icch20200930_10q.htm
 

 

Table of Contents

 

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549 

_______________________________ 

 

FORM 10-Q 

_______________________________ 

 

(Mark One) 

 

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

 

For the quarterly period ended September 30, 2020

or 

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

 

For transition period from                      to                     .

 

Commission File Number: 001-38046 

 

ICC Holdings, Inc.

(Exact name of registrant as specified in its charter)

_______________________________ 

 

Pennsylvania

(State or other jurisdiction of
incorporation or organization)

 

81-3359409

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

 

225 20th Street,  Rock Island,  Illinois

(Address of principal executive offices)

 

61201

(Zip Code)

 

(309)  793-1700

(Registrant’s telephone number, including area code)

_______________________________ 

 

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

 

Title of each class

Trading
Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

ICCH

The NASDAQ Stock Market LLC

 

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

 

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

 

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

 



Large accelerated filer   ☐

Accelerated filer   ☐



Non-accelerated filer     ☒  

Smaller reporting company   ☒



 

Emerging growth company   ☒

 

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

 

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

 

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

  

 

 

Table of Contents

 



 

Page

PART I

 

 

Item 1.

Financial Statements

 



Condensed Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019

3



Condensed Consolidated Statements of Earnings and Comprehensive Earnings for the Three-Month Periods Ended September 30, 2020 and 2019 (unaudited)

4



Condensed Consolidated Statements of Earnings and Comprehensive Earnings for the Nine-Month Periods Ended September 30, 2020 and 2019 (unaudited)

5



Condensed Consolidated Statements of Stockholders Equity for the Nine-Month Periods Ended September 30, 2020 and 2019 (unaudited)

6



Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2020 and 2019 (unaudited)

7



Notes to Unaudited Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

34

Item 4.

Controls and Procedures

35



 

 

PART II

 

 

Item 1.

Legal Proceedings

36

 Item 1A.

Risk Factors

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

Item 3.

Default Upon Senior Securities

36

Item 4.

Mine Safety Disclosures

36

Item 5.

Other Information

36

Item 6.

Exhibits

37



 

 

Signatures

38

 

   

 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

ICC Holdings, Inc. and Subsidiaries 

Condensed Consolidated Balance Sheets

 

   

As of

 
   

September 30,

   

December 31,

 
   

2020

   

2019

 
   

(Unaudited)

         

Assets

               

Investments and cash:

               

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

  $ 103,318,485     $ 92,087,572  

Common stocks at fair value

    12,596,635       14,448,773  

Preferred stocks at fair value

    1,638,453        

Other invested assets

    1,779,060       877,900  

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

    5,515,676       4,353,713  

Cash and cash equivalents

    6,598,640       6,626,585  

Total investments and cash

    131,446,949       118,394,543  

Accrued investment income

    719,389       646,504  

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

    22,737,615       22,368,526  

Ceded unearned premiums

    839,718       822,818  

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

    13,844,420       11,036,170  

Federal income taxes

    717,862       192,559  

Deferred policy acquisition costs, net

    5,267,470       5,269,256  

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

    2,851,235       3,033,348  

Other assets

    1,559,179       1,239,794  

Total assets

  $ 179,983,837     $ 163,003,518  

Liabilities and Equity

               

Liabilities:

               

Unpaid losses and settlement expenses

  $ 61,943,244     $ 56,838,307  

Unearned premiums

    29,921,669       30,392,817  

Reinsurance balances payable

    728,674       374,998  

Corporate debt

    15,097,960       3,475,088  

Accrued expenses

    3,093,882       4,216,988  

Income taxes - deferred

    214,674       39,213  

Other liabilities

    950,858       1,324,273  

Total liabilities

    111,950,961       96,661,684  

Equity:

               

Common stock1

    35,000       35,000  

Treasury stock, at cost2

    (3,112,656 )     (3,146,576 )

Additional paid-in capital

    32,717,495       32,703,209  

Accumulated other comprehensive earnings, net of tax

    5,208,657       2,953,936  

Retained earnings

    35,821,408       36,608,750  

Less: Unearned Employee Stock Ownership Plan shares at cost3

    (2,637,028 )     (2,812,485 )

Total equity

    68,032,876       66,341,834  

Total liabilities and equity

  $ 179,983,837     $ 163,003,518  

 

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

22020205,775 shares and 2019 – 203,811 shares

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

 

 

See accompanying notes to consolidated financial statements

 

 

 

  

ICC Holdings, Inc. and Subsidiaries 

Condensed Consolidated Statements of Earnings and Comprehensive Earnings (Unaudited) 

 

   

For the Three-Months Ended

 
   

