Vericity, Inc. - Quarter Report: 2023 June (Form 10-Q)

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, 2023

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

Commission File Number 001-38945

VERICITY, INC.

(Exact name of Registrant as specified in its Charter)


Delaware		46-2348863
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1350 E Touhy Avenue, Suite 205W, Des Plaines, Illinois		60018
(Address of principal executive offices)		(Zip Code)

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

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


Title of each class	Trading Symbol	Name on each exchange on which registered
Common Stock, Par Value $0.001 per share	VERY	NASDAQ Capital Market

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 12, 2023 was 14,875,000.

Table of Contents


			Page

PART I –	Financial Information		1
Item 1.	Financial Statements (Unaudited) (at June 30, 2023 and December 31, 2022 and for the three and six months ended June 30, 2023 and 2022		1

	Interim Condensed Consolidated Balance Sheets		1
	Interim Condensed Consolidated Statements of Operations		2
	Interim Condensed Consolidated Statements of Comprehensive (Loss) Income		3
	Interim Condensed Consolidated Statements of Changes in Shareholders' Equity		4
	Interim Condensed Consolidated Statements of Cash Flows		5
	Notes to the Interim Condensed Consolidated Financial Statements		6
		Note 1 – Summary of Significant Accounting Policies	6
		Note 2 – Investments	7
		Note 3 – Policy Liabilities	12
		Note 4 – Reinsurance	13
		Note 5 – Closed Block	13
		Note 6 – Commitments and Contingencies	15
		Note 7 – Assets and Liabilities Measured at Fair Value	16
		Note 8 – Long and Short-term Debt	19
		Note 9– Accumulated Other Comprehensive (Loss) Income	20
		Note 10 – Business Segments	20
		Note 11 – Subsequent Events	22

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 4.	Controls and Procedures		36

PART II –	Other Information		36
Item 1.	Legal Proceedings		36
Item 1A.	Risk Factors		36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 3.	Default upon Senior Securities		37
Item 4.	Mine Safety Disclosures		37
Item 5.	Other Information		37
Item 6.	Exhibits		38
Signature			39

Part 1. Financial Information

Item I. Financial Statements

Vericity, Inc.

Interim Condensed Consolidated Balance Sheets

(dollars in thousands)


	June 30,			December 31,
	2023			2022
	(Unaudited)			(Audited)
Assets
Investments:
Fixed maturities – available-for-sale – at fair value (amortized cost; $332,423 and $331,946, net of allowances for credit losses of $0 and $0)	$	303,514		$	298,138
Mortgage loans (net of allowances for credit losses of $280 and $83)		42,911			45,270
Policyholder loans		6,991			6,699
Other invested assets		3,048			3,693
Total investments		356,464			353,800
Cash, cash equivalents and restricted cash		6,611			9,776
Accrued investment income		3,701			3,006
Reinsurance recoverables (net of allowances for credit losses of $126 and $126)		223,973			214,862
Deferred policy acquisition costs		88,262			90,189
Commissions and agent balances (net of allowances for credit losses of $336 and $338)		48,782			34,766
Intangible assets		1,635			1,635
Deferred income tax assets, net		29,039			28,437
Other assets		34,454			33,607
Total assets		792,921			770,078
Liabilities and Shareholders' Equity
Liabilities
Future policy benefits and claims		473,042			453,763
Policyholder account balances		73,395			77,443
Other policyholder liabilities		35,501			47,486
Policy dividend obligations		9,506			9,515
Reinsurance liabilities and payables		6,741			6,246
Long-term debt		34,525			30,213
Short-term debt		8,618			6,976
Other liabilities		36,213			27,093
Total liabilities		677,541			658,735
Commitments and Contingencies (Note 6)
Shareholders' Equity
Common stock, $.001 par value, 30,000,000 shares authorized, 14,875,000 shares, issued and outstanding		15			15
Additional paid-in capital		39,840			39,840
Retained earnings		101,571			101,660
Accumulated other comprehensive (loss) income		(26,046	)		(30,172	)
Total shareholders' equity		115,380			111,343
Total liabilities and shareholders' equity	$	792,921		$	770,078

See notes to interim condensed consolidated financial statements

Vericity, Inc.

Interim Condensed Consolidated Statements of Operations

(dollars in thousands, except earnings per share)


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Revenues
Net insurance premiums	$	23,743		$	26,846		$	48,081		$	49,006
Net investment income		4,489			3,798			8,836			7,264
Net (losses) gains on investments		(337	)		110			(876	)		1,659
Earned commissions		15,432			10,488			30,181			21,525
Insurance lead sales		804			1,276			2,026			2,514
Other income		606			213			1,111			275
Total revenues		44,737			42,731			89,359			82,243
Benefits and expenses
Life, annuity, and health claim benefits		12,613			15,319			28,984			30,117
Interest credited to policyholder account balances		684			726			1,373			1,454
Operating costs and expenses		25,716			24,573			51,484			49,726
Amortization of deferred policy acquisition costs		2,982			4,239			6,630			9,151
Total benefits and expenses		41,995			44,857			88,471			90,448
Income (loss) before income tax		2,742			(2,126	)		888			(8,205	)
Income tax expense (benefit)		763			223			790			(194	)
Net income (loss)	$	1,979		$	(2,349	)	$	98		$	(8,011	)


Earnings per share for the periods
	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Weighted average shares outstanding, basic and diluted		14,875,000			14,875,000			14,875,000			14,875,000
Basic earnings per share	$	0.13		$	(0.16	)	$	0.01		$	(0.54	)
Diluted earnings per share	$	0.13		$	(0.16	)	$	0.01		$	(0.54	)

See notes to interim condensed consolidated financial statements

Vericity, Inc.

Interim Condensed Consolidated Statements of Comprehensive (Loss) Income

(dollars in thousands)


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023		2022
	(Unaudited)						(Unaudited)
Net income (loss)	$	1,979		$	(2,349	)	$	98	$	(8,011	)
Other comprehensive (loss) income, net of tax:
Change in net unrealized (losses) gains		(2,187	)		(14,803	)		4,126		(30,029	)
Total other comprehensive (loss) income		(2,187	)		(14,803	)		4,126		(30,029	)
Total comprehensive (loss) income	$	(208	)	$	(17,152	)	$	4,224	$	(38,040	)

See notes to interim condensed consolidated financial statements

Vericity, Inc.

Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity

(dollars in thousands)


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
	(Unaudited)						(Unaudited)
Common stock
Balance – beginning of period	$	15		$	15		$	15		$	15
Balance – end of period	$	15		$	15		$	15		$	15

Additional paid-in capital
Balance – beginning of period	$	39,840		$	39,840		$	39,840		$	39,840
Balance – end of period	$	39,840		$	39,840		$	39,840		$	39,840

Retained earnings
Balance – beginning of period	$	99,592		$	116,458		$	101,660		$	122,120
Cumulative effect adjustment from changes in accounting guidance, net of tax		—			—			(187	)		—
Balance after adjustments - beginning of period	$	99,592		$	116,458		$	101,473		$	122,120
Net income (loss)		1,979			(2,349	)		98			(8,011	)
Balance – end of period	$	101,571		$	114,109		$	101,571		$	114,109

Accumulated other comprehensive income (loss)
Balance – beginning of period	$	(23,859	)	$	(4,297	)	$	(30,172	)	$	10,929
Other comprehensive income (loss)		(2,187	)		(14,803	)		4,126			(30,029	)
Balance – end of period	$	(26,046	)	$	(19,100	)	$	(26,046	)	$	(19,100	)
Total shareholders' equity	$	115,380		$	134,864		$	115,380		$	134,864

See notes to interim condensed consolidated financial statements

Vericity, Inc.

Interim Condensed Consolidated Statements of Cash Flows

(dollars in thousands)


	Six Months Ended June 30,
	2023			2022
	(Unaudited)
Cash flows from operating activities
Net income (loss)	$	98		$	(8,011	)
Adjustments to reconcile net (loss) income to net cash (used) provided by operating activities:
Depreciation and amortization and other non-cash items		2,366			2,250
Interest credited to policyholder account balances		1,373			1,454
Deferred income tax		(1,454	)		(1,820	)
Net investment losses (gains)		876			(1,659	)
Interest expense		1,091			730
Change in:
Accrued investment income		(695	)		(434	)
Reinsurance recoverables, net		(9,111	)		(18,024	)
Deferred policy acquisition costs		1,927			3,322
Commissions and agent balances		(14,016	)		(1,617	)
Other assets		1,518			(1,580	)
Insurance liabilities		7,397			16,525
Other liabilities		6,821			(235	)
Net cash (used) provided by operating activities		(1,809	)		(9,099	)
Cash flows from investing activities
Sales, maturities and repayments of:
Fixed maturities		32,097			26,062
Mortgage loans		3,126			2,794
Other invested assets		454			—
Purchases of:
Fixed maturities		(32,263	)		(17,378	)
Mortgage loans		(964	)		(2,828	)
Other invested assets		(618	)		(190	)
Change in policyholder loans, net		(292	)		(229	)
Other, net		(2,432	)		(3,149	)
Net cash (used) provided by investing activities		(892	)		5,082
Cash flows from financing activities
Debt issued		25,089			9,517
Debt repaid		(20,226	)		(3,628	)
Deposits to policyholder account balances		568			207
Withdrawals from policyholder account balances		(5,895	)		(2,778	)
Net cash (used) provided by financing activities		(464	)		3,318
Net (decrease) in cash, cash equivalents and restricted cash		(3,165	)		(699	)
Cash, cash equivalents and restricted cash – beginning of period		9,776			22,399
Cash, cash equivalents and restricted cash – end of period	$	6,611		$	21,700
Supplemental cash flow information
Non-cash transactions:	$	—		$	—

See notes to interim condensed consolidated financial statements

Vericity, Inc.

Notes to Interim Condensed Consolidated Financial Statements

(dollars in thousands)

Note 1 – Summary of Significant Accounting Policies

Description of Business

Vericity, Inc. (the Company) is a Delaware corporation organized to be the stock holding company for Members Holding Company (Members) and its subsidiaries. On August 7, 2019, the Company completed the initial public offering of 14,875,000 shares of its common stock at a price of $10.00 per share (the IPO). The IPO was conducted in connection with the conversion of Members Mutual Holding Company from mutual to stock form and the acquisition by the Company of all of the capital stock of Members following its conversion to stock form after its plan of conversion and amended and restated articles of incorporation were approved at a special meeting of eligible members on August 6, 2019 (the Conversion). As a result of the Conversion, the Company became the holding company for converted Members Mutual Holding Company and its indirect subsidiaries, including Fidelity Life Association (Fidelity Life) and Efinancial, LLC (Efinancial).

The Company operates as a holding company and currently has no other business operations. Fidelity Life is an Illinois‑domiciled life insurance company that was founded in 1896. Fidelity Life markets life insurance products through independent and affiliated distributors and is licensed in the District of Columbia and all states, except New York and Wyoming. Efinancial markets life and other products for non‑affiliated insurance companies and sells life products for Fidelity Life.

The accompanying interim condensed consolidated financial statements present the accounts of the Company and subsidiaries for the three and six months ended June 30, 2023 and at June 30, 2022 and December 31, 2022. These interim condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report in the Form 10-K for the year ended December 31, 2022. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

Basis of Presentation

These interim condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The unaudited interim condensed consolidated financial information furnished herein reflects all adjustments which are, in the opinion of management, necessary to fairly state the results for the interim periods presented. All such adjustments are of a normal recurring nature. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated results of operations for the interim periods presented are not necessarily indicative of results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted from this report, as is permitted by such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the financial statements as of and for the year ended December 31, 2022, and notes thereto, included in the Form 10-K.

Use of Estimates

The preparation of interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The more significant estimates employed in the preparation of the interim condensed consolidated financial statements include the determination of the valuation of investments in fixed maturity, investment impairments, the valuation of deferred tax assets, future policy benefits and other policyholder liabilities.

Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments— Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance requires that Other-Than-Temporary Impairment (OTTI) on a debt security will be recognized as an allowance going forward, such that improvements in expected future cash flows after an impairment will no longer be reflected as a prospective yield adjustment through net investment income, but rather a reversal of the previous impairment and recognized through net gains (losses) on investments. The guidance also requires enhanced disclosures. In March 2022, the FASB issued ASU 2022-02 – Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructuring and Vintage Disclosure. This ASU was issued to eliminate the troubled debt restructuring recognition and measurement guidance for creditors that have adopted the current expected credit loss guidance while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. The Company has assessed the impact of ASU 2016-13 and has established an additional for credit losses on our mortgage portfolio of $237. The tax effected amount of $187 is reflected as a beginning of year equity as a

Cumulative effect adjustment from changes in accounting guidance, net of tax. The Company has also assessed fixed maturities - available-for-sale, reinsurance recoverables and commissions and agent balances and determined no additional allowance for credit losses is needed. We also adopted the required disclosures within Note 2 Investments, Note 4 Reinsurance, Note 9 Accumulated Other Comprehensive Income and Note 10 Business Segments.) Due to the adoption of the measurement of credit losses on financial instruments accounting standard, prior change in valuation allowance is now presented as a change in allowance for credit losses.

Note 2 – Investments

The Company continuously monitors its investment strategies and individual holdings with consideration of current and projected market conditions, the composition of the Company’s liabilities, projected liquidity and capital investment needs, and compliance with investment policies and state regulatory guidelines.

Fixed Maturities

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


	June 30, 2023
Fixed maturities	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. government and agencies	$	9,724	$	353	$	(470	)	$	9,607
U.S. agency mortgage-backed		7,621		41		(612	)		7,050
State and political subdivisions		72,385		115		(9,641	)		62,859
Corporate and miscellaneous		175,149		1,661		(14,640	)		162,170
Foreign government		130		5		—			135
Residential mortgage-backed		6,915		157		(628	)		6,444
Commercial mortgage-backed		22,172		22		(2,228	)		19,966
Asset-backed		38,327		45		(3,089	)		35,283
Total fixed maturities	$	332,423	$	2,399	$	(31,308	)	$	303,514


	December 31, 2022
Fixed maturities	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		OTTI Losses (1)
U.S. government and agencies	$	9,258	$	349	$	(501	)	$	9,106	$	—
U.S. agency mortgage-backed		9,429		63		(614	)		8,878		—
State and political subdivisions		68,213		26		(12,015	)		56,224		—
Corporate and miscellaneous		171,283		1,473		(16,275	)		156,481		—
Foreign government		130		1		—			131		—
Residential mortgage-backed		4,912		140		(622	)		4,430		(709	)
Commercial mortgage-backed		21,374		2		(1,914	)		19,462		—
Asset-backed		47,347		5		(3,926	)		43,426		—
Total fixed maturities	$	331,946	$	2,059	$	(35,867	)	$	298,138	$	(709	)

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

Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Maturities of mortgage-backed and asset-backed securities may be substantially shorter than their contractual maturity because they may require monthly principal installments and such loans may prepay principal. The amortized cost and fair value of fixed maturities available-for-sale by contractual maturity, are presented in the following table:


	June 30, 2023
	Amortized Cost		Fair Value
Due in one year or less	$	3,350	$	3,348
Due after one year through five years		36,227		34,480
Due after five years through ten years		78,363		74,418
Due after ten years		139,448		122,526
Securities not due at a single maturity date — primarily mortgage and asset-backed		75,035		68,742
Total fixed maturities	$	332,423	$	303,514

Fixed maturities with a carrying value of $2,712 and $2,680 were on deposit with governmental authorities, as required by law at June 30, 2023 and December 31, 2022, respectively.

The Company’s fixed maturities portfolio was primarily composed of investment grade securities, defined as a security having a rating of Aaa, Aa, A, or Baa from Moody’s, AAA, AA, A, or BBB from Standard & Poor’s, or National Association of Insurance Commissioners (NAIC) rating of NAIC 1 or NAIC 2. Investment grade securities comprised 96.7% and 95.1% of the Company’s total fixed maturities portfolio at June 30, 2023 and December 31, 2022, respectively.

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

Mortgage Loans

The Company makes investments in commercial mortgage loans. The Company, along with other investors, owns a pro rata share of each loan. The Company participates in 36 such investment instruments with ownership shares ranging from 0.6% to 30.0% of the trust at June 30, 2023. The Company owns a share of 323 mortgage loans with an average loan balance of $134 and a maximum exposure related to any single loan of $600. Mortgage loan holdings are diversified by geography and property type as follows:


	June 30, 2023						December 31, 2022
	Gross Carrying Value			% of Total			Gross Carrying Value			% of Total
Property Type:
Retail	$	13,309			30.8	%	$	13,866			30.6	%
Office		11,418			26.4	%		11,115			24.5	%
Industrial		7,773			18.0	%		8,138			17.9	%
Mixed use		4,921			11.4	%		5,249			11.6	%
Apartments		2,067			4.8	%		2,796			6.2	%
Medical office		2,577			6.0	%		3,053			6.7	%
Other		1,126			2.6	%		1,136			2.5	%
Gross carrying value of mortgage loans		43,191			100.0	%		45,353			100.0	%
Credit loss allowance (1)		(280	)					(83	)
Net carrying value of mortgage loans	$	42,911					$	45,270


	June 30, 2023						December 31, 2022
	Gross Carrying Value			% of Total			Gross Carrying Value			% of Total
U.S. Region:
West South Central	$	10,830			25.0	%	$	11,608			25.6	%
East North Central		12,591			29.2	%		12,320			27.2	%
South Atlantic		8,409			19.5	%		8,815			19.4	%
West North Central		2,541			5.9	%		2,871			6.3	%
Mountain		2,670			6.2	%		2,824			6.2	%
Middle Atlantic		2,091			4.8	%		2,310			5.1	%
East South Central		3,597			8.3	%		3,661			8.1	%
New England		—			0.0	%		34			0.1	%
Pacific		462			1.1	%		910			2.0	%
Gross carrying value of mortgage loans		43,191			100.0	%		45,353			100.0	%
Credit loss allowance (1)		(280	)					(83	)
Net carrying value of mortgage loans	$	42,911					$	45,270

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

During the six months ended June 30, 2023 and June 30, 2022, $964 and $2,828 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, 2023 and December 31, 2022. At June 30, 2023 and December 31, 2022, the Company had 2 and 3 mortgage loans with a total carrying value of $359 and $692 that were in a restructured status, respectively. There were no impairments for mortgage loans at three months ended June 30, 2023 and June 30, 2022 and December 31, 2022.

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


	Six Months Ended June 30, 2023			Year Ended December 31, 2022
Beginning balance	$	83		$	69
Net increase in allowances for credit losses related to change in accounting standards (See Note 1)		237			—
Net (decrease) increase in allowances for credit losses		(40	)		14
Ending balance	$	280		$	83

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

At June 30, 2023 and December 31, 2022, the Company had commitments to make investments in mortgage loans in the amount of $3,025 and $2,575, respectively.

Net Investment Income

The sources of net investment income are as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Income from:
Fixed maturities	$	4,138		$	3,481		$	8,006		$	6,623
Policyholder loans		83			94			180			182
Mortgage loans		579			568			1,305			1,236
Cash, cash equivalents and restricted cash		33			2			64			2
Gross investment income		4,833			4,145			9,555			8,043
Investment expenses		(344	)		(347	)		(719	)		(779	)
Net investment income	$	4,489		$	3,798		$	8,836		$	7,264

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

Net Investment (Losses) Gains

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Investment (losses) gains from sales:
Fixed maturities	$	(126	)	$	(185	)	$	(89	)	$	(131	)
Mortgage loans		—			(16	)		—			26
Gains and losses from sales		(126	)		(201	)		(89	)		(105	)
Valuation change of other invested assets - (decline) appreciation:		(263	)		312			(809	)		1,867
Change in allowance for credit losses (1)		52			(1	)		22			(103	)
Total net gains (losses) on investments	$	(337	)	$	110		$	(876	)	$	1,659

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

Change in Allowance for Credit Losses

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

Significant judgment is required in the determination of whether a credit loss has occurred for a security. The Company has developed a consistent methodology and has identified significant inputs for determining whether a credit loss has occurred. Some of the factors considered in evaluating whether a decline in fair value is a credit loss are the financial condition and prospects of the issuer, payment status, the probability of collecting scheduled principal and interest payments when due, credit ratings of the securities, and the duration and severity of the decline.

The credit loss component of fixed maturity impairment is calculated as the difference between amortized cost and the present value of the expected cash flows of the security. The present value is determined using the best estimate of cash flows discounted at the effective rate implicit to the security at the date of purchase or prior impairment. The methodology and assumptions for estimating the cash flows vary depending on the type of security. For mortgage-backed and asset-backed securities, cash flow estimates, including prepayment assumptions, are based on data from widely accepted third-party sources or internal estimates. In addition to prepayment assumptions, cash flow estimates vary based on assumptions regarding the underlying collateral characteristics, expectations of delinquency and default rates, and structural support, including subordination and guarantees. If the present value of the modeled expected cash flows equals or exceeds the amortized cost of a security, no credit loss exists, and the security is considered to be temporarily impaired. If the present value of the expected cash flows is less than amortized cost, the security is determined to be impaired for credit reasons and a credit loss is recognized in earnings. The non-credit component, determined as the difference between the adjusted amortized cost basis and fair value, is recognized a credit loss in other comprehensive (loss) income.

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

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


	June 30,		December 31,
	2023		2022
Beginning balance of credit losses on fixed maturities	$	1,263	$	837
Additional credit loss not previously recognized (1)		—		394
Additional credit loss that was previously recognized (1)		18		48
Reduction of credit losses related to securities sold during period		—		(16	)
Ending balance of credit losses on fixed maturities	$	1,281	$	1,263

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

Unrealized Losses for Fixed Maturities

The Company’s fair value and gross unrealized losses for fixed maturities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous gross unrealized loss position are as follows:


	12 months or less					Longer than 12 months					Total
June 30, 2023	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
Fixed maturities
U.S. government and agencies	$	497	$	(3	)	$	2,754	$	(467	)	$	3,251	$	(470	)
U.S. agency mortgage-backed		1,132		(76	)		4,233		(536	)		5,365		(612	)
State and political subdivisions		18,390		(734	)		36,374		(8,907	)		54,764		(9,641	)
Corporate and miscellaneous		42,482		(2,983	)		57,693		(11,657	)		100,175		(14,640	)
Residential mortgage-backed		2,016		(74	)		2,824		(554	)		4,840		(628	)
Commercial mortgage-backed		3,019		(201	)		15,988		(2,027	)		19,007		(2,228	)
Asset-backed		7,555		(503	)		26,389		(2,586	)		33,944		(3,089	)
Total fixed maturities	$	75,091	$	(4,574	)	$	146,255	$	(26,734	)	$	221,346	$	(31,308	)


	12 months or less					Longer than 12 months					Total
December 31, 2022	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
Fixed maturities
U.S. agency mortgage-backed	$	2,722	$	(501	)	$	—	$	—		$	2,722	$	(501	)
State and political subdivisions		5,297		(578	)		216		(36	)		5,513		(614	)
Corporate and miscellaneous		38,252		(7,036	)		15,057		(4,979	)		53,309		(12,015	)
Foreign government		94,461		(13,479	)		8,322		(2,796	)		102,783		(16,275	)
Residential mortgage-backed		3,286		(554	)		344		(68	)		3,630		(622	)
Commercial mortgage-backed		16,218		(1,611	)		2,655		(303	)		18,873		(1,914	)
Asset-backed		20,465		(1,726	)		21,069		(2,200	)		41,534		(3,926	)
Total fixed maturities	$	180,701	$	(25,485	)	$	47,663	$	(10,382	)	$	228,364	$	(35,867	)

The indicated gross unrealized losses in all fixed maturity categories decreased to $31,308 from $35,867 at June 30, 2023 and December 31, 2022, respectively. Based on the Company’s current evaluation of its fixed maturities in an unrealized loss position, in accordance with our impairment policy and the Company’s current intentions to hold these securities, the Company concluded that these securities do not have credit losses.

