KANSAS CITY LIFE INSURANCE COMPANY
2016 ANNUAL REPORT
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
Independent Auditors' Report...............................................................................................................................................
70
Management's Discussion and Analysis of Financial Condition and Results of Operations .................................................
71
Risk Factors ............................................................................................................................................................................
81
Financial Information
Amounts in thousands, except share data, security counts, claims counts, 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: 2016 - $2,438,718; 2015 - $2,486,338)
Equity securities available for sale, at fair value
(amortized cost: 2016 - $23,289; 2015 - $24,067)
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 loss
Treasury stock, at cost (2016 and 2015 - 8,813,266 shares)
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31
2016
2015
$
2,530,907
$
2,580,845
23,996
630,889
195,621
79,893
27,526
1,388
3,490,220
9,630
31,586
271,089
187,941
15,853
69,838
373,256
4,449,413
943,643
2,051,728
34,553
178,806
181,844
373,256
3,763,830
23,121
41,025
868,054
(5,316)
(241,301)
685,583
4,449,413
$
$
$
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
$
$
$
See accompanying Notes to Consolidated Financial Statements
3
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
2015
2014
2016
$
$
171,819
111,134
282,953
$
160,175
112,030
272,205
165,548
118,649
284,197
150,608
157,150
164,968
5,509
6,248
4,902
(563)
(57)
(620)
155,497
6,572
445,022
211,866
72,814
27,833
101,465
413,978
31,044
8,728
(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
22,316
$
29,226
$
(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
29,990
(288)
(1,960)
(10)
12,152
9,894
32,210
2.30
$
$
$
$
(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
$
$
$
$
See accompanying Notes to Consolidated Financial Statements
4
Kansas City Life Insurance Company
Consolidated Statements of Stockholders’ Equity
Year Ended December 31
2015
2014
2016
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 (2016, 2015, and 2014 - $1.08 per share)
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 shares acquired (2016 - 0 shares; 2015 - 1,142,351 shares; 2014 - 144,188
shares)
Cost of shares sold (2016 - 0 shares; 2015 - 560 shares; 2014 - 554 shares)
End of year
41,025
—
41,025
41,007
18
41,025
40,989
18
41,007
856,196
22,316
(10,458)
838,508
29,226
(11,538)
820,327
29,990
(11,809)
868,054
856,196
838,508
(15,210)
9,894
23,040
(38,250)
(5,316)
(15,210)
14,170
8,870
23,040
(241,301)
(182,917)
(176,284)
—
—
(58,392)
8
(6,641)
8
(241,301)
(241,301)
(182,917)
TOTAL STOCKHOLDERS’ EQUITY
$
685,583
$
663,831
$
742,759
See accompanying Notes to Consolidated Financial Statements
5
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
Net 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
Net cash provided (used)
Year Ended December 31
2015
2014
2016
$
22,316
$
29,226
$
29,990
4,051
5,478
(32,004)
27,833
(4,889)
10,893
14,243
(22,535)
3,825
(8,324)
20,887
(228,007)
(3)
(153,947)
(34,530)
(10,524)
(782)
279,854
118
112,152
2,042
12,026
383
(5,052)
(938)
(27,208)
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)
6
Kansas City Life Insurance Company
Consolidated Statements of Cash Flows (Continued)
FINANCING ACTIVITIES
Deposits on policyholder account balances
$
215,688
$
217,929
$
238,751
Year Ended December 31
2015
2014
2016
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 provided (used)
Increase (decrease) in cash
Cash at beginning of year
Cash at end of year
(205,372)
7,670
572
(10,458)
—
8,100
1,779
7,851
9,630
$
(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
See accompanying Notes to Consolidated Financial Statements
7
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. The consolidated entity (the Company) offers a diversified
portfolio of individual insurance, annuity, and group life and health products through its three life insurance companies. 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 non-insurance
subsidiaries that individually and collectively are not material. The terms "the Company," "we," "us," and "our" are used in these
consolidated financial statements to refer to Kansas City Life Insurance Company and its subsidiaries.
We have three reportable business segments, which are defined based on the nature of the products and services offered: Individual
Insurance, Group Insurance, and Old American. For additional information on our segments, please see Note 19. Segment
Information.
Basis of Presentation
The consolidated financial statements and the accompanying notes to the consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America (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.
Our financial statements include the following:
• Consolidated Balance Sheets
• Consolidated Statements of Comprehensive Income
• Consolidated Statements of Stockholders' Equity
• Consolidated Statements of Cash Flows
• Notes to Consolidated Financial Statements
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 our common stock. We purchased approximately 906,500 shares or 9% of the outstanding shares
valued at $52.50 per share for $47.6 million. We subsequently completed a 250-for-1 forward stock split for each one share of
our common stock (including each fractional share of such class of stock in excess of one share). The purpose of the transaction
was to allow us to deregister from the Securities and Exchange Commission (SEC) and to delist our common stock from the
NASDAQ Capital Market. These activities were effective as of December 16, 2015. Effective January 4, 2016, we began trading
on the OTCQX® Market. Please refer to www.kclife.com for more information on the specific transactions identified above.
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 invested assets, deferred acquisition costs (DAC), deferred income
taxes, value of business acquired (VOBA), deferred revenue liability (DRL), policyholder account balances, 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
Our 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. Fixed maturity and equity securities, which are
all classified as available for sale, are carried at fair value in the 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
8
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
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 other 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 are reported in accumulated other comprehensive income (loss). See Note 3 - Investments
for additional discussion of our 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 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 earnings and cash contributions or
distributions.
Policy loans are carried at the outstanding principal amount. Short-term investments are stated at cost and are adjusted for
amortization of premium and accrual of discount, as necessary.
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
We establish liabilities for amounts payable under insurance policies, including traditional life insurance, immediate annuities with
life contingencies, supplementary contracts with life contingencies, group life insurance, 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.
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.
9
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
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
2016
2015
$
638,231
$
628,274
273,285
32,127
263,437
34,674
Future policy benefits
$
943,643
$
926,385
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, we perform testing and analysis on our blocks of business to ensure the assumptions made remain viable.
We also periodically perform sensitivity testing on these blocks of business to ensure we maintain 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 2016, 2015, and
2014.
The following table provides detail about the composition of policyholder account balances at December 31.
Universal life insurance
Fixed deferred annuities
2016
2015
$
921,669
$
928,398
1,075,576
1,073,592
Immediate annuities and supplementary
contracts without life contingencies
54,483
54,136
Policyholder account balances
$ 2,051,728
$ 2,056,126
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, we review our 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
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 the Unlocking and Refinements in Estimates section below for additional information.
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, above.
DAC is 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,
the asset will be adjusted downward with the adjustment recorded as an expense in the current period.
10
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table provides information about DAC at December 31.
Balance at beginning of year
Capitalization of commissions and expenses
Gross amortization
Accrual of interest
Amortization due to realized investment (gains) losses
Change in DAC due to the change in unrealized investment gains
Balance at end of year
2016
2015
2014
$
267,936
$
249,195
$
256,386
32,004
(41,375)
13,542
(201)
(817)
271,089
$
37,714
(41,832)
13,484
(18)
9,393
$
267,936
$
36,170
(54,531)
13,643
(49)
(2,424)
249,195
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, above.
VOBA is 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 VOBA,
the asset will be adjusted downward with the adjustment recorded as an expense in the current period.
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 or 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
2016
2015
2014
$
$
24,283
(4,215)
1,591
(14)
1,445
$
24,655
(5,679)
1,795
(5)
3,517
$
23,090
$
24,283
$
28,542
(4,643)
1,938
(100)
(1,082)
24,655
Interest accrued on the VOBA of one block was at the rates of 4.21% on the interest sensitive life block and 5.25% on the traditional
life block, based upon the credited rates of the VOBA policies. The VOBA on a separate acquired block of business used a 7.00%
interest rate on the traditional life portion and a 5.40% interest rate on the interest sensitive portion, based upon rates appropriate
at the time of acquisition.
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 the recognition of revenue rather than expense. The DRL
could be impacted by unlocking and refinements in estimates, as discussed below.
11
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Unlocking and Refinements in Estimates
At least annually, we review 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. Key assumptions analyzed include net interest
income, net realized investments gains and losses, fees, surrender charges, expenses, and mortality gains and losses, net of
reinsurance. 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, VOBA, and DRL 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, VOBA, or DRL 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. In addition, unlocking adjustments may also impact other line items in the financial statements
such as change in reserves.
We may also consider refinements in estimates due to improved capabilities resulting from administrative or actuarial system
enhancements. We consider 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. In addition, we
had a $3.7 million reserve increase in 2016, a $0.3 million reserve decrease in 2015, and a $0.5 million decrease in 2014 related
to the impacts of unlocking.
