The following tables include selected financial data for ICC prior to the offering which closed during the first quarter of 2017. The selected statements of operations and expenses data for each of the year ended December 31, 2016 and the selected balance sheet data as of December 31, 2016 is derived from the audited consolidated financial statements of ICC and its subsidiaries. The selected statements of operations and expenses data for the years ended December 31, 2018 and 2017 and the selected balance sheet data as of December 31, 2018 and 2017 are derived from the audited consolidated financial statements of ICC Holdings, Inc. and its subsidiaries contained herein. This data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes thereto included elsewhere in this report.
We evaluate our insurance operations by monitoring certain key measures of growth and profitability. In addition to GAAP measures, we utilize certain non-GAAP financial measures that we believe are valuable in managing our business and for providing comparisons to our peers. These non-GAAP measures are loss and settlement expense ratios, expense ratios and combined ratios, written premiums, and net written premiums to statutory surplus ratio.
For the year ended December 31, 2018, we had direct written premiums of $61.1 million, net premiums earned of $47.1 million, and net income of $0.9 million. For the year ended December 31, 2017, we had direct premiums written of $53.7 million, net premiums earned of $44.2 million, and net income of $0.7 million. At December 31, 2018, we had total assets of $150.3 million and equity of $58.6 million. At December 31, 2017 we had total assets of $152.3 million and equity of $64.1 million.
Expenses incurred to underwrite risks are referred to as policy acquisition expenses. Variable policy acquisition costs consist of commission expenses, premium taxes and certain other underwriting expenses that vary with and are primarily related to the writing and acquisition of new and renewal business. These policy acquisition costs are deferred and amortized over the effective period of the related insurance policies. Fixed policy acquisition costs, referred to herein as underwriting and administrative expenses are expensed as incurred. These costs include salaries, rent, office supplies, and depreciation. Other operating expenses consists primarily of information technology costs, accounting and internal control salaries, as well as audit and legal expenses.
Other Than Temporary Impairment-Under current accounting standards, an OTTI write-down of debt securities, where fair value is below amortized cost, is triggered by circumstances where (1) an entity has the intent to sell a security, (2) it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis or (3) the entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the difference between the security’s amortized cost and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other
The Company defers commissions, premium taxes, and certain other costs that are incrementally or directly related to the successful acquisition of new or renewal insurance contracts. Acquisition-related costs may be deemed ineligible for deferral when they are based on contingent or performance criteria beyond the basic acquisition of the insurance contract or when efforts to obtain or renew the insurance contract are unsuccessful. All eligible costs are capitalized and charged to expense in proportion to premium revenue recognized. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value. This deferral methodology applies to both gross and ceded
The Company considers uncertainties in income taxes and recognizes those in its financial statements as required. As it relates to uncertainties in income taxes, unrecognized tax benefits, including interest and penalty accruals, are not considered material to the consolidated financial statements. Also, no tax uncertainties are expected to result in significant increases or decreases to unrecognized tax benefits within the next 12-month period. Penalties and interest related to income tax uncertainties, should they occur, would be included in income tax expense in the period in which they are incurred.
Comprehensive earnings include net earnings plus unrealized gains/losses on available-for-sale investment securities, net of tax. In reporting the components of comprehensive earnings on a net basis in the statement of earnings, the Company used a 21% tax rate for 2018 and 2017 and 34% for all prior periods.
Direct premiums written increased by $7,455,000, or 13.9%, primarily from organic growth including the impact of recent geographical expansion efforts from 2017 to 2018, while net written premium increased by $4,026,000, or 8.8%, during the same period. Net premiums earned grew by $2,904,000, or 6.6%
For the years ended December 31, 2018, and 2017, we ceded to reinsurers $10,759,000 and $7,948,000 of earned premiums, respectively. Ceded earned premiums as a percent of direct premiums written were 17.6% in 2018, and 14.8% in 2017. This slight increase in ceded premium was driven by four reinsurance contract changes that took place during the year ended December 31, 2018.
