The following tables include selected financial data derived from the audited consolidated financial statements of the Company for the years ended and as of December 31, 2020, 2019 and 2018. 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.
Loss and settlement expenses represent the largest expense item and include: (1) claim payments made, (2) estimates for future claim payments and changes in those estimates from prior periods, and (3) costs associated with investigating, defending and adjusting claims.
We evaluate our insurance operations by monitoring certain key measures of growth and profitability. In addition to reviewing our financial performance based on results determined in accordance with generally accepted accounting principles in the United States (GAAP), we utilize certain non-GAAP financial measures that we believe are valuable in managing our business and for comparison to our peers. These non-GAAP measures are combined ratio, written premiums, underwriting income, the loss and settlement expense ratio, the expense ratio, the ratio of net written premiums to statutory surplus and return on average equity.
Equity Securities-Equity securities include common stock, mutual funds, and non-redeemable preferred stock. Equity securities are carried at fair value with subsequent changes in fair value recorded in net earnings effective January 1, 2019.
The probability that the Company will recover the entire amortized cost basis of the fixed income securities prior to maturity, or
In developing our loss and settlement expense reserve estimates, we relied upon widely used and accepted loss reserving methods (described below). Based on the deemed predictive qualities of each of the applied methods, we selected estimated ultimates by year in order to determine our reserve estimates. Our estimates can be considered actuarial central estimates, which means that they represent an expected value over the range of reasonably possible outcomes.
Loss Development Methods (Paid and Incurred Loss and Settlement Expense)-Loss development ultimates are determined by multiplying current reported values by cumulative loss development factors. Incremental loss development factors are determined by analyzing historical development of losses and assuming that future development will mimic historical. Cumulative development factors are calculated from the selection of incremental factors.
This method is also applied to incurred settlement expense to incurred loss ratios and paid settlement expense to paid loss ratios to estimate ultimate settlement expense.
High and low net reserve estimates were developed by stressing our expected loss ratio and loss development factor selections. By applying a factor to increase (and decrease) these assumptions, we developed high (and low) ultimate loss and settlement expense estimates. These estimates, along with paid and incurred loss information, result in a range of reserves. The gross reserve range is based on selected percentages which produce a range which is slightly wider than the net range.
Premiums are recognized ratably over the term of the contracts, net of ceded reinsurance. Unearned premiums represent the portion of premiums written relative to the unexpired terms of coverage. Unearned premiums are calculated on a daily pro rata basis.
The major components of operating revenues and net earnings are as follows:
1Calculated by subtracting the sum of loss and settlement expenses (2020 - $32,562 and 2019 - $33,715) and policy and acquisition costs and other operating expenses (2020 - $18,529 and 2019 - $20,020) from net premiums earned (2020 -$49,689 and 2019 - $52,842).
Direct premiums written decreased by $4,001,000, or 6.4%, primarily from the disproportionate negative impact COVID-19 had on the Company’s market niche in 2020 compared to the pre-COVID-19 environment in 2019, and net written premium decreased by $4,188,000, or 7.9%, during the same period. Net premiums earned decreased by $3,153,000, or 6.0%.
For the years ended December 31, 2020, and 2019, we ceded to reinsurers $10,080,000 and $9,925,000 of earned premiums, respectively. Ceded earned premiums as a percent of direct premiums written were 17.1% in 2020, and 15.8% in 2019.
Our expense ratio is calculated by dividing the sum of policy acquisition costs and operating expenses by net earned premiums. We use the expense ratio to evaluate the operating efficiency of our consolidated operations. Costs that cannot be readily identifiable as a direct cost of a product line remain in Corporate and Other expenses.
General corporate expenses consist primarily of occupancy costs, such as rent and utilities. These costs are largely fixed and, therefore, do not vary significantly with premium volume but do vary with the Company’s changes in properties held for investment. Our general corporate expenses increased by $61,000, or 10.5%, in 2020 as compared to 2019.
Interest expense increased to $208,000 for the year ended December 31, 2020 from $129,000 for the year ended December 31, 2019 which reflects the cost of the $6.0 million FLHB and the $1.6 million Paycheck Protection Program loan agreements entered into in 2020.
We reported income tax expense of $1,047,000 in 2020, as compared to $787,000 in 2019. Total income tax expense increased in 2020 due to the increase in investment income and unrealized gains on equity securities in 2020 compared to 2019.
