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ICCH ICC

Filed: 12 Nov 20, 4:39pm
 

 

Table of Contents

 

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549 

_______________________________ 

 

FORM 10-Q 

_______________________________ 

 

(Mark One) 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

or 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For transition period from                     to                     .

 

Commission File Number: 001-38046 

 

ICC Holdings, Inc.

(Exact name of registrant as specified in its charter)

_______________________________ 

 

Pennsylvania

(State or other jurisdiction of
incorporation or organization)

 

81-3359409

(I.R.S. Employer
Identification No.)

 

225 20th Street,  Rock Island,  Illinois

(Address of principal executive offices)

 

61201

(Zip Code)

 

(309)  793-1700

(Registrant’s telephone number, including area code)

_______________________________ 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading
Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

ICCH

The NASDAQ Stock Market LLC

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 



Large accelerated filer   ☐

Accelerated filer   ☐



Non-accelerated filer     ☒  

Smaller reporting company   ☒



 

Emerging growth company   ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐     No ☒

 

The number of shares of the registrant’s common stock outstanding as of November 6, 2020 was 3,293,325.

  

 

 
 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

ICC Holdings, Inc. and Subsidiaries 

Condensed Consolidated Balance Sheets

 

  

As of

 
  

September 30,

  

December 31,

 
  

2020

  

2019

 
  

(Unaudited)

     

Assets

        

Investments and cash:

        

Fixed maturity securities (cost or amortized cost - $96,725,639 at 9/30/2020 and $88,348,415 at 12/31/2019)

 $103,318,485  $92,087,572 

Common stocks at fair value

  12,596,635   14,448,773 

Preferred stocks at fair value

  1,638,453    

Other invested assets

  1,779,060   877,900 

Property held for investment, at cost, net of accumulated depreciation of $438,720 at 9/30/2020 and $332,218 at 12/31/2019

  5,515,676   4,353,713 

Cash and cash equivalents

  6,598,640   6,626,585 

Total investments and cash

  131,446,949   118,394,543 

Accrued investment income

  719,389   646,504 

Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $100,000 at 9/30/2020 and 12/31/2019

  22,737,615   22,368,526 

Ceded unearned premiums

  839,718   822,818 

Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $0 at 9/30/2020 and 12/31/2019

  13,844,420   11,036,170 

Federal income taxes

  717,862   192,559 

Deferred policy acquisition costs, net

  5,267,470   5,269,256 

Property and equipment, at cost, net of accumulated depreciation of $5,949,933 at 9/30/2020 and $5,619,706 at 12/31/2019

  2,851,235   3,033,348 

Other assets

  1,559,179   1,239,794 

Total assets

 $179,983,837  $163,003,518 

Liabilities and Equity

        

Liabilities:

        

Unpaid losses and settlement expenses

 $61,943,244  $56,838,307 

Unearned premiums

  29,921,669   30,392,817 

Reinsurance balances payable

  728,674   374,998 

Corporate debt

  15,097,960   3,475,088 

Accrued expenses

  3,093,882   4,216,988 

Income taxes - deferred

  214,674   39,213 

Other liabilities

  950,858   1,324,273 

Total liabilities

  111,950,961   96,661,684 

Equity:

        

Common stock1

  35,000   35,000 

Treasury stock, at cost2

  (3,112,656)  (3,146,576)

Additional paid-in capital

  32,717,495   32,703,209 

Accumulated other comprehensive earnings, net of tax

  5,208,657   2,953,936 

Retained earnings

  35,821,408   36,608,750 

Less: Unearned Employee Stock Ownership Plan shares at cost3

  (2,637,028)  (2,812,485)

Total equity

  68,032,876   66,341,834 

Total liabilities and equity

 $179,983,837  $163,003,518 

 

1Par value $0.01; authorized: 2020 - 10,000,000 shares and 2019 – 10,000,000 shares; issued: 2020 – 3,500,000 shares and 2019 – 3,500,000 shares; outstanding: 2020 –  3,030,522 and 20193,014,941 shares.

22020205,775 shares and 2019 – 203,811 shares

32020 – 263,703 shares and 2019 – 281,248 shares

 

 

See accompanying notes to consolidated financial statements

 

 

 

  

ICC Holdings, Inc. and Subsidiaries 

Condensed Consolidated Statements of Earnings and Comprehensive Earnings (Unaudited) 

 

  

For the Three-Months Ended

 
  

September 30,

 
  

2020

  

2019

 

Net premiums earned

 $12,532,967  $13,679,746 

Net investment income

  900,950   811,462 

Net realized investment (losses) gains

  (59,333)  141,481 

Net unrealized gains (losses) on equity securities

  981,779   (7,603)

Other (loss)

  (36,333)  (112,763)

Consolidated revenues

  14,320,030   14,512,323 

Losses and settlement expenses

  8,863,053   9,609,347 

Policy acquisition costs and other operating expenses

  4,722,485   4,733,206 

Interest expense on debt

  58,724   32,458 

General corporate expenses

  171,860   164,378 

Total expenses

  13,816,122   14,539,389 

Earnings (loss) before income taxes

  503,908   (27,066)

Total income tax expense (benefit)

  99,919   (13,150)

Net earnings (loss)

 $403,989  $(13,916)
         

Other comprehensive earnings, net of tax

  440,838   703,220 

Comprehensive earnings

 $844,827  $689,304 
         

Earnings per share:

        

Basic:

        

Basic net earnings (loss) per share

 $0.13  $(0.00)

Diluted:

        

Diluted net earnings (loss) per share

 $0.13  $(0.00)
         

Weighted average number of common shares outstanding:

        

Basic

  3,030,571   3,011,034 

Diluted

  3,039,658   3,015,038 

 

See accompanying notes to consolidated financial statements 

 

  

ICC Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings and Comprehensive Earnings (Unaudited) 

 

  

For the Nine-Months Ended

 
  

September 30,

 
  

2020

  

2019

 

Net premiums earned

 $36,921,702  $39,219,882 

Net investment income

  2,644,900   2,406,965 

Net realized investment (losses) gains

  (402,320)  741,123 

Net unrealized gains on equity securities

  2,195   1,716,124 

Other income (loss)

  82,934   (43,838)

Consolidated revenues

  39,249,411   44,040,256 

Losses and settlement expenses

  25,913,619   28,117,369 

Policy acquisition costs and other operating expenses

  13,741,725   14,541,986 

Interest expense on debt

  150,773   96,353 

General corporate expenses

  471,616   444,829 

Total expenses

  40,277,733   43,200,537 

(Loss) earnings before income taxes

  (1,028,322)  839,719 

Total income tax (benefit) expense

  (240,980)  122,796 

Net (loss) earnings

 $(787,342) $716,923 
         

Other comprehensive earnings, net of tax

  2,254,721   3,423,233 

Comprehensive earnings

 $1,467,379  $4,140,156 
         

Earnings per share:

        

Basic:

        

Basic net (loss) earnings per share

 $(0.26) $0.24 

Diluted:

        

Diluted net (loss) earnings per share

 $(0.26) $0.24 
         

Weighted average number of common shares outstanding:

        

Basic

  3,023,794   3,004,887 

Diluted

  3,032,881   3,008,891 



See accompanying notes to consolidated financial statements. 



 

 

ICC Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

 

  

Common stock

  

Treasury stock

  

Unearned ESOP

  

Additional paid-in capital

  

Retained earnings

  

Accumulated other comprehensive earnings (loss)

  

Total equity

 

Balance, January 1, 2020

 $35,000  $(3,146,576) $(2,812,485) $32,703,209  $36,608,750  $2,953,936  $66,341,834 

Purchase of treasury stock

     (109,460)              (109,460)

Net (loss)

              (787,342)     (787,342)

Other comprehensive earnings, net of tax

                 2,254,721   2,254,721 

Restricted stock unit expense

     143,380

1

     (16,792)        126,588 

ESOP compensation expense

        175,457   31,078         206,535 

Balance, September 30, 2020

 $35,000  $(3,112,656) $(2,637,028) $32,717,495  $35,821,408  $5,208,657  $68,032,876 

 

1Amount represents restricted stock units that have fully vested in the period

 

  

Common stock

  

Treasury stock

  

Unearned ESOP

  

Additional paid-in capital

  

Retained earnings

  

Accumulated other comprehensive earnings (loss)

  

Total equity

 

Balance, January 1, 2019

 $35,000  $(2,999,995) $(3,046,855) $32,505,423  $33,680,702  $(1,580,976) $58,593,299 

Cumulative-effect adjustment from ASU 2016-011

              (1,366,297)  1,366,297    

Purchase of treasury stock

     (102,855)              (102,855)

Net earnings

              716,923      716,923 

Other comprehensive earnings, net of tax

                 3,423,233   3,423,233 

Restricted stock unit expense

           78,226         78,226 

ESOP compensation expense

        175,296   57,839         233,135 

Balance, September 30, 2019

 $35,000  $(3,102,850) $(2,871,559) $32,641,488  $33,031,328  $3,208,554  $62,941,961 

    

1See discussion of Accounting Standards Update 2016-01 adoption in 2019 10-K, Note 1 - Summary of Significant Accounting Policies

 

See accompanying notes to consolidated financial statements. 

 

 

  

ICC Holdings, Inc. and Subsidiaries 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

  

Nine-Month Periods Ended September 30,

 
  

2020

  

2019

 

Cash flows from operating activities:

        

Net (loss) earnings

 $(787,342) $716,923 

Adjustments to reconcile net (loss) earnings to net cash provided by operating activities

        

Net realized investment losses (gains)

  402,320   (741,123)

Net unrealized (gains) on equity securities

  (2,195)  (1,716,124)

Depreciation

  508,152   613,916 

Deferred income tax

  (423,896)  360,009 

Amortization of bond premium and discount

  175,114   172,691 

Stock-based compensation expense

  333,123   311,361 

Change in:

        

Accrued investment income

  (72,885)  (2,371)

Premiums and reinsurance balances receivable

  (369,089)  (1,847,981)

Ceded unearned premiums

  (16,900)  (65,406)

Reinsurance balances payable

  353,676   (897,013)

Reinsurance balances recoverable

  (2,808,250)  (5,530,517)

Deferred policy acquisition costs

  1,786   (278,207)

Unpaid losses and settlement expenses

  5,104,937   6,875,171 

Unearned premiums

  (471,148)  1,642,978 

Accrued expenses

  (1,123,106)  (1,376,476)

Current federal income tax

  (525,303)  (18,097)

Other

  (692,009)  (570,277)

Net cash (used in) operating activities

  (413,015)  (2,350,543)

Cash flows from investing activities:

        

Purchases of:

        

Fixed maturity securities, available-for-sale

  (20,946,699)  (19,060,848)

Common stocks

  (3,356,465)  (5,252,095)

Preferred stocks

  (1,718,782)   

Other invested assets

  (901,500)  (738,300)

Property held for investment

  (1,268,464)  (332,393)

Property and equipment

  (231,291)  (321,704)

Proceeds from sales, maturities and calls of:

        

Fixed maturity securities, available-for-sale

  12,813,180   19,522,461 

Common stocks

  4,247,936   5,998,276 

Preferred stocks

  221,990    

Property and equipment

  11,753   31,137 

Net cash (used in) investing activities

  (11,128,342)  (153,466)

Cash flows from financing activities:

        

Proceeds from loans

  11,629,800    

Repayments of borrowed funds

  (6,928)  (7,020)

Purchase of treasury stock

  (109,460)  (102,855)

Net cash provided by (used in) financing activities

  11,513,412   (109,875)

Net (decrease) in cash and cash equivalents

  (27,945)  (2,613,884)

Cash and cash equivalents at beginning of year

  6,626,585   4,644,784 

Cash and cash equivalents at end of period

 $6,598,640  $2,030,900 

Supplemental information:

        

Federal income tax paid (recovered)

 $  $(164,543)

Interest paid

  135,800   96,700 

 

See accompanying notes to consolidated financial statements. 

