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EX-32.2 - EXHIBIT 32.2 - US Alliance Corpex32-2.htm
EX-32.1 - EXHIBIT 32.1 - US Alliance Corpex32-1.htm
EX-31.2 - EXHIBIT 31.2 - US Alliance Corpex31-2.htm
EX-31.1 - EXHIBIT 31.1 - US Alliance Corpex31-1.htm

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

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2017.

 

or

 

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

 

For the transition period from _________________________ to _________________________________

 

Commission File Number: 000-55627

 

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

 

KANSAS 26-4824142
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
4123 SW Gage Center Drive, Suite 240, Topeka, Kansas 66604
(Address of principal executive offices) (Zip Code)

 

(785) 228-0200

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      [X] 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. (Check One)    

 

Large accelerated filer

[   ]

 

Accelerated filer

[   ]

Non-accelerated filer

[   ]

(Do not check if a smaller reporting company)

     

Smaller Reporting Company

[X]

     

Emerging growth company

[X]

 

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. [X]

 

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

 

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

 

Common stock, $0.10 par value

5,636,367 shares outstanding

as of July 31, 2017

 

1

 

 

US ALLIANCE CORPORATION

         

FORM 10-Q

         

TABLE OF CONTENTS

         

Part I - Financial Information

         

Item

 

Item Description

 

Page

Item 1

 

Financial Statements

 

3

         
   

Consolidated Balance Sheets

 

3

         
   

Consolidated Statements of Comprehensive Loss

 

4

         
   

Consolidated Statements of Changes in Shareholders' Equity

 

5

         
   

Consolidated Statements of Cash Flows

 

6

         
   

Notes to Consolidated Financial Statements

 

7

         

Item 2

 

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

 

16

         

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

 

25

         

Item 4

 

Controls and Procedures

 

25

         

Part II - Other Information

         

Item

 

Item Description

 

Page

Item 1

 

Legal Proceedings

 

25

         

Item 1A

 

Risk Factors

 

25

         

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

25

         

Item 3

 

Defaults Upon Senior Securities

 

25

         

Item 4

 

Mine Safety Disclosures

 

25

         

Item 5 

 

Other Information

 

26

         

Item 6

 

Exhibits

 

26

         
   

Signatures

 

27

 

2

 

 

ITEM 1.    FINANCIAL STATEMENTS

 

US Alliance Corporation

   

Consolidated Balance Sheets 

   

 

   

June 30, 2017

   

December 31, 2016

 
   

(unaudited)

         

Assets

               

Investments:

               

Available for sale fixed maturity securities (amortized cost: $10,866,298 and $10,318,164 as of June 30, 2017 and December 31, 2016, respectively)

  $ 11,088,336     $ 10,320,074  

Available for sale equity securities (cost: $6,943,319 and $4,905,953 as of June 30, 2017 and December 31, 2016, respectively)

    7,220,486       5,143,504  

Total investments

    18,308,822       15,463,578  
                 

Cash and cash equivalents

    1,728,857       3,145,745  

Investment income due and accrued

    106,814       100,713  

Reinsurance related assets

    31,616       31,390  

Deferred acquisition costs, net

    213,636       153,792  

Property, equipment and software, net

    233,681       244,849  

Other assets

    301,851       51,922  

Total assets

  $ 20,925,277     $ 19,191,989  
                 
                 

Liabilities and Shareholders' Equity

               

Liabilities:

               

Policy liabilities

               

Deposit-type contracts

  $ 4,191,021     $ 3,398,170  

Policyholder benefit reserves

    5,017,874       4,220,215  

Advance premiums

    188,343       121,944  

Total policy liabilities

    9,397,238       7,740,329  
                 

Accounts payable and accrued expenses

    140,456       66,472  

Other liabilities

    1,885       4,205  

Total liabilities

    9,539,579       7,811,006  
                 

Shareholders' Equity:

               

Common stock, $0.10 par value. Authorized 20,000,000 shares; issued and outstanding 5,624,063 and 5,565,943 shares as of June 30, 2017 and December 31, 2016, respectively

    562,407       556,595  

Additional paid-in capital

    18,270,769       18,017,163  

Accumulated deficit

    (7,946,683 )     (7,432,236 )

Accumulated other comprehensive income

    499,205       239,461  

Total shareholders' equity

    11,385,698       11,380,983  
                 

Total liabilities and shareholders' equity

  $ 20,925,277     $ 19,191,989  

 

See Notes to Consolidated Financial Statements (unaudited).

   

 

 

3

 

 

US Alliance Corporation

Consolidated Statements of Comprehensive Loss

 

   

Six Months Ended June 30,

   

Three Months Ended June 30,

 
   

2017

   

2016

   

2017

   

2016

 

Income:

 

(unaudited)

   

(unaudited)

 

Premium income

  $ 3,732,570     $ 3,230,836     $ 1,982,642     $ 1,873,464  

Net investment income

    296,119       203,711       170,099       112,450  

Net realized gain (loss) on sale of securities

    208,502       10,764       16,097       (74 )

Other income

    39,455       35,590       19,253       22,185  

Total income

    4,276,646       3,480,901       2,188,091       2,008,025  
                                 

Expenses:

                               

Death claims

    686,158       333,264       293,570       216,737  

Policyholder benefits

    2,187,150       1,861,670       1,213,426       1,139,525  

Increase in policyholder reserves

    576,548       762,904       311,570       403,352  

Commissions, net of deferrals

    265,434       226,598       141,143       118,383  

Amortization of deferred acquisition costs

    84,225       89,099       46,461       51,642  

Salaries & benefits

    383,143       393,184       204,951       204,817  

Other operating expenses

    608,435       580,673       322,669       313,343  

Total expense

    4,791,093       4,247,392       2,533,790       2,447,799  
                                 

Net loss

  $ (514,447 )   $ (766,491 )   $ (345,699 )   $ (439,774 )
                                 

Net loss per common share, basic and diluted

  $ (0.09 )   $ (0.15 )   $ (0.06 )   $ (0.08 )
                                 

Unrealized net holding gains arising during the period

    468,246       686,410       270,394       403,993  

Reclassification adjustment for (gains) losses included in net loss

    (208,502 )     (10,764 )     (16,097 )     74  

Other comprehensive income

    259,744       675,646       254,297       404,067  
                                 

Comprehensive loss

  $ (254,703 )   $ (90,845 )   $ (91,402 )   $ (35,707 )

 

See Notes to Consolidated Financial Statements (unaudited).