Differences from the initial reserve estimates emerged as changes in the ultimate loss estimates as those estimates were updated through the reserve analysis process. The recognition of the changes in initial reserve estimates occurred over time as claims were reported, initial case reserves were established, initial reserves were reviewed in light of additional information and ultimate payments were made on the collective set of claims incurred as of that evaluation date. The new information on the ultimate settlement value of claims is updated until all claims in a defined set are settled. As a small specialty insurer with a niche product portfolio, our experience will ordinarily exhibit fluctuations from period to period. While management attempts to identify and react to systematic changes in the loss environment, management must also consider the volume of experience directly available to us and interpret any particular period’s indications with a realistic technical understanding of the reliability of those observations.
Our expense ratio decreased 49 basis points from 39.15% to 38.66% for the year ended December 31, 2018 as compared to 2017.
Our investment portfolio was comprised of 88.3%% and 87.8% of readily marketable, investment-grade fixed-maturity securities as of December 31, 2018 and 2017, respectively. The remainder of the portfolio is comprised of rental real estate, common and preferred stock. Net investment income is primarily comprised of interest earned and dividends paid on these securities and rental income on investment real estate, net of related investment expenses, and excludes realized gains and losses.
Net investment income increased by $258,000 for the year ended December 31, 2018 as compared to 2017, primarily from the growth of the investment portfolio. Average invested assets for 2018 were $110,610,000 compared to $96,254,000 for 2017, an increase of $14,356,000, or 14.9%.
Interest expense decreased to $141,000 for the year ended December 31, 2018 from $225,000 for the year ended December 31, 2017 as a result of paying off the debt related to the sale leaseback arrangements in the first quarter of 2018.
We reported income tax expense of $106,000 in 2018, as compared to $372,000 in 2017. The Company had historically recorded its deferred tax assets and liabilities using the statutory federal tax rate of 34%. The Public Law no. 115-97, an Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 (Tax Act) was signed into law on December 22, 2017 and lowered the federal corporate tax rate to 21% effective January 1, 2018. As a result, the Company revalued deferred tax items as of year-end 2017 to reflect the lower rate. The revaluation of deferred tax items increased income tax expense by $152,000 for the year ended December 31, 2017. Total income tax expense decreased in 2018 due to the decrease in earnings before income taxes in 2018 compared to 2017 as well as the additional tax expense recognized in 2017 related to the deferred tax revaluation.
1 Par value $0.01; authorized: 2018 - 10,000,000 shares and 2017 - 10,000,000 shares; issued: 2018 - 3,500,000 and 2017 - 3,500,000 shares; outstanding: 2018 - 2,992,734 and 2017 - 3,171,878 shares.
The following table provides case and IBNR reserves for losses and settlement expenses as of December 31, 2018 and 2017.
the impact of court decisions on insurance coverage issues, which can impact the ultimate cost of settling claims;
Our actuary is required to exercise a considerable degree of judgment in the evaluation of all of these and other factors in the analysis of our loss and settlement expense reserves, and related range of anticipated losses. Because of the level of uncertainty impacting the estimation process, it is reasonably possible that different actuaries would arrive at different conclusions. The method of determining the reserve range has not changed and the reserve range generated by our actuary is consistent with the observed development of our loss reserves over the last few years.
The estimation process for determining the liability for unpaid loss and settlement expense inherently results in adjustments each year for claims incurred (but not paid) in preceding years. Negative amounts reported for claims incurred related to prior years are a result of claims being settled for amounts less than originally estimated (favorable development). Positive amounts reported for claims incurred related to prior years are a result of claims being settled for amounts greater than originally estimated (unfavorable development). For the years ended December 31, 2018 and 2017, we experienced adverse development of $1.5 million and favorable development of $0.8 million, respectively.
As discussed earlier, the estimation of our reserves is based on several actuarial methods, each of which incorporates many quantitative assumptions. The judgment of the actuary plays an important role in selecting among various loss development factors and selecting the appropriate method, or combination of methods, to use for a given accident year. The ranges presented above represent the expected variability around the actuarially determined central estimate. The total range around our actuarially determined estimate varies from (14.1)% to (2.1)%. As shown in the table below, since 2013 the variance in our originally estimated accident year loss reserves has ranged from (11.0)% deficient to 11.5% redundant as of December 31, 2018.
Net unrealized gains in the corporate bond portfolio decreased $967,861 in 2018 from a gain of $950,648 in 2017 to a loss of $17,213 in 2018. The decrease was driven by the fact that US Treasury rates increased significantly in the first 9 months of the year (5yr US Treasury rate up ~75 bps), driving prices on Corporate bonds lower. While US Treasury rates dropped in the fourth quarter (5yr US Treasury rate down ~45 bps), Corporate bonds did not rebound as there was a 'risk-off' trade in the fourth quarter due to concerns about growth rates going forward. This caused spreads in Corporate bonds to widen about 40 bps which offset the positive impact the drop in Treasury rates had on the unrealized position.
As of December 31, 2018 and 2017, municipal bonds totaled $16,486,520 and $24,763,512, respectively with net unrealized gains of $338,225 and $959,844, respectively. The decrease was driven by the fact that US Treasury rates increased significantly in the first 9 months of the year (5yr US Treasury rate up ~75 bps), driving prices on Municipals lower. However, US Treasury rates dropped in the fourth quarter (5yr US Treasury rate down ~45 bps) which did help the Municipals recover some of the unrealized gains, but not enough to offset all that was lost in the first 9 months.
The equity portfolio consists of common stock as of December 31, 2018. The equity portfolio as of December 31, 2017 consisted of common and preferred stock. Net unrealized gains in the equity portfolio decreased $2,716,537 and increased $443,229 in 2018 and 2017, respectively. The equity markets declined between 10-20% in the fourth quarter, leading to this change in unrealized gains. Given the intent to hold and expectation of recovery to cost within a reasonable period of time, the Company does not consider most of its equities to be other-than-temporarily impaired. We have impaired three holdings due to company specific risks, resulting in an OTTI charge of $16,178.
The unrealized losses as of December 31, 2018 and 2017 were primarily related to changes in the interest rate environment as well as an overall decline in the equity markets. Fair values of interest rate sensitive instruments may be affected by increases and decreases in prevailing interest rates which generally translate, respectively, into decreases and increases in fair values of fixed maturity investments. The fair values of interest rate sensitive instruments also may be affected by the credit worthiness of the issuer, prepayment options, relative values of other investments, the liquidity of the instrument, and other general market conditions.
We use quoted values and other data provided by independent pricing services in our process for determining fair values of our investments. The evaluations of such pricing services represent an exit price and a good faith opinion as to what a buyer in the marketplace would pay for a security in a current sale. This pricing service provides us with one quote per instrument. For fixed maturity securities that have quoted prices in active markets, market quotations are provided. For fixed maturity securities that do not trade on a daily basis, the independent pricing service prepares estimates of fair value using a wide array of observable inputs including relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. The observable market inputs that our independent pricing service utilizes may include (listed in order of priority for use) benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers, and other reference data on markets, industry, and the economy. Additionally, the independent pricing service uses an option adjusted spread model to develop prepayment and interest rate scenarios. The pricing service did not use broker quotes in determining fair values of our investments.
As of December 31, 2018 and 2017, we had no material unrecognized tax benefits or accrued interest and penalties. Federal tax years 2014 through 2017 are open for examination. The tax return related to the year ended December 31, 2018 has not yet been filed.
ICC Holdings, Inc. secured a loan with American Bank & Trust in March 2017 in the amount of $3,500,000 and used the proceeds to repay ICC for the money borrowed by the ESOP. The term of the loan is five years bearing interest at 3.65% and the Company pledged stock and $1.5 million of trust assets as collateral for the loan. Additionally, the Company entered into two debt agreements in 2016 with BofI Federal Bank; one agreement for $500,000 and another debt agreement for $75,000. The terms of the loans were 36 months, but the Company had the option to prepay the $500,000 loan after 12 months. The Company paid off the remaining balance of the $500,000 loan in September 2017. The $75,000 loan was paid off in March 2018. The total balance of debt agreements at year end 2018 and 2017 was $3,484,606 and $3,534,195, respectively.
A compensation expense charge is booked monthly during each year for the shares committed to be allocated to participants that year, determined with reference to the fair market value of our stock at the time the commitment to allocate the shares is accrued and recognized. For the year ended December 31, 2018, we recognized compensation expense of $355,836 related to 23,437 shares of our common stock that were committed to be released to participants’ accounts for the year ended December 31, 2018. Of the 23,437 shares committed to be released, 1,867 shares were commited on December 31, 2018 and had no impact on the weighted average common shares outstanding for the year ended December 31, 2018. For the year ended December 31, 2017, we recognized compensation expense of $367,730 related to 21,878 shares of our common stock that were committed to be released to participants’ accounts for the year ended December 31, 2017. Of the 21,878 shares committed to be released, 2,320 shares were committed on December 31, 2017 and had no impact on the weighted average common shares outstanding for the year ended December 31, 2017. The fair value of the unearned ESOP shares as of December 31, 2018 and December 31, 2017 was $4,158,955 and $5,338,545, respectively.
