ICC HOLDINGS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes included elsewhere in this Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-K constitutes forward-looking information that involves risks and uncertainties. Please see Item 3A. Forward-Looking Information and Item 1A. Risk Factors for more information. Please see Item 1A. Risk Factors for a discussion of important factors that could cause actual results to differ materially from the results described, or implied by, the forward-looking statements contained herein. Overview ICC is a regional property and casualty insurance company incorporated inIllinois and focused exclusively on the food and beverage industry. On the effective date of the conversion, ICC became a wholly owned subsidiary ofICC Holdings, Inc. For the year endedDecember 31, 2021 , we had direct written premiums of$71.1 million , net premiums earned of$53.9 million , and net earnings of$4.1 million . For the year endedDecember 31, 2020 , we had direct premiums written of$59.0 million , net premiums earned of$49.7 million , and net earnings of$3.5 million . AtDecember 31, 2021 , we had total assets of$200.0 million and equity of$74.7 million . AtDecember 31, 2020 , we had total assets of$183.9 million and equity of$72.7 million . 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 at a later date 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 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). 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 onJuly 1, 2021 , one-half of the premiums would be earned in 2021 and the other half would be earned in 2022. ~ 41 ~
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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 settlement expenses) in cash, cash equivalents, equities, fixed maturity securities and real estate. Investment income includes interest and dividends earned on invested assets. Net realized gains and losses on invested assets are reported separately from net investment income. We recognize realized gains when invested assets are sold for an amount greater than their cost or amortized cost (in the case of fixed maturity securities) and recognize realized losses when investment securities are written down as a result of an other than temporary impairment or sold for an amount less than their cost or amortized cost, as applicable. Our portfolio of investment securities is managed by two independent third parties with managers specializing in the insurance industry. ICC's expenses consist primarily of: Loss and settlement expenses Loss 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 from 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, referred to herein as underwriting and administrative expenses are expensed as incurred. These costs include salaries, rent, office supplies, and depreciation. Other operating expenses consist primarily of information technology costs, accounting and internal control salaries, as well as audit and legal expenses. 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 inthe United States (GAAP), we utilize certain non-GAAP financial measures that we believe are valuable in managing our business and for comparison to our peers. These non-GAAP measures are combined ratio, written premiums, underwriting income, the loss 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 expenses, underwriting expenses and combined ratios. We also measure profitability by examining underwriting income (loss) and net earnings (loss). Loss and settlement expense ratio The loss and settlement expense ratio is the ratio (expressed as a percentage) of loss and settlement expenses incurred to premiums earned. We measure the loss ratio on an accident year and calendar year loss basis to monitor underwriting profitability. An accident year loss ratio measures loss 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. ~ 42 ~
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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 net 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 loss 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 loss and settlement expense,
amortization of deferred policy acquisition costs, and underwriting and
administrative expenses from 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
General
The preparation of financial statements in accordance with GAAP requires both
the use of estimates and judgment relative to the application of appropriate
accounting policies. We are required to make estimates and assumptions in
certain circumstances that affect amounts reported in our financial statements
and related footnotes. We evaluate these estimates and assumptions on an
on-going basis based on historical developments, market conditions, industry
trends and other information that we believe to be reasonable under the
circumstances. There can be no assurance that actual results will conform to our
estimates and assumptions and that reported results of operations will not be
materially adversely affected by the need to make accounting adjustments to
reflect changes in these estimates and assumptions from time to time. We believe
the following policies are the most sensitive to estimates and judgments.
Investments
Available-for-Sale Securities-Debt securities are classified as
available-for-sale (AFS) and reported at fair value. Unrealized gains and losses
on these securities are excluded from net earnings but are recorded as a
separate component of comprehensive earnings and policyholders' equity, net of
deferred income taxes.
Equity Securities-Equity securities include common stock, mutual funds, and
non-redeemable preferred stock. Equity securities are carried at fair value with
subsequent changes in fair value recorded in net earnings.