 

4

 

 

US Alliance Corporation

           

Consolidated Statements of Changes in Shareholders' Equity

           

Six Months Ended June 30, 2017 and 2016 (unaudited)

         

 

   

Number of

Shares of

Common Stock

   

Common

Stock

   

Additional

Paid-in Capital

   

Outstanding

Warrants

   

Common

Stock

Subscribed

   

Common

Stock

Subscription

Receivable

   

Accumulated

Other

Comprehensive

Income / (Loss)

   

Accumulated

Deficit

   

Total

 

Balance, December 31, 2015

    5,177,245     $ 517,725     $ 17,018,285     $ 15,876     $ 13,799     $ (827,952 )   $ (100,477 )   $ (6,146,463 )   $ 10,490,793  

Common stock issued upon exercise of warrants, $6.00 per share

    372,003       37,200       2,210,694       (15,876 )     -       -       -       -       2,232,018  

Common stock issued, $7 per share

    2,100       210       14,490       -       -       -       -       -       14,700  

Costs associated with common stock issued

    -       -       (412,041 )     -       -       -       -       -       (412,041 )

Common stock subscribed

    -       -       (814,153 )     -       (13,799 )     827,952       -       -       -  

Other comprehensive income

    -       -       -       -       -       -       675,646       -       675,646  

Net loss

    -       -       -       -       -       -       -       (766,491 )     (766,491 )

Balance, June 30, 2016

    5,551,348     $ 555,135     $ 18,017,275     $ -     $ -     $ -     $ 575,169     $ (6,912,954 )   $ 12,234,625  
                                                                         

Balance, December 31, 2016

    5,565,943     $ 556,595     $ 18,017,163     $ -     $ -     $ -     $ 239,461     $ (7,432,236 )   $ 11,380,983  

Common stock issued, $7 per share

    58,120       5,812       401,028       -       -       -       -       -       406,840  

Costs associated with common stock issued

    -       -       (147,422 )     -       -       -       -       -       (147,422 )

Other comprehensive income

    -       -       -       -       -       -       259,744       -       259,744  

Net loss

    -       -       -       -       -       -       -       (514,447 )     (514,447 )

Balance, June 30, 2017

    5,624,063     $ 562,407     $ 18,270,769     $ -     $ -     $ -     $ 499,205     $ (7,946,683 )   $ 11,385,698  

 

 

See Notes to Consolidated Financial Statements (unaudited).

 

5

 

 

US Alliance Corporation

     

Consolidated Statements of Cash Flows

     

(unaudited)

     

 

   

Six Months Ended June 30,

 
   

2017

   

2016

 

Cash Flows from Operating Activities:

               

Net loss

  $ (514,447 )   $ (766,491 )

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

               

Depreciation and amortization

    17,169       19,404  

Net realized (gains) on the sale of securities

    (208,502 )     (10,764 )

Amortization of investment securities, net

    16,468       7,397  

Deferred acquisition costs capitalized

    (144,069 )     (127,119 )

Deferred acquisition costs amortized

    84,225       89,099  

Interest credited on deposit type contracts

    63,607       32,531  

(Increase) decrease in operating assets:

               

Investment income due and accrued

    (6,101 )     (4,177 )

Reinsurance related assets

    (226 )     (116,698 )

Other assets

    (249,929 )     57,526  

Increase (decrease) in operating liabilities:

               

Policyowner benefit reserves

    797,659       1,039,565  

Advance premiums

    66,399       25,848  

Other liabilities

    (2,320 )     (3,097 )

Accounts payable and accrued expenses

    73,984       (45,891 )

Net cash (used in) provided by operating activities

    (6,083 )     197,133  
                 

Cash Flows from Investing Activities:

               

Available-for-sale securities

               

Purchase of fixed income investments

    (2,100,968 )     (1,512,774 )

Purchase of equity investments

    (3,124,648 )     (805,227 )

Proceeds from fixed income sales and repayments

    1,532,509       467,504  

Proceeds from equity sales and repayments

    1,299,640       92,247  

Purchase of property, equipment and software

    (6,000 )     -  

Net cash (used in) investing activities

    (2,399,467 )     (1,758,250 )
                 

Cash Flows from Financing Activities:

               

Receipts on deposit-type contracts

    1,000,563       949,295  

Withdrawals on deposit-type contracts

    (271,319 )     (153,699 )

Proceeds received from exercise of warrants, net of costs of issuance

    259,418       1,834,677  

Net cash provided by financing activities

    988,662       2,630,273  
                 

Net (decrease) increase in cash and cash equivalents

    (1,416,888 )     1,069,156  
                 

Cash and Cash Equivalents:

               

Beginning

    3,145,745       2,466,526  

Ending

  $ 1,728,857     $ 3,535,682  

 

 

See Notes to Consolidated Financial Statements (unaudited).

     
       
6

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

Note 1.     Description of Business and Significant Accounting Policies

 

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

 

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

 

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

 

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

 

The results of operation for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the year ended December 31, 2017 or for any other interim period or for any other future year. Certain financial information which is normally included in notes to financial statements prepared in accordance with US GAAP, but which 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 the Company’s report on Form 10-K and amendments thereto for the year ended December 31, 2016.

 

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

 

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

 

Common stock and earnings (loss) per share: The par value for common stock is $0.10 per share with 20,000,000 shares authorized. As of June 30, 2017 and December 31, 2016, the Company had 5,624,063 and 5,565,943 common shares issued and outstanding, respectively.

