Note
s to 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-K, references to “the Company,” “we,” “us,” and “our” refer to the consolidated group for the period after the completion of the stock conversion and refer to I
llinois Casualty Company (ICC)
and its subsidiaries for the period prior to the stock conversion. 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; an operating insurance company, ICC; and ICC’s two wholly-owned subsidiaries, Beverage Insurance Agency, Inc., an inactive insurance agency and Estrella Innovative Solutions, Inc., an outsourcing company. ICC is an Illinois domiciled company.
ICC Holdings, Inc. was formed so that it could acquire all of the capital stock of ICC in a mutual-to-stock conversion. The plan of conversion was approved by ICC policyholders at a special meeting on March 17, 2017. Simultaneously, surplus notes totaling
$1.65
million were converted into
165,000
shares of the Company’s common stock. The Company’s offering closed on March 24, 2017, and our Employee Stock Ownership Plan (ESOP) purchased
350,000
of the shares in the offering. On March 28, 2017, the Company’s stock began trading on the NASDAQ Capital Market under the “ICCH” ticker. The Company paid
$1.0
million of underwriting fees to Griffin Financial Group, LLC. Proceeds received from the offering net of offering costs and underwriting fees was
$28.7
million.
Prior to the conversion on March 24, 2017, ICC Holdings, Inc did not engage in any operations. After the conversion, ICC Holdings, Inc’s primary assets are the outstanding capital stock of ICC and a portion of the net proceeds from the stock offering completed in connection with the mutual-to-stock conversion. On the effective date of the conversion, ICC became a wholly owned subsidiary of ICC Holdings, Inc. The mutual to stock conversion was accounted for as a change in corporate form with the historic basis of ICC’s assets, liabilities, and equity unchanged as a result. The condensed consolidated financial statements as of and for the twelve months ended December 31, 2017, include ICC Holdings and subsidiaries. The financial statements as of and for the twelve months ended December 31, 2016, represent the financial position and results of operations of ICC and its subsidiaries only, as the conversion to stock form was completed on March 24, 2017.
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 Colorado, Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, Ohio, and Wisconsin and markets through independent agents. Approximately
33.7%
and
36.9%
of the premium was
written in Illinois for the years ended December 31, 2017 and 2016, respectively. ICC has
two
wholly owned subsidiaries, Beverage Insurance Agency and Estrella Innovative Solutions, Inc.
ICC Realty, LLC is a serial LLC that held investment property for ICC and was a wholly owned subsidiary of ICC through October 11, 2017. ICC sold all of its real estate holdings held by ICC Realty, Inc. to its parent, ICC Holdings, Inc. via the sale of ICC Realty, Inc. to ICC Holdings, Inc. during the fourth quarter of 2017. The Company operates as a single segement.
B. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles (GAAP), which differ in some respects from those followed in reports to insurance regulatory authorities. The consolidated financial statements include the accounts of our subsidiaries. All significant intercompany balances and transactions have been eliminated.
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, revenues and expenses for the periods then ended, and the accompanying notes to the financial statements. Such estimates and assumptions could change in the future as more information becomes known which could impact the amounts reported and disclose herein. The most significant of these amounts is the liability for unpaid losses and settlement expenses. Other estimates include investment valuation and other than temporary impairments (OTTIs), the collectability of reinsurance balances, recoverability of deferred tax assets, and deferred policy acquisition costs. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate. Although recorded estimates are supported by actuarial computations and other supportive data, the estimates are ultimately based on expectations of future events. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.
C. INVESTMENTS:
The Company classifies its investments in all debt and equity securities as available-for-sale.
AVAILABLE-FOR-SALE SECURITIES
Debt and equity securities are classified as available-for-sale (AFS) and reported at fair value. Unrealized gains and losses on these securities are excluded from net earnings but are recorded as a separate component of comprehensive earnings and shareholders’ equity, net of deferred income taxes.
OTHER THAN TEMPORARY IMPAIRMENT
Under current accounting standards, an OTTI write-down of debt securities, where fair value is below amortized cost, is triggered by circumstances where (1) an entity has the intent to sell a security, (2) it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis or (3) the entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security in a loss position or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the difference between the security’s amortized cost and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income. Impairment losses result in a reduction of the underlying investment’s cost basis.
The Company regularly evaluates its fixed income and equity securities using both quantitative and qualitative criteria to determine impairment losses for other-than-temporary declines in the fair value of the investments. The following are the key factors for determining if a security is other-than-temporarily impaired as follows:
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·
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The extent to which the fair value is less than cost,
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·
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The assessment of significant adverse changes to the cash flows on a fixed income investment,
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·
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The occurrence of a discrete credit event resulting in the issuer defaulting on a material obligation, the issuer seeking protection from
creditors
under the bankruptcy laws, the issuer proposing a voluntary reorganization under which creditors are asked to exchange their claims for cash or securities having a fair value substantially lower than par value,
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·
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The
probability
that the Company will recover the entire amortized cost basis of the fixed income securities prior to maturity,
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·
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The ability and
intent
to hold fixed income securities until maturity or
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·
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For equity
securities
, the expectation of recovery to cost within a reasonable period of time.
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Quantitative and qualitative criteria are considered during this process to varying degrees depending on the sector the analysis is being performed as follows:
Corporates
The Company performs a qualitative evaluation of holdings that fall below the price threshold. The analysis begins with an opinion of industry and competitive position. This includes an assessment of factors that enable the profit structure of the business (e.g., reserve profile for exploration and production companies), competitive advantage (e.g., distribution system), management strategy, and an analysis of trends in return on invested capital. Analysts may also review other factors to determine whether an impairment exists including liquidity, asset value cash flow generation, and industry multiples.
Municipals
The Company analyzes the screened impairment candidates on a quantitative and qualitative basis. This includes an assessment of the factors that may be contributing to the unrealized loss and whether the recovery value is greater or less than current market value.
Structured Securities
The “stated assumptions” analytic approach relies on actual 6-month average collateral performance measures (voluntary prepayment rate, gross default rate, and loss severity) sourced through third party data providers or remittance reports. The analysis applies the stated assumptions throughout the remaining term of the transaction using forecasted cashflows, which are then applied through the transaction structure (reflecting the priority of payments and performance triggers) to determine whether there is a loss to the security (“Loss to Tranche”). For securities or sectors for which no actual loss or minimal loss has been observed (certain Prime Residential Mortgage Backed Securities (RMBS) and Commercial Mortgage Backed Securities (CMBS), for example), sector-based assumptions are applied or an alternative quantitative or qualitative analysis is performed.
Investment Income
Interest on fixed maturities and short-term investments is credited to earnings on an accrual basis. Premiums and discounts are amortized or accreted over the lives of the related fixed maturities. Dividends on equity securities are credited to earnings on the ex-dividend date. Realized gains and losses on disposition of investments are based on specific identification of the investments sold on the settlement date, which does not differ significantly from trade date accounting.
D. PROPERTY HELD FOR INVESTMENT
Property held for investment purposes is initially recorded at the purchase price, which is generally fair value, and is subsequently reported at cost less accumulated depreciation. Buildings are depreciated on a straight-line bases over the estimated useful lives of the building, which we estimate to be
39
years. Income from property held for investment is reported as net investment income.
E. CASH AND CASH EQUIVALENTS
Cash consists of uninvested balances in bank accounts. Cash equivalents consist of investments with original maturities of 90 days or less, primarily AAA-rated prime and government money market funds. Cash equivalents are carried at cost, which approximates fair value. The Company has not experienced losses on these instruments.
We maintain cash balances primarily at one bank, which are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250
,000.
During the normal course of business, balances are maintained above the FDIC insurance limit.
F. REINSURANCE
Ceded unearned premiums and reinsurance balances recoverable on paid and unpaid losses and settlement expenses are reported separately as assets instead of being netted with the related liabilities, since reinsurance does not relieve us of our legal liability to our policyholders.
Quarterly, the Company monitors the financial condition of its reinsurers. The Company’s monitoring efforts include, but are not limited to, the review of annual summarized financial data and analysis of the credit risk associated with reinsurance balances recoverable by monitoring the A.M. Best and Standard & Poor’s (S&P) ratings. In addition, the Company subjects its reinsurance recoverables to detailed recoverable tests, including an analysis based on average default by A.M. Best rating. Based upon the review and testing, the Company’s policy is to charge to earnings, in the form of an allowance, an estimate of unrecoverable amounts from reinsurers. This allowance is reviewed on an ongoing basis to ensure that the amount makes a reasonable provision for reinsurance balances that the Company may be unable to recover.
G. POLICY ACQUISITION COSTS
The Company defers commissions, premium taxes, and certain other costs that are incrementally or directly related to the successful acquisition of new or renewal insurance contracts. Acquisition-related costs may be deemed ineligible for deferral when they are based on contingent or performance criteria beyond the basic acquisition of the insurance contract or when efforts to obtain or renew the insurance contract are unsuccessful. All eligible costs are capitalized and charged to expense in proportion to premium revenue recognized. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value. This deferral methodology applies to both gross and ceded premiums and acquisition costs.
