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EX-10.11 - EXHIBIT 10.11 - US Alliance Corpex_105266.htm
EX-32.2 - EXHIBIT 32.2 - US Alliance Corpex_104414.htm
EX-32.1 - EXHIBIT 32.1 - US Alliance Corpex_104413.htm
EX-31.2 - EXHIBIT 31.2 - US Alliance Corpex_104412.htm
EX-31.1 - EXHIBIT 31.1 - US Alliance Corpex_104411.htm
EX-21.1 - EXHIBIT 21.1 - US Alliance Corpex_105255.htm
 

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549 

 


FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2017

Commission File Number 000-55627

 


 

US ALLIANCE CORPORATION

 


 

Kansas

26-4824142

State of Incorporation

IRS Employer Identification Number

   

4123 SW Gage Center Drive, Suite 240

Topeka, Kansas 66604

(785) 228-0200

Address, including zip code, of principal executive offices

Registrant's telephone number, including area code

 

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.10 par value per share

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☑

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☑

 

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

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ☑

 

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

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

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

 

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

 

[As of February 1, 2018 the aggregate market value of voting and non-voting common equity held by non-affiliates of US Alliance could not be calculated as no established public trading market for our equity exists.]

 

Applicable only to registrants involved in bankruptcy proceedings during the preceding five years

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  ☐    No  ☐

 

No established public trading market for our common stock currently exists. As of February 1, 2018, 7,322,732 shares of our common stock were outstanding.

 

Documents Incorporated By Reference

 

Information required by Part III of this Annual Report on Form 10-K is incorporated by reference to portions of our definitive proxy statement for our 2018 annual meeting of stockholders (our "2018 Proxy Statement") which we will file with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2017.

 

 

 

 

TABLE OF CONTENTS

 

PART I

   

Item 1.

Business

1

Item 1A.

Risk Factors

6

Item 1B.

Unresolved Staff Comments

10

Item 2.

Properties

10

Item 3.

Legal Proceedings

10

Item 4.

Mine Safety Disclosures

10

     

PART II

   

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

11

Item 6.

Selected Financial Data

11

Item 7.

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

12

Item 7A.

Quantitative And Qualitative Disclosures About Market Risk

21

Item 8.

Financial Statements and Supplementary Data

21

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

21

Item 9A.

Controls and Procedures

21

Item 9B.

Other Information

21

     

PART III

   

Item 10.

Directors, Executive Officers and Corporate Governance

21

Item 11.

Executive Compensation

21

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

22

Item 13.

Certain Relationships and Related Transactions and Director Independence

22

Item 14.

Principal Accountant Fees and Services

22

     

PART IV

   

Item 15.

Exhibits and Financial Statement Schedules

23

     
 

Exhibit Index

23

 

Signatures

 

 

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This report, and the Annual Report to Shareholders of which this report is a part, contain forward-looking statements within the meaning of the U.S. federal securities laws. You can identify forward-looking statements by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “projects,” “may,” “will” or “should,” or the negative or other variation of these or similar words, or by discussions of strategy or risks and uncertainties, and similar references to future periods.

 

We base these and other forward-looking statements on our current expectations and assumptions regarding our business, the economy and other future conditions; however, our actual results may differ materially from those contemplated by the forward-looking statements. We caution you, therefore, that you should not rely on any of these forward-looking statements as statements of historical fact or as guarantees or assurances of future performance. Forward-looking statements, which by their nature relate to the future, are subject to inherent uncertainties, risks and changes in circumstances which we cannot easily predict. Important factors that could cause actual results to differ materially and adversely from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions.

 

Any forward-looking statement made by us in this report speaks only as of the date of this report. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

 

 

PART I

 

ITEM 1.

BUSINESS.

 

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

 

Our four wholly-owned operating subsidiaries are: US Alliance Life and Security Company ("USALSC") formed June 9, 2011, to serve as our life insurance company; US Alliance Marketing Corporation ("USAMC") formed April 23, 2012, to serve as a marketing resource; US Alliance Investment Corporation ("USAIC") formed April 23, 2012 to serve as investment manager for USAC; and Dakota Capital Life Insurance Company (“DCLIC”), which was acquired by the Company on August 1, 2017 in connection with USAC's merger with Northern Plains Capital Corporation (“NPCC”). Unless the context otherwise indicates, references in this registration statement to "we", "us", "our", or the "Company" refer collectively to USAC and its subsidiaries.

 

We capitalized our subsidiaries with proceeds from intrastate public offering(s) registered by qualification with the office of Kansas Securities Commissioner.

 

USALSC received a Certificate of Authority from the Kansas Insurance Department ("KID") effective January 2, 2012, and sold its first insurance product on May 1, 2013. USALSC currently offers the following eight product categories:

 

 

Solid Solutions Term Life Series®, Registered Trademark No 4,740,828. This simplified issue term life insurance product is designed to provide coverage with a face value of $250,000 or less. This product features limited underwriting and is offered with 10, 20, 25, and 30 year terms.

 

 

Sound Solutions Term Life Series®, Registered Trademark No, 4,740,827. This is a fully underwritten term life insurance product designed to provide coverage for higher face amounts. This product features multiple risk classifications and is offered with 15, 20, 25 and 30 year terms.

 

 

Pioneer Whole Life. This is a traditional whole life insurance product designed to provide permanent coverage with a limited premium paying period. This product is sold with death benefits typically ranging from $25,000 to $100,000.

 

 

Legacy Juvenile Series®, Registered Trademark No. 4,577,835. This product is term life insurance to age 25 available for purchase on children up to the age of 16 in an amount of $10,000 or $20,000 with a one-time premium payment.

 

 

American Annuity Series®, Registered Trademark No. 4,582,074. This product is a flexible premium deferred annuity with initial rates guaranteed for five years by company practice.

 

 

Thoughtful Pre-Need Series®, Registered Trademark No 4,620,073. This series of products includes a single or multiple pay premium pre-need whole life insurance policy sold by funeral directors who are licensed by the KID in conjunction with a preplanned funeral. This product is typically sold with smaller death benefits than our traditional Pioneer Whole Life.

 

 

Group Products. This is a series of group non-medical insurance products developed for the small group marketplace. These products are sold to employers and provide benefits for their employees. Our group suite of products includes group term life insurance, group long term disability, and group short term disability.

     
 

Critical Illness. This individual policy provides cash benefits to the insured should certain defined illnesses or injuries occur.

 

 

Our single pay life products (which include our Legacy Juvenile and Thoughtful Pre-Need products) accounted for 73% of 2017 direct premium revenue. Our individual life and Critical Illness products (which include our Sound and Solid Term Life and Pioneer Whole Life products) accounted for 18% of 2017 direct premium revenue. Our group products accounted for 9% of 2017 direct written premiums.

 

USALSC seeks opportunities to develop and market additional products.

 

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

 

Material Agreements and Partners - Effective January 1, 2013, USALSC entered into a reinsurance agreement with Unified Life Insurance Company (“ULIC”) to assume 20% of a certain block of health insurance policies. This agreement renews annually unless either party provides written notice of its intent not to renew at least 120 days prior to the expiration of the then-current term. The agreement provides for monthly settlement. For the year ended December 31, 2017, USALSC assumed premiums of $3,643,783.

 

On September 1, 2015, USALSC entered into an agreement to provide certain insurance administrative functions, data processing systems, daily operational services, management consulting, and marketing development to Dakota Capital Life Insurance Company. This agreement has an initial term of 60 months (beginning on September 1, 2015), and requires 90-day advance written notice to terminate. In addition, the agreement requires that certain products will be exclusively administered by USALSC and administrative services with respect to such products may not be transferred without our consent. The agreement provides for monthly settlement. On August 1, 2017, DCLIC became a wholly-owned subsidiary of USALSC as described below.

 

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

 

On September 30, 2017, USALSC entered into a coinsurance agreement with American Life and Security Corporation (“ALSC”) to assume 100% of a certain block of life insurance policies. USALSC is also the servicer of this block of policies. USALSC deferred costs of $2,861,450 related to this reinsurance trasnaction and received $6,895,145 from ALSC. The agreement will remain in effect until all liabilities associated with this block of policies have been satisfied.

 

USAC uses the actuarial firm of Miller & Newberg to provide valuation, pricing and illustration actuarial services for USALSC and DCLIC.

 

Investments - USALSC, through USAIC, and USAC contracted in 2013 with New England Asset Management (NEAM), a Berkshire Hathaway subsidiary, to manage the investments of USALSC and a portion of the investments of USAC. DCLIC, through USAIC, was added to this contract upon acquisition. The investment parameters are determined by Kansas law, the KID, and the North Dakota Insurance Department, as well as the internal investment policies of USALSC, DCLIC and USAC.

 

USAC internally manages a portfolio of equities within its investment policy guidelines (as modified from time to time, "Investment Policy"), which consider type of investments and investment instruments, and establishes diversification benchmarks to help manage investment risk. USAC's investment in its subsidiaries is managed outside of its Investment Policy.

 

The USAC Investment Policy may be modified by USAC's Board of Directors (the "Board" or "Board of Directors") in compliance with applicable law.

 

 

The following summarizes USAC’s Investment Policy, effective December 5, 2016:

 

 

Approved Investment Instruments. We may invest in the following approved investment classes in accordance with the restrictions and subject to the benchmark ranges set forth in our Investment Policy and described below:

 

 

United States Government Securities — bonds or other evidences of indebtedness that are fully guaranteed or insured by the U.S. Government or any agency or instrumentality thereof.

 

 

Securities of the District of Columbia, State, Insular or Territorial Possession Government of the United States —bonds or other evidences of indebtedness, without limitation, of the District of Columbia, State, or any political subdivision of such, or Insular or Territorial Possession of the United States.

 

 

Canadian Government, Provincial and Municipal Obligations —bonds or other evidences of indebtedness issued by the Dominion of Canada, or by any Province thereof, or by any municipality, agency or instrumentality thereof.

 

 

Fixed Income Obligations — bonds or other evidence of indebtedness issued, assumed or guaranteed by a corporation.

     
 

Equity Interests - preferred stocks, common stocks, mutual funds, exchange traded funds, master limited partnerships and other securities representing equity ownership interests in a corporation, provided that we may not own more than 2% of any corporation, mutual fund, exchange traded fund, master limited partnership or other equity security.

