Our headquarters are located at 225 20th Street, Rock Island, Illinois. We own this approximately 24,000 square foot facility. We also own and operate investment property comprising of 57 apartment rental units located in Moline, Rock Island, Silvis, Illinois, and Le Claire, Iowa.
We are an “emerging growth company” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to: not required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act; reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; exemptions from the requirements of holding an annual non-binding advisory vote on executive compensation and nonbinding stockholder approval of any golden parachute payments not previously approved.
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, 2018, one-half of the premiums would be earned in 2018 and the other half would be earned in 2019.
We measure growth by monitoring changes in gross premiums written and net premiums written. We measure underwriting profitability by examining losses and settlement expense, underwriting expense and combined ratios. We also measure profitability by examining underwriting income (loss) and net income (loss).
Corporates-The Company performs a qualitative evaluation of holdings that fall below the price threshold. The analysis begins with an opinion of industry and competitive position. This includes an assessment of factors that enable the profit structure of the business (e.g., reserve profile for exploration and production companies), competitive advantage (e.g., distribution system), management strategy, and an analysis of trends in return on invested capital. Analysts may also review other factors to determine whether an impairment exists including liquidity, asset value cash flow generation, and industry multiples.
Structured Securities-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 cash flows, 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.
Expected Loss Ratio Method- The expected loss ratio method applies a selected ultimate loss ratio to premium to determine ultimate losses and settlement expenses. Expected loss ratios for 2007 and prior were selected based on the results of the loss development methods discussed above, industry experience, actual loss experience of ICC to date and general industry conditions. Beginning with 2008, expected loss ratios have been calculated based on the prior expected loss ratios, rate changes and loss trend.
We estimate IBNR reserves by first deriving an actuarially based estimate of the ultimate cost of total loss and settlement expenses incurred by line of business as of the financial statement date. We then reduce the estimated ultimate loss and settlement expenses by loss and settlement expense payments and case reserves carried as of the financial statement date. The actuarially determined estimate is based upon indications from one of the above actuarial methodologies or uses a weighted average of these results. The specific method used to estimate the ultimate losses for individual lines of business, or individual accident years within a line of business, will vary depending on the judgment of the actuary as to what is the most appropriate method for a line of business’ unique characteristics. Finally, we consider other factors that impact reserves that are not fully incorporated in the actuarially based estimate, such as changes in the external business environment and changes in internal company processes and strategy.
1Calculated by subtracting the sum of loss and settlement expenses (2018 -$31,262 and 2017 -$29,010) and policy and acquisistion costs and other operating expenses (2018 - $18,215 and 2017 - $17,308) from net premiums earned (2018 -$47,117 and 2017 - $44,213).
Substantially all other income is derived from policies we write and represents additional charges to policyholders for services outside of the premium charge, such as installment billing or policy issuance costs. Other income decreased by $129,000, or 39.7%, in 2018 as compared to 2017 primarily as a result of an increase in premiums written off.
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 $907,000, or 5.2% for the year ended December 31, 2018, as compared to the same period in 2017. The primary drivers are an increase in direct commission expense associated with the increase in direct written premium coupled with an increase in self-funded employee medical expenses of $535,000 for the twelve months ended December 31, 2018, as compared to the same period in 2017.
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.
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. Accordingly, our general corporate expenses decreased by $9,000, or 1.6%, in 2018 as compared to 2017.
Our actuary determined a range of reasonable reserve estimates which reflect the uncertainty inherent in the loss reserve process. This range does not represent the range of all possible outcomes. We believe that the actuarially-determined ranges represent reasonably likely changes in the loss and settlement expense estimates, however actual results could differ significantly from these estimates. The range was determined by line of business and accident year after a review of the output generated by the various actuarial methods utilized. The actuary reviewed the variance around the select loss reserve estimates for each of the actuarial methods and selected reasonable low and high estimates based on his knowledge and judgment. In making these judgments the actuary typically assumed, based on his experience, that the larger the reserve the less volatility and that property reserves would exhibit less volatility than casualty reserves. In addition, when selecting these low and high estimates, the actuary considered:
Specifically, the following factors could impact the frequency and severity of claims, and therefore, the ultimate amount of loss and settlement expense paid:
If the net loss and settlement expense reserves were recorded at the high end of the actuarially-determined range as of Decemeber 31, 2017, the loss and settlement expense reserves would increase by $0.7 million before taxes. This increase in reserves would have the effect of decreasing net income and equity as of December 31, 2018 by $0.6 million. If the loss and settlement expense reserves were recorded at the low end of the actuarially-determined range, the net loss and settlement expense reserves at December 31, 2018 would be reduced by $5.0 million with corresponding increases in net income and equity of $3.9 million.
