

(a) Within twenty (20) days following the delivery of a Merger Notice, Positive shall prepare and deliver to Diversus such documentation as shall be reasonably required to accomplish the Merger, including without limitation: (i) the documents necessary to merge Diversus with Positive

________________________

¹ Add any other shareholder of Positive that would need to be party to this agreement - including any Management, Directors, or Diversus Shareholders who participated in the Offering.

² The date that is two years after the date of this agreement, which will be the closing date of the Conversions.

³ The date that is two years after the date of this agreement.

Form of “Option Agreement”

Exhibit B to Standby Purchase Agreement

Merger Sub, including an agreement and plan of merger that provides that in such merger each Diversus Shareholder will receive either cash or the number of shares of Positive common stock as determined in accordance with Section 1.5 , (ii) any filings or requests for consent or approval required by the Pennsylvania Insurance Department or any other federal or state court, administrative agency or commission or other governmental authority or instrumentality (collectively “ Governmental Agencies ”) in order to effect the Merger, (iii) a shareholder agreement of Positive to be entered into by ICG; Diversus management, directors and shareholders who participated in the Offering; and the owners of Diversus common stock or preferred stock who have voted to approve the Merger and receive stock of Positive, and (iv) any board or shareholder resolutions required to approve the Merger, in each case, on terms and conditions consistent with the terms of this Agreement (such documentation, the “ Merger Documents ”). The parties hereto shall negotiate in good faith to agree upon the Merger Documents, which shall contain customary and reasonable terms and conditions, within sixty (60) days following the delivery of a Merger Notice; provided that if the parties cannot agree the form of the Merger Document by such date, then the Merger Notice shall be deemed withdrawn and cancelled.

(b) The Merger Documents shall provide that:

(i) (A) it shall be a condition to the closing of the Merger that provision shall be made for the existing debt of Positive and Diversus and each subsidiary thereof in existence prior to the Merger to remain in place following the Merger without triggering a default or other adverse consequence under the terms of such debt (including, without limitation, the obtaining of consents or waivers from the applicable lenders, as necessary) and neither Positive nor Diversus (nor their respective affiliates or subsidiaries prior to the closing of the Merger) shall be required to guaranty the debt of the other (or its respective affiliates), and (B) if such condition has not been satisfied prior to the deadline for the Merger set forth in the Merger Notice, either Positive or Diversus may terminate the Merger process, in which case the parties shall abandon the Merger, unless Positive and Diversus agree to waive such condition ; provided, however, that no person may terminate the Merger process if the applicable condition has not been satisfied as the result of the action or omission of such person;

(ii) In connection with the Merger, each share of Diversus preferred equity and option exercisable for Diversus common stock shall be converted into the right to receive such amount of cash or such number of shares of Positive common stock as if such share of Diversus preferred stock or option had been converted into or exercised for shares of Diversus common stock immediately prior to the effective date of the Merger, and such amount of cash or number of shares shall be issued to the holders of such preferred shares or options at the closing of the Merger in exchange for the surrender or other cancellation of such preferred shares or options; and [ Note: The Certificate of Incorporation provides that a merger entered into “in a transaction or series of transactions involving a plan of conversion” is a mandatory conversion event from preferred to common. ]

(iii) If shares of Diversus capital stock are exchanged for shares of Positive common stock in connection with the Merger and within five years following the closing of the Merger no (A) public offering by selling shareholders of Positive, (B) acquisition of all of the assets or shares of Positive for cash or marketable securities or (C) the acquisition of all of the shares of Positive held by Diversus Shareholders for cash or marketable securities (a “ Liquidity Event ”) has occurred, the board of Positive will, upon the written request of a majority of the Diversus Shareholders (measured based upon the shares of Positive held by such Diversus Shareholders) take such steps are may be reasonably necessary to cause a Liquidity Event (including, without limitation, the hiring of an investment bank to conduct such a process).

Form of “Option Agreement”

Exhibit B to Standby Purchase Agreement

(c) Diversus agrees to reimburse Positive for fifty percent (50%) of the actual costs incurred by Positive in preparing the Merger Documentation.

Section 1.4. Determination of Diversus Fair Market Value .

(a) Upon receipt of a Merger Notice, Positive and Diversus shall negotiate in good faith to determine the fair market value of the common equity of Diversus (the “ Diversus Equity FMV ”), and if the merger consideration is to be paid in shares of Positive common stock, the fair market value of a share of Positive common stock (the “ Positive Share FMV ”). If Positive and Diversus cannot agree on the Diversus Equity FMV and, if necessary, the Positive Share FMV within thirty (30) days after the delivery of the Merger Notice, then each party shall appoint an appraiser (each, an “ Appointed Appraiser ”). The Appointed Appraisers shall jointly appoint a third appraiser (the “ Neutral Appraiser ” and, collectively with each Appointed Appraiser, the “ Appraisers ”). Each Appraiser shall prepare and deliver to each of Positive and Diversus a preliminary report of the Diversus FMV and, if necessary, the Positive Share FMV, determined in accordance with this Section 1.4 within forty-five (45) days after such Appraiser’s appointment. Within ten (10) days after delivery of such preliminary reports, each of Positive and Diversus shall provide comments on such reports to the applicable Appraiser. The Appraisers shall incorporate any corrections of manifest errors raised by Positive and/or Diversus in such comments and shall incorporate such other comments from Positive and/or Diversus as such Appraisers deem reasonably appropriate. Within fifteen (15) days after the receipt of comments from each of Positive and Diversus, each Appraiser shall deliver its final report of the Diversus Equity FMV and, if necessary, the Positive Share FMV.

(b) The Diversus Equity FMV shall be the arithmetic average of the Diversus Equity FMV as determined by the Neutral Appraiser and the Diversus Equity FMV as determined by the Appointed Appraiser whose value for such company was closest to the Neutral Appraiser’s value ; provided, that if the Diversus Equity FMV as determined by the Neutral Appraiser is within five percent (5%) of the arithmetic mean of the Diversus FMVs as determined by the two Appointed Appraisers, then the Diversus Equity FMV shall be the value as determined by the Neutral Appraiser ; provided further, that if the Diversus Equity FMV as determined by both Appointed Appraisers is the same, then the Diversus Equity FMV shall be the value as determined by each Appointed Appraiser. The Diversus Equity FMV shall be determined by reference to the total enterprise value of Diversus, as the same would be determined by an informed and willing buyer under no compulsion to purchase, and an informed and willing seller under no compulsion to sell, determined in accordance with the attached Exhibit A , less net indebtedness and all other liabilities, (including all other debt-like obligations and liabilities and preferred equity to the extent not converted in the Merger) and adjusted to take into account normalized working capital needs, in each case, of Diversus and its subsidiaries. For the avoidance of doubt, the Appraisers shall include in their consideration of the Diversus Equity FMV any outstanding borrowings and other obligations of Diversus and its subsidiaries. The Diversus Equity FMV as determined pursuant to this Section 1.4(b) shall be included in the board of directors of Diversus’ consideration in determining whether to approve the Merger.

(c) The Positive Share FMV shall be the arithmetic average of the Positive Share FMV as determined by the Neutral Appraiser and the Positive Share FMV as determined by the Appointed Appraiser whose value for such company was closest to the Neutral Appraiser’s value ; provided, that if the Positive Share FMV as determined by the Neutral Appraiser is within five percent (5%) of the arithmetic mean of the Positive Share FMVs as determined by the two Appointed Appraisers, then the Positive Share FMV shall be the value as determined by the Neutral Appraiser ; provided further, that if the Positive Share FMV as determined by both Appointed Appraisers is the same, then the Positive Share FMV shall be the value as determined by each Appointed Appraiser. The Positive Share FMV shall

Form of “Option Agreement”

Exhibit B to Standby Purchase Agreement

be determined by reference to the total enterprise value of Positive, as the same would be determined by an informed and willing buyer under no compulsion to purchase, and an informed and willing seller under no compulsion to sell, determined in accordance with the attached Exhibit A , less net indebtedness and all other liabilities, (including all other debt-like obligations and liabilities) and adjusted to take into account normalized working capital needs, in each case, of Positive and its subsidiaries. For the avoidance of doubt, the Appraisers shall include in their consideration of the Positive Share FMV any outstanding borrowings and other obligations of Positive and its subsidiaries.

(d) The costs of the Appointed Appraiser appointed by the Positive shall be borne by the Positive Shareholders. The costs of the Appointed Appraiser appointed by Diversus shall be borne by the Diversus Shareholders. The costs of the Neutral Appraiser shall be shared equally by the Positive Shareholders, on the one hand, and the Diversus Shareholders, on the other hand.

(e) If Diversus and Positive are unable to agree upon whether shares of Diversus capital stock will be exchange for cash or shares of Positive common stock in connection with the Merger, then Positive shall have the right to choose, in its sole discretion, whether the merger consideration will be paid in cash or shares of Positive common stock, or a combination thereof.

Section 1.5. Merger Consideration to be Received by Diversus Shareholders . Each Diversus Shareholder shall receive, in the event the merger consideration is to be paid in cash, an amount equal to the product of (i) the Diversus Equity FMV, multiplied by, (ii) a quotient, the numerator of which is the number of shares of Diversus common stock held by such Diversus Shareholder and the denominator of which is the total number of Diversus shares of common stock and common stock equivalents outstanding. In the event that the merger consideration is to be paid in shares of Positive common stock, each Diversus Shareholder shall receive that number of shares of Positive common stock as is equal to the cash consideration that would be paid to such Diversus Shareholder pursuant to the immediately preceding sentence divided by the Positive Share FMV.

Section 1.6. Board and Shareholder Approval .

(a) Following delivery of the Merger Documents and receipt of the determination of the Diversus FMV and the Positive Share FMV, the boards of directors of Positive and Diversus shall review and negotiate the Merger Documents in good faith. When each of Diversus and Positive is reasonably satisfied with the form and substance of such Merger Documents, it will call and hold a meeting of its board of directors to consider and vote on approving the Merger Documents and the terms of the Merger. If approved by both the board of directors of Diversus and the board of directors of Positive, the respective boards of directors of Positive and Diversus shall (i) call a special meeting of their respective shareholders to consider and vote on approving the Merger Documents and the transactions contemplated by the Merger Documents, and (ii) recommend to their respective shareholders that such shareholders vote in favor of approval of the transactions contemplated by the Merger Documents. ICG agrees to cause its representatives on the board of directors of Positive to vote to approve the Merger Documents and the transactions contemplated by the Merger Documents and to vote all shares of voting stock of Positive owned by ICG in favor of approving the transactions contemplated by the Merger Documents.

(b) If approved by the respective boards of directors and shareholders of Positive and Diversus, the closing date of the Merger shall be the earlier of (i) a date which is mutually acceptable to Positive and Diversus and (ii) the deadline set forth in the applicable Merger Notice ; provided, however, that such closing shall not occur prior to the date that all consents required from Governmental Agencies have been obtained.

Form of “Option Agreement”

Exhibit B to Standby Purchase Agreement

(c) If the merger consideration paid to each Diversus Shareholder for each share of common stock of Diversus (determined on a fully-diluted basis assuming the conversion of all preferred equity into common stock and the exercise of all options for common stock) in connection with the Merger is at least six dollars ($6.00) per share (as adjusted as necessary to take into account any stock splits, dividends or combinations) and the Diversus directors and/or shareholders fail to approve such Merger, Positive shall have the right to terminate this Agreement on written notice to Diversus, following which notice this Agreement shall terminate and be of no further force or effect; provided, that if, at the time which such Merger is considered by the Diversus directors and/or shareholders, Positive or a subsidiary thereof has executed a term sheet for an acquisition which, if consummated, would have the effect of increasing the Diversus Equity FMV, then Diversus may by notice to Positive and ICG, postpone the Merger for up to nine (9) months, in which event the calculation of the Diversus Equity FMV for such Merger shall be performed as of such later date.

ARTICLE II --ASSIGNMENTS; CHANGE OF OWNERSHIP

Section 2.1. Each of the Positive Shareholders and each of the Diversus Shareholders agrees that such shareholder shall not sell or otherwise assign or transfer any of its shares in Diversus or Positive, as applicable, unless the transferee of such shares agrees in writing to be bound by this Agreement and accepts the assignment of the rights and obligations of such shareholder hereunder.

Section 2.2. No party to this Agreement may assign any of its rights and obligations under this Agreement except in the manner set forth in Section 2.1 , without the prior written consent of Positive and Diversus.

ARTICLE III - MISCELLANEOUS

Section 3.1. Notices . All notices, communications and deliveries required or permitted by this Agreement shall be made in writing signed by the party making the same, shall specify the Section of this Agreement pursuant to which it is given or being made and shall be deemed given or made (i) on the date delivered if delivered by hand, (ii) on the third (3rd) Business Day after it is mailed if mailed by United States registered or certified mail (return receipt requested) (with postage and other fees prepaid), or (iii) on the day after it is delivered, prepaid, to an overnight express delivery service promising next business day delivery that confirms to the sender delivery to the recipient on such day, as follows:



(a) If to [_________], at:	[______________] [Address]
(b) If to ICG, at:	Insurance Capital Group, LLC [address] Attention: Matthew T. Popoli and Craig A. Huff
(c) If to Positive, at:	[______________] [Address]
(d) If to Diversus, at:	[______________] [Address]
[add other parties]

Form of “Option Agreement”

Exhibit B to Standby Purchase Agreement

Section 3.2. Entire Agreement . This Agreement embodies the entire agreement and understanding between the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties, or undertakings other than those set forth or referred to herein, with respect to the transactions contemplated by this Agreement. This Agreement supersedes all prior agreements and understandings between the parties with respect to the subject matter of this Agreement.

Section 3.3. Governing Law; Venue . This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania (other than its rules of conflict of laws to the extent the application of the laws of another jurisdiction would be required thereby). The state courts of the County of Philadelphia, Pennsylvania and the United States District Court for the Eastern District of Pennsylvania shall have the exclusive jurisdiction over any and all claims, lawsuits and litigation relating to or arising out of this Agreement, the subject matter hereof or the transactions contemplated hereby. Each party hereto hereby irrevocably (a) submits to the personal jurisdiction of such courts over such party in connection with any litigation, proceeding or other legal action arising out of or in connection with this Agreement, and (b) waives to the fullest extent permitted by law any objection to the venue of any such litigation, proceeding or action which is brought in any such court.

Section 3.4. Severability . If any provision of this Agreement or the application thereof to any Person or circumstances is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to Persons or circumstances other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination, the parties shall negotiate in good faith in an effort to agree upon a suitable and equitable substitute provision to effect the original intent of the parties.

Section 3.5. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which, when taken together, shall constitute one and the same instrument. In the event that any signature is delivered by facsimile transmission, or by e‑mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile signature page were an original thereof.

[Remainder of this page intentionally left blank.]

Form of “Option Agreement”

Exhibit B to Standby Purchase Agreement

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written.



INSURANCE CAPITAL GROUP, LLC
By: ICG Management, LLC, its managing member

By:
Name: Craig A. Huff
Title: Co-Managing Member


By:
Name: Matthew T. Popoli
Title: Co-Managing Member

DIVERSUS, INC.

By:
	Name:
	Title:

POSITIVE PHYSICIANS HOLDINGS, INC.

By:
	Name:
	Title:

[to add other parties]

[Signature Page to Option Agreement]

Exhibit 10.7

MANAGEMENT SERVICES AGREEMENT

MANAGEMENT SERVICES AGREEMENT (this “ Agreement ”) made as of ___________, 2019 (the “ Effective Date ”), between POSITIVE PHYSICIANS HOLDINGS, INC., a Pennsylvania corporation (“ Holdings ”), and DIVERSUS MANAGEMENT, INC., a Pennsylvania corporation (“ Diversus ”).

W I T N E S S E T H:

WHEREAS, Holdings is the parent company of Positive Physicians Insurance Company, a Pennsylvania stock insurance company (“Positive Insurance”).

WHEREAS, Positive Insurance is the company that resulted from the conversion of Positive Physicians Insurance Exchange, Professional Casualty Association, and Physicians’ Insurance Program Exchange from reciprocal insurance exchanges to stock insurance companies (the “ Conversions ”).

WHEREAS, in connection with the Conversions, Holdings offered its common stock in a public offering (the “ Offering ”), and as a result of the Conversions and the Offering Holdings has become a publicly traded company and the holding company for Positive Insurance.

WHEREAS, as a result of becoming an insurance holding company and a publicly traded company, Holdings will be required to (i) prepare and file various reports with the Pennsylvania Insurance Department (the “ Department ”), (ii) prepare and file annual, quarterly and current reports with the United States Securities and Exchange Commission (the “ SEC ”), and (iii) comply with the listing requirements of the NASDAQ Stock Market.

WHEREAS, Diversus is willing to provide the Services described in this Agreement to Holdings on the terms and conditions described herein.

NOW, THEREFORE, in consideration of the above premises and the mutual covenants herein contained, and intending to be legally bound hereby, Holdings and Diversus agree as follows:

1. Engagement to Provide Services; Acceptance of Engagement . Holdings hereby engages Diversus to provide the Services (as defined in Section 2 ), and Diversus hereby accepts such engagement and agrees to provide the Services to Holdings, in each case on the terms and conditions set forth in this Agreement. Diversus shall obtain and maintain, and shall require all Diversus employees providing such services to obtain and maintain, during the term of this Agreement, all licenses and approvals required to be held by Diversus to perform the Services hereunder and shall make all required filings with the Department and all other governmental authorities having regulatory authority over Diversus in connection with the performance of such Services. Diversus is expressly authorized to engage independent contractors to assist in providing the Services and to work with Holdings’ independent certified public accounting firm and legal counsel in providing the Services.

2. Services. Diversus agrees to provide sufficient personnel, equipment, computer software, and supplies so that Diversus can perform or provide for the performance of the following specified administrative and management services (collectively, the “ Services ”):

(a) The administration and management of the day-to-day business of Holdings including, without limitation (i) maintaining complete and accurate financial accounting records so that Holdings can produce financial statements that are prepared in accordance with generally accepted accounting principles and generally accepted statutory accounting principles, (ii) designing and maintaining disclosure controls and procedures to ensure that material information relating to Holdings, including its consolidated subsidiaries, is made known to management of Holdings on a timely basis, and (iii) designing and maintaining a system of internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(b) The preparation, on timely basis and in accordance with applicable SEC rules and regulations (“ SEC Rules ”), of an annual report on Form 10-K, quarterly reports on Form 10‑Q, and current reports on Form 8-K with respect to Holdings for review by the Audit Committee of the board of directors of Holdings (the “ SEC Reports ”);

(c) The preparation on timely basis of a proxy statement for solicitation of proxies at the annual meeting of shareholders of Holdings in accordance with SEC Rules (the “ Proxy Statement ”) for review by the appropriate committees of the board of directors of Holdings;

(d) The preparation on a timely basis of all annual, quarterly and other reports required to be filed by Holdings with the Department and any other governmental agency or regulatory authority;

(e) The preparation of such financial and other reports as may be requested by the board of directors of Holdings or any committee of such board of directors;

(f) Accounting for all funds received by Holdings and making provision for the timely deposit of all such funds in a bank or banks in the name of Holdings (and in no other account) in accordance with such policies and standards as may be established from time to time by Holdings; the maintenance of all funds of Holdings in accordance with applicable law and the investment of Holdings’ investable assets in accordance with applicable legal requirements and the advice or instructions of any investment advisors retained from time to time by Diversus on behalf Holdings; provided , however , that in all events Diversus will (i) ensure that all funds payable to Holdings that are received by Diversus will be deposited in an account owned by Holdings and not deposited to or held in any account of Diversus, (ii) provide a report to Holdings detailing all transactions, including a monthly report of accounts receivable and accounts payable and all deposits into and all withdrawals from each bank account maintained in the name of Holdings on a monthly basis or as requested by Holdings from time to time, and remit all funds due under this Agreement to Holdings on not less than a monthly basis, and (iii) promptly deposit any such funds are in a bank or banks in the name of Holdings;

(g) The establishment and maintenance for Holdings of all other business records required by applicable laws and regulations and generally accepted insurance and accounting practices and in accordance with such policies and standards as may be established from time to time by Holdings and Diversus; and the preparation for and on behalf of Holdings of all other reports required by governmental and nongovernmental regulatory and supervisory authorities;

(h) The monitoring of the legal affairs of Holdings, including compliance with applicable legal requirements and obtaining and maintaining all licenses and approvals required to be obtained and maintained by Holdings, and the making of all required filings with the Department and all other governmental authorities having jurisdiction over Holdings; and

(i) The taking of all such other actions and things as Diversus shall determine to be necessary, convenient, advisable, or proper in order to administer and manage Holdings’ business or to otherwise discharge properly and in good faith the responsibilities and duties of Diversus under this Agreement.

Notwithstanding any other provision of this Agreement, Holdings shall maintain oversight for functions provided to Holdings by Diversus and Holdings shall monitor the Services regularly for quality assurance.

3. Management Fee . As compensation for the Services to be performed by Diversus on behalf of Holdings as set forth in Section 2 hereof, Holdings agrees to pay to Diversus an annual administrative fee equal to $10,000 plus the cost of any independent contractors used by Diversus to assist in providing the Services.

4. Payment of Expenses of Holdings . Holdings shall be responsible to pay and bear the expenses of third-party service providers that provide services to Holdings and other expenses related to Holdings’ function as a holding company and an SEC registrant, including but not limited to (a) auditors and tax-return preparers, (b) directors’ fees, (c) the cost of directors and officers liability insurance, (d) legal counsel, (e) filing fees for regulatory or securities filings, (f) the costs of subscriptions or services for financial and reporting software, (g) the costs incurred by Holdings in calling and holding meetings of shareholders of Holdings, and (h) the cost of any independent contractors used by Diversus to assist in providing the Services that have been approved in writing by Holdings. If Diversus elects to advance its own funds to pay Holdings’ expenses described in the preceding sentence, Diversus shall properly document the expense and the advance of funds and Holdings shall promptly reimburse Diversus. Holdings shall ensure that all third-party expenses are promptly paid.

5. Records; Right to Audit . Diversus shall keep sufficient records for the express purpose of recording therein the nature and details of the Services, including all financial transactions undertaken for Holdings pursuant to this Agreement. All books and records developed or maintained by Diversus under or related to this Agreement with respect to Holdings (including, without limitation, all books and records that pertain in any way to the Services performed by Diversus pursuant to this Agreement) (collectively, “ Books and Records ”) shall be owned by Holdings and the exclusive property of Holdings, shall be held by Diversus for the

benefit of Holdings, and are subject in all respects to the control of Holdings. Any files maintained in electronic format will be maintained in a form and format that is usable by Holdings. Holdings shall have access and the right to copy all accounts and the Books and Records related to its business in a form usable by Holdings, and the Department shall have access to all Books and Records and bank accounts of Diversus pertaining to Services provided hereunder in a form usable to the Department. All Books and Records shall be retained according to the laws pertaining to the conduct of examinations. All rights to examination and audit of the Books and Records shall survive the termination of this Agreement and shall remain in effect for so long as either Diversus or Holdings has any rights or obligations under this Agreement.

6. Term and Termination. This Agreement shall become effective as of the Effective Date and shall continue in effect for an indefinite term thereafter ; provided, however, that (i) Holdings shall have the right to terminate this Agreement at any time, with or without cause, upon written notice to Diversus, stating when, no earlier than 30 days later, this Agreement shall terminate, and (ii) Diversus shall have the right to terminate this Agreement at any time, with or without cause, upon written notice to Holdings, stating when, no earlier than 30 days later, this Agreement shall terminate. This Agreement may also be terminated at any time by mutual written agreement of Holdings and Diversus.

7. Indemnification .

(a) Holdings shall indemnify, defend and hold harmless Diversus and each shareholder, director, officer, employee and agent thereof (each a “ Diversus Indemnified Person ”), from and against all claims, losses, damages, liabilities and expense (including, without limitation, settlement costs and any reasonable legal fees and expenses or other expenses for investigating and defending any actions or threatened actions) incurred by such Diversus Indemnified Person as a result of any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, relating to or arising out of the Services provided by Diversus hereunder, except to the extent the act or failure to act giving rise to the claim for indemnification is determined by a court to have resulted from the gross negligence, willful misconduct or fraud of Diversus or from a breach of this Agreement by Diversus.

(b) Diversus shall indemnify, defend and hold harmless Holdings and each director, officer, employee and agent thereof (each a “ Holdings Indemnified Person ”), from and against all claims, losses, damages, liabilities and expense (including, without limitation, settlement costs and any reasonable legal fees and expenses or other expenses for investigation and defending any actions or threatened actions) incurred by such Holdings Indemnified Person as a result of any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, relating to or arising out of the Services provided by Diversus hereunder, except to the extent the act or failure to act giving rise to the claim for indemnification is determined by a court to have resulted from the gross negligence, willful misconduct, or fraud on the part of Holdings or a breach of this Agreement by Holdings.

8. Designated Personnel . Initially, Daniel Payne shall be responsible for providing the Services (the “ Designated Diversus Personnel ”). The Designated Diversus Personnel may assign other employees or agents of Diversus acceptable to Holdings with certain tasks and responsibilities in connection with providing the Services.

9. Compliance with Federal and State Securities Laws . Diversus hereby acknowledges that it is aware (and that its employees who are involved in providing any of the Services are aware) of its responsibility under the United States securities laws with respect to purchasing or selling securities of a company about which it (or its employees) have material nonpublic information and agrees that it will neither use, nor permit any of its employees to use, any information in contravention of such securities laws or any rules or regulations promulgated thereunder. Diversus further agrees that it will not disclose any material nonpublic information regarding Holdings to any person, other than Diversus employees who have a need to know such information in order to provide the Services, and will inform its employees of their legal responsibility to not disclose such information.

10. Arbitration. In the event of any dispute or difference of opinion hereafter arising with respect to this Agreement, Diversus and Holdings agree that any dispute or difference of opinion shall be submitted to arbitration before a panel of three arbitrators, each of whom shall be a retired disinterested officer who has experience in preparing annual and quarterly reports of a publicly traded company. One such arbitrator shall be chosen by Diversus, one such arbitrator shall be chosen by Holdings and the third arbitrator shall be chosen by the other two arbitrators. In the event any party hereto refuses or neglects to appoint an arbitrator within 60 days after the other party requests it to do so, or if the two arbitrators selected by Diversus and Holdings fail to agree upon a third arbitrator within 30 days of the appointment of the second arbitrator to be appointed, such arbitrator or arbitrators, as the case may be, shall, upon the application of any party, be appointed by the Philadelphia office of the American Arbitration Association and the arbitrators shall thereupon proceed. The arbitrators shall consider this Agreement as an honorable engagement rather than merely as a legal obligation, and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the majority of the arbitrators shall be final and binding on all parties. Each party shall bear the expense of its own arbitrator and shall bear one-half of the expenses of the third arbitrator and of the arbitration. Any such arbitration shall take place in Philadelphia, Pennsylvania unless otherwise agreed by the parties hereto.

11. Miscellaneous .

(a) Diversus shall be an independent contractor, and its employees shall in no event be considered Holdings’ employees. Except as expressly provided for herein, no agency relationship shall exist between the parties as a result of the execution of this Agreement or performance hereunder unless required by law or regulatory authority.

(b) This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, without regard to its law or principles pertaining to the

conflict of laws. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.

(c) This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. Except as expressly set forth in this Section 11(c) , neither this Agreement, nor any of the respective rights, duties, liabilities or obligations of the parties hereunder, may be transferred, assigned or delegated, in whole or in part, by either party without the prior written consent of the other party ; provided, however, that notwithstanding the foregoing, (i) Holdings shall have the right to assign this Agreement and any of its rights hereunder to any affiliate of, or successor to the business of, Holdings upon prior written notice to, but without the consent of, Diversus and (ii) this Agreement may not be assigned in whole or part by Diversus. Notwithstanding the foregoing, Diversus shall have the right to engage independent contractors to assist in providing the Services.

(d) This Agreement constitutes the entire understanding and agreement between the parties, and supersedes all prior and contemporaneous agreements or understandings, written or oral, of the parties hereto, with respect to its subject matter. This Agreement may be modified, amended, or waived only in writing executed by the parties. This Agreement is separate and distinct from the Management Agreement between Diversus, Inc., Holdings, Diversus, and Positive Insurance and is intended to cover only specified holding company matters set forth herein.

(e) No failure or delay on the part of either party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude or require any other or further exercise thereof or the exercise of any other right, power or privilege. No party shall be deemed, by any act of omission or commission, to have waived any of its rights or remedies hereunder unless such waiver is in writing and signed by such party. A waiver with respect to one event shall not be construed as continuing or as a bar to or a waiver of any right or remedy with respect to a subsequent event. The rights and remedies herein provided to the parties are cumulative and not exclusive of any rights or remedies provided by law.

(f) Notwithstanding anything to the contrary set forth herein, all claims, transactions, and other matters hereunder shall be settled in a timely manner, not less frequently than on a quarterly basis.

(g) If Holdings is placed in receivership or seized by the Insurance Commissioner of Pennsylvania (the “ Commissioner ”) under The Insurance Department Act of 1921, (i) the rights of Holdings under this Agreement extend to the receiver or the Commissioner, and (ii) the Books and Records shall immediately be made available to the receiver or the Commissioner immediately upon the receiver or the Commissioner’s request. Diversus will continue to

maintain systems, programs or other infrastructure notwithstanding a seizure by the Commissioner under The Insurance Department Act of 1921 and shall make them available to the receiver for as long as Diversus continues to receive timely payment for Services rendered.

REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOLLOWS

IN WITNESS WHEREOF, Diversus and Holdings, intending to be legally bound hereby, have duly executed and delivered this Agreement as of the day and year first set forth above.



POSITIVE PHYSICIANS HOLDINGS, INC.

By:
	Name:
	Title:

DIVERSUS MANAGEMENT, INC.

By:
	Name:
	Title:

Exhibit 10.8

MEDICAL PROFESSIONAL LIABILITY EXCESS OF LOSS

REINSURANCE CONTRACT

EFFECTIVE: JANUARY 1, 2018

between

POSITIVE PHYSICIANS INSURANCE EXCHANGE
KING OF PRUSSIA, PENNSYLVANIA
(hereinafter called the “Company”)

and

HANNOVER RUCK SE

AIIN Reference 1340125

(hereinafter called the “Reinsurer”)

Under the terms of this Contract the above Reinsurer agrees to assume severally and not joint with other participants



Excess of Loss	Coverage “A”: Professional Liability 100.00% share
	Coverage “B”: Professional Liability 100.00% share
	Coverage “C”: Professional Liability 100.00% share

of the liability of the layer(s) described in the attached Contract including the same corresponding proportional participation of the Reinsurers’ additionalobligations set forth therein.

Signed in Hannover , on this 2nd day of July , 2018,



HANNOVER RUCK SE

BY	/s/ Thomas Reinecke

PRINT NAME	Thomas Reinecke

TITLE	Chief Underwriter

REF. NO.	9007707, 9007713

and signed in Berwyn , on this 2nd day of July , 2018.



POSITIVE PHYSICIANS INSURANCE EXCHANGE

BY	/s/ Lewis S. Sharps M.D.

