UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM TO
Commission File Number 001-38945
VERICITY, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
1350 E Touhy Avenue, Suite 205W, Des Plaines, Illinois
(Address of principal executive offices)
46-2348863
(I.R.S. Employer
Identification No.)
60018
(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
Common Stock, Par Value $0.001 per share
Trading
Symbol(s)
VERY
Name of each exchange on which registered
NASDAQ Capital Market
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒
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
Non-accelerated filer
Emerging growth company
Accelerated filer
Smaller reporting 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the
Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to
previously issued financial statements.. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive
officers during the relevant recovery period pursuant to §240.10D-1(b).. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the offering price and number of shares sold in the Registrant’s initial
public offering on August 7, 2019, was $18,411,600.
The number of shares of Registrant’s Common Stock outstanding as of December 31, 2023 was 14,875,000.
DOCUMENTS INCORPORATED BY REFERENCE
PART I
Item 1.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Table of Contents
Business
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
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Item 1. Business.
Overview
PART I
We conduct our business through our two operating subsidiaries, Fidelity Life Association, an Illinois-domiciled life insurance company
chartered in 1896 (“Fidelity Life”), and Efinancial, LLC, a call center-based insurance agency (“Efinancial”). Fidelity Life distributes life insurance
products through Efinancial and other unaffiliated agents and is licensed in the District of Columbia and every state except New York and Wyoming. A.M.
Best has assigned our rating is under review with developing implications with a financial strength rating as "A-" (Excellent). Fidelity Life is located in Des
Plaines, Illinois.
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
strive to deliver to this market affordable, easy to understand term and whole life insurance products through a consumer-friendly and efficient sales
process. Through innovation in product design and distribution that provides access to the Middle Market, including call center and web-enabled sales and
underwriting processes, quick issuance of policies and an emphasis on products not medically underwritten at the time of sale, we believe we are well
positioned to make life insurance more affordable and accessible to the Middle Market.
Efinancial markets life products for Fidelity Life and other unaffiliated insurance companies. Efinancial’s primary operations are conducted through
employee agents from physical call centers and remote locations which we refer to as our retail channel, and through independent agents and other
marketing organizations, which we refer to as our wholesale channel. Efinancial’s principal office is located in Bellevue, Washington.
We believe our unique products and ability to unconditionally issue policies either during or within 24 to 48 hours of the initial call differentiates us
from our competitors. Leveraging our patented RAPIDecision® sales and underwriting processes, we can sell a life insurance policy to a consumer before
medical underwriting is complete. We are able to complete an initial underwriting process for most of our life insurance applicants either during or shortly
after the initial call, and if not, within 24 to 48 hours after that initial call. For the year ended December 31, 2023, approximately 90% of our policy
applications processed through our RAPIDecision® underwriting process received an underwriting disposition on or shortly after the initial sales call.
Approximately one-half of the remaining applications received final underwriting decisions within the next 24 to 48 hours.
Our RAPIDecision®Life product provides coverage at the point of issue that is a blend of all-cause term life insurance for part of the coverage and
accidental death insurance for the remainder of the total face amount. If a policyholder completes medical underwriting after the initial sale of the
RAPIDecision®Life product, the policy benefits may be improved based on the underwriting results to increase the proportion of all-cause term life
insurance coverage, typically with no increase in premium. In some instances, based upon the results of predictive analytic models, the consumer can
qualify for the full amount of all-cause coverage without medical testing.
For the years ended December 31, 2023 and 2022, we had total consolidated revenue of $177.6 million and $163.9 million, net life premium
revenue of $96.8 million and $100.1 million, and a net loss of $9.5 million and $20.5 million, respectively. As of December 31, 2023, we had total assets of
$822.8 million and equity of $110.2 million.
Our Approach
Our business model is predicated upon gaining cost effective access to the Middle Market, engaging consumers in our sales process for life
insurance with products that have higher placement rates than traditional fully underwritten term life insurance in a call center environment, and issuing
those products quickly. We require access to a large quantity of quality sales leads to keep our retail call center agents productive. Currently, we acquire
about half of our sales leads from third-party vendors. We supplement that lead flow with leads from affinity partner relationships and leads we generate
ourselves. More significantly, we are rapidly increasing our own lead generation capabilities and growing our affinity business with non-life insurance
partners that provide their customers or prospects as leads, and we market and sell life insurance products to those leads.
We tend to sell policies with lower face amounts, resulting in more affordable options for our customers. Although not the lowest priced, our
products are competitive and they represent an attractive consumer value considering the coverage they provide and the relative simplicity of our sales and
underwriting processes. Our business model allows us to capture end-to-end data beginning with the acquisition of sales leads through the final disposition
of life insurance policies. With this data, we plan to develop and apply predictive analytics to realize efficiencies at various points in the sales process.
1
Business Segments
We manage our business through three segments:
•
•
•
Agency. Our Agency Segment operates through Efinancial. Efinancial sells insurance products through its call center distribution platform
and through its independent agents and other marketing organizations.
Insurance. Our Insurance Segment operates through Fidelity Life. Fidelity Life engages in the principal business lines of Core Life, Non-
Core Life, Closed Block, annuities and assumed life. In its Core Life and Non-Core Life business lines, Fidelity Life offers primarily term
life insurance products, and to a lesser extent accidental death and final expense products. We currently do not offer annuity contracts,
separate account variable products or universal life products.
Corporate & Other. Our Corporate & Other Segment consists primarily of a small amount of capital required to be maintained for regulatory
purposes, and also includes certain expenses considered to be corporate and not allocated to our Agency or Insurance Segments.
Agency Segment
Overview
The Agency Segment consists of the operations of Efinancial. Efinancial is a call center and remote employee based insurance agency that markets
life insurance for Fidelity Life and unaffiliated insurance companies. Efinancial’s primary operations are conducted through employee agents who may be
located remotely or within one of our three call center locations, all located within the United States, 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 channel. Efinancial’s
employee agents utilize insurance sales leads to contact potential customers and then work with the customers to complete the sales process, which can
occur during the initial contact or within 24 to 48 hours for non-medically underwritten policies. In our wholesale channel, in consideration for using our
carrier contracts, access to leads and case management services, we receive a portion of the commission earned by the independent agent from the carrier.
Efinancial also generates insurance lead sales revenue through its eCoverage web presence, and through the resale of leads that are not well suited for our
call center.
Agents
Our agents in the Agency Segment are either employed by Efinancial or are independent agents who sell through our wholesale distribution channel.
Our Employee Agents
In each of our retail call center facilities, our employee agents, or call center insurance agents, conduct outbound telephone sales using insurance
sales leads obtained from sales lead vendors or generated by our own marketing efforts or through our affinity partner relationships. To a much lesser
extent, the call center insurance agents also handle inbound telephone and web-based inquiries directly from consumers. Our Applicant and Prospect
System provides a structured environment in which our call center insurance agents are able to efficiently handle both in-bound and out-bound sales traffic.
Efinancial is reliant on a capable and well-trained sales force of insurance agents to effectively operate its call center platform. It is therefore
important for Efinancial’s business to attract, retain and develop its insurance agents. Efinancial primarily recruits individuals with little or no prior
experience in the insurance industry. We seek to develop a career path for our recruits by providing a comprehensive training program designed to assist
new recruits in becoming licensed agents and achieving success with call center marketing. In a process that typically takes between six to eighteen weeks,
a new hire will receive training, learn to develop leads and work towards receiving the required insurance sales licenses. Following licensure and promotion
to retail call center agent, a new agent is placed on the physical or virtual sales floor, where monitoring and coaching continue. As an agent develops sales
experience, the level of supervision of that agent decreases and the agent is able to handle more sophisticated sales opportunities.
For the years ended December 31, 2023 and December 31, 2022, Efinancial’s retail call centers generated a total of $58.0 million and $41.0 million,
respectively, in commission revenues, of which $41.0 million and $28.9 million, respectively, were generated from sales of Fidelity Life products.
2
Our Independent Agents
Efinancial has developed capabilities that allow us to expand sales operations beyond the call center insurance agents traditionally associated with a
direct sales operation. Efinancial also operates as a wholesale agency and recruits independent agents to market insurance products using Efinancial’s
platform. Through our wholesale channel, we subcontract with our independent agents to sell through Efinancial’s contracts with its insurance carriers.
Efinancial offers services to these independent agents, including access to our ALISS® technology, marketing platform, case management services,
insurance sales leads and sales education. Efinancial earns a portion of the commission revenue on independent agent sales. For the years ended December
31, 2023 and December 31, 2022, Efinancial generated $3.2 million and $2.4 million, respectively, in revenue from our affiliation with our independent
agents.
Our Partners
We partner with unaffiliated insurance carriers to market their products through our agency distribution platform. We also have marketing
relationships with third-party businesses and member organizations, which we call our affinity partners, under which Efinancial provides their customers
and members with access to the insurance products we market, either under their brand or Efinancial’s brand.
Other Insurance Carriers
Our Agency Segment also generates revenue from the sales of insurance products issued by unaffiliated companies, or carriers. We typically enter
into contractual agency relationships with carriers that are non-exclusive and terminable on short notice by either party for any reason. Efinancial’s retail
call center agents help consumers select among these carriers based on that consumer’s needs, insurance product features, cost and other factors. The mix
of insurance carrier sales will vary over time based on client preferences, carrier strategies, availability of new product features, premium cost,
commissions paid, carrier placement rates, and ease of doing business.
For the years ended December 31, 2023 and December 31, 2022, Efinancial generated $19.4 million and $14.2 million, respectively, in total
commission revenue from agency contracts with unaffiliated life insurance carriers.
The following tables show our total earned commissions for our retail and wholesale channels:
Retail Channel:
Wholesale Channel:
(dollars in thousands)
Carrier
Fidelity Life Association
Affinity partners
All other carriers
Total eSales Earned Commissions
(dollars in thousands)
Carrier
Fidelity Life Association
All other carriers
Total earned commissions
Wholesale commission expense
Net earned wholesale commissions
3
For the Years Ended
December 31,
2023
2022
40,931 $
4,160
12,910
58,001 $
28,889
2,792
9,298
40,979
For the Years Ended
December 31,
2023
2022
6 $
3,816
3,822
1,542
2,280 $
5
2,713
2,718
635
2,083
$
$
$
$
Affinity Partners
In a typical affinity partner arrangement, Efinancial will market our range of insurance products to the affinity partner’s customers or prospects
under Efinancial’s brand or our affinity partner’s brand. Affinity partner relationships offer an attractive source for insurance sales leads and increase our
revenues. Given the existing relationship between an affinity partner and its prospects or customers, we believe that the sales leads generated by our affinity
partners are of a high quality relative to sales leads purchased from a third-party. We expect affinity partner relationships to continue to be a valuable source
of future growth. Currently, nearly all of our affinity business is derived from a single affinity partner.
Our Technology Platforms
Applicant and Prospect System
Our Applicant and Prospect System (APS) is a technology ecosystem that uses a combination of proprietary software and Software-As-A-Service (SaaS)
third party vendors to operate our retail call centers. Our proprietary software application suite manages lead management, call scripting, quoting, insurance
policy applications, and product information. Our technology ecosystem includes Salesforce Sales Cloud, a best in breed consumer management system
that supports robust automation engines as well as layered data protection. Additionally, our environment is integrated with a third-party telephony system
to prioritize and distribute calls to sales personnel. This full technology solution includes logic that makes allocations to specific call center insurance
agents based on factors such as availability, complexity of sales leads, state licensing requirements, source of the sales lead and other factors, in an effort to
enhance the productivity and effectiveness of our retail call centers.
ALISS®
Our independent agents continue to use our patented Automated Life Insurance Sales System, or ALISS®, as a service remotely from their locations.
ALISS® is made up of several functional models that provide much of the same functionality as the Applicant and Prospect System, including consumer
relationship management. We believe that ALISS® provides a comprehensive package of operational features that help our distributors increase their
productivity and grow their businesses.
Consumer Technologies
Fidelity Life has developed a digital purchase experience – a web portal that enables qualified consumers to calculate how much life insurance they
need, obtain quotes, apply, and purchase a policy online. Consumers can also start the purchase process online and seamlessly transition to speak with an
agent at any point in the journey. Fidelity Life also has a robust website, FidelityLife.com, that enables consumers to obtain customized product
recommendations and quotes depending on their personal situation. Efinancial also has several web portals for consumers to shop for insurance, including
Efinancial.com, termfinder.com and eCoverage.com. These web portals offer consumers easy-to-use tools, such as online price quoting and information (in
the form of articles and blogs) designed to help consumers better understand the life insurance market. These websites also provide consumers with the
ability to initiate the sales process online.
Marketing
Efinancial’s business relies heavily on direct-to-consumer insurance lead generation. Leads generated for sales representatives consist of personal
and contact information for potential purchasers of life insurance. Using proprietary methods, the sales leads are analyzed and scored based on the
likelihood that the consumers are more likely than the general population to purchase life insurance products and that sales agents’ outreach to the
consumers will result in a successful contact.
Efinancial uses a combination of marketing methods to obtain insurance sales leads to support operations. These methods include referral leads from
affinity partners whose customers and prospects are interested in life insurance. Additionally, Efinancial generates leads through branded websites (e.g.
FidelityLife.com, Efinancial.com, and eCoverage.com) and acquires sales leads from third-party vendors specializing in insurance lead generation. The
Efinancial business model requires large scale lead generation, therefore marketing expenses are a significant part of the total cost of doing business. As an
ongoing practice, marketing expenses are continuously optimized by evaluating the profitability of each sales lead using the cost to generate the lead and
resulting sales productivity.
To reduce customer acquisition costs, consumers are offered the ability to click on advertisements from other third-party marketers at various places
on online lead generation pages and websites. Consumers who click on those advertisements become an Efinancial lead who is contacted and quoted a
policy for purchase by Efinancial sales representatives. Consumers who click advertisements also generate click revenue for Efinancial. In addition,
consumers who do not meet acceptance criteria from Efinancial lead generation programs may also be offered to other third-party marketers or insurance
carriers for sale. For the years ended December 31, 2023 and December 31, 2022 we generated $4.0 million and $4.9 million from insurance lead sales
revenues, respectively. For a description of the marketing of policies written by Fidelity Life, see “Business—Insurance Segment—Distribution.”
4
Competition
Efinancial competes for access to talented sales representatives and for quality sales prospects or leads. Much of the competition for talent involves
agent recruitment. Efinancial competitors include SelectQuote and AIG Direct, among others. Some competitors in the direct distribution call center
industry have made much larger investments or have greater resources to hire insurance agents and develop new technologies. Also, when deciding which
agency to join, agents base their decision on a number of factors including marketing services and support, technology tools, the insurance company that
the agency represents, sales commission structure, and the number and quality of sales leads. Efinancial believes that its innovative sales processes and the
Fidelity Life quick-issue products it sells, combined with the agent’s ability to access a network of third-party products to customize a solution tailored to a
customer’s budget, positions Efinancial to successfully compete and continue to grow within the Middle Market.
Insurance Segment
Overview
Fidelity Life was chartered in 1896 and operated independently until the 1950s, when it became affiliated with several stock life insurance
companies that managed its operations and controlled its strategies pursuant to a management services agreement. In 2003, the independent members of the
Board of Directors undertook a review of the longstanding management relationship and future plans for operation of Fidelity Life. During 2005, the prior
long-term management contract and all affiliations were terminated and a reconstituted Board of Directors and a new management team were selected.
Since then, Fidelity Life has again operated independently.
As discussed in more detail below, 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 in-force 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; in-force 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 in-force participating insurance policies of Fidelity Life. The Closed Block was established in
connection with our 2007 reorganization into a mutual holding company structure.
Annuities and Assumed Life. We have assumed reinsurance commitments with respect to annuity contract-holder deposits and a block of life
insurance contracts that were ceded by former affiliates of Fidelity Life. On March 29, 2019, the majority of the assumed block of life business was
recaptured. The annuity deposits were ceded to Fidelity Life through two contracts entered into in the early 1990s. These annuity and assumed life deposits
are now largely in runoff, with only minor amounts of new deposits each year. There are minimal remaining surrender charges associated with the assumed
annuity contracts.
The following table sets forth the net premium revenues by business line for Fidelity Life’s Insurance Segment for the years ended December 31,
2023 and December 31, 2022:
(dollars in thousands)
Net Insurance Premium
Core Life
Non-Core Life
Closed Block
Annuities and Assumed Life
Total
Core Life and Non-Core Life
Our Products
For the Twelve Months Ended
December 31,
2023
2022
$
$
63,864 $
28,892
3,991
92
96,839 $
69,002
27,934
3,073
66
100,075
In its Core and Non-Core Life insurance business, Fidelity Life offers an array of traditional and innovative insurance products. The principal life
insurance products offered by Fidelity Life fall within the RAPIDecision® product line. The RAPIDecision® product line includes several term life
insurance products. RAPIDecision® products use our RAPIDecision® underwriting process, which is a process that for many products does not rely on
medical testing as part of the underwriting process, thereby substantially shortening the time required for underwriting and policy issuance. See
“Underwriting and Risk Selection” in this form 10-K.
5
Core Life:
RAPIDecision® Life. Our RAPIDecision® Life product was introduced in 2008 and is primarily marketed by Efinancial and select unaffiliated
distributors. The RAPIDecision® Life product was specifically designed to address the problem of low product placement in direct distribution for
medically underwritten business, stemming in part from the typical length of the life insurance underwriting process. Our RAPIDecision® Life product
incorporates the following features:
•
•
•
•
A patented sales process featuring RAPIDecision® underwriting, which allows for the quick issuance of a policy. Under certain
circumstances, this policy will be issued entirely on an all-cause basis. In other circumstances, the issuance will provide a blend of all-cause
term life insurance coverage and accidental death benefit coverage;
If issued as a blend of all-cause and accidental death benefit coverage, there is an option permitting policyholders to begin a traditional
medical underwriting process within the first six months after policy issuance;
Depending on the underwriting results, policyholders completing medical underwriting may have the option to reduce or eliminate the
accidental death coverage and increase the proportion of the all-cause term life insurance coverage under the policy with no increase in
premium; and
Policyholders not completing medical underwriting (or failing to meet medical underwriting standards) may retain the original coverage
blend of term life and accidental death benefit coverage at the existing premium rates.
RAPIDecisionLifeOne®. This product is a one-year term product designed to be a quick sale, with a focus on younger issue ages (20-45).
Underwriting utilizes the RAPIDecision® underwriting process.
LifeTime Benefit Term. LifeTime Benefit Term is our patented voluntary worksite product offering. Voluntary worksite policies like LifeTime
Benefit Term are provided to employer and other groups for sales to their employees, participants and members. LifeTime Benefit Term insurance is sold
on a group policy basis by offering future paid up coverage additions after the policy has been in-force for a certain number of years. LifeTime Benefit
Term coverage can be kept by the individual after they leave employment with the group. We have been issued a patent for one variation of the LifeTime
Benefit Term product. We largely ceased writing this business directly in 2014 and have entered into a licensing agreement and reinsurance agreement
under which we license the product to Combined Insurance Company of America (“Combined Insurance”) and assume 50% of the business written. The
most current licensing agreement provides Combined Insurance with a non-exclusive license to market the LifeTime Benefit Term product. The
reinsurance agreement has been terminated as of December 31, 2021 as to new policies or certificates of insurance written on or after January 1, 2022. A
revised licensing agreement was entered into in early 2022 which provides a fee to Fidelity Life allowing Combined Insurance to use our patented product.
The fee in 2023 and 2022, reported in Other income was $834 thousand and $373 thousand, respectively. Fidelity Life continues to manage the direct in-
force block of LifeTime Benefit Term policies that are now in run-off.
RAPIDecision® Final Expense. Our RAPIDecision® Final Expense product is targeted toward individuals aged 50-85 and provides permanent
whole life coverage for amounts ranging from $5,000 to $35,000. These policies are designed to help in lessening the burden of covering final expenses,
such as medical costs, funeral costs, and credit card debt. Like RAPIDecision® Life, RAPIDecision®Final Expense does not require a medical examination,
but instead approval is determined based upon answers to various health questions and database results. There is a related graded death benefit Final
Expense product for poorer underwriting risks.
Non-Core Life:
Accidental Death Benefit. Fidelity Life offers accidental death benefit insurance as both a policy rider and as stand-alone policy coverage. The
accidental death benefit product covers death due to accidental causes as defined in the policy. Accidental death benefit is a quick-issue product with
limited underwriting.
RAPIDecision® Senior Life Term and Whole Life. Fidelity Life’s Senior Life Term and Whole Life products are designed for impaired risk
individuals in particular age ranges (50 to 70 for term and 50 to 85 for whole life). Senior Life Term and Whole Life products are underwritten utilizing the
RAPIDecision® underwriting process and offer graded death benefits over an initial three-year period (the full face amount is paid for all causes of death
starting in policy year four).
6
Distribution
For the years ended December 31, 2023 and 2022, the breakdown of sales of annualized premiums for new in-force policies by distribution channel
were as follows:
(dollars in thousands)
External Distribution
AmeriLife
Independent Sales Distributors
Total
For the Years Ended
December 31,
2023
2022
$
$
11,389 $
37,850
23
49,262 $
8,492
29,708
29
38,229
More information regarding our relationship with AmeriLife can be found in Item 7 Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
Underwriting and Risk Selection
We have developed the RAPIDecision® underwriting process to support the quick issuance of our RAPIDecision® products. The first step in our
RAPIDecision® underwriting process is for a consumer to complete a coverage application. We verify the medical history and conditions disclosed in the
application using automated web-based links to reporting and statistical agencies and a data base service with pharmaceutical records. The underwriting
decision is made based on this information. The RAPIDecision® underwriting process is supported by our proprietary technology platforms that allow us to
obtain an underwriting decision during or shortly after the initial call, and if not, 24 to 48 hours after that initial call. This technology platform is our
Fidelity Life Association Sales Handler, or FLASH, system.
Consistent with our business strategy and our view of the needs of our customers, we do not perform medical underwriting in the traditional way
prior to the issuance of a policy. Traditionally, in our industry, the life insurance underwriting process takes place prior to policy issuance and involves a
paramedical examination, blood and urine testing and other tests designed to assess the underwriting risk and the lowest premium appropriate for the level
of risk involved. Such traditional underwriting delays policy issuance after an application is submitted by several weeks. This delay makes it difficult to
achieve acceptable placement ratios in call center sales, leading to lost sales and unrecovered costs. In contrast, our primary underwriting process is
designed to support the quick issuance of policies. We therefore do not typically require an initial paramedical exam. By not requiring this exam or
postponing it until after policy issuance, we are able to issue coverage far more quickly, although without access to up front medical data that is standard in
industry underwriting practices. This means that our insurance products generally are issued at lower face amounts and a relatively higher price per dollar
of coverage as compared to medically underwritten products. If medical underwriting is completed after the initial sale of a RAPIDecision® Life policy, the
policy benefits may be improved based on the underwriting results to increase the proportion of all-cause term life insurance coverage, typically with no
increase in premium.
Fidelity Life employs a small staff of full-time employee underwriters. Most of the underwriting of individual policies is performed on an
outsourced basis, primarily using two contract underwriting firms. Given the quick-issue nature of many of Fidelity Life’s products, it is important to our
business to be able to access underwriting services on an as-needed basis. Using outsourced contract underwriters gives Fidelity Life the flexibility to meet
this need.
In our typical underwriting process, Fidelity Life’s contract underwriters access the information on a potential customer, what we refer to as a case,
through a web-based interface and approve or decline the individual case based on Fidelity Life’s underwriting rules. If necessary, a member of our contract
underwriting team can be joined to an initial phone call with a potential customer. While our in-house underwriting team does engage in certain case
underwriting activities, the team’s primary function is to manage and supervise the contract underwriters. Our in-house underwriting team oversees our
contract underwriters to review their compliance with our underwriting standards.
Product Pricing
We regularly review claim results for each of our products, comparing actual experience to the assumptions used to design and price the products.
The review process is performed by our actuarial and finance teams with assistance from the underwriting and operations team, product development team
and marketing. Variances in our expectations for particular products are examined for implications on product performance and used to evaluate product
prices and underwriting assumptions. Product experience is also reviewed by our reinsurance partners.
7
Key elements of our product pricing include assumptions regarding future mortality (amount and timing of future benefit payments), persistency
experience (number and timing of policyholder discontinuations or coverage lapses) and investment returns (interest we will earn on investment of
available cash and reserves).
Outsourced Functions
Fidelity Life contracts with third-party service providers to provide, or assist with, a number of key functions that are traditionally performed in-
house in the life insurance industry. These functions include insurance policy administration, underwriting, investment portfolio management, internal
audit, filing of insurance policy forms with state regulatory agencies and income tax return preparation. This model was adopted to reduce the fixed cost
investment in our Insurance Segment, provide operating flexibility and allow access to specialized skills as needed. In doing so, we believe we can contract
with partners that possess a wide range of experience and with established capabilities that would be costly and time consuming for us to develop
internally.
Competition
Competition in the life insurance industry is based on many factors. These factors include the perceived financial strength of the insurer, premiums
charged, policy terms and conditions, services provided, reputation, financial ratings assigned by independent rating agencies and the experience of the
insurer in the line of insurance to be written. In addition, there are many competitors that participate in the non-medically underwritten segment of the life
insurance industry. As new competitors enter the non-medically underwritten market using predictive analytics, they may price aggressively to capture
market share.
Fidelity Life’s competition includes many companies that are larger, and which have significantly more resources at their disposal. While lacking the
scale and market presence of many of its principal competitors, Fidelity Life does have certain attributes we believe to provide us competitive advantages
in a crowded marketplace. These include innovative products, proprietary technology and controlled distribution in Efinancial. These advantages allow us
to be more flexible in adapting to product and sales process opportunities than our more established competitors. We also believe that our innovative
products and processes provide a point of differentiation that appeals to consumers.
Fidelity Life also competes by placing a majority of its policies through Efinancial. While this distribution channel provides access to our target
Middle Market, we are aware that some Middle Market consumers prefer to purchase life insurance through alternative methods. We have developed an
internet-based direct sales platform that permits customers to complete the purchase of a Fidelity Life insurance policy completely over the internet.
Several of our competitors have also begun to implement online and digital distribution platforms. We believe that through the implementation of the
Fidelity Life internet-based direct sales platform we will be able to extend our reach into our target Middle Market.
A.M. Best Rating
Fidelity Life is rated by A.M. Best, an independent rating agency that specializes in ratings for the insurance industry. A.M. Best annually issues a
financial strength rating for the great majority of insurance companies doing business in the U.S. The financial strength rating is an independent opinion of
an insurer’s financial strength and its ability to meet its ongoing insurance policy obligations. A.M. Best’s financial strength rating is based on a
comprehensive quantitative and qualitative evaluation of an insurer’s balance sheet strength, operating performance and business profile and is subject to a
regular review by A.M. Best. Currently, A.M. Best has assigned Fidelity Life a financial strength rating of “A-” (Excellent), which is the fourth highest
rating category for A.M. Best. A.M. Best’s financial strength rating is not a recommendation to purchase, hold, or terminate any insurance policy or
contract or any other financial obligation issued by an insurer, nor does it address the suitability of any particular policy or contract for a specific purpose or
purchaser. In addition, A.M. Best’s financial strength rating does not address the risks or the advisability of any investment in our common stock.
IT Applications
Fidelity Life’s business, including the marketing, sales and administration of its insurance products, relies on its technology infrastructure. Our
technology infrastructure incorporates both proprietary and commercially available elements, including the following:
•
•
Fidelity Life Association Sales Handler (FLASH). Fidelity Life has developed FLASH, a modular technology platform that interfaces with
our other key systems including Salesforce, our third-party data and service providers, and our reinsurer’s automated underwriting engine.
FLASH allows an agent to collect the information necessary to complete an application for insurance and obtain underwriting decision while
on the telephone with an applicant. In addition, FLASH is the technology platform that powers our direct-to-consumer digital sales efforts.
New Business Exchange (NBX). Fidelity Life’s business processes are managed through NBX, a proprietary system developed by Fidelity
Life. The NBX system catalogues all of the data gathered in the sales process and relevant to the insurance application process, and permits
Fidelity Life employees to electronically access information used for underwriting maintained by third-party database providers.
8
•
Other. Fidelity Life uses several other software applications for administration and operational purposes. Typically, these are obtained from
third-party vendors. For example, we use commercially available software applications for all of Fidelity Life’s financial reporting and
control functions.
Reinsurance
Fidelity Life uses reinsurance arrangements with multiple reinsurance carriers to limit our claims risk under our insurance contracts and to mitigate
the impact of the insurance policies we issue on our statutory policyholder surplus. Our retention limit is $300,000 on each insured life for all policies. On
the products that we currently issue where we have reinsurance, our reinsurance is on a first-dollar quota-share basis. Additionally, our reinsurance
arrangements provide Fidelity Life with access to underwriting technology and risk management expertise from our reinsurance partners.
We evaluate our reinsurance needs, including the appropriate amount and structure of particular reinsurance arrangements, based on a number of
factors, including the expertise of particular reinsurance carriers (and their technology platforms) required to support our various life insurance products,
the estimated variability of claims experience, the estimated future impact of new business written on our statutory reserves and the costs of reinsurance.
Our current reinsurance arrangements open for new business are with Hannover Life Reassurance Company of America (“Hannover Life”), Swiss
Re Life & Health America Inc. (“Swiss Re”), Reinsurance Group of America ("RGA"), and Scor Global Life Americas Reinsurance Company ("Scor").
The following is a brief summary of the reinsurance agreements relating to these arrangements:
Hannover Life. Under our agreements with Hannover Life, we cede claims liability under certain of our term life policies in the Core Life business
to Hannover Life on a coinsurance basis. We cede 25% of the claims liability to Hannover Life. Reinsurance premiums per policy are determined
according to the amount reinsured with Hannover Life. These agreements do not have a fixed term. Either party may terminate the agreements with
respect to future business with 90 days written notice to the other party.
Swiss Re. Under our agreements with Swiss Re, we cede claims liability under certain of our term life policies in the Core Life business to Swiss Re
on a coinsurance basis. We cede 65% of the claims liability to Swiss Re. Reinsurance premiums per policy are determined according to the amount
reinsured with Swiss Re. These agreements do not have a fixed term. Either party may terminate the agreements with respect to future business with
90 days written notice to the other party.
Swiss Re.— Accidental Death Benefit. Under our agreement with Swiss Re, we cede to Swiss Re 90% of our claims liability, subject to certain per
life limits, under our accidental death benefit policies and riders on a coinsurance basis. Reinsurance premiums are determined according to the
amount reinsured with Swiss Re per policy or rider. Swiss Re has the right to modify the reinsurance premium rates upon 90 days written notice to
us. If we do not accept such modified reinsurance premium rates and we are unable to agree upon a revised rate structure within 60 days of Swiss
Re’s original notice, then the reinsurance premium rates then in effect continue unchanged. However, Swiss Re may, upon 30 days written notice to
us, terminate the reinsurance on any policy or rider for which we have not accepted Swiss Re’s modified reinsurance premium rate. This agreement
does not have a fixed term. Either party may terminate the agreement with respect to future business with 90 days written notice to the other party.
In the first quarter 2022, Fidelity Life entered into a reinsurance contract with Swiss Re Life & Health America Inc. This new treaty is in addition to
existing coinsurance agreements on policies issued through and including December 31, 2020. The impact of this transaction to our segment results
included an initial ceded premium of $2.6 million based on the statutory reserves at January 1, 2022. The impact to pre-tax income at the initial sale
date was nominal, however various income statement lines are impacted.
Swiss Re.—Final Expense. Under a separate agreement with Swiss Re, we cede to Swiss Re on a coinsurance basis 40% of our claims liability,
subject to certain per life limits, under our final expense level death benefit and final expense graded benefit policies. This agreement does not have
a fixed term. Either party may terminate the agreement with respect to future business with 60 days written notice to the other party. In the first
quarter 2022, Fidelity Life entered into a reinsurance contract with Swiss Re Life & Health America Inc. This new treaty is in addition to existing
coinsurance agreements on Final Expense Level Death Benefit policies issued through and including December 31, 2020. The impact of this
transaction to our segment results included an initial ceded premium of $3.9 million based on the statutory reserves at January 1, 2022. The impact
to pre-tax income at the initial sale date was nominal, however various income statement lines are impacted.
Swiss Re.—InstaTerm. The Company cedes to Swiss Re, on a coinsurance basis 33.3% of our claims liability, subject to certain per life limits,
under InstaTerm term life insurance product. Either party may terminate the agreement with respect to future business with 90 days written notice to
the other party.
Swiss Re.—RapidDecission LifeOne®. The Company cedes to Swiss Re, on a coinsurance basis 80% of our claims liability, subject to certain per
life limits, under RAPIDecision LifeOne® term life insurance product. Either party may terminate the agreement with respect to future business with
90 days written notice to the other party.
RGA Reinsurance Company —Final Expense Under an agreement with RGA Reinsurance Company we cede to RGA on a coinsurance basis 40%
of our claims liability, subject to certain per life limits, under our final expense level death benefit and
9
final expense graded benefit policies. This agreement does not have a fixed term. Either party may terminate the agreement with respect to future
business with 60 days written notice to the other party.
SCOR Global Life USA Reinsurance Company Inc. (SCOR)—InstaTerm. The Company cedes to SCOR on a coinsurance basis 33.3% of our
claims liability, subject to certain per life limits, under InstaTerm term life insurance product. This agreement does not have a fixed term. Either
party may terminate the agreement with respect to future business with 90 days written notice to the other party.
In 2013, Fidelity Life entered into a reserve financing reinsurance arrangement with Hannover Life designed to enhance its ability to continue to
grow Fidelity Life’s Core Life insurance business. This agreement was first amended and restated as of July 1, 2016, and a subsequent amendment was
filed with the Illinois Department of Insurance in November 2019 and approved by the Illinois Department of Insurance on December 23, 2019. The
structure of the agreement, which was first effective July 1, 2013, involves a combination of coinsurance with funds withheld and yearly renewable term
reinsurance covering most of the Company’s non-participating in-force life insurance business with issue dates on or before December 31, 2019.
Even though we reinsure certain of our liabilities to third-party reinsurance carriers, Fidelity Life remains directly liable to policyholders for the
benefit payments associated with these policies. Our reinsurance carriers have a contractual relationship with Fidelity Life to reimburse us for policy claims
but are not under any contractual obligation to our policyholders. Because Fidelity Life remains directly liable to policyholders for the full amount of the
death benefits payable under its policies, Fidelity Life bears credit risk relating to its reinsurers under its reinsurance contracts. As a result, Fidelity Life
will only enter into a reinsurance agreement with reinsurers that have stable operating performance, including a minimum A.M. Best financial strength
rating of “A-” (Excellent).
