UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
(Zip Code) |
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(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer |
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filer |
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Smaller reporting company |
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Emerging growth company |
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Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the exchange act. ☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common stock, $0.10 par value
as of November 1, 2024
US ALLIANCE CORPORATION
FORM 10-Q
Part I - Financial Information
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Item Description |
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Item 1 |
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Consolidated Statements of Comprehensive Income (Loss) (unaudited) |
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Consolidated Statements of Changes in Shareholders' Equity (unaudited) |
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Item 2 |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3 |
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Item 4 |
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Part II - Other Information |
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Item Description |
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Item 1 |
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Item 1A |
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Item 2 |
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Item 3 |
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Item 4 |
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Item 5 |
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Item 6 |
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US Alliance Corporation |
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September 30, 2024 |
December 31, 2023 |
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(unaudited) |
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| Assets | ||||||||
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Investments: |
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Available for sale fixed maturity securities (amortized cost: $ |
$ | $ | ||||||
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Equity securities, at fair value |
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Limited partnership interests |
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Mortgage loans on real estate (net of allowance for credit losses of $ |
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Other invested assets |
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Policy loans |
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Real estate, net of depreciation |
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Total investments |
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Cash and cash equivalents |
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Investment income due and accrued |
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Reinsurance related assets |
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Deferred acquisition costs, net |
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Value of business acquired, net |
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Property, equipment and software, net |
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Goodwill |
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Federal and state income tax receivable |
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Deferred tax asset, net of valuation allowance |
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Other assets |
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Total assets |
$ | $ | ||||||
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Liabilities and Shareholders' Equity |
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Liabilities: |
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Policy liabilities |
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Deposit-type contracts |
$ | $ | ||||||
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Policyholder benefit reserves |
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Dividend accumulation |
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Advance premiums |
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Total policy liabilities |
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Accounts payable and accrued expenses |
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Federal Home Loan Bank advance |
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Other liabilities |
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Total liabilities |
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Shareholders' Equity: |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
( |
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Accumulated other comprehensive loss |
( |
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Total shareholders' equity |
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Total liabilities and shareholders' equity |
$ | $ | ||||||
See Notes to Consolidated Financial Statements.
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US Alliance Corporation |
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Nine Months Ended September 30, |
Three Months Ended September 30, |
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2024 |
2023 |
2024 |
2023 |
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(unaudited) |
(unaudited) |
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| Income: | ||||||||||||||||
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Premium income |
$ | $ | $ | $ | ||||||||||||
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Net investment income |
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Net investment gains (losses) |
( |
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Other income |
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Total income |
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Expenses: |
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Death claims |
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Policyholder benefits |
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Increase in policyholder reserves |
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Commissions, net of deferrals |
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Amortization of deferred acquisition costs |
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Amortization of value of business acquired |
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Salaries & benefits |
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Other operating expenses |
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Total expense |
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Net income (loss) before tax |
$ | $ | $ | ( |
) | $ | ( |
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Deferred federal income tax (expense) benefit |
( |
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Total federal income tax (expense) benefit |
( |
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Net Income (loss) |
$ | $ | $ | ( |
) | $ | ( |
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Net income (loss) per common share, basic and diluted |
$ | $ | $ | ( |
) | $ | ( |
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Unrealized net holding gains (losses) arising during the period, net of tax |
( |
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Reclassification adjustment for losses included in net income |
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Other comprehensive income (loss) |
( |
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Comprehensive income (loss) |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
See Notes to Consolidated Financial Statements.
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US Alliance Corporation |
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Nine and Three Months Ended September 30, 2024 and 2023 (unaudited) |
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Accumulated |
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Number of |
Other |
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Shares of |
Common |
Additional |
Comprehensive |
Accumulated |
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Common Stock |
Stock |
Paid-in Capital |
Loss |
Deficit |
Total |
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Balance, December 31, 2022 |
$ | $ | $ | ( |
) | $ | ( |
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Common stock issued, $ |
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Costs associated with common stock issued |
- | ( |
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Other comprehensive loss |
- | ( |
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Cumulative effect of changes in accounting principal |
- | ( |
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Net income |
- | |||||||||||||||||||||||
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Balance, September 30, 2023 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
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Balance, December 31, 2023 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
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Other comprehensive income |
- | |||||||||||||||||||||||
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Net income |
- | |||||||||||||||||||||||
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Balance, September 30, 2024 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
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Accumulated |
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Number of |
Other |
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Shares of |
Common |
Additional |
Comprehensive |
Accumulated |
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Common Stock |
Stock |
Paid-in Capital |
Income / (Loss) |
Deficit |
Total |
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Balance, June 30, 2023 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
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Common stock issued, $ |
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Costs associated with common stock issued |
- | |||||||||||||||||||||||
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Other comprehensive loss |
- | ( |
) | ( |
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Net loss |
- | ( |
) | ( |
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Balance, September 30, 2023 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
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Balance, June 30, 2024 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
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Other comprehensive income |
- | |||||||||||||||||||||||
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Net loss |
- | ( |
) | ( |
) | |||||||||||||||||||
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Balance, September 30, 2024 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
See Notes to Consolidated Financial Statements.
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US Alliance Corporation |
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Nine Months Ended September 30, |
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2024 |
2023 |
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(unaudited) |
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| Cash Flows from operating activities: | ||||||||
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Net income |
$ | $ | ||||||
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Net (gains) losses realized on the sale of securities and net credit losses recognized in operations |
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Unrealized (gains) losses on equity securities |
( |
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Change in fair value of embedded derivative |
( |
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(Accretion) amortization of investment securities, net |
( |
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Deferred acquisition costs capitalized |
( |
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Deferred acquisition costs amortized |
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Value of business acquired amortized |
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Interest credited on deposit type contracts |
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(Increase) decrease in operating assets: Investment income due and accrued |
( |
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Reinsurance related assets |
( |
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Deferred tax assets, net of valuation allowance |
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Other assets |
( |
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Increase (decrease) in operating liabilities: Policyowner benefit reserves |
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Dividend accumulation |
( |
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Advance premiums |
( |
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Other liabilities |
( |
) | ||||||
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Accounts payable and accrued expenses |
( |
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Net cash provided by operating activities |
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Cash Flows from investing activities: |
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Purchase of fixed income investments |
( |
) | ( |
) | ||||
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Purchase of equity investments |
( |
) | ( |
) | ||||
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Purchase of mortgage investments |
( |
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Purchase of other invested assets |
( |
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Proceeds from fixed income sales and repayments |
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Proceeds from equity sales |
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Proceeds from mortgage repayments |
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Proceeds from other invested assets |
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Increase in policy loans |
( |
) | ||||||
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Purchase of property, equipment and software |
( |
) | ( |
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Net cash used in investing activities |
( |
) | ( |
) | ||||
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Cash Flows from financing activities: |
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Receipts on deposit-type contracts |
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Withdrawals on deposit-type contracts |
( |
) | ( |
) | ||||
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Proceeds received from issuance of common stock, net of costs of issuance |
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Net cash used in financing activities |
( |
) | ( |
) | ||||
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Net increase (decrease) in cash and cash equivalents |
( |
) | ||||||
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Cash and Cash Equivalents: |
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Beginning |
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Ending |
$ | $ | ||||||
See Notes to Consolidated Financial Statements.
US Alliance Corporation
Notes to Consolidated Financial Statements (unaudited)
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Note 1. |
Description of Business and Significant Accounting Policies |
Description of business: US Alliance Corporation ("USAC") was formed as a Kansas corporation on April 24, 2009 to raise capital to form a new Kansas-based life insurance company. Our offices are located at 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 wholly-owned operating subsidiaries. US Alliance Life and Security Company ("USALSC") was formed June 9, 2011, to serve as our life insurance company. US Alliance Marketing Corporation ("USAMC") was formed April 23, 2012, to serve as a marketing resource. US Alliance Investment Corporation ("USAIC") was formed April 23, 2012 to serve as investment manager for USAC. Dakota Capital Life Insurance Company (“DCLIC”), was acquired on August 1, 2017 when USAC merged with Northern Plains Capital Corporation (“NPCC”) and was merged into USALSC on December 31, 2023. US Alliance Life and Security Company - Montana (USALSC-Montana), was acquired December 14, 2018. USALSC-Montana is a wholly-owned subsidiary of USALSC. Unless the context indicates otherwise, references herein to the "Company" refer to USAC and its consolidated subsidiaries.
The Company terminated its initial public offering on February 24, 2013. During the balance of 2013, the Company achieved approval of an array of life insurance and annuity products, began development of various distribution channels and commenced insurance operations and product sales. The Company sold its first insurance product on May 1, 2013. The Company continued to expand its product offerings and distribution channels throughout 2014 and 2015. On February 24, 2015, the Company commenced a warrant exercise offering set to expire on February 24, 2016. On February 24, 2016, the Company extended the offering until February 24, 2017 and made additional shares available for purchase. All outstanding warrants expired on April 1, 2016. The Company further extended this offering to February 24, 2024. During the 4th quarter of 2017, the Company began a private placement offering to accredited investors in the state of North Dakota. Both offerings were terminated in the second quarter of 2024.
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. In 2023, USALSC re-domesticated to North Dakota with approval of the North Dakota Insurance Department ("NDID").
USALSC seeks opportunities to develop and market additional products.
The Company’s business model also anticipates the acquisition by USAC and/or USALSC of other insurance and insurance related companies, including third-party administrators, marketing organizations, and rights to other blocks of insurance business through reinsurance or other transactions.
Basis of presentation: The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods have been included.
