The following discussion should be read in conjunction with our condensed
consolidated financial statements and notes thereto included in this Form 10-K.
In connection with, and because we desire to take advantage of, the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, we
caution readers regarding certain forward looking statements in the following
discussion and elsewhere in this report and in any other statement made by, or
on our behalf, whether or not in future filings with the Securities and Exchange
Commission. Forward looking statements are statements not based on historical
information and which relate to future operations, strategies, financial results
or other developments. Forward looking statements are necessarily based upon
estimates and assumptions that are inherently subject to significant business,
economic and competitive uncertainties and contingencies, including those
relating to the Covid-19 pandemic, many of which are beyond our control and many
of which, with respect to future business decisions, are subject to change.
These uncertainties and contingencies can affect actual results and could cause
actual results to differ materially from those expressed in any forward looking
statements made by, or on our behalf. We disclaim any obligation to update
forward looking statements.
Overview
USAC was formed as a Kansas corporation on April 24, 2009 for the purpose of
raising capital to form a new Kansas-based life insurance company. We presently
conduct our business through our five wholly-owned subsidiaries: USALSC, a life
insurance corporation; DCLIC, a life insurance corporation; USALSC-Montana, a
life insurance corporation; USAMC, an insurance marketing corporation; and
USAIC, an investment management corporation
On January 2, 2012, USALSC was issued a Certificate of Authority to conduct life
insurance business in the State of Kansas. We began third party administrative
services in 2015.
On August 1, 2017, the Company merged with Northern Plains Capital Corporation
with the Company being the ultimate surviving entity. As a result of this
merger, the Company acquired Dakota Capital Life Insurance Company which became
a wholly owned subsidiary of USALSC.
On December 14, 2018, the Company acquired Great Western Life Insurance Company.
Great Western Life Insurance Company was renamed US Alliance Life and Security
Company - Montana and is a subsidiary of USALSC.
The Company assumes business under three reinsurance treaties. On January 1,
2013, the Company entered into an agreement to assume 20% of a certain block of
health insurance policies from Unified Life Insurance Company. On September 30,
2017, the Company entered into the 2017 ALSC Agreement to assume 100% of a
certain block of life insurance policies from ALSC. On April 15, 2020, with an
effective date of January 1, 2020, the Company entered into the 2020 ALSC
Agreement to assume a quota share percentage of a block of annuity policies. As
of December 31, 2021, the Company had assumed $51.5 million in annuity deposits
under the 2020 ALSC Agreement. 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.
USALSC and ASLC agreed that the commuted business shall be discharged by
USALSC's transfer of invested assets and cash in the amount of $9,181,100. As
part of the transaction the Company released $10,972,785 in reserve liabilities
and $1,146,156 of deferred acquisition costs, resulting in a commutation gain of
$543,794, which is recorded in other income for the year ended December 31,
2020.
Significant Accounting Policies and Estimates
Our accounting and reporting policies are in accordance with GAAP. Preparation
of the consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. The following is an explanation of our accounting policies and the
estimates considered most significant by management. These accounting policies
inherently require significant judgment and assumptions and actual operating
results could differ significantly from management's estimates determined using
these policies. We believe the following accounting policies, judgments and
estimates are the most critical to the understanding of our results of
operations and financial position. A detailed discussion of significant
accounting policies is provided in this report in the Notes to Consolidated
Financial Statements included with this annual report.
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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,
classified as available for sale, are carried at their fair value in the
consolidated balance sheets, with unrealized gains or losses recorded in
net income (loss).
We have a policy and process in place to identify securities that could
potentially have an impairment that is other-than-temporary. The assessment of
whether impairments have occurred is based on a case-by-case evaluation of
underlying reasons for the decline in fair value. We consider severity of
impairment, duration of impairment, forecasted recovery period, industry
outlook, financial condition of the issuer, issuer credit ratings and whether we
intend to sell a security, or it is more likely than not that we would be
required to sell a security, prior to the recovery of the amortized cost. NEAM
and 1505 Capital, our investment managers, provide support to the Company in
making these determinations.
The recognition of other-than-temporary impairment losses on debt securities is
dependent on the facts and circumstances related to the specific security. If we
intend to sell a security or it is more likely than not that we would be
required to sell a security prior to recovery of the amortized cost, the
difference between amortized cost and fair value is recognized in the income
statement as an other-than-temporary impairment. Our membership in the Federal
Home Loan Bank ("FHLB") provides additional liquidity which further reduces the
likelihood that we would be required to sell a security prior to recovery. As it
relates to debt securities, if we do not expect to recover the amortized basis,
do not plan to sell the security and if it is not more likely than not that we
would be required to sell a security before the recovery of its amortized cost,
the other-than-temporary impairment would be recognized. We would recognize the
credit loss portion through earnings in the income statement and the noncredit
loss portion in accumulated other comprehensive loss.