We had reinsurance recoverables of $238.6 million and $214.9 million as of December 31, 2023 and December 31, 2022, respectively. The
following table sets forth our five largest reinsurers based on reinsurance recoverables as of December 31, 2023 and December 31, 2022, and the A.M. Best
ratings of those reinsurers as of December 31, 2023:
As of December 31, 2023
As of December 31, 2022
Ceded
Future
Policy
Benefits
Claims and
Other
Amounts
Total
Reinsurance
Recoverable
Recoverables
2022
A.M.
Best’s
Rating
Ceded
Future
Policy
Benefits
Claims and
Other
Amounts
Total
Reinsurance
Recoverable
Recoverables
(dollars in thousands)
Reinsurer
Hannover Life
Swiss Re
Combined Insurance
RGA Reinsurance Company
Canada Life Assurance
Company
Other (13 Reinsurers)
Total
$
86,997 $
78,618
17,315
8,828
8,806 $
21,093
1,768
2148
95,803
99,711
19,083
10,976
A+
A+
A+
A+
1,894
394
2,288
A+
5,321
198,973 $
5,416
39,625 $
10,737
238,598
$
$
$
80,792 $
63,182
16,064
5,535
12,431 $
21,560
2,189
788
2,056
416
93,223
84,742
18,253
6,323
2,472
6,275
173,904 $
3,574
40,958 $
9,849
214,862
Core Life. The overall relationship of ceded premium to direct premiums increased in 2022 due to the mix of business and related retention rates.
For the Core Life business line, the amount of death benefit reinsured by Fidelity Life varies by insurance product, with some products having no
reinsurance and others have 80% or 90% of the death benefit is reinsured, all of which is subject to the $300,000 limit. For the Closed Block and the
annuities and assumed life business lines, the percent of death benefit reinsured is higher, on average, than the average for the insurance products currently
being sold in the Core Life line of business. The following table shows the different relationship of reinsurance premiums ceded to total direct and assumed
premiums for each of these business lines for the years ended December 31, 2023 and December 31, 2022.
As of December 31, 2023
As of December 31, 2022
Core Life
Non-Core
Life
Closed
Block
Annuities
and
Assumed
Life
Total
Core Life
Non-Core
Life
Closed
Block
Annuities
and
Assumed
Life
Total
(dollars in thousands)
Ratios:
Direct and Assumed Premium $
Ceded Premium
$
Ceded % of Total Direct and
Assumed Premiums
151,457
$
60,683
$
4,969
$
400
$
217,509
$
150,030
$
61,867
$
7,881
$
460
$
220,238
87,593
$
31,791
$
978
$
308
$
120,670
$
81,028
$
33,933
$
4,808
$
394
$
120,163
57.8 %
52.4 %
19.7 %
77.0 %
55.5 %
54.0 %
54.8 %
61.0 %
85.7 %
54.6 %
10
The period-to-period comparison of the ceded to direct and assumed premiums shows the total ceding percentage in our Core Life increasing, as the
percentage of the total increased due to changes in reinsurance contracts.
Non-Core Life. Non-Core life follows the same reinsurance guidelines and procedures as Core Life, as discussed above.
Closed Block. In October 2006, Fidelity Life established a Closed Block consisting of all of the outstanding participating policies issued or assumed
by Fidelity Life. We call this arrangement the Closed Block. We operate the Closed Block in accordance with a Closed Block memorandum that we entered
into in connection with our 2007 reorganization as a mutual holding company. The purpose of the Closed Block is to provide reasonable assurance to the
participating policyholders that sufficient assets will be available to provide for the continuation of policy benefits and experience-based dividends for these
participating policies. Most of the participating policies in the Closed Block were sold on the basis of “no dividends expected” and, accordingly, such
policies had never received an experience-based dividend prior to 2022. In 2022, dividends on these “no dividends expected” policies began to be paid, and
dividends will be paid in future years if experience warrants. The payment of any dividends is not guaranteed based on the results of a specific block or
group of participating policies. The declaration of any dividend is subject to the discretion of the Board of Directors of Fidelity Life, and dividends are not
payable until declared. No new dividend-paying or participating policies have been issued by Fidelity Life since our reorganization in 2007.
The Closed Block was funded on October 1, 2006 with cash flow producing assets that together with anticipated revenues from the Closed Block
policies were expected to be sufficient to support the Closed Block, including payment of claims, expenses, and taxes and to provide for continuation of
dividends, to the extent experience allowed, for the life of the policies. Dividend scales were changed in 2022 due to past and expected future experience. It
is possible that past experience and expectations of future experience may lead to further changes in dividend scales. If the future experience is such that
the assets of the Closed Block are not sufficient to pay the claims and expenses guaranteed under the policies, then Fidelity Life would be required to make
such payments from its general funds. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K
for further discussion regarding the Closed Block.
Annuities and Assumed Life
Fidelity Life reinsures products issued by other companies under four reinsurance arrangements, three of which are not open to new insurance
policies but still cover the existing in-force business that was assumed prior to 1993. Under two contracts with Zurich American Life Insurance Company,
Fidelity Life assumed the liability for the contractual benefits under a group of annuity contracts written through 1993. Under a contract with Protective
Life Insurance Company (“Protective Life”), the successor company of a former affiliate, Fidelity Life assumed a portion of the risk on a group of life
insurance contracts primarily written in the 1980s and early 1990s. On March 29, 2019, Protective Life recaptured the majority of the assumed block of life
business.
Fidelity has an active reinsurance agreement with Hannover Life Reassurance Company of America (Bermuda) Ltd. (Hannover Bermuda) under
which Fidelity Life assumes a portion of risks on certain life contracts originally issued by Fidelity Life and ceded to Hannover Life Reassurance Company
of America. In addition, we license our LifeTime Benefit Term product to Combined Insurance Company of America (Combined Insurance) and for
certificates issued prior to January 1, 2022 we reinsured 50% of the business written by Combined Insurance on that product.
The following table sets forth Fidelity Life’s assumed reinsurance liabilities as of December 31, 2023 and December 31, 2022:
(dollars in thousands)
Reinsurer
Hannover Bermuda
Protective Life Insurance Company
Zurich American Life Insurance
Company
Combined Insurance Company of
America
Total
As of December 31, 2023
As of December 31, 2022
Future
Policy
Benefits
Contract
Holder
Account
Balances
Other
Policyholde
r Liabilities
Total Assumed
Liabilities
Future
Policy
Benefits
Contract
Holder
Account
Balances
Other
Policyholde
r Liabilities
Total Assumed
Liabilities
$
(1,268 ) $
1,012
— $
—
9 $
3
(1,259 ) $
1,015
(1,441 ) $
1,507
— $
—
9 $
4
(1,432 )
1,511
—
62,665
—
62,665
—
69,070
—
69,070
76,453
76,197 $
—
62,665 $
1,973
1,985 $
$
78,426
140,847 $
60,910
60,976 $
—
69,070 $
1,776
1,789 $
62,686
131,835
11
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 that are not allocated to our other segments, including public company costs and other expenses of Vericity, Inc., board 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.
Intellectual Property
The Company and its subsidiaries rely on our proprietary intellectual property to conduct our business. We believe that it is easy for participants in
the insurance industry to attempt to copy product and process ideas of other participants. We therefore intend to protect to the fullest extent permitted by
law our intellectual property rights in the unique products and sales processes we have developed. We believe that protecting our intellectual property rights
and obtaining protection for future innovations will help us to achieve better results over time.
Efinancial currently has trade name protection for certain of its key internet domains, including Efinancial.com, termfinder.com, eCoverage.com,
and netcoverage.com. Efinancial has also been granted two U.S. patents for its ALISS® agency management system. The patents include tracking and
management of leads from purchase through the sales cycle. Real-time modeling is applied to lead sourcing, user identification, purchase intent and
identification of the product a customer is most likely to purchase.
We have been granted four U.S. patents related to the RAPIDecision® Life product and its supporting sales and underwriting technology and
processes and a separate patent directed to the LifeTime Benefit Term product. We continue to seek additional patent protections for our RAPIDecision®
Life product. We may be unable to adequately protect our intellectual property rights or avoid infringing the intellectual property rights of third parties, and
the intellectual property rights we have may not be a meaningful barrier to competition.
Information Technology
Fidelity Life maintains an in-house information technology staff. Fidelity Life’s in-house personnel are supplemented by independent consultants, as
needed, for programming, development, and other technology-based efforts.
Fidelity Life maintains a Disaster Recovery Plan under the Enterprise Disaster Recovery Plan umbrella and has put in place various programs to
increase our agility in responding to a disaster.
Similar to Fidelity Life, Efinancial maintains an in-house information technology staff. The Efinancial technology team is responsible for
developing and maintaining Efinancial’s applications and assisting our internal and external customers. In limited cases, we use outside contractors to
provide additional programming and development expertise.
The Des Plaines, and Tempe call centers are connected via high-speed connection to TierPoint. The data and files hosted on the two TierPoint data
centers are automatically backed up and duplicated to the other data center nightly and weekly.
Efinancial maintains a Disaster Recovery Plan under the Enterprise Disaster Recovery Plan umbrella.
Cybersecurity
Vericity maintains a dedicated Cybersecurity Department with a mission to safeguard the confidentiality, integrity, and availability of our
information systems, identity systems, and data assets to help our company remain a trusted and secure brand by accelerating risk reduction in a way that
lines up with business goals and constraints on budget and resources.
The cybersecurity framework is in alignment with corporate governance programs and regulatory requirements such as the following:
•
•
•
Enterprise Risk Management led by the Legal Department
SEC, Sarbanes-Oxley Compliance Program, and IDOI compliance led by Internal Audit
Privacy and GLBA Compliance led by the Privacy and Compliance Teams.
12
The Cybersecurity Department uses the Center for Internet Security Controls as a base to safeguard our company and the team focuses on Data Protection
and Compliance. The Cybersecurity Department establishes, implements and tests multiple policies, principles, standards and guidelines including, but not
limited to, Cybersecurity Incident Response Plan, Disaster Recovery Plan, Access Review, Application Security, Cloud Security, Data Loss Prevention,
Email Security, Endpoint Security, Penetration Testing, Privilege Management, Risk Assessments, Risk Identification, Security Awareness Training and
Vulnerability Management.
We also use various tools to help manage our overall program including third party threat detection, email filtering, security training, penetration testing
and other tools typically associated with protecting company data.
With a more than 20 years of experience in the information technology field, the team is led by our Director of Cybersecurity who in turn reports directly to
Vericity’s Chief Information Officer. Vericity’s Board of Directors oversees cybersecurity risk management and delegates oversight of our information
security program to our executive officers and our Chief Information Officer reports quarterly to our Board of Directors. Vericity’s partially outsourced
internal audit team reports in to Vericity’s Audit Committee on Cybersecurity testing and the program itself.
Like most companies, our systems are exposed to cybersecurity threats on a regular basis and our efforts may be insufficient to prevent or defend against
incidents or an attack. We, and certain of our third-party vendors, have experienced attacks and incidents in the past, and there can be no assurance that we,
or any vendor, will be successful in preventing future attacks or incidents or detecting and stopping them once they have begun. Through the date hereof,
risks from cybersecurity threats, including prior incidents and attacks, have not materially affected, and we do not believe are reasonably likely to
materially affect, our business strategy, results of operations, or financial condition. However, we cannot guarantee that we will not be materially affected in
the future. Cybersecurity risks rapidly evolve and are complex, so we must continually adapt and enhance our processes and defenses. As we do this, we
must make judgments about where to invest resources to most effectively protect ourselves from cybersecurity risks. These are inherently challenging
processes, and we can provide no assurance that processes and defenses that we implement will be effective.
Investments
We had total cash and invested assets of $371.5 million as of December 31, 2023. All invested assets are managed pursuant to an investment plan
developed by our executive management team and approved by and reviewed annually with the investment committee of our Board of Directors. All
changes to the investment plan are approved by the investment committee.
We have contracted with a third-party investment advisory firm to provide portfolio management and consulting services to assist our Chief
Financial Officer with the oversight of various portfolios and investment managers that manage portions of our investment portfolio. We utilize multiple
investment managers to leverage specialized expertise in specific asset classes. Each investment manager operates under agreed-upon guidelines that are
specifically designed for the investment manager’s segment of the overall portfolio. Our investment advisor meets periodically, but not less frequently than
quarterly, with the investment committee of our Board of Directors to review portfolio results, portfolio managers and discuss portfolio strategies.
Our investment strategy is to diversify among asset classes and individual issuers to achieve appropriate matching of assets with insurance
liabilities, sufficient liquidity and predictability of income. The composition of our investment portfolio supporting our Insurance Segment is primarily
investment grade fixed maturity securities and is managed with primary emphasis on current earnings. The Closed Block assets are segregated in a separate
portfolio and are managed in accordance with the Closed Block memorandum.
Enterprise Risk Management
The review and assessment of enterprise risks is the responsibility of the Vericity, Inc. executive management team with oversight provided by the
Board of Directors through its audit committee. We have established risk management policies and procedures throughout our organization. To supervise
the implementation of these risk management policies and procedures, we have engaged outside consultants on this topic and have established a risk
management committee that consists of members of our senior management team.
In 2015, we launched a multi-phase risk assessment project focused on formalizing our enterprise risk management process covering Efinancial,
Fidelity Life, their respective subsidiaries and operations and all corporate activities. Project goals include defining key risks and risk events, establishing
corporate risk tolerances and documenting the accountability for the risk management processes. We re-evaluated our program in 2019 and made
significant reporting and process improvements and narrowed the focus of our enterprise risk management program. We seek continuous improvement of
our program and the program will continue to evolve over time. We currently assess our key risks on four primary measures: impact, likelihood,
vulnerability and speed of onset.
Employees & Human Capital
As of December 31, 2023, Fidelity Life had 131 employees and Efinancial had 327 employees. None of our employees are covered by a collective
bargaining agreement. We believe that relations with our employees are good. Our core values of Putting People First,
13
Operating with Excellence, being Passionate Team Players and Making a Positive Difference help our employees maintain a connected culture of working
together to help middle America get access to affordable life insurance products and solutions. We are also committed to helping build a diverse and well
rounded employee base where we focus on a stair step approach to maintaining equity, fostering inclusion which ultimately leads to the diversity of people,
thoughts and ideas we want to hear and see in all of our employees. We view our employees as part of our overall competitive advantage and the key to a
successful future. We monitor competitor, industry and overall economic trends in order to ensure we maintain competitive compensation and
comprehensive benefits to attract and retain our talent. We also provide training, education and other development opportunities to ensure our employees
can grow and achieve their goals.
Environmental, Social, and Governance
As a publicly traded holding company for a US domiciled life insurance product manufacturer and insurance agency, our primary Environmental,
Social and Governance (ESG) focus tends to lean toward the social responsibility aspects of ESG. We comply in all material respects with insurance, SEC,
NASDAQ and other legal, regulatory or exchange governance requirements. Additionally as we do not manufacture industrial or waste dependent products,
do not have a large industrial or commercial real estate footprint and conduct limited travel overall, the environmental impacts of the Company itself are
small. We do discuss ESG principles with our third-party investment advisory firm and we monitor the potential impacts of climate change or other
environmental considerations as they relate to our ability accurately underwrite our insurance policies. As a provider of a product that is especially
important to those who would suffer a great deal of financial hardship due to the death of a loved one, our entire business is focused on social responsibility
and providing assistance to people when they may need it the most. As to our employees, as discussed elsewhere in this document we are committed to
helping build a diverse and well rounded employee base where we focus on a stair step approach where we work toward maintaining equity, foster
inclusion which in turn ultimately leads to a more diverse group of people, thoughts and ideas. We believe that by serving our Middle Market consumers,
engaging our diverse and multi-state workforce and ensuring we are offering products and services that help maintain financial security we make a large
impact from a social responsibility perspective. We closely follow ESG activities, proposed laws, rules and regulations, including recently promulgated
SEC climate disclosure rules and we do not believe we have impacts that would cause us to change or further enhance our risk factors as it relates to ESG.
Regulation
Our businesses are subject to a number of federal and state laws and regulations. These laws and regulations cover Fidelity Life operations as a life
insurance company and Efinancial’s insurance agency operations. Our operations are subject to extensive laws and governmental regulations, including
administrative determinations, court decisions and similar constraints. The purpose of the laws and regulations affecting our operations is primarily to
protect our policyholders and not our shareholders. Many of the laws and regulations to which we are subject are regularly re-examined, and existing or
future laws and regulations may become more restrictive or otherwise adversely affect our operations. State insurance laws regulate most aspects of our
insurance businesses, and we are regulated by the insurance departments of the states in which we sell insurance policies. The National Association of
Insurance Commissioners (“NAIC”) assists the various state insurance regulators in the development, review and implementation of a wide range of
financial and other regulations over the insurance industry.
Insurance Regulation
Both Fidelity Life and Efinancial are licensed to transact business in all states and jurisdictions in which they conduct an insurance business. Fidelity
Life is an Illinois-domiciled life insurance company licensed to transact business in 48 states and the District of Columbia. Fidelity Life is not licensed to
transact business in New York or Wyoming. Efinancial is an insurance agency domiciled in the State of Washington and is licensed in all 50 states and the
District of Columbia. State insurance laws regulate many aspects of our business. Such regulation is vested primarily in state agencies having broad
administrative and in some instances discretionary power dealing with many aspects of our business, which may include, among other things, required
reserve liability levels, permitted classes of investments, transactions among affiliates, marketing practices, advertising, privacy, policy forms, reinsurance
reserve requirements, acquisitions, mergers, and capital adequacy, and is concerned primarily with the protection of policyholders and other consumers
rather than shareholders. We are subject to financial and market conduct examinations by insurance regulators from our domiciliary states and from other
states in which we do business and are currently undergoing such a financial examination by the Illinois Department of Insurance.
State laws and regulations governing the financial condition of insurers apply to Fidelity Life, including standards of solvency, risk-based capital
requirements, types, quality and concentration of investments, establishment and maintenance of reserves, required methods of accounting, reinsurance and
minimum capital and surplus requirements, and the business conduct of insurers, including sales and marketing practices, claim procedures and practices,
and policy form content. In addition, state insurance laws require licensing of insurers and their agents. State insurance regulators have the power to grant,
suspend and revoke licenses to transact business and to impose substantial fines and other penalties.
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Agent Licensing
Efinancial (or its designated representative) is authorized to act as an insurance producer under company licenses or licenses held by its officers in
all 50 states and the District of Columbia. In each jurisdiction in which Efinancial transacts business, it is generally subject to regulation regarding
licensing, sales and marketing practices, premium collection and safekeeping, and other market conduct practices. Its business depends on the validity of,
and continued good standing under, the licenses and approvals pursuant to which it operates, as well as compliance with pertinent regulations. We devote
significant effort toward maintaining licenses for Efinancial and managing its operations and practices consistent with the diverse and complex regulatory
environment in which we operate.
Fidelity Life sells its insurance products through Efinancial and independent distributors. Efinancial employs insurance agents working in its call
centers and also works with independent insurance agents. The states in which insurance agents operate require agents to obtain and maintain licenses to
sell insurance products. In order to sell insurance products, the agents must be licensed by their resident state and by any other state in which they do
business and must comply with regulations regarding licensing, sales and marketing practices, premium collection and safeguarding, and other market
conduct practices. In addition, in most states, Fidelity Life must appoint the agents and agencies that sell our insurance products, and Efinancial and the
agents that they work with must be appointed by all carriers for which they sell.
Consistent with various federal and state legal requirements, we monitor our agents that sell for Fidelity Life and Efinancial, and we monitor the
agencies with which the independent distributors and independent agents work in order to understand and evaluate the agencies’ training and general
supervision programs relevant to regulatory compliance. For Efinancial’s call center agents using telephone sales, we periodically record and monitor the
sales calls in order to identify and correct potential regulatory compliance problems.
Financial Review
Fidelity Life is required to file detailed annual and quarterly financial reports with the insurance departments in the states in which we do business,
and its business and accounts are subject to examination by such agencies at any time. These examinations generally are conducted under NAIC guidelines.
Under the rules of these jurisdictions, insurance companies are examined periodically (generally every three to five years) by one or more of the
supervisory agencies on behalf of the states in which they do business.
Market Conduct Regulation
The laws and regulations governing our insurance businesses include numerous provisions governing the marketplace activities of insurers, such as
Fidelity Life, and agencies, such as Efinancial, including regulations governing the form and content of disclosures to consumers, advertising, product
replacement, sales and underwriting practices, complaint handling, and claims handling. State insurance regulators enforce compliance, in part, through
periodic market conduct examinations.
Insurance Holding Company Regulation
All states in which Fidelity Life conducts insurance business have enacted legislation that requires each insurance company in a holding company
system to register with the insurance regulatory authority of its state of domicile and to furnish that regulatory authority financial and other information
concerning the operations of, and the interrelationships and transactions among, companies within its holding company system that may materially affect
the operations, management or financial condition of the insurers within the system. These laws and regulations also regulate transactions between
insurance companies and their parents and affiliates. Generally, these laws and regulations require that all transactions within a holding company system
between an insurer and its affiliates be fair and reasonable and that the insurer’s statutory surplus following any transaction with an affiliate be both
reasonable in relation to its outstanding liabilities and adequate to its financial needs. Statutory surplus is the excess of admitted assets over statutory
liabilities. For certain types of agreements and transactions between an insurer and its affiliates, these laws and regulations require prior notification to, and
non-disapproval or approval by, the insurance regulatory authority of the insurer’s state of domicile. These laws and regulations also require the holding
company system to file an annual report identifying certain risks (“enterprise risks”) that, if not remedied, are likely to have a material adverse effect upon
the financial condition of the insurer or its holding company system as a whole.
Dividend Limitations
As a holding company with no significant business operations of its own, Vericity, Inc. depends on intercompany dividends or other distributions
from its subsidiaries as the principal source of cash to meet its obligations. The ability of Fidelity Life to pay dividends to its corporate parent is limited
under Illinois law. Such dividends may only be paid out of earned surplus (excluding unrealized capital gains), and no dividend may be paid that would
reduce Fidelity Life’s statutory surplus to less than the amount required to be maintained by Illinois law for the types of business transacted by Fidelity
Life. All intercompany dividends must be reported to the Illinois Department of Insurance prior to payment. In addition, Fidelity Life may not pay an
“extraordinary” dividend or distribution until 30 days after the Illinois Director of Insurance (“the Director”) has received sufficient notice of the intended
payment and has not objected or has approved the payment within the 30-day period. An “extraordinary” dividend or distribution is defined under Illinois
law as a
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dividend or distribution that, together with other dividends and distributions made within the preceding 12 months, exceeds the greater of:
•
•
10% of the insurer’s statutory surplus as of the immediately prior year end; or
the statutory basis net income of the insurer for the prior year.
During 2023, Fidelity Life declared and paid $5,000 in dividends.
Efinancial is not subject to the above dividend restrictions that relate to Fidelity Life.
Change of Control
Illinois law requires advance approval by the Director of any direct or indirect change of control of an Illinois-domiciled insurer, such as Fidelity
Life. In considering an application to acquire control of an insurer, the Director generally will consider such factors as experience, competence, and the
financial strength of the applicant, the integrity of the applicant’s Board of Directors and officers, the acquirer’s plans for the management and operation of
the insurer, and any anti-competitive effects that may result from the acquisition. Under Illinois law, there exists a presumption of “control” when an
acquiring party acquires 10% or more of the voting securities of an insurance company or of a company which itself controls an insurance company.
Therefore, any person, (including those named in our merger announcement of October 3, 2023) acquiring, directly or indirectly, 10% or more of our
common stock would need the prior approval of the Director, or a determination from the Director that “control” has not been acquired. Under Section
59.1(6)(i) of the Illinois Insurance Code, no person or a group of persons acting in concert (other than the Standby Purchaser in the Company’s IPO-Apex
Holdco L.P.), may acquire, directly or indirectly, more than 5% of the capital stock of Vericity, Inc. for a period of five years from the effective date of the
Conversion without the approval of the Director.
In addition, a person seeking to acquire, directly or indirectly, control of an insurance company is required in some states to make filings prior to
completing an acquisition if the acquirer and the target insurance company and their affiliates have sufficiently large market shares in particular lines of
insurance in those states. Approval of an acquisition may not be required in these states, but the state insurance departments could take action to impose
conditions on an acquisition that could delay or prevent its consummation.
Policy and Contract Reserve Sufficiency
Fidelity Life is required under Illinois law to conduct annual analyses of the sufficiency of its life insurance and annuity statutory reserves. In
addition, other states in which Fidelity Life is licensed may have certain reserve requirements that differ from those of Illinois. In each case, a qualified
actuary must submit an opinion each year that states that the aggregate statutory reserves, when considered in light of the assets held with respect to such
reserves, make good and sufficient provision for the associated contractual obligations and related expenses of the insurer. If such an opinion cannot be
provided, the affected insurer must set up additional reserves by moving funds from surplus. Fidelity Life submitted these opinions without qualification as
of December 31, 2023 to applicable insurance regulatory authorities.
Risk-Based Capital (RBC) Requirements
The NAIC has established a standard for assessing the solvency of insurance companies using a formula for determining each insurer’s RBC. The
RBC model act provides that life insurance companies must submit an annual RBC report to state regulators reporting their RBC based upon four
categories of risk: asset risk, insurance risk, interest rate risk and business risk. For each category, the capital requirement is determined by applying factors
to various asset, premium and reserve items, with the factor being higher for those items with greater underlying risk and lower for less risky items. The
formula is intended to be used by insurance regulators as an early warning tool to identify possible weakly capitalized companies for purposes of initiating
further regulatory action. Companies that do not maintain total adjusted risk-based capital in excess of 200% of the company’s authorized control level
RBC may be required to take specific actions at the direction of state insurance regulators. Fidelity Life’s total adjusted capital at December 31, 2023 was
well in excess of 200% of its authorized control level. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation—
Risk-Based Capital.”
NAIC Ratios
The NAIC is a voluntary association of state insurance commissioners formed to discuss issues and formulate policy with respect to regulation,
reporting and accounting of insurance companies. Although the NAIC has no legislative authority and insurance companies are at all times subject to the
laws of their respective domiciliary states, and to a lesser extent, other states in which they conduct business, the NAIC is influential in determining the
form in which such laws are enacted. Model insurance laws, regulations
16
and guidelines have been promulgated by the NAIC as minimum standards by which state regulatory systems and regulations are measured.
The NAIC also has established a set of 12 financial ratios to assess the financial strength of insurance companies. The key financial ratios of the
NAIC’s Insurance Regulatory Information System, or IRIS, which were developed to assist insurance departments in overseeing the financial condition of
insurance companies, are reviewed by experienced financial examiners of the NAIC and state insurance departments to select those companies that merit
highest priority in the allocation of the regulators’ resources. IRIS identifies these key financial ratios and specifies a range of “unusual values” for each
ratio. The NAIC suggests that insurance companies that fall outside the “usual” range in four or more financial ratios are those most likely to require
analysis by state regulators. However, according to the NAIC, it may not be unusual for a financially sound company to have several ratios outside the
“usual” range. For the year ended December 31, 2023, Fidelity Life was within the “usual” range for all ratios.
Statutory Accounting Principles (SAP)
SAP is a basis of accounting developed by U.S. insurance regulators to monitor and regulate the solvency of insurance companies. In developing
SAP, insurance regulators were primarily concerned with evaluating an insurer’s ability to pay all its current and future obligations to policyholders. As a
result, statutory accounting focuses on conservatively valuing the assets and liabilities of insurers, generally in accordance with standards specified by the
insurer’s domiciliary jurisdiction. Uniform statutory accounting practices are established by the NAIC and generally adopted by regulators in the various
U.S. jurisdictions. These accounting principles differ somewhat from GAAP, which are designed to measure a business on a going-concern basis. GAAP
gives consideration to matching of revenue and expenses and, as a result, certain insurer expenses are capitalized when incurred and then amortized over
the life of the associated policies. The valuation of assets and liabilities under GAAP is based in part upon best estimate assumptions made by the insurer.
Shareholders’ equity under GAAP represents both amounts currently available and amounts expected to emerge over the life of the business. As a result,
the values for assets, liabilities and equity reflected in financial statements prepared in accordance with GAAP may be different from those reflected in
financial statements prepared under SAP.
State insurance laws and regulations require Fidelity Life to file with state insurance departments publicly available quarterly and annual financial
statements, prepared in accordance with statutory guidelines that generally follow NAIC uniform standards. State insurance laws require that the annual
statutory financial statements be audited by an independent public accountant and that the audited statements be filed with the insurance departments in
states where the insurer transacts business.
State Insurance Guaranty Funds Laws
In most states, there is a requirement that life insurers doing business within the state participate in a guaranty association, which is organized to pay
contractual benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers. These associations levy assessments, up to
prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the written premium in the state by member insurers
in the lines of business in which the impaired, insolvent or failed insurer is engaged. Some states permit member insurers to recover such paid assessments
through full or partial premium tax offsets.
Life insurance company insolvencies or failures may result in additional guaranty association assessments against Fidelity Life in the future. At this
time, we are not aware of any material liabilities for guaranty fund assessments that apply to Fidelity Life with respect to impaired or insolvent insurers that
are currently subject to insolvency proceedings.
Regulation of Investments
Fidelity Life is subject to state laws and regulations that require diversification of its investment portfolios and limit the amount of investments in
certain asset categories, such as below-investment grade fixed-income securities, equity real estate, mortgages, other equity investments, foreign
investments and derivatives. Failure to comply with these laws and regulations would cause investments exceeding regulatory limitations to be treated as
non-admitted assets for purposes of measuring statutory surplus, and, in most instances, require divestiture.
Federal and State Legislative and Regulatory Changes
From time to time, various regulatory and legislative changes have been proposed for the insurance industry. Among the proposals that have in the
past been or are at present being considered are the possible introduction of federal regulation in addition to, or in lieu of, the current system of state
regulation of insurers and proposals in various state legislatures (some of which proposals have been enacted) to conform portions of their insurance laws
and regulations to various model acts adopted by the NAIC. We are unable to predict whether any of these proposed laws and regulations will be adopted,
the form in which any such laws and regulations would be adopted or the effect, if any, these developments would have on our business, financial condition
and results of operations.
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Other Laws and Regulations
USA Patriot Act and Similar Regulations
The USA Patriot Act of 2001, enacted in response to the terrorist attacks on September 11, 2001, contains anti-money laundering and financial
transparency laws and mandates the implementation of various regulations applicable to broker-dealers and other financial services companies, including
insurance companies. The Patriot Act seeks to promote cooperation among financial institutions, regulators and law enforcement entities in identifying
parties that may be involved in terrorism or money laundering. The increased obligations of financial institutions to identify their customers, watch for and
report suspicious transactions, respond to requests for information by regulatory authorities and law enforcement agencies, and share information with
other financial institutions, require the implementation and maintenance of internal practices, procedures and controls.
Privacy of Consumer Information
U.S. federal and state laws and regulations require financial institutions, including insurance companies, to protect the security and confidentiality of
consumer financial information and to notify consumers about their policies and practices relating to their collection and disclosure of consumer
information and their policies relating to protecting the security and confidentiality of that information. Similarly, federal and state laws and regulations
also govern the disclosure and security of consumer health information. In particular, regulations promulgated by the U.S. Department of Health and
Human Services regulate the disclosure and use of protected health information by health insurers and others (including life insurers), the physical and
procedural safeguards employed to protect the security of that information and the electronic transmission of such information.
Telephone and Email Solicitation Sales Regulations
The United States Congress, the Federal Communications Commission and various states have promulgated and enacted rules and laws that govern
personal privacy, telephone and email solicitations and data privacy. There are numerous state statutes and regulations governing phone and email
solicitation activities that apply or may apply to us. For example, some states place restrictions on the methods and timing of telephone solicitation calls
and require that certain mandatory disclosures be made during the course of a call. We specifically train our retail call center sales agents to handle calls in
an approved manner, and such compliance training is costly and time consuming. Federal and state “Do Not Call” regulations must be followed for us to
engage in telephone sales activities. In addition, the Federal Trade Commission has promulgated rules in response to the CAN-SPAM Act of 2003 that
regulates the use of electronic mail in commercial contexts. This regulation applies to all electronic mail for which the primary purpose is the commercial
advertisement or promotion of a commercial product or service.
Federal Income Taxation
The U.S. Congress and state and local governments consider from time-to-time legislation that could increase or change the manner of taxing the
products Fidelity Life sells and of calculating the amount of taxes paid by life insurance companies or other corporations, including Fidelity Life. To the
extent that any such legislation is enacted in the future, we could be adversely affected.
Item 1A. Risk Factors.
In addition to the risks delineated throughout Item 1, the outbreak of the novel coronavirus (“COVID-19”) in many countries has adversely impacted
global commercial activity. The measures governments worldwide have enacted to combat the pandemic have resulted in disruptions in global and local
supply chains and have led to adverse impacts on economic and market conditions as well as increases in unemployment. The severity of COVID-19 and
duration of government containment actions have impacted both employees and customers of the Company and presented material uncertainty and risk
with respect to the Company’s performance, liquidity, results of operations, and financial condition.
The stress and disruption placed on the global economy and financial markets from the outbreak of COVID-19 or other viral outbreaks may have
near and long-term negative effects on investment valuations, returns, and credit allowance exposure. The Company will continue to closely monitor the
potential for impacts from any similar type of outbreak, 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 any such similar outbreak or its impact to the
Company’s operations, but the effect could be material.
Item 1B. Unresolved Staff Comments.
None
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Item 2. Properties.
We operate from three locations that are leased from unaffiliated parties. Vericity, Inc. and Fidelity Life are headquartered in Des Plaines, Illinois at
1350 E. Touhy Avenue, Suite 205W. Efinancial is headquartered in Bellevue, Washington at 1203 114th Avenue, Southeast. Efinancial has a call center in
Des Plaines, Bellevue and Tempe, Arizona. In total, the three locations can house in excess of 200 employees. During the COVID pandemic we began
transitioning most employee roles to remote capable roles. Today we operate as a remote first workforce and our locations supplement those remote
capabilities to provide hybrid work location alternatives for our employees.
Item 3. Legal Proceedings.
We are, from time to time, involved in various legal proceedings in the ordinary course of business. These matters often raise difficult and complicated
factual and legal issues and are subject to many uncertainties and complexities, including but not limited to the underlying facts of each matter; novel legal
issues; differences or developments in applicable laws and judicial interpretations; class certification issues; judges reconsidering prior rulings; the length
of time before many of these matters might be resolved by settlement, through litigation, or otherwise.
The outcome of these matters may be affected by many factors included but not limited to decisions, verdicts, and settlements in other individual and
class action lawsuits that involve the Company, other insurers, or other entities and/or by other legal, governmental, and regulatory actions that involve the
Company, other insurers, or other entities.