The results of operation for the three and nine months ended September 30, 2024 are not necessarily indicative of the results to be expected for the year ended December 31, 2024 or for any other interim period or for any other future year. Certain financial information which is normally included in notes to financial statements prepared in accordance with US GAAP, but which are not required for interim reporting purposes, has been condensed or omitted. The accompanying financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in USAC’s report on Form 10-K and amendments thereto for the year ended December 31, 2023.
US Alliance Corporation
Notes to Consolidated Financial Statements (unaudited)
Common stock and income (loss) per share: The par value for common stock is $
Income (loss) per share attributable to USAC’s common stockholders were computed based on the net income (loss) and the weighted average number of shares outstanding during each year. The weighted average number of shares outstanding during the nine months ended September 30, 2024 and 2023 were
New accounting standards:
Targeted Improvements to the Accounting for Long-Duration Contracts
In August 2018, the FASB issued ASU 2018-12 Financial Services-Insurance (Topic 944) - Targeted Improvements to the Accounting for Long-Duration Contracts. This update is aimed at improving the Codification related to long-duration contracts which will improve the timeliness of recognizing changes in the liability for future policy benefits, simplify accounting for certain market-based options, simplify the amortization of deferred acquisition costs, and improve the effectiveness of required disclosures. These updates were originally required to be applied retrospectively to the earliest period presented in the financial statements for periods beginning after December 15, 2020. The FASB recently delayed the effective date of ASU 2018-12 to periods beginning after December 15, 2024 for smaller reporting companies, with early adoption permitted. The Company is currently evaluating the impact of this guidance on the Company's financial condition and results of operations.
In December 2022, the FASB issued amendments (Accounting Standards Update 2022-5) to Accounting Standards Update 2018-12 (Targeted Improvements for Long-Duration Contracts) that originally required an insurance entity to apply a retrospective transition method as of the beginning of the earliest period presented or the beginning of the prior fiscal year if early adoption was elected. This updated guidance reduces implementation costs and complexity associated with the adoption of targeted improvements in accounting for long-duration contracts that have been derecognized in accordance with Accounting Standards Update 2018-12 before the delayed effective date. Without the amendments in this Update, an insurance entity would be required to reclassify a portion of gains or losses previously recognized in the sale or disposal of insurance contracts or legal entities because of the adoption of a new accounting standard.
Because there is no effect on an insurance entity's future cash flows, this reclassification may not be useful to users of financial information. The amendments in this guidance are effective for fiscal years beginning after December 15, 2024, with early adoption permitted. We are evaluating the effect this standard will have on our Consolidated Financial Statements. For a company our size, the implementation costs of this standard will be exorbitant and permanent.
US Alliance Corporation
Notes to Consolidated Financial Statements (unaudited)
Improvements to Income Tax Disclosures
In December 2023, the FASB issued Accounting Standards Update 2023-09 Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("ASU 2023-09"). ASU 2023-09 is intended to improve the effectiveness of income tax disclosures by requiring, among other things, the disclosure on an annual basis of: (i) specific categories in the rate reconciliation; and (ii) additional information for reconciling items that meet a quantitative threshold. In addition, ASU 2023-09 requires disclosure (on an annual basis) of the following information about income taxes paid: (i) the amount of income taxes paid (net of refunds received) disaggregated by federal (national), state, and foreign taxes; and (ii) the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than 5 percent of total income taxes paid (net of refunds received). ASU 2023-09 is effective for annual periods beginning January 1, 2026, to be applied prospectively with an option for retrospective application (with early adoption permitted). The adoption of ASU 2023-09 will modify our disclosures but will not have an impact on our financial position or results of operations.
All other new accounting standards and updates of existing standards issued through the date of this filing were considered by management and did not relate to accounting policies and procedures pertinent or material to the Company at this time.
US Alliance Corporation
Notes to Consolidated Financial Statements (unaudited)
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Note 2. |
Investments |
Fixed Maturity
The amortized cost and fair value of available for sale investments as of September 30, 2024 and December 31, 2023 is as follows:
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September 30, 2024 |
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Cost or |
Gross |
Gross |
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Amortized |
Unrealized |
Unrealized |
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Cost |
Gains |
Losses |
Fair Value |
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(unaudited) |
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| Available for sale: | ||||||||||||||||
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Fixed maturities: |
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US Treasury securities |
$ | $ | $ | ( |
) | $ | ||||||||||
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Corporate bonds |
( |
) | ||||||||||||||
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Municipal bonds |
( |
) | ||||||||||||||
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Redeemable preferred stock |
( |
) | ||||||||||||||
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Term loans |
( |
) | ||||||||||||||
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Mortgage backed and asset backed securities |
( |
) | ||||||||||||||
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Total available for sale |
$ | $ | $ | ( |
) | $ | ||||||||||
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December 31, 2023 |
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Cost or |
Gross |
Gross |
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Amortized |
Unrealized |
Unrealized |
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Cost |
Gains |
Losses |
Fair Value |
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Available for sale: |
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Fixed maturities: |
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US Treasury securities |
$ | $ | $ | ( |
) | $ | ||||||||||
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Corporate bonds |
( |
) | ||||||||||||||
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Municipal bonds |
( |
) | ||||||||||||||
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Redeemable preferred stock |
( |
) | ||||||||||||||
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Term loans |
( |
) | ||||||||||||||
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Mortgage backed and asset backed securities |
( |
) | ||||||||||||||
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Total available for sale |
$ | $ | $ | ( |
) | $ | ||||||||||
The amortized cost and fair value of debt securities as of September 30, 2024 and December 31, 2023, by contractual maturity, are shown below. 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.
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As of September 30, 2024 |
As of December 31, 2023 |
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Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
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(unaudited) |
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| Amounts maturing in: | ||||||||||||||||
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One year or less |
$ | $ | $ | $ | ||||||||||||
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After one year through five years |
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After five years through ten years |
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More than 10 years |
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Redeemable preferred stocks |
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Mortgage backed and asset backed securities |
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Total amortized cost and fair value |
$ | $ | $ | $ | ||||||||||||
US Alliance Corporation
Notes to Consolidated Financial Statements (unaudited)
|
Note 2. |
Investments (continued) |
Proceeds from the sale of securities, maturities, and asset paydowns for the nine months ended September 30, 2024 and 2023 were $
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Nine Months Ended September 30, |
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(unaudited) |
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2024 |
2023 |
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Gross gains |
$ | $ | ||||||
|
Gross losses |
( |
) | ( |
) | ||||
|
Realized gains (losses) |
$ | ( |
) | $ | ( |
) | ||
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Fixed maturity securities |
||||||||
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Mortgage loans on real estate |
( |
) | ||||||
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(Increase) Decrease in allowance for credit losses |
$ | ( |
) | $ | ||||
Proceeds from the sale of securities, maturities, and asset paydowns for the three months ended September 30, 2024 and 2023 were $
|
Three Months Ended September 30, |
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(unaudited) |
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|
2024 |
2023 |
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|
Gross gains |
$ | $ | ||||||
|
Gross losses |
( |
) | ( |
) | ||||
|
Net security losses |
$ | ( |
) | $ | ( |
) | ||
|
Fixed maturity securities |
||||||||
|
Mortgage loans on real estate |
( |
) | ||||||
|
Decrease in allowance for credit losses |
$ | $ | ||||||
US Alliance Corporation
Notes to Consolidated Financial Statements (unaudited)
|
Note 2. |
Investments (continued) |
Gross unrealized losses by duration are summarized as follows:
|
Less than 12 months |
Greater than 12 months |
Total |
||||||||||||||||||||||
|
Fair |
Unrealized |
Fair |
Unrealized |
Fair |
Unrealized |
|||||||||||||||||||
|
Value |
Loss |
Value |
Loss |
Value |
Loss |
|||||||||||||||||||
|
September 30, 2024 |
||||||||||||||||||||||||
| (unaudited) | ||||||||||||||||||||||||
| Available for sale: | ||||||||||||||||||||||||
|
Fixed maturities: |
||||||||||||||||||||||||
|
US Treasury securities |
$ | $ | $ | 289,974 | $ | (56,967 | ) | $ | $ | ( |
) | |||||||||||||
|
Corporate bonds |
( |
) | ( |
) | ||||||||||||||||||||
|
Municipal bonds |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
|
Redeemable preferred stock |
( |
) | ( |
) | ||||||||||||||||||||
|
Term loans |
2,470,314 | (12,117 | ) | ( |
) | |||||||||||||||||||
|
Mortgage backed and asset backed securities |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
|
Total fixed maturities |
$ | $ | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||||||
|
Less than 12 months |
Greater than 12 months |
Total |
||||||||||||||||||||||
|
Fair |
Unrealized |
Fair |
Unrealized |
Fair |
Unrealized |
|||||||||||||||||||
|
Value |
Loss |
Value |
Loss |
Value |
Loss |
|||||||||||||||||||
|
December 31, 2023 |
||||||||||||||||||||||||
|
Available for sale: |
||||||||||||||||||||||||
|
Fixed maturities: |
||||||||||||||||||||||||