Other-Than-Temporary Impairment-Under current accounting standards, an OTTI
write-down of debt securities, where fair value is below amortized cost, is
triggered by circumstances where (1) an entity has the intent to sell a
security, (2) it is more likely than not that the entity will be required to
sell the security before recovery of its amortized cost basis or (3) the entity
does not expect to recover the entire amortized cost basis of the security. If
an entity intends to sell a security or if it is more likely than not the entity
will be required to sell the security before recovery, an OTTI write-down is
recognized in earnings equal to the difference between the security's amortized
cost and its fair value. If an entity does not intend to sell the security or it
is not more likely than not that it will be required to sell the security before
recovery, the OTTI write-down is separated into an amount representing the
credit loss, which is recognized in earnings, and the amount related to all
other
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factors, which is recognized in other comprehensive income. Impairment losses result in a reduction of the underlying investment's cost basis. The Company regularly evaluates its fixed income securities using both quantitative and qualitative criteria to determine impairment losses for other-than-temporary declines in the fair value of the investments. The following are the key factors for determining if a security is other-than-temporarily impaired:
?The extent to which the fair value is less than cost,
?The assessment of significant adverse changes to the cash flows on a fixed income investment,
?The occurrence of a discrete credit event resulting in the issuer defaulting on a material obligation, the issuer seeking protection from creditors under the bankruptcy laws, the issuer proposing a voluntary reorganization under which creditors are asked to exchange their claims for cash or securities having a fair value substantially lower than par value,
?The probability that the Company will recover the entire amortized cost basis of the fixed income securities prior to maturity, or
?The ability and intent to hold fixed income securities until maturity. Quantitative and qualitative criteria are considered during this process to varying degrees depending on the sector the analysis is being performed:Corporates-The Company performs a qualitative evaluation of holdings that fall below the price threshold. The analysis begins with an opinion of industry and competitive position. This includes an assessment of factors that enable the profit structure of the business (e.g., reserve profile for exploration and production companies), competitive advantage (e.g., distribution system), management strategy, and an analysis of trends in return on invested capital. Analysts may also review other factors to determine whether an impairment exists including liquidity, asset value cash flow generation, and industry multiples.Municipals-The Company analyzes the screened impairment candidates on a quantitative and qualitative basis. This includes an assessment of the factors that may be contributing to the unrealized loss and whether the recovery value is greater or less than current market value. Structured Securities-The "stated assumptions" analytic approach relies on actual 6-month average collateral performance measures (voluntary prepayment rate, gross default rate, and loss severity) sourced through third party data providers or remittance reports. The analysis applies the stated assumptions throughout the remaining term of the transaction using forecasted cash flows, which are then applied through the transaction structure (reflecting the priority of payments and performance triggers) to determine whether there is a loss to the security ("Loss to Tranche"). For securities or sectors for which no actual loss or minimal loss has been observed (certainPrime Residential Mortgage Backed Securities (RMBS) andCommercial Mortgage Backed Securities (CMBS), for example), sector-based assumptions are applied or an alternative quantitative or qualitative analysis is performed. Property Held for Investment-Property held for investment purposes is initially recorded at the purchase price, which is generally fair value, and is subsequently reported at cost less accumulated depreciation. Buildings are depreciated on a straight-line bases over the estimated useful lives of the building, which we estimate to be 39 years. Income from property held for investment is reported as net investment income Investment Income-Interest on fixed maturities and short-term investments is credited to earnings on an accrual basis. Premiums and discounts are amortized or accreted over the lives of the related fixed maturities. Dividends on equity securities are credited to earnings on the ex-dividend date. 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. Cash and Cash Equivalents Cash consists of uninvested balances in bank accounts. Cash equivalents consist of investments with original maturities of 90 days or less, primarily AAA-rated prime and government money market funds. Cash equivalents are carried at cost, which approximates fair value. The Company has not experienced losses on these instruments. ~ 44 ~
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Loss and Settlement Expense Reserves We maintain reserves for the payment of claims (incurred losses) and expenses related to adjusting those claims (loss settlement expenses). Our loss reserves consist of case reserves, which are reserves for claims that have been reported to us, loss settlement expense reserve, which includes all defense and litigation-related expenses, whether internal or external to us, and reserves for claims that have been incurred but have not yet been reported or for case reserve deficiencies or redundancies (IBNR). When a claim is reported to us, our claims personnel establish a case reserve for the estimated amount of the ultimate payment. The amount of the loss reserve for the reported claim is based primarily upon a claim-by-claim evaluation of coverage, liability, injury severity or scope of property damage, and any other information considered pertinent to estimating the exposure presented by the claim. Each claim is settled individually based upon its merits, and some claims may take years to settle, especially if legal action is involved. Case reserves are reviewed on a regular basis and are updated as new data becomes available. In addition to case reserves, we maintain an estimate of reserves for loss and settlement expenses incurred but not reported. Some claims may not be reported for several years. As a result, the liability for unpaid loss and settlement expense reserves includes significant estimates for IBNR. We utilize an independent actuary to assist with the estimation of our loss and settlement expense reserves bi-annually. This actuary prepares estimates of the ultimate liability for unpaid losses and settlement expenses based on established actuarial methods described below. Our management reviews these estimates and supplements the actuarial analysis with information not fully incorporated into the actuarially based estimate, such as changes