 

  

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A.

DESCRIPTION OF BUSINESS

 

ICC Holdings, Inc. is a Pennsylvania corporation that was organized in 2016. As used in this Form 10-Q, 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.; ICC Realty, LLC, a real estate services and holding company; Beverage Insurance Agency, Inc., a non-insurance subsidiary; Estrella Innovative Solutions, Inc., an outsourcing company; and Illinois Casualty Company (ICC), an operating insurance company that is the parent company of ICC Properties, LLC, a real estate series limited liability company. Both ICC and ICC Properties, LLC are Illinois domiciled companies.

 

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 Arizona, Colorado, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Ohio, Pennsylvania, and Wisconsin and markets through independent agents. Approximately 22.7% and 22.3% of the premium is written in Illinois for the three months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020 and 2019, approximately 25.0% and 25.8% of the premium is written in Illinois, respectively. The Company operates as a single segment.

 

B.

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

 

The unaudited condensed consolidated interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial reporting and with the instructions to Form 10-Q.  Accordingly, they do not include all the disclosures required by GAAP for complete financial statements.  As such, these unaudited condensed consolidated interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K, for the year ended December 31, 2019 (the “2019 10-K”). Management believes that the disclosures are adequate to make the information presented not misleading, and all normal and recurring adjustments necessary to present fairly the financial position at September 30, 2020, and the results of operations of the Company and its subsidiaries for all periods presented have been made. The results of operations for any interim period are not necessarily indicative of the operating results for a full year.

 

The preparation of the unaudited condensed consolidated interim financial statements requires management to make estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated interim financial statements, and the reported amounts of revenue and expenses during the period. These amounts are inherently subject to change and actual results could differ significantly from these estimates.

 

C.

SIGNIFICANT ACCOUNTING POLICIES

 

The Company reported its significant accounting policies in the 2019 10-K.

 

D.

PROSPECTIVE ACCOUNTING STANDARDS

 

For information regarding accounting standards that the Company has not yet adopted, see the “Prospective Accounting Standards” in Note 1 – Summary of Significant Accounting Policies in the 2019 10-K. The Company maintains its status as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). We have taken advantage of the extended transition period provided by Section 107 of the JOBS Act. We decided to comply with the effective dates for financial accounting standards applicable to emerging growth companies later in compliance with the requirements in Sections 107(b)(2) and (3) of the JOBS Act. Such decision is irrevocable. 

 

E.

PROPERTY AND EQUIPMENT

 

Annually, the Company reviews the major asset classes of property and equipment held for impairment. For the periods ended September 30, 2020 and December 31, 2019, the Company recognized no impairments.  Property and equipment are summarized as follows:

 

  

As of

 
  

September 30,

  

December 31,

 
  

2020

  

2019

 

Automobiles

 $530,722  $505,788 

Furniture and fixtures

  474,401   457,218 

Computer equipment and software

  3,917,136   3,823,416 

Home office

  3,878,909   3,866,632 

Total cost

  8,801,168   8,653,054 

Accumulated depreciation

  (5,949,933)  (5,619,706)

Net property and equipment

 $2,851,235  $3,033,348 

 

 

F.

COMPREHENSIVE EARNINGS

 

Comprehensive earnings (loss) include net (loss) 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. Other comprehensive earnings, as shown in the consolidated statements of earnings and comprehensive earnings, is net of tax expense of $343,316 and $771,697 for the nine months ended September 30, 2020 and 2019, respectively.

 

The following table presents changes in accumulated other comprehensive earnings for unrealized gains and losses on available-for-sale securities:

 

  

Nine-Month Periods Ended

 
  September 30, 
  

2020

  

2019

 

Beginning balance

 $2,953,936  $(1,580,976)

Cumulative effect of adoption of ASU 2016-01

  -   1,366,297 

Adjusted beginning balance

  2,953,936   (214,679)

Other comprehensive earnings before reclassification

  2,579,925   3,611,573 

Amount reclassified from accumulated other comprehensive earnings

  (325,204)  (188,340)

Net current period other comprehensive earnings

  2,254,721   3,423,233 

Ending balance

 $5,208,657  $3,208,554 

 

The following table illustrates the components of other comprehensive earnings for each period presented in the condensed consolidated interim financial statements.

 

  

Three-Month Periods Ended September 30,

 
  

2020

  

2019

 
  

Pre-tax

  

Tax

  

After-tax

  

Pre-tax

  

Tax

  

After-tax

 

Other comprehensive earnings, net of tax

                        

Unrealized gains and losses on AFS investments:

                        

Unrealized holding gains arising during the period

 $551,140  $(57,292) $493,848  $890,152  $(116,415) $773,737 

Reclassification adjustment for (gains) included in net earnings

  (67,102)  14,092   (53,010)  (89,262)  18,745   (70,517)

Total other comprehensive earnings

 $484,038  $(43,200) $440,838  $800,890  $(97,670) $703,220 

 

  

Nine-Month Periods Ended September 30,

 
  

2020

  

2019

 
  

Pre-tax

  

Tax

  

After-tax

  

Pre-tax

  

Tax

  

After-tax

 

Other comprehensive (loss) earnings, net of tax

                        

Unrealized gains and losses on AFS investments:

                        

Unrealized holding gains arising during the period

 $2,836,794  $(256,869) $2,579,925  $4,333,205  $(721,632) $3,611,573 

Reclassification adjustment for (gains) included in net earnings

  (411,651)  86,447   (325,204)  (238,405)  50,065   (188,340)

Total other comprehensive earnings

 $2,425,143  $(170,422) $2,254,721  $4,094,800  $(671,567) $3,423,233 

 

The following table provides the reclassifications from accumulated other comprehensive earnings for the periods presented:

  

Amounts Reclassified from

Accumulated Other Comprehensive Earnings

  

Three-Month Periods Ended

  

Nine-Month Periods Ended

  

Details about Accumulated Other

 

September 30,

  

September 30,

 

Affected Line Item in the Statement

Comprehensive Earnings Component

 

2020

  

2019

  

2020

  

2019

 

where Net Earnings is Presented

Unrealized (gains) losses on AFS investments:

                 
  $(67,102) $(89,262) $(411,651) $(238,405)

Net realized investment (gains) losses

   14,092   18,745   86,447   50,065 

Income tax expense (benefit)

Total reclassification adjustment, net of tax

 $(53,010) $(70,517) $(325,204) $(188,340) 

  

G.

RISKS AND UNCERTAINTIES

 

Certain risks and uncertainties are inherent to our day-to-day operations. Adverse changes in the economy could lower demand for our insurance products or negatively impact our investment results, both of which could have an adverse effect on the revenue and profitability of our operations. The COVID-19 pandemic has resulted in, and is expected to continue to result in, significant disruptions in economic activity and financial markets. The cumulative effects of COVID-19 on the Company, and the effect of any civil unrest or other public health outbreak, cannot be predicted at this time, but could reduce demand for our insurance policies, result in increased level of losses, settlement expenses or other operating costs, or reduce the market value of invested assets held by the Company.

  

 

 

2.

INVESTMENTS

 

The Company’s investments are primarily composed of fixed income debt securities and common and preferred stock equity securities. We carry our equity securities at fair value and categorize all our fixed maturity debt securities as available-for-sale (AFS), which are carried at fair value. When available, quoted market prices are obtained to determine fair value for the Company’s investments. If a quoted market price is not available, fair value is estimated using a secondary pricing source or using quoted market prices of similar securities. The Company has no investment securities for which fair value is determined using Level 3 inputs as defined in Note 3 – Fair Value Disclosures. Realized gains and losses on disposition of investments are based on specific identification of the investments sold on the settlement date, which does not differ significantly from trade date accounting.

 

Available-for-Sale Fixed Maturity and Equity Securities 

 

The following tables are a summary of the proceeds from sales, maturities, and calls of AFS fixed maturity and equity securities and the related gross realized gains and losses.

 

  

For the Three-Months Ended September 30,

 
              

Net Realized

 
  

Proceeds

  

Gains

  

Losses

  

Gains (Losses)

 

2020

                

Fixed maturity securities

 $3,428,951  $67,102  $  $67,102 

Common stocks

  986,939   93,984   (226,398)  (132,414)

Preferred stocks

  76,500   5,979      5,979 

2019

                

Fixed maturity securities

 $5,771,988  $99,445  $(10,183) $89,262 

Common stocks

  1,320,803   185,319   (133,100)  52,219 

 

  

For the Nine-Months Ended September 30,

 
              

Net Realized

 
  

Proceeds

  

Gains

  

Losses

  

Gains (Losses)

 

2020

                

Fixed maturity securities

 $12,813,180  $412,577  $(926) $411,651 

Common stocks

  4,247,936   470,406   (1,282,423)  (812,017)

Preferred stocks

  221,990   8,808   (10,762)  (1,954)

2019

                

Fixed maturity securities

 $19,522,461  $264,737  $(26,332) $238,405 

Common stocks

  5,998,276   960,420   (457,702)  502,718 

 

The amortized cost and estimated fair value of fixed income securities at September 30, 2020, by contractual maturity, are shown as follows:

 

  

Amortized Cost

  

Fair Value

 

Due in one year or less

 $1,275,943  $1,305,900 

Due after one year through five years

  18,436,788   19,612,776 

Due after five years through 10 years

  16,366,929   18,431,137 

Due after 10 years

  21,586,567   23,678,509 

Asset and mortgage backed securities without a specific due date

  38,843,607   40,057,464 

Redeemable preferred stocks

  215,805   232,699 

Total fixed maturity securities

 $96,725,639  $103,318,485 

 

Expected maturities may differ from contractual maturities due to call provisions on some existing securities.

 

 

The following table is a schedule of cost or amortized cost and estimated fair values of investments in securities classified as available for sale at September 30, 2020 and December 31, 2019:

   

  

Cost or

      

Gross Unrealized

 
  

Amortized Cost

  

Fair Value

  

Gains

  

Losses

 

2020

                

Fixed maturity securities:

                

U.S. Treasury

 $1,352,935  $1,390,344  $37,491  $(82)

MBS/ABS/CMBS

  38,843,607   40,057,464   1,354,537   (140,680)

Corporate

  38,295,706   42,339,992   4,141,760   (97,474)

Municipal

  18,017,586   19,297,986   1,288,389   (7,989)

Redeemable preferred stock

  215,805   232,699   16,894    

Total fixed maturity securities

 $96,725,639  $103,318,485  $6,839,071  $(246,225)

 

          

Gross Unrealized

 
  

Amortized Cost

  

Fair Value

  

Gains

  

Losses

 

2019

                

Fixed maturity securities:

                

U.S. Treasury

 $800,462  $800,219  $684  $(927)

MBS/ABS/CMBS

  33,802,911   34,290,995   540,743   (52,659)

Corporate

  39,442,202   41,915,103   2,482,378   (9,477)

Municipal

  14,302,840   15,081,255   808,081   (29,666)

Total fixed maturity securities

 $88,348,415  $92,087,572  $3,831,886  $(92,729)

 

All the Company’s collateralized securities carry an average credit rating of AA+ by one or more major rating agencies and continue to pay according to contractual terms. Included within MBS/ABS/CMBS, as defined in Note 3 – Fair Value Disclosures, are residential mortgage backed securities with fair values of $13,590,690 and $9,909,462 and commercial mortgage backed securities of $13,811,945 and $13,408,898 at September 30, 2020 and December 31, 2019, respectively.