|
US Treasury securities |
$ | $ | ( |
) | $ | - | $ | - | $ | $ | ( |
) | ||||||||||||
|
Corporate bonds |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
|
Municipal bonds |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
|
Redeemable preferred stock |
( |
) | ( |
) | ||||||||||||||||||||
|
Term loans |
( |
) | 3,534,621 | (111,815 | ) | ( |
) | |||||||||||||||||
|
Mortgage backed and asset backed securities |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
|
Total fixed maturities |
$ | $ | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||||||
Unrealized losses occur from market price declines due to changes in interest rates. The total number of available for sale fixed maturity securities in the investment portfolio in an unrealized loss position as of September 30, 2024 was
US Alliance Corporation
Notes to Consolidated Financial Statements (unaudited)
|
Note 2. |
Investments (continued) |
Mortgage Loans on Real Estate
The Company has invested in various mortgage loans through participation agreements with the original issuing entity. The Company’s mortgage loans by property type as of September 30, 2024 and December 31, 2023 are summarized as follows:
|
September 30, 2024 |
December 31, 2023 |
|||||||
|
|
(unaudited) |
|||||||
| Commercial mortgage loans by property type | ||||||||
|
Condominium |
$ | $ | ||||||
|
Mixed use |
||||||||
|
Lodging |
||||||||
|
Multi-property |
||||||||
|
Multi-family |
||||||||
|
Industrial |
||||||||
|
Retail/Office |
||||||||
|
Total commercial mortgages |
$ | $ | ||||||
|
Allowance for credit losses |
( |
) | ( |
) | ||||
|
Carrying value |
$ | $ | ||||||
The Company’s mortgage loans by loan-to-value ratio as of September 30, 2024 and December 31, 2023 are summarized as follows:
|
September 30, 2024 |
December 31, 2023 |
|||||||
|
|
(unaudited) |
|||||||
| Loan to value ratio | ||||||||
|
Over 70 to 80% |
$ | $ | ||||||
|
Over 60 to 70% |
||||||||
|
Over 50 to 60% |
||||||||
|
Over 40 to 50% |
||||||||
|
Over 30 to 40% |
||||||||
|
Over 20 to 30% |
||||||||
|
Over 10 to 20% |
||||||||
|
Total |
$ | $ | ||||||
|
Allowance for credit losses |
( |
) | ( |
) | ||||
|
Carrying value |
$ | $ | ||||||
The Company’s mortgage loans by maturity date as of September 30, 2024 and December 31, 2023 are summarized as follows:
|
September 30, 2024 |
December 31, 2023 |
|||||||
|
|
(unaudited) |
|||||||
| Maturity Date | ||||||||
|
One year or less |
$ | $ | ||||||
|
After one year through five years |
||||||||
|
Total |
$ | $ | ||||||
|
Allowance for credit losses |
( |
) | ( |
) | ||||
|
Carrying value |
$ | $ | ||||||
US Alliance Corporation
Notes to Consolidated Financial Statements (unaudited)
|
Note 2. |
Investments (continued) |
The Company individually evaluates its commercial mortgage loan portfolio for the establishment of a specific loan loss allowance. A mortgage loan requires a specific allowance when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. If the Company determines that the value of any specific mortgage loan requires an allowance, the carrying amount of the mortgage loan will be reduced to its fair value, based upon the present value of expected future cash flows from the loan discounted at the loan's effective interest rate, or the fair value of the underlying collateral less estimated costs to sell. The Company had mortgage loans that were on non-accrued status as of September 30, 2024 and December 31, 2023. The were no mortgage loans delinquent on payments due to the Company as of September 30, 2024 and December 31, 2023.
The Company analyzes our commercial mortgage loan portfolio for the need of a general loan allowance for expected credit losses on all other loans on a quantitative and qualitative basis by grouping assets with similar risk characteristics when there is not a specific expectation of a loss for an individual loan. The amount of the general loan allowance is based upon management's evaluation of the collectability of the loan portfolio, historical loss experience, delinquencies, credit concentrations, underwriting standards and national and local economic conditions. The Company does not measure a credit loss allowance on accrued interest receivable as we write off any uncollectible accrued interest receivable balance to net investment income in a timely manner. The Company did not charge off any uncollectible accrued interest receivable on our commercial mortgage loan portfolio during the three and nine months ended September 30, 2024 and June 30, 2023.
The Company's commercial mortgage loans are pooled by risk rating and property collateral type and an estimated loss ratio is applied against each risk pool. The loss ratios are generally based upon historical loss experience for each risk pool and are adjusted for current and forecasted economic factors management believes to be relevant and supportable. Economic factors are forecasted for two years with immediate reversion to historical experience.
The following table presents a roll-forward of our specific and general valuation allowances for our commercial mortgage loan portfolio:
|
Nine Months Ended September 30, 2024 |
||||||||
|
(unaudited) |
||||||||
|
Individually Evaluated Allowance |
General Allowance |
|||||||
|
Beginning allowance balance |
$ | $ | ||||||
|
Cumulative adjustment for changes in accounting principals |
||||||||
|
Charge-offs |
||||||||
|
Recoveries |
||||||||
|
Change in provision for credit losses |
||||||||
|
Ending Allowance |
$ | $ | ||||||
The individually evaluated allowance represents the total credit loss allowances on loans which are individually evaluated for allowance. The general allowance is for the group of loans discussed above which are collectively evaluated for impairment. The change in provision for credit losses is recorded in net investment gains (losses).
Charge-offs include allowances that have been established on loans that were satisfied either by taking ownership of the collateral or by some other means such as discounted pay-off or loan sale. When ownership of the property is taken it is recorded at the lower of the loan's carrying value or the property's fair value (based on appraised values) less estimated costs to sell. The real estate owned is recorded as a component of other investments and the loan is recorded as fully paid, with any allowance for credit loss that has been established charged off. Fair value of the real estate is determined by third party appraisal. Recoveries are situations where the Company has received a payment from the borrower in an amount greater than the carrying value of the loan (principal outstanding less specific allowance). The Company did not own any real estate related to our mortgage participations during the nine months ended September 30, 2024 and 2023.
US Alliance Corporation
Notes to Consolidated Financial Statements (unaudited)
|
Note 2. |
Investments (continued) |
The Company will record an "intent-to-sell impairment" as a reduction to the amortized cost of fixed maturities, available-for-sale (AFS) in an unrealized loss position if the Company intends to sell or it is more likely than not that the Company will be required to sell the fixed maturity before a recovery in value. A corresponding charge is recorded in net realized losses equal to the difference between the fair value on the impairment date and the amortized cost basis of the fixed maturity before recognizing the impairment.
For fixed maturity securities where a credit loss has been identified and no intent-to-sell impairment has been recorded, the Company will record an allowance for credit loss ("ACL") for the portion of the unrealized loss related to a credit loss. Any remaining unrealized loss on a fixed maturity after recording an ACL is the non-credit amount is recorded in OCI. The ACL is the excess of the amortized cost over the greater of the Company's best estimate present value of the expected future cash flows or the security's fair value. Cash flows are discounted at the effective yield that is used to record interest income. The ACL cannot exceed the unrealized loss and, therefore, it may fluctuate with the changes in the fair value of the fixed maturity if the fair is greater than the Company's best estimate of the present value of expected future cash flows. The initial ACL and any subsequent changes are recorded in net realized gains and losses. The ACL is written off against amortized cost in the period in which all or a portion of the related fixed maturity is determined to be uncollectible.
Developing the Company's best estimate of expected future cash flows is a quantitative and qualitative process that incorporates information received from third party sources along with certain internal assumptions regarding the future performance. The Company's considerations include a) changes in the financial condition of the issuer and/or the underlying collateral, (b) whether the issuer is current on contractually obligated interest and principal payments, (c) credit ratings, (d) payment structure of the security, and (e) the extent to which the fair value has been less than the amortized cost of the security. For non-structured securities, assumptions included, but are not limited to, economic and industry specific trends and fundamentals, instrument specific developments including changes in credit ratings, industry earnings multiples and the issuer's ability to restructure, access capital markets, and execute asset sales.
The following table presents a roll-forward of our valuation allowances for our fixed maturity securities:
|
Three Months Ended September 30, 2024 |
|||
|
(unaudited) |
|||
|
Specific Allowance |
|||
|
Beginning allowance balance |
$ | ||
|
Cumulative adjustment for changes in accounting principals |
|||
|
Charge-offs |
|||
|
Recoveries |
|||
|
Change in provision for credit losses |
( |
) | |
|
Ending Allowance |
$ | ||
US Alliance Corporation
Notes to Consolidated Financial Statements (unaudited)
|
Note 2. |
Investments (continued) |
Investment Income, Net of Expenses
The components of net investment income for the nine months ended September 30, 2024 and 2023 are as follows:
|
Nine Months Ended September 30, |
||||||||
|
2024 |
2023 |
|||||||
|
(unaudited) |
||||||||
|
Fixed maturities |
$ | $ | ||||||
|
Mortgages |
||||||||
|
Equity securities |
||||||||
|
Other invested assets |
||||||||
|
Cash and cash equivalents |
||||||||
|
Less investment expenses |
( |
) | ( |
) | ||||
| $ | $ | |||||||
The components of net investment income for the three months ended September 30, 2024 and 2023 are as follows:
|
Three Months Ended September 30, |
||||||||
|
2024 |
2023 |
|||||||
|
(unaudited) |
||||||||
|
Fixed maturities |
$ | $ | ||||||
|
Mortgages |
||||||||
|
Equity securities |
||||||||
|
Other invested assets |
||||||||
|
Cash and cash equivalents |
||||||||
|
Less investment expenses |
( |
) | ||||||
| $ | $ | |||||||
Net Investment Gains (losses)
Net investment gains (losses) for the nine and three months ended September 30, 2024 and 2023 are summarized in the following tables:
|
Nine Months Ended September 30, |
||||||||
|
(unaudited) |
||||||||
|
2024 |
2023 |
|||||||
|
Recognized gains (losses) on sale of investments |
$ | ( |
) | $ | ( |
) | ||
|
Change in allowance for credit loss recognized in earnings |
( |
) | ||||||
|
Unrealized net gains (losses) recognized in earnings |
||||||||
|
Embedded Derivative |
( |
) | ||||||
|
Net investment gains (losses) |
$ | $ | ||||||
|
Three Months Ended September 30, |
||||||||
|
(unaudited) |
||||||||
|
2024 |
2023 |
|||||||
|
Recognized gains (losses) on sale of investments |
$ | ( |
) | $ | ( |
) | ||
|
Change in allowance for credit loss recognized in earnings |
||||||||
|
Unrealized net gains (losses) recognized in earnings |
( |
) | ||||||
|
Embedded Derivative |
( |
) | ( |
) | ||||
|
Net investment gains (losses) |
$ | $ | ( |
) | ||||
US Alliance Corporation
Notes to Consolidated Financial Statements (unaudited)
|
Note 3. |
Derivative Instruments |
Types of Derivatives used by the Company
The Company’s derivatives consist of a reinsurance contract allocated hedge.
