UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM
_______________________________
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For transition period from __________ to __________.
Commission File Number:
ICC Holdings, Inc.
(Exact name of registrant as specified in its charter)
_______________________________
| (State or other jurisdiction of | (I.R.S. Employer | |
| (Address of principal executive offices) | (Zip Code) |
(
(Registrant’s telephone number, including area code)
_______________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading | Name of each exchange on which registered |
| | | The |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| | Smaller reporting company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The number of shares of the registrant’s common stock outstanding as of May 10, 2023 was $
| Page |
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| Item 1 |
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| Condensed Consolidated Balance Sheets as of March 31, 2023 (unaudited) and December 31, 2022 |
3 | ||
| 4 | |||
| 5 | |||
| 6 | |||
| Notes to Unaudited Condensed Consolidated Financial Statements |
7 | ||
| Item 2 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
21 | |
| Item 3 |
33 | ||
| Item 4 |
34 | ||
| Item 1 |
35 | ||
| Item 1A |
35 | ||
| Item 2 |
35 | ||
| Item 3 |
35 | ||
| Item 4 |
35 | ||
| Item 5 |
35 | ||
| Item 6 |
36 | ||
| 37 | |||
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
ICC Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
| As of | ||||||||
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Investments and cash: | ||||||||
| Fixed maturity securities (amortized cost of $ at 3/31/2023 and $ at 12/31/2022) | $ | $ | ||||||
| Common stocks at fair value | ||||||||
| Preferred stocks at fair value | ||||||||
| Other invested assets | ||||||||
| Property held for investment, at cost, net of accumulated depreciation of $ at 3/31/2023 and $ at 12/31/2022 | ||||||||
| Cash and cash equivalents | ||||||||
| Total investments and cash | ||||||||
| Accrued investment income | ||||||||
| Premiums and reinsurance balances receivable, net of allowances for credit losses of $ at 3/31/2023 and 12/31/2022 | ||||||||
| Ceded unearned premiums | ||||||||
| Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for credit losses of $ at 3/31/2023 and $ at 12/31/2022 | ||||||||
| Federal income taxes | ||||||||
| Deferred policy acquisition costs, net | ||||||||
| Property and equipment, at cost, net of accumulated depreciation of $ at 3/31/2023 and $ at 12/31/2022 | ||||||||
| Other Assets, net of allowances for credit losses of $ at 3/31/2023 and $ at 12/31/2022 | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities: | ||||||||
| Unpaid losses and settlement expenses | $ | $ | ||||||
| Unearned premiums | ||||||||
| Reinsurance balances payable | ||||||||
| Corporate debt | ||||||||
| Accrued expenses | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Equity: | ||||||||
| Common stock1 | ||||||||
| Treasury stock, at cost2 | ( | ) | ( | ) | ||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive (loss), net of tax | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Less: Unearned Employee Stock Ownership Plan shares at cost3 | ( | ) | ( | ) | ||||
| Total equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
1 Par value $0.01; authorized: 2023 - 10,000,000 shares and 2022 – 10,000,000 shares; issued: 2023 – 3,500,000 shares and 2022 – 3,500,000 shares; outstanding: 2023 – 3,150,759 and 2022 – 3,153,741 shares
2 2023 – 349,241 shares and 2022 – 346,259 shares
3 2023 – 205,156 shares and 2022 – 210,935 shares
See accompanying notes to consolidated financial statements.
ICC Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings and Comprehensive Earnings (Unaudited)
| For the Three-Months Ended |
||||||||
| March 31, |
||||||||
| 2023 |
2022 |
|||||||
| Net premiums earned |
$ | $ | ||||||
| Net investment income |
||||||||
| Net realized investment (losses) gains |
( |
) | ||||||
| Net unrealized gains (losses) on equity securities |
( |
) | ||||||
| Other income |
||||||||
| Consolidated revenues |
||||||||
| Losses and settlement expenses |
||||||||
| Policy acquisition costs and other operating expenses |
||||||||
| Interest expense on debt |
||||||||
| General corporate expenses |
||||||||
| Total expenses |
||||||||
| Earnings (loss) before income taxes |
( |
) | ||||||
| Total income tax expense (benefit) |
( |
) | ||||||
| Net earnings (loss) |
$ | $ | ( |
) | ||||
| Other comprehensive earnings (loss), net of tax |
( |
) | ||||||
| Comprehensive earnings (loss) |
$ | $ | ( |
) | ||||
| Earnings per share: |
||||||||
| Basic: |
||||||||
| Basic net earnings (loss) per share |
$ | $ | ( |
) | ||||
| Diluted: |
||||||||
| Diluted net earnings (loss) per share |
$ | ( |
) | |||||
| Weighted average number of common shares outstanding: |
||||||||
| Basic |
||||||||
| Diluted |
||||||||
See accompanying notes to consolidated financial statements.
ICC Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
| Common stock |
Treasury stock |
Unearned ESOP |
Additional paid-in capital |
Retained earnings |
Accumulated other comprehensive earnings (loss) |
Total equity |
||||||||||||||||||||||
| Balance, January 1, 2022 |
$ | $ | ( |
) | $ | ( |
) | $ | $ | $ | $ | |||||||||||||||||
| Purchase of treasury stock |
( |
) | ( |
) | ||||||||||||||||||||||||
| Net loss |
( |
) | ( |
) | ||||||||||||||||||||||||
| Other comprehensive loss, net of tax |
( |
) | ( |
) | ||||||||||||||||||||||||
| Restricted stock unit expense |
1 |
( |
) | |||||||||||||||||||||||||
| ESOP compensation expense |
||||||||||||||||||||||||||||
| Balance, March 31, 2022 |
$ | $ | ( |
) | $ | ( |
) | $ | $ | $ | ( |
) | $ | |||||||||||||||
| Common stock |
Treasury stock |
Unearned ESOP |
Additional paid-in capital |
Retained earnings |
Accumulated other comprehensive earnings (loss) |
Total equity |
||||||||||||||||||||||
| Balance, January 1, 2023 |
$ | $ | ( |
) | $ | ( |
) | $ | $ | $ | ( |
) | $ | |||||||||||||||
| Cumulative adjustment for adoption of ASU 2016-13, net of tax |
( |
) | ( |
) | ||||||||||||||||||||||||
| Purchase of treasury stock |
( |
) | ( |
) | ||||||||||||||||||||||||
| Net earnings |
||||||||||||||||||||||||||||
| Other comprehensive earnings, net of tax |
||||||||||||||||||||||||||||
| Restricted stock unit expense |
||||||||||||||||||||||||||||
| ESOP compensation expense |
||||||||||||||||||||||||||||
| Balance, March 31, 2023 |
$ | $ | ( |
) | $ | ( |
) | $ | $ | $ | ( |
) | $ | |||||||||||||||
1Amount represents restricted stock units that have fully vested in the period.
