Make the Right Move with Kansas City Life Insurance Company Kansas City Life Insurance Company Home Office: Kansas City, MO 3520 Broadway Kansas City, MO 64111 816-753-7000 www.kclife.com 2011 Annual Report The Game of Chess Make the Right Move with Kansas City Life Strategy. Goals. Concentration. Protection. Precision. Relationships. In the game of chess, these components create a solid player; a player who devises creative solutions to put their plan into action. And so it is in business; the same components create a solid business partner. Since 1895, Kansas City Life has devised long-term goals; concentrating on its known strategies to remain successful while adapting to an ever-changing environment. Perhaps the most significant factor in the success of Kansas City Life’s 116-year history is the strategic relationships that have developed over time. On the following pages, you’ll find stories detailing two of Kansas City Life’s most prominent agencies that recently celebrated centennial anniversaries with our Company – Morris Financial Group and Generations Financial Resources. The leaders of these agencies, along with their predecessors, have continually evaluated their position to best fit their strategy. And with each change in position, these leaders brought new knowledge to the forefront from which to determine their next moves; adapting to the changes in front of them. Throughout the past 100 years, however, one thing has remained a constant – their teamwork and strategic partnership with Kansas City Life. 1 that represents the highest ethical practices and maintains superb customer service. Although the agency has seen various leaders throughout its time, they all have held a shared commitment of operating with honesty, integrity and the utmost professional standards. And laying truth to those sentiments is the fact that Morris Financial Group has many second and third generation clients, some of which have owned Kansas City Life policies for nearly 85 years. “All of my predecessors had a part in laying this foundation,” says Mike. “Since our agency got up and running we’ve had quality people in place to guide us and for that we’re very fortunate. Our number one priority is to service our clients and provide them with the best. Integrity is extremely important to us. We are a people organization and we strive to provide the best service that we possibly can.” The bonds created by Morris Financial Group have been established over time, and built on the guidance and trust of key influencers. The celebration of 100 years is a testament to the solidarity and teamwork Morris Financial Group has fostered throughout its remarkable history. Centennial Agency Morris Financial Group For nearly 30 years, the late G. Clair Plank (seated) successfully positioned Morris Financial Group. Current General Agent Mike Morris took over the agency in 1990, and has continued the agency’s successful operations. F or Morris Financial Group in Springfield, Mo., the growth of a legacy has been 100 years in the making as the agency recently celebrated their centennial anniversary with Kansas City Life Insurance Company. Originally founded as the Missouri Agency by W.S. Lowry, this southern Missouri agency’s roots run deep with passionate leaders dedicated to the insurance industry. W.S. created the foundation for the agency and ran it for nearly 60 years before turning over leadership to G. Clair Plank in 1968. G. Clair led the agency to its first-ever Agency Building Award (ABA) in 1978, the most esteemed Kansas City Life agency honor. In 1982, G. Clair welcomed Mike Morris to the agency, and when G. Clair stepped back from his leadership role in 1990, Mike was named general agent and the agency became known as the Morris Financial Group. Since taking on the leadership role, General Agent Mike Morris led the agency to three consecutive Agency Building Awards from 2001 to 2003. In 2009, the agency claimed its first-ever President’s Quality Service Award – an award presented to an agency 22 Centennial Agency Generations Financial Resources General Agent Shelley Rowe and her late father, former General Agent Ernie Rowe, have strategically aligned their agency with Kansas City Life since 1911. T he story of Generations Financial Resources began more than 100 years ago and still continues to this day. The agency, led by General Agent was passed on to his daughter, Shelley, in 1995. And just three years after taking over the agency, Shelley and her team accomplished an ABA “three-peat,” winning the Company’s top agency honor each year from 1997 to 1999. “This agency has been in place for more than 100 years and we value relationships the same as if we are dealing with our own extended family,” says Shelley. “This milestone represents all the people, past and present, on our team who accomplish all of their individuals goals. Growth, focus and accomplishment