Summary of Derivative Positions
The fair value of the Company’s derivative financial instruments on the consolidated balance sheets is as follows:
|
September 30, 2024 |
December 31, 2023 |
||||||||||||||||
|
Derivative |
Derivative |
Balance |
|||||||||||||||
|
Asset |
Liability |
Asset |
Liability |
Reported In |
|||||||||||||
|
|
(unaudited) |
||||||||||||||||
| Derivatives: | |||||||||||||||||
|
Embedded derivatives: |
|||||||||||||||||
|
Reinsurance contract allocated hedge |
$ | $ | $ |
Reinsurance related assets |
|||||||||||||
The following table shows the change in the fair value of the derivative financial instruments in the consolidated statements of comprehensive income (loss) for the nine months ended September 30, 2024 and 2023:
|
Nine Months Ending |
Nine Months Ending |
Balance |
|||||||
|
September 30, 2024 |
September 30, 2023 |
Reported In |
|||||||
|
|
(unaudited) |
(unaudited) |
|||||||
| Derivatives: | |||||||||
|
Embedded derivatives: |
|||||||||
|
Change in reinsurance contract allocated hedge |
$ | ( |
) | $ |
Net investment gains (losses) |
||||
The following table shows the change in the fair value of the derivative financial instruments in the consolidated statements of comprehensive income (loss) for the three months ended September 30, 2024 and 2023:
|
Three Months Ending |
Three Months Ending |
Balance |
|||||||
|
September 30, 2024 |
September 30, 2023 |
Reported In |
|||||||
|
Derivatives: |
(unaudited) |
(unaudited) |
|||||||
|
Embedded derivatives: |
|||||||||
|
Change in reinsurance contract allocated hedge |
$ | ( |
) | $ | ( |
) |
Net investment gains (losses) |
||
US Alliance Corporation
Notes to Consolidated Financial Statements (unaudited)
|
Note 4. |
Fair Value Measurements |
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. The Company uses a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
|
● |
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement rate. |
|
● |
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. |
|
● |
Level 3 inputs are unobservable for the asset or liability and reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. |
Investments, available for sale: Fair values of available for sale fixed maturity securities are provided by a third party pricing service. The pricing service uses a variety of sources to determine fair value of securities. The Company’s fixed maturity securities are highly liquid, which allows for a high percentage of the portfolio to be priced through pricing sources.
Equity securities: Fair values for equity securities are also provided by a third party pricing service and are derived from active trading on national market exchanges.
Embedded derivative: The fair value of the reinsurance related assets represents the Company’s allocation of the fair value of the corresponding derivative instruments used in the hedge. The fair value of the underlying assets for the embedded derivative is generally based upon market observable inputs with industry standard valuation techniques. The valuation also requires certain significant inputs, which are generally not observable and accordingly, the valuation is considered Level 3 in the fair value hierarchy. The Company’s utilization of a credit-valuation adjustment did not have a material effect on the change in fair value of the embedded derivatives for the three and nine months ended September 30, 2024 and September 30, 2023.
US Alliance Corporation
Notes to Consolidated Financial Statements (unaudited)
|
Note 4. |
Fair Value Measurements (continued) |
The table below presents the amounts of assets and liabilities measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023:
|
September 30, 2024 |
||||||||||||||||
|
Total |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
|
(unaudited) |
||||||||||||||||
|
Fixed maturities: |
||||||||||||||||
|
US Treasury securities |
$ | $ | $ | $ | ||||||||||||
|
Corporate bonds |
||||||||||||||||
|
Municipal bonds |
||||||||||||||||
|
Redeemable preferred stock |
||||||||||||||||
|
Term loans |
||||||||||||||||
|
Mortgage backed and asset backed securities |
||||||||||||||||
|
Total fixed maturities |
||||||||||||||||
|
Equities: |
||||||||||||||||
|
Common stock |
||||||||||||||||
|
Preferred stock |
||||||||||||||||
|
Total equities |
||||||||||||||||
|
Other invested assets |
||||||||||||||||
|
Reinsurance contract allocated hedge |
||||||||||||||||
|
Limited partnership interests |
||||||||||||||||
|
Total |
$ | $ | $ | $ | ||||||||||||
|
December 31, 2023 |
||||||||||||||||
|
Total |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
|
Fixed maturities: |
||||||||||||||||
|
US Treasury securities |
$ | $ | $ | $ | ||||||||||||
|
Corporate bonds |
||||||||||||||||
|
Municipal bonds |
||||||||||||||||
|
Redeemable preferred stock |
||||||||||||||||
|
Term loans |
||||||||||||||||
|
Mortgage backed and asset backed securities |
||||||||||||||||
|
Total fixed maturities |
||||||||||||||||
|
Equities: |
||||||||||||||||
|
Common stock |
||||||||||||||||
|
Preferred stock |
||||||||||||||||
|
Total equities |
||||||||||||||||
|
Other invested assets |
||||||||||||||||
|
Reinsurance contract allocated hedge |
||||||||||||||||
|
Limited partnership interests |
||||||||||||||||
|
Total |
$ | $ | $ | $ | ||||||||||||
US Alliance Corporation
Notes to Consolidated Financial Statements (unaudited)
|
Note 4. |
Fair Value Measurements (continued) |
The reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) are as follows:
|
Mortgage |
Other |
|||||||||||||||
|
For the Nine Months Ended September 30, 2024 |
Corporate |
Backed |
Term |
Invested |
||||||||||||
|
(unaudited) |
Bonds |
Securities |
Loans |
Assets |
||||||||||||
|
Fair value, beginning of period |
$ | $ | $ | $ | ||||||||||||
|
Principal payment |
( |
) | ( |
) | ||||||||||||
|
Acquisition |
||||||||||||||||
|
Investment related gains (losses), net |
( |
) | ||||||||||||||
|
Fair value, end of period |
$ | $ | $ | $ | ||||||||||||
|
Mortgage |
Other |
|||||||||||||||
|
For the Three Months Ended September 30, 2024 |
Corporate |
Backed |
Term |
Invested |
||||||||||||
|
(unaudited) |
Bonds |
Securities |
Loans |
Assets |
||||||||||||
|
Fair value, beginnig of period |
$ | $ | $ | $ | ||||||||||||
|
Principal payment |
( |
) | ( |
) | ||||||||||||
|
Acquisition |
||||||||||||||||
|
Investment related gains (losses), net |
||||||||||||||||
|
Fair value, end of period |
$ | $ | $ | $ | ||||||||||||
The Company discloses the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed on the previous page. The estimated fair value approximates carrying value for accrued interest. The methodologies for other financial assets and financial liabilities are discussed below:
Cash and cash equivalents: The carrying amounts approximate fair value because of the short maturity of these instruments.
Investment income due and accrued: The carrying amounts approximate fair value because of the short maturity of these instruments.
Mortgage loans on real estate: Mortgage loans are carried at their unpaid principal value as that is considered the fair market values for these loans. The fair values of mortgage loans on real estate are calculated using discounted expected cash flows using competitive market interest rates currently being offered for similar loans. The inputs utilized to determine fair value of all mortgage loans are unobservable market data (competitive market interest rates); therefore, fair value of mortgage loans falls into Level 3 in the fair value hierarchy.
Limited partnership interests: Limited partnership interests are carried at net asset value which approximates fair value.
Reinsurance contract allocated hedge: The carrying value of funds withheld at interest approximates fair value as funds are specifically identified in the agreement. The fair value of the specified funds is based on the fair value of the underlying assets that are held by the ceding company. The ceding company uses a variety of sources and pricing methodologies, which are not transparent to the Company and may include significant unobservable inputs to value the securities held in distinct portfolios, therefore the valuation of these funds withheld assets are considered Level 3 in the fair value hierarchy.
Policy loans: Policy loans are stated at unpaid principal balances. As these loans are fully collateralized by the cash surrender value of the underlying insurance policies, the carrying value of the policy loans approximates their fair value.
Federal Home Loan Bank Advances: FHLB advances are stated at the outstanding principal balances and the carrying value approximates fair value.
US Alliance Corporation
Notes to Consolidated Financial Statements (unaudited)
|
Note 4. |
Fair Value Measurements (continued) |
Policyholder deposits in deposit-type contracts: The fair value for policyholder deposits deposit-type insurance contracts (accumulation annuities) is calculated using a discounted cash flow approach. Cash flows are projected using actuarial assumptions and discounted to the valuation date using risk-free rates adjusted for credit risk and the nonperformance risk of the liabilities.