TITLE	CEO

POSITIVE PHYSICIANS INSURANCE EXCHANGE

BERWYN, PENNSYLVANIA

MEDICAL MALPRACTICE WORKING EXCESS

REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2018

INDEX



ARTICLE	SUBJECT	PAGE
ARTICLE 1	BUSINESS COVERED	1
ARTICLE 2	COMMENCEMENT & TERM	2
ARTICLE 3	TERRITORIAL SCOPE	2
ARTICLE 4	EXCLUSIONS	3
ARTICLE 5	RETENTION AND LIMIT	4
ARTICLE 6	PREMIUM	5
ARTICLE 7	COMMUTATION	6
ARTICLE 8	ULTIMATE NET LOSS	6
ARTICLE 9	NET RETAINED LINES	7
ARTICLE 10	LOSS IN EXCESS OF POLICY LIMITS AND EXTRA CONTRACTUAL OBLIGATIONS	7
ARTICLE 11	SALVAGE AND SUBROGATION	8
ARTICLE 12	CLAIMS	8
ARTICLE 13	ERRORS AND OMISSIONS	9
ARTICLE 14	CURRENCY (BRMA 12A)	9
ARTICLE 15	TAXES (BRMA 50C)	9
ARTICLE 16	FEDERAL EXCISE TAX	9
ARTICLE 17	ACCESS TO RECORDS	9
ARTICLE 18	RESERVES	10
ARTICLE 19	SERVICE OF SUIT (BRMA 49E)	11
ARTICLE 20	GOVERNING LAW (BRMA 71B)	11
ARTICLE 21	ARBITRATION (BRMA 6J)	11
ARTICLE 22	INSOLVENCY	12
ARTICLE 23	ENTIRE AGREEMENT	13
ARTICLE 24	OFFSET	13
ARTICLE 25	THIRD PARTY RIGHTS (BRMA 52A)	13
ARTICLE 26	MODE OF EXECUTION	13
ARTICLE 27	FOREIGN ACCOUNT TAX COMPLIANCE ACT (“FATCA”)	13
ARTICLE 28	ASSIGNMENT	14
ARTICLE 29	ALTERNATE PAYEE	14
ARTICLE 30	INTERMEDIARY	15

ATTACHMENTS :

NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - USA (BRMA 35A)

POLLUTION EXCLUSION CLAUSE – GENERAL LIABILITY – REINSURANCE

SCHEDULE ONE - NEW JERSEY ILF’s

POSITIVE PHYSICIANS INSURANCE EXCHANGE

BERWYN, PENNSYLVANIA

(hereinafter the “Company”)

MEDICAL MALPRACTICE WORKING EXCESS

REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2018

ARTICLE 1

BUSINESS COVERED

A. This Contract applies to all Policies, except as hereinafter excluded, written and classified by the Company as Professional Liability as respects physicians, surgeons, ancillary health care professionals, and directly affiliated corporations, partnerships and associations that are written on a Claims Made or Occurrence basis, being inforce or becoming effective during the term of this Contract, including renewals (“Business Covered”).

B. Notwithstanding Paragraph A above, reinsurance coverage hereunder as respects Policies written on an Occurrence basis applies to all historical Occurrence Policies that the Company has ever written, regardless of whether the Policies were inforce, or written with a policy period (new or renewal) during the term of this Contract. Although the Company may issue Occurrence form Policies, for the purposes of this Contract, the date of loss for such Occurrence form Policies shall be the date on which the Company is first advised of a claim, incident or suit, whether such advice is verbal or in writing. The claims made date for claims brought under Claims Made Policy forms shall be the date determined in accordance with the original Policy conditions. It is understood and agreed that, for the purposes of determining the Net Subject Earned Premium to be used hereunder for such Occurrence Policies, the Net Subject Earned Premium shall be the earned premium amount, if any, of each Occurrence form Policy that is earned during the term of this Contract.

C. The term “Policies”, whenever used herein, shall mean all binders, policies, contracts, certificates and other written obligations of insurance, whether “Occurrence” form, or “Claims Made” form, or “Claims Made Plus” form that are the Business Covered. The maximum original policy period shall not exceed eighteen months (18) months plus odd time.

D. “Insured” as used herein shall mean each insured who is provided with a separate limit of liability under the Company's Policy(ies).

E. The Company may provide extended reporting coverage in accordance with such provisions of its Policies. Any claims made under an Extended Reporting Period Endorsement shall be deemed to have been made on the day the original Policy expired, was non-renewed or was cancelled. Premiums for any Extended Reporting Period Endorsement shall for the purposes of calculating premium ceded hereunder be considered fully earned on the last day of the Policy period immediately preceding the extended reporting period.

F. “Extended Reporting Period Endorsement” as used herein shall mean those endorsements issued by the Company to become a part of, or replace, Policies otherwise subject to this Contract, that provide for the reporting of claims subsequent to the Policy expiration, non-renewal or cancellation date with respect to incidents occurring prior to the effective date of such endorsements and after the retroactive date stated in the Policy.

G. The Reinsurer’s liability to the Company as regards all reinsurance under this Contract shall follow the terms, conditions and exclusions of the Company’s Policies and the Underwriting Guidelines in effect at the inception of the Contract, subject to all terms, conditions and exclusions of this Contract. The Company shall provide Reinsurers with a copy of the Company’s Underwriting Guidelines in place at the inception of this Contract, and shall not modify such guidelines without Reinsurer’s prior written approval.

ARTICLE 2

COMMENCEMENT & TERM

A. This Contract shall become effective 12:01 a.m., Eastern Standard Time, January 1, 2018, and shall remain in effect until 12:01 a.m., Eastern Standard Time, January 1, 2020 applying to claims made or losses reported during the term of this Contract (“Contract Period”).

B. For the purposes of this Contract, “Eastern Standard Time” shall mean the time as described in the original Policy.

1. The “First Annual Period” as used in this Contract shall be from 12:01 a.m. Eastern Standard Time, January 1, 2018 to 12:01 a.m. Eastern Standard Time, January 1, 2019.

2. The “Second Annual Period” as used in this Contract shall be from 12:01 a.m. Eastern Standard Time, January 1, 2019 to 12:01 a.m. Eastern Standard Time, January 1, 2020.

C. The Reinsurer shall have no liability for Claims Made or losses reported after the termination or expiration date of this Contract and no return premium shall be due the Company. However, in the event no replacement contract is secured after the termination or expiration of this Contract, the Company may elect that this Contract be terminated or expire on a “run-off” basis. In such event, the Reinsurer shall be liable for Claims Made or losses reported during a twenty four (24) month period subsequent to the first anniversary, natural expiration or cancellation of each Policy ceded hereunder, or, if an Occurrence form Policy ceded hereunder has expired, cancelled or is no longer in force, twenty four months (24) after the termination of this Contract for all such Occurrence Policies that are the Business Covered. The Premium payable to the Reinsurer for any such run-off period shall be determined in accordance with Paragraph B of the Article entitled BUSINESS COVERED .

D. The Company may terminate this Contract at December 31, 2018, upon the giving of thirty (30) days written notice to the Reinsurer prior to December 31, 2018.

E. The Reinsurer may renegotiate the Second Annual Period of December 31, 2018, upon the happening of any one of the following circumstances and by the giving of thirty (30) days written notice to the Company prior to December 31, 2018.

1. The Company has entered into a definitive agreement to:

a. become acquired or controlled by any company, corporation or individual(s) not controlling or affiliated with the party’s operations previously; or

b. directly or indirectly assign all or essentially all of its entire liability for Obligations under this Contract to another party, other than with affiliated companies with substantially the same or greater net worth, without the Company’s prior written consent; or

2. There is a severance from active employment (of any kind) of any two (2) or more executives, by whatever title, of the Company during the most recent forty five (45) day period who perform the following functions: chief executive officer, chief underwriting officer, chief actuary, or chief financial officer. This condition does not apply whenever the severance in employment is for the publicly announced purpose of the individual’s assuming within thirty (30) days a known position with another identified firm in the (re)insurance or financial services industry.

ARTICLE 3

TERRITORIAL SCOPE

This Contract shall apply to Policies written by the Company for Insureds with medical practices within the Commonwealth of Pennsylvania and States of New Jersey, Ohio, Maryland and Delaware.

ARTICLE 4

EXCLUSIONS

A. This Contract does not apply to and specifically excludes the following:

1. Policies written on a multi-year basis.

2. Directors’ and Officers’ Policies.

3. Managed Care Errors and Omissions Policies.

4. Reinsurance assumed by the Company except reinsurance of “fronting carriers” where the Policies involved are underwritten, rated and administered by the Company.

5. Nuclear risks as defined in the “Nuclear Incident Exclusion Clause Liability – Reinsurance U.S.A. (BRMA 35A)” attached to and forming part of this Contract.

6. Liability as a member, subscriber or Reinsurer of any pool, syndicate or association.

7. All liability of the Company arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. “Insolvency fund” includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, however denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claims, debt, charge, fee or other obligation in whole or in part.

8. Loss or damage caused by or resulting from war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority, but this exclusion shall not apply to loss or damage covered under a standard Policy with a standard War Exclusion Clause.

9. Pollution Bodily Injury and Property Damage liability as respects the premises and operations coverages excluded under the “General Liability Pollution Exclusion Appendix” attached to and forming part of this Contract. However, this exclusion shall not apply in any jurisdiction where it is illegal to exclude pollution, seepage and/or contamination, where there has been a final court ruling that the Company's pollution, seepage and/or contamination exclusion is not valid or enforceable.

10. Loss from Acts of Terrorism that:

a. involve the use, release or escape of nuclear materials, or directly or indirectly results in nuclear reaction or radiation or radioactive contamination; or

b. is carried out by means of the dispersal or application of pathogenic or poisonous biological reaction or chemical materials; or

c. release of pathogenic or poisonous biological or chemical materials, and it appears that one purpose of the terrorism was to release such materials.

11. “Ex Gratia” loss settlement payments. “Ex Gratia” settlements shall mean those settlements for which there is no possibility of legal obligation on the part of the Company under the terms and conditions of the original Policy, and which are made solely to maintain the good will of the Insured.

B. Business falling within the scope of one or more of the exclusions set forth in Paragraph A., may be submitted to the Reinsurers for Special Acceptance and, if accepted by the Reinsurers, shall be subject to all the terms of this Contract except as modified by the Special Acceptance.

ARTICLE 5

RETENTION AND LIMIT

For each annual period (i.e., the First Annual Period and the Second Annual Period), the Reinsurer shall be liable for one hundred percent (100%) of the excess net loss above an initial Ultimate Net Loss to the Company as follows:

Coverage A:

Seven hundred thousand dollars ($700,000) of Ultimate Net Loss, each claim, each Insured, each Policy excess of three hundred thousand dollars ($300,000) of Ultimate Net Loss each claim, each Insured, each Policy.

For MCARE eligible insureds in Pennsylvania the original policy limits shall be five hundred thousand dollars ($500,000) of Ultimate Net Loss, each claim, each Insured, each Policy and one million five hundred thousand dollars ($1,500,000) in the aggregate except for those Policies deemed by the Company as Registered Certified Nurses, physician assistants, chiropractors, technicians, respiratory therapist or any other specialty not covered under MCARE, and any Physician Corporation which is not entirely owned by health care providers deemed MCARE ineligible, where the original policy limits shall be one million dollars ($1,000,000) of Ultimate Net Loss, each claim, each Insured, each Policy and three million dollars ($3,000,000) in the aggregate.

Coverage B:

A. The Company shall retain and be liable for the first six hundred thousand dollars ($600,000) of Ultimate Net Loss arising out of each Loss Event, whether involving one or several of the Company’s Policies or Insureds. The Reinsurer shall then be liable for the amount by which such Ultimate Net Loss exceeds the Company’s retention, but the liability of the Reinsurer shall not exceed two million two hundred thousand dollars ($2,200,000) excess of six hundred thousand dollars ($600,000) as respects any one Loss Event, nor more than two million two hundred thousand dollars ($2,200,000) during the applicable annual period. Recoveries from Coverages A and C shall inure to the benefit of this Coverage B.

B. “Loss Event” as used herein shall mean each accident, occurrence, medical incident, wrongful act or series of accidents, occurrences, medical incidents or wrongful acts arising out of one event, whether involving one or several of the Company’s Policies or Insureds. All bodily injury or property damage arising out of continuous or repeated exposure to substantially the same general conditions shall be considered as arising out of one event, whether involving one or several of the Company’s Policies or Insureds. The date of loss for any event shall be the date the first claim is reported to the Company (i.e., the earliest report date among the claims involved in the Loss Event). The report date as respects Loss in Excess of Policy Limits liability / Extra Contractual Obligation will be deemed, in all circumstances, to be the date when the underlying claim is first reported to the Company.

Reinsurer’s Maximum As Respects Coverage A and B:

The Reinsurer’s liability for each annual period in respect to Ultimate Net Losses, and if applicable Loss Adjustment Expenses which does not reduce the Company’s limit of liability under the Policy involved, covered under Coverages A and B above shall be limited to an amount in the aggregate as respects all Ultimate Net Loss on Business Covered equal to four hundred percent (400%) of the ceded reinsurance premium under Coverages A and B for the applicable annual period.

Coverage C

One million dollars ($1,000,000) of Ultimate Net Loss, each claim, each Insured, each Policy excess of one million dollars ($1,000,000) of Ultimate Net Loss each claim, each Insured, each Policy. The Reinsurer’s maximum liability to the Company for this section of coverage shall be limited to an amount in the aggregate as respects all Ultimate Net Loss equal to two million dollars ($2,000,000) for the applicable annual period. Recoveries from Coverage A shall inure to the benefit of this Coverage C. Furthermore, the Reinsurer’s maximum liability for each annual period as set forth in the Section of this Article entitled Reinsurer’s Maximum As Respects Coverage A and B shall not apply to this Coverage C.

ARTICLE 6

PREMIUM

Coverage A and Coverage B Only

A. As premium for the reinsurance provided hereunder:

1. For the First Annual Period, the Company shall pay the Reinsurer fourteen point zero percent (14.0%) of its Net Subject Earned Premium for the annual period. The Company shall pay the Reinsurers a deposit premium of two million dollars ($2,000,000) in four (4) equal installments of five hundred thousand dollars ($500,000) on April 1, July 1 October 1, 2018, and January 1, 2019.

2. For the Second Annual Period, the Company shall pay the Reinsurer fourteen point zero percent (14.0%) of its Net Subject Earned Premium for the annual period. The Company shall pay the Reinsurers a deposit premium of two million dollars ($2,000,000) in four (4) equal installments of five hundred thousand dollars ($500,000) on April 1, July 1, October 1, 2019, and January 1, 2020.

B. As promptly as possible after the end of each annual period, the Company shall provide a report to the Reinsurer setting forth the premium due hereunder, computed in accordance with Paragraph A.1. for the First Annual Period and with Paragraph A.2. for the Second Annual Period, and any additional premium due the Reinsurer or return premium due the Company shall be remitted promptly.

C. “Net Subject Earned Premium” as used herein for Coverage A and B shall mean the Company’s net premiums for all classes of business reinsured hereunder, after deduction of return premiums and cancellations.

D. If the Company elects to terminate this Contract at December 31, 2018, the fourteen point zero (14.0%) rate set forth in Paragraph A for the First Annual Period shall increase to fifteen point zero percent (15.0%) for the First Annual Period.

Coverage C

A. A cession rate calculated from the Company’s rates indicated on Schedule One attached to and made part of this Contract shall apply. Within forty five (45) days after the end of each quarter during the Contract Period, the Company shall calculate, report and pay the Reinsurer the reinsurance premium for the Policies covered for this Coverage C. Coverage C shall be disregarded when calculating premium for Coverages A and B.

B. “Losses Incurred” as used herein shall mean losses and loss adjustment expense paid by the Reinsurers as of the effective date of calculation, plus the ceded reserves for losses and loss adjustment expense outstanding as of the same date, it being understood and agreed that all losses under Policies which are in force during an applicable annual period shall be charged to that annual period.

C. “Net Subject Earned Premium” as used herein for this Coverage C shall mean the gross earned premium of the Company for the Business Covered hereunder, less premium for reinsurance that inures to the benefit of this Contract.

ARTICLE 7

COMMUTATION

A. Within sixty (60) days following twenty four (24) months after the close of any one annual period of this Contract, the Company may commute all liability for said annual period hereunder.

B. The Company shall report to the Reinsurer the commuted value of such claims for the applicable annual period, which shall be deemed to be the positive balance of:

1. Reinsurance premiums paid or payable hereunder for the applicable annual period; less

2. Expenses incurred by the Reinsurer at a rate of twenty seven point zero percent (27.0%) of the Net Earned Premium for the applicable annual period hereof: less

3. Reinsurance recoveries previously made hereunder for Policies allocated to this Contract for the applicable annual period.

C. The Reinsurer shall remit payment to the Company of the commuted value (as determined above) within thirty (30) days following receipt of the Company's report. Such payment shall constitute a full and final release of all liability (known or unknown) under this Contract for the applicable annual period.

ARTICLE 8

ULTIMATE NET LOSS

A. “Ultimate Net Loss” as used herein is defined as the sum or sums (including ninety point zero percent (90.0%) of Loss in Excess of Policy Limits (XPL), ninety point zero percent (90.0%) of Extra Contractual Obligations (ECO) and any Loss Adjustment Expense, as hereinafter defined, which reduces the limit of liability under the Policy involved) paid or payable by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, all recoveries and all claims on inuring insurance or reinsurance, whether collectible or not. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company's Ultimate Net Loss has been ascertained.

B. “Loss Adjustment Expense” as used herein shall mean expenses assignable to the investigation, defense and/or settlement of specific claims, regardless of how such expenses are classified for statutory reporting purposes, including litigation expenses, interest on judgments and legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto and including Declaratory Judgment Expense, as outlined below, but shall not include office or normal overhead expenses or salaries of the Company's regular employees, expenses of the Attorney In Fact, and the expenses relating to third party claim administration.

C. In the event of loss hereunder, Loss Adjustment Expense incurred by the Company in connection therewith which does not reduce the Company’s limit of liability under the Policy involved shall be shared on a pro rata basis with the Reinsurers. The Reinsurer’s liability for such Loss Adjustment Expense shall be in addition to its liability for Ultimate Net Loss.

D. “Declaratory Judgment Expense” as used herein shall mean all court costs, attorney's fees and expense incurred by the Company in contesting insurance coverage on Policies reinsured hereunder.

E. “Declaratory Judgment Expenses” shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the Policy.

F. It is understood and agreed that the maximum reinsurance recovery, as respects all Declaratory Judgment Expense arising out of all Business Covered hereunder shall be limited to one million dollars ($1,000,000).

ARTICLE 9

NET RETAINED LINES

A. This Contract applies only to that portion of any Policy which the Company retains net for its own account, and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any Policy which the Company retains net for its own account shall be included.

B. The amount of the Reinsurers’ liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other Reinsurers, whether specific or general, any amounts which may have become due from such Reinsurers, whether such inability arises from the insolvency of such other Reinsurers or otherwise.

C. This Contract applies after application of any specific facultative reinsurance placed to provide reinsurance protection below the limit of Coverage A as set forth in Paragraph A., of the Article entitled RETENTION AND LIMIT .

ARTICLE 10

LOSS IN EXCESS OF POLICY LIMITS AND EXTRA CONTRACTUAL OBLIGATIONS

A. “Loss in Excess of Policy Limits” shall mean any amount paid or payable by the Company in excess of its Policy limits, but otherwise within the terms of its Policy, as a result of an action against it by its insured or its insured's assignee to recover damages the insured is legally obligated to pay to a third party claimant because of the Company’s alleged or actual negligence or bad faith in rejecting a settlement within Policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action.

B. “Extra Contractual Obligations” shall mean any damages including, but not limited to, exemplary, compensatory or consequential damages, other than Loss in Excess of Policy Limits paid or payable by the Company as a result of an action against it by its insured, its insured's assignee or a third party claimant, which action alleges negligence or bad faith on the part of the Company in handling a claim under a Policy subject to this Contract. An Extra Contractual Obligation shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the Policy.

C. Recoveries from any form of insurance or reinsurance which protect the Company against claims the subject matter of this Article will inure to the benefit of the Reinsurers and shall be deducted to arrive at the amount of the Company's loss payable hereunder.

D. Notwithstanding anything stated herein, this Contract shall not apply to any Loss in Excess of Policy Limits or any Extra Contractual Obligation incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder.

E. If any provision of this Article shall be rendered illegal or unenforceable by the laws, regulations or public policy of any state, such provision shall be considered void in such state, but this shall not affect the validity or enforceability of any other provision of this Article or the enforceability of such provision in any other jurisdiction.

ARTICLE 11

SALVAGE AND SUBROGATION

A. All salvages, recoveries, payments and reversals or reductions of verdicts or judgments (net of the cost of obtaining such salvage, recovery, payment or reversal or reduction of a verdict or judgment) whether recovered, received or obtained prior or subsequent to a loss settlement under this Contract, including amounts recoverable under other reinsurance whether collected or not, shall be applied as if recovered, received or obtained prior to the aforesaid settlement and shall be deducted from the actual losses sustained to arrive at the amount of the Net Loss. Nothing in this Article shall be construed to mean losses are not recoverable until the Net Loss to the Company finally has been ascertained.

B. The Reinsurer shall be subrogated, as respects any loss for which the Reinsurer shall actually pay or become liable, but only to the extent of the amount of payment by or the amount of liability to the Reinsurer, to all the rights of the Company against any person or other entity who may be legally responsible for damages as a result of said loss. Should the Company elect not to enforce such rights, the Reinsurer is hereby authorized and empowered to bring any appropriate action in the name of the Company or its policyholders, or otherwise to enforce such rights. The Reinsurer shall promptly remit to the Company the amount of any judgment awarded in such an action in excess of the amount of payment by, or the amount of liability to, the Reinsurer hereunder.

ARTICLE 12

CLAIMS

A. The Company shall notify Reinsurers whenever a claim is reserved by the Company for an amount greater than fifty percent (50%) of its retention hereunder. All cases of serious injury which, regardless of considerations of liability or coverage, might result in a claim under this Contract, shall be reported to Reinsurers, including but not limited to the following:

1. Brain injury;

2. Spinal cord injury and/or other damage resulting in significant sensory and/or motor loss;

3. Blindness;

4. Amputation of a significant portion of limb(s);

5. Birth trauma;

6. Fatalities of wage earners, women with minor children and all fatalities in jurisdictions where mental anguish and/or emotional distress are recoverable.

The Company will provide quarterly updates on reported claims to the Reinsurer. The Reinsurer shall have the right to participate, at its own expense, in the defense or control of any claim or suit or proceeding involving this reinsurance.

B. Except for Loss in Excess of Policy Limits and Extra Contractual Obligations, all loss settlements made by the Company, provided they are within the terms and conditions of the original Policy and this Contract, shall be binding upon Reinsurers, and, upon receipt of satisfactory proof of loss, the Reinsurers agree to pay or allow, as the case may be, its share of each such settlement in accordance with this Contract. The Reinsurer shall be subject to the liability of the Company to the extent provided in this Contract and shall pay or allow, as the case may be, its share of each such settlement in accordance with this Contract all amounts for which it is obligated as soon as possible, but not later than ten (10) business days, of being furnished by the Company with reasonable evidence of the amount due. Reasonable evidence of the amount due shall consist of a certification by the Company, accompanied by proof of loss documentation the Company customarily presents with its claims payment requests, that the amount requested to be paid and submitted by the certification, is, upon information and belief, due and payable to the Company by the Reinsurer under the terms and conditions of this Contract. If the above reasonable evidence is insufficient and not in accordance with this Article, within that ten (10) day period, the Reinsurer shall advise the Company of any failure to comply with this Article with particularity. The Company shall

respond promptly to such identified deficiency and provide the Reinsurer with any response necessary to remedy the deficiency. Upon receipt of the Company’s response, the Reinsurer shall promptly pay the amount due within ten (10) days thereof.

ARTICLE 13

ERRORS AND OMISSIONS

Inadvertent delays, errors or omissions made in connection with this Contract or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery and shall not impose any greater liability of either party than would have been attached if the error or omission had not occurred.

ARTICLE 14

CURRENCY (BRMA 12A)

A. Whenever the word “Dollars” or the “$” sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars.

B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company.

ARTICLE 15

TAXES (BRMA 50C)

In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America, the District of Columbia or Canada.

ARTICLE 16

FEDERAL EXCISE TAX

(Section A Applicable to those Reinsurers, excepting Underwriters at Lloyd’s London and other Reinsurers exempt from Federal Excise Tax, who are domiciled outside the United States of America)

A. The Reinsurers shall allow for the purpose of paying the Federal Excise Tax the applicable percentage of the premium payable hereon (as imposed under Section 4371 of the Internal Revenue Code) to the extent such premium is subject to the Federal Excise Tax. In the event of any return of premium becoming due hereunder, the Reinsurers shall deduct the applicable percentage from the return premium payable hereon and the Company or its agent should take steps to recover the tax from the United States Government.

B. In consideration of the terms under which this Contract is issued, the Company undertakes not to claim any deduction of the premium hereon when making Canadian Tax returns or when making tax returns, other than Income or Profits Tax returns, to any State or Territory of the United States of America or to the District of Columbia.

ARTICLE 17

ACCESS TO RECORDS

The Company shall place at the disposal of the Reinsurer at all reasonable times, and the Reinsurer shall have the right to inspect (and make reasonable copies) through its designated representatives, all non-privileged books, records and papers of the Company directly related to any reinsurance hereunder, or the subject matter hereof, provided that if the Reinsurer is a Run-Off Reinsurer and is no longer an active reinsurance market, this right of access shall be subject to that Reinsurer being current in all payments owed the Company that are not currently the subject of a dispute. For the purposes of this Article, “non-privileged” refers to books, records and papers that are not subject to the Attorney-client privilege and Attorney-work product doctrine. The term “dispute” shall be as defined consistent with the NAIC Annual Statement Instructions.

ARTICLE 18

RESERVES

A. If a jurisdiction of the United States shall not permit the Company, in the statements required to be filed with its regulatory authority(ies), to receive full credit as admitted reinsurance for any Reinsurer’s share of obligations, the Company shall forward to that Reinsurer a statement of the Reinsurer’s share of such obligations. Upon receipt of that statement the Reinsurer shall promptly apply for, and provide the Company with, at the Reinsurer’s sole option, either collateral in the form of a trust account or a “clean,” unconditional and irrevocable Letter of Credit, in the amount specified in the statement submitted, with terms and from a bank acceptable to the Company and the regulatory authority (ies) having jurisdiction over the Company.

B. “Obligations,” as used in this Article, shall mean the sum of ceded (i) Net Losses and Loss Adjustment Expenses paid by the Company but not yet recovered from the Reinsurer, plus (ii) reserves for reported Net Losses and Loss Adjustment Expenses, plus (iii) reserves for Net Losses incurred but not reported (including Loss Adjustment Expenses) and premiums unearned, if any.

C. The Reinsurers hereby agree that the Letter of Credit shall provide for automatic extension of the Letter of Credit without amendment for one year from the date of expiration of said Letter or any future expiration date unless thirty (30) days prior to any expiration the issuing bank shall notify the Company by certified mail that the issuing bank elects not to consider the Letter of Credit renewed for any additional period. An issuing bank, not a “qualified bank” as defined by Regulation No. 133 promulgated by the Insurance Department of the State of New York, shall provide sixty (60) days notice to the Company prior to any expiration.

D. Notwithstanding any other provision of this Contract, the Company or any successor by operation of law of the Company including, without limitation, any liquidator, rehabilitator, receiver or conservator of the Company may draw upon such credit, without diminution because of the insolvency of any party hereto, at any time and undertakes to use and apply such credit for one or more of the following purposes only:

1. To pay the Reinsurer’s share or to reimburse the Company for the Reinsurer’s share of any Obligations, as stipulated in the statement submitted by the Company to the Reinsurer, which is due to the Company and not otherwise paid by the Reinsurer.

2. In the event the Company has received notice of non-renewal of the Letter of Credit and the Reinsurer’s liability remains unliquidated and undischarged thirty (30) days prior to the expiry date of the Letter of Credit, to withdraw the balance of the Letter of Credit and place such sums in an interest bearing trust account to secure the continuing obligations of the Reinsurer under this Contract until a renewal Letter of Credit acceptable to the regulatory authority(ies) having jurisdiction over the Company, a trust account or a substitute in lieu thereof acceptable to the regulatory authority(ies) having jurisdiction over the Company, has been received by the Company. The Company shall provide to the Reinsurer payment of any interest thereon accruing from such account.

3. To make refund of any sum which is in excess of the actual amount required for Sections 1 and 2 of this paragraph.

E. At annual intervals or more frequently as determined by the Company, but never more frequently than quarterly, the Company shall prepare a specific statement, for the sole purpose of amending the Letter of Credit, or adjusting the balance of the trust account, as applicable, of the Reinsurer’s share of any obligations. If the statement shows that the Reinsurer’s share of obligations exceeds the balance of credit as of the statement date, the Reinsurer shall, within thirty (30) days after receipt of notice of such excess, secure delivery to the Company of an amendment of the Letter of Credit increasing the amount of credit or adjust the trust account balance, as applicable, by the amount of such difference. If the statement shows, however, that the Reinsurer’s share of obligations is less than the balance of the Letter of Credit or the trust account as of the statement date, the Company shall, within thirty (30) days after receipt of written request from the Reinsurer, release such excess credit by agreeing to release funds from the trust to the Reinsurer or secure an amendment to the Letter of Credit reducing the amount of credit available by the amount of such excess credit.

F. The bank shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to assure that withdrawals are made only upon the order of properly authorized representatives of the Company. The Company shall incur no obligation to the bank in acting upon the credit, other than as appears in the express terms thereof.

ARTICLE 19

SERVICE OF SUIT (BRMA 49E) (This Article applies to Reinsurers domiciled outside the United States of America and/or unauthorized in any state, territory, or district of the United States of America that has jurisdiction over the Company and in which a subject suit has been instituted. This Article is not intended to conflict with or override the parties' obligation to arbitrate their disputes in accordance with the Article entitled ARBITRATION ).

A. In the event any Reinsurer hereon fails to pay any amount claimed due hereunder, such Reinsurer, at the request of the Company, shall submit to the jurisdiction of a court of competent jurisdiction within the United States and shall comply with all requirements necessary to give that court jurisdiction. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's right to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. Service of process in such suit may be made upon Mendes and Mount, 750 Seventh Avenue, New York, New York 10019-6829, or another party specifically designated in the applicable Interests and Liabilities Agreement attached hereto. In any suit instituted against it upon this Contract, the Reinsurer shall abide by the final decision of such court or of any appellate court in the event of an appeal.

B. The above named are authorized and directed to accept service of process on behalf of the Reinsurer in any such suit and/or upon the request of the Company to give a written undertaking to the Company that they shall enter a general appearance upon the Reinsurer's behalf in the event such a suit is instituted.

C. Further, pursuant to any statute of any state, territory, or district of the United States that makes provision therefor, the Reinsurer hereby designates the Superintendent, Commissioner, or Director of Insurance or other officer specified for that purpose in the statute (or his successor or successors in office) as its true and lawful attorney upon whom may be served any lawful process in any action, suit, or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract, and hereby designates the above named as the person to whom the said officer is authorized to mail such process or a true copy thereof.

