ITEM 1.      FINANCIAL STATEMENTS

 

US Alliance Corporation

Consolidated Balance Sheets

 

 

See Notes to Consolidated Financial Statements (unaudited).

 

 

US Alliance Corporation

Consolidated Statements of Comprehensive Loss

 

 

See Notes to Consolidated Financial Statements (unaudited).

 

 

US Alliance Corporation

Consolidated Statements of Changes in Shareholders' Equity

Quarters Ended March 31, 2018 and 2017 (Unaudited)

 

 

See Notes to Consolidated Financial Statements (unaudited).

 

 

US Alliance Corporation

Consolidated Statements of Cash Flows

 

 

See Notes to Consolidated Financial Statements (unaudited).

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

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

 

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

 

Overview

 

US Alliance Corporation (“USAC”) was formed as a Kansas corporation on April 24, 2009 for the purpose of raising capital to form a new Kansas-based life insurance company. We presently conduct our business through our four wholly-owned subsidiaries: 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 Northern Plains Capital Corporation (“Northern Plains”) with the Company being the ultimate surviving entity. As a result of this merger, the Company acquired Dakota Capital Life Insurance Company 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 the Notes to the Consolidated Financial Statements included with this quarterly report.

 

Valuation of Investments

 

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

 

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

 

 

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

 

Deferred Acquisition Costs

 

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

 

Value of Business Acquired

 

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

 

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

 

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

 

Goodwill

 

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

 

 

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

 

Reinsurance

 

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

 

Future Policy Benefits

 

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

 

Income Taxes

 

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

 

Recognition of Revenues

 

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

 

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

 

Merger

 

On May 23, 2017 the Company entered into a definitive merger agreement with Northern Plains Capital Corporation. The merger transaction closed on July 31, 2017. Northern Plains shareholders received .5841 shares of US Alliance Corporation stock for each share of Northern Plains stock owned. USAC issued 1,644,458 shares of common stock to holders of Northern Plains shares.

 

New Accounting Standards

 

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

 

 

Discussion of Consolidated Results of Operations

 

Revenues. Insurance revenues are primarily generated from premium revenues and investment income. Insurance revenues for the three months ended March 31, 2018 and 2017 are summarized in the table below.

 

		Three Months Ended March 31,
		2018				2017
Income:		(unaudited)
Premium income		$	2,432,096			$	1,749,928
Net investment income			311,560				126,020
Net realized gain (loss) on sale of securities			-				192,405
Other income			9,246				20,202
Total income		$	2,752,902			$	2,088,555

 

 

Premium revenue: Premium revenue for the first three months of 2018 was $2,432,096 compared to $1,749,928 in the first three months of 2017, an increase of $682,168. USALSC entered into a coinsurance transaction with American Life and Security Corporation (“ALSC”) effective September 30, 2017. This agreement, along with our acquisition of DCLIC and our organic growth, is the primary driver of the increase in premiums.

 

Direct, assumed and ceded premiums for the three months ended March 31, 2018 and 2017 are summarized in the following table.

 

		Three Months Ended March 31,
		2018				2017
		(unaudited)
Direct		$	1,139,367			$	743,094
Assumed			1,405,606				1,041,306
Ceded			(112,877	)			(34,472	)
Total		$	2,432,096			$	1,749,928

 

 

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

 

Investment income, net of expenses: The components of net investment income for the three months ended March 31, 2018 and 2017 are as follows:

 

		Three Months Ended March 31,
		2018				2017
		(unaudited)
Fixed maturities		$	229,643			$	92,736
Equity securities			100,705				42,446
Cash and short term investments			747				783
			331,095				135,965
Less investment expenses			(19,535	)			(9,945	)
		$	311,560			$	126,020

 

 

Net investment income for the first three months of 2018 was $311,560, compared to $126,020 in 2017, an increase of $185,540. This increase in investment income is primarily a result of increased invested assets as a result of our premium income, the Merger with Northern Plains, and our 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 three months ended March 31, 2018 were $0, compared to gains of $192,405 in 2017, a decrease of $192,405. The decrease in realized gains is attributable to the repositioning of an equity portfolio from a market return focus to an income focus in 2017. There was not a similar activity in 2018. Realized gains and losses related to the sale of securities for the three months ended March 31, 2018 and 2017 are summarized as follows:

 

		Three Months Ended March 31,
		(unaudited)
		2018				2017
Gross gains		$	-			$	192,405
Gross losses			-				-
Net security gains		$	-			$	192,405

 

Other income: Other income for the three months ended March 31, 2018 was $9,246 compared to $20,202 in 2017, a decrease of $10,956. This decrease is due to the acquisition of DCLIC who was previously a third party administration client.