2016:
2015:
2014:
Unlocking
Refinement in estimate
Unlocking
Refinement in estimate
Unlocking
Refinement in estimate
DAC
VOBA
DRL
Total
$
$
$
$
$
$
5,918
(82)
5,836
6,380
—
6,380
(1,723)
(1,566)
(3,289)
$
$
$
$
$
$
536
—
536
(862)
—
(862)
1,486
—
1,486
$
$
$
$
$
$
(1,153)
178
(975)
(2,344)
—
(2,344)
1,764
—
1,764
$
$
$
$
$
$
5,301
96
5,397
3,174
—
3,174
1,527
(1,566)
(39)
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 14 - Pensions and Other Postemployment Benefits for further details.
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 are derived from directly-
12
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
issued policies and contracts, as well as reinsurance assumed business. These revenues consist principally of contract charges,
which include maintenance charges, administrative fees, and mortality and expense charges.
We have a GMWB rider for certain direct variable annuity contracts that is considered to be a financial derivative and, as such, is
accounted for at fair value. We determine 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, we enter 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. We cede 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 our significant
reinsurers, along with additional information pertaining to reinsurance, please see Note 16 - 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.
In addition, we have two reinsurance assumed arrangements. We acquired a block of traditional life and universal life products
in 1997 through a 100% coinsurance and servicing arrangement. These assumed policies and contracts are accounted for in a
manner similar to that followed for direct business. We acquired a block of variable universal life insurance policies and variable
annuity contracts in 2013. We receive 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 our financial statements. The coinsurance portion of the
transaction, which is invested in our fixed funds, is included in future policy benefits. We record these fixed fund accounts as a
separate block under our general accounts. We receive fees on both the separate accounts and the fixed fund accounts.
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.
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, we 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
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table provides information about our insurance revenues, net of reinsurance, for the years ended December 31.
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
2016
2015
2014
$
$
114,852
84,100
27,034
56,967
282,953
$
$
104,599
83,013
29,017
55,576
272,205
$
$
107,696
88,181
30,468
57,852
284,197
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.
Realized Gains (Losses)
We realize investment gains and losses from several sources, including write-downs of investment securities and mortgage loans,
the change in the allowance for mortgage loan losses, and sales of investment securities and real estate.
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. We evaluate 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 Adopted
We adopted the following accounting pronouncements during 2016, with no material impact to our consolidated financial
statements.
In August 2014, the Financial Accounting Standards Board (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. We early-adopted this guidance during the second quarter of 2016.
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 was effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2015.
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 was effective for public entities for fiscal years and interim periods within
those fiscal years beginning after December 15, 2015.
14
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 was effective for interim and annual reporting periods beginning after December 15, 2015.
In May 2015, the FASB issued guidance targeted to improve disclosures related to short-duration contracts. Additional disclosures
are 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
was effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after
December 15, 2016.
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 was effective
for fiscal years beginning after December 15, 2015.
Accounting Pronouncements Issued, Not Yet Adopted
In May 2014, the 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. In March 2016, this guidance was updated for principal versus agent
considerations. This guidance was also updated in April 2016 to address performance obligations and licensing issues. In addition,
this guidance was updated in May 2016 for narrow-scope improvements and practical expedients. The FASB also issued technical
corrections and improvements to this guidance in December 2016. We are currently evaluating this guidance. As an insurance
enterprise, we have determined that our primary sources of revenue are excluded from this guidance, including insurance premiums,
contract charges, and most investment revenues. While we do have certain types of revenue that will be impacted, our adoption
of this guidance is not expected to have a material impact on our 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. We are currently
evaluating this guidance.
In February 2016, the FASB issued guidance regarding leases. This guidance includes a lessee model that will cause most leases
to be reported on the balance sheet. In addition, the guidance aligns existing GAAP pertaining to leases with the new revenue
recognition model that will be effective for periods beginning after December 15, 2017. This guidance is effective for fiscal years
beginning after December 15, 2018 and interim periods within those fiscal years. We are currently evaluating this guidance.
In June 2016, the FASB issued guidance regarding the measurement of credit losses on financial instruments. Under this guidance,
the incurred loss impairment methodology currently used under current GAAP for loans and other financial instruments will be
replaced by a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and
supportable information to inform credit loss estimates. Additional disclosures will be required to provide additional information
regarding significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting
standards of an organization's portfolio. This guidance is effective for fiscal years beginning after December 15, 2020 and interim
periods within those fiscal years. We are currently evaluating this guidance.
In August 2016, the FASB issued guidance regarding the presentation and classification of certain cash receipts and cash payments
in the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods
within those fiscal years. We are currently evaluating this guidance.
In November 2016, the FASB issued guidance regarding restricted cash. This guidance requires that the statement of cash flows
explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or
15
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
restricted cash equivalents. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods
within those fiscal years. We are currently evaluating this guidance.
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 us at this time or were not expected to have a
material impact to the consolidated financial statements.
3. Investments
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, 2016.
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
Amortized
Cost
Gross
Unrealized
Gains
Losses
$
148,468
$
5,246
$
19,796
25,868
194,132
506,218
201,416
234,280
200,124
564,868
239,719
1,946,625
41,969
147,384
94,062
14,546
2,438,718
23,289
515
2,973
8,734
20,445
7,880
12,630
9,928
16,431
13,132
80,446
2,563
17,546
1,122
125
110,536
1,386
Fair
Value
$
152,865
20,311
28,840
202,016
524,487
206,518
245,717
209,133
578,310
250,289
849
—
1
850
2,176
2,778
1,193
919
2,989
2,562
12,617
2,014,454
—
696
2,989
1,195
18,347
679
44,532
164,234
92,195
13,476
2,530,907
23,996
$ 2,462,007
$
111,922
$
19,026
$ 2,554,903
1 Federal agency securities are not backed by the full faith and credit of the U.S. Government.
16
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, 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.
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 issuers or borrowers may have the right to call or prepay obligations.
December 31, 2016
December 31, 2015
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Due in one year or less
$
177,007
$
180,934
$
115,294
$
117,145
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
751,986
1,020,233
372,488
102,458
14,546
788,759
1,043,340
394,254
110,144
13,476
735,559
1,117,415
349,789
150,844
17,437
779,402
1,126,585
378,861
161,204
17,648
Total
$ 2,438,718
$ 2,530,907
$ 2,486,338
$ 2,580,845
No material derivative financial instruments were held during December 31, 2016, 2015, or 2014.
17
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. A formal review document is prepared 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.
We consider 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 of the issuer;
Significant uncertainty regarding the issuer’s industry;
•
•
• Violation of financial covenants;
• Consideration of information or evidence that supports timely recovery;
• The intent and ability to hold a security until it recovers in value;
• Whether we intend to sell a debt security and whether it is more likely than not that we 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 we determine 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 our 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 credit
enhancement levels and recovery values do not provide sufficient protection to contractual principal and interest;
• The risk that fraudulent, inaccurate, or misleading information could be provided to our 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 our investments;
• The risk that new information obtained or changes in other facts and circumstances may lead us to change our 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 we 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
security is a collateralized obligation, such as a mortgage-backed or other asset-backed instrument, research is also conducted to
18
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
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.
We may selectively determine that we no longer intend to hold a specific issue to its maturity. If we make 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. Subsequently, we seek to obtain the best possible outcome available for this specific issue and record an investment
gain or loss at the disposal date.
A discounted future cash flow calculation 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. Such indications typically include below investment grade
ratings and significant unrealized losses for an extended period of time, among other factors. We identified 16 non-U.S. agency
mortgage-backed securities that were determined to have such indications at December 31, 2016. We identified 21 non-U.S.
agency mortgage-backed securities that were determined to have such indications at December 31, 2015. 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 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 our 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, we are 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, we 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
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, 2016.
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
Municipal securities
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
$
37,557
$
849
$
4
$
— $
37,561
$
180
37,737
91,106
31,575
35,985
21,914
121,552
46,917
349,049
16,948
4,943
9,851
418,528
11,430
—
849
2,054
600
745
199
2,989
2,479
9,066
696
64
1,195
11,870
679
41
45
2,976
37,984
6,953
5,165
—
1,038
54,116
—
44,190
—
98,351
—
1
1
122
2,178
448
720
—
83
3,551
—
2,925
—
6,477
—
221
37,782
94,082
69,559
42,938
27,079
121,552
47,955
403,165
16,948
49,133
9,851
516,879
11,430
849
1
850
2,176
2,778
1,193
919
2,989
2,562
12,617
696
2,989
1,195
18,347
679
$ 429,958
$
12,549
$
98,351
$
6,477
$ 528,309
$
19,026
1 Federal agency securities are not backed by the full faith and credit of the U.S. Government.
20
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.
The following table provides information regarding the number of fixed maturity and equity security issues with unrealized losses
at December 31.
Below cost for less than one year
Below cost for one year or more and less than three years
Below cost for three years or more
Total
2016
2015
160
20
8
188
179
19
9
207
We do not consider the unrealized losses related to these securities to be credit-related. The unrealized losses at December 31,
2016 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. Included in other investment securities are commercial mortgage-backed securities and asset-backed securities.
21
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table summarizes our investments in fixed maturity and equity securities available for sale with unrealized losses
at December 31, 2016.
