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 years ended December 31, 2016 and 2015 and the selected balance sheet data as of December 31, 2016 and 2015 are derived from the audited consolidated financial statements of ICC and its subsidiaries. The selected statements of operations and expenses data for the year ended December 31, 2017 and the selected balance sheet data as of December 31, 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.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes included elsewhere in this Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-K constitutes forward-looking information that involves risks and uncertainties. Please see Item 3A. Forward-Looking Information and Item 1A. Risk Factors for more information. Please see Item 1A. Risk Factors for a discussion of important factors that could cause actual results to differ materially from the results described, or implied by, the forward-looking statements contained herein.
Premiums earned is the earned portion of our net premiums written. Gross premiums written include all premiums recorded by an insurance company during a specified policy period. Insurance premiums on property and casualty insurance contracts are recognized in proportion to the underlying risk insured and are earned ratably over the duration of the policies. At the end of each accounting period, the portion of the premiums that is not yet earned is included in unearned premiums and is realized as revenue in subsequent periods over the remaining term of the policy. Our policies typically have a term of twelve months. Thus, for example, for a policy that is written on July 1, 2017, one-half of the premiums would be earned in 2017 and the other half would be earned in 2018.
We invest our surplus and the funds supporting our insurance liabilities (including unearned premiums and unpaid loss and settlement expenses) in cash, cash equivalents, equities, fixed maturity securities and real estate. Investment income includes interest and dividends earned on invested assets. Net realized gains and losses on invested assets are reported separately from net investment income. We recognize realized gains when invested assets are sold for an amount greater than their cost or amortized cost (in the case of fixed maturity securities) and recognize realized losses when investment securities are written down as a result of an other than temporary impairment or sold for an amount less than their cost or amortized cost, as applicable. Our portfolio of investment securities is managed by an independent third party and manager specializing in the insurance industry.
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 for prior periods, and (3) costs associated with investigating, defending and adjusting claims.
The underwriting expense ratio is the ratio (expressed as a percentage) of amortization of deferred policy acquisition costs and other operating expenses to premiums earned, and measures our operational efficiency in producing, underwriting and administering our insurance business.
The assessment of significant adverse changes to the cash flows on a fixed income investment,
For equity securities, the expectation of recovery to cost within a reasonable period of time.
Quantitative and qualitative criteria are considered during this process to varying degrees depending on the sector the analysis is being performed:
Cash consists of uninvested balances in bank accounts. Cash equivalents consist of investments with original maturities of 90 days or less, primarily AAA-rated prime and government money market funds. Cash equivalents are carried at cost, which approximates fair value. The Company has not experienced losses on these instruments.
Bornhuetter-Ferguson (B-F) Methods (Paid and Incurred Loss)-The Loss Development Methods rely heavily on data as of the most recent evaluation date, and a relatively small swing in early reported (or paid) losses may result in a large swing in the ultimate loss projections. Therefore, other methods may also be considered.
The B-F Methods offer a blend of stability and responsiveness by estimating ultimate losses as a weighted combination of an expected loss estimate and current loss data. The weight applied to the expected loss estimate is based on the appropriate cumulative loss development factor from the Loss Development Methods. This percentage is multiplied by expected losses to determine expected future development. This estimate of future loss development is then added to losses as of the current evaluation date to project ultimate losses.
Direct premiums written increased by $2.7 million, or 5.3%, primarily from organic growth from 2016 to 2017, while net written premium increased by $2.8, or 6.5%, during the same period. Net premiums earned grew by $1.6 million, or 3.8%, for the year ended December 31, 2017 as compared to 2016 primarily due to increased organic growth.
For the years ended December 31, 2017, and 2016, we ceded to reinsurers $7.9 million of earned premiums. Ceded earned premiums as a percent of direct premiums written were 14.8% in 2017, and 15.5% in 2016. This favorable, slight decrease is a result of not placing 100% of the first property XOL in 2017.
Policy acquisition costs are costs we incur to issue policies, which include commissions, premium taxes, underwriting reports, and underwriter compensation costs. The Company offsets the direct commissions it pays with ceded commissions it receives from reinsurers. Other operating expenses consist primarily of information technology costs, accounting and internal control salaries, as well as audit and legal expenses. Policy acquisition costs and other operating expenses increased by $1,459,000, or 9.2%.
