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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO

Commission File Number 001-38945

 

VERICITY, INC.

(Exact name of Registrant as specified in its Charter)

 

 

Delaware

 

46-2348863

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1350 E Touhy Avenue, Suite 205W, Des Plaines, Illinois

 

60018

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (312) 288-0073

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol

 

Name on each exchange on which registered

Common Stock, Par Value $0.001 per share

 

VERY

 

NASDAQ Capital Market

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. YesNo

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). YesNo

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

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

 

 

 

 

 

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 November 10, 2023 was 14,875,000.

 

 


Table of Contents

 

 

 

Page

 

 

 

 

 

PART I –

 

Financial Information

 

 

1

Item 1.

 

Financial Statements (Unaudited) (at September 30, 2023 and December 31, 2022 and for the three and nine months ended September 30, 2023 and 2022

 

1

 

 

 

 

 

 

 

Interim Condensed Consolidated Balance Sheets

 

1

 

 

Interim Condensed Consolidated Statements of Operations

 

2

 

 

Interim Condensed Consolidated Statements of Comprehensive (Loss) Income

 

3

 

 

Interim Condensed Consolidated Statements of Changes in Shareholders' Equity

 

4

 

 

Interim Condensed Consolidated Statements of Cash Flows

 

5

 

 

Notes to the Interim Condensed Consolidated Financial Statements

 

6

 

 

 

Note 1 – Summary of Significant Accounting Policies

 

6

 

 

 

Note 2 – Investments

 

7

 

 

 

Note 3 – Policy Liabilities

 

13

 

 

 

Note 4 – Reinsurance

 

14

 

 

 

Note 5 – Closed Block

 

14

 

 

 

Note 6 – Commitments and Contingencies

 

16

 

 

 

Note 7 – Assets and Liabilities Measured at Fair Value

 

17

 

 

 

Note 8 – Long and Short-term Debt

 

20

 

 

 

Note 9– Accumulated Other Comprehensive (Loss) Income

 

22

 

 

 

Note 10 – Business Segments

 

22

 

 

 

Note 11 – Subsequent Events

 

24

 

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25

Item 4.

 

Controls and Procedures

 

38

 

 

 

 

PART II –

 

Other Information

 

38

Item 1.

 

Legal Proceedings

 

38

Item 1A.

 

Risk Factors

 

39

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

39

Item 3.

 

Default upon Senior Securities

 

39

Item 4.

 

Mine Safety Disclosures

 

39

Item 5.

 

Other Information

 

39

Item 6.

 

Exhibits

 

40

Signature

 

 

 

41

 

 


 

Part 1. Financial Information

Item I. Financial Statements

Vericity, Inc.

Interim Condensed Consolidated Balance Sheets

(dollars in thousands)

 

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

(Unaudited)

 

 

(Audited)

 

Assets

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

Fixed maturities – available-for-sale – at fair value (amortized cost; $334,600
   and $
331,946, net of allowances for credit losses of $21 and $0)

 

$

295,524

 

 

$

298,138

 

Mortgage loans (net of allowances for credit losses of $571 and $83)

 

 

42,005

 

 

 

45,270

 

Policyholder loans

 

 

7,062

 

 

 

6,699

 

Other invested assets

 

 

2,803

 

 

 

3,693

 

Total investments

 

 

347,394

 

 

 

353,800

 

Cash, cash equivalents and restricted cash

 

 

7,625

 

 

 

9,776

 

Accrued investment income

 

 

4,064

 

 

 

3,006

 

Reinsurance recoverables (net of allowances for credit losses of $126 and $126)

 

 

230,585

 

 

 

214,862

 

Deferred policy acquisition costs

 

 

88,171

 

 

 

90,189

 

Commissions and agent balances (net of allowances for credit losses of $337 and $338)

 

 

50,415

 

 

 

34,766

 

Intangible assets

 

 

1,635

 

 

 

1,635

 

Deferred income tax assets, net

 

 

32,003

 

 

 

28,437

 

Other assets

 

 

34,293

 

 

 

33,607

 

Total assets

 

 

796,185

 

 

 

770,078

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Future policy benefits and claims

 

 

490,506

 

 

 

453,763

 

Policyholder account balances

 

 

72,245

 

 

 

77,443

 

Other policyholder liabilities

 

 

41,012

 

 

 

47,486

 

Policy dividend obligations

 

 

9,544

 

 

 

9,515

 

Reinsurance liabilities and payables

 

 

6,959

 

 

 

6,246

 

Long-term debt

 

 

37,311

 

 

 

30,213

 

Short-term debt

 

 

9,172

 

 

 

6,976

 

Other liabilities

 

 

30,113

 

 

 

27,093

 

Total liabilities

 

 

696,862

 

 

 

658,735

 

Commitments and Contingencies (Note 6)

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

Common stock, $.001 par value, 30,000,000 shares authorized, 14,875,000 shares, issued and outstanding

 

 

15

 

 

 

15

 

Additional paid-in capital

 

 

39,840

 

 

 

39,840

 

Retained earnings

 

 

93,596

 

 

 

101,660

 

Accumulated other comprehensive (loss) income

 

 

(34,128

)

 

 

(30,172

)

Total shareholders' equity

 

 

99,323

 

 

 

111,343

 

Total liabilities and shareholders' equity

 

$

796,185

 

 

$

770,078

 

 

See notes to interim condensed consolidated financial statements

1


 

Vericity, Inc.

Interim Condensed Consolidated Statements of Operations

(dollars in thousands, except earnings per share)

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Net insurance premiums

 

 

$

23,434

 

 

$

24,468

 

 

$

71,515

 

 

$

73,474

 

Net investment income

 

 

 

4,010

 

 

 

4,126

 

 

 

12,846

 

 

 

11,390

 

Net (losses) gains on investments

 

 

 

(883

)

 

 

(1,570

)

 

 

(1,759

)

 

 

89

 

Earned commissions

 

 

 

15,354

 

 

 

11,267

 

 

 

45,535

 

 

 

32,792

 

Insurance lead sales

 

 

 

1,026

 

 

 

1,259

 

 

 

3,052

 

 

 

3,773

 

Other income

 

 

 

720

 

 

 

144

 

 

 

1,831

 

 

 

419

 

Total revenues

 

 

 

43,661

 

 

 

39,694

 

 

 

133,020

 

 

 

121,937

 

Benefits and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Life, annuity, and health claim benefits

 

 

 

22,583

 

 

 

17,505

 

 

 

51,567

 

 

 

47,622

 

Interest credited to policyholder account balances

 

 

 

627

 

 

 

646

 

 

 

2,000

 

 

 

2,100

 

Operating costs and expenses

 

 

 

26,755

 

 

 

23,133

 

 

 

78,239

 

 

 

72,859

 

Amortization of deferred policy acquisition costs

 

 

 

3,283

 

 

 

4,086

 

 

 

9,913

 

 

 

13,237

 

Total benefits and expenses

 

 

 

53,248

 

 

 

45,370

 

 

 

141,719

 

 

 

135,818

 

Income (loss) before income tax

 

 

 

(9,587

)

 

 

(5,676

)

 

 

(8,699

)

 

 

(13,881

)

Income tax expense (benefit)

 

 

 

(1,612

)

 

 

(591

)

 

 

(822

)

 

 

(785

)

Net income (loss)

 

 

$

(7,975

)

 

$

(5,085

)

 

$

(7,877

)

 

$

(13,096

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share for the periods

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

Weighted average shares outstanding, basic and diluted

 

 

 

14,875,000

 

 

 

14,875,000

 

 

 

14,875,000

 

 

 

14,875,000

 

Basic earnings per share

 

 

$

(0.54

)

 

$

(0.34

)

 

$

(0.53

)

 

$

(0.88

)

Diluted earnings per share

 

 

$

(0.54

)

 

$

(0.34

)

 

$

(0.53

)

 

$

(0.88

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to interim condensed consolidated financial statements

2


 

Vericity, Inc.

Interim Condensed Consolidated Statements of Comprehensive (Loss) Income

(dollars in thousands)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Net income (loss)

 

$

(7,975

)

 

$

(5,085

)

 

$

(7,877

)

 

$

(13,096

)

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized (losses) gains

 

 

(8,082

)

 

 

(10,964

)

 

 

(3,956

)

 

 

(40,993

)

Total other comprehensive (loss) income

 

 

(8,082

)

 

 

(10,964

)

 

 

(3,956

)

 

 

(40,993

)

Total comprehensive (loss) income

 

$

(16,057

)

 

$

(16,049

)

 

$

(11,833

)

 

$

(54,089

)

 

See notes to interim condensed consolidated financial statements

3


 

Vericity, Inc.

Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity

(dollars in thousands)

 

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Common stock

 

 

 

 

 

 

 

 

 

 

 

 

Balance – beginning of period

 

$

15

 

 

$

15

 

 

$

15

 

 

$

15

 

Balance – end of period

 

$

15

 

 

$

15

 

 

$

15

 

 

$

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional paid-in capital

 

 

 

 

 

 

 

 

 

 

 

 

Balance – beginning of period

 

$

39,840

 

 

$

39,840

 

 

$

39,840

 

 

$

39,840

 

Balance – end of period

 

$

39,840

 

 

$

39,840

 

 

$

39,840

 

 

$

39,840

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

 

 

 

 

 

 

 

 

 

 

Balance – beginning of period

 

$

101,571

 

 

$

114,109

 

 

$

101,660

 

 

$

122,120

 

Cumulative effect adjustment from changes in accounting guidance, net of tax

 

 

 

 

 

 

 

 

(187

)

 

 

 

Balance after adjustments - beginning of period

 

$

101,571

 

 

$

114,109

 

 

$

101,473

 

 

$

122,120

 

Net income (loss)

 

 

(7,975

)

 

 

(5,085

)

 

 

(7,877

)

 

 

(13,096

)

Balance – end of period

 

$

93,596

 

 

$

109,024

 

 

$

93,596

 

 

$

109,024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

Balance – beginning of period

 

$

(26,046

)

 

$

(19,100

)

 

$

(30,172

)

 

$

10,929

 

Other comprehensive income (loss)

 

 

(8,082

)

 

 

(10,964

)

 

 

(3,956

)

 

 

(40,993

)

Balance – end of period

 

$

(34,128

)

 

$

(30,064

)

 

$

(34,128

)

 

$

(30,064

)

Total shareholders' equity

 

$

99,323

 

 

$

118,815

 

 

$

99,323

 

 

$

118,815

 

 

See notes to interim condensed consolidated financial statements

4


 

Vericity, Inc.