 

 

Real Estate - real estate for use in the operations of the Company, which we refer to as "Home Office Real Estate," or for the production of income. We may also invest in shares of beneficial interest in or obligations issued by a Real Estate Investment Trust qualified under pertinent sections of the United States Internal Revenue Code.

 

 

Mortgage Loans - first-lien mortgage loans on commercial or residential property with loan to value of no greater than 80% at the time of purchase.

 

 

Mortgage - Backed Securities - mortgage-backed securities issued by the Federal Home Loan Mortgage Corporation (Freddie Mac), Federal National Mortgage Association (Fannie Mae), or a private entity. Any such securities must be rated investment grade by Moody's, S&P or Fitch.

 

 

Asset-Backed Securities - asset-backed securities designated as investment grade by Moody's, S&P or Fitch or the equivalent rating by another nationally recognized statistical rating organization.

 

 

Certificates of Deposit, Time Deposits, Overnight Bank Deposits, Banker's Acceptances and Repurchase Agreements - certificates of deposit, time deposits, overnight bank deposits, banker's acceptances issued by federally insured banks with maturities of 270 days or less from the date of acquisition, repurchase agreements with acceptable collateral and maturities of 270 days or less from date of acquisition.

 

 

Commercial Paper - commercial paper of US corporations that are rated at least "A-2" by S&P or "P-2" by Moody's or the equivalent rating of another nationally recognized statistical rating organization if S&P or Moody's cease publishing ratings of these securities, and have maturities of 270 days or less from the date of acquisition.

 

 

 

Money Market Accounts or Funds - money market accounts or funds that meet the following criteria:

 

 

A substantial portion of the assets of the money market account or fund must be comprised of certain qualifying investments instruments;

 

 

Issuers of the fund or account's investments must have a combined capital and surplus in excess of $500,000,000;

 

 

Maturities of 270 days or less from the date of acquisition;

 

 

Have net assets of not less than $500,000,000; and

 

 

Have the highest rating available of S&P, Moody's, or Fitch, or carry an equivalent rating by a nationally recognized statistical rating organization if the named rating agencies cease publishing ratings of investments.

 

 

Diversification. Our portfolio is constructed to diversify risk with respect to asset class, geographical location, quality, maturity, business sector and individual issuer and issue concentrations.

 

 

Benchmarks. We benchmark the allocation of our investments based on the criteria set forth in the table below to help assure our investments are appropriately diversified. The benchmarks may change to respond to market conditions. Based on market conditions and other considerations, investments in the approved investment instruments described are maintained in the following ranges:

 

% of Portfolio Cost Value

     

Asset Class

Minimum

Maximum

Cash/Short Term

0%

100%

Investment Grade Fixed Income

20%

100%

High Yield Fixed Income

0%

15%

Equity

0%

50%

Mortgage and Mortgage related

0%

50%

Real Estate (including REITs)

0%

20%

 

The Executive Committee of our Board of Directors may modify the above benchmark ranges at any time deemed appropriate based on current conditions. Any such modifications will be subject to approval by the full Board of Directors at its next regularly scheduled meeting. USALSC's investment policy, as a regulated insurance entity, contains additional investment limitations as required by law.

 

 

Reporting. The President, CEO, or their respective designees provide monthly reports to the Executive Committee and quarterly reports to the Board of Directors reflecting the securities purchased and sold during the quarter, securities held at the end of the quarter, current benchmarks and an overall evaluation of the portfolio's investment performance.

 

Marketing and Distribution - USALSC uses independent consultants, the USAC stockholder base, and stockholder-based referrals to market its products and build distribution channels among funeral homes, banks, accountants, independent insurance agencies, agents, insurance brokerage firms, Kansas companies and other distribution channels as opportunities arise. USALSC works with other insurance companies who have captive or non-captive agents to broaden their product offerings.

 

 

Employees - As of December 31, 2017, USAC and its subsidiaries have thirteen full-time employees and six part-time employees.

 

Reports to Security Holders - We provide the information in this annual report to our stockholders, along with our audited year-end financial statements. In addition, all periodic reports and other information we file with the U.S. Securities and Exchange Commission (the “SEC”) are available for inspection and copying at the public reference facilities of the Securities and Exchange Commission located at 100 F Street N E, Washington, D C 20549.

 

Copies of such material may be obtained by mail from the Public Reference Section of the Securities and Exchange Commission, 100 F Street, N E, Washington, D.C. 20549, at prescribed rates.

 

Information on the operation of the Public Reference Room may be obtained by calling the SEC at l-800-SEC-0330. In addition, the Commission maintains a World Wide Website on the Internet at: http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. You may also find this information on our website (http://www.usalliancecorporation.com).

 

Implications of Emerging Growth Company Status - As a company with less than $1.07 billion in revenue in our last fiscal year, we are defined as an “emerging growth company” under the Jumpstart Our Business Startups (“JOBS”) Act. We will retain “emerging growth company” status until the earliest of:

 

• The last day of the fiscal year during which our annual revenues are equal to or exceed $1.07 billion;

 

• The last day of the fiscal year following the fifth anniversary of our first sale of USAC Common Stock pursuant to a registration statement filed under the Securities Act of 1933, as amended (the “Securities Act”);

 

• The date on which we have issued more than $1 billion in nonconvertible debt in a previous three-year period; or

 

• The date on which we qualify as a large accelerated filer under Rule 12b-2 adopted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (i.e., an issuer with a public float of $700 million that has been filing reports with the SEC under the Exchange Act for at least 12 months).

 

       As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to SEC reporting companies. For so long as we remain an emerging growth company we will not be required to:

 

• Comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);

 

• Submit certain executive compensation matters to stockholder non-binding advisory votes;

 

• Submit for stockholder approval golden parachute payments not previously approved;

 

• Disclose certain executive compensation related items, as we will be subject to the scaled disclosure requirements of a smaller reporting company with respect to executive compensation disclosure.

 

Pursuant to Section 107(b) of the JOBS Act, we have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of The JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result, our financial statements may not be comparable to companies that comply with public company effective dates. Section 107 of the JOBS Act provides that our decision to opt into the extended transition period for complying with new or revised accounting standards is irrevocable.

 

Because the worldwide market value of USAC Common Stock held by non-affiliates, or public float, is below $75 million, we are also a “smaller reporting company” as defined under the Exchange Act. Some of the foregoing reduced disclosure and other requirements are also available to us because we are a smaller reporting company and may continue to be available to us even after we are no longer an emerging growth company under the JOBS Act but remain a smaller reporting company under the Exchange Act. As a smaller reporting company we are not required to:

 

• Have an auditor report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; and

 

• Present more than two years of audited financial statements in our registration statements and annual reports on Form 10-K and present any selected financial data in such registration statements and annual reports.

 

 

ITEM 1A.

RISK FACTORS.

 

Risks Associated with an Investment in USAC Stock

 

We face many significant risks in the operating of our business and may face significant unforeseen risks as well. Our significant material risks are set forth below:

 

SHARE OWNERSHIP RISK - An investment in our voting common stock ("USAC Common Stock") is speculative. Shares of USAC Common Stock constitute a high-risk investment in a developing business that has incurred losses to date and expects to continue to incur losses for several years. No assurance or guaranty can be given that any of the potential benefits envisioned by our business plan will prove to be available to our stockholders, nor can any assurance or guaranty be given as to the actual amount of financial return, if any, which may result from ownership of USAC Common Stock. The entire value of the shares of USAC Common Stock may be lost.

 

OPERATING RISK - We have a limited operating history. We face all of the risks inherent in establishing a new business, including limited capital, uncertain product markets, lack of significant revenues, as well as competition from better capitalized and more seasoned companies. We have no control over general economic conditions, competitors’ products or their pricing, customer demand and costs of marketing or advertising. There can be no assurance that our life insurance operations will be successful or result in any significant revenues. The likelihood of any success must be considered in light of our limited history of operations and operating losses incurred to date. These risks and the lack of seasoned operating history make it difficult to predict our future revenues or results of operations. As a result, our financial results may fluctuate and fall below expectations.

 

LIQUIDITY RISK - Although USAC is a public company, there is no established public market for USAC Common Stock, and there is no assurance that one will develop or be sustained, or that the USAC Common Stock will ever become publicly traded. It may be difficult to sell your shares of USAC Common Stock. Our securities are not listed for trading on any national securities exchange nor are bid or asked quotations reported in any over-the-counter quotation service and we do not intend to seek any such listing in the foreseeable future.

 

PROFITABILITY - As is common among young life insurance companies, we have and will incur significant losses for a number of years. The costs of administration and the substantial nonrecurring costs of writing new life insurance (which are deferred and amortized in accordance with our deferred acquisition policy) include first year commissions payable to insurance agents, medical and investigation expenses, and other expenses incidental to the issuance of new policies, which, together with the initial reserves required to be established for each policy, may exceed the first year premium. As of December 31, 2017 we had a consolidated accumulated deficit of $8.5 million. These losses were attributable primarily to our organization, creation of products, distribution channels and capital raising efforts and to our entry into the life insurance business.

 

DIVIDENDS - We have not paid a cash dividend on USAC Common Stock and we do not anticipate paying a cash dividend in the foreseeable future. We intend to retain available funds to be used in the expansion of operations. USAC is a holding company without independent operations and on a standalone basis has limited revenues. Because we do not expect to pay any cash dividends for the foreseeable future, the success of any investment in USAC Common Stock will depend upon any future appreciation in its value. We cannot guarantee that USAC Common Stock will appreciate in value or achieve or maintain a value equal to the price at which shares were purchased. Further, a market may never develop to sell shares of USAC Common Stock.

 

CAPITAL RISK - We are required by law to have adequate capital and surplus calculated in accordance with statutory accounting principles prescribed by state insurance regulatory authorities to meet regulatory requirements in the states in which we operate. The amount of capital and surplus ultimately required will be based on certain “risk-based capital” standards established by statute and regulation and administered by other regulators. The “risk-based capital” system establishes a framework for evaluating the adequacy of the minimum amount of capital and surplus, calculated in accordance with statutory accounting principles, necessary for an insurance company to support its overall business operations. If we fail to maintain required capital levels, our ability to conduct business would be compromised absent a prompt infusion of capital.

