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

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2017.

 

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)

 

KANSAS	26-4824142
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
4123 SW Gage Center Drive, Suite 240, Topeka, Kansas	66604
(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. [X] 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 and posted 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 and post such files).      [  ] Yes [X] 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. (Check One)

 

[  ]  Large accelerated filer			[  ]  Accelerated filer
[  ]  Non-accelerated filer			(Do not check if a smaller reporting company)
			[X] Smaller reporting company
			[X]  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 [X] 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

5,600,339 shares outstanding

as of April 30, 2017

 

 

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 Loss		4
		Consolidated Statements of Changes in Shareholders' Equity		5
		Consolidated Statements of Cash Flows		6
		Notes to Consolidated Financial Statements		7
Item 2		Management's Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3		Quantitative and Qualitative Disclosures About Market Risk		23
Item 4		Controls and Procedures		23
Part II - Other Information
Item		Item Description		Page
Item 1		Legal Proceedings		23
Item 1A		Risk Factors		23
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds		23
Item 3		Defaults Upon Senior Securities		23
Item 4		Mine Safety Disclosures		24
Item 5		Other Information		24
Item 6		Exhibits		24
		Signatures		24

 

 

ITEM 1.      FINANCIAL STATEMENTS

 

US Alliance Corporation
Consolidated Balance Sheets

 

		March 31, 2017				December 31, 2016
		(unaudited)
Assets
Investments:
Available for sale fixed maturity securities (amortized cost: $11,633,957 and $10,318,164 as of March 31, 2017 and December 31, 2016, respectively)		$	11,688,456			$	10,320,074
Available for sale equity securities (cost: $5,259,107 and $4,905,953 as of March 31, 2017 and December 31, 2016, respectively)			5,467,106				5,143,504
Total investments			17,155,562				15,463,578
Cash and cash equivalents			2,177,660				3,145,745
Investment income due and accrued			94,458				100,713
Reinsurance related assets			31,597				31,390
Deferred acquisition costs, net			186,846				153,792
Property, equipment and software, net			236,265				244,849
Other assets			889,468				51,922
Total assets		$	20,771,856			$	19,191,989
Liabilities and Shareholders' Equity
Liabilities:
Policy liabilities
Deposit-type contracts		$	3,856,221			$	3,398,170
Policyholder benefit reserves			4,609,783				4,220,215
Advance premiums			133,191				121,944
Total policy liabilities			8,599,195				7,740,329
Accounts payable and accrued expenses			69,268				66,472
Other liabilities			813,909				4,205
Total liabilities			9,482,372				7,811,006
Shareholders' Equity:
Common stock, $0.10 par value. Authorized 9,000,000 shares; issued and outstanding 5,583,702 and 5,565,943 shares as of March 31, 2017 and December 31, 2016, respectively			558,371				556,595
Additional paid-in capital			18,069,599				18,017,163
Accumulated deficit			(7,600,984	)			(7,432,236	)
Accumulated other comprehensive income			262,498				239,461
Total shareholders' equity			11,289,484				11,380,983
Total liabilities and shareholders' equity		$	20,771,856			$	19,191,989

 

See Notes to Consolidated Financial Statements.

 

 

 

US Alliance Corporation
Consolidated Statements of Comprehensive Loss

 

		Quarter Ended March 31,
		2017				2016
Income:		(unaudited)
Premium income		$	1,749,928			$	1,357,372
Net investment income			126,020				91,261
Net realized gain on sale of securities			192,405				10,838
Other income			20,202				13,405
Total income			2,088,555				1,472,876
Expenses:
Death claims			392,588				116,527
Policyholder benefits			973,724				722,145
Increase in policyholder reserves			264,978				359,552
Commissions, net of deferrals			124,291				108,215
Amortization of deferred acquisition costs			37,764				37,457
Salaries & benefits			178,192				188,367
Other operating expenses			285,766				267,330
Total expense			2,257,303				1,799,593
Net loss		$	(168,748	)		$	(326,717	)
Unrealized net holding gains arising during the period			215,442				282,417
Reclassification adjustment for loss (gains) included in net loss			(192,405	)			(10,838	)
Other comprehensive income			23,037				271,579
Comprehensive loss		$	(145,711	)		$	(55,138	)
Net loss per common share, basic and diluted		$	(0.03	)		$	(0.06	)

 

See Notes to Consolidated Financial Statements.