Net investment income increased by $664,000 for the year ended December 31, 2017 as compared to 2016, primarily from the growth of the investment portfolio. Average invested assets for 2017 were $96.3 million compared to $78.7 million for 2016, an increase of $17.6 million, or 22.4%. The increase in the portfolio was primarily due to proceeds from the initial public offering that closed on March 24, 2017.
Interest expense was relatively flat, decreasing to $225,000 for the year ended December 31, 2017 from $226,000 for the year ended December 31, 2016.
We reported income tax expense of $0.4 million in 2017, as compared to $1.2 million in 2016. 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. Total income tax expense decreased in 2017 due to a decrease in earnings before income taxes in 2017 compared to 2016.
As of December 31, 2017 and 2016, municipal bonds totaled $24,763,512 and $14,870,791, respectively with net unrealized gains of $959,844 and $530,948, respectively. Just under 75% of of our municpal holdings reside in longer maturities (73.5% in 10yr maturities or longer). Longer municipals benefited from long interest rates dropping during the year (30 year Treasury rates down 33 bps in 2017) as well as from spreads tightening in the sector.
The fair value estimates of our investments provided by the independent pricing service at December 31, 2017 and December 31, 2016, 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, 2017 and 2016, 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.
We had net deferred tax assets of $0.3 million and $0.9 million at December 31, 2017 and 2016, respectively. A valuation allowance is required to be established for any portion of the deferred tax asset for which we believe it is more likely than not that it will not be realized. At December 31, 2017 and 2016, we had no valuation allowance with respect to our deferred tax asset.
As of December 31, 2017 and 2016, we had no material unrecognized tax benefits or accrued interest and penalties. Federal tax years 2014 through 2016 are open for examination. The tax return related to the year ended December 31, 2017 has not yet been filed.
The Company entered into a sale leaseback arrangement in 2016 that is 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 remain 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 $0.9 million and $1.8 million as of December 31, 2017 and 2016, respectively. There was no gain or loss recognized as part of this transaction. Lease payments totaled $502,000 and $439,000 for the years ended December 31, 2017 and 2016, respectively. The term of the electronic data processing lease is 48 months and the term of the titled vehicles lease is 36 months. The outstanding lease obligation at December 31, 2017, was $0.8 million compared to $1.2 million at Decemeber 31, 2016.
ICC Holdings, Inc. secured a loan with American Bank & Trust 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 the ESOP shares and $1.5 million of trust assets as collateral for the loan. Additionally, the Company entered into two debt agreements in 2016; one agreement for $500,000 and another debt agreement for $75,000 with BofI. The terms of the loans are 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 total balance of debt agreements at year end 2017 and 2016 was $3.5 million and $0.5 million, respectively. The Bofi loans bear interest at 4.7%.
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 1, 2018. 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, 2017. Interest paid on the line of credit in 2016 was immaterial. There are no financial covenants governing this agreement. For the years ended December 31, 2017 and 2016, no amounts were outstanding on this facility.
Under the stock-based incentive plan, we may issue a total number of shares equal to 14% of the shares of common stock that are issued in the offering. Of this amount, an amount equal to 10% of the shares of common stock issued in the offering may be used to make restricted stock and stock-settled restricted stock unit awards and 4% of the shares of common stock issued in the offering may be used to award stock options under the stock-based incentive plan. The grant-date fair value of any common stock used for restricted stock and restricted stock unit awards will represent unearned compensation. As we accrue compensation expense to reflect the vesting of such shares, unearned compensation will be reduced accordingly. We will also compute compensation expense at the time stock options are awarded based on the fair value of such options on the date they are granted. This compensation expense will be recognized over the appropriate service period.
We generate sufficient funds from our operations and maintain a high degree of liquidity in our investment portfolio to meet the demands of claim settlements and operating expenses. The primary sources of funds are premium collections, investment earnings and maturing investments.
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.
In February 2018, FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This update allows a reclassification from Accumulated Other Comprehensive Income (AOCI) to retained earnings for stranded tax effects resulting from 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), which was enacted on December 22, 2017. The effect of a change in income tax rates on deferred tax assets and liabilities is required to be recognized in income on the date of enactment, even if the deferred tax was originally recorded in other comprehensive income. Prior to the adoption of this update, application of prior guidance resulted in an amount being stranded in AOCI
related to the difference between historical and enacted tax rates. The update allows an entity to reclassify the difference related to the Tax Act from AOCI to retained earnings. The update is required to be adopted January 1, 2019, and early adoption is permitted for any interim or annual period for which financial statements have not yet been filed. We elected to early adopt this update effective October 1, 2017, and have elected to reclassify stranded amounts associated with the Tax Act, resulting in a reclassification of $366,000 from AOCI to retained earnings.
