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US ALLIANCE CORP – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in this Form 10-K. In connection with, and because we desire to take advantage of, the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with theSecurities 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 aKansas corporation onApril 24, 2009 for the purpose of raising capital to form a newKansas -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 OnJanuary 2, 2012 , USALSC was issued a Certificate of Authority to conduct life insurance business in theState of Kansas . We began third party administrative services in 2015. OnAugust 1, 2017 , the Company merged withNorthern Plains Capital Corporation with the Company being the ultimate surviving entity. As a result of this merger, the Company acquiredDakota Capital Life Insurance Company which became a wholly owned subsidiary of USALSC. OnDecember 14, 2018 , the Company acquiredGreat Western Life Insurance Company .Great Western Life Insurance Company was renamedUS Alliance Life and Security Company -Montana and is a subsidiary of USALSC. The Company assumes business under three reinsurance treaties. OnJanuary 1, 2013 , the Company entered into an agreement to assume 20% of a certain block of health insurance policies fromUnified Life Insurance Company . OnSeptember 30, 2017 , the Company entered into the 2017 ALSC Agreement to assume 100% of a certain block of life insurance policies from ALSC. OnApril 15, 2020 , with an effective date ofJanuary 1, 2020 , the Company entered into the 2020 ALSC Agreement to assume a quota share percentage of a block of annuity policies. As ofDecember 31, 2022 , the Company had assumed$52.3 million in annuity deposits under the 2020 ALSC Agreement. EffectiveDecember 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.
Critical Accounting Policies and Estimates
Our accounting and reporting policies are in accordance with GAAP. Preparation
of the consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. The following is an explanation of our accounting policies and the
estimates considered most significant by management. These accounting policies
inherently require significant judgment and assumptions and actual operating
results could differ significantly from management's estimates determined using
these policies. We believe the following accounting policies, judgments and
estimates are the most critical to the understanding of our results of
operations and financial position. A detailed discussion of significant
accounting policies is provided in this report in the Notes to Consolidated
Financial Statements included with this annual report.
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Table of Contents 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). 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 theFederal Home Loan Bank ("FHLB") provides additional liquidity which further reduces the likelihood that we would be required to sell a security prior to recovery. As it relates to debt securities, if we do not expect to recover the amortized basis, do not plan to sell the security and if it is not more likely than not that we would be required to sell a security before the recovery of its amortized cost, the other-than-temporary impairment would be recognized. We would recognize the credit loss portion through earnings in the income statement and the noncredit loss portion in accumulated other comprehensive loss.
Deferred Acquisition Costs
Incremental direct costs, net of amounts ceded to reinsurers, that result
directly from and are essential to a product sale and would not have been
incurred by us had the sale not occurred, are capitalized, to the extent
recoverable, and amortized over the life of the premiums produced.
Recoverability of deferred acquisition costs is evaluated periodically by
comparing the current estimate of the present value of expected pretax future
profits to the unamortized asset balance. If this current estimate is less than
the existing balance, the difference is charged to expense.
Value of Business Acquired
Value of business acquired ("VOBA") represents the estimated value assigned to
purchased companies or insurance in- force of the assumed policy obligations at
the date of acquisition of a block of policies. At least annually, a review is
performed of the models and the assumptions used to develop expected future
profits, based upon management's current view of future events. VOBA is reviewed
on an ongoing basis to determine that the unamortized portion does not exceed
the expected recoverable amounts. Management's view primarily reflects our
experience but can also reflect emerging trends within the industry. Short-term
deviations in experience affect the amortization of VOBA in the period, but do
not necessarily indicate that a change to the long-term assumptions of future
experience is warranted. If it is determined that it is appropriate to change
the assumptions related to future experience, then an unlocking adjustment is
recognized for the block of business being evaluated. Certain assumptions, such
as interest spreads and surrender rates, may be interrelated. As such, unlocking
adjustments often reflect revisions to multiple assumptions. The VOBA balance is
immediately impacted by any assumption changes, with the change reflected
through the statements of comprehensive income as an unlocking adjustment in the
amount of VOBA amortized. These adjustments can be positive or negative with
adjustments reducing amortization limited to amounts previously deferred plus
interest accrued through the date of the adjustment.