 

ANALYSIS 

 

The following tables are also used as part of the impairment analysis and displays the total value of securities that were in an unrealized loss position as of September 30, 2020 and December 31, 2019. The tables segregate 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.

 

  

September 30, 2020

  

December 31, 2019

 
      

12 Months

          

12 Months

     
  

< 12 Months

  

& Greater

  

Total

  

< 12 Months

  

& Greater

  

Total

 

Fixed Maturity Securities:

                        

U.S. Treasury

                        

Fair value

 $300,000  $  $300,000  $  $699,391  $699,391 

Amortized cost

  300,082      300,082      700,318   700,318 

Unrealized loss

  (82)     (82)     (927)  (927)

MBS/ABS/CMBS

                        

Fair value

  11,438,192   2,014,666   13,452,858   6,398,581   5,056,732   11,455,313 

Amortized cost

  11,556,312   2,037,226   13,593,538   6,420,488   5,087,484   11,507,972 

Unrealized loss

  (118,120)  (22,560)  (140,680)  (21,907)  (30,752)  (52,659)

Corporate

                        

Fair value

  1,075,259      1,075,259   1,396,706      1,396,706 

Amortized cost

  1,172,733      1,172,733   1,406,183      1,406,183 

Unrealized loss

  (97,474)     (97,474)  (9,477)     (9,477)

Municipal

                        

Fair value

  491,160      491,160   1,969,468      1,969,468 

Amortized cost

  499,149      499,149   1,999,134      1,999,134 

Unrealized loss

  (7,989)     (7,989)  (29,666)     (29,666)

Total

                        

Fair value

  13,304,611   2,014,666   15,319,277   9,764,755   5,756,123   15,520,878 

Amortized cost

  13,528,276   2,037,226   15,565,502   9,825,805   5,787,802   15,613,607 

Unrealized loss

 $(223,665) $(22,560) $(246,225) $(61,050) $(31,679) $(92,729)

 

 

The fixed income portfolio contained 22 securities in an unrealized loss position as of September 30, 2020. Of these 22 securities, 4 have been in an unrealized loss position for 12 consecutive months or longer and represent $22,560 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.

 

There were no other-than-temporary impairment losses recognized in net earnings during the nine months ended September 30, 2020. For all fixed income securities at a loss at September 30, 2020, 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 for each security, which may be at maturity. The fixed income securities in an unrealized loss position were not other-than-temporarily impaired at September 30, 2020 and December 31, 2019.

 

UNREALIZED GAINS AND LOSSES ON EQUITY SECURITIES 

 

Net unrealized gains for the three and nine months ended September 30, 2020 for equity securities held as of September 30, 2020 were $981,779 and $2,195 respectively. Net unrealized (losses) gains for the three and nine months ended September 30, 2019 for equity securities held as of September 30, 2019 were $(7,603) and $1,716,124, respectively.

 

Other Invested Assets 

 

Other invested assets include membership in the Federal Home Loan Bank of Chicago (FHLBC), which occurred in February 2018. Our $200,000 investment in FHLBC stock is carried at cost. Due to the nature of our membership in the FHLBC, the carrying amount approximates fair value.

 

In addition, other invested assets include privately held investments of $305,000, and notes issued for $625,000 and $650,000 on July 30, 2019 and January 28, 2020, respectively. Both notes bear interest at 6.5% and are amortized over 20 years with a balloon payment due July 30, 2029.

 

 

3.

FAIR VALUE DISCLOSURES

 

Fair value is defined as the price in the principal market that would be received for an asset to facilitate an orderly transaction between market participants on the measurement date. The fair value of certain financial instruments is determined based on their underlying characteristics and relevant transactions in the marketplace. GAAP guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance also describes three levels of inputs that may be used to measure fair value.

 

The following are the levels of the fair value hierarchy and a brief description of the type of valuation inputs that are used to establish each level:

 

 

● 

Level 1 is applied to valuations based on readily available, unadjusted quoted prices in active markets for identical assets.

 

 

● 

Level 2 is applied to valuations based upon quoted prices for similar assets in active markets, quoted prices for identical or similar assets in inactive markets; or valuations based on models where the significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities) or can be corroborated by observable market data.

 

 

● 

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.

 

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.

 

Corporate, Agencies, and Municipal Bonds—The pricing vendor employs a multi-dimensional model which uses standard inputs including (listed in order of priority for use) benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers and other reference data. The pricing vendor also monitors market indicators, as well as industry and economic events. All bonds valued using these techniques are classified as Level 2. All Corporate, Agencies, and Municipal securities are deemed Level 2.

 

Mortgage-backed Securities (MBS), Collateralized Mortgage Obligations (CMO), Commercial Mortgage-backed Securities (CMBS) and Asset-backed Securities (ABS)—The pricing vendor evaluation methodology includes principally interest rate movements and new issue data. Evaluation of the tranches (non-volatile, volatile, or credit sensitivity) is based on the pricing vendors’ interpretation of accepted modeling and pricing conventions. This information is then used to determine the cash flows for each tranche, benchmark yields, pre-payment assumptions and to incorporate collateral performance. To evaluate CMO volatility, an option adjusted spread model is used in combination with models that simulate interest rate paths to determine market price information. This process allows the pricing vendor to obtain evaluations of a broad universe of securities in a way that reflects changes in yield curve, index rates, implied volatility, mortgage rates, and recent trade activity. MBS, CMBS, CMO and ABS with corroborated and observable inputs are classified as Level 2. All MBS, CMBS, CMO and ABS holdings are deemed Level 2.

 

U.S. Treasury Bonds, Common Stocks and Exchange Traded Funds—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.

 

 

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 and are classified as Level 2. All preferred stock holdings are deemed Level 2.

 

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.

 

Assets measured at fair value on a recurring basis as of September 30, 2020, are summarized below:

  

      

Significant

         
  

Quoted in Active

  

Other

  

Significant

     
  

Markets for

  

Observable

  

Unobservable

     
  

Identical Assets

  

Inputs

  

Inputs

     
  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Total

 

AFS securities

                

Fixed maturity securities

                

U.S. treasury

 $1,390,344  $  $  $1,390,344 

MBS/ABS/CMBS

     40,057,464      40,057,464 

Corporate

     42,339,992      42,339,992 

Municipal

     19,297,986      19,297,986 

Redeemable preferred stocks

     232,699      232,699 

Total fixed maturity securities

  1,390,344   101,928,141      103,318,485 

Equity securities

                

Common stocks

  12,596,635         12,596,635 

Perpetual preferred stocks

     1,638,453      1,638,453 

Total equity securities

  12,596,635   1,638,453      14,235,088 

Total marketable investments measured at fair value

 $13,986,979  $103,566,594  $  $117,553,573 

 

Assets measured at fair value on a recurring basis as of December 31, 2019, are summarized below:



      

Significant

         
  

Quoted in Active

  

Other

  

Significant

     
  

Markets for

  

Observable

  

Unobservable

     
  

Identical Assets

  

Inputs

  

Inputs

     
  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Total

 

AFS securities

                

Fixed maturity securities

                

U.S. treasury

 $800,219  $  $  $800,219 

MBS/ABS/CMBS

     34,290,995      34,290,995 

Corporate

     41,915,103      41,915,103 

Municipal

     15,081,255      15,081,255 

Total fixed maturity securities

  800,219   91,287,353      92,087,572 

Equity securities

                

Common stocks

  14,448,773         14,448,773 

Total marketable investments measured at fair value

 $15,248,992  $91,287,353  $  $106,536,345 

 

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 September 30, 2020 and December 31, 2019. Additionally, there were no securities transferred in or out of Levels 1 or 2 during the nine-month periods ended September 30, 2020 and 2019.

  

   

 

4.

DEBT

 

Debt Obligation 

 

ICC Holdings, Inc. secured a loan with a commercial bank in March 2017 in the amount of $3.5 million and used the proceeds to repay ICC for the money borrowed by the ESOP. The term of the loan is five years bearing interest at 3.65%. The Company pledged stock and $1.0 million of marketable assets as collateral for the loan.

 

The Company also has borrowing capacity up to approximately $33 million in the aggregate from its membership with the Federal Home Loan Bank of Chicago (FHLBC).

 

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 part of the Company’s response to COVID-19, the Company obtained, in March 2020, a $6.0 million loan from the FHLBC as a precautionary measure to increase its cash position and compensate for potential reductions in premium receivable collections. The term of the loan is five years bearing interest at 1.4%. The Company pledged $6.8 million of fixed income securities as collateral for this loan. The Company also obtained, in May 2020, a $4.0 million 0% interest, one-year loan from the FHLBC as an additional precautionary measure to increase its cash position and compensate for potential reductions in premium receivable collections as a result of the Company’s announcement in March 2020 to temporarily suspend all insurance premium billing for 30 days. The Company pledged an additional $7.4 million of fixed income securities as collateral for both FHLBC loans.

 

In April 2020, the Company obtained a $1.6 million loan (the PPP loan) from a commercial bank pursuant to the federally authorized Paycheck Protection Program (Program) administered by the Small Business Administration (the SBA). The PPP loan matures in the second quarter of 2022 and bears interest at a rate of 1.0% per annum. Commencing the fourth quarter of 2020, we will begin making loan payments. All or a portion of the PPP loan may be forgiven by the SBA upon application by us beginning 60 days, but not later than 120 days, after loan approval and upon documentation of expenditures in accordance with the SBA's requirements. Under the Paycheck Protection Program Flexibility Act of 2020 (the PPP Flexibility Act), (i) the first payment date for the PPP loan will be the earlier of (a) 10 months after the end of the “covered period” (as determined under the Program) or (b) the date the bank receives a remittance of the forgiven amount from the SBA, and (ii) the PPP loan’s maturity is extended to five years (from 2 years). Pursuant to the PPP Flexibility Act, we can obtain the lender's consent for the PPP loan maturity to be extended to the second quarter of 2025 (from 2022) and for the first payment date under the PPP loan to be extended as described in clause (i) of the previous sentence. 

 

The total balance of the debt agreements at September 30, 2020 and December 31, 2019 was $15,097,960 and $3,475,088, respectively. The average interest rate on remaining debt was 1.5% as of September 30, 2020 and 3.7% as of December 31, 2019.

 

On July 30, 2020, the Company secured through FHLBC a fixed 0.74% borrowing rate for a future $4.0 million loan that becomes effective May 3, 2021, upon the maturity of the existing $4.0 million FHLBC loan.  No collateral was pledged for this forward advance.

 

Revolving Line of Credit 

 

We maintained a revolving line of credit with a commercial bank, which permitted borrowing up to an aggregate principal amount of $1.75 million. This facility was initially entered into during 2013 and expired August 5, 2020. The line of credit was 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 would draw down on the line of credit. There was no interest paid on the line of credit during the nine months ended September 30, 2020 and 2019. There were no financial covenants governing this agreement.

 

Effective August 3, 2020, the Company replaced its expiring line of credit with a $2.0 million revolving line of credit with another commercial bank, which renews annually and has a current expiration date of August 3, 2021.  This new line of credit is priced at Prime plus 0.5%. The Company pledged $2.0 million of business assets in the event the Company draws down on the line of credit.  There are no financial covenants governing this line of credit.

  

 

 

5.

