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

Nine Months Ended September 30, 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

Supplemental Cash Flow Information

 

 

 

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 this report in the Notes to Consolidated Financial Statements included with this Registration Statement.

 

Valuation of Investments

 

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

 

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

 

 

The recognition of other-than-temporary impairment losses on debt securities is dependent on the facts and circumstances related to the specific security. If we intend to sell a security or it is more likely than not that we would be required to sell a security prior to recovery of the amortized cost, the difference between amortized cost and fair value is recognized in the income statement as an other-than-temporary impairment. 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. 9 of this quarterly report.

 

 

Discussion of Consolidated Results of Operations

 

Revenues. Insurance revenues are primarily generated from premium revenues and investment income. Insurance revenues for the nine months ended September 30, 2018 and 2017 are summarized in the table below.

 

		Nine Months Ended September 30,
		2018				2017
		(unaudited)
Income:
Premium income		$	6,651,103			$	8,902,208
Net investment income			1,047,330				485,147
Net realized gain (loss) on sale of securities			(327	)			435,392
Other income			27,648				40,656
Total income		$	7,725,754			$	9,863,403

 

 

USALSC entered into a coinsurance transaction with American Life and Security Corporation (“ALSC”) effective September 30, 2017. The agreement resulted in a one-time premium revenue of approximately $3.9 million in the third quarter of 2017, which is the driver of this decrease in revenue for the same period in 2018. Absent this one-time revenue in 2017, our 2018 revenues increased by $1,717,253 or 29% as compared to 2017.

 

Insurance revenues for the three months ended September 30, 2018 and 2017 are summarized in the table below.

 

		Three Months Ended September 30,
		2018				2017
		(unaudited)
Income:
Premium income		$	1,776,623			$	5,169,638
Net investment income			370,207				189,028
Net realized gain on sale of securities			-				226,890
Other income			11,654				1,201
Total income		$	2,158,484			$	5,586,757

 

 

Absent the one-time premium revenue associated with our ALSC agreement in 2017, our third quarter 2018 revenues increased by $461,887, or 35%, as compared to third quarter of 2017 revenues.

 

Premium revenue: Premium revenue for the first nine months of 2018 was $6,651,103 compared to $8,902,208 in the first nine months of 2017, a decrease of $2,251,105. The ALSC agreement resulted in a one-time premium revenue of approximately $3.9 million in 2017, which is the driver of this decrease in revenue. The decrease is offset by the growth of our direct and on-going assumed premiums. Absent this one-time premium in 2017, our premiums during the first nine months of 2018 increased by $1,603,797, or 32%, as compared to 2017.

 

Direct, assumed and ceded premiums for the nine months ended September 30, 2018 and 2017 are summarized in the following table.

 

		Nine Months Ended September 30,
		2018				2017
		(unaudited)
Direct		$	3,401,876			$	2,422,907
Assumed			3,689,412				6,639,092
Ceded			(440,185	)			(159,791	)
Total		$	6,651,103			$	8,902,208

 

 

Premium revenue for the third quarter of 2018 was $1,776,623 compared to $5,169,638 in the third quarter of 2017, a decrease of $3,393,015. The ALSC agreement resulted in a one-time premium revenue of approximately $3.9 million in 2017. The decrease is offset by the growth of our direct and on-going assumed premiums. Absent this one-time premium in 2017, our third quarter 2018 premiums increased by $461,889, or 52%, as compared to 2017.

 

Direct, assumed and ceded premiums for the three months ended September 30, 2018 and 2017 are summarized in the following table.

 

		Three Months ended September 30,
		2018				2017
		(unaudited)
Direct		$	1,093,272			$	931,463
Assumed			839,933				4,323,692
Ceded			(156,582	)			(85,517	)
Total		$	1,776,623			$	5,169,638

 

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

 

 

Investment income, net of expenses: The components of net investment income for the nine months ended September 30, 2018 and 2017 are as follows:

 

		Nine Months Ended September 30,
		2018				2017
		(unaudited)
Fixed maturities		$	712,841			$	306,614
Equity securities			387,221				213,920
Cash and short term investments			7,485				3,730
			1,107,547				524,264
Less investment expenses			(60,217	)			(39,117	)
		$	1,047,330			$	485,147

 

Net investment income for the first nine months of 2018 was $1,047,330, compared to $485,147 in 2017, an increase of $562,183 or 116%. 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, and an improvement in our book yield.

