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USAC US Alliance

Filed: 12 Nov 20, 10:38am
 

 

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2020.

 

or

 

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

 

For the transition period from _________________________ to _________________________________

 

Commission File Number: 000-55627

 

US ALLIANCE CORPORATION
(Exact name of registrant as specified in its charter)

 

KANSAS26-4824142
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
  
4123 SW Gage Center Drive, Suite 240, Topeka, Kansas66604
(Address of principal executive offices)(Zip Code)

 

(785) 228-0200

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   ☒ Yes ☐ No

 

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

Large accelerated

filer

Accelerated filer

Non-accelerated

filer

Smaller reporting

company

Emerging growth

company

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common stock, $0.10 par value

7,741,401 shares outstanding

as of November 4, 2020

 

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

Title of each classTrading SymbolName of each exchange on which registered
N/AN/AN/A
 

 

 

 

 

US ALLIANCE CORPORATION

     

FORM 10-Q

     

TABLE OF CONTENTS

     

Part I - Financial Information

     

Item

 

Item Description

 

Page

Item 1

 

Financial Statements

 

3

     
  

Consolidated Balance Sheets

 

3

     
  

Consolidated Statements of Comprehensive Income (Loss)

 

4

     
  

Consolidated Statements of Changes in Shareholders' Equity

 

5

     
  

Consolidated Statements of Cash Flows

 

6

     
  

Notes to Consolidated Financial Statements

 

8

     

Item 2

 

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

 

21

     

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

 

34

     

Item 4

 

Controls and Procedures

 

34

     

Part II - Other Information

     

Item

 

Item Description

 

Page

Item 1

 

Legal Proceedings

 

35

     

Item 1A

 

Risk Factors

 

35

     

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

35

     

Item 3

 

Defaults Upon Senior Securities

 

35

     

Item 4

 

Mine Safety Disclosures

 

35

     

Item 5 

 

Other Information

 

35

     

Item 6

 

Exhibits

 

36

     
  

Signatures

 

37

 

 

 

1.      FINANCIAL STATEMENTS

 

US Alliance Corporation

 

Consolidated Balance Sheets

 

 

  

September 30, 2020

  

December 31, 2019

 
    (unaudited)     

Assets

       

Investments:

        

Available for sale fixed maturity securities (amortized cost: $32,587,751 and $30,823,397 as of September 30, 2020 and December 31, 2019, respectively)

 $36,667,727  $33,152,892 

Equity securities, at fair value

  10,123,484   10,141,503 

Mortgage loans on real estate

  2,311,931   - 

Funds withheld under coinsurance agreement, at fair value

  45,330,710   - 

Policy loans

  163,725   118,930 

Total investments

  94,597,577   43,413,325 
         

Cash and cash equivalents

  5,184,510   6,678,805 

Investment income due and accrued

  370,342   321,362 

Reinsurance related assets

  62,498   188,382 

Deferred acquisition costs, net

  8,394,478   2,652,674 

Value of business acquired, net

  544,767   559,994 

Property, equipment and software, net

  36,163   43,841 

Goodwill

  277,542   277,542 

Deferred tax asset, net of valuation allowance

  431,158   431,158 

Other assets

  722,840   372,166 

Total assets

 $110,621,875  $54,939,249 
         
         

Liabilities and Shareholders' Equity

        

Liabilities:

        

Policy liabilities:

        

Deposit-type contracts

 $71,662,245  $19,396,614 

Policyholder benefit reserves

  19,921,816   17,326,524 

Dividend accumulation

  115,205   123,038 

Advance premiums

  122,415   78,709 

Total policy liabilities

  91,821,681   36,924,885 
         

Accounts payable and accrued expenses

  143,522   122,981 

Federal Home Loan Bank advance

  2,000,000   1,000,000 

Other liabilities

  180,976   15,186 

Total liabilities

  94,146,179   38,063,052 
         

Shareholders' Equity:

        

Common stock, $0.10 par value. Authorized 20,000,000 shares; issued and outstanding 7,741,358 and 7,734,004 shares as of September 30, 2020 and December 31, 2019, respectively

  774,137   773,401 

Additional paid-in capital

  23,116,136   23,210,257 

Accumulated deficit

  (11,494,544)  (9,436,956)

Accumulated other comprehensive income

  4,079,967   2,329,495 

Total shareholders' equity

  16,475,696   16,876,197 
         

Total liabilities and shareholders' equity

 $110,621,875  $54,939,249 
         

 

See Notes to Consolidated Financial Statements (unaudited).

 

 

 

US Alliance Corporation

Consolidated Statements of Comprehensive Income (Loss)

 

  

Nine Months Ended September 30,

  

Three Months Ended September 30,

 
  

2020

  

2019

  

2020

  

2019

 
  (unaudited)  (unaudited) 

Income:

 

     

Premium income

 $7,631,621  $6,983,705  $2,547,843  $2,063,015 

Net investment income

  2,322,169   1,303,757   1,066,158   442,719 

Net investment gains (losses)

  (437,085)  937,590   922,020   106,301 

Other income

  48,232   40,454   20,524   15,396 

Total income

  9,564,937   9,265,506   4,556,545   2,627,431 
                 

Expenses:

                

Death claims

  1,316,831   1,022,585   394,175   298,269 

Policyholder benefits

  3,949,421   3,267,898   1,301,716   962,603 

Increase in policyholder reserves

  2,574,776   1,997,786   962,083   560,128 

Commissions, net of deferrals

  536,257   571,543   164,687   157,944 

Amortization of deferred acquisition costs

  757,333   293,032   9,961   112,305 

Amortization of value of business acquired

  15,227   15,228   5,076   5,076 

Salaries & benefits

  780,626   773,400   263,541   270,673 

Other operating expenses

  1,692,054   940,502   383,151   217,987 

Total expense

  11,622,525   8,881,974   3,484,390   2,584,985 
                 
                 

Net income (loss)

 $(2,057,588) $383,532  $1,072,155  $42,446 
                 

Net income (loss) per common share, basic and diluted

 $(0.27) $0.05  $0.14  $0.01 
                 

Unrealized net holding gains arising during the period

  1,819,318   2,480,863   571,875   993,217 

Reclassification adjustment for (gains) losses included in net loss

  (68,846)  13,985   (9,157)  (543)
                 

Other comprehensive income

  1,750,472   2,494,848   562,718   992,674 
                 

Comprehensive income (loss)

 $(307,116) $2,878,380  $1,634,873  $1,035,120 

 

See Notes to Consolidated Financial Statements (unaudited).

 

 

 

US Alliance Corporation

Consolidated Statements of Changes in Shareholders' Equity

Nine Months and Three Months Ended September 30, 2020 and 2019 (Unaudited)

 

 

              

Accumulated

         
  

Number of

          

Other

         
  

Shares of

  

Common

  

Additional

  

Comprehensive

  

Accumulated

     
  

Common Stock

  

Stock

  

Paid-in Capital

  

Income / (Loss)

  

Deficit

  

Total

 

Balance, December 31, 2018

  7,650,551  $765,056  $22,989,443  $(2,184,429) $(8,937,404) $12,632,666 

Common stock issued, $7 per share

  82,019   8,202   565,931   -   -   574,133 

Costs associated with common stock issued

  -   -   (300,981)  -   -   (300,981)

Cumulative effect, adoption of accounting guidance for equity securities

  -   -   -   1,098,760   (1,098,760)  - 

Other comprehensive income

  -   -   -   3,580,517   -   3,580,517 

Net income

  -   -   -   -   383,532   383,532 

Balance, September 30, 2019

  7,732,570  $773,258  $23,254,393  $2,494,848  $(9,652,632) $16,869,867 
                         

Balance, December 31, 2019

  7,734,004  $773,401  $23,210,257  $2,329,495  $(9,436,956) $16,876,197 

Common stock issued, $7 per share

  7,354   736   50,742   -   -   51,478 

Costs associated with common stock issued

  -   -   (144,863)  -   -   (144,863)

Other comprehensive income

  -   -   -   1,750,472   -   1,750,472 

Net loss

  -   -   -   -   (2,057,588)  (2,057,588)

Balance, September 30, 2020

  7,741,358  $774,137  $23,116,136  $4,079,967  $(11,494,544) $16,475,696 

 

 

              

Accumulated

         
  

Number of

          

Other

         
  

Shares of

  

Common

  

Additional

  

Comprehensive

  

Accumulated

     
  

Common Stock

  

Stock

  

Paid-in Capital

  

Income

  

Deficit

  

Total

 

Balance, June 30, 2019

  7,707,090  $770,710  $23,141,692  $1,502,174  $(9,695,078) $15,719,498 

Common stock issued, $7 per share

  25,480   2,548   175,812   -   -   178,360 

Costs associated with common stock issued

  -   -   (63,111)  -   -   (63,111)

Other comprehensive income

  -   -   -   992,674   -   992,674 

Net income

  -   -   -   -   42,446   42,446 

Balance, September 30, 2019

  7,732,570  $773,258  $23,254,393  $2,494,848  $(9,652,632) $16,869,867 
                         

Balance, June 30, 2020

  7,741,229  $774,124  $23,161,098  $3,517,249  $(12,566,699) $14,885,772 

Common stock issued, $7 per share

  129   13   890   -   -   903 

Costs associated with common stock issued

  -   -   (45,852)  -   -   (45,852)

Other comprehensive income

  -   -   -   562,718   -   562,718 

Net income

  -   -   -   -   1,072,155   1,072,155 

Balance, September 30, 2020

  7,741,358  $774,137  $23,116,136  $4,079,967  $(11,494,544) $16,475,696 

 

See Notes to Consolidated Financial Statements (unaudited).

 

 

 

US Alliance Corporation

Consolidated Statements of Cash Flows

 

 

  

Nine Months Ended September 30,

 
  

2020

  

2019

 
  (unaudited) 

Cash Flows from operating activities:

 

 

 

Net income (loss)

 $(2,057,588) $383,532 

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

        

Depreciation and amortization

  7,678   7,678 

Net realized losses on the sale of securities

  172,351   13,985 

Unrealized (gains) losses on equity securities

  126,205   (951,575)

Change in fair value of funds withheld embedded derivative

  138,529   - 

Amortization of investment securities, net

  100,026   27,664 

Deferred acquisition costs capitalized

  (591,987)  (254,723)

Deferred acquisition costs amortized

  757,333   293,033 

Value of business acquired amortized

  15,227   15,228 

Interest credited on deposit type contracts

  811,403   495,623 

(Increase) decrease in operating assets:

        

Change in funds withheld

  (518,388)  - 

Investment income due and accrued

  (48,980)  (19,453)

Reinsurance related assets

  189,532   (12,981)

Other assets

  130,235   6,687 

Increase (decrease) in operating liabilities:

        

Policyowner benefit reserves

  2,595,292   2,045,227 

Dividend accumulation

  (7,833)  (49,481)

Advance premiums

  43,706   39,972 

Other liabilities

  165,790   (11,117)

Accounts payable and accrued expenses

  20,541   (207,403)

Net cash provided by operating activities

  2,049,072   1,821,896 
         
         

Cash Flows from investing activities:

        

Purchase of fixed income investments

  (2,496,724)  (1,230,636)

Purchase of equity investments

  (5,013,668)  (179,496)

Purchase of mortgage investments

  (2,317,154)  - 

Proceeds from fixed income sales and repayments

  1,928,744   528,750 

Proceeds from equity sales

  3,437,262   268,101 

Proceeds from mortgage repayments

  5,223   - 

   Transfers to funds withheld

  (4,391,824)  - 

   Interest on policy loans

  (8,934)  (675)

   Increase in policy loans

  (35,861)  (11,560)

Net cash used in investing activities

  (8,892,936)  (625,516)
         

Cash Flows from financing activities:

        

Receipts on deposit-type contracts

  5,883,499   2,779,027 

Withdrawals on deposit-type contracts

  (1,440,545)  (1,180,666)

Proceeds from FHLB advance

  1,000,000   - 

Proceeds received from issuance of common stock, net of costs of issuance

  (93,385)  273,152 

Net cash provided by financing activities

  5,349,569   1,871,513 
         

Net increase (decrease) in cash and cash equivalents

  (1,494,295)  3,067,893 
         

Cash and Cash Equivalents:

        

Beginning

  6,678,805   2,077,646 

Ending

 $5,184,510  $5,145,539 

 

See Notes to Consolidated Financial Statements (unaudited).

 

 

US Alliance Corporation

Supplemental Cash Flow Information

 

 

  

Nine Months Ended September 30,

 
  

2020

  

2019

 

Supplemental Disclosure of Non-Cash Information

        

Funds withheld assumed deposits on deposit-type contracts

 $47,097,503  $- 

Funds withheld assumed withdrawals on deposit-type contracts

  86,229   - 

Commissions and expense allowances deducted from funds withheld

  6,808,484   - 

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

 

Note 1.     Description of Business and Significant Accounting Policies

 

Description of business: US Alliance Corporation ("USAC") was formed as a Kansas corporation on April 24, 2009 to raise capital to form a new Kansas-based life insurance company. Our offices are located at 4123 SW Gage Center Drive, Suite 240, Topeka, Kansas 66604. Our telephone number is 785-228-0200 and our website address is www.usalliancecorporation.com.

 

USAC has five direct and indirect wholly-owned operating subsidiaries. US Alliance Life and Security Company ("USALSC") was formed June 9, 2011, to serve as our life insurance company. US Alliance Marketing Corporation ("USAMC") was formed April 23, 2012, to serve as a marketing resource. US Alliance Investment Corporation ("USAIC") was formed April 23, 2012 to serve as investment manager for USAC. Dakota Capital Life Insurance Company (“DCLIC”) was acquired on August 1, 2017 when USAC merged with Northern Plains Capital Corporation (“NPCC”). US Alliance Life and Security Company - Montana (USALSC-Montana) was acquired December 14, 2018. Both DCLIC and USALSC-Montana are wholly-owned subsidiaries of USALSC.

 

Unless the context otherwise indicates, references in this report to "we," "us," "our," or the "Company" refer collectively to USAC and its subsidiaries.

 

USAC terminated its initial public offering on February 24, 2013. During the balance of 2013, USAC achieved approval of an array of life insurance and annuity products, began development of various distribution channels and commenced insurance operations and product sales. USAC sold its first insurance product on May 1, 2013. USAC continued to expand its product offerings and distribution channels throughout 2014 and 2015. On February 24, 2015, USAC commenced a warrant exercise offering set to expire on February 24, 2016. On February 24, 2016, USAC extended the offering until February 24, 2017 and made additional shares available for purchase. All outstanding warrants expired on April 1, 2016. USAC has extended this offering to February 24, 2021. During the 4th quarter of 2017, USAC began a private placement offering to accredited investors in the state of North Dakota.

 

USALSC and DCLIC seek opportunities to develop and market additional products.

 

Our business model also anticipates the acquisition by USAC and/or USALSC of other insurance and insurance related companies, including third-party administrators, marketing organizations, and rights to other blocks of insurance business through reinsurance or other transactions.

 

Basis of presentation: The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods have been included.

 

The results of operation for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the year ended December 31, 2020 or for any other interim period or for any other future year. Certain financial information which is normally included in the notes to financial statements prepared in accordance with US GAAP, but which are not required for interim reporting purposes, has been condensed or omitted. The accompanying financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in USAC’s report on Form 10-K and amendments thereto for the year ended December 31, 2019.

 

Principles of consolidation: The consolidated financial statements include the accounts of USAC and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated from the consolidated financial statements.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

Area of Operation: USALSC is authorized to operate in the states of Kansas, North Dakota, Missouri, Nebraska, Oklahoma, and Wyoming. DCLIC is authorized to operate in the states of North Dakota and South Dakota. USALSC-Montana is authorized to operate in the state of Montana

 

Reclassifications: Certain reclassifications of a minor nature have been made to prior-year balances to conform to current-year presentation with no net impact to net loss/income or equity.

 

Common stock and income (loss) per share: The par value for common stock is $0.10 per share with 20,000,000 shares authorized. As of September 30, 2020, and December 31, 2019, USAC had 7,741,358 and 7,734,004 common shares issued and outstanding, respectively.

 

Income (loss) per share attributable to USAC’s common stockholders were computed based on the net income (loss) and the weighted average number of shares outstanding during each year. The weighted average number of shares outstanding during the quarters ended September 30, 2020 and 2019 were 7,741,272 and 7,715,583 shares, respectively. The weighted average number of shares outstanding during the nine months ended September 30, 2020 and 2019 were 7,738,179 and 7,681,612 shares, respectively. Potential common shares are excluded from the computation when their effect is anti-dilutive. Basic and diluted net loss per common share is the same for the quarters and nine months ended September 30, 2020 and 2019.

 

New accounting pronouncements

 

Revenue from Contracts with Customers

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued updated guidance to clarify the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company's fee income related to providing services will be subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services.

 

The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when, or as, the entity satisfies a performance obligation.

 

In July 2015, the FASB deferred the effective date of the updated guidance on revenue recognition by one year to the quarter ending March 31, 2018.  As an emerging growth company, the Company chose to defer implementation of this accounting standard until the year ending December 31, 2019. The adoption of this guidance did not have a material effect on the Company’s result of operations, financial position or liquidity.

 

Recognition and Measurement of Financial Assets and Financial Liabilities

 

In January 2016, the FASB issued updated guidance regarding financial instruments. This guidance intends to enhance reporting for financial instruments and addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The significant amendments in this update generally require equity investments to be measured at fair value with changes in fair value recognized in net income, require the use of an exit price notion when measuring the fair value of financial instruments for disclosure purposes and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. This guidance also intends to enhance the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

This guidance was effective for the Company for the year ended December 31, 2019 and required a cumulative effect adjustment to opening retained earnings to be recorded for equity investments with readily determinable fair values. As of the adoption date, the Company held publicly traded equity investments with a fair value of $10,987,539 million in a net unrealized gain position of $ 1,098,760 million. The Company has recorded a cumulative-effect adjustment of $ 1,098,760 to decrease Accumulated Other Comprehensive Income (AOCI) with a corresponding increase to accumulated deficit for unrealized gains as of the beginning of fiscal year 2019. As a result of the implementation of ASU 2016-01, unrealized gains and losses in equity investments with readily determinable fair values are recorded on the Consolidated Statements of Comprehensive Income (Loss) within net investment gains (losses). The Company recorded a gain in net investment gains (losses) of $1.1 million for year ended December 31, 2019 as a result of adopting this standard. The implementation of this guidance is expected to increase volatility in our net income as the volatility previously recorded in Comprehensive Income (OCI) related to changes in the fair market value of available-for-sale equity investments will now be reflected in net income effective with the adoption date.

 

Leases

 

In February 2016, the FASB issued updated guidance to require lessees to recognize a right-to-use asset and a lease liability for leases with terms of more than 12 months.  The updated guidance retains the two classifications of a lease as either an operating or finance lease (previously referred to as a capital lease).  Both lease classifications require the lessee to record the right-to-use asset and the lease liability based upon the present value of cash flows.  Finance leases will reflect the financial arrangement by recognizing interest expense on the lease liability separately from the amortization expense of the right-to-use asset.  Operating leases will recognize lease expense (with no separate recognition of interest expense) on a straight-line basis over the term of the lease.   The accounting by lessors is not significantly changed by the updated guidance.  The updated guidance requires expanded qualitative and quantitative disclosures, including additional information about the amounts recorded in the financial statements.

 

The updated guidance is effective for reporting periods beginning after December 15, 2018, and will require that the earliest comparative period presented include the measurement and recognition of existing leases with an adjustment to equity as if the updated guidance had always been applied.  Early adoption is permitted.  As an emerging growth company, the Company has elected to defer implementation of this standard to fiscal years beginning after December 15, 2020. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

Measurement of Credit Losses on Financial Instruments

 

In June 2016, the FASB issued updated guidance for the accounting for credit losses for financial instruments.  The updated guidance applies a new credit loss model (current expected credit losses or CECL) for determining credit-related impairments for financial instruments measured at amortized cost (e.g. reinsurance recoverables) and requires an entity to estimate the credit losses expected over the life of an exposure or pool of exposures. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The expected credit losses, and subsequent adjustments to such losses, will be recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected.

 

 The updated guidance also amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value.  In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists.

 

The updated guidance is effective for reporting periods beginning after December 15, 2019.  Early adoption is permitted for reporting periods beginning after December 15, 2018.  As an emerging growth company, the Company has elected to defer implementation of this standard to fiscal years beginning after December 15, 2022. The Company will not be able to determine the impact that the updated guidance will have on its results of operations, financial position or liquidity until the updated guidance is adopted.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

Classification of Certain Cash Receipts and Cash Payment

 

In August 2016, the FASB issued new guidance that clarifies the classification of certain cash receipts and cash payments in the statement of cash flows under eight different scenarios including, but not limited to: (i) debt prepayment or debt extinguishment costs; (ii) proceeds from the settlement of corporate-owned life insurance policies including bank-owned life insurance policies; (iii) distributions received from equity method investees; and (iv) separately identifiable cash flows and application of the predominance principle. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. As an emerging growth company, the Company elected to defer implementation of this standard to fiscal years beginning after December 15, 2018. The implementation of this standard did not have a material impact on the Company’s statement of cash flows.

 

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

 

On December 22, 2017, the U.S. federal government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (Tax Cuts and Jobs Act). In February 2018, FASB issued guidance to address certain issues related to the Tax Cuts and Jobs Act. This new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

 

Targeted Improvements to the Accounting for Long-Duration Contracts

 

In August 2018, the FASB issued ASU 2018-12 “Targeted Improvements to the Accounting for Long-Duration Contracts.” ASU 2018-12 requires periodic reassessment of actuarial and discount rate assumptions used in the valuation of policyholder liabilities and deferred acquisition costs arising from the issuance of long-duration insurance and reinsurance contracts, with the effects of the changes in cash flow assumptions reflected in earnings and the effects of changes in discount rate assumptions reflected in other comprehensive income. Under current accounting guidance, the actuarial and discount rate assumptions are set at the contract inception date and not subsequently changed, except in limited circumstances. ASU 2018-12 also requires new disclosures and is effective for fiscal years beginning after December 15, 2023, with early adoption permitted. We are evaluating the effect this standard will have on our Consolidated Financial Statements.