ARTICLE 20

GOVERNING LAW (BRMA 71B)

This Contract shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania.

ARTICLE 21

ARBITRATION (BRMA 6J)

A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Contract, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two (2) Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd's London Underwriters. In the event that either party should fail to choose an Arbiter within thirty (30) days following a written request by the other party to do so, the requesting party may choose two (2) Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two (2) Arbiters fail to agree upon the selection of an Umpire within thirty (30) days following their appointment, each Arbiter shall

nominate three (3) candidates within ten (10) days thereafter, two (2) of whom the other shall decline, and the decision shall be made by drawing lots.

B. Each party shall present its case to the Arbiters within thirty (30) days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction.

C. If more than one Reinsurer is involved in the same dispute, all such Reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such Reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the Reinsurers participating under the terms of this Contract from several to joint.

D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two (2) Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two (2) parties.

E. Any arbitration proceedings shall take place at a location mutually agreed upon by the parties to this Contract, but notwithstanding the location of the arbitration, all proceedings pursuant hereto shall be governed by the law of the state of Pennsylvania.

ARTICLE 22

INSOLVENCY

A. In the event of insolvency and the appointment of a conservator, liquidator, or statutory successor of the Company, the portion of any risk or obligation assumed by the Reinsurer shall be payable to the conservator, liquidator, or statutory successor on the basis of claims allowed against the insolvent Company by any court of competent jurisdiction or by any conservator, liquidator, or statutory successor of the Company having authority to allow such claims, without diminution because of that insolvency, or because the conservator, liquidator, or statutory successor has failed to pay all or a portion of any claims.

B. Payments by the Reinsurer as above set forth shall be made directly to the Company or to its conservator, liquidator, or statutory successor, except where the contract of insurance or reinsurance specifically provides another payee of such reinsurance or except as provided by applicable law and regulation (such as subsection (a) of section 4118 of the New York Insurance Laws) in the event of the insolvency of the Company.

C. In the event of the insolvency of the Company, the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the insolvent Company on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding and during the pendency of such claim any Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses which it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable subject to court approval against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer.

D. Where two (2) or more Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the Company.

E. The original insured or policyholder shall not have any rights against the Reinsurer which are not specifically set forth in this Contract, or in a specific agreement between the Reinsurer and the original insured or policyholder.

ARTICLE 23

ENTIRE AGREEMENT

This Contract shall constitute the entire agreement between the parties with respect to the Business Covered hereunder. There are no understandings between the parties other than as expressed in this Contract. Any change or modification of this Contract shall be null and void unless made by amendment to the Contract and signed by both parties. Nothing in this Article shall act to preclude the introduction of submission-related documents in any dispute between the parties.

ARTICLE 24

OFFSET

The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. In the event of the insolvency of any party, offset shall be as permitted by applicable insolvency or liquidation law.

ARTICLE 25

THIRD PARTY RIGHTS (BRMA 52A)

This Contract is solely between the Company and the Reinsurer, and in no instance shall any insured, claimant or other third party have any rights under this Contract unless expressly mentioned elsewhere in this Contract or any attachment hereto.

ARTICLE 26

MODE OF EXECUTION

A. This Contract may be executed by:

1. an original written ink signature of paper documents;

2. an exchange of facsimile copies showing the original written ink signature of paper documents; or

3. electronic signature technology employing computer software and a digital signature or digitizer pen pad to capture a person’s handwritten signature in such a manner that the signature is unique to the person signing, is under the sole control of the person signing, is capable of verification to authenticate the signature and is linked to the document signed in such a manner that if the data is changed, such signature is invalidated.

B. The use of any one or a combination of these methods of execution shall constitute a legally binding and valid signing of this Contract. This Contract may be executed in one or more counterparts, each of which, when duly executed, shall be deemed an original.

ARTICLE 27

FOREIGN ACCOUNT TAX COMPLIANCE ACT (“FATCA”)

A. Each Reinsurer hereby acknowledges the requirements of Sections 1471-1474 US Internal Revenue Code of 1986, as amended, and the Treasury regulations and other guidance issued from time to time thereunder (“FATCA”) and the obligation of each of them to provide to the Intermediary a valid Internal Revenue Service (“IRS”) Form W8-BEN-E, W-9 or other documentation meeting the requirements of the FATCA regulations to establish they are not subject to any withholding requirement pursuant to FATCA (the “Required Documentation”).

B. Furthermore:

1. If a Reinsurer becomes non-compliant with FATCA during the Contract period or has not provided the Intermediary with the Required Documentation fourteen (14) days prior to any reinsurance premium due date, the Withholding Agent (as defined in U.S. Treasury Regulation Section 1.1471-1(b)(147)) shall withhold thirty percent (30%) of the reinsurance premium (to the extent all or a portion of that reinsurance premium is subject to withholding pursuant to FATCA) due to that Reinsurer under this Contract on that reinsurance premium due date and shall promptly notify that Reinsurer via the Intermediary.

2. The withholding of reinsurance premium by virtue of 1. above shall not be, and shall not be treated by the Reinsurer as a breach of any reinsurance premium payment condition, warranty or other clause whether or not entitling the Reinsurer to cancel, terminate or restrict this Contract, refuse, restrict or delay payment of any claim or invoke any interest, penalty or other late payment provision. The Reinsurer shall be liable under this Contract as if no such withholding had been made.

3. The Reinsurer shall not recoup sums withheld under 1. above by deducting equivalent sums from any payments due to the Company or by set off against any other sums owed by the Reinsurer and any general or contractual right of set-off enjoyed by the Reinsurer is hereby varied and qualified to that extent.

4. Where reinsurance premium is withheld in error, has not yet been paid to the IRS and the underwriter has been paid only the net reinsurance premium following such withholding, the Intermediary will cooperate with the Reinsurer to process the requisite refund.

ARTICLE 28

ASSIGNMENT

This Contract shall be binding upon and inure to the benefit of the Company and Reinsurer and their respective successors and assigns provided, however, that this Contract may not be assigned by either party without the prior written consent of the other which consent may be withheld by either party in its sole unfettered discretion. This provision shall not be construed to preclude the assignment by the Company of reinsurance recoverables to another party for collection. Notwithstanding the foregoing, no prior written consent shall be required in the event of any conversion by the Company from a reciprocal insurance exchange to a stock company during the term of this Contract, nor shall such a conversion affect the terms and conditions of this Contract.

ARTICLE 29

ALTERNATE PAYEE

A. If the Company becomes insolvent, specific insureds (which shall be explicitly named in an amendment to the Contract) shall be permitted to make direct claim to the Reinsurer subject to all terms and conditions, including but not limited to all retentions and limits, of the Policy and the Contract. The Reinsurer shall have no duty to defend any actions against the named insureds and shall have no liability for amounts due from other Subscribing Reinsurers. In no event shall the provisions of this Article subject the Reinsurer to any additional liability to or on behalf of the Company or its liquidator, receiver, conservator or statutory successor. The Reinsurer reserves the right to set off any outstanding premium against payment in accordance with this Article, before such payment is made.

B. The Company has the option to allow insured, in addition to those specifically listed in an amendment to this Contract, to make direct claim to the Reinsurer in the manner set forth in that paragraph, and the Reinsurer agrees to provide to any such insureds the coverage described in that paragraph, subject to all the conditions set forth in that paragraph.

ARTICLE 30

INTERMEDIARY

JLT Re (North America) Inc. (“JLT Re”) is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through JLT Re, United Plaza, 30 South 17 ^th Street, 17 ^th Floor, Philadelphia, Pennsylvania 19103. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. In acting as Intermediary for this Contract, the Intermediary shall (i) comply with all aspects of New York Regulation 98 and shall (ii) be entitled to withdraw funds in accordance with section 32.3(a)(3) of that Regulation including commissions, excise tax and interest received on its premium and loss accounts.

NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE U.S.A. (BRMA 35A)

1. This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association.

2. Without in any way restricting the operation of paragraph 1 of this Clause, it is understood and agreed that for all purposes of this reinsurance all the original policies of the Reassured (new, renewal and replacement) of the classes specified in Clause II of this paragraph 2 from the time specified in Clause III in this paragraph 2 shall be deemed to include the following provision (specified as the Limited Exclusion Provision):

Limited Exclusion Provision*


I.	It is agreed that the policy does not apply under any liability coverage, to ( injury, sickness,

disease, death or destruction ( bodily injury or property damage

with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability.

II.

Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liability Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policies of a similar nature; and the liability portion of combination forms related to the four classes of policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies.


III.	The inception dates and thereafter of all original policies as described in II above, whether new, renewal or replacement, being policies which either


(a)	become effective on or after 1st May, 1960, or


(b)	become effective before that date and contain the Limited Exclusion Provision set out above;

provided this paragraph 2 shall not be applicable to Family Automobile Policies, Special Automobile Policies, or policies or combination policies of a similar nature, issued by the Reassured on New York risks, until 90 days following approval of the Limited Exclusion Provision by the Governmental Authority having jurisdiction thereof.

3. Except for those classes of policies specified in Clause II of paragraph 2 and without in any way restricting the operation of paragraph 1 of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability policies of the Reassured (new, renewal and replacement) affording the following coverages:

Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad), Protective Liability, Manufacturers and Contractors Liability, Product Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability)

shall be deemed to include, with respect to such coverages, from the time specified in Clause V of this paragraph 3, the following provision (specified as the Broad Exclusion Provision):

Broad Exclusion Provision*

It is agreed that the policy does not apply:


I.	Under any Liability Coverage, to (injury, sickness, disease, death or destruction

( bodily injury or property damage


(a)	with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; or

(b)

resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not been issued would be, entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by the United States of America, or any agency thereof, with any person or organization.


II.	Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to

(immediate medical or surgical relief

( first aid

to expenses incurred with respect to (bodily injury, sickness, disease or death

(bodily injury resulting from the hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization.


III.	Under any Liability Coverage, to ( injury, sickness, disease, death or destruction

( bodily injury or property damage resulting from the hazardous properties of nuclear material, if


(a)	the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured, or (2) has been discharged or dispersed therefrom;


(b)	the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or


(c)	the ( injury, sickness, disease, death or destruction

( bodily injury or property damage arises out of the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories, or possessions or Canada, this exclusion (c) applies only to ( injury to or destruction of property at such nuclear facility

(property damage to such nuclear facility and any property thereat.


IV.	As used in this endorsement:

“Hazardous properties” include radioactive, toxic or explosive properties; “nuclear material” means source material, special nuclear material or byproduct material; “source material”, “special nuclear material”, and “byproduct material” have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; “spent fuel” means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; “waste” means any waste material (1) containing byproduct material other than tailings or wastes produced by the extraction or concentration of uranium or thorium from any ore processed primarily for its source material content, and (2) resulting from the operation by any person or organization of any nuclear facility included under the first two paragraphs of the definition of nuclear facility; “nuclear facility” means:


(a)	any nuclear reactor,


(b)	any equipment or device designed or used for (1) separating the isotopes of uranium or plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste,


(c)	any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235,


(d)	any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste,

and includes the site on which any of the foregoing is located, all operations conducted on such site and all premises used for such operations; “nuclear reactor” means any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of fissionable material;

( With respect to injury to or destruction of property, the word “injury” or “destruction”

(“property damage” includes all forms of radioactive contamination of property.

( includes all forms of radioactive contamination of property .


V.	The inception dates and thereafter of all original policies affording coverages specified in this paragraph 3, whether new, renewal or replacement, being policies which become effective on or after 1st May, 1960, provided this paragraph 3 shall not be applicable to:


(a)	Garage and Automobile Policies issued by the Reassured on New York risks, or


(b)	statutory liability insurance required under Chapter 90, General Laws of Massachusetts,

until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof.

4. Without in any way restricting the operation of paragraph 1 of this Clause, it is understood and agreed that paragraphs 2 and 3 above are not applicable to original liability policies of the Reassured in Canada and that with respect to such policies this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters’ Association or the Independent Insurance Conference of Canada.

* NOTE : The words printed in italics in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words.

POLLUTION EXCLUSION CLAUSE – GENERAL LIABILITY – REINSURANCE

This reinsurance does not cover any loss or liability accruing to the Reassured as a result of:


(1)	Bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants:


(a)	At or from premises owned, rented or occupied by a named insured;


(b)	At or from any site or location used by or for a named insured or others for the handling, storage, disposal, processing or treatment of waste;


(c)	Which are at any time transported, handled, stored, treated, disposed of, or processed as waste by or for a named insured or any person or organization for whom a named insured may be legally responsible; or


(d)	At or from any site or location to which a named insured or any contractors or subcontractors working directly or indirectly on behalf of a named insured are performing operations:


(i)	if the pollutants are brought on or to the site or location in connection with such operations; or


(ii)	if the operations are to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize the pollutants.

Sub-paragraphs (a) and (d) (i) of this exclusion do not apply to bodily injury or property damage caused by heat, smoke or fumes from a hostile fire. As used in this exclusion, a “hostile fire” means one which becomes uncontrollable or breaks out from where it was intended to be.


(2)	To any loss, cost or expense arising out of any governmental direction or request that a named insured test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants.

Pollutants mean any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

SCHEDULE ONE

POSITIVE PHYSICIANS INSURANCE EXCHANGE

ILF’s for New Jersey Policies as a % of Premium for Primary $1,000,000 coverage



80254	Allergy No Surgery	24.70	%
80114	Ophthalmology Surgery	24.70	%
80145	Surgery - Urological Surgery	24.70	%
80151	Anesthesiology Surgery	24.70	%
80231	General Preventative Medicine No Surgery	24.70	%
80233	Occupational Medicine No Surgery	24.70	%
80235	Physiatry, Physical Med & Rehabilitation No Surgery	24.70	%
80236	Public Health No Surgery	24.70	%
80240	Forensic Medicine No Surgery	24.70	%
80244	Gynecology No Surgery	24.70	%
80245	Hematology No Surgery	24.70	%
80246	Infectious Diseases No Surgery	24.70	%
80248	Nutrition No Surgery	24.70	%
80249	Psychiatry-including child No Surgery	24.70	%
80252	Rheumatology No Surgery	24.70	%
80253	Radiology - Diagnostic No Surgery	24.70	%
80255	Cardiovascular Disease No Surgery	24.70	%
80257	Internal Medicine No Surgery	24.70	%
80261	Neurology-including child No Surgery	24.70	%
80262	Nuclear Medicine No Surgery	24.70	%
80263	Ophthalmology No Surgery	24.70	%
80266	Pathology No Surgery	24.70	%
80267	Pediatrics No Surgery	24.70	%
80269	Pulmonary Diseases No Surgery	24.70	%
80274	Gastroenterology Minor Surgery	24.70	%
80276	Geriatrics Minor Surgery	24.70	%
80277	Gynecology Minor Surgery	24.70	%
80278	Hematology Minor Surgery	24.70	%
80279	Infectous Diseases Minor Surgery	24.70	%
80281	Cardiovascular Disease Minor Surgery	24.70	%
80282	Dermatology Minor Surgery	24.70	%
80284	Internal Medicine Minor Surgery	24.70	%
80287	Nephrology Minor Surgery	24.70	%
80288	Neurology-including child Minor Surgery	24.70	%
80289	Ophthalmology Minor Surgery	24.70	%
80290	Otology Minor Surgery	24.70	%
80291	Otorhinolarygology Minor Surgery	24.70	%
80293	Pediatrics Minor Surgery	24.70	%
80420	Family Physician No Surgery	24.70	%
80421	Family Physician Minor Surgery	24.70	%
80103	Endocrinology Surgery	27.93	%
80104	Gastroenterology Surgery	27.93	%
80115	Surgery - Colon and Rectal Surgery	27.93	%



80117	Family Physician-Major Surgery (Excl OB) Surgery	27.93	%
80159	Otorhinolarygology Exc. Plastic/Reconstructive Surgery	27.93	%
80241	Gastroenterology No Surgery	27.93	%
80272	Endocrinology Minor Surgery	27.93	%
80280	Radiology - Diagnostic Minor Surgery	27.93	%
80102	Emergency Medicine No Major Surgery	31.15	%
80141	Surgery - Cardiac Surgery	31.15	%
80143	Surgery - General Surgery	31.15	%
80144	Surgery - Thoracic Surgery	31.15	%
80146	Vascular Surgery	31.15	%
80150	Cardiovascular Disease Surgery	31.15	%
80152	Neurology-including child Surgery	31.15	%
80153	Family Physician-Major Surgery (w/OB, incl. C-Sec.) Surgery	31.15	%
80154	Surgery - Orthopedic (No back surgery) Surgery	31.15	%
80155	Surgery - Plastic-Otorhinolaryngology Surgery	31.15	%
80156	Surgery - Plastic Surgery	31.15	%
80166	Surgery - Abdominal Surgery	31.15	%
80167	Gynecology Surgery	31.15	%
80168	Surgery - Obstetrics Surgery	31.15	%
80169	Surgery - Hand Surgery	31.15	%
80170	Surgery - Head and Neck Surgery	31.15	%
99903	Surgery - Obstetrics and Gynecology Surgery	31.15	%
99904	Surgery - Orthopedic (With back surgery) Surgery	31.15	%

ENDORSEMENT NO. 1

EFFECTIVE MARCH 1, 2018

MEDICAL MALPRACTICE WORKING EXCESS REINSURANCE CONTRACT

EFFECTIVE: JANUARY 1, 2018

between

POSITIVE PHYSICIANS INSURANCE EXCHANGE

(hereinafter called the "Company")

and

HANNOVER RUCK SE

AIIN Reference: 1340125

(hereinafter called the "Reinsurer")

FOR VALUE RECEIVED , the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound, effective March 1, 2018 (the “Effective Date”),

1. Radiology Affiliates Imaging has been specially accepted into the reinsurance contract as attached.

2. Paragraph D. is hereby added to Coverage C of the Article entitled PREMIUM and shall read as follows:

D. Premium payment for Radiology Affiliates Imaging of $17,372.75 is due May 15, 2018.

3. All other terms and conditions not inconsistent with the above remain unchanged.

IN WITNESS WHEREOF , the parties intending to be legally bound hereto have executed this Endorsement on dates indicated below by their duly authorized representatives to be effective on the Effective Date.

Signed in Hannover , on this 29th day of June , 2018,



HANNOVER RUCK SE

BY	/s/ Thomas Reinecke

PRINT NAME	Thomas Reinecke

TITLE	Chief Underwriter

REF. NO.	9007707, 9007713

and signed in Berwyn , Pennsylvania , this 17th day of April, 2018.



POSITIVE PHYSICIANS INSURANCE EXCHANGE

BY:	/s/ Lewis S. Sharps M.D.

TITLE:	CEO

ENDORSEMENT NO. 2

EFFECTIVE JANUARY 1, 2018

MEDICAL MALPRACTICE WORKING EXCESS REINSURANCE CONTRACT

EFFECTIVE: JANUARY 1, 2018

between

POSITIVE PHYSICIANS INSURANCE EXCHANGE

(hereinafter called the "Company")

and

HANNOVER RUCK SE

AIIN Reference: 1340125

(hereinafter called the "Reinsurer")

FOR VALUE RECEIVED , the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound, effective January 1, 2018 (the “Effective Date”),

1. Paragraph E. of the Article entitled COMMENCEMENT & TERM is hereby amended to read as follows:

A. E. The Reinsurer may renegotiate the Second Annual Period of December 31, 2018, upon the happening of any one of the following circumstances and by the giving of thirty (30) days written notice to the Company prior to December 31, 2018.

1. The Company has entered into a definitive agreement to:

a. become acquired or controlled by any company, corporation or individual(s) not controlling or affiliated with the party’s operations previously; or

B. It is understood that subparagraph E.1. above shall exclude renegotiation in the event that the Company is converted to a stock company from its current status of a reciprocal

insurance exchange and this conversion is considered being affiliated with the party’s operations previously.

2. Subparagraph A.4. of the Article entitled EXCLUSIONS is hereby amended to read as follows:

1. 4. Reinsurance assumed by the Company except reinsurance of “fronting carriers” or captives where the Policies involved are underwritten, rated and administered by the Company.

3. All other terms and conditions not inconsistent with the above remain unchanged.

Signed in , on this 29th day of June , 2018,



HANNOVER RUCK SE

BY	/s/ Thomas Reinecke

PRINT NAME	Thomas Reinecke

TITLE	Chief Underwriter

REF. NO.

and signed in ______________, _______________, this day of , 2018.



POSITIVE PHYSICIANS INSURANCE EXCHANGE

BY

TITLE

Exhibit 10.9

GOVERNANCE AGREEMENT

This GOVERNANCE AGREEMENT (this “ Agreement ”), dated as of September 19, 2018, is entered into by and among Insurance Capital Group, LLC, a Delaware limited liability company (“ ICG ”), and Enstar Holdings (US) LLC, a Delaware limited liability company (“ Enstar ”).

W I T N E S S E T H:

WHEREAS, ICG has agreed to act as the “Standby Purchaser” pursuant to that certain Standby Stock Purchase Agreement dated as of June 8, 2018 (the “ Purchase Agreement ”) by and among Positive Physicians Holdings, Inc. a Pennsylvania corporation (the “ Company ”), Positive Physicians Insurance Exchange, a Pennsylvania domiciled reciprocal inter-insurance exchange (“ PPIX ”), Physician’s Insurance Program Exchange, a Pennsylvania domiciled reciprocal inter-insurance exchange (“ PIPE ”), and Professional Casualty Association, a Pennsylvania domiciled reciprocal inter-insurance exchange (“ PCA ”, and collectively with PPIX and PIPE, or each individually as the context requires, the “ Exchanges ”), in connection with the conversion of each of the Exchanges from reciprocal to stock form through a transaction which will result in the Exchanges becoming indirectly wholly owned by the Company;

WHEREAS, Enstar intends to purchase thirty percent (30%) of the number of Shares (as defined in the Purchase Agreement) that ICG is committed to purchase pursuant to the Purchase Agreement (without taking into account any Shares purchased by Enstar which, for avoidance of doubt, shall be counted against and reduce the commitment of ICG under the Purchase Agreement) and to accommodate such purchase, the Company shall limit the Shares that existing Diversus, Inc. (“ Diversus ”) shareholders, management and members of the Diversus board of directors will be permitted to acquire in the Community Offering by an amendment to the Plans of Conversion (as defined in the Purchase Agreement);

WHEREAS, ICG and Enstar have agreed that, following the Conversion (as defined in the Purchase Agreement), ICG and Enstar shall cooperate in the governance of the Company in the manner set forth herein.

NOW THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and intending to be legally bound, the parties hereto hereby agree as follows:

Section 1. Certain Other Definitions . The following terms used herein shall have the meanings set forth below:

“ Affiliate ” shall have the meaning set forth in Rule 12b‑2 under the Exchange Act and shall include Persons who become Affiliates of any Person subsequent to the date hereof.

“ Agreement ” shall have the meaning given to such term in the preamble hereof.

“ Board ” shall mean the board of directors of the Company.

“ Business Day ” shall mean any day that is not a Saturday, a Sunday or a day on which banks are required or permitted to be closed in the Commonwealth of Pennsylvania.

“ Change of Control ” shall have the meaning given to such term in the Purchase Agreement.

“ Closing ” shall have the meaning given to such term in the Purchase Agreement.

“ Closing Date ” shall have the meaning given to such term in the Purchase Agreement.

“ Common Stock Equivalent ” shall have the meaning given to such term in the Purchase Agreement.

“ Company ” shall have the meaning given to such term in the recitals hereof.

“ Department ” shall mean the Pennsylvania Insurance Department.

“ Governmental Entity ” shall mean any federal or state court, administrative agency or commission or other governmental authority or instrumentality, other than the Department.

“ Including ” shall mean including, without limitation.

“ Litigation ” means the litigation styled as Enstar Holdings (US) LLC, a Delaware limited liability company, individually, and derivatively on behalf of Nominal Defendant Diversus, Inc., as Plaintiff, v. Gregory Campbell, Scott Penwell, Lewis Sharps, James Zech, ICG and Professional Casualty Holdings, Inc., as Defendants, and Diversus Inc., as Nominal Defendant, in the Court of Chancery of the State of Delaware, C.A. No. 2018-0211-JRS.

“ Material Adverse Effect ” shall mean, with respect to any Person, an event which has a material adverse effect on the financial condition, or on the earnings, operations, assets or business, of such Person and its respective subsidiaries taken as a whole.

“ Person ” shall mean an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a Governmental Entity.

“ Plans of Conversion ” shall have the meaning given to such term in the Purchase Agreement.

“ Purchased Shares ” shall have the meaning given to such term in the Purchase Agreement.

“ Shares ” shall have the meaning given to such term in the Purchase Agreement.

“ Stockholder ” shall have the meaning given to such term in the Purchase Agreement.

“ Third Party Purchaser ” shall have the meaning given to such term in the Purchase Agreement.

“ Transfer ” shall mean, directly or indirectly, purchase, sell, transfer, assign, lend, convey, gift, mortgage, pledge, encumber, hypothecate or otherwise dispose of, directly or indirectly.

Section 2. Participation in Community Offering; Expenses .

(a) In order to induce ICG to enter into this Agreement, Enstar hereby agrees that it shall purchase from the Company, in the Community Offering, thirty percent (30%) of the number of Shares (as defined in the Purchase Agreement) that ICG is committed to purchase pursuant to the Purchase Agreement (without taking into account any Shares purchased by Enstar which, for avoidance of doubt, shall be counted against and reduce the commitment of ICG under the Purchase Agreement) (the “ Enstar Shares ”).

(b) Enstar shall (i) within ten (10) Business Days of Enstar’s receipt of the written request of ICG (which written request shall be accompanied by invoices and/or other reasonable supporting documentation), reimburse ICG for thirty percent (30%) of the out-of-pocket expenses reasonably incurred by ICG in connection with the transactions contemplated in the Purchase Agreement, and (ii) fund thirty percent (30%) of the amount of any funding required to be provided by ICG in respect of the Exchangeable Note (as defined in the Purchase Agreement), as and when such amounts are required to be funded; provided that, with respect to the exchange of the Exchangeable Note for Shares, ICG shall take such steps as are necessary to cause Enstar to be issued thirty percent (30%) of the Shares issued upon exchange of the Exchangeable Note.

Section 3. Representations and Warranties of ICG . ICG represents and warrants to Enstar as follows:

(a) ICG is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware and it has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted.

(b) The execution and delivery of this Agreement by ICG and performance by ICG of the transactions contemplated hereby have been duly authorized by all necessary limited liability company action on the part of ICG, and no further consent or authorization in connection therewith is required by ICG, its board of directors or its members.

(c) This Agreement has been duly executed and delivered by ICG and constitutes the binding obligation of ICG enforceable against it in accordance with its terms, subject to (i) the application of bankruptcy, receivership, conservatorship, reorganization, insolvency and similar laws affecting creditors’ rights generally and (ii) equitable principles being applied at the discretion of a court before which any proceeding may be brought (clauses (i) and (ii) collectively, the “ Bankruptcy and Equity Exception ”).

(d) Neither the execution, delivery or performance of this Agreement by ICG, nor the consummation by ICG of the transactions contemplated hereby, will: (i) conflict with or result in any breach of any provisions of the Organizational Documents of ICG; (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation, vesting, payment, exercise, acceleration, suspension or revocation) under, any of the terms, conditions or provisions of any note, bond, mortgage, deed of trust, security interest, indenture, license, contract, agreement, plan or other instrument or obligation to which ICG is a party or by which ICG is otherwise bound; or (iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to ICG; except in each case for conflicts, violations, breaches, defaults, terminations, cancellations, accelerations, impositions, suspensions or revocations which would not individually or in the aggregate have or be reasonably likely to result in a Material Adverse Effect.

Section 4. Representations and Warranties of Enstar . Enstar represents and warrants to ICG as follows:

(a) Enstar is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is organized and has the requisite organizational power and authority to enter into and perform its obligations under this Agreement and to consummate the transactions contemplated hereby.

(b) The execution and delivery of this Agreement by Enstar and performance by Enstar of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Enstar, and no further consent or authorization in connection therewith is required by Enstar, its board of directors or its member.

(c) This Agreement has been duly executed and delivered by Enstar and constitutes the binding obligation of Enstar, enforceable against it in accordance with its respective terms, subject to the Bankruptcy and Equity Exception.

Section 5. Release; Covenant regarding Conversion .

(a) Effective as of the Closing, (i) Enstar, for and on behalf of itself and its Affiliates and principals, heirs, successors and assigns, releases ICG and its Affiliates, employees, members, managers, and principals, heirs, successors and assigns, from any and all claims, demands, or causes of action whatsoever, whether known or unknown, arising out of or relating in any way to the facts and circumstances described in the Litigation (including claims and counterclaims related to the Purchase Agreement, the Plans of Conversion, the Option Agreement (as defined in Purchase Agreement), the Diversus Management Agreement (as defined in Purchase Agreement) and/or any of the other documents to be executed in connection with the Purchase Agreement) (“ Released Claims ”), and (ii) ICG, for and on behalf of itself and its Affiliates and principals, heirs, successors and assigns, releases Enstar and its Affiliates, employees, members, managers, and principals, heirs, successors and assigns, from any and all Released Claims. Notwithstanding anything herein to the contrary, “ Released Claims ” shall not include or limit in any manner whatsoever any obligations under this Agreement.

(b) Enstar agrees that it shall, as a condition to the obligations and covenants of ICG hereunder, take all commercially reasonably steps necessary to cause the Litigation to be dismissed without prejudice on the date of this Agreement, and to take all commercially reasonably steps necessary to cause the Litigation to be dismissed with prejudice effective as of Closing.

(c) Enstar covenants and agrees that it shall not, and it shall ensure that its Affiliates and its and their respective principals, heirs, successors and assigns who are controlled by Enstar do not, bring any proceeding to prevent, obstruct or interfere with the Conversions (as defined in the Purchase Agreement) or the other transactions contemplated in the Purchase Agreement or the Plans of Conversion. For the avoidance of any doubt, any action to compel the enforcement of this Agreement shall not be deemed to be a violation of this Section 5(c).

(d) Enstar covenants and agrees that it shall, and it shall ensure that its Affiliates who have the right to do so shall (i) vote their shares of Diversus to approve the Conversions and the other transactions contemplated in the Purchase Agreement and (ii) execute and deliver the Option Agreement; provided, that Enstar and its Affiliates shall have the right to vote their shares of Diversus for the approval or rejection of the merger contemplated in the Option Agreement as Enstar and/or its Affiliates shall determine.

Section 6. Covenants .

(a) ICG agrees that, as soon as practicable following the Closing, and so long as ICG has the right to do so and is not prohibited from doing so by law or regulation, ICG shall cause the Organizational Documents of the Company and its subsidiaries to be amended as necessary to reflect the matters described on Exhibit A hereto.

(b) ICG agrees that, for so long as Enstar owns the Enstar Shares, ICG will use its commercially reasonable efforts to cause the Company to consider a proposal from Enstar with respect to any reinsurance that is proposed to be purchased by the Company or any of the Company’s subsidiaries (including Positive).

