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Vericity, Inc. - Quarter Report: 2019 June (Form 10-Q)

 

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 June 30, 2019

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.)

8700 W. Bryn Mawr Avenue, Suite 900S, Chicago Illinois

 

60631

(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. YES  NO 

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). YES  NO  

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 August 08, 2019 was 14,875,000.

 

 


Table of Contents

 

 

 

 

 

Page

 

 

 

 

 

PART I –

 

Financial Information

 

1

Item 1.

 

 

 

 

 

 

Interim Condensed Consolidated Balance Sheets

 

1

 

 

Interim Condensed Consolidated Statements of Operations

 

2

 

 

Interim Condensed Consolidated Statements of Comprehensive Income (Loss)

 

3

 

 

Interim Condensed Consolidated Statements of Changes in Equity

 

4

 

 

Interim Condensed Consolidated Statements of Cash Flows

 

5

 

 

Notes the Interim Condensed Consolidated Financial Statements

 

6

 

 

 

Note 1 – Summary of Significant Accounting Policies

 

6

 

 

 

Note 2 – Investments

 

9

 

 

 

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

 

21

 

 

 

Note 9 – Accumulated Other Comprehensive Income (Loss)

 

21

 

 

 

Note 10 – Business Segments

 

21

 

 

 

Note 11 – Subsequent Events

 

23

 

 

 

 

 

 

Item 2.

 

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

 

24

Item 4.

 

Controls and Procedures

 

37

 

 

 

 

 

PART II –

 

Other Information

 

37

Item 1.

 

Legal Proceedings

 

37

Item 1A.

 

Risk Factors

 

37

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

38

Item 3.

 

Default upon Senior Securities

 

38

Item 4.

 

Mine Safety Disclosures

 

38

Item 5.

 

Other Information

 

38

Item 6.

 

Exhibits

 

39

Signature

 

 

 

40

 

 


Part 1. Financial Information

Item I. Financial Statements

Members Mutual Holding Company

Interim Condensed Consolidated Balance Sheets

(dollars in thousands)

 

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

(Audited)

 

ASSETS:

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Fixed maturities – available-for-sale – at fair value (amortized cost; $297,360

   and $304,303)

 

$

314,856

 

 

$

306,586

 

Equity securities – available-for-sale – at fair value (cost; $104 and $99)

 

 

104

 

 

 

99

 

Equity securities – trading – at fair value (cost; $6,416 and $6,328)

 

 

5,682

 

 

 

4,823

 

Mortgage loans (net of valuation allowances of $62 and $236)

 

 

54,297

 

 

 

50,830

 

Limited partnership interests

 

 

13

 

 

 

118

 

Policyholder loans

 

 

5,708

 

 

 

5,623

 

Total investments

 

 

380,660

 

 

 

368,079

 

Cash and cash equivalents

 

 

14,254

 

 

 

20,984

 

Accrued investment income

 

 

2,726

 

 

 

2,985

 

Reinsurance recoverable

 

 

134,861

 

 

 

136,601

 

Deferred policy acquisition costs

 

 

85,231

 

 

 

84,567

 

Commissions and agent balances (net of allowances of $466 and $562)

 

 

13,268

 

 

 

1,864

 

Intangible assets

 

 

1,675

 

 

 

1,716

 

Deferred income tax assets, net

 

 

8,104

 

 

 

10,663

 

Other assets

 

 

32,742

 

 

 

27,511

 

Total assets

 

 

673,521

 

 

 

654,970

 

LIABILITIES AND EQUITY:

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Future policy benefits and claims

 

 

327,811

 

 

 

320,397

 

Policyholder account balances

 

 

90,186

 

 

 

93,051

 

Other policyholder liabilities

 

 

23,292

 

 

 

25,738

 

Policy dividend obligations

 

 

11,155

 

 

 

9,383

 

Reinsurance liabilities and payables

 

 

5,377

 

 

 

6,167

 

Long-term debt

 

 

13,542

 

 

 

10,294

 

Short-term debt

 

 

3,633

 

 

 

3,072

 

Other liabilities

 

 

17,291

 

 

 

14,678

 

Total liabilities

 

 

492,287

 

 

 

482,780

 

Commitments and contingencies

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Retained earnings

 

 

174,296

 

 

 

174,558

 

Accumulated other comprehensive income (loss)

 

 

6,938

 

 

 

(2,368

)

Total equity

 

 

181,234

 

 

 

172,190

 

Total liabilities and equity

 

$

673,521

 

 

$

654,970

 

 

See notes to interim condensed consolidated financial statements

1


Members Mutual Holding Company

Interim Condensed Consolidated Statements of Operations

(dollars in thousands)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

(Unaudited)

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net insurance premiums

 

$

25,791

 

 

$

22,089

 

 

$

48,880

 

 

$

43,101

 

Net investment income

 

 

3,682

 

 

 

3,720

 

 

 

7,501

 

 

 

7,464

 

Sales and other net realized investment (losses) gains

 

 

(99

)

 

 

682

 

 

 

949

 

 

 

121

 

Earned commissions

 

 

5,149

 

 

 

3,360

 

 

 

8,895

 

 

 

6,695

 

Insurance lead sales

 

 

1,444

 

 

 

2,123

 

 

 

2,879

 

 

 

4,305

 

Other income

 

 

87

 

 

 

44

 

 

 

142

 

 

 

157

 

Total revenue

 

 

36,054

 

 

 

32,018

 

 

 

69,246

 

 

 

61,843

 

BENEFITS AND EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Life, annuity, and health claim benefits

 

 

16,085

 

 

 

13,540

 

 

 

32,330

 

 

 

26,591

 

Interest credited to policyholder account balances

 

 

837

 

 

 

867

 

 

 

1,638

 

 

 

1,789

 

Operating costs and expenses

 

 

18,357

 

 

 

18,132

 

 

 

37,263

 

 

 

35,026

 

Amortization of deferred policy acquisition costs

 

 

3,383

 

 

 

2,791

 

 

 

6,522

 

 

 

5,616

 

Other expenses

 

 

20

 

 

 

41

 

 

 

42

 

 

 

83

 

Total benefits and expenses

 

 

38,682

 

 

 

35,371

 

 

 

77,795

 

 

 

69,105

 

(Loss) income from operations before income tax

 

 

(2,628

)

 

 

(3,353

)

 

 

(8,549

)

 

 

(7,262

)

Income tax (benefit) expense

 

 

(30

)

 

 

(220

)

 

 

284

 

 

 

(863

)

Net (loss) income

 

$

(2,598

)

 

$

(3,133

)

 

$

(8,833

)

 

$

(6,399

)

 

See notes to interim condensed consolidated financial statements

2


Members Mutual Holding Company

Interim Condensed Consolidated Statements of Comprehensive Income (Loss)

(dollars in thousands)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Net (loss) income

 

$

(2,598

)

 

$

(3,133

)

 

$

(8,833

)

 

$

(6,399

)

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains (losses) on investments (net of tax $1,225,

   ($701) and $2,474, ($2,080))

 

 

4,608

 

 

 

(2,636

)

 

 

9,306

 

 

 

(7,824

)

Total comprehensive income (loss) (net of tax $1,225,

   ($701) and $2,474, ($2,080))

 

 

4,608

 

 

 

(2,636

)

 

 

9,306

 

 

 

(7,824

)

Total comprehensive income (loss)

 

$

2,010

 

 

$

(5,769

)

 

$

473

 

 

$

(14,223

)

 

See notes to interim condensed consolidated financial statements

3


Members Mutual Holding Company

Interim Condensed Consolidated Statements of Changes in Equity

(dollars in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

RETAINED EARNINGS:

 

 

 

 

 

 

 

 

Balance – beginning of period

 

$

174,558

 

 

$

188,405

 

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

 

 

8,571

 

 

 

 

Balance after adjustments – beginning of period

 

 

183,129

 

 

 

188,405

 

Net (loss) income attributable to the Company

 

 

(8,833

)

 

 

(6,399

)

Balance – end of period

 

 

174,296

 

 

 

182,006

 

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

Balance – beginning of period

 

 

(2,368

)

 

 

7,798

 

Other comprehensive income (loss) attributable to the Company

 

 

9,306

 

 

 

(7,824

)

Balance – end of period

 

 

6,938

 

 

 

(26

)

Total equity

 

$

181,234

 

 

$

181,980

 

 

See notes to interim condensed consolidated financial statements

4


Members Mutual Holding Company

Interim Condensed Consolidated Statements of Cash Flows

(dollars in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(8,833

)

 

$

(6,399

)

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

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization and other non-cash items

 

 

921

 

 

 

634

 

Interest credited to policyholder account balances

 

 

1,638

 

 

 

1,789

 

Deferred income tax

 

 

85

 

 

 

(888

)

Realized investment gains

 

 

(949

)

 

 

(121

)

Interest expense

 

 

446

 

 

 

169

 

Change in:

 

 

 

 

 

 

 

 

Trading securities

 

 

(216

)

 

 

(157

)

Accrued investment income

 

 

258

 

 

 

230

 

Reinsurance recoverable

 

 

1,740

 

 

 

4,382

 

Deferred policy acquisition costs

 

 

(665

)

 

 

(1,560

)

Commissions and agent balances

 

 

(2,834

)

 

 

639

 

Other assets

 

 

(3,672

)

 

 

(572

)

Insurance liabilities

 

 

3,309

 

 

 

(859

)

Other liabilities

 

 

1,823

 

 

 

(4,061

)

Net cash (used) provided by operating activities

 

 

(6,949

)

 

 

(6,774

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Sales, maturities and repayments of:

 

 

 

 

 

 

 

 

Fixed maturity securities

 

 

60,356

 

 

 

45,194

 

Equity securities

 

 

 

 

 

10

 

Limited partnerships

 

 

138

 

 

 

780

 

Mortgage loans

 

 

1,215

 

 

 

2,735

 

Purchases of:

 

 

 

 

 

 

 

 

Fixed maturity securities

 

 

(53,467

)

 

 

(39,216

)

Limited partnerships

 

 

(38

)

 

 

 

Mortgage loans

 

 

(4,508

)

 

 

(5,930

)

Change in policyholder loans, net

 

 

(86

)

 

 

304

 

Other investments, net

 

 

(2,336

)

 

 

(2,529

)

Net cash provided (used) by investing activities

 

 

1,274

 

 

 

1,348

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from issuance of debt

 

 

6,845

 

 

 

9,343

 

Repayment of debt

 

 

(3,482

)

 

 

(1,904

)

Deposits to policyholder account balances

 

 

240

 

 

 

280

 

Withdrawals from policyholder account balances

 

 

(4,658

)

 

 

(3,954

)

Net cash (used) provided by financing activities

 

 

(1,055

)

 

 

3,765

 

Net (decrease) in cash and cash equivalents

 

 

(6,730

)

 

 

(1,661

)

Cash and cash equivalents – beginning of period

 

 

20,984

 

 

 

11,766

 

Cash and cash equivalents – end of period

 

$

14,254

 

 

$

10,105

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Non-cash transactions

 

 

 

 

 

 

 

 

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

 

$

8,571

 

 

$

 

 

See notes to interim condensed consolidated financial statements

5


Members Mutual Holding Company

Notes to Interim Condensed Consolidated Financial Statements

(dollars in thousands)

Note 1 – Summary of Significant Accounting Policies

Description of Business

Vericity, Inc. is a Delaware corporation organized to be the stock holding company for Members Mutual Holding Company (Members Mutual) and its subsidiaries. On August 7, 2019, Vericity Inc. 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 from mutual to stock form and the acquisition by Vericity Inc. of all of the capital stock of Members Mutual 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, Vericity Inc. became the holding company for converted Members Mutual and its indirect subsidiaries, including Fidelity Life Association and Efinancial, LLC.

Members Mutual is an Illinois‑domiciled mutual insurance holding company. Members Mutual was formed in 2007 in connection with the conversion of Fidelity Life Association, a Legal Reserve Life Insurance Company (Fidelity Life), from a mutual insurance company into a stock insurance company. The members’ interests in Fidelity Life were transferred to Members Mutual as part of the reorganization.  In addition, Fidelity LifeCorp, Inc. (Fidelity LifeCorp), a Delaware general business corporation, was formed as part of the reorganization.  In 2011, the name of Fidelity LifeCorp was changed to LifeStory Interactive, Inc.  In 2014, the name of LifeStory Interactive, Inc. was changed to Vericity Holdings, Inc. (Vericity). The aforementioned companies are collectively referred to as the “Company.”

Members Mutual and Vericity operate as holding companies and currently have 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, LLC (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 Members Mutual and subsidiaries for the three and six months ended June 30, 2019 and June 30, 2018 and at June 30, 2019 and December 31, 2018. 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 for the year ended December 31, 2018. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

Basis of Presentation 

These interim condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The unaudited interim condensed consolidated financial information furnished herein reflects all adjustments which are, in the opinion of management, necessary to fairly state the results for the interim periods presented. All such adjustments are of a normal recurring nature. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated results of operations for the interim periods presented are not necessarily indicative of results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted from this report, as is permitted by such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the financial statements as of and for the year ended December 31, 2018, and notes thereto, included in this registration statement.

