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VERICITY, INC. – 10-K – Management’s Discussion And Analysis Of Financial Condition And Results Of Operations. – InsuranceNewsNet

VERICITY, INC. - 10-K - Management's Discussion And Analysis Of Financial Condition And Results Of Operations. – InsuranceNewsNet
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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;

National Gold 2022-04 Body Leaderboard

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 Company continues to monitor the effects of the changing economic
environment on our fixed maturity securities 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 December 31, 2021 has
resulted in no additional material other-than-temporary impairments (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 2021, including payment
deferrals and other loan modifications. At December 31, 2021, the Company held 3
mortgage loans where requests for temporary modifications were granted. The
total loan balance for these 3 loans amounted to $0.9 million or about 2% of the
mortgage loan portfolio at December 31, 2021.

In the twelve months ended December 31, 2021 and 2020, the Company had an
estimated $10.5 and $4.3 millionrespectively in net reported policyholder
claims that included COVID-19 as a contributing cause of death.

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.

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
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 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, 2021 and December 31, 2020, our Agency Segment
revenue earned 85% and 85% through the retail channel, 3% and 5% through the
wholesale channel, and 12% and 10% 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
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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.

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,
2021 and December 31, 2020, these offsetting revenues were $6.3 million and $5.0
million, respectively, which reduced our total agency expenses by approximately
11% and 10%, 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 in­force policies that are considered
to be of high strategic importance to Fidelity Life.

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

Closed Block - Our Closed Block represents all in­force participating insurance
policies of Fidelity Life. The Closed Block was established in connection with
our 2007 reorganization into a mutual holding company structure 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 Holding Company 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, one of these former affiliates recaptured the majority of the assumed
block of life business. The annuity deposits were ceded to Fidelity Life through
two contracts entered into in the early 1990s. These annuity and assumed life
deposits are now largely in run­off, with only minor amounts of new deposits
each year. There are minimal remaining surrender charges associated with the
assumed annuity contracts.
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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."

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
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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.

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

Beginning in the fourth quarter of 2017, Fidelity Life changed the commission
structure related to Efinancial's sale of the RAPIDecision® Life to pay annual
level commissions over the life of the product instead of up-front, or
first-year-only commissions. This change reduced Fidelity Life's surplus strain
associated with issuing RAPIDecision® Life business by spreading its statutory
commission expenses over the life of the policy instead of incurring it all in
the policy year of issue. In order to help provide liquidity for Efinancial
through the receipt of larger first-year-only commissions, Fidelity Life and
Efinancial entered into a financing arrangement with Hannover Life under which,
on a monthly basis, Hannover Life advances to Efinancial amounts approximately
equal to the first-year-only commissions on Fidelity Life RAPIDecision® Life
business sold through Efinancial. In exchange, Efinancial assigns to Hannover
Life its right to all future levelized commission payments on that business due
from Fidelity Life, and Fidelity Life pays to Hannover Life the level
commissions over the life of the contract. Our arrangement with Hannover Life
allows us to finance up to $30.0 million of commission expense. In the first
quarter of 2021, the Company ceased new advances on this financing arrangement.
Efinancial's ability to receive advances under this arrangement will terminate
when the aggregate amount advanced under the arrangement equals or exceeds $30.0
million. This arrangement was also amended in 2021 removing Fidelity Life as a
party to the arrangement. It is anticipated that Efinancial will enter into new
financing arrangements in 2022. As of December 31, 2021, we had net advances of
$21.9 million under this arrangement.

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 and equity
securities, other-than-temporary impairments 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 and Equity 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.

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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.

At December 31, 2021 and December 31, 2020the estimated fair value of our
fixed maturity securities, short-term investments and equity securities by fair
value hierarchy was as follows:

Fair Value of Investments at December 31, 2021

                    (dollars in thousands)
                                                   Total Fair
 Level 1            Level 2          Level 3         Value
$    2,821$     321,486$ 28,076$    352,383
         1 %                91 %            8 %            100 %



        Fair Value of Investments at December 31, 2020
                    (dollars in thousands)
                                                   Total Fair
 Level 1            Level 2          Level 3          Value
$    6,518$     350,926$ 10,255$    367,699
         2 %                95 %            3 %            100 %



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

All of the fair values of our fixed maturity and equity securities 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).

