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 35 apartment rental units located in Rock Island and Moline, Illinois.
The selected historical financial data of ICC Holdings, Inc. have not been presented as ICC Holdings, Inc. is a newly incorporated entity, has had no business transactions or activities to date and had no assets or liabilities during the periods presented in this section.
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, 2016, one-half of the premiums would be earned in 2016 and the other half would be earned in 2017.
We use net earnings (loss) to measure our profit and return on average equity to measure our effectiveness in utilizing equity to generate net income. In determining return on average equity for a given year, net earnings (loss) is divided by the average of the beginning and ending equity for that year.
We accrue liabilities for unpaid loss and settlment expenses based upon estimates of the ultimate amount payable.
Ceded unearned premiums and reinsurance balances recoverable on paid and unpaid losses and settlement expenses are reported separately as assets instead of being netted with the related liabilities, since reinsurance does not relieve us of our legal liability to our policyholders.
Comprehensive earnings include net earnings plus unrealized gains/losses on available-for-sale investment securities, net of tax. In reporting the components of comprehensive earnings on a net basis in the statement of earnings, the Company used a 34% tax rate.
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 grew by $66,000, or 34.9%, in 2016 as compared to 2015 primarily as a result of the growth in premium volume.
Net investment income increased by $635,000 for the year ended December 31, 2016 as compared to 2015, primarily from the growth of the investment portfolio. Average invested assets for 2016 were $78.7 million compared to $74.9 million for 2015, an increase of $3.8 million, or 5.1%. The increase in the portfolio was primarily due to net cash provided by operating activities of $4.6 million.
Interest expense increased to $226,000 for the year ended December 31, 2016 from $136,000 for the year ended December 31, 2015. This 66.2% increase year over year reflects the Company’s financing of certain assets under financial sales-leaseback transactions in September 2015, again in March of 2016 and most recently from a debt agreement in September 2016. The Company does not anticipate expanding these borrowings over the next twelve months.
Our reserves for unpaid loss and settlement expense are summarized below:
The width of the range in reserves arises primarily because specific losses may not be known and reported for some period and the ultimate losses paid and settlement expenses incurred with respect to known losses may be larger than currently estimated. The ultimate frequency or severity of these claims can be very different than the assumptions we used in our estimation of ultimate reserves for these exposures.
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, 2016 and 2015, we experienced favorable development of $1.3 million and $0.5 million, respectively.
As discussed earlier, the estimation of our reserves is based on several actuarial methods, each of which incorporates many quantitative assumptions. The judgment of the actuary plays an important role in selecting among various loss development factors and selecting the appropriate method, or combination of methods, to use for a given accident year. The ranges presented above represent the expected variability around the actuarially determined central estimate. The total range around our actuarially determined estimate varies from (1.9)% to 11.5%. As shown in the table below, since 2011 the variance in our originally estimated accident year loss reserves has ranged from (4.0%) deficient to 12.0% redundant as of December 31, 2016.
For the year ended December 31, 2016, the Company incurred $0.2 million of OTTI losses on two securities that were impaired and subsequently sold during the last three months of 2016. During 2015 the Company did not recognize any impairment losses. Adverse investment market conditions, or poor operating results of underlying investments, could result in impairment charges in the future.
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, 2016 and 2015, deferred acquisition costs and the related unearned premium reserves were as follows:
We had net deferred tax assets of $0.9 million and $1.4 million at December 31, 2016 and 2015, 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, 2016 and 2015, we had no valuation allowance with respect to our deferred tax asset.
We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record an additional valuation allowance against our deferred tax assets.
As of December 31, 2016 and 2015, other assets totaled $2.4 million and $0.9 million, respectively. Deferred stock offering and conversion expenses account for $1.3 million of the increase.
We entered into a sale leaseback arrangement in 2016 that is accounted for as a capital lease. Under the agreement, the third party finance company purchased electronic data processing software and titled vehicles which are leased to us. These assets remain on our books due to provisions within the agreement that trigger capital lease accounting. To secure the lowest rate possible of 4.7%, we pledged bonds totaling $0.8 million during 2016, bringing the total pledged to $1.8 million and $0.9 million as of December 31, 2016 and 2015, respectively. There was no gain or loss recognized as part of this transaction. Lease payments totaled $454,000 and $64,000 for the years ended Decemeber 31, 2016 and 2015, 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, 2016, was $1.2 million and was included in corporate debt on the consolidated balance sheet.