While it is not possible to forecast the outcome of such legal proceedings, in light of known facts, current issues under consideration via motions to dismiss
or otherwise, existing insurance, reinsurance, and established reserves, we believe that there is no individual or class action case pending against the
Company that is currently likely to have a material adverse effect on our financial condition or results of operations.
Item 4. Mine Safety Disclosures.
Non-Applicable
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PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
Our common stock is listed on the NASDAQ Capital Market under the symbol “VERY.”
On November 6, 2019, the Company announced that its Board of Directors had declared a special one-time cash distribution of $6.25 per share to
common shareholders of record on November 21, 2019, that was paid on December 6, 2019. The cash distribution totaled approximately $93 million. The
cash distribution was declared after the completion of a capital needs assessment undertaken by Vericity, Inc. management at the direction of the Board of
Directors, following the closing of the Company’s IPO.
Since we are a holding company, our ability to pay cash dividends depends in large measure on our subsidiaries' ability to make distributions of cash
or property to us. Illinois insurance laws restrict the amount of distributions Fidelity Life can pay to us without the approval of the Director. See
Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 9 to our audited consolidated financial statements,
which are incorporated by reference in this Item 5. In connection with the approval of the Conversion by the Director, we agreed, for a period of twenty-
four months following the completion of the Conversion, to (i) seek the prior approval of the Illinois Department of Insurance for any declaration of an
ordinary dividend by Fidelity Life, and (ii) either maintain $20 million of the proceeds of the IPO at Vericity, Inc. or use all or a portion of that $20 million
to fund our operations. Fidelity Life declared and paid $5,000 in dividends in 2023.
As of April 1, 2024, the Company had 804 shareholders of record of common stock.
Item 6. Selected Financial Data.
As a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and Item 10(f)(1) of Regulation S-
K, the Company has elected to comply with certain scaled disclosure reporting obligations, and therefore is not required to provide the information required
by Item 301 of Regulation S-K.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This Form 10-K 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 investment 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 8 of this Form 10-K. Some of the information contained in this discussion and analysis and set forth elsewhere in
this Form 10-K 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.
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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.
COVID-19
The stress and disruption placed on the global economy and financial markets from the outbreak of COVID-19 may continue to have near and long-
term negative effects on investment valuations, returns, and credit allowance exposure. The Company will continue to closely monitor the situation,
including potential negative impacts on sales of new policies and mortality; however, due to the highly uncertain nature of these conditions, it is not
possible to reliably estimate the length and severity of COVID-19 or its impact to the Company’s operations, but the effect could be material.
War in Ukraine and Israel
The Company believes the war in Ukraine and in and around Israel do not have a material impact on the condensed consolidated financial
statements of the Company at December 31, 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 Chairman.
Agency Segment
This segment primarily consists of the operations of Efinancial. Efinancial is a physical call center and remote employee 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 desire to work for the carriers that Efinancial represents, which we refer to as our wholesale channel. Efinancial also generates insurance lead sales
revenue through its eCoverage web presence. For the years ended December 31, 2023 and December 31, 2022, our Agency Segment revenue earned 90%
and 86% through the retail channel, 4% and 5% through the wholesale channel, and 6% and 9% through insurance lead sales revenue, respectively.
The Agency Segment’s main source of revenue is commissions earned on the sale of insurance policies sold through our retail channel. Efinancial’s
employee agents utilize insurance sales leads to contact or be contacted by potential customers and then work with the customers to complete the sales
process, which can occur during the initial contact or within 24 to 48 hours for non-medically underwritten policies. In our wholesale channel, we
subcontract with our independent agents who sell through Efinancial’s contracts with its unaffiliated insurance carriers. In consideration for using our
carrier contracts and services, we receive a portion of the commission earned by the independent agent from the carrier.
22
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 are able to 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. For years ended December 31, 2023 and December 31, 2022, these offsetting revenues were $4.0 million
and $4.5 million, respectively, which reduced our total agency expenses by approximately 6% and 8%, respectively. Our Agency Segment recognizes
income (loss) to the extent that commissions and other revenue exceed (are less than) our marketing and overhead costs for the period.
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 in force 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 in force 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 in force participating insurance policies of Fidelity Life. The Closed Block was established in
connection with our 2007 reorganization into a mutual holding company structure and represents all in-force participating insurance policies of Fidelity
Life. Annuities and assumed life represent (i) our assumed life business, which consists of policies primarily written in the 1980s and early 1990s; (ii) our
direct annuity contracts, which consist of approximately 77 structured settlement contracts that remain from a group of contracts entered into in the late
1980s; and (iii) our assumed annuities, which consist of contract-holder deposits assumed from a former affiliate under two coinsurance treaties entered
into in 1991 and 1992. The 2019 demutualization of Members Mutual had no impact on how the Closed Block is structured.
We have not accepted new policies in these legacy lines since 2006 or prior, and these lines are considered to be in “run-off” with a declining
number of policies in-force each period. We recognize income on the Closed Block, and annuities and assumed life to the extent that premium revenues and
net investment income exceed the benefit expenses and operating expenses (including paid and accrued policyholder dividends) of these lines of business.
On the two annuity lines, we recognize income (loss) to the extent that our net investment income earned exceeds (are less than) benefit expenses (direct
annuities) and amounts credited on policy deposits (assumed annuities) and operating expenses of the two lines.
Annuities and Assumed Life - We have assumed reinsurance commitments with respect to annuity contract-holder deposits and a block of life
insurance contracts that were ceded by former affiliates of Fidelity Life. On March 29, 2019, the majority of the assumed block of life business was
recaptured. The annuity deposits were ceded to Fidelity Life through two contracts entered into in the early 1990s. These annuity and assumed life deposits
are now largely in runoff, with only minor amounts of new deposits each year. There are minimal remaining surrender charges associated with the assumed
annuity contracts.
Our Insurance Segment revenues consist of net insurance premiums, net investment income, and net gains (losses) on investments. Our distributors
consist of the independent insurance agencies and Efinancial that we contract with to sell our insurance products to the customers (policyholders) who buy
our insurance policies. 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 companies. 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 securities that we purchase with cash flows from our premium revenues. We also realize gains
and losses on sales of investment securities. These investments support our liability for policy reserves and provide the capital required to operate our
insurance business. Capital requirements are primarily established by regulatory authorities. See “Note 2—Investments” and “Business—Risk-Based
Capital (RBC) Requirements.”
23
Insurance Segment expenses consist of benefits paid to policyholders or their beneficiaries under life insurance policies. Benefit expenses also
include additions to the reserve for future policyholder benefits to recognize our estimated future obligations under the policies. Benefit expenses are shown
net of amounts ceded under our reinsurance contracts. Our Insurance Segment also incurs policy acquisition costs that consist of commissions paid to
agents, policy underwriting and issue costs and variable sales costs. A portion of these policy acquisition costs are deferred and expensed over the life of
the insurance policies acquired during the period. In addition to policy acquisition costs, we incur expenses that vary based on the number of contracts that
we have in-force, or variable policy administrative costs. These variable costs consist of expenses paid to third-party administrators based on rates for each
policy administered. As the number of in-force policies increases, these expenses will increase. Conversely, when the number of in-force policies declines,
variable policy expenses decline. Our insurance operations also incur overhead costs for functional and administrative staff to support insurance operations,
financial reporting and information technology. We recognize income (loss) on insurance operations to the extent that premium revenues, net investment
income and investment gains (losses) exceed (are less than) benefit expenses and general operating expenses for the period.
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 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.
Factors Affecting Our Results
Strategic Goals and Financial Impact of Sales of Policies Produced by Efinancial
Using Efinancial as both a direct writing and sub-agent of AmeriLife we have full vertical integration for the sale and issuance of life insurance
policies and are able to gather end-to-end consumer data, extending from tracking data to analyzing the characteristics of leads that generate successful
marketing efforts to the associated underwriting and claims experience. Since we acquired Efinancial in 2009, we have made significant investments in the
development of our controlled distribution strategy for reaching our target market. By converting data we generate through our distribution platform into
actionable insight using statistical analysis, we will seek to be more efficient in our acquisition and use of leads, improve our call center placement ratios
and strive to achieve overall profitability. However, the investments made in pursuit of this strategy, among other factors, have adversely affected our
historical results of operations. Additionally, while unlikely, changes in the relationship between Efinancial and Amerilfe could also negatively impact our
financial condition and results of operations.
Accuracy of Our Pricing Assumptions
In order for our insurance operations to be profitable, we must achieve product experience consistent with our pricing assumptions. We price our
products using a number of assumptions that are designed to support the desired level of profitability. Our operating results will be affected by variances
between our pricing assumptions and our actual experience. The key pricing assumptions made are:
•
•
Investment Returns. We earn income on the investments held to support reserves and capital requirements. 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 we own, the interest
rates earned and amount of dividends received on our investments. If the actual amount of net investment income earned is less than
projected, our products may not generate the desired level of profitability.
Persistency Experience. Many of the non-medically underwritten products that we issue have a limited amount of insurance industry
information to use in developing policy lapse rates. We are developing our own historical experience as to expected lapse rates for these
products and reflect our emerging experience in our pricing. If actual policy lapse rates exceed the lapse rates assumed in pricing our
products, we may receive lower premium revenues and may not receive enough premium to cover all of our acquisition costs for the policy.
24
•
•
Mortality Experience. We use our historical experience combined with experience projections from our reinsurance partners to develop our
assumptions for the level, frequency and pattern of future claims experience. In our Insurance Segment, we principally issue non-medically
underwritten products through underwriting processes that generally have limited recent company and industry experience; therefore, their
performance may be less reliable and subject to greater variance than products underwritten through processes with more established industry
experience.
Operating Expenses. Our level of operating expenses affects our reported net income (loss). Our general operating expenses include
expenses that vary based on the growth in our revenues and expenses that are fixed regardless of revenue growth. As discussed above, we
have experienced operating losses principally because our operating expenses and corporate overhead exceed our revenues, and our inability
to defer a majority of our commission expense on policies produced by our affiliated agency, Efinancial.
Efinancial Commission Financing
In instances where Efinancial has agreed to accept the receipt of levelized commissions on the successful placement of an insurance policy.
Efinancial has entered into a commission financing arrangement with Hannover Life. Under this arrangement, Efinancial receives an upfront commission
from Hannover Life and agrees to pay a levelized commission back to Hannover Life. This payment stream is over the level premium period the policy
stays in-force and premiums are received. This arrangement covered certain RD Life business issued October 2017 through December 2020 and issued
January 2022 through December 2023. This arrangement has been terminated for new business effective December 31, 2023.
Critical Accounting Policies
The accounting policies discussed in this section are those that we consider to be the most critical to an understanding of our consolidated financial
statements, and include valuation of fixed maturity securities, allowance for credit losses on available-for-sale securities, mortgage loans, deferred policy
acquisition costs (DAC), future policy benefit reserves and income taxes. Our significant policies are described in Note 1—Basis of Presentation and
Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere in this Form 10-K. The preparation of the
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.
Valuation of Fixed Maturity Securities
Our fixed maturity securities are classified as “available-for-sale” securities, which are carried at fair value on the balance sheet. Fair value
represents the price that would be received to sell an asset in an orderly transaction between market participants on the measurement date. For investments
that are not actively traded, the determination of fair value requires us to make a significant number of assumptions and judgments. Fair value
determinations include consideration of both observable and unobservable inputs. Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information. Security pricing is applied
using a hierarchy approach.
Level 1—Unadjusted quoted prices for identical assets in active markets the Company can access.
Level 2—This level includes fixed maturity securities 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 in 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—Fair values are derived from valuation techniques in which one or more significant inputs are unobservable. Level 3 instruments include
less liquid securities 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. Level 3 hierarchy requires the use of observable market data when
available.
25
At December 31, 2023 the estimated fair value of our fixed maturity securities by fair value hierarchy was as follows:
Fair Value of Investments at December 31, 2023
(dollars in thousands)
Level 1
Level 2
Level 3
Total Fair
Value
$
2,258
1 %
$
281,023
90 %
$
30,102
9 %
$
313,383
100 %
Level 1 securities include principally exchange traded funds that are valued based on quoted market prices for identical assets.
All of the fair values of our fixed maturity within Level 2 are based on prices obtained from independent pricing services. All of our 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. We ultimately use the price from the pricing service highest in the vendor hierarchy based on the
respective asset type and region. For fixed maturity securities that do not trade on a daily basis, the pricing services prepare estimates of fair value
measurements using their pricing applications which incorporate a variety of inputs including, but not limited to, benchmark yields, reported trades,
broker/dealer quotes, issuer spreads, and U.S. Treasury curves. Specifically, for asset-backed securities, key inputs include prepayment and default
projections based on past performance of the underlying collateral and current market data. Securities with validated quotes from pricing services are
reflected within Level 2 of the fair value hierarchy, as they generally are based on observable pricing for similar assets or other market significant
observable inputs.
Level 3 fair value classification consists of investments in structured securities where the fair value of the security is determined by a pricing service
using internal pricing models where one or more of the significant inputs is unobservable in the marketplace, or there is a single broker/dealer quote. The
fair value of a broker-quoted asset is based solely on the receipt of an updated quote from a single market maker or a broker-dealer recognized as a market
participant. The Company does not adjust broker quotes when used as the fair value measurement for an asset.
If we believe the pricing information received from third-party pricing services is not reflective of market activity or other inputs observable in the
market, we may challenge the price through a formal process with the pricing service. Historically, we have 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 us 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).
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 a fixed maturity security impairment is calculated as the difference between amortized cost and the present value of
the expected cash flows of the security. The present value is determined using the best estimate of cash flows discounted at the effective rate implicit to the
security at the date of purchase or prior impairment. The methodology and assumptions for estimating the cash flows vary depending on the type of
security. For mortgage-backed and asset-backed securities, cash flow estimates, including prepayment assumptions, are based on data from widely accepted
third-party sources or internal estimates. In addition to prepayment assumptions, cash flow estimates vary based on assumptions regarding the underlying
collateral characteristics, expectations of delinquency and default rates, and structural support, including subordination and guarantees.If the Company does
not expect to receive cash flows sufficient to recover the entire amortized cost basis of the fixed maturity security, a credit loss allowance is recorded in
26
earnings for the shortfall in expected cash flows; however, the amortized cost, net of the credit loss allowance, may not be lower than the fair value of the
security. If the present value of the modeled expected cash flows equals or exceeds the amortized cost of a security, no credit loss exists. The non-credit
component, determined as the difference between the adjusted amortized cost basis and fair value, is recognized in other comprehensive (loss) income. If
the present value of the modeled expected cash flows equals or exceeds the amortized cost of a security, no credit loss exists.
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.
Mortgage Loans
Our mortgage loans are held on commercial real estate and are stated at the aggregate unpaid principal balances, net of any credit losses and
valuation allowances. We identify loans for evaluation of credit loss primarily based on the collection experience of each loan. Mortgage loans are
considered to have a credit loss when, based on current information and events, it is probable that we will be unable to collect principal or interest amounts
according to the contractual terms of the loan agreement. Credit losses are measured on a loan-by-loan basis based on the present value of expected future
cash flows discounted at the loan’s effective interest rate or the fair value of the collateral. Credit losses are included in net gains (losses) on investments in
the Consolidated Statements of Operations.
Interest income from mortgage loans is recognized on an accrual basis using the effective yield method. Accrual of income is generally suspended
for mortgage loans that are in default or when full and timely collection of principal and interest payments is not probable. Mortgage loans are considered
past due when full principal or interest payments have not been received according to contractual terms.
At December 31, 2023 and December 31, 2022, there was a valuation allowance of $573 thousand and $83 thousand, respectively.
Deferred Policy Acquisition Costs (DAC)
For our Insurance Segment, the costs of acquiring new business are deferred to the extent that they are directly related to the successful acquisition
of insurance contracts. Deferred acquisition costs include commissions paid in the first policy year that are in excess of the ultimate renewal commissions
payable on the policy. For any of our policies for which we do not pay renewal commissions, the deferred acquisition costs (at the segment level) include
all commissions paid in the first year. For policies for which we pay levelized commissions over the life of the policy, we expense the first-year
commission and therefore do not defer any other commission expense. We also defer costs associated with policy underwriting and issuance related to the
successful acquisition of insurance contracts. Non-deferred first year acquisition costs that are expensed as incurred include expenses that do not meet the
definition of a deferrable cost, which includes the acquisition costs incurred on insurance applications that do not result in an in-force policy (unsuccessful
efforts).
The amortization of DAC for traditional life insurance products is determined as a level proportion of premium based on actuarial methods and
assumptions about mortality, morbidity, lapse rates, expenses, and future yield on related investments, established by us at the time the policy is issued.
GAAP requires that assumptions for these types of products not be modified while the policy is outstanding. Amortization is adjusted each period to reflect
policy lapse or termination rates compared to anticipated experience. Accordingly, acceleration of DAC amortization could occur if policies terminate
earlier than originally assumed. We establish the assumptions used to determine DAC amortization based on estimates using Company experience and
other relevant information that is used to price the products. We monitor our actual experience and will update the actuarial factors applied to future policy
issues if warranted. The selection of actuarial assumptions requires considerable judgment and has inherent uncertainty. Should actual policy lapse
experience be higher than that assumed during a reporting period, we will amortize our DAC balance faster and report lower net income.
We evaluate the recoverability of our DAC asset as part of our premium deficiency testing. If a premium deficiency exists, we reduce DAC by the
amount of the deficiency through a charge to current period earnings (loss). If the deficiency is more than the recognized DAC balance, we reduce the DAC
balance to zero and increase the reserve for future policy benefits by the excess with a corresponding charge to current period earnings (loss). See “Future
Policy Benefit Reserves” below for more information on premium deficiency testing.
27
Future Policy Benefit Reserves
We calculate and maintain reserves for estimated future claims payments to policyholders using actuarial assumptions in accordance with industry
practice and GAAP. Many factors affect these reserves, including mortality trends, policy persistency and investment returns. We establish our reserves
based on estimates, assumptions and our analysis of historical experience.
The calculation of future policy reserves requires the use of significant judgment and is inherently uncertain. If our actual experience differs from
the experience assumed in establishing our reserves, the impact of these differences is reflected in the results of operations in each period. If actual claims
are higher than assumed claims experience, our reported income (loss) will be reduced (increased) for the periods in which this experience occurs. If actual
policy lapses are generally higher than that assumed, our future policy benefit reserves will be reduced for the period in which this experience occurs.
The primary reserve method that is used in calculation of our future policy benefit reserves is the net level premium method. The net level premium
method requires that the future policy benefit reserves are accrued as a level proportion of the premium paid by the policyholder. In applying this method,
we use a number of actuarial assumptions that represent management’s best estimate at the time the contract was issued with the addition of a margin for
adverse deviation. Actuarial assumptions include estimates of morbidity, mortality, policy persistency, discount rates and expenses over the life of the
contracts.
A premium deficiency exists if the discounted present value of future gross premiums is not sufficient to cover anticipated future cash outflows. To
assess the adequacy of our benefit reserves, we annually perform premium deficiency testing for each of our lines of business using best estimate
assumptions as of the date of the test without provision for adverse deviation. If benefit reserves minus the DAC asset are less than the present value of
future cash flows on the line of business, then first the DAC asset will be reduced. If reducing the DAC asset down to zero is still not sufficient to eliminate
the premium deficiency, then benefit reserves will be increased. Recognizing a premium deficiency will reduce our reported net income or increase our
reported loss, for the period.
Under best estimate assumptions as to mortality, lapses, expenses, and investment yields, DAC is still recoverable on the Core Life and Non-Core
Life products (Open Block), Closed Block, and assumed life line of business. The annuities line has no remaining DAC, and under best estimate
assumptions on that line, no benefit reserve increases are needed.
In connection with our premium deficiency testing, we performed sensitivity analyses on our Open Block, Closed Block, annuities, and assumed life
business lines to capture the effect that certain key assumptions have on expected future cash flows, and the impact of those assumptions on the adequacy
of DAC balances and GAAP benefit reserves. The sensitivity tests are performed independently, without consideration for any correlation among the key
assumptions.
We performed the following sensitivity tests as of December 31, 2023:
•
•
•
future lapse assumptions increased by a multiplicative factor of 1.05,
future mortality increased by a multiplicative factor of 1.05 for all life blocks,
future investment yield assumptions were lowered by 50 basis points.
Under all tests described above, the DAC was still recoverable on the Core Life plus Non-Core Life and assumed life lines of business. For the
annuities line, there is no remaining DAC due to the age of the contracts. As such, these sensitivity runs tested the adequacy of the benefit reserves for this
line. For the annuities line, a drop in investment yield of 50 basis points would result in a required reserve increase of $0.3 million, while for the mortality
scenario and the lapse scenario there would be no impact to benefit reserves.
Income Taxes
Under applicable Federal income tax guidance, the taxation of life insurance companies is subject to special rules not applicable to other (non-life)
companies. Accordingly, we have to consider the implications of these different tax rules in accounting for income tax expense, as separately applicable to
our life and non-life subgroups of companies.
We record federal income tax expense in our Consolidated Statements of Operations based on pre-tax income as determined using GAAP
accounting. The timing of the recognition of certain income and expense items for GAAP accounting can differ from the timing of recognition of the same
income and expense items in our federal tax returns. The timing of recognition in the federal tax return is based on tax laws and regulations. As a result, the
annual tax expense reflected in our Consolidated Statements of Operations is different than that reported in the tax returns.
We account for income taxes under the asset and liability method, which requires the recognition of deferred taxes for temporary differences
between the financial statement and tax return basis of assets and liabilities. Deferred tax assets generally represent items that can be used as a tax
deduction or credit in future years for which we have already recorded the tax benefit in our income statement. Deferred tax liabilities generally represent
tax expense recognized in our financial statements for which payment has been deferred or expenditures for which we have already taken a deduction in
our tax return but have not yet been recognized in our financial statements. Under GAAP, we are required to evaluate the recoverability of our deferred tax
assets and establish a valuation allowance if necessary,
28
to reduce our deferred tax assets to an amount that is more likely than not to be realized. Significant judgment is required in determining whether valuation
allowances should be established, as well as the amount of such allowances. To the extent that we are required to establish an additional valuation
allowance against deferred income tax assets, the amount of such valuation allowance would generally be charged against our net income for the period in
which that valuation allowance is established.
We establish or adjust valuation allowances for deferred tax assets when we estimate that it is more likely than not that future taxable income will be
insufficient to realize the value of the deferred tax asset. We evaluate all significant available positive and negative evidence as part of our analysis.
Negative evidence includes the existence of losses in recent years. Positive evidence includes the forecast of future taxable income and tax-planning
strategies that would result in the realization of deferred tax assets. The underlying assumptions we use in forecasting future taxable income require
significant judgment and take into account our recent performance. The ultimate realization of deferred tax assets depends on the generation of future
taxable income during the periods in which temporary differences are deductible or creditable. If actual experience differs from these estimates and
assumptions, the recognized deferred tax asset value may not be fully realized, resulting in an increase to income tax expense in our results of operations.
As of December 31, 2023, we had a 100% valuation allowance recorded against the deferred tax assets related to the non-life subgroup of our tax
return. The Company also maintains a valuation allowance against a portion of the unrealized investment losses at December 31, 2022 in the life group.
Valuation allowances are established because we determined that it is more likely than not that these assets will not be recoverable. The recording of the
valuation allowance not related to investment losses, increases our federal income tax expense which in turn reduces our reported net income or increases
our net loss as applicable. Our recorded net deferred tax asset is shown in the following table.
(dollars in thousands)
Deferred income tax assets, net
Total deferred tax assets
Total deferred tax liabilities
Net deferred tax asset (liability)
before valuation allowance
Valuation allowance
Deferred income tax asset, net
Principal Revenue & Expense Items
Revenues
Life
December 31, 2023
Non-Life
Total
Life
December 31, 2022
Non-Life
Total
$
62,331 $
28,805
31,084 $
5,577
93,415 $
34,382
53,747 $
24,244
37,910 $
14,550
91,657
38,794
33,526
(1,130 )
32,396 $
25,507
(25,507 )
— $
59,033
(26,637 )
32,396 $
29,503
(1,066 )
28,437 $
23,360
(23,360 )
— $
52,863
(24,426 )
28,437
$
Our primary revenue sources are net insurance premiums, commissions, net investment income, net gains (losses) on investments, insurance lead
sales and other income.
Net Insurance Premiums
Net premiums consist of direct life insurance premiums due and collected from our policyholders on in-force insurance policies and premiums
collected on assumed life reinsurance contracts, less reinsurance premiums paid to reinsurers. Direct premiums are recorded in our Insurance Segment and
classified as first year premiums when they relate to the first calendar year coverage period. Premiums for policies outside their first calendar year are
called renewal premiums.
Net Investment Income
Net investment income consists of income generated from our investment portfolio and is recorded net of related expenses incurred to manage our
investments. Net investment income primarily consists of interest income earned on fixed maturity security investments and dividends earned on our equity
holdings, net of related expenses incurred to manage our investments. Net investment income earned on assets required to support insurance reserves,
annuity deposits and related regulatory capital requirements is allocated to our Insurance Segment. Any other net investment income is recorded in the
Corporate & Other Segment.
Earned Commissions
Earned commission revenue consists of amounts received and due from insurance carriers on policies sold by Efinancial and is recorded in our
Agency Segment. However, the commission revenue from sales of Fidelity Life policies, not included in the AmeriLife agreement, are eliminated in our
Consolidated Statements of Operations, because Efinancial and Fidelity Life are affiliated.
29
Net Gains (Losses) on Investments
Net gains (losses) on investments result from sales of investment securities and net of allowances for credit losses of fixed maturity securities.
Insurance Lead Sales
In our Agency Segment, insurance lead sales revenue consists of (i) click-through revenues we generate when leads click through to our webpages
to access information about life insurance options sponsored by another company and (ii) data revenues we generate through the sale of information
regarding leads.
Other Income
For our Insurance Segment, other income primarily consists of cost of insurance charges on universal life contracts. Included in other income are
fees received from the licensing of our patented worksite product where the licensee is required under the agreement to pay a licensing fee as premiums are
earned. The license of intellectual property rights for a licensing transaction in which consideration is tied to the subsequent sale or usage of intellectual
property, the revenue recognition standard provides an exception to the recognition principle that is part of step 5 (i.e., recognize revenue when or as
control of the goods or services is transferred to the customer). Under this sales- or usage-based royalty exception, an entity would not estimate the variable
consideration from sales- or usage-based royalties. Instead, the entity would wait until the subsequent sale or usage occurs to determine the amount of
revenue to recognize. Accordingly, licensing fee income under this arrangement is recognized as the licensee earns premiums.
Benefits and Expenses
This category consists of benefits to policyholders, which include policyholder dividends and policyholder dividend obligations (PDO), interest
credited to policyholder and contract-holder balances, general operating expenses and amortization of DAC.
Life, Annuity and Health Claim Benefits
Benefit expenses are recorded in our Insurance Segment. Benefit expenses include claims paid or payable on in-force insurance policies, as well as
the change in our reserves for future policy benefits during the period. Benefit expenses are reduced by amounts ceded to reinsurance companies with
whom we contract to share policy risks.
Interest Credited to Policyholder Account Balances
The interest credited primarily relates to amounts that contract-holders earn on any contract-holder deposits from our assumed annuity contracts and
other amounts left on deposit with us. Our universal life policies and assumed annuity contracts require Fidelity Life to periodically establish the crediting
rate to be paid on policyholder and contract-holder deposits. All current assumed annuity contracts are credited with interest at the minimum interest rate
guaranteed in the contract. Interest credited relates solely to our Insurance Segment.
Operating Costs and Expenses
Operating expenses are incurred by all of our segments. The operating expenses of our Insurance Segment include policy acquisition costs in excess
of amounts that qualify for deferral, ceding commissions received on ceded reinsurance in excess of amounts deferred, variable policy administration costs,
general overhead and administration costs, and insurance premium taxes and assessments paid to various states. Agency Segment expenses consist of
compensation paid to employee sales agents, costs of insurance sales leads (marketing), costs of sales management and support activities, agent licensing
expenses and general overhead and administration expenses. The expenses of the Corporate & Other Segment include allocation of a portion of the
compensation of senior executives related to corporate activities, Board of Director expenses related to corporate business, and other operating costs
considered to be of a corporate nature and not directly related to either of our other business segments. Overhead and administrative expenses of the
segments include employee costs (salaries, bonuses and benefits), office rent, information technology and costs of third-party administrators and other
contractors.
Amortization of Deferred Policy Acquisition Costs
DAC amortization represents the actuarially determined reduction in the DAC asset for the period. The amount of acquisition cost amortization
recognized each period is based on actual factors established when the insurance contracts were written.
30
Results of Operations
The major components of operating revenues, benefits and expenses and net (loss) income are as follows:
Vericity, Inc. Consolidated Results of Operations
(dollars in thousands)
Revenues
Net insurance premiums
Net investment income
Net (losses) gains on investments
Earned commissions
Insurance lead sales
Other income
Total revenues
Benefits and expenses
Life, annuity, and health claim benefits
Interest credited to policyholder account balances
Operating costs and expenses
Amortization of deferred policy acquisition costs
Total benefits and expenses
(Loss) income before income taxes
Income tax (benefit) expense
Net (loss) income
Year Ended December 31,
2023
2022
96,839 $
16,613
(2,507 )
59,937
4,008
2,675
177,565
67,674
2,638
104,151
13,954
188,417
(10,852 )
(959 )
(9,893 ) $
100,075
16,036
(327 )
42,634
4,453
1,041
163,912
67,502
2,780
97,755
18,443
186,480
(22,568 )
(2,108 )
(20,460 )
$
$
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Total Revenues
For the year ended December 31, 2023, total revenues were $177.6 million compared to $163.9 million for the year ended December 31, 2022. This
increase of $13.7 was primarily due to an increase in earned commissions and net investment income, partially offset by a decrease in net insurance
premiums, a higher net loss on investments and a decrease in insurance lead sales.
Benefits and Expenses
For the year ended December 31, 2023, total benefits and expenses were $188.4 million compared to $186.5 million for the year ended December
31, 2022. This increase of $1.9 million was primarily due to higher operating expenses partially offset by amortization of deferred policy acquisition
expenses.
Loss from Operations Before Income Taxes
For the year ended December 31, 2023, we had a loss before taxes of $10.9 million compared to a loss before taxes of $22.6 million for the year
ended December 31, 2022. This decrease in loss of $11.7 million was primarily due to increases in earned commission, net investment income and lower
deferred policy acquisition costs, partially offset by higher operating costs and expenses, lower net insurance premiums and higher net losses on
investments.
Income Taxes
For the year ended December 31, 2023, our income tax benefit was $1.0 million compared to an income tax benefit of $2.1 million for the year
ended December 31, 2022. The decreased benefit of $1.1 million reflects a smaller loss attributable to the life sub-group. The non-life sub-group has a full
valuation allowance, therefore no income tax impact. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Critical Accounting Policies—Income Taxes.”
31
Analysis of Segment Results
Reconciliation of Segment Results to Consolidated Results
The following analysis reconciles the reported segment results to the Vericity, Inc. total consolidated results.
(Loss) income before income tax by segment
Agency
Insurance
Corporate & Other
(Loss) income from operations before income tax
Income tax (benefit) expense
Net (loss) income
Agency Segment
The results of our Agency Segment were as follows:
Revenues
Earned commissions
Insurance lead sales & other
Total revenues
Expenses
Operating costs and expenses
Total expenses
Income (loss) before income taxes
Year Ended December 31,
2023
2022
(dollars in thousands)
$
$
1,444 $
(3,502 )
(8,794 )
(10,852 )
(959 )
(9,893 ) $
(8,695 )
(7,652 )
(6,221 )
(22,568 )
(2,108 )
(20,460 )
Year Ended December 31,
2023
2022
(dollars in thousands)
$
$
60,282 $
5,579
65,861
64,417
64,417
1,444 $
43,063
4,890
47,953
56,648
56,648
(8,695 )
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Earned Commissions
For the year ended December 31, 2023, earned commissions were $60.3 million compared to $43.1 million for the year ended December 31, 2022.
This increase of $17.2 million resulted primarily from increased sales in the retail channel.
Insurance Lead Sales & other
For the year ended December 31, 2023, insurance lead sales and other were $5.6 million compared to $4.9 million for the year ended December 31,
2022. This increase of $0.7 million was primarily due to higher click-through revenue.
Operating Costs and Expenses
For the year ended December 31, 2023, general operating expenses were $64.4 million compared to $56.7 million for the year ended December 31,
2022. This increase of $7.7 million was primarily due to an increase in variable costs.
Net (Loss) Income
For the year ended December 31, 2023, the Agency Segment had a net gain of $1.4 million compared to a net loss of $8.7 million for the year ended
December 31, 2022. This increase in net income of $10.2 million was the result of higher earned commissions and insurance lead sales, partially offset by
increased operating costs and expenses.
32
Insurance Segment
The results of our Insurance Segment were as follows:
Revenues
Net insurance premiums
Net investment income
Net (losses) gains on investments
Other income
Total revenues
Benefits and expenses
Life, annuity, and health claim benefits
Interest credited to policyholder account balances
Operating costs and expenses
Amortization of deferred policy acquisition costs
Total benefits and expenses
(Loss) income before income taxes
Year Ended December 31,
2023
2022
(dollars in thousands)
$
96,839 $
16,305
(2,143 )
1,104
112,105
67,674
2,638
31,341
13,954
115,607
$
(3,502 ) $
100,075
15,556
(590 )
604
115,645
67,502
2,780
34,572
18,443
123,297
(7,652 )
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Net Insurance Premiums
For the year ended December 31, 2023, net insurance premiums were $96.8 million compared to $100.1 million for the year ended December 31,
2022. The decrease of $3.3 million was primarily due to a decrease in Core of $5.1 million driven mostly by a decrease in LBT of $8.8 million and RDL of
$1.0 million, offset by Final Expense increase of $4.8 million and increases in Non-Core of $1.0 million and Closed Block of $1.0 million. The Swiss Re
deal (see discussion earlier in this Management Discussion and Analysis of Financial Condition and Results of Operations) contributed a positive $7.3
million increase to the net premium from 2022 to 2023.
Net Investment Income
For the year ended December 31, 2023, net investment income was $16.3 million compared to $15.6 million for the year ended December 31, 2022.
This 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-K.
Net (Losses) Gains on Investments
For the year ended December 31, 2023, net loss on investments was $2.1 million compared to a loss of $0.6 million for the year ended December
31, 2022. The $1.5 million decrease was mainly due to valuation changes of other invested assets. For more information on net gains (losses) on
investments, see “Note 2– Investments” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-K.