 

DILUTION RISK - We intend to conduct additional offerings of our securities to raise additional capital to fund our growth. In February, 2010, we filed a Prospectus with the Kansas Securities Commission to register shares of USAC Common Stock and warrants to purchase USAC Common Stock. In February 2015, we filed a Prospectus with the Kansas Securities Commission to register the USAC Common Stock to be issued upon the exercise of the warrants, and in January, 2016, filed a Supplement to the Prospectus to register an additional 1,500,000 shares of USAC Common Stock. We also commenced a private placementof USAC Common Stock in North Dakota in 2017. Any additional offerings of USAC equity or convertible securities that we may conduct in the future will reduce the ownership interests and be accretive to existing stockholder book value.

 

KEY EXECUTIVE RISK - Our ability to operate is dependent primarily upon the efforts of our Chairman and Chief Executive Officer, Jack H. Brier, and Chief Operating Officer of USALSC, Jeff Brown. The loss of the services of these officers could have a material adverse effect on our ability to execute our business plan. We do not have employment agreements with either Mr. Brier or Mr. Brown.

 

SEC REGISTRATION - USAC is a public company. As a public company, we incur significant legal, accounting and other expenses under the Exchange Act and the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC. These rules impose various requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and appropriate corporate governance practices. Our management and other personnel are required to devote a substantial amount of time to these compliance requirements. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly.

 

EMERGING GROWTH COMPANY - We are an “emerging growth company,” as defined in the JOBS Act. We will remain an “emerging growth company” for up to five years. However, if our non-convertible debt issued within a three-year period exceeds $1 billion, or revenues exceeds $1.07 billion, or the market value of our ordinary shares that are held by non-affiliates exceeds $700 million on the last day of the second fiscal quarter of any given fiscal year, we would cease to be an emerging growth company as of the following fiscal year. As an emerging growth company, we are not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act, we have reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and we are exempt from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

 

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. We have elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, will not adopt the new or revised standard until the time private companies are required to adopt the new or revised standard. This may make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

 

 

POTENTIAL ACQUISITION RISK - In addition to our organic growth plans, an additional component of our business plan is to pursue strategic acquisitions of insurance related companies that meet our acquisition criteria. However, suitable acquisition candidates may not be available on terms and conditions that are economic to us. In pursuing acquisitions, we compete with other companies, who may have greater financial and other resources than us. Further, if we succeed in consummating acquisitions, our business, financial condition and results of operations may be negatively affected.

 

 

An acquired business may not achieve anticipated revenues, earnings or cash flows;

 

We may assume liabilities that were not disclosed or exceed estimates;

 

We may be unable to integrate acquired businesses successfully and realize anticipated economic, operational and other benefits in a timely manner;

 

Acquisitions could disrupt our on-going business, distract our management and divert our financial and human resources;

 

We may experience difficulties operating in markets in which we have no or only limited direct experience; and

 

There is the potential for loss of customers and key employees of any acquired company.

 

MARKETING STRATEGY RISK - We market our products through several different distribution channels which require licensed insurance agents. These distribution channels include funeral directors, bankers, brokerages, accountants, and independent agents. While some of these producers have little or no experience in selling life insurance products, others have extensive experience mitigating some of the risk of agents with little or no experience. We believe the premium volume written will depend primarily on our products, product pricing and ability to choose and timely and adequately train and motivate agents to sell our products.

 

Independent agents are not required to sell the Company’s products and are free to sell products from other licensed companies. We are committed to working to educate and incentivize independent agents to sell our products. Failure to build a network of independent agents selling our products could impact our ability to generate future premiums and profits.

 

THE COMPANY’S INVESTMENTS ARE SUBJECT TO MARKET AND CREDIT RISKS - Our invested assets, primarily including fixed maturity securities, are subject to customary risks of credit defaults and changes in fair value. Factors that may affect the overall default rate on and fair value of the Company’s invested assets include interest rate levels and changes, availability and cost of liquidity, financial market performance, and general economic conditions.

 

RATINGS RISK - Insurance ratings reflect the rating agencies’ opinion of an insurance company’s history, financial strength, operating performance and ability to meet its obligations to policyholders. There can be no assurance that USALSC or DCLIC will be rated by a rating agency or that any rating, if and when received, will be favorable.

 

We do not anticipate that USALSC or DCLIC will be rated by rating agencies for several years. This may have a negative impact on its ability to complete with rated insurance companies.

 

Risks Associated with Companies in the Life Insurance Industry, including USAC and its subsidiaries

 

GENERAL REGULATORY RISK -All insurance operations are subject to government regulation in each of the states in which they conduct business. Such regulatory authority is vested in state agencies having broad administrative power dealing with all aspects of the insurance business, including premium rates, policy forms, and capital adequacy, and is concerned with the protection of policyholders rather than stockholders. Among other things, the regulations require prior approval of acquisitions of insurance companies, certain solvency standards, licensing of insurers and their agents, investment restrictions, deposits of securities for the benefit of policyholders, approval of policy forms and premium rates, periodic examinations, and reserves for unearned premiums, losses and other matters.

 

Compliance with insurance regulation is costly and time consuming, requiring the filing of detailed annual reports, and the business and accounts are subject to examination by the applicable state insurance regulator, which may include inquiries and follow-up, including investigations.

 

 

In addition, increased scrutiny has been placed upon the insurance regulatory framework during the past several years, and certain state legislatures have considered or enacted laws that alter, and in many cases increase, state authority to regulate insurance companies and insurance holding company systems. The National Association of Insurance Commissioners (“NAIC”) and state insurance regulators reexamine existing laws and regulations on an ongoing basis, and focus on insurance company investments and solvency issues, risk-based capital guidelines, interpretations of existing laws, the development of new laws, the implementation of non-statutory guidelines and the circumstances under which dividends may be paid. Future NAIC initiatives, and other regulatory changes, could have a material adverse impact on the insurance industry. There is no assurance the regulatory requirements of the departments of insurance of their respective state of domicile or a similar department in any other state in which they may wish to transact business can be satisfied.

 

Individual state guaranty associations assess insurance companies to pay benefits to policyholders of insolvent or failed insurance companies. The amount of any future assessments to be made from known insolvencies cannot be predicted.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”) reshapes financial regulations in the United States by creating new regulators, regulating new markets and firms, and providing new enforcement powers to regulators. Virtually all major areas of the Reform Act continue to be subject to regulatory interpretation and implementation rules requiring rulemaking that may take several years to complete. The ultimate outcome of the regulatory rulemaking proceedings cannot be predicted with certainty. The regulations promulgated could have a material impact on consolidated financial results or financial condition.

 

COMPETITION RISK - The operating results of life insurance companies are subject to significant fluctuations due to competition, economic conditions, interest rates, investment performance, maintenance of insurance ratings from rating agencies such as A.M. Best, the ability to choose and timely and adequately train agents, and other factors. Each company encounters significant competition from other insurance companies, as well as competition from other available investment alternatives.

 

Large life insurance companies who have greater financial resources, longer business histories, and who may have more products present significant competition to smaller insurance companies, such as USALSC and DCLIC. These larger companies also generally have large distribution opportunities.

 

The ability to compete is dependent upon, among other things, the ability to develop competitive and profitable products, market the insurance products, and achieve efficient costs of placing policies.

 

ASSUMPTION RISK - In the life insurance business, assumptions as to expected mortality, lapse rates and other factors in developing the pricing and other terms of life insurance products are made. These assumptions are based on industry experience and are reviewed and revised regularly by an outside actuary to reflect actual experience on a current basis. However, variation of actual experience from that assumed in developing such terms may affect a product’s profitability or sales volume and in turn adversely impact our revenues.

 

LIABILITY RISK - Underestimating future policy benefits results in the incurrence of additional expenses at the time a company becomes aware of the inadequacy. As a result, the ability to achieve profits would suffer as a result of such underestimates.

 

INTEREST RATE RISK - Interest rate fluctuations could impair an insurance company’s ability to pay policyholder benefits with operating and investment cash flows, cash on hand and other cash sources. Annuity products expose the risk that changes in interest rates will reduce any spread, or the difference between the amounts that the insurance company is required to pay under the contracts and the amounts the insurance company is able to earn on its investments intended to support its obligations under the contracts. Spread is a key component of revenues.

 

To the extent that interest rates credited are less than those generally available in the marketplace, policyholder lapses, policy loans and surrenders, and withdrawals of life insurance policies and annuity contracts may increase as contract holders seek to purchase products with perceived higher returns. This process may result in cash outflows requiring that an insurance subsidiary sell investments as a time when the prices of those investments are adversely affected by the increase in market interest rates, which may result in realized investment losses.

 

Increases in market interest rates may also negatively affect profitability in periods of increasing interest rates. The ability to replace invested assets with higher yielding assets needed to fund the higher crediting rates that may be necessary to keep interest sensitive products competitive.

 

LAPSE AND WITHDRAWAL RISK - Policy lapses in excess of those actuarially anticipated would have a negative impact on financial performance. Profitability could be reduced if lapse and surrender rates exceed the assumptions upon which the insurance policies were priced. Policy sales costs are deferred and recognized over the life of a policy. Excess policy lapses, however, cause the immediate expensing or amortizing of deferred policy sales costs. In addition, some of our policies allow holders to withdraw all or some of the policy’s value, and withdrawals beyond those anticipated could impact our business.

 

 

OPERATIONAL RISK - In the insurance industry, successful incorporation and functionality of the internal audit function, the evolution of financial and administrative internal controls to safeguard human, facility and financial assets electronically, including anti-fraud initiatives and compliance with anti-money laundering requirements, as well as an effective disaster recovery program and effective business continuity programs, are necessary.

 

TAX LAW RISK - Congress from time to time considers possible legislation that would eliminate the deferral of taxation on the accretion of value within certain annuities and life insurance products. This and similar legislation, including a simplified “flat tax” income tax structure with an exemption from taxation for investment income, could adversely affect the sale of life insurance compared with other financial products if such legislation were to be enacted. There can be no assurance as to whether such legislation will be enacted or, if enacted, whether such legislation would contain provisions with possible adverse effects on any annuity and life insurance products that we and our operating subsidiaries develop.

 

Under the Internal Revenue Code, income taxes payable by policyholders on investment earnings is deferred during the accumulation period of certain life insurance and annuity products. This favorable tax treatment may give certain insurance products a competitive advantage over other non-insurance products. To the extent that the Internal Revenue Code may be revised to reduce the tax-deferred status of life insurance and annuity products, or to increase the tax-deferred status of competing products, insurance companies would be adversely affected with respect to their ability to sell products. Also, depending on grandfathering provisions, the surrenders of existing annuity contracts and life insurance policies might increase. In addition, life insurance products are often used to fund estate tax obligations. We cannot predict what future tax initiatives may be proposed with respect to the estate tax or other taxes which may adversely affect us.

 

REINSURANCE RISK -In order to manage the risk of financial exposure to adverse underwriting results, USALSC and DCLIC reinsure a portion of their risk with other insurance companies. However, USALSC and DCLIC remain liable with respect to ceded insurance should any reinsurer fail to meet the obligations assumed by the reinsurer. The Company evaluates the financial condition of its reinsurers to minimize its exposure to losses from reinsurer insolvencies. Management believes that any liabilities arising from this contingency would not be material to the Company’s financial position.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS.

 

Not applicable.

 

ITEM 2.

PROPERTIES.

 

USAC and its subsidiaries share offices located at 4123 SW Gage Center Drive, Suite 240, Topeka, Kansas 66604. Effective January 1, 2015, the lease rate was $2,250 per month for three years with a one-year option under the same rate, terms, and conditions Total rent expense was $27,000 and $27,000 for the years ended December 31, 2017 and 2016. DCLIC also maintains an office at 107 W. Main Avenue, Suite 325, Bismarck, North Dakota, 58501. The lease for the Bismarck office expires on September 30, 2018 with monthly rent of $948. The Company paid $4,684 in rent for this location in 2017.

 

ITEM 3.

LEGAL PROCEEDINGS

 

Neither the Company, its subsidiaries nor any of its or their respective principals are presently engaged in any material pending litigation which might have an adverse impact on our net assets.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

PART II

 

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

 

(a)

Market Information

 

There is no established trading market for USAC Common Stock. Our securities are not listed for trading or quoted on any national securities exchange nor are bid or asked quotations reported in any over-the-counter quotation system.

 

As of December 31, 2017 was had issued and outstanding 7,310,939 shares of USAC Common Stock. No other equity securities of the Company have been issued.

 

 

(b)

Holders of Record

 

As of February 1, 2018 there are approximately 3,380 holders of record of USAC Common Stock.

 

 

(c)

Dividends

 

We have not paid dividends on the USAC Common Stock and do not anticipate paying dividends in the foreseeable future. We intend to retain any future earnings for reinvestment into our business.

 

 

(d)

Securities Authorized for Issuance Under Equity Compensation Plans

 

We have not established any equity compensation plans or granted any equity awards under such plans. As a result, there are no securities authorized for issuance under such plans.

 

 

(e)

Recent Sales of Unregistered Securities

 

During the year ended December 31, 2017, the Company issued 100,538 shares of USAC Common Stock, for aggregate consideration of $703,765, 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 USAC 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 USAC Common Stock was exempt from registration under Section 3(a)11 of the Securities Act for securities offered and sold on a wholly intrastate basis. The shares of USAC Common Stock were sold only to bona fide residents of the state of Kansas.

 

ITEM 6.

SELECTED FINANCIAL DATA.

 

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

 

 

ITEM 7.

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-K. 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 four wholly-owned subsidiaries: USALSC, a life insurance corporation; DCLIC, 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.

 

On August 1, 2017, the Company merged with NPCC, with the Company being the ultimate surviving entity. As a result of this merger, the Company acquired DCLIC, which 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 annual report.

 

Valuation of Investments

 

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

 

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

 

 

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

 

Deferred Acquisition Costs

 

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

 

Value of Business Acquired

 

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

 

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

 

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

 

Goodwill

 

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

 

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

 

 

Reinsurance

 

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

 

Future Policy Benefits

 

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

 

Income Taxes

 

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

 

Recognition of Revenues

 

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

 

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

 

Merger

 

On May 23, 2017 the Company entered into a definitive merger agreement with NPCC. The Merger closed on July 31, 2017. NPCC shareholders received .5841 shares of USAC Common Stock for each share of NPCC stock owned. USAC issued 1,644,458 shares of USAC Common Stock to holders of NPCC shares.

 

New Accounting Standards

 

A detailed discussion of new accounting standards is provided in the Notes to Consolidated Financial Statements beginning on p. F-7 of this annual report.

 

 

Discussion of Consolidated Results of Operations

 

Revenues. Insurance revenues are primarily generated from premium revenues and investment income. Insurance revenues for the years ended December 31, 2017 and 2016 are summarized in the table below.

 

   

Years Ended December 31,

 
   

2017

   

2016

 

Income:

               

Premium income

  $ 10,773,246     $ 5,948,978  

Net investment income

    817,989       449,951  

Net realized gain (loss) on sale of securities

    430,565       100,378  

Other income

    50,057       87,566  

Total income

  $ 12,071,857     $ 6,586,873  

 

Premium revenue: Premium revenue for the year ended December 31, 2017 was $10,773,246 compared to $5,948,978 in 2016, an increase of $4,824,268. 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 written premiums also increased 22% from the prior year.

 

Direct, assumed and ceded premiums for the years ended December 31, 2017 and 2016 are summarized in the following table.

 

   

Years Ended December 31,

 
   

2017

   

2016

 
                 

Direct

  $ 3,167,654     $ 2,592,243  

Assumed

    7,826,619       3,500,758  

Ceded

    (221,027 )     (144,023 )

Total

  $ 10,773,246     $ 5,948,978  

 

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

 

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

 

   

Years Ended December 31,

 
   

2017

   

2016

 

Fixed maturities

  $ 497,866     $ 304,213  

Equity securities

    373,141       189,274  

Cash and short term investments

    6,275       2,504  
      877,282       495,991  

Less investment expenses

    (59,293 )     (46,040 )
    $ 817,989     $ 449,951  

 

Net investment income for 2017 was $817,989, compared to $449,951 in 2016, an increase of $368,038. This increase in investment income is primarily a result of increased invested assets as a result of our premium income, merger with NPCC, and coinsurance agreement with ALSC as well as an improvement in our book yield.

 

 

Net realized gains on investments: Net realized gains on investments for the years ended December 31, 2017 were $430,565, compared to $100,378 in 2016, an increase of $330,187. 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 reinsurance transaction with ALSC. Realized gains and losses related to the sale of securities for the years ended December 31, 2017 and 2016 are summarized as follows:

 

   

Years Ended December 31,

 
   

2017

   

2016

 

Gross gains

  $ 499,568     $ 122,192  

Gross losses

    (69,003 )     (21,814 )

Net security gains

  $ 430,565     $ 100,378  

 

Other income: Other income for the year ended December 31, 2017 was $50,057 compared to $87,566 in 2016, a decrease of $37,509. This decrease is due to the acquisition of DCLIC, who was previously a third party administration client.

 

Expenses. Expenses for the year ended December 31, 2017 and 2016 are summarized in the table below.

 

   

Years Ended December 31,

 
   

2017

   

2016

 

Expenses:

               

Death claims

  $ 823,545     $ 475,815  

Policyholder benefits

    3,485,564       3,136,999  

Increase in policyholder reserves

    5,654,476       1,686,841  

Commissions, net of deferrals

    521,155       457,671  

Amortization of deferred acquisition costs

    321,451       153,671  

Amortization of value of business acquired

    8,460       -  

Salaries & benefits

    990,076       752,534  

Other operating expenses

    1,316,162       1,209,115  

Total expense

  $ 13,120,889     $ 7,872,646  

 

Death claims: Death benefits were $823,545 in the year ended December 31, 2017 compared to $475,815 in 2016, an increase of $347,730. This increase is attributable to the growth of our in-force block of life insurance policies. The majority of death claims paid from inception have been on pre-need policies. We expect these claims to grow as we continue to increase the size of our in-force pre-need business.

 

Policyholder benefits: Policyholder benefits were $3,485,564 in the year ended December 31, 2017 compared to $3,136,999 in 2016, an increase of $348,565. 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 $5,654,476 in the year ended December 31, 2017, compared to $1,686,841 in 2016, an increase of $3,967,635. The increase in policyholder reserves is driven by an assumed reserve increase of $3,824,902 incurred with inception of reinsurance transaction with ALSC.

 

Commissions, net of deferrals: The Company pays commissions to ULIC on a block of assumed policies. Commissions were $521,155 in the year ended December 31, 2017, compared to $457,671 in 2016, an increase of $63,484. This increase is due to an increase in assumed premiums.

 

 

Amortization of deferred acquisition costs: The amortization of deferred acquisition costs was $321,451 in the year ended December 31, 2017, compared to $153,671 in 2016, an increase of $167,780. This increase is due to amortization of the deferred cost of reinsurance on our ALSC reinsurance transaction.

 

Salaries and benefits: Salaries and benefits were $990,076 for the year ended December 31, 2017, compared to $752,534 in 2016, an increase of $237,542. The increase is primarily attributable to additional staff as a result of our merger with NPCC.

 

Other expenses: Other operating expenses were $1,316,162 in the year ended December 31, 2017, compared to $1,209,115 in 2016, an increase of $107,047. The increase is driven by marketing costs and professional fees associated with our growing business.

 

Net Loss: Our net loss was $1,049,032 in the year ended December 31, 2017 compared to net loss of $1,285,773 in the same period of 2016, a decrease of $236,741. This decrease is attributable to growth in our invested assets and our reinsurance agreement with ALSC offset by our increased operating expenses. Our net loss per share decreased to $0.18 from $0.24 in 2016, basic and diluted.

 

Discussion of Consolidated Balance Sheet

 

Assets. Assets have increased to $38,988,337 as of December 31, 2017, an increase of $19,191,989 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 December 31, 2017, we had available for sale fixed maturity assets of $22,945,700, an increase of $12,625,626 from the December 31, 2016 balance of $10,320,074. This growth is driven by our Merger with NPCC and our reinsurance agreement with ALSC.

 

Available for sale equity securities: As of December 31, 2017, we had available for sale equity assets of $10,663,515, an increase of $5,520,011 from the December 31, 2016 balance of $5,143,504. This growth is driven by our Merger with NPCC and our reinsurance agreement with ALSC.

 

Cash and cash equivalents: As of December 31, 2017, we had cash and cash equivalent assets of $651,809, a decrease of $2,493,936 from the December 31, 2016 balance of $3,145,745. This decrease was the result of deploying more cash into invested assets to provide additional investment earnings.