In connection with the offering, the ESOP purchased 350,000 shares, or 10.0% of the common stock issued. The Company borrowed $3.5 million at an interest rate of 3.65% to fund the purchase of these shares and will make annual contributions to the ESOP sufficient to repay that loan.
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. Implementation of the stock-based incentive plan is subject to shareholder approval.
Upon completion of the offering, we became subject to the proxy solicitation, periodic reporting, insider trading prohibitions and other requirements of the Exchange Act and to most of the provisions of the Sarbanes-Oxley Act of 2002. We estimate that the cost of initial compliance with the requirements of the Sarbanes-Oxley Act will be approximately $300,000 and that compliance with the ongoing requirements of the Exchange Act and the Sarbanes-Oxley Act will result in an increase of approximately $200,000 in our annual operating expenses.
ICC Holdings, Inc’s principal source of liquidity will be dividend payments and other fees received from ICC and ICC Realty, LLC. ICC is restricted by the insurance laws of Illinois as to the amount of dividends or other distributions it may pay to us. Under Illinois law, there is a maximum amount that may be paid by ICC during any twelve-month period. ICC may pay dividends to us after notice to, but without prior approval of the Illinois Department of Insurance in an amount “not to exceed” the greater of (i) 10% of the surplus as regards policyholders of ICC as reported on its most recent annual statement filed with the Illinois Department of Insurance, or (ii) the statutory net income of ICC for the period covered by such annual statement. Dividends in excess of this amount are considered “extraordinary” and are subject to the approval of the Illinois Department of Insurance.
The amount available for payment of dividends from ICC in 2017 without the prior approval of the Illinois Department of Insurance is approximately $3.4 million based upon the insurance company’s 2016 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.
In June 2016, the FASB issued ASU No. 2016 13, Financial Instruments Credit Losses. The guidance affects the recognition of expected credit losses. Credit losses relating to available for sale securities will be recorded through an allowance for credit losses. The amendments will be applied to fiscal years beginning after December 15, 2020 and early adoption is permitted as of fiscal years beginning after December 15, 2018. The effect of applying the new guidance on accounting for credit losses has not yet been determined.
We have audited the accompanying consolidated balance sheets of Illinois Casualty Company as of December 31, 2016 and 2015, and the related consolidated statements of earnings and comprehensive earnings, policyholders’ equity and cash flows for each of the years then ended. The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing auditing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits also included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Illinois Casualty Company as of December 31, 2016, and 2015, 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.
As used in this Form 10-K, references to “the Company,” “we,” “us,” and “our” refer to the consolidated group. On a stand-alone basis ICC Holdings, Inc is referred to as the “Parent Company.” The consolidated group consists of the holding company, ICC Holdings, Inc., an operating insurance company, ICC, and ICC’s three wholly-owned subsidiaries, Beverage Insurance Agency, Inc., an inactive insurance agency, Estrella Innovative Solutions, Inc., an outsourcing company, and ICC Realty, LLC, a real estate services and holding company. ICC is an Illinois insurance company.
The extent to which the fair value is less than cost,
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 bases over the estimated useful lives of the building, which we estimate to be 39 years. Income from property held for investment is reported as net investment income.
The liability for unpaid losses and settlement expenses represents estimates of amounts needed to pay reported and unreported claims and related expenses. The estimates are based on certain actuarial and other assumptions related to the ultimate cost to settle such claims. Such assumptions are subject to occasional changes due to evolving economic, social, and political conditions. 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, 2016, make a reasonable provision to meet our future obligations. See Note 7 - Unpaid Losses and Settlement Expenses for further discussion.