describe Generations Financial Resources. Our tagline is “Your growth is our focus.” We all want to grow and do better in life, therefore each and every individual’s growth is our focus. We want people to accomplish what they want to become.” Generations Financial Resources has been a cornerstone of Kansas City Life Insurance Company since 1911. The deep-rooted commitment of each general agent in charge, as well as its agents, has fueled the agency’s illustrious success. It’s no doubt the agency will continue to build upon the successful Shelley Rowe, LUTCF, was the first in Kansas City Life 100 years it’s already established. Insurance Company’s history to reach 100 years in business with the Company. Kansas City Life’s most historic agency can be traced back to 1911 – when Jack Allen Sr. founded the agency near Denver, Colo. After nearly 30 years at the helm, Jack Allen Sr. passed the agency down to his son, Jack Allen Jr., who took the agency to new heights. Under Jack Jr.’s guidance, the agency won Kansas City Life’s first-ever Agency Building Award (ABA) in 1948, and also went on to win the honor two more times before retiring in 1967. Upon his retirement, Jack Jr. divided the agency up into thirds with some of his most trusted agents: Ernie Rowe, Fred Provenzano and Andy Anderson. Ernie took the primary portion of the agency in 1967, and later, after Ernie retired, the leadership 3 The Kansas City Life Group of Companies Kansas City Life Insurance Company Since 1895, Kansas City Life Insurance Company (www.kclife.com) has been dedicated to the present and future financial security of its customers. Kansas City Life and its subsidiaries provide financial services, including life insurance and investments, to consumers throughout 49 states and the District of Columbia. More than 2,500 general agents and agents serve individuals, families, small businesses and corporations with a diverse range of products including universal life, term life, whole life, variable life insurance,* variable annuities,* fixed deferred annuities and group products. Kansas City Life has been providing Security Assured for more than 116 years. Old American Insurance Company Since 1939, the mission of Old American Insurance Company (www.oaic.com) has been to provide peace of mind to the senior market and, in turn, enhance the quality of life for policyholders and their beneficiaries. Agents assist individuals ages 50 to 85 through final arrangements planning, charitable giving life insurance, and Social Security and retirement income replacement insurance. In addition, Old American began targeting individuals ages 20 to 65 in 2009 with its Level Term 20 life insurance product. The subsidiary operates in 47 states and the District of Columbia. Sunset Financial Services Inc.* Sunset Financial Services (www.sunsetfinancial.com) is a full-service brokerage firm and registered investment advisor. Sunset Financial Services’ registered representatives are also licensed with Kansas City Life. Investment options include variable products, mutual funds, stocks and bonds, money market funds, CDs and asset management products. Sunset Life Insurance Company of America Sunset Life Insurance Company of America (www.sunsetlife.com) was originally founded in 1937 in Olympia, Wash. Kansas City Life purchased Sunset Life in 1974 and its operations were consolidated into the Company’s Home Office in 1999. The Sunset Life sales force was integrated into the Kansas City Life sales force in 2006. Financial Ratings, evaluated by A.M. Best Kansas City Life Insurance Company: A (Excellent; Stable Outlook) Old American Insurance Company: B++ (Good; Positive Outlook) Sunset Life Insurance Company: A- (Excellent; Stable Outlook) These ratings represent A.M. Best’s opinion of the financial strength and stability of Kansas City Life, Old American and Sunset Life Insurance Companies and each company’s ability to meet ongoing obligations to policyholders, as of June 2011. There are 16 financial strength ratings offered by A.M. Best, ranging from A++ (Superior) to F (In liquidation). Please refer to the Company’s Form 10-K and Proxy Statement as filed with the Securities and Exchange Commission (SEC). *Securities are distributed through Sunset Financial Services Inc., 3520 Broadway, Kansas City, MO 64111, 816-753-7000. Member FINRA and SIPC. 4 Message from the President T he year 2011 was one of slow, yet volatile, economic recovery. The economic challenges of the past several years magnified the difficulty we all shared in 2011 of having to make choices that might have offered the promise of near-term relief or benefit but would have had the effect of delaying or detracting from the ability to achieve our long-term objectives. During 2011, these choices were faced by individuals, households, businesses of all types, and even governments across the globe. As we have for the past 