 

Earnings (loss) per share attributable to the Company’s common stockholders were computed based on the net loss and the weighted average number of shares outstanding during each year. The weighted average number of shares outstanding during the quarters ended June 30, 2017 and 2016 were 5,596,489 and 5,538,475 shares, respectively. The weighted average number of shares outstanding during the six months ended June 30, 2017 and 2016 were 5,579,493 and 5,357,056 shares, respectively. Potential common shares are excluded from the computation when their effect is anti-dilutive. Basic and diluted net loss per common share is the same for the quarters and six months ended June 30, 2017 and 2016 because all warrants for common shares are anti-dilutive.

 

7

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

New accounting standards 

 

Revenue from Contracts with Customers

 

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

 

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

 

In July 2015, the FASB deferred the effective date of the updated guidance on revenue recognition by one year to the quarter ending March 31, 2018.  The adoption of this guidance is not expected to have a material effect on the Company’s result of operations, financial position or liquidity.

 

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

 

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

 

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

 

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

 

Recognition and Measurement of Financial Assets and Financial Liabilities

 

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

 

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

 

8

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

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

 

Leases

 

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

 

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

 

Contingent Put and Call Options in Debt Instruments

 

In March 2016, the FASB issued updated guidance clarifying that when a call (put) option in a debt instrument can accelerate the repayment of principal on the debt instrument, a reporting entity does not need to assess whether the contingent event that triggers the ability to exercise the call (put) option is related to interest rates or credit risk in determining whether the option should be accounted for separately.  The updated guidance is effective for reporting periods beginning after December 15, 2016.  Early adoption is permitted.  The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

 

Measurement of Credit Losses on Financial Instruments

 

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

 

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

 

The updated guidance is effective for reporting periods beginning after December 15, 2019.  Early adoption is permitted for reporting periods beginning after December 15, 2018.  The Company will not be able to determine the impact that the updated guidance will have on its results of operations, financial position or liquidity until the updated guidance is adopted.

 

9

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

Classification of Certain Cash Receipts and Cash Payment

 

In August 2016, the FASB issued new guidance that clarifies the classification of certain cash receipts and cash payments in the statement of cash flows under eight different scenarios including, but not limited to: (i) debt prepayment or debt extinguishment costs; (ii) proceeds from the settlement of corporate-owned life insurance policies including bank-owned life insurance policies; (iii) distributions received from equity method investees; and (iv) separately identifiable cash flows and application of the predominance principle. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its statement of cash flows.

 

 

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

 

10

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

Note 2. Investments

 

The amortized cost and fair value of available for sale and held to maturity investments as of June 30, 2017 and December 31, 2016 is as follows:

 

   

June 30, 2017

 
   

Cost or

   

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

         
   

Cost

   

Gains

   

Losses

   

Fair Value

 

Available for sale:

 

(Unaudited)

 

Fixed maturities:

                               

US Treasury securities

  $ 267,504     $ -     $ (15,902 )   $ 251,602  

Corporate bonds

    3,966,440       116,132       (18,574 )     4,063,998  

Municipal bonds

    4,145,420       129,749       (14,552 )     4,260,617  

Mortgage backed and asset backed securities

    2,486,934       42,812       (17,627 )     2,512,119  

Total fixed maturities

    10,866,298       288,693       (66,655 )     11,088,336  

Equities:

                               

Equities

    6,834,157       327,375       (73,906 )     7,087,626  

Other equity investments

    109,162       23,698       -       132,860  

Total equities

    6,943,319       351,073       (73,906 )     7,220,486  

Total available for sale

  $ 17,809,617     $ 639,766     $ (140,561 )   $ 18,308,822  

 

 

   

December 31, 2016

 
   

Cost or

   

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

         
   

Cost

   

Gains

   

Losses

   

Fair Value

 

Available for sale:

                               

Fixed maturities:

                               

US Treasury securities

  $ 314,992     $ -     $ (15,830 )   $ 299,162  

Corporate bonds

    3,828,418       62,712       (45,234 )     3,845,896  

Municipal bonds

    2,841,137       46,883       (38,191 )     2,849,829  

Mortgage backed and asset backed securities

    3,333,617       36,870       (45,300 )     3,325,187  

Total fixed maturities

    10,318,164       146,465       (144,555 )     10,320,074  

Equities:

                               

Equities

    4,723,024       350,981       (131,757 )     4,942,248  

Other equity investments

    182,929       23,046       (4,719 )     201,256  

Total equities

    4,905,953       374,027       (136,476 )     5,143,504  

Total available for sale

  $ 15,224,117     $ 520,492     $ (281,031 )   $ 15,463,578  

 

The amortized cost and fair value of debt securities as of June 30, 2017, by contractual maturity, are shown below. Equity securities do not have stated maturity dates and therefore are not included in the following maturity summary. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   

Amortized

         
   

Cost

   

Fair Value

 

Amounts maturing in:

 

(unaudited)

 

One year or less

  $ 99,976     $ 99,932  

After one year through five years

    1,220,739       1,221,261  

After five years through ten years

    1,894,372       1,914,255  

More than 10 years

    5,164,277       5,340,769  

Mortgage backed and asset backed securities

    2,486,934       2,512,119  

Total fixed maturities

  $ 10,866,298     $ 11,088,336  

 

11

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

Proceeds from the sale of securities, maturities, and asset paydowns for the first six months of 2017 and 2016 were $2,832,149 and $559,751, respectively. Realized gains and losses related to the sale of securities are summarized as follows:

 

   

Six Months Ended June 30,

 
   

(unaudited)

 
   

2017

   

2016

 

Gross gains

  $ 227,463     $ 12,830  

Gross losses

    (18,961 )     (2,066 )

Net security (losses) gains

  $ 208,502     $ 10,764  

 

Proceeds from the sale of securities, maturities, and asset paydowns for the three months ended June 30, 2017 and 2016 were $1,862,409 and $314,111, respectively. Realized gains and losses related to the sale of securities for the three months ended June 30, 2017 and 2016 are summarized as follows:

 

   

Three Months Ended June 30,

 
   

(unaudited)

 
   

2017

   

2016

 

Gross gains

  $ 35,058     $ 1,992  

Gross losses

    (18,961 )     (2,066 )

Net security (losses) gains

  $ 16,097     $ (74 )