 

Fair Value Measurement

 

This guidance is part of the FASB’s disclosure framework project and eliminates certain disclosure requirements for fair value measurement, requires entities to disclose new information and modifies existing disclosure requirements. This guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

 

All other new accounting standards and updates of existing standards issued through the date of this filing were considered by management and did not relate to accounting policies and procedures pertinent or material to the Company at this time.

 

The Company’s significant accounting policies are discussed in Note 1 “Description of Business and Significant Accounting Policies” of the 2019 Annual Report. The significant accounting policies below reflect the impact of new transactions involving funds withheld under a coinsurance agreement and the issuance of mortgage loans.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

Funds Withheld under Coinsurance Agreement: Funds withheld under coinsurance agreement represent amounts contractually withheld by American Life and Security Corporation in accordance with a reinsurance agreement entered into in 2020. For agreements written on a coinsurance funds withheld basis, assets that support the net statutory reserves or as defined by the treaty, are withheld and legally owned by the ceding company.  Interest is recorded in net investment income, net of related expenses in the consolidated statements of income (loss).  Funds withheld under coinsurance agreement are presented net of the embedded derivative, discussed below.

 

Embedded Derivatives: The Company has entered into coinsurance funds withheld arrangement which contains an embedded derivative. Under ASC 815, the Company assesses whether the embedded derivative is clearly and closely related to the host contract. The Company bifurcates embedded derivatives from the host instrument for measurement purposes when the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and a separate instrument with the same terms would qualify as a derivative instrument. Embedded derivatives, which are reported with the host instrument on the consolidated balance sheets in funds withheld under coinsurance agreement, are reported at fair value with changes in fair value recognized in the consolidated statements of comprehensive income (loss) in net investment gains (losses).

 

Mortgage Loans on Real Estate: Mortgage loans on real estate are carried at unpaid principal balances, net of any unamortized premium or discount and valuation allowances.  Interest income is accrued on the principal amount of the mortgage loans based on its contractual interest rate.  Amortization of premiums and discounts is recorded using the effective yield method. The Company accrues interest on loans until probable the Company will not receive interest or the loan is 90 days past due.  Interest income, amortization of premiums, accretion of discounts and prepayment fees are reported in investment income, net of related expenses in the consolidated statements of comprehensive income (loss).

 

A mortgage loan is considered to be impaired when, based on the current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the mortgage agreement. 

 

Valuation allowances on mortgage loans are established based upon inherent losses expected by management to be realized in connection with future dispositions or settlement of mortgage loans, including foreclosures. The Company establishes valuation allowances for estimated impairments on an individual loan basis as of the balance sheet date. Such valuation allowances are based on the excess carrying value of the loan over the present value of expected future cash flows discounted at the loan’s original effective interest rate, the value of the loan’s collateral if the loan is in the process of foreclosure or is otherwise collateral-dependent, or the loan’s market value if the loan is being sold. These evaluations are revised as conditions change and new information becomes available. In addition to historical experience, management considers qualitative factors that include the impact of changing macro-economic conditions, which may not be currently reflected in the loan portfolio performance, and the quality of the loan portfolio.

 

Any interest accrued or received on the net carrying amount of the impaired loan will be included in investment income or applied to the principal of the loan, depending on the assessment of the collectibility of the loan. Mortgage loans deemed to be uncollectible or that have been foreclosed are charged off against the valuation allowances and subsequent recoveries, if any, are credited to the valuation allowances. Changes in valuation allowances are reported in investment related gains (losses), net on the consolidated statements of income (loss).

 

The Company evaluates whether a mortgage loan modification represents a troubled debt restructuring. In a troubled debt restructuring, the Company grants concessions related to the borrower’s financial difficulties. Generally, the types of concessions include: reduction of the contractual interest rate, extension of the maturity date at an interest rate lower than current market interest rates and/or a reduction of accrued interest. The Company considers the amount, timing and extent of the concession granted in determining any impairment or changes in the specific valuation allowance recorded in connection with the troubled debt restructuring. Through the continuous monitoring process, the Company may have recorded a specific valuation allowance prior to when the mortgage loan is modified in a troubled debt restructuring. Accordingly, the carrying value (after specific valuation allowance) before and after modification through a troubled debt restructuring may not change significantly, or may increase if the expected recovery is higher than the pre-modification recovery assessment.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

 

Note 2.     Investments

 

Fixed Maturities

 

The amortized cost and fair value of available for sale investments as of September 30, 2020 and December 31, 2019 is as follows:

 

  

September 30, 2020

 
  

Cost or

  

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

     
  

Cost

  

Gains

  

Losses

  

Fair Value

 
  (unaudited) 

Available for sale:

   

Fixed maturities:

                

US Treasury securities

 $573,979  $122,953  $-  $696,932 

Corporate bonds

  19,128,008   3,086,100   (111,683)  22,102,425 

Municipal bonds

  5,951,127   920,148   (103)  6,871,172 

Redeemable preferred stock

  3,015,598   16,473   (48,985)  2,983,086 

Mortgage backed and asset backed securities

  3,919,039   106,252   (11,179)  4,014,112 

Total available for sale

 $32,587,751  $4,251,926  $(171,950) $36,667,727 

 

 

  

December 31, 2019

 
  

Cost or

  

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

     
  

Cost

  

Gains

  

Losses

  

Fair Value

 

Available for sale:

                

Fixed maturities:

                

US Treasury securities

 $608,477  $24,162  $-  $632,639 

Corporate bonds

  18,407,211   1,697,265   (20,079)  20,084,397 

Municipal bonds

  6,538,883   518,059   (1,883)  7,055,059 

Redeemable preferred stock

  2,097,206   36,687   -   2,133,893 

Mortgage backed and asset backed securities

  3,171,620   77,593   (2,309)  3,246,904 

Total available for sale

 $30,823,397  $2,353,766  $(24,271) $33,152,892 

 

The amortized cost and fair value of debt securities as of September 30, 2020 and December 31, 2019, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

  

As of September 30, 2020

  

As of December 31, 2019

 
  

Amortized Cost

  

Fair Value

  

Amortized Cost

  

Fair Value

 
  (unaudited)         

Amounts maturing in:

 

 

         

One year or less

 $100,957  $103,352  $99,987  $100,239 

After one year through five years

  1,625,522   1,747,976   1,424,337   1,471,552 

After five years through ten years

  2,885,723   3,367,585   3,286,937   3,574,191 

More than 10 years

  21,040,912   24,451,616   20,743,310   22,626,113 

Redeemable preferred stocks

  3,015,598   2,983,086   2,097,206   2,133,893 

Mortgage backed and asset backed securities

  3,919,039   4,014,112   3,171,620   3,246,904 

Total amortized cost and fair value

 $32,587,751  $36,667,727  $30,823,397  $33,152,892 

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

Proceeds from the sale of securities, maturities, and asset paydowns for the first nine months of 2020 and 2019 were $5,371,229 and $796,851 respectively. Realized gains and losses related to the sale of securities are summarized below:

 

  

Nine Months Ended September 30,

 
  

(unaudited)

 
  

2020

  

2019

 

Gross gains

 $119,173  $4,601 

Gross losses

  (291,524)  (18,586)

Net security losses

 $(172,351) $(13,985)

 

Proceeds from the sale of securities, maturities, and asset paydowns for the three months September 30, 2020 and 2019 were $766,220 and $135,587 respectively. Realized gains and losses related to the sale of securities are summarized below:

 

  

Three Months Ended September 30,

 
  

(unaudited)

 
  

2020

  

2019

 

Gross gains

 $54,266  $650 

Gross losses

  (1,739)  (107)

Net security gains

 $52,527  $543 

 

Gross unrealized losses by duration for available for sale securities are summarized as follows:

 

  

Less than 12 months

  

Greater than 12 months

  

Total

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Loss

  

Value

  

Loss

  

Value

  

Loss

 
September 30, 2020 (unaudited) 

Available for sale:

   

Fixed maturities:

                        

Corporate bonds

 $1,379,313  $(106,717) $45,000  $(4,966) $1,424,313  $(111,683)

Municipal bonds

  47,844   (103)  -   -   47,844   (103)

Redeemable preferred stock

  2,280,348   (48,985)  -   -   2,280,348   (48,985)

Mortgage backed and asset backed securities

  316,327   (11,179)  -   -   316,327   (11,179)

Total fixed maturities

 $4,023,832  $(166,984) $45,000  $(4,966) $4,068,832  $(171,950)

 

 

  

Less than 12 months

  

Greater than 12 months

  

Total

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Loss

  

Value

  

Loss

  

Value

  

Loss

 

December 31, 2019

 

Available for sale:

                        

Fixed maturities:

                        

Corporate bonds

 $967,848  $(20,079) $-  $-  $967,848  $(20,079)

Municipal bonds

  46,646   (1,883)  -   -   46,646   (1,883)

Mortgage backed and asset backed securities

  -   -   296,576   (2,309)  296,576   (2,309)

Total fixed maturities

 $1,014,494  $(21,962) $296,576  $(2,309) $1,311,070  $(24,271)

 

Unrealized losses occur from market price declines that may be due to a number of factors, including economic downturns, changes in interest rates, competitive forces within an industry, issuer specific events, operational difficulties, lawsuits, and market pricing anomalies caused by factors such as temporary lack of liquidity.

 

The total number of available for sale securities in the investment portfolio in an unrealized loss position as of September 30, 2020 was 22, which represented an unrealized loss of $171,950 of the aggregate carrying value of those securities. The 22 securities breakdown as follows: 7 bonds, 6 mortgage and asset backed securities, and 9 preferred stocks. The Company determined that no securities were considered to be other-than-temporarily impaired as of September 30, 2020 and December 31, 2019.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

Mortgage Loans on Real Estate

 

The Company’s mortgage loans by property type as of September 30, 2020 and December 31, 2019 are summarized as follows:

 

  

September 30,2020

  

December 31, 2019

 
  (unaudited)     

Commercial mortgage loans by property type

 

 

     

Student housing

 $781,512  $- 

Condominium

  1,352,435   - 

Multi-family

  177,984   - 

Total commercial mortgages

 $2,311,931  $- 

 

The Company’s mortgage loans by loan-to-value ratio as of September 30, 2020 and December 31, 2019 are summarized as follows:

 

  

September 30,2020

  

December 31, 2019

 
  (unaudited)     

Loan to value ratio

 

 

     

Over 70 to 80%

 $1,352,435  $- 

Over 20 to 30%

  177,984   - 

Over 10 to 20%

  781,512   - 

Total

 $2,311,931  $- 

 

The Company’s mortgage loans by maturity date as of September 30, 2020 and December 31, 2019 are summarized as follows:

 

  

September 30,2020

  

December 31, 2019

 
  (unaudited)     

Maturity Date

 

 

     

One year or less

 $2,311,931  $- 

 

Investment Income, Net of Expenses

 

The components of net investment income for the nine months ended September 30, 2020 and 2019 are as follows:

 

  

Nine Months Ended September 30,

 
  

2020

  

2019

 
  

(unaudited)

 

Fixed maturities

 $889,563  $873,443 

Mortgages

  61,438   - 

Equity securities

  487,777   440,426 

Funds withheld

  962,023   - 

Cash and cash equivalents

  12,240   23,772 
   2,413,041   1,337,641 

Less investment expenses

  (90,872)  (33,884)
  $2,322,169  $1,303,757 

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

The components of net investment income for the three months ended September 30, 2020 and 2019 are as follows:

 

  

Three Months Ended September 30,

 
  

2020

  

2019

 
  

(unaudited)

 

Fixed maturities

 $272,145  $288,410 

Mortgages

  55,587  $- 

Equity securities

  198,327   155,350 

Funds withheld

  597,990   - 

Cash and cash equivalents

  864   9,794 
   1,124,913   453,554 

Less investment expenses

  (58,755)  (10,835)
  $1,066,158  $442,719 

 

 

Note 3.     Derivative Instruments

 

Accounting for Derivative Instruments

 

See Note 1 for a detailed description of the accounting treatment for derivative instruments, including embedded derivatives.

