As a “smaller reporting company”, the Company is not required to provide disclosure pursuant to this item.
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
The Company assumes business under three reinsurance treaties. On January 1, 2013, the Company entered into an agreement to assume 20% of a certain block of health insurance policies from Unified Life Insurance Company. On September 30, 2017, the Company entered into the 2017 ALSC Agreement to assume 100% of a certain block of life insurance policies from ALSC. On April 15, 2020, with an effective date of January 1, 2020, the Company entered into the 2020 ALSC Agreement to assume a quota share percentage of a block of annuity policies. As of December 31, 2020, the Company had assumed $50.1 million in annuity deposits under the 2020 ALSC Agreement. Effective December 31, 2020 USALSC entered into an agreement with ALSC, which provided for ASLC to recapture all reserves previously ceded to USALSC with respect to a portion of the 2017 ALSC Agreement. USALSC and ASLC agreed that the commuted business shall be discharged by USALSC’s transfer of invested assets and cash in the amount of $9,181,100. As part of the transaction the Company released $10,972,785 in reserve liabilities and $1,146,156 of deferred acquisition costs, resulting in a commutation gain of $543,794, which is recorded in other income.
The Company's principal investments are in fixed maturity, mortgages, and equity securities. Fixed maturity and equity securities, classified as available for sale, are carried at their fair value in the consolidated balance sheets, with unrealized gains or losses recorded in comprehensive income. Our fixed income investment manager utilizes external independent third-party pricing services to determine the fair values of investment securities available for sale.
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.
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.
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.
The Company has entered into coinsurance funds withheld arrangement with ALSC which contains an embedded derivative. Under ASC 815, the Company assesses whether the embedded derivative is clearly and closely related to the host contract. The Company bifurcates embedded derivatives from the host instrument for measurement purposes when the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and a separate instrument with the same terms would qualify as a derivative instrument. Embedded derivatives, which are reported with the host instrument on the consolidated balance sheets in funds withheld under coinsurance agreement, are reported at fair value with changes in fair value recognized in the consolidated statements of comprehensive income in net investment gains.
Mortgage loans on real estate are carried at unpaid principal balances, net of any unamortized premium or discount and valuation allowances. Interest income is accrued on the principal amount of the mortgage loans based on its contractual interest rate. Amortization of premiums and discounts is recorded using the effective yield method. The Company accrues interest on loans until probable the Company will not receive interest or the loan is 90 days past due. Interest income, amortization of premiums, accretion of discounts and prepayment fees are reported in investment income, net of related expenses in the consolidated statements of comprehensive income.
A mortgage loan is considered to be impaired when, based on the current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the mortgage agreement.
Valuation allowances on mortgage loans are established based upon inherent losses expected by management to be realized in connection with future dispositions or settlement of mortgage loans, including foreclosures. The Company establishes valuation allowances for estimated impairments on an individual loan basis as of the balance sheet date. Such valuation allowances are based on the excess carrying value of the loan over the present value of expected future cash flows discounted at the loan’s original effective interest rate, the value of the loan’s collateral if the loan is in the process of foreclosure or is otherwise collateral-dependent, or the loan’s market value if the loan is being sold. These evaluations are revised as conditions change and new information becomes available. In addition to historical experience, management considers qualitative factors that include the impact of changing macro-economic conditions, which may not be currently reflected in the loan portfolio performance, and the quality of the loan portfolio.
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.
Effective December 31, 2020, the DCLIC acquired a block of life insurance policies according to the terms of an assumption agreement with ALSC. The Company acquired fixed maturity securities and cash of $9,181,100 [IS THIS NUMBER CONSISTENT WITH P. 3?], assumed liabilities of $10,972,785 and recorded VOBA of $2,163,542.
Total Income. Insurance revenues are primarily generated from premium revenues and investment income. Insurance revenues for the years ended December 31, 2020 and 2019 are summarized in the table below.
Our 2020 total income grew to $16,271,905, an increase of $4,305,619 or 36% from 2019 total income of $11,966,286. The increase in total income was driven by increased investment income as a result of our growth in assets, net investment gains, and premium income.
Premium income: Premium income for the year ended December 31, 2020 was $10,117,110 compared to $9,076,205 in 2019, an increase of $1,040,905 or 11%. The increase is a result of growth of our direct premiums.
The Company continues to search for new product and distribution opportunities to increase premium production on both a direct and assumed basis.
Investment income, net of expenses: The components of net investment income for the years ended December 31, 2020 and 2019 are as follows:
Net investment income for the years ended December 31, 2020 was $3,552,261, compared to $1,790,601 in 2019, an increase of $1,761,660 or 98%. This increase in investment income is primarily a result of increased invested assets as a result of our 2020 ALSC Agreement.
Other income: Other income for the year ended December 31, 2020 was $635,520 compared to $57,146 in 2019, an increase of $578,374 or 1012%. The increase is driven by the net gain on the partial termination of our 2017 ALSC Agreement.
* 2017 Increase in Reserves includes a one-time $3.9 million reserve increase from the 2017 ALSC Agreement transaction.
Death claims: Death benefits were $1,943,563 in the year ended December 31, 2020 compared to $1,287,893 in 2019, an increase of $655,670 or 51%. This increase is attributable to the growth of our in-force block of life insurance policies. The majority of death claims paid from inception have been on pre-need policies. We expect these claims to grow as we continue to increase the size of our in-force pre-need business.