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, 2020 and 2019, we experienced adverse development of $1,206,000 and $151,000, respectively.
If the net loss and settlement expense reserves were recorded at the high end of the actuarially-determined range as of December 31, 2020, the loss and settlement expense reserves would increase by $2,224,000 before taxes. This increase in reserves would have the effect of decreasing net earnings and equity as of December 31, 2020 by $1,757,000. If the loss and settlement expense reserves were recorded at the low end of the actuarially-determined range as of December 31, 2020, the net loss and settlement expense reserves at December 31, 2020 would be reduced by $5.7 million with corresponding increases in net earnings and equity of $4.5 million.
The net unrealized gain in the Corporate bond portfolio increased about $1.92 million from a gain of $2.47 million at the end of 2019 to a gain of $4.39 million at the end of 2020. This sharp increase in unrealized gains was driven by the sharp drop in Treasury rates in 2020 (5 year Treasury rate dropped 133 bps, 10 year Treasury rate dropped 100 bps) due to concerns over COVID-19 and the negative impact it would have on economic growth. This drop in yields drove prices up in all bonds, including Corporates.
The unrealized losses as of December 31, 2020 and 2019 were primarily related to changes in the interest rate environment. 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.
The fair value estimates of our investments provided by the independent pricing service at December 31, 2020 and December 31, 2019, respectively, were utilized, among other resources, in reaching a conclusion as to the fair value of our investments.
Management reviews the reasonableness of the pricing provided by the independent pricing service by employing various analytical procedures. We review all securities to identify recent downgrades, significant changes in pricing, and pricing anomalies on individual securities relative to other similar securities. This will include looking for relative consistency across securities in common sectors, durations, and credit ratings. This review will also include all fixed maturity securities rated lower than “A” by Moody’s or S&P. If, after this review, management does not believe the pricing for any security is a reasonable estimate of fair value, then it will seek to resolve the discrepancy through discussions with the pricing service. In our review we did not identify any such discrepancies for the years ended December 31, 2020 and 2019, and no adjustments were made to the estimates provided by the pricing service. The classification within the fair value hierarchy of Accounting Standards Codification (ASC) Topic 820, Fair Value Measurement, is then confirmed based on the final conclusions from the pricing review.
Certain acquisition costs consisting of direct and ceded commissions, premium taxes and certain other direct underwriting expenses that vary with and are primarily related to the production of business are deferred and amortized over the effective period of the related insurance policies as the underlying policy premiums are earned. At December 31, 2020 and December 31, 2019, deferred acquisition costs and the related unearned premium reserves were as follows:
As of December 31, 2020 and 2019, we had no material unrecognized tax benefits or accrued interest and penalties. Periods still subject to Internal Revenue Service (IRS) audit include 2017 through current year. There are currently no open tax exams. The tax return related to the year ended December 31, 2020 has not yet been filed.
In response to COVID-19, the Company obtained in March 2020 and May 2020 a $6.0 million and a $4.0 million loan, respectively, from the FHLBC as a precautionary measure to increase its cash position and compensate for potential reductions in premium receivable collections.
As of December 31, 2020 and 2019, outstanding debt balances totaled $13,466,000 and $3,475,000, respectively.
The Company may make discretionary contributions to the ESOP and pay dividends on unallocated shares to the ESOP. The ESOP uses funds it receives to repay the loan. When loan payments are made, ESOP shares are allocated to participants based on relative compensation and expense is recorded. The Company contributed $294,000 and $289,000 to the ESOP during the twelve months ended December 31, 2020 and 2019, 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, 2020, we recognized compensation expense of $283,000 related to 23,437 shares of our common stock that were committed to be released to participants’ accounts for the year ended December 31, 2020. Of the 23,437 shares committed to be released, 1,985 shares were committed on December 31, 2020 and had no impact on the weighted average common shares outstanding for the year ended December 31, 2020. For the year ended December 31, 2019, we recognized compensation expense of $324,000 related to 23,437 shares of our common stock that were committed to be released to participants’ accounts for the year ended December 31, 2019. Of the 23,437 shares committed to be released, 1,991 shares were committed on December 31, 2019 and had no impact on the weighted average common shares outstanding for the year ended December 31, 2019. The fair value of the unearned ESOP shares as of December 31, 2020 and December 31, 2019 was $3,687,000 and $3,963,000, respectively.