in the external business environment and changes in internal company processes and strategy. We may adjust the actuarial estimates based on this supplemental information in order to arrive at the amount recorded in the financial statements. Reserving Methods In developing our loss and settlement expense reserve estimates, we relied upon widely used and accepted loss reserving methods (described below). Based on the deemed predictive qualities of each of the applied methods, we selected estimated ultimates by year in order to determine our reserve estimates. Our estimates can be considered actuarial central estimates, which means that they represent an expected value over the range of reasonably possible outcomes. Loss Development Methods (Paid and Incurred Loss and Settlement Expense) - Loss development ultimates are determined by multiplying current reported values by cumulative loss development factors. Incremental loss development factors are determined by analyzing historical development of losses and assuming that future development will mimic historical. Cumulative development factors are calculated from the selection of incremental factors. This method is also applied to incurred settlement expense to incurred loss ratios and paid settlement expense to paid loss ratios to estimate ultimate settlement expense. Loss development methods are particularly appropriate when historical loss development patterns have been relatively stable and can be predicted with reasonable accuracy. Expected Loss Ratio Method - The expected loss ratio method applies a selected ultimate loss ratio to premium to determine ultimate losses and settlement expenses. Expected loss ratios for 2007 and prior were selected based on the results of the loss development methods discussed above, industry experience, actual loss experience of ICC to date and general industry conditions. Beginning with 2008, expected loss ratios have been calculated based on the prior expected loss ratios, rate changes and loss trend. Bornhuetter-Ferguson (B-F) Methods (Paid and Incurred Loss) - The Loss Development Methods rely heavily on data as of the most recent evaluation date, and a relatively small swing in early reported (or paid) losses may result in a large swing in the ultimate loss projections. Therefore, other methods may also be considered. The B-F Methods offer a blend of stability and responsiveness by estimating ultimate losses as a weighted combination of an expected loss estimate and current loss data. The weight applied to the expected loss estimate is based on the appropriate cumulative loss development factor from theLoss Development Methods. This percentage is multiplied by expected losses to determine expected future development. This estimate of future loss development is then added to losses as of the current evaluation date to project ultimate losses. ~ 45 ~
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A&OE Method - In 2012, we implemented a new approach to reserving for unpaid Adjusting & Other Expenses (A&OE). This method is referred to as the "Wendy Johnson Method" where historical A&OE payments are measured against certain claim units to develop an average rate for projecting into future years. These claim units are defined as a means of measuring the overall level of claim activity in a year as follows: Units = 2 x (Newly Reported Claims in Year X) + (Number of Claims Open at Start of Year X) Future A&OE costs are projected by inflating the selected average A&OE per unit rate, 1.0% annually, against future units calculated by claims runoff patterns. Range of Estimates In addition to our actuarial central estimate, we have also developed a range of estimates. This range is not designed to represent minimum or maximum possible outcomes. It is developed to represent low and high ends for a reasonable range of expected outcomes given the selection of alternative, but reasonable assumptions. Actual results may fall outside of this range. High and low net reserve estimates were developed by stressing our expected loss ratio and loss development factor selections. By applying a factor to increase (and decrease) these assumptions, we developed high (and low) ultimate loss and settlement expense estimates. These estimates, along with paid and incurred loss information, result in a range of reserves. The gross reserve range is based on selected percentages which produce a range which is slightly wider than the net range. We estimate IBNR reserves by first deriving an actuarially based estimate of the ultimate cost of total loss and settlement expenses incurred by line of business as of the financial statement date. We then reduce the estimated ultimate loss and settlement expenses by loss and settlement expense payments and case reserves carried as of the financial statement date. The actuarially determined estimate is based upon indications from one of the above actuarial methodologies or uses a weighted average of these results. The specific method used to estimate the ultimate losses for individual lines of business, or individual accident years within a line of business, will vary depending on the judgment of the actuary as to what is the most appropriate method for a line of business' unique characteristics. Finally, we consider other factors that impact reserves that are not fully incorporated in the actuarially based estimate, such as changes in the external business environment and changes in internal company processes and strategy. The process of estimating loss reserves involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both internal and external events, such as changes in claims handling procedures, economic inflation, legal trends, and legislative changes, among others. The impact of many of these items on ultimate costs for claims and claim adjustment expenses is difficult to estimate. Loss reserve estimation difficulties also differ significantly by line of business due to differences in claim complexity, the volume of claims, the potential severity of individual claims, the determination of occurrence date for a claim, and reporting lags (the time between the occurrence of the policyholder event and when it is actually reported to the insurer). Informed judgment is applied throughout the process, including the application of various individual experiences and expertise to multiple sets of data and analyses. We continually refine our loss reserve estimates in a regular ongoing process as historical loss experience develops and additional claims are reported and settled. We consider all significant facts and circumstances known at the time loss reserves are established. Due to the inherent uncertainty underlying loss reserve estimates, final resolution of the estimated liability for loss and settlement expenses may be higher or lower than the related loss reserves at the reporting date. Therefore, actual paid losses, as claims are settled in the future, may be materially higher or lower in amount than current loss reserves. We reflect adjustments to loss reserves in the results of operations in the period the estimates are changed. We accrue liabilities for unpaid loss and settlement expenses based upon estimates of the ultimate amount payable. Policy Acquisition Costs and Other Operating ExpensesThe Company defers commissions, premium taxes, and certain other costs that are incrementally or directly related to the successful acquisition of new or renewal insurance contracts. Acquisition-related costs may be deemed ineligible for deferral when they are based on contingent or performance criteria beyond the basic acquisition of the insurance contract or when efforts to obtain or renew the insurance contract are unsuccessful. All eligible costs are capitalized and charged to expense in proportion to premium revenue recognized. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value. This deferral methodology applies to both gross and ceded premiums and acquisition costs. Other operating expenses consist primarily of information technology costs, accounting and internal control salaries, as well as audit and legal expenses. ~ 46 ~
