KANSAS CITY LIFE INSURANCE COMPANY
ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015
KANSAS CITY LIFE INSURANCE COMPANY
TABLE OF CONTENTS
Financial Information .............................................................................................................................................................
3
Consolidated Balance Sheets ...............................................................................................................................................
3
Consolidated Statements of Comprehensive Income...........................................................................................................
4
Consolidated Statements of Stockholders' Equity................................................................................................................
5
Consolidated Statements of Cash Flows ..............................................................................................................................
6
Notes to Consolidated Financial Statements ........................................................................................................................
8
Report of Independent Registered Public Accounting Firm ................................................................................................
65
Management's Discussion and Analysis of Financial Condition and Results of Operations .................................................
66
Asset/Liability Management...................................................................................................................................................
76
Risk Factors ............................................................................................................................................................................
77
Financial Information
Amounts in thousands, except share data, or as otherwise noted
Kansas City Life Insurance Company
Consolidated Balance Sheets
ASSETS
Investments:
Fixed maturity securities available for sale, at fair value
(amortized cost: 2015 - $2,486,338; 2014 - $2,553,416)
Equity securities available for sale, at fair value
(amortized cost: 2015 - $24,067; 2014 - $23,576)
Mortgage loans
Real estate
Policy loans
Short-term investments
Other investments
Total investments
Cash
Accrued investment income
Deferred acquisition costs
Reinsurance recoverables
Property and equipment
Other assets
Separate account assets
Total assets
LIABILITIES
Future policy benefits
Policyholder account balances
Policy and contract claims
Other policyholder funds
Other liabilities
Separate account liabilities
Total liabilities
STOCKHOLDERS' EQUITY
Common stock, par value $1.25 per share
Authorized 36,000,000 shares, issued 18,496,680 shares
Additional paid in capital
Retained earnings
Accumulated other comprehensive income (loss)
Treasury stock, at cost (2015 - 8,813,266 shares; 2014 - 7,671,475 shares)
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31
2015
2014
$
2,580,845
$
2,726,731
25,325
589,960
168,097
81,392
22,474
380
3,468,473
7,851
33,023
267,936
198,834
16,580
56,252
372,924
4,421,873
926,385
2,056,126
37,959
174,353
190,295
372,924
3,758,042
23,121
41,025
856,196
(15,210)
(241,301)
663,831
4,421,873
$
$
$
24,881
541,180
181,082
83,553
39,107
462
3,596,996
11,011
33,078
249,195
194,425
17,527
63,134
406,501
4,571,867
930,761
2,072,041
37,452
165,062
217,291
406,501
3,829,108
23,121
41,007
838,508
23,040
(182,917)
742,759
4,571,867
$
$
$
See accompanying Notes to Consolidated Financial Statements
3
Table of Contents
Kansas City Life Insurance Company
Consolidated Statements of Comprehensive Income
REVENUES
Insurance revenues:
Net premiums
Contract charges
Total insurance revenues
Investment revenues:
Net investment income
Net realized investment gains, excluding
other-than-temporary impairment losses
Net impairment losses recognized in earnings:
Total other-than-temporary impairment losses
Portion of impairment losses recognized in
other comprehensive income (loss)
Net other-than-temporary impairment losses
recognized in earnings
Total investment revenues
Other revenues
Total revenues
BENEFITS AND EXPENSES
Policyholder benefits
Interest credited to policyholder account balances
Amortization of deferred acquisition costs
Operating expenses
Total benefits and expenses
Income before income tax expense
Income tax expense
NET INCOME
COMPREHENSIVE INCOME (LOSS),
NET OF TAXES
Change in net unrealized gains on securities
available for sale, net of DAC, VOBA, and DRL
Change in future policy benefits
Change in policyholder account balances
Change in benefit plan obligations
Other comprehensive income (loss)
COMPREHENSIVE INCOME (LOSS)
Basic and diluted earnings per share:
Net income
Year Ended December 31
2014
2013
2015
$
$
160,175
112,030
272,205
$
165,548
118,649
284,197
186,530
113,454
299,984
157,150
164,968
169,740
6,248
4,902
5,005
(2,189)
(292)
(2,481)
160,917
7,729
440,851
198,721
74,326
28,348
97,260
398,655
42,196
12,970
(2,176)
643
(1,533)
168,337
12,485
465,019
202,946
76,463
40,888
101,738
422,035
42,984
12,994
$
$
$
$
29,226
$
29,990
$
$
(43,803)
4,913
276
364
(38,250)
31,641
(6,928)
(242)
(15,601)
8,870
(9,024)
$
38,860
2.75
$
2.74
$
$
$
(1,032)
(101)
(1,133)
173,612
9,997
483,593
211,994
79,294
37,228
110,622
439,138
44,455
14,392
30,063
(63,538)
8,421
408
14,785
(39,924)
(9,861)
2.73
See accompanying Notes to Consolidated Financial Statements
4
Table of Contents
Kansas City Life Insurance Company
Consolidated Statements of Stockholders’ Equity
Year Ended December 31
2014
2013
2015
COMMON STOCK, beginning and end of year
$
23,121
$
23,121
$
23,121
ADDITIONAL PAID IN CAPITAL
Beginning of year
Excess of proceeds over cost of treasury stock sold
End of year
RETAINED EARNINGS
Beginning of year
Net income
Stockholder dividends of $1.08 per share (2014 - $1.08; 2013 - $1.08)
End of year
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Beginning of year
Other comprehensive income (loss)
End of year
TREASURY STOCK, at cost
Beginning of year
Cost of 1,142,351 shares acquired (2014 - 144,188 shares; 2013 - 64,792 shares)
Cost of 560 shares sold (2014 - 554 shares; 2013 - 774 shares)
End of year
41,007
18
41,025
40,989
18
41,007
40,969
20
40,989
838,508
29,226
(11,538)
820,327
29,990
(11,809)
802,153
30,063
(11,889)
856,196
838,508
820,327
23,040
(38,250)
(15,210)
14,170
8,870
23,040
54,094
(39,924)
14,170
(182,917)
(58,392)
8
(176,284)
(6,641)
8
(173,513)
(2,782)
11
(241,301)
(182,917)
(176,284)
TOTAL STOCKHOLDERS’ EQUITY
$
663,831
$
742,759
$
722,323
See accompanying Notes to Consolidated Financial Statements
5
Table of Contents
Kansas City Life Insurance Company
Consolidated Statements of Cash Flows
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of investment premium and discount
Depreciation
Acquisition costs capitalized
Amortization of deferred acquisition costs
Realized investment gains
Changes in assets and liabilities:
Reinsurance recoverables
Future policy benefits
Policyholder account balances
Income taxes payable and deferred
Other, net
Net cash provided
INVESTING ACTIVITIES
Purchases:
Fixed maturity securities
Equity securities
Mortgage loans
Real estate
Policy loans
Other investments
Sales or maturities, calls, and principal paydowns:
Fixed maturity securities
Equity securities
Mortgage loans
Real estate
Policy loans
Other investments
Net sales (purchases) of short-term investments
Acquisition of property and equipment
Reinsurance transaction
Net cash provided (used)
Year Ended December 31
2014
2013
2015
$
29,226
$
29,990
$
30,063
4,257
5,368
(37,714)
28,348
(3,767)
(4,409)
3,182
(20,222)
7,216
4,207
15,692
(235,767)
(38)
(141,184)
(8,253)
(8,638)
(280)
298,913
33
91,096
20,000
10,799
419
16,633
(683)
—
43,050
4,388
4,698
(36,170)
40,888
(3,369)
(3,370)
9,875
(16,284)
4,237
3,316
38,199
(280,686)
(89)
(48,195)
(41,201)
(8,975)
—
219,738
15
127,071
2,915
8,941
11,121
1,605
(1,669)
—
(9,409)
5,447
4,279
(36,709)
37,228
(3,872)
(442)
33,497
(24,161)
7,093
3,338
55,761
(261,006)
(12,711)
(72,656)
(24,435)
(10,517)
—
282,742
1,459
116,680
370
13,078
181
(15,810)
(830)
(34,279)
(17,734)
6
Table of Contents
Kansas City Life Insurance Company
Consolidated Statements of Cash Flows (Continued)
FINANCING ACTIVITIES
Deposits on policyholder account balances
$
217,929
$
238,751
$
239,501
Year Ended December 31
2014
2013
2015
Withdrawals from policyholder account balances
Net transfers from separate accounts
Change in other deposits
Cash dividends to stockholders
Net change in treasury stock
Net cash used
Increase (decrease) in cash
Cash at beginning of year
Cash at end of year
(222,907)
9,026
3,954
(11,538)
(58,366)
(61,902)
(3,160)
11,011
(257,745)
8,534
2,908
(11,809)
(6,615)
(25,976)
2,814
8,197
$
7,851
$
11,011
$
(276,327)
5,962
8,648
(11,889)
(2,751)
(36,856)
1,171
7,026
8,197
See accompanying Notes to Consolidated Financial Statements
7
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements
1. Nature of Operations and Significant Accounting Policies
Business
Kansas City Life Insurance Company is a Missouri domiciled stock life insurance company which, with its subsidiaries, is licensed
to sell insurance products in 49 states and the District of Columbia. Kansas City Life Insurance Company (Kansas City Life) is
the parent company. Sunset Life Insurance Company of America (Sunset Life) and Old American Insurance Company (Old
American) are wholly-owned subsidiaries. The Company also has several non-insurance subsidiaries that individually and
collectively are not material. The consolidated entity (the Company) offers a diversified portfolio of individual insurance, annuity,
and group products through three life insurance companies.
Basis of Presentation
The consolidated financial statements and the accompanying notes to the consolidated financial statements have been prepared
on the basis of U.S. generally accepted accounting principles (GAAP) and include the accounts of Kansas City Life and its
subsidiaries, principally Sunset Life and Old American. Significant intercompany transactions have been eliminated in
consolidation and certain immaterial reclassifications have been made to the prior period results to conform with the current
period’s presentation.
Business Changes
In December 2015, the Company completed a reverse/forward stock-split transaction. This transaction occurred as part of a 1-
for-250 reverse stock split of the Company's common stock. The Company purchased approximately 906,500 shares or 9% of
the outstanding shares valued at $52.50 per share for $47.6 million. The Company subsequently completed a 250-for-1 forward
stock split for each one share of its common stock (including each fractional share of such class of stock in excess of one share).
The purpose of the transaction was to allow the Company to deregister from the Securities and Exchange Commission (SEC) and
to delist its common stock from the NASDAQ Capital Market. These activities were effective as of December 16, 2015. Effective
January 4, 2016, the Company began trading on the OTCQX ® Market. Please refer to www.kclife.com for more information on
the specific transactions identified above.
In 2014, the Company completed a divestiture of certain non-proprietary agent relationships related to Sunset Financial Services
(SFS) with Securities America (SAI). Under this agreement SFS transferred the servicing of certain accounts primarily related
to non-proprietary broker-dealer and registered investment advisory accounts to SAI. SFS will continue as a wholly-owned
wholesale broker-dealer subsidiary of Kansas City Life to provide support for Kansas City Life's proprietary products and those
variable products specifically associated with the American Family Insurance Company (American Family) transaction (see
Reinsurance Transaction below). This transaction resulted in $3.3 million of revenue from the sale of these assets at SFS, which
is reported as other revenue in the 2014 Consolidated Statements of Comprehensive Income. This transaction does not represent
a strategic shift that will have a major effect on the consolidated entity's financial results nor does the Company believe that there
is any material impact to the consolidated entity's financial position.
Reinsurance Transaction
In April 2013, the Company acquired a closed block of variable life insurance policies and variable annuity contracts through
reinsurance and servicing agreements from American Family. Under the reinsurance agreement, the Company assumed 100% of
the separate account liabilities on a modified coinsurance basis and 100% of the general account liabilities on a coinsurance basis.
The transaction also involved an ongoing servicing arrangement for this business. This block is included as a component of the
Individual Insurance segment.
The Company receives fees based upon both specific transactions and the fund value of the block of policies, as provided under
modified coinsurance transactions. Also, as required under modified coinsurance transaction accounting, the separate account
fund balances are not recorded as separate accounts on the Company's financial statements. The coinsurance portion of the
transaction, which is invested in the Company's fixed funds, is included in future policy benefits. The Company records these
fixed fund accounts as a separate block under its general accounts. The Company receives fees on both the separate accounts and
the fixed fund accounts.
Use of Estimates
The preparation of the consolidated financial statements requires management of the Company to make estimates and assumptions
relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of revenue and expenses during the period. These estimates are
inherently subject to change and actual results could differ from these estimates. Significant estimates required in the preparation
of the consolidated financial statements include the fair value of certain invested assets, deferred acquisition costs (DAC), deferred
8
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements
income taxes, value of business acquired (VOBA), deferred revenue liability (DRL), future policy benefits, policy and contract
claim liabilities, and pension and other postemployment benefits.
Significant Accounting Policies
Investments
Valuation of Investments and Other-than-Temporary Impairments
The Company’s principal investments are in fixed maturity securities, mortgage loans, and real estate; all of which are exposed
to at least three primary sources of investment risk, including: credit, interest rate, and liquidity. The fixed maturity and equity
securities, which are all classified as available for sale, are carried at fair value in the Company’s Consolidated Balance Sheets,
with unrealized gains or losses recorded in accumulated other comprehensive income (loss). The unrealized gains or losses are
recorded net of the adjustment to policyholder account balances, future policy benefits, DAC, VOBA, and DRL to reflect what
would have been earned had those gains or losses been realized and the proceeds reinvested. The adjustments to DAC, VOBA,
and DRL represent changes in the amortization that would have been required as a charge or credit to income had such unrealized
amounts been realized. The adjustments to policyholder account balances and future policy benefits represent the increase from
using a discount rate that would have been required if such unrealized gains or losses had been realized and the proceeds reinvested
at current market interest rates, which were lower or higher than the then-current effective portfolio rate. The amortized cost of a
security is adjusted for declines in value that are other than temporary. Other than temporary impairment losses are reported as a
component of investment revenues in the Consolidated Statements of Comprehensive Income, which also presents the amount of
non-credit impairment losses for certain fixed maturity securities that is reported in accumulated other comprehensive income
(loss). See Note 3 - Investments for additional discussion of the Company’s considerations related to other than temporary
impairments. For additional information regarding fair value, please see Note 4 - Fair Value Measurements.
Mortgage loans are stated at cost, adjusted for amortization of premium and accrual of discount, less an allowance for loan losses.
A loan is considered impaired if it is probable that all contractual amounts due will not be collected. The allowance for loan losses
is maintained at a level believed by management to be adequate to absorb potential future incurred credit losses. Management’s
periodic evaluation and assessment of the adequacy of the allowance is based on known and inherent risks in the portfolio, historical
and industry data, current economic conditions, and other relevant factors, along with specific risks related to specific loans. Loans
in foreclosure, loans considered to be impaired, and loans past due 90 days or more are placed on a non-accrual status.
Real estate consists of directly owned investments and real estate joint ventures. Real estate that is directly owned is carried at
depreciated cost. Real estate joint ventures consist primarily of office buildings, industrial warehouses, unimproved land for future
development, and low income housing tax credit (LIHTC) investments. Real estate joint ventures are consolidated when required.
The initial cost of the non-consolidated LIHTC investments is amortized in proportion to the tax credits and other tax benefits
received and the net investment performance is recognized in the Consolidated Statements of Comprehensive Income as a
component of income tax expense. The investments in other non-consolidated real estate joint ventures are recorded using the
equity method of accounting, in which the initial cost of the investment is adjusted for the Company’s earnings and cash contributions
or distributions.
Policy loans are carried at the outstanding principal amount. Short-term investments are stated at cost, adjusted for amortization
of premium and accrual of discount.
Investment Income
Investment income is recognized when earned. Premiums and discounts on fixed maturity securities are amortized over the life
of the related security as an adjustment to yield using the effective interest method. Realized gains and losses on the sale of
investments are determined on the basis of specific security identification recorded on the trade date.
Future Policy Benefits
The Company establishes liabilities for amounts payable under insurance policies, including traditional life insurance, immediate
annuities with life contingencies, supplementary contracts with life contingencies, and accident and health insurance. These
liabilities originate from new premiums and conversions from other products and are generally payable over an extended period
of time.
Liabilities for future policy benefits of traditional life insurance have been computed by a net level premium method based upon
estimates at the time of issue for investment yields, mortality, and withdrawals. These estimates include provisions for experience
less favorable than initially expected. Mortality assumptions are based on Company experience expressed as a percentage of
standard mortality tables. The 2008 Valuation Basic Table, the 2001 Valuation Basic Table, and the 1975-1980 Select and Ultimate
Basic Table serve as the bases for most mortality assumptions.
9
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Liabilities for future policy benefits of immediate annuities and supplementary contracts with life contingencies are computed by
calculating an actuarial present value of future policy benefits, based upon estimates for investment yields and mortality at the
time of issue. The 2012 Individual Annuity Reserving Table, the Annuity 2000 Table, the 1983 Individual Annuity Mortality
Table, and the 1971 Individual Annuity Mortality Table serve as the bases for most immediate annuity and supplementary contract
mortality assumptions.
Liabilities for future policy benefits of accident and health insurance represent estimates of payments to be made on reported
insurance claims, as well as claims incurred but not yet reported. These liabilities are estimated using actuarial analyses and case
basis evaluations that are based upon past claims experience, claim trends, and industry experience.
The following table provides detail about the composition of future policy benefits at December 31.
Life insurance
Immediate annuities and supplementary
contracts with life contingencies
Accident and health insurance
2015
2014
$
628,274
$
622,350
263,437
34,674
271,088
37,323
Total future policy benefits
$
926,385
$
930,761
Policyholder Account Balances
Policyholder account balances include universal life insurance, fixed deferred annuity contracts, and investment-type contracts.
Liabilities for policyholder account balances are included without reduction for potential surrender charges. These liabilities
originate from new deposits and conversions from other products. Policyholder account balances are equal to cumulative deposits,
less contract charges and withdrawals, plus interest credited. Deferred front-end contract charges reduce policyholder account
balance liabilities and increase the other policyholder funds liability, and are amortized over the term of the policies in a manner
similar to DAC, as discussed below. Interest on policyholder account balances is credited as earned.
On an ongoing basis, the Company performs testing and analysis on its blocks of business to ensure the assumptions made remain
viable. The Company also periodically performs sensitivity testing on these blocks of business to ensure it maintains the capacity
to meet an increase in policyholder benefits, namely increased surrenders, policy loans, or other policyholder elective withdrawals.
Crediting rates for universal life insurance and fixed deferred annuity products ranged from 1.00% to 5.50% in 2015, 2014, and
2013.
The following table provides detail about the composition of policyholder account balances at December 31.
Universal life insurance
Fixed deferred annuities
Immediate annuities and supplementary
contracts with life contingencies
Policyholder account balances
2015
2014
$
928,398
$
936,770
1,073,592
1,080,322
54,136
54,949
$ 2,056,126
$ 2,072,041
Deferred Acquisition Costs (DAC)
DAC, principally agent commissions and other selling, selection, and issue costs, which are related directly to the successful
acquisition of new or renewal insurance contracts, are capitalized as incurred. At least annually, the Company reviews its DAC
capitalization policy and the specific items which are capitalized with existing guidance. These costs for life insurance products
are generally deferred and amortized over the premium paying period. Assumptions related to DAC on traditional life insurance
products are typically determined at inception and remain unchanged with any future premium deficiency recorded first as a
reduction of DAC.
Policy acquisition costs that relate to interest sensitive and variable insurance products are deferred and amortized in relation to
the estimated gross profits to be realized over the lives of the contracts. Estimated gross profits for interest sensitive and variable
insurance products are projected using assumptions as to net interest income, net realized investment gains and losses, fees,
surrender charges, expenses, and mortality gains and losses, net of reinsurance. At the issuance of policies, projections of estimated
gross profits are made. These projections are then replaced by actual gross profits over the lives of the policies. In addition to
10
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
other factors, emerging experience may lead to a revised outlook for the remaining estimated gross profits. Accordingly, DAC
may be recalculated (unlocked) using these new assumptions and any resulting adjustment is included in income in the period
such an unlocking is deemed appropriate. See Unlocking and Refinements in Estimates section below.
The DAC asset is adjusted to reflect the impact of realized and unrealized gains and losses on fixed maturity securities available
for sale, as described in the Investments section of Note 1 - Nature of Operations and Significant Accounting Policies.
The following table provides information about DAC at December 31.
Balance at beginning of year
Capitalization of commissions, sales, issue expenses
and reinsurance transaction
Gross amortization
Accrual of interest
Amortization due to realized investment (gains) losses
Change in DAC due to the change in unrealized investment gains
2015
2014
2013
$
249,195
$
256,386
$
176,275
37,714
(41,832)
13,484
(18)
9,393
36,170
(54,531)
13,643
(49)
(2,424)
249,195
85,929
(50,923)
13,695
(66)
31,476
$
256,386
Balance at end of year
$
267,936
$
Value of Business Acquired (VOBA)
Prior to the adoption of ASC No. 805, Business Combinations, a portion of the purchase price was allocated to a separately
identifiable intangible asset, VOBA, when a new block of business was acquired or when an insurance company was purchased.
VOBA is established as the actuarially determined present value of future gross profits of the business acquired and is amortized
with interest in proportion to future premium revenues or the expected future profits, depending on the type of business acquired.
VOBA is reported as a component of other assets with related amortization included in operating expenses. Amortization of
VOBA occurs with interest over the anticipated lives of the underlying business to which it relates, initially 15 to 30 years. The
assumptions regarding future experience on interest sensitive business can affect the carrying value of VOBA, similar to DAC.
These assumptions include interest spreads, mortality, expense margins, and policy and premium persistency experience.
The VOBA asset is adjusted to reflect the impact of realized and unrealized gains and losses on fixed maturity securities available
for sale, as described in the Investments section of Note 1. The concept of VOBA is no longer applied to business combinations.
Rather, under current guidance for business combinations, all assets and liabilities are reported at fair value at acquisition and an
intangible asset (liability) may result due to differences between fair value and consideration paid.
The following table provides information about VOBA at December 31.
Balance at beginning of year
Gross amortization
Accrual of interest
Amortization due to realized investment (gains) losses
Change in VOBA due to the change in unrealized investment gains
Balance at end of year
2015
2014
2013
$
$
24,655
(5,679)
1,795
(5)
3,517
$
24,283
$
28,542
(4,643)
1,938
(100)
(1,082)
24,655
$
$
21,165
(7,566)
2,220
(58)
12,781
28,542
Interest accrued on the VOBA of one block was at the rates of 4.2% on the interest sensitive life block and 5.3% on the traditional
life block. The VOBA on a separate acquired block of business used a 7.0% interest rate on the traditional life portion and a 5.4%
interest rate on the interest sensitive portion. The interest rates used in the calculation of VOBA are based on rates appropriate at
the time of acquisition.
11
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Deferred Revenue Liabilities (DRL)
Deferred revenue liabilities represent the capitalization of revenues received from contracts as compensation for services to be
provided by the Company in future periods. Such loads and charges are reported as unearned revenue in the period received and
are subsequently recognized as income over the policy benefit period, using the same assumptions and factors used to amortize
DAC. Similar to DAC, these amounts are amortized in relation to estimated gross profits for interest sensitive and variable
insurance products. However, unlike DAC, the amortization of the DRL results in a recognition of revenue rather than expense.
The DRL could be impacted by unlocking and refinements in estimates, as discussed below.
Unlocking and Refinements in Estimates
DAC and VOBA are reviewed on an ongoing basis to evaluate whether the unamortized portion exceeds the expected recoverable
amounts. If it is determined from emerging experience that the premium margins or expected gross profits are insufficient to
amortize DAC and VOBA, then the asset will be adjusted downward with the adjustment recorded as an expense in the current
period. Similarly, if future projections of estimated gross profits indicate improvements, the amortization of DAC and VOBA
may be reduced and the balance adjusted.
At least annually, a review is performed of the models and the assumptions used to develop expected gross profits for interest
sensitive and variable insurance products based upon management’s current view of future events. Management’s view primarily
reflects Company experience but can also reflect emerging trends within the industry. Short-term deviations in experience affect
the amortization of DAC, DRL, and VOBA in the period, but do not necessarily indicate that a change to the long-term assumptions
of future experience is warranted. If it is determined that it is appropriate to change the assumptions related to future experience,
then an unlocking adjustment is recognized retrospectively for the block of business being evaluated. Certain assumptions, such
as interest spreads and surrender rates, may be interrelated. As such, unlocking adjustments often reflect revisions to multiple
assumptions. The DAC, DRL, or VOBA balance is immediately impacted by any assumption changes, with the change reflected
through the income statement as an unlocking adjustment. These adjustments can be positive or negative, and adjustments
increasing the DAC asset are limited to amounts previously deferred plus interest accrued through the date of the adjustment.
The Company may also consider refinements in estimates due to improved capabilities resulting from administrative or actuarial
system enhancements. The Company considers such enhancements to determine whether and to what extent they are associated
with prior periods or simply improvements in the projection of future expected gross profits due to improved functionality. To
the extent they represent such improvements, these items are applied to DAC, VOBA, and DRL in a manner similar to unlocking
adjustments.
The following table summarizes the effects of the refinements in estimates on all products and unlocking of assumptions on interest
sensitive products in the Consolidated Statements of Comprehensive Income for the years ended December 31.