 

 

 US Alliance Corporation

 

Consolidated Statements of Changes in Shareholders' Equity

Quarter Ended March 31, 2017 and March 31, 2016 (unaudited)

 

		Number of Shares of								Additional								Common				Common Stock				Accumulated Other Comprehensive
		Common Stock				Common Stock				Paid-in Capital				Outstanding Warrants				Stock Subscribed				Subscription Receivable				Income / (Loss)				Accumulated Deficit				Total
Balance, December 31, 2015			5,177,245			$	517,725			$	17,018,285			$	15,876			$	13,799			$	(827,952	)		$	(100,477	)		$	(6,146,463	)		$	10,490,793
Common stock issued upon exercise of warrants, $6.00 per share			354,794				35,479				2,109,161				(15,876	)			-				-				-				-				2,128,764
Costs associated with warrant exercise			-				-				(246,945	)			-				-				-				-				-				(246,945	)
Common stock subscribed			-				-				(761,041	)			-				(12,899	)			773,940				-				-				-
Other comprehensive income			-				-				-				-				-				-				271,579				-				271,579
Net loss			-				-				-				-				-				-				-				(326,717	)			(326,717	)
Balance, March 31, 2016			5,532,039			$	553,204			$	18,119,460			$	-			$	900			$	(54,012	)		$	171,102			$	(6,473,180	)		$	12,317,474
Balance, December 31, 2016			5,565,943			$	556,595			$	18,017,163			$	-			$	-			$	-			$	239,461			$	(7,432,236	)		$	11,380,983
Common stock issued, $7 per share			17,759				1,776				122,537				-				-				-				-				-				124,313
Costs associated with common stock issued			-				-				(70,101	)			-				-				-				-				-				(70,101	)
Other comprehensive income			-				-				-				-				-				-				23,037				-				23,037
Net loss			-				-				-				-				-				-				-				(168,748	)			(168,748	)
Balance, March 31, 2017			5,583,702			$	558,371			$	18,069,599			$	-			$	-			$	-			$	262,498			$	(7,600,984	)		$	11,289,484

 

See Notes to Consolidated Financial Statements.

US Alliance Corporation
Consolidated Statements of Cash Flows

 

		Quarters Ended March 31,
		2017				2016
Cash Flows from Operating Activities:		(unaudited)
Net loss		$	(168,748	)		$	(326,717	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			8,584				9,734
Net realized gains on the sale of securities			(192,405	)			(10,838	)
Amortization of investment securities, net			8,789				5,520
Deferred acquisition costs capitalized			(70,818	)			(48,382	)
Deferred acquisition costs amortized			37,764				37,457
Interest credited on deposit type contracts			16,597				14,244
(Increase) decrease in operating assets:
Investment income due and accrued			6,255				10,909
Reinsurance related assets			(207	)			3,484
Pre-paid expenses			(4,277	)			32,202
Other assets			(18,225	)			2,003
Increase (decrease) in operating liabilities:
Policyowner benefit reserves			389,568				390,000
Advance premiums			11,247				15,740
Other liabilities			14,352				12,037
Accounts payable and accrued expenses			2,796				(24,110	)
Net cash provided by operating activities			41,272				123,283
Cash Flows from Investing Activities:
Available-for-sale securities
Purchase of fixed income investments			(1,479,152	)			(269,208	)
Purchase of equity investments			(180,567	)			(395,268	)
Proceeds from fixed income sales and repayments			154,696				153,393
Proceeds from equity sales and repayments			-				92,247
Net cash (used in) investing activities			(1,505,023	)			(418,836	)
Cash Flows from Financing Activities:
Receipts on deposit-type contracts			579,215				441,382
Withdrawals on deposit-type contracts			(137,761	)			(74,577	)
Proceeds received from exercise of warrants, net of costs of issuance			54,212				1,881,819
Net cash provided by financing activities			495,666				2,248,624
Net (decrease) increase in cash and cash equivalents			(968,085	)			1,953,071
Cash and Cash Equivalents:
Beginning			3,145,745				2,466,526
Ending		$	2,177,660			$	4,419,597

 

See Notes to Consolidated Financial Statements.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

Note 1.     Description of Business and Significant Accounting Policies

 

Description of business: US Alliance Corporation (“the Company”) is a Kansas corporation located in Topeka, Kansas. The Company was incorporated April 24, 2009, as a holding company to form, own, operate and manage a life insurance company and its marketing and investment affiliates. On June 9, 2011, the wholly owned subsidiary, US Alliance Life and Security Company was incorporated. US Alliance Life and Security Company received its Certificate of Authority from the Kansas Insurance Department (KID) effective January 2, 2012. On April 23, 2012, US Alliance Investment Corporation and US Alliance Marketing Corporation were incorporated as wholly-owned subsidiaries of the Company to provide investment management and marketing services.

