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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 March 31, 2021.

 

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.)
     
1303 SW First American Pl, Suite 200, 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. ☒ Yes ☐ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 ☐ 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

7,742,573 shares outstanding

as of May 4, 2021

 

 

 

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

 

8

         

Item 2

 

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

 

20

         

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

 

32

         

Item 4

 

Controls and Procedures

 

32

         

Part II - Other Information

         

Item

 

Item Description

 

Page

Item 1

 

Legal Proceedings

 

33

         

Item 1A

 

Risk Factors

 

33

         

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

33

         

Item 3

 

Defaults Upon Senior Securities

 

33

         

Item 4

 

Mine Safety Disclosures

 

33

         

Item 5 

 

Other Information

 

33

         

Item 6

 

Exhibits

 

34

         
   

Signatures

 

35

 

 

1.      FINANCIAL STATEMENTS

 

US Alliance Corporation

 

Consolidated Balance Sheets

 

   

March 31, 2021

   

December 31, 2020

 

 

 

(unaudited)

         
Assets              

Investments:

               

Available for sale fixed maturity securities

               

(amortized cost: $33,551,489 and $33,784,518 as of March 31, 2021 and December 31, 2020, respectively)

  $ 35,178,702     $ 37,677,578  

Equity securities, at fair value

    9,399,091       9,221,574  

Mortgage loans on real estate

    3,433,437       3,166,136  

Funds withheld under coinsurance agreement, at fair value

    47,150,149       46,830,076  

Policy loans

    166,703       163,725  

Real estate, net of depreciation

    1,409,461       1,415,743  

Total investments

    96,737,543       98,474,832  
                 

Cash and cash equivalents

    5,620,444       4,320,759  

Investment income due and accrued

    473,120       423,036  

Reinsurance related assets

    398,252       165,082  

Deferred acquisition costs, net

    6,940,094       7,105,890  

Value of business acquired, net

    2,680,128       2,703,233  

Property, equipment and software, net

    36,757       37,818  

Goodwill

    277,542       277,542  

Deferred tax asset, net of valuation allowance

    243,257       243,257  

Other assets

    515,618       1,635,647  

Total assets

  $ 113,922,755     $ 115,387,096  
                 
                 

Liabilities and Shareholders' Equity

               

Liabilities:

               

Policy liabilities

               

Deposit-type contracts

  $ 73,347,975     $ 72,082,207  

Policyholder benefit reserves

    22,335,281       21,158,568  

Dividend accumulation

    117,056       116,127  

Advance premiums

    191,919       102,178  

Total policy liabilities

    95,992,231       93,459,080  
                 

Accounts payable and accrued expenses

    142,652       1,507,756  

Federal Home Loan Bank advance

    2,000,000       2,000,000  

Other liabilities

    25,101       15,469  

Total liabilities

    98,159,984       96,982,305  
                 

Shareholders' Equity:

               

Common stock, $0.10 par value. Authorized 20,000,000 shares; issued and outstanding 7,742,573 and 7,741,487 shares as of March 31, 2021 and December 31, 2020, respectively

    774,258       774,150  

Additional paid-in capital

    23,023,211       23,063,273  

Accumulated deficit

    (9,333,724 )     (8,997,507 )

Accumulated other comprehensive income

    1,299,026       3,564,875  

Total shareholders' equity

    15,762,771       18,404,791  
                 

Total liabilities and shareholders' equity

  $ 113,922,755     $ 115,387,096  

 

See Notes to Consolidated Financial Statements (unaudited).

 

 

 

US Alliance Corporation

Consolidated Statements of Comprehensive Loss 

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 

Income:

 

(unaudited)

 

Premium income

  $ 3,047,177     $ 2,715,761  

Net investment income

    1,298,992       514,708  

Net investment losses

    (117,332 )     (1,370,761 )

Other income

    79,428       13,656  

Total income

    4,308,265       1,873,364  
                 

Expenses:

               

Death claims

    571,164       481,712  

Policyholder benefits

    1,692,601       1,249,083  

Increase in policyholder reserves

    1,196,921       923,248  

Commissions, net of deferrals

    179,208       206,956  

Amortization of deferred acquisition costs

    270,057       575,210  

Amortization of value of business acquired

    23,105       5,076  

Salaries & benefits

    256,028       263,205  

Other operating expenses

    455,398       872,245  

Total expense

    4,644,482       4,576,735  
                 
                 

Net loss

  $ (336,217   $ (2,703,371 )
                 

Net loss per common share, basic and diluted

  $ (0.04 )   $ (0.35 )
                 

Unrealized net holding losses arising during the period

    (2,251,999 )     (1,674,158 )

Reclassification adjustment for gains included in net loss

    (13,850 )     (30,873 )
                 

Other comprehensive loss

    (2,265,849 )     (1,705,031 )
                 

Comprehensive loss

  $ (2,602,066 )   $ (4,408,402 )

 

See Notes to Consolidated Financial Statements. (unaudited).