Deferred acquisition costs
Incremental direct costs, net of amounts ceded to reinsurers, that result
directly from and are essential to a product sale and would not have been
incurred by us had the sale not occurred, are capitalized, to the extent
recoverable, and amortized over the life of the premiums produced.
Recoverability of deferred acquisition costs is evaluated periodically by
comparing the current estimate of the present value of expected pretax future
profits to the unamortized asset balance. If this current estimate is less than
the existing balance, the difference is charged to expense.
Value of Business Acquired
Value of business acquired ("VOBA") represents the estimated value assigned to
purchased companies or insurance in- force of the assumed policy obligations at
the date of acquisition of a block of policies. At least annually, a review is
performed of the models and the assumptions used to develop expected future
profits, based upon management's current view of future events. VOBA is reviewed
on an ongoing basis to determine that the unamortized portion does not exceed
the expected recoverable amounts. Management's view primarily reflects our
experience but can also reflect emerging trends within the industry. Short-term
deviations in experience affect the amortization of VOBA in the period, but do
not necessarily indicate that a change to the long-term assumptions of future
experience is warranted. If it is determined that it is appropriate to change
the assumptions related to future experience, then an unlocking adjustment is
recognized for the block of business being evaluated. Certain assumptions, such
as interest spreads and surrender rates, may be interrelated. As such, unlocking
adjustments often reflect revisions to multiple assumptions. The VOBA balance is
immediately impacted by any assumption changes, with the change reflected
through the statements of comprehensive income as an unlocking adjustment in the
amount of VOBA amortized. These adjustments can be positive or negative with
adjustments reducing amortization limited to amounts previously deferred plus
interest accrued through the date of the adjustment.
Additionally, we may consider refining the estimates due to improved
capabilities resulting from administrative or actuarial system upgrades. We
consider such improvements to determine whether and to what extent they are
associated with prior periods or simply improvements in the projection of future
gross profits expected from improved functionality. To the extent that they
represent such improvements, these elements are applied to
financial statement line items in a manner similar to the release of adjustments.
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VOBA is also reviewed on an ongoing basis to determine that the unamortized
portion does not exceed the expected recoverable amounts. If it is determined
from emerging experience that the premium margins or gross profits are less than
the unamortized value of business acquired, then the asset will be adjusted
downward with the adjustment recorded as an expense in the current period.
Goodwill
Goodwill represents the excess of the amounts paid to acquire subsidiaries and
other businesses over the fair value of their net assets at the date of
acquisition. Goodwill is tested for impairment at least annually in the fourth
quarter or more frequently if events or circumstances change that would indicate
that a triggering event has occurred.
We assess the recoverability of indefinite-lived intangible assets at least
annually or whenever events or circumstances suggest that the carrying value of
an identifiable indefinite-lived intangible asset may exceed the sum of the
future discounted cash flows expected to result from its use and eventual
disposition. If the asset is considered to be impaired, the amount of any
impairment is measured as the difference between the carrying value and the fair
value of the impaired asset.
Reinsurance
In the normal course of business, we seek to limit aggregate and single exposure
to losses on risk by purchasing reinsurance. The amounts reported in the
consolidated balance sheets as reinsurance recoverable include amounts billed to
reinsurers on losses paid as well as estimates of amounts expected to be
recovered from reinsurers on insurance liabilities that have not yet been paid.
Reinsurance recoverable on unpaid losses are estimated based upon assumptions
consistent with those used in establishing the liabilities related to the
underlying reinsured contracts. Insurance liabilities are reported gross of
reinsurance recoverable. Management believes the recoverables are appropriately
established. We diversify our credit risks related to reinsurance ceded.
Reinsurance premiums are generally reflected in income in a manner consistent
with the recognition of premiums on the reinsured contracts. Reinsurance does
not extinguish our primary liability under the policies written. We regularly
evaluate the financial condition of our reinsurers including their activities
with respect to claim settlement practices and commutations, and establish
allowances for uncollectible reinsurance recoverable as appropriate.
Future Policy Benefits
We establish liabilities for amounts payable under insurance policies, including
traditional life insurance and annuities. Generally, amounts are payable over an
extended period of time. Liabilities for future policy benefits of traditional
life insurance have been computed by using a net level premium method based upon
estimates at the time of issue for investment yields, mortality and withdrawals.
These estimates include provisions for experience less favorable than initially
expected. Mortality assumptions are based on industry experience expressed as a
percentage of standard mortality tables. Such liabilities are reviewed quarterly
by an independent consulting actuary.