Information and concentrations related to fixed maturities in an unrealized loss position are included below. The tables below include fixed maturities and number of securities in an unrealized loss position for greater than and less than 12 months and the percentage that were investment grade at June 30, 2023.


	Unrealized Losses 12 months or less
	Gross Unrealized Losses			Impairment is Less than 10% of Amortized Cost			Impairment is Between 10% and 20% of Amortized Cost			Impairment is Greater than 20% of Amortized Cost			Percent Investment Grade
Fixed maturities
U.S. government and agencies	$	(3	)	$	(3	)	$	—		$	—			100	%
U.S. agency mortgage-backed		(76	)		(56	)		(20	)		—			100	%
State and political subdivisions		(734	)		(682	)		(52	)		—			100	%
Corporate and miscellaneous		(2,983	)		(1,309	)		(1,303	)		(371	)		77	%
Residential mortgage-backed		(74	)		(50	)		(13	)		(11	)		67	%
Commercial mortgage-backed		(201	)		(190	)		(11	)		—			100	%
Asset-backed		(503	)		(152	)		(290	)		(61	)		100	%
Gross unrealized losses	$	(4,574	)	$	(2,442	)	$	(1,689	)	$	(443	)

Total number of fixed maturities	282				232			42			8


	Unrealized Losses greater than 12 months
	Gross Unrealized Losses			Impairment is Less than 10% of Amortized Cost			Impairment is Between 10% and 20% of Amortized Cost			Impairment is Greater than 20% of Amortized Cost			Percent Investment Grade
Fixed maturities
U.S. government and agencies	$	(467	)	$	(84	)	$	(383	)	$	—			100	%
U.S. agency mortgage-backed		(536	)		(116	)		(420	)		—			100	%
State and political subdivisions		(8,907	)		(186	)		(3,206	)		(5,515	)		100	%
Corporate and miscellaneous		(11,657	)		(790	)		(4,853	)		(6,014	)		91	%
Residential mortgage-backed		(554	)		(52	)		(277	)		(225	)		94	%
Commercial mortgage-backed		(2,027	)		(427	)		(1,388	)		(212	)		100	%
Asset-backed		(2,586	)		(743	)		(1,569	)		(274	)		97	%
Gross unrealized losses	$	(26,734	)	$	(2,398	)	$	(12,096	)	$	(12,240	)

Total number of fixed maturities		545			127			260			158


	Investment Grade		Below Investment Grade		Total

Fixed income securities with unrealized loss position less than or equal to 20% of amortized cost, net (1) (2)	$	18,135	$	490	$	18,625
Fixed income securities with unrealized loss position greater than 20% of amortized cost, net (3) (4)		12,302		381		12,683
Total unrealized losses	$	30,437	$	871	$	31,308

(1) Below investment grade fixed income securities include $302 that have been in an unrealized loss position for less than twelve months. (2) Related to securities with an unrealized loss position less than 20% of amortized cost, net, the degree of which suggests that these securities do not pose a high risk of having credit losses. (3) No below investment grade fixed income securities have been in an unrealized loss position for a period of twelve or more consecutive months. (4) Evaluated based on factors such as discounted cash flows and the financial condition and near-term and long-term prospects of the issue or issuer and were determined to have adequate resources to fulfill contractual obligations.

Note 3 – Policy Liabilities

Future Policy Benefits

Future policy benefits represent the reserve for direct and assumed traditional life insurance policies and annuities in payout status.

The annuities in payout status are certain structured settlement contracts. The policy liability for structured settlement contracts of $12,703 and $13,118 at June 30, 2023 and December 31, 2022, 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, 2023 and December 31, 2022, is $9,882 and $10,097, respectively.

To the extent that unrealized gains on fixed maturities would result in a premium deficiency had those gains actually been realized, a premium deficiency reserve is recorded. A liability of $340 and $470 is included as part of the liability for structured settlements with respect to this deficiency at June 30, 2023 and December 31, 2022, respectively. The offset to this liability is recorded as a reduction of the unrealized capital gains included in AOCI.

Participating life insurance in-force was 2.7% and 3.9% of the face value of total life insurance at June 30, 2023 and December 31, 2022, respectively.

Note 4 – Reinsurance

The Company uses reinsurance to mitigate exposure to potential losses, provide additional capacity for growth, and provide greater diversity of business. For ceded reinsurance, the Company remains liable to the extent that reinsuring companies may not be able to meet their obligations under the reinsurance agreements. To manage the risk from failure of a reinsurer to meet its obligations, the Company periodically evaluates the financial condition of all of its reinsurers.

In the first quarter 2022, Fidelity Life entered into a reinsurance contract with Swiss Re Life & Health America Inc. (Swiss Re). This new treaty is in addition to existing coinsurance agreements, largely with Swiss Re on certain policies issued through and including December 31, 2020. The impact of this transaction to our segment results included an initial ceded premium in 2022 of $6.5 million based on the statutory reserves at January 1, 2022. The impact to pre-tax income in 2022 was nominal, however various income statement lines were impacted.

Reinsurance recoverables are as follows:


	June 30,		December 31,
	2023		2022
Ceded future policy benefits	$	186,863	$	173,904
Claims and other amounts recoverables		37,110		40,958
Ending balance	$	223,973	$	214,862

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Direct premiums	$	44,844		$	43,889		$	89,200		$	87,052
Assumed premiums		8,621			11,432			18,533			24,675
Ceded premiums		(29,722	)		(28,475	)		(59,652	)		(62,721	)
Net insurance premiums	$	23,743		$	26,846		$	48,081		$	49,006

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Direct	$	24,908		$	27,454		$	58,965		$	68,710
Assumed		1,767			4,292			5,927			10,255
Ceded		(14,062	)		(16,427	)		(35,908	)		(48,848	)
Life, annuity, and health claim benefits	$	12,613		$	15,319		$	28,984		$	30,117

Net policy charges on universal life products were $47 and $46 for the three months ended June 30, 2023 and 2022, respectively and $94 and $92 for the six months ended June 30, 2023 and 2022, respectively, and are included in other income.

At June 30, 2023 and December 31, 2022, reserves related to fixed‑rate annuity deposits assumed from a former affiliate company amounted to approximately $65,187 and $69,070, respectively, and are included with policyholder account balances in the Interim Condensed Consolidated Balance Sheets.

Note 5 – Closed Block

The Closed Block was formed at October 1, 2006 and contains all participating policies issued or assumed by Fidelity Life. The assets and future net cash flows of the Closed Block are available only for purposes of paying benefits, expenses and dividends of the Closed Block and are not available to the Company, except for an amount of additional funding that was established at the inception of the Closed Block. The additional funding was designed to protect the block against future experience, and if the funding is not required for that purpose, is subject to reversion to the Company in the future. Any reversion of Closed Block assets to the Company must be approved by the Illinois Department of Insurance (IDOI).

In October 2011, the IDOI approved a reversion of a portion of the initial funding that the Company had determined was not required to fund the Closed Block. The carrying value of the assets transferred from the Closed Block on October 31, 2011, the date of transfer, was $4,397.

The assets and liabilities within the Closed Block are included in the Company’s condensed consolidated financial statements on the same basis as other accounts of the Company. The maximum future earnings and accumulated other comprehensive income to be recognized from Closed Block assets and liabilities represent the estimated future Closed Block profits that will accrue to the Company

and is calculated as the excess of Closed Block assets over Closed Block liabilities. Included in Closed Block assets at June 30, 2023 and December 31, 2022 is $10,967 and $10,792 of additional Closed Block funding, plus accrued interest, that is eligible for reversion to the Company if not needed to fund Closed Block experience, respectively.

The Closed Block was funded based on a model developed to forecast the future cash flows of the Closed Block, which is referred to as the actuarial calculation. The actuarial calculation projected the anticipated future cash flows of the Closed Block as established at the initial funding. We compare the actual results of the Closed Block to expected results from the actuarial calculation as part of the annual assessment of the current level of policyholder dividends. The assessment of policyholder dividends includes projections of future experience of the Closed Block. The review of Closed Block experience also includes consideration of whether a policy dividend obligation should be recorded to reflect favorable Closed Block experience that has not yet been reflected in the dividend scales. At June 30, 2023 and December 31, 2022, the Company recognized a policyholder dividend obligation of $9,506 and $9,515, respectively, resulting from the excess of actual cumulative earnings over the expected cumulative earnings and from accumulated net unrealized investment gains (losses) that have arisen subsequent to the establishment of the Closed Block.

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


	June 30,			December 31,
Closed Block Liabilities	2023			2022
Future policy benefits and claims	$	29,051		$	29,382
Policyholder account balances		6,607			6,731
Other policyholder liabilities		2,728			5,298
Policyholder dividend obligations		9,506			9,515
Other liabilities		680			586
Total Closed Block liabilities		48,572			51,512
Assets Designated to the Closed Block
Investments:
Fixed maturities - available-for-sale (amortized cost $41,637 and $40,522, respectively)		38,204			36,625
Policyholder loans		1,244			1,132
Total investments		39,448			37,757
Premiums due and uncollected		443			1,852
Accrued investment income		491			457
Reinsurance recoverables		11,144			13,885
Deferred income tax assets, net		3,867			4,263
Total assets designated to the Closed Block		55,393			58,214
Excess of Closed Block assets over liabilities		6,821			6,702
Amounts included in accumulated other comprehensive income:
Unrealized investment loss (gains), net of income tax		(2,712	)		(3,079	)
Total amounts included in accumulated other comprehensive income		(2,712	)		(3,079	)
Maximum future earnings and accumulated other comprehensive income to be recognized from Closed Block assets and liabilities (includes excess assets of $10,967 and $10,792, respectively)	$	(9,533	)	$	(9,781	)


	June 30,			December 31,
Policyholder Dividend Obligations	2023			2022
Beginning balance	$	9,515		$	12,669
Impact from earnings allocable to policyholder dividend obligations		(9	)		(165	)
Change in net unrealized investment gains (losses) allocated to policyholder dividend obligations		—			(2,989	)
Ending balance	$	9,506		$	9,515

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


	Three Months Ended June 30,					Six Months Ended June 30,
	2023		2022			2023		2022
Revenues
Net insurance premiums	$	1,205	$	1,105		$	2,582	$	2,028
Net investment income		467		394			905		782
Net Realized Investment Gains (Losses)		2		—			3		—
Total revenues		1,674		1,499			3,490		2,810
Benefits and expenses
Life and annuity benefits - including policyholder dividends of $696, $209, $1,022 and $604, respectively		1,223		1,113			2,905		2,516
Interest credited to policyholder account balances		41		42			82		84
Operating costs and expenses		182		(75	)		352		(126	)
Total expenses		1,446		1,080			3,339		2,474
Revenues, net of expenses before provision for income tax expense (benefit)		228		419			151		336
Income tax expense (benefit)		48		89			32		71
Revenues, net of expenses and provision for income tax expense (benefit)	$	180	$	330		$	119	$	265

The Company charges the Closed Block with federal income taxes and state and local premium taxes, policy maintenance costs and investment management expenses relating to the Closed Block as provided in the Closed Block Memorandum.

The following table presents the amortized cost and fair value of the Closed Block fixed maturities portfolio by contractual maturity at June 30, 2023. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties:



	Amortized Cost		Fair Value
Due in one year or less	$	1,101	$	1,089
Due after one year through five years		6,322		6,211
Due after five years through ten years		7,357		7,135
Due after ten years		23,302		20,340
Securities not due at a single maturity date — primarily mortgage and asset- backed		3,555		3,429
Total fixed maturities	$	41,637	$	38,204

Note 6 – Commitments and Contingencies

Litigation

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

Note 7 – Assets and Liabilities Measured at Fair Value

Fair value is the estimated price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company attempts to establish fair value as an exit price consistent with transactions taking place under normal market conventions. The Company utilizes market observable information to the extent possible and seeks to obtain quoted market prices for all securities. If quoted market prices in active markets are not available, the Company uses a number of methodologies to establish fair value estimates including discounted cash flow models, prices from recently executed transactions of similar securities, or broker/dealer quotes.