 

The components of net investment income for the three months ended September 30, 2018 and 2017 are as follows:

 

		Three Months Ended September 30,
		2018				2017
		(unaudited)
Fixed maturities		$	245,663			$	114,132
Equity securities			140,630				91,228
Cash and short term investments			4,524				2,238
			390,817				207,598
Less investment expenses			(20,610	)			(18,570	)
		$	370,207			$	189,028

 

 

Net investment income for the third quarter of 2018 was $370,207 compared to $189,028 in 2017, an increase of $181,179. 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 (losses) on investments: Net realized losses on investments for the nine months ended September 30, 2018 were $327, compared to gains of $435,392 in 2017, a decrease of $435,719. 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 as well as liquidating an equity portfolio to fund the ALSC transaction in 2017. There was not a similar activity in 2018. Realized gains and losses related to the sale of securities for the nine months ended September 30, 2018 and 2017 are summarized as follows:

 

		Nine Months Ended September 30,
		(unaudited)
		2018				2017
Gross gains		$	530			$	486,523
Gross losses			(857	)			(51,131	)
Net security gains (losses)		$	(327	)		$	435,392

 

 

There were no net realized gains on investments for the three months ended September 30, 2018, compared to gains of $226,890 in 2017, a decrease of $226,890. The decrease in realized gains is attributable to the repositioning of the DCLIC portfolio acquired in 2017. Realized gains and losses related to the sale of securities for the three months ended September 30, 2018 and 2017 are summarized as follows:

 

		Three Months Ended September 30,
		(unaudited)
		2018				2017
Gross gains		$	-			$	259,061
Gross losses			-				(32,171	)
Net security gains		$	-			$	226,890

 

 

Other income: Other income for the nine months ended September 30, 2018 was $27,648 compared to $40,656 in 2017, a decrease of $13,008. This decrease is due to the acquisition of DCLIC who was previously a third party administration client. Other income for the three months ended September 30, 2018 was $11,654 compared to $1,201 in 2017, an increase of $10,453.

 

Expenses. Expenses for the nine months ended September 30, 2018 and 2017 are summarized in the table below.

 

		Nine Months Ended September 30,
		2018				2017
		(unaudited)
Expenses:
Death claims		$	633,206			$	624,864
Policyholder benefits			3,056,358				2,609,324
Increase in policyholder reserves			2,112,259				5,205,124
Commissions, net of deferrals			440,391				362,585
Amortization of deferred acquisition costs			313,860				136,709
Amortization of value of business acquired			15,228				3,384
Salaries & benefits			781,952				627,286
Other operating expenses			1,155,973				887,230
Total expense		$	8,509,227			$	10,456,506

 

 

Expenses for the three months ended September 30, 2018 and 2017 are summarized in the table below.

 

		Three Months Ended September 30,
		2018				2017
		(unaudited)
Expenses:
Death claims		$	228,994			$	152,234
Policyholder benefits			740,579				479,965
Increase in policyholder reserves			604,647				4,357,257
Commissions, net of deferrals			120,413				97,151
Amortization of deferred acquisition costs			103,246				52,484
Amortization of value of business acquired			5,076				3,384
Salaries & benefits			238,612				244,143
Other operating expenses			320,804				278,795
Total expense		$	2,362,371			$	5,665,413

 

 

Death and other benefits: Death benefits were $633,206 in the nine months ended September 30, 2018 compared to $624,864 in 2017, an increase of $8,342. This increase is attributable to our growing block of in-force life insurance policies. We expect these claims to grow as we continue to increase the size of our in-force business.

 

Death benefits were $228,994 in the three months ended September 30, 2018 compared to $152,234 in 2017, an increase of $76,760. This increase is attributable to our growing block of in-force life insurance policies. We expect these claims to grow as we continue to increase the size of our in-force business.

 

Policyholder benefits: Policyholder benefits were $3,056,358 in the nine months ended September 30, 2018 compared to $2,609,324 in 2017, an increase of $447,034. The primary driver of this increase is the growth of interest credited on annuities from ALSC and acquired with Dakota Capital Life.