The estimated fair values of the Company’s financial assets and liabilities at September 30, 2024 and December 31, 2023 are as follows:
|
September 30, 2024 |
||||||||||||||||||||
|
Carrying Value |
Fair Value |
Level 1 |
Level 2 |
Level 3 |
||||||||||||||||
|
|
(unaudited) |
|||||||||||||||||||
| Financial Assets: | ||||||||||||||||||||
|
Cash and cash equivalents |
$ | $ | $ | $ | $ | |||||||||||||||
|
Mortgage loans on real estate |
||||||||||||||||||||
|
Limited partnership interests |
||||||||||||||||||||
|
Investment income due and accrued |
||||||||||||||||||||
|
Reinsurance contract allocated hedge |
||||||||||||||||||||
|
Policy loans |
||||||||||||||||||||
|
Total Financial Assets (excluding available for sale investments) |
$ | $ | $ | $ | $ | |||||||||||||||
|
Financial Liabilities: |
||||||||||||||||||||
|
Federal Home Loan Bank advance |
$ | $ | $ | $ | $ | |||||||||||||||
|
Policyholder deposits in deposit-type contracts |
||||||||||||||||||||
|
Total Financial Liabilities |
$ | $ | $ | $ | $ | |||||||||||||||
|
December 31, 2023 |
||||||||||||||||||||
|
Carrying Value |
Fair Value |
Level 1 |
Level 2 |
Level 3 |
||||||||||||||||
|
Financial Assets: |
||||||||||||||||||||
|
Cash and cash equivalents |
$ | $ | $ | $ | $ | |||||||||||||||
|
Mortgage loans on real estate |
||||||||||||||||||||
|
Limited partnership interests |
||||||||||||||||||||
|
Investment income due and accrued |
||||||||||||||||||||
|
Reinsurance contract allocated hedge |
||||||||||||||||||||
|
Policy loans |
||||||||||||||||||||
|
Total Financial Assets (excluding available for sale investments) |
$ | $ | $ | $ | $ | |||||||||||||||
|
Financial Liabilities: |
||||||||||||||||||||
|
Federal Home Loan Bank advance |
$ | $ | $ | $ | $ | |||||||||||||||
|
Policyholder deposits in deposit-type contracts |
||||||||||||||||||||
|
Total Financial Liabilities |
$ | $ | $ | $ | $ | |||||||||||||||
US Alliance Corporation
Notes to Consolidated Financial Statements (unaudited)
|
Note 5. |
Income Tax Provision |
The Company uses the estimated effective tax rate ("ETR") method in computing the interim tax provision. Certain items, including those deemed unusual, infrequent, or that cannot be reliably estimated, are treated as discrete items and excluded from the estimated annual ETR ("AETR"). In these cases, the actual tax expense or benefit is reported in the same period as the related item. Certain tax effects are also not reflected in the AETR, primarily certain changes in the realizability of deferred tax assets and uncertain tax positions and are recorded in the period in which the change occurs. The AETR is revised, as necessary, at the end of successive interim reporting periods.
The Company's effective income tax rate was
The Company is required to evaluate the recoverability of its deferred tax assets and establish a valuation allowance, if necessary, to reduce its deferred tax asset to an amount that is more likely than not to be realizable. Considerable judgment and the use of estimates are required when determining whether a valuation allowance is necessary and, if so, the amount of such valuation allowance. When evaluating the need for a valuation allowance, the Company considers many factors, including: the nature and character of the deferred tax assets and liabilities; taxable income in prior carryback years; future reversals of temporary differences; the length of time carryovers can be utilized; and any tax planning strategies the Company would employ to avoid a tax benefit from expiring unused.
As of September 30, 2024, based on all available evidence, we concluded that a valuation allowance should remain on a portion of the deferred tax asset related to capital loss carryforwards that are not more-likely-than-not to be realized. For the nine months ended September 30, 2024, the Company recorded an increase of $
|
Note 6. |
Contingencies and Commitments |
Investment Commitments
The Company entered into a subscription agreement with Mutual Capital Investment Fund, LP on November 11, 2022. The agreement set forth a capital commitment of $
|
Note 7. |
Subsequent Events |
All of the effects of subsequent events that provide additional evidence about conditions that existed at the balance sheet date, including the estimates inherent in the process of preparing the consolidated financial statements, are recognized in the consolidated financial statements. The Company does not recognize subsequent events that provide evidence about conditions that did not exist at the balance sheet date but arose after, but before the consolidated financial statements are issued. In some cases, unrecognized subsequent events are disclosed to keep the consolidated financial statements from being misleading.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included in this Form 10-Q. In connection with, and because we desire to take advantage of, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, including those relating to the COVID-19 pandemic, and many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by, or on our behalf. We disclaim any obligation to update forward looking statements.
Overview
USAC was formed as a Kansas corporation on April 24, 2009 for the purpose of raising capital to form a new Kansas-based life insurance company. We presently conduct our business through our four wholly-owned subsidiaries: USALSC, a life insurance corporation; 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. USALSC re-domesticated to North Dakota in 2023. USALSC is currently authorized to conduct business in 18 states.
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. In 2023, Dakota Capital Life Insurance Company was merged into 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 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 an agreement (the “2017 ALSC Agreement”) t to assume 100% of a certain block of life insurance policies from American Life & Security Company (“ALSC”). On April 15, 2020, with an effective date of January 1, 2020, the Company entered into an agreement with ALSC (the “2020 ALSC Agreement “) to assume a quota share percentage of a block of annuity policies. Effective December 31, 2020 USALSC entered into an agreement with ALSC, which provided for ALSC to recapture all reserves previously ceded to USALSC with respect to a portion of the 2017 ALSC Agreement.
On December 31, 2023 USALSC entered into an agreement with Lewer Life Insurance LLIC to assume a block of life and annuity policies.
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 August 1, 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, 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, assumed liabilities of $10,972,785 and recorded VOBA of $2,163,541.
On December 31, 2023, DCLIC was merged into its parent company, USALSC.
Critical Accounting Policies and Estimates
Our accounting and reporting policies are in accordance with GAAP. Preparation of the consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The following is an explanation of our accounting policies and the estimates considered most significant by management. These accounting policies inherently require significant judgment and assumptions and actual operating results could differ significantly from management’s estimates determined using these policies. We believe the following accounting policies, judgments and estimates are the most critical to the understanding of our results of operations and financial position. A detailed discussion of significant accounting policies is provided in this report in the Notes to Consolidated Financial Statements included with this quarterly report.
Valuation of Investments
The Company's principal investments are in fixed maturity, mortgages, and equity securities. Fixed maturity, classified as available for sale, are carried at their fair value in the consolidated balance sheets, with unrealized gains or losses recorded in comprehensive income (loss). Our fixed income investment manager utilizes external independent third-party pricing services to determine the fair values of investment securities available for sale. Equity securities are carried at their fair value in the consolidated balance sheets, with unrealized gains or losses recorded in net income (loss). Mortgages, including mortgage loan participations, are carried at unpaid principal balances, net of any unamortized premium or discount and valuation allowances.
The recognition of credit losses on debt securities is dependent on the facts and circumstances related to the specific security. If we determine a credit loss exists, the difference between amortized cost and fair value is recognized in the consolidated statements of comprehensive income (loss). 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 for liquidity purposes.
Mortgage loans on real estate, including mortgage loan participations, are carried at unpaid principal balances, net of any unamortized premium or discount and valuation allowances. Interest income is accrued on the principal amount of the mortgage loans based on its contractual interest rate. Amortization of premiums and discounts is recorded using the effective yield method. The Company accrues interest on loans until probable the Company will not receive interest or the loan is 90 days past due. Interest income, amortization of premiums, accretion of discounts and prepayment fees are reported in investment income, net of related expenses in the consolidated statements of comprehensive income (loss).
A mortgage loan is considered to be impaired when, based on the current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the mortgage agreement.
Valuation allowances on mortgage loans are established based upon inherent losses expected by management to be realized in connection with future dispositions or settlement of mortgage loans, including foreclosures. The Company establishes valuation allowances for estimated impairments on an individual loan basis as of the balance sheet date. Such valuation allowances are based on the excess carrying value of the loan over the present value of expected future cash flows discounted at the loan’s original effective interest rate, the value of the loan’s collateral if the loan is in the process of foreclosure or is otherwise collateral-dependent, or the loan’s market value if the loan is being sold. These evaluations are revised as conditions change and new information becomes available. In addition to historical experience, management considers qualitative factors that include the impact of changing macro-economic conditions, which may not be currently reflected in the loan portfolio performance, and the quality of the loan portfolio.
Any interest accrued or received on the net carrying amount of the impaired loan will be included in investment income or applied to the principal of the loan, depending on the assessment of the collectability of the loan. Mortgage loans deemed to be uncollectible or that have been foreclosed would be 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 comprehensive income (loss).
Other invested assets include collateral loans and private credit investments. The collateral loans and private credit investments are carried at fair value. The inputs used to measure these assets are classified as Level 3 within the fair value hierarchy.
Limited partnership interests consist of an investment in Mutual Capital Investment Fund. Limited partnerships interests are carried at net asset value as determined by a third-party valuation.
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.
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.
New Accounting Standards
A detailed discussion of new accounting standards is provided in the Notes to Consolidated Financial Statements beginning on p. 7 of this quarterly report.