REINSURANCE

 

In the ordinary course of business, the Company assumes and cedes premiums and selected insured risks with other insurance companies, known as reinsurance. A large portion of the reinsurance is put into effect under contracts known as treaties and, in some instances, by negotiation on each individual risk (known as facultative reinsurance). In addition, there are several types of treaties including quota share, excess of loss and catastrophe reinsurance contracts that protect against losses over stipulated amounts arising from any one occurrence or event. The arrangements allow the Company to pursue greater diversification of business and serve to limit the maximum net loss to a single event, such as a catastrophe. Through the quantification of exposed policy limits in each region and the extensive use of computer-assisted modeling techniques, management monitors the concentration of risks exposed to catastrophic events.

 

Through the purchase of reinsurance, the Company also generally limits its net loss on any individual risk to a maximum of $1,000,000 for casualty business, $500,000 for property, and $500,000 for workers’ compensation, although certain treaties contain an annual aggregate deductible before reinsurance applies.

 

Premiums, written and earned, along with losses and settlement expenses incurred for the periods presented is summarized as follows:

 
  

Three-Month Periods Ended September 30,

 
  

2020

  

2019

 

WRITTEN

        

Direct

 $14,534,058  $16,305,222 

Reinsurance assumed

  51,551   70,200 

Reinsurance ceded

  (2,328,734)  (2,410,170)

Net

 $12,256,875  $13,965,252 

EARNED

        

Direct

 $14,825,942  $16,007,232 

Reinsurance assumed

  51,108   64,863 

Reinsurance ceded

  (2,344,083)  (2,392,349)

Net

 $12,532,967  $13,679,746 

LOSS AND SETTLEMENT EXPENSES INCURRED

        

Direct

 $10,536,397  $13,034,216 

Reinsurance assumed

  6,073   36,297 

Reinsurance ceded

  (1,679,417)  (3,461,166)

Net

 $8,863,053  $9,609,347 

 

  

Nine-Month Periods Ended September 30,

 
  

2020

  

2019

 

WRITTEN

        

Direct

 $44,240,437  $48,349,466 

Reinsurance assumed

  114,924   178,446 

Reinsurance ceded

  (7,921,708)  (7,730,458)

Net

 $36,433,653  $40,797,454 

EARNED

        

Direct

 $44,710,106  $46,710,351 

Reinsurance assumed

  116,404   174,583 

Reinsurance ceded

  (7,904,808)  (7,665,052)

Net

 $36,921,702  $39,219,882 

LOSSES AND SETTLEMENT EXPENSES INCURRED

        

Direct

 $37,370,896  $37,778,378 

Reinsurance assumed

  44,409   119,498 

Reinsurance ceded

  (11,501,686)  (9,780,507)

Net

 $25,913,619  $28,117,369 

 

 

 

6.

UNPAID LOSSES AND SETTLEMENT EXPENSES

 

The following table is a reconciliation of the Company’s unpaid losses and settlement expenses:



  

For the Three-Months Ended

 
  

September 30,

 

(In thousands)

 

2020

  

2019

 

Unpaid losses and settlement expense - beginning of the period:

        

Gross

 $66,415  $61,264 

Less: Ceded

  19,463   13,974 

Net

  46,952   47,290 

Increase in incurred losses and settlement expense:

        

Current year

  9,298   9,092 

Prior years

  (435)  517 

Total incurred

  8,863   9,609 

Deduct: Loss and settlement expense payments for claims incurred:

        

Current year

  4,885   6,064 

Prior years

  2,831   4,778 

Total paid

  7,716   10,842 

Net unpaid losses and settlement expense - end of the period

  48,099   46,057 

Plus: Reinsurance recoverable on unpaid losses

  13,844   12,266 

Gross unpaid losses and settlement expense - end of the period

 $61,943  $58,323 

 

  

For the Nine-Months Ended

 
  

September 30,

 

(In thousands)

 

2020

  

2019

 

Unpaid losses and settlement expense - beginning of the period:

        

Gross

 $56,838  $51,447 

Less: Ceded

  11,036   6,736 

Net

  45,802   44,711 

Increase in incurred losses and settlement expense:

        

Current year

  23,838   25,779 

Prior years

  2,076   2,338 

Total incurred

  25,914   28,117 

Deduct: Loss and settlement expense payments for claims incurred:

        

Current year

  10,534   10,455 

Prior years

  13,083   16,316 

Total paid

  23,617   26,771 

Net unpaid losses and settlement expense - end of the period

  48,099   46,057 

Plus: Reinsurance recoverable on unpaid losses

  13,844   12,266 

Gross unpaid losses and settlement expense - end of the period

 $61,943  $58,323 

  

Net unpaid losses and settlement expense increased $2,042,000, or 4.4%, in the nine months ended September 30, 2020 as compared to the same period in 2019. For the nine months ended September 30, 2020 and 2019, we experienced unfavorable development of $2,076,000 and $2,338,000, respectively. The  unfavorable development for the three and nine months ended September 30, 2020 was primarily driven by the Business Owners Liability and Business Owners Property lines of business. Business Owners Liability and Liquor Liability lines of business were the primary drivers of adverse development for the three and nine-month periods ended September 30, 2019.

 

   

 

7.

INCOME TAXES

 

The Company’s effective tax rate for the three and nine-month periods ended September 30, 2020, were 19.8% and 23.4%, respectively, compared to 48.6% and 14.6% for the same periods in 2019, respectively. Effective rates are dependent upon components of pretax earnings and the related tax effects.

 

Income tax expense for the three and nine months ended September 30, 2020 and 2019, differed from the amounts computed by applying the U.S. federal tax rate of 21% to pretax income from continuing operations as demonstrated in the following tables:

 

  

For the Three-Months Ended

 
  

September 30,

 
  

2020

  

2019

 

Provision for income taxes at the statutory federal tax rates

 $105,820  $(5,684)

Increase (reduction) in taxes resulting from:

        

Dividends received deduction

  (7,871)  (8,955)

Tax-exempt interest income

  (15,531)  (16,433)

Proration of tax-exempt interest and dividends received deduction

  5,715   5,939 

Nondeductible expenses

  11,523   8,404 

Officer life insurance, net

  263   3,579 

Total

 $99,919  $(13,150)



  

For the Nine-Months Ended

 
  

September 30,

 
  

2020

  

2019

 

Provision for income taxes at the statutory federal tax rates

 $(215,948) $176,341 

Increase (reduction) in taxes resulting from:

        

Dividends received deduction

  (21,567)  (28,482)

Tax-exempt interest income

  (46,795)  (60,249)

Proration of tax-exempt interest and dividends received deduction

  16,683   21,775 

Nondeductible expenses

  25,751   24,450 

Officer life insurance, net

  896   (11,039)

Total

 $(240,980) $122,796 

 

Management believes it is more likely than not that all deferred tax assets will be recovered as the result of future operations, which will generate sufficient taxable income to realize the deferred tax asset.

 

As of September 30, 2020 and December 31, 2019, the Company does not have any capital or operating loss carryforwards. Periods still subject to IRS audit include 2016 through current year. There are currently no open tax exams.

  

   

 

8.

EMPLOYEE BENEFITS

 

ESOP 

 

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 equity section of the balance sheet for the unallocated shares at an amount equal to their $10.00 per share purchase price.

 

The Company may make discretionary contributions to the ESOP and pay dividends on unallocated shares to the ESOP. ICC makes annual contributions to the ESOP sufficient to repay the loan. When loan payments are made, ESOP shares are allocated to participants based on relative compensation.  No contributions to the ESOP were made during the nine months ended September 30, 2020 and 2019, respectively.

 

A compensation expense charge is booked monthly during each year for the shares committed to be allocated to participants that year, determined with reference to the fair market value of our stock at the time the commitment to allocate the shares is accrued and recognized. For the nine months ended September 30, 2020, we recognized compensation expense of $206,535 related to 17,546 shares of our common stock that are committed to be released to participants’ accounts at December 31, 2020. Of the 17,546 shares committed to be released, 1,921 shares were committed on September 30, 2020 and had no impact on the weighted average common shares outstanding for the three and nine months ended September 30, 2020. For the nine months ended September 30, 2019, we recognized compensation expense of $233,135 related to 17,530 shares of our common stock that were committed to be released to participants’ accounts at December 31, 2019. Of the 17,530 shares committed to be released at December 31, 20191,926 shares were committed on September 30, 2019 and had no impact on the weighted average common shares outstanding for the three and nine months ended September 30, 2019.  

 

RESTRICTED STOCK UNITS 

 

Restricted stock units (RSUs) were granted for the first time in February 2018 with additional RSUs granted in March 2019 and April 2020. 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.

 

As of September 30, 2020, 18,040,  13,071, and 11,700 RSUs have been granted at a fair market value of $11.03,  $13.70, and $15.10, respectively. We recognized $126,588 and $78,226 of expense on these units in the nine months ended September 30, 2020 and September 30, 2019, respectively. Total unrecognized compensation expense relating to outstanding and unvested RSUs was $269,359 as of September 30, 2020, which will be recognized over the remainder of the three-year vesting periods.

  

 

9.

SUBSEQUENT EVENTS

 

Subsequent events have been evaluated through the date the financial statements were issued.

 

   

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The Private Securities Litigation Reform Act of 1995 (the “Reform Act”) provides a safe harbor for forward-looking statements made by or on behalf of ICC Holdings, Inc. ICC Holdings, Inc. and its representatives may, from time to time, make written or verbal forward-looking statements, including statements contained in ICC Holdings, Inc.'s filings with the Securities and Exchange Commission (SEC) and its reports to shareholders. Generally, the inclusion of the words “anticipates,” “believe,” “estimate,” “expect,” “future,” “intend,” “estimate,” “may,” “plans,” “seek”, “will,” or the negative of such terms and similar expressions identify statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and that are intended to come within the safe harbor protection provided by those sections. All statements addressing operating performance, events, or developments that ICC Holdings, Inc. expects or anticipates will occur in the future, including statements relating to sales growth, earnings or earnings per share growth, and market share, as well as statements expressing optimism or pessimism about future operating results, are forward-looking statements within the meaning of the Reform Act. The forward-looking statements are and will be based on management’s then-current beliefs and assumptions regarding future events and operating performance and on information currently available to management, and are applicable only as of the dates of such statements. 

 

Forward-looking statements involve risks, uncertainties and assumptions, including, among other things, the factors discussed under the heading “Item 1A. Risk Factors” of ICC Holdings, Inc.’s Annual Report on Form 10-K and those listed below. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Actual results may differ materially from those expressed in these forward-looking statements due to several uncertainties and risks, including the risks described in this Quarterly Report on Form 10-Q and other unforeseen risks. Readers should not put undue reliance on any forward-looking statements. These statements speak only as of the date of this Quarterly Report on Form 10-Q, even if subsequently made available by us on our website or otherwise, and we undertake no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q. 