 

 

 

US Alliance Corporation

Consolidated Statements of Changes in Shareholders' Equity (unaudited)

Three Months Ended March 31, 2021 and 2020

 

                           

Accumulated

                 
   

Number of

                   

Other

                 
   

Shares of

   

Common

   

Additional

   

Comprehensive

   

Accumulated

         
   

Common Stock

   

Stock

   

Paid-in Capital

   

Income / (Loss)

   

Deficit

   

Total

 

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

    6,696       670       46,202       -       -       46,872  

Costs associated with common stock issued

    -       -       (51,565 )     -       -       (51,565 )

Other comprehensive loss

    -       -       -       (1,705,031 )     -       (1,705,031 )

Net loss

    -       -       -       -       (2,703,371 )     (2,703,371 )

Balance, March 31, 2020

    7,740,700     $ 774,071     $ 23,204,894     $ 624,464     $ (12,140,327 )   $ 12,463,102  
                                                 

Balance, December 31, 2020

    7,741,487     $ 774,150     $ 23,063,273     $ 3,564,875     $ (8,997,507 )   $ 18,404,791  

Common stock issued, $7 per share

    1,086       108       7,494       -       -       7,602  

Costs associated with common stock issued

    -       -       (47,556 )     -       -       (47,556 )

Other comprehensive loss

    -       -       -       (2,265,849 )     -       (2,265,849 )

Net loss

    -       -       -       -       (336,217 )     (336,217 )

Balance, March 31, 2021

    7,742,573     $ 774,258     $ 23,023,211     $ 1,299,026     $ (9,333,724 )   $ 15,762,771  

 

See Notes to Consolidated Financial Statements. (unaudited)

 

 

 

US Alliance Corporation

Consolidated Statements of Cash Flows

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 

Cash Flows from operating activities:

 

(unaudited)

 

Net loss

  $ (336,217 )   $ (2,703,371 )

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

               

Depreciation and amortization

    7,344       2,559  

Net (gains) losses realized on the sale of securities

    (52,397 )     218,953  

Unrealized (gains) losses on equity securities

    (32,918 )     1,151,808  

Change in fair value of funds withheld embedded derivative

    202,647       -  

Amortization of investment securities, net

    44,015       20,201  

Deferred acquisition costs capitalized

    (97,971 )     (1,796,373 )

Deferred acquisition costs amortized

    270,057       575,210  

Value of business acquired amortized

    23,105       5,076  

Interest credited on deposit type contracts

    373,779       194,549  

(Increase) decrease in operating assets:

               

Change in funds withheld

    (584,526 )     -  

Investment income due and accrued

    (50,084 )     (33,166 )

Reinsurance related assets

    48,813       (70,088 )

Other assets

    1,120,029       (44,238 )

Increase (decrease) in operating liabilities:

               

Policyowner benefit reserves

    1,176,713       989,476  

Dividend accumulation

    929       (2,022 )

Advance premiums

    89,741       11,853  

Other liabilities

    9,632       82,893  

Accounts payable and accrued expenses

    (1,365,104 )     40,416  

Net cash provided by (used in) operating activities

    847,587       (1,356,264 )
                 
                 

Cash Flows from investing activities:

               

Purchase of fixed income investments

    -       (876,333 )

Purchase of equity investments

    (139,813 )     (2,974,768 )

Purchase of mortgage investments

    (391,388 )     -  

Proceeds from fixed income sales and repayments

    183,632       523,611  

Proceeds from equity sales

    52,469       2,965,665  

Proceeds from mortgage repayments

    124,086       -  

Transfers from (to) funds withheld

    300,000       -  

Interest on policy loans

    -       (2,477 )

Increase in policy loans

    (2,978 )     (20,243 )

Net cash provided by (used in) investing activities

    126,008       (384,545 )
                 

Cash Flows from financing activities:

               

Receipts on deposit-type contracts

    972,879       2,944,455  

Withdrawals on deposit-type contracts

    (606,835 )     (650,221 )

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

    (39,954 )     (4,693 )

Net cash provided by financing activities

    326,090       2,289,541  
                 

Net increase in cash and cash equivalents

    1,299,685       548,732  
                 

Cash and Cash Equivalents:

               

Beginning

    4,320,759       6,678,805  

Ending

  $ 5,620,444     $ 7,227,537  

 

See Notes to Consolidated Financial Statements. (unaudited)

 

 

 

US Alliance Corporation

Supplemental Cash Flow Information

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 

Supplemental Disclosure of Non-Cash Information

               

Assumed deposit-type deposits due from reinsurer

  $ -     $ 13,524,325  

Funds withheld assumed deposits on deposit-type contracts

    681,594       -  

Funds withheld assumed withdrawals on deposit-type contracts

    (155,649 )     -  

Commissions and expense allowances deducted from funds withheld

    (276,279 )     -  

 

 

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 1303 SW First American Place, Suite 200, Topeka, Kansas 66604. Our telephone number is 785-228-0200 and our website address is www.usalliancecorporation.com.  Unless the context indicates otherwise, references herein to the "Company" refer to USAC and its consolidated subsidiaries.

 

USAC has five 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.

 

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 the 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, 2022. During the 4th quarter of 2017, the Company began a private placement offering to accredited investors in the state of North Dakota.

 

USALSC received a Certificate of Authority from the Kansas Insurance Department ("KID") effective January 2, 2012, and sold its first insurance product on May 1, 2013. DCLIC received a Certificate of Authority from the North Dakota Insurance Department ("NDID") effective January 24, 2012.

 

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

 

The Company’s 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 months ended March 31, 2021 are not necessarily indicative of the results to be expected for the year ended December 31, 2021 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 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, 2020.

 

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, 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 March 31, 2021, and December 31, 2020, USAC had 7,742,573 and 7,741,487 common shares issued and outstanding, respectively.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

 

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 three months ended March 31, 2021 and 2020 were 7,741,879 and 7,736,236 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 three months ended March 31, 2021 and 2020.

 

New accounting standards:

 

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, 2021. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

Income Taxes - Simplifying the Accounting for Income Taxes

 

In December 2019, the FASB issued updated guidance (Accounting Standards Update 2019-12) for the accounting for income taxes. The updated guidance is intended to simplify the accounting for income taxes by removing several exceptions contained in existing guidance and amending other existing guidance to simplify several other income tax accounting matters. The updated guidance is effective for the quarter ending March 31, 2021. 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.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

 

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.

