UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
Commission File Number
(Exact name of Registrant as specified in its Charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol |
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Name on each exchange on which registered |
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Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO
The number of shares of Registrant’s Common Stock outstanding as of August 12, 2022 was
Table of Contents
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PART I – |
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Item 1. |
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Interim Condensed Consolidated Statements of Comprehensive (Loss) Income |
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Interim Condensed Consolidated Statements of Changes in Shareholders' Equity |
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Notes to the Interim Condensed Consolidated Financial Statements |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 4. |
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PART II – |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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Part 1. Financial Information
Item I. Financial Statements
Vericity, Inc.
Interim Condensed Consolidated Balance Sheets
(dollars in thousands)
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June 30, |
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December 31, |
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2022 |
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2021 |
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(Unaudited) |
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(Audited) |
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Assets |
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Investments: |
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Fixed maturities – available-for-sale – at fair value (amortized cost; $ |
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$ |
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$ |
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Mortgage loans (net of valuation allowances of $ |
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Policyholder loans |
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Other invested assets |
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Total investments |
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Cash, cash equivalents and restricted cash |
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Accrued investment income |
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Reinsurance recoverables (net of allowances of $ |
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Deferred policy acquisition costs |
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Commissions and agent balances (net of allowances of $ |
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Intangible assets |
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Deferred income tax assets, net |
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Other assets |
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Total assets |
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Liabilities and Shareholders' Equity |
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Liabilities |
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Future policy benefits and claims |
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Policyholder account balances |
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Other policyholder liabilities |
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Policy dividend obligations |
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Reinsurance liabilities and payables |
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Long-term debt |
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Short-term debt |
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Other liabilities |
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Total liabilities |
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Shareholders' Equity |
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Common stock, $ |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive (loss) income |
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Total shareholders' equity |
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Total liabilities and shareholders' equity |
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$ |
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$ |
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See notes to interim condensed consolidated financial statements
1
Vericity, Inc.
Interim Condensed Consolidated Statements of Operations
(dollars in thousands, except earnings per share)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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(Unaudited) |
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(Unaudited) |
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(Unaudited) |
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(Unaudited) |
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Revenues |
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Net insurance premiums |
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$ |
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$ |
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$ |
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$ |
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Net investment income |
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Net gains (losses) on investments |
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Other-than-temporary-impairments (OTTI) |
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Earned commissions |
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Insurance lead sales |
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Other income |
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Total revenues |
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Benefits and expenses |
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Life, annuity, and health claim benefits |
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Interest credited to policyholder account balances |
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Operating costs and expenses |
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Amortization of deferred policy acquisition costs |
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Total benefits and expenses |
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(Loss) income before income tax |
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Income tax (benefit) expense |
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( |
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Net (loss) income |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Earnings per share for the periods |
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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(Unaudited) |
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(Unaudited) |
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(Unaudited) |
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(Unaudited) |
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Weighted average shares outstanding, basic and diluted |
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Basic earnings per share |
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$ |
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$ |
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$ |
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$ |
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Diluted earnings per share |
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$ |
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$ |
( |
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$ |
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$ |
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See notes to interim condensed consolidated financial statements
2
Vericity, Inc.
Interim Condensed Consolidated Statements of Comprehensive (Loss) Income
(dollars in thousands)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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(Unaudited) |
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(Unaudited) |
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Net (loss) income |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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Other comprehensive (loss) income, net of tax: |
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Net unrealized (losses) gains on investments |
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( |
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( |
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( |
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Total other comprehensive (loss) income |
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( |
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( |
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( |
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Total comprehensive (loss) income |
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$ |
( |
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$ |
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$ |
( |
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$ |
( |
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See notes to interim condensed consolidated financial statements
3
Vericity, Inc.
Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity
(dollars in thousands)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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(Unaudited) |
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(Unaudited) |
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Common stock |
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Balance – beginning of period |
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$ |
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$ |
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$ |
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$ |
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Balance – end of period |
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$ |
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$ |
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$ |
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$ |
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Additional paid-in capital |
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Balance – beginning of period |
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$ |
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$ |
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$ |
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$ |
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Balance – end of period |
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$ |
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$ |
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$ |
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$ |
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Retained earnings |
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Balance – beginning of period |
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$ |
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$ |
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$ |
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$ |
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Net (loss) income |
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( |
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( |
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( |
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Balance – end of period |
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$ |
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$ |
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$ |
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$ |
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Accumulated other comprehensive (loss) income |
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Balance – beginning of period |
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$ |
( |
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$ |
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$ |
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$ |
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Other comprehensive (loss) income |
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( |
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( |
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( |
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Balance – end of period |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Total shareholders' equity |
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$ |
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$ |
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$ |
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$ |
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See notes to interim condensed consolidated financial statements
4
Vericity, Inc.
Interim Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
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Six Months Ended June 30, |
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2022 |
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2021 |
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(Unaudited) |
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Cash flows from operating activities |
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Net (loss) income |
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$ |
( |
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$ |
( |
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Adjustments to reconcile net (loss) income to net cash (used) provided by operating activities: |
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Depreciation and amortization and other non-cash items |
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Interest credited to policyholder account balances |
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Deferred income tax |
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( |
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( |
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Net gains (losses) on investments |
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( |
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Other-than-temporary-impairments |
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Interest expense |
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Change in: |
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Equity securities |
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— |
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( |
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Accrued investment income |
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( |
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Reinsurance recoverables |
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( |
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( |
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Deferred policy acquisition costs |
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( |
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Commissions and agent balances |
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( |
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( |
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Other assets |
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( |
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( |
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Insurance liabilities |
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Other liabilities |
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( |
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Net cash (used) provided by operating activities |
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Cash flows from investing activities |
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Sales, maturities and repayments of: |
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Fixed maturities |
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Mortgage loans |
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Other invested assets |
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— |
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Purchases of: |
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Fixed maturities |
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( |
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Mortgage loans |
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( |
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( |
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Other invested assets |
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( |
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( |
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Change in policyholder loans, net |
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( |
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Other, net |
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( |
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( |
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Net cash provided (used) by investing activities |
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Cash flows from financing activities |
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Debt issued |
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Debt repaid |
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( |
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Deposits to policyholder account balances |
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Withdrawals from policyholder account balances |
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( |
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( |
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Net cash provided (used) by financing activities |
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( |
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Net (decrease) increase in cash, cash equivalents and restricted cash |
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( |
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( |
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Cash, cash equivalents and restricted cash – beginning of period |
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Cash, cash equivalents and restricted cash – end of period |
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$ |
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$ |
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See notes to interim condensed consolidated financial statements
5
Vericity, Inc.
Notes to Interim Condensed Consolidated Financial Statements
(dollars in thousands)
Note 1 – Summary of Significant Accounting Policies
Description of Business
Vericity, Inc. (the Company) is a Delaware corporation organized to be the stock holding company for Members Holding Company (Members) and its subsidiaries. On August 7, 2019, the Company completed the initial public offering of
The Company operates as a holding company and currently has no other business operations. Fidelity Life is an Illinois‑domiciled life insurance company that was founded in 1896. Fidelity Life markets life insurance products through independent and affiliated distributors and is licensed in the District of Columbia and all states, except New York and Wyoming. Efinancial markets life and other products for non‑affiliated insurance companies and sells life products for Fidelity Life.
The accompanying interim condensed consolidated financial statements present the accounts of the Company and subsidiaries for the six months ended June 30, 2022 and June 30, 2021 and at June 30, 2022 and December 31, 2021. These interim condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report in the Form 10-K for the year ended December 31, 2021. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.
Basis of Presentation
These interim condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The unaudited interim condensed consolidated financial information furnished herein reflects all adjustments which are, in the opinion of management, necessary to fairly state the results for the interim periods presented. All such adjustments are of a normal recurring nature. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated results of operations for the interim periods presented are not necessarily indicative of results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted from this report, as is permitted by such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the financial statements as of and for the year ended December 31, 2021, and notes thereto, included in the Form 10-K.
Use of Estimates
The preparation of interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The more significant estimates employed in the preparation of the interim condensed consolidated financial statements include the determination of the valuation of investments in fixed maturity, investment impairments, the valuation of deferred tax assets, future policy benefits and other policyholder liabilities.
Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842): Accounting for Leases. The guidance is effective for interim and annual periods beginning on or after January 1, 2022. The new guidance requires a lessee to recognize “right-of-use” (ROU) assets and liabilities for leases with lease terms of more than 12 months including those historically accounted for as operating leases. We
6
Note 2 – Investments
The Company continuously monitors its investment strategies and individual holdings with consideration of current and projected market conditions, the composition of the Company’s liabilities, projected liquidity and capital investment needs, and compliance with investment policies and state regulatory guidelines.
Fixed Maturities
The amortized cost, gross unrealized gains, gross unrealized losses, fair value, and OTTI loss included in accumulated other comprehensive income (AOCI) of fixed maturities available-for-sale are as follows:
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June 30, 2022 |
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Fixed maturities |
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Amortized |
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Unrealized |
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Unrealized |
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Fair |
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OTTI |
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|||||
U.S. government and agencies |
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$ |
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$ |
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$ |
( |
) |
|
$ |
|
|
$ |
— |
|
|||
U.S. agency mortgage-backed |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
— |
|
|||
State and political subdivisions |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
— |
|
|||
Corporate and miscellaneous |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
— |
|
|||
Foreign government |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
— |
|
||||
Residential mortgage-backed |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Commercial mortgage-backed |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
— |
|
||
Asset-backed |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
— |
|
|||
Total fixed maturities |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||
|
|
December 31, 2021 |
|
|||||||||||||||||
Fixed maturities |
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
OTTI |
|
|||||
U.S. government and agencies |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|||
U.S. agency mortgage-backed |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
— |
|
|||
State and political subdivisions |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
— |
|
|||
Corporate and miscellaneous |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
— |
|
|||
Foreign government |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|||
Residential mortgage-backed |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Commercial mortgage-backed |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
— |
|
|||
Asset-backed |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
— |
|
|||
Total fixed maturities |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||
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. Maturities of mortgage-backed and asset-backed securities may be substantially shorter than their contractual maturity because they may require monthly principal installments and such loans may prepay principal.
