CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

 

PART I

 

 

ITEM 1.

BUSINESS.

 

 

Overview and History - US Alliance Corporation ("USAC") 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 1303 SW First American Place, Suite 200, Topeka, Kansas 66604. Our telephone number is 785-228-0200 and our website address is www.usalliancecorporation.com.

 

USAC has five wholly-owned operating subsidiaries. US Alliance Life and Security Company ("USALSC") was incorporated June 9, 2011, to serve as our life insurance company. US Alliance Marketing Corporation ("USAMC") was incorporated April 23, 2012, to serve as a marketing resource. US Alliance Investment Corporation ("USAIC") was incorporated 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 registration statement to "we", "us", "our", or the "Company" refer collectively to USAC and its subsidiaries.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

DCLIC received a Certificate of Authority from the North Dakota Insurance Department ("NDID") effective January 24, 2012. DCLIC currently offers the following eight product categories:

 

Prairie Term Life Series®, Registered Trademark No 5,266,633. This series of products includes a simplified issue term life insurance product is designed to provide coverage with a face value of $250,000 or less and a fully underwritten term life insurance product designed to provide coverage for higher face amounts.

 

Accumulator Whole Life. This is a hybrid product featuring a limited pay whole life insurance policy and a flexible premium deferred annuity rider.

 

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

 

Little Missouri Juvenile Series®, Registered Trademark No. 5,271,811. This product is term life insurance to age 25 available for purchase on children up to the age of 16 in an amount of $10,000 or $20,000 with a one-time premium payment.

 

Badlands Annuity Series®, Registered Trademark No. 5,266,632. This product is a flexible premium deferred annuity with initial rates guaranteed for five years by company practice.

 

Peace Garden Pre-Need Series®, Registered Trademark No. 5,271,810. This series of products includes a single or multiple pay premium pre-need whole life insurance policy sold by funeral directors who are licensed by the NDID in conjunction with a preplanned funeral. This product is typically sold with smaller death benefits than our traditional Frontier Whole Life.

 

Dakota Group Series®, Registered Trademark No. 5,402,079. This is a series of group non-medical insurance products developed for the small group marketplace. These products are sold to employers and provide benefits for their employees. Our group suite of products includes group term life insurance, group long term disability, and group short term disability.

 

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

 

USALSC-Montana is not marketing products at this time.

 

Our single pay life products (which include our Juvenile and Pre-Need products) accounted for 61% of 2020 direct premium revenue. Our individual life and Critical Illness products (which include Term Life and Whole Life products) accounted for 21% of 2020 direct premium revenue. Our group products accounted for 18% of 2020 direct written premiums.

 

USALSC and DCLIC seek opportunities to develop and market additional products.

 

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

 

Material Agreements and Partners - Effective January 1, 2013, USALSC entered into a reinsurance agreement with Unified Life Insurance Company (“ULIC”) to assume 20% of a certain block of health insurance policies. This agreement renews annually unless either party provides written notice of its intent not to renew at least 120 days prior to the expiration of the then-current term. The agreement provides for monthly settlement. For the year ended December 31, 2020, USALSC assumed premiums of $3,825,040.

 

 

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

 

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

 

On September 30, 2017, USALSC entered into a coinsurance agreement with American Life and Security Corporation (“ALSC”) to assume 100% of a certain block of life insurance policies (the "2017 ALSC Agreement"). USALSC is also the servicer of this block of policies. USALSC paid a ceding commission of $1,850,000 and received $7,153,663 from ALSC. The 2017 ALSC Agreement will remain in effect until all liabilities associated with this block of policies have been satisfied.

 

On December 14, 2018, USALSC acquired Great Western Life Insurance Company (GWLIC) pursuant to Stock Purchase agreement entered into on October 11, 2018 with Great Western Insurance Company, a wholly-owned subsidiary of American Enterprise Group, Inc. USALSC paid $500,000 to acquire all outstanding shares of GWLIC. Subsequent to the acquisition, GWLIC was renamed US Alliance Life and Security Company – Montana.

 

On April 15, 2020, with an effective date of January 1, 2020, USALSC 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 December 31, 2020, the Company had assumed $50.1 million in annuity deposits under the 2020 ALSC Agreement.

 

On December 31, 2020, USALSC and ALSC agreed to terminate a portion of the 2017 ALSC Agreement, pursuant to an amendment to the 2017 ALSC Agreement. USALSC transferred assets of $9,282,836 and received a ceding commission of $927,000.

 

On December 31, 2020, DCLIC entered into an assumption agreement with ALSC where it acquired a certain block of life insurance policies (the "ALSC Assumption Agreement"). Under the ALSC Assumption Agreement, DCLIC becomes directly liable to the policyholders of this block of business. DCLIC received assets equaling $9,282,836 [IS THIS NUMBER CONSISTENT WITH P. 27?] and paid a ceding commission of $927,000 to ALSC.

 

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

 

Investments – USAC and USAIC contracted in 2013 with New England Asset Management, Inc. ("NEAM"), a Berkshire Hathaway subsidiary, to manage the investments of USALSC and a portion of the investments of USAC. USALSC, DCLIC and USALSC-Montana have investment management agreements with USAIC, who has a sub-advisory agreement with NEAM. DCLIC was added to this agreement on August 1, 2017 and USALSC-Montana was added to this agreement on December 14, 2018. The investment parameters are determined by Kansas law, the KID, the North Dakota Insurance Department, and the Montana Insurance Department, as well as the internal investment policies of USALSC, DCLIC, USALSC-Montana and USAC.

 

   As a part of its 2020 ALSC Agreement, USALSC contracted with 1505 Capital LCL ("1505 Capital") to provide investment services on the assets supporting this agreement.

 

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

 

 

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

 

The following summarizes USAC’s Investment Policy, effective September 13, 2018 as amended:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

■

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

 

■

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

 

■

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

 

■

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

 

■

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

 

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

 

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

 

% of Portfolio Cost Value
Asset Class		Minimum				Maximum
Cash/Short Term			0	%			100	%
Investment Grade Fixed Income			20	%			100	%
High Yield Fixed Income			0	%			15	%
Equity			0	%			50	%
Mortgage and Mortgage related			0	%			50	%
Real Estate (including REITs)			0	%			20	%

 

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

 

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

 

 

Marketing and Distribution - USALSC and DCLIC use independent consultants and referrals to market their products and build distribution channels among funeral homes, banks, accountants, independent insurance agencies, agents, insurance brokerage firms, business owners and other distribution channels as opportunities arise. USALSC and DCLIC works with other insurance companies who have captive or non-captive agents to broaden their product offerings.