 

The Company terminated its initial public offering on February 24, 2013. During the balance of 2013, the Company achieved approval of an array of life insurance and annuity products, began development of various distribution channels and commenced insurance operations and product sales. The Company sold its first insurance product on May 1, 2013. The Company continued to expand its product offerings and distribution channels throughout 2014 and 2015. On February 24, 2015, the Company commenced a warrant exercise offering set to expire on February 24, 2016. On February 24, 2016, the Company extended its current offering until February 24, 2017 and made additional shares available for purchase. All outstanding warrants expired on April 1, 2016. The Company further extended this offering to February 24, 2018.

 

The Company began offering third party administrative (“TPA”) services in 2015. TPA agreements generate service fee income for the Company. The Company currently has one TPA agreement in place. The Company has been able to perform its TPA services using existing resources.

 

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 months ended March 31, 2017 are not necessarily indicative of the results to be expected for the year ended December 31, 2017 or for any other interim period or for any other future year. Certain financial information which is normally included in notes to financial statements prepared in accordance with US GAAP, but which is 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 the Company’s report on Form 10-K and amendments thereto for the year ended December 31, 2016.

 

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

 

Area of Operation: US Alliance Life and Security Company is authorized to operate in the states of Kansas, North Dakota, Oklahoma, and Missouri.

 

Common stock and earnings (loss) per share: The par value for common stock is $0.10 per share with 9,000,000 shares authorized. As of March 31, 2017 and December 31, 2016, the Company had 5,583,702 and 5,565,943 common shares issued and outstanding, respectively.

 

Earnings (loss) per share attributable to the Company’s common stockholders were computed based on the net loss and the weighted average number of shares outstanding during each year. The weighted average number of shares outstanding during the three months ended March 31, 2017 and 2016 were 5,571,529 and 5,295,510 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 ended March 31, 2017 and 2016 because all warrants for common shares are anti-dilutive.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

New accounting standards:

 

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.  The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern

 

In August 2014, the FASB issued guidance to address the diversity in practice in determining when there is substantial doubt about an entity's ability to continue as a going concern and when an entity must disclose certain relevant conditions and events. The new guidance requires an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). The new guidance allows the entity to consider the mitigating effects of management's plans that will alleviate the substantial doubt and requires certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans.

 

If conditions or events raise substantial doubt that is not alleviated, an entity should disclose that there is substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued), along with the principal conditions or events that raise substantial doubt, management's evaluation of the significance of those conditions or events in relation to the entity's ability to meet its obligations and management's plans that are intended to mitigate those conditions.

 

The guidance is effective for annual periods ending after December 15, 2016, and interim and annual periods thereafter. The adoption of this guidance did not have a material effect on the Company's results 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.

 

This guidance is effective for fiscal years beginning after December 15, 2017. The recognition and measurement provisions of this guidance will be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption and early adoption is not permitted. The Company is evaluating this guidance but expects the primary impact will be the recognition of unrealized gains and losses on available-for-sale equity securities in net income. Currently, all unrealized gains and losses on available-for-sale equity securities are recognized in other comprehensive income (loss).

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

The effect of the adoption of this guidance on the Company’s results of operations, financial position and liquidity is primarily dependent on the fair value of the available-for-sale equity securities in future periods and the existence of a deferred tax asset related to available-for-sale securities in future periods that have not yet been fully assessed.

 

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.  The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

Contingent Put and Call Options in Debt Instruments

 

In March 2016, the FASB issued updated guidance clarifying that when a call (put) option in a debt instrument can accelerate the repayment of principal on the debt instrument, a reporting entity does not need to assess whether the contingent event that triggers the ability to exercise the call (put) option is related to interest rates or credit risk in determining whether the option should be accounted for separately.  The updated guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted.  The adoption of this guidance did not 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.  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. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its statement of cash flows.

 

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.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

Note 2. Investments

 

The amortized cost and fair value of available for sale and held to maturity investments as of March 31, 2017 and December 31, 2016 is as follows:

 

		March 31, 2017
		Cost or				Gross				Gross
		Amortized				Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
Available for sale:		(Unaudited)
Fixed maturities:
US Treasury securities		$	315,229			$	-			$	(12,646	)		$	302,583
Corporate bonds			4,417,718				71,032				(36,034	)			4,452,716
Municipal bonds			3,624,678				62,399				(30,087	)			3,656,990
Mortgage backed and asset backed securities			3,276,332				39,488				(39,653	)			3,276,167
Total fixed maturities			11,633,957				172,919				(118,420	)			11,688,456
Equities:
Equities			4,962,881				257,651				(85,109	)			5,135,423
Other equity investments			296,226				38,949				(3,492	)			331,683
Total equities			5,259,107				296,600				(88,601	)			5,467,106
Total available for sale		$	16,893,064			$	469,519			$	(207,021	)		$	17,155,562