Life, Annuity and Health Claim Benefits
For the year ended December 31, 2023, life, annuity and health claim benefits were $67.7 million compared with $67.5 million for the year ended
December 31, 2022. The increase of $0.2 million was primarily due to a $3.0 million increase in our Core lines and a $0.6 million increase in FKLA,
partially offset by $3.2 million decrease in Non-Core lines and a decrease in $0.3 million in annuities. The impact of the reinsurance agreement with Swiss
Re was a decrease in ceded benefits of $7.0 million (see discussion earlier in this Management Discussion and Analysis of Financial Condition and Results
of Operations).
Interest Credited to Policyholder Account Balances
For the year ended December 31, 2023, interest credited was $2.6 million compared to $2.8 million for the year ended December 31, 2022. This
decrease of $0.2 million was due to lower interest credited on assumed fixed annuity contract-holder account balances.
Operating Costs and Expenses
For the year ended December 31, 2023, general operating expenses were $31.3 million compared to $34.6 million for the year ended December 31,
2022. This decrease of $3.3 million was attributable, primarily to higher ceded allowances.
33
Amortization of Deferred Policy Acquisition Costs
For the year ended December 31, 2023, amortization of deferred acquisition costs was $13.9 million compared to $18.4 million for the year ended
December 31, 2022. This decrease of $4.5 million includes a decrease in the Closed Block of $2.5 million and $3.9 million in our Core lines, partially
offset by an increase of $1.9 million in our Non-Core lines.
Net (Loss) Income
For the year ended December 31, 2023, net loss was $3.5 million compared to a net loss of $7.7 million for the year ended December 31, 2022. The
decrease in net loss of $4.2 million resulted from lower operating costs and expenses and amortization of deferred policy acquisition costs, partially offset
by lower net insurance premiums and lower net gains on investments.
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.
Included in Closed Block assets at December 31, 2023 and December 31, 2022 are $11.1 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
Consolidated Financial Statements.
Corporate & Other Segment
The results of the Corporate & Other Segment are as follows:
Revenues
Net investment income
Net (losses) gains on investments
Earned commissions
Total revenues
Expenses
Operating costs and expenses
Total expenses
(Loss) income from operations before income tax
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Net Gains (Losses) on Investments
Year Ended December 31,
2023
2022
(dollars in thousands)
$
$
308 $
(364 )
(345 )
(401 )
8,393
8,393
(8,794 ) $
480
263
(429 )
314
6,535
6,535
(6,221 )
For the year ended December 31, 2023, net losses on investments were $0.4 million compared to a gain of $0.3 million for the year ended December
31, 2022. This change is attributable to net asset valuation changes of other invested assets.
Operating Expenses
For the year ended December 31, 2023, operating expenses were $8.4 million compared to $6.5 million for the year ended December 31, 2022.
primarily related to $3.4 million of transaction costs related to the recent merger agreement with iA American Holdings, Inc., partially offset with lower
staff costs.
34
Investments
Investment Returns
We invest our available cash and funds that support our regulatory capital, surplus requirements and policy reserves in investment securities that are
included in our Insurance and Corporate & Other Segments. We earn income on these investments in the form of interest on fixed maturity securities
(bonds and mortgage loans) and dividends (from equity holdings). Net investment income is recorded net of investment related expenses as revenue. 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 we own,
the interest rates earned and amount of dividends received on our investments.
Gains and losses on sales of investments are classified as net gains (losses) on investments and are recorded as revenue. Capital appreciation and
depreciation caused by changes in the market value of investments classified as “available-for-sale” is recorded in accumulated other comprehensive
income. The amount of investment gains and losses that we recognize depends on the amount of and the types of invested assets we own and the market
conditions related to those investments. Our cash needs can vary from time to time and could require that we sell invested assets to fund cash needs.
Investment Guidelines
Our investment strategy and guidelines are developed by management and approved by the Investment Committee of Fidelity Life’s Board of
Directors. Our investment strategy related to our Insurance Segment is designed to maintain a well-diversified, high quality fixed maturity portfolio that
will provide adequate levels of net investment income and liquidity to meet our policyholder obligations under our life insurance policies and our assumed
annuity deposits. To help maintain liquidity, we establish the duration of invested assets within a tolerance to the policy liability duration. The investments
of our Insurance Segment are managed with an emphasis on current income within quality and diversification constraints. The focus is on book yield of the
fixed maturity portfolio as the anticipated portfolio yield is a key element used in pricing our insurance products and establishing policyholder crediting
rates on our annuity contracts.
We apply our overall investment strategy and guidelines on a consolidated basis for purposes of monitoring compliance with our overall guidelines.
Almost all of our investments 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 and in
particular 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.
35
The following table shows the distribution of the fixed maturity securities classified as available-for-sale by quality rating, using the rating assigned
by Standard & Poor’s (S&P), a nationally recognized statistical rating organization. For securities where the S&P rating is not available (not rated), the
National Association of Insurance Commissioners (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 has increased to 96.0% at December 31, 2023 from 95.1% at
December 31, 2022 due to the S&P ratings on certain new securities acquired in our portfolio of distressed residential mortgage-backed securities.
S&P Rating
AAA
AA
A
BBB
Not rated
Total investment grade
BB
B
CCC
Not Rated
Total below investment grade
Total
Estimated Fair Value
December 31, 2023
December 31, 2022
(dollars in thousands)
$
$
36,750
81,513
70,682
51,638
60,263
300,846
5,134
2,844
407
4,151
12,536
313,382
11.7 % $
26.0 %
22.6 %
16.5 %
19.2 %
96.0 %
1.6 %
1.0 %
0.1 %
1.3 %
4.0 %
100.0 % $
53,065
66,283
64,018
56,194
44,163
283,723
5,520
4,778
492
3,625
14,415
298,138
17.8 %
22.2 %
21.5 %
18.8 %
14.8 %
95.1 %
1.9 %
1.6 %
0.2 %
1.2 %
4.9 %
100.0 %
The following table sets forth the maturity profile of our fixed maturity securities at December 31, 2023 and 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.
(dollars in thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Securities not due at a single
maturity date-primarily mortgage
and asset-backed securities
Total fixed maturities
Amortized
Cost
$
$
7,754
37,576
74,512
144,102
72,198
336,142
December 31, 2023
%
Fair Value
%
2.3 % $
11.2 %
22.2 %
42.9 %
7,670
36,830
71,313
129,902
Amortized
Cost
2.4 % $
11.8 %
22.8 %
41.5 %
6,239
34,330
72,312
136,004
December 31, 2022
%
Fair Value
%
1.9 % $
10.3 %
21.8 %
41.0 %
6,207
32,719
67,472
115,545
21.5 %
100.1 % $
67,667
313,382
21.6 %
100.0 % $
83,061
331,946
25.0 %
100.0 % $
76,195
298,138
2.1 %
11.0 %
22.6 %
38.7 %
25.6 %
100.0 %
Every quarter, we review all investments where the market value is less than the carrying value to determine if a credit loss has occurred. 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
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Polices—Change in Allowance for Credit
Losses”.
Net Investment Income
One key measure of our net investment income is the book yield on our holdings of fixed maturity securities classified as available-for-sale, which
holdings totaled $313.4 million and $298.1 million, and represented 86.2% and 84.3% of our invested assets, as of December 31, 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 years ended December 31, 2023 and
December 31, 2022, our book yield on fixed maturity securities available-for-sale was 4.5% for the years ended December 31, 2023 and December 31,
2022.
See “Note 2 – Investments” in the Notes to the Consolidated Financial Statements included in this Form 10-K.
36
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:
December 31, 2023
Ending
Balance
Year to Date
Interest
Credited
Average
Credit
Rate
Ending
Balance
December 31, 2022
Year to Date
Interest
Credited
Average
Credit Rate
(dollars in thousands)
Annuity contract holder deposits—assumed $
Dividends left on deposit
Other
Total
$
62,665 $
6,492
1,569
70,726 $
2,438
165
35
2,638
3.9% $
2.5%
2.2%
3.7% $
69,070 $
6,731
1,642
77,443 $
2,576
169
35
2,780
3.7%
2.5%
2.1%
3.6%
The liability for deferred annuity deposits represents the contract-holder account balances. We credit interest on all contract-holder deposit liabilities
at contractual rates that are currently at the minimum rate allowed by the contract or by state regulations.
Our Insurance Segment realizes operating profit from the excess of our book yield realized on fixed maturity securities that support our contract-
holder deposits over the amount of interest that we credit to the contract-holder. We refer to this operating profit as the “spread” we earn on contract-holder
deposits. Our book yields on fixed maturity investments have declined in recent periods due to current market conditions. If book yields continue to
decline, 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 in particular correlate generally with movements in the major equity
market indexes. The amounts classified as investment gains and losses in our Consolidated Statements of Operations include amounts realized from sales
of investments, mark-to-market adjustments on investments classified as equity holdings and investments that use the equity method of accounting (limited
partnership interests which are included in Other invested assets on the Consolidated Balance Sheet) and individual securities related to credit losses.
See “Note 2 – Investments” in the Notes to the Consolidated Financial Statements included in this Form 10-K.
Unrealized Holding Gains (Losses)
We also record capital appreciation/depreciation on our available-for-sale fixed maturity securities. We had Accumulated Other Comprehensive
income of $9.0 million and a loss of $41.1 million, net of federal income taxes and reserve, for years ended December 31, 2023 and December 31, 2022,
respectively.
At December 31, 2023 our fixed maturity securities had an unrealized loss of $22.8 million compared to an unrealized loss of $33.8 million at
December 31, 2022. Duration measures the sensitivity of a bond’s price to changes in market yields and convexity measures a bond’s duration sensitivity to
changes in market yields. The Company’s unrealized gain incurred in 2023 was $11.0 million in our fixed maturities portfolio which has a duration of 7.1,
convexity of 0.791, and current yield of 5.6%, is accounted for by the fluctuation of the 10-year treasury bill yield in 2023.
Financial Position
At December 31, 2023, we had total assets of $822.8 million compared to total assets at December 31, 2022 of $770.1 million, an increase of $52.7
million. Reinsurance recoverables increased $23.7 million as a result of a $22.4 million increase in ceded policy and claim reserves and $1.3 million
related to timing of settlements of reinsured claims. Commission and agent balances increased $18.7 million mainly due to increased commission
receivables in the Agency segment and increased agent debit balances in the insurance segment. The invested asset base increased $9.6 million, mainly due
to $11.0 million in net unrealized gains partially offset by net sales of investments. Deferred income tax assets increased $4.0 million due to tax credits of
$5.9 million as a result of a net loss, partially offset by $1.9 million of unrealized investment market gains. Accrued investment income increased $0.6
million due to timing of receipt of investment income. The above increases were partially offset by the following: Deferred policy acquisition costs
decreased $2.1 million, resulting from amortization of $14.0 million being higher than deferrals of new business of $11.8 million and cash decreased $1.7
million primarily related to cash used from investing, offset by inflows from operating and financing.
At December 31, 2023, we had total liabilities of $712.6 million compared to total liabilities of $658.7 million at December 31, 2022, an increase of
$53.9 million. Future policy benefits and claims increased $48.7 million, primarily due to a $49.8 million increase in Core Life and Non-Core Life lines,
resulting from growth of the underlying blocks of business, partially offset by decreases in
37
Annuities and assumed life of $1.0 million and Closed Block of $0.1 million. Debt increased $11.8 million due increase in net borrowing of $9.2 million
and interest accrued of $2.6 million under our commission financing agreement with Hannover Life. Other liabilities increased $6.0 million, due to an
increase in operating liabilities. The above increases were partially offset by decreases in policyholder account balances of $6.7 million largely due to
annuity payments and Other policyholder liabilities of $6.0 million due to a decrease in claim liabilities.
At December 31, 2023, total equity decreased to $110.2 million from $111.3 million at December 31, 2022. This decrease in equity of $1.1 million
primarily consists of a net loss of $9.9 million and a increase of $8.9 million in other comprehensive income.
Liquidity and Capital Resources
Our principal sources of funds are from premium revenues, commission revenues, net investment income and proceeds from the sale and maturity of
investments. The Company’s primary uses of funds are for payment of life policy benefits, contract-holder withdrawals on assumed annuity contracts, new
business acquisition costs for our Insurance segment (i.e., commissions, underwriting and issue costs), cost of sales for Agency segment (i.e., agent
compensation, purchased lead and lead generation costs), general operating expenses and purchases of investments. Our investment portfolio is structured
to provide funds periodically over time, through net investment income and maturities, to provide for the payment of policy benefits and contract-holder
withdrawals.
Under our commission financing arrangement, Efinancial receives an upfront commission from Hannover Life on certain insurance products and
agrees to pay levelized commissions back to Hannover Life over the period the policy stays in-force and premiums are received. On March 31, 2022,
Efinancial entered into a new commission financing arrangement and is taking new advances on this financing arrangement. As of December 31, 2023 and
December 31, 2022, we had net advances of $40.4 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. We own FHLBC common stock with a book value of $0.3 million, The Company's ability to borrow under this facility is subject to the
FHLBC's discretion and requires the availability of qualifying assets. Interest on borrowed funds is charged at variable rates established from time to time
by the FHLBC based on the interest rate option selected at the time of borrowing. The Company borrowed and repaid $21 million and $4 million in 2023
and 2022, respectively.
Fidelity Life’s ability to pay dividends to Vericity Holdings, Inc. (VHI) is limited by the insurance laws of the State of Illinois. All shareholder
dividends are subject to notice filings with the Illinois Director of Insurance. The maximum amount of dividends that can be paid by Illinois life insurance
companies to shareholders without 30 days prior notice to the Illinois Director of Insurance is the greater of (i) statutory net income for the preceding year
or (ii) 10% of statutory surplus as of the preceding year-end. Under Illinois insurance statutes, dividends may be paid only from surplus, excluding
unrealized appreciation in value of investments, without prior approval. Dividends in excess of these amounts require advance approval of the Illinois
Director of Insurance. There are no limitations on the amount of dividends that Efinancial can pay.
Cash inflows from operating activities come primarily from net insurance premiums, earned commissions and net investment income. Cash outflows
from operations are the result of life, annuity and health claim benefits, operating expenses and income taxes.
Cash flows from investing activities includes our fixed maturity securities and equity holdings that are classified as available-for-sale securities.
Period to period, the cash flows associated with the changes in these portfolios will vary between cash sources and cash uses depending on portfolio trading
due to investment market conditions and other factors.
Cash flows from financing activities primarily consists of the assumed annuity contract-holder deposits. The annuity liabilities are reducing each
period due to cash withdrawals by contract-holders on this block of annuities that were primarily written in the late 1980s. Cash deposits to these annuity
contracts are minimal compared to cash withdrawal activity. Also included in financing cash flows is activity from our commission financing program.
Cash Flows
For the for the year ended December 31, 2023, the Company had a net decrease in cash of $1.7 million compared to a net decrease of $12.6 million
for the year ended December 31, 2022.
The increase in cash flows from operating activities is primarily due to timing related to reinsurance recoverables and an increase in other
policyholder liabilities.
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 year ended December 31, 2023, $6.7 million was used principally to acquire $5.6
million of capitalized software and $1.1 million of investment purchases net of sales and maturities.
Cash flows from financing activities was $0.1 million which includes $9.3 million net proceeds from our commission financing program, partially
offset by $9.2 million, net of deposits by contract holders of annuities that were primarily written in the late 1980s.
38
The following table summarizes our cash flows for the years ended December 31, 2023 and 2022.
Consolidated Summary of Cash Flows
Net cash provided (used) by operating activities
Net cash (used) provided by investing activities
Net cash provided (used) by financing activities
Net (decrease) in cash, cash equivalents and restricted cash
Risk-Based Capital
Year Ended December 31,
2023
2022
(dollars in thousands)
$
$
4,833 $
(6,680 )
115
(1,732 ) $
(7,370 )
(8,766 )
3,513
(12,623 )
Fidelity Life is subject to regulatory guidelines related to the ratio of its capital level compared to its RBC level as determined by formulas adopted
by state insurance departments and applicable to all life insurance companies. A company’s “authorized control level RBC” is a measure of the amount of
capital appropriate for an insurance company to support its overall business operations in light of its size, growth and risk profile. RBC standards are used
by regulators to determine appropriate regulatory actions for insurers that show signs of weak or deteriorating conditions. Companies that do not maintain
total adjusted RBC in excess of 200% of the company’s authorized control level RBC may be required to take specific actions at the direction of state
insurance regulators. Fidelity Life’s total adjusted capital at December 31, 2023 and 2022 was well in excess of 200% of its authorized control level. See
“Business—Regulation—Risk-Based Capital (RBC) Requirements.”
Due to the continued growth in Fidelity Life’s sales of new insurance policies, Fidelity Life’s statutory surplus has been declining. The accounting
principles applicable to regulatory reporting require that insurance companies expense all policy acquisition costs as incurred. Acquisition expenses
attributable to Fidelity Life’s increasing new business growth have resulted in net losses being reported for regulatory reporting purposes. Regulatory
accounting principles allow limited recognition of the future benefits of deferred tax assets. Accordingly, we recognize no income tax benefit that would
offset our operating losses for regulatory reporting purposes.
Fidelity Life is also subject to the model regulation entitled “Valuation of Life Insurance Policies” commonly known as “Regulation XXX.” This
regulation requires life insurance companies that issue insurance policies with level premium guarantees to carry reserves that can greatly exceed the
amount that the insurance company believes is necessary to reflect its liability for future claim payments. Such reserves are sometimes referred to as “non-
economic reserves.” Many insurance companies use reinsurance, financing, formation of captive reinsurers and other reserve financing transactions to
reduce the regulatory capital needs under Regulation XXX. Generally, these solutions have only been available to carriers with much larger amounts of
affected liabilities than Fidelity Life. To mitigate the future impact on regulatory capital from Regulation XXX and help stabilize our regulatory capital
position in light of anticipated sales increases, we entered into a reserve financing agreement with Hannover Life effective July 1, 2013 that covered certain
products with policies written on or before September 30, 2012. This agreement was first amended and restated as of July 1, 2016 and a subsequent
amendment was filed with the Illinois Department of Insurance in November 2019 and approved by the Illinois Department of Insurance on December 23,
2019. The structure of the agreement, which was first effective July 1, 2013, involves a combination coinsurance with funds withheld and yearly renewable
term reinsurance covering most of the Company’s non-participating in-force life insurance business with issue dates on or before December 31, 2019. As of
December 31, 2023 and December 31, 2022, the reserve credit net of funds held of ($67.6 million and $69.2 million for 2023 and 2022), respectively under
this arrangement was approximately $145.3 million and $136.0 million, respectively.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues
or expenses, results of operations, liquidity or capital expenditures.
Quantitative and Qualitative Information about Market Risk
We own a diversified portfolio of investments including cash, bonds, commercial mortgages, and common stock. Each of these investments is
subject, in varying degree, to market risk that can affect their return and their fair value. Bonds are the majority of our investments and include debt issues
of corporations, residential and commercial mortgage-backed securities or other asset-backed securities, U.S. Treasury securities, or obligations of U.S.
Government Sponsored Enterprises and are classified as fixed maturity investments in our financial statements. Our investment portfolios are subject to
market risks.
Market risk is the risk that we will incur losses due to adverse changes in market rates and prices on the fair value of the investment securities that
we own. We have exposure to market risk through our investment activities, including interest rate risk, credit risk, equity risk and foreign currency risk.
We have not and do not plan to enter into any derivative financial instruments for trading or speculative purposes.
39
Interest Rate Risk
Interest rate risk arises from the price sensitivity of investments to changes in interest rates. The changes in the fair value of our fixed maturity
investments are inversely related to changes in market interest rates. As market interest rates fall the fixed income streams of fixed maturity investments
held become more valuable and market values rise. As market interest rates rise, the opposite effect occurs. Interest rate risk can also arise if market rates
fall, which can result in lower interest spreads on our assumed annuity deposits, which are our primary interest rate sensitive liability.
We review the interest rate sensitivity of our available-for-sale fixed maturity securities by calculating the impact on the market value of our
holdings that would result from a hypothetical instantaneous shift in market interest rates across all maturities, which we consider to be reasonably
possible. The impact of such a parallel shift upward in the yield curve of 200 basis points would reduce the market value of our fixed maturity securities
portfolio by $41.3 million (13.2%) and $39.4 million (13.2%) as of December 31, 2023 and December 31, 2022, respectively. The estimated market value
changes assume all other factors are held constant and do not attempt to estimate any offsetting change in the value of our liabilities.
With regard to our assumed annuity deposits, we are subject to risk from contract-holder behavior resulting from changes in interest rates. The
assumed annuity contracts have virtually no surrender charges remaining that could be assessed against withdrawals. When market interest rates exceed the
amount that we are crediting on deposits, we are subject to higher contract-holder withdrawals or an increase in contract loans, both of which could force
the Company to sell assets prematurely and could lead to the realization of capital losses on such sales. As of December 31, 2023, we were crediting
interest at the minimum contract interest rate, which on a composite basis is approximately 3.9% annually. We manage our exposure to rising interest rates
through our ability to increase the contract crediting rate. Our ability to increase our crediting rate is constrained by our portfolio yield at the time of the
decision to increase rates. Increases in the contract crediting rates could reduce our income unless we are able to maintain a constant interest spread on our
assets.
Credit Risk
Credit risk is the risk of loss due to an adverse change in the financial condition of a specific debt issuer or, in the case of a securitized investment,
adverse change in the assets being securitized. We address credit risk by establishing minimum rating standards for investments that our portfolio managers
can acquire and, in the case of a downgrade, continue to hold the investment. For our core fixed maturity portfolio, which comprises a significant majority
of our invested assets, only investment grade securities (minimum credit rating for new investments is BBB- as established by Standard & Poor’s or a
comparable nationally recognized statistical rating organization) can be purchased and such portfolio managers must maintain an overall credit rating for
the portfolio of at least A-. Through our portfolio managers, we monitor the financial condition of all the issues of securities that we own. As an additional
step to reduce our exposure to credit risk, we have established diversification guidelines limiting the total amount of holding by issuer and by investment
sector.
Recent Accounting Pronouncements
All applicable adopted accounting pronouncements have been reflected in our consolidated financial statements as of and for the years ended
December 31, 2023 and December 31, 2022.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and Item 10(f)(1) of Regulation S-
K, the Company has elected to comply with certain scaled disclosure reporting obligations, and therefore is not required to provide the information required
by Item 305 of Regulation S-K.
40
Index to Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm (Public Company Accounting Oversight Board ID no. 34)
Consolidated Balance Sheets as of December 31, 2023 and 2022
Consolidated Statements of Operations for the Years ended December 31, 2023 and 2022
Consolidated Statements of Comprehensive Income (Loss) for the Years ended December 31, 2023 and 2022
Consolidated Statements of Changes in Shareholders’ Equity for the Years ended December 31, 2023 and 2022
Consolidated Statements of Cash Flows for the Years ended December 31, 2023 and 2022
Notes to the Consolidated Financial Statements
Schedule I – Summary of Investments Other Than Investments in Related Parties
Schedule II – Condensed Financial Information of Registrant (Parent Company) Statement of Operations
Schedule III – Supplementary Insurance Information
Schedule IV – Reinsurance
Schedule V – Valuation and Qualifying Accounts
41
42
43
44
45
46
47
48
73
74
78
79
80
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and Board of Directors of Vericity, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Vericity, Inc. and subsidiaries (the "Company") as of December 31, 2023 and 2022, the
related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows, for each of the two years in
the period ended December 31, 2023, and the related notes and schedules listed in the Index at Item 8 (collectively referred to as the “financial
statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023
and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with
accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
April 1, 2024
We have served as the Company’s auditor since 2005.
42
Vericity, Inc.
Consolidated Balance Sheets
(dollars in thousands, except share and par value data)
December 31,
December 31,
2023
2022
Assets
Investments:
Fixed maturities – available-for-sale – at fair value (net of allowance for credit loss of $28 and $0, and
amortized cost $336,142 and $331,946)
Mortgage loans (net of allowances for credit losses of $573 and $83)
Policyholder loans
Other invested assets
Total investments
$
Cash, cash equivalents and restricted cash
Accrued investment income
Reinsurance recoverables (net of allowances for credit losses of $167 and $126)
Deferred policy acquisition costs
Commissions and agent balances (net of allowances for credit losses of $336 and $338)
Intangible assets
Deferred income tax assets, net
Other assets
Total assets
Liabilities and Shareholders' Equity
Liabilities
Future policy benefits and claims
Policyholder account balances
Other policyholder liabilities
Policy dividend obligations
Reinsurance liabilities and payables
Long-term debt
Short-term debt
Other liabilities
Total liabilities
Commitments and Contingencies (Note 10)
Shareholders' Equity
Common stock, $.001 par value, 30,000,000 shares authorized, 14,875,000 shares, issued and
outstanding
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income
Total shareholders' equity
Total liabilities and shareholders' equity
See footnotes to the consolidated financial statements.
$
43
313,382 $
40,534
7,149
2,364
363,429
8,044
3,630
238,598
88,076
53,494
1,635
32,396
33,516
822,818
502,464
70,726
41,450
9,636
6,262
39,761
9,249
33,057
712,605
15
39,840
91,580
(21,222 )
110,213
822,818 $
298,138
45,270
6,699
3,693
353,800
9,776
3,006
214,862
90,189
34,766
1,635
28,437
33,607
770,078
453,763
77,443
47,486
9,515
6,246
30,213
6,976
27,093
658,735
15
39,840
101,660
(30,172 )
111,343
770,078
Vericity, Inc.
Consolidated Statements of Operations
(dollars in thousands, except earnings per share)
Year Ended December 31,
2023
2022
Revenues
Net insurance premiums
Net investment income
Net (losses) gains on investments
Earned commissions
Insurance lead sales
Other income
Total revenues
Benefits and expenses
Life, annuity, and health claim benefits
Interest credited to policyholder account balances
Operating costs and expenses
Amortization of deferred policy acquisition costs
Total benefits and expenses
(Loss) Income before income tax
Income tax (benefit) expense
Net (loss) income
Earnings per share for the periods
Weighted average shares outstanding, basic and diluted
Basic (loss) earnings per share
Diluted earnings per share
$
96,839 $
16,613
(2,507 )
59,937
4,008
2,675
177,565
67,674
2,638
104,151
13,954
188,417
(10,852 )
(959 )
$
(9,893 )
$
100,075
16,036
(327 )
42,634
4,453
1,041
163,912
67,502
2,780
97,755
18,443
186,480
(22,568 )
(2,108 )
(20,460 )
Year Ended December 31,
2023
2022
$
$
14,875,000
(0.67 ) $
(0.67 ) $
14,875,000
(1.38 )
(1.38 )
See footnotes to the consolidated financial statements.
44
Vericity, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(dollars in thousands)
Net (loss) income
Other comprehensive (loss) income, net of tax:
Change in net unrealized gains (losses)
Total other comprehensive income (loss)
Total comprehensive (loss) income
Year Ended December 31,
2023
2022
$
(9,893 ) $
(20,460 )
8,950
8,950
(943 ) $
(41,101 )
(41,101 )
(61,561 )
$
See footnotes to the consolidated financial statements.
45
Vericity, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
(dollars in thousands)
Year Ended December 31,
2023
2022
Common stock
Balance – beginning of period
Balance – end of period
Additional paid-in capital
Balance – beginning of period
Balance – end of period
Retained earnings
Balance – beginning of period
Cumulative effect adjustment from changes in accounting guidance, net of tax
Balance after adjustments - beginning of period
Net (loss) income
Balance – end of period
Accumulated other comprehensive (loss) income
Balance – beginning of period
Other comprehensive (loss) income
Balance – end of period
Total shareholders' equity
$
$
$
$
$
$
$
$
$
$
15
15
$
$
39,840
$
39,840 $
101,660
$
(187 )
101,473
$
(9,893 )
91,580 $
(30,172 )
$
8,950
(21,222 ) $
110,213 $
15
15
39,840
39,840
122,120
—
122,120
(20,460 )
101,660
10,929
(41,101 )
(30,172 )
111,343
See footnotes to the consolidated financial statements.
46
Vericity, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
Cash flows from operating activities
Net (loss) income
Adjustments to reconcile net (loss) income to net cash (used) provided by operating activities:
Year Ended December 31,
2023
2022
$
(9,893 ) $
(20,460 )
Depreciation and amortization and other non-cash items
Interest credited to policyholder account balances
Deferred income tax
Net investment (losses) gains
Interest expense
Change in:
Accrued investment income
Reinsurance recoverables, net
Deferred policy acquisition costs
Commissions and agent balances
Other assets
Insurance liabilities
Other liabilities
Net cash provided (used) by operating activities
Cash flows from investing activities
Sales, maturities and repayments of:
Fixed maturities
Mortgage loans
Other invested assets
Purchases of:
Fixed maturities
Mortgage loans
Other invested assets
Change in policyholder loans, net
Other, net
Net cash (used) provided by investing activities
Cash flows from financing activities
Debt issued
Debt repaid
Deposits to policyholder account balances
Withdrawals from policyholder account balances
Net cash provided (used) by financing activities
Net (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash – beginning of period
Cash, cash equivalents and restricted cash – end of period
Supplemental cash flow information
Non-cash transactions:
5,413
2,638
(5,849 )
2,507
2,529
(624 )
(23,736 )
2,113
(18,728 )
2,566
42,636
3,261
4,833
44,466
5,266
454
(49,019 )
(964 )
(840 )
(450 )
(5,593 )
(6,680 )
43,983
(34,691 )
753
(9,930 )
115
(1,732 )
9,776
8,044
$
4,105
2,780
(6,160 )
327
1,648
(416 )
(30,731 )
5,526
(6,077 )
(402 )
41,783
707
(7,370 )
37,534
6,650
-
(42,373 )
(4,527 )
(980 )
(328 )
(4,742 )
(8,766 )
22,169
(13,006 )
381
(6,031 )
3,513
(12,623 )
22,399
9,776
—
$
—
$
$
See footnotes to the consolidated financial statements.
47
Vericity, Inc.
Notes to the Consolidated Financial Statements
(dollars in thousands)
Note 1—Summary of Significant Accounting Policies
Description of Business
On October 3, 2023, the Company, announced that it entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among the
Company, iA American Holdings Inc. (“iA” or “Parent”), Long Grove Acquisition Corp., a wholly owned subsidiary of Parent (“Merger Sub”), and, solely
for purposes of Section 6.03 and Article IX thereof, iA Financial Corporation, Inc. (“Guarantor”). On the terms and subject to the conditions of the Merger
Agreement, including receipt of approval from the Illinois Department of Insurance, at the closing, Merger Sub will merge with and into the Company (the
“Merger”), with the Company continuing as the surviving entity, which will become a wholly-owned subsidiary of Parent. The time that the Merger
becomes effective is referred to as the “Effective Time.” The Merger was unanimously approved by the Company’s board of directors. As a result of the
Merger, each share of Common Stock outstanding immediately prior to the Effective Time (subject to certain exceptions, including shares of Common
Stock owned by stockholders of the Company who have not voted in favor of the adoption of the Merger Agreement and have properly exercised appraisal
rights in accordance with Section 262 of the General Corporation Law of the State of Delaware) will, at the Effective Time, automatically be converted into
the right to receive $11.43 in cash, without interest and subject to applicable withholding taxes (the “Merger Consideration”). The aggregate equity value of
the Common Stock acquired by Parent will be approximately $170 million.
If the Merger is consummated, the Company’s Common Stock will be de-listed from The Nasdaq Capital Market and de-registered under the
Securities Exchange Act of 1934, as amended. On October 3, 2023, the Company issued a Form 8-K and press release announcing the execution of the
Merger Agreement and the Form 8-K is incorporated into this filing by reference. As of the date of this filing, the Company is awaiting the Illinois
Department of Insurance approval of the transaction. No other regulatory approvals remain outstanding. The Merger is expected to close during the second
quarter of 2024.
The Company operates as a holding company and currently has no other business operations. Fidelity Life is an Illinois- domiciled life insurance
company that was founded in 1896. Fidelity Life markets life insurance products through independent and affiliated distributors and is licensed in the
District of Columbia and all states, except New York and Wyoming. Efinancial markets life and other products for non-affiliated insurance companies and
sells life products for Fidelity Life.
The accompanying consolidated financial statements present the accounts of the Company and subsidiaries at December 31, 2023 and December 31,
2022, and for the years ended December 31, 2023 and 2022.
Basis of Presentation
These consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America
(GAAP). All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of 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.
Unconsolidated Variable Interest Entities
In the normal course of investing activities, the Company enters into relationships with variable interest entities (VIEs), as an investor in limited
partnership interests and asset-backed securities. The Company is not the primary beneficiary of these VIEs, and therefore does not consolidate them. The
Company determines whether it is the primary beneficiary of a VIE based on a qualitative assessment of the relative power and benefits of the Company
and the other participants in the VIE. The Company’s maximum exposure to loss with respect to these investments is limited to the investment carrying
values included in the Company’s Consolidated Balance Sheets and any unfunded commitments.
Fixed Maturities
Fixed maturities classified as available-for-sale are reported at fair value. Changes in fair value are reported as unrealized gains or losses as
discussed below. Fixed maturities include bonds, residential mortgage-backed securities, commercial mortgage-backed securities and asset-backed
securities. Unrealized gains and losses on available-for-sale fixed maturity securities are reported as a component of accumulated other comprehensive
income (AOCI), net of applicable deferred income taxes.
48
Fair value is based on quoted market prices, when available. When quoted market prices are not available, fair value is estimated by discounting
fixed maturity securities cash flows to reflect interest rates currently being offered on similar terms to borrowers of similar credit quality, by quoted market
prices of comparable instruments, and by independent pricing sources. See "Note 11–Assets and Liabilities Measured at Fair Value" for further discussion
on inputs and assumptions used to estimate fair value.
Mortgage Loans
Mortgage loans are held on commercial real estate and are stated at the aggregate unpaid principal balances, net of any write-downs and valuation
allowances. The Company identifies loans for evaluation of impairment primarily based on the collection experience of each loan. Mortgage loans are
considered impaired when, based on current information and events, it is probable that the Company will be unable to collect principal or interest amounts
according to the contractual terms of the loan agreement. Impairment is measured on a loan-by-loan basis based on the present value of expected future
cash flows discounted at the loan’s effective interest rate or the fair value of the collateral. Impairments are included in net gains (losses) on investments in
the Consolidated Statements of Operations.
Interest income from mortgage loans is recognized on an accrual basis using the effective yield method. Accrual of income is generally suspended
for mortgage loans that are in default or when full and timely collection of principal and interest payments is not probable.
Short-Term Investments
Short-term investments include highly liquid securities and other investments with remaining maturities of one year or less, but greater than three
months from the date of purchase. Securities included within short-term investments are classified as available-for-sale and are reported at fair value.
Changes in fair value are reported as unrealized gains or losses and are a component of AOCI, net of applicable deferred income taxes. Fair value is based
on quoted market prices, when available. When quoted market prices are not available, fair value is estimated by discounting fixed maturity securities cash
flows to reflect interest rates currently being offered on similar terms to borrowers of similar credit quality, by quoted market prices of comparable
instruments, and by independent pricing sources. See “Note 11–Assets and Liabilities Measured at Fair Value” for further discussion on inputs and
assumptions used to estimate fair value.
