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 54 apartment rental units located in Moline, Rock Island, and Silvis, Illinois.
For the year ended December 31, 2017, we had direct written premium of $53.7 million, net premiums earned of $44.2 million, and net income of $0.7 million. For the year ended December 31, 2016, we had direct premiums written of $51.0 million, net premiums earned of $42.6 million, and net income of $2.8 million. At December 31, 2017, we had total assets of $152.3 million and equity of $64.1 million. At December 31, 2016 we had total assets of $122.2 million and equity of $33.6 million.
Gross premiums written is equal to direct and assumed premiums before the effect of ceded reinsurance. Net premiums written is the difference between gross premiums written and premiums ceded or paid to reinsurers (ceded premiums written).
We maintain reserves for the payment of claims (incurred losses) and expenses related to adjusting those claims (loss settlement expenses). Our loss reserves consist of case reserves, which are reserves for claims that have been reported to us, loss settlement expense reserve, which includes all defense and litigation-related expenses, whether internal or external to us, and reserves for claims that have been incurred but have not yet been reported or for case reserve deficiencies or redundancies (IBNR).
In addition to our actuarial central estimate, we have also developed a range of estimates. This range is not designed to represent minimum or maximum possible outcomes. It is developed to represent low and high ends for a reasonable range of expected outcomes given the selection of alternative, but reasonable assumptions. Actual results may fall outside of this range.
Due to the inherent uncertainty underlying loss reserve estimates, final resolution of the estimated liability for loss and settlement expenses may be higher or lower than the related loss reserves at the reporting date. Therefore, actual paid losses, as claims are settled in the future, may be materially higher or lower in amount than current loss reserves. We reflect adjustments to loss reserves in the results of operations in the period the estimates are changed.
Comprehensive earnings include net earnings plus unrealized gains/losses on available-for-sale investment securities, net of tax. In reporting the components of comprehensive earnings on a net basis in the statement of earnings, the Company used a 21% tax rate for 2017 and 34% for all prior periods.
1Calculated by subtracting the sum of loss and settlement expenses (2017 -$29,010 and 2016 -$24,345) and policy and acquisistion costs and other operating expenses (2017 - $17,308 and 2016 - $15,849) from net premiums earned (2017 -$44,213 and 2016 - $42,611).
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 $70,000, or 27.5%, in 2017 as compared to 2016 primarily as a result of the growth in premium volume.
For calendar year 2016, we experienced favorable development relative to prior years’ reserve estimates in the 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 BOP Liability.
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 increased by $91,000, or 19.6%, in 2017 as compared to 2016.
Our investment portfolio consisted of 87.8% and 86.8% of readily marketable, investment-grade fixed-maturity securities as of December 31, 2017 and 2016, respectively. The remainder of the portfolio is comprised of rental real estate, common and preferred stock. Net investment income is primarily comprised of interest earned and dividends paid on these securities and rental income on investment real estate, net of related investment expenses, and excludes realized gains and losses.
The following table provides case and IBNR reserves for losses and settlement expenses as of December 31, 2017 and 2016.
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, 2017 and 2016, we experienced favorable development of $0.8 million and $1.3 million, respectively.
Potential for variability in our reserves is evidenced by this development. As further illustration of reserve variability, we initially estimated unpaid loss and settlement expense net of reinsurance at the end of 2016 at $40.7 million. As of December 31, 2017, that amount was re-estimated at $39.9 million, which is $0.8 million, or 2.0%, lower than the initial estimate.
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 (6.2)% to 7.0%. As shown in the table below, since 2012 the variance in our originally estimated accident year loss reserves has ranged from (10.6%) deficient to 12.9% redundant as of December 31, 2017.
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 $339,000 before taxes. This increase in reserves would have the effect of decreasing net income and equity as of December 31, 2017 by $224,000. 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, 2017 would be reduced by $4.7 million with corresponding increases in net income and equity of $3.1 million.
The equity portfolio consists of common and preferred stock. Net unrealized gains in the equity portfolio increased $443,229 and $949,119 in 2017 and 2016, respectively. Given the intent to hold and expectation of recovery to cost within a reasonable period of time, the Company does not consider any of its equities to be other-than-temporarily impaired.
The unrealized losses as of December 31, 2017 and 2016 were primarily related to changes in the interest rate environment. Fair values of interest rate sensitive instruments may be affected by increases and decreases in prevailing interest rates which generally translate, respectively, into decreases and increases in fair values of fixed maturity investments. The fair values of interest rate sensitive instruments also may be affected by the credit worthiness of the issuer, prepayment options, relative values of other investments, the liquidity of the instrument, and other general market conditions.