H. PROPERTY AND EQUIPMENT
Property and equipment are presented at cost, less accumulated depreciation, and are depreciated using accelerated methods for financial statement purposes for a period based on their economic life. Computer equipment is depreciated over
3
years and equipment over a range of
5
to
7
years. Buildings are depreciated over
39
years and related improvements over
15
years. Annually, the Company reviews the major asset classes held for impairment. For the years ended December 31, 2017 and 2016, the Company recognized
no
impairments. Property and equipment are summarized as follows:
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As of
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December 31,
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December 31,
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2017
|
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2016
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Automobiles
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$
|
794,959
|
|
$
|
668,794
|
Furniture and fixtures
|
|
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425,825
|
|
|
516,318
|
Computer equipment and software
|
|
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3,404,975
|
|
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3,151,676
|
Home office
|
|
|
3,774,187
|
|
|
3,690,994
|
Total cost
|
|
|
8,399,946
|
|
|
8,027,782
|
Accumulated depreciation
|
|
|
(4,896,041)
|
|
|
(4,308,247)
|
Net property and equipment
|
|
$
|
3,503,904
|
|
$
|
3,719,535
|
I. UNPAID LOSSES AND SETTLEMENT EXPENSES
The liability for unpaid losses and settlement expenses represents estimates of amounts needed to pay reported and unreported claims and related expenses. The estimates are based on certain actuarial and other assumptions related to the ultimate cost to settle such claims. Such assumptions are subject to occasional changes due to evolving economic, social, and political conditions. All estimates are periodically reviewed and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments are reflected in the results of operations in the period in which they are determined. Due to the inherent uncertainty in estimating reserves for losses and settlement expenses, there can be no assurance that the ultimate liability will not exceed recorded amounts. If actual liabilities do exceed recorded amounts, there will be an adverse effect. Based on the current assumptions used in estimating reserves, we believe that our overall reserve levels at December 31, 2017, make a reasonable provision to meet our future obligations. See
Note 7 – Unpaid Losses and Settlement Expenses
for further discussion.
J. PREMIUMS
Premiums are recognized ratably over the term of the contracts, net of ceded reinsurance. Unearned premiums represent the portion of premiums written relative to the unexpired terms of coverage. Unearned premiums are calculated on a daily pro rata basis.
K. GENERAL CORPORATE EXPENSE
General corporate expenses consist primarily of real estate and occupancy costs, such as utilities and maintenance. These costs do not vary significantly with premium volume but rather with square footage of real estate owned.
L. INCOME TAXES
The Company files a consolidated federal income tax return. Federal income taxes are accounted for using the asset and liability method under which deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities, operating losses and tax credit carry forwards. The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance if it is more likely than not all or some of the deferred tax assets will not be realized.
The Company considers uncertainties in income taxes and recognizes those in its financial statements as required. As it relates to uncertainties in income taxes, unrecognized tax benefits, including interest and penalty accruals, are not considered material to the consolidated financial statements. Also, no tax uncertainties are expected to result in significant increases or decreases to unrecognized tax benefits within the next 12-month period. Penalties and interest related to income tax uncertainties, should they occur, would be included in income tax expense in the period in which they are incurred.
ICC is subject to minimal state income tax liabilities. On a state basis, since the majority of income is from insurance operations, the Company pays premium taxes in lieu of state income tax. Premium taxes are a component of policy acquisition costs and calculated as a percentage of gross premiums written.
M.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company recognizes compensation expense related to its employee stock ownership plan (ESOP) ratably 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 purposes of balance sheet disclosures of shares outstanding, the Company includes only the number of ESOP shares that have been committed to be released for the period.
For purposes of calculating earnings per share, the Company includes the weighted average ESOP shares committed to be released for the period. The ESOP covers all employees who have worked a minimum of
1,000
hours in the plan year.
N.
EARNINGS PER SHARE
Basic and diluted earnings per share (EPS) are calculated by dividing earnings available to common shareholders by the weighted average number of common shares outstanding during the period. The denominator for basic and diluted EPS includes ESOP shares committed to be released. The unaudited pro forma earnings per share for the twelve months ended December 31, 2016 are provided to be used as a basis for comparison of current period earnings. The weighted average number of common shares outstanding are computed as if the resulting shares from the initial public offering, which was completed in March 2017, were outstanding for the year ended December 31, 2016.
O. COMPREHENSIVE EARNINGS
Comprehensive earnings include net 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 tax rates of
21%
and
34%
for the year ended December 31, 2017, and 2016, respectively. Oth
er comprehensive earnings
, as shown in the consolidated statements of earnings and comprehensive earnings, is net of tax expense of
$1,048,847
and
$346,785
for 2017 and 2016, respectively.
The following table provides the reclassifications out of accumulated other comprehensive income for the periods presented:
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Amounts Reclassified from
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Accumulated Other Comprehensive Earnings
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Details about Accumulated Other
|
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Twleve-Month Periods Ended December 31,
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Affected Line Item in the Statement
|
Comprehensive Earnings Component
|
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2017
|
|
2016
|
|
where Net Earnings is Presented
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Unrealized gains (losses) on AFS investments:
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$
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(1,064,577)
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$
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(249,923)
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Net realized investment gains
|
|
|
|
57,316
|
|
|
212,731
|
|
Other-than-temporary impairment losses
|
|
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342,469
|
|
|
12,645
|
|
Income tax expense
|
Total reclassification adjustment, net of tax
|
|
$
|
(664,792)
|
|
$
|
(24,547)
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|
|
P. ADOPTED ACCOUNTING PRONOUNCEMENTS
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02)
–
This update allows a reclassification from Accumulated Other Comprehensive Income (AOCI) to retained earnings for stranded tax effects resulting from Public Law no. 115-97, an Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 (Tax Act), which was enacted on December 22, 2017. The effect of a change in income tax rates on deferred tax assets and liabilities is required to be recognized in income on the date of enactment, even if the deferred tax was originally recorded in other comprehensive income. Prior to the adoption of this update, application of prior guidance resulted in an amount being stranded in AOCI related to the difference between historical and enacted tax rates. The update allows an entity to reclassify the difference related to the Tax Act from AOCI to retained earnings. The update is required to be adopted January 1, 2019, and early adoption is permitted for any interim or annual period for which financial statements have not yet been filed. We elected to early adopt this update effective October 1, 2017, and have elected to reclassify stranded amounts associated with the Tax Act, resulting in a reclassification of
$366,480
from AOCI to retained earnings.
Short-Duration Contracts Disclosures (ASU 2015-09)
– This guidance addresses enhanced disclosure requirements for insurers relating to short-duration insurance contract claims and the unpaid claims liability rollforward for long and short-duration contracts.
The Company adopted this ASU for the year ended December 31, 2017. As the requirements are disclosure only, the adoption of this guidance did not impact the Company’s financial statements, but did result in additional disclosures.
Q. PROSPECTIVE ACCOUNTING STANDARDS
The dates presented below, represent the implementation dates for publicly traded entities. The Company’s status as an Emerging Growth Company could delay the required adoption of each of these standards.
Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15)
–
This guidance addresses eight specific cash flow issues with the objective of reducing existing diversity in practice. The new guidance is effective beginning after December 15, 2018, and it is not expected to have a material impact on the Company’s cash flows.
Financial Instruments Credit Losses (ASU 2016-13)
– This guidance affects the recognition of expected credit losses. Credit losses relating to available for sale securities will be recorded through an allowance for credit losses. The amendments will be applied to fiscal years beginning after December 15, 2019, and early adoption is permitted as of fiscal years beginning after December 15, 2018. The effect of applying the new guidance on accounting for credit losses has not yet been determined.
Leases (ASU 2016-02)
– This update will supersede the current lease requirements in ASC 840. The ASU requires lessees to recognize a right of use asset and related lease liability for all leases, with a limited exception for short term leases. Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of operations. Currently, leases are classified as either capital or operating, with only capital leases recognized on the balance sheet. The reporting of lease related expenses in the statements of operations and cash flows will be generally consistent with the current guidance.
The new lease guidance will be effective for the Company’s year ending December 31, 2020 and will be applied using a modified retrospective transition method to the beginning of the earliest period presented. The effect of applying the new lease guidance on the consolidated financial statements is expected to be minimal due to current and future lease obligations being immaterial.
Financial Instruments – Recognition and Measurement (ASU 2016-01)
– This guidance affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements of financial instruments.
The amendments will be applied to fiscal years beginning after December 15, 2018. Early adoption is permitted for the accounting guidance on financial liabilities under the fair value option.
The Company will make a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The primary impact this guidance will have on our financial statements relates to recognizing changes in the fair value of equity securities through the statement of earnings. The impact to our statement of earnings will vary depending upon the level of volatility in the performance of the securities held in our equity portfolio and the overall market.
Revenue Recognition (ASU 2014-09)
This will supersede the current revenue recognition requirements in Topic 605, Revenue Recognition. The ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.
The new guidance will be effective for the Company’s year ending December 31, 2019. The effect of applying this on the consolidated financial statements is not expected to have a material impact as the Company’s primary revenue is derived from insurance contracts which are excluded from the scope of ASU 2014-09.
R. RISKS AND UNCERTAINTIES:
Certain risks and uncertainties are inherent to day-to-day operations and to the process of preparing the Company’s consolidated financial statements. The more significant risks and uncertainties, as well as the Company’s attempt to mitigate, quantify, and minimize such risks, are presented below and throughout the notes to the consolidated financial statements.
Catastrophe Exposures
The Company’s insurance coverages include exposure to catastrophic events. All catastrophe exposures are monitored by quantifying exposed policy limits in each region and by using computer-assisted modeling techniques. Additionally, the Company limits its risk to such catastrophes through restraining the total policy limits written in each region and by purchasing reinsurance. The Company’s major catastrophe exposure is to losses caused by tornado and hail to commercial properties throughout the Midwest.
The catastrophe reinsurance treaty renewed on January 1, 2018, and the Company had protection of
$9.5
million in excess of
$500,000
first-dollar retention for both of the years ended December 31, 2017 and 2016. The catastrophe program is actively managed to keep net retention in line with risk tolerances and to optimize the risk/return trade off.
Reinsurance
Reinsurance does not discharge the Company from its primary liability to policyholders, and to the extent that a reinsurer is unable to meet its obligations, the Company would be liable. On a quarterly basis, the financial condition of prospective and existing reinsurers is monitored. As a result, the Company purchases reinsurance from a number of financially strong reinsurers. Accordingly, no allowance for reinsurance balances deemed uncollectible has been made. See
Note 6 –Reinsurance
for further discussion.
