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Table of Contents

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

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2020.

or

 

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

 

For the transition period from _________________________ to _________________________________

 

Commission File Number: 000-55627

 

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

 

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

 

(785) 228-0200

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted 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 such files).      ☒ Yes  ☐ No

 

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

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

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.  ☐

 

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

 

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

 

Common stock, $0.10 par value

7,741,272 shares outstanding

as of August 4, 2020

 

Securities registered pursuant to Section 12(b) of the Act

Title of each class Trading Symbol Name of each exchange on which registered
N/a N/A N/A
 

 

 

 

US ALLIANCE CORPORATION

         

FORM 10-Q

         

TABLE OF CONTENTS

         

Part I - Financial Information

         

Item

 

Item Description

 

Page

Item 1

 

Financial Statements

 

3

         
   

Consolidated Balance Sheets

 

3

         
   

Consolidated Statements of Comprehensive Income (Loss)

 

4

         
   

Consolidated Statements of Changes in Shareholders' Equity

 

5

         
   

Consolidated Statements of Cash Flows

 

6

         
   

Notes to Consolidated Financial Statements

 

8

         

Item 2

 

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

 

21

         

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

 

33

         

Item 4

 

Controls and Procedures

 

34

         

Part II - Other Information

         

Item

 

Item Description

 

Page

Item 1

 

Legal Proceedings

 

34

         

Item 1A

 

Risk Factors

 

34

         

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

34

         

Item 3

 

Defaults Upon Senior Securities

 

34

         

Item 4

 

Mine Safety Disclosures

 

34

         

Item 5 

 

Other Information

 

34

         

Item 6

 

Exhibits

 

35

         
   

Signatures

 

36

 

 

1.      FINANCIAL STATEMENTS

 

US Alliance Corporation

Consolidated Balance Sheets

 

 

   

June 30, 2020

   

December 31, 2019

 
       (unaudited)          

Assets

             

Investments:

               

Available for sale fixed maturity securities (amortized cost: $32,635,261 and $30,823,397 as of June 30, 2020 and December 31, 2019, respectively)

  $ 36,152,521     $ 33,152,892  

Mortgage loans on real estate

    962,690       -  

Equity securities, at fair value

    9,141,500       10,141,503  

Funds withheld under coinsurance agreement, at fair value

    41,294,491       -  

Policy loans

    154,088       118,930  

Total investments

    87,705,290       43,413,325  
                 

Cash and cash equivalents

    7,376,813       6,678,805  

Investment income due and accrued

    370,326       321,362  

Reinsurance related assets

    922,104       188,382  

Deferred acquisition costs, net

    8,310,532       2,652,674  

Value of business acquired, net

    549,843       559,994  

Property, equipment and software, net

    38,722       43,841  

Goodwill

    277,542       277,542  

Deferred tax asset, net of valuation allowance

    431,158       431,158  

Other assets

    890,771       372,166  

Total assets

  $ 106,873,101     $ 54,939,249  
                 
                 

Liabilities and Shareholders' Equity

               

Liabilities:

               

Policy liabilities

               

Deposit-type contracts

  $ 70,647,008     $ 19,396,614  

Policyholder benefit reserves

    18,976,406       17,326,524  

Dividend accumulation

    114,290       123,038  

Advance premiums

    80,727       78,709  

Total policy liabilities

    89,818,431       36,924,885  
                 

Accounts payable and accrued expenses

    148,434       122,981  

Federal Home Loan Bank advance

    2,000,000       1,000,000  

Other liabilities

    20,464       15,186  

Total liabilities

    91,987,329       38,063,052  
                 

Shareholders' Equity:

               

Common stock, $0.10 par value. Authorized 20,000,000 shares; issued and outstanding 7,741,229 and 7,734,004 shares as of June 30, 2020 and December 31, 2019, respectively

    774,124       773,401  

Additional paid-in capital

    23,161,098       23,210,257  

Accumulated deficit

    (12,566,699 )     (9,436,956 )

Accumulated other comprehensive income

    3,517,249       2,329,495  

Total shareholders' equity

    14,885,772       16,876,197  
                 

Total liabilities and shareholders' equity

  $ 106,873,101     $ 54,939,249  

 

See Notes to Consolidated Financial Statements.

 

 

US Alliance Corporation

Consolidated Statements of Comprehensive Income (Loss)

 

 

   

Six Months Ended June 30,

   

Three Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

 

 

(unaudited)

   

(unaudited)

 
Income:            

Premium income

  $ 5,083,778     $ 4,920,690     $ 2,368,017     $ 2,527,714  

Net investment income

    1,256,011       861,038       741,303       451,106  

Net investment gains (losses)

    (1,359,105 )     831,289       11,656       104,086  

Other income

    27,708       25,058       14,052       12,259  

Total income

    5,008,392       6,638,075       3,135,028       3,095,165  
                                 

Expenses:

                               

Death claims

    922,656       724,316       440,944       328,649  

Policyholder benefits

    2,647,705       2,305,295       1,398,622       1,168,467  

Increase in policyholder reserves

    1,612,693       1,437,658       689,445       757,098  

Commissions, net of deferrals

    371,570       413,599       164,614       194,064  

Amortization of deferred acquisition costs

    747,372       180,727       172,162       117,825  

Amortization of value of business acquired

    10,151       10,152       5,075       5,076  

Salaries & benefits

    517,085       502,727       253,880       250,895  

Other operating expenses

    1,308,903       722,515       436,658       307,873  

Total expense

    8,138,135       6,296,989       3,561,400       3,129,947  
                                 
                                 

Net income (loss)

  $ (3,129,743 )   $ 341,086     $ (426,372 )   $ (34,782 )
                                 

Net income (loss) per common share, basic and diluted

  $ (0.40 )   $ 0.04     $ (0.06 )   $ -  
                                 

Unrealized net holding gains arising during the period

    1,247,443       2,573,315       2,910,478       1,327,537  

Reclassification adjustment for (gains) losses included in net loss

    (59,689 )     14,528       (17,693 )     14,528  
                                 

Other comprehensive income

    1,187,754       2,587,843       2,892,785       1,342,065  
                                 

Comprehensive income (loss)

  $ (1,941,989 )   $ 2,928,929     $ 2,466,814     $ 1,307,283  

 

See Notes to Consolidated Financial Statements.