Amortized
Cost
Fair
Value
Gross
Unrealized
Losses
Securities owned without realized impairment:
Unrealized losses of 10% or less
$
517,145
$
501,873
$
26,552
543,697
23,093
524,966
—
908
908
130
—
130
1,038
544,735
2,526
74
2,600
—
—
—
—
—
—
—
—
715
715
104
—
104
819
525,785
2,464
60
2,524
—
—
—
—
—
—
—
2,600
2,524
15,272
3,459
18,731
—
193
193
26
—
26
219
18,950
62
14
76
—
—
—
—
—
—
—
76
$
547,335
$
528,309
$
19,026
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
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table summarizes our 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
23
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table provides information on fixed maturity securities available for sale with gross unrealized losses by actual or
equivalent Standard & Poor’s rating at December 31, 2016.
AAA
AA
A
BBB
Total investment grade
BB
B and below
Total below investment grade
Fair
Value
%
of Total
Gross
Unrealized
Losses
%
of Total
$
27,051
87,400
135,619
234,305
484,375
14,359
18,145
32,504
5% $
17%
26%
46%
94%
3%
3%
6%
983
3,389
4,841
6,430
15,643
1,592
1,112
2,704
$
516,879
100% $
18,347
5%
19%
26%
35%
85%
9%
6%
15%
100%
The following table provides information on fixed maturity securities available for sale 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%
Our residential mortgage-backed securities, commercial mortgage-backed securities, and asset-backed securities that were rated
below investment grade were 34% of the below investment grade total at December 31, 2016. Our residential mortgage-backed
securities, commercial mortgage-backed securities, and asset-backed securities that were rated below investment grade were 41%
of the below investment grade total at December 31, 2015.
24
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.
Expected maturities may differ from these contractual maturities since borrowers may have the right to call or prepay obligations.
December 31, 2016
December 31, 2015
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fixed maturity securities available for sale:
Due in one year or less
$
3,727
$
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
43,474
344,940
114,661
506,802
226
9,851
113
516
9,525
6,997
17,151
1
1,195
$
— $
68,757
421,519
65,939
556,215
4,079
6,925
—
1,548
26,164
4,388
32,100
21
99
Total
$
516,879
$
18,347
$
567,219
$
32,220
We held one non-income producing security with a carrying value of $0.4 million at December 31, 2016 and $0.6 million at
December 31, 2015. This security was previously written down due to other-than-temporary impairment.
We did not hold securities of any corporation and its affiliates that exceeded 10% of stockholders' equity at December 31, 2016
or 2015.
The following table provides information regarding our other-than-temporary impairments for the years ended December 31.
Total other-than-temporary impairment losses
$
563
$
2,189
$
2,176
Net other-than-temporary impairment losses
recognized in earnings
620
2,481
1,533
2016
2015
2014
The differences represent the non-credit portion of current or prior other-than-temporary impairment that was recorded in other
comprehensive income (loss). Corporate private-labeled residential mortgage-backed and other securities had impairments
recorded in earnings of $0.1 million, $0.3 million, and $0.6 million for the years ended December 31, 2016, 2015, and 2014,
respectively. We determined the other-than-temporary impairments recorded in earnings based upon the present value of projected
future cash flows.
One equity security had an impairment recorded in earnings of $0.5 million during 2016. This is common stock of a company
within the oil exploration and production sector that went through a reorganization pursuant to Chapter 11 of the U.S. Bankruptcy
Code. As part of the reorganization, we received equity shares in exchange for this company's corporate obligation in 2015. We
recorded an impairment in earnings of $2.0 million during 2015 on this corporate obligation that resulted from 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 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.
25
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The Company 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, collateralized debt obligations, and other
collateralized obligations.
The following tables identify structured securities by credit ratings for all vintages owned at December 31.
Residential & Non-agency MBS:
Investment Grade
Below Investment Grade
Total residential & Non-agency MBS
Other structured securities:
Investment grade
Below investment grade
Total other structured securities
Total structured securities
Residential & Non-agency MBS:
Investment Grade
Below Investment Grade
Total residential & Non-agency MBS
Other structured securities:
Investment grade
Below investment grade
Total other structured securities
Total structured securities
Fair
Value
2016
Amortized
Cost
Unrealized
Gains (Losses)
$
9,949
$
9,610
$
39,932
49,881
61,810
13,450
75,260
37,758
47,368
63,092
15,317
78,409
$
125,141
$
125,777
$
339
2,174
2,513
(1,282)
(1,867)
(3,149)
(636)
Fair
Value
2015
Amortized
Cost
Unrealized
Gains (Losses)
$
$
12,351
70,966
83,317
56,601
14,714
71,315
$
11,952
66,932
78,884
57,416
15,585
73,001
$
154,632
$
151,885
$
399
4,034
4,433
(815)
(871)
(1,686)
2,747
The following table provides a reconciliation of credit losses recognized in earnings on fixed maturity securities 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 the beginning of the year
$
20,350
$
17,889
$
16,375
2016
2015
2014
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 securities sold (realized)
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 year
—
—
808
74
(7,179)
2,481
—
725
—
(21)
13,224
$
(20)
20,350
$
(19)
17,889
$
26
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table provides the net unrealized gains (losses) reported in accumulated other comprehensive income (loss) on our
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
2016
2015
2014
$
92,896
$
95,765
$
174,620
(14,603)
(22,235)
(470)
(19,454)
36,134
$
(17,030)
(19,219)
(454)
(20,670)
38,392
$
(28,495)
(26,778)
(879)
(41,462)
77,006
$
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
2016
2015
2014
$
109,799
$
116,713
$
121,137
1,093
30,694
18,738
5,558
130
295
1,023
31,662
17,059
5,774
8
177
1,037
37,452
11,756
5,848
4
535
166,307
(15,699)
150,608
$
172,416
(15,266)
157,150
$
177,769
(12,801)
164,968
$
Realized Gains (Losses)
The following table provides net realized investment gains (losses) by major category for the years ended December 31.
Fixed maturity securities
Equity securities
Real estate
Mortgage loans
Amortization of DAC, VOBA, and DRL
Net realized investment gains
2016
2015
2014
$
$
5,066
(190)
955
(769)
(173)
4,889
$
$
569
49
4,228
(1,041)
(38)
3,767
$
$
2,576
403
642
(105)
(147)
3,369
27
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
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
2016
2015
2014
$
1,343
4,641
1,084
7,068
(445)
(43)
(129)
(95)
(712)
(674)
(173)
$
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)
5,509
6,248
4,902
(563)
(57)
(2,189)
(2,176)
(292)
643
(620)
4,889
$
(2,481)
3,767
$
(1,533)
3,369
$
Proceeds from Sales of Investment Securities
The following table provides proceeds from the sale of fixed maturity and equity securities, excluding maturities and calls, for the
three years ended December 31.
Proceeds
$
42,603
$
39,954
$
38,527
2016
2015
2014
28
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Non-Cash Investing Activity
Our non-cash investing transactions in 2016 consisted of a $5.0 million bond exchange with an issuer. Non-cash investing
transactions in 2015 consisted of the receipt of $0.6 million common stock for a bond reorganization. Non-cash investing
transactions in 2014 included $5.8 million of mortgage loan foreclosures transferred to real estate, along with a buyout of a joint
venture partner that retired a mortgage loan of $2.7 million and the corresponding transfer of the $4.2 million book value to real
estate.
Mortgage Loans
Investments in mortgage loans totaled $630.9 million at December 31, 2016, compared to $590.0 million at December 31, 2015.
Our mortgage loans are secured by commercial real estate and are stated at cost, adjusted for premium amortization and discount
accretion, less an allowance for loan losses. We believe this allowance is at a level adequate to absorb estimated credit losses and
was $3.3 million at December 31, 2016 and $2.7 million at December 31, 2015. Our 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. We do not hold
mortgage loans to any single borrower that exceed 5% of stockholders' equity.
We had 18% of our total investments in commercial mortgage loans at December 31, 2016, compared to 17% at December 31,
2015. New commercial loans, including refinanced loans, totaled $171.3 million during 2016 and $164.0 million during 2015.
The level of new commercial mortgage loans in any year is influenced by market conditions, as we respond to changes in interest
rates, available spreads, borrower demand, and opportunities to acquire loans that meet our yield and quality thresholds.
In addition to the subject collateral underlying the mortgage, we typically require 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. We added 51 new loans to the portfolio during 2016, and 94% of these loans had some amount of recourse requirement. No
new loans were purchased from institutional lenders during 2016. The average loan-to-value ratio for the overall portfolio was
48% at December 31, 2016, up from 47% at December 31, 2015. 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. Additionally, we may receive fees when borrowers prepay
their mortgage loans. The average loan balance was $1.7 million at December 31, 2016 and $1.6 million at December 31, 2015.
We have certain mortgage loans that have an unamortized premium, totaling $0.2 million as of December 31, 2016, compared to
$0.4 million at December 31, 2015.