(c) Enstar and ICG agree that, as soon as practicable following the Closing, each of them shall cooperate in a commercially reasonable manner to cause the Organizational Documents of Diversus to be amended to provide that:

(i) the board of directors of Diversus is reconstituted to consist of seven members, three designated by Gregg Campbell or his Affiliates, one designated by Jim Zech, two designated by Enstar, and one designated by ICG;

(ii) the chairman and vice chairman of the board of directors of Diversus shall be elected by a majority vote of Directors; and

(iii) such individuals who are nominated to the board of directors of Diversus by the Persons described above shall from time to time be removed or appointed at the written direction of the Person granted the authority to appoint such individual.

(d) Information Rights . Until Enstar is granted the right to appoint members to the Board of the Company, ICG covenants and agrees to exercise its rights to request information under Section 6(d) of the Purchase Agreement as reasonably requested by Enstar, and agrees to request that a representative of Enstar be permitted to attend any meetings requested pursuant to such section. Enstar hereby acknowledges that it is aware, and it agrees that it will advise its representatives, agents, advisors, Affiliates and associates who are informed as to the matters which are the subject of this provision (collectively, its “ Representatives ”), that the United States securities laws prohibit any Person who has received material, non‑public information concerning the Company or the matters which are the subject of this provision from purchasing or selling securities of the Company or from communicating such information to any other Person. Enstar agrees, and shall instruct its Representatives, to (i) keep such non‑public information provided by the Company strictly confidential, (ii) use the same degree of care to protect such non‑public information as each would use to protect its own non‑public information of a similar nature, but in no event with less than reasonable care, and (iii) not disclose the non‑public information in any manner whatsoever to any Person, except with the specific prior written consent of the Company. As used in this Section 6(d), “non‑public information” shall not include information which (a) is or becomes public knowledge other than as a result of a breach of the obligations of Enstar or its Representatives; (b) was known to the Standby Purchaser prior to the date of this Agreement; (c) becomes available without restriction from a third party not known by Enstar to be under any confidentiality obligation to the Company with respect thereto; or (d) is developed by Enstar or its Representatives without use of the Company’s non‑public information. In the event that Enstar or any of its Representatives are requested or required by law, regulation, deposition, interrogatory, request for documents, subpoena, civil investigative demand, administrative regulatory requirement, order, decree or the rules of any applicable stock exchange or similar legal process (collectively, “ Law ”) to disclose any of the foregoing non‑public information,

Enstar shall (or will direct its Representatives to) provide ICG and the Company with prompt prior written notice of such requirement to the extent permissible under applicable Law and reasonably practicable under the circumstances in order to enable the Company to (A) seek, at its own cost, an appropriate protective order or other remedy or (B) waive compliance, in whole or in part, with the terms of this Agreement; and Enstar or such Representative shall consult and reasonably cooperate with the Company, at the Company’s expense and upon its written request, with respect to taking steps to resist or narrow the scope of such request or requirement. If, in the absence of a protective order, Enstar or such Representative is nonetheless, on the advice of counsel of Enstar or such Representative, as applicable, required by applicable Law to disclose the foregoing non‑public information, Enstar or such Representative shall (I) furnish only that portion of the foregoing non‑public information that, based upon advice of legal counsel, is legally required, (II) give advance notice to the Company of the information to be disclosed as far in advance as is legally permissible and practical, and (III) exercise commercially reasonable efforts, at the Company’s expense and upon its written request, to obtain reliable assurance that confidential treatment will be accorded such non‑public information. Notwithstanding anything to the contrary herein, without satisfying the other obligations of this paragraph, Enstar and its Representative may disclose such non‑public information to the extent such disclosure is requested or required in connection with routine audits or examinations by, or blanket document requests from, a Governmental Entity that does not specifically target the other parties, this Agreement or the transactions contemplated hereby. ICG and Enstar agree that the Company shall be a third party beneficiary of this Section 6(d).

Section 7. Public Statements . Neither ICG nor Enstar shall issue any public announcement, statement or other disclosure with respect to this Agreement or the transactions contemplated hereby without the prior consent of the other party hereto, which consent shall not be unreasonably withheld or delayed, except if such public announcement, statement or other disclosure is required by applicable law or applicable stock market rules, in which case the disclosing party shall consult in advance with respect to such disclosure with the other party to the extent reasonably practicable.

Section 8. Restrictions on Transfer . Enstar understands and agrees that the Enstar Shares will bear a legend substantially similar to the legend set forth below in addition to any other legend that may be required by applicable law or by any agreement between the Company and ICG. Upon receipt of certifications from Enstar reasonably satisfactory to the Company’s counsel, ICG shall request that Company shall cause the legend to be removed in accordance with, and pursuant to, Rule 144 promulgated under the Securities Act and any other applicable federal and state securities laws.

QUALIFICATION UNDER APPLICABLE STATE SECURITIES LAWS, (B) IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND REGISTRATION AND/OR QUALIFICATION UNDER APPLICABLE STATE SECURITIES LAWS PROVIDED THAT AT THE ISSUER’S REQUEST, THE TRANSFEROR THEREOF SHALL HAVE DELIVERED TO THE ISSUER AN OPINION OF COUNSEL (WHICH OPINION SHALL BE IN FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO THE ISSUER) TO THE EFFECT THAT SUCH SECURITIES MAY BE SOLD OR TRANSFERRED PURSUANT TO AN EXEMPTION FROM SUCH REGISTRATION, OR (C) SUCH SECURITIES MAY BE SOLD PURSUANT TO RULE 144 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

Section 9. Drag Along Rights .

(a) If ICG receives a bona fide offer from a non‑affiliated Third Party Purchaser to consummate, in one transaction, or a series of related transactions, a Change of Control (a “ Drag‑along Sale ”), ICG shall have the right to require that Enstar participate in such Transfer in the manner set forth in this Section 9, provided , however , that Enstar shall not be required to participate in the Drag‑along Sale if the consideration for the Drag‑along Sale is other than cash or registered securities listed on an established U.S. securities exchange or traded on the NASDAQ Stock Market. Notwithstanding anything to the contrary in this Agreement, Enstar shall vote in favor of the transaction and take all actions to waive any dissenters, appraisal or other similar rights.

(b) ICG shall exercise its rights pursuant to this Section 9 by delivering a written notice (the “ Drag‑along Notice ”) to Enstar no later than 20 Business Days prior to execution of an agreement to effect a Drag‑along Sale. The Drag‑along Notice shall make reference to ICG’s rights and obligations hereunder and shall describe in reasonable detail:

(i) the number of Shares to be sold by ICG, if the Drag‑along Sale is structured as a Transfer of Shares;

(ii) the identity of the Third Party Purchaser;

(iii) the proposed date, time and location of the closing of the Drag‑along Sale;

(v) a copy of any form of agreement proposed to be executed in connection therewith.

(c) If the Drag‑along Sale is structured as a Transfer of Shares, then, subject to Section 9(d), ICG and Enstar shall Transfer the number of Shares equal to the product of (x) the aggregate number of Shares the Third Party Purchaser proposes to buy as stated in the

Drag‑along Notice and (y) a fraction (A) the numerator of which is equal to the number of Shares and Common Stock Equivalents then held by ICG or Enstar, as the case may be, and (B) the denominator of which is equal to the number of Common Stock Equivalents then held by all of the Stockholders (including, for the avoidance of doubt, ICG and Enstar).

(d) The consideration to be received by Enstar shall be the same form and amount of consideration per Share to be received by ICG (or, if ICG is given an option as to the form and amount of consideration to be received, the same option shall be given to Enstar) and the terms and conditions of such Transfer shall, except as otherwise provided in the immediately succeeding sentence, be the same as those upon which ICG Transfers its Shares. Enstar shall make or provide the same representations, warranties, covenants, and agreements as ICG makes or provides in connection with the Drag‑along Sale (except that in the case of representations, warranties, covenants, and agreements pertaining specifically to ICG, Enstar shall make the comparable representations, warranties, covenants, and agreements pertaining specifically to itself). Notwithstanding anything to the contrary set forth herein, Enstar will not be required to agree to any covenant to, or any covenant to cause its Affiliates who do not acquire shares of the Company to, not compete or not solicit customers, employees or suppliers of any party to the proposed Drag-along Sale (but not, for the avoidance of doubt, the Company), or any other similar restrictive covenants in connection with the proposed Drag-along Sale. For avoidance of doubt, to the extent reasonably requested by the counterparty in a Drag-along Sale, Enstar may agree to covenants which restrict its and its Affiliates’ ability to use confidential information concerning the Company acquired through Enstar’s ownership of shares of the Company and through the individuals appointed by Enstar to the Board to directly compete with the Company or to solicit the Company’s customers, employees or suppliers.

(e) The fees and expenses of ICG incurred in connection with a Drag‑along Sale shall be paid by the ICG and Enstar on a pro-rata basis based upon the amount of consideration received by such Person in such Drag-along Sale to the extent not paid or reimbursed by the Company or the Third Party Purchaser.

(f) Enstar shall take all actions as may be reasonably necessary to consummate the Drag‑along Sale, including entering into agreements and delivering certificates and instruments, in each case consistent with the agreements being entered into and the certificates being delivered by ICG.

(g) ICG shall have 120 days following the date of the Drag‑along Notice in which to consummate the Drag‑along Sale, on the terms set forth in the Drag‑along Notice (which such 120 day period may be extended for a reasonable time not to exceed 180 days to the extent reasonably necessary to obtain any government approvals). If at the end of such period, ICG has not completed the Drag‑along Sale, ICG may not then effect a transaction subject to this Section 9 without again fully complying with the provisions of this Section 9.

Section 10. Tag Along Rights .

(a) Except for transfers effected on an Exchange, if ICG proposes to Transfer more than 50% of the outstanding Shares to a Third Party Purchaser and ICG has not elected to

exercise its drag‑along rights set forth in Section 9, Enstar shall be permitted to participate in such Transfer (a “ Tag‑along Sale ”) on the terms and conditions set forth in this Section 10.

(b) Prior to the consummation of any such Transfer of Shares described in Section 10(a), ICG shall deliver to Enstar a written notice (a “ Sale Notice ”) of the proposed Tag‑along Sale subject to this Section 10 no later than 10 Business Days prior to the execution of an agreement for a Tag‑along Sale. The Sale Notice shall make reference to Enstar’s rights hereunder and shall describe in reasonable detail:

(i) the aggregate number of shares of Shares the Third Party Purchaser has offered to purchase;

(ii) the identity of the Third Party Purchaser;

(iii) the proposed date, time and location of the closing of the Tag‑along Sale;

(v) a copy of any form of agreement proposed to be executed in connection therewith.

(c) Enstar shall exercise its right to participate in a Transfer of Shares by ICG subject to this Section 10 by delivering to ICG a written notice (a “ Tag‑along Notice ”) stating its election to do so and specifying the number of Shares to be Transferred by it no later than 10 Business Days after receipt of the Sale Notice (the “ Tag‑along Period ”). The offer of Enstar set forth in a Tag‑along Notice shall be irrevocable, and, to the extent such offer is accepted, Enstar shall be bound and obligated to Transfer in the proposed Transfer on the terms and conditions set forth in this Section 10. ICG and Enstar shall have the right to Transfer in a Transfer subject to this Section 10 the number of Shares equal to the product of (x) the aggregate number of Shares the Third Party Purchaser proposes to buy as stated in the Sale Notice and (y) a fraction (A) the numerator of which is equal to the number of Shares and Common Stock Equivalents then held by ICG or Enstar, as the case may be, and (B) the denominator of which is equal to the number of and Common Stock Equivalents then held by all of the Stockholders (including, for the avoidance of doubt ICG and Enstar).

(d) If Enstar does not deliver a Tag‑along Notice in compliance with Section 10(c) above, Enstar shall be deemed to have waived all of its rights to participate in the applicable Transfer, and ICG shall thereafter be free to Transfer to the applicable Third Party Purchaser its Shares at a per share price that is no greater than the per share price set forth in the Sale Notice and on terms and conditions which are not materially more favorable to ICG than those set forth in the Sale Notice without any further obligation to Enstar under this Section 10.

(e) If Enstar elects to participate in a Transfer pursuant to this Section 10, Enstar shall receive the same consideration per share as ICG.

(f) Enstar shall make or provide the same representations, warranties, covenants, and agreements as ICG makes or provides in connection with the Tag‑along Sale (except that in the case of representations, warranties, covenants, and agreements pertaining specifically to ICG, Enstar shall make the comparable representations, warranties, covenants, indemnities and agreements pertaining specifically to itself). Notwithstanding anything to the contrary set forth herein, Enstar will not be required to agree to any covenant, or any covenant to cause its Affiliates who do not acquire shares of the Company to, not compete or not solicit customers, employees or suppliers of any party to the proposed Tag-along Sale (but not, for the avoidance of doubt, the Company), or any other similar restrictive covenants in connection with the proposed Tag-along Sale. For avoidance of doubt, to the extent reasonably requested by the counterparty in a Tag-along Sale, Enstar may agree to covenants which restrict its and its Affiliates’ ability to use confidential information concerning the Company acquired through Enstar’s ownership of shares of the Company and through the individuals appointed by Enstar to the Board to directly compete with the Company or to solicit the Company’s customers, employees or suppliers.

(g) Each of ICG and Enstar shall be responsible for its own expenses in connection with any Tag-along Sale.

(h) Enstar shall take all actions as may be reasonably necessary to consummate the Tag‑along Sale, including entering into agreements and delivering certificates and instruments, in each case consistent with the agreements being entered into and the certificates being delivered by ICG.

(i) ICG shall have 120 Business Days following the expiration of the Tag‑along Period in which to Transfer the Shares described in the Sale Notice, on the terms set forth in the Sale Notice (which such 120 Business Day period may be extended for a reasonable time not to exceed 180 Business days to the extent reasonably necessary to obtain any government approvals). If at the end of such 120 Business day period, ICG has not completed such Transfer, ICG may not then effect a Transfer of Shares subject to this Section 10 without again fully complying with the provisions of this Section 10.

Section 11. Termination . This Agreement shall be terminated without further action by either party hereto if the Purchase Agreement is terminated in accordance with its terms.

Section 12. Survival . The representations and warranties of ICG and Enstar contained in this Agreement or in any certificate delivered hereunder shall survive the closing of the transactions contemplated herein.

Section 13. Notices . All notices, communications and deliveries required or permitted by this Agreement shall be made in writing signed by the party making the same, shall specify the Section of this Agreement pursuant to which it is given or being made and shall be deemed given or made (i) on the date delivered if delivered by hand, (ii) on the third (3rd) Business Day

after it is mailed if mailed by United States registered or certified mail (return receipt requested) (with postage and other fees prepaid), or (iii) on the day after it is delivered, prepaid, to an overnight express delivery service promising next Business Day delivery that confirms to the sender delivery to the recipient on such day, as follows:



(a) If to ICG, at:	Insurance Capital Group, LLC c/o ICG Management, LLC 767 5 ^th Avenue New York, New York 10153 Attention: Matthew T. Popoli, Craig A. Huff
(b) If to Enstar, at:	Enstar Holdings (US) LLC 150 2nd Ave N 3 ^rd floor, St. Petersburg, Florida 33701 Attention: Paul Brockman

or to such other representative or at such other address of a party as such party hereto may furnish to the other party in writing in accordance with this Section 13. If notice is given pursuant to this Section 13 of any assignment to a successor or permitted assign of a party hereto, the notice shall be given as set forth above to such successor or permitted assign of such party.

Section 14. Assignment . This Agreement will be binding upon, and will inure to the benefit of and be enforceable by, the parties hereto and their respective successors and assigns. No party to this Agreement may assign this Agreement or any of its rights or obligations under this Agreement without the prior written consent of the other party hereto.

Section 15. Entire Agreement . This Agreement embodies the entire agreement and understanding between the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties, or undertakings, other than those set forth or referred to herein, with respect to the transactions contemplated by this Agreement, and this Agreement supersedes all prior agreements and understandings between the parties with respect to the subject matter of this Agreement.

Section 16. Governing Law; Venue . This Agreement shall be governed by and construed in accordance with the laws of the state of New York (other than those of its laws which would require the application of the laws of another jurisdiction, and then only to the extent that such laws would require the application of the laws of another jurisdiction). The state and federal courts in the County of New York, New York shall have the exclusive jurisdiction over any and all claims, lawsuits and litigation relating to or arising out of this Agreement, the subject matter hereof or the transactions contemplated hereby. Each party hereto hereby irrevocably (a) submits to the personal jurisdiction of such courts over such party in connection with any litigation, proceeding or other legal action arising out of or in connection with this Agreement, and (b) waives to the fullest extent permitted by law any objection to the venue of any such litigation, proceeding or action which is brought in any such court.

Section 17. Severability . If any provision of this Agreement or the application thereof to any Person or circumstances is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to Persons or circumstances other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination, the parties shall negotiate in good faith in an effort to agree upon a suitable and equitable substitute provision to effect the original intent of the parties.

Section 18. Miscellaneous .

(a) The headings in this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning of this Agreement.

[Remainder of this page intentionally left blank.]

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written.



INSURANCE CAPITAL GROUP, LLC By: ICG Management, LLC, its managing member

By:	/s/ Craig A. Huff
Name:	Craig A. Huff
Title:	Managing Partner

By:	/s/ Matthew T. Popoli
Name:	Matthew T. Popoli
Title:	Managing Partner

ENSTAR HOLDINGS (US) LLC

By:	/s/ Paul Brockman
Name:	Paul Brockman
Title:	President

Exhibit A

Governance Matters

The Board of the Company

(a) The business and affairs of the Company shall be managed by or under the direction of a board of directors (the “ Board ”). The Board shall have the sole power, subject to the provisions of a definitive written agreement (the “ Agreement ”), to exercise any rights and powers on behalf of the Company (whether under the Agreement or otherwise). No shareholder or, except as otherwise authorized by the Board, any other Person shall have the authority to exercise any such rights or powers or take any such actions on behalf of the Company.

(i) The Board shall consist of eight members – five designated by Insurance Capital Group (each, an “ ICG Designee ”), one of which will serve as Chairman of the Board, two designated by Enstar Holdings (US) LLC (each, an “ Enstar Designee ” and “ Investor Designees ” when referred to as a group along with all of the ICG Designees), one of which will serve as Vice Chairman of the Board, and the Chief Executive Officer of the Company shall hold one seat on the Board (“ CEO Designee ”). The party entitled to designate a Board member may remove any individual designated by it at any time and appoint a replacement member. The initial ICG Designees shall be Craig Huff, Steve Johnson, Scott Penwell, James Zech and Matt Popoli, in each case until such person’s resignation or removal. The initial Enstar Designees shall be [Paul Brockman and Duncan McLaughlin], in each case until such person’s resignation or removal. The initial CEO Designee shall be Lewis Sharps, until such person’s resignation or removal. The Investor Designees shall be entitled to receive reimbursement of their reasonable out-of-pocket expenses in connection with performing their duties under the Agreement.

(ii) Each Board member shall be entitled to one vote.

(iii) The Board shall hold meetings (in person or via teleconference) at such time and place as shall be determined from time to time by resolution of the Board; provided that except for regular meetings that have been previously approved, any such meeting shall require at least 72 hours’ written notice to each Board member. At all meetings of the Board, the presence in person or via teleconference of a minimum of five or a lesser number if those not attending give their proxy to their designee of the total number of Board members (including at least one ICG Designee and one Enstar Designee) shall constitute a quorum for the transaction of business. The affirmative vote of Board members holding at least a majority of the votes of those present (including any proxies provided by absent members to attending members) at a meeting at which a quorum is present shall constitute an act of the Board. Any action required or permitted to be taken at a meeting of the Board may be taken without a meeting by written consent of Board members as a “consent in lieu a meeting” if the approval of such matters is unanimous.

(iv) Each Major Investor will have the right to appoint a designee to the Company Claims Committee and provide input and oversight into the Company’s claims handling procedures as determined to be appropriate by the Major Investors.

(v) The Board shall appoint a Transaction Committee made up of two ICG Designees and one Enstar Designee. The Transaction Committee shall review all potential acquisitions and make recommendations regarding such acquisitions to the Board for approval.

Matters Requiring Approval by the Company Board and each Major Investor (ICG and Enstar)

Notwithstanding anything to the contrary to be contained in the Agreement, the Company and its Subsidiaries shall not take any action with respect to any of the following matters without the prior written approval of (i) the Board and (ii) each Major Investor, which may be given or withheld in the Board’s or each Major Investor’s sole discretion, except as required to approve the transactions contemplated pursuant to the Option Agreement (as defined in the Purchase Agreement), as applicable:

1. the creation, incurrence or guarantee (other than in connection with an acquisition approved pursuant to 5. below) of Indebtedness (to be defined) in excess of one million dollars ($1,000,000), other than (i) borrowings under credit facilities that have been previously approved by the Board and each Major Investor and (ii) the loan from Legacy Texas Bank to the Company in the principal amount of up to $10,000,000 made in connection with the closing of the transactions contemplated by the Purchase Agreement;

2. the authorization or issuance (other than in connection with an acquisition approved pursuant to 5. below) of (i) new shares of any class of equity of the Company or any Subsidiary or (ii) securities convertible into, or exercisable or exchangeable for, such shares; in each case, only if either Major Investor is not offered the opportunity to participate on a pro rata basis;

3. any non pro rata dividends or other distributions of cash or other property to shareholders of the Company or any Subsidiary;

4. the repurchase of any class of equity of the Company or any Subsidiary, where either Major Investor is not offered the opportunity to participate in such repurchase on a pro rata basis;

5. any acquisition (in a single transaction or a series of related transactions whether by merger, consolidation, purchase or otherwise) of any business which in the aggregate would exceed one million dollars ($1,000,000) (“ Major Transaction ”). If either Major Investor exercises its veto under this provision of a Major Transaction that has been approved by the Board and the other Major Investor, then the other Major Investor may pursue such Major Transaction (“ Independent Transaction ”). If such other Major Investor elects to pursue an Independent Transaction, such Independent Transaction must be pursued and completed only by such Major Investor or any affiliate thereof (other than the Company or any Subsidiary). Such Major Investor may, at its and Diversus’s discretion, contract with Diversus for the management of the Independent Transaction. Upon a Major Investor vetoing three or more Major Transactions approved by the Board

and the other Major Investor, the Company and such other Major Investor may, at their option, endeavor to complete the buyout of the shares of such vetoing Major Investor on terms mutually agreeable to the Company and such vetoing Major Investor;

6. any disposal (in a single transaction or a series of related transactions whether by merger, consolidation, purchase, or otherwise) of (i) any asset of the Company or any Subsidiary with a fair market value greater than one million dollars ($1,000,000) or (ii) all or substantially all of the capital stock of any Subsidiary. For the avoidance of doubt, this provision shall not restrict the ability of the Company or any Subsidiary to manage its investment portfolio, including disposing of bonds or any other held position in the investment portfolio;

7. the election to dissolve or liquidate the Company or any Subsidiary, or to file bankruptcy or similar proceedings;

8. make or change any material election in respect of taxes, adopt or change in any material respect any accounting method in respect of taxes, settle or compromise any material claim or assessment in respect of taxes or file any amended tax return that is reasonably likely to result in a material increase in a liability in respect of taxes;

9. initiate, conduct or settle any legal or regulatory proceeding or threatened legal or regulatory proceeding (with the exception of those issues pertaining to policy claims in the ordinary course of business) for an amount in excess of one million dollars ($1,000,000);

10. create any new non-wholly owned Subsidiaries;

11. amend, alter, waive or repeal any provision of the certificate of incorporation, bylaws, or other organizational documents of the Company or any Subsidiary in a manner which would negatively impact either Major Investor’s economic, voting or other rights thereunder in a material manner;

12. enter into or be a party to any transaction with an employee, officer, or director of the Company or any Subsidiary (a “ Related Party ”) or member of such Released Party’s immediate family, or any corporation, partnership or other entity in which such Related Party is an officer, director, or partner, or in which such Related Party has significant ownership interests or otherwise controls, except for obligations to officers, employees, directors and consultants arising in the ordinary course of business or where such transaction is on arms-length terms as approved by the non-interested members of the Board;

13. enter into any agreement committing to do any of the foregoing.

Exhibit 10.10

Execution Copy

LOAN AGREEMENT

THIS LOAN AGREEMENT is dated as of [•], 2019 (this agreement, together with all amendments and restatements hereto, this “ Agreement ”), between DIVERSUS, INC., a Delaware corporation (“ Borrower ”), and POSITIVE PHYSICIANS HOLDINGS, INC., a Pennsylvania corporation (“ Lender ”).

RECITALS :

Borrower desires to obtain the Loan (defined below) from Lender.

Lender is willing to make the Loan to Borrower, subject to and in accordance with the terms of this Agreement and the other Loan Documents (defined below).

In consideration of the making of the Loan by Lender and the covenants, agreements, representations and warranties set forth in this Agreement, the parties hereto hereby covenant, agree, represent and warrant as follows:

ARTICLE 1.

DEFINITIONS; PRINCIPLES OF CONSTRUCTION

Section 1.1 Definitions .

For all purposes of this Agreement, except as otherwise expressly required or unless the context clearly indicates a contrary intent:

“ Affiliate ” shall mean, as to any Person, any other Person that, directly or indirectly, owns more than forty percent (40%) of the voting Capital Stock of, is in Control of, is Controlled by or is under common ownership or Control with such Person or is a director or officer of such Person or of an Affiliate of such Person.

“ Agreement ” shall have the meaning set forth in the introductory paragraph hereof.

“ Applicable Law ” shall mean all applicable federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions of Governmental Authorities affecting Borrower, any guarantors or any of their respective properties or assets, whether now or hereafter enacted and in force, including, without limitation, the Americans with Disabilities Act of 1990, and all permits, licenses and authorizations and regulations relating thereto.

“ Borrower ” shall have the meaning set forth in the introductory paragraph hereof.

“ Business Day ” shall mean any day other than a Saturday, Sunday or any other day on which commercial banks in the State of New York are not open for business.

“ Capital Stock ” means any and all shares, units, interests, participations or other equivalents (however designated) of capital stock of a corporation, including, without limitation, all preferred stock, any and all equivalent ownership interests in a Person other than a corporation and any and all warrants, rights or options to purchase any of the foregoing, in each case whether voting or non-voting.

“ Community Offering ” shall have the meaning given to such term in the Standby Purchase Agreement.

“ Control ” shall mean the power to direct the management and policies of an entity, directly or indirectly, whether through the ownership of voting securities or other beneficial interests, by contract or otherwise.

“ Creditors Rights Laws ” shall mean any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization, conservatorship, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to its debts or debtors.

“ Debt ” shall mean, as of any time, (a) the Outstanding Principal Amount together with all interest accrued and unpaid thereon and all other sums due to Lender in respect of the Loan under the Note, this Agreement or the other Loan Documents and (b) all sums advanced and costs and expenses incurred (including unpaid or unreimbursed servicing and special servicing fees) by Lender in connection with the enforcement and/or collection of the Debt or any part thereof.

“ Default ” shall mean the occurrence of any event hereunder or under the Note or the other Loan Documents which, but for the giving of notice or passage of time, or both, would be an Event of Default.

“ Default Rate ” shall mean, with respect to the Loan, a rate per annum equal to the lesser of (i) the Maximum Legal Rate, and (ii) twelve percent (12.00%).

“ Diversus Management Agreement ” has the meaning given to such term in the Standby Purchase Agreement.

“ Embargoed Person ” shall have the meaning set forth in Section 4.18 .

“ ERISA ” shall mean the Employee Retirement Income Security Act of 1974, as the same may heretofore have been or shall be amended, restated, replaced or otherwise modified.

“ Event of Default ” shall have the meaning set forth in Section 6.1 .

“ FATCA ” shall mean Sections 1471 through 1474 of the IRS Code and any regulations or official interpretations thereof.

“ GAAP ” shall mean generally accepted accounting principles in the United States of America as of the date of the applicable financial report.

“ Governmental Authority ” shall mean any court, board, agency, commission, office or other authority of any nature whatsoever for any governmental unit (foreign, federal, state, county, district, municipal, city or otherwise) whether now or hereafter in existence.

“ Guarantors ” shall mean, individually and/or collectively (as the context may require) Diversus Management, Inc., a Pennsylvania corporation, Professional Third Party, L.P., a Pennsylvania limited partnership, PTPGP, LLC, a Pennsylvania limited liability company, Specialty Insurance Services, LLC, a Pennsylvania limited liability company, Physicians’ Insurance Program Management Company, a Pennsylvania corporation, Gateway Risk Services, LLC, a Pennsylvania limited liability company and Andrews Outsource Solutions, Inc., a Florida corporation.

“ Guaranty ” shall mean that certain Guaranty Agreement executed by the Guarantors and dated as of the date hereof.

“ Indebtedness ” shall mean, for any Person, without duplication: (a) all indebtedness of such Person for borrowed money, for amounts drawn under a letter of credit, or for the deferred purchase price of property for which such Person or its assets is liable, (b) all unfunded amounts under a loan agreement, letter of credit, or other credit facility for which such Person would be liable if such amounts were advanced thereunder, (c) all amounts required to be paid by such Person as a guaranteed payment to partners or a preferred or special dividend, including any mandatory redemption of shares or interests, (d) all indebtedness guaranteed by such Person, directly or indirectly, (e) all obligations under leases that constitute capital leases for which such Person is liable, (f) all obligations of such Person under interest rate swaps, caps, floors, collars and other interest hedge agreements, in each case whether such Person is liable contingently or otherwise, as obligor, guarantor or otherwise, or in respect of which obligations such Person otherwise assures a creditor against loss, (g) all other liabilities or obligations of such Person which are required to be treated as indebtedness under GAAP and (h) any other similar liabilities or obligations.

“ Indemnified Parties ” shall mean (a) Lender, (b) any successor owner or holder of the Loan or participations in the Loan, (c) any servicer or prior servicer of the Loan, (d) any investor or any prior investor in the Loan, (e) any trustees, custodians or other fiduciaries who hold or who have held a full or partial interest in the Loan for the benefit of any investor or other third party, (f) any receiver or other fiduciary appointed in a Creditors Rights Laws proceeding, (g) any officers, directors, shareholders, partners, members, employees, agents, servants, representatives, contractors, subcontractors, Affiliates or subsidiaries of any and all of the foregoing, and (h) the heirs, legal representatives, successors and assigns of any and all of the foregoing (including, without limitation, any successors by merger, consolidation or acquisition of all or a substantial portion of the Indemnified Parties’ assets and business) in all cases whether during the term of the Loan or otherwise.

“ Initial Closing Date ” shall mean the date on which the first disbursement of the Loan is made in accordance with this Agreement.

“ Intercreditor Agreement ” shall have the meaning given to such term in the Standby Purchase Agreement.

“ Interest ” shall have the meaning set forth in Section 2.4(a) .

“ Interest Rate ” shall mean a rate per annum equal to eight percent (8.00%).

“ Lender ” shall have the meaning set forth in the introductory paragraph hereof.

“ Lien ” means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement to give or not to give any of the foregoing), any conditional sale or other title retention agreement, any financing or other lease in the nature thereof, and the filing of or agreement to give any financing statement or other similar form of public notice under the laws of any jurisdiction.

“ Loan ” shall mean the loan made by Lender to Borrower pursuant to this Agreement.