 

 

US Alliance Corporation

Consolidated Statements of Changes in Shareholders' Equity

Six Months and Three Months Ended June 30, 2020 and 2019 (Unaudited)

 

 

                           

Accumulated

                 
   

Number of

                   

Other

                 
   

Shares of

   

Common

   

Additional

   

Comprehensive

   

Accumulated

         
   

Common Stock

   

Stock

   

Paid-in Capital

   

Income / (Loss)

   

Deficit

   

Total

 

Balance, December 31, 2018

    7,650,551     $ 765,056     $ 22,989,443     $ (2,184,429 )   $ (8,937,404 )   $ 12,632,666  

Common stock issued, $7 per share

    56,539       5,654       390,119       -       -       395,773  

Costs associated with common stock issued

    -       -       (237,870 )     -       -       (237,870 )

Cumulative effect, adoption of accounting guidance for equity sercurities

    -       -       -       1,098,760       (1,098,760 )     -  

Other comprehensive income

    -       -       -       2,587,843       -       2,587,843  

Net income

    -       -       -       -       341,086       341,086  

Balance, June 30, 2019

    7,707,090     $ 770,710     $ 23,141,692     $ 1,502,174     $ (9,695,078 )   $ 15,719,498  
                                                 

Balance, December 31, 2019

    7,734,004     $ 773,401     $ 23,210,257     $ 2,329,495     $ (9,436,956 )   $ 16,876,197  

Common stock issued, $7 per share

    7,225       723       49,852       -       -       50,575  

Costs associated with common stock issued

    -       -       (99,011 )     -       -       (99,011 )

Other comprehensive income

    -       -       -       1,187,754       -       1,187,754  

Net loss

    -       -       -       -       (3,129,743 )     (3,129,743 )

Balance, June 30, 2020

    7,741,229     $ 774,124     $ 23,161,098     $ 3,517,249     $ (12,566,699 )   $ 14,885,772  

 

 

 

                           

Accumulated

                 
   

Number of

                   

Other

                 
   

Shares of

   

Common

   

Additional

   

Comprehensive

   

Accumulated

         
   

Common Stock

   

Stock

   

Paid-in Capital

   

Income

   

Deficit

   

Total

 

Balance, March 31, 2019

    7,693,408     $ 769,342     $ 23,142,047     $ 160,109     $ (9,660,296 )   $ 14,411,202  

Common stock issued, $7 per share

    13,682       1,368       94,406       -       -       95,774  

Costs associated with common stock issued

    -       -       (94,761 )     -       -       (94,761 )

Other comprehensive income

    -       -       -       1,342,065       -       1,342,065  

Net loss

    -       -       -       -       (34,782 )     (34,782 )

Balance, June 30, 2019

    7,707,090     $ 770,710     $ 23,141,692     $ 1,502,174     $ (9,695,078 )   $ 15,719,498  
                                                 

Balance, March 31, 2020

    7,740,700     $ 774,071     $ 23,204,894     $ 624,464     $ (12,140,327 )   $ 12,463,102  

Common stock issued, $7 per share

    529       53       3,650       -       -       3,703  

Costs associated with common stock issued

    -       -       (47,446 )     -       -       (47,446 )

Other comprehensive income

    -       -       -       2,892,785       -       2,892,785  

Net loss

    -       -       -       -       (426,372 )     (426,372 )

Balance, June 30, 2020

    7,741,229     $ 774,124     $ 23,161,098     $ 3,517,249     $ (12,566,699 )   $ 14,885,772  

 

See Notes to Consolidated Financial Statements.

 

 

US Alliance Corporation

Consolidated Statements of Cash Flows

 

 

   

Six Months Ended June 30,

 
   

2020

   

2019

 

 

 

(unaudited)

 
Cash Flows from operating activities:      

Net income (loss)

  $ (3,129,743 )   $ 341,086  

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

               

Depreciation and amortization

    5,119       5,118  

Net realized losses on the sale of securities

    224,878       14,528  

Unrealized (gains) losses on equity securities

    497,194       (845,817 )

Change in fair value of funds withheld embedded derivative

    637,033       -  

Amortization of investment securities, net

    75,873       17,055  

Deferred acquisition costs capitalized

    (511,691 )     (176,056 )

Deferred acquisition costs amortized

    747,373       180,727  

Value of business acquired amortized

    10,151       10,152  

Interest credited on deposit type contracts

    479,157       328,583  

(Increase) decrease in operating assets:

               

Change in funds withheld

    (170,516 )      -  

Investment income due and accrued

    (48,964 )     1,237  

Reinsurance related assets

    (50,475 )     (19,513 )

Other assets

    196,689       (10,830 )

Increase (decrease) in operating liabilities:

               

Policyowner benefit reserves

    1,649,882       1,474,338  

Dividend accumulation

    (8,748 )     (8,180 )

Advance premiums

    2,018       16,590  

Other liabilities

    5,278       (14,533 )

Accounts payable and accrued expenses

    25,453       (143,134 )

Net cash provided by operating activities

    635,961       1,171,351  
                 
                 

Cash Flows from investing activities:

               

Purchase of fixed income investments

    (2,028,449 )     (984,288 )

Purchase of equity investments

    (4,186,434 )     (179,039 )

Purchase of mortgage investments

    (962,632 )     -  

Proceeds from fixed income sales and repayments

    1,619,318       393,163  

Proceeds from equity sales and repayments

    2,985,691       268,101  

Transferred to funds withheld

    (2,334,966 )     -  

Interest on policy loans

    (5,199 )     (723 )

Increase (decrease) in policy loans

    (29,959 )     179  

Net cash used in investing activities

    (4,942,630 )     (502,607 )
                 

Cash Flows from financing activities:

               

Receipts on deposit-type contracts

    5,019,037       1,921,482  

Withdrawals on deposit-type contracts

    (965,923 )     (882,725 )

Proceeds from FHLB advance

    1,000,000       -  

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

    (48,437 )     157,903  

Net cash provided by financing activities

    5,004,677       1,196,660  
                 

Net increase in cash and cash equivalents

    698,008       1,865,404  
                 

Cash and cash equivalents:

               

Beginning

    6,678,805       2,077,646  

Ending

  $ 7,376,813     $ 3,943,050  

 

See Notes to Consolidated Financial Statements.