September 30,

 
   

2020

   

2019

 

Net premiums earned

  $ 12,532,967     $ 13,679,746  

Net investment income

    900,950       811,462  

Net realized investment (losses) gains

    (59,333 )     141,481  

Net unrealized gains (losses) on equity securities

    981,779       (7,603 )

Other (loss)

    (36,333 )     (112,763 )

Consolidated revenues

    14,320,030       14,512,323  

Losses and settlement expenses

    8,863,053       9,609,347  

Policy acquisition costs and other operating expenses

    4,722,485       4,733,206  

Interest expense on debt

    58,724       32,458  

General corporate expenses

    171,860       164,378  

Total expenses

    13,816,122       14,539,389  

Earnings (loss) before income taxes

    503,908       (27,066 )

Total income tax expense (benefit)

    99,919       (13,150 )

Net earnings (loss)

  $ 403,989     $ (13,916 )
                 

Other comprehensive earnings, net of tax

    440,838       703,220  

Comprehensive earnings

  $ 844,827     $ 689,304  
                 

Earnings per share:

               

Basic:

               

Basic net earnings (loss) per share

  $ 0.13     $ (0.00 )

Diluted:

               

Diluted net earnings (loss) per share

  $ 0.13     $ (0.00 )
                 

Weighted average number of common shares outstanding:

               

Basic

    3,030,571       3,011,034  

Diluted

    3,039,658       3,015,038  

 

See accompanying notes to consolidated financial statements 

 

  

ICC Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings and Comprehensive Earnings (Unaudited) 

 

   

For the Nine-Months Ended

 
   

September 30,

 
   

2020

   

2019

 

Net premiums earned

  $ 36,921,702     $ 39,219,882  

Net investment income

    2,644,900       2,406,965  

Net realized investment (losses) gains

    (402,320 )     741,123  

Net unrealized gains on equity securities

    2,195       1,716,124  

Other income (loss)

    82,934       (43,838 )

Consolidated revenues

    39,249,411       44,040,256  

Losses and settlement expenses

    25,913,619       28,117,369  

Policy acquisition costs and other operating expenses

    13,741,725       14,541,986  

Interest expense on debt

    150,773       96,353  

General corporate expenses

    471,616       444,829  

Total expenses

    40,277,733       43,200,537  

(Loss) earnings before income taxes

    (1,028,322 )     839,719  

Total income tax (benefit) expense

    (240,980 )     122,796  

Net (loss) earnings

  $ (787,342 )   $ 716,923  
                 

Other comprehensive earnings, net of tax

    2,254,721       3,423,233  

Comprehensive earnings

  $ 1,467,379     $ 4,140,156  
                 

Earnings per share:

               

Basic:

               

Basic net (loss) earnings per share

  $ (0.26 )   $ 0.24  

Diluted:

               

Diluted net (loss) earnings per share

  $ (0.26 )   $ 0.24  
                 

Weighted average number of common shares outstanding:

               

Basic

    3,023,794       3,004,887  

Diluted

    3,032,881       3,008,891  



See accompanying notes to consolidated financial statements. 



 

 

ICC Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

 

   

Common stock

   

Treasury stock

   

Unearned ESOP

   

Additional paid-in capital

   

Retained earnings

   

Accumulated other comprehensive earnings (loss)

   

Total equity

 

Balance, January 1, 2020

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

Purchase of treasury stock

          (109,460 )                             (109,460 )

Net (loss)

                            (787,342 )           (787,342 )

Other comprehensive earnings, net of tax

                                  2,254,721       2,254,721  

Restricted stock unit expense

          143,380

1

          (16,792 )                 126,588  

ESOP compensation expense

                175,457       31,078                   206,535  

Balance, September 30, 2020

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

 

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

 

   

Common stock

   

Treasury stock

   

Unearned ESOP

   

Additional paid-in capital

   

Retained earnings

   

Accumulated other comprehensive earnings (loss)

   

Total equity

 

Balance, January 1, 2019

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

Cumulative-effect adjustment from ASU 2016-011

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

Purchase of treasury stock

          (102,855 )                             (102,855 )

Net earnings

                            716,923             716,923  

Other comprehensive earnings, net of tax

                                  3,423,233       3,423,233  

Restricted stock unit expense

                      78,226                   78,226  

ESOP compensation expense

                175,296       57,839                   233,135  

Balance, September 30, 2019

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

    

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

 

See accompanying notes to consolidated financial statements. 