 

Employees - As of December 31, 2020, USAC and its subsidiaries have twelve full-time employees and one part-time employee.

 

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

 

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

 

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

 

Implications of Emerging Growth Company Status - As a company with less than $1 billion in revenue in our last fiscal year, we are defined as an “emerging growth company” under the Jumpstart Our Business Startups (“JOBS”) Act. We will retain “emerging growth company” status until the earliest of:

 

• The last day of the fiscal year during which our annual revenues are equal to or exceed $1 billion;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

 

ITEM 1A.

RISK FACTORS.

 

Risks Associated with an Investment in USAC Stock

 

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

 

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

 

OPERATING RISK - We face the risks inherent in establishing a business, including limited capital, challenging product markets, lack of significant revenues, as well as competition from better capitalized and more seasoned companies. We have no control over general economic conditions, competitors’ products or their pricing, customer demand, costs of marketing or advertising and hacking of our administrative systems. There can be no assurance that our life insurance operations will be successful. The likelihood of any success must be considered in light of our history of operations and accumulated operating losses to date. These risks make it difficult to accurately predict our future revenues or results of operations. As a result, our financial results fluctuate. The Company evaluates the financial condition of its reinsurers to minimize its exposure to losses from reinsurer insolvencies. Management believes that any liabilities arising from this contingency would not be material to the Company’s financial position. Additional Operating Risks include:

 

BREACH OF INTERNAL CONTROLS/FRAUD – Internal controls are established on all aspects of the business. If internal controls are breached, fraud, incorrect payment of funds, incorrect claim processing, or other material issues within the company could result. Fraud from internal or external sources will hurt profitability and strain and limit financial resources needed for company to grow.

 

CYBER ATTACK – A variety of cyber attacks can leave the company vulnerable to loss or theft of data, systems shutdown and a large-scale timeframe of being unable to conduct business related activities.

 

DEFICIENCY OF INTERNAL CONTROLS OVER FINANCIAL REPORTING – A deficiency of internal controls could leave assets vulnerable from accidental loss or loss from fraud. The integrity of the information used to make accurate business decisions could be compromised and could lead to being not in compliance with many federal, state and local laws and regulations affecting the operation of the business.

 

 

STRUCTURAL RISK/SYSTEMS RISK – The loss of primary, secondary and back-up power systems at office or at cloud data facilities, failure of networking devices, file servers, server crashes or undiagnosed errors masked by automated failure detection systems can lead to catastrophic failure of core systems and large scale downtime events.

 

REINSURANCE RELATIONSHIP RISK – The Company relies upon its reinsurers to provide expertise, financial strength, and growth opportunities and they play a key role in the success of the Company. The loss of a key reinsurance relationship could impact the future success of the Company.

 

LIQUIDITY RISK – While USAC is considered a public company by the SEC, there is no public market for USAC Common Stock, and there is no assurance that one will develop or be sustained, or that USAC Common Stock will become publicly traded. As noted in the 2015 prospectus and subsequent post-effective amendments which have been filed with the office of the Security Commissioners in Kansas, it may be difficult to sell shares shares of USAC Common Stock. Our securities are not listed for trading on any national securities exchange nor are bid or asked quotations reported in any over-the-counter quotation service and we do not intend to seek any such listing in the foreseeable future.

 

PROFITABILITY - As is common among small life insurance companies, we have incurred significant losses. As of December 31, 2020 we had a consolidated accumulated deficit of $9.1 million. These losses were attributable primarily to costs of administration, the substantial nonrecurring costs of writing new life insurance (which are deferred and amortized in accordance with our deferred acquisition policy) and include first year commissions payable to insurance agents, medical and investigation expenses as well as other expenses incidental to the issuance of new policies as well as with the reserves required to be established for each policy.  The Company was profitable for the first time in 2019 and was profitable again in 2020.

 

DIVIDENDS - We have not paid a cash dividend on USAC Common Stock and we do not anticipate paying a cash dividend in the foreseeable future. We intend to retain available funds to be used in the expansion of operations. The success of any investment in USAC Common Stock will depend upon any future appreciation in its value which depends upon the success of our life insurance subsidiaries. We cannot guarantee that our common stock will appreciate in value or achieve or maintain a value equal to the price at which shares were purchased. Further, a market may never develop to sell shares of USAC Common Stock.

 

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

 

DILUTION RISK - We continue to conduct additional offerings of our securities to raise additional capital to fund our growth. In February, 2010, we filed a prospectus with the Kansas Securities Commission to register shares of USAC Common Stock and warrants to purchase USAC Common Stock. In February 2015, we filed a Prospectus with the Kansas Securities Commission to register the common stock to be issued upon the exercise of the warrants, and in January 2016, filed a Supplement to the Prospectus to register an additional 1,500,000 shares of USAC Common Stock. This offering has been renewed annually by post-effective amendments to the original 2015 offering. We also commenced a private placement of USAC Common Stock in North Dakota in 2017. Any additional offerings of USAC securities that we may conduct in the future will reduce the ownership percentage of existing stockholders and be accretive to existing stockholder book value.

 

KEY EXECUTIVE RISK - The loss of services from a key executive could have a material adverse effect on our ability to execute our business plan. This could hamper profitability, response time, productivity, image, reputation and confidence.

 

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

 

 

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

 

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

 

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

 

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

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

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

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

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

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

 

MARKETING STRATEGY RISK - Premium written depends primarily on our products, product pricing and ability to choose and timely and adequately train and motivate agents, producers, and brokers to sell our products.

 

Large life companies who have greater financial resources, longer business histories, and who may have more products present significant competition to smaller insurance companies. These larger companies also generally have large distribution opportunities which makes it difficult to build a small company.

 

Independent agents are not required to sell the Company’s products and are free to sell products from other licensed companies. We are committed to working to educate and incentivize independent agents to sell our products.

 

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

 

 

NO INSURANCE RATING RISK – USACSC, DCLIC, and USALSC-Montana have not been rated by a rating agency. The lack of a rating could result in loss of faith from producers, E&O carriers and consumers looking to get products from a rated company, as well as a negative impact on ability to compete with rated companies.

 

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

 

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

 

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

 

Compliance with insurance regulation is costly and time consuming, requiring the filing of detailed annual reports, and the business and accounts are subject to examination by the applicable state insurance regulator.