Investment Risk
The investment portfolio is subject to market, credit, and interest rate risks. The equity portfolio will fluctuate with movements in the overall stock market. While the equity portfolio has been constructed to have lower downside risk than the market, the portfolio is sensitive to movements in the market. The bond portfolio is affected by interest rate changes and movement in credit spreads. The Company attempts to mitigate its interest rate and credit risks by constructing a well-diversified portfolio with high-quality securities with varied maturities. Downturns in the financial markets could have a negative effect on the portfolio. However, the Company attempts to manage this risk through asset allocation, duration, and security selection.
Liquidity Risk
Liquidity is essential to the Company’s business and a key component of the concept of asset-liability matching. The Company’s liquidity may be impaired by an inability to collect premium receivable or reinsurance recoverable balances in a timely manner, an inability to sell assets or redeem investments, unforeseen outflows of cash or large claim payments, or an inability to access debt. Liquidity risk may arise due to circumstances that the Company may be unable to control, such as a general market disruption, an operational problem that affects third parties or the Company, or even by the perception among market participants that the Company, or other market participants, are experiencing greater liquidity risk.
The Company’s A.M. Best rating is important to its liquidity. A reduction in credit ratings could adversely affect the Company’s liquidity and competitive position, by increasing borrowing costs or limiting access to the capital markets.
External Factors
The Company is highly regulated by the state of Illinois and by the states in which it underwrites business. Such regulations, among other things, limit the amount of dividends, impose restrictions on the amount and types of investments, and regulates rates insurers may charge for various coverages. The Company is also subject to insolvency and guarantee fund assessments for various programs designed to ensure policyholder indemnification. Assessments are generally accrued during the period in which it becomes probable that a liability has been incurred from an insolvency and the amount of the related assessment can be reasonably estimated.
The National Association of Insurance Commissioners (NAIC) has developed Property/Casualty Risk-Based Capital (RBC) standards that relate an insurer’s reported statutory surplus to the risks inherent in its overall operations. The RBC formula uses the statutory annual statement to calculate the minimum indicated capital level to support asset (investment and credit) risk and underwriting (loss reserves, premiums written and unearned premium) risk. The NAIC model law calls for various levels of regulatory action based on the magnitude of an indicated RBC capital deficiency, if any. As of December 31, 2017, the Company determined that its capital levels are well in excess of the minimum capital requirements for all RBC action levels and that its capital levels are sufficient to support the level of risk inherent in its operations. See
Note 10 – Statutory Information and Dividend Restrictions
for further discussion of statutory information and related insurance regulatory restrictions.
In addition, ratings are a critical factor in establishing the competitive position of insurance companies. The Company is rated by A.M. Best. This rating reflects their opinion of the insurance company’s financial strength, operating performance, strategic position, and ability to meet its obligations to policyholders.
2.
I
NVESTMENTS
NET INVESTMENT INCOME
A summary of net investment income for the years ended December 31, 201
7
and 201
6
is as follows:
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2017
|
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2016
|
AFS, fixed maturity securities
|
|
$
|
2,500,136
|
|
$
|
2,050,205
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Investment property
|
|
|
449,990
|
|
|
348,393
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AFS, equity securities
|
|
|
434,950
|
|
|
372,151
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Cash and short-term investments
|
|
|
42,426
|
|
|
17,189
|
Investment revenue
|
|
|
3,427,502
|
|
|
2,787,938
|
Less investment expenses
|
|
|
(795,004)
|
|
|
(820,000)
|
Net investment income
|
|
$
|
2,632,498
|
|
$
|
1,967,938
|
INVESTMENT RELATED GAINS (LOSSES)
The following is a summary of the proceeds from sales, maturities, and calls of
AFS
securities and the related gross realized gains and losses
, excluding OTTI,
for the years ended December 31, 201
7
and 201
6
.
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Net realized
|
|
|
Proceeds
|
|
Gains
|
|
Losses
|
|
gain
|
2017
|
|
|
|
|
|
|
|
|
|
|
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|
Fixed maturity securities
|
|
$
|
7,431,133
|
|
$
|
29,436
|
|
$
|
(21)
|
|
$
|
29,415
|
Common stocks
|
|
|
5,481,197
|
|
|
1,025,909
|
|
|
(2,753)
|
|
|
1,023,156
|
Preferred stocks
|
|
|
260,119
|
|
|
12,006
|
|
|
—
|
|
|
12,006
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
$
|
11,437,484
|
|
$
|
216,803
|
|
$
|
(3,737)
|
|
$
|
213,066
|
Common stocks
|
|
|
4,708,756
|
|
|
73,186
|
|
|
(26,287)
|
|
|
46,899
|
Preferred stocks
|
|
|
98,998
|
|
|
—
|
|
|
(10,042)
|
|
|
(10,042)
|
The amortized cost and estimated fair value of fixed income
AFS
securities at December 31, 201
7
,
are shown by contractual maturity below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Fair Value
|
Due in one year or less
|
|
$
|
1,500,544
|
|
$
|
1,499,050
|
Due after one year through five years
|
|
|
22,428,557
|
|
|
22,911,341
|
Due after five years through 10 years
|
|
|
11,892,260
|
|
|
12,405,986
|
Due after 10 years
|
|
|
20,367,545
|
|
|
21,270,034
|
Asset and mortgage backed securities without a specific due date
|
|
|
31,584,141
|
|
|
31,518,662
|
Total fixed maturity securities
|
|
$
|
87,773,047
|
|
$
|
89,605,073
|
In addition, the following table is a schedule of amortized costs and estimated fair values of investments in fixed
maturity
and equity securities as of December 31, 201
7
and 201
6
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
|
|
Gross Unrealized
|
|
|
Amortized Cost
|
|
Fair Value
|
|
Gains
|
|
Losses
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury
|
|
$
|
1,346,712
|
|
$
|
1,333,725
|
|
$
|
—
|
|
$
|
(12,987)
|
MBS/ABS/CMBS
|
|
|
31,584,141
|
|
|
31,518,662
|
|
|
158,944
|
|
|
(224,423)
|
Corporate
|
|
|
31,038,526
|
|
|
31,989,174
|
|
|
1,001,906
|
|
|
(51,258)
|
Municipal
|
|
|
23,803,668
|
|
|
24,763,512
|
|
|
976,872
|
|
|
(17,028)
|
Total fixed maturity securities
|
|
|
87,773,047
|
|
|
89,605,073
|
|
|
2,137,722
|
|
|
(305,696)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
7,631,180
|
|
|
8,534,109
|
|
|
920,629
|
|
|
(17,700)
|
Preferred stocks
|
|
|
3,783,311
|
|
|
3,867,429
|
|
|
132,054
|
|
|
(47,936)
|
Total equity securities
|
|
|
11,414,491
|
|
|
12,401,538
|
|
|
1,052,683
|
|
|
(65,636)
|
Total AFS securities
|
|
$
|
99,187,538
|
|
$
|
102,006,611
|
|
$
|
3,190,405
|
|
$
|
(371,332)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
|
|
Gross Unrealized
|
|
|
Amortized Cost
|
|
Fair Value
|
|
Gains
|
|
Losses
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury
|
|
$
|
1,244,542
|
|
$
|
1,241,125
|
|
$
|
2,527
|
|
$
|
(5,944)
|
MBS/ABS/CMBS
|
|
|
19,751,138
|
|
|
19,677,200
|
|
|
183,175
|
|
|
(257,113)
|
Corporate
|
|
|
27,593,568
|
|
|
28,344,907
|
|
|
842,782
|
|
|
(91,443)
|
Municipal
|
|
|
14,339,843
|
|
|
14,870,791
|
|
|
665,790
|
|
|
(134,842)
|
Total fixed maturity securities
|
|
|
62,929,091
|
|
|
64,134,023
|
|
|
1,694,274
|
|
|
(489,342)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
6,311,708
|
|
|
6,982,547
|
|
|
704,768
|
|
|
(33,929)
|
Preferred stocks
|
|
|
2,925,434
|
|
|
2,798,413
|
|
|
5,425
|
|
|
(132,446)
|
Total equity securities
|
|
|
9,237,142
|
|
|
9,780,960
|
|
|
710,193
|
|
|
(166,375)
|
Total AFS securities
|
|
$
|
72,166,233
|
|
$
|
73,914,983
|
|
$
|
2,404,467
|
|
$
|
(655,717)
|
MORTGAGE-BACKED, COMMERCIAL MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
All of the Company’s collateralized securities carry an average credit rating of AA+ by one or more major rating agency and continue to pay according to contrac
tual terms.
Included within MBS/ABS/CMBS are residential mortgage backed securities
with fair values of
$13,517,725
and
$10,288,405
and commercial mortgage backed securiti
es of
$8,469,852
and
$7,600,109
at December 31, 2017 and 2016
, respectively.