 

 

  

ICC Holdings, Inc. and Subsidiaries 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

   

Nine-Month Periods Ended September 30,

 
   

2020

   

2019

 

Cash flows from operating activities:

               

Net (loss) earnings

  $ (787,342 )   $ 716,923  

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

               

Net realized investment losses (gains)

    402,320       (741,123 )

Net unrealized (gains) on equity securities

    (2,195 )     (1,716,124 )

Depreciation

    508,152       613,916  

Deferred income tax

    (423,896 )     360,009  

Amortization of bond premium and discount

    175,114       172,691  

Stock-based compensation expense

    333,123       311,361  

Change in:

               

Accrued investment income

    (72,885 )     (2,371 )

Premiums and reinsurance balances receivable

    (369,089 )     (1,847,981 )

Ceded unearned premiums

    (16,900 )     (65,406 )

Reinsurance balances payable

    353,676       (897,013 )

Reinsurance balances recoverable

    (2,808,250 )     (5,530,517 )

Deferred policy acquisition costs

    1,786       (278,207 )

Unpaid losses and settlement expenses

    5,104,937       6,875,171  

Unearned premiums

    (471,148 )     1,642,978  

Accrued expenses

    (1,123,106 )     (1,376,476 )

Current federal income tax

    (525,303 )     (18,097 )

Other

    (692,009 )     (570,277 )

Net cash (used in) operating activities

    (413,015 )     (2,350,543 )

Cash flows from investing activities:

               

Purchases of:

               

Fixed maturity securities, available-for-sale

    (20,946,699 )     (19,060,848 )

Common stocks

    (3,356,465 )     (5,252,095 )

Preferred stocks

    (1,718,782 )      

Other invested assets

    (901,500 )     (738,300 )

Property held for investment

    (1,268,464 )     (332,393 )

Property and equipment

    (231,291 )     (321,704 )

Proceeds from sales, maturities and calls of:

               

Fixed maturity securities, available-for-sale

    12,813,180       19,522,461  

Common stocks

    4,247,936       5,998,276  

Preferred stocks

    221,990        

Property and equipment

    11,753       31,137  

Net cash (used in) investing activities

    (11,128,342 )     (153,466 )

Cash flows from financing activities:

               

Proceeds from loans

    11,629,800        

Repayments of borrowed funds

    (6,928 )     (7,020 )

Purchase of treasury stock

    (109,460 )     (102,855 )

Net cash provided by (used in) financing activities

    11,513,412       (109,875 )

Net (decrease) in cash and cash equivalents

    (27,945 )     (2,613,884 )

Cash and cash equivalents at beginning of year

    6,626,585       4,644,784  

Cash and cash equivalents at end of period

  $ 6,598,640     $ 2,030,900  

Supplemental information:

               

Federal income tax paid (recovered)

  $     $ (164,543 )

Interest paid

    135,800       96,700  

 

See accompanying notes to consolidated financial statements. 

 

  

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A.

DESCRIPTION OF BUSINESS

 

ICC Holdings, Inc. is a Pennsylvania corporation that was organized in 2016. As used in this Form 10-Q, references to the “Company,” “we,” “us,” and “our” refer to the consolidated group. On a stand-alone basis ICC Holdings, Inc. is referred to as the “Parent Company.” The consolidated group consists of the holding company, ICC Holdings, Inc.; ICC Realty, LLC, a real estate services and holding company; Beverage Insurance Agency, Inc., a non-insurance subsidiary; Estrella Innovative Solutions, Inc., an outsourcing company; and Illinois Casualty Company (ICC), an operating insurance company that is the parent company of ICC Properties, LLC, a real estate series limited liability company. Both ICC and ICC Properties, LLC are Illinois domiciled companies.

 

We are a specialty insurance carrier primarily underwriting commercial multi-peril, liquor liability, workers’ compensation, and umbrella liability coverages for the food and beverage industry through our subsidiary insurance company, ICC. ICC writes business in Arizona, Colorado, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Ohio, Pennsylvania, and Wisconsin and markets through independent agents. Approximately 22.7% and 22.3% of the premium is written in Illinois for the three months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020 and 2019, approximately 25.0% and 25.8% of the premium is written in Illinois, respectively. The Company operates as a single segment.

 

B.

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

 

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

 

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

 

C.

SIGNIFICANT ACCOUNTING POLICIES

 

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

 

D.

PROSPECTIVE ACCOUNTING STANDARDS

 

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

 

E.

PROPERTY AND EQUIPMENT

 

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

 

   

As of

 
   

September 30,

   

December 31,

 
   

2020

   

2019

 

Automobiles

  $ 530,722     $ 505,788  

Furniture and fixtures

    474,401       457,218  

Computer equipment and software

    3,917,136       3,823,416  

Home office

    3,878,909       3,866,632  

Total cost

    8,801,168       8,653,054  

Accumulated depreciation

    (5,949,933 )     (5,619,706 )

Net property and equipment

  $ 2,851,235     $ 3,033,348  

 

 

F.