In addition, we may consider refinements in estimates due to improved
capabilities resulting from administrative or actuarial system upgrades. We
consider such enhancements to determine whether and to what extent they are
associated with prior periods or simply improvements in the projection of future
expected gross profits due to improved functionality. To the extent they
represent such improvements, these items are applied to the appropriate
financial statement line items in a manner similar to unlocking adjustments.
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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
Revenues on traditional life insurance products consist of direct and assumed
premiums reported as earned when due.
Amounts received as payment for annuities are recognized as deposits to
policyholder account balances and included in future insurance policy benefits.
Revenues from these contracts are comprised of investment earnings of the
deposits, which are recognized over the period of the contracts, and included in
revenue. Deposits are shown as a financing activity in the Consolidated
Statements of Cash Flows.
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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. The Company has two
different embedded derivatives, the first of which existed prior to the transfer
of the funds withheld account, which is reported on the consolidated balance
sheets in funds withheld under coinsurance agreement, with changes in fair value
recognized in the consolidated statements of comprehensive income (loss) in net
investment gains (losses). The second embedded derivative recognized after the
funds withheld transfer is reported within reinsurance related assets on the
balance sheet and within net investment gains (losses) on the statement of
comprehensive income (loss).
Funds Withheld under Coinsurance Agreement
Funds withheld under coinsurance agreement represent amounts contractually withheld by a ceding company in accordance with the 2020 ALSC Agreement. For agreements written on a coinsurance funds withheld basis, assets that support the net statutory reserves or as defined by the treaty, are withheld and legally owned by the ceding company. Interest is recorded in net investment income, net of related expenses, in the consolidated statements of comprehensive 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) and we have attained this designation in the fourth quarter of 2022. The Company recorded the funds withheld assets at fair value on the date of transfer, which eliminated the embedded derivative component associated with the unrealized gains and losses within the funds withheld account. Additionally, after the transfer of the funds withheld assets, ALSC continued to manage currency risk within the coinsured liability portfolio using derivative instruments. In accordance with the coinsurance agreement, ALSC allocates a proportion of the derivative activity it manages to the Company, which is settled quarterly as part of the reinsurance settlement. As the derivative allocation is not clearly and closely related to the host contract, the Company recognizes an embedded derivative equal to the fair value of the derivative allocation.
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 to be impaired when, based on the current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the mortgage
agreement.
Valuation allowances on mortgage loans are established based upon inherent
losses expected by management to be realized in connection with future
dispositions or settlement of mortgage loans, including foreclosures. The
Company establishes valuation allowances for estimated impairments on an
individual loan basis as of the balance sheet date. Such valuation allowances
are based on the excess carrying value of the loan over the present value of
expected future cash flows discounted at the loan's original effective interest
rate, the value of the loan's collateral if the loan is in the process of
foreclosure or is otherwise collateral-dependent, or the loan's market value if
the loan is being sold. These evaluations are revised as conditions change and
new information becomes available. In addition to historical experience,
management considers qualitative factors that include the impact of changing
macro-economic conditions, which may not be currently reflected in the loan
portfolio performance, and the quality of the loan portfolio.
Any interest accrued or received on the net carrying amount of the impaired loan
will be included in investment income or applied to the principal of the loan,
depending on the assessment of the collectibility of the loan. Mortgage loans
deemed to be uncollectible or that have been foreclosed are charged off against
the valuation allowances and subsequent recoveries, if any, are credited to the
valuation allowances. Changes in valuation allowances are reported in net
investment gains (losses) on the consolidated statements of comprehensive 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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Table of Contents Other Invested Assets 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. Mergers and Acquisitions OnMay 23, 2017 the Company entered into a definitive merger agreement withNorthern Plains Capital Corporation . The merger transaction closed onAugust 1, 2017 . NPCC shareholders received .5841 shares ofUS Alliance Corporation stock for each share of NPCC stock owned. USAC issued 1,644,458 shares of common stock to holders of NPCC shares. OnOctober 11, 2018 the Company entered into a stock purchase agreement withGreat Western Insurance Company to acquireGreat Western Life Insurance Company . The transaction closed onDecember 14, 2018 . USALSC paid$500,000 to acquire all of the outstanding shares of GWLIC. EffectiveDecember 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$2,163,541 . New Accounting Standards
A detailed discussion of new accounting standards is provided in the Notes to
Consolidated Financial Statements beginning on p. F-7 of this annual report.
Discussion of Consolidated Results of Operations
Total Income. Insurance revenues are primarily generated from premium revenues and investment income. Total income for the years endedDecember 31, 2022 and 2021 are summarized in the table below. Years Ended December 31, 2022 2021 Income: Premium income$ 12,815,238 $ 11,792,063 Net investment income 4,798,199 5,336,048 Net investment gains (losses) (1,925,086 ) 142,280 Other income 317,502 318,854 Total income 16,005,853 17,589,245 Our 2022 total income decreased to$16,005,853 , a decrease of$1,583,392 or 9% from the 2021 total income of$17,589,245 . The decrease is driven by net investment losses and a reduction in funds withheld income due to market volatility offset by increases in our premium 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 and is the driver of reduced total income. 18
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The following graph summarizes our five-year trend of total income:
[[Image Removed: g01.jpg]]
Premium income: Premium income for 2022 was $12,815,238 compared to $11,792,063
in 2021, an increase of $1,023,175 or 9%. 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 years ended
2021 are summarized in the following table.
Years Ended December 31,
2022 2021
Direct $ 9,629,831 $ 8,566,404
Assumed 4,400,339 4,301,496
Ceded (1,214,932 ) (1,075,837 )
Total $ 12,815,238 $ 11,792,063
The Company continuously searches for new product and distribution opportunities
to continue to increase premium production on both a direct and assumed basis.
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Investment income, net of expenses: The components of net investment income for
the years ended
Years Ended December 31,
2022 2021
Fixed maturities $ 2,159,129 $ 1,121,170
Mortgages 758,362 378,035
Equity securities 669,721 617,198
Funds withheld 1,581,453 3,421,796
Other invested assets 47,241 -
Cash and cash equivalents 47,285 1,794
5,263,191 5,539,993
Less investment expenses (464,992 ) (203,945 )
$ 4,798,199 $ 5,336,048
Net investment income for 2022 was $4,798,199 , compared to $5,336,048 in 2021, a
decrease of $537,849 or 10%. This decrease in investment income is a result of
decreased funds withheld income. We converted our funds withheld asset to funds
paid in the fourth quarter of 2022 and those assets transferred at fair value.
Due to the increase in interest rates, this resulted in a temporary loss being
reflected in our funds withheld income. While these assets are classified as
available for sale, we anticipate holding them to maturity. This will result in
the recognition of income over the life of those assets as they amortize to par
value.
Net investment gains (losses): Net investment losses for 2022 were $1,925,086 ,
compared to gains of $142,280 for 2021, a decrease of $2,067,366 . The net
investment losses are attributable to decreases in the value of our equity
securities and derivatives driven by market volatility and required by
accounting standards to be included in our calculation of net income. Net
investment losses for 2022 were comprised of $1,816,443 of unrealized losses in
our equity portfolio and derivative assets and realized losses of $108,643 . 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 .