Should the independent pricing service be unable to provide a fair value estimate, we would attempt to obtain a non-binding fair value estimate from a number of broker-dealers and review this estimate in conjunction with a fair value estimate reported by an independent business news service or other sources. In instances where only one broker-dealer provides a fair value for a fixed maturity security, we use that estimate. In instances where we are able to obtain fair value estimates from more than one broker-dealer, we would review the range of estimates and would select the most appropriate value based on the facts and circumstances. Should neither the independent pricing service nor a broker-dealer provide a fair value estimate, we would develop a fair value estimate based on cash flow analyses and other valuation techniques that utilize certain unobservable inputs. Accordingly, we would classify such a security as a Level 3 investment.
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, 2017 and 2016, deferred acquisition costs and the related unearned premium reserves were as follows:
As of December 31, 2017 and 2016, other assets totaled $1.3 million and $2.4 million, respectively. The decrease in other assets primarily relates to the elimination of deferred stock offering and conversion expenses in the amount $1.3 million which had been included in the balance as of December 31, 2016.
As of December 31, 2017 and 2016, outstanding debt balances totaled $4.3 million and $3.8 million, respectively. The average interest rate on debt in was 3.9% in 2017 compared to 5.0% in 2016. The debt balance is comprised of leasehold obligations, debt obligations, and our revolving line of credit.
ICC’s Plan of Conversion from a mutual to a stock company was approved by ICC policyholders at a special meeting on March 17, 2017. Simultaneously, surplus notes totaling $1.65 million, representing all outstanding surplus notes as of that date were converted into 165,000 shares of the Company’s common stock. The remaining $200,000 balance of surplus notes was paid in March 2017.
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 $269,000 to the ESOP during the fourth quarter of 2017.
A compensation expense charge is booked monthly during each year for the shares committed to be allocated to particpants that year, determined with reference to the fair market value of our stock at the time the commitment to allocate the shares is accrued and recognized. For the year ended December 31, 2017, we recognized compensation expense of $368,000 related to 21,878 shares of our common stock that were committed to be released to partipants’ accounts for the year ended December 31, 2017. Of the 21,878 shares committed to be released, 2,320 shares were commited on December 31, 2017 and had no impact on the weighted average common shares outstanding for the year ended December 31, 2017.
Cash flows from continuing operations for the years ended December 31, 2017 and 2016 were as follows:
ICC Holdings, Inc’s principal source of liquidity is 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 2018 without the prior approval of the Illinois Department of Insurance is approximately $5.1 million based upon the insurance company’s 2017 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, 2017, our future payments under contractual obligations and estimated claims and claims related payments for continuing operations.
In January 2016, FASB issued ASU No. 2016 01, Financial Instruments Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements of financial instruments. The amendments will be applied to fiscal years beginning after December 15, 2018. Early adoption is permitted for the accounting guidance on financial liabilities under the fair value option. The Company will make a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The primary impact this guidance will have on our financial statements relates to recognizing changes in the fair value of equity securities through the statement of earnings. The impact to our statement of earnings will vary depending upon the level of volatility in the performance of the securities held in our equity portfolio and the overall market.
Consolidated Statements of Earnings and Comprehensive Earnings (Years ended December 31, 2017 and 2016)
Consolidated Statements of Cash Flows (Years ended December 31, 2017 and 2016)
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits.
1Common stock securities consist of exchange trade funds (ETF) made up primarily of Dividends Select and the S&P 500
2Par 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.
2Weighted average number of common shares outstanding for the twelve months ended December 31, 2016 is based on the resulting shares from the initial public offering that was completed in March 2017 and are used to calculate the pro forma earnings per share for the twelve months ended December 31, 2016.
ICC Holdings, Inc. is a Pennsylvania corporation that was organized in 2016. As used in this Form 10-K, references to “the Company,” “we,” “us,” and “our” refer to the consolidated group for the period after the completion of the stock conversion and refer to Illinois Casualty Company (ICC) and its subsidiaries for the period prior to the stock conversion. On a stand-alone basis ICC Holdings, Inc is referred to as the “Parent Company.” The consolidated group consists of the holding company, ICC Holdings, Inc.; ICC Realty, LLC, a real estate services and holding company; an operating insurance company, ICC; and ICC’s two wholly-owned subsidiaries, Beverage Insurance Agency, Inc., an inactive insurance agency and Estrella Innovative Solutions, Inc., an outsourcing company. ICC is an Illinois domiciled company.