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Premiums
Premiums are recognized ratably over the term of the contracts, net of ceded reinsurance. Unearned premiums represent the portion of premiums written relative to the unexpired terms of coverage. Unearned premiums are calculated on a daily pro rata basis. Reinsurance Ceded unearned premiums and reinsurance balances recoverable on paid and unpaid losses and settlement expenses are reported separately as assets instead of being netted with the related liabilities, since reinsurance does not relieve us of our legal liability to our policyholders. Quarterly, the Company monitors the financial condition of its reinsurers. The Company's monitoring efforts include, but are not limited to, the review of annual summarized financial data and analysis of the credit risk associated with reinsurance balances recoverable by monitoring theA.M. Best andStandard & Poor's (S&P) ratings. In addition, the Company subjects its reinsurance recoverables to detailed recoverable tests, including an analysis based on average default byA.M. Best rating. Based upon the review and testing, the Company's policy is to charge to earnings, in the form of an allowance, an estimate of unrecoverable amounts from reinsurers. This allowance is reviewed on an ongoing basis to ensure that the amount makes a reasonable provision for reinsurance balances that the Company may be unable to recover. Income Taxes The Company files a consolidated federal income tax return. Federal income taxes are accounted for using the asset and liability method under which deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities, operating losses and tax credit carry forwards. The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance if it is more likely than not all or some of the deferred tax assets will not be realized. The Company considers uncertainties in income taxes and recognizes those in its financial statements as required. As it relates to uncertainties in income taxes, unrecognized tax benefits, including interest and penalty accruals, are not considered material to the consolidated financial statements. Also, no tax uncertainties are expected to result in significant increases or decreases to unrecognized tax benefits within the next 12-month period. Penalties and interest related to income tax uncertainties, should they occur, would be included in income tax expense in the period in which they are incurred. As an insurance company, the Company is subject to minimal state income tax liabilities. On a state basis, since the majority of income is from insurance operations, the Company pays premium taxes in lieu of state income tax. Premium taxes are a component of policy acquisition costs and calculated as a percentage of gross premiums written. Comprehensive Earnings Comprehensive earnings include net earnings plus unrealized gains (losses) on AFS investment securities, net of tax. In reporting the components of comprehensive earnings on a net basis in the statement of earnings, the Company used a 21% tax rate for 2021 and 2020. Results of Operations Our results of operations are influenced by factors affecting the property and casualty insurance industry in general. The operating results ofthe 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. Our premium growth 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. ~ 47 ~
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The following summarizes our results for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . Premiums Direct premiums written grew by$12,110,000 , or 20.5%, primarily due to our insureds' businesses being open substantially all year long in 2021 in contrast to business closures brought on by COVID-19 in 2020, and net written premium increased by$11,163,000 , or 22.8%, during the same period. Net premiums earned grew by$4,204,000 , or 8.5%. For the years endedDecember 31, 2021 and 2020, we ceded to reinsurers$10,854,000 and$10,080,000 of earned premiums, respectively. Ceded earned premiums as a percent of direct premiums written were 15.3% in 2021, and 17.1% in 2020. Premiums are earned ratably over the term of the policy whereas written premiums are reflected on the effective date of the policy. 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. Another component of other income is attributable to sales made by the Company's subsidiary, Katkin. Other income increased by$580,000 , or 251.1%, in 2021 as compared to 2020 primarily as a result of a decrease in premiums written off and the addition of Katkin in the fourth quarter of 2021. Unpaid Losses and Settlement Expenses The following table details our unpaid losses and settlement expenses. (In thousands) 2021
2020
Unpaid losses and settlement expense - beginning of the period: Gross$ 61,576 $ 56,838 Less: Ceded 13,020 11,036 Net 48,556 45,802 Increase in incurred losses and settlement expense: Current year 33,968 31,356 Prior years 732 1,206 Total incurred 34,700 32,562 Deduct: Loss and settlement expense payments for claims incurred: Current year 14,740 13,054 Prior years 21,203 16,754 Total paid 35,943 29,808
Net unpaid losses and settlement expense - end of the period 47,314
48,556
Plus: Reinsurance recoverable on unpaid losses 14,521
13,020
Gross unpaid losses and settlement expense - end of the period
Differences from the initial reserve estimates emerged as changes in the
ultimate loss estimates were updated through the reserve analysis process. The
recognition of the changes in initial reserve estimates occurred over time as
claims were reported, initial case reserves were established, initial reserves
were reviewed in light of additional information and ultimate payments were made
on the collective set of claims incurred as of that evaluation date. The new
information on the ultimate settlement value of claims is updated until all
claims in a defined set are settled. As a small specialty insurer with a niche
product portfolio, our experience will ordinarily exhibit fluctuations from
period to period. While management attempts to identify and react to systematic
changes in the loss environment, management must also consider the volume of
experience directly available to the Company and interpret any particular
period's indications with a realistic technical understanding of the reliability
of those observations.