“ Loan Documents ” shall mean, collectively, this Agreement, the Note, the Guaranty, the Intercreditor Agreement and all other documents executed and/or delivered in connection with the Loan.

“ Losses ” shall mean any and all claims, suits, liabilities (including, without limitation, strict liabilities), actions, proceedings, obligations, debts, damages, losses, costs, expenses, fines, penalties, charges, fees, judgments, awards, amounts paid in settlement of whatever kind or nature (including but not limited to legal fees and other costs of defense).

“ Make-Whole Amount ” shall mean an amount equal to the amount of Interest which would accrue on the Term Loan from the date on which the applicable payment or prepayment is made or is required to be made to the date that is five (5) years after the Transaction Closing Date, discounted to the date of payment at a discount rate of 8.00%. For avoidance of doubt, the Make-Whole Amount does not apply to the Revolving Loan.

“ Material Adverse Effect ” shall mean a material adverse effect on (a) the business, profits, prospects, management, operations or condition (financial or otherwise) of Borrower and the Guarantors, taken as a whole, (c) the enforceability, validity of this Agreement or the other Loan Documents, (d) the ability of Borrower to perform its obligations under this Agreement or the other Loan Documents or (e) the ability of any Guarantor to perform its obligations under any Guaranty (not including the merger of certain Guarantors contemplated by Section 5.1).

“ Maturity Date ” shall mean the date that is five (5) years following the Transaction Closing Date or such earlier date on which the final payment of principal of the Note becomes due and payable as therein or herein provided, whether at such stated maturity date, by declaration of acceleration or otherwise.

“ Maximum Legal Rate ” shall mean the maximum non-usurious interest rate, if any, that at any time or from time to time may be contracted for, taken, reserved, charged or received on the indebtedness evidenced by the Note and as provided for herein or the other Loan Documents, under the laws of such state or states whose laws are held by any court of competent jurisdiction to govern the interest rate provisions of the Loan Agreement and the Note.

“ Merger ” shall have the meaning given to such term in the Option Agreement (as defined in the Standby Purchase Agreement).

“ Note ” shall mean that certain Promissory Note of even date herewith in the principal amount of up to the Term Loan Commitment Amount plus the Revolving Loan Commitment Amount, made by Borrower in favor of Lender, as the same may be amended, restated, replaced, extended, renewed, supplemented, severed, split, or otherwise modified from time to time.

“ OFAC ” shall have the meaning set forth in Section 4.18 .

“ Officer’s Certificate ” shall mean a certificate delivered to Lender by Borrower which is signed by Responsible Officer of Borrower.

“ Outstanding Principal Amount ” shall mean, as of any date, an amount equal to the sum of the Outstanding Term Loan Amount plus the Outstanding Revolving Loan Amount.

“ Outstanding Revolving Loan Amount ” shall mean, as of any date, an amount equal to (a) the portion of the Revolving Loan Commitment Amount which has been advanced to Borrower pursuant to Section 2.2(b) minus (b) the amount of any prepayments or repayments of the Loan which have been applied to the Outstanding Revolving Loan Amount pursuant to Section 2.6.

“ Outstanding Term Loan Amount ” shall mean, as of any date, an amount equal to (a) the portion of the Term Loan Commitment Amount which has been advanced to Borrower pursuant to Section 2.2 minus (b) the amount of any prepayments of the Loan which have been applied to the Outstanding Term Loan Amount pursuant to Section 2.6 .

“ Patriot Act ” shall have the meaning set forth in Section 4.19 .

“ Permitted Indebtedness ” shall have the meaning set forth in Section 5.13 .

“ Permitted Lien ” shall mean, collectively, (a) the lien and security interests created by the Senior Loan Documents, (b) liens for taxes or mechanics or materialmens’ liens which the Borrower or the Guarantors, as applicable, are contesting by appropriate proceedings (acceptable to Lender in its sole discretion) that stay the enforcement of the liens or other action against the Borrower or the Guarantors, as applicable.

“ Person ” shall mean any individual, corporation, partnership, joint venture, limited liability company, estate, trust, unincorporated association, any federal, state, county or municipal government or any bureau, department or agency thereof and any fiduciary acting in such capacity on behalf of any of the foregoing.

“ Prepayment Date ” shall mean the earlier to occur of (a) the date on which the Standby Purchase Agreement is terminated, (b) the date that is one (1) year following the date hereof, if the Community Offering has not occurred prior to such date and (c) the date that is one (1) Business Day following the date of the closing of the Merger.

“ Required Financial Item ” shall have the meaning set forth in Section 5.10 .

“ Responsible Officer ” shall mean with respect to a Person, the chairman of the board, president, chief operating officer, chief financial officer, treasurer, vice president or manager of such Person or such other similar officer of such Person reasonably acceptable to Lender and appropriately authorized by the applicable Person in a manner reasonably acceptable to Lender.

“ Revolving Borrowing ” shall mean any disbursement of the Revolving Loan made in accordance with Section 2.2(b).

“ Revolving Commitment Period ” shall mean the date commencing on the date hereof and ending on the date that is one Business Day prior to the Maturity Date.

“ Revolving Loan ” shall have the meaning set forth in Section 2.1(b) .

“ Revolving Loan Commitment Amount ” shall mean an amount equal to Five Hundred Thousand Dollars ($500,000), as may be reduced pursuant to Section 2.5(b)(ii) .

“ Senior Loan Documents ” shall mean that certain Credit Agreement dated as of January 3, 2017 between Borrower and Oak Street Funding, LLC, and the other “Credit Documents” as defined therein, as the same may be amended, restated or otherwise modified from time to time in accordance with the terms hereof.

“ Standby Purchase Agreement ” shall mean that certain Standby Purchase Agreement dated as of June 8, 2018 by and among Lender, Positive Physicians Insurance Exchange, Physician’s Insurance Program Exchange, Professional Casualty Association and the Standby Purchaser, as amended, restated or otherwise modified from time to time.

“ Standby Purchaser ” shall mean Insurance Capital Group, LLC, a Delaware limited liability company.

“ Term Loan ” shall have the meaning set forth in Section 2.1(a) .

“ Term Loan Commitment Amount ” shall mean an amount equal to Five Million Five Hundred Thousand Dollars ($5,500,000), as may be increased pursuant to Section 2.5(b)(ii) .

“ Transaction Closing Date ” shall mean the date of the closing and completion of the Community Offering.

Section 1.2 Principles of Construction .

All references to sections, exhibits and schedules are to sections, exhibits and schedules in or to this Agreement unless otherwise specified. All uses of the word “including” shall mean “including, without limitation” unless the context shall indicate otherwise. Unless otherwise specified, the words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. Unless otherwise specified, all meanings attributed to defined terms herein shall be equally applicable to both the singular and plural forms of the terms so defined.

ARTICLE 2.

GENERAL TERMS

Section 2.1 The Loan .

(a) Subject to and upon the terms and conditions set forth herein, Lender hereby agrees to make and Borrower hereby agrees to accept a term loan in an amount not to exceed the Term Loan Commitment Amount (the “ Term Loan ”).

(b) Subject to and upon the terms and conditions set forth herein, Lender hereby agrees to make and Borrower hereby agrees to accept a revolving loan in an amount not to exceed the Revolving Loan Commitment Amount (the “ Revolving Loan ”).

Section 2.2 Disbursements to Borrower .

(a) Following the Transaction Closing Date, provided that all of the conditions set forth in Section 3.1 and Section 3.2 have been satisfied, Lender shall advance the Term Loan to Borrower, in one or more advances, in an amount of up to $5,500,000.

(b) The Revolving Loan shall be disbursed during the Revolving Commitment Period, provided that all of the conditions set forth in Section 3.1 and Section 3.2 have been satisfied, upon Borrower’s irrevocable notice to Lender, which may be given by telephone. Each such notice must be received by Lender not later than 3:00 p.m. three Business Days prior to the requested date of any Revolving Borrowing. Any telephonic notice must be confirmed promptly by delivery to Lender of a written borrowing request for such Revolving Borrowing signed by a Responsible Officer of Borrower. Each such request (whether telephonic or written) shall specify (i) the requested date of the Revolving Borrowing (which shall be a Business Day), and (ii) the principal amount of the Revolving Borrowing to be borrowed. Each Revolving Loan shall be in the principal amount of $50,000.00 or any whole multiple of $50,000.00 in excess thereof or the unused portion of the Revolving Loan Commitment Amount.

Section 2.3 Note and Other Loan Documents . The Loan shall be evidenced by the Note and this Agreement and guaranteed by the Guaranty.

Section 2.4 Interest Rate; Interest Payments .

(a) Interest on the Outstanding Principal Amount of the Loan (“ Interest ”) shall accrue from the Initial Closing Date up to but excluding the Maturity Date at the Interest Rate.

(b) Interest shall be calculated on the basis of a 360-day year and the actual number of days elapsed.

(c) On the last day of each month following the Initial Closing Date and on the Maturity Date, Borrower shall pay to Lender the amount of accrued and unpaid Interest.

(d) In the event that, and for so long as, any Event of Default shall have occurred and be continuing, the Outstanding Principal Amount of the Loans shall accrue interest at the Default Rate.

(e) This Agreement and the other Loan Documents are subject to the express condition that at no time shall Borrower be required to pay Interest at a rate which could subject Lender to either civil or criminal liability as a result of being in excess of the Maximum Legal Rate. If, by the terms of this Agreement or the other Loan Documents, Borrower is at any time required or obligated to pay Interest due hereunder at a rate in excess of the Maximum Legal Rate, the Interest Rate or the Default Rate, as the case may be, shall be deemed to be immediately reduced to the Maximum Legal Rate and all previous payments in excess of the Maximum Legal Rate shall be deemed to have been payments in reduction of principal and not on account of the Interest due hereunder. All sums paid or agreed to be paid to Lender for the use or forbearance of the sums due under the Loan, shall, to the extent permitted by Applicable Law, be amortized, prorated, allocated and spread throughout the full stated term of the Loan until payment in full so that the rate or amount of interest on account of the Loan does not exceed the Maximum Legal Rate from time to time in effect and applicable to the Loan for so long as the Loan is outstanding.

Section 2.5 Loan Payments .

(a) Term Loan.

(i) On the Maturity Date, Borrower shall pay to Lender:


A.	If the Maturity Date occurs as the result of the acceleration of the Loan following an Event of Default, the Make-Whole Amount; plus


B.	the Outstanding Term Loan Amount; plus


C.	all accrued and unpaid Interest and all other amounts due hereunder and under the Note and the other Loan Documents.

(b) Revolving Loan.

(i) Borrower shall pay to Lender, on the date that is six (6) months from the date of any Revolving Borrowing that is made when there are no Revolving Loans outstanding:


A.	The Outstanding Revolving Loan Amount; plus


B.	all accrued and unpaid Interest and all other amounts due hereunder and under the Note and the other Loan Documents on such Revolving Loans.

(ii) In the event that any Revolving Loan is not repaid as required pursuant to Section 2.5(b)(i) , such Revolving Loans shall immediately be converted to a Term Loan, the Revolving Commitment shall be cancelled and the Term Loan Commitment shall be increased by the amount of such Revolving Commitment.

(c) Except as otherwise specifically provided herein, all payments and prepayments under this Agreement and the Note shall be made to Lender not later than 2:00pm, New York time, on the date when due and shall be made in lawful money of the United States of America in immediately available funds at Lender’s office or into an account that Lender shall select by not less than three (3) Business Days prior written notice to Borrower, and any funds received by Lender after such time shall, for all purposes hereof, be deemed to have been paid on the next succeeding Business Day.

(d) Whenever any payment to be made hereunder or under any other Loan Document shall be stated to be due on a day which is not a Business Day, the due date thereof shall be deemed to be the immediately succeeding Business Day.

(e) All payments required to be made by Borrower hereunder or under the Note or the other Loan Documents shall be made irrespective of, and without deduction for, any setoff, claim or counterclaim and shall be made irrespective of any defense thereto.

Section 2.6 Prepayments .

(a) Voluntary Prepayments . Borrower may not, without the prior written consent of the Lender, which permission may be given or withheld in Lender’s sole discretion, prepay the Term Loan in whole or in part, except as set forth in Section 2.6(b) . Borrower may from time to time repay the Revolving Loans.

(b) Mandatory Prepayments . On any Prepayment Date, Borrower shall pay to Lender:

(i) the Make-Whole Amount, if such prepayment occurs following the Transaction Closing Date; plus

(ii) the Outstanding Principal Amount; plus

(iii) all accrued and unpaid Interest and all other amounts due hereunder and under the Note and the other Loan Documents.

(c) Application of Payments . Amounts prepaid in accordance with this Section 2.6 shall be applied to the Debt in the following order:

(i) first , to pay any costs or expenses owed under this Agreement or any of the other Loan Documents;

(ii) second , to the Make-Whole Amount;

(iii) third , to pay any accrued and unpaid interest on the Outstanding Principal Amount as of the date of such prepayment; and

(iv) fourth , to pay the Outstanding Principal Amount.

(d) Any amounts of the Term Loan which are pre-paid may not be reborrowed.

Section 2.7 Taxes .

(a) Any and all payments by Borrower under or in respect of this Agreement or any other Loan Document to which Borrower is a party shall be made free and clear of, and without deduction or withholding for or on account of, any and all present or future taxes, levies, imposts, duties, deductions, assessments, fees, charges or withholdings (including backup withholdings), and all liabilities (including penalties, interest and additions to tax) with respect thereto, whether now or hereafter imposed, levied, collected, withheld or assessed by any taxation authority or other Governmental Authority, unless required by Applicable Law.

(b) In addition, Borrower hereby agrees to pay any and all present or future stamp, recording, documentary, excise, property, intangible, filing or similar taxes, charges or levies that arise from any payment made under or in respect of this Agreement or any other Loan Document or from the execution, delivery or registration of, any performance under, enforcement or registration of, from the receipt or perfection of a security interest under, or otherwise with respect to, this Agreement, the Note or any other Loan Document.

(c) Borrower hereby agrees to indemnify Lender for, and to hold Lender harmless against, the full amount of taxes described in this Section 2.7 imposed on or paid by Lender, or required to be withheld or deducted from a payment to Lender, and any liability (including penalties, additions to tax, interest and expenses) arising therefrom or with respect thereto. The indemnity by Borrower provided for in this Section 2.7(c) shall apply and be made whether or not such taxes have been correctly or legally imposed or asserted. A certificate as to the amount of such payment or liability delivered to Borrower by Lender shall be conclusive absent manifest error. Amounts payable by Borrower under the indemnity set forth in this Section 2.7(c) shall be paid within ten (10) days from the date on which the applicable Lender, as the case may be, makes written demand therefor.

(d) Lender shall take commercially reasonable actions (consistent with legal and regulatory restrictions) requested by Borrower to assist Borrower, as the case may be, at the sole expense of Borrower, to recover from the relevant taxation authority or other Governmental Authority any taxes in respect of which amounts were paid by Borrower pursuant to Section 2.7(a) , Section 2.7(b) or Section 2.7(c) . However, Lender will not be required to take any action that would be, in the sole judgment of Lender, legally inadvisable or commercially or otherwise disadvantageous to Lender in any respect. In no event shall Lender be required to disclose any tax returns or any other information that, in the sole judgment of Lender is confidential or proprietary.

Section 2.8 Conversion . At the option of the Lender, to be exercised at any time following the completion of the Community Offering (as described in the Standby Purchase Agreement) and prior repayment of the Loan, the Outstanding Principal Amount shall be exchanged and converted and shall be deemed to be repaid in full upon the issuance to Lender of a number of shares of Series A Common Stock of the Borrower equal to the Outstanding Principal Amount plus the amount of any outstanding Revolving Loans divided by $1.00, as such amount shall be adjusted to take into account the issuance of any additional Capital Stock of Borrower, stock splits, or other changes to the capital structure of Borrower. Such issuance shall occur within five (5) Business Days of the Lender’s written request therefor.

ARTICLE 3.

Conditions

Section 3.1 Conditions to Initial Disbursement . The obligation of Lender to make the initial disbursement of the Loan is subject to the satisfaction, in the discretion of Lender and of the Standby

Purchaser, of the following conditions, subject to Section 2.2 :

(a) The effective filing of the Registration Statement (as defined in the Standby Purchase Agreement);

(b) execution and delivery by Borrower and each Guarantor of each Loan Document to which such Person is a party;

(d) receipt by Lender of a legal opinion from counsel to Borrower and the Guarantors with respect to the authorization, execution, delivery and enforceability of the Loan Documents and such other matters requested by Lender; and

(e) receipt by Lender of an Officer’s Certificate of Borrower and each Guarantor attaching (i) a certified copy of such Person’s certificate of formation or incorporation, (ii) a certificate of good standing in respect of such Person issued by its jurisdiction of formation and each jurisdiction in which it is registered to do business, (iii) a certified copy of such Person’s articles of incorporation and bylaws or limited liability operating agreement, (iv) an incumbency certificate with specimen signatures of the individuals who are authorized to execute the Loan Documents on behalf of such Person, (v) a certified copy of the resolutions adopted by the shareholders or members and/or directors or managers of such Person approving the execution, delivery and performance by such Person of the Loan Documents to which it is a Party.

Section 3.2 Conditions to Each Disbursement . The obligation of Lender to make any disbursement of the Loan is subject to the satisfaction, in the discretion of Lender and of the Standby Purchaser, prior to or at the date for such disbursement, of the following conditions, subject to Section 2.2 :

(a) The delivery by Borrower of a borrowing request in the form of Exhibit A not less than five (5) Business Days prior to the date of the requested disbursement;

(b) all of the representations and warranties made by Borrower and/or the Guarantors shall be true and correct as and when made and as of the date of the requested disbursement, provided, however, any inaccuracy of such representations and warranties may be cured by Borrower and/or the Guarantors prior to such disbursement;

(c) no Default or Event of Default shall have occurred or be in existence, and no Default or Event of Default would reasonably be expected to occur as the result of the making of such Disbursement;

(d) Borrower and the Guarantors, on a consolidated basis, shall be in compliance with the financial covenants described in Section 5.19 , and shall remain in compliance with such covenants, on a pro-forma basis after taking into account the making of the requested disbursement;

(e) receipt by the Lender of a closing certificate dated as of the date of such disbursement executed by an officer of Borrower certifying that all of the conditions set forth in Section 3.1 (if applicable) and this Section 3.2 have been satisfied; and

(f) no event or circumstance shall have occurred or be in existence that has or could have a Material Adverse Effect.

ARTICLE 4.

REPRESENTATIONS AND WARRANTIES

Borrower represents and warrants to Lender that:

Section 4.1 Legal Status and Authority .

(a) Borrower (i) is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of formation; (ii) is duly qualified to transact business and is in good standing under the laws of each state where required in order to conduct its business and own the properties owned by it and (iii) has all powers and all governmental licenses, authorizations, registrations, permits, consents and approvals required under all Applicable Law and required in order to carry on its business as now conducted.

(b) Each Guarantor (i) is the type of entity identified in the definition of “Guarantor” and isduly organized, validly existing and in good standing under the laws of its jurisdiction of formation; (ii) is duly qualified to transact business and is in good standing under the laws of each state where required in order to conduct its business and own the properties owned by it and (iii) has all powers and all governmental licenses, authorizations, registrations, permits, consents and approvals required under all Applicable Law and required in order to carry on its business as now conducted.

Section 4.2 Validity of Documents . (a) The execution, delivery and performance of this Agreement, the Note and the other Loan Documents by Borrower and each Guarantor and the borrowing evidenced by the Note and this Agreement (inclusive of all Exhibits and Schedules) (i) are within its corporate or limited liability company power and authority; (ii) have been authorized by all requisite corporate or limited liability company pursuant to its organizational documents; (iii) will not violate, conflict with, result in a breach of or constitute (with notice or lapse of time, or both) a default under any provision of law, any order or judgment of any court or Governmental Authority, any license, certificate or other approval applicable to it, its organizational documents, or any indenture, agreement or other instrument to which it is a party or by which it or any of its assets is or may be bound or affected; (iv) will not result in the creation or imposition of any Lien upon any of its assets; and (v) will not require any authorization or license from, or any filing with, any Governmental Authority, (b) this Agreement, the Note and the other Loan Documents have been duly executed and delivered by Borrower and each Guarantor through the undersigned authorized representative of Borrower and each Guarantor and (c) this Agreement, the Note and the other Loan Documents constitute the legal, valid and binding obligations of Borrower and each Guarantor. The Loan Documents are not subject to any right of rescission, set-off, counterclaim or defense by Borrower or any Guarantor, including the defense of usury, nor would the operation of any of the terms of the Loan Documents, or the exercise of any right thereunder, render the Loan Documents unenforceable (except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar Creditors Rights Laws, and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law)), and neither Borrower nor any Guarantor have asserted any right of rescission, set-off, counterclaim or defense with respect thereto. No consent, approval or authorization of or registration, qualification, designation, declaration or filing with any governmental authority on the part of the Borrower or any Guarantor is required in connection with the valid execution and delivery of this Agreement, the Note and/or the , or the other Loan Documents.

Section 4.3 The authorized and outstanding Capital Stock of the Borrower and each Guarantor is as set forth on Schedule 4.3 . All issued and outstanding Capital Stock of each such Person is duly authorized and validly issued, fully paid, non-assessable, free and clear of all Liens other than Permitted Liens and such Capital Stock was issued in compliance with all Applicable Law. The identity of the holders

of the Capital Stock of the Borrower and each Guarantor and the percentage of the fully diluted ownership of the Capital Stock of each such Person is set forth on Schedule 4.3 . Except as set forth on Schedule 4.3 , there are no preemptive or other outstanding rights, options, warrants, conversion rights or similar agreements or understandings for the purchase or acquisition from the Borrower or any Guarantor of any Capital Stock of any such Person.

Section 4.4 Litigation . There is no action, suit or proceeding, judicial, administrative or otherwise (including any condemnation or similar proceeding), pending or, to the best of Borrower’s knowledge, threatened or contemplated against Borrower or any Guarantor or against or affecting any of its or their assets other than as set forth on Schedule 4.4 .

Section 4.5 Agreements . Neither Borrower nor any Guarantor is a party to any agreement or instrument or subject to any restriction which could be reasonably likely to have a Material Adverse Effect. Neither Borrower nor any Guarantor is in default in any material respect in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement or instrument to which it is a party or by which Borrower, Guarantor or any of its or their assets is bound. Neither Borrower nor any Guarantor has material financial obligation under any agreement or instrument to which Borrower or any Guarantor is a party or by which Borrower, Guarantor or any of its or their assets is bound, other than (a) obligations incurred in the ordinary course of the operation of the Borrower’s and Guarantors’ business, (b) obligations under the Senior Loan Documents and (c) obligations under this Agreement, the Note and the other Loan Documents. Other than the Senior Loan Documents, and subject to the Intercreditor Agreement, there is no agreement or instrument to which Borrower is a party or by which Borrower is bound that would require the subordination in right of payment of any of Borrower’s obligations hereunder or under the Note to an obligation owed to another party.

Section 4.6 Financial Condition .

(a) Borrower and each Guarantor is solvent and no proceeding under Creditors Rights Laws with respect to Borrower or any Guarantor has been initiated. Neither Borrower nor any Guarantor has initiated any proceeding under Creditors Rights Laws with respect to Borrower or such Guarantor.

(b) No petition in bankruptcy has been filed by or against Borrower or any Guarantor in the last ten (10) years, and neither Borrower nor any Guarantor has made any assignment for the benefit of creditors or taken advantage of any Creditors Rights Laws in the last ten (10) years.

(c) Neither Borrower nor any Guarantor is contemplating either the filing of a petition by it under any Creditors Rights Laws or the liquidation of its assets or property, and neither Borrower nor any Guarantor has any knowledge of any Person contemplating the filing of any such petition against it.

Section 4.7 Disclosure . Borrower has disclosed to Lender all material facts and has not failed to disclose any material fact that could cause any representation or warranty made herein to be materially misleading.

Section 4.8 No Plan Assets . As of the date hereof and throughout the term of the Loan (a) Borrower is not nor will be an “employee benefit plan,” as defined in Section 3(3) of ERISA, subject to Title I of ERISA, (b) Borrower is not nor will be a “governmental plan” within the meaning of Section 3(32) of ERISA, (c) no transactions by or with Borrower are nor will be subject to any state statute regulating investments of, or fiduciary obligations with respect to, governmental plans; and (d) none of the assets of Borrower constitutes or will constitute “plan assets” of one or more such plans within the meaning of 29 C.F.R. Section 2510.3-101.

Section 4.9 Not a Foreign Person . Borrower is not a “foreign person” within the meaning of § 1445(f)(3) of the IRS Code.

Section 4.10 Financial Information . All financial data, including, without limitation, the balance sheets, statements of cash flow, statements of income and operating expense and rent rolls, that have been delivered to Lender in respect of Borrower and/or the Guarantors and its and their assets (a) are true, complete and correct in all material respects, (b) accurately represent the financial condition of Borrower and/or the Guarantors and its and their assets in all material respects, as applicable, as of the date of such reports, and (c) to the extent prepared or audited by an independent certified public accounting firm, have been prepared in accordance with GAAP throughout the periods covered, except as disclosed therein. Borrower has no contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments, except as referred to or reflected in said financial statements. Since the date of such financial statements, there has been no materially adverse change in the financial condition, operations or business of Borrower from that set forth in said financial statements except as described on Schedule 4.9 .

Section 4.11 Taxes . Borrower and each Guarantor have filed all federal, state, county, municipal, and city income, personal property and other tax returns required to have been filed by it and has paid all taxes and related liabilities which have become due pursuant to such returns or pursuant to any assessments received by it. Borrower knows of no basis for any additional assessment in respect of any such taxes and related liabilities for prior years.

Section 4.12 Title to Properties . Borrower and each Guarantor have (a) full corporate, partnership, limited liability company, as appropriate, power, authority and legal right to own and operate the properties and assets which it now owns, and to carry on the lines of business in which it is now engaged, and (b) good and marketable title to its owned properties and assets, subject to no Lien of any kind, except Permitted Liens.

Section 4.13 Indebtedness . Neither Borrower nor any Guarantor has incurred, has issued or is liable for any Indebtedness other than Permitted Indebtedness.

Section 4.14 Third Party Representations . Each of the representations and the warranties made by Borrower and/or the Guarantors in the other Loan Documents are true, complete and correct in all material respects.

Section 4.15 Federal Reserve Regulations . No part of the proceeds of the Loan will be used for the purpose of purchasing or acquiring any “margin stock” within the meaning of Regulation U of the Board of Governors of the Federal Reserve System or for any other purpose which would be inconsistent with such Regulation U or any other Regulations of such Board of Governors, or for any purposes prohibited by Applicable Law or by the terms and conditions of this Agreement, the Note or the other Loan Documents.

Section 4.16 Investment Company Act . Borrower is not (a) an “investment company” or a company “controlled” by an “investment company,” within the meaning of the Investment Company Act of 1940, as amended, (b) a “holding company” or a “subsidiary company” of a “holding company” or an “affiliate” of either a “holding company” or a “subsidiary company” within the meaning of the Public Utility Holding Company Act of 1935, as amended or (c) subject to any other federal or state law or regulation which purports to restrict or regulate its ability to borrow money.

Section 4.17 Fraudulent Conveyance . Borrower (a) has not entered into the Loan or any Loan Document with the actual intent to hinder, delay, or defraud any creditor and (b) received reasonably equivalent value in exchange for its obligations under the Loan Documents. Giving effect to the Loan, the

fair saleable value of Borrower’s assets exceeds and will, immediately following the execution and delivery of the Loan Documents, exceed Borrower’s total liabilities, including, without limitation, subordinated, unliquidated, disputed or contingent liabilities. The fair saleable value of Borrower’s assets is and will, immediately following the execution and delivery of the Loan Documents, be greater than Borrower’s probable liabilities, including the maximum amount of its contingent liabilities or its debts as such debts become absolute and matured. Borrower’s assets do not and, immediately following the execution and delivery of the Loan Documents will not, constitute unreasonably small capital to carry out its business as conducted or as proposed to be conducted. Borrower does not intend to, and does not believe that it will, incur debts and liabilities (including, without limitation, contingent liabilities and other commitments) beyond its ability to pay such debts as they mature (taking into account the timing and amounts to be payable on or in respect of obligations of Borrower).

Section 4.18 Embargoed Person . As of the date hereof and at all times throughout the term of the Loan, including after giving effect to any transfers of interests permitted pursuant to the Loan Documents, (a) none of the funds or other assets of Borrower constitute property of, or are beneficially owned, directly or indirectly, by any person, entity or country which is a sanctioned person, entity or country under U.S. law, including but not limited to, the International Emergency Economic Powers Act, 50 U.S.C. §§ 1701 et seq., The Trading with the Enemy Act, 50 U.S.C. App. 1 et seq., and any Executive Orders or regulations promulgated thereunder (including regulations administered by the Office of Foreign Assets Control (“ OFAC ”) of the U.S. Department of the Treasury and the Specially Designated Nationals List maintained by OFAC) with the result that the investment in Borrower, as applicable (whether directly or indirectly), is prohibited by Applicable Law or the Loan made by Lender is in violation of Applicable Law (“ Embargoed Person ”); (b) unless expressly waived in writing by Lender, no Embargoed Person has any interest of any nature whatsoever in Borrower, with the result that the investment in Borrower (whether directly or indirectly), is prohibited by Applicable Law or the Loan is in violation of Applicable Law; and (c) none of the funds of Borrower have been derived from any unlawful activity with the result that the investment in Borrower (whether directly or indirectly), is prohibited by Applicable Law or the Loan is in violation of Applicable Law. Borrower covenants and agrees that in the event Borrower receives any notice that Borrower (or any of their respective beneficial owners, affiliates or participants) or any Person that has an interest in Borrower is designated as an Embargoed Person, Borrower shall immediately notify Lender in writing. At Lender’s option, it shall be an Event of Default hereunder if Borrower or any other party to the Loan is designated as an Embargoed Person.

Section 4.19 Patriot Act . All capitalized words and phrases and all defined terms used in the USA Patriot Act of 2001, 107 Public Law 56 (October 26, 2001) and in other statutes and all orders, rules and regulations of the United States government and its various executive departments, agencies and offices related to the subject matter of the Patriot Act (collectively referred to in this Section only as the “ Patriot Act ”) are incorporated into this Section. Borrower hereby represents and warrants that Borrower, each Guarantor and each and every Person affiliated with Borrower or any Guarantor or that has an economic interest in Borrower or any Guarantor, or, that has or will have an interest in the transaction contemplated by this Agreement or will participate, in any manner whatsoever, in the Loan, is: (a) in full compliance with all applicable requirements of the Patriot Act and any regulations issued thereunder; (b) operated under policies, procedures and practices, if applicable, that are in compliance with the Patriot Act and available to Lender for Lender’s review and inspection during normal business hours and upon reasonable prior notice; (c) not in receipt of any notice from the Secretary of State or the Attorney General of the United States or any other department, agency or office of the United States claiming a violation or possible violation of the Patriot Act; (d) not a person who has been determined by competent authority to be subject to any of the prohibitions contained in the Patriot Act; and (e) not owned or controlled by or now acting and or will in the future act for or on behalf of any person who has been determined to be subject to the prohibitions contained in the Patriot Act. Borrower covenants and agrees that in the event Borrower receives any notice that Borrower, any Guarantor (or any of their respective beneficial owners, affiliates or

participants) or any Person that has an interest in the Borrower or any Guarantor is indicted, arraigned, or custodially detained on charges involving money laundering or predicate crimes to money laundering, Borrower shall immediately notify Lender. At Lender’s option, it shall be an immediate Event of Default hereunder if Borrower or any Guarantor or any Controlling principal of Borrower or any Guarantor is indicted, arraigned or custodially detained on charges involving money laundering or predicate crimes to money laundering.

