USAC and its subsidiaries share offices located at 1303 SW First American Place, Suite 200, Topeka, Kansas 66604 in a building purchased by DCLIC on November 15, 2020. Prior to moving into 1303 SW Frist American Place, USAC and its subsidiaries rented space at 4123 SW Gage Center Dr, Suite 240, Topeka, KS 66604. Total rent expense was $37,824 and $34,671 for the years ended December 31, 2020 and 2019.
DCLIC also maintains an office at 107 W. Main Avenue, Suite 325, Bismarck, North Dakota, 58501. The lease for the Bismarck office expired on September 30, 2018 and was renewed for an additional two year term. In 2020, this lease was extended for one additional year to September 30, 2021 with an optional additional year. The lease rate for this location is $939 per month for the lease year beginning October 1, 2020. The Company paid $10,322 and $11,114 in rent for this location in 2020 and 2019.
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.
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.
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.
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 ("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.
Funds withheld under coinsurance agreement represent amounts contractually withheld by a ceding company in accordance with the 2020 ALSC Agreement. For agreements written on a coinsurance funds withheld basis, assets that support the net statutory reserves or as defined by the treaty, are withheld and legally owned by the ceding company. Interest is recorded in net investment income, net of related expenses, in the consolidated statements of income. Funds withheld under coinsurance agreement are presented net of the embedded derivative, discussed above. Under the terms of the 2020ALSC Agreement, the Company may assume custody of the assets in the funds withheld account once the Company attains its "Qualified Institutional Buyer" designation (as that term is defined in Rule 144A under the Securities Act of 1933, as amended, which is anticipated to be achieved in the first quarter of 2021. The Company will record the funds withheld assets at fair value on the date of transfer, which will eliminate the embedded derivative component associated with the 2020 ALSC Agreement.
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.
Direct, assumed and ceded premiums for the years ended December 31, 2020 and 2019 are summarized in the following table.
Net investment gains (losses): Net investment gains for the year ended December 31, 2020 were $1,967,014, compared to gains of $1,042,334 in 2019, an increase of $924,680 or 89%. The increase in net investment gains is attributable to unrealized gains in our equity portfolio, realized gains in our equity portfolio, and an unrealized gain on our funds withheld asset. Net investment gains for 2020 were comprised of $952,667 of unrealized gains in our equity portfolio and funds withheld asset and realized gains of 1,014,347. Net investment gains for 2019 were comprised of $1,256,769 of unrealized gains in our equity portfolio and realized losses of 214,235. Realized gains and losses related to the sale of securities for the years ended December 31, 2020 and 2019 are summarized as follows:
Commissions, net of deferrals: The Company pays commissions to the ceding company on a block of assumed policies as well as commissions to agents on directly written business. Commissions, net of deferrals, were $781,400 in the year ended December 31, 2020, compared to $783,724 in 2019, a decrease of $2,324 or 2.9%. This decrease is due to a changing mix of premiums.
Salaries and benefits: Salaries and benefits were $1,219,534 for the year ended December 31, 2020, compared to $1,081,955 in 2019, an increase of $137,579 or 13%. Staffing costs increased due to increased compensation and bonus payments.
Other expenses: Other operating expenses were $2,429,466 in the year ended December 31, 2020, compared to $1,379,034 in 2019, an increase of $1,050,432 or 76%. Operating costs were driven higher due primarily to our pre-paid software asset being recognized as an expense of $250,000, increased accounting and actuarial fees totaling approximately $175,000, increased computer and software expense of approximately $100,000, increased regulatory costs as a result of our insurance company examination totaling approximately $75,000 and expenses associated with implementing a new disability reinsurance program totaling $50,000. Additionally, in 2019 we recognized expense savings from our acquisition of USALSC-Montana which reduced 2019 expenses by $100,000. We also recovered a loan balance that had previously been written off which further reduced our 2019 expenses by approximately $60,000.
Net Income: Our net income was $439,449 in the year ended December 31, 2020 compared to net income of $599,208 in 2019, a decrease of $159,759 or 27%. Our net income per share was $0.06 compared to net income per share of $0.08 in 2019, basic and diluted.
The following graph illustrates our five-year trend of net income per share:
Mortgage loans on real estate: As of December 31, 2020, we had mortgage loans on real estate of $3,166,136 which are as a result of the 2020 ALSC Agreement. We held no mortgages at December 31, 2019.
Policy loans: As of December 31, 2020, our policy loans were $163,725, an increase of $44,795 or 38% from the December 31, 2019 balance of $118,930. The increase is a result of normal policy loan activity.
Cash and cash equivalents: As of December 31, 2020, we had cash and cash equivalent assets of $4,320,759, a decrease of $2,358,046 or 35% from the December 31, 2019 balance of $6,678,805. This decrease was the result of deploying more cash into invested assets.
Investment income due and accrued: As of December 31, 2020, our investment income due and accrued was $423,036 compared to $321,362 as of December 31, 2019, an increase of $101,674 or 32%. This increase is attributable to the growth of our invested assets.
Reinsurance related assets: As of December 31, 2020, our reinsurance related assets were $165,082 compared to $188,382 as of December 31, 2019, a decrease of $23,300 or 12%. This decrease is the result of normal reinsurance activity.
Policy liabilities: Our total policy liabilities as of December 31, 2020 were $93,459,080 compared to $36,924,885 as of December 31, 2019, an increase of $56,534,195 or 153%. This increase is the result of our 2020 ALSC Agreement.
Federal Home Loan Bank advance: In October of 2019, the Company took an advance of $1,000,000 from the FHLB of Topeka which was outstanding as of December 31, 2020 and 2019. In the second quarter of 2020, the Company took two additional advances of $500,000 each, which were outstanding as of December 31, 2020. The advances were taken to create additional liquidity and investment opportunities.
Shareholders’ Equity. Our shareholders’ equity was $18,893,813 as of December 31, 2020, an increase of $2,017,616 or 12% from our December 31, 2019 shareholders’ equity of $16,876,197. The growth in shareholders’ equity was driven by an increase in other comprehensive income and our net income. Other comprehensive income consists of the unrealized gains and losses on our fixed maturity portfolio. The increase in other comprehensive income is the result of lower interest rates which increases the market value of our fixed maturity securities. Similarly, higher interest rates would decrease the value of our fixed maturity securities.
The total value of our investments and cash and cash equivalents increased to $102,631,866 as of December 31, 2020 from $49,973,200 at December 31, 2019, an increase of $52,658,666. Increases in investments are primarily attributable to the 2020 ALSC Agreement.
The amortized cost and fair value of debt securities as of December 31, 2020 and 2019, by contractual maturity, are shown below. Equity securities do not have stated maturity dates and therefore are not included in the following maturity summary. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The impact of COVID-19 on the Company is evolving, and its future effects are not yet quantifiable. The Company is closely monitoring the effects and risks of COVID-19 to assess its impact on the Company's business, sales, financial condition, results of operations, liquidity and capital position.
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: