The following tables include selected financial data derived from the audited consolidated financial statements of the Company for the years ended and as of December 31, 2019, 2018 and 2017. 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.
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 two independent third parties with managers specializing in the insurance industry.
Expenses incurred to underwrite risks are referred to as policy acquisition expenses. Variable policy acquisition costs consist of commission expenses, premium taxes and certain other underwriting expenses that vary with, and are primarily related to, the writing and acquisition of new and renewal business. These policy acquisition costs are deferred and amortized over the effective period of the related insurance policies. Fixed policy acquisition costs, referred to herein as underwriting and administrative expenses are expensed as incurred. These costs include salaries, rent, office supplies, and depreciation. Other operating expenses consist primarily of information technology costs, accounting and internal control salaries, as well as audit and legal expenses.
The underwriting expense ratio is the ratio (expressed as a percentage) of amortization of deferred policy acquisition costs and other operating expenses to net premiums earned, and measures our operational efficiency in producing, underwriting and administering our insurance business.
We use net earnings (loss) to measure our profit and return on average equity to measure our effectiveness in utilizing equity to generate net earnings. 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.
Equity Securities-Equity securities include common stock, mutual funds, and non-redeemable preferred stock. Equity securities are carried at fair value with subsequent changes in fair value recorded in net earnings effective January 1, 2019. Prior to January 1, 2019, the accounting for subsequent changes in fair value of equity securities was consistent with the treatment of AFS unrealized gains and losses.
Loss development methods are particularly appropriate when historical loss development patterns have been relatively stable and can be predicted with reasonable accuracy.
The process of estimating loss reserves involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both internal and external events, such as changes in claims handling procedures, economic inflation, legal trends, and legislative changes, among others. The impact of many of these items on ultimate costs for claims and claim adjustment expenses is difficult to estimate. Loss reserve estimation difficulties also differ significantly by line of business due to differences in claim complexity, the volume of claims, the potential severity of individual claims, the determination of occurrence date for a claim, and reporting lags (the time between the occurrence of the policyholder event and when it is actually reported to the insurer). Informed judgment is applied throughout the process, including the application of various individual experiences and expertise to multiple sets of data and analyses. We continually refine our loss reserve estimates in a regular ongoing process as historical loss experience develops and additional claims are reported and settled. We consider all significant facts and circumstances known at the time loss reserves are established.
As an insurance company, the Company is subject to minimal state income tax liabilities. On a state basis, since the majority of income is from insurance operations, the Company pays premium taxes in lieu of state income tax. Premium taxes are a component of policy acquisition costs and calculated as a percentage of gross premiums written.
Comprehensive earnings include net earnings plus unrealized gains (losses) on AFS investment securities, net of tax. In reporting the components of comprehensive earnings on a net basis in the statement of earnings, the Company used a 21% tax rate for 2019, 2018, and 2017.
The major components of operating revenues and net earnings (loss) are as follows:
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Direct premiums written increased by $1,858,000, or 3.0%, primarily from organic growth including the impact of recent geographical expansion efforts from 2018 to 2019, while net written premium increased by $3,222,000, or 6.4%, during the same period. Net premiums earned grew by $5,725,000, or 12.2%
For the years ended December 31, 2019, and 2018, we ceded to reinsurers $9,925,000 and $10,759,000 of earned premiums, respectively. Ceded earned premiums as a percent of direct premiums written were 15.8% in 2019, and 17.6% in 2018.
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. Another component of other income was historically attributable to sales made by the Company’s subsidiary, Estrella Innovative Solutions, Inc. Other income decreased by $249,000, or 127.0%, in 2019 as compared to 2018 primarily as a result of an increase in premiums written off.
Differences from the initial reserve estimates emerged as changes in the ultimate loss 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, our experience will ordinarily exhibit fluctuations from period to period. While management attempts to identify and react to systematic changes in the loss environment, management 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.
Policy Acquisition Costs and Other Operating Expenses and the Expense Ratio
Our expense ratio decreased 77 basis points from 38.66% to 37.89% for the year ended December 31, 2019 as compared to 2018.
General corporate expenses consist primarily of occupancy costs, such as rent and utilities. These costs are largely fixed and, therefore, do not vary significantly with premium volume but do vary with the Company’s changes in properties held for investment. Our general corporate expenses increased by $34,000, or 6.2%, in 2019 as compared to 2018.
the rate of increase in labor costs, medical costs, and material costs that underlie insured risks;
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, 2019 and 2018, we experienced adverse development of $151,000 and $1,500,000, respectively.
The fair value and unrealized losses for our securities that were temporarily impaired are as follows:
There were no other-than-temporary impairment losses recognized in net earnings during the year ended December 31, 2019. 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. Adverse investment market conditions, or poor operating results of underlying investments, could result in impairment charges in the future.
As of December 31, 2019 and 2018, other assets totaled $1.2 million and $1.0 million, respectively. The increase in other assets primarily relates to an increase in the Corporate Owned Life Insurance asset value as of December 31, 2019 compared to the same period of 2018.