Other-Than-Temporary Impairments on Available-For-Sale Securities

Securities that are classified as available-for-sale are subject to market
declines below amortized cost (a gross unrealized loss position). When a gross
unrealized loss position occurs, the security is considered impaired. Quarterly
or when necessary, we review each impaired security to identify whether the
impairment may be other-than-temporary impairment ("OTTI") and require the
recognition of an impairment loss in the current period earnings. Indication of
OTTI includes potential credit deterioration whether due
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to ratings downgrades, unexpected price variances, and/or other company or
industry specific concerns. A number of factors are considered in determining
whether or not a decline in a specific security is other-than-temporary,
including our current intention or need to sell the security or an indication
that a credit loss exists. An impairment loss will be recorded if our intention
is to sell an impaired security or it is considered to be more likely than not
that we will be required to sell the security.

Our review of our available-for-sale securities for impairment includes an
analysis of impaired securities in terms of severity and/or age of the gross
unrealized loss. Additionally, we consider a wide range of factors about the
issuer of the security and use our best judgment in evaluating the cause of the
decline in the estimated fair value of the security and in assessing the
likelihood for near-term recovery. Inherent in our evaluation of the security
are assumptions and estimates about the operations of the issuer and its future
earnings potential that includes the evaluation of the financial condition and
expected near-term and long-term prospects of the issuer, collateral position,
the relevant industry conditions and trends, and whether expected cash flows
will be sufficient to recover the entire amortized cost basis of the security.

The credit loss component of fixed maturity securities impairment is calculated
as the difference between amortized cost of the security and the present value
of the expected cash flows of the security. The present value is determined
using the best estimate of cash flows discounted at the effective rate implicit
to the security at the date of purchase or prior impairment. The methodology and
assumptions for estimating the cash flows vary depending on the type of
security. For mortgage-backed and asset-backed securities, cash flow estimates,
including prepayment assumptions, are based on data from widely accepted
third-party sources or internal estimates. In addition to prepayment
assumptions, cash flow estimates vary based on assumptions regarding the
underlying collateral characteristics, expectations of delinquency and default
rates, and structural support, including subordination and guarantees. If the
present value of the modeled expected cash flows equals or exceeds the amortized
cost of a security, no credit loss exists, and the security is considered to be
temporarily impaired. If the present value of the expected cash flows is less
than amortized cost, the security is determined to be other-than-temporarily
impaired for credit reasons and is recognized as an OTTI loss in earnings. The
portion of the OTTI that is not considered a credit loss, is recognized as OTTI
in accumulated comprehensive income.

There was OTTI on fixed maturity securities in the amount of $4 thousand and $68
thousand
for the years ended December 31, 2021 and December 31, 2020,
respectively.

Mortgage Loans

Our 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. We identify 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 we 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. Mortgage loans are considered past due when
full principal or interest payments have not been received according to
contractual terms.

At December 31, 2021 and December 31, 2020there was a valuation allowance of
$69 thousand and $141 thousandrespectively.

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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.

Our consolidated DAC will be lower relative to other insurance companies that
utilize unaffiliated distributors. GAAP does not permit the deferral of
commission revenues paid to Efinancial, our affiliated agency, in excess of
those expenses actually incurred by Efinancial in the placement of the policy.
Because we are focused on increasing insurance premium volume through
Efinancial, our operating results will reflect higher current period expenses
and lower current reported net income. Therefore, in consolidation, the
first-year commission acquisition costs ("Commission DAC") recorded in our
Insurance Segment is reduced to reflect the elimination of that portion of
Commission DAC that results from expenses of Efinancial that cannot be directly
tied to the successful placement of a policy. The amount of eliminated
Commission DAC is charged to current expense, and acquisition cost DAC is
recorded at a reduced amount, which represents the amount of Commission DAC that
is eligible for deferral. As a result of recognizing a majority of expenses for
the Efinancial sales immediately, we will recognize a charge against our
consolidated earnings (loss) and consolidated equity in the amount of such
expenses for the period in which they are incurred. See "Results of
Operations-Analysis of Segment Results-Corporate & Other Segment."

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 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
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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 September 30, 2021:

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.

Regarding this sensitivity testing 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 $0.7 million, while for the mortality scenario and the lapse
scenario there would be no impact to benefit reserves.

For the assumed life line of business sensitivity testing, there is also no
remaining DAC. Under all the sensitivity tests on this line, no benefit reserve
increases are needed.

For the Open Block sensitivity testing, DAC is still recoverable under the lapse
sensitivity test. However, under the mortality and investment earned rates
sensitivity tests, the DAC would have to be decreased by $7.9 million and $17.7
million, respectively.