COMPREHENSIVE EARNINGS

 

Comprehensive earnings (loss) include net (loss) earnings plus unrealized (gains) losses on available-for-sale investment securities, net of tax. In reporting the components of comprehensive earnings on a net basis in the statement of earnings, the Company used a 21% tax rate. Other comprehensive earnings, as shown in the consolidated statements of earnings and comprehensive earnings, is net of tax expense of $343,316 and $771,697 for the nine months ended September 30, 2020 and 2019, respectively.

 

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

 

   

Nine-Month Periods Ended

 
    September 30,  
   

2020

   

2019

 

Beginning balance

  $ 2,953,936     $ (1,580,976 )

Cumulative effect of adoption of ASU 2016-01

    -       1,366,297  

Adjusted beginning balance

    2,953,936       (214,679 )

Other comprehensive earnings before reclassification

    2,579,925       3,611,573  

Amount reclassified from accumulated other comprehensive earnings

    (325,204 )     (188,340 )

Net current period other comprehensive earnings

    2,254,721       3,423,233  

Ending balance

  $ 5,208,657     $ 3,208,554  

 

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

 

   

Three-Month Periods Ended September 30,

 
   

2020

   

2019

 
   

Pre-tax

   

Tax

   

After-tax

   

Pre-tax

   

Tax

   

After-tax

 

Other comprehensive earnings, net of tax

                                               

Unrealized gains and losses on AFS investments:

                                               

Unrealized holding gains arising during the period

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

Reclassification adjustment for (gains) included in net earnings

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

Total other comprehensive earnings

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

 

   

Nine-Month Periods Ended September 30,

 
   

2020

   

2019

 
   

Pre-tax

   

Tax

   

After-tax

   

Pre-tax

   

Tax

   

After-tax

 

Other comprehensive (loss) earnings, net of tax

                                               

Unrealized gains and losses on AFS investments:

                                               

Unrealized holding gains arising during the period

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

Reclassification adjustment for (gains) included in net earnings

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

Total other comprehensive earnings

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

 

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

  

Amounts Reclassified from

Accumulated Other Comprehensive Earnings

   

Three-Month Periods Ended

   

Nine-Month Periods Ended

   

Details about Accumulated Other

 

September 30,

   

September 30,

 

Affected Line Item in the Statement

Comprehensive Earnings Component

 

2020

   

2019

   

2020

   

2019

 

where Net Earnings is Presented

Unrealized (gains) losses on AFS investments:

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

Net realized investment (gains) losses

      14,092       18,745       86,447       50,065  

Income tax expense (benefit)

Total reclassification adjustment, net of tax

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

  

G.

RISKS AND UNCERTAINTIES

 

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

  

 

 

2.

INVESTMENTS

 

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

 

Available-for-Sale Fixed Maturity and Equity Securities 

 

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

 

   

For the Three-Months Ended September 30,

 
                           

Net Realized

 
   

Proceeds

   

Gains

   

Losses

   

Gains (Losses)

 

2020

                               

Fixed maturity securities

  $ 3,428,951     $ 67,102     $     $ 67,102  

Common stocks

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

Preferred stocks

    76,500       5,979             5,979  

2019

                               

Fixed maturity securities

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

Common stocks

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

 

   

For the Nine-Months Ended September 30,

 
                           

Net Realized

 
   

Proceeds

   

Gains

   

Losses

   

Gains (Losses)

 

2020

                               

Fixed maturity securities

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

Common stocks

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

Preferred stocks

    221,990       8,808       (10,762 )     (1,954 )

2019

                               

Fixed maturity securities

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

Common stocks

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

 

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

 

   

Amortized Cost

   

Fair Value

 

Due in one year or less

  $ 1,275,943     $ 1,305,900  

Due after one year through five years

    18,436,788       19,612,776  

Due after five years through 10 years

    16,366,929       18,431,137  

Due after 10 years

    21,586,567       23,678,509  

Asset and mortgage backed securities without a specific due date

    38,843,607       40,057,464  

Redeemable preferred stocks

    215,805       232,699  

Total fixed maturity securities

  $ 96,725,639     $ 103,318,485  

 

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

 

 

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

   

   

Cost or

           

Gross Unrealized

 
   

Amortized Cost

   

Fair Value

   

Gains

   

Losses

 

2020

                               

Fixed maturity securities:

                               