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
2016
2015
$
$
634,222
(3,333)
630,889
$
$
592,619
(2,659)
589,960
29
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table summarizes the amount of mortgage loans at December 31, 2016 and 2015, 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 2007
$
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2016
20,483
12,402
14,821
8,951
16,257
49,822
87,607
59,003
51,758
143,606
169,512
%
of Total
3% $
2%
2%
1%
3%
8%
14%
9%
8%
23%
27%
2015
36,237
17,722
21,440
11,544
38,002
81,357
104,775
62,808
57,100
161,634
—
%
of Total
6%
3%
4%
2%
6%
14%
18%
10%
10%
27%
—%
Principal outstanding
$
634,222
100% $
592,619
100%
The following table identifies mortgage loans by geographic location at December 31.
2016
%
of Total
2015
%
of Total
West south central
East north central
Pacific
South Atlantic
West north central
Middle Atlantic
Mountain
East south central
New England
$
119,443
19% $
112,093
97,635
95,555
89,961
75,492
64,396
59,557
29,251
2,932
15%
15%
14%
12%
10%
9%
5%
1%
71,178
129,108
71,599
84,210
30,141
67,526
26,764
—
19%
12%
22%
12%
14%
5%
11%
5%
—%
Principal outstanding
$
634,222
100% $
592,619
100%
The following table identifies the concentration of mortgage loans by state greater than 5% of total at December 31.
2016
%
of Total
2015
%
of Total
Texas
California
Minnesota
Ohio
New Jersey
Florida
All others
$
115,676
18% $
108,104
76,746
53,637
40,903
39,401
34,508
273,351
12%
9%
7%
6%
5%
43%
111,050
58,841
39,410
—
30,753
244,461
Principal outstanding
$
634,222
100% $
592,619
1 Concentration was less than 5% at December 31, 2015.
18%
19%
10%
7%
—% 1
5%
41%
100%
30
53%
30%
5%
12%
100%
%
of Total
3%
18%
22%
57%
100%
%
of Total
15%
5%
10%
22%
33%
15%
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table identifies mortgage loans by property type at December 31. The Other category consists principally of
apartments and retail properties.
2016
%
of Total
2015
%
of Total
Industrial
Office
Medical
Other
$
374,116
59% $
312,458
161,277
26,731
72,098
25%
4%
12%
181,912
28,042
70,207
Principal outstanding
$
634,222
100% $
592,619
The following table 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
2016
15,680
75,360
94,833
448,349
%
of Total
2015
2% $
18,560
12%
15%
71%
107,219
129,232
337,608
Principal outstanding
$
634,222
100% $
592,619
The following table identifies the commercial mortgage portfolio by current loan balance at December 31.
$5 million or greater
$
134,195
21% $
2016
%
of Total
$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
41,313
55,588
127,731
188,359
87,036
6%
9%
20%
30%
14%
2015
88,656
31,025
57,735
130,397
195,604
89,202
$
634,222
100% $
592,619
100%
The following table identifies the commercial mortgage portfolio by current loan balance as a percentage of the value at the time
of origination at December 31.
2016
%
of Total
2015
%
of Total
70% or greater
50% to 69%
Less than 50%
$
93,724
15% $
66,330
336,722
203,776
53%
32%
301,901
224,388
Principal outstanding
$
634,222
100% $
592,619
11%
51%
38%
100%
We diversify our commercial mortgage loan portfolio both geographically and by property type to reduce certain risks, including
local and regional physical and economic exposures. However, diversification may not always sufficiently mitigate these risks.
The concentration in the west south central, east north central, and Pacific regions exposes us to potential losses from an economic
downturn, certain catastrophes, and natural disasters that may affect areas of the regions. We would not expect an occurrence in
any of these areas to have a material adverse effect on our business, financial position, or financial statements. However, we 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
31
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
commercial mortgage lender, we customarily conduct environmental assessments prior to making commercial mortgage loans
secured by real estate and before taking title on real estate. Based on our environmental assessments, we believe that any compliance
costs associated with environmental laws and regulations or any remediation of affected properties would not have a material
adverse effect on our business, financial position, or financial statements. However, we cannot provide assurance that material
compliance costs will not be incurred.
We may refinance commercial mortgage loans prior to contractual maturity as a means of originating new loans that meet our
underwriting and pricing parameters. We refinanced eleven loans with outstanding balances of $17.5 million during the year ended
December 31, 2016. We refinanced 18 loans with outstanding balances of $22.8 million during the year ended December 31,
2015. None of these refinancings were the result of troubled debt restructuring.
In the normal course of business, we commit 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, we retain the commitment fee. For additional
information, please see Note 22 - Commitments, Contingent Liabilities, Guarantees, and Indemnifications.
Real Estate
The following table provides information concerning real estate investments by major category at December 31.
Land
Buildings
Less accumulated depreciation
Real estate, commercial
Real estate, joint ventures
Total
2016
2015
$
36,425
$
29,157
159,510
(31,196)
164,739
30,882
141,936
(36,291)
134,802
33,295
$
195,621
$
168,097
Investment real estate is depreciated on a straight-line basis over periods ranging from 3 years to 60 years. We had real estate
sales of $1.4 million during 2016, $20.0 million during 2015, and $2.9 million during 2014.
We had $30.9 million in real estate joint ventures at year-end 2016, compared with $33.3 million at year-end 2015. Included in
these joint ventures, we are the holder of all shares in three subsidiary real estate ventures with a combined carrying value of $20.3
million at year-end 2016 and $20.6 million at year-end 2015. Each of the three subsidiaries holds a 50% interest in these separate
joint ventures and all are based in Urbandale, Iowa. Based on information provided on January 26, 2017 by the Managing Member
of the underlying joint ventures and with consideration given to ongoing disputes between our subsidiaries and the Managing
Member, we have evaluated our interest in the joint venture to determine whether the underlying real estate was impaired and
correspondingly whether our investment in the joint venture had an other-than-temporary impairment to be recognized. In making
our evaluation, we considered, among other things, recent activity in the subject real estate, other real estate in the surrounding
area, and prospects for future activity. We have concluded that no other-than-temporary impairment had occurred as of December
31, 2016. The evaluation for other-than-temporary impairment involves significant judgment about the inputs into the valuation
model, including significant assumptions regarding the planned use of the real estate, current and projected values of the real estate,
the cost of future development and the associated cash flows expected, and the time period over which the real estate will be
developed. To the extent there are changes in the intended use or real estate absorption in the immediate area does not develop as
expected, the estimated value of our investment could materially change.
We had non-income producing commercial real estate, consisting of vacant properties and properties under development, of $8.5
million at December 31, 2016, compared to $8.7 million at December 31, 2015. In addition, the majority of our real estate joint
ventures are non-income producing.
32
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
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. We maximize the use of observable inputs and minimize
the use of unobservable inputs when developing fair value measurements.
We categorize our 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 our 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
We do not record mortgage, policy, or agent 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,
type, remaining maturity, likelihood of prepayment, and repricing characteristics. Mortgage loans are categorized as Level 3.
Policy loans are made to policyholders under terms defined in the policy. 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. We have 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.
33
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Guaranteed Minimum Withdrawal Benefits (GMWB) Included in Other Policyholder Funds
We offer 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
We utilize external third-party pricing services to determine the majority of our fair values on investment securities available for
sale. At both December 31, 2016 and 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. In the event
that the primary pricing service does not provide a price, we utilize the price provided by a second pricing service. We review
prices received from service providers for reasonableness and unusual fluctuations but generally accept the price identified from
the primary pricing service. In the event a price is not available from either third-party pricing service, we pursue external pricing
from brokers. Generally, we pursue and utilize only one broker quote per security. In doing so, we solicit only brokers which
have previously demonstrated knowledge and experience of the subject security. If a broker price is not available, we determine
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.
We utilize available market information, wherever possible, to identify inputs into the fair value determination, primarily prices
and spreads on comparable securities.
Each quarter, we evaluate 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. We corroborate and validate 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, we analyze the primary third-party pricing service's
methodologies and related inputs and also evaluate the various types of securities in our investment portfolio to determine an
appropriate fair value hierarchy. Finally, we also perform 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 limited or no observable market data exists are calculated using our 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. 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.
Our 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 us 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.