RSUs were granted for the first time in February 2018 with additional RSUs being granted in March 2019 and April 2020. 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.
In response to COVID-19, the Company obtained in March 2020 and May 2020 a $6.0 million loan and a $4.0 million loan, respectively, from the Federal Home Loan Bank of Chicago (FHLBC) as a precautionary measure to increase its cash position and compensate for potential reductions in premium receivable collections. On July 30, 2020, the Company secured through the FHLBC a $4.0 million loan that becomes effective May 3, 2021, upon the maturity of the existing $4.0 million FHLBC loan. No collateral was pledged for this forward advance. The Company has borrowing capacity up to approximately $37 million in the aggregate from the FHLBC.
In addition to both operational funding and the recent loan proceeds, we maintained a revolving line of credit with a commercial bank, which permitted borrowing up to an aggregate principal amount of $1.75 million. This line of credit expired August 5, 2020 and was replaced, effective August 3, 2020, with a $2.0 million revolving line of credit with another commercial bank. The Company’s access to readily available funds is expected to sufficiently support the Company’s operational needs.
We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital reserves.
Consolidated Statements of Earnings and Comprehensive Earnings (Years ended December 31, 2020 and 2019)
Consolidated Statements of Cash Flows (Years ended December 31, 2020 and 2019)
We have audited the accompanying consolidated balance sheets of ICC Holdings, Inc. and Subsidiaries (the Company) as of December 31, 2020 and 2019, and the related consolidated statements of earnings, comprehensive earnings, stockholders’ equity, and cash flows, for the years then ended, and the related notes and financial statement schedules listed in Item 15 of the Company’s Form 10-K (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.
1See discussion of Accounting Standards Update 2016-01 adoption in Note 1 - Summary of Significant Accounting Policies
2Amount represents restricted stock units that have fully vested in the period
The Company regularly evaluates its fixed maturity securities using both quantitative and qualitative criteria to determine impairment losses for other-than-temporary declines in the fair value of the investments. The following are the key factors for determining if a security is other-than-temporarily impaired:
The assessment of significant adverse changes to the cash flows on a fixed maturity investment,
The “stated assumptions” analytic approach relies on actual 6-month average collateral performance measures (voluntary prepayment rate, gross default rate, and loss severity) sourced through third party data providers or remittance reports. The analysis applies the stated assumptions throughout the remaining term of the transaction using forecasted cashflows, which are then applied through the transaction structure (reflecting the priority of payments and performance triggers) to determine whether there is a loss to the security (“Loss to Tranche”). For securities or sectors for which no actual loss or minimal loss has been observed (certain Prime Residential Mortgage Backed Securities (RMBS) and Commercial Mortgage Backed Securities (CMBS), for example), sector-based assumptions are applied, or an alternative quantitative or qualitative analysis is performed.
Interest on fixed maturities and short-term investments is credited to earnings on an accrual basis. Premiums and discounts are amortized or accreted over the lives of the related fixed maturities. Dividends on equity securities are credited to earnings on the ex-dividend date. Realized gains and losses on disposition of investments are based on specific identification of the investments sold on the settlement date, which does not differ significantly from trade date accounting.
Property held for investment purposes is initially recorded at the purchase price, which is generally fair value, and is subsequently reported at cost less accumulated depreciation. Buildings are depreciated on a straight-line basis over the estimated useful life of the building, which we estimate to be 39 years. Income from property held for investment is reported as net investment income.
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, 2020 and 2019, the Company recognized no impairments. Property and equipment are summarized as follows:
The liability for unpaid losses and settlement expenses represents estimates of both reported and unreported claims and related expenses. The estimates are based on various actuarial reserving methodologies and other assumptions related to the ultimate cost to settle such claims. The reserving methodologies used are Loss Development for paid and incurred loss and settlement expense, Expected Loss Ratio for ultimate loss and settlement expense, Bornhuetter-Ferguson (B-F) for paid and incurred loss, and A&OE (also known as the “Wendy Johnson Method”) for unpaid adjusting and other expense. The assumptions used are subject to occasional changes due to evolving economic, social, and political conditions. There were no changes to the core methodologies used as of December 31, 2020.