 

Investment income due and accrued: As of December 31, 2017, our investment income due and accrued was $214,998 compared to $100,713 as of December 31, 2016. This increase is attributable to the growth of our invested assets.

 

Policy loans: As of December 31, 2017, our policy loans were $33,975. All of our policy loans were the result of our coinsurance agreement with ALSC and we had no policy loans prior to this transaction.

 

Reinsurance related assets: As of December 31, 2017, our reinsurance related assets were $249,879 compared to $31,390 as of December 31, 2016. This increase is the result of the growth of our reinsured business.

 

Deferred acquisition costs, net: As of December 31, 2017, our deferred acquisition costs were $2,963,057 compared to $153,792 as of December 31, 2016. 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 December 31, 2017 our value of business acquired asset was $600,601. This asset was established in the third quarter of 2017 as a result of our acquisition of DCLIC.

 

Property, equipment and software, net: As of December 31, 2017 our property, equipment and software assets were $221,077, a decrease of $23,772 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.

 

Goodwill: As of December 31, 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.

 

Other assets: As of December 31, 2017, our other assets were $166,184, an increase of $114,262 from the December 31, 2016 balance of $51,922. This increase was driven by our purchase of pre-paid systems consulting hours.

 

Liabilities. Our total liabilities were $25,052,635 as of December 31, 2017, an increase of $17,241,629 from our December 31, 2016 liability of $7,811,006.

 

 

Policy liabilities: Our total policy liabilities as of December 31, 2017 were $24,945,377 compared to $7,740,329 as of December 31, 2016, an increase of $17,205,048. 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 December 31, 2017, our accounts payable and accrued expenses were $98,382 compared to $66,472 as of December 31, 2016, an increase of $31,910. The increase is driven by growth of the Company over the course of 2017.

 

Shareholders’ Equity. Our shareholders’ equity was $13,935,702 as of December 31, 2017, an increase of $2,554,719 from our December 31, 2016 shareholders’ equity of $11,380,983. The growth in shareholders’ equity was driven by our Merger with NPCC, 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 year.

 

Investments

 

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

 

   

December 31, 2017

   

December 31, 2016

 
   

Fair

   

Percent

   

Fair

   

Percent

 
   

Value

   

of Total

   

Value

   

of Total

 

Fixed maturities:

                               

US Treasury securities

  $ 250,750       0.7 %   $ 299,162       1.6 %

Corporate bonds

    12,156,225       35.6 %     3,845,896       20.7 %

Municipal bonds

    6,352,444       18.5 %     2,849,829       15.3 %

Redeemable preferred stocks

    100,520       0.3 %     -       0.0 %

Mortgage backed and asset backed securities

    4,085,761       11.9 %     3,325,187       17.9 %

Total fixed maturities

    22,945,700       67.0 %     10,320,074       55.5 %

Equities:

                               

Equities

    10,663,515       31.1 %     4,942,248       26.5 %

Other equity investments

    -       0.0 %     201,256       1.1 %

Total equities

    10,663,515       31.1 %     5,143,504       27.6 %

Cash and cash equivalents

    651,809       1.9 %     3,145,745       16.9 %

Total

  $ 34,261,024       100.0 %   $ 18,609,323       100.0 %

 

The total value of our investments and cash and cash equivalents increased to $34,261,024 as of December 31, 2017 from $18,609,323 at December 31, 2016, an increase of $15,651,701. Increases in investments and cash and cash equivalents are primarily attributable to our Merger with NPCC, our coinsurance agreement with ALSC, and premiums and annuity deposits received by USALSC and DCLIC.

 

 

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

 

   

December 31, 2017

   

December 31, 2016

 
   

Fair

   

Percent

   

Fair

   

Percent

 
   

Value

   

of Total

   

Value

   

of Total

 
   

(unaudited)

   

(unaudited)

 

AAA and U.S. Government

  $ 1,185,345       5.2 %   $ 1,080,028       10.5 %

AA

    8,225,461       35.8 %     4,887,863       47.3 %

A

    4,961,276       21.6 %     1,961,311       19.0 %

BBB

    8,108,313       35.3 %     2,194,473       21.3 %

BB

    265,305       1.2 %     196,399       1.9 %

Not Rated - Private Placement

    200,000       0.9 %     -       0.0 %

Total

  $ 22,945,700       100.0 %   $ 10,320,074       100.0 %

 

Reflecting the high quality of securities maintained by us, 97.9% of all fixed maturity securities were investment grade as of December 31, 2017. As of December 31, 2016, 98.1% of all fixed maturity securities were investment grade. The increase in non-investment grade securities was driven by the purchase of a non-rated privately placed security.

 

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

   

As of December 31, 2016

 
   

Amortized Cost

   

Fair Value

   

Amortized Cost

   

Fair Value

 

Amounts maturing in:

                               

One year or less

  $ -     $ -     $ 49,915     $ 49,931  

After one year through five years

    612,088       617,562       1,819,437       1,809,470  

After five years through ten years

    1,910,307       1,945,454       1,646,576       1,643,823  

More than 10 years

    15,740,739       16,196,403       3,468,619       3,491,663  

Redeemable preferred stocks

    99,560       100,520       -       -  

Mortgage backed and asset backed securities

    4,077,011       4,085,761       3,333,617       3,325,187  
    $ 22,439,705     $ 22,945,700     $ 10,318,164     $ 10,320,074  

 

Market Risk of Financial Instruments

 

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

 

Interest Rate Risk

 

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

 

 

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

 

Credit Risk

 

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

 

Liquidity and Capital Resources

 

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

 

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

 

Net cash provided by operating activities was $593,160 for the year ended December 31, 2017. The primary sources of cash from operating activities were premiums 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 $5,007,794. The primary source of cash was from sales of available for sale securities, our Merger with NPCC and our reinsurance agreement with ALSC. Offsetting this source of cash was our purchases of investments in available-for-sale securities. Cash provided by financing activities was $1,920,698. The primary sources of cash were receipts on deposit-type contracts and issuance of USAC Common Stock.

 

At December 31, 2017, we had cash and cash equivalents totaling $651,809. We believe that our existing cash and cash equivalents along with our cash flow from operations will be sufficient to fund the anticipated operating expenses and capital expenditures through at least 2018. We have based this estimate upon assumptions that may prove to be wrong and we could use our capital resources sooner than we currently expect. The growth of USALSC and DCLIC, our insurance subsidiaries, is uncertain and will require additional capital if they continues to grow.

 

Impact of Inflation

 

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

 

Off-Balance Sheet Arrangements

 

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

 

 

ITEM 7A.

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 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The consolidated financial statements are included as part of this reporting beginning on page F-1.

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

         There are not and have not been any disagreements between USAC and its auditor, Kerber, Eck and Braeckel LLP on any matter of accounting principles, practices or financial statement disclosure.

 

ITEM 9A.

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 year ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s control over financial reporting.

 

ITEM 9B.

OTHER INFORMATION

 

None.

PART III

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The information required by this item is set forth under the captions “Proposal One-Election of Directors,” “Corporate Governance,” “Executive Officers” and “Beneficial Ownership Reporting Compliance” in our definitive proxy statement to be filed in connection with our 2018 annual stockholders’ meeting (“2018 Proxy Statement”) and is incorporated herein by reference.

 

ITEM 11.

EXECUTIVE COMPENSATION

 

The information required by this item is set forth under the captions “Director and Management Compensation” in our 2018 Proxy Statement and is incorporated herein by reference.

 

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information required by this item is set forth under the captions “Security Ownership” in our 2018 Proxy Statement and is incorporated herein by reference.

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

The information required by this item is set forth under the captions “Certain Relationships and Related Parties” in our 2018 Proxy Statement and is incorporated herein by reference.

 

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The information required by this item is set forth under the caption “Principal Accountant Fees and Services” in our 2018 Proxy Statement and is incorporated herein by reference

 

 

PART IV

 

 

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

 

(1)

Consolidated financial statements:

 

The list of financial statements filed with this Annual Report on Form 10-K is provided on page F-1.

 

Financial Statement Schedules

 

We have omitted schedules required by applicable SEC accounting regulations because they are either not required under the related instructions, are inapplicable, or we present the required information in the financial statements or notes thereto.

 

Exhibit Index

 

2.1 Plan and Agreement of Merger amount 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 herein by reference as Exhibit 2.1.
   
2.2

Amendment dated May 21, 2017 to Plan and Agreement of Merger 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 incoporated 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 Corporation (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.

 

 

10.1 Commercial Lease Agreement dated October 11, 2011 between US Alliance Corporatoin and Lindemuth, Inc., DBA Gage Center, filed as Exhibit 10.1 to the Company's amended Registration Statement on Form 10 filed June 29, 2016 (File No. 000-55627), is incorporated herein by reference as Exhibit 10.1.
   
10.2 Automatic Yearly Term Reinsurance Agreement between US Alliance Life and Security Company and General Re Life Insurance Corporation, filed as Exhibit 10.2 to the amended Company's Registration Statement on Form 10 filed June 29, 2016 (File No. 000-55627), is incorporated herein by reference as Exhibit 10.2.
   
10.3 Group Long Term and Short Term Disability Reinsurance Agreement between US Alliance Life and Security Company and Reliance Standard Life Insurance Company, DBA Custom Disability Solutions, filed as Exhibit 10.3 to the Company's amended Registration Statement on Form 10 filed June 29, 2016 (File No. 000-55627), is incorporated herein by reference as Exhibit 10.3.
   
10.4 Automatic Reinsurance Agreement between US Alliance Life and Security Company and Optimum Re Insurance Company (schedules omitted), filed as Exhibit 10.4 to the Company's amended Registration Statement on Form 10 filed June 29, 2016 (File No. 000-55627), is incorporated herein by reference as Exhibit 10.4.
   
10.5 Bulk Reinurance Agreement between US Alliance Life and Security Company and Optimum Re Insurance Company, filed as Exhibit 10.5 to the Company's amended Registration Statement on Form 10 filed June 29, 2016 (File No. 000-55627), is incorporated herein by reference as Exhibit 10.5.
   
10.6 Group Medical Reinsurance Agreement between US Alliance Life and Security Company and Unified Life Insurance Company, filed as Exhibit 10.6 to the Company's  amended Registration Statement on Form 10 filed June 29, 2016 (File No. 000-55627), is incorporated herein by reference as Exhibit 10.6.
   
