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EX-32.2 - EXHIBIT 32.2 - US Alliance Corpex_99921.htm
EX-32.1 - EXHIBIT 32.1 - US Alliance Corpex_99920.htm
EX-31.2 - EXHIBIT 31.2 - US Alliance Corpex_99919.htm
EX-31.1 - EXHIBIT 31.1 - US Alliance Corpex_99918.htm
EX-10.1 - EXHIBIT 10.1 - US Alliance Corpex_99961.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 September 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.

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

7,302,192 shares outstanding

as of November 6, 2017

 

 

US ALLIANCE CORPORATION

 

FORM 10-Q

 

TABLE OF CONTENTS

 

Part I - Financial Information

 

         

Item

 

Item Description

 

Page

Item 1

 

Financial Statements

 

3

         
   

Consolidated Balance Sheets

 

3

         
   

Consolidated Statements of Comprehensive Loss

 

4

         
   

Consolidated Statements of Changes in Shareholders' Equity

 

5

         
   

Consolidated Statements of Cash Flows

 

6

         
   

Supplemental Cash Flow Disclosure

 

7

         
   

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

  31
         

Item 4

 

Controls and Procedures

 

31

         

Part II - Other Information

         

Item

 

Item Description

 

Page

Item 1

 

Legal Proceedings

  32
         

Item 1A

 

Risk Factors

  32
         

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

  32
         

Item 3

 

Defaults Upon Senior Securities

 

32

         

Item 4

 

Mine Safety Disclosures

  32
         

Item 5 

 

Other Information

  32
         

Item 6

 

Exhibits

 

32

         
   

Signatures

  33

 

 

ITEM 1.      FINANCIAL STATEMENTS

 

US Alliance Corporation

Consolidated Balance Sheets 

   

September 30, 2017

   

December 31, 2016

 
   

(unaudited)

         

Assets

               

Investments:

               

Available for sale fixed maturity securities (amortized cost: $14,911,919 and $10,318,164 as of September 30, 2017 and December 31, 2016, respectively)

  $ 15,153,824     $ 10,320,074  

Available for sale equity securities (cost: $7,615,226 and $4,905,953 as of September 30, 2017 and December 31, 2016, respectively)

    7,665,497       5,143,504  

Total investments

    22,819,321       15,463,578  
                 

Cash and cash equivalents

    11,015,077       3,145,745  

Investment income due and accrued

    124,745       100,713  

Policy loans

    33,376       -  

Reinsurance related assets

    315,702       31,390  

Deferred acquisition costs, net

    3,083,154       153,792  

Value of business acquired, net

    605,677       -  

Property, equipment and software, net

    229,939       244,849  

Goodwill

    277,542       -  

Other assets

    241,517       51,922  

Total assets

  $ 38,746,050     $ 19,191,989  
                 
                 

Liabilities and Shareholders' Equity

               

Liabilities:

               

Policy liabilities

               

Deposit-type contracts

  $ 12,749,556     $ 3,398,170  

Policyholder benefit reserves

    10,216,596       4,220,215  

Advance premiums

    836,805       121,944  

Total policy liabilities

    23,802,957       7,740,329  
                 

Accounts payable and accrued expenses

    75,399       66,472  

Other liabilities

    551,485       4,205  

Total liabilities

    24,429,841       7,811,006  
                 

Shareholders' Equity:

               

Common stock, $0.10 par value. Authorized 20,000,000 shares; issued and outstanding 7,296,351 and 5,565,943 shares as of September 30, 2017 and December 31, 2016, respectively

    729,636       556,595  

Additional paid-in capital

    21,319,758       18,017,163  

Accumulated deficit

    (8,025,339 )     (7,432,236 )

Accumulated other comprehensive income

    292,154       239,461  

Total shareholders' equity

    14,316,209       11,380,983  
                 

Total liabilities and shareholders' equity

  $ 38,746,050     $ 19,191,989  

 

See Notes to Consolidated Financial Statements (unaudited).

 

 

US Alliance Corporation

Consolidated Statements of Comprehensive Loss

 

   

Nine Months Ended September 30,

   

Three Months Ended September 30,

 
   

2017

   

2016

   

2017

   

2016

 

 

 

(unaudited)

   

(unaudited)

 
Income:                                

Premium income

  $ 8,902,208     $ 4,721,091     $ 5,169,638     $ 1,490,255  

Net investment income

    485,147       320,491       189,028       116,780  

Net realized gain on sale of securities

    435,392       40,653       226,890       29,889  

Other income

    40,656       57,468       1,201       21,878  

Total income

    9,863,403       5,139,703       5,586,757       1,658,802  
                                 

Expenses:

                               

