The Private Securities Litigation Reform Act of 1995 (the "Reform Act") provides
a safe harbor for forward-looking statements made by or on behalf of ICC
Holdings, Inc. ICC Holdings, Inc., and its representatives may, from time to
time, make written or verbal forward-looking statements, including statements
contained in ICC Holdings, Inc.'s filings with the Securities and Exchange
Commission (SEC) and its reports to shareholders. Generally, the inclusion of
the words "anticipates," "believe," "estimate," "expect," "future," "intend,"
"may," "plans," "seek", "will," or the negative of such terms and similar
expressions identify statements that constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 and that are intended to come within the
safe harbor protection provided by those sections. All statements addressing
operating performance, events, or developments that ICC Holdings, Inc. expects
or anticipates will occur in the future, including statements relating to sales
growth, earnings or earnings per share growth, and market share, as well as
statements expressing optimism or pessimism about future operating results, are
forward-looking statements within the meaning of the Reform Act. The
forward-looking statements are and will be based on management's then-current
beliefs and assumptions regarding future events and operating performance and on
information currently available to management and are applicable only as of the
dates of such statements.
Forward-looking statements involve risks, uncertainties and assumptions,
including, among other things, the factors discussed under the heading "Item 1A.
Risk Factors" of ICC Holdings, Inc.'s Annual Report on Form 10-K and those
listed below. Although we do not make forward-looking statements unless we
believe we have a reasonable basis for doing so, we cannot guarantee their
accuracy. Actual results may differ materially from those expressed in these
forward-looking statements due to several uncertainties and risks, including the
risks described in this Quarterly Report on Form 10-Q and other unforeseen
risks. Readers should not put undue reliance on any forward-looking statements.
These statements speak only as of the date of this Quarterly Report on Form
10-Q, even if subsequently made available by us on our website or otherwise, and
we undertake no obligation to update or revise these statements to reflect
events or circumstances occurring after the date of this Quarterly Report on
Form 10-Q.
All of these factors are difficult to predict and many are beyond our control.
These important factors include those discussed under "Item 1A. Risk Factors" of
ICC Holdings, Inc.'s 2021 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, inflation 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 June 30, 2022 resulting directly from the COVID-19 pandemic and
consequent economic crises;
?our reserves at June 30, 2022 could change including as a result of, among
other things, the impact of legislative or regulatory actions taken in response
to COVID-19;
?the continued impact of COVID-19, its variants and related risks, including
from shelter-in-place and other restrictive orders, unemployment, supply chain
disruptions, 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 and its variants,
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;
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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 Financial Accounting Standards Board or other
standard-setting bodies;
?unanticipated changes in industry trends and ratings assigned by nationally
recognized rating organizations;
?adverse litigation or arbitration results;
?litigation tactics and developments, including those related to business
interruption claims; and
?adverse changes in applicable laws, regulations or rules governing insurance
holding companies and insurance companies, and environmental, tax or accounting
matters including limitations on premium levels, increases in minimum capital
and reserves, and other financial viability requirements, and changes that
affect the cost of, or demand for our products.
Because forward-looking information is subject to various risks and
uncertainties, actual results may differ materially from that expressed or
implied by the forward-looking information.
All subsequent written and oral forward-looking information attributable to ICC
Holdings, Inc. or any person acting on our behalf is expressly qualified in its
entirety by the cautionary statement contained or referred to in this section.
Overview
ICC is a regional property and casualty insurance company incorporated in
Illinois and focused exclusively on the food and beverage industry. On the
effective date of the mutual-to-public company conversion, ICC became a wholly
owned subsidiary of ICC Holdings, Inc.
For the six months ended June 30, 2022, we had direct written premiums of
$40,795,000, net premiums earned of $33,041,000, and net loss of $4,289,000. For
the six months ended June 30, 2021, we had direct premiums written of
$33,688,000, net premiums earned of $24,782,000, and net earnings of $1,725,000.
At June 30, 2022, we had total assets of $192,902,000 and equity of $61,508,000.
At December 31, 2021, we had total assets of $200,002,000 and equity of
$74,704,000.
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.
Our "emerging growth company" status will expire in connection with the filing
of our annual report on Form 10-K for the year ended December 31, 2022.