Fair values for the Company’s fixed maturity and equity securities are determined by management, utilizing prices obtained from third-party pricing services. Management reviews on an ongoing basis the reasonableness of the methodologies used by the pricing services to ensure prices received represent a reasonable estimate of fair value and to confirm representations regarding whether inputs are observable or unobservable. The main procedure the Company employs in fulfillment of this objective includes back-testing transactions, where past fair value estimates are compared to actual transactions executed in the market on similar dates.

The Company’s assets and liabilities have been classified into a three-level hierarchy based on the priority of the inputs to the respective valuation technique. The hierarchy gives the highest ranking to fair values determined using unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest ranking to fair values determined using methodologies and models with unobservable inputs (Level 3). An asset’s or a liability’s classification is based on the lowest level input that is significant to its measurement. For example, a Level 3 fair value measurement may include inputs that are both observable (Level 1 and Level 2) and unobservable (Level 3). The levels of the fair value hierarchy are as follows:

Level 1 – Unadjusted quoted prices for identical assets in active markets the Company can access. Level 1 assets include securities that are traded in an active exchange market.

Level 2 – This level includes fixed maturities priced principally by independent pricing services using observable inputs other than Level 1 prices, such as quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments on inactive markets; and model-derived valuations for which all significant inputs are observable market data. Level 2 instruments include most corporate debt securities and U.S. government and agency mortgage-backed securities that are valued by models using inputs that are derived principally from or corroborated by observable market data.

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are unobservable. Level 3 instruments include less liquid assets for which significant inputs are unobservable in the market, such as structured securities with complex features that require significant management assumptions or estimation in the fair value measurement.

This hierarchy requires the use of observable market data when available.

Certain assets and liabilities are not carried at fair value on a recurring basis, including investments such as mortgage loans, intangible assets, future policy benefits excluding term life reserves and policyholder account balances. Accordingly, such items are only included in the fair value hierarchy disclosure when the items are subject to re-measurement at fair value after initial recognition (for example, when there is evidence of impairment) and the resulting re-measurement is reflected in the consolidated financial statements at the reporting date.

Recurring and Non-Recurring Fair Value Measurements

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


June 30, 2023	Level 1		Level 2		Level 3		Total Fair Value
Recurring fair value measurements
Financial instruments recorded as assets:
Fixed maturities
U.S. government and agencies	$	—	$	9,607	$	—	$	9,607
U.S. agency mortgage-backed		—		7,050		—		7,050
State and political subdivisions		—		62,411		448		62,859
Corporate and miscellaneous		2,631		131,823		27,716		162,170
Foreign government		—		135		—		135
Residential mortgage-backed		—		6,444		—		6,444
Commercial mortgage-backed		—		19,966		—		19,966
Asset-backed		—		31,822		3,461		35,283
Total fixed maturities		2,631		269,258		31,625		303,514
Total recurring assets	$	2,631	$	269,258	$	31,625	$	303,514


December 31, 2022	Level 1		Level 2		Level 3		Total Fair Value
Recurring fair value measurements
Financial instruments recorded as assets:
Fixed maturities
U.S. government and agencies	$	—	$	9,106	$	—	$	9,106
U.S. agency mortgage-backed		—		8,878		—		8,878
State and political subdivisions		—		55,782		442		56,224
Corporate and miscellaneous		2,847		126,644		26,990		156,481
Foreign government		—		131		—		131
Residential mortgage-backed		—		4,430		—		4,430
Commercial mortgage-backed		—		19,462		—		19,462
Asset-backed		—		40,293		3,133		43,426
Total fixed maturities		2,847		264,726		30,565		298,138
Total recurring assets	$	2,847	$	264,726	$	30,565	$	298,138

Summary of Significant Valuation Techniques for Assets on a Recurring Basis

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

Level 2 securities are based on prices obtained from independent pricing services. All of the Company’s prices for each security are generally sourced from multiple pricing vendors, and a vendor hierarchy is maintained by asset type and region of the world, based on historical pricing experience and vendor expertise. The Company ultimately uses the price from the pricing service highest in the vendor hierarchy based on the respective asset type and region. For fixed maturities that do not trade on a daily basis, the pricing services prepare estimates of fair value measurements using their pricing applications which incorporate a variety of inputs including, but not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, and U.S. Treasury curves. Specifically, for asset-backed securities, key inputs include prepayment and default projections based on past performance of the underlying collateral and current market data. Securities with validated quotes from pricing services are reflected within Level 2 of the fair value hierarchy, as they generally are based on observable pricing for similar assets or other market significant observable inputs.

Level 3 fair value classification consists of investments in securities where the fair value of the security is determined by a pricing service using internal pricing models where one or more of the significant inputs is unobservable in the marketplace, or there is a single broker/dealer quote. The fair value of a broker-quoted asset is based solely on the receipt of an updated quote from a single market maker or a broker-dealer recognized as a market participant. The fair value of Level 3 liabilities is estimated on the discounted cash flows of contractual payments.

If the Company believes the pricing information received from third-party pricing services is not reflective of market activity or other inputs observable in the market, the Company may challenge the price through a formal process with the pricing service. Historically, the Company has not challenged or updated the prices provided by third-party pricing services. However, any such updates by a pricing service to be more consistent with the presented market observations, or any adjustments made by the Company to prices provided by third-party pricing services would be reflected in the balance sheet for the current period.

When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). Net transfers into and/or out of Level 3 are reported as having occurred at the beginning of the period and are based on observable inputs received from pricing sources; therefore, all net realized and unrealized gains and losses on these securities for the period are reflected in the table that follows. A summary of changes in fair value of Level 3 assets held at fair value on a recurring basis is as follows:


			Total gains (losses) included in:
	Balance at January 1, 2023		Net Income (loss)		OCI			Purchases		Sales			Settlements		Net Transfers		Balance at June 30, 2023
Financial Assets
Fixed maturities
State and political subdivision	$	442	$	—	$	6		$	—	$	—		$	—	$	—	$	448
Corporate and miscellaneous		26,991		—		(24	)		1,991		(1,702	)		—		460		27,716
Asset-backed		3,133		150		70			79		(471	)		—		500		3,461
Total assets	$	30,566	$	150	$	52		$	2,070	$	(2,173	)	$	—	$	960	$	31,625


			Total gains (losses) included in:
	Balance at January 1, 2022		Net Income			OCI			Purchases		Sales			Settlements		Net Transfers		Balance at December 31, 2022
Financial Assets
Fixed maturities
State and political subdivisions	$	498	$	—		$	(56	)	$	—	$	—		$	—	$	—	$	442
Corporate and miscellaneous		24,740		2			(398	)		3,198		(2,582	)		1,468		563		26,991
Asset-backed		2,838		(122	)		(325	)		1,907		(1,260	)		—		95		3,133
Total assets	$	28,076	$	(120	)	$	(779	)	$	5,105	$	(3,842	)	$	1,468	$	658	$	30,566

There was 1 transfer from Level 3 to Level 2 and 4 transfers from level 2 to level 3 in 2023. There were 2 transfers from Level 3 to Level 2 and 6 transfers from level 2 to level 3 in 2022.

Financial Instruments not Measured at Fair Value

The following tables provide fair value information for financial instruments that are carried on the balance sheet at amounts other than fair value. These tables exclude cash and cash equivalents and accrued investment income, that are not securities and therefore are not included in the three-level hierarchy table disclosed in the “Recurring and Non-Recurring Fair Value Measurements” section. The carrying amount and estimated fair values of the Company’s financial instruments that are not measured at fair value on the Interim Condensed Consolidated Balance Sheets are as follows:


			Estimated Fair Value
June 30, 2023	Carrying Value		Level 1		Level 2		Level 3		Total
Financial instruments recorded as assets:
Mortgage loans	$	42,911	$	—	$	—	$	39,712	$	39,712
Policyholder loans	$	6,991	$	—	$	—	$	8,057	$	8,057
Financial instruments recorded as liabilities:
Future policy benefits, excluding term life reserves	$	16,212	$	—	$	—	$	15,174	$	15,174
Long/short-term debt	$	43,143	$	—	$	—	$	45,168	$	45,168
Policyholder account balances	$	73,395	$	—	$	—	$	67,034	$	67,034


			Estimated Fair Value
December 31, 2022	Carrying Value		Level 1		Level 2		Level 3		Total
Financial instruments recorded as assets:
Mortgage loans	$	45,270	$	—	$	—	$	41,622	$	41,622
Policyholder loans	$	6,699	$	—	$	—	$	7,722	$	7,722
Financial instruments recorded as liabilities:
Future policy benefits, excluding term life reserves	$	16,555	$	—	$	—	$	15,192	$	15,192
Long/short-term debt	$	37,189	$	—	$	—	$	36,763	$	36,763
Policyholder account balances	$	77,443	$	—	$	—	$	70,157	$	70,157

The following methods and assumptions were used to estimate the fair value of these financial assets and liabilities.

Mortgage Loans — Fair value was based on the discounted value of future cash flows for all first mortgage loans adjusted for specific loan risk. The discount rate was based on the rate that would be offered for similar loans at the reporting date. Fair value excludes $1,204 and $1,952 of second and mezzanine mortgages carried at cost for which fair value is not measurable at June 30, 2023 and December 31, 2022, respectively.

Policyholder Loans — Fair value of policyholder loans was estimated using discounted cash flows using risk-free interest rates with no adjustment for borrower credit risk as these loans are fully collateralized by the cash value of the underlying insurance policy.

Future Policy Benefits and Policyholder Account Balances — Liabilities with interest rate guarantees greater than one year or with defined maturities, the fair value was estimated by calculating an average present value of expected cash flows over a broad range of interest rate scenarios using the current market risk‑free interest rates adjusted for spreads required for publicly traded bonds issued by comparably rated insurers. Certain non-interest sensitive reserves are at carrying value, which approximates fair value.

Long and Short-Term Debt — Fair value was calculated using the discounted value of future cash flows method. The discount rate was based on the rate that is commensurable to the level of risk. The carrying amounts reported on the Interim Condensed Consolidated Balance Sheets have been divided in to short and long-term based upon expected maturity dates.

Note 8 – Long and Short-Term Debt

In 2022 and subsequent amendments in 2023, Efinancial entered into a new commission financing arrangement and is taking new advances on this financing arrangement. Efinancial’s ability to receive advances under this arrangement will terminate when the aggregate amount advanced under the arrangement equals or exceeds $46.0 million. At June 30, 2023 and December 31, 2022, the Company had a net advance of $35,963 and $31,100, respectively, under this arrangement. At June 30, 2023, the Company expects to pay back the aggregate amounts as presented in the following table.


	June 30, 2023
Due in one year or less	$	8,618
Due after one year through two years		5,851
Due after two years through three years		5,443
Due after three years through four years		5,096
Due after four years through five years		4,659
Due after five years		35,154
Less discount		(21,678	)
Total long/short-term debt	$	43,143

Federal Home Loan Bank of Chicago

The Company is a member of the Federal Home Loan Bank of Chicago (FHLBC). As a member, the Company is able to borrow on a collateralized basis from the FHLBC which can be used as an alternative source of liquidity. The FHLBC membership requires the Company to own member stock. At June 30, 2023 and December 31, 2022, the Company held $270 and $180 of FHLBC common stock, which is included in Other invested assets, respectively. The Company's ability to borrow under this facility is subject to the FHLBC's discretion and requires the availability of qualifying assets. As of June 30, 2023 and December 31, 2022, the Company had not pledged any assets and there were no outstanding borrowings.