 

		December 31, 2016
		Cost or				Gross				Gross
		Amortized				Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
Available for sale:
Fixed maturities:
US Treasury securities		$	314,992			$	-			$	(15,830	)		$	299,162
Corporate bonds			3,828,418				62,712				(45,234	)			3,845,896
Municipal bonds			2,841,137				46,883				(38,191	)			2,849,829
Mortgage backed and asset backed securities			3,333,617				36,870				(45,300	)			3,325,187
Total fixed maturities			10,318,164				146,465				(144,555	)			10,320,074
Equities:
Equities			4,723,024				350,981				(131,757	)			4,942,248
Other equity investments			182,929				23,046				(4,719	)			201,256
Total equities			4,905,953				374,027				(136,476	)			5,143,504
Total available for sale		$	15,224,117			$	520,492			$	(281,031	)		$	15,463,578

 

 

The amortized cost and fair value of debt securities as of March 31, 2017, 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 March 31, 2017
		Amortized Cost				Fair Value
Amounts maturing in:		(unaudited)
One year or less		$	49,951			$	49,929
After one year through five years			1,718,157				1,714,094
After five years through ten years			1,646,453				1,647,786
More than 10 years			4,943,064				5,000,480
Mortgage backed and asset backed securities			3,276,332				3,276,167
		$	11,633,957			$	11,688,456

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

Proceeds from the sale of securities, maturities, and asset paydowns for the first three months of 2017 and 2016 were $969,740 and $245,640, respectively. Realized gains and losses related to the sale of securities are summarized as follows:

 

		Quarter Ended March 31,
		(unaudited)
		2017				2016
Gross gains		$	192,405			$	10,838
Gross losses			-				-
Net security gains		$	192,405			$	10,838

 

Gross unrealized losses by duration 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
March 31, 2017
Available for sale:		(unaudited)
Fixed maturities:
US Treasury securities		$	302,583			$	(12,646	)		$	-			$	-			$	302,583			$	(12,646	)
Corporate bonds			2,057,429				(35,288	)			49,157				(746	)			2,106,586				(36,034	)
Municipal bonds			1,219,109				(30,087	)			-				-				1,219,109				(30,087	)
Mortgage backed and asset backed securities			1,564,225				(37,381	)			116,700				(2,272	)			1,680,925				(39,653	)
Total fixed maturities			5,143,346				(115,402	)			165,857				(3,018	)			5,309,203				(118,420	)
Equities:
Equities			1,648,897				(23,309	)			1,074,560				(61,800	)			2,723,457				(85,109	)
Other equity investments			109,804				(3,492	)			-				-				109,804				(3,492	)
Total equities			1,758,701				(26,801	)			1,074,560				(61,800	)			2,833,261				(88,601	)
Total available for sale		$	6,902,047			$	(142,203	)		$	1,240,417			$	(64,818	)		$	8,142,464			$	(207,021	)

 

		Less than 12 months								Greater than 12 months								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Loss				Value				Loss				Value				Loss
December 31, 2016
Available for sale:
Fixed maturities:
US Treasury securities		$	299,162			$	(15,830	)		$	-			$	-			$	299,162			$	(15,830	)
Corporate bonds			1,897,000				(42,994	)			196,399				(2,240	)			2,093,399				(45,234	)
Municipal bonds			1,296,688				(38,191	)			-				-				1,296,688				(38,191	)
Mortgage backed and asset backed securities			1,700,173				(39,264	)			134,090				(6,036	)			1,834,263				(45,300	)
Total fixed maturities			5,193,023				(136,279	)			330,489				(8,276	)			5,523,512				(144,555	)
Equities:
Equities			1,007,860				(59,357	)			1,063,959				(72,400	)			2,071,819				(131,757	)
Other equity investments			52,840				(4,719	)			-				-				52,840				(4,719	)
Total equities			1,060,700				(64,076	)			1,063,959				(72,400	)			2,124,659				(136,476	)
Total available for sale		$	6,253,723			$	(200,355	)		$	1,394,448			$	(80,676	)		$	7,648,171			$	(281,031	)

 

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 securities in the investment portfolio in an unrealized loss position as of March 31, 2017 was 66, which represented an unrealized loss of $207,021 of the aggregate carrying value of those securities. The 66 securities breakdown as follows: 33 bonds, 22 mortgage and asset backed securities, 7 common stocks, 2 high yield corporate bond fund, 1 preferred stock index fund, and 1 senior loan fund. The Company determined that no securities were considered to be other-than-temporarily impaired as of March 31, 2017 and December 31, 2016. The unrealized gains on the remainder of the available for sale portfolio as of March 31, 2017 were $469,519. 