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, 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.

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As of December 31, 2021, we had a 100% valuation allowance recorded against the
deferred tax assets related to the non-life subgroup of our tax return because
we determined that it is more likely than not that these assets will not be
recoverable. The recording of the valuation allowance 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. The balances for each period are shown based on the
life/non-life portions of the consolidated federal tax returns and in total.

                                              December 31, 2021                        December 31, 2020
                                       Life       Non-Life        Total         Life       Non-Life        Total
(dollars in thousands)
Deferred income tax assets, net
Total deferred tax assets            $ 53,090$  28,491$  81,581$ 52,646$  26,148$  78,794
Total deferred tax liabilities         40,390         8,432        48,822       41,720         9,483        51,203
Net deferred tax asset (liability)
  before valuation allowance           12,700        20,059        32,759       10,926        16,665        27,591
Valuation allowance                         -       (20,059 )     (20,059 )          -       (16,665 )     (16,665 )
Deferred income tax asset, net       $ 12,700     $       -     $  12,700$ 10,926     $       -     $  10,926




Due to the valuation allowance on the non-life subgroup, the effective income
tax rate reflected on our Consolidated Statements of Operations will vary
depending on the portion of our pretax income (loss) that results from our life
subgroup and the portion from our non-life subgroup. With the current full
valuation allowance, the current tax benefit related to our non-life subgroup is
limited. We continue to record tax expense (benefit) related to the pretax
income (loss) of our life subgroup.

Principal Revenue & Expense Items

Revenues

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.

Net Gains (Losses) on Investments

Net gains (losses) on investments result from sales of investment securities and
OTTI for estimated credit losses of fixed maturity securities.

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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.

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.

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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.

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
                                                       Year Ended December 31,
(dollars in thousands)
Revenues                                                 2021             2020
Net insurance premiums                               $    107,958$ 108,042
Net investment income                                      14,566          14,121
Net gains (losses) on investments                           3,106          (1,242 )
Other-than-temporary-impairments                               (4 )           (68 )
Earned commissions                                         44,393          21,811
Insurance lead sales                                        6,313           4,958
Other income                                                  247             209
Total revenues                                            176,579         147,831
Benefits and expenses
Life, annuity, and health claim benefits                   77,693          

77,692

Interest credited to policyholder account balances 2,984 3,118
Operating costs and expenses

                               94,712          

80,363

Amortization of deferred policy acquisition costs 18,225 13,961
Total benefits and expenses

                               193,614         

175,134

(Loss) income before income taxes                         (17,035 )       (27,303 )
Income tax expense (benefit)                                 (378 )        (2,275 )
Net (loss) income                                    $    (16,657 )$ (25,028 )

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Total Revenues

For the year ended December 31, 2021, total revenues were $176.6 million
compared to $147.8 million for the year ended December 31, 2020. This increase
of $28.7 million primarily resulted from higher earned commissions, investment
gains and insurance lead sales, partially offset by higher ceded premiums.

Benefits and Expenses

For the year ended December 31, 2021, total benefits and expenses were $193.6
million compared to $175.1 million for the year ended December 31, 2020. This
increase of $18.5 million was primarily due to operating costs and expenses and
amortization of deferred policy acquisition costs.

Loss from Operations Before Income Taxes

For the year ended December 31, 2021, we had a loss before taxes of $17.0
million compared to a loss before taxes of $27.3 million for the year ended
December 31, 2020. This decrease in loss of $10.3 million was primarily due to
higher earned commissions, net gains on investments and insurance lead sales,
partially offset by higher operating costs and expenses and amortization of
deferred policy acquisition costs.

income taxes

For the year ended December 31, 2021, our income tax benefit was $0.4 million
compared to an income tax benefit of $2.3 million for the year ended December
31, 2020. The lower benefit of $1.9 million reflects increased net 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."
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Analysis of Segment Results

Reconciliation of Segment Results to Consolidated Results

The following analysis reconciles the reported segment results to the Verity,
inc.
total consolidated results.