Policyholder Loans
Policyholder loans are carried at the aggregate of the unpaid balance. Interest income on such loans is recorded as earned in net investment income
using the contractually agreed-upon interest rate.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash on hand, amounts due from banks and highly liquid investments that are both readily convertible into known
amounts of cash and have maturities of three months or less at the time of acquisition such that they present insignificant risk of changes in value due to
changing interest rates and lack of credit exposure. The carrying value of these securities approximates their fair value.
Reinsurance
The Company enters into reinsurance agreements to diversify risk and limit its overall financial exposure. Although these reinsurance agreements
contractually obligate the reinsurers to reimburse the Company, they do not discharge the Company from its primary liability and obligation to
policyholders. Risk transfer criteria are reviewed for each reinsurance contract to determine if the contract will be accounted for as reinsurance or under the
deposit method of accounting.
The Company estimates the amount of allowances for credit losses on reinsurance recoverables based on periodic evaluations of balances due from
reinsurers, reinsurer solvency, and management’s experience. Changes in the allowances for credit losses are presented as a component of life, annuity, and
health claim benefits in the Consolidated Statements of Operations. Amounts owed by reinsurers are considered past due based on the terms of the
reinsurance contract. Reinsurance recoverables and any related allowance are written off after collection efforts have been exhausted or a negotiated
settlement is reached with the reinsurer.
49
Deferred Policy Acquisition Costs (DAC)
Incremental direct costs of acquiring new business, principally commissions on sales, underwriting, policy issuance and processing, and medical
inspection costs, are deferred for successfully placed contracts. DAC for the life insurance business is amortized over the life of the business; for traditional
life products, the DAC is amortized as a level percentage of gross premiums. For immaterial blocks, a simplified approach was taken. There was no
remaining DAC on the assumed block or on the deferred annuities.
Intangible Assets
Impairment testing may be performed when events or changes in circumstances indicate that the carrying amount of the intangible assets may not be
recoverable. Intangible assets are tested for impairment based on undiscounted cash flows, which requires the use of estimates and judgment, and, if
impaired, are written down to fair value based on discounted cash flows. For years ended December 31, 2023 and December 31, 2022, we have not
recorded an impairment of intangible assets.
Future Policy Benefits, Policyholder Account Balances, and Other Policyholder Liabilities
Future policy benefits represent the reserve for traditional life insurance policies and annuities in payout status. Reserves for traditional life
insurance policies are computed using the net level premium method on the basis of actuarial assumptions at the issue date of the contracts, including
mortality, policy lapse assumptions, and rates of interest. The reserves for annuities in payout status (structured settlements) represent the present value of
assumed future payments based on contract terms for the future payouts and can include assumptions for mortality. To the extent that unrealized gains on
available-for-sale fixed maturity securities would result in a premium deficiency had those gains actually been realized, an adjustment is recorded net of tax
as a (decrease) increase of unrealized capital gains included in AOCI. For years ended December 31, 2023 and 2022, this adjustment, net of tax, was $125
and ($4,687), respectively.
A premium deficiency exists if the discounted present value of future gross premiums is not sufficient to cover anticipated future cash outflows. To
assess the adequacy of our benefit reserves, we annually perform premium deficiency testing for each of our lines of business using best estimate
assumptions as of the date of the test without provision for adverse deviation. If benefit reserves minus the DAC asset are less than the present value of
future cash flows on the line of business, then first the DAC asset will be reduced. If reducing the DAC asset down to zero is still not sufficient to eliminate
the premium deficiency, then benefit reserves will be increased. Recognizing a premium deficiency will reduce our reported net income or increase our
reported loss, for the period.
In connection with our premium deficiency testing on our most significant business lines, we performed sensitivity analyses on our Core Life, Non-
Core Life, Closed Block, and annuities and assumed life business lines to capture the effect that certain key assumptions have on expected future cash
flows, and the impact of those assumptions on the adequacy of DAC balances and GAAP benefit reserves. The sensitivity tests are performed
independently, without consideration for any correlation among the key assumptions.
Policyholder account balances include the liability for assumed deferred annuity and universal life contracts and the liabilities for policyholder
dividends and death benefits on life insurance contracts that have been left on deposit with the Company. These liabilities represent the account value of the
policyholder as there are no other benefits due. This liability is equal to the balance that accrues to the benefit of the policyholder, which includes the
accumulation of deposits, plus interest credited, less withdrawals.
Other policyholder liabilities include the amounts estimated for claims that have been reported but not settled and estimates for claims incurred but
not reported.
Long and Short-Term Debt
Debt represents upfront commission payments received on certain term life products that are to be repaid as level commissions over the life of the
underlying policies issued. The debt liability is accounted for under the interest method, which requires the imputation of interest resulting in the
recognition of a discount as the difference between the cash payments received and the level commissions expected to be repaid based on current policy
lapse assumptions. Under the interest method, the discount is amortized as interest expense over the period that level commissions are repaid resulting in a
constant rate of interest when applied to the amount outstanding at the beginning of any given period. The amount to be repaid as level commissions are
dependent on the level of expected policy lapses assumed for the underlying commissions financed; therefore, the debt liability may be adjusted in periods
where revisions to policy lapse assumptions are made, which may result in the recognition of a gain or loss.
50
Shareholders' Equity - Common Stock
Apex Holdco L.P., an affiliate of J.C. Flowers IV L.P., a private equity fund advised by J.C. Flowers & Co. LLC, pursuant to a standby stock
purchase agreement under which Apex Holdco L.P. agreed to act as the standby purchaser for the IPO (“Standby Purchaser”). As a result, the Standby
Purchaser owns approximately 76.5% of the issued and outstanding shares of Vericity, Inc. common stock.
Income Taxes
The current receivable for federal income tax is recognized based on the estimated amounts to be reflected on the filed tax returns. Federal income
tax expense or benefit is recognized based on amounts reported in the consolidated financial statements and using the applicable current federal income tax
rate. Income taxes are allocated to operations and other comprehensive (loss) income based on the source of the taxable event. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The effects of changes in tax rates or laws are recognized in the period
that includes the enactment date. If necessary, a valuation allowance is established to reduce the carrying amount of deferred tax assets to amounts that are
more likely than not to be realized. See “Note 4 – Income Taxes” for further details.
Revenue Recognition
Life and health insurance contract premiums are recognized as income when due from policyholders. Deposits on deposit-type contracts are entered
directly as a liability when cash is received.
Commission revenue from the sale of insurance products by Efinancial is recognized once the insurance policy is issued by the insurance company
and accepted by the customer (policy placement) and recorded as commission receivable, net of any advances received. Provision is made for commission
revenue that, based on experience, will ultimately not be earned due to the customer discontinuing the underlying insurance policy. Commission revenue
that Efinancial earns from the sale of insurance products where Efinancial acts as the general agent and utilizes a sub-agent to sell the policy (wholesale
distribution) is recorded net of related commission expense paid to the writing agency. Efinancial commissions earned for the sale of Fidelity Life products,
where Efinancial is acting in the capacity as a sub-agent, are not eliminated, primarily related to the agreement with AmeriLife in which services under the
agency and sub-agency agreements are distinct from one another.
Our primary revenue-generating arrangements that are within the scope of Accounting Standards Codification (ASC) 606 are our brokerage
arrangements associated with selling an insurance policy where Efinancial is either acting in the capacity of a general agent and selling directly to the
insurance carrier, or acting as a sub-agent under general agency agreement. In these arrangements, our customer is the insurance carrier and we have a
single performance obligation to place a policy for the insurance carrier. Our performance obligation is satisfied at the point in time when the policy is
placed, which is the point in time when the customer obtains control over the policy and has the right to use and obtain the benefits from the policy. In these
arrangements, depending on the number of years the policy is in-force, a majority of our consideration is received in the first year. In addition to the first-
year consideration, depending on the specific carrier and product involved, we may also be entitled to renewal commissions over the period of time the
policy remains in-force. Our consideration is variable based on the amount of time we estimate a policy will remain in-force. We estimate the amount of
variable consideration that we expect to receive based on our historical experience or carrier experience to the extent available, industry data and our
expectations as to future persistency rates. Additionally, we consider application of the constraint and only recognize the amount of variable consideration
that we believe is probable to be received and will not be subject to a significant revenue reversal. We monitor and update this estimate at each reporting
date. Because we recognize revenue prior to being entitled to the payment for these renewal commissions, we recognize a contract asset. We have
determined that any contract costs (e.g., costs to obtain or costs to fulfill) related to our brokerage arrangements are immaterial.
Insurance lead sales include the sale of potential life insurance customer leads to outside parties including agencies and unaffiliated insurers. Sales
of leads are recorded at the time the lead data is sold to the customer and recorded as a receivable, net of allowance for returns.
Net Investment Income and Net Gains (Losses) on Investments
Net investment income consists primarily of interest and dividends. Interest is recognized on an accrual basis and reflects amortization of premiums
and accretion of discounts on an effective yield basis, based on expected cash flows. Dividends are recorded on the ex-dividend date. Net gains (losses) on
investments, resulting from sales or calls of investments and representing the difference between the net proceeds and the carrying value of investments
sold, are determined on a specific identification basis. Net gains (losses) on investments are also recognized when there are write-downs from impairments
and changes in the allowance for credit losses. Changes in value reported for investments accounted for using the equity method of accounting are
classified within net gains (losses) on investments.
51
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.
Policyholder Dividend Obligations
Dividends payable to policyholders are determined annually based on the experience of the Closed Block policies and are payable only upon
declaration by the Board of Directors of Fidelity Life. At December 31, 2023 and 2022, a provision has been made for dividends expected to be paid in the
following calendar year of $1,536 and $1,236, respectively. The provision is recorded in other policyholder liabilities in the Consolidated Balance Sheets.
The Company also establishes a policyholder dividend obligation when cumulative actual earnings of the Closed Block are in excess of the
cumulative expected earnings that were determined at the inception of the Closed Block. See “Note 8 – Closed Block” for further discussion.
Recently Issued and Adopted Accounting Pronouncements
Pursuant to the Jumpstart Our Business Startups Act (“JOBS Act”), an emerging growth company is provided the option to adopt new or revised
accounting standards that may be issued by the Financial Accounting Standards Board (FASB) or the SEC either (i) within the same periods as those
otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. The Company has elected to use the
extended transition period for complying with any new or revised financial accounting standards. Accordingly, the information contained herein may be
different than the information you receive from other public companies. We also intend to continue to take advantage of some of the reduced regulatory and
reporting requirements of emerging growth companies pursuant to the JOBS Act so long as we qualify as an emerging growth company, including, but not
limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure
obligations regarding executive compensation, and exemptions from the requirements of holding non-binding advisory votes on executive compensation
and golden parachute payments.
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 alllowance for credit losses on our mortgage portfolio of $237. The tax effected amount of $187 is reflected in the 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 6 Reinsurance, Note 13 Accumulated Other Comprehensive Income and Note 14 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.
In August 2018, the FASB issued ASU No. 2018-12, Targeted Improvements to the Accounting for Long-Duration Insurance Contracts (Topic 944).
The FASB amends the accounting model under GAAP for certain long-duration insurance contracts and requires insurers to provide additional disclosures
in annual and interim reporting periods. The amendments are aimed at improving the following four key areas of financial reporting: measurement of the
liability for future policy benefits related to non-participating traditional and limited-payment contracts, measurement and presentation of market risk
benefits, amortization of deferred acquisition costs (DAC), and presentation and disclosures. The Company expects the impact to be material and is in the
process of quantifying the impact of this standard. In November 2020, the FASB issued ASU 2020-11—Financial Services—Insurance (Topic 944):
Effective Date and Early Application. This ASU was issued to provide additional time for implementation of ASU 2018-12 by deferring the effective date
by one year. For smaller reporting companies, this update is effective for fiscal years beginning after December 15, 2024 and interim periods within fiscal
years beginning after December 15, 2025. In December 2022, FASB issued ASU 2022-05 —Financial Services—Insurance
52
(Topic 944): Transition for Sold Contracts. This ASU introduced an optional accounting policy election under which the insurer can choose not to apply the
amendments made by ASU 2018-12 to certain contracts that are derecognized as a result of a sale or disposal before the effective date of ASU 2018-12.
Insurers that make this policy election would also be subject to additional disclosure requirements.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting:Improvements to Reportable Segment Disclosures (Topic 280). The primary
objective of ASU 2023-07 is to enhance the reportable segment disclosures provided by entities in their financial statements. It aims to improve
transparency and usefulness of information related to an entity’s reportable operating segments. Entities must disclose significant segment expenses that are
regularly provided to the chief operating decision maker (CODM). The disclosures include: (i) General Information: Description of the nature of the
segments, products, and services. (ii) Segment Profit or Loss: Revenue, operating profit or loss, and other relevant financial information for each segment.
(iii) Segment Assets: Total assets for each segment. (iv) Measurement Criteria: Explanation of how segment profit or loss is measured. ASU 2023-07 will
be effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. The Company
is evaluating the impact of the guidance on its annual disclosures.
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, and fair value net of allowances for credit losses are included in accumulated
other comprehensive income (AOCI) of fixed maturities available-for-sale are as follows:
Fixed maturities
U.S. government and agencies
U.S. agency mortgage-backed
State and political subdivisions
Corporate and miscellaneous
Foreign government
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Total fixed maturities
Fixed maturities
U.S. government and agencies
U.S. agency mortgage-backed
State and political subdivisions
Corporate and miscellaneous
Foreign government
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Total fixed maturities
Amortized
Cost
December 31, 2023
Unrealized
Gains
Unrealized
Losses
Fair
Value
$
$
10,188 $
7,173
79,362
174,263
130
7,302
22,043
35,681
336,142 $
365 $
61
347
2,733
5
96
23
86
3,716 $
(488 ) $
(516 )
(9,490 )
(11,700 )
—
(523 )
(1,678 )
(2,081 )
(26,476 ) $
10,065
6,718
70,219
165,296
135
6,875
20,388
33,686
313,382
Amortized
Cost
Unrealized
Gains
December 31, 2022
Unrealized
Losses
Fair
Value
OTTI
Losses
(1)
$
$
9,258 $
9,429
68,213
171,283
130
4,912
21,374
47,347
331,946 $
349 $
63
26
1,473
1
140
2
5
2,059 $
(501 ) $
(614 )
(12,015 )
(16,275 )
—
(622 )
(1,914 )
(3,926 )
(35,867 ) $
9,106 $
8,878
56,224
156,481
131
4,430
19,462
43,426
298,138 $
—
—
—
—
—
(709 )
—
—
(709 )
(1) Due to the adoption of the measurement of credit losses on financial instruments accounting standard, realized capital losses previously reported as OTTI write-downs are now presented as
credit losses; therefore OTTI is not presented in the 2023 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
53
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 by contractual maturity, are presented in the following table:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Securities not due at a single maturity date — primarily mortgage and
asset-backed
Total fixed maturities
December 31, 2023
Amortized
Cost
Fair
Value
$
$
7,754 $
37,576
74,512
144,102
72,198
336,142 $
7,670
36,830
71,313
129,902
67,667
313,382
Fixed maturities with a carrying value of $2,689 and $2,680 were on deposit with governmental authorities, as required by law at December 31,
2023 and 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 S&P or NAIC rating of NAIC 1 or NAIC 2. Investment grade securities comprised 96.0% and 95.1%
of the Company’s total fixed maturities portfolio at December 31, 2023 and 2022, respectively.
At December 31, 2023 and December 31, 2022, the Company had unfunded commitments to make investments in fixed maturity securities in the
amount of $0 and $1,290, respectively.
Mortgage Loans
The Company makes investments in commercial mortgage loans. The Company, along with other investors, owns a pro-rata share of each loan. The
Company participates in 35 such investment instruments with ownership shares ranging from 0.6% to 30.0% of the trust at December 31, 2023. The
Company owns a share of 311 mortgage loans with a loan average balance of $132 and a maximum exposure related to any single loan of $600. Mortgage
loan holdings are diversified by geography and property type as follows:
Property Type:
Retail
Office
Industrial
Mixed use
Apartments
Medical office
Other
Gross carrying value of mortgage loans
(1)
Credit loss allowance
Net carrying value of mortgage loans
December 31, 2023
December 31, 2022
Gross Carrying
Value
% of Total
Gross Carrying
Value
% of Total
12,812
10,635
7,476
4,798
2,077
2,423
886
41,107
(573 )
40,534
31.2 % $
25.9 %
18.2 %
11.7 %
5.0 %
5.9 %
2.1 %
100.0 %
$
13,866
11,115
8,138
5,249
2,796
3,053
1,136
45,353
(83 )
45,270
30.6 %
24.5 %
17.9 %
11.6 %
6.2 %
6.7 %
2.5 %
100.0 %
$
$
54
U.S. Region:
West South Central
East North Central
South Atlantic
West North Central
Mountain
Middle Atlantic
East South Central
New England
Pacific
Gross carrying value of mortgage loans
(1)
Credit loss allowance
Net carrying value of mortgage loans
December 31, 2023
December 31, 2022
Gross Carrying
Value
% of Total
Gross Carrying
Value
% of Total
$
$
10,038
12,184
8,046
2,328
2,560
1,986
3,519
—
446
41,107
(573 )
40,534
24.3 % $
29.6 %
19.6 %
5.7 %
6.2 %
4.8 %
8.7 %
0.0 %
1.1 %
100.0 %
$
11,608
12,320
8,815
2,871
2,824
2,310
3,661
34
910
45,353
(83 )
45,270
25.6 %
27.2 %
19.4 %
6.3 %
6.2 %
5.1 %
8.1 %
0.1 %
2.0 %
100.0 %
(1) Due to the adoption of the measurement of credit losses on financial instruments accounting standard, the valuation allowance in 2022 is now presented as an allowance for expected credit
losses in 2023.
During the years ended December 31, 2023 and 2022, $964 and $4,527 of new mortgage loans were purchased, respectively, which did not include
second lien mortgage loans. All taxes, assessments, or any amounts advanced were not included in the mortgage loan balances at December 31, 2023 and
2022. At December 31, 2023 and 2022, the Company had zero and 3 mortgage loans with a total carrying value of $0 and $692 that were in a restructured
status, respectively. There were no impairments for mortgage loans in 2023 and 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:
Beginning balance
Net increase in allowances for credit losses related to change in accounting standards (See Note 1)
Net increase (decrease) in allowances for credit losses
Ending balance
$
$
83 $
237
253
573 $
69
—
14
83
Year Ended December
31, 2023
Year Ended December
31, 2022
At December 31, 2023 and 2022 the Company had no mortgage loans that were on non-accrual status.
At December 31, 2023 and 2022, the Company had a commitment to make investments in mortgage loans in the amount of $3,734 and $2,575,
respectively.
Net Investment Income
The sources of net investment income are as follows:
Income from:
Fixed maturities
Policyholder loans
Mortgage loans
Cash, cash equivalents and restricted cash
Gross investment income
Investment expenses
Net investment income
55
Year Ended December 31,
2023
2022
$
$
15,155 $
365
2,312
144
17,976
(1,363 )
16,613 $
14,556
378
2,472
66
17,472
(1,436 )
16,036
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 (Losses) Gains on Investments
The sources of net investment gains (losses) are as follows:
Investment (losses) gains from sales:
Fixed maturities
Mortgage loans
Cash and cash equivalents
Gains and losses from sales
Valuation change of other invested assets - (decline) appreciation:
Change in allowance for credit losses
(1)
Total net (losses) gains on investments
Year Ended December 31,
2023
2022
$
$
(567 ) $
56
—
(511 )
(1,715 )
(281 )
(2,507 ) $
(364 )
(80 )
1
(443 )
572
(456 )
(327 )
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 a fixed maturity security impairment is calculated as the difference between amortized cost and the present value of
the expected cash flows of the security. The present value is determined using the best estimate of cash flows discounted at the effective rate implicit to the
security at the date of purchase or prior impairment. The methodology and assumptions for estimating the cash flows vary depending on the type of
security. For mortgage-backed and asset-backed securities, cash flow estimates, including prepayment assumptions, are based on data from widely accepted
third-party sources or internal estimates. In addition to prepayment assumptions, cash flow estimates vary based on assumptions regarding the underlying
collateral characteristics, expectations of delinquency and default rates, and structural support, including subordination and guarantees. If the present value
of the modeled expected cash flows equals or exceeds the amortized cost of a security, no credit loss exists. The non-credit component, determined as the
difference between the adjusted amortized cost basis and fair value, is recognized in other comprehensive (loss) income. The credit loss component of a
fixed maturity security impairment is calculated as the difference between amortized cost and the present value of the expected cash flows of the security.
The present value is determined using the best estimate of cash flows discounted at the effective rate implicit to the security at the date of purchase or prior
impairment. The methodology and assumptions for estimating the cash flows vary depending on the type of security. For mortgage-backed and asset-
backed securities, cash flow estimates, including prepayment assumptions, are based on data from widely accepted third-party sources or internal estimates.
In addition to prepayment assumptions, cash flow estimates vary based on assumptions regarding the underlying collateral characteristics, expectations of
delinquency and default rates, and structural support, including subordination and guarantees. If the Company does not expect to receive cash flows
sufficient to recover the entire amortized cost basis of the fixed maturity security, a credit loss allowance is recorded in earnings for the shortfall in
expected cash flows; however, the amortized cost, net of the credit loss allowance, may not be lower than the fair value of the security. If the present value
of the modeled expected cash flows equals or exceeds the amortized cost of a security, no credit loss exists. The non-credit component, determined as the
difference between the adjusted amortized cost basis and fair value, is recognized in other comprehensive (loss) income.
56
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 maturity securities is as follows:
Beginning allowance for credit loss balance
Additional credit loss allowance
Reduction of credit losses allowances related to securities sold during period
Ending allowance for credit loss balance
Unrealized Losses for Fixed Maturities
December 31,
2023
-
28
—
28
$
$
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:
December 31, 2023
Fixed maturities
U.S. government and agencies
U.S. agency mortgage-backed
State and political subdivisions
Corporate and miscellaneous
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Total fixed maturities
December 31, 2022
Fixed maturities
U.S. government and agencies
U.S. agency mortgage-backed
State and political subdivisions
Corporate and miscellaneous
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Total fixed maturities
12 months or less
Estimated
Fair Value
Gross
Unrealized
Losses
Longer than 12 months
Gross
Unrealized
Losses
Estimated
Fair Value
Total
Estimated
Fair Value
Gross
Unrealized
Losses
$
$
$
$
499 $
94
8,151
22,527
269
1,430
3,551
36,521 $
(1 ) $
—
(176 )
(1,871 )
(10 )
(53 )
(190 )
(2,301 ) $
2,732 $
4,879
45,628
66,482
3,029
17,582
26,644
166,976 $
3,231 $
(488 ) $
4,973
(515 )
53,779
(9,314 )
89,009
(9,829 )
3,298
(513 )
19,012
(1,625 )
30,195
(1,891 )
(24,175 ) $ 203,497 $
(489 )
(515 )
(9,490 )
(11,700 )
(523 )
(1,678 )
(2,081 )
(26,476 )
12 months or less
Estimated
Fair Value
Gross
Unrealized
Losses
Longer than 12 months
Gross
Unrealized
Losses
Estimated
Fair Value
Total
Estimated
Fair Value
Gross
Unrealized
Losses
2,722 $
5,297
38,252
94,461
3,286
16,218
20,465
180,701 $
(501 ) $
(578 )
(7,036 )
(13,479 )
(554 )
(1,611 )
(1,726 )
(25,485 ) $
— $
216
15,057
8,322
344
2,655
21,069
47,663 $
2,722 $
— $
5,513
(36 )
53,309
(4,979 )
102,783
(2,796 )
3,630
(68 )
18,873
(303 )
(2,200 )
41,534
(10,382 ) $ 228,364 $
(501 )
(614 )
(12,015 )
(16,275 )
(622 )
(1,914 )
(3,926 )
(35,867 )
The indicated gross unrealized losses in all fixed maturity categories were $26,476 and $35,867 at December 31, 2023 and 2022, respectively.
At as of December 31, 2023 and 2022, the Company did not have the intent to sell these investments, and it was not more likely than not that the
Company would be required to sell these investments before an anticipated recovery of value. The Company evaluated these investments for credit losses
at December 31, 2023. The Company considers many factors in evaluating whether the unrealized losses were credit related including, but not limited to,
the extent to which the fair value has been less than amortized cost, conditions related to the security, industry, or geographic area, payment structure of the
investment and the likelihood of the issuer’s ability to make contractual cashflows, defaults or other collectability concerns related to the issuer, changes in
the ratings assigned by a rating agency,
57
and other credit enhancements that affect the investment’s expected performance. The Company determined that the unrealized losses on these securities
were due to non-credit related factors at the evaluation date.
Information and concentrations related to fixed maturities in an unrealized loss position are included below. The tables below include the number of
fixed maturities in an unrealized loss position for greater than and less than 12 months and the percentage that were investment grade at December 31,
2023.
Fixed maturities
U.S. government and agencies
U.S. agency mortgage-backed
State and political subdivisions
Corporate and miscellaneous
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Gross unrealized losses
Gross Unrealized
Losses
$
$
(1 ) $
—
(176 )
(1,871 )
(10 )
(53 )
(190 )
(2,301 ) $
Impairment is
Less than
10% of
Amortized
Cost
Unrealized Losses 12 months or less
Impairment
is Between
10% and
20% of
Amortized
Cost
Impairment
is Greater
than 20% of
Amortized
Cost
Percent
Investment
Grade
(1 ) $
—
(176 )
(621 )
(10 )
(53 )
(114 )
(975 ) $
— $
—
—
(747 )
—
—
(76 )
(823 ) $
—
—
—
(502 )
—
—
—
(502 )
5
Total number of fixed maturities
154
127
22
Fixed maturities
U.S. government and agencies
U.S. agency mortgage-backed
State and political subdivisions
Corporate and miscellaneous
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Gross unrealized losses
Gross Unrealized
Losses
$
$
(488 ) $
(515 )
(9,314 )
(9,829 )
(513 )
(1,625 )
(1,891 )
(24,175 ) $
Impairment is
Less than
10% of
Amortized
Cost
Unrealized Losses greater than 12 months
Impairment
is Between
10% and
20% of
Amortized
Cost
Impairment
is Greater
than 20% of
Amortized
Cost
(62 ) $
(202 )
(601 )
(1,454 )
(47 )
(746 )
(871 )
(3,983 ) $
— $
(313 )
(3,391 )
(4,055 )
(336 )
(680 )
(883 )
(9,658 ) $
(426 )
—
(5,322 )
(4,320 )
(130 )
(198 )
(138 )
(10,534 )
100 %
0 %
100 %
82 %
17 %
100 %
100 %
100 %
100 %
100 %
86 %
90 %
100 %
97 %
Percent
Investment
Grade
Total number of fixed maturities
584
221
224
139
Gross unrealized losses by unrealized loss position and credit quality at December 31, 2023 are as follows:
(1) (2)
Fixed income securities with unrealized loss position less than or equal to 20% of
amortized cost, net
Fixed income securities with unrealized loss position greater than 20% of amortized cost,
net
Total unrealized losses
(3) (4)
Investment Grade
Below Investment
Grade
Total
$
$
14,902
$
539 $
15,441
10,618
25,520
$
417
956 $
11,035
26,476
(1) Below investment grade fixed income securities include $103 that have been in an unrealized loss position for less than twelve months.
(2) Related to securities with an unrealized loss position less than or equal to 20% of amortized cost, net, the degree of which suggests that these securities do not pose a high risk of having credit
losses.
58
(3) Below investment grade fixed income securities include $853 that have been in an unrealized loss position for a period of twelve or more consecutive months.
(4) Evaluated based on factors such as discounted cash flows and the financial condition and near-term and long-term prospects of the issue or issuer and were determined to have adequate
resources to fulfill contractual obligations.
Note 3—Deferred Policy Acquisition Costs
Policy acquisition costs deferred primarily consist of commissions on sales, policy underwriting and issuance costs, and variable sales and
marketing costs. Annually, the Company reviews the assumptions and experience underlying the expected gross margins for policies accounted for as
investment contracts, which may or may not result in the recognition of unlocking adjustments.
The deferred policy acquisition costs and changes are as follows:
Beginning balance
Acquisition costs deferred
Amortization
Ending balance
Note 4—Income Taxes
December 31,
December 31,
2023
2022
$
$
90,189 $
11,841
(13,954 )
88,076 $
95,715
12,917
(18,443 )
90,189
Provided below are income taxes based on the difference between the expected tax provision, applying the statutory tax rate (21%) to the actual tax
provision.
(Loss) income before income taxes
Statutory rate
Income tax (benefit) expense at statutory rate
Effect of:
Return to provision adjustments
Valuation allowance
Increase (decrease) in the valuation allowance related to return to provision adjustments
Increase in the valuation allowance - current year
Total increase in the valuation allowance
Other
Income tax (benefit) expense
The components of income tax (benefit) expense are as follows:
Income tax applicable to:
Current
Deferred (net of increase in allowance: 2023 - $2,559, 2022 - $3,301)
Ending balance
59
Year Ended December 31,
2023
2022
(10,852 ) $
21 %
(2,279 )
(22,568 )
21 %
(4,739 )
(1,198 )
(664 )
290
2,269
2,559
(41 )
(959 ) $
172
3,129
3,301
(6 )
(2,108 )
$
$
Year Ended December 31,
2023
2022
$
$
4,890 $
(5,849 )
(959 ) $
4,052
(6,160 )
(2,108 )
The components of the net deferred income tax assets are as follows:
Deferred tax assets:
Net operating loss carryforward
Reinsurance assets
Net unrealized investment losses
Policyholder dividend obligation
Policyholder dividend
Commission receivable, net
Incentive compensation
Other
Total deferred tax assets
Valuation allowance
Total deferred income tax assets
Deferred tax liabilities:
Life insurance reserves
Deferred policy acquisition cost
Intangible assets
Basis difference – investments
Fixed assets
Other
Total deferred tax liabilities
Deferred income tax assets, net
Year Ended December 31,
2023
2022
24,818 $
50,175
4,780
2,023
323
6,822
581
3,893
93,415
(26,637 )
66,778
25,753
4,948
344
593
2,507
237
34,382
32,396 $
23,490
48,717
7,100
1,998
259
6,813
378
2,902
91,657
(24,426 )
67,231
27,539
7,096
344
464
2,784
567
38,794
28,437
$
$
As of December 31, 2023, we had a 100% valuation allowance recorded against the deferred tax assets related to the non-life subgroup of our tax
return. The Company also maintains a valuation allowance of $718 and $1,066 against a portion of the unrealized investment losses at December 31, 2023
and 2022, respectively in the life group. In 2023, the Company established a full valuation allowance against the realized capital losses portion of the life
group deferred tax asset in the amount of $412. Valuation allowances are established because we determined that it is more likely than not that these assets
will not be recoverable. The recording of the valuation allowance not related to investment losses, increases our federal income tax expense which in turn
reduces our reported net income or increases our net loss as applicable. It is possible that some or all of these DTAs may not be realized unless we are able
to generate sufficient taxable income from our operations. If we do not generate sufficient taxable income in the future a valuation allowance to reduce our
DTAs may be required, which could materially increase our expenses in the period the allowance is recognized and materially adversely affect our results
of operations and statement of financial condition.
On December 22, 2017, the Tax Cut and Jobs Act Bill H.R.1 was enacted, which, among other things, allows Net Operating Losses (NOLs) to be
carried forward indefinitely; therefore, NOLs generated after December 31, 2017 are reflected in the table below under the caption no expiration. Internal
Revenue Code Section 382 (“Section 382”) limits how much of a loss carry-forward existing as of the date of an ownership change that can be used to
offset annual taxable income subsequent to the change of ownership. As a result of the IPO and Section 382, the Company will be restricted in its ability to
utilize loss carry-forwards. The annual limit is estimated to be approximately $3,100 . In 2023, no NOLs expired and there was a return to provision
adjustment related to non-life NOLs of ($400). These expiring NOLs have no impact on the Company’s results due to a full valuation allowance on these
NOLs. The Inflation Reduction Act of 2022 (“Act”), which contains several tax-related provisions, was signed into law in August 2022. The Act creates a
15% corporate alternative minimum tax (“CAMT”) on certain large corporations and an excise tax of 1% on stock repurchases by publicly traded U.S.
corporations, both effective after December 31, 2022. The Company has determined that it is not considered an “applicable corporation” under the rules of
CAMT.
60
The Company’s net operating loss carry-forwards are as follows:
Year net operating loss expires
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
No expiration
Life Sub-
Group
Non-Life
Sub-Group
Total
$
$
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
- $
1,229 $
5,249
5,057
3,061
1,708
8,121
5,361
2,539
1,099
13,527
5,311
5,267
4,266
56,385
118,180 $
1,229
5,249
5,057
3,061
1,708
8,121
5,361
2,539
1,099
13,527
5,311
5,267
4,266
56,385
118,180
The Company has no unrecognized tax benefits for the years ended December 31, 2023 and 2022 and the Company does not expect the
unrecognized tax benefits to increase in the next 12 months. The Company records penalties and interest related to unrecognized tax benefits within income
tax expense.
Note 5—Policy Liabilities
Future Policy Benefits and Claims
Future policy benefits and claims 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 $12,665 and
$13,118 at December 31, 2023 and 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 December 31, 2023 and 2022, is $10,014 and $10,097 respectively.
To the extent that unrealized gains on fixed maturity securities would result in a premium deficiency had those gains actually been realized, a
premium deficiency reserve is recorded. A liability of $629 and $470 is included as part of the liability for structured settlements with respect to this
deficiency at December 31, 2023 and 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 2.3% and 3.9% of the face value of total life insurance in-force at December 31, 2023 and 2022,
respectively.
Note 6—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. The reinsurance recoverable balances are stated net of allowances for credit losses. We have recorded claim amounts anticipated to
be uncollectible of $0.2 million in 2023 and $0.1 million in 2022, respectively.
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 at the initial sale date was nominal, however various income statement lines are impacted. See “Item 1 Reinsurance” in this form 10-K.
61
On July 18, 2023, the Liquidation Order of Scottish Re was approved by the Delaware Court specifying the effective date of the liquidation as
September 30, 2023. The Liquidation Order specifies that all reinsurance agreements of Scottish Re are cancelled effective September 30, 2023.
Accordingly, ceded future policy benefits of $657 were taken down as of the effective date of the order. Amounts recoverable on paid claims of $1.4
million and $1.1 million as of December 31, 2023 and 2022, respectively have been evaluated for any further credit losses and all amounts recorded are
expected to be collectible.