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For calendar year 2021, the Company experienced unfavorable development relative to prior years' reserve estimates in both its property and liability lines of business relating to Businessowners Property 2020 accident year claims and Businessowners Liability 2017 accident year claims, respectively. These adverse developments were largely offset by favorable development in Workers' Compensation 2020 accident year claims. For calendar year 2020, the Company experienced unfavorable development relative to prior years' reserve estimates in both its property and liability lines of business relating to Businessowners Property 2019 accident year claims and Businessowners Liability 2016 accident year claims, respectively. These adverse developments were largely offset by favorable development in Liquor Liability. 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 increased by$2,295,000 , or 12.4%. The primary drivers for this change were an increase in commissions along with positive earned premium growth. 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 expenses. Our expense ratio increased 135 basis points from 37.29% to 38.64% for the year endedDecember 31, 2021 as compared to 2020. 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$82,000 , or 12.9%, in 2021 as compared to 2020. Investment Income Our investment portfolio consisted of 80.0% and 86.6% of readily marketable, investment-grade fixed-maturity securities as ofDecember 31, 2021 and 2020, respectively. The remainder of the portfolio is comprised of rental real estate, perpetual preferred stock and common stock. Net investment income is primarily comprised of interest earned and dividends paid on these securities and rental income on investment real estate, net of related investment expenses, and excludes realized gains and losses. Net investment income decreased by$84,000 for the year endedDecember 31, 2021 as compared to 2020. The slight decline in net investment income for the twelve months endedDecember 31, 2021 , was driven primarily by a reduction in equity security dividend income. Average invested assets for 2021 were$140,677,000 compared to$127,158,000 for 2020, an increase of$13,519,000 , or 10.6%. For additional information, see Item 1. Business - Investments above. Interest Expense Interest expense increased to$235,000 for the year endedDecember 31, 2021 from$208,000 for the year endedDecember 31, 2020 , reflecting the cost of the new$5.0 million FLHB loan agreement entered into in 2021. Income Tax Expense We reported income tax expense of$815,000 in 2021, as compared to$1,047,000 in 2020. Total income tax expense decreased in 2021 primarily due to a favorable prior year tax true-up offset in part by an increase in taxes from 2021's higher taxable earnings. The Company has not established a valuation allowance against any of the net deferred tax assets. ~ 49 ~
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Financial Position The following summarizes our financial position as ofDecember 31, 2021 andDecember 31, 2020 . Unpaid Losses and Settlement Expense Our reserves for unpaid loss and settlement expense are summarized below: As of December 31, As of December 31, (In thousands) 2021 2020 Case reserves $ 26,309 $ 27,901 IBNR reserves 21,005 20,655 Net unpaid losses and settlement expense 47,314
48,556
Reinsurance recoverable on unpaid loss and settlement expense 14,521
13,020
Reserves for unpaid loss and settlement $ $ expense 61,835 61,576 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 settlement expenses as ofDecember 31, 2021 and 2020. As ofDecember 31, 2021 Actuarially Determined ?Range of Estimates (In thousands) Case Reserves IBNR Reserves Total Reserves Low High Commercial liability$ 19,223 $ 18,540 $ 37,763 Property 3,018 (558) 2,460 Other 4,068 3,023 7,091 Total net reserves 26,309 21,005 47,314$ 41,980 $ 49,737 Reinsurance recoverables 4,002 10,519 14,521 12,932 17,112 Gross reserves$ 30,311 $ 31,524 $ 61,835 $ 54,912 $ 66,849 As ofDecember 31, 2020 Actuarially Determined ?Range of Estimates (In thousands) Case Reserves IBNR Reserves Total Reserves Low High Commercial liability$ 19,019 $ 17,661 $ 36,680 Property 4,075 (39) 4,036 Other 4,807 3,033 7,840 Total net reserves 27,901 20,655 48,556$ 42,860 $ 50,780 Reinsurance recoverables 5,281 7,739 13,020 10,962 14,742 Gross reserves$ 33,182 $ 28,394 $ 61,576 $ 53,822 $ 65,522 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
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?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 settlement expenses incurred with respect to known losses may be larger than currently estimated. The ultimate frequency or severity of these claims can be very different than the assumptions we used in our estimation of ultimate reserves for these exposures. 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 years endedDecember 31, 2021 and 2020, we experienced adverse development of$732,000 and$1,206,000 , 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 2020 at$48,556,000 . As ofDecember 31, 2021 , that amount was re-estimated at$49,288,000 , which is$732,000 , or 1.5%, higher than the initial estimate. As discussed earlier, the estimation of our reserves is based on several actuarial methods, each of which incorporates many quantitative assumptions. The judgment of the actuary plays an important role in selecting among various loss development factors and selecting the appropriate method, or combination of methods, to use for a given accident year. The ranges presented above represent the expected variability around the actuarially determined central estimate. The total range around our actuarially determined estimate varies from (11.3)% to 5.1%. As shown in the table below, since 2016 the variance in our originally estimated accident year loss reserves has ranged from (4.4)% deficient to 7.0% redundant as ofDecember 31, 2021 . Recent Variabilities of Incurred Losses and Settlement Expense, Net of