                                                    Year Ended December 31,
                                                      2021             2020
(dollars in thousands)
(Loss) income before income tax by segment
Agency                                            $     (3,971 )$    (866 )
Insurance                                                  (64 )          (622 )
Corporate & Other                                      (13,000 )       (25,815 )
(Loss) income from operations before income tax        (17,035 )       (27,303 )
Income tax (benefit) expense                              (378 )        (2,275 )
Net (loss) income                                 $    (16,657 )$ (25,028 )


Agency Segment

The results of our Agency Segment were as follows:

                                      Year Ended December 31,
                                        2021             2020
(dollars in thousands)
Revenues
Earned commissions                  $     46,455$  43,424
Insurance lead sales                       6,313           4,958
Total revenues                            52,768          48,382
Expenses
Operating costs and expenses              56,739          49,248
Total expenses                            56,739          49,248

(Loss) income before income taxes $ (3,971)$(866)

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Earned Commissions

For the year ended December 31, 2021earned commissions were $46.5 million
compared to $43.4 million for the year ended December 31, 2020. This increase of
$3.1 million resulted from increased sales in the retail channel, which was
primarily driven by increased marketing efforts, efficiency and agent
productivity, partially offset by lower sales in the wholesale channel.

Insurance Lead Sales

For the year ended December 31, 2021, insurance lead sales were $6.3 million
compared to $5.0 million for the year ended December 31, 2020. This increase of
$1.3 million was primarily due to higher click and transfer revenue.

Operating Costs and Expenses

For the year ended December 31, 2021, general operating expenses were $56.7
million compared to $49.2 million for the year ended December 31, 2020. This
increase of $7.5 million was primarily due to increased variable costs of $4.3
million and costs related to technology and marketing capabilities of $3.2
million.

Net (Loss) Income

For the year ended December 31, 2021, the Agency Segment incurred a net loss of
$4.0 million compared to a net loss of $0.9 million for the year ended December
31, 2020. This increase in net loss of $3.1 million was primarily the result of
increased operating costs and expenses, partially offset by higher earned
commissions and insurance lead sales.

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Insurance Segment

The results of our Insurance Segment were as follows:

                                                       Year Ended December 31,
                                                         2021             2020
(dollars in thousands)
Revenues
Net insurance premiums                               $    107,958         108,042
Net investment income                                      13,973          13,925
Net gains (losses) on investments                           2,352          (1,370 )
Other-than-temporary-impairments                               (4 )           (68 )
Other income                                                  247             209
Total revenues                                       $    124,526$ 120,738
Benefits and expenses
Life, annuity, and health claim benefits                   77,693          

77,692

Interest credited to policyholder account balances 2,984 3,118
Operating costs and expenses

                               25,688          

26,589

Amortization of deferred policy acquisition costs 18,225 13,961
Total benefits and expenses

                               124,590         

121,360

(Loss) income before income taxes                    $        (64 )$    (622 )

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Net Insurance Premiums

For the year ended December 31, 2021, net insurance premiums were $108.0 million
compared to $108.0 million for the year ended December 31, 2020. This slight
decrease was primarily due to a decrease of $4.8 million related to Closed
Block, partially offset by growth in our Core and Non-Core Life lines of $4.7
million, mainly driven by increases in LifeTime Benefit Term (LBT) and
RAPIDecision® Life.

Net Investment Income

For the year ended December 31, 2021, net investment income was $14.0 million
compared to $13.9 million for the year ended December 31, 2020. This slight
increase was primarily due to an increase in income from a larger mortgage loan
asset base, partially offset by a lower invested asset base in short term
investments and fixed maturities.

Net Gains (Losses) on Investments

For the year ended December 31, 2021, net gains on investments were $2.4 million
compared to a loss of $1.4 million for the year ended December 31, 2020. The
$3.8 million change was mainly due to the equity portfolio which incurred mark
to market gains of $1.0 million compared to losses of $1.9 million in the year
ended December 31, 2021 and December 31, 2020, respectively. In addition
investment gains on other invested assets increased $0.4 million related to net
asset value changes and gains on sales of fixed maturities increased $0.3
million.

Life, Annuity and Health Claim Benefits

For the year ended December 31, 2021, life, annuity and health claim benefits
were $77.7 million compared with $77.7 million for the year ended December 31,
2020. This slight increase was primarily due to an increase in Core life and
Non-Core life net claim benefits of $9.6 million, partially offset by a decrease
in future policy benefit reserves of $6.1 million. This increase was partially
offset by a decrease in Closed Block of $3.5 million. Net incurred policyholder
claims that included COVID-19 as a contributing cause of death was $10.5 million
and $4.3 million in 2021 and 2020, respectively.