Comprehensive earnings include net earnings plus unrealized gains/losses on available-for-sale investment securities, net of tax. In reporting the components of comprehensive earnings on a net basis in the statement of earnings, the Company used a 34% tax rate. Other comprehensive earnings (loss), as shown in the consolidated statements of earnings and comprehensive earnings, is net of tax expense (benefit) of $346,785 and $(472,678) for 2016 and 2015, respectively.
Short-Duration Contracts Disclosures (ASU 2015-09) - This guidance addresses enhanced disclosure requirements for insurers relating to short-duration insurance contract claims and the unpaid claims liability rollforward for long and short-duration contracts. This ASU is effective for annual reporting periods beginning after December 15, 2015, and for interim periods after December 15, 2016. Early adoption is permitted. As an emerging growth company, the Company is permitted to and intends to defer adoption until required for private entities. The Company will adopt this ASU for the year ended December 31, 2017 and while disclosures will be increased, management does not believe adoption will have a material effect on the Company’s financial statements.
Revenue Recognition (ASU 2014-09) This will supersede the current revenue recognition requirements in Topic 605, Revenue Recognition. The ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The new guidance will be effective for the Company’s year ending December 31, 2019. The effect of applying this on the consolidated financial statements is not expected to have a material impact as the Company’s primary revenue is derived from insurance contracts which are excluded from the scope of ASU 2014-09.
Certain reclassifications have been made to the 2015 financial statements to conform to the 2016 financial statement presentation. These reclassifications had no effect on net earnings.
A summary of net investment income for the years ended December 31, 2016 and 2015 is as follows:
The following is a summary of the proceeds from sales, maturities, and calls of AFS securities and the related gross realized gains and losses, excluding OTTI, for the years ended December 31, 2016 and 2015.
1Equity securities consist of exchange traded funds (ETF) made up of Dividends Select, the S&P 500, and one bond ETF.
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 $10,288,405 and $9,201,791 and commercial mortgage backed securities of $7,600,109 and $6,874,455 at December 31, 2016 and 2015, respectively.
As of December 31, 2016 and 2015, municipal bonds totaled $14,870,791 and $16,356,450, respectively with net unrealized gains of $530,948 and $1,090,259, respectively. Unlike corporates, municipal spreads widened in 2016 especially after the U.S. Presidential election. As of December 31, 2016, approximately 13% of the municipal fixed income securities in the investment portfolio were general obligations of state and local governments, 44% were revenue based, 34% were pre-refunded, and the remaining 9% were taxable. The municipal bond portfolio has an overall rating of AA.
As of December 31, 2016 and 2015, the Company held 21 equity securities that were in unrealized loss positions. The total unrealized loss on these securities in 2016 and 2015 was $166,375 and $418,501, respectively.
For the year ended Decemeber 31, 2016, the Company recognized in net earnings $212,731 of OTTI losses on two securities that were impaired and subsequently sold during the last three months of 2016. During 2015, the Company did not recognize any impairment losses. For all fixed income securities at a loss at December 31, 2016, 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, 2016. 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, 2016, and 2015.
As required by law, certain fixed maturity investments amounting to $2,958,297 and $2,950,105 at December 31, 2016 and 2015, respectively, were on deposit with either regulatory authorities or banks. In addition, $1,808,523 and $947,554 was pledged as of December 31, 2016 and 2015, respectively, as part of a capital lease arrangement.
As a part of the process to determine fair value, management utilizes widely recognized, third-party pricing sources to determine fair values. Management has obtained an understanding of the third-party pricing sources’ valuation methodologies and inputs. The following is a description of the valuation techniques used for financial assets that are measured at fair value, including the general classification of such assets pursuant to the fair value hierarchy.
Preferred Stock-Preferred stocks do not have readily observable prices, but do have quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets in markets that are not active; and inputs other than quoted prices are classificed as Level 2. All preferred stock holdings are deemed Level 2.
Assets measured at fair value on a recurring basis as of December 31, 2015, are as summarized below:
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 additional bonds totaling $860,969 during 2016, bringing the total pledged to $1,808,523 and $947,554 as of December 31, 2016 and 2015, respectively. There was no gain or loss recognized as part of this transaction. Lease payments totaled $438,593 and $64,182 for the years ended December 31, 2016 and 2015, 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, 2016, was $1,227,541 compared to $859,818 at Decemeber 31, 2015.