UNREALIZED LOSSES ON AFS SECURITIES
The following table is also used as part of the impairment analysis and displays the total value of securities that were in an unrealized loss position as of December 31, 201
7
and 201
6
. The table segregates 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
|
|
|
|
12 Mos
|
|
|
|
|
|
|
|
12 Mos
|
|
|
|
|
|
< 12 Mos.
|
|
& Greater
|
|
Total
|
|
< 12 Mos.
|
|
& Greater
|
|
Total
|
U.S. Treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
$
|
1,038,297
|
|
$
|
295,428
|
|
$
|
1,333,725
|
|
$
|
993,576
|
|
$
|
—
|
|
$
|
993,576
|
Cost or Amortized cost
|
|
|
1,046,508
|
|
|
300,204
|
|
|
1,346,712
|
|
|
999,520
|
|
|
—
|
|
|
999,520
|
Unrealized Loss
|
|
|
(8,211)
|
|
|
(4,776)
|
|
|
(12,987)
|
|
|
(5,944)
|
|
|
—
|
|
|
(5,944)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS/ABS/CMBS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
9,754,119
|
|
|
7,445,071
|
|
|
17,199,190
|
|
|
10,712,987
|
|
|
322,641
|
|
|
11,035,628
|
Cost or Amortized cost
|
|
|
9,778,528
|
|
|
7,645,085
|
|
|
17,423,613
|
|
|
10,968,840
|
|
|
323,901
|
|
|
11,292,741
|
Unrealized Loss
|
|
|
(24,409)
|
|
|
(200,014)
|
|
|
(224,423)
|
|
|
(255,853)
|
|
|
(1,260)
|
|
|
(257,113)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
5,583,942
|
|
|
2,023,856
|
|
|
7,607,798
|
|
|
5,476,442
|
|
|
984,115
|
|
|
6,460,557
|
Cost or Amortized cost
|
|
|
5,610,093
|
|
|
2,048,963
|
|
|
7,659,056
|
|
|
5,552,624
|
|
|
999,376
|
|
|
6,552,000
|
Unrealized Loss
|
|
|
(26,151)
|
|
|
(25,107)
|
|
|
(51,258)
|
|
|
(76,182)
|
|
|
(15,261)
|
|
|
(91,443)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
478,019
|
|
|
1,171,520
|
|
|
1,649,539
|
|
|
2,995,362
|
|
|
—
|
|
|
2,995,362
|
Cost or Amortized cost
|
|
|
479,904
|
|
|
1,186,663
|
|
|
1,666,567
|
|
|
3,130,204
|
|
|
—
|
|
|
3,130,204
|
Unrealized Loss
|
|
|
(1,885)
|
|
|
(15,143)
|
|
|
(17,028)
|
|
|
(134,842)
|
|
|
—
|
|
|
(134,842)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, fixed income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
16,854,377
|
|
|
10,935,875
|
|
|
27,790,252
|
|
|
20,178,367
|
|
|
1,306,756
|
|
|
21,485,123
|
Cost or Amortized cost
|
|
|
16,915,033
|
|
|
11,180,915
|
|
|
28,095,948
|
|
|
20,651,188
|
|
|
1,323,277
|
|
|
21,974,465
|
Unrealized Loss
|
|
|
(60,656)
|
|
|
(245,040)
|
|
|
(305,696)
|
|
|
(472,821)
|
|
|
(16,521)
|
|
|
(489,342)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
637,100
|
|
|
—
|
|
|
637,100
|
|
|
—
|
|
|
445,872
|
|
|
445,872
|
Cost or Amortized cost
|
|
|
654,800
|
|
|
—
|
|
|
654,800
|
|
|
—
|
|
|
479,801
|
|
|
479,801
|
Unrealized Loss
|
|
|
(17,700)
|
|
|
—
|
|
|
(17,700)
|
|
|
—
|
|
|
(33,929)
|
|
|
(33,929)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
842,530
|
|
|
520,710
|
|
|
1,363,240
|
|
|
2,328,345
|
|
|
—
|
|
|
2,328,345
|
Cost or Amortized cost
|
|
|
870,755
|
|
|
540,421
|
|
|
1,411,176
|
|
|
2,460,791
|
|
|
—
|
|
|
2,460,791
|
Unrealized Loss
|
|
|
(28,225)
|
|
|
(19,711)
|
|
|
(47,936)
|
|
|
(132,446)
|
|
|
—
|
|
|
(132,446)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
18,334,007
|
|
|
11,456,585
|
|
|
29,790,592
|
|
|
22,506,712
|
|
|
1,752,628
|
|
|
24,259,340
|
Cost or amortized cost
|
|
|
18,440,588
|
|
|
11,721,336
|
|
|
30,161,924
|
|
|
23,111,979
|
|
|
1,803,078
|
|
|
24,915,057
|
Unrealized Loss
|
|
$
|
(106,581)
|
|
$
|
(264,751)
|
|
$
|
(371,332)
|
|
$
|
(605,267)
|
|
$
|
(50,450)
|
|
$
|
(655,717)
|
As of December 31, 201
7
, the Company held
13
equity securities that were in unrealized loss positions.
Of the 13 securities,
5
have been in an unrealized loss position for 12 consecutive months or longer and represent
$19,711
in unrealized losses. As of December 31, 2016, the Company held
21
equity securities that were in unrealized loss positions. Of these
21
securities,
2
were in an unrealized loss position for 12 consecutive months or longer and represented
$33,929
in unrealized losses.
The fix
ed income portfolio contained
64
securities in an unrealized loss position as of December 31, 201
7
. Of these
64
securities,
29
have been in an unrealized loss position for 12 consecutive months or longer and represent
$245,040
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 princ
ipal and interest.
For the year ended Decemeber 31, 201
7
, the Company recognized in
net earnings
$57,316
of
OTTI losses
on
an ETF included in common stock that was
impaired
during the second quarter of 2017
and subsequently sold during
in the third quarter of 2017
.
During 201
6
, the Company recognize
d
$205,834
of
OTTI on one common stock security and
$6,897
of OTTI on one fixed income security
.
For all fixed income securities at a loss at December 31, 201
7
, 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 of each security, which may be maturity. Management does not consider these investments to be other-than-temporarily impaired at December 31, 201
7
.
Based on management’s analysis, it was concluded that the securities in an unrealized loss position were not other-than-temporarily impaired at December 31, 201
7
, and 201
6
.
As required by law, certain fixed maturity investments amounting to
$3,962,291
and
$2,958,297
at December 31, 2017
and 201
6
, respectively, were on deposit with either regulatory authorities or banks. In addition,
$923,766
and
$1,808,523
was pledged as of December 31, 201
7
and 201
6
, respectively, as part of a capital lease arrangement.
PROPERTY HELD FOR INVESTMENT
In 2017
, investment property
comprised of
5
4
apartment rental units located in Rock Island
,
Moline
, and Silvis
, Illinois. Property held for investment is net of accumulated depreciation of
$127,161
and
$50,948
as of December 31, 201
7
, and 201
6
, respectively. Related depreciation expense was
$76,213
and
$47,793
for the years ended December 31, 201
7
, and 201
6
, respectively.
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. We determined the fair value of certain financial instruments 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) 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 recen
t trade activity. MBS/CMO
and ABS with corroborated and observable inputs are classified as Level 2. All MBS/CMO and ABS holdings are deemed Level 2.
U.S. Treasury Bonds and Common
Equity/ETF Securities
—
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 are classificed as Level 2. All preferred stock holdings are deemed Level 2.
Due to the relatively short-term nature of cash, cash equivalents, and the mortgage on the home office, their carrying amounts are reasonable estimates of fair value. The surplus notes
, leasehold obligations, and debt obligations reported under Note 5–Debt,
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. Cash and cash equivalents are classified as Level 1 of the hierarchy. The mortgage on the home office and the surplus notes are carried at Level 2 of the hierarchy.
Assets measured
at fair value on a recurring basis as of December 31, 201
7
, are as 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
|
|
$
|
1,333,725
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,333,725
|
MBS/ABS/CMBS
|
|
|
—
|
|
|
31,518,662
|
|
|
—
|
|
|
31,518,662
|
Corporate
|
|
|
—
|
|
|
31,989,174
|
|
|
—
|
|
|
31,989,174
|
Municipal
|
|
|
—
|
|
|
24,763,512
|
|
|
—
|
|
|
24,763,512
|
Total fixed maturity securities
|
|
|
1,333,725
|
|
|
88,271,348
|
|
|
—
|
|
|
89,605,073
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
8,534,109
|
|
|
—
|
|
|
—
|
|
|
8,534,109
|
Preferred stocks
|
|
|
—
|
|
|
3,867,429
|
|
|
—
|
|
|
3,867,429
|
Total equity securities
|
|
|
8,534,109
|
|
|
3,867,429
|
|
|
—
|
|
|
12,401,538
|
Total AFS securities
|
|
$
|
9,867,834
|
|
$
|
92,138,777
|
|
$
|
—
|
|
$
|
102,006,611
|
Assets measured at fair value on a recurring basis as of December 31, 201
6
, are as 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
|
|
$
|
1,241,125
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,241,125
|
MBS/ABS/CMBS
|
|
|
—
|
|
|
19,677,200
|
|
|
—
|
|
|
19,677,200
|
Corporate
|
|
|
—
|
|
|
28,344,907
|
|
|
—
|
|
|
28,344,907
|
Municipal
|
|
|
—
|
|
|
14,870,791
|
|
|
—
|
|
|
14,870,791
|
Total fixed maturity securities
|
|
|
1,241,125
|
|
|
62,892,898
|
|
|
—
|
|
|
64,134,023
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
6,982,547
|
|
|
—
|
|
|
—
|
|
|
6,982,547
|
Preferred stocks
|
|
|
—
|
|
|
2,798,413
|
|
|
—
|
|
|
2,798,413
|
Total equity securities
|
|
|
6,982,547
|
|
|
2,798,413
|
|
|
—
|
|
|
9,780,960
|
Total AFS sec
ur
iti
e
s
|
|
$
|
8,223,672
|
|
$
|
65,691,311
|
|
$
|
—
|
|
$
|
73,914,983
|
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 December 31, 201
7
and 201
6
. Additionally, there were
no
securities transferred in or out of levels 1 or
2
during the years ended December 31, 201
7
and 201
6
.
4.
POLICY ACQUISITION COSTS
Policy acquisition costs deferred and amortized to income for the years ended December 31 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Deferred policy acquisition costs (DAC), beginning of year
|
$
|
4,162,927
|
|
$
|
3,982,734
|
Deferred:
|
|
|
|
|
|
Direct commission
|
|
7,635,524
|
|
|
7,156,434
|
Premium taxes
|
|
902,438
|
|
|
723,067
|
Ceding commissions
|
|
(983,634)
|
|
|
(959,451)
|
Underwriting
|
|
435,916
|
|
|
384,814
|
Net deferred
|
|
7,990,245
|
|
|
7,304,865
|
Amortized
|
|
7,560,757
|
|
|
7,124,672
|
DAC, end of year
|
$
|
4,592,415
|
|
$
|
4,162,927
|
|
|
|
|
|
|
Policy acquisition costs:
|
|
|
|
|
|
Amortized to expense
|
$
|
7,560,757
|
|
$
|
7,124,672
|
Period costs:
|
|
|
|
|
|
Contingent commission
|
|
1,795,359
|
|
|
1,826,944
|
Other underwriting expenses
|
|
7,951,584
|
|
|
6,896,931
|
Total policy acquisition costs
|
$
|
17,307,700
|
|
$
|
15,848,547
|
5. DEBT
As of December 31, 201
7
and 201
6
, outs
tanding debt balances totaled
$4,339,208
and
$3,786,950
, respectively. The average rate on debt
was
3.9%
in 201
7
compared to
5.0%
in 201
6
.