See accompanying notes to consolidated financial statements.
ICC Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
| Three-Month Periods Ended March 31, |
||||||||
| 2023 |
2022 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net earnings (loss) |
$ | $ | ( |
) | ||||
| Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities |
||||||||
| Net realized investment losses (gains) |
( |
) | ||||||
| Net unrealized (gains) losses on equity securities |
( |
) | ||||||
| Depreciation |
||||||||
| Deferred income tax |
( |
) | ||||||
| Amortization of bond premium and discount |
||||||||
| Stock-based compensation expense |
||||||||
| Change in: |
||||||||
| Accrued investment income |
( |
) | ||||||
| Premiums and reinsurance balances receivable |
( |
) | ( |
) | ||||
| Ceded unearned premiums |
||||||||
| Reinsurance balances payable |
( |
) | ( |
) | ||||
| Reinsurance balances recoverable |
( |
) | ( |
) | ||||
| Deferred policy acquisition costs |
( |
) | ( |
) | ||||
| Unpaid losses and settlement expenses |
||||||||
| Unearned premiums |
||||||||
| Accrued expenses |
( |
) | ( |
) | ||||
| Current federal income tax |
||||||||
| Other |
( |
) | ( |
) | ||||
| Net cash provided by operating activities |
||||||||
| Cash flows from investing activities: |
||||||||
| Purchases of: |
||||||||
| Fixed maturity securities |
( |
) | ( |
) | ||||
| Common stocks |
( |
) | ( |
) | ||||
| Preferred stocks |
( |
) | ( |
) | ||||
| Other invested assets |
( |
) | ( |
) | ||||
| Property held for investment |
( |
) | ( |
) | ||||
| Property and equipment |
( |
) | ( |
) | ||||
| Proceeds from sales, maturities and calls of: |
||||||||
| Fixed maturity securities |
||||||||
| Common stocks |
||||||||
| Preferred stocks |
||||||||
| Other invested assets |
||||||||
| Property and equipment |
||||||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| Cash flows from financing activities: |
||||||||
| Repayments of borrowed funds |
( |
) | ||||||
| Purchase of treasury stock |
( |
) | ( |
) | ||||
| Net cash used in financing activities |
( |
) | ( |
) | ||||
| Net decrease in cash and cash equivalents |
( |
) | ( |
) | ||||
| Cash and cash equivalents at beginning of year |
||||||||
| Cash and cash equivalents at end of period |
$ | $ | ||||||
| Supplemental information: |
||||||||
| Interest paid |
$ | $ | ||||||
See accompanying notes to consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial Statements
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| A. | DESCRIPTION OF BUSINESS |
ICC Holdings, Inc. (the Company) is a Pennsylvania corporation that was organized in 2016. As used in this Form 10-Q, references to the “Company,” “we,” “us,” and “our” refer to the consolidated group. On a stand-alone basis ICC Holdings, Inc. is referred to as the “Parent Company.” The consolidated group consists of the holding company, ICC Holdings, Inc.; ICC Realty, LLC, a real estate services and holding company; Beverage Insurance Agency, Inc., a non-insurance subsidiary; Estrella Innovative Solutions, Inc., an outsourcing company; Southern Hospitality Education, LLC, dba Katkin, a full-service food safety and education company; and Illinois Casualty Company (ICC), an operating insurance company and parent company of ICC Properties, LLC, a real estate series limited liability company. Both ICC and ICC Properties, LLC are Illinois domiciled entities.
We are a specialty insurance carrier primarily underwriting commercial multi-peril, liquor liability, workers’ compensation, and umbrella liability coverages for the food and beverage industry through our subsidiary insurance company, ICC. ICC writes business in Arizona, Colorado, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Ohio, Pennsylvania, Utah, and Wisconsin and markets through independent agents. Approximately
| |
B. | PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION |
The unaudited condensed consolidated interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial reporting and with the instructions to Form 10-Q. Accordingly, they do not include all the disclosures required by GAAP for complete financial statements. As such, these unaudited condensed consolidated interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K, for the year ended December 31, 2022 (the “2022 10-K”). Management believes that the disclosures are adequate to make the information presented not misleading, and all normal and recurring adjustments necessary to present fairly the financial position at March 31, 2023 the results of operations of the Company and its subsidiaries for all periods presented have been made. The results of operations for any interim period are not necessarily indicative of the operating results for a full year.
The preparation of the unaudited condensed consolidated interim financial statements requires management to make estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated interim financial statements, and the reported amounts of revenue and expenses during the period. These amounts are inherently subject to change and actual results could differ significantly from these estimates.
| |
C. | SIGNIFICANT ACCOUNTING POLICIES |
On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 was issued to improve recognition and measurement of credit losses and to provide more decision-useful information about those losses. This new impairment model is based on expected losses rather than incurred losses. ASU 2016- 13 requires that a financial asset measured at amortized cost be presented at the net amount expected to be collected by means of an allowance for credit losses that is included in net earnings. Credit losses relating to available-for-sale debt securities are also required to be recorded through a reversible allowance for credit losses but is limited to the amount by which fair value is less than amortized cost. The Company applied this standard to fixed maturity securities, premiums and reinsurance balances receivable, ceded unearned premiums, reinsurance balances recoverable on unpaid losses and settlement expenses, and other assets using the loss-rate method. The impact of this standard was and is expected to continue to be minimal. In total, the cumulative-effect adjustment made to the financials as of the beginning of the year resulted in a $
| D. | PROSPECTIVE ACCOUNTING STANDARDS |
There are no prospective accounting standards that would have a material impact on our financial statements as of March 31, 2023.