Section 4.20 Bank Holding Company . Borrower is not a “bank holding company” or a direct or indirect subsidiary of a “bank holding company” as defined in the Bank Holding Company Act of 1956, as amended, and Regulation Y thereunder of the Board of Governors of the Federal Reserve System.

Section 4.21 No Change in Facts or Circumstances . All information submitted by Borrower to Lender and in all financial statements, reports, certificates and other documents submitted in connection with the Loan or in satisfaction of the terms thereof and all statements of fact made by Borrower in this Agreement or in the other Loan Documents, are accurate, complete and correct in all material respects. There has been no material adverse change in any condition, fact, circumstance or event that would make any such information inaccurate, incomplete or otherwise misleading in any material respect or that would otherwise have a Material Adverse Effect.

Section 4.22 Survival of Representations . Borrower agrees that, unless expressly provided otherwise, all of the representations and warranties of Borrower set forth in this Article 4 and elsewhere in this Agreement and the other Loan Documents shall survive for so long as any portion of the Debt remains owing to Lender. All representations, warranties, covenants and agreements made in this Agreement and in the other Loan Documents shall be deemed to have been relied upon by Lender notwithstanding any investigation heretofore or hereafter made by Lender or on its behalf.

ARTICLE 5.

BORROWER COVENANTS

From the date hereof and until payment and performance in full of all obligations of Borrower under this Agreement, the Note and the other Loan Documents, Borrower hereby covenants and agrees with Lender that:

Section 5.1 Existence . Borrower and each Guarantor shall continuously maintain (i) its existence and shall not dissolve or permit its dissolution, (ii) its rights to do business in the applicable State and (iii) its franchises and trade names, if any; provided, however that PTPGP, LLC, Professional Third Party, LP, Specialty Insurance Services, LLC, and Physicians’ Insurance Program Management Company shall be permitted to merge with and into Diversus Management, Inc.

Section 5.2 Applicable Law . Borrower and each Guarantor shall promptly comply in all material respects with all Applicable Law affecting Borrower, the Guarantors and their respective assets, or the use thereof, including, without limitation, Applicable Law relating to OFAC, Embargoed Persons and the Patriot Act.

Section 5.3 Use of Proceeds . The proceeds of the Loan will be used solely for the Borrower’s and the Guarantors’ working capital purposes in the ordinary course; provided that, without the prior written consent of Lender, no proceeds of the Loan shall be used to repay any of Borrower’s Indebtedness under the Senior Loan Document.

Section 5.4 Other Obligations . Borrower and each Guarantor shall pay and discharge all trade

obligations (defined as balances owed to third parties for goods, supplies, and services obtained in the ordinary course of business and purchased on open account) as they mature and all taxes, assessments or other governmental charges or levies before penalties attach, except such as are being appropriately contested in good faith and for which an adequate reserve for payment is being maintained.

Section 5.5 Insurance . Borrower and each Guarantor shall (i) maintain adequate insurance as is customarily maintained by similar businesses, (ii) ensure that each policy for such insurance shall contain a provision for thirty (30) days prior notice to Lender of any cancellation thereof and stipulating Lender as loss payee, (iii) provide a detailed list of such insurance to Lender upon request, and (iv) within thirty (30) days of written notice from Lender, obtain such additional insurance as may be reasonably requested.

Section 5.6 Litigation . Borrower shall give prompt written notice to Lender of any litigation or governmental proceedings pending or threatened in writing against Borrower or any Guarantor.

Section 5.7 Notice of Default . Borrower shall promptly advise Lender of any material adverse change in Borrower’s or any Guarantor’s condition (financial or otherwise) or of the occurrence of any Default or Event of Default of which Borrower or any Guarantor has knowledge.

Section 5.8 Cooperate in Legal Proceedings . Borrower shall and shall cause each Guarantor to reasonably and fully cooperate with Lender with respect to any proceedings before any court, board or other Governmental Authority which may in any way affect the rights of Lender hereunder or any rights obtained by Lender under any of this Agreement, the Note or the other Loan Documents and, in connection therewith, permit Lender, at Lender’s election, to participate in any such proceedings.

Section 5.9 Performance by Borrower . Borrower shall and shall cause each Guarantor to in a timely manner observe, perform and fulfill each and every covenant, term and provision to be observed and performed by Borrower under this Agreement, the Note and the other Loan Documents and any amendments, modifications or changes thereto.

Section 5.10 Information Covenants .

(a) Borrower shall and shall cause each Guarantor to keep adequate books and records of account in accordance with GAAP or in accordance with other methods acceptable to Lender in its reasonable discretion (consistently applied), and furnish to Lender:

(i) annual financial statements of Borrower and each Guarantor audited (on a consolidated bases) by an accounting firm or other independent certified public accountant reasonably acceptable to Lender, within ninety (90) days after the close of each fiscal year of Borrower, except for the year ended December 31, 2018, where such statements shall be furnished to lender within one hundred twenty (120) days after the close of 2018;

(ii) quarterly unaudited financial statements of Borrower and each Guarantor within thirty (30) days after the end of each calendar quarter, together with a certificate of the chief financial officer of Borrower certifying that such statements have been prepared in accordance with GAAP and containing calculations of the financial covenants set forth in Section 5.19 ; and

(iii) such other certificates or evidence acceptable to Lender to confirm that any funds advanced by Lender hereunder have been used by Borrower in the manner set forth herein.

(b) Within ten (10) Business Days of Lender’s request, Borrower shall furnish Lender with such other additional financial or management information relating to Borrower and/or the Guarantors (including State and Federal tax returns) as may, from time to time, be reasonably required by Lender in form and substance reasonably satisfactory to Lender. Borrower shall permit Lender and its agents to perform an examination and audit of any such books and records at any reasonable time from time to time during business hours upon no less than one (1) Business Days written notice, unless a Default or Event of Default is then in existence, in which case no advance notice shall be required.

(c) Borrower agrees that all financial statements and other items required to be delivered to Lender pursuant to this Section 5.10 (each a “ Required Financial Item ” and, collectively, the “ Required Financial Items ”) shall: (i) be complete and correct in all material respects; (ii) present fairly the financial condition of the party as of the respective dates of the financial statements; (iii) disclose all liabilities that are required to be reflected or reserved against; and (iv) be prepared (A) in hardcopy and electronic formats and (B) in accordance with GAAP or in accordance with other methods acceptable to Lender in its sole discretion (consistently applied). Borrower shall be deemed to warrant and represent that, as of the date of delivery of any such financial statement, there has been no material adverse change in financial condition, nor have any assets or properties been sold, transferred, assigned, mortgaged, pledged or encumbered since the date of such financial statement except as disclosed by Borrower in a writing delivered to Lender. Borrower agrees that all Required Financial Items shall not contain any misrepresentation or omission of a material fact.

Section 5.11 Debt Cancellation . Neither Borrower nor any Guarantor shall cancel or otherwise forgive or release any claim or debt owed to Borrower or such Guarantor by any Person, except for adequate consideration and in the ordinary course of Borrower’s or such Guarantor’s business.

Section 5.12 ERISA .

(a) Neither Borrower nor any Guarantor shall engage in any transaction which would cause any obligation, or action taken or to be taken, hereunder (or the exercise by Lender of any of its rights hereunder or under the other Loan Documents) to be a non-exempt (under a statutory or administrative class exemption) prohibited transaction under ERISA.

(b) Borrower further covenants and agrees to deliver to Lender such certifications or other evidence from time to time throughout the term of the Loan, as requested by Lender in its reasonable discretion, that (i) neither Borrower nor any Guarantor is an “employee benefit plan” as defined in Section 3(3) of ERISA, or other retirement arrangement, which is subject to Title I of ERISA or Section 4975 of the IRS Code, or a “governmental plan” within the meaning of Section 3(32) of ERISA; (ii) neither Borrower nor any Guarantor is subject to state statutes regulating investments and fiduciary obligations with respect to governmental plans; and (iii) one or more of the following circumstances is true:

(i) Capital Stock interests in Borrower and the Guarantors are publicly offered securities, within the meaning of 29 C.F.R. § 2510.3 101(b)(2);

(ii) Less than 25 percent of each outstanding class of Capital Stock in Borrower and the Guarantors are held by “benefit plan investors” within the meaning of 29 C.F.R.§ 2510.3 101(f)(2), as modified by § 3(42) of ERISA, disregarding the value of any Capital Stock in Borrower and the Guarantors held by (I) a Person (other than a benefit plan investor) who has discretionary authority or control with respect to the assets of Borrower and the Guarantors, (II) any Person who provides investment advice for a fee (direct or indirect) with respect to the assets of Borrower and the Guarantors, or (III) any affiliate of a Person described in the immediately preceding clause (I) or (II);

(iii) Borrower qualifies as an “operating company” or a “real estate operating company” within the meaning of 29 C.F.R § 2510.3 101(c) or (e) or an investment company registered under The Investment Company Act of 1940; or

(iv) The assets of Borrower and the Guarantors are not otherwise “plan assets” of one or more “employee benefit plans” (as defined in Section 3(3) of ERISA) subject to Title I of ERISA, within the meaning of 29 C.F.R. § 2510.3-101.

Section 5.13 No Other Indebtedness . Neither Borrower nor any Guarantor shall incur, directly or indirectly, any Indebtedness, other than (a) the Indebtedness arising hereunder and under the other Loan Documents, (b) Indebtedness under the Senior Loan Documents; provided that the amount of Indebtedness under the Senior Loan Documents shall not, at any time, exceed the amount of such Indebtedness as of the Transaction Closing Date (taking into account any prepayment of such Indebtedness made in connection with the transactions occurring on the Transaction Closing Date) minus amount of such Indebtedness which is repaid prior to such time in accordance with the terms of the Senior Loan Documents and further minus any amortization or payment on the Senior Loan Documents paid following the Transaction Closing Date and (c) trade accounts payable of Borrower and Guarantors and other similar obligations incurred in the ordinary course of business which do not, in the aggregate, exceed $100,000 at any time (collectively, “ Permitted Indebtedness ”).

Section 5.14 Assets; Liens . Neither Borrower nor any Guarantor shall, directly or indirectly, (a) convey, lease, sublease, sell, transfer, assign or otherwise dispose of, in one transaction or a series of transactions, all or any part of its business, assets or properties of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible, whether now owned or hereafter acquired, except in the ordinary course of business consistent with past practices and except for the transactions relating to entry into the new Management Agreement between Diversus Management Inc. and Positive Physicians Insurance Company and the related termination of the existing attorney-in-fact agreements all as referenced in the Standby Purchase Agreement, or (b) indirectly, create, incur, assume or permit to exist any Lien or other encumbrance on or with respect to any property or asset of any kind of Borrower and Guarantors, whether now owned or hereafter acquired, other than Permitted Liens.

Section 5.15 Changes in Corporate Structure; Asset Acquisition . Subject to the proviso set forth in Section 5.1, neither Borrower nor any Guarantor shall, directly or indirectly, (a) make or own any investments (including without limitation any direct or indirect loans, advances or capital contributions) in any person, including any joint venture, but excluding investments, loans or advances by Borrower in its direct or indirect subsidiaries, (b) other than pursuant to the Option Agreement, enter into any amalgamation, merger or consolidation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), (c) issue any Capital Stock to any Person or otherwise cause or permit any change in Borrower’s or any Guarantor’s ownership or capital structure (including, without limitation, by amendment to the terms of any Capital Stock of Borrower or any Guarantor), (d) acquire, by purchase or otherwise, the business, property or fixed assets of, or stock or other evidence of beneficial ownership of, any person or entity or business unit thereof in excess of $100,000.00 in the aggregate in any calendar year or (e) change its business or enter into any new line of business.

Section 5.16 Formation of Subsidiaries . Neither Borrower nor any Guarantor shall form any subsidiary or acquire any interest in any other Person unless such Person executes a joinder to this Agreement and the Guaranty in form and substance satisfactory to Lender and the Standby Purchaser and provides (a) an Officer’s Certificate of such Person with respect to the matters listed in Section 3.1(e) and (b) a legal opinion of counsel to such Person with respect to the execution and enforceability of the documents executed by such Person pursuant to this Section 5.16 .

Section 5.17 Restricted Payments . Borrower shall not cause or permit, directly or indirectly, (a) any payments of dividends or other payments in respect its Capital Stock, or (b) any payments of any fees, commissions, compensation or other amounts to the holders of Borrower’s Capital Stock or Affiliates thereof, except for those permitted payments identified on Exhibit B attached hereto and made a part hereof.

Section 5.18 Transactions with Affiliates . Neither Borrower nor any Guarantor shall enter into, or cause, suffer or permit to exist, directly or indirectly, any arrangement, transaction or contract with any Affiliates thereof or with any of the holders of Borrower’s Capital Stock unless (a) such arrangement, transaction or contract is identified on Exhibit B attached hereto and made a part hereof, or (b) such arrangement, transaction or contract is on an arm’s length basis and on commercially reasonable terms.

Section 5.19 Financial Covenants .

(a) Borrower and the Guarantors, on a consolidated basis, shall be in compliance with each of the following financial covenants in each full calendar quarter following the Initial Closing Date, as shown on the Borrower’s quarterly financial statements and calculated in accordance with GAAP consistently applied:

(i) the Debt Service Coverage Ratio (defined below) shall be at least 1.1 to 1.00, tested as follows:


A.	on a trailing 3-month basis for the quarter ending on June 30, 2019;


B.	on a trailing 6-month basis for the quarter ending on September 30, 2019;


C.	on a trailing 9-month basis for the quarter ending December 31, 2019; and


D.	on a trailing 12-month basis for each quarter ending on or after March 31, 2020,

(ii) EBITDA (defined below) shall be at least these amount for the periods indicated, measured on a trailing 12-month basis:


A.	For 2019 - $3,000,000;


B.	For 2020 – $2,500,000;


C.	For 2021 – $2,400,000; and


D.	For 2022 and each year thereafter - $2,200,000;

provided , that, EBITDA shall be at least $3,000,000 for all periods following the completion of an acquisition by Lender, and

(iii) Funded Indebtedness (defined below), shall not be more than 5.50 times Adjusted EBITDA, measured on a trailing 12-month basis.

(b) For the purposes of this Section 5.19 :

“ Adjusted EBITDA ” shall, for any period, mean EBITDA plus cash contributions from Borrower’s shareholders plus, if such amounts are included in the definition of “Adjusted EBITDA” contained in the Senior Loan Documents (as amended), draws on this Term Loan during such period.

“ Debt Service Coverage Ratio ” shall, for any period, mean (a) Adjusted EBITDA for such period divided by (b) the current portion of Indebtedness plus capital lease payments not expensed in the current fiscal year during such period.

“ EBITDA ” shall, for any period, mean earnings before interest expense, depreciation and amortization expense.

“ Funded Indebtedness ” shall, for any period, mean the outstanding principal amount of all Indebtedness of Borrower and the Guarantors, on a consolidated basis during such period, including, without limitation, the Indebtedness evidenced by the Senior Loan Documents and the Indebtedness evidenced by this Agreement, the Note and the Other Loan Documents.

Section 5.20 Modification to Senior Loan Documents . Borrower shall not, without the prior written consent of Lender, amend, restate or otherwise modify any of the terms of the Senior Loan Documents; provided that, notwithstanding the foregoing, Borrower may amend and restate the Senior Loan Documents in connection with the partial repayment of principal to the Senior Lender in the amount of $10,000,000.

ARTICLE 6.

EVENTS OF DEFAULT; REMEDIES

Section 6.1 Event of Default . The occurrence of any one or more of the following events shall constitute an “ Event of Default ”:

(a) if Borrower shall fail to (i) pay when due any sums which are payable on the Maturity Date, or (ii) pay when due any other sums payable under the Note, this Agreement or any of the other Loan Documents if such failure continues for three (3) days following the due date for such payment;

(b) if any of the representations or covenants contained in Article 4 or Article 5 hereof are breached or violated;

(c) if any representation or warranty of, or with respect to, Borrower, any Guarantor or any member, general partner, principal or beneficial owner of any of the foregoing, made herein or in any other Loan Documents, or in any certificate, report, financial statement or other instrument or document furnished to Lender shall have been false or misleading in any material adverse respect when made or would otherwise constitute a Material Adverse Effect;

(d) any one or more of the Loan Documents shall be canceled, terminated, revoked or rescinded otherwise than in accordance with the terms thereof or with the express prior written consent of the Lender, or any action at law, suit in equity or other legal proceeding to cancel, revoke or rescind any of the Loan Documents shall be commenced by or on behalf of Borrower or any Guarantor, or any governmental authority of competent jurisdiction shall issue a judgment, order, decree or ruling to the effect that, any one or more of the Loan Documents is illegal, invalid or unenforceable in accordance with the

terms thereof; or Borrower or any Guarantor denies that it has any liability or obligation under any Loan Document, or purports to revoke, terminate or rescind any Loan Document;

(e) if (i) Borrower or any Guarantor shall commence any case, proceeding or other action (A) under any Creditors Rights Laws seeking to have an order for relief entered with respect to it, or seeking to adjudicate it bankrupt or insolvent, or seeking reorganization, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or Borrower or any Guarantor shall make a general assignment for the benefit of its creditors; (ii) there shall be commenced against Borrower or any Guarantor any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of sixty (60) days; (iii) there shall be commenced against Borrower or any Guarantor any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of any order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within sixty (60) days from the entry thereof; (iv) Borrower or any Guarantor shall take any action in furtherance of, or indicating its consent in writing or in any legal proceeding to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii) or (iii) above; or (v) Borrower or any Guarantor shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due;

(f) if (i) Borrower or any Guarantor fails to pay any amount due on the Indebtedness evidence by the Senior Loan Documents or any of its other Indebtedness (including principal, interest and any premium or fee thereon, but excluding Indebtedness evidenced by this Agreement and the other Loan Documents) (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise), and such failure continues beyond the applicable cure period, if any, (ii) a default occurs under any agreement or instrument evidencing any such Indebtedness, or under which any Borrower or any Guarantor has outstanding at the time, any such Indebtedness and such default continues beyond the applicable cure period, if any, or (iii) any such Indebtedness shall be declared to be due and payable, or required to be prepaid, prior to the stated maturity thereof as a result of a default or other similar adverse event;

(g) if Borrower or any of its Affiliates shall be in default under any of its obligations under the Diversus Management Agreement or any other agreement entered into in connection with the Standby Purchase Agreement;

(h) if Borrower or any Guarantor shall have rendered against it a money judgment as finally determined by a court of competent jurisdiction with respect to any litigation, arbitration or mediation, in an amount equal to or greater than $500,000 (net of insurance issued by unrelated third parties), or which would reasonably be expected to result in a Material Adverse Effect;

(i) if any federal tax lien is filed against Borrower and same is not discharged of record (by payment, bonding or otherwise) within thirty (30) days after same is filed;

(j) if Borrower shall fail to deliver to Lender any Required Financial Item when the same is due, or if no due date is specified therefor, within thirty (30) days after written request by Lender;

(k) if any Person other than those Persons named in Schedule 4.3 shall hold the legal and beneficial title to any of the Capital Stock of Borrower (other than by reason of a transfer of such Capital Stock by any such Person to an Affiliate of such Person; provided that Lender is given prior written notice of such transfer, together with an amended form of Schedule 4.3 reflecting such transfer); or

(l) if any event, development or circumstance shall have occurred that, in the reasonable judgment of Lender and/or the Standby Purchaser, could constitute a Material Adverse Effect.

Section 6.2 Remedies .

(a) Upon the occurrence and during the continuance of an Event of Default, Lender may, in addition to any other rights or remedies available to it pursuant to this Agreement, the Note and the other Loan Documents or at law or in equity, take such action, without notice or demand, that Lender deems advisable to protect and enforce its rights against Borrower, including, without limitation, declaring the Debt to be immediately due and payable, and Lender may enforce or avail itself of any or all rights or remedies provided in this Agreement, the Note and the other Loan Documents against Borrower and the Guarantors, including, without limitation, all rights or remedies available at law or in equity. Upon any Event of Default described in Section 6.1(e) (with respect to Borrower only), the Debt and all other obligations of the members of Borrower under this Agreement, the Note and the other Loan Documents shall immediately and automatically become due and payable, without notice or demand, and Borrower hereby expressly waives any such notice or demand, anything contained herein or in the Note and the other Loan Documents to the contrary notwithstanding.

(b) Upon the occurrence and during the continuance of an Event of Default, all or any one or more of the rights, powers, privileges and other remedies available to Lender against Borrower under this Agreement, the Note or the other Loan Documents executed and delivered by, or applicable to, Borrower or at law or in equity may be exercised by Lender at any time and from time to time, whether or not all or any of the Debt shall be declared due and payable. Any such actions taken by Lender shall be cumulative and concurrent and may be pursued independently, singularly, successively, together or otherwise, at such time and in such order as Lender may determine in its sole discretion, to the fullest extent permitted by Applicable Law, without impairing or otherwise affecting the other rights and remedies of Lender permitted by Applicable Law, equity or contract or as set forth herein or in the Note or the other Loan Documents. No delay or omission to exercise any remedy, right or power accruing upon an Event of Default shall impair any such remedy, right or power or shall be construed as a waiver thereof, but any such remedy, right or power may be exercised from time to time and as often as may be deemed expedient. A waiver of one Default or Event of Default with respect to Borrower or any Guarantor shall not be construed to be a waiver of any subsequent Default or Event of Default by Borrower or any Guarantor to impair any remedy, right or power consequent thereon.

(c) Upon the occurrence and during the continuance of an Event of Default, Lender may, but without any obligation to do so and without notice to or demand on Borrower and without releasing Borrower from any obligation hereunder or being deemed to have cured any Event of Default hereunder, make, do or perform any obligation of Borrower hereunder in such manner and to such extent as Lender may deem necessary. All such costs and expenses incurred by Lender in remedying such Event of Default or such failed payment or act or in appearing in, defending, or bringing any action or proceeding shall bear interest at the Default Rate, for the period after Borrower receives written notice of such cost or expense being incurred through and including the date of payment to Lender. All such costs and expenses incurred by Lender together with interest thereon calculated at the Default Rate shall be deemed to constitute a portion of the Debt and shall be due and payable promptly (but in no event more than ten (10) days) following written demand by Lender therefor.

ARTICLE 7.

ASSIGNMENT

Section 7.1 Assignment by Borrower . Borrower may not assign this Agreement or delegate

any of its obligations or liabilities hereunder.

Section 7.2 Assignment by Lender . Lender may assign its rights and obligations hereunder or sell participating interests in the Loan and/or this Agreement. Borrower agrees to cooperate with Lender in any such sale and/or assignment.

ARTICLE 8.

EXPENSES; INDEMNIFICATIONS

Section 8.1 Expenses . Borrower shall pay: (i) all reasonable out-of-pocket expenses incurred by Lender, including the reasonable fees, charges and disbursements of outside counsel for Lender, in connection with its underwriting activities, in connection with the credit facilities provided for herein, and/or preparation, administration, and documentation of this Agreement, the Loan and related Loan Documents, or any amendments, modifications or waivers of the provisions thereof (whether or not the transactions contemplated hereby or thereby shall be consummated); (ii) all out-of-pocket expenses incurred by Lender, including the fees, charges and disbursements of outside counsel for Lender, in connection with the enforcement, collection or protection of its rights in any way related to the Loan and Loan Documents, including its rights under this Article 8 and/or in the collection of the Loan, as well as all other obligations and liabilities of Borrower to Lender as a result of the occurrence of an Event of Default hereunder or in the pursuit of any remedy of Lender available to it under or pursuant to the Loan or any of the Loan Documents, both before and after entry of a judgment, whether inside or outside of bankruptcy, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations with respect to this Agreement, the Loan and Loan Documents (whether inside or outside of bankruptcy) being reimbursed by the Borrower under this Article 8, include without limiting the generality of the foregoing, costs and expenses incurred in connection with: (a) filed examinations and preparation of reports based on fees charged by a third party retained by Lender or the internally allocated fees for such persons employed by Lender; (b) background and/or credit checks; (c) sums paid or incurred to take any action required of the Borrower, which the Borrower fails to take; and (d) forwarding loan proceeds and collecting checks and other items of payment

Section 8.2 Indemnification . Borrower shall at all times protect, indemnity, defend and save harmless each of the Indemnified Parties from and against any and all Losses of which such Indemnified Party may at any time sustain or incur by reason of or in consequence of or arising out of the execution and delivery of, the consummation of the transactions contemplated by, or the amendment or modification of, or any waiver or consent under or in respect of the Loan or any of the Loan Documents.

Section 8.3 Survival . The obligations and liabilities of Borrower under this Article 8 shall fully survive indefinitely notwithstanding any termination, satisfaction or assignment hereof.

ARTICLE 9.

NOTICES

Section 9.1 Notices . All notices or other written communications hereunder shall be deemed to have been properly given (a) upon delivery, if delivered in person or by facsimile transmission with receipt acknowledged by the recipient thereof and confirmed by telephone by sender, (b) one (1) Business Day after having been deposited for overnight delivery with any reputable overnight courier service, or (c) three (3) Business Days after having been deposited in any post office or mail depository regularly maintained by the U.S. Postal Service and sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows:



If to Borrower:	Diversus, Inc. 100 Berwyn Park, 850 Cassatt Road, Suite 220, Berwyn, PA 19312 Attn: Gregory Campbell, Chair Email: gcampbell@cdvcapital.com Fax:

with a copy to:

If to Lender:	Positive Physicians Insurance Company 850 Cassatt Road, Suite 220 Berwyn, PA 19312 Attnt: Lewis S. Sharps, M.D. Email: Fax:

with a copy to:	Insurance Capital Group, LLC c/o ICG Management, LLC 767 5 ^th Avenue New York, New York 10153 Attn: Matthew T. Popoli, Craig A. Huff, Jack Sun
	Email:	mpopoli@insurancecap.com ; chuff@reservoircap.com ; jsun@insurancecap.com
	Fax:

or addressed as such party may from time to time designate by written notice to the other parties. Either party by notice to the other may designate additional or different addresses for subsequent notices or communications.

ARTICLE 10.

FURTHER ASSURANCES

Section 10.1 Replacement Documents . Upon receipt of an affidavit of an officer of Lender as to the loss, theft, destruction or mutilation of the Note, this Agreement or any of the other Loan Documents, which affidavit shall contain an appropriate indemnity against loss to Borrower or any other party to the Loan Document that has been lost, stolen or destroyed, and, in the case of any such mutilation, upon surrender and cancellation of the Note, this Agreement or such other Loan Document, Borrower will issue, or will cause the applicable member of Borrower to issue, in lieu thereof, a replacement thereof, dated the date of the Note, this Agreement or such other Loan Document, as applicable, in the same principal amount thereof and otherwise of like tenor.

ARTICLE 11.

WAIVERS

Section 11.1 Remedies Cumulative; Waivers . The rights, powers and remedies of Lender under this Agreement shall be cumulative and not exclusive of any other right, power or remedy which Lender may have against the members of Borrower pursuant to this Agreement, the Note or the other Loan Documents, or existing at law or in equity or otherwise. Lender’s rights, powers and remedies may be pursued singularly, concurrently or otherwise, at such time and in such order as Lender may determine in Lender’s sole discretion. No delay or omission to exercise any remedy, right or power accruing upon an Event of Default shall impair any such remedy, right or power or shall be construed as a waiver thereof, but any such remedy, right or power may be exercised from time to time and as often as may be deemed expedient. A waiver of one Default or Event of Default with respect to Borrower shall not be construed to be a waiver of any subsequent Default or Event of Default by Borrower or to impair any remedy, right or power consequent thereon.

Section 11.2 Modification, Waiver in Writing . No modification, amendment, extension, discharge, termination or waiver of any provision of this Agreement, the Note and the other Loan Documents, nor consent to any departure by Borrower therefrom, shall in any event be effective unless the same shall be in a writing signed by the party against whom enforcement is sought, and then such waiver or consent shall be effective only in the specific instance, and for the purpose, for which given. Except as otherwise expressly provided herein, no notice to, or demand on Borrower, shall entitle Borrower to any other or future notice or demand in the same, similar or other circumstances.

Section 11.3 Delay Not a Waiver . Neither any failure nor any delay on the part of Lender in insisting upon strict performance of any term, condition, covenant or agreement, or exercising any right, power, remedy or privilege under this Agreement, the Note or the other Loan Documents, or any other instrument given as security therefor, shall operate as or constitute a waiver thereof, nor shall a single or partial exercise thereof preclude any other future exercise, or the exercise of any other right, power, remedy or privilege. In particular, and not by way of limitation, by accepting payment after the due date of any amount payable under this Agreement, the Note or the other Loan Documents, Lender shall not be deemed to have waived any right either to require prompt payment when due of all other amounts due under this Agreement, the Note and the other Loan Documents, or to declare a default for failure to effect prompt payment of any such other amount.

Section 11.4 Waiver of Trial by Jury . To the extent permitted by applicable law, Borrower and Lender, by acceptance of this Agreement, hereby waive, to the fullest extent permitted by applicable law, the right to trial by jury in any action, proceeding or counterclaim, whether in contract, tort or otherwise, relating directly or indirectly to the Loan, the application for the Loan, this Agreement, the Note or the other Loan Documents or any acts or omissions of Lender or Borrower.

Section 11.5 Waiver of Notice . Borrower shall not be entitled to any notices of any nature whatsoever from Lender except (a) with respect to matters for which this Agreement specifically and expressly provides for the giving of notice by Lender to Borrower and (b) with respect to matters for which Lender is required by Applicable Law to give notice, and Borrower hereby expressly waives the right to receive any notice from Lender with respect to any matter for which this Agreement does not specifically and expressly provide for the giving of notice by Lender to Borrower.

Section 11.6 Remedies of Borrower . In the event that a claim or adjudication is made that Lender or its agents have acted unreasonably or unreasonably delayed acting in any case where by Applicable Law or under this Agreement, the Note and the other Loan Documents, Lender or such agent,

as the case may be, has an obligation to act reasonably or promptly, Borrower agrees that neither Lender nor its agents shall be liable for any monetary damages, and Borrower’s sole remedies shall be limited to commencing an action seeking injunctive relief or declaratory judgment. The parties hereto agree that any action or proceeding to determine whether Lender has acted reasonably shall be determined by an action seeking declaratory judgment. Lender agrees that, in such event, it shall cooperate in expediting any action seeking injunctive relief or declaratory judgment.

Section 11.7 Waiver of Statute of Limitations . To the extent permitted by Applicable Law, Borrower hereby expressly waives and releases on behalf of itself and the other members of Borrower, to the fullest extent permitted by Applicable Law, the pleading of any statute of limitations as a defense to payment of the Debt or performance of its obligations hereunder, under the Note or other Loan Documents.