Restricted Stock Units (RSUs) were granted for the first time in February 2018. RSUs have a grant date value equal to the closing price of the Company’s stock on the dates the shares are granted. The RSUs vest 1/3 over three years from the date of grant.
We maintain investment and reinsurance programs that are intended to provide sufficient funds to meet our obligations without forced sales of investments. We maintain a portion of our investment portfolio in relatively short-term and highly liquid assets to ensure the availability of funds.
For a discussion of new accounting pronouncements affecting us, see Note 1 - Summary of Significant Accounting Policies to the consolidated financials statements.
Consolidated Statements of Earnings and Comprehensive Earnings (Loss) (Years ended December 31, 2018 and 2017)
Consolidated Statements of Stockholders’ Equity (Years ended December 31, 2017 and 2016)
Consolidated Statements of Cash Flows (Years ended December 31, 2018 and 2017)
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
1 At December 31, 2018, common stock securities consist primarily of individual common stocks. At December 31, 2017, common stock consisted of exchange trade funds (ETF) made up primarily of Dividends Select and the S&P 500
2 Par value $0.01; authorized: 2018 - 10,000,000 shares and 2017 - 10,000,000 shares; issued: 2018 - 3,500,000 and 2017 - 3,500,000 shares; outstanding: 2018 - 2,992,734 and 2017 - 3,171,878 shares.
ICC Holdings, Inc. is a Pennsylvania corporation that was organized in 2016. As used in this Form 10-K, references to “the Company,” “we,” “us,” and “our” refer to the consolidated group. On a stand-alone basis ICC Holdings, Inc. is referred to as the “Parent Company.” The consolidated group consists of the holding company, ICC Holdings, Inc.; ICC Realty, LLC, a real estate services and holding company; Beverage Insurance Agency, Inc., an inactive insurance agency; Estrella Innovative Solutions, Inc., an outsourcing company; and ICC, an operating insurance company. ICC is an Illinois domiciled company.
ICC Holdings, Inc. was formed so that it could acquire all of the capital stock of ICC in a mutual-to-stock conversion. The plan of conversion was approved by ICC policyholders at a special meeting on March 17, 2017. Simultaneously, surplus notes totaling $1.65 million were converted into 165,000 shares of the Company’s common stock. The Company’s offering closed on March 24, 2017, and our Employee Stock Ownership Plan (ESOP) purchased 350,000 of the shares in the offering. On March 28, 2017, the Company’s stock began trading on the NASDAQ Capital Market under the “ICCH” ticker. The Company paid $1.0 million of underwriting fees to Griffin Financial Group, LLC. Proceeds received from the offering, net of offering costs and underwriting fees, was $28.7 million.
Prior to the conversion on March 24, 2017, the Parent Company did not engage in any operations. Since the conversion, the Parent Company’s primary assets are the outstanding equity of ICC, ICC Realty, LLC, Estrella Innovative Solutions, Inc., Beverage Insurance Agency, Inc., and a portion of the net proceeds from the stock offering completed in connection with the mutual-to-stock conversion. On the effective date of the conversion, ICC became a wholly owned subsidiary of ICC Holdings, Inc. The mutual-to-stock conversion was accounted for as a change in corporate form with the historic basis of ICC’s assets, liabilities, and equity unchanged as a result.
Debt and equity securities are classified as available-for-sale (AFS) and reported at fair value. Unrealized gains and losses on these securities are excluded from net earnings but are recorded as a separate component of comprehensive earnings and shareholders’ equity, net of deferred income taxes.