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% and the Company pledged stock and $1.0 million of marketable assets as collateral for the loan. As of December 31, 2019 and 2018, outstanding debt balances totaled $3,475,000 and $3,485,000, respectively.
In response to COVID-19, the Company obtained in March 2020 a $6.0 million loan from Federal Home Loan Bank of Chicago (FHLBC) as a precautionary measure to increase its cash position and compensate for potential reductions in premium receivable collections.
The company has borrowing capacity up to approximately $33 million in the aggregate from its membership with FHLBC. We also 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 5, 2020. 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 draws down on the line of credit. There was no interest paid on the line of credit during the year ended December 31, 2019 and December 31, 2018. There are no financial covenants governing this agreement.
In connection with our conversion and public offering, we established an ESOP. The ESOP borrowed from the Company to purchase 350,000 shares in the offering. The issuance of the shares to the ESOP resulted in a contra account established in the shareholder’s equity section of the balance sheet for the unallocated shares at an amount equal to their $10.00 per share purchase price.
As of December 31, 2019 13,071 and 11,700 RSUs have been granted at a fair market value of $13.70 and $15.10, respectively. As of December 31, 2018, 11,700 RSUs have been granted at a fair market value of $15.10 per share. We recognized $108,000 and $51,000 of expense on these units in the twelve months ended December 31, 2019 and 2018, respectively. Total unrecognized compensation expense relating to outstanding and unvested RSUs was $197,000 and $126,000 as of December 31, 2019 and 2018, respectively, which is recognized over the remainder of the three-year vesting periods.
In March 2020, the World Health Organization declared a pandemic related to the rapidly spreading coronavirus (COVID-19) outbreak, which has led to a global health emergency. As a result, economic uncertainties have arisen which could impact the Company’s operations and its financial position. The extent of the impact of COVID-19 on the Company’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, as well as the impact on our policyholders, employees, vendors, and investment portfolio all of which are uncertain and cannot be predicted. The related financial impact cannot be reasonably estimated at this time.
In response to COVID-19, the Company obtained in March 2020 a $6.0 million loan from Federal Home Loan Bank of Chicago (FHLBC) as a precautionary measure to increase its cash position and compensate for potential reductions in premium receivable collections. The Company has borrowing capacity up to approximately $33 million in the aggregate from the FHLBC. In addition to both operational funding and the recent loan proceeds, we maintain a revolving line of credit with American Bank & Trust, which permits borrowing up to an aggregate principal amount of $1.75 million. The Company’s access to readily available funds is expected to sufficiently support the Company’s operational needs.
The Parent Company’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 following table summarizes, as of December 31, 2019, our future payments under contractual obligations and estimated claims and claims related payments for continuing operations.
Consolidated Statements of Earnings and Comprehensive Earnings (Loss) (Years ended December 31, 2019 and 2018)
Consolidated Statements of Stockholders’ Equity (Years ended December 31, 2019 and 2018)
We have audited the accompanying consolidated balance sheet of ICC Holdings, Inc. and Subsidiaries (the Company) as of December 31, 2019, and the related consolidated statements of earnings, comprehensive earnings, stockholders’ equity, and cash flows, for the year then ended and the related notes and the financial statement schedules listed in Item 15 of the Company’s Form 10-K (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
1 Par value $0.01; authorized: 2019 - 10,000,000 shares and 2018 - 10,000,000 shares; issued: 2019 - 3,500,000 and 2018 - 3,500,000 shares; outstanding: 2019 - 3,014,941 and 2018 - 2,992,734 shares.
Equity securities include common stock, mutual funds, and non-redeemable preferred stock. Equity securities are carried at fair value with subsequent changes in fair value recorded in net earnings effective January 1, 2019. Prior to January 1, 2019, the accounting for subsequent changes in fair value of equity securities was consistent with the treatment of AFS unrealized gains and losses.
Under current accounting standards, an OTTI write-down of fixed maturity securities, where fair value is below amortized cost, is triggered by circumstances where (1) an entity has the intent to sell a security, (2) it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis or (3) the entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security in a loss position or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the difference between the security’s amortized cost and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors is recognized in other comprehensive income. Impairment losses result in a reduction of the underlying investment’s cost basis.
Other invested assets include privately held investments and a promissory note. Other invested assets are carried at face value and given that there is no readily available market for these to trade in, management believes face value accurately reflects fair value.
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 reinsurer 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, 2019 and 2018, the Company recognized no impairments. Property and equipment are summarized as follows:
The liability for unpaid losses and settlement expenses represents estimates of both reported and unreported claims and related expenses. The estimates are based on 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, 2019, make a reasonable provision to meet our future obligations. See Note 7 - Unpaid Losses and Settlement Expenses for further discussion.