 

Types of Derivatives used by the Company

 

The Company’s derivatives consists solely of embedded derivatives on funds withheld on coinsurance assets.

 

Summary of Derivative Positions

 

The fair value of the Company’s derivative financial instruments on the consolidated balance sheets is as follows:

 

  

September 30, 2020

  

December 31, 2019

  
  

(unaudited)

          
  

Derivative

  

Derivative

 

Balance

  

Asset

  

Liability

  

Asset

  

Liability

 

Reported In

Derivatives:

                 

Embedded derivatives:

                 

Funds withheld embedded derivative

 $-  $138,529  $-  $- 

Funds withheld

 

The following table shows the change in the fair value of the derivative financial instruments in the consolidated statements of comprehensive income:

 

  

Nine Months Ending

  

Nine Months Ending

 

Balance

  

September 30,2020

  

September 30,2019

 

Reported In

  (unaudited)  (unaudited)  

Derivatives:

 

 

  

 

 

 

Embedded derivatives:

         

Change in funds withheld embedded derivative

 $(138,529) $- 

Net investment gains (losses)

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

 

Note 4.     Fair Value Measurements

 

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. The Company uses a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

 

 

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement rate.

 

 

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

 

Level 3 inputs are unobservable for the asset or liability and reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

 

Investments, available for sale: Fair values of available for sale fixed maturity securities are provided by a third party pricing service. The pricing service uses a variety of sources to determine fair value of securities. The Company’s fixed maturity securities are highly liquid, which allows for a high percentage of the portfolio to be priced through pricing sources.

 

Equity securities: Fair values for equity securities are also provided by a third party pricing service and are derived from active trading on national market exchanges.

 

Embedded derivative: The fair value of embedded derivatives associated with funds withheld reinsurance treaty is determined upon a total return swap technique with reference to the fair value of the investments held by the ceding company that support the Company’s fund withheld asset with an adjustment for a credit valuation adjustment. The fair value of the underlying assets is generally based upon market observable inputs with industry standard valuation techniques. The valuation also requires certain significant inputs, which are generally not observable and accordingly, the valuation is considered level 3 in the fair value hierarchy. Since the embedded derivative is in a liability position there is no credit valuation adjustment at September 30, 2020.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

The following table presents the amounts of assets measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019:

 

  

September 30, 2020

 
  

Total

  

Level 1

  

Level 2

  

Level 3

 
  

(unaudited)

 

Fixed maturities:

                

US Treasury securities

 $696,932  $696,932  $-  $- 

Corporate bonds

  22,102,425   -   21,915,625   186,800 

Municipal bonds

  6,871,172   -   6,871,172   - 

Redeemable preferred stock

  2,983,086   -   2,983,086   - 

Mortgage backed and asset backed securities

  4,014,112   -   4,014,112   - 

Total fixed maturities

  36,667,727   696,932   35,783,995   186,800 

Equities:

                

Common stock

  7,876,172   7,785,072   91,100   - 

Preferred stock

  2,247,312   -   2,247,312   - 

Total equities

  10,123,484   7,785,072   2,338,412   - 

Funds withheld embedded derivative

  (138,529)  -   -   (138,529)

Total

 $46,652,682  $8,482,004  $38,122,407  $48,271 

 

  

December 31, 2019

 
  

Total

  

Level 1

  

Level 2

  

Level 3

 

Available for sale:

                

Fixed maturities:

                

US Treasury securities

 $632,639  $632,639  $-  $- 

Corporate bonds

  20,084,397   -   19,892,797   191,600 

Municipal bonds

  7,055,059   -   7,055,059   - 

Redeemable preferred stock

  2,133,893   -   2,133,893   - 

Mortgage backed and asset backed securities

  3,246,904   -   3,246,904   - 

Total fixed maturities

  33,152,892   632,639   32,328,653   191,600 

Equities:

                

Common stock

  9,214,694   9,169,694   45,000   - 

Preferred stock

  926,809   -   926,809   - 

Total equities

  10,141,503   9,169,694   971,809   - 

Total

 $43,294,395  $9,802,333  $33,300,462  $191,600 

 

 

The reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) are as follows:

 

For the Nine Months Ended September 30, 2020

 

Corporate

  

Funds

 
  

Bonds

  

Withheld

 

Fair value, beginning of period

 $191,600  $- 

Principal payment

  (4,800)  - 

Investment related (losses), net

  -   (138,529)

Fair value, end of period

 $186,800  $(138,529)

 

For the Three Months Ended September 30, 2020

 

Corporate

  

Funds

 
  

Bonds

  

Withheld

 

Fair value, beginning of period

 $191,600  $(637,033)

Principal payment

  (4,800)  - 

Investment related gains (losses), net

  -   498,504 

Fair value, end of period

 $186,800  $(138,529)

 

The Company discloses the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The estimated fair value approximates carrying value for accrued interest. The methodologies for other financial assets and financial liabilities are discussed below:

 

Cash and cash equivalents: The carrying amounts approximate fair value because of the short maturity of these instruments.

 

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

Investment income due and accrued: The carrying amounts approximate fair value because of the short maturity of these instruments.

 

Funds withheld: The carrying value of funds withheld at interest approximates fair value as funds are specifically identified in the agreement. The fair value of the specified funds is based on the fair value of the underlying assets that are held by the ceding company.  The ceding company uses a variety of sources and pricing methodologies, which are not transparent to the Company and may include significant unobservable inputs to value the securities held in distinct portfolios, therefore the valuation of these funds withheld assets are considered Level 3 in the fair value hierarchy.

 

Policy loans: Policy loans are stated at unpaid principal balances. As these loans are fully collateralized by the cash surrender value of the underlying insurance policies, the carrying value of the policy loans approximates their fair value.

 

Federal Home Loan Bank Advances: FHLB advances are stated at the outstanding principal balances and the carrying value approximates fair value.

 

Policyholder deposits in deposit-type contracts: The fair value for policyholder deposits in deposit-type insurance contracts (accumulation annuities) is calculated using a discounted cash flow approach.  Cash flows are projected using actuarial assumptions and discounted to the valuation date using risk-free rates adjusted for credit risk and the nonperformance risk of the liabilities.

 

The estimated fair values of the Company’s financial assets and liabilities are as follows:

 

  

September 30, 2020

             
  

(unaudited)

             
  

Carrying Value

  

Fair Value

  

Level 1

  

Level 2

  

Level 3

 

Financial Assets:

                    

Cash and cash equivalents

 $5,184,510  $5,184,510  $5,184,510  $-  $- 

Investment income due and accrued

  370,342   370,342   -   370,342   - 

Funds withheld

  45,469,239   45,330,710   -   -   45,330,710 

Policy loans

  163,725   163,725   -   -   163,725 

Total Financial Assets (excluding available for sale investments)

 $51,187,816  $51,049,287  $5,184,510  $370,342  $45,494,435 
                     

Financial Liabilities:

                    

Federal Home Loan Bank advance

 $2,000,000  $2,000,000  $-  $-  $2,000,000 

Policyholder deposits in deposit-type contracts

  71,662,245   73,982,003   -   -   73,982,003 

Total Financial Liabilities

 $73,662,245  $75,982,003  $-  $-  $75,982,003 

 

 

  

December 31, 2019

             
                     
  

Carrying Value

  

Fair Value

  

Level 1

  

Level 2

  

Level 3

 

Financial Assets:

                    

Cash and cash equivalents

 $6,678,805  $6,678,805  $6,678,805  $-  $- 

Investment income due and accrued

  321,362   321,362   -   321,362   - 

Policy loans

  118,930   118,930   -   -   118,930 

Total Financial Assets (excluding available for sale investments)

 $7,119,097  $7,119,097  $6,678,805  $321,362  $118,930 
                     

Financial Liabilities:

                    

Federal Home Loan Bank advance

 $1,000,000  $1,000,000  $-  $-  $1,000,000 

Policyholder deposits in deposit-type contracts

  19,396,614   19,186,265   -   -   19,186,265 

Total Financial Liabilities

 $20,396,614  $20,186,265  $-  $-  $20,186,265 

 

 

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 


Note 5.     Income Tax Provision

 

No income tax expense or (benefit) has been reflected for the quarters ended September 30, 2020 and 2019 due to the lack of taxable net income generated by the Company and a change in the valuation allowance pertaining to the deferred tax asset. The difference between the reported amount of income tax expense and the amount expected based upon statutory rates is primarily due to the increase in the valuation allowance on deferred taxes.

 

The net operating loss carryforwards for the Company are $13,296,815 and $12,567,367 as of September 30, 2020 and December 31, 2019, respectively. The components of the deferred tax assets and liabilities due to book and tax differences are the following: fixed asset depreciation, net operating loss carryforward, net unrealized gains (losses) on investment securities, policyowner benefit reserves and deferred acquisition costs. The deferred tax asset net of valuation allowance is $431,158 as of each of September 30, 2020 and December 31, 2019.

 

 

 

Note 6.   Subsequent Events

 

All of the effects of subsequent events that provide additional evidence about conditions that existed at the balance sheet date, including the estimates inherent in the process of preparing the consolidated financial statements, are recognized in the consolidated financial statements. The Company does not recognize subsequent events that provide evidence about conditions that did not exist at the balance sheet date but arose after, but before the consolidated financial statements are issued. In some cases, unrecognized subsequent events are disclosed to keep the consolidated financial statements from being misleading.

 

The Company has evaluated subsequent events through November 11, 2020, the date on which the consolidated financial statements were issued.

 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in this Form 10-Q. In connection with, and because we desire to take advantage of, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, including those relating to the Covid-19 pandemic, and many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by, or on our behalf. We disclaim any obligation to update forward looking statements.