 

Policyholder benefits were $740,579 in the three months ended September 30, 2018 compared to $479,965 in 2017, an increase of $260,614. The primary driver of this increase is the growth of interest credited on annuities assumed from ALSC and acquired with Dakota Capital Life as well as the growth in benefits from Unified Life.

 

Increase in policyholder reserves: Policyholder reserves increased $2,112,259 in the nine months ended September 30, 2018, compared to $5,205,124 in 2017, a decrease of $3,092,865. The decrease is driven by a one-time increase in reserves of approximately $3.9 million in 2017 as a result of our ALSC coinsurance transaction and is fully offset by the one-time assumed premium revenue associated with this transaction.

 

Policyholder reserves increased $604,647 in the three months ended September 30, 2018, compared to $4,357,257 in 2017, a decrease of $3,752,610. The decrease is driven by a one-time increase in reserves of approximately $3.9 million in 2017 as a result of our ALSC coinsurance transaction and is fully offset by the one-time assumed premium revenue associated with this transaction.

 

Commissions, net of deferrals: The Company pays commissions to the ceding company on a block of assumed policies as well as commissions to agents on directly written business. Commissions, net of deferrals, were $440,391 in the nine months ended September 30, 2018, compared to $362,585 in 2017, an increase of $77,806. This increase is due to an increase in premiums.

 

Commissions, net of deferrals, were $120,413 in the three months ended September 30, 2018, compared to $97,151 in 2017, an increase of $23,262. This increase is due to an increase in premiums.

 

Amortization of deferred acquisition costs: The amortization of deferred acquisition costs was $313,860 in the nine months ended September 30, 2018, compared to $136,709 in 2017, an increase of $177,151. The amortization increase is attributable to the growth of our deferred acquisition cost asset related to our reinsurance transaction with ALSC.

 

 

The amortization of deferred acquisition costs was $103,246 in the three months ended September 30, 2018, compared to $52,484 in 2017, an increase of $50,762. The amortization increase is attributable to the growth of our deferred acquisition cost asset related to our reinsurance transaction with ALSC.

 

Amortization of value of business acquired: The amortization of value of business acquired (“VOBA”) was $15,228 in the nine months ended September 30, 2018. Our VOBA balance was established August 1, 2017 with acquisition of DCLIC. VOBA is being amortized straight-line over 30 years. The amortization of value of business acquired was $5,076 in the three months ended September 30, 2018.

 

Salaries and benefits: Salaries and benefits were $781,952 for the nine months ended September 30, 2018, compared to $627,286 in 2017, an increase of $154,666. Staffing costs increased due to additional staffing acquired with the Northern Plains Merger and the growth of our customer service team.

 

Salaries and benefits were $238,612 for the three months ended September 30, 2018, compared to $244,143 in 2017, a decrease of $5,531. There was no significant change from the prior period.

 

Other expenses: Other operating expenses were $1,155,973 in the nine months ended September 30, 2018, compared to $887,230 in 2017, an increase of $268,743. Operating costs have increased due to expenses associated with the DCLIC acquisition, including additional auditing and actuarial fees, increased information technology costs, and selling and marketing expenses.

 

Other operating expenses were $320,804 in the three months ended September 30, 2018, compared to $278,795 in 2017, an increase of $42,009. Operating costs have increased due to expenses associated with the DCLIC acquisition, including additional auditing and actuarial fees, and increased information technology costs and selling and marketing expenses.

 

Net Loss: Our net loss was $783,473 in the nine months ended September 30, 2018 compared to net loss of $593,103 in the same period of 2017, an increase of $190,370. Our net loss per share increased to $0.11 from $0.10 in 2017, basic and diluted. This increase is primarily attributable to capital gains realized in 2017 and no similar gains in 2018 partially offset by increasing margins on our life insurance business. The 2017 capital gains were attributable to the repositioning of an equity portfolio from a market return focus to an income focus and liquidating an equity portfolio to fund the ALSC transaction. Without capital gains, our 2017 loss per share would have been $0.19.

 

Our net loss was $203,887 in the three months ended September 30, 2018 compared to net loss of $78,656 in the same period of 2017, an increase of $125,231. Our net loss per share increased to $0.03 from $0.01 in 2017, basic and diluted. This increase is primarily attributable to capital gains realized in 2017 and no similar gains in 2018 partially offset by increasing margins on our life insurance business. The 2017 capital gains were attributable to liquidating an equity portfolio to fund the ALSC transaction. Without capital gains, our third quarter 2017 loss per share would have been $0.05.