 

All of these factors are difficult to predict and many are beyond our control. These important factors include those discussed under “Item 1A. Risk Factors” of ICC Holdings, Inc.’s 2019 Annual Report on Form 10-K and those listed below:

 

 

the potential impact of fraud, operational errors, systems malfunctions, or cybersecurity incidents;

 

• 

future economic conditions in the markets in which we compete that are less favorable than expected;

 

• 

our ability to expand geographically;

 

• 

the effects of weather-related and other catastrophic events, including those related to health emergencies and the spread of infectious diseases and pandemics;

 

• 

the effect of legislative, judicial, economic, demographic and regulatory events in the jurisdictions where we do business, especially changes with respect to laws, regulations and judicial decisions relating to liquor liability;

 

• 

our ability to enter new markets successfully and capitalize on growth opportunities either through acquisitions or the expansion of our producer network;

 

• 

financial market conditions, including, but not limited to, changes in interest rates and the stock markets causing a reduction of investment income or investment gains and a reduction in the value of our investment portfolio;

 

• 

heightened competition, including specifically the intensification of price competition, the entry of new competitors and the development of new products by new or existing competitors, resulting in a reduction in the demand for our products;

 actual claims may exceed our best estimate of ultimate insurance losses incurred through September 30, 2020 resulting directly from the COVID-19 pandemic and consequent economic crises;
 our reserves at September 30, 2020 could change including as a result of, among other things, the impact of legislative or regulatory actions taken in response to COVID-19; 
 the continued impact of COVID-19 and related risks, including from shelter-in-place orders, unemployment, and the financial market volatility, could continue to adversely impact our results, including premiums written and investment income; 
 infection rates, severity of pandemics, including COVID-19, civil unrest and their effects on our business operations and claims activity, and any adverse impact to our insureds, brokers, agents, and employees; 
 

• 

the impact of acts of terrorism and acts of war;

 

• 

the effects of terrorist related insurance legislation and laws;

 

• 

changes in general economic conditions, including inflation, unemployment, interest rates, volatility in the stock and credit markets, the depth and duration of potential recession and other factors;

 

• 

the cost, availability and collectability of reinsurance;

 

• 

estimates and adequacy of loss reserves and trends in loss and settlement expenses;

 

• 

changes in the coverage terms selected by insurance customers, including higher limits;

 

• 

our inability to obtain regulatory approval of, or to implement, premium rate increases;

 

• 

our ability to obtain reinsurance coverage at reasonable prices or on terms that adequately protect us;

 

• 

the potential impact on our reported net income that could result from the adoption of future auditing or accounting standards issued by the Public Company Accounting Oversight Board or the Financial Accounting Standards Board or other standard-setting bodies;

 

• 

unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations;

 

• 

adverse litigation or arbitration results;

 

• 

litigation tactics and developments, including those related to business interruption claims; and

 

• 

adverse changes in applicable laws, regulations or rules governing insurance holding companies and insurance companies, and environmental, tax or accounting matters including limitations on premium levels, increases in minimum capital and reserves, and other financial viability requirements, and changes that affect the cost of, or demand for our products. 

 

Because forward-looking information is subject to various risks and uncertainties, actual results may differ materially from that expressed or implied by the forward-looking information.

 

All subsequent written and oral forward-looking information attributable to ICC Holdings, Inc. or any person acting on our behalf is expressly qualified in its entirety by the cautionary statement contained or referred to in this section.

 

 

Overview

 

ICC is a regional property and casualty insurance company incorporated in Illinois and focused exclusively on the food and beverage industry. On the effective date of the mutual-to-public company conversion, ICC became a wholly owned subsidiary of ICC Holdings, Inc.

 

For the nine months ended September 30, 2020, we had direct written premiums of $44,240,000, net premiums earned of $36,922,000, and net loss of $787,000. For the nine months ended September 30, 2019, we had direct premiums written of $48,349,000, net premiums earned of $39,220,000, and net earnings of $717,000. At September 30, 2020, we had total assets of $179,984,000 and equity of $68,032,000. At December 31, 2019, we had total assets of $163,004,000 and equity of $66,342,000. In response to the ongoing novel coronavirus (COVID-19) pandemic, in March 2020, we announced that we would be temporarily suspending all insurance premium billing for at least 30 days. As of August 10, 2020, normal billing has resumed in all states we operate in.

 

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.

 

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have taken advantage of the extended transition period provided by Section 107 of the JOBS Act. We decided to comply with the effective dates for financial accounting standards applicable to emerging growth companies later in compliance with the requirements in Sections 107(b)(2) and (3) of the JOBS Act. Such decision is irrevocable.

  

Principal Revenue and Expense Items 

 

We derive our revenue primarily from premiums earned, net investment income and net realized and unrealized gains (losses) from investments. 

 

Gross and net premiums written

 

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). 

 

Net premiums earned

 

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, 2020, one-half of the premiums would be earned in 2020 and the other half would be earned in 2021.

 

Net investment income and net realized gains (losses) on investments 

 

We invest our surplus and the funds supporting our insurance liabilities (including unearned premiums and unpaid loss and loss adjustment expenses) in cash, cash equivalents, equities, fixed maturity securities and real estate. Investment income includes interest and dividends earned on invested assets as well as rental income on investment properties. 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. We recognize in earnings the change in unrealized gains and losses on equity securities when our equity securities are trading at an amount greater than or less than their cost, respectively. Unrealized gains for the three and nine months ended September 30, 2020 for equity securities held as of September 30, 2020 were $982,000 and $2,000, respectively. Unrealized (losses) gains for the three and nine months ended September 30, 2019 for equity securities held as of September 30, 2019 were $(8,000) and $1,716,000, respectively. Our portfolio of investment securities is managed by two independent third parties with managers specializing in the insurance industry.

 

ICC’s expenses consist primarily of:

 

Losses and settlement expenses

 

Losses and settlement expenses represent the largest expense item and include: (1) claim payments made, (2) estimates for future claim payments and changes in those estimates for prior periods, and (3) costs associated with investigating, defending and adjusting claims.

 

 

Amortization of deferred policy acquisition costs and other operating expenses

 

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 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.

 

Income taxes

 

We use the asset and liability method of accounting for income taxes. Deferred income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the tax bases of our assets and liabilities. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The effect of a change in tax rates is recognized in the period of the enactment date.

  

Key Financial Measures 

 

We evaluate our insurance operations by monitoring certain key measures of growth and profitability. In addition to reviewing our financial performance based on results determined in accordance with generally accepted accounting principles in the United States (GAAP), we utilize certain operational financial measures that we believe are valuable in managing our business and for comparison to our peers. These operational measures are combined ratio, written premiums, underwriting income, the losses and settlement expense ratio, the expense ratio, the ratio of net written premiums to statutory surplus and return on average equity.

 

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 earnings (loss).

 

Losses and settlement expense ratio

 

The losses and settlement expense ratio is the ratio (expressed as a percentage) of losses and settlement expenses incurred to net premiums earned. We measure the losses and settlement expense ratio on an accident year and calendar year loss basis to measure underwriting profitability. An accident year loss ratio measures losses and settlement expenses for insured events occurring in a particular year, regardless of when they are reported, as a percentage of premiums earned during that year. A calendar year loss ratio measures loss and settlement expense for insured events occurring during a particular year and the change in loss reserves from prior accident years as a percentage of premiums earned during that year.

 

Expense ratio

 

The underwriting expense ratio is the ratio (expressed as a percentage) of amortization of deferred policy acquisition costs and other operating expenses to premiums earned, and measures our operational efficiency in producing, underwriting and administering our insurance business.

 

GAAP combined ratio

 

Our GAAP combined ratio is the sum of the losses and settlement expense ratio and the expense ratio and measures our overall underwriting profit. If the GAAP combined ratio is below 100%, we are making an underwriting profit. If our combined ratio is at or above 100%, we are not profitable without investment income and may not be profitable if investment income is insufficient.

 

Net premiums written to statutory surplus ratio

 

The net premiums written to statutory surplus ratio represents the ratio of net premiums written, after reinsurance ceded, to statutory surplus. This ratio measures our exposure to pricing errors in our current book of business. The higher the ratio, the greater the impact on surplus should pricing prove inadequate.

 

Underwriting income (loss)

 

Underwriting income (loss) measures the pre-tax profitability of our insurance operations. It is derived by subtracting losses and settlement expense, amortization of deferred policy acquisition costs, and underwriting and administrative expenses from net earned premiums. Each of these items is presented as a caption in our statements of earnings.

 

Net earnings (loss) and return on average equity

 

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.

  

Critical Accounting Policies 

 

The accounting policies and estimates considered by management to be critically important in the preparation and understanding of the Company’s financial statements and related disclosures are presented in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019

 

 

 

Results of Operations 

 

Our results of operations are influenced by factors affecting the property and casualty insurance industry in general. The operating results of the United States property and casualty insurance industry are subject to significant variations due to competition, weather, catastrophic events, regulation, general economic conditions, judicial trends, fluctuations in interest rates and other changes in the investment environment. In response to the ongoing novel coronavirus (COVID-19) pandemic, in March 2020, we announced that we would be temporarily suspending all insurance premium billing for 30 days. As of August 10, 2020 normal billing has resumed in all states we operate in.

 

Our premium and underwriting results have been, and continue to be, influenced by market conditions. Pricing in the property and casualty insurance industry historically has been cyclical. During a soft market cycle, price competition is more significant than during a hard market cycle and makes it difficult to attract and retain properly priced commercial business. A hard market typically has a positive effect on premium growth.

 

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

 

The major components of operating revenues and net earnings are as follows:

 

  

For the Nine-Months Ended

 
  

September 30,

 

(In thousands)

 

2020

  

2019

 

Revenues

        

Total premiums earned

 $36,922  $39,220 

Investment income, net of investment expense

  2,645   2,407 

Realized investment (losses) gains, net

  (402)  741 

Net unrealized gains on equity securities

  2   1,716 

Other income (loss)

  83   (44)

Total revenues

 $39,250  $44,040 

Summarized components of net earnings

        

Underwriting (loss)¹

 $(2,734) $(3,439)

Investment income, net of investment expense

  2,645   2,407 

Realized investment (losses) gains, net

  (402)  741 

Net unrealized gains on equity securities

  2   1,716 

Other income (loss)

  83   (44)

General corporate expenses

  471   445 

Interest expense

  151   96 

(Loss) earnings, before income taxes

  (1,028)  840 

Income tax (benefit) expense

  (241)  123 

Net (loss) earnings

 $(787) $717 

Total other comprehensive earnings

  2,255   3,423 

Comprehensive earnings

 $1,468  $4,140 

 

1Calculated by subtracting the sum of loss and settlement expenses (2020 -$25,914 and 2019 -$28,117) and policy and acquisition costs and other operating expenses (2020 - $13,742 and 2019 - $14,542) from net premiums earned (2020 -$36,922 and 2019 - $39,220).



  

For the Nine-Months Ended

 
  September 30, 
  

2020

  

2019

 

Operational Ratios:

        

Losses and settlement expense ratio1

  70.19%  71.69%

Expense ratio2

  37.22%  37.08%

Combined ratio3

  107.40%  108.77%

 

1Calculated by dividing loss and settlement expenses by net premiums earned. 

2Calculated by dividing the sum of policy acquisition costs and operating expenses by net earned premiums. 

 

3The sum of the losses and settlement expense ratio and the expense ratio. A combined ratio of under 100% indicates an underwriting profit. A combined ratio over 100% indicates an underwriting loss. 

 

The following summarizes our results for the nine months ended September 30, 2020 and 2019:

 

Premiums

 

Direct premiums written decreased by $4,109,000, or 8.5%, to $44,240,000 for the nine months ended September 30, 2020 from $48,349,000 for the same period of 2019. Net written premium decreased by $4,364,000, or 10.7%, to $36,433,000 for the nine months ended September 30, 2020 from $40,797,000 for the same period in 2019. Net premiums earned decreased by $2,298,000, or 5.9%, in the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, primarily due to policy exposure decreases resulting from state mandated shutdowns of restaurants and taverns and increased reinstatement costs associated with the civil unrest and protests occurring in Minneapolis, MN and the greater Chicago area in Illinois.  

 

 

For the nine months ended September 30, 2020, we ceded to reinsurers $7,905,000 of earned premiums, compared to $7,665,000 of earned premiums for the nine months ended September 30, 2019. Ceded earned premiums as a percent of direct premiums written increased to 17.9% from 15.9% for the nine months ended September 30, 2020 and September 30, 2019, respectfully, primarily due to increased reinstatement premium costs associated with the civil unrest and protests occurring in Minnesota and Illinois. 

 

Premiums are earned ratably over the term of the policy whereas written premiums are reflected on the effective date of the policy. 