 

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, 2024, 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.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

 

 

Note 2. Investments

 

Fixed Maturity

 

The amortized cost and fair value of available for sale investments as of March 31, 2021 and December 31, 2020 is as follows:

 

   

March 31, 2021

 
   

Cost or

   

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

         
   

Cost

   

Gains

   

Losses

   

Fair Value

 

 

 

(unaudited)

 
Available for sale:                                

Fixed maturities:

                               

US Treasury securities

  $ 575,881     $ 93,935     $ -     $ 669,816  

Corporate bonds

    20,118,835       1,513,800       (442,183 )     21,190,452  

Municipal bonds

    5,982,208       508,856       (53,494 )     6,437,570  

Redeemable preferred stock

    2,873,999       37,532       (14,324 )     2,897,207  

Mortgage backed and asset backed securities

    4,000,566       33,011       (49,920 )     3,983,657  

Total available for sale

  $ 33,551,489     $ 2,187,134     $ (559,921 )   $ 35,178,702  

 

 

   

December 31, 2020

 
   

Cost or

   

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

         
   

Cost

   

Gains

   

Losses

   

Fair Value

 

Available for sale:

                               

Fixed maturities:

                               

US Treasury securities

  $ 574,935     $ 127,981     $ -     $ 702,916  

Corporate bonds

    20,126,836       2,821,508       (533 )     22,947,811  

Municipal bonds

    5,992,707       804,443       (496 )     6,796,654  

Redeemable preferred stock

    2,900,330       90,085       (200 )     2,990,215  

Mortgage backed and asset backed securities

    4,189,710       50,274       (2 )     4,239,982  

Total available for sale

  $ 33,784,518     $ 3,894,291     $ (1,231 )   $ 37,677,578  

 

The amortized cost and fair value of debt securities as of March 31, 2021 and December 31, 2020, by contractual maturity, are shown below. 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, 2021

   

As of December 31, 2020

 
   

Amortized Cost

   

Fair Value

   

Amortized Cost

   

Fair Value

 

 

 

(unaudited)

                 
Amounts maturing in:                                

One year or less

  $ 373,737     $ 378,110     $ 373,590     $ 379,823  

After one year through five years

    1,536,790       1,620,593       1,540,931       1,641,749  

After five years through ten years

    2,886,887       3,220,456       2,887,066       3,379,930  

More than 10 years

    21,879,510       23,078,679       21,892,891       25,045,879  

Redeemable preferred stocks

    2,873,999       2,897,207       2,900,330       2,990,215  

Mortgage backed and asset backed securities

    4,000,566       3,983,657       4,189,710       4,239,982  

Total amortized cost and fair value

  $ 33,551,489     $ 35,178,702     $ 33,784,518     $ 37,677,578  

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

 

Proceeds from the sale of securities, maturities, and asset paydowns in the three months ended March 31, 2021 and 2020 were $360,187 and $3,489,276, respectively. Realized gains and losses related to the sale of securities are summarized as follows:

 

   

Three Months Ended March 31,

 
   

(unaudited)

 
   

2021

   

2020

 

Gross gains

  $ 52,792     $ 44,295  

Gross losses

    (395 )     (263,248 )

Realized gains (losses)

  $ 52,397     $ (218,953 )

 

 

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, 2021

 

(unaudited)

 
Available for sale:                                                

Fixed maturities:

                                               

Corporate bonds

  $ 5,606,231     $ (442,183 )   $ -     $ -     $ 5,606,231     $ (442,183 )

Municipal bonds

    746,298       (53,494 )     -       -       746,298       (53,494 )

Redeemable preferred stock

    1,213,188       (14,324 )     -       -       1,213,188       (14,324 )

Mortgage backed and asset backed securities

    2,947,093       (49,920 )     -       -       2,947,093       (49,920 )

Total fixed maturities

  $ 10,512,810     $ (559,921 )   $ -     $ -     $ 10,512,810     $ (559,921 )

 

 

   

Less than 12 months

   

Greater than 12 months

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Loss

   

Value

   

Loss

   

Value

   

Loss

 
December 31, 2020                                                

Available for sale:

                                               

Fixed maturities:

                                               

Corporate bonds

  $ 210,625     $ (2 )   $ 49,438     $ (531 )   $ 260,063     $ (533 )

Municipal bonds

    47,249       (496 )     -       -       47,249       (496 )

Redeemable preferred stock

    77,918       (200 )     -       -       77,918       (200 )

Mortgage backed and asset backed securities

    309,144       (2 )     -       -       309,144       (2 )

Total fixed maturities

  $ 644,936     $ (700 )   $ 49,438     $ (531 )   $ 694,374     $ (1,231 )

 

 

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 March 31, 2021 was 66, which represented an unrealized loss of $559,921 of the aggregate carrying value of those securities. The 66 securities breakdown as follows: 35 bonds, 26 mortgage and asset backed securities, and 5 redeemable preferred stock. The Company determined that no securities were considered to be other-than-temporarily impaired as of March 31, 2021 and December 31, 2020.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

 

Mortgage Loans on Real Estate

 

The Company has invested in various mortgage loans through participation agreements with the original issuing entity.  The Company’s mortgage loans by property type as of March 31, 2021 and December 31, 2020 are summarized as follows:

 

   

March 31, 2021

   

December 31, 2020

 

Commercial mortgage loans by property type

 

(unaudited)

         

Student housing

  $ 781,512     $ 781,512  

Condominium

    2,083,700       1,874,445  

Multi-property

    382,500       332,195  

Multi-family

    185,725       177,984  

Total commercial mortgages

  $ 3,433,437     $ 3,166,136  

 