Discussion of Consolidated Results of Operations
Total Income. Insurance revenues are primarily generated from premium revenues and investment income. Total income for the nine months ended September 30, 2024 and 2023 are summarized in the table below.
|
Nine Months Ended September 30, |
||||||||
|
2024 |
2023 |
|||||||
|
|
(unaudited) |
|||||||
| Income: | ||||||||
|
Premium income |
$ | 11,299,100 | $ | 9,955,527 | ||||
|
Net investment income |
5,306,212 | 5,092,863 | ||||||
|
Net investment gains (losses) |
568,778 | 632,924 | ||||||
|
Other income |
455,741 | 267,766 | ||||||
|
Total income |
$ | 17,629,831 | $ | 15,949,080 | ||||
In the first nine months of 2024, total income increased to $17,269,831, an increase of $1,680,751 or 11% from the 2023 first nine months total income of $15,949,080. The increase is driven by increased premiums and net investment income. The Company records unrealized gains and losses on equity securities in total income in accordance with accounting standards. This standard continues to result in increased volatility in total income.
Total income for the three months ended September 30, 2024 and 2023 are summarized in the table below.
|
Three Months Ended September 30, |
||||||||
|
2024 |
2023 |
|||||||
|
|
(unaudited) |
|||||||
| Income: | ||||||||
|
Premium income |
$ | 3,544,213 | $ | 3,353,042 | ||||
|
Net investment income |
1,310,732 | 1,803,369 | ||||||
|
Net investment gains (losses) |
56,118 | (257,552 | ) | |||||
|
Other income |
80,473 | 97,023 | ||||||
|
Total income |
$ | 4,991,536 | $ | 4,995,882 | ||||
Our 2024 third quarter total income decreased to $4,991,536, a decrease of $4,346 or 0% from the 2023 third quarter total income of $4,995,882. The decrease was driven by decreased net investment income.
Premium income: Premium income for the first nine months of 2024 was $11,299,100 compared to $9,955,527 in the first nine months of 2023, an increase of $1,343,573 or 14%. The increase was driven by an increase in direct single and recurring premiums. Even though it is a reduction in revenue, ceded premium increases reflect the growth of our group policy premiums as we focused on small companies to assist them with their employee benefits.
Direct, assumed and ceded premiums for the nine months ended September 30, 2024 and 2023 are summarized in the following table.
|
Nine Months Ended September 30, |
||||||||
|
2024 |
2023 |
|||||||
|
(unaudited) |
||||||||
|
Direct |
$ | 8,722,136 | $ | 7,500,108 | ||||
|
Assumed |
3,754,250 | 3,513,157 | ||||||
|
Ceded |
(1,177,286 | ) | (1,057,738 | ) | ||||
|
Total |
$ | 11,299,100 | $ | 9,955,527 | ||||
The Company continuously searches for new product and distribution opportunities to continue to increase premium production on a direct and assumed basis.
Premium income for the three months ended September 30, 2024 was $3,544,213 compared to $3,353,042 for the same period in 2023, an increase of $191,171 or 6%. The increase was driven by an increase in direct single and recurring premiums. Even though it is a reduction in revenue, ceded premium increases reflect the growth of our group policy premiums as we focused on small companies to assist them with their employee benefits.
Direct, assumed and ceded premiums for the three months ended September 30, 2024 and 2023 are summarized in the following table.
|
Three Months ended September 30, |
||||||||
|
2024 |
2023 |
|||||||
|
(unaudited) |
||||||||
|
Direct |
$ | 2,966,996 | $ | 2,740,408 | ||||
|
Assumed |
1,009,148 | 984,312 | ||||||
|
Ceded |
(431,931 | ) | (371,678 | ) | ||||
|
Total |
$ | 3,544,213 | $ | 3,353,042 | ||||
Investment income, net of expenses: The components of net investment income for the nine months ended September 30, 2024 and 2023 are as follows:
|
Nine Months Ended September 30, |
||||||||
|
2024 |
2023 |
|||||||
|
(unaudited) |
||||||||
|
Fixed maturities |
$ | 4,366,080 | $ | 3,520,865 | ||||
|
Mortgages |
915,208 | 1,520,564 | ||||||
|
Equity securities |
239,092 | 552,098 | ||||||
|
Other invested assets |
253,174 | 159,935 | ||||||
|
Cash and cash equivalents |
255,426 | 67,353 | ||||||
| 6,028,980 | 5,820,815 | |||||||
|
Less investment expenses |
(722,768 | ) | (727,952 | ) | ||||
| $ | 5,306,212 | $ | 5,092,863 | |||||
Net investment income for the first nine months of 2024 was $5,306,212, compared to $5,092,863 for the same period in 2023, an increase of $213,349 or 4%. This increase in investment income is a result of improved yields.
The components of net investment income for the three months ended September 30, 2024 and 2023 are as follows:
|
Three Months Ended September 30, |
||||||||
|
2024 |
2023 |
|||||||
|
(unaudited) |
||||||||
|
Fixed maturities |
$ | 1,477,931 | $ | 625,328 | ||||
|
Mortgages |
8,689 | 517,551 | ||||||
|
Equity securities |
74,947 | 157,298 | ||||||
|
Other invested assets |
194,360 | 59,070 | ||||||
|
Cash and cash equivalents |
60,851 | 31,393 | ||||||
| 1,816,778 | 1,390,640 | |||||||
|
Less investment expenses |
(506,046 | ) | 412,729 | |||||
| $ | 1,310,732 | $ | 1,803,369 | |||||
Net investment income for the three months ended September 30, 2024 was $1,310,732, compared to $1,803,369 for the same period in 2023, a decrease of $492,637 or 27%. This decrease in investment income is a result of a one-time adjustment in interest income on two high performing mortgage loans.
Net investment gains (losses): Accounting standards require that the unrealized gains and losses on equity securities be reported as income on the consolidated statements of comprehensive income (loss). For the nine months ended September 30, 2024, net investment gains are summarized in the following table.
|
Nine Months Ended September 30, |
||||||||
|
(unaudited) |
||||||||
|
2024 |
2023 |
|||||||
|
Recognized gains (losses) on sale of investments |
$ | (139,626 | ) | $ | (219,087 | ) | ||
|
Change in allowance for credit loss recognized in earnings |
(32,150 | ) | 115,762 | |||||
|
Unrealized net gains (losses) recognized in earnings |
1,006,400 | 311,127 | ||||||
|
Embedded Derivative |
(265,846 | ) | 425,122 | |||||
|
Net investment gains (losses) |
$ | 568,778 | $ | 632,924 | ||||
For the three months ended September 30, 2024 and 2023, net investment gains are summarized in the following table.
|
Three Months Ended September 30, |
||||||||
|
(unaudited) |
||||||||
|
2024 |
2023 |
|||||||
|
Recognized gains (losses) on sale of investments |
$ | (94,672 | ) | $ | (140,204 | ) | ||
|
Change in allowance for credit loss recognized in earnings |
93,550 | - | ||||||
|
Unrealized net gains (losses) recognized in earnings |
419,301 | (45,317 | ) | |||||
|
Embedded Derivative |
(362,061 | ) | (72,031 | ) | ||||
|
Net investment gains (losses) |
$ | 56,118 | $ | (257,552 | ) | |||
Realized gains and losses related to the sale of securities for the nine months ended September 30, 2024 and 2023 are summarized as follows:
|
Nine Months Ended September 30, |
||||||||
|
(unaudited) |
||||||||
|
2024 |
2023 |
|||||||
|
Gross gains |
$ | 48,824 | $ | 193,318 | ||||
|
Gross losses |
(188,450 | ) | (412,405 | ) | ||||
|
Realized gains (losses) |
$ | (139,626 | ) | $ | (219,087 | ) | ||
|
Fixed maturity securities |
- | - | ||||||
|
Mortgage loans on real estate |
(32,150 | ) | 115,762 | |||||
|
(Increase) Decrease in allowance for credit losses |
$ | (32,150 | ) | $ | 115,762 | |||
Realized gains and losses related to the sale of securities for the three months ended September 30, 2024 and 2023 are summarized as follows:
|
Three Months Ended September 30, |
||||||||
|
(unaudited) |
||||||||
|
2024 |
2023 |
|||||||
|
Gross gains |
$ | 26,754 | $ | 4,541 | ||||
|
Gross losses |
(121,426 | ) | (144,745 | ) | ||||
|
Net security losses |
$ | (94,672 | ) | $ | (140,204 | ) | ||
|
Fixed maturity securities |
116,563 | - | ||||||
|
Mortgage loans on real estate |
(23,013 | ) | - | |||||
|
Decrease in allowance for credit losses |
$ | 93,550 | $ | - | ||||
Other income: Other income for the nine months ended September 30, 2024 was $455,741 compared to $267,766 for the same period in 2023, an increase of $187,975. The increase was the result of implementation fees for a third-party administration agreement. Other income for the three months ended September 30, 2024 was $80,473 compared to $97,023 for the same period in 2023, a decrease of $16,550. The increases were the result of implementation fees for a third-party administration agreement.