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

Note 3.     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. The Company’s Level 2 assets and liabilities include fixed maturity securities with quoted prices that are traded less frequently than exchange-traded instruments or assets and liabilities whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.  This category generally includes U.S. Government and agency mortgage-backed debt securities and corporate debt securities.

 

●

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: Investments in securities that are classified as available for sale are recorded at fair value utilizing Level 1 and Level 2 measurements.

 

 

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 March 31, 2017 and December 31, 2016:

 

		March 31, 2017
		Total				Level 1				Level 2				Level 3
Available for sale:							(unaudited)
Fixed maturities:
US Treasury securities		$	302,583			$	302,583			$	-			$	-
Corporate bonds			4,452,716				-				4,452,716				-
Municipal bonds			3,656,990				-				3,656,990				-
Mortgage backed and asset backed securities			3,276,167				-				3,276,167				-
Total fixed maturities			11,688,456				302,583				11,385,873				-
Equities:
Equities			5,135,423				5,135,423				-				-
Other equity investments			331,683				331,683				-				-
Total equities			5,467,106				5,467,106				-				-
Total		$	17,155,562			$	5,769,689			$	11,385,873			$	-

 

		December 31, 2016
		Total				Level 1				Level 2				Level 3
Available for sale:
Fixed maturities:
US Treasury securities		$	299,162			$	299,162			$	-			$	-
Corporate bonds			3,845,896				-				3,845,896				-
Municipal bonds			2,849,829				-				2,849,829				-
Mortgage backed and asset backed securities			3,325,187				-				3,325,187				-
Total fixed maturities			10,320,074				299,162				10,020,912				-
Equities:
Equities			4,942,248				4,942,248				-				-
Other equity investments			201,256				201,256				-				-
Total equities			5,143,504				5,143,504				-				-
Total		$	15,463,578			$	5,442,666			$	10,020,912			$	-

 

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.

 

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

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

The estimated fair values of the Company’s financial assets and liabilities at March 31, 2017 and December 31, 2016 are as follows:

 

		March 31, 2017								December 31, 2016
		(unaudited)
		Carrying Value				Fair Value				Carrying Value				Fair Value
Financial Assets:
Cash and cash equivalents		$	2,177,660			$	2,177,660			$	3,145,745			$	3,145,745
Investments, at fair value			17,155,562				17,155,562				15,463,578				15,463,578
Total Financial Assets		$	19,333,222			$	19,333,222			$	18,609,323			$	18,609,323
Financial Liabilities:
Policyholder deposits in deposit-type contracts		$	3,856,221			$	3,795,307			$	3,398,170			$	3,260,086
Total Financial Liabilities		$	3,856,221			$	3,795,307			$	3,398,170			$	3,260,086

 

 

Note 4.     Income Tax Provision

 

No income tax expense or (benefit) has been reflected for the quarters ended March 31, 2017 and 2016 due to the lack of taxable net income generated by the Company and the 100% 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 $5,250,492 and $5,050,176 as of March 31, 2017 and December 31, 2016, 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 losses on investment securities, policyholder benefit reserves and deferred acquisition costs. The net deferred tax asset is offset 100 percent by the valuation allowance.

 

Note 5.     Warrants

 

The Company conducted its public stock offering through the sale of units. Each unit was sold for $1,000 and consisted of 200 shares of common stock and a warrant to purchase an additional 200 shares of common stock at $6.00 per share. The warrants were originally scheduled to expire, if not exercised, February 24, 2016. The board of directors of the Company extended the warrant expiration date to April 1, 2016. As of December 31, 2014 warrant-holders had the right to purchase 2,532,400 shares of common stock. On February 24, 2015, the Company registered a warrant exercise offering with the Kansas Securities Commissioner. During 2015, warrant-holders exercised warrants for the purchase of 944,845 shares of common stock. As of December 31, 2015 warrant-holders had the right to purchase 1,587,555 shares of common stock. During the first three months of 2016, warrant-holders exercised their rights to purchase an additional 354,794 shares of common stock.

 

Management engaged the services of an experienced valuation firm to value the warrants as of February 24, 2013. The valuation performed valued the warrants to be worth $0.01 per share of common stock and management has allocated this amount from additional paid-in capital to the outstanding warrants. As the warrants have been exercised, the value allocated to the warrants exercised has been restored to additional paid-in capital. The value of outstanding warrants was reduced to zero at March 31, 2016. During the warrant exercise period, we were not aware of any sale of our warrants.