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 maturities and equity securities, investment impairments, the valuation of deferred tax assets, future policy benefits and other policyholder liabilities.  

 

6


Revenue Recognition

We adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 606”) on January 1, 2019. The majority of our revenue-generating arrangements are premiums received from insurance contracts and therefore are excluded from the scope of ASU 606. Life and health insurance contract premiums are recognized as income when due from policyholders. Deposits on deposit-type contracts are entered directly as a liability when cash is received.

 

Commission revenue from the sale of insurance products by Efinancial is recognized once the insurance policy is issued by the insurance company and accepted by the customer (policy placement) and recorded as commission receivable, net of any advances received. Provision is made for commission revenue that, based on experience, will ultimately not be earned due to the customer discontinuing the underlying insurance policy. Commission revenue that Efinancial earns from the sale of insurance products where Efinancial acts as the general agent (wholesale distribution) is recorded net of related commission expense paid to the writing agency.

 

Our primary revenue-generating arrangements that are within the scope of ASU 606 are our brokerage arrangements with third parties. In these arrangements, our customer is the insurance carrier and we have a single performance obligation to place a policy for the insurance carrier. Our performance obligation is satisfied at the point in time when the policy is placed, which is the point in time when the customer obtains control over the policy and has the right to use and obtain the benefits from the policy. In these arrangements, depending on the number of years the policy is in force, a significant majority of our consideration is received in the first year. In addition to the first-year consideration, depending on the specific carrier and product involved, we may also be entitled to renewal commissions over the period of time the policy remains in force. Our consideration is variable based on the amount of time we estimate a policy will remain in force. We estimate the amount of variable consideration that we expect to receive based on our historical experience or carrier experience to the extent available, industry data and our expectations as to future persistency rates. Additionally, we consider application of the constraint and only recognize the amount of variable consideration that we believe is probable to be received and will not be subject to a significant revenue reversal. We monitor and update this estimate at each reporting date.

 

Because we recognize revenue prior to being entitled to the payment for these renewal commissions, we recognize a contract asset; however, we have determined that the amount of our contract asset is immaterial. Additionally, because our brokerage arrangements consist of a single performance obligation that is satisfied at the point in time that policies are placed, we do not have any remaining performance obligations in our contracts with customers. We have evaluated our arrangements and concluded that none of our brokerage arrangements include a significant financing component, and therefore do not adjust revenue for the time value of money. We have determined that any contract costs (e.g., costs to obtain or costs to fulfill) related to our brokerage arrangements are immaterial.

 

Our Chief Operating Decision Maker makes decisions by analyzing our segment information, which is included in Note 10. 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.

 

Insurance lead sales include the sale of potential life insurance customer leads to outside parties including agencies and unaffiliated insurers. Sales of leads are recorded at the time the lead data is transferred to the customer and recorded as a receivable, net of allowance for returns.

Accounting Standards Adopted

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. The guidance is effective for interim and annual periods beginning after December 15, 2017. The core principle of the updated guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The standard also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments, changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The standard excludes from its scope the accounting for insurance contracts, financial instruments, and certain other agreements that are governed under other GAAP guidance.  The Company adopted the new revenue guidance effective January 1, 2019 using the modified retrospective approach.

7


The cumulative effect changes to the Interim Condensed Consolidated Balance Sheet for the adoption of the updated guidance on January 1, 2019 were as follows:

 

 

 

Balance at

December 31,

 

 

Adoption

Adjustment

 

 

Balance at

January 1,

 

ASSETS:

 

2018

 

 

Topic 606

 

 

2019

 

Commissions and agent balances

 

$

1,864

 

 

$

8,571

 

 

$

10,435

 

Deferred income tax assets, net

 

 

10,663

 

 

 

 

 

 

10,663

 

Retained earnings

 

 

174,558

 

 

 

8,571

 

 

 

183,129

 

 

The impact of adoption on the Interim Condensed Consolidated Statement of Operations and Balance Sheet as of June 30, 2019 and for the three and six months ended June 30, 2019 was as follows:

 

 

 

Three Months Ended June 30, 2019

 

REVENUES:

 

Before

Adoption

Adjustment

 

 

Adoption

Adjustment

Effect

 

 

After

Adoption

Adjustment

 

Earned commissions

 

$

5,053

 

 

$

96

 

 

$

5,149

 

Total revenue

 

 

35,958

 

 

 

96

 

 

 

36,054

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from operations before income tax

 

 

(2,724

)

 

 

96

 

 

 

(2,628

)

Income tax (benefit) expense

 

 

(30

)

 

 

 

 

 

(30

)

Net (loss) income

 

 

(2,694

)

 

 

96

 

 

 

(2,598

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2019

 

REVENUES:

 

Before

Adoption

Adjustment

 

 

Adoption

Adjustment

Effect

 

 

After

Adoption

Adjustment

 

Earned commissions

 

$

8,696

 

 

$

199

 

 

$

8,895

 

Total revenue

 

 

69,047

 

 

 

199

 

 

 

69,246

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from operations before income tax

 

 

(8,748

)

 

 

199

 

 

 

(8,549

)

Income tax expense (benefit)

 

 

284

 

 

 

 

 

 

284

 

Net (loss) income

 

 

(9,032

)

 

 

199

 

 

 

(8,833

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2019

 

ASSETS:

 

Before

Adoption

Adjustment

 

 

Adoption

Adjustment

Effect

 

 

After

Adoption

Adjustment

 

Commissions and agent balances

 

$

13,069

 

 

$

199

 

 

$

13,268

 

Deferred income tax assets, net

 

 

8,104

 

 

 

 

 

 

8,104

 

LIABILITIES AND EQUITY:

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

174,097

 

 

 

199

 

 

 

174,296

 

 

In January  2016, the FASB issued ASU No. 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The updated guidance requires changes to the current financial instruments reporting model and is effective for annual periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company expects that the primary effects of the new guidance will be around the accounting for equity investments. All equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings. There will no longer be an available-for-sale classification for changes in fair value reported in other comprehensive income (loss) for equity securities with readily determinable fair values. Under the new guidance, changes in the fair value of equity securities will be reported as net realized investment gains (losses) in the Company's consolidated statement of operations. There is no impact to the Company’s results of operations or financial position as the Company holds no investment positions in this category.

 

8


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.

Available‑for‑Sale Securities

The amortized cost, gross unrealized gains, gross unrealized losses, fair value, and Other Than Temporary Impairments (OTTI) loss included in Accumulated Other Comprehensive Income (AOCI) of fixed maturities and equity securities available-for-sale are as follows:

 

 

 

June 30, 2019

 

Fixed maturities, available-for-sale

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

OTTI

Losses

 

U.S. government and agencies

 

$

15,823

 

 

$

1,840

 

 

$

 

 

$

17,663

 

 

$

 

U.S. agency mortgage-backed

 

 

40,960

 

 

 

770

 

 

 

(98

)

 

 

41,632

 

 

 

 

State and political subdivisions

 

 

18,658

 

 

 

1,616

 

 

 

 

 

 

20,274

 

 

 

 

Corporate and miscellaneous

 

 

134,253

 

 

 

12,727

 

 

 

(754

)

 

 

146,226

 

 

 

 

Foreign government

 

 

131

 

 

 

28

 

 

 

 

 

 

159

 

 

 

 

Residential mortgage-backed securities

 

 

7,241

 

 

 

497

 

 

 

(9

)

 

 

7,729

 

 

 

(266

)

Commercial mortgage-backed securities

 

 

18,922

 

 

 

787

 

 

 

(11

)

 

 

19,698

 

 

 

 

Asset-backed securities

 

 

61,372

 

 

 

398

 

 

 

(295

)

 

 

61,475

 

 

 

 

Total fixed maturities, available-for-sale

 

$

297,360

 

 

$

18,663

 

 

$

(1,167

)

 

$

314,856

 

 

$

(266

)

 

 

 

December 31, 2018

 

Fixed maturities, available-for-sale

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

OTTI

Losses

 

U.S. government and agencies

 

$

11,459

 

 

$

1,181

 

 

$

(129

)

 

$

12,511

 

 

$

 

U.S. agency mortgage-backed

 

 

32,811

 

 

 

332

 

 

 

(562

)

 

 

32,581

 

 

 

 

State and political subdivisions

 

 

23,334

 

 

 

694

 

 

 

(117

)

 

 

23,911

 

 

 

 

Corporate and miscellaneous

 

 

155,372

 

 

 

5,972

 

 

 

(4,428

)

 

 

156,916

 

 

 

 

Foreign government

 

 

131

 

 

 

11

 

 

 

 

 

 

142

 

 

 

 

Residential mortgage-backed securities

 

 

9,786

 

 

 

374

 

 

 

(75

)

 

 

10,085

 

 

 

(269

)

Commercial mortgage-backed securities

 

 

16,409

 

 

 

56

 

 

 

(313

)

 

 

16,152

 

 

 

 

Asset-backed securities

 

 

55,001

 

 

 

117

 

 

 

(830

)

 

 

54,288

 

 

 

 

Total fixed maturities, available-for-sale

 

$

304,303

 

 

$

8,737

 

 

$

(6,454

)

 

$

306,586

 

 

$

(269

)

 

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:

 

 

 

June 30, 2019

 

 

 

Amortized

Cost

 

 

Fair

Value

 

Due in one year or less

 

$

10,025

 

 

$

10,154

 

Due after one year through five years

 

 

38,183

 

 

 

39,930

 

Due after five years through ten years

 

 

29,703

 

 

 

31,533

 

Due after ten years

 

 

90,772

 

 

 

102,520

 

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

   asset-backed securities

 

 

128,677

 

 

 

130,719

 

Total fixed maturities, available-for-sale

 

$

297,360

 

 

$

314,856

 

 

Fixed maturities with a carrying value of $4,960 and $4,273 were on deposit with governmental authorities as required by law at June 30, 2019 and December 31, 2018, respectively.

9


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 97.9% and 94.0% of the Company’s total fixed maturities portfolio at June 30, 2019 and December 31, 2018, 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 32 such investment instruments with ownership shares ranging from 3.1% to 30.0% of the trust at June 30, 2019. The Company owns a share of 297 mortgage loans with a loan average balance of $183 and a maximum exposure related to any single loan of $555. Mortgage loan holdings are diversified by geography and property type as follows:

 

 

 

June 30, 2019

 

 

December 31, 2018

 

 

 

Gross Carrying

Value

 

 

% of Total

 

 

Gross Carrying

Value

 

 

% of Total

 

Property Type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

17,441

 

 

 

32.1

%

 

$

16,081

 

 

 

31.5

%

Office

 

 

13,143

 

 

 

24.2

%

 

 

12,446

 

 

 

24.4

%

Industrial

 

 

8,712

 

 

 

16.0

%

 

 

7,742

 

 

 

15.2

%

Mixed use

 

 

6,352

 

 

 

11.7

%

 

 

6,526

 

 

 

12.8

%

Apartments

 

 

4,265

 

 

 

7.8

%

 

 

4,118

 

 

 

8.1

%

Medical office

 

 

3,220

 

 

 

5.9

%

 

 

2,905

 

 

 

5.7

%

Other

 

 

1,226

 

 

 

2.3

%

 

 

1,248

 

 

 

2.3

%

Gross carrying value of mortgage loans

 

 

54,359

 

 

 

100.0

%

 

 

51,066

 

 

 

100.0

%

Valuation allowance

 

 

(62

)

 

 

 

 

 

 

(236

)

 

 

 

 

Net carrying value of mortgage loans

 

$

54,297

 

 

 

 

 

 

$

50,830

 

 

 

 

 

 

 

 

June 30, 2019

 

 

December 31, 2018

 

 

 

Gross Carrying

Value

 

 

% of Total

 

 

Gross Carrying

Value

 

 

% of Total

 

U.S. Region:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

West South Central

 

$

13,397

 

 

 

24.6

%

 

$

12,223

 

 

 

23.9

%

East North Central

 

 

12,614

 

 

 

23.2

%

 

 

11,262

 

 

 

22.1

%

South Atlantic

 

 

11,953

 

 

 

22.0

%

 

 

12,105

 

 

 

23.7

%

West North Central

 

 

4,399

 

 

 

8.1

%

 

 

4,067

 

 

 

8.0

%

Mountain

 

 

4,567

 

 

 

8.4

%

 

 

4,357

 

 

 

8.5

%

Middle Atlantic

 

 

2,873

 

 

 

5.3

%

 

 

2,714

 

 

 

5.3

%

East South Central

 

 

3,197

 

 

 

5.9

%

 

 

2,903

 

 

 

5.7

%

New England

 

 

140

 

 

 

0.3

%

 

 

144

 

 

 

0.3

%

Pacific

 

 

1,219

 

 

 

2.2

%

 

 

1,291

 

 

 

2.5

%

Gross carrying value of mortgage loans

 

 

54,359

 

 

 

100.0

%

 

 

51,066

 

 

 

100.0

%

Valuation allowance

 

 

(62

)

 

 

 

 

 

 

(236

)

 

 

 

 

Net carrying value of mortgage loans

 

$

54,297

 

 

 

 

 

 

$

50,830

 

 

 

 

 

 

During the six months ended June 30, 2019 and 2018, $4,508 and, $5,930 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 June 30, 2019 and December 31, 2018.  At June 30, 2019, and December 31, 2018, the Company had 6 and 6 mortgage loans with a total carrying value of $610 and $617 that were in a restructured status, respectively. There were no impairments for mortgage loans at June 30, 2019 and December 31, 2018.