Income Taxes
Deferred tax assets are recorded based on the differences between the financial
statement and tax basis of assets and liabilities at the enacted tax rates. The
principal assets and liabilities giving rise to such differences are
investments, insurance reserves, and deferred acquisition costs. A deferred tax
asset valuation allowance is established when there is uncertainty that such
assets would be realized. We have no uncertain tax positions we believe are
more-likely-than-not that the benefit will not to be realized.
Recognition of Revenues
Income from traditional life insurance products consists of direct and assumed income
premiums declared as acquired when they are due.
Amounts received as payment for annuities are recognized as deposits to
policyholder account balances and included in future insurance policy benefits.
Revenues from these contracts are comprised of investment earnings of the
deposits, which are recognized over the period of the contracts, and included in
revenue. Deposits are shown as a financing activity in the Consolidated
Statements of Cash Flows.
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Embedded Derivatives
The Company has entered into coinsurance funds withheld arrangement with ALSC
which contains an embedded derivative. Under ASC 815, the Company assesses
whether the embedded derivative is clearly and closely related to the host
contract. The Company bifurcates embedded derivatives from the host instrument
for measurement purposes when the embedded derivative possesses economic
characteristics that are not clearly and closely related to the economic
characteristics of the host contract and a separate instrument with the same
terms would qualify as a derivative instrument. Embedded derivatives, which are
reported with the host instrument on the consolidated balance sheets in funds
withheld under coinsurance agreement, are reported at fair value with changes in
fair value recognized in the consolidated statements of comprehensive income
(loss) in net investment gains (losses).
Funds withheld under co-insurance agreement
Funds withheld under coinsurance agreement represent amounts contractually
withheld by a ceding company in accordance with the 2020 ALSC Agreement. For
agreements written on a coinsurance funds withheld basis, assets that support
the net statutory reserves or as defined by the treaty, are withheld and legally
owned by the ceding company. Interest is recorded in net investment income, net
of related expenses, in the consolidated statements of income (loss). Funds
withheld under coinsurance agreement are presented net of the embedded
derivative, discussed above. Under the terms of the 2020 ALSC Agreement the
Company may assume custody of the assets in the funds withheld account once the
Company attains its "Qualified Institutional Buyer" designation (as that term is
defined in Rule 144A under the Securities Act of 1933, as amended, which is
anticipated to be achieved in the second quarter of 2022. The Company will
record the funds withheld assets at fair value on the date of transfer, which
will eliminate the embedded derivative component associated with the 2020 ALSC
Agreement.
Mortgage loans on real estate
Mortgage loans on real estate, 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 impaired when, according to the
information and events, it is likely that the Company will not be able to
collect all amounts due under the contractual terms of the mortgage
OK.
Valuation allowances on mortgage loans are established based upon inherent
losses expected by management to be realized in connection with future
dispositions or settlement of mortgage loans, including foreclosures. The
Company establishes valuation allowances for estimated impairments on an
individual loan basis as of the balance sheet date. Such valuation allowances
are based on the excess carrying value of the loan over the present value of
expected future cash flows discounted at the loan's original effective interest
rate, the value of the loan's collateral if the loan is in the process of
foreclosure or is otherwise collateral-dependent, or the loan's market value if
the loan is being sold. These evaluations are revised as conditions change and
new information becomes available. In addition to historical experience,
management considers qualitative factors that include the impact of changing
macro-economic conditions, which may not be currently reflected in the loan
portfolio performance, and the quality of the loan portfolio.
Any interest accrued or received on the net carrying amount of the impaired loan
will be included in investment income or applied to the principal of the loan,
depending on the assessment of the collectibility of the loan. Mortgage loans
deemed to be uncollectible or that have been foreclosed are charged off against
the valuation allowances and subsequent recoveries, if any, are credited to the
valuation allowances. Changes in valuation allowances are reported in net
investment gains (losses) on the consolidated statements of income (loss).
The Company evaluates whether a mortgage loan modification represents a troubled
debt restructuring. In a troubled debt restructuring, the Company grants
concessions related to the borrower's financial difficulties. Generally, the
types of concessions include: reduction of the contractual interest rate,
extension of the maturity date at an interest rate lower than current market
interest rates and/or a reduction of accrued interest. The Company considers the
amount, timing and extent of the concession granted in determining any
impairment or changes in the specific valuation allowance recorded in connection
with the troubled debt restructuring. Through the continuous monitoring process,
the Company may have recorded a specific valuation allowance prior to when the
mortgage loan is modified in a troubled debt restructuring. Accordingly, the
carrying value (after specific valuation allowance) before and after
modification through a troubled debt restructuring may not change significantly,
or may increase if the expected recovery is higher than the pre-modification
recovery assessment.
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Mergers and Acquisitions
On May 23, 2017 the Company entered into a definitive merger agreement with
Northern Plains Capital Corporation. The merger transaction closed onAugust 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.