Property and equipment are presented at cost, less accumulated depreciation, and are depreciated using accelerated methods for financial statement purposes for a period based on their economic life. Computer equipment is depreciated over 3 years and equipment over a range of 5 to 7 years. Buildings are depreciated over 39 years and related improvements over 15 years. Annually, the Company reviews the major asset classes held for impairment. For the years ended December 31, 2018 and 2017, the Company recognized no impairments. Property and equipment are summarized as follows:
Comprehensive earnings include net earnings plus unrealized gains/losses on available-for-sale investment securities, net of tax. In reporting the components of comprehensive earnings on a net basis in the statement of earnings, the Company used a 21% tax rate for the years ended December 31, 2018, and 2017. Other comprehensive earnings, as shown in the consolidated statements of earnings and comprehensive earnings, is net of tax (benefit) expense of $(609,140) and $1,048,847 for 2018 and 2017, respectively.
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15) - This guidance addresses eight specific cash flow issues with the objective of reducing existing diversity in practice. The new guidance is effective beginning January 1, 2019, and it is not expected to have a material impact on the Company’s cash flows.
Financial Instruments Credit Losses (ASU 2018-19 and ASU 2016-13) - This update is designed to reduce complexity by limiting the number of credit impairment models used for different assets. The model will result in accelerated credit loss recognition on assets held at amortized cost, which includes our commercial and residential mortgage investments. The identification of credit-deteriorated securities will include all assets that have experienced a more-than-insignificant deterioration in credit since origination. Additionally, any changes in the expected cash flows of credit-deteriorated securities will be recognized immediately in the income statement. AFS fixed maturity securities are not in scope of the new credit loss model, but will undergo targeted improvements to the current reporting model including the establishment of a valuation allowance for credit losses versus the current direct write down approach. We will be required to adopt this update effective January 1, 2020. We are currently evaluating the impact of this guidance on our consolidated financial statements.
The updates are effective for the Company January 1, 2020. ASU 2016-02 required the adoption on a modified retrospective basis. However, with the issuance of ASU 2018-11, we have the option to recognize the cumulative effect as an adjustment to the opening balance of retained earnings in the year of adoption, while continuing to present all prior periods under the previous lease guidance. These updates provide optional practical expedients in transition. The effect of applying the new lease guidance on the consolidated financial statements is expected to be minimal due to current and future lease obligations being immaterial.
Financial Instruments - Recognition and Measurement (ASU 2016-01) - This guidance affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements of financial instruments. The amendments will be applied to fiscal years beginning January 1, 2019. Early adoption is permitted for the accounting guidance on financial liabilities under the fair value option. The Company will make a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The primary impact this guidance will have on our financial statements relates to recognizing changes in the fair value of equity securities through the statement of earnings. The impact to our statement of earnings will vary depending upon the level of volatility in the performance of the securities held in our equity portfolio and the overall market.
Revenue Recognition (ASU 2017-13, ASU 2016-20, ASU 2016-12, ASU 2016-11, ASU 2016-10, ASU 2016-08, ASU 2015-14 and ASU 2014-09) - This will supersede the current revenue recognition requirements in Topic 605, Revenue Recognition. The ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The new guidance will be effective for the Company’s year ending December 31, 2019. The effect of applying this on the consolidated financial statements is not expected to have a material impact as the Company’s primary revenue is derived from insurance contracts which are excluded from the scope of ASU 2014-09.
The catastrophe reinsurance treaty renewed on January 1, 2019, and the Company had protection of $9.5 million in excess of $500,000 first-dollar retention for both of the years ended December 31, 2018 and 2017. The catastrophe program is actively managed to keep net retention in line with risk tolerances and to optimize the risk/return trade off.
Liquidity is essential to the Company’s business and a key component of the concept of asset-liability matching. The Company’s liquidity may be impaired by an inability to collect premium receivable or reinsurance recoverable balances in a timely manner, an inability to sell assets or redeem investments, unforeseen outflows of cash or large claim payments, or an inability to access debt. Liquidity risk may arise due to circumstances that the Company may be unable to control, such as a general market disruption, an operational problem that affects third parties or the Company, or even by the perception among market participants that the Company, or other market participants, are experiencing greater liquidity risk.
The Company is highly regulated by the state of Illinois and by the states in which it underwrites business. Such regulations, among other things, limit the amount of dividends, impose restrictions on the amount and types of investments, and regulates rates insurers may charge for various coverages. The Company is also subject to insolvency and guarantee fund assessments for various programs designed to ensure policyholder indemnification. Assessments are generally accrued during the period in which it becomes probable that a liability has been incurred from an insolvency and the amount of the related assessment can be reasonably estimated.