The changes in the valuation allowance for commercial mortgage loans were as follows:

 

 

 

Six Months Ended June 30, 2019

 

 

Year Ended December 31, 2018

 

Beginning balance

 

$

236

 

 

$

268

 

Net decrease in valuation allowance

 

 

(174

)

 

 

(32

)

Ending balance

 

$

62

 

 

$

236

 

 

10


At June 30, 2019 and December 31, 2018, the Company had no mortgage loans that were on nonaccrual status.

At June 30, 2019 and December 31, 2018, the Company had a commitment to make investments in mortgage loans in the amount of $734 and $4,397, respectively.

Limited Partnerships

The carrying value of limited partnerships at both June 30, 2019 and December 31, 2018, was $13 and $118, which includes undistributed losses of $54 and $96, respectively. The Company’s maximum exposure to loss related to these equity method investments is limited to the carrying value of these investments plus unfunded commitments of $119 and $119 at June 30, 2019 and December 31, 2018, respectively.

At both June 30, 2019 and December 31, 2018, the Company’s limited partnerships holdings were in one hedge fund of funds investment, which consists of a diversified group of managers with multiple strategies being employed.  

Net Investment Income

The sources of net investment income are as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Interest from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities - available-for-sale

 

$

3,132

 

 

$

3,382

 

 

$

6,442

 

 

$

6,818

 

Policyholder loans

 

 

80

 

 

 

114

 

 

 

211

 

 

 

157

 

Mortgage loans

 

 

653

 

 

 

503

 

 

 

1,285

 

 

 

1,052

 

Cash and cash equivalents

 

 

46

 

 

 

34

 

 

 

106

 

 

 

53

 

Dividends on equity securities

 

 

106

 

 

 

98

 

 

 

207

 

 

 

193

 

Gross investment income

 

 

4,017

 

 

 

4,131

 

 

 

8,251

 

 

 

8,273

 

Investment expense

 

 

(335

)

 

 

(411

)

 

 

(750

)

 

 

(809

)

Net investment income

 

$

3,682

 

 

$

3,720

 

 

$

7,501

 

 

$

7,464

 

 

Investment expenses include investment management fees, some of which include incentives based on market performance, custodial fees and internal costs for investment-related activities.

Realized Investment (Losses) Gains

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

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Investment (losses) gains from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities - available-for-sale

 

$

42

 

 

$

133

 

 

$

153

 

 

$

250

 

Equity securities, trading

 

 

(131

)

 

 

500

 

 

 

647

 

 

 

(205

)

Mortgage loans valuation allowance

 

 

 

 

 

52

 

 

 

174

 

 

 

53

 

Limited partnerships

 

 

2

 

 

 

10

 

 

 

(5

)

 

 

47

 

Investment expenses

 

 

(12

)

 

 

(13

)

 

 

(20

)

 

 

(24

)

Total net realized investment (losses) gains

 

$

(99

)

 

$

682

 

 

$

949

 

 

$

121

 

 

Other‑Than‑Temporary Declines in Fair Value

The Company regularly reviews its investments portfolio for factors that may indicate that a decline in the fair value of an investment is other‑than‑temporary. A fixed maturity security is other-than-temporarily impaired if the fair value of the security is less than its amortized cost basis and the Company either intends to sell the fixed maturity security or it is more likely than not the Company will be required to sell the fixed maturity security before recovery of its amortized cost basis. For all other securities in an unrealized loss position in which the Company does not expect to recover the entire amortized cost basis, the security is deemed to be other-than-temporarily impaired for credit reasons.

11


Significant judgment is required in the determination of whether an OTTI loss has occurred for a security. The Company has developed a consistent methodology and has identified significant inputs for determining whether an OTTI loss has occurred. Some of the factors considered in evaluating whether a decline in fair value is other‑than‑temporary 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 a fixed maturity security 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 other-than-temporarily impaired for credit reasons and is recognized as an OTTI loss in earnings. The non-credit component, determined as the difference between the adjusted amortized cost basis and fair value, is recognized as OTTI in other comprehensive (loss) income.

A rollforward of the cumulative credit losses on fixed maturity securities are as follows:

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Beginning balance of credit losses on fixed maturity securities

 

$

828

 

 

$

828

 

Reduction of credit losses related to securities sold during period

 

 

 

 

 

 

Ending balance of credit losses on fixed maturity securities

 

$

828

 

 

$

828

 

 

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:

 

June 30, 2019

 

12 months or less

 

 

Longer than 12 months

 

 

Total

 

 

 

Estimated

Fair Value

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

 

Gross

Unrealized

Losses

 

Fixed maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

U.S. agency mortgage-backed

 

 

2,539

 

 

 

(10

)

 

 

4,459

 

 

 

(88

)

 

 

6,998

 

 

 

(98

)

Corporate and miscellaneous

 

 

3,118

 

 

 

(267

)

 

 

4,873

 

 

 

(487

)

 

 

7,991

 

 

 

(754

)

Residential mortgage-backed

 

 

828

 

 

 

(8

)

 

 

7

 

 

 

(1

)

 

 

835

 

 

 

(9

)

Commercial mortgage-backed

 

 

251

 

 

 

(1

)

 

 

1,266

 

 

 

(10

)

 

 

1,517

 

 

 

(11

)

Asset-backed securities

 

 

28,959

 

 

 

(238

)

 

 

1,571

 

 

 

(57

)

 

 

30,530

 

 

 

(295

)

Total fixed maturities

 

$

35,695

 

 

$

(524

)

 

$

12,176

 

 

$

(643

)

 

$

47,871

 

 

$

(1,167

)

 

December 31, 2018

 

12 months or less

 

 

Longer than 12 months

 

 

Total

 

 

 

Estimated

Fair Value

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

 

Gross

Unrealized

Losses

 

Fixed maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

$

1,991

 

 

$

(82

)

 

$

1,469

 

 

$

(47

)

 

$

3,460

 

 

$

(129

)

U.S. agency mortgage-backed

 

 

11,420

 

 

 

(171

)

 

 

12,565

 

 

 

(391

)

 

 

23,985

 

 

 

(562

)

State and political subdivisions

 

 

5,420

 

 

 

(63

)

 

 

2,416

 

 

 

(54

)

 

 

7,836

 

 

 

(117

)

Corporate and miscellaneous

 

 

62,162

 

 

 

(3,359

)

 

 

7,310

 

 

 

(1,068

)

 

 

69,472

 

 

 

(4,427

)

Residential mortgage-backed

 

 

4,667

 

 

 

(53

)

 

 

621

 

 

 

(22

)

 

 

5,288

 

 

 

(75

)

Commercial mortgage-backed

 

 

4,948

 

 

 

(117

)

 

 

4,357

 

 

 

(197

)

 

 

9,305

 

 

 

(314

)

Asset-backed securities

 

 

35,372

 

 

 

(703

)

 

 

6,325

 

 

 

(126

)

 

 

41,697

 

 

 

(829

)

Total fixed maturities

 

$

125,980

 

 

$

(4,548

)

 

$

35,063

 

 

$

(1,905

)

 

$

161,043

 

 

$

(6,453

)

 

12


The indicated gross unrealized losses in all fixed maturity categories decreased to $1,167 from $6,453 at June 30, 2019 and December 31, 2018, 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 regarding these securities, the Company concluded that these securities were not other-than-temporarily impaired.  

Information and concentrations related to fixed maturities in an unrealized loss position are included below. The tables below include the number of fixed maturities in an unrealized loss position for greater than and less than 12 months and the percentage that were investment grade at June 30, 2019.

 

 

 

Unrealized Losses 12 months or less

 

 

 

Number of Securities

 

 

 

Total

 

 

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 maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency mortgage-backed

 

 

3

 

 

 

3

 

 

 

 

 

 

 

 

 

100

%

Corporate and miscellaneous

 

 

12

 

 

 

7

 

 

 

4

 

 

 

1

 

 

 

25

%

Residential mortgage-backed

 

 

3

 

 

 

3

 

 

 

 

 

 

 

 

 

33

%

Commercial mortgage-backed

 

 

1

 

 

 

1

 

 

 

 

 

 

 

 

 

0

%

Asset-backed securities

 

 

48

 

 

 

48

 

 

 

 

 

 

 

 

 

90

%

Total fixed maturities

 

 

67

 

 

 

62

 

 

 

4

 

 

 

1

 

 

 

 

 

 

 

 

Unrealized Losses greater than 12 months

 

 

 

Number of Securities

 

 

 

Total

 

 

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 maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency mortgage-backed

 

 

11

 

 

 

11

 

 

 

 

 

 

 

 

 

100

%

Corporate and miscellaneous

 

 

12

 

 

 

8

 

 

 

4

 

 

 

 

 

 

58

%

Residential mortgage-backed

 

 

1

 

 

 

1

 

 

 

 

 

 

 

 

 

0

%

Commercial mortgage-backed

 

 

1

 

 

 

1

 

 

 

 

 

 

 

 

 

100

%

Asset-backed securities

 

 

2

 

 

 

2

 

 

 

 

 

 

 

 

 

100

%

Total fixed maturities

 

 

27

 

 

 

23

 

 

 

4

 

 

 

 

 

 

 

 

 

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 $17,888 and $16,145 at June 30, 2019 and December 31, 2018, respectively, is computed as the present value of contractually-specified future benefits. The amount included in the policy liability for structured settlements that are life contingent at June 30, 2019 and December 31, 2018, is $12,866 and $11,258, respectively.

To the extent that unrealized gains on fixed income securities would result in a premium deficiency had those gains actually been realized, a premium deficiency reserve is recorded. A liability of $3,737 and $2,001 is included as part of the liability for structured settlements with respect to this deficiency at June 30, 2019 and December 31, 2018, 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 18.7% and 21.9% of the face value of total life at June 30, 2019 and December 31, 2018, 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. No amounts have been recorded in the six months ended June 30, 2019 and 2018 for amounts anticipated to be uncollectible or for the anticipated failure of a reinsurer to meet its obligations under the contracts.

Reinsurance recoverable are as follows:

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Ceded future policy benefits

 

$

114,465

 

 

$

117,035

 

Claims and other amounts recoverable

 

 

20,396

 

 

 

19,566

 

Ending balance

 

$

134,861

 

 

$

136,601

 

 

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

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Direct premiums

 

$

37,417

 

 

$

34,377

 

 

$

73,728

 

 

$

69,591

 

Assumed premiums

 

 

7,160

 

 

 

4,605

 

 

 

11,911

 

 

 

9,138

 

Ceded premiums

 

 

(18,786

)

 

 

(16,893

)

 

 

(36,759

)

 

 

(35,628

)

Net insurance premiums

 

$

25,791

 

 

$

22,089

 

 

$

48,880

 

 

$

43,101

 

 

Net policy charges on universal life products were $41, $84, $44 and $88, for the three and six months ended June 30, 2019 and 2018, respectively, and are included in other income.  

At June 30, 2019 and December 31, 2018, reserves related to fixed‑rate annuity deposits assumed from a former affiliate company amounted to approximately $80,771 and $83,299, respectively, and are included with policyholder account balances in the 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).

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 consolidated financial statements on the same basis as other accounts of the Company. The maximum future earnings and accumulated other comprehensive income to be recognized from Closed Block assets and liabilities represent the estimated future Closed Block profits that will accrue to the Company and is calculated as the excess of Closed Block assets over Closed Block liabilities. Included in Closed Block assets at June 30, 2019 and December 31, 2018 is $9,667 and $9,541 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 June 30, 2019 and December 31, 2018, the Company recognized a policyholder dividend obligation of $11,155 and $9,383, respectively, resulting from the excess of actual cumulative earnings over the expected cumulative earnings, and from accumulated net unrealized investment gains that have arisen subsequent to the establishment of the Closed Block.