Note 9 – Accumulated Other Comprehensive (Loss) Income

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


	2023								2022
	Net Unrealized Gains (Losses) on Investments with Credit Losses		Net Unrealized Gains (Losses) on Other Investments			Total			Net Unrealized Gains (Losses) on Investments with Credit Losses		Net Unrealized Gains (Losses) on Other Investments			Total
Balance at beginning of year	$	362	$	(30,534	)	$	(30,172	)	$	362	$	10,567		$	10,929
Second Quarter
Other comprehensive income (loss)
Unrealized holding (losses) gains from changes in the market value of securities		—		(3,029	)		(3,029	)		—		(20,876	)		(20,876	)
Impact on policy benefit liabilities of changes in market value of securities		—		380			380			—		1,796			1,796
Change in net unrealized investment (losses) gains allocated to policyholder dividend obligations		—		—			—			—		343			343
Deferred income tax (expense) benefit		—		462			462			—		3,934			3,934
Second Quarter, net		—		(2,187	)		(2,187	)		—		(14,803	)		(14,803	)

Year to Date
Other comprehensive (loss) income
Unrealized holding (losses) gains from changes in the market value of securities		—		4,898			4,898			—		(45,520	)		(45,520	)
Impact on policy benefit liabilities of changes in market value of securities		—		129			129			—		4,520			4,520
Change in net unrealized investment (losses) gains allocated to policyholder dividend obligations		—		—			—			—		2,989			2,989
Deferred income tax benefit (expense)		—		(901	)		(901	)		—		7,982			7,982
Year to Date, net		—		4,126			4,126			—		(30,029	)		(30,029	)

Balance at end of period	$	362	$	(26,408	)	$	(26,046	)	$	362	$	(19,462	)	$	(19,100	)

Note 10 – Business Segments

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

The Insurance Segment is composed of three broad lines consisting of Traditional Life, Closed Block, and Assumed Life and Annuities. Traditional Life and the Closed Block are distinct operations; the Assumed life and annuities business and the small amount of structured settlements are all blocks in runoff from a prior management arrangement.

The Agency Segment includes the insurance distribution operations of the Company and includes commission revenue from the sale of Fidelity Life products.

The Corporate & Other Segment includes expenses that will benefit the overall organization, which are not allocated to a segment. This segment recognizes net investment income on cash and invested assets held mainly as a result of the IPO and interest expense related to our commission financing agreement.

All intercompany accounts and transactions have been eliminated in consolidation, including any profit or loss from the sale of Insurance Segment products through the Agency Segment.

The segment results are as follows:


	Three Months Ended June 30, 2023											Three Months Ended June 30, 2022
	Insurance			Agency		Corporate & Other			Total Consolidated			Insurance			Agency			Corporate & Other			Total Consolidated
Net insurance premiums	$	23,743		$	—	$	—		$	23,743		$	26,846		$	—		$	—		$	26,846
Net investment income		4,414			—		75			4,489			3,720			—			78			3,798
Net (losses) gains on investments (1)		(205	)		—		(132	)		(337	)		(55	)		—			165			110
Earned commissions		—			15,432		—			15,432			—			10,587			(99	)		10,488
Other income		256			1,154		—			1,410			213			1,276			—			1,489
Total revenues		28,208			16,586		(57	)		44,737			30,724			11,863			144			42,731
Life, annuity, and health claim benefits		13,297			—		—			13,297			16,045			—			—			16,045
Operating costs and expenses		8,226			15,653		1,837			25,716			9,271			13,720			1,582			24,573
Amortization of deferred policy acquisition costs		2,982			—		—			2,982			4,239			—			—			4,239
Total benefits and expenses		24,505			15,653		1,837			41,995			29,555			13,720			1,582			44,857
Income (loss) before income taxes	$	3,703		$	933	$	(1,894	)	$	2,742		$	1,169		$	(1,857	)	$	(1,438	)	$	(2,126	)

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


	Six Months Ended June 30, 2023											Six Months Ended June 30, 2022
	Insurance			Agency		Corporate & Other			Total Consolidated			Insurance			Agency			Corporate & Other			Total Consolidated
Net insurance premiums	$	48,081		$	—	$	—		$	48,081		$	49,006		$	—		$	—		$	49,006
Net investment income		8,687			—		149			8,836			7,055			—			209			7,264
Net realized investment gains (losses) (1)		(512	)		—		(364	)		(876	)		833			—			826			1,659
Earned commissions		—			30,526		(345	)		30,181			—			21,725			(200	)		21,525
Other income		531			2,606		—			3,137			275			2,514			—			2,789
Total revenues		56,787			33,132		(560	)		89,359			57,169			24,239			835			82,243
Life, annuity, and health claim benefits		30,357			—		—			30,357			31,571			—			—			31,571
Operating costs and expenses		15,929			32,072		3,483			51,484			17,187			28,463			4,076			49,726
Amortization of deferred policy acquisition costs		6,630			—		—			6,630			9,151			—			—			9,151
Total benefits and expenses		52,916			32,072		3,483			88,471			57,909			28,463			4,076			90,448
(Loss) income before income tax	$	3,871		$	1,060	$	(4,043	)	$	888		$	(740	)	$	(4,224	)	$	(3,241	)	$	(8,205	)

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


	June 30, 2023								December 31, 2022
	Insurance		Agency		Corporate & Other		Total Consolidated		Insurance		Agency		Corporate & Other		Total Consolidated
Investments and cash	$	359,820	$	354	$	2,901	$	363,075	$	358,620	$	1,094	$	3,862	$	363,576
Commissions and agent balances		13,840		34,942		—		48,782		4,751		30,015		—		34,766
Deferred policy acquisition costs		88,262		—		—		88,262		90,189		—		—		90,189
Intangible assets		—		1,635		—		1,635		—		1,635		—		1,635
Reinsurance recoverables net		223,973		—		—		223,973		214,862		—		—		214,862
Deferred income tax assets, net		14,969		—		14,070		29,039		13,489		—		14,948		28,437
Other		28,963		8,899		293		38,155		26,800		5,869		3,944		36,613
Total assets	$	729,827	$	45,830	$	17,264	$	792,921	$	708,711	$	38,613	$	22,754	$	770,078

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

Note 11 –Subsequent Events

Management has evaluated subsequent events up to and including August 14, 2023, the date these Interim Condensed Consolidated Financial Statements were issued and determined there were no reportable subsequent events.

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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Form 10-Q contains “forward-looking” statements that are intended to enhance the reader’s ability to assess our future financial and business performance. Forward-looking statements include, but are not limited to, statements that represent our beliefs concerning future operations, strategies, financial results or other developments, and contain words and phrases such as “may,” “expects,” “should,” “believes,” “anticipates,” “estimates,” “intends” or similar expressions. In addition, statements that refer to our future financial performance, anticipated growth and trends in our business and in our industry and other characterizations of future events or circumstances are forward-looking statements. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different.

Consequently, such forward-looking statements should be regarded solely as our current plans, estimates and beliefs with respect to, among other things, future events and financial performance. Except as required under the federal securities laws, we do not intend, and do not undertake, any obligation to update any forward-looking statements to reflect future events or circumstances after the date of such statements.

The forward-looking statements include, among other things, those items listed below:

•

future economic conditions in the markets in which we compete that could be less favorable than expected and could have impacts on demand for our products and services;

•

our ability to grow and develop our Agency business through expansion of retail call centers, online sales, wholesale operations and other areas of opportunity;

•

our ability to grow and develop our insurance business and successfully develop and market new products;

•

our ability to enter new markets successfully and capitalize on growth opportunities either through acquisitions or organically;

•

financial market conditions, including, but not limited to, changes in interest rates and the level and trends of stock market prices causing a reduction of net investment income or realized losses and reduction in the value of our investment portfolios;

•

increased competition in our businesses, including the potential impacts of aggressive price competition by other insurance companies, payment of higher commissions to agents that could affect demand for our insurance products and impact the ability to grow and retain agents in our Agency Segment and the entry of new competitors and the development of new products by new or existing competitors, resulting in a reduction in the demand for our products and services;

•

the effect of legislative, judicial, economic, demographic, and regulatory events in the jurisdictions where we do business;

•

the effect of challenges to our patents and other intellectual property;

•

costs, availability, and collectability of reinsurance;

•

the potential impact on our reported net income that could result from the adoption of future accounting standards issued by the Financial Accounting Standards Board or other standard-setting bodies;

•

the inability to maintain or grow our strategic partnerships or our inability to realize the expected benefits from our relationship with the Standby Purchaser;

•

the inability to manage future growth and integration of our operations; and

•

changes in industry trends and financial strength ratings assigned by nationally recognized statistical rating organizations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes included in Item 1 of this Form 10-Q. Some of the information contained in this discussion and analysis and set forth elsewhere in this Form 10-Q constitutes forward looking information that involves risks and uncertainties. You should review “Forward Looking Statements” for a discussion of important factors that could cause actual results to differ materially from the results described, or implied by, the forward-looking statements contained herein.

Overview

We provide life insurance protection targeted to the middle American market. We believe there is a substantial unmet need for life insurance, particularly among domestic households with annual incomes of between $50,000 and $125,000, a market we refer to as our target Middle Market. We differentiate our product and service offerings through innovative product design and sales processes, with an emphasis on rapidly issued products that are not medically underwritten at the time of sale.

We conduct our business through our two operating subsidiaries, Fidelity Life, an Illinois-domiciled life insurance company, and Efinancial, a call center-based insurance agency. Efinancial sells Fidelity Life products through its own call center distribution platform, independent agents and other marketing organizations. Efinancial, in addition to offering Fidelity Life products, sells insurance products of unaffiliated carriers. We report our operating results in three segments: Agency, Insurance and Corporate & Other.

COVID-19

The stress and disruption placed on the global economy and financial markets from the outbreak of COVID-19 may continue to have near and long-term negative effects on investment valuations, returns, and credit allowance exposure. The Company will continue to closely monitor the situation, including potential negative impacts on sales of new policies and mortality; however, due to the highly uncertain nature of these conditions, it is not possible to reliably estimate the length and severity of COVID-19 or its impact to the Company’s operations, but the effect could be material.

Russia and Ukraine War

The Company believes the war in Ukraine does not have a material impact on the interim condensed consolidated financial statements of the Company at June 30, 2023.

National Service Group of AmeriLife, LLC

In the second quarter 2020, Fidelity Life entered into a General Agent’s agreement with an unaffiliated third party, National Service Group of AmeriLife, LLC (“AmeriLife”). The President of this entity, Scott Perry also sits on the Company’s Board of Directors. This agreement provides Fidelity Life access to AmeriLife distribution channels, its commission systems and assists in streamlining administrative processes related to commissions. This agreement also allows Efinancial to operate as a sub agent to AmeriLife. On May 15, 2020, the Company began selling products using this new distribution arrangement. Due to the large amount of the Company’s insurance policies now being sold through AmeriLife, dissolution of this agency arrangement could have a material impact on the Company’s financial statements. The Company has additional arrangements with AmeriLife wherein Efinancial’s sub agents may sell third party products through AmeriLife. To date it is not believed that any of these arrangements will exceed the related party thresholds described in 17 CFR § 229.404. Should these or other arrangements change or exceed the aforementioned threshold, after review by the CFO and General Counsel, the Company’s Chairman will be advised and written sign-off will be required from the Company's Chairman.

Agency Segment

This segment primarily consists of the operations of Efinancial. Efinancial is a call center-based insurance agency that markets life insurance for Fidelity Life and unaffiliated insurance companies. Efinancial’s primary operations are conducted through employee agents from three call center locations, which we refer to as our retail channel. In addition, Efinancial operates as a wholesale agency, assisting independent agents that seek to produce business for the carriers that Efinancial represents, which we refer to as our wholesale channel. The Agency Segment’s main source of revenue is commissions earned on the sale of insurance policies sold through our retail and wholesale channels. Efinancial also generates data and click-through revenue (reported as part of Insurance Lead Sales on the related Interim Condensed Consolidated Statements of Operations) through its eCoverage web presence.