Realized gains and losses related to the sale of securities for the years ended
December 31, 2022 and 2021 are summarized as follows:
Year Ended December 31,
2022 2021
Gross gains $ 24,720 $ 248,891
Gross losses (133,363 ) (18,899 )
Realized gains (losses) $ (108,643 ) $ 229,992
Other income: Other income for the year ended
compared to
Expenses. Expenses for the year endedDecember 31, 2022 and 2021 are summarized in the table below. Years Ended December 31, 2022 2021 Expenses: Death claims$ 2,994,386 $ 2,314,682 Policyholder benefits 6,553,901 6,238,032 Increase in policyholder reserves 4,207,703 4,063,488 Commissions, net of deferrals 777,162 772,053
Amortization of deferred acquisition costs 1,205,554 1,210,345
Amortization of value of business acquired 92,420
92,420 Salaries & benefits 1,465,259 1,350,851 Other operating expenses 2,014,953 1,893,561 Total expense$ 19,311,338 $ 17,935,432 20
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The following chart and graph summarizes our five-year expense trend:
Increase in Other % of Operating
Policyholder Policy-related Operating Total Expense to
Year Reserves Expenses Expenses Expenses Total Expense
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%
2022 4,207,703 11,623,423 3,480,212 19,311,338 18%
[[Image Removed: g02.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 and consists of salaries and benefits and other operating expenses.
Death claims: Death benefits were $2,994,386 in the year ended December 31, 2022
compared to $2,314,682 for 2021, an increase of $679,704 or 29%. This increase
is attributable to our growing block of in-force pre-need life insurance
policies and to increased group life claims. 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 $6,553,901 in the year ended
December 31, 2022 compared to $6,238,032 in 2021, an increase of $315,869 or 5%.
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
$4,207,703 in the year ended December 31, 2022 , compared to $4,063,488 in 2021,
an increase of $144,215 or 4%. The growth in reserves is the result of increased
pre-need 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
year ended
Amortization of deferred acquisition costs: The amortization of deferred
acquisition costs ("DAC") was $1,205,554 in the year ended December 31, 2022 ,
compared to $1,210,345 in 2021, a decrease of $4,791 . The decrease is driven by
normal adjustments to DAC amortization.
Amortization of value of business acquired: The amortization of value of
business acquired ("VOBA") was $92,420 in the years ended December 31, 2022 and
2021, respectively. 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 $1,465,259 for the year ended
December 31, 2022 , compared to $1,350,851 in 2021, an increase of $114,408 or
8%. The increase was driven by increased employee compensation costs and
additional team members.
Other expenses: Other operating expenses were
6%. The increase is driven by increased marketing, regulatory filing, and
information technology expenses.
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Federal income tax benefit: In the year endedDecember 31, 2022 , the Company recognized a deferred income tax benefit of$149,000 . In the year endedDecember 31, 2021 , the Company recognized a deferred income tax benefit of$680,542 .
These benefits are the result of changes in the deferred tax asset and deferred
tax asset valuation allowance.
Net Income (loss): Our net loss was$3,156,485 in the year endedDecember 31, 2022 compared to net income of$334,355 in 2021, a decrease of$3,490,840 . Our net loss per share was$0.41 compared to net income per share of$0.04 in 2021, basic and diluted.
The following graph illustrates our five-year trend of net income (loss) per
share:
[[Image Removed: g03.jpg]]
Discussion of Consolidated Balance Sheet
Assets. Assets have decreased to$118,298,297 as ofDecember 31, 2022 , a decrease of$3,186,537 or 3% fromDecember 31, 2021 assets of$121,484,834 . This is primarily the result of a decrease in the market value of our fixed maturity securities. Available for sale fixed maturity securities: As ofDecember 31, 2022 , we had available for sale fixed maturity assets of$65,316,077 , an increase of$27,373,420 or 72% from theDecember 31, 2021 balance of$37,942,657 . The increase is driven by the settlement of our funds withheld asset into assets held by the Company. This increase is partially offset by a decrease in the market value of these securities of$7.9 million due to changes in interest rates. If we hold our fixed maturity securities to maturity any change in market value is temporary.
Equity securities, at fair value: As of
of
balance of
value of our equity securities.
