EXHIBIT 1 to FORM A Stock Purchase Agreement

REDACTED EXHIBITS DOCKET NO. 19-0378

EXHIBIT 1 to FORM A

Stock Purchase Agreement

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STOCK PURCHASE AGREEMENT

AMONG

PHYSICIANS INSURANCE A MUTUAL COMPANY

as Seller,

AND

COPIC INSURANCE COMPANY

AND

MICHIGAN PROFESSIONAL INSURANCE EXCHANGE

as Buyers,

Dated July 31, 2019

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STOCK PURCHASE AGREEMENT

This Stock Purchase Agreement (“Agreement”) is entered into as of July ___, 2019, by and among Physicians Insurance A Mutual Company, a Washington mutual insurance company (the “Seller”), COPIC Insurance Company, a Colorado corporation (“COPIC”), and Michigan Profession Insurance Exchange, a reciprocal exchange organized in Michigan (“MPIE” and COPIC, individually each a “Buyer” and collectively, the “Buyers”). The Seller and the Buyers are individually referred to herein as a “Party” and collectively as the “Parties.”

RECITALS

The Seller owns one hundred percent (100%) of the issued and outstanding capital stock (the “Target Shares”) of Western Professional Insurance Company, a Washington insurance company (the “Target”).

The Target is a Washington stock insurance corporation. The Target has not issued policies and has not advertised or solicited new business since on or about 2004.

This Agreement contemplates a transaction in which each Buyer will purchase from the Seller, and the Seller will sell to each Buyers, one third of the Target Shares (collectively, the “Acquired Shares”), in return for cash.

Now, therefore, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties, and covenants herein contained, the Parties agree as follows:

AGREEMENT

1. Definitions.

“Acquired Shares” has the meaning set forth in the Recitals.

“Adverse Consequences” means all actions, suits, proceedings, hearings, investigations,charges, complaints, claims, demands, injunctions, judgments, orders, decrees, rulings, damages, dues, penalties, fines, costs, liabilities, obligations, taxes, liens, losses, expenses, and fees, including court costs and attorneys’ fees and expenses.

“Balance Sheet Date” has the meaning set forth in Section 4(g) below.

“Buyers” has the meaning set forth in the preface above.

“Closing” has the meaning set forth in Section 2(d) below.

“Closing Date” has the meaning set forth in Section 2(d) below.

“Confidential Information” means any information concerning the businesses and affairs of a Party that is not already generally available to the public.

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“Disclosure Schedule” shall mean a schedule executed and delivered by Seller to Buyers as of the date hereof which sets forth the exceptions to the representations and warranties contained in Sections 3 and 4 hereof and certain other information called for by this Agreement.

“Employee Benefit Plan” means any (a) nonqualified deferred compensation or retirement plan or arrangement which is an Employee Pension Benefit Plan, (b) qualified defined contribution retirement plan or arrangement which is an Employee Pension Benefit Plan, (c) qualified defined benefit retirement plan or arrangement which is an Employee Pension Benefit Plan (including any Multiemployer Plan), or (d) Employee Welfare Benefit Plan for material fringe benefit plan or program.

“Employee Pension Benefit Plan” has the meaning set forth in ERISA Sec. 3(2).

“Employee Welfare Benefit Plan” has the meaning set forth in ERISA Sec. 3(l).

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

“Financial Statements” has the meaning set forth in Section 4(f) below.

“Income Tax” means any federal, state, local, or foreign income tax, including any interest, penalty, or addition thereto, whether disputed or not.

“Income Tax Return” means any return, declaration, report, claim for refund, or information return or statement relating to Income Taxes, including any schedule or attachment thereto.

“Indemnified Party” has the meaning set forth in Section 8(d) below.

“Indemnifying Party” has the meaning set forth in Section 8(d) below. “Intellectual Property Assets” has the meaning set forth in Section 4(l) below.

“Knowledge” means the actual knowledge of the President & CEO, Treasurer, and

Secretary of the Target or the knowledge that a reasonably prudent business person would have after a reasonable investigation of the matter.

“Multiemployer Plan” has the meaning set forth in ERISA Sec. 3(37).

“Ordinary Course of Business” means the ordinary course of business of the Target, as described in the Recitals.

“Party” has the meaning set forth in the preface above. “Permits” means all permits, licenses, franchises, registrations, approvals, consents and

authorizations.

“Person” means an individual, a partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, or a governmental entity (or any department, agency, or political subdivision thereof).

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“Purchase Price” has the meaning set forth in Section 2(b) below.

“SAP” means statutory accounting principles promulgated by the National Association of Insurance Commissioners as in effect from time to time.

“Securities Act” means the Securities Act of 1933, as amended.

“Security Interest” means any mortgage, pledge, lien, encumbrance, charge, or other security interest, other than (a) mechanic’s, materialmen’s, and similar liens, (b) liens for taxes not yet due and payable, (c) purchase money liens and liens securing rental payments under capital lease arrangements, and (d) other liens arising in the Ordinary Course of Business and not incurred in connection with the borrowing of money.

“Seller” has the meaning set forth in the preface above.

“Surplus” means the difference between the Target’s statutory admitted assets and the statutory liabilities.

“Target” has the meaning set forth in the Recitals.

“Target Shares” has the meaning set forth in the Recitals.

“Third Party Claim” has the meaning set forth in Section 8(d) below.

2. Purchase and Sale of Target Shares.

(a) Basic Transaction. On and subject to the terms and conditions of this Agreement,the Buyers agree to purchase from the Seller, and the Seller agrees to sell to the Buyers, the Acquired Shares, for the consideration specified in Section 2(b) below. The Acquired Shares shall be allocated equally between COPIC and MPIE, such that after the Closing (as defined below), the Target Shares shall be owned as follows:

Seller 100,000 Target Shares COPIC 100,000 Target Shares MPIE 100,000 Target Shares

(b) Purchase Price. As consideration for the aforesaid sale, the Buyers shall pay tothe Seller at the Closing the aggregate amount of (the “Purchase Price”), by delivery of cash payable by wire transfer or delivery of other immediately available funds. Each of COPIC and MPIE shall be responsible for payment of one half of the Purchase Price. A breakdown of the Purchase Price is set forth in Section 2(b) of the Disclosure Schedule.

(c) Notwithstanding the purchase of the Acquired Shares by the Buyers, andanything else to the contrary in this Agreement, subject to and upon Closing of the transaction contemplated under this Agreement, Seller shall assume, and at all times remain solely responsible for any duties, obligations, claims or liabilities related to or arising out of any insurance policies issued by the Target prior to the Closing Date.

(d) The Closing. The closing of the transaction contemplated by this Agreement (the“Closing”) shall take place by teleconference, with the exchange of deliverables (in counterparts

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or otherwise) by electronic transmission in PDF format or by facsimile, on the second business day following the satisfaction or waiver of all conditions to the obligations of the Parties to consummate the transaction contemplated hereby (other than conditions with respect to actions the respective Parties will take at the Closing itself) or such other date as the Buyers and the Seller may mutually determine (the “Closing Date”). For accounting and computational purposes, the Closing will be deemed to have occurred at 9:00 a.m. (Pacific Standard Time) on the Closing Date.

(e) Deliveries by Seller. At the Closing, the Seller will deliver to the Buyers:

(i) two (2) stock certificates, each such certificate duly and validly endorsedin favor of each Buyer, or accompanied by a separate stock power duly and validly executed by Seller and otherwise sufficient to vest in each Buyer good title to such Buyer’s Acquired Shares;

(ii) executed copies of the consents, authorizations and approvals set forth inSection 3(a)(iii) and 4(c) of the Disclosure Schedule;

(iii) executed copies of the Amended and Restated Articles of Incorporation,Amended and Restated Bylaws, Shareholders Agreement, and the Unanimous Consent of the Board of Directors Appointing Officers, in substantially the form attached hereto as Exhibits A through D;

(iv) true and correct copies of the resolutions of the directors and/ormembers, as applicable, of the Seller approving the execution, delivery and performance of this Agreement and the related agreements to which Seller is a party; and

(v) a certificate of the Seller to the effect that each of the conditionsspecified in Sections 5(d) and 7(a)(i)-(iv) have been satisfied in all respects.

(f) Deliveries of Buyers. At the Closing, each Buyer shall deliver to the Seller:

(i) executed copies of the consents, authorizations and approvals set forth inSection 3(b)(iii) of the Disclosure Schedule;

(ii) executed copies of the Amended and Restated Articles of Incorporation,Amended and Restated Bylaws, the Shareholders Agreement, and the Unanimous Consent of the Board of Directors Appointing Officers, in substantially the form attached hereto as Exhibits A through D;

(iii) the consideration specified in Section 2(b) above to an accountdesignated by the Seller prior to the Closing by wire transfer in immediately available funds;

(iv) true and correct copies of the resolutions of the directors and/orshareholders, as applicable, of each Buyer approving the execution, delivery and performance of this Agreement and the related agreements to which each Buyer is a party; and

(v) a certificate of each Buyer to the effect that each of the conditionsspecified in Section 7(b)(i)-(iv) pertaining to such Buyer have been satisfied in all respects.

3. Representations and Warranties Concerning the Transaction.

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(a) Representations and Warranties of the Seller. The Seller represents and warrantsto the Buyers that the statements contained in this Section 3(a) are correct and complete as of the date of this Agreement and will be correct and complete as of the Closing Date (as though made then and as though the Closing Date were substituted for the date of this Agreement throughout this Section 3(a)) with respect to itself.

(i) Organization of Seller. The Seller is duly organized, validly existing, andin good standing under the laws of the jurisdiction of its incorporation.

(ii) Authorization of Transaction. The Seller has full corporate power andauthority to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement constitutes the valid and legally binding obligation of the Seller, enforceable in accordance with its terms and conditions.

(iii) Noncontravention. Except for the filings, Permits, authorizations,consents, applications and approvals as may be required under RCW 48.31B, and except as set forth in Section 3(a)(iii) of the Disclosure Schedule, neither the execution and the delivery of this Agreement, nor the consummation of the transaction contemplated hereby, will (A) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which the Seller is subject or any provision of its charter or bylaws; or (B) conflict with, result in a breach of, constitute a default under, result in theacceleration of, create in any party the right to accelerate, terminate, modify, or cancel, orrequire any notice or consent under any agreement, contract, lease, license, instrument, orother arrangement to which the Seller is a party or by which it is bound or to which anyof its assets is subject. All contracts and governmental authorizations under which Selleris obligated to request or obtain any such consent or governmental authorization or togive any such notice are identified in Section 3(a)(iii) of the Disclosure Schedule.

(iv) Brokers’ Fees. The Seller has no liability or obligation to pay any fees orcommissions to any broker, finder, or agent with respect to the transaction contemplated by this Agreement for which the Buyers could become liable or obligated.

(v) Stock Ownership. The Seller holds of record and owns beneficially thenumber of Target Shares set forth in Section 4(b) of this Agreement, free and clear of any taxes, Security Interests, options, warrants, purchase rights, contracts, commitments, equities, claims, and demands. The Seller is not a party to any option, warrant, purchase right, or other contract or commitment that could require the Seller to sell, transfer, or otherwise dispose of any capital stock of the Target (other than this Agreement). The Seller is not a party to any voting trust, proxy, or other agreement or understanding with respect to the voting of any capital stock of the Target (other than this Agreement).

(b) Representations and Warranties of the Buyers. Each Buyer, severally and notjointly, represents and warrants to the Seller that the statements contained in this Section 3(b) as to the respective Buyer are correct and complete as of the date of this Agreement and will be correct and complete as of the Closing Date (as though made then and as though the Closing Date were substituted for the date of this Agreement throughout this Section 3(b)).

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(i) Organization of the Buyers. Each Buyer is a corporate entity duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation.

(ii) Authorization of Transaction. Each Buyer has full corporate power and

authority to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement constitutes the valid, legally binding obligation of each Buyer, enforceable in accordance with its terms and conditions.

(iii) Noncontravention. Except for the filings, Permits, authorizations,

consents, applications and approvals as may be required under RCW 48.31B, and except as set forth in Section 3(b)(iii) of the Disclosure Schedule, neither the execution and the delivery of this Agreement, nor the consummation of the transaction contemplated hereby, will (A) violate any constitution, statute, regulation, rule, injunction, judgment order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which each Buyer is subject or any provision of its charter or bylaws or (B) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which each Buyer is a party or by which it is bound or to which any of its assets is subject. All contracts and governmental authorizations under which each Buyer is obligated to request or obtain any such consent or governmental authorization or to give any such notice are identified in Section 3(b)(iii) of the Disclosure Schedule.

(iv) Brokers’ Fees. Neither Buyer has any liability or obligation to pay any

fees or commissions to any broker, finder, or agent with respect to the transaction contemplated by this Agreement for which the Seller could become liable or obligated.

(v) Investment. Neither Buyer is acquiring the Target Shares with a view to

or for sale in connection with any distribution thereof within the meaning of the Securities Act.

4. Representations and Warranties Concerning the Target. The Seller represents and warrants to the Buyers that the statements contained in this Section 4 are correct and complete as of the date of this Agreement and will be correct and complete as of the Closing Date (as though made then and as though the Closing Date were substituted for the date of this Agreement throughout this Section 4), except as set forth in the Disclosure Schedule delivered by the Seller to the Buyers on the date hereof.

(a) Organization, Qualification, and Corporate Power. The Target is a Washington insurance company duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation. The Target is duly authorized to conduct business and is in good standing under the laws of each jurisdiction where such qualification is required, except where the lack of such qualification would not have a material adverse effect on the Target.

(b) Capitalization. The entire authorized capital stock of the Target consists of 20,000,000 Shares, of which 300,000 Target Shares are issued and outstanding. All of the Target Shares have been duly authorized, are validly issued, fully paid, and nonassessable, and are held of record by the Seller. There are no outstanding or authorized options, warrants, purchase rights, subscription rights, conversion rights, exchange rights or other contracts or commitments that

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could require the Target to issue, sell, or otherwise cause to become outstanding any of its capital stock (other than this Agreement.) There are no outstanding or authorized stock appreciation, phantom stock, profit participation, or similar rights with respect to the Target.

(c) Noncontravention. Except for the filings, Permits, authorizations, consents,applications and approvals as may be required under RCW 48.31B, and except as set forth in Section 4(c) of the Disclosure Schedule, neither the execution and the delivery of this Agreement, nor the consummation of the transaction contemplated hereby, will (i) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which the Target is subject or any provision of the charter or bylaws of the Target or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which the Target is a party or by which it is bound or to which any of its assets are subject (or result in the imposition of any Security Interest upon any of its assets), except where the violation, conflict, breach, default, acceleration, termination, modification, cancellation, failure to give notice, or Security Interest would not have a material adverse effect on the Target or on the ability of the Parties to consummate the transaction contemplated by this Agreement. All contracts and governmental authorizations under which the Target is obligated to request or obtain any such consent or governmental authorization or to give any such notice are identified in Section 4(c) of the Disclosure Schedule.

(d) Brokers’ Fees. The Target does not have any liability or obligation to pay anyfees or commissions to any broker, finder, or agent with respect to the transaction contemplated by this Agreement.

(e) Title to Tangible Assets. The Target has no tangible assets.

(f) Financial Statements. Section 4(f) of the Disclosure Schedule sets forth thefollowing financial statements of the Target (collectively the “Financial Statements”): (i) audited balance sheets and statements of income and cash flow as of and for the fiscal years ended 2016, 2017 and 2018; and unaudited interim balance sheet and profit and loss statements as of and for the three months ended on March 31, 2019. The Financial Statements (including the notes thereto) have been prepared in accordance with SAP applied on a consistent basis throughout the periods covered thereby and present fairly the financial condition of the Target as of such dates and the results of operations of the Target for such periods.

(g) Absence of Material Adverse Change. Except as and to the extent adequatelyaccrued or reserved against the audited balance sheet of the Target as of December 31, 2018 (the “Balance Sheet Date”), there has not been any material adverse change in the financial condition of the Target since the Balance Sheet Date. Without limiting the generality of the foregoing, since the Balance Sheet Date, the Target has not engaged in any practice, taken any action, or entered into any transaction outside the Ordinary Course of Business.

(h) Legal Compliance. To the Knowledge of the Seller, the Target has complied withall applicable laws (including rules, regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and charges thereunder) of federal, state, local, and foreign governments (and all agencies thereof), except where the failure to comply would not have a material adverse effect upon the Target.

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(i) Tax Matters.

(i) All Income Tax Returns that that the Target was required to file or theSeller was required to file on behalf of the Target have been filed, and all Income Taxes shown thereon as owing, except where the failure to file Income Tax Returns or to pay Income Taxes would not have a material adverse effect on the Target, have been paid.

(ii) No statutes of limitations applicable to the Target in respect of IncomeTaxes have been waived and no extensions of time with respect to an outstanding Income Tax assessment or deficiency applicable to the Target have been agreed to.

(iii) Except as set forth on Schedule 4(i), the Target is not a party to anyIncome Tax allocation or sharing agreement.

(j) Contracts. Section 4(j) of the Disclosure Schedule lists all written contracts andother written agreements to which the Target is a party. Upon request by either Buyer, the Seller shall deliver to the Buyers a correct and complete copy of each requested contract or other agreement (as amended to date).

(k) Permits. The Target has (i) all Permits listed in Section 4(k) of the DisclosureSchedule. All such Permits are valid, in full force and effect and in good standing. Except as set forth in Section 4(k) of the Disclosure Schedule, the Target has not received any notice of any legal claim, action or proceeding of revocation or suspension of any such Permit or of inspection, finding of deficiency, finding of non-compliance, penalty, fine, sanction, assessment, audit, request for corrective or remedial action, or, other investigation, compliance or enforcement action relating to the business of the Target.

(l) Intellectual Property Assets.

(i) The term “Intellectual Property Assets” includes: (A) the name of theTarget, all fictional business names, trading names, registered and unregistered trademarks, service marks, and applications; (B) all patents, patent applications, and inventions and discoveries that may be patentable; (C) all registered and unregistered copyrights in both published works and unpublished works, including applications therefor, and works of authorship contained in software and other compilations of information, and all renewals and extensions thereof; (D) trade secrets including all know-how, confidential information, customer lists, marketing information and plans, sales records/databases, proprietary software and applications, technical information, data, process technology, plans, drawings, and blue prints owned, used, or licensed by the Target as licensee or licensor; (E) any agreement pursuant to which the Target licenses or has otherwise been granted rights to software or other type of intellectual property of third parties; and (F) all rights in internet websites and domain names used by the Target.

(ii) Section 4(l)(ii) of the Disclosure Schedule sets forth a correct andcomplete list of all Intellectual Property Assets owned by the Target. The Target has the lawful right to use and disclose all of its Intellectual Property Assets, and neither the use nor disclosure of any Intellectual Property Assets by the Target infringes upon or misappropriates the lawful rights of any other Person. The Intellectual Property Assets owned or licensed by the Target as of the Closing Date constitute all Intellectual Property Assets necessary to conduct the Target’s business as currently planned to be conducted.

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(m) Powers of Attorney. To the Knowledge of the Seller, there are no outstandingpowers of attorney executed on behalf of the Target, except as set forth in Section 4(m) of the Disclosure Schedule.

(n) Litigation. To the Knowledge of the Seller, the Target is not, and no event hasoccurred that may give rise to the Target becoming: (i) subject to any outstanding injunction, judgment, order, decree, ruling, or charge or (ii) a party to any action, suit, proceeding, hearing, or investigation of, in, or before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction, except where the injunction, judgment, order, decree, ruling, action, suit, proceeding, hearing, or investigation would not have a material adverse effect on the Target.

(o) Employee Benefits. Except as set forth in Section 4(o) of the DisclosureSchedule, the Target does not maintain or contribute to any Employee Benefit Plans.

(p) Owned Real Property. Except as set forth in Section 4(p) of the DisclosureSchedule, the Target does not own, and has never owned, any real property or buildings, fixtures or improvements located thereon.