Interim Condensed Consolidated Statements of Cash Flows

(dollars in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

 

(Unaudited)

 

Cash flows from operating activities

 

 

 

 

 

 

Net income (loss)

 

$

(7,877

)

 

$

(13,096

)

Adjustments to reconcile net (loss) income to net cash (used) provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization and other non-cash items

 

 

3,899

 

 

 

3,187

 

Interest credited to policyholder account balances

 

 

2,000

 

 

 

2,100

 

Deferred income tax

 

 

(2,673

)

 

 

(3,908

)

Net investment losses (gains)

 

 

1,759

 

 

 

(89

)

Interest expense

 

 

1,775

 

 

 

931

 

Change in:

 

 

 

 

 

 

Accrued investment income

 

 

(1,058

)

 

 

(957

)

Reinsurance recoverables, net

 

 

(15,723

)

 

 

(27,932

)

Deferred policy acquisition costs

 

 

2,018

 

 

 

3,529

 

Commissions and agent balances

 

 

(15,649

)

 

 

(4,719

)

Other assets

 

 

1,638

 

 

 

(2,407

)

Insurance liabilities

 

 

30,766

 

 

 

30,687

 

Other liabilities

 

 

1,002

 

 

 

5,580

 

Net cash (used) provided by operating activities

 

 

1,877

 

 

 

(7,094

)

Cash flows from investing activities

 

 

 

 

 

 

Sales, maturities and repayments of:

 

 

 

 

 

 

Fixed maturities

 

 

39,190

 

 

 

33,176

 

Mortgage loans

 

 

3,796

 

 

 

4,515

 

Purchases of:

 

 

 

 

 

 

Fixed maturities

 

 

(42,018

)

 

 

(34,685

)

Mortgage loans

 

 

(964

)

 

 

(3,965

)

Other invested assets

 

 

(190

)

 

 

(724

)

Change in policyholder loans, net

 

 

(363

)

 

 

(289

)

Other, net

 

 

(3,934

)

 

 

(4,156

)

Net cash (used) provided by investing activities

 

 

(4,483

)

 

 

(6,128

)

Cash flows from financing activities

 

 

 

 

 

 

Debt issued

 

 

35,321

 

 

 

13,600

 

Debt repaid

 

 

(27,803

)

 

 

(6,127

)

Deposits to policyholder account balances

 

 

387

 

 

 

294

 

Withdrawals from policyholder account balances

 

 

(7,450

)

 

 

(4,241

)

Net cash (used) provided by financing activities

 

 

455

 

 

 

3,526

 

Net (decrease) in cash, cash equivalents and restricted cash

 

 

(2,151

)

 

 

(9,696

)

Cash, cash equivalents and restricted cash – beginning of period

 

 

9,776

 

 

 

22,399

 

Cash, cash equivalents and restricted cash – end of period

 

$

7,625

 

 

$

12,703

 

Supplemental cash flow information

 

 

 

 

 

 

Non-cash transactions:

 

$

 

 

$

 

 

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 14,875,000 shares of its common stock at a price of $10.00 per share (the IPO). The IPO was conducted in connection with the conversion of Members Mutual Holding Company from mutual to stock form and the acquisition by the Company of all of the capital stock of Members following its conversion to stock form after its plan of conversion and amended and restated articles of incorporation were approved at a special meeting of eligible members on August 6, 2019 (the Conversion). As a result of the Conversion, the Company became the holding company for converted Members Mutual Holding Company and its indirect subsidiaries, including Fidelity Life Association (Fidelity Life) and Efinancial, LLC (Efinancial).

On October 3, 2023, the Company, announced that it entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among the Company, iA American Holdings Inc. (“iA” or “Parent”), Long Grove Acquisition Corp., a wholly owned subsidiary of Parent (“Merger Sub”), and, solely for purposes of Section 6.03 and Article IX thereof, iA Financial Corporation, Inc. (“Guarantor”).

On the terms and subject to the conditions of the Merger Agreement, at the closing, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving entity, which will become a wholly-owned subsidiary of Parent. The time that the Merger becomes effective is referred to as the “Effective Time.” The Merger was unanimously approved by the Company’s board of directors.

Following execution of the Merger Agreement, Apex Holdco L.P. (the “Consenting Stockholder” or “Apex”) executed and delivered to the Company a written consent (the “Stockholder Written Consent”), adopting the Merger Agreement and the transactions contemplated thereby, including the Merger.

As a result of the execution and delivery of the Stockholder Written Consent, the holders of at least a majority of the outstanding shares of Common Stock have adopted the Merger Agreement. No further approval of the stockholders of the Company is required to adopt the Merger Agreement.

As a result of the Merger, each share of Common Stock outstanding immediately prior to the Effective Time (subject to certain exceptions, including shares of Common Stock owned by stockholders of the Company who have not voted in favor of the adoption of the Merger Agreement and have properly exercised appraisal rights in accordance with Section 262 of the General Corporation Law of the State of Delaware) will, at the Effective Time, automatically be converted into the right to receive $11.43 in cash, without interest and subject to applicable withholding taxes (the “Merger Consideration”). The aggregate equity value of the Common Stock acquired by Parent will be approximately $170 million.

If the Merger is consummated, the Company’s Common Stock will be delisted from The Nasdaq Capital Market and deregistered under the Securities Exchange Act of 1934, as amended. The completion of the Merger is subject to satisfaction or waiver of certain closing conditions, including: (i) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR”), and receipt of certain regulatory approvals; (ii) there being no law or injunction prohibiting consummation of the Merger; (iii) subject to specified materiality standards, the accuracy of the representations and warranties of the other party; and (iv) compliance by the other party in all material respects with its covenants. Parent’s and Merger Sub’s obligations are also conditioned upon the absence of a material adverse effect on the Company and the absence of any burdensome condition (as defined in the Merger Agreement) imposed by any regulators as part of the regulatory approval process.

On October 3, 2023, the Company issued a Form 8-K and press release announcing the execution of the Merger Agreement and the Form 8-K is incorporated into this filing by reference. The Merger is expected to close in the first half of 2024.

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 three and nine months ended September 30, 2023 and at September 30, 2022 and December 31, 2022. 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, 2022. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

6


 

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, 2022, 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 June 2016, the FASB issued ASU No. 2016-13, Financial Instruments— Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance requires that Other-Than-Temporary Impairment (OTTI) on a debt security will be recognized as an allowance going forward, such that improvements in expected future cash flows after an impairment will no longer be reflected as a prospective yield adjustment through net investment income, but rather a reversal of the previous impairment and recognized through net gains (losses) on investments. The guidance also requires enhanced disclosures. In March 2022, the FASB issued ASU 2022-02 – Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructuring and Vintage Disclosure. This ASU was issued to eliminate the troubled debt restructuring recognition and measurement guidance for creditors that have adopted the current expected credit loss guidance while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. The Company has assessed the impact of ASU 2016-13 and has established an additional for credit losses on our mortgage portfolio of $237. The tax effected amount of $187 is reflected as a beginning of year equity as a Cumulative effect adjustment from changes in accounting guidance, net of tax. The Company has also assessed fixed maturities - available-for-sale, reinsurance recoverables and commissions and agent balances and determined no additional allowance for credit losses is needed. We also adopted the required disclosures within Note 2 Investments, Note 4 Reinsurance, Note 9 Accumulated Other Comprehensive Income and Note 10 Business Segments. Due to the adoption of the measurement of credit losses on financial instruments accounting standard, prior change in valuation allowance is now presented as a change in allowance for credit losses.

 

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.

7


 

Fixed Maturities

The amortized cost, gross unrealized gains, gross unrealized losses, fair value, and net of allowances for credit losses are included in accumulated other comprehensive income (AOCI) of fixed maturities available-for-sale are as follows:

 

 

 

September 30, 2023

Fixed maturities

 

Amortized
Cost

 

 

Unrealized
Gains

 

 

Unrealized
Losses

 

 

Fair
Value

 

 

U.S. government and agencies

 

$

10,206

 

 

$

108

 

 

$

(715

)

 

$

9,599

 

 

U.S. agency mortgage-backed

 

 

7,353

 

 

 

15

 

 

 

(835

)

 

 

6,533

 

 

State and political subdivisions

 

 

76,764

 

 

 

12

 

 

 

(13,437

)

 

 

63,339

 

 

Corporate and miscellaneous

 

 

174,536

 

 

 

664

 

 

 

(19,397

)

 

 

155,803

 

 

Foreign government

 

 

130

 

 

 

 

 

 

(5

)

 

 

125

 

 

Residential mortgage-backed

 

 

7,249

 

 

 

56

 

 

 

(685

)

 

 

6,620

 

 

Commercial mortgage-backed

 

 

21,801

 

 

 

6

 

 

 

(2,152

)

 

 

19,655

 

 

Asset-backed

 

 

36,561

 

 

 

71

 

 

 

(2,782

)

 

 

33,850

 

 

Total fixed maturities

 

$

334,600

 

 

$

932

 

 

$

(40,008

)

 

$

295,524

 

 

 

 

 

December 31, 2022

 

Fixed maturities

 

Amortized
Cost

 

 

Unrealized
Gains

 

 

Unrealized
Losses

 

 

Fair
Value

 

 

OTTI
Losses
(1)

 

U.S. government and agencies

 

$

9,258

 

 

$

349

 

 

$

(501

)

 

$

9,106

 

 

$

 

U.S. agency mortgage-backed

 

 

9,429

 

 

 

63

 

 

 

(614

)

 

 

8,878

 

 

 

 

State and political subdivisions

 

 

68,213

 

 

 

26

 

 

 

(12,015

)

 

 

56,224

 

 

 

 

Corporate and miscellaneous

 

 

171,283

 

 

 

1,473

 

 

 

(16,275

)

 

 

156,481

 

 

 

 

Foreign government

 

 

130

 

 

 

1

 

 

 

 

 

 

131

 

 

 

 

Residential mortgage-backed

 

 

4,912

 

 

 

140

 

 

 

(622

)

 

 

4,430

 

 

 

(709

)

Commercial mortgage-backed

 

 

21,374

 

 

 

2

 

 

 

(1,914

)

 

 

19,462

 

 

 

 

Asset-backed

 

 

47,347

 

 

 

5

 

 

 

(3,926

)

 

 

43,426

 

 

 

 

Total fixed maturities

 

$

331,946

 

 

$

2,059

 

 

$

(35,867

)

 

$

298,138

 

 

$

(709

)

(1) Due to the adoption of the measurement of credit losses on financial instruments accounting standard, OTTI is not presented in respect in the table above.

 

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. The amortized cost and fair value of fixed maturities available-for-sale by contractual maturity, are presented in the following table:

 

 

 

September 30, 2023

 

 

 

Amortized
Cost

 

 

Fair
Value

 

Due in one year or less

 

$

4,150

 

 

$

4,122

 

Due after one year through five years

 

 

39,652

 

 

 

37,578

 

Due after five years through ten years

 

 

73,284

 

 

 

68,163

 

Due after ten years

 

 

144,550

 

 

 

119,003

 

Securities not due at a single maturity date — primarily mortgage and asset-backed

 

 

72,964

 

 

 

66,658

 

Total fixed maturities

 

$

334,600

 

 

$

295,524

 

 

8


 

Fixed maturities with a carrying value of $2,486 and $2,680 were on deposit with governmental authorities, as required by law at September 30, 2023 and December 31, 2022, respectively.

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 96.2% and 95.1% of the Company’s total fixed maturities portfolio at September 30, 2023 and December 31, 2022, respectively.

At September 30, 2023 and December 31, 2022, the Company had commitments to make investments in available-for-sale securities in the amount of $0 and $1,290, respectively.

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 35 such investment instruments with ownership shares ranging from 0.6% to 30.0% of the trust at September 30, 2023. The Company owns a share of 319 mortgage loans with an average loan balance of $133 and a maximum exposure related to any single loan of $600. Mortgage loan holdings are diversified by geography and property type as follows:

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

Gross Carrying
Value

 

 

% of Total

 

 

Gross Carrying
Value

 

 

% of Total

 

Property Type:

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

12,997

 

 

 

30.5

%

 

$

13,866

 

 

 

30.6

%

Office

 

 

11,276

 

 

 

26.5

%

 

 

11,115

 

 

 

24.5

%

Industrial

 

 

7,682

 

 

 

18.0

%

 

 

8,138

 

 

 

17.9

%

Mixed use

 

 

4,860

 

 

 

11.4

%

 

 

5,249

 

 

 

11.6

%

Apartments

 

 

2,100

 

 

 

4.9

%

 

 

2,796

 

 

 

6.2

%

Medical office

 

 

2,546

 

 

 

6.0

%

 

 

3,053

 

 

 

6.7

%

Other

 

 

1,115

 

 

 

2.7

%

 

 

1,136

 

 

 

2.5

%

Gross carrying value of mortgage loans

 

 

42,576

 

 

 

100.0

%

 

 

45,353

 

 

 

100.0

%

Credit loss allowance (1)

 

 

(571

)

 

 

 

 

 

(83

)

 

 

 

Net carrying value of mortgage loans

 

$

42,005

 

 

 

 

 

$

45,270

 

 

 

 

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

Gross Carrying
Value

 

 

% of Total

 

 

Gross Carrying
Value

 

 

% of Total

 

U.S. Region:

 

 

 

 

 

 

 

 

 

 

 

 

West South Central

 

$

10,779

 

 

 

25.2

%

 

$

11,608

 

 

 

25.6

%

East North Central

 

 

12,457

 

 

 

29.3

%

 

 

12,320

 

 

 

27.2

%

South Atlantic

 

 

8,153

 

 

 

19.1

%

 

 

8,815

 

 

 

19.4

%

West North Central

 

 

2,477

 

 

 

5.8

%

 

 

2,871

 

 

 

6.3

%

Mountain

 

 

2,626

 

 

 

6.2

%

 

 

2,824

 

 

 

6.2

%

Middle Atlantic

 

 

2,072

 

 

 

4.9

%

 

 

2,310

 

 

 

5.1

%

East South Central

 

 

3,558

 

 

 

8.4

%

 

 

3,661

 

 

 

8.1

%

New England

 

 

 

 

 

0.0

%

 

 

34

 

 

 

0.1

%

Pacific

 

 

454

 

 

 

1.1

%

 

 

910

 

 

 

2.0

%

Gross carrying value of mortgage loans

 

 

42,576

 

 

 

100.0

%

 

 

45,353

 

 

 

100.0

%

Credit loss allowance (1)

 

 

(571

)

 

 

 

 

 

(83

)

 

 

 

Net carrying value of mortgage loans

 

$

42,005

 

 

 

 

 

$

45,270

 

 

 

 

(1) Due to the adoption of the measurement of credit losses on financial instruments accounting standard, prior valuation allowance is now presented as an allowance for expected credit losses.