 

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 May 10, 2017, 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, 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

 

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 three wholly-owned subsidiaries: USALSC, a life insurance corporation; USAMC, an insurance marketing corporation; and USAIC, an investment management corporation

 

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.

 

Critical Accounting Policies and Estimates

 

Our accounting and reporting policies are in accordance with GAAP. 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 and equity securities, classified as available for sale, 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.

 

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 loss.

 

 

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.

 

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 is 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.

 

New Accounting Standards

 

A detailed discussion of new accounting standards is provided in the Notes to Consolidated Financial Statements beginning on p. 7 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 three months ended March 31, 2017 and 2016 are summarized in the following table.

 

		Quarter Ended March 31,
		2017				2016
Income:			(unaudited)
Premium income		$	1,749,928			$	1,357,372
Net investment income			126,020				91,261
Net realized gain on sale of securities			192,405				10,838
Other income			20,202				13,405
Total income		$	2,088,555			$	1,472,876

 

Premium income: Premium income for the first three months of 2017 was $1,749,928 compared to $1,357,372 in the first three months of 2016, an increase of $392,556. This growth is attributable to both an increase in direct written premiums due to our organic growth efforts and an increase in assumed premiums from our reinsurance treaty with ULIC.

 

Direct, assumed and ceded premiums for the three months ended March 31, 2017 and 2016 are summarized in the following table.

 

		Quarters ended March 31,
		2017				2016
			(unaudited)
Direct		$	743,094			$	583,615
Assumed			1,041,306				800,730
Ceded			(34,472	)			(26,973	)
Total		$	1,749,928			$	1,357,372

 

 

The Company is continuing to pursue new product and distribution opportunities to increase premium production.

 

Investment income, net of expenses: The components of net investment income for the three months ended March 31, 2017 and 2016 are as follows:

 

		Quarter Ended March 31,
		2017				2016
		(unaudited)
Fixed maturities		$	92,736			$	69,502
Equity securities			42,446				31,476
Cash and short term investments			783				199
			135,965				101,177
Less investment expenses			(9,945	)			(9,916	)
		$	126,020			$	91,261

 

Net investment income for the first three months of 2017 was $126,020, compared to $91,261 in 2016, an increase of $34,759. This increase in investment income is primarily a result of increased invested assets as a result of our premium income.

 

 

Net realized gains on investments: Net realized gains on investments for the three months ended March 31, 2017 were $192,405, compared to gains of $10,838 in 2016, an increase of $179,654. The increase in realized gains is attributable to the repositioning of an equity portfolio from a market return focus to an income focus.

 

		Quarter Ended March 31,
		(unaudited)
		2017				2016
Gross gains		$	192,405			$	10,838
Gross losses			-				-
Net security gains		$	192,405			$	10,838

 

Other income: Other income for the three months ended March 31, 2017 was $20,202 compared to $13,405 in 2015, an increase of $6,797. This increase is due to the growth of our third party administration business.

 

Expenses. Expenses for the three months ended March 31, 2017 and 2016 are summarized in the table below.

 

		Quarter Ended March 31,
		2017				2016
Expenses:			(unaudited)
Death claims		$	392,588			$	116,527
Policyholder benefits			973,724				722,145
Increase in policyholder reserves			264,978				359,552
Commissions, net of deferrals			124,291				108,215
Amortization of deferred acquisition costs			37,764				37,457
Salaries & benefits			178,192				188,367
Other operating expenses			285,766				267,330
Total expense		$	2,257,303			$	1,799,593

 

Death and other benefits: Death benefits were $392,588 in the three months ended March 31, 2017 compared to $116,527 in 2016, an increase of $276,061. This increase is attributable to the growth of our in-force block of life insurance policies. The majority of death claims paid from inception have been on pre-need policies. We expect these claims to grow as we continue to increase the size of our in-force pre-need business.

 

Policyholder benefits: Policyholder benefits were $973,724 in the three months ended March 31, 2017 compared to $722,145 in 2016, an increase of $251,579. The primary driver of this increase is the growth of our assumed business and is more than offset by the increased premiums associated with this block of assumed policies.

 

Increase in policyholder reserves: Policyholder reserves increased $264,978 in the three months ended March 31, 2017, compared to $359,552 in 2016, a decrease of $94,574. The reduction in increase in policyholder reserves reflects the reserves released on paid death claims.

 

Commissions, net of deferrals: The Company pays commissions to the ceding company on a block of assumed policies. Commissions were $124,291 in the three months ended March 31, 2017, compared to $108,215 in 2016, an increase of $16,076. This increase is due to an increase in assumed premiums. Commissions paid to agents on direct written premiums are deferred and amortized as a part of our deferred acquisition costs.