Death claims

    624,864       355,151       152,234       119,700  

Policyholder benefits

    2,609,324       2,520,956       479,965       715,171  

Increase in policyholder reserves

    5,205,124       1,473,287       4,357,257       556,685  

Commissions, net of deferrals

    362,585       315,550       97,151       88,952  

Amortization of deferred acquisition costs

    136,709       128,540       52,484       39,441  

Amortization of value of business acquired

    3,384       -       3,384       -  

Salaries & benefits

    627,286       564,410       244,143       171,226  

Other operating expenses

    887,230       902,598       278,795       321,925  

Total expense

    10,456,506       6,260,492       5,665,413       2,013,100  
                                 

Net loss

  $ (593,103 )   $ (1,120,789 )   $ (78,656 )   $ (354,298 )
                                 

Net loss per common share, basic and diluted

  $ (0.10 )   $ (0.21 )   $ (0.01 )   $ (0.06 )
                                 

Unrealized net holding gains arising during the period

    488,085       855,203       19,839       168,793  

Reclassification adjustment for (gains) losses included in net loss

    (435,392 )     (40,653 )     (226,890 )     (29,889 )

Other comprehensive income (loss)

    52,693       814,550       (207,051 )     138,904  
                                 

Comprehensive loss

  $ (540,410 )   $ (306,239 )   $ (285,707 )   $ (215,394 )

 

See Notes to Consolidated Financial Statements (unaudited).

 

 

US Alliance Corporation

Consolidated Statements of Changes in Shareholders' Equity

Nine Months Ended September 30, 2017 and 2016 (unaudited)

 

 

                                           

Common

   

Accumulated

                 
   

Number of

                           

Common

   

Stock

   

Other

                 
   

Shares of

   

Common

   

Additional

   

Outstanding

   

Stock

   

Subscription

   

Comprehensive

   

Accumulated

         
   

Common Stock

   

Stock

   

Paid-in Capital

   

Warrants

   

Subscribed

   

Receivable

   

Income / (Loss)

   

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

    4,886       489       33,713       -       -       -       -       -       34,202  

Costs associated with common stock issued

    -       -       (482,385 )     -       -       -       -       -       (482,385 )

Common stock subscribed

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

Other comprehensive income

    -       -       -       -       -       -       814,550       -       814,550  

Net loss

    -       -       -       -       -       -       -       (1,120,789 )     (1,120,789 )

Balance, September 30, 2016

    5,554,134     $ 555,414     $ 17,966,154     $ -     $ -     $ -     $ 714,073     $ (7,267,252 )   $ 11,968,389  
                                                                         

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

    85,950       8,595       593,055       -       -       -       -       -       601,650  

Costs associated with common stock issued

    -       -       (223,394 )     -       -       -       -       -       (223,394 )

Common stock issued, Northern Plains Capital Corporation merger

    1,644,458       164,446       2,932,934                                               3,097,380  

Other comprehensive income

    -       -       -       -       -       -       52,693       -       52,693  

Net loss

    -       -       -       -       -       -       -       (593,103 )     (593,103 )

Balance, September 30, 2017

    7,296,351     $ 729,636     $ 21,319,758     $ -     $ -     $ -     $ 292,154     $ (8,025,339 )   $ 14,316,209  

 

See Notes to Consolidated Financial Statements (unaudited).

 

 

US Alliance Corporation
Consolidated Statements of Cash Flows
(unaudited)

 

   

Nine Months Ended September 30,

 
   

2017

   

2016

 

Cash Flows from Operating Activities:

               

Net loss

  $ (593,103 )   $ (1,120,789 )

Adjustments to reconcile net loss to net cash provided by operating activities:

               

Depreciation and amortization

    26,031       29,074  

Net realized (gains) on the sale of securities

    (435,392 )     (40,653 )

Amortization of investment securities, net

    27,429       12,406  

Deferred acquisition costs capitalized

    (204,620 )     (182,537 )

Deferred acquisition costs amortized

    136,709       128,540  

Value of business acquired amortized

    3,384       -  

Interest credited on deposit type contracts

    110,097       49,395  

(Increase) decrease in operating assets:

               

Investment income due and accrued

    9,315       3,097  

Reinsurance related assets

    (8,294 )     (51,893 )

Other assets

    (132,357 )     91,353  

Increase (decrease) in operating liabilities:

               

Policyowner benefit reserves

    1,284,750       1,497,064  

Advance premiums

    92,016       41,297  

Other liabilities

    3,600       73,434  

Accounts payable and accrued expenses

    (32,519 )     (16,609 )

Net cash provided by operating activities

    287,046       513,179  
                 

Cash Flows from Investing Activities:

               

Available-for-sale securities

               

Purchase of fixed income investments

    (4,629,966 )     (2,624,560 )

Purchase of equity investments

    (4,669,164 )     (1,210,646 )