 

During the nine months ended September 30, 2023 and September 30, 2022, $964 and $3,965 of new mortgage loans were purchased, respectively, which did not include second lien mortgage loans. There were no taxes, assessments, or any amounts advanced that were not included in the mortgage loan balances at September 30, 2023 and December 31, 2022. At September 30, 2023 and December 31, 2022, the Company had 2 and 3 mortgage loans with a total carrying value of $358 and $692 that were in a restructured status, respectively. There was 1 impairment for mortgage loans during the three months ended September 30, 2023 and zero impairment of mortgage loans during the three months ended September 30, 2022 and December 31, 2022.

9


 

The changes in the allowances for credit losses (includes $237 related to adoption of ASU 2016-13) for commercial mortgage loans were as follows:

 

 

 

Nine Months Ended September 30, 2023

 

 

Year Ended December 31, 2022

 

Beginning balance

 

$

83

 

 

$

69

 

Net increase in allowances for credit losses related to change in accounting standards (See Note 1)

 

 

237

 

 

 

 

Net (decrease) increase in allowances for credit losses

 

 

251

 

 

 

14

 

Ending balance

 

$

571

 

 

$

83

 

 

At September 30, 2023 and December 31, 2022, the Company had no mortgage loans that were on non-accrual status.

At September 30, 2023 and December 31, 2022, the Company had commitments to make investments in mortgage loans in the amount of $3,023 and $2,575, respectively.

Net Investment Income

The sources of net investment income are as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Income from:

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities

 

$

3,684

 

 

$

3,763

 

 

$

11,690

 

 

$

10,385

 

Policyholder loans

 

 

88

 

 

 

90

 

 

 

268

 

 

 

272

 

Mortgage loans

 

 

509

 

 

 

594

 

 

 

1,815

 

 

 

1,830

 

Cash, cash equivalents and restricted cash

 

 

47

 

 

 

32

 

 

 

110

 

 

 

34

 

Gross investment income

 

 

4,328

 

 

 

4,479

 

 

 

13,883

 

 

 

12,521

 

Investment expenses

 

 

(318

)

 

 

(353

)

 

 

(1,037

)

 

 

(1,131

)

Net investment income

 

$

4,010

 

 

$

4,126

 

 

$

12,846

 

 

$

11,390

 

 

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 (Losses) Gains

The sources of net investment gains (losses) are as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Investment (losses) gains from sales:

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities

 

$

(373

)

 

$

(61

)

 

$

(462

)

 

$

(191

)

Mortgage loans

 

 

56

 

 

 

(134

)

 

 

56

 

 

 

(80

)

Gains and losses from sales

 

 

(317

)

 

 

(195

)

 

 

(406

)

 

 

(271

)

Valuation change of other invested assets - (decline) appreciation:

 

 

(271

)

 

 

(1,087

)

 

 

(1,080

)

 

 

779

 

Change in allowance for credit losses (1)

 

 

(295

)

 

 

(288

)

 

 

(273

)

 

 

(419

)

Total net gains (losses) on investments

 

$

(883

)

 

$

(1,570

)

 

$

(1,759

)

 

$

89

 

(1) Due to the adoption of the measurement of credit losses on financial instruments accounting standard, prior change in valuation allowance is now presented as a change in allowance for credit losses.

Change in Allowance for Credit Losses

The Company regularly reviews its fixed income portfolio to identify and evaluate whether a security may require a credit loss allowance. For each fixed income security in an unrealized loss position, the Company assesses whether management with the appropriate authority has made the decision to sell or whether it is more likely than not the Company will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes. If a security meets either of these criteria, any existing credit loss allowance would be written-off against the amortized cost basis of the asset along with any remaining unrealized losses, with incremental losses recorded in earnings. 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 have a credit loss.

10


 

Significant judgment is required in the determination of whether a credit loss has occurred for a security. The Company has developed a consistent methodology and has identified significant inputs for determining whether a credit loss has occurred. Some of the factors considered in evaluating whether a decline in fair value is a credit loss 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.

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 impaired for credit reasons and a credit loss is recognized in earnings. The non-credit component, determined as the difference between the adjusted amortized cost basis and fair value, is recognized a credit loss in other comprehensive (loss) income.

The measurement of credit losses for available-for-sale fixed income securities measured at fair value is not affected except that credit losses recognized are limited to the amount by which fair value is below amortized cost and the credit loss adjustment is recognized through an allowance which may change over time but once recorded cannot subsequently be reduced to an amount below zero. Previously these credit loss adjustments were recorded as OTTI and were not reversed once recorded.

A roll-forward of the cumulative credit losses on fixed maturities are as follows:

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Beginning balance of credit losses on fixed maturities

 

$

1,263

 

 

$

837

 

Additional credit loss not previously recognized (1)

 

 

 

 

 

394

 

Additional credit loss that was previously recognized (1)

 

 

21

 

 

 

48

 

Reduction of credit losses related to securities sold during period

 

 

 

 

 

(16

)

Ending balance of credit losses on fixed maturities

 

$

1,284

 

 

$

1,263

 

(1) Due to the adoption of the measurement of credit losses on financial instruments accounting standard, additional credit losses for OTTI is now presented as an additional credit loss.

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

 

September 30, 2023

 

Estimated
Fair Value

 

 

Gross
Unrealized
Losses

 

 

Estimated
Fair Value

 

 

Gross
Unrealized
Losses

 

 

Estimated
Fair Value

 

 

Gross
Unrealized
Losses

 

Fixed maturities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

$

977

 

 

$

(22

)

 

$

2,527

 

 

$

(693

)

 

$

3,504

 

 

$

(715

)

U.S. agency mortgage-backed

 

 

780

 

 

 

(23

)

 

 

4,712

 

 

 

(812

)

 

 

5,492

 

 

 

(835

)

State and political subdivisions

 

 

19,634

 

 

 

(1,108

)

 

 

42,635

 

 

 

(12,329

)

 

 

62,269

 

 

 

(13,437

)

Corporate and miscellaneous

 

 

46,767

 

 

 

(3,546

)

 

 

64,833

 

 

 

(15,851

)

 

 

111,600

 

 

 

(19,397

)

Foreign Government

 

 

125

 

 

 

(5

)

 

 

 

 

 

 

 

 

125

 

 

 

(5

)

Residential mortgage-backed

 

 

3,009

 

 

 

(69

)

 

 

2,786

 

 

 

(616

)

 

 

5,795

 

 

 

(685

)

Commercial mortgage-backed

 

 

1,711

 

 

 

(61

)

 

 

17,499

 

 

 

(2,091

)

 

 

19,210

 

 

 

(2,152

)

Asset-backed

 

 

5,262

 

 

 

(417

)

 

 

26,143

 

 

 

(2,365

)

 

 

31,405

 

 

 

(2,782

)

Total fixed maturities

 

$

78,265

 

 

$

(5,251

)

 

$

161,135

 

 

$

(34,757

)

 

$

239,400

 

 

$

(40,008

)

 

11


 

 

 

 

12 months or less

 

 

Longer than 12 months

 

 

Total

 

December 31, 2022

 

Estimated
Fair Value

 

 

Gross
Unrealized
Losses

 

 

Estimated
Fair Value

 

 

Gross
Unrealized
Losses

 

 

Estimated
Fair Value

 

 

Gross
Unrealized
Losses

 

Fixed maturities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency mortgage-backed

 

$

2,722

 

 

$

(501

)

 

$

 

 

$

 

 

$

2,722

 

 

$

(501

)

State and political subdivisions

 

 

5,297

 

 

 

(578

)

 

 

216

 

 

 

(36

)

 

 

5,513

 

 

 

(614

)

Corporate and miscellaneous

 

 

38,252

 

 

 

(7,036

)

 

 

15,057

 

 

 

(4,979

)

 

 

53,309

 

 

 

(12,015

)

Foreign government

 

 

94,461

 

 

 

(13,479

)

 

 

8,322

 

 

 

(2,796

)

 

 

102,783

 

 

 

(16,275

)

Residential mortgage-backed

 

 

3,286

 

 

 

(554

)

 

 

344

 

 

 

(68

)

 

 

3,630

 

 

 

(622

)

Commercial mortgage-backed

 

 

16,218

 

 

 

(1,611

)

 

 

2,655

 

 

 

(303

)

 

 

18,873

 

 

 

(1,914

)

Asset-backed

 

 

20,465

 

 

 

(1,726

)

 

 

21,069

 

 

 

(2,200

)

 

 

41,534

 

 

 

(3,926

)

Total fixed maturities

 

$

180,701

 

 

$

(25,485

)

 

$

47,663

 

 

$

(10,382

)

 

$

228,364

 

 

$

(35,867

)

 

The indicated gross unrealized losses in all fixed maturity categories decreased to $40,008 from $35,867 at September 30, 2023 and December 31, 2022, respectively. Based on the Company’s current evaluation of its fixed maturities in an unrealized loss position, in accordance with our impairment policy and the Company’s current intentions to hold these securities, the Company concluded that these securities do not have credit losses.

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 September 30, 2023.

 

 

 

Unrealized Losses 12 months or less

 

 

 

Gross Unrealized Losses

 

 

Impairment is
Less than
10% of
Amortized
Cost

 

 

Impairment
is Between
10% and
20% of
Amortized
Cost

 

 

Impairment
is Greater
than 20% of
Amortized
Cost

 

 

Percent
Investment
Grade

 

Fixed maturities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

$

(22

)

 

$

(22

)

 

$

 

 

$

 

 

 

100

%

U.S. agency mortgage-backed

 

 

(23

)

 

 

(23

)

 

 

 

 

 

 

 

 

100

%

State and political subdivisions

 

 

(1,108

)

 

 

(948

)

 

 

(160

)

 

 

 

 

 

100

%

Corporate and miscellaneous

 

 

(3,546

)

 

 

(1,607

)

 

 

(960

)

 

 

(979

)

 

 

84

%

Foreign Government

 

 

(5

)

 

 

(5

)

 

 

 

 

 

 

 

 

100

%

Residential mortgage-backed

 

 

(69

)

 

 

(69

)

 

 

 

 

 

 

 

 

75

%

Commercial mortgage-backed

 

 

(61

)

 

 

(51

)

 

 

(10

)

 

 

 

 

 

100

%

Asset-backed

 

 

(417

)

 

 

(271

)

 

 

(85

)

 

 

(61

)

 

 

100

%

Gross unrealized losses

 

$

(5,251

)

 

$

(2,996

)

 

$

(1,215

)

 

$

(1,040

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total number of fixed maturities

 

300

 

 

 

257

 

 

 

33

 

 

 

10

 

 

 

 

 

12


 

 

 

 

Unrealized Losses greater than 12 months

 

 

 

Gross Unrealized Losses

 

 

Impairment is
Less than
10% of
Amortized
Cost

 

 

Impairment
is Between
10% and
20% of
Amortized
Cost

 

 

Impairment
is Greater
than 20% of
Amortized
Cost

 