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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Net premiums earned
Premiums earned is the earned portion of our net premiums written. Gross
premiums written include all premiums recorded by an insurance company during a
specified policy period. Insurance premiums on property and casualty insurance
contracts are recognized in proportion to the underlying risk insured and are
earned ratably over the duration of the policies. At the end of each accounting
period, the portion of the premiums that is not yet earned is included in
unearned premiums and is realized as revenue in subsequent periods over the
remaining term of the policy. Our policies typically have a term of twelve
months. Thus, for example, for a policy that is written on July 1, 2022,
one-half of the premiums would be earned in 2022 and the other half would be
earned in 2023.
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 (losses) on
equity securities for the three and six months ended June 30, 2022 were
$(3,805,000) and $(5,097,000), respectively. Unrealized gains for the three and
six months ended June 30, 2021 for equity securities were $729,000 and
$1,605,000, respectively. Our portfolio of investment securities is managed by
two independent third parties with managers specializing in the insurance
industry.
ICC's expenses consist primarily of:
Losses and settlement expenses
Losses and settlement expenses represent the largest expense item and include:
(1) claim payments made, (2) estimates for future claim payments and changes in
those estimates for prior periods, and (3) costs associated with investigating,
defending, and adjusting claims.
Amortization of deferred policy acquisition costs and other operating expenses
Expenses incurred to underwrite risks are referred to as policy acquisition
expenses. Variable policy acquisition costs consist of commission expenses,
premium taxes and certain other underwriting expenses that vary with and are
primarily related to the writing and acquisition of new and renewal business.
These policy acquisition costs are deferred and amortized over the effective
period of the related insurance policies. Fixed policy acquisition costs are
expensed as incurred. These costs include salaries, rent, office supplies, and
depreciation. Other operating expenses consist primarily of information
technology costs, accounting, and internal control salaries, as well as audit
and legal expenses.
Income taxes
We use the asset and liability method of accounting for income taxes. Deferred
income taxes arise from the recognition of temporary differences between
financial statement carrying amounts and the tax bases of our assets and
liabilities. A valuation allowance is provided when it is more likely than not
that some portion of the deferred tax asset will not be realized. The effect of
a change in tax rates is recognized in the period of the enactment date.
Key Financial Measures
We evaluate our insurance operations by monitoring certain key measures of
growth and profitability. In addition to reviewing our financial performance
based on results determined in accordance with generally accepted accounting
principles in the United States (GAAP), we utilize certain operational financial
measures that we believe are valuable in managing our business and for
comparison to our peers. These operational measures are combined ratio, written
premiums, underwriting income, the losses and settlement expense ratio, the
expense ratio, the ratio of net written premiums to statutory surplus and return
on average equity.
We measure growth by monitoring changes in gross premiums written and net
premiums written. We measure underwriting profitability by examining losses and
settlement expense, underwriting expense, and combined ratios. We also measure
profitability by examining underwriting income (loss) and net earnings (loss).
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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 ended December 31, 2021.
Results of Operations
Our results of operations are influenced by factors affecting the property and
casualty insurance industry in general. The operating results of the United
States property and casualty insurance industry are subject to significant
variations due to competition, weather, catastrophic events, regulation, general
economic conditions, judicial trends, fluctuations in interest rates and other
changes in the investment environment.
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.
?
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Here is a summary of our results for the six months ended June 30, 2022 and
2021:
Premiums
Direct premiums written grew by $7,107,000, or 21.1%, to $40,795,000 for the six
months ended June 30, 2022 from $33,688,000 for the same period of 2021. Net
written premium increased by $8,017,000, or 28.3%, to $36,327,000 for the six
months ended June 30, 2022 from $28,310,000 for the same period in 2021. Net
premiums earned grew by $8,259,000, or 33.3%, in the six months ended June 30,
2022 as compared to the six months ended June 30, 2021, consistent with our
increased premium writings in 2022 and 2021 coupled with less earned premium
ceded to reinsurers.
For the six months ended June 30, 2022, we ceded to reinsurers $4,523,000 of
earned premiums, compared to $5,289,000 of earned premiums for the six months
ended June 30, 2021. Ceded earned premiums as a percent of direct premiums
written decreased to 11.1% from 15.7% for the six months ended June 30, 2022 as
compared to the six months ended June 30, 2021 due to lower reinsurance ceding
rates.