(q) Employees. Except as set forth in Section 4(q) of the Disclosure Schedule, theTarget does not have, and has never had, any employees.

(r) Material Misstatements or Omissions. No representations or warranties by Sellerin this Agreement contain or will contain any untrue statement of a material fact, or omit or will omit to state any material fact necessary to make the statements or facts contained therein not misleading. Seller has disclosed to Buyers all events, conditions and facts materially affecting the Target.

5. Pre-Closing Covenants. The Parties agree as follows with respect to the period betweenthe execution of this Agreement and the Closing.

(a) General. Each of the Parties will use its reasonable best efforts to take all actionand to do all things necessary in order to consummate and make effective the transaction contemplated by this Agreement (including satisfaction, but not waiver, of the closing conditions set forth in Section 7 below).

(b) Notices and Consents. Each of the Parties will (and the Seller will cause theTarget to) give any notices to, make any filings with, and use its reasonable best efforts to obtain any authorizations, consents, and approvals referenced in Sections 3(a)(iii), 3(b)(iii) and 4(c) of the Disclosure Schedule.

(c) Operation of Business. The Seller will not cause or permit the Target to engagein any practice, take any action, or enter into any transaction outside the Ordinary Course of Business.

(d) Closing Surplus. The Seller will cause the Target to have in its accounts, as of12:01 a.m. (Pacific Time) on the Closing Date, Surplus in the amount of , provided, however, that the Surplus may be less than such amount as a result of all reasonable expenses paid or incurred by the Target in connection with the transaction contemplated under this Agreement as of the Closing Date. Notwithstanding any provision to the contrary of this

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Agreement (and specifically the limitations in Section 5(c) above), and consistent with the procedures identified in Section 5(d) of the Disclosure Schedule, prior to or on the Closing Date, the Seller may cause the Target to make any distributions or transfers of capital out of the Target’s accounts, provided the Seller remains in compliance with the covenant in this Section 5(d).

(e) Confidential Information. Without limiting the generality of, and in addition to,the obligations of the Parties set forth in the Mutual Confidentiality and Nondisclosure Agreement, dated July 25, 2017, the Parties will treat and hold as confidential any Confidential Information they receive from one another in connection with the transaction contemplated under this Agreement, will not use any of the Confidential Information except in connection with this Agreement, and, if this Agreement is terminated for any reason whatsoever, will return to one another all tangible embodiments (and all copies) of the Confidential Information in their possession.

(f) Update of Disclosure Schedules. Seller may, from time to time, prior to or on theClosing Date supplement or amend the Disclosure Schedule to (i) correct any matter that would otherwise constitute a breach of any representation, warranty or covenant contained herein, or (ii) reflect new information received by Seller. If such a supplement or amendment of any section of the Disclosure Schedule materially and adversely affects the benefits to be obtained by the Buyers under this Agreement, then the Parties will attempt to resolve any disagreements arising from such supplement or amendment to the Disclosure Schedules by engaging in good faith negotiations. If within ten (10) days from the date of the notice the Parties do not reach a resolution, then either Buyer shall have the right to terminate this Agreement, but such right of termination shall be such Buyer’s sole remedy relating to matters set forth in the amendment or supplements to any section of the Disclosure Schedule. Notwithstanding any other provision hereof to the contrary, the Disclosure Schedule and the representations and warranties made by the Seller shall be deemed for all purposes to include and reflect such supplements and amendments as of the date hereof and at all times thereafter, including the Closing Date.

6. Post-Closing Covenants. The Parties agree as follows with respect to the period followingthe Closing.

(a) General. In case at any time after the Closing any further action is necessary tocarry out the purposes of this Agreement, including, without limitation, the filing of the Amended and Restated Articles of Incorporation in substantially the form attached hereto as Exhibit A, each of the Parties will take such further action (including the execution and delivery of such further instruments and documents) as any other Party reasonably may request, all at the sole cost and expense of the requesting Party (unless the requesting Party is entitled to indemnification therefor under Section 8 below).

(b) Litigation Support. In the event and for so long as any Party actively iscontesting or defending against any action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand in connection with (i) any transaction contemplated under this Agreement or (ii) any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction on or prior to the Closing Date involving the Target, each of the other Parties shall cooperate with it and its counsel in the defense or contest, make available their personnel, and provide such testimony and access to their books and records as shall be necessary in connection with the defense or contest, all at the sole

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cost and expense of the contesting or defending Party (unless the contesting or defending Party is entitled to indemnification therefor under Section 8 below).

(c) Transition. The Seller will not take any action that is designed or intended to

have the effect of discouraging any lessor, licensor, customer, supplier, or other business associate of the Target from maintaining the same business relationships with the Target after the Closing as it maintained with the Target prior to the Closing. 7. Conditions to Obligation to Close.

(a) Conditions to Obligation of the Buyers. The obligation of each Buyer to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions:

(i) the representations and warranties set forth in Section 3(a) and Section 4 above shall be true and correct in all material respects at and as of the Closing Date;

(ii) the Seller shall have performed and complied with all of its covenants

hereunder in all material respects through the Closing;

(iii) there shall not be any injunction, judgment, order, decree, ruling, or charge in effect preventing consummation of any of the transaction contemplated by this Agreement;

(iv) the Parties and the Target shall have obtained all material consents,

authorizations, and approvals set forth in Sections 3(a)(iii), 3(b)(iii) and 4(c) of the Disclosure Schedule, including, without limitation, the approval by the Washington State Office of the Insurance Commissioner (“OIC”) of the Form A Application filed in connection with the transactions contemplated under this Agreement;

(v) the Seller shall have delivered to the Buyers a certificate to the effect that

each of the conditions specified in Section 7(a)(i)-(iv) above is satisfied in all respects; (vi) the Parties shall have executed, subject to and effective upon Closing, the

Amended and Restated Articles of Incorporation, Amended and Restated Bylaws, Shareholders Agreement and Unanimous Consent of the Board of Directors Appointing Officers, in substantially the form attached hereto as Exhibits A through D; and

(vii) all actions to be taken by the Seller in connection with consummation of

the transaction contemplated hereby and all certificates, opinions, instruments, and other documents required to effect the transaction contemplated hereby will be reasonably satisfactory in form and substance to the Buyers.

The Buyers may waive any condition specified in this Section 7(a) by a writing so stating at or prior to the Closing.

(b) Conditions to Obligation of the Seller. The obligation of the Seller to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions:

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(i) the representations and warranties set forth in Section 3(b) above shall betrue and correct in all material respects at and as of the Closing Date;

(ii) each Buyer shall have performed and complied with all of its covenantshereunder in all material respects through the Closing;

(iii) there shall not be any injunction, judgment, order, decree, ruling, orcharge in effect preventing consummation of any of the transaction contemplated by this Agreement;

(iv) the Parties and the Target shall have obtained all material consents,authorizations, and approvals set forth in Sections 3(a)(iii), 3(b)(iii) and 4(c) of the Disclosure Schedule, including, without limitation, the approval by the OIC of the Form A Application filed in connection with the transaction contemplated under this Agreement;

(v) the Buyers shall have delivered to the Seller a certificate to the effect thateach of the conditions specified above in Section 7(b)(i)-(iv) is satisfied in all respects;

(vi) the Parties shall have executed, subject to and effective upon Closing, theAmended and Restated Articles of Incorporation, Amended and Restated Bylaws, Shareholders Agreement, and Unanimous Consent of the Board of Directors Appointing Officers, in substantially the form attached hereto as Exhibits A through D; and

(vii) all actions to be taken by the Buyers in connection with consummation ofthe transaction contemplated hereby and all certificates, opinions, instruments, and other documents required to effect the transaction contemplated hereby will be reasonably satisfactory in form and substance to the Seller.

The Seller may waive any condition specified in this Section 7(b) by a writing so stating at or prior to the Closing.

8. Remedies for Breaches of this Agreement.

(a) Survival of Representations and Warranties. All of the representations andwarranties of the Parties contained herein shall survive the Closing (unless the damaged Party knew or had reason to know of any misrepresentation or breach of warranty at the time of Closing) and continue in full force and effect indefinitely (subject to any applicable statutes of limitations).

(b) Indemnification Provisions for Benefit of the Buyers. In the event the Sellerbreaches any of its representations, warranties and covenants contained herein, provided that a particular Buyer makes a written claim for indemnification against the Seller pursuant to Section 10(h), then the Seller shall indemnify such Buyer from and against any Adverse Consequences such Buyer shall suffer through and after the date of the claim for indemnification caused proximately by the breach. Except for claims of a breach of Seller’s obligations under Sections 2(c) or 5(d), for any claims by either Buyer against the Seller relating to breaches of any representations and warranties in this Agreement, Seller’s obligations are capped at the portion of the Purchase Price paid by the Buyer making such indemnification claim.

14 126181.0002/7664231.5

(c) Indemnification Provisions for Benefit of the Seller. In the event a particularBuyer breaches any of its representations, warranties, and covenants contained herein (the “Breaching Buyer”), and provided that the Seller makes a written claim for indemnification against such Breaching Buyer pursuant to Section 10(h) below, then such Breaching Buyer shall indemnify the Seller from and against any Adverse Consequences the Seller shall suffer through and after the date of the claim for indemnification caused proximately by the breach. Each Buyer’s indemnification obligation hereunder is capped at the portion of the Purchase Price paid by such Buyer against which the Seller makes an indemnification claim.

(d) Matters Involving Third Parties.

(i) If any third party shall notify any Party (the “Indemnified Party”) withrespect to any matter (a “Third Party Claim”) which may give rise to a claim for indemnification against any other Party (the “Indemnifying Party”) under this Section 8, then the Indemnified Party shall promptly (and in any event within five business days after receiving notice of the Third Party Claim) notify each Indemnifying Party thereof in writing.

(ii) Any Indemnifying Party will have the right to assume and thereafterconduct the defense of the Third Party Claim with counsel of its choice reasonably satisfactory to the Indemnified Party; provided, however, that the Indemnifying Party will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnified Party (not to be withheld unreasonably) unless the judgment or proposed settlement involves only the payment of money damages and does not impose an injunction or other equitable relief upon the Indemnified Party.

(iii) Unless and until an Indemnifying Party assumes the defense of the ThirdParty Claim as provided in Section 8(d)(ii) above, however, the Indemnified Party may defend against the Third Party Claim in any manner the Indemnified Party reasonably may deem appropriate.

(iv) In no event will the Indemnified Party consent to the entry of anyjudgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of each of the Indemnifying Parties, which shall not be unreasonably withheld.

(e) Determination of Adverse Consequences. The Parties shall make appropriateadjustments for tax benefits and insurance coverage and take into account the time cost of money in determining Adverse Consequences for purposes of this Section 8. Nothing in this Agreement shall be deemed to require any Party to make or file a claim for insurance coverage prior to making a claim for indemnification under this Agreement.

(f) Other Indemnification Provisions. The indemnification provisions in thisSection 8 shall be the exclusive remedy of the Parties for any breach of the representations and warranties in Sections 3 and 4 above.

9. Termination.

15 126181.0002/7664231.5

(a) Termination of Agreement. Certain of the Parties may terminate this Agreementas provided below:

(i) either Buyer and the Seller may terminate this Agreement by mutualwritten consent at any time prior to the Closing;

(ii) either Buyer may terminate this Agreement by giving written notice tothe Seller at any time prior to the Closing in the event (A) the Seller has within the then previous 10 business days given the Buyers any notice pursuant to Section 5(f) above, (B) the development that is the subject of the notice has had a material adverse effectupon the Target, and (C) the Parties have not been able to successfully negotiate andresolve the resulting disagreements pursuant to Section 5(f);

(iii) either Buyer may terminate this Agreement by giving written notice tothe Seller at any time prior to the Closing (A) in the event the Seller has breached any material representation, warranty, or covenant contained in this Agreement (other than the representations and warranties in Section 4 above) in any material respect, the Buyers have notified the Seller of the breach, and the breach has continued without cure for a period of 30 days after the notice of breach or (B) if the Closing shall not have occurred on or before July 1, 2020, by reason of the failure of any condition precedent under Section 7(a) hereof (unless the failure results primarily from either Buyer itself breaching any representation, warranty, or covenant contained in this Agreement); and

(iv) the Seller may terminate this Agreement by giving written notice to theBuyers at any time prior to the Closing (A) in the event either Buyer has breached any material representation, warranty, or covenant contained in this Agreement in any material respect, the Seller has notified the Buyers of the breach, and the breach has continued without cure for a period of 30 days after the notice of breach or (B) if the Closing shall not have occurred on or before July 1, 2020, by reason of the failure of any condition precedent under Section 7(b) hereof (unless the failure results primarily from the Seller itself breaching any representation, warranty, or covenant contained in this Agreement).

(b) Effect of Termination. If any Party terminates this Agreement pursuant toSection 9(a) above, all rights and obligations of the Parties hereunder shall terminate without any liability of any Party to any other Party (except for any liability of any Party then in breach); provided, however, that the confidentiality provisions contained in Section 5(d) above shall survive termination.

10. Miscellaneous.

(a) Nature of Certain Obligations. The representations, warranties and covenants ofthe Buyers in this Agreement are several obligations. This means that the particular Buyer making the representation, warranty, or covenant will be solely responsible to the extent provided in Section 8 above for any Adverse Consequences the Seller may suffer as a result of any breach thereof by such particular Buyer.

(b) Press Releases and Public Announcements. No Party shall issue any press releaseor make any public announcement relating to the subject matter of this Agreement prior to the Closing without the prior written approval of the Buyers and the Seller; provided, however, that

16

126181.0002/7664231.5

any Party may make any public disclosure it believes in good faith is required to satisfy the condition to closing set forth in Section 7 of this Agreement.

(c) No Third-Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any Person other than the Parties and their respective successors and permitted assigns.

(d) Entire Agreement. This Agreement (including the documents referred to herein) constitutes the entire agreement among the Parties and supersedes any prior understandings, agreements, or representations by or among the Parties, written or oral, to the extent they have related in any way to the subject matter hereof.

(e) Succession and Assignment. This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. No Party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written approval of each Buyer and the Seller, which approval shall not be unreasonably withheld.

(f) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument.

(g) Headings. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement.

(h) Notices. All notices, requests, demands, claims, and other communications hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: If to the Seller: Physicians Insurance A Mutual Company

1301 Second Avenue, Suite 2700 Seattle, WA 98101 Attn: President & CEO

With a copy to: Attn: General Counsel If to COPIC:

COPIC Insurance 7351 E Lowey Blvd. #400, Denver, CO 80230 Attn: Gerry Lewis-Jenkins

With a copy to: Attn: General Counsel If to MPIE:

Michigan Professional Insurance Exchange 333 Bridge St. NW, Suite 810 Grand Rapids, MI 49504 Attention: CEO

With a copy to: Jason Byrne

17

126181.0002/7664231.5

Warner Norcross + Judd LLP [email protected]

Any Party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, ordinary mail, or e-mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any Party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other Parties notice in the manner herein set forth.

(i) Governing Law and Jurisdiction. This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Washington without giving effect to any choice or conflict of law provision or rule (whether of the State of Washington or any other jurisdictions that would cause the application of the laws of any jurisdiction other than the State of Washington.)

(j) Amendments and Waivers. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by each Buyer and the Seller. No waiver by any Party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence.

(k) Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction.

(1) Expenses. The Target and each of the Parties will bear its own costs and expenses (including all of their respective legal fees and expenses) incurred in connection with this Agreement and the transaction contemplated hereby.

(m) Construction. The Parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local, or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word “including” shall mean including without limitation.

(n) Incorporation of Exhibits and Disclosure Schedule. The Exhibits and Disclosure Schedule identified in this Agreement are incorporated herein by reference and made a part hereof.

IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on the date first above written.

SELLER:

PHYSICIANS INSURANCE A MUTUAL COMPANY, a Washington mutual insurance

;~;l~~~y Title: ,(..(.>1~ r LGo

BUYERS:

COPIC INSURANCE COMPANY, a Colorado corporation

By: __________ _

Name: -----------Title: ------------

MICHIGAN PROFESSIONAL INSURANCE EXCHANGE, a reciprocal exchange organized in Michigan

By: __________ _ Name: ------------Tit I e: ------------

[Signature page to Stock Purchase Agreement]


SELLER:

PHYSICIANS INSURANCE A MUTUAL COMPANY, a Washington mutual insurance company

By: __________ _

Name: ------------Title: - -----------

BUYERS:

COPIC INSURANCE COMPANY, a Colorado co:? By: ~.._~~

Name:~..:.,,..) f\ . R i1~ Title: ~\.>2.,~\<:J..:::J\1


By: -----------Name: ------------Title: - ----------- -



SELLER:

PHYSICIANS INSURANCE A MUTUAL COMPANY, a Washington mutual insurance company

By: ------------Name: -----------Title: ------------

BUYERS:

COPJC INSURANCE COMPANY, a Colorado corporation

By: __________ _

Name: -------- - --Title: ------------


By: ~ t. R.~ ~ Name: M;O\Ll~ -Hoff..., Title: \.f>µ,,,.-£-.f ., c..£:z>


126181.0002/7664231.5

EXHIBIT A

Amended and Restated Articles of Incorporation

126181.0002/7694363.4

AMENDED AND RESTATED

ARTICLES OF INCORPORATION

OF

WESTERN PROFESSIONAL INSURANCE COMPANY

1. Name and Location

The name of the corporation shall be:


The principal place of business shall be located in Seattle, WA.

2. Existence

The duration of the corporation’s existence shall be perpetual.

3. Purposes

The purposes for which the corporation is organized are:

3.1 To issue insurance contracts, to provide general casualty insurance, property, marine and

transportation, vehicle, surety, disability, and such other lines of insurance as a stock insurer may issue, to

grant reinsurance, and to engage in and carry out any and all lawful business for which a licensed domestic

stock insurance corporation may be incorporated under the laws of the State of Washington.

3.2 In furtherance of, and not in limitation to, the general powers conferred by the laws of the

State of Washington, it is expressly provided that the corporation shall also have the following powers:

a. To acquire, by purchase or otherwise, and to own, hold, cancel, reissue, sell, pledge

and otherwise deal in the stock, bonds, debentures, notes and other securities and obligations of the

corporation;

b. To borrow money and give security therefore;

c. To lend money for the corporation’s purposes, to invest and reinvest its funds or

take security therefor;

2126181.0002/7694363.4

d. To enter into, make, perform and carry out contracts of every kind, for any lawful

purpose pertaining to its business, with any individual, entity, firm, association or corporation, or with any

government, municipal or public authority, domestic or foreign;

e. To do any and all of the things to the same extent a natural person might or could

do, and in any part of the world, as principals, agents, contractors, trustees or otherwise, either alone or in

company of others;

f. To do everything necessary, proper, convenient or incidental to the

accomplishment of the purposes of this corporation or which is calculated directly or indirectly to promote

the welfare or interest of the corporation or enhance the value or render profitable any of its properties or

rights;

g. To indemnify directors, trustees, officers, or employees of the corporation in any

manner and with respect to any matter now or hereafter permitted by law;

h. To make any and all distributions of assets, cash or property out of surplus or

capital surplus in any matter now or hereafter permitted by law; and

i. To engage in any business or trade or enter into any transaction now or hereafter

not prohibited by statute.

4. Registered Office and Registered Agent

The location and post office address of the initial registered office of the corporation in the State of

Washington, and the name of its registered agent at such address, shall, until duly changed by the

corporation, be:

REGISTERED OFFICE: WKG, Inc. Two Union Square 601 Union Street, Suite 4100 P.O. Box 21926 Seattle, Washington 98111-3926

REGISTERED AGENT: Jerry B. Edmonds

3126181.0002/7694363.4

5. Shares

The authorized capital stock of the corporation shall consist of twenty million (20,000,000) shares

of common voting stock. The par value of each share shall be ten dollars ($10).