 

Overview

 

US Alliance Corporation (“USAC”) was formed as a Kansas corporation on April 24, 2009 for the purpose of raising capital to form a new Kansas-based life insurance company. We presently conduct our business through our five wholly-owned subsidiaries: USALSC, a life insurance corporation; DCLIC, a life insurance corporation; USALSC-Montana, a life insurance corporation; USAMC, an insurance marketing corporation; and USAIC, an investment management corporation. Unless the context otherwise indicates, references in this report to “we”, “us”, “our”, or the “Company” refer collectively to USAC and its subsidiaries.

 

On January 2, 2012, USALSC was issued a Certificate of Authority to conduct life insurance business in the State of Kansas. We began third party administrative services in 2015.

 

On August 1, 2017, the Company merged with Northern Plains Capital Corporation (“Northern Plains”) with the Company being the ultimate surviving entity. As a result of this merger, the Company acquired Dakota Capital Life Insurance Company which became a wholly owned subsidiary of USALSC.

 

On December 14, 2018, the Company acquired Great Western Life Insurance Company. Great Western Life Insurance Company was renamed US Alliance Life and Security Company – Montana and is a subsidiary of USALSC.

 

The Company assumes business under three reinsurance treaties. On January 1, 2013, the Company entered into an agreement to assume 20% of a certain block of health insurance policies from Unified Life Insurance Company. On September 30, 2018, the Company entered into a coinsurance agreement to assume 100% of a certain block of life insurance policies from American Life and Security Company (“ALSC”). On April 15, 2020, with an effective date of January 1, 2020, the Company entered into a second coinsurance agreement with ALSC (the “2020 ALSC Agreement”) to assume a quota share percentage of a block of annuity policies. As of September 30, 2020, the Company had assumed $50.2 million in annuity deposits under the 2020 ALSC Agreement.

 

 

Critical Accounting Policies and Estimates

 

Our accounting and reporting policies are in accordance with GAAP. Our estimates may vary as more information about the extent to which Covid-19 and the resulting impact on economic conditions and the financial markets become known. Preparation of the consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The following is an explanation of our accounting policies and the estimates considered most significant by management. These accounting policies inherently require significant judgment and assumptions and actual operating results could differ significantly from management’s estimates determined using these policies. We believe the following accounting policies, judgments and estimates are the most critical to the understanding of our results of operations and financial position. A detailed discussion of significant accounting policies is provided in this report in the Notes to Consolidated Financial Statements included with this quarterly report.

 

 

Valuation of Investments

 

The Company's principal investments are in fixed maturity and equity securities. Fixed maturity securities, classified as available for sale, and equity securities are carried at their fair value in the consolidated balance sheets, with unrealized gains or losses recorded in comprehensive income (loss). Our fixed income investment manager utilizes external independent third-party pricing services to determine the fair values of investment securities available for sale.

 

We have a policy and process in place to identify securities that could potentially have an impairment that is other-than-temporary. The assessment of whether impairments have occurred is based on a case-by-case evaluation of underlying reasons for the decline in fair value. We consider severity of impairment, duration of impairment, forecasted recovery period, industry outlook, financial condition of the issuer, issuer credit ratings and whether we intend to sell a security, or it is more likely than not that we would be required to sell a security, prior to the recovery of the amortized cost. New England Asset Management, our investment manager, provides support to the Company in making these determinations.

 

The recognition of other-than-temporary impairment losses on debt securities is dependent on the facts and circumstances related to the specific security. If we intend to sell a security or it is more likely than not that we would be required to sell a security prior to recovery of the amortized cost, the difference between amortized cost and fair value is recognized in the income statement as an other-than-temporary impairment. As it relates to debt securities, if we do not expect to recover the amortized basis, do not plan to sell the security and if it is not more likely than not that we would be required to sell a security before the recovery of its amortized cost, the other-than-temporary impairment would be recognized. We would recognize the credit loss portion through earnings in the income statement and the noncredit loss portion in accumulated other comprehensive income.

 

Deferred Acquisition Costs

 

Incremental direct costs, net of amounts ceded to reinsurers, that result directly from and are essential to a product sale and would not have been incurred by us had the sale not occurred, are capitalized, to the extent recoverable, and amortized over the life of the premiums produced. Recoverability of deferred acquisition costs is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense.

 

Value of Business Acquired

 

Value of business acquired (VOBA) represents the estimated value assigned to purchased companies or insurance in force of the assumed policy obligations at the date of acquisition of a block of policies. At least annually, a review is performed on the models and the assumptions used to develop expected future profits, based upon management’s current view of future events. VOBA is reviewed on an ongoing basis to determine that the unamortized portion does not exceed the expected recoverable amounts. Management’s view primarily reflects our experience but can also reflect emerging trends within the industry. Short-term deviations in experience affect the amortization of VOBA in the period, but do not necessarily indicate that a change to the long-term assumptions of future experience is warranted. If it is determined that it is appropriate to change the assumptions related to future experience, then an unlocking adjustment is recognized for the block of business being evaluated. Certain assumptions, such as interest spreads and surrender rates, may be interrelated. As such, unlocking adjustments often reflect revisions to multiple assumptions. The VOBA balance is immediately impacted by any assumption changes, with the change reflected through the statements of comprehensive income as an unlocking adjustment in the amount of VOBA amortized. These adjustments can be positive or negative with adjustments reducing amortization limited to amounts previously deferred plus interest accrued through the date of the adjustment.

 

 

In addition, we may consider refinements in estimates due to improved capabilities resulting from administrative or actuarial system upgrades. We consider such enhancements to determine whether and to what extent they are associated with prior periods or simply improvements in the projection of future expected gross profits due to improved functionality. To the extent they represent such improvements, these items are applied to the appropriate financial statement line items in a manner similar to unlocking adjustments.

 

VOBA is also reviewed on an ongoing basis to determine that the unamortized portion does not exceed the expected recoverable amounts. If it is determined from emerging experience that the premium margins or gross profits are less than the unamortized value of business acquired, then the asset will be adjusted downward with the adjustment recorded as an expense in the current period.

 

Goodwill

 

Goodwill represents the excess of the amounts paid to acquire subsidiaries and other businesses over the fair value of their net assets at the date of acquisition. Goodwill is tested for impairment at least annually in the fourth quarter or more frequently if events or circumstances change that would indicate that a triggering event has occurred.

 

We assess the recoverability of indefinite-lived intangible assets at least annually or whenever events or circumstances suggest that the carrying value of an identifiable indefinite-lived intangible asset may exceed the sum of the future discounted cash flows expected to result from its use and eventual disposition. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.

 

Reinsurance

 

In the normal course of business, we seek to limit aggregate and single exposure to losses on risk by purchasing reinsurance. The amounts reported in the consolidated balance sheets as reinsurance recoverable include amounts billed to reinsurers on losses paid as well as estimates of amounts expected to be recovered from reinsurers on insurance liabilities that have not yet been paid. Reinsurance recoverable on unpaid losses are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying reinsured contracts. Insurance liabilities are reported gross of reinsurance recoverable. Management believes the recoverables are appropriately established. We diversify our credit risks related to reinsurance ceded. Reinsurance premiums are generally reflected in income in a manner consistent with the recognition of premiums on the reinsured contracts. Reinsurance does not extinguish our primary liability under the policies written. We regularly evaluate the financial condition of our reinsurers including their activities with respect to claim settlement practices and commutations, and establish allowances for uncollectible reinsurance recoverable as appropriate.

 

Future Policy Benefits

 

We establish liabilities for amounts payable under insurance policies, including traditional life insurance and annuities. Generally, amounts are payable over an extended period of time. Liabilities for future policy benefits of traditional life insurance have been computed by using a net level premium method based upon estimates at the time of issue for investment yields, mortality and withdrawals. These estimates include provisions for experience less favorable than initially expected. Mortality assumptions are based on industry experience expressed as a percentage of standard mortality tables. Such liabilities are reviewed quarterly by an independent consulting actuary.

 

Income Taxes

 

Deferred tax assets are recorded based on the differences between the financial statement and tax basis of assets and liabilities at the enacted tax rates. The principal assets and liabilities giving rise to such differences are investments, insurance reserves, and deferred acquisition costs. A deferred tax asset valuation allowance is established when there is uncertainty that such assets would be realized. We have no uncertain tax positions that we believe are more-likely-than-not that the benefit will not to be realized.

 

 

Recognition of Revenues

 

   Revenues on traditional life insurance products consist of direct and assumed premiums reported as earned when due.

 

Amounts received as payment for annuities are recognized as deposits to policyholder account balances and included in future insurance policy benefits. Revenues from these contracts are comprised of investment earnings of the deposits, which are recognized over the period of the contracts, and included in revenue. Deposits are shown as a financing activity in the Consolidated Statements of Cash Flows.

 

       Embedded Derivatives

 

       The Company has entered into coinsurance funds withheld arrangement which contains an embedded derivative. Under ASC 815, the Company assesses whether the embedded derivative is clearly and closely related to the host contract. The Company bifurcates embedded derivatives from the host instrument for measurement purposes when the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and a separate instrument with the same terms would qualify as a derivative instrument. Embedded derivatives, which are reported with the host instrument on the consolidated balance sheets in funds withheld under coinsurance agreement, are reported at fair value with changes in fair value recognized in the consolidated statements of comprehensive income (loss) in net investment gains (losses).

 

       Funds Withheld under Coinsurance Agreement

 

         Funds withheld under coinsurance agreement represent amounts contractually withheld by a ceding company in accordance with a reinsurance agreement entered into in 2020. For agreements written on a coinsurance funds withheld basis, assets that support the net statutory reserves or as defined by the treaty, are withheld and legally owned by the ceding company.  Interest is recorded in net investment income, net of related expenses, in the consolidated statements of income (loss).  Funds withheld under coinsurance agreement are presented net of the embedded Derivative, discussed above.  Under the terms of the coinsurance agreement the Company may assume custody of the assets in the funds withheld account once the Company attains its "Qualified Institutional Buyer" designation (as that term is defined in Rule 144A under the Securities Act of 1933, as amended, which is anticipated to be achieved in the first quarter of 2021.   The Company will record  the funds withheld assets at fair value on the date of transfer, which will eliminate the embedded derivative component associated with the coinsurance agreement.

 

       Mortgage Loans on Real Estate 

 

        Mortgage loans on real estate are carried at unpaid principal balances, net of any unamortized premium or discount and valuation allowances.  Interest income is accrued on the principal amount of the mortgage loans based on its contractual interest rate.  Amortization of premiums and discounts is recorded using the effective yield method. The Company accrues interest on loans until probable the Company will not receive interest or the loan is 90 days past due.  Interest income, amortization of premiums, accretion of discounts and prepayment fees are reported in investment income, net of related expenses in the consolidated statements of comprehensive income (loss).

 

          A mortgage loan is considered to be impaired when, based on the current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the mortgage agreement.  