 

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

 

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

 

REGULATORY FACTORS RISK – Broad insurance laws in the states we do business give insurance regulators broad regulatory authority. Combined with the Dodd-Frank Wall Street Reform and Consumer Protection Act, this authority can allow regulators to interpret and implement additional rules that may take several years to complete. The ultimate outcome of regulatory rulemaking proceedings cannot be predicted with certainty and the regulations promulgated could have a material impact on consolidated financial results or financial condition.

 

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

 

COMPETITION RISK - Large life companies who have greater financial resources, longer business histories, and who may have more products present significant competition to smaller insurance companies. These larger companies also generally have large distribution opportunities which makes product distribution difficult to build a small company.

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

TAX LAW RISK - Congress considers legislation that could adversely affect the sale of life insurance products compared with other financial products. There can be no assurance as to whether such adverse legislation will be enacted or, if enacted, whether such legislation would contain provisions with possible adverse effects on any annuity and life insurance products that we and our operating subsidiaries develop.

 

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

 

REINSURANCE RISK -In order to manage the risk of financial exposure to adverse underwriting results, reinsurers accept a portion of the risk of other insurance companies. However, the direct insurer remains liable with respect to ceded insurance should any reinsurer fail to meet the obligations assumed by the reinsurer.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS.

 

Not applicable.

 

 

ITEM 2.

PROPERTIES.

 

USAC and its subsidiaries share offices located at 1303 SW First American Place, Suite 200, Topeka, Kansas 66604 in a building purchased by DCLIC on November 15, 2020. Prior to moving into 1303 SW Frist American Place, USAC and its subsidiaries rented space at 4123 SW Gage Center Dr, Suite 240, Topeka, KS 66604.  Total rent expense was $37,824 and $34,671 for the years ended December 31, 2020 and 2019.

 

DCLIC also maintains an office at 107 W. Main Avenue, Suite 325, Bismarck, North Dakota, 58501. The lease for the Bismarck office expired on September 30, 2018 and was renewed for an additional two year term. In 2020, this lease was extended for one additional year to September 30, 2021 with an optional additional year. The lease rate for this location is $939 per month for the lease year beginning October 1, 2020. The Company paid $10,322 and $11,114 in rent for this location in 2020 and 2019.

 

ITEM 3.

LEGAL PROCEEDINGS

 

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

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

PART II

 

ITEM 5.

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

 

(a)

Market Information

 

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

 

As of December 31, 2020, we had issued and outstanding 7,741,487 shares of our voting common stock. No other equity securities of the Company have been issued.

 

(b)

Holders of Record

 

As of February 1, 2021 there are approximately 3,502 holders of record of our voting common stock.

 

(c)

Dividends

 

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

 

 

(d)

Securities Authorized for Issuance Under Equity Compensation Plans

 

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

 

(e)

Recent Sales of Unregistered Securities

 

During the year ended December 31, 2020, the Company issued 3,483 shares of common stock, for aggregate consideration of $24,381, pursuant to an offering to residents of the state of Kansas that was registered with the Kansas Securities Commissioner (the "Kansas Offering").

 

The Kansas Offering 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 Kansas Offering 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 year ended December 31, 2020, the Company issued 4,000 shares of common stock, for aggregate consideration of $28,000, pursuant to a private placement offering to accredited investor 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 6.

SELECTED FINANCIAL DATA.

 

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

 

 

ITEM 7.

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

 

The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in this Form 10-K. In connection with, and because we desire to take advantage of, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, including those relating to the Covid-19 pandemic, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by, or on our behalf. We disclaim any obligation to update forward looking statements.

 

Overview

 

USAC was formed as a Kansas corporation on April 24, 2009 for the purpose of raising capital to form a new Kansas-based life insurance company. We presently conduct our business through our 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

 

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 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, 2017, the Company entered into the 2017 ALSC Agreement to assume 100% of a certain block of life insurance policies from ALSC. On April 15, 2020, with an effective date of January 1, 2020, the Company entered into the 2020 ALSC Agreement to assume a quota share percentage of a block of annuity policies. As of December 31, 2020, the Company had assumed $50.1 million in annuity deposits under the 2020 ALSC Agreement. Effective December 31, 2020 USALSC entered into an agreement with ALSC, which provided for ASLC to recapture all reserves previously ceded to USALSC with respect to a portion of the 2017 ALSC Agreement. USALSC and ASLC agreed that the commuted business shall be discharged by USALSC’s transfer of invested assets and cash in the amount of $9,181,100. As part of the transaction the Company released $10,972,785 in reserve liabilities and $1,146,156 of deferred acquisition costs, resulting in a commutation gain of $543,794, which is recorded in other income.

 

Critical Accounting Policies and Estimates

 

Our accounting and reporting policies are in accordance with GAAP. Preparation of the consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The following is an explanation of our accounting policies and the estimates considered most significant by management. These accounting policies inherently require significant judgment and assumptions and actual operating results could differ significantly from management’s estimates determined using these policies. We believe the following accounting policies, judgments and estimates are the most critical to the understanding of our results of operations and financial position. A detailed discussion of significant accounting policies is provided in this report in the Notes to Consolidated Financial Statements included with this annual report.

 

 

 Valuation of Investments

 

 The Company's principal investments are in fixed maturity, mortgages, 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. 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. NEAM and 1505 Capital, our investment managers, provide 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. Our membership in the Federal Home Loan Bank )"FHLB") provides additional liquidity which further reduces the likelihood that we would be required to sell a security prior to recovery. As it relates to debt securities, if we do not expect to recover the amortized basis, do not plan to sell the security and if it is not more likely than not that we would be required to sell a security before the recovery of its amortized cost, the other-than-temporary impairment would be recognized. We would recognize the credit loss portion through earnings in the income statement and the noncredit loss portion in accumulated other comprehensive loss.

 

Deferred Acquisition Costs

 

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

 

Value of Business Acquired

 

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

 

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

 

 

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

 

 Goodwill

 

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

 

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

 

Reinsurance

 

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

 

Future Policy Benefits

 

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

 

Income Taxes

 

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

 

Recognition of Revenues

 

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

 

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

 

 

Embedded Derivatives

 

The Company has entered into coinsurance funds withheld arrangement with ALSC 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 in net investment gains.