Premiums are earned ratably over the term of the policy whereas written premiums
are reflected on the effective date of the policy.
investment income
Net investment income increased by $284,000, or 17.9%, to $1,869,000 for the six
months ended June 30, 2022, as compared to $1,585,000 for the same period in
2021. These increases are a result of increased rates on our fixed income
portfolio and an increase in overall equity holdings.
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, which was
acquired in October 2021. Other income increased by $110,000, or 79.7%, during
the six months ended June 30, 2022 as compared to the same period in 2021 as a
result of the Katkin sales in 2022 compared to zero sales during the same period
in 2021 and a positive change in the cash value of officer life insurance.
Unpaid losses and settlement costs
For the Six-Months Ended
June 30,
(In thousands) 2022 2021
Unpaid losses and settlement expense - beginning of the
period:
Gross $ 61,835 $ 61,576
Less: Ceded 14,521 13,020
Net 47,314 48,556
Increase in incurred losses and settlement expense:
Current year 19,485 15,236
Prior years 4,519 1,231
Total incurred 24,004 16,467
Deduct: Loss and settlement expense payments for claims
incurred:
Current year 5,994 4,811
Prior years 10,469 12,272
Total paid 16,463 17,083
Unpaid net losses and settlement expenses – end
period
54,855
47,940
Plus: Reinsurance recoverable on unpaid losses 15,526
15,918
Gross unpaid losses and settlement expenses – end of
period
$ 70,381
$63,858
Net unpaid losses and settlement expenses increased by $6,913,500, or 14.4%, in
the six months ended June 30, 2022 as compared to the same period in 2021. For
the six months ended June 30, 2022 and 2021, we experienced unfavorable
development of $4,519,000 and $1,231,000, respectively. The unfavorable
development for the six months ended June 30, 2022 was primarily driven by new
claims and additional information received for the six months ended June 30,
2022 for a handful of prior year claims in the following lines of business and
denoted accident years: Business Owners Liability (2020;
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a claim & 2017; two claims) and alcohol civil liability (2019; one claim). The
The Ownership of Business Owners line of business was the main contributor to
development for the semester ended June 30, 2022.
Settlement losses and expenses
Losses and settlement expenses increased by $7,537,000, or 45.8%, to $24,004,000
for the six months ended June 30, 2022, from $16,467,000 for the same period in
2021. The increase in losses and settlement expenses was driven in part by
increased earned premium in 2022 and the $4,519,000 in prior year adverse loss
development.
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 $2,260,000, or 23.8%, to $11,775,000 for the six months
ended June 30, 2022 from $9,515,000 for the same period in 2021. The increase in
these expenses is mainly due to increased commissions consistent with the
current period's premium growth experienced across our market footprint. In
addition, the Company provided non-executive employees cost of living
adjustments in recognition of inflation's current impact on employees.
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
general corporate expenses.
Our expense ratio decreased by 275 basis points from 38.4% to 35.6% for the six
months ended June 30, 2022 as compared to the same period in 2021. The primary
driver for this change was an increase in earned premium.
General business 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
$14,000, or 3.9%, in the six months ended June 30, 2022 as compared to the same
period in 2021.
Interest Expense
Interest expense decreased to $103,000 for the six months ended June 30, 2022
of $112,000 for the same period in 2021.
income tax expense
We reported income tax benefit of $1,162,000 and income tax expense of $468,000
for the six months ended June 30, 2022 and 2021, respectively. The decrease in
income tax expense in 2022 relates to a pretax loss for the six months ended
June 30, 2022 compared to pretax earnings for the same period in 2021. Our
effective tax rate for the six months ended June 30, 2022 was 21.3%, compared to
21.4% for the same period in 2021. Effective rates are dependent upon components
of pretax earnings and losses and the related tax effects.
The Company has not established a valuation allowance against any of the net
deferred tax assets.
The following summarizes our results for the three months ended June 30, 2022
and 2021:
Premiums
Direct premiums written grew by $2,713,000, or 14.7%, to $21,229,000 for the
three months ended June 30, 2022 from $18,516,000 for the same period of 2021.