 

Expenses. Expenses for the three months ended March 31, 2018 and 2017 are summarized in the table below.

 

		Three Months Ended March 31,
		2018				2017
Expenses:		(unaudited)
Death claims		$	235,374			$	291,150
Policyholder benefits			1,127,682				937,401
Increase in policyholder reserves			796,636				402,739
Commissions, net of deferrals			152,157				124,291
Amortization of deferred acquisition costs			90,355				37,764
Amortization of value of business acquired			5,076				-
Salaries & benefits			274,848				178,192
Other operating expenses			473,532				285,766
Total expense		$	3,155,660			$	2,257,303

 

 

Death and other benefits: Death benefits were $235,374 in the three months ended March 31, 2018 compared to $291,150 in 2017, a decrease of $55,776. This decrease is attributable to fewer pre-need claims paid during the quarter. 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 $1,127,682 in the three months ended March 31, 2018 compared to $937,401 in 2017, an increase of $190,281. The primary driver of this increase is the growth of our assumed business with ULIC and is more than offset by the increased premiums associated with this block of assumed policies.

 

Increase in policyholder reserves: Policyholder reserves increased $796,636 in the three months ended March 31, 2018, compared to $402,739 in 2017, an increase of $393,897. The increase in policyholder reserves is driven by the growth of our assumed and direct written business.

 

 

Commissions, net of deferrals: The Company pays commissions to the ceding company on a block of assumed policies. Commissions were $152,157 in the three months ended March 31, 2018, compared to $124,291 in 2017, an increase of $27,866. This increase is due to an increase in assumed premiums.

 

Amortization of deferred acquisition costs: The amortization of deferred acquisition costs was $90,355 in the three months ended March 31, 2018, compared to $37,764 in 2017, an increase of $52,591. The amortization increase is attributable to the growth of our DAC asset related to our reinsurance transaction with ALSC.

 

Amortization of value of business acquired: The amortization of value of business acquired was $5,076 in the three months ended March 31, 2018. Our initial VOBA balance was established August 1, 2017 with acquisition of DCLIC. VOBA is being amortized straight-line over 30 years.

 

Salaries and benefits: Salaries and benefits were $274,848 for the three months ended March 31, 2018, compared to $178,192 in 2017, an increase of $96,656. Staffing costs have increased due to additional employees acquired with the Northern Plains Merger.

 

Other expenses: Other operating expenses were $473,532 in the three months ended March 31, 2018, compared to $285,766 in 2017, an increase of $187,766. Operating costs have increased due to expenses associated with the DCLIC acquisition, including additional auditing and actuarial fees and due to increase selling and marketing expenses.

 

Net Loss: Our net loss was $402,758 in the three months ended March 31, 2018 compared to net loss of $168,748 in the same period of 2017, an increase of $234,010. This increase is primarily attributable to capital gains realized in 2017 and no similar gains in 2018. Our net loss per share increased to $0.05 from $0.03 in 2017, basic and diluted.

 

Discussion of Consolidated Balance Sheet

 

Assets. Assets have increased to $39,338,716 as of March 31, 2018, an increase of $350,379 from December 31, 2017. This is primarily the result of the growth of our business, offset by a decrease in the market value of our fixed income securities.

 

Available for sale fixed maturity securities: As of March 31, 2018, we had available for sale fixed maturity assets of $22,790,101, a decrease of $155,599 from the December 31, 2017 balance of $22,945,700. The decrease is the result of higher interest rates, which lowers the market value of these securities.

 

Available for sale equity securities: As of March 31, 2018, we had available for sale equity assets of $10,804,019, an increase of $140,504 from the December 31, 2017 balance of $10,663,515. This growth is driven by purchases of equity securities with premium income.

 

Cash and cash equivalents: As of March 31, 2018, we had cash and cash equivalent assets of $1,171,351, an increase of $519,542 from the December 31, 2017 balance of $651,809. This increase is primarily the result of cash received from premium income.

 

Investment income due and accrued: As of March 31, 2018, our investment income due and accrued was $237,932 compared to $214,998 as of December 31, 2017. This increase is attributable to normal investment activity and the growth of our invested assets.

 

Reinsurance related assets: As of March 31, 2018, our reinsurance related assets were $182,903, a decrease of $66,976 from the December 31, 2017 balance of $249,879. This decrease was driven by a reduction in the amounts receivable on our reinsurance business.