In August 2016, Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016 15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments. The guidance addresses eight specific cash flow issues with the objective of reducing existing diversity in practice. The new guidance is effective beginning after December 15, 2018, and it is not expected to have a material impact on the Company’s cash flows.
In May 2014, FASB issued ASU No. 2014 09, Revenue from Contracts with Customers (Topic 606), which 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.
Consolidated Statements of Stockholders’ Equity (Years ended December 31, 2016 and 2015)
We have audited the accompanying consolidated balance sheets of ICC Holdings, Inc. and Subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of earnings and comprehensive earnings, stockholders’ equity and cash flows for each of the years then ended and the related notes to the consolidated financial statements (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016 and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
1The unaudited pro forma earnings per share for the twelve months ended December 31, 2016 is provided as a basis for comparison of current period earnings.
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.
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.
Quarterly, the Company monitors the financial condition of its reinsurers. The Company’s monitoring efforts include, but are not limited to, the review of annual summarized financial data and analysis of the credit risk associated with reinsurance balances recoverable by monitoring the A.M. Best and Standard & Poor’s (S&P) ratings. In addition, the Company subjects its reinsurance recoverables to detailed recoverable tests, including an analysis based on average default by A.M. Best rating. Based upon the review and testing, the Company’s policy is to charge to earnings, in the form of an allowance, an estimate of unrecoverable amounts from reinsurers. This allowance is reviewed on an ongoing basis to ensure that the amount makes a reasonable provision for reinsurance balances that the Company may be unable to recover.
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, 2017 and 2016, the Company recognized no impairments. Property and equipment are summarized as follows:
The Company recognizes compensation expense related to its employee stock ownership plan (ESOP) ratably 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 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.
Basic and diluted earnings per share (EPS) are calculated by dividing earnings available to common shareholders by the weighted average number of common shares outstanding during the period. The denominator for basic and diluted EPS includes ESOP shares committed to be released. The unaudited pro forma earnings per share for the twelve months ended December 31, 2016 are provided to be used as a basis for comparison of current period earnings. The weighted average number of common shares outstanding are computed as if the resulting shares from the initial public offering, which was completed in March 2017, were outstanding for the year ended December 31, 2016.
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 tax rates of 21% and 34% for the year ended December 31, 2017, and 2016, respectively. Other comprehensive earnings, as shown in the consolidated statements of earnings and comprehensive earnings, is net of tax expense of $1,048,847 and $346,785 for 2017 and 2016, respectively.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02) - This update allows a reclassification from Accumulated Other Comprehensive Income (AOCI) to retained earnings for stranded tax effects resulting from 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), which was enacted on December 22, 2017. The effect of a change in income tax rates on deferred tax assets and liabilities is required to be recognized in income on the date of enactment, even if the deferred tax was originally recorded in other comprehensive income. Prior to the adoption of this update, application of prior guidance resulted in an amount being stranded in AOCI related to the difference between historical and enacted tax rates. The update allows an entity to reclassify the difference related to the Tax Act from AOCI to retained earnings. The update is required to be adopted January 1, 2019, and early adoption is permitted for any interim or annual period for which financial statements have not yet been filed. We elected to early adopt this update effective October 1, 2017, and have elected to reclassify stranded amounts associated with the Tax Act, resulting in a reclassification of $366,480 from AOCI to retained earnings.
Leases (ASU 2016-02) - This update will supersede the current lease requirements in ASC 840. The ASU requires lessees to recognize a right of use asset and related lease liability for all leases, with a limited exception for short term leases. Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of operations. Currently, leases are classified as either capital or operating, with only capital leases recognized on the balance sheet. The reporting of lease related expenses in the statements of operations and cash flows will be generally consistent with the current guidance. The new lease guidance will be effective for the Company’s year ending December 31, 2020 and will be applied using a modified retrospective transition method to the beginning of the earliest period presented. 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 catastrophe reinsurance treaty renewed on January 1, 2018, 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, 2017 and 2016. The catastrophe program is actively managed to keep net retention in line with risk tolerances and to optimize the risk/return trade off.