Proceeds from fixed income sales and repayments

    3,081,710       573,590  

Proceeds from equity sales and repayments

    4,439,235       190,583  

Acquisition of Northern Plains Capital Corporation

    1,079,627       -  

Assumed reinsurance from American Life & Security Corporation

    6,895,145       -  

Purchase of property, equipment and software

    (11,121 )     -  

Net cash provided by (used in) investing activities

    6,185,466       (3,071,033 )
                 

Cash Flows from Financing Activities:

               

Receipts on deposit-type contracts

    1,368,680       1,485,628  

Withdrawals on deposit-type contracts

    (350,116 )     (170,906 )

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

    378,256       1,783,835  

Net cash provided by financing activities

    1,396,820       3,098,557  
                 

Net increase in cash and cash equivalents

    7,869,332       540,703  
                 

Cash and Cash Equivalents:

               

Beginning

    3,145,745       2,466,526  

Ending

  $ 11,015,077     $ 3,007,229  

 

See Notes to Consolidated Financial Statements (unaudited).

 

 

US Alliance Corporation
Supplemental Cash Flow Information
(unaudited)

 

   

Nine Months Ended September 30,

 
   

2017

   

2016

 

Supplemental Disclosure of Non-Cash Information

               

Common stock issued on the acquisition of Northern Plains

  $ 3,097,380     $ -  

Cost of reinsurance deferred on coinsurance transaction with American Life & Security Corp

  $ 2,861,450     $ -  

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

Note 1.     Description of Business and Significant Accounting Policies

 

Description of business: US Alliance Corporation ("USAlliance" or “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 (“USALSC”) was incorporated. USALSC received its Certificate of Authority from the Kansas Insurance Department (KID) effective January 2, 2012. On April 23, 2012, US Alliance Investment Corporation (“USAIC”) and US Alliance Marketing Corporation (“USAMC”) were incorporated as wholly-owned subsidiaries of the Company to provide investment management and marketing services. On August 1, 2017, the Company, through its wholly owned subsidiary, merged with Northern Plains Capital Corporation (“Northern Plains”) with the Company being the ultimate surviving entity. As a result of this merger, the Company acquired Dakota Capital Life Insurance Company (“DCLIC”) which became a wholly owned subsidiary of US Alliance Life and Security Company.

 

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 nine months ended September 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.

 

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

 

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

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

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 September 30, 2017, and December 31, 2016, the company had 7,296,351 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 September 30, 2017 and 2016 were 6,181,492 and 5,552,227 shares, respectively. The weighted average number of shares outstanding during the nine months ended September 30, 2017 and 2016 were 5,698,514 and 5,395,456 shares, respectively. Potential common shares are excluded from the computation when their effect is anti-dilutive. Basic and diluted net loss per common share is the same for the quarters and nine months ended September 30, 2017 and 2016 because all warrants for common shares are anti-dilutive.

 

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.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

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).

 

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.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

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.

 

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.

 

Note 2.     Acquisitions

 

On August 1, 2017 the Company acquired Northern Plains pursuant to a Plan and Agreement of Merger dated May 23, 2017 (the "Merger Agreement") under which Alliance Merger Sub, Inc. (“Acquisition”), a wholly owned subsidiary of the Company, merged with and into Northern Plains (“Merger”) with Acquisition being the surviving company. Pursuant to the Merger Agreement, the Company exchanged .5841 shares of the Company’s common stock for each share of Northern Plains common stock, or approximately 1,644,458 shares, as consideration for the Merger. Subsequent to the Merger, Acquisition was merged into the Company and the Company contributed its interest in DCLIC to USALSC.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

The Merger was accounted for under the acquisition method of accounting, which requires the consideration transferred and all assets and liabilities assumed to be recorded at fair value. The table on the following page summarizes the preliminary fair value of the consideration transferred and the preliminary fair value of Northern Plains’ assets acquired and liabilities assumed:

 

Fair value of US Alliance common stock issued as consideration

  $ 3,099,165  
         

Preliminary amounts of indentifiable assets acquired and liablities assumed

       

Investment securities

  $ 4,623,449  

Cash

    1,079,627  

VOBA

    609,061  

Other assets

    60,080  

Policyholder reserves

    (1,277,411 )

Deposit type contracts

    (2,029,138 )

Other liabilities

    (243,608 )

Total indentifiable net assets

  $ 2,822,060  

Goodwill

    277,105  
Total    $ 3,099,165  

 

The fair value of the US Alliance  common stock issued as consideration and the assets acquired and liabilities assumed from our Merger with  Northern Plains was based on a preliminary valuation and our estimates and assumptions are subject to change within the measurement period. The primary areas that are not yet finalized are related to the fair value of US Alliance common stock issued and the fair value of value of business acquired ("VOBA"). Measurement period adjustments will be applied to the period that the adjustment is identified in our consolidated financial statements.

 

VOBA is being amortized on a straight-line basis over 30 years which approximates the earnings pattern of the related policies.