New Accounting Standards
A detailed analysis of the new accounting standards is provided in the Notes
Consolidated financial statements from p. F-7 of this annual report.
Discussion of consolidated operating results
Total Income. Insurance revenues are primarily generated from premium revenues
and investment income. Insurance revenues for the years ended December 31, 2021
and 2020 are summarized in the table below.
Years Ended December 31,
2021 2020
Income:
Premium income $11,792,063 $10,117,110
Net investment income 5,336,048 3,552,261
Net investment gains 142,280 1,967,014
Other income
318,854 635,520
Total income $ 17,589,245 $ 16,271,905
Our 2021 total income increased to $17,589,245, an increase of $1,317,340 or 8%
from the 2020 total income of $16,271,905. The increase is driven by increases
in our premium income and net investment income. The Company was required to
implement a new accounting standard in 2019 which results in unrealized gains
and losses on equity securities being included in total income. This standard
continues to result in increased volatility in total income.
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The following chart summarizes our four-year trend in total revenue:
[[Image Removed: g01.jpg]]
Premium income: Premium income for 2021 was $11,792,063 compared to $10,117,110
in 2020, an increase of $1,674,953 or 17%. 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 years ended December 31, 2021 and
2020 are summarized in the following table.
Years Ended December 31,
2021 2020
Direct $ 8,566,404 $ 6,358,043
Assumed 4,301,496 4,682,634
Ceded (1,075,837 ) (923,567 )
Total $ 11,792,063 $ 10,117,110
The Company is constantly looking for new products and distribution opportunities.
continue to increase bounty production on a direct and assumed basis.
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Investment income, net of expenses: The components of net investment income for
the years have ended December 31, 2021 and 2020 are as follows:
Years Ended December 31,
2021 2020
Fixed maturities $ 1,121,170 $ 1,178,055
Mortgages 378,035 129,621
Equity securities 617,198 669,147
Funds withheld 3,421,796 1,680,220
Cash and cash equivalents 1,794 12,501
5,539,993 3,669,544
Less investment expenses (203,945 ) (117,283 )
$ 5,336,048 $ 3,552,261
Net investment income for 2021 was $5,336,048compared to $3,552,261 in 2020,
an augmentation of $1,783,787 or 50%. This increase in investment income is
primarily due to increased invested assets due to our premium
income, annuity deposits and ALSC 2020 agreement.
Net investment gains (losses): Net investment gains for 2021 were $142,280,
compared to gains of $1,967,014 for 2020, a decrease of $1,824,734. The decrease
in net investment gains is attributable to strong 2020 investment gains. Net
investment gains for 2021 were comprised of $87,712 of unrealized losses in our
equity portfolio and funds withheld asset and realized gains of $229,992. Net
investment gains for 2020 were comprised of $952,667 of unrealized gains in our
equity portfolio and funds withheld asset and realized gains of $1,014,347.
Realized gains and losses related to the sale of securities for the years ended
December 31, 2021 and 2020 are summarized as follows:
Years Ended December 31,
2021 2020
Gross gains $ 248,891 $ 1,388,209
Gross losses (18,899 ) (373,862 )
Realized gains $ 229,992 $ 1,014,347
Other income: Other income for the year ended December 31, 2021 was $318,854
compared to $635,520 in 2020, a decrease of $316,666. The decrease in other
income is the result of a gain in 2020 related to the partial recapture of our
2017 ALSC Agreement partially offset by rent collected from a building acquired
in late 2020.
Expenses. Expenses for the year ended December 31, 2021 and 2020 are summarized
in the table below.
Years Ended December 31,
2021 2020
Expenses:
Death claims $ 2,314,682 $ 1,943,563
Policyholder benefits 6,238,032 5,248,470
Increase in policyholder reserves 4,063,488 3,359,609
Commissions, net of deferrals 772,053 781,400
Amortization of deferred acquisition costs 1,210,345 970,386
Amortization of value of business acquired 92,420
20,302
Salaries & benefits 1,350,851 1,219,534
Other operating expenses 1,893,561 2,429,466
Total expense $ 17,935,432 $ 15,972,730
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The following table and graph summarize our four-year spending trend:
Increase in Other % of Operating
Policyholder Policy-related Operating Total Expense to
Year Reserves Expenses Expenses Expenses Total Expense
2018 2,766,169 6,028,730 3,120,524 11,915,423 26%
2019 2,599,575 6,737,672 2,460,989 11,798,236 21%
2020 3,359,609 8,964,121 3,649,000 15,972,730 23%
2021 4,063,488 10,627,532 3,244,412 17,935,432 18%
[[Image Removed: chart2.jpg]]
Increases in policyholder reserves represents funds that we maintain and invest
for the future benefit of our policyholders. Other policy-related expenses
represent the other expenses associated with fulfilling our obligations to our
policyholders and producers. Operating expenses represent the costs to operate
the company.