 

 

Discussion of Consolidated Balance Sheet

 

Assets. Assets have increased to $42,109,336 as of September 30, 2018, an increase of $3,120,999 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 September 30, 2018, we had available for sale fixed maturity assets of $24,135,704, an increase of $1,190,004 from the December 31, 2017 balance of $22,945,700. The increase is driven by the purchase of additional assets. The increase is offset by higher interest rates, which lowers the market value of these securities. If we hold our fixed maturity securities to maturity, as we intend to do, any changes in market value is temporary.   

 

Available for sale equity securities: As of September 30, 2018, we had available for sale equity assets of $11,521,657, an increase of $858,142 from the December 31, 2017 balance of $10,663,515. This growth is driven by purchases of equity securities with premium income.

 

 

Policy loans: As of September 30, 2018, our policy loans were $42,436, an increase of $8,461 from the December 31, 2017 balance of $33,975. The increase 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.

 

Cash and cash equivalents: As of September 30, 2018, we had cash and cash equivalent assets of $1,981,829, an increase of $1,330,020 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 September 30, 2018, our investment income due and accrued was $265,766 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 September 30, 2018, our reinsurance related assets were $168,926, a decrease of $80,953 from the December 31, 2017 balance of $249,879. This decrease was driven by a reduction in the amounts receivable on our reinsurance business.

 

Deferred acquisition costs, net: As of September 30, 2018, our deferred acquisition costs were $2,829,688, a decrease of $133,369 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 September 30, 2018, our value of business acquired asset was $585,373, a decrease of $15,228 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 September 30, 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.

 

Property, equipment and software, net: As of September 30, 2018, our property, equipment and software assets were $199,804, a decrease of $21,273 from the December 31, 2017 balance of $221,077. This decrease is a result of normal amortization during the period, offset by equipment purchased in the second quarter.

 

Other assets: As of September 30, 2018, our other assets were $100,611, a decrease of $65,573 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 $29,589,860 as of September 30, 2018, an increase of $4,537,225 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 September 30, 2018 were $29,311,702, an increase of $4,366,325 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 September 30, 2018, our accounts payable and accrued expenses were $89,351, a decrease of $9,031 from the December 31, 2017 balance of $98,382. This decrease is the result of normal operating activity.

 

Other liabilities: As of September 30, 2018, our other liabilities were $188,807, an increase of $179,931 from the December 31, 2017 balance of $8,876. This increase is the result of a securities payable at September 30, 2018.

 

Shareholders’ Equity. Our shareholders’ equity was $12,519,476 as of September 30, 2018, a decrease of $1,416,226 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. Other comprehensive income consists of the unrealized gains and losses on our investment portfolio. The reduction in other comprehensive income is the result of higher interest rates which lowers the market value of our fixed maturity securities.

 

 

Investments and Cash and Cash Equivalents

 

Our investment philosophy is reflected by the allocation of our investments. We emphasize investment grade debt securities with smaller holdings in equity securities and other investments. The following table shows the carrying value of our investments by investment category and cash and cash equivalents, and the percentage of each to total invested assets as of September 30, 2018 and December 31, 2017.

 

		September 30, 2018								December 31, 2017
		Fair				Percent				Fair				Percent
		Value				of Total				Value				of Total
Fixed maturities:		(unaudited)
US Treasury securities		$	250,606				0.7	%		$	250,750				0.7	%
Corporate bonds			13,513,782				35.9	%			12,156,225				35.6	%
Municipal bonds			6,466,859				17.2	%			6,352,444				18.5	%
Redeemable preferred stocks			94,000				0.2	%			100,520				0.3	%
Mortgage backed and asset backed securities			3,810,457				10.1	%			4,085,761				11.9	%
Total fixed maturities			24,135,704				64.1	%			22,945,700				67.0	%
Equities:
Equities			11,521,657				30.6	%			10,663,515				31.1	%
Total equities			11,521,657				30.6	%			10,663,515				31.1	%
Cash and cash equivalents			1,981,829				5.3	%			651,809				1.9	%
Total		$	37,639,190				100.0	%		$	34,261,024				100.0	%

 

 

The total value of our investments and cash and cash equivalents increased to $37,639,190 as of September 30, 2018 from $34,261,024 at December 31, 2017, an increase of $3,378,166. 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 September 30, 2018 and December 31, 2017.

