ICC(ICCH) - 2022 Q4 - Annual Report

Part I Business ICC Holdings, Inc. is a specialty insurer for the food and beverage industry across 13 states, leveraging technology and expertise for profitability - The company specializes in commercial multi-peril, liquor liability, workers' compensation, and umbrella liability for the food and beverage industry[11] - Operations span 13 states including Illinois, utilizing a network of 191 independent agents[11][41] - Illinois remains a key market, contributing approximately 22.6% of direct premiums written in 2022[11] - ICC's A.M. Best financial strength rating was reaffirmed at "A-" (Excellent) as of July 19, 2022[12] Strategies and Strengths The company's strategy focuses on leveraging technology, deep industry expertise, and robust risk management for competitive advantage - Core strategies involve customized products, geographic expansion, and leveraging data and technology for efficiency and pricing[21] - An internally developed policy management system enables predictive analytics using data such as on-site entertainment and beverage pricing for underwriting[20] - The executive team possesses extensive experience, averaging over 23 years in the property and casualty insurance industry[39] Products and Distribution ICC offers specialized insurance products for the food and beverage industry, distributed through independent agents with over 16,000 policies in force Policies in Force as of December 31, 2022 | Policy Type | Number of Policies | | :--- | :--- | | Business Owners Policy (BOP) | 5,876 | | Liquor Liability | 6,763 | | Workers' Compensation | 1,840 | | Commercial Umbrella | 1,591 | - The top 10 producers generated approximately 40.8% of direct premiums written in 2022, with two producers each exceeding 5%[43] - Agent compensation includes a fixed commission, typically 15% for most lines and 7.5% for workers' compensation, plus a contingent profit-sharing plan[45] Reinsurance The company uses reinsurance to manage risk and increase capacity, ceding $9.5 million in 2022, with a $1.0 million retention for most risks - Ceded written premiums decreased to $9.5 million in 2022 from $11.0 million in 2021[65] - The 2023 reinsurance program retains the first $1.0 million of losses for workers' compensation, property, and most casualty occurrences[69][70][71] Top 5 Reinsurers by Recoverable Losses (Dec 31, 2022) | Reinsurance Company | Recoverable (in thousands) | Percentage of Total | A.M. Best Rating | | :--- | :--- | :--- | :--- | | General Reinsurance Corporation | $6,913 | 50.7% | A++ | | Aspen Insurance UK Ltd | $1,250 | 9.2% | A | | Partner Reinsurance Company | $1,081 | 7.9% | A+ | | Renaissance Reinsurance US Inc. | $1,028 | 7.6% | A+ | | Everest Reinsurance Company | $898 | 6.6% | A+ | Losses and Settlement Expense Reserves The company's gross unpaid loss reserves increased to $67.6 million in 2022, with $5.1 million in unfavorable prior-year development Reconciliation of Unpaid Losses and Settlement Expense (in thousands) | | 2022 | 2021 | | :--- | :--- | :--- | | Net Unpaid Losses (Beginning of Period) | $47,314 | $48,556 | | Incurred Losses - Current Year | $39,434 | $33,968 | | Incurred Losses - Prior Years (Development) | $5,099 | $732 | | Total Paid | $37,843 | $35,943 | | Net Unpaid Losses (End of Period) | $54,004 | $47,314 | | Gross Unpaid Losses (End of Period) | $67,614 | $61,835 | - The company consistently experienced net cumulative deficiencies in loss reserves, with a $5.1 million deficiency for the 2021 accident year as of year-end 2022[87] Investments The investment strategy focuses on maximizing after-tax income and capital preservation, with AFS fixed maturity securities decreasing to $93.4 million in 2022 Investment Portfolio Fair Value (in thousands) | Security Type | 2022 Fair Value | 2021 Fair Value | | :--- | :--- | :--- | | U.S. Treasury | $1,253 | $1,346 | | MBS/ABS/CMBS | $38,803 | $41,024 | | Corporate | $35,602 | $41,207 | | Municipal | $17,542 | $22,032 | | Redeemable preferred stock | $189 | $233 | | Total AFS Securities | $93,389 | $105,842 | - The fixed maturity portfolio maintains high credit quality, with 96.5% of securities rated BBB or higher by S&P as of December 31, 2022[94] Investment Performance | (In thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Average cash and invested assets | $137,949 | $140,677 | | Net investment income | $4,034 | $3,414 | | Return on average cash and invested assets | 2.9% | 2.4% | Regulation The company