Section 11.8 Waiver of Counterclaim . Borrower hereby waives on behalf of itself and the other members of Borrower, the right to assert a counterclaim, other than a compulsory counterclaim, in any action or proceeding brought against it by Lender or its agents arising out of or in any way connected with the Loan Agreement, the Note or any of the other Loan Documents.

Section 11.9 Sole Discretion of Lender . Wherever pursuant to this Agreement (a) Lender exercises any right given to it to approve or disapprove, (b) any arrangement or term is to be satisfactory to Lender, or (c) any other decision or determination is to be made by Lender, the decision to approve or disapprove all decisions that arrangements or terms are satisfactory or not satisfactory, and all other decisions and determinations made by Lender, shall be in the sole discretion of Lender, except as may be otherwise expressly and specifically provided herein.

ARTICLE 12.

MISCELLANEOUS

Section 12.1 Survival . This Agreement and all covenants, agreements, representations and warranties made herein and in the certificates delivered pursuant hereto shall survive the making by Lender of the Loan and the execution and delivery to Lender of the Note, and shall continue in full force and effect so long as all or any of the Debt is outstanding and unpaid unless a longer period is expressly set forth in this Agreement, the Note or the other Loan Documents. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the legal representatives, successors and assigns of such party. All covenants, promises and agreements in this Agreement, by or on behalf of Borrower, shall inure to the benefit of the legal representatives, successors and assigns of Lender.

Section 12.2 Governing Law . This Agreement shall be governed, construed, applied and enforced in accordance with the Applicable Laws of the state of New York and Applicable Laws of the United States of America.

Section 12.3 Headings . The Article and/or Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose.

Section 12.4 Severability . Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under Applicable Law, but if any provision of this Agreement shall be prohibited by or invalid under Applicable Law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement.

Section 12.5 Preferences . During the continuance of an Event of Default, Lender shall have the continuing and exclusive right to apply or reverse and reapply any and all payments by Borrower to any portion of the obligations of Borrower hereunder. To the extent Borrower makes a payment or payments to Lender, which payment or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party under any Creditors Rights Laws, state or federal law, common law or equitable cause, then, to the extent of such payment or proceeds received, the obligations hereunder or part thereof intended to be satisfied shall be revived and continue in full force and effect, as if such payment or proceeds had not been received by Lender.

Section 12.6 Incorporation of Schedules . The Schedules annexed hereto are hereby incorporated herein as a part of this Agreement with the same effect as if set forth in the body hereof.

Section 12.7 Offsets, Counterclaims and Defenses . Any assignee of Lender’s interest in and to this Agreement, the Note and the other Loan Documents shall take the same free and clear of all offsets, counterclaims or defenses which are unrelated to such documents which Borrower may otherwise have against any assignor of such documents, and no such unrelated counterclaim or defense shall be interposed or asserted by Borrower in any action or proceeding brought by any such assignee upon such documents and any such right to interpose or assert any such unrelated offset, counterclaim or defense in any such action or proceeding is hereby expressly waived by Borrower.

Section 12.8 No Joint Venture or Partnership; No Third Party Beneficiaries .

(a) Borrower and Lender intend that the relationships created under this Agreement, the Note and the other Loan Documents be solely that of borrower and lender. Nothing herein or therein is intended to create a joint venture, partnership, tenancy-in-common, or joint tenancy relationship between Borrower and Lender.

(b) This Agreement, the Note and the other Loan Documents are solely for the benefit of Lender and Borrower and nothing contained in this Agreement, the Note or the other Loan Documents shall be deemed to confer upon anyone other than Lender and Borrower any right to insist upon or to enforce the performance or observance of any of the obligations contained herein or therein. All conditions to the obligations of Lender to make the Loan hereunder are imposed solely and exclusively for the benefit of Lender and no other Person shall have standing to require satisfaction of such conditions in accordance with their terms or be entitled to assume that Lender will refuse to make the Loan in the absence of strict compliance with any or all thereof and no other Person shall under any circumstances be deemed to be a beneficiary of such conditions, any or all of which may be freely waived in whole or in part by Lender if, in Lender’s sole discretion, Lender deems it advisable or desirable to do so.

(c) Notwithstanding anything to the contrary contained herein, Lender is not undertaking the performance of any obligations with respect to such agreements, contracts, certificates, instruments, franchises, permits, trademarks, licenses and/or other documents.

(d) By accepting or approving anything required to be observed, performed or fulfilled or to be given to Lender pursuant to this Agreement, the Note or the other Loan Documents, including, without limitation, any Officer’s Certificate, balance sheet, statement of profit and loss or other financial statement, survey, appraisal, or insurance policy, Lender shall not be deemed to have warranted, consented to, or affirmed the sufficiency, the legality or effectiveness of same, and such acceptance or approval thereof shall not constitute any warranty or affirmation with respect thereto by Lender.

(e) Borrower recognizes and acknowledges that in accepting this Agreement, the Note and the other Loan Documents, Lender is expressly and primarily relying on the truth and accuracy of the representations and warranties set forth in Article 4 without any obligation to investigate the Borrower and notwithstanding any investigation of the Borrower by Lender; that such reliance existed on the part of Lender prior to the date hereof, that the warranties and representations are a material inducement to Lender in making the Loan; and that Lender would not be willing to make the Loan and accept the this Agreement, the Note and the other Loan Documents in the absence of the warranties and representations as set forth in Article 4 .

Section 12.9 Conflict; Construction of Documents; Reliance . In the event of any conflict between the provisions of this Agreement, the Note or any of the other Loan Documents, the provisions of this Agreement shall control. Wherever the phrase “during the continuance of an Event of Default” or the like appears herein or in any other Loan Document, such phrase shall not mean or imply that Lender has any obligation to accept a cure of such Event of Default. The parties hereto acknowledge that they were represented by competent counsel in connection with the negotiation, drafting and execution of this Agreement, the Note and the other Loan Documents and this Agreement, the Note and the other Loan Documents shall not be subject to the principle of construing their meaning against the party which drafted same. Borrower acknowledges that, with respect to the Loan, Borrower shall rely solely on its own judgment and advisors in entering into the Loan without relying in any manner on any statements, representations or recommendations of Lender or any parent, subsidiary or Affiliate of Lender. Lender shall not be subject to any limitation whatsoever in the exercise of any rights or remedies available to it under this Agreement, the Note and the other Loan Documents or any other agreements or instruments which govern the Loan by virtue of the ownership by it or any parent, subsidiary or Affiliate of Lender of any equity interest any of them may acquire in Borrower, and Borrower hereby irrevocably waives the right to raise any defense or take any action on the basis of the foregoing with respect to Lender’s exercise of any such rights or remedies. Borrower acknowledges that Lender engages in the business of real estate financings and other real estate transactions and investments which may be viewed as adverse-to or competitive with the business of Borrower or its Affiliates.

Section 12.10 Entire Agreement . This Agreement, the Note and the other Loan Documents contain the entire agreement of the parties hereto and thereto in respect of the transactions contemplated hereby and thereby, and all prior agreements among or between such parties, whether oral or written between Borrower and Lender are superseded by the terms of this Agreement, the Note and the other Loan Documents.

Section 12.11 Liability . The obligations and liabilities of Borrower and the Guarantors under the Loan Documents shall be joint and several. This Agreement shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns forever.

Section 12.12 Duplicate Originals; Counterparts . This Agreement may be executed in any number of duplicate originals and each duplicate original shall be deemed to be an original. The failure of any party hereto to execute this Agreement, or any counterpart hereof, shall not relieve the other signatories from their obligations hereunder.

Section 12.13 Time of Essence . Time is of the essence with respect to each and all of the provisions of this Agreement.

[signatures on following page(s)]

IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to be duly executed by their duly authorized representatives, all as of the day and year first above written.



BORROWER:

DIVERSUS, INC.


By:
Name:
Title:

Signature Page to Loan Agreement

IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to be duly executed by their duly authorized representatives, all as of the day and year first above written.



LENDER

POSITIVE PHYSICIANS HOLDINGS, INC.


By:
Name:
Title:

Signature Page to Loan Agreement

Exhibit A

Form of Disbursement Request

[to come]

Exhibit B

Permitted Affiliate Transactions

1. Payment of consultancy fees in an amount to be agreed to Gregory Campbell in respect of certain acquisition and financial advisory services to be performed by him.

2. Payment of salary, bonus and other fringe benefits to Kurt Gingrich, and to any other employee of Diversus or its Affiliates who also holds shares of stock in Diversus; on the same terms that such payments are made as of the date hereof (with such adjustments as may be made in the ordinary course of business consistent with past practice).

Exhibit 10.11

MEDICAL PROFESSIONAL LIABILITY EXCESS OF LOSS

REINSURANCE CONTRACT

EFFECTIVE: JANUARY 1, 2018

between

PROFESSIONAL CASUALTY ASSOCIATION

KING OF PRUSSIA, PENNSYLVANIA

(hereinafter called the “Company”)

and

HANNOVER RUCK SE

AIIN Reference 1340125

(hereinafter called the “Reinsurer”)

Under the terms of this Contract the above Reinsurer agrees to assume severally and not joint with other participants



Excess of Loss	Coverage “A”: Professional Liability 100.00% share
	Coverage “B”: Professional Liability 100.00% share
	Coverage “C”: Professional Liability 100.00% share

of the liability of the layer(s) described in the attached Contract including the same corresponding proportional participation of the Reinsurers’ additional obligations

set forth therein.

Signed in Hannover , on this 2nd day of July , 2018,



HANNOVER RUCK SE

BY	/s/ Thomas Reinecke

PRINT NAME	Thomas Reinecke

TITLE	Chief Underwriter

REF NO.	3030658

and signed in Berwyn , on this 2nd day of July , 2018.



PROFESSIONAL CASUALTY ASSOCIATION

BY:	/s/ Lewis S Sharps M.D.

TITLE	CEO

PROFESSIONAL CASUALTY ASSOCIATION

KING OF PRUSSIA, PENNSYLVANIA

MEDICAL PROFESSIONAL LIABILITY EXCESS OF LOSS

REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2018

INDEX



ARTICLE	SUBJECT	PAGE

ARTICLE 1	BUSINESS COVERED	1
ARTICLE 2	TERM	1
ARTICLE 3	SPECIAL TERMINATION	2
ARTICLE 4	TERRITORIAL SCOPE	3
ARTICLE 5	EXCLUSIONS	3
ARTICLE 6	SPECIAL ACCEPTANCE	4
ARTICLE 7	RETENTION AND LIMIT	4
ARTICLE 8	PREMIUM	5
ARTICLE 9	COMMUTATION	5
ARTICLE 10	DEFINITIONS	6
ARTICLE 11	NET RETAINED LIABILITY	8
ARTICLE 12	LOSS IN EXCESS OF POLICY LIMITS AND EXTRA CONTRACTUAL OBLIGATIONS	8
ARTICLE 13	ACCOUNTING, LEGAL AND TAX REPRESENTATIONS AND WARRANTIES	8
ARTICLE 14	WARRANTY	9
ARTICLE 15	NOTICE OF LOSS AND LOSS SETTLEMENTS	9
ARTICLE 16	INDEMNIFICATION AND ERRORS AND OMISSIONS	10
ARTICLE 17	CURRENCY (BRMA 12A)	10
ARTICLE 18	TAXES (BRMA 50C)	10
ARTICLE 19	FEDERAL EXCISE TAX	11
ARTICLE 20	ACCESS TO RECORDS	11
ARTICLE 21	CONFIDENTIALITY	11
ARTICLE 22	RESERVES	12
ARTICLE 23	SERVICE OF SUIT (BRMA 49E)	13
ARTICLE 24	GOVERNING LAW (BRMA 71B)	14
ARTICLE 25	ARBITRATION (BRMA 6J)	14
ARTICLE 26	INSOLVENCY	14
ARTICLE 27	ENTIRE AGREEMENT	15
ARTICLE 28	OFFSET	15
ARTICLE 29	THIRD PARTY RIGHTS (BRMA 52A)	15
ARTICLE 30	MODE OF EXECUTION	16
ARTICLE 31	FOREIGN ACCOUNT TAX COMPLIANCE ACT (“FATCA”)	16
ARTICLE 32	ASSIGNMENT	17
ARTICLE 33	ALTERNATE PAYEE	17
ARTICLE 34	INTERMEDIARY	17

ATTACHMENTS :

NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE – U.S.A.

NUCLEAR INCIDENT EXCLUSION CLAUSE – PHYSICAL DAMAGE REINSURANCE – U.S.A.

PROFESSIONAL CASUALTY ASSOCIATION

KING OF PRUSSIA, PENNSYLVANIA

(hereinafter the “Company”)

MEDICAL PROFESSIONAL LIABILITY EXCESS OF LOSS

REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2018

ARTICLE 1

BUSINESS COVERED

A. This Contract is to indemnify the Company in respect of the liability that may accrue to the Company as a result of loss or losses under Policies classified by the Company as Medical Malpractice, General Liability or Dental Professional Liability, written or renewed during the term of this Contract by or on behalf of the Company, subject to the terms and conditions herein contained.

B. Notwithstanding the foregoing, as respects Medical Malpractice Policies written on an occurrence basis, the maximum amount of the Net Written Premium that may be ceded to this Contract as a result of said Policies is forty point zero percent (40.0%).

ARTICLE 2

TERM

A. This Contract shall take effect at 12:01 a.m., Standard Time, January 1, 2018, in respect of Policies written or renewed at and after such time and date, and shall remain in effect until 12:01 a.m., Standard Time, January 1, 2020, unless terminated earlier by mutual agreement.

B. For the purposes of this Contract, “Standard Time” shall mean the time as described in the original Policy.

1. The “First Annual Period” as used in this Contract shall be from 12:01 a.m. Eastern Standard Time, January 1, 2018 to 12:01 a.m. Eastern Standard Time, January 1, 2019.

2. The “Second Annual Period” as used in this Contract shall be from 12:01 a.m. Eastern Standard Time, January 1, 2019 to 12:01 a.m. Eastern Standard Time, January 1, 2020.

C. The Company may terminate this Contract at December 31, 2018, upon the giving of thirty (30) days written notice to the Reinsurer prior to December 31, 2018.

D. The Reinsurer may renegotiate the Second Annual Period of December 31, 2018, upon the happening of any one of the following circumstances and by the giving of thirty (30) days written notice to the Company prior to December 31, 2018.

1. The Company has entered into a definitive agreement to:

a. become acquired or controlled by any company, corporation or individual(s) not controlling or affiliated with the party’s operations previously; or

2. There is a severance from active employment (of any kind) of any two (2) or more executives, by whatever title, of the Company during the most recent forty five (45) day

period who perform the following functions: chief executive officer, chief underwriting officer, chief actuary, or chief financial officer. This condition does not apply whenever the severance in employment is for the publicly announced purpose of the individual’s assuming within thirty (30) days a known position with another identified firm in the (re)insurance or financial services industry.

E. At expiration or termination (as provided in paragraph C. of this Article) of this Contract, the Reinsurer shall remain liable for all Policies covered by this Contract that are in force at expiration or termination, until the termination, expiration or renewal of such Policies, whichever occurs first, but in no event shall the Reinsurer be liable for losses occurring, or claims made as applicable, and Events, more than 12 months after the expiration or termination of this Contract.

F. However, at expiration or termination (as provided in paragraph C. of this Article) of this Contract, the parties shall, by mutual agreement, have the option to require a return of the ceded unearned premium as of the date of expiration or termination, on business in force at that date, in which event the Reinsurer shall be released from liability for losses occurring or claims made, as applicable, and Events, after expiration or termination.

G. Notwithstanding anything to the contrary in this Article, Extended Reporting Period Coverage (“Tail Policies”) shall be covered hereunder, as follows:

1. All claims made under a Tail Policy shall be covered hereunder, irrespective of the date any such claim is made, provided the premium for the Tail Policy is fully earned during the term of this Contract.

2. The time limit described in paragraph E. of this Article shall not apply to Tail Policies.

3. For purposes of this Contract, premium for a Tail Policy shall be considered fully earned on the inception date of the Tail Policy.

ARTICLE 3

SPECIAL TERMINATION

A. Notwithstanding the provisions of the Term Article, the Company has the option to cancel and/or commute at mutually agreeable terms a Subscribing Reinsurer’s percentage share in this Contract at any time by giving written notice to the Subscribing Reinsurer in the event the Subscribing Reinsurer:

1. has its policyholders’ surplus at any time during the term of this Contract reduced by more than twenty five percent (25%) of the amount of surplus at the date of the Subscribing Reinsurer’s most recent financial statement filed with regulatory authorities and available to the public as of the inception of this Contract;

2. is acquired or controlled by, or merged with any other company;

3. has its A.M. Best’s rating assigned or downgraded below “A-” and/or Standard and Poor’s rating assigned or downgraded below “BBB+”;

4. reinsures its entire business, except as respects any internal reinsurance arrangements;

5. is ordered by a State Insurance Department or other legal authority to cease writing business;

6. has become insolvent or has been placed into liquidation or receivership (whether voluntary or involuntary) or proceedings have been instituted against the Subscribing Reinsurer for the appointment of a receiver, liquidator, rehabilitator, conservator or trustee in bankruptcy, or other agent known by whatever name, to take possession of its assets or control of its operations;

7. has ceased assuming new and renewal property and casualty treaty reinsurance business.

B. In the event of termination in accordance with paragraph A. above, the Subscribing Reinsurer’s liability shall terminate on a cut-off basis as of the date of termination, and the Subscribing Reinsurer shall not be liable for any losses occurring, or claims made as applicable, and Events after that date. The reinsurance premium due the Subscribing Reinsurer hereunder shall be prorated based on the Subscribing Reinsurer’s participation hereon, and the Subscribing Reinsurer shall immediately return any excess of unearned reinsurance premium received.

ARTICLE 4

TERRITORIAL SCOPE

The territorial limits of this Contract shall be identical with those of the Company’s Policies.

ARTICLE 5

EXCLUSIONS

This Contract does not apply to and specifically excludes the following:

1. Reinsurance assumed by the Company.

2. Losses excluded by the attached “Nuclear Incident Exclusion Clause – Liability – Reinsurance – U.S.A.”

3. Losses excluded by the attached “Nuclear Incident Exclusion Clause – Physical Damage – U.S.A.”

4. All liability of the Company arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. “Insolvency fund” includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, however denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claims, debt, charge, fee or other obligation in whole or in part.

5. War risk.

6. Terrorism.

7. Microorganism.

8. Cyber Risk.

9. Asbestos liability.

10. Credit, Insolvency, Financial Guarantee, Surety, Fidelity or Fiduciary Liability business, regardless of how classified in the Company’s Annual Statement.

11. Pollution.

12. Nursing Home or Extended Care Facility Professional and/or General Liability.

13. Sexual misconduct.

14. Ex-gratia Settlements.

ARTICLE 6

SPECIAL ACCEPTANCE

Business that is not within the scope of this Contract may be submitted to the Reinsurer for special acceptance hereunder, and such business, if accepted by the Reinsurer in writing shall be covered hereunder, subject to the terms and conditions of this Contract, except as modified by the special acceptance. Any renewal of a special acceptance agreed to for a predecessor contract to this Contract, shall automatically be covered hereunder.

ARTICLE 7

RETENTION AND LIMIT

A. Coverage A: (As respects only Insured Individuals and Facilities covered under Medical Care Availability and Reduction of Error Fund (“MCARE”) and Insured Individuals not covered under MCARE):

1. Seven hundred thousand dollars ($700,000) of Ultimate Net Loss, each Claim, each Insured, each Policy excess of three hundred thousand dollars ($300,000) of Ultimate Net Loss each claim, each Insured, each Policy.

2. For MCARE eligible insureds in Pennsylvania the original policy limits shall be five hundred thousand dollars ($500,000) of Ultimate Net Loss, each Claim, each Insured, each Policy and one million five hundred thousand dollars ($1,500,000) in the aggregate except for those Policies deemed by the Company as Registered Certified Nurses, physician assistants, chiropractors, technicians, respiratory therapist or any other specialty not covered under MCARE, and any Physician Corporation which is not entirely owned by health care providers deemed MCARE ineligible, where the original policy limits shall be one million dollars ($1,000,000) of Ultimate Net Loss, each Claim, each Insured, each Policy and three million dollars ($3,000,000) in the aggregate.

B. Coverage B (As respects all Policies covered under this Contract):

1. The Company shall retain and be liable for the first six hundred thousand dollars ($600,000) of Ultimate Net Loss arising out of each Event, whether involving one or several of the Company’s Policies or Insureds. The Reinsurer shall then be liable for the amount by which such Ultimate Net Loss exceeds the Company’s retention, but the liability of the Reinsurer shall not exceed two million two hundred thousand dollars ($2,200,000) excess of six hundred thousand dollars ($600,000) as respects any one Event, nor more than two million two hundred thousand dollars ($2,200,000) during the applicable annual period.

2. Recoveries from Coverages A and C shall inure to the benefit of this Coverage B.

3. In the event that two or more Claims or Insureds or Policies are involved in the same Event and there is a difference in the Reinsurance Accounting Period of the Policies to which such individual Claims attach, the Policy relating to the date the first Claim or loss is reported to the Company (the “Report Date”) shall be used to determine the Reinsurance Accounting Period from which the entire Event shall be recovered. In the event two or more Insureds involved in the same Event have the same Report Date, but attach to different Reinsurance Accounting Periods, the Event shall attach to the earliest Reinsurance Accounting Period. The Event shall remain allocated to such Reinsurance Accounting Period regardless of the final disposition of the first reported Claim or loss. “Reinsurance Accounting Period” as used herein shall be defined as the term of the 12-month predecessor contract to this Contract, and shall also be defined to mean the term of this Contract.

C. Coverage C (As respects only Insureds located in Michigan):

1. As respects Policies issued with limits of $200,000 per Claim and an annual aggregate limit of $600,000, $100,000 of Ultimate Net Loss, each Claim, each Insured, excess of $100,000 of Ultimate Net Loss each Claim, each Insured.

2. As respects Policies with limits greater than $200,000 per claim and an annual aggregate limit of $600,000, not exceeding $1,000,000 per claim and an annual aggregate limit $3,000,000, $700,000 each Claim, each Insured, excess of $300,000 Ultimate Net Loss each Claim, each Insured.

D. Annual Aggregate Deductible:

No claim shall be made under this Contract unless and until the Company shall have first sustained as a result of any one loss or losses, an annual aggregate amount of Ultimate Net Loss otherwise recoverable hereunder equal to eleven point seven five percent (11.75%) of the Net Written Premium during the applicable annual period.

E. Reinsurer’s maximum as Respects Coverage A and B and C Combined:

The Reinsurer’s liability for all losses including Extra Contractual Obligations, Loss in Excess of Policy Limits and Allocated Loss Adjustment Expenses paid hereunder shall not exceed an amount equal to six hundred percent (600%) of the reinsurance premium paid for the term of this Contract in accordance with the Premium Article.

ARTICLE 8

PREMIUM

A. As premium for the reinsurance provided hereunder:

1. For the First Annual Period, the Company shall pay the Reinsurer seven point two five percent (7.25%) of its Net Written Premium for the annual period. The Company shall pay the Reinsurers a deposit premium of five hundred forty thousand dollars ($540,000) in four (4) equal installments of one hundred thirty five thousand dollars ($135,000) on April 1, July 1 October 1, 2018, and January 1, 2019.

2. For the Second Annual Period, the Company shall pay the Reinsurer seven point two five percent (7.25%) of its Net Written Premium for the annual period. The Company shall pay the Reinsurers a deposit premium of five hundred forty thousand dollars ($540,000) in four (4) equal installments of one hundred thirty five thousand dollars ($135,000) on April 1, July 1, October 1, 2019, and January 1, 2020.

C. If the Company elects to terminate this Contract at December 31, 2018, the seven point two five percent (7.25%) rate set forth in Paragraph A for the First Annual Period shall increase to eight point zero percent (8.0%) for the First Annual Period.

D. The Company shall furnish the Reinsurer with such information as may be required by the Reinsurer for completion of its financial statements.

ARTICLE 9

COMMUTATION

A. Within sixty (60) days following twenty four (24) months after the close of any one annual period of this Contract, the Company may commute all liability for said annual period hereunder.

B. The Company shall report to the Reinsurer the commuted value of such claims for the applicable annual period, which shall be deemed to be the positive balance of:

1. Reinsurance premiums paid or payable hereunder for the applicable annual period; less

2. Expenses incurred by the Reinsurer at a rate of twenty seven point zero percent (27.0%) of the Net Written Premium for the applicable annual period hereof: less

3. Reinsurance recoveries previously made hereunder for Policies allocated to this Contract for the applicable annual period.

ARTICLE 10

DEFINITIONS

A. “Ultimate Net Loss” means the actual loss paid by the Company or which the Company becomes liable to pay, including ninety point zero percent (90.0%) of Loss in Excess of Policy Limits and ninety point zero percent (90.0%) of Extra Contractual Obligations, but excluding Allocated Loss Adjustment Expense, which shall be handled in accordance with the penultimate paragraph within this definition.

Salvages and all recoveries (including amounts due from all reinsurances that inure to the benefit of this Contract, whether recovered or not), shall be first deducted from such loss to arrive at the amount of liability attaching hereunder.

All salvages, recoveries or payments recovered or received subsequent to loss settlement hereunder shall be applied as if recovered or received prior to the aforesaid settlement, and all necessary adjustments shall be made by the parties hereto.

The Company shall be deemed to be “liable to pay” a loss when a judgment has been rendered that the Company does not plan to appeal, and/or the Company has obtained a release, and/or the Company has accepted a proof of loss.

Nothing in this clause shall be construed to mean that losses are not recoverable hereunder until the Company's Ultimate Net Loss has been ascertained.

The Reinsurer shall pay to the Company the Reinsurer’s proportion of Allocated Loss Adjustment Expense in the ratio that the Reinsurer’s loss payment bears to the total Ultimate Net Loss. However, expense incurred in obtaining salvages or recoveries, or in the reduction or reversal of any award or judgment, shall be apportioned between the Company and the Reinsurer in the proportion that each benefits from such salvage, recovery, reduction, or reversal. Expenses incurred up to the time of the original loss settlement, verdict, judgment or award shall be shared in proportion to what would have been each party’s share. Such payment shall be in addition to the limits stated in paragraphs A., B., and C. of the Article entitled RETENTION AND LIMIT .

Notwithstanding the foregoing, if legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto, including but not limited to declaratory judgment actions, have been incurred in connection with a claim under a Policy covered by this Contract, and such coverage question was resolved in the Company’s favor, such expenses and costs shall be considered Ultimate Net Loss hereunder.

B. “Allocated Loss Adjustment Expense” means costs and expenses incurred by the Company in connection with the investigation, appraisal, adjustment, settlement, litigation, defense or appeal of a specific claim or loss, or alleged loss, including but not limited to:

1. court costs;

2. costs of supersedeas and appeal bonds;

3. monitoring counsel expenses;

4. legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto, including but not limited to declaratory judgment actions;

5. post-judgment interest;

6. pre-judgment interest, unless included as part of an award or judgment; and

7. subrogation, salvage and recovery expenses

“Allocated Loss Adjustment Expense” does not include salaries and expenses of the Company’s employees and office and other overhead expenses.

C. “Event” “means the happening of one or a series of related acts, errors, omissions or accidents, irrespective of the number of Insureds, Policies and Claims involved. The date of loss for any Event shall be the earliest report date for any Claim or loss involved in the Event. If the earliest report date is under a Policy allocated to this Contract, the entire Event shall be subject to coverage hereunder and all Policies involved in such Event, regardless of the inception date of such Policies, shall be covered hereunder.

Any claim made under any extended reporting and/or discovery period shall for the purposes of this Contract be considered to be made on the last day of the Policy period immediately preceding the extended reporting and/or discovery period.

D. “Net Written Premium” means gross written premium of the Company for the classes of business reinsured hereunder, less return premiums, and less written premiums ceded by the Company for reinsurance that inures to the benefit of this Contract.

E. “Policy” means any binder, policy, or contract of insurance issued, accepted or held covered provisionally or otherwise, by or on behalf of the Company.

F. “Ex-gratia Settlements” means all settlements of losses tendered but not covered under the Company’s Policies, which Policies are otherwise reinsured hereunder, other than Losses in Excess of Original Policy Limits and Extra Contractual Obligations as defined herein. Ex- gratia Settlements shall not include:

1. Settlements of losses which are arguably within the contemplation of coverage under the Company’s Policies reinsured hereunder;

2. Settlements made to avoid costs that could be incurred in connection with potential or actual litigation relating to coverage issues arising under the Company’s Policies reinsured hereunder;

3. Losses already excluded under this Contract.

G. “Insured” means each insured who is provided with a separate limit of liability under the Company's Policy(ies).

H. “Claim” shall follow the definition under the original Policy.

ARTICLE 11

NET RETAINED LIABILITY

A. This Contract applies only to that portion of any loss that the Company retains net for its own account (prior to deduction of any reinsurance that inures solely to the benefit of the Company).

B. The amount of the Reinsurer’s liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts that may have become due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise.

ARTICLE 12

LOSS IN EXCESS OF POLICY LIMITS AND EXTRA CONTRACTUAL OBLIGATIONS

A. This Contract shall cover Loss in Excess of Policy Limits, as provided in the definition of Ultimate Net Loss under the Article entitled DEFINITIONS . “Loss in Excess of Policy Limits” shall mean any amount paid or payable by the Company in excess of its Policy limits, but otherwise within the terms of its Policy, as a result of an action against it by its insured or its insured's assignee to recover damages the insured is legally obligated to pay to a third party claimant because of the Company’s alleged or actual negligence or bad faith in rejecting a settlement within Policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action.

B. This Contract shall cover Extra Contractual Obligations, as provided in the definition of Ultimate Net Loss under the Article entitled DEFINITIONS . “Extra Contractual Obligations” shall mean any damages including, but not limited to, exemplary, compensatory or consequential damages, other than Loss in Excess of Policy Limits paid or payable by the Company as a result of an action against it by its insured, its insured's assignee or a third party claimant, which action alleges negligence or bad faith on the part of the Company in handling a claim under a Policy subject to this Contract. An Extra Contractual Obligation shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the Policy.

D. The report date as respects Loss in Excess of Policy Limits liability / Extra Contractual Obligation will be deemed, in all circumstances, to be the date when the underlying claim is first reported to the Company.

E. Notwithstanding anything stated herein, this Contract shall not apply to any Loss in Excess of Policy Limits or any Extra Contractual Obligation incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder.

F. If any provision of this Article shall be rendered illegal or unenforceable by the laws, regulations or public policy of any state, such provision shall be considered void in such state, but this shall not affect the validity or enforceability of any other provision of this Article or the enforceability of such provision in any other jurisdiction.