 

         Valuation allowances on mortgage loans are established based upon inherent losses expected by management to be realized in connection with future dispositions or settlement of mortgage loans, including foreclosures. The Company establishes valuation allowances for estimated impairments on an individual loan basis as of the balance sheet date. Such valuation allowances are based on the excess carrying value of the loan over the present value of expected future cash flows discounted at the loan’s original effective interest rate, the value of the loan’s collateral if the loan is in the process of foreclosure or is otherwise collateral-dependent, or the loan’s market value if the loan is being sold. These evaluations are revised as conditions change and new information becomes available. In addition to historical experience, management considers qualitative factors that include the impact of changing macro-economic conditions, which may not be currently reflected in the loan portfolio performance, and the quality of the loan portfolio.

 

 

        Any interest accrued or received on the net carrying amount of the impaired loan will be included in investment income or applied to the principal of the loan, depending on the assessment of the collectibility of the loan. Mortgage loans deemed to be uncollectible or that have been foreclosed are charged off against the valuation allowances and subsequent recoveries, if any, are credited to the valuation allowances. Changes in valuation allowances are reported in net investment gains (losses) on the consolidated statements of income (loss).

 

       The Company evaluates whether a mortgage loan modification represents a troubled debt restructuring. In a troubled debt restructuring, the Company grants concessions related to the borrower’s financial difficulties. Generally, the types of concessions include: reduction of the contractual interest rate, extension of the maturity date at an interest rate lower than current market interest rates and/or a reduction of accrued interest. The Company considers the amount, timing and extent of the concession granted in determining any impairment or changes in the specific valuation allowance recorded in connection with the troubled debt restructuring. Through the continuous monitoring process, the Company may have recorded a specific valuation allowance prior to when the mortgage loan is modified in a troubled debt restructuring. Accordingly, the carrying value (after specific valuation allowance) before and after modification through a troubled debt restructuring may not change significantly, or may increase if the expected recovery is higher than the pre-modification recovery assessment.

 

 

Mergers and Acquisitions

 

On May 23, 2017 the Company entered into a definitive merger agreement with Northern Plains Capital Corporation. The merger transaction closed on July 31, 2017. Northern Plains shareholders received .5841 shares of US Alliance Corporation stock for each share of Northern Plains stock owned. USAC issued 1,644,458 shares of common stock to holders of Northern Plains shares.

 

On October 11, 2018 the Company entered into a stock purchase agreement with Great Western Insurance Company to acquire Great Western Life Insurance Company. The transaction closed on December 14, 2018. USALSC paid $500,000 to acquire all of the outstanding shares of GWLIC.

 

 

New Accounting Standards

 

A detailed discussion of new accounting standards is provided in the Notes to Consolidated Financial Statements beginning on p. 9 of this quarterly report.

 

Discussion of Consolidated Results of Operations

 

Revenues. Insurance revenues are primarily generated from premium revenues and investment income. Insurance revenues for the nine months ended September 30, 2020 and 2019 are summarized in the table below.

 

  

Nine Months Ended September 30,

 
  

2020

  

2019

 

Income:

 

(unaudited)

 

Premium income

 $7,631,621  $6,983,705 

Net investment income

  2,322,169   1,303,757 

Net investment gains (losses)

  (437,085)  937,590 

Other income

  48,232   40,454 

Total income

 9,564,937  $9,265,506 

 

 

Insurance revenues for the three months ended September 30, 2020 and 2019 are summarized in the table below.

 

  

Three Months Ended September 30,

 
  

2020

  

2019

 

Income:

 

(unaudited)

 

Premium income

 $2,547,843  $2,063,015 

Net investment income

  1,066,158   442,719 

Net investment gains 

  922,020   106,301 

Other income

  20,524   15,396 

Total income

 4,556,545  $2,627,431 

 

      Our 2020 first nine months revenue increased to $9,564,937, an increase of $299,431 or 3% from the 2019 first nine months revenue of $9,265,506. The Company was required to implement a new accounting standard in 2019 which results in unrealized gains and losses on equity securities being included in total income. This standard has resulted in increased volatility in total income.

 

Premium revenue: Premium revenue for the first nine months of 2020 was $7,631,621 compared to $6,983,705 in the first nine months of 2019, an increase of $647,916 or 9%. The increase was driven by an increase in direct single and recurring premiums. While ceded premium results in a reduction in revenue, ceded premium increases reflect the growth of our group policy premiums as we focused on small companies to assist them with their employee benefits.

 

Direct, assumed and ceded premiums for the nine months ended September 30, 2020 and 2019 are summarized in the following table.

 

  

Nine Months Ended September 30,

 
  

2020

  

2019

 
   (unaudited) 

Direct

 $4,765,909  $3,868,350 

Assumed

  3,565,753   3,723,457 

Ceded

  (700,041)  (608,102)

Total

 $7,631,621  $6,983,705 

 

The Company continuously searches for new product and distribution opportunities to continue to increase premium production on both a direct and assumed basis.

 

Premium revenue for the three months ended September 30, 2020 was $2,547,843 compared to $2,063,015 for the same period in 2019, an increase of $484,828 or 23%. The increase was driven by an increase in direct premiums. While ceded premium results in a reduction in revenue, ceded premium increases reflect the growth of our group policy premiums as we focused on small companies to assist them with their employee benefits.

 

Direct, assumed and ceded premiums for the three months ended September 30, 2020 and 2019 are summarized in the following table.

 

  

Three Months ended September 30,

 
  

2020

  

2019

 
  

(unaudited)

 

Direct

 $1,824,908  $1,265,253 

Assumed

  955,873   979,880 

Ceded

  (232,938)  (182,118)

Total

 $2,547,843  $2,063,015 

 

 

Investment income, net of expenses: The components of net investment income for the nine months ended September 30, 2020 and 2019 are as follows:

 

  

Nine Months Ended September 30,

 
  

2020

  

2019

 
  

(unaudited)

 

Fixed maturities

 $889,563  $873,443 

Mortgages

  61,438   - 

Equity securities

  487,777   440,426 

Funds withheld

  962,023   - 

Cash and cash equivalents

  12,240   23,772 
   2,413,041   1,337,641 

Less investment expenses

  (90,872)  (33,884)
  $2,322,169  $1,303,757 

 

Net investment income for the first nine months of 2020 was $2,322,169, compared to $1,303,757 in 2019, an increase of $1,018,412 or 78%. This increase in investment income is primarily a result of increased invested assets as a result of our premium income, annuity deposits, and the 2020 ALSC Agreement.

 

The components of net investment income for the three months ended September 30, 2020 and 2019 are as follows:

 

  

Three Months Ended September 30,

 
  

2020

  

2019

 
  

(unaudited)

 

Fixed maturities

 $272,145  $288,410 

Mortgages

  55,587  $- 

Equity securities

  198,327   155,350 

Funds withheld

  597,990   - 

Cash and cash equivalents

  864   9,794 
   1,124,913   453,554 

Less investment expenses

  (58,755)  (10,835)
  $1,066,158  $442,719 

 

Net investment income for the quarter ended September 30, 2020 was $1,066,158 compared to $442,719 for the same period in 2019, an increase of $623,439 or 141%. This increase in investment income is primarily a result of increased invested assets as a result of our premium income, annuity deposits, and the 2020 ALSC Agreement.

 

 

Net investments gains (losses): Net investment losses for the nine months ended September 30, 2020 were $437,085, compared to gains of $937,590 for the same period in 2019, a decrease of $1,374,675. The decrease in net investment gains is attributable to unrealized losses in our equity portfolio and our funds withheld asset as a result of the Covid-19 pandemic. Net investments losses for the nine months ended September 30, 2020 were comprised of $264,734 of unrealized losses in our equity portfolio and funds withheld asset and realized losses of $172,351. Net investment gains for the nine months ended September 30, 2019 were comprised of $951,575 of unrealized gains in our equity portfolio and realized losses of $13,985. Realized gains and losses related to the sale of securities for the nine months ended September 30, 2020 and 2019 are summarized as follows:

 

  

Nine Months Ended September 30,

 
  

(unaudited)

 
  

2020

  

2019

 

Gross gains

 $119,173  $4,601 

Gross losses

  (291,524)  (18,586)

Net security losses

 $(172,351) $(13,985)

 

 

Net investment gains for the three months ended September 30, 2020 were $922,020, compared to gains of $106,301 for the same period in 2019, an increase of $815,719. The increase in net investment gains is attributable to unrealized gains in our funds withheld asset and in our equity portfolio. Net investments gains for the three months ended September 30, 2020 were comprised of $869,493 of unrealized gains in our equity portfolio and funds withheld asset and realized gains of $52,527. Net investment gains for the same period in 2019 were comprised of $105,758 of unrealized gains in our equity portfolio and realized gains of $543. Realized gains and losses related to the sale of securities for the three months ended September 30, 2020 and 2019 are summarized as follows:

 

  

Three Months Ended September 30,

 
  

(unaudited)

 
  

2020

  

2019

 

Gross gains

 $54,266  $650 

Gross losses

  (1,739)  (107)

Net security gains

 $52,527  $543 

 

Other income: Other income for the nine months ended September 30, 2020 was $48,232 compared to $40,454 in the same period in 2019, an increase of $7,778. Other income for the three months ended September 30, 2020 was $20,524 compared to $15,396 in the same period in 2019, an increase of $5,128.

 

Expenses. Expenses for the nine months ended September 30, 2020 and 2019 are summarized in the table below.

 

  

Nine Months Ended September 30,

 
  

2020

  

2019

 
  (unaudited) 

Expenses:

        

Death claims

  1,316,831   1,022,585 

Policyholder benefits

  3,949,421   3,267,898 

Increase in policyholder reserves

  2,574,776   1,997,786 

Commissions, net of deferrals

  536,257   571,543 

Amortization of deferred acquisition costs

  757,333   293,032 

Amortization of value of business acquired

  15,227   15,228 

Salaries & benefits

  780,626   773,400 

Other operating expenses

  1,692,054   940,502 

Total expense

  11,622,525   8,881,974 

 

 

Expenses for the three months ended September 30, 2020 and 2019 are summarized in the table below.

 

  

Three Months Ended September 30,

 
  

2020

  

2019

 
  

(unaudited)

 

Expenses:

        

Death claims

  394,175   298,269 

Policyholder benefits

  1,301,716   962,603 

Increase in policyholder reserves

  962,083   560,128 

Commissions, net of deferrals

  164,687   157,944 

Amortization of deferred acquisition costs

  9,961   112,305 

Amortization of value of business acquired

  5,076   5,076 

Salaries & benefits

  263,541   270,673 

Other operating expenses

  383,151   217,987 

Total expense

  3,484,390   2,584,985 

 

Death and other benefits: Death benefits were $1,316,831 in the nine months ended September 30, 2020 compared to $1,022,585 for the same period in 2019, an increase of $294,246 or 29%. This increase is attributable to our growing block of in-force life insurance policies. We expect these claims to grow as we continue to increase the size of our in-force business.

 

Death benefits were $394,175 in the three months ended September 30, 2020 compared to $298,269 in the same period in 2019, an increase of $95,906 or 32%. This increase is attributable to our growing block of in-force life insurance policies. We expect these claims to grow as we continue to increase the size of our in-force business.