2015:
2014:
2013:
Unlocking
Refinement in estimate
Unlocking
Refinement in estimate
Unlocking
Refinement in estimate
DAC
VOBA
DRL
Total
$
$
$
$
$
$
6,380
—
6,380
(1,723)
(1,566)
(3,289)
(155)
(291)
(446)
$
$
$
$
$
$
(862)
—
(862)
1,486
—
1,486
(877)
(306)
(1,183)
$
$
$
$
$
$
(2,344)
—
(2,344)
1,764
—
1,764
1,141
—
1,141
$
$
$
$
$
$
3,174
—
3,174
1,527
(1,566)
(39)
109
(597)
(488)
Pensions and Other Postemployment Benefits (OPEB)
The measurement of pension and other postemployment benefit obligations and costs depends on a variety of assumptions. Changes
in the valuation of pension obligations and assets supporting this obligation can significantly impact the funded status. Assumptions
are made regarding the discount rate, expected long-term rate of return on plan assets, health care claim costs, health care cost
trends, retirement rates, and mortality. Generally, the discount rate, expected return on plan assets, and mortality tables have the
most significant impact on the cost. See Note 13 - Pensions and Other Postemployment Benefits for further details.
12
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Separate Accounts and Guaranteed Minimum Withdrawal Benefits (GMWB)
Separate account assets and liabilities arise from the sale of variable universal life insurance and variable annuity products. The
separate account represents funds segregated for the benefit of certain policyholders who bear the investment risk. The assets are
legally segregated and are not subject to claims which may arise from any other business of the Company. The separate account
assets and liabilities, which are equal, are recorded at fair value based upon net asset value (NAV) of the underlying investment
holdings as derived from closing prices on a national exchange or as provided by the issuer. Policyholder account deposits and
withdrawals, investment income, and realized investment gains and losses are excluded from the amounts reported in the
Consolidated Statements of Comprehensive Income. Revenues to the Company from separate accounts consist principally of
contract charges, which include maintenance charges, administrative fees, and mortality and expense charges.
The Company has a GMWB rider for variable annuity contracts that is considered to be a financial derivative and, as such, is
accounted for at fair value. The Company determines the fair value of the GMWB rider using a risk-neutral valuation method.
The value of the riders will fluctuate depending on market conditions, but is principally impacted by stock market volatility, interest
rates, and equity market returns. The change in value can have a material impact on earnings. See further discussion in Note 4.
Reinsurance
Consistent with the general practice of the life insurance industry, the Company enters into traditional agreements of indemnity
reinsurance with other insurance companies to support sales of new products and the in force business. The reinsurance
arrangements have taken various forms over the years. The Company cedes reinsurance in force on all of the following
bases: automatic and facultative; yearly renewable term (YRT) and coinsurance; and excess and quota share basis. For additional
information pertaining to the Company’s significant reinsurers, along with additional information pertaining to reinsurance, please
see Note 15 - Reinsurance.
Future policy benefits and other related assets are not reduced for reinsurance in the Consolidated Balance Sheets. A reinsurance
recoverable is established for these items. Reinsurance recoverables include amounts related to paid benefits and estimated amounts
related to unpaid policy and contract claims, future policy benefits, and policyholder account balances. All insurance related
revenues, benefits, and expenses are reported net of reinsurance ceded in the Consolidated Statements of Comprehensive Income.
Policies and contracts assumed are accounted for in a manner similar to that followed for direct business.
Recognition of Insurance Revenues
Premiums
Premiums for traditional life insurance products are reported as revenue when due. Premiums for immediate annuities with life
contingencies are reported as revenue when received. Premiums on accident and health, disability, and dental insurance are
reported as earned ratably over the contract period in proportion to the amount of insurance protection provided.
Deposits
Deposits related to universal life, fixed deferred annuity contracts, and investment-type products are credited to policyholder
account balances. Deposits are not recorded as revenue and are shown as a Financing Activity in the Consolidated Statements of
Cash Flows. Revenues from such contracts consist of amounts assessed against policyholder account balances for mortality, policy
administration, and surrender charges, and are recognized in the period in which the benefits and services are provided as contract
charges in the Consolidated Statements of Comprehensive Income.
Contract Charges
Contract charges consist of cost of insurance, expense loads, the amortization of unearned revenues, and surrender charges on
policyholder account balances. Cost of insurance relates to charges for mortality. These charges are applied to the excess of the
mortality benefit over the account value for universal life policies. Expense loads are amounts that are assessed against the
policyholder balance as consideration for origination and maintenance of the contract. Surrender charges are fees on policyholder
account balances upon cancellation or withdrawal of policyholder account balances consistent with policy terms.
An additional component of contract charges is the recognition over time of the DRL for certain fixed and variable universal life
policies. This liability arises from front-end loads on such policies and is recognized into the Consolidated Statements of
Comprehensive Income in a manner similar to the amortization of DAC. If it is determined that it is appropriate to change the
assumptions of future experience, then an unlocking adjustment is recognized for the block of business being evaluated. Certain
assumptions, such as interest spreads and surrender rates, may be interrelated, and unlocking adjustments often reflect revisions
to multiple assumptions. In addition, the Company may also consider refinements in estimates for other unusual or one-time
occurrences, such as administrative or actuarial system upgrades. These items are applied to the appropriate financial statement
line items, similar to unlocking adjustments.
13
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Realized Gains (Losses)
The Company realizes investment gains and losses from several sources, including write-downs of investment securities and
mortgage loans, the change in the mortgage loan loss allowance, and sales of investment securities and real estate.
Interest Credited to Policyholder Account Balances
Interest is credited to policyholder account balances according to terms of the policies or contracts. Interest sensitive life and
annuity contracts provide for the payment of interest credited to policyholder account balances, subject to contractual minimum
guaranteed rates. Amounts in excess of guarantees are credited at the discretion of the Company and reflect competitive, economic,
investment and product considerations. Accordingly, the Company reviews and adjusts crediting rates as necessary and appropriate
within contractual terms. Amounts credited are a function of account balances and current period crediting rates. As account
balances fluctuate, so will the amount of interest credited to policyholder account balances.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return that includes both life insurance companies and
non-life insurance companies.
Deferred income taxes are recorded based on the differences between the tax bases of assets and liabilities and the amounts at
which they are reported in the consolidated financial statements. Recorded amounts are adjusted to reflect changes in income tax
rates and other tax law provisions as they become enacted.
Deferred income tax assets are subject to ongoing evaluation of whether such assets will be realized. The ultimate realization of
deferred income tax assets generally depends on the reversal of deferred tax liabilities and the generation of future taxable income
and realized gains during the periods in which temporary differences become deductible. Deferred income taxes include future
deductible differences relating to unrealized losses on investment securities. The Company evaluates the character and timing of
unrealized gains and losses to determine whether future taxable amounts are sufficient to offset future deductible amounts. A
valuation allowance against deferred income tax assets may be required if future taxable income of an appropriate amount and
character is not expected.
2. New Accounting Pronouncements
Accounting Pronouncements Issued, Not Yet Adopted
In May 2014, the Financial Accounting Standards Board (FASB) issued guidance regarding accounting for revenue recognition
that identifies the accounting treatment for an entity’s contracts with customers. Certain contracts, including insurance contracts,
are specifically excluded from this guidance. However, certain other types of contracts may impact the financial statements of
insurance providers. In August 2015, the FASB deferred the effective date of this guidance for public entities to annual reporting
periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently
evaluating this guidance.
In August 2014, the FASB issued guidance that requires management to evaluate whether there are concerns or events that raise
substantial doubt about the entity's ability to continue as a going concern within one year after the date the financial statements
are issued. Disclosures are required when certain criteria are met. This guidance is effective for annual periods ending after
December 15, 2016. The Company is currently evaluating this guidance, but it does not believe that there will be a material impact
to the consolidated financial statements.
In January 2015, the FASB issued guidance that eliminated the concept of extraordinary items. While the requirement for entities
to consider whether an underlying event or transaction is extraordinary was eliminated, the presentation and disclosure guidance
for items that are unusual in nature or occur infrequently was retained and was expanded to include items that are both unusual in
nature and occur infrequently. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2015. The Company is currently evaluating this guidance, but it does not believe that there will be a material
impact to the consolidated financial statements.
In February 2015, the FASB issued guidance regarding the analysis that a reporting entity must perform to determine whether it
should consolidate certain types of legal entities. Under this guidance, previous consolidation conclusions may change and
additional disclosures may be required. This guidance is effective for public entities for fiscal years and interim periods within
those fiscal years beginning after December 15, 2015. The Company is currently evaluating this guidance, but it does not believe
that there will be a material impact to the consolidated financial statements.
14
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
In April 2015, the FASB issued guidance regarding a customer's accounting for fees paid in a cloud computing arrangement and
whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license,
a customer should account for the software license element of the arrangement consistent with the acquisition of other software
licenses. If a cloud computing arrangement does not include a software license, a customer should account for the arrangement
as a service contract. The new guidance does not change the accounting for a customer's accounting for service contracts. This
guidance is effective for interim and annual reporting periods beginning after December 15, 2015. The Company is currently
evaluating this guidance, but it does not believe that there will be a material impact to the consolidated financial statements.
In May 2015, the FASB issued guidance targeted to improve disclosures related to short-duration contracts. Additional disclosures
will be required about insurance liabilities to provide information regarding the nature, amount, timing, and uncertainty of future
cash flows related to insurance liabilities and the effect of those cash flows on the statement of comprehensive income. This
guidance is effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning
after December 15, 2016. The Company is currently evaluating this guidance, but it does not believe that there will be a material
impact to the consolidated financial statements.
In July 2015, the FASB issued guidance regarding employee benefit accounting. The guidance is divided into three parts. First,
the guidance requires a pension plan to use contract value as the only required measure for fully benefit-responsive investment
contracts. Second, the guidance simplifies and increases the effectiveness of the investment disclosure requirements for employee
benefit plans. Third, the guidance provides benefit plans with a measurement date practical expedient. This guidance is effective
for fiscal years beginning after December 15, 2015. The Company is currently evaluating this guidance, but it does not believe
that there will be a material impact to the consolidated financial statements.
In January 2016, the FASB issued guidance regarding accounting for recognition and measurement of financial assets and financial
liabilities. The new standard significantly revises an entity’s accounting related to the classification and measurement of investments
in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends
certain disclosure requirements associated with the fair value of financial instruments. The guidance is effective for annual periods,
and interim periods within those annual periods, beginning after December 15, 2017 with early adoption allowed. The Company
is currently evaluating this guidance, but it does not believe that there will be a material impact to the consolidated financial
statements.
All other new accounting standards and updates of existing standards issued through the date of this filing were considered by
management and did not relate to accounting policies and procedures pertinent to the Company at this time or were not expected
to have a material impact to the consolidated financial statements.
15
Table of Contents
3. Investments
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Fixed Maturity and Equity Securities Available for Sale
Securities by Asset Class
The following table provides amortized cost and fair value of securities by asset class at December 31, 2015.
U.S. Treasury securities and
obligations of U.S. Government
Federal agencies 1
Federal agency issued residential
mortgage-backed securities 1
Subtotal
Corporate obligations:
Industrial
Energy
Communications and technology
Financial
Consumer
Public utilities
Subtotal
Corporate private-labeled residential
mortgage-backed securities
Municipal securities
Other
Redeemable preferred stocks
Fixed maturity securities
Equity securities
Total
Gross
Unrealized
Gains
Losses
Amortized
Cost
$
148,930
$
19,782
34,015
202,727
532,880
231,639
233,063
210,142
534,073
223,172
1,964,969
70,761
134,079
96,365
17,437
2,486,338
24,067
$
7,397
1,415
3,545
12,357
22,283
6,768
11,538
12,764
18,133
17,368
88,854
3,436
18,844
2,926
310
126,727
1,832
Fair
Value
$
156,125
21,197
37,559
214,881
544,509
227,019
242,233
221,497
549,301
240,299
202
—
1
203
10,654
11,388
2,368
1,409
2,905
241
28,965
2,024,858
20
74
2,859
99
32,220
574
74,177
152,849
96,432
17,648
2,580,845
25,325
$ 2,510,405
$
128,559
$
32,794
$ 2,606,170
1 Federal agency securities are not backed by the full faith and credit of the U.S. Government.
16
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table provides amortized cost and fair value of securities by asset class at December 31, 2014.
U.S. Treasury securities and
obligations of U.S. Government
Federal agencies 1
Federal agency issued residential
mortgage-backed securities 1
Subtotal
Corporate obligations:
Industrial
Energy
Communications and technology
Financial
Consumer
Public utilities
Subtotal
Corporate private-labeled residential
mortgage-backed securities
Municipal securities
Other
Redeemable preferred stocks
Fixed maturity securities
Equity securities
Total
Gross
Unrealized
Gains
Losses
Amortized
Cost
$
154,937
$
19,769
44,287
218,993
527,269
219,518
226,442
276,586
517,050
225,375
$
9,939
2,182
4,457
16,578
33,400
14,147
16,705
18,826
28,290
24,932
1,992,240
136,300
90,819
135,518
98,373
17,473
2,553,416
23,576
4,463
22,974
3,818
379
184,512
1,895
Fair
Value
$
164,793
21,951
48,742
235,486
559,377
230,090
242,905
294,329
544,079
250,079
2,120,859
95,282
158,492
99,473
17,139
2,726,731
24,881
83
—
2
85
1,292
3,575
242
1,083
1,261
228
7,681
—
—
2,718
713
11,197
590
$ 2,576,992
$
186,407
$
11,787
$ 2,751,612
1 Federal agency securities are not backed by the full faith and credit of the U.S. Government.
Contractual Maturities
The following table provides the distribution of maturities for fixed maturity securities available for sale. Expected maturities
may differ from these contractual maturities since borrowers may have the right to call or prepay obligations.
December 31, 2015
Fair
Value
Amortized
Cost
December 31, 2014
Fair
Value
Amortized
Cost
Due in one year or less
$
115,294
$
117,145
$
165,955
$
168,913
Due after one year through five years
Due after five years through ten years
Due after ten years
Securities with variable principal payments
Redeemable preferred stocks
735,559
1,117,414
349,789
150,844
17,438
779,402
1,126,585
378,861
161,204
17,648
694,809
1,045,557
438,719
190,903
17,473
757,397
1,087,891
490,976
204,415
17,139
Total
$ 2,486,338
$ 2,580,845
$ 2,553,416
$ 2,726,731
No material derivative financial instruments were held during December 31, 2015, 2014, or 2013.
17
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Unrealized Losses on Investments
At the end of each quarter, all securities are reviewed to determine whether impairments exist and whether other-than-temporary
impairments should be recorded. This quarterly process includes an assessment of the credit quality of each investment in the
entire securities portfolio. Additional reporting and review procedures are conducted for those securities where fair value is less
than 90% of amortized cost. The Company prepares a formal review document no less often than quarterly of all investments
where fair value is less than 80% of amortized cost for six months or more and selected investments that have changed significantly
from a previous period and that have a decline in fair value greater than 10% of amortized cost.
The Company considers relevant facts and circumstances in evaluating whether the impairment of a security is other-than-temporary.
Relevant facts and circumstances considered include but are not limited to:
• The current fair value of the security as compared to amortized cost;
• The credit rating of the security;
• The extent and the length of time the fair value has been below amortized cost;
• The financial position of the issuer, including the current and future impact of any specific events, material declines
in the issuer’s revenues, margins, cash positions, liquidity issues, asset quality, debt levels, and income results;
Significant management or organizational changes;
Significant uncertainty regarding the issuer’s industry;
•
•
• Violation of financial covenants;
• Consideration of information or evidence that supports timely recovery;
• The Company’s intent and ability to hold an equity security until it recovers in value;
• Whether the Company intends to sell a debt security and whether it is more likely than not that the Company will
be required to sell a debt security before recovery of the amortized cost basis; and
• Other business factors related to the issuer’s industry.
To the extent the Company determines that a fixed maturity security is deemed to be other-than-temporarily impaired, the portion
of the impairment that is deemed to be due to credit is charged to earnings in the Consolidated Statements of Comprehensive
Income and the cost basis of the underlying investment is reduced. The portion of such impairment that is determined to be non-
credit-related is reflected in other comprehensive income (loss) and accumulated other comprehensive income (loss).
There are a number of significant risks and uncertainties inherent in the process of monitoring impairments, determining if an
impairment is other-than-temporary, and determining the portion of an other-than-temporary impairment that is due to credit.
These risks and uncertainties include but are not limited to:
• The risk that the Company’s assessment of an issuer’s ability to meet all of its contractual obligations will change
based on changes in the credit characteristics of that issuer;
• The risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated;
• The risk that the performance of the underlying collateral for securities could deteriorate in the future and the
Company’s credit enhancement levels and recovery values do not provide sufficient protection to the Company’s
contractual principal and interest;
• The risk that fraudulent, inaccurate, or misleading information could be provided to the Company’s credit, investment,
and accounting professionals who determine the fair value estimates and accounting treatment for securities;
• The risk that actions of trustees, custodians, or other parties with interests in the security may have an unforeseen
adverse impact on the Company’s investments;
• The risk that new information obtained by the Company or changes in other facts and circumstances may lead the
Company to change its intent to sell the security before it recovers in value;
• The risk that facts and circumstances change such that it becomes more likely than not that the Company will be
required to sell the investment before recovery of the amortized cost basis; and
• The risk that the methodology or assumptions used to develop estimates of the portion of impairments due to credit
prove, over time, to be inaccurate or insufficient.
Any of these situations could result in a charge to income in a future period.
Once a security is determined to have met certain of the criteria for consideration as being other-than-temporarily impaired, further
information is gathered and evaluated pertaining to the particular security. If the security is an unsecured obligation, the additional
research is a top-down approach with particular emphasis on the likelihood of the issuer to meet the contractual terms of the
obligation. If the security is secured by an asset or guaranteed by another party, the value of the underlying secured asset or the
financial ability of the third-party guarantor is evaluated as a secondary source of repayment. Such research is based upon a top-
down approach, narrowing to the specific estimates of value and cash flow of the underlying secured asset or guarantor. If the
18
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
security is a collateralized obligation, such as a mortgage-backed or other asset-backed instrument, research is also conducted to
obtain and analyze the performance of the collateral relative to expectations at the time of acquisition and with regard to projections
for the future. Such analyses are based upon historical results, trends, comparisons to collateral performance of similar securities,
and analyses performed by third parties. This information is used to develop projected cash flows that are compared to the amortized
cost of the security.
The Company may selectively determine that it no longer intends to hold a specific issue to its maturity. If the Company makes
this determination and the fair value is less than the cost basis, the investment is written down to the fair value and an other-than-
temporary impairment is recorded on this particular position. Subsequently, the Company seeks to obtain the best possible outcome
available for this specific issue and records an investment gain or loss at the disposal date.
A discounted future cash flow calculation typically becomes the primary determinant of whether any portion and to what extent
an unrealized loss is due to credit on loan-backed and similar asset-backed securities with significant indications of potential other-
than-temporary impairment. Such indications typically include below investment grade ratings and significant unrealized losses
for an extended period of time, among other factors. The Company identified 21 and 22 non-U.S. agency mortgage-backed
securities that were determined to have such indications at December 31, 2015 and December 31, 2014, respectively. A discounted
future cash flow analysis was performed for each of these securities to determine if any portion of the impairment was due to credit
and deemed to be other-than-temporary. This amount is recognized as a realized loss in the Company's Consolidated Statements
of Comprehensive Income and the carrying value of the security is written down by the same amount. The portion of an impairment
that is determined not to be due to credit is recorded as a component of accumulated other comprehensive income (loss) in the
Consolidated Balance Sheets. The discount rate used in calculating the present value of future cash flows was the investment yield
at the time of purchase for each security. The initial default rates were assumed to remain constant or grade down over time,
reflecting the Company's estimate of stabilized collateral performance in the future for such securities.
Significant unrealized losses on securities can continue for extended periods of time, particularly for certain individual securities.
While this can be an indication of potential credit impairments, it can also be an indication of illiquidity in a particular sector or
security. In addition, the fair value of an individual security can be heavily influenced by the complexities of varying market
sentiment or uncertainty regarding the prospects for an individual security. Based upon the process described above, the Company
is best able to determine if and to what extent credit impairment may exist in these securities by performing present value calculations
of projected future cash flows at the conclusion of each reporting period. By reviewing the most recent data available regarding
the security and other relevant industry and market factors, the Company can modify assumptions used in the cash flow projections
and determine the best estimate of the portion of any impairment that is due to credit at the conclusion of each period.
19
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table provides information regarding fixed maturity and equity security investments available for sale with unrealized
losses by length of time at December 31, 2015.
Less Than 12 Months
Fair
Value
Unrealized
Losses
12 Months or Longer
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
U.S. Treasury securities and
obligations of U.S. Government
Federal agency issued residential
mortgage-backed securities 1
Subtotal
Corporate obligations:
Industrial
Energy
Communications and technology
Financial
Consumer
Public utilities
Subtotal
Corporate private-labeled residential
mortgage-backed securities
Municipal securities
Other
Redeemable preferred stocks
Fixed maturity securities
Equity securities
Total
$
19,447
$
202
$
— $
— $
19,447
$
47
19,494
—
202
153,258
10,151
5,638
2,368
927
2,573
241
291
291
2,492
34,313
—
1,421
7,192
—
1
1
503
5,750
—
482
332
—
21,898
45,418
7,067
20
74
386
—
22,580
574
—
—
33,366
6,925
86,000
—
—
—
2,473
99
9,640
—
76,838
53,751
18,040
121,261
15,983
439,131
3,734
3,118
15,742
—
481,219
2,156
338
19,785
155,750
111,151
53,751
19,461
128,453
15,983
484,549
3,734
3,118
49,108
6,925
567,219
2,156
202
1
203
10,654
11,388
2,368
1,409
2,905
241
28,965
20
74
2,859
99
32,220
574
$ 483,375
$
23,154
$
86,000
$
9,640
$ 569,375
$
32,794
1 Federal agency securities are not backed by the full faith and credit of the U.S. Government.
20
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table provides information regarding fixed maturity and equity security investments available for sale with unrealized
losses by length of time at December 31, 2014.
U.S. Treasury securities and
obligations of U.S. Government
Federal agency issued residential
mortgage-backed securities 1
Subtotal
Corporate obligations:
Industrial
Energy
Communications and technology
Financial
Consumer
Public utilities
Subtotal
Other
Redeemable preferred stocks
Fixed maturity securities
Equity securities
Total
Less Than 12 Months
Fair
Value
Unrealized
Losses
12 Months or Longer
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
$
468
$
— $
4,944
$
60
528
15,289
40,493
5,061
14,831
10,991
—
86,665
12,567
—
99,760
—
2
2
184
1,962
33
165
165
—
281
5,225
42,830
36,789
9,676
4,963
40,185
6,768
2,509
141,211
396
—
2,907
—
30,210
9,404
186,050
11,515
83
—
83
1,108
1,613
209
918
1,096
228
5,172
2,322
713
8,290
590
$
5,412
$
341
5,753
58,119
77,282
14,737
19,794
51,176
6,768
227,876
42,777
9,404
285,810
11,515
83
2
85
1,292
3,575
242
1,083
1,261
228
7,681
2,718
713
11,197
590
$
99,760
$
2,907
$ 197,565
$
8,880
$ 297,325
$
11,787
1 Federal agency securities are not backed by the full faith and credit of the U.S. Government.
At December 31, 2015, the Company had 207 issues in its investment portfolio of fixed maturity and equity securities with
unrealized losses. Included in this total, 179 security issues were below cost for less than one year; 19 security issues were below
cost for one year or more and less than three years; and nine security issues were below cost for three years or more. At December 31,
2014, the Company had 96 issues in its investment portfolio of fixed maturity and equity securities with unrealized losses. Included
in this total, 40 security issues were below cost for less than one year; 50 security issues were below cost for one year or more and
less than three years; and six security issues were below cost for three years or more.
The Company does not consider these unrealized losses to be credit-related. The unrealized losses at December 31, 2015 primarily
relate to changes in interest rates and market spreads subsequent to purchase. A substantial portion of investment securities that
have unrealized losses are either corporate debt issued with investment grade credit ratings or other investment securities. Other
investment securities include residential mortgage-backed securities, commercial mortgage-backed securities, and asset-backed
securities, for which a discounted cash flow calculation is typically performed to determine any credit-related losses.
21
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table summarizes the Company’s investments in fixed maturity and equity securities available for sale with unrealized
losses at December 31, 2015.
Amortized
Cost
Fair
Value
Gross
Unrealized
Losses
Securities owned without realized impairment:
Unrealized losses of 10% or less
$
511,941
$
496,587
$
57,124
569,065
48,447
545,034
18,096
908
19,004
5,893
—
5,893
24,897
12,944
596
13,540
2,743
—
2,743
16,283
593,962
561,317
8,097
—
8,097
110
—
110
—
—
—
110
8,207
8,013
—
8,013
45
—
45
—
—
—
45
15,354
8,677
24,031
5,152
312
5,464
3,150
—
3,150
8,614
32,645
84
—
84
65
—
65
—
—
—
65
$
602,169
$
569,375
$
32,794
8,058
149
Unrealized losses of 20% or less and greater than 10%
Subtotal
Unrealized losses greater than 20%:
Investment grade:
Less than twelve months
Twelve months or greater
Total investment grade
Below investment grade:
Less than twelve months
Twelve months or greater
Total below investment grade
Unrealized losses greater than 20%
Subtotal
Securities owned with realized impairment:
Unrealized losses of 10% or less
Unrealized losses of 20% or less and greater than 10%
Subtotal
Unrealized losses greater than 20%:
Investment grade:
Less than twelve months
Twelve months or greater
Total investment grade
Below investment grade:
Less than twelve months
Twelve months or greater
Total below investment grade
Unrealized losses greater than 20%
Subtotal
Total
22
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table summarizes the Company’s investments in securities available for sale with unrealized losses at December 31,
2014.
Amortized
Cost
Fair
Value
Gross
Unrealized
Losses
Securities owned without realized impairment:
Unrealized losses of 10% or less
$
295,543
$
286,130
$
8,973
304,516
7,874
294,004
—
908
908
—
—
—
908
—
663
663
—
—
—
663
305,424
294,667
—
—
—
3,688
—
3,688
—
—
—
3,688
3,688
—
—
—
2,658
—
2,658
—
—
—
2,658
2,658
9,413
1,099
10,512
—
245
245
—
—
—
245
10,757
—
—
—
1,030
—
1,030
—
—
—
1,030
1,030
$
309,112
$
297,325
$
11,787
Unrealized losses of 20% or less and greater than 10%
Subtotal
Unrealized losses greater than 20%:
Investment grade:
Less than twelve months
Twelve months or greater
Total investment grade
Below investment grade:
Less than twelve months
Twelve months or greater
Total below investment grade
Unrealized losses greater than 20%
Subtotal
Securities owned with realized impairment:
Unrealized losses of 10% or less
Unrealized losses of 20% or less and greater than 10%
Subtotal
Unrealized losses greater than 20%:
Investment grade:
Less than twelve months
Twelve months or greater
Total investment grade
Below investment grade:
Less than twelve months
Twelve months or greater
Total below investment grade
Unrealized losses greater than 20%
Subtotal
Total
23
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table provides information on fixed maturity securities with gross unrealized losses by actual or equivalent
Standard & Poor’s rating at December 31, 2015.
AAA
AA
A
BBB
Total investment grade
BB
B and below
Total below investment grade
Fair
Value
%
of Total
Gross
Unrealized
Losses
%
of Total
$
10,050
79,448
161,483
280,178
531,159
25,465
10,595
36,060
2% $
14%
28%
50%
94%
4%
2%
6%
198
2,570
4,928
20,569
28,265
3,798
157
3,955
1%
8%
15%
64%
88%
12%
—%
12%
$
567,219
100% $
32,220
100%
The following table provides information on fixed maturity securities with gross unrealized losses by actual or equivalent
Standard & Poor’s rating at December 31, 2014.
AAA
AA
A
BBB
Total investment grade
BB
B and below
Total below investment grade
Fair
Value
%
of Total
Gross
Unrealized
Losses
%
of Total
$
7,953
37,702
91,299
132,230
269,184
13,969
2,657
16,626
3% $
13%
32%
46%
94%
5%
1%
6%
47
1,670
2,840
4,580
9,137
1,031
1,029
2,060
$
285,810
100% $
11,197
—%
15%
26%
41%
82%
9%
9%
18%
100%
The Company’s residential mortgage-backed securities, commercial mortgage-backed securities, and asset-backed securities that
were rated below investment grade were 41% and 40% of the below investment grade total at December 31, 2015 and December 31,
2014, respectively.
24
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table provides the distribution of maturities for fixed maturity securities available for sale with unrealized losses at
December 31. Expected maturities may differ from these contractual maturities since borrowers may have the right to call or
prepay obligations.
December 31, 2015
December 31, 2014
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fixed maturity securities available for sale:
Due in one year or less
$
— $
— $
5,052
$
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
Securities with variable principal payments
Redeemable preferred stocks
68,757
421,519
65,939
556,215
4,079
6,925
1,548
26,164
4,388
32,100
21
99
21,033
202,240
47,740
276,065
341
9,404
115
960
5,772
3,635
10,482
2
713
Total
$
567,219
$
32,220
$
285,810
$
11,197
The Company held one non-income producing security with a carrying value of $0.6 million at December 31, 2015, compared to
three securities with a carrying value of $0.8 million at December 31, 2014. These securities were previously written down due
to other-than-temporary impairments and placed on non-accrual status.
The Company did not hold securities of any corporation and its affiliates that exceeded 10% of stockholders' equity at December 31,
2015 or 2014.
The Company recognized other-than-temporary impairments of $2.2 million, $2.2 million, and $1.0 million for the years ended
December 31, 2015, 2014, and 2013, respectively. Included in these total impairments, $2.5 million, $1.5 million, and $1.1 million
were recorded in earnings for the years ended December 31, 2015, 2014, and 2013, respectively. The differences represented the
non-credit portion of current or prior other-than-temporary impairment that were recorded in other comprehensive income (loss).
Corporate private-labeled residential mortgage-backed and other securities had impairments recorded in earnings of $0.3 million,
$0.6 million, and $0.6 million for the years ended December 31, 2015, 2014, and 2013, respectively. The Company determined
the other-than-temporary impairments recorded in earnings based upon the present value of projected future cash flows.
One corporate obligation had an impairment recorded in earnings of $2.0 million during 2015. This is a debt obligation of a
company within the oil exploration and production sector that is challenged by reduced oil prices and lower demand for exploration
equipment. In addition, one other-type security was written down by $0.2 million during 2015 due to an increase in projected
future losses on the underlying collateral. One equity security had an impairment of less than $0.1 million during 2015. Two
corporate obligations had a impairments recorded in earnings of $0.7 million during 2014. The first was written down $0.7 million
and was an oil industry debt obligation that was challenged by reduced oil prices. The second was a utility debt obligation that
was written down less than $0.1 million. In addition, an other-type security was written down by $0.1 million due to an increase
in projected future losses on the underlying collateral. There were two equity securities with impairments recorded of $0.1 million
during 2014. One other-type security was written down by $0.5 million during 2013 due to an increase in projected future losses
on the underlying collateral. There were no impairments on equity securities during 2013.
25
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following tables present the range of significant assumptions used in projecting the future cash flows of the Company's
residential mortgage-backed securities, commercial mortgage-backed securities, and asset-backed securities. The Company
believes that the assumptions below are reasonable and they are based largely upon the actual historical results of the underlying
security collateral.
Initial Default Rate
Low
High
0.8%
0.8%
4.9%
9.3%
10.0%
1.0%
9.2%
10.5%
9.3%
10.0%
December 31, 2015
Initial Severity Rate
High
Low
30%
35%
35%
80%
62%
Initial Default Rate
Low
High
0.8%
0.8%
4.8%
5.7%
11.0%
1.0%
7.0%
12.6%
8.4%
11.0%
December 31, 2014
Initial Severity Rate
High
Low
30%
35%
35%
35%
59%
35%
72%
74%
80%
62%
35%
65%
71%
85%
59%
Prepayment Speed
Low
High
12.0%
10.0%
6.0%
8.0%
10.0%
16.0%
16.0%
20.0%
8.0%
10.0%
Prepayment Speed
Low
High
12.0%
8.0%
6.0%
8.0%
8.0%
16.0%
18.0%
18.0%
16.0%
8.0%
Vintage
2003
2004
2005
2006
2007
Vintage
2003
2004
2005
2006
2007
The Company also monitors structured securities through a combination of an analysis of vintage, credit ratings, and other factors.
Structured securities include asset-backed, residential mortgage-backed securities, along with collateralized debt obligations, and
other collateralized obligations.
26
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following tables divide these investment types among vintage and credit ratings.
December 31, 2015
Fair
Value
Amortized
Cost
Unrealized
Gains (Losses)
$
$
4,478
5,203
2,670
12,351
2,233
22,011
41,966
1,873
2,883
70,966
56,601
14,714
71,315
$
4,313
4,980
2,659
11,952
2,137
21,055
40,223
817
2,700
66,932
57,416
15,585
73,001
$
154,632
$
151,885
$
165
223
11
399
96
956
1,743
1,056
183
4,034
(815)
(871)
(1,686)
2,747
December 31, 2014
Fair
Value
Amortized
Cost
Unrealized
Gains (Losses)
$
8,249
$
7,910
$
6,459
14,708
29,647
55,806
3,528
3,386
92,367
57,672
14,728
72,400
6,177
14,087
28,080
53,741
2,406
3,164
87,391
57,658
16,073
73,731
$
179,475
$
175,209
$
339
282
621
1,567
2,065
1,122
222
4,976
14
(1,345)
(1,331)
4,266
Residential & non-agency MBS: 1
Investment Grade:
Vintage 2003 and earlier
2004
2005
Total investment grade
Below Investment Grade:
Vintage 2003 and earlier
2004
2005
2006
2007
Total below investment grade
Other structured securities:
Investment grade
Below investment grade
Total other
Total structured securities
1 This table accounts for all vintages owned by the Company.
Residential & non-agency MBS: 1
Investment grade:
Vintage 2003 and earlier
2004
Total investment grade
Below investment grade:
2004
2005
2006
2007
Total below investment grade
Other structured securities:
Investment grade
Below investment grade
Total other
Total structured securities
1 This table accounts for all vintages owned by the Company.
27
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table provides a reconciliation of credit losses recognized in earnings on fixed maturity securities held by the
Company for which a portion of the other-than-temporary impairment loss was recognized in other comprehensive income (loss)
for the years ended December 31.
Credit losses on securities held at beginning of the period
$
17,889
$
16,375
15,260
2015
2014
2013
Additions for credit losses not previously recognized in
other-than-temporary impairment
Additions for increases in the credit loss for which
an other-than-temporary impairment was previously
recognized when there was no intent to sell the security
before recovery of its amortized cost basis
Reductions for increases in cash flows expected to be
collected that are recognized over the remaining
life of the security
Credit losses on securities held at the end of the period
—
808
27
2,481
725
1,106
(20)
20,350
$
(19)
17,889
$
(18)
16,375
$
The following table provides the net unrealized gains (losses) reported in accumulated other comprehensive income (loss) on the
Company's investments in securities available for sale, at December 31.
Net unrealized gains
Amounts resulting from:
DAC, VOBA, and DRL
Future policy benefits
Policyholder account balances
Deferred income taxes
Total
2015
2014
2013
$
95,765
$
174,620
$
124,427
(17,030)
(19,219)
(454)
(20,670)
38,392
$
(28,495)
(26,778)
(879)
(41,462)
77,006
$
(26,979)
(16,119)
(507)
(28,287)
52,535
$
Investment Revenues
The following table provides investment revenues by major category for the years ended December 31.
Gross investment income:
Fixed maturity securities
Equity securities
Mortgage loans
Real estate
Policy loans
Short-term investments
Other
Total
Less investment expenses
Net investment income
2015
2014
2013
116,713
1,023
31,662
17,059
5,774
8
177
172,416
(15,266)
157,150
$
$
121,137
1,037
37,452
11,756
5,848
4
535
177,769
(12,801)
164,968
$
$
122,448
1,953
40,605
10,652
5,753
5
357
181,773
(12,033)
169,740
$
$
28
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Realized Gains (Losses)
The following table provides net realized investment gains (losses) by major category for the years ended December 31.
Realized investment gains (losses):
Fixed maturity securities
Equity securities
Real estate
Mortgage loans
Amortization of DAC, VOBA, and DRL
Net realized investment gains
2015
2014
2013
$
$
569
49
4,228
(1,041)
(38)
3,767
$
2,576
$
403
642
(105)
(147)
3,369
$
$
3,464
626
(69)
(49)
(100)
3,872
The following table provides detail concerning realized investment gains and losses for the three years ended December 31.
Gross gains resulting from:
Sales of investment securities
Investment securities called and other
Real estate
Total gross gains
Gross losses resulting from:
Sales of investment securities
Investment securities called and other
Sale of real estate and joint venture
Mortgage loans
Total gross losses
Change in allowance for loan losses
Amortization of DAC, VOBA, and DRL
Net realized investment gains, excluding
other-than-temporary impairment losses
Net impairment losses recognized in earnings:
Other-than-temporary impairment losses on fixed
maturity and equity securities
Portion of loss recognized in other comprehensive
income (loss)
Net other-than-temporary impairment losses
recognized in earnings
Net realized investment gains
2015
2014
2013
$
360
$
3,354
4,228
7,942
(403)
(212)
—
(296)
(911)
(745)
(38)
$
3,199
3,084
864
7,147
(1,352)
(419)
(222)
(1,442)
(3,435)
1,337
(147)
261
5,627
20
5,908
(5)
(660)
(89)
(144)
(898)
95
(100)
6,248
4,902
5,005
(2,189)
(2,176)
(1,032)
(292)
643
(2,481)
3,767
$
(1,533)
3,369
$
$
(101)
(1,133)
3,872
Proceeds From Sales of Investment Securities
The table below details proceeds from the sale of fixed maturity and equity securities, excluding maturities and calls, for the three
years ended December 31.
Proceeds
$
39,954
$
38,527
$
12,292
2015
2014
2013
29
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Mortgage Loans
Investments in mortgage loans totaled $590.0 million at December 31, 2015, compared to $541.2 million at December 31, 2014.
The Company's mortgage loans are mostly secured by commercial real estate and are stated at cost, adjusted for amortization of
premium and accrual of discount, less an allowance for loan losses. This allowance is maintained at a level believed by management
to be adequate to absorb estimated credit losses and was $2.7 million at December 31, 2015 and $1.9 million at December 31,
2014. Management's periodic evaluation and assessment of the adequacy of the allowance is based on known and inherent risks
in the portfolio, historical and industry data, current economic conditions, and other relevant factors. Please see Note 5 - Financing
Receivables for additional information. The Company does not hold mortgage loans to any single borrower that exceed 5% of
stockholders' equity.
The Company had 17% of its invested assets in commercial mortgage loans at December 31, 2015, compared to 15% at
December 31, 2014. New commercial loans, including refinanced loans, were $164.0 million and $61.2 million for 2015 and
2014, respectively. The level of new commercial mortgage loans in any year is influenced by market conditions, as the Company
responds to changes in interest rates, available spreads, borrower demand, and opportunities to acquire loans that meet the Company's
yield and quality thresholds.
In addition to the subject collateral underlying the mortgage, the Company typically requires some amount of recourse from
borrowers as another potential source of repayment. The recourse requirement is determined as part of the underwriting
requirements of each loan. The Company added 70 new loans to the portfolio during 2015, and 96% of these loans had some
amount of recourse requirement. No new loans were purchased from institutional lenders during 2015. The average loan-to-value
ratio for the overall portfolio was 47% at December 31, 2015, up from 46% at December 31, 2014. These ratios are based upon
the current balance of loans relative to the appraisal of value at the time the loan was originated or acquired. The average loan
balance was $1.6 million at December 31, 2015 and $1.5 million at December 31, 2014. The Company has certain mortgage loans
that have an unamortized premium, totaling $0.4 million as of December 31, 2015, compared to $1.0 million at December 31,
2014.
The following table identifies the gross mortgage loan principal outstanding and the allowance for loan losses at December 31.
Principal outstanding
Allowance for loan losses
Carrying value
2015
2014
$
$
592,619
(2,659)
589,960
$
$
543,094
(1,914)
541,180
The following table summarizes the amount of mortgage loans held by the Company at December 31, 2015 and 2014, segregated
by year of origination. Purchased loans are shown in the year acquired by the Company, although the individual loans may have
been initially originated in prior years.
Prior to 2006
$
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2015
25,799
10,438
17,722
21,440
11,544
38,002
81,357
104,775
62,808
57,100
161,634
%
of Total
4% $
2%
3%
4%
2%
6%
14%
18%
10%
10%
27%
2014
47,843
16,280
19,991
22,938
20,754
51,205
91,943
133,912
77,784
60,444
—
Principal outstanding
$
592,619
100% $
543,094
30
%
of Total
9%
3%
4%
4%
4%
9%
17%
25%
14%
11%
—%
100%
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table identifies mortgage loans by geographic location at December 31.
Pacific
West south central
West north central
Mountain
South Atlantic
East north central
Middle Atlantic
East south central
2015
$
129,108
112,093
84,210
67,526
71,599
71,178
30,141
26,764
%
of Total
2014
%
of Total
22% $
131,109
19%
14%
11%
12%
12%
5%
5%
94,122
78,027
68,961
60,557
64,013
21,877
24,428
25%
17%
14%
13%
11%
12%
4%
4%
Principal outstanding
$
592,619
100% $
543,094
100%
The following table identifies the concentration of mortgage loans by state greater than 5% of total at December 31.
2015
%
of Total
2014
%
of Total
California
Texas
Minnesota
Ohio
Florida
All others
$
111,050
19% $
108,683
108,104
58,841
39,410
30,753
244,461
18%
10%
7%
5%
41%
89,923
55,916
30,432
26,452
231,688
Principal outstanding
$
592,619
100% $
543,094
20%
16%
10%
6%
5%
43%
100%
The following table identifies mortgage loans by property type at December 31. The Other category consists principally of
apartments and retail properties.
2015
%
of Total
2014
%
of Total
Industrial
Office
Medical
Other
Principal outstanding
$
$
312,458
53% $
281,671
181,912
28,042
70,207
592,619
30%
5%
12%
100% $
165,859
25,617
69,947
543,094
51%
31%
5%
13%
100%
The table below identifies mortgage loans by maturity at December 31.
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Principal outstanding
2015
%
of Total
2014
%
of Total
$
18,560
3% $
27,607
107,219
129,232
337,608
18%
22%
57%
145,530
143,382
226,575
$
592,619
100% $
543,094
5%
27%
26%
42%
100%
31
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The table below identifies the commercial mortgage portfolio by current loan balance at years ending December 31.
$5 million or greater
$4 million to less than $5 million
$3 million to less than $4 million
$2 million to less than $3 million
$1 million to less than $2 million
Less than $1 million
Principal outstanding
$
2015
88,656
31,025
57,735
130,397
195,604
89,202
%
of Total
15% $
5%
10%
22%
33%
15%
2014
69,237
27,189
47,718
130,026
178,862
90,062
%
of Total
13%
5%
9%
24%
33%
16%
$
592,619
100% $
543,094
100%
The table below identifies the commercial mortgage portfolio by current loan balance as a percentage of the value at the time of
origination at December 31.
2015
%
of Total
2014
%
of Total
70% or greater
50% to 69%
Less than 50%
$
66,330
11% $
33,113
301,901
224,388
51%
38%
297,001
212,980
Principal outstanding
$
592,619
100% $
543,094
6%
55%
39%
100%
The concentration in California, along with other states included in the pacific region, exposes the Company to potential losses
from a regional economic downturn and certain catastrophes, such as earthquakes and fires, that may affect certain areas of the
region. The Company requires borrowers to maintain fire insurance coverage to provide reimbursement for any losses due to fire.
The Company diversifies its commercial mortgage loan portfolio both geographically and by property type to reduce certain
catastrophic and economic exposure. However, diversification may not always sufficiently mitigate the risk of such losses.
Historically, the delinquency rate of the Company's pacific region commercial mortgage loans has been substantially below the
industry average and consistent with the Company's experience in other regions. The Company does not require earthquake
insurance for properties on which it makes commercial mortgage loans. However, the Company does consider structural information
specific to each property, as well as the potential for earthquake loss if the property lies within areas believed by the Company to
be seismically active submarkets. The Company does not expect catastrophe or earthquake damage or economic downturn in the
pacific region that may occur to have a material adverse effect on its business, financial position, results of operations, or cash
flows. However, the Company cannot provide assurance that such risks could not have such material adverse effects.
Under the laws of certain states, environmental contamination of a property may result in a lien on the property to secure recovery
of the costs of cleanup. In some states, such a lien has priority over the lien of an existing mortgage against such property. As a
commercial mortgage lender, the Company customarily conducts environmental assessments prior to making commercial mortgage
loans secured by real estate and before taking title on real estate. Based on the Company's environmental assessments, the Company
believes that any compliance costs associated with environmental laws and regulations or any remediation of affected properties
would not have a material adverse effect on the Company's business, financial position, results of operations, or cash flows.
However, the Company cannot provide assurance that material compliance costs will not be incurred.
The Company may refinance commercial mortgage loans prior to contractual maturity as a means of originating new loans that
meet the Company's underwriting and pricing parameters. The Company refinanced loans with outstanding balances of $22.8
million and $13.0 million during the years ended December 31, 2015 and December 31, 2014, respectively.
In the normal course of business, the Company commits to fund commercial mortgage loans generally up to 120 days in advance.
These commitments typically have fixed expiration dates. A small percentage of commitments expire due to the borrower's failure
to deliver the requirements of the commitment by the expiration date. In these cases, the Company retains the commitment fee.
For additional information, please see Note 21 - Commitments, Contingent Liabilities, Guarantees, and Indemnifications.
32
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Real Estate
Investments in real estate totaled $168.1 million at December 31, 2015, compared to $181.1 million at December 31, 2014. The
table below provides information concerning the Company's real estate investments by major category at December 31.
Land
Buildings
Less accumulated depreciation
Real estate, commercial
Real estate, joint ventures
Total
2015
2014
$
29,157
$
28,767
141,936
(36,291)
134,802
33,295
150,501
(33,217)
146,051
35,031
$
168,097
$
181,082
Investment real estate is depreciated on a straight-line basis over periods ranging from 3 years to 60 years. The Company had
real estate sales of $20.0 million, $2.9 million, and $0.4 million during 2015, 2014, and 2013, respectively.
The Company had non-income producing real estate, consisting of vacant properties and properties under development, of $8.7
million at December 31, 2015, compared to $12.2 million at December 31, 2014.
4. Fair Value Measurements
Under GAAP, fair value represents the price that would be received to sell an asset or paid to transfer a liability (exit price) in an
orderly transaction between market participants at the measurement date. It is the Company’s practice to maximize the use of
observable inputs and minimize the use of unobservable inputs when developing fair value measurements.
The Company categorizes its financial assets and liabilities measured at fair value in three levels, based on the inputs and assumptions
used to determine the fair value. These levels are as follows:
Level 1 - Valuations are based upon unadjusted quoted prices for identical instruments traded in active markets.
Level 2 - Valuations are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are
observable in the market. Valuations are obtained from third-party pricing services or inputs that are observable or derived
principally from or corroborated by observable market data.
Level 3 - Valuations are generated from techniques that use significant assumptions not observable in the market. These
unobservable assumptions reflect the Company's assumptions that market participants would use in pricing the asset or liability.
Valuation techniques include the use of discounted cash flow models, spread-based models, and similar techniques, using the best
information available in the circumstances.
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair
value for financial instruments not recorded at fair value but for which fair value is disclosed.
Assets
Securities Available for Sale
Fixed maturity and equity securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is
based upon unadjusted quoted prices, if available, except as described in the subsequent paragraphs.
Cash and Short-Term Investments
Cash and short-term investments include cash and highly-liquid investments in institutional money market funds. The carrying
value of cash and short-term investments approximates the fair value and are categorized as Level 1. Fair value is provided for
disclosure purposes only.
Loans
The Company does not record loans at fair value. As such, valuation techniques discussed herein for loans are primarily for
estimating fair value for purpose of disclosure.
Fair values of mortgage loans on real estate properties are calculated by discounting contractual cash flows, using discount rates
based on current industry pricing or the Company’s estimate of an appropriate risk-adjusted discount rate for loans of similar size,
33
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
type, remaining maturity, likelihood of prepayment, and repricing characteristics. Mortgage loans are categorized as Level 3 in
the fair value hierarchy.
The Company also has loans made to policyholders. These loans cannot exceed the cash surrender value of the policy. Carrying
value of policy loans approximates fair value. Policy loans are categorized as Level 3.
Separate Accounts
The separate account assets and liabilities, which are equal, are recorded at fair value based upon NAV of the underlying investment
holdings as derived from closing prices on a national exchange or as provided by the issuer. This is the value at which a policyholder
could transact with the issuer on the date. Separate accounts are categorized as Level 2.
Liabilities
Investment-Type Liabilities Included in Policyholder Account Balances and Other Policyholder Funds
The fair values of supplementary contracts and annuities without life contingencies are estimated to be the present value of payments
at a market yield. The fair values of deposits with no stated maturity are estimated to be the amount payable on demand at the
measurement date. These liabilities are categorized as Level 3. The Company has not estimated the fair value of the liabilities
under contracts that involve significant mortality or morbidity risks, as these liabilities fall within the definition of insurance
contracts. Insurance contracts are excluded from financial instruments that require disclosures of fair value.
Guaranteed Minimum Withdrawal Benefits (GMWB) Included in Other Policyholder Funds
The Company offers a GMWB rider that can be added to new or existing variable annuity contracts. The rider provides an enhanced
withdrawal benefit that guarantees a stream of income payments to an owner or annuitant, regardless of the contract account value.
Fair value for GMWB rider contracts is a Level 3 valuation, as it is based on models which utilize significant unobservable inputs.
These models require actuarial and financial market assumptions, which reflect the assumptions market participants would use in
pricing the contract, including adjustments for volatility, risk, and issuer non-performance.
Determination of Fair Value
The Company utilizes external third-party pricing services to determine the majority of its fair values on investment securities
available for sale. At December 31, 2015, approximately 98% of the carrying value of these investments was from external pricing
services, 1% was from brokers, and 1% was derived from internal matrices and calculations. At December 31, 2014, approximately
97% of the carrying value of these investments was from external pricing services, 1% was from brokers, and 2% was derived
from internal matrices and calculations. In the event that the primary pricing service does not provide a price, the Company utilizes
the price provided by a second pricing service. The Company reviews prices received from service providers for reasonableness
and unusual fluctuations but generally accepts the price identified from the primary pricing service. In the event a price is not
available from either third-party pricing service, the Company pursues external pricing from brokers. Generally, the Company
pursues and utilizes only one broker quote per security. In doing so, the Company solicits only brokers which have previously
demonstrated knowledge and experience of the subject security. If a broker price is not available, the Company determines a fair
value through various valuation techniques that may include discounted cash flows, spread-based models, or similar techniques,
depending upon the specific security to be priced. These techniques are primarily applied to private placement securities. The
Company utilizes available market information, wherever possible, to identify inputs into the fair value determination, primarily
prices and spreads on comparable securities.
Each quarter, the Company evaluates the prices received from third-party security pricing services and independent brokers to
ensure that the prices represent a reasonable estimate of the fair value within the macro-economic environment, sector factors,
and overall pricing trends and expectations. The Company corroborates and validates the primary pricing sources through a variety
of procedures that include but are not limited to comparison to additional third-party pricing services or brokers, where possible;
a review of third-party pricing service methodologies; back testing; in-depth specific analytics on randomly selected issues; and
comparison of prices to actual trades for specific securities where observable data exists. In addition, the Company analyzes the
primary third-party pricing service's methodologies and related inputs and also evaluates the various types of securities in its
investment portfolio to determine an appropriate fair value hierarchy. Finally, the Company also performs additional evaluations
when individual prices fall outside tolerance levels when comparing prices received from third-party pricing services.
Fair value measurements for assets and liabilities where there exists limited or no observable market data are calculated using the
Company’s own estimates and are categorized as Level 3. These estimates are based on current interest rates, credit spreads,
liquidity premium or discount, the economic and competitive environment, unique characteristics of the asset or liability, and other
pertinent factors. Therefore, these estimates cannot be determined with precision and may not be realized in an actual sale or
immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any valuation technique. Further,
changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect
the results of current or future values.
34
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The Company’s own estimates of fair value of fixed maturity and equity securities may be derived in a number of ways, including
but not limited to: 1) pricing provided by brokers, where the price indicates reliability as to value; 2) fair values of comparable
securities, incorporating a spread adjustment for maturity differences, collateralization, credit quality, liquidity, and other items,
if applicable; 3) discounted cash flow models and margin spreads; 4) bond yield curves; 5) observable market prices and exchange
transaction information not provided by external pricing services; and 6) statement values provided to the Company by fund
managers.
The fair value of the GMWB embedded derivative is calculated using a discounted cash flow valuation model that projects future
cash flows under multiple risk neutral stochastic equity scenarios. The risk neutral scenarios are generated using the current swap
curve and projected equity volatilities and correlations. The equity correlations are based on historical price observations. For
policyholder behavior assumptions, expected lapse and utilization assumptions are used and updated for actual experience. The
mortality assumption uses the 2000 U.S. Annuity Basic Mortality Table. The present value of cash flows is determined using the
discount rate curve, based upon London Interbank Offered Rate (LIBOR) plus a credit spread.
Categories Reported at Fair Value
The following tables present the Company's fair value hierarchy for those assets and liabilities reported at fair value on a
recurring basis at December 31.
Level 1
Level 2
Level 3
Total
2015
Assets:
U.S. Treasury securities and
obligations of U.S. Government
Federal agencies 1
Federal agency issued residential
mortgage-backed securities 1
Subtotal
Corporate obligations:
Industrial
Energy
Communications and technology
Financial
Consumer
Public utilities
Subtotal
Corporate private-labeled residential
mortgage-backed securities
Municipal securities
Other
Redeemable preferred stocks
Fixed maturity securities
Equity securities
Total
$
Percent of total
Liabilities:
Other policyholder funds
$
146,421
21,197
$
$
9,704
—
—
9,704
37,559
205,177
544,509
227,019
242,233
221,497
549,301
240,299
2,024,858
74,177
152,849
95,855
17,648
2,570,564
20,159
$ 2,590,723
—
—
—
—
—
—
—
—
—
—
—
9,704
5,166
14,870
1%
99%
—
—
—
—
—
—
—
—
—
—
—
—
—
577
—
577
—
577
$
156,125
21,197
37,559
214,881
544,509
227,019
242,233
221,497
549,301
240,299
2,024,858
74,177
152,849
96,432
17,648
2,580,845
25,325
$ 2,606,170
—%
100%
(2,778)
(2,778)
$
$
(2,778)
(2,778)
$
$
$
Guaranteed minimum withdrawal benefits $
$
Total
—
—
$
$
—
—
1 Federal agency securities are not backed by the full faith and credit of the U.S. Government.
35
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Assets:
U.S. Treasury securities and
obligations of U.S. Government
Federal agencies 1
Federal agency issued residential
mortgage-backed securities 1
Subtotal
Corporate obligations:
Industrial
Energy
Communications and technology
Financial
Consumer
Public utilities
Subtotal
Corporate private-labeled residential
mortgage-backed securities
Municipal securities
Other
Redeemable preferred stocks
Fixed maturity securities
Equity securities
Total
Percent of total
Liabilities:
Other policyholder funds
Level 1
Level 2
Level 3
Total
2014
$
12,247
$
152,546
$
—
—
12,247
—
—
—
—
—
—
—
—
—
—
—
12,247
5,347
21,951
48,742
223,239
559,377
230,090
242,905
294,329
544,079
250,079
2,120,859
95,282
158,492
98,714
17,139
2,713,725
19,534
$
17,594
$ 2,733,259
$
—
—
—
—
—
—
—
—
—
—
—
—
—
759
—
759
—
759
$
164,793
21,951
48,742
235,486
559,377
230,090
242,905
294,329
544,079
250,079
2,120,859
95,282
158,492
99,473
17,139
2,726,731
24,881
$ 2,751,612
1%
99%
—%
100%
Guaranteed minimum withdrawal benefits $
$
Total
—
—
$
$
—
—
$
$
(1,094)
(1,094)
$
$
(1,094)
(1,094)
1 Federal agency securities are not backed by the full faith and credit of the U.S. Government.
36
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the years ended December 31 are
summarized below:
2015
Assets
Liabilities
Fixed maturity
securities available
for sale
GMWB
$
759
$
(193)
(1,094)
(1,488)
306
—
—
—
—
(295)
—
—
$
577
$
—
330
—
(526)
—
—
(2,778)
2014
Assets
Liabilities
Fixed maturity
securities available
for sale
$
1,433
$
(12)
(421)
—
—
—
(241)
—
—
$
759
$
GMWB
(4,703)
3,145
—
—
592
—
(128)
—
—
(1,094)
Beginning balance
Included in earnings
Included in other comprehensive income
(loss)
Purchases, issuances, sales and other
dispositions:
Purchases
Issuances
Sales
Other dispositions
Transfers into Level 3
Transfers out of Level 3
Ending balance
Beginning balance
Included in earnings
Included in other comprehensive income
(loss)
Purchases, issuances, sales and other
dispositions:
Purchases
Issuances
Sales
Other dispositions
Transfers into Level 3
Transfers out of Level 3
Ending balance
Depending upon the availability of Level 1 or Level 2 pricing, specific securities may transfer into or out of Level 3. The Company
did not have any transfers between any levels at December 31, 2015 or 2014.
The Company's assets categorized as Level 3 instruments are primarily fixed maturity securities, totaling $0.6 million at
December 31, 2015 and $0.8 million as of December 31, 2014. These assets are valued using discounted cash flow models for
which the significant assumptions are not observable in the market.
37
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table presents the valuation method for the financial instrument liability categorized as Level 3, as well as the
unobservable inputs used in the valuation of those financial instruments at December 31, 2015.
Embedded Derivative -
GMWB
(2,778) Actuarial cash flow
model
Fair Value
$
Valuation
Technique
Unobservable
Inputs
Mortality
Lapse
Benefit Utilization
Nonperformance
Risk
Range
80% of U.S. Annuity
Basic Table (2000)
0%-16% depending
on product/duration/
funded status of
guarantee
0%-80% depending
on age/duration/
funded status of
guarantee
0.87%-1.73%
The following table presents the valuation method for the financial instrument liability categorized as Level 3, as well as the
unobservable inputs used in the valuation of those financial instruments at December 31, 2014.
Embedded Derivative -
GMWB
(1,094) Actuarial cash flow
model
Fair Value
$
Valuation
Technique
Unobservable
Inputs
Mortality
Lapse
Benefit Utilization
Nonperformance
Risk
Range
80% of U.S. Annuity
Basic Table (2000)
0%-16% depending
on product/duration/
funded status of
guarantee
0%-80% depending
on age/duration/
funded status of
guarantee
0.73%-1.35%
The GMWB liability is sensitive to changes in observable and unobservable inputs. Observable inputs include risk-free rates,
index returns, volatilities, and correlations. Increases in risk-free rates and equity returns reduce the liability, while increases in
volatilities increase the liability. The Company's mortality, lapse, benefit utilization and nonperformance risk adjustment are
unobservable. Increases in mortality, lapses and credit spreads used for nonperformance risk reduce the liability, while increases
in benefit utilization increase the liability.
The Company estimates that the impact of unobservable inputs at December 31, 2015 was as follows: a 10% increase in the
mortality assumption would reduce the liability less than $0.1 million; a 10% decrease in the lapse assumption would increase the
liability $0.2 million; a 10% increase in the benefit utilization would increase the liability $0.7 million; and a 10 basis point increase
in the credit spreads used for non-performance would decrease the liability $0.3 million.
The Company estimates that the impact of unobservable inputs at December 31, 2014 was as follows: a 10% increase in the
mortality assumption would reduce the liability less than $0.1 million; a 10% decrease in the lapse assumption would increase the
liability $0.3 million; a 10% increase in the benefit utilization would increase the liability $0.9 million; and a 10 basis point increase
in the credit spreads used for non-performance would decrease the liability $0.4 million.
38
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table presents a summary of fair value estimates at December 31 for financial instruments. The Company has not
included assets and liabilities that are not financial instruments in this disclosure. The total of the fair value calculations presented
below may not be indicative of the value that can be obtained.
2015
2014
Carrying
Value
Fair Value
Carrying
Value
Fair Value
Assets:
Investments:
Fixed maturity securities available for sale
$ 2,580,845
$ 2,580,845
$ 2,726,731
$ 2,726,731
Equity securities available for sale
Mortgage loans
Policy loans
Cash and short-term investments
Separate account assets
Liabilities:
Individual and group annuities
Supplementary contracts and annuities
without life contingencies
Separate account liabilities
Other policyholder funds - GMWB
25,325
589,960
81,392
30,325
372,924
25,325
606,708
81,392
30,325
372,924
24,881
541,180
83,553
50,118
406,501
24,881
567,435
83,553
50,118
406,501
1,073,592
1,055,052
1,080,322
1,061,067
54,136
372,924
(2,778)
52,636
372,924
(2,778)
54,949
406,501
(1,094)
53,744
406,501
(1,094)
5. Financing Receivables
The Company has financing receivables that have both a specific maturity date, either on demand or on a fixed or determinable
date, and are recognized as assets in the Consolidated Balance Sheets.
The table below identifies the Company’s financing receivables by classification amount at December 31.
Receivables:
Agent receivables, net
(allowance $1,197; 2014 - $2,003)
Investment-related financing receivables:
Mortgage loans, net
(allowance $2,659; 2014 - $1,914)
2015
2014
$
1,602
$
1,727
589,960
541,180
Total financing receivables
$
591,562
$
542,907
The following table details the activity of the allowance for doubtful accounts on agent receivables at December 31. Any recoveries
are reflected as deductions.
Beginning of year
Additions
Deductions
End of year
2015
2014
$
$
2,003
$
128
(934)
1,197
$
2,245
306
(548)
2,003
39
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table details the mortgage loan portfolio, as collectively or individually evaluated for impairment at December 31.
Mortgage loans collectively evaluated
for impairment
Mortgage loans individually evaluated
for impairment
Allowance for loan losses
Carrying value
2015
2014
$
585,207
$
535,398
7,412
(2,659)
$
589,960
$
7,696
(1,914)
541,180
The following table details the activity of the allowance for mortgage loan losses at December 31. Any recoveries are reflected
as deductions.
Beginning of year
Provision
Deductions
End of year
2015
2014
$
$
1,914
$
745
—
2,659
$
3,251
—
(1,337)
1,914
Agent Receivables
The Company has agent receivables that are classified as financing receivables and are reduced by an allowance for doubtful
accounts. These trade receivables from agents are long-term in nature and are specifically assessed as to the collectibility of each
receivable. The Company's gross agent receivables totaled $2.8 million at December 31, 2015 with an allowance for doubtful
accounts totaling $1.2 million. Gross agent receivables totaled $3.7 million with an allowance for doubtful accounts of $2.0
million at December 31, 2014. The Company has two types of agent receivables including:
• Agent specific loans. At both December 31, 2015 and December 31, 2014, these loans totaled $1.0 million and the
allowance for doubtful accounts of $0.3 million.
• Other agent receivables. Gross agent receivables in this category totaled $1.8 million, and the allowance for doubtful
accounts was $0.9 million at December 31, 2015. Gross agent receivables totaled $2.7 million, and the allowance for
doubtful accounts was $1.7 million at December 31, 2014.
Mortgage Loans
The Company considers its mortgage loan portfolio to be long-term financing receivables. Mortgage loans are stated at cost,
adjusted for amortization of premium and accrual of discount, less an allowance for loan losses. Mortgage loan interest income
is recognized on an accrual basis with any premium or discount amortized over the life of the loan. Prepayment and late fees are
recorded on the date of collection. Loans in foreclosure, loans considered impaired, or loans past due 90 days or more are placed
on non-accrual status. Payments received on loans on non-accrual status for these reasons are applied first to interest income not
collected while on non-accrual status, followed by fees, accrued and past-due interest, and principal.
If a mortgage loan is determined to be on non-accrual status, the Company does not accrue interest income into its financial
statements. The loan is independently monitored and evaluated as to potential impairment or foreclosure. This evaluation includes
assessing the probability of receiving future cash flows, along with consideration of many of the factors described below. If
delinquent payments are made and the loan is brought current, then the Company returns the loan to active status and accrues
income accordingly.
Generally, the Company considers its mortgage loans to be a portfolio segment. The Company considers its primary class to be
property type. The Company primarily uses loan-to-value as its credit risk quality indicator but also monitors additional secondary
risk factors, such as geographic distribution both on a regional and specific state basis. The mortgage loan portfolio segment is
presented by property type in a table in Note 3, as are geographic distributions by both region and state. These measures are also
supplemented with various other analytics to provide additional information concerning potential impairment of mortgage loans
and management's assessment of financing receivables.
40
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table presents an aging schedule for delinquent payments for both principal and interest by property type.
December 31, 2015
Industrial
Office
Medical
Other
Total
December 31, 2014
Industrial
Office
Medical
Other
Total
Book Value
30-59 Days
Amount of Payments Past Due
60-89 Days
> 90 Days
Total
$
$
$
$
— $
— $
— $
— $
5,064
—
—
5,064
$
74
—
—
74
—
—
—
—
—
—
$
— $
— $
— $
— $
— $
— $
—
—
—
—
—
—
—
—
—
—
—
—
— $
— $
— $
— $
—
74
—
—
74
—
—
—
—
—
There was one mortgage loan that was 30 days past due at December 31, 2015. Subsequently, payment was received on this loan
and it was brought current. No mortgage loans were past due at December 31, 2014. There were no loans in the process of
foreclosure at December 31, 2015 or December 31, 2014.
The allowance for loan losses is monitored and evaluated at multiple levels with a process that includes, but is not limited to, the
factors presented below. Generally, the Company establishes the allowance for loan losses using the collectively evaluated
impairment methodology at an overall portfolio level and then specifically identifies an allowance for loan losses on loans that
contain elevated risk profiles. If the Company determines through its evaluation that a loan has an elevated specific risk profile,
it then individually assesses the loan’s risk profile and assigns a specific allowance value based on many factors, including those
identified below.
Macro-environmental and elevated risk profile considerations:
Perceived market liquidity;
• Current industry conditions that are affecting the market, including rental and vacancy rates;
•
• Analysis of the markets and sub-markets in which the Company has mortgage loans;
• Analysis of industry historical loss and delinquency experience;
• Other factors that the Company may perceive as important or critical given its portfolio; and
• Analysis of the Company’s loan portfolio based on loan size concentrations, geographic concentrations, property type
concentrations, maturity concentrations, origination loan-to-value concentrations, and borrower concentrations.
Specific mortgage loan level considerations:
• The payment history of each borrower;
• Negative reports from property inspectors; and
• Each loan’s property financial statement including net operating income, debt service coverage, and occupancy level.
The Company has not acquired any mortgage loans with deteriorated credit quality during the years presented.
As part of the Company’s process of monitoring impairments on loans, there are a number of significant risks and uncertainties
inherent in this process. These risks include, but are not limited to:
• The risk that the Company’s assessment of a borrower to meet all of its contractual obligations will change based on
changes in the credit characteristics of the borrower or property;
• The risk that the economic outlook will be worse than expected or have more of an impact on the borrower than anticipated;
• The risk that the performance of the underlying property could deteriorate in the future;
• The risk that fraudulent, inaccurate, or misleading information could be provided to the Company;
41
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
• The risk that the methodology or assumptions used to develop estimates of the portion of the impairment of the loan
prove over time to be inaccurate; and
• The risk that other facts and circumstances change such that it becomes more likely than not that the Company will not
obtain all of the contractual payments.
The Company increased the allowance for mortgage loan losses $0.7 million in 2015, largely the result of the Company's view of
credit trends under the current economic conditions. The Company reviews the portfolio's risk profile and expected ongoing
performance at least quarterly.
To the extent the Company's review and valuation determines a loan is impaired, that amount is charged to the allowance for loan
losses and the loan balance is reduced. In the event that a property is foreclosed upon, the carrying value is written down to the
lesser of the current fair value or book value of the property with a charge to the allowance and a corresponding reduction to the
mortgage loan asset. The property is then transferred to real estate where the Company has the ability and intent to manage these
properties on an ongoing basis.
Over the past three years, the Company has had two mortgage loan defaults. Two loans were foreclosed in 2014 for a total
impairment loss of $0.3 million. There were no foreclosures in 2015 or 2013. The Company had no troubled loans that were
restructured or modified in 2015, 2014, or 2013.
6. Variable Interest Entities
The Company invests in certain affordable housing and real estate joint ventures which are considered to be variable interest
entities (VIEs) and are included in Real Estate in the Consolidated Balance Sheets. The assets held in affordable housing real
estate joint venture VIEs are primarily residential real estate properties that are restricted to provide affordable housing under
federal or state programs for varying periods of time. The restrictions primarily apply to the rents that may be paid by tenants
residing in the properties during the term of an agreement to remain in the affordable housing program. Investments in real estate
joint ventures are equity interests in partnerships or limited liability companies that may or may not participate in profits or residual
value. The Company's investments in these entities generate a return primarily through the realization of federal and state income
tax credits and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods.
The Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and
recognizes the net investment performance in the Consolidated Statements of Comprehensive Income as a component of income
tax expense. The tax credits are recognized as a reduction of tax expense. The Company realized federal income tax credits related
to these investments of $2.8 million, $2.8 million, and $2.9 million for the years ended December 31, 2015, 2014, and 2013,
respectively. The Company also recognized $1.2 million, $1.1 million, and $1.6 million of amortization related to these investments
for the years ended December 31, 2015, 2014, and 2013, respectively. The Company's investments in other real estate VIEs are
recorded using the equity method. Cash distributions from the VIE and cash contributions to the VIE are recorded as decreases
or increases, respectively, in the carrying value of the VIE. Certain other equity investments in VIEs, where permitted, are recorded
on an amortized cost basis. The operating performance of investments in the VIE is recorded in the Consolidated Statements of
Comprehensive Income as investment income or as a component of income tax expense, depending upon the nature and primary
design of the investment. The Company evaluates the carrying value of VIEs for impairment on an ongoing basis to assess whether
the carrying value is expected to be realized during the anticipated life of the investment. In certain cases, the Company may issue
fixed-rate senior mortgage loan investments secured by properties controlled by VIEs. These investments are classified as mortgage
loans in the Consolidated Balance Sheets, and the income received from such investments is recorded as investment income in
the Consolidated Statements of Comprehensive Income.
Investments in the affordable housing and real estate joint ventures are interests that will absorb portions of the VIE's expected
losses or receive portions of expected residual returns of the VIE's net assets exclusive of variable interests. The Company makes
an assessment of whether it is the primary beneficiary of a VIE at the time of the initial investment and on an ongoing basis
thereafter. The Company considers many factors when making this determination based upon a review of the underlying investment
agreement and other information related to the specific investment. The first factor is whether the Company has the ability to
direct the activities of a VIE that most significantly impact the VIE's economic performance. The power to direct the activities
of the VIE is generally vested in the managing general partner or managing member of the VIE, which is not the position held by
the Company in these investments. Other factors include the entity's equity investment at risk, decision-making abilities, obligations
to absorb economic risks, the right to receive economic rewards of the entity, and the extent to which the Company shares in the
VIE's expected losses and residual returns.
42
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table presents the carrying amount and maximum exposure to loss relating to VIEs for which the Company holds
a variable interest, but is not the primary beneficiary, and which had not been consolidated at December 31, 2015 and December 31,
2014. The table includes investments in five real estate joint ventures and 22 affordable housing real estate joint ventures at
December 31, 2015 and investments in five real estate joint ventures and 23 affordable housing real estate joint ventures at
December 31, 2014.
Real estate joint ventures
Affordable housing real estate joint ventures
Total
2015
2014
Carrying
Amount
Maximum
Exposure
to Loss
Carrying
Amount
Maximum
Exposure
to Loss
$
$
21,269
11,542
32,811
$
$
21,269
51,686
72,955
$
$
21,415
13,153
34,568
$
$
21,415
54,028
75,443
The maximum exposure to loss relating to the real estate joint ventures and affordable housing real estate joint ventures, as shown
in the table above, is equal to the carrying amounts plus any unfunded equity commitments, exposure to potential recapture of tax
credits, guarantees of debt, or other obligations of the VIE with recourse to the Company. Unfunded equity and loan commitments
typically require financial or operating performance by other parties and have not yet become due or payable but which may
become due in the future.
At December 31, 2015 and December 31, 2014, the Company had no mortgage loan or equity commitments outstanding to the
real estate joint venture VIEs. The Company has contingent commitments to fund additional equity contributions for operating
support to certain real estate joint venture VIEs, which could result in additional exposure to loss. However, the Company is not
able to quantify the amount of these contingent commitments.
In addition, the maximum exposure to loss on affordable housing joint ventures at December 31, 2015 and 2014 included $28.6
million and $27.7 million, respectively, of losses which could be realized if the tax credits received by the VIEs were recaptured.
Recapture events would cause the Company to reverse some or all of the benefit previously recognized by the Company or third
parties to whom the tax credit interests were transferred. A recapture event can occur at any time during a 15-year required
compliance period. The principal causes of recapture include financial default and non-compliance with affordable housing
program requirements by the properties controlled by the VIE. The potential exposure due to recapture may be mitigated by
guarantees from the managing member or managing partner in the VIE, insurance contracts, or changes in the residual value
accruing to the Company's interests in the VIEs.
7. Property and Equipment
Property and equipment are stated at cost and depreciated over estimated useful lives using the straight-line method. The home
office is depreciated over 25 years to 50 years and furniture and equipment is depreciated over 3 years to 10 years. The table
below provides information at December 31.
Land
Home office complex
Furniture and equipment
Accumulated depreciation
Property and equipment
2015
2014
766
$
21,518
42,183
64,467
(47,887)
16,580
$
766
21,249
47,296
69,311
(51,784)
17,527
$
$
Depreciation expense totaled $1.6 million, $1.7 million, and $1.6 million in 2015, 2014, and 2013, respectively.
43
Table of Contents
8. Separate Accounts
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The total separate account assets were $372.9 million at December 31, 2015 (2014 - $406.5 million). Variable universal life and
variable annuity assets comprised 27% and 73% of this amount in 2015 compared to 28% and 72% of this amount in 2014.
The following table provides a reconciliation of activity within separate account liabilities at December 31.
2015
2014
2013
Balance at beginning of year
$
406,501
$
393,416
$
340,093
Deposits on variable policyholder contracts
Transfers to general account
Investment performance
Policyholder benefits and withdrawals
Contract charges
Balance at end of year
32,306
(5,726)
(13,720)
(33,083)
(13,354)
372,924
$
47,308
(5,859)
24,314
(39,177)
(13,501)
406,501
$
36,471
(4,349)
69,545
(35,236)
(13,108)
393,416
$
The Company has a GMWB rider that can be added to new or existing variable annuity contracts. The rider provides an enhanced
withdrawal benefit that guarantees a stream of income payments to an owner or annuitant, regardless of the contract account value.
The value of the separate accounts with the GMWB rider was recorded at fair value of $118.0 million at December 31, 2015 (2014
- $132.3 million). The GMWB guarantee liability was $(2.8) million at December 31, 2015 (2014 - $(1.1) million). The change
in this value is included in policyholder benefits in the Consolidated Statements of Comprehensive Income. The value of variable
annuity separate accounts with the GMWB rider is recorded in separate account liabilities, and the value of the rider is included
in other policyholder funds in the Consolidated Balance Sheets.
The Company has two blocks of variable universal life policies and variable annuity contracts from which the Company receives
fees. The fees are based upon both specific transactions and the fund value of the blocks of policies. The Company has a direct
block of ongoing business identified in the Consolidated Balance Sheets as separate account assets, totaling $372.9 million at
December 31, 2015 and $406.5 million at December 31, 2014, and corresponding separate account liabilities of an equal amount.
In addition, the Company has an assumed closed block of business that is recorded in the Company's financial statements in
accordance with modified coinsurance accounting for variable insurance business. This block of separate account fund balances
totaled $292.4 million at December 31, 2015 and $318.1 million at December 31, 2014. The Company also records separate
accounts invested in the general account for the direct block of business. In accordance with coinsurance reinsurance transaction
accounting, the Company also records the assumed block of fixed accounts under its general account. The future policy benefits
for the direct block approximated $0.5 million and $0.4 million at December 31, 2015 and December 31, 2014, respectively. The
future policy benefits for the assumed block approximated $0.6 million at both December 31, 2015 and December 31, 2014.
Guarantees are offered under variable universal life and variable annuity contracts: a guaranteed minimum death benefit (GMDB)
rider is available on certain variable universal life contracts, and GMDB are provided on all variable annuities. The GMDB rider
for variable universal life contracts guarantees the death benefit for specified periods of time, regardless of investment performance,
provided cumulative premium requirements are met. The GMDB rider for variable annuity contracts guarantees the death benefit
for specified periods of time, regardless of investment performance.
44
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
At December 31, 2015 and 2014, separate account balances for variable annuity contracts were $270.7 million and $292.3 million,
respectively. The total reserve held for variable annuity GMDB was $0.1 million at December 31, 2015 and less than $0.1 million
at December 31, 2014. Additional information related to the GMDB and related separate account balances and net amount at risk
(the amount by which the GMDB exceeds the account balance) as of December 31, 2015 and 2014 is provided below:
2015
Net
Amount
at Risk
Separate
Account
Balance
Weighted
Average
Attained
Age
Separate
Account
Balance
2014
Net
Amount
at Risk
Weighted
Average
Attained
Age
Return of net deposits
$ 211,281
$
3,644
60.2
$ 230,426
$
667
59.9
Return of the greater of the highest
anniversary contract value or net
deposits
Return of the greater of every fifth
year highest anniversary contract
value or net deposits
Return of the greater of net deposits
accumulated annually at 5% or the
highest anniversary contract value
Total
8,161
7,528
758
146
67.5
8,594
102
67.3
67.7
7,770
50
65.5
43,686
6,419
$ 270,656
$
10,967
62.2
60.9
45,466
$ 292,256
$
2,173
2,992
61.6
60.5
The following table presents the GMDB for the variable annuity incurred and paid death benefits for the three years ended
December 31.
Variable annuity incurred death benefits
$
Variable annuity paid death benefits
2015
2014
2013
$
1,177
1,237
$
2,475
2,289
2,900
3,744
The following table presents the aggregate fair value of assets by major investment asset category supporting the variable annuity
separate accounts with guaranteed benefits at December 31.
Money market
Fixed income
Balanced
International equity
Intermediate equity
Aggressive equity
Total
2015
2014
$
3,171
$
19,670
85,346
12,039
127,968
22,462
4,267
36,351
60,726
22,057
139,609
29,246
$
270,656
$
292,256
45
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
9. Unpaid Accident and Health Claims Liability
The liability for unpaid accident and health claims is included with policy and contract claims on the Consolidated Balance Sheets.
Claim adjustment expenditures are expensed as incurred and were not material in any year presented. Activity in the liability
follows.
Gross liability at beginning of year
$
Less reinsurance recoverable
Net liability at beginning of year
Incurred benefits related to:
Current year
Prior years 1
Total incurred benefits
Paid benefits related to:
Current year
Prior years
Total paid benefits
Net liability at end of year
Reinsurance recoverable
Gross liability at end of year
2015
2014
2013
$
34,691
(28,122)
6,569
$
33,888
(27,567)
6,321
36,219
(29,938)
6,281
26,273
(450)
25,823
22,920
3,091
26,011
6,381
26,791
33,172
$
27,037
(161)
26,876
23,352
3,276
26,628
6,569
28,122
34,691
$
24,333
(937)
23,396
20,906
2,450
23,356
6,321
27,567
33,888
$
1 The incurred benefits related to prior years’ unpaid accident and health claims reflect the change in these liabilities.
10. Participating Policies
The Company has some insurance contracts where the policyholder is entitled to share in the earnings through dividends, which
reflect the difference between the premium charged and the actual experience. Participating business at year-end 2015 approximated
9% of statutory premiums and 12% of the life insurance in force, compared to 9% and 13% in 2014, respectively. The amount of
dividends to be paid is determined annually by the Company's Board of Directors. Provision has been made in the liability for
future policy benefits to allocate amounts to participating policyholders on the basis of dividend scales contemplated at the time
the policies were issued, as well as for policyholder dividends having been declared by the Board of Directors in excess of the
original scale.
11. Debt
The Company had no notes payable at December 31, 2015 or December 31, 2014.
As a member of the Federal Home Loan Bank of Des Moines (FHLB) with a capital investment of $4.9 million at December 31,
2015, the Company has the ability to borrow on a collateralized basis from the FHLB. The Company received an insignificant
amount of dividends on the capital investment in 2015, 2014, and 2013.
The Company had unsecured revolving lines of credit of $70.0 million with two major commercial banks with no balances
outstanding at December 31, 2015 and December 31, 2014. The lines of credit are at variable interest rates based upon short-term
indices, and they will mature in June of 2016. The Company anticipates renewing these lines as they come due.
12. Income Taxes
The following table provides information about income taxes for the years ended December 31.
Current income tax expense
Deferred income tax expense
Total income tax expense
2015
2014
2013
9,048
3,922
12,970
$
$
8,065
4,929
12,994
$
$
6,018
8,374
14,392
$
$
46
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table provides information about taxes paid for the years ended December 31.
2015
2014
2013
Cash paid for income taxes
5,754
8,756
7,590
The following table provides a reconciliation of the federal income tax rate to the Company's effective income tax rate for the
years ended December 31.
Federal income tax rate
Tax credits, net of equity adjustment
Permanent differences
Effective income tax rate
2015
2014
2013
35 %
(4)%
— %
31 %
35 %
(4)%
(1)%
30 %
35 %
(3)%
— %
32 %
Presented below are tax effects of temporary differences that result in significant deferred tax assets and liabilities at December 31.
Deferred tax assets:
Future policy benefits
Employee retirement benefits
Other
Deferred tax assets
Deferred tax liabilities:
Basis differences between tax and
GAAP accounting for investments
Unrealized investment gains
Capitalization of deferred acquisition costs, net of amortization
Value of business acquired
Property and equipment, net
Other
Deferred tax liabilities
Net deferred tax liability
Current tax asset
Income taxes payable
2015
2014
$
21,257
31,293
—
52,550
5,200
33,482
59,533
8,499
4,970
69
24,335
34,422
486
59,243
6,861
61,090
53,381
8,629
5,159
—
111,753
135,120
59,203
(529)
58,674
$
75,877
(2,255)
73,622
$
$
A valuation allowance must be established for any portion of the deferred tax asset which is believed not to be realizable.
Management reviews the need for a valuation allowance based on the Company’s anticipated future earnings, reversal of future
taxable differences, the available carryback and carryforward periods, tax planning strategies that are prudent and feasible, and
the ability and intent to hold securities until their recovery. In management’s opinion, it is more likely than not that the Company
will realize the benefit of its deferred taxes.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. In general,
the Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for years prior to 2012.
The Company is not currently under examination by the Internal Revenue Service.
47
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Tax positions are evaluated at the reporting date to determine whether an unrecognized tax benefit should be recorded. A
reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31 is as follows:
Beginning of year
Additions based on tax positions related to the current year
Additions for tax positions of prior years
End of year
2015
2014
$
$
22
94
419
535
$
$
—
22
—
22
The Company's policy is to recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense.
The Company recognized no tax penalty and interest expense in 2015 and $0.1 million of tax penalty and interest expense in 2014.
The Company did not recognize any expense related to interest and penalties during 2013.
The Company had no material tax uncertainties requiring recognition in its consolidated financial statements as of December 31,
2015. The Company is no longer subject to income tax examinations by tax authorities for years prior to 2012.
The income tax expense is recorded in various places in the Company's financial statements, as detailed below, for the years ended
December 31.
Income tax expense
Stockholders’ equity:
Related to:
2015
2014
2013
$
12,970
$
12,994
$
14,392
Change in net unrealized gains on securities available
for sale
Effect on DAC, VOBA, and DRL
Change in future policy benefits
Change in policyholder account balances
Change in benefit plan obligations
Total income tax expense (benefit) included in financial statements $
13. Pensions and Other Postemployment Benefits (OPEB)
(27,600)
4,013
2,646
149
196
(7,626)
$
17,568
(530)
(3,730)
(130)
(8,400)
17,772
$
(50,790)
16,577
4,534
220
7,961
(7,106)
The Company has pension and other postemployment benefit plans covering substantially all its employees for which the
measurement date is annually on December 31.
The Kansas City Life Cash Balance Pension Plan (the Plan) was amended effective December 31, 2010 to provide that participants’
accrued benefits will be frozen, and that no further benefits or accruals will be earned after December 31, 2010. Although participants
will no longer accrue additional benefits under the Plan at December 31, 2010, participants will continue to earn years of service
for vesting purposes under the Plan with respect to their benefits accrued through December 31, 2010. In addition, the cash balance
account will continue to earn annual interest. Plan benefits are based on a cash balance account consisting of credits to the account
based upon an employee’s years of service, compensation and interest credits on account balances calculated using the greater of
the average 30-year Treasury bond rate for November of each year or 5.5%. The benefits expected to be paid in each year from
2016 through 2020 are $11.0 million, $9.3 million, $10.6 million, $9.9 million, and $9.7 million, respectively. The aggregate
benefits expected to be paid in the five years from 2021 through 2025 are $46.9 million. The expected benefits to be paid are
based on the same assumptions used to measure the Company’s benefit obligation at December 31, 2015 and are the actuarial
present value of the vested benefits to which the employee is currently entitled but based upon the expected date of separation or
retirement. The 2016 contribution for the plan has not been determined.
48
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The asset allocation of the fair value of pension plan assets compared to the target allocation range at December 31 was:
Equity securities
Asset allocation and alternative assets
Debt securities
Cash and cash equivalents
2015
2014
38%
29%
31%
2%
Target
Allocation
33% - 43%
23% - 33%
26% - 42%
0% - 2%
40%
29%
30%
1%
Certain of the Company's pension plan assets consist of investments in pooled separate accounts. Net asset value (NAV) of the
separate accounts is calculated in a manner consistent with GAAP for investment companies and is determinative of their fair
value. Several of the separate accounts invest in publicly quoted mutual funds or actively managed stocks. The fair value of the
underlying mutual funds or stock is used to determine the NAV of the separate account, which is not publicly quoted. Some of
the separate accounts also invest in fixed income securities. The fair value of the underlying securities is based on quoted prices
of similar assets and used to determine the NAV of the separate account. Sale of plan assets may be at values less than NAV.
Certain redemption restrictions may apply to specific stock and bond funds, including written notices prior to the withdrawal of
funds and a potential redemption fee on certain withdrawals.
Hedge fund investments are recorded at NAV. The Plan's hedge funds invest primarily in other investment funds. The valuation
policies of the hedge funds provide that the value of investments in other investment funds be stated at fair value based on the
NAV of the other investment funds and certain redemption restrictions may apply, including a forty-five day prior written notice
to withdraw funds.
Plan fiduciaries set investment policies and strategies and oversee its investment allocation, which includes selecting investment
managers, commissioning periodic asset-liability studies, and setting long-term strategic targets. Long-term strategic investment
objectives include preserving the funded status of the plan and balancing risk and return. Target allocation ranges are guidelines,
not limitations, and occasionally plan fiduciaries will approve allocations above or below a target range. The Plan does not expect
to return any plan assets to the Company during 2016.
The current assumption for the expected long-term rate of return on plan assets is 7.50%. This assumption is determined by
analyzing: 1) historical average returns achieved by asset allocation and active management; 2) historical data on the volatility of
returns; 3) current yields available in the marketplace; 4) actual returns on plan assets; and 5) current and anticipated future
allocation among asset classes. The asset classes used for this analysis are domestic and international equities, investment grade
corporate bonds, alternative assets, and cash. The overall rate is derived as a weighted average of the estimated long-term returns
on the asset classes represented in the investment portfolio of the plan.
The assumed discount rates used to determine the benefit obligation for pension benefits and postemployment benefits are 3.84%
and 4.26%, respectively. The discount rates were determined by reference to the Citigroup Pension Liability Yield Curve on
December 31, 2015. Specifically, the spot rate curve represents the rates on zero coupon securities of the quality and type included
in the pension index at various maturities. By discounting benefit cash flows at these rates, a notional amount equal to the fair
value of a cash flow defeasing portfolio of bonds was determined. The discount rate for benefits was calculated as a single rate
giving the same discounted value as the notional amount.
The Company adopted the updated mortality tables issued by the Society of Actuaries (SOA) during 2015. The new tables, as
issued by the SOA, were updated because of additional Social Security mortality information and reflect shorter life expectancy,
which may result in a lower benefit obligation for certain pension plans. The result of the adoption of this updated table was a
decrease of $3.2 million in the Plan's benefit obligation.
The postemployment medical plans for eligible employees, agents, and their dependents are contributory with contributions adjusted
annually. The benefits expected to be paid in each year from 2016 through 2020 are $1.0 million, $1.1 million, $1.1 million, $1.2
million, and $1.2 million, respectively. The aggregate benefits expected to be paid in the five years from 2021 through 2025 are
$7.8 million. The expected benefits to be paid are based on the same assumptions used to measure the Company’s benefit obligation
at December 31, 2015. Contributions to the plan in 2015 were $0.8 million. The 2016 contribution for the plan is estimated to
be $1.0 million. The Company pays these medical costs as they become due and the plan incorporates cost-sharing features. The
postemployment plan disclosures included herein do not include the potential impact from the Medicare Act (the Act) that became
law in December 2003. The Act introduced a new federal subsidy to sponsors of certain retiree health care plans that provide a
49
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
benefit that is at least actuarially equivalent to Medicare. Since the Company does not provide benefits that are actuarially equivalent
to Medicare, the Act did not impact the Company’s disclosures.
Non-contributory defined contribution retirement plans for eligible general agents and sales agents provide supplemental payments
based upon earned agency first year individual life and annuity commissions. Contributions to these plans in 2015 were $0.1
million (2014 - $0.1 million; 2013 - $0.1 million). Non-contributory deferred compensation plans for eligible agents based upon
earned first year commissions are also offered. Contributions to these plans in 2015 were $0.3 million (2014 - $0.3 million; 2013-
$0.3 million).
Savings plans for eligible employees and agents match employee and agent contributions up to 8% of salary and 2.5% of agents’
prior year paid commissions, respectively. Contributions to the plans in 2015 were $2.1 million (2014 - $2.1 million; 2013 - $2.1
million). The Company may contribute an additional profit sharing amount up to 4% of salary for eligible employees, depending
upon corporate profits. In 2014, the Company made a contribution to the plan under the profit sharing determination of 4% of
salary for eligible employees, which totaled $1.3 million. The Company did not make a profit sharing contribution in 2015.
During 2015, the Company announced the termination of its employee stock ownership plan, which was a non-contributory trusteed
employee stock ownership plan that covered substantially all salaried employees. No contributions have been made to this plan
since 1992. The final valuation date for the assets held by the plan was September 30, 2015, and distribution of the plan's assets
occurred in the fourth quarter of 2015.
The Company recognizes the funded status of its defined pension and postemployment plans, measured as the difference between
plan assets at fair value and the projected benefit obligation, on the Consolidated Balance Sheets. Changes in the funded status
that arise during the period, but are not recognized as components of net periodic benefit cost, are recognized within other
comprehensive income (loss), net of taxes.
50
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following tables provide information regarding pension benefits and other benefits for the years ended December 31.
Change in projected benefit obligation:
Benefit obligation at beginning of year
$
157,713
$
146,000
$
36,456
$
31,179
Pension Benefits
OPEB
2015
2014
2015
2014
Service cost
Interest cost
Plan participants' contributions
Actuarial (gain) loss
Benefits paid
Benefit obligation at end of year
$
Change in plan assets:
Fair value of plan assets at beginning of year $
Return on plan assets
Plan participants' contributions
Company contributions
Benefits paid
Fair value of net plan assets at end of year $
—
5,424
—
(8,860)
(9,882)
144,395
137,987
(3,275)
—
6,028
(9,882)
130,858
Unfunded status at end of year
$
13,537
—
6,202
—
15,465
(9,954)
157,713
$
$
686
1,402
512
(3,168)
(1,272)
34,616
$
$
136,707
$
— $
5,154
—
6,080
(9,954)
137,987
19,726
$
$
—
512
760
(1,272)
— $
611
1,499
515
4,027
(1,375)
36,456
—
—
515
860
(1,375)
—
Amounts recognized in accumulated other
comprehensive income (loss):
Net loss
Prior service credit
Total accumulated other comprehensive
income (loss)
Other changes in plan assets and benefit
obligations recognized in other
comprehensive income (loss):
Unrecognized actuarial net (gain) loss
Amortization of net loss
Amortization of prior service credit
Total (gain) loss recognized in other
comprehensive income (loss)
$
$
$
$
$
$
$
$
$
34,616
$
36,456
OPEB
2015
2014
4,274
(1,901)
2,373
$
$
7,914
(3,048)
4,866
OPEB
2015
2014
$
(3,168)
(471)
1,146
4,027
(87)
1,146
Pension Benefits
2015
2014
80,090
—
80,090
$
$
78,156
—
78,156
Pension Benefits
2015
2014
$
4,334
(2,400)
—
20,633
(1,718)
—
1,934
$
18,915
$
(2,493)
$
5,086
51
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Pension Benefits
OPEB
2015
2014
2015
2014
Plans with underfunded accumulated benefit
obligation:
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
$
144,395
$
157,713
$
144,395
130,858
157,713
137,987
$
—
—
—
—
—
—
Weighted average assumptions used to
determine benefit obligations at December 31:
Discount rate
3.84%
3.57%
4.26%
3.90%
Weighted average assumptions used to
determine net periodic benefit cost for years
ended December 31:
Discount rate
Expected return on plan assets
3.57%
7.50%
4.42%
7.70%
3.90%
—
4.88%
—
The following table presents the fair value of each major category of pension plan assets at December 31.
Pension Plan
2015
2014
$
2,071
$
2,179
18,697
19,554
18,877
19,147
23,362
20,787
5,357
19,582
19,491
32
2,379
245
130,880
22
22
130,858
$
$
$
30,621
19,060
5,694
20,779
20,096
50
1,306
229
138,715
728
728
137,987
Debt securities:
United States Government fixed
maturity securities
Industrial and public utility fixed
maturity securities
Investment funds:
Hedge funds
Stock and bond funds:
Domestic equity
International equity
Emerging markets
Global asset allocation
Fixed income
Other invested assets
Cash and cash equivalents
Receivables
Fair value of assets at end of year
Liabilities
Accrued liabilities
Total liabilities
Fair value of net plan assets at end of year
$
$
$
52
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following tables provide the fair value hierarchy, as described in Note 4, for pension plan assets at December 31.
Debt securities:
United States Government fixed
maturity securities
Industrial and public utility fixed
maturity securities
Investment funds:
Hedge funds
Stock and bond funds
Other invested assets
Cash and cash equivalents
Receivables
Total
Debt securities:
United States Government fixed
maturity securities
Industrial and public utility fixed
maturity securities
Investment funds:
Hedge funds
Stock and bond funds
Other invested assets
Cash and cash equivalents
Receivables
Total
Level 1
Level 2
Level 3
Total
2015
$
— $
2,071
$
— $
2,071
—
—
—
—
2,379
245
18,697
18,877
88,579
—
—
—
$
2,624
$
128,224
$
—
—
—
32
—
—
32
18,697
18,877
88,579
32
2,379
245
$
130,880
Level 1
Level 2
Level 3
Total
2014
$
— $
2,179
$
— $
2,179
—
—
—
—
1,306
229
19,554
19,147
96,250
—
—
—
$
1,535
$
137,130
$
—
—
—
50
—
—
50
19,554
19,147
96,250
50
1,306
229
$
138,715
The following table discloses the changes in Level 3 plan assets measured at fair value on a recurring basis for the years ended
December 31.
Beginning balance
Gains (losses) realized and unrealized
Sales
Ending balance
Pension Plan
2015
2014
$
$
50
(18)
—
32
$
$
53
16
(19)
50
53
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table provides the components of net periodic benefit cost for the years ended December 31.
Service cost
Interest cost
Expected return on plan assets
Amortization of:
Unrecognized actuarial net loss
Unrecognized prior service cost
(credit)
Curtailment
Net periodic benefit cost (credit)
Total recognized in other
comprehensive income (loss)
Total recognized in net periodic
benefit cost and other
comprehensive income (loss)
Pension Benefits
2014
2015
2013
2015
OPEB
2014
2013
$
— $
— $
— $
686
$
611
$
5,424
(9,919)
6,202
(10,322)
5,338
(9,227)
1,402
—
2,400
1,718
2,393
471
—
—
(2,095)
—
—
(2,402)
—
—
(1,496)
(1,146)
—
1,413
1,499
—
87
(1,146)
—
1,051
786
1,368
—
103
(752)
(116)
1,389
1,934
18,915
(17,231)
(2,493)
5,086
(5,515)
$
(161)
$
16,513
$
(18,727)
$
(1,080)
$
6,137
$
(4,126)
The following table provides the estimated net loss and prior service credit for the pension plan and other postemployment plans
that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost in 2015.
Actuarial net loss
Prior service credit
Pension
Benefits
$
2,649
$
—
OPEB
96
(977)
The assumed growth rate of health care costs has a significant effect on the benefit amounts reported, as the table below demonstrates.
One Percentage Point
Change in the Growth Rate
Increase
Decrease
Service and interest cost components
$
400
$
Postemployment benefit obligation
5,985
(313)
(4,783)
For measurement purposes, the annual increase in the per capita cost of covered health care benefits was assumed to be 7.8%,
decreasing gradually to 5.0% in 2027 and thereafter.
Included in the Company's OPEB is a medical insurance plan for retired agents. During the second quarter of 2013, the Company
notified the participants that this benefit was being terminated effective December 31, 2013. This benefit termination required a
re-valuation of the plan, which was performed effective June 10, 2013 and resulted in a plan curtailment. The curtailment resulted
in the immediate recognition of reduced operating expenses of $0.1 million and a reduced liability of $4.4 million.
14. Share-Based Payment
The Company has a long-term incentive plan for senior management that provides a cash award to participants for the increase
in the share price of the Company's common stock through units (phantom shares) assigned by the Board of Directors. The cash
award is calculated over a three-year interval on a calendar year basis. At the conclusion of each three-year interval, participants
will receive a cash award based on the increase in the share price during a defined measurement period, multiplied by the number
of units attributable to each participant. The increase in the share price is determined based on the change in the share price from
the beginning to the end of the three-year interval. Amounts representing dividends are accrued and paid at the end of each three-
year interval to the extent that they exceed negative stock price appreciation. Plan payments are contingent on the continued
54
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
employment of the participant unless termination is due to a qualifying event such as death, disability, or retirement. In addition,
all payments are lump sum with no deferrals allowed. The Company does not make payments in shares, warrants, or options.
The following table provides information about the outstanding three-year intervals at December 31, 2015.
Defined
Measurement
Period
2013-2015
2014-2016
2015-2017
2016-2018*
Number
of Units
212,734
162,063
186,962
203,355
Grant
Price
$37.86
$48.06
$47.87
$43.49
* Effective January 1, 2016
The plan made a payment of $3.8 million during 2015 for the three-year interval ended December 31, 2014 and a payment of $3.8
million during 2014 for the three-year interval ended December 31, 2013. The plan made a payment of $2.4 million during 2013
for the three-year interval ended December 31, 2012. The change in accrual for share-based compensation that reduced operating
expense during 2015 was $0.1 million, net of tax. The cost of share-based compensation accrued as an operating expense during
2014 and 2013 was $1.4 million, and $3.5 million, net of tax, respectively.
15. Reinsurance
The table below provides information about reinsurance for the years ended December 31.
Life insurance in force (in millions) :
Direct
Ceded
Assumed
Net
Premiums:
Life insurance:
Direct
Ceded
Assumed
Net
Accident and health:
Direct
Ceded
Net
$
$
$
2015
2014
2013
$
28,104
(13,296)
3,666
$
27,978
(13,546)
4,006
27,753
(13,689)
4,271
18,474
$
18,438
$
18,335
$
159,692
(46,262)
2,415
$
162,110
(45,703)
2,479
186,358
(45,061)
2,562
$
115,845
$
118,886
$
143,859
$
$
54,465
(10,135)
44,330
$
$
57,603
(10,941)
46,662
$
$
55,068
(12,397)
42,671
Ceded Reinsurance Arrangements
Old American has a coinsurance agreement that reinsures certain whole life policies issued by Old American prior to December 1,
1986. These policies had a face value of $20.8 million at December 31, 2015 (2014 - $23.3 million). The reserve for future policy
benefits ceded under this agreement at December 31, 2015 was $12.2 million (2014 - $13.5 million).
Sunset Life entered into a yearly renewable term reinsurance agreement January 1, 2002, whereby it ceded 80% of its retained
mortality risk on traditional and universal life policies. In June 2012, Sunset Life recaptured approximately 9% of the outstanding
55
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
bulk reinsurance agreement. At December 31, 2015, the insurance in force ceded approximated $0.9 billion (2014 - $1.0 billion)
and premiums totaled $7.0 million (2014 - $7.3 million; 2013 - $7.4 million).
Reinsurance recoverables were $198.8 million at year-end 2015, consisting of reserves ceded of $178.7 million and claims ceded
of $20.1 million. Reinsurance recoverables were $194.4 million at year end 2014, consisting of reserves ceded of $181.5 million
and claims ceded of $12.9 million.
The maximum retention on any one life during 2015 and 2014 was $0.5 million for ordinary life plans and $0.1 million for group
coverage.
The following table reflects the Company’s reinsurance partners whose reinsurance recoverable was 5% or greater of the Company's
total reinsurance recoverable at December 31, 2015, along with their A.M. Best credit rating.
A.M. Best
Rating
A+
TransAmerica Life Insurance Company
A
Security Life of Denver
A+
RGA Reinsurance Company
A-
Union Security Insurance Company
Employers Reassurance Corporation
A-
SCOR Global Life Americas Reinsurance Company A
B
Lewer Life Insurance Company
Lincoln National Life Insurance Company
A+
Other (22 Companies)
Total
Reinsurance
Recoverable
53,942
$
25,782
20,975
13,314
12,542
10,825
10,725
9,340
41,389
198,834
$
% of
Recoverable
27%
13%
11%
7%
6%
5%
5%
5%
21%
100%
A contingent liability exists with respect to reinsurance, which may become a liability of the Company in the unlikely event that
the reinsurers should be unable to meet obligations assumed under reinsurance contracts. The solvency of reinsurers is reviewed
annually.
The Company monitors several factors that it considers relevant to satisfy itself as to the ongoing ability of a reinsurer to meet the
obligations of the reinsurance agreements. These factors include the credit rating of the reinsurer, significant changes or events
of the reinsurer, and any other factors that the Company believes relevant. If the Company believes that any reinsurer would not
be able to satisfy its obligations with the Company, a separate contingency reserve may be established. At year-end 2015 and
2014, no reinsurer met these conditions. In addition, the Company will review the credit rating and financial statements of a
reinsurer before entering into any new agreements.
Assumed Reinsurance Arrangements
Kansas City Life acquired a block of traditional life and universal life products in 1997 through a 100% coinsurance and servicing
arrangement. Investments equal to the statutory policy reserves are held in a trust to secure payment of the estimated liabilities
relating to the policies. At December 31, 2015, the block had $0.9 billion of life insurance in force (2014 - $1.0 billion). The
block generated life insurance premiums of $2.3 million in 2015 (2014 - $2.4 million; 2013 - $2.4 million).
The Company acquired a block of variable universal life insurance policies and variable annuity contracts from American Family
in 2013. The transfer was comprised of a 100% modified coinsurance transaction on the separate account business and a 100%
coinsurance transaction for the corresponding fixed account business. Included in the transaction are ongoing servicing
arrangements for this business. At December 31, 2015, the block consisted of $292.4 million (2014 - $318.0 million) of separate
account balances, which are included in the financial statements of American Family. At December 31, 2015, the block consisted
of $0.6 million (2014 - $0.6 million) of future policy benefits and $26.5 million (2014 - $27.2 million) in fixed fund balances that
are included in policyholder account balances in the Company’s Consolidated Balance Sheets.
56
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
16. Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net income and other comprehensive income (loss). Other comprehensive income
(loss) includes the unrealized investment gains or losses on securities available for sale (net of reclassifications for realized
investment gains or losses), net of adjustments to DAC, VOBA, DRL, future policy benefits, and policyholder account balances
(including DRL). In addition, other comprehensive income (loss) includes the change in the liability for benefit plan obligations.
Other comprehensive income (loss) reflects these items net of tax.
The following tables provide information about comprehensive income (loss).
Net unrealized gains (losses) arising during the year:
Fixed maturity securities
Equity securities
Less reclassification adjustments:
Net realized investment gains, excluding impairment
losses
Other-than-temporary impairment losses recognized in
earnings
Other-than-temporary impairment gains recognized in
other comprehensive income (loss)
Net unrealized losses excluding impairment losses
Change in benefit plan obligations
Effect on DAC, VOBA, and DRL
Future policy benefits
Policyholder account balances
Other comprehensive loss
Net income
Comprehensive loss
Year Ended December 31, 2015
Pre-Tax
Amount
Tax Expense
(Benefit)
Net-of-Tax
Amount
$
(78,242)
(46)
$
(27,386)
(16)
$
(50,856)
(30)
3,048
1,067
1,981
(2,189)
(766)
(1,423)
(292)
(78,855)
560
11,465
7,559
425
(58,846)
$
(103)
(27,600)
196
4,013
2,646
149
(20,596)
$
(189)
(51,255)
364
7,452
4,913
276
(38,250)
29,226
(9,024)
$
$
57
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Net unrealized gains (losses) arising during the year:
Fixed maturity securities
Equity securities
Less reclassification adjustments:
Net realized investment gains, excluding impairment
losses
Other-than-temporary impairment losses recognized in
earnings
Other-than-temporary impairment losses recognized in
other comprehensive income (loss)
Net unrealized gains excluding impairment losses
Change in benefit plan obligations
Effect on DAC, VOBA, and DRL
Future policy benefits
Policyholder account balances
Other comprehensive income
Net income
Comprehensive income
Net unrealized gains (losses) arising during the year:
Fixed maturity securities
Equity securities
Less reclassification adjustments:
Net realized investment gains, excluding impairment
losses
Other-than-temporary impairment losses recognized
in earnings
Other-than-temporary impairment losses recognized in
other comprehensive income (loss)
Net unrealized losses excluding impairment losses
Change in benefit plan obligations
Effect on DAC, VOBA, and DRL1
Future policy benefits
Policyholder account balances
Other comprehensive loss
Net income
Comprehensive loss
Year Ended December 31, 2014
Pre-Tax
Amount
Tax Expense
(Benefit)
Net-of-Tax
Amount
$
50,805
$
17,781
$
1,880
658
33,024
1,222
4,025
1,409
2,616
(2,176)
(762)
(1,414)
643
50,193
(24,001)
(1,516)
(10,659)
(372)
13,645
$
225
17,567
(8,400)
(531)
(3,731)
(130)
4,775
$
418
32,626
(15,601)
(985)
(6,928)
(242)
8,870
29,990
38,860
$
$
Year Ended December 31, 2013
Pre-Tax
Amount
Tax Expense
(Benefit)
Net-of-Tax
Amount
$
(139,206)
(1,816)
$
(48,721)
(636)
$
(90,485)
(1,180)
5,225
(1,032)
(101)
(145,114)
22,745
47,363
12,956
628
(61,422)
$
$
1,829
(361)
(35)
(50,790)
7,960
16,577
4,535
220
(21,498)
3,396
(671)
(66)
(94,324)
14,785
30,786
8,421
408
(39,924)
30,063
(9,861)
$
$
1 The pre-tax amount includes $16.0 million for a one-time refinement in estimate and $5.6 million for the effect on the deferred
revenue liability.
58
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table provides accumulated balances related to each component of accumulated other comprehensive income
(loss) at December 31, 2015, net of tax.
Unrealized
Gain (Loss)
on
Non-
Impaired
Securities
Unrealized
Gain (Loss)
on
Impaired
Securities
Benefit
Plan
Obligations
DAC/
VOBA/
DRL
Impact
Future
Policy
Benefits
Policyholder
Account
Balances
Total
Beginning of year
110,362
3,141
(53,964)
(18,521)
(17,406)
(572)
23,040
Other comprehensive
income (loss) before
reclassification
Amounts reclassified
from accumulated
other comprehensive
income (loss)
Net current-period other
comprehensive income
(loss)
(53,180)
1,556
364
7,477
4,913
276
(38,594)
1,981
(1,612)
—
(25)
—
—
344
End of year
$
59,163
$
3,085
$
(51,199)
(56)
364
7,452
(53,600) $ (11,069) $ (12,493) $
4,913
(38,250)
276
(296) $ (15,210)
The following table provides accumulated balances related to each component of accumulated other comprehensive income
(loss) at December 31, 2014, net of tax.
Unrealized
Gain (Loss)
on
Non-
Impaired
Securities
Unrealized
Gain (Loss)
on
Impaired
Securities
Benefit
Plan
Obligations
DAC/
VOBA/
DRL
Impact
Future
Policy
Benefits
Policyholder
Account
Balances
Total
Beginning of year
78,496
2,381
(38,363)
(17,536)
(10,478)
(330)
14,170
Other comprehensive
income (loss) before
reclassification
Amounts reclassified
from accumulated
other comprehensive
income (loss)
Net current-period other
comprehensive income
(loss)
End of year
$
110,362
$
3,141
$
31,866
760
29,250
1,756
(15,601)
(889)
(6,928)
(242)
7,346
2,616
(996)
—
(96)
—
—
1,524
(15,601)
(985)
(53,964) $ (18,521) $ (17,406) $
(6,928)
(242)
8,870
(572) $ 23,040
59
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table presents the pre-tax and the related income tax expense (benefit) components of the amounts reclassified
from the Company's accumulated other comprehensive income (loss) to the Company's Consolidated Statements of
Comprehensive Income for the years ended December 31.
Reclassification adjustments related to unrealized gains (losses)
on investment securities:
Having impairments recognized in the Consolidated Statements
of Comprehensive Income 1
Income tax expense 2
Net of taxes
Having no impairments recognized in the Consolidated Statements
of Comprehensive Income 1
Income tax benefit 2
Net of taxes
Reclassification adjustment related to DAC, VOBA, and DRL 1
Income tax benefit 2
Net of taxes
Total pre-tax reclassifications
Total income tax expense
Total reclassification, net taxes
2015
2014
$
$
3,048
(1,067)
1,981
(2,481)
869
(1,612)
(38)
13
(25)
529
(185)
344
$
$
4,025
(1,409)
2,616
(1,533)
537
(996)
(147)
51
(96)
2,345
(821)
1,524
1 (Increases) decreases net realized investment gains (losses) on the Consolidated Statements of Comprehensive Income.
2 (Increases) decreases income tax expense on the Consolidated Statements of Comprehensive Income.
17. Earnings Per Share
Due to the Company’s capital structure and the absence of other potentially dilutive securities, there is no difference between basic
and diluted earnings per common share for any of the years reported. The average number of shares outstanding during 2015 was
10,614,068 shares (2014 - 10,927,705 shares; 2013 - 11,005,799 shares). The number of shares outstanding at year-end 2015 was
9,683,414 (2014 - 10,825,205).
18. Segment Information
The Company has three reportable business segments, which are defined based on the nature of the products and services offered:
Individual Insurance, Group Insurance, and Old American. The Individual Insurance segment consists of individual insurance
products for both Kansas City Life and Sunset Life and the assumed reinsurance transactions. The Group Insurance segment
consists of sales of group life, dental, vision, and group disability products. The Old American segment consists of individual
insurance products designed largely as final expense products.
Insurance revenues, as shown in the Consolidated Statements of Comprehensive Income, consist of premiums and contract charges,
less reinsurance ceded. Insurance revenues are defined as “customer revenues” for segment reporting purposes. Separate investment
portfolios are maintained for Kansas City Life, Sunset Life, and Old American for segment reporting purposes. However, investment
assets and income are allocated to the Group Insurance segment based upon its cash flows and future policy benefit liabilities.
Policyholder benefits are specifically identified to the respective segment. Most home office functions are fully integrated for all
segments in order to maximize economies of scale. Therefore, operating expenses are allocated to the segments based upon internal
cost studies, which are consistent with industry cost methodologies.
Inter-segment revenues are not material. The Company operates solely in the United States and no individual customer accounts
for 10% or more of the Company's revenue.
60
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following schedules provide selected financial statement items of each of the operating segments of the Company for the three
years ended December 31.
Insurance revenues
(customer revenues)
Interest credited to policyholder
account balances
Amortization of deferred
acquisition costs
Income tax expense
Segment net income
Segment assets
Interest expense
Insurance revenues
(customer revenues)
Interest credited to policyholder
account balances
Amortization of deferred
acquisition costs
Income tax expense
Segment net income
Segment assets
Interest expense
2015
Individual
Insurance
Group
Insurance
Old
American
Consolidated
$
137,001
$
55,576
$
79,628
$
272,205
74,326
13,411
11,111
25,969
4,035,016
—
—
14,937
1,693
2,949
74,326
28,348
12,970
29,226
377,558
4,421,873
—
—
—
—
166
308
9,299
—
2014
Individual
Insurance
Group
Insurance
Old
American
Consolidated
$
150,523
$
57,852
$
75,822
$
284,197
76,463
23,668
11,632
27,649
4,184,516
—
—
17,220
1,080
1,818
76,463
40,888
12,994
29,990
377,663
4,571,867
—
—
—
—
282
523
9,688
—
2013
Individual
Insurance
Group
Insurance
Old
American
Consolidated
Insurance revenues
(customer revenues)
Interest credited to policyholder
account balances
Amortization of deferred
acquisition costs
Income tax expense
Segment net income
Segment assets
$
173,428
$
53,021
$
73,535
$
299,984
79,294
20,440
11,974
25,737
—
—
284
526
—
16,788
2,134
3,800
79,294
37,228
14,392
30,063
4,129,852
8,731
371,177
4,509,760
61
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Individual Insurance includes an adjustment to remove intercompany transactions for life and accident and health insurance that
the Company purchases for its employees and agents. Insurance revenues from the Group Insurance segment and operating
expenses from the Individual Insurance segment were eliminated to arrive at Consolidated Statements of Comprehensive Income.
The adjustments were $414, $406, and $395 for the years ended December 31, 2015, 2014, and 2013, respectively.
The following table provides information about the Company’s customer revenues, net of reinsurance, for the years ended
December 31.
2015
2014
2013
Customer revenues by line of business:
Traditional individual insurance products, net
Interest sensitive products
Variable universal life insurance and annuities
Group life and accident and health products, net
Insurance revenues
$
$
104,599
83,013
29,017
55,576
272,205
$
$
107,696
88,181
30,468
57,852
284,197
$
$
133,509
86,618
26,836
53,021
299,984
19. Quarterly Consolidated Financial Data (unaudited)
The unaudited quarterly results of operations for the years ended December 31 are summarized in the table below.
2015:
Total revenues
Total benefits and expenses
Net income
Per common share,
basic and diluted
2014:
Total revenues
First
Second
Third
Fourth
$
110,805
$
108,873
$
112,261
$
108,912
101,283
6,778
93,317
10,899
104,101
5,435
99,954
6,114
0.63
1.01
0.52
0.59
$
115,112
$
116,539
$
115,663
$
117,705
Total benefits and expenses
107,148
104,055
104,059
106,773
Net income
Per common share,
basic and diluted
5,672
8,625
7,960
7,733
0.52
0.78
0.73
0.71
20. Statutory Information and Stockholder Dividends Restriction
The table below provides Kansas City Life’s net gain from operations, net income, and capital and surplus (stockholders' equity)
on the statutory basis used to report to regulatory authorities for the years ended December 31.
2015
2014
2013
Net gain from operations
$
27,390
$
27,167
$
Net income
Capital and surplus
29,149
297,612
26,697
338,422
535
335
330,599
The decrease in capital and surplus in 2015 was largely attributable to $58.4 million in stock purchases, including $47.6 million
from the reverse/forward stock split transaction that occurred during the fourth quarter of 2015.
62
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Kansas City Life recognizes its 100% ownership in Old American and Sunset Life under the equity method with subsidiary earnings
recorded through surplus on a statutory accounting basis. Capital and surplus at December 31, 2015 in the above table includes
capital and surplus of $22.1 million and $29.4 million for each of those entities, respectively.
Stockholder dividends may not exceed statutory unassigned surplus. Additionally, under Missouri law, the Company must have
the prior approval of the Missouri Director of Insurance in order to pay dividends in any consecutive twelve-month period exceeding
the greater of statutory net gain from operations for the preceding year or 10% of statutory stockholders' equity at the end of the
preceding year. Kansas City Life, as the parent company, believes it has sufficient cash resources, independent of dividends paid
by its affiliates, to satisfy its own stockholder dividend payments. In addition, the Company believes that individually each of the
insurance enterprises has sufficient cash flows to satisfy the anticipated cash dividends that are expected to be declared.
The maximum stockholder dividends payable by Kansas City Life without prior approval in 2016 is $29.8 million, 10% of
December 31, 2015 capital and surplus. The maximum stockholder dividends payable by Old American without prior approval
in 2016 is $2.3 million, which is 10% of December 31, 2015 capital and surplus. The maximum stockholder dividends payable
by Sunset Life without prior approval in 2016 is $3.3 million, the statutory net gain from operations for the preceding year. Each
of the individual insurance enterprises believes that the statutory limitations impose no practical restrictions on any of its dividend
payment plans.
Insurance companies are monitored and evaluated by state insurance departments as to the financial adequacy of statutory capital
and surplus in relation to each company's risks. One such measure is through the risk-based capital (RBC) guidelines. RBC
requirements are intended to be used by insurance regulators as an early warning tool to identify deteriorating or weakly capitalized
insurance companies for the purpose of initiating regulatory action. RBC guidelines consist of target statutory surplus levels based
on the relationship of statutory capital and surplus to the sum of weighted risk exposures. The RBC calculation determines both
an authorized control level and a total adjusted capital prepared on the RBC basis. Generally, regulatory action is at 150% of the
authorized control level. Each of the three insurance companies was within the range of approximately 600% to 800%, well in
excess of the control level at December 31, 2015.
The Company is required to deposit a defined amount of assets with state regulatory authorities. Such assets had a statutory
carrying value of $12.1 million at December 31, 2015 (2014 - $12.2 million; 2013 - $12.5 million).
21. Commitments, Contingent Liabilities, Guarantees, and Indemnifications
Commitments
In the normal course of business, the Company has open purchase and sale commitments. At December 31, 2015, the Company
had purchase commitments to fund mortgage loans of $9.8 million.
Subsequent to December 31, 2015 the Company entered into commitments to fund additional mortgage loans of $20.0 million.
Contingent Liabilities
The Company and its subsidiaries are defendants in, or subject to, other claims or legal actions related to insurance and investment
products. Some of these claims and legal actions are in jurisdictions where juries are given substantial latitude in assessing
damages, including punitive damages.
The Company and its subsidiaries are involved in litigation from time to time both as a defendant and as a plaintiff, in the ordinary
course of business. Although no assurances can be given and no determinations can be made at this time, management believes
that the ultimate liability, if any, with respect to these legal actions and other claims would not have a material effect on the
Company's business, results of operations, or financial position.
In accordance with applicable accounting guidelines, the Company establishes an accrued liability for litigation and regulatory
matters, when those matters present loss contingencies that are both probable and estimable. As a litigation or regulatory matter
develops, it is evaluated on an ongoing basis, often in conjunction with outside counsel, as to whether the matter presents a loss
contingency that meets conditions indicating the need for accrual and/or disclosure. If and when a loss contingency related to
litigation or regulatory matters is deemed to be both probable and estimable, the Company establishes an accrued liability. This
accrued liability is then monitored for further developments that may affect the amount of the accrued liability.
Based on currently available information, the Company does not believe that any litigation, proceeding or other matter to which
it is a party or otherwise involved will have a material adverse effect on its financial position, the results of its operations, or its
cash flows.
63
Table of Contents
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The Company and its subsidiaries are subject to regular reviews and inspections by state and federal regulatory authorities. State
insurance examiners - or independent audit firms engaged by such examiners - may, from time to time, conduct examinations or
investigations into industry practices and into customer complaints. The Company is currently subject to a regular financial
examination by the Missouri Department of Insurance. A regulatory violation discovered during a review, inspection, or
investigation could result in a wide range of remedies that could include the imposition of sanctions against the Company, its
subsidiaries, or its employees, any of which could have a material adverse effect on the Company's financial condition or results
of operations.
The life insurance industry has been the subject of significant regulatory and legal activities regarding the use of the U.S. Social
Security Administration's Death Master File (“Death Master File”) in the claims process. Certain states have proposed, and many
other states are considering, new legislation and regulations related to unclaimed life insurance benefits and the use of the Death
Master File in the claims process. Based on its analysis to date, the Company believes that it has adequately reserved for
contingencies from a change in statute or regulation. Ongoing regulatory developments and other future requirements related to
this matter may result in additional payments or costs that could be significant and could have a material adverse effect on the
Company's financial condition or results of operations.
Guarantees and Indemnifications
The Company is subject to various indemnification obligations issued in conjunction with certain transactions, primarily assumption
reinsurance agreements, stock purchase agreements, mortgage servicing agreements, tax credit assignment agreements,
construction and lease guarantees, and borrowing agreements whose terms range in duration and often are not explicitly defined.
Generally, a maximum obligation is not explicitly stated. Therefore, the overall maximum amount of the obligation under the
indemnifications cannot be reasonably estimated. The Company is unable to estimate with certainty the ultimate legal and financial
liability with respect to these indemnifications. The Company believes that the likelihood is remote that material payments would
be required under such indemnifications and, therefore, such indemnifications would not result in a material adverse effect on the
financial position or results of operations.
22. Subsequent Events
The Company has performed an evaluation of events that have occurred subsequent to December 31, 2015 through March 10,
2016, the date the consolidated financial statements were issued.
On January 25, 2016, the Kansas City Life Board of Directors declared a quarterly dividend of $0.27 per share, paid on February
10, 2016 to stockholders of record on February 4, 2016.
There have been no other subsequent events that have occurred during such period that would require disclosure in, or adjustment
to, the consolidated financial statements as of and for the year ended December 31, 2015.
64
The Audit Committee and Stockholders
Kansas City Life Insurance Company:
Independent Auditors’ Report
We have audited the accompanying consolidated financial statements of Kansas City Life Insurance Company and subsidiaries,
which comprise the consolidated balance sheets as of December 31, 2015 and 2014, and the related consolidated statements of
comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31,
2015, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control
relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement,
whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits
in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement
of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers
internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Kansas City Life Insurance Company and subsidiaries as of December 31, 2015 and 2014, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31, 2015 in accordance with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
Kansas City, Missouri
March 10, 2016
65
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Amounts are stated in thousands, except share data, or as otherwise noted.
Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2015
is intended to provide in narrative form the perspective of the management of Kansas City Life Insurance Company (the Company)
on its financial condition, results of operations, and certain other factors that may affect its future results. This discussion should
be read in conjunction with the consolidated financial statements and accompanying notes included in this document.
Overview
The Company’s profitability depends on many factors, which include but are not limited to:
• The sale of life, interest sensitive, annuity, and accident and health products;
• The rate of mortality, lapse, and surrenders of future policy benefits and policyholder account balances;
• The rate of morbidity, disability, and incurrence of other policyholder benefits;
Persistency of existing insurance policies;
•
•
Interest rates credited to policyholders;
• The effectiveness of reinsurance programs;
• The amount of investment assets under management;
• The ability to maximize investment returns and manage risks such as interest rate risk, credit risk, and equity risk;
• Timely and cost-effective access to liquidity; and
• Management of distribution costs and operating expenses.
General economic conditions may affect future results. Market fluctuations, often extreme in nature, have significantly impacted
the financial markets and the Company’s investments, revenues, and policyholder benefits in recent periods. The sustained low
interest rate environment and volatile equity markets have presented significant challenges to the financial markets as a whole
and specifically to companies invested in fixed maturity securities and other fixed income investments. These conditions may
continue and the stressed economic and market environment may persist into the future, affecting the Company’s revenue, net
income, and financial position.
Cautionary Statement on Forward-Looking Information
This report reviews the Company’s financial condition and results of operations, and historical information is presented and
discussed. Where appropriate, factors that may affect future financial performance are also identified and discussed. Certain
statements made in this report include “forward-looking statements”. Forward-looking statements include any statement that may
predict, forecast, indicate or imply future results, performance, or achievements rather than historical facts and may contain words
like “believe,” “expect,” “estimate,” “project,” “forecast,” “anticipate,” “plan,” “will,” “shall,” and other words, phrases, or
expressions with similar meaning.
Forward-looking statements are subject to known and unknown risks, uncertainties, and other factors that may cause actual results
to differ materially from those contemplated by the forward-looking statements. Factors that could cause the Company’s future
results to differ materially from expected results include, but are not limited to:
• Changes in general economic conditions, including the performance of financial markets and interest rates;
•
Increasing competition and changes in consumer behavior, which may affect the Company’s ability to sell its products
and retain business;
Increasing competition in the recruitment of new general agents and agents;
•
• Customer and agent response to new products, distribution channels, and marketing initiatives;
•
Fluctuations in experience regarding current mortality, morbidity, persistency, and interest rates relative to expected
amounts used in pricing the Company’s products;
• Changes in assumptions related to DAC, VOBA, and DRL;
• Regulatory, accounting, or tax changes that may affect the cost of, or the demand for, the Company’s products or services;
and
• Unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations.
The Company cannot give assurances that such statements will prove to be correct. Given these risks and uncertainties, investors
should not place undue reliance on forward-looking statements as a prediction of actual results.
66
Consolidated Results of Operations
Summary of Results
The Company earned net income of $29.2 million in 2015 compared to $30.0 million in 2014. Net income per share was $2.75
in 2015 versus $2.74 in 2014. Contributing to the decline in net income in 2015 were decreases in net premiums, contract charges,
net investment income, and other revenues. Mostly offsetting these items were decreases in policyholder benefits, interest credited
to policyholder account balances, amortization of deferred acquisition costs, and operating expenses. Additional information on
these items is presented below.
Insurance Revenues
Insurance revenues consist of premiums, net of reinsurance, and contract charges. Insurance revenues are affected by the level
of new sales, the type of products sold, the persistency of policies, general economic conditions, and competitive forces.
The following table presents gross premiums on new and renewal business, less reinsurance ceded, for the two years ended
December 31. New premiums are also detailed by product.
2015
% Change
2014
New premiums:
Traditional life insurance
Immediate annuities
Group life insurance
Group accident and health insurance
Total new premiums
Renewal premiums
Total premiums
Reinsurance ceded
$
18,466
21,843
2,364
12,072
54,745
161,827
216,572
(56,397)
4 % $
(20)%
(32)%
(15)%
(13)%
2 %
(3)%
— %
Net premiums
$
160,175
(3)% $
17,694
27,466
3,454
14,240
62,854
159,338
222,192
(56,644)
165,548
Consolidated total premiums decreased $5.6 million or 3% in 2015 compared to 2014. New premiums decreased $8.1 million or
13% in 2015 versus the prior year. This decrease largely resulted from a $5.6 million decline in new immediate annuity premiums.
Immediate annuity receipts can have sizeable fluctuations, as receipts from deferred annuities are based upon the individual needs
and decisions of contract owners. Conversions from fixed deferred annuities totaled $15.2 million in 2015, down from $17.4
million in 2014. Excluding the conversions from fixed deferred annuities, total new premiums decreased $5.8 million or 13% in
2015 compared to the prior year. New group accident and health premiums decreased $2.2 million or 15%, largely reflecting a
decline in new dental premiums. In addition, new group life premiums decreased $1.1 million or 32% in 2015 compared to 2014.
Partially offsetting the declines, new individual life premiums increased $0.8 million or 4% in 2015 compared to the prior year.
The increase in new traditional life insurance premiums was principally from the Old American segment. Renewal premiums
increased $2.5 million or 2% in 2015 compared to 2014. This increase reflected a $2.5 million or 2% increase in renewal traditional
life premiums and a $0.9 million or 9% increase in group life renewal premiums. Partially offsetting these improvements was a
$0.8 million or 2% decline in group accident and health renewal premiums, as an increase in renewal dental premiums was offset
by a decline in renewal short-term disability premiums. The increase in renewal traditional life insurance premiums was principally
from the Old American segment.
67
The following table reconciles deposits with the Consolidated Statements of Cash Flows and provides detail by new and renewal
deposits for the two years ended December 31. New deposits are also detailed by product.
2015
% Change
2014
New deposits:
Universal life insurance
$
13,314
20 % $
11,087
Variable universal life insurance
Fixed annuities
Variable annuities
Total new deposits
Renewal deposits
303
40,874
19,160
73,651
144,278
(61)%
(2)%
(41)%
(15)%
(5)%
772
41,821
32,568
86,248
152,503
Total deposits
$
217,929
(9)% $
238,751
New deposits on interest sensitive products are heavily influenced by the general economic conditions and interest rates available
in the marketplace. In addition, the variable life and annuity products are also influenced by the fluctuations in the equity markets.
Generally, low interest rate environments present significant challenges to products such as these and potential sizeable fluctuations
in new sales can result.
Total new deposits decreased $12.6 million or 15% in 2015 compared to 2014. This decline resulted from a $13.4 million or 41%
decrease in new variable annuity deposits, a $0.9 million or 2% decrease in new fixed annuity deposits, and a $0.5 million or 61%
decline in new variable universal life deposits. Partially offsetting this was a $2.2 million or 20% increase in new universal life
deposits. Total renewal deposits decreased $8.2 million or 5% in 2015 compared to the prior year, as an increase in universal life
renewal deposits was offset by decreases in variable universal life, fixed annuity, and variable annuity renewal deposits.
Contract charges result from charges and fees on interest-sensitive and investment-type products. The Company maintains both
open, active blocks of business and closed blocks of business. Contract charges are also potentially impacted by unlocking
adjustments, as discussed below.
Total contract charges decreased $6.6 million or 6% in 2015 relative to the prior year. This decline reflected lower amortization
of deferred revenue, primarily resulting from unlocking effects on the deferred revenue liability. At least annually, a review is
performed of the assumptions related to profit expectations. If it is determined the assumptions should be revised, the impact is
recorded as a change in the revenue reported in the current period as an unlocking adjustment. An unlocking adjustment decreased
the amortization of deferred revenue $2.3 million during 2015. This compares to an unlocking adjustment that increased deferred
revenue amortization $1.8 million during 2014. In addition, surrender charges declined, reflecting reduced surrenders on
policyholder account balances.
Included in total contract charges are groups of policies and companies that the Company considers to be closed blocks. The
closed blocks of business reflect products and entities that have been purchased but for which the Company is not actively pursuing
marketing efforts to generate new sales. The Company services these policies to meet long-term profit objectives as these blocks
of business run off or decline over time. Total contract charges on these closed blocks equaled 43% of total consolidated contract
charges during 2015, up from 42% in 2014. This increase can be attributed to the unlocking mentioned above, which decreased
contract charges on open, or ongoing, blocks of business. Total contract charges on closed blocks decreased 4% compared to the
prior year, reflecting the runoff of the business as well as reduced surrender charges on acquired variable universal life and variable
annuity products. Total contract charges on open, or ongoing, blocks of business decreased 7% in 2015 compared to 2014. This
decline largely reflected lower amortization of deferred revenue that resulted from unlocking effects on the deferred revenue
liability.
Investment Revenues
Gross investment income decreased $5.4 million or 3% in 2015 compared to one year earlier. This decline reflected lower average
invested assets and lower overall yields earned and available on certain investments. In addition, investment expenses increased
$2.5 million or 19%, primarily due to an increase in real estate expenses from real estate purchases made during 2014.
Fixed maturity securities provided a majority of the Company’s investment income during 2015. Approximately 75% of the
Company's investments were in fixed maturity securities at both December 31, 2015 and December 31, 2014. Income from these
investments declined $4.4 million or 4% compared to 2014, as an increase in average invested assets was more than offset by
lower yields earned.
68
Investment income from commercial mortgage loans decreased $5.8 million or 16% in 2015. This decline was primarily due to
lower yields earned and to a lower mortgage loan portfolio balance compared to the prior year, primarily from maturities and
principal paydowns that have exceeded new mortgage loan originations. The decline in income from commercial mortgages also
reflected a decline in prepayment fees. This decrease was primarily due to prepayment fees from one large loan prepayment in
the fourth quarter of 2014.
Investment income from real estate properties increased $5.3 million or 45% in 2015, largely due to the purchase and development
of real estate in recent years. However, real estate expenses also increased with the real estate purchases mentioned above.
The Company recorded net realized investment gains of $3.8 million in 2015. During 2015, investment losses of $2.5 million
were due to write-downs of investment securities that were considered other-than-temporarily impaired. Offsetting these losses,
the Company recorded a $3.1 million net gain from investment securities and a $4.2 million net gain from sales of real estate.
Other Revenues
Other revenues consist primarily of supplementary contract considerations; policyholder dividends left with the Company to
accumulate; and certain income received from subsidiaries of the Company. Other revenues decreased $4.8 million or 38% in
2015 compared to the prior year. This decline reflects the revenue decrease from the divestiture of certain non-proprietary agent
relationships related to SFS in the fourth quarter of 2014. In addition, lower revenue was earned by the Company's subsidiary
that invests in affordable housing real estate, due to lower amounts of tax credits transferred or sold in 2015 compared to 2014.
Policyholder Benefits
Policyholder benefits consist of death benefits, immediate annuity benefits, accident and health benefits, surrenders, other benefits,
and the associated increase or decrease in reserves for future policy benefits. The largest component of policyholder benefits was
death benefits for the periods presented. Death benefits reflect mortality results, after consideration of the impact of reinsurance.
Policyholder benefits decreased $4.2 million or 2% in 2015 compared to 2014, predominantly the result of a decrease in benefit
and contract reserves. Several factors contributed to the change in reserves. Changes in the fair value of the GMWB rider resulted
in a $5.3 million decrease in benefit and contract reserves. Approximately $1.5 million of this favorable change was due to the
movement of variable annuity investments associated with the GMWB rider into funds managed with the objective of lower
volatility. Also contributing to the reserve change was a decrease in immediate annuity premiums. Policyholder reserves for
immediate annuity premiums are established on an approximately equal and offsetting basis, and a decrease in premiums results
in a decrease to the change in reserves on a comparative basis. In addition, the decline in policyholder benefits reflected decreased
group benefit payments, largely from the dental line. Partially offsetting these decreases, death benefits, net of reinsurance,
increased in 2015 compared to 2014.
At December 31, 2015, the fair value of the GMWB liability decreased $1.7 million compared to the fair value at December 31,
2014. This fluctuation can be primarily attributed to decreases in risk-free swap rates, lower capital market returns, and the
movement of variable annuity investments into funds managed with the objective of lower volatility.
Interest Credited to Policyholder Account Balances
Interest credited to policyholder account balances decreased $2.1 million or 3% in 2015. This decline was due to lower average
crediting rates as well as a decrease in policyholder account balances compared to one year earlier.
Total policyholder account balances decreased $15.9 million or 1% during 2015. The average interest rate credited to policyholder
account balances was 3.60% in 2015 compared to 3.67% in 2014 and 3.75% in 2013. Investment yields on the assets matched to
these liabilities were 4.86% in 2015 compared to 5.03% in 2014 and 5.24% in 2013.
Amortization of DAC
The amortization of DAC decreased $12.5 million or 31% in 2015 compared to the prior year. This decline was largely due to an
unlocking adjustment that decreased DAC amortization $6.4 million in 2015, compared to an unlocking adjustment that increased
DAC amortization $1.7 million in 2014. The unlocking in 2015 was associated with favorable adjustments for mortality and
expenses, partially offset by adjustments related to interest rates. In addition, changes in expense assumptions on new business
contributed to the declines in 2015.
Operating Expenses
Operating expenses consist of incurred commission expense from the sale of insurance products, net of the deferral of certain
commissions and certain expenses directly associated with the successful acquisition of new business, expenses from the Company’s
operations, the amortization of VOBA, and other expenses. In total, operating expenses decreased $4.5 million or 4% in 2015.
This decrease was primarily due to lower salary and benefit costs, lower commissions, and higher capitalized commissions.
Partially offsetting these were increases in VOBA amortization and legal costs.
69
The amortization of VOBA will generally decline over time, as policies run off. In addition, VOBA is evaluated on an ongoing
basis for unlocking adjustments. If necessary, adjustments are made to the current period VOBA amortization. The amortization
of VOBA increased $1.2 million or 44% in 2015, principally due to an unlocking adjustment that increased VOBA amortization
$0.9 million in 2015 compared to an unlocking adjustment that decreased VOBA amortization $1.5 million in 2014.
Income Taxes
The Company recorded income tax expense of $13.0 million or 31% of income before tax in 2015, compared to income tax expense
of $13.0 million or 30% of income before tax in 2014. The increase in the effective tax rate in 2015 versus 2014 was primarily
due to an increase in expense from prior year taxes.
70
Analysis of Investments
This analysis of investments should be read in conjunction with Note 3 - Investments included in this document.
The following table provides asset class detail of the investment portfolio at December 31. Fixed maturity and equity securities
represented 75% and 77% of the entire investment portfolio at December 31, 2015 and 2014, respectively.
Fixed maturity securities
Equity securities
Mortgage loans
Real estate
Policy loans
Short-term investments
Other investments
Total
2015
$ 2,580,845
25,325
589,960
168,097
81,392
22,474
380
$ 3,468,473
%
of Total
2014
%
of Total
74% $ 2,726,731
24,881
1%
541,180
17%
181,082
5%
83,553
2%
39,107
1%
—
462
100% $ 3,596,996
76%
1%
15%
5%
2%
1%
—
100%
Fixed maturity securities comprised 74% of the Company's total investments at December 31, 2015. The largest categories of
total fixed maturity securities at December 31, 2015 consisted of 78% in corporate securities and 6% in municipal securities and
U.S. Treasury securities and obligations of the U.S. Government. Fixed maturity securities had unrealized gains of $126.7 million
and unrealized losses of $32.2 million at December 31, 2015.
The Company uses actual or equivalent Standard & Poor's ratings to determine the investment grading of fixed maturity securities
available for sale. The Company had 95% of its fixed maturity securities available for sale above investment grade at December
31, 2015 and December 31, 2014.
The fair value of fixed maturity securities with unrealized losses was $567.2 million at December 31, 2015, compared with $285.8
million one year earlier. This increase primarily reflected a rise in market interest rates during 2015. Ninety-four percent of
security investments with an unrealized loss were investment grade and accounted for 88% of the total unrealized losses at December
31, 2015. One year earlier, 94% of securities with an unrealized loss were investment grade and accounted for 82% of the total
unrealized losses. At December 31, 2015, the Company had gross unrealized losses on fixed maturity and equity securities of
$32.8 million that were offset by $128.6 million in gross unrealized gains. At December 31, 2014, the Company had $11.8 million
in gross unrealized losses on fixed maturity and equity securities, offset by $186.4 million in gross unrealized gains. At December
31, 2015, 78% of the fixed maturity and equity securities portfolio had unrealized gains, a decrease from 89% at December 31,
2014. The Company had an increase in gross unrealized losses in most categories from year-end 2014 to year-end 2015 due to
changes in interest rates and market spreads during 2015. Gross unrealized losses on fixed maturity and equity securities for less
than 12 months accounted for $23.2 million or 71% of the security values in a gross unrealized loss position at December 31,
2015. Gross unrealized losses on fixed maturity and equity security investments of 12 months or longer increased from $8.9
million at December 31, 2014 to $9.6 million at December 31, 2015.
The Company’s residential mortgage-backed securities, commercial mortgage-backed securities, and asset-backed securities that
were rated below investment grade were 41% and 40% of the total at December 31, 2015 and 2014, respectively.
The Company has written down certain investments in previous periods. Fixed maturity securities written down and continuing
to be owned at December 31, 2015 had a fair value of $80.7 million with a net unrealized gain of $4.6 million, which compares
to the December 31, 2014 fair value of $105.3 million and a net unrealized gain of $4.8 million. The identification of additional
information or further deteriorations could result in additional impairments in future periods.
The Company evaluated the current status of all investments previously written down to determine whether the Company continues
to believe that these investments were still credit-impaired to the extent previously recorded. The Company’s evaluation process
is similar to its impairment evaluation process. If evidence exists that the Company believes that it will receive its contractual
cash flows from securities previously written down, the accretion of income is adjusted. The Company did not change its evaluation
of any investments under this process during 2015 or 2014.
The Company’s investment portfolio also includes mortgage loans, real estate, policy loans, and short-term investments. Mortgage
loans comprised 17% and 15% of total invested assets at December 31, 2015 and 2014, respectively. Real estate investments were
5% of total invested assets at both December 31, 2015 and December 31, 2014. Policy loans and short-term investments comprised
3% of total invested assets at both December 31, 2015 and December 31, 2014.
71
Investments in mortgage loans totaled $590.0 million at December 31, 2015 ($541.2 million - December 31, 2014). The commercial
mortgage loan portfolio increased $48.8 million during 2015, primarily due to the volume of new loans exceeding the amount of
prepaid loans. The Company had a $2.5 million decrease in income from prepayment fees in 2015 relative to 2014. The decrease
in prepayment fees during 2015 was primarily due to one large loan prepayment in the fourth quarter of 2014. The dollar volume
of prepaid loans also decreased in 2015. The Company's mortgage loans are mostly secured by commercial real estate and are
stated at the outstanding principal balance, adjusted for amortization of premium and accrual of discount, less an allowance for
loan losses. This allowance is maintained at a level believed by management to be adequate to absorb estimated credit losses and
was $2.7 million at December 31, 2015 and $1.9 million at December 31, 2014. This increase was primarily the result of the
Company's increased macro-environmental risk assessment, as well as an increase in the size of the portfolio. The Company
evaluates the macro-environmental risk on an ongoing basis, using multiple considerations. The Company believes its assessment
of the perceived market liquidity and current industry conditions warranted the increase in the reserve. For additional information
on the Company’s mortgage loan portfolio, please see Note 3.
Investments in real estate totaled $168.1 million at December 31, 2015 and $181.1 million at December 31, 2014. In the third
quarter of 2015, the Company sold a developed property that resulted in a realized gain of $4.2 million before applicable income
taxes.
Liquidity and Capital Resources
Liquidity
The Company meets liquidity requirements primarily through positive cash flows from operations. Management believes that
the Company has sufficient sources of liquidity and capital resources to satisfy operational requirements and to finance expansion
plans and strategic initiatives. Primary sources of cash flow are premiums, other insurance considerations and deposits, receipts
for policyholder accounts, investment sales and maturities, and investment income. In addition, the Company has credit facilities
that are available for additional working capital needs or investment opportunities. The principal uses of cash are for the insurance
operations, including the purchase of investments, payment of insurance benefits, operating expenses, policyholder dividends,
withdrawals from policyholder accounts, and costs related to acquiring new business. In addition, the Company uses cash for
other purposes, including the payment of stockholder dividends and income taxes. There can be no assurance that the Company
will continue to generate cash flows at or above current levels or that the ability to borrow under the current credit facilities will
be maintained.
The Company performs cash flow testing and adds various levels of stress testing to potential surrender and policy loan levels in
order to assess current and near-term cash and liquidity needs. In the event of increased surrenders and other cash needs, the
Company has several sources of cash flow available to meet its needs.
Net cash provided by operating activities was $15.7 million for the year ended December 31, 2015. The primary sources of cash
from operating activities in 2015 were premium receipts and net investment income. The primary uses of cash from operating
activities in 2015 were for the payment of policyholder benefits and operating expenses. Net cash provided by investing activities
was $43.1 million. The primary sources of cash were sales, maturities, calls, and principal paydowns of investments totaling
$421.3 million. Offsetting these, the Company's new investments totaled $394.2 million. Net cash used for financing activities
was $61.9 million, primarily including $5.0 million of withdrawals, net of deposits, from interest sensitive policyholder account
balances, treasury stock purchases of $58.4 million, and the payment of $11.5 million in stockholder dividends.
Capital Resources
The Company considers existing capital resources to be adequate to support the current level of business activities.
The following table shows the capital adequacy for the Company at December 31.
Total assets, excluding separate accounts
Total stockholders' equity
Ratio of stockholders' equity to assets, excluding separate accounts
2015
2014
$
4,048,949
$
4,165,366
663,831
16%
742,759
18%
The ratio of equity to assets less separate accounts was 16% at December 31, 2015, down from 18% at December 31, 2014.
Stockholders’ equity decreased $78.9 million from year-end 2014. The largest factor in this decrease was a $58.4 million increase
in treasury stock, which largely resulted from the reverse/forward stock split transaction that occurred during the fourth quarter
of 2015. In addition, the decline in stockholders' equity reflected a decrease in net unrealized gains compared to the prior year.
Partially offsetting these, retained earnings increased due to net income in excess of dividends paid to stockholders. Stockholders’
equity per share, or book value, equaled $68.55 at year-end 2015, a slight decline from $68.61 at year-end 2014.
72
Net unrealized gains on available for sale securities, which are included as part of accumulated other comprehensive income (loss)
and as a component of stockholders’ equity (net of securities losses, related taxes, policyholder account balances, future policy
benefits, DAC, VOBA, and DRL), totaled $31.7 million at December 31, 2015. This represents a decrease of $45.3 million from
the $77.0 million net unrealized investment gain position at December 31, 2014, reflecting an increase in market interest rates in
2015.
The Company’s statutory equity exceeds the minimum capital deemed necessary to support its insurance business, as determined
by the risk-based capital calculations and guidelines established by the National Association of Insurance Commissioners. The
Company believes these statutory limitations impose no practical restrictions on its dividend payment plans. See further discussion
in Note 20 - Statutory Information and Stockholder Dividends Restriction.
During the year ended December 31, 2015, the Company purchased 15,092 shares and sold 400 shares of treasury stock in
transactions with the Company's employee stock ownership plan for a net increase in treasury stock of $0.7 million. During the
third quarter of 2015, the Company announced the termination of its employee stock ownership plan. The final valuation date for
the assets held by the plan was September 30, 2015, and distribution of the plan’s assets occurred in the fourth quarter of 2015.
As part of the termination of the employee stock ownership plan, the Company repurchased 14,674 of the plan’s 23,045 shares
during the fourth quarter of 2015 to satisfy those participants who requested cash distributions from the plan. The remaining
shares were distributed to plan participants, as directed by those participants.
The stock repurchase program was extended by the Board of Directors through January 2017 to permit the purchase of up to one
million of the Company’s shares on the open market. During 2015, the Company purchased 215,548 of its shares under the stock
repurchase program for $9.8 million (2014 – 142,738 shares for $6.6 million).
On January 25, 2016, the Board of Directors declared a quarterly dividend of $0.27 per share that was paid February 10, 2016 to
stockholders of record at February 4, 2016.
73
Minimum Rate Guarantees
The Company’s rate guarantees for those products with minimum crediting rate provisions are identified in the table below. The
guaranteed minimum crediting rate has been reduced over time on new products being sold, consistent with the declining interest
rate environment. The actual interest rate credited to these products may be greater than the guaranteed rates, particularly for
products having been sold more recently and within the lower guaranteed rate categories. Approximately 83% and 85% of total
policyholder account balances were at the minimum guaranteed rate as of December 31, 2015 and December 31, 2014, respectively.
$
997,153
$
$
105,221
$
54,135
$
2,056,126
Fixed
Deferred
Annuities
172,230
345,466
424,524
54,933
Fixed
Deferred
Annuities
143,588
367,843
433,225
61,865
December 31, 2015
Universal
Life
Variable Life
and Annuities
Supplemental
Contracts and
Annuities
NILC
$
8,555
$
2,794
$
8,175
$
94,467
7,960
—
25,177
14,330
6,453
December 31, 2014
Universal
Life
Variable Life
and Annuities
Supplemental
Contracts and
Annuities
NILC
$
333
$
2,157
$
6,456
$
92,272
7,196
—
23,963
17,266
7,264
200,698
314,613
375,751
899,617
189,596
290,247
428,770
908,946
Total
191,754
665,808
761,427
437,137
Total
152,534
673,674
747,934
497,899
0% to 1%
$
Greater than 1% to 3%
Greater than 3% to 4%
Greater than 4%
Total
0% to 1%
$
Greater than 1% to 3%
Greater than 3% to 4%
Greater than 4%
Total
$
1,006,521
$
$
101,625
$
54,949
$
2,072,041
Fixed Deferred Annuity Contracts
Fixed deferred annuities typically involve single-payment deposits that accumulate over time through interest credited, and these
contracts also typically provide the right to make additional renewal deposits. The timing and magnitude of outgoing cash flows
from these contracts is dependent upon many factors, primarily due to contract owner rights to surrender or annuitize the policy
value during the term of the contract and benefit options that are provided upon death. The Company makes estimates and
projections of future cash flows on fixed deferred annuities based upon the economic environment, ranges of future economic
changes, and historical contract holder behavior.
The term of the contract is dependent upon the individual needs and decisions of contract owners up to and including the time of
contractual maturity. The maturity of the contract is typically determined by a combination of the duration of ownership of the
contract and the annuity owner’s age. Deferred annuity contract owners with upcoming annuity maturities receive communication
from the Company regarding the various maturity settlement options that are available in the contract. The communication can
result in extension of the contract maturity date, surrender of the contract prior to maturity, or conversion of the contract to other
contract or policy types. Conversions typically involve payment of the contract value over time and often with life contingencies.
74
The following table provides deferred annuity contract values within maturity date ranges. The values and date ranges provided
below do not necessarily represent the Company’s expected outflow of funds from these contracts, as these cash flows may be
significantly impacted by the needs and decisions of the contract owners.
2015
%
of Total
2014
%
of Total
One year or less
$
124,393
13% $
130,501
Two years
Three years
Four years
Five years
Six years or more
Total
$
53,209
40,981
45,676
62,643
670,251
997,153
5%
4%
5%
6%
50,593
33,028
43,426
47,796
67%
701,177
100% $
1,006,521
13%
5%
3%
4%
5%
70%
100%
Fixed deferred annuity contracts typically also contain provisions for charges to be paid by contract holders if the contract is
surrendered within a fixed period of time after purchase. The surrender charge typically declines on an annual basis during an
initial term of typically ten or fewer years. The magnitude of any surrender charge applicable to a contract is believed to impact
policyholder behavior and the timing of future cash flows. The following table provides the policy values for fixed deferred
annuities by summary ranges of applicable surrender charges as of December 31, 2015 and 2014.
None
Less than 5%
5% and greater
Total
2015
646,440
149,646
201,067
997,153
$
$
%
of Total
65% $
15%
20%
2014
647,457
130,098
228,966
100% $
1,006,521
%
of Total
64%
13%
23%
100%
75
Asset/Liability Management
The Company’s asset/liability management programs and procedures involve the monitoring of asset and liability durations for
various product lines, cash flow testing under various interest rate scenarios to evaluate the potential sensitivity of assets and
liabilities to interest rate movements, and the continuous rebalancing of assets and liabilities with respect to yield, risk, and cash
flow characteristics.
The Company believes its asset/liability management programs and procedures, along with certain product features, provide
protection for the Company against the effects of changes in interest rates under various scenarios.
Cash flows and effective durations of the asset and liability portfolios are measured at points in time and are affected by changes
in the level and term structure of interest rates, as well as changes in policyholder behavior. Further, durations are managed on
an individual product level, and an aggregate portfolio basis. As a result, differences typically exist between the duration, cash
flows, and yields of assets versus liabilities on an individual portfolio and aggregate basis. The Company’s asset/liability
management programs and procedures enable management to monitor the changes, which have varying correlations among certain
portfolios, and to make adjustments to asset mix, liability crediting rates, and product terms so as to manage risk and profitability
over time.
The Company aggregates similar policyholder liabilities into portfolios and then matches specific investments with these liability
portfolios. In 2015 and 2014, all of the Company’s portfolios had investment yields that exceeded the crediting rates on the matched
liabilities. The Company monitors the risk to portfolio investment margins on an ongoing basis.
The Company performs cash flow scenario testing through models of its in force business. These models reflect specific product
characteristics and include assumptions based on current and anticipated experience regarding the relationships between short-
term and long-term interest rates (i.e., the slope of the yield curve), credit spreads, market liquidity and other factors, including
policyholder behavior in certain market conditions. In addition, these models include asset cash flow projections, reflecting interest
payments, sinking fund payments, scheduled principal payments, and optional bond calls and prepayments.
The Company has a risk that the asset or liability portfolio performance may differ from forecasted results as a result of unforeseen
economic circumstances, estimates or assumptions that prove incorrect, unanticipated policyholder behavior, or other factors. The
result of such deviation of actual versus expected performance could include excess or insufficient liquidity in future periods.
Excess liquidity, in turn, could result in reduced profitability on one or more product lines. Insufficient liquidity could result in
the need to generate liquidity through borrowing, asset sales, or other means. The Company believes that its asset/liability
management programs will provide sufficient liquidity to enable it to fulfill its obligation to pay benefits under its various insurance
and deposit contracts. On a historical basis, the Company has not needed to liquidate assets to ensure sufficient cash flows. The
Company maintains borrowing lines on a secured and unsecured basis to provide additional liquidity, if needed.
76
Risk Factors
The operating results of life insurance companies have historically been subject to significant fluctuations. The factors which
could affect the Company’s future results include, but are not limited to, general economic conditions and the known trends and
uncertainties which are discussed more fully below.
Strategic and Operational Risks:
The Company operates in a mature, highly competitive industry, which could limit its ability to grow sales or maintain its
position in the industry and negatively affect profitability.
Life insurance is a mature and highly competitive industry. The Company encounters significant competition in all lines of business
from other insurance companies, many of which may have greater financial resources, a greater market share, a broader range of
products, lower product prices, better name recognition, greater actual or perceived financial strength, higher claims-paying ratings,
the ability to assume a greater level of risk, lower operating or financing costs, or lower profitability expectations.
In recent years, there has been substantial consolidation and convergence among companies in the financial services industry,
resulting in increased competition from large, well-capitalized financial services firms. Furthermore, many of these larger
competitors may have lower operating costs and an ability to absorb greater risk while maintaining their financial strength ratings,
thereby allowing them to price their products more competitively.
Changes in demographics, particularly the aging of the population, and the decline in the number of agents in the industry, may
affect the sales of life insurance products. Also, as technology evolves, customers and agents may be able to compare products
of any particular company with any other, which could lead to increased competition as well as changes in agent or customer
behavior, including persistency, that differs from past behavior.
The Company may be unable to attract and retain agencies and agents.
The Company sells insurance and annuity products through independent agents and agencies. These agencies and agents are not
captive and may sell products of the Company’s competitors. Sales and the results of operations and financial condition could be
adversely affected if the Company is unsuccessful in attracting agencies and agents. The Company’s ability to retain agents and
agencies is dependent upon a number of factors, including: the ability of the Company to maintain a competitive compensation
system while also offering products with competitive features and benefits for policyholders; the ability to maintain a level of
service and support activities that effectively support the needs of agents and agencies; and the ability to approve and monitor
sales and business practices of agents and agencies that are consistent with regulatory requirements and expectations of the Company.
The Company’s results may be negatively affected should actual experience differ from management’s assumptions and
estimates.
The Company makes certain assumptions regarding mortality, persistency, expenses, interest rates, tax liability, business mix,
policyholder behavior, and other factors appropriate for the type of business results it expects to experience in future periods.
These assumptions are also used to estimate the amounts of DAC, VOBA, DRL, policy reserves and accruals, future earnings,
and various components of the Company’s Consolidated Balance Sheets. These assumptions are used in the operations of the
Company’s business in making decisions that are crucial to its success, including the pricing of products and expense structures
relating to products. The Company’s actual experience and changes in estimates are reflected in the Company’s financial statements.
The Company’s actual experience may vary from period to period and from established assumptions, potentially resulting in
variability in the financial statements.
The Company establishes and carries a reserve liability based on estimates of how much will be needed to pay for future benefits
and claims. The assumptions and estimates used in connection with establishing and carrying reserves are inherently uncertain
and in some cases are mandated by regulators, irrespective of a company's actual experience. If actual experience is significantly
different from assumptions or estimates or if regulators decide to increase or change regulations, reserves may prove to be inadequate
in relation to estimated future benefits and claims. As a result, a charge to earnings would be incurred in the quarter in which the
Company increases reserves.
The calculations the Company uses to estimate various components of its financial statements are complex and involve analyzing
and interpreting large quantities of data. The Company employs various techniques for such calculations and, from time to time,
will develop and implement more sophisticated systems and procedures to facilitate calculations and improve estimates.
Accordingly, the Company’s results may be affected, positively or negatively, by actual results differing from assumptions, by
changes in estimates, and by changes resulting from implementing new administrative systems and procedures.
77
Risk management policies and procedures may leave the Company exposed to unidentified or unanticipated risk, which could
negatively affect business or result in losses.
The Company has devoted significant resources to develop risk management policies and procedures and will continue to do so
in the future. However, the Company’s policies and procedures used to identify, monitor, and manage risks may not be fully
effective. Many of the methods of managing risk and exposures are based upon the use of observed historical policyholder and
market behavior or statistics based on historical models. As a result, these methods may not effectively identify or evaluate the
magnitude of existing or future exposures, which could be significantly greater than the historical measures indicate. An example
of such risks includes the risk of pandemics, which could cause a large number of deaths. Other risk management methods depend
upon the evaluation of information regarding markets, agents, clients, catastrophe occurrence, or other matters that are publicly
available or otherwise accessible. This information may not always be accurate, complete, up-to-date, or properly evaluated.
Management of operational, legal, and regulatory risks requires, among other things, policies and procedures to record properly
and verify a large number of transactions and events, and these policies and procedures may not be fully effective. Additional
risks and uncertainties not currently known or that the Company currently deems to be immaterial may adversely affect the business,
financial condition, and/or operating results.
A rating downgrade could adversely affect the Company’s ability to compete and increase the number or value of policies
surrendered.
The Company’s financial strength rating, which is intended to measure its ability to meet policyholder obligations, is an important
factor affecting public confidence in most of the Company’s products and, as a result, the Company’s competitiveness. A downgrade
in the Company’s rating could adversely affect the Company’s ability to sell its products, retain existing business, and compete
for attractive acquisition opportunities. Rating organizations assign ratings based upon several factors. While most of the factors
relate to the rated company, some of the factors relate to the views of the rating organization, general economic conditions, and
circumstances outside the rated company’s control. The Company cannot predict what actions rating organizations may take or
what actions the Company may be required to take in response to the actions of the rating organizations.
Investment Risks:
The Company’s investments are subject to market and credit risks.
The Company holds a diversified portfolio of investments that primarily includes fixed maturity securities, preferred stocks,
residential mortgage-backed securities, commercial mortgages, real estate, and alternative investments. Each of these investments
is subject, in varying degree, to market risks that can affect their return and their fair value.
The Company’s invested assets, primarily including fixed maturity securities, are subject to customary risks of credit defaults and
changes in fair value. The value of the Company’s commercial mortgage loan and real estate portfolios also depend on the financial
condition of the borrowers and tenants occupying the properties which the Company has financed. Factors that may affect the
overall default rate on and fair value of the Company’s invested assets include interest rate levels and changes, availability and
cost of liquidity, financial market performance, and general economic conditions, as well as particular circumstances affecting the
businesses of individual borrowers and tenants.
The Company’s investments are exposed to varying degrees of credit risk. Credit risk is the risk that the value of the investment
may decline due to deterioration in the financial strength of the issuer and that the timely or ultimate payment of principal or
interest might not occur. A default by an issuer usually involves some loss of principal to the investor. Losses can be mitigated
by timely sales of affected securities or by active involvement in a restructuring process. However, there can be no assurance that
the efforts of an investor will lead to favorable outcomes in a bankruptcy or restructuring.
The Company attempts to mitigate credit risk by diversifying the investment portfolio across a broad range of issuers, investment
sectors and security types, and by limiting the amount invested in any particular entity. The Company also invests in securities
collateralized or supported by physical assets, guarantees by insurers or other providers of financial strength, and other sources of
secondary or contingent payment. These securities can improve the likelihood of payment according to contractual terms and
increase recovery amounts in the case of issuer default, bankruptcy, or restructuring.
78
Interest rate fluctuations could negatively affect the Company’s spread income or otherwise impact its business.
Interest rate fluctuations or sustained low interest rate environments could negatively affect earnings because the profitability of
certain products depends in part on interest rate spreads. These products include fixed deferred annuities, single premium immediate
annuities, interest-sensitive whole life, universal life, and the fixed portion of variable universal life insurance and variable annuity
business. In addition, the Company offers riders, including guaranteed minimum withdrawal benefits and guaranteed minimum
death benefits. Changes in interest rates or sustained low interest rate environments may reduce both the profitability and the
return on invested capital.
Some of the Company’s products, principally fixed annuities, interest-sensitive whole life, universal life, and the fixed portion of
variable universal life insurance and variable annuity business have interest rate guarantees that expose the Company to the risk
that changes in interest rates will reduce the spread, or the difference between the amounts the Company is required to credit to
policyholder contracts and the amounts earned by the Company on general account investments. The Company is entitled to reset
the interest rates it credits on fixed-rate annuities. Because many of the Company’s policies have guaranteed minimum interest
or crediting rates, spreads could decrease and potentially become negative. Declines in spread or instances where the returns on
the general account investments are not sufficient to support the interest rate guarantees on these products could have a material
adverse effect on the results of operations. In periods of increasing interest rates, the Company may not be able to replace the
assets in the general account with higher yielding assets needed to fund the higher crediting rates that may be necessary to keep
interest sensitive products competitive. The Company, therefore, may have to accept a lower spread and profitability or face a
decline in sales, loss of existing contracts from non-renewed maturities, early withdrawals, or surrenders. In periods of declining
interest rates, the Company may have to reinvest the cash received from interest or return of principal on investments in lower
yielding instruments then available. Moreover, issuers of fixed-income investment securities and borrowers related to the
Company’s commercial mortgage investments may prepay these obligations in order to borrow at lower market rates, which may
exacerbate the risk for the Company to have to reinvest at lower rates.
Increases in interest rates may cause increased surrenders and withdrawals of insurance products. In periods of increasing interest
rates, policy loans and surrenders and withdrawals of life insurance policies and annuity contracts may increase, as policyholders
seek to buy products with higher returns. These outflows may require investment assets to be sold at a time when the prices of
those assets are lower because of the increase in market interest rates, which may result in realized investment losses. Further,
higher interest rates may result in significant unrealized losses on investments. These net unrealized losses could have a negative
effect on stockholders' equity. This could negatively impact the ability to pay policyholder and stockholder dividends. In addition,
higher interest rates may reduce the fair value of policyholders' separate account investments, which may reduce the Company's
revenues from asset-based management fees.
While the Company develops and maintains asset/liability management programs and procedures designed to mitigate the effect
on spread income in rising or falling interest rate environments, no assurance can be given that changes in interest rates will not
affect such spreads. Additionally, the Company’s asset/liability management programs incorporate assumptions about the
relationship between short-term and long-term interest rates (i.e., the slope of the yield curve) and relationships between risk-
adjusted and risk-free interest rates, market liquidity, and policyholder behavior in periods of changing interest rates and other
factors. The effectiveness of the Company’s asset/liability management programs and procedures may be negatively affected
whenever actual results differ from these assumptions.
Prolonged periods of low interest rates can affect policyholder behavior and negatively impact earnings.
As interest rates decline, policyholders may become more likely to extend the retention or duration of fixed-rate products previously
purchased and may seek alternatives to fixed-rate products for new purchases. Policyholders may add premiums or deposits to
existing policies or contracts with terms upon which the Company is no longer offering on new products. Many of the products
sold in earlier periods may have minimum guaranteed interest crediting rates or other features that are greater than those being
offered in the current low interest rate environment. Additionally, cash flows from existing investments, including interest and
principal payments, may be reinvested at lower interest rates relative to prior periods. As a result, a prolonged low interest rate
environment can result in significant changes to cash flows, lower investment income, compressed product spreads, reduced
earnings, and increased surplus strain. In addition, the Company may change its risk profiles in regards to selecting investment
opportunities to reduce the impact on earnings.
The change from a low interest rate environment to an environment of increasing interest rates can affect policyholder behavior
and negatively impact earnings.
The change from a period of low interest rates to a period of significantly higher and increasing interest rates may cause policyholders
to surrender policies or to make early withdrawals in order to maximize their returns. Accordingly, the Company may become
more susceptible to increased surrenders and withdrawals on policies, as surrender charges and other features that help protect the
79
Company from increased or unexpected policyholder withdrawals or lapses. Increases in policyholder surrenders, withdrawals,
or lapses could negatively affect the Company's operating results and liquidity.
The Company’s valuation of fixed maturity and equity securities may include methodologies, estimations, and assumptions
and could result in changes to investment valuations that may have a material adverse effect on the results of operations or
financial condition.
Fixed maturity securities, equity securities, and short-term investments are reported at fair value in the Consolidated Balance
Sheets and represent the majority of total cash and invested assets. During periods of market disruption, including periods of
significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, it may be difficult to value certain securities
if trading becomes less frequent and/or market data becomes less observable. There may be certain asset classes that were previously
acquired and valued in active markets with significant observable data that are now valued in illiquid markets with little observable
data. As such, valuations may include inputs and assumptions that are less observable or require greater estimation as well as
valuation methods which are more complex or require increased estimation, thereby resulting in values which may have greater
variance from the value at which the investments may or could be ultimately sold. Further, rapidly changing credit and equity
market conditions could materially impact the valuation of securities as reported in the consolidated financial statements, and the
period to period changes in value could vary significantly. Decreases in value could have a material adverse effect on the Company’s
results of operations or financial condition.
Equity market volatility could negatively impact the Company’s profitability.
The Company is exposed to equity market volatility in the following ways:
• The Company has exposure to equity price risk through investments, but this exposure is limited due to the relatively
small equity portfolio held during the periods presented.
• The Company earns investment management fees and mortality and expense fee income based upon the value of assets
held in the Company’s separate accounts from both its direct and reinsurance arrangements. Revenues from these sources
fluctuate with changes in the fair value of the separate accounts.
• Volatility in equity markets may discourage purchasers of variable universal life and annuity products that have returns
linked to the performance of the equity markets and may also result in existing customers withdrawing cash values or
reducing investments in those products.
• The Company has equity price risk to the extent that it may affect the liability recognized under guaranteed minimum
death benefits and guaranteed minimum withdrawal benefit provisions of the variable contracts. Periods of significant
and sustained downturns in equity markets, increased equity volatility or reduced interest rates could result in an increase
in the valuation of the future policy benefit or policyholder account balance liabilities associated with such products,
which ultimately results in a reduction to net income.
• The amortization of DAC relating to variable products can fluctuate with changes in the performance of the underlying
separate accounts due to the impact on estimated gross profits.
The determination of the amount of realized and unrealized impairments and allowances established on the Company’s
investments is highly subjective and could materially impact results of operations or financial position.
The determination of the amount of impairments and allowances varies by investment type and is based upon the Company’s
evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments
are revised as conditions change and new information becomes available. There can be no assurance that the assumptions,
methodologies, and judgments employed in these evaluations and assessments will be accurate or sufficient in later periods. As
a result, additional impairments may need to be realized or allowances provided in future periods. Further, historical trends may
not be indicative of future impairments or allowances.
Additionally, the Company considers a wide range of factors about security issuers and uses its best judgment in evaluating the
cause of the decline in the fair value of the security and in assessing the prospects for recovery. Inherent in management’s evaluation
of the security are assumptions and estimates about the operations of the issuer, its future earnings potential, and the ability and
timeliness of the security’s recovery in fair value.
80
The Company could be forced to sell investments at a loss to meet policyholder withdrawals.
Many of the products offered by the Company allow policy and contract holders to withdraw their funds under defined
circumstances. The Company manages liabilities and attempts to align the investment portfolio so as to provide and maintain
sufficient liquidity to support anticipated withdrawal demands, contract benefits, and maturities. While the Company owns a
significant amount of liquid assets, a certain portion of investment assets are relatively illiquid. If the Company experiences
unanticipated withdrawal or surrender activity, the Company could exhaust all other sources of liquidity and be forced to liquidate
assets, perhaps on unfavorable terms. If the Company is forced to dispose of assets on unfavorable terms, it could have an adverse
effect on the Company’s results of operations and financial condition.
Regulatory Risks:
Insurance companies are highly regulated and are subject to numerous legal restrictions and regulations.
The Company is subject to government regulation in each of the states in which business is conducted. Such regulation is vested
in state agencies having broad administrative and, in some instances, discretionary power dealing with many aspects of the
Company’s business. This may include, among other things, premium rates and increases thereto, reserve requirements, marketing
practices, advertising, privacy, policy forms, reinsurance reserve requirements, acquisitions, mergers, and capital adequacy.
Government regulation of insurers is concerned primarily with the protection of policyholders and other customers rather than
shareholders. Interpretations of regulations by regulators may change, and statutes, regulations, and interpretations may be applied
with retroactive impact, particularly in areas such as accounting or reserve requirements.
The Company cannot predict whether or in what manner regulatory reforms will be enacted and, if so, whether the enacted reforms
will positively or negatively affect the Company or whether any effects will be material. The National Association of Insurance
Commissioners (NAIC) generally formulates and promulgates statutory-based insurance regulations. However, each state is
independent and must separately enact these financial regulations and guidelines. As such, insurers follow the interpretations and
legal approvals of their respective states of domicile.
Other types of regulation that could affect the Company include insurance company investment laws and regulations, state statutory
accounting practices, state escheatment practices, anti-trust laws, minimum solvency requirements, state securities laws, federal
privacy laws, insurable interest laws, federal money laundering laws, and anti-terrorism laws. Further, because the Company owns
and operates real property, state, federal, and local environmental laws could affect the Company. The Company cannot predict
what form any future changes in these or other areas of regulation affecting the insurance industry might take or what effect, if
any, such proposals might have on the Company if enacted into law.
The Company is also subject to various government regulations at the federal level. As a result of economic and market conditions
in recent years, the federal government has become increasingly more active in issuing and enforcing regulations. The
implementation of these legislative or regulatory requirements may make it more expensive for the Company to conduct its business,
may have a material adverse effect on the overall business climate, and could materially affect the profitability of the results of
operations and financial condition of financial institutions. The Company is uncertain as to all of the impacts that new legislation
will have and cannot provide assurance that it will not adversely affect its results of operations and financial condition.
New accounting rules or changes to existing accounting rules could negatively impact the financial results of the Company.
The Company is required to comply with GAAP, as promulgated by the FASB. GAAP is subject to constant review in an effort
to address emerging accounting issues and develop interpretative accounting guidance on a continual basis. The implementation
of new accounting guidance could result in substantial costs and or changes in assumptions or estimates, which could negatively
impact the results of operations for the Company. Accordingly, the Company can give no assurance that future changes to GAAP
will not have a negative impact on the Company.
In addition, the Company is required to comply with statutory accounting principles (SAP). SAP and various components of SAP,
such as statutory actuarial reserving methodology, are subject to constant review by the NAIC, NAIC task forces and committees,
as well as state insurance departments to address emerging issues and otherwise improve or modify financial reporting. Various
proposals are typically pending before committees and task forces of the NAIC. If enacted, some of these may negatively affect
the Company. The NAIC also typically works to reform state regulation in various areas, including reforms relating to life insurance
reserves and the accounting for such reserves. The Company cannot predict whether or in what manner reforms will be enacted
and, if so, whether the enacted reforms will positively or negatively affect the Company. Although states generally defer to the
interpretation of the insurance department of the state of domicile with regards to regulations and guidelines, neither the action of
the domiciliary state nor action of the NAIC is binding on any other state. Accordingly, a state could choose to follow a different
interpretation. The Company can give no assurance that future changes to SAP or components of SAP will not have a negative
impact on the Company.
81
Catastrophic Event Risk:
The Company is exposed to the risks of climate change, natural disasters, pandemics, terrorism, or other acts that could adversely
affect the Company’s operations.
While the Company has implemented risk management and contingency plans and taken preventive measures and other precautions,
no predictions of specific scenarios can be made nor can assurance be given that there are not scenarios that could have an adverse
effect on the Company. Climate change, a natural disaster, a pandemic, or an outbreak of an easily communicable disease could
adversely affect the mortality or morbidity experience of the Company or its reinsurers. A pandemic could also have an adverse
effect on lapses and surrenders of existing policies, as well as sales of new policies. In addition, a pandemic could result in large
areas being subject to quarantine, with the result that economic activity slows or ceases, adversely affecting the marketing or
administration of the Company’s business. These effects, in turn, could have an adverse financial effect on the Company. The
possible macroeconomic effects of climate change, natural disasters, or pandemics could also adversely affect the Company’s asset
portfolio, as well as many other variables.
Information Technology Risk:
The failure of the Company’s cybersecurity or other information system security controls or those of the Company's third-party
providers may result in the unauthorized disclosure of sensitive or confidential corporate or customer information. Such
failures could damage the Company's reputation and hinder its ability to conduct business. The Company's contingency
planning and disaster recovery programs may be insufficient to address unanticipated events. In addition, the Company's
reputation could be damaged by inaccurate presentations made in social media.
As part of the normal course of business, the Company uses computer systems to collect, process, and retain sensitive and confidential
corporate and customer information. In addition, the Company uses third-party vendors and cloud technology on a limited basis
for storage, processing, and data support of certain activities. The Company relies on commercial technologies and third parties
to maintain the security of that information. The Company's information systems are subject to computer viruses, malicious
software code, or other unauthorized computer-related actions. The Company is not aware of any material breach of cybersecurity,
administrative, or technical controls having occurred. However, preventive actions taken by the Company to reduce the risk of
cyber-incidents and protect the Company's information may be insufficient to prevent cyber-attacks or other security breaches.
Any security breach involving the misappropriation, loss, or other unauthorized disclosure of confidential information by the
Company could severely damage its reputation, expose it to an increase in the risk of litigation, disrupt its operations, cause
incurrence of significant technical, legal, and operating expenses, or otherwise harm its business.
The Company is highly dependent on its ability to access its computer systems to perform the necessary business functions, such
as processing premium payments, processing claim payments, administration of policy data, providing customer support, managing
its investment portfolio, and conducting financial reporting and analysis. Events such as natural disasters, pandemics, blackouts,
computer viruses, terrorist attacks, or cyber-attacks could result in system failures or outages that may cause the Company's
computer systems to become inaccessible to its employees and customers for an extended period of time. The Company's disaster
recovery program may be insufficient to deal with such an unanticipated event. This could result in an adverse impact to the
Company's ability to conduct business functions in a timely manner and could result in a failure to maintain the security and
confidentiality of sensitive data, including personal information of customers. This could also result in damage to the Company's
ability to conduct business, damage to the Company's reputation, result in substantial remediation costs, and subject the Company
to regulatory sanctions, legal claims, or other unidentified consequences.
While the Company has limited social media content, it recognizes that social media outlets are independent of the Company and
its security measures. Inaccurate presentations based upon incorrect information or assumptions could be distributed via social
media outlets and could harm the Company and its reputation.
Reinsurance Risks:
The Company’s reinsurers could fail to meet assumed obligations or be subject to adverse developments that could affect the
Company.
The Company follows the insurance practice of reinsuring a portion of the risks under the policies written by the Company, known
as ceding. The Company cedes significant amounts of insurance to other insurance companies through reinsurance. This reinsurance
makes the assuming reinsurer liable to the Company for the reinsured portion of the risk. However, reinsurance does not discharge
the Company from its primary obligation to pay policyholders for losses insured under the policies that are issued. Therefore, the
Company is subject to the credit risk of reinsurers and the failure of one or more of the Company’s reinsurers could negatively
impact the Company’s earnings and financial position.
82
The Company’s ability to compete is dependent on the availability of reinsurance, cost of reinsurance, or other substitute capital
market solutions.
Premium rates charged by the Company are based, in part, on the assumption that reinsurance will be available at a certain cost.
Under certain reinsurance agreements, the reinsurer may increase the rate it charges the Company for the reinsurance. Therefore,
if the cost of reinsurance were to increase for existing business, or if reinsurance were to become unavailable for new business,
or if alternatives to reinsurance were not available, the Company may be exposed to reduced profitability and cash flow strain or
may not be able to price new business at competitive rates.
Recently, access to reinsurance has become more costly for the Company, as well as the insurance industry in general. In recent
years, the number of life reinsurers has decreased as the reinsurance industry has consolidated. The decreased number of participants
in the life reinsurance market results in increased concentration risk for insurers, including the Company. If the reinsurance market
further contracts, the Company’s ability to continue to offer its products on terms favorable to the Company could be adversely
impacted.
83