Accounting principles used to prepare statutory financial statements differ from those used to prepare these consolidated financial statements under GAAP. Prescribed statutory accounting practices (“SAP”) include state laws, regulations, and general administration rules, as well as a variety of publications from the National Association of Insurance Commissioners (“NAIC”). The statutory financial statements of Positive Insurance Company are prepared in accordance with SAP prescribed by the Pennsylvania Insurance Department.

Financial statements prepared under SAP focus on solvency of the insurer and generally provide a more conservative approach than under GAAP. These accounting practices differ significantly in the following respects from GAAP: (1) assets must be included in the statutory balance sheet at “admitted asset value,” whereas GAAP requires historical cost or, in certain instances, fair value; (2) “non-admitted assets” must be excluded through a charge to surplus, while on a GAAP basis “non-admitted assets” are included in the balance sheet net of any valuation allowance; (3) acquisition costs, such as commissions, management fees, premium taxes, and other items, have been charged to operations when incurred, whereas GAAP requires capitalization of these expenses, which are amortized over the term of the policies; (4) the carrying value of fixed maturity securities are based on NAIC ratings, whereas GAAP requires fixed maturity securities to be valued based on whether management intends to hold the securities to maturity; (5) changes in deferred income taxes are reported directly to surplus, whereas changes to deferred income taxes are reflected in the statement of income for GAAP; (6) deferred tax assets, net of any valuation allowance, are subject to an admissibility calculation, whereas under GAAP, no such calculation exists; and (7) ceded reinsurance amounts (unearned premiums and estimated unpaid loss recoverables) are shown net of the related liability, whereas they are presented on a gross basis and reflected as an asset for GAAP.

The Pennsylvania Insurance Department.has adopted certain prescribed accounting practices that differ from those found in NAIC SAP. Specifically, the Pennsylvania Insurance Department permits the deduction of management fees related to unearned premiums from unearned premiums reserve and charging operations on a pro-rata basis over the period covered by these policies; whereas under NAIC SAP, the unearned premiums would not be reduced by the management fees paid related to unearned premiums reserve. With the conversions of PPIX, PCA, and PIPE from reciprocal insurance exchanges into stock insurance companies as of March 27, 2019, the prescribed practice of deducting management fees related to unearned premiums from unearned premiums reserve is no longer applicable to Positive Insurance Company.

Statutory net income (loss) and surplus and other funds as determined in accordance with SAP prescribed or permitted by the Pennsylvania Insurance Department for the years ended December 31, 2019 and 2018 are as follows:

	Year Ended December 31,
	2019		2018
Statutory net income (loss)	$	1,359,223	$	(4,937,935	)
Statutory surplus and other funds		39,415,264		36,535,665

A reconciliation of statutory surplus and other funds between NAIC SAP and practices prescribed by the Pennsylvania Insurance Department for the years ended December 31, 2019 and 2018 are as follows:

	December 31,
	2019		2018
Statutory surplus and other funds prescribed by the Department	$	39,415,264	$	36,535,665
State prescribed practices:
Unearned management fees		-		(2,735,711	)
Statutory surplus and other funds per NAIC statutory accounting practices	$	39,415,264	$	33,799,954

Positive Insurance Company is subject to minimum risk-based capital (“RBC”) requirements that were developed by the NAIC. The formulas for determining the amount of RBC specify various weighting factors that are applied to financial balances and various levels of risk activity. Regulatory compliance is determined by a ratio of Positive Insurance Company’s total adjusted capital, as defined by the NAIC, to its authorized control level RBC. At December 31, 2019 and 2018, our RBC exceeded minimum RBC requirements.