|
|
June 30, 2022 |
|
|||||
|
|
Amortized |
|
|
Fair |
|
||
Due in one year or less |
|
$ |
|
|
$ |
|
||
Due after one year through five years |
|
|
|
|
|
|
||
Due after five years through ten years |
|
|
|
|
|
|
||
Due after ten years |
|
|
|
|
|
|
||
Securities not due at a single maturity date — primarily mortgage and |
|
|
|
|
|
|
||
Total fixed maturities |
|
$ |
|
|
$ |
|
||
7
Fixed maturities with a carrying value of $
The Company’s fixed maturities portfolio was primarily composed of investment grade securities, defined as a security having a rating of Aaa, Aa, A, or Baa from Moody’s, AAA, AA, A, or BBB from Standard & Poor’s, or National Association of Insurance Commissioners (NAIC) rating of NAIC 1 or NAIC 2. Investment grade securities comprised
At June 30, 2022 and December 31, 2021, the Company had commitments to make investments in available-for-sale securities in the amount of $
Mortgage Loans
The Company makes investments in commercial mortgage loans. The Company, along with other investors, owns a pro rata share of each loan. The Company participates in
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||||||||||
|
|
Gross Carrying |
|
|
% of Total |
|
|
Gross Carrying |
|
|
% of Total |
|
||||
Property Type: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Retail |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||
Office |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Industrial |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Mixed use |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Apartments |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Medical office |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Other |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Gross carrying value of mortgage loans |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Valuation allowance |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Net carrying value of mortgage loans |
|
$ |
|
|
|
|
|
$ |
|
|
|
|
||||
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||||||||||
|
|
Gross Carrying |
|
|
% of Total |
|
|
Gross Carrying |
|
|
% of Total |
|
||||
U.S. Region: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
West South Central |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||
East North Central |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
South Atlantic |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
West North Central |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Mountain |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Middle Atlantic |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
East South Central |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
New England |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Pacific |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Gross carrying value of mortgage loans |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Valuation allowance |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Net carrying value of mortgage loans |
|
$ |
|
|
|
|
|
$ |
|
|
|
|
||||
During the six months ended June 30, 2022 and June 30, 2021, $
8
The changes in the valuation allowance for commercial mortgage loans were as follows:
|
|
Six Months Ended June 30, 2022 |
|
|
Year Ended December 31, 2021 |
|
||
Beginning balance |
|
$ |
|
|
$ |
|
||
Net (decrease) increase in valuation allowance |
|
|
|
|
|
( |
) |
|
Ending balance |
|
$ |
|
|
$ |
|
||
At June 30, 2022 and December 31, 2021, the Company had
At June 30, 2022 and December 31, 2021, the Company had commitments to make investments in mortgage loans in the amount of $
Net Investment Income
The sources of net investment income are as follows:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Income from: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Fixed maturities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Policyholder loans |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Mortgage loans |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash, cash equivalents and restricted cash |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Dividends on equity securities |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Gross investment income |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Investment expenses |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net investment income |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Investment expenses include investment management fees, some of which include incentives based on market performance, custodial fees and internal costs for investment-related activities.
Net Investment Gains (Losses)
The sources of net investment gains (losses) are as follows:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Investment gains (losses) from sales: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Fixed maturities |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Mortgage loans |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Investment expenses |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Gains (losses) from sales |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Valuation change of Other invested assets - appreciation (decline): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Valuation change of Equity securities - appreciation (decline): |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Total net gains (losses) on investments |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Other-Than-Temporary Impairments
The Company regularly reviews its investments portfolio for factors that may indicate that a decline in the fair value of an investment is other-than-temporary. A fixed maturity has OTTI if the fair value of the security is less than its amortized cost basis and the Company either intends to sell the fixed maturity or it is more likely than not the Company will be required to sell the fixed maturity before recovery of its amortized cost basis. For all other securities in an unrealized loss position in which the Company does not expect to recover the entire amortized cost basis, the security is deemed to be OTTI for credit reasons.
Significant judgment is required in the determination of whether an OTTI loss has occurred for a security. The Company has developed a consistent methodology and has identified significant inputs for determining whether an OTTI loss has occurred. Some of the factors considered in evaluating whether a decline in fair value is OTTI are the financial condition and prospects of the issuer, payment status, the probability of collecting scheduled principal and interest payments when due, credit ratings of the securities, and the duration and severity of the decline.
9
The credit loss component of fixed maturity impairment is calculated as the difference between amortized cost and the present value of the expected cash flows of the security. The present value is determined using the best estimate of cash flows discounted at the effective rate implicit to the security at the date of purchase or prior impairment. The methodology and assumptions for estimating the cash flows vary depending on the type of security. For mortgage-backed and asset-backed securities, cash flow estimates, including prepayment assumptions, are based on data from widely accepted third-party sources or internal estimates. In addition to prepayment assumptions, cash flow estimates vary based on assumptions regarding the underlying collateral characteristics, expectations of delinquency and default rates, and structural support, including subordination and guarantees. If the present value of the modeled expected cash flows equals or exceeds the amortized cost of a security, no credit loss exists, and the security is considered to be temporarily impaired. If the present value of the expected cash flows is less than amortized cost, the security is determined to be OTTI impaired for credit reasons and is recognized as an OTTI loss in earnings. The non-credit component, determined as the difference between the adjusted amortized cost basis and fair value, is recognized as OTTI in other comprehensive (loss) income.
A roll-forward of the cumulative credit losses on fixed maturities are as follows:
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Beginning balance of credit losses on fixed maturities |
|
$ |
|
|
$ |
|
||
Additional credit losses for OTTI |
|
|
|
|
|
|
||
Reduction of credit losses related to securities sold during period |
|
|
( |
) |
|
|
— |
|
Ending balance of credit losses on fixed maturities |
|
$ |
|
|
$ |
|
||
Unrealized Losses for Fixed Maturities
The Company’s fair value and gross unrealized losses for fixed maturities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous gross unrealized loss position are as follows:
|
|
12 months or less |
|
|
Longer than 12 months |
|
|
Total |
|
|||||||||||||||
June 30, 2022 |
|
Estimated |
|
|
Gross |
|
|
Estimated |
|
|
Gross |
|
|
Estimated |
|
|
Gross |
|
||||||
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
U.S. government and agencies |
|
$ |
|
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
( |
) |
||
U.S. agency mortgage-backed |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
State and political subdivisions |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Corporate and miscellaneous |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Residential mortgage-backed |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Commercial mortgage-backed |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Asset-backed |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Total fixed maturities |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||
|
|
12 months or less |
|
|
Longer than 12 months |
|
|
Total |
|
|||||||||||||||
December 31, 2021 |
|
Estimated |
|
|
Gross |
|
|
Estimated |
|
|
Gross |
|
|
Estimated |
|
|
Gross |
|
||||||
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
U.S. agency mortgage-backed |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
( |
) |
|||
State and political subdivisions |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Corporate and miscellaneous |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Foreign Government |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
||
Residential mortgage-backed |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Commercial mortgage-backed |
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
( |
) |
||
Asset-backed |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Total fixed maturities |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||
The indicated gross unrealized losses in all fixed maturity categories increased to $
10
Information and concentrations related to fixed maturities in an unrealized loss position are included below. The tables below include fixed maturities and number of securities in an unrealized loss position for greater than and less than 12 months and the percentage that were investment grade at June 30, 2022.
|
|
Fair Value with Securities with Unrealized Losses 12 months or less |
|
|||||||||||||||||
|
|
Total |
|
|
Impairment is |
|
|
Impairment |
|
|
Impairment |
|
|
Percent |
|
|||||
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
U.S. government and agencies |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
% |
|||
U.S. agency mortgage-backed |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
% |
||||
State and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
Corporate and miscellaneous |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
Residential mortgage-backed |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
% |
||||
Commercial mortgage-backed |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
% |
||||
Asset-backed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
Total fixed maturities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total number of fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
Fair Value with Securities with Unrealized Losses greater than 12 months |
|
|||||||||||||||||
|
|
Total |
|
|
Impairment is |
|
|
Impairment |
|
|
Impairment |
|
|
Percent |
|
|||||
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
U.S. agency mortgage-backed |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
|
% |
||||
State and political subdivisions |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
% |
||||
Corporate and miscellaneous |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
% |
||||
Residential mortgage-backed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
Commercial mortgage-backed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|||||
Total fixed maturities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total number of fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Note 3 – Policy Liabilities
Future Policy Benefits
Future policy benefits represent the reserve for direct and assumed traditional life insurance policies and annuities in payout status.
The annuities in payout status are certain structured settlement contracts. The policy liability for structured settlement contracts of $
To the extent that unrealized gains on fixed maturities would result in a premium deficiency had those gains actually been realized, a premium deficiency reserve is recorded. A liability of $
Participating life insurance in-force was
11
Note 4 – Reinsurance
The Company uses reinsurance to mitigate exposure to potential losses, provide additional capacity for growth, and provide greater diversity of business. For ceded reinsurance, the Company remains liable to the extent that reinsuring companies may not be able to meet their obligations under the reinsurance agreements. To manage the risk from failure of a reinsurer to meet its obligations, the Company periodically evaluates the financial condition of all of its reinsurers.
In the first quarter 2022, Fidelity Life entered into a reinsurance contract with Swiss Re Life & Health America Inc. (Swiss Re). This new treaty is in addition to existing coinsurance agreements, largely with Swiss Re on certain policies issued through and including December 31, 2020. The impact of this transaction to our segment results included an initial ceded premium of $
Reinsurance recoverables are as follows:
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Ceded future policy benefits |
|
$ |
|
|
$ |
|
||
Claims and other amounts recoverables |
|
|
|
|
|
|
||
Ending balance |
|
$ |
|
|
$ |
|
||
The reconciliation of direct insurance premiums to net insurance premiums is as follows:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Direct |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Assumed |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Ceded |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net insurance premiums |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The reconciliation of direct life, annuity, and health claim benefits to life, annuity, and health claim benefits as follows:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Direct |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Assumed |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Ceded |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Life, annuity, and health claim benefits |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Net policy charges on universal life products were $
At June 30, 2022 and December 31, 2021, reserves related to fixed‑rate annuity deposits assumed from a former affiliate company amounted to approximately $
Note 5 – Closed Block
The Closed Block was formed at October 1, 2006 and contains all participating policies issued or assumed by Fidelity Life. The assets and future net cash flows of the Closed Block are available only for purposes of paying benefits, expenses and dividends of the Closed Block and are not available to the Company, except for an amount of additional funding that was established at the inception of the Closed Block. The additional funding was designed to protect the block against future experience, and if the funding is not required for that purpose, is subject to reversion to the Company in the future. Any reversion of Closed Block assets to the Company must be approved by the Illinois Department of Insurance (IDOI).