Death claims: Death benefits were $2,314,682 in the year ended December 31, 2021
compared to $1,943,563 for 2020, an increase of $371,119 or 19%. 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. The COVID-19 pandemic has increased mortality rates for
the entire United States population.
Policyholder benefits: Policyholder benefits were $6,238,032 in the year ended
December 31, 2021 compared to $5,248,470 in 2020, an increase of $989,562 or
19%. The primary driver of this increase is the growth of interest credited on
our direct and assumed annuities.
Increase in policyholder reserves: Policyholder reserves increased to
$4,063,488 in the year ended December 31, 2021compared to $3,359,609 in 2020,
an augmentation of $703,879 or 21%. The growth in reserves is the result of
increase in pension premiums.
Commissions, net of deferrals: The Company pays commissions to the transferor
company on a block of policies assumed as well as commissions to agents on
business written directly. Commissions, net of deferrals, were $772,053 in the
year ended December 31, 2021compared to $781,400 in 2020, a decrease of
$9,347. This decrease is due to a changing composition of premiums.
Amortization of deferred acquisition costs: The amortization of deferred
acquisition costs ("DAC") was $1,210,345 in the year ended December 31, 2021,
compared to $970,386 in 2020, an increase of $239,859 or 25%. The increase is
driven by the amortization of costs deferred in conjunction with the 2020 ALSC
Agreement. The increase in single pay pre-need policies, where commissions are
deferred and immediately amortized, also contributed to this increase.
Amortization of value of business acquired: The amortization of value of
business acquired ("VOBA") was $92,420 in the year ended December 31, 2021
compared to $20,302 in 2020. In 2021, we began to amortize VOBA associated with
DCLIC's acquisition of policies from ALSC. VOBA is being amortized straight-line
over 30 years.
Salaries and benefits: Salaries and benefits were $1,350,851 for the year ended
December 31, 2021, compared to $1,219,534 in 2020, an increase of $131,317 or
11%. The increase was driven by increased employee compensation costs and
additional team members.
Other expenses: Other operating expenses were $1,893,561 in the year ended
December 31, 2021, compared to $2,429,466 in 2020, a decrease of $535,905 or
22%. Operating costs were driven lower due primarily to the non-recurrence of
two large 2020 expenditures (our pre-paid software asset being recognized as an
expense of $250,000 and expenses associated with implementing a new disability
reinsurance program totaling $50,000) as well as reduced operating costs in
2021.
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Federal income tax benefit: In the year ended December 31, 2021, the Company
recognized a deferred income tax benefit of $680,542. In the year ended December
31, 2020, the Company recognized a deferred income tax benefit of $140,274.
These benefits are the result of reductions in the valuation of deferred tax assets
allocation.
Net Income Our net income was $334,355 in the year ended December 31, 2021
compared to the net result of $439,449 in 2020, a decrease of $105,094. Our net
earnings per share was $0.04 compared to net earnings per share of $0.06 in 2020,
basic and dilute.
The following graph illustrates the four-year trend of our net earnings per share:
[[Image Removed: b03.jpg]]
Discussion of the consolidated balance sheet
Assets. Assets have increased to $121,484,834 as of December 31, 2021, an
increase of $6,097,738 or 5% from December 31, 2020 assets of $115m574,997. This
is primarily the result of growth in our funds withheld asset and cash and cash
equivalents.
Available for sale fixed maturity securities: As of December 31, 2021, we had
available for sale fixed maturity assets of $37,942,657, an increase of $265,079
or 1% from the December 31, 2020 balance of $37,677,578. The increase is driven
by purchases of additional fixed maturity securities partially offset by a
decrease in the market value of these securities. If we hold our fixed maturity
securities to maturity any change in market value is temporary.
Equity securities, at fair value: As of December 31, 2021, we had equity assets
of $9,157,193, a decrease of $64,381 or 1% from the December 31, 2020 balance of
$9,221,574. This decrease is the result of normal investment activity.
Mortgage loans on real estate: As of December 31, 2021, we had mortgage loans on
real estate of $3,653,142 an increase of $487,006 or 15% from the December 31,
2020 balance of $3,166,136. The increase is the result of acquiring additional
mortgage loan participations.
Funds withheld under coinsurance agreement, at fair value: As of December 31,
2021, we had funds withheld assets of $49,018,974, an increase of $2,188,898 or
5% from the December 31, 2020 balance of $46,830,076. The growth represents
investment returns in the funds withheld account.
Policy loans: As of December 31, 2021our advances on the police have been $173,341a
increase of $9,616 or 6% of the December 31, 2020 balance of $163,725. the
the increase is the result of normal policy loan activity.