Reinsurance
Accident Year Data
(In thousands) 2016 2017 2018 2019 2020
As originally estimated $ 25,619 $ 29,801 $ 29,762 $ 33,564 $ 31,356
As estimated at December 31, 2021 26,741 30,689 27,955 34,551 29,162
Net cumulative (deficiency) redundancy $ (1,121) $ (888) $ 1,807 $ (987) $ 2,194
% (deficiency) redundancy (4.4)% (3.0)% 6.1% (2.9)% 7.0%
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The table below summarizes the impact on equity, net of tax, from changes in estimates of net unpaid loss and settlement expense:
December 31,
2021 2020
Aggregate Loss Percentage Aggregate Loss Percentage
and Settlement Change in and Settlement Change in
(In thousands) Reserve Equity Reserve Equity
Reserve Range for Unpaid Losses
and Settlement Expense
Low End $ 41,980 5.6% $ 42,860 6.2%
Recorded 47,314 0.0% 48,556 0.0%
High End 49,737 (2.6)% 50,780 (2.4)%
If the net loss and settlement expense reserves were recorded at the high end of
the actuarially-determined range as of December 31, 2021 , the loss and
settlement expense reserves would increase by $2,423,000 before taxes. This
increase in reserves would have the effect of decreasing net earnings and equity
as of December 31, 2021 by $1,914,000 . If the loss and settlement expense
reserves were recorded at the low end of the actuarially-determined range as of
December 31, 2021 , the net loss and settlement expense reserves at December 31,
2021 would be reduced by $5,334,000 with corresponding increases in net earnings
and equity of $4,214,000 .
Investments
Debt securities are classified as available-for-sale (AFS) and reported at fair
value as determined by management based upon quoted market prices or a
recognized pricing service at the reporting date for those or similar
investments. Changes in unrealized investment gains or losses on our AFS
investments, 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. Investment income is recognized
when earned, and capital gains and losses are recognized when investments are
sold, or other-than-temporarily impaired.
Corporate Bonds
The net unrealized gain in the Corporate bond portfolio decreased about $2.1
million from a gain of $4,394,000 at the end of 2020 to a gain of $2,247,000 at
the end of 2021. This sharp decrease in unrealized gains was driven by an
increase in Treasury rates. In 2021, 5 year Treasury rates increased 90 bps and
10 year Treasury rates increased 60 bps. As a result of this rate move,
Corporate bond prices dropped causing the unrealized gain position to worsen.
Municipal Bonds
The net unrealized gain in the Municipal portfolio decreased from $1,300,000 at
the end of 2020 to $1,127,000 at the end of 2021, a decrease of $0.17
million . This stability in the unrealized position was driven by two factors.
Treasury rates rose during the year, which had a negative impact on Municipal
prices. However, this was mostly offset by spread tightening in the Municipal
sector throughout the year. This spread tightening was driven by a number of
factors, most notably investor concerns about the potential for higher tax rates
and an influx of cash into Municipal coffers from the fiscal stimulus package.
?
The fair value and unrealized losses for our securities that were temporarily
impaired are as follows:
December 31, 2021
Less than 12 Months 12 Months or Longer Total
Unrealized Unrealized Unrealized
(In thousands) Fair Value Losses Fair Value Losses Fair Value Losses
U.S. Treasury $ 391 $ (9) $ 292 $ (8) $ 683 $ (17)
MBS/ABS/CMBS 20,404 (244) 1,124 (52) 21,528 (296)
Corporate 6,428 (162) 995 (26) 7,423 (188)
Municipal 2,676 (19) 269 (4) 2,945 (23)
Total temporarily impaired
fixed maturity securities $ 29,899 $ (434) $ 2,680 $ (90) $ 32,579 $ (524)
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December 31, 2020
Less than 12 Months 12 Months or Longer Total
Unrealized Unrealized Unrealized
(In thousands) Fair Value Losses Fair Value Losses Fair Value Losses
U.S. Treasury $ 299 $ (1) $ - $ - $ 299 $ (1)
MBS/ABS/CMBS 7,120 (116) 2,010 (17) 9,130 (133)
Corporate 1,740 (35) - - 1,740 (35)
Municipal 757 (16) - - 757 (16)
Total temporarily impaired
fixed maturity securities $ 9,916 $ (168) $ 2,010 $ (17) $ 11,926 $ (185)
The unrealized losses as of December 31, 2021 and 2020 were primarily related to
changes in the interest rate environment. Fair values of interest rate sensitive
instruments may be affected by increases and decreases in prevailing interest
rates which generally translate, respectively, into decreases and increases in
fair values of fixed maturity investments. The fair values of interest rate
sensitive instruments also may be affected by the credit worthiness of the
issuer, prepayment options, relative values of other investments, the liquidity
of the instrument, and other general market conditions.