34
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Categories Reported at Fair Value
The following tables present the 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
2016
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
Separate account assets
Total
Percent of total
Liabilities:
Other policyholder funds
$
12,108
—
—
12,108
—
—
—
—
—
—
—
—
—
—
—
12,108
4,950
—
17,058
$
$
140,757
20,311
$
28,840
189,908
524,487
206,518
245,717
209,133
578,310
250,289
2,014,454
44,532
164,234
91,795
13,476
2,518,399
19,046
373,256
$ 2,910,701
1%
99%
—
—
—
—
—
—
—
—
—
—
—
—
—
400
—
400
—
—
400
$
152,865
20,311
28,840
202,016
524,487
206,518
245,717
209,133
578,310
250,289
2,014,454
44,532
164,234
92,195
13,476
2,530,907
23,996
373,256
$ 2,928,159
—%
100%
(2,158)
—
(2,158)
$
$
(2,158)
373,256
371,098
$
$
$
Guaranteed minimum withdrawal benefits $
Separate account liabilities
Total
$
—
—
—
$
$
—
373,256
373,256
1 Federal agency securities are not backed by the full faith and credit of the U.S. Government.
35
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
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
Separate account assets
Total
Percent of total
Liabilities:
$
9,704
$
146,421
$
—
—
9,704
—
—
—
—
—
—
—
—
—
—
—
9,704
5,166
—
21,197
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
372,924
$
14,870
$ 2,963,647
$
—
—
—
—
—
—
—
—
—
—
—
—
—
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
372,924
$ 2,979,094
1%
99%
—%
100%
Other policyholder funds
Guaranteed minimum withdrawal benefits
Separate account liabilities
Total
$
$
—
—
—
$
$
—
372,924
372,924
$
$
(2,778)
—
(2,778)
$
$
(2,778)
372,924
370,146
1 Federal agency securities are not backed by the full faith and credit of the U.S. Government.
36
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:
2016
Assets
Liabilities
Fixed maturity
securities available
for sale
GMWB
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
$
577
—
91
—
—
—
(268)
—
—
(2,778)
1,237
—
—
430
—
(1,047)
—
—
(2,158)
$
400
$
2015
Assets
Liabilities
Fixed maturity
securities available
for sale
$
759
$
(193)
306
—
—
—
(295)
—
—
$
577
$
GMWB
(1,094)
(1,488)
—
—
330
—
(526)
—
—
(2,778)
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
37
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
2014
Assets
Liabilities
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
Fixed maturity
securities available
for sale
$
1,433
$
(12)
(421)
—
—
—
(241)
—
—
$
759
$
GMWB
(4,703)
3,145
—
—
592
—
(128)
—
—
(1,094)
Depending upon the availability of Level 1 or Level 2 pricing, specific securities may transfer into or out of Level 3. We did not
have any transfers between any levels at December 31, 2016, 2015 or 2014.
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, 2016.
Embedded Derivative -
GMWB
Fair Value
$
(2,158) Actuarial cash flow
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
0.77%-1.32%
model
38
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 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. Our mortality, lapse, benefit utilization, and nonperformance risk adjustments are unobservable.
Increases in mortality, lapses and credit spreads used for nonperformance risk reduce the liability, while increases in benefit
utilization increase the liability.
Following are estimates of the impact from changes in unobservable inputs on the GMWB liability at December 31.
A 10% increase in the mortality assumption
A 10% decrease in the lapse assumption
A 10% increase in the benefit utilization
A 10 basis point increase in the credit spreads used for non-performance
2016
2015
Increase/(Decrease)
in millions
(0.1)
0.2
$
0.7
(0.3)
(0.1)
0.2
0.7
(0.3)
39
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following tables present a summary of fair value estimates for financial instruments at December 31. Assets and liabilities
that are not financial instruments are not included in this disclosure. The total of the fair value calculations presented below may
not be indicative of the value that can be obtained.
2016
Fair Value
Level 1
Level 2
Level 3
Total
Carrying
Value
Assets:
Investments:
Fixed maturity securities available for sale $
Equity securities available for sale
12,108
$ 2,518,399
$
4,950
19,046
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
—
—
37,156
—
—
—
—
—
—
—
—
373,256
—
—
373,256
—
400
—
636,801
79,893
—
—
$ 2,530,907
$ 2,530,907
23,996
636,801
79,893
37,156
373,256
23,996
630,889
79,893
37,156
373,256
1,056,759
1,056,759
1,075,576
53,167
—
(2,158)
53,167
373,256
(2,158)
54,483
373,256
(2,158)
2015
Fair Value
Level 1
Level 2
Level 3
Total
Carrying
Value
Assets:
Investments:
Fixed maturity securities available for sale $
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
9,704
5,166
—
—
30,325
—
—
—
—
—
$ 2,570,564
$
20,159
—
—
—
372,924
—
—
372,924
—
577
—
606,708
81,392
—
—
$ 2,580,845
$ 2,580,845
25,325
606,708
81,392
30,325
372,924
25,325
589,960
81,392
30,325
372,924
1,055,052
1,055,052
1,073,592
52,636
—
(2,778)
52,636
372,924
(2,778)
54,136
372,924
(2,778)
40
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
5. Financing Receivables
We have financing receivables with specific maturity dates that are recognized as assets in the Consolidated Balance Sheets.
The following table identifies financing receivables by classification amount at December 31.
Receivables:
Agent receivables, net
(allowance $660; 2015 - $1,197)
Investment-related financing receivables:
Mortgage loans, net
(allowance $3,333; 2015 - $2,659)
2016
2015
$
1,661
$
1,602
630,889
589,960
Total financing receivables
$
632,550
$
591,562
Agent Receivables
We have certain agent receivables that are classified as financing receivables. These receivables from agents are long-term in
nature and are specifically assessed for collectibility and are reduced by an allowance for doubtful accounts.
The following table details the gross receivables, allowance, and net receivables for the two types of agent receivables at December
31.
2016
2015
Gross
Receivables
Allowance
Net
Receivables
Gross
Receivables
Allowance
Net
Receivables
Agent specific loans
Other agent receivables
Total
$
$
988
1,333
2,321
$
$
346
314
660
$
$
642
1,019
1,661
$
$
959
1,840
2,799
$
$
314
883
1,197
$
$
645
957
1,602
The following table details the activity of the allowance for doubtful accounts on agent receivables at December 31. Any recoveries
are included as deductions.
Beginning of year
Additions
Deductions
End of year
2016
2015
$
$
1,197
$
210
(747)
660
$
2,003
128
(934)
1,197
Mortgage Loans
We classify our mortgage loan portfolio as long-term financing receivables. Mortgage loans are stated at cost, adjusted for
amortization of premium and accretion 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 placed on non-accrual status, we do not accrue interest income in the 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 we return the loan to active status and accrue income accordingly.
41
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
2016
2015
$
566,865
$
585,207
67,357
(3,333)
$
630,889
$
7,412
(2,659)
589,960
Generally, we consider our mortgage loans to be a portfolio segment. We consider our primary class to be property type. We
primarily use loan-to-value as our credit risk quality indicator but also monitor 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.
The following table presents an aging schedule for delinquent payments for both principal and interest by property type.
December 31, 2016
Industrial
Office
Medical
Other
Total
December 31, 2015
Industrial
Office
Medical
Other
Total
Book Value
30-59 Days
Amount of Payments Past Due
60-89 Days
> 90 Days
Total
$
$
$
$
— $
— $
— $
— $
—
4,922
—
4,922
$
—
75
—
75
$
—
75
—
75
$
—
600
—
600
$
— $
— $
— $
— $
—
5,064
—
5,064
$
—
74
—
74
—
—
—
—
—
—
$
— $
— $
—
—
750
—
750
—
—
74
—
74
There was one mortgage loan that was over 90 days past due and in the process of foreclosure at December 31, 2016. 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. There were no foreclosures in 2015. We had no troubled loans that were restructured or modified in 2016 or
2015.
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
2016
2015
2,659
$
1,914
674
—
745
—
3,333
$
2,659
$
$
42
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
We increased our allowance for mortgage loan losses $0.7 million in 2016, largely due to the $40.9 million increase in the mortgage
loan portfolio. We increased our allowance for mortgage loan losses $0.7 million in 2015, largely the result of our view of credit
trends under the current economic conditions. We review the portfolio's risk profile and expected ongoing performance at least
quarterly.
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, we establish the allowance for loan losses using the collectively evaluated impairment
methodology at an overall portfolio level and then specifically identify an allowance for loan losses on loans that contain elevated
risk profiles. If we determine through our evaluation that a loan has an elevated specific risk profile, we then individually assess
the loan’s risk profile and may assign 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 we have mortgage loans;
• Analysis of industry historical loss and delinquency experience;
• Other factors that we may perceive as important or critical given our portfolio; and
• Analysis of our 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.
We have not acquired any mortgage loans with deteriorated credit quality during the years presented.
As part of our 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 our assessment of a borrower's ability 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 us;
• 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 we will not obtain all
of the contractual payments.
To the extent our review and evaluation 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 recorded at 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 we have the ability and intent to manage these properties on an ongoing
basis.
43
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
6. Variable Interest Entities (VIEs)
We invest in certain affordable housing and real estate joint ventures. These VIEs 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 these joint ventures are equity interests in partnerships or limited liability companies that may or may
not participate in profits or residual value. Our 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. We amortize the initial cost of the investment in proportion to the tax credits and other tax benefits received
and recognize the net investment performance in the Consolidated Statements of Comprehensive Income as a component of income
tax expense. The tax credits reduce tax expense.
The following table provides information regarding our VIEs for the years ended December 31.
Federal income tax credits realized
Amortization
2016
2015
2014
$
$
2,752
1,543
$
2,752
1,232
2,752
1,120
Our 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. We evaluate 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.
Investments in the affordable housing and real estate joint ventures are interests that absorb portions of the VIE's expected losses.
These investments also receive portions of expected residual returns of the VIE's net assets exclusive of variable interests. We
make an assessment of whether we are the primary beneficiary of a VIE at the time of the initial investment and on an ongoing
basis thereafter. We consider 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 we have 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 us 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 we share in the VIE's expected losses and residual
returns.