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

Insurance Segment

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

Fidelity Life engages in the following business lines:

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

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

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

Annuities and Assumed Life - We have assumed reinsurance commitments with respect to annuity contract holder deposits and a block of life insurance contracts that were ceded by former affiliates of Fidelity Life. Under an agreement with Protective Life Insurance Company (Protective Life), the successor to a former affiliate of Fidelity Life, Fidelity Life had assumed a portion of risk on a group of life insurance contracts primarily written in the 1980s and early 1990s.

Insurance Segment revenues consist of net insurance premiums, net investment income, and net realized gains (losses) on investments. We recognize premium revenue from our policyholders. We purchase reinsurance coverage to help manage the risk on our insurance policies by paying, or ceding, a portion of the policyholder premiums to the reinsurance company. Our net insurance premiums reflect amounts collected from policyholders, plus premiums assumed under reinsurance agreements less premiums ceded to reinsurance companies. Net investment income represents primarily interest income earned on fixed maturity investments. We also realize gains and losses on sales of investment securities.

Insurance Segment expenses consist of benefits paid to policyholders or their beneficiaries under life insurance policies. Benefit expenses also include additions to the reserve for future policyholder benefits to recognize our estimated future obligations under the policies. Benefit expenses are shown net of amounts ceded under our reinsurance contracts. Our Insurance Segment also incurs policy acquisition costs that consist of commissions paid to agents, policy underwriting, issue costs and variable sales costs. A portion of these policy acquisition costs are deferred and expensed over the life of the insurance policies acquired during the period. In addition to policy acquisition costs, we incur expenses that vary based on the number of contracts that we have in-force, or variable policy administrative costs. These variable costs consist of expenses paid to third-party administrators based on rates for each policy administered. Our insurance operations also incur overhead costs for functional and administrative staff to support insurance operations, financial reporting and information technology.

In the first quarter 2022, Fidelity Life entered into a reinsurance contract with Swiss Re Life & Health America Inc. (Swiss Re). This new treaty is in addition to existing coinsurance agreements, largely with Swiss Re on certain policies issued through and including December 31, 2020. The impact of this transaction to our segment results included an initial ceded premium of $6.5 million based on the statutory reserves at January 1, 2022. The impact to pre-tax income is nominal, however various income statement lines are impacted. The impact is discussed in the segment results of this Management Discussion and Analysis of Financial Condition and results of Operations.

Corporate & Other Segment

The results of this segment consist of net investment income and net gains (losses) on investments earned on invested assets. We also include certain corporate expenses, including severance costs that are not allocated to our other segments, including expenses of Vericity, Inc., board of director's expenses, allocation of executive management time spent on corporate matters, and financial reporting and auditing costs related to our consolidation and internal controls. Our Corporate & Other Segment recognizes income (loss) to the extent that net investment income and net gains (losses) on investments exceed (are less than) corporate expenses.

Included in the Corporate & Other Segment is the elimination of intercompany transactions which primarily consists of the sales by our Agency Segment of life products of our Insurance Segment. The eliminations represent the amounts required to eliminate the intercompany transactions as recorded in our segment results, and in particular, to eliminate any intersegment profits resulting from such transactions. Our segment results follow the accounting principles and methods applicable to each segment as if the intercompany transactions were with unaffiliated organizations: See "Corporate & Other" segment results included in this Management Discussion & Analysis for further discussion.

Critical Accounting Policies

Our critical accounting policies are described in “Note 1—Basis of Presentation and Summary of Significant Accounting Policies” to our Consolidated Financial Statements as of and for the year ended December 31, 2022 included in the Form 10-K. The preparation of the Interim Condensed Consolidated Financial Statements in conformity with GAAP requires management to use judgment in making estimates and assumptions that affect reported amounts of assets, liabilities, revenues, expenses and related disclosures. We regularly

evaluate our estimates and judgments based on historical experience, market indicators and other relevant factors and circumstances. Actual results may differ from these estimates under different assumptions or conditions and may affect our financial position and results of operations. Accordingly, these Interim Condensed Consolidated Financial Statements should be read in conjunction with the financial statements as of and for the year ended December 31, 2022, and notes thereto, included in the Form 10-K.

Results of Operations

The major components of operating revenues, benefits and expenses and net (loss) income were as follows (certain prior year values have been re-classified due to the adoption of ASU 2016-02, see footnote 1 in this form 10-Q):

Vericity, Inc. Consolidated Results of Operations

(dollars in thousands)


	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)
Revenues	2023			2022			2023			2022
Net insurance premiums	$	23,743		$	26,846		$	48,081		$	49,006
Net investment income		4,489			3,798			8,836			7,264
Net (losses) gains on investments		(337	)		110			(876	)		1,659
Earned commissions		15,432			10,488			30,181			21,525
Insurance lead sales		804			1,276			2,026			2,514
Other income		606			213			1,111			275
Total revenues		44,737			42,731			89,359			82,243
Benefits and expenses
Life, annuity, and health claim benefits		12,613			15,319			28,984			30,117
Interest credited to policyholder account balances		684			726			1,373			1,454
Operating costs and expenses		25,716			24,573			51,484			49,726
Amortization of deferred policy acquisition costs		2,982			4,239			6,630			9,151
Total benefits and expenses		41,995			44,857			88,471			90,448
Income (loss) before income taxes		2,742			(2,126	)		888			(8,205	)
Income tax expense (benefit)		763			223			790			(194	)
Net income (loss)	$	1,979		$	(2,349	)	$	98		$	(8,011	)

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

Total Revenues

For the three months ended June 30, 2023, total revenues were $44.7 million compared to $42.7 million for the three months ended June 30, 2022. This increase of $2.0 million resulted primarily from an increase in net investment income and earned commissions, partially offset by a decrease in net insurance premiums, lower net gains on investments and a decrease in insurance lead sales.

Benefits and Expenses

For the three months ended June 30, 2023, total benefits and expenses were $42.0 million compared to $44.9 million for the three months ended June 30, 2022. This decrease of $2.9 million is driven by lower claim benefits and amortization of deferred policy acquisition costs, partially offset by higher operating expenses.

Income (loss) Before Income Taxes

For the three months ended June 30, 2023, net income before taxes was $2.7 million compared to net loss before taxes of $2.1 million for the three months ended June 30, 2022. This increase in net income of $4.8 million was primarily due to higher earned commissions, net investment income, lower claim benefits and deferred policy acquisition costs, partially offset by lower net insurance premium, lower realized investment gains and higher operating expenses.

Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022

Total Revenues

For the six months ended June 30, 2023, total revenues were $89.4 million compared to $82.2 million for the six months ended June 30, 2022. This increase of $7.2 million resulted primarily from higher earned commissions and net investment income, partially offset by lower net gains on investments, a decrease in net insurance premiums, and a decrease in insurance lead sales.

Benefits and Expenses

For the six months ended June 30, 2023, total benefits and expenses were $88.5 million compared to $90.4 million for the six months ended June 30, 2022. This decrease of $1.9 million is driven by lower deferred policy acquisition costs and claim benefits, partially offset by higher operating expenses.

Income (loss) Before Income Taxes

For the six months ended June 30, 2023, net income before taxes was $0.9 million compared to net loss before taxes of $8.2 million for the six months ended June 30, 2022. This increase in net income of $9.1 million was primarily due to higher earned commissions, higher net investment income, lower deferred policy acquisition costs, and lower claim benefits, partially offset with lower realized investment gains, higher operating expenses, and lower net insurance premiums.

Consolidated Results

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
	(dollars in thousands)						(dollars in thousands)
Income (loss) before income tax by segment
Agency	$	933		$	(1,857	)	$	1,060		$	(4,224	)
Insurance		3,703			1,169		$	3,871			(740	)
Corporate & Other		(1,894	)		(1,438	)	$	(4,043	)		(3,241	)
Income (loss) from operations before income tax		2,742			(2,126	)		888			(8,205	)
Income tax expense (benefit)		763			223			790			(194	)
Net income (loss)	$	1,979		$	(2,349	)	$	98		$	(8,011	)

Agency Segment

The results of our Agency Segment were as follows:


	Three Months Ended June 30,					Six Months Ended June 30,
	2023		2022			2023		2022
(dollars in thousands)	(dollars in thousands)					(dollars in thousands)
Revenues
Earned commissions	$	15,432	$	10,587		$	30,526	$	21,725
Insurance lead sales & Other		1,154		1,276			2,606		2,514
Total revenues		16,586		11,863			33,132		24,239
Expenses
Operating costs and expenses		15,653		13,720			32,072		28,463
Total expenses		15,653		13,720			32,072		28,463
Income (loss) before income taxes	$	933	$	(1,857	)	$	1,060	$	(4,224	)

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

Earned Commissions

For the three months ended June 30, 2023, earned commissions were $15.4 million compared to $10.6 million for the three months ended June 30, 2022. This increase of $4.8 million resulted from increased sales in the retail channel.

Operating Costs and Expenses

For the three months ended June 30, 2023, operating costs and expenses were $15.7 million compared to $13.7 million for the three months ended June 30, 2022. This increase of $2.0 million was primarily due to an increase in variable costs.

Income (Loss) Before Income Taxes

For the three months ended June 30, 2023, the Agency Segment net income was $0.9 million compared to net loss of $1.9 million for the three months ended June 30, 2022. This increase in net income of $2.8 million was the result of higher earned commissions, partially offset by increased operating expenses.

Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022

Earned Commissions

For the six months ended June 30, 2023, earned commissions were $30.5 million compared to $21.7 million for the six months ended June 30, 2022. This increase of $8.8 million resulted from increased sales in the retail channel.

Operating Costs and Expenses

For the six months ended June 30, 2023, operating costs and expenses were $32.1 million compared to $28.5 million for the six months ended June 30, 2022. This increase of $3.6 million was primarily due to an increase in variable costs.

Income (Loss) Before Income Taxes

For the six months ended June 30, 2023, the Agency Segment net income was $1.1 million compared to net loss of $4.2 million for the six months ended June 30, 2022. This increase in net income of $5.3 million was the result of higher earned commissions, partially offset by increased operating expenses.

Insurance Segment

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
(dollars in thousands)							(dollars in thousands)
Revenues
Net insurance premiums	$	23,743		$	26,846		$	48,081		$	49,006
Net investment income		4,414			3,720			8,687			7,055
Net (losses) gains on investments		(205	)		(55	)		(512	)		833
Other income		256			213			531			275
Total revenues	$	28,208		$	30,724			56,787			57,169
Benefits and expenses
Life, annuity, and health claim benefits		12,613			15,319			28,984			30,117
Interest credited to policyholder account balances		684			726			1,373			1,454
Operating costs and expenses		8,226			9,271			15,929			17,187
Amortization of deferred policy acquisition costs		2,982			4,239			6,630			9,151
Total benefits and expenses		24,505			29,555			52,916			57,909
Income (loss) before income taxes	$	3,703		$	1,169		$	3,871		$	(740	)

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

Net Insurance Premiums

For the three months ended June 30, 2023, net insurance premiums were $23.7 million compared to $26.8 million for the three months ended June 30, 2022. This decrease of $3.1 million in net insurance premiums was primarily due to decreases in our Core lines of $2.7 million, primarily due to our LifeTime benefit Term (LBT) product, and a decrease of $0.5 million in our Non-core lines offset by an increase in Closed Block of $0.1 million.

Net Investment Income

For the three months ended June 30, 2023, net investment income increased to $4.4 million compared to $3.7 million for the three months ended June 30, 2022. The $0.7 million increase was mainly due to higher reinvestment yields in the fixed maturities portfolio. For more information on net investment income, see “Note 2 – Investments” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.