 

Funds Withheld under Coinsurance Agreement

 

Funds withheld under coinsurance agreement represent amounts contractually withheld by a ceding company in accordance with the 2020 ALSC Agreement. 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.  Funds withheld under coinsurance agreement are presented net of the embedded derivative, discussed above.  Under the terms of the 2020ALSC Agreement, the Company may assume custody of the assets in the funds withheld account once the Company attains its "Qualified Institutional Buyer" designation (as that term is defined in Rule 144A under the Securities Act of 1933, as amended, which is anticipated to be achieved in the first quarter of 2021.   The Company will record the funds withheld assets at fair value on the date of transfer, which will eliminate the embedded derivative component associated with the 2020 ALSC Agreement.

 

 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.

 

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 net investment gains (losses) on the consolidated statements of income.

 

 

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. NPCC shareholders received .5841 shares of US Alliance Corporation stock for each share of NPCC stock owned. USAC issued 1,644,458 shares of common stock to holders of NPCC 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. The transaction closed on December 14, 2018. USALSC paid $500,000 to acquire all of the outstanding shares of GWLIC.

 

Effective December 31, 2020, the DCLIC acquired a block of life insurance policies according to the terms of an assumption agreement with ALSC. The Company acquired fixed maturity securities and cash of $9,181,100 [IS THIS NUMBER CONSISTENT WITH P. 3?], assumed liabilities of $10,972,785 and recorded VOBA of $2,163,542.

 

New Accounting Standards

 

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

 

Discussion of Consolidated Results of Operations

 

Total Income. Insurance revenues are primarily generated from premium revenues and investment income. Insurance revenues for the years ended December 31, 2020 and 2019 are summarized in the table below.

 

		Years Ended December 30,
		2020				2019
Income:
Premium income		$	10,117,110			$	9,076,205
Net investment income			3,552,261				1,790,601
Net investment gains			1,967,014				1,042,334
Other income			635,520				57,146
Total income			16,271,905				11,966,286

 

Our 2020 total income grew to $16,271,905, an increase of $4,305,619 or 36% from 2019  total income of $11,966,286. The increase in total income was driven by increased investment income as a result of our growth in assets, net investment gains, and premium income.

 

 

The following graph summarizes our five-year trend of total income:

 

 

Premium income: Premium income for the year ended December 31, 2020 was $10,117,110 compared to $9,076,205 in 2019, an increase of $1,040,905 or 11%. The increase is a result of growth of our direct premiums.

 

Direct, assumed and ceded premiums for the years ended December 31, 2020 and 2019 are summarized in the following table.

 

		Years Ended December 31,
		2020				2019
Direct		$	6,358,043			$	4,970,208
Assumed			4,682,634				4,906,522
Ceded			(923,567	)			(800,525	)
Total		$	10,117,110			$	9,076,205

 

The Company continues to search for new product and distribution opportunities to increase premium production on both a direct and assumed basis.

 

Investment income, net of expenses: The components of net investment income for the years ended December 31, 2020 and 2019 are as follows:

 

		Years Ended December 31,
		2020				2019
Fixed maturities		$	1,178,055			$	1,164,520
Mortgages			129,621				-
Equity securities			669,147				636,668
Funds withheld			1,680,220				-
Cash and cash equivalents			12,501				36,359
			3,669,544				1,837,547
Less investment expenses			(117,283	)			(46,946	)
		$	3,552,261			$	1,790,601

 

 

Net investment income for the years ended December 31, 2020 was $3,552,261, compared to $1,790,601 in 2019, an increase of $1,761,660 or 98%. This increase in investment income is primarily a result of increased invested assets as a result of our 2020 ALSC Agreement.

 

Net investment gains (losses): Net investment gains for the year ended December 31, 2020 were $1,967,014, compared to gains of $1,042,334 in 2019, an increase of $924,680 or 89%. The increase in net investment gains is attributable to unrealized gains in our equity portfolio, realized gains in our equity portfolio, and an unrealized gain on our funds withheld asset. Net investment gains for 2020 were comprised of $952,667 of unrealized gains in our equity portfolio and funds withheld asset and realized gains of 1,014,347. Net investment gains for 2019 were comprised of $1,256,769 of unrealized gains in our equity portfolio and realized losses of 214,235. Realized gains and losses related to the sale of securities for the years ended December 31, 2020 and 2019 are summarized as follows:

 

		Years Ended December 31,
		2020				2019
Gross gains		$	1,388,209			$	43,935
Gross losses			(373,862	)			(258,370	)
Realized gains (losses)		$	1,014,347			$	(214,435	)

 

Other income: Other income for the year ended December 31, 2020 was $635,520 compared to $57,146 in 2019, an increase of $578,374 or 1012%. The increase is driven by the net gain on the partial termination of our 2017 ALSC Agreement.

 

Expenses. Expenses for the year ended December 31, 2020 and 2019 are summarized in the table below.

 

			2020				2019
Expenses:
Death claims		$	1,943,563			$	1,287,893
Policyholder benefits			5,248,470				4,212,534
Increase in policyholder reserves			3,359,609				2,599,575
Commissions, net of deferrals			781,400				783,724
Amortization of deferred acquisition costs			970,386				433,218
Amortization of value of business acquired			20,302				20,303
Salaries & benefits			1,219,534				1,081,955
Other operating expenses			2,429,466				1,379,034
Total expense		$	15,972,730			$	11,798,236

 

        The following chart and graph summarizes our five-year expense trend:

 

 

			Increase in				Other												% of Operating
			Policyholder				Policy-related				Operating				Total				Expense to
Year			Reserves				Expenses				Expenses				Expenses				Total Expense
2016				1,686,841				4,224,156				1,961,649				7,872,646				25	%
2017*				5,654,476				5,160,175				2,306,238				13,120,889				18	%
2018				2,766,169				6,028,730				3,120,524				11,915,423				26	%
2019				2,599,575				6,737,672				2,460,989				11,798,236				21	%
2020				3,359,609				8,964,121				3,649,000				15,972,730				23	%

 

* 2017 Increase in Reserves includes a one-time $3.9 million reserve increase from the 2017 ALSC Agreement transaction.

Increases in policyholder reserves represents funds that we maintain and invest for the future benefit of our policyholders. Other policy-related expenses represent the other expenses associated with fulfilling our obligations to our policyholders and producers. Operating expenses represent the costs to operate the company. It is important to note that our 2017 operating expense ratio is impacted by the one-time reserve increase which resulted from our transaction with ALSC. Absent this transaction, our 2017 ratio would have been 25%.

 

Death claims: Death benefits were $1,943,563 in the year ended December 31, 2020 compared to $1,287,893 in 2019, an increase of $655,670 or 51%. This increase is attributable to the growth of our in-force block of life insurance policies. The majority of death claims paid from inception have been on pre-need policies. We expect these claims to grow as we continue to increase the size of our in-force pre-need business.