In October 2011, the IDOI approved a reversion of a portion of the initial funding that the Company had determined was not required to fund the Closed Block. The carrying value of the assets transferred from the Closed Block on October 31, 2011, the date of transfer, was $
The assets and liabilities within the Closed Block are included in the Company’s consolidated financial statements on the same basis as other accounts of the Company. The maximum future earnings and accumulated other comprehensive income to be recognized from Closed Block assets and liabilities represent the estimated future Closed Block profits that will accrue to the Company and is calculated as the excess of Closed Block assets over Closed Block liabilities. Included in Closed Block assets at June 30, 2022 and
12
December 31, 2021 is $
The Closed Block was funded based on a model developed to forecast the future cash flows of the Closed Block, which is referred to as the actuarial calculation. The actuarial calculation projected the anticipated future cash flows of the Closed Block as established at the initial funding. We compare the actual results of the Closed Block to expected results from the actuarial calculation as part of the annual assessment of the current level of policyholder dividends. The assessment of policyholder dividends includes projections of future experience of the Closed Block. The review of Closed Block experience also includes consideration of whether a policy dividend obligation should be recorded to reflect favorable Closed Block experience that has not yet been reflected in the dividend scales. At June 30, 2022 and December 31, 2021, the Company recognized a policyholder dividend obligation of $
Information regarding the Closed Block liabilities (assets) designated to the Closed Block is as follows:
|
|
June 30, |
|
|
December 31, |
|
||
Closed Block Liabilities |
|
2022 |
|
|
2021 |
|
||
Future policy benefits and claims |
|
$ |
|
|
$ |
|
||
Policyholder account balances |
|
|
|
|
|
|
||
Other policyholder liabilities |
|
|
|
|
|
|
||
Policyholder dividend obligations |
|
|
|
|
|
|
||
Other liabilities (assets) |
|
|
|
|
|
( |
) |
|
Total Closed Block liabilities |
|
|
|
|
|
|
||
Assets Designated to the Closed Block |
|
|
|
|
|
|
||
Investments: |
|
|
|
|
|
|
||
Fixed maturities - available-for-sale (amortized cost $ |
|
|
|
|
|
|
||
Policyholder loans |
|
|
|
|
|
|
||
Total investments |
|
|
|
|
|
|
||
Cash, cash equivalents and restricted cash |
|
|
— |
|
|
|
|
|
Premiums due and uncollected |
|
|
|
|
|
|
||
Accrued investment income |
|
|
|
|
|
|
||
Reinsurance recoverables |
|
|
|
|
|
|
||
Deferred income tax assets, net |
|
|
|
|
|
|
||
Total assets designated to the Closed Block |
|
|
|
|
|
|
||
Excess of Closed Block assets over liabilities |
|
|
|
|
|
|
||
Amounts included in accumulated other comprehensive income: |
|
|
|
|
|
|
||
Unrealized investment gains (losses), net of income tax |
|
|
( |
) |
|
|
|
|
Allocated to policyholder dividend obligations, net of income tax |
|
|
- |
|
|
|
( |
) |
Total amounts included in accumulated other comprehensive income |
|
|
( |
) |
|
|
|
|
Maximum future earnings and accumulated other comprehensive income to |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
June 30, |
|
|
December 31, |
|
||
Policyholder Dividend Obligations |
|
2022 |
|
|
2021 |
|
||
Beginning balance |
|
$ |
|
|
$ |
|
||
Impact from earnings allocable to policyholder dividend obligations |
|
|
( |
) |
|
|
|
|
Change in net unrealized investment (losses) gains allocated to policyholder |
|
|
( |
) |
|
|
( |
) |
Ending balance |
|
$ |
|
|
$ |
|
||
13
Information regarding the Closed Block revenues and expenses is as follows:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net insurance premiums |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Net investment income |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Realized gains |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
||
Total revenues |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Benefits and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Life and annuity benefits - including policyholder dividends |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest credited to policyholder account balances |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating costs and expenses |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Revenues, net of expenses before provision for income tax |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Income tax expense (benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Revenues, net of expenses and provision for income tax |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The Company charges the Closed Block with federal income taxes and state and local premium taxes, policy maintenance costs and investment management expenses relating to the Closed Block as provided in the Closed Block Memorandum.
The following table presents the amortized cost and fair value of the Closed Block fixed maturities portfolio by contractual maturity at June 30, 2022. 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:
|
|
|
|
|
|
|
||
|
|
Amortized Cost |
|
|
Fair Value |
|
||
Due in one year or less |
|
$ |
|
|
$ |
|
||
Due after one year through five years |
|
|
|
|
|
|
||
Due after five years through ten years |
|
|
|
|
|
|
||
Due after ten years |
|
|
|
|
|
|
||
Securities not due at a single maturity date — primarily mortgage and asset- |
|
|
|
|
|
|
||
Total fixed maturities |
|
$ |
|
|
$ |
|
||
Note 6 – Commitments and Contingencies
Litigation
The Company is subject to legal and regulatory actions in the course of our business. Management does not believe such litigation will have a material impact on the Company’s interim condensed consolidated financial statements. The Company establishes accruals for litigation and regulatory matters when it is probable that a loss has been incurred and the amount of that loss can be reasonably estimated. For litigation and regulatory matters where a loss may be reasonably possible but not probable or, is probable but not reasonably able to be estimated, no accrual is established, but the matter, if material, is disclosed. The Company is not aware of any material legal or regulatory matters threatened or pending against the Company.
Federal Home Loan Bank of Chicago
The Company is a member of the Federal Home Loan Bank of Chicago (FHLBC). As a member, the Company is able to borrow on a collateralized basis from the FHLBC which can be used as an alternative source of liquidity. The FHLBC membership requires the Company to own member stock. At June 30, 2022 and December 31, 2021, the Company held $
14
Note 7 – Assets and Liabilities Measured at Fair Value
Fair value is the estimated price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company attempts to establish fair value as an exit price consistent with transactions taking place under normal market conventions. The Company utilizes market observable information to the extent possible and seeks to obtain quoted market prices for all securities. If quoted market prices in active markets are not available, the Company uses a number of methodologies to establish fair value estimates including discounted cash flow models, prices from recently executed transactions of similar securities, or broker/dealer quotes.
Fair values for the Company’s fixed maturity and equity securities are determined by management, utilizing prices obtained from third-party pricing services. Management reviews on an ongoing basis the reasonableness of the methodologies used by the pricing services to ensure prices received represent a reasonable estimate of fair value and to confirm representations regarding whether inputs are observable or unobservable. The main procedure the Company employs in fulfillment of this objective includes back-testing transactions, where past fair value estimates are compared to actual transactions executed in the market on similar dates.
The Company’s assets and liabilities have been classified into a three-level hierarchy based on the priority of the inputs to the respective valuation technique. The hierarchy gives the highest ranking to fair values determined using unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest ranking to fair values determined using methodologies and models with unobservable inputs (Level 3). An asset’s or a liability’s classification is based on the lowest level input that is significant to its measurement. For example, a Level 3 fair value measurement may include inputs that are both observable (Level 1 and Level 2) and unobservable (Level 3). The levels of the fair value hierarchy are as follows:
Level 1 – Unadjusted quoted prices for identical assets in active markets the Company can access. Level 1 assets include securities that are traded in an active exchange market.
Level 2 – This level includes fixed maturities priced principally by independent pricing services using observable inputs other than Level 1 prices, such as quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments on inactive markets; and model-derived valuations for which all significant inputs are observable market data. Level 2 instruments include most corporate debt securities and U.S. government and agency mortgage-backed securities that are valued by models using inputs that are derived principally from or corroborated by observable market data.
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are unobservable. Level 3 instruments include less liquid assets for which significant inputs are unobservable in the market, such as structured securities with complex features that require significant management assumptions or estimation in the fair value measurement.
This hierarchy requires the use of observable market data when available.
Certain assets and liabilities are not carried at fair value on a recurring basis, including investments such as mortgage loans, intangible assets, future policy benefits excluding term life reserves and policyholder account balances. Accordingly, such items are only included in the fair value hierarchy disclosure when the items are subject to re-measurement at fair value after initial recognition (for example, when there is evidence of impairment) and the resulting re-measurement is reflected in the consolidated financial statements at the reporting date.
Recurring and Non-Recurring Fair Value Measurements
The Company’s assets that are carried at fair value on a recurring and non-recurring basis, by fair value hierarchy level, are as follows:
June 30, 2022 |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total Fair Value |
|
||||
Recurring fair value measurements |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Financial instruments recorded as assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. government and agencies |
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
U.S. agency mortgage-backed |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
State and political subdivisions |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|||
Corporate and miscellaneous |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign government |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Residential mortgage-backed |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Commercial mortgage-backed |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Asset-backed |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|||
Total fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total recurring assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
15
December 31, 2021 |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total Fair Value |
|
||||
Recurring fair value measurements |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Financial instruments recorded as assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. government and agencies |
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
U.S. agency mortgage-backed |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
State and political subdivisions |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|||
Corporate and miscellaneous |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign government |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Residential mortgage-backed |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Commercial mortgage-backed |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Asset-backed |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|||
Total fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total recurring assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Summary of Significant Valuation Techniques for Assets on a Recurring Basis
Level 1 securities include principally exchange‑traded funds that are valued based on quoted market prices for identical assets.
Level 2 securities are based on prices obtained from independent pricing services. All of the Company’s prices for each security are generally sourced from multiple pricing vendors, and a vendor hierarchy is maintained by asset type and region of the world, based on historical pricing experience and vendor expertise. The Company ultimately uses the price from the pricing service highest in the vendor hierarchy based on the respective asset type and region. For fixed maturities that do not trade on a daily basis, the pricing services prepare estimates of fair value measurements using their pricing applications which incorporate a variety of inputs including, but not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, and U.S. Treasury curves. Specifically, for asset-backed securities, key inputs include prepayment and default projections based on past performance of the underlying collateral and current market data. Securities with validated quotes from pricing services are reflected within Level 2 of the fair value hierarchy, as they generally are based on observable pricing for similar assets or other market significant observable inputs.
Level 3 fair value classification consists of investments in structured securities where the fair value of the security is determined by a pricing service using internal pricing models where one or more of the significant inputs is unobservable in the marketplace, or there is a single broker/dealer quote. The fair value of a broker-quoted asset is based solely on the receipt of an updated quote from a single market maker or a broker-dealer recognized as a market participant. The fair value of Level 3 liabilities is estimated on the discounted cash flows of contractual payments.
If the Company believes the pricing information received from third-party pricing services is not reflective of market activity or other inputs observable in the market, the Company may challenge the price through a formal process with the pricing service. Historically, the Company has not challenged or updated the prices provided by third-party pricing services. However, any such updates by a pricing service to be more consistent with the presented market observations, or any adjustments made by the Company to prices provided by third-party pricing services would be reflected in the balance sheet for the current period.
When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). Net transfers into and/or out of Level 3 are reported as having occurred at the beginning of the period and are based on observable inputs received from pricing sources; therefore, all net realized and unrealized gains and losses on these securities for the period are reflected in the table that follows.
|
|
|
|
|
Total gains (losses) included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
Balance at January 1, 2022 |
|
|
Net Income |
|
|
OCI |
|
|
Purchases |
|
|
Sales |
|
|
Settlements |
|
|
Net |
|
|
Balance at June 30, 2022 |
|
||||||||
Financial Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
State and political subdivision |
|
$ |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
Corporate and miscellaneous |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|||||
Asset-backed |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|||||
Total assets |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||||
16
|
|
|
|
|
Total gains (losses) included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
Balance at January 1, 2021 |
|
|
Net Income |
|
|
OCI |
|
|
Purchases |
|
|
Sales |
|
|
Settlements |
|
|
Net |
|
|
Balance at December 31, 2021 |
|
||||||||
Financial Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
State and political subdivisions |
|
$ |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
Corporate and miscellaneous |
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|||
Asset-backed |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
|
||||
Total assets |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|||
In 2022, there were
Financial Instruments not Measured at Fair Value
The following tables provide fair value information for financial instruments that are carried on the balance sheet at amounts other than fair value. These tables exclude cash and cash equivalents and accrued investment income, that are not securities and therefore are not included in the three-level hierarchy table disclosed in the “Recurring and Non-Recurring Fair Value Measurements” section.
|
|
|
|
|
Estimated Fair Value |
|
||||||||||||||
June 30, 2022 |
|
Carrying Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|||||
Financial instruments recorded as assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Mortgage loans |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|||
Policyholder loans |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|||
Financial instruments recorded |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Future policy benefits, excluding term |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|||
Long/short-term debt |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|||
Policyholder account balances |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|||
|
|
|
|
|
Estimated Fair Value |
|
||||||||||||||
December 31, 2021 |
|
Carrying Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|||||
Financial instruments recorded as assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Mortgage loans |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|||
Policyholder loans |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|||
Financial instruments recorded |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Future policy benefits, excluding term |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|||
Long/short-term debt |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|||
Policyholder account balances |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|||
The following methods and assumptions were used to estimate the fair value of these financial assets and liabilities.