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, Minnesota, Missouri, Ohio, and Wisconsin and markets through independent agents. Approximately 33.7% and 36.9% of the premium was written in Illinois for the years ended December 31, 2017 and 2016, respectively. ICC has two wholly owned subsidiaries, Beverage Insurance Agency and Estrella Innovative Solutions, Inc. ICC Realty, LLC is a serial LLC that held investment property for ICC and was a wholly owned subsidiary of ICC through October 11, 2017. ICC sold all of its real estate holdings held by ICC Realty, Inc. to its parent, ICC Holdings, Inc. via the sale of ICC Realty, Inc. to ICC Holdings, Inc. during the fourth quarter of 2017. The Company operates as a single segement.
The Company classifies its investments in all debt and equity securities as available-for-sale.
The Company analyzes the screened impairment candidates on a quantitative and qualitative basis. This includes an assessment of the factors that may be contributing to the unrealized loss and whether the recovery value is greater or less than current market value.
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, 2017, make a reasonable provision to meet our future obligations. See Note 7 - Unpaid Losses and Settlement Expenses for further discussion.
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. The Company adopted this ASU for the year ended December 31, 2017. As the requirements are disclosure only, the adoption of this guidance did not impact the Company’s financial statements, but did result in additional disclosures.
The dates presented below, represent the implementation dates for publicly traded entities. The Company’s status as an Emerging Growth Company could delay the required adoption of each of these standards.
Financial Instruments - Recognition and Measurement (ASU 2016-01) - This guidance affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements of financial instruments. The amendments will be applied to fiscal years beginning after December 15, 2018. Early adoption is permitted for the accounting guidance on financial liabilities under the fair value option. The Company will make a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The primary impact this guidance will have on our financial statements relates to recognizing changes in the fair value of equity securities through the statement of earnings. The impact to our statement of earnings will vary depending upon the level of volatility in the performance of the securities held in our equity portfolio and the overall market.
Reinsurance does not discharge the Company from its primary liability to policyholders, and to the extent that a reinsurer is unable to meet its obligations, the Company would be liable. On a quarterly basis, the financial condition of prospective and existing reinsurers is monitored. As a result, the Company purchases reinsurance from a number of financially strong reinsurers. Accordingly, no allowance for reinsurance balances deemed uncollectible has been made. See Note 6 -Reinsurance for further discussion.
The National Association of Insurance Commissioners (NAIC) has developed Property/Casualty Risk-Based Capital (RBC) standards that relate an insurer’s reported statutory surplus to the risks inherent in its overall operations. The RBC formula uses the statutory annual statement to calculate the minimum indicated capital level to support asset (investment and credit) risk and underwriting (loss reserves, premiums written and unearned premium) risk. The NAIC model law calls for various levels of regulatory action based on the magnitude of an indicated RBC capital deficiency, if any. As of December 31, 2017, the Company determined that its capital levels are well in excess of the minimum capital requirements for all RBC action levels and that its capital levels are sufficient to support the level of risk inherent in its operations. See Note 10 - Statutory Information and Dividend Restrictions for further discussion of statutory information and related insurance regulatory restrictions.
The following is a summary of the proceeds from sales, maturities, and calls of AFS securities and the related gross realized gains and losses, excluding OTTI, for the years ended December 31, 2017 and 2016.
The amortized cost and estimated fair value of fixed income AFS securities at December 31, 2017, 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, 2017 and 2016:
The following table is also used as part of the impairment analysis and displays the total value of securities that were in an unrealized loss position as of December 31, 2017 and 2016. The table segregates the securities based on type, noting the fair value, cost (or amortized cost), and unrealized loss on each category of investment as well as in total. The table further classifies the securities based on the length of time they have been in an unrealized loss position.
As of December 31, 2017, the Company held 13 equity securities that were in unrealized loss positions. Of the 13 securities, 5 have been in an unrealized loss position for 12 consecutive months or longer and represent $19,711 in unrealized losses. As of December 31, 2016, the Company held 21 equity securities that were in unrealized loss positions. Of these 21 securities, 2 were in an unrealized loss position for 12 consecutive months or longer and represented $33,929 in unrealized losses.
· Level 3 is applied to valuations that are derived from techniques in which one or more of the significant inputs are unobservable. Financial assets are classified based upon the lowest level of significant input that is used to determine fair value.
U.S. Treasury Bonds and Common Equity/ETF Securities-U.S. treasury bonds and exchange traded equities have readily observable price levels and are classified as Level 1 (fair value based on quoted market prices). All common stock holdings are deemed Level 1.
Assets measured at fair value on a recurring basis as of December 31, 2016, are as summarized below:
ICC entered into sale leaseback arrangements in 2016 and 2015 that are accounted for as a capital lease. Under the agreement, BofI Federal Bank (BofI) 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 $923,766 and $1,808,523 as of December 31, 2017 and 2016, respectively. There was no gain or loss recognized as part of this transaction. Lease payments totaled $501,976 and $438,593 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 $805,013 compared to $1,227,541 at Decemeber 31, 2016.
Future minimum lease payments for the three succeeding years as of December 31, 2017 are:
Premiums, written and earned, along with losses and settlement expenses incurred for the years ended December 31 are summarized as follows:
The reinsurance assumed business consists of assigned risk pools, which require the Company to participate in certain workers’ compensation and other liability pools, as a result of their licensure and premium writings in the various states in which it does business.
At December 31, 2017 and 2016, the Company had reinsurance recoverable on unpaid losses and settlement expenses totaling $10,029,834 and $12,114,998, respectively. More than 98% of the Company’s reinsurance recoverables are due from companies with financial strength ratings of “A” or better by A.M. Best.
The following table displays net reinsurance balances recoverable, after consideration of collateral, on paid losses and settlement expenses, known case and IBNR loss and settlement expense reserves, unearned premiums, and contingent commissions from the Company’s top 10 reinsurers as of December 31, 2017. 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 2017.
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, 2008 to 2017, as well as total IBNR and the cumulative number of reported claims for the year ended December 31, 2017. The information about incurred and paid claims development for the years ended December 31, 2008 to 2017, as well as total IBNR and the cumulative number of reported claims for the year ended December 31, 2016, 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 2017 and 2016.
The Company’s effective tax rate was 34.5% and 29.5% for 2017 and 2016, respectively. Effective rates are dependent upon components of pretax earnings and the related tax effects.
Management believes it is more likely than not that all deferred tax assets will be recovered given the carry back availability of insurance company losses as well as the results of future operations, which will generate sufficient taxable income to realize the deferred tax asset. In addition, it is believed that when these deferred items reverse in future years, taxable income will be taxed at an effective rate of 21%.
In connection with our conversion and public offering, we establish an ESOP. The ESOP borrowed from the Company to purchase 350,000 shares in the offering. The issuance of the shares to the ESOP resulted in a contra account established in the shareholder’s equity section of the balance sheet for the unallocated shares at an amount equal to their $10.00 per share purchase price.
A compensation expense charge is booked monthly during each year for the shares committed to be allocated to particpants that year, determined with reference to the fair market value of our stock at the time the commitment to allocate the shares is accrued and recognized. For the year ended December 31, 2017, we recognized compensation expense of $367,730 related to 21,878 shares of our common stock that were committed to be released to partipants’ accounts for the year ended December 31, 2017. Of the 21,878 shares committed to be released, 2,320 shares were commited on December 31, 2017 and had no impact on the weighted average common shares outstanding for the year ended December 31, 2017. The fair value of the unearned ESOP shares as of December 31, 2017 was $5,338,545.
Year-end statutory surplus for 2017 and 2016 presented in the table below includes $0 and $51,207 of Estrella Innovative Solutions, LLC common stock (cost basis of $270,078 and $270,078) held by ICC. This investment is eliminated in the GAAP consolidated financial statements.
Mr. John R. Klockau, a director of the Company, held two surplus note from the Company totaling $1,150,000 which were converted into 115,000 shares of the Company’s common stock on March 17, 2017. John R. Klockau received a payment for interest on the surplus notes of $12,975 during the three months ended March 31, 2017 and $64,000 for the year ended 2016. Additionally, Mr. Klockau is a claims consultant and was paid $16,230 and $12,944 in 2017 and 2016, respectively, related to his services to the Company.
Mr. Kevin Clinton is a director of the Company and owns more than 10% of the Company’s outstanding shares of common stock. Mr. Clinton was paid $1,330 and $0 in 2017 and 2016, respectively for travel reimbursement costs.
Mr. Scott T. Burgess is a director of the Company and a Senior Managing Director of Griffin Financial Group. Mr. Burgess was paid $2,690 and $2,190 in 2017 and 2016, respectively. Griffin Financial Group was paid $893,240 and $9,910 in 2017 and 2016, respectively. Griffin and Stevens & Lee are affiliated. Stevens & Lee is a full-service law firm that was paid $46,286 and $630,125 as of December 31, 2017 and 2016, respectively.
Rent benefit totaled $16,964 and rent expense totaled $3,646 in 2017 and 2016, respectively.
Subsequent events have been evaluated through the date the financial statements were issued.