6. Director and Officer Indemnification and Liability

6.1 The corporation intends by this Article 6.1 to provide for limited liability of its officers and

directors as if they were officers and directors of a Washington stock corporation and to the fullest extent

which would be so permitted by the Washington Business Corporation Act, RCW Title 23B (the “WBCA”),

on or after the date of filing hereof. A director of the corporation shall not be personally liable to the

corporation or its shareholders for monetary damages for conduct as a director, except for liability of the

director for (i) acts or omissions that involve intentional misconduct or a knowing violation of law by the

director, (ii) conduct which violates RCW 23B.08.310 of the WBCA and/or Title 48 of the Revised Code

of Washington (the “Insurance Code”), pertaining to unpermitted distributions to shareholders or loans to

directors, or (iii) any transaction from which the director will personally receive a benefit in money,

property, or services to which the director is not legally entitled. If the WBCA or the Insurance Code is

amended to authorize corporate action further eliminating or limiting the personal liability of directors, then

the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by

the WBCA and/or the Insurance Code as so amended. Any repeal or modification of this paragraph shall

not adversely affect any right or protection of a director of the corporation existing at the time of such repeal

or modification.

6.2 The corporation intends by this Article 6.2 to provide for indemnification of its officers

and directors as if they were officers and directors of a Washington stock corporation and to the fullest

extent which would be so permitted by the WBCA (on or after the date of filing hereof). The corporation

shall indemnify any such person made a party to any proceeding by reason of the fact that he or she is or

was an officer or director, against judgments, penalties, fines, settlements, and reasonable expenses actually

incurred in connection with such proceedings; provided, however, that the corporation shall not indemnify

4126181.0002/7694363.4

an officer or director for acts or omissions that involved intentional misconduct, a knowing violation of

law, conduct which was not in good faith or in a manner not reasonably believed to be in the best interest

of the corporation, or for any transaction from which the officer or director will personally receive a benefit

in money, property or services to which the officer or director is not legally entitled. The Board of Directors

of the corporation (the “Board of Directors”) may, from time to time, approve by general or specific action,

or by contract, the indemnification of any other person which the corporation has the power to indemnify.

The indemnification provided by this Article 6.2 shall not be deemed exclusive of any other rights to which

a person may be entitled as a matter of law or by contract.

The indemnification provided by this Article 6.2 shall not be deemed exclusive of any other rights

to which those indemnified may be entitled under any agreement or any vote of shareholders of the

corporation, or the Board of Directors, or otherwise, both as to acts in an official capacity and as to acts in

another capacity while holding such office, and shall continue as to a person who has ceased to be an officer

or director and shall inure to the benefit of the heirs, executors and administrators of such person.

7. Shareholder Approval

Except as otherwise provided in this Article 7, in the case of any matter submitted to a vote of the

shareholders of this corporation for which the WBCA or the Insurance Code provide for a greater voting

requirement for shareholders, the approval of the shareholders holding a majority of the outstanding shares

entitled to vote on such matter shall be sufficient for such matter to be approved.

In addition, the affirmative vote of the Shareholders holding at least eighty percent (80%) of the

outstanding shares entitled to vote on such matter shall be required for approval of the following actions:

a. the amendment or modification of the corporation’s Articles of Incorporation (“Articles”)and the Bylaws;

b. the reorganization of the corporation, establishment of any subsidiary or affiliate of thecorporation or any consolidation, merger or similar transaction of the corporation with or into anyother entity;

c. any offer or issuance of, or split, combination, or reclassification of, the corporation’sshares;

d. the appointment, and the termination without cause, of the corporation’s President;

5126181.0002/7694363.4

e. the appointment, and the termination without cause, of the corporation’s CEO;

f. the commencement of a bankruptcy, receivership, assignment for the benefit of creditorsor other insolvency proceeding on behalf of the corporation; and

g. the dissolution of the corporation.

8. Cumulative Voting Rights; Preemptive Rights

The application of cumulative voting rights under RCW 23B.07.280; and shareholders’ preemptive

rights under RCW 23B.06.300 are hereby explicitly denied.

9. Amendment of Articles

Amendments to these Articles shall be made by the majority vote of the directors of the Board of

Directors and consistent with the shareholder voting requirements set forth in Article 7 of these Articles.

10. Participating Policies

The Corporation may issue policies which are entitled to participate from time to time in the

earnings of the corporation through dividends and the corporation may issue policies which are not entitled

to participate in the earnings of the corporation through dividends.

6126181.0002/7694363.4

IN WITNESS WHEREOF, the president and secretary, under the corporate seal, certify these

Amended and Restated Articles of Incorporation of Western Professional Insurance Company have

hereunto set his or her hand, in duplicate this

____________________________________ ____________________________________

Date [Name, title]

____________________________________ ____________________________________

Date [Name, title]

126181.0002/7664231.5

EXHIBIT B

Amended and Restated Bylaws

1 126181.0002/7669664.5

AMENDED AND RESTATED

BYLAWS

OF


ARTICLE I SHAREHOLDERS' MEETINGS

1.1. Place. Shareholders' meetings will be held at the principal office of the corporation, or at any other location within or without the State of Washington as determined by the Board of Directors and stated in the notice of meeting.

1.2. Annual Meeting. The annual meeting of the shareholders of the corporation for the election of directors to succeed those whose terms then expire and for the transaction of any other business as may properly come before the meeting will be held in January each year, at such time and place as determined by the Board of Directors. Failure to hold an election of directors at the annual meeting of the shareholders, or failure to hold an annual meeting of the shareholders at the time stated in these Bylaws, through oversight or otherwise, does not affect the validity of any corporate action, and a meeting of the shareholders may be held at a later date for the election of directors and for the transaction of any other business that may properly come before the meeting. Any election held or other business transacted at a later meeting will be as valid as if done or transacted at the annual meeting of the shareholders. Any later meeting will be called in the same manner as a special meeting of the shareholders, and notice of the time, place, and purpose of the meeting will be given in the same manner as notice of a special meeting of the shareholders.

1.3. Special Meetings. Special meetings of the shareholders for any purpose or purposes may be called at any time by the Chief Executive Officer, President, any member of the Board of Directors, or by holders of not less than 10% of all shares of stock of the corporation entitled to vote on any proposed issue to be considered at the meeting.

1.4. Notice of Meetings. Notice stating the date, time, and place of the meeting, any information required by the corporation’s Articles of Incorporation or these Bylaws, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, will be delivered not less than ten (10) nor more than sixty (60) days before the date of the meeting, unless a purpose of the meeting is to act on an amendment to the Articles of Incorporation, a plan of merger or share exchange, a proposed sale of all or substantially all of the assets of the corporation, or the dissolution of the corporation, in which case notice will be delivered not less than twenty (20) nor more than sixty (60) days before the date of the meeting. Notice of any shareholders' meeting will be delivered by mail, personal carrier, personal delivery, telegraph, teletype, facsimile transmission (with confirmation of receipt), or any other method provided in the Washington Business Corporation Act as it may from time to time be amended (RCW 23B) by or at the direction of the Chief Executive Officer, President, Secretary, or person or persons calling the meeting, to each shareholder of record entitled to vote at the meeting and to others as required by law. If mailed, the notice will be deemed to be delivered when deposited in the

2 126181.0002/7669664.5

United States mail with postage prepaid, addressed to the shareholder at its, his or her address as it appears in the current records of the corporation.

1.5. Waiver of Notice. Notice of any shareholders' meeting may be waived at any time, either before or after the meeting, if the waiver is in writing, signed by the shareholders entitled to notice, and delivered to the corporation. A shareholder's attendance at a meeting waives objection to lack of notice or defective notice of the meeting unless the shareholder objects at the beginning of the meeting to holding the meeting or transacting business at the meeting. A shareholder waives objection to consideration of a particular matter at a meeting that is not within the purpose or purposes described in the meeting notice unless the shareholder objects to considering the matter when it is presented.

1.6. Adjourned Meetings. An adjournment or adjournments of any shareholders' meeting may be taken until the time and place determined by those present, without new notice being given, whether by reason of the failure of a quorum to attend or otherwise. However, any meeting at which directors are to be elected will be adjourned only from day to day until the directors are elected.

1.7. Quorum of Shareholders; Attendance by Means of Communications Equipment. A majority of the shares entitled to vote on a matter presented at a shareholders' meeting in person or by proxy other than solely to object to the meeting or the business to be transacted, having once been in attendance at the meeting, will constitute a quorum for action taken during the meeting on that matter. If a quorum is present, action is approved by the affirmative vote of the majority of the shares represented at the meeting at the time the vote is taken and entitled to vote on the subject matter, unless the vote of a greater number or voting by classes is required by the Articles of Incorporation, these Bylaws or the Shareholders Agreement (as defined below.) Shareholders may participate in a meeting of the shareholders by means of a conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other during the meeting. Participation by such means will constitute presence in person at a meeting.

1.8. Voting of Shares. All voting at shareholders' meetings will be by voice vote unless any qualified voter demands a vote by ballot. A shareholder may vote either in person or by proxy executed in writing by the shareholder or its, his or her duly authorized attorney-in-fact. No proxy will be valid after one year months from the date of its execution, unless otherwise provided in the proxy. Unless otherwise provided in the Articles of Incorporation, each outstanding share is entitled to one vote on each matter submitted, and shareholders do not have the right to cumulate their votes with respect to the election of directors.

1.9. Action Without Meeting. Any action required or permitted to be taken at a meeting of the shareholders of the corporation may be taken without a meeting if a written consent resolution, setting forth the action taken, is signed by not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting which all shareholders entitled to vote thereon were present and voted.

3 126181.0002/7669664.5

ARTICLE II BOARD OF DIRECTORS

2.1. Number and Qualifications. All corporate powers shall be exercised by, or under the authority of, and the business and affairs of the corporation will be managed by a Board of Directors, the members of which need not be shareholders of the corporation or residents of the State of Washington. The Board of Directors shall consist of at least one (1) director, with the exact number of directors set by any voting requirements and procedures established in the Shareholders Agreement.

2.2. Election - Term of Office. Except as otherwise provided by law and the Shareholders Agreement, the directors will be elected by the shareholders at each annual shareholders' meeting, to hold office until the next annual shareholders' meeting and until their respective successors are elected and qualified. The Board of Directors, in its discretion, may also elect a Chairperson of the Board of Directors from among the members of the Board. The Chairperson of the Board of Directors, if any, will preside at all meetings of the Board of Directors and of the shareholders at which he or she is present and will perform any other duties assigned to that office by the Board of Directors from time to time.

2.3. Vacancies. Except as otherwise provided by law and the Shareholders Agreement, all vacancies in the Board of Directors, whether caused by resignation, death, or otherwise, may be filled by the affirmative vote of a majority of the remaining directors in office even if less than a quorum of the Board of Directors. A director elected to fill a vacancy shall hold office until the next shareholders' meeting at which directors are elected and until his or her successor is elected and qualified. Any directorship to be filled by reason of an increase in the number of directors may be filled by the Board of Directors for a term of office continuing only until the next election of directors by the shareholders and until his or her successor is elected and qualified.

2.4. Annual Meeting. The first meeting of each newly elected Board of Directors will be the annual meeting of the Board of Directors and will be held immediately after and at the same place as the annual shareholders' meeting or any later shareholders' meeting at which a Board of Directors is elected.

2.5. Regular Meetings. Regular meetings of the Board of Directors will be held on the dates and at the times and places decided by resolution of the Board of Directors.

2.6. Special Meetings. Special meetings of the Board of Directors may be called at any time by the Chief Executive Officer, President or any director of the corporation in the manner and with the notice provided in Section 2.7 of these Bylaws.

2.7. Notice of Meetings. Notice of the annual or regular meetings of the Board of Directors is not required. Notice of the date, time, and place of special meetings of the Board of Directors must be given, by or at the direction of the Chairperson of the Board of Directors, the CEO, the President, the Secretary, or any person or persons calling the meeting, by mail, email, facsimile, or personal communication over the telephone or otherwise, at least two (2) days prior to the day on which the meeting is to be held. No notice need be given if the time and place of

4 126181.0002/7669664.5

the meeting has been fixed by resolution of the Board of Directors and a copy of the resolution has been mailed to every director at least three (3) days before the meeting.

2.8. Waiver of Notice. Notice of any meeting of the Board of Directors may be waived at any time, either before or after a meeting, if the waiver is in writing, signed by the director entitled to notice, and delivered to the corporation. Notice is waived by any director attending or participating in a meeting unless the director, at the beginning of the meeting or promptly on the director's arrival, objects to holding the meeting or transacting business at the meeting and does not vote for or assent to any action taken at the meeting.

2.9. Quorum of Directors; Attendance by Means of Communications Equipment. A majority of the number of directors fixed in accordance with the Articles of Incorporation, these Bylaws, or the Shareholders Agreement from time to time will constitute a quorum for the transaction of business. Except as otherwise set forth in these Bylaws, the Articles of Incorporation or the Shareholders Agreement, the act of a majority of the directors present at a meeting at which a quorum is present will be the act of the Board of Directors. Members of the Board of Directors or any committee designated by the Board of Directors may participate in a meeting of the Board of Directors or committee by telephone, online virtual meeting service, or similar communication technology through which all persons participating in the meeting can hear and speak to one another. Participation by such means will constitute presence in person at a meeting. A director may authorize another person to act for the director by proxy, executed in writing by the director or its, his or her duly authorized attorney-in-fact. No proxy will be valid after one year months from the date of its execution, unless otherwise provided in the proxy.

2.10. Dissent by Directors. A director of the corporation who is present at a meeting of its Board of Directors at which action on any corporate matter is taken will be presumed to have assented to the action unless (a) the director objects at the beginning of the meeting, or promptly on his or her arrival, to holding the meeting or transacting business at the meeting; (b) the director's dissent or abstention from the action taken is entered in the minutes of the meeting; or (c) the director delivers written notice of his or her dissent or abstention to the presiding officer of the meeting before its adjournment or to the corporation within a reasonable time after adjournment. The right of dissent or abstention is not available to a director who votes in favor of the action taken.

2.11. Action Without Meeting. Any action which may be or is required to be taken at a meeting of the Board of Directors, or any action which may be taken at a meeting of a committee designated by the Board of Directors, may be taken without a meeting if a written consent resolution, setting forth the action taken, is signed by the directors having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting which all directors entitled to vote thereon were present and voted. The signed consent resolution will have the same force and effect as a unanimous vote. Action taken under this Section 2.11 shall be effective when the last director signs the consent, unless the consent specifies a later date.

2.12. Committees. The Board of Directors, by resolution adopted by a majority of the full Board of Directors, may designate from among its members an executive committee or one or more other committees. Each must consist of two (2) or more members, who shall serve at the

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pleasure of the Board of Directors. The committees will be governed by the same rules regarding meetings, actions without meetings, notices, waivers of notice, and quorum and voting requirements applied to the Board of Directors. To the extent provided in the resolution forming the committee, each committee will have and may exercise all the authority of the Board of Directors, except that no committee will have the authority to:

(a) Authorize or approve a distribution except according to a general formula ormethod prescribed by the Board of Directors;

(b) Approve or propose to shareholders action required to be approved byshareholders;

(c) Fill vacancies on the Board of Directors or on any of its committees;

(d) Amend the Articles of Incorporation of the corporation;

(e) Adopt, amend, or repeal these Bylaws of the corporation;

(f) Approve a plan of merger not requiring shareholder approval; or

(g) Authorize or approve the issuance or sale or contract for sale of shares, ordetermine the designation and relative rights, preferences, and limitations of a class or series of shares, except as authorized by the Board of Directors within limits specifically prescribed by the Board of Directors.

The creation of, delegation of authority to, or action by such a committee of the Board of Directors will not operate to relieve the Board of Directors, or any of its members, of any responsibility imposed by law.

ARTICLE III OFFICERS

3.1. Officers Enumerated - Appointment. The officers of the corporation shall include a Chief Executive Officer, President, Secretary, and Treasurer, and may include one or more Vice Presidents, as well as any assistants to the officers as the Board of Directors may determine. All officers will be appointed by the Board of Directors at its annual meeting to hold office until their successors are elected and qualified.

3.2. Qualifications. None of the officers of the corporation need be a director. The same person may hold any two or more offices.

3.3. Chief Executive Officer. The Chief Executive Officer will oversee the operations of the corporation. Subject to the authority of the Board of Directors, the Chief Executive Officer will have general charge, supervision, and control over the business and affairs of the corporation and will be responsible for its management. If no Chairman of the Board of Directors is elected, or in the absence of the Chairman or Vice Chairman, if any, of the Board of Directors, the Chief Executive Officer will preside at all meetings of the shareholders, and of the Board of Directors if he or she is a member of the Board of Directors. Any shares of stock of another corporation held by the corporation will be voted by the Chief Executive Officer, subject

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to direction from the Board of Directors. The Chief Executive Officer will perform any other duties assigned to that office from time to time by the Board of Directors.

3.4. President. If no Chief Executive Officer is appointed, the President will act as the chief executive officer of the corporation, will have responsibility for the general management of the business of the corporation, and will perform those duties set forth in Section 3.3 of these Bylaws. If the Chief Executive Officer is absent or disabled, the President will have and may exercise and perform the authority and duties of the Chief Executive Officer. If the Board of Directors has appointed a Chief Executive Officer, the President shall manage the day-to-day operations of the corporation as well as perform any other duties assigned to that office from time to time by the Board of Directors or Chief Executive Officer.

3.5. Vice Presidents. If the Chief Executive Officer and President are absent or disabled, the Vice Presidents, if any, in the order designated by the Board of Directors, will have and may exercise and perform the authority and duties of Chief Executive Officer and the President. In addition, the Vice President will perform any other duties assigned to that office by the Board of Directors, Chief Executive Officer or President from time to time. Each Vice President will have the title, seniority, and duties established for him or her by the Board of Directors.

3.6. Secretary. The Secretary will prepare and keep minutes of meetings of shareholders and directors, will be responsible for authenticating records of the corporation, and will exercise the usual authority pertaining to the office of Secretary. The Secretary will keep the stock book of the corporation, a record of certificates representing shares of stock issued by the corporation, and a record of transfers of certificates. The Secretary will keep and, when proper, affix the seal of the corporation, if any, and will perform any other duties assigned to that office by the Board of Directors, Chief Executive Officer or President from time to time.

3.7. Treasurer. The Treasurer will have charge and custody of and be responsible for all funds and securities of the corporation. The Treasurer will deposit all such funds in the name of the corporation in the depositories or invest them in the investments designated or approved by the Board of Directors, and will authorize disbursement of the funds of the corporation in payment of just demands against the corporation or as may be ordered by the Board of Directors on securing proper vouchers. The Treasurer will render to the Board of Directors from time to time, as may be required, an account of all transactions as Treasurer, and will perform any other duties assigned to that office from time to time by the Board of Directors, Chief Executive Officer or President.

3.8. Other Officers and Agents. The Board of Directors may appoint other officers and agents, as it deems necessary or expedient. Such other officers will hold their offices for terms as provided in Subsection 3.1 above, and such other agents will hold their positions for the periods determined from time to time by the Board of Directors. These other officers and agents will exercise the authority and perform the duties prescribed for them by the Board of Directors, which authority and duties may include, in the case of the other officers, one or more of the duties of the named officers of the corporation.

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3.9. Removal of Officers. Any officer or agent may be removed by the Board of Directors, with or without cause, whenever in its judgment the best interests of the corporation will be served by doing so. Removal will be without prejudice to the contract rights, if any, of the person removed. Appointment of an officer or agent will not of itself create contract rights.

3.10. Vacancies. Vacancies in any office arising from any cause may be filled by the Board of Directors at any regular or special meeting.

3.11. Salaries. Salaries of all officers and agents of the corporation appointed by the Board of Directors will be fixed by the Board of Directors.