Future minimum lease payments for the four succeeding years as of December 31, 2016 are:
The Company maintains a mortgage on its home office. Interest is charged at a fixed rate of 2.6% and the loan matures in 2017. The building is used as collateral to secure the loan. The loan balance at year end 2016 and 2015 was $183,790 and $492,315, respectively. The interest paid on the loan in 2016 was $9,163 and $17,153 in 2015.
Through the purchase of reinsurance, the Company also generally limits its net loss on any individual risk to a maximum of $500,000, although certain treaties contain an annual aggregate deductible before reinsurance applies.
The following table displays net reinsurance balances recoverable, after consideration of collateral, from the Company’s top 10 reinsurers as of December 31, 2016. These reinsurers all have financial strength ratings of “A” or better by A.M. Best. Also shown are the amounts of written premium ceded to these reinsurers during the calendar year 2016.
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, 2016 and 2015. 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.
The Company experienced favorable development relative to prior years’ reserve estimates in its casualty line of business primarily from the 2015 accident year. Liquor Liability and Workers’ Compensation were the largest contributors to the favorable development, partially offset by adverse development in Business Liability.
The Company maintains a 401(k) and bonus and incentive plans covering executives, managers, and associates. Excluding the 401(k), at the CEO’s discretion, funding of these plans is primarily dependent upon reaching predetermined levels of combined ratio, growth in statutory surplus, growth in direct written premium, and overall renewal retention ratios. Bonuses are earned as the Company generates earnings in excess of this required return. While some management incentive plans may be affected somewhat by other performance factors, the larger influence of corporate performance ensures that the interests of the executives, managers, and associates corresponds with those of the stakeholders.
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. Additionally, bonuses may be awarded to executives, managers, and associates through company incentive plans, provided certain financial or operational goals are met. Annual expenses for these incentive plans totaled $724,965 and $776,390 for 2016 and 2015, respectively.
In November 2012, the Company entered into a deferred compensation agreement with an executive of the Company. The agreement requires the Company to make payments to the executive beginning at retirement (age 62). In the event of separation of service without cause prior to age 62, benefits under this agreement vest 25% in November 2017, 50% in November 2022, 75% in November 2027, and 100% on January 1, 2032. In the event of death prior to retirement, benefits become fully vested and are payable to the executive’s beneficiaries. Using a discount rate of 4.14%, the fully vested obligation under the agreement would total approximately $1,610,932 on January 1, 2032. As of December 31, 2016 and 2015, the accrued liability related to this agreement totaled $153,409 and $173,676, respectively. The Company’s recognized $20,267 of benefit and $68,000 of expense in 2016 and 2015, respectively.
Year-end statutory surplus for 2016 and 2015 presented in the table below includes $51,207 and $115 of Estrella Innovative Solutions, LLC common stock (cost basis of $270,078 and $170,078) held by ICC. This investment is eliminated in the GAAP consolidated financial statements.
The Company did not pay any dividends to security holders in 2016 or 2015. It did however, make cash dividend payments in the amount of $1,838 and $1,452 in 2016 and 2015, respectively, to Wisconsin policyholders in accordance with policy contractual obligations.
Mr. John R. Klockau, a director of the Company, holds two surplus note from the Company totaling $1,150,000. The first note is for $1,000,000 and bears interest at 5.35%. The second note is for $150,000 and bears interest at 7.00%. Mr. Klockau was paid interest in the amount of $64,000 in both 2016 and 2015. Additionally, Mr. Klockau is a claims consultant and was paid $12,944 and $14,011 in 2016 and 2015, respectively, related to his services to the Company.
Mr. Dan Porters is a director of the Company and the Chairman and CEO of Management Resource Group, Ltd (MRG). MRG was paid $4,900 and $0 in 2016 and 2015, respectively.
Rent expense totaled $3,643 and $32,457 in 2016 and 2015, respectively.
Upon closing of the offering, R. Kevin Clinton became a member of our Board of Directors on March 24, 2017.