The Private Securities Litigation Reform Act of 1995 (the "Reform Act") provides a safe harbor for forward-looking statements made by or on behalf ofICC Holdings, Inc. ICC Holdings, Inc. and its representatives may, from time to time, make written or verbal forward-looking statements, including statements contained inICC Holdings, Inc.'s filings with theSecurities 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 thatICC 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" ofICC 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" ofICC Holdings, Inc.'s 2020 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
and consequent economic crises;
· our reserves at
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 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; ~ 18 ~
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· 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
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 toICC 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
For the three months endedMarch 31, 2021 , we had direct written premiums of$15,172,000 , net premiums earned of$12,049,000 , and net earnings of$1,162,000 . For the three months endedMarch 31, 2020 , we had direct premiums written of$14,795,000 , net premiums earned of$13,014,000 , and net loss of$1,973,000 . AtMarch 31, 2021 , we had total assets of$182,744,000 and equity of$71,781,000 . AtDecember 31, 2020 , we had total assets of$183,939,000 and equity of$72,743,000 . In response to the ongoing novel coronavirus (COVID-19) pandemic, inMarch 2020 , we temporarily suspended all insurance premium billing for at least 30 days, and, byAugust 2020 , normal billing resumed in all states in which we operate. 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).
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Table of Contents 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 onJuly 1, 2021 , one-half of the premiums would be earned in 2021 and the other half would be earned in 2022.
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 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 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 (losses) on equity securities for the three months endedMarch 31, 2021 andMarch 31, 2020 were$876,000 and$(3,689,000) , 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 inthe 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). ~ 20 ~
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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 endedDecember 31, 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. In response to the ongoing novel coronavirus (COVID-19) pandemic, inMarch 2020 , we announced a temporary suspense of all insurance premium billing for 30 days, and, byAugust 2020 normal billing had resumed in all states in which we operate. 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. ~ 21 ~ --------------------------------------------------------------------------------
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The following summarizes our results for the three months ended
Premiums Direct premiums written grew by$377,000 , or 2.5%, to$15,172,000 for the three months endedMarch 31, 2021 from$14,795,000 for the same period of 2020. Net written premium increased by$272,000 , or 2.2%, to$12,727,000 for the three months endedMarch 31, 2021 from$12,455,000 for the same period in 2020. Net premiums earned decreased by$965,000 , or 7.4%, in the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 , primarily due to 2020's policy exposure decreases resulting from state mandated shutdowns of restaurants and taverns. For the three months endedMarch 31, 2021 , we ceded to reinsurers$2,472,000 of earned premiums, compared to$2,394,000 of earned premiums for the three months endedMarch 31, 2020 . Ceded earned premiums as a percent of direct premiums written increased to 16.3% from 16.2% for the three months endedMarch 31, 2020 in comparison toMarch 31, 2020 .
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 decreased by$34,000 , or 4.1%, to$801,000 for theMarch 31, 2021 , as compared to$835,000 for the same period in 2020 as a result of a decrease in our bond portfolio's investment income which is sensitive to the changes in interest rates. 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 decreased by$3,000 or 6.0% during the three months endedMarch 31, 2021 as a result of fewer premium write offs as compared to the same period in 2020.
Unpaid Losses and Settlement Expenses
The following table details our unpaid losses and settlement expenses.