All estimates are periodically reviewed and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments are reflected in the results of operations in the period in which they are determined. Due to the inherent uncertainty in estimating reserves for losses and settlement expenses, there can be no assurance that the ultimate liability will not exceed recorded amounts. If actual liabilities do exceed recorded amounts, there will be an adverse effect. Based on the current assumptions used in estimating reserves, we believe that our overall reserve levels at December 31, 2020, make a reasonable provision to meet our future obligations. See Note 7 - Unpaid Losses and Settlement Expenses for further discussion.
ICC is subject to minimal state income tax liabilities. On a state basis, since the majority of income is from insurance operations, the Company pays premium taxes in lieu of state income tax. Premium taxes are a component of policy acquisition costs and calculated as a percentage of gross premiums written.
The Company recognizes employee stock ownership plan (ESOP) compensation expense ratably during each year for the shares committed to be allocated to participants that year. This expense is determined by the fair market value of our stock at the time the commitment to allocate the shares is accrued and recognized. For purposes of balance sheet disclosures of shares outstanding, the Company includes only the number of ESOP shares that have been committed to be released for the period. For purposes of calculating earnings per share, the Company includes the weighted average ESOP shares committed to be released for the period. The ESOP covers all employees who have worked a minimum of 1,000 hours in the plan year.
Comprehensive earnings include net earnings plus unrealized (gains) losses on AFS investment securities, net of tax. In reporting the components of comprehensive earnings on a net basis in the consolidated statement of earnings, the Company used a 21% tax rate for the years ended December 31, 2020, and 2019. Other comprehensive earnings, as shown in the consolidated statements of earnings and comprehensive earnings, is net of tax expense of $682,142 and $842,290 for 2020 and 2019, respectively.
Fair Value Measurement - Disclosure Requirements (ASU 2018-13) - The amendments in this update modify the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. We adopted this update on January 1, 2020.
Leases (ASU 2018-20, ASU 2018-11, ASU 2018-10, ASU 2018-01, ASU 2017-13 and ASU 2016-02) - These updates are intended to increase transparency and comparability for lease transactions. ASU 2016-02 requires a lessee to recognize a right-of-use asset and lease liability on the balance sheet for all leases with an original term longer than twelve months and disclose key information about leasing arrangements. Lessor accounting is largely unchanged. The updates are effective for the Company’s year-end December 31, 2021 and quarters beginning January 1, 2022. 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.
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, 2020, 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.
Governmental authorities have taken significant measures to provide economic assistance to individual households and businesses, stabilize the markets, and support economic growth. The success of these measures is unknown, and they may not be sufficient to fully mitigate the negative impact of the pandemic. Additionally, some measures, such as a suspension of insurance premium payments and the reduction in interest rates to near zero, may have a negative impact on our business, financial condition, liquidity, and results of operations. We also may become subject to legislative and/or regulatory action that retroactively mandates coverage for losses that our insurance policies were not intended or priced to cover, including business interruption claims, despite terms included in our policies to preclude coverage or that creates presumptions of compensability not otherwise present (including for example in workers’ compensations exposures). Regulatory requirements could also impact pricing, risk selection and our rights and obligations with respect to our policies and insureds, including our ability to cancel policies, collect premiums, or requiring us to refund premiums in a manner not otherwise required. We also face an increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of the pandemic on market and economic conditions and actions governmental authorities take in response to those conditions. These potential exposures include direct claims relating to COVID-19 (e.g., business interruption following a shelter in place order) and indirect exposures arising from an economic downturn.
The length of the pandemic and the effectiveness of the measures put in place to address it are unknown. Until the effects of the pandemic subside, we could experience reduced revenues in our businesses. To the extent the pandemic adversely affects our business, financial condition, liquidity, or results of operations, it may also have the effect of heightening many of the other risks described in this “Risks and Uncertainties” section and any subsequent Quarterly Reports on Form 10-Q.
The following is a summary of the proceeds from sales, maturities, and calls of fixed maturity and equity securities and the related gross realized gains and losses for the years ended December 31, 2020 and 2019.
The amortized cost and estimated fair value of fixed income securities at December 31, 2020, are shown as follows:
Expected maturities may differ from contractual maturities due to call provisions on some existing securities.
The following table is also used as part of the impairment analysis and displays the total value of securities that were in an unrealized loss position as of December 31, 2020 and 2019. The table segregates the securities based on type, noting the fair value, amortized cost, and unrealized loss on each category of investment as well as in total. The table further classifies the securities based on the length of time they have been in an unrealized loss position.