The following table presents the carrying amount and maximum exposure to loss relating to VIEs for which we hold a variable
interest, but are not the primary beneficiary, and which had not been consolidated at December 31, 2016 and December 31, 2015.
The table includes investments in five real estate joint ventures and 19 affordable housing real estate joint ventures at December 31,
2016 and investments in five real estate joint ventures and 22 affordable housing real estate joint ventures at December 31, 2015.
Real estate joint ventures
Affordable housing real estate joint ventures
Total
2016
2015
Carrying
Amount
Maximum
Exposure
to Loss
Carrying
Amount
Maximum
Exposure
to Loss
$
$
21,098
9,784
30,882
$
$
21,098
34,215
55,313
$
$
21,269
11,542
32,811
$
$
21,269
51,686
72,955
The maximum exposure to loss relating to the real estate joint ventures and affordable housing real estate joint ventures 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. 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.
44
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
At December 31, 2016 and December 31, 2015, we had no equity commitments outstanding to the real estate joint venture VIEs.
We have 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, we are unable to quantify the amount of these contingent
commitments.
In addition, the maximum exposure to loss on affordable housing joint ventures at December 31, 2016 included $14.6 million of
losses which could be realized if the tax credits received by the VIEs were recaptured, compared to $28.6 million at December 31,
2015. Recapture events would cause us to reverse some or all of the benefit previously recognized by us 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. Guarantees from the managing member or managing partner in the VIE, insurance contracts,
or changes in the residual value accruing to our interests in the VIE may mitigate the potential exposure due to recapture.
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 following
table provides information at December 31.
Land
Home office complex
Furniture and equipment
Accumulated depreciation
Property and equipment
2016
2015
$
766
$
21,988
41,237
63,991
(48,138)
$
15,853
$
766
21,518
42,183
64,467
(47,887)
16,580
Depreciation expense totaled $1.7 million during 2016, $1.6 million during 2015, and $1.7 million during 2014.
8. Separate Accounts
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 the net asset value 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 from separate accounts consist principally of contract charges, which include maintenance
charges, administrative fees, and mortality and expense charges.
The total separate account assets were $373.3 million at December 31, 2016 and $372.9 million at December 31, 2015. Variable
universal life and variable annuity assets comprised 28% and 72% of this amount in 2016 compared to 27% and 73% of this amount
in 2015.
The following table provides a reconciliation of activity within separate account liabilities at December 31.
Balance at beginning of year
$
372,924
$
406,501
$
393,416
2016
2015
2014
Deposits on variable policyholder contracts
Transfers to general account
Investment performance
Policyholder benefits and withdrawals
Contract charges
Balance at end of year
23,344
(3,880)
28,489
(34,991)
(12,630)
373,256
$
32,306
(5,726)
(13,720)
(33,083)
(13,354)
372,924
$
47,308
(5,859)
24,314
(39,177)
(13,501)
406,501
$
45
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
We have 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 $116.5 million at December 31, 2016. The fair value
of the separate accounts with the GMWB rider was $118.0 million at December 31, 2015. The GMWB guarantee liability was
$(2.2) million at December 31, 2016 and $(2.8) million at December 31, 2015. 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.
We have two blocks of variable universal life policies and variable annuity contracts from which we receive fees. The fees are
based upon both specific transactions and the fund value of the blocks of policies. We have a direct block of ongoing business
identified in the Consolidated Balance Sheets as separate account assets, totaling $373.3 million at December 31, 2016 and $372.9
million at December 31, 2015, and corresponding separate account liabilities of an equal amount. The fixed-rate funds for these
policies are included in our general account as Future Policy Benefits. The Future Policy Benefits for the direct block approximated
$0.4 million at December 31, 2016 and $0.5 million at December 31, 2015.
In addition, we have an assumed closed block of business that totaled $295.7 million at December 31, 2016 and $292.4 million at
December 31, 2015. As required under modified coinsurance transaction accounting, the assumed separate account fund balances
are not recorded as separate accounts on our consolidated financial statements. Rather, the assumed fixed-rate funds for these
policies are included in our general account as Future Policy Benefits. The Future Policy Benefits for the assumed block
approximated $0.6 million at both December 31, 2016 and December 31, 2015.
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.
Separate account balances for variable annuity contracts were $268.7 million at December 31, 2016 and $270.7 million at
December 31, 2015. The total reserve held for variable annuity GMDB was $0.1 million at December 31, 2016 and $0.1 million
at December 31, 2015. 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, 2016 and 2015 is provided below:
2016
Net
Amount
at Risk
Separate
Account
Balance
Weighted
Average
Attained
Age
Separate
Account
Balance
2015
Net
Amount
at Risk
Weighted
Average
Attained
Age
Return of net deposits
$ 211,861
$
2,122
60.7
$ 211,281
$
3,644
60.2
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
8,046
431
68.5
8,161
6,977
66
67.4
7,528
758
146
41,840
$ 268,724
$
5,303
7,922
62.7
61.4
43,686
6,419
$ 270,656
$
10,967
67.5
67.7
62.2
60.9
46
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
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
2016
2015
$
2,345
$
19,078
81,117
14,552
128,489
23,143
3,171
19,670
85,346
12,039
127,968
22,462
$
268,724
$
270,656
9. Short-Duration Contracts
During 2016, we adopted FASB ASU No. 2015-09 Disclosures about Short-Duration Contracts. Presented below are the required
disclosures that we have determined to be material.
Incurred-but-not-reported liabilities for the group long-term disability product that were included in the liability for unpaid claims
and claim adjustment expenses, net of reinsurance, totaled $0.6 million at December 31, 2016. These liabilities were calculated
by the reinsurers of the various blocks of group long-term disability business, using percent of premium methodologies with
varying factors. Claim frequencies were calculated for the long-term disability product using information that includes paid and
pending claims at the claimant level. Thus, frequency is measured by individual claimant. Claims that are counted in a particular
year as a liability but do not result in a liability in future years are not included once the claim is settled. There have been no
significant changes to the methodologies for calculating claim frequencies, incurred-but-not-reported liabilities, or any other unpaid
claims liabilities for the long-term disability product.
The liabilities in the following table for group long-term disability claims involve present value of future benefits calculations.
The carrying amount of liabilities at December 31, 2016 was $3.7 million, consisting of an undiscounted amount of $4.6 million
and an aggregated discount amount deducted of $0.9 million. Discount rates ranged from 3.60% to 6.00% for the various blocks
of group long-term disability business included in the totals.
The following table provides incurred claims and allocated claim adjustment expenses, net of reinsurance, for the group long-term
disability product at December 31, 2016. The amounts for 2015 and earlier are unaudited.
Year Incurred
2012
2013
2014
2015
2016
For the Years Ended December 31,
Total of
Incurred-but-
Not-Reported
Liabilities Plus
Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
528
137
177
223
164
—
—
—
—
597
2012
2013
2014
2015
2016
$
1,132
$
1,087
$
806
$
999
836
868
993
815
955
989
$
1,116
$
838
799
918
1,694
5,365
Total
$
47
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table provides cumulative paid claims and allocated claim adjustment expenses, net of reinsurance, for the group
long-term disability product at December 31, 2016. The amounts for 2015 and earlier are unaudited.
Year Incurred
2012
2013
2014
2015
2016
For the Years Ended December 31,
$
91
$
$
373
91
$
499
336
71
2012
2013
2014
2015
2016
605
449
276
100
Total
All outstanding liabilities before 2012, net of reinsurance
Liabilities for claims and claim adjustment expenses, net of reinsurance
$
$
$
$
675
501
411
390
164
2,141
1,422
4,646
The following table provides a reconciliation of incurred and paid claims development information to the aggregate carrying
amount of the liability for unpaid claims and claim adjustment expenses at December 31, 2016. Included in other short-duration
contracts are group life, group short-term disability, group dental, group vision, and individual accident and health for the Individual
and Old American segments, none of which are individually significant.
Net outstanding liabilities:
Group long-term disability
Other short-duration contracts
$
Liabilities for unpaid claims and claim adjustment
expenses, net of reinsurance
Reinsurance recoverable on unpaid claims:
Group long-term disability
Other short-duration contracts
Total reinsurance recoverable on unpaid claims
Insurance lines other than short-duration
Unallocated claims adjustment expenses
Impact of discounting
Other
4,646
4,051
8,697
26,554
6,595
33,149
26,300
—
(8,123)
—
18,177
Total gross liability for unpaid claims and claim
adjustment expenses
$
60,023
The following table provides the historical average annual percentage payout of incurred claims by age, net of reinsurance, at
December 31, 2016.
Group long-term disability
9.68%
27.92%
13.93%
7.85%
6.26%
1
2
Years
3
4
5
48
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
10. Unpaid Claims Liability
Disclosures for unpaid claims liabilities were expanded in 2016, resulting from our adoption of FASB ASU No. 2015-09 Disclosures
about Short-Duration Contracts.