14


The impacts on the Company’s comprehensive (loss) income from recognizing a policyholder dividend obligation are as follows:

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Actual cumulative (loss) income earnings over expected cumulative earnings

 

$

(8,743

)

 

$

(8,668

)

Income tax (benefit) expense

 

 

(1,836

)

 

 

(1,820

)

Net (loss) income impact

 

 

(6,907

)

 

 

(6,848

)

Accumulated net unrealized investment (losses) gains

 

 

(2,412

)

 

 

(715

)

Income tax (benefit) expense

 

 

(506

)

 

 

(150

)

Other comprehensive (loss) income impact

 

 

(1,906

)

 

 

(565

)

Comprehensive (loss) income impact

 

$

(8,813

)

 

$

(7,413

)

 

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

 

 

 

June 30,

 

 

December 31,

 

Closed Block Liabilities

 

2019

 

 

2018

 

Future policy benefits and claims

 

$

51,270

 

 

$

58,468

 

Policyholder account balances

 

 

7,811

 

 

 

8,147

 

Other policyholder liabilities

 

 

2,815

 

 

 

3,856

 

Policyholder dividend obligations

 

 

11,155

 

 

 

9,383

 

Other (assets) liabilities

 

 

(1,169

)

 

 

(1,061

)

Total Closed Block liabilities

 

 

71,882

 

 

 

78,793

 

Assets Designated to the Closed Block

 

 

 

 

 

 

 

 

Investments

 

 

 

 

 

 

 

 

Fixed maturity securities - available-for-sale (amortized cost $33,744 and

   $34,631, respectively)

 

 

37,440

 

 

 

36,104

 

Policyholder loans

 

 

1,259

 

 

 

1,321

 

Total investments

 

 

38,699

 

 

 

37,425

 

Cash and cash equivalents

 

 

5,278

 

 

 

2,664

 

Premiums due and uncollected

 

 

1,445

 

 

 

2,595

 

Accrued investment income

 

 

440

 

 

 

450

 

Reinsurance recoverable

 

 

29,576

 

 

 

36,900

 

Deferred income tax assets, net

 

 

4,070

 

 

 

5,314

 

Total assets designated to the Closed Block

 

 

79,508

 

 

 

85,348

 

Excess of Closed Block assets over liabilities

 

 

7,626

 

 

 

6,555

 

Amounts included in accumulated other comprehensive income:

 

 

 

 

 

 

 

 

Unrealized investment gains (losses), net of income tax

 

 

2,920

 

 

 

1,164

 

Allocated to policyholder dividend obligations, net of income tax

 

 

(1,905

)

 

 

(565

)

Total amounts included in accumulated other comprehensive income

 

 

1,015

 

 

 

599

 

Maximum future earnings and accumulated other comprehensive income to

   be recognized from Closed Block assets and liabilities (includes excess

   assets of $9,667 and $9,541, respectively.)

 

$

(6,611

)

 

$

(5,956

)

 

 

 

 

June 30,

 

 

December 31,

 

Policyholder Dividend Obligations

 

2019

 

 

2018

 

Beginning Balance

 

$

9,383

 

 

$

11,097

 

Impact from earnings allocable to policyholder dividend obligations

 

 

75

 

 

 

47

 

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

   dividend obligations

 

 

1,697

 

 

 

(1,761

)

Ending Balance

 

$

11,155

 

 

$

9,383

 

 

15


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

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Life insurance premiums

 

$

1,514

 

 

$

1,764

 

 

$

2,783

 

 

$

3,572

 

Net investment income

 

 

397

 

 

 

406

 

 

 

786

 

 

 

817

 

Realized investment gains

 

 

 

 

 

14

 

 

 

 

 

 

36

 

Total revenues

 

 

1,911

 

 

 

2,184

 

 

 

3,569

 

 

 

4,425

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Life and annuity benefits - including policyholder dividends

   of ($409, $331, $669 and $646), respectively

 

 

1,088

 

 

 

1,798

 

 

 

2,490

 

 

 

3,159

 

Interest credited to policyholder account balances

 

 

49

 

 

 

52

 

 

 

98

 

 

 

102

 

General operating expenses

 

 

31

 

 

 

425

 

 

 

151

 

 

 

331

 

Total expenses

 

 

1,168

 

 

 

2,275

 

 

 

2,739

 

 

 

3,592

 

Revenues, net of expenses before provision for income tax

   expense

 

 

743

 

 

 

(91

)

 

 

830

 

 

 

833

 

Income tax expense (benefit)

 

 

156

 

 

 

(19

)

 

 

174

 

 

 

175

 

Revenues, net of expenses and provision for income tax

   expense

 

$

587

 

 

$

(72

)

 

$

656

 

 

$

658

 

 

The Company charges the Closed Block with federal income taxes and state and local premium taxes, as well as investment management expenses relating to the Closed Block as provided in the Closed Block Memorandum. The Company also charges the Closed Block for expenses of maintaining the policies included in the Closed Block.

 

The following table presents the amortized cost and fair value of the Closed Block fixed maturity securities portfolio by contractual maturity at June 30, 2019. 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

 

$

3,010

 

 

$

3,033

 

Due after one year through five years

 

 

8,603

 

 

 

8,872

 

Due after five years through ten years

 

 

6,340

 

 

 

6,788

 

Due after ten years

 

 

14,763

 

 

 

17,707

 

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

   backed securities

 

 

1,028

 

 

 

1,040

 

Total fixed maturities

 

$

33,744

 

 

$

37,440

 

 

 

Note 6 Commitments and Contingencies

Litigation

The Company is subject to legal and regulatory actions in the ordinary course of its business. Management does not believe such litigation will have a material impact on the Company’s interim condensed consolidated financial statements. The Company establishes accruals for litigation and regulatory matters when it is probable that a loss has been incurred and the amount of that loss can be reasonably estimated. For litigation and regulatory matters where a loss may be reasonably possible but not probable or, is probable but not reasonably able to be estimated, no accrual is established, but the matter, if material, is disclosed.  The Company is not aware of any material legal or regulatory matters threatened or pending against the Company.

Federal Home Loan Bank of Chicago

The Company is a member of the Federal Home Loan Bank of Chicago (FHLBC). As a member, the Company is able to borrow on a collateralized basis from FHLBC which can be used as an alternative source of liquidity. FHLBC membership requires the Company to own member stock. At June 30, 2019, the Company held $99 of FHLBC common stock which allows the Company to borrow up to $2,311. Interest on borrowed funds is charged at variable rates established from time to time by FHLBC and depending on the borrowing option selected at the time of the borrowing. No amounts have been borrowed from the FHLBC as of June 30, 2019 and December 31, 2018.

 

16


Note 7 Assets and Liabilities Measured at Fair Value

Fair value is the estimated price that would be received to sell assets 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 maturities 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 2 instruments also include a private placement equity fund.

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 and private placement bonds, 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.

17


Recurring and Non-Recurring Fair Value Measurements

The Company’s assets that are carried at fair value on a recurring and non-recurring basis, by fair value hierarchy level, are as follows:

 

June 30, 2019

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total Fair Value

 

Recurring fair value measurements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments recorded as assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

$

 

 

$

17,663

 

 

$

 

 

$

17,663

 

U.S. agency mortgage-backed

 

 

 

 

 

41,632

 

 

 

 

 

 

41,632

 

State and political subdivisions

 

 

 

 

 

20,273

 

 

 

 

 

 

20,273

 

Corporate and miscellaneous

 

 

1,314

 

 

 

134,293

 

 

 

10,621

 

 

 

146,228

 

Foreign government

 

 

 

 

 

159

 

 

 

 

 

 

159

 

Residential mortgage-backed securities

 

 

 

 

 

7,729

 

 

 

 

 

 

7,729

 

Commercial mortgage-backed securities

 

 

 

 

 

19,698

 

 

 

 

 

 

19,698

 

Asset-backed securities

 

 

 

 

 

59,636

 

 

 

1,838

 

 

 

61,474

 

Total fixed maturities available-for-sale

 

 

1,314

 

 

 

301,083

 

 

 

12,459

 

 

 

314,856

 

Equity securities, available-for-sale

 

 

 

 

 

104

 

 

 

 

 

 

104

 

Equity securities, trading

 

 

5,682

 

 

 

 

 

 

 

 

 

5,682

 

Total recurring assets

 

$

6,996

 

 

$

301,187

 

 

$

12,459

 

 

$

320,642

 

 

December 31, 2018

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total Fair Value

 

Recurring fair value measurements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments recorded as assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

$

 

 

$

12,510

 

 

$

 

 

$

12,510

 

U.S. agency mortgage-backed

 

 

 

 

 

32,582

 

 

 

 

 

 

32,582

 

State and political subdivisions

 

 

 

 

 

23,911

 

 

 

 

 

 

23,911

 

Corporate and miscellaneous

 

 

1,637

 

 

 

142,507

 

 

 

12,773

 

 

 

156,917

 

Foreign government

 

 

 

 

 

142

 

 

 

 

 

 

142

 

Residential mortgage-backed securities

 

 

 

 

 

10,085

 

 

 

 

 

 

10,085

 

Commercial mortgage-backed securities

 

 

 

 

 

16,151

 

 

 

 

 

 

16,151

 

Asset-backed securities

 

 

 

 

 

53,366

 

 

 

922

 

 

 

54,288

 

Total fixed maturities available-for-sale

 

 

1,637

 

 

 

291,254

 

 

 

13,695

 

 

 

306,586

 

Equity securities, available-for-sale

 

 

 

 

 

99

 

 

 

 

 

 

99

 

Equity securities, trading

 

 

4,823

 

 

 

 

 

 

 

 

 

4,823

 

Total recurring assets

 

$

6,460

 

 

$

291,353

 

 

$

13,695

 

 

$

311,508

 

 

Summary of Significant Valuation Techniques for Assets and Liabilities on a Recurring Basis

Level 1 securities include principally exchange‑traded funds that are valued based on quoted market prices for identical assets.

All the fair values of the Company’s fixed maturities and equity securities within Level 2 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 primarily of investments in private placement securities where the fair value of the security is determined by a pricing service using spread matrix pricing which incorporates a discounted cash flow model where one or more of the significant inputs is unobservable in the marketplace.  The remaining securities in Level 3 consist of corporate bonds whose fair values are determined by pricing models where there is a lack of transparency to one or more significant inputs, or broker/dealer quotes. 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 Company does not adjust broker quotes when used as the fair value measurement for an asset. At June 30, 2019, the Company held 1 security priced using a broker/dealer quote that was within Level 3.  The fair value of Level 3 liabilities is estimated on the discounted cash flow 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 in 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 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, 2019

 

 

Net Income

(loss)

 

 

OCI

 

 

Purchases

 

 

Sales

 

 

Settlements

 

 

Net

Transfers

 

 

Balance at June 30, 2019

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and miscellaneous

 

$

12,773

 

 

$

(19

)

 

$

255

 

 

$

 

 

$

(219

)

 

$

(2,385

)

 

$

216

 

 

$

10,621

 

Asset-backed securities

 

 

922

 

 

 

 

 

 

9

 

 

 

998

 

 

 

 

 

 

(91

)

 

 

 

 

 

1,838

 

Total assets

 

$

13,695

 

 

$

(19

)

 

$

264

 

 

$

998

 

 

$

(219

)

 

$

(2,476

)

 

$

216

 

 

$

12,459

 

 

 

 

 

 

 

 

Total gains (losses) included in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2018

 

 

Net Income

(loss)

 

 

OCI

 

 

Purchases

 

 

Sales

 

 

Settlements

 

 

Net

Transfers

 

 

Balance at December 31, 2018

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and miscellaneous

 

$

22,290

 

 

$

 

 

$

(607

)

 

$

 

 

$

 

 

$

(7,660

)

 

$

(1,250

)

 

$

12,773

 

Asset-backed securities

 

 

1,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(78

)

 

 

 

 

 

922

 

Total assets

 

$

23,290

 

 

$

 

 

$

(607

)

 

$

 

 

$

 

 

$

(7,738

)

 

$

(1,250

)

 

$

13,695

 

 

The total change in unrealized investment gains (losses) presented in the preceding table represents unrealized gains (losses) only for the current year during which the applicable financial instruments were classified as Level 3. Securities may be transferred in or out of Level 3 based on the availability of observable market information used to determine the fair value of the security. There were no transfers out of Level 2 into Level 3. There was one transfer out of Level 3 into Level 2 based on observable inputs obtained from pricing sources in 2019. There were no transfers between Level 1 and Level 2 in 2019 or 2018.

The following presents quantitative information about the significant unobservable inputs utilized by the Company in the fair value measurements of Level 3 assets. Valuations for assets and liabilities not presented in the tables below are primarily based on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of these unobservable inputs is neither provided nor reasonably available to the Company.

 

June 30, 2019

 

Fair Value

 

 

Valuation technique

 

Unobservable Input(s)

 

Range (Weighted

Average)

Corporate and miscellaneous

 

$

10,621

 

 

Matrix pricing

 

Spreads off benchmark yields

 

53-135 bps (88 bps)

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

Fair Value

 

 

Valuation technique

 

Unobservable Input(s)

 

Range (Weighted

Average)

Corporate and miscellaneous

 

$

12,773

 

 

Matrix pricing

 

Spreads off benchmark yields

 

99-110 bps (102 bps)

 

 

 

 

 

 

 

 

 

 

 

 

19


For the fixed maturities, an increase in spreads off benchmark yields would result in a lower fair value measurement.