U.S. Treasury

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

MBS/ABS/CMBS

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

Corporate

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

Municipal

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

Redeemable preferred stock

    215,805       232,699       16,894        

Total fixed maturity securities

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

 

                   

Gross Unrealized

 
   

Amortized Cost

   

Fair Value

   

Gains

   

Losses

 

2019

                               

Fixed maturity securities:

                               

U.S. Treasury

  $ 800,462     $ 800,219     $ 684     $ (927 )

MBS/ABS/CMBS

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

Corporate

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

Municipal

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

Total fixed maturity securities

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

 

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

 

ANALYSIS 

 

The following tables are also used as part of the impairment analysis and displays the total value of securities that were in an unrealized loss position as of September 30, 2020 and December 31, 2019. The tables segregate the securities based on type, noting the fair value, cost or amortized cost, and unrealized loss on each category of investment as well as in total. The table further classifies the securities based on the length of time they have been in an unrealized loss position.

 

   

September 30, 2020

   

December 31, 2019

 
           

12 Months

                   

12 Months

         
   

< 12 Months

   

& Greater

   

Total

   

< 12 Months

   

& Greater

   

Total

 

Fixed Maturity Securities:

                                               

U.S. Treasury

                                               

Fair value

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

Amortized cost

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

Unrealized loss

    (82 )           (82 )           (927 )     (927 )

MBS/ABS/CMBS

                                               

Fair value

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

Amortized cost

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

Unrealized loss

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

Corporate

                                               

Fair value

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

Amortized cost

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

Unrealized loss

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

Municipal

                                               

Fair value

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

Amortized cost

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

Unrealized loss

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

Total

                                               

Fair value

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

Amortized cost

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

Unrealized loss

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

 

 

The fixed income portfolio contained 22 securities in an unrealized loss position as of September 30, 2020. Of these 22 securities, 4 have been in an unrealized loss position for 12 consecutive months or longer and represent $22,560 in unrealized losses. All fixed income securities in the investment portfolio continue to pay the expected coupon payments under the contractual terms of the securities. Credit-related impairments on fixed income securities that we do not plan to sell, and for which we are not more likely than not to be required to sell, are recognized in net earnings. Any non-credit related impairment is recognized in comprehensive earnings. Based on management’s analysis, the fixed income portfolio is of a high credit quality and it is believed it will recover the amortized cost basis of the fixed income securities. Management monitors the credit quality of the fixed income investments to assess if it is probable that the Company will receive its contractual or estimated cash flows in the form of principal and interest.

 

There were no other-than-temporary impairment losses recognized in net earnings during the nine months ended September 30, 2020. For all fixed income securities at a loss at September 30, 2020, management believes it is probable that the Company will receive all contractual payments in the form of principal and interest. In addition, the Company is not required to, nor does it intend to sell these investments prior to recovering the entire amortized cost basis for each security, which may be at maturity. The fixed income securities in an unrealized loss position were not other-than-temporarily impaired at September 30, 2020 and December 31, 2019.

 

UNREALIZED GAINS AND LOSSES ON EQUITY SECURITIES 

 

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

 

Other Invested Assets 

 

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

 

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

 

 

3.

FAIR VALUE DISCLOSURES

 

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

 

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

 

 

● 

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

 

 

● 

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

 

 

● 

Level 3 is applied to valuations that are derived from techniques in which one or more of the significant inputs are unobservable. Financial assets are classified based upon the lowest level of significant input that is used to determine fair value.

 

As a part of the process to determine fair value, management utilizes widely recognized, third-party pricing sources to determine fair values. Management has obtained an understanding of the third-party pricing sources’ valuation methodologies and inputs. The following is a description of the valuation techniques used for financial assets that are measured at fair value, including the general classification of such assets pursuant to the fair value hierarchy.

 

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

 

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

 

U.S. Treasury Bonds, Common Stocks and Exchange Traded Funds—U.S. treasury bonds and exchange traded equities have readily observable price levels and are classified as Level 1 (fair value based on quoted market prices). All common stock holdings are deemed Level 1.

 

 

Preferred Stock—Preferred stocks do not have readily observable prices, but do have quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets in markets that are not active; and inputs other than quoted prices and are classified as Level 2. All preferred stock holdings are deemed Level 2.

 

Due to the relatively short-term nature of cash and cash equivalents, their carrying amounts are reasonable estimates of fair value. Other invested assets as well as debt obligations are carried at face value and given that there is no readily available market for these to trade in, management believes that face value accurately reflects fair value.