| |
E. | PROPERTY AND EQUIPMENT |
Annually, the Company reviews the major asset classes of property and equipment held for impairment. For the periods ended March 31, 2023 and 2022, the Company recognized
| As of | ||||||||
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Automobiles | $ | $ | ||||||
| Furniture and fixtures | ||||||||
| Computer equipment and software | ||||||||
| Home office | ||||||||
| Total cost | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Net property and equipment | $ | $ | ||||||
| |
F. | COMPREHENSIVE EARNINGS |
Comprehensive (loss) earnings include net earnings (loss) 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 and comprehensive earnings, the Company used a
The following table presents changes in accumulated other comprehensive (loss) earnings for unrealized gains and losses on available-for-sale securities:
| Three-Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Beginning balance | $ | ( | ) | $ | ||||
| Other comprehensive earnings (loss) before reclassification | ( | ) | ||||||
| Amount reclassified from accumulated other comprehensive earnings (loss) | ( | ) | ||||||
| Net current period other comprehensive earnings (loss) | ( | ) | ||||||
| Ending balance | $ | ( | ) | $ | ( | ) | ||
The following table illustrates the components of other comprehensive earnings for each period presented in the condensed consolidated interim financial statements.
| Three-Month Periods Ended March 31, | ||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||
| Pre-tax | Tax | After-tax | Pre-tax | Tax | After-tax | |||||||||||||||||||
| Other comprehensive earnings (loss), net of tax | ||||||||||||||||||||||||
| Unrealized gains and losses on AFS investments: | ||||||||||||||||||||||||
| Unrealized holding gains (losses) arising during the period | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| Reclassification adjustment for losses (gains) included in net earnings | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Total other comprehensive earnings (loss) | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
The following table provides the reclassifications from accumulated other comprehensive earnings for the periods presented:
| Amounts Reclassified from | |||||||||
| Accumulated Other Comprehensive Earnings | |||||||||
| Three-Month Periods Ended | |||||||||
| Details about Accumulated Other | March 31, | Affected Line Item in the Statement | |||||||
| Comprehensive Earnings Component | 2023 | 2022 | where Net Earnings is Presented | ||||||
| Unrealized losses (gains) on AFS investments: | |||||||||
| $ | $ | ( | ) | Net realized investment losses (gains) | |||||
| ( | ) | Income tax expense (benefit) | |||||||
| Total reclassification adjustment, net of tax | $ | $ | ( | ) | |||||
| |
G. | RISKS AND UNCERTAINTIES |
Certain risks and uncertainties are inherent to our day-to-day operations. Adverse changes in the economy could lower demand for our insurance products or negatively impact our investment results, both of which could have an adverse effect on the revenue and profitability of our operations. The COVID-19 pandemic and subsequent governmental policies, including fiscal and monetary policies have resulted in, and may continue to result in, significant disruptions in economic activity and financial markets. Russia’s invasion of Ukraine, supply chain disruptions, labor shortages and tightening, inflation and related monetary policy responses, and recession fears are also causing volatility and disruptions in credit and capital markets, adverse developments or general investor sentiment regarding the value of our investment securities as a result of rising interest rates or otherwise, and the business prospects of the industry we serve. The cumulative effects of these events on the Company cannot be predicted, but could reduce demand for our insurance policies, result in increased level of losses, settlement expenses or other operating costs, or reduce the market value of invested assets held by the Company.
| 2. | INVESTMENTS |
The Company’s investments are primarily composed of fixed income debt securities and common and preferred equity securities. We carry our equity securities at fair value and categorize all our fixed maturity debt securities as available-for-sale (AFS), which are carried at fair value. When available, quoted market prices are obtained to determine fair value for the Company’s investments. If a quoted market price is not available, fair value is estimated using a secondary pricing source or using quoted market prices of similar securities. The Company has no investment securities for which fair value is determined using Level 3 inputs as defined in Note 3 – Fair Value Disclosures. Realized gains and losses on disposition of investments are based on specific identification of the investments sold on the settlement date, which does not differ significantly from trade date accounting.
Available-for-Sale Fixed Maturity and Equity Securities
The following tables are a summary of the proceeds from sales, maturities, and calls of AFS fixed maturity and equity securities and the related gross realized gains and losses.
| For the Three-Months Ended March 31, | ||||||||||||||||
| Net Realized | ||||||||||||||||
| Proceeds | Gains | Losses | Gains (Losses) | |||||||||||||
| 2023 | ||||||||||||||||
| Fixed maturity securities | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Common stocks | ( | ) | ( | ) | ||||||||||||
| Preferred stocks | ||||||||||||||||
| 2022 | ||||||||||||||||
| Fixed maturity securities | $ | $ | $ | $ | ||||||||||||
| Common stocks | ( | ) | ||||||||||||||
| Preferred stocks | ( | ) | ||||||||||||||
The amortized cost and estimated fair value of fixed income securities at March 31, 2023, by contractual maturity, are shown as follows:
| Amortized Cost | Fair Value | |||||||
| Due in one year or less | $ | $ | ||||||
| Due after one year through five years | ||||||||
| Due after five years through 10 years | ||||||||
| Due after 10 years | ||||||||
| Asset and mortgage-backed securities without a specific due date | ||||||||
| Redeemable preferred stocks | ||||||||
| Total fixed maturity securities | $ | $ | ||||||
Expected maturities may differ from contractual maturities due to call provisions on some existing securities.
The following table is a schedule of amortized cost and estimated fair values of investments in securities classified as available for sale at March 31, 2023 and December 31, 2022
| Gross Unrealized | ||||||||||||||||
| Amortized Cost | Fair Value | Gains | Losses | |||||||||||||
| 2023 | ||||||||||||||||
| Fixed maturity securities: | ||||||||||||||||
| U.S. Treasury | $ | $ | $ | $ | ( | ) | ||||||||||
| MBS/ABS/CMBS | ( | ) | ||||||||||||||
| Corporate | ( | ) | ||||||||||||||
| Municipal | ( | ) | ||||||||||||||
| Redeemable preferred stock | ( | ) | ||||||||||||||
| Total fixed maturity securities | $ | $ | $ | $ | ( | ) | ||||||||||
| Gross Unrealized | ||||||||||||||||
| Amortized Cost | Fair Value | Gains | Losses | |||||||||||||
| 2022 | ||||||||||||||||
| Fixed maturity securities: | ||||||||||||||||
| U.S. Treasury | $ | $ | $ | $ | ( | ) | ||||||||||
| MBS/ABS/CMBS | ( | ) | ||||||||||||||
| Corporate | ( | ) | ||||||||||||||
| Municipal | ( | ) | ||||||||||||||
| Redeemable preferred stock | ( | ) | ||||||||||||||
| Total fixed maturity securities | $ | $ | $ | $ | ( | ) | ||||||||||
All the Company’s collateralized securities carry an average credit rating of AA+ by one or more major rating agencies and continue to pay according to contractual terms. Included within MBS/ABS/CMBS, as defined in Note 3 – Fair Value Disclosures, are asset backed securities with fair values of $
ANALYSIS
The following tables are also used as part of the impairment analysis and display the total value of securities that were in an unrealized loss position as of March 31, 2023 and December 31, 2022. The tables segregate the securities based on type, noting the fair value, 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.