Reinsurance recoverables are as follows:
Ceded future policy benefits
Claims and other amounts recoverables
Ending balance
The reconciliation of direct premiums to net premiums is as follows:
Direct premiums
Assumed premiums
Ceded premiums
Net insurance premiums
December 31,
December 31,
2023
2022
$
$
198,973 $
39,625
238,598 $
173,904
40,958
214,862
Year Ended December 31,
2022
2023
174,600
181,638 $
45,637
35,871
(120,162 )
(120,670 )
100,075
96,839 $
$
$
The reconciliation of direct, assumed and ceded amounts for life, annuity, and health claim benefits is as follows:
Direct
Assumed
Ceded
Life, annuity, and health claim benefits
Year Ended December 31,
2023
2022
126,937 $
19,990
(79,253 )
67,674 $
139,083
20,459
(92,040 )
67,502
$
$
Net policy charges on universal life products were $178 and $181 for the year ended December 31, 2023 and 2022, respectively, and are included in
other income.
At December 31, 2023 and December 31, 2022 reserves related to fixed-rate annuity deposits assumed from a former affiliate company amounted to
approximately $62,665 and $69,070, respectively, and are included with policyholder account balances in the Consolidated Balance Sheets.
Note 7—Retirement and Executive Compensation Plans
The Company sponsors a defined contribution 401(k) plan covering substantially all employees. For the years ended December 31, 2023 and 2022,
the Company’s expenses were $608 and $712, respectively. These expenses were recorded as part of Operating costs and expenses in the Consolidated
Statements of Operations.
Note 8—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.
62
The assets and liabilities within the Closed Block are included in the Company’s consolidated financial statements on the same basis as other
accounts of the Company. The maximum future earnings and accumulated other comprehensive income to be recognized from Closed Block assets and
liabilities represent the estimated future Closed Block profits that will accrue to the Company and is calculated as the excess of Closed Block liabilities
over Closed Block assets. Included in Closed Block assets are $11,143 and $10,792 at December 31, 2023 and 2022, 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 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 policyholder dividend obligations should be recorded to reflect favorable Closed Block experience that has not yet
been reflected in the dividend scales. At December 31, 2023 and 2022, the Company recognized policyholder dividend obligations of $9,636 and $9,515,
respectively, resulting from the excess of actual cumulative earnings over the expected cumulative earnings and from accumulated net unrealized
investment gains that have arisen subsequent to the establishment of the Closed Block.
Information regarding the Closed Block liabilities (assets) designated to the Closed Block is as follows:
Closed Block Liabilities
Future policy benefits and claims
Policyholder account balances
Other policyholder liabilities
Policyholder dividend obligations
Other liabilities
Total Closed Block liabilities
Assets Designated to the Closed Block
Investments:
Fixed maturities - available-for-sale (amortized cost $42,506 and
$40,522, respectively)
Policyholder loans
Total investments
Premiums due and uncollected
Accrued investment income
Reinsurance recoverables
Deferred income tax assets, net
Total assets designated to the Closed Block
Excess of Closed Block assets over liabilities
Amounts included in accumulated other comprehensive income:
Unrealized investment loss (gains), net of income tax
Total amounts included in accumulated other comprehensive income
Maximum future earnings and accumulated other comprehensive income to
be recognized from Closed Block assets and liabilities (includes excess
assets of $11,143 and $10,792, respectively)
Information regarding the policyholder dividend obligations is as follows:
Policyholder Dividend Obligations
Beginning balance
Impact from earnings allocable to policyholder dividend obligations
Change in net unrealized investment gains (losses) allocated to policyholder
dividend obligations
Ending balance
63
$
December 31,
2023
December 31,
2022
29,144 $
6,492
5,207
9,636
2,068
52,547
39,678
1,234
40,912
81
484
14,739
4,100
60,316
7,769
(2,234 )
(2,234 )
29,382
6,731
5,298
9,515
586
51,512
36,625
1,132
37,757
1,852
457
13,885
4,263
58,214
6,702
(3,079 )
(3,079 )
$
(10,003 ) $
(9,781 )
December 31,
December 31,
2023
2022
$
$
9,515 $
121
—
9,636 $
12,669
(165 )
(2,989 )
9,515
Information regarding the Closed Block revenues and expenses is as follows:
Revenues
Net insurance premiums
Net investment income
Net Realized Investment Gains (Losses)
Total revenues
Benefits and expenses
Life and annuity benefits - including policyholder dividends
of $1,855 and $1,483, respectively
Interest credited to policyholder account balances
Operating costs and expenses
Total expenses
Revenues, net of expenses before provision for income tax
expense (benefit)
Income tax expense (benefit)
Revenues, net of expenses and provision for income tax
expense (benefit)
Year Ended December 31,
2023
2022
$
3,991 $
1,788
9
5,788
5,077
165
265
5,507
281
59
$
222 $
3,073
1,666
(1 )
4,738
4,994
169
(484 )
4,679
58
12
46
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 maturity securities portfolio by contractual maturity at
December 31, 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:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Securities not due at a single maturity date — primarily mortgage and asset-
backed
Total fixed maturities
Note 9—Regulatory Matters
Minimum Capital and Surplus Requirements
Amortized Cost
Fair Value
4,057 $
3,656
7,330
24,186
3,277
42,506 $
4,005
3,675
7,105
21,697
3,196
39,678
$
$
Fidelity Life is required to comply with the provisions of state insurance statutes in the jurisdictions in which it does business. These statutes include
minimum statutory capital and surplus requirements. At December 31, 2023, Fidelity Life exceeded the minimum statutory capital and surplus level of
$2,000 required by Illinois, its state of domicile.
Risk-Based Capital Requirements
The NAIC established a standard for assessing the solvency of insurance companies using a formula for determining each insurer’s risk-based
capital (RBC). At December 31, 2023, the RBC of the Company’s insurance subsidiary, Fidelity Life, exceeded the levels at which certain regulatory
corrective actions would be initiated.
Dividend Limitations
The maximum amount of dividends that can be paid by Illinois life insurance companies to shareholders without 30 days prior notice to the Director
of the IDOI is the greater of (i) statutory net income for the preceding year or (ii) 10% of statutory surplus as of the preceding year-end. However, under
State of Illinois insurance statutes, dividends may be paid only from surplus, excluding unrealized appreciation in value of investments without prior
approval. All dividends paid by Fidelity Life must be reported to the IDOI prior to payment.
64
Fidelity Life declared and paid $5,000 and zero dividends during the twelve months ended December 31, 2023 and 2022, respectively.
In connection with the approval of the Conversion by the Director, the Company agreed, for a period of twenty-four months following the
completion of the Conversion, to (i) seek the prior approval of the IDOI for any declaration of an ordinary dividend by Fidelity Life, and (ii) either maintain
$20,000 of the proceeds of the IPO at Vericity, Inc. or use all or a portion of that $20,000 to fund Company operations.
Statutory Accounting Practices
Fidelity Life prepares their statutory-basis financial statements in conformity with accounting practices prescribed or permitted by the IDOI. The
IDOI requires that insurance companies domiciled in Illinois prepare their statutory-basis financial statements in accordance with the NAIC’s Accounting
Practices and Procedures Manual, as modified by the IDOI. In addition, the IDOI has the right to permit other specific practices that may deviate from
prescribed practices.
Statutory Financial Information
The statutory capital and surplus and net income for Fidelity Life, as determined in accordance with statutory accounting practices prescribed or
permitted by the IDOI, at December 31, 2023 and 2022, and for the years ended December 31, 2023 and 2022, are as follows:
Statutory capital and surplus
Fidelity Life
Statutory net income (loss)
Fidelity Life
Note 10—Commitments and Contingencies
Leases
At December 31,
2023
2022
$
94,349 $
106,260
Year Ended December 31,
2023
2022
$
3,925 $
1,282
Minimum future operating lease payments, including lease payments for real estate, vehicles, computers and office equipment at December 31,
2023, are as follows:
Year
2024
2025
2026
2027
2028
2029
Total
$
$
588
281
240
247
254
116
1,726
Lease expense for the years ended December 31, 2023 and 2022 was $1,001 and $1,393, respectively.
Litigation
The Company is subject to legal and regulatory actions in the ordinary course of its business. Management does not believe such litigation will have
a material impact on the Company’s 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.
65
Note 11—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 maturities 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 maturity securities 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 investments are only included in the fair value hierarchy
disclosure when the investment is 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.
66
Recurring and Non-Recurring Fair Value Measurements
The Company’s assets and liabilities that are carried at fair value on a recurring and non-recurring basis, by fair value hierarchy level, are as follows:
December 31, 2023
Recurring fair value measurements
Financial instruments recorded as assets:
Fixed maturities
U.S. government and agencies
U.S. agency mortgage-backed
State and political subdivisions
Corporate and miscellaneous
Foreign government
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Total fixed maturities
Total recurring assets
December 31, 2022
Recurring fair value measurements
Financial instruments recorded as assets:
Fixed maturities
U.S. government and agencies
U.S. agency mortgage-backed
State and political subdivisions
Corporate and miscellaneous
Foreign government
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Total fixed maturities
Total recurring assets
Level 1
Level 2
Level 3
Total Fair Value
— $
—
—
2,258
—
—
—
—
2,258
2,258 $
10,065 $
6,718
69,726
136,688
135
6,875
20,388
30,428
281,023
281,023 $
— $
—
493
26,351
—
—
—
3,258
30,102
30,102 $
10,065
6,718
70,219
165,297
135
6,875
20,388
33,686
313,383
313,383
Level 1
Level 2
Level 3
Total Fair Value
— $
—
—
2,847
—
—
—
—
2,847
2,847 $
9,106 $
8,878
55,782
126,644
131
4,430
19,462
40,293
264,726
264,726 $
— $
—
442
26,990
—
—
—
3,133
30,565
30,565 $
9,106
8,878
56,224
156,481
131
4,430
19,462
43,426
298,138
298,138
$
$
$
$
Summary of Significant Valuation Techniques for Assets and Liabilities on a Recurring Basis
Level 1 securities include preferred stocks classified as fixed maturities that are valued based on quoted market prices for identical assets.
All the fair values of the Company’s fixed maturities within Level 2 are based on prices obtained from independent pricing services. All of the
Company’s prices for each security are generally sourced from multiple pricing vendors, and a vendor hierarchy is maintained by asset type and region of
the world, based on historical pricing experience and vendor expertise. The Company ultimately uses the price from the pricing service highest in the
vendor hierarchy based on the respective asset type and region. For fixed maturities that do not trade on a daily basis, the pricing services prepare estimates
of fair value measurements using their pricing applications which incorporate a variety of inputs including, but not limited to, benchmark yields, reported
trades, broker/dealer quotes, issuer spreads, and U.S. Treasury curves. Specifically, for asset-backed securities, key inputs include prepayment and default
projections based on past performance of the underlying collateral and current market data. Securities with validated quotes from pricing services are
reflected within Level 2 of the fair value hierarchy, as they generally are based on observable pricing for similar assets or other market significant
observable inputs.
67
Level 3 fair value classification consists of investments in structured securities and privately placed 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
December 31,
2023
$
442
$
—
$
50
$
—
$
—
$
—
$
—
$
492
26,991
3,133
30,566
$
$
(38 )
106
68
$
74
182
306
$
2,982
658
3,640
$
(4,030 )
(820 )
(4,850 ) $
—
—
—
$
372
—
372
$
26,351
3,259
30,102
Total gains (losses) included in:
Balance at
January 1, 2022
Net Income
OCI
Purchases
Sales
Settlements
Net
Transfers
Balance at
December 31,
2022
$
498
$
—
$
(56 ) $
—
$
—
$
—
$
—
$
442
24,740
2,838
28,076
$
$
2
(122 )
(120 ) $
(398 )
(325 )
(779 ) $
3,198
1,907
5,105
$
(2,582 )
(1,260 )
(3,842 ) $
1,468
—
1,468
$
563
95
658
$
26,991
3,133
30,566
Financial Assets
Fixed maturities
State and political
subdivision
Corporate and
miscellaneous
Asset-backed
Total assets
Financial Assets
Fixed maturities
State and political
subdivisions
Corporate and
miscellaneous
Asset-backed
Total assets
There were 3 transfers from Level 2 to Level 3 and 1 transfer from Level 3 to Level 2 in 2023. In 2022, there were 2 transfers from Level 3 to Level
2 and 6 transfers from Level 2 to Level 3.
68
Financial Instruments not Measured at Fair Value
The carrying amount and estimated fair values of the Company’s financial instruments that are not measured at fair value on the Consolidated
Balance Sheets are as follows:
December 31, 2023
Financial instruments recorded as assets:
Carrying Value
Level 1
Level 2
Level 3
Total
Estimated Fair Value
Mortgage loans
Policyholder loans
$
$
40,534 $
7,149 $
Financial instruments recorded as liabilities:
Future policy benefits, excluding term life
reserves
Long/short-term debt
Policyholder account balances
$
$
$
16,307 $
49,010 $
70,726 $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
37,005 $
8,234 $
15,319 $
51,927 $
65,881 $
37,005
8,234
15,319
51,927
65,881
December 31, 2022
Financial instruments recorded as assets:
Mortgage loans
Policyholder loans
Financial instruments recorded
as liabilities:
Future policy benefits, excluding term
life reserves
Long/short-term debt
Policyholder account balances
$
$
$
$
$
Carrying Value
Level 1
Level 2
Level 3
Total
Estimated Fair Value
45,270 $
6,699 $
16,555 $
37,189 $
77,443 $
— $
— $
— $
— $
— $
— $
— $
41,622 $
7,722 $
41,622
7,722
— $
— $
— $
15,192 $
36,763 $
70,157 $
15,192
36,763
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 $1,098 and $1,952 of second and
mezzanine mortgages carried at cost which fair value is not measurable at December 31, 2023 and 2022, respectively.
Policyholder Loans—Fair value of policyholder loans are estimated using discounted cash flows using risk-free interest rates with no adjustment
for borrower credit risk as these loans are fully collateralized by the cash value of the underlying insurance policy.
Future Policy Benefits and Policyholder Account Balances—For deposit liabilities with interest rate guarantees greater than one year or with
defined maturities, the fair value was estimated by calculating an average present value of expected cash flows over a broad range of interest rate scenarios
using the current market risk-free interest rates adjusted for spreads required for publicly traded bonds issued by comparably rated insurers. For deposit
liabilities with interest rate guarantees of less than one year, the fair value was based on the amount payable on demand at the reporting date.
Long 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 Consolidated Balance Sheets has been divided into short and long-
term based upon expected maturity dates.
69
Note 12—Long and Short-Term Debt
Commission Financing
In 2022, Efinancial entered into a new commission financing arrangement and is taking new advances on this financing arrangement. Efinancial's
ability to receive advances under this agreement will terminate when the aggregate amount advanced under the arrangement equals or exceeds $46,000. At
December 31, 2023 and December 31, 2022, we had a net advance of $40,393 and $31,100 respectively, under this arrangement. At December 31, 2023,
the Company expects to pay back the aggregate amounts as presented in the following table.
Due in one year or less
Due after one year through two years
Due after two years through three years
Due after three years through four years
Due after four years through five years
Due after five years
Less discount
Total long/short-term debt
Federal Home Loan Bank of Chicago
December 31, 2023
9,249
6,632
6,175
5,721
5,221
40,252
(24,240 )
49,010
$
$
The Company is a member of the FHLBC. As a member, the Company is able to borrow on a collateralized basis from FHLBC which can be used
as an alternative source of liquidity. The FHLBC membership requires the Company to own member stock. The Company held $270 and $180 of FHLBC
common stock at December 31, 2023 and December 31, 2022, respectively. The Company's ability to borrow under this facility is subject to the FHLBC's
discretion and requires the availability of qualifying assets. In 2023 and 2022, the Company borrowed and repaid $21,000 and $4,000, respectively.
FHLBC common stock is classified in Other Invested Assets in the Consolidated Balance Sheet. As of December 31, 2023 and December 31, 2022, the
Company had not pledged any assets and there were no outstanding borrowings.
Note 13—Accumulated Other Comprehensive Income (Loss)
Changes in Accumulated Other Comprehensive (Loss) Income, net of taxes are as follows:
Balance at January 1, 2023
Other comprehensive (loss) income
Unrealized holding gains (losses) from changes in the market value of securities
Impact on Policy benefit liabilities of changes in market value of securities
Change in net unrealized investment (losses) gains allocated to policyholder dividend obligations
Income tax (expense) benefit
Other comprehensive (loss) income, net of tax
Balance at December 31, 2023
70
Net Unrealized
Gains (Losses)
on Investments
with Credit Losses
Net Unrealized
Gains (Losses)
on Other
Investments
Total
$
362 $
(30,534 ) $
(30,172 )
—
—
—
—
—
362 $
11,047
(159 )
—
(1,938 )
8,950
(21,584 ) $
11,047
(159 )
—
(1,938 )
8,950
(21,222 )
$
Balance at January 1, 2022
Other comprehensive (loss) income
Unrealized holding (losses) gains from changes in the market value of securities
Impact on Policy benefit liabilities of changes in market value of securities
Change in net unrealized investment gains (losses) allocated to policyholder dividend obligations
Income tax benefit (expense)
Other comprehensive (loss) income, net of tax
Balance at December 31, 2022
Net Unrealized
Gains (Losses)
on Investments
with OTTI Losses
Net Unrealized
Gains (Losses)
on Other
Investments
Total
$
362
$
10,567 $
10,929
—
—
—
—
—
362
$
(59,600 )
5,934
2,989
9,576
(41,101 )
(30,534 ) $
(59,600 )
5,934
2,989
9,576
(41,101 )
(30,172 )
$
(1) Due to the adoption of the measurement of credit losses on financial instruments accounting standard, realized capital losses previously reported as OTTI write-downs are now presented as
credit losses; therefore OTTI is not presented in the 2023 table above.
Note 14—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 Direct Life, Closed Block, and Assumed Life and Annuities. Direct Life and
the Closed Block are distinct operations; the assumed business and the small amount of structured settlements are all blocks in run-off 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 certain expenses that are corporate expenses or that will benefit the overall organization and are not
allocated to a segment.
All intercompany accounts and transactions have been eliminated in consolidation, including any profit or loss from the sale of Insurance Segment
products through the Agency Segment.
The segment results are as follows:
Net insurance premiums
Net investment income
Net realized investment
gains (losses)
Earned commissions
Other income
(1)
Total revenues
Life, annuity, and health
claim benefits
Operating costs and
expenses
Amortization of deferred
policy
acquisition costs
Total benefits and
expenses
(Loss) income before
income tax
Year Ended December 31, 2023
Year Ended December 31, 2022
Insurance
Agency
Corporate &
Other
Total
Consolidated
Insurance
Agency
Corporate &
Other
Total
Consolidated
$
96,839
$
—
$
—
$
96,839
$
100,075
$
—
$
—
$
16,305
(2,143 )
—
1,104
112,105
—
—
60,282
5,579
65,861
308
16,613
15,556
(364 )
(345 )
—
(401 )
(2,507 )
(590 )
59,937
6,683
177,565
—
604
115,645
—
—
43,063
4,890
47,953
480
263
(429 )
—
314
70,312
—
—
70,312
70,282
—
—
31,341
64,417
8,393
104,151
34,572
56,648
6,535
100,075
16,036
(327 )
42,634
5,494
163,912
70,282
97,755
13,954
—
—
13,954
18,443
—
—
18,443
115,607
64,417
8,393
188,417
123,297
56,648
6,535
186,480
$
(3,502 ) $
1,444
$
(8,794 ) $
(10,852 ) $
(7,652 ) $
(8,695 ) $
(6,221 ) $
(22,568 )
71
Investments and cash
Commissions and agent balances
Deferred policy acquisition costs
Intangible assets
Reinsurance recoverables net
Deferred income tax assets, net
Other
Total assets
$
December 31, 2023
December 31, 2022
Insurance
Agency
Corporate
& Other
Total
Consolidated
Insurance
Agency
Corporate
& Other
Total
Consolidated
$
367,746
$
643
$
3,084
$
371,473
$
358,620
$
1,094
$
3,862
$
363,576
8,471
88,076
—
238,598
19,195
27,623
749,709
45,023
—
1,635
—
—
9,009
56,310
$
$
—
—
—
—
13,201
514
16,799
$
53,494
88,076
1,635
238,598
32,396
37,146
822,818
$
4,751
90,189
—
214,862
13,489
26,800
708,711
30,015
—
1,635
—
—
5,869
38,613
$
$
—
—
—
—
14,948
3,944
22,754
$
34,766
90,189
1,635
214,862
28,437
36,613
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 15—Quarterly Financial Information
As a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and Item 10(f)(1) of Regulation S-
K, the Company has elected to comply with certain scaled disclosure reporting obligations, and therefore is not required to provide the information required
by Item 503(c) of Regulation S-K.
Note 16—Subsequent Events
Management has evaluated subsequent events up to and including April 1, 2024, the date these Consolidated Financial Statements were issued and
determined there were no reportable subsequent events.
72
Vericity, Inc.
Schedule I
Summary of Investments Other Than Investments in Related Parties
As of December 31, 2023
(dollars in thousands)
Type of Investment
Fixed maturities:
Bonds:
U.S. government and agencies
U.S. agency mortgage-backed
State and political subdivisions
Corporate and miscellaneous
Foreign government
Residential mortgage-backed securities
Commercial mortgage-backed securities
Asset backed securities
Total fixed maturity securities
Mortgage loans
Policy loans
Other invested assets
Total investments
Cost / Amortized
Cost
Fair Value
Balance Sheet
$
$
10,188 $
7,173
79,362
174,263
130
7,302
22,043
35,681
336,142
40,534
7,149
2,966
386,791 $
10,065 $
6,718
70,219
165,296
135
6,875
20,388
33,686
313,382
37,005
8,234
2,364
360,985 $
10,065
6,718
70,219
165,296
135
6,875
20,388
33,686
313,382
40,534
7,149
2,364
363,429
73
Vericity, Inc.
Schedule II
Condensed Financial Information of Registrant (Parent Company) Statement of Operations
As of and for the Years Ended December 31, 2023 and 2022
(dollars in thousands)
For the Years Ended December 31,
Revenues
Net investment income and (losses) gains
Total revenues
Expenses
Operating costs and expenses
Total expenses
(Loss) Income before income taxes
Income tax (benefit) expense
Net (loss) income before equity in net loss of subsidiary
Equity in net (loss) of subsidiary
Net (loss) income
Equity in other comprehensive income of subsidiary
Total comprehensive (loss) income
2023
2022
(56 ) $
(56 )
7,853
7,853
(7,909 )
(607 )
(7,302 )
(2,591 )
(9,893 )
8,950
(943 ) $
786
786
5,650
5,650
(4,864 )
(298 )
(4,566 )
(15,894 )
(20,460 )
(41,101 )
(61,561 )
$
$
See footnotes to the condensed financial statements.
74
Vericity, Inc.
Schedule II (Continued)
Condensed Financial Information of Registrant (Parent Company) Statement of Financial Position
(dollars in thousands)
For the Years Ended December 31,
Assets
Investment in subsidiaries
Fixed maturities - available-for-sales - at fair value (amortized cost; $2,871 and $2,563)
Other invested assets
Cash, cash equivalents and restricted cash
Inter-company receivables
Current income tax receivable
Other assets
Total assets
Liabilities and Shareholders' Equity
Liabilities:
Other liabilities
Total liabilities
Shareholders' Equity
Common stock, $.001 par value, 30,000,000 shares authorized, 14,875,000 shares, issued and outstanding
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income
Total shareholders' equity
Total liabilities and shareholders' equity
See footnotes to the condensed financial statements.
2023
2022
104,889 $
2,871
-
153
301
2,085
514
110,813
600
600
15
39,840
91,580
(21,222 )
110,213
110,813 $
98,168
2,563
818
419
8,433
1,477
635
112,513
1,170
1,170
15
39,840
101,660
(30,172 )
111,343
112,513
$
$
75
Vericity, Inc.
Schedule II (Continued)
Condensed Financial Information of Registrant (Parent Company) Statement of Cash Flows
(dollars in thousands)
For the Years Ended December 31,
Cash flows from operating activities
Net (loss) income
Adjustments to reconcile net income to net cash provided (used) by operations:
2023
2022
$
(9,893 ) $
(20,460 )
Equity in earnings of subsidiaries
Net investment (gains) losses
Accretion of bond discount
Change in:
Due to subsidiaries
Accrued investment income
Other liabilities
Other assets
Income tax
Net cash used by operating activities
Cash flows from investing activities
Purchases of fixed maturities
Sales of other invested assets
Sales of fixed maturities
Net cash provided (used) by investing activities
Cash flows from financing activities
Net cash flows provided by financing
Net (decrease) increase in cash and cash equivalents
Cash, cash equivalents and restricted cash - beginning of period
Cash, cash equivalents and restricted cash - end of period
2,591
364
(308 )
7,582
—
(570 )
121
(607 )
(720 )
—
454
—
454
—
(266 )
419
153 $
$
15,894
(263 )
(462 )
(1,338 )
—
(874 )
120
136
(7,247 )
(228 )
—
4,010
3,782
—
(3,465 )
3,884
419
See footnotes to the condensed financial statements.
76
Vericity, Inc.
Schedule II (Continued)
Notes to Condensed Financial Information of Registrant
Note 1—General
Pursuant to rules and regulations of the SEC, the unconsolidated condensed financial statements of the Parent Company do not reflect all of the
information and notes normally included with financial statements prepared in accordance with GAAP. Therefore, these condensed financial statements of
the Registrant should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8.
77
Vericity, Inc.
Schedule III
Supplementary Insurance Information
As of and for the Years Ended December 31, 2023 and 2022
(dollars in thousands)
Segment
2023
Insurance
Agency
Corporate & other
Total
2022
Insurance
Agency
Corporate & other
Total
$
$
$
$
Deferred
Policy
Acquisition
Costs
Future
Policy
Benefits
Losses and
Expenses
Other
Policy
Claims and
Benefits
Payable
Net Insurance
Premiums
Net
Investment
Income
Benefits,
Claims,
Losses and
Settlement
Expenses
Amortization
of DAC
Other
Operating
Expenses
$
88,076
—
—
88,076 $
$
502,464
—
—
502,464 $
$
121,812
—
—
121,812 $
$
96,839
—
—
96,839 $
90,189
$
—
—
90,189 $
453,763
$
—
—
453,763 $
134,444
$
—
—
134,444 $
100,075
$
—
—
100,075 $
$
16,305
—
308
16,613 $
15,556
$
—
480
16,036 $
$
70,312
—
—
70,312 $
70,282
$
—
—
70,282 $
$
13,954
—
—
13,954 $
18,443
$
—
—
18,443 $
31,341
64,417
8,393
104,151
34,572
56,648
6,535
97,755
78
Vericity, Inc.
Schedule IV
Reinsurance
As of and for the Years Ended December 31, 2023 and 2022
(dollars in thousands)
2023
Life insurance face amount in-force (millions)
Premiums
Life insurance
Accident and health
Total premiums
2022
Life insurance face amount in-force (millions)
Premiums
Life insurance
Accident and health
Total premiums
Gross
Amount
Ceded to
Other
Companies
Assumed
From Other
Companies
Net
Amount
Percentage
of Amount
Assumed
to Net
$
$
$
$
$
$
40,967 $
36,415 $
2,564 $
7,116
36.0 %
181,035 $
603
181,638 $
120,537 $
133
120,670 $
35,871 $
—
35,871 $
96,369
470
96,839
37.2 %
0.0 %
37.0 %
35,139 $
33,815 $
3,188 $
4,512
70.7 %
173,944 $
656
174,600 $
120,015 $
147
120,162 $
45,637 $
—
45,637 $
99,566
509
100,075
45.8 %
0.0 %
45.6 %
79
2023
Allowance for losses on commercial mortgage
Allowance for uncollectible receivables
Valuation allowance on deferred tax asset
2022
Allowance for losses on commercial mortgage
Allowance for uncollectible receivables
Valuation allowance on deferred tax asset
Vericity, Inc.
Schedule V
Valuation and Qualifying Accounts
For the Years Ended December 31, 2023 and 2022
(dollars in thousands)
Additions
Balance at
Beginning
of Period
Charged to
Costs and
Expenses
Other
Deductions
Balance at
End of
Period
253 $
39
2,559
2,851 $
14 $
—
3,301
3,315 $
237 $
—
(348 )
(111 ) $
— $
—
1,066
1,066 $
— $
—
—
— $
— $
117
—
117 $
573
503
26,637
27,713
83
464
24,426
24,973
$
$
$
$
83 $
464
24,426
24,973 $
69 $
581
20,059
20,709 $
80
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Under the supervision and
with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, the principal
executive officer and the principal financial officer concluded that our disclosure controls and procedures are effective in providing reasonable assurance
that material information required to be disclosed in our reports filed with or submitted to the SEC under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods specified by the Securities Exchange Act and made known to management, including the
principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2023 based on the criteria related to internal
control over financial reporting described in "Internal Control - Integrated Framework (2013)" issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation, management concluded that our internal control over financial reporting was effective as of December 31,
2023.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(d) or 15d-15(d) of the Exchange Act)
during 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
Not applicable
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable
81
Item 10. Directors, Executive Officers and Corporate Governance.
The table below provides information of our directors and executive officers as of March 30, 2024.
Age
55
56
36
77
61
65
68
41
53
41
65
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Position
Director and Chairman
Director
Director
Director
Director
Director
Chief Executive Officer, President and Director
Executive Vice President, Chief Marketing Officer
Executive Vice President, General Counsel and Corporate Secretary
Executive Vice President, Chief Data Officer & Chief Technology Officer
Executive Vice President of Vericity, President and Chief Operating Officer of Fidelity Life
Executive Vice President, Chief Financial Officer and Treasurer
Name
Eric Rahe
Neil Ashe
Calvin Dong
Richard A. Hemmings
Scott Perry
Laura R. Zimmerman
James E. Hohmann
Melissa Balsan
John Buchanan
David R. Drollette
James C. Harkensee
Chris S. Kim
Directors
Our directors were initially chosen based upon their individual skills, experiences and qualifications which collectively provide a balanced level of
expertise to the Company. Additionally, we believe that each of our directors possess high professional and personal ethics and values, which are attributes
that are important characteristics to the Company.
Eric Rahe has served as Vericity’s Chairman since August 7, 2019. Mr. Rahe has served as a Managing Director of J.C. Flowers & Co. LLC since
2014, a leading private investment firm dedicated to investing globally in the financial services industry and serves as a member of the firm’s Management
Committee. From 2008 to 2014, Mr. Rahe was a Managing Director at Clayton, Dubilier & Rice where he established and led the firm’s financial services
practice. Previously, he was a senior investment professional at the hedge fund SAB Capital, and before that a Partner at Capital Z Partners, the financial
services focused private equity firm. Mr. Rahe began his career at Donaldson, Lufkin & Jenrette. Mr. Rahe serves on the Boards of Directors of ELMC
Group, LLC.
He received an A.B. in Economics from Harvard College, where he graduated magna cum laude, and an M.B.A. from Harvard Business School.
Mr. Rahe was selected to serve on our Board of Directors because of his experience in the insurance and financial services industries. Mr. Rahe has
been investing in the insurance industry for over 25 years and has served on the board of directors of a number of insurance companies.
Richard A. Hemmings has served as a director of Vericity since 2013 and served as the Chairman of the Board of Directors of Members Mutual
from its formation in 2007 until its conversion in 2019. From 2007 until 2014, Mr. Hemmings also served as the President and Chief Executive Officer of
Members Mutual. Mr. Hemmings also served as the Chairman of the Board of Directors and Chief Executive Officer (and prior to 2012, President) of
Fidelity Life, positions held by him from 2005 to 2014. Mr. Hemmings became a director of Fidelity Life in 2002. Prior to joining Fidelity Life in 2005,
Mr. Hemmings was a partner in the Chicago law firm of Lord, Bissell & Brook LLP and was associated with the firm for 25 years.
Mr. Hemmings was selected to serve on our Board of Directors because of his experience in the life insurance industry; his knowledge of the legal
and regulatory matters affecting our operations; and his executive experience with Members Mutual and Fidelity Life.
James E. Hohmann has served as a director, Chief Executive Officer and President of Vericity since September 2014 and served as a director and
Chief Executive Officer of Vericity from September 2014 until its conversion in 2019. For approximately two years prior thereto, Mr. Hohmann worked as
a private consultant in the life insurance industry, including providing consulting services for Members Mutual. From April 2009 until June 2012, Mr.
Hohmann served as a director, President, and Chief Executive Officer of FBL Financial Group, an individual life insurance and annuity products company.
From January 2007 until January 2009, Mr. Hohmann was an executive officer of Allstate Corporation with accountabilities as President and Chief
Executive Officer of Allstate Financial. From December 2004 until December 2006, Mr. Hohmann was President and Chief Operating Officer of Conseco,
Inc. Earlier, he served as President and Chief Executive Officer of a newly formed XL Life and Annuity business at XL Capital, was Chief Actuary and
then
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President of the Financial Institutions business of Zurich (Kemper), and worked for nearly 13 years as a management consultant, first for KPMG Peat
Marwick, followed by Tillinghast/Towers Perrin (now Willis Towers Watson) where he was Managing Principal of the Chicago Life Practice. Effective
March 22, 2022, Mr. Hohmann reassumed the President and Chief Operating Officer role at eFinancial, a role he previously had prior to Mr. Campbell’s
arrival in 2017.
Mr. Hohmann is a member of the board of directors of Bankers Trust (non-public) and is Chairman of MIB Group Inc., a life insurance industry
membership organization. He also serves on the ACLI Forum 500 board of directors. He has previously served as a director of the Board of Governors for
the Property Casualty Insurance Association of America and is a former member of the board of directors of American Council of Life Insurers. Mr.
Hohmann is a Fellow of the Society of Actuaries and a Member of the American Academy of Actuaries.
Mr. Hohmann was selected to serve on our Board of Directors because of his executive leadership experience, his expertise in insurance and
financial services, and his actuarial background.
Calvin Dong has served as a director of Vericity since August 7, 2019. He is a Vice President at J.C. Flowers & Co. LLC, where he has been
employed since 2013. Prior to joining J.C. Flowers & Co. LLC, Mr. Dong was a member of the Financial Institutions Group at Barclays Investment Bank
in New York for three years, focusing on mergers and acquisitions and capital raising transactions in the insurance sector.
Mr. Dong received a B.S. (Honors) in Finance and Accounting with High Distinction from the Kelley School of Business, Indiana University.
Mr. Dong was selected to serve on our Board of Directors because of his experience in the insurance and financial services industries. Mr. Dong has
over 11 years of experience as an investor and banker to the life insurance industry.