The investment portfolio is subject to market, credit, and interest rate risks. The equity portfolio will fluctuate with movements in the overall stock market. While the equity portfolio has been constructed to have lower downside risk than the market, the portfolio is sensitive to movements in the market. The bond portfolio is affected by interest rate changes and movement in credit spreads. The Company attempts to mitigate its interest rate and credit risks by constructing a well-diversified portfolio with high-quality securities with varied maturities. Downturns in the financial markets could have a negative effect on the portfolio. However, the Company attempts to manage this risk through asset allocation, duration, and security selection.
The Company’s A.M. Best rating is important to its liquidity. A reduction in credit ratings could adversely affect the Company’s liquidity and competitive position, by increasing borrowing costs or limiting access to the capital markets.
A summary of net investment income for the years ended December 31, 2017 and 2016 is as follows:
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 $13,517,725 and $10,288,405 and commercial mortgage backed securities of $8,469,852 and $7,600,109 at December 31, 2017 and 2016, respectively.
The fixed income portfolio contained 64 securities in an unrealized loss position as of December 31, 2017. Of these 64 securities, 29 have been in an unrealized loss position for 12 consecutive months or longer and represent $245,040 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.
For the year ended Decemeber 31, 2017, the Company recognized in net earnings $57,316 of OTTI losses on an ETF included in common stock that was impaired during the second quarter of 2017 and subsequently sold during in the third quarter of 2017. During 2016, the Company recognized $205,834 of OTTI on one common stock security and $6,897 of OTTI on one fixed income security. For all fixed income securities at a loss at December 31, 2017, 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, 2017. Based on management’s analysis, it was concluded that the securities in an unrealized loss position were not other-than-temporarily impaired at December 31, 2017, and 2016.
As required by law, certain fixed maturity investments amounting to $3,962,291 and $2,958,297 at December 31, 2017 and 2016, respectively, were on deposit with either regulatory authorities or banks. In addition, $923,766 and $1,808,523 was pledged as of December 31, 2017 and 2016, respectively, as part of a capital lease arrangement.
In 2017, investment property comprised of 54 apartment rental units located in Rock Island, Moline, and Silvis, Illinois. Property held for investment is net of accumulated depreciation of $127,161 and $50,948 as of December 31, 2017, and 2016, respectively. Related depreciation expense was $76,213 and $47,793 for the years ended December 31, 2017, and 2016, respectively.
· Level 2 is applied to valuations based upon quoted prices for similar assets in active markets, quoted prices for identical or similar assets in inactive markets; or valuations based on models where the significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities) or can be corroborated by observable market data.
As noted in the previous tables, the Company did not have any assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of December 31, 2017 and 2016. Additionally, there were no securities transferred in or out of levels 1 or 2 during the years ended December 31, 2017 and 2016.
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 the ESOP shares and $1.5 million of trust assets as collateral for the loan. Additionally, ICC entered into two debt agreements in 2016; one agreement for $500,000 and another debt agreement for $75,000 with BofI. The terms of the loans are 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 total balance of debt agreements at year end 2017 and 2016 was $3,534,195 and $525,619, respectively. The Bofi loans bear interest at 4.7%.
Through the purchase of reinsurance, the Company also generally limits its net loss on any individual risk to a maximum of $750,000 for casualty business, $350,000 for property, and $500,000 for workers compensation, although certain treaties contain an annual aggregate deductible before reinsurance applies.
Ceded unearned premiums and reinsurance balances recoverable on paid losses and settlement expenses are reported separately as an asset, rather than being netted with the related liability, since reinsurance does not relieve the Company of its liability to policyholders. Such balances are subject to the credit risk associated with the individual reinsurer. On a quarterly basis, the financial condition of the Company’s reinsurers is monitored. As part of the monitoring efforts, management reviews annual summarized financial data and publically available information. The credit risk associated with the reinsurance balances recoverable is analyze by monitoring the A.M. Best and S&P ratings of the reinsurers. In addition, the Company subjects its reinsurance recoverables to detailed recoverability tests, including one based on average default by A.M. Best rating.