ARTICLE 13

ACCOUNTING, LEGAL AND TAX REPRESENTATIONS AND WARRANTIES

The Company represents and warrants that:

A. The Company has performed its own financial analysis of the transaction contemplated by this Contract (the “Transaction”), including with respect to the transferred risk and the underlying

economic impact, and that it has sought, is seeking or shall seek its own accounting, legal and tax advice for the Transaction; and

B. The Company:

1. has fully disclosed or hereby agrees to fully disclose prior to the completion of the current audit cycle, the Transaction to its accountants and independent auditors;

2. where appropriate in its reasonable opinion, has made or shall make appropriate disclosure to, or consult with its legal counsel and any relevant regulatory and tax authorities; and

3. shall account for the Transaction in accordance with applicable accounting principles and standards, consistently applied. The Company is not entering into this Contract for the purpose of altering its financial or accounting statements in a manner that would be misleading to users of such statements.

ARTICLE 14

WARRANTY

A. The Company warrants that the underwriting of each individual risk, including all acceptance criteria and rating, shall be described in the underwriting presentation materials and correspondence provided to the Reinsurer for its consideration of the business covered by this Contract (the “Manual”). Any deviation from the Manual as respects acceptance criteria and/or rating of an individual risk shall void the coverage under this Contract for that risk only.

B. Additionally the Company warrants the following:

1. The Company will obtain prior written approval from the Reinsurer for any reduction in filed rates.

2. There will be no material changes to underwriting guidelines included in the Manual, or to class or geographic mix of business during the term of this Contract.

ARTICLE 15

NOTICE OF LOSS AND LOSS SETTLEMENTS

A. The Company shall advise the Reinsurer promptly and in writing of all losses that, in the opinion of the Company, may result in a claim hereunder and of all subsequent developments thereto that may materially affect the position of the Reinsurer.

B. On a quarterly basis 45 days after quarter end, the Company shall provide the Reinsurer with a bordereau of losses for which the incurred loss amount is equal to or greater than $125,000. The bordereau shall include the following information:

1. Policy number;

2. Account name;

3. Claim number;

4. Claim date;

5. Claimant’s name;

6. Practice area;

7. Injury description/cause; and

8. Incurred and paid loss and Allocated Loss Adjustment Expense.

C. The Company alone and at its full discretion shall adjust, settle or compromise all claims and losses.

D. As respects losses subject to this Contract, all loss settlements made by the Company, whether under strict Policy terms or by way of compromise provided they are within the terms of the Contract, and any Extra Contractual Obligations and/or Loss in Excess of Policy Limits, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay or allow, as the case may be, its share of each such settlement immediately upon receipt of proof of loss.

ARTICLE 16

INDEMNIFICATION AND ERRORS AND OMISSIONS

A. The Reinsurer is reinsuring, to the amount herein provided, the obligations of the Company under the Policies. The Company shall, in the exercise of its reasonable and businesslike discretion, be the sole judge as to:

1. what shall constitute a claim or loss covered under the Policies;

2. the Company’s liability thereunder; and

3. the amount or amounts that it shall be proper for the Company to pay thereunder.

B. The Reinsurer shall be bound by the judgment of the Company as to the obligation(s) and liability(ies) of the Company under the Policies. Notwithstanding the foregoing, Ex-gratia Settlements shall not be covered under any circumstances.

C. Any inadvertent error, omission or delay in complying with the terms and conditions of this Contract shall not be held to relieve either party hereto from any liability that would attach to it hereunder if such error, omission or delay had not been made, provided such error, omission or delay is rectified immediately upon discovery.

ARTICLE 17

CURRENCY (BRMA 12A)

ARTICLE 18

TAXES (BRMA 50C)

ARTICLE 19

FEDERAL EXCISE TAX

(Section A Applicable to those Reinsurers, excepting Underwriters at Lloyd’s London and other Reinsurers exempt from Federal Excise Tax, who are domiciled outside the United States of America)

ARTICLE 20

ACCESS TO RECORDS

ARTICLE 21

CONFIDENTIALITY

A. The Reinsurer hereby acknowledges that the documents, information and data provided to it by the Company, whether directly or through an authorized agent, in connection with the placement and execution of this Contract (“Confidential Information”) are proprietary and confidential to the Company. Confidential Information shall not include documents, information or data that the Reinsurer can show:

1. are publicly known or have become publicly known through no unauthorized act of the Reinsurer;

2. have been rightfully received from a third person without obligation of confidentiality; or

3. were known by the Reinsurer prior to the placement of this Contract without an obligation of confidentiality.

B. Absent the written consent of the Company, the Reinsurer shall not disclose any Confidential Information to any third parties, including any affiliated companies, except:

1. when required by retrocessionaires subject to the business ceded to this Contract;

2. when required by regulators performing an audit of the Reinsurer's records and/or financial condition;

3. when required by external auditors performing an audit of the Reinsurer's records in the normal course of business; or

4. when requested by a court of law.

Subject to the provisions above, the Reinsurer agrees not to use any Confidential Information for any purpose not related to the performance of its obligations or enforcement of its rights under this Contract.

C. Notwithstanding the above, in the event that the Reinsurer is required by court order, other legal process or any regulatory authority to release or disclose any or all of the Confidential Information, the Reinsurer agrees to provide the Company, where practicable, with written notice of same at least ten (10) days prior to such release or disclosure and to use its best efforts to assist the Company in maintaining the confidentiality provided for in this Article.

D. The provisions of this Article shall extend to the officers, directors and employees of the Reinsurer and its affiliates, and shall be binding upon their successors and assigns and shall apply for a period of one year from the expiration, commutation or termination of this Contract.

ARTICLE 22

RESERVES

B. “Obligations,” as used in this Article, shall mean the sum of ceded (i) Net Losses and Allocated Loss Adjustment Expenses paid by the Company but not yet recovered from the Reinsurer, plus (ii) reserves for reported Net Losses and Allocated Loss Adjustment Expenses, plus (iii) reserves for Net Losses incurred but not reported (including Allocated Loss Adjustment Expenses) and premiums unearned, if any.

obligations of the Reinsurer under this Contract until a renewal Letter of Credit acceptable to the regulatory authority(ies) having jurisdiction over the Company, a trust account or a substitute in lieu thereof acceptable to the regulatory authority(ies) having jurisdiction over the Company, has been received by the Company. The Company shall provide to the Reinsurer payment of any interest thereon accruing from such account.

3. To make refund of any sum which is in excess of the actual amount required for Sections 1 and 2 of this paragraph.

ARTICLE 23

SERVICE OF SUIT (BRMA 49E)

(This Article applies to Reinsurers domiciled outside the United States of America and/or unauthorized in any state, territory, or district of the United States of America that has jurisdiction over the Company and in which a subject suit has been instituted. This Article is not intended to conflict with or override the parties' obligation to arbitrate their disputes in accordance with the Article entitled ARBITRATION ).

or successors in office) as its true and lawful attorney upon whom may be served any lawful process in any action, suit, or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract, and hereby designates the above named as the person to whom the said officer is authorized to mail such process or a true copy thereof.

ARTICLE 24

GOVERNING LAW (BRMA 71B)

This Contract shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania.

ARTICLE 25

ARBITRATION (BRMA 6J)

ARTICLE 26

INSOLVENCY

liquidator, or statutory successor of the Company having authority to allow such claims, without diminution because of that insolvency, or because the conservator, liquidator, or statutory successor has failed to pay all or a portion of any claims.

ARTICLE 27

ENTIRE AGREEMENT

ARTICLE 28

OFFSET

ARTICLE 29

THIRD PARTY RIGHTS (BRMA 52A)

ARTICLE 30

MODE OF EXECUTION

A. This Contract may be executed by:

1. an original written ink signature of paper documents;

2. an exchange of facsimile copies showing the original written ink signature of paper documents; or

ARTICLE 31

FOREIGN ACCOUNT TAX COMPLIANCE ACT (“FATCA”)

B. Furthermore:

ARTICLE 32

ASSIGNMENT

ARTICLE 33

ALTERNATE PAYEE

ARTICLE 34

INTERMEDIARY

JLT Re (North America) Inc. (“JLT Re”) is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, Allocated Loss Adjustment Expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through JLT Re, United Plaza, 30 South 17 ^th Street, 17 ^th Floor, Philadelphia, Pennsylvania 19103. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. In acting as Intermediary for this Contract, the Intermediary shall (i) comply with all aspects of New York Regulation 98 and shall (ii) be entitled to withdraw funds in accordance with section 32.3(a)(3) of that Regulation including commissions, excise tax and interest received on its premium and loss accounts.

NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE U.S.A.)

(Approved by Lloyd's Underwriters' Non-Marine Association)

(1) This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association.

(2) Without in any way restricting the operation of paragraph (1) of this Clause it is understood and agreed that for all purposes of this reinsurance all the original policies of the Reassured (new, renewal and replacement) of the classes specified in Clause II of this paragraph (2) from the time specified in Clause III in this paragraph (2) shall be deemed to include the following provision (specified as the Limited Exclusion Provision).

Limited Exclusion Provision:

I. It is agreed that the policy does not apply under any liability coverage,

to: { injury, sickness, disease, death or destruction

{bodily injury or property damage

II. Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liability Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policies of a similar nature; and the liability portion of combination forms related to the four classes of policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies.

III. The inception dates and thereafter of all original policies as described in II above, whether new, renewal or replacement, being policies which either

(a) become effective on or after 1st May, 1960, or

(b) become effective before that date and contain the Limited Exclusion Provision set out above;

provided this paragraph (2) shall not be applicable to Family Automobile Policies, Special Automobile Policies, or policies or combination policies of a similar nature, issued by the Reassured on New York risks, until 90 days following approval of the Limited Exclusion Provision by the Governmental Authority having jurisdiction thereof.

(3) Except for those classes of policies specified in Clause II of paragraph (2) and without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability policies of the Reassured (new, renewal and replacement) affording the following coverages:

Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad) Protective Liability, Manufacturers and Contractors Liability, Product Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability)

shall be deemed to include, with respect to such coverages, from the time specified in Clause V of this paragraph (3), the following provision (specified as the Broad Exclusion Provision):

Broad Exclusion Provision.*

It is agreed that the policy does not apply:

I. Under any Liability Coverage, to { injury, sickness, disease, death or destruction

{bodily injury or property damage

(a) with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability;

(b) resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not been issued would be, entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by the United States of America, or any agency thereof, with any person or organization.

II. Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating

to { immediate medical or surgical relief,

{first aid,

to expenses incurred with respect to { bodily injury, sickness, disease or death

{bodily injury

resulting from the hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization.

III. Under any Liability Coverage, to { injury, sickness, disease, death or destruction

{bodily injury or property damage

resulting from the hazardous properties of nuclear material, if

(a) the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured or (2) has been discharged or dispersed therefrom;

(b) the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or

{bodily injury or property damage

arises out of the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories, or possessions or Canada, this exclusion (c) applies only to { injury to or destruction of property at such nuclear facility ,

{property damage to such nuclear facility and any

property thereat.

IV. As used in this endorsement:

"hazardous properties" include, radioactive, toxic or explosive properties; "nuclear material" means source material, special nuclear material or byproduct material; "source material" , "special nuclear material" , and "byproduct material" have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; "spent fuel" means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; "waste" means any waste material (1) containing by product material and (2) resulting from the operation by any person or organization of any nuclear facility included within the definition of nuclear facility under paragraph (a) or (b) thereof; "nuclear facility" means

(a) any nuclear reactor,

(b) any equipment or device designed or used for (1) separating the isotopes of uranium or plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste,

(c) any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235,

(d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste,

and includes the site on which any of the foregoing is located, all operations conducted on such site and all premises used for such operations; "nuclear reactor" means any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of fissionable material;

{ With respect to injury to or destruction of property, the word "injury" or "destruction",

{"property damage" includes all forms of radioactive contamination of property,

{ includes all forms of radioactive contamination of property.

V. The inception dates and thereafter of all original policies affording coverages specified in this paragraph (3), whether new, renewal or replacement, being policies which become effective on or after 1st May, 1960, provided this paragraph (3) shall not be applicable to

(i) Garage and Automobile Policies issued by the Reassured on New York risks.

(ii) statutory liability insurance required under Chapter 90, General Laws of Massachusetts,

until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof.

(4) Without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that paragraphs (2) and (3) above are not applicable to original liability policies of the Reassured in Canada and that with respect to such policies this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters' Association or the Independent Insurance Conference of Canada.

*NOTE. The words printed in italics in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words.

NOTES: Wherever used herein the terms:

“Reassured” shall be understood to mean “Company”, “Reinsured”, “Reassured” or whatever other term is used in the attached reinsurance document to designate the reinsured company or companies.

“Agreement” shall be understood to mean “Agreement”, “Contract”, “Policy” or whatever other term is used to designate the attached reinsurance document.

“Reinsurers” shall be understood to mean “Reinsurers”, “Underwriters” or whatever other term is used in the attached reinsurance document to designate the reinsurer or reinsurers.

21/9/67

N.M.A. 1590

AMENDMENT TO THE DEFINITION OF WASTE

It is agreed that the definition of "Waste" contained in sub-paragraph IV above is amended to read as follows:

"Waste" means any material


(a)	containing by-product material other than the tailings or waste produced by the extraction or concentration of uranium or thorium from any ore processed primarily for its source material content, and


(b)	resulting from the operation by any person or organisation of any nuclear facility included under the first two paragraphs of the definition of nuclear facility .

NUCLEAR INCIDENT EXCLUSION CLAUSE – PHYSICIAL DAMAGE – REINSURANCE – U.S.A.


1.	This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks.


2.	Without in any way restricting the operation of paragraph (1) of this clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to:


I.	Nuclear reactor power plants including all auxiliary property on the site, or


II.	Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and “critical facilities” as such, or


III.	Installations for fabricating complete fuel elements or for processing substantial quantities of “special nuclear material”, and for reprocessing, salvaging, chemically separating, storing or disposing of “spent” nuclear fuel or waste materials, or


IV.	Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission.

Without in any way restricting the operations of paragraphs (1) and (2) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate


(a)	where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or


(b)	where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof.


4.	Without in any way restricting the operations of paragraphs (1), (2) and (3) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against.


5.	It is understood and agreed that this clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard.


6.	The term “special nuclear material” shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof.


7.	Reassured to be sole judge of what constitutes:


(a)	substantial quantities, and


(b)	the extent of installation, plant or site.


Note:	Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that


(a)	all policies issued by the Reassured on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.


(b)	with respect to any risk located in Canada policies issued by the Reassured on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.

12/12/57

NMA 1119

NOTES: Wherever used herein the terms:

“Agreement” shall be understood to mean “Agreement”, “Contract”, “Policy” or whatever other term is used to designate the attached reinsurance document.

“Reinsurers” shall be understood to mean “Reinsurers”, “Underwriters” or whatever other term is used in the attached reinsurance document to designate the reinsurer or reinsurers.

ENDORSEMENT NO. 1

EFFECTIVE JANUARY 1, 2018

MEDICAL PROFESSIONAL LIABILITY EXCESS OF LOSS

REINSURANCE CONTRACT

EFFECTIVE: JANUARY 1, 2018

between

PROFESSIONAL CASUALTY ASSOCIATION

(hereinafter called the "Company")

and

HANNOVER RUCK SE

AIIN Reference: 1340125

(hereinafter called the "Reinsurer")

FOR VALUE RECEIVED , the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound, effective January 1, 2018 (the “Effective Date”),

1. Paragraph D. of the Article entitled TERM is hereby amended to read as follows:

A. D. The Reinsurer may renegotiate the Second Annual Period of December 31, 2018, upon the happening of any one of the following circumstances and by the giving of thirty (30) days written notice to the Company prior to December 31, 2018.

1. The Company has entered into a definitive agreement to:

a. become acquired or controlled by any company, corporation or individual(s) not controlling or affiliated with the party’s operations previously; or

B. It is understood that subparagraph D.1. above shall exclude renegotiation in the event that the Company is converted to a stock company from its current

status of a reciprocal insurance exchange and this conversion is considered being affiliated with the party’s operations previously.

2. Subparagraph 1. of the Article entitled EXCLUSIONS is hereby amended to read as follows:

1. 1. Reinsurance assumed by the Company except reinsurance of “fronting carriers” or captives where the Policies involved are underwritten, rated and administered by the Company.

3. All other terms and conditions not inconsistent with the above remain unchanged.

Signed in Hannover , on this 29th day of June , 2018,



HANNOVER RUCK SE

BY	/s/ Thomas Reinecke

PRINT NAME	Thomas Reinecke

TITLE	Cheif Underwriter

REF. NO.	3030658

and signed in ______________, _______________, this day of , 2018.



PROFESSIONAL CASUALY ASSOCIATION


BY

TITLE

Exhibit 10.12

MEDICAL PROFESSIONAL LIABILITY EXCESS OF LOSS

REINSURANCE CONTRACT

EFFECTIVE: JANUARY 1, 2018

between

PHYSICIANS INSURANCE PROGRAM EXCHANGE

KING OF PRUSSIA, PENNSYLVANIA

(hereinafter called the “Company”)

and

HANNOVER RUCK SE

AIIN Reference 1340125

(hereinafter called the “Reinsurer”)

Under the terms of this Contract the above Reinsurer agrees to assume severally and not joint with other participants



Excess of Loss	Coverage “A”: Professional Liability 100.00% share
	Coverage “B”: Professional Liability 100.00% share
	Coverage “C”: Professional Liability 100.00% share

of the liability of the layer(s) described in the attached Contract including the same corresponding proportional participation of the Reinsurers’ additional obligations set forth therein.

Signed in Hannover , on this 2nd day of July , 2018,



HANNOVER RUCK SE

BY	/s/ Thomas Reinecke

PRINT NAME	Thomas Reincke

TITLE	Chief Underwriter

REF NO.	9007712

and signed in Berwyn , on this 2nd day of July , 2018.



PHYSICIANS INSURANCE PROGRAM EXCHANGE

BY	/s/ Lewis S Sharps M.D.

TITLE	CEO

PHYSICIANS INSURANCE PROGRAM EXCHANGE

KING OF PRUSSIA, PENNSYLVANIA

MEDICAL PROFESSIONAL LIABILITY EXCESS OF LOSS

REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2018

INDEX



ARTICLE	SUBJECT	PAGE
ARTICLE 1	BUSINESS COVERED	1
ARTICLE 2	TERM	1
ARTICLE 3	SPECIAL TERMINATION	2
ARTICLE 4	TERRITORIAL SCOPE	3
ARTICLE 5	EXCLUSIONS	3
ARTICLE 6	SPECIAL ACCEPTANCE	3
ARTICLE 7	RETENTION AND LIMIT	4
ARTICLE 8	PREMIUM	5
ARTICLE 9	COMMUTATION	5
ARTICLE 10	DEFINITIONS	6
ARTICLE 11	NET RETAINED LIABILITY	7
ARTICLE 12	LOSS IN EXCESS OF POLICY LIMITS AND EXTRA CONTRACTUAL OBLIGATIONS	7
ARTICLE 13	ACCOUNTING, LEGAL AND TAX REPRESENTATIONS AND WARRANTIES	8
ARTICLE 14	WARRANTY	8
ARTICLE 15	NOTICE OF LOSS AND LOSS SETTLEMENTS	9
ARTICLE 16	INDEMNIFICATION AND ERRORS AND OMISSIONS	9
ARTICLE 17	CURRENCY (BRMA 12A)	10
ARTICLE 18	TAXES (BRMA 50C)	10
ARTICLE 19	FEDERAL EXCISE TAX	10
ARTICLE 20	ACCESS TO RECORDS	10
ARTICLE 21	CONFIDENTIALITY	10
ARTICLE 22	RESERVES	11
ARTICLE 23	SERVICE OF SUIT (BRMA 49E)	12
ARTICLE 24	GOVERNING LAW (BRMA 71B)	13
ARTICLE 25	ARBITRATION (BRMA 6J)	13
ARTICLE 26	INSOLVENCY	14
ARTICLE 27	ENTIRE AGREEMENT	14
ARTICLE 28	OFFSET	14
ARTICLE 29	THIRD PARTY RIGHTS (BRMA 52A)	15
ARTICLE 30	MODE OF EXECUTION	15
ARTICLE 31	FOREIGN ACCOUNT TAX COMPLIANCE ACT (“FATCA”)	15
ARTICLE 32	ASSIGNMENT	16
ARTICLE 33	ALTERNATE PAYEE	16
ARTICLE 34	INTERMEDIARY	16

ATTACHMENTS :

NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE – U.S.A.

NUCLEAR INCIDENT EXCLUSION CLAUSE – PHYSICAL DAMAGE REINSURANCE – U.S.A.

PHYSICIANS INSURANCE PROGRAM EXCHANGE

KING OF PRUSSIA, PENNSYLVANIA

(hereinafter the “Company”)

MEDICAL PROFESSIONAL LIABILITY EXCESS OF LOSS

REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2018

ARTICLE 1

BUSINESS COVERED

ARTICLE 2

TERM

B. For the purposes of this Contract, “Standard Time” shall mean the time as described in the original Policy.

1. The “First Annual Period” as used in this Contract shall be from 12:01 a.m. Eastern Standard Time, January 1, 2018 to 12:01 a.m. Eastern Standard Time, January 1, 2019.

2. The “Second Annual Period” as used in this Contract shall be from 12:01 a.m. Eastern Standard Time, January 1, 2019 to 12:01 a.m. Eastern Standard Time, January 1, 2020.

C. The Company may terminate this Contract at December 31, 2018, upon the giving of thirty (30) days written notice to the Reinsurer prior to December 31, 2018.

1. The Company has entered into a definitive agreement to:

a. become acquired or controlled by any company, corporation or individual(s) not controlling or affiliated with the party’s operations previously; or

announced purpose of the individual’s assuming within thirty (30) days a known position with another identified firm in the (re)insurance or financial services industry.

G. Notwithstanding anything to the contrary in this Article, Extended Reporting Period Coverage (“Tail Policies”) shall be covered hereunder, as follows:

2. The time limit described in paragraph E. of this Article shall not apply to Tail Policies.

3. For purposes of this Contract, premium for a Tail Policy shall be considered fully earned on the inception date of the Tail Policy.

ARTICLE 3

SPECIAL TERMINATION

2. is acquired or controlled by, or merged with any other company;

3. has its A.M. Best’s rating assigned or downgraded below “A-” and/or Standard and Poor’s rating assigned or downgraded below “BBB+”;

4. reinsures its entire business, except as respects any internal reinsurance arrangements;

5. is ordered by a State Insurance Department or other legal authority to cease writing business;

7. has ceased assuming new and renewal property and casualty treaty reinsurance business.

ARTICLE 4

TERRITORIAL SCOPE

The territorial limits of this Contract shall be identical with those of the Company’s Policies.

ARTICLE 5

EXCLUSIONS

This Contract does not apply to and specifically excludes the following:

1. Reinsurance assumed by the Company.

2. Losses excluded by the attached “Nuclear Incident Exclusion Clause – Liability – Reinsurance – U.S.A.”

3. Losses excluded by the attached “Nuclear Incident Exclusion Clause – Physical Damage – U.S.A.”

5. War risk.

6. Terrorism.

7. Microorganism.

8. Cyber Risk.

9. Asbestos liability.

10. Credit, Insolvency, Financial Guarantee, Surety, Fidelity or Fiduciary Liability business, regardless of how classified in the Company’s Annual Statement.

11. Pollution.

12. Nursing Home or Extended Care Facility Professional and/or General Liability.

13. Sexual misconduct.

14. Ex-gratia Settlements.

ARTICLE 6

SPECIAL ACCEPTANCE

ARTICLE 7

RETENTION AND LIMIT

A. Coverage A: (As respects only Insured Individuals and Facilities covered under Medical Care Availability and Reduction of Error Fund (“MCARE”) and Insured Individuals not covered under MCARE):

B. Coverage B (As respects all Policies covered under this Contract):

2. Recoveries from Coverages A and C shall inure to the benefit of this Coverage B.

C. Coverage C (As respects only Insureds located in South Carolina):

D. Annual Aggregate Deductible:

E. Reinsurer’s maximum as Respects Coverage A and B and C Combined:

ARTICLE 8

PREMIUM

A. As premium for the reinsurance provided hereunder:

1. For the First Annual Period, the Company shall pay the Reinsurer five point seven five percent (5.75%) of its Net Written Premium for the annual period. The Company shall pay the Reinsurers a deposit premium of two hundred ten thousand dollars ($210,000) in four (4) equal installments of fifty two thousand five hundred dollars ($52,500) on April 1, July 1 October 1, 2018, and January 1, 2019.

2. For the Second Annual Period, the Company shall pay the Reinsurer five point seven five percent (5.75%) of its Net Written Premium for the annual period. The Company shall pay the Reinsurers a deposit premium of two hundred ten thousand dollars ($210,000) in four (4) equal installments of fifty two thousand five hundred dollars ($52,500) on April 1, July 1, October 1, 2019, and January 1, 2020.

C. If the Company elects to terminate this Contract at December 31, 2018, the five point seven five percent (5.75%) rate set forth in Paragraph A for the First Annual Period shall increase to six point two five percent (6.25%) for the First Annual Period.

D. The Company shall furnish the Reinsurer with such information as may be required by the Reinsurer for completion of its financial statements.

ARTICLE 9

COMMUTATION

A. Within sixty (60) days following twenty four (24) months after the close of any one annual period of this Contract, the Company may commute all liability for said annual period hereunder.

B. The Company shall report to the Reinsurer the commuted value of such claims for the applicable annual period, which shall be deemed to be the positive balance of:

1. Reinsurance premiums paid or payable hereunder for the applicable annual period; less

2. Expenses incurred by the Reinsurer at a rate of twenty seven point zero percent (27.0%) of the Net Written Premium for the applicable annual period hereof: less

3. Reinsurance recoveries previously made hereunder for Policies allocated to this Contract for the applicable annual period.

ARTICLE 10

DEFINITIONS

Nothing in this clause shall be construed to mean that losses are not recoverable hereunder until the Company's Ultimate Net Loss has been ascertained.

1. court costs;

2. costs of supersedeas and appeal bonds;

3. monitoring counsel expenses;

4. legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto, including but not limited to declaratory judgment actions;

5. post-judgment interest;

6. pre-judgment interest, unless included as part of an award or judgment; and

7. subrogation, salvage and recovery expenses

“Allocated Loss Adjustment Expense” does not include salaries and expenses of the Company’s employees and office and other overhead expenses.

E. “Policy” means any binder, policy, or contract of insurance issued, accepted or held covered provisionally or otherwise, by or on behalf of the Company.

1. Settlements of losses which are arguably within the contemplation of coverage under the Company’s Policies reinsured hereunder;

2. Settlements made to avoid costs that could be incurred in connection with potential or actual litigation relating to coverage issues arising under the Company’s Policies reinsured hereunder;

3. Losses already excluded under this Contract.

G. “Insured” means each insured who is provided with a separate limit of liability under the Company's Policy(ies).

H. “Claim” shall follow the definition under the original Policy.

ARTICLE 11

NET RETAINED LIABILITY

A. This Contract applies only to that portion of any loss that the Company retains net for its own account (prior to deduction of any reinsurance that inures solely to the benefit of the Company).

ARTICLE 12

LOSS IN EXCESS OF POLICY LIMITS AND EXTRA CONTRACTUAL OBLIGATIONS

defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action.

ARTICLE 13

ACCOUNTING, LEGAL AND TAX REPRESENTATIONS AND WARRANTIES

The Company represents and warrants that:

A. The Company has performed its own financial analysis of the transaction contemplated by this Contract (the “Transaction”), including with respect to the transferred risk and the underlying economic impact, and that it has sought, is seeking or shall seek its own accounting, legal and tax advice for the Transaction; and

B. The Company:

1. has fully disclosed or hereby agrees to fully disclose prior to the completion of the current audit cycle, the Transaction to its accountants and independent auditors;

2. where appropriate in its reasonable opinion, has made or shall make appropriate disclosure to, or consult with its legal counsel and any relevant regulatory and tax authorities; and

ARTICLE 14

WARRANTY

from the Manual as respects acceptance criteria and/or rating of an individual risk shall void the coverage under this Contract for that risk only.

B. Additionally the Company warrants the following:

1. The Company will obtain prior written approval from the Reinsurer for any reduction in filed rates.

2. There will be no material changes to underwriting guidelines included in the Manual, or to class or geographic mix of business during the term of this Contract.

ARTICLE 15

NOTICE OF LOSS AND LOSS SETTLEMENTS

1. Policy number;

2. Account name;

3. Claim number

4. Claim date;

5. Claimant’s name;

6. Practice area;

7. Injury description/cause; and

8. Incurred and paid loss and Allocated Loss Adjustment Expense.

C. The Company alone and at its full discretion shall adjust, settle or compromise all claims and losses.

ARTICLE 16

INDEMNIFICATION AND ERRORS AND OMISSIONS

1. what shall constitute a claim or loss covered under the Policies;

2. the Company’s liability thereunder; and

3. the amount or amounts that it shall be proper for the Company to pay thereunder.

ARTICLE 17

CURRENCY (BRMA 12A)

ARTICLE 18

TAXES (BRMA 50C)

ARTICLE 19

FEDERAL EXCISE TAX

(Section A Applicable to those Reinsurers, excepting Underwriters at Lloyd’s London and other Reinsurers exempt from Federal Excise Tax, who are domiciled outside the United States of America)

ARTICLE 20

ACCESS TO RECORDS

ARTICLE 21

CONFIDENTIALITY

of this Contract (“Confidential Information”) are proprietary and confidential to the Company. Confidential Information shall not include documents, information or data that the Reinsurer can show:

1. are publicly known or have become publicly known through no unauthorized act of the Reinsurer;

2. have been rightfully received from a third person without obligation of confidentiality; or

3. were known by the Reinsurer prior to the placement of this Contract without an obligation of confidentiality.

B. Absent the written consent of the Company, the Reinsurer shall not disclose any Confidential Information to any third parties, including any affiliated companies, except:

1. when required by retrocessionaires subject to the business ceded to this Contract;

2. when required by regulators performing an audit of the Reinsurer's records and/or financial condition;

3. when required by external auditors performing an audit of the Reinsurer's records in the normal course of business; or

4. when requested by a court of law.

ARTICLE 22

RESERVES

3. To make refund of any sum which is in excess of the actual amount required for Sections 1 and 2 of this paragraph.

ARTICLE 23

SERVICE OF SUIT (BRMA 49E)

Contract, the Reinsurer shall abide by the final decision of such court or of any appellate court in the event of an appeal.

ARTICLE 24

GOVERNING LAW (BRMA 71B)

This Contract shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania.

ARTICLE 25

ARBITRATION (BRMA 6J)

B. in turn choose an Umpire before entering upon arbitration. If the two (2) Arbiters fail to agree upon the selection of an Umpire within thirty (30) days following their appointment, each Arbiter shall nominate three (3) candidates within ten (10) days thereafter, two (2) of whom the other shall decline, and the decision shall be made by drawing lots.

C. Each party shall present its case to the Arbiters within thirty (30) days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction.

D. If more than one Reinsurer is involved in the same dispute, all such Reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such Reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the Reinsurers participating under the terms of this Contract from several to joint.

E. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two (2) Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two (2) parties.

F. Any arbitration proceedings shall take place at a location mutually agreed upon by the parties to this Contract, but notwithstanding the location of the arbitration, all proceedings pursuant hereto shall be governed by the law of the state of Pennsylvania.