The Company utilizes loan-to-value of individual mortgage loans to evaluate the credit quality of its mortgage loan portfolio.  The loan-to-value measures the loan's carrying value to its appraised value.  The Company’s mortgage loans by loan-to-value ratio as of March 31, 2021 and December 31, 2020 are summarized as follows:

 

   

March 31, 2021

   

December 31, 2020

 

Loan to value ratio

 

(unaudited)

         

Over 60 to 70%

  $ 2,083,700     $ 1,874,445  

Over 30 to 40%

    185,725     $ 177,984  

Over 10 to 20%

    1,164,012       1,113,707  

Total

  $ 3,433,437     $ 3,166,136  

 

The Company’s mortgage loans by maturity date as of March 31, 2021 and December 31, 2020 are summarized as follows:

 

   

March 31, 2021

   

December 31, 2020

 

Maturity Date

 

(unaudited)

         

One year or less

  $ 2,482,353     $ 2,393,900  

After one year through five years

    951,084       772,236  

Total

  $ 3,433,437     $ 3,166,136  

 

The Company had no mortgage loans that were on non-accrued status as of March 31, 2021 and December 31, 2020.  The were no mortgage loans delinquent on payments due the Company as of March 31, 2021 and December 31, 2020.  In addition, the Company did not establish a valuation allowance on any mortgage loans.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

 

Investment Income, Net of Expenses

 

The components of net investment income for the three months ended March 31, 2021 and 2020 are as follows:

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 
   

(unaudited)

 

Fixed maturities

  $ 277,489     $ 366,731  

Mortgages

    72,917       -  

Equity securities

    147,931       150,189  

Funds withheld

    827,997       -  

Cash and cash equivalents

    308       9,312  
      1,326,642       526,232  

Less investment expenses

    (27,650 )     (11,524 )
    $ 1,298,992     $ 514,708  

 

Net Investment Gains

 

The Company was required to implement a new accounting standard in the first quarter of 2019 which requires that the unrealized gains and losses on equity securities be reported as income on the consolidated statements of comprehensive loss. For the three months ended March 31, 2021, net investment losses is comprised of $32,918 of unrealized gains on our equity portfolio, net realized gains of $52,397, and a loss on the change in the fair value of our embedded derivative on funds withheld of $202,647. For the three months ended March 31, 2020, net investment losses are comprised of $1,151,808 of unrealized losses on our equity portfolio and net realized losses of $218,953.

 

 

Note 3.     Derivative Instruments

 

 

Types of Derivatives used by the Company

 

The Company’s derivatives consist 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:

 

   

March 31, 2021

   

December 31, 2020

     
                                     
   

Derivative

   

Derivative

   

Balance

   

Asset

   

Liability

   

Asset

   

Liability

   

Reported In

Derivatives:

 

(unaudited)

                     

Embedded derivatives:

                                   

Funds withheld embedded derivative

  $ 450,647     $ -     $ 653,294     $ -    

Funds withheld

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

 

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

 

   

Period Ending

   

Period Ending

   

Balance

   

March 31,2021

   

March 31, 2020

   

Reported In

Derivatives:

 

(unaudited)

             

Embedded derivatives:

                   

Change in funds withheld embedded derivative

  $ (202,647 )   $ -    

Net investment losses

 

 

 

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.

 

Fixed maturities, 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 funds 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. The Company’s utilization of a credit-valuation adjustment did not have a material effect on the change in fair value of the embedded derivative for the three months ended March 31, 2021 and 2020.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

 

The table below presents the amounts of assets measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020:   

 

   

March 31, 2021

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 
   

(unaudited)

 

Fixed maturities:

                               

US Treasury securities

  $ 669,816     $ 669,816     $ -     $ -  

Corporate bonds

    21,190,452       -       21,003,652       186,800  

Municipal bonds

    6,437,570       -       6,437,570       -  

Redeemable preferred stock

    2,897,207       -       2,897,207       -  

Mortgage backed and asset backed securities

    3,983,657       -       3,983,657       -  

Total fixed maturities

    35,178,702       669,816       34,322,086       186,800  

Equities:

                               

Common stock

    7,004,840       6,912,340       92,500       -  

Preferred stock

    2,394,251       -       2,394,251       -  

Total equities

    9,399,091       6,912,340       2,486,751       -  

Funds withheld embedded derivative

    450,647       -       -       450,647  

Total

  $ 45,028,440     $ 7,582,156     $ 36,808,837     $ 637,447  

 

 

   

December 31, 2020

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 
                                 

Fixed maturities:

                               

US Treasury securities

  $ 702,916     $ 702,916     $ -     $ -  

Corporate bonds

    22,947,811       -       22,761,011       186,800  

Municipal bonds

    6,796,654       -       6,796,654       -  

Redeemable preferred stock

    2,990,215       -       2,990,215       -  

Mortgage backed and asset backed securities

    4,239,982       -       4,239,982       -  

Total fixed maturities

    37,677,578       702,916       36,787,862       186,800  

Equities:

                               

Common stock

    6,808,944       6,717,144       91,800       -  

Preferred stock

    2,412,630       -       2,412,630       -  

Total equities

    9,221,574       6,717,144       2,504,430       -  

Funds withheld embedded derivative

    653,294       -       -       653,294  

Total

  $ 47,552,446     $ 7,420,060     $ 39,292,292     $ 840,094  

 

 

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 Three Months Ended March 31, 2021

 

Corporate

   

Funds

 
   

Bonds

   

Withheld

 

Fair value, beginning of period

  $ 186,800     $ 653,294  

Investment related losses

    -       (202,647 )

Fair value, end of period

  $ 186,800     $ 450,647  

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

 

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 or non-recurring basis are discussed above. The methodologies for other financial assets and financial liabilities not measured at fair value on a recurring basis are discussed below:

 

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

 

Investment income due and accrued: The carrying amounts approximate fair value net of any unamortized premium or discount because of the short maturity of these instruments.