 

 

US Alliance Corporation

Supplemental Cash Flow Information (unaudited)

 

   

Six Months Ended

 
   

2020

   

2019

 

Supplemental Disclosure of Non-Cash Information

               

Funds withheld assumed deposits on deposit-type contracts

  $ 46,763,118     $ -  

Funds withheld assumed withdrawals on deposit-type contracts

    44,995       -  

Commissions and expense allowances deducted from funds withheld

    6,608,834       -  

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

 

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.

 

USAC has five  direct and indirect wholly-owned operating subsidiaries . US Alliance Life and Security Company ("USALSC") was formed June 9, 2011, to serve as our life insurance company. US Alliance Marketing Corporation ("USAMC") was formed April 23, 2012, to serve as a marketing resource. US Alliance Investment Corporation ("USAIC") was formed April 23, 2012 to serve as investment manager for USAC. Dakota Capital Life Insurance Company (“DCLIC”) was acquired on August 1, 2017 when USAC merged with Northern Plains Capital Corporation (“NPCC”). US Alliance Life and Security Company - Montana ("USALSC-Montana") was acquired December 14, 2018. Both DCLIC and USALSC-Montana are wholly-owned subsidiaries of USALSC.  Unless the context otherwise indicates, references in this report to "we," "us," "our," or the "Company" refer collectively to USAC and its subsidiaries.

 

USAC terminated its initial public offering on February 24, 2013. During the balance of 2013, the Company achieved approval of an array of life insurance and annuity products, began development of various distribution channels and commenced insurance operations and product sales. The Company sold its first insurance product on May 1, 2013. The Company continued to expand its product offerings and distribution channels throughout 2014 and 2015. On February 24, 2015, USAC commenced a warrant exercise offering set to expire on February 24, 2016. On February 24, 2016, USAC extended the offering until February 24, 2017 and made additional shares available for purchase. All outstanding warrants expired on April 1, 2016. USAC has extended this offering to February 24, 2021. During the 4th quarter of 2017, USAC began a private placement offering to accredited investors in the state of North Dakota.

 

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

 

The results of operation for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the year ended December 31, 2020 or for any other interim period or for any other future year. Certain financial information which is normally included in notes to financial statements prepared in accordance with US GAAP, but which are not required for interim reporting purposes, has been condensed or omitted. The accompanying financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in USAC’s report on Form 10-K and amendments thereto for the year ended December 31, 2019.

 

Principles of consolidation: The consolidated financial statements include the accounts of USAC 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 states of North Dakota and South Dakota. USALSC-Montana is authorized to operate in the state of Montana

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

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.

 

Common stock and income (loss) per share: The par value for common stock is $0.10 per share with 20,000,000 shares authorized. As of June 30, 2020, and December 31, 2019, USAC had 7,741,229 and 7,734,004 common shares issued and outstanding, respectively.

 

Earnings (loss) per share attributable to USAC’s common stockholders were computed based on the net loss and the weighted average number of shares outstanding during each year. The weighted average number of shares outstanding during the quarters ended June 30, 2020 and 2019 were 7,740,876 and 7,697,969 shares, respectively. The weighted average number of shares outstanding during the six months ended June 30, 2020 and 2019 were 7,737,418 and 7,673,690 shares, respectively. Potential common shares are excluded from the computation when their effect is anti-dilutive. Basic and diluted net income (loss) per common share is the same for the quarters and six months ended June 30, 2020 and 2019.

 

New accounting pronouncements

 

Revenue from Contracts with Customers

 

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

 

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

 

In July 2015, the FASB deferred the effective date of the updated guidance on revenue recognition by one year to the quarter ending March 31, 2018.  As an emerging growth company, the Company chose to defer implementation of this accounting standard until the year ending December 31, 2019. The adoption of this guidance did not have a material effect on the Company’s result 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 was effective for the Company for the year ended December 31, 2019 and required a cumulative effect adjustment to opening retained earnings to be recorded for equity investments with readily determinable fair values. As of the adoption date, the Company held publicly traded equity investments with a fair value of $ 10,987,539 million in a net unrealized gain position of $ 1,098,760 million. The Company has recorded a cumulative-effect adjustment of $ 1,098,760 to decrease Accumulated Other Comprehensive Income (AOCI) with a corresponding increase to accumulated deficit for unrealized gains as of the beginning of fiscal year 2019. As a result of the implementation of ASU 2016-01, unrealized gains and losses in equity investments with readily determinable fair values are recorded on the Consolidated Statements of Comprehensive Income (Loss) within net investment gains (losses). The Company recorded a gain in net investment gains (losses) of $1.1 million for year ended December 31, 2019 as a result of adopting this standard. The implementation of this guidance is expected to increase volatility in our net income as the volatility previously recorded in Comprehensive Income (OCI) related to changes in the fair market value of available-for-sale equity investments will now be reflected in net income effective with the adoption date.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

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.  As an emerging growth company, the Company has elected to defer implementation of this standard to fiscal years beginning after December 15, 2020. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

Measurement of Credit Losses on Financial Instruments

 

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

 

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

 

The updated guidance is effective for reporting periods beginning after December 15, 2019.  Early adoption is permitted for reporting periods beginning after December 15, 2018.  As an emerging growth company, the Company has elected to defer implementation of this standard to fiscal years beginning after December 15, 2022. 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.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

Classification of Certain Cash Receipts and Cash Payment

 

In August 2016, the FASB issued new guidance that clarifies the classification of certain cash receipts and cash payments in the statement of cash flows under eight different scenarios including, but not limited to: (i) debt prepayment or debt extinguishment costs; (ii) proceeds from the settlement of corporate-owned life insurance policies including bank-owned life insurance policies; (iii) distributions received from equity method investees; and (iv) separately identifiable cash flows and application of the predominance principle. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. As an emerging growth company, the Company has elected to defer implementation of this standard to fiscal years beginning after December 15, 2018. The implementation of this standard did not have a material impact on the Company’s statement of cash flows.