Real estate, net of depreciation: At December 31, 2021we had real estate
assets of $1,403,137 related to the purchase of our home office building, a
decrease of $12,606 from December 31, 2020 balance of $1,415,743. the
the decrease is the result of depreciation.
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Cash and cash equivalents: At December 31, 2021we had cash and cash
active equivalents of $7,955,348an augmentation of $3,634,589 or 84% of the
December 31, 2020 balance of $4,320,759. This increase is the result of cash
being prepared for deployment in invested assets.
Investment income due and accrued: As of December 31, 2021our investment
income due and accrued has been $698,504 compared to $423,036 from The 31st of December,
2020an augmentation of $275,468 or 65%. This increase is attributable to
investment activity.
Reinsurance related assets: As of December 31, 2021, our reinsurance related
assets were $3,438 compared to $165,082 as of December 31, 2020, a decrease of
$161,644. This decrease is the result of changes in the net settlement due
to/from ALSC under our 2020 ALSC Agreement.
Deferred acquisition costs, net: At December 31, 2021our deferred
acquisition costs were $6,354,875 compared to $7,105,890 from The 31st of December,
2020a decrease of $751,015 or 11%. The decrease corresponds to the damping of the DAC
related to our ALSC 2020 agreement.
Value of business acquired, net: As of December 31, 2021 our value of business
acquired asset was $2,610,813 compared to $2,703,233 as of December 31, 2020, a
decrease of $92,420 or 3%. The decrease is the result of amortization of VOBA.
Property, equipment and software, net: As of December 31, 2021 our property,
equipment and software assets were $92,785, an increase of $54,967 from the
December 31, 2020 balance of $37,818. This increase is the result of renovation
of our home office.
Good will: Starting the December 31, 2021 and December 31, 2020our goodwill was
$277,542. Good will was created as a result of our merger with NPCC. We have
determined that there was no impairment of our goodwill balance.
Deferred tax asset, net of valuation allowance: The Company had a net deferred
tax asset of $1,560,767 as of December 31, 2021. The Company had a net deferred
tax asset of $243,257 as of December 31, 2020 and the resulting change in
deferred tax asset was recorded as a deferred tax benefit and as a reduction in
other comprehensive income.
Other assets: Au December 31, 2021our other assets were $582,318a
decrease of $1,053,329 or 65% of the December 31, 2020 balance of $1,635,647.
This decrease is explained by a balance receivable due to DCLIC paid in 2021.
Passives. Our total liability was $103,903,078 from December 31, 2021a
increase of $6,920,773 or 7% of our December 31, 2020 passive of
$96,982,305. This increase is attributable to the growth of our mathematical reserves.
Policy liabilities: Our total policy liabilities as of December 31, 2021 were
$101,026,942 compared to $93,459,080 as of December 31, 2020, an increase of
$7,567,862 or 8%. This increase is the result of the growth of our in-force
business.
Accounts payable and accrued expenses: As of December 31, 2021, our accounts
payable and accrued expenses were $689,065 compared to $1,507,756 as of December
31, 2020, a decrease of $818,691 or 54%. The decrease is driven by the
settlement in the first quarter of a payable to ALSC related to the partial
termination of our 2017 ALSC Agreement offset by income tax payable.
Federal Home Loan Bank advance: As of December 31, 2021 and December 31, 2020,
the Company has outstanding advances of $2,000,000 with the Federal Home Loan
Bank of Topeka. The advances were taken to create liquidity and investment
opportunities.
Shareholders' Equity. Our shareholders' equity was $17,581,756 as of December
31, 2021, a decrease of $823,035 from our December 31, 2020 shareholders' equity
of $18,404,791. The reduction in shareholders' equity was driven by a decrease
in other comprehensive income offset by our net income. Other comprehensive
income consists of the unrealized gains and losses on our fixed maturity
portfolio. The decrease in other comprehensive income is the result of higher
interest rates which decreases the market value of our fixed maturity
securities.
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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 as well as a significant funds
withheld investment as a result of the 2020 ALSC Agreement. The following table
shows the carrying value of our investments by investment category and cash and
cash equivalents, and the percentage of each to total invested assets as of
December 31, 2021 and December 31, 2020.