Interest Credited to Policyholder Account Balances

For the year ended December 31, 2021interest credited was $3.0 million
compared to $3.1 million for the year ended December 31, 2020. This decrease of
$0.1 million was due to lower interest credited on assumed fixed annuity
contract-holder account balances.

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Operating Costs and Expenses

For the year ended December 31, 2021, general operating expenses were $25.7
million compared to $26.6 million for the year ended December 31, 2020. This
decrease of $0.9 million was primarily due to higher reinsurance allowances of
$6.5 million, which includes $3.7 million related to the Closed Block and $2.8
million in our Core and Non-Core products due to direct premium growth. Other
operating expenses increased by $5.6 million, primarily attributable to
depreciation on capitalized projects, staff costs and policy administration
expenses. See "Closed Block" section in this Form 10-K for further discussion
regarding Closed Block and "Note 8- Closed Block" in the accompanying Notes to
the Consolidated Financial Statements.

Amortization of Deferred Policy Acquisition Costs

For the year ended December 31, 2021, amortization of deferred acquisition costs
was $18.2 million compared to $14.0 million for the year ended December 31,
2020. This increase of $4.2 million includes an increase in the Closed Block of
$3.4 million and Core and Non-core of $3.3 million, partially offset by a
reduction of $2.4 million related to changes in our distribution channel
resulting from the AmeriLife agreement.

Net (Loss) Income

For the year ended December 31, 2021, net loss was $0.1 million compared to a
net loss of $0.6 million for the year ended December 31, 2020. The decrease in
net loss of $0.5 million resulted primarily from higher net investment gains and
decreases in net operating expenses, partially offset by an increase in
amortization of deferred policy acquisition costs.

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, 2021 and December 31, 2020 are
$10.5 million and $10.2 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.

The block where there are no dividends expected had a significant number of
policies issued in December 1999 which had level premiums for the first 20
durations, followed by premiums which increased significantly in duration 21 as
the premiums from that point forward go to an annually increasing scale. The
approximate increase in premiums going from the 20th to the 21st duration is
1300%. Direct policies are a mixture of annual, semi-annual, quarterly, and
monthly premium payment modes, whereas ceded policies are all annual premium
mode. Therefore, both direct and ceded premiums increased significantly in the
fourth quarter of 2019 on the Closed Block compared to the prior year as this
group of policies ended their level term with larger impacts affecting ceded
premiums more than direct premiums as a result of these modal differences.

Most of these policies lapsed in the first quarter of 2020. This caused a
reversal of ceded premiums and a reduction in the direct due and unpaid premiums
on the policies which lapsed. The lapsed policies also caused reversals of items
such as ceding allowances, reserves and amortization of deferred policy
acquisition costs.

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Corporate & Other Segment

The impact of the eliminations for intercompany transactions primarily consists
of the sales by our Agency Segment of life products of our Insurance Segment.
The eliminations represent the amounts required to eliminate the intercompany
transactions as recorded in our segment results, and in particular, to eliminate
any intersegment profits resulting from such transactions. Our segment results
follow the accounting principles and methods applicable to each segment as if
the intercompany transactions were with unaffiliated organizations:

Revenue-our Agency Segment recognizes all commission revenue earned in the year
the policy goes in force at the carrier.

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

Viewed at the segment level, because of the timing difference between the Agency
Segment's immediate recognition of commission revenue and the Insurance
Segment's deferral and amortization of the commission expense over the expected
life of the policy, all else being equal, the sale of a policy through our
Agency Segment results in an intersegment profit in an amount equal to the
difference between the commission paid and the related amortization expense.
However, in consolidation, two impacts occur. First, the intercompany revenue
recognized by our Agency Segment and the related deferred acquisition expense
recorded by our Insurance Segment are eliminated. Second, we record deferred
acquisition costs equal to that portion of Commission DAC that can be tied
directly to Efinancial's expenses incurred in the successful placement of a
policy. Therefore, in consolidation, the Commission DAC recorded in our
Insurance Segment is effectively reduced to reflect the elimination of that
portion of Commission DAC that results from Efinancial expenses that cannot be
directly tied to the successful placement of a policy. The amount of eliminated
Commission DAC, which represents a majority of the Commission DAC, is charged to
current expense, and acquisition cost DAC is recorded at a reduced amount, which
represents the amount of Commission DAC that is eligible for deferral under
GAAP. See "Critical Accounting Policies-Deferred Policy Acquisition Costs (DAC)"
and "Factors Affecting our Results-Strategic Goals and Financial Impact of Sales
of Policies Produced by Efinancial" for more information. The results of these
elimination entries are included in our Corporate & Other segment