 

Policyholder benefits: Policyholder benefits were $5,248,470 in the year ended December 31, 2020 compared to $4,212,534 in 2019, an increase of $1,035,936 or 25%. The primary driver of this increase is interest credited on annuities assumed as a result of our 2020 ALSC Agreement.

 

Increase in policyholder reserves: Policyholder reserves increased $3,359,609 in the year ended December 31, 2020, compared to $2,599,575 in 2019, an increase of $760,034 or 29%. The growth in reserves is the result of increased premiums.

 

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 $781,400 in the year ended December 31, 2020, compared to $783,724 in 2019, a decrease of $2,324 or 2.9%. This decrease is due to a changing mix of premiums.

 

Amortization of deferred acquisition costs: The amortization of deferred acquisition costs ("DAC") was $970,386 in the year ended December 31, 2020, compared to $433,218 in 2019, an increase of $537,168 or 124%. As a result of the Covid-19 pandemic and the resulting historic low interest rates, the Company reassessed its DAC assumptions regarding reinvestment rates. As a result, the Company reduced its DAC balance by $430,000 to reflect the current reinvestment environment and the uncertainty of interest rates. Additionally, the Company began amortizing costs deferred in conjunction with its 2020 ALSC Agreement.

 

Amortization of value of business acquired: The amortization of value of business acquired (“VOBA”) was $20,302 in the year ended December 31, 2020 and is unchanged from the same period in 2019. VOBA amortization is due to our 2017 acquisition of DCLIC. VOBA is being amortized straight-line over 30 years.

 

Salaries and benefits: Salaries and benefits were $1,219,534 for the year ended December 31, 2020, compared to $1,081,955 in 2019, an increase of $137,579 or 13%. Staffing costs increased due to increased compensation and bonus payments.

 

Other expenses: Other operating expenses were $2,429,466 in the year ended December 31, 2020, compared to $1,379,034 in 2019, an increase of $1,050,432 or 76%. Operating costs were driven higher due primarily to our pre-paid software asset being recognized as an expense of $250,000, increased accounting and actuarial fees totaling approximately $175,000, increased computer and software expense of approximately $100,000, increased regulatory costs as a result of our insurance company examination totaling approximately $75,000 and expenses associated with implementing a new disability reinsurance program totaling $50,000. Additionally, in 2019 we recognized expense savings from our acquisition of USALSC-Montana which reduced 2019 expenses by $100,000. We also recovered a loan balance that had previously been written off which further reduced our 2019 expenses by approximately $60,000.

 

Federal income tax benefit: In the year ended December 31, 2020, the Company recognized a deferred income tax benefit of $140,274. In the year ended December 31, 2019, the Company recognized a deferred income tax benefit of $431,158.  These benefits are the result of reductions in the deferred tax asset valuation allowance. 

 

Net Income: Our net income was $439,449 in the year ended December 31, 2020 compared to net income of $599,208 in 2019, a decrease of $159,759 or 27%. Our net income per share was $0.06 compared to net income per share of $0.08 in 2019, basic and diluted.

 

 

The following graph illustrates our five-year trend of net income per share:

 

 

Discussion of Consolidated Balance Sheet

 

Assets. Assets have increased to $115,574,997 as of December 31, 2020, an increase of $60,635,748 or 110% from December 31, 2019. This is primarily the result of the 2020 ALSC Agreement.

 

Available for sale fixed maturity securities: As of December 31, 2020, we had available for sale fixed maturity assets of $37,677,578, an increase of $4,524,686 or 14% from the December 31, 2019 balance of $33,152,892. The increase is driven by the purchase of additional assets and by an increase in 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.

 

Mortgage loans on real estate: As of December 31, 2020, we had mortgage loans on real estate of $3,166,136 which are as a result of the 2020 ALSC Agreement. We held no mortgages at December 31, 2019.

 

Equity securities, at fair value: As of December 31, 2020, we had available for sale equity assets of $9,221,574, a decrease of $919,929 or 9% from the December 31, 2019 balance of $10,141,503. This decrease is the result of repositioning within our investment portfolio.

 

Funds withheld under coinsurance agreement, at fair value: As of December 31, 2020, we had funds withheld assets of $46,830,076 which were acquired with the 2020 ALSC Agreement. There were no funds withheld assets at December 31, 2019.

 

Policy loans: As of December 31, 2020, our policy loans were $163,725, an increase of $44,795 or 38% from the December 31, 2019 balance of $118,930. The increase is a result of normal policy loan activity.

 

Real estate, net of depreciation: As of December 31, 2020, we had real estate assets of $1,415,743 related to the purchase of our home office building. We had no such assets at December 31, 2019.

 

Cash and cash equivalents: As of December 31, 2020, we had cash and cash equivalent assets of $4,320,759, a decrease of $2,358,046 or 35% from the December 31, 2019 balance of $6,678,805. This decrease was the result of deploying more cash into invested assets.

 

Investment income due and accrued: As of December 31, 2020, our investment income due and accrued was $423,036 compared to $321,362 as of December 31, 2019, an increase of $101,674 or 32%. This increase is attributable to the growth of our invested assets.

 

 

Reinsurance related assets: As of December 31, 2020, our reinsurance related assets were $165,082 compared to $188,382 as of December 31, 2019, a decrease of $23,300 or 12%. This decrease is the result of normal reinsurance activity.

 

Deferred acquisition costs, net: As of December 31, 2020, our deferred acquisition costs were $7,105,890 compared to $2,652,674 as of December 31, 2019, an increase of $4,453,216 or 168%. The increase is driven by our 2020 ALSC Agreement.

 

Value of business acquired, net: As of December 31, 2020 our value of business acquired asset was $2,703,233, compared to $559,994 as of December 31, 2019, an increase of $2,143,239 or 383%. The increase is the result of additional VOBA being added in conjunction with DCLIC’s assumption of policies from ALSC.

 

Property, equipment and software, net: As of December 31, 2020 our property, equipment and software assets were $37,818, a decrease of $6,023 from the December 31, 2019 balance of $43,841. This decrease is the result of normal amortization of these assets.

 

Goodwill: As of December 31, 2020 and 2019, our goodwill was $277,542. Goodwill was established as a result of our merger with NPCC. We have determined that there has been no impairment to our goodwill balance.