 

Investment Income

 

Net investment income increased by $238,000, or 9.9%, to $2,645,000 for the nine months ended September 30, 2020, as compared to $2,407,000 for the same period in 2019 as a result of our increased property held for investment.

 

Other Income

 

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 increased by $127,000 or 288.6% during the nine months ended September 30, 2020 as a result of a decrease in audit premiums, which resulted in fewer write offs as compared to the same period in 2019.

 

Unpaid Losses and Settlement Expenses

 

The following table details our unpaid losses and settlement expenses. 



  

For the Nine-Months Ended

 
  

September 30,

 

(In thousands)

 

2020

  

2019

 

Unpaid losses and settlement expense - beginning of the period:

        

Gross

 $56,838  $51,447 

Less: Ceded

  11,036   6,736 

Net

  45,802   44,711 

Increase in incurred losses and settlement expense:

        

Current year

  23,838   25,779 

Prior years

  2,076   2,338 

Total incurred

  25,914   28,117 

Deduct: Loss and settlement expense payments for claims incurred:

        

Current year

  10,534   10,455 

Prior years

  13,083   16,316 

Total paid

  23,617   26,771 

Net unpaid losses and settlement expense - end of the period

  48,099   46,057 

Plus: Reinsurance recoverable on unpaid losses

  13,844   12,266 

Gross unpaid losses and settlement expense - end of the period

 $61,943  $58,323 

 

Net unpaid losses and settlement expense increased $2,042,000, or 4.4%, in the nine months ended September 30, 2020 as compared to the same period in 2019. For the nine months ended September 30, 2020 and 2019, we experienced unfavorable development of $2,076,000 and $2,338,000, respectively. The 2020 unfavorable development was primarily driven by the Business Owners Liability and Business Owners Property lines of business. Business Owners Liability and Liquor Liability lines of business were the primary drivers of adverse development for the nine months ended September 30, 2019.

 

Losses and Settlement Expenses 

 

Losses and settlement expenses decreased by $2,203,000, or 7.8%, to $25,914,000 for the nine months ended September 30, 2020, from $28,117,000 for the same period in 2019. Losses and settlement expenses decreased for the nine months ended September 30, 2020, primarily due to decreased losses due to state mandated shutdowns for restaurants and taverns and offset by increased losses related to the civil unrest and rioting that occurred in Minnesota and Illinois in late May and early June of 2020. 

 

Policy Acquisition Costs and Other Operating Expenses and the Expense Ratio

 

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 decreased by $800,000, or 5.5%, to $13,742,000 for the nine months ended September 30, 2020 from $14,542,000 for the same period in 2019 due to decreased premium writings coupled with a corresponding decrease in contingent commission expense.

 

 

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. Our expense ratio increased by 14 basis points from 37.08% to 37.22% for the nine months ended September 30, 2020 as compared to 2019.  

 

General Corporate Expenses

 

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 $26,000, or 5.8%, in the nine months ended September 30, 2020 as compared to the same period in 2019.

 

Interest Expense

 

Interest expense increased to $151,000 for the nine months ended September 30, 2020 from $96,000 for the same period during 2019. This increase is primarily due to $46,000 in interest expense for the $6 million FHLBC borrowing in March 2020.

 

Income Tax Expense

 

We reported income tax benefit of $241,000 and income tax expense of $123,000 for the nine months ended September 30, 2020 and 2019, respectively. The increase in income tax benefit in 2020 relates to a pretax loss for the nine months ended September 30, 2020 compared to pretax earnings for the same period in 2019. Our effective tax rate for the nine months ended September 30, 2020 was 23.4%, compared to 14.6% for the same period in 2019. Effective rates are dependent upon components of pretax (loss) or earnings and the related tax effects.

 

The Company has not established a valuation allowance against any of the net deferred tax assets.

 

 

 

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

 

The major components of operating revenues and net earnings are as follows:

 

  

For the Three-Months Ended

 
  

September 30,

 

(In thousands)

 

2020

  

2019

 

Revenues

        

Total premiums earned

 $12,533  $13,680 

Investment income, net of investment expense

  901   811 

Realized investment (losses) gains, net

  (59)  141 

Net unrealized gains (losses) on equity securities

  982   (8)

Other (loss)

  (36)  (112)

Total revenues

 $14,321  $14,512 

Summarized components of net earnings (loss)

        

Underwriting (loss)¹

 $(1,052) $(662)

Investment income, net of investment expense

  901   811 

Realized investment (losses) gains, net

  (59)  141 

Net unrealized gains (losses) on equity securities

  982   (8)

Other (loss)

  (36)  (112)

General corporate expenses

  173   164 

Interest expense

  59   32 

Earnings (loss), before income taxes

  504   (26)

Income tax expense (benefit)

  100   (13)

Net earnings (loss)

 $404  $(13)

Total other comprehensive earnings

  441   703 

Comprehensive earnings

 $845  $690 

 

1Calculated by subtracting the sum of loss and settlement expenses (2020- $8,863 and 2019 - $9,609) and policy and acquisition costs and other operating expenses (2020 - $4,722 and 2019 - $4,733) from net premiums earned (2020 - $12,533 and 2019- $13,680).

 

  

For the Three-Months Ended

 
  September 30, 
  

2020

  

2019

 

Operational Ratios:

        

Losses and settlement expense ratio1

  70.72%  70.24%

Expense ratio2

  37.68%  34.60%

Combined ratio3

  108.39%  104.84%

 

1Calculated by dividing loss and settlement expenses by net premiums earned. 

 

2Calculated by dividing the sum of policy acquisition costs and operating expenses by net earned premiums. 

 

3The sum of the losses and settlement expense ratio and the expense ratio. A combined ratio of under 100% indicates an underwriting profit. A combined ratio over 100% indicates an underwriting loss. 

 

The following summarizes our results for the three months ended September 30, 2020 and 2019:

 

Premiums

 

Direct premiums written decreased by $1,771,000, or 10.9%, to $14,534,000 for the three months ended September 30, 2020 from $16,305,000 for the same period of 2019. Net written premium decreased by $1,708,000, or 12.2%, to $12,257,000 for the three months ended September 30, 2020 from $13,965,000 for the same period in 2019. Net premiums earned decreased by $1,147,000, or 8.4%, in the three months ended September 30, 2020 as compared to the three months ended September 30, 2019, primarily due to policy exposure decreases resulting from state mandated shutdowns of restaurants and taverns.  

 

For the three months ended September 30, 2020, we ceded to reinsurers $2,344,000 of earned premiums, compared to $2,392,000 of earned premiums for the three months ended September 30, 2019. Ceded earned premiums as a percent of direct premiums written increased to 16.1% in the three months ended September 30, 2020, from 14.7% in the three months ended September 30, 2019.  

 

Premiums are earned ratably over the term of the policy whereas written premiums are reflected on the effective date of the policy.

 

 

 

Investment Income

 

Net investment income increased by $90,000, or 11.1%, to $901,000 for the period ended September 30, 2020, as compared to $811,000 for the same period in 2019.

 

Other Income

 

Other income (loss) 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 (loss) decreased by $76,000 or 67.9% during the three months ended September 30, 2020 as a result of a decrease in administrative billing charges due to decreased written premiums as compared to the same period in 2019.

  

Losses and Settlement Expenses 

 

Losses and settlement expenses decreased by $746,000, or 7.8%, to $8,863,000 for the three months ended September 30, 2020, from $9,609,000for the same period in 2019. Losses and settlement expenses decreased for the three months ended September 30, 2020, primarily due to favorable development in prior year reported claims during the three months ended September 30, 2020

 

Policy Acquisition Costs and Other Operating Expenses and the Expense Ratio

 

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 decreased by $11,000, or 0.2%, to $4,722,000 for the three months ended September 30, 2020 from $4,733,000 for the same period in 2019.

 

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. Our expense ratio increased by 308 basis points from 34.60% to 37.68% for the three months ended September 30, 2020 as compared to 2019. This increase was primarily driven by a decrease in the current quarter's written and earned premium. 

 

General Corporate Expenses

 

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 $9,000, or 5.5%, in the three months ended September 30, 2020 as compared to the same period in 2019.  

 

Interest Expense

 

Interest expense increased to $59,000 for the three months ended September 30, 2020 from $32,000 for the same period during 2019. This increase is due to $24,000 in interest expense for the three months ended September 30, 2020 relating to the $6 million FHLBC borrowing in September 30, 2020.

 

Income Tax Expense

 

We reported income tax expense of $100,000 and income tax benefit of $13,000 for the three months ended September 30, 2020 and 2019, respectively. The increase in income tax expense in 2020 relates to an increase in pretax earnings for the three months ended September 30, 2020 compared to pretax earnings for the same period in 2019. Our effective tax rate for the three months ended September 30, 2020 was 19.8%, compared to 48.6% for the same period in 2019. Effective rates are dependent upon components of pretax (loss) or earnings and the related tax effects.

 

The Company has not established a valuation allowance against any of the net deferred tax assets.

 

 

  

Financial Position

 

The major components of our assets and liabilities are as follows:

 

  

As of

 
  

September 30,

  

December 31,

 
  

2020

  

2019

 

(In thousands)

 

(Unaudited)

     

Assets

        

Investments and cash:

        

Fixed maturity securities (amortized cost - $96,726 at 9/30/2020 and $88,348 at 12/31/2019)

 $103,318  $92,087 

Common stocks at fair value

  12,597   14,449 

Preferred stocks at fair value

  1,638    

Other invested assets

  1,779   878 

Property held for investment, at cost, net of accumulated depreciation of $439 at 9/30/2020 and $332 at 12/31/2019

  5,516   4,354 

Cash and cash equivalents

  6,599   6,627 

Total investments and cash

  131,447   118,395 

Accrued investment income

  720   646 

Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $100 at 9/30/2020 and 12/31/2019

  22,738   22,369 

Ceded unearned premiums

  840   823 

Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $0 at 9/30/2020 and 12/31/2019

  13,844   11,036 

Federal income taxes

  718   193 

Deferred policy acquisition costs, net

  5,267   5,269 

Property and equipment, at cost, net of accumulated depreciation of $5,950 at 9/30/2020 and $5,620 at 12/31/2019

  2,851   3,033 

Other assets

  1,559   1,240 

Total assets

 $179,984  $163,004 
         

Liabilities and Equity

        

Liabilities:

        

Unpaid losses and settlement expenses

 $61,943  $56,838 

Unearned premiums

  29,922   30,393 

Reinsurance balances payable

  729   375 

Corporate debt

  15,098   3,475 

Accrued expenses

  3,094   4,217 

Income taxes - deferred

  215   39 

Other liabilities

  951   1,325 

Total liabilities

  111,952   96,662 
         

Equity:

        

Common stock1

  35   35 

Treasury stock, at cost2

  (3,113)  (3,147)

Additional paid-in capital

  32,717   32,703 

Accumulated other comprehensive earnings, net of tax

  5,209   2,954 

Retained earnings

  35,821   36,609 

Less: Unearned ESOP shares at cost3

  (2,637)  (2,812)

Total equity

  68,032   66,342 

Total liabilities and equity

 $179,984  $163,004 

 

1 Par value $0.01; authorized: 2020 - 10,000 shares and 2019 – 10,000 shares; issued: 2020 – 3,500 shares and 2019 – 3,500 shares;  outstanding: 2020 – 3,031 shares and 2019 – 3,015 shares.

