ICC Holdings, Inc. - Quarter Report: 2020 September (Form 10-Q)

 

 

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

 

   

 

		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

 

 

		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

		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

 

		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

		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

 

		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

 

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:

 

 

 

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:

 

 

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

 

 

 

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

  

  

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.

 

 

 

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

 

 

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:

   

 

 

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.

 

 

 

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:

  

 

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



 

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:

 

 

 

 

 

6.	UNPAID LOSSES AND SETTLEMENT EXPENSES

 

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



 

  

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:

 



 

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, 2019, 1,926 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.