10.7.1 Investment Management Agreement between US Alliance Investment Corporation and General Re - New England Asset Management, Inc., filed as Exhibit 10.7.1 to the Company's amended Registration Statement on Form 10 filed June 29, 2016 (File No. 000-55627), is incorporated herein by reference as Exhibit 10.7.1.
   
10.7.2 Subadvisory Investment Management Agreement between US Alliance Investment Corporation and General Re - New England Asset Management, Inc., filed as Exhibit 10.17.2 to the Company's amended Registration Statement on Form 10 filed June 29, 2016 (File No. 000-55627), is incorporated herein by reference as Exhibit 10.7.2.
   
10.8 Third Party Insurance Services Agreement between US Alliance Life and Security Company and Dakota Capital Life Insurance Company, as amended, filed as Exhibit 10.8 to the Company's amended Registration Statement on Form 10 filed June 29, 2016 (File No. 000-55627), is incorporated herein by reference as Exhibit 10.8.
   
10.9 Critical Illness Reinsurance Treaty, Effective 9/1/16 between US Alliance Life and Security Company and General Re Life Corporation, filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K filed February 17, 2017 (File No. 000-55627), is incorporated herein by reference as Exhibit 10.9.
   
10.10 Critical Illness Reinsurance Treaty, Effective 9/1/16 between US Alliance Life and Security Company and Unified Life Insurance Company, filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K filed February 17, 2017 (File No. 000-55627), is incorporated herein by reference as Exhibit 10.10.
   
10.11* Coinsurance Agreement between US Alliance Life and Security Company and American Life & Security Company of Nebraska
   
21.1*   List of Subsidiaries
     
24.1   Power of Attorney (contained in the signature page herein)
     

31.1*

 

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

 

 

 

31.2*

 

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

 

 

 

32.1*

 

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

     

32.2*

 

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

     
101.INS*†   XLRB Instance
     
101.SCH*†   XLRB Taxonomy Extension Schema
     
101.CAL*†   XLRB Taxonomy Extension Calculation
     
101.DEF*†   XLRB Taxonomy Extension Definition
     
101.LAB*†   XLRB Taxonomy Extension Labels
     
101.PRE*†   XLRB Taxonomy Extension Presentation

 

* Filed herewith.

 

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

 

 

SIGNATURES

 

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report 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

       

(principal executive officer)

 

 

POWER OF ATTORNEY

 

Know all people by these presents, that each person whose signature appears below constitutes and appoints Jack H. Brier his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any amendments to this annual report on Form 10-K, and to file the same, with all exhibits thereto, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he or she might or could do in person, hereby confirming all that said attorneys-in-fact and agents or either of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated on January 29, 2016.

 

Signature

  

Title

 

 

/S/    Jack H. Brier

  

President and Chairman

Jack H. Brier

 

 

 

 

 

/S/    Jeff Brown

  

Chief Operating Officer and Vice-President of US Alliance Life and Security Company, a wholly-owned subsidiary of US Alliance Corporation

Jeff Brown

 

 

 

 

/S/    Rochelle Chronister

  

Director

Rochelle Chronister

 

 

 

 

/S/    Kurt Scott

  

Treasurer and Director

Kurt Scott

 

 

 

 

/S/    James Concannon

  

Director.

James Concannon

 

 

 

 

/S/    William Graves

  

Director.

William Graves

 

 

 

 

 

 

 

 

US Alliance Corporation

 

Consolidated Financial Statements

December 31, 2017 and 2016

(With Independent Auditor’s Report Thereon)

 

 

Contents

 

Report of Independent Registered Public Accounting Firm 

 

F1

Consolidated Financial Statements

 
   

Consolidated Balance Sheets

F2

Consolidated Statements of Comprehensive Loss 

F3

Consolidated Statements of Changes in Shareholders’ Equity

F4

Consolidated Statements of Cash Flows

F5

   

Notes to Consolidated Financial Statements

F7 – F24

   

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and

Shareholders of US Alliance Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of US Alliance Corporation and Subsidiaries (the Company) as of December 31, 2017 and 2016, and the related consolidated statements of comprehensive loss, changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2017, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Kerber, Eck & Braeckel, LLP

 

We have served as the Company’s auditor since 2016.

 

Springfield, Illinois

February 21, 2018

 

 

 

US Alliance Corporation

Consolidated Balance Sheets 

 

   

December 31, 2017

   

December 31, 2016

 
                 

Assets

               

Investments:

               

Available for sale fixed maturity securities (amortized cost: $22,439,705 and $10,318,164 as of December 31, 2017 and December 31, 2016, respectively)

  $ 22,945,700     $ 10,320,074  

Available for sale equity securities (cost: $10,764,072 and $4,905,953 as of December 31, 2017 and December 31, 2016, respectively)

    10,663,515       5,143,504  

Total investments

    33,609,215       15,463,578  
                 

Cash and cash equivalents

    651,809       3,145,745  

Investment income due and accrued

    214,998       100,713  

Policy loans

    33,975       -  

Reinsurance related assets

    249,879       31,390  

Deferred acquisition costs, net

    2,963,057       153,792  

Value of business acquired, net

    600,601       -  

Property, equipment and software, net

    221,077       244,849  

Goodwill

    277,542       -  

Other assets

    166,184       51,922  

Total assets

  $ 38,988,337     $ 19,191,989  
                 
                 

Liabilities and Shareholders' Equity

               

Liabilities:

               

Policy liabilities

               

Deposit-type contracts

  $ 13,448,891     $ 3,398,170  

Policyholder benefit reserves

    10,632,009       4,220,215  

Advance premiums

    864,477       121,944  

Total policy liabilities

    24,945,377       7,740,329  
                 

Accounts payable and accrued expenses

    98,382       66,472  

Other liabilities

    8,876       4,205  

Total liabilities

    25,052,635       7,811,006  
                 

Shareholders' Equity:

               

Common stock, $0.10 par value. Authorized 20,000,000 shares; issued and outstanding 7,310,939 and 5,565,943 shares as of December 31, 2017 and December 31, 2016, respectively

    731,095       556,595  

Additional paid-in capital

    21,280,437       18,017,163  

Accumulated deficit

    (8,481,268 )     (7,432,236 )

Accumulated other comprehensive income

    405,438       239,461  

Total shareholders' equity

    13,935,702       11,380,983  
                 

Total liabilities and shareholders' equity

  $ 38,988,337     $ 19,191,989  

 

See Notes to Consolidated Financial Statements.

 

 

 

US Alliance Corporation

Consolidated Statements of Comprehensive Loss

 

   

Years Ended December 31,

 
   

2017

   

2016

 

Income:

               

Premium income

  $ 10,773,246     $ 5,948,978  

Net investment income

    817,989       449,951  

Net realized gain on sale of securities

    430,565       100,378  

Other income

    50,057       87,566  

Total income

    12,071,857       6,586,873  
                 

Expenses:

               

Death claims

    823,545       475,815  

Policyholder benefits

    3,485,564       3,136,999  

Increase in policyholder reserves

    5,654,476       1,686,841  

Commissions, net of deferrals

    521,155       457,671  

Amortization of deferred acquisition costs

    321,451       153,671  

Amortization of value of business acquired

    8,460       -  

Salaries & benefits

    990,076       752,534  

Other operating expenses

    1,316,162       1,209,115  

Total expense

    13,120,889       7,872,646  
                 

Net loss

  $ (1,049,032 )   $ (1,285,773 )
                 

Net loss per common share, basic and diluted

  $ (0.18 )   $ (0.24 )
                 

Unrealized net holding gains arising during the period

    596,542       440,316  

Reclassification adjustment for gains included in net loss

    (430,565 )     (100,378 )

Other comprehensive income

    165,977       339,938  
                 

Comprehensive loss

  $ (883,055 )   $ (945,835 )

 

See Notes to Consolidated Financial Statements.

 

 

 

US Alliance Corporation

Consolidated Statements of Changes in Shareholders' Equity

Years Ended December 31, 2017 and 2016

 

                                           

Common

   

Accumulated

                 
   

Number of

            Additional            

Common

   

Stock

   

Other

                 
   

Shares of

   

Common

   

Paid-in

   

Outstanding

   

Stock

   

Subscription

   

Comprehensive

   

Accumulated

         
   

Common Stock

   

Stock

   

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

    16,695       1,670       115,195       -       -       -       -       -       116,865  

Costs associated with common stock issued

    -       -       (512,858 )     -       -       -       -       -       (512,858 )

Common stock subscribed

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

Other comprehensive income

    -       -       -       -       -       -       339,938       -       339,938  

Net loss

    -       -       -       -       -       -       -       (1,285,773 )     (1,285,773 )

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

    100,538       10,054       693,711       -       -       -       -       -       703,765  

Costs associated with common stock issued

    -       -       (363,371 )     -       -       -       -       -       (363,371 )

Common Stock issued, Northern Plains Capital Corporation merger

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

Other comprehensive income

    -       -       -       -       -       -       165,977       -       165,977  

Net loss

    -       -       -       -       -       -       -       (1,049,032 )     (1,049,032 )

Balance, December 31, 2017

    7,310,939     $ 731,095     $ 21,280,437     $ -     $ -     $ -     $ 405,438     $ (8,481,268 )   $ 13,935,702  

 

See Notes to Consolidated Financial Statements.