ARTICLE IV BUSINESS OF THE CORPORATION

4.1. Obligations. The Chief Executive Officer, President (or the Vice Presidents in their absence or disability) will have responsibility for and authority to carry out the normal and regular business affairs of the corporation. Any agreements or other documents requiring Board of Directors’ approval will be valid if approved by the Board of Directors and signed by the Chief Executive Officer, President, or Vice President.

4.2. Contracts. The Board of Directors may authorize any officer or agent to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation. This authority may be general or confined to specific instances.

4.3. Loans to Corporation. No loans will be contracted on behalf of the corporation, and no evidence of indebtedness will be issued in its name, unless authorized by the Board of Directors. This authority may be general or confined to specific instances.

4.4. Checks and Drafts. All checks, drafts, or other orders for the payment of money, notes, or other evidence of indebtedness issued in the name of the corporation will be signed by the officer(s) or agent(s) of the corporation and in the manner prescribed from time to time by the Board of Directors.

ARTICLE V INDEMNIFICATION

5.1. Indemnification of Directors and Officers. The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Washington as the same now exists or may hereafter be amended, indemnify any person against expenses (including attorneys’ fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit, or proceeding in which such person was or is a party or is threatened to be made a party by reason of the fact that such person is or was a director or officer of the corporation. For purposes of this Section 5.1, a “director” or “officer” of the corporation shall mean any person (i) who is or was a director or officer of the corporation, (ii) who 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, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation.

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The corporation shall be required to indemnify a director or officer in connection with an action, suit, or proceeding (or part thereof) initiated by such director or officer only if the initiation of such action, suit, or proceeding (or part thereof) by the director or officer was authorized by the Board of Directors of the corporation.

The corporation shall pay the expenses (including attorney’s fees) incurred by a director or officer of the corporation entitled to indemnification hereunder in defending any action, suit or proceeding referred to in this Section 5.1 in advance of its final disposition; provided, however, that payment of expenses incurred by a director or officer of the corporation in advance of the final disposition of such action, suit or proceeding shall be made only upon receipt of an undertaking by the director or officer to repay all amounts advanced if it should ultimately be determined that the director or officer is not entitled to be indemnified under this Section 5.1 or otherwise.

If a claim for indemnification or payment of expenses under this Article is not paid in full within sixty (60) days after a written claim therefor has been received by the corporation the claimant may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the corporation shall have the burden of proving that the claimant was not entitled to the requested indemnification or payment of expenses under applicable law.

The rights conferred on any person by this Article shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the corporation’s Certificate of Incorporation, these bylaws, agreement, vote of the stockholders or disinterested directors or otherwise.

Any repeal or modification of the foregoing provisions of this Article shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification.

5.2. Indemnification of Others. The corporation shall have the power, to the maximum extent and in the manner permitted by the General Corporation Law of Washington as the same now exists or may hereafter be amended, to indemnify any person (other than directors and officers) against expenses (including attorneys’ fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit, or proceeding, in which such person was or is a party or is threatened to be made a party by reason of the fact that such person is or was an employee or agent of the corporation. The corporation’s obligation, if any, to indemnify any person who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or non-profit entity shall be reduced by any amount such person may collect as indemnification from such other corporation, partnership, joint venture, trust, enterprise or non-profit enterprise. For purposes of this Section 5.2, an “employee” or “agent” of the corporation (other than a director or officer) shall mean any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation.

5.3. Insurance. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was

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serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Washington.

ARTICLE VI STOCK

6.1. Certificate of Stock. Certificates of stock will be issued in numerical order. Each shareholder will be entitled to a certificate signed, either manually or in facsimile, by any two officers of the corporation, one of which must be the Chief Executive Officer, President, or Vice President. The certificate may be sealed with the corporate seal. Every certificate of stock will state:

(a) The name of the corporation and the fact that the corporation is incorporatedunder the laws of the State of Washington;

(b) The name of the registered holder of the shares represented by the certificate; and

(c) The number and class of the shares and the designation of the series, if any,represented by the certificate.

6.2. Legend on Certificates of Stock. The corporation will cause the certificates of stock of the corporation to be endorsed with the legends similar to the following legend(s) prior to their issuance:

“The shares evidenced by this certificate have not been registered under the Securities Act of 1933, as amended (the “Act”), or applicable state law, and no interest therein may be sold, distributed, assigned, offered, pledged or otherwise transferred unless (i) there is an effective registration statement under the Act and applicable state securities laws covering any such transaction involving said securities, (ii) the corporation receives an opinion of legal counsel for the holder of these securities satisfactory to the corporation stating that such transaction is exempt from registration; or (iii) the corporation otherwise satisfies itself that such transaction is exempt from registration.

The securities represented by this certificate are also subject to restrictions on transfer, and are otherwise subject to the provisions of the Shareholders Agreement executed by the shareholders of the corporation. Information concerning these restrictions may be obtained from the corporation.”

6.3. Transfer. Shares of stock may be transferred by delivery of the certificate, accompanied by either an assignment in writing on the back of the certificate or a separate written assignment and power of attorney to transfer the same, which in either event is signed by the record holder of the certificate. No transfer will be valid, except as between the parties to the transfer, until the transfer is made on the books of the corporation. Except as otherwise specifically provided in these Bylaws, no shares of stock will be transferred on the books of the corporation until the outstanding certificate or certificates representing the transferred stock have been surrendered to the corporation or to its transfer agent or registrar.

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6.4. Shareholders of Record. The corporation will be entitled to treat the holder of record on the books of the corporation of any share or shares of stock as the holder in fact of those shares for all purposes, including the payment of dividends on and the right to vote the stock, unless provided otherwise by the Board of Directors.

6.5. Loss or Destruction of Certificates. If any certificate of stock is lost or destroyed, another may be issued in its place on proof of loss or destruction and on the giving of a satisfactory bond of indemnity to the corporation. A new certificate may be issued without requiring any bond when, in the judgment of the Board of Directors, it is proper to do so.

6.6. Record Date and Transfer Books. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors will make in advance a record date for any such determination of shareholders. The record date in any case will not be more than seventy (70) days and, in the case of a meeting of shareholders, not less than ten (10) days prior to thedate on which the particular action requiring the determination of shareholders is to be taken. Ifno record date is fixed for these purposes, the date on which notice of the meeting is mailed orthe date on which the resolution of the Board of Directors declaring the dividend is adopted, asthe case may be, will be the record date for the determination of shareholders.

6.7. Regulations. The Board of Directors will have the power and authority to make all rules and regulations it deems expedient concerning the issue, transfer, conversion, and registration of certificates for shares of stock of the corporation not inconsistent with these Bylaws, the Articles of Incorporation, or the laws of the United States or the State of Washington.

6.8. Preemptive Rights. Unless otherwise set forth in the Articles of Incorporation, shareholders do not have a preemptive right to acquire unissued shares of stock of the corporation.

ARTICLE VII BOOKS AND RECORDS

7.1. Records of Corporate Meetings and Share Register. The corporation will keep at either its principal place of business, its registered office, or another place permitted by law, as the Board of Directors may designate, (a) complete books and records of account and complete minutes or records of all of the proceedings of the Board of Directors, director committees, and shareholders, and (b) a record of shareholders, giving the names of the shareholders in alphabetical order by class of shares and showing their respective addresses and the number and class of shares held by each.

7.2. Reliance on Records. Any person dealing with the corporation may rely on a copy of any of the records of the proceedings, resolutions, or votes of the Board of Directors, director committees, or shareholders when certified by the Chief Executive Officer, President, Vice President, or Secretary.

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ARTICLE VIII CORPORATE SEAL

The corporation may adopt, but will not be required to adopt, a corporate seal. If a seal is adopted, it will consist of a flat-faced circular die producing words, letters, and figures in raised form, which will state the name of the corporation, the year of its incorporation, and the words "corporate seal."

ARTICLE IX AMENDMENTS

9.1. By the Shareholders. These Bylaws may be amended, altered, or repealed at any regular or special meeting of the shareholders if notice of the proposed alteration or amendment is contained in the notice of the meeting.

9.2. By the Board of Directors. Except as otherwise set forth in the Shareholder Agreement, the Bylaws may be amended, altered, or repealed by the affirmative vote of a majority of the whole Board of Directors at any regular or special meeting of the Board of Directors, if notice of the proposed alteration or amendment is contained in the notice of the meeting; provided, however, the Board of Directors shall not amend, alter, or repeal any Bylaw in such manner as to affect the qualifications, classifications, term of office or compensation of the directors in any way. Any action of the Board of Directors with respect to the amendment, alteration or repeal of these Bylaws is made expressly subject to change or repeal by the shareholders.

ARTICLE X FISCAL YEAR

The fiscal year of the corporation will be as determined by resolution of the Board of Directors at the Corporation’s organizational meeting and from time to time thereafter. Absent Board approval, the fiscal year of the Corporation shall be the calendar year.

ARTICLE XI VARIANCES WITH SHAREHOLDERS AGREEMENT

The corporation and the shareholders of the corporation have entered into a Shareholders Agreement dated of even date herewith (as amended or restated from time to time, the “Shareholders Agreement”). It is the intent of the corporation that, consistent with RCW 23B.07.320 and 23B.07.320, so long as the Shareholders Agreement is in effect, the provisions of the Shareholders Agreement shall govern in the event of a variance or conflict between the provisions of the Shareholders Agreement and these Bylaws.

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CERTIFICATE OF ADOPTION

The undersigned, being the Secretary of the corporation, certifies that these are the Amended and Restated Bylaws of the corporation, adopted by the Board of Directors at a special meeting of the corporation’s shareholders.

DATED: _____________________.


By: __________________________________ , Secretary

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AMENDED AND RESTATED BYLAWS

OF


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TABLE OF CONTENTS

Page

ARTICLE I SHAREHOLDERS' MEETINGS ................................................................................1 1.1. Place .........................................................................................................................1 1.2. Annual Meeting .......................................................................................................1 1.3. Special Meetings ......................................................................................................1 1.4. Notice of Meetings ...................................................................................................1 1.5. Waiver of Notice ......................................................................................................2 1.6. Adjourned Meetings .................................................................................................2 1.7. Quorum of Shareholders; Attendance by Means of

Communications Equipment ....................................................................................2 1.8. Voting of Shares ......................................................................................................2 1.9. Action Without Meeting ..........................................................................................2

ARTICLE II BOARD OF DIRECTORS .........................................................................................3 2.1. Number and Qualifications ......................................................................................3 2.2. Election - Term of Office .........................................................................................3 2.3. Vacancies .................................................................................................................3 2.4. Annual Meeting .......................................................................................................3 2.5. Regular Meetings .....................................................................................................3 2.6. Special Meetings ......................................................................................................3 2.7. Notice of Meetings ...................................................................................................3 2.8. Waiver of Notice ......................................................................................................4 2.9. Quorum of Directors; Attendance by Means of Communications

Equipment ................................................................................................................4 2.10. Dissent by Directors .................................................................................................4 2.11. Action Without Meeting ..........................................................................................4 2.12. Committees ..............................................................................................................4

ARTICLE III OFFICERS ................................................................................................................5 3.1. Officers Enumerated - Appointment ........................................................................5 3.2. Qualifications ...........................................................................................................5 3.3. Chief Executive Officer ...........................................................................................5 3.4. President ...................................................................................................................6 3.5. Vice Presidents .........................................................................................................6 3.6. Secretary ..................................................................................................................6 3.7. Treasurer ..................................................................................................................6 3.8. Other Officers and Agents .......................................................................................6 3.9. Removal of Officers .................................................................................................7 3.10. Vacancies .................................................................................................................7 3.11. Salaries .....................................................................................................................7

ARTICLE IV BUSINESS OF THE CORPORATION ...................................................................7 4.1. Obligations ...............................................................................................................7 4.2. Contracts ..................................................................................................................7 4.3. Loans to Corporation ...............................................................................................7

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4.4. Checks and Drafts ....................................................................................................7 ARTICLE V INDEMNIFICATION ................................................................................................7

5.1. Indemnification of Directors and Officers ...............................................................7 5.2. Indemnification of Others ........................................................................................8 5.3. Insurance ..................................................................................................................8

ARTICLE VI STOCK .....................................................................................................................9 6.1. Certificate of Stock ..................................................................................................9 6.2. Legend on Certificates of Stock ...............................................................................9 6.3. Transfer ....................................................................................................................9 6.4. Shareholders of Record ..........................................................................................10 6.5. Loss or Destruction of Certificates ........................................................................10 6.6. Record Date and Transfer Books ...........................................................................10 6.7. Regulations ............................................................................................................10 6.8. Preemptive Rights ..................................................................................................10

ARTICLE VII BOOKS AND RECORDS ....................................................................................10 7.1. Records of Corporate Meetings and Share Register ..............................................10 7.2. Reliance on Records ..............................................................................................10

ARTICLE VIII CORPORATE SEAL ...........................................................................................11

ARTICLE IX AMENDMENTS ....................................................................................................11 9.1. By the Shareholders ...............................................................................................11 9.2. By the Board of Directors ......................................................................................11

ARTICLE X FISCAL YEAR ........................................................................................................11

ARTICLE XI VARIANCES WITH SHAREHOLDERS AGREEMENT ....................................11

126181.0002/7664231.5

EXHIBIT C

Shareholders Agreement

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SHAREHOLDERS AGREEMENT

This Shareholders Agreement (the “Agreement”) is made and entered into as of _________ ___, 2019, by and among Western Professional Insurance Company, a Washington insurance company (the “Company”), Physicians Insurance A Mutual Company, a Washington mutual insurance company (“PI”), COPIC Insurance Company, a Colorado corporation (“COPIC”), Michigan Professional Insurance Exchange, a reciprocal exchange organized in Michigan (“MPIE”), and any other person identified on Exhibit A hereto that becomes an owner of record of the Company’s shares of common stock and becomes a party to this Agreement from time to time by executing a counterpart signature in the form of Exhibit B hereto (each a “Shareholder” and together the “Shareholders”).

RECITALS

WHEREAS, upon the closing (the “Closing”) of the transaction contemplated under that certain Stock Purchase Agreement, dated July __, 2019, by and among PI, COPIC and MPIE (the “Purchase Agreement”), COPIC and MPIE shall have purchased from PI, and PI shall have sold to COPIC and MPIE, a portion of the Shares (as defined below) owned by PI;

WHEREAS, the Company and the Shareholders desire to enter into this Agreement, consistent with RCW 23B.07.310 and 23B.07.320, for the purposes, among others, of (i) establishing the composition of the Company’s board of directors (the “Board”), (ii) limiting the manner and terms by which the Company’s capital stock may be transferred; (iii) establishing the terms and procedures governing the obligations and option of the Company and the Shareholders to buy and sell their Shares; and (iv) establishing terms and conditions for Company’s call for additional contributions to the capital of the Company.

NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement hereby agree as follows:

AGREEMENT

1. Definitions.

a. “Affiliate” means, with respect to any Shareholder, any Person: (i) that ownsmore than 50% of the voting interest in the Shareholder; or (ii) in which the Shareholder owns more than 50% of the voting interests; or (iii) in which more than 50% of the voting interests are owned by an entity who has a relationship with the Shareholder described in clauses (i) or (ii) above.

b. “Bankruptcy” means, with respect to any Person, the occurrence of any of thefollowing events:

(i) the Person makes an assignment for the benefit of creditors;

(ii) the Person files a voluntary petition of bankruptcy;

(iii) the Person is adjudged bankrupt or insolvent or there is entered againstthe Person an order for relief in any bankruptcy or insolvency proceeding;

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(iv) the Person files a petition or answer seeking any reorganization,arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation;

(v) the Person seeks, consents to, or acquiesces in the appointment of atrustee for, receiver for, or liquidation of such Person or of all or any substantial part of such Person’s properties;

(vi) the Person files an answer or other pleading admitting or failing tocontest the material allegations of a petition filed against the Person in any proceeding described in Subsections (i) through (v); or

(vii) any proceeding against the Person seeking reorganization, arrangement,composition, readjustment, liquidation, dissolution, or similar relief under any statute, law or regulation, continues for one hundred twenty (120) days after the commencement thereof; or the appointment of a trustee, receiver, or liquidator for the Shareholder or all or any substantial part of the Person’s properties without such Person's agreement or acquiescence, which appointment is not vacated or stayed for one hundred twenty (120) days or, if the appointment is stayed, for one hundred twenty (120) days after the expiration of the stay during which period the appointment is not vacated.

c. “Business Day” means any day when the Washington State Office of theInsurance Commissioner is open for business.

d. “Cause” means, with respect to any Person, any of the following: (a) theconviction of any criminal offense involving moral turpitude, (b) the persistent unwillingness, incompetence, or inability to perform the Person’s duties and responsibilities to the Company, (c) the persistent malfeasance, misfeasance, or nonfeasance in connection with the performance of the Person’s duties and responsibilities to the Company, or (d) the performance of willful and intentional acts having the effect of injuring the reputation, business, or business relationships of the Company.

e. “Control” (including the terms “Change of Control” or “Change in Control”)means either owning more than 50% of the voting power of the Shareholder, or the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Shareholder, whether through the ownership of voting securities, by contract or otherwise.

f. “Initial Term” means the fourth anniversary of the Closing.

g. “Key Officer” means any Person whose position title contains the word “chief”(e.g. “chief executive officer,” “chief operating officer,” “chief financial officer,” etc.), “president,” “vice president,” “secretary,” or “treasurer,” or the head of any discrete department or division, regardless of title.

h. “Person” means an individual, a partnership, a corporation, a limited liabilitycompany, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof.

i. “Shares” shall mean any issued and outstanding shares of common stock of theCompany owned by a Shareholder as of the date hereof or any time hereafter.

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j. “Valuation Date” means the last day of the month immediately before the date ofthe event triggering the option or obligation to purchase under Sections 6 and 7.

2. Restrictions on Transfer. Except as otherwise provided in this Agreement, a Shareholderwill not sell, assign, transfer, pledge, hypothecate, encumber, gift, bequeath, or dispose of in any way (a “Transfer”) all or any part of or any interest in the Shares now or hereafter owned or held by such Shareholder, without the unanimous written consent of all Shareholders and such Transfer being in compliance with all applicable regulatory consent and notice requirements. A Transfer of the Shares not made in conformance with this Section 2 shall be null and void, and shall not be recorded on the books of the Company, and any Person to whom Shares are attempted to be Transferred in violation of this Section 2 shall not be entitled to vote with respect to such Shares on matters coming before the Shareholders, receive distributions from the Company with respect to such Shares, or have any other rights in or with respect to the Shares subject to the attempted Transfer. The provisions of the preceding sentence are in addition to, and are not intended to supersede the provisions of Section 7 of this Agreement.

3. Board of Directors. From and after the Closing, each Shareholder shall vote its Sharesand shall take all other necessary or desirable actions within its control, and the Company shall take all necessary or desirable actions within its control (including calling special Board and Shareholder meetings), so that:

a. The authorized number of directors on the Board (“Directors”) shall beestablished and maintained at three (3) directors;

b. the following persons shall be elected to the Board:

(i) one (1) representative designated by PI for so long as PI continues toown beneficially at least of all then issued and outstanding Shares, who shall initially be Mary-LouMisrahy;

(ii) one (1) representative designated by COPIC for so long as COPICcontinues to own beneficially at least of all then issued and outstanding Shares, who shall initially be Gerry Lewis-Jenkins;

(iii) one (1) representative designated by MPIE for so long as MPIEcontinues to own beneficially at least of all then issued and outstanding Shares, who shall initially be Michelle Hoppes.

c. The designating Shareholder shall have the exclusive right to remove itsdesignee from the Board, without Cause, as well as the exclusive right to fill vacancies created due to death, removal or resignation, unless such designating Shareholder is no longer so entitled to designate a Director due to ownership of less than the required percentage of Shares. If a Director is a designee of more than one Shareholder, as set forth in Section 3(d) below, then such right to remove or fill vacancies shall be exercised by the affirmative vote of all such designating Shareholders.

d. If a Shareholder is no longer so entitled to designate a Director due to ownershipof less than the required percentage of Shares (“Ineligible Shareholder”), such Ineligible Shareholder’s designee shall be removed from the Board and the resulting vacancy on the Board shall be filled with a Director approved by the vote of the Shareholders (excluding the vote of the Ineligible Shareholder). If

• • •

4 126181.0002/7731823.3

such Shareholders are unable to agree on a Director to fill such Board vacancy within 15 Business Days of the removal of the designee of the Ineligible Shareholder, the Ineligible Shareholder shall cast the tie-breaking vote in favor of a candidate nominated by the other Shareholders, and such candidate shall thereby be appointed to the Board. Such replacement Director shall be deemed the designee of all Shareholders other than the Ineligible Shareholder. Nothing in this Section 3(d) prohibits the Shareholder(s) from re-appointing the removed designee of the Ineligible Shareholder.