is extensively regulated by state and federal authorities, consistently exceeding NAIC capital requirements, with dividend payments restricted - Primary regulation is by the Illinois Department of Insurance, with an examination covering 2017-2021 commencing in October 2022[112][116] - Capital levels consistently exceed NAIC risk-based capital (RBC) requirements, avoiding regulatory action levels[118] - Dividends from the insurance subsidiary to the parent are restricted, with a $6.0 million limit for 2023 without prior regulatory approval[133] Risk Factors The company faces risks from rating downgrades, investment volatility, concentrated claims, geographic concentration, and challenges in loss reserve estimation - A downgrade in the "A-" A.M. Best rating could severely limit new business and policy renewals[138][139] - Loss reserve estimation is inherently difficult; actual losses exceeding reserves would adversely affect operating results, consistent with historical loss development[152] - Geographic concentration, with 22.6% of direct premiums in Illinois, exposes the company to regional catastrophic events[146] - A small group of shareholders, owning 31.9% of common stock, have voting agreements that could entrench management and impact stock price[185] - The COVID-19 pandemic has adversely affected the economy and client base, potentially continuing to impact business and financial results[207] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - No unresolved staff comments from the SEC[210] Properties The company owns its 24,000 sq ft headquarters and a portfolio of investment properties including a storage facility and 58 rental units - The company owns its headquarters at 225 20th Street, Rock Island, Illinois[211] - Investment properties include one storage facility and 58 rental units across Illinois, Iowa, and Florida[211] Legal Proceedings The company is involved in routine litigation but considers no current proceedings to be material - The company is party to litigation in the normal course of business, none of which are considered material[212] Forward-Looking Information This section provides a safe harbor statement for forward-looking information, cautioning that actual results may differ due to inherent risks - The report contains forward-looking statements, identified by specific terminology, protected under the Reform Act's safe harbor provisions[213] - Readers are cautioned against undue reliance on these statements, as they involve risks and uncertainties and are not guarantees of future performance[214] Mine Safety Disclosures This item is not applicable to the company - Not applicable[218] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under "ICCH"; it has never paid dividends and established a new $5.0 million share repurchase program in 2022 - The company's common stock trades on the NASDAQ Capital Market under the symbol "ICCH"[220] - The company has never paid cash dividends and plans to retain earnings for future growth[221] Share Repurchase Activity (Q4 2022) | Period | Total Shares Purchased | Average Price Paid ($) | Maximum Value Remaining for Purchase ($) | | :--- | :--- | :--- | :--- | | Oct 2022 | 2,544 | $15.86 | $52,756 | | Nov 2022 | — | — | $52,756 | | Dec 2022 | — | — | $5,052,756 | - In December 2022, a new $5.0 million share repurchase program was established with no expiration date[225] Selected Financial Data This item is not applicable as disclosures focus on comparing fiscal periods ended December 31, 2022, and 2021 - Not applicable; prior period financial information is available in previously filed Form 10-K and 10-Q reports[227] Management's Discussion and Analysis of Financial Condition and Results of Operations The company reported a $0.6 million net loss in 2022 due to unfavorable loss development and unrealized investment losses, despite 16.4% growth in direct premiums Overview The company reported a $0.6 million net loss in 2022, a decline from $4.1 million net earnings in 2021, despite growth in direct written premiums Key Financial Highlights (in millions) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Direct Premiums Written | $82.7 | $71.1 | | Net Premiums Earned | $69.1 | $53.9 | | Net (Loss) Earnings | $(0.6) | $4.1 | | Total Assets (End of Period) | $192.2 | $200.0 | | Total Equity (End of Period) | $60.4 | $74.7 | Results of Operations Direct premiums written increased by 16.4% in 2022, but a $5.1 million unfavorable prior-year loss development led to a pre-tax