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

                                                    Year Ended December 31,
                                                      2021             2020
(dollars in thousands)
Revenues
Net investment income                             $        593$     196
Net gains (losses) on investments                          754             128
Earned commissions                                      (2,062 )       (21,614 )
Total revenues                                            (715 )       (21,290 )
Expenses
Operating costs and expenses                            12,285           

4,525

Total expenses                                          12,285           

4,525

(Loss) income from operations before income tax $ (13,000)$(25,815)

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Net Investment Income


For the year ended December 31, 2021, net investment income was $0.6 million
compared to $0.2 million for the year ended December 31, 2020. This change is a
result of increases in assets attributable to the Corporate & Other segment.

Net Gains (Losses) on Investments


For the year ended December 31, 2021, net gains on investments were $0.7 million
compared to $0.1 million for the year ended December 31, 2020. This change is a
result of gains from other invested assets related to net asset value changes.



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Earned Commissions


For the year ended December 31, 2021, earned commissions were $(2.0) million
compared to $(21.6) million for the year ended December 31, 2020. This increase
is attributable to the elimination of lower intersegment earned commissions
resulting from declining intersegment sales.

Operating Expenses


For the year ended December 31, 2021, operating expenses were $12.3 million
compared to $4.5 million for the year ended December 31, 2020. The increase of
$7.8 million is primarily related to $8.1 million lower deferral of internal
agent selling expenses related to lower intersegment sales and $0.3 million of
other corporate initiatives.

Net Loss

The net loss for the year ended December 31, 2021 decreased $12.8 million to
$13.0 million from a net loss of $25.8 million for the year ended December 31,
2020. The smaller loss is primarily a result of lower intersegment sales and net
gains on investments.

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,
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or more frequently if circumstances require, we review the performance of all
portfolios and portfolio managers with the Investment Committee.

The following table shows the distribution of the fixed 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 decreased to 94.8% at December 31, 2021 from 97.9% at December
31, 2020 due to the S&P ratings on certain new securities acquired in our
portfolio of distressed residential mortgage-backed securities.


                                             Estimated Fair Value
                                 December 31, 2021          December 31, 2020
                                            (dollars in thousands)
S&P Rating
AAA                            $   68,171        19.3 %   $   91,153        25.2 %
AA                                 73,535        20.9 %       75,167        20.7 %
A                                  79,603        22.6 %       95,263        26.2 %
BBB                                69,420        19.7 %       72,945        20.0 %
Not rated                          43,254        12.3 %       21,261         5.8 %
Total investment grade            333,983        94.8 %      355,789        97.9 %
BB                                  7,832         2.2 %        4,814         1.3 %
B                                   4,031         1.1 %        2,627         0.7 %
CCC                                   341         0.1 %          418         0.1 %
D                                       4         0.0 %            5         0.0 %
Not Rated                           6,192         1.8 %          198         0.0 %
Total below investment grade       18,400         5.2 %        8,062         2.1 %
Total                          $  352,383       100.0 %   $  363,851       100.0 %




The following table sets forth the maturity profile of our fixed maturity
securities at December 31, 2021 and December 31, 2020. Expected maturities could
differ from contractual maturities because borrowers may have the right to call
or prepay obligations, with or without penalty.


                                          December 31, 2021                                       December 31, 2020
                         Amortized                   Estimated                   Amortized                   Estimated
(dollars in thousands)      Cost           %         Fair Value         %           Cost           %         Fair Value         %
Due in one year or
less                     $    1,753         0.5 %   $      1,771

0.5% $9,296 2.8% $9,371 2.6%
Due after one year
through five years

           36,245        11.1 %         38,497        

10.9% 42,301 12.9% 46,085 12.7%
Due after five years
through ten years

            67,802        20.8 %         71,435        

20.3% 41,115 12.5% ​​45,997 12.6%
Due after ten years 127,396 39.0% 145,580 41.3% 119,693 36.5% 143,477 39.4%
Securities not due at
to single

  maturity
date-primarily
mortgage
  and asset-backed
securities                   93,395        28.6 %         95,100        

27.0% 115,858 35.3% 118,921 32.7%
Total fixed maturities $326,591 100.0% $352,383 100.0% $328,263 100.0% $363,851 100.0%




Every quarter, we review all investments where the market value is less than the
carrying value to ascertain if the impairment of the security's value is OTTI.
The quarterly review is targeted to focus on securities with larger impairments
and that have been in an impaired status for longer periods of time. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Critical Accounting Polices-Other-Than-Temporary Impairments on
Available-For-Sale Securities".