Financial Instruments not Measured at Fair Value

The carrying amount and estimated fair values of the Company’s financial instruments that are not measured at fair value on the consolidated balance sheets are as follows:

 

 

 

 

 

 

 

Estimated Fair Value

 

June 30, 2019

 

Carrying Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial instruments recorded as assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans

 

$

54,297

 

 

$

 

 

$

 

 

$

49,682

 

 

$

49,682

 

Policyholder loans

 

 

5,708

 

 

 

 

 

 

 

 

 

7,465

 

 

 

7,465

 

Financial instruments recorded as liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Future policy benefits, excluding term life

   Reserves

 

 

20,589

 

 

 

 

 

 

 

 

 

18,539

 

 

 

18,539

 

Long/short-term debt

 

 

17,175

 

 

 

 

 

 

 

 

 

19,218

 

 

 

19,218

 

Policyholder account balances

 

$

90,186

 

 

$

 

 

$

 

 

$

90,749

 

 

$

90,749

 

 

 

 

 

 

 

 

Estimated Fair Value

 

December 31, 2018

 

Carrying Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial instruments recorded as assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans

 

$

50,830

 

 

$

 

 

$

 

 

$

46,629

 

 

$

46,629

 

Policyholder loans

 

 

5,623

 

 

 

 

 

 

 

 

 

7,355

 

 

 

7,355

 

Financial instruments recorded as liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Future policy benefits, excluding term life

   Reserves

 

 

18,774

 

 

 

 

 

 

 

 

 

17,090

 

 

 

17,090

 

Long/short-term debt

 

 

13,366

 

 

 

 

 

 

 

 

 

12,992

 

 

 

12,992

 

Policyholder account balances

 

$

93,051

 

 

$

 

 

$

 

 

$

88,513

 

 

$

88,513

 

 

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 $3,441 and $3,262 of second and mezzanine mortgages carried at cost which fair value is not measurable at June 30, 2019 and December 31, 2018, respectively.

Policyholder Loans Fair value of policyholder loans are 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 — For deposit liabilities with interest rate guarantees greater than one year or with defined maturities, the fair value was estimated by calculating an average present value of expected cash flows over a broad range of interest rate scenarios using the current market risk‑free interest rates adjusted for spreads required for publicly traded bonds issued by comparably rated insurers. For deposit liabilities with interest rate guarantees of less than one year, the fair value was based on the amount payable on demand at the reporting date.

Long/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 consolidated balance sheets has been divided in to short and long-term based upon expected maturity dates.

20


Note 8Long and Short-term Debt

The Company has entered into a financing arrangement with an external party in January 2018, from which the Company receives an advanced commission-based payment for certain insurance segment term policies sold through the Agency segment, in exchange for a level commission that is paid by the Company over the period the policy remains in-force. The Company’s arrangement with the external party allows us to finance up to $23,000 of commission. At June 30, 2019 and December 31, 2018, we had a net advance of $17,175 and $13,366, respectively, under this arrangement. At June 30, 2019 the Company expects to pay back the aggregate amounts as presented in the following table.

 

Due in one year or less

 

$

3,633

 

Due after one year through two years

 

 

2,145

 

Due after two years through three years

 

 

1,942

 

Due after three years through four years

 

 

1,803

 

Due after four years through five years

 

 

1,699

 

Due after five years

 

 

13,400

 

Less discount

 

 

(7,447

)

Total long/short-term debt

 

$

17,175

 

 

Note 9 Accumulated Other Comprehensive Income (Loss)

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

 

 

 

Net Unrealized

Gains (Losses)

on Investments

with OTTI Losses

 

 

Net Unrealized

(Losses) Gains

on Other

Investments

 

 

Total

 

Balance at January 1, 2019

 

$

362

 

 

$

(2,730

)

 

$

(2,368

)

Other comprehensive income

 

 

 

 

 

11,780

 

 

 

11,780

 

Income tax  expense

 

 

 

 

 

2,474

 

 

 

2,474

 

Other comprehensive (loss) income, net of tax

 

 

 

 

 

9,306

 

 

 

9,306

 

Balance at June 30, 2019

 

$

362

 

 

$

6,576

 

 

$

6,938

 

 

 

 

Net Unrealized

Gains (Losses)

on Investments

with OTTI Losses

 

 

Net Unrealized

(Losses) Gains

on Other

Investments

 

 

Total

 

Balance at January 1, 2018

 

$

362

 

 

$

7,436

 

 

$

7,798

 

Other comprehensive (loss) income

 

 

 

 

 

(9,904

)

 

 

(9,904

)

Income tax (benefit) expense

 

 

 

 

 

(2,080

)

 

 

(2,080

)

Other comprehensive (loss) income, net of tax

 

 

 

 

 

(7,824

)

 

 

(7,824

)

Balance at June 30, 2018

 

$

362

 

 

$

(388

)

 

$

(26

)

 

Note 10 Business Segments

The Company’s current operations were organized into three reportable segments: Insurance, Agency, and Corporate.  

The Insurance segment is composed of three broad lines consisting of Direct Life, Closed Block, and Assumed Life and Annuities. Direct Life and the Closed Block are distinct operations; the assumed 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 segment includes certain expenses that are corporate expenses or that will benefit the overall organization and are not allocated to a segment.

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.

21


The segment results are as follows:

 

 

 

Three Months Ended June 30, 2019

 

 

Three Months Ended June 30, 2018

 

 

 

Insurance

 

 

Agency

 

 

Corporate

 

 

Eliminations

 

 

Total

Consolidated

 

 

Insurance

 

 

Agency

 

 

Corporate

 

 

Eliminations

 

 

Total

Consolidated

 

Net insurance premiums

 

$

25,791

 

 

$

 

 

$

 

 

$

 

 

$

25,791

 

 

$

22,089

 

 

$

 

 

$

 

 

$

 

 

$

22,089

 

Net investment income

 

 

3,695

 

 

 

 

 

 

92

 

 

 

(105

)

 

 

3,682

 

 

 

3,749

 

 

 

 

 

 

79

 

 

 

(108

)

 

 

3,720

 

Net realized investment (losses)

   gains

 

 

(99

)

 

 

 

 

 

 

 

 

 

 

 

(99

)

 

 

682

 

 

 

 

 

 

 

 

 

 

 

 

682

 

Earned commissions from

   external customers

 

 

 

 

 

5,149

 

 

 

 

 

 

 

 

 

5,149

 

 

 

 

 

 

3,360

 

 

 

 

 

 

 

 

 

3,360

 

Intersegment earned commissions

 

 

 

 

 

5,720

 

 

 

 

 

 

(5,720

)

 

 

 

 

 

 

 

 

7,473

 

 

 

 

 

 

(7,473

)

 

 

 

Other income

 

 

87

 

 

 

1,444

 

 

 

 

 

 

 

 

 

1,531

 

 

 

44

 

 

 

2,123

 

 

 

 

 

 

 

 

 

2,167

 

Total revenues

 

 

29,474

 

 

 

12,313

 

 

 

92

 

 

 

(5,825

)

 

 

36,054

 

 

 

26,564

 

 

 

12,956

 

 

 

79

 

 

 

(7,581

)

 

 

32,018

 

Life and annuity benefits

 

 

16,922

 

 

 

 

 

 

 

 

 

 

 

 

16,922

 

 

 

14,407

 

 

 

 

 

 

 

 

 

 

 

 

14,407

 

Operating costs and expenses

 

 

7,274

 

 

 

13,101

 

 

 

1,304

 

 

 

(3,322

)

 

 

18,357

 

 

 

7,321

 

 

 

13,319

 

 

 

1,114

 

 

 

(3,622

)

 

 

18,132

 

Amortization of deferred policy

   acquisition costs

 

 

4,416

 

 

 

 

 

 

 

 

 

(1,033

)

 

 

3,383

 

 

 

3,912

 

 

 

 

 

 

 

 

 

(1,121

)

 

 

2,791

 

Amortization of intangible assets

 

 

 

 

 

20

 

 

 

 

 

 

 

 

 

20

 

 

 

 

 

 

41

 

 

 

 

 

 

 

 

 

41

 

Total benefits and expenses

 

 

28,612

 

 

 

13,121

 

 

 

1,304

 

 

 

(4,355

)

 

 

38,682

 

 

 

25,640

 

 

 

13,360

 

 

 

1,114

 

 

 

(4,743

)

 

 

35,371

 

(Loss) income before

   income tax

 

$

862

 

 

$

(808

)

 

$

(1,212

)

 

$

(1,470

)

 

$

(2,628

)

 

$

924

 

 

$

(404

)

 

$

(1,035

)

 

$

(2,838

)

 

$

(3,353

)

 

 

 

Six Months Ended June 30, 2019

 

 

Six Months Ended June 30, 2018

 

 

 

Insurance

 

 

Agency

 

 

Corporate

 

 

Eliminations

 

 

Total

Consolidated

 

 

Insurance

 

 

Agency

 

 

Corporate

 

 

Eliminations

 

 

Total

Consolidated

 

Net insurance premiums

 

$

48,880

 

 

$

 

 

$

 

 

$

 

 

$

48,880

 

 

$

43,101

 

 

$

 

 

$

 

 

$

 

 

$

43,101

 

Net investment income

 

 

7,536

 

 

 

 

 

 

175

 

 

 

(210

)

 

 

7,501

 

 

 

7,515

 

 

 

 

 

 

130

 

 

 

(181

)

 

 

7,464

 

Net realized investment (losses)

   gains

 

 

949

 

 

 

 

 

 

 

 

 

 

 

 

949

 

 

 

121

 

 

 

 

 

 

 

 

 

 

 

 

121

 

Earned commissions from

   external customers

 

 

 

 

 

8,895

 

 

 

 

 

 

 

 

 

8,895

 

 

 

 

 

 

6,695

 

 

 

 

 

 

 

 

 

6,695

 

Intersegment earned commissions

 

 

 

 

 

11,839

 

 

 

 

 

 

(11,839

)

 

 

 

 

 

 

 

 

14,533

 

 

 

 

 

 

(14,533

)

 

 

 

Other income

 

 

142

 

 

 

2,879

 

 

 

 

 

 

 

 

 

3,021

 

 

 

157

 

 

 

4,305

 

 

 

 

 

 

 

 

 

4,462

 

Total revenues

 

 

57,507

 

 

 

23,613

 

 

 

175

 

 

 

(12,049

)

 

 

69,246

 

 

 

50,894

 

 

 

25,533

 

 

 

130

 

 

 

(14,714

)

 

 

61,843

 

Life and annuity benefits

 

 

33,968

 

 

 

 

 

 

 

 

 

 

 

 

33,968

 

 

 

28,380

 

 

 

 

 

 

 

 

 

 

 

 

28,380

 

Operating costs and expenses

 

 

15,482

 

 

 

25,494

 

 

 

3,132

 

 

 

(6,845

)

 

 

37,263

 

 

 

14,284

 

 

 

25,807

 

 

 

2,426

 

 

 

(7,491

)

 

 

35,026

 

Amortization of deferred policy

   acquisition costs

 

 

8,674

 

 

 

 

 

 

 

 

 

(2,152

)

 

 

6,522

 

 

 

7,856

 

 

 

 

 

 

 

 

 

(2,240

)

 

 

5,616

 

Amortization of intangible assets

 

 

 

 

 

42

 

 

 

 

 

 

 

 

 

42

 

 

 

 

 

 

83

 

 

 

 

 

 

 

 

 

83

 

Total benefits and expenses

 

 

58,124

 

 

 

25,536

 

 

 

3,132

 

 

 

(8,997

)

 

 

77,795

 

 

 

50,520

 

 

 

25,890

 

 

 

2,426

 

 

 

(9,731

)

 

 

69,105

 

(Loss) income before

   income tax

 

$

(617

)

 

$

(1,923

)

 

$

(2,957

)

 

$

(3,052

)

 

$

(8,549

)

 

$

374

 

 

$

(357

)

 

$

(2,296

)

 

$

(4,983

)

 

$

(7,262

)

 

 

 

 

June 30, 2019

 

 

December 31, 2018

 

 

 

Insurance

 

 

Agency

 

 

Corporate

 

 

Total

Consolidated

 

 

Insurance

 

 

Agency

 

 

Corporate

 

 

Total

Consolidated

 

Cash and investments

 

$

391,958

 

 

$

786

 

 

$

2,170

 

 

$

394,914

 

 

$

386,254

 

 

$

590

 

 

$

2,219

 

 

$

389,063

 

Commissions and agent balances

 

 

(13,327

)

 

 

26,595

 

 

 

 

 

 

13,268

 

 

 

(13,160

)

 

 

15,024

 

 

 

 

 

 

1,864

 

Deferred policy acquisition costs

 

 

85,231

 

 

 

 

 

 

 

 

 

85,231

 

 

 

84,567

 

 

 

 

 

 

 

 

 

84,567

 

Intangible assets

 

 

 

 

 

1,675

 

 

 

 

 

 

1,675

 

 

 

 

 

 

1,716

 

 

 

 

 

 

1,716

 

Reinsurance recoverable

 

 

134,861

 

 

 

 

 

 

 

 

 

134,861

 

 

 

136,601

 

 

 

 

 

 

 

 

 

136,601

 

Deferred income tax (liabilities)

   assets, net

 

 

(8,704

)

 

 

 

 

 

16,808

 

 

 

8,104

 

 

 

(6,548

)

 

 

 

 

 

17,211

 

 

 

10,663

 

Other

 

 

21,046

 

 

 

2,835

 

 

 

11,587

 

 

 

35,468

 

 

 

18,468

 

 

 

2,584

 

 

 

9,444

 

 

 

30,496

 

Total assets

 

$

611,065

 

 

$

31,891

 

 

$

30,565

 

 

$

673,521

 

 

$

606,182

 

 

$

19,914

 

 

$

28,874

 

 

$

654,970

 

 

The Company’s investment in equity method investees and the related equity income is attributable to the Corporate segment.