 

The following table presents unaudited pro forma consolidated total income and net loss as if the Merger had occurred as of January 1, 2016 (the earliest date presented).

 

   

Nine Months Ended September 30,

 
   

2017

   

2016

 
    (unaudited)  

Income:

 

 

 

Premium income

  $ 9,322,648     $ 5,231,372  

Net investment income

    544,477       396,697  

Net realized gain (loss) on sale of securities

    483,130       16,031  

Other income

    11,594       6,987  

Total income

    10,361,849       5,651,087  
                 

Net Loss

  $ (745,970 )   $ (1,508,555 )
                 

Net Loss per share

  $ (0.10 )   $ (0.21 )

 

The unaudited pro forma total income and net loss above was adjusted to eliminate the TPA fees paid by Northern Plains to the Company of $31,250 and $50,781 for the nine months ended September 30, 2017 and 2016, respectively; and eliminate the loss of $201,577 for acquisition related expenses that Northern Plains recorded for the nine months ended September 30, 2017 and also includes adjustments for the amortization of VOBA and elimination of DAC amortization for the nine months ending September 30, 2017 and 2016 of $78,379 and $21,498, respectively.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

Note 3.     Investments

 

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

 

   

September 30, 2017

 
   

Cost or

   

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

         
   

Cost

   

Gains

   

Losses

   

Fair Value

 
    (Unaudited)  

Available for sale:

 

 

 

Fixed maturities:

                               

US Treasury securities

  $ 269,529     $ -     $ (29,054 )   $ 240,475  

Government agency bonds

    299,842       -       (539 )     299,303  

Corporate bonds

    6,119,784       140,246       (25,617 )     6,234,413  

Municipal bonds

    5,570,008       152,099       (19,519 )     5,702,588  

Redeemable preferred stock

    99,560       480       -       100,040  

Mortgage backed and asset backed securities

    2,553,196       38,963       (15,154 )     2,577,005  

Total fixed maturities

    14,911,919       331,788       (89,883 )     15,153,824  

Equities:

                               

Equities

    7,615,226       114,845       (64,574 )     7,665,497  

Total available for sale

  $ 22,527,145     $ 446,633     $ (154,457 )   $ 22,819,321  

 

 

   

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  

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

The amortized cost and fair value of debt securities as of September 30, 2017, by contractual maturity, are shown in the following table. 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

         

September 30, 2017

 

Cost

   

Fair Value

 
    (unaudited)  

Amounts maturing in:

 

 

 

One year or less

  $ 200,568     $ 200,473  

After one year through five years

    1,932,156       1,933,444  

After five years through ten years

    2,490,661       2,517,547  

More than 10 years

    7,635,778       7,825,315  

Redeemable preferred stocks

    99,560       100,040  

Mortgage backed and asset backed securities

    2,553,196       2,577,005  

Total fixed maturities

  $ 14,911,919     $ 15,153,824  

 

Proceeds from the sale of securities, maturities, and asset paydowns for the first nine months of 2017 and 2016 were $7,520,945 and $764,173, respectively. Realized gains and losses related to the sale of securities are summarized as follows:

 

   

Nine Months Ended September 30,

 
   

(unaudited)

 
   

2017

   

2016

 

Gross gains

  $ 486,523     $ 42,719  

Gross losses

    (51,131 )     (2,066 )

Net security gains

  $ 435,392     $ 40,653  

 

Proceeds from the sale of securities, maturities, and asset paydowns for the three months ended September 30, 2017 and 2016 were $4,688,796 and $204,422, respectively. Realized gains and losses related to the sale of securities for the three months ended September 30, 2017 and 2016 are summarized as follows:

 

   

Three Months Ended September 30,

 
   

(unaudited)

 
   

2017

   

2016

 

Gross gains

  $ 259,061     $ 29,889  

Gross losses

    (32,171 )     -  

Net security gains

  $ 226,890     $ 29,889  

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

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

 

September 30, 2017

                                               

Available for sale:

                                               

Fixed maturities:

                                               

US Treasury securities

  $ 240,475     $ (29,054 )   $ -     $ -     $ 240,475     $ (29,054 )

Government agency bonds

    299,303       (539 )     -       -       299,303       (539 )

Corporate bonds

    1,734,089       (14,488 )     798,161       (11,129 )     2,532,250       (25,617 )

Municipal bonds

    1,571,608       (18,464 )     98,945       (1,055 )     1,670,553       (19,519 )

Mortgage backed and asset backed securities

    995,261       (13,137 )     92,315       (2,017 )     1,087,576       (15,154 )

Total fixed maturities

    4,840,736       (75,682 )     989,421       (14,201 )     5,830,157       (89,883 )

Equities:

                                               

Equities

    1,283,438       (4,999 )     1,179,505       (59,575 )     2,462,943       (64,574 )

Total available for sale

  $ 6,124,174     $ (80,681 )   $ 2,168,926     $ (73,776 )   $ 8,293,100     $ (154,457 )

 

 

   

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 )   $ 7,648,170     $ (281,031 )

 

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

 

The total number of securities in the investment portfolio in an unrealized loss position as of September 30, 2017 was 71, which represented an unrealized loss of $154,457 of the aggregate carrying value of those securities. The 71 securities breakdown as follows: 51 bonds, 14 mortgage and asset backed securities, 1 common stock, 2 high yield corporate bond funds, 2 preferred stock index funds, and 1 senior loan fund. The Company determined that no securities were considered to be other-than-temporarily impaired as of September 30, 2017 and December 31, 2016. The unrealized gains on the remainder of the available for sale portfolio as of September 30, 2017 were $446,663. 