 

Mortgage loans on real estate: Mortgage loans are carried at their unpaid principal value as that is considered the fair market values for these loans.

 

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 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.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

 

The estimated fair values of the Company’s financial assets and liabilities at March 31, 2021 and December 31, 2020 are as follows:

 

   

March 31, 2021

                         
   

(unaudited)

                         
   

Carrying Value

   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 

Financial Assets:

                                       

Cash and cash equivalents

  $ 5,620,444     $ 5,620,444     $ 5,620,444     $ -     $ -  

Mortgage loans on real estate

    3,433,437       3,433,437       -       -       3,433,437  

Investment income due and accrued

    473,120       473,120       -       -       473,120  

Funds withheld

    46,699,502       47,150,149       -       -       47,150,149  

Policy loans

    166,703       166,703       -       -       166,703  

Total Financial Assets (excluding available for sale investments)

  $ 56,393,206     $ 56,843,853     $ 5,620,444     $ -     $ 51,223,409  
                                         

Financial Liabilities:

                                       

Federal Home Loan Bank advance

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

Policyholder deposits in deposit-type contracts

    73,347,975       74,263,243       -       -       74,263,243  

Total Financial Liabilities

  $ 75,347,975     $ 76,263,243     $ -     $ -     $ 76,263,243  

 

 

   

December 31, 2020

                         
                                         
   

Carrying Value

   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 

Financial Assets:

                                       

Cash and cash equivalents

  $ 4,320,759     $ 4,320,759     $ 4,320,759     $ -     $ -  

Mortgage loans on real estate

    3,166,136       3,166,136       -       -       3,166,136  

Investment income due and accrued

    423,036       423,036       -       -       423,036  

Funds withheld

    46,176,782       46,830,076       -       -       46,830,076  

Policy loans

    163,725       163,725       -       -       163,725  

Total Financial Assets (excluding available for sale investments)

  $ 54,250,438     $ 54,903,732     $ 4,320,759     $ -     $ 50,582,973  
                                         

Financial Liabilities:

                                       

Federal Home Loan Bank advance

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

Policyholder deposits in deposit-type contracts

    72,082,207       74,351,806       -       -       74,351,806  

Total Financial Liabilities

  $ 74,082,207     $ 76,351,806     $ -     $ -     $ 76,351,806  

 

 

 

Note 5.      Income Tax Provision

 

No income tax expense or (benefit) has been reflected for the three months ended March 31, 2021 and 2020 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 $10,054,432 as of December 31, 2020 and estimated to be $10,500,000 as of March 31, 2021. 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 $243,257 as of March 31, 2021 and December 31, 2020, respectively.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

 

 

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 12, 2021, the date on which the consolidated financial statements were issued.

 

 

 

ITEM 2. MANAGEMENTS 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

 

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 indicates otherwise, references herein to the "Company" refer to USAC and its consolidated 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, USAC merged with Northern Plains Capital Corporation ("NPCC") with USAC 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 ("GWIC"). Great Western Life Insurance Company, a subsidiary of GWIC, 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, 2017, the Company entered into a coinsurance agreement with American Life and Security Corporation (“ALSC”) to assume 100% of a certain block of life insurance policies from ALSC (the “2017 ALSC Agreement”). On April 15, 2020, with an effective date of January 1, 2020, the Company entered into 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 December 31, 2020, the Company had assumed $50.1 million in annuity deposits under the 2020 ALSC Agreement. On December 31, 2020, USALSC and ALSC agreed to terminate a portion of the 2017 ALSC Agreement, pursuant to an amendment to the 2017 ALSC Agreement.   Effective December 31, 2020, USALSC entered into an agreement with ALSC, which provided for ASLC to recapture all reserves previously ceded to USALSC with respect to a portion of the 2017 ALSC Agreement. USALSC and ASLC agreed that the commuted business shall be discharged by USALSC’s transfer of invested assets and cash in the amount of $9,181,100. As part of the transaction the Company released $10,972,785 in reserve liabilities and $1,146,156 of deferred acquisition costs, resulting in a commutation gain of $543,794, which is recorded in other income

.

 

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, mortgages, 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. 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 and 1505 Capital, our investment managers, provide 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. Our membership in the Federal Home Loan Bank ("FHLB") provides additional liquidity which further reduces the likelihood that we would be required to sell a security prior to recovery. 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.

 

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 of 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 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 with ALSC 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 in net investment losses.

 

Funds Withheld under Coinsurance Agreement

 

Funds withheld under coinsurance agreement represent amounts contractually withheld by a ceding company in accordance with the 2020 ALSC Agreement. 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 Comprehensive Loss.  Funds withheld under coinsurance agreement are presented net of the embedded derivative, discussed above.  Under the terms of the 2020 ALSC 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 second 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 2020 ALSC 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.

 

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 Comprehensive 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 NPCC. The merger transaction closed on July 31, 2017. NPCC shareholders received .5841 shares of US Alliance Corporation stock for each share of NPCC stock owned. USAC issued 1,644,458 shares of common stock to holders of NPCC shares.

 

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

 

Effective December 31, 2020, the DCLIC acquired a block of life insurance policies according to the terms of an assumption agreement with ALSC. The Company acquired fixed maturity securities and cash of $9,181,100, assumed liabilities of $10,972,785 and recorded VOBA of $2,163,542.

 

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 three months ended March 31, 2021 and 2020 are summarized in the table below.