Expenses. Expenses for the nine months ended September 30, 2024 and 2023 are summarized in the table below.
|
Nine Months Ended September 30, |
||||||||
|
2024 |
2023 |
|||||||
|
|
(unaudited) |
|||||||
| Expenses: | ||||||||
|
Death claims |
$ | 2,938,512 | $ | 2,621,079 | ||||
|
Policyholder benefits |
5,292,687 | 4,933,077 | ||||||
|
Increase in policyholder reserves |
3,962,363 | 3,372,265 | ||||||
|
Commissions, net of deferrals |
654,809 | 561,139 | ||||||
|
Amortization of deferred acquisition costs |
1,046,775 | 1,059,974 | ||||||
|
Amortization of value of business acquired |
69,315 | 69,315 | ||||||
|
Salaries & benefits |
1,140,240 | 1,159,385 | ||||||
|
Other operating expenses |
2,058,170 | 1,377,587 | ||||||
|
Total expense |
$ | 17,162,871 | $ | 15,153,821 | ||||
Expenses for the three months ended September 30, 2024 and 2023 are summarized in the table below.
|
Three Months Ended September 30, |
||||||||
|
2024 |
2023 |
|||||||
|
|
(unaudited) |
|||||||
| Expenses: | ||||||||
|
Death claims |
$ | 815,287 | $ | 901,546 | ||||
|
Policyholder benefits |
1,530,753 | 1,435,212 | ||||||
|
Increase in policyholder reserves |
1,474,839 | 1,386,070 | ||||||
|
Commissions, net of deferrals |
218,441 | 198,623 | ||||||
|
Amortization of deferred acquisition costs |
349,402 | 368,263 | ||||||
|
Amortization of value of business acquired |
23,105 | 23,105 | ||||||
|
Salaries & benefits |
431,837 | 423,269 | ||||||
|
Other operating expenses |
623,378 | 428,386 | ||||||
|
Total expense |
$ | 5,467,042 | $ | 5,164,474 | ||||
Death claims: Death benefits were $2,938,512 in the nine months ended September 30, 2024 compared to $2,621,079 for the same period in 2023, an increase of $317,433 or 12%. This increase is attributable to our growing block of in-force pre-need life insurance policies. We expect these claims to grow as we continue to increase the size of our in-force business.
Death benefits were $815,287 in the three months ended September 30, 2024 compared to $901,546 for for the same period in 2023, a decrease of $86,259 or 10%. This decrease is attributable to quarterly variability in our growing block of in-force pre-need life insurance policies.
Policyholder benefits: Policyholder benefits were $5,292,687 in the nine months ended September 30, 2024 compared to $4,933,077 for the same period in 2023, an increase of $359,610 or 7%. The primary driver of this increase is an increase in assumed benefits.
Policyholder benefits were $1,530,753 in the nine months ended September 30, 2024 compared to $1,435,212 for the same period in 2023, an increase of $95,541 or 7%. The primary driver of this increase is an increase in assumed benefits.
Increase in policyholder reserves: Policyholder reserves increased $3,962,363 in the nine months ended September 30, 2024, compared to $3,372,265 for the same period in 2023, an increase of $590,098 or 18%. The increase in reserve growth is driven by increased premiums.
Policyholder reserves increased $1,474,839 in the three months ended September 30, 2024, compared to $1,435,212 for the same period in 2023, an increase of $88,769 or 6%. The increase in reserve growth is driven by 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 $654,809 in the nine months ended September 30, 2024, compared to $561,139 for the same period in 2023, an increase of $93,670 or 17%. This increase is due to an increase in and changing mix of premiums.
Commissions, net of deferrals, were $218,441 in the three months ended September 30, 2024, compared to $198,623 for the same period in 2023, an increase of $19,818 or 10%. This increase is due to an increase in and changing mix of premiums.
Amortization of deferred acquisition costs: The amortization of deferred acquisition costs ("DAC") was $1,046,775 in the nine months ended September 30, 2024, compared to $1,059,974 for the same period in 2023, a decrease of $13,199 or 1%. The decrease is driven by normal adjustments to DAC amortization which occur over the life of a policy.
The amortization of DAC was $349,402 in the three months ended September 30, 2024, compared to $368,263 for the same period in 2023, a decrease of $18,861 or 5%. The decrease is driven by adjustments to DAC amortization which occur over the life of a policy.
Amortization of value of business acquired: The amortization of value of business acquired (“VOBA”) was $69,315 in the nine months ended September 30, 2024 and 2023, respectively. VOBA is being amortized straight-line over 30 years. The amortization of VOBA was $23,105 in the three months ended September 30, 2024 and 2023, respectively.
Salaries and benefits: Salaries and benefits were $1,140,240 for the nine months ended September 30, 2024, compared to $1,159,385 for the same period in 2023, a decrease of $19,145 or 2%. The decrease was driven by changes in staffing levels.
Salaries and benefits were $431,837 for the three months ended September 30, 2024, compared to $423,269 ior the same period in 2023, an increase of $8,568 or 2%. The increase was driven by changes in staffing levels.
Other expenses: Other operating expenses were $2,058,170 in the nine months ended September 30, 2024, compared to $1,377,587f or the same period in 2023, an increase of $680,583 or 49%. The increase is driven by increased audit and actuarial costs. Audit costs this year have increased over 200% and actuarial costs are up over 45%.
Other operating expenses were $623,378 in the three months ended September 30, 2024, compared to $428,386 for the same period in 2023, an increase of $194,992 or 46%. The increase is driven by increased audit and actuarial costs.
Federal income tax expenses: Federal income tax expense of $114,298 was recorded for the nine months ended September 30, 2024. Federal income tax benefit of $103,134 was recorded for the three months ended September 30, 2024. No such benefit or expense was recorded for the three and nine months ended September 30, 2023.
Net Income: Our net income was $352,662 in the nine months ended September 30, 2024 compared to net income of $795,259 for the same period in 2023, a decrease of $442,597. Our net income per share was $0.05 compared to net income per share of $0.10 in 2023, basic and diluted. Our net loss was $372,372 in the three months ended September 30, 2024 compared to a net loss of $168,592 for the same period in 2023, a decrease of $203,780. Our net loss per share for the three months ended September 30, 2024 was $0.05 compared to net loss per share of $0.02 for the same period in 2023, basic and diluted.
Discussion of Consolidated Balance Sheet
Assets. Assets have increased to $131,682,669 as of September 30, 2024, an increase of $5.598.033 or 4% from December 31, 2023 assets of $126,084,636. This is primarily the result of an increase in fixed maturity securities and mortgage loans.
Available for sale fixed maturity securities: As of September 30, 2024, we had available for sale fixed maturity assets of $78,864,062, an increase of $4,354,542 or 6% from the December 31, 2023 balance of $74,509,520. The increase is driven by new purchases and increased market value.
Equity securities, at fair value: As of September 30, 2024, we had equity assets of $3,934,398, an increase of $348,513 or 10% from the December 31, 2023 balance of $3,585,885. This increase is driven by an increase in value of our equity securities.
Limited partnership interests: As of September 30, 2024, we had limited partnership interests of $415,721, an increase of $25,894 or 7% from our December 31, 2023 balance of $389,827. This is related to our investment in the Mutual Capital Investment Fund.
Mortgage loans on real estate: As of September 30, 2024, we had mortgage loans on real estate of $25,662,587, an increase of $6,045,334 or 31% from the December 31, 2023 balance of $19,617,253. The increase is the result of additional mortgage loan participations.
Other invested assets: As of September 30, 2024, we had other invested assets of $2,803,831, an increase of $564,148 or 25% from the December 31, 2023 balance of $2,239,683.
Policy loans: As of September 30, 2024, our policy loans were $30,978, an increase of $4,846 or 19% from the December 31, 2023 balance of $26,132. The increase is a result of normal policy loan activity.
Real estate, net of depreciation: As of September 30, 2024, we had real estate assets of $1,666,197 related to our home office building, a decrease of $20,471 from the December 31, 2023 balance of $1,686,668. The decrease is the result of normal depreciation.
Cash and cash equivalents: As of September 30, 2024, we had cash and cash equivalent assets of $4,492,006, a decrease of $4,490,132 or 50% from the December 31, 2023 balance of $8.982.138. This decrease was the result of cash being redeployed into invested assets.
Investment income due and accrued: As of September 30, 2024, our investment income due and accrued was $995,105 compared to $1,878,620 as of December 31, 2023, a decrease of $883,515 or 47%. This decrease is attributable to investment activity.
Reinsurance related assets: As of September 30, 2024, our reinsurance related assets were $715,731 compared to $1,039,274 as of December 31, 2023, a decrease of $323,543. This decrease is the result of changes in the net settlement due to/from ALSC under our 2020 ALSC Agreement.
Deferred acquisition costs, net: As of September 30, 2024, our deferred acquisition costs were $4,134,810 compared to $4,751,497 as of December 31, 2023, a decrease of $616,687 or 13%. The decrease is the result of the amortization of DAC related to our 2020 ALSC Agreement.
Value of business acquired, net: As of September 30, 2024 our value of business acquired asset was $2,356,658 compared to $2,425,973 as of December 31, 2023, a decrease of $69,315 or 3%. The decrease is the result of amortization of VOBA.
Property, equipment and software, net: As of September 30, 2024 our property, equipment and software assets were $143,058, an increase of $4,802 from the December 31, 2023 balance of $138,256. This increase is the result of the purchase of computers in 2024.
Goodwill: As of September 30, 2024 and December 31, 2023, 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 $3,428,530 as of June 30, 2024, a decrease of $460,377 from the December 31, 2023 balance of $3,888,907. The decrease is the result of deferred federal income tax expense.
Other assets: As of September 30, 2024, our other assets were $1,616,333, an increase of $1,115,703 or 223% from the December 31, 2023 balance of $500,630. This increase is the result of a mortgage loan receivable.
Liabilities. Our total liabilities were $119,356,166 as of September 30, 2024, an increase of $3,602,607 or 3% from our December 31, 2023 liabilities of $115,753,559. This increase is driven by an increase in our policy liabilities.