For the Three-Months Ended March 31, (In thousands) 2021 2020 Unpaid losses and settlement expense - beginning of the period: Gross$ 61,576 $ 56,838 Less: Ceded 13,020 11,036 Net 48,556 45,802 Increase in incurred losses and settlement expense: Current year 7,142 6,245 Prior years 661 1,597 Total incurred 7,803 7,842 Deduct: Loss and settlement expense payments for claims incurred: Current year 1,288 1,204 Prior years 7,274 5,484 Total paid 8,562 6,688
Net unpaid losses and settlement expense - end of the period
47,797
46,956
Plus: Reinsurance recoverable on unpaid losses 14,011
11,318
Gross unpaid losses and settlement expense - end of the period$ 61,808 $ 58,274 Net unpaid losses and settlement expense increased by$841,000 , or 1.8%, in the three months endedMarch 31, 2021 as compared to the same period in 2020. For the three months endedMarch 31, 2021 and 2020, we experienced unfavorable development of$661,000 and$1,597,000 , respectively. The 2021 decrease in unfavorable development was primarily driven by the Workers' Compensation line of business. Business Owners Liability and Business Owners Property lines of business were the primary drivers of adverse development for the three months endedMarch 31, 2020 . ~ 22 ~
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Losses and Settlement Expenses
Losses and settlement expenses decreased by$39,000 , or 0.5%, to$7,803,000 for the three months endedMarch 31, 2021 , from$7,842,000 for the same period in 2020. Losses and settlement expenses decreased slightly for the three months endedMarch 31, 2021 , which we believe indicates a return to pre-COVID-19 claims experience with restaurants and taverns re-opening their doors for business.
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$297,000 , or 6.2%, to$4,468,000 for the three months endedMarch 31, 2021 from$4,765,000 for the same period in 2020. 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 46 basis points from 36.61% to 37.07% for the three months endedMarch 31, 2021 as compared to the same period in 2020. The primary driver for this change was the$965,000 decrease in net 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 decreased by$12,000 , or 6.9%, in the three months endedMarch 31, 2021 as compared to the same period in 2020. Interest Expense Interest expense increased to$54,000 for the three months endedMarch 31, 2021 from$35,000 for the same period during 2020 and reflects a full three months of interest for the$6.0 million FHLB borrowing agreement entered into inMarch 2020 . Income Tax Expense We reported income tax expense of$310,000 and income tax benefit of$538,000 for the three months endedMarch 31, 2021 and 2020, respectively. The increase in income tax expense in 2021 relates to pretax earnings for the three months endedMarch 31, 2021 compared to a pretax loss for the same period in 2020. Our effective tax rate for the three months endedMarch 31, 2021 was 21.1%, compared to 21.4% for the same period in 2020. 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 following summarizes our financial position as of
Unpaid Losses and Settlement Expense
Our reserves for unpaid loss and settlement expense are summarized below:
As of March 31, As of December 31, (In thousands) 2021 2020 Case reserves $ 27,071 $ 27,901 IBNR reserves 20,726 20,655 Net unpaid losses and settlement expense 47,797
48,556
Reinsurance recoverable on unpaid loss and settlement expense 14,011
13,020
Reserves for unpaid loss and settlement $ $ expense 61,808 61,576 ~ 23 ~
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Table of Contents As ofMarch 31, 2021 , the Company had received 1,296 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
As ofMarch 31, 2021 (In thousands) Case Reserves IBNR Reserves Total Reserves Commercial liability$ 18,861 $ 17,617 $ 36,478 Property 3,801 84 3,885 Other 4,409 3,025 7,434 Total net reserves 27,071 20,726 47,797 Reinsurance recoverables 3,852 10,159 14,011 Gross reserves$ 30,923 $ 30,885 $ 61,808 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
· 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. ~ 24 ~ --------------------------------------------------------------------------------
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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 three months endedMarch 31, 2021 and 2020, we experienced unfavorable development of$661,000 and$1,597,000 , 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 ofMarch 31, 2021 , that reserve was re-estimated at$49,217,000 , which is$661,000 , or 1.4%, higher than the initial estimate. The estimation of our reserves is based on several actuarial methods, each of which incorporates many quantitative assumptions. The judgment of the actuary plays an important role in selecting among various loss development factors and selecting the appropriate method, or combination of methods, to use for a given accident year. The ranges presented above represent the expected variability around the actuarially determined central estimate. The total range around our actuarially determined estimate varies from (10.3)% to 6.2%. As shown in the table below, since 2016, the variance in our originally estimated accident year selections range from (3.7)% deficient to 5.4% redundant as ofMarch 31, 2021 . Recent Variabilities of Incurred Losses and Settlement Expense, Net of Reinsurance Accident Year Data (In thousands) 2016 2017 2018 2019 2020 As originally estimated$ 25,619 $ 29,801 $ 29,762 $ 33,563 $ 31,356 As estimated at March 31, 26,148 30,918 28,383 34,619 29,659 2021 Net cumulative (deficiency)$ (529) $ (1,117) $ 1,379 $ (1,055) $ 1,698 redundancy % (deficiency) redundancy (2.1)% (3.7)% 4.6% (3.1)% 5.4%
The table below summarizes the impact on equity, net of tax, from changes in estimates of net unpaid loss and settlement expense:
December 31, 2020 Aggregate Loss Percentage and Settlement Change in (In thousands) Reserve EquityReserve Range for Unpaid Losses and Settlement Expense Low End $ 42,860 6.2% Recorded 48,556 0.0% High End 50,780 (2.4)% If the net loss and settlement expense reserves were recorded at the high end of the actuarially determined range as ofDecember 31, 2020 , the loss and settlement expense reserves would increase by$2,224,000 before taxes. This increase in reserves would have the effect of decreasing net earnings and equity as ofDecember 31, 2020 by$1,757,000 . If the loss and settlement expense reserves were recorded at the low end of the actuarially-determined range as ofDecember 31, 2020 , the net loss and settlement expense reserves atDecember 31, 2020 would be reduced by$5,696,000 with corresponding increases in net earnings and equity of$4,500,000 . Investments Our investments are primarily composed of fixed maturity debt securities, and both common and preferred stock equity securities. We categorize all our debt securities as available-for-sale (AFS), which are carried at fair as determined by management based upon quoted market prices when available. If a quoted market price is not available, fair value is estimated using a secondary pricing source or using quoted market prices of similar securities. Changes in unrealized investment gains or losses on our AFS securities, net of applicable income taxes, are reflected directly in equity as a component of comprehensive earnings (loss) and, accordingly, have no effect on net earnings (loss). Equity securities are carried at fair value with ~ 25 ~ --------------------------------------------------------------------------------
Table of Contents subsequent changes in fair value recorded in net earnings (loss). Investment income is recognized when earned, and capital gains and losses are recognized when investments are sold, or other-than-temporarily impaired. The fair value and unrealized losses for our securities that were temporarily impaired are as follows: March 31, 2021 Less than 12 Months 12 Months or Longer Total Unrealized Unrealized Unrealized (In thousands) Fair Value Losses Fair Value Losses Fair Value Losses U.S. Treasury$ 689 $ (11) $ - $ -$ 689 $ (11) MBS/ABS/CMBS 7,513 (199) 1,821 (116) 9,334 (315) Corporate 6,201 (189) 233 (16) 6,434 (205) Municipal 3,458 (107) 245 (4) 3,703 (111) Total temporarily impaired fixed maturity securities$ 17,861 $ (506) $ 2,299 $ (135) $ 20,160 $ (641) December 31, 2020 Less than 12 Months 12 Months or Longer Total Unrealized Unrealized (In thousands) Fair Value Losses Fair Value Unrealized 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) Corporate Bonds The net unrealized gain in the Corporate bond portfolio decreased by about$1.8 million from a gain of$4,394,000 at the end of 2020 to a gain of$2,631,000 as ofMarch 31, 2021 . The decrease in unrealized gains was driven by an increase inTreasury rates.Treasury rates moved higher across the curve during the first quarter, with the five year maturity up 58 basis points and the ten year maturity up 82 basis points. This increase in the risk free rate caused prices on bonds to drop meaningfully. Municipal Bonds The net unrealized gain in the Municipal portfolio decreased by about$0.5 million from$1,300,000 at the end of 2020 to$845,000 at the end ofMarch 31, 2021 . Like Corporates, Municipal gains were negatively impacted by higherTreasury rates. However, the decline in unrealized gains was muted by spread tightening in the sector due to tailwinds from the$350 billion allocation to states from the$1.9 trillion fiscal stimulus package and concerns about higher future tax rates. 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 three months endedMarch 31, 2021 and for the year endedDecember 31, 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. ~ 26 ~ --------------------------------------------------------------------------------