loss - Direct premiums written grew by $11.6 million (16.4%) in 2022, primarily driven by increased rates[292] - Losses and settlement expenses for prior years showed $5.1 million in unfavorable development in 2022, significantly higher than $0.7 million in 2021, driving the net loss[300][301] - The expense ratio improved by 250 basis points, decreasing from 38.6% in 2021 to 36.1% in 2022[305] Financial Position Total assets decreased to $192.2 million in 2022, driven by $11.4 million in unrealized losses on fixed maturity securities due to rising interest rates - The fixed maturity securities portfolio incurred significant unrealized losses of $11.4 million in 2022, up from $0.5 million in 2021, primarily due to rising interest rates[328][329] - Total outstanding debt decreased from $18.5 million in 2021 to $15.0 million in 2022, primarily FHLBC loans[343][344] - The revolving line of credit increased to $4.0 million in July 2022 and remained undrawn as of December 31, 2022[350] Liquidity and Capital Resources Net cash from operating activities increased to $10.8 million in 2022, while liquidity is primarily sourced from restricted dividends from the insurance subsidiary Summary of Cash Flows (in thousands) | | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $10,755 | $5,312 | | Net cash used in investing activities | $(6,256) | $(12,155) | | Net cash used in/provided by financing activities | $(5,965) | $4,851 | | Net (decrease) in cash | $(1,466) | $(1,992) | - The insurance subsidiary can pay approximately $6.0 million in dividends to the parent in 2023 without prior regulatory approval[361] Quantitative and Qualitative Disclosures about Market Risk Primary market risk is interest rate risk, with a 100 basis point increase potentially decreasing fixed maturity fair value by $4.7 million; credit and inflation risks are also managed Interest Rate Sensitivity of Fixed Maturity Investments (as of Dec 31, 2022) | Hypothetical Change in Interest Rates | Estimated Change in Fair Value (in thousands) | Resulting Fair Value (in thousands) | | :--- | :--- | :--- | | +200 basis points | $(9,049) | $84,340 | | +100 basis points | $(4,735) | $88,654 | | No change | — | $93,389 | | -100 basis points | $5,155 | $98,544 | - Credit risk is managed by investing primarily in investment-grade fixed maturity securities, with at least 70% of the portfolio rated 'A' or better[371] - Inflation increases claim costs, which the company attempts to offset through premium rate adjustments[373] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2022 and 2021, reflecting a net loss of $581,662 in 2022 compared to $4.1 million net earnings in 2021 - Independent auditor Johnson Lambert LLP issued an unqualified opinion, affirming fair presentation of financial statements in conformity with U.S. GAAP[377] Consolidated Balance Sheet Summary (in thousands) | | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $192,162 | $200,002 | | Total Liabilities | $131,721 | $125,298 | | Total Equity | $60,441 | $74,704 | Consolidated Earnings Summary (in thousands) | | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Total Revenues | $69,680 | $61,441 | | Total Expenses | $70,402 | $56,483 | | Net (Loss) Earnings | $(582) | $4,143 | | Comprehensive (Loss) Earnings | $(12,343) | $1,543 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting or financial disclosure - No changes in or disagreements with accountants on accounting or financial disclosure matters[546] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - Management concluded that disclosure controls and procedures were effective as of December 31, 2022[549] - Management concluded that internal control over financial reporting was effective as of December 31, 2022, based on the COSO 2013 framework[550] Other Information The company reports no other information for this item - No other information is reported for this item[554] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[555] Part III Items 10-14 Information for Items 10-14 is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Shareholders - Information for Items 10-14 is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Shareholders[557] Part IV Exhibits, Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including corporate governance documents, material contracts, and certifications - This section provides an index of all exhibits filed with the Form 10-K, including corporate governance documents, benefit plans, and certifications[563]