Long-term debt consists of the following as of the periods referenced below
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
Surplus notes
|
|
$
|
—
|
|
$
|
1,850,000
|
Capital lease obligation
|
|
|
805,013
|
|
|
1,227,541
|
Debt obligation
|
|
|
3,534,195
|
|
|
525,619
|
Home office mortgage
|
|
|
—
|
|
|
183,790
|
Total
|
|
$
|
4,339,208
|
|
$
|
3,786,950
|
Surplus Notes
ICC’s Plan of Conversion from a mutual to a stock company was approved by ICC policyholders at a special meeting on March 17, 2017. Simultaneously, surplus notes totaling
$1.65
million, representing all outstanding surplus notes as of that date were converted into
165,000
shares of the Company’s common stock. The remaining
$200,000
balance of surplus notes was paid in March 2017.
Leasehold Obligations
ICC
entered into
sale leaseback arrangement
s
in 201
6
and 2015 that are accounted for as a
capital lease. Under the agreement,
BofI Federal Bank
(BofI)
purchased electronic data processing software
,
vehicles
, and other assets
which are leased to the Company. These assets remain on the Company’s books due to provisions within the agreement that trigger capital lease accounting. To secure
the lowest rate possible of
4.7%
, the Company pledged
bonds totaling
$923,766
and
$1,808,523
as of December 31, 201
7
and 201
6
, respectively.
There was
no
gain or loss recognized as part of this transaction. Lease payments totaled
$501,976
and
$438,593
for the years ended December 31, 201
7
and 201
6
, respectively
. The term of the electronic data processing lease is
48
months and the term of the titled vehicles lease is
36
months. The outstanding lease obligation at December 31, 201
7
, was
$805,013
compared to
$1,227,541
at Decemeber 31, 201
6
.
Future min
imum lease payments for the three
succeeding years as of December 31, 201
7
are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
501,972
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
361,374
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,190
|
Total payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
893,536
|
Less: Interest portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,523
|
Total oustanding lease obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
805,013
|
Debt Obligation
ICC Holdings, Inc. secured a loan with American Bank & Trust in March 2017 in the amount of $3,500,000 and used the proceeds to repay ICC for the money borrowed by the ESOP. The term of the loan is five years bearing interest at 3.65%
and t
he Company pledged the ESOP shares and $1.5 million of trust assets as collateral for the loan.
Additionally,
ICC
entered i
nto
two
debt agreement
s
in 2016
; one agreement for
$500,000
and another
debt agreement for
$75,000
with BofI
. The
term
s
of the loan
s
are
36
months, but the Company ha
d
the option to prepay
the
$500,000
loan
after
12
months.
The Company paid off the remaining balance of the $500,000 loan in September 2017.
The total balance of debt agreements at year end 201
7
and 201
6
was
$3,534,195
and
$525,619
, respectively.
The
Bofi
loan
s bear interest at
4.7%
.
Home Office Mortgage
The Company
paid off the remaining
mortgage
balance
on its home office
during the fourth quarter of 2017. Interest wa
s
charged at a fixed rate of
2.6%
and the loan mature
d
in
2017
. The building
wa
s used as collateral to secure the loan. The
loan balance at year end 201
7
and 201
6
was
$0
and
$183,790
, respectively. The interest paid on the loan in 201
7
was
$1,518
and
$9,163
in 201
6
.
Revolving Line of Credit
We maintain a revolving line of credit with American Bank & Trust, which permits borrowing up to an aggregate principal amount of
$
1.75
million. This facility was entered into durin
g 2013 and is renewed annually with a current expiration of
August 1, 201
8
. The line of credit is priced at 30 day LIBOR plus
2%
with a floor of
3.5%
.
In order to secure the lowest rate possible, th
e Company pledged marketable securities not to exceed
$5.0
million in the event the Company drawls
down
on the line of credit.
There was no interest paid on the line of credit during the year ended December 31, 2017.
Interest paid on the line of credit in 2016 was immaterial.
There are no financial covenants governing this agreement.
For
t
he years ended December 31, 201
7
and 201
6
,
no
amounts were outstanding on this facility.
6
. 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
$750,000
for casualty business,
$350,000
for property, and
$500,000
for workers compensation,
although certain treaties contain an annual aggre
gate deductible before reinsurance applies.
Premiums, written and earned, along with losses and settlement expenses incurred for the years ended December 31 are summarized as follows:
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
WRITTEN
|
|
|
|
|
|
|
Direct
|
|
$
|
53,670,397
|
|
$
|
51,031,003
|
Reinsurance assumed
|
|
|
269,184
|
|
|
307,597
|
Reinsurance ceded
|
|
|
(7,952,661)
|
|
|
(8,111,446)
|
Net
|
|
$
|
45,986,920
|
|
$
|
43,227,154
|
EARNED
|
|
|
|
|
|
|
Direct
|
|
$
|
51,862,625
|
|
$
|
50,190,888
|
Reinsurance assumed
|
|
|
299,086
|
|
|
318,476
|
Reinsurance ceded
|
|
|
(7,948,440)
|
|
|
(7,898,000)
|
Net
|
|
$
|
44,213,271
|
|
$
|
42,611,365
|
LOSSES AND SETTLEMENT EXPENSES INCURRED
|
|
|
|
|
|
|
Direct
|
|
$
|
37,543,652
|
|
$
|
33,388,283
|
Reinsurance assumed
|
|
|
150,051
|
|
|
149,719
|
Reinsurance ceded
|
|
|
(8,683,870)
|
|
|
(9,193,451)
|
Net
|
|
$
|
29,009,833
|
|
$
|
24,344,551
|
The reinsurance assumed business consists of assigned risk pools, which require the Company to participate in certain workers’ compensation and other liability pools, as a result of their licensure and premium writings in the various states in which it does business.
At December 31, 2017 and 2016, the Company had reinsurance recoverable on unpaid losses and settlement expenses totaling
$10,029,834
and
$12,114,998
, respectively. More than
98%
of the Company’s reinsurance recoverables are due from companies with financial strength ratings of “A” or better by A.M. Best.
The following table displays net reinsurance balances recoverable, after consideration of collateral, on paid losses and settlement expenses, known case and IBNR loss and settlement expense reserves, unearned premiums, and contingent commissions from the Company’s top 10 reinsurers as of December 31, 2017. These reinsurers all have financial strength ratings of “A” or better by A.M. Best. Also shown are the amounts of written premium ceded to these reinsurers during the calendar year 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Reinsurer
|
|
|
|
Ceded
|
|
|
|
A.M. Best
|
|
S & P
|
|
Exposure as of
|
|
Percent of
|
|
Premiums
|
|
Percent of
|
(In thousands)
|
Rating
|
|
Rating
|
|
December 31, 2017
|
|
Total
|
|
Written
|
|
Total
|
Everest Reinsurance Company
|
A+
|
|
A+
|
|
2,700
|
|
24.1%
|
|
856
|
|
10.8%
|
Aspen Insurance UK Ltd
|
A
|
|
A
|
|
2,111
|
|
18.9%
|
|
1,308
|
|
16.4%
|
Hannover Ruckversicherungs
|
A+
|
|
AA-
|
|
1,885
|
|
16.9%
|
|
1,114
|
|
14.0%
|
Partner Reinsurance Company
|
A
|
|
A+
|
|
1,268
|
|
11.3%
|
|
461
|
|
5.8%
|
Arch Reinsurance Company
|
A+
|
|
A+
|
|
1,241
|
|
11.1%
|
|
86
|
|
1.1%
|
Platinum Underwriters
|
A
|
|
A-
|
|
1,169
|
|
10.5%
|
|
765
|
|
9.6%
|
Swiss Reinsurance
|
A+
|
|
AA-
|
|
1,120
|
|
10.0%
|
|
385
|
|
4.8%
|
Toa Reinsurance Company
|
A
|
|
A+
|
|
1,017
|
|
9.1%
|
|
2
|
|
0.0%
|
Allied World Reinsurance
|
A
|
|
A
|
|
680
|
|
6.1%
|
|
883
|
|
11.1%
|
Endurance Reinsurance
|
A
|
|
A
|
|
521
|
|
4.7%
|
|
547
|
|
6.9%
|
All other reinsurers including anticipated subrogation
|
|
|
|
|
(2,529)
|
|
-22.6%
|
|
1,546
|
|
19.4%
|
|
|
|
|
|
11,183
|
|
100.0%
|
|
7,953
|
|
100.0%
|
Ceded unearned premiums and reinsurance balances recoverable on paid losses and settlement expenses are reported separately as an asset, rather than being netted with the related liability, since reinsurance does not relieve the Company of its liability to policyholders. Such balances are subject to the credit risk associated with the individual reinsurer. On a quarterly basis, the financial condition of the Company’s reinsurers is monitored. As part of the monitoring efforts, management reviews annual summarized financial data and publically available information. The credit risk associated with the reinsurance balances recoverable is analyze by monitoring the A.M. Best and S&P ratings of the reinsurers. In addition, the Company subjects its reinsurance recoverables to detailed recoverability tests, including one based on average default by A.M. Best rating.