We monitor our investment portfolio and review securities that have experienced a decline in fair value below cost to evaluate whether the decline is other than temporary. When assessing whether the amortized cost basis of the security will be recovered, we compare the present value of the cash flows likely to be collected, based on an evaluation of all available information relevant to the collectability of the security, to the amortized cost basis of the security. The shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is referred to as the “credit loss.” If there is a credit loss, the impairment is considered to be other-than-temporary. If we identify that an other-than-temporary impairment loss has occurred, we then determine whether we intend to sell the security, or if it is more likely than not that we will be required to sell the security prior to recovering the amortized cost basis less any current-period credit losses. If we determine that we do not intend to sell, and it is not more likely than not that we will be required to sell the security, the amount of the impairment loss related to the credit loss will be recorded in earnings, and the remaining portion of the other-than-temporary impairment loss will be recognized in other comprehensive income (loss), net of tax. If we determine that we intend to sell the security, or that it is more likely than not that we will be required to sell the security prior to recovering its amortized cost basis less any current-period credit losses, the full amount of the other-than-temporary impairment (OTTI) will be recognized in earnings.
For the year ended December 31, 2018, the Company incurred $16,000 of OTTI losses on three common stock securities that were impaired during the fourth quarter of 2018. During 2017, the Company incurred $57,000 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. Adverse investment market conditions, or poor operating results of underlying investments, could result in impairment charges in the future.
The fair value estimates of our investments provided by the independent pricing service at December 31, 2018 and December 31, 2017, 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, 2018 and 2017, 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, 2018 and 2017, deferred acquisition costs and the related unearned premium reserves were as follows:
We had net deferred tax assets of $1.0 million and $0.3 million at December 31, 2018 and 2017, 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, 2018 and 2017, we had no valuation allowance with respect to our deferred tax asset.
As of December 31, 2018 and 2017, other assets totaled $1.0 million and $1.3 million, respectively. The decrease in other assets primarily relates to a decrease in prepaid fees as of December 31, 2018 compared to the same period of 2017.
As of December 31, 2018 and 2017, outstanding debt balances totaled $3.5 million and $4.3 million, respectively. The average interest rate on debt in was 3.7% in 2018 compared to 3.9% in 2017. The debt balance is comprised of leasehold obligations, debt obligations, and our revolving line of credit.
As of December 31, 2018, 11,700 RSUs have been granted at a fair market value of $15.10 per share. We recognized $50,662 of expense on these units in the twelve months ended December 31, 2018, respectively. Total unrecognized compensation expense relating to outstanding and unvested RSUs was $126,008 as of December 31, 2018, which will be recognized over the remainder of the three-year vesting period.
Cash flows from continuing operations for the years ended December 31, 2018 and 2017 were as follows:
The amount available for payment of dividends from ICC in 2019 without the prior approval of the Illinois Department of Insurance is approximately $5.1 million based upon the insurance company’s 2018 annual statement. Prior to its payment of any dividend, ICC is required to provide notice of the dividend to the Illinois Department of Insurance. This notice must be provided to the Illinois Department of Insurance 30 days prior to the payment of an extraordinary dividend and 10 days prior to the payment of an ordinary dividend. The Illinois Department of Insurance has the power to limit or prohibit dividend payments if ICC is in violation of any law or regulation. These restrictions or any subsequently imposed restrictions may affect our future liquidity.
The following table summarizes, as of December 31, 2018, our future payments under contractual obligations and estimated claims and claims related payments for continuing operations.
We have audited the accompanying consolidated balance sheets of ICC Holdings, Inc. and Subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of earnings and comprehensive earnings (loss), 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, 2018 and 2017 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.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We are a specialty insurance carrier primarily underwriting commercial multi-peril, liquor liability, workers’ compensation, and umbrella liability coverages for the food and beverage industry through our subsidiary insurance company, ICC. ICC writes business in Colorado, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Ohio, Pennsylvania, and Wisconsin and markets through independent agents. Approximately 29.7% and 33.7% of the premium was written in Illinois for the years ended December 31, 2018 and December 31, 2017, respectively. ICC sold its two wholly-owned subsidiaries, Beverage Insurance Agency, Inc. and Estrella Innovative Solutions, Inc. to ICC Holdings during the second quarter of 2018. ICC sold ICC Realty, LLC to its parent, ICC Holdings, Inc. during the fourth quarter of 2017. The Company operates as a single segment.
The probability that the Company will recover the entire amortized cost basis of the fixed income securities prior to maturity,
The ability and intent to hold fixed income securities until maturity or
Quantitative and qualitative criteria are considered during this process to varying degrees depending on the sector the analysis is being performed as follows:
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. We maintain cash balances primarily at one bank, which are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. During the normal course of business, balances are maintained above the FDIC insurance limit.
The dates presented below, represent the implementation dates for the Company. The Company’s status as an Emerging Growth Company could delay the required adoption of each of these standards.
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.
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 will be required to adopt this update on January 1, 2020, and depending on the specific amendment will be required to adopt prospectively or retrospectively. We early adopted the removal and modification of certain disclosures as permitted. We are currently evaluating the impact of the remaining guidance on our consolidated financial statements.
A summary of net investment income for the years ended December 31, 2018 and 2017 is as follows:
The amortized cost and estimated fair value of fixed income AFS securities at December 31, 2018, are shown by contractual maturity below.