Net written premium grew by $3,410,000, or 21.9%, to $18,994,000 for the three
months ended June 30, 2022 from $15,584,000 for the same period in 2021. Net
premiums earned grew by $4,291,000, or 33.7%, in the three months ended June 30,
2022 as compared to the three months ended June 30, 2021, consistent with our
increased premium writings in 2022 and 2021 coupled with less earned premium
ceded to reinsurers.
For the three months ended June 30, 2022, we ceded to reinsurers $2,233,000 of
earned premiums, compared to $2,817,000 of earned premiums for the three months
ended June 30, 2021. Ceded earned premiums as a percent of direct
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premiums written decreased to 10.5% from 15.2% for the three months ended June
30, 2022 as compared to the three months ended June 30, 2021 due to lower
reinsurance ceding rates.
Premiums are earned ratably over the term of the policy whereas written premiums
are reflected on the effective date of the policy.
investment income
Net investment income increased by $168,000, or 21.4%, to $952,000 for the three
months ended June 30, 2022, as compared to $784,000 for the same period in 2021.
These increases are as a result of increased rates on our fixed income portfolio
and an increase in overall equity holdings.
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, which was
acquired in October 2021. Other income decreased by $3,000 or 3.3% during the
three months ended June 30, 2022 as compared to the same period in 2021.
Losses and Settlement Expenses
Losses and settlement expenses increased by $5,145,000, or 59.4%, to $13,809,000
for the three months ended June 30, 2022, from $8,664,000 for the same period in
2021. The increase in losses and settlement expenses was driven in part by
increased earned premium in 2022 and the $1,850,000 in prior year adverse loss
development.
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 $956,000, or 18.9%, to $6,003,000 for the three months
ended June 30, 2022 from $5,047,000 for the same period in 2021. The increase is
mainly due to increased commissions consistent with the current period's premium
growth experienced across our market footprint.
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
general corporate expenses.
Our expense ratio decreased by 437 basis points from 39.6% to 35.3% for the
three months ended June 30, 2022 as compared to the same period in 2021. The
primary driver for this change was an increase in earned premium.
General business 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
$11,000, or 5.6%, in the three months ended June 30, 2022 as compared to the
same period in 2021.
Interest Expense
Interest expense decreased to $42,000 for the three months ended June 30, 2022
of $58,000 for the same period in 2021.
?
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income tax expense
We reported income tax benefit of $1,112,000 and income tax expense of $158,000
for the three months ended June 30, 2022 and 2021, respectively. The decrease in
income tax expense in 2022 relates to a pretax loss for the three months ended
June 30, 2022 compared to pretax earnings for the same period in 2021. Our
effective tax rate for the three months ended June 30, 2022 was 21.2%, compared
to 22.0% for the same period in 2021. Effective rates are dependent upon
components of pretax earnings and losses 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 June 30, 2022 and December
31, 2021:
Unpaid Losses and Settlement Expense
Our reserves for unpaid loss and settlement expense are summarized below:
As of June 30, As of December 31,
(In thousands) 2022 2021
Case reserves $ 32,709 $ 26,309
IBNR reserves 22,146 21,005
Net unpaid losses and settlement expense 54,855
47,314
Reinsurance recoverable on unpaid loss and
settlement expense 15,526
14,521
Reserves for unpaid loss and settlement $ $
expense 70,381 61,835
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 June 30, 2022 and December 31, 2021.
As of June 30, 2022
(In thousands) Case Reserves IBNR Reserves Total Reserves
Commercial liability $ 23,447 $ 19,515 $ 42,962
Property 5,608 (589) 5,019
Other 3,654 3,220 6,874
Total net reserves 32,709 22,146 54,855
Reinsurance recoverables 4,471 11,055 15,526
Gross reserves $ 37,180 $ 33,201 $ 70,381
As of December 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
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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 line of business;
?Historical business development experience;
?the impact of court rulings on insurance coverage issues, which may
the ultimate cost of claims settlement;
?changes in our internal complaints handling policies and procedures; and
?trends and risks in claim costs, such as risk that medical cost inflation could
increase.
Our actuary is required to exercise a considerable degree of judgment in the
evaluation of all of these and other factors in the analysis of our loss and
settlement expense reserves, and related range of anticipated losses. Because of
the level of uncertainty impacting the estimation process, it is reasonably
possible that different actuaries would arrive at different conclusions. The
method of determining the reserve range has not changed and the reserve range
generated by our actuary is consistent with the observed development of our loss
reserves over the last few years.