 

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

 

June 30, 2017                                                                                                                                                                                                      (unaudited)

 

Available for sale:

                                               

Fixed maturities:

                                               

US Treasury securities

  $ 251,602     $ (15,902 )   $ -     $ -     $ 251,602     $ (15,902 )

Corporate bonds

    1,117,565       (17,474 )     48,806       (1,100 )     1,166,371       (18,574 )

Municipal bonds

    724,631       (14,552 )     -       -       724,631       (14,552 )

Mortgage backed and asset backed securities

    850,512       (15,649 )     99,326       (1,978 )     949,838       (17,627 )

Total fixed maturities

    2,944,310       (63,577 )     148,132       (3,078 )     3,092,442       (66,655 )

Equities:

                                               

Equities

    771,225       (23,360 )     843,041       (50,546 )     1,614,266       (73,906 )

Other equity investments

    -       -       -       -       -       -  

Total equities

    771,225       (23,360 )     843,041       (50,546 )     1,614,266       (73,906 )

Total available for sale

  $ 3,715,535     $ (86,937 )   $ 991,173     $ (53,624 )   $ 4,706,708     $ (140,561 )

 

   

Less than 12 months

   

Greater than 12 months

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Loss

   

Value

   

Loss

   

Value

   

Loss

 

December 31, 2016

 

Available for sale:

                                               

Fixed maturities:

                                               

US Treasury securities

  $ 299,162     $ (15,830 )   $ -     $ -     $ 299,162     $ (15,830 )

Corporate bonds

    1,897,000       (42,994 )     196,399       (2,240 )     2,093,399       (45,234 )

Municipal bonds

    1,296,688       (38,191 )     -       -       1,296,688       (38,191 )

Mortgage backed and asset backed securities

    1,700,173       (39,264 )     134,090       (6,036 )     1,834,263       (45,300 )

Total fixed maturities

    5,193,023       (136,279 )     330,489       (8,276 )     5,523,512       (144,555 )

Equities:

                                               

Equities

    1,007,860       (59,357 )     1,063,959       (72,400 )     2,071,819       (131,757 )

Other equity investments

    52,840       (4,719 )     -       -       52,840       (4,719 )

Total equities

    1,060,700       (64,076 )     1,063,959       (72,400 )     2,124,659       (136,476 )

Total available for sale

  $ 6,253,723     $ (200,355 )   $ 1,394,448     $ (80,676 )   $ 7,648,171     $ (281,031 )

 

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

 

12

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

The total number of securities in the investment portfolio in an unrealized loss position as of June 30, 2017 was 39, which represented an unrealized loss of $140,561 of the aggregate carrying value of those securities. The 39 securities breakdown as follows: 18 bonds, 12 mortgage and asset backed securities, 5 common stocks, 2 high yield corporate bond funds, 1 preferred stock index fund, and 1 senior loan fund. The Company determined that no securities were considered to be other-than-temporarily impaired as of June 30, 2017 and December 31, 2016. The unrealized gains on the remainder of the available for sale portfolio as of June 30, 2017 were $639,766. 

 

Note 3.     Fair Value Measurements

 

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

 

 

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

 

 

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The Company’s Level 2 assets and liabilities include fixed maturity securities with quoted prices that are traded less frequently than exchange-traded instruments or assets and liabilities whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.  This category generally includes U.S. Government and agency mortgage-backed debt securities and corporate debt securities.

 

 

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

 

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

 

13

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

The following table presents the amounts of assets measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016:

 

   

June 30, 2017

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 

Available for sale:

 

(unaudited)

 

Fixed maturities:

                               

US Treasury securities

  $ 251,602     $ 251,602     $ -     $ -  

Corporate bonds

    4,063,998       -       4,063,998       -  

Municipal bonds

    4,260,617       -       4,260,617       -  

Mortgage backed and asset backed securities

    2,512,119       -       2,512,119       -  

Total fixed maturities

    11,088,336       251,602       10,836,734       -  

Equities:

                               

Equities

    7,087,626       7,087,626       -       -  

Other equity investments

    132,860       132,860       -       -  

Total equities

    7,220,486       7,220,486       -       -  

Total

  $ 18,308,822     $ 7,472,088     $ 10,836,734     $ -  

 

 

   

December 31, 2016

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 

Available for sale:

                               

Fixed maturities:

                               

US Treasury securities

  $ 299,162     $ 299,162     $ -     $ -  

Corporate bonds

    3,845,896       -       3,845,896       -  

Municipal bonds

    2,849,829       -       2,849,829       -  

Mortgage backed and asset backed securities

    3,325,187       -       3,325,187       -  

Total fixed maturities

    10,320,074       299,162       10,020,912       -  

Equities:

                               

Equities

    4,942,248       4,942,248       -       -  

Other equity investments

    201,256       201,256       -       -  

Total equities

    5,143,504       5,143,504       -       -  

Total

  $ 15,463,578     $ 5,442,666     $ 10,020,912     $ -  

 

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

 

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

 

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

and the nonperformance risk of the liabilities.

 

The estimated fair values of the Company’s financial assets and liabilities at June 30, 2017 and December 31, 2016 are as follows:

 

   

June 30, 2017

   

December 31, 2016

 
                                 
   

Carrying Value

   

Fair Value

   

Carrying Value

   

Fair Value

 

Financial Assets:

 

(unaudited)

                 

Cash and cash equivalents

  $ 1,728,857     $ 1,728,857     $ 3,145,745     $ 3,145,745  

Investments, at fair value

    18,308,822       18,308,822       15,463,578       15,463,578  

Total Financial Assets

  $ 20,037,679     $ 20,037,679     $ 18,609,323     $ 18,609,323  
                                 

Financial Liabilities:

                               

Policyholder deposits in deposit-type contracts

  $ 4,191,021     $ 4,099,186     $ 3,398,170     $ 3,260,086  

Total Financial Liabilities

  $ 4,191,021     $ 4,099,186     $ 3,398,170     $ 3,260,086  

 

14

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

Note 4.     Income Tax Provision

 

No income tax expense or (benefit) has been reflected for the quarters ended June 30, 2017 and 2016 due to the lack of taxable net income generated by the Company and the 100% valuation allowance pertaining to the deferred tax asset. The difference between the reported amount of income tax expense and the amount expected based upon statutory rates is primarily due to the increase in the valuation allowance on deferred taxes.

 

The net operating loss carryforwards for the Company are $5,579,497 and $5,050,176 as of June 30, 2017 and December 31, 2016, respectively. The components of the deferred tax assets and liabilities due to book and tax differences are the following: fixed asset depreciation, net operating loss carryforward, net unrealized gains (losses) on investment securities, policyowner benefit reserves and deferred acquisition costs. The net deferred tax asset is offset 100 percent by the valuation allowance.

 

Note 5.     Warrants

 

The Company conducted its public stock offering through the sale of units. Each unit was sold for $1,000 and consisted of 200 shares of common stock and a warrant to purchase an additional 200 shares of common stock at $6.00 per share. The warrants were originally scheduled to expire, if not exercised, February 24, 2016. The board of directors of the Company extended the warrant expiration date to April 1, 2016. As of December 31, 2014 warrant-holders had the right to purchase 2,532,400 shares of common stock. On February 24, 2015, the Company registered a warrant exercise offering with the Kansas Securities Commissioner. During 2015, warrant-holders exercised warrants for the purchase of 944,845 shares of common stock. As of December 31, 2015 warrant-holders had the right to purchase 1,587,555 shares of common stock. During the first six months of 2016, warrant-holders exercised their rights to purchase an additional 372,003 shares of common stock.

 

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

 

Note 6.     Subsequent Events

 

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

 

On May 23, 2017, the Company entered into a definitive merger agreement with Northern Plains Capital Corporation. Northern Plains Capital Corporation shareholders received .5841 shares of US Alliance Corporation stock for each share of Northern Plains stock that they owned. The merger closed on July 31, 2017 with an  August 1, 2017 effective date.

 

The Company has evaluated subsequent events through August 4, 2017, the date on which the consolidated financial statements were issued.

 

15

 

 

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, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by, or on our behalf. We disclaim any obligation to update forward looking statements.

 

Overview

 

USAC was formed as a Kansas corporation on April 24, 2009 for the purpose of raising capital to form a new Kansas-based life insurance company. We presently conduct our business through our three wholly-owned subsidiaries: USALSC, a life insurance corporation; USAMC, an insurance marketing corporation; and USAIC, an investment management corporation.

 

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

 

Critical Accounting Policies and Estimates

 

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

 

Valuation of Investments

 

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

 

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

 

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

 

16

 

 

Deferred Acquisition Costs

 

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

 

Reinsurance

 

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

 

Future Policy Benefits

 

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

 

Income Taxes

 

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

 

Recognition of Revenues

 

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

 

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

 

Merger

 

On May 23, 2017, the Company entered into a definitive merger agreement with Northern Plains Capital Corporation (“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.

 

17

 

 

New Accounting Standards

 

A detailed discussion of new accounting standards is provided in the Notes to Consolidated Financial Statements beginning on p. 8 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 six months ended June 30, 2017 and 2016 are summarized in the table below.

 

   

Six Months Ended June 30,

 
   

2017

   

2016

 

Income:

 

(unaudited)

 

Premium income

  $ 3,732,570     $ 3,230,836  

Net investment income

    296,119       203,711  

Net realized gain on sale of securities

    208,502       10,764  

Other income

    39,455       35,590  

Total income

  $ 4,276,646     $ 3,480,901  

 

 

Insurance revenues for the three months ended June 30, 2017 and 2016 are summarized in the table below.

 

   

Three Months Ended June 30,

 
   

2017

   

2016

 

Income:

 

(unaudited)

 

Premium income

  $ 1,982,642     $ 1,873,464  

Net investment income

    170,099       112,450  

Net realized (loss) gain on sale of securities

    16,097       (74 )

Other income

    19,253       22,185  

Total income

  $ 2,188,091     $ 2,008,025  

 

Premium revenue: Premium revenue for the first six months of 2017 was $3,732,570 compared to $3,230,836 in the first six months of 2016, an increase of $501,734. This growth is attributable to both an increase in direct written premiums due to our organic growth efforts and an increase in assumed premiums from our reinsurance treaty with ULIC.

 

Direct, assumed and ceded premiums for the six months ended June 30, 2017 and 2016 are summarized in the following table.

 

   

Six Months Ended June 30,

 
   

2017

   

2016

 
   

(unaudited)

 

Direct

  $ 1,491,444     $ 1,300,959  

Assumed

    2,315,400       1,991,730  

Ceded

    (74,274 )     (61,853 )

Total

  $ 3,732,570     $ 3,230,836  

 

Premium revenue for the second quarter of 2017 was $1,982,642 compared to $1,873,464 in 2016, an increase of $109,178. This growth is attributable to both an increase in direct written premiums due to our organic growth efforts and an increase in assumed premiums from our reinsurance treaty with ULIC.

 

18

 

 

Direct, assumed and ceded premiums for the three months ended June 30, 2017 and 2016 are summarized in the following table.

 

   

Three Months ended June 30,

 
   

2017

   

2016

 
   

(unaudited)

 

Direct

  $ 748,350     $ 717,343  

Assumed

    1,274,094       1,191,001  

Ceded

    (39,802 )     (34,880 )

Total

  $ 1,982,642     $ 1,873,464  

 

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

 

Investment income, net of expenses: The components of net investment income for the six months ended June 30, 2017 and 2016 are as follows:

 

   

Six Months Ended June 30,

 
   

2017

   

2016

 
   

(unaudited)

 

Fixed maturities

  $ 192,481     $ 145,616  

Equity securities

    122,692       78,441  

Cash and short term investments

    1,493       766  
      316,666       224,823  

Less investment expenses

    (20,547 )     (21,112 )
    $ 296,119     $ 203,711  

 

Net investment income for the first six months of 2017 was $296,119, compared to $203,711 in 2016, an increase of $92,408. This increase in investment income is primarily a result of increased invested assets as a result of our premium income and an improvement in our book yield.

 

The components of net investment income for the three months ended June 30, 2017 and 2016 are as follows:

 

   

Three Months Ended June 30,

 
   

2017

   

2016

 
   

(unaudited)

 

Fixed maturities

  $ 99,745     $ 76,114  

Equity securities

    80,246       46,965  

Cash and short term investments

    710       567  
      180,701       123,646  

Less investment expenses

    (10,602 )     (11,196 )
    $ 170,099     $ 112,450  

 

Net investment income for the second quarter of 2017 was $170,099, compared to $112,450 in 2016, an increase of $57,649. This increase in investment income is a result of increased invested assets as a result of our premium income and an improvement in our book yield.

 

Net realized gains on investments: Net realized gains on investments for the six months ended June 30, 2017 were $208,502, compared to gains of $10,764 in 2016, an increase of $197,738. The increase in realized gains is attributable to the repositioning of an equity portfolio from a market return focus to an income focus. Realized gains and losses related to the sale of securities for the six months ended June 30, 2017 and 2016 are summarized as follows:

 

   

Six Months Ended June 30,

 
   

(unaudited)

 
   

2017

   

2016

 

Gross gains

  $ 227,463     $ 12,830  

Gross losses

    (18,961 )     (2,066 )

Net security gains

  $ 208,502     $ 10,764  

 

 

19

 

 

Net realized gains on investments for the second quarter of 2017 were $16,097 compared to losses of $74 in 2016. Realized gains and losses related to the sale of securities for the three months ended June 30, 2016 and 2016 are summarized as follows:

 

   

Three Months Ended June 30,

 
   

(unaudited)

 
   

2017

   

2016

 

Gross gains

  $ 35,058     $ 1,992  

Gross losses

    (18,961 )     (2,066 )

Net security gains (losses)

  $ 16,097     $ (74 )

 

Other income: Other income for the six months ended June 30, 2017 was $39,455 compared to $35,590 in 2016, an increase of $3,865. This increase is due to the growth of our third party administration business.

 

Other income for the second quarter of 2017 was $19,253 compared to $22,185 in 2016, a decrease of $2,932. This decrease is due to lower ceding commissions during the quarter.

 

Expenses. Expenses for the six months ended June 30, 2017 and 2016 are summarized in the table below.

 

   

Six Months Ended June 30,

 
   

2017

   

2016

 

Expenses:

 

(unaudited)

 

Death claims

  $ 686,158     $ 333,264  

Policyholder benefits

    2,187,150       1,861,670  

Increase in policyholder reserves

    576,548       762,904  

Commissions, net of deferrals

    265,434       226,598  

Amortization of deferred acquisition costs

    84,225       89,099  

Salaries & benefits

    383,143       393,184  

Other operating expenses

    608,435       580,673  

Total expense

  $ 4,791,093     $ 4,247,392  

 

 

Expenses for the three months ended June 30, 2017 and 2016 are summarized in the table below.

 

   

Three Months Ended June 30,

 
   

2017

   

2016

 

Expenses:

 

(unaudited)

 

Death claims

  $ 293,570     $ 216,737  

Policyholder benefits

    1,213,426       1,139,525  

Increase in policyholder reserves

    311,570       403,352  

Commissions, net of deferrals

    141,143       118,383  

Amortization of deferred acquisition costs

    46,461       51,642  

Salaries & benefits

    204,951       204,817  

Other operating expenses

    322,669       313,343  

Total expense

  $ 2,533,790     $ 2,447,799  

 

20

 

 

Death and other benefits: Death benefits were $686,158 in the six months ended June 30, 2017 compared to $333,264 in 2016, an increase of $352,894. This increase is attributable to the growth of our in-force block of life insurance policies. The majority of death claims paid from inception have been on pre-need policies. We expect these claims to grow as we continue to increase the size of our in-force pre-need business.

 

Death benefits were $293,570 for the three months ended June 30, 2017, compared to $216,737 for the same period in 2016, an increase of $76,833. This increase is attributable to the growth of our in-force block of life insurance policies. We expect these claims to grow as we continue to increase the size of our in-force life business.

 

Policyholder benefits: Policyholder benefits were $2,187,150 in the six months ended June 30, 2017 compared to $1,861,670 in 2016, an increase of $325,480. The primary driver of this increase is the growth of our assumed business and is more than offset by the increased premiums associated with this block of assumed policies.

 

Policyholder benefits were $1,213,426 during the second quarter of 2017, compared to $1,139,525 in the second quarter of 2016, an increase of $73,901. The primary driver of this increase is the growth of our assumed business and is more than offset by the increased premiums associated with this block of assumed policies.

 

Increase in policyholder reserves: Policyholder reserves increased $576,548 in the six months ended June 30, 2017, compared to $762,904 in 2016, a decrease of $186,356. The reduction in increase in policyholder reserves reflects the reserves released on paid death claims.

 

Policyholder reserves increased by $311,570 in the second quarter of 2017, compared to $403,352 in the second quarter of 2016, a decrease of $91,782. The reduction in increase in policyholder reserves reflects the reserves released on paid death claims.

 

Commissions, net of deferrals: The Company pays commissions to the ceding company on a block of assumed policies. Commissions were $265,434 in the six months ended June 30, 2017, compared to $226,598 in 2016, an increase of $38,836. This increase is due to an increase in assumed premiums.

 

Commissions were $141,143 in the second quarter of 2017, compared to $118,383 in the second quarter of 2016, an increase of $22,760. This increase is due to an increase in assumed premiums.

 

Amortization of deferred acquisition costs: The amortization of deferred acquisition costs was $84,225 in the six months ended June 30, 2017, compared to $89,099 in 2016, a decrease of $4,874. The age bands for pre-need purchases affects the amortization of the commissions paid and limited the amount of amortization this period.

 

The amortization of deferred acquisition costs was $46,461 in the second quarter of 2017, compared to $51,642 in the second quarter of 2016, a decrease of $5,181. The age bands for pre-need purchases affects the amortization of the commissions paid and limited the amount of amortization this period.