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

Note 4.     Fair Value Measurements

 

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

 

 

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

 

 

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

 

 

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

 

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

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

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

 

   

September 30, 2017

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 
    (unaudited)  

Available for sale:

 

 

 

Fixed maturities:

                               

US Treasury securities

  $ 240,475     $ 240,475     $ -     $ -  

Government agency bonds

    299,303       -       299,303       -  

Corporate bonds

    6,234,413       -       6,234,413       -  

Municipal bonds

    5,702,588       -       5,702,588       -  

Redeemable preferred stock

    100,040       -       100,040       -  

Mortgage backed and asset backed securities

    2,577,005       -       2,577,005       -  

Total fixed maturities

    15,153,824       240,475       14,913,349       -  

Equities:

                               

Equities

    7,665,497       7,665,497       -       -  

Total

  $ 22,819,321     $ 7,905,972     $ 14,913,349     $ -  

 

 

   

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, investment income due and accrued, and policy loans: The carrying value of these financial instruments approximates their fair values. Cash and cash equivalents are included in Level 1 of the fair value hierarchy due to their highly liquid nature.

 

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.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

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

 

   

September 30, 2017

   

December 31, 2016

 
                                 
   

Carrying Value

   

Fair Value

   

Carrying Value

   

Fair Value

 
    (unaudited)                  

Financial Assets:

 

 

                 

Cash and cash equivalents

  $ 11,015,077     $ 11,015,077     $ 3,145,745     $ 3,145,745  

Investment income due and accrued

    124,745       124,745       100,713       100,713  

Policy loans

    33,376       33,376       -       -  

Investments, at fair value

    22,819,321       22,819,321       15,463,578       15,463,578  

Total Financial Assets

  $ 33,992,519     $ 33,992,519     $ 18,710,036     $ 18,710,036  
                                 

Financial Liabilities:

                               

Policyholder deposits in deposit-type contracts

  $ 12,749,556     $ 11,950,167     $ 3,398,170     $ 3,260,086  

Total Financial Liabilities

  $ 12,749,556     $ 11,950,167     $ 3,398,170     $ 3,260,086  

 

 

Note 5.     Income Tax Provision

 

No income tax expense or (benefit) has been reflected for the quarters ended September 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 $6,500,000 and $5,050,176 as of September 30, 2017 and December 31, 2016, respectively. The September 30, 2017 net operating loss carryforward is estimated as the impact of the Merger with Northern Plains has not been finalized.  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 6.     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, on 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 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. 

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

Note 7.   Subsequent Events

 

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

 

The Company has evaluated subsequent events through November 13, 2017, the date on which the consolidated financial statements were issued.

 

 

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

 

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

 

Overview

 

US Alliance Corporation (“USAC”) was formed as a Kansas corporation on April 24, 2009 for the purpose of raising capital to form a new Kansas-based life insurance company. We presently conduct our business through our four wholly-owned subsidiaries: US Alliance Life and Security Company ("USALSC"), a life insurance corporation; Dakota Capital Life Insurance Corporation ("DCLIC"), a life insurance corporation; US Alliance Marketing Corporation ("USAMC"), an insurance marketing corporation; and US Alliance Investment Corporation ("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.

 

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

 

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 Registration Statement.

 

Valuation of Investments

 

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

 

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

 

 

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

 

Deferred Acquisition Costs

 

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

 

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 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. The Merger transaction closed on July 31, 2017. Northern Plains shareholders received .5841 shares of US Alliance Corporation stock for each share of Northern Plains stock owned. USAC issued 1,644,458 shares of common stock to holders of Northern Plains shares in consideration for the Merger.

 

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 nine months ended September 30, 2017 and 2016 are summarized in the table below.

