January 28, 2023


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VERICITY, INC. – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three and nine months ended September 30, 2021 and 2020



Forward-Looking Statements

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

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

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

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

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




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

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


The Company continues to monitor the effects of the changing economic
environment on our fixed maturities portfolio and currently have a number of
securities on our watch list, which are mainly concentrated in the oil and gas
and airline sectors. Our assessment through September 30, 2021 has resulted in
no additional material OTTI due to COVID-19 and the recent market events.

In response to the economic impact related to COVID-19, concessions were granted
to certain of the Company’s mortgage loan borrowers in the third quarter of
2021, including payment deferrals and other loan modifications. At September 30,
, the Company held 2 mortgage loans where requests for temporary
modifications were granted. The total loan balance for these 3 loans amounted to
$0.8 million or about 2% of the mortgage loan portfolio at September 30, 2021.

In the three months ended September 30, 2021 and September 30, 2020, the Company
had an estimated $3.3 million and $0.9 million, respectively in net reported
policyholder claims that included COVID-19 as a contributing cause of death. In
the nine months ended September 30, 2021 and September 30, 2020, the Company had
an estimated $7.2 million and $1.8 million, respectively in net reported
policyholder claims that included COVID-19 as a contributing cause of death.

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

Agency Segment

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

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



Insurance Segment

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

Fidelity Life engages in the following business lines:

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

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

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

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

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

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

Corporate & Other Segment

The results of this segment consist of net investment income and net realized
investment gains (losses) earned on invested assets. We also include certain
corporate expenses that are not allocated to our other segments, including
expenses of the Company, 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
realized investment gains (losses) exceed (are less than) corporate expenses.
This segment also includes certain items previously reported in the elimination
segment, see “Note 10 – Business Segments” in the Notes to the Interim Condensed
Consolidated Financial Statements included in this Form 10-Q.

Critical Accounting Policies

Our critical accounting policies are described in “Note 1-Basis of Presentation
and Summary of Significant Accounting Policies” to our Consolidated Financial
Statements as of and for the year ended December 31, 2020 included in the Form
10-K. The preparation of the Interim Condensed Consolidated Financial Statements
in conformity with GAAP requires management to use judgment in making estimates
and assumptions that affect reported amounts of assets, liabilities, revenues,
expenses and related disclosures. We regularly evaluate our estimates and
judgments based on historical experience, market indicators and other relevant
factors and circumstances. Actual results may differ from these estimates under
different assumptions or conditions and may affect our financial position and
results of operations. Accordingly, these Interim Condensed Consolidated
Financial Statements should be read in conjunction with the financial statements
as of and for the year ended December 31, 2020, and notes thereto, included in
the Form 10-K.



Results of Operations

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