 

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

 

On December 22, 2017, the U.S. federal government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (Tax Cuts and Jobs Act). In February 2018, FASB issued guidance to address certain issues related to the Tax Cuts and Jobs Act. This new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

 

Targeted Improvements to the Accounting for Long-Duration Contracts

 

In August 2018, the FASB issued ASU 2018-12 “Targeted Improvements to the Accounting for Long-Duration Contracts.” ASU 2018-12 requires periodic reassessment of actuarial and discount rate assumptions used in the valuation of policyholder liabilities and deferred acquisition costs arising from the issuance of long-duration insurance and reinsurance contracts, with the effects of the changes in cash flow assumptions reflected in earnings and the effects of changes in discount rate assumptions reflected in other comprehensive income. Under current accounting guidance, the actuarial and discount rate assumptions are set at the contract inception date and not subsequently changed, except in limited circumstances. ASU 2018-12 also requires new disclosures and is effective for fiscal years beginning after December 15, 2023, with early adoption permitted. We are evaluating the effect this standard will have on our Consolidated Financial Statements.

 

Fair Value Measurement

 

This guidance is part of the FASB’s disclosure framework project and eliminates certain disclosure requirements for fair value measurement, requires entities to disclose new information and modifies existing disclosure requirements. This guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

 

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.

 

The Company’s significant account policies are discussed in Note 1 “Description of Business and Significant Accounting Policies” of the 2019 Annual Report. The significant accounting policies below reflect the impact of new transactions involving funds withheld under a coinsurance agreement and the issuance of mortgage loans.

 

Funds Withheld under Coinsurance Agreement: Funds withheld under coinsurance agreement represent amounts contractually withheld by a ceding company in accordance with a reinsurance agreement entered into in 2020. For agreements written on a coinsurance funds withheld basis, assets that support the net statutory reserves or as defined by the treaty, are withheld and legally owned by the ceding company.  Interest is recorded in net investment income, net of related expenses, in the consolidated statements of income (loss).  Funds withheld under coinsurance agreement are presented net of the embedded derivative, discussed below.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

Embedded Derivatives: The Company has entered into coinsurance funds withheld arrangement which contains an embedded derivative. Under ASC 815, the Company assesses whether the embedded derivative is clearly and closely related to the host contract. The Company bifurcates embedded derivatives from the host instrument for measurement purposes when the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and a separate instrument with the same terms would qualify as a derivative instrument. Embedded derivatives, which are reported with the host instrument on the consolidated balance sheets in funds withheld under coinsurance agreement, are reported at fair value with changes in fair value recognized in the consolidated statements of comprehensive income (loss) in net investment gains (losses).

 

Mortgage Loans on Real Estate: Mortgage loans on real estate are carried at unpaid principal balances, net of any unamortized premium or discount and valuation allowances.  Interest income is accrued on the principal amount of the mortgage loans based on its contractual interest rate.  Amortization of premiums and discounts is recorded using the effective yield method. The Company accrues interest on loans until probable the Company will not receive interest or the loan is 90 days past due.  Interest income, amortization of premiums, accretion of discounts and prepayment fees are reported in investment income, net of related expenses in the consolidated statements of comprehensive income (loss).

 

A mortgage loan is considered to be impaired when, based on the current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the mortgage agreement.  

 

Valuation allowances on mortgage loans are established based upon inherent losses expected by management to be realized in connection with future dispositions or settlement of mortgage loans, including foreclosures. The Company establishes valuation allowances for estimated impairments on an individual loan basis as of the balance sheet date. Such valuation allowances are based on the excess carrying value of the loan over the present value of expected future cash flows discounted at the loan’s original effective interest rate, the value of the loan’s collateral if the loan is in the process of foreclosure or is otherwise collateral-dependent, or the loan’s market value if the loan is being sold. These evaluations are revised as conditions change and new information becomes available. In addition to historical experience, management considers qualitative factors that include the impact of changing macro-economic conditions, which may not be currently reflected in the loan portfolio performance, and the quality of the loan portfolio.

 

Any interest accrued or received on the net carrying amount of the impaired loan will be included in investment income or applied to the principal of the loan, depending on the assessment of the collectibility of the loan. Mortgage loans deemed to be uncollectible or that have been foreclosed are charged off against the valuation allowances and subsequent recoveries, if any, are credited to the valuation allowances. Changes in valuation allowances are reported in investment related gains (losses), net on the consolidated statements of income (loss).

 

The Company evaluates whether a mortgage loan modification represents a troubled debt restructuring. In a troubled debt restructuring, the Company grants concessions related to the borrower’s financial difficulties. Generally, the types of concessions include: reduction of the contractual interest rate, extension of the maturity date at an interest rate lower than current market interest rates and/or a reduction of accrued interest. The Company considers the amount, timing and extent of the concession granted in determining any impairment or changes in the specific valuation allowance recorded in connection with the troubled debt restructuring. Through the continuous monitoring process, the Company may have recorded a specific valuation allowance prior to when the mortgage loan is modified in a troubled debt restructuring. Accordingly, the carrying value (after specific valuation allowance) before and after modification through a troubled debt restructuring may not change significantly, or may increase if the expected recovery is higher than the pre-modification recovery assessment.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

 

Note 2.     Investments

 

Fixed Maturities

 

The amortized cost and fair value of available for sale investments as of June 30, 2020 and December 31, 2019 is as follows:

 

   

June 30, 2020

 
   

Cost or

   

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

         
   

Cost

   

Gains

   

Losses

   

Fair Value

 

 

 

(unaudited)

 
Available for sale:      

Fixed maturities:

                               

US Treasury securities

  $ 573,039     $ 101,726     $ -     $ 674,765  

Corporate bonds

    19,240,984       2,816,255       (182,565 )     21,874,674  

Municipal bonds

    5,959,395       872,610       -       6,832,005  

Redeemable preferred stock

    3,213,953       4,224       (159,884 )     3,058,293  

Mortgage backed and asset backed securities

    3,647,890       81,386       (16,492 )     3,712,784  

Total available for sale

  $ 32,635,261     $ 3,876,201     $ (358,941 )   $ 36,152,521  

 

 

   

December 31, 2019

 
   

Cost or

   

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

         
   

Cost

   