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||
| 12 Months | 12 Months | |||||||||||||||||||||||
| < 12 Months | & Greater | Total | < 12 Months | & Greater | Total | |||||||||||||||||||
| Fixed Maturity Securities: | ||||||||||||||||||||||||
| U.S. Treasury | ||||||||||||||||||||||||
| Fair value | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Amortized cost | ||||||||||||||||||||||||
| Unrealized loss | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| MBS/ABS/CMBS | ||||||||||||||||||||||||
| Fair value | ||||||||||||||||||||||||
| Amortized cost | ||||||||||||||||||||||||
| Unrealized loss | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Corporate | ||||||||||||||||||||||||
| Fair value | ||||||||||||||||||||||||
| Amortized cost | ||||||||||||||||||||||||
| Unrealized loss | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Municipal | ||||||||||||||||||||||||
| Fair value | ||||||||||||||||||||||||
| Amortized cost | ||||||||||||||||||||||||
| Unrealized loss | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Redeemable preferred stock | ||||||||||||||||||||||||
| Fair value | ||||||||||||||||||||||||
| Amortized cost | ||||||||||||||||||||||||
| Unrealized loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Total | ||||||||||||||||||||||||
| Fair value | ||||||||||||||||||||||||
| Amortized cost | ||||||||||||||||||||||||
| Unrealized loss | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||
The fixed income portfolio contained
There were
UNREALIZED GAINS AND LOSSES ON EQUITY SECURITIES
Net unrealized gains recognized during the three months ended March 31, 2023 on equity securities held as of March 31, 2023 were $
Other Invested Assets
Other invested assets as of March 31, 2023 and December 31, 2022 were $
Other invested assets as of March 31, 2023 include privately held investments of $
In addition, other invested assets include a membership in the Federal Home Loan Bank of Chicago (FHLBC) with a carrying value of $
In November 2021, we agreed to commit up to $
| 3. | FAIR VALUE DISCLOSURES |
Fair value is defined as the price in the principal market that would be received for an asset to facilitate an orderly transaction between market participants on the measurement date. The fair value of certain financial instruments is determined based on their underlying characteristics and relevant transactions in the marketplace. GAAP guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance also describes three levels of inputs that may be used to measure fair value.
The following are the levels of the fair value hierarchy and a brief description of the type of valuation inputs that are used to establish each level:
| ● | Level 1 is applied to valuations based on readily available, unadjusted quoted prices in active markets for identical assets. |
| ● | Level 2 is applied to valuations based upon quoted prices for similar assets in active markets, quoted prices for identical or similar assets in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities) or can be corroborated by observable market data. |
| ● | Level 3 is applied to valuations that are derived from techniques in which one or more of the significant inputs are unobservable. Financial assets are classified based upon the lowest level of significant input that is used to determine fair value. |
As a part of the process to determine fair value, management utilizes widely recognized, third-party pricing sources to determine fair values. Management has obtained an understanding of the third-party pricing sources’ valuation methodologies and inputs. The following is a description of the valuation techniques used for financial assets that are measured at fair value, including the general classification of such assets pursuant to the fair value hierarchy.
Corporate, Agencies, and Municipal Bonds—The pricing vendor employs a multi-dimensional model which uses standard inputs including (listed in order of priority for use) benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers and other reference data. The pricing vendor also monitors market indicators, as well as industry and economic events. All bonds valued using these techniques are classified as Level 2. All Corporate, Agencies, and Municipal securities are deemed Level 2.
Mortgage-backed Securities (MBS), Collateralized Mortgage Obligations (CMO), Commercial Mortgage-backed Securities (CMBS) and Asset-backed Securities (ABS)—The pricing vendor evaluation methodology includes principally interest rate movements and new issue data. Evaluation of the tranches (non-volatile, volatile, or credit sensitivity) is based on the pricing vendors’ interpretation of accepted modeling and pricing conventions. This information is then used to determine the cash flows for each tranche, benchmark yields, pre-payment assumptions and to incorporate collateral performance. To evaluate CMO volatility, an option adjusted spread model is used in combination with models that simulate interest rate paths to determine market price information. This process allows the pricing vendor to obtain evaluations of a broad universe of securities in a way that reflects changes in yield curve, index rates, implied volatility, mortgage rates, and recent trade activity. MBS, CMBS, CMO and ABS with corroborated and observable inputs are classified as Level 2. All MBS, CMBS, CMO and ABS holdings are deemed Level 2.
U.S. Treasury Bonds, Common Stocks and Exchange Traded Funds—U.S. treasury bonds and exchange traded equities have readily observable price levels and are classified as Level 1 (fair value based on quoted market prices). All common stock holdings are deemed Level 1.
Preferred Stock—Preferred stocks do not have readily observable prices but do have quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets in markets that are not active; and inputs other than quoted prices and are classified as Level 2. All preferred stock holdings are deemed Level 2.
Due to the relatively short-term nature of cash and cash equivalents, their carrying amounts are reasonable estimates of fair value. Other invested assets include notes receivable, stock, and a membership in the Federal Home Loan Bank of Chicago (FHLBC). Notes receivable are carried at outstanding balance plus accrued interest. Stock and the membership in FHLBC are carried at cost.