The National Association of Insurance Commissioners (NAIC) has developed Property/Casualty Risk-Based Capital (RBC) standards that relate an insurer’s reported statutory surplus to the risks inherent in its overall operations. The RBC formula uses the statutory annual statement to calculate the minimum indicated capital level to support asset (investment and credit) risk and underwriting (loss reserves, premiums written and unearned premium) risk. The NAIC model law calls for various levels of regulatory action based on the magnitude of an indicated RBC capital deficiency, if any. As of December 31, 2018, the Company determined that its capital levels are well in excess of the minimum capital requirements for all RBC action levels and that its capital levels are sufficient to support the level of risk inherent in its operations. See Note 10 - Statutory Information and Dividend Restrictions for further discussion of statutory information and related insurance regulatory restrictions.
The following is a summary of the proceeds from sales, maturities, and calls of AFS securities and the related gross realized gains and losses, excluding OTTI, for the years ended December 31, 2018 and 2017.
All of the Company’s collateralized securities carry an average credit rating of AA+ by one or more major rating agency and continue to pay according to contractual terms. Included within MBS/ABS/CMBS are residential mortgage backed securities with fair values of $13,696,585 and $13,517,725 and commercial mortgage backed securities of $10,126,352 and $8,469,852 at December 31, 2018 and 2017, respectively.
For the year ended December 31, 2018, the Company recognized in net earnings $16,178 of OTTI losses on three common stock securities that were impaired during the fourth quarter of 2018. During 2017, the Company recognized $57,316 of OTTI on an ETF included in common stock that was impaired during the second quarter of 2017 and subsequently sold during the third quarter of 2017. For all fixed income securities at a loss at December 31, 2018, management believes it is probable that the Company will receive all contractual payments in the form of principal and interest. In addition, the Company is not required to, nor does it intend to sell these investments prior to recovering the entire amortized cost basis of each security, which may be maturity. Management does not consider these investments to be other-than-temporarily impaired at December 31, 2018. Based on management’s analysis, it was concluded that the fixed income securities in an unrealized loss position were not other-than-temporarily impaired at December 31, 2018, and 2017.
As required by law, certain fixed maturity investments amounting to $3,742,450 and $3,962,291 at December 31, 2018 and 2017, respectively, were on deposit with either regulatory authorities or banks. In addition, $0 and $923,766 was pledged as of December 31, 2018 and 2017, respectively, as part of a capital lease arrangement.
Other invested assets include privately held investments, including membership in the Federal Home Loan Bank of Chicago (FHLBC), which occurred in February 2018. Our investment in FHLBC stock is carried at cost. Due to the nature of our membership in the FHLBC, its carrying amount approximates fair value. As of December 31, 2018, there were no investments pledged as collateral with the FHLBC. There may be investments pledged as collateral with the FHLBC to ensure timely access to the secured lending facility that ownership of FHLBC stock provides. As of and during the twelve month period ending December 31, 2018, there were no outstanding borrowings with the FHLBC.
Assets measured at fair value on a recurring basis as of December 31, 2018, are as summarized below:
Assets measured at fair value on a recurring basis as of December 31, 2017, are as summarized below:
The Company entered into a sale leaseback arrangement in 2016 that was accounted for as a capital lease. Under the agreement, Bofi Federal Bank purchased electronic data processing software, vehicles, and other assets which are leased to the Company. These assets remained on the Company’s books due to provisions within the agreement that trigger capital lease accounting. To secure the lowest rate possible of 4.7%, the Company pledged bonds totaling $923,563 and $923,766 as of March 31, 2018 and December 31, 2017. There was no gain or loss recognized as part of this transaction. On March 2, 2018 and March 7, 2018, the Company paid $404,928 and $346,000, respectively to Bofi. These disbursements were made to pay off the balances of the sale leaseback arrangements. As a result of paying off the leasehold obligations during the first quarter of 2018, the bonds pledged as collateral related to this debt were released in April 2018. For the twelve months ended December 31, 2018 and 2017, lease payments totaled $70,051 and $501,976, respectively. The outstanding lease obligation was $0 and $805,013 at December 31, 2018 and December 31, 2017, respectively.