Gains

   

Losses

   

Fair Value

 

Available for sale:

                               

Fixed maturities:

                               

US Treasury securities

  $ 608,477     $ 24,162     $ -     $ 632,639  

Corporate bonds

    18,407,211       1,697,265       (20,079 )     20,084,397  

Municipal bonds

    6,538,883       518,059       (1,883 )     7,055,059  

Redeemable preferred stock

    2,097,206       36,687       -       2,133,893  

Mortgage backed and asset backed securities

    3,171,620       77,593       (2,309 )     3,246,904  

Total available for sale

  $ 30,823,397     $ 2,353,766     $ (24,271 )   $ 33,152,892  

 

The amortized cost and fair value of debt securities as of June 30, 2020 and December 31, 2019, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   

As of June 30, 2020

   

As of December 31, 2019

 
   

Amortized Cost

   

Fair Value

   

Amortized Cost

   

Fair Value

 
   

(unaudited)

                 
Amounts maturing in:                                

One year or less

  $ -     $ -     $ 99,987     $ 100,239  

After one year through five years

    1,623,810       1,726,647       1,424,337       1,471,552  

After five years through ten years

    3,087,409       3,570,764       3,286,937       3,574,191  

More than 10 years

    21,062,199       24,084,033       20,743,310       22,626,113  

Redeemable preferred stocks

    3,213,953       3,058,293       2,097,206       2,133,893  

Mortgage backed and asset backed securities

    3,647,890       3,712,784       3,171,620       3,246,904  

Total amortized cost and fair value

  $ 32,635,261     $ 36,152,521     $ 30,823,397     $ 33,152,892  

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

Proceeds from the sale of securities, maturities, and asset paydowns for the first six months of 2020 and 2019 were $4,605,009 and $661,264 respectively. Realized gains and losses related to the sale of securities are summarized below:

 

   

Six Months Ended June 30,

 
   

(unaudited)

 
   

2020

   

2019

 

Gross gains

  $ 64,907     $ 3,951  

Gross losses

    (289,785 )     (18,479 )

Net security losses

  $ (224,878 )   $ (14,528 )

 

Proceeds from the sale of securities, maturities, and asset paydowns for the three months ended June 30, 2020 and 2019 were $1,115,733 and $608,682 respectively. Realized gains and losses related to the sale of securities are summarized below:

 

   

Three Months Ended June 30,

 
   

(unaudited)

 
   

2020

   

2019

 

Gross gains

  $ 20,612     $ 3,951  

Gross losses

    (26,537 )     (18,479 )

Net security losses

  $ (5,925 )   $ (14,528 )

 

Gross unrealized losses by duration for available for sale securities are summarized as follows:

 

   

Less than 12 months

   

Greater than 12 months

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Loss

   

Value

   

Loss

   

Value

   

Loss

 
June 30, 2020   (unaudited)  

Available for sale:

     

Fixed maturities:

                                               

Corporate bonds

  $ 1,731,912     $ (182,565 )   $ -     $ -     $ 1,731,912     $ (182,565 )

Redeemable preferred stock

    2,779,058       (159,884 )     -       -       2,779,058       (159,884 )

Mortgage backed and asset backed securities

    457,526       (16,492 )     -       -       457,526       (16,492 )

Total fixed maturities

  $ 4,968,496     $ (358,941 )   $ -     $ -     $ 4,968,496     $ (358,941 )

 

 

   

Less than 12 months

   

Greater than 12 months

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Loss

   

Value

   

Loss

   

Value

   

Loss

 

December 31, 2019

 

Available for sale:

                                               

Fixed maturities:

                                               

Corporate bonds

  $ 967,848     $ (20,079 )   $ -     $ -     $ 967,848     $ (20,079 )

Municipal bonds

    46,646       (1,883 )     -       -       46,646       (1,883 )

Mortgage backed and asset backed securities

    -       -       296,576       (2,309 )     296,576       (2,309 )

Total fixed maturities

  $ 1,014,494     $ (21,962 )   $ 296,576     $ (2,309 )   $ 1,311,070     $ (24,271 )

 

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

 

The total number of available for sale securities in the investment portfolio in an unrealized loss position as of June 30, 2020 was 24, which represented an unrealized loss of $358,941 of the aggregate carrying value of those securities. The 24 securities breakdown as follows: 8 bonds, 7 mortgage and asset backed securities, and 9 preferred stocks. The Company determined that no securities were considered to be other-than-temporarily impaired as of June 30, 2020 and December 31, 2019.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

Mortgage loans on Real Estate

 

The Company’s mortgage loans by property type as of June 30, 2020 and December 31, 2019 are summarized as follows:

 

   

June 30,2020

   

December 31, 2019

 

 

 

(unaudited)

         
Commerical mortgage loans by property type              

Student housing

  $ 786,736     $ -  

Multi-family

    175,954       -  

Total commerical mortgages

  $ 962,690     $ -  

 

The Company’s mortgage loans by loan-to-value ratio as of June 30, 2020 and December 31, 2019 are summarized as follows:

 

   

June 30,2020

   

December 31, 2019

 

 

 

(unaudited)

         
Loan to value ratio              

Over 20 to 30%

  $ 175,954     $ -  

Over 10 to 20%

    786,736       -  

Total

  $ 962,690     $ -  

 

The Company’s mortgage loans by maturity date as of June 30, 2020 and December 31, 2019 are summarized as follows:

 

   

June 30,2020

   

December 31, 2019

 

 

 

(unaudited)

         
Maturity Date              

One year or less

  $ 962,690     $ -  

 

Investment Income, Net of Expenses

 

The components of net investment income for the six months ended June 30, 2020 and 2019 are as follows:

 

   

Six Months Ended June 30,

 
   

2020

   

2019

 
   

(unaudited)

 

Fixed maturities

  $ 617,418     $ 585,033  

Mortgages

    5,851       -  

Equity securities

    289,450       285,076  

Funds withheld

    364,033       -  

Cash and cash equivalents

    11,376       13,978  
      1,288,128       884,087  

Less investment expenses

    (32,117 )     (23,049 )
    $ 1,256,011     $ 861,038  

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

The components of net investment income for the three months ended June 30, 2020 and 2019 are as follows:

 

   

Three Months Ended June 30,

 
   

2020

   

2019

 
   

(unaudited)

 

Fixed maturities

  $ 309,943     $ 282,739  

Mortgages

    5,851     $ -  

Equity securities

    139,261       170,491  

Funds withheld

    304,778       -  

Cash and cash equivalents

    2,064       9,779  
      761,897       463,009  

Less investment expenses

    (20,594 )     (11,903 )
    $ 741,303     $ 451,106  

 

 

Note 3.     Derivative Instruments

 

Accounting for Derivative Instruments

 

See Note 1 for a detailed description of the accounting treatment for derivative instruments, including embedded derivatives.

 

Types of Derivatives used by the Company

 

The Company’s derivatives consists solely of embedded derivatives on funds withheld on coinsurance assets.

 

 

Summary of Derivative  Positions

 

The fair value of the Company’s derivative financial instruments on the consolidated balance sheets as of June 30, 2020 is as follows:

 

   

June 30, 2020

   

December 31, 2019

   
   

(unaudited)

                   
   

Derivative

   

Derivative

 

Balance

   

Asset

   

Liability

   

Asset

   

Liability

 

Reported In

Derivatives:

                                 

Embedded derivatives:

                                 

Funds withheld embedded derivative

  $ -     $ 637,033     $ -     $ -  

Funds withheld

 

The following table shows the change in the fair value of the derivative financial instruments in the consolidated statements of comprehensive income:

 

   

Period Ending

   

Period Ending

 

Balance

   

June 30,2020

   

June 30,2019

 

Reported In

 

 

(unaudited)

   

(unaudited)

   
Derivatives:              

Embedded derivatives:

                 

Change in funds withheld embedded derivative

  $ (637,033 )   $ -  

Net investment gains (losses)

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

 

Note 4.     Fair Value Measurements

 

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

 

 

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

 

 

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

 

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

 

Investments, available for sale: Fair values of available for sale fixed maturity securities are provided by a third party pricing service. The pricing service uses a variety of sources to determine fair value of securities. The Company’s fixed maturity securities are highly liquid, which allows for a high percentage of the portfolio to be priced through pricing sources.

 

Equity securities: Fair values for equity securities are also provided by a third party pricing service and are derived from active trading on national market exchanges.

 

Embedded derivative: The fair value of embedded derivatives associated with funds withheld reinsurance treaty is determined upon a total return swap technique with reference to the fair value of the investments held by the ceding company that support the Company's fund withheld asset with an adjustment for a credit valuation adjustment.  The fair value of the underlying assets is generally based upon market observable inputs using industry standard valuation techniques.  The valuation also requires certain significant inputs, which are generally not observable and accordingly, the valuation is considered level 3 in the fair value hierarchy.  Since the embedded derivative is in a liability position there is no credit valuation adjustment at June 30, 2020.

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

The following table presents the amounts of assets measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019:

 

   

June 30, 2020

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 
   

(unaudited)

 

Fixed maturities:

                               

US Treasury securities

  $ 674,765     $ 674,765     $ -     $ -  

Corporate bonds

    21,874,674       -       21,683,074       191,600  

Municipal bonds

    6,832,005       -       6,832,005       -  

Redeemable preferred stock

    3,058,293       -       3,058,293       -  

Mortgage backed and asset backed securities

    3,712,784       -       3,712,784       -  

Total fixed maturities

    36,152,521       674,765       35,286,156       191,600  

Equities:

                               

Common stock

    7,162,008       7,071,608       90,400       -  

Preferred stock

    1,979,492       -       1,979,492       -  

Total equities

    9,141,500       7,071,608       2,069,892       -  

Funds withheld embedded derivative

    (637,033 )     -       -       (637,033 )

Total

  $ 44,656,988     $ 7,746,373     $ 37,356,048     $ (445,433 )

 

   

December 31, 2019

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 

Available for sale:

                               

Fixed maturities:

                               

US Treasury securities

  $ 632,639     $ 632,639     $ -     $ -  

Corporate bonds

    20,084,397       -       19,892,797       191,600  

Municipal bonds

    7,055,059       -       7,055,059       -  

Redeemable preferred stock

    2,133,893       -       2,133,893       -  

Mortgage backed and asset backed securities

    3,246,904       -       3,246,904       -  

Total fixed maturities

    33,152,892       632,639       32,328,653       191,600  

Equities:

                               

Common stock

    9,214,694       9,169,694       45,000       -  

Preferred stock

    926,809       -       926,809       -  

Total equities

    10,141,503       9,169,694       971,809       -  

Total

  $ 43,294,395     $ 9,802,333     $ 33,300,462     $ 191,600  

 

The reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) are as follows:

 

For the Six Months Ended June 30, 2020

 

Corporate

   

Funds

 
   

Bonds

   

Withheld

 

Fair value, beginnig of period

  $ 191,600     $ -  

Investment related gains (losses), net

    -       (637,033 )

Fair value, end of period

  $ 191,600     $ (637,033 )

 

 

For the Three Months Ended June 30, 2020

 

Corporate

   

Funds

 
   

Bonds

   

Withheld

 

Fair value, beginnig of period

  $ 191,600     $ -  

Investment related gains (losses), net

    -       (637,033 )

Fair value, end of period

  $ 191,600     $ (637,033 )

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 

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

 

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

 

Investment income due and accrued: The carrying amounts approximate fair value because of the short maturity of these instruments.

 

Funds withheld: The carrying value of funds withheld at interest approximates fair value as funds are specifically identified in the agreement. The fair value of the specified funds is based on the fair value of the underlying assets that are held by the ceding company.  The ceding company uses a variety of sources and pricing methodologies, which are not transparent to the Company and may include significant unobservable inputs to value the securities held in distinct portfolios, therefore the valuation of these funds withheld assets are considered Level 3 in the fair value hierarchy.

 

Policy loans: Policy loans are stated at unpaid principal balances. As these loans are fully collateralized by the cash surrender value of the underlying insurance policies, the carrying value of the policy loans approximates their fair value.

 

Federal Home Loan Bank Advances: FHLB advances are stated at the outstanding principal balances and the carrying value approximates fair value.