The liability for unpaid claims is included with Policy and Contract Claims and Future Policy Benefits in the Consolidated Balance
Sheets. Claim adjustment expenditures are expensed as incurred and were not material in any year presented.
The following tables present activity in the accident and health portion of the unpaid claims liability for the Individual Insurance,
Group Insurance, and Old American segments. Classified as policy and contract claims, but excluded from these tables, are
amounts recorded for group life, individual life, and deferred annuities. The amounts for 2015 and earlier are unaudited.
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
$
Individual Insurance Segment
2016
2015
2014
$
995
(595)
400
$
1,276
(761)
515
1,314
(690)
624
65
5
70
36
94
130
340
445
785
$
93
(36)
57
56
116
172
400
595
995
128
(24)
104
78
135
213
515
761
$
1,276
1 The incurred benefits related to prior years’ unpaid accident and health claims reflect the change in these liabilities.
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
$
Group Insurance Segment
2016
2015
2014
$
26,045
(20,142)
5,903
$
25,345
(19,369)
5,976
24,057
(18,502)
5,555
26,069
(503)
25,566
22,264
3,035
25,299
6,170
19,850
26,020
$
26,067
(356)
25,711
22,827
2,957
25,784
5,903
20,142
26,045
$
26,803
(7)
26,796
23,243
3,132
26,375
5,976
19,369
25,345
1 The incurred benefits related to prior years’ unpaid accident and health claims reflect the change in these liabilities.
49
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Old American Segment
2016
2015
2014
Gross liability at beginning of year
$
Less reinsurance recoverable
Net liability at beginning of year
Incurred benefits related to:
$
6,132
(6,054)
78
$
8,070
(7,992)
78
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
128
(64)
64
49
12
61
81
113
(58)
55
37
18
55
78
5,260
5,341
$
6,054
6,132
$
7,992
8,070
$
1 The incurred benefits related to prior years’ unpaid accident and health claims reflect the change in these liabilities.
The following table presents the reconciliation of amounts in the above tables to Policy and Contract Claims and claim reserves
that are included in Future Policy Benefits as presented in the Consolidated Balance Sheets. The amounts for 2015 and earlier
are unaudited.
2016
2015
2014
Individual Insurance Segment:
Individual accident and health
$
785
$
995
$
Individual life
Deferred annuity
Subtotal
Group Insurance Segment:
Group accident and health
Group life
Subtotal
Old American Segment:
Individual accident and health
Individual life
Subtotal
Total
16,624
3,221
20,630
26,020
1,671
27,691
5,341
6,361
11,702
20,936
2,310
24,241
26,045
1,962
28,007
6,132
6,524
12,656
$
60,023
$
64,904
$
65,557
50
8,517
(8,375)
142
106
(130)
(24)
31
9
40
78
1,276
17,856
3,628
22,760
25,345
2,550
27,895
8,070
6,832
14,902
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
11. Participating Policies
We have 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. These insurance contracts were directly issued by the Company
or were acquired through the purchase of participating blocks of business, largely through reinsurance assumption transactions.
Participating business approximated 8% of total statutory premiums in 2016, compared to 9% in 2015. Assumed participating
business accounted for 99% of total participating statutory premiums in both 2016 and 2015. Participating business equaled 11%
of total life insurance in force at December 31, 2016, compared to 12% at December 31, 2015. Assumed participating business
accounted for 97% of total participating life insurance in force at both December 31, 2016 and December 31, 2015.
The amount of dividends to be paid is determined annually by our 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.
12. Debt
We had no notes payable at December 31, 2016 or December 31, 2015.
As a member of the Federal Home Loan Bank of Des Moines (FHLB) with a capital investment of $4.8 million at December 31,
2016, we have the ability to borrow on a collateralized basis from the FHLB. We received an insignificant amount of dividends
on the capital investment in 2016, 2015, and 2014.
We have unsecured revolving lines of credit with two major commercial banks. The lines available totaled $70.0 million at
December 31, 2016 and December 31, 2015 with no balances outstanding. The lines of credit are at variable interest rates based
upon short-term indices, and they will mature in June of 2017. We anticipate renewing these lines as they come due.
13. 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
2016
2015
2014
$
$
5,069
3,659
8,728
$
$
9,048
3,922
12,970
$
$
8,065
4,929
12,994
The following table provides information about taxes paid for the years ended December 31.
2016
2015
2014
Cash paid for income taxes
$
4,933
$
5,754
$
8,756
The following table provides a reconciliation of the federal income tax rate to our effective income tax rate for the years ended
December 31.
Federal income tax rate
Tax credits, net of equity adjustment
Permanent differences and other
Effective income tax rate
2016
2015
2014
35 %
(5)%
(2)%
28 %
35 %
(4)%
— %
31 %
35 %
(4)%
(1)%
30 %
51
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
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 DAC, 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
2016
2015
$
18,327
18,760
6,725
43,812
6,431
32,476
60,216
8,081
4,797
—
21,257
31,293
—
52,550
5,200
33,482
59,533
8,499
4,970
69
112,001
111,753
68,189
(1,937)
66,252
$
59,203
(529)
58,674
$
$
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 our 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 we will realize the benefit
of our deferred taxes.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. In general,
we are no longer subject to U.S. federal, state, or local income tax examinations by tax authorities for years prior to 2013. We are
not currently under examination by the Internal Revenue Service (IRS).
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 (reductions) for tax positions of prior years
End of year
2016
2015
$
$
535
$
—
(535)
— $
22
94
419
535
Our policy is to recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense. The Company
recognized $0.1 million tax benefit related to tax penalty and interest expense in 2016. The Company recognized no tax penalty
and interest expense in and 2015 and $0.1 million tax penalty and interest expense in 2014.
We had no material uncertain tax positions at December 31, 2016 or December 31, 2015.
52
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Income tax expense is recorded in various places in our financial statements, as detailed below, for the years ended December 31.
Income tax expense
Stockholders’ equity:
Related to:
2016
2015
2014
$
8,728
$
12,970
$
12,994
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
(1,004)
850
(1,056)
(6)
6,543
Total income tax expense (benefit) included in financial statements $
14,055
$
(27,600)
4,013
2,646
149
196
(7,626)
$
17,568
(530)
(3,730)
(130)
(8,400)
17,772
14. Pensions and Other Postemployment Benefits (OPEB)
We have pension and other postemployment benefit plans covering substantially all of our 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 U.S. Treasury bond rate for November of each year or 5.50%.
The Plan credits interest to eligible participants at the greater of 5.50% or the 30-year U.S. Treasury Rate as defined under the
Plan. During 2016, the IRS mandated that qualified pension plans adopt one of three interest crediting methodologies. The Plan
was amended effective January 1, 2017 to change its interest crediting rate to be the greater of 5.00% or the 30-year U.S. Treasury
Rate.
In September 2016, the Plan was amended to allow for a one-time payment of benefits to certain qualified participants. Benefits
in the form of cash lump sum payments or rollovers of lump sum benefits to qualified financial institutions were elected by certain
participants. Total benefits paid under this one-time offer equaled $2.3 million or 1.60% of the projected benefit obligation as of
December 31, 2015 and were not considered to be a significant event.
The benefits expected to be paid in each year from 2017 through 2021 are as follows: $11.6 million in 2017; $10.7 million in 2018;
$9.8 million in 2019; $8.8 million in 2020; and $8.8 million in 2021. The aggregate benefits expected to be paid in the five years
from 2022 through 2026 are $43.4 million. The expected benefits to be paid are based on the same assumptions used to measure
the Company’s benefit obligation at December 31, 2016 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 2017 contribution for the plan
has not been determined.
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
2016
2015
41%
30%
28%
1%
Target
Allocation
33% - 43%
23% - 33%
26% - 42%
0% - 2%
38%
29%
31%
2%
53
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Certain of our 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 45 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 2017.
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 rate used to determine the benefit obligation was 3.69% for pension benefits and was 4.02% for
postemployment benefits. The discount rates were determined by reference to the Citigroup Pension Liability Yield Curve on
December 31, 2016. 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.
We adopted the updated mortality tables issued by the Society of Actuaries during 2015. These tables 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 $2.2 million in the Plan's benefit
obligation. These same tables were used during 2016.
The postemployment medical plans for eligible employees and their dependents are contributory with contributions adjusted
annually. The benefits expected to be paid in each year from 2017 through 2021 are as follows: $0.8 million in 2017; $0.8 million
in 2018; $0.9 million in 2019; $0.9 million in 2020; and $1.0 million in 2021. The aggregate benefits expected to be paid in the
five years from 2022 through 2026 are $5.8 million. The expected benefits to be paid are based on the same assumptions used to
measure the Company’s benefit obligation at December 31, 2016. Contributions to the plan in 2016 were $0.5 million. The 2017
contribution for the plan is estimated to be $0.8 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 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 our 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 were $0.2 million in
2016, $0.1 million in 2015, and $0.1 million in 2014. Non-contributory deferred compensation plans for eligible agents based
upon earned first year commissions are also offered. Contributions to these plans were $0.2 million in 2016, $0.3 million in 2015,
and $0.3 million in 2014.