Assets measured at fair value on a recurring basis as of March 31, 2023, are summarized below:
| Significant | ||||||||||||||||
| Quoted in Active | Other | Significant | ||||||||||||||
| Markets for | Observable | Unobservable | ||||||||||||||
| Identical Assets | Inputs | Inputs | ||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
| AFS securities | ||||||||||||||||
| Fixed maturity securities | ||||||||||||||||
| U.S. treasury | $ | $ | $ | $ | ||||||||||||
| MBS/ABS/CMBS | ||||||||||||||||
| Corporate | ||||||||||||||||
| Municipal | ||||||||||||||||
| Redeemable preferred stocks | ||||||||||||||||
| Total fixed maturity securities | ||||||||||||||||
| Equity securities | ||||||||||||||||
| Common stocks | ||||||||||||||||
| Perpetual preferred stocks | ||||||||||||||||
| Total equity securities | ||||||||||||||||
| Total marketable investments measured at fair value | $ | $ | $ | $ | ||||||||||||
Assets measured at fair value on a recurring basis as of December 31, 2022, are summarized below:
| Significant | ||||||||||||||||
| Quoted in Active | Other | Significant | ||||||||||||||
| Markets for | Observable | Unobservable | ||||||||||||||
| Identical Assets | Inputs | Inputs | ||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
| AFS securities | ||||||||||||||||
| Fixed maturity securities | ||||||||||||||||
| U.S. treasury | $ | $ | $ | $ | ||||||||||||
| MBS/ABS/CMBS | ||||||||||||||||
| Corporate | ||||||||||||||||
| Municipal | ||||||||||||||||
| Redeemable preferred stocks | ||||||||||||||||
| Total fixed maturity securities | ||||||||||||||||
| Equity securities | ||||||||||||||||
| Common stocks | ||||||||||||||||
| Perpetual preferred stocks | ||||||||||||||||
| Total equity securities | ||||||||||||||||
| Total marketable investments measured at fair value | $ | $ | $ | $ | ||||||||||||
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 March 31, 2023 or December 31, 2022. Additionally, there were no securities transferred in or out of Levels 1 and 2 during the three-month periods ended March 31, 2023 and 2022.
| 4. | DEBT |
Debt Obligation
Debt Obligations
The Company had $
ICC Holdings, Inc. secured a loan with a commercial bank in March 2017 in the amount of $
The Company also has borrowing capacity of $
As part of the Company’s response to COVID-19, the Company obtained, in March 2020, a $
In May 2021, the Company entered into a $
In May 2022, this Company entered into a $
The Company has $
Revolving Line of Credit
We increased our revolving line of credit with a commercial bank from $
| 5. | REINSURANCE |
In the ordinary course of business, the Company assumes and cedes premiums and selected insured risks with other insurance companies, known as reinsurance. A large portion of the reinsurance is put into effect under contracts known as treaties and, in some instances, by negotiation on each individual risk (known as facultative reinsurance). In addition, there are several types of treaties including quota share, excess of loss and catastrophe reinsurance contracts that protect against losses over stipulated amounts arising from any one occurrence or event. The arrangements allow the Company to pursue greater diversification of business and serve to limit the maximum net loss to a single event, such as a catastrophe. Through the quantification of exposed policy limits in each region and the extensive use of computer-assisted modeling techniques, management monitors the concentration of risks exposed to catastrophic events.
Through the purchase of reinsurance, the Company also generally limits its net loss on any individual risk to a maximum of $
Premiums, written and earned, along with losses and settlement expenses incurred for the periods presented is summarized as follows:
| Three-Month Periods Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| WRITTEN | ||||||||
| Direct | $ | $ | ||||||
| Reinsurance assumed | ||||||||
| Reinsurance ceded | ( | ) | ( | ) | ||||
| Net | $ | $ | ||||||
| EARNED | ||||||||
| Direct | $ | $ | ||||||
| Reinsurance assumed | ||||||||
| Reinsurance ceded | ( | ) | ( | ) | ||||
| Net | $ | $ | ||||||
| LOSS AND SETTLEMENT EXPENSES INCURRED | ||||||||
| Direct | $ | $ | ||||||
| Reinsurance assumed | ||||||||
| Reinsurance ceded | ( | ) | ( | ) | ||||
| Net | $ | $ | ||||||
| 6. | UNPAID LOSSES AND SETTLEMENT EXPENSES |
The following table is a reconciliation of the Company’s unpaid losses and settlement expenses:
| For the Three-Months Ended | ||||||||
| March 31, | ||||||||
| (In thousands) | 2023 | 2022 | ||||||
| Unpaid losses and settlement expense - beginning of the period: | ||||||||
| Gross | $ | $ | ||||||
| Less: Ceded | ||||||||
| Net | ||||||||
| Increase in incurred losses and settlement expense: | ||||||||
| Current year | ||||||||
| Prior years | ( | ) | ||||||
| Total incurred | ||||||||
| Deduct: Loss and settlement expense payments for claims incurred: | ||||||||
| Current year | ||||||||
| Prior years | ||||||||
| Total paid | ||||||||
| Net unpaid losses and settlement expense - end of the period | ||||||||
| Plus: Reinsurance recoverable on unpaid losses | ||||||||
| Plus: CECL allowance for reinsurance recoverable on unpaid losses | ||||||||
| Gross unpaid losses and settlement expense - end of the period | $ | $ | ||||||
For the three months ended March 31, 2023 and 2022, we experienced favorable development of $
| 7. | INCOME TAXES |
The Company’s effective tax rate for the three month periods ended March 31, 2023 was
Income tax expense for the three month periods ended March 31, 2023 and 2022 differed from the amounts computed by applying the U.S. federal tax rate of
| For the Three-Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Provision for income taxes at the statutory federal tax rates | $ | $ | ( | ) | ||||
| Increase (reduction) in taxes resulting from: | ||||||||
| Dividends received deduction | ( | ) | ( | ) | ||||
| Tax-exempt interest income | ( | ) | ( | ) | ||||
| Proration of tax-exempt interest and dividends received deduction | ||||||||
| Nondeductible expenses | ||||||||
| Officer life insurance, net | ( | ) | ( | ) | ||||
| Total | $ | $ | ( | ) | ||||
Management believes it is more likely than that all deferred tax assets will be recovered as the result of future operations, which will generate sufficient taxable income to realize the deferred tax asset.