4. Actions Requiring a Supermajority Approval of the Shareholders. Notwithstanding avoting requirement of a lesser proportion in the Company’s organizational or governing documents, including, without limitation, the Company’s Bylaws and the Articles of Incorporation, the following decisions and actions shall require the affirmative vote of the Shareholders holding at least eighty percent (80%) of the Shares (a “Supermajority”):

a. the amendment or modification of the Company’s Articles of Incorporation andthe Bylaws;

b. the reorganization of the Company, establishment of any subsidiary or affiliate ofthe Company or any consolidation, merger or similar transaction of the Company with or into any other Person;

c. any offer or issuance of, or split, combination, or reclassification of, the Shares ofthe Company, except as expressly authorized otherwise under this Agreement;

d. the appointment, and the termination without Cause, of the Company’s President;

e. the appointment, and the termination without Cause, of the Company’s CEO;

f. the Bankruptcy filing on behalf of the Company; and

g. the dissolution of the Company.

5. Additional Capital Contributions. Upon the occurrence of any of the events set forth inSection 5(a) below, as determined by the Board, the Company may require that the Shareholders advance or contribute additional amounts to the Company (“Capital Call”), and the Shareholders shall, in proportion to their respective percentage of ownership of Shares, advance or contribute such amounts in cash to the Company within fourteen (14) days of receipt of a Capital Call notice from the Company. At the election of the Board, a Capital Call may be structured as a loan to the Company pursuant to a surplus note or as a purchase of additional Shares issued by the Company, in each case on such terms and conditions as may be established by the Board. The terms and conditions of a Capital Call established by the Board shall apply to all Shareholders in an identical manner and shall be in compliance with all applicable statutes, laws or regulations. Except as otherwise approved by the unanimous affirmative vote of each Director, the amount of the Capital Call shall not exceed the amount that is reasonably required to cure the event(s) triggering a Capital Call.

a. The events that may trigger a Capital Call are as follows:

(i) Company’s failure or anticipated failure to meet the statutory minimumcapital and surplus requirements of any applicable jurisdiction;

5 126181.0002/7731823.3

(ii) Company’s failure or anticipated failure to maintain the minimumamount of capital as determined by the statutory risk-based capital (RBC) requirements to avoid any regulatory action under any applicable jurisdiction;

(iii) Company’s failure or anticipated failure to maintain at least an AM BestA- rating due to capital insufficiency; and

(iv) Company’s failure or anticipated failure to stay in compliance with anyother applicable statute, law, regulation or regulatory directive or order due to insufficient surplus funds.

The determination whether an event described in Section 5(a) above has occurred shall be made by the Board.

b. In the event any Shareholder fails to participate in a Capital Call as set forth inthis Section 5 (“Nonparticipating Shareholder”), then the Board may treat such failure as a Purchase Option event under Section 7, and the remaining Shareholders may, at least in proportion to their respective percentage of ownership of all Shares held by all participating Shareholders:

(i) in the event of a Capital Call through an issuance of additional Shares,purchase the additional Shares allotted to the Nonparticipating Shareholder; and

(ii) in the event of a Capital Call through a surplus note loan, advance theamount allocated to the Nonparticipating Shareholder.

6. Cure Option.

a. In the event the Board determines that any event set forth in Section 5(a) hasoccurred but declines to approve a Capital Call, the Shareholder whose designated Director cast a minority dissenting vote (in favor of a Capital Call) (the “Dissenting Shareholder”) shall have the option (“Cure Option”) to:

(i) contribute to the Company the entire amount that is reasonably requiredto cure the event(s) triggering a Capital Call vote, which contribution shall be structured as a purchase of additional Shares by the Dissenting Shareholder; or

(ii) purchase from the Shareholders whose designated Directors cast themajority vote (against a Capital Call) (the “Withdrawing Shareholders”), and the Withdrawing Shareholders shall be required to sell, 100%, but not less than 100%, of the Withdrawing Shareholders’ Shares to the Dissenting Shareholder.

b. To exercise the Cure Option, the Dissenting Shareholder must give written noticeto the Company and each Withdrawing Shareholder of the Dissenting Shareholder’s exercise of the Cure Option, no later than seven (7) Business Days after the final vote of the Board pertaining to the Capital Call.

c. Upon the exercise of a Cure Option, the purchase price for the Shares purchasedby the Dissenting Shareholder, from the Company or the Withdrawing Shareholders, as the case may be,

6 126181.0002/7731823.3

d. Upon the exercise of a Cure Option, the purchase price for the Shares shall bepayable, at the election and in the sole discretion of the Dissenting Shareholder, in immediately available funds or as follows:

(i) A down payment in the form of a certified or cashier's check, payable tothe Company or to the Withdrawing Shareholders proportionately, as the case may be, in an amount equal to at least 20% of the total purchase price; and

(ii) A promissory note made by the Dissenting Shareholder to the Companyor the Withdrawing Shareholders proportionately, as the case may be, for the balance of the purchase price.

The promissory note shall contain the right of prepayment at any time without penalty, premium, or prior notice. The promissory note shall be secured by a pledge of the Shares purchased pursuant to the Cure Option, subject to all applicable regulatory approvals. In the event that such pledge is prohibited by law or applicable regulations, the promissory note shall be unsecured.

e. The closing of the purchase pursuant to the Cure Option shall take place no laterthan 120 days after the determination of the purchase price or 30 days after the applicable regulatory approval, whichever occurs later, unless the parties otherwise agree.

7 126181.0002/7731823.3

f. Any amount paid pursuant to the Cure Option shall be treated as a payment forthe Shares.

g. The Cure Option in this Section 6 shall not be available to any Shareholder in theevent the Director that cast the dissenting minority vote (in favor of a Capital Call) is a designee of more than one Shareholder.

7. Company Purchase Option. The Company shall have the option to purchase (“PurchaseOption”) and the selling Shareholder (the “Selling Shareholder”) shall be required to sell, upon the Company’s exercise of the Purchase Option, one hundred percent (100%) of such Selling Shareholder’s Shares upon the occurrence of any one of the events listed below. Only the Director(s) not designated by the Selling Shareholder, consistent with the procedures set forth in Section 3, shall be entitled to vote with respect to the Company’s exercise of the Purchase Option.

a. The events that may trigger the Purchase Option are as follows:

(i) Shareholder’s failure to participate in a Capital Call in the full amountestablished by the Board for each Shareholder pursuant to Section 5;

(ii) Engaging in conduct, or the occurrence of an event, that constitutesCause by the Selling Shareholder;

(iii) The Bankruptcy of the Selling Shareholder;

(iv) The Selling Shareholder’s material breach or attempted breach (includingby operation of law) of any provision of this Agreement; and

(v) The Selling Shareholder’s Change in Control.

b. Each Shareholder shall provide notice to the Company of the occurrence ofChange in Control, no later than seven (7) days after such occurrence. The Company shall give notice of the Company's intention to exercise the Purchase Option within sixty (60) days of receiving notice of an event giving rise to the Purchase Option.

c. Purchase Price.

(i) If the Company exercises a Purchase Option that arises out of theoccurrence of any event described in Sections 7(a)(ii), 7(a)(iv) or 7(a)(v), the purchase price for the Shares shall be pursuant to the Purchase Option.

(ii) If the Company exercises a Purchase Option that arises out of theoccurrence, before the Initial Term, of any event described in Sections 7(a)(iii), the purchase price for the Shares shall be pursuant to the Purchase Option.

(iii) If the Company exercises a Purchase Option that arises out of theoccurrence, before the Initial Term, of an event described in Section 7(a)(i), the purchase price for the Shares shall be pursuant to the Purchase Option.

8 126181.0002/7731823.3

(iv) If the Company exercises a Purchase Option that arises out of theoccurrence, after the Initial Term, of an event described in Sections 7(a)(i) or 7(a)(iii), the purchase price for the Shares of the Shares purchased pursuant to the Purchase Option.

References to “Fair Market Value” in this Section 7(c) shall be as defined in Section 6(c) above, except: “Cure Option” replaced with “Purchase Option”; “Withdrawing Shareholders” replaced with “Selling Shareholder”; and “Dissenting Shareholder” replaced with “Company.”

d. The closing of the purchase pursuant to a Purchase Option shall take place at theprincipal place of business of the Company at a date and time designated by the Company, but the date shall not be later than thirty (30) days after the determination of the purchase price or the applicable regulatory approval, whichever occurs later, unless the Company and the Selling Shareholder otherwise agree. Notice of the date and time of the closing shall be given by the Company to the Selling Shareholder.

8. Deadlock.

(a) If the Directors are unable to reach a decision by the required vote regarding an issuesubmitted for consideration by the Board at such meetings (a “Deadlock”), the Board shall refer the matter subject to the Deadlock to the Shareholders, who shall attempt to resolve such matter within ten (10) Business Days after referral to them of the Deadlocked issue (or, if mutually agreed by theShareholders, a longer period of time). Any resolution agreed to by the Shareholders shall be final andbinding on the Company and the Shareholders as if it were approved by the Board.

(b) During the continuation of any Deadlock, the Company shall continue to operate in amanner consistent with its prior practices until such time as such Deadlock is resolved. If the Deadlock is with respect to the approval of the Company’s annual business plan or budget, the Company shall operate its business in accordance with the business plan or budget then in effect.

(c) If the Shareholders are unable to reach an agreement as to the issue within the time periodset forth in Section 8(a) (including any agreed extensions), the Deadlock shall be mediated (the “Mediation”) within 15 Business Days from the date a written request for mediation is made by any Shareholder. The Mediation shall take place in Seattle, Washington. The Mediation shall be conducted before a single mediator to be agreed upon by the Shareholders. If the Shareholders cannot agree on the mediator, each Shareholder shall select a mediator and such mediators shall together unanimously select a neutral mediator who will conduct the mediation. All the Shareholders shall equally bear the fees and expenses of the Mediation. The decision of the mediator for any Deadlock shall be final and binding on the Shareholders and the Company.

9. Transferees Bound by this Agreement. All Shares transferred consistent with thisAgreement shall at all times remain subject to this Agreement, and such transferee shall execute and deliver a counterpart signature page in the form attached hereto as Exhibit B as confirmation that such transferee shall be bound by the terms and conditions of this Agreement as a Shareholder. The Company shall update Exhibit A to reflect such transfers and additional Shareholders.

9 126181.0002/7731823.3

10. Assignments and Transfers; No Third Party Beneficiaries. This Agreement and the rights and obligations of the parties hereunder shall inure to the benefit of, and be binding upon, their respective successors, assigns and legal representatives, but shall not otherwise be for the benefit of any third party.

11. Notices. Any notice required or permitted to be given to a party by any provision of this Agreement shall be given in writing and shall be delivered personally, by courier or overnight delivery services, e-mail, or by registered or certified mail, postage prepaid, addressed to such party’s address as set forth in the signature pages hereto or such other address as such party may designate in writing from time to time. Notices that are mailed shall be deemed received three (3) days after deposit in the United States mail. Notices sent by courier or overnight delivery shall be deemed received two (2) days after they have been so sent. Notices sent by e-mail or delivered personally shall be deemed received when delivered, or in the case of notices delivered on a Saturday, Sunday or holiday, on the first Business Day thereafter.

12. Further Instruments and Actions. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. The Shareholders agree to cooperate affirmatively with the Company, to the extent reasonably requested by the Company, to enforce rights and obligations pursuant hereto.

13. Term. This Agreement shall terminate upon the earlier of (i) the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of the Company’s capital stock, (ii) the dissolution, merger, or consolidation of the Company with another entity, unless otherwise specified by the Board, or (iii) upon the written agreement of all of the Shareholders.

14. Voting Requirements. Unless otherwise expressly set forth in this Agreement, the Director and Shareholder voting requirements in the Company’s then current Bylaws and the Articles of Incorporation shall govern.

15. Entire Agreement; Applicable Law. This Agreement contains the entire understanding of the parties hereto with respect to the subject matter hereof, supersedes all other agreements between or among any of the parties with respect to the subject matter hereof. This Agreement shall be interpreted under the laws of the State of Washington without reference to Washington conflicts of law provisions.

16. Amendments and Waivers. Except for updating Exhibit A, this Agreement may only be amended with the prior written consent of the Company and all Shareholders.

17.

18. Specific Performance. The Shareholders recognize that irreparable injury will result from a breach of any provision of this Agreement and that money damages will be inadequate to fully remedy the injury. Accordingly, in the event of a breach or threatened breach of one or more of the provisions of

10 126181.0002/7731823.3

this Agreement, any party who may be injured (in addition to any other remedies which may be available to that party) shall be entitled to one or more preliminary or permanent orders (i) restraining and enjoining any act which would constitute a breach or (ii) compelling the performance of any obligation which, if not performed, would constitute a breach.

19. Severability. In case any provision of the Agreement shall be invalid, illegal orunenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

20. Counterparts. This Agreement may be executed in two or more counterparts, each ofwhich shall be deemed an original, but all of which together shall constitute one and the same instrument.

(Signature Page Follows)

Signature Page to Shareholders Agreement

126181.0002/7731823.3

IN WITNESS WHEREOF, the parties hereto have executed this Shareholders Agreement as of the date first written above.

COMPANY:


________________________________________________, Chief Executive Officer Address: E-mail:

SHAREHOLDERS:

PHYSICIANS INSURANCE A MUTUAL COMPANY

________________________________

________________, [Title] Address: E-mail:

COPIC INSURANCE COMPANY

________________________________

________________, [Title] Address:

E-mail:

MICHIGAN PROFESSIONAL INSURANCE EXCHANGE

________________________________

________________, [Title] Address:

E-mail:

12

EXHIBIT A

SHAREHOLDERS

(As of [DATE])

SHAREHOLDER SHARES OF COMMON STOCK PHYSICIANS INSURANCE A MUTUAL COMPANY

100,000

COPIC INSURANCE COMPANY 100,000 MICHIGAN PROFESSIONAL INSURANCE EXCHANGE

100,000

13

EXHIBIT B

COUNTERPART SIGNATURE PAGE

The undersigned hereby agrees to become a party to that certain Shareholders Agreement (the “Agreement”) of Western Professional Insurance Company, a Washington insurance company, effective as of July 31, 2019. From and after the undersigned’s execution and delivery and the Company’s acceptance of this Counterpart Signature Page, the undersigned shall be a “Shareholder” under the Agreement and all shares of capital stock of the Company, whether currently held or subsequently acquired by the undersigned, shall be deemed to be “Shares” for all purposes of the Agreement.

SHAREHOLDER:

By:

(signature) Name:

(print name) Date: Address:

Agreed and accepted: WESTERN PROFESSIONAL INSURANCE COMPANY By:

(signature) Name:

(print name) Title:

Date:

126181.0002/7664231.5

EXHIBIT D

Unanimous Consent of the Board of Directors Appointing Officers

126181.0002/7694362.1

UNANIMOUS CONSENT OF THE BOARD OF DIRECTORS OF


The undersigned, being all of the members of the Board of Directors of Western Professional Insurance Company, a Washington insurance company (the “Corporation”), hereby waive all notices, statutory and otherwise, and consent to the following corporate action in lieu of holding a meeting for that purpose.

APPOINTMENT OF OFFICERS

RESOLVED: The undersigned hereby appoint the following individuals (each an “Officer” and, collectively, the “Officers”) to the offices set forth below, to serve until the next annual meeting of the Board of Directors and until their successors are appointed and qualified, unless earlier removed in accordance with law:

_________ Chief Executive Officer _________ President _________ Treasurer _________ Secretary

SIGNATORY AUTHORITY

RESOLVED: Each Officer, individually and with right of substitution, is hereby authorized and directed to negotiate, execute and deliver, on behalf of and in the name of the Corporation, such agreements, notices, acknowledgements, instructions, requests, documents, amendments, certificates, and other agreements, including any power of attorney, as may be required, necessary or advisable as determined in the sole discretion of such Officer, for the Corporation to carry on its business, including registering the Corporation in any foreign jurisdiction and obtaining tax identification numbers required by any tax authority.

This document may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute the same document, whether or not all parties execute each counterpart.

[Signature page follows]

2126181.0002/7694362.1

DATED: DIRECTORS:

_________ ___, 2019

_________ ___, 2019

_________ ___, 2019

31

Ernst & Young LLP

F I N A N C I A L S T A T E M E N T S – S T A T U T O R Y B A S I S

Western Professional Insurance Company (A Wholly Owned Subsidiary of Physicians Insurance A Mutual Company) Years Ended December 31, 2016 and 2015 With Report of Independent Auditors

EV Building a better working world

1701-2163681

Western Professional Insurance Company (A Wholly Owned Subsidiary of Physicians Insurance A Mutual Company)

Financial Statements – Statutory Basis

Years Ended December 31, 2016 and 2015

Contents

Report of Independent Auditors.......................................................................................................1

Financial Statements – Statutory Basis

Balance Sheets – Statutory Basis .....................................................................................................3Statements of Income – Statutory Basis ..........................................................................................4Statements of Changes in Capital and Surplus – Statutory Basis ....................................................5 Statements of Cash Flow – Statutory Basis .....................................................................................6Notes to Financial Statements – Statutory Basis .............................................................................7

A member firm of Ernst & Young Global Limited

Ernst & Young LLP Suite 3500 999 Third Avenue Seattle, WA 98104-4086

Tel: +1 206 621 1800 Fax: +1 206 654 7799 ey.com

1701-2163681 1

Report of Independent Auditors

The Board of Directors Western Professional Insurance Company

We have audited the accompanying statutory-basis financial statements of Western Professional Insurance Company, which comprise the balance sheets as of December 31, 2016 and 2015, and the related statements of income, changes in capital and surplus and cash flow for the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in conformity with accounting practices prescribed or permitted by the Washington State Office of the Insurance Commissioner. Management also is responsible for the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions.

EY Building a better working world

1701-2163681 2

Basis for Adverse Opinion on U.S. Generally Accepted Accounting Principles

As described in Note 1, to meet the requirements of Washington, the financial statements have been prepared in conformity with accounting practices prescribed or permitted by the Washington State Office of the Insurance Commissioner, which practices differ from U.S. generally accepted accounting principles. The variances between such practices and U.S. generally accepted accounting principles are described in Note 1. The effects on the accompanying financial statements of these variances are not reasonably determinable but are presumed to be material.

Adverse Opinion on U.S. Generally Accepted Accounting Principles

In our opinion, because of the effects of the matter described in the preceding paragraph, the statutory-basis financial statements referred to above do not present fairly, in conformity with U.S. generally accepted accounting principles, the financial position of Western Professional Insurance Company at December 31, 2016 and 2015, or the results of its operations or its cash flows for the years then ended.

Opinion on Statutory-Basis of Accounting

However, in our opinion, the statutory-basis financial statements referred to above present fairly, in all material respects, the financial position of Western Professional Insurance Company at December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended in conformity with accounting practices prescribed or permitted by the Washington State Office of the Insurance Commissioner.

April 6, 2017



2016 2015Admitted assetsCash and investments:

Bonds, at amortized cost (fair value of $13,620,929and $13,776,455 at December 31, 2016 and2015, respectively) 13,289,177$ 13,344,867$

Cash of $253,747 and $132,962, and short-terminvestments of $14,854 and $73,579 atDecember 31, 2016 and 2015, respectively 268,601 206,541

Receivable for securities 79 –Total cash and investments 13,557,857 13,551,408

Reinsurance recoverables on paid losses – 2,532Accrued interest income 94,978 90,882Total 13,652,835$ 13,644,822$

Liabilities and capital and surplusLiabilities:

Reserves for losses and loss adjustment expenses –$ –$Other expenses 227Payable to affiliate 27,217 27,112Federal income taxes payable 70,857 55,188

Total liabilities 98,301 82,300

Capital and surplus:Capital stock 3,000,000 3,000,000Paid-in surplus 7,000,000 7,000,000Unassigned surplus 3,554,534 3,562,522

Total capital and surplus 13,554,534 13,562,522Total 13,652,835$ 13,644,822$

See accompanying notes.

Western Professional Insurance Company(A Wholly Owned Subsidiary of Physicians Insurance A Mutual Company)

Balance Sheets – Statutory Basis

December 31

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2016 2015Revenues:

Net premiums earned –$ –$

Losses and expenses:Net losses and loss adjustment expenses – –Underwriting expenses 67,501 67,480

Net underwriting loss (67,501) (67,480)

Net investment income earned 319,840 315,823Net realized capital gains, less income taxes of $2,908

and $1,132 at December 31, 2016 and 2015, respectively 6,310 2,906Net investment gain 326,150 318,729

Other income 155 –Income before federal income taxes 258,804 251,249

Federal income taxes incurred 72,792 54,056Net income 186,012$ 197,193$



Statements of Income – Statutory Basis

Year Ended December 31

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2016 2015Capital stock:

Beginning and end of year 3,000,000$ 3,000,000$

Paid-in surplus:Beginning and end of year 7,000,000 7,000,000

Unassigned surplus:Beginning of year 3,562,522 3,605,329

Net income 186,012 197,193Dividends to stockholder (194,000) (240,000)

End of year 3,554,534 3,562,522Total capital and surplus 13,554,534$ 13,562,522$



Statements of Changes in Capital and Surplus – Statutory Basis


1701-2163681 5

2016 2015Operating activitiesPremiums collected, net of reinsurance –$ –$Net investment income 343,266 351,624Miscellaneous income 155 –Total 343,421 351,624

Benefits and loss-related receipts 2,533 2,214Expenses paid (67,274) (67,480)Federal income taxes paid (60,032) (83,796)Total (124,773) (149,062)Net cash provided by operating activities 218,648 202,562

Investing activitiesProceeds from bonds sold, matured, or repaid 890,427 2,767,118Cost of bonds acquired (853,120) (2,669,842)Net cash provided by investing activities 37,307 97,276

Financing and miscellaneous activitiesDividends to stockholder (194,000) (240,000)Other cash provided 105 1,331Net cash used in financing and miscellaneous activities (193,895) (238,669)

Net change in cash and short-term investments 62,060 61,169Cash and short-term investments at beginning of year 206,541 145,372Cash and short-term investments at end of year 268,601$ 206,541$



Statements of Cash Flow – Statutory Basis


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Notes to Financial Statements – Statutory Basis

December 31, 2016

1. Description of the Company and Significant Accounting Policies

Western Professional Insurance Company (the Company or WPIC) is a wholly owned subsidiary of Physicians Insurance A Mutual Company (PI). WPIC was incorporated on May 8, 1998, and was granted a certificate of authority by the Washington State Office of the Insurance Commissioner (the Department) on October 22, 1998. WPIC was formed to provide professional liability and general liability insurance to hospitals and to provide business owners’ policies and provider stop-loss insurance to physicians. All business underwritten by WPIC was fully ceded to PI, except premiums related to facultative reinsurance.

WPIC did not renew all of its hospital professional liability business at the natural expiration date of each policy during 2004. All business owners’ policies and most provider stop-loss business were renewed by PI effective January 1, 2005. Once the last remaining stop-loss policy expired on April 1, 2006, the account was renewed by PI. After that date, WPIC has no ongoing risk. PI will continue to manage the orderly runoff of WPIC’s liabilities.

The Company, domiciled in Washington State, prepares its statutory-basis financial statements in conformity with the National Association of Insurance Commissioners’ (NAIC) AccountingPractices and Procedures Manual (effective March 2016), which has been adopted by the Department. The Company employs no accounting practices that differ from those adopted by the Department.

NAIC accounting practices differ in certain respects from U.S. generally accepted accounting principles (GAAP). Significant differences are:

• Certain assets designated as “nonadmitted” assets are excluded from the balance sheets, and the changes in such assets are credited or charged directly to unassigned surplus. Under GAAP, such assets are included in the balance sheets to the extent that those assets are not impaired.

• Investments in bonds are recorded at amortized cost or fair value based on their NAIC rating. Under GAAP, such fixed maturity investments would be designated at purchase as held-to-maturity, trading, or available-for-sale. Held-to-maturity fixed maturity investments would be reported at amortized cost, and the remaining fixed maturity investments would be reported at fair value, with unrealized holding gains and losses reported in operations for those designated as trading and as a separate component of other comprehensive income, net of the related deferred taxes, for those designated as available-for-sale.


Notes to Financial Statements – Statutory Basis (continued)

1701-2163681 8

1. Description of the Company and Significant Accounting Policies (continued)

• Ceded reinsurance recoverables on unpaid losses and loss adjustment expenses are recorded as a reduction to the reserves for losses and loss adjustment expenses. Under GAAP, ceded reinsurance recoverables are reported as assets.

• The statements of cash flow differ in certain respects from the presentation required by GAAP.

• Realized gains or losses are recorded net of tax in the statements of income. Under GAAP, the tax associated with realized gains or losses is recorded as an income tax expense or benefit.

The effects of the foregoing variances from GAAP on the Company’s statutory-basis financial statements have not been determined, but are presumed to be material.

Other significant accounting practices are as follows:

Cash, Cash Equivalents, and Short-Term Investments

The Company considers all highly liquid instruments with original maturities of three months or less at the time of purchase to be cash equivalents and all liquid instruments with an original maturity of one year or less at the time of purchase to be short-term investments. The carrying amount of cash, cash equivalents, and short-term investments approximates fair value because of the short-term maturity of those instruments.

Investments

Bonds are reported at statement value as prescribed by the NAIC. Bonds that are investment grade (NAIC designation 1 or 2) are stated at cost or amortized cost. All other bonds (NAIC designations 3 to 6) are stated at the lower of amortized cost or fair value. Discount or premium on bonds is amortized using the effective-yield method.



1701-2163681 9


Mortgage-backed securities are adjusted using the prospective method. Prepayment assumptions for single and multiclass mortgage-backed and asset-backed securities are initially obtained from broker/dealer statements. Updates to prepayment assumptions are obtained from independent pricing sources.

The Company uses the first-in, first-out method in determining gains and losses from the sale of investments. The Company monitors investments for other-than-temporary impairment. In determining whether the losses are temporary or other-than-temporary, the Company considers (1) the length of time and extent to which the fair value has been less than the cost or carrying value, (2) the financial strength of the issuer, and (3) its intent to sell the security or the Company’s ability to hold the security long enough to recover in value.

Interest and dividend income is recorded on the accrual basis. The Company nonadmits investment income due and accrued if amounts are more than 90 days past due.

Reserves for Losses and Loss Adjustment Expenses

The reserves for losses and loss adjustment expenses are established on the basis of reported losses (case-basis method). Provision is also made for claims incurred but not reported and related loss adjustment expenses. These amounts are based on the estimates of management and are subject to risks and uncertainties. Changes in estimates of losses and loss adjustment expenses are included in income for the period in which the estimates are changed. The Company does not discount loss and loss adjustment expense reserves. The method of making such estimates and establishing the resulting reserves is based on actuarial assumptions of future contingencies and the applicability of other data sources such as recent settlements, claim frequency, and other economic and social factors. A provision for inflation in the calculation of estimated future claims costs is implicit in the calculation because reliance is placed both on actual historical data that reflects past inflation and on other factors that are considered to be appropriate modifiers of past experience. Although the Company considers its experience and industry data in determining such reserves, assumptions and projections of future events are necessary, and the ultimate amounts may differ materially from the amounts recorded or disclosed.



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Reinsurance

Amounts recoverable from reinsurers are estimated in a manner consistent with the loss and loss adjustment expense reserves associated with the insured policy.

The Company protects itself from losses by reinsuring 100% of its losses. WPIC is 100% reinsured by PI for policy limits up to $5,000,000. Higher limits are placed in the facultative market. Unsecured reinsurance recoverables with PI amount to $1,621,935 and $470,931 as of December 31, 2016 and 2015, respectively. WPIC would be ultimately liable for these amounts in the event that PI was unable to meet these ceded loss obligations.

Income Taxes and Deferred Taxes

The Company accounts for income taxes under the liability method, which requires the recognition of deferred taxes and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are limited to those that will more likely than not (defined as a likelihood of more than 50%) generate a tax benefit, and a valuation allowance is established if necessary to reduce the deferred tax asset to an amount that is more likely than not to be realized. No valuation allowance has been recorded as of December 31, 2016 and 2015.

Deferred income taxes are further subject to limitations as to the amount of deferred income tax assets that may be reported as “admitted assets.” Admitted deferred tax assets are limited to: (1) the amount of federal income taxes paid in prior years that can be recovered through loss carrybacks for existing temporary differences that reverse within the IRS loss carryback provision; (2) the lesser of the remaining gross deferred tax assets expected to be realized within one year to three years of the balance sheet date or 10% to 15% of capital and surplus, excluding surplus arising from any net deferred tax assets, EDP equipment, operating software, and net positive goodwill; and (3) the amount of remaining gross deferred tax assets that can be offset against existing gross deferred tax liabilities. The Company considers character (capital or ordinary) in admitting deferred tax assets. Deferred income taxes do not include amounts for state income taxes.



1701-2163681 11


Use of Estimates

The preparation of financial statements in conformity with accounting practices prescribed or permitted by the Department requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the statutory-basis financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounts subject to management estimates are reserves for losses and loss adjustment expenses, reinsurance recoverables on unpaid losses and loss adjustment expenses, and other-than-temporary impairment of invested assets.

Subsequent Events

The Company has evaluated subsequent events through April 6, 2017, the date on which the Company’s financial statements were available to be issued.

2. Investments

The cost or amortized cost, gross unrealized gains or losses, and fair value of investments are as follows:

Cost or Amortized

Cost

GrossUnrealized

Gains

GrossUnrealized

Losses Fair

Value December 31, 2016 U.S. treasury securities and

obligations of U.S. government corporations and agencies $ 7,333,839 $ 195,219 $ (12,211) $ 7,516,847

Obligations of states and political subdivisions 1,377,628 24,384 (46) 1,401,966

Corporate securities 3,736,758 111,525 (17,258) 3,831,025 Mortgage-backed securities 840,952 32,675 (2,536) 871,091 Total bonds $ 13,289,177 $ 363,803 $ (32,051) $ 13,620,929



1701-2163681 12

2. Investments (continued)

Cost or Amortized

Cost

GrossUnrealized

Gains

GrossUnrealized

Losses Fair

Value December 31, 2015 U.S. treasury securities and


Obligations of states and political subdivisions 1,659,552 55,664 – 1,715,216

Corporate securities 3,536,074 120,535 (11,654) 3,644,955 Mortgage-backed securities 1,066,546 43,823 (954) 1,109,415 Total bonds $ 13,344,867 $ 456,668 $ (25,080) $ 13,776,455

The cost or amortized cost and fair value of debt securities by contractual maturity at December 31, 2016, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Cost or Amortized

CostFair

Value Due one year or less $ 1,551,106 $ 1,569,640 Due between one year and five years 5,481,323 5,607,814 Due between five years and ten years 4,735,473 4,810,865 Due after ten years 680,323 761,519 Mortgage-backed securities 840,952 871,091 $ 13,289,177 $ 13,620,929

Proceeds from sales of investments in bonds during 2016 and 2015 were $111,156 and $500,723, respectively. Gross gains of $9,209 and $488 and gross losses of $0 and $0 were realized on those sales during 2016 and 2015, respectively.



1701-2163681 13


The Company has debt securities on deposit with the Department for the protection of policyholders. The amortized cost of these securities at December 31, 2016 and 2015, was $1,013,956 and $1,015,661, respectively.

Net investment income is summarized as follows for the year ended December 31:

2016 2015

Investment income $ 380,388 $ 376,344 Less investment expenses (60,548) (60,521)

$ 319,840 $ 315,823

No amounts of investment income due and accrued have been excluded from surplus.

Provided below is a summary of securities that were in an unrealized loss position as of December 31, 2016 and 2015. Management does not believe any individual unrealized loss as of December 31, 2016 and 2015, represents an other-than-temporary impairment, as the quantitative and qualitative criteria used by management to determine other-than-temporary impairment have not been met. The Company has the intent and ability, at the reporting date, to hold these investments until maturity or until fair value recovers above cost or amortized cost. In 2016 and 2015, there were no realized losses due to other-than-temporary impairments.

Less Than 12 Months 12 Months or More Total Fair

Value Unrealized

Losses Fair

Value Unrealized

Losses Fair

Value Unrealized

Losses (In Thousands)

December 31, 2016 U.S. treasury and obligation of

U.S. government corporations and agencies $ 1,937 $ 12 $ – $ – $ 1,937 $ 12

Obligations of states and political subdivisions 230 – – – 230 –

Corporate securities 1,065 17 – – 1,065 17 Mortgage-backed securities 291 3 – – 291 3 Temporarily impaired securities $ 3,523 $ 32 $ – $ – $ 3,523 $ 32



1701-2163681 14


Less Than 12 Months 12 Months or More Total Fair

Value Unrealized

Losses Fair

Value Unrealized

Losses Fair

Value Unrealized

Losses (In Thousands)


U.S. government corporations and agencies $ 1,252 $ 7 $ 912 $ 5 $ 2,164 $ 12

Corporate securities 303 2 512 10 815 12 Mortgage-backed securities 142 1 – – 142 1 Temporarily impaired securities $ 1,697 $ 10 $ 1,424 $ 15 $ 3,121 $ 25

Credit risk is managed by entering into transactions with creditworthy counterparties and obtaining collateral where appropriate and customary. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of corporate debt securities. As the portfolio is well diversified and issuers of securities are dispersed throughout many industries and geographies, the concentrations of credit risk are limited.

3. Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in estimating the “fair value” of financial instruments in the accompanying financial statements and notes:

Cash and short-term investments: The carrying amounts reported in the accompanying balance sheets for these financial instruments approximate fair value.

Investment securities: Fair values for investment securities are primarily based on prices received from a third-party pricing service that uses observable market information in determining the fair value.

For all other financial instruments (payables and receivables), carrying value approximates fair value.



1701-2163681 15

3. Fair Value of Financial Instruments (continued)

Financial assets and liabilities carried at fair value have been classified, for disclosure purposes, based on a fair value hierarchy. The three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:

Level 1 – Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2 – Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

Assets Measured at Fair Value on a Recurring and Nonrecurring Basis

The Company has no assets or liabilities recorded on the balance sheets at fair value on a recurring or nonrecurring basis at December 31, 2016 or 2015.

Aggregate fair value of all financial instruments and the level within the fair value hierarchy for December 31, 2016 and 2015, are as follows:

Type of Financial Instrument

AggregateFair

ValueAdmitted

Assets Level 1 Level 2 Level 3

Not Practical(Carrying

Value) 2016 Bonds $ 13,620,929 $ 13,289,177 $ 4,748,714 $ 8,872,215 $ – $ – Short-term investments 14,854 14,854 – 14,854 – –

Type of Financial Instrument

AggregateFair

ValueAdmitted

Assets Level 1 Level 2 Level 3

Not Practical(Carrying

Value) 2015 Bonds $ 13,776,455 $ 13,344,867 $ 4,743,690 $ 9,032,765 $ – $ – Short-term investments 73,579 73,579 – 73,579 – –



1701-2163681 16

4. Reserves for Losses and Loss Adjustment Expenses

Loss and loss adjustment expense reserves are 100% reinsured by PI. Therefore, net reserve balances at December 31, 2016 and 2015, are $0 and $0, respectively, and there were no net incurred or paid losses in the years ended December 31, 2016 or 2015. Net reserves reflect reinsurance recoverable on unpaid losses and loss adjustment expenses of $1,621,935 and $468,399 at December 31, 2016 and 2015, respectively.

5. Federal Income Taxes

The Company has no deferred tax assets or liabilities as of December 31, 2016 or 2015, and, therefore, no admissibility calculation was performed.

The Company did not utilize any reinsurance tax planning or any other tax planning strategies in 2016 or 2015 that would have had an impact on gross and net deferred tax assets.

There are no temporary differences for which deferred tax liabilities are not recognized. The Company did not have any tax contingencies for the years ended December 31, 2016 or 2015.

Current income taxes incurred consist of the following major components:

2016 2015 Change (a) Current federal income tax expense $ 67,949 $ 54,056 $ 13,893 (b) Foreign – – – (c) Subtotal 67,949 54,056 13,893 (d) Tax on capital gains 2,908 1,132 1,776 (e) Utilization of capital loss carryforward – – – (f) Other, including prior year adjustment 4,843 – 4,843 (g) Federal income tax incurred $ 75,700 $ 55,188 $ 20,512

The federal income tax expense incurred differs from the amount computed by applying the expected U.S. corporate income tax rate of 34% to income before taxes for the years ended December 31, 2016 and 2015, primarily due to tax-exempt income.



1701-2163681 17

5. Federal Income Taxes (continued)

The following represents income tax expense for 2016, 2015, and 2014 that is available for recoupment in the event of future net losses:

Ordinary Capital Total 2016 $ 67,949 $ 2,908 $ 70,857 2015 58,900 1,132 60,032 2014 N/A 10,447 10,447 $ 126,849 $ 14,487 $ 141,336

The Company had no capital loss carryforwards and no alternative minimum tax credit carryforwards as of December 31, 2016 and 2015.

The Company has no deposits admitted under Section 6603 of the Internal Revenue Code. As of December 31, 2016, the Company is subject to federal examination in the United States from 2013 to present.

The Company files a consolidated federal income tax return with its parent company, PI. The consolidated tax return also includes PI’s other subsidiaries. The method of taxation between the companies is subject to written agreement, approved by the Board of Directors. Allocation is based upon separate return calculations with current credit for net losses. Intercompany tax balances are settled annually in the first quarter of the following year.

6. Information Concerning Parent, Subsidiaries, and Affiliates

WPIC is a stock insurance company and a wholly owned subsidiary of PI. PI performs substantially all services for WPIC and is reimbursed under a written management services agreement. Costs are shared based on an analysis of the cost of services provided to the Company. Pursuant to the agreement, operating costs reimbursed were $50,000 for each of the years ended December 31, 2016 and 2015. The agreement continues indefinitely unless terminated by either party upon one year’s written notice.



1701-2163681 18

7. Surplus, Dividend Restrictions, and Risk-Based Capital

Without prior approval of the Department, dividends to the stockholder are limited in 2017 to $179,702, an amount that is based on restrictions relating to the prior year’s net income less capital gains net of taxes. An ordinary dividend in the amount of $194,000 and $240,000 were paid by the Company during 2016 and 2015 respectively.

The Company is subject to Risk-Based Capital (RBC) requirements of the NAIC, which require that certain amounts of capital be maintained. As of December 31, 2016 and 2015, the Company’s RBC exceeded the required amount.

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FINANCIAL STATEMENTS - STATUTORY BASIS

Western Professional Insurance Company (A Wholly Owned Subsidiary of Physicians Insurance A Mutual Company) Years Ended December 31, 2017 and 2016 With Report oflndependent Auditors

Ernst & Young LLP



Financial Statements - Statutory Basis


Contents

Report of Independent Auditors ....................................................................................................... 1


Balance Sheets - Statutory Basis ..................................................................................................... 3 Statements of Income - Statutory Basis ......................................................................................... .4 Statements of Changes in Capital and Surplus - Statutory Basis .................................................... 5 Statements of Cash Flow - Statutory Basis ..................................................................................... 6 Notes to Financial Statements - Statutory Basis ............................................................................. 7

1801-2544835

Building a better working world

Ernst & Young LLP Suite 3500

Tel: +12066211800 Fax: +1 206 654 7799

999 Third Avenue ey.com Seattle, WA 98104-4086



We have audited the accompanying statutory-basis financial statements of Western Professional Insurance Company, which comprise the balance sheets as of December 31, 2017 and 2016, and the related statements of income, changes in capital and surplus and cash flow for the years then ended, and the related notes to the financial statements.

Management's Responsibility for the Financial Statements


Auditor's Responsibility


An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.


1801-2544835 1


Building a better working world


As described in Note 1, to meet the requirements of Washington, the financial statements have been prepared in conformity with accounting practices prescribed or permitted by the Washington State Office of the Insurance Commissioner, which practices differ from U.S. generally accepted accounting principles. The variances between such practices and U.S. generally accepted accounting principles are described in Note 1. The effects on the accompanying financial statements of these variances are not reasonably determinable but are presumed to be material.


In our opinion, because of the effects of the matter described in the preceding paragraph, the statutory-basis financial statements referred to above do not present fairly, in conformity with U.S. generally accepted accounting principles, the financial position of Western Professional Insurance Company at December 31, 2017 and 2016, or the results of its operations or its cash flows for the years then ended.


However, in our opinion, the statutory-basis financial statements referred to above present fairly, in all material respects, the financial position of Western Professional Insurance Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended in conformity with accounting practices prescribed or permitted by the Washington State Office of the Insurance Commissioner.

May 7, 2018

1801-2544835 2



Balance Sheets - Statutory Basis

Admitted assets Cash and investments:

Bonds, at amortized cost (fair value of$13,420,186 and $13,620,929 at December 31, 2017 and 2016, respectively)

Cash of $375,365 and $253,747, and short-term investments of $27,038 and $14,854 at December 31, 2017 and 2016, respectively

Receivable for securities Total cash and investments

Accrued interest income Total

Liabilities and capital and surplus Liabilities:

Reserves for losses and loss adjustment expenses Other expenses Payable to affiliate Federal income taxes payable

Total liabilities

Capital and surplus: Capital stock Paid-in surplus Unassigned surplus

Total capital and surplus Total


1801-2544835

December 31 2017 2016

$ 13,147,484 $ 13,289,177

402,403

13,549,887

268,601 79

13,557,857

102,619 94,978 $ 13,652,506 $ 13,652,835

$ -

27,120 70,627 97,747

3,000,000 7,000,000 3,554,759

13,554,759 $ 13,652,506

$ 227

27,217 70,857 98,301

3,000,000 7,000,000 3,554,534

13,554,534 $ 13,652,835

3


Statements of Income - Statutory Basis


Revenues: Net premiums earned

Losses and expenses: Net losses and loss adjustment expenses Underwriting expenses

Net underwriting loss

Net investment income earned Net realized capital (losses) gains, less income (benefit) taxes

of $(3 3 3) and $2,908 at December 31, 2017 and 2016, respectively

Net investment gain

Other income Income before federal income taxes

Federal income taxes incurred Net income


1801-2544835

2017 2016

$ - $

68,112 (68,112)

319,020

(723) 318,297

250,185

70,960 $ 179,225 $

67,501 (67,501)

319,840

6,310 326,150

155 258,804

72,792 186,012

4


Statements of Changes in Capital and Surplus - Statutory Basis

Capital stock: Beginning and end of year

Paid-in surplus: Beginning and end of year

Unassigned surplus: Beginning of year

Net income Dividends to stockholder

End of year Total capital and surplus


1801-2544835

Year Ended December 31 2017 2016

$ 3,000,000 $ 3,000,000

7,000,000

3,554,534 179,225

(179,000) 3,554,759

$ 13,554,759

7,000,000

3,562,522 186,012

(194,000) 3,554,534

$ 13,554,534

5


Statements of Cash Flow - Statutory Basis


Operating activities Premiums collected, net of reinsurance $ - $ Net investment income 334,728 343,266 Miscellaneous income 155 Total 334,728 343,421

Benefits and loss-related receipts 2,533 Expenses paid (68,339) (67,274) Federal income taxes paid (7028572 {60,032} Total {13921962 024,7732 Net cash provided by operating activities 195,532 218,648

Investing activities Proceeds from bonds sold, matured, or repaid 2,313,626 890,427 Cost of bonds acquired {2219622592 {853,1202 Net cash provided by investing activities 117,367 37,307

Financing and miscellaneous activities Dividends to stockholder (179,000) (194,000) Other cash ( applied) provided {972 105 Net cash used in financing and miscellaneous activities {17920972 {193,895}

Net change in cash and short-term investments 133,802 62,060 Cash and short-term investments at beginning of year 2682601 206,541 Cash and short-term investments at end of year $ 402,403 $ 268,601


1801-2544835 6


Notes to Financial Statements - Statutory Basis

December 31, 2017


Western Professional Insurance Company (the Company or WPIC) is a wholly owned subsidiary of Physicians Insurance A Mutual Company (PI). WPIC was incorporated on May 8, 1998, and was granted a certificate of authority by the Washington State Office of the Insurance Commissioner (the Department) on October 22, 1998. WPIC was formed to provide professional liability and general liability insurance to hospitals and to provide business owners' policies and provider stop-loss insurance to physicians. All business underwritten by WPIC was fully ceded to PI, except premiums related to facultative reinsurance.

WPIC did not renew all of its hospital professional liability business at the natural expiration date of each policy during 2004. All business owners' policies and most provider stop-loss business were renewed by PI effective January 1, 2005. Once the last remaining stop-loss policy expired on April 1, 2006, the account was renewed by PI. After that date, WPIC has no ongoing risk. PI will continue to manage the orderly runoff of WPIC's liabilities.

The Company, domiciled in Washington State, prepares its statutory-basis financial statements in conformity with the National Association of Insurance Commissioners' (NAIC) Accounting Practices and Procedures Manual (effective March 2017), which has been adopted by the Department. The Company employs no accounting practices that differ from those adopted by the Department.


• Certain assets designated as "nonadmitted" assets are excluded from the balance sheets, and the changes in such assets are credited or charged directly to unassigned surplus. Under GAAP, such assets are included in the balance sheets to the extent that those assets are not impaired.

• Investments in bonds are recorded at amortized cost or fair value based on their NAIC rating. Under GAAP, such fixed maturity investments would be designated at purchase as held-to-maturity, trading, or available-for-sale. Held-to-maturity fixed maturity investments would be reported at amortized cost, and the remaining fixed maturity investments would be reported at fair value, with unrealized holding gains and losses reported in operations for those designated as trading and as a separate component of other comprehensive income, net of the related deferred taxes, for those designated as availablefor-sale.

1801-2544835 7


Notes to Financial Statements - Statutory Basis ( continued)



• The statements of cash flow differ in certain respects from the presentation required byGAAP.

• Realized gains or losses are recorded net of tax in the statements of income. Under GAAP, the tax associated with realized gains or losses is recorded as an income tax expense or benefit.

The effects of the foregoing variances from GAAP on the Company's statutory-basis financial statements have not been detennined, but are presumed to be material.




Investments


1801-2544835 8




Mortgage-backed securities are adjusted using the prospective method. Prepayment assumptions for single and multiclass mortgage-backed and asset-backed securities are initially obtained from broker/dealer statements. Updates to prepayment assumptions are obtained from independent pncmg sources.

The Company uses the first-in, first-out method in determining gains and losses from the sale of investments. The Company monitors investments for other-than-temporary impairment. In determining whether the losses are temporary or other-than-temporary, the Company considers (1) the length of time and extent to which the fair value has been less than the cost or carrying value, (2) the financial strength of the issuer, and (3) its intent to sell the security or the Company's ability to hold the security long enough to recover in value.



The reserves for losses and loss adjustment expenses are established on the basis of reported losses (case-basis method). Provision is also made for claims incurred but not reported and related loss adjustment expenses. These amounts are based on the estimates of management and are subject to risks and uncertainties. Changes in estimates of losses and loss adjustment expenses are included in income for the period in which the estimates are changed. The Company does not discount loss and loss adjustment expense reserves. The method of making such estimates and establishing the resulting reserves is based on actuarial assumptions of future contingencies and the applicability of other data sources such as recent settlements, claim frequency, and other economic and social factors. A provision for inflation in the calculation of estimated future claims costs is implicit in the calculation because reliance is placed both on actual historical data that reflects past inflation and on other factors that are considered to be appropriate modifiers of past experience. Although the Company considers its experience and industry data in determining such reserves, assumptions and projections of future events are necessary, and the ultimate amounts may differ materially from the amounts recorded or disclosed.

1801-2544835 9



1. Description of the Company and Significant Accounting Policies ( continued)

Reinsurance


The Company protects itself from losses by reinsuring 100% of its losses. WPIC is 100% reinsured by PI for policy limits up to $5,000,000. Higher limits are placed in the facultative market. Unsecured reinsurance recoverables with PI amount to $0 and $1,621,935 as of December 31, 2017 and 2016, respectively. WPIC would be ultimately liable for these amounts in the event that PI was unable to meet these ceded loss obligations.


The Company accounts for income taxes under the liability method, which requires the recognition of deferred taxes and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are limited to those that will more likely than not ( defined as a likelihood of more than 50%) generate a tax benefit, and a valuation allowance is established if necessary to reduce the deferred tax asset to an amount that is more likely than not to be realized. No valuation allowance has been recorded as of December 31, 2017 and 2016.

Deferred income taxes are further subject to limitations as to the amount of deferred income tax assets that may be reported as "admitted assets." Admitted deferred tax assets are limited to: (1) the amount of federal income taxes paid in prior years that can be recovered through loss carrybacks for existing temporary differences that reverse within the IRS loss carryback provision; (2) the lesser of the remaining gross deferred tax assets expected to be realized within one year to three years of the balance sheet date or 10% to 15% of capital and surplus, excluding surplus arising from any net deferred tax assets, EDP equipment, operating software, and net positive goodwill; and (3) the amount of remaining gross deferred tax assets that can be offset against existing gross deferred tax liabilities. The Company considers character ( capital or ordinary) in admitting deferred tax assets. Deferred income taxes do not include amounts for state income taxes.

1801-2544835 10




Use of Estimates

The preparation of financial statements in conformity with accounting practices prescribed or permitted by the Department requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the statutory-basis financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounts subject to management estimates are reserves for losses and loss adjustment expenses, reinsurance recoverables on unpaid losses and loss adjustment expenses, and other-than-temporary impairment of invested assets.

Subsequent Events

The Company has evaluated subsequent events through May 7, 2018, the date on which the Company's financial statements were available to be issued.

2. Investments


Cost or Gross Gross Amortized Unrealized Unrealized Fair

Cost Gains Losses Value December 31, 2017 U.S. treasury securities and


Obligations of states and political subdivisions 976,828 28,037 1,004,865

Corporate securities 4,261,114 99,571 (6,743) 4,353,942 Mortgage-backed securities 970:905 23,775 (847} 993,833 Total bonds $ 13,147,484 $ 305,032 $ (32,330} $ 13,420,186

1801-2544835 11



2. Investments ( continued)




Obligations of states and political subdivisions 1,377,628 24,384 (46) 1,401,966

Corporate securities 3,736,758 111,525 (17,258) 3,831,025 Mortgage-backed securities 840,952 32,675 (2,536) 871,091 Total bonds $ 13,289,177 $ 363,803 $ (32,051) $ 13,620,929


Due one year or less Due between one year and five years Due between five years and ten years Due after ten years Mortgage-backed securities

Cost or Amortized

Cost

$ 1,940,212 4,995,685 4,872,762

367,920 970,905

$13,147,484

Fair Value

$ 1,942,906 5,068,490 4,998,475

416,482 993,833

$13,420,186

Proceeds from sales of investments in bonds during 2017 and 2016 were $734,680 and $111,156, respectively. Gross gains of $447 and $9,209 and gross losses of $1,503 and $0 were realized on those sales during 2017 and 2016, respectively.

1801-2544835 12




The Company has debt securities on deposit with the Department for the protection of policyholders. The amortized cost of these securities at December 31, 201 7 and 2016 was $1,012,135 and $1,013,956, respectively.


Investment income Less investment expenses

2017 2016

$ 379,107 $ (60,087)

$ 319,020 $

380,388 (60,548) 319,840


Provided below is a summary of securities that were in an unrealized loss position as of December 31, 2017 and 2016. Management does not believe any individual unrealized loss as of December 31, 2017 and 2016 represents an other-than-temporary impairment, as the quantitative and qualitative criteria used by management to determine other-than-temporary impairment have not been met. The Company has the intent and ability, at the reporting date, to hold these investments until maturity or until fair value recovers above cost or amortized cost. In 2017 and 2016, there were no realized losses due to other-than-temporary impairments.

Less Than 12 Months 12 Months or More Total Fair Unrealized Fair Unrealized Fair Unrealized

Value Losses Value Losses Value Losses (In Thousands)



Obligations of states and political subdivisions

Corporate securities 923 4 204 3 1,127 7 Mortgage-backed securities 246 246 Temporarily impaired securities $ 42030 $ 24 $ 349 $ 8 $ 42379 $ 32

1801-2544835 13







U.S. government corporations and agencies $ 1,937 $ 12 $ - $ - $ 1,937 $ 12

Obligations of states and political subdivisions 230 230

Corporate securities 1,065 17 1,065 17 Mortgage-backed securities 291 3 291 3 Temporarily impaired securities $ 3,523 $ 32 $ - $ - $ 3,523 $ 32



The following methods and assumptions were used by the Company in estimating the "fair value" of financial instruments in the accompanying financial statements and notes:

Cash and short-term investments: The carrying amounts reported in the accompanying balance sheets for these financial instruments approximate fair value.



1801-2544835 14



3. Fair Value of Financial Instruments ( continued)


Level 1 - Valuations based on quoted prices for identical assets and liabilities m active markets.

Level 2 - Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 - Valuations based on unobservable inputs reflecting the Company's own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.


The Company has short-term investments recorded on the balance sheets at fair value on a recurring basis. The Company has no assets or liabilities recorded on the balance sheets at fair value on a nonrecurring basis.

Aggregate fair value of all financial instruments and the level within the fair value hierarchy for December 31, 2017 and 2016, are as follows:

Aggregate Not Practical Type of Fair Admitted (Carrying

Financial Instrument Value Assets Level 1 Level 2 Level3 Value}

2017 Bonds $ 13,420,186 $ 13,147,484 $ 5,259,470 $ 8,160,716 $ - $ Short-term investments 27,038 27,038 27,038

Aggregate Not Practical Type of Fair Admitted (Carrying

Financial Instrument Value Assets Level 1 Level 2 Level3 Value}

2016 Bonds $ 13,620,929 $ 13,289,177 $4,748,714 $ 8,872,215 $ - $ Short-term investments 14,854 14,854 14,854

1801-2544835 15




Loss and loss adjustment expense reserves are 100% reinsured by PI. Therefore, net reserve balances at December 31, 2017 and 2016 are $0 and $0, respectively, and there were no net incurred or paid losses in the years ended December 31, 2017 or 2016. Net reserves reflect reinsurance recoverable on unpaid losses and loss adjustment expenses of $0 and $1,621,935 at December 31, 2017 and 2016, respectively.


The Company has no deferred tax assets or liabilities as of December 31, 2017 or 2016, and, therefore, no admissibility calculation was performed.

The Company did not utilize any reinsurance tax planning or any other tax planning strategies in 201 7 or 2016 that would have had an impact on gross and net deferred tax assets.



2017 2016 Change

(a) Current federal income tax expense $ 70,960 $ 67,949 $ 3,011 (b) Foreign (c) Subtotal 70,960 67,949 3,011 ( d) Tax on capital gains (333) 2,908 (3,241) (e) Utilization of capital loss carryforward (f) Other, including prior year adjustment 4,843 {4,8431 (g) Federal income tax incurred $ 70,627 $ 75,700 $ (5,073)

The federal income tax expense incurred differs from the amount computed by applying the expected U.S. corporate income tax rate of 34% to income before taxes for the years ended December 31, 2017 and 2016, primarily due to tax-exempt income.

1801-2544835 16



5. Federal Income Taxes (continued)

The following represents income tax expense for 2017, 2016, and 2015 that is available for recoupment in the event of future net losses:

Ordinary Capital Total

2017 $ 70,960 $ (333) $ 70,627 2016 67,949 2,908 70,857 2015 NA 1,132 1,132

$ 138,909 $ 3,707 $ 142,616



The Company files a consolidated federal income tax return with its parent company, PI. The consolidated tax return also includes PI' s other subsidiaries. The method of taxation between the companies is subject to written agreement, approved by the Board of Directors. Allocation is based upon separate return calculations with current credit for net losses. Intercompany tax balances are settled annually in the first quarter of the following year.


WPIC is a stock insurance company and a wholly owned subsidiary of PI. PI performs substantially all services for WPIC and is reimbursed under a written management services agreement. Costs are shared based on an analysis of the cost of services provided to the Company. Pursuant to the agreement, operating costs reimbursed were $50,000 for each of the years ended December 31, 2017 and 2016. The agreement continues indefinitely unless terminated by either party upon one year's written notice.

1801-2544835 17




Without prior approval of the Department, dividends to the stockholder are limited in 2018 to $179,200, an amount that is based on restrictions relating to the prior year's net income less capital gains net of taxes. An ordinary dividend in the amount of$179,000 and $194,000 were paid by the Company during 2017 and 2016 respectively.

The Company is subject to Risk-Based Capital (RBC) requirements of the NAIC, which require that certain amounts of capital be maintained. As of December 31, 2017 and 2016, the Company's RBC exceeded the required amount.

1801-2544835 18

EY I Assurance I Tax I Transactions I Advisory

About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

© 2018 Ernst & Young LLP. A 11 Rights Reserved.

ey.com

FINANCIAL STATEMENTS STATUTORY BASIS

Western Professional Insurance Company (A Wholly Owned Subsidiary of Physicians Insurance A Mutual Company) Years Ended December 31, 2018 and 201 7 With Report of Independent Auditors

Ernst & Young LLP





Contents

Report of Independent Auditors ....................................................................................................... 1


Balance Sheets - Statutory Basis ..................................................................................................... 3 Statements of Income - Statutory Basis ......................................................................................... .4 Statements of Changes in Capital and Surplus - Statutory Basis .................................................... 5 Statements of Cash Flows - Statutory Basis .................................................................................... 6 Notes to Financial Statements - Statutory Basis ............................................................................. 7

1901-3043754


Ernst & Young LLP Tel: +l 206 6211800 Suite 3500 Fax:+ 1 206 654 7799 999 Third Avenue ey.com Seattle, WA 98104-4086



We have audited the accompanying statutory-basis financial statements of Western Professional Insurance Company, which comprise the balance sheets as of December 31, 2018 and 2017, and the related statements of income, changes in capital and surplus and cash flows for the years then ended, and the related notes to the financial statements.

Management's Responsibility for the Financial Statements


Auditor's Responsibility


An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.


1901-3043754 1



Ernst & Young LLP Tel: +l 206 6211800 Suite 3500 Fax:+ 1 206 654 7799 999 Third Avenue ey.com Seattle, WA 98104-4086


As described in Note 1, to the statutory-basis financial statements, the Company prepared these financial statements using accounting practices prescribed or permitted by the Washington State Office of the Insurance Commissioner, which is a basis of accounting other than U.S. generally accepted accounting principles. The effects on the financial statements of the variances between these statutory accounting practices and U.S. generally accepted accounting principles, although not reasonably determinable, are presumed to be material.