Policyholder benefits: Policyholder benefits were $5,248,470 in the year ended December 31, 2020 compared to $4,212,534 in 2019, an increase of $1,035,936 or 25%. The primary driver of this increase is interest credited on annuities assumed as a result of our 2020 ALSC Agreement.
Increase in policyholder reserves: Policyholder reserves increased $3,359,609 in the year ended December 31, 2020, compared to $2,599,575 in 2019, an increase of $760,034 or 29%. The growth in reserves is the result of increased premiums.
Amortization of deferred acquisition costs: The amortization of deferred acquisition costs ("DAC") was $970,386 in the year ended December 31, 2020, compared to $433,218 in 2019, an increase of $537,168 or 124%. As a result of the Covid-19 pandemic and the resulting historic low interest rates, the Company reassessed its DAC assumptions regarding reinvestment rates. As a result, the Company reduced its DAC balance by $430,000 to reflect the current reinvestment environment and the uncertainty of interest rates. Additionally, the Company began amortizing costs deferred in conjunction with its 2020 ALSC Agreement.
Amortization of value of business acquired: The amortization of value of business acquired (“VOBA”) was $20,302 in the year ended December 31, 2020 and is unchanged from the same period in 2019. VOBA amortization is due to our 2017 acquisition of DCLIC. VOBA is being amortized straight-line over 30 years.
Federal income tax benefit: In the year ended December 31, 2020, the Company recognized a deferred income tax benefit of $140,274. In the year ended December 31, 2019, the Company recognized a deferred income tax benefit of $431,158. These benefits are the result of reductions in the deferred tax asset valuation allowance.
Assets. Assets have increased to $115,574,997 as of December 31, 2020, an increase of $60,635,748 or 110% from December 31, 2019. This is primarily the result of the 2020 ALSC Agreement.
Available for sale fixed maturity securities: As of December 31, 2020, we had available for sale fixed maturity assets of $37,677,578, an increase of $4,524,686 or 14% from the December 31, 2019 balance of $33,152,892. The increase is driven by the purchase of additional assets and by an increase in the market value of these securities. If we hold our fixed maturity securities to maturity, as we intend to do, any changes in market value is temporary.
Funds withheld under coinsurance agreement, at fair value: As of December 31, 2020, we had funds withheld assets of $46,830,076 which were acquired with the 2020 ALSC Agreement. There were no funds withheld assets at December 31, 2019.
Real estate, net of depreciation: As of December 31, 2020, we had real estate assets of $1,415,743 related to the purchase of our home office building. We had no such assets at December 31, 2019.
Deferred acquisition costs, net: As of December 31, 2020, our deferred acquisition costs were $7,105,890 compared to $2,652,674 as of December 31, 2019, an increase of $4,453,216 or 168%. The increase is driven by our 2020 ALSC Agreement.
Value of business acquired, net: As of December 31, 2020 our value of business acquired asset was $2,703,233, compared to $559,994 as of December 31, 2019, an increase of $2,143,239 or 383%. The increase is the result of additional VOBA being added in conjunction with DCLIC’s assumption of policies from ALSC.
Property, equipment and software, net: As of December 31, 2020 our property, equipment and software assets were $37,818, a decrease of $6,023 from the December 31, 2019 balance of $43,841. This decrease is the result of normal amortization of these assets.
Deferred tax asset, net of valuation allowance: The Company had a net deferred tax asset of $243,257 as of December 31, 2020. The Company had a net deferred tax asset of $431,158 as of December 31, 2019 and the resulting change in deferred tax asset was recorded as a deferred tax benefit and as a reduction in other comprehensive income.
Other assets: As of December 31, 2020, our other assets were $1,635,647, an increase of $1,263,481 or 339% from the December 31, 2019 balance of $372,166. This increase was driven by a receivable balance due to DCLIC.
Liabilities. Our total liabilities were $96,982,305 as of December 31, 2020, an increase of $58,919,253 or 155% from our December 31, 2019 liabilities of $38,063,052. This increase is driven by our 2020 ALSC Agreement.
Our overall investment philosophy is reflected in the allocation of our investments. We emphasize investment grade debt securities with smaller holdings in equity securities, mortgages and other investments. The following table shows the carrying value of our investments by investment category and cash and cash equivalents, and the percentage of each to total invested assets as of December 31, 2020 and December 31, 2019.
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.
Additionally, USALSC is a member of the FHL of Topeka, which provides access to liquidity and further reduces the likelihood of disposing of fixed maturities at a loss.
Net cash provided by operating activities was $2,099,401 for the year ended December 31, 2020. The primary sources of cash from operating activities were premiums and deposits received from policyholders. The primary uses of cash for operating activities were for payments of commissions to agents and settlement of policy liabilities. Net cash used in investing activities was $9,903,788. The primary use of cash was from purchases of available for sale securities and funds transferred to our funds withheld account. Cash provided by financing activities was $5,446,341. The primary sources of cash were receipts on deposit-type contracts.
The following chart and graph illustrate our five-year trend of cash flow from insurance activities:
At December 31, 2020, we had cash and cash equivalents totaling $4,320,759. We believe that our existing cash and cash equivalents will be sufficient to fund the anticipated operating expenses and capital expenditures for the foreseeable future. We have based this estimate upon assumptions that may prove to be wrong and we could use our capital resources sooner than we currently expect. The growth of USALSC and DCLIC, our insurance subsidiaries, is uncertain and will require additional capital if they continue to grow.