Scott Perry has served as a director of Vericity since August 7, 2019. He joined AmeriLife Group Holdings as Chief Executive Officer in December
2016. AmeriLife is a distributor of annuity, life, and health insurance products and is a portfolio company of a fund advised by Thomas H. Lee Partners,
L.P. He was previously the Chief Business Officer of CNO Financial Group, Inc., (formerly, Conseco, Inc.), where he oversaw the operations of Bankers
Life, Colonial Penn and Washington National, from 2009 until 2016. Prior to that, Mr. Perry served as the President of Bankers Life from 2002 until 2009.
Before joining Bankers Life, Mr. Perry worked for 12 years in sales, marketing, and management roles at Golden Rule, Anthem Blue Cross Blue Shield
and Premera Blue Cross. Earlier in his career, he advised healthcare payers and providers on strategies to improve operational and financial performance
with the Deloitte & Touche Integrated Health Care Group.
Mr. Perry has served on the boards of LL Global (LIMRA) and the American College. He also served as a board member and Chair of the Greater
Illinois chapter of the Alzheimer’s Association.
Mr. Perry was selected to serve on our Board of Directors because of his experience in the insurance industry. Mr. Perry has over 30 years of
experience in the life insurance industry. As Chief Executive Officer of AmeriLife and former President of Bankers Life, Chief Business Officer of CNO,
he brings particular expertise in the distribution of a wide variety of life and health products across various distribution channels.
Neil Ashe has served as a director of Vericity since August 7, 2019. He is the Chief Executive officer of Acuity Brands which is a global technology
manufacturer, driving an innovative and comprehensive portfolio of lighting products, controls, software, and services. Mr. Ashe also serves as the Chief
Executive officer of Faster Horses LLC, which invests in, operates and advises companies that are embracing the power of digital to grow and change their
businesses. Mr. Ashe has served in this position since 2017. From 2012 to 2017, Mr. Ashe was the President and Chief Executive Officer of Global
eCommerce and Technology for Wal-Mart Stores, Inc. Mr. Ashe was with CNET Networks (NASDAQ: CNET) from 2002 to 2008, having been appointed
as Chief Executive Officer in 2006, and, subsequently, the President of CBS Interactive from 2008 until 2011, following the sale of CNET to CBS. He has
served on the boards of directors of numerous companies, including CNET and AMC Networks (NASDAQ: AMCX), and was a member of the
Georgetown University Board of Regents.
Mr. Ashe has an M.B.A. from the Harvard Business School and a B.S. in Business Administration from Georgetown University.
Mr. Ashe was selected to serve on our Board of Directors because of his experience helping companies use and adopt technology to grow their
businesses. Through his experience running several leading internet businesses, Mr. Ashe brings a breadth of experience that will be germane to the
Company’s internet agency, Efinancial.
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Laura R. Zimmerman served as Executive Vice President and Chief Marketing Officer of Vericity from February 2016 to January 2023. Ms.
Zimmerman served as Executive Vice President and Chief Marketing Officer of Members Mutual from February 2016 until its conversion in 2019. Prior
thereto, Ms. Zimmerman served as Vice President, Chief Marketing Officer, Group Worksite, at The Guardian Life Insurance Company of America from
July 2014 to February 2016, where she led marketing and enrollment services for the employee benefits division. Prior thereto, Ms. Zimmerman served as
the Managing Director at Bridgestar Solutions, LLC from July 2013 to June 2014. Prior thereto, Ms. Zimmerman served as Senior Vice President for Aon
Hewitt from November 2011 to June 2012, where she led marketing and advertising strategy. Before joining Aon Hewitt, Ms. Zimmerman served as
Managing Director, Head of Marketing and Product at Legg Mason Global Asset Management from June 2010 to June 2011. Prior thereto, Ms.
Zimmerman served in various positions during a thirteen-year career at Allstate Insurance Company. Among other positions at Allstate, Ms. Zimmerman
served as Chief Strategy Officer for Allstate’s financial services division. Ms. Zimmerman earned her bachelor's degree from Dartmouth College and her
MBA from the Kellogg School of Management at Northwestern University.
Ms. Zimmerman was selected to serve on our Board of Directors due to her extensive marketing and leadership experience, her insurance industry
knowledge and her familiarity with the operations of the Company.
Executive Officers
Set forth below is biographical information for our executive officers (except for Mr. Hohmann, whose biographical information is set forth above):
James C. Harkensee has served as Executive Vice President of Vericity since its conversion in 2019 and as President and Chief Operating Officer of
Fidelity Life since November 2012. From July 1, 2013 to August 4, 2014, Mr. Harkensee served as Interim Chief Financial Officer of Members Mutual.
Prior to that, Mr. Harkensee served in various capacities at Fidelity Life, including most recently as Vice President of Product and Corporate Development
and prior to that as President of America Direct Insurance Agency, Inc., a subsidiary of Fidelity Life, which he joined in 2005. He was formerly President
of Zurich Direct, a direct marketing insurance agency. Mr. Harkensee began his career at Bankers Life & Casualty in 1980, later joining Zurich Life, where
he was promoted to Chief Actuary. Mr. Harkensee also serves as Executive Vice President of Vericity. He is a Fellow of the Society of Actuaries.
Chris S. Kim has served as Chief Financial Officer of Vericity since August 2014 and served as Chief Financial Officer of Members Mutual from
August 2014 until its conversion in 2019. He has served as Executive Vice President of Vericity since its conversion in 2019. Prior thereto, Mr. Kim served
as Chief Accounting Officer of Members Mutual since June 2013. Mr. Kim has over 20 years of experience in public accounting and controllership with a
focus on property and casualty and life insurers. He has extensive experience in advising public companies on accounting and financial reporting matters
related to capital raising activities and advising clients on complex accounting matters. Mr. Kim also serves as Executive Vice President of Vericity. Prior to
joining Members Mutual, he was employed by PricewaterhouseCoopers LLC for a total of seventeen years within the audit and transaction services
practice in Kansas City, Chicago, and New York, from 1995-2002 and again from 2004-2013. From 2002-2004, Mr. Kim held the position of Assistant
Controller with Employers Reinsurance Corporation, a subsidiary of GE Capital.
John Buchanan has served as Executive Vice President, General Counsel and Corporate Secretary of Vericity since February, 2016. Mr. Buchanan
served as Executive Vice President, General Counsel and Corporate Secretary of Members Mutual from February 2016 until its conversion in 2019. Prior
thereto, from 1995 to February 2016, Mr. Buchanan served in various legal roles during a twenty-year career at Allstate Insurance Company most recently
as Chief Counsel supporting Allstate’s agency operations from July 2014 to February 2016, and prior to that as Corporate Counsel supporting direct sales
from July 2009 until July 2014. Among other positions at Allstate, Mr. Buchanan led several legal teams within Allstate’s P&C and life insurance
operations, including acting as lead counsel for Allstate Life of New York. He also served as lead counsel to Allstate’s Chief Marketing Officer and Lead
Counsel to Allstate’s Eastern Region President. Mr. Buchanan served as Secretary on NJ Life and Health Guaranty Fund boards. Mr. Buchanan began his
career as a trial attorney with dozens of jury and bench trials on insurance matters.
David R. Drollette has served as Executive Vice President and Chief Data Officer & Chief Technology Officer since September 1, 2020. Prior
thereto, Mr. Drollette served as Vice President Product Analytics at athenahealth, Inc. from September 2018 through August 2020, where he led the product
analytics team and set the research & development strategy for the data and artificial intelligence engineering teams across multiple geographies. Prior
thereto, Mr. Drollette served in various leadership roles at Wayfair, Inc. from January 2006 through August 2018, where he led a 180+ person team of
analysts, data scientists, and software engineers. He holds a bachelor’s degree in Mathematics/Physics from Ithaca College in New York where he
graduated Cum Laude.
Melissa Balsan has served as Executive Vice President and Chief Marketing Officer since January 2023. With more than 20 years of experience in
direct-to-consumer marketing and branding, Melissa has built deep knowledge of customer acquisition and led digital transformation within insurance,
education, and e-commerce businesses. She served as Chief Marketing Officer for GoHealth, a Medicare insurance broker, as well as Chief Marketing
Officer for Endurance Warranty, a leader in auto protection services. At Perdoceo Education Corporation, Melissa held marketing leadership positions
responsible for new student enrollment and retention; and as a digital native, helped establish search engine and social media marketing at
CareerBuilder.com. She began her career in advertising
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guiding established brands like Ford Motor Company and La-Z-Boy through digital transformation. Melissa graduated from Adrian College in Adrian,
Michigan with a BBA in Marketing where she also completed Public Relations studies.
Corporate Governance
Overview of Our Board Structure
As part of the conversion of Members Mutual in connection with our IPO, Apex Holdco purchased approximately 76.5% of the shares sold in the
IPO pursuant to a standby stock purchase agreement under which Apex Holdco acted as the standby purchaser for the IPO. As such, we qualify as a
“controlled company” within the meaning of the corporate governance rules of Nasdaq. “Controlled companies” under those rules are companies of which
more than 50% of the voting power is held by an individual, a group or another company.
As we are a “controlled company” we have availed ourselves of the “controlled company” exception under the Nasdaq rules and will not be subject
to the Nasdaq listing requirements that would otherwise require us to have a board of directors comprised of a majority of independent directors, a
compensation committee composed solely of independent directors or a nominating committee composed solely of independent directors.
The standby purchase agreement and/or our bylaws contain provisions regarding our corporate governance and board structure and chief executive officer,
including:
•
•
•
•
•
•
the board of directors shall consist of designees appointed by the standby purchaser (the “standby purchaser designees”) and designees
appointed by Vericity (the “company designees”). The number of company designees shall not exceed six or at any time be less than two, and
the number of standby purchaser designees at any given time shall be one more than the number of company designees, but in no event less
than three, provided that the standby purchaser may designate the minimum additional number of designees as necessary to comply with SEC
and Nasdaq Stock Market rules relating to the number of independent directors serving on the board of directors or any committee of the
board. Messrs. Rahe, Dong, Perry and Ashe serve as the standby purchaser designees, and Messrs. Hemmings, Hohmann and Schacht serve
as the company designees;
the compensation payable to the company designees may not be decreased without the consent of a majority of the company designees, and
may not be increased without the consent of a majority of the standby purchaser designees;
in the event of any vacancy in the office of any standby purchaser designee or company designee, a majority of the remaining designees, as
applicable, will have the right to nominate a replacement to fill the vacancy, provided that in the case of a vacancy of a company designee,
the standby purchaser may elect to reduce the size of the board of directors by two so long as one of the standby purchaser designees resigns,
and provided further that in the event that there are no remaining company designees to nominate a replacement, the Advisory Board shall
have the right to designate a replacement company designee;
at any election of directors of Vericity, a majority of the standby purchaser designees will have the right to nominate the successors of the
standby purchaser designees, and a majority of the company designees will have the right to nominate the successors of the company
designees, provided that in the event that there are no remaining company designees to nominate successors, the Advisory Board shall have
the right to designate successor company designees;
any transaction between the standby purchaser or any of its affiliates, on the one hand, and Vericity or any of its subsidiaries, on the other
hand, shall be subject to approval by the company designees, other than ordinary course transactions on arm’s length terms; and
Mr. Hohmann shall serve as Chief Executive Officer of the Company for no less than three years after the closing of the offering, subject to
his earlier death, retirement, resignation or removal for cause as defined in the standby purchase agreement.
Director Independence
We have undertaken a review of the composition of our Board of Directors and considered whether any director has a relationship that could
compromise that director independent judgment in carrying out his responsibilities and all other facts and circumstances that the Board of Directors deemed
relevant in determining their independence. We have affirmatively determined that each of our directors, with the exception of Mr. Hohmann, Mr. Rahe and
Ms. Zimmerman, is an independent director under the Nasdaq Marketplace Rules.
Committees of the Board of Directors
We have the following committees of our Board of Directors in place: the audit committee; the compensation committee; and the nominating and
governance committee. Each of these committees operates under a committee charter to be approved by our Board of Directors and available on our
website at www.vericity.com. The composition, duties and responsibilities of our committees are as set forth below:
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Audit Committee
The audit committee is responsible for the oversight of the integrity of our consolidated financial statements, our systems of internal control over
financial reporting, our risk management, the qualifications, independence and performance of our independent registered public accounting firm, the
performance of our internal auditor and our compliance with applicable legal and regulatory requirements. The audit committee has the sole authority and
responsibility to select, determine the compensation for, evaluate and, when appropriate, replace our independent registered public accounting firm. All
audit and non-audit services, other than de minimis non-audit services, to be provided to us by our independent registered public accounting firm must be
approved in advance by our audit committee. The audit committee also approves related-party transactions.
Our audit committee is composed of Mr. Perry (chair), Mr. Hemmings, and Mr. Dong. Our Board of Directors has determined that each of the
members of the audit committee meets the definition of “independent director” for purposes of serving on the audit committee under Exchange Act Rule
10A-3 and the Nasdaq Marketplace Rules. In addition, the Board of Directors has determined that Scott R. Perry qualifies as an “audit committee financial
expert” as such term is defined in Item 407(d)(5) under Regulation S-K.
Compensation Committee
The compensation committee is responsible for annually reviewing and approving the corporate goals and objectives relevant to the compensation
of our Chief Executive Officer and evaluating our Chief Executive Officer’s performance in light of these goals; reviewing and approving the
compensation of our executive officers and other appropriate officers; reviewing and reporting to the Board of Directors on compensation of directors and
board committee members; and administering our incentive and equity-based compensation plans.
Our compensation committee is composed of Mr. Rahe (chair), Mr. Hemmings, Mr. Ashe, Mr. Dong and Mr. Hohmann.
Nominating and Governance Committee
Our nominating and corporate governance committee is composed of Mr. Dong (chair), Mr. Rahe, and Mr. Ashe and Mr. Hohmann. The nominating
and governance committee is responsible for identifying and recommending candidates for election to our Board of Directors and each committee of our
Board of Directors, developing and recommending corporate governance guidelines to the Board of directors and overseeing performance reviews of the
Board of Directors, its committees and the individual members of the Board.
Code of Ethics
We have adopted a code of business conduct and ethics applicable to all of our directors and employees, including our principal executive, financial
and accounting officers and all persons performing similar functions. A copy of that code is available on our website at www.vericity.com. We intend to
disclose future amendments to certain provisions of our code of business conduct and ethics, or waivers of such provisions, on our website to the extent
required by applicable rules and exchange requirements.
Advisory Board
Upon completion of the offerings, we established an Advisory Board to provide general policy advice to the Board of Directors. Only individuals
who served as directors of Members Mutual as of the date of the standby stock purchase agreement are eligible to serve on our Advisory Board. Advisory
board members are entitled to attend meetings of the Board of Directors but shall not vote. Members of the Advisory Board shall have the right to nominate
individuals to be company designees in the event that there are no then-serving company designees. Members of the Advisory Board will receive the same
compensation provided to company designees serving on the Board of Directors of Vericity. Advisory Board members will serve until the earlier of the sale
of Vericity to a third party, the fifth anniversary of the closing of our 2019 offering or a member’s death, resignation or removal for cause. The initial
Advisory Board consists of Ms. Bynoe, Mr. Fibiger and Mr. Groot. Mr. Schacht was added to the Advisory Board in August of 2022 as he attained the age
of 80 in 2022 and was no longer eligible to serve on the Vericity Board. Amount shown in Director Compensation represents total payments for 2023
which include compensation for participation on the Advisory Board.
Set forth below is biographical information for the members of the Advisory Board:
Linda Walker Bynoe is the President and Chief Executive Officer of Telemat Ltd., a project management and consulting firm based in Chicago,
Illinois. Ms. Bynoe has served in that position since 1995. From 1989 to 1995, Ms. Bynoe was the Chief Operating Officer of Telemat Ltd. From 1978 to
1989, Ms. Bynoe worked in executive capacities with the capital markets division of Morgan Stanley, serving as Vice President since 1985. Ms. Bynoe
serves on the board of directors of Anixter International Inc., Prudential Retail Mutual Funds and the Northern Trust Corporation, and as a Trustee of
Equity Residential. Ms. Bynoe became a director of Fidelity Life from 2002, and a director of Members Mutual from 2007 through the completion of the
conversion in 2019.
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John A. Fibiger served in various positions, including President, Chief Financial Officer and Chairman of the board of directors, of the
Transamerica Life Companies. Prior to his association with the Transamerica Life Companies, Mr. Fibiger served in various positions with New England
Mutual Life Insurance Company, including as its President from 1982 to 1989. He recently served as an independent trustee with the following mutual fund
complexes associated with Genworth Financial, Inc.: GPS Funds II (10 portfolios); since 2004, Genworth Financial Asset Management Funds (10
portfolios); and from 2008 to 2011, Genworth Variable Insurance Trust (20 portfolios). He served as a trustee of the Menninger Foundation, and was
Chairman of the Menninger Fund.
Mr. Fibiger has been a member since 1956 and a Fellow since 1959 of the Society of Actuaries. He has been a Member since 1963 of the American
Academy of Actuaries and served as its President from 1987 to 1988. He is also a trustee of the Austin Symphony Orchestra and a life trustee of the
Museum of Science, Boston, Massachusetts. Mr. Fibiger became a director of Fidelity Life from 2004, and a director of Members Mutual from 2007,
through the completion of the conversion in 2019.
Steven L. Groot held a series of actuarial and executive management positions during a thirty-plus year career with Allstate Insurance Company.
Among other positions at Allstate, Mr. Groot served as President of Allstate Insurance Companies of Canada, President of Allstate Indemnity, President of
Allstate International and President of Allstate’s direct distribution and e-commerce business. He was a member of the Allstate Insurance Company board
of directors from 1994 to 2002 and served on the investment and executive committees of the Allstate Insurance Company board of directors.
Mr. Groot is a Fellow of the Casualty Actuarial Society and a Member of the American Academy of Actuaries and also a member of the California
State Bar Association. He currently serves as a member of the board of directors of CEM Insurance Company, a privately held property and casualty
insurer, and was a life trustee of Lawrence Hall Youth Services in Chicago, Illinois. Since 2006, Mr. Groot has served on the board of directors of American
Safety Insurance Holdings, Ltd., a specialty commercial insurer that was sold in 2013. Mr. Groot served as a director of Fidelity Life from 2006, and a
director of Members Mutual from 2007, through the completion of the conversion in 2019.
James W. Schacht has served as a director of Vericity since 2013 and as the President of The Schacht Group, Inc., which advises national and
international clients with respect to insurance and regulatory matters, since its founding in 2008. Prior thereto, Mr. Schacht was for thirteen years a
Managing Director at two international consulting firms. Mr. Schacht has over 45 years of broad-based experience in the insurance industry and all areas of
insurance regulation. Mr. Schacht has served as an expert consultant and witness on a variety of insurance, reinsurance, and regulatory issues in litigation,
and advises clients on new insurance products, organizing insurance companies, financial and reporting requirements, and securing regulatory approval for
a variety of transactions. Mr. Schacht served as the Director of the Illinois Department of Insurance on three occasions. Mr. Schacht serves on the board of
directors of Spinnaker Insurance Company, a property and casualty insurer. Mr. Schacht has served on the Board of Directors of Members Mutual from
2007 through its conversion in 2019.
Mr. Schacht was selected to serve on our original board and now our Advisory Board because of his experience in the insurance industry and his
knowledge of legal and regulatory matters affecting our operations.
Item 11. Executive Compensation.
The following table shows the compensation information for our President and Chief Executive Officer, our Executive Vice President and President
and Chief Operating Officer of Fidelity Life and our Executive Vice President and President and Chief Operating Officer of Efinancial based on
compensation earned for the years ended December 31, 2023 and December 31, 2022 (our “named executive officers”).
Name and Principal Position
James Hohmann
President and Chief Executive Officer of Vericity
James Harkensee
Executive Vice President of Vericity, President and Chief
Operating Officer of Fidelity Life
Melissa Balsan
Executive Vice President, Chief Marketing Officer
Year
2023
2022
2023
2022
2023
2022
Non-Equity
Incentive Plan
Compensation
($)(1)
All Other
Compensation
(2)(3)
Total ($)
Salary ($)
767,350
767,350
450,000
814,820
411,491
311,118
450,000
177,086
505,000
—
431,581
—
37,859
41,181
36,034
31,312
515,567
—
1,620,029
1,220,022
797,152
658,398
1,452,148
—
(1)
(2)
(3)
See “Executive Compensation—Short-Term Incentive Program” below for additional information. Note that compensation earned for annual
performance is paid in March of the following year.
All other compensation consists of the following: (i) company portion of health, dental, life, disability and vision insurance premiums and (ii)
401(k) company matching contributions. For Ms. Balsan, this amount also includes a sign-on bonus and a second bonus payment to compensate for
long term compensation that was lost in accepting her role with the Company.
Following the closing of the IPO, the named executive officers also received grants under an equity incentive plan adopted, maintained and
administered by the standby purchaser. See “—Apex Holdco Equity Incentive Plan” below for additional information.
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Short-Term Incentive Program
2023 Short-Term Incentive Program
Under the annual bonus program, the compensation committee established 2023 bonus opportunities. Mr. Hohmann’s annual bonus opportunity was
0% to 140% of his base salary, with his target bonus opportunity equal to 80% of base salary. The bonus opportunity for Mr. Harkensee was 0% to 96.25%
of his base salary, with the target bonus opportunity equal to 55% of his base salary. The bonus opportunity for Ms. Balsan was 0% to 105% of her base
salary, with the target bonus opportunity equal to 60% of her base salary. The amount of bonus paid depended on achievement of performance measures
recommended by management and approved by the compensation committee.
The performance award for each of our named executive officers was based on the following performance categories:
•
•
•
Corporate (Fidelity Life pre-tax GAAP earnings and Efinancial EBITDA combined; Capital Management, Infrastructure Modernization and
Call Center Operational Improvements;
Fidelity Life (pre-tax statutory operating income; pre-tax GAAP income; 3rd party business growth
Efinancial (EBITDA; Opex as a % of Revenue and eSales net revenue.
Mr. Hohmann’s bonus opportunity was weighted 50% Corporate, 25% Fidelity Life, and 25% Efinancial. Mr. Harkensee’s bonus opportunity was
weighted 30% Corporate, 40% Fidelity Life, and 30% Efinancial. Ms. Balsan's bonus opportunity was weighted 40% Corporate, 30% Fidelity Life, and
30% Efinancial.
In 2023, we achieved 139% of target for Corporate, 81% for Fidelity Life, and 172% for Efinancial. Based on this performance, 2023 annual
bonuses for our named executive officers are reflected in the table above.
2022 Short-Term Incentive Program
Under the annual bonus program, the compensation committee established 2022 bonus opportunities. Mr. Hohmann’s annual bonus opportunity was
0% to 140% of his base salary, with his target bonus opportunity equal to 80% of base salary. The bonus opportunity for each of Messrs. Harkensee was 0%
to 96.25% of his base salary, with the target bonus opportunity equal to 55% of his base salary. Ms. Balsan started her role in January of 2023 and did not
participate in any 2022 incentive compensation. The amount of bonus paid depended on achievement of performance measures recommended by
management and approved by the compensation committee.
The performance award for each of our named executive officers was based on the following performance categories:
•
•
•
Corporate (Fidelity Life pre-tax GAAP earnings and Efinancial EBITDA combined; Cash Management at Holding Company level, research
& technology initiatives;
Fidelity Life (pre-tax statutory operating income; pre-tax GAAP income; 3rd party business growth
Efinancial (EBITDA; net revenue; and gross contribution margin).
Mr. Hohmann’s bonus opportunity was weighted 50% Corporate, 25% Fidelity Life, and 25% Efinancial. Mr. Harkensee’s bonus opportunity was
weighted 30% Corporate, 40% Fidelity Life, and 30% Efinancial.
In 2022, we achieved 66% of target for Corporate, 109% for Fidelity Life, and 27% for Efinancial. Based on this performance, 2022 annual bonuses
for our named executive officers are reflected in the table above.
In November of 2023, the Company adopted clawback requirements related to executive incentive compensation. A copy of this policy is attached
to this filing as Exhibit 97.
Deferred Compensation Plan
We offer a non-qualified deferred compensation plan to our named executive officers, directors and certain other executive officers. Deferred
compensation plan participants can elect to defer a portion of their annual compensation into the deferred compensation plan, with the deferrals generally
not subject to current income tax. Deferred compensation plan balances are credited with interest, computed monthly, using the yield rate that we earn on
our invested assets. Net gains (losses) on investments are not considered in determining earnings on deferred compensation accounts. There are currently
no participants in this plan.
Apex Holdco Equity Incentive Plan
88
Following the closing of the IPO, the standby purchaser established the Apex Holdco L.P. 2019 Equity Incentive Plan (the “EI Plan”) under the
terms of the amended and restated limited partnership agreement of the standby purchaser. Under the EI Plan, Class B units representing 20.6% of the fully
diluted units of the standby purchaser at the closing of the IPO were reserved for issuance to employees, directors, advisory board members and other
service providers of the Company. Following the closing, awards under the EI Plan were made to the executive officers, certain directors, certain other
employees, and advisory board members of the Company in an aggregate amount of approximately 85.4% of the available pool of Class B units under the
EI Plan. Class B units are non-voting profits interests in the standby purchaser that entitle the holders thereof to participate in the appreciation in the value
of the standby purchaser, as represented by its ownership of the Company’s common stock, above a per share threshold representing the amount of the
standby purchaser’s investment in the Company’s common stock, subject to certain customary adjustments, and are immediatley vested and payable in the
event of a future sale of the Company. The grants of Class B Units made to the named executive officers, directors and advisory board members
represented the following percentages of the fully diluted units of the standby purchaser at the closing of the IPO: Mr. Hohmann, 5.00%; Mr. Harkensee,
1.75%; Ms. Balsan 1.0%; Mr. Ashe, 1.00%; Mr. Hemmings, 0.80%; Mr. Perry, 0.25%; Mr. Schacht, 0.80%, Ms. Bynoe, 0.80%; Mr. Fibiger, 0.80%; and
Mr. Groot, 0.80%.
Under the EI Plan, for all of our directors and our executive officers other than Mr. Hohmann, the grants of Class B units vest ratably over five
years, subject to forfeiture under certain conditions. Mr. Hohmann’s grant was fully vested upon grant, subject to recoupment ratably over five years and
forfeiture under certain conditions. The grants to the directors of Vericity are not subject to forfeiture. The EI Plan is adopted, maintained and administered
by the standby purchaser, not the Company.
Employment Agreements
We have entered into employment agreements with Messrs. Hohmann, Harkensee, Kim and Buchanan. The employment agreements provide for a
base salary, subject to increase as determined by the Company. Pursuant to the employment agreements, these executives are eligible to participate in all
employee profit sharing and welfare benefit plans for executives as well as our annual short term incentive program, and Change in Control Severance
Benefits Plan (the “CIC Plan”). The employment agreements require the Company to indemnify any executive who is made a party or is threatened to be
made a party to any action, suit or proceeding because he or she is or was a director or officer of the Company, subject to certain conditions. In such case,
the Company will provide for the advancement of certain expenses.
Under the employment agreements, the agreement and an executive’s employment thereunder may be terminated due to (i) death; (ii) total
disability; (iii) by the Company for Cause; (iv) by the Company at any time without Cause; (v) or by an executive on at least thirty days’ notice. In the
event an executive is terminated by the Company without Cause and there has not been a Change in Control under the Company’s CIC Plan, the executive
will be entitled to the following (x) an amount equal to eighteen months of executive’s then current base salary; (y) an amount equal to the executive’s
target bonus percentage for the current year multiplied by the amount payable pursuant to (x); and (z) COBRA coverage for eighteen months provided the
executive makes the appropriate election and continues to pay the relevant premiums at the same level as when employed. The amounts payable pursuant to
(x) and (y) shall be paid in monthly installments. Pursuant to the employment agreements, the executives are subject to certain restrictions regarding
confidential information and trade secrets. In addition, for a period of up to eighteen months, the executives are prohibited from soliciting the Company’s
customers and employees and from engaging in certain activities which compete with the Company.
Change in Control Severance Benefits Plan
Our named executive officers, among others, participate in the Vericity Holdings Change in Control Severance Benefits Plan (the “CIC plan”). The
CIC plan provides for the payment of severance benefits to certain eligible employees whose employment is terminated without Cause or who voluntarily
terminates for Good Reason following a Change in Control as those terms are defined in the CIC plan.
Pursuant to the CIC Plan, if our named executive officers are terminated without Cause or voluntarily terminate their employment due to
Constructive Termination within 12 months of a Change in Control, they would be entitled to receive 24 months of base salary. Also, our named executive
officers would receive payment of a bonus computed as the average of their short-term annual bonus as a percentage of base salary for the past three
complete years in which a bonus plan was in effect. The annual bonus payout would be multiplied to be consistent with the period covered by the base
salary award (2 times for 24 months). Base salary payments would continue to be paid on the same frequency as before the termination, while the bonus
payment would be made in a lump sum. Following the termination of employment, we would pay the employee’s share of any health insurance premiums
as were paid before the termination if the employee elects to continue coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985
(“COBRA”) for the continuation period under COBRA. The Company would also reimburse the named executive officer the cost of obtaining comparable
life and long-term disability insurance coverage that the employee was provided before the termination for 24 months. In addition, our named executive
officers would be entitled to receive the immediate payment of all outstanding (vested and un-vested) awards under the Company’s incentive and bonus
plans, including the annual bonus program.
In the event that any payments made under the CIC plan would cause our named executive officers to be considered the recipient of an excess
parachute payment within the meaning of Section 280G(b) of the Code, the amount of such payments would be reduced to an amount necessary to avoid
application of Section 280G(b) of the Code.
89
Director Compensation
In 2023, each non-employee director and advisory director of Vericity, Inc. received an annual retainer of $100,000 which was paid on a quarterly
basis. Messrs. Rahe, Dong and Perry and Ms. Zimmerman do not receive cash compensation from the Company for service as a director of Vericity, Inc.
Following the closing of the IPO, each director other than Messrs. Rahe and Dong also received a grant of Class B Units under the EI Plan. See “—Apex
Holdco Equity Incentive Plan” above for additional information.
The table below summarizes the total compensation earned from the Company and its subsidiaries by our non-employee directors for service as a
director for the fiscal year ended December 31, 2023.
Non-Equity
Incentive Plan
Compensation
$
Linda Walker Bynoe
John A. Fibiger
Richard A. Hemmings
Steven L. Groot
James W. Schacht
Neil Ashe
Eric Rahe
Calvin Dong
Scott Perry
Laura Zimmerman
(1)
Fees Earned or
Paid in Cash
$
100,000
100,000
100,000
100,000
100,000
100,000
—
—
—
—
Total
$
—
—
—
—
—
—
—
—
—
—
100,000
100,000
100,000
100,000
100,000
100,000
—
—
—
—
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.
The tables below provide information regarding the beneficial ownership of the Company's common stock for:
•
•
•
•
each beneficial owner known by us to be the beneficial owner of more than five percent of the Company's common stock;
each of our directors;
each of our named executive officers; and
all directors and executive officers as a group.
We have based our calculations of the percentage of beneficial ownership on 14,875,000 shares of common stock outstanding on March 31, 2024.
Five Percent Shareholders
The following table sets forth information regarding all persons known by the Company to be the beneficial owner of more than 5% of the
Company's common stock as of March 31, 2024.
Apex Holdco, L.P. (1) 767 Fifth Avenue New York, NY 10153
11,373,352
Five Percent (5%) Shareholders
Number of Shares and Nature of Beneficial Ownership
Percentage of Class (%)
76.5%
Directors and Executive Officers
The Company has adopted insider trading policies and procedures governing the purchase, sale, and/or other dispositions of the issuer’s securities by
directors, officers and employees. A copy of this policy is attached as Exhibit 19. To date no director or officer has adopted a Rule 10b5-1 trading plan.
90
The following table sets forth information regarding our common stock beneficially owned as of March 31, 2024 by (i) each director, (ii) each of the
named executive officers, and (iii) all current directors and executive officers as a group.
Directors & Executive Officers
Neil Ashe
Calvin Dong
Richard A. Hemmings
James E. Hohmann
Scott Perry
Eric Rahe
James C. Harkensee
Laura Zimmerman
All current directors and executive officers as a group (12 persons)
Ownership percentage is less than 1.0%.
Number of Shares and Nature of
Beneficial Ownership
-
-
-
453
193,500
625,532
327,782
120,104
1,553,296
Percentage of Class (%)
0
*(1)
1.3
4.2
0
0
2
*(1)
10.4
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The Company has no related party transactions.
Item 14. Principal Accountant Fees and Services.
The following table provides information regarding the fees incurred to Deloitte & Touche LLP during the years ended December 31, 2023 and
2022. All fees described below were approved by the audit committee.
(dollars in thousands)
Audit Fees (1)
Audit Related Fees (2)
Tax Fees (3)
All Other Fees (4)
Total
$
$
2023
2022
1,225
—
—
—
1,225
$
$
1,200
—
—
—
1,200
(1)
Audit Fees of Deloitte & Touche LLP for 2023 and 2022 were for professional services associated with the annual audit of our consolidated financial statements, the
reviews of our quarterly condensed consolidated financial statements and the issuance of consents and comfort letters in connection with registration statement filings with
the SEC.
Audit-related fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated
(2)
financial statements and are not reported under “Audit Fees.” No such services were incurred in 2023 and 2022.
(3)
(4)
Tax Fees consist of fees for tax compliance, tax advice and tax planning. No such services were incurred in 2023 and 2022.
All Other Fees include any fees billed that are not audit, audit-related or tax fees. No such services were incurred in 2023 and 7 in 2022.
Before an independent registered public accounting firm is engaged by the Company to render audit or non-audit services, our audit committee must
review the terms of the proposed engagement and pre-approve the engagement. The audit committee may delegate authority to one or more of the members
of the audit committee to provide these pre-approvals for audit or non-audit services, provided that the person or persons to whom authority is delegated
must report the pre-approvals to the full audit committee at its next scheduled meeting. Audit committee pre-approval of non-audit services (other than
review and attest services) are not required if those services fall within available exceptions established by the SEC. The audit committee pre-approved all
audit, audit-related, tax and other services provided by Deloitte & Touche LLP for the fiscal years 2023 and 2022 and the estimated costs of those services.
Actual amounts billed, to the extent in excess of the estimated amounts, were periodically reviewed and approved by the audit committee.
91
Item 15. Exhibits and Financial Statement Schedules.
(a) We have filed the following documents as part of this Form 10-K:
PART IV
(1)
Consolidated Financial Statements
See Item 8, Index to Financial Statements
(2)
Financial Statement Schedules
NOTE: Certain financial statement schedules have been omitted as they are deemed inapplicable or not required by Regulation S-X.