As of March 31, 2023 and December 31, 2022, the Company does have any capital or operating loss carryforwards. Periods still subject to IRS audit include 2019 through current year. Unrealized losses on fixed income securities and equity securities the investment portfolio during 2022 have kept the Company in net deferred tax asset position as of March 31, 2023. There are currently no open tax exams.
| 8. | EMPLOYEE BENEFITS |
ESOP
In connection with our conversion and public offering, we established an ESOP. The ESOP borrowed from the Company to purchase
The Company may make discretionary contributions to the ESOP and pay dividends on unallocated shares to the ESOP. ICC makes annual contributions to the ESOP sufficient to repay the loan. When loan payments are made, ESOP shares are allocated to participants based on relative compensation. The Company repurchases shares from participants that have left our employment. ICC Holdings contributed $
A compensation expense charge is booked monthly during each year for the shares committed to be allocated to participants that year, determined with reference to the fair market value of our stock at the time the commitment to allocate the shares is accrued and recognized. For the three months ended March 31, 2023, we recognized compensation expense of $
RESTRICTED STOCK UNITS
Restricted stock units (RSUs) were granted for the first time in February 2018 and more recently in April of each year. RSUs have a grant date value equal to the closing price of the Company’s stock on the dates the shares are granted. The RSUs vest third over years beginning the first anniversary of the date of grant. The Company recognized $
| RSUs | Weighted Average Grant Date Fair Value | |||||||
| Nonvested at December 31, 2022 | $ | $ | ||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Nonvested at March 31, 2023 | $ | $ | ||||||
| 9. | SUBSEQUENT EVENTS |
The Company received licenses to do business in Kentucky and North Dakota in early Q2 2023. The Company granted
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Private Securities Litigation Reform Act of 1995 (the “Reform Act”) provides a safe harbor for forward-looking statements made by or on behalf of ICC Holdings, Inc. ICC Holdings, Inc., and its representatives may, from time to time, make written or verbal forward-looking statements, including statements contained in ICC Holdings, Inc.'s filings with the Securities and Exchange Commission (SEC) and its reports to shareholders. Generally, the inclusion of the words “anticipates,” “believes,” “estimate,” “expect,” “future,” “intend,” “may,” “plans,” “seek”, “will,” or the negative of such terms and similar expressions identify statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and that are intended to come within the safe harbor protection provided by those sections. All statements addressing operating performance, events, or developments that ICC Holdings, Inc. expects or anticipates will occur in the future, including statements relating to sales growth, earnings or earnings per share growth, and market share, as well as statements expressing optimism or pessimism about future operating results, are forward-looking statements within the meaning of the Reform Act. The forward-looking statements are and will be based on management’s then-current beliefs and assumptions regarding future events and operating performance and on information currently available to management and are applicable only as of the dates of such statements.
Forward-looking statements involve risks, uncertainties and assumptions, including, among other things, the factors discussed under the heading “Item 1A. Risk Factors” of ICC Holdings, Inc.’s Annual Report on Form 10-K and those listed below. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Actual results may differ materially from those expressed in these forward-looking statements due to several uncertainties and risks, including the risks described in this Quarterly Report on Form 10-Q and other unforeseen risks. Readers should not put undue reliance on any forward-looking statements. These statements speak only as of the date of this Quarterly Report on Form 10-Q, even if subsequently made available by us on our website or otherwise, and we undertake no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.
All of these factors are difficult to predict, and many are beyond our control. These important factors include those discussed under “Item 1A. Risk Factors” of ICC Holdings, Inc.’s 2022 Annual Report on Form 10-K and those listed below:
| ● |
the potential impact of fraud, operational errors, systems malfunctions, or cybersecurity incidents; |
| ● |
future economic conditions in the markets in which we compete that are less favorable than expected; |
| ● |
our ability to expand geographically; |
| ● |
the effects of weather-related and other catastrophic events, including those related to health emergencies and the spread of infectious diseases and pandemics; |
| ● |
the effect of legislative, judicial, economic, demographic and regulatory events in the jurisdictions where we do business, especially changes with respect to laws, regulations and judicial decisions relating to liquor liability; |
| ● |
our ability to enter new markets successfully and capitalize on growth opportunities either through acquisitions or the expansion of our producer network; |
| ● |
macroeconomic and market conditions and market volatility, including, but not limited to, changes in interest rates, inflation and the credit and capital markets causing a reduction of investment income or investment gains and a reduction in the value of our investment portfolio; |
| ● |
heightened competition, including specifically the intensification of price competition, the entry of new competitors and the development of new products by new or existing competitors, resulting in a reduction in the demand for our products; |
| ● |
infection rates, severity of pandemics, including COVID-19 and its variants, civil unrest and their effects on our business operations and claims activity, and any adverse impact to our insureds, brokers, agents, and employees; |
|
| ● | our debt and debt service requirements which may restrict our operation and financial flexibility, as well as imposing unfavorable interest and financing costs; | |
| ● | our ability to maintain our existing credit facilities or obtain satisfactory new credit facilities or other borrowings; | |
| ● | changes to our assessment as to whether it is more likely than not that we will be required to sell, or have the intent to sell, available for sale or fixed maturity investments before their anticipated recovery; | |
| ● | our ability to implement business strategies, including our acquisition strategy and expansion plans; | |
| ● | our acquisition strategy many not be successful in locating advantageous targets; | |
| ● | our ability to successfully integrate any assets, liabilities, customers, systems and management personnel we acquire into our operations and our ability to realize related revenue synergies, strategic gains, and cost savings many be significantly harder to achieve, if at all, or may take longer to achieve; | |
| ● | potential goodwill impairment charges, future impairment charges and fluctuations in the fair values of reporting units or of assets in the event projected financial results are not achieved within expected time frames; | |
| ● | disruptions and negative investor sentiment caused by bank failures during 2023; |
| ● |
the impact of acts of terrorism and acts of war; |
| ● |
the effects of terrorist related insurance legislation and laws; |
| ● |
changes in general economic conditions, including inflation, unemployment, interest rates and other factors; |
| ● |
the cost, availability, and collectability of reinsurance; |
| ● |
estimates and adequacy of loss reserves and trends in loss and settlement expenses; |
| ● |
changes in the coverage terms selected by insurance customers, including higher limits; |
| ● |
our inability to obtain regulatory approval of, or to implement, premium rate increases; |
| ● |
our ability to obtain reinsurance coverage at reasonable prices or on terms that adequately protect us; |
| ● |
the potential impact on our reported net income that could result from the adoption of future auditing or accounting standards issued by the Public Company Accounting Oversight Board or the Financial Accounting Standards Board or other standard-setting bodies; |
| ● |
unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations; |
| ● |
adverse litigation or arbitration results; |
| ● |
litigation tactics and developments, including those related to business interruption claims; and |
| ● |
adverse changes in applicable laws, regulations or rules governing insurance holding companies and insurance companies, and environmental, tax or accounting matters including limitations on premium levels, increases in minimum capital and reserves, and other financial viability requirements, and changes that affect the cost of, or demand for our products. |
Because forward-looking information is subject to various risks and uncertainties, actual results may differ materially from that expressed or implied by the forward-looking information.