December 31, 2021 December 31, 2020
Fair Percent Fair Percent
Value of Total Value of Total
Fixed maturities:
US Treasury securities $ 447,765 0.4 %
$ 702,916 0.7 %
Corporate bonds 21,321,279 19.6 % 22,947,811 22.4 %
Municipal bonds 6,963,358 6.4 % 6,796,654 6.6 %
Redeemable preferred stocks 3,621,526 3.3 % 2,990,215 2.9 %
Mortgage backed and asset backed
securities 5,588,729 5.1 % 4,239,982 4.1 %
Total fixed maturities 37,942,657 34.8 % 37,677,578 36.7 %
Mortgage loans 3,653,142 3.3 % 3,166,136 3.1 %
Equities:
Common stock 7,319,584 6.7 % 6,808,944 6.6 %
Preferred stock 1,837,609 1.7 % 2,412,630 2.4 %
Total equities 9,157,193 8.4 % 9,221,574 9.0 %
Funds withheld 49,018,974 44.9 % 46,830,076 45.6 %
Real estate, net of depreciation 1,403,137 1.3 % 1,415,743 1.4 %
Cash and cash equivalents 7,955,348 7.3 % 4,320,759 4.2 %
Total $ 109,130,451 100.0 % $ 102,631,866 100.0 %
The total value of our investments and cash and cash equivalents increased to
$109,130,451 as of December 31, 2021 from $102,631,866 at December 31, 2020, an
increase of $6,498,585 or 6%. Increases in investments are primarily
attributable to growth in our cash and cash equivalents and in our funds
withheld asset.
The following table shows the distribution of the credit ratings of our
portfolio of fixed maturity securities by carrying value as of December 31, 2021
and 2020.
December 31, 2021 December 31, 2020
Fair Percent Fair Percent
Value of Total Value of Total
AAA and U.S. Government $ 914,862 2.4 % $ 1,160,359 3.1 %
AA 9,999,588 26.4 % 8,219,481 21.8 %
A 8,140,616 21.5 % 8,587,743 22.8 %
BBB 15,719,874 41.3 % 16,060,510 42.6 %
BB 2,986,117 7.9 % 3,462,685 9.2 %
Not Rated - Private Placement 181,600 0.5 % 186,800 0.5 %
Total $ 37,942,657 100.0 % $ 37,677,578 100.0 %
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The amortized cost and fair value of debt securities as of December 31, 2021 and
2020, by contractual maturity, are shown below. Equity securities do not have
stated maturity dates and therefore are not included in the following maturity
summary. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
As of December 31, 2021 As of December 31, 2020
Amortized Cost Fair Value Amortized Cost Fair Value
Amounts maturing in:
One year or less $ - $ - $ 373,590 $ 379,823
After one year through five years 1,987,421 2,087,132 1,540,931 1,641,749
After five years through ten years 2,540,089 2,865,020 2,887,066 3,379,930
More than 10 years 21,479,533 23,780,250 21,892,891 25,045,879
Redeemable preferred stocks 3,612,625 3,621,526 2,900,330 2,990,215
Mortgage backed and asset backed
securities 5,636,371 5,588,729 4,189,710 4,239,982
Total amortized cost and fair value $ 35,256,039 $ 37,942,657 $ 33,784,518 $ 37,677,578
Market risk of financial instruments
We hold a diversified portfolio of investments that primarily includes cash,
bonds, equity securities, mortgage loans, and funds withheld under the 2020 ALSC
Agreement. Each of these investments is subject to market risks that can affect
their return and their fair value. A significant percentage of the investments
are fixed maturity securities including debt issuances of corporations, US
Treasury securities, or securities issued by government agencies. The primary
market risks affecting the investment portfolio are interest rate risk, credit
risk, and equity risk. The Company's investment portfolio, including the
creditworthiness and valuation of investment assets, as well as availability of
new investments may be adversely affected as a result of market developments
related to the COVID-19 pandemic and uncertainty regarding its ultimate severity
and duration.
Interest Rate Risk
Interest rate risk arises from the price sensitivity of investments to changes
in interest rates. Interest represents the greatest portion of an investment's
return for most fixed maturity securities in stable interest rate environments.
The changes in the fair value of such investments are inversely related to
changes in market interest rates. As interest rates fall, the interest and
dividend streams of existing fixed-rate investments become more valuable and
fair values rise. As interest rates rise, the opposite effect occurs.
We 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.
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Cash and capital resources
The impact of COVID-19 on the Company is evolving, and its future effects are
not yet quantified. The Company continues to monitor the effects and risks
of COVID-19 to assess its impact on the Company's business, sales, financial
condition, results of operations, liquidity and capital position.
Premium income, deposits to policyholder account balances, investment income,
and capital raising are the primary sources of funds while withdrawals of
policyholder account balances, investment purchases, policy benefits in the form
of claims, and operating expenses are the primary uses of funds. To ensure we
will be able to pay future commitments, the funds received as premium payments
and deposits are invested in primarily fixed income securities. Funds are
invested with the intent that the income from investments, plus proceeds from
maturities, will in the future meet our ongoing cash flow needs. The approach of
matching asset and liability durations and yields requires an appropriate mix of
investments. Our investments consist primarily of marketable debt securities
that could be readily converted to cash for liquidity needs. Cash flow
projections and cash flow tests under various market interest scenarios are also
performed annually to assist in evaluating liquidity needs and adequacy. As a
member of the Federal Home Loan Bank, USALSC has immediate access to additional
cash liquidity, if needed.