Table of Contents 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 atMarch 31, 2021 andDecember 31, 2020 , 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 three months endedMarch 31, 2021 and 2020 and for the year endedDecember 31, 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. AtMarch 31, 2021 andDecember 31, 2020 , deferred acquisition costs and the related unearned premium reserves were as follows: (In thousands) March 31, 2021 December 31, 2020
Deferred acquisition costs $ 5,721 $ 5,430 Unearned premium reserves 30,468 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 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 ~ 27 ~ --------------------------------------------------------------------------------
Table of Contents 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
Other Assets As ofMarch 31, 2021 andDecember 31, 2020 , other assets totaled$1,289,000 and$1,307,000 , respectively. The decrease in other assets primarily relates to decreases inCorporate Owned Life Insurance asset values as well as prepaid fees. The Company owns life insurance policies onArron K. Sutherland , President and Chief Executive Officer, andNorman D. Schmeichel , Vice President - Chief Information Officer. Outstanding Debt As ofMarch 31, 2021 andDecember 31, 2020 , outstanding debt balances totaled$13,463,000 and$13,466,000 , respectively. The average rate on remaining debt was 1.6% and 2.2% as ofMarch 31, 2021 andDecember 31, 2020 , respectively. 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. Revolving Line of Credit We maintain a revolving line of credit with a commercial bank, which permits borrowing up to an aggregate principal amount of$2.0 million . This facility was initially entered into inAugust 2020 and is priced at Prime plus 0.5%. The Company pledged$2.0 million in business assets in the event the Company draws down on the line of credit. There are no financial covenants governing this agreement.
There were no borrowings outstanding and there was no interest paid on the line
of credit during the three months ended
Other Liabilities As ofMarch 31, 2021 andDecember 31, 2020 , other liabilities totaled$944,000 and$1,291,000 , respectively. The decrease in other liabilities relates to$210,000 of investment purchases that were pending settlement as of year-endDecember 31, 2020 and subsequently settled in the first quarter of 2021. 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 endedDecember 31, 2020 . ~ 28 ~ --------------------------------------------------------------------------------
Table of Contents Stock-based Incentive Plan Under theICC 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 inFebruary 2018 with additional RSUs granted inMarch 2019 andApril 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 2020 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 decrease in cash used in investing activities during the three months endedMarch 31, 2021 compared to the same period in 2020 relates primarily to purchases of fixed maturity securities and preferred stocks. The decrease in cash provided by financing activities during the three months endedMarch 31, 2021 compared to the same period in 2020 relates to a$6.0 million loan obtained from FHLBC during the first three 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 three months endedMarch 31, 2021 and 2020 were as follows: Three-Months Ended March 31, (In thousands) 2021 2020 Net cash provided by operating activities $ 483 $
163
Net cash used in investing activities (1,503)
(3,781)
Net cash (used in) provided by financing activities (22)
5,997
Net (decrease) increase in cash and cash equivalents $ (1,042) $ 2,379ICC Holdings, Inc.'s principal source of liquidity is dividend payments and other fees received from ICC,Beverage Insurance Agency Inc. , andICC 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 2021 without the prior approval of theIllinois Department of Insurance is approximately$5.9 million based upon the insurance company's 2020 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. InMarch 2020 , ICC paid a$500,000 dividend toICC Holdings, Inc. As ofMarch 31, 2021 , the Company had received 1,296 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.
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.
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