In addition, the following table is a schedule of amortized costs and estimated fair values of investments in fixed maturity and equity securities as of December 31, 2018 and 2017
As of December 31, 2018, the Company held 200 equity securities that were in unrealized loss positions. Of the 200 securities, none have been in an unrealized loss position for 12 consecutive months or longer. As of December 31, 2017, the Company held 13 equity securities that were in unrealized loss positions. Of these 13 securities, five were in an unrealized loss position for 12 consecutive months or longer and represented $19,711 in unrealized losses.
The fixed income portfolio contained 131 securities in an unrealized loss position as of December 31, 2018. Of these 131 securities, 51 have been in an unrealized loss position for 12 consecutive months or longer and represent $655,653 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.
In 2018, investment property comprised of 57 apartment rental units located in Rock Island, Moline, Illinois, Silvis, Illinois and Le Claire, Iowa. Property held for investment is net of accumulated depreciation of $222,825 and $127,161 as of December 31, 2018, and 2017, respectively. Related depreciation expense was $95,664 and $76,213 for the years ended December 31, 2018, and 2017, respectively.
· Level 1 is applied to valuations based on readily available, unadjusted quoted prices in active markets for identical assets.
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, 2018 and 2017. Additionally, there were no securities transferred in or out of levels 1 or 2 during the years ended December 31, 2018 and 2017.
As of December 31, 2018 and 2017, outstanding debt balances totaled $3,484,606 and $4,339,208, respectively. The average rate on debt was 3.7% in 2018 compared to 3.9% in 2017.
Long-term debt consists of the following as of the periods referenced below:
At December 31, 2018 and 2017, the Company had reinsurance recoverable on unpaid losses and settlement expenses totaling $6,735,964 and $10,029,834, 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 tables represent cumulative incurred losses and settlement expenses, net of reinsurance, by accident year and cumulative paid loss and settlement expenses, net of reinsurance, by accident year, for the years ended December 31, 2009 to 2018, as well as total IBNR and the cumulative number of reported claims for the year ended December 31, 2018. The information about incurred and paid claims development for the years ended December 31, 2009 to 2017, as well as total IBNR and the cumulative number of reported claims for the year ended December 31, 2018, is presented as unaudited required supplementary information. The property line of business has been disaggregated based on the shorter payout period in comparison to the workers compensation and liability lines of business.
The following table is a reconciliation of the Company’s unpaid losses and settlement expenses for the years 2018 and 2017.
The Tax Cuts and Jobs Act of 2017 (the Tax Act) was enacted on December 22, 2017 and lowered the federal corporate tax rate to 21% effective January 1, 2018. As a result, the Company revalued its deferred tax items as of December 31, 2017 to reflect the 21% rate as provided for in the Tax Act. The Tax Act required a change in the methodology employed to calculate reserves for tax purposes. Beginning in 2018, a higher interest rate assumption and longer payout patterns will be used to discount loss 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 Internal Revenue Service (IRS) annually.
In December 2018, the Treasury issued Rev Proc 2019-06, which included revised loss reserve discounting factors and transitional guidance necessary to complete the accounting for the impacts of the Tax Act. The transitional adjustment for loss reserve discounting was calculated as of January 1, 2018 and the resulting adjustment will be recognized in taxable income evenly over an eight year period beginning in 2018.
As of December 31, 2018, the Company does not have any capital or operating loss carryforwards. Periods still subject to Internal Revenue Service (IRS) audit include 2015 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 $239,813 and $311,507 for 2018 and 2017, respectively. Additionally, bonuses may be awarded to executives, managers, and associates through company incentive plans, provided certain financial or operational goals are met.
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.
No Illinois domiciled company may pay any extraordinary dividend or make any other extraordinary distribution to its security holders until: (a) 30 days after the Director has received notice of the declaration thereof and has not within such period disapproved the payment, or (b) the Director approves such payment within the 30-day period. For purposes of this subsection, an extraordinary dividend or distribution is any dividend or distribution of cash or other property whose fair market value, together with that of other dividends or distributions, made within the period of 12 consecutive months ending on the date on which the proposed dividend is scheduled for payment or distribution exceeds the greater of: (a) 10% of the company’s surplus as regards policyholders as of the 31st day of December next preceding, or (b) the net income of the company for the 12-month period ending the 31st day of December next preceding, but does not include pro rata distributions of any class of the company’s own securities.
Mr. Scott T. Burgess is a director of the Company and a Senior Managing Director of Griffin Financial Group. Mr. Burgess was paid $3,812 and $2,690 in 2018 and 2017, respectively. Griffin Financial Group was paid $0 and $893,240 in 2018 and 2017, respectively. Griffin and Stevens & Lee are affiliated. Stevens & Lee is a full-service law firm that was paid $99,591 and $46,286 as of December 31, 2018 and 2017, respectively.
The Company has operating lease obligations related to managing the business. Minimum future rental payments under non-cancellable agreements total $111,490 in 2019.
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, 2018, we have also audited Schedules III, IV, V and VI on pages 95 through 101. 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.