Mortgage Loans — Fair value was based on the discounted value of future cash flows for all first mortgage loans adjusted for specific loan risk. The discount rate was based on the rate that would be offered for similar loans at the reporting date. Fair value excludes $
Policyholder Loans — Fair value of policyholder loans was estimated using discounted cash flows using risk-free interest rates with no adjustment for borrower credit risk as these loans are fully collateralized by the cash value of the underlying insurance policy.
17
Future Policy Benefits and Policyholder Account Balances — For deposit liabilities with interest rate guarantees greater than one year or with defined maturities, the fair value was estimated by calculating an average present value of expected cash flows over a broad range of interest rate scenarios using the current market risk‑free interest rates adjusted for spreads required for publicly traded bonds issued by comparably rated insurers. For deposit liabilities with interest rate guarantees of less than one year, the fair value was based on the amount payable on demand at the reporting date.
Long and Short-Term Debt — Fair value was calculated using the discounted value of future cash flows method. The discount rate was based on the rate that is commensurable to the level of risk. The carrying amounts reported on the Interim Condensed Consolidated Balance Sheets have been divided in to short and long-term based upon expected maturity dates.
Note 8 – Long and Short-Term Debt
Beginning in the fourth quarter of 2017, Fidelity Life changed the commission structure related to Efinancial’s sale of the RAPIDecision® Life to pay annual level commissions over the life of the product instead of up-front, or first-year-only commissions. This change reduced Fidelity Life’s surplus strain associated with issuing RAPIDecision® Life business by spreading its statutory commission expenses over the life of the policy instead of incurring it all in the policy year of issue. In order to help provide liquidity for Efinancial through the receipt of larger first-year-only commissions, Fidelity Life and Efinancial entered into a financing arrangement with Hannover Life under which, on a monthly basis, Hannover Life advances to Efinancial amounts approximately equal to the first-year-only commissions on Fidelity Life RAPIDecision® Life business sold through Efinancial. In exchange, Efinancial assigns to Hannover Life its right to all future levelized commission payments on the business due from Fidelity Life, and Fidelity Life pays to Hannover Life the level commissions over the life of the contract. The 2017 arrangement was amended in 2021 and Fidelity Life was removed from any obligation under this prior arrangement. On March 31, 2022, Efinancial entered into a new commission financing arrangement and is taking new advances on this financing arrangement. Efinancial’s ability to receive advances under this arrangement will terminate when the aggregate amount advanced under the arrangement equals or exceeds $
|
|
June 30, 2022 |
|
|
Due in one year or less |
|
$ |
|
|
Due after one year through two years |
|
|
|
|
Due after two years through three years |
|
|
|
|
Due after three years through four years |
|
|
|
|
Due after four years through five years |
|
|
|
|
Due after five years |
|
|
|
|
Less discount |
|
|
( |
) |
Total long/short-term debt |
|
$ |
|
|
18
Note 9 – Accumulated Other Comprehensive (Loss) Income
Changes in accumulated other comprehensive (loss) income, net of taxes are as follows:
|
|
2022 |
|
|
2021 |
|
||||||||||||||||||
|
|
Net Unrealized |
|
|
Net Unrealized |
|
|
Total |
|
|
Net Unrealized |
|
|
Net Unrealized |
|
|
Total |
|
||||||
Balance at beginning of year |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Second Quarter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Other comprehensive (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Unrealized holding gains from changes in the market value of securities |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
||
Impact on Policy benefit liabilities of changes in market value of securities |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
||
Change in net unrealized investment (losses) gains allocated to policyholder dividend obligations |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
||
Deferred income tax benefit (expense) |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
||
Second Quarter, net |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Year to Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Other comprehensive (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Unrealized holding gains from changes in the market value of securities |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Impact on Policy benefit liabilities of changes in market value of securities |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Change in net unrealized investment (losses) gains allocated to policyholder dividend obligations |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Deferred income tax benefit (expense) |
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Year to Date, net |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Balance at end of period |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
||||
Note 10 – Business Segments
The Company’s current operations are organized into
The Insurance Segment is composed of three broad lines consisting of Traditional Life, Closed Block, and Assumed Life and Annuities. Traditional Life and the Closed Block are distinct operations; the Assumed life and annuities business and the small amount of structured settlements are all blocks in runoff from a prior management arrangement.
The Agency Segment includes the insurance distribution operations of the Company and includes commission revenue from the sale of Fidelity Life products.
The Corporate & Other Segment includes expenses that will benefit the overall organization, which are not allocated to a segment. This segment recognizes net investment income on cash and invested assets held mainly as a result of the IPO and interest expense related to our commission financing agreement.
All intercompany accounts and transactions have been eliminated in consolidation, including any profit or loss from the sale of Insurance Segment products through the Agency Segment.
19
The segment results are as follows:
|
|
Three Months Ended June 30, 2022 |
|
|
Three Months Ended June 30, 2021 |
|
|
||||||||||||||||||||||||||
|
|
Insurance |
|
|
Agency |
|
|
Corporate & Other |
|
|
Total |
|
|
Insurance |
|
|
Agency |
|
|
Corporate & Other |
|
|
Total |
|
|
||||||||
Net insurance premiums |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
||||
Net investment income |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
||||||
Net gains (losses) on investments |
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|||||
Other-than-temporary-impairments |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Earned commissions |
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
|
|
||||
Other income |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
||||||
Total revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|||||||
Life, annuity, and health claim benefits |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
||||
Operating costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Amortization of deferred policy acquisition |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
||||
Total benefits and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
(Loss) income before income tax |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
||
|
|
Six Months Ended June 30, 2022 |
|
|
Six Months Ended June 30, 2021 |
|
||||||||||||||||||||||||||
|
|
Insurance |
|
|
Agency |
|
|
Corporate & Other |
|
|
Total |
|
|
Insurance |
|
|
Agency |
|
|
Corporate & Other |
|
|
Total |
|
||||||||
Net insurance premiums |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||||
Net investment income |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||||
Net gains (losses) on investments |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||||
Other-than-temporary-impairment |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Earned commissions |
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
|
||||
Other income |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||||
Total revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||||
Life, annuity, and health claim benefits |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Operating costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Amortization of deferred policy |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Total benefits and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
(Loss) income before income tax |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||||||||||||||||||||||||||
|
|
Insurance |
|
|
Agency |
|
|
Corporate & Other |
|
|
Total |
|
|
Insurance |
|
|
Agency |
|
|
Corporate & Other |
|
|
Total |
|
||||||||
Investments and cash |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
Commissions and agent balances |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
||||||
Deferred policy acquisition costs |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Intangible assets |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||||
Reinsurance recoverables |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Deferred income tax assets (liabilities), net |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
|||||
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Total assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
All the Company’s significant revenues and long-lived assets are located in the United States, which is the Company’s country of domicile.
Management has evaluated subsequent events up to and including August 15, 2022, the date these Interim Condensed Consolidated Financial Statements were issued and determined there were no reportable subsequent events.
20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three and six months ended June 30, 2022 and 2021
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Form 10-Q contains “forward-looking” statements that are intended to enhance the reader’s ability to assess our future financial and business performance. Forward-looking statements include, but are not limited to, statements that represent our beliefs concerning future operations, strategies, financial results or other developments, and contain words and phrases such as “may,” “expects,” “should,” “believes,” “anticipates,” “estimates,” “intends” or similar expressions. In addition, statements that refer to our future financial performance, anticipated growth and trends in our business and in our industry and other characterizations of future events or circumstances are forward-looking statements. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different.
Consequently, such forward-looking statements should be regarded solely as our current plans, estimates and beliefs with respect to, among other things, future events and financial performance. Except as required under the federal securities laws, we do not intend, and do not undertake, any obligation to update any forward-looking statements to reflect future events or circumstances after the date of such statements.
The forward-looking statements include, among other things, those items listed below:
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes included in Item 1 of this Form 10-Q. Some of the information contained in this discussion and analysis and set forth elsewhere in this Form 10-Q constitutes forward looking information that involves risks and uncertainties. You should review “Forward Looking Statements” for a discussion of important factors that could cause actual results to differ materially from the results described, or implied by, the forward-looking statements contained herein.
21
Overview
We provide life insurance protection targeted to the middle American market. We believe there is a substantial unmet need for life insurance, particularly among domestic households with annual incomes of between $50,000 and $125,000, a market we refer to as our target Middle Market. We differentiate our product and service offerings through innovative product design and sales processes, with an emphasis on rapidly issued products that are not medically underwritten at the time of sale.
We conduct our business through our two operating subsidiaries, Fidelity Life, an Illinois-domiciled life insurance company, and Efinancial, a call center-based insurance agency. Efinancial sells Fidelity Life products through its own call center distribution platform, independent agents and other marketing organizations. Efinancial, in addition to offering Fidelity Life products, sells insurance products of unaffiliated carriers. We report our operating results in three segments: Agency, Insurance and Corporate & Other.
COVID-19
The stress and disruption placed on the global economy and financial markets from the outbreak of COVID-19 may continue to have near and long-term negative effects on investment valuations, returns, and credit allowance exposure. The Company will continue to closely monitor the situation, including potential negative impacts on sales of new policies and mortality; however, due to the highly uncertain nature of these conditions, it is not possible to reliably estimate the length and severity of COVID-19 or its impact to the Company’s operations, but the effect could be material.
Russia and Ukraine War
The Company believes the war in Ukraine does not have a material impact on the interim condensed consolidated financial statements of the Company at June 30, 2022.
National Service Group of AmeriLife, LLC
In the second quarter 2020, Fidelity Life entered into a General Agent’s agreement with an unaffiliated third party, National Service Group of AmeriLife, LLC (“AmeriLife”). The President of this entity, Scott Perry also sits on the Company’s Board of Directors. This agreement provides Fidelity Life access to AmeriLife distribution channels, its commission systems and assists in streamlining administrative processes related to commissions. This agreement also allows Efinancial to operate as a sub agent to AmeriLife. On May 15, 2020, the Company began selling products using this new distribution arrangement. Due to the large amount of the Company’s insurance policies now being sold through AmeriLife, dissolution of this agency arrangement could have a material impact on the Company’s financial statements. The Company has additional arrangements with AmeriLife wherein Efinancial’s sub agents may sell third party products through AmeriLife. To date it is not believed that any of these arrangements will exceed the related party thresholds described in 17 CFR § 229.404. Should these or other arrangements change or exceed the aforementioned threshold, after review by the CFO and General Counsel, the Company’s Chairman will be advised and written sign-off will be required from the Chairman.
Agency Segment
This segment primarily consists of the operations of Efinancial. Efinancial is a call center-based insurance agency that markets life insurance for Fidelity Life and unaffiliated insurance companies. Efinancial’s primary operations are conducted through employee agents from three call center locations, which we refer to as our retail channel. In addition, Efinancial operates as a wholesale agency, assisting independent agents that seek to produce business for the carriers that Efinancial represents, which we refer to as our wholesale channel. The Agency Segment’s main source of revenue is commissions earned on the sale of insurance policies sold through our retail and wholesale channels. Efinancial also generates data and click-through revenue (reported as part of Insurance Lead Sales on the related Interim Condensed Consolidated Statements of Operations) through its eCoverage web presence.
Agency Segment expenses consist of marketing costs to acquire potential customers, salary and bonuses paid to our employee agents, salary and other costs of employees involved in managing the underwriting process for our insurance applications, sales management, agent licensing, training and compliance costs. Other Agency Segment expenses include costs associated with financial and administrative employees, facilities rent, and information technology. After payroll, the most significant Agency Segment expense is the cost of acquiring leads. We partially offset our sales leads expense through advertising revenues from individuals who click on specific advertisements while viewing one of our web pages, and through the resale of leads that are not well suited for our call center.
Insurance Segment
This segment consists of the operations of Fidelity Life. Fidelity Life underwrites primarily term life insurance through Efinancial and a diverse group of independent insurance distributors. Fidelity Life specializes in life insurance products that can be issued immediately or within a short period following a sales call, using non-medical underwriting at the time of policy issuance.
Fidelity Life engages in the following business lines:
22
Core Life - Our Core Life insurance business is the primary business of the Insurance Segment. Core Life represents a significant portion of the insurance business written by Fidelity Life since it resumed independent operations in 2005. Our Core Life business consists of inforce policies that are considered to be of high strategic importance to Fidelity Life.
NonCore Life - Our NonCore Life business consists of: products that are currently being marketed but are not deemed to be of high strategic importance to the Company; inforce policies from product lines introduced since Fidelity Life resumed independent operations in 2005 but were subsequently discontinued; and an older annuity block of business that was not included in the Closed Block.
Closed Block - Our Closed Block represents all inforce participating insurance policies of Fidelity Life. The Closed Block was established in connection with our 2007 reorganization into a mutual holding company structure.
Annuities and Assumed Life - We have assumed reinsurance commitments with respect to annuity contract holder deposits and a block of life insurance contracts that were ceded by former affiliates of Fidelity Life. Under an agreement with Protective Life Insurance Company (Protective Life), the successor to a former affiliate of Fidelity Life, Fidelity Life had assumed a portion of risk on a group of life insurance contracts primarily written in the 1980s and early 1990s.
Insurance Segment revenues consist of net insurance premiums, net investment income, and net realized gains (losses) on investments. We recognize premium revenue from our policyholders. We purchase reinsurance coverage to help manage the risk on our insurance policies by paying, or ceding, a portion of the policyholder premiums to the reinsurance company. Our net insurance premiums reflect amounts collected from policyholders, plus premiums assumed under reinsurance agreements less premiums ceded to reinsurance companies. Net investment income represents primarily interest income earned on fixed maturity investments. We also realize gains and losses on sales of investment securities.
Insurance Segment expenses consist of benefits paid to policyholders or their beneficiaries under life insurance policies. Benefit expenses also include additions to the reserve for future policyholder benefits to recognize our estimated future obligations under the policies. Benefit expenses are shown net of amounts ceded under our reinsurance contracts. Our Insurance Segment also incurs policy acquisition costs that consist of commissions paid to agents, policy underwriting, issue costs and variable sales costs. A portion of these policy acquisition costs are deferred and expensed over the life of the insurance policies acquired during the period. In addition to policy acquisition costs, we incur expenses that vary based on the number of contracts that we have in-force, or variable policy administrative costs. These variable costs consist of expenses paid to third-party administrators based on rates for each policy administered. Our insurance operations also incur overhead costs for functional and administrative staff to support insurance operations, financial reporting and information technology.
In the first quarter 2022, Fidelity Life entered into a reinsurance contract with Swiss Re Life & Health America Inc. (Swiss Re). This new treaty is in addition to existing coinsurance agreements, largely with Swiss Re on certain policies issued through and including December 31, 2020. The impact of this transaction to our segment results included an initial ceded premium of $6.5 million based on the statutory reserves at January 1, 2022. The impact to pre-tax income is nominal, however various income statement lines are impacted. The impact is discussed in the segment results of this Management Discussion and Analysis of Financial Condition and results of Operations.
Corporate & Other Segment
The results of this segment consist of net investment income and net gains (losses) on investments earned on invested assets. We also include certain corporate expenses, including severance costs that are not allocated to our other segments, including expenses of Vericity, Inc., board of director's expenses, allocation of executive management time spent on corporate matters, and financial reporting and auditing costs related to our consolidation and internal controls. Our Corporate & Other Segment recognizes income (loss) to the extent that net investment income and net gains (losses) on investments exceed (are less than) corporate expenses.
Included in the Corporate & Other Segment is the elimination of intercompany transactions which primarily consists of the sales by our Agency Segment of life products of our Insurance Segment. The eliminations represent the amounts required to eliminate the intercompany transactions as recorded in our segment results, and in particular, to eliminate any intersegment profits resulting from such transactions. Our segment results follow the accounting principles and methods applicable to each segment as if the intercompany transactions were with unaffiliated organizations: See "Corporate & Other" segment results included in this Management Discussion & Analysis for further discussion.
Critical Accounting Policies
Our critical accounting policies are described in “Note 1—Basis of Presentation and Summary of Significant Accounting Policies” to our Consolidated Financial Statements as of and for the year ended December 31, 2021 included in the Form 10-K. The preparation of the Interim Condensed Consolidated Financial Statements in conformity with GAAP requires management to use judgment in making estimates and assumptions that affect reported amounts of assets, liabilities, revenues, expenses and related disclosures. We regularly evaluate our estimates and judgments based on historical experience, market indicators and other relevant factors and circumstances.
23
Actual results may differ from these estimates under different assumptions or conditions and may affect our financial position and results of operations. Accordingly, these Interim Condensed Consolidated Financial Statements should be read in conjunction with the financial statements as of and for the year ended December 31, 2021, and notes thereto, included in the Form 10-K.
Results of Operations
The major components of operating revenues, benefits and expenses and net (loss) income were as follows:
Vericity, Inc. Consolidated Results of Operations
(dollars in thousands)
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
Revenues |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Net insurance premiums |
|
$ |
26,846 |
|
|
$ |
25,433 |
|
|
$ |
49,006 |
|
|
$ |
50,730 |
|
Net investment income |
|
|
3,798 |
|
|
|
3,610 |
|
|
|
7,264 |
|
|
|
6,864 |
|
Net losses (gains) on investments |
|
|
111 |
|
|
|
1,297 |
|
|
|
1,762 |
|
|
|
2,813 |
|
Other-than-temporary-impairments |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(103 |
) |
|
|
(3 |
) |
Earned commissions |
|
|
10,488 |
|
|
|
11,808 |
|
|
|
21,525 |
|
|
|
22,430 |
|
Insurance lead sales |
|
|
1,276 |
|
|
|
1,758 |
|
|
|
2,514 |
|
|
|
3,232 |
|
Other income |
|
|
213 |
|
|
|
63 |
|
|
|
275 |
|
|
|
137 |
|
Total revenues |
|
|
42,731 |
|
|
|
43,968 |
|
|
|
82,243 |
|
|
|
86,203 |
|
Benefits and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Life, annuity, and health claim benefits |
|
|
15,319 |
|
|
|
17,430 |
|
|
|
30,117 |
|
|
|
39,382 |
|
Interest credited to policyholder account balances |
|
|
726 |
|
|
|
751 |
|
|
|
1,454 |
|
|
|
1,473 |
|
Operating costs and expenses |
|
|
24,573 |
|
|
|
22,748 |
|
|
|
49,726 |
|
|
|
46,076 |
|
Amortization of deferred policy acquisition costs |
|
|
4,239 |
|
|
|
3,938 |
|
|
|
9,151 |
|
|
|
7,178 |
|
Total benefits and expenses |
|
|
44,857 |
|
|
|
44,867 |
|
|
|
90,448 |
|
|
|
94,109 |
|
(Loss) income before income taxes |
|
|
(2,126 |
) |
|
|
(899 |
) |
|
|
(8,205 |
) |
|
|
(7,906 |
) |
Income tax expense (benefit) |
|
|
223 |
|
|
|
264 |
|
|
|
(194 |
) |
|
|
(676 |
) |
Net (loss) income |
|
$ |
(2,349 |
) |
|
$ |
(1,163 |
) |
|
$ |
(8,011 |
) |
|
$ |
(7,230 |
) |
Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021
Total Revenues
For the three months ended June 30, 2022, total revenues were $42.7 million compared to $44.0 million for the three months ended June 30, 2021. This decrease of $1.3 million resulted from lower net gains on investments, earned commissions and insurance lead sales, partially offset by an increase in net insurance premiums and net investment income.
Benefits and Expenses
For the three months ended June 30, 2022, total benefits and expenses were $44.9 million compared to $44.9 million for the three months ended June 30, 2021. Lower claim benefits were offset by higher operating costs and deferred policy acquisition costs.
(Loss) Income Before Income Taxes
For the three months ended June 30, 2022, net loss before taxes was $2.1 million compared to net loss before taxes of $0.9 million for the three months ended June 30, 2021. The increased net loss of $1.2 million was primarily due to lower net gains on investments, earned commissions, insurance lead sales and higher operating costs and expenses, partially offset by lower claim benefits.
Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021
Total Revenues
For the six months ended June 30, 2022, total revenues were $82.2 million compared to $86.2 million for the six months ended June 30, 2021. This decrease of $4.0 million resulted from lower net insurance premiums, earned commissions, net gains on investments, and insurance lead sales, partially offset by an increase in net investment income.
Benefits and Expenses
For the six months ended June 30, 2022, total benefits and expenses were $90.4 million compared to $94.1 million for the six months ended June 30, 2021. This decrease of $3.7 million was primarily due to lower claim benefits, partially offset by higher operating costs and deferred policy acquisition costs.
24
(Loss) Income Before Income Taxes
For the six months ended June 30, 2022, net loss before taxes was $8.2 million compared to net loss before taxes of $7.9 million for the six months ended June 30, 2021. The increased net loss of $0.3 million was primarily due to lower net insurance premiums, net gains on investments, increased operating costs and deferred policy acquisition costs, partially offset by claim benefits.
Consolidated Results
The following analysis reconciles the reported segment results to the Company’s total consolidated results.
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
|
(dollars in thousands) |
|
|
(dollars in thousands) |
|
||||||||||
(Loss) income before income tax by segment |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Agency |
|
$ |
(1,857 |
) |
|
$ |
(104 |
) |
|
$ |
(4,224 |
) |
|
$ |
(788 |
) |
Insurance |
|
|
1,169 |
|
|
|
2,154 |
|
|
|
(740 |
) |
|
|
(353 |
) |
Corporate & Other |
|
|
(1,438 |
) |
|
|
(2,949 |
) |
|
|
(3,241 |
) |
|
|
(6,765 |
) |
(Loss) income before income taxes |
|
|
(2,126 |
) |
|
|
(899 |
) |
|
|
(8,205 |
) |
|
|
(7,906 |
) |
Income tax (benefit) expense |
|
|
223 |
|
|
|
264 |
|
|
|
(194 |
) |
|
|
(676 |
) |
Net (loss) income |
|
$ |
(2,349 |
) |
|
$ |
(1,163 |
) |
|
$ |
(8,011 |
) |
|
$ |
(7,230 |
) |
Agency Segment
The results of our Agency Segment were as follows:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
|
(dollars in thousands) |
|
|
(dollars in thousands) |
|
||||||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Earned commissions |
|
$ |
10,587 |
|
|
$ |
12,414 |
|
|
$ |
21,725 |
|
|
$ |
24,288 |
|
Insurance lead sales |
|
|
1,276 |
|
|
|
1,758 |
|
|
|
2,514 |
|
|
|
3,232 |
|
Total revenues |
|
|
11,863 |
|
|
|
14,172 |
|
|
|
24,239 |
|
|
|
27,520 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating costs and expenses |
|
|
13,720 |
|
|
|
14,276 |
|
|
|
28,463 |
|
|
|
28,308 |
|
Total expenses |
|
|
13,720 |
|
|
|
14,276 |
|
|
|
28,463 |
|
|
|
28,308 |
|
(Loss) income before income taxes |
|
$ |
(1,857 |
) |
|
$ |
(104 |
) |
|
$ |
(4,224 |
) |
|
$ |
(788 |
) |
Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021
Earned Commissions
For the three months ended June 30, 2022, earned commissions were $10.6 million compared to $12.4 million for the three months ended June 30, 2021. This decrease of $1.8 million resulted from lower sales in the retail channel, which was primarily driven by a reduction in policy placement rates.
Insurance Lead Sales
For the three months ended June 30, 2022 insurance lead sales were $1.3 million compared to $1.8 million for the three months ended June 30, 2021. This decrease of $0.5 million was primarily due to lower click-through revenue.
Operating Costs and Expenses
For the three months ended June 30, 2022, operating costs and expenses were $13.7 million compared to $14.3 million for the three months ended June 30, 2021. This decrease of $0.6 million was primarily due to a decrease in variable costs.
(Loss) Income Before Income Taxes
For the three months ended June 30, 2022, the Agency Segment net loss was $1.9 million compared to net loss of $0.1 million for the three months ended June 30, 2021. This increase in net loss of $1.8 million was the result of decreased earned commissions and insurance lead sales, partially offset by lower operating costs and expenses,
25
Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021
Earned Commissions
For the six months ended June 30, 2022, earned commissions were $21.7 million compared to $24.3 million for the six months ended June 30, 2021. This decrease of $2.6 million resulted from lower sales in the retail channel, which was primarily driven by a reduction in policy placement rates.
Insurance Lead Sales
For the six months ended June 30, 2022, insurance lead sales were $2.5 million compared to $3.2 million for the six months ended June 30, 2021. This decrease of $0.7 million was primarily due to lower click-through revenue.
Operating Costs and Expenses
For the six months ended June 30, 2022, operating costs and expenses were $28.5 million compared to $28.3 million for the six months ended June 30, 2021. This increase of $0.2 million was primarily due to ongoing investment in technology and marketing capabilities partially offset by a decrease in variable costs.
(Loss) Income Before Income Taxes
For the six months ended June 30, 2022, the Agency Segment net loss was $4.2 million compared to net loss of $0.8 million for the six months ended June 30, 2021. This increase in net loss of $3.5 million was the result of lower earned commissions and insurance lead sales.
Insurance Segment
The results of our Insurance Segment were as follows:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
|
(dollars in thousands) |
|
|
(dollars in thousands) |
|
||||||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net insurance premiums |
|
$ |
26,846 |
|
|
$ |
25,433 |
|
|
$ |
49,006 |
|
|
|
50,730 |
|
Net investment income |
|
|
3,720 |
|
|
|
3,551 |
|
|
|
7,055 |
|
|
|
6,759 |
|
Net losses (gains) on investments |
|
|
(54 |
) |
|
|
1,102 |
|
|
|
936 |
|
|
|
2,223 |
|
Other-than-temporary-impairments |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(103 |
) |
|
|
(3 |
) |
Other income |
|
|
213 |
|
|
|
63 |
|
|
|
275 |
|
|
|
137 |
|
Total revenues |
|
|
30,724 |
|
|
|
30,148 |
|
|
|
57,169 |
|
|
|
59,846 |
|
Benefits and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Life, annuity, and health claim benefits |
|
|
15,320 |
|
|
|
17,430 |
|
|
|
30,117 |
|
|
|
39,382 |
|
Interest credited to policyholder account balances |
|
|
726 |
|
|
|
751 |
|
|
|
1,454 |
|
|
|
1,473 |
|
Operating costs and expenses |
|
|
9,270 |
|
|
|
5,875 |
|
|
|
17,187 |
|
|
|
12,166 |
|
Amortization of deferred policy acquisition costs |
|
|
4,239 |
|
|
|
3,938 |
|
|
|
9,151 |
|
|
|
7,178 |
|
Total benefits and expenses |
|
|
29,555 |
|
|
|
27,994 |
|
|
|
57,909 |
|
|
|
60,199 |
|
Income (loss) before income taxes |
|
$ |
1,169 |
|
|
$ |
2,154 |
|
|
$ |
(740 |
) |
|
$ |
(353 |
) |
Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021
Net Insurance Premiums
For the three months ended June 30, 2022, net insurance premiums were $26.8 million compared to $25.4 million for the three months ended June 30, 2021. The increase of $1.4 million in net insurance premiums was primarily due to an increase in our Core lines and non-core lines of $2.9 million, partially offset by the impact of the new reinsurance agreement with Swiss Re in the amount of $1.6 million (see discussion earlier in this Management Discussion and Analysis of Financial Condition and results of Operations).
26
Net Investment Income
For the three months ended June 30, 2022, net investment income increased to $3.7 million compared to $3.6 million for the three months ended June 30, 2021. The $0.1 million increase was mainly due to higher reinvestment yields in the fixed maturities portfolio, partially offset by a decrease from the mortgage loan portfolio and equity securities. The equity securities portfolio was sold in 2021. For more information on net investment income, see “Note 2 – Investments” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.
Net (Losses) Gains on Investments
For the three months ended June 30, 2022, net gains (losses) on investments decreased to $(0.1) million compared to $1.1 million for the three months ended June 30, 2021. The $1.2 million decrease was mainly due to a reduction in sales of fixed maturities and valuation changes in the equity securities portfolio. The equity securities portfolio was sold in 2021. For more information on net gains (losses) on investments, see “Note 2 – Investments” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.
Life, Annuity and Health Claim Benefits
For the three months ended June 30, 2022, life, annuity and health claim benefits were $15.3 million compared with $17.4 million for the three months ended June 30, 2021. This decrease of $2.1 million was primarily due to a decrease in claim benefits of $1.8 million which includes a reduction of $0.8 million related to the new reinsurance agreement with Swiss Re (see discussion earlier in this Management Discussion and Analysis of Financial Condition and results of Operations) and a reduction of claims related to Covid-19.
Operating Costs and Expenses
For the three months ended June 30, 2022, operating costs and expenses were $9.3 million compared to $5.9 million for the three months ended June 30, 2021. The $3.4 million increase was attributable to a decrease in reinsurance allowances of $1.3 million, largely related to changes in the reinsurance agreements, primarily Swiss Re and $2.1 million of other operating expenses, primarily staff costs, depreciation expense and other operating expenses.
Amortization of Deferred Policy Acquisition Costs
For the three months ended June 30, 2022, amortization of deferred policy acquisition costs was $4.2 million compared to $3.9 million for the three months ended June 30, 2021. The increase of $0.3 million primarily related to Closed Block.
Income (Loss) Before Income Taxes
For the three months ended June 30, 2022, net income was $1.2 million compared to net income of $2.2 million for the three months ended June 30, 2021. This decrease in net income of $1.0 million resulted primarily from an increase in operating expenses of $3.4 million and a decrease in net gains (losses) from investments of $1.2 million, partially offset a $2.1 million decrease in life, annuity and health claim benefits, and increased net insurance premiums of $1.4 million.
Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021
Net Insurance Premiums
For the six months ended June 30, 2022, net insurance premiums were $49.0 million compared to $50.7 million for the six months ended June 30, 2021. The decrease of $1.7 million in net insurance premiums was primarily due to a new reinsurance agreement with Swiss Re (see discussion earlier in this Management Discussion and Analysis of Financial Condition and results of Operations) which reduced net insurance premiums by $9.8 million in both our core and non-core lines of business. Offsetting this decrease was a $7.7 million increase due to growth in our Core and non-core lines and $0.3 million in Closed Block.
27
Net Investment Income
For the six months ended June 30, 2022, net investment income increased to $7.1 million compared to $6.8 million for the six months ended June 30, 2021. The $0.3 million increase was mainly due to higher reinvestment yields in the fixed maturities portfolio, offset by a decrease from equity securities and the mortgage loan portfolio. The equity securities portfolio was sold in 2021. For more information on net investment income, see “Note 2 – Investments” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.
Net (Losses) Gains on Investments
For the six months ended June 30, 2022, net gains (losses) on investments decreased to $0.9 million compared to $2.2 million for the six months ended June 30, 2021. The $1.3 million decrease was mainly due to a reduction in sales of fixed maturities and valuation changes in both the equity securities portfolio and other invested assets. The equity securities portfolio was sold in 2021. For more information on net gains (losses) on investments, see “Note 2 – Investments” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.
Life, Annuity and Health Claim Benefits
For the six months ended June 30, 2022, life, annuity and health claim benefits were $30.1 million compared with $39.4 million for the six months ended June 30, 2021. This decrease of $9.3 million was primarily due to a new reinsurance agreement with Swiss Re (see discussion earlier in this Management Discussion and Analysis of Financial Condition and results of Operations) which reduced Life, annuity and health claim benefits by $8.4 million and our core and non-core lines of business also decreased $0.9 million primarily due to a reduction of claims related to Covid-19.
Operating Costs and Expenses
For the six months ended June 30, 2022, operating costs and expenses were $17.2 million compared to $12.2 million for the six months ended June 30, 2021. The $5.0 million increase was attributable to a decrease in reinsurance allowances of $2.6 million largely related to changes in the reinsurance agreements, primarily Swiss Re and a $2.4 million increase of other operating expenses, primarily related to staff costs.
Amortization of Deferred Policy Acquisition Costs
For the six months ended June 30, 2022, amortization of deferred policy acquisition costs was $9.2 million compared to $7.2 million for the six months ended June 30, 2021. The increase of $2.0 million primarily relates to increases in our core and non-core lines of $1.0 million and Closed Block of $1.1 million.
Income (Loss) Before Income Taxes
For the six months ended June 30, 2022, net loss was $0.7 million compared to net loss of $0.4 million for the six months ended June 30, 2021. This increase in net loss of $0.3 million resulted primarily from an increase in operating expenses of $5.0 million, amortization of deferred policy acquisition costs of $2.0 million, decreased net insurance premiums of $1.7 million and a decrease in net gains (losses) from investments of $1.3 million, partially offset by $9.3 million decrease in life, annuity and health claim benefits and $0.3 million in net investment income.
Closed Block
The Closed Block was formed as of October 1, 2006 and contains all participating policies issued or assumed by Fidelity Life. The assets and future net cash flows of the Closed Block are available only for purposes of paying benefits, expenses and dividends of the Closed Block and are not available to the Company, except for an amount of additional funding that was established at inception. The additional funding was designed to protect the block against future adverse experience, and if the funding is not required for that purpose, it is subject to reversion to the Company in the future. Any reversion of Closed Block assets to the Company must be approved by the Illinois Department of Insurance.
The maximum future earnings to be recognized from Closed Block assets and liabilities represent the estimated future Closed Block profits that will accrue to the Company and is calculated as the excess of Closed Block assets over Closed Block liabilities. Included in Closed Block assets at June 30, 2022 and December 31, 2021, are $10.6 million and $10.5 million, respectively, of additional Closed Block funding, plus accrued interest, that is eligible for reversion to the Company if not needed to fund Closed Block experience.
The Closed Block was funded based on a model developed to forecast the future cash flows of the Closed Block which is referred to as the “glide path.” The glide path model projected the anticipated future cash flows of the Closed Block as established at the initial
28
funding. We compare the actual results of the Closed Block to expected results from the glide path as part of the annual assessment of the current level of policyholder dividends. The assessment of policyholder dividends includes projections of future experience of the Closed Block policies and the investment experience of the Closed Block assets. The review of Closed Block experience also includes consideration of whether a policy dividend obligation should be recorded to reflect favorable Closed Block experience that has not yet been reflected in the dividend scales. See “Note 5—Closed Block” in the accompanying Notes to the Interim Condensed Consolidated Financial Statements.
Corporate & Other Segment
The results of the Corporate & Other Segment were as follows:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
|
(dollars in thousands) |
|
|
(dollars in thousands) |
|
||||||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net investment income |
|
$ |
78 |
|
|
$ |
59 |
|
|
$ |
209 |
|
|
$ |
105 |
|
Net gains (losses) on investments |
|
|
165 |
|
|
|
195 |
|
|
|
826 |
|
|
|
590 |
|
Earned commissions |
|
|
(99 |
) |
|
|
(606 |
) |
|
|
(200 |
) |
|
|
(1,858 |
) |
Total revenues |
|
|
144 |
|
|
|
(352 |
) |
|
|
835 |
|
|
|
(1,163 |
) |
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating costs and expenses |
|
|
1,582 |
|
|
|
2,597 |
|
|
|
4,076 |
|
|
|
5,602 |
|
Total expenses |
|
|
1,582 |
|
|
|
2,597 |
|
|
|
4,076 |
|
|
|
5,602 |
|
(Loss) income before income taxes |
|
$ |
(1,438 |
) |
|
$ |
(2,949 |
) |
|
$ |
(3,241 |
) |
|
$ |
(6,765 |
) |
Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021
Net Investment Income
For the three months ended June 30, 2022, net investment income was $0.1 million compared to $0.1 million for the three months ended June 30, 2021. The slight change is a result of increased yields in the fixed maturity portfolio.
Net Gains (Losses) on Investment
For the three months ended June 30, 2022, net gains (losses) on investments were $0.2 million compared to $0.2 million for the three months ended June 30, 2021. The gains are attributable to net asset valuation changes of other invested assets.
Earned Commissions
For the three months ended June 30, 2022, earned commissions were ($0.1) million compared to ($0.6) million for the three months ended June 30, 2021. This increase is attributable to the elimination of lower intersegment earned commissions resulting from declining intersegment sales.
Operating Expenses
For the three months ended June 30, 2022, operating expenses were $1.6 million compared to $2.6 million for the three months ended June 30, 2021. The decrease of $1.0 million is primarily related to the completion of corporate wide initiatives.
(Loss) Income Before Income Taxes
For the three months ended June 30, 2022, net loss decreased to $1.4 million from $2.9 million for the three months ended June 30, 2021. The reduced loss is primarily a result of lower intersegment sales and reduced operating costs and expenses.
Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021
Net Investment Income
For the six months ended June 30, 2022, net investment income was $0.2 million compared to $0.1 million for the six months ended June 30, 2021. The slight change is a result of increased yields in the fixed maturity portfolio.
29
Net Gains (Losses) on Investment
For the six months ended June 30, 2022, net gains (losses) on investments were $0.8 million compared to $0.6 million for the six months ended June 30, 2021. This change is a result of gains from other invested assets related to net asset value changes.
Earned Commissions
For the six months ended June 30, 2022, earned commissions were ($0.2) million compared to ($1.9) million for the six months ended June 30, 2021. This decrease is attributable to the elimination of lower intersegment earned commissions resulting from declining intersegment sales.
Operating Expenses
For the six months ended June 30, 2022, operating expenses were $4.1 million compared to $5.6 million for the six months ended June 30, 2021. The decrease of $1.5 million is primarily related to the completion of corporate wide initiatives partially offset by one-time severance activity.
(Loss) Income Before Income Taxes
For the six months ended June 30, 2022, net loss decreased to $3.2 million from $6.8 million for the six months ended June 30, 2021. The decreased loss is primarily a result of lower intersegment sales and lower operating costs and expenses.
Investments
Investment Returns
We invest available cash and funds that support our regulatory capital, surplus requirements and policy reserves in investment securities that are included in the Insurance and Corporate & Other Segments. We earn income on these investments in the form of interest on fixed maturities (bonds and mortgage loans) and dividends (equity holdings). Net investment income is recorded as revenue, net of investment related expenses. The amount of net investment income that we recognize will vary depending on the amount of invested assets that we own, the types of investments, the interest rates earned, and amount of dividends received on our investments.
Gains and losses on sales of investments are classified as “realized investment gains (losses)” and are recorded as revenue. Capital appreciation and depreciation caused by changes in the market value of investments classified as “available-for-sale” is recorded in accumulated other comprehensive income. The amount of investment gains and losses that we recognize depends on the amount of and the types of invested assets we own, and the market conditions related to those investments. Our cash needs can vary from time to time and could require that we sell invested assets to fund cash needs.
Investment Guidelines
Our investment strategy and guidelines are developed by management and approved by the Investment Committee of Fidelity Life’s board of directors. Our investment strategy related to the Insurance Segment is designed to maintain a well-diversified, high quality fixed income portfolio that will provide adequate levels of net investment income and liquidity to meet our policyholder obligations under our life insurance policies and our assumed annuity deposits. To help maintain liquidity, we establish the duration of invested assets within a tolerance to the policy liability duration. The investments of the Insurance Segment are managed with an emphasis on current income within quality and diversification constraints. The focus is on book yield of the fixed income portfolio as the anticipated portfolio yield is a key element used in pricing our insurance products and establishing policyholder crediting rates on our annuity contracts.
We apply our overall investment strategy and guidelines on a consolidated basis for purposes of monitoring compliance with our overall guidelines. All of our investments are owned by Fidelity Life and are maintained in compliance with insurance regulations. Critical guidelines of our investment plan include:
Our investment portfolios are all managed by third-party investment managers that specialize in insurance company asset management. These managers are selected based upon their expertise in the particular asset classes that we own. We contract with an
30
investment management firm to provide overall assistance with oversight of our portfolio managers, evaluation of investment performance and assistance with development and implementation of our investment strategy. This investment management firm reports to our Chief Financial Officer and to the Investment Committee of Fidelity Life’s board of directors. On a quarterly basis, or more frequently if circumstances require, we review the performance of all portfolios and portfolio managers with the Investment Committee.
The following table shows the distribution of the fixed maturities classified as available-for-sale by quality rating using the rating assigned by Standard & Poor’s (S&P), a nationally recognized statistical rating organization. For securities where the S&P rating is not available (not rated), the NAIC rating is used. Over the periods presented, we have maintained a consistent weighted average bond quality rating of “A.” The percentage allocation of total investment grade securities was 94.4% and 94.8% at June 30, 2022 and December 31, 2021, respectively.
|
|
Estimated Fair Value |
|
|||||||||||||
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||||||||||
|
|
(dollars in thousands) |
|
|||||||||||||
S&P Rating |
|
|
|
|
|
|
|
|
|
|||||||
AAA |
|
$ |
54,959 |
|
|
|
18.5 |
% |
|
$ |
68,171 |
|
|
|
19.3 |
% |
AA |
|
|
60,023 |
|
|
|
20.1 |
% |
|
|
73,535 |
|
|
|
20.9 |
% |
A |
|
|
66,626 |
|
|
|
22.3 |
% |
|
|
79,603 |
|
|
|
22.6 |
% |
BBB |
|
|
57,611 |
|
|
|
19.3 |
% |
|
|
69,420 |
|
|
|
19.7 |
% |
Not rated |
|
|
42,401 |
|
|
|
14.2 |
% |
|
|
43,254 |
|
|
|
12.3 |
% |
Total investment grade |
|
|
281,620 |
|
|
|
94.4 |
% |
|
|
333,983 |
|
|
|
94.8 |
% |
BB |
|
|
6,618 |
|
|
|
2.2 |
% |
|
|
7,832 |
|
|
|
2.2 |
% |
B |
|
|
3,954 |
|
|
|
1.3 |
% |
|
|
4,031 |
|
|
|
1.1 |
% |
CCC |
|
|
296 |
|
|
|
0.1 |
% |
|
|
341 |
|
|
|
0.1 |
% |
D |
|
|
- |
|
|
|
0.0 |
% |
|
|
4 |
|
|
|
0.0 |
% |
Not Rated |
|
|
5,890 |
|
|
|
2.0 |
% |
|
|
6,192 |
|
|
|
1.8 |
% |
Total below investment grade |
|
|
16,758 |
|
|
|
5.6 |
% |
|
|
18,400 |
|
|
|
5.2 |
% |
Total |
|
$ |
298,378 |
|
|
|
100.0 |
% |
|
$ |
352,383 |
|
|
|
100.0 |
% |
The following table sets forth the maturity profile of our fixed maturities at June 30, 2022 from December 31, 2021. Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without penalty.
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||||||||||||||||||||||||||
(dollars in thousands) |
|
Amortized |
|
|
% |
|
|
Estimated |
|
|
% |
|
|
Amortized |
|
|
% |
|
|
Estimated |
|
|
% |
|
||||||||
Due in one year or less |
|
$ |
6,317 |
|
|
|
2.0 |
% |
|
$ |
6,340 |
|
|
|
2.1 |
% |
|
$ |
1,753 |
|
|
|
0.5 |
% |
|
$ |
1,771 |
|
|
|
0.5 |
% |
Due after one year through five years |
|
|
29,203 |
|
|
|
9.2 |
% |
|
|
28,652 |
|
|
|
9.6 |
% |
|
|
36,245 |
|
|
|
11.1 |
% |
|
|
38,497 |
|
|
|
10.9 |
% |
Due after five years through ten years |
|
|
72,210 |
|
|
|
22.7 |
% |
|
|
69,547 |
|
|
|
23.3 |
% |
|
|
67,802 |
|
|
|
20.8 |
% |
|
|
71,435 |
|
|
|
20.3 |
% |
Due after ten years |
|
|
128,990 |
|
|
|
40.5 |
% |
|
|
116,461 |
|
|
|
39.1 |
% |
|
|
127,396 |
|
|
|
39.0 |
% |
|
|
145,580 |
|
|
|
41.3 |
% |
Securities not due at a single |
|
|
81,386 |
|
|
|
25.6 |
% |
|
|
77,378 |
|
|
|
25.9 |
% |
|
|
93,395 |
|
|
|
28.6 |
% |
|
|
95,100 |
|
|
|
27.0 |
% |
Total fixed maturities |
|
$ |
318,106 |
|
|
|
100.0 |
% |
|
$ |
298,378 |
|
|
|
100.0 |
% |
|
$ |
326,591 |
|
|
|
100.0 |
% |
|
$ |
352,383 |
|
|
|
100.0 |
% |
Every quarter, we review all investments where the market value is less than the carrying value to ascertain if the impairment of the security’s value is OTTI. The quarterly review is targeted to focus on securities with larger impairments and that have been in an impaired status for longer periods of time. See “Note 9 – Accumulated Other Comprehensive (Loss) Income” in the accompanying Interim Condensed Consolidated Financial Statements included in this Form 10-Q.