Net (Losses) Gains on Investments

For the three months ended June 30, 2023, net losses on investments was $0.2 million compared to net losses of $0.1 million for the three months ended June 30, 2022. The $0.1 million increase in net loss was mainly due to valuation changes of other invested assets, partially offset by a gain in our fixed maturity portfolio. For more information on net (losses) gains on investments, see “Note 2 – Investments” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.

Other Income

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

Life, Annuity and Health Claim Benefits

For the three months ended June 30, 2023, life, annuity and health claim benefits were $12.6 million compared with $15.3 million for the three months ended June 30, 2022. This decrease of $2.7 million was primarily due to a decrease in our Core lines of $2.2 million and a decrease in our Non core lines of $0.6 million, partially offset by an increase in Closed Block of $0.1 million.

Operating Costs and Expenses

For the three months ended June 30, 2023, operating costs and expenses were $8.2 million compared to $9.3 million for the three months ended June 30, 2022. The $1.1 million decrease was attributable to higher ceded commissions of $1.4 million, partially offset by an increase of $0.3 million in other operating expenses.

Amortization of Deferred Policy Acquisition Costs

For the three months ended June 30, 2023, amortization of deferred policy acquisition costs was $3.0 million compared to $4.2 million for the three months ended June 30, 2022. This decrease of $1.2 million is primarily related to an decrease of $0.6 million in Closed Block and a decrease in Core of $0.5 million.

Income (Loss) Before Income Taxes

For the three months ended June 30, 2023, net income was $3.7 million compared to net income of $1.2 million for the three months ended June 30, 2022. This increase in net income of $2.5 million resulted primarily from a decrease in claim benefits of $2.7 million, decreased amortization of deferred policy acquisition costs of $1.2 million, a decrease in operating expenses of $1.0 million and an increase of net investment income of $0.7 million, partially offset by a decrease in net insurance premiums of $3.1 million.

Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022

Net Insurance Premiums

For the six months ended June 30, 2023, net insurance premiums were $48.1 million compared to $49.0 million for the six months ended June 30, 2022. The decrease of $0.9 million was primarily due to a 2022 reinsurance agreement with Swiss Re in 2022, (see discussion earlier in this Management Discussion and Analysis of Financial Condition and results of Operations) which reduced 2022 net insurance premiums by $6.5 million. Net insurance premiums decreased by $7.4 million excluding the impact of the Swiss Re agreement. This decrease was primarily driven by a $6.8 million decrease in Core and a $1.2 million decrease in Non-core, partially offset by $0.6 million increase in Closed Block.

Net Investment Income

For the six months ended June 30, 2023, net investment income increased to $8.7 million compared to $7.1 million for the six months ended June 30, 2022. The $1.6 million increase was mainly due to higher reinvestment yields in the fixed maturities portfolio. For more information on net investment income, see “Note 2 – Investments” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.

Net (Losses) Gains on Investments

For the six months ended June 30, 2023, net losses on investments was $0.5 million compared to net gains of $0.8 million for the six months ended June 30, 2022. The $1.3 million decrease was mainly due to valuation changes of other invested assets. For more information on net (losses) gains on investments, see “Note 2 – Investments” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.

Other Income

For the six months ended June 30, 2023, other income increased to $0.5 million compared to $0.3 million for the six months ended June 30, 2022. The $0.2 million increase was mainly due to a licensing arrangement on our patented LifeTime Benefit term product.

Life, Annuity and Health Claim Benefits

For the six months ended June 30, 2023, life, annuity and health claim benefits were $29.0 million compared with $30.1 million for the six months ended June 30, 2022. This $1.1 million decrease was primarily due to a $1.7 million decrease in our Core lines, partially offset by $0.4 million increase in Closed Block and a $0.2 million increase in Non-core lines. 2022 life, annuity and health claim benefits were reduced $6.5 million by the impact of the reinsurance agreement with Swiss Re (see discussion earlier in this Management Discussion and Analysis of Financial Condition and results of Operations). life, annuity and health claim benefits decreased by $7.6 million excluding the impact of the Swiss Re agreement. This decrease was primarily driven by a $4.2 million decrease in Non-core and a $3.7 million decrease in Core, partially offset by a $0.4 million increase in Closed Block.

Operating Costs and Expenses

For the six months ended June 30, 2023, operating costs and expenses were $15.9 million compared to $17.2 million for the six months ended June 30, 2022. The $1.3 million decrease was attributable to higher ceded commissions of $2.9 million, partially offset by a decrease of $1.6 million in other operating expenses.

Amortization of Deferred Policy Acquisition Costs

For the six months ended June 30, 2023, amortization of deferred policy acquisition costs was $6.6 million compared to $9.2 million for the six months ended June 30, 2022. The decrease of $2.6 million primarily relates to a decrease of $3.8 million in Core and Closed Block of $0.7 million, partially offset by an increase in Non-Core of $1.9 million.

Income (Loss) Before Income Taxes

For the six months ended June 30, 2023, net income was $3.9 million compared to net loss of $0.7 million for the six months ended June 30, 2022. This increase in net income of $4.6 million resulted primarily from an increase in reinsurance allowances of $2.9 million, a decrease in amortization of deferred policy acquisition costs of $2.7 million, a decrease in claim benefits of $1.1 million, an increase in net investment income of 1.6 million, partially offset with a decrease in net gains on investments of $1.4 million, an increase in operating expenses of $1.4 million, and decrease in net insurance premiums of $0.9 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, 2023 and December 31, 2022, are $11.0 million and $10.8 million, respectively, of additional Closed Block funding, plus accrued interest, that is eligible for reversion to the Company if not needed to fund Closed Block experience.

The Closed Block was funded based on a model developed to forecast the future cash flows of the Closed Block which is referred to as the “glide path.” The glide path model projected the anticipated future cash flows of the Closed Block as established at the initial funding. We compare the actual results of the Closed Block to expected results from the glide path as part of the annual assessment of the current level of policyholder dividends. The assessment of policyholder dividends includes projections of future experience of the Closed Block policies and the investment experience of the Closed Block assets. The review of Closed Block experience also includes consideration of whether a policy dividend obligation should be recorded to reflect favorable Closed Block experience that has not yet been reflected in the dividend scales. See “Note 5—Closed Block” in the accompanying Notes to the Interim Condensed Consolidated Financial Statements.

Corporate & Other Segment

The results of the Corporate & Other Segment were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
	(dollars in thousands)						(dollars in thousands)
Revenues
Net investment income	$	75		$	78		$	149		$	209
Net (losses) gains on investments		(132	)		165			(364	)		826
Earned commissions		—			(99	)		(345	)		(200	)
Total revenues		(57	)		144			(560	)		835
Expenses
Operating costs and expenses		1,837			1,582			3,483			4,076
Total expenses		1,837			1,582			3,483			4,076
(Loss) income from operations before income tax	$	(1,894	)	$	(1,438	)	$	(4,043	)	$	(3,241	)

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

Net (Losses) Gains on Investments

For the three months ended June 30, 2023, net (losses) on investments were ($0.1) million compared to $0.2 million for the three months ended June 30, 2022. The change is attributable to net asset valuation changes of other invested assets.

Earned Commissions

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

Operating Expenses

For the three months ended June 30, 2023, operating expenses were $1.8 million compared to $1.6 million for the three months ended June 30, 2022. This increase of $0.2 million is primarily related to administrative expenses.

(Loss) Income Before Income Taxes

For the three months ended June 30, 2023, net loss increased to $1.9 million from $1.4 million for the three months ended June 30, 2022. The increased loss is primarily due to losses on investments and increased operating costs and expenses.

Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022

Net (Losses) Gains on Investments

For the six months ended June 30, 2023, net losses on investments were ($0.4) million compared to $0.8 million for the six months ended June 30, 2022. The change is attributable to net asset valuation changes of other invested assets.

Earned Commissions

For the six months ended June 30, 2023, earned commissions were ($0.3) million compared to ($0.2) million for the six months ended June 30, 2022. The decrease is related to increased intersegment earned commissions, which are eliminated within the Corporate and other segment.

Operating Expenses

For the six months ended June 30, 2023, operating expenses were $3.5 million compared to $4.1 million for the six months ended June 30, 2022. The decrease of $0.6 million is primarily related to administrative expenses.

(Loss) Income Before Income Taxes

For the six months ended June 30, 2023, net loss increased to $4.0 million from $3.2 million for the six months ended June 30, 2022. The increased loss is primarily due to losses on investments, partially offset by lower operating costs and expenses.

Investments

Investment Returns

We invest available cash and funds that support our regulatory capital, surplus requirements and policy reserves in investment securities that are included in the Insurance and Corporate & Other Segments. We earn income on these investments in the form of interest on fixed maturities (bonds and mortgage loans) and dividends (equity holdings). Net investment income is recorded as revenue, net of investment related expenses. The amount of net investment income that we recognize will vary depending on the amount of invested assets that we own, the types of investments, the interest rates earned, and amount of dividends received on our investments.

Gains and losses on sales of investments are classified as “realized investment gains (losses)” and are recorded as revenue. Capital appreciation and depreciation caused by changes in the market value of investments classified as “available-for-sale” is recorded in accumulated other comprehensive income. The amount of investment gains and losses that we recognize depends on the amount of and the types of invested assets we own, and the market conditions related to those investments. Our cash needs can vary from time to time and could require that we sell invested assets to fund cash needs.

Investment Guidelines

Our investment strategy and guidelines are developed by management and approved by the Investment Committee of Fidelity Life’s board of directors. Our investment strategy related to the Insurance Segment is designed to maintain a well-diversified, high quality fixed income portfolio that will provide adequate levels of net investment income and liquidity to meet our policyholder obligations under our life insurance policies and our assumed annuity deposits. To help maintain liquidity, we establish the duration of invested assets within a tolerance to the policy liability duration. The investments of the Insurance Segment are managed with an emphasis on current income within quality and diversification constraints. The focus is on book yield of the fixed income portfolio as the anticipated portfolio yield is a key element used in pricing our insurance products and establishing policyholder crediting rates on our annuity contracts.

We apply our overall investment strategy and guidelines on a consolidated basis for purposes of monitoring compliance with our overall guidelines. All of our investments are owned by Fidelity Life and are maintained in compliance with insurance regulations. Critical guidelines of our investment plan include:

•

Asset concentration guidelines that limit the amount that we hold in any one issuer of securities,

•

Asset quality guidelines applied on a portfolio basis and for individual issues that establish a minimum asset quality standard for portfolios and establish minimum asset quality standards for investment purchases and investment holdings,

•

Liquidity guidelines that limit the amount of illiquid assets that can be held at any time, and

•

Diversification guidelines that limit the exposure at any time to the total portfolio by investment sectors.

Our investment portfolios are all managed by third-party investment managers that specialize in insurance company asset management. These managers are selected based upon their expertise in the particular asset classes that we own. We contract with an investment management firm to provide overall assistance with oversight of our portfolio managers, evaluation of investment performance and assistance with development and implementation of our investment strategy. This investment management firm reports to our Chief Financial Officer and to the Investment Committee of Fidelity Life’s board of directors. On a quarterly basis, or more frequently if circumstances require, we review the performance of all portfolios and portfolio managers with the Investment Committee.

The following table shows the distribution of the fixed maturities classified as available-for-sale by quality rating using the rating assigned by Standard & Poor’s (S&P), a nationally recognized statistical rating organization. For securities where the S&P rating is not available (not rated), the NAIC rating is used. Over the periods presented, we have maintained a consistent weighted average bond quality rating of “A.” The percentage allocation of total investment grade securities was 96.7% and 95.1% at June 30, 2023 and December 31, 2022, respectively.