 

   

Nine Months Ended September 30,

 
   

2017

   

2016

 
    (unaudited)  

Income:

 

 

 

Premium income

  $ 8,902,208     $ 4,721,091  

Net investment income

    485,147       320,491  

Net realized gain (loss) on sale of securities

    435,392       40,653  

Other income

    40,656       57,468  

Total income

  $ 9,863,403     $ 5,139,703  

 

 

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

 

   

Three Months Ended September 30,

 
   

2017

   

2016

 
    (unaudited)  

Income:

 

 

 

Premium income

  $ 5,169,638     $ 1,490,255  

Net investment income

    189,028       116,780  

Net realized gain (loss) on sale of securities

    226,890       29,889  

Other income

    1,201       21,878  

Total income

  $ 5,586,757     $ 1,658,802  

 

 

Premium revenue: Premium revenue for the first nine months of 2017 was $8,902,208 compared to $4,721,091 in the first nine months of 2016, an increase of $4,181,117. USALSC entered into a coinsurance transaction with American Life and Security Corporation (“ALSC”) effective September 30, 2017. This agreement resulted in the immediate recognition of $3,854,902 of assumed premiums and is the primary driver of the increase in premiums.

 

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

 

   

Nine Months Ended September 30,

 
   

2017

   

2016

 
   

(unaudited)

 

Direct

  $ 2,422,907     $ 2,048,060  

Assumed

    6,639,092       2,770,010  

Ceded

    (159,791 )     (96,979 )

Total

  $ 8,902,208     $ 4,721,091  

 

Premium revenue for the third quarter of 2017 was $5,169,638 compared to $1,490,255 in 2016, an increase of $3,679,383. This growth is primarily attributable to the coinsurance transaction with ALSC.

 

 

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

 

   

Three Months ended September 30,

 
   

2017

   

2016

 
   

(unaudited)

 

Direct

  $ 931,463     $ 747,100  

Assumed

    4,323,692       778,281  

Ceded

    (85,517 )     (35,126 )

Total

  $ 5,169,638     $ 1,490,255  

 

 

The Company is pursuing new product and distribution opportunities to increase premium production. The acquisition of DCLIC and the reinsurance agreement with ALSC are both expected to increase future premiums.

 

 

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

 

   

Nine Months Ended September 30,

 
   

2017

   

2016

 
   

(unaudited)

 

Fixed maturities

  $ 306,614     $ 225,790  

Equity securities

    213,920       126,571  

Cash and short term investments

    3,730       1,527  
      524,264       353,888  

Less investment expenses

    (39,117 )     (33,397 )
    $ 485,147     $ 320,491  

 

 

Net investment income for the first nine months of 2017 was $485,147, compared to $320,491 in 2016, an increase of $164,656. This increase in investment income is primarily a result of increased invested assets as a result of our premium income and the Merger with Northern Plains, as well as an improvement in our book yield.

 

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

 

   

Three Months Ended September 30,

 
   

2017

   

2016

 
   

(unaudited)

 

Fixed maturities

  $ 114,132     $ 80,174  

Equity securities

    91,228       48,130  

Cash and short term investments

    2,238       761  
      207,598       129,065  

Less investment expenses

    (18,570 )     (12,285 )
    $ 189,028     $ 116,780  

 

Net investment income for the second quarter of 2017 was $189,028, compared to $116,780 in 2016, an increase of $72,248. This increase in investment income is a result of increased invested assets as a result of our premium income and the Merger with Northern Plains as well as an improvement in our book yield.

 

 

Net realized gains on investments: Net realized gains on investments for the nine months ended September 30, 2017 were $435,392, compared to gains of $40,653 in 2016, an increase of $394,739. The increase in realized gains is attributable to the repositioning of an equity portfolio from a market return focus to an income focus. Additionally, during the third quarter we reduced our equity exposure in order to facilitate our coinsurance transaction with ALSC. Realized gains and losses related to the sale of securities for the nine months ended September 30, 2017 and 2016 are summarized as follows:

 

   

Nine Months Ended September 30,

 
   

(unaudited)

 
   

2017

   

2016

 

Gross gains

  $ 486,523     $ 42,719  

Gross losses

    (51,131 )     (2,066 )

Net security gains

  $ 435,392     $ 40,653  

 

Net realized gains on investments for the third quarter of 2017 were $226,890 compared to gains of $29,889 in 2016. Realized gains and losses related to the sale of securities for the three months ended September 30, 2017 and 2016 are summarized as follows:

 

   

Three Months Ended September 30,

 
   

(unaudited)

 
   

2017

   

2016

 

Gross gains

  $ 259,061     $ 29,889  

Gross losses

    (32,171 )     -  

Net security gains

  $ 226,890     $ 29,889  

 

Other income: Other income for the nine months ended September 30, 2017 was $40,656 compared to $57,468 in 2016, a decrease of $16,812. This decrease is due to the acquisition of DCLIC who was previously a third party administration client.

 

Other income for the third quarter of 2017 was $1,201 compared to $21,878 in 2016, a decrease of $20,677. This decrease is due to the acquisition of DCLIC who was previously a third party administration client.