 

Salaries and benefits: Salaries and benefits were $383,143 for the six months ended June 30, 2017, compared to $393,184 in 2016, a decrease of $10,041. Staffing costs have remained in line with the prior year.

 

Salaries and benefits were $204,951 in the second quarter of 2017, compared to $204,817 in the second quarter of 2016. Staffing costs have remained in line with the prior year.

 

Other expenses: Other operating expenses were $608,435 in the six months ended June 30, 2017, compared to $580,673 in 2016, an increase of $27,762. This increase is driven by increased spending on our selling and marketing efforts.

 

Other operating expenses were $322,669 during the second quarter of 2017, compared to $313,343 in the second quarter of 2016, an increase of $9,326.

 

Net Loss: Our net loss was $514,447 in the six months ended June 30, 2017 compared to net loss of $766,491 in the same period of 2016, a decrease of $252,044. This decrease is primarily attributable to our increased realized gains as well as growing product margins. Our net loss per share decreased to $0.09 from $0.15 in 2016, basic and diluted.

 

Our net loss was $345,699 for the second quarter of 2017, compared to $439,774 for the same period in 2016, a decrease of $94,105. This decrease is primarily attributable to improved product margins. Our net loss per share was $0.06 per share in the second quarter of 2017, basic and diluted, compared to $0.08 net loss per share in the second quarter of 2016.

 

21

 

 

Discussion of Consolidated Balance Sheet

 

Assets. Assets have increased to $20,925,277 as of June 30, 2017, an increase of $1,733,288 from December 31, 2016. This is primarily the result of the growth of our available for sale assets.

 

Available for sale fixed maturity securities: As of June 30, 2017, we had available for sale fixed maturity assets of $11,088,336, an increase of $768,262 from the December 31, 2016 balance of $10,320,074. This growth is driven by our premium income.

 

Available for sale equity securities: As of June 30, 2017, we had available for sale equity assets of $7,220,486, an increase of $2,076,982 from the December 31, 2016 balance of $5,143,504. This growth is driven by our premium income.

 

Cash and cash equivalents: As of June 30, 2017, we had cash and cash equivalent assets of $1,728,857, a decrease of $1,416,888 from the December 31, 2016 balance of $3,145,745. This decrease is driven by our deployment of cash into invested assets.

 

Investment income due and accrued: As of June 30, 2017, our investment income due and accrued was $106,814 compared to $100,713 as of December 31, 2016. This increase is attributable to normal investment activity.

 

Reinsurance related assets: As of June 30, 2017, our reinsurance related assets were $31,616 compared to $31,390 as of December 31, 2016. There were no significant changes in this account during the reporting period.

 

Deferred acquisition costs, net: As of June 30, 2017, our deferred acquisition costs were $213,636 compared to $153,792 as of December 31, 2016. This is the result of our growing block of in-force policies and we expect this balance to continue to grow along with the size of our in-force business.

 

Property, equipment and software, net: As of June 30, 2017 our property, equipment and software assets were $233,681 compared to $244,849 as of December 31, 2016. This decrease is a result of normal depreciation during the period. We did purchase additional office furniture and equipment in the first half of 2017.

 

Other assets: As of June 30, 2017, our other assets were $301,851 compared to $51,922 as of December 31, 2016. This increase was the result of a receivable related to the recovery of merger related expenses and pre-paid insurance.

 

Liabilities. Our total liabilities were $9,539,579 as of June 30, 2017, an increase of $1,728,573 from our December 31, 2016 liability of $7,811,006.

 

Policy liabilities: Our total policy liabilities as of June 30, 2017 were $9,397,238 compared to $7,740,329 as of December 31, 2016. This increase is the result of new policy sales and the growth of our in-force policies. The growth in deposit-type contracts is the result of our annuity sales and the growth of our annuity block of business. The growth in policyholder benefit reserves is the result of our life insurance sales and the growth of our life insurance block of business. The growth of advance premiums is also attributable to the growth of our life insurance block of business.

 

Accounts payable and accrued expenses: As of June 30, 2017, our accounts payable and accrued expenses were $140,456 compared to $66,472 as of December 31, 2016. The growth is the result of expenses accrued related to our pending merger transaction.    

 

Shareholders’ Equity. Our shareholders’ equity was $11,385,698 as of June 30, 2017, an increase of $4,715 from our December 31, 2016 shareholders’ equity of $11,380,983. The growth in shareholders’ equity was driven by the issuance of new shares of stock and the growth of accumulated other comprehensive income. This was partially offset by our net loss during the period.

 

22

 

 

Investments and Cash and Cash Equivalents

 

Our overall investment philosophy is reflected in the allocation of our investments. We emphasize investment grade debt securities with smaller holdings in equity securities and other investments. The following table shows the carrying value of our investments by investment category and cash and cash equivalents, and the percentage of each to total invested assets as of June 30, 2017 and December 31, 2016.

 

   

June 30, 2017

   

December 31, 2016

 
   

Fair

   

Percent

   

Fair

   

Percent

 
   

Value

   

of Total

   

Value

   

of Total

 

Fixed maturities:

 

(unaudited)

                 

US Treasury securities

  $ 251,602       1.3 %   $ 299,162       1.6 %

Corporate bonds

    4,063,998       20.3 %     3,845,896       20.7 %

Municipal bonds

    4,260,617       21.3 %     2,849,829       15.3 %

Mortgage backed and asset backed securities

    2,512,119       12.5 %     3,325,187       17.9 %

Total fixed maturities

    11,088,336       55.4 %     10,320,074       55.5 %

Equities:

                               

Equities

    7,087,626       35.3 %     4,942,248       26.5 %

Other equity investments

    132,860       0.7 %     201,256       1.1 %

Total equities

    7,220,486       36.0 %     5,143,504       27.6 %

Cash and cash equivalents

    1,728,857       8.6 %     3,145,745       16.9 %

Total

  $ 20,037,679       100.0 %   $ 18,609,323       100.0 %

 

The total value of our investments and cash and cash equivalents increased to $20,037,679 as of June 30, 2017 from $18,609,323 at December 31, 2016, an increase of $1,428,356. Increases in investments are primarily attributable to premiums and annuity deposits received by USALSC.