Net Investment Income
One key measure of our net investment income is the book yield on our holdings of fixed maturities classified as available-for-sale. Fair value of these securities totaled $298.4 million and $352.4 million as of June 30, 2022 and December 31, 2021, respectively. Book yield is the effective interest rate, before investment expenses, that we earn on these investments. Book yield is calculated as the percent of net investment income to the average amortized cost of the underlying investments for the period. For the six months ended June 30, 2022 and 2021, our book yield on fixed maturities available-for-sale was 4.1% and 3.6%, respectively. See “Note 2 – Investments” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.
31
Interest Credited to Policyholder Account Balances
Included with the future policy benefits is the liability for contract holder deposits on deferred annuity contracts assumed through two reinsurance agreements effective in 1991 and 1992 and certain other policy funds left on deposit with the Company. The aggregate liability for deposits is as follows:
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
|
June 30, 2022 |
|
|
June 30, 2021 |
|
||||
|
|
Ending |
|
|
Ending |
|
|
Year to Date |
|
|
Year to Date |
|
||||
|
|
(dollars in thousands) |
|
|||||||||||||
Annuity contract holder deposits—assumed |
|
$ |
70,762 |
|
|
$ |
71,832 |
|
|
$ |
1,353 |
|
|
$ |
1,368 |
|
Dividends left on deposit |
|
|
6,850 |
|
|
|
6,957 |
|
|
|
84 |
|
|
|
86 |
|
Other |
|
|
1,674 |
|
|
|
1,705 |
|
|
|
17 |
|
|
|
19 |
|
Total |
|
$ |
79,286 |
|
|
$ |
80,494 |
|
|
$ |
1,454 |
|
|
$ |
1,473 |
|
The liability for deferred annuity deposits represents the contract holder account balances. Due to the declines in market interest rates and the book yield on our investment portfolio, we credit interest on all contract holder deposit liabilities at contractual rates that are currently at the minimum rate allowed by the contract or by state regulations.
Our Insurance Segment realizes operating profit from the excess of our book yield realized on fixed maturities that support our contract holder deposits over the amount of interest that we credit to the contract holder. We refer to this operating profit as the “spread” we earn on contract holder deposits. If book yields decline further, the amount of spread between the interest earned and credited will be reduced.
Net Gains (Losses) on Investments
Net gains (losses) on investments are subject to general economic trends and generally correlate with movements in major market indexes. The amounts classified as net realized gains (losses) in our Interim Condensed Consolidated Statements of Operations include amounts realized from sales of investments, mark-to-market adjustments and OTTI of individual securities related to credit impairment. See “Note 2 – Investments” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.
Unrealized Holding Gains (Losses)
The Company records capital appreciation/depreciation on the available-for-sale fixed maturities. At June 30, 2022 and 2021, accumulated other comprehensive income, from mark-to-market adjustments of our available-for-sale fixed income securities, net of federal income taxes and reserves was ($30.3) million and ($3.3) million, respectively. See “Note 9 – Accumulated other comprehensive (loss) income” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.
At June 30, 2022 our fixed maturity securities had an unrealized loss of $19.7 million compared to an unrealized gain of $25.8 million at December 31, 2021, resulting in an unrealized loss of $45.5 million for the six months ended June 30, 2022. Duration measures the sensitivity of a bond’s price to changes in market yields and convexity measures a bond’s duration sensitivity to changes in market yields. The company’s unrealized loss of $45.5 million in our fixed maturities portfolio which has a duration of 7.4, convexity of 0.876, and current yield of 4.8%, is accounted for by the increase in the 10-year treasury bill yield for the first six months of 2022 of 147 basis points, along with the widening of credit spreads over the same period of time.
Financial Position
At June 30, 2022, we had total assets of $764.2 million compared to total assets at December 31, 2021 of $788.0 million, a decrease of $23.8 million. The invested asset base decreased $51.7 million, mainly due to $45.5 million in net unrealized losses. The remainder represents net purchases and sales in the portfolio. Deferred policy acquisition costs decreased $3.3 million, primarily due to a reduction of $6.9 million driven by a change in reinsurance agreement, partially offset by deferrals on new business in excess of amortization. Cash and cash equivalents decrease of $0.7 million is attributable to cash used in operating, investing and financing activities. See Cash Flows section for further discussion on changes in cash. The above decreases were partially offset by the following: Reinsurance recoverables increased $18.0 million as a result of a $16.1 million increase in ceded policy and claim reserves and $1.9 million related to timing of settlements of reinsured claims. Deferred income tax assets increased $9.8 million due to tax credits of $8.0 million on unrealized investment market losses and $1.8 million as a result of net loss. Other assets increased $2.4 million, primarily due to establishment of a right-of-use asset in the amount of $1.7 million from the adoption of ASU No. 2016-02, Leases (Topic 842) and internally developed software. Commission and agent balances increased $1.6 million due to increases in agent debit balances.
At June 30, 2022, we had total liabilities of $629.4 million compared to total liabilities of $615.1 million at December 31, 2021, an increase of $14.3 million. Future policy benefits and claims increased $17.3 million, primarily due to a $23.8 million increase in Core Life and Non-Core Life lines, resulting from growth of the underlying blocks of business, partially offset by decreases in Annuities and
32
assumed life of $4.6 million and Closed Block of $1.9 million. Debt increased $6.6 million related to an increase in net borrowing of $5.9 million and interest accrued of $0.7 million under our commission financing agreement with Hannover Life. The above increases were partially offset by the following decreases: Other policyholder liabilities decreased $5.0 million due to a decrease in claim reserves and Policyholder dividend obligation related to the Closed Block decreased $3.2 million, primarily related to changes in accumulated net unrealized investment gains of $3.0 million. Policyholder account balances decreased $1.2 million largely due to annuity payments. Other liabilities decreased $0.2 million, due to reductions in operating expense accruals of $1.9 million, largely offset by an operating lease liability from the adoption of ASU No. 2016-02, Leases (Topic 842) in the amount of $1.7 million.
At June 30, 2022, total equity decreased to $134.9 million from $172.9 million at December 31, 2021. This decrease in equity of $38.0 million was attributable to decreases in other comprehensive loss of $30.0 million related to market declines in fixed maturities net of tax and in retained earnings of $8.0 million due to net loss.
Liquidity and Capital Resources
Our principal sources of funds are from premium revenues, commission revenues, net investment income and proceeds from the sale or maturity of investments and net borrowings. The Company’s primary uses of funds are for payment of life, annuity and health claim benefits, contract holder withdrawals on assumed annuity contracts, new business acquisition costs for our insurance operations (i.e., commissions, underwriting and issue costs), cost of sales for Agency operations (i.e., agent compensation, purchased lead and lead generation costs), operating costs and expenses and purchases of investments. Our investment portfolio is structured to provide funds periodically over time, through net investment income and maturities, for the payment of policy benefits and contract holder withdrawals.
Under our commission financing arrangement with Hannover Life, Fidelity Life is able to pay level annual commissions instead of first year only commissions to Efinancial for sales of RAPIDecision® Life policies and Hannover Life advances to Efinancial amounts approximately equal to first year only commissions for sales of those policies. This arrangement reduces Fidelity Life’s surplus strain associated with issuing RAPIDecision® Life business while helping to provide liquidity for Efinancial through the receipt of larger first year only commissions. In the first quarter of 2021, the Company ceased new advances on this financing arrangement. On March 31, 2022, Efinancial entered into a new commission financing arrangement and is taking new advances on this financing arrangement. As of June 30, 2022 and December 31, 2021, we had net advances of $27.8 million and $21.9 million, respectively, under this arrangement.
We are a member of the Federal Home Loan Bank of Chicago (the “FHLBC”). As a member, we are able to borrow on a collateralized basis from the FHLBC. We own FHLBC common stock with a book value of $0.1 million, The Company's ability to borrow under this facility is subject to the FHLBC's discretion and requires the availability of qualifying assets, Interest on borrowed funds is charged at variable rates established from time to time by the FHLBC based on the interest rate option selected at the time of the borrowing. There have been no borrowings from the FHLBC during 2022 and 2021.
Cash Flows
For the six months ended June 30, 2022, the Company had a net decrease in cash of $0.7 million compared to a net decrease of $16.4 million for the six months ended June 30, 2021.
The current year decrease in cash flows from operating activities is primarily due to timing related to reinsurance recoverables, partially offset by increases in policy liabilities.
Cash flows from investing activities mainly includes our fixed maturities, mortgage loans, and equity holdings. Period to period, the cash flows associated with the changes in these portfolios will vary between cash sources and cash uses depending on the need for cash or the excess of cash from operating activities, as well as portfolio trading due to investment market conditions. In the first six months of 2022 cash of $5.1 million was provided and includes net sales and maturities of $8.2 million of invested assets, partially offset by $3.1 million of capitalized software.
Cash flows from financing activities increased $3.3 million which includes $5.9 million, net proceeds from our commission financing program, partially offset by $2.6 million in cash withdrawals, net of deposits, by contract holders of annuities that were primarily written in the late 1980s.
The following table summarizes our cash flows for the six months ended June 30, 2022 and 2021:
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Six Months Ended June 30, |
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2022 |
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2021 |
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(dollars in thousands) |
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Consolidated Summary of Cash Flows |
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Net cash (used) provided by operating activities |
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$ |
(9,099 |
) |
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$ |
(7,759 |
) |
Net cash provided (used) by investing activities |
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5,082 |
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|
(1,951 |
) |
Net cash provided (used) by financing activities |
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3,318 |
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(6,670 |
) |
Net (decrease) increase in cash, cash equivalents and restricted cash |
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$ |
(699 |
) |
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$ |
(16,380 |
) |
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Recent Accounting Pronouncements
All applicable adopted accounting pronouncements have been reflected in our Interim Condensed Consolidated Financial Statements as of and for the six months ended June 30, 2022. See “Note 1 – Summary of Significant Accounting Policies” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(d) and 15d-15(d) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectives of Controls and Procedures
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of control procedures. The objectives of internal control include providing management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, and that transactions are executed in accordance with management’s authorization and recorded properly to permit the preparation of consolidated financial statements in conformity with GAAP.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
We are, from time to time, involved in various legal proceedings in the ordinary course of business. While it is not possible to forecast the outcome of such legal proceedings, in light of existing insurance, reinsurance, and established reserves, we believe that there is no individual case pending that is likely to have a material adverse effect on our financial condition or results of operations.
Item 1A. Risk Factors
Not applicable to smaller reporting companies.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Use of IPO Proceeds
The Company completed its IPO on August 7, 2019, pursuant to a Form S-1 declared effective by the SEC on June 20, 2019 (File No. 333-231952). Below are further details of the use of the IPO proceeds: Vericity, Inc. registered the sale of a maximum of 20,125,000 shares, of which 14,875,000 were sold in the IPO. Raymond James served as managing underwriter in the IPO.
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Item 3. Default upon Senior Securities
None
Item 4. Mine Safety Disclosures
None
Item 5. Other Information
None
35
Item 6. Exhibits
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31.1 |
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31.2 |
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32.1 |
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32.2 |
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101.INS |
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Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document. |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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104 |
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Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Vericity, Inc. |
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Date: August 15, 2022 |
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By: |
/s/ Chris S. Kim |
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Chris S. Kim |
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Executive Vice President, Chief Financial Officer and Treasurer |
37