In our opinion, because of the significance of the matter described in the Basis for Adverse Opinion on U.S. Generally Accepted Accounting Principles paragraph, the statutory-basis financial statements referred to above do not present fairly, in conformity with U.S. generally accepted accounting principles, the financial position of Western Professional Insurance Company at December 31, 2018 and 201 7, or the results of its operations or its cash flows for the years then ended.


In our opinion, the statutory-basis financial statements referred to above present fairly, in all material respects, the financial position of Western Professional Insurance Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, on the basis of accounting described in Note 1.

May 3, 2019

1901-3043754 2



Balance Sheets - Statutory Basis

Admitted assets Cash and investments:

Bonds, at amortized cost ( fair value of $13,173,299 and $13,420,186 at December 31, 2018 and 2017, respectively)

Cash of $250,000 and $375,365, and short-term investments of$176,570 and $27,038 at December 31, 2018 and 2017, respectively

Total cash and investments

Accrued interest income Total admitted assets

Liabilities and capital and surplus Liabilities:

Other expenses Payable to affiliate Federal income taxes payable

Total liabilities

Capital and surplus: Capital stock Paid-in surplus Unassigned surplus

Total capital and surplus Total liabilities and capital and surplus


1901-3043754

December 31 2018 2017

$ 13,154,077 $ 13,147,484

426,570 402,403 13,580,647 13,549,887

91,016 102,619 $ 13,671,663 $ 13,652,506

$ 5,102 $ 25,675 52,709 83,486

3,000,000 7,000,000 3,588,177

13,588,177

27,120 70,627 97,747

3,000,000 7,000,000 3,554,759

13,554,759 $ 13,671,663 $ 13,652,506

3


Statements of Income - Statutory Basis


Revenues: Net premiums earned

Losses and expenses: Underwriting expenses

Net underwriting loss

Net investment income earned Net realized capital gains (losses), less income taxes (benefit)

of $872 and $(333) at December 31, 2018 and 2017, respectively

Net investment gain

Income before federal income taxes

Federal income taxes incurred Net income


1901-3043754

$

$

2018 2017

- $

69,544 (69,544)

330,513

3,285 333,798

264,254

51,836 212,418 $

68,112 (68,112)

319,020

{7232 318,297

250,185

70,960 179,225

4


Statements of Changes in Capital and Surplus - Statutory Basis

Capital stock: Beginning and end of year

Paid-in surplus: Beginning and end of year

Unassigned surplus: Beginning of year

Net income Dividends to stockholder

End of year Total capital and surplus


1901-3043754


$ 3,000,000 $ 3,000,000

7,000,000

3,554,759 212,418

(179,000) 3,588,177

$ 13,588,177

7,000,000

3,554,534 179,225

(179,000) 3,554,759

$ 13,554,759

5


Statements of Cash Flow - Statutory Basis


Operating activities Net investment income $ 354,123 $ 334,728 Total 354,123 334,728

Expenses paid (64,442) (68,339) Federal income taxes paid {70,627} (70,857) Total {135,069} {139,1962 Net cash provided by operating activities 219,054 195,532

Investing activities Proceeds from bonds sold, matured, or repaid 3,010,853 2,313,626 Cost of bonds acquired {3,025,295} (2,196,259) Net cash (used in) provided by investing activities (14,442) 117,367

Financing and miscellaneous activities Dividends to stockholder (179,000) (179,000) Other cash used {1,445} {972 Net cash used in financing and miscellaneous activities {180,445} (179,0972

Net change in cash and short-term investments 24,167 133,802 Cash and short-term investments at beginning of year 402,403 268,601 Cash and short-term investments at end of year $ 426,570 $ 402,403


1901-3043754 6


Notes to Financial Statements - Statutory Basis

December 31, 2018


Western Professional Insurance Company (the Company or WPIC) is a wholly owned subsidiary of Physicians Insurance A Mutual Company (PI). WPIC was incorporated on May 8, 1998, and was granted a certificate of authority by the Washington State Office of the Insurance Commissioner (the Department) on October 22, 1998. WPIC was formed to provide professional liability and general liability insurance to hospitals and to provide business owners' policies and provider stop-loss insurance to physicians. All business underwritten by WPIC was fully ceded to PI, except premiums related to facultative reinsurance.

WPIC did not renew all of its hospital professional liability business at the natural expiration date of each policy during 2004. All business owners' policies and most provider stop-loss business were renewed by PI effective January 1, 2005. Once the last remaining stop-loss policy expired on April 1, 2006, the account was renewed by PI. After that date, WPIC has no ongoing risk. PI will continue to manage the orderly runoff of WPIC's liabilities. As of December 31, 2018, there were no open claims.

The Company, domiciled in Washington state, prepares its statutory-basis financial statements in conformity with the National Association of Insurance Commissioners (NAIC) Accounting Practices and Procedures Manual ( effective March 2018), which has been adopted by the Department. The Company employs no accounting practices that differ from those adopted by the Department.


• Certain assets designated as "nonadmitted" assets are excluded from the balance sheets, and the changes in such assets are credited or charged directly to unassigned surplus. Under GAAP, such assets are included on the balance sheets to the extent that those assets are not impaired.

• Investments in bonds are recorded at amortized cost or fair value based on their NAIC rating. Under GAAP, such fixed maturity investments would be designated at purchase as held-to-maturity, trading, or available-for-sale. Held-to-maturity fixed maturity investments would be reported at amortized cost, and the remaining fixed maturity investments would be reported at fair value, with unrealized holding gains and losses reported in operations for those designated as trading and as a separate component of other comprehensive income, net of the related deferred taxes, for those designated as availablefor-sale.

1901-3043754 7





• The statements of cash flows differ in certain respects from the presentation required by GAAP.

• Realized gains or losses are recorded net of tax on the statements of income. Under GAAP, the tax associated with realized gains or losses is recorded as an income tax expense or benefit.

The effects of the foregoing variances from GAAP on the Company's statutory-basis financial statements have not been determined, but are presumed to be material.




Investments


1901-3043754 8




Mortgage-backed securities are adjusted using the prospective method. Prepayment assumptions for single and multiclass mortgage-backed and asset-backed securities are initially obtained from broker/dealer statements. Updates to prepayment assumptions are obtained from independent pncmg sources.

The Company uses the first-in, first-out method in determining gains and losses from the sale of investments. The Company monitors investments for other-than-temporary impairment. In determining whether the losses are temporary or other than temporary, the Company considers (1) the length of time and extent to which the fair value has been less than the cost or carrying value, (2) the financial strength of the issuer, and (3) its intent to sell the security or the Company's ability to hold the security long enough to recover in value.



The reserves for losses and loss adjustment expenses are established on the basis ofreported losses ( case-basis method). Provision is also made for claims incurred but not reported and related loss adjustment expenses. These amounts are based on the estimates of management and are subject to risks and uncertainties. Changes in estimates of losses and loss adjustment expenses are included in income for the period in which the estimates are changed. The Company does not discount loss and loss adjustment expense reserves. The method of making such estimates and establishing the resulting reserves is based on actuarial assumptions of future contingencies and the applicability of other data sources such as recent settlements, claim frequency, and other economic and social factors. A provision for inflation in the calculation of estimated future claims costs is implicit in the calculation because reliance is placed both on actual historical data that reflects past inflation and on other factors that are considered to be appropriate modifiers of past experience. Although the Company considers its experience and industry data in determining such reserves, assumptions and projections of future events are necessary, and the ultimate amounts may differ materially from the amounts recorded or disclosed.

1901-3043754 9




Reinsurance


The Company protects itself from losses by re insuring 100% of its losses. WPI C is 100% re insured by PI for policy limits up to $5,000,000. Higher limits are placed in the facultative market. Unsecured reinsurance recoverables with PI amount to zero as of December 31, 2018 and 2017. WPIC would be ultimately liable for these amounts in the event that PI was unable to meet these ceded loss obligations.


The Company accounts for income taxes under the liability method, which requires the recognition of deferred taxes and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are limited to those that will more likely than not ( defined as a likelihood of more than 50%) generate a tax benefit, and a valuation allowance is established if necessary to reduce the deferred tax asset to an amount that is more likely than not to be realized. No valuation allowance has been recorded as of December 31, 2018 or 2017.

Deferred income taxes are further subject to limitations as to the amount of deferred income tax assets that may be reported as "admitted assets." Admitted deferred tax assets are limited to (1) the amount of federal income taxes paid in prior years that can be recovered through loss carry backs for existing temporary differences that reverse within the Internal Revenue Service loss carryback provision; (2) the lesser of the remaining gross deferred tax assets expected to be realized within one year to three years of the balance sheet date or 10% to 15% of capital and surplus, excluding surplus arising from any net deferred tax assets, electronic data processing (EDP) equipment, operating software, and net positive goodwill; and (3) the amount ofremaining gross deferred tax assets that can be offset against existing gross deferred tax liabilities. The Company considers character (capital or ordinary) in admitting deferred tax assets. Deferred income taxes do not include amounts for state income taxes.

1901-3043754 10




Use of Estimates

The preparation of financial statements in conformity with accounting practices prescribed or permitted by the Department requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the statutory-basis financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2. Investments





Obligations of states and political subdivisions 483,299 15,080 498,379

Corporate securities 3,526,382 16,425 (79,332) 3,463,475 Mortgage-backed securities 2,543,624 34,521 {10,659} 2,567,486 Total bonds $ 13,154,077 $ 162,995 $ {143,773} $ 13,173,299

1901-3043754 11







Obligations of states and political subdivisions 976,828 28,037 1,004,865

Corporate securities 4,261,114 99,571 (6,743) 4,353,942 Mortgage-backed securities 970,905 23,775 (8472 993,833 Total bonds $ 13,147,484 $ 305,032 $ {32,330} $ 13,420,186


Due in one year or less Due between one year and five years Due between five years and ten years Due after ten years Mortgage-backed securities

Cost or Amortized

Cost

$ 462,961 5,320,876 4,458,523

368,093 2,543,624

$ 13,154,077

Fair Value

$ 460,466 5,327,183 4,431,538

386,626 2,567,486

$ 13,173,299

Proceeds from sales ofinvestments in bonds during 2018 and 2017 were $1,254,968 and $734,680, respectively. Gross gains of $4,921 and $447 and gross losses of $764 and $1,503 were realized on those sales during 2018 and 2017, respectively.

1901-3043754 12




The Company has debt securities on deposit with the Department for the protection of policyholders. The amortized cost of these securities at December 31, 2018 and 2017, was $1,118,040 and $1,012,135, respectively.


Investment income Less investment expenses

2018 2017

$ 390,365 $ (59,852)

$ 330,513 $

379,107 (60,087) 319,020


Provided below is a summary of securities that were in an unrealized loss position as of December 31, 2018 and 2017. Management does not believe any individual unrealized loss as of December 31, 2018 and 2017, represents an other-than-temporary impairment, as the quantitative and qualitative criteria used by management to determine other-than-temporary impairment have not been met. The Company does not have the intent to sell and has the intent and ability, at the reporting date, to hold these investments until maturity or until fair value recovers above cost or amortized cost. In 2018 and 2017, there were no realized losses due to other-than-temporary impairments.




U.S. government corporations and agencies $ 2,240 $ 15 $ 2,055 $ 39 $ 4,295 $ 54

Corporate securities 1,662 38 940 41 2,602 79 Mortgage-backed securities 256 5 210 6 466 11 Temporarily impaired securities $ 4,158 $ 58 $ 3,205 $ 86 $ 7,363 $ 144

1901-3043754 13








Corporate securities 923 4 204 3 1,127 7 Mortgage-backed securities 246 246 Temporarily impaired securities $ 4,030 $ 24 $ 349 $ 8 $ 4,379 $ 32



The following methods and assumptions were used by the Company in estimating the fair value of financial instruments in the accompanying financial statements and notes:

Cash and short-term investments: The carrying amounts reported on the accompanying balance sheets for these financial instruments approximate fair value.



!901-3043754 14



3. Fair Value of Financial Instruments (continued)


Level 1 - Valuations based on quoted prices for identical assets and liabilities m active markets.

Level 2 - Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 - Valuations based on unobservable inputs reflecting the Company's own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.


The Company has short-term investments recorded on the balance sheets at fair value on a recurring basis. The Company has no assets or liabilities recorded on the balance sheets at fair value on a nonrecurring basis.

Aggregate fair values of all financial instruments and the level within the fair value hierarchy for December 31, 2018 and 2017, are as follows:

Aggregate Not Practical Type of Fair Admitted Net Asset (Carrying

Financial Instrument Value Assets Level 1 Level 2 Level 3 Value Value)

2018 Bonds $ 13,173,299 $ 13,154,077 $ 4,865,017 $ 8,308,282 $ -$ $ Short-term investments 176,570 176,570 176,570

2017 Bonds $ 13,420,186 $ 13,147,484 $ 5,259,470 $ 8,160,716 $ -$ $ Short-term investments 27,038 27,038 27,038

1901-3043754 15




Loss and loss adjustment expense reserves are 100% reinsured by PI. Therefore, net reserve balances at both December 31, 2018 and 2017, are zero, and there were no net incurred or paid losses in the years ended December 31, 2018 or 201 7. Gross and net reserves were zero at both December 31, 2018 and 2017. As of December 31, 2018, there were no outstanding claims.


The Company files a consolidated federal income tax return with its parent company, PI. The consolidated tax return also includes PI's other subsidiaries. The method of taxation between the companies is subject to written agreement, approved by the Board of Directors. Allocation is based upon separate return calculations with current credit for net losses. Intercompany tax balances are settled annually in the first quarter of the following year.

The Company has no deferred tax assets or liabilities as of December 31, 2018 or 201 7, and, therefore, no admissibility calculation was performed.

The Company did not utilize any reinsurance tax planning or any other tax planning strategies in 2018 or 2017 that would have had an impact on gross or net deferred tax assets.



2018 2017 Change

(a) Current federal income tax expense $ 51,836 $ 70,960 $ (19,124) (b) Foreign ( c) Subtotal 51,836 70,960 (19,124) (d) Tax on capital gains 872 (333) 1,205 ( e) Utilization of capital loss carryforward (f) Other, including prior year adjustment (g) Federal income tax incurred $ 52,708 $ 70,627 $ {17,919}

1901-3043754 16



5. Federal Income Taxes ( continued)

The federal income tax expense incurred differs from the amount computed by applying the expected U.S. corporate income tax rate of 21 % and 34% to income before taxes for the years ended December 31, 2018 and 2017, respectively, primarily due to tax-exempt income.

The following represents income tax expense that is available for recoupment in the event of future net losses:

Ordinary Capital Total

2018 $ 51,836 $ 872 $ 52,708 2017 70,960 (333) 70,627 2016 NA 2,908 2,908

$ 122,796 $ 3,447 $ 126,243




WPIC is a stock insurance company and a wholly owned subsidiary of Pl. PI performs substantially all services for WPIC and is reimbursed under a written management services agreement. Costs are shared based on an analysis of the cost of services provided to the Company. Pursuant to the agreement, operating costs reimbursed were $50,000 for each of the years ended December 31, 2018 and 201 7. The agreement continues indefinitely unless terminated by either party upon one year's written notice.

1901-3043754 17




Without prior approval of the Department, dividends to the stockholder are limited in 2019 to $209,100, an amount that is based on restrictions relating to the prior year's net income less capital gains net of taxes. An ordinary dividend in the amount of $179,000 was paid by the Company during 2018 and 2017.

The Company is subject to risk-based capital (RBC) requirements of the NAIC, which require that certain amounts of capital be maintained. As of December 31, 2018 and 2017, the Company's RBC exceeded the required amount.

8. Subsequent Events

On February 27, 2019, the Board of Directors of WPIC declared an extraordinary dividend in the amount of $6,088,177 to its sole shareholder, PI, as permitted under the laws and regulations applicable to the Company in the State of Washington payable on or after March 28, 2019. WPIC's surplus will be approximately $7,500,000 after the dividend distribution.

1901-3043754 18

EY I Assurance I Tax I Transactions I Advisory

About EV

EV is a global leader in assurance, tax, transaction and advisory services.

The insights and quality services we deliver help build trust and confidence

in the capital markets and in economies the world over. We develop

outstanding leaders who team to deliver on our promises to all of our

stakeholders. In so doing, we play a critical role in building a better

working world for our people, for our clients and for our communities.

EV refers to the global organization, and may refer to one or more, of

the member firms of Ernst & Young Global Limited, each of which is a

separate legal entity. Ernst & Young Global Limited, a UK company limited

by guarantee, does not provide services to clients. For more information

about our organization, please visit ey.com.

© 2019 Ernst & Young LLP.

All Rights Reserved.

ey.com

Western Professional Insurance Company Statutory Balance Sheet

Comparing March 31, 2019 to December 31, 2018 (Unaudited)

ASSETS

1. Bonds at Amortized Value 2019 Cost $13,455,156; Market $13,645,178 2018 Cost $13,151,136; Market $13,173,299

2. Preferred Stocks at Cost

3. Short-Term Investments

4. Total Invested Assets

5. Cash on Deposit 6. Premium Receivable 7. Deferred Federal Income Tax Asset (Liability) 8. Accrued Investment Income 9. Receivable from Reinsurers on Losses 10. Receivable for Securities Sold 11 . Other Assets

12. TOTAL ASSETS

LIABILITIES AND POLICYHOLDERS' SURPLUS

LIABILITIES: 13. Unpaid Losses & LAE 14. Unearned Premium 15. Payable (Receivable) to (from) Affiliates 16. Premium Deposits 17. Reinsurance Premium Payable 18. Other Liabilities 19. Federal Income Tax Payable (Recoverable)

20. TOTAL LIABILITIES

POLICYHOLDERS' SURPLUS: 21. Common Stock 22. Paid In Surplus 23. Unassigned Surplus

24. Total Policyholders' Surplus

25. TOTAL LIABILITIES AND POLICYHOLDERS' SURPLUS

March 2019

$13,407,241

36,804

13,444,045

159,834

79,308 0 0 0

$13,683,187

$0

26,941

0 13,732

40,673

3,000,000 7,000,000 3,642,514

13,642,514

$13,683,187

December 31 2018

$13,154,077

176,570

13,330,647

250,000

91,016 0 0 0

$13,671,663

0

$0

25,675

5,102 52,709

83,486

3,000,000 7,000,000 3,588,177

13,588,177

$13,671,663 2

Western Professional Insurance Company Statutory Statement of Income

Comparing March 31, 2019 to March 31, 2018

(Unaudited)

Actual Actual UNDERWRITING INCOME: 2,019 2018

1. Direct Written Premium $0 $0 2. Less: Reinsurance Ceded 0 0

3. Net Written Premium 0 0 4. Change in Unearned Premium

5. Net Earned Premium 0 0

6. Loss & ALAE Incurred 0 0 7. Less: Loss & ALAE Ceded 0 0 8. ULAE & Operating Expenses 23,813 28,484

9. Total Expenses Incurred 23,813 28,484

10. Net Underwriting Gain (Loss) (23,813) (28,484)

INVESTMENT INCOME:

11. Taxable Investment Income 98,115 89,582 12. Tax-Exempt Investment Income 3,575 5,691 13. Net Realized Capital Gain (Loss) 0 2,720

14. Total Investment Income 101,690 97,993 15. Less: Investment Expense 9,808 15,082

16. Net Investment Income 91,882 82,910 17. Other Income 0 0

18. Net Investment & Other Income 91,882 82,910

19. Income Before Dividends & FIT 68,070 54,426 (Lines 10 + 18)

20. Dividends & Loss Experience Credits

21. Income Before Federal Income Tax 68,070 54,426

22. FIT Expense (Recoverable) 13,732 10,414

23. NET INCOME 54,338 $44,013 3

Documents

EXHIBIT 1 to FORM A Stock Purchase Agreement