The width of the range in reserves arises primarily because specific losses may
not be known and reported for some period and the ultimate losses paid and loss
adjustment expenses incurred with respect to known losses may be larger than
currently estimated. The ultimate frequency or severity of these claims can be
very different than the assumptions we used in our estimation of ultimate
reserves for these exposures.
Specifically, the following factors could impact the frequency and severity of
claims, and therefore, the ultimate amount of loss and settlement expense paid:
?the rate of increase in labor costs, medical costs and material costs that
underlying the 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 six months ended June 30, 2022 and 2021, we experienced unfavorable
development of $4,519,000 and $1,231,000, 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 2021 at $47,314,000. As
of June 30, 2022, that reserve was re-estimated at $51,833,000, which is
$4,519,000, or 9.6%, 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.
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 value 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
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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:
June 30, 2022
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 $ 630 $ (23) $ 649 $ (52) $ 1,279 $ (75)
MBS/ABS/CMBS 26,290 (1,234) 8,212 (930) 34,502 (2,164)
Corporate 27,075 (2,671) 1,517 (240) 28,592 (2,911)
Municipal 13,670 (2,660) 212 (61) 13,882 (2,721)
Redeemable preferred stock 139 (8) - - 139 (8)
Total temporarily impaired
fixed maturity securities $ 67,804 $ (6,595) $ 10,590 $ (1,283) $ 78,394 $ (7,879)
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)
Corporate Bonds
The net unrealized gain in the Corporate bond portfolio decreased by about
$5.1 million from a gain of $2,247,000 at the end of 2021 to a loss of
$(2,818,000) as of June 30, 2022. Two factors drove this significant decline.
First was the meaningful shift higher in Treasury yields as a response to news
that the Fed would be more aggressive in removing economic accommodations.
During the first half of 2022, five year and ten year Treasury rates moved up
176 bps and 148 bps, respectively. Additionally, Corporate spreads widened about
65 bps throughout the first half of 2022, driven mainly by geopolitical concerns
arising from Russia's invasion of Ukraine, inflation and related monetary
policies, and the increasing probability of a recession.
Municipal Bonds
The net unrealized gain in the Municipal portfolio decreased by about
$3.7 million from a gain of $1,127,000 at the end of 2021 to a loss of
$(2,592,000) as of June 30, 2022. Municipal prices declined as Treasury rates
rose in the first six months of 2022.
We screen the portfolio for securities that hit certain thresholds and review
those securities for potential impairment. The thresholds vary by sector. For
corporates, as an example, we screen for any holding that has a market price
below $80. For munis, we screen for securities that have an unrealized loss of
more than 5% of book value. When assessing whether the amortized cost basis of
the security will be recovered, we may 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
(OTTI) 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 OTTI 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 OTTI will be recognized in earnings.
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For the six months ended June 30, 2022, the Company did not take an impairment
charge on any of its security holdings. Adverse investment market conditions, or
poor operating results of underlying investments, could result in impairment
charges in the future.
We use quoted values and other data provided by independent pricing services in
our process for determining fair values of our investments. The evaluations of
such pricing services represent an exit price and a good faith opinion as to
what a buyer in the marketplace would pay for a security in a current sale. This
pricing service provides us with one quote per instrument. For fixed maturity
securities that have quoted prices in active markets, market quotations are
provided. For fixed maturity securities that do not trade daily, the independent
pricing service prepares estimates of fair value using a wide array of
observable inputs including relevant market information, benchmark curves,
benchmarking of like securities, sector groupings, and matrix pricing. The
observable market inputs that our independent pricing service utilizes may
include (listed in order of priority for use) benchmark yields, reported trades,
broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities,
market bids/offers, and other reference data on markets, industry, and the
economy. Additionally, the independent pricing service uses an option adjusted
spread model to develop prepayment and interest rate scenarios. The pricing
service did not use broker quotes in determining fair values of our investments.