Mortgage loans on real estate: As ofDecember 31, 2022 , we had mortgage loans on real estate of$23,790,073 an increase of$20,136,931 or 551% from theDecember 31, 2021 balance of$3,653,142 . The increase is the result of acquiring additional mortgage loan participations and the settlement of our funds withheld asset into assets held by the Company. Funds withheld under coinsurance agreement, at fair value: As ofDecember 31, 2022 , we had no funds withheld assets as these assets were settled into assets owned by the Company. As ofDecember 31, 2021 our funds with assets were$49,018,974 . Other invested assets: As ofDecember 31, 2022 , we had other invested assets of$1,760,777 . These assets were acquired when our funds withheld asset settled into assets owned by the Company. We had no such balance atDecember 31, 2021 . Policy loans: As ofDecember 31, 2022 , our policy loans were$34,980 , a decrease of$138,361 or 80% from theDecember 31, 2021 balance of$173,341 . The decrease is a result of policy loans being repaid.
Real estate, net of depreciation: As of
assets of
decrease of
decrease is the result of depreciation.
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Cash and cash equivalents: As of
equivalent assets of
being deployed into invested assets.
Investment income due and accrued: As of
income due and accrued was
2021
investment activity.
Reinsurance related assets: As ofDecember 31, 2022 , our reinsurance related assets were$125,549 compared to$3,438 as ofDecember 31, 2021 , an increase of$122,111 . This increase is the result of changes in the net settlement due to/from ALSC under our 2020 ALSC Agreement.
Deferred acquisition costs, net: As of
acquisition costs were
2021
amortization of DAC related to our 2020 ALSC Agreement.
Value of business acquired, net: As ofDecember 31, 2022 our value of business acquired asset was$2,518,393 compared to$2,610,813 as ofDecember 31, 2021 , a decrease of$92,420 or 4%. The decrease is the result of amortization of VOBA. Property, equipment and software, net: As ofDecember 31, 2022 our property, equipment and software assets were$132,475 , an increase of$39,690 from theDecember 31, 2021 balance of$92,785 . This increase is the result of renovation of our home office.
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$3,294,522 as ofDecember 31, 2022 . The Company had a net deferred tax asset of$1,560,767 as ofDecember 31, 2021 and the resulting change in deferred tax asset was recorded as a deferred tax benefit and as an increase in other comprehensive loss.
Other assets: As of
decrease of
increase is the result of normal business activity.
Liabilities. Our total liabilities were
increase of
Policy liabilities: Our total policy liabilities as ofDecember 31, 2022 were$108,737,803 compared to$101,026,942 as ofDecember 31, 2021 , an increase of$7,710,861 or 8%. This increase is the result of the growth of our in-force business. Accounts payable and accrued expenses: As ofDecember 31, 2022 , our accounts payable and accrued expenses were$448,805 compared to$689,065 as ofDecember 31, 2021 , a decrease of$240,260 or 35%.Federal Home Loan Bank advance: As ofDecember 31, 2022 , the Company has outstanding advances of$1,000,000 with theFederal Home Loan Bank of Topeka compared to outstanding advances of$2,000,000 as ofDecember 31, 2021 . The decrease is the result of the Company repaying two$500,000 advances in the second quarter of 2022. Shareholders' Equity. Our shareholders' equity was$8,069,394 as ofDecember 31, 2022 , a decrease of$9,512,362 from ourDecember 31, 2021 shareholders' equity of$17,581,756 . The reduction in shareholders' equity was driven by a decrease in other comprehensive loss and by our net loss. For the year endedDecember 31, 2022 , unrealized losses in our fixed maturity portfolio, before tax, totaled$7,929,744 . Other comprehensive income (loss) consists of the unrealized gains and losses on our fixed maturity portfolio. The increase in other comprehensive loss is the result of higher interest rates which decreases the market value of our fixed maturity securities. 23