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

22


 

Note 11 Subsequent Events

The Company has evaluated events and transactions for potential recognition or disclosure in the interim condensed consolidated financial statements through the date on which the Interim Condensed Consolidated Financial Statements were available to be issued.

On August 7, 2019, the Company completed its IPO in which it issued 14,875,000 shares of its common stock at $10.00 per share for gross proceeds of $148,750. In addition, on August 9, 2019, the Company paid $5,865 related to the vesting of long-term incentive plan for executive management and employee compensation as a result of the completion of the IPO.

23


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three- and Six-Month Periods Ended June 30, 2019 and 2018

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, 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 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 Public Company Accounting Oversight Board or 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 rating organizations.

You should review carefully the section captioned “Risk Factors” in our Form S-1 declared effective by the Securities and Exchange Commission on June 20, 2019 (File No. 333-231952), for a complete discussion of the material risks of an investment in our common stock.

24


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.

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 two 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 related Statements of Operations) through its eCoverage web presence.

Agency segment expenses consist of marketing costs to acquire potential customers, salary and bonuses paid to our employee agents, salary and other costs of employees involved in managing the underwriting process for our insurance applications, sales management, agent licensing, training and compliance costs. Other agency segment expenses include costs associated with financial and administrative employees, facilities rent, and information technology. After payroll, the most significant agency segment expense is the cost of acquiring leads. We partially offset our sales leads expense through advertising revenues from individuals who click on specific advertisements while viewing one of our web pages, and through the resale of leads that are not well suited for our call center.

Insurance Segment

This segment consists of the operations of Fidelity Life. Fidelity Life underwrites primarily term life insurance through Efinancial and a diverse group of independent insurance distributors. Fidelity Life specializes in life insurance products that can be issued immediately or within a short period following a sales call, using non-medical underwriting at the time of policy issuance.

Fidelity Life engages in the following business lines:

Core Life - Our core life insurance business is the primary business of the insurance segment. Core life represents a significant portion of the insurance business written by Fidelity Life since it resumed independent operations in 2005. Our core life business consists of in­force policies that are considered to be of high strategic importance to Fidelity Life.

Non­Core Life - Our non­core life business consists of: products that are currently being marketed but are not deemed to be of high strategic importance to the Company; in­force policies from product lines introduced since Fidelity Life resumed independent operations in 2005, but were subsequently discontinued; and an older annuity block of business that was not included in the closed block.

Closed Block - Our Closed Block represents all in­force participating insurance policies of Fidelity Life. The Closed Block was established in connection with our 2007 reorganization into a mutual holding company structure.

Annuities and Assumed Life. We have assumed reinsurance commitments with respect to annuity contract-holder deposits and a block of life insurance contracts that were ceded by former affiliates of Fidelity Life. On March 29, 2019, one of these former affiliates recaptured the majority of the assumed block of life business. The annuity deposits were ceded to Fidelity Life through two contracts entered into in the early 1990s. These annuity and assumed life deposits are now largely in run­off, with only minor amounts of new deposits each year. There are minimal remaining surrender charges associated with the assumed annuity contracts.

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 security investments. We also realize gains and losses on sales of investment securities.

25


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 and 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.

Corporate Segment

The results of this segment consist of net investment income and realized investment gains (losses) earned on nominal invested assets. We also include certain corporate expenses that are not allocated to our other segments, including expenses of Vericity, board expenses, executive management time spent on corporate matters, and financial reporting and auditing costs related to our consolidation and internal controls.

Critical Accounting Policies

Our critical accounting policies are described in Note 1—Basis of Presentation and Summary of Significant Accounting Policies to our Interim Condensed Consolidated Financial Statements included elsewhere in this form 10-Q as well as the Company’s Form S-1. The accounting policies discussed in this section are those that we consider to be the most critical to an understanding of our Interim Condensed Consolidated Financial Statements. The preparation of the Interim Condensed Consolidated Financial Statements in conformity with GAAP requires management to use judgment in making estimates and assumptions that affect reported amounts of assets, liabilities, revenues, expenses and related disclosures. We regularly evaluate our estimates and judgments based on historical experience, market indicators and other relevant factors and circumstances. Actual results may differ from these estimates under different assumptions or conditions and may affect our financial position and results of operations.

Results of Operations

The major components of operating revenues, benefits and expenses and net (loss) income were as follows:

MMHC Consolidated Results of Operations

(dollars in thousands)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

Revenues

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net insurance premiums

 

$

25,791

 

 

$

22,089

 

 

$

48,880

 

 

$

43,101

 

Net investment income

 

 

3,682

 

 

 

3,720

 

 

 

7,501

 

 

 

7,464

 

Net realized investment (losses) gains

 

 

(99

)

 

 

682

 

 

 

949

 

 

 

121

 

Earned commissions

 

 

5,149

 

 

 

3,360

 

 

 

8,895

 

 

 

6,695

 

Insurance lead sales

 

 

1,444

 

 

 

2,123

 

 

 

2,879

 

 

 

4,305

 

Other income

 

 

87

 

 

 

44

 

 

 

142

 

 

 

157

 

Total revenues

 

 

36,054

 

 

 

32,018

 

 

 

69,246

 

 

 

61,843

 

Benefits and Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Life, annuity, and health claim benefits

 

 

16,085

 

 

 

13,540

 

 

 

32,330

 

 

 

26,591

 

Interest credited to policyholder account balances

 

 

837

 

 

 

867

 

 

 

1,638

 

 

 

1,789

 

General operating expenses

 

 

18,357

 

 

 

18,132

 

 

 

37,263

 

 

 

35,026

 

Amortization of deferred policy acquisition costs

 

 

3,383

 

 

 

2,791

 

 

 

6,522

 

 

 

5,616

 

Amortization of intangible assets

 

 

20

 

 

 

41

 

 

 

42

 

 

 

83

 

Total benefits and expenses

 

 

38,682

 

 

 

35,371

 

 

 

77,795

 

 

 

69,105

 

(Loss) income before income taxes

 

 

(2,628

)

 

 

(3,353

)

 

 

(8,549

)

 

 

(7,262

)

Income tax (benefit) expense

 

 

(30

)

 

 

(220

)

 

 

284

 

 

 

(863

)

Net (loss) income

 

$

(2,598

)

 

$

(3,133

)

 

$

(8,833

)

 

$

(6,399

)

 

26


Three Months Ended June 30, 2019 Compared to the Three Months Ended June 30, 2018

Total Revenues

For the three months ended June 30, 2019, total revenues were $36.1 million compared to $32.0 million for the three months ended June 30, 2018. This increase of $4.1 million (12.8%) resulted from higher net insurance premiums and earned commissions primarily due to a shift in business from intersegment to external customers, partially offset by lower net realized investment (losses) gains and a decrease in insurance lead sales.

Benefits and Expenses

For the three months ended June 30, 2019, total benefits and expenses were $38.7 million compared to $35.4 million for the three months ended June 30, 2018. This increase of $3.3 million (9.3%) was primarily due to increases in life, annuity, and health claim benefits and increases in amortization of deferred policy acquisition costs.

(Loss) Income Before Income Taxes

For the three months ended June 30, 2019, we had a loss before taxes of $2.6 million compared to a loss before taxes of $3.4 million for the three months ended June 30, 2018. This decreased loss of $0.8 million (23.5%) was due to increased insurance premiums and earned commissions, partially offset by higher life, annuity, and health claim benefits, higher amortization of deferred policy acquisition costs and lower net realized investment gains.

Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018

Total Revenues

For the six months ended June 30, 2019, total revenues were $69.2 million compared to $61.8 million for the six months ended June 30, 2018. This increase of $7.4 million (12.0%) resulted from higher net insurance premiums, higher earned commissions primarily due to a shift in business from intersegment to external customers and higher net realized investment gains, partially offset by a decrease in insurance lead sales.

Benefits and Expenses

For the six months ended June 30, 2019, total benefits and expenses were $77.8 million compared to $69.1 million for the six months ended June 30, 2018. This increase of $8.7 million (12.6%) was primarily due to increases in life, annuity, and health claim benefits, general operating expenses and deferred policy acquisition costs.

(Loss) Income Before Income Taxes

For the six months ended June 30, 2019, we had a loss before taxes of $8.5 million compared to a loss before taxes of  $7.3 million for the six months ended June 30, 2018. This increased loss of $1.2 million (16.4%) was due to increases in life, annuity, and health claim benefits, general operating expenses and amortization of deferred policy acquisition costs, partially offset by higher net insurance premiums and net realized investment gains.

27


Analysis of Segment Results

Reconciliation of Segment Results to Consolidated Results

The following analysis reconciles the reported segment results to the MMHC total consolidated results. The main difference was the intercompany eliminations.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

(Loss) income before income taxes by segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency operations

 

$

(808

)

 

$

(404

)

 

$

(1,923

)

 

$

(357

)

Insurance operations

 

 

862

 

 

 

924

 

 

 

(617

)

 

 

374

 

Corporate operations

 

 

(1,212

)

 

 

(1,035

)

 

 

(2,957

)

 

 

(2,296

)

Eliminations

 

 

(1,470

)

 

 

(2,838

)

 

 

(3,052

)

 

 

(4,983

)

(Loss) income before income taxes

 

 

(2,628

)

 

 

(3,353

)

 

 

(8,549

)

 

 

(7,262

)

Income tax (benefit) expense

 

 

(30

)

 

 

(220

)

 

 

284

 

 

 

(863

)

Net (loss)

 

$

(2,598

)

 

$

(3,133

)

 

$

(8,833

)

 

$

(6,399

)

 

Agency Segment

The results of our agency segment were as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earned commissions

 

$

10,869

 

 

$

10,833

 

 

$

20,734

 

 

$

21,228

 

Insurance lead sales

 

 

1,444

 

 

 

2,123

 

 

 

2,879

 

 

 

4,305

 

Total revenues

 

 

12,313

 

 

 

12,956

 

 

 

23,613

 

 

 

25,533

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General operating expenses

 

 

13,101

 

 

 

13,319

 

 

 

25,494

 

 

 

25,807

 

Amortization of intangibles

 

 

20

 

 

 

41

 

 

 

42

 

 

 

83

 

Total expenses

 

 

13,121

 

 

 

13,360

 

 

 

25,536

 

 

 

25,890

 

(Loss) income before income taxes

 

$

(808

)

 

$

(404

)

 

$

(1,923

)

 

$

(357

)

 

Three Months Ended June 30, 2019 Compared to the Three Months Ended June 30, 2018

Earned Commissions

For the three months ended June 30, 2019, earned commissions were $10.9 million compared to $10.8 million for the three months ended June 30, 2018. This slight increase resulted from wholesale channel growth, partially offset by decreases in our retail channel which was primarily due to lower agent headcount and shift in business mix.

Insurance Lead Sales

For the three months ended June 30, 2019, insurance lead sales were $1.4 million compared to $2.2 million for the three months ended June 30, 2018. This decrease of $0.8 million (34.2%) was primarily due to a management decision to shift outside lead sales to maximize internal retail channel sales.

General Operating Expenses

For the three months ended June 30, 2019, general operating expenses were $13.1 million compared to $13.3 million for the three months ended June 30, 2018. This decrease of $0.2 million (1.5%) was due to decreases in variable cost of sales of $0.6 million  which was mainly driven by lower retail earned commissions, partially offset by $0.4 million increase in overhead expenses which were due primarily to increases in non-agent staff costs. The variable cost of sales consisted of both agents’ compensation and marketing costs.

 

28


(Loss) Income Before Income Taxes

For the three months ended June 30, 2019, the agency segment incurred a net loss of $0.8 million compared to net loss of $0.4 million for the three months ended June 30, 2018. This increase in net loss of $0.4 million was the result of lower lead sales, partially offset by lower general operating expenses.

Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018

Earned Commissions

For the six months ended June 30, 2019, earned commissions were $20.7 million compared to $21.2 million for the six months ended June 30, 2018. This decrease of $0.5 million (2.4%) resulted from a decline in our retail channel primarily due to lower agent headcount and shift in business mix, partially offset by growth in our wholesale channel.

Insurance Lead Sales

For the six months ended June 30, 2019, insurance lead sales were $2.9 million compared to $4.3 million for the six months ended June 30, 2018. This decrease of $1.4 million (32.6%) was primarily due to a management decision to shift outside lead sales to maximize internal retail channel sales.

General Operating Expenses

For the six months ended June 30, 2019, general operating expenses were $25.5 million compared to $25.8 million for the six months ended June 30, 2018. This decrease of $0.3 million (1.2%) was due to lower variable cost of sales of $1.0 million, partially offset by an increase in overhead expenses of $0.7 million which was due primarily to increases in non-agent staff costs.

(Loss) Income Before Income Taxes

For the six months ended June 30, 2019, the Agency segment incurred a net loss of $1.9 million compared to a net loss of $0.4 million for the six months ended June 30, 2018. This increase in net loss of $1.5 million was the result of lower lead sales revenue, lower earned commissions, partially offset by lower general operating expenses.