 

Deferred tax asset, net of valuation allowance:  The Company had a net deferred tax asset of $243,257 as of December 31, 2020. The Company had a net deferred tax asset of $431,158 as of December 31, 2019 and the resulting change in deferred tax asset was recorded as a deferred tax benefit and as a reduction in other comprehensive income.

 

Other assets: As of December 31, 2020, our other assets were $1,635,647, an increase of $1,263,481 or 339% from the December 31, 2019 balance of $372,166. This increase was driven by a receivable balance due to DCLIC.

 

Liabilities. Our total liabilities were $96,982,305 as of December 31, 2020, an increase of $58,919,253 or 155% from our December 31, 2019 liabilities of $38,063,052. This increase is driven by our 2020 ALSC Agreement.

 

Policy liabilities: Our total policy liabilities as of December 31, 2020 were $93,459,080 compared to $36,924,885 as of December 31, 2019, an increase of $56,534,195 or 153%. This increase is the result of our 2020 ALSC Agreement.

 

Accounts payable and accrued expenses: As of December 31, 2020, our accounts payable and accrued expenses were $1,507,756 compared to $122,981 as of December 31, 2019, an increase of $1,384,775 or 1126%. The increase is driven by a payable to ALSC related to the partial termination of our 2017 ALSC Agreement.

 

Federal Home Loan Bank advance: In October of 2019, the Company took an advance of $1,000,000 from the FHLB of Topeka which was outstanding as of December 31, 2020 and 2019. In the second quarter of 2020, the Company took two additional advances of $500,000 each, which were outstanding as of December 31, 2020.  The advances were taken to create additional liquidity and investment opportunities.

 

Shareholders’ Equity. Our shareholders’ equity was $18,893,813 as of December 31, 2020, an increase of $2,017,616  or 12% from our December 31, 2019 shareholders’ equity of $16,876,197. The growth in shareholders’ equity was driven by an increase in other comprehensive income and our net income. Other comprehensive income consists of the unrealized gains and losses on our fixed maturity portfolio. The increase in other comprehensive income is the result of lower interest rates which increases the market value of our fixed maturity securities.  Similarly, higher interest rates would decrease the value of our fixed maturity securities. 

 

 

Investments

 

Our overall investment philosophy is reflected in the allocation of our investments. We emphasize investment grade debt securities with smaller holdings in equity securities, mortgages and other investments. The following table shows the carrying value of our investments by investment category and cash and cash equivalents, and the percentage of each to total invested assets as of December 31, 2020 and December 31, 2019.

 

		December 31, 2020								December 31, 2019
		Fair				Percent				Fair				Percent
		Value				of Total				Value				of Total
Fixed maturities:
US Treasury securities		$	702,916				0.7	%		$	632,639				1.3	%
Corporate bonds			22,947,811				22.4	%			20,084,397				40.2	%
Municipal bonds			6,796,654				6.6	%			7,055,059				14.1	%
Redeemable preferred stocks			2,990,215				2.9	%			2,133,893				4.3	%
Mortgage backed and asset backed securities			4,239,982				4.1	%			3,246,904				6.5	%
Total fixed maturities			37,677,578				36.7	%			33,152,892				66.3	%
Mortgage loans			3,166,136				3.1	%			-				0.0	%
Equities:
Common stock			6,808,944				6.6	%			9,214,694				18.4	%
Preferred stock			2,412,630				2.4	%			926,809				1.9	%
Total equities			9,221,574				9.0	%			10,141,503				20.3	%
Funds withheld			46,830,076				45.6	%			-				0.0	%
Real estate, net of depreciation			1,415,743				1.4	%			-				0.0	%
Cash and cash equivalents			4,320,759				4.2	%			6,678,805				13.4	%
Total		$	102,631,866				100.0	%		$	49,973,200				100.0	%

 

The total value of our investments and cash and cash equivalents increased to $102,631,866 as of December 31, 2020 from $49,973,200 at December 31, 2019, an increase of $52,658,666. Increases in investments are primarily attributable to the 2020 ALSC Agreement.

 

The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of December 31, 2020 and 2019.

 

		December 31, 2020								December 31, 2019
		Fair				Percent				Fair				Percent
		Value				of Total				Value				of Total
AAA and U.S. Government		$	1,160,359				3.1	%		$	1,201,046				3.6	%
AA			8,219,481				21.8	%			7,901,834				23.8	%
A			8,587,743				22.8	%			8,446,360				25.5	%
BBB			16,060,510				42.6	%			13,832,629				41.7	%
BB			3,462,685				9.2	%			1,579,423				4.8	%
Not Rated - Private Placement			186,800				0.5	%			191,600				0.6	%
Total		$	37,677,578				100.0	%		$	33,152,892				100.0	%

 

 

The amortized cost and fair value of debt securities as of December 31, 2020 and 2019, by contractual maturity, are shown below. Equity securities do not have stated maturity dates and therefore are not included in the following maturity summary. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

		As of December 31, 2020								As of December 31, 2019
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
Amounts maturing in:
One year or less		$	373,590			$	379,823			$	99,987			$	100,239
After one year through five years			1,540,931				1,641,749				1,424,337				1,471,552
After five years through ten years			2,887,066				3,379,930				3,286,937				3,574,191
More than 10 years			21,892,891				25,045,879				20,743,310				22,626,113
Redeemable preferred stocks			2,900,330				2,990,215				2,097,206				2,133,893
Mortgage backed and asset backed securities			4,189,710				4,239,982				3,171,620				3,246,904
Total amortized cost and fair value		$	33,784,518			$	37,677,578			$	30,823,397			$	33,152,892

 

Market Risk of Financial Instruments

 

We hold a diversified portfolio of investments that primarily includes cash, bonds, equity securities, mortgage loans, and funds withheld under the 2020 ALSC Agreement. Each of these investments is subject to market risks that can affect their return and their fair value. A significant percentage 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. The Company's investment portfolio, including the creditworthiness and valuation of investment assets, as well as availability of new investments may be adversely affected as a result of market developments related to the COVID-19 pandemic and uncertainty regarding its ultimate severity and duration.

 

Interest Rate Risk

 

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

 

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

 

Additionally, USALSC is a member of the FHL of Topeka, which provides access to liquidity and further reduces the likelihood of disposing 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

 

The impact of COVID-19 on the Company is evolving, and its future effects are not yet quantifiable. The Company is closely monitoring the effects and risks of COVID-19 to assess its impact on the Company's business, sales, financial condition, results of operations, liquidity and capital position.