We maintain a revolving line of credit with American Bank & Trust, which permits borrowing up to an aggregate principal amount of $1.75 million. This facility was entered into during 2013 and is renewed annually with a current expiration of August 5, 2019. The line of credit is priced at 30 day LIBOR plus 2% with a floor of 3.5%. In order to secure the lowest rate possible, the Company pledged marketable securities not to exceed $5.0 million in the event the Company drawls down on the line of credit. There was no interest paid on the line of credit during the year ended December 31, 2018 and no interest paid on the line of credit during the year ended December 31, 2017. The balance of the revolving line of credit was $0 and $0 as of December 31, 2018 and 2017, respectively. There are no financial covenants governing this agreement.
The following table displays net reinsurance balances recoverable, after consideration of collateral, on paid losses and settlement expenses, known case and IBNR loss and settlement expense reserves, unearned premiums, and contingent commissions from the Company’s top 10 reinsurers as of December 31, 2018. These reinsurers all have financial strength ratings of “A” or better by A.M. Best. Also shown are the amounts of written premium ceded to these reinsurers during the calendar year 2018.
For calendar year 2018, the Company experienced adverse development relative to prior years’ reserve estimates in its casualty line of business primarily from the 2016 accident year. Adverse development in Business Liability was partially offset by favorable development in Liquor Liability and Workers’ Compensation.
For calendar year 2017, the Company experienced favorable development relative to prior years’ reserve estimates in both its property and casualty lines of business primarily from the 2016 accident year. Workers’ Compensation and Business Property were the largest contributors to the favorable development, partially offset by adverse development in Business Liability.
In November 2012, the Company entered into a deferred compensation agreement with an executive of the Company. The agreement requires the Company to make payments to the executive beginning at retirement (age 62). In the event of separation of service without cause prior to age 62, benefits under this agreement vest 25% in November 2017, 50% in November 2022, 75% in November 2027, and 100% on January 1, 2032. In the event of death prior to retirement, benefits become fully vested and are payable to the executive’s beneficiaries. Using a discount rate of 4.22%, the fully vested obligation under the agreement would total approximately $1,643,716 on January 1, 2032. As of December 31, 2018 and 2017, the accrued liability related to this agreement totaled $235,932 and $248,481, respectively. The Company’s recognized $12,549 of benefit and $95,072 of expense in 2018 and 2017, respectively.
The NAIC has Risk-based capital (RBC) requirements that require insurance companies to calculate and report information under a risk-based formula, which measures statutory capital and surplus needs based upon a regulatory definition of risk relative to the company’s balance sheet and mix of products. As of December 31, 2018 and 2017, ICC had RBC amounts in excess of the authorized control level RBC, as defined by the NAIC. ICC had an authorized control level RBC of $6,751,399 and $6,275,664 as of December 31, 2018 and 2017, respectively, compared to actual statutory capital and surplus of $50,552,167 and $50,772,460, respectively, for these same periods.
Mr. John R. Klockau, a director of the Company, held two surplus notes from the Company totaling $1,150,000 which were converted into 115,000 shares of the Company’s common stock on March 17, 2017. John R. Klockau received a payment for interest on the surplus notes of $12,975 during the three months ended March 31, 2017. Additionally, Mr. Klockau is a claims consultant and was paid $15,680 and $16,230 in 2018 and 2017, respectively, related to his services to the Company.
Mr. Kevin Clinton is a director of the Company and owns more than 10% of the Company’s outstanding shares of common stock. On September 7, 2018, the Company repurchased from the Clinton-Flood Purchasers, as previously defined in our final prospectus filed with the SEC on February 13, 2017, which includes Mr. Kevin Clinton, 196,721 shares of the Company’s common stock at a price of $15.25 per share. The Clinton-Flood Purchasers received an aggregate payment of $2,999,995 during the year ended December 31, 2018 related to the share repurchase. Mr. Clinton was paid $2,071 and $1,330 in 2018 and 2017, respectively for travel reimbursement costs.
In our opinion, the financial statement schedules referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
1Par value $0.01; authorized: 2018 - 10,000,000 shares and 2017 - 10,000,000 shares; issued: 2018 - 3,500,000 and 2017 - 3,500,000 shares; outstanding: 2018 - 2,992,734 and 2017 - 3,171,878 shares.