Insurance Segment

The results of our Insurance segment were as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net insurance premiums

 

$

25,791

 

 

$

22,089

 

 

$

48,880

 

 

$

43,101

 

Net investment income

 

 

3,695

 

 

 

3,749

 

 

 

7,536

 

 

 

7,515

 

Net realized investment (losses) gains

 

 

(99

)

 

 

682

 

 

 

949

 

 

 

121

 

Other income

 

 

87

 

 

 

44

 

 

 

142

 

 

 

157

 

Total revenues

 

 

29,474

 

 

 

26,564

 

 

 

57,507

 

 

 

50,894

 

Benefits and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Life and annuity benefits

 

 

16,085

 

 

 

13,540

 

 

 

32,330

 

 

 

26,591

 

Interest credited to policyholder account balances

 

 

837

 

 

 

867

 

 

 

1,638

 

 

 

1,789

 

General operating expenses

 

 

7,274

 

 

 

7,321

 

 

 

15,482

 

 

 

14,284

 

Amortization of deferred policy acquisition costs

 

 

4,416

 

 

 

3,912

 

 

 

8,674

 

 

 

7,856

 

Total benefits and expenses

 

 

28,612

 

 

 

25,640

 

 

 

58,124

 

 

 

50,520

 

Income (loss) before income taxes

 

$

862

 

 

$

924

 

 

$

(617

)

 

$

374

 

 

29


Three Months Ended June 30, 2019 Compared to the Three Months Ended June 30, 2018

Premium Revenues

For the three months ended June 30, 2019, net insurance premiums were $25.8 million compared to $22.1 million for the three months ended June 30, 2018. This increase of $3.7 million (16.7%) in net insurance premiums was primarily due to increases in our core lines of $3.4 million mainly driven by increases in LifeTime Benefit Term (LBT) and $0.7 million in our non-core lines, partially offset by a decrease in Closed Block of $0.2 million and annuities and assumed life of $0.2 million.

Net Realized Investment Gains (Losses)

For the three months ended June 30, 2019, the realized investment losses were $0.1 million compared with realized investment gains of $0.7 million for the three months ended June 30, 2018. This decrease of $0.8 million was mainly due to higher mark-to-market gains in 2018 on equity securities held as trading securities.

Life and Annuity Benefits

For the three months ended June 30, 2019, life and annuity claim benefits were $16.1 million compared with $13.5 million for the three months ended June 30, 2018. This increase of $2.6 million (21.6%) was mainly attributable to an increase of $1.1 million in net claims resulting from $1.6 million higher claim activity on certain core and non-core products and offset by a decrease of $0.5 million in closed block. Benefit reserves on in-force business increased $1.5 million primarily due to growth in our core lines, partially offset by decreases in our non-core lines related to maturity of the products.

Amortization of Deferred Policy Acquisition Costs

For the three months ended June 30, 2019, amortization of deferred policy acquisition costs was $4.4 million compared to $3.9 million for the three months ended June 30, 2018, reflecting an increase in our core lines of $0.5 million, non-core of $0.5 million, partially offset by a decrease in Closed Block of $0.5 million.

Income (Loss) Before Income Taxes

For the three months ended June 30, 2019, net income was $0.9 million compared to net income of $0.9 million for the three months ended June 30, 2018. The slight decrease resulted primarily from an increase in premiums of $3.7 million offset by $2.6 million increase in life and annuity benefits, $0.8 million decrease in realized investment gains, and an increase in amortization of deferred policy acquisition costs of $0.5 million.

Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018

Premium Revenues

For the six months ended June 30, 2019, net insurance premiums were $48.9 million compared to $43.1 million for the six months ended June 30, 2018. This increase of $5.8 million (13.5%) in net insurance premiums was primarily due to increases in our core lines of $6.4 million mainly driven by increases in LBT and $1.2 million in our non-core lines, partially offset by a decrease in annuities and assumed life of $1.0 million due to the recapture of a majority of this business and Closed Block of $0.8 million.

Net Realized Investment Gains (Losses)

For the six months ended June 30, 2019, the realized investment gains were $0.9 million compared with realized investment gains of $0.1 million for the six months ended June 30, 2018. This increase of $0.8 million was mainly due to higher mark-to-market gains in 2019 on equity securities held as trading securities.

Life and Annuity Benefits

For the six months ended June 30, 2019, life and annuity claim benefits were $32.3 million compared with $26.6 million for the six months ended June 30, 2018. This increase of $5.7 million (21.4%) was mainly attributable to an increase of $5.5 million in net claim benefits resulting from $4.5 million higher claim activity on certain core and non-core products, $1.9 million in annuities and assumed life, partially offset by $0.9 million in closed block. Benefit reserves on in-force business increased $0.2 million primarily due to growth in our core lines of $4.2 million, partially offset by $4.1 million in annuities and assumed life, primarily related to the recapture of the majority of an assumed life block of business.

30


General Operating Expenses

For the six months ended June 30, 2019, general operating expenses were $15.5 million compared to $14.3 million for the six months ended June 30, 2018. This increase of $1.2 million (8.4%) was due to an increase in non-deferrable acquisition costs.

 

Amortization of Deferred Policy Acquisition Costs

For the six months ended June 30, 2019, amortization of deferred policy acquisition costs was $8.7 million compared to $7.9 million for the six months ended June 30, 2018 reflecting $1.5 million increased amortization from core and non-core lines, partially offset by $0.7 million reduction in closed block.

(Loss) Income Before Income Taxes

For the six months ended June 30, 2019, net loss was $0.6 million compared to net income of $0.4 million for the six months ended June 30, 2018. The decrease in net income of $1.0 million resulted primarily from an increase in life and annuity benefits of $5.7 million, higher general expenses of $1.2 million and increased amortization of deferred policy acquisition costs of $0.8 million, partially offset by increases in premiums of $5.8 million and net realized capital gains of $0.8 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.

The maximum future earnings to be recognized from Closed Block assets and liabilities represent the estimated future Closed Block profits that will accrue to the Company and is calculated as the excess of Closed Block assets over Closed Block liabilities. Included in Closed Block assets at June 30, 2019 and December 31, 2018, are $9.6 million and $9.5 million, respectively, of additional Closed Block funding, plus accrued interest, that is eligible for reversion to the Company if not needed to fund Closed Block experience.

The Closed Block was funded based on a model developed to forecast the future cash flows of the Closed Block which is referred to as the “glide path.” The glide path model projected the anticipated future cash flows of the Closed Block as established at the initial 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 Segment

The results of the corporate segment were as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income

 

$

92

 

 

$

79

 

 

$

175

 

 

$

130

 

Total revenue

 

 

92

 

 

 

79

 

 

 

175

 

 

 

130

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General operating expenses

 

 

1,304

 

 

 

1,114

 

 

 

3,132

 

 

 

2,426

 

Total expenses

 

 

1,304

 

 

 

1,114

 

 

 

3,132

 

 

 

2,426

 

(Loss) before income taxes

 

$

(1,212

)

 

$

(1,035

)

 

$

(2,957

)

 

$

(2,296

)

31


Three Months Ended June 30, 2019 Compared to the Three Months Ended June 30, 2018       ( 

(Loss) Income Before Income Taxes

For the three months ended June 30, 2019, the net loss increased $0.2 million (20.0%) to $1.2 million from a net loss of $1.0 million for the three months ended June 30, 2018. The increase in the net loss was mainly due to an increase in staff costs from 2018.

Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018     

(Loss) Income Before Income Taxes

For the six months ended June 30, 2019, the net loss increased $0.7 million (30.4%) to $3.0 million from a net loss of $2.3 million for the six months ended June 30, 2018. The increase in the net loss was mainly due to an increase in staff costs from 2018.

Intercompany Eliminations

The impact of the eliminations for intercompany transactions 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:

Revenue—our agency segment recognizes all commission revenue to be paid for the first year that the policy is in force at the date that the insurance policy goes in force at the carrier.

Expense—our insurance segment recognizes the first-year commission as a policy acquisition cost, in proportion to the premiums earned from providing insurance coverage throughout the first year that the policy is in force. In addition, our insurance segment defers the amount by which the first-year commission acquisition costs exceed the ultimate renewal commission and records this amount as deferred acquisition cost that is amortized over the expected life of the policy.

Viewed at the segment level, because of the timing difference between the agency segment’s immediate recognition of commission revenue and the insurance segment’s deferral and amortization of the commission expense over the expected life of the policy, all else being equal, the sale of a policy through our agency segment results in an intersegment profit in an amount equal to the difference between the commission paid and the related amortization expense. However, in consolidation, two impacts occur. First, the intercompany revenue recognized by our agency segment and the related deferred acquisition expense recorded by our insurance segment are eliminated. Second, we record deferred policy acquisition costs equal to that portion of commission deferred acquisition cost (DAC) that can be tied directly to Efinancial’s expenses incurred in the successful placement of a policy. Therefore, in consolidation, the commission DAC recorded in our insurance segment is effectively reduced to reflect the elimination of that portion of commission DAC that results from Efinancial expenses that cannot be directly tied to the successful placement of a policy. The amount of eliminated commission DAC, which represents a majority of the commission DAC, is charged to current expense, and acquisition cost DAC is recorded at a reduced amount, which represents the amount of commission DAC that is eligible for deferral under GAAP.

 

The results of these elimination entries were as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment (loss) income

 

$

(105

)

 

$

(108

)

 

$

(210

)

 

$

(181

)

Earned commissions

 

 

(5,720

)

 

 

(7,473

)

 

 

(11,839

)

 

 

(14,533

)

Total revenues

 

 

(5,825

)

 

 

(7,581

)

 

 

(12,049

)

 

 

(14,714

)

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commission expense

 

 

(3,322

)

 

 

(3,622

)

 

 

(6,845

)

 

 

(7,491

)

General operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred policy acquisition costs

 

 

(1,033

)

 

 

(1,121

)

 

 

(2,152

)

 

 

(2,240

)

Total expenses

 

 

(4,355

)

 

 

(4,743

)

 

 

(8,997

)

 

 

(9,731

)

(Loss) before income taxes

 

$

(1,470

)

 

$

(2,838

)

 

$

(3,052

)

 

$

(4,983

)

 

32


Three Months Ended June 30, 2019 Compared to the Three Months Ended June 30, 2018

For the three months ended June 30, 2019, the impact of intercompany eliminations on pre-tax income was a reduction of $1.5 million compared to a $2.8 million reduction for the three months ended June 30, 2018. This decrease in pre-tax loss of $1.3 million (46.4%) was mainly due to lower volume of intersegment sales period-over-period.

Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018

For the six months ended June 30, 2019, the impact of intercompany eliminations on pre-tax income was a reduction of $3.1 million compared to a $5.0 million reduction for the six months ended June 30, 2018. This decrease in pre-tax loss of $1.9 million (38.0%) was mainly due to lower volume of intersegment sales period-over-period.

Investments

Investment Returns

We invest our available cash and funds that support our regulatory capital, surplus requirements and policy reserves in investment securities that are included in our insurance and corporate segments. We earn income on these investments in the form of interest on fixed maturity securities (bonds and mortgage loans) and dividends (equity holdings). 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 our 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 our insurance segment are managed with an emphasis on current income within quality and diversification constraints. The focus is on book yield of the fixed income portfolio as the anticipated portfolio yield is a key element used in pricing our insurance products and establishing policyholder crediting rates on our annuity contracts.

We apply our overall investment strategy and guidelines on a consolidated basis for purposes of monitoring compliance with our overall guidelines. Almost all of our investments (over 99%) 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.

33


The following table shows the distribution of the fixed maturity securities classified as available-for-sale by quality rating using the rating assigned by Standard & Poor’s, a nationally recognized statistical rating organization. Over the periods presented, we have maintained a consistent weighted average bond quality rating of “A.” The percentage allocation of total investment grade securities has increased to 97.9% at June 30, 2019 from 94.0% at December 31, 2018 due to the S&P ratings on certain new securities acquired in our portfolio of distressed residential mortgage-backed securities.

 

 

 

Estimated Fair Value

 

 

 

June 30, 2019

 

 

December 31, 2018

 

 

 

(dollars in thousands)

 

S&P Rating

 

 

 

 

 

 

 

 

 

 

 

AAA

 

$

95,106

 

 

 

30.2

%

 

$

80,606

 

 

 

26.3

%

AA

 

 

45,127

 

 

 

14.3

%

 

 

40,583

 

 

 

13.2

%

A

 

 

89,959

 

 

 

28.6

%

 

 

93,214

 

 

 

30.4

%

BBB

 

 

63,524

 

 

 

20.2

%

 

 

57,599

 

 

 

18.8

%

Not rated

 

 

14,509

 

 

 

4.6

%

 

 

16,076

 

 

 

5.2

%

Total investment grade

 

 

308,225

 

 

 

97.9

%

 

 

288,078

 

 

 

94.0

%

BB

 

 

3,094

 

 

 

1.0

%

 

 

11,896

 

 

 

3.8

%

B

 

 

2,572

 

 

 

0.8

%

 

 

4,802

 

 

 

1.6

%

CCC

 

 

957

 

 

 

0.3

%

 

 

1,802

 

 

 

0.6

%

D

 

 

8

 

 

 

0.0

%

 

 

8

 

 

 

0.0

%

Total below investment grade

 

 

6,631

 

 

 

2.1

%

 

 

18,508

 

 

 

6.0

%

Total

 

$

314,856

 

 

 

100.0

%

 

$

306,586

 

 

 

100.0

%

 

The following table sets forth the maturity profile of our debt securities at June 30, 2019 and December 31, 2018. Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without penalty.