 

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

 

The estimated fair values of the Company’s financial assets and liabilities at June 30, 2020 and December 31, 2019 are as follows:

 

   

June 30, 2020

                         
   

(unaudited)

                         
   

Carrying Value

   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 

Financial Assets:

                                       

Cash and cash equivalents

  $ 7,376,813     $ 7,376,813     $ 7,376,813     $ -     $ -  

Investment income due and accrued

    370,326       370,326       -       370,326       -  

Funds withheld

    41,931,524       41,294,491       -       -       41,294,491  

Policy loans

    154,088       154,088       -       -       154,088  

Total Financial Assets (excluding available for sale investments)

  $ 49,832,751     $ 49,195,718     $ 7,376,813     $ 370,326     $ 41,448,579  
                                         

Financial Liabilities:

                                       

Federal Home Loan Bank advance

  $ 2,000,000     $ 2,000,000     $ -     $ -     $ 2,000,000  

Policyholder deposits in deposit-type contracts

    70,647,008       73,033,465       -       -       73,033,465  

Total Financial Liabilities

  $ 72,647,008     $ 75,033,465     $ -     $ -     $ 75,033,465  

 

 

   

December 31, 2019

                         
                                         
   

Carrying Value

   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 

Financial Assets:

                                       

Cash and cash equivalents

  $ 6,678,805     $ 6,678,805     $ 6,678,805     $ -     $ -  

Investment income due and accrued

    321,362       321,362       -       321,362       -  

Policy loans

    118,930       118,930       -       -       118,930  

Total Financial Assets (excluding available for sale investments)

  $ 7,119,097     $ 7,119,097     $ 6,678,805     $ 321,362     $ 118,930  
                                         

Financial Liabilities:

                                       

Federal Home Loan Bank advance

  $ 1,000,000     $ 1,000,000     $ -     $ -     $ 1,000,000  

Policyholder deposits in deposit-type contracts

    19,396,614       19,186,265       -       -       19,186,265  

Total Financial Liabilities

  $ 20,396,614     $ 20,186,265     $ -     $ -     $ 20,186,265  

 

 

US Alliance Corporation

Notes to Consolidated Financial Statements (unaudited)

 


Note 5.     Income Tax Provision

 

No income tax expense or (benefit) has been reflected for the quarters ended June 30, 2020 and 2019 due to the lack of taxable net income generated by the Company and a change in the valuation allowance pertaining to the deferred tax asset. The difference between the reported amount of income tax expense and the amount expected based upon statutory rates is primarily due to the increase in the valuation allowance on deferred taxes.

 

The net operating loss carryforwards for the Company are $12,965,591 and $12,567,367 as of June 30, 2020 and December 31, 2019, respectively. The components of the deferred tax assets and liabilities due to book and tax differences are the following: fixed asset depreciation, net operating loss carryforward, net unrealized gains (losses) on investment securities, policyowner benefit reserves and deferred acquisition costs. The deferred tax asset net of valuation allowance is $431,158 as of June 30, 2020 and December 31, 2019.

 

 

Note 6.   Subsequent Events

 

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

 

The Company has evaluated subsequent events through August 12, 2020, the date on which the consolidated financial statements were issued.

 

 

 

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

 

The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in this Form 10-Q. In connection with, and because we desire to take advantage of, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, including those relating to the Covid-19 pandemic, and 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 five wholly-owned subsidiaries: USALSC, a life insurance corporation; DCLIC, a life insurance corporation; USALSC-Montana, a life insurance corporation; USAMC, an insurance marketing corporation; and USAIC, an investment management corporation.  Unless the context otherwise indicates, references in this report to "we," "us,", "our," or the "Company refer collective to USAC and its subsidiaries. 

 

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.

 

On December 14, 2018, the Company acquired Great Western Life Insurance Company. Great Western Life Insurance Company was renamed US Alliance Life and Security Company – Montana and is a subsidiary of USALSC.

 

The Company assumes business under three reinsurance treaties. On January 1, 2013, the Company entered into an agreement to assume 20% of a certain block of health insurance policies from Unified Life Insurance Company. On September 30, 2018, the Company entered into a coinsurance agreement to assume 100% of a certain block of life insurance policies from American Life and Security Company (“ALSC”). On April 15, 2020, with an effective date of January 1, 2020, the Company entered into a second coinsurance agreement with ALSC (the "2020 ALSC Agreement") to assume a quota share percentage of a block of annuity policies.  As of June 30, the Company had assumed $49.8 million in annuity deposits under the 2020 ALSC Agreement.

 

Critical Accounting Policies and Estimates

 

Our accounting and reporting policies are in accordance with GAAP.  Our estimates may vary as more information about the extent to which Covid-19 and the resulting impact on economic conditions and the financial markets become known.   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 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. 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 income.

 

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 on 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.

 

 

       Embedded Derivatives

 

       The Company has entered into coinsurance funds withheld arrangement which contains an embedded derivative. Under ASC 815, the Company assesses whether the embedded derivative is clearly and closely related to the host contract. The Company bifurcates embedded derivatives from the host instrument for measurement purposes when the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and a separate instrument with the same terms would qualify as a derivative instrument. Embedded derivatives, which are reported with the host instrument on the consolidated balance sheets in funds withheld under coinsurance agreement, are reported at fair value with changes in fair value recognized in the consolidated statements of comprehensive income (loss) in net investment gains (losses).

 

       Funds Withheld under Coinsurance Agreement

 

         Funds withheld under coinsurance agreement represent amounts contractually withheld by a ceding company in accordance with a reinsurance agreement entered into in 2020. For agreements written on a coinsurance funds withheld basis, assets that support the net statutory reserves or as defined by the treaty, are withheld and legally owned by the ceding company.  Interest is recorded in net investment income, net of related expenses, in the consolidated statements of income (loss).  Funds withheld under coinsurance agreement are presented net of the embedded Derivative, discussed below.

 

       Mortgage Loans on Real Estate 

 

        Mortgage loans on real estate are carried at unpaid principal balances, net of any unamortized premium or discount and valuation allowances.  Interest income is accrued on the principal amount of the mortgage loans based on its contractual interest rate.  Amortization of premiums and discounts is recorded using the effective yield method. The Company accrues interest on loans until probable the Company will not receive interest or the loan is 90 days past due.  Interest income, amortization of premiums, accretion of discounts and prepayment fees are reported in investment income, net of related expenses in the consolidated statements of comprehensive income (loss).