All subsequent written and oral forward-looking information attributable to ICC Holdings, Inc. or any person acting on our behalf is expressly qualified in its entirety by the cautionary statement contained or referred to in this section.
Overview
ICC is a regional property and casualty insurance company incorporated in Illinois and focused exclusively on the food and beverage industry. On the effective date of the mutual-to-public company conversion, ICC became a wholly owned subsidiary of ICC Holdings, Inc.
For the three months ended March 31, 2023, the Company had direct written premiums of $20,815,000, net premiums earned of $17,801,000, and net earnings of $1,579,000. For the three months ended March 31, 2022, we had direct premiums written of $19,566,000, net premiums earned of $16,017,000, and net loss of $160,000. At March 31, 2023, we had total assets of $197,807,000 and equity of $63,599,000. At December 31, 2022, we had total assets of $192,162,000 and equity of $60,441,000.
Principal Revenue and Expense Items
We derive our revenue primarily from premiums earned, net investment income and net realized and unrealized gains (losses) from investments.
Gross and net premiums written
Gross premiums written are equal to direct and assumed premiums before the effect of ceded reinsurance. Net premiums written is the difference between gross premiums written and premiums ceded or paid to reinsurers (ceded premiums written).
Net premiums earned
Premiums earned are the earned portion of our net premiums written. Gross premiums written include all premiums recorded by an insurance company during a specified policy period. Insurance premiums on property and casualty insurance contracts are recognized in proportion to the underlying risk insured and are earned ratably over the duration of the policies. At the end of each accounting period, the portion of the premiums that are not yet earned is included in unearned premiums and is realized as revenue in subsequent periods over the remaining term of the policy. Our policies typically have a term of twelve months. Thus, for example, for a policy that is written on July 1, 2023, one-half of the premiums would be earned in 2023 and the other half would be earned in 2024.
Net investment income and net realized gains (losses) on investments
We invest our surplus and the funds supporting our insurance liabilities (including unearned premiums and unpaid loss and loss adjustment expenses) in cash, cash equivalents, equities, fixed securities, and real estate. Investment income includes interest and dividends earned on invested assets as well as rental income on investment properties. Net realized gains and losses on invested assets are reported separately from net investment income. We recognize realized gains when invested assets are sold for an amount greater than their cost or amortized cost (in the case of fixed securities) and recognize realized losses when investment securities are written down as a result of an other-than-temporary impairment or sold for an amount less than their cost or amortized cost, as applicable. We recognize in earnings the change in unrealized gains and losses on equity securities when our equity securities are trading at an amount greater than or less than their cost, respectively. Net unrealized gains on equity securities for the three months ended March 31, 2023 were $639,000. Net unrealized losses for the three months ended March 31, 2022 for equity securities were $1,293,000. Our portfolio of investment securities is managed by two independent third parties with managers specializing in the insurance industry. The board of directors’ investment committee is responsible for establishing investment policies and monitoring risk limits and tolerances. We seek to protect customers’ benefits by optimizing the risk/return relationship on an ongoing basis, avoiding high levels of investments that may be redeemed by the issuer, maintaining sufficiently liquid investments and avoiding undue asset concentrations through diversification. We are exposed to two primary sources of investment risk:
| ● |
credit risk, relating to the uncertainty associated with the continued ability of an obligor to make timely payments of principal and interest; and |
| ● |
interest rate risk, relating to the market price and/or cash flow variability associated with changes in market yield curves. |
Our ability to manage credit risk is essential to our business and our profitability. We devote considerable resources to the credit analysis of each new investment. We manage credit risk through industry, issuer and asset class diversification.
ICC’s expenses consist primarily of:
Losses and settlement expenses
Losses and settlement expenses represent the largest expense item and include: (1) claim payments made, (2) estimates for future claim payments and changes in those estimates for prior periods, and (3) costs associated with investigating, defending, and adjusting claims.
Amortization of deferred policy acquisition costs and other operating expenses
Expenses incurred to underwrite risks are referred to as policy acquisition expenses. Variable policy acquisition costs consist of commission expenses, premium taxes and certain other underwriting expenses that vary with and are primarily related to the writing and acquisition of new and renewal business. These policy acquisition costs are deferred and amortized over the effective period of the related insurance policies. Fixed policy acquisition costs are expensed as incurred. These costs include salaries, rent, office supplies, and depreciation. Other operating expenses consist primarily of information technology costs, accounting, and internal control salaries, as well as audit and legal expenses.
Income taxes
We use the asset and liability method of accounting for income taxes. Deferred income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the tax bases of our assets and liabilities. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The effect of a change in tax rates is recognized in the period of the enactment date.
Key Financial Measures
We evaluate our insurance operations by monitoring certain key measures of growth and profitability. In addition to reviewing our financial performance based on results determined in accordance with generally accepted accounting principles in the United States (GAAP), we utilize certain operational financial measures that we believe are valuable in managing our business and for comparison to our peers. These operational measures are combined ratio, written premiums, underwriting income, the losses and settlement expense ratio, the expense ratio, the ratio of net written premiums to statutory surplus and return on average equity.
We measure growth by monitoring changes in gross premiums written and net premiums written. We measure underwriting profitability by examining losses and settlement expense, underwriting expense, and combined ratios. We also measure profitability by examining underwriting income (loss) and net earnings (loss).
Losses and settlement expense ratio
The losses and settlement expense ratio is the ratio (expressed as a percentage) of losses and settlement expenses incurred to net premiums earned. We measure the losses and settlement expense ratio on an accident year and calendar year loss basis to measure underwriting profitability. An accident year loss ratio measures losses and settlement expenses for insured events occurring in a particular year, regardless of when they are reported, as a percentage of premiums earned during that year. A calendar year loss ratio measures loss and settlement expense for insured events occurring during a particular year and the change in loss reserves from prior accident years as a percentage of premiums earned during that year.