 

Policyholder benefits: Policyholder benefits were $3,949,421 in the nine months ended September 30, 2020 compared to $3,267,898 in the same period in 2019, an increase of $681,523 or 21%. The primary driver of this increase is the increased interest credited on our direct and assumed annuities.

 

Policyholder benefits were $1,301,716 in the three months ended September 30, 2020 compared to $962,603 in the same period in 2019, an increase of $339,113 or 35%. The primary driver of this increase is the increased interest credited on our direct and assumed annuities.

 

Increase in policyholder reserves: Increases in policyholder reserves were $2,574,776 in the nine months ended September 30, 2020, compared to $1,997,786 in the same period in 2019, an increase of $576,990 or 29%. The growth in reserve increase is the result of higher sales.

 

Policyholder reserves increased $962,083 in the three months ended September 30, 2020, compared to $560,128 in the same period in 2019, an increase of $401,955 or 72%. The growth in reserve increase is the result of higher sales.

 

Commissions, net of deferrals: The Company pays commissions to ceding companies on assumed policies as well as commissions to agents on directly written business. Commissions, net of deferrals, were $536,257 in the nine months ended September 30, 2020, compared to $571,543 in the same period in 2019, a decrease of $35,286 or 6%. This decrease is driven by a change in composition of premiums collected.

 

Commissions, net of deferrals, were $164,687 in the three months ended September 30, 2020, compared to $157,944 in the same period in 2019, an increase of $6,743 or 4%. This increase is driven by a change in composition of premiums collected and an increase in premiums.

 

Amortization of deferred acquisition costs: The amortization of deferred acquisition costs (“DAC”) was $757,333 in the nine months ended September 30, 2020, compared to $293,032 in the same period in 2019, an increase of $464,301 or 158%. As a result of the Covid-19 pandemic and the resulting historic low interest rates, the Company reassessed its DAC assumptions regarding reinvestment rates. As a result, the Company reduced its DAC balance by $430,000 to reflect the current reinvestment environment and the uncertainty of interest rates.

 

 

The amortization of DAC was $9,961 in the three months ended September 30, 2020, compared to $112,305 in the same period in 2019, a decrease of $102,344 or 91%. The decrease was driven by a reduction in amortization on the 2020 ALSC Agreement to reflect the investment ramp up period on this block of policies.

 

Amortization of value of business acquired: The amortization of value of business acquired (“VOBA”) was $15,227 in the nine months ended September 30, 2020 and is unchanged from the same period in 2019. Our VOBA balance was established August 1, 2017 with acquisition of DCLIC. VOBA is being amortized straight-line over 30 years.

 

The amortization of VOBA was $5,076 in the three months ended September 30, 2020 and is unchanged from 2019.

 

Salaries and benefits: Salaries and benefits were $780,626 for the nine months ended September 30, 2020, compared to $773,400 for the same period in 2019, an increase of $7,226 or 1%. The Company has maintained its staffing levels during the Covid-19 pandemic to ensure that customer service needs continue to be met. The increase in salaries and benefits expense is attributable to ordinary and customary increases in compensation for individual employees.

 

Salaries and benefits were $263,541 for the three months ended September 30, 2020, compared to $270,673 for the same period in 2019, a decrease of $7,132 or 3%.

 

Other expenses: Other operating expenses were $1,692,054 in the nine months ended September 30, 2020, compared to $940,502 for the same period in 2019, an increase of $751,552 or 80%. Operating costs were driven higher due primarily to our pre-paid software asset being recognized as an expense of $250,000, increased accounting and actuarial fees totaling $50,000, increased computer and software expense of $90,000, and expenses associated with implementing a new disability reinsurance program totaling $50,000. Additionally, in 2019 we recognized expense savings from our acquisition of USALSC-Montana which reduced 2019 expenses by $100,000. We also recovered a loan balance that had previously been written off which further reduced our 2019 expenses by an additional $60,000.

 

Other operating expenses were $383,151 in the three months ended September 30, 2020, compared to $217,987 for the same period in 2019, an increase of $165,164 or 76%. Increased computer and software expense of $60,000 and TPA fees  of $15,000 associated with the 2020 ALSC Agreement were the primary drivers of the increase. In 2019 we recovered a loan balance that had previously been written off, which reduced our 2019 expenses.

 

Net Income (Loss): Our net loss was $2,057,588 in the nine months ended September 30, 2020 compared to a net income of $383,582 in the same period of 2019, a decrease of $2,441,170. Our net loss per share increased to $0.27 from a net income of $0.05 for the same period in 2019, basic and diluted. This decrease is primarily attributable to Covid-19 impacts on unrealized losses on our equity securities and on deferred acquisition costs. For the three months end September 30, 2020 our net income per share was $1,072,155 or $0.14 per share compared to $42,446 or $0.01 per share for the same period in 2019.

 

 

Discussion of Consolidated Balance Sheet

 

Assets. Assets have increased to $110,621,875 as of September 30, 2020, an increase of $55,682,626 from December 31, 2019. This is primarily the result of the 2020 ALSC Agreement.

 

Available for sale fixed maturity securities: As of September 30, 2020, we had available for sale fixed maturity assets of $36,667,727, an increase of $3,514,835 or 10% from the December 31, 2019 balance of $33,152,892. The increase is driven by an increase in the market value of these securities.

 

Mortgage loans on real estate: As of September 30, 2020, we had mortgage loans on real estate of $2,311,931 which are as a result of the 2020 ALSC Agreement. We held no mortgages at December 31, 2019.

 

Equity securities, at fair value: As of September 30, 2020, we had equity securities of $10,123,484, a decrease of $18,019 or 0.2% from the December 31, 2019 balance of $10,141,503. This reduction is driven by a decrease in the market value of our equity securities.

 

 

Funds withheld under coinsurance agreement, at fair value: As of September 30, 2020, we had funds withheld assets of $45,330,710 which were acquired with the 2020 ALSC Agreement. There were no funds withheld assets at December 31, 2019.

 

Policy loans: As of September 30, 2020, our policy loans were $163,725, an increase of $44,795 or 38% from the December 31, 2019 balance of $118,930. The increase is the result of normal loan activity.

 

Cash and cash equivalents: As of September 30, 2020, we had cash and cash equivalent assets of $5,184,510, a decrease of $1,494,295 or 22% from the December 31, 2019 balance of $6,678,805. This decrease is primarily the result of cash being deployed to invested assets.

 

Investment income due and accrued: As of September 30, 2020, our investment income due and accrued was $370,342 compared to $321,362 as of December 31, 2019. This increase is attributable to normal investment activity and the growth of our invested assets.

 

Reinsurance related assets: As of September 30, 2020, our reinsurance related assets were $62,498, a decrease of $125,884 or 67% from the December 31, 2019 balance of $188,382. This decrease is the result of normal reinsurance activity.

 

Deferred acquisition costs, net: As of September 30, 2020, our deferred acquisition costs were $8,394,478, an increase of $5,741,804 or 217% from the December 31, 2019 balance of $2,652,674. The increase is the result of costs deferred on the 2020 ALSC Agreement.

 

Value of business acquired, net: As of September 30, 2020, our value of business acquired asset was $544,767, a decrease of $15,227 from the December 31, 2019 balance of $559,994. This asset was established in the third quarter of 2017 as a result of the acquisition of DCLIC. The decrease is the result of amortization of the asset.

 

Property, equipment and software, net: As of September 30, 2020, our property, equipment and software assets were $36,163, a decrease of $7,678 from the December 31, 2019 balance of $43,841. This decrease is a result of normal amortization.

 

Goodwill: As of September 30, 2020, our goodwill was $277,542 and was unchanged from the December 31, 2019 balance. Goodwill was established as a result of the merger with Northern Plains.

 

Deferred tax asset, net of valuation allowance: As of September 30, 2020, the Company had a deferred tax asset of $431,158 unchanged from December 31, 2019.

 

Other assets: As of September 30, 2020, other assets were $722,840, an increase of $350,674 or 94% from the December 31, 2019 balance of $372,166. This increase was the result of pre-paid benefit expenses offset by a reduction in our pre-paid software asset.

 

Liabilities. Our total liabilities were $94,146,179 as of September 30, 2020, an increase of $56,083,127 or 147% from our December 31, 2019 liability of $38,063,052. The 2020 ALSC Agreement significantly impacted our assets and liabilities. This increase is driven by an increase in our policyholder liabilities as a result of the 2020 ALSC Agreement.

 

Policy liabilities: Our total policy liabilities as of September 30, 2020 were $91,821,681, an increase of $54,896,796 or 149% from the December 31, 2019 balance of $36,924,885. This increase is driven by annuities assumed under the 2020 ALSC Agreement.

 

Accounts payable and accrued expenses: As of September 30, 2020, our accounts payable and accrued expenses were $143,522, an increase of $20,541 or 17% from the December 31, 2019 balance of $122,981. This increase is the result of normal operating activity.

 

Federal Home Loan Bank advance: In October of 2019, the Company took an advance of $1,000,000 from the Federal Home Loan Bank of Topeka (“FHLB”) which was outstanding as of September 30, 2020 and December 31, 2019. In the second quarter of 2020, the Company took two additional advances of $500,000 each, which were outstanding as of September 30, 2020.  The advances were taken to create additional liquidity and investment opportunities.

 

Other liabilities: As of September 30, 2020, our other liabilities were $180,976, an increase of $165,790 from the December 31, 2019 balance of $15,186. The increase is the result of normal business activities.

 

 

Shareholders’ Equity. Our shareholders’ equity was $16,475,696 as of September 30, 2020, a decrease of $400,501 or 2% from our December 31, 2019 shareholders’ equity of $16,876,197. The decrease in shareholders’ equity was driven by our net loss during the period which was materially impacted by the Covid-19 pandemic.

 

Investments and Cash and Cash Equivalents

 

Our investment philosophy is reflected by the allocation of our investments. We emphasize investment grade debt securities with smaller holdings in equity securities and other investments. The following table shows the carrying value of our investments by investment category and cash and cash equivalents, and the percentage of each to total invested assets as of September 30, 2020 and December 31, 2019.

 

  

September 30, 2020

  

December 31, 2019

 
  

Fair

  

Percent

  

Fair

  

Percent

 
  

Value

  

of Total

  

Value

  

of Total

 
  (unaudited)         

Fixed maturities:

 

 

         

US Treasury securities

 $696,932   0.7% $632,639   1.3%

Corporate bonds

  22,102,425   22.2%  20,084,397   40.2%

Municipal bonds

  6,871,172   6.9%  7,055,059   14.1%

Redeemable preferred stocks

  2,983,086   3.0%  2,133,893   4.3%

Mortgage backed and asset backed securities

  4,014,112   4.0%  3,246,904   6.5%

Total fixed maturities

  36,667,727   36.8%  33,152,892   66.3%

Mortgage loans

  2,311,931   2.3%  -   0.0%

Equities:

                

Common stock

  7,876,172   7.9%  9,214,694   18.4%

Preferred stock

  2,247,312   2.3%  926,809   1.9%

Total equities

  10,123,484   10.2%  10,141,503   20.3%

Funds withheld

  45,330,710   45.5%  -   0.0%

Cash and cash equivalents

  5,184,510   5.2%  6,678,805   13.4%

Total

 $99,618,362   100.0% $49,973,200   100.0%

 

The total value of our investments and cash and cash equivalents increased to $99,618,362 as of September 30, 2020 from $49,973,200 at December 31, 2019, an increase of $49,645,162. Increases in investments are primarily attributable to the 2020 ALSC Agreement.