The fixed income portfolio contained 26 securities in an unrealized loss position as of December 31, 2020. Of these 26 securities, 4 have been in an unrealized loss position for 12 consecutive months or longer and represent $17,258 in unrealized losses. All fixed income securities in the investment portfolio continue to pay the expected coupon payments under the contractual terms of the securities. Credit-related impairments on fixed income securities that we do not plan to sell, and for which we are not more likely than not to be required to sell, are recognized in net earnings. Any non-credit related impairment is recognized in comprehensive earnings. Based on management’s analysis, the fixed income portfolio is of a high credit quality and it is believed it will recover the amortized cost basis of the fixed income securities. Management monitors the credit quality of the fixed income investments to assess if it is probable that the Company will receive its contractual or estimated cash flows in the form of principal and interest.
There were no other-than-temporary impairment losses recognized in net earnings during the year ended December 31, 2020 and 2019. For all fixed income securities at a loss at December 31, 2020, 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 for each security, which may be maturity. The fixed income securities in an unrealized loss position were not other-than-temporarily impaired at December 31, 2020 and December 31, 2019.
As required by law, certain fixed maturity investments amounting to $3,916,710 and $3,827,627 at December 31, 2020 and 2019, respectively, were on deposit with either regulatory authorities or banks.
Net unrealized gains for the twelve months ended December 31, 2020 and 2019 for equity securities held as of December 31, 2020 and December 31, 2019 were $2,167,417 and $2,350,513, respectively.
Other invested assets as of December 31, 2020 and December 31, 2019 were $1,772,867 and $877,900, respectively.
As of December 31, 2020, investment property comprised of one storage facility in Davenport, Iowa and 65 apartment rental units located in Milan, Illinois; Moline, Illinois; Rock Island, Illinois; Silvis, Illinois; and Le Claire, Iowa. As of December 31, 2019, investment property comprised of 67 apartment rental units located in Milan, Illinois; Moline, Illinois; Rock Island, Illinois; Silvis, Illinois; and Le Claire, Iowa. Property held for investment is net of accumulated depreciation of $465,364 and $332,218 as of December 31, 2020, and 2019, respectively. Related depreciation expense was $144,545 and $109,393 for the years ended December 31, 2020, and 2019, respectively.
Corporate, Agencies, and Municipal Bonds-The pricing vendor employs a multi-dimensional model which uses standard inputs including (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. The pricing vendor also monitors market indicators, as well as industry and economic events. All bonds valued using these techniques are classified as Level 2. All Corporate, Agencies, and Municipal securities are deemed Level 2.
Mortgage-backed Securities (MBS), Collateralized Mortgage Obligations (CMO), Commercial Mortgage-backed Securities (CMBS) and Asset-backed Securities (ABS)-The pricing vendor evaluation methodology includes principally interest rate movements and new issue data. Evaluation of the tranches (non-volatile, volatile, or credit sensitivity) is based on the pricing vendors’ interpretation of accepted modeling and pricing conventions. This information is then used to determine the cash flows for each tranche, benchmark yields, pre-payment assumptions and to incorporate collateral performance. To evaluate CMO volatility, an option-adjusted spread model is used in combination with models that simulate interest rate paths to determine market price information. This process allows the pricing vendor to obtain evaluations of a broad universe of securities in a way that reflects changes in yield curve, index rates, implied volatility, mortgage rates, and recent trade activity. MBS, CMBS, CMO and ABS with corroborated and observable inputs are classified as Level 2. All MBS, CMBS, CMO and ABS holdings are deemed Level 2.
Due to the relatively short-term nature of cash and cash equivalents, their carrying amounts are reasonable estimates of fair value. Other invested assets as well as debt obligations are carried at cost and given that there is no readily available market for these to trade in, management believes that cost accurately reflects fair value.
Assets measured at fair value on a recurring basis as of December 31, 2020, are as summarized below:
ICC Holdings, Inc. secured a loan with a commercial bank in March 2017 in the amount of $3.5 million 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%. The Company pledged stock and $1.0 million of marketable assets as collateral for the loan.
The total balance of debt agreements at year end 2020 and 2019 was $13,465,574 and $3,475,088, respectively.