We monitor our investment portfolio and review securities that have experienced
a decline in fair value below cost to evaluate whether the decline is other than
temporary. When assessing whether the amortized cost basis of the security will
be recovered, we compare the present value of the cash flows likely to be
collected, based on an evaluation of all available information relevant to the
collectability of the security, to the amortized cost basis of the security. The
shortfall of the present value of the cash flows expected to be collected in
relation to the amortized cost basis is referred to as the "credit loss." If
there is a credit loss, the impairment is considered to be other-than-temporary.
If we identify that an other-than-temporary impairment loss has occurred, we
then determine whether we intend to sell the security, or if it is more likely
than not that we will be required to sell the security prior to recovering the
amortized cost basis less any current-period credit losses. If we determine that
we do not intend to sell, and it is not more likely than not that we will be
required to sell the security, the amount of the impairment loss related to the
credit loss will be recorded in earnings, and the remaining portion of the
other-than-temporary impairment loss will be recognized in other comprehensive
income (loss), net of tax. If we determine that we intend to sell the security,
or that it is more likely than not that we will be required to sell the security
prior to recovering its amortized cost basis less any current-period credit
losses, the full amount of the other-than-temporary impairment (OTTI) will be
recognized in earnings.
There were no other-than-temporary impairment losses recognized in net earnings
during the years ended December 31, 2021 and 2020. 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 on a daily basis, 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 we are able to
obtain fair value estimates from more than one broker-dealer, we would review
the range of estimates and would select the most appropriate value based on the
facts and circumstances. Should neither the independent pricing service nor a
broker-dealer provide a fair value estimate, we would develop a fair value
estimate based on cash flow analyses and other valuation techniques that utilize
certain unobservable inputs. Accordingly, we would classify such a security as a
Level 3 investment.
The fair value estimates of our investments provided by the independent pricing
service at December 31, 2021 and December 31, 2020 , respectively, were utilized,
among other resources, in reaching a conclusion as to the fair value of our
investments.
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Management reviews the reasonableness of the pricing provided by the independent pricing service by employing various analytical procedures. We review all securities to identify recent downgrades, significant changes in pricing, and pricing anomalies on individual securities relative to other similar securities. This will include looking for relative consistency across securities in common sectors, durations, and credit ratings. This review will also include all fixed maturity securities rated lower than "A" by Moody's or S&P. If, after this review, management does not believe the pricing for any security is a reasonable estimate of fair value, then it will seek to resolve the discrepancy through discussions with the pricing service. In our review we did not identify any such discrepancies for the years endedDecember 31, 2021 and 2020, 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. AtDecember 31, 2021 andDecember 31, 2020 , deferred acquisition costs and the related unearned premium reserves were as follows: (In thousands) December 31, 2021 December 31, 2020 Deferred acquisition costs $ 6,539 $ 5,430 Unearned premium reserves 36,212 29,789 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 settlement 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 settlement 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 had a net deferred tax liability of$955,000 and$1,231,000 atDecember 31, 2021 and 2020, respectively. A valuation allowance is required to be established for any portion of a deferred tax asset for which we believe it is more likely than not that it will not be realized. AtDecember 31, 2021 and 2020, we had no valuation allowance with respect to a deferred tax asset. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record an additional valuation allowance against our deferred tax assets. As ofDecember 31, 2021 and 2020, we had no material unrecognized tax benefits or accrued interest and penalties. Periods still subject to Internal Revenue Service (IRS) audit include 2018 through the current year. There are currently no open tax exams. The tax return related to the year endedDecember 31, 2021 has not yet been filed. Other Assets As ofDecember 31, 2021 and 2020, other assets totaled$1,344,000 and$1,308,000 , respectively. These balances includeCorporate Owned Life Insurance policies onArron K. Sutherland , President and Chief Executive Officer, andNorman D. Schmeichel , Vice President - Chief Information Officer. Outstanding Debt As ofDecember 31, 2021 and 2020, outstanding debt balances totaled$18,455,000 and$13,466,000 , respectively. The average rate on remaining debt was 1.3% and 1.6% as ofDecember 31, 2021 and 2020, respectively. ~ 54 ~
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Debt ObligationICC Holdings, Inc. secured a loan with a commercial bank inMarch 2017 in the amount of$3,500,000 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. In response to COVID-19, the Company obtained inMarch 2020 andMay 2020 a$6.0 million and$4.0 million loan, respectively, from the FHLBC as a precautionary measure to increase its cash position, to provide increased liquidity, and to compensate for potential reductions in premium receivable collections. The Company's$4.0 million loan matured onMay 3, 2021 and, on this date, a new$4.0 million FHLBC loan became effective. In addition, the Company entered into a one year,$5.0 million FHLBC loan onMay 28, 2021 . See Note 5 - Debt of this Form 10-K for more information. 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 entered into during 2013 and expiredAugust 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 were no financial covenants governing this agreement. EffectiveAugust 3, 2020 , the Company replaced its expired 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 ofJuly 2022 . 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 agreement. There was no interest paid on these lines of credit during the years endedDecember 31, 2021 andDecember 31, 2020 . Other Liabilities As ofDecember 31, 2021 andDecember 31, 2020 , other liabilities totaled$1,031,000 and$1,291,000 , respectively. The decrease in other liabilities relates primarily to$210,000 of investment purchases that were pending settlement as of year-endDecember 31, 2020 . For information regarding our reinsurance program, investment portfolio, unpaid losses and settlement information, see Item 1. Business.