 

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

  

           

Significant

                 
   

Quoted in Active

   

Other

   

Significant

         
   

Markets for

   

Observable

   

Unobservable

         
   

Identical Assets

   

Inputs

   

Inputs

         
   

(Level 1)

   

(Level 2)

   

(Level 3)

   

Total

 

AFS securities

                               

Fixed maturity securities

                               

U.S. treasury

  $ 1,390,344     $     $     $ 1,390,344  

MBS/ABS/CMBS

          40,057,464             40,057,464  

Corporate

          42,339,992             42,339,992  

Municipal

          19,297,986             19,297,986  

Redeemable preferred stocks

          232,699             232,699  

Total fixed maturity securities

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

Equity securities

                               

Common stocks

    12,596,635                   12,596,635  

Perpetual preferred stocks

          1,638,453             1,638,453  

Total equity securities

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

Total marketable investments measured at fair value

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

 

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



           

Significant

                 
   

Quoted in Active

   

Other

   

Significant

         
   

Markets for

   

Observable

   

Unobservable

         
   

Identical Assets

   

Inputs

   

Inputs

         
   

(Level 1)

   

(Level 2)

   

(Level 3)

   

Total

 

AFS securities

                               

Fixed maturity securities

                               

U.S. treasury

  $ 800,219     $     $     $ 800,219  

MBS/ABS/CMBS

          34,290,995             34,290,995  

Corporate

          41,915,103             41,915,103  

Municipal

          15,081,255             15,081,255  

Total fixed maturity securities

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

Equity securities

                               

Common stocks

    14,448,773                   14,448,773  

Total marketable investments measured at fair value

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

 

As noted in the previous tables, the Company did not have any assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of September 30, 2020 and December 31, 2019. Additionally, there were no securities transferred in or out of Levels 1 or 2 during the nine-month periods ended September 30, 2020 and 2019.

  

   

 

4.

DEBT

 

Debt Obligation 

 

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

 

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

 

In March 2020, the World Health Organization declared a pandemic related to the rapidly spreading coronavirus (COVID-19) outbreak, which has led to a global health emergency. As part of the Company’s response to COVID-19, the Company obtained, in March 2020, a $6.0 million loan from the FHLBC as a precautionary measure to increase its cash position and compensate for potential reductions in premium receivable collections. The term of the loan is five years bearing interest at 1.4%. The Company pledged $6.8 million of fixed income securities as collateral for this loan. The Company also obtained, in May 2020, a $4.0 million 0% interest, one-year loan from the FHLBC as an additional precautionary measure to increase its cash position and compensate for potential reductions in premium receivable collections as a result of the Company’s announcement in March 2020 to temporarily suspend all insurance premium billing for 30 days. The Company pledged an additional $7.4 million of fixed income securities as collateral for both FHLBC loans.

 

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

 

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

 

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

 

Revolving Line of Credit 

 

We maintained a revolving line of credit with a commercial bank, which permitted borrowing up to an aggregate principal amount of $1.75 million. This facility was initially entered into during 2013 and expired August 5, 2020. The line of credit was priced at 30-day LIBOR plus 2% with a floor of 3.5%. In order to secure the lowest rate possible, the Company pledged marketable securities not to exceed $5.0 million in the event the Company would draw down on the line of credit. There was no interest paid on the line of credit during the nine months ended September 30, 2020 and 2019. There were no financial covenants governing this agreement.

 

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

  

 

 

5.

REINSURANCE

 

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

 

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

 

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

 
   

Three-Month Periods Ended September 30,

 
   

2020

   

2019

 

WRITTEN

               

Direct

  $ 14,534,058     $ 16,305,222  

Reinsurance assumed

    51,551       70,200  

Reinsurance ceded

    (2,328,734 )     (2,410,170 )

Net

  $ 12,256,875     $ 13,965,252  

EARNED

               

Direct

  $ 14,825,942     $ 16,007,232  

Reinsurance assumed

    51,108       64,863  

Reinsurance ceded

    (2,344,083 )     (2,392,349 )

Net

  $ 12,532,967     $ 13,679,746  

LOSS AND SETTLEMENT EXPENSES INCURRED

               

Direct

  $ 10,536,397     $ 13,034,216  

Reinsurance assumed

    6,073       36,297  

Reinsurance ceded

    (1,679,417 )     (3,461,166 )

Net

  $ 8,863,053     $ 9,609,347  

 

   

Nine-Month Periods Ended September 30,

 
   

2020

   

2019

 

WRITTEN

               

Direct

  $ 44,240,437     $ 48,349,466  

Reinsurance assumed

    114,924       178,446  

Reinsurance ceded

    (7,921,708 )     (7,730,458 )

Net

  $ 36,433,653     $ 40,797,454  

EARNED

               

Direct

  $ 44,710,106     $ 46,710,351  

Reinsurance assumed

    116,404       174,583  

Reinsurance ceded

    (7,904,808 )     (7,665,052 )

Net

  $ 36,921,702     $ 39,219,882  

LOSSES AND SETTLEMENT EXPENSES INCURRED

               

Direct

  $ 37,370,896     $ 37,778,378  

Reinsurance assumed

    44,409       119,498  

Reinsurance ceded

    (11,501,686 )     (9,780,507 )

Net

  $ 25,913,619     $ 28,117,369  

 

 

 

6.