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Table of Contents Investments Our investment philosophy is reflected by the allocation of our investments. We emphasize investment grade debt securities with smaller holdings in equity securities, mortgages and other investments. The following table shows the carrying value of our investments by investment category and cash and cash equivalents, and the percentage of each to total invested assets as ofDecember 31, 2022 andDecember 31, 2021 . December 31, 2022 December 31, 2021 Carrying Percent Carrying Percent Value of Total Value of Total Fixed maturities: US Treasury securities$ 1,025,087 1.0 %
$ 447,765 0.4 % Corporate bonds 15,869,078 15.3 % 21,321,279 19.6 % Municipal bonds 5,420,409 5.2 % 6,963,358 6.4 % Redeemable preferred stocks 3,355,615 3.2 % 3,621,526 3.3 % Term Loans 18,149,718 17.6 % - 0.0 % Mortgage backed and asset backed securities 21,496,170 20.8 % 5,588,729 5.1 % Total fixed maturities 65,316,077 63.1 % 37,942,657 34.8 % Mortgage loans 23,790,073 22.9 % 3,653,142 3.3 % Other invested assets 1,760,777 1.7 % - 0.0 % Equities: Common stock 6,024,224 5.8 % 7,319,584 6.7 % Preferred stock 1,370,820 1.3 % 1,837,609 1.7 % Total equities 7,395,044 7.1 % 9,157,193 8.4 % Funds withheld - 0.0 % 49,018,974 44.9 % Real estate, net of depreciation 1,373,716 1.3 % 1,403,137 1.3 % Cash and cash equivalents 4,091,507 3.9 % 7,955,348 7.3 % Total$ 103,727,194 100.0 %$ 109,130,451 100.0 % The total value of our investments and cash and cash equivalents decreased to$103,840,238 as ofDecember 31, 2022 from$109,130,451 atDecember 31, 2021 , a decrease of$5,290,213 or 5%. Decreases in investments are primarily attributable to a reduction of the market value of our fixed maturity securities. The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as ofDecember 31, 2022 and 2021. December 31, 2022 December 31, 2021 Fair Percent Fair Percent Value of Total Value of Total AAA and U.S. Government$ 3,068,529 4.7 %$ 914,862 2.4 % AA 11,582,642 17.7 % 9,999,588 26.4 % A 17,142,623 26.2 % 8,140,616 21.5 % BBB 27,520,644 42.1 % 15,719,874 41.3 % BB 2,456,185 3.8 % 2,986,117 7.9 % Not Rated - Private Placement 3,545,454 5.5 % 181,600 0.5 % Total$ 65,316,077 100.0 %$ 37,942,657 100.0 % 24
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The amortized cost and fair value of debt securities as ofDecember 31, 2022 and 2021, 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, 2022 As of December 31, 2021 Amortized Cost Fair Value Amortized Cost Fair Value Amounts maturing in: One year or less$ 442,846 $ 450,461 $ - $ - After one year through five years 17,048,721 17,035,270 1,987,421 2,087,132 After five years through ten years 5,498,364 5,340,498 2,540,089 2,865,020 More than 10 years 21,337,372 17,638,063 21,479,533 23,780,250 Redeemable preferred stocks 3,875,526 3,355,615 3,612,625 3,621,526
Mortgage backed and asset backed securities 22,412,895 21,496,170
5,636,371 5,588,729 Total amortized cost and fair value$ 70,615,724 $ 65,316,077 $ 35,256,039 $ 37,942,657
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. 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 ofTopeka , 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. 25
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Liquidity 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. Death claims have increased 29% from the prior year, but it is currently impossible to quantify the amount of such increase that can be attributed to COVID-19 deaths and deaths not directly attributable to COVID-19. 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 theFederal Home Loan Bank , USALSC has immediate access to additional cash liquidity, if needed. Net cash provided by operating activities was$4,787,903 for the year endedDecember 31, 2022 . 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$9,804,712 . The primary use of cash was the purchase of fixed maturity, mortgage, and equity investments. Cash provided by financing activities was$1,152,968 . The primary sources of cash were receipts on deposit-type contracts.
The following chart and graph illustrate our five-year trend of cash flow from
insurance activities:
[[Image Removed: g04.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
2022 4,787,903 2,145,995 $ 6,933,898
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AtDecember 31, 2022 , we had cash and cash equivalents totaling$4,091,507 . 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a "smaller reporting company", the Company is not required to provide
disclosure pursuant to this item.
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