Policy liabilities: Our total policy liabilities as of September 30, 2024 were $117,193,366 compared to $112,563,626 as of December 31, 2023, an increase of $4,629,740 or 4%. This increase is the result of the growth of our in-force business.
Accounts payable and accrued expenses: As of September 30, 2024, our accounts payable and accrued expenses were $1,006,040 compared to $2,053,363 as of December 31, 2023, a decrease of $1,047,323 or 51%. The decrease is driven by reduced investment fees payable.
Federal Home Loan Bank advance: As of September 30, 2024 and December 31, 2023, respectively, the Company has outstanding advances of $1,000,000 with the Federal Home Loan Bank of Topeka.
Other liabilities: As of September 30, 2024, we had other liabilities of $156,760 compared to $136,570 as of December 31, 2023, an increase of $20,190. The increase is the result of changes in investment-related payables.
Shareholders’ Equity. Our shareholders’ equity was $12,326,503 as of September 30, 2024, an increase of $1,995,426 or 19% from our December 31, 2023 shareholders’ equity of $10,331,077. The increase in shareholders’ equity was driven by an increase in the market value of our fixed maturity securities.
Investments
Our investment philosophy is reflected by 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 September 30, 2024 and December 31, 2023.
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September 30, 2024 |
December 31, 2023 |
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Carrying |
Percent |
Carrying |
Percent |
|||||||||||||
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Value |
of Total |
Value |
of Total |
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(unaudited) |
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| Fixed maturities: | ||||||||||||||||
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US Treasury securities |
$ | 742,712 | 0.6 | % | $ | 724,668 | 0.7 | % | ||||||||
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Corporate bonds |
17,914,873 | 15.2 | % | 17,813,362 | 16.0 | % | ||||||||||
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Municipal bonds |
4,738,839 | 4.0 | % | 5,636,093 | 5.1 | % | ||||||||||
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Redeemable preferred stocks |
2,449,490 | 2.1 | % | 3,305,569 | 3.0 | % | ||||||||||
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Term Loans |
16,582,752 | 14.1 | % | 17,052,420 | 15.4 | % | ||||||||||
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Mortgage backed and asset backed securities |
36,435,396 | 30.8 | % | 29,977,408 | 27.0 | % | ||||||||||
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Total fixed maturities |
78,864,062 | 66.8 | % | 74,509,520 | 67.1 | % | ||||||||||
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Mortgage loans |
25,662,587 | 21.8 | % | 19,617,253 | 17.7 | % | ||||||||||
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Other invested assets |
2,803,831 | 2.4 | % | 2,239,683 | 2.0 | % | ||||||||||
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Limited partnership interests |
415,721 | 0.4 | % | 389,827 | 0.4 | % | ||||||||||
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Equities: |
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Common stock |
2,351,171 | 2.0 | % | 2,116,356 | 1.9 | % | ||||||||||
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Preferred stock |
1,583,227 | 1.3 | % | 1,469,529 | 1.3 | % | ||||||||||
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Total equities |
3,934,398 | 3.3 | % | 3,585,885 | 3.2 | % | ||||||||||
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Real estate, net of depreciation |
1,666,197 | 1.4 | % | 1,686,668 | 1.5 | % | ||||||||||
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Cash and cash equivalents |
4,492,006 | 3.8 | % | 8,982,138 | 8.1 | % | ||||||||||
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Total |
$ | 117,838,802 | 100.0 | % | $ | 111,010,974 | 100.0 | % | ||||||||
The total value of our investments and cash and cash equivalents increased to $117,838,802 as of September 30, 2024 from $111,010,974 at December 31, 2023, an increase of $6,827,828 or 6%. Increases in investments are primarily attributable to premium income and improved market values.
The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of September 30, 2024 and December 31, 2023.
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September 30, 2024 |
December 31, 2023 |
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Fair |
Percent |
Fair |
Percent |
|||||||||||||
|
Value |
of Total |
Value |
of Total |
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(unaudited) |
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AAA and U.S. Government |
$ | 5,753,085 | 7.3 | % | $ | 4,259,281 | 5.7 | % | ||||||||
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AA |
10,887,490 | 13.8 | % | 11,274,407 | 15.1 | % | ||||||||||
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A |
13,025,643 | 16.5 | % | 18,479,331 | 24.8 | % | ||||||||||
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BBB |
36,829,368 | 46.8 | % | 33,714,311 | 45.3 | % | ||||||||||
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BB |
5,722,029 | 7.3 | % | 3,033,357 | 4.1 | % | ||||||||||
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B |
88,516 | 0.1 | % | - | 0.0 | % | ||||||||||
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Not Rated - Private Placement |
6,557,931 | 8.3 | % | 3,748,833 | 5.0 | % | ||||||||||
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Total |
$ | 78,864,062 | 100.0 | % | $ | 74,509,520 | 100.0 | % | ||||||||
The amortized cost and fair value of debt securities as of September 30, 2024 and December 31, 2023, 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.
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As of September 30, 2024 |
As of December 31, 2023 |
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Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
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(unaudited) |
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| Amounts maturing in: | ||||||||||||||||
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One year or less |
$ | 328,710 | $ | 328,710 | $ | 152,840 | $ | 147,835 | ||||||||
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After one year through five years |
16,649,480 | 16,744,573 | 16,397,124 | 16,461,777 | ||||||||||||
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After five years through ten years |
4,973,769 | 5,004,230 | 6,371,607 | 6,112,389 | ||||||||||||
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More than 10 years |
20,438,967 | 17,901,663 | 21,488,624 | 18,504,542 | ||||||||||||
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Redeemable preferred stocks |
2,563,224 | 2,449,490 | 3,622,572 | 3,305,569 | ||||||||||||
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Mortgage backed and asset backed securities |
36,043,987 | 36,435,396 | 30,621,025 | 29,977,408 | ||||||||||||
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Total amortized cost and fair value |
$ | 80,998,137 | $ | 78,864,062 | $ | 78,653,792 | $ | 74,509,520 | ||||||||
Market Risk of Financial Instruments
We hold a diversified portfolio of investments that primarily includes cash, bonds, equity securities, mortgage loans, and other invested assets. Each of these investments is subject to market risks that can affect their return and their fair value. The primary market risks affecting the investment portfolio are interest rate risk, credit risk, and equity risk.
Interest Rate Risk
Interest rate risk arises from the price sensitivity of investments to changes in interest rates. Interest represents the greatest portion of an investment's return for most fixed maturity securities in stable interest rate environments. The changes in the fair value of such investments are inversely related to changes in market interest rates. As interest rates fall, the interest and dividend streams of existing fixed-rate investments become more valuable and fair values rise. As interest rates rise, the opposite effect occurs.
We work 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, we believe 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 FHLB 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
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, if needed.
Net cash provided by operating activities was $4,827,724 for the nine months ended September 30, 2024. The primary sources of cash from operating activities were premiums received from policyholders as well as investment income. 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 $8,412,198. The primary source of cash was proceeds of fixed maturity, mortgage, and equity investments sales and repayments. Cash used by financing activities was $905,658. The primary uses of cash were withdrawals on deposit-type contracts.
At September 30, 2024, we had cash and cash equivalents totaling $4,492,006. We believe that our existing cash and cash equivalents are 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, our primary insurance subsidiary, is uncertain and may require additional capital as it continues to grow.
Impact of Inflation
Insurance premiums are established before the amount of losses, or the extent to which inflation may affect such losses and expenses, are known. We attempt, in establishing premiums, to anticipate the potential impact of inflation. If, for competitive reasons, premiums cannot be increased to anticipate inflation, this cost would be absorbed by us. Inflation also affects the rate of investment return on the investment portfolio with a corresponding effect on investment income.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company”, the Company does not provide disclosure pursuant to this item.
ITEM 4. CONTROLS AND PROCEDURES
We have established disclosure controls and procedures to ensure, among other things, material information relating to our Company, including our consolidated subsidiaries, is made known to our officers who certify our financial reports and to the other members of our senior management and the Board of Directors.
As required by Exchange Act Rule 13a-15(b), management of the Company, including the Chief Executive Officer and the Vice President 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 three and nine months ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s control over financial reporting.
We are involved in litigation incidental to our operations from time to time. We are not presently a party to any legal proceedings other than litigation arising in the ordinary course of business, and we are not aware of any claims that could materially affect our financial position or results of operation.
As a “smaller reporting company”, the Company is not required to provide disclosure pursuant to this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the quarter ended September 30, 2024, the Company did not issue any shares of common stock pursuant to an offering to residents of the state of Kansas that was registered with the Kansas Securities Commissioner. This offering was terminated in the second quarter of 2024.
During the quarter ended September 30, 2024, the Company did not issue any shares of common stock pursuant to a private placement offering to residents of the state of North Dakota. This offering was terminated in the second quarter of 2024.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
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3.1 |
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3.1.1 |
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3.1.2 |
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3.2 |
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3.2.1 |
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31.1* |
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31.2* |
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32.1* |
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32.2* |
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101.INS** |
Inline XBRL Instance |
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101.SCH** |
Inline XBRL Taxonomy Extension Schema |
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101.CAL** |
Inline XBRL Taxonomy Extension Calculation |
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101.DEF** |
Inline XBRL Taxonomy Extension Definition |
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101.LAB** |
Inline XBRL Taxonomy Extension Labels |
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101.PRE** |
Inline XBRL Taxonomy Extension Presentation |
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104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
**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.
* Filed herewith
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized
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US Alliance |
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Corporation |
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(Registrant) |
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Date |
November 13, 2024 |
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By |
/s/ Jack H. Brier |
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Jack H. Brier, President and Chairman |