Expense ratio
The underwriting expense ratio is the ratio (expressed as a percentage) of amortization of deferred policy acquisition costs and other operating expenses to premiums earned, and measures our operational efficiency in producing, underwriting, and administering our insurance business.
GAAP combined ratio
Our GAAP combined ratio is the sum of the losses and settlement expense ratio and the expense ratio and measures our overall underwriting profit. If the GAAP combined ratio is below 100%, we are making an underwriting profit. If our combined ratio is at or above 100%, we are not profitable without investment income and may not be profitable if investment income is insufficient.
Net premiums written to statutory surplus ratio
The net premiums written to statutory surplus ratio represents the ratio of net premiums written, after reinsurance ceded, to statutory surplus. This ratio measures our exposure to pricing errors in our current book of business. The higher the ratio, the greater the impact on surplus should pricing prove inadequate.
Underwriting income (loss)
Underwriting income (loss) measures the pre-tax profitability of our insurance operations. It is derived by subtracting losses and settlement expense, amortization of deferred policy acquisition costs, and underwriting and administrative expenses from net earned premiums. Each of these items is presented as a caption in our statements of earnings.
Net earnings (loss) and return on average equity
We use net earnings (loss) to measure our profit and return on average equity to measure our effectiveness in utilizing equity to generate net earnings. In determining return on average equity for a given year, net earnings (loss) is divided by the average of the beginning and ending equity for that year.
Critical Accounting Policies
The accounting policies and estimates considered by management to be critically important in the preparation and understanding of the Company’s financial statements and related disclosures are presented in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
Results of Operations
Our results of operations are influenced by factors affecting the property and casualty insurance industry in general. The operating results of the United States property and casualty insurance industry are subject to significant variations due to competition, weather, catastrophic events, regulation, general economic conditions, judicial trends, fluctuations in interest rates and other changes in the investment environment.
Our premium and underwriting results have been, and continue to be, influenced by market conditions. Pricing in the property and casualty insurance industry historically has been cyclical. During a soft market cycle, price competition is more significant than during a hard market cycle and makes it difficult to attract and retain properly priced commercial business. A hard market typically has a positive effect on premium growth.
The following summarizes our results for the three months ended March 31, 2023 and 2022:
Premiums
Direct premiums written increased by $1,249,000, or 6.4%, to $20,815,000 for the three months ended March 31, 2023 from $19,566,000 for the same period of 2022. Net written premium increased by $1,181,000, or 6.8%, to $18,513,000 for the three months ended March 31, 2023 from $17,332,000 for the same period in 2022. Net premiums earned increased by $1,784,000, or 11.1%, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, consistent with our increased premium writings in 2023 and 2022.
For the three months ended March 31, 2023, we ceded to reinsurers $2,484,000 of earned premiums, compared to $2,290,000 of earned premiums for the three months ended March 31, 2022. Ceded earned premiums as a percent of direct premiums written increased to 11.9% from 11.7% for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 as a result of increased direct earned premiums.
Premiums are earned ratably over the term of the policy whereas written premiums are reflected on the effective date of the policy.
Investment Income
Net investment income increased by $292,000, or 31.8%, to $1,209,000 for the three months ended March 31, 2023, as compared to $917,000 for the same period in 2022. This increase is a result of increased rates on our fixed income portfolio and an increase in overall investment holdings.
Other Income
Other income is derived from policies we write and represents additional charges to policyholders for services outside of the premium charge, such as installment billing or policy issuance costs. Another component of other income is attributable to sales made by the Company’s subsidiary, Katkin. Other income decreased by $113,000, or 71.1%, during the three months ended March 31, 2023 as compared to the same period in 2022 due to increased premiums written off.
Unpaid Losses and Settlement Expenses
| For the Three-Months Ended |
||||||||
| March 31, |
||||||||
| (In thousands) |
2023 |
2022 |
||||||
| Unpaid losses and settlement expense - beginning of the period: |
||||||||
| Gross |
$ | 67,614 | $ | 61,835 | ||||
| Less: Ceded |
13,610 | 14,521 | ||||||
| Net |
54,004 | 47,314 | ||||||
| Increase in incurred losses and settlement expense: |
||||||||
| Current year |
11,072 | 7,525 | ||||||
| Prior years |
(24 | ) | 2,670 | |||||
| Total incurred |
11,048 | 10,195 | ||||||
| Deduct: Loss and settlement expense payments for claims incurred: |
||||||||
| Current year |
1,158 | 1,389 | ||||||
| Prior years |
5,487 | 4,802 | ||||||
| Total paid |
6,645 | 6,191 | ||||||
| Net unpaid losses and settlement expense - end of the period |
58,407 | 51,318 | ||||||
| Plus: Reinsurance recoverable on unpaid losses |
14,356 | 16,089 | ||||||
| Plus: CECL allowance for reinsurance recoverable on unpaid losses |
104 | — | ||||||
| Gross unpaid losses and settlement expense - end of the period |
$ | 72,867 | $ | 67,407 | ||||
Gross unpaid losses and settlement expenses increased by $5,460,000, or 8.1%, in the three months ended March 31, 2023 as compared to the same period in 2022. For the three months ended March 31, 2023 and 2022, we experienced favorable development of $24,000 and unfavorable development of $2,670,000, respectively.
Losses and Settlement Expenses
Losses and settlement expenses increased by $853,000, or 8.4%, to $11,048,000 for the three months ended March 31, 2023, from $10,195,000 for the same period in 2022. The increase in losses and settlement expenses was driven by spring storms in late March 2023.
Policy Acquisition Costs and Other Operating Expenses and the Expense Ratio
Policy acquisition costs are costs we incur to issue policies, which include commissions, premium taxes, underwriting reports, and underwriter compensation costs. The Company offsets the direct commissions it pays with ceded commissions it receives from reinsurers. Other operating expenses consist primarily of information technology costs, accounting, and internal control salaries, as well as audit and legal expenses. Policy acquisition costs and other operating expenses increased by $578,000, or 10.0%, to $6,350,000 for the three months e