The following discussion should be read in conjunction with our consolidated
financial statements and notes thereto included in this Form 10-Q. In connection
with, and because we desire to take advantage of, the “safe harbor” provisions
of the Private Securities Litigation Reform Act of 1995, we caution readers
regarding certain forward looking statements in the following discussion and
elsewhere in this report and in any other statement made by, or on our behalf,
whether or not in future filings with the Securities and Exchange Commission.
Forward looking statements are statements not based on historical information
and which relate to future operations, strategies, financial results or other
developments. Forward looking statements are necessarily based upon estimates
and assumptions that are inherently subject to significant business, economic
and competitive uncertainties and contingencies, including those relating to the
COVID-19 pandemic, and many of which are beyond our control and many of which,
with respect to future business decisions, are subject to change. These
uncertainties and contingencies can affect actual results and could cause actual
results to differ materially from those expressed in any forward looking
statements made by, or on our behalf. We disclaim any obligation to update
forward looking statements.


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. Unless the context indicates
otherwise, references herein to the “Company” refer to USAC and its consolidated

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, USALSC entered into an agreement (the “2017 ALSC Agreement”) with American
Life & Security Company (“ALSC”) 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, USALSC entered into an agreement (the “2020 ALSC Agreement”)
with ALSC to assume a quota share percentage of a block of annuity policies. As
of December 31, 2020, USALSC had assumed $50.1 million in annuity deposits under
the 2020 ALSC Agreement. Effective December 31, 2020, DCIC entered into an
agreement (teh (“ALSC 2020 Assumption 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 ALSC 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 was recorded in other income
for the year ended December 31, 2020.

Critical Accounting Policies and Estimates

Our accounting and reporting policies are in accordance with GAAP. Preparation
of the consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. The following is an explanation of our accounting policies and the
estimates considered most significant by management. These accounting policies
inherently require significant judgment and assumptions and actual operating
results could differ significantly from management’s estimates determined using
these policies. We believe the following accounting policies, judgments and
estimates are the most critical to the understanding of our results of
operations and financial position. A detailed discussion of significant
accounting policies is provided in this report in the Notes to Consolidated
Financial Statements included with this quarterly report.



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Valuation of Investments

The Company’s principal investments are in fixed maturity, mortgages, and equity
securities. Fixed maturity 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. Equity
securities are carried at 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. New
England Asset Management (“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 loss 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.



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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.

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 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.


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.



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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.

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 loss in
net investment losses.

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 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 will
occur in the third 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 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 that 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



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Valuation allowances on mortgage loans are established based upon inherent
losses expected by management to be realized in connection with future
dispositions or settlement of mortgage loans, including foreclosures. The
Company establishes valuation allowances for estimated impairments on an
individual loan basis as of the balance sheet date. Such valuation allowances
are based on the excess carrying value of the loan over the present value of
expected future cash flows discounted at the loan’s original effective interest
rate, the value of the loan’s collateral if the loan is in the process of
foreclosure or is otherwise collateral-dependent, or the loan’s market value if
the loan is being sold. These evaluations are revised as conditions change and
new information becomes available. In addition to historical experience,
management considers qualitative factors that include the impact of changing
macro-economic conditions, which may not be currently reflected in the loan
portfolio performance, and the quality of the loan portfolio.

Any interest accrued or received on the net carrying amount of the impaired loan
will be included in investment income or applied to the principal of the loan,
depending on the assessment of the collectability of the loan. Mortgage loans
deemed to be uncollectible or that have been foreclosed 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

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.

Mergers and Acquisitions

On May 23, 2017, the Company entered into a definitive merger agreement with
Northern Plains Capital Corporation. The merger transaction closed on July 31,
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 the 2020 ALSC Assumption Agreement. The Company
acquired fixed maturity securities and cash of $9,181,100, assumed liabilities
of $10,972,785 and recorded VOBA of $2,163,542.

New Accounting Standards

A detailed discussion of new accounting standards is provided in the Notes to
Consolidated Financial Statements beginning on p. 9 of this quarterly report.



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