Once regulatory action (such as receivership, finding of insolvency, order of conservation or order of liquidation) is taken against a reinsurer, the paid and unpaid recoverable for the reinsurer are specifically identified and written off through the use of the allowance for estimated unrecoverable amounts from reinsurers. When such a balance is written off, it is done in full. The Company then re-evaluates the remaining allowance and determines whether the balance is sufficient as detailed above, and if needed, an additional allowance is recognized and income charged. The Company had
no
allowance recorded related to uncollectible amounts on paid and unpaid recoverables at December 31, 2017 and 2016. The Company has no receivables with a due date that extends beyond 90 days from the date of billing that are not included in the allowance for uncollectible amounts.
7.
UNPAID LOSSES AND SETTLEMENT EXPENSES
Loss Development Tables
The following tables represent cumulative incurred losses and settlement expenses, net of reinsurance, by accident year and cumulative paid loss and settlement expenses, net of reinsurance, by accident year, for the years ended December 31, 2008 to 2017, as well as total IBNR and the cumulative number of reported claims for the year ended December 31, 2017. The information about incurred and paid claims development for the years ended December 31, 2008 to 2017, as well as total IBNR and the cumulative number of reported claims for the year ended December 31, 201
6
, is presented as unaudited required supplementary information. The property line of business has been disaggregated based on the shorter payout period in comparison to the workers compensation and liability lines of business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY LINES
|
Incurred loss and settlement expenses, net of reinsurance
(in thousands)
|
|
As of December 31, 2017
|
|
Year Ended December 31,
|
|
|
|
|
Accident Year
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
Total IBNR plus expected development on reported claims
|
|
Cumulative number of reported claims
|
2008
|
$
|
6,980
|
$
|
6,892
|
$
|
6,703
|
$
|
6,484
|
$
|
6,901
|
$
|
6,837
|
$
|
6,792
|
$
|
6,805
|
$
|
6,774
|
$
|
6,773
|
|
$
|
—
|
|
706
|
2009
|
|
|
|
4,560
|
|
4,099
|
|
3,889
|
|
4,406
|
|
4,562
|
|
4,409
|
|
4,352
|
|
4,370
|
|
4,339
|
|
|
—
|
|
479
|
2010
|
|
|
|
|
|
5,644
|
|
5,105
|
|
4,831
|
|
4,992
|
|
5,118
|
|
5,006
|
|
4,891
|
|
4,899
|
|
|
13
|
|
485
|
2011
|
|
|
|
|
|
|
|
7,427
|
|
6,708
|
|
6,621
|
|
6,752
|
|
6,733
|
|
6,645
|
|
6,631
|
|
|
1
|
|
655
|
2012
|
|
|
|
|
|
|
|
|
|
6,143
|
|
6,374
|
|
6,406
|
|
6,546
|
|
6,482
|
|
6,411
|
|
|
(12)
|
|
507
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
9,266
|
|
8,302
|
|
8,290
|
|
8,415
|
|
8,471
|
|
|
161
|
|
482
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,865
|
|
7,586
|
|
7,798
|
|
7,883
|
|
|
48
|
|
561
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,693
|
|
7,494
|
|
7,717
|
|
|
(9)
|
|
427
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,941
|
|
7,981
|
|
|
(249)
|
|
445
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,993
|
|
|
204
|
|
515
|
Total
|
|
75,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative paid loss and settlement expenses, net of reinsurance
(in thousands)
|
|
Year Ended December 31,
|
Accident Year
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
2008
|
$
|
4,308
|
$
|
6,668
|
$
|
6,538
|
$
|
6,584
|
$
|
6,715
|
$
|
6,774
|
$
|
6,775
|
$
|
6,773
|
$
|
6,773
|
$
|
6,773
|
2009
|
|
|
|
2,991
|
|
3,930
|
|
4,082
|
|
4,137
|
|
4,280
|
|
4,349
|
|
4,338
|
|
4,338
|
|
4,339
|
2010
|
|
|
|
|
|
3,166
|
|
4,584
|
|
4,719
|
|
4,740
|
|
4,791
|
|
4,818
|
|
4,873
|
|
4,874
|
2011
|
|
|
|
|
|
|
|
5,327
|
|
6,351
|
|
6,459
|
|
6,520
|
|
6,556
|
|
6,589
|
|
6,623
|
2012
|
|
|
|
|
|
|
|
|
|
4,949
|
|
6,401
|
|
6,369
|
|
6,362
|
|
6,326
|
|
6,472
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
6,856
|
|
8,079
|
|
8,200
|
|
8,238
|
|
8,265
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,243
|
|
7,631
|
|
7,746
|
|
7,796
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,057
|
|
7,040
|
|
7,474
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,157
|
|
7,624
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,055
|
Total
|
|
70,295
|
Unpaid losses and settlement expense - years 2008 through 2017
|
|
4,803
|
Unpaid losses and settlement expense - prior to 2008
|
|
(1)
|
Unpaid loss and settlement expense, net of reinsurance
|
$
|
4,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WORKERS COMPENSATION AND LIABILITY LINES
|
Incurred loss and settlement expenses, net of reinsurance
(in thousands)
|
|
As of December 31, 2017
|
|
Year Ended December 31,
|
|
|
|
|
Accident Year
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
Total IBNR plus expected development on reported claims
|
|
Cumulative number of reported claims
|
2008
|
$
|
15,484
|
$
|
14,493
|
$
|
14,616
|
$
|
14,538
|
$
|
14,169
|
$
|
14,224
|
$
|
14,161
|
$
|
14,183
|
$
|
14,324
|
$
|
14,361
|
|
$
|
24
|
|
1,532
|
2009
|
|
|
|
11,945
|
|
10,845
|
|
11,549
|
|
11,807
|
|
12,119
|
|
12,098
|
|
11,824
|
|
11,895
|
|
11,951
|
|
|
17
|
|
1,259
|
2010
|
|
|
|
|
|
10,475
|
|
11,039
|
|
10,683
|
|
11,371
|
|
11,701
|
|
11,474
|
|
11,422
|
|
11,431
|
|
|
60
|
|
1,093
|
2011
|
|
|
|
|
|
|
|
12,375
|
|
12,126
|
|
11,894
|
|
12,039
|
|
12,098
|
|
12,027
|
|
11,819
|
|
|
73
|
|
1,356
|
2012
|
|
|
|
|
|
|
|
|
|
13,122
|
|
11,338
|
|
11,407
|
|
11,638
|
|
12,692
|
|
12,845
|
|
|
229
|
|
1,325
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
12,584
|
|
13,559
|
|
13,169
|
|
12,960
|
|
13,696
|
|
|
466
|
|
1,314
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,385
|
|
14,744
|
|
15,341
|
|
16,718
|
|
|
914
|
|
1,411
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,596
|
|
13,876
|
|
13,440
|
|
|
3,144
|
|
1,236
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,677
|
|
14,843
|
|
|
5,224
|
|
1,147
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,808
|
|
|
10,739
|
|
1,016
|
Total
|
|
136,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative paid loss and settlement expenses, net of reinsurance
(in thousands)
|
|
Year Ended December 31,
|
Accident Year
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
2008
|
$
|
1,482
|
$
|
3,832
|
$
|
6,814
|
$
|
9,739
|
$
|
11,713
|
$
|
12,622
|
$
|
13,491
|
$
|
14,026
|
$
|
14,232
|
$
|
14,290
|
2009
|
|
|
|
1,202
|
|
3,014
|
|
6,175
|
|
8,289
|
|
10,281
|
|
11,080
|
|
11,432
|
|
11,639
|
|
11,862
|
2010
|
|
|
|
|
|
1,248
|
|
3,395
|
|
5,865
|
|
8,462
|
|
10,022
|
|
10,733
|
|
11,067
|
|
11,194
|
2011
|
|
|
|
|
|
|
|
1,669
|
|
3,761
|
|
5,841
|
|
8,072
|
|
10,122
|
|
10,971
|
|
11,484
|
2012
|
|
|
|
|
|
|
|
|
|
1,180
|
|
3,021
|
|
5,589
|
|
8,327
|
|
10,913
|
|
11,753
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
1,579
|
|
4,156
|
|
7,634
|
|
10,423
|
|
12,181
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,539
|
|
4,087
|
|
9,515
|
|
13,602
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,405
|
|
4,319
|
|
7,400
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,490
|
|
5,485
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,523
|
Total
|
|
100,774
|
Unpaid losses and settlement expense - years 2008 through 2017
|
|
36,138
|
Unpaid losses and settlement expense - prior to 2008
|
|
104
|
Unpaid loss and settlement expense, net of reinsurance
|
$
|
36,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LINES
|
Incurred loss and settlement expenses, net of reinsurance
(in thousands)
|
|
As of December 31, 2017
|
|
Year Ended December 31,
|
|
|
|
|
Accident Year
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
Total IBNR plus expected development on reported claims
|
|
Cumulative number of reported claims
|
2008
|
$
|
22,464
|
$
|
21,385
|
$
|
21,319
|
$
|
21,022
|
$
|
21,070
|
$
|
21,061
|
$
|
20,953
|
$
|
20,988
|
$
|
21,098
|
$
|
21,134
|
|
$
|
24
|
|
2,238
|
2009
|
|
|
|
16,505
|
|
14,944
|
|
15,438
|
|
16,213
|
|
16,681
|
|
16,507
|
|
16,176
|
|
16,265
|
|
16,290
|
|
|
17
|
|
1,738
|
2010
|
|
|
|
|
|
16,119
|
|
16,144
|
|
15,514
|
|
16,363
|
|
16,819
|
|
16,480
|
|
16,313
|
|
16,330
|
|
|
73
|
|
1,578
|
2011
|
|
|
|
|
|
|
|
19,802
|
|
18,834
|
|
18,515
|
|
18,791
|
|
18,831
|
|
18,672
|
|
18,450
|
|
|
74
|
|
2,011
|
2012
|
|
|
|
|
|
|
|
|
|
19,265
|
|
17,712
|
|
17,813
|
|
18,184
|
|
19,174
|
|
19,256
|
|
|
217
|
|
1,832
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
21,850
|
|
21,861
|
|
21,459
|
|
21,375
|
|
22,167
|
|
|
627
|
|
1,796
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,250
|
|
22,330
|
|
23,139
|
|
24,601
|
|
|
962
|
|
1,972
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,289
|
|
21,370
|
|
21,157
|
|
|
3,135
|
|
1,663
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,618
|
|
22,824
|
|
|
4,975
|
|
1,592
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,801
|
|
|
10,943
|
|
1,531
|
Total
|
|
212,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative paid loss and settlement expenses, net of reinsurance
(in thousands)
|
|
Year Ended December 31,
|
Accident Year
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
2008
|
$
|
5,790
|
$
|
10,500
|
$
|
13,352
|
$
|
16,323
|
$
|
18,428
|
$
|
19,396
|
$
|
20,266
|
$
|
20,799
|
$
|
21,005
|
$
|
21,063
|
2009
|
|
|
|
4,193
|
|
6,944
|
|
10,257
|
|
12,426
|
|
14,561
|
|
15,429
|
|
15,770
|
|
15,977
|
|
16,201
|
2010
|
|
|
|
|
|
4,414
|
|
7,979
|
|
10,584
|
|
13,202
|
|
14,813
|
|
15,551
|
|
15,940
|
|
16,068
|
2011
|
|
|
|
|
|
|
|
6,996
|
|
10,112
|
|
12,300
|
|
14,592
|
|
16,678
|
|
17,560
|
|
18,107
|
2012
|
|
|
|
|
|
|
|
|
|
6,129
|
|
9,422
|
|
11,958
|
|
14,689
|
|
17,239
|
|
18,225
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
8,435
|
|
12,235
|
|
15,834
|
|
18,661
|
|
20,446
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,782
|
|
11,718
|
|
17,261
|
|
21,398
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,462
|
|
11,359
|
|
14,874
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,647
|
|
13,109
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,578
|
Total
|
|
171,069
|
Unpaid losses and settlement expense - years 2008 through 2017
|
|
40,941
|
Unpaid losses and settlement expense - prior to 2008
|
|
103
|
Unpaid loss and settlement expense, net of reinsurance
|
$
|
41,044
|
Loss Duration Disclosure
The following table represents the average annual percentage payout of incurred losses by age, net of reinsurance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average annual percentage payout of incurred losses by age, net of reinsurance
|
|
|
|
|
|
|
Year 1
|
|
Year 2
|
|
Year 3
|
|
Year 4
|
|
Year 5
|
|
Year 6
|
|
Year 7
|
|
Year 8
|
|
Year 9+
|
Property Lines
|
|
|
|
|
|
71.3%
|
|
13.6%
|
|
3.4%
|
|
2.8%
|
|
7.8%
|
|
-0.3%
|
|
0.5%
|
|
1.0%
|
|
-0.1%
|
Liability Lines
|
|
|
|
|
|
40.5%
|
|
27.2%
|
|
15.7%
|
|
6.9%
|
|
4.1%
|
|
3.0%
|
|
1.1%
|
|
0.7%
|
|
0.2%
|
Total Lines
|
|
|
|
|
|
42.8%
|
|
26.2%
|
|
14.6%
|
|
6.7%
|
|
4.4%
|
|
2.8%
|
|
1.0%
|
|
0.7%
|
|
0.7%
|
The following table is a reconciliation of the Company’s unpaid losses and settlement e
xpenses for the years 2017 and 2016
.
|
|
|
|
|
|
|
(In thousands)
|
|
2017
|
|
2016
|
Unpaid losses and settlement expense - beginning of the period:
|
|
|
|
|
|
|
Gross
|
|
$
|
52,817
|
|
$
|
61,056
|
Less: Ceded
|
|
|
12,115
|
|
|
19,158
|
Net
|
|
|
40,702
|
|
|
41,898
|
Increase (decrease) in incurred losses and settlement expense:
|
|
|
|
|
|
|
Current year
|
|
|
29,801
|
|
|
25,620
|
Prior years
|
|
|
(791)
|
|
|
(1,275)
|
Total incurred
|
|
|
29,010
|
|
|
24,345
|
Deduct: Loss and settlement expense payments for claims incurred:
|
|
|
|
|
|
|
Current year
|
|
|
11,578
|
|
|
7,649
|
Prior years
|
|
|
17,090
|
|
|
17,892
|
Total paid
|
|
|
28,668
|
|
|
25,541
|
Net unpaid losses and settlement expense - end of the period
|
|
|
41,044
|
|
|
40,702
|
Plus: Reinsurance recoverable on unpaid losses
|
|
|
10,030
|
|
|
12,115
|
Gross unpaid losses and settlement expense - end of the period
|
|
$
|
51,074
|
|
$
|
52,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2017
|
|
2016
|
Supplemental ceded unpaid losses and settlement expense at end of year disclosure:
|
|
|
|
|
|
|
Reinsurance balances recoverable on unpaid losses and settlement expenses,
|
|
|
|
|
|
|
net of allowances for uncollectible amounts of
$0
in 2017 and
$0
in 2016
|
|
$
|
10,030
|
|
$
|
12,115
|
Less : Reinsurance balances payable
|
|
|
—
|
|
|
—
|
Reinsurance recoverable on unpaid losses
|
|
$
|
10,030
|
|
$
|
12,115
|
Differences from the initial reserve estimates emerged as changes in the ultimate loss estimates as those estimates were updated through the reserve analysis process. The recognition of the changes in initial reserve estimates occurred over time as claims were reported, initial case reserves were established, initial reserves were reviewed in light of additional information and ultimate payments were made on the collective set of claims incurred as of that evaluation date. The new information on the ultimate settlement value of claims is updated until all claims in a defined set are settled. As a small specialty insurer with a niche product portfolio, the Company’s experience will ordinarily exhibit fluctuations from period to period. While management attempts to identify and react to systematic changes in the loss environment, they must also consider the volume of experience directly available to the Company and interpret any particular period’s indications with a realistic technical understanding of the reliability of those observations.
A discussion of significant components of reserve development for the two most recent calendar years follows:
2017
For calendar year 2017, the Company experienced favorable development relative to prior years’ reserve estimates in both its property and casualty lines of business primarily from the 2016 accident year. Workers’ Compensation and Business Property were the largest contributors to the favorable development, partially offset by adverse development in Business Liability.
2016
The Company experienced favorable development relative to prior years’ reserve estimates in its casualty line of business primarily from the 2015 accident year. Liquor Liability and Workers’ Compensation were the largest contributors to the favorable development, partially offset by adverse development in Business Liability.
8
. INCOME TAXES
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are summarized as follows
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
|
|
|
Tax discounting of claim reserves
|
|
$
|
454,772
|
|
$
|
730,161
|
Unearned premium reserve
|
|
|
1,139,002
|
|
|
1,710,498
|
AMT credit carryforward
|
|
|
103,439
|
|
|
—
|
Deferred compensation
|
|
|
131,175
|
|
|
356,650
|
Provision for uncollectible accounts
|
|
|
10,500
|
|
|
17,000
|
Property and equipment
|
|
|
—
|
|
|
837
|
Other
|
|
|
71,688
|
|
|
88,393
|
Deferred tax assets before allowance
|
|
|
1,910,576
|
|
|
2,903,539
|
Less valuation allowance
|
|
|
—
|
|
|
—
|
Total deferred tax assets
|
|
$
|
1,910,576
|
|
$
|
2,903,539
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Net unrealized appreciation of securities
|
|
$
|
592,005
|
|
$
|
594,575
|
Deferred policy acquisition costs
|
|
|
964,407
|
|
|
1,415,395
|
Property and equipment
|
|
|
1,267
|
|
|
—
|
Other
|
|
|
3,639
|
|
|
5,315
|
Total deferred tax liabilities
|
|
|
1,561,318
|
|
|
2,015,285
|
Net deferred tax asset
|
|
$
|
349,258
|
|
$
|
888,254
|
Income tax expense attributable to income from operations for the years ended December 31, 201
7
and 201
6
, differed from the amounts computed by applying
the U.S. federal tax rate of
34%
to pretax income from continuing operations as demonstrated in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2017
|
|
2016
|
Provision for income taxes at the statutory federal tax rates
|
|
$
|
367,246
|
|
$
|
1,355,704
|
Increase (reduction) in taxes resulting from:
|
|
|
|
|
|
|
Dividends received deduction
|
|
|
(48,020)
|
|
|
(36,414)
|
Tax-exempt interest income
|
|
|
(219,550)
|
|
|
(163,011)
|
15%
proration of tax exempt interest and dividends received decution
|
|
|
38,203
|
|
|
29,914
|
Officer life insurance, net
|
|
|
(546)
|
|
|
(1,292)
|
Nondeductible expenses
|
|
|
70,329
|
|
|
47,766
|
Effect of change in tax rate
|
|
|
152,173
|
|
|
—
|
Prior year true-ups and other
|
|
|
12,450
|
|
|
(55,698)
|
Total
|
|
$
|
372,285
|
|
$
|
1,176,969
|
The Company’s effective tax rate was
34.5%
and
29.5%
for 201
7
and 201
6
, respectively. Effective rates are dependent upon components of pretax earnings and the related tax effects.
The Company ha
d historically
recorded its deferred tax assets and liabilities using the statutory federal tax rate of
34%
.
The Tax Act was signed into law on December 22, 2017 and lowered the federal corporate tax rate to
21%
effective January 1, 2018. As a result, the Company revalued deferred tax items as of year-end 2017 to reflect the lower rate. The revaluation of of deferred tax items increased income tax expense
by
$152,173
and increased the effective tax rate by
14.1%
.
The Tax Cuts and Jobs Act of 2017 provides for a change in the methodology employed to calculate reserves for tax purposes. Beginning January 1, 2018, a higher interest rate assumption and longer payout patterns will be used to discount these reserves. In addition, companies will no longer be able to elect to use their own experience to discount reserves, but will instead be required to use the industry-based tables published by the IRS annually; however, the 2018 tables have yet to b
e released. Consequently, the C
ompany cannot reasonably estimate the impact this would have on
gross
deferred taxes at December 31, 2017.
However, this would not impact the net deferred tax asset.
The Company
also
continues to analyze certain aspects of the Tax Act and further refinements are possible, which could potentially affect the measurement of these balance or potentially give rise to new deferred tax amounts, although management does not expect these adjustments to materially impact its financial statements.
Management believes it is more likely than not that all deferred tax assets will be recovered given the carry back availability
of insurance company losses
as well as the results of future operations, which will generate sufficient taxable income to realize the deferred tax asset. In addition, it is believed that when these deferred items reverse in future years, taxable income will be taxed at
an effective rate of
21%
.
As of December 31, 201
7
, the Company does not have any
capital
or
operating
loss carryforwards. Periods still subject to Internal Revenue Service (IRS) audit include 201
4
through current year. There are currently
no
open tax exams.
9
.
EMPLOYEE BENEFITS
401(K) AND BONUS AND INCENTIVE PLANS
The Company maintains a 401(k) and bonus and incentive plans covering executives, managers, and associates. Excluding the 401(k), at the CEO’s discretion, funding of these plans is primarily dependent upon reaching predetermined levels of combined ratio, growth in statutory surplus, growth in direct written premium, and overall renewal retention ratios. Bonuses are earned as the Company generates earnings in excess of this required return. While some management incentive plans may be affected somewhat by other performance factors, the larger influence of corporate performance ensures that the interests of the executives, managers, and associates corresponds with those of the stakeholders.
The 401(k) plan offers a matching percentage up to
4%
of eligible compensation, as well as a profit sharing percentage of each employee’s compensation. Participants are
100%
vested in the matching percentage and vest at a rate of
25%
per year for the profit sharing distribution.
The total contribution to the 401(k) profit sharing plan was
$311,507
and
$217,598
for 2017 and 2016, respectively.
Additionally, bonuses may be awarded to executives, managers, and associates through company incentive plans, provided certain financial or operational goals are met.
DEFERRED COMPENSATION
In November 2012, the Company entered into a deferred compensation agreement with an executive of the Company. The agreement requires the Company to make payments to the executive beginning at retirement (age 62). In the event of separation of service without cause prior to age 62, benefits under this agreement vest
25%
in November 2017,
50%
in November 2022,
75%
in November 2027, and
100%
on January 1, 2032. In the event of death prior to retirement, benefits become fully vested and are payable to the executive’s beneficiari
es. Using a discount rate of
3.6
%
, the fully vested obligation under the agreement would total approximately
$1,689,467
on January 1, 2032. As of December 31, 201
7
and 201
5
, the accrued liability related to this agreement totaled
$248,481
and
$153,409
, respectively. The Company’s
recognized
$95,072
of
expense
and
$20,267
of
benefit
in 201
7
and 201
6
, respectively.
ESOP
In connection with our conversion and public offering, we establish an ESOP. The ESOP borrowed from the Company to purchase
350,000
shares in the offering. The issuance of the shares to the ESOP resulted in a contra account established in the shareholder’s equity section of the balance sheet for the unallocated shares at an amount equal to their
$10.00
per share purchase price.
The Company may make discretionary contributions to the ESOP and pay dividends on unallocated shares to the ESOP, the ESOP uses funds it receives to repay the loan. When loan payments are made, ESOP shares are allocated to participants based on relative compensation and expense is recorded.
The Company contributed
$269,344
to the ESOP during the
fourth quarter of 2017
.
A compensation expense charge is booked monthly during each year for the shares committed to be allocated to particpants that year, determined with reference to the fair market value of our stock at the time the commitment to allocate the shares is accrued and recognized. For the
year
ended
December 31
, 2017, we recognized compensation expense of
$367,730
related to
21,878
shares of our common stock that were committed to be released to partipants’ accounts
for the year ended
December 31, 2017. Of the
21,878
shares committed to be released,
2,320
shares were commited on
December 31
, 2017 and had no impact on the weighted average common shares outstanding for the
year
ended
December 31
, 2017.
The fair value of the unearned ESOP shares as of December 31, 2017 was
$5,338,545
.
10
.
STATUTORY INFORMATION AND DIVIDEND RESTRICTIONS
The statutory financial statements of
ICC
are presented on the basis of accounting practices prescribed or permitted by the Illinois Department of Insurance, which has adopted the National Associati
on of Insurance Commissioners (
NAIC) statutory accounting practices as the basis of its statutory accounting practices.
ICC
did not use any permitted statutory accounting practices that differ from NAIC prescribed statutory accounting practices. In converting from statutory to GAAP, typical adjustments include deferral of policy acquisition costs, the inclusion of statutory non-admitted assets and the inclusion of net unrealized holding gains or losses in equity relating to
AFS
investment securities, and the reclassification of surplus notes from equity to debt.
The NAIC has Risk-based capital (RBC) requirements that require insurance companies to calculate and report information under a risk-based formula, which measures statutory capital and surplus needs based upon a regulatory definition of risk relative to the company’s balance sheet and mix of products. As of December 31, 201
7
and 201
6
,
ICC
had RBC amounts in excess of the authorized control level RBC, as defined by the NAIC. ICC had an authorized control level RBC of
$6,275,664
and
$6,314,396
as of December 31, 201
7
and 201
6
, respectively, compared to actual statutory capital and surplus of
$50,772,460
and
$29,957,250
, respectively, for these same periods.
Yea
r-end statutory surplus for 201
7
and 201
6
presente
d in the table below includes
$
0
and
$51,207
of Estrella Innovative Solutions, LLC common stock (cost basis o
f
$270,078
and
$270,078
) held by
ICC
. This investment is eliminated in the GAAP consolidated financial statements.
The followi
ng table includes selected information for our insurance subsidiary
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and periods ended December 31,
|
|
|
2017
|
|
2016
|
Net income, statutory basis
|
|
$
|
1,316,086
|
|
$
|
3,445,706
|
Consolidated surplus, statutory basis
|
|
$
|
50,772,460
|
|
$
|
29,957,250
|
No Illinois domiciled company may pay any extraordinary dividend or make any other extraordinary distribution to its security holders until: (a) 30 days after the Director has received notice of the declaration thereof and has not within such period disapproved the payment, or (b) the Director approves such payment within the 30-day period. For purposes of this subsection, an extraordinary dividend or distribution is any dividend or distribution of cash or other property whose fair market value, together with that of other dividends or distributions, made within the period of 12 consecutive months ending on the date on which the proposed dividend is scheduled for payment or distribution exceeds the greater of: (a) 10% of the company’s surplus as regards policyholders as of the 31st day of December next preceding, or (b) the net income of the company for the 12-month period ending the 31st day of December next preceding, but does not include pro rata distributions of any class of the company’s own securities.
The Company
did not
pay any dividends to security holders in 201
7
or 201
6
. It did however, make cash dividend payments in the
amount of
$2,646
and
$1,838
in
201
7
and 201
6
, respectively, to Wisconsin policyholders in accordance with policy contractual obligations.
11
. RELATED PARTY
Mr. John R. Klockau, a director of the Company, h
eld
two
surplus note from the Company totaling
$1,150,000
which
were converted into
115,000
shares of the Company’s common stock on March 17, 2017. John R. Klockau received a payment for interest on the surplus notes of
$12,975
during the three months ended March 31, 2017
and
$64,000
for the year ended 2016
.
Additionally, Mr. Klockau is a claims consultant and was paid
$16,230
and
$12,944
in 201
7
and 201
6
, respectively, related to his services to the Company.
Mr. Kevin Clinton is a director of the Company and owns more than 10% of the Company’s outstanding shares of common stock.
Mr. Clinton was paid
$1,330
and
$
0
in 2017 and 2016, respectively
for travel reimbursement costs
.
Mr. Scott T. Burgess is a director of the Company and a Senior Managing Director of Griffin Financial Group. Mr. Burgess was paid
$2,690
and
$2,190
in 201
7
and 201
6
, respectively. Griffin Financial Group was paid
$893,240
and
$9,910
in 201
7 and 2016
, respectively.
Griffin and Stevens & Lee are affiliated. Stevens & Lee is a full-service law firm that was paid
$46,286
and
$630,125
as of December 31, 201
7
and 201
6
, respectively.
12
.
COMMITM
ENTS AND CONTINGENT LIABILITIES
The Company is party to numerous claims, losses, and litigation matters that arise in the normal course of business. Many of such claims, losses, or litigation matters involve claims under policies that the Company underwrites as an insurer. Management believes that the resolution of these claims and losses will not have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.
The Company has operating lease obligations related to managing the business
.
Minimum future rental payments under non-cancellable agreements are as follows:
|
|
|
|
|
|
|
|
Year
|
|
Payments
|
2018
|
|
|
100,509
|
2019
|
|
|
49,745
|
Total
|
|
$
|
150,254
|
Rent
benefit
totaled
$16,964
and
rent expense totaled
$3,646
in 2017 and 2016
, respectively.
13
.
SUBSEQUENT EVENTS
Subsequent
events have been evaluated through the date the financial statements were issued.
In 2017, the Board approved a new Executive Discretionary Bonus Program with a long term incentive component. On February 20, 2018, the Board
of Directors
approved bonuses and equity awards based on 2017 company results and
achievement of
ind
ividual performance goals. The number of Restricted Stock Units (RSUs)
that
were awarded
to select executives
on
February 20, 2018 was
11,700
.
On March 2, 2018 and March 7, 2018, the Company paid
$343,365
and
$346,000
, respectively to BofI. These disbursements were made to pay off the balances of the sale leaseback arrangements entered into with BofI during 2015 and 2016.