 

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

 

   

Nine Months Ended September 30,

 
   

2017

   

2016

 
    (unaudited)  

Expenses:

 

 

 

Death claims

  $ 624,864     $ 355,151  

Policyholder benefits

    2,609,324       2,520,956  

Increase in policyholder reserves

    5,205,124       1,473,287  

Commissions, net of deferrals

    362,585       315,550  

Amortization of deferred acquisition costs

    136,709       128,540  

Amortization of value of business acquired

    3,384       -  

Salaries & benefits

    627,286       564,410  

Other operating expenses

    887,230       902,598  

Total expense

  $ 10,456,506     $ 6,260,492  

 

 

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

 

 

   

Three Months Ended September 30,

 
   

2017

   

2016

 
    (unaudited)  

Expenses:

 

 

 

Death claims

  $ 152,234     $ 119,700  

Policyholder benefits

    479,965       715,171  

Increase in policyholder reserves

    4,357,257       556,685  

Commissions, net of deferrals

    97,151       88,952  

Amortization of deferred acquisition costs

    52,484       39,441  

Amortization of value of business acquired

    3,384       -  

Salaries & benefits

    244,143       171,226  

Other operating expenses

    278,795       321,925  

Total expense

  $ 5,665,413     $ 2,013,100  

 

 

Death and other benefits: Death benefits were $624,864 in the nine months ended September 30, 2017 compared to $355,151 in 2016, an increase of $269,713. 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 $152,234 for the three months ended September 30, 2017, compared to $119,700 for the same period in 2016, an increase of $32,534. 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 $2,609,324 in the nine months ended September 30, 2017 compared to $2,520,956 in 2016, an increase of $88,368. The primary driver of this increase is the growth of our assumed business with ULIC and is more than offset by the increased premiums associated with this block of assumed policies.

 

Policyholder benefits were $479,965 during the third quarter of 2017, compared to $715,171 in the third quarter of 2016, a decrease of $235,206. The primary driver of this decrease is reduced benefits payments on our assumed business with ULIC.

 

Increase in policyholder reserves: Policyholder reserves increased $5,205,124 in the nine months ended September 30, 2017, compared to $1,473,287 in 2016, an increase of $3,731,837. The increase in policyholder reserves is driven by an assumed reserve increase of $3,824,902 associated with our reinsurance transaction with ALSC.

 

Policyholder reserves increased by $4,357,257 in the third quarter of 2017, compared to $556,685 in the third quarter of 2016, an increase of $3,800,572. The increase in policyholder reserves is driven by an assumed reserve increase of $3,824,902 associated with our reinsurance transaction with ALSC.

 

Commissions, net of deferrals: The Company pays commissions to the ceding company on a block of assumed policies. Commissions were $362,585 in the nine months ended September 30, 2017, compared to $315,550 in 2016, an increase of $47,035. This increase is due to an increase in assumed premiums.

 

Commissions were $97,151 in the third quarter of 2017, compared to $88,952 in the third quarter of 2016, an increase of $8,199. This increase is driven by an increase in non-deferred commissions on direct written premiums.

 

Amortization of deferred acquisition costs: The amortization of deferred acquisition costs was $136,709 in the nine months ended September 30, 2017, compared to $128,540 in 2016, an increase of $8,169. The amortization increase is attributable to the growth of our DAC asset and product margins.

 

 

The amortization of deferred acquisition costs was $52,484 in the third quarter of 2017, compared to $39,441 in the third quarter of 2016, an increase of $13,043. The amortization increase is attributable to the growth of our DAC asset and product margins.

 

Amortization of value of business acquired: The amortization of value of business acquired was $3,384 in the nine months ended September 30, 2017. Our initial VOBA balance was established August 1, 2017 with acquisition of DCLIC. VOBA is being amortized straight-line over 30 years.

 

Salaries and benefits: Salaries and benefits were $627,286 for the nine months ended September 30, 2017, compared to $564,410 in 2016, an increase of $62,876. Staffing costs have increased due to additional employees acquired with the Northern Plains Merger.

 

Salaries and benefits were $244,143 in the third quarter of 2017, compared to $171,226 in the third quarter of 2016, an increase of $72,917. Staffing costs have increased due to additional employees acquired with the Northern Plains Merger.

 

Other expenses: Other operating expenses were $887,230 in the nine months ended September 30, 2017, compared to $902,598 in 2017, a decrease of $15,368. Operating costs have remained in line with the prior period.

 

Other operating expenses were $278,795 during the third quarter of 2017, compared to $321,925 in the third quarter of 2016, a decrease of $43,130.

 

 

Net Loss: Our net loss was $593,103 in the nine months ended September 30, 2017 compared to net loss of $1,120,789 in the same period of 2016, a decrease of $527,686. This decrease is primarily attributable to our increased realized gains as well as growing product margins. Our net loss per share decreased to $0.10 from $0.21 in 2016, basic and diluted.