	Estimated Fair Value
	June 30, 2023				December 31, 2022
	(dollars in thousands)
S&P Rating
AAA	$	43,095	14.2	%	$	53,065	17.8	%
AA		70,497	23.2	%		66,283	22.2	%
A		80,669	26.6	%		64,018	21.5	%
BBB		50,248	16.6	%		56,194	18.8	%
Not rated		48,839	16.1	%		44,163	14.8	%
Total investment grade		293,348	96.7	%		283,723	95.1	%
BB		2,448	0.8	%		5,520	1.9	%
B		3,719	1.2	%		4,778	1.6	%
CCC		243	0.1	%		492	0.2	%
Not Rated		3,756	1.2	%		3,625	1.2	%
Total below investment grade		10,166	3.3	%		14,415	4.9	%
Total	$	303,514	100.0	%	$	298,138	100.0	%

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


	June 30, 2023										December 31, 2022
(dollars in thousands)	Amortized Cost		%			Fair Value		%			Amortized Cost		%			Fair Value		%
Due in one year or less	$	3,350		1.0	%	$	3,348		1.1	%	$	6,239		1.9	%	$	6,207		2.1	%
Due after one year through five years		36,227		10.9	%		34,480		11.4	%		34,330		10.3	%		32,719		11.0	%
Due after five years through ten years		78,363		23.6	%		74,418		24.5	%		72,312		21.8	%		67,472		22.6	%
Due after ten years		139,448		41.9	%		122,526		40.4	%		136,004		41.0	%		115,545		38.7	%
Securities not due at a single maturity date-primarily mortgage and asset-backed securities		75,035		22.6	%		68,742		22.6	%		83,061		25.0	%		76,195		25.6	%
Total fixed maturities	$	332,423		100.0	%	$	303,514		100.0	%	$	331,946		100.0	%	$	298,138		100.0	%

Every quarter, we review all investments where the market value is less than the carrying value to ascertain if the impairment of the security’s value has credit losses. The quarterly review is targeted to focus on securities with larger impairments and that have been in an impaired status for longer periods of time. See “Note 2 – Investments” in the accompanying Interim Condensed Consolidated Financial Statements included in this Form 10-Q.

Net Investment Income

One key measure of our net investment income is the book yield on our holdings of fixed maturities classified as available-for-sale. Fair value of these securities totaled $303.5 million and $298.1 million as of June 30, 2023 and December 31, 2022, respectively. Book yield is the effective interest rate, before investment expenses, that we earn on these investments. Book yield is calculated as the percent of net investment income to the average amortized cost of the underlying investments for the period. For the six months ended June 30, 2023 and 2022, our book yield on fixed maturities available-for-sale was 4.8% and 4.1%, respectively. See “Note 2 – Investments” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.

Interest Credited to Policyholder Account Balances

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


	June 30, 2023		December 31, 2022		June 30, 2023		June 30, 2022
	Ending Balance		Ending Balance		Year to Date Interest Credited		Year to Date Interest Credited
	(dollars in thousands)
Annuity contract holder deposits—assumed	$	65,187	$	69,070	$	1,273	$	1,353
Dividends left on deposit		6,607		6,731		82		84
Other		1,601		1,642		18		17
Total	$	73,395	$	77,443	$	1,373	$	1,454

The liability for deferred annuity deposits represents the contract holder account balances. Due to the declines in market interest rates and the book yield on our investment portfolio, we credit interest on all contract holder deposit liabilities at contractual rates that are currently at the minimum rate allowed by the contract or by state regulations.

Our Insurance Segment realizes operating profit from the excess of our book yield realized on fixed maturities that support our contract holder deposits over the amount of interest that we credit to the contract holder. We refer to this operating profit as the “spread” we earn on contract holder deposits. If book yields decline further, the amount of spread between the interest earned and credited will be reduced.

Net Gains (Losses) on Investments

Net gains (losses) on investments are subject to general economic trends and generally correlate with movements in major market indexes. The amounts classified as net realized gains (losses) in our Interim Condensed Consolidated Statements of Operations include amounts realized from sales of investments, mark-to-market adjustments and allowances for credit loss of individual securities related to credit impairment. See “Note 2 – Investments” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.

Unrealized Holding Gains (Losses)

The Company records capital appreciation/depreciation on the available-for-sale fixed maturities. At June 30, 2023 and 2022, accumulated other comprehensive income (loss), from mark-to-market adjustments of our available-for-sale fixed income securities, net of federal income taxes and reserves was $4.1 million and ($30.3) million, respectively. See “Note 9 – Accumulated other comprehensive (loss) income” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.

At June 30, 2023 our fixed maturity securities had an unrealized loss of $28.9 million compared to an unrealized loss of $33.8 million at December 31, 2022. The Company’s unrealized loss incurred in 2023 was $4.9 million in our fixed maturities portfolio which has a duration of 7.2 years, convexity of 0.833, and current yield of 5.7%, is primarily accounted for by the decrease in the 10-year treasury bill yield for the first six months of 2023 of 7 basis points.

Financial Position

At June 30, 2023, we had total assets of $792.9 million compared to total assets at December 31, 2022 of $770.1 million, an increase of $22.8 million. Commission and agent balances increased $14.0 million due to increased commission receivables in the Agency segment and increased agent debit balances in the insurance segment. Reinsurance recoverables increased $9.1 million as a result of a $5.0 million increase in ceded policy and claim reserves and $4.1 million related to timing of settlements of reinsured claims. The invested asset base increased $2.7 million, mainly due to $4.9 million in net unrealized gains in fixed maturity securities, partially offset by valuation losses in Other invested assets and net purchases and sales in the portfolio. Other assets increased $0.8 million, primarily due to settlements of invested assets. Accrued investment income increased $0.7 million due to timing of receipt of investment income. Deferred income tax assets increased $0.6 million due to a tax credit of $1.5 million on net income partially offset by $0.9 million decrease as a result of tax on unrealized investment gains. The above increases were partially offset by a decrease in deferred policy acquisition costs of $1.9 million, resulting from deferrals on new business of $4.7 million and amortization of $6.6 million, and a decrease in Cash and cash equivalents of $3.2 million, attributable to net cash used in operating, investing and financing activities. See Cash Flows section for further discussion on changes in cash.

At June 30, 2023, we had total liabilities of $677.5 million compared to total liabilities of $658.7 million at December 31, 2022, an increase of $18.8 million. Future policy benefits and claims increased $19.3 million, primarily due to a $20.6 million increase in Core Life and Non-Core Life lines, resulting from growth of the underlying blocks of business, partially offset by decreases in Annuities and assumed life of $1.0 million and Closed Block of $0.3 million. Other liabilities increased $9.1 million, due to a $3.2 million increase in

charge-back liabilities and $5.9 million of other operating liabilities. Debt increased $6.0 million related to an increase in net borrowing of $4.9 million and interest accrued of $1.1 million under our commission financing agreement with Hannover Life. The above increases were partially offset by decreases in Other policyholder liabilities of $12.0 million due to a decrease in claim liabilities, and a $4.0 million decrease in Policyholder account balances largely due to annuity payments.

At June 30, 2023, total equity increased to $115.4 million from $111.3 million at December 31, 2022. This increase in equity of $4.1 million was attributable to an increase in Other comprehensive income of $4.2 million related to market increases in fixed maturities net of tax partially offset by $0.1 million in retained earnings related to net income and changes in accounting guidance.

Liquidity and Capital Resources

Our principal sources of funds are from premium revenues, commission revenues, net investment income and proceeds from the sale or maturity of investments and net borrowings. The Company’s primary uses of funds are for payment of life, annuity and health claim benefits, contract holder withdrawals on assumed annuity contracts, new business acquisition costs for our insurance operations (i.e., commissions, underwriting and issue costs), cost of sales for Agency operations (i.e., agent compensation, purchased lead and lead generation costs), operating costs and expenses and purchases of investments. Our investment portfolio is structured to provide funds periodically over time, through net investment income and maturities, for the payment of policy benefits and contract holder withdrawals.

Under our commission financing arrangement with Hannover Life, Fidelity Life is able to pay level annual commissions instead of first year only commissions to Efinancial for sales of RAPIDecision® Life policies and Hannover Life advances to Efinancial amounts approximately equal to first year only commissions for sales of those policies. This arrangement reduces Fidelity Life’s surplus strain associated with issuing RAPIDecision® Life business while helping to provide liquidity for Efinancial through the receipt of larger first year only commissions. As of June 30, 2023 and December 31, 2022, we had net advances of $36.0 million and $31.1 million, respectively, under this arrangement.

We are a member of the Federal Home Loan Bank of Chicago (the “FHLBC”). As a member, we are able to borrow on a collateralized basis from the FHLBC. At June 30, 2023 and December 31, 2022, the Company held $270 and $180 of FHLBC common stock, which is included in Other invested assets, respectively. The Company's ability to borrow under this facility is subject to the FHLBC's discretion and requires the availability of qualifying assets. Interest on borrowed funds is charged at variable rates established from time to time by the FHLBC based on the interest rate option selected at the time of the borrowing. The Company borrowed and repaid $14.0 million and $4.0 million in the six months ended June 30, 2023 and the twelve months ended December 31, 2022, respectively.

Cash Flows

For the six months ended June 30, 2023, the Company had a net decrease in cash of $3.2 million compared to a net decrease of $0.7 million for the six months ended June 30, 2022.

The current year decrease in cash flows from operating activities is primarily due to timing related to net claim benefits and increases in commissions and agent balances.

Cash flows from investing activities mainly includes our fixed maturities and mortgage loans. Period to period, the cash flows associated with the changes in these portfolios will vary between cash sources and cash uses depending on the need for cash or the excess of cash from operating activities, as well as portfolio trading due to investment market conditions. In the first six months of 2023 cash of $0.9 million was used by investing activities and includes $2.4 million of capitalized software, partially offset by $1.5 million of investment purchases net of sales and maturities.

Cash flows uses from financing activities were $0.5 million which includes $5.3 million in cash withdrawals, net of deposits, by contract holders of annuities that were primarily written in the late 1980s, partially offset by $4.9 million, net proceeds from our commission financing program.

The following table summarizes our cash flows for the six months ended June 30, 2023 and 2022:


	Six Months Ended June 30,
	2023			2022
	(dollars in thousands)
Consolidated Summary of Cash Flows
Net cash (used) provided by operating activities	$	(1,809	)	$	(9,099	)
Net cash (used) provided by investing activities		(892	)		5,082
Net cash (used) provided by financing activities		(464	)		3,318
Net (decrease) in cash, cash equivalents and restricted cash	$	(3,165	)	$	(699	)

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, 2023. including the adoption ASU No. 2016-13, Financial Instruments— Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, See “Note 1 – Summary of Significant Accounting Policies” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

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

Limitations on Effectiveness of Controls and Procedures

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

Part II. OTHER INFORMATION

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.

In advance of the effective date of the recently adopted Securities and Exchange Commission rules regarding cybersecurity disclosure, we are disclosing a recent security incident involving unauthorized access to approximately 250,000 Fidelity Life customers’ personally identifiable information. This incident was caused by our vendor’s subcontractor using the MOVEit Transfer software. As has been documented extensively in the media, this software contained a zero-day vulnerability that a threat actor exploited to gain access to hundreds of companies’ data. Fidelity Life itself did not, and does not use the MOVEit application and our computer systems and infrastructure were not impacted by the incident.

We have worked with the vendor to ensure this incident was appropriately remediated. We have also worked with the vendor to mail notices to all impacted Fidelity Life customers and while we are unaware of any actual misuse of the compromised data, free credit monitoring was offered to each impacted customer. We have also provided notice of this third party vendor’s security incident to all appropriate regulators. While the breach was not directly related to our systems or infrastructure, as a result of or otherwise related to the incident, we may be subject to subsequent investigations, claims or actions in addition to other costs, fines, penalties, or other obligations.

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

Item 1A. Risk Factors

Not applicable to smaller reporting companies.

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

Use of IPO Proceeds

None since initial public offering of August 7, 2019

Item 3. Default upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

Rule 16a-1(f)

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

Cybersecurity, Privacy and Data Protection Regulation

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

Item 6. Exhibits



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

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

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

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

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101.SCH		Inline XBRL Taxonomy Extension Schema Document.

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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, 2023	By:	/s/ Chris S. Kim
		Chris S. Kim
		Executive Vice President, Chief Financial Officer and Treasurer