116 years, Kansas City Life Insurance Company remained steadfast in our focus and decision-making to achieve the long-term objective of providing Security Assured to all of those whom we serve. Kansas City Life recorded net income for 2011 of $26.1 million or $2.29 per share, an increase of $3.8 million or $0.34 per share compared to 2010. In addition to improved earnings, the Company completed several important initiatives during the year in areas that favorably impact policyholders, general group accident and health insurance increased for the year. New individual life insurance premiums increased $0.7 million or 4% for the year, largely due to growth in sales within the Old American segment. New group accident and health insurance premiums increased $0.4 million or 3% for the twelve months, primarily due to greater short-term agents and agents, associates and shareholders. Among disability product sales. the highlights of the changes benefiting policyholders were improved features in the Company’s popular living benefit riders and lowering the costs of certain term life products. To further enhance relationships with current general agents and agents, along with attracting prospective representatives, the Company added a new general agent contract that provides greater flexibility in compensation for agencies and agents. These initiatives directly support the Company’s growth objectives, which when combined with maintaining a strong investment portfolio and capital position, enhance the opportunity for attractive shareholder returns. Several factors contributed to the Company’s 17% earnings growth in 2011, most significantly including increased investment revenues and lower policyholder benefits. Although lower sales of immediate annuities led to lower insurance revenues, sales of new individual life insurance and Total investment revenues increased $4.0 million or 2% for the year ended 2011. Included in the improvement was a $2.6 million increase in realized investment gains for the year. While the historically low interest rate environment negatively affected yields on fixed-rate security investments, the impact of lower yields on securities was partially offset by the decision to increase the Company’s allocation to higher-yielding commercial mortgage investments. The difficult economic environment and sustained period of low interest rates makes it an increasing challenge for financial service companies and investors to satisfy both near-term and long-term objectives. Policyholder benefits declined $27.2 million or 15% for the year, largely due to the lower sales of immediate annuities and the reduced benefit and contract reserves that result from these lower 5 sales. In addition, policyholder benefits were further per share that was paid on February 8, 2012 to reduced as a result of the release of non-guaranteed stockholders of record on February 2, 2012. interest on certain products, lower claims, and refinements in estimates from an actuarial system The theme of this 2011 annual report is an analogy conversion during the year. of the Company relative to the intricate game of chess. Just as the game requires many individual The amortization of deferred acquisition costs steps, with the entire focus of each decision on (DAC) increased $6.9 million or 26% for the twelve a singular, ultimate objective, Kansas City Life is months, primarily due to refinements in estimates unwavering in its commitment to achieve the and unlocking of assumptions regarding universal life objective of providing Security Assured to all of those and traditional products. Finally, operating expenses whom we serve. The Company’s rich tradition of increased $5.5 million or 5% for the year, largely due more than a century of performance is a testament to increases in employee and agent benefit costs and to this commitment. legal expenses. Agent benefit costs include changes in the charge-off and allowance for doubtful agent receivable balances. Consistent with its history, and recognizing the commitment that investors have with the Company, on January 23, 2012, the Kansas City Life Board of Directors declared a quarterly dividend of $0.27 R. Philip Bixby President, Chief Executive Officer and Chairman of the Board Corporate Highlights For 116 years, Kansas City Life Insurance Company Moving forward, the Company will continue to make has been committed to providing Security Assured. steps that are calculated and decisive; maintaining its This term is the foundation of our Company, and in concentration toward Security Assured along with recent years, its meaning has never resonated more. long-term, sustainable growth. Despite operating in an unpredictable economy, Individual Insurance Kansas City Life Insurance Company continues to maintain a well managed, diversified investment portfolio and a strong capital position. The individuals who represent us know when they sell a Kansas City Life Insurance Company policy they are protecting and securing their customers with the tradition and legacy of a Company whose integrity, customer service and solid financial foundation date back to 1895. Kansas City Life Insurance Company’s Individual Insurance segment provides financial security to consumers in 48 states. Life insurance products are distributed through two channels: the Company’s field force, and through alliances with third-party marketing arrangements. 6 Company’s field force Life insurance sales The Company’s field force is represented by Life insurance sales and new business production independent agencies, which are operated by general at Kansas City Life are measured by new premiums agents and agents across the U.S. and in certain recorded and new deposits received. Premiums locations in Europe. Kansas City Life Insurance include receipts from traditional individual life Company provides each agency with the product insurance and immediate annuity products. Deposits portfolio and marketing support necessary to are received from universal life insurance, variable succeed in servicing consumers in their local markets. universal life insurance and fixed deferred and The Company’s expanding product portfolio and variable annuity products. individual one-on-one support from the Home Office are attractive recruiting resources, setting The Individual Insurance segment generated Kansas City Life apart from many in the industry. approximately 49% of consolidated insurance revenues for the year ended December 31, 2011 and approximately 54% for the years ended December 31, 2010 and 2009. Total new deposits decreased $10.0 million or 10% in 2011, following a $3.2 million or 3% decrease in 2010. The decline in 2011 was largely due to a decrease in new fixed deferred annuities, which can largely be attributed to lower interest rates and increased competition from alternative products. Renewal deposits increased $5.8 million or 4% in 2011 compared to a $1.8 million or 1% increase in 2010. The improvement in 2011 was due to an increase in renewal fixed deferred annuity deposits. This increase reflected favorable fixed rates on these products relative to alternative fixed-rate products available in the market, as well as increased sales in recent years. Future growth Symbolism Shown above are four of the nine symbols on Kansas City Life’s front doors. The shield with chevrons for protection; burning torches for progress; oak leaf for strength; and owl for wisdom. Third-party alliances The Individual Insurance segment is an essential part of Kansas City Life’s core business, representing a Independent alliances with American Republic majority of the Company’s revenue and net income. Insurance Company and GuideOne Mutual Insurance Company allow representatives from both The Company plans to continue to grow the companies to distribute Kansas City Life’s products. segment by recruiting talented general agents and These agreements provide representatives with the agents. Enhancements to the product portfolio, complementary products and services they need to increased focus on sales development and superior offer financial security to their clients. marketing support are elements that will be emphasized to attract new field representatives. 7 As an additional point of emphasis, the Company The Group Insurance segment generated 22% of the will also seek potential third-party marketing Company’s consolidated insurance revenues in 2011, relationships, such as those established with compared to 20% in 2010 and 2009. Total Group American Republic and GuideOne, to enhance premiums increased $2.9 million or 5% in 2011, future sales. Group Insurance Kansas City Life Insurance Company offers several insurance products in the Group Insurance segment, including dental, life, vision, and short- and long- term disability. These offerings encompass both traditional, employer-funded group insurance, as well following a $1.3 million or 2% increase in 2010. Moving forward, the Group Insurance segment is focused on three primary areas of emphasis to improve sales: 1. Growing in-force business, both through the Company’s sales representatives as well as select third-party marketing arrangements. as voluntary, employee-paid products. 2. Improving administrative efficiency through greater use of customer-facing technology, designed to reduce expenses and improve customer service. 3. Enhancing the segment’s product portfolio, through delivery of new product offerings and flexible options to meet the dynamic needs of the employee benefits market. Sunset Financial Services Inc. Kansas City Life Insurance Company’s in-house broker/dealer facilitates the purchase, sale and management of securities, such as variable universal life and variable annuity products. Through this alliance, Sunset Financial Services (SFS) provides registered representatives the flexibility to market a full range of fixed and variable products through a single relationship. Despite continued market volatility, SFS achieved a 13% increase in gross revenue for 2011, following a Kugel When Kansas City Life Insurance Company celebrated its 100th anniversary, the Kugel fountain was constructed as a tribute to our first century of service and is symbolic of our enduring commitment to policyowners. The Group Insurance segment markets its products 16% increase in 2010. primarily to small and mid-size organizations. Group products are sold through sales representatives who Moving forward, SFS has laid the groundwork for target a nationwide network of independent general increased sales and improved performance. Further, agents and group brokers, along with the Company’s SFS will continue working with Kansas City Life to help career general agents. The sales network is this recruit and retain quality agencies and producers. segment’s core distribution system. The Company also markets Group products through select third- party marketing arrangements. 8 Old American Insurance Company — 20 years with Kansas City Life Old American Insurance Company celebrated its After completing the purchase, Kansas City Life 20th year as a strategic partner with Kansas City Life evaluated Old American’s product offerings and Insurance Company in 2011. focused on its core mission – to insure the senior market. The Company also reassessed its marketing Founded in 1939 by the Thomas McGee family, and distribution into the more-current versions of Old American was created to satisfy the need of a what is used today. During the last five years, Old forgotten market segment, as the leaders at the time American has seen excellent growth and has focused believed everyone should be insurable regardless of on its lead generation and territorial approach to their age. This vision allowed for tremendous growth remain successful. during the next several decades with Old American offering peace of mind to the senior market across In 2011, Old American focused on improving the country. territory penetration, recruiting and agent productivity for its general agencies in order to effectively meet the sales goals of the Company. Old American accounted for 30% of Kansas City Life’s consolidated insurance revenues in 2011 compared to 26% in 2010 and 2009. Old American’s new premiums increased 9% in 2011. The increase in new premiums reflects a combination of expanded distribution efforts and improved agency productivity. Old American continues to focus on the recruitment and development of new agencies and agents, along with improved production from existing agencies and agents. Two of the Company’s 26 general agencies produced at least 2,000 new policies during the year and two of the Company’s agencies generated more The McGee family owned and operated Old than 3,000 new policies. American until 1986. During the next five years, Old American saw different ownership until the Now, after more than 70 years, Old American leaders of Kansas City Life noticed Old American’s continues to adapt its approach to keep pace with excellent foothold in the senior market. the changing needs of the final expense insurance Kansas City Life purchased Old American on on its mission that has guided the Company for October 31, 1991, and a new chapter of history more than seven decades – delivering peace of mind began. Walter E. Bixby III, a fourth generation to the senior market. market. As always, Old American will remain focused member of the Bixby family, has served as the Company’s President since 1996. 9 Senior Officers Charles R. Duffy Jr., FLMI Senior Vice President, Operations Dan L. Schick, CPA, CLU, FLMI Vice President and Auditor Kansas City Life Insurance Company R. Philip Bixby President, Chief Executive Officer and Chairman of the Board Walter E. Bixby, LLIF Vice Chairman of the Board Kansas City Life Insurance Company President Old American Insurance Company Tracy W. Knapp Senior Vice President, Finance Donald E. Krebs, MSM, CLU, ChFC Senior Vice President, Sales and Marketing Mark A. Milton, FSA, CERA, MAAA Senior Vice President and Actuary Gregory M. Galvin Vice President, Real Estate David A. Laird, CPA, FLMI Vice President and Controller A. Craig Mason, Jr. Vice President, General Counsel and Secretary Robert J. Milroy* Vice President, Underwriting and New Business Bruce G. Olberding Vice President, Broker Dealer Robert J. Milroy* Vice President, Underwriting and Richard D. Ropp, FLMI, ACS Vice President, Customer Services and Claims Stephen E. Ropp Vice President, Insurance Services J. Todd Salash Vice President, Computer Information Services Jeffrey M. Seeman Vice President, Group Philip A. Williams, CFA Vice President, Securities Old American Insurance Company R. Philip Bixby Chairman of the Board Walter E. Bixby, LLIF President John C. Alderton Vice President, Sales New Business Richard D. Ropp, FLMI, ACS Vice President, Customer Services and Claims Stephen E. Ropp Vice President, Insurance Services Sunset Life Insurance Company of America R. Philip Bixby President, Chairman of the Board Walter E. Bixby, LLIF Vice Chairman of the Board Donald E. Krebs, MSM, CLU, ChFC Vice President, Sales and Marketing David A. Laird, CPA, FLMI Vice President and Controller Robert J. Milroy* Vice President, Insurance Services and Assistant Secretary Mark A. Milton, FSA, CERA, MAAA Vice President and Actuary Gary K. Hoffman, JD, CLU, FLMI Vice President, Associate General Counsel and Secretary Tracy W. Knapp Chief Financial Officer Richard D. Ropp, FLMI, ACS Vice President, Policy Administration Matthew R. O’Connor Secretary John L. Nogalski, CPA, FLMI Vice President, Taxes David A. Laird, CPA, FLMI Vice President and Controller *Robert J. Milroy retired from the Company in February 2011. Kansas City Life Insurance Company Old American Insurance Company Sunset Financial Services Inc. Sunset Life Insurance Company of America Home Office 3520 Broadway Kansas City, MO 64111 816-753-7000 Visit us on the Internet: www.kclife.com www.oaic.com www.sunsetfinancial.com www.sunsetlife.com 10 Board of Directors – Kansas City Life Insurance Company Kevin G. Barth President and Chief Operating Officer Commerce Bank Kansas City, Mo. R. Philip Bixby President, Chief Executive Officer and Chairman of the Board Kansas City Life Insurance Company Kansas City, Mo. Walter E. Bixby, LLIF Vice Chairman of the Board Kansas City Life Insurance Company President Old American Insurance Company Kansas City, Mo. William R. Blessing Retired Senior Vice President, Corporate Strategy and Development Embarq Overland Park, Kan. Michael Braude Retired President and Chief Executive Officer Kansas City Board of Trade Kansas City, Mo. James T. Carr President and Chief Executive Officer National Association of Intercollegiate Athletics Kansas City, Mo. John C. Cozad President Cozad Company, LLC Platte City, Mo. Richard L. Finn Retired Senior Vice President, Finance Kansas City Life Insurance Company Kansas City, Mo. Nancy Bixby Hudson Investor Lander, Wyo. Tracy W. Knapp Senior Vice President, Finance Kansas City Life Insurance Company Kansas City, Mo. Cecil R. Miller, CPA Retired Partner KPMG, LLP Kansas City, Mo. Mark Milton, FSA, CERA, MAAA Senior Vice President and Actuary Kansas City Life Insurance Company Kansas City, Mo. Bradford T. Nordholm Chief Executive Officer Starwood Energy Group Global, LLC Greenwich, Conn. William A. Schalekamp, JD, CLU, FLMI Retired Senior Vice President, General Counsel and Secretary Kansas City Life Insurance Company Kansas City, Mo. 11 Stockholder Information CORPORATE HEADQUARTERS Kansas City Life Insurance Company 3520 Broadway Post Office Box 219139 Kansas City, MO 64121-9139 Telephone: 816-753-7000 Fax: 816-753-4902 Internet: http://www.kclife.com Email: kclife@kclife.com NOTICE OF ANNUAL MEETING The annual meeting of stockholders will be held at 9 a.m. on Thursday, April 19, 2012, at Kansas City Life Insurance Company’s corporate headquarters. TRANSFER AGENT Janice Poe, Stock Agent and Assistant Secretary Kansas City Life Insurance Company Post Office Box 219139 Kansas City, MO 64121-9139 10-K REQUEST Stockholders may request a free copy of Kansas City Life’s Form 10-K, as filed with the Securities and Exchange Commission, by writing to Secretary, Kansas City Life Insurance Company. SECURITY HOLDERS As of January 31, 2012, Kansas City Life had approximately 3,556 security holders, including individual participants in security position listings. Please refer to the Company’s Form 10-K and Proxy Statement as filed with the Securities and Exchange Commission (SEC). Stock & Dividend Information Stock and Dividend Information The following table presents the high and low prices for the Company’s common stock for the periods indicated and the dividends declared per share and paid during such periods. The Company’s common stock is traded on the NASDAQ Capital Market under the symbol “KCLI.” High Low Dividend Paid 2011: First quarter Second quarter Third quarter Fourth quarter 2010: First quarter Second quarter Third quarter Fourth quarter $ 34.45 32.35 31.57 36.07 $ 29.70 28.48 28.37 30.16 $ 33.50 35.85 32.63 33.77 $ 24.86 27.84 28.58 30.42 $ 0.27 0.27 0.27 0.27 $ 1.08 $ 0.27 0.27 0.27 0.27 $ 1.08 A quarterly dividend of $0.27 per share was paid February 8, 2012. NASDAQ market quotations are compiled according to Company records and may reflect inter-dealer prices, without markup, markdown or commission and may not necessarily represent actual transactions. 12 Make the Right Move with Kansas City Life Insurance Company Kansas City Life Insurance Company Home Office: Kansas City, MO 3520 Broadway Kansas City, MO 64111 816-753-7000 www.kclife.com 2011 Annual Report