 

 

 

US Alliance Corporation

Consolidated Statements of Cash Flows

 

   

Years Ended December 31,

 
   

2017

   

2016

 

Cash Flows from Operating Activities:

               

Net loss

  $ (1,049,032 )   $ (1,285,773 )

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

               

Depreciation and amortization

    34,893       38,733  

Net realized gains on the sale of securities

    (430,565 )     (100,378 )

Amortization of investment securities, net

    42,941       22,014  

Deferred acquisition costs capitalized

    (269,266 )     (221,410 )

Deferred acquisition costs amortized

    321,451       153,671  

Value of business acquired amortized

    8,460       -  

Interest credited on deposit type contracts

    247,692       80,452  

Interest on policy loans

    636       -  

(Increase) decrease in operating assets:

               

Investment income due and accrued

    (80,937 )     (22,173 )

Reinsurance related assets

    57,529       (9,946 )

Policy loans

    (599 )     -  

Other assets

    (105,029 )     78,744  

Increase (decrease) in operating liabilities:

               

Policyowner benefit reserves

    1,700,163       1,643,251  

Advance premiums

    119,688       52,371  

Other liabilities

    4,671       (787 )

Accounts payable and accrued expenses

    (9,536 )     (19,416 )

Net cash provided by operating activities

    593,160       409,353  
                 

Cash Flows from Investing Activities:

               

Available-for-sale securities

               

Purchase of fixed income investments

    (14,992,862 )     (3,028,015 )

Purchase of equity investments

    (8,241,105 )     (1,955,888 )

Proceeds from fixed income sales and repayments

    5,823,079       1,003,308  

Proceeds from equity sales and repayments

    4,439,443       670,706  

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 used in investing activities

    (5,007,794 )     (3,309,889 )
                 

Cash Flows from Financing Activities:

               

Receipts on deposit-type contracts

    2,187,387       1,989,833  

Withdrawals on deposit-type contracts

    (607,083 )     (246,103 )

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

    340,394       1,836,025  

Net cash provided by financing activities

    1,920,698       3,579,755  
                 

Net increase (decrease) in cash and cash equivalents

    (2,493,936 )     679,219  
                 

Cash and Cash Equivalents:

               

Beginning

    3,145,745       2,466,526  

Ending

  $ 651,809     $ 3,145,745  

 

See Notes to Consolidated Financial Statements.

   

 

 

US Alliance Corporation

Supplemental Cash Flow Information

 

   

Years Ended December 31,

 
   

2017

   

2016

 

Supplemental Disclosure of Non-Cash Information

               

Common stock issued on the acquisition of Northern Plains

  $ 3,097,380     $ -  

Fixed maturity securities acquired with the Northern Plains acquisition

    3,006,552       -  
Equity securities aquired with the Northern Plains acquisition     1,616,897       -  
Deposit-type contract liabilities acquired with the Northern Plains acquisition     2,029,138       -  
Deposit-type contract liabilities assumed from American Life & Security Corp     6,193,587       -  

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

    2,861,450       -  

 

 

US Alliance Corporation

 

Notes to Consolidated Financial Statements


 

 

 

Note 1.

Description of Business and Significant Accounting Policies

 

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

 

Our four wholly-owned operating subsidiaries are: US Alliance Life and Security Company ("USALSC") formed June 9, 2011; US Alliance Marketing Corporation ("USAMC") formed April 23, 2012, to serve as a marketing resource; US Alliance Investment Corporation ("USAIC") formed April 23, 2012 to serve as investment manager for USAC and USALSC; and Dakota Capital Life Insurance Company (“DCLIC”), acquired on August 1, 2017 when USAC merged with Northern Plains Capital Corporation (“NPCC”).

 

We capitalized our subsidiaries with proceeds from intrastate public offerings registered by qualification with the office of Kansas Securities Commissioner.

 

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

 

Our single pay life products (which include our Legacy Juvenile and Thoughtful Pre-Need products) accounted for 73% of 2017 direct premium revenue. Our individual life and Critical Illness products (which include our Sound and Solid Term Life and Pioneer Whole Life products) accounted for 18% of 2017 direct premium revenue. Our group products accounted for 9% of 2017 direct written premiums.

 

USALSC seeks opportunities to develop and market additional products.

 

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

 

Basis of presentation: The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States of America.

 

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

 

Cash and cash equivalents: For purposes of the statement of cash flows, the Company considers demand deposits and highly liquid investments with original maturities of three months or less when purchased to be cash and cash equivalents. The Company maintains its cash balances in one financial institution located in Topeka, Kansas. The FDIC insures aggregate balances, including interest-bearing and noninterest-bearing accounts, of $250,000 per depositor per insured institution. The Company’s financial institution is a member of a network that participates in the Insured Cash Sweep (ICS) program. By participating in ICS, the Company’s deposits in excess of the insured limit are apportioned and placed in demand deposit accounts at other financial institutions in amounts under the insured limit. As a result, the Company can access insurance coverage from multiple financial institutions while working directly with one. The Company had no amounts uninsured as of December 31, 2017. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.

 

 

US Alliance Corporation

 

Notes to Consolidated Financial Statements


 

 

Note 1.

Description of Business and Significant Accounting Policies (Continued)

 

Property, equipment and software: Property, equipment and software are stated at cost less accumulated depreciation. Expenditures for additions and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are charged to income currently. Upon disposition, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in income.

 

Depreciation is computed by the straight-line method over the estimated useful lives of the assets. Computer equipment is depreciated over no longer than a 5-year period. Furniture and equipment are depreciated over no longer than a 10-year period. Software is depreciated over no longer than a 10-year period. Major categories of depreciable assets and the respective book values as of December 31, 2017 and 2016 are represented below.

 

   

December 31,

   

December 31,

 
   

2017

   

2016

 

Computer

  $ 20,755     $ 20,755  

Furniture and equipment

    92,077       80,956  

Software

    257,500       257,500  

Accumulated depreciation

    (149,255 )     (114,362 )

Balance at end of period

  $ 221,077     $ 244,849  

 

Pre-paid expenses: The Company recognizes pre-paid expenses as the expenses are incurred. Pre-paid expenses consist of systems consulting hours and insurance. Systems consulting hours are charged as they are incurred on projects. Insurance expenses are charged straight line over the life of the contract.

 

Investments: Investments in available-for-sale securities are carried in the consolidated financial statements at fair value with the net unrealized holding gains (losses) included in accumulated other comprehensive income. Bond premiums and discounts are amortized using the scientific-yield method over the term of the bonds.

 

Realized gains and losses on securities sold during the year are determined using the specific identification method and included in investment income. Investment income is recognized as earned.

 

Management has 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. As of December 31, 2017 and 2016, the Company had no investment securities that were evaluated to be other than temporarily impaired.

 

Value of business acquiredValue 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.  VOBA is amortized on a straight-line method over 30 years.

 

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.

 

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.

 

 

US Alliance Corporation

 

Notes to Consolidated Financial Statements


 

 

Note 1.

Description of Business and Significant Accounting Policies (Continued)

 

Reinsurance: In the normal course of business, the Company seeks to limit aggregate and single exposure to losses on risks 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. Reinsurance premiums are generally reflected in income in a manner consistent with the recognition of premiums on the reinsured contracts. Reinsurance does not extinguish the Company’s primary liability under the policies written. Therefore, the Company regularly evaluates the financial condition of its reinsurers including their activities with respect to claim settlement practices and commutations, and establishes allowances for uncollectible reinsurance recoverable as appropriate. There were no allowances as of December 31, 2017 and 2016.

 

Benefit reserves: The Company establishes 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 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.

 

Policy claims: Policy claims are based on reported claims plus estimated incurred but not reported claims developed from trends of historical data applied to current exposure. The Company’s current estimate of incurred but not reported claims is $85,832 and is included as a part of policyholder benefit reserves.

 

Deposit-type contracts: Deposit-type contracts consist of amounts on deposit associated with deferred annuity contracts and premium deposit funds. The deferred annuity contracts credit interest based upon a fixed interest rate set by the Company. The Company has the ability to change this rate annually subject to minimums established by law or administrative regulation.

 

Liabilities for deferred annuity deposit-type contracts are included without reduction for potential surrender charges. This liability is equal to the accumulated account deposits, plus interest credited, and less policyholder withdrawals. The following table provides information about deferred annuity deposit-type contracts for the years ended December 31, 2017 and 2016.

 

   

Year ended

   

Year ended

 
   

December 31,

   

December 31,

 
   

2017

   

2016

 
                 

Balance at beginning of year

  $ 3,398,170     $ 1,573,988  

Acquisition of Dakota Capital Life

    1,853,728       -  

Assumed from American Life & Security Corp

    5,841,703       -  

Deposits received

    2,187,387       1,989,833  

Interest credited

    243,310       80,452  

Withdrawals

    (592,398 )     (246,103 )

Balance at end of year

  $ 12,931,900     $ 3,398,170  

 

The premium deposit funds credit interest based upon a fixed interest rate set by the Company. The Company has the ability to change this rate subject to minimums established by law or administrative regulation.

 

 

US Alliance Corporation

 

Notes to Consolidated Financial Statements


 

 

Note 1.

Description of Business and Significant Accounting Policies (Continued)

 

Liabilities for premium deposit fund deposit-type contracts are included without reduction for potential surrender charges. This liability is equal to the accumulated account deposits, plus interest credited, and less withdrawals. The following table provides information about premium deposit fund deposit-type contracts for the years ended December 31, 2017 and 2016.

 

   

Year ended

   

Year ended

 
   

December 31,

   

December 31,

 
   

2017

   

2016

 
                 

Balance at beginning of year

  $ -     $ -  

Acquisition of Dakota Capital Life

    175,410       -  

Assumed from American Life & Security Corp

    351,884       -  

Deposits received

    -       -  

Interest credited

    4,382       -  

Withdrawals

    (14,685 )     -  

Balance at end of year

  $ 516,991     $ -  

 

Revenue recognition and related expenses: Revenues on traditional life insurance products consist of direct premiums reported as earned when due. Premium income includes reinsurance assumed and is reduced by premiums ceded.

 

Amounts received as payment for annuity contracts without life contingencies are recognized as deposits to policyholder account balances and included in future insurance policy benefits. Revenues from these contracts are comprised of fees earned for contract-holder services, 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.

 

Liabilities for future policy benefits are provided and acquisition costs are amortized by associating benefits and expenses with earned premiums to recognize related profits over the life of the contracts.

 

Deferred acquisition costs: The Company capitalizes and amortizes over the life of the premiums produced incremental direct costs that result directly from and are essential to the contract acquisition transaction and would not have been incurred by the Company had the contract acquisition not occurred. An entity may defer incremental direct costs of contract acquisition that are incurred in transactions with independent third parties or employees as well as the portion of employee compensation and other costs directly related to underwriting, policy issuance and processing, medical inspection, and contract selling for successfully negotiated contracts. Additionally, an entity may capitalize as a deferred acquisition cost only those advertising costs meeting the capitalization criteria for direct-response advertising. Acquisition costs are amortized over the premium paying period using the net level premium method. Traditional life insurance products are treated as long duration contracts, which generally remain in force for the lifetime of the insured.

 

The following table provides information about deferred acquisition costs for the years ended December 31, 2017 and 2016, respectively.

 

   

Year ended

   

Year ended

 
   

December 31,

   

December 31,

 
   

2017

   

2016

 
                 

Balance at beginning of year

  $ 153,792     $ 86,053  

Deferred cost of reinsurance, American Life & Security Corp block acquisition

    2,861,450       -  

Capitalization of commissions, sales and issue expenses

    269,266       221,410  

Amortization net of interest

    (321,451 )     (153,671 )

Balance at end of year

  $ 2,963,057     $ 153,792  

 

 

US Alliance Corporation

 

Notes to Consolidated Financial Statements


 

 

Note 1.

Description of Business and Significant Accounting Policies (Continued)

 

Comprehensive loss: Comprehensive loss is comprised of net loss and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses from marketable securities classified as available for sale, net of applicable taxes.

 

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 December 31, 2017 and 2016 the company had 7,310,939 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 years ended December 31, 2017 and 2016 were 5,871,949 and 5,421,972 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 years ended December 31, 2017 and 2016.

 

Income taxes: The Company is subject to U.S. federal and state taxes. The provision for income taxes is based on income as reported in the consolidated financial statements. The income tax provision is calculated using the asset and liability method. Deferred income taxes are recorded based on the differences between the financial statement and tax basis of assets and liabilities at the enacted rates expected to apply to taxable income in the years in which the differences are expected to reverse. A valuation allowance is established for the amount of any deferred tax asset that exceeds the amount of the estimated future taxable income needed to utilize the future tax benefits.

 

All of the Company’s tax returns are subject to U.S. federal, state and local income tax examinations by tax authorities. The Company had no known uncertain tax benefits included in its provision for income taxes as of December 31, 2017 and 2016. The Company’s policy is to recognize interest and penalties (if applicable) as an element of the provision for income taxes in the consolidated statements of income.

 

The tax years which remain subject to examination by taxing authorities are the years ended December 31, 2014 through 2017.

 

Risk and uncertainties: Certain risks and uncertainties are inherent in the Company’s day-to-day operations and in the process of preparing its consolidated financial statements. The more significant of those risks and uncertainties, as well as the Company’s method for mitigating the risks, are presented below and throughout the notes to the consolidated financial statements.

 

 

- Use of Estimates: 

 

 

The preparation of consolidated financial statements in conformity with US GAAP, generally accepted accounting principles in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
     
 

- Regulatory Factors:

The insurance laws of Kansas give the KID broad regulatory authority, including powers to (i) grant and revoke licenses to transact business; (ii) regulate and supervise trade practices and market conduct, (iii) establish guaranty associations; (iv) license agents; (v) approve policy forms; (vi) approve premium rates for some lines of business; (vii) establish reserve requirements; (viii) prescribe the form and content of required financial statements and reports; (ix) determine the reasonableness and adequacy of statutory capital and surplus; and (x) regulate the type and amount of permitted investments.

     
    The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Reform Act") reshapes financial regulations in the United States by creating new regulators, regulating new markets and firms, and providing new enforcement powers to regulators. Virtually all major areas of the Reform Act continue to be subject to regulatory interpretation and implementation rules requiring rulemaking that may take several years to complete. The ultimate outcome of the regulatory rulemaking proceedings cannot be predicted with certainty. The regulations promulgated could have a material impact on consolidated financial results or financial condition.

 

 

US Alliance Corporation

 

Notes to Consolidated Financial Statements


 

 

Note 1.

Description of Business and Significant Accounting Policies (Continued)

 

 

- Reinsurance:

In order to manage the risk of financial exposure to adverse underwriting results, USALSC reinsures a portion of its risk with other insurance companies. USALSC retains $35,000 on its Pioneer Whole Life Series and $25,000 on its Solid Solutions Term Life Series* and Sound Solutions Term Life Series®. USALSC also reinsures 100% of the risk on its accidental death benefit rider. USALSC retains 25% of the risk for each covered life on its group life product to a maximum of $100,000 on any individual person. USALSC retains 25% of the risk for each covered life on its group accidental death and dismemberment product to a maximum of $25,000 on any individual person. USALSC also has catastrophic reinsurance coverage to protect against three or more group life deaths resulting from a single event. USALSC also reinsures 100% of the risk on its group disability products. USALSC reinsurers 66% of the risk on its critical illness product. Optimum Re Insurance Company (a subsidiary of Optimum Group), General Reinsurance Corporation (a subsidiary of Berkshire Hathaway), Reliance Standard Life Insurance Company (a subsidiary of Tokio Marine Holdings), and Unified Life Insurance Company provide reinsurance for USALSC and DCLIC. The Company evaluates the financial condition of its reinsurers to minimize its exposure to losses from reinsurer insolvencies. Management believes that any liabilities arising from this contingency would not be material to the Company’s financial position.

     
  - Interest Rate Risk:

Interest rate fluctuations could impair an insurance company's ability to pay policyholder benefits with operating and investment cash flows, cash on hand and other cash sources. Annuity products expose the risk that changes in interest rates will reduce any spread, or the difference between the amounts that the insurance company is required to pay under the contracts and the amounts the insurance subsidiary is able to earn on its investments intended to support its obligations under the contracts. Spread is a key component of revenues.

     
    To the extent that interest rates credited are less than those generally available in the marketplace, policyholder lapses, policy loans and surrenders, and withdrawals of life insurance policies and annuity contracts may increase as contract holders seek to purchase products with perceived higher returns. This process may result in cash outflows requiring that an insurance subsidiary sell investments at a time when the prices of those investments are adversely affected by the increase in market interest rates, which may result in realized investment losses.
     
   

Increases in market interest rates may also negatively affect profitability in periods of increasing interest rates. The ability to replace invested assets with higher yielding assets needed to fund the higher crediting rates that may be necessary to keep interest sensitive products competitive.

 

 

US Alliance Corporation

 

Notes to Consolidated Financial Statements


 

 

Note 1.

Description of Business and Significant Accounting Policies (Continued)

 

    If interest rates were to increase by 1%, the market value of our fixed income securities would decrease by 11.1% as of December 31, 2017. USALSC and DCLIC therefore may have to accept a lower spread and thus lower profitability or face a decline in sales and greater loss of existing contracts.
     
   

Conversely, in a period of prolonged low interest rates it is difficult to invest assets and earn the rate of return necessary to support insurance products. Some central banks currently have negative interest rates which contributes to the current low interest rate environment.

     
   

Policy lapses in excess of those actuarially anticipated would have a negative impact on our financial performance.

     
    Profitability could be reduced if lapse and surrender rates exceed the assumptions upon which the insurance policies were priced. Policy sales costs are deferred and recognized over the life of a policy. Excess policy lapses, however, cause the immediate expensing or amortizing of deferred policy sales costs.    

 

- Investment Risk:

Our invested assets are subject to customary risks of defaults and changes in market values. Factors that may affect the overall default rate on, and market value of, the invested assets include interest rate levels, financial market performance, and general economic conditions.

   
- Assumptions Risk: In the life insurance business, assumptions as to expected mortality, lapse rates and other factors in developing the pricing and other terms of life insurance products are made. These assumptions are based on industry experience and are reviewed and revised regularly by an outside actuary to reflect actual experience on a current basis. However, variation of actual experience from that assumed in developing such terms may affect a product's profitability or sales volume and in turn adversely impact our revenues.

 

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

 

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.

 

 

US Alliance Corporation

 

Notes to Consolidated Financial Statements


 

 

Note 1.

Description of Business and Significant Accounting Policies (Continued)

 

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).

 

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.

 

 

US Alliance Corporation

 

Notes to Consolidated Financial Statements


 

 

Note 1.

Description of Business and Significant Accounting Policies (Continued)

 

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. 

 

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. mortgage loans) and requires an entity to estimate the credit losses expected over the life of an exposure or pool of exposures. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The expected credit losses, and subsequent adjustments to such losses, will be recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected.

 

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

 

 

US Alliance Corporation

 

Notes to Consolidated Financial Statements


 

 

Note 1.

Description of Business and Significant Accounting Policies (Continued)

 

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 NPCC pursuant to a Plan and Agreement of Merger dated May 23, 2017 under which Alliance Merger Sub, Inc. (“Acquisition”), a wholly owned subsidiary of the Company, merged with and into NPCC (“Merger”) with Acquisition being the surviving company. Pursuant to the agreement, the Company exchanged .5841 shares of the Company’s common stock for each share of Northern Plains common stock, or 1,644,458 shares. Subsequent to the merger, Acquisition was merged into the Company.

 

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 below summarizes the fair value of the consideration transferred and the preliminary fair value of Northern Plains’ assets acquired and liabilities assumed:

 

Fair value of US Alliance Corporation common stock issued as consideration

  $ 3,099,165  
         

Amounts of indentifiable assets acquired and liablities assumed

       

Investment securities

  $ 4,623,449  

Cash

    1,079,627  

Value of business acquired

    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 amounts of indentifiable assets acquired and liabilties assumed   $ 3,099,165  

 

 

US Alliance Corporation

 

Notes to Consolidated Financial Statements


 

 

Note 2.

Acquisitions (Continued)

 

The fair value of the US Alliance Corporation common stock issued as consideration and the assets acquired and liabilities assumed from our acquisition of Northern Plains was based on a valuation and our estimates and assumptions are subject to change within the measurement period. 

 

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

 

   

Years Ended December 31,

 
   

2017

   

2016

 

 

 

(unaudited)

 
Income:                

Premium income

  $ 11,193,686     $ 6,533,765  

Net investment income

    877,319       539,801  

Net realized gain (loss) on sale of securities

    478,303       44,282  

Other income

    20,995       14,391  

Total income

    12,570,303       7,132,239  
                 

Net Loss

  $ (1,201,899 )   $ (1,887,423 )
                 

Net Loss per share

  $ (0.33 )   $ (0.52 )

 

The unaudited pro forma total income and net loss above was adjusted to eliminate the Third Party Administration fees paid by Northern Plains to the Company of $31,250 and $75,781 for the years ended December 31, 2017 and 2016, respectively; and eliminate the loss of $201,577 for acquisition related expenses that Northern Plains recorded for the year ended December 31, 2017 and also includes adjustments for the amortization of VOBA and elimination of DAC amortization for the years ending December 31, 2017 and 2016 of $78,379 and $12,306, respectively.

 

 

US Alliance Corporation

 

Notes to Consolidated Financial Statements


 

 

 

Note 3.

Investments

 

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

 

   

December 31, 2017

 
   

Cost or

   

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

         
   

Cost

   

Gains

   

Losses