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 $352.4 million and $363.9 million, and represented 86.3% and 85.7% of
our invested assets, as of December 31, 2021 and December 31, 2020,
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, 2021 and December
31, 2020, our book yield on fixed maturity securities available-for-sale was
3.9% and 3.9% for the years ended December 31, 2021 and December 31, 2020,
respectively.

See “Note 2 – Investments” in the Notes to the Consolidated Financial Statements
included in this Form 10-K.

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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, 2021                          December 31, 2020
                                         Year to Date      Average                  Year to Date      Average
                            Ending         Interest        Credit     

Ending Interest Credit

                           Balance         Credited         Rate      Balance         Credited         Rate
(dollars in thousands)
Annuity contract holder
deposits-assumed          $   71,832$       2,775      3.9%     $   74,918$       2,892      3.9%
Dividends left on
deposit                        6,957               173      2.5%          7,271               184      2.5%
Other                          1,705                36      2.1%          1,680                42      2.5%
  Total                   $   80,494$       2,984      3.7%     $   83,869$       3,118      3.7%





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

Our Insurance Segment realizes operating profit from the excess of our book
yield realized on fixed maturity securities that support our contract-holder
deposits over the amount of interest that we credit to the contract-holder. We
refer to this operating profit as the "spread" we earn on contract-holder
deposits. 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 other-than-temporary impairments of individual
securities related to credit impairments.

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. At December 31, 2021 and December 31, 2020, our Accumulated
Other Comprehensive Income (Loss) from mark-to-market adjustments of our
available-for-sale fixed maturity securities was $5.7 million and $7.8 million
(net of federal income taxes and reserve), respectively.

See “Note 13 – Accumulated Other Comprehensive Income (Loss)” in the Notes to
the Consolidated Financial Statements included in this Form 10-K.

Financial Position

At December 31, 2021, we had total assets of $788.0 million compared to total
assets at December 31, 2020 of $768.8 million, an increase of $19.2 million.
Reinsurance recoverables increased $26.1 million as a result of a $26.2 million
increase in ceded policy and claim reserves, partially offset by a $0.1 million
related to timing of settlements of reinsured claims. Commission and agent
balances increased $9.2 million due to the timing collections. Deferred policy
acquisition costs increased $8.5 million, primarily due to deferrals on new
business in excess of amortization. Deferred income taxes increased $1.8
million, primarily due to a $1.5 million tax credit on unrealized investment
market losses and a $0.3 million credit as a result of net operating loss. Other
assets increased $3.8 million, primarily due to increases in due premium and in
internally developed software. The invested asset base decreased $16.4 million,
primarily due to an decrease in fixed maturity securities of $11.5 million,
which includes $9.8 million of market value changes and net sales of equity
securities and mortgages of $6.8 million, partially offset by acquisitions and
mark-to-market investment gains of other
                                       39
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invested assets of $1.9 million. Cash decreased $13.8 million primarily related
to cash used from financing, investments and operating activities.

At December 31, 2021, we had total liabilities of $615.1million compared to
total liabilities of $573.5 million at December 31, 2020, an increase of $41.6
million. Future policy benefits and claims increased $34.5 million, primarily
due to a $42.5 million increase in Core and Non-Core lines from the growth and
maturity of the underlying blocks of business, partially offset by a decrease of
$2.0 million in annuities and assumed life and a decrease of $6.0 million in the
Closed Block. Other policyholder liabilities increased $11.4 million, primarily
due to $13.0 million in Core and Non-Core lines offset by a decrease of $1.3
million in Closed Block. Debt decreased $4.1 million due to net payments of $5.5
million, offset by capitalized interest of $1.4 million. Other liabilities
increased $3.5 million, primarily related to chargebacks allowances and
operating accruals. Policyholder dividend obligations related to the Closed
Block decreased $0.6 million. Reinsurance liabilities and payable increased $0.2
million, primarily due to timing of reinsurance settlements.