 

		September 30, 2018								December 31, 2017
		Fair				Percent				Fair				Percent
		Value				of Total				Value				of Total
		(unaudited)								(unaudited)
AAA and U.S. Government		$	1,159,858				4.8	%		$	1,185,345				5.2	%
AA			7,864,998				32.6	%			8,225,461				35.8	%
A			4,735,191				19.6	%			4,961,276				21.6	%
BBB			9,930,761				41.2	%			8,108,313				35.3	%
BB			244,896				1.0	%			265,305				1.2	%
Not Rated - Private Placement			200,000				0.8	%			200,000				0.9	%
Total		$	24,135,704				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 September 30, 2018, 98.2% of all fixed maturity securities were investment grade.

 

 

The amortized cost and fair value of debt securities as of September 30, 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 September 30, 2018								As of December 31, 2017
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
Amounts maturing in:		(unaudited)
After one year through five years		$	858,351			$	847,014			$	612,088			$	617,562
After five years through ten years			1,804,441				1,753,743				1,910,307				1,945,454
More than 10 years			18,389,050				17,630,490				15,740,739				16,196,403
Redeemable preferred stocks			99,560				94,000				99,560				100,520
Mortgage backed and asset backed securities			3,929,386				3,810,457				4,077,011				4,085,761
		$	25,080,788			$	24,135,704			$	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 the structuring of our 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.

 

 

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

 

Net cash provided by operating activities was $2,079,021 for the nine months ended September 30, 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 $3,578,194. The primary use of cash was the purchase of available for sale securities. Cash provided by financing activities was $2,829,193. The primary sources of cash were receipts on deposit-type contracts and issuance of common stock.

 

At September 30, 2018, we had cash and cash equivalents totaling $1,981,829. We believe that our existing cash and cash equivalents will be sufficient to fund the anticipated operating expenses and capital expenditures for the foreseeable future. We have based this estimate upon assumptions that may prove to be wrong and we could use our capital resources sooner than we currently expect. The growth of 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 nine months ended September 30, 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 September 30, 2018, the Company issued 12,065 shares of common stock, for aggregate consideration of $84,455, 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 September 30, 2018, the Company issued 50,140 shares of common stock, for aggregate consideration of $350,980, pursuant to a private placement offering to residents of the state of North Dakota (the “North Dakota Offering”).  Proceeds from the sale of shares in the North Dakota were used to finance the growth of DCLIC and to provide working capital for the Company. The North Dakota Offering and sales of shares thereunder were not registered with the SEC in reliance on an exemption for registration under Rule 506(b) of Regulation D under this Securities Act of 1933 (“Reg D”).  Shares 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)
3.2.1	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).
3.2.2	Amendment to Bylaws of US Alliance Corporation dated June 4, 2018 (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed on June 7, 2018 (File No. 000-55627), is incorporated herein by reference as Exhibit 3.2.2.
10.1	Stock Purchase Agreement dated October 11, 2018 between the Company and Great Western Insurance Company (filed as Exhibit 10.1 to the Company's Curretn Report of Form 8-K filed on October 16, 2018 (File No. 000-55627) is incorporated herein by reference as Exhibit 10.1.

 

31.1	Certification of Chief Executive Officer of US Alliance Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Principal Financial Officer of US Alliance Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certifications of the Chief Executive Officer of US Alliance pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certifications of the Principal Financial Officer of US Alliance pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101.INS** XBRL Instance

 

101.SCH** XBRL Taxonomy Extension Schema

 

101.CAL** XBRL Taxonomy Extension Calculation

 

101.DEF** XBRL Taxonomy Extension Definition

 

101.LAB** XBRL Taxonomy Extension Labels

 

101.PRE** XBRL Taxonomy Extention Presentation

 

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

 

 

SIGNATURES

 

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

 

                              US Alliance Corporation               

                                         (Registrant)

 

Date 

 

By  /s/ Jack H. Brier                                                                                  

      Jack H. Brier, President and Chairman

 

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