UNPAID LOSSES AND SETTLEMENT EXPENSES

 

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



   

For the Three-Months Ended

 
   

September 30,

 

(In thousands)

 

2020

   

2019

 

Unpaid losses and settlement expense - beginning of the period:

               

Gross

  $ 66,415     $ 61,264  

Less: Ceded

    19,463       13,974  

Net

    46,952       47,290  

Increase in incurred losses and settlement expense:

               

Current year

    9,298       9,092  

Prior years

    (435 )     517  

Total incurred

    8,863       9,609  

Deduct: Loss and settlement expense payments for claims incurred:

               

Current year

    4,885       6,064  

Prior years

    2,831       4,778  

Total paid

    7,716       10,842  

Net unpaid losses and settlement expense - end of the period

    48,099       46,057  

Plus: Reinsurance recoverable on unpaid losses

    13,844       12,266  

Gross unpaid losses and settlement expense - end of the period

  $ 61,943     $ 58,323  

 

   

For the Nine-Months Ended

 
   

September 30,

 

(In thousands)

 

2020

   

2019

 

Unpaid losses and settlement expense - beginning of the period:

               

Gross

  $ 56,838     $ 51,447  

Less: Ceded

    11,036       6,736  

Net

    45,802       44,711  

Increase in incurred losses and settlement expense:

               

Current year

    23,838       25,779  

Prior years

    2,076       2,338  

Total incurred

    25,914       28,117  

Deduct: Loss and settlement expense payments for claims incurred:

               

Current year

    10,534       10,455  

Prior years

    13,083       16,316  

Total paid

    23,617       26,771  

Net unpaid losses and settlement expense - end of the period

    48,099       46,057  

Plus: Reinsurance recoverable on unpaid losses

    13,844       12,266  

Gross unpaid losses and settlement expense - end of the period

  $ 61,943     $ 58,323  

  

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

 

   

 

7.

INCOME TAXES

 

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

 

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

 

   

For the Three-Months Ended

 
   

September 30,

 
   

2020

   

2019

 

Provision for income taxes at the statutory federal tax rates

  $ 105,820     $ (5,684 )

Increase (reduction) in taxes resulting from:

               

Dividends received deduction

    (7,871 )     (8,955 )

Tax-exempt interest income

    (15,531 )     (16,433 )

Proration of tax-exempt interest and dividends received deduction

    5,715       5,939  

Nondeductible expenses

    11,523       8,404  

Officer life insurance, net

    263       3,579  

Total

  $ 99,919     $ (13,150 )



   

For the Nine-Months Ended

 
   

September 30,

 
   

2020

   

2019

 

Provision for income taxes at the statutory federal tax rates

  $ (215,948 )   $ 176,341  

Increase (reduction) in taxes resulting from:

               

Dividends received deduction

    (21,567 )     (28,482 )

Tax-exempt interest income

    (46,795 )     (60,249 )

Proration of tax-exempt interest and dividends received deduction

    16,683       21,775  

Nondeductible expenses

    25,751       24,450  

Officer life insurance, net

    896       (11,039 )

Total

  $ (240,980 )   $ 122,796  

 

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

 

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

  

   

 

8.

EMPLOYEE BENEFITS

 

ESOP 

 

In connection with our conversion and public offering, we established an ESOP. The ESOP borrowed from the Company to purchase 350,000 shares in the offering. The issuance of the shares to the ESOP resulted in a contra account established in the equity section of the balance sheet for the unallocated shares at an amount equal to their $10.00 per share purchase price.

 

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

 

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

 

RESTRICTED STOCK UNITS 

 

Restricted stock units (RSUs) were granted for the first time in February 2018 with additional RSUs granted in March 2019 and April 2020. RSUs have a grant date value equal to the closing price of the Company’s stock on the dates the shares are granted. The RSUs vest 1/3 over three years from the date of grant.

 

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

  

 

9.

SUBSEQUENT EVENTS

 

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

 

   

 

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

 

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

 

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

 

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

 

 

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

 

• 

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

 

• 

our ability to expand geographically;

 

• 

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

 

• 

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

 

• 

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

 

• 

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

 

• 

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

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

• 

the impact of acts of terrorism and acts of war;

 

• 

the effects of terrorist related insurance legislation and laws;

 

• 

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

 

• 

the cost, availability and collectability of reinsurance;

 

• 

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

 

• 

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

 

• 

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

 

• 

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

 

• 

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

 

• 

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

 

• 

adverse litigation or arbitration results;

 

• 

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

 

• 

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

 

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

 

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

 

 

Overview

 

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

 

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

 

We are an “emerging growth company” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to: not required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act; reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; exemptions from the requirements of holding an annual non-binding advisory vote on executive compensation and nonbinding stockholder approval of any golden parachute payments not previously approved.

 

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

  

Principal Revenue and Expense Items 

 

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

 

Gross and net premiums written

 

Gross premiums written is equal to direct and assumed premiums before the effect of ceded reinsurance. Net premiums written is the difference between gross premiums written and premiums ceded or paid to reinsurers (ceded premiums written). 

 

Net premiums earned

 

Premiums earned is the earned portion of our net premiums written. Gross premiums written include all premiums recorded by an insurance company during a specified policy period. Insurance premiums on property and casualty insurance contracts are recognized in proportion to the underlying risk insured and are earned ratably over the duration of the policies. At the end of each accounting period, the portion of the premiums that is not yet earned is included in unearned premiums and is realized as revenue in subsequent periods over the remaining term of the policy. Our policies typically have a term of twelve months. Thus, for example, for a policy that is written on July 1, 2020, one-half of the premiums would be earned in 2020 and the other half would be earned in 2021.

 

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

 

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

 

ICC’s expenses consist primarily of:

 

Losses and settlement expenses

 

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

 

 

Amortization of deferred policy acquisition costs and other operating expenses

 

Expenses incurred to underwrite risks are referred to as policy acquisition expenses. Variable policy acquisition costs consist of commission expenses, premium taxes and certain other underwriting expenses that vary with and are primarily related to the writing and acquisition of new and renewal business. These policy acquisition costs are deferred and amortized over the effective period of the related insurance policies. Fixed policy acquisition costs are expensed as incurred. These costs include salaries, rent, office supplies, and depreciation. Other operating expenses consist primarily of information technology costs, accounting and internal control salaries, as well as audit and legal expenses.

 

Income taxes

 

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

  

Key Financial Measures 

 

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

 

We measure growth by monitoring changes in gross premiums written and net premiums written. We measure underwriting profitability by examining losses and settlement expense, underwriting expense and combined ratios. We also measure profitability by examining underwriting income (loss) and net earnings (loss).

 

Losses and settlement expense ratio

 

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

 

Expense ratio

 

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

 

GAAP combined ratio

 

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

 

Net premiums written to statutory surplus ratio

 

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

 

Underwriting income (loss)

 

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

 

Net earnings (loss) and return on average equity

 

We use net earnings (loss) to measure our profit and return on average equity to measure our effectiveness in utilizing equity to generate net earnings. In determining return on average equity for a given year, net earnings (loss) is divided by the average of the beginning and ending equity for that year.

  

Critical Accounting Policies 

 

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

 

 

 

Results of Operations 

 

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

 

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

 

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

 

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

 

   

For the Nine-Months Ended

 
   

September 30,

 

(In thousands)

 

2020

   

2019

 

Revenues

               

Total premiums earned

  $ 36,922     $ 39,220  

Investment income, net of investment expense

    2,645       2,407  

Realized investment (losses) gains, net

    (402 )     741  

Net unrealized gains on equity securities

    2       1,716  

Other income (loss)

    83       (44 )

Total revenues

  $ 39,250     $ 44,040  

Summarized components of net earnings

               

Underwriting (loss)¹

  $ (2,734 )   $ (3,439 )

Investment income, net of investment expense

    2,645       2,407  

Realized investment (losses) gains, net

    (402 )     741  

Net unrealized gains on equity securities

    2       1,716  

Other income (loss)

    83       (44 )

General corporate expenses

    471       445  

Interest expense

    151       96  

(Loss) earnings, before income taxes

    (1,028 )     840  

Income tax (benefit) expense

    (241 )     123  

Net (loss) earnings

  $ (787 )   $ 717  

Total other comprehensive earnings

    2,255       3,423  

Comprehensive earnings

  $ 1,468     $ 4,140  

 

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



   

For the Nine-Months Ended

 
    September 30,  
   

2020

   

2019

 

Operational Ratios:

               

Losses and settlement expense ratio1

    70.19 %     71.69 %

Expense ratio2

    37.22 %     37.08 %

Combined ratio3