 

 

 

June 30, 2019

 

 

December 31, 2018

 

(dollars in thousands)

 

Amortized

Cost

 

 

%

 

 

Estimated

Fair Value

 

 

%

 

 

Amortized

Cost

 

 

%

 

 

Estimated

Fair Value

 

 

%

 

Due in one year or less

 

$

10,025

 

 

 

3.4

%

 

$

10,154

 

 

 

3.2

%

 

$

7,395

 

 

 

2.4

%

 

$

7,434

 

 

 

2.4

%

Due after one year through five years

 

 

38,183

 

 

 

12.8

%

 

 

39,930

 

 

 

12.7

%

 

 

53,759

 

 

 

17.7

%

 

 

54,239

 

 

 

17.7

%

Due after five years through ten years

 

 

29,703

 

 

 

10.0

%

 

 

31,533

 

 

 

10.0

%

 

 

41,125

 

 

 

13.5

%

 

 

40,866

 

 

 

13.3

%

Due after ten years

 

 

90,772

 

 

 

30.5

%

 

 

102,520

 

 

 

32.6

%

 

 

85,398

 

 

 

28.1

%

 

 

88,461

 

 

 

28.9

%

Securities not due at a single maturity

   date-primarily mortgage and

   asset-backed securities

 

 

128,677

 

 

 

43.3

%

 

 

130,719

 

 

 

41.5

%

 

 

116,626

 

 

 

38.3

%

 

 

115,586

 

 

 

37.7

%

Total debt securities

 

$

297,360

 

 

 

100.0

%

 

$

314,856

 

 

 

100.0

%

 

$

304,303

 

 

 

100.0

%

 

$

306,586

 

 

 

100.0

%

 

Every quarter, we review all investments where the market value is less than the carrying value to ascertain if the impairment of the security’s value is other than temporary (“OTTI”). The quarterly review is targeted to focus on securities with larger impairments and that have been in an impaired status for longer periods of time. (see “Note 9 – Accumulated Other Comprehensive Income (Loss)” in the accompanying Interim Condensed Consolidated Financial Statements included in this Form 10-Q).

Net Investment Income

One key measure of our investment income is the book yield on our holdings of fixed maturity securities classified as available-for-sale. This totaled $297.4 million and $304.3 million, or 78.0% and 83.2% of our invested assets as of June 30, 2019 and December 31, 2018, respectively. Book yield is the effective interest rate, before investment expenses, that we earn on these investments. Book yield is calculated as the percent of net investment income to the average amortized cost of the underlying investments for the period. For the six months ended June 30, 2019 and 2018, our book yield on fixed maturity securities available-for-sale was 4.3% and 4.3%, respectively.

34


Interest Credited on Contract-holder Deposits

Included with the future policy benefits is the liability for contract-holder deposits on deferred annuity contracts assumed through two reinsurance agreements effective in 1991 and 1992, and certain other policy funds left on deposit with the Company. The aggregate liability for deposits is as follows:

 

 

 

June 30, 2019

 

 

December 31, 2018

 

 

June 30, 2019

 

 

June 30, 2018

 

 

 

Ending

Balance

 

 

Ending

Balance

 

 

Year to Date

Interest

Credited

 

 

Year to Date

Interest

Credited

 

 

 

(dollars in thousands)

 

Annuity contract holder deposits—assumed

 

$

80,770

 

 

$

83,299

 

 

$

1,520

 

 

$

1,669

 

Dividends left on deposit

 

 

7,812

 

 

 

8,147

 

 

 

98

 

 

 

102

 

Other

 

 

1,604

 

 

 

1,605

 

 

 

20

 

 

 

18

 

Total

 

$

90,186

 

 

$

93,051

 

 

$

1,638

 

 

$

1,789

 

 

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 maturity securities 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 Realized Investment Gains (Losses)

Realized investment gains and losses are subject to general economic trends and generally correlate with movements in major market indexes. The amounts classified as realized gains and losses in our statement of operations include amounts realized from sales of investments, mark-to-market adjustments and other-than-temporary impairments of individual securities related to credit impairment.

Unrealized Holding Gains (Losses)

We also record capital appreciation/depreciation on our available-for-sale fixed maturity securities. The following table shows the change in mark-to-market adjustments on our available-for-sale fixed maturity securities. These adjustments result from the low current market interest rates which cause the market value of our holdings, that overall carry higher interest rates than available in the market, to increase.

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

(dollars in thousands)

 

Accumulated Other Income (loss)

 

 

 

 

 

 

 

 

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

   securities, including the related impact to future policy benefit liabilities,

   the policyholder dividend obligation and deferred policy acquisition cost balances

 

$

11,780

 

 

$

(9,904

)

Income tax effect

 

 

(2,474

)

 

 

2,080

 

Net change in accumulated other comprehensive income (loss)

 

$

9,306

 

 

$

(7,824

)

 

Financial Position

At June 30, 2019, we had total assets of $673.5 million compared to total assets at December 31, 2018 of $655.0 million, an increase of $18.0 million. The invested asset base increased $12.6 million primarily due to increase in market value changes of $15.8 million, primarily offset by net sales of invested assets. In addition, commissions receivable increased by $11.4 million primarily resulting from accounting standard adoption (see “Note 1 – Summary of Significant Accounting Policies – Accounting Standards Adopted” in the notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q). Other assets increased $5.2 million primarily due to capitalization of certain registration costs and internally developed software. The above increases were offset by the following drivers: reinsurance recoverable decreased $1.7 million as a result of a $4.7 million decrease in ceded policy and claim reserves, offset by an increase of $3.0 million related to timing of settlements of reinsurance receivables. Deferred income taxes decreased $2.5 million primarily due to changes related to other comprehensive income. Cash decreased $6.7 million primarily related to operations and timing of claim payments and collection of reinsurance recoveries.

35


At June 30, 2019, we had total liabilities of $492.3 million compared to total liabilities of $482.8 million at December 31, 2018, an increase of $9.5 million. Future policy benefits and claims increased $7.4 million primarily due to $20.9 million increase in and non-core lines due to growth and maturity of the underlying blocks of business, offset by decreases of $7.2 million in the Closed Block and decreases in annuities and assumed life of $6.3 million,  primarily related to the recapture of the majority of assumed  life block of business. Debt increased $3.8 million related to additional net borrowings under our commission financing agreement with Hannover Life. Other liabilities increased $2.6 million primarily related to timing of investment trades, partially offset by changes in operating accruals. Policyholder dividend obligation relating to the Closed Block increased $1.8 million primarily related to changes in market value of invested assets. The above increases were offset by the following drivers: policyholder account balances decreased $2.9 million which was largely due to annuity payments. Other policyholder liabilities and reinsurance liabilities and payables decreased $3.2 million, primarily due to timing of claim payments and reinsurance settlements.

At June 30, 2019 total equity increased to $181.2 million from $172.2 million at December 31, 2018. This increase in equity of $9.0 million (5.2%) consists of a net gain in other comprehensive income for the period of $9.3 million which was due to unrealized net gains on our fixed maturity available-for-sale securities portfolio. Retained earnings decreased by $0.9 million which includes a net loss of $9.4 million and an increase of $8.6 million related to the revenue recognition accounting standard adoption. (see “Note 1 – Summary of Significant Accounting Policies – Accounting Standards Adopted” in the notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q).

Liquidity and Capital Resources

Our principal sources of funds are from premium revenues, commission revenues, 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 policy 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), general operating expenses and purchases of investments. Our investment portfolio is structured to provide funds periodically over time, through 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. We are able to obtain advances up to $23 million under our arrangement with Hannover Life. As of June 30, 2019 and December 31, 2018, we had net advances of $17.2 million and $13.4 million under this arrangement.

We are a member of the Federal Home Loan Bank of Chicago (the “FHLBC”). As a member we are able to borrow on a collateralized basis from the FHLBC. We own FHLBC common stock with a book value of $0.1 million, which allows us to borrow up to $2.3 million. Interest on borrowed funds is charged at variable rates established from time to time by the FHLBC based on the interest rate option selected at the time of the borrowing. There have been no borrowings from the FHLBC during 2019 and 2018.

During the first six months of 2019 and 2018, the board of directors of Fidelity Life approved the payment of $5.0 million and $3.5 million, respectively, in dividends to Vericity Holdings. The dividends provided operating funds to Vericity Holdings to support corporate operations and initiatives. Following the conversion, Fidelity Life has agreed not to pay any common stock dividends without the approval of a majority of the Company designees.

Cash Flows

Cash flows from investing activities includes our fixed maturity securities and equity holdings that are classified as available-for-sale securities. Period to period, the cash flows associated with the changes in these portfolios will vary between cash sources and cash uses depending on portfolio trading due to investment market conditions and represents our primary source of cash.

Cash flows from financing activities primarily consists of the assumed annuity contract-holder deposits. The annuity liabilities are reducing each period due to cash withdrawals by contract-holders on this block of annuities that were primarily written in the late 1980s. Cash deposits to these annuity contracts are minimal compared to cash withdrawal activity. Also included in financing cash flows are net proceeds from our commission financing arrangement.

36


The following table summarizes our cash flows for the six months ended June 30, 2019 and June 30, 2018.

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

(dollars in thousands)

 

Consolidated Summary of Cash Flows

 

 

 

 

 

 

 

 

Cash flows provided by (used for) operating activities

 

$

(6,949

)

 

$

(6,774

)

Cash flows provided by (used for) investing activities

 

 

1,274

 

 

 

1,348

 

Cash flows provided by (used for) financing activities

 

 

(1,055

)

 

 

3,765

 

Net increase (decrease) in cash and cash equivalents

 

$

(6,730

)

 

$

(1,661

)

 

For the six months ended June 30, 2019 and 2018, we had a net decrease in cash of $6.7 million compared to net decrease of $1.7 million for the year ended December 31, 2018. The decrease in cash flows year over year of $5.0 million is primarily related to lower net proceeds received from commission financing arrangement.

Recent Accounting Pronouncements

All applicable adopted accounting pronouncements have been reflected in our Interim Condensed Consolidated Financial Statements as of and for the six months ended June 30, 2019 and December 31, 2018.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(d) and 15d-15(d) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectives of Controls and Procedures

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of control procedures. The objectives of internal control include providing management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, and that transactions are executed in accordance with management’s authorization and recorded properly to permit the preparation of consolidated financial statements in conformity with GAAP.

 

 

Part II. OTHER INFORMATION

Item 1.  Legal Proceedings

We are, from time to time, involved in various legal proceedings in the ordinary course of business. While it is not possible to forecast the outcome of such legal proceedings, in light of existing insurance, reinsurance, and established reserves, we believe that there is no individual case pending that is likely to have a material adverse effect on our financial condition or results of operations.

Item 1A. Risk Factors

Not applicable to smaller reporting companies.

 

37


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  

Use of IPO Proceeds

The Company completed its IPO on August 7, 2019, pursuant to a Form S-1 declared effective by the SEC on June 20, 2019 (File No. 333-231952). Below are further details of the use of the IPO proceeds: Vericity Inc. registered the sale of a maximum of 20,125,000 shares, of which 14,875,000 were sold in the IPO. Raymond James served as managing underwriter in the IPO.

 

The amount registered and the aggregate price of the offering amount was 20,125,000 and $201,250,000, respectively, and the amount sold and the aggregate price of the offering amount was 14,875,000 and $148,750,000, respectively.

 

The common stock was registered pursuant to the Form S-1 described above.

 

The total estimated offering expenses incurred in connection with the IPO were $15.5 million, including $4.0 million paid to the underwriters. Of the total offering expenses of $11.5 million, material fees were incurred in legal fees and expenses $5.7 million, actuarial fees and expenses $2.4 million, printing and mailing $1.8 million, and accounting fees and expenses, $1.6 million.

 

The net offering proceeds to Vericity Inc. after deducting total offering expenses is estimated to be $133.3 million. 

 

Vericity Inc. expects that any unallocated net proceeds from the offerings will be used for general corporate purposes, including paying holding company expenses, and potentially paying a special cash dividend to stockholders or repurchasing shares of our common stock. 

 

Additionally, pursuant to an agreement with the Illinois Department of Insurance, at least $20 million of the proceeds of the offerings will be used to fund the operations of Vericity Inc.’s various subsidiaries. 

Item 3. Default upon Senior Securities

None

Item 4. Mine Safety Disclosures

None  

Item 5. Other Information

None

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Item 6. Exhibits

 

    3.1

 

Amended and Restated Certificate of Incorporation of Vericity, Inc.

 

 

 

    3.2

 

Amended and Restated Bylaws of Vericity, Inc.

 

 

 

  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

 

XBRL Instance Document.

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

101.LAR

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 

39


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: August 14, 2019

 

By:

/s/ Chris S. Kim

 

 

 

Chris S. Kim

 

 

 

Executive Vice President, Chief Financial Officer and Treasurer

 

 

40