 

Percent
Investment
Grade

 

Fixed maturities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

$

(693

)

 

$

(95

)

 

$

 

 

$

(598

)

 

 

100

%

U.S. agency mortgage-backed

 

 

(812

)

 

 

(44

)

 

 

(752

)

 

 

(16

)

 

 

100

%

State and political subdivisions

 

 

(12,329

)

 

 

(563

)

 

 

(1,822

)

 

 

(9,944

)

 

 

100

%

Corporate and miscellaneous

 

 

(15,851

)

 

 

(835

)

 

 

(3,348

)

 

 

(11,668

)

 

 

87

%

Residential mortgage-backed

 

 

(616

)

 

 

(56

)

 

 

(306

)

 

 

(254

)

 

 

89

%

Commercial mortgage-backed

 

 

(2,091

)

 

 

(487

)

 

 

(1,376

)

 

 

(228

)

 

 

100

%

Asset-backed

 

 

(2,365

)

 

 

(789

)

 

 

(1,172

)

 

 

(404

)

 

 

97

%

Gross unrealized losses

 

$

(34,757

)

 

$

(2,869

)

 

$

(8,776

)

 

$

(23,112

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total number of fixed maturities

 

 

587

 

 

 

145

 

 

 

201

 

 

 

241

 

 

 

 

 

 

 

Investment Grade

 

 

Below Investment Grade

 

 

Total

 

 

 

 

 

 

 

 

 

 

Fixed income securities with unrealized loss position less than or equal to 20% of amortized cost, net (1) (2)

$

15,251

 

 

$

604

 

 

$

15,855

 

Fixed income securities with unrealized loss position greater than 20% of amortized cost, net (3) (4)

 

23,704

 

 

 

449

 

 

 

24,153

 

Total unrealized losses

$

38,955

 

 

$

1,053

 

 

$

40,008

 

 

 

 

 

 

 

 

 

 

(1) Below investment grade fixed income securities include $150 that have been in an unrealized loss position for less than twelve months.

(2) Related to securities with an unrealized loss position less than 20% of amortized cost, net, the degree of which suggests that these securities do not pose a high risk of having credit losses.

(3) Below investment grade fixed income securities include $902 that have been in an unrealized loss position for a period of twelve or more consecutive months.

(4) Evaluated based on factors such as discounted cash flows and the financial condition and near-term and long-term prospects of the issue or issuer and were determined to have adequate resources to fulfill contractual obligations.

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 $12,198 and $13,118 at September 30, 2023 and December 31, 2022, respectively, is computed as the present value of contractually specified future benefits. The amounts included in the policy liability for structured settlements that are life contingent at September 30, 2023 and December 31, 2022, is $9,499 and $10,097, respectively.

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 $0 and $470 is included as part of the liability for structured settlements with respect to this deficiency at September 30, 2023 and December 31, 2022, respectively. The offset to this liability is recorded as a reduction of the unrealized capital gains included in AOCI.

Participating life insurance in-force was 2.5% and 3.9% of the face value of total life insurance at September 30, 2023 and December 31, 2022, respectively.

 

13


 

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 in 2022 of $6.5 million based on the statutory reserves at January 1, 2022. The impact to pre-tax income in 2022 was nominal, however various income statement lines were impacted.

On July 18, 2023, the Liquidation Order of Scottish Re was approved by the Delaware Court specifying the effective date of the liquidation as September 30, 2023. The Liquidation Order specifies that all reinsurance agreements of Scottish Re are cancelled effective September 30, 2023. Accordingly, ceded future policy benefits of $657 were taken down as of the effective date of the order.

Reinsurance recoverables are as follows:

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Ceded future policy benefits

 

$

192,968

 

 

$

173,904

 

Claims and other amounts recoverables

 

 

37,617

 

 

 

40,958

 

Ending balance

 

$

230,585

 

 

$

214,862

 

 

The reconciliation of direct insurance premiums to net insurance premiums is as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Direct premiums

 

$

46,413

 

 

$

44,740

 

 

$

135,613

 

 

$

131,792

 

Assumed premiums

 

 

8,960

 

 

 

10,838

 

 

 

27,493

 

 

 

35,512

 

Ceded premiums

 

 

(31,939

)

 

 

(31,110

)

 

 

(91,591

)

 

 

(93,830

)

Net insurance premiums

 

$

23,434

 

 

$

24,468

 

 

$

71,515

 

 

$

73,474

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The reconciliation of direct life, annuity, and health claim benefits to life, annuity, and health claim benefits as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Direct

 

$

34,658

 

 

$

36,963

 

 

$

93,623

 

 

$

105,673

 

Assumed

 

 

10,209

 

 

 

5,656

 

 

 

16,136

 

 

 

15,911

 

Ceded

 

 

(22,284

)

 

 

(25,114

)

 

 

(58,192

)

 

 

(73,962

)

Life, annuity, and health claim benefits

 

$

22,583

 

 

$

17,505

 

 

$

51,567

 

 

$

47,622

 

 

 

Net policy charges on universal life products were $41 and $44 for the three months ended September 30, 2023 and 2022, respectively and $135 and $136 for the nine months ended September 30, 2023 and 2022, respectively, and are included in other income.

At September 30, 2023 and December 31, 2022, reserves related to fixed‑rate annuity deposits assumed from a former affiliate company amounted to approximately $64,095 and $69,070, respectively, and are included with policyholder account balances in the Interim Condensed Consolidated Balance Sheets.

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).

14


 

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 $4,397.

The assets and liabilities within the Closed Block are included in the Company’s condensed 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 September 30, 2023 and December 31, 2022 is $11,058 and $10,792 of additional Closed Block funding, plus accrued interest, that is eligible for reversion to the Company if not needed to fund Closed Block experience, respectively.

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 September 30, 2023 and December 31, 2022, the Company recognized a policyholder dividend obligation of $9,544 and $9,515, respectively, resulting from the excess of actual cumulative earnings over the expected cumulative earnings and from accumulated net unrealized investment gains (losses) that have arisen subsequent to the establishment of the Closed Block.

 

Information regarding the Closed Block liabilities (assets) designated to the Closed Block is as follows:

 

 

 

September 30,

 

 

December 31,

 

Closed Block Liabilities

 

2023

 

 

2022

 

Future policy benefits and claims

 

$

29,216

 

 

$

29,382

 

Policyholder account balances

 

 

6,567

 

 

 

6,731

 

Other policyholder liabilities

 

 

3,436

 

 

 

5,298

 

Policyholder dividend obligations

 

 

9,544

 

 

 

9,515

 

Other liabilities

 

 

38

 

 

 

586

 

Total Closed Block liabilities

 

 

48,801

 

 

 

51,512

 

Assets Designated to the Closed Block

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

Fixed maturities - available-for-sale (amortized cost $41,673 and
   $
40,522, respectively)

 

 

36,464

 

 

 

36,625

 

Policyholder loans

 

 

1,238

 

 

 

1,132

 

Total investments

 

 

37,702

 

 

 

37,757

 

Cash and Cash Equivalents

 

 

365

 

 

 

 

Premiums due and uncollected

 

 

382

 

 

 

1,852

 

Accrued investment income

 

 

490

 

 

 

457

 

Reinsurance recoverables

 

 

10,834

 

 

 

13,885

 

Deferred income tax assets, net

 

 

4,712

 

 

 

4,263

 

Total assets designated to the Closed Block

 

 

54,485

 

 

 

58,214

 

Excess of Closed Block assets over liabilities

 

 

5,684

 

 

 

6,702

 

Amounts included in accumulated other comprehensive income:

 

 

 

 

 

 

Unrealized investment loss (gains), net of income tax

 

 

(4,116

)

 

 

(3,079

)

Total amounts included in accumulated other comprehensive income

 

 

(4,116

)

 

 

(3,079

)

Maximum future earnings and accumulated other comprehensive income to
   be recognized from Closed Block assets and liabilities (includes excess
   assets of $
11,058 and $10,792, respectively)

 

$

(9,800

)

 

$

(9,781

)

 

 

 

 

September 30,

 

 

December 31,

 

Policyholder Dividend Obligations

 

2023

 

 

2022

 

Beginning balance

 

$

9,515

 

 

$

12,669

 

Impact from earnings allocable to policyholder dividend obligations

 

 

29

 

 

 

(165

)

Change in net unrealized investment gains (losses) allocated to policyholder
   dividend obligations

 

 

 

 

 

(2,989

)

Ending balance

 

$

9,544

 

 

$

9,515

 

 

15


 

Information regarding the Closed Block revenues and expenses is as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Net insurance premiums

 

$

769

 

 

$

329

 

 

$

3,351

 

 

$

2,357

 

Net investment income

 

 

456

 

 

 

375

 

 

 

1,361

 

 

 

1,157

 

Net Realized Investment Gains (Losses)

 

 

5

 

 

 

 

 

 

8

 

 

 

 

Total revenues

 

 

1,230

 

 

 

704

 

 

 

4,720

 

 

 

3,514

 

Benefits and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Life and annuity benefits - including policyholder dividends
   of $
452, $498, $1,474 and $1,102, respectively

 

 

1,353

 

 

 

1,072

 

 

 

4,258

 

 

 

3,588

 

Interest credited to policyholder account balances

 

 

42

 

 

 

44

 

 

 

124

 

 

 

128

 

Operating costs and expenses

 

 

(38

)

 

 

(356

)

 

 

314

 

 

 

(482

)

Total expenses

 

 

1,357

 

 

 

760

 

 

 

4,696

 

 

 

3,234

 

Revenues, net of expenses before provision for income tax
   expense (benefit)

 

 

(127

)

 

 

(56

)

 

 

24

 

 

 

280

 

Income tax expense (benefit)

 

 

(27

)

 

 

(12

)

 

 

5

 

 

 

59

 

Revenues, net of expenses and provision for income tax
   expense (benefit)

 

$

(100

)

 

$

(44

)

 

$

19

 

 

$

221

 

 

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 September 30, 2023. 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

 

$

1,100

 

 

$

1,093

 

Due after one year through five years

 

 

6,615

 

 

 

6,482

 

Due after five years through ten years

 

 

6,836

 

 

 

6,374

 

Due after ten years

 

 

23,683

 

 

 

19,193

 

Securities not due at a single maturity date — primarily mortgage and asset-
   backed

 

 

3,439

 

 

 

3,322

 

Total fixed maturities

 

$

41,673

 

 

$

36,464

 

 

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.

 

16


 

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:

 

September 30, 2023

 

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

 

$

 

 

$

9,599

 

 

$

 

 

$

9,599

 

U.S. agency mortgage-backed

 

 

 

 

 

6,533

 

 

 

 

 

 

6,533

 

State and political subdivisions

 

 

 

 

 

62,895

 

 

 

444

 

 

 

63,339

 

Corporate and miscellaneous

 

 

2,231

 

 

 

127,012

 

 

 

26,560

 

 

 

155,803

 

Foreign government

 

 

 

 

 

125

 

 

 

 

 

 

125

 

Residential mortgage-backed

 

 

 

 

 

6,620

 

 

 

 

 

 

6,620

 

Commercial mortgage-backed

 

 

 

 

 

19,655

 

 

 

 

 

 

19,655

 

Asset-backed

 

 

 

 

 

30,512

 

 

 

3,338

 

 

 

33,850

 

Total fixed maturities

 

 

2,231

 

 

 

262,951

 

 

 

30,342

 

 

 

295,524

 

Total recurring assets

 

$

2,231

 

 

$

262,951

 

 

$

30,342

 

 

$

295,524

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17


 

 

December 31, 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

 

$

 

 

$

9,106

 

 

$

 

 

$

9,106

 

U.S. agency mortgage-backed

 

 

 

 

 

8,878

 

 

 

 

 

 

8,878

 

State and political subdivisions

 

 

 

 

 

55,782

 

 

 

442

 

 

 

56,224

 

Corporate and miscellaneous

 

 

2,847

 

 

 

126,644

 

 

 

26,990

 

 

 

156,481

 

Foreign government

 

 

 

 

 

131

 

 

 

 

 

 

131

 

Residential mortgage-backed

 

 

 

 

 

4,430

 

 

 

 

 

 

4,430

 

Commercial mortgage-backed

 

 

 

 

 

19,462

 

 

 

 

 

 

19,462

 

Asset-backed

 

 

 

 

 

40,293

 

 

 

3,133

 

 

 

43,426

 

Total fixed maturities

 

 

2,847

 

 

 

264,726

 

 

 

30,565

 

 

 

298,138

 

Total recurring assets

 

$

2,847

 

 

$

264,726

 

 

$

30,565

 

 

$

298,138

 

 

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.

18


 

Level 3 fair value classification consists of investments in 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. A summary of changes in fair value of Level 3 assets held at fair value on a recurring basis is as follows:

 

 

 

 

 

 

Total gains (losses) included in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2023

 

 

Net Income
(loss)

 

 

OCI

 

 

Purchases

 

 

Sales

 

 

Settlements

 

 

Net
Transfers

 

 

Balance at September 30, 2023

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and political subdivision

 

$

442

 

 

$

 

 

$

2

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

444

 

Corporate and miscellaneous

 

 

26,991

 

 

 

2

 

 

 

(31

)

 

 

2,449

 

 

 

(2,989

)

 

 

 

 

 

138

 

 

 

26,560

 

Asset-backed

 

 

3,133

 

 

 

90

 

 

 

80

 

 

 

145

 

 

 

(610

)

 

 

 

 

 

500

 

 

 

3,338

 

Total assets

 

$

30,566

 

 

$

92

 

 

$

51

 

 

$

2,594

 

 

$

(3,599

)

 

$

 

 

$

638

 

 

$

30,342

 

 

 

 

 

 

 

 

Total gains (losses) included in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2022

 

 

Net Income

 

 

OCI

 

 

Purchases

 

 

Sales

 

 

Settlements

 

 

Net
Transfers

 

 

Balance at December 31, 2022

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and political subdivisions

 

$

498

 

 

$

 

 

$

(56

)

 

$

 

 

$

 

 

$

 

 

$

 

 

$

442

 

Corporate and miscellaneous

 

 

24,740

 

 

 

2

 

 

 

(398

)

 

 

3,198

 

 

 

(2,582

)

 

 

1,468

 

 

 

563

 

 

 

26,991

 

Asset-backed

 

 

2,838

 

 

 

(122

)

 

 

(325

)

 

 

1,907

 

 

 

(1,260

)

 

 

 

 

 

95

 

 

 

3,133

 

Total assets

 

$

28,076

 

 

$

(120

)

 

$

(779

)

 

$

5,105

 

 

$

(3,842

)

 

$

1,468

 

 

$

658

 

 

$

30,566

 

 

There were 4 transfers from Level 3 to Level 2 and 5 transfers from level 2 to level 3 in 2023. There were 2 transfers from Level 3 to Level 2 and 6 transfers from level 2 to level 3 in 2022.

19


 

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. The carrying amount and estimated fair values of the Company’s financial instruments that are not measured at fair value on the Interim Condensed Consolidated Balance Sheets are as follows:

 

 

 

 

 

 

Estimated Fair Value

 

September 30, 2023

 

Carrying Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial instruments recorded as assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans

 

$

42,005

 

 

$

 

 

$

 

 

$

38,074

 

 

$

38,074

 

Policyholder loans

 

$

7,062

 

 

$

 

 

$

 

 

$

8,136

 

 

$

8,136

 

Financial instruments recorded as liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Future policy benefits, excluding term life reserves

 

$

15,776

 

 

$

 

 

$

 

 

$

14,511

 

 

$

14,511

 

Long/short-term debt

 

$

46,483

 

 

$

 

 

$

 

 

$

47,762

 

 

$

47,762

 

Policyholder account balances

 

$

72,245

 

 

$

 

 

$

 

 

$

65,459

 

 

$

65,459

 

 

 

 

 

 

 

Estimated Fair Value

 

December 31, 2022

 

Carrying Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial instruments recorded as assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans

 

$

45,270

 

 

$

 

 

$

 

 

$

41,622

 

 

$

41,622

 

Policyholder loans

 

$

6,699

 

 

$

 

 

$

 

 

$

7,722

 

 

$

7,722

 

Financial instruments recorded
   as liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Future policy benefits, excluding term
   life reserves

 

$

16,555

 

 

$

 

 

$

 

 

$

15,192

 

 

$

15,192

 

Long/short-term debt

 

$

37,189

 

 

$

 

 

$

 

 

$

36,763

 

 

$

36,763

 

Policyholder account balances

 

$

77,443

 

 

$

 

 

$

 

 

$

70,157

 

 

$

70,157

 

 

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 $974 and $1,952 of second and mezzanine mortgages carried at cost for which fair value is not measurable at September 30, 2023 and December 31, 2022, respectively.

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.

Future Policy Benefits and Policyholder Account Balances — 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. Certain non-interest sensitive reserves are at carrying value, which approximates fair value.

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

In 2022 and subsequent amendments in 2023, 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 $46.0 million. At September 30, 2023 and December 31, 2022,

20


 

the Company had a net advance of $38,618 and $31,100, respectively, under this arrangement. At September 30, 2023, the Company expects to pay back the aggregate amounts as presented in the following table.

 

 

 

September 30, 2023

 

Due in one year or less

 

$

9,172

 

Due after one year through two years

 

 

6,328

 

Due after two years through three years

 

 

5,891

 

Due after three years through four years

 

 

5,493

 

Due after four years through five years

 

 

5,014

 

Due after five years

 

 

38,411

 

Less discount

 

 

(23,826

)

Total long/short-term debt

 

$

46,483

 

 

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 September 30, 2023 and December 31, 2022, the Company held $270 and $180 of FHLBC common stock, which is included in Other invested assets, respectively. The Company's ability to borrow under this facility is subject to the FHLBC's discretion and requires the availability of qualifying assets. As of September 30, 2023 and December 31, 2022, the Company had not pledged any assets and there were no outstanding borrowings.

 

 

 

21


 

Note 9 Accumulated Other Comprehensive (Loss) Income

Changes in accumulated other comprehensive (loss) income, net of taxes are as follows:

 

 

 

 

2023

 

 

2022

 

 

 

Net Unrealized
Gains (Losses)
on Investments
with Credit Losses

 

 

Net Unrealized
Gains (Losses)
on Other
Investments

 

 

Total

 

 

Net Unrealized
Gains (Losses)
on Investments
with Credit Losses

 

 

Net Unrealized
Gains (Losses)
on Other
Investments

 

 

Total

 

Balance at beginning of year

 

$

362

 

 

$

(30,534

)

 

$

(30,172

)

 

$

362

 

 

$

10,567

 

 

$

10,929

 

Third Quarter

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (losses) gains from changes in the market value of securities

 

 

 

 

 

(10,166

)

 

 

(10,166

)

 

 

 

 

 

(15,424

)

 

 

(15,424

)

Impact on policy benefit liabilities of changes in market value of securities

 

 

 

 

 

340

 

 

 

340

 

 

 

 

 

 

1,545

 

 

 

1,545

 

Change in net unrealized investment (losses) gains allocated to policyholder dividend obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred income tax (expense) benefit

 

 

 

 

 

1,744

 

 

 

1,744

 

 

 

 

 

 

2,915

 

 

 

2,915

 

Third Quarter, net

 

 

 

 

 

(8,082

)

 

 

(8,082

)

 

 

 

 

 

(10,964

)

 

 

(10,964

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year to Date

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (losses) gains from changes in the market value of securities

 

 

 

 

 

(5,268

)

 

 

(5,268

)

 

 

 

 

 

(60,944

)

 

 

(60,944

)

Impact on policy benefit liabilities of changes in market value of securities

 

 

 

 

 

469

 

 

 

469

 

 

 

 

 

 

6,065

 

 

 

6,065

 

Change in net unrealized investment (losses) gains allocated to policyholder dividend obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,989

 

 

 

2,989

 

Deferred income tax benefit (expense)

 

 

 

 

 

843

 

 

 

843

 

 

 

 

 

 

10,897

 

 

 

10,897

 

Year to Date, net

 

 

 

 

 

(3,956

)

 

 

(3,956

)

 

 

 

 

 

(40,993

)

 

 

(40,993

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

 

$

362

 

 

$

(34,490

)

 

$

(34,128

)

 

$

362

 

 

$

(30,426

)

 

$

(30,064

)

 

Note 10 Business Segments

Our Chief Operating Decision Maker makes decisions by analyzing our segment information. For internal decision-making purposes and external reporting purposes, we do not disaggregate revenue beyond our segment information and believe that any further disaggregation is immaterial. The Company’s current operations were organized into three reportable segments: Insurance, Agency, and Corporate & Other.

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 recently announced merger transaction and commission financing agreement.

22


 

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.

The segment results are as follows:

 

 

 

Three Months Ended September 30, 2023

 

 

Three Months Ended September 30, 2022

 

 

 

Insurance

 

 

Agency

 

 

Corporate & Other

 

 

Total
Consolidated

 

 

Insurance

 

 

Agency

 

 

Corporate & Other

 

 

Total
Consolidated

 

Net insurance premiums

 

$

23,434

 

 

$

 

 

$

 

 

$

23,434

 

 

$

24,468

 

 

$

 

 

$

 

 

$

24,468

 

Net investment income

 

 

3,931

 

 

 

 

 

 

79

 

 

 

4,010

 

 

 

3,927

 

 

 

 

 

 

199

 

 

 

4,126

 

Net (losses) gains on investments (1)

 

 

(883

)

 

 

 

 

 

 

 

 

(883

)

 

 

(1,100

)

 

 

 

 

 

(470

)

 

 

(1,570

)

Earned commissions

 

 

 

 

 

15,354

 

 

 

 

 

 

15,354

 

 

 

 

 

 

11,379

 

 

 

(112

)

 

 

11,267

 

Other income

 

 

274

 

 

 

1,472

 

 

 

 

 

 

1,746

 

 

 

144

 

 

 

1,259

 

 

 

 

 

 

1,403

 

Total revenues

 

 

26,756

 

 

 

16,826

 

 

 

79

 

 

 

43,661

 

 

 

27,439

 

 

 

12,638

 

 

 

(383

)

 

 

39,694

 

Life, annuity, and health claim benefits

 

 

23,210

 

 

 

 

 

 

 

 

 

23,210

 

 

 

18,151

 

 

 

 

 

 

 

 

 

18,151

 

Operating costs and expenses

 

 

7,914

 

 

 

16,564

 

 

 

2,277

 

 

 

26,755

 

 

 

7,957

 

 

 

14,110

 

 

 

1,066

 

 

 

23,133

 

Amortization of deferred policy acquisition
   costs

 

 

3,283

 

 

 

 

 

 

 

 

 

3,283

 

 

 

4,086

 

 

 

 

 

 

 

 

 

4,086

 

Total benefits and expenses

 

 

34,407

 

 

 

16,564

 

 

 

2,277

 

 

 

53,248

 

 

 

30,194

 

 

 

14,110

 

 

 

1,066

 

 

 

45,370

 

Income (loss) before income taxes

 

$

(7,651

)

 

$

262

 

 

$

(2,198

)

 

$

(9,587

)

 

$

(2,755

)

 

$

(1,472

)

 

$

(1,449

)

 

$

(5,676

)

(1) Due to the adoption of the measurement of credit losses on financial instruments accounting standard, items previously reported as OTTI, are now included in net (losses) gains on investments.

 

 

 

Nine Months Ended September 30, 2023

 

 

Nine Months Ended September 30, 2022

 

 

 

Insurance

 

 

Agency

 

 

Corporate & Other

 

 

Total
Consolidated

 

 

Insurance

 

 

Agency

 

 

Corporate & Other

 

 

Total
Consolidated

 

Net insurance premiums

 

$

71,515

 

 

$

 

 

$

 

 

$

71,515

 

 

$

73,474

 

 

$

 

 

$

 

 

$

73,474

 

Net investment income

 

 

12,618

 

 

 

 

 

 

228

 

 

 

12,846

 

 

 

10,982

 

 

 

 

 

 

408

 

 

 

11,390

 

Net realized investment gains (losses) (1)

 

 

(1,395

)

 

 

 

 

 

(364

)

 

 

(1,759

)

 

 

(267

)

 

 

 

 

 

356

 

 

 

89

 

Earned commissions

 

 

 

 

 

45,880

 

 

 

(345

)

 

 

45,535

 

 

 

 

 

 

33,105

 

 

 

(313

)

 

 

32,792

 

Other income

 

 

804

 

 

 

4,079

 

 

 

 

 

 

4,883

 

 

 

419

 

 

 

3,773

 

 

 

 

 

 

4,192

 

Total revenues

 

 

83,542

 

 

 

49,959

 

 

 

(481

)

 

 

133,020

 

 

 

84,608

 

 

 

36,878

 

 

 

451

 

 

 

121,937

 

Life, annuity, and health claim benefits

 

 

53,567

 

 

 

 

 

 

 

 

 

53,567

 

 

 

49,722

 

 

 

 

 

 

 

 

 

49,722

 

Operating costs and expenses

 

 

23,843

 

 

 

48,636

 

 

 

5,760

 

 

 

78,239

 

 

 

25,143

 

 

 

42,573

 

 

 

5,143

 

 

 

72,859

 

Amortization of deferred policy
   acquisition costs

 

 

9,913

 

 

 

 

 

 

 

 

 

9,913

 

 

 

13,237

 

 

 

 

 

 

 

 

 

13,237

 

Total benefits and expenses

 

 

87,323

 

 

 

48,636

 

 

 

5,760

 

 

 

141,719

 

 

 

88,102

 

 

 

42,573

 

 

 

5,143

 

 

 

135,818

 

(Loss) income before income tax

 

$

(3,781

)

 

$

1,323

 

 

$

(6,241

)

 

$

(8,699

)

 

$

(3,494

)

 

$

(5,695

)

 

$

(4,692

)

 

$

(13,881

)

(1) Due to the adoption of the measurement of credit losses on financial instruments accounting standard, items previously reported as OTTI, are now included in net (losses) gains on investments.

23


 

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

Insurance

 

 

Agency

 

 

Corporate & Other

 

 

Total
Consolidated

 

 

Insurance

 

 

Agency

 

 

Corporate & Other

 

 

Total
Consolidated

 

Investments and cash

 

$

351,240

 

 

$

800

 

 

$

2,979

 

 

$

355,019

 

 

$

358,620

 

 

$

1,094

 

 

$

3,862

 

 

$

363,576

 

Commissions and agent balances

 

 

8,550

 

 

 

41,865

 

 

 

 

 

 

50,415

 

 

 

4,751

 

 

 

30,015

 

 

 

 

 

 

34,766

 

Deferred policy acquisition costs

 

 

88,171

 

 

 

 

 

 

 

 

 

88,171

 

 

 

90,189

 

 

 

 

 

 

 

 

 

90,189

 

Intangible assets

 

 

 

 

 

1,635

 

 

 

 

 

 

1,635

 

 

 

 

 

 

1,635

 

 

 

 

 

 

1,635

 

Reinsurance recoverables net

 

 

230,585

 

 

 

 

 

 

 

 

 

230,585

 

 

 

214,862

 

 

 

 

 

 

 

 

 

214,862

 

Deferred income tax assets, net

 

 

18,361

 

 

 

 

 

 

13,642

 

 

 

32,003

 

 

 

13,489

 

 

 

 

 

 

14,948

 

 

 

28,437

 

Other

 

 

28,635

 

 

 

9,068

 

 

 

654

 

 

 

38,357

 

 

 

26,800

 

 

 

5,869

 

 

 

3,944

 

 

 

36,613

 

Total assets

 

$

725,542

 

 

$

53,368

 

 

$

17,275

 

 

$

796,185

 

 

$

708,711

 

 

$

38,613

 

 

$

22,754

 

 

$

770,078

 

 

All the Company’s significant revenues and long-lived assets are located in the United States, which is the Company’s country of domicile.

Note 11 Subsequent Events

On October 3, 2023, Vericity, Inc. announced that it entered into an Agreement and Plan of Merger with iA American Holdings Inc. Please refer to Note 1 - Summary of Significant Accounting Policies for additional details.

 

24


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three and nine months ended September 30, 2023 and 2022

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:

future economic conditions in the markets in which we compete that could be less favorable than expected and could have impacts on demand for our products and services;
our ability to grow and develop our Agency business through expansion of retail call centers, online sales, wholesale operations and other areas of opportunity;
our ability to grow and develop our insurance business and successfully develop and market new products;
our ability to enter new markets successfully and capitalize on growth opportunities either through acquisitions or organically;
financial market conditions, including, but not limited to, changes in interest rates and the level and trends of stock market prices causing a reduction of net investment income or realized losses and reduction in the value of our investment portfolios;
increased competition in our businesses, including the potential impacts of aggressive price competition by other insurance companies, payment of higher commissions to agents that could affect demand for our insurance products and impact the ability to grow and retain agents in our Agency Segment and the entry of new competitors and the development of new products by new or existing competitors, resulting in a reduction in the demand for our products and services;
the effect of legislative, judicial, economic, demographic, and regulatory events in the jurisdictions where we do business;
the effect of challenges to our patents and other intellectual property;
costs, availability, and collectability of reinsurance;
the potential impact on our reported net income that could result from the adoption of future accounting standards issued by the Financial Accounting Standards Board or other standard-setting bodies;
the inability to maintain or grow our strategic partnerships or our inability to realize the expected benefits from our relationship with the Standby Purchaser;
the inability to manage future growth and integration of our operations; and
changes in industry trends and financial strength ratings assigned by nationally recognized statistical rating organizations.

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.

25


 

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.

War in Ukraine and Israel

The Company believes the wars in Ukraine and in and around Israel do not have a material impact on the interim condensed consolidated financial statements of the Company at September 30, 2023.

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 Company's 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.

26


 

Fidelity Life engages in the following business lines:

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.

Non ­Core Life - Our Non­ Core 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, 2022 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

27


 

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. 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, 2022, 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 (certain prior year values have been re-classified due to the adoption of ASU 2016-02, see footnote 1 in this form 10-Q):

Vericity, Inc. Consolidated Results of Operations

(dollars in thousands)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net insurance premiums

 

$

23,434

 

 

$

24,468

 

 

$

71,515

 

 

$

73,474

 

Net investment income

 

 

4,010

 

 

 

4,126

 

 

 

12,846

 

 

 

11,390

 

Net (losses) gains on investments

 

 

(883

)

 

 

(1,570

)

 

 

(1,759

)

 

 

89

 

Earned commissions

 

 

15,354

 

 

 

11,267

 

 

 

45,535

 

 

 

32,792

 

Insurance lead sales

 

 

1,026

 

 

 

1,259

 

 

 

3,052

 

 

 

3,773

 

Other income

 

 

720

 

 

 

144

 

 

 

1,831

 

 

 

419

 

Total revenues

 

 

43,661

 

 

 

39,694

 

 

 

133,020

 

 

 

121,937

 

Benefits and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Life, annuity, and health claim benefits

 

 

22,583

 

 

 

17,505

 

 

 

51,567

 

 

 

47,622

 

Interest credited to policyholder account balances

 

 

627

 

 

 

646

 

 

 

2,000

 

 

 

2,100

 

Operating costs and expenses

 

 

26,755

 

 

 

23,133

 

 

 

78,239

 

 

 

72,859

 

Amortization of deferred policy acquisition costs

 

 

3,283

 

 

 

4,086

 

 

 

9,913

 

 

 

13,237

 

Total benefits and expenses

 

 

53,248

 

 

 

45,370

 

 

 

141,719

 

 

 

135,818

 

Income (loss) before income taxes

 

 

(9,587

)

 

 

(5,676

)

 

 

(8,699

)

 

 

(13,881

)

Income tax expense (benefit)

 

 

(1,612

)

 

 

(591

)

 

 

(822

)

 

 

(785

)

Net income (loss)

 

$

(7,975

)

 

$

(5,085

)

 

$

(7,877

)

 

$

(13,096

)

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022

Total Revenues

For the three months ended September 30, 2023, total revenues were $43.7 million compared to $39.7 million for the three months ended September 30, 2022. This increase of $4.0 million resulted primarily from an increase in earned commissions and lower net losses on investments, partially offset by a decrease in net insurance premiums, net investment income and a decrease in insurance lead sales.

Benefits and Expenses

For the three months ended September 30, 2023, total benefits and expenses were $53.2 million compared to $45.4 million for the three months ended September 30, 2022. This increase of $7.8 million is driven by higher operating expenses and claim benefits, partially offset by lower amortization of deferred policy acquisition costs.

Income (loss) Before Income Taxes

For the three months ended September 30, 2023, net loss before taxes was $9.6 million compared to net loss before taxes of $5.7 million for the three months ended September 30, 2022. This increase in net loss of $3.9 million was primarily due to higher claim benefits and operating expenses and lower net insurance premiums and net investment income, partially offset by higher earned commissions, lower net loss on investments, and lower amortization of deferred policy acquisition costs.

28


 

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022

Total Revenues

For the nine months ended September 30, 2023, total revenues were $133.0 million compared to $121.9 million for the nine months ended September 30, 2022. This increase of $11.1 million resulted primarily from higher earned commissions and net investment income, partially offset by a decrease in net insurance premiums, lower net gains on investments and a decrease in insurance lead sales.

Benefits and Expenses

For the nine months ended September 30, 2023, total benefits and expenses were $141.7 million compared to $135.8 million for the nine months ended September 30, 2022. This increase of $5.9 million is driven by higher operating expenses and claim benefits, partially offset by lower amortization of deferred policy acquisition costs.

Income (loss) Before Income Taxes

For the nine months ended September 30, 2023, net loss before taxes was $8.7 million compared to net loss before taxes of $13.9 million for the nine months ended September 30, 2022. This decrease in net loss of $5.2 million was primarily due to increases in earned commissions and net investment income, lower deferred policy acquisition costs, partially offset with an increase in claim benefits and operating expenses, lower net insurance premiums and higher net losses on investments.

Consolidated Results

The following analysis reconciles the reported segment results to the Company’s total consolidated results.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

Income (loss) before income tax by segment

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

$

262

 

 

$

(1,472

)

 

$

1,323

 

 

$

(5,695

)

Insurance

 

 

(7,651

)

 

 

(2,755

)

 

$

(3,781

)

 

 

(3,494

)

Corporate & Other

 

 

(2,198

)

 

 

(1,449

)

 

$

(6,241

)

 

 

(4,692

)

Income (loss) from operations before income tax

 

 

(9,587

)

 

 

(5,676

)

 

 

(8,699

)

 

 

(13,881

)

Income tax expense (benefit)

 

 

(1,612

)

 

 

(591

)

 

 

(822

)

 

 

(785

)

Net income (loss)

 

$

(7,975

)

 

$

(5,085

)

 

$

(7,877

)

 

$

(13,096

)

Agency Segment

The results of our Agency Segment were as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

(dollars in thousands)

 

(dollars in thousands)

 

 

(dollars in thousands)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Earned commissions

 

$

15,354

 

 

$

11,379

 

 

$

45,880

 

 

$

33,105

 

Insurance lead sales & Other

 

 

1,472

 

 

 

1,259

 

 

 

4,079

 

 

 

3,773

 

Total revenues

 

 

16,826

 

 

 

12,638

 

 

 

49,959

 

 

 

36,878

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses

 

 

16,564

 

 

 

14,110

 

 

 

48,636

 

 

 

42,573

 

Total expenses

 

 

16,564

 

 

 

14,110

 

 

 

48,636

 

 

 

42,573

 

Income (loss) before income taxes

 

$

262

 

 

$

(1,472

)

 

$

1,323

 

 

$

(5,695

)

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022

Earned Commissions

For the three months ended September 30, 2023, earned commissions were $15.4 million compared to $11.4 million for the three months ended September 30, 2022. This increase of $4.0 million resulted from increased sales in the retail channel.

 

 

29


 

Insurance Lead Sales

For the three months ended September 30, 2023 insurance lead sales were $1.5 million compared to $1.3 million for the three months ended September 30, 2022. This increase of $0.2 million was primarily due to higher click-through revenue.

Operating Costs and Expenses

For the three months ended September 30, 2023, operating costs and expenses were $16.6 million compared to $14.1 million for the three months ended September 30, 2022. This increase of $2.5 million was primarily due to an increase in variable costs.

Income (Loss) Before Income Taxes

For the three months ended September 30, 2023, the Agency Segment net income was $0.3 million compared to net loss of $1.5 million for the three months ended September 30, 2022. This increase in net income of $1.8 million was the result of higher earned commissions, partially offset by increased operating expenses.

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022

Earned Commissions

For the nine months ended September 30, 2023, earned commissions were $45.9 million compared to $33.1 million for the nine months ended September 30, 2022. This increase of $12.8 million resulted from increased sales in the retail channel.

Insurance Lead Sales

For the nine months ended September 30, 2023 insurance lead sales were $4.1 million compared to $3.8 million for the nine months ended September 30, 2022. This increase of $0.3 million was primarily due to higher click-through revenue.

Operating Costs and Expenses

For the nine months ended September 30, 2023, operating costs and expenses were $48.6 million compared to $42.6 million for the nine months ended September 30, 2022. This increase of $6.0 million was primarily due to an increase in variable costs.

Income (Loss) Before Income Taxes

For the nine months ended September 30, 2023, the Agency Segment net income was $1.3 million compared to net loss of $5.7 million for the nine months ended September 30, 2022. This increase in net income of $7.0 million was the result of higher earned commissions, partially offset by increased operating expenses.

Insurance Segment

The results of our Insurance Segment were as follows (certain prior period values have been re-classified due to the adoption of ASU 2016-02, see footnote 1 in this form 10-Q):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

(dollars in thousands)

 

 

 

 

(dollars in thousands)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Net insurance premiums

 

$

23,434

 

 

$

24,468

 

 

$

71,515

 

 

$

73,474

 

Net investment income

 

 

3,931

 

 

 

3,927

 

 

 

12,618

 

 

 

10,982

 

Net (losses) gains on investments

 

 

(883

)

 

 

(1,100

)

 

 

(1,395

)

 

 

(267

)

Other income

 

 

274

 

 

 

144

 

 

 

804

 

 

 

419

 

Total revenues

 

$

26,756

 

 

$

27,439

 

 

 

83,542

 

 

 

84,608

 

Benefits and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Life, annuity, and health claim benefits

 

 

22,583

 

 

 

17,505

 

 

 

51,567

 

 

 

47,622

 

Interest credited to policyholder account balances

 

 

627

 

 

 

646

 

 

 

2,000

 

 

 

2,100

 

Operating costs and expenses

 

 

7,914

 

 

 

7,957

 

 

 

23,843

 

 

 

25,143

 

Amortization of deferred policy acquisition costs

 

 

3,283

 

 

 

4,086

 

 

 

9,913

 

 

 

13,237

 

Total benefits and expenses

 

 

34,407

 

 

 

30,194

 

 

 

87,323

 

 

 

88,102

 

Income (loss) before income taxes

 

$

(7,651

)

 

$

(2,755

)

 

$

(3,781

)

 

$

(3,494

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30


 

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022

Net Insurance Premiums

For the three months ended September 30, 2023, net insurance premiums were $23.4 million compared to $24.5 million for the three months ended September 30, 2022. This decrease of $1.1 million in net insurance premiums was primarily due to decreases in our Core lines of $1.3 million, primarily due to our LifeTime benefit Term (LBT) product, and a decrease of $0.1 million in our Non-core lines, partially offset by an increase in Closed Block of $0.4 million.

Net (Losses) Gains on Investments

For the three months ended September 30, 2023, net losses on investments was $0.9 million compared to net losses of $1.1 million for the three months ended September 30, 2022. The $0.2 million decrease in net loss was mainly due to lower valuation losses in our other invested assets, partially offset by higher losses in our fixed maturity portfolio. For more information on net (losses) gains on investments, see “Note 2 – Investments” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.

Other Income

For the three months ended September 30, 2023, other income increased to $0.3 million compared to $0.1 million for the three months ended September 30, 2022. The $0.2 million increase was mainly due to higher licensing fees on our patented LifeTime Benefit term product.

Life, Annuity and Health Claim Benefits

For the three months ended September 30, 2023, life, annuity and health claim benefits were $22.6 million compared with $17.5 million for the three months ended September 30, 2022. This increase of $5.0 million was primarily due to an increases in our Core lines of $4.9 million that included a reserve increase related to our assumed worksite business, and Closed Block of $0.3 million, partially offset by a decrease in our Non-core lines of $0.5 million.

Operating Costs and Expenses

For the three months ended September 30, 2023, operating costs and expenses were $7.9 million compared to $8.0 million for the three months ended September 30, 2022. The $0.1 million decrease was attributable to higher ceded commissions of $0.1 million.

Amortization of Deferred Policy Acquisition Costs

For the three months ended September 30, 2023, amortization of deferred policy acquisition costs was $3.3 million compared to $4.1 million for the three months ended September 30, 2022. This decrease of $0.8 million is primarily related to a decrease of $0.5 million in Closed Block and a decrease in Core of $0.3 million.

Income (Loss) Before Income Taxes

For the three months ended September 30, 2023, net loss was $7.7 million compared to net loss of $2.8 million for the three months ended September 30, 2022. This increase in net loss of $4.9 million resulted primarily from an increase in claim benefits of $5.1 million and a decrease in net insurance premiums of $1.0 million, partially offset by a decrease in amortization of deferred policy acquisition costs of $0.8 million, a decrease in net losses on investments of $0.3 million and an increase in other income of $0.1 million.

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022

Net Insurance Premiums

For the nine months ended September 30, 2023, net insurance premiums were $71.5 million compared to $73.5 million for the nine months ended September 30, 2022. The decrease of $2.0 million was primarily due to a 2022 reinsurance agreement with Swiss Re in 2022, (see discussion earlier in this Management Discussion and Analysis of Financial Condition and results of Operations) which reduced 2022 net insurance premiums by $6.5 million. Excluding the impact of the Swiss Re agreement, the decrease in net insurance premiums decreased by $8.5 million, which was primarily driven by a $8.1 million decrease in Core lines, mainly in the LBT product, and a $1.3 million decrease in Non-core lines, partially offset by $1.0 million increase in Closed Block.

31


 

Net Investment Income

For the nine months ended September 30, 2023, net investment income increased to $12.6 million compared to $11.0 million for the nine months ended September 30, 2022. The $1.6 million increase was mainly due to higher reinvestment yields in the fixed maturities portfolio. 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 nine months ended September 30, 2023, net losses on investments were $1.4 million compared to net losses of $0.3 million for the nine months ended September 30, 2022. The $1.1 million increase in net losses was mainly due to valuation changes of other invested assets. For more information on net (losses) gains on investments, see “Note 2 – Investments” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.

Other Income

For the nine months ended September 30, 2023, other income increased to $0.8 million compared to $0.4 million for the nine months ended September 30, 2022. The $0.4 million increase was mainly due to higher licensing fees on our patented LifeTime Benefit term product.

Life, Annuity and Health Claim Benefits

For the nine months ended September 30, 2023, life, annuity and health claim benefits were $51.6 million compared with $47.6 million for the nine months ended September 30, 2022. This $4.0 million increase was primarily due to a $5.1 million increase in our Core lines and a $0.7 million increase in Closed Block, partially offset by $2.2 million decrease in Non-core lines. The 2022 life, annuity and health claim benefits were reduced $6.5 million by the impact of the reinsurance agreement with Swiss Re (see discussion earlier in this Management Discussion and Analysis of Financial Condition and results of Operations). Excluding the impact of the Swiss Re agreement, life, annuity and health claim benefits decreased by $2.5 million, primarily driven by lower claim benefits in Core lines and Non-core lines of $1.4 million and $2.2 million respectively, partially offset by an increase in Closed Block of $0.8 million .

Operating Costs and Expenses

For the nine months ended September 30, 2023, operating costs and expenses were $23.8 million compared to $25.1 million for the nine months ended September 30, 2022. The $1.3 million decrease was attributable to higher ceded commissions of $3.0 million, partially offset by a decrease of $1.7 million in other operating expenses.

Amortization of Deferred Policy Acquisition Costs

For the nine months ended September 30, 2023, amortization of deferred policy acquisition costs was $9.9 million compared to $13.2 million for the nine months ended September 30, 2022. The decrease of $3.3 million primarily relates to a decrease of $4.2 million in Core and Closed Block of $1.2 million, partially offset by an increase in Non-Core of $2.1 million.

Income (Loss) Before Income Taxes

For the nine months ended September 30, 2023, net loss was $3.8 million compared to net loss of $3.5 million for the nine months ended September 30, 2022. This increase in net loss of $0.3 million resulted primarily from an increase in claim benefits of $4.0 million, a decrease in net insurance premiums of $2.0 million and an increase in net losses on investments of $1.0 million, partially offset by a decrease in amortization of deferred policy acquisition costs of $3.3 million, an increase in net investment income of $1.6 million, a decrease in operating expenses of $1.3 million and an increase in other income of $0.4 million.

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.

32


 

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 September 30, 2023 and December 31, 2022, are $11.0 million and $10.8 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 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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income

 

$

79

 

 

$

199

 

 

$

228

 

 

$

408

 

Net (losses) gains on investments

 

 

 

 

 

(470

)

 

 

(364

)

 

 

356

 

Earned commissions

 

 

 

 

 

(112

)

 

 

(345

)

 

 

(313

)

Total revenues

 

 

79

 

 

 

(383

)

 

 

(481

)

 

 

451

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses

 

 

2,277

 

 

 

1,066

 

 

 

5,760

 

 

 

5,143

 

Total expenses

 

 

2,277

 

 

 

1,066

 

 

 

5,760

 

 

 

5,143

 

(Loss) income from operations before income tax

 

$

(2,198

)

 

$

(1,449

)

 

$

(6,241

)

 

$

(4,692

)

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022

Net (Losses) Gains on Investments

For the three months ended September 30, 2023, net (losses) on investments were zero compared to $0.5 million for the three months ended September 30, 2022. The change is attributable to net asset valuation changes of other invested assets.

Earned Commissions

For the three months ended September 30, 2023, earned commissions were zero compared to ($0.1) million for the three months ended September 30, 2022. This change is attributable to reduced intersegment earned commissions, which are eliminated within the Corporate and Other segment.

Operating Expenses

For the three months ended September 30, 2023, operating expenses were $2.3 million compared to $1.1 million for the three months ended September 30, 2022. This increase of $1.2 million is attributable to transaction costs related to the recent merger agreement with iA American Holdings, Inc.

33


 

(Loss) Income Before Income Taxes

For the three months ended September 30, 2023, net loss increased $2.2 million from $1.4 million for the three months ended September 30, 2022. The increased loss is primarily due to an increase in operating expenses and a decrease in net investment income, partially offset by lower losses on investments.

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022

Net (Losses) Gains on Investments

For the nine months ended September 30, 2023, net losses on investments were $0.4 million compared to net gains on investments of $0.4 million for the nine months ended September 30, 2022. The change is attributable to net asset valuation changes of other invested assets.

Operating Expenses

For the nine months ended September 30, 2023, operating expenses were $5.8 million compared to $5.1 million for the nine months ended September 30, 2022. The increase of $0.7 million is primarily related to $1.8 million in transaction costs related to the recent merger agreement with iA American Holdings, Inc., partially offset with lower salaries and related expenses.

(Loss) Income Before Income Taxes

For the nine months ended September 30, 2023, net loss increased to $6.2 million from $4.7 million for the nine months ended September 30, 2022. The increased loss is primarily due to an increase in net losses on investments, higher operating expenses and a decrease in net investment income.

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.

34


 

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:

Asset concentration guidelines that limit the amount that we hold in any one issuer of securities,
Asset quality guidelines applied on a portfolio basis and for individual issues that establish a minimum asset quality standard for portfolios and establish minimum asset quality standards for investment purchases and investment holdings,
Liquidity guidelines that limit the amount of illiquid assets that can be held at any time, and
Diversification guidelines that limit the exposure at any time to the total portfolio by investment sectors.

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 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 96.2% and 95.1% at September 30, 2023 and December 31, 2022, respectively.

 

 

 

Estimated Fair Value

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

(dollars in thousands)

 

S&P Rating

 

 

 

 

 

 

 

 

 

AAA

 

$

34,948

 

 

 

11.8

%

 

$

53,065

 

 

 

17.8

%

AA

 

 

76,013

 

 

 

25.7

%

 

 

66,283

 

 

 

22.2

%

A

 

 

67,635

 

 

 

22.9

%

 

 

64,018

 

 

 

21.5

%

BBB

 

 

48,281

 

 

 

16.4

%

 

 

56,194

 

 

 

18.8

%

Not rated

 

 

57,370

 

 

 

19.4

%

 

 

44,163

 

 

 

14.8

%

Total investment grade

 

 

284,247

 

 

 

96.2

%

 

 

283,723

 

 

 

95.1

%

BB

 

 

3,190

 

 

 

1.1

%

 

 

5,520

 

 

 

1.9

%

B

 

 

3,270

 

 

 

1.1

%

 

 

4,778

 

 

 

1.6

%

CCC

 

 

406

 

 

 

0.1

%

 

 

492

 

 

 

0.2

%

Not Rated

 

 

4,411

 

 

 

1.5

%

 

 

3,625

 

 

 

1.2

%

Total below investment grade

 

 

11,277

 

 

 

3.8

%

 

 

14,415

 

 

 

4.9

%

Total

 

$

295,524

 

 

 

100.0

%

 

$

298,138

 

 

 

100.0

%

 

The following table sets forth the maturity profile of our fixed maturities at September 30, 2023 from December 31, 2022. Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without penalty.

 

 

 

September 30, 2023

 

 

December 31, 2022

 

(dollars in thousands)

 

Amortized
Cost

 

 

%

 

 

Fair Value

 

 

%

 

 

Amortized
Cost

 

 

%

 

 

Fair Value

 

 

%

 

Due in one year or less

 

$

4,150

 

 

 

1.2

%

 

$

4,122

 

 

 

1.4

%

 

$

6,239

 

 

 

1.9

%

 

$

6,207

 

 

 

2.1

%

Due after one year through five years

 

 

39,652

 

 

 

11.9

%

 

 

37,578

 

 

 

12.7

%

 

 

34,330

 

 

 

10.3

%

 

 

32,719

 

 

 

11.0

%

Due after five years through ten years

 

 

73,284

 

 

 

21.9

%

 

 

68,163

 

 

 

23.1

%

 

 

72,312

 

 

 

21.8

%

 

 

67,472

 

 

 

22.6

%

Due after ten years

 

 

144,550

 

 

 

43.2

%

 

 

119,003

 

 

 

40.3

%

 

 

136,004

 

 

 

41.0

%

 

 

115,545

 

 

 

38.7

%

Securities not due at a single
   maturity date-primarily mortgage
   and asset-backed securities

 

 

72,964

 

 

 

21.8

%

 

 

66,658

 

 

 

22.6

%

 

 

83,061

 

 

 

25.0

%

 

 

76,195

 

 

 

25.6

%

Total fixed maturities

 

$

334,600

 

 

 

100.0

%

 

$

295,524

 

 

 

100.0

%

 

$

331,946

 

 

 

100.0

%

 

$

298,138

 

 

 

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 has credit losses. 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 2 – Investments” in the accompanying Interim Condensed Consolidated Financial Statements included in this Form 10-Q.

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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 $295.5 million and $298.1 million as of September 30, 2023 and December 31, 2022, 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 nine months ended September 30, 2023 and 2022, our book yield on fixed maturities available-for-sale was 4.7% and 4.3%, respectively. See “Note 2 – Investments” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.

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:

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

September 30, 2023

 

 

September 30, 2022

 

 

 

Ending
Balance

 

 

Ending
Balance

 

 

Year to Date
Interest
Credited

 

 

Year to Date
Interest
Credited

 

 

 

(dollars in thousands)

 

Annuity contract holder deposits—assumed

 

$

64,095

 

 

$

69,070

 

 

$

1,849

 

 

$

1,946

 

Dividends left on deposit

 

 

6,567

 

 

 

6,731

 

 

 

124

 

 

 

128

 

Other

 

 

1,583

 

 

 

1,642

 

 

 

27

 

 

 

26

 

   Total

 

$

72,245

 

 

$

77,443

 

 

$

2,000

 

 

$

2,100

 

 

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 allowances for credit loss 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 September 30, 2023 and 2022, accumulated other comprehensive income (loss), from mark-to-market adjustments of our available-for-sale fixed income securities, net of federal income taxes and reserves was ($4.0) million and ($41.0) 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 September 30, 2023 our fixed maturity securities had an unrealized loss of $39.1 million compared to an unrealized loss of $33.8 million at December 31, 2022. The Company’s unrealized loss incurred in 2023 was $5.3 million in our fixed maturities portfolio which has a duration of 6.9 years, convexity of 0.795, and current yield of 6.2%, is primarily accounted for the increase in the 10-year treasury bill yield for the first nine months of 2023 of 71 basis points.

Financial Position

At September 30, 2023, we had total assets of $796.2 million compared to total assets at December 31, 2022 of $770.1 million, an increase of $26.1 million.

Reinsurance recoverables increased $15.7 million as a result of a $15.5 million increase in ceded policy and claim reserves and $0.3 million related to timing of settlements of reinsured claims. Commission and agent balances increased $15.6 million due to

36


 

increased commission receivables in the Agency segment and increased agent debit balances in the insurance segment. The invested asset base decreased $6.4 million, mainly due to $5.3 million in net unrealized losses in fixed maturity securities, partially offset by valuation losses in Other invested assets and net sales. Deferred income tax assets increased $3.6 million due to a tax credit of $2.7 million on net income and $0.9 million increase as a result of a tax on unrealized investment gains.

Accrued investment income increased $1.1 million due to the timing of receipt of investment income. Other assets increased $0.7 million, primarily due to an increase in prepaid. The above increases were partially offset by a decrease in deferred policy acquisition costs of $2.0 million, resulting from deferrals on new business of $7.9 million and amortization of $10.0 million, and a decrease in Cash and cash equivalents of $2.2 million, primarily used in investing activities. See Cash Flows section for further discussion on changes in cash.

At September 30, 2023, we had total liabilities of $696.9 million compared to total liabilities of $658.7 million at December 31, 2022, an increase of $38.2 million. Future policy benefits and claims increased $36.7 million, primarily due to a $38.2 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 assumed life of $1.7 million and Closed Block of $0.1 million. Debt increased $9.3 million related to an increase in net borrowing of $7.5 million and interest accrued of $1.8 million under our commission financing agreement with Hannover Life. Other liabilities increased $3.0 million, primarily due to an increase in other operating liabilities. The above increases were partially offset by decreases in Other policyholder liabilities of $6.5 million due to a decrease in claim liabilities, and a $5.2 million decrease in Policyholder account balances largely due to annuity payments.

At September 30, 2023, total equity decreased to $99.3 million from $111.3 million at December 31, 2022. This decrease in equity of $12.0 million was attributable to a decrease in Other comprehensive income of $3.9 million related to market declines in fixed maturities, net of tax and retained earnings of $8.1 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. As of September 30, 2023 and December 31, 2022, we had net advances of $38.6 million and $31.1 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. At September 30, 2023 and December 31, 2022, the Company held $270 and $180 of FHLBC common stock, which is included in Other invested assets, respectively. 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. The Company borrowed and repaid $18.0 million and $4.0 million in the nine months ended September 30, 2023 and the twelve months ended December 31, 2022, respectively.

Cash Flows

For the nine months ended September 30, 2023, the Company had a net decrease in cash of $2.2 million compared to a net decrease of $9.7 million for the nine months ended September 30, 2022.

The current year increase in cash flows from operating activities is primarily due to lower net claims, partially offset by higher operating costs and expenses.

Cash flows from investing activities mainly includes our fixed maturities and mortgage loans. 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 nine months of 2023, cash of $4.5 million was used by investing activities and includes $3.9 million of capitalized software, partially offset by $0.6 million of investment purchases net of sales and maturities.

37


 

Cash flows from financing activities were $0.5 million which includes $7.5 million, net proceeds from our commission financing program, partially offset by $7.1 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 nine months ended September 30, 2023 and 2022:

 

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

 

(dollars in thousands)

 

Consolidated Summary of Cash Flows

 

 

 

 

 

 

Net cash (used) provided by operating activities

 

$

1,877

 

 

$

(7,094

)

Net cash (used) provided by investing activities

 

 

(4,483

)

 

 

(6,128

)

Net cash (used) provided by financing activities

 

 

455

 

 

 

3,526

 

Net (decrease) in cash, cash equivalents and restricted cash

 

$

(2,151

)

 

$

(9,696

)

 

Recent Accounting Pronouncements

All applicable adopted accounting pronouncements have been reflected in our Interim Condensed Consolidated Financial Statements as of and for the nine months ended September 30, 2023. including the adoption ASU No. 2016-13, Financial Instruments— Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, 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 Effectiveness 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

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.

In advance of the effective date of the recently adopted Securities and Exchange Commission rules regarding cybersecurity disclosure, we are disclosing a recent security incident involving unauthorized access to approximately 250,000 Fidelity Life customers’ personally identifiable information. This incident was caused by our vendor’s subcontractor using the MOVEit Transfer software. As

38


 

has been documented extensively in the media, this software contained a zero-day vulnerability that a threat actor exploited to gain access to hundreds of companies’ data. Fidelity Life itself did not and does not use the MOVEit application and our computer systems and infrastructure were not impacted by the incident.

We have worked with the vendor to ensure this incident was appropriately remediated. We have also worked with the vendor to mail notices to all impacted Fidelity Life customers and while we are unaware of any actual misuse of the compromised data, free credit monitoring was offered to each impacted customer. We have also provided notice of this third party vendor’s security incident to all appropriate regulators. While the breach was not directly related to our systems or infrastructure, as a result of or otherwise related to the incident, we did receive a notice of filed litigation related to this matter (which we believe has no merit) and we may be subject to subsequent investigations, claims or actions.

While the event did not impact our systems we are working with our cybersecurity insurance carrier. While we intend to continue to carry cybersecurity insurance, future cybersecurity insurance coverage may be difficult to obtain or may only be available at significantly higher costs to us.

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

None since initial public offering of August 7, 2019

Item 3. Default upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

Rule 16a-1(f)

During the nine months ended September 30, 2023, none of the officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934) or directors of the Company adopted or, terminated or, modified any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement,” as such term is defined in Item 408(a) of Regulation S-K.

Cybersecurity, Privacy and Data Protection Regulation

In July 2023, the U.S. Securities and Exchange Commission adopted the Risk Management, Strategy, Governance, and Incident Disclosure Final Rule (the “Cybersecurity Final Rule”) enhancing disclosure requirements for registered companies covering cybersecurity risk and management. The Cybersecurity Final Rule requires registrants to disclose material cybersecurity incidents on Form 8-K within four business days of a determination that a cybersecurity incident is material, and such materiality determination must be made without unreasonable delay. The rule also requires periodic disclosures of, among other things, details on the company’s processes to assess, identify, and manage cybersecurity risks, cybersecurity governance, and management’s role in overseeing such a compliance program, including the board of directors’ oversight of cybersecurity risks. Certain reporting requirements under the Cybersecurity Final Rule become effective as early as December 2023.

 

39


 

Item 6. Exhibits

 

 

 

 

  31.1

 

Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended

 

 

 

  31.2

 

Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended

 

 

 

  32.1

 

Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

  32.2

 

Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101.INS

 

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.

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

104

 

Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

 

 

 

 

40


 

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.

 

Vericity, Inc.

Date: November 14, 2023

By:

/s/ Chris S. Kim

Chris S. Kim

Executive Vice President, Chief Financial Officer and Treasurer

 

 

41