(b)
Exhibits: The following are exhibits to this report, and if incorporated by reference, we have indicated the document previously filed with the
SEC in which the exhibit was included:
92
Exhibit
Number
Exhibit Index
Description
3.1
3.2
4.1
4.2*
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
Amended and Restated Certificate of Incorporation of Vericity, Inc., as amended (incorporated by reference to Exhibit 3.1 to the
Company’s Quarterly Report on Form 10-Q filed on August 14, 2019)
Amended and Restated Bylaws of Vericity, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on
Form 10-Q filed on August 14, 2019)
Form of Stock Certificate of Vericity, Inc. (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on
Form S-1 (No. 333-231952) filed on June 4, 2019)
Description of Capital Stock
Fidelity Life Association Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s Registration
Statement on Form S-1 (No. 333-231952) filed on June 4, 2019)
Form of Executive Employment Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement
on Form S-1 (No. 333-231952) filed on June 4, 2019)
Vericity Holdings, Inc. Change in Control Severance Benefits Plan (incorporated by reference to Exhibit 10.3 to the Company’s
Registration Statement on Form S-1 (No. 333-231952) filed on June 4, 2019)
Form of Indemnification Agreement for Directors and Certain Officers of Vericity, Inc. (incorporated by reference to Exhibit 10.4
to the Company’s Registration Statement on Form S-1 (No. 333-231952) filed on June 4, 2019)
Automatic Coinsurance Agreement dated as of January 1, 2012 between Fidelity Life Association and Hannover Life Reassurance
Company of America (as amended by Amendment I effective January 20, 2014 and Amendment II effective January 1, 2015)
(incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form S-1 (No. 333-231952) filed on June
4, 2019)
Indemnity Reinsurance Agreement (Combined Block) effective as of October 1, 2012 by and between Combined Insurance
Company of America and Fidelity Life Association (incorporated by reference to Exhibit 10.6 to the Company’s Registration
Statement on Form S-1 (No. 333-231952) filed on June 4, 2019)
Indemnity Reinsurance Agreement (Transition Block) effective as of October 1, 2012 by and between Combined Insurance
Company of America and Fidelity Life Association (as amended by Amendment Number One dated August 27, 2013 and
Amendment Number Two effective January 1, 2014.) (incorporated by reference to Exhibit 10.7 to the Company’s Registration
Statement on Form S-1 (No. 333-231952) filed on June 4, 2019)
License Agreement dated October 1, 2012 by and between Fidelity Life Association, James Harkensee and Combined Insurance
Company of America (incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1 (No. 333-
231952) filed on June 4, 2019)
Amended and Restated Reinsurance Agreement effective July 1, 2016 between Fidelity Life Association and Hannover Life
Reassurance Company of America (incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement on Form S-
1 (No. 333-231952) filed on June 4, 2019)
Automatic Self-Administered Accidental Death Benefit Rider Policy Coinsurance Reinsurance Agreement between Fidelity Life
Association and Swiss Re Life and Health America Inc. effective June 1, 2013 (including Amendment 1 dated September 22,
2014, Amendment 2 dated December 23, 2014, Amendment 3 dated March 31, 2015, Amendment 4 dated April 7, 2015,
Amendment 5 January 29, 2016, Amendment 6 dated March 23, 2016, and Amendment 7 dated March May 16, 2016)
(incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-1 (No. 333-231952) filed on June
4, 2019)
93
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
19.0*
21.1
31.1*
31.2*
32.1*
32.2*
Automatic Self-Administered Coinsurance Reinsurance Agreement effective February 21, 2014 between Fidelity Life Association
and Swiss Re Life & Health America Inc. (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on
Form S-1 (No. 333-231952) filed on June 4, 2019)
Amended and Restated Purchase and Sale Agreement dated as of April 20, 2018 by and between Hannover Life Reassurance
Company of America (Bermuda) LTD., Fidelity Life Association, and Efinancial, LLC (incorporated by reference to Exhibit 10.12
to the Company’s Registration Statement on Form S-1 (No. 333-231952) filed on June 4, 2019)
Amended and Restated Standby Stock Purchase Agreement dated as of March 26, 2019 by and among Apex Holdco L.P., Vericity,
Inc., Members Mutual Holding Company, and Fidelity Life Association (incorporated by reference to Exhibit 10.13 to the
Company’s Registration Statement on Form S-1 (No. 333-231952) filed on June 4, 2019)
Amended and Restated Guaranty dated March 26, 2019 by J.C. Flowers IV L.P. in favor of Members Mutual Holding Company
and Vericity, Inc. (incorporated by reference to Exhibit 10.14 to the Company’s Registration Statement on Form S-1 (No. 333-
231952) filed on June 4, 2019)
Amendment No. 1 dated as of December 17, 2018 to the Amended and Restated Purchase and Sale Agreement dated as of April
20, 2018 by and between Hannover Life Reassurance Company of America (Bermuda) LTD., Fidelity Life Association, and
Efinancial, LLC (incorporated by reference to Exhibit 10.17 to the Company’s Registration Statement on Form S-1 (No. 333-
231952) filed on June 4, 2019)
Apex Holdco L.P. 2019 Equity Incentive Plan (incorporated by reference to Exhibit 10.18 to the Company’s Quarterly Report on
Form 10-Q filed on November 14, 2019)
Form of Employee-Consultant Award Agreement (incorporated by reference to Exhibit 10.19 to the Company’s Quarterly Report
on Form 10-Q filed on November 14, 2019)
Form of Director Award Agreement (incorporated by reference to Exhibit 10.20 to the Company’s Quarterly Report on Form 10-Q
filed on November 14, 2019)
Form of CEO Award Agreement (incorporated by reference to Exhibit 10.21 to the Company’s Quarterly Report on Form 10-Q
filed on November 14, 2019)
Insider Trading Policy
Subsidiaries of Vericity, Inc. (incorporated by reference to Exhibit 10.21 to the Company’s Registration Statement on Form S-1
(No. 333-231952) filed on June 4, 2019)
Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as
amended
Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as
amended
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
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
97.0*
Clawback Policy
101.INS*
Inline XBRL Instance Document
101.SCH*
Inline XBRL Taxonomy Extension Schema with Embedded Linkbase Documents
94
101.CAL*
Inline XBRL Taxonomy Extension Calculation
101.DEF*
Inline XBRL Taxonomy Extension Definition
101.LAB*
Inline Taxonomy Extension Label
101.PRE*
Inline XBRL Taxonomy Extension Presentation
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
*
Filed herewith.
Item 16. Form 10-K Summary
None.
95
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.
SIGNATURES
Date: April 1, 2024
Vericity, Inc.
By:
/s/ Chris S. Kim
Chris S. Kim
Executive Vice President, Chief Financial Officer and Treasurer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James E. Hohmann and John
Buchanan, and each of them, his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in
his or her name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents
and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or
his or her substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
Director, Chief Executive Officer, and President
Title
Date
April 1, 2024
Executive Vice President, Chief Financial Officer and Treasurer
April 1, 2024
Name
/s/ James E. Hohmann
James E. Hohmann
/s/ Chris S. Kim
Chris S. Kim
/s/ Eric Rahe
Eric Rahe
/s/ Neil Ashe
Neil Ashe
/s/ Calvin Dong
Calvin Dong
/s/ Richard A. Hemmings
Richard A. Hemmings
/s/ Scott Perry
Scott Perry
Director and Chairman
Director
Director
Director
Director
/s/ Laura R. Zimmerman
Director
Laura R. Zimmerman
96
April 1, 2024
April 1, 2024
April 1, 2024
April 1, 2024
April 1, 2024
April 1, 2024
DESCRIPTION OF CAPITAL STOCK
Exhibit 4.2
Authorized Capital Stock. Our authorized capital stock consists of 30,000,000 shares of common stock, par value $0.001 per share.
Voting Rights. Holders of our common stock are entitled to one vote per share on all matters submitted to a vote of stockholders, including the election of
directors. Holders of our common stock are not entitled to cumulative voting in the election of directors. Directors of the Company are elected by a
plurality of the shares of our common stock present in person or by proxy and entitled to vote thereon. Other than for the election of directors, matters to be
voted on by stockholders must generally be approved by the affirmative vote of the majority of the shares of our common stock present in person or by
proxy and entitled to vote thereon.
Dividends. Holders of our common stock are entitled to receive ratably, on a per share basis, the dividends, if any, as may be declared from time to time by
our board of directors out of funds legally available therefor.
Transfer Restrictions. The shares of common stock purchased by our directors and officers pursuant to subscription rights granted to them in connection
with our conversion from mutual to stock form and related initial public offering completed in August 2019 (“IPO”) will be restricted for a period of one
year from the effective date of the conversion pursuant to the plan of conversion and Section 59.1(7)(a)(iii) of the Illinois Insurance Code. The shares
purchased by the standby purchaser in our IPO will be restricted securities and subject to trading limitations under applicable law and our agreement with
the standby purchaser.
Liquidation. If there is a liquidation, dissolution or winding up of Vericity, holders of our common stock would be entitled to share in our assets remaining
after the payment of liabilities, ratably on a per share basis.
Other Characteristics. Holders of our common stock have no preemptive or conversion rights or other subscription rights, and no redemption or sinking
fund provisions apply to our common stock.
Advance Notice Requirements for Stockholder Proposals and Director Nominations. Our bylaws provide that stockholders seeking to bring business
before a meeting of stockholders, or to nominate candidates for election as directors at a meeting of shareholders, must provide timely notice of their intent
in writing. Our bylaws also specify certain requirements as to the form and content of a stockholder’s notice. Our bylaws also require that such stockholder
provide information concerning each item of business proposed by the stockholder and individuals nominated for election as a director, as applicable.
These provisions may preclude our stockholders from bringing matters before our annual meeting of stockholders or from making nominations for
directors at our annual meeting of stockholders. These provisions could also have an anti-takeover effect and make the following transactions more
difficult: acquisition of us by means of a tender offer; acquisition of us by means of a proxy contest or otherwise; or removal of our incumbent officers and
directors.
Stockholder Action by Written Consent. Our charter and bylaws do not prohibit action by written consent of our stockholders, and therefore any action
required or permitted to be taken by our stockholders may be taken by written consent. Our standby purchaser acquired a majority of our shares of
common stock in the IPO, and as a result will be able to approve most corporate actions requiring stockholder approval by written consent without a duly-
noticed and duly-held meeting of stockholders.
Corporate Governance and Board Structure. Our bylaws and/or our agreement with the standby purchaser contain provisions regarding our corporate
governance and board structure, including that the board of directors shall consist of designees appointed by the standby purchaser (the “standby purchaser
designees”) and designees appointed by Vericity (the “company designees”). The number of company designees shall not exceed six or at any time be less
than two, and the number of standby purchaser designees at any given time shall be one more than the number of company designees, but in no event less
than three, provided that the standby purchaser may designate the minimum additional number of designees as necessary to comply with SEC and Nasdaq
Stock Market rules relating to the number of independent directors serving on the board of directors or any committee of the board.
VERICITY, INC.
INSIDER TRADING POLICY
EXHIBIT 19
Purpose
This Insider Trading Policy provides guidelines with respect to transactions in the securities of Vericity, Inc. (together with its subsidiaries, “Vericity”) and
the handling of confidential information about Vericity and the companies with which Vericity does business.
Persons Subject to the Policy
All directors, officers, employees and advisory board members of Vericity, and any family members living in such a person’s household, other members of
such a person’s household and any entity controlled by such a person (each a “Covered Person”) are subject to, and must comply with, this Policy. The
Office of the General Counsel shall maintain a list of all Vericity employees identified as a “Designated Employee” for purposes of this Policy.
Transactions Subject to the Policy
This Policy applies to transactions in Vericity’s securities, including Vericity’s common stock, options for common stock, restricted stock units and any
other securities Vericity may issue from time to time, as well as derivative securities not issued by Vericity, such as exchange-traded put or call options or
swaps relating to Vericity’s securities (collectively referred to in this Policy as “Vericity Securities”).
Statement of Policy
No Covered Person who is aware of Material Nonpublic Information (defined below) relating to Vericity may, directly, or indirectly through family
members or other persons or entities:
(1)
(2)
Engage in transactions in Vericity Securities, except as otherwise specifically permitted by this Policy or Vericity;
Recommend the purchase or sale of any Vericity Securities;
(3) Disclose Material Nonpublic Information to persons within Vericity whose jobs do not require them to have that information, or to persons
outside of Vericity, unless any such disclosure is required in fulfillment of their job responsibilities and subject to appropriate confidentiality
restrictions; or
(4) Assist anyone engaged in the above activities.
In addition, a Covered Person who, in the course of working for Vericity, learns of Material Nonpublic Information about a company with which Vericity
has a relationship or does business, including a customer or supplier of Vericity, may not:
•
•
trade in that company’s securities until the information becomes public or is no longer material, or
disclose such information to anyone other than a co-worker within Vericity with a business need to know.
Anyone with any questions regarding trading in Vericity Securities, including questions regarding restrictions on a specific transaction, should contact
Vericity’s Office of the General Counsel.
Definition of Material Nonpublic Information
Material Nonpublic Information is positive or negative information that is not generally known to the public and, if publicly known, would be considered
by a reasonable investor to be important in making a decision to buy, hold or sell securities or might reasonably be expected to affect the market for or price
of Vericity Securities (or the securities of a company with which Vericity has a relationship or does business). While it is not possible to define
all categories of Material Nonpublic Information, there are various categories of information that are particularly sensitive and, as a general rule, should be
considered material. Examples of such information include:
•
•
•
•
•
•
•
•
•
•
Financial results
Projections of future earnings or losses, or other earnings guidance
A pending or proposed acquisition or disposition of a significant asset
A pending or proposed merger, acquisition or tender offer
A change in dividend policy, the declaration of a dividend or a stock split, or an offering of additional securities
Bank borrowings or other financing transactions out of the ordinary course
The establishment of a repurchase program for Vericity Securities
A change in management or key personnel
Pending or threatened significant litigation, or the resolution of such litigation
The gain or loss of a significant customer or business partner
Directors, Officers, Advisory Board and Designated Employees: Special and Prohibited Transactions
Vericity has determined that there is a heightened legal risk and/or the appearance of improper or inappropriate conduct if Vericity’s directors, officers,
advisory board members or Designated Employees engage in certain types of transactions. It therefore is Vericity’s policy that directors, officers, advisory
board members and Designated Employees may not engage in any of the following transactions:
•
•
•
•
•
Short sales of Vericity Securities
Transactions in publicly-traded options, including put options, call options or other derivative securities, on an exchange or in any other
organized market
Hedging or monetization transactions, including through the use of financial instruments such as prepaid variable forwards, equity swaps,
collars and exchange funds
Holding Vericity Securities in a margin account or otherwise pledging Vericity Securities as collateral for a loan (other than Vericity
Securities acquired prior to August 8, 2019, the first day Vericity common stock was available for trading on the Nasdaq Capital Market).
Any other hedging or derivative transactions designed to hedge or offset the effect of a change in the market price of Vericity Securities
Directors, Executive Officers, Advisory Board and Designated Employees: Additional Procedures
Vericity has established the following additional procedures applicable to directors, executive officers, advisory board members and Designated
Employees:
•
Pre-Clearance Procedures. No one subject to these procedures may engage in any transaction in Vericity Securities without first obtaining
pre-clearance of the transaction from Vericity. A request for pre-clearance should be submitted to Vericity’s Office of the General Counsel at
least three business days in advance of the proposed transaction, or such shorter period as may be acceptable to such Office.
Any pre-clearance received from the Office of the General Counsel to engage in a proposed transaction is effective for the first to occur of (1)
five (5) business days from the preclearance date, (2) the beginning of a Blackout Period, or (3) the time at which such person comes into
possession of Material Nonpublic Information, after which preapproval must be requested again. If anyone subject to these procedures
comes into possession of Material Nonpublic Information after obtaining pre-clearance, he or she should immediately stop any transactions
in Vericity Securities.
2
•
•
•
Quarterly Trading Restrictions. No one subject to this restriction may conduct any transactions involving Vericity Securities (other than as
specified by this Policy), during a “Blackout Period” beginning 21 trading days prior to the end of each fiscal quarter and ending on the third
business day following the date of the public release of Vericity’s earnings results for that quarter. Following the receipt of pre-clearance as
described above, those persons subject to this restriction generally may conduct transactions in Vericity Securities during the “Window
Period” beginning on the third business day following the public release of Vericity’s quarterly earnings and ending 21 trading days prior to
the close of the next fiscal quarter.
Event-Specific Trading Restriction Periods. From time to time, an event may occur that is material to Vericity and is known by only a few
directors, officers and/or employees. So long as the event remains material and nonpublic, the persons designated by the Office of the
General Counsel or may not trade Vericity Securities. In that situation, the Office of the General Counsel may notify these persons that they
should not trade in Vericity Securities.
Exceptions. The requirement for pre-clearance, the quarterly trading restrictions and event-driven trading restrictions do not apply to
transactions conducted pursuant to approved Rule 10b5-1 Plans.
Rule 10b5-1 Plans
If an individual enters into a plan that meets the requirements of Rule 10b5-1 (a “Rule 10b5-1 Plan”), Vericity Securities may be purchased or sold pursuant
to such Rule 10b5-1 Plan by that person without regard to certain insider trading restrictions. To comply with the Policy, a Rule 10b5-1 Plan must be
approved by Vericity and meet the requirements of Rule 10b5-1. In general, a Rule 10b5-1 Plan must be entered into at a time when the person entering
into the plan is not aware of Material Nonpublic Information. Once the Rule 10b5-1 Plan is adopted, the person must not exercise any influence over the
amount of securities to be traded, the price at which they are to be traded or the date of the trade. The plan must either specify the amount, pricing and
timing of transactions in advance or delegate discretion on these matters to an independent third party. No further pre-approval of transactions conducted
pursuant to a Vericity-approved Rule 10b5-1 Plan will be required.
Post-Termination Transactions
This Policy continues to apply to transactions in Vericity Securities even after termination of service to Vericity. If an individual is in possession of
Material Nonpublic Information when his or her service terminates, that individual may not trade in Vericity Securities until that information has become
public or is no longer material.
Transactions Not Involving a Purchase or Sale
Bona fide gifts of securities are not transactions subject to this Policy.
Consequences of Violations
The purchase or sale of securities while aware of Material Nonpublic Information, or the disclosure of Material Nonpublic Information to others who then
trade in Vericity Securities, is prohibited by federal and state laws (as well as the laws of foreign jurisdictions). Insider trading violations are pursued
vigorously by the U.S. Securities and Exchange Commission, U.S. Attorneys and state enforcement authorities. Punishment for insider trading violations
is severe, and could include significant fines and imprisonment. In addition, an individual’s failure to comply with this Policy may subject the individual to
Vericity-imposed sanctions, including dismissal for cause, whether or not the employee’s failure to comply results in a violation of law.
Company Assistance
Any person who has a question about this Policy or its application to any proposed transaction may obtain additional guidance from the Office of the
General Counsel.
3
Exhibit 31.1
I, James Hohmann, certify that:
1.
2.
3.
4.
I have reviewed this report on Form 10-K of Vericity Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter
(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 31, 2024
/s/ James E. Hohmann
James E. Hohmann
Chief Executive Officer and President, Vericity, Inc.
Exhibit 31.2
I, Chris Kim, certify that:
1.
2.
3.
4.
I have reviewed this report on Form 10-K of Vericity Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter
(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 31, 2024
/s/ Chris S. Kim
Chris S. Kim
Executive Vice President, Chief Financial Officer and Treasurer, Vericity, Inc.
Vericity, Inc.
Certification of Periodic Financial Report
Pursuant to 18 U.S.C. Section 1350
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
The undersigned officer of Vericity, Inc. (“Vericity”) certifies, to his knowledge and solely for the purposes of 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that the report on Form 10-K of Vericity for the period ended December 31, 2023 fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Form 10-K fairly presents, in all
material respects, the financial condition and results of operations of Vericity.
Dated: March 31, 2024
By:
/s/ James E. Hohmann
James E. Hohmann
Chief Executive Officer and President, Vericity, Inc.
Vericity, Inc.
Certification of Periodic Financial Report
Pursuant to 18 U.S.C. Section 1350
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2
The undersigned officer of Vericity, Inc. (“Vericity”) certifies, to his knowledge and solely for the purposes of 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that the report on Form 10-K of Vericity for the period ended December 31, 2023 fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Form 10-K fairly presents, in all
material respects, the financial condition and results of operations of Vericity.
Dated: March 31, 2024
By:
/s/ Chris S. Kim
Chris S. Kim
Executive Vice President, Chief Financial Officer and Treasurer,
Vericity, Inc.
VERICITY, INC.
CLAWBACK POLICY
Exhibit 97
(As adopted on November 9, 2023)
1.
Introduc on and Purpose
a.
b.
Introduc on. This document sets forth the Vericity, Inc. Clawback Policy (the “Policy”), as adopted on the date listed above.
Purpose. Vericity, Inc. (the “Company”) has established this Policy to appropriately align the interests of the execu ves of
the Company, who have been designated as Covered Execu ves , with those of the Company and to provide for the recovery
of (i) Erroneously Awarded Compensa on from Covered Execu ves , and (ii) Recoverable Amounts from Covered Execu ves.
This Policy is designed to comply with Nasdaq Rule 5608 (“Rule 5608”) and with Sec on 10D and Rule 10D-1 of the
Exchange Act (“Rule 10D-1”). All capitalized terms not defined herein shall have the meanings set forth in Sec on 4 of this
Policy.
2. Mandatory Recovery as Required by the SEC and Nasdaq
a.
Recovery of Erroneously Awarded Compensa on due to an Accoun ng Restatement.
I. In the event of an Accoun ng Restatement, the Company will reasonably promptly recover the Erroneously Awarded
Compensa on in accordance with Rule 5608 and Rule 10D-1 as follows:
Upon the occurrence of an Accoun ng Restatement, the Compensa on Commi ee (the “Commi ee”), shall determine the
amount of any Erroneously Awarded Compensa on and shall promptly deliver a wri en no ce to each Covered Execu ve
containing the amount of any Erroneously Awarded Compensa on and a demand for repayment or return of such
compensa on, as applicable. For the avoidance of doubt, recovery of Erroneously Awarded Compensa on is on a “no fault”
basis, meaning that it will occur regardless of whether the Covered Execu ve engaged in misconduct or was otherwise
directly or indirectly responsible, in whole or in part, for the Accoun ng Restatement. To determine the amount of any
Erroneously Awarded Compensa on for Incen ve-based Compensa on that is based on a Financial Repor ng Measure a er
an Accoun ng Restatement:
The Company shall recalculate the applicable Financial Repor ng Measure and the amount of Incen ve-based
Compensa on that would have been Received based on such Financial Repor ng Measure; and
The Company shall determine whether the Covered Execu ve Received a greater amount of Incen ve-based Compensa on
than would have been Received applying the recalculated Financial Repor ng Measure, based on: (i) the originally
calculated Financial Repor ng Measure, and (ii) taking into considera on any discre on that the Commi ee applied to
reduce the amount originally received.
To determine the amount of any Erroneously Awarded Compensa on for Incen ve-based Compensa on that is based on
stock price or TSR, where the amount of Erroneously Awarded Compensa on is not subject to mathema cal recalcula on
directly from the informa on in the applicable Accoun ng Restatement:
The amount to be repaid or returned shall be determined by the Commi ee based on a reasonable es mate of the effect of
the Accoun ng Restatement on the Company’s stock price or TSR upon which the Incen ve-based Compensa on was
Received; and
The Company shall maintain documenta on of the determina on of such reasonable es mate and provide the relevant
documenta on as required to Nasdaq.
•
•
•
•
(ii) The Commi ee shall have discre on to determine the appropriate means of recouping Erroneously Awarded
Compensa on hereunder based on the par cular facts and circumstances which may include, without limita on:
•
•
•
•
•
requiring reimbursement of cash Incen ve-based Compensa on previously paid;
seeking recovery of any gain realized on the ves ng, exercise, se lement, sale, transfer, or other disposi on of any
equity-based awards;
offse ng the recouped amount from any compensa on otherwise owed by the Company to the Covered Execu ve;
canceling outstanding vested or unvested equity awards; and/or
taking any other remedial and recovery ac on permi ed by law, as determined by the Commi ee , in its sole
discre on.
(iii) Notwithstanding the foregoing, except as set forth in Sec on 2.a.II. below, in no event may the Company accept an
amount that is less than the amount of Erroneously Awarded Compensa on in sa sfac on of a Covered Execu ve ’s
obliga ons hereunder.
(iv) To the extent that a Covered Execu ve fails to repay all Erroneously Awarded Compensa on to the Company when due,
the Company shall take all ac ons reasonable and appropriate to recover such Erroneously Awarded Compensa on from
the applicable Covered Execu ve . The applicable Covered Execu ve shall be required to reimburse the Company for any
and all expenses reasonably incurred (including legal fees) by the Company in recovering such Erroneously Awarded
Compensa on in accordance with the immediately preceding sentence.
II. Notwithstanding anything herein to the contrary, the Company shall not be required to take the ac ons contemplated by
Sec on 2.a.I. above if the Commi ee determines that recovery would be imprac cable and any of the following two
condi ons are met:
(i) The Commi ee has determined that the direct expenses, such as reasonable legal expenses and consul ng fees,
paid to a third party to assist in enforcing the Policy would exceed the amount to be recovered. In order for the
Commi ee to make this determina on, the Company must make a reasonable a empt to recover the Erroneously
Awarded Compensa on, document such a empt(s) to recover, and provide such documenta on to Nasdaq; or
(ii) Recovery would likely cause an otherwise tax-qualified re rement plan, under which benefits are broadly available
to employees of the Company, to fail to meet the requirements of Sec on 401(a)(13) or Sec on 411(a) of the Code.
(iii) Company is not longer listed on the Nasdaq exchange or the company becomes a direct or indirect subsidiary of a
publicly traded company listed on any na onal securi es exchange.
b. Mandatory Disclosure. The Company shall file this Policy with its next 10k and, in the event of an Accoun ng Restatement,
will disclose informa on related to such Accoun ng Restatement in accordance with applicable law, including, for the
avoidance of doubt, Rule 10-D1 and Rule 5608.
c. Prohibi on of Indemnifica on. The Company shall not be permi ed to insure or indemnify any Covered Execu ve against (i)
the loss of any Erroneously Awarded Compensa on that is repaid, returned, or recovered pursuant to the terms of this
Policy, or (ii) any claims rela ng to the Company’s enforcement of its rights under this Policy. While Covered Execu ve
subject to this Policy may purchase their own personal insurance to cover their poten al recovery obliga ons, the Company
shall not be permi ed to pay or reimburse the
Covered Execu ve for premiums for such an insurance policy. Further, the Company shall not enter into any agreement that
exempts any Incen ve-based Compensa on that is granted, paid, or awarded to a Covered Execu ve from the applica on of
this Policy or that waives the Company’s right to recovery of any Erroneously Awarded Compensa on, and this Policy shall
supersede any such agreement (whether entered into before, on, or a er the Effec ve Date of this Policy), including, for the
avoidance of doubt, the Company’s Indemnifica on Agreement.
d. Other Recoupment Rights. This Policy shall be binding and enforceable against all Covered Execu ves and, to the extent
required by applicable law or guidance from the SEC or Nasdaq , their beneficiaries, heirs, executors, administrators, or
other legal representa ves. The Administrator intends that this Policy will be applied to the fullest extent required by
applicable law. Any employment agreement, equity award agreement, compensatory plan, or any other agreement or
arrangement with a Covered Execu ve shall be deemed to include, as a condi on to the grant of any benefit thereunder, an
agreement by the Covered Execu ve to abide by the terms of this Policy. Any right of recovery under this Policy is in addi on
to, and not in lieu of, any other remedies or rights of recovery that may be available to the Company under applicable law,
regula on, or rule pursuant to the terms of any policy of the Company or any provision in any employment agreement,
equity award agreement, compensatory plan, agreement, or other arrangement.
3. Miscellaneous and Defini ons
a. Administra on and Interpreta on. This Policy shall be administered by the Commi ee or by the Board ac ng as the
Commi ee (either of these, as applicable, the “Administrator”), which shall have authority to (i) exercise all of the powers
granted to it under the Policy, (ii) construe, interpret, and implement this Policy, (iii) make all determina ons necessary or
advisable in administering this Policy and for the Company’s compliance with Rule 5608, Sec on 10D and Rule 10D-1, and
any other applicable law, regula on, rule, or interpreta on of the SEC or Nasdaq rules promulgated or issued in connec on
therewith, and (iv) amend this Policy, including to reflect changes in applicable law or stock exchange regula on. Any
determina ons made by the Administrator shall be final and binding on all affected individuals.
b. Applica on and Method of Recovery. Nothing in this Policy will limit in any respect (i) the Company’s right to take or not to
take any ac on with respect to any Covered Execu ve ’s or any other person’s employment or (ii) the obliga on of the Chief
Execu ve Officer or the Chief Financial Officer to reimburse the Company in accordance with Sec on 304 of the Sarbanes-
Oxley Act of 2002, as amended. Any determina on made pursuant to Sec on 3 of this Policy and any applica on and
implementa on thereof need not be uniform with respect to each Covered Execu ve , or payment recovered or forfeited
under this Policy. To the extent permi ed by applicable law, the Board may seek to recoup Recoverable Amounts by all legal
means available, including but not limited to, by requiring any affected Covered Execu ve to repay such amount to the
Company, by set-off, by reducing future compensa on of the affected Covered Execu ve, or by such other means or
combina on of means as the Board , in its sole discre on, determines to be appropriate.
c. Disclosure of Clawback Events. If the Board determines that a Clawback Event has occurred that is subsequently disclosed by
the Company in a public filing required under the Exchange Act (a “Disclosed Event”), the Company will disclose in the proxy
statement rela ng to the year in which such determina on is made (i) if any amount was clawed back from a Covered
Execu ve and the aggregate amount clawed back or (ii) if no amount was clawed back from the Covered Execu ve as a
result of the Disclosed Event, the fact that no amount was clawed back.
d. Amendment; Termina on. The Administrator may amend this Policy from me to me in its discre on and shall amend this
Policy as it deems necessary. Notwithstanding anything in this Sec on to the contrary, no amendment or termina on of this
Policy shall be effec ve if such amendment or termina on would (a er taking into account any ac ons taken by the
Company contemporaneously with such amendment or termina on) cause the Company to violate any federal securi es
laws, Rule 10D-1, or any Nasdaq rules. This policy shall automa cally terminate on the date that the Company is no longer
listed on the Nasdaq exchange or the company becomes a direct or indirect subsidiary of a publicly traded company listed
on any na onal securi es exchange.
e. Defini ons. For purposes of this Policy, the following terms shall have the following meanings:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
“Accoun ng Restatement” means an accoun ng restatement due to the material noncompliance of the Company
with any financial repor ng requirement under the securi es laws, including any required accoun ng restatement to
correct an error in previously issued financial statements that is material to the previously issued financial statements
(a “Big R” restatement), or that corrects an error that is not material to previously issued financial statements but
would result in a material misstatement if the error were corrected in the current period or le uncorrected in the
current period (a “li le R” restatement).
“Board” means the Board of Directors of the Company.
“Clawback Eligible Incen ve Compensa on” means all Incen ve-based Compensa on Received by a Covered
Execu ve (i) on or a er the Effec ve Date, (ii) a er beginning service as a Covered Execu ve , (iii) who served as a
Covered Execu ve at any me during the applicable performance period rela ng to any Incen ve-based
Compensa on (whether or not such Covered Execu ve is serving at the me any Erroneously Awarded Compensa on
is required to be repaid to the Company), (iv) while the Company has a class of securi es listed on a na onal
securi es exchange or a na onal securi es associa on, and (v) during the applicable Clawback Period.
“Clawback Period” means, with respect to any Accoun ng Restatement, the three completed fiscal years of the
Company immediately preceding the Restatement Date and if the Company changes its fiscal year, any transi on
period of less than nine months within or immediately following those three completed fiscal years.
“Code” means the Internal Revenue Code of 1986, as amended, and the regula ons thereunder.
“Commi ee” means the Compensa on Commi ee of the Board of Directors of the Company, which is required to be
composed en rely of independent directors.
“Covered Execu ve” means each “officer,” as defined in Rule 16a-1 under the Exchange Act , and any other senior
execu ve as designated by the Commi ee or the Board.
“Effec ve Date” means November 28, 2023.
“Erroneously Awarded Compensa on” means, with respect to each Covered Execu ve in connec on with an
Accoun ng Restatement, the amount of Clawback Eligible Incen ve Compensa on that exceeds the amount of
Incen ve-based Compensa on that would have been Received had it been determined based on the restated
amounts in the Accoun ng Restatement, computed without regard to any taxes paid.
“Exchange Act” means the Securi es Exchange Act of 1934, as amended.
“Financial Repor ng Measures” means measures that are determined and presented in accordance with the
accoun ng principles used in preparing the Company’s financial statements, and all other measures that are derived
wholly or in part from such measures. Stock price and TSR (and any measures that are derived wholly or in part from
stock price or TSR) shall, for purposes of this Policy, be considered Financial Repor ng Measures . For the avoidance
of doubt, a Financial Repor ng Measure need not be presented in the Company’s financial statements or included in
a filing with the SEC.
(l)
“Incen ve-based Compensa on” means any compensa on that is granted, earned, or vested based wholly or in part
upon the a ainment of a Financial Repor ng Measure.
(m)
“Nasdaq” means the Nasdaq Stock Market.
(n)
“Recoverable Amounts” means (i) any equity compensa on (including stock op ons, restricted stock, me-based
restricted stock units, performance-based restricted stock units, and any other equity awards) or (ii) cash incen ve-
based compensa on (other than base salary), in each case received a er the Effec ve Date.
(o)
(p)
(q)
(r)
(s)
“Received” means, with respect to any Incen ve-based Compensa on , actual or deemed receipt, and Incen ve-
based Compensa on shall be deemed received in the Company’s fiscal period during which the Financial Repor ng
Measure specified in the Incen ve-based Compensa on award is a ained even if the payment or grant of the
Incen ve-based Compensa on to the Covered Execu ve occurs a er the end of that period. For the avoidance of
doubt, Incen ve-based Compensa on shall only be treated as Received during one (and only one) fiscal year, even if
such Incen ve-based Compensa on is deemed received in one fiscal year and actually received in a later fiscal year.
For example, if an amount is deemed received in 2024, but actually received in 2025, such amount shall be treated as
Received under this defini on only in 2024.
“Restatement Date” means the earlier to occur of (i) the date the Board , a commi ee of the Board , or officers of the
Company authorized to take ac on if Board ac on is not required, concludes, or reasonably should have concluded,
that the Company is required to prepare an Accoun ng Restatement, or (ii) the date a court, regulator, or other
legally authorized body directs the Company to prepare an Accoun ng Restatement.
“SEC” means the U.S. Securi es and Exchange Commission.
“Securi es Act” means the U.S. Securi es Act of 1933, as amended.
“TSR” means total shareholder return.