 

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. As a member of the Federal Home Loan Bank, USALSC has immediate access to additional cash liquidity.

 

Net cash provided by operating activities was $2,099,401 for the year ended December 31, 2020. 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 $9,903,788. The primary use of cash was from purchases of available for sale securities and funds transferred to our funds withheld account. Cash provided by financing activities was $5,446,341. The primary sources of cash were receipts on deposit-type contracts.

 

The following chart and graph illustrate our five-year trend of cash flow from insurance activities:

 

 

Cash flow from insurance activities is a non-GAAP financial measure. Cash flow from insurance activities combines cash flow from operations with the net cash received from deposit type contracts to show the impact of our insurance operations on our cash flows. Cash flow from deposit type contracts is primarily made up of funds received into our annuity products. The following table reconciles cash flow from operations to cash flow from insurance activities:

 

		Cash Flow				Net Cash Flow				Cash Flow
		From				From Deposit				from Insurance
Year		Operations				Type Contracts				Activities
2016			409,353				1,743,730			$	2,153,083
2017			593,123				1,580,305			$	2,173,428
2018			2,249,068				2,598,564			$	4,847,632
2019			2,270,041				2,176,602			$	4,446,643
2020			2,099,401				4,592,576			$	6,691,977

 

 

At December 31, 2020, we had cash and cash equivalents totaling $4,320,759. 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 USALSC and DCLIC, our insurance subsidiaries, is uncertain and will require additional capital if they continue to grow.

 

Impact of Inflation

 

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

 

Off-Balance Sheet Arrangements

 

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

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

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

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

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

 

ITEM 9A.

CONTROLS AND PROCEDURES

 

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

 

As required by Exchange Act Rule 13a-15(b), management of the Company, including the Chief Executive Officer and the Vice President and Principal Financial Officer 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 Vice President concluded that the disclosure controls and procedures are effective in timely alerting them to material information relating to us and our consolidated subsidiaries required to be disclosed in our periodic reports under the exchange act.

 

There were no changes to the Company’s internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) during the year ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s control over financial reporting.

 

 

ITEM 9B.

OTHER INFORMATION

 

None.

 

PART III

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The information required by this item is set forth under the captions “Proposal One-Election of Directors,” “Corporate Governance,” “Executive Officers” and “Beneficial Ownership Reporting Compliance” in our definitive proxy statement to be filed in connection with our 2021 annual stockholders’ meeting (“2021 Proxy Statement”) and is incorporated herein by reference.

 

ITEM 11.

EXECUTIVE COMPENSATION

 

The information required by this item is set forth under the captions “Director and Management Compensation” in our 2021 Proxy Statement and is incorporated herein by reference.

 

ITEM 12.

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

 

         The information required by this item is set forth under the captions “Security Ownership” in our 2021 Proxy Statement and is incorporated herein by reference.

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

The information required by this item is set forth under the captions “Certain Relationships and Related Parties” in our 2021 Proxy Statement and is incorporated herein by reference.

 

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The information required by this item is set forth under the caption “Principal Accountant Fees and Services” in our 2021 Proxy Statement and is incorporated herein by reference.

 

 

PART IV

 

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(1)

Consolidated financial statements:

 

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

 

Financial Statement Schedules

 

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

 

Exhibit Index

 

	2.1	Plan and Agreement of Merger amount Northern Plains Capital Corporation, US Alliance Corporation and Acquisition Merger Sub, Inc., filed as Exhibit 2.1 to the Company's Registration Statement on Form S-4 filed on June 1, 2017 (File No. 333-218389), is incorporated herein by reference as Exhibit 2.1.
	2.2	Amendment dated May 21, 2017 to Plan and Agreement of Merger among Northern Plains Capital Corporation, US Alliance Corporation and Acquisition Merger Sub, Inc., filed as Exhibit 2.2 to the Company's Registration Statement on Form S-4 filed on June 1, 2017 (File No. 333-218389), is incorporated herein by reference as Exhibit 2.2.
	2.3	Stock Purchase Agreement dated October 11, 2018 between Great Western Insurance Company and US Alliance Life and Security Company, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 16, 2018 (File No. 000-55627), is incorporated herein by reference as Exhibit 2.3.
	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.
	3.1.1	First Amendment to the Articles of Incorporation of US Alliance Corporation, filed as Exhibit 3.1.1 to the Company’s Current Report on Form 8-K filed on June 9, 2017 (File No. 000-55627), is incorporated herein by reference as Exhibit 3.1.1.
	3.1.2	Second Amendment to the Articles of Incorporation of US Alliance Corporation, filed as Exhibit 3.1.2 to the Company’s Current Report on Form 8-K filed on June 9, 2017 (File No. 000-55627), is incorporated herein by reference as Exhibit 3.1.2.
	3.2	Bylaws of US Alliance Corporation (filed as Exhibit 3.2 to the Company’s Registration Statement on Form 10 filed on May 2, 2016 (File No. 000-55627), is incorporated herein by reference as Exhibit 3.2.
	3.2.1	Amendment No. 1 to the Bylaws of US Alliance Corporation, filed as Exhibit 3.2.1 to the Company’s Current Report on Form 8-K filed on June 9, 2017 (File No. 000-55627), is incorporated herein by reference as Exhibit 3.1.1.
	4.1	Form of Warrant to Purchase Common Shares of US Alliance Corporation, filed as Exhibit 4.1 to the Company’s Registration Statement on Form 10 filed on May 2, 2016 (File No. 000-55627), is incorporated herein by reference as Exhibit 4.1.