 

          A mortgage loan is considered to be impaired when, based on the current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the mortgage agreement.  

 

         Valuation allowances on mortgage loans are established based upon inherent losses expected by management to be realized in connection with future dispositions or settlement of mortgage loans, including foreclosures. The Company establishes valuation allowances for estimated impairments on an individual loan basis as of the balance sheet date. Such valuation allowances are based on the excess carrying value of the loan over the present value of expected future cash flows discounted at the loan’s original effective interest rate, the value of the loan’s collateral if the loan is in the process of foreclosure or is otherwise collateral-dependent, or the loan’s market value if the loan is being sold. These evaluations are revised as conditions change and new information becomes available. In addition to historical experience, management considers qualitative factors that include the impact of changing macro-economic conditions, which may not be currently reflected in the loan portfolio performance, and the quality of the loan portfolio.

 

        Any interest accrued or received on the net carrying amount of the impaired loan will be included in investment income or applied to the principal of the loan, depending on the assessment of the collectibility of the loan. Mortgage loans deemed to be uncollectible or that have been foreclosed are charged off against the valuation allowances and subsequent recoveries, if any, are credited to the valuation allowances. Changes in valuation allowances are reported in investment related gains (losses), net on the consolidated statements of income (loss).

 

       The Company evaluates whether a mortgage loan modification represents a troubled debt restructuring. In a troubled debt restructuring, the Company grants concessions related to the borrower’s financial difficulties. Generally, the types of concessions include: reduction of the contractual interest rate, extension of the maturity date at an interest rate lower than current market interest rates and/or a reduction of accrued interest. The Company considers the amount, timing and extent of the concession granted in determining any impairment or changes in the specific valuation allowance recorded in connection with the troubled debt restructuring. Through the continuous monitoring process, the Company may have recorded a specific valuation allowance prior to when the mortgage loan is modified in a troubled debt restructuring. Accordingly, the carrying value (after specific valuation allowance) before and after modification through a troubled debt restructuring may not change significantly, or may increase if the expected recovery is higher than the pre-modification recovery assessment.

 

 

Mergers and Acquisitions

 

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.

 

On October 11, 2018, the Company entered into a stock purchase agreement with Great Western Insurance Company to acquire Great Western Life Insurance Company ("GWLIC"). The transaction closed on December 14, 2018. USALSC paid $500,000 to acquire all of the outstanding shares of GWLIC.

 

New Accounting Standards

 

A detailed discussion of new accounting standards is provided in the Notes to Consolidated Financial Statements beginning on p. 8 of this quarterly report.

 

Discussion of Consolidated Results of Operations

 

Revenues. Insurance revenues are primarily generated from premium revenues and investment income. Insurance revenues for the six months ended June 30, 2020 and 2019 are summarized in the table below.

 

   

Six Months Ended June 30,

 
   

2020

   

2019

 

Income:

    (unaudited)

Premium income

  $ 5,083,778     $ 4,920,690  

Net investment income

    1,256,011       861,038  

Net investment gains (losses)

    (1,359,105 )     831,289  

Other income

    27,708       25,058  

Total income

  $ 5,008,392     $ 6,638,075  

 

Insurance revenues for the three months ended June 30, 2020 and 2019 are summarized in the table below.

 

   

Three Months Ended June 30,

 
   

2020

   

2019

 

 

 

(unaudited)

 
Income:                

Premium income

  $ 2,368,017     $ 2,527,714  

Net investment income

    741,303       451,106  

Net investment gains (losses)

    11,656       104,086  

Other income

    14,052       12,259  

Total income

  $ 3,135,028     $ 3,095,165  

 

Our 2020 first half revenues decreased to $5,008,392, a decrease of $1,629,683 or 25%, from the 2019 first half revenues of $6,638,075. The Company was required to implement a new accounting standard in 2019 which results in unrealized gains and losses on equity securities being included in total income. This standard has resulted in increased volatility in total income.

 

Premium revenue: Premium revenue for the first six months of 2020 was $5,083,778 compared to $4,920,690 in the first six months of 2019, an increase of $163,088 or 3%. The increase was driven by an increase in direct single and recurring premiums. Even though it is a reduction in revenue, ceded premium increases reflect the growth of our group policy premiums as we focused on small companies to assist them with their employee benefits.

 

 

Direct, assumed and ceded premiums for the six months ended June 30, 2020 and 2019 are summarized in the following table.

 

   

Six Months Ended June 30,

 
   

2020

   

2019

 
    (unaudited)

Direct

  $ 2,941,001     $ 2,603,097  

Assumed

    2,609,880       2,743,577  

Ceded

    (467,103 )     (425,984 )

Total

  $ 5,083,778     $ 4,920,690  

 

The Company continuously searches for new product and distribution opportunities to continue to increase premium production on both a direct and assumed basis.

 

Premium revenue for the three months ended June 30, 2020 was $2,368,017 compared to $2,527,714 for the same period in 2019, a decrease of $159,697 or 6%. The decrease was driven by a decrease in direct single premiums and assumed premiums. Even though it is a reduction in revenue, ceded premium increases reflect the growth of our group policy premiums as we focused on small companies to assist them with their employee benefits.

 

Direct, assumed and ceded premiums for the three months ended June 30, 2020 and 2019 are summarized in the following table.

 

   

Three Months ended June 30,

 
   

2020

   

2019

 
   

(unaudited)

 

Direct

  $ 1,363,776     $ 1,411,317  

Assumed

    1,249,493       1,339,784  

Ceded

    (245,253 )     (223,387 )

Total

  $ 2,368,017     $ 2,527,714  

 

Investment income, net of expenses: The components of net investment income for the six months ended June 30, 2020 and 2019 are as follows:

 

   

Six Months Ended June 30,

 
   

2020

   

2019

 
   

(unaudited)

 

Fixed maturities

  $ 617,418     $ 585,033  

Mortgages

    5,851       -  

Equity securities

    289,450       285,076  

Funds withheld

    364,033       -  

Cash and short term investments