 

Our net loss was $78,656 for the third quarter of 2017, compared to $354,298 for the same period in 2016, a decrease of $275,642. This decrease is primarily attributable to increased realized gains as well as improved product margins. Our net loss per share was $0.01 per share in the third quarter of 2017, basic and diluted, compared to $0.06 net loss per share in the second quarter of 2016.

 

Discussion of Consolidated Balance Sheet

 

Assets. Assets have increased to $38,746,049 as of September 30, 2017, an increase of $19,554,060 from December 31, 2016. This is primarily the result of the Merger with Northern Plains and our coinsurance agreement with ALSC.

 

Available for sale fixed maturity securities: As of September 30, 2017, we had available for sale fixed maturity assets of $15,153,824, an increase of $4,833,750 from the December 31, 2016 balance of $10,320,074. This growth is driven by our Merger with Northern Plains and our premium income.

 

Available for sale equity securities: As of September 30, 2017, we had available for sale equity assets of $7,665,497, an increase of $2,521,993 from the December 31, 2016 balance of $5,143,504. This growth is driven by our Merger with Northern Plains and our premium income.

 

Cash and cash equivalents: As of September 30, 2017, we had cash and cash equivalent assets of $11,015,077, an increase of $7,869,332 from the December 31, 2016 balance of $3,145,745. This increase is primarily the result of cash received upon entering into our coinsurance agreement with ALSC.

 

Investment income due and accrued: As of September 30, 2017, our investment income due and accrued was $124,745 compared to $100,713 as of December 31, 2016. This increase is attributable to normal investment activity and the growth of our invested assets.

 

Reinsurance related assets: As of September 30, 2017, our reinsurance related assets were $315,702, an increase of $284,312 from the December 31, 2016 balance of $31,390. This increase was driven by a $264,311 receivable from ALSC related to our coinsurance transaction.

 

 

Policy loans: As of September 30, our policy loans were $33,376. All of our policy loans were the result of our coinsurance agreement with ALSC and we had no policy loans prior to this transaction.

 

Deferred acquisition costs, net: As of September 30, 2017, our deferred acquisition costs were $3,083,154, an increase of $2,929,362 from the December 31, 2016 balance of $153,792. The growth is the result of the cost of reinsurance deferred on our coinsurance agreement with ALSC in the amount of $2,861,450.

 

Value of business acquired, net: As of September 30, 2017 our value of business acquired asset was $605,677. This asset was established in the third quarter of 2017 as a result of our acquisition of DCLIC.

 

Goodwill: As of September 30, 2017, our goodwill was $277,542. Goodwill was established as a result of our merger with Northern Plains and we had no previous goodwill balances.

 

Property, equipment and software, net: As of September 30, 2017 our property, equipment and software assets were $229,939, a decrease of $14,910 from the December 31, 2016 balance of $244,849. This decrease is a result of normal amortization during the period. We did purchase additional office furniture and equipment in 2017.

 

Other assets: As of September 30, 2017, our other assets were $241,517, an increase of $189,595 from the December 31, 2016 balance of $51,922. 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 $24,429,841 as of September 30, 2017, an increase of $16,618,835 from our December 31, 2016 liability of $7,811,006.

 

Policy liabilities: Our total policy liabilities as of September 30, 2017 were $23,802,957, an increase of $16,062,718 from the December 31, 2016 balance of $7,740,239. This increase is the result of our acquisition of DCLIC, our coinsurance agreement with ALSC, new policy sales and the growth of our in-force policies.

 

Accounts payable and accrued expenses: As of September 30, 2017, our accounts payable and accrued expenses were $75,399, an increase of $8,927 from the December 31, 2016 balance of $66,472. The growth is the result of expenses accrued related to our Merger with Northern Plains.

 

Shareholders’ Equity. Our shareholders’ equity was $14,316,208 as of September 30, 2017, an increase of $2,935,225 from our December 31, 2016 shareholders’ equity of $11,380,983. The growth in shareholders’ equity was driven by our Merger with Northern Plains, 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.

 

 

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 September 30, 2017 and December 30, 2016.

 

   

September 30, 2017

   

December 31, 2016

 
   

Fair

   

Percent

   

Fair

   

Percent

 
   

Value

   

of Total

   

Value

   

of Total

 
    (unaudited)                  

Fixed maturities:

 

 

                 

US Treasury securities

  $ 240,475       0.7 %   $ 299,162       1.6 %

Government agency bonds

    299,303       0.9 %     -       0.0 %

Corporate bonds

    6,234,413       18.4 %     3,845,896       20.7 %

Municipal bonds

    5,702,588       16.9 %     2,849,829       15.3 %

Redeemable preferred stocks

    100,040       0.3 %     -       0.0 %

Mortgage backed and asset backed securities

    2,577,005       7.6 %     3,325,187       17.9 %

Total fixed maturities

    15,153,824       44.8 %     10,320,074       55.5 %

Equities: