Insurance Segment
The results of our Insurance Segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(dollars in thousands) |
|
|
(dollars in thousands) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Net insurance premiums |
|
$ |
24,468 |
|
|
$ |
24,932 |
|
|
$ |
73,474 |
|
|
|
75,662 |
|
Net investment income |
|
|
3,927 |
|
|
|
3,312 |
|
|
|
10,982 |
|
|
|
10,071 |
|
Net losses (gains) on investments |
|
|
(802 |
) |
|
|
(266 |
) |
|
|
134 |
|
|
|
1,958 |
|
Other-than-temporary-impairments |
|
|
(298 |
) |
|
|
- |
|
|
|
(401 |
) |
|
|
(3 |
) |
Other income |
|
|
144 |
|
|
|
65 |
|
|
|
419 |
|
|
|
202 |
|
Total revenues |
|
|
27,439 |
|
|
|
28,043 |
|
|
|
84,608 |
|
|
|
87,890 |
|
Benefits and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Life, annuity, and health claim benefits |
|
|
17,505 |
|
|
|
19,216 |
|
|
|
47,622 |
|
|
|
58,574 |
|
Interest credited to policyholder account balances |
|
|
646 |
|
|
|
722 |
|
|
|
2,100 |
|
|
|
2,219 |
|
Operating costs and expenses |
|
|
7,957 |
|
|
|
5,846 |
|
|
|
25,143 |
|
|
|
18,012 |
|
Amortization of deferred policy acquisition costs |
|
|
4,086 |
|
|
|
3,297 |
|
|
|
13,237 |
|
|
|
10,475 |
|
Total benefits and expenses |
|
|
30,194 |
|
|
|
29,081 |
|
|
|
88,102 |
|
|
|
89,280 |
|
Income (loss) before income taxes |
|
$ |
(2,755 |
) |
|
$ |
(1,038 |
) |
|
$ |
(3,494 |
) |
|
$ |
(1,390 |
) |
Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021
Net Insurance Premiums
For the three months ended September 30, 2022, net insurance premiums were $24.5 million compared to $24.9 million for the three months ended September 30, 2021. The decrease of $0.4 million was primarily due to the new reinsurance agreement with Swiss Re (see discussion earlier in this Management Discussion and Analysis of Financial Condition and results of Operations) of $1.5 million and a decrease in Closed Block of $0.2 million, partially offset by a $1.5 million due to growth in our core and non-core lines of $1.2 million.
26
Net Investment Income
For the three months ended September 30, 2022, net investment income increased to $3.9 million compared to $3.3 million for the three months ended September 30, 2021. The $0.6 million increase was mainly due to higher reinvestment yields in the fixed maturities portfolio, partially offset by a decrease in equity securities. The equity securities portfolio was sold in 2021. For more information on net investment income, see “Note 2 – Investments” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.
Net Losses on Investments
For the three months ended September 30, 2022, net losses on investments was $0.8 million compared to $0.3 million for the three months ended September 30, 2021. The $0.5 million increased net loss was mainly due to losses in other invested assets and mortgage loans, partially offset by valuation changes in the equity securities portfolio. The equity securities portfolio was sold in 2021. For more information on net (losses) gains on investments, see “Note 2 – Investments” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.
Other-than-temporary impairments
For the three months ended September 30, 2022, other-than-temporary impairments on investments increased to $0.3 million compared to none for the three months ended September 30, 2021. The $0.3 million of other-than-temporary impairments relates to available for sale fixed maturity securities the Company intends to sell.
.Life, Annuity and Health Claim Benefits
For the three months ended September 30, 2022, life, annuity and health claim benefits were $17.6 million compared with $19.2 million for the three months ended September 30, 2021. This decrease of $1.6 million was primarily due to a decrease in claim benefits of $2.4 million which includes a reduction of $1.0 million related to the new reinsurance agreement with Swiss Re (see discussion earlier in this Management Discussion and Analysis of Financial Condition and results of Operations) and a reduction of claims related to Covid-19.
Operating Costs and Expenses
For the three months ended September 30, 2022, operating costs and expenses were $8.0 million compared to $5.8 million for the three months ended September 30, 2021. The $2.2 million increase was attributable to a decrease of $1.8 million of other operating expenses, primarily related to staff costs and depreciation expense and reinsurance allowances of $0.4 million, largely related to changes in the reinsurance agreements, primarily Swiss Re.
Amortization of Deferred Policy Acquisition Costs
For the three months ended September 30, 2022, amortization of deferred policy acquisition costs was $4.1 million compared to $3.3 million for the three months ended September 30, 2021. The increase of $0.8 million primarily related to Closed Block.
Income (Loss) Before Income Taxes
For the three months ended September 30, 2022, net loss was $2.7 million compared to net loss of $1.0 million for the three months ended September 30, 2021. This increase in net loss of $1.7 million resulted primarily from an increase in operating expenses of $2.2 million, increased amortization of deferred policy acquisition costs of $0.8 million and an increase in net losses from investments of $0.5 million and a decrease of net insurance premiums of $0.3 million, partially offset by a $1.7 million decrease in life, annuity and health claim benefits.
Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021
Net Insurance Premiums
For the nine months ended September 30, 2022, net insurance premiums were $73.5 million compared to $75.7 million for the nine months ended September 30, 2021. The decrease of $2.2 million was primarily due to a new reinsurance agreement with Swiss Re (see discussion earlier in this Management Discussion and Analysis of Financial Condition and results of Operations) which reduced net insurance premiums by $11.3 million in both our core and non-core lines of business. This was partially offset by a decrease as a $9.0 million due to growth in our Core and non-core lines and $0.1 million in Closed Block.
27
Net Investment Income
For the nine months ended September 30, 2022, net investment income was $11.0 million compared to $10.1 million for the nine months ended September 30, 2021. The $0.9 million increase was mainly due to higher reinvestment yields in the fixed maturities portfolio, offset by a decrease from equity securities and the mortgage loan portfolio. The equity securities portfolio was sold in 2021. For more information on net investment income, see “Note 2 – Investments” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.
Net Gains on Investments
For the nine months ended September 30, 2022, net gains on investments were $0.1 million compared to $2.0 million for the nine months ended September 30, 2021. The $1.9 million increase was mainly due to a reduction in sales of fixed maturities and valuation changes in both the equity securities portfolio and other invested assets. The equity securities portfolio was sold in 2021. For more information on net gains (losses) on investments, see “Note 2 – Investments” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.
Other-than-temporary impairments
For the nine months ended September 30, 2022, other-than-temporary impairments on investments increased to $0.4 million compared to $0.0 million for the nine months ended September 30, 2021. The $0.4 million of other-than-temporary impairments relates to available for sale fixed maturity securities the Company intends to sell.
Other Income
For the nine months ended September 30, 2022, other income increased to $0.4 million compared to $0.2 million for the nine months ended September 30, 2021. The $0.2 million increase is primarily related to licensing fee revenue from our Lifetime Benefit Term products.
Life, Annuity and Health Claim Benefits
For the nine months ended September 30, 2022, life, annuity and health claim benefits were $47.6 million compared to $58.6 million for the nine months ended September 30, 2021. This decrease of $11.0 million was primarily due to the new reinsurance agreement with Swiss Re (see discussion earlier in this Management Discussion and Analysis of Financial Condition and results of Operations) which reduced Life, annuity and health claim benefits by $9.4 million, and our core and non-core lines of business also decreased $1.6 million, primarily due to a reduction of claims related to Covid-19.
Operating Costs and Expenses
For the nine months ended September 30, 2022, operating costs and expenses were $25.1 million compared to $18.0 million for the nine months ended September 30, 2021. The $7.1 million increase was attributable, primarily to a $4.1 million increase in other operating expenses, primarily related to staff costs and depreciation expense. In addition, reinsurance allowances of $3.0 million largely related to changes in the reinsurance agreements, primarily Swiss Re decreased.
Amortization of Deferred Policy Acquisition Costs
For the nine months ended September 30, 2022, amortization of deferred policy acquisition costs was $13.2 million compared to $10.5 million for the nine months ended September 30, 2021. The increase of $2.7 million primarily relates to increases in Closed Block of $2.1 million and our core and non-core lines of $0.6 million.
Income (Loss) Before Income Taxes
For the nine months ended September 30, 2022, net loss was $3.5 million compared to net loss of $1.4 million for the nine months ended September 30, 2021. This increase in net loss of $2.1 million resulted primarily from an increase in operating expenses of $7.1 million, amortization of deferred policy acquisition costs of $2.8 million, decreased net insurance premiums of $2.2 million and a decrease in net gains (losses) from investments of $1.9 million, partially offset by $11.0 million decrease in life, annuity and health claim benefits and $0.9 million in net investment income.
28
Closed Block
The Closed Block was formed as of October 1, 2006 and contains all participating policies issued or assumed by Fidelity Life. The assets and future net cash flows of the Closed Block are available only for purposes of paying benefits, expenses and dividends of the Closed Block and are not available to the Company, except for an amount of additional funding that was established at inception. The additional funding was designed to protect the block against future adverse experience, and if the funding is not required for that purpose, it is subject to reversion to the Company in the future. Any reversion of Closed Block assets to the Company must be approved by the Illinois Department of Insurance.
The maximum future earnings to be recognized from Closed Block assets and liabilities represent the estimated future Closed Block profits that will accrue to the Company and is calculated as the excess of Closed Block assets over Closed Block liabilities. Included in Closed Block assets at September 30, 2022 and December 31, 2021, are $10.6 million and $10.5 million, respectively, of additional Closed Block funding, plus accrued interest, that is eligible for reversion to the Company if not needed to fund Closed Block experience.
The Closed Block was funded based on a model developed to forecast the future cash flows of the Closed Block which is referred to as the “glide path.” The glide path model projected the anticipated future cash flows of the Closed Block as established at the initial funding. We compare the actual results of the Closed Block to expected results from the glide path as part of the annual assessment of the current level of policyholder dividends. The assessment of policyholder dividends includes projections of future experience of the Closed Block policies and the investment experience of the Closed Block assets. The review of Closed Block experience also includes consideration of whether a policy dividend obligation should be recorded to reflect favorable Closed Block experience that has not yet been reflected in the dividend scales. See “Note 5—Closed Block” in the accompanying Notes to the Interim Condensed Consolidated Financial Statements.
Corporate & Other Segment
The results of the Corporate & Other Segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(dollars in thousands) |
|
|
(dollars in thousands) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
199 |
|
|
$ |
65 |
|
|
$ |
408 |
|
|
$ |
170 |
|
Net gains (losses) on investments |
|
|
(470 |
) |
|
|
140 |
|
|
|
356 |
|
|
|
729 |
|
Earned commissions |
|
|
(112 |
) |
|
|
(107 |
) |
|
|
(313 |
) |
|
|
(1,965 |
) |
Total revenues |
|
|
(383 |
) |
|
|
98 |
|
|
|
451 |
|
|
|
(1,066 |
) |
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses |
|
|
1,066 |
|
|
|
3,305 |
|
|
|
5,143 |
|
|
|
8,907 |
|
Total expenses |
|
|
1,066 |
|
|
|
3,305 |
|
|
|
5,143 |
|
|
|
8,907 |
|
(Loss) income before income taxes |
|
$ |
(1,449 |
) |
|
$ |
(3,207 |
) |
|
$ |
(4,692 |
) |
|
$ |
(9,973 |
) |
Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021
Net Investment Income
For the three months ended September 30, 2022, net investment income was $0.2 million compared to $0.1 million for the three months ended September 30, 2021. The slight change is a result of increased yields in the fixed maturity portfolio.
Net Gains (Losses) on Investment
For the three months ended September 30, 2022, net gains (losses) on investments were ($0.5) million compared to $0.1 million for the three months ended September 30, 2021. The gains (losses) are attributable to net asset valuation changes of other invested assets.
Operating Expenses
For the three months ended September 30, 2022, operating expenses were $1.1 million compared to $3.3 million for the three months ended September 30, 2021. The decrease of $2.2 million is primarily related to the completion of corporate wide initiatives.
29
(Loss) Income Before Income Taxes
For the three months ended September 30, 2022, net loss decreased to $1.5 million from $3.2 million for the three months ended September 30, 2021. The reduced loss is primarily a result of lower operating costs and expenses.
Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021
Net Investment Income
For the nine months ended September 30, 2022, net investment income was $0.4 million compared to $0.2 million for the nine months ended September 30, 2021. The slight change is a result of increased yields in the fixed maturity portfolio.
Net Gains on Investments
For the nine months ended September 30, 2022, net gains on investments were $0.4 million compared to $0.7 million for the nine months ended September 30, 2021. This change is a result of gains from other invested assets related to net asset value changes.
Earned Commissions
For the nine months ended September 30, 2022, earned commissions were ($0.3) million compared to ($2.0) million for the nine months ended September 30, 2021. This decrease is attributable to the elimination of lower intersegment earned commissions resulting from declining intersegment sales.
Operating Expenses
For the nine months ended September 30, 2022, operating expenses were $5.1 million compared to $8.9 million for the nine months ended September 30, 2021. The decrease of $3.8 million is primarily related to the completion of corporate wide initiatives, partially offset by one-time severance activity.
(Loss) Income Before Income Taxes
For the nine months ended September 30, 2022, net loss decreased to $4.7 million from $10.0 million for the nine months ended September 30, 2021. The decreased loss is primarily a result of lower intersegment sales and lower operating costs and expenses.
Investments
Investment Returns
We invest available cash and funds that support our regulatory capital, surplus requirements and policy reserves in investment securities that are included in the Insurance and Corporate & Other Segments. We earn income on these investments in the form of interest on fixed maturities (bonds and mortgage loans) and dividends (equity holdings). Net investment income is recorded as revenue, net of investment related expenses. The amount of net investment income that we recognize will vary depending on the amount of invested assets that we own, the types of investments, the interest rates earned, and amount of dividends received on our investments.
Gains and losses on sales of investments are classified as “realized investment gains (losses)” and are recorded as revenue. Capital appreciation and depreciation caused by changes in the market value of investments classified as “available-for-sale” is recorded in accumulated other comprehensive income. The amount of investment gains and losses that we recognize depends on the amount of and the types of invested assets we own, and the market conditions related to those investments. Our cash needs can vary from time to time and could require that we sell invested assets to fund cash needs.
Investment Guidelines
Our investment strategy and guidelines are developed by management and approved by the Investment Committee of Fidelity Life’s board of directors. Our investment strategy related to the Insurance Segment is designed to maintain a well-diversified, high quality fixed income portfolio that will provide adequate levels of net investment income and liquidity to meet our policyholder obligations under our life insurance policies and our assumed annuity deposits. To help maintain liquidity, we establish the duration of invested assets within a tolerance to the policy liability duration. The investments of the Insurance Segment are managed with an emphasis on current income within quality and diversification constraints. The focus is on book yield of the fixed income portfolio as the anticipated portfolio yield is a key element used in pricing our insurance products and establishing policyholder crediting rates on our annuity contracts.
30
We apply our overall investment strategy and guidelines on a consolidated basis for purposes of monitoring compliance with our overall guidelines. All of our investments are owned by Fidelity Life and are maintained in compliance with insurance regulations. Critical guidelines of our investment plan include:
•Asset concentration guidelines that limit the amount that we hold in any one issuer of securities,
•Asset quality guidelines applied on a portfolio basis and for individual issues that establish a minimum asset quality standard for portfolios and establish minimum asset quality standards for investment purchases and investment holdings,
•Liquidity guidelines that limit the amount of illiquid assets that can be held at any time, and
•Diversification guidelines that limit the exposure at any time to the total portfolio by investment sectors.
Our investment portfolios are all managed by third-party investment managers that specialize in insurance company asset management. These managers are selected based upon their expertise in the particular asset classes that we own. We contract with an investment management firm to provide overall assistance with oversight of our portfolio managers, evaluation of investment performance and assistance with development and implementation of our investment strategy. This investment management firm reports to our Chief Financial Officer and to the Investment Committee of Fidelity Life’s board of directors. On a quarterly basis, or more frequently if circumstances require, we review the performance of all portfolios and portfolio managers with the Investment Committee.
The following table shows the distribution of the fixed maturities classified as available-for-sale by quality rating using the rating assigned by Standard & Poor’s (S&P), a nationally recognized statistical rating organization. For securities where the S&P rating is not available (not rated), the NAIC rating is used. Over the periods presented, we have maintained a consistent weighted average bond quality rating of “A.” The percentage allocation of total investment grade securities was 95.0% and 94.8% at September 30, 2022 and December 31, 2021, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value |
|
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
|
|
(dollars in thousands) |
|
S&P Rating |
|
|
|
|
|
|
|
|
|
AAA |
|
$ |
53,558 |
|
|
|
18.3 |
% |
|
$ |
68,171 |
|
|
|
19.3 |
% |
AA |
|
|
64,510 |
|
|
|
22.0 |
% |
|
|
73,535 |
|
|
|
20.9 |
% |
A |
|
|
62,567 |
|
|
|
21.3 |
% |
|
|
79,603 |
|
|
|
22.6 |
% |
BBB |
|
|
55,380 |
|
|
|
18.9 |
% |
|
|
69,420 |
|
|
|
19.7 |
% |
Not rated |
|
|
42,589 |
|
|
|
14.5 |
% |
|
|
43,254 |
|
|
|
12.3 |
% |
Total investment grade |
|
|
278,604 |
|
|
|
95.0 |
% |
|
|
333,983 |
|
|
|
94.8 |
% |
BB |
|
|
6,208 |
|
|
|
2.1 |
% |
|
|
7,832 |
|
|
|
2.2 |
% |
B |
|
|
3,739 |
|
|
|
1.3 |
% |
|
|
4,031 |
|
|
|
1.1 |
% |
CCC |
|
|
640 |
|
|
|
0.2 |
% |
|
|
341 |
|
|
|
0.1 |
% |
D |
|
|
— |
|
|
|
0.0 |
% |
|
|
4 |
|
|
|
0.0 |
% |
Not Rated |
|
|
4,022 |
|
|
|
1.4 |
% |
|
|
6,192 |
|
|
|
1.8 |
% |
Total below investment grade |
|
|
14,609 |
|
|
|
5.0 |
% |
|
|
18,400 |
|
|
|
5.2 |
% |
Total |
|
$ |
293,213 |
|
|
|
100.0 |
% |
|
$ |
352,383 |
|
|
|
100.0 |
% |
The following table sets forth the maturity profile of our fixed maturities at September 30, 2022 from December 31, 2021. Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without penalty.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
(dollars in thousands) |
|
Amortized Cost |
|
|
% |
|
|
Estimated Fair Value |
|
|
% |
|
|
Amortized Cost |
|
|
% |
|
|
Estimated Fair Value |
|
|
% |
|
Due in one year or less |
|
$ |
6,258 |
|
|
|
1.9 |
% |
|
$ |
6,240 |
|
|
|
2.1 |
% |
|
$ |
1,753 |
|
|
|
0.5 |
% |
|
$ |
1,771 |
|
|
|
0.5 |
% |
Due after one year through five years |
|
|
28,114 |
|
|
|
8.6 |
% |
|
|
26,975 |
|
|
|
9.2 |
% |
|
|
36,245 |
|
|
|
11.1 |
% |
|
|
38,497 |
|
|
|
10.9 |
% |
Due after five years through ten years |
|
|
73,308 |
|
|
|
22.3 |
% |
|
|
67,930 |
|
|
|
23.2 |
% |
|
|
67,802 |
|
|
|
20.8 |
% |
|
|
71,435 |
|
|
|
20.3 |
% |
Due after ten years |
|
|
138,049 |
|
|
|
42.0 |
% |
|
|
115,438 |
|
|
|
39.5 |
% |
|
|
127,396 |
|
|
|
39.0 |
% |
|
|
145,580 |
|
|
|
41.3 |
% |
Securities not due at a single maturity date-primarily mortgage and asset-backed securities |
|
|
82,636 |
|
|
|
25.2 |
% |
|
|
76,630 |
|
|
|
26.1 |
% |
|
|
93,395 |
|
|
|
28.6 |
% |
|
|
95,100 |
|
|
|
27.0 |
% |
Total fixed maturities |
|
$ |
328,365 |
|
|
|
100.0 |
% |
|
$ |
293,213 |
|
|
|
100.0 |
% |
|
$ |
326,591 |
|
|
|
100.0 |
% |
|
$ |
352,383 |
|
|
|
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 “Note 9 – Accumulated Other Comprehensive (Loss) Income” in the accompanying Interim Condensed Consolidated Financial Statements included in this Form 10-Q.
31
Net Investment Income
One key measure of our net investment income is the book yield on our holdings of fixed maturities classified as available-for-sale. Fair value of these securities totaled $293.2 million and $352.4 million as of September 30, 2022 and December 31, 2021, 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 nine months ended September 30, 2022 and 2021, our book yield on fixed maturities available-for-sale was 4.3% and 3.6%, respectively. See “Note 2 – Investments” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.
Interest Credited to Policyholder Account Balances
Included with the future policy benefits is the liability for contract holder deposits on deferred annuity contracts assumed through two reinsurance agreements effective in 1991 and 1992 and certain other policy funds left on deposit with the Company. The aggregate liability for deposits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
|
|
Ending Balance |
|
|
Ending Balance |
|
|
Year to Date Interest Credited |
|
|
Year to Date Interest Credited |
|
|
|
(dollars in thousands) |
|
Annuity contract holder deposits—assumed |
|
$ |
70,028 |
|
|
$ |
71,832 |
|
|
$ |
1,946 |
|
|
$ |
2,062 |
|
Dividends left on deposit |
|
|
6,826 |
|
|
|
6,957 |
|
|
|
128 |
|
|
|
130 |
|
Other |
|
|
1,657 |
|
|
|
1,705 |
|
|
|
26 |
|
|
|
27 |
|
Total |
|
$ |
78,511 |
|
|
$ |
80,494 |
|
|
$ |
2,100 |
|
|
$ |
2,219 |
|
The liability for deferred annuity deposits represents the contract holder account balances. Due to the declines in market interest rates and the book yield on our investment portfolio, we credit interest on all contract holder deposit liabilities at contractual rates that are currently at the minimum rate allowed by the contract or by state regulations.
Our Insurance Segment realizes operating profit from the excess of our book yield realized on fixed maturities that support our contract holder deposits over the amount of interest that we credit to the contract holder. We refer to this operating profit as the “spread” we earn on contract holder deposits. If book yields decline further, the amount of spread between the interest earned and credited will be reduced.
Net Gains (Losses) on Investments
Net gains (losses) on investments are subject to general economic trends and generally correlate with movements in major market indexes. The amounts classified as net realized gains (losses) in our Interim Condensed Consolidated Statements of Operations include amounts realized from sales of investments, mark-to-market adjustments and OTTI of individual securities related to credit impairment. See “Note 2 – Investments” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.
Unrealized Holding Gains (Losses)
The Company records capital appreciation/depreciation on the available-for-sale fixed maturities. At September 30, 2022 and 2021, accumulated other comprehensive income, from mark-to-market adjustments of our available-for-sale fixed income securities, net of federal income taxes and reserves was ($41.0) million and ($4.6) million, respectively. See “Note 9 – Accumulated other comprehensive (loss) income” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.
At September 30, 2022 our fixed maturity securities had an unrealized loss of $35.2 million compared to an unrealized gain of $25.8 million at December 31, 2021, resulting in an unrealized loss of $61.0 million for the nine months ended September 30, 2022. Duration measures the sensitivity of a bond’s price to changes in market yields and convexity measures a bond’s duration sensitivity to changes in market yields. The company’s unrealized loss of $61.0 million in our fixed maturities portfolio which has a duration of 7.1, convexity of 0.853, and current yield of 5.8%, is accounted for by the increase in the 10-year treasury bill yield for the first nine months of 2022 of 231 basis points, along with the widening of credit spreads over the same period of time.
Financial Position
At September 30, 2022, we had total assets of $767.5 million compared to total assets at December 31, 2021 of $788.0 million, a decrease of $20.5 million. The invested asset base decreased $58.0 million, mainly due to $60.9 million in net unrealized losses. The remainder represents net purchases and sales in the portfolio. Cash and cash equivalents decrease of $9.7 million is attributable to cash used in operating, investing and financing activities. See Cash Flows section for further discussion on changes in cash. Deferred policy acquisition costs decreased $3.5 million, primarily due to a reduction of $7.1 million driven by a change in reinsurance agreement, partially offset by deferrals on new business in excess of amortization. The above decreases were partially offset by the following:
32
Reinsurance recoverables increased $27.9 million as a result of a $23.7 million increase in ceded policy and claim reserves and $4.2 million related to timing of settlements of reinsured claims. Deferred income tax assets increased $14.8 million due to tax credits of $10.9 million on unrealized investment market losses and $3.9 million as a result of net loss. Commission and agent balances increased $4.7 million due to increased commission receivables in the Agency segment primarily related to levelized commission structures implemented in 2022, partially offset by a decrease in agent debit balances. Other assets increased $2.3 million, primarily due to establishment of a right-of-use asset in the amount of $1.7 million from the adoption of ASU No. 2016-02, Leases (Topic 842) and internally developed software. Accrued investment income increased $1.0 million due to timing of receipt of earnings.
At September 30, 2022, we had total liabilities of $648.7 million compared to total liabilities of $615.1 million at December 31, 2021, an increase of $33.6 million. Future policy benefits and claims increased $27.4 million, primarily due to a $35.6 million increase in Core Life and Non-Core Life lines, resulting from growth of the underlying blocks of business, partially offset by decreases in Annuities and assumed life of $6.1 million and Closed Block of $2.1 million. Debt increased $8.4 million related to an increase in net borrowing of $7.5 million and interest accrued of $0.9 million under our commission financing agreement with Hannover Life. Other liabilities increased $4.4 million, due to an operating lease liability from the adoption of ASU No. 2016-02, Leases (Topic 842) in the amount of $1.4 million, securities in transit of $1.2 million and other operating liabilities of $1.8 million. The above increases were partially offset by the following decreases: Policyholder dividend obligation related to the Closed Block decreased $3.3 million, primarily related to changes in accumulated net unrealized investment gains of $3.0 million. Other policyholder liabilities decreased $2.4 million due to a decrease in claim reserves and Policyholder account balances decreased $2.0 million largely due to annuity payments.
At September 30, 2022, total equity decreased to $118.8 million from $172.9 million at December 31, 2021. This decrease in equity of $54.1 million was attributable to decreases in other comprehensive loss of $41.0 million related to market declines in fixed maturities net of tax and in retained earnings of $13.1 million due to net loss.
Liquidity and Capital Resources
Our principal sources of funds are from premium revenues, commission revenues, net investment income and proceeds from the sale or maturity of investments and net borrowings. The Company’s primary uses of funds are for payment of life, annuity and health claim benefits, contract holder withdrawals on assumed annuity contracts, new business acquisition costs for our insurance operations (i.e., commissions, underwriting and issue costs), cost of sales for Agency operations (i.e., agent compensation, purchased lead and lead generation costs), operating costs and expenses and purchases of investments. Our investment portfolio is structured to provide funds periodically over time, through net investment income and maturities, for the payment of policy benefits and contract holder withdrawals.
Under our commission financing arrangement with Hannover Life, Fidelity Life is able to pay level annual commissions instead of first year only commissions to Efinancial for sales of RAPIDecision® Life policies and Hannover Life advances to Efinancial amounts approximately equal to first year only commissions for sales of those policies. This arrangement reduces Fidelity Life’s surplus strain associated with issuing RAPIDecision® Life business while helping to provide liquidity for Efinancial through the receipt of larger first year only commissions. In the first quarter of 2021, the Company ceased new advances on this financing arrangement. On March 31, 2022, Efinancial entered into a new commission financing arrangement and is taking new advances on this financing arrangement. As of September 30, 2022 and December 31, 2021, we had net advances of $29.4 million and $21.9 million, respectively, under this arrangement.
We are a member of the Federal Home Loan Bank of Chicago (the “FHLBC”). As a member, we are able to borrow on a collateralized basis from the FHLBC. We own FHLBC common stock with a book value of $0.1 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 the borrowing. There have been no borrowings from the FHLBC during 2022 and 2021.
Cash Flows
For the nine months ended September 30, 2022, the Company had a net decrease in cash of $9.7 million compared to a net decrease of $15.5 million for the nine months ended September 30, 2021.
The current year decrease in cash flows from operating activities is primarily due to timing related to reinsurance recoverables and a decrease in other policyholder liabilities.
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 first nine months of 2022 cash of $6.1 million was used by investing activities and includes $4.2 million of capitalized software and $2.0 million of investment purchases net of sales and maturities.
33
Cash flows from financing activities increased $3.5 million which includes $7.4 million, net proceeds from our commission financing program, partially offset by $3.9 million in cash withdrawals, net of deposits, by contract holders of annuities that were primarily written in the late 1980s.
The following table summarizes our cash flows for the nine months ended September 30, 2022 and 2021:
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Nine Months Ended September 30, |
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2022 |
|
|
2021 |
|
|
|
(dollars in thousands) |
|
Consolidated Summary of Cash Flows |
|
|
|
|
|
|
Net cash (used) provided by operating activities |
|
$ |
(7,094 |
) |
|
$ |
1,265 |
|
Net cash (used) provided by investing activities |
|
|
(6,128 |
) |
|
|
(7,688 |
) |
Net cash provided (used) by financing activities |
|
|
3,526 |
|
|
|
(9,107 |
) |
Net (decrease) increase in cash, cash equivalents and restricted cash |
|
$ |
(9,696 |
) |
|
$ |
(15,530 |
) |
Recent Accounting Pronouncements
All applicable adopted accounting pronouncements have been reflected in our Interim Condensed Consolidated Financial Statements as of and for the nine months ended September 30, 2022. See “Note 1 – Summary of Significant Accounting Policies” in the Notes to the Interim Condensed Consolidated Financial Statements included in this Form 10-Q.