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 shareholder's 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. The ESOP uses funds it receives to repay the loan. When loan payments are made, ESOP shares are allocated to participants based on relative compensation and expense is recorded. The Company contributed$294,000 and$295,000 to the ESOP during the twelve months endedDecember 31, 2021 and 2020. 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 year endedDecember 31, 2021 , we recognized compensation expense of$270,000 related to 23,437 shares of our common stock that were committed to be released to participants' accounts for the year endedDecember 31, 2021 . Of the 23,437 shares committed to be released, 1,926 shares were committed onDecember 31, 2021 and had no impact on the weighted average common shares outstanding for the year endedDecember 31, 2021 . For the year endedDecember 31, 2020 , we recognized compensation expense of$283,000 related to 23,437 shares of our common stock that were committed to be released to participants' accounts for the year endedDecember 31, 2020 . Of the 23,437 shares committed to be released, 1,985 shares were committed onDecember 31, 2020 and had no impact on the weighted average common shares outstanding for the year endedDecember 31, 2020 . The fair value of the unearned ESOP shares as ofDecember 31, 2021 andDecember 31, 2020 was$3,926,000 and$3,687,000 , respectively. ~ 55 ~
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Restricted Stock Units RSUs were granted for the first time inFebruary 2018 with additional RSUs granted inMarch 2019 ,April 2020 andApril 2021 . 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 ofDecember 31, 2021 , 11,700, 13,071, 18,040 and 15,000 RSUs have been granted at a fair market value of$15.10 ,$13.70 ,$11.03 and$14.78 , respectively. As ofDecember 31, 2020 , 11,700, 13,071 and 18,040 RSUs have been granted at a fair market value of$15.10 ,$13.70 and$11.03 per share, respectively. We recognized$187,000 and$172,000 of expense on these units in the twelve months endedDecember 31, 2021 and 2020, respectively. Total unrecognized compensation expense relating to outstanding and unvested RSUs was$255,000 and$224,000 as ofDecember 31, 2021 and 2020, respectively, which is recognized over the remainder of the three year vesting periods. 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. 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 years endedDecember 31, 2021 and 2020 were as follows: Year Ended December 31, (In thousands) 2021 2020
Net cash provided by operating activities
(12,155) (13,111)
Net cash provided by financing activities 4,851 11,470
Net decrease in cash and cash equivalents
The Parent Company's principal source of liquidity is dividend payments and other fees received from ICC,Beverage Insurance Agency Inc. ,Katkin and ICC Realty, LLC . ICC is restricted by the insurance laws ofIllinois as to the amount of dividends or other distributions it may pay to us. UnderIllinois 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 theIllinois 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 theIllinois 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 theIllinois Department of Insurance . The amount available for payment of dividends from ICC in 2022 without the prior approval of theIllinois Department of Insurance is approximately$6.3 million based upon the insurance company's 2021 annual statement. Prior to its payment of any dividend, ICC is required to provide notice of the dividend to theIllinois Department of Insurance . This notice must be provided to theIllinois 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. ICC paid dividends of$800,000 and$500,000 toICC Holdings, Inc. inApril 2021 andMarch 2020 , respectively. As ofDecember 31, 2021 , the Company has received 1,296 claims for business interruption related to COVID-19. This count has not changed since the period endedMarch 31, 2021 . Based on policy language, the Company does not anticipate that coverage will be triggered for these property claims requiring loss payment. The actual timing of gross loss and loss adjustment expense payments is unknown and therefore timing estimates are based on historical experience and the expectations of future payment patterns. ~ 56 ~
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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.
Recently Issued Accounting Pronouncements
For a discussion of new accounting pronouncements affecting us, see Note 1 -
Summary of Significant Accounting Policies to the consolidated financial
statements.
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