22020 – 206 shares and 2019 – 204 shares

32020 – 264 shares and 2019 – 281 shares

 

  

Unpaid Losses and Settlement Expense 

 

Our reserves for unpaid loss and settlement expense are summarized below:

 

  

As of September 30,

  

As of December 31,

 

(In thousands)

 

2020

  

2019

 

Case reserves

 $27,533  $24,370 

IBNR reserves

  20,566   21,432 

Net unpaid losses and settlement expense

  48,099   45,802 

Reinsurance recoverable on unpaid loss and settlement expense

  13,844   11,036 

Reserves for unpaid loss and settlement expense

 $61,943  $56,838 

 

As of September 30, 2020, the Company had received 1,283 claims for business interruption related to COVID-19. Based on policy language, the Company does not anticipate that coverage will be triggered for these property claims requiring loss payment.

 

Actuarial Ranges

 

The selection of the ultimate loss is based on information unique to each line of business and accident year and the judgment and expertise of our actuary and management.

 

The following table provides case and IBNR reserves for losses and loss adjustment expenses as of September 30, 2020 and December 31, 2019.

 

As of September 30, 2020

 

(In thousands)

 

Case Reserves

  

IBNR Reserves

  

Total Reserves

 

Commercial liability

 $18,556  $18,312  $36,868 

Property

  4,394   (423)  3,971 

Other

  4,583   2,677   7,260 

Total net reserves

  27,533   20,566   48,099 

Reinsurance recoverables

  6,732   7,112   13,844 

Gross reserves

 $34,265  $27,678  $61,943 

  

As of December 31, 2019



(In thousands)

 

Case Reserves

  

IBNR Reserves

  

Total Reserves

 

Commercial liability

 $18,406  $18,249  $36,655 

Property

  2,706   (178)  2,528 

Other

  3,258   3,361   6,619 

Total net reserves

  24,370   21,432   45,802 

Reinsurance recoverables

  4,488   6,548   11,036 

Gross reserves

 $28,858  $27,980  $56,838 

 

  

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:

 

 

historical industry development experience in our business line;

 

• 

historical company development experience;

 

• 

the impact of court decisions on insurance coverage issues, which can impact the ultimate cost of settling claims;

 

• 

changes in our internal claims processing policies and procedures; and

 

• 

trends and risks in claim costs, such as risk that medical cost inflation could increase.

 

Our actuary is required to exercise a considerable degree of judgment in the evaluation of all of these and other factors in the analysis of our loss and settlement expense reserves, and related range of anticipated losses. Because of the level of uncertainty impacting the estimation process, it is reasonably possible that different actuaries would arrive at different conclusions. The method of determining the reserve range has not changed and the reserve range generated by our actuary is consistent with the observed development of our loss reserves over the last few years.

 

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 loss adjustment 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.

 

Specifically, the following factors could impact the frequency and severity of claims, and therefore, the ultimate amount of loss and settlement expense paid:

 

 

the rate of increase in labor costs, medical costs, and material costs that underlie insured risks;

 

• 

development of risk associated with our expanding producer relationships and our growth in new states or states where we currently have small market share; and

 

• 

impact of changes in laws or regulations.

 

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 nine months ended September 30, 2020 and 2019, we experienced unfavorable development of $2,076,000 and $2,338,000, 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 2019 at $45,802,000. As of September 30, 2020, that reserve was re-estimated at $47,878,000, which is $2,076,000, or 4.5%higher than the initial estimate.

 

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 (6.0)% to 7.5%. As shown in the table below, since 2015 the variance in our originally estimated accident year selections range from (2.6)% deficient to 9.0% redundant as of September 30, 2020.

 

Recent Variabilities of Incurred Losses and Settlement Expense, Net of Reinsurance

  

  

Accident Year Data

 

(In thousands)

 

2015

  

2016

  

2017

  

2018

  

2019

 

As originally estimated

  24,293   25,619   29,801   29,762   33,563 

As estimated at September 30, 2020

  22,108   25,695   30,258   28,451   34,427 

Net cumulative (deficiency) redundancy

 $2,185  $(76) $(456) $1,311  $(864)

% (deficiency) redundancy

  9.0%  (0.3)%  (1.5)%  4.4%  (2.6)%

 

 

The table below summarizes the impact on equity, net of tax, from changes in estimates of net unpaid loss and settlement expense:



  

December 31,

 
  

2019

 

(In thousands)

 

Aggregate Loss and Settlement Reserve

  

Percentage Change in Equity

 

Reserve Range for Unpaid Losses and Settlement Expense

        

Low End

 $41,371   5.3%

Recorded

  45,802   0.0%

High End

  47,312   (1.8)%

 

If the net loss and settlement expense reserves were recorded at the high end of the actuarially determined range as of December 31, 2019, the loss and settlement expense reserves would increase by $1.5 million before taxes. This increase in reserves would have the effect of decreasing net earnings and equity as of December 31, 2019 by $1.2 million. If the loss and settlement expense reserves were recorded at the low end of the actuarially-determined range as of December 31, 2019, the net loss and settlement expense reserves at December 31, 2019 would be reduced by $4.4 million with corresponding increases in net earnings and equity of $3.5 million.

 

Investments

 

Our investments are primarily composed of fixed maturity debt securities, and both common and preferred stock equity securities. We categorize all our debt securities as available-for-sale (AFS), which are carried at fair as determined by management based upon quoted market prices when available. If a quoted market price is not available, fair value is estimated using a secondary pricing source or using quoted market prices of similar securities. Changes in unrealized investment gains or losses on our AFS securities, net of applicable income taxes, are reflected directly in equity as a component of comprehensive earnings (loss) and, accordingly, have no effect on net earnings (loss). Equity securities are carried at fair value with subsequent changes in fair value recorded in net earnings (loss). Investment income is recognized when earned, and capital gains and losses are recognized when investments are sold, or other-than-temporarily impaired.

 

The fair value and unrealized losses for our securities that were temporarily impaired are as follows:



  

September 30, 2020

 
  

Less than 12 Months

  

12 Months or Longer

  

Total

 

(In thousands)

 

Fair Value

  

Unrealized Losses

  

Fair Value

  

Unrealized Losses

  

Fair Value

  

Unrealized Losses

 
U.S. Treasury  300            300    

MBS/ABS/CMBS

 $11,438  $(118) $2,015  $(23) $13,453  $(141)

Corporate

  1,075   (97)        1,075   (97)

Municipal

  491   (8)        491   (8)

Total temporarily impaired fixed maturity securities

 $13,304  $(223) $2,015  $(23) $15,319  $(246)

 

  

December 31, 2019

 
  

Less than 12 Months

  

12 Months or Longer

  

Total

 

(In thousands)

 

Fair Value

  

Unrealized Losses

  

Fair Value

  

Unrealized Losses

  

Fair Value

  

Unrealized Losses

 

U.S. Treasury

 $  $  $699  $(1) $699  $(1)

MBS/ABS/CMBS

  6,399   (22)  5,057   (31)  11,456   (53)

Corporate

  1,397   (9)        1,397   (9)

Municipal

  1,969   (30)        1,969   (30)

Total temporarily impaired fixed maturity securities

 $9,765  $(61) $5,756  $(32) $15,521  $(93)

 

Corporate Bonds 

 

The net unrealized gain in the Corporate bond portfolio increased by about $1.6 million from a gain of $2,473,000 at the end of 2019 to a gain of $4,044,000 as of September 30, 2020. The increase in unrealized gains was driven by a strong rally in Treasuries which resulted in the yield curve dropping about 125 bps due to COVID-19 concerns and the subsequent change in Federal policy. While spreads on Corporate bonds have been volatile through the year, they are generally back to where they were at the end of the year, so spreads have had a limited impact on unrealized gains so far in 2020.

 

Municipal Bonds 

 

The net unrealized gain in the Municipal portfolio rose from $778,000 at the end of 2019 to $1,280,000 at the end of September 30, 2020, an increase of $502,000.  Like Corporates, Municipals benefitted from a strong rally in the Treasury market which caused prices in Municipals to move higher.

 

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 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 nine months ended September 30, 2020, the Company did not take an impairment charge on any of its security holdings. Adverse investment market conditions, or poor operating results of underlying investments, could result in impairment charges in the future.

 

We use quoted values and other data provided by independent pricing services in our process for determining fair values of our investments. The evaluations of such pricing services represent an exit price and a good faith opinion as to what a buyer in the marketplace would pay for a security in a current sale. This pricing service provides us with one quote per instrument. For fixed maturity securities that have quoted prices in active markets, market quotations are provided. For fixed maturity securities that do not trade daily, the independent pricing service prepares estimates of fair value using a wide array of observable inputs including relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. The observable market inputs that our independent pricing service utilizes may include (listed in order of priority for use) benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers, and other reference data on markets, industry, and the economy. Additionally, the independent pricing service uses an option adjusted spread model to develop prepayment and interest rate scenarios. The pricing service did not use broker quotes in determining fair values of our investments.

 

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 can 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.

 

The fair value estimates of our investments provided by the independent pricing service at September 30, 2020 and December 31, 2019, 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 nine months ended September 30, 2020 and 2019 and for the year ended December 31, 2019, 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.

 

Deferred Policy Acquisition Costs

 

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 September 30, 2020 and December 31, 2019, deferred acquisition costs and the related unearned premium reserves were as follows: 

 

(In thousands)

 

September 30, 2020

  

December 31, 2019

 

Deferred acquisition costs

 $5,267  $5,269 

Unearned premium reserves

  29,922   30,393 

 

The method followed in computing deferred acquisition costs limits the amount of deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, loss and loss adjustment expenses, and certain other costs expected to be incurred as the premium is earned. Future changes in estimates, the most significant of which is expected loss and loss adjustment expenses, may require adjustments to deferred policy acquisition costs. If the estimation of net realizable value indicates that the deferred acquisition costs are not recoverable, they would be written off.

 

Income Taxes 

 

We use the asset and liability method of accounting for income taxes. Deferred income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the tax bases of our assets and liabilities. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The effect of a change in tax rates is recognized in the period of the enactment date.

 

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 September 30, 2020, and December 31, 2019, we had no material unrecognized tax benefits or accrued interest and penalties. Federal tax years 2016 through current year are open for examination.

 

Other Assets 

 

As of September 30, 2020 and December 31, 2019 other assets totaled $1,559,000 and $1,240,000, respectively. The other assets balances on the consolidated balance sheets are primarily composed of Corporate Owned Life Insurance asset value as well as prepaid fees. The increase in other assets relates to $298,000 of securities receivable as of September 30, 2020.

 

 

Outstanding Debt

 

As of September 30, 2020 and December 31, 2019, outstanding debt balances totaled $15,098,000 and $3,475,000, respectively. The average rate on remaining debt was 1.5% as of September 30, 2020 and 3.7% as of  December 31, 2019, respectively.  

  

Debt Obligation 

 

ICC Holdings, Inc. secured a loan with a commercial bank in March 2017 in the amount of $3.5 million and used the proceeds to repay ICC for the money borrowed by the ESOP. The term of the loan is five years bearing interest at 3.65%. The Company pledged stock and $1.0 million of marketable assets as collateral for the loan.

 

The Company also has borrowing capacity up to approximately $33 million in the aggregate from its membership with FHLBC.

 

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 part of the Company’s response to COVID-19, the Company obtained, in March 2020, a $6.0 million loan from the 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 term of the loan is five years bearing interest at 1.4%. The Company pledged $6.8 million of fixed income securities as collateral for this loan. The Company also obtained in May 2020 a $4.0 million loan from the FHLBC as an additional precautionary measure to increase its cash position and compensate for potential reductions in premium receivable collections as a result of the Company’s announcement in March 2020 to temporarily suspend all insurance premium billing for 30 days. The Company pledged an additional $7.4 million of fixed income securities as collateral for both FHLBC loans.