 

Amortization of deferred acquisition costs: The amortization of deferred acquisition costs was $37,764 in the three months ended March 31, 2017, compared to $37,457 in 2016. The age bands for pre-need purchases affects the amortization of the commissions paid and limited the amount of increase in amortization this period.

 

Salaries and benefits: Salaries and benefits were $178,192 for the three months ended March 31, 2017, compared to $188,367 in 2016, a decrease of $10,175. Staffing costs have remained in line with the prior year.

 

Other expenses: Other operating expenses were $285,766 in the three months ended March 31, 2017, compared to $267,330 in 2016, an increase of $18,436. This increase is driven by increased spending on our selling and marketing efforts.

 

 

Net Loss: Our net loss was $168,748 in the three months ended March 31, 2017 compared to $326,717 in 2016, a decrease of $157,969. This decrease is primarily attributable to our increased realized gains. Our net loss per share decreased to $0.03 from $0.06 in 2016, basic and diluted.

 

Discussion of Consolidated Balance Sheet

 

Assets. Assets have increased to $20,771,856 as of March 31, 2017, an increase of $1,579,867 from December 31, 2016. This is primarily the result of the growth of our available for sale assets.

 

Available for sale fixed maturity securities: As of March 31, 2017, we had available for sale fixed maturity assets of $11,688,456, an increase of $1,368,382 from the December 31, 2016 balance of $10,320,074. This growth is driven by our premium income.

 

Available for sale equity securities: As of March 31, 2017, we had available for sale equity assets of $5,467,106, an increase of $323,062 from the December 31, 2016 balance of $5,143,504. This growth is driven by our premium income.

 

Cash and cash equivalents: As of March 31, 2017, we had cash and cash equivalent assets of $2,177,660, a decrease of $968,085 from the December 31, 2016 balance of $3,145,745. This decrease is driven by our deployment of cash into invested assets.

 

Investment income due and accrued: As of March 31, 2017, our investment income due and accrued was $94,458 compared to $100,713 as of December 31, 2016. This decrease is attributable to normal investment activity.

 

Reinsurance related assets: As of March 31, 2017, our reinsurance related assets were $31,597 compared to $31,390 as of December 31, 2016. There were no outstanding claim recoveries for either period.

 

Deferred acquisition costs, net: As of March 31, 2017, our deferred acquisition costs were $186,846 compared to $153,792 as of December 31, 2016. This is the result of our growing block of in-force policies and we expect this balance to continue to grow along with the size of our in-force business.

 

Property, equipment and software, net: As of March 31, 2017 our property, equipment and software assets were $236,265 compared to $244,849 as of December 31, 2016. This decrease is a result of normal amortization during the period. We did not purchase any new property, equipment and software during the first three months of 2017.

 

Other assets: As of March 31, 2017, our other assets were $889,468 compared to $51,922 as of December 31, 2016. This increase was the result of a receivable on securities sold but not yet settled as a part of a repositioning on an equity portfolio.

 

Liabilities. Our total liabilities were $9,482,372 as of March 31, 2017, an increase of $1,671,366 from our December 31, 2016 liability of $7,811,006.

 

Policy liabilities: Our total policy liabilities as of March 31, 2017 were $8,599,195 compared to $7,740,329 as of December 31, 2016. This increase is the result of new policy sales and the growth of our in-force policies. The growth in deposit-type contracts is the result of our annuity sales and the growth of our annuity block of business. The growth in policyholder benefit reserves is the result of our life insurance sales and the growth of our life insurance block of business. The growth of advance premiums is also attributable to the growth of our life insurance block of business.

 

Other liabilities: As of March 31, 2017, our other liabilities were $813,909 compared to $4,205 as of December 31, 2016. This increase was the result of a payable on securities purchased but not yet settled as a part of a repositioning on an equity portfolio.    

 

Shareholders’ Equity. Our shareholders’ equity was $11,289,484 as of March 31, 2017, a decrease of $91,499 from our December 31, 2016 shareholders’ equity of $11,380,983. The reduction in shareholders’ equity was driven by our net loss during the first three months of 2017. This was partially offset by the sale of additional shares of common stock during the quarter. The increase in accumulated other comprehensive income reflects the change in unrealized gains and losses in our available for sale securities.

 

 

Investments

 

Our overall investment philosophy is reflected in 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 March 31, 2017 and December 31, 2016.