 

The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of September 30, 2020 and December 31, 2019.

 

  

September 30, 2020

  

December 31, 2019

 
  

Fair

  

Percent

  

Fair

  

Percent

 
  

Value

  

of Total

  

Value

  

of Total

 
  

(unaudited)

  

(unaudited)

 

AAA and U.S. Government

 $1,154,478   3.1% $1,201,046   3.6%

AA

  7,983,810   21.8%  7,901,834   23.8%

A

  9,266,074   25.3%  8,446,360   25.5%

BBB

  14,882,533   40.6%  13,832,629   41.7%

BB

  3,194,032   8.7%  1,579,423   4.8%

Not Rated - Private Placement

  186,800   0.5%  191,600   0.6%

Total

 $36,667,727   100.0% $33,152,892   100.0%

 

 

The amortized cost and fair value of debt securities as of September 30, 2020 and December 31, 2019, by contractual maturity, are shown below. Equity securities do not have stated maturity dates and therefore are not included in the following maturity summary. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

  

As of September 30, 2020

  

As of December 31, 2019

 
  

Amortized Cost

  

Fair Value

  

Amortized Cost

  

Fair Value

 
  (unaudited)         

Amounts maturing in:

 

 

         

One year or less

 $100,957  $103,352  $99,987  $100,239 

After one year through five years

  1,625,522   1,747,976   1,424,337   1,471,552 

After five years through ten years

  2,885,723   3,367,585   3,286,937   3,574,191 

More than 10 years

  21,040,912   24,451,616   20,743,310   22,626,113 

Redeemable preferred stocks

  3,015,598   2,983,086   2,097,206   2,133,893 

Mortgage backed and asset backed securities

  3,919,039   4,014,112   3,171,620   3,246,904 

Total amortized cost and fair value

 $32,587,751  $36,667,727  $30,823,397  $33,152,892 

 

Market Risk of Financial Instruments

 

We hold a diversified portfolio of investments that primarily includes cash, bonds, equity securities, mortgage loans, and funds withheld under the 2020 ALSC Agreement. Each of these investments is subject to market risks that can affect their return and their fair value. A significant percentage of the investments are fixed maturity securities including debt issues of corporations, US Treasury securities, or securities issued by government agencies. The primary market risks affecting the investment portfolio are interest rate risk, credit risk, and equity risk. The Company's investment portfolio, including the creditworthiness and valuation of investment assets, as well as availability of new investments may be adversely affected as a result of market developments related to the COVID-19 pandemic and uncertainty regarding its ultimate severity and duration.

 

Interest Rate Risk

 

Interest rate risk arises from the price sensitivity of investments to changes in interest rates. Interest represents the greatest portion of an investment's return for most fixed maturity securities in stable interest rate environments. The changes in the fair value of such investments are inversely related to changes in market interest rates. As interest rates fall, the interest and dividend streams of existing fixed-rate investments become more valuable and fair values rise. As interest rates rise, the opposite effect occurs.

 

We attempt to mitigate our exposure to adverse interest rate movements through laddering the maturities of the fixed maturity investments and through maintaining cash and other short term investments to assure sufficient liquidity to meet our obligations and to address reinvestment risk considerations. Due to the composition of our book of insurance business, management believes it is unlikely that we would encounter large surrender activity due to an interest rate increase that would force the disposal of fixed maturities at a loss.

 

Additionally, USALSC is a member of the Federal Home Loan Bank of Topeka, which provides access to liquidity and further reduces the likelihood of disposing of fixed maturities at a loss.

 

Credit Risk

 

We are exposed to credit risk through counterparties and within the investment portfolio. Credit risk relates to the uncertainty associated with an obligor's ability to make timely payments of principal and interest in accordance with the contractual terms of an instrument or contract. We manage our credit risk through established investment policies and guidelines which address the quality of creditors and counterparties, concentration limits, diversification practices and acceptable risk levels. These policies and guidelines are regularly reviewed and approved by senior management and USAC's Board of Directors.

 

Liquidity and Capital Resources

 

The impact of COVID-19 on the Company is evolving, and its future effects are not yet quantifiable. The Company is closely monitoring the effects and risks of COVID-19 to assess its impact on the Company's business, sales, financial condition, results of operations, liquidity and capital position.

 

 

Premium income, deposits to policyholder account balances, investment income, and capital raising are the primary sources of funds while withdrawals of policyholder account balances, investment purchases, policy benefits in the form of claims, and operating expenses are the primary uses of funds. To ensure we will be able to pay future commitments, the funds received as premium payments and deposits are invested in primarily fixed income securities. Funds are invested with the intent that the income from investments, plus proceeds from maturities, will in the future meet our ongoing cash flow needs. The approach of matching asset and liability durations and yields requires an appropriate mix of investments. Our investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs. Cash flow projections and cash flow tests under various market interest scenarios are also performed annually to assist in evaluating liquidity needs and adequacy. As a member of the Federal Home Loan Bank, USALSC has immediate access to additional cash liquidity.

 

Net cash provided by operating activities was $2,049,072 for the nine months ended September 30, 2020. The primary sources of cash from operating activities were premiums and deposits received from policyholders. The primary uses of cash for operating activities were for payments of commissions to agents and settlement of policy liabilities. Net cash used in investing activities was $8,892,936. The primary use of cash was the purchase of available for sale securities and funds transferred to our funds withheld account. Cash provided by financing activities was $5,349,569. The primary sources of cash were receipts on deposit-type contracts.

 

At September 30, 2020, we had cash and cash equivalents totaling $5,184,510. We believe that our existing cash and cash equivalents and premiums from our insurance operations will be sufficient to fund the anticipated operating expenses and capital expenditures for the foreseeable future. We have based this estimate upon assumptions that may prove to be wrong and we could use our capital resources sooner than we currently expect. The growth of USALSC and DCLIC, our insurance subsidiaries, is uncertain and will require additional capital as and if they continue to grow.

 

Impact of Inflation

 

Insurance premiums are established before the amount of losses, or the extent to which inflation may affect such losses and expenses, are known. We attempt, in establishing premiums, to anticipate the potential impact of inflation. If, for competitive reasons, premiums cannot be increased to anticipate inflation, this cost would be absorbed by us. Inflation also affects the rate of investment return on the investment portfolio with a corresponding effect on investment income.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

   As a “smaller reporting company”, the Company does not provide disclosure pursuant to this item.

 

 

ITEM 4.    CONTROLS AND PROCEDURES

 

We have established disclosure controls and procedures to ensure, among other things, material information relating to our Company, including our consolidated subsidiaries, is made known to our officers who certify our financial reports and to the other members of our senior management and the Board of Directors.

 

As required by Exchange Act Rule 13a-15(b), management of the Company, including the Chief Executive Officer and the Vice President conducted an evaluation as of the end of the period covered by this report, of the effectiveness of the Company’s disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e). Based upon an evaluation at the end of the period, the Chief Executive Officer and the Vice President concluded that the disclosure controls and procedures are effective in timely alerting them to material information relating to us and our consolidated subsidiaries required to be disclosed in our periodic reports under the exchange act.

 

 

There were no changes to the Company’s internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) during the nine months ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s control over financial reporting.

 

 

Part II – Other Information

 

ITEM 1. LEGAL PROCEEDINGS

 

We are involved in litigation incidental to our operations from time to time. We are not presently a party to any legal proceedings other than litigation arising in the ordinary course of business, and we are not aware of any claims that could materially affect our financial position or results of operation.

 

ITEM 1A. RISK FACTORS

 

   As a “smaller reporting company”, the Company is not required to provide disclosure pursuant to this item.

 

ITEM 2.      UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

During the quarter ended September 30, 2020, the Company issued 129 shares of common stock, for aggregate consideration of $903, pursuant to an offering to residents of the state of Kansas that was registered with the Kansas Securities Commissioner.

 

The offering of shares in the above described transaction was self-underwritten and sold through agents of the Company licensed to sell securities in Kansas. Proceeds from the sale of common stock were used to finance the growth of the Company’s life insurance subsidiary and to provide working capital for the Company. The offer and sale of common stock was exempt from registration under Section 3(a)11 of the Securities Act of 1933 for securities offered and sold on a wholly intrastate basis. The shares of common stock were sold only to bona fide residents of the state of Kansas.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

 None

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable

 

ITEM 5. OTHER INFORMATION

 

None.

 

 

ITEM 6.

EXHIBITS

 

 

3.1

Articles of Incorporation of US Alliance Corporation (filed as Exhibit 3.1 to the Company’s Registration Statement on Form 10 filed on May 2, 2016 (File No. 000-55627), is incorporated herein by reference as Exhibit 3.1)

 

 

3.1.1

First Amendment to Articles of Incorporation of US Alliance Corporation, filed as Exhibit 3.1.1 to the Company's Current Report on Form 8-K filed on June 9, 2017 (File No. 000-55627), is incorporated herein by reference a Exhibit 3.1.1.

 

 

3.1.2

Second Amendment to Articles of Incorporation of US Alliance Corporation, filed as Exhibit 3.1.2 to the Company's Current Report on Form 8-K filed on June 9, 2017 (File No. 000-55627), is incorporated herein by reference as Exhibit 3.1.2.

 

 

3.2

Bylaws of US Alliance Corporation (filed as Exhibit 3.2 to the Company’s Registration Statement on Form 10 filed on May 2, 2016 (File No. 000-55627), is incorporated herein by reference as Exhibit 3.2).

 

 

3.2.1

Amendment No. 1. to the bylaws of US Alliance Corporation, filed as Exhibit 3.2.1 to the Company's Current Report on Form 8-K filed on June 9, 2017 (File No. 000-55627), is incorporated herein by reference as Exhibit 3.2.1.

 

 

31.1*

Certification of Chief Executive Officer of US Alliance Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.2*

Certification of Principal Financial Officer of US Alliance Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32.1*

Certifications of the Chief Executive Officer of US Alliance pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

32.2*

Certifications of the Principal Financial Officer of US Alliance pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

101.INS**

XBRL Instance

 

 

101.SCH**

XBRL Taxonomy Extension Schema

 

 

101.CAL**

XBRL Taxonomy Extension Calculation

 

 

101.DEF**

XBRL Taxonomy Extension Definition

 

 

101.LAB**

XBRL Taxonomy Extension Labels

 

 

101.PRE**

XBRL Taxonomy Extention Presentation

 

**XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

* Filed herewith

 

 

SIGNATURES

 

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized

 

 

 

 

 

 

 

 

 

 

 

US Alliance Corporation

 

 

 (Registrant)

 

 

 

Date  
   
By/s/ Jack H. Brier 
 Jack H. Brier, President and Chairman 
   

 

37