Should the independent pricing service be unable to provide a fair value
estimate, we would attempt to obtain a non-binding fair value estimate from a
number of broker-dealers and review this estimate in conjunction with a fair
value estimate reported by an independent business news service or other
sources. In instances where only one broker-dealer provides a fair value for a
fixed maturity security, we use that estimate. In instances where can obtain
fair value estimates from more than one broker-dealer, we would review the range
of estimates and would select the most appropriate value based on the facts and
circumstances. Should neither the independent pricing service nor a
broker-dealer provide a fair value estimate, we would develop a fair value
estimate based on cash flow analyses and other valuation techniques that utilize
certain unobservable inputs. Accordingly, we would classify such a security as a
Level 3 investment.
The fair value estimates of our investments provided by the independent pricing
service at June 30, 2022 and December 31, 2021, 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 six months ended June 30, 2022 and 2021 and for the
year ended December 31, 2021, and no adjustments were made to the estimates
provided by the pricing service. The classification within the fair value
hierarchy of Accounting Standards Codification (ASC) Topic 820, Fair Value
Measurement, is then confirmed based on the final conclusions from the pricing
review.
Deferred Policy Acquisition Costs
Certain acquisition costs consisting of direct and ceded commissions, premium
taxes and certain other direct underwriting expenses that vary with and are
primarily related to the production of business are deferred and amortized over
the effective period of the related insurance policies as the underlying policy
premiums are earned. At June 30, 2022 and December 31, 2021, deferred
acquisition costs and the related unearned premium reserves were as follows:
(In thousands) June 30, 2022 December 31, 2021
Deferred acquisition costs $ 7,157 $ 6,539
Unearned premium reserves 39,512 36,212
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
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allowance is provided when it is more likely than not that some portion of the
deferred tax asset will not be realized. The effect of a change in tax rates is
recognized in the period of the enactment date.
We exercise significant judgment in evaluating the amount and timing of
recognition of the resulting tax liabilities and assets. These judgments require
us to make projections of future taxable income. The judgments and estimates we
make in determining our deferred tax assets, which are inherently subjective,
are reviewed on a continual basis as regulatory and business factors change. Any
reduction in estimated future taxable income may require us to record an
additional valuation allowance against our deferred tax assets.
As of June 30, 2022 and December 31, 2021, we had no material unrecognized tax
benefits or accrued interest and penalties. Federal tax years 2018 through the
current year are open for examination.
Other Assets
As of June 30, 2022 and December 31, 2021, other assets totaled $1,327,000 and
$1,344,000, respectively. The decrease in other assets primarily relates to a
decrease in prepaids.
?
Outstanding Debt
As of June 30, 2022 and December 31, 2021, outstanding debt balances totaled
$15,000,000 and $18,455,000, respectively. The average rate on remaining debt
was 1.2% and 1.3% as of June 30, 2022 and December 31, 2021.
Debt Obligations
ICC Holdings, Inc. secured a loan with a commercial bank in March 2017 in the
amount of $3.5 million and used the proceeds to repay ICC for the money borrowed
by the ESOP. The term of the loan is five years bearing interest at 3.65%. The
Company pledged stock and $1.0 million of marketable assets as collateral for
the loan. The Company paid off this loan in April 2022.
The Company also has borrowing capacity of $42.0 million, which is 25% of net
admitted statutory assets of Illinois Casualty Company as of the prior year-end.
As part of the Company's response to COVID-19, the Company obtained, in March
2020, a $6.0 million loan from the FHLBC as a precautionary measure to increase
its cash position, to provide increased liquidity, and to compensate for
potential reductions in premium receivable collections. The term of the loan is
five years bearing interest at 1.4%. The Company pledged $6.8 million of fixed
income securities as collateral for this loan.
In May 2021, the Company entered into a $4.0 million, 0.74% fixed interest, five
year FHLBC loan.
A one year FHLBC loan for $5.0 million, 0% interest was entered into in May
2021. Upon maturity in May 2022, this loan rolled over to a $5.0 million, 1.36%
fixed interest loan.
The Company has $19.3 million in bonds pledged as collateral for all FHLBC loans
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 $4.0 million. This line of
credit is priced at Prime plus 0.5% with a 4.75% floor and renews annually with
a current expiration date of July 2023. Prior to our July 2022 renewal this line
had been $2.0 million. The Company pledged $4.0 million of business assets in
the event the Company draws down on the line of credit. This agreement includes
an annually calculated financial debt covenant requiring a minimum total
adjusted capital of $21.0 million. Total adjusted capital is the sum of an
insurer's statutory capital and surplus as determined in accordance with the
statutory accounting applicable to the annual financial statements required to
be filed with Illinois Department of Insurance.