Premiums are recognized ratably over the term of the contracts, net of ceded reinsurance. Unearned premiums represent the portion of premiums written relative to the unexpired terms of coverage. Unearned premiums are calculated on a daily pro rata basis. A premium deficiency reserve should be recognized if the sum of expected claim costs and claim adjustment expenses, expected dividends to policyholders, unamortized acquisition costs, and maintenance costs exceeds related unearned premiums. The Company utilizes anticipated investment income as a factor in its premium deficiency calculation. The Company concluded that no premium deficiency adjustments were necessary in either of the years ended December 31, 2019 and 2018.
Comprehensive earnings include net earnings plus unrealized (gains) losses on AFS investment securities, net of tax. In reporting the components of comprehensive earnings on a net basis in the consolidated statement of earnings, the Company used a 21% tax rate for the years ended December 31, 2019, and 2018. Other comprehensive earnings, as shown in the consolidated statements of earnings and comprehensive earnings, is net of tax expense (benefit) of $677,121 and $(609,140) for 2019 and 2018, respectively.
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.
The Company’s insurance coverages include exposure to catastrophic events. All catastrophe exposures are monitored by quantifying exposed policy limits in each region and by using computer-assisted modeling techniques. Additionally, the Company limits its risk to such catastrophes through restraining the total policy limits written in each region and by purchasing reinsurance. The Company’s major catastrophe exposure is to losses caused by tornado/hail and freeze to commercial properties throughout the Midwest.
The Company had protection of $14.5 million and $9.5 million in excess of $500,000 first-dollar retention for the years ended December 31, 2019 and 2018, respectively. The catastrophe program is actively managed to keep net retention in line with risk tolerances and to optimize the risk/return trade off. The catastrophe reinsurance treaty renewed on January 1, 2020.
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.
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, 2019, 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.
A summary of net investment income for the years ended December 31, 2019 and 2018 is as follows:
As required by law, certain fixed maturity investments amounting to $3,827,627 and $3,742,450 at December 31, 2019 and 2018, respectively, were on deposit with either regulatory authorities or banks.
Also included in other invest assets is a promissory note with the option to borrow up to $1,275,000. The Company funded $625,000 on July 30, 2019. The note bears interest at 6.5%, and is amortized over 20 years with a balloon payment due July 30, 2029.
As of December 31, 2019, investment property comprised of 67 apartment rental units located in Milan, Illinois; Moline, Illinois; Rock Island, Illinois; Silvis, Illinois; and Le Claire, Iowa. As of December 31, 2018, investment property comprised of 57 apartment rental units located in Rock Island, Illinois; Moline, Illinois; Silvis, Illinois; and Le Claire, Iowa. Property held for investment is net of accumulated depreciation of $332,218 and $222,825 as of December 31, 2019, and 2018, respectively. Related depreciation expense was $109,393 and $95,664 for the years ended December 31, 2019, and 2018, respectively.
Due to the relatively short-term nature of cash and cash equivalents, their carrying amounts are reasonable estimates of fair value. Other invested assets as well as debt obligations are carried at face value and given that there is no readily available market for these to trade in, management believes that face value accurately reflects fair value.
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, 2019 and 2018. Additionally, there were no securities transferred in or out of levels 1 or 2 during the years ended December 31, 2019 and 2018.
The Company has borrowing capacity up to approximately $33 million in the aggregate from its membership with FHLBC. We also 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 5, 2020. 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 draws down on the line of credit. There was no interest paid on the line of credit during the year ended December 31, 2019 and December 31, 2018. There are no financial covenants governing this agreement.
At December 31, 2019 and 2018, the Company had reinsurance recoverable on unpaid losses and settlement expenses totaling $11,036,170 and $6,735,964, respectively. All of the Company’s reinsurance recoverables are due from companies with financial strength ratings of “A” or better by A.M. Best.
The following table 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, 2019. 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 2019.
The following table reconciles the loss development information to the consolidated balance sheet for the year ended December 31, 2019, by reportable segement.
A discussion of significant components of reserve development for the two most recent calendar years follows:
The Company’s effective tax rate was 15.5% and 10.6% for 2019 and 2018, respectively. Effective rates are dependent upon components of pretax earnings and the related tax effects.
The Company maintains a 401(k) and bonus and incentive plans covering executives, managers, and employees. Excluding the 401(k), at the CEO’s discretion, funding of these plans is primarily dependent upon reaching predetermined levels of combined ratio, reduction in operating expenses, 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 employees corresponds with those of the stakeholders.
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.
The Company did not pay any dividends to security holders in 2019 or 2018. It did, however, make cash dividend payments in the amount of $18,793 and $6,836 in 2019 and 2018, respectively, to Wisconsin policyholders in accordance with policy contractual obligations.
Mr. Scott T. Burgess is a director of the Company and a Senior Managing Director of Griffin Financial Group. Mr. Burgess was paid $3,794 and $3,812 in 2019 and 2018, respectively for travel reimbursement costs. Griffin and Stevens & Lee are affiliated. Stevens & Lee is a full-service law firm that was paid $41,910 and $99,591 as of December 31, 2019 and 2018, respectively.
At its March 10, 2020 Board of Directors meeting, the Board unanimously approved ICC’s offering of cannabis coverage in states that allow for recreational cannabis consumption.