 

Policy loans: As of March 31, 2018, our policy loans were $32,645, a decrease of $1,330 from the December 31, 2017 balance of $33,975. The decrease is the result of normal loan activity. All of our policy loans were the result of our coinsurance agreement with ALSC and we had no policy loans prior to this transaction.

 

Deferred acquisition costs, net: As of March 31, 2018, our deferred acquisition costs were $2,901,406, a decrease of $61,651 from the December 31, 2017 balance of $2,963,057. The decrease is the result of amortization of costs deferred on our coinsurance agreement with ALSC.

 

 

Value of business acquired, net: As of March 31, 2018 our value of business acquired asset was $595,525, a decrease of $5,076 from the December 31, 2017 balance of $600,601. This asset was established in the third quarter of 2017 as a result of our acquisition of DCLIC. The decrease is the result of amortization of the asset.

 

Goodwill: As of March 31, 2018, our goodwill was $277,542 and was unchanged from the December 31, 2017 balance. Goodwill was established as a result of our merger with Northern Plains and we had no previous goodwill balances.

 

Property, equipment and software, net: As of March 31, 2018 our property, equipment and software assets were $212,272, a decrease of $8,805 from the December 31, 2017 balance of $221,077. This decrease is a result of normal amortization during the period. We did not purchase additional office furniture and equipment in the first quarter of 2018.

 

Other assets: As of March 31, 2018, our other assets were $133,020, a decrease of $33,164 from the December 31, 2017 balance of $166,184. This decrease was the result of a reduction in our pre-paid assets.

 

Liabilities. Our total liabilities were $26,590,907 as of March 31, 2018, an increase of $1,538,272 from our December 31, 2017 liability of $25,052,635. This increase is driven by an increase in our policyholder liabilities.

 

Policy liabilities: Our total policy liabilities as of March 31, 2018 were $26,477,440, an increase of $1,532,063 from the December 31, 2017 balance of $24,945,377. This increase is the result new policy sales and the growth of our in-force policies.

 

Accounts payable and accrued expenses: As of March 31, 2018, our accounts payable and accrued expenses were $97,758, a decrease of $624 from the December 31, 2017 balance of $98,382.  This decrease was the result of normal operating activity.

 

Shareholders’ Equity. Our shareholders’ equity was $12,747,809 as of March 31, 2018, a decrease of $1,187,893 from our December 31, 2017 shareholders’ equity of $13,935,702. The reduction in shareholders’ equity was driven by a reduction in other comprehensive income and our net loss during the period.

 

 

Investments and Cash and Cash Equivalents

 

Our overall investment philosophy is reflected in the allocation of our investments. We emphasize investment grade debt securities with smaller holdings in equity securities and other investments. The following table shows the carrying value of our investments by investment category and cash and cash equivalents, and the percentage of each to total invested assets as of March 31, 2018 and December 31, 2017.

 

		March 31, 2018								December 31, 2017
		Fair				Percent				Fair				Percent
		Value				of Total				Value				of Total
Fixed maturities:		(unaudited)
US Treasury securities		$	264,998				0.8	%		$	250,750				0.7	%
Corporate bonds			12,234,158				35.2	%			12,156,225				35.6	%
Municipal bonds			6,215,171				17.9	%			6,352,444				18.5	%
Redeemable preferred stocks			96,440				0.3	%			100,520				0.3	%
Mortgage backed and asset backed securities			3,979,334				11.4	%			4,085,761				11.9	%
Total fixed maturities			22,790,101				65.6	%			22,945,700				67.0	%
Equities:
Total equities			10,804,019				31.0	%			10,663,515				31.1	%
Cash and cash equivalents			1,171,351				3.4	%			651,809				1.9	%
Total		$	34,765,471				100.0	%		$	34,261,024				100.0	%

 

 

The total value of our investments and cash and cash equivalents increased to $34,765,471 as of March 31, 2018 from $34,621,024 at December 31, 2017, an increase of $504,447. Increases in investments are primarily attributable to 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 March 31, 2018 and December 31, 2017.

 

		March 31, 2018								December 31, 2017
		Fair				Percent				Fair				Percent
		Value				of Total				Value				of Total
		(unaudited)								(unaudited)
AAA and U.S. Government		$	1,184,376				5.2	%		$	1,185,345				5.2	%
AA			8,013,068				35.2	%			8,225,461				35.8	%
A			4,743,043				20.8	%			4,961,276				21.6	%
BBB			8,394,840				36.8	%			8,108,313				35.3	%
BB			254,774				1.1	%			265,305				1.2	%
Not Rated - Private Placement			200,000				0.9	%			200,000				0.9	%
Total		$	22,790,101				100.0	%		$	22,945,700				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 March 31, 2018, 98.0% of all fixed maturity securities were investment grade.