At December 31, 2021total equity decreased to $172.9 million desde $195.2
million
at December 31, 2020. This decreases in equity of $22.3 million consists
of a net loss of $16.7 million and a decrease of $5.7 million of 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 with Hannover Life, Fidelity Life is
able to pay level annual commissions instead of first-year-only commissions to
Efinancial for sales of RAPIDecision® Life policies, and Hannover Life advances
to Efinancial amounts approximately equal to first-year-only commissions for
sales of those policies. This arrangement reduces Fidelity Life's surplus strain
associated with issuing RAPIDecision® Life business while helping to provide
liquidity for Efinancial through the receipt of larger first-year-only
commissions. In the first quarter of 2021, the Company ceased new advances on
this financing arrangement. We are able to obtain advances up to $30.0 million
under our arrangement with Hannover Life. As of December 31, 2021, we had net
advances of $21.9 million under this arrangement.

We are a member of the Federal Home Loan Bank of Chicago (the "FHLBC"). As a
member, we are able to borrow on a collateralized basis from the FHLBC. We own
FHLBC common stock with a book value of $0.1 million, 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. There have been no borrowings
from the FHLBC during 2021 and 2020.

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.

Following the Conversion, Fidelity Life has agreed not to pay any common stock
dividends without the approval of a majority of the company designees. In
connection with the approval of the Conversion by the Illinois Director of
Insurance, we agreed, for a period of twenty-four months following the
completion of the offerings, to seek the prior approval of the Illinois
Department of Insurance for any declaration of an ordinary dividend by Fidelity
Life. To date we have not requested any such dividend and the 24 month prior
approval for ordinary dividends expired in August of 2021. During the years
ended 2021 and 2020, the Board of Directors of Fidelity Life approved no
dividend payments to VHI.

Our affiliated companies are parties to various internal service and cost
sharing arrangements. Reimbursement of these expenses occurs in a timely manner.

We have experienced net negative cash flows in 2021 and in most prior periods
due to continued growth in sales of our life insurance products and in our
Agency operations and through continued net withdrawals on assumed annuity
contract-holder deposits. Our annuity deposits are in run-off because we do not
market annuity contracts to generate annuity deposits to offset the withdrawal
activity on in-force contracts.
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Cash uses in our Insurance Segment result in negative operating cash flows
related to sales of new insurance policies because:

Policy acquisition costs (consisting of agent commissions, policy underwriting
and issue costs) exceed the amount of first year premium received from the
policyholder,

Depending on the product sold, a portion or all of the agent’s commission may be
paid as a cash advance to the agent and most of the underwriting and policy
issue costs are paid at the time the initial policy is issued, whereas the
premiums may be paid throughout the policy year, and

Amounts due from reinsurers to reimburse claims paid are usually paid at some
date after the claim has been paid.

The resulting negative first year cash flows from sales of new policies are
partially offset by positive cash flows from insurance policy renewals. The
continued sales growth in our Insurance operations has resulted in a net cash
decrease from operations. Cash flows from reinsurance collections will vary from
period to period based on claims activity.

Our Corporate & Other Segment experienced negative cash flows as a result of the
payment of allocated overhead expenses.

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, 2021, the Company had a net decrease in
cash of $13.8 million compared to a net decrease of $1.6 million for the year
ended December 31, 2020.

The decrease in cash flows from operating activities is primarily due to
increased paid claims and timing related to reinsurance recoverables, partially
offset by sales of equity securities.

Cash flows from investing activities mainly includes our fixed maturities,
mortgage loans, and equity holdings. 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, 2021$1.3 million was used principally to acquire
$6.4 million of capitalized software, partially offset by sales of net invested
assets of $5.1 million.

Cash flows from financing activities declined due to changes in the commission
financing arrangement. Also included in financing cash are cash withdrawals by
contract holders of annuities that were primarily written in the late 1980s.

The following table summarizes our cash flows for the years ended December 31,
2021 and 2020.


                                                            Year Ended December 31,
                                                            2021                2020
                                                             (dollars in thousands)
Consolidated Summary of Cash Flows
Net cash (used) provided by operating activities        $        (794 )$      5,303
Net cash (used) provided by investing activities               (1,275 )           (8,754 )
Net cash (used) provided by financing activities              (11,774 )     

1,851

Net (decrease) in cash, cash equivalents and
restricted cash                                         $     (13,843 )$     (1,600 )


Risk-Based Capital

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
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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, 2021 and 2020 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
claims 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, 2021 and December 31, 2020, the
reserve credit under this arrangement was approximately $195.1 and $181.4
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.

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