There were no borrowings outstanding and there was no interest paid on the line
of credit during the six months ended June 30, 2022.
Other Liabilities
As of June 30, 2022 and December 31, 2021, other liabilities totaled $1,047,000
and $1,031,000, respectively.
?
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ESOP
In connection with our conversion and public offering, the ESOP financed the
purchase of 10.0% of the common stock issued in the offering for $3,500,000 with
the proceeds of a loan from ICC prior to the expiration of the offering. ICC
makes annual contributions to the ESOP sufficient to repay that loan. See Note 8
- Employee Benefits of this Form 10-Q as well as the "Management - Benefit Plans
and Employment Agreements -Employee Stock Ownership Plan" section of the
Company's Annual Report on Form 10-K for the year ended December 31, 2021.
Stock-based Incentive Plan
Under the ICC Holdings, Inc. 2016 Equity Incentive Plan, we reserved for
issuance a total of 490,000 shares of common stock. Of this amount, 350,000
shares of common stock may be granted in the form of restricted stock and
stock-settled restricted stock unit awards, and 140,000 shares of common stock
may be granted in the form of stock options under the stock-based incentive
plan. The grant-date fair value of any common stock used for restricted stock
and restricted stock unit awards will represent unearned compensation. As we
accrue compensation expense to reflect the vesting of such shares, unearned
compensation will be reduced accordingly. We compute compensation expense at the
time stock units are awarded based on the fair value of such options on the date
they are granted. This compensation expense is recognized over the appropriate
service period. Restricted stock units (RSUs) were granted for the first time in
February 2018 with additional RSUs granted in March 2019, April 2020, April
2021, and April 2022. The RSUs vest one third over three years from the first
anniversary of 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 2021 Annual Report on Form 10-K.
Liquidity and Capital Resources
We generate sufficient funds from our operations and maintain a high degree of
liquidity in our investment portfolio to meet the demands of claim settlements
and operating expenses. The primary sources of funds are premium collections,
investment earnings and maturing investments. The increase in cash provided by
investing activities during the six months ended June 30, 2022 compared to the
same period in 2021 relates primarily to sales of fixed securities. The decrease
in cash used in financing activities during the six months ended June 30, 2022
compared to the same period in 2021 relates to repayment of the $3.5 million
commercial bank loan in April 2022.
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 six months ended June 30, 2022 and
2021 were as follows:
Six-Months Ended June 30,
(In thousands) 2022 2021
Net cash provided by operating activities $ 5,614 $
2,424
Net cash provided by (used in) investing
activities 1,516
(9,926)
Net cash (used in) provided by financing
activities (3,694)
4,902
Net increase (decrease) in cash and cash
equivalents $ 3,436 $
(2,600)
ICC Holdings, Inc.'s principal source of liquidity is dividend payments and
other fees received from ICC, Beverage Insurance Agency Inc., and ICC Realty,
LLC. ICC is restricted by the insurance laws of Illinois as to the amount of
dividends or other distributions it may pay to us. Under Illinois law, there is
a maximum amount that may be paid by ICC during any twelve-month period. ICC may
pay dividends to us after notice to, but without prior approval of the Illinois
Department of Insurance in an amount "not to exceed" the greater of (i) 10% of
the surplus as regards policyholders of ICC as reported on its most recent
annual statement filed with the Illinois Department of Insurance, or (ii) the
statutory net income of ICC for the period covered by such annual statement.
Dividends in excess of this amount are considered "extraordinary" and are
subject to the approval of the Illinois Department of Insurance.
The amount available for payment of dividends from ICC in 2022 without the prior
approval of the Illinois 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 the
Illinois Department of Insurance. This notice must be provided to the Illinois
Department of Insurance 30 days prior to the payment of an extraordinary
dividend and 10 days prior to the payment of an ordinary dividend. The Illinois
Department of Insurance has the power to limit or prohibit dividend payments if
ICC is in violation of any law or regulation. These restrictions or any
subsequently imposed restrictions may affect
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our future liquidity. ICC paid a $3.0M dividend to ICC Holdings, Inc. in April
2022. ICC paid $800,000 in dividends in the first six months of 2021.
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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