We maintained a revolving line of credit with a commercial bank, which permitted borrowing up to an aggregate principal amount of $1.75 million. This facility was initially entered into during 2013 and expired August 5, 2020. The line of credit was 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 would draw down on the line of credit. There was no interest paid on the line of credit during the twelve months ended December 31, 2020 and 2019. There were no financial covenants governing this agreement.
Through the purchase of reinsurance, the Company also generally limits its net loss on any individual risk to a maximum of $1,000,000 for casualty and workers’ compensation business and $750,000 for property, although certain treaties contain an annual aggregate deductible before reinsurance applies.
At December 31, 2020 and 2019, the Company had reinsurance recoverable on unpaid losses and settlement expenses totaling $13,019,865 and $11,036,170, respectively. All of the Company’s reinsurance recoverables are due from companies with financial strength ratings of “A” or better by A.M. Best.
The following table is a reconciliation of the Company’s unpaid losses and settlement expenses for the years 2020 and 2019.
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 3.6%, the fully vested obligation under the agreement would total approximately $1,689,467 on January 1, 2032. As of December 31, 2020 and 2019, the accrued liability related to this agreement totaled $470,446 and $347,987, respectively. The Company recognized $122,459 and $112,055 of expense in 2020 and 2019, respectively.
In connection with our conversion and public offering, we established an ESOP. The ESOP borrowed from the Company to purchase 350,000 shares in the offering. The issuance of the shares to the ESOP resulted in a contra account established in the equity section of the balance sheet for the unallocated shares at an amount equal to their $10.00 per share purchase price.
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, 2020, we recognized compensation expense of $283,222 related to 23,437 shares of our common stock that were committed to be released to participants’ accounts for the year ended December 31, 2020. Of the 23,437 shares committed to be released, 1,985 shares were committed on December 31, 2020 and had no impact on the weighted average common shares outstanding for the year ended December 31, 2020. For the year ended December 31, 2019, we recognized compensation expense of $324,041 related to 23,437 shares of our common stock that were committed to be released to participants’ accounts for the year ended December 31, 2019. Of the 23,437 shares committed to be released, 1,991 shares were committed on December 31, 2019 and had no impact on the weighted average common shares outstanding for the year ended December 31, 2019. The fair value of the unearned ESOP shares as of December 31, 2020 and December 31, 2019 was $3,686,702 and $3,962,789, respectively.
As of December 31, 2020, 11,700, 13,071 and 18,040 RSUs have been granted at a fair market value of $15.10, $13.70 and $11.03 per share, respectively. As of December 31, 2019, 11,700 and 13,071 RSUs have been granted at a fair market value of $15.10 and $13.70 per share, respectively. We recognized $171,755 and $108,115 of expense on these units in the twelve months ended December 31, 2020 and 2019, respectively. Total unrecognized compensation expense relating to outstanding and unvested RSUs was $224,192 and $196,967 as of December 31, 2020 and 2019, respectively, which is recognized over the remainder of the three-year vesting periods.
The statutory financial statements of ICC are presented on the basis of accounting practices prescribed or permitted by the Illinois Department of Insurance, which has adopted the National Association of Insurance Commissioners (NAIC) statutory accounting practices as the basis of its statutory accounting practices. ICC did not use any permitted statutory accounting practices that differ from NAIC prescribed statutory accounting practices. In converting from statutory to GAAP, typical adjustments include deferral of policy acquisition costs, the inclusion of statutory non-admitted assets, recording debt securities at fair value versus amortized cost, net unrealized gains or losses on equity securities are recorded in earnings as opposed to being a component of surplus, and the reclassification of surplus notes from equity to debt.
The NAIC has Risk-Based Capital (RBC) standards 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, 2020 and 2019, ICC had RBC amounts in excess of the authorized control level RBC, as defined by the NAIC. ICC’s statutory capital and surplus as of December 31, 2020 and 2019 were $58,801,101 and $55,357,446, respectively.
1 Par value $0.01; authorized: 2020 - 10,000,000 shares and 2019 - 10,000,000 shares; issued: 2020 - 3,500,000 and 2019 - 3,500,000 shares; outstanding: 2020 - 3,033,314 and 2019 - 3,014,941 shares.
Certain balances in the 2019 financial statement have been reclassified to conform to the 2020 presentation.
See accompanying notes to consolidated financial statements and report of independent registered public accounting firm.