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 
   

(unaudited)

 
Income:                

Premium income

  $ 3,047,177     $ 2,715,761  

Net investment income

    1,298,992       514,708  

Net investment losses

    (117,332 )     (1,370,761 )

Other income

    79,428       13,656  

Total income

  $ 4,308,265     $ 1,873,364  

 

Our 2021 first three months total income increased to $4,308,265, an increase of $2,434,901 or 130% from the 2020 first three months total income of $1,873,364. 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 income: Premium income for the first three months of 2021 was $3,047,177 compared to $2,715,761 in the first three months of 2020, an increase of $331,416 or 12%. The increase was driven by an increase in direct single and recurring premiums. Even though it is 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 March 31, 2021 and 2020 are summarized in the following table.

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 
      (unaudited)  

Direct

  $ 2,123,679     $ 1,577,225  

Assumed

    1,197,748       1,360,386  

Ceded

    (274,250 )     (221,850 )

Total

  $ 3,047,177     $ 2,715,761  

 

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

 

 

Investment income, net of expenses: The components of net investment income for the three months ended March 31, 2021 and 2020 are as follows:

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 
   

(unaudited)

 

Fixed maturities

  $ 277,489     $ 366,731  

Mortgages

    72,917       -  

Equity securities

    147,931       150,189  

Funds withheld

    827,997       -  

Cash and cash equivalents

    308       9,312  
      1,326,642       526,232  

Less investment expenses

    (27,650 )     (11,524 )
    $ 1,298,992     $ 514,708  

 

Net investment income for the first three months of 2021 was $1,298,992, compared to $514,708 in the same period in 2020, an increase of $784,284 or 152%. 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 three months ended March 31, 2021 were $117,332, compared to $1,370,761 for the same period in 2020, a decrease of $1,253,429. The decrease in net investment losses is attributable to 2020 being impacted by the Covid-19 pandemic. Net investment losses for the three months ended March 31, 2021 were comprised of $169,729 of unrealized losses in our equity portfolio and funds withheld asset and realized gains of $52,397. Net investment losses for the three months ended March 31, 2020 were comprised of $1,151,808 of unrealized losses in our equity portfolio and realized losses of $218,953. Realized gains and losses related to the sale of securities for the three months ended March 31, 2021 and 2020 are summarized as follows:

 

   

Three Months Ended March 31,

 
   

(unaudited)

 
   

2021

   

2020

 

Gross gains

  $ 52,792     $ 44,295  

Gross losses

    (395 )     (263,248 )

Realized gains (losses)

  $ 52,397     $ (218,953 )

 

Other income: Other income for the three months ended March 31, 2021 was $79,428 compared to $13,656 in the same period in 2020, an increase of $65,772. The increase in other income is the result of rent collected from a building acquired in 2020.

 

 

Expenses. Expenses for the three months ended March 31, 2021 and 2020 are summarized in the table below.

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 

Expenses:

 

(unaudited)

 

Death claims

  $ 571,164     $ 481,712  

Policyholder benefits

    1,692,601       1,249,083  

Increase in policyholder reserves

    1,196,921       923,248  

Commissions, net of deferrals

    179,208       206,956  

Amortization of deferred acquisition costs

    270,057       575,210  

Amortization of value of business acquired

    23,105       5,076  

Salaries & benefits

    256,028       263,205  

Other operating expenses

    455,398       872,245  

Total expense

  $ 4,644,482     $ 4,576,735  

 

Death and other benefits: Death benefits were $571,164 in the three months ended March 31, 2021 compared to $481,712 for the same period in 2020, an increase of $89,452 or 19%. 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 $1,692,601 in the three months ended March 31, 2021 compared to $1,249,083 in the same period in 2020, an increase of $443,518 or 36%. The primary driver of this increase is the growth of interest credited on our direct and assumed annuities.

 

Increase in policyholder reserves: Policyholder reserves increased to $1,196,921 in the three months ended March 31, 2021, compared to $923,248 in the same period in 2020, an increase of $273,673 or 30%. The growth in reserves is the result of increased premiums.

 

Commissions, net of deferrals: The Company pays commissions to the ceding company on a block of assumed policies as well as commissions to agents on directly written business. Commissions, net of deferrals, were $179,208 in the three months ended March 31, 2021, compared to $206,956 in the same period in 2020, a decrease of $27,748 or 13%. This decrease is due to a changing mix of premiums.

 

Amortization of deferred acquisition costs: The amortization of deferred acquisition costs ("DAC") was $270,057 in the three months ended March 31, 2021, compared to $575,210 in the same period in 2020, a decrease of $305,153 or 53%. 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 in the first quarter of 2020 to reflect the current reinvestment environment and the uncertainty of interest rates. Additionally, the Company began amortizing costs deferred in conjunction with its 2020 ALSC Agreement.

 

Amortization of value of business acquired: The amortization of value of business acquired (“VOBA”) was $23,105 in the three months ended March 31, 2021 compared to $5,076 in the same period in 2020. In 2021, we began to amortize VOBA associated with DCLIC’s acquisition of policies from ALSC. VOBA is being amortized straight-line over 30 years.

 

Salaries and benefits: Salaries and benefits were $256,028 for the three months ended March 31, 2021, compared to $263,205 in the same period in 2020, a decrease of $7,177 or 3%. Staffing costs decreased due to a reduction in employees.

 

Other expenses: Other operating expenses were $455,398 in the three months ended March 31, 2021, compared to $872,245 in the same period in 2020, a decrease of $416,847 or 48%. Operating costs were driven lower due primarily to the non-recurrence of two large 2020 expenditures (our pre-paid software asset being recognized as an expense of $250,000 and expenses associated with implementing a new disability reinsurance program totaling $50,000) as well as reduced travel and operating costs in 2021.