 

 

The amortized cost and fair value of debt securities as of March 31, 2018 and December 31, 2017, by contractual maturity, are shown below. Equity securities do not have stated maturity dates and therefore are not included in the following maturity summary. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

		As of March 31, 2018								As of December 31, 2017
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
Amounts maturing in:		(unaudited)
After one year through five years		$	911,496			$	901,495			$	612,088			$	617,562
After five years through ten years			1,756,916				1,738,030				1,910,307				1,945,454
More than 10 years			16,299,031				16,074,802				15,740,739				16,196,403
Redeemable preferred stocks			99,560				96,440				99,560				100,520
Mortgage backed and asset backed securities			4,046,691				3,979,334				4,077,011				4,085,761
		$	23,113,694			$	22,790,101			$	22,439,705			$	22,945,700

 

 

Market Risk of Financial Instruments

 

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

 

Interest Rate Risk

 

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

 

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

 

Credit Risk

 

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

 

Liquidity and Capital Resources

 

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

 

In addition to capital raising, 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 $662,185 for the three months ended March 31, 2018. The primary sources of cash from operating activities were premiums and deposits received from policyholders. The primary uses of cash for operating activities were for payments of commissions to agents and settlement of policy liabilities. Net cash used in investing activities was $987,176. The primary use of cash was the purchase of available for sale securities. Cash provided by financing activities was $844,533. The primary sources of cash were receipts on deposit-type contracts and issuance of common stock.

 

At March 31, 2018, we had cash and cash equivalents totaling $1,171,351. We believe that our existing cash and cash equivalents will be sufficient to fund the anticipated operating expenses and capital expenditures for the forseeable future. We have based this estimate upon assumptions that may prove to be wrong and we could use our capital resources sooner than we currently expect. The growth of our insurance subsidiary is uncertain and will require additional capital if it continues to grow.

 

Impact of Inflation

 

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

 

Off-Balance Sheet Arrangements

 

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 4.    CONTROLS AND PROCEDURES

 

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

 

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

 

There were no changes to the Company’s internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) during the three months ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s control over financial reporting.

 

 

Part II – Other Information

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

ITEM 1A. RISK FACTORS

 

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

 

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

 

During the quarter ended March 31, 2018, the Company issued 26,833 shares of common stock, for aggregate consideration of $187,831, pursuant to an offering to residents of the state of Kansas that was registered with the Kansas Securities Commissioner.

 

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

 

During the quarter ended March 31, 2018, the Company issued 19,385 shares of common stock, for aggregate consideration of $135,695, pursuant to a private placement offering to residents of the state of North Dakota (the “North Dakota Offering”).  Proceeds from the sale of shares in the North Dakota will be used to finance the growth of DCLIC and to provide working capital for the Company. The North Dakota Offering and sales of shares thereunder were not registered with the SEC in reliance on an exemption for registration under Rule 506(b) of Regulation D under this Securities Act of 1933 (“Reg D”).  Shares were sold only to “accredited investors”, as that term is defined in Rule 501 of Reg D, and were not sold by any means of general advertisement or solicitation. 

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable

 

ITEM 5. OTHER INFORMATION

 

None.

 

 

ITEM 6. EXHIBITS

 

3.1			Articles of Incorporation of US Alliance Corporation (filed as Exhibit 3.1 to the 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).

 

31.1				Certification of Chief Executive Officer of US Alliance Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2				Certification of Principal Financial Officer of US Alliance Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1				Certifications of the Chief Executive Officer of US Alliance pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2				Certifications of the Principal Financial Officer of US Alliance pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS**				XLRB Instance
101.SCH**				XLRB Taxonomy Extension Schema
101.CAL**				XLRB Taxonomy Extension Calculation
101.DEF**				XLRB Taxonomy Extension Definition
101.LAB**				XLRB Taxonomy Extension Labels
101.PRE**				XLRB Taxonomy Extention Presentation

 

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

 

 

 

 

SIGNATURES

 

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

 

			US Alliance Corporation
			(Registrant)
Date	May 14, 2018
By	/s/ Jack H. Brier
	Jack H. Brier, President and Chairman

 

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