 

		March 31, 2017								December 31, 2016
		Fair				Percent				Fair				Percent
		Value				of Total				Value				of Total
Fixed maturities:		(unaudited)
US Treasury securities		$	302,583				1.6	%		$	299,162				1.6	%
Corporate bonds			4,452,716				23.0	%			3,845,896				20.7	%
Municipal bonds			3,656,990				18.9	%			2,849,829				15.3	%
Mortgage backed and asset backed securities			3,276,167				16.9	%			3,325,187				17.9	%
Total fixed maturities			11,688,456				60.4	%			10,320,074				55.5	%
Equities:
Equities			5,135,423				26.6	%			4,942,248				26.5	%
Other equity investments			331,683				1.7	%			201,256				1.1	%
Total equities			5,467,106				28.3	%			5,143,504				27.6	%
Cash and cash equivalents			2,177,660				11.3	%			3,145,745				16.9	%
Total		$	19,333,222				100.0	%		$	18,609,323				100.0	%

 

The total value of our investments increased to $19,333,222 as of March 31, 2017 from $18,609,323 at December 31, 2016, an increase of $723,899. Increases in investments are primarily attributable to premiums received by USALSC.

 

The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of March 31, 2017 and December 31, 2016.

 

		March 31, 2017								December 31, 2016
		Fair				Percent				Fair				Percent
		Value				of Total				Value				of Total
		(unaudited)
AAA and U.S. Government		$	1,071,085				9.2	%		$	1,080,028				10.5	%
AA			5,212,905				44.6	%			4,887,863				47.3	%
A			2,307,354				19.7	%			1,961,311				19.0	%
BBB			2,897,025				24.8	%			2,194,473				21.3	%
BB			200,087				1.7	%			196,399				1.9	%
Total		$	11,688,456				100.0	%		$	10,320,074				100.0	%

 

Reflecting the high quality of securities maintained by us, 98.1% of all fixed maturity securities were investment grade as of December 31, 2016. As of March 31, 2017, 98.3% of all fixed maturity securities were investment grade.

 

The amortized cost and fair value of debt securities as of December 31, 2016 and March 31, 2017, 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 March 31, 2017								As of December 31, 2016
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
Amounts maturing in:		(unaudited)
One year or less		$	49,951			$	49,929			$	49,915			$	49,931
After one year through five years			1,718,157				1,714,094				1,819,437				1,809,470
After five years through ten years			1,646,453				1,647,786				1,646,576				1,643,823
More than 10 years			4,943,064				5,000,480				3,468,619				3,491,663
Mortgage backed and asset backed securities			3,276,332				3,276,167				3,333,617				3,325,187
		$	11,633,957			$	11,688,456			$	10,318,164			$	10,320,074

 

 

Market Risk of Financial Instruments

 

We hold a diversified portfolio of investments that primarily includes cash, bonds and equity securities. Each of these investments is subject to market risks that can affect their return and their fair value. A majority 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.

 

 

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.

 

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

 

Since inception, our operations have been financed primarily through the sale of voting common stock. Our operations have not been profitable and have generated significant operating losses since we were incorporated in 2009.

 

Aside from raising capital, which has funded the vast majority of our operations, premium income, deposits to policyholder account balances, and investment income 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.

 

Net cash provided by operating activities was $41,272 for the three months ended March 31, 2017. 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 $1,505,023. The primary source of cash was from sales of available for sale securities and the sale of the short-term investments. Offsetting this source of cash was our purchases of investments in available-for-sale securities. Cash provided by financing activities was $495,666. The primary sources of cash were receipts on deposit-type contracts and issuance of common stock.

 

At March 31, 2017, we had cash and cash equivalents totaling $2,177,660. We believe that our existing cash and cash equivalents will be sufficient to fund the anticipated operating expenses and capital expenditures through at least 2017. 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 our insurance subsidiary is uncertain and will require additional capital if it continues 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 is not required to 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 Executive Vice President of US Alliance Life and Security Company 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 Executive Vice President of US Alliance Life and Security Company 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 three months ended March 31, 2017 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 March 31, 2017, the Company issued 17,759 shares of common stock for aggregate consideration of $124,313, 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)
3.2			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).
4.1			Form of Warrant to Purchase Common Shares of US Alliance (filed as Exhibit 4.1 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 4.1)
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*			XLRB Instance
101.SCH*			XLRB Taxonomy Extension Schema
101.CAL*			XLRB Taxonomy Extension Calculation
101.DEF*			XLRB Taxonomy Extension Definition
101.LAB*			XLRB Taxonomy Extension Labels
101.PRE*			XLRB Taxonomy Extension Presentation

 

*Filed herewith.  

 

XLRB 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 Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

 

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

 

 

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