 

 

	4.2	Description of US Alliance Corporation’s Securities Registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, filed as Exhibit 4.2 to the Company’s Annual Report on Form 10-K filed on February 2, 2020, (File No. 000-55627), is incorporated herein by reference as Exhibit 4.2.
	10.1	Automatic Yearly Term Reinsurance Agreement between US Alliance Life and Security Company and General Re Life Insurance Corporation, filed as Exhibit 10.2 to the amended Company's Registration Statement on Form 10 filed June 29, 2016 (File No. 000-55627), is incorporated herein by reference as Exhibit 10.1.
	10.2	Group Long Term and Short Term Disability Reinsurance Agreement between US Alliance Life and Security Company and Reliance Standard Life Insurance Company, DBA Custom Disability Solutions, filed as Exhibit 10.3 to the Company's amended Registration Statement on Form 10 filed June 29, 2016 (File No. 000-55627), is incorporated herein by reference as Exhibit 10.2.
	10.3	Automatic Reinsurance Agreement between US Alliance Life and Security Company and Optimum Re Insurance Company (schedules omitted), filed as Exhibit 10.4 to the Company's amended Registration Statement on Form 10 filed June 29, 2016 (File No. 000-55627), is incorporated herein by reference as Exhibit 10.3.
	10.4	Bulk Reinsurance Agreement between US Alliance Life and Security Company and Optimum Re Insurance Company, filed as Exhibit 10.5 to the Company's amended Registration Statement on Form 10 filed June 29, 2016 (File No. 000-55627), is incorporated herein by reference as Exhibit 10.5.
	10.5	Group Medical Reinsurance Agreement between US Alliance Life and Security Company and Unified Life Insurance Company, filed as Exhibit 10.6 to the Company's  amended Registration Statement on Form 10 filed June 29, 2016 (File No. 000-55627), is incorporated herein by reference as Exhibit 10.5.
	10.6.1	Investment Management Agreement between US Alliance Investment Corporation and General Re - New England Asset Management, Inc., filed as Exhibit 10.7.1 to the Company's amended Registration Statement on Form 10 filed June 29, 2016 (File No. 000-55627), is incorporated herein by reference as Exhibit 10.6.1.
	10.6.2	Subadvisory Investment Management Agreement between US Alliance Investment Corporation and General Re - New England Asset Management, Inc., filed as Exhibit 10.17.2 to the Company's amended Registration Statement on Form 10 filed June 29, 2016 (File No. 000-55627), is incorporated herein by reference as Exhibit 10.6.2.
	10.7	Third Party Insurance Services Agreement between US Alliance Life and Security Company and Dakota Capital Life Insurance Company, as amended, filed as Exhibit 10.8 to the Company's amended Registration Statement on Form 10 filed June 29, 2016 (File No. 000-55627), is incorporated herein by reference as Exhibit 10.7.
	10.8	Critical Illness Reinsurance Treaty, Effective 9/1/16 between US Alliance Life and Security Company and General Re Life Corporation, filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K filed February 17, 2017 (File No. 000-55627), is incorporated herein by reference as Exhibit 10.8.
	10.9	Critical Illness Reinsurance Treaty, Effective 9/1/16 between US Alliance Life and Security Company and Unified Life Insurance Company, filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K filed February 17, 2017 (File No. 000-55627), is incorporated herein by reference as Exhibit 10.9.
	10.10	Coinsurance Agreement between US Alliance Life and Security Company and American Life & Security Company of Nebraska effective as of September 30, 2017, filed as Exhibit 10.11 to the Company Annual Report filed on February 21, 2018 (File No. 000-55627) is incorporated herein by reference as Exhibit 10.10
	10.10.1*	Amendment No. 1 to ALSC 2017 Coinsurance Agreement effective as of June 1, 2020.

 

 

	10.10.2*	Second Amendment to ALSC 2017 Coinsurance Agreement effective as of December 31, 2020.
	10.11	Employment Agreement dated June 4, 2018 between US Alliance Corporation and Jeffrey Brown, filed as Exhibit 10.1 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 10.11.
	10.12	Coinsurance Agreement effective January 1, 2020 between US Alliance Life and Security Company and American Life & Security Corporation, filed as Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q filed on May 12, 2020, (File No. 000-55627), is incorporated herein by reference as Exhibit 10.12.
	10.13	Commercial Real Estate Contract dated November 16, 2020 between Dakota Life Insurance Company and Trinity Life Insurance Company, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 20, 2020, (File No. 000-55627), is incorporated herein by reference as Exhibit 10.13.
	10.14*	Assumption Reinsurance Agreement effective December 31, 2020 between Dakota Life Insurance Company and American Life & Security Corporation.
	21.1*	List of Subsidiaries
	24.1	Power of Attorney (contained in the signature page herein)
	31.1*	Certification of Chief Executive Officer of US Alliance Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2*	Certification of Principal Financial Officer of US Alliance Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1*	Certifications of the Chief Executive Officer of US Alliance pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2*	Certifications of the Principal Financial Officer of US Alliance pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	101.INS*†	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

 

* Filed herewith.

 

† 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 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

				US ALLIANCE CORPORATION
				(Registrant)
Date:	02/22/2021	By:		/s/ Jack H. Brier
				Jack H. Brier
				President and Chairman
				(principal executive officer)

 

 

POWER OF ATTORNEY

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

 

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

 

Signature		Title
/S/    Jack H. Brier		President and Chairman
Jack H. Brier
/S/    Jeff Brown		Vice-President and Principal Financial Officer
Jeff Brown
/S/    Rochelle Chronister		Director
Rochelle Chronister
/S/    Kurt Scott		Treasurer and Director
Kurt Scott
/S/    James Concannon		Director.
James Concannon
/S/    William Graves		Director.
William Graves

 

 

US Alliance Corporation

 

Consolidated Financial Statements

December 31, 2020 and 2019

(With Independent Auditor’s Report Thereon)

 

 

Contents

 

Report of Independent Registered Public Accounting Firm	F-1
Consolidated Financial Statements
Consolidated Balance Sheets	F-2
Consolidated Statements of Comprehensive Income	F-3
Consolidated Statements of Changes in Shareholders’ Equity	F-4
Consolidated Statements of Cash Flows	F-5
Supplemental Cash Flow Information	F-6
Notes to Consolidated Financial Statements	F-7 – F-31

 

To the Board of Directors and

Shareholders of US Alliance Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of US Alliance Corporation and Subsidiaries (the Company) as of December 31, 2020 and 2019, and the related consolidated statements of comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the financial statements).  In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

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

 

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

 

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

 

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

 

/s/ Kerber, Eck & Braeckel LLP

Springfield, Illinois

   February 22, 2021

 

 

 

US Alliance Corporation

Consolidated Balance Sheets

 

 

See Notes to Consolidated Financial Statements.

 

 

US Alliance Corporation

Consolidated Statements of Comprehensive Income

 

 

See Notes to Consolidated Financial Statements.

 

 

US Alliance Corporation

Consolidated Statements of Changes in Shareholders' Equity

Years Ended December 31, 2020 and 2019

 

 

See Notes to Consolidated Financial Statements.

 

 

US Alliance Corporation

Consolidated Statements of Cash Flows

 

 

See Notes to Consolidated Financial Statements.

 

 

US Alliance Corporation

Supplemental Cash Flow Information

 

 

 

US Alliance Corporation

 

Notes to Consolidated Financial Statements

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