Once regulatory action (such as receivership, finding of insolvency, order of conservation or order of liquidation) is taken against a reinsurer, the paid and unpaid recoverable for the reinsurer are specifically identified and written off through the use of the allowance for estimated unrecoverable amounts from reinsurers. When such a balance is written off, it is done in full. The Company then re-evaluates the remaining allowance and determines whether the balance is sufficient as detailed above, and if needed, an additional allowance is recognized and income charged. The Company had no allowance recorded related to uncollectible amounts on paid and unpaid recoverables at December 31, 2017 and 2016. The Company has no receivables with a due date that extends beyond 90 days from the date of billing that are not included in the allowance for uncollectible amounts.
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, the Company’s experience will ordinarily exhibit fluctuations from period to period. While management attempts to identify and react to systematic changes in the loss environment, they must also consider the volume of experience directly available to the Company and interpret any particular period’s indications with a realistic technical understanding of the reliability of those observations.
Income tax expense attributable to income from operations for the years ended December 31, 2017 and 2016, differed from the amounts computed by applying the U.S. federal tax rate of 34% to pretax income from continuing operations as demonstrated in the following table:
The Company had historically recorded its deferred tax assets and liabilities using the statutory federal tax rate of 34%. The 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 of deferred tax items increased income tax expense by $152,173 and increased the effective tax rate by 14.1%. The Tax Cuts and Jobs Act of 2017 provides for a change in the methodology employed to calculate reserves for tax purposes. Beginning January 1, 2018, a higher interest rate assumption and longer payout patterns will be used to discount these reserves. In addition, companies will no longer be able to elect to use their own experience to discount reserves, but will instead be required to use the industry-based tables published by the IRS annually; however, the 2018 tables have yet to be released. Consequently, the Company cannot reasonably estimate the impact this would have on gross deferred taxes at December 31, 2017. However, this would not impact the net deferred tax asset. The Company also continues to analyze certain aspects of the Tax Act and further refinements are possible, which could potentially affect the measurement of these balance or potentially give rise to new deferred tax amounts, although management does not expect these adjustments to materially impact its financial statements.
As of December 31, 2017, the Company does not have any capital or operating loss carryforwards. Periods still subject to Internal Revenue Service (IRS) audit include 2014 through current year. There are currently no open tax exams.
The 401(k) plan offers a matching percentage up to 4% of eligible compensation, as well as a profit sharing percentage of each employee’s compensation. Participants are 100% vested in the matching percentage and vest at a rate of 25% per year for the profit sharing distribution. The total contribution to the 401(k) profit sharing plan was $311,507 and $217,598 for 2017 and 2016, respectively. Additionally, bonuses may be awarded to executives, managers, and associates through company incentive plans, provided certain financial or operational goals are met.
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, 2017 and 2015, the accrued liability related to this agreement totaled $248,481 and $153,409, respectively. The Company’s recognized $95,072 of expense and $20,267 of benefit in 2017 and 2016, 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 $269,344 to the ESOP during the fourth quarter of 2017.
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, 2017 and 2016, 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 $6,275,664 and $6,314,396 as of December 31, 2017 and 2016, respectively, compared to actual statutory capital and surplus of $50,772,460 and $29,957,250, respectively, for these same periods.
The Company did not pay any dividends to security holders in 2017 or 2016. It did however, make cash dividend payments in the amount of $2,646 and $1,838 in 2017 and 2016, respectively, to Wisconsin policyholders in accordance with policy contractual obligations.
The Company has operating lease obligations related to managing the business. Minimum future rental payments under non-cancellable agreements are as follows:
In 2017, the Board approved a new Executive Discretionary Bonus Program with a long term incentive component. On February 20, 2018, the Board of Directors approved bonuses and equity awards based on 2017 company results and achievement of individual performance goals. The number of Restricted Stock Units (RSUs) that were awarded to select executives on February 20, 2018 was 11,700.
In connection with our audit of the consolidated financial statements of ICC Holdings, Inc. and Subsidiaries for each of the two years in the period ended December 31, 2017, we have also audited Schedules II, III, IV, V, and VI on pages 96 through 102. These financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statement schedules based on our audits of the basic consolidated financial statements. The schedules are presented for purposes of complying with the Securities and Exchange Commission's rules and regulations and are not a required part of the consolidated financial statements.
1Par value $0.01; authorized: 2017 - 10,000,000 shares and 2016 - 0 shares; issued: 2017 - 3,500,000 and 2016 - 0 shares; outstanding: 2017 - 3,171,878 and 2016 - 0 shares.