Net cash provided by operating activities was $3,411,873 for the year ended
December 31, 2021. 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
$1,713,117. The primary use of cash was the purchase of fixed maturity and
equity investments. Cash provided by financing activities was $1,935,833. The
primary sources of cash were receipts on deposit-type contracts.
The following table and graph illustrate our four-year cash flow trend from
insurance activities:
[[Image Removed: image001.jpg]]
Cash flow from insurance activities is a non-GAAP financial measure. Cash flow
from insurance activities combines cash flow from operations with the net cash
received from deposit type contracts to show the impact of our insurance
operations on our cash flows. Cash flow from deposit type contracts is primarily
made up of funds received into our annuity products. The following table
reconciles cash flow from operations to cash flow from insurance activities:
Cash Flow Net Cash Flow Cash Flow
From From Deposit from Insurance
Year Operations Type Contracts Activities
2018 2,249,068 2,598,564 $ 4,847,632
2019 2,270,041 2,176,602 $ 4,446,643
2020 2,099,401 4,592,576 $ 6,691,977
2021 3,411,873 2,050,078 $ 5,461,951
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At December 31, 2021, we had cash and cash equivalents totaling $7,955,348. 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 and DCLIC, our insurance subsidiaries, is uncertain and may
require additional capital as they continue to grow.
Impact of Inflation
Insurance premiums are established before the amount of losses, or the extent to
which inflation may affect such losses and expenses, are known. We attempt, in
establishing premiums, to anticipate the potential impact of inflation. If, for
competitive reasons, premiums cannot be increased to anticipate inflation, this
cost would be absorbed by us. Inflation also affects the rate of investment
return on the investment portfolio with a corresponding effect on investment
income.
Off-balance sheet arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.
SECTION 7A. QUANTITATIVE AND QUALITATIVE INFORMATION ON MARKET RISK
As a “small reporting company”, the Company is not required to provide
disclosure under this section.
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Community leaders hope to raise $10 million for workforce housing in Bozeman
July 1, 2022
Montana Loans
Comments Off on Community leaders hope to raise $10 million for workforce housing in Bozeman
Roberta T. Mainor
The housing crisis in Bozeman is a problem that community leaders have been trying to solve for years. Now, with the creation of a new community fund, they hope it will provide solutions to a crisis that has challenged area residents.
“I don’t want to live in a community that’s a… where it’s just a resort community for the super-rich. It’s not what Bozeman is, it’s not our roots, it’s not where we want to be,” Bozeman Deputy Mayor Terry Cunningham said.
Cunningham says it’s hard to see house prices continue to soar.
“It’s frustrating for the city because we have so few tools to get the workforce housing projects off the ground,” Cunningham said.
With this new fund goal of $10 million, leaders are beginning to see light at the end of the tunnel.
“Housing prices got away from us a bit, rent affordability a bit, so we started talking a bit more about an investment fund that would help solve some of the problems that we are having,” said the President. and CEO of First Security Bank, Jim Ness.
For Ness, housing affordability is an issue his employees struggle with. This is one of the reasons why the bank is committed to contributing the first million dollars to the fund.
“As I talk to my employees and hear some of their situations, I hear things like having 3 roommates, 4 roommates, 6 roommates, maybe sharing a room with someone. I think the quality life is a challenge,” says Ness.
This is what inspired Ness to approach Deputy Mayor Cunningham with the idea of collaborating and creating a discovery aimed at tackling housing affordability in the Gallatin Valley.
The fund aims to help workforce housing projects get started and provide funds to fill the funding gap. Part of the fund will also help to obtain home loans. Leaders hope this investment in the community will inspire more people to put down roots in the Gallatin Valley.
“Private businesses, bankers and other community partners are stepping up and contributing to this fund, sends a great message to the community that we’re in this together,” Cunningham said.
They say a healthy workforce is the foundation of a city like Bozeman.
“If we don’t have an active workforce and I believe workforce housing is a barrier to that right now and I want to help and address that,” Ness said.
Even with all the construction, Ness says a piece of the puzzle is missing.
“There’s a lot of construction going on in Bozeman right now and there’s a lot of apartments going on, which is great, and there’s a need for that too, but the area I see for that need is for this category of affordability,” he said.
Ness and Cunningham are optimistic about mobilizing community support to tackle a community-wide issue.
“It’s definitely not the silver bullet that’s going to do it, but I think it’s part of the solution,” Ness said.