 

 

Net Loss: Our net loss was $336,217 in the three months ended March 31, 2021 compared to a net loss of $2,703,371 in the same period in 2020, an improvement of $2,367,154. Our net loss per share was $0.04 compared to a net loss per share of $0.35 in 2020, basic and diluted.

 

Discussion of Consolidated Balance Sheet

 

Assets. Assets have decreased to $113,922,755 as of March 31, 2021, a decrease of $1,464,341 or 1% from December 31, 2020. This is primarily the result of a decrease in the market value of our fixed maturity securities.

 

Available for sale fixed maturity securities: As of March 31, 2021, we had available for sale fixed maturity assets of $35,178,072, a decrease of $2,498,876 or 7% from the December 31, 2020 balance of $37,677,578. The decrease is driven by a decrease in the market value of these securities. If we hold our fixed maturity securities to maturity, as we intend to do, any changes in market value is temporary.

 

Mortgage loans on real estate: As of March 31, 2021, we had mortgage loans on real estate of $3,433,437 an increase of $267,301 or 8% from the December 31, 2020 balance of $3,166,136.

 

Equity securities, at fair value: As of March 31, 2021, we had available for sale equity assets of $9,399,091, an increase of $177,517 or 2% from the December 31, 2020 balance of $9,221,574. This increase is the result of normal investment activity.

 

Funds withheld under coinsurance agreement, at fair value: As of March 31, 2021, we had funds withheld assets of $47,150,149, an increase of $320,073 or 1% from the December 31, 2020 balance of $46,830,076.

 

Policy loans: As of March 31, 2021, our policy loans were $166,703, an increase of $2,978 or 2% from the December 31, 2020 balance of $163,725. The increase is a result of normal policy loan activity.

 

Real estate, net of depreciation: As of March 31, 2021, we had real estate assets of $1,409,461 related to the purchase of our home office building, a decrease of $6,282 from the December 31, 2020 balance of $1,415,743. The decrease is the result of depreciation.

 

Cash and cash equivalents: As of March 31, 2021, we had cash and cash equivalent assets of $5,620,444, an increase of $1,299,685 or 30% from the December 31, 2020 balance of $4,320,759. This increase was the result of cash being prepared for deployment into invested assets.

 

Investment income due and accrued: As of March 31, 2021, our investment income due and accrued was $473,120 compared to $423,036 as of December 31, 2020, an increase of $50,084 or 12%. This increase is attributable to investment activity.

 

Reinsurance related assets: As of March 31, 2021, our reinsurance related assets were $398,252 compared to $165,082 as of December 31, 2020, an increase of $233,170 or 141%. This increase is the result of amounts due from ALSC under our 2020 ALSC Agreement.

 

Deferred acquisition costs, net: As of March 31, 2021, our deferred acquisition costs were $6,940,094 compared to $7,105,890 as of December 31, 2020, a decrease of $165,796 or 2%. The decrease is the amortization of DAC related to our 2020 ALSC Agreement.

 

Value of business acquired, net: As of March 31, 2021 our value of business acquired asset was $2,680,128 compared to $2,703,233 as of December 31, 2020, a decrease of $23,105 or 1%. The decrease is the result of amortization of VOBA.

 

 

Property, equipment and software, net: As of March 31, 2021 our property, equipment and software assets were $36,757, a decrease of $1,061 or 3% from the December 31, 2020 balance of $37,818. This decrease is the result of amortization of these assets.

 

Goodwill: As of March 31, 2021 and December 31, 2020, our goodwill was $277,542. Goodwill was established as a result of our merger with NPCC. We have determined that there has been no impairment to our goodwill balance.

 

Deferred tax asset, net of valuation allowance:  The Company had a net deferred tax asset of $243,257 as of March 31, 2021 and December 31, 2020. No change in the net deferred tax asset was recorded in the first quarter.

 

Other assets: As of March 31, 2021, our other assets were $515,618, a decrease of $1,120,029 or 69% from the December 31, 2020 balance of $1,635,647. This decrease was driven by a receivable balance due to DCLIC paid in the quarter.

 

Liabilities. Our total liabilities were $98,159,984 as of March 31, 2021, an increase of $1,177,679 or 1% from our December 31, 2020 liabilities of $96,982,305. This increase is driven by growth in our policy liabilities.

 

Policy liabilities: Our total policy liabilities as of March 31, 2021 were $95,992,231 compared to $93,459,080 as of December 31, 2020, an increase of $2,533,151 or 3%. This increase is the result of the growth of our in-force business.

 

Accounts payable and accrued expenses: As of March 31, 2021, our accounts payable and accrued expenses were $142,652 compared to $1,507,756 as of December 31, 2020, a decrease of $1,365,104 or 90%. The decrease is driven by the settlement in the first quarter of a payable to ALSC related to the partial termination of our 2017 ALSC Agreement.

 

Federal Home Loan Bank advance: In October of 2019, the Company took an advance of $1,000,000 from the FHLB of Topeka which was outstanding as of March 31, 2021 and December 31, 2020. In the second quarter of 2020, the Company took two additional advances of $500,000 each, which were outstanding as of March 31, 2021 and December 31, 2020.  The advances were taken to create liquidity and investment opportunities.

 

Other liabilities: As of March 31, 2021, our other liabilities were $25,101, an increase of $9,632 from the December 31, 2020 balance of $15,469. The increase is the result of normal business activities.

 

Shareholders Equity. Our shareholders’ equity was $15,762,771 as of March 31, 2021, a decrease of $2,642,020 or 14% from our December 31, 2020 shareholders’ equity of $18,404,791. The reduction in shareholders’ equity was driven by a decrease in other comprehensive income and our net loss. Other comprehensive income consists of the unrealized gains and losses on our fixed maturity portfolio. The decrease in other comprehensive income is the result of higher interest rates which decreases the market value of our fixed maturity securities.  Similarly, lower interest rates would increase the value of our fixed maturity securities. 

 

 

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, mortgages 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, 2021 and December 31, 2020.

 

   

March 31, 2021

   

December 31, 2020

 
   

Fair

   

Percent

   

Fair

   

Percent

 
   

Value

   

of Total

   

Value

   

of Total

 

Fixed maturities:

 

(unaudited)

                 

US Treasury securities

  $ 669,816       0.7 %   $ 702,916       0.7 %

Corporate bonds

    21,190,452       20.7 %     22,947,811       22.4 %

Municipal bonds

    6,437,570       6.3 %     6,796,654       6.6 %

Redeemable preferred stocks

    2,897,207       2.8 %     2,990,215       2.9 %

Mortgage backed and asset backed securities

    3,983,657       3.9 %     4,239,982       4.1 %

Total fixed maturities

    35,178,702       34.4 %     37,677,578       36.7 %

Mortgage loans

    3,433,437       3.4 %     3,166,136       3.1 %

Equities:

                               

Common stock

    7,004,840       6.9 %     6,808,944       6.6 %

Preferred stock

    2,394,251       2.3 %     2,412,630       2.4 %

Total equities

    9,399,091       9.2 %     9,221,574       9.0 %

Funds withheld

    47,150,149       46.1 %     46,830,076       45.6 %

Real estate, net of depreciation

    1,409,461       1.4 %     1,415,743       1.4 %

Cash and cash equivalents

    5,620,444       5.5 %     4,320,759       4.2 %

Total

  $ 102,191,284       100.0 %   $ 102,631,866       100.0 %

 

The total value of our investments and cash and cash equivalents decreased to $102,191,284 as of March 31, 2021 from $102,631,866 at December 31, 2020, a decrease of $440,582 or less than 1%. Decreases in investments are primarily attributable to a reduction in the market value of our fixed maturity securities.

 

The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of March 31, 2021 and December 31, 2020.

 

   

March 31, 2021

   

December 31, 2020

 
   

Fair

   

Percent

   

Fair

   

Percent

 
   

Value

   

of Total

   

Value

   

of Total

 
   

(unaudited)

                 

AAA and U.S. Government

  $ 1,120,582       3.2 %   $ 1,160,359       3.1 %

AA

    7,959,579       22.6 %     8,219,481       21.8 %

A

    7,989,856       22.7 %     8,587,743       22.8 %

BBB

    14,531,638       41.3 %     16,060,510       42.6 %

BB

    3,390,247       9.7 %     3,462,685       9.2 %

Not Rated - Private Placement

    186,800       0.5 %     186,800       0.5 %

Total

  $ 35,178,702       100.0 %   $ 37,677,578       100.0 %

 

 

The amortized cost and fair value of debt securities as of March 31, 2021 and December 31, 2020, 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, 2021

   

As of December 31, 2020

 
   

Amortized Cost

   

Fair Value

   

Amortized Cost

   

Fair Value

 

 

 

(unaudited)

                 
Amounts maturing in:                                

One year or less

  $ 373,737     $ 378,110     $ 373,590     $ 379,823  

After one year through five years

    1,536,790       1,620,593       1,540,931       1,641,749  

After five years through ten years

    2,886,887       3,220,456       2,887,066       3,379,930  

More than 10 years

    21,879,510       23,078,679       21,892,891       25,045,879  

Redeemable preferred stocks

    2,873,999       2,897,207       2,900,330       2,990,215  

Mortgage backed and asset backed securities

    4,000,566       3,983,657       4,189,710       4,239,982  

Total amortized cost and fair value

  $ 33,551,489     $ 35,178,702     $ 33,784,518     $ 37,677,578  

 

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 work 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, we believe 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 FHLB 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 quantified. The Company continues to monitor 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 $847,587 for the three months ended March 31, 2021. The primary sources of cash from operating activities were premiums and deposit-type 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 provided by investing activities was $126,008. The primary use of cash was from purchases of available for sale securities. Cash provided by financing activities was $326,090. The primary sources of cash were receipts on deposit-type contracts.

 

At March 31, 2021, we had cash and cash equivalents totaling $5,620,444. We believe that our existing cash and cash equivalents 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 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 three months ended March 31, 2021 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, 2021, the Company issued 86 shares of common stock, for aggregate consideration of $602, 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.

 

During the quarter ended March 31, 2021, the Company issued 1,000 shares of common stock, for aggregate consideration of $7,000, pursuant to a private placement offering to residents of the state of North Dakota (the “North Dakota Offering”).  Proceeds from the sale of shares in the North Dakota were used to finance the growth of DCLIC and to provide working capital for the Company. The North Dakota Offering and sales of shares thereunder were not registered with the SEC in reliance on an exemption for registration under Rule 506(b) of Regulation D under this Securities Act of 1933 (“Reg D”).  Shares are sold only to “accredited investors”, as that term is defined in Rule 501 of Reg D, and were not sold by any means of general advertisement or solicitation. 

 

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 Companys 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 Companys 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.

   
10.1 Employment Agreement dated March 15, 2020 between US Alliance Corporation and Jeffery Brown, filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on March 18, 2021 (File No. 000-0056727), is incorporated by reference as Exhibit 10.1.
   

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 Extension 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 May 12, 2021    
       

By

/s/ Jack H. Brier

 

 

 

Jack H. Brier, President and Chairman

 

 

 

 

 

 

 

35