 

The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of June 30, 2017 and December 31, 2016.

 

   

June 30, 2017

   

December 31, 2016

 
   

Fair

   

Percent

   

Fair

   

Percent

 
   

Value

   

of Total

   

Value

   

of Total

 
   

(unaudited)

   

 

 

AAA and U.S. Government

  $ 875,859       7.9 %   $ 1,080,028       10.5 %

AA

    5,176,964       46.7 %     4,887,863       47.3 %

A

    2,196,804       19.8 %     1,961,311       19.0 %

BBB

    2,638,120       23.8 %     2,194,473       21.3 %

BB

    200,589       1.8 %     196,399       1.9 %

Total

  $ 11,088,336       100.0 %   $ 10,320,074       100.0 %

 

Reflecting the high quality of securities maintained by us, 98.1% of all fixed maturity securities were investment grade as of December 31, 2016. As of June 30, 2017, 98.2% of all fixed maturity securities were investment grade.

 

The amortized cost and fair value of debt securities as of June 30, 2017 and December 31, 2016, 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 June 30, 2017

   

As of December 31, 2016

 
   

Amortized Cost

   

Fair Value

   

Amortized Cost

   

Fair Value

 

Amounts maturing in:

 

(unaudited)

                 

One year or less

  $ 99,976     $ 99,932     $ 49,915     $ 49,931  

After one year through five years

    1,220,739       1,221,261       1,819,437       1,809,470  

After five years through ten years

    1,894,372       1,914,255       1,646,576       1,643,823  

More than 10 years

    5,164,277       5,340,769       3,468,619       3,491,663  

Mortgage backed and asset backed securities

    2,486,934       2,512,119       3,333,617       3,325,187  
    $ 10,866,298     $ 11,088,336     $ 10,318,164     $ 10,320,074  

 

 

Market Risk of Financial Instruments

 

We hold a diversified portfolio of investments that primarily includes cash, bonds and equity securities. Each of these investments is subject to market risks that can affect their return and their fair value. A majority of the investments are fixed maturity securities including debt issues of corporations, US Treasury securities, or securities issued by government agencies. The primary market risks affecting the investment portfolio are interest rate risk, credit risk, and equity risk.

 

23

 

 

Interest Rate Risk

 

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

 

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

 

Credit Risk

 

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

 

Liquidity and Capital Resources

 

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

 

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

 

Net cash used in operating activities was $6,083 for the six months ended June 30, 2017. The primary sources of cash from operating activities were premiums and deposits received from policyholders. The primary uses of cash for operating activities were for payments of commissions to agents and settlement of policy liabilities. Net cash used in investing activities was $2,399,467. The primary source of cash was from sales of available for sale securities and the sale of the short-term investments. Offsetting this source of cash was our purchases of investments in available-for-sale securities. Cash provided by financing activities was $988,662. The primary sources of cash were receipts on deposit-type contracts and issuance of common stock.

 

At June 30, 2017, we had cash and cash equivalents totaling $1,728,857. We believe that our existing cash and cash equivalents will be sufficient to fund the anticipated operating expenses and capital expenditures through at least 2017. We have based this estimate upon assumptions that may prove to be wrong and we could use our capital resources sooner than we currently expect. The growth of our insurance subsidiary is uncertain and will require additional capital if it continues to grow.

 

Impact of Inflation

 

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

 

24

 

 

Off-Balance Sheet Arrangements

 

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

 

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 4.    CONTROLS AND PROCEDURES

 

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

 

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

 

There were no changes to the Company’s internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) during the six months ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s control over financial reporting.

 

Part II – Other Information

 

ITEM 1.     LEGAL PROCEEDINGS

 

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

 

ITEM 1A.   RISK FACTORS

 

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

 

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

 

During the quarter ended June 30, 2017, the Company issued 40,361 shares of common stock, for aggregate consideration of $289,527, pursuant to an offering to residents of the state of Kansas that was registered with the Kansas Securities Commissioner.

 

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

 

 

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

 

 None

 

ITEM 4.    MINE SAFETY DISCLOSURES

 

Not Applicable

 

25

 

 

ITEM 5.   OTHER INFORMATION

 

None.

 

 

 

ITEM 6.    EXHIBITS

 

2.1   Plan and Agreemetn of Merger dated May 23, 2017 among Northern Plains Capital Corporation, US Alliance Corporation and Acquisition Merger Sub, Inc., filed as Exhibit 2.1 to the Company's Registration Statement on Form S-4 filed on June 1, 2017 (File No. 333-218389), is incorporated by reference as Exhibit 2.1.
     
2.2   Amendment No. 1 to Plan and Agreement of Merger dated May 23, 2017 among Northern Plains Capital Corporation, US Alliance Corporation and Acquisition Merger Sub, Inc., filed as Exhibit 2.2 to the Company's Registration Statement on Form S-4 filed on June 1, 2017 (File No. 333-218389), is incorporated herein by reference as Exhibit 2.2.
     

3.1

 

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

 

 

 

3.2

 

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

 

 

 

4.1

 

Form of Warrant to Purchase Common Shares of US Alliance, filed as Exhibit 4.1 to the Company’s Registration Statement on Form 10 filed on May 2, 2016 (File No. 000-55627), is incorporated herein by reference as Exhibit 4.1)

 

31.1

 

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

 

 

 

31.2

 

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

 

 

 

32.1

 

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

     

32.2

 

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

     

101.INS** XLRB Instance

 

101.SCH** XLRB Taxonomy Extension Schema

 

101.CAL** XLRB Taxonomy Extension Calculation

 

101.DEF** XLRB Taxonomy Extension Definition

 

101.LAB** XLRB Taxonomy Extension Labels

 

101.PRE** XLRB Taxonomy Extention Presentation

 

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

 

26

 

 

SIGNATURES

 

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

 

 

 

 

 

US Alliance Corporation

 

 

 

 

(Registrant)

 

Date

 

 

 

 

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

 

 

 

27