  

In April 2020, the Company obtained a $1.6 million loan (the PPP loan) from a commercial bank pursuant to the federally authorized Paycheck Protection Program (Program) administered by the Small Business Administration (the SBA). The PPP loan matures in the second quarter of 2022 and bears interest at a rate of 1.0% per annum. Commencing the fourth quarter of 2020, we will begin making loan payments. All or a portion of the PPP loan may be forgiven by the SBA upon application by us beginning 60 days, but not later than 120 days, after loan approval and upon documentation of expenditures in accordance with the SBA's requirements. Under the Paycheck Protection Program Flexibility Act of 2020 (the PPP Flexibility Act), (i) the first payment date for the PPP loan will be the earlier of (a) 10 months after the end of the “covered period” (as determined under the Program) or (b) the date the bank receives a remittance of the forgiven amount from the SBA, and (ii) the PPP loan’s maturity is extended to five years (from 2 years). Pursuant to the PPP Flexibility Act, we can obtain the lender's consent for the PPP loan maturity to be extended to the second quarter of 2025 (from 2022) and for the first payment date under the PPP loan to be extended as described in clause (i) of the previous sentence. 

 

Revolving Line of Credit 

 

We also maintain a revolving line of credit with another commercial bank, which permits borrowing up to an aggregate principal amount of $2.0 million. This facility was initially entered into in early August of 2020. The line of credit is priced at Prime plus 0.5%. In order to secure the lowest rate possible, the Company pledged business assets not to exceed $2.0 million in the event the Company draws down on the line of credit. There were no borrowings outstanding and there was no interest paid on the line of credit during the nine months ended September 30, 2020 and 2019. There are no financial covenants governing this line of credit.

 

Other Liabilities 

 

As of September 30, 2020 and December 31, 2019 other liabilities totaled $951,000 and $1,325,000, respectively. The decrease in other liabilities relates to decreases in accounts payable and advance premiums as of September 30, 2020.

 

ESOP 

 

In connection with our conversion and public offering, the ESOP financed the purchase of 10.0% of the common stock issued in the offering for $3,500,000 with the proceeds of a loan from ICC prior to the expiration of the offering. ICC makes annual contributions to the ESOP sufficient to repay that loan. See Note 8 – Employee Benefits of this Form 10-Q as well as the “Management — Benefit Plans and Employment Agreements —Employee Stock Ownership Plan” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

  

 

Stock-based Incentive Plan

 

Under the ICC Holdings, Inc. 2016 Equity Incentive Plan, we reserved for issuance a total of 490,000 shares of common stock. Of this amount, 350,000 shares of common stock may be granted in the form of restricted stock and stock-settled restricted stock unit awards, and 140,000 shares of common stock may be granted in the form of 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 compute compensation expense at the time stock units are awarded based on the fair value of such options on the date they are granted. This compensation expense is recognized over the appropriate service period. Restricted stock units (RSUs) were granted for the first time in February 2018 with additional RSUs granted in March 2019 and April 2020. The RSUs vest 1/3 over three years from the date of grant. See Note 8 – Employee Benefits of this Form 10-Q as well as the “Management — Benefit Plans and Employment Agreements” section of the Company’s 2019 Annual Report on Form 10-K.

  

Liquidity and Capital Resources 

 

We generate sufficient funds from our operations and maintain a high degree of liquidity in our investment portfolio to meet the demands of claim settlements and operating expenses. The primary sources of funds are premium collections, investment earnings and maturing investments. The increase in cash used in investing activities during the nine months ended September 30, 2020 compared to the same period in 2019 relates to purchases of both fixed maturity securities and preferred stocks. The increase in cash provided by financing activities during the nine months ended September 30, 2020 compared to the same period in 2019 relates to $11.6 million in loans obtained from FHLBC and SBA during the first six months of 2020. See Note 4 – Debt of this Form 10-Q for more information.

 

We maintain investment and reinsurance programs that are intended to provide sufficient funds to meet our obligations without forced sales of investments. We maintain a portion of our investment portfolio in relatively short-term and highly liquid assets to ensure the availability of funds.

 

Cash flows from continuing operations for the nine months ended September 30, 2020 and 2019 were as follows:

 

  

Nine-Months Ended September 30,

 

(In thousands)

 

2020

  

2019

 

Net cash (used in) operating activities

 $(413) $(2,351)

Net cash (used in) investing activities

  (11,128)  (153)

Net cash provided by (used in) financing activities

  11,513   (110)

Net (decrease) in cash and cash equivalents

 $(28) $(2,614)

 

ICC Holdings, Inc.’s principal source of liquidity will be dividend payments and other fees received from ICC and its other subsidiaries. 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 2020 without the prior approval of the Illinois Department of Insurance is approximately $5.5 million based upon the insurance company’s 2019 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 March 2020, ICC paid a $500,000 dividend to ICC Holdings, Inc.

 

The following table summarizes, as of September 30, 2020, our future payments under contractual obligations and estimated claims and claims related payments for continuing operations. As of September 30, 2020, the Company had received 1,283 claims for business interruption related to COVID-19. Based on policy language, the Company does not anticipate that coverage will be triggered for these property claims requiring loss payment.

  

  

Payments Due by Period

 

(In thousands)

 

Total

  

Less than 1 year

  

1-3 years

  

3-5 years

  

More than 5 years

 

Estimated gross loss and settlement expense payments

 $61,944  $21,313  $22,265  $12,482  $5,884 

Debt obligations

  15,758   307   9,346   6,105    

Operating lease obligations

  411   286   125       

Total

 $78,113  $21,906  $31,736  $18,587  $5,884 

 

The timing of the amounts of the gross loss and loss adjustment expense payments is an estimate based on historical experience and the expectations of future payment patterns. However, the timing of these payments may vary from the amounts stated above.

  

 

Off-Balance Sheet Arrangements 

 

We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital reserves.

 

Item 3. Quantitative and Qualitative Information about Market Risk

 

Market Risk

 

Market risk is the risk that we will incur losses due to adverse changes in the fair value of financial instruments. We have exposure to three principal types of market risk through our investment activities: interest rate risk, credit risk and equity risk. Our primary market risk exposure is to changes in interest rates. We have not entered, and do not plan to enter, into any derivative financial instruments for hedging, trading or speculative purposes.

 

Interest Rate Risk

 

Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. Our exposure to interest rate changes primarily results from our significant holdings of fixed rate investments. Fluctuations in interest rates have a direct impact on the fair value of these securities.

 

The average maturity of the debt securities in our investment portfolio at September 30, 2020, was 8.15 years. Our debt securities investments include U.S. government bonds, securities issued by government agencies, obligations of state and local governments and governmental authorities, and corporate bonds, most of which are exposed to changes in prevailing interest rates and which may experience moderate fluctuations in fair value resulting from changes in interest rates. We carry these investments as available for sale. This allows us to manage our exposure to risks associated with interest rate fluctuations through active review of our investment portfolio by our management and board of directors and consultation with our third-party investment manager.

 

Fluctuations in near-term interest rates could have an impact on our results of operations and cash flows. Certain of these securities may have call features. In a declining interest rate environment these securities may be called by their issuer and replaced with securities bearing lower interest rates. If we are required to sell these securities in a rising interest rate environment, we may recognize losses.

 

As a general matter, we attempt to match the durations of our assets with the durations of our liabilities. Our investment objectives include maintaining adequate liquidity to meet our operational needs, optimizing our after-tax investment income, and our after-tax total return, all of which are subject to our tolerance for risk.

 

The table below shows the interest rate sensitivity of our fixed maturity investments measured in terms of fair value (which is equal to the carrying value for all our investment securities that are subject to interest rate changes):

 

  

September 30, 2020

 

Hypothetical Change in Interest Rates (In thousands)

 

Estimated Change in Fair Value

  

Fair Value

 

200 basis point increase

 $(10,528) $92,790 

100 basis point increase

  (5,414)  97,904 

No change

     103,318 

100 basis point decrease1

  3,337   106,655 

200 basis point decrease1

  4,370   107,688 

 

1Assumes US rates are floored at 0%.

 

Credit Risk

 

Credit risk is the potential economic loss principally arising from adverse changes in the financial condition of a specific debt issuer. We address this risk by investing primarily in fixed maturity securities that are rated investment grade and at least 70% of our investment securities must be rated at least “A” by Moody’s or an equivalent rating quality. We also independently, and through our independent third-party investment manager, monitor the financial condition of all of the issuers of fixed maturity securities in the portfolio. To limit our exposure to risk, we employ diversification rules that limit the credit exposure to any single issuer or asset class.

 

Equity Risk

 

Equity price risk is the risk that we will incur economic losses due to adverse changes in equity prices.

 

Impact of Inflation

 

Inflation increases our customers’ needs for property and casualty insurance coverage due to the increase in the value of the property covered and any potential liability exposure. Inflation also increases claims incurred by property and casualty insurers as property repairs, replacements and medical expenses increase. These cost increases reduce profit margins to the extent that rate increases are not implemented on an adequate and timely basis. We establish property and casualty insurance premiums levels before the amount of loss and loss expenses, or the extent to which inflation may impact these expenses, are known. Therefore, we attempt to anticipate the potential impact of inflation when establishing rates. Because inflation has remained relatively low in recent years, financial results have not been significantly affected by it.

 

 

Item 4. Controls and Procedures

 

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

  

Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that required information is recorded, processed, summarized and reported within the required timeframe as specified in the SEC’s rules and forms of the SEC. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed is accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

In connection with the preparation of this Quarterly Report on Form 10-Q, we carried out an evaluation under the supervision of and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, as of September 30, 2020, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that as of September 30, 2020, our disclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) identified during the third quarter of 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

  

 

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There were no material changes to report.

 

  

Item 1A. Risk Factors

 

A description of the risks associated with our business, financial conditions and results of operations is set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, and filed with the SEC on March 30, 2020 and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, and filed with the SEC on May 15, 2020. 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers 

 

The following table summarizes repurchases of common stock pursuant to share repurchase programs authorized by the Board of Directors.

Purchases of Equity Securities 

 

Period

 

(a) Total number of shares (or units) purchased

  

(b) Average price paid per share (or unit)

  

(c) Total number of shares (or units) purchased as part of publicly announced plans or programs

  

(d) Maximum number (or approximate dollar value) of shares (or units) that may be purchased under the plans or programs (1)

 

July 1 – July 31, 2020

  3,672  $11.66   3,672  $2,833,779 

August 1 – August 31, 2020

  1,100   11.35   1,100   2,832,679 

September 1 – September 30, 2020

  3,283   11.64   3,283   2,829,396 

Total

  8,055  $11.61   8,055     

 

 

(1)

In August 2018, the Company announced the establishment of a $3.0 million share repurchase program, with no expiration date.

    

Item 3. Default Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable. 

 

Item 5. Other Information

 

Not applicable. 

 

 

Item 6. Exhibits

 

Exhibit
Number

 

Description

3.1  

  

Form of Amended and Restated Articles of Incorporation of ICC Holdings, Inc. (incorporated by reference to Exhibit 3.1 to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-214081) filed on December 23, 2016)

3.2  

  

Form of Amended and Restated Bylaws of ICC Holdings, Inc. (incorporated by reference to Exhibit 3.2 to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-214081) filed on December 23, 2016)

31.1  

 

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2  

 

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1  

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2  

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase

101.LAB

 

XBRL Taxonomy Extension Labels Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Link Document

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 12, 2020.

 



 

 



 

 



ICC HOLDINGS, INC.



 

 



By:  

/s/ Arron K. Sutherland



 

Arron K. Sutherland

President, Chief Executive Officer and Director

(Principal Executive Officer)



 

 



By:  

/s/ Michael R. Smith



 

Michael R. Smith

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

38