Savings plans for eligible employees and agents match employee and agent contributions up to 8.00% of salary and 2.50% of
agents’ prior year paid commissions. Contributions to the plans were $2.1 million in 2016, 2015, and 2014. We may contribute
54
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
an additional profit sharing amount up to 4% of salary for eligible employees, depending upon corporate profits. The Company
did not make a profit sharing contribution in 2016 or 2015.
During 2015, we terminated our 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.
We recognize the funded status of our defined benefit pension and postemployment plans, measured as the difference between
plan assets at fair value and the projected benefit obligation, in 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.
The following tables provide information regarding pension benefits and other benefits for the years ended December 31.
Pension Benefits
OPEB
2016
2015
2016
2015
Change in projected benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Plan participants' contributions
Plan changes
Actuarial gain
Benefits paid
Benefit obligation at end of year
$
$
144,395
—
5,333
—
(1,538)
(1,504)
(12,824)
133,862
$
$
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 $
130,858
$
10,231
—
6,028
(12,824)
134,293
$
$
Funded status at end of year
$
(431)
157,713
—
5,424
—
—
(8,860)
(9,882)
144,395
137,987
(3,275)
—
6,028
(9,882)
130,858
13,537
$
$
$
$
$
34,616
518
1,452
496
—
(13,055)
(967)
23,060
$
$
— $
—
496
471
(967)
— $
36,456
686
1,402
512
—
(3,168)
(1,272)
34,616
—
—
512
760
(1,272)
—
23,060
$
34,616
Pension Benefits
OPEB
2016
2015
2016
2015
Amounts recognized in accumulated other
comprehensive income (loss):
Net loss (gain)
Prior service credit
Total accumulated other comprehensive
income (loss)
$
$
75,108
(1,538)
73,570
$
$
80,090
—
80,090
$
$
$
(8,877)
(925)
4,274
(1,901)
(9,802)
$
2,373
55
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Pension Benefits
OPEB
2016
2015
2016
2015
Other changes in plan assets and benefit
obligations recognized in other
comprehensive income (loss):
Unrecognized actuarial net (gain) loss
$
Unrecognized prior service credit
Amortization of net loss
Amortization of prior service credit
Total (gain) loss recognized in other
comprehensive income (loss)
(2,333)
(1,538)
(2,649)
—
$
4,334
$
—
(2,400)
—
$
(13,055)
—
(96)
976
(3,168)
—
(471)
1,146
$
(6,520)
$
1,934
$
(12,175)
$
(2,493)
Pension Benefits
OPEB
2016
2015
2016
2015
Plans with underfunded accumulated benefit
obligation:
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
$
133,862
$
144,395
$
133,862
134,293
144,395
130,858
$
—
—
—
—
—
—
Weighted average assumptions used to
determine benefit obligations at December 31:
Discount rate
3.69%
3.84%
4.02%
4.26%
Weighted average assumptions used to
determine net periodic benefit cost for years
ended December 31:
Discount rate
Expected return on plan assets
3.84%
7.50%
3.57%
7.50%
4.26%
—
3.90%
—
The following table presents the fair value of each major category of pension plan assets at December 31.
Fixed maturity securities:
United States Government
Industrial and public utility
Investment funds:
Mutual funds
Hedge fund
Collective trust
Limited partnerships
Other invested assets
Cash and cash equivalents
Receivables
2016
2015
$
666
$
16,050
44,548
18,679
42,995
10,443
14
723
178
2,071
18,697
40,292
18,877
38,295
9,992
32
2,379
245
Fair value of assets at end of year
134,296
130,880
Liabilities:
Accrued liabilities
Total liabilities
3
3
22
22
Fair value of net plan assets at end of year $
134,293
$
130,858
56
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.
Level 1
Level 2
Level 3
Total
2016
Fixed maturity securities:
United States Government
Industrial and public utility
Mutual funds
Other invested assets
Total assets in the fair value hierarchy
Investments measured at net asset value: 1
Hedge fund
Collective trust
Limited partnerships
$
— $
666
$
— $
—
44,548
—
44,548
16,050
—
—
16,716
—
—
14
14
Investments at fair value
$
44,548
$
16,716
$
14
$
666
16,050
44,548
14
61,278
18,679
42,995
10,443
133,395
Fixed maturity securities:
United States Government
Industrial and public utility
Mutual funds
Other invested assets
Total assets in the fair value hierarchy
Investments measured at net asset value: 1
Hedge fund
Collective trust
Limited partnerships
Investments at fair value
Level 1
Level 2
Level 3
Total
2015
$
— $
2,071
$
— $
—
40,292
—
40,292
18,697
—
—
20,768
—
—
32
32
2,071
18,697
40,292
32
61,092
18,877
38,295
9,992
$
40,292
$
20,768
$
32
$
128,256
1 These investments are valued based on net asset value per unit. These values are provided by the fund as a practical expedient
and have not been classified in the fair value hierarchy.
The following table discloses the changes in Level 3 pension plan assets measured at fair value on a recurring basis for the years
ended December 31.
Beginning balance
Losses realized and unrealized
Ending balance
2016
2015
$
$
32
(18)
14
$
$
50
(18)
32
57
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 credit
Net periodic benefit cost (credit)
Total recognized in other
comprehensive income (loss)
Total recognized in net periodic
benefit cost (credit) and other
comprehensive income (loss)
Pension Benefits
2015
2016
2014
2016
OPEB
2015
$
— $
— $
— $
518
$
686
$
5,333
(9,403)
2,649
—
(1,421)
5,424
(9,919)
2,400
—
(2,095)
6,202
(10,322)
1,718
—
(2,402)
1,452
—
96
(976)
1,090
1,402
—
471
(1,146)
1,413
2014
611
1,499
—
87
(1,146)
1,051
(6,520)
1,934
18,915
(12,175)
(2,493)
5,086
$
(7,941)
$
(161)
$
16,513
$
(11,085)
$
(1,080)
$
6,137
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 2017.
Actuarial net loss (gain)
Prior service credit
Pension
Benefits
$
2,638
$
(66)
OPEB
(833)
(825)
The assumed growth rate of health care costs has a significant effect on the benefit amounts reported, as the following table
demonstrates.
One Percentage Point
Change in the Growth Rate
Increase
Decrease
Service and interest cost components
$
224
$
Postemployment benefit obligation
3,597
(178)
(2,911)
For measurement purposes, the annual increase in the per capita cost of covered health care benefits was assumed to be 7.50%,
decreasing gradually to 5.00% in 2027 and thereafter.
58
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
15. Share-Based Payment
We have an omnibus incentive plan that includes a long-term incentive benefit for senior management. The plan design includes
a cash award to participants that may be paid, in part, based on the increase in the share price of our 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 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, 2016.
Defined
Measurement
Period
2014-2016
2015-2017
2016-2018
2017-2019*
Number
of Units
162,063
186,962
152,857
146,772
Grant
Price
$48.06
$47.87
$43.495
$48.01
* Effective January 1, 2017
The plan made a payment of $1.7 million during 2016 for the three-year interval ended December 31, 2015 and a payment of $3.8
million during 2015 for the three-year interval ended December 31, 2014. The plan made a payment of $3.8 million during 2014
for the three-year interval ended December 31, 2013. The cost of share-based compensation accrued as an operating expense
during 2016 was $1.0 million, net of tax. The change in accrual 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 was $1.4 million, net of tax.
59
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
16. Reinsurance
The following table 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
$
$
$
2016
2015
2014
$
28,838
(13,245)
3,409
$
28,104
(13,296)
3,666
27,978
(13,546)
4,006
19,002
$
18,474
$
18,438
$
171,314
(47,122)
2,304
159,692
(46,262)
2,415
$
162,110
(45,703)
2,479
$
126,496
$
115,845
$
118,886
$
$
55,400
(10,077)
45,323
$
$
54,465
(10,135)
44,330
$
$
57,603
(10,941)
46,662
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 $19.4 million at December 31, 2016 and $20.8 million at December 31, 2015. The reserve
for future policy benefits ceded under this agreement was $11.5 million at December 31, 2016 and $12.2 million at December 31,
2015.
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
bulk reinsurance agreement. The insurance in force ceded approximated $0.8 billion at December 31, 2016 and $0.9 billion at
December 31, 2015. Premiums totaled $6.8 million during 2016, $7.0 million during 2015, and $7.3 million during 2014.
Reinsurance recoverables were $187.9 million at year-end 2016, consisting of reserves ceded of $175.9 million and claims ceded
of $12.0 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.
The maximum retention on any one life during 2016 and 2015 was $0.5 million for ordinary life plans and $0.1 million for group
coverage.
60
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table reflects our reinsurance partners whose reinsurance recoverable was 5% or greater of our total reinsurance
recoverable at December 31, 2016, along with their A.M. Best credit rating.
TransAmerica Life Insurance Company
Security Life of Denver
RGA Reinsurance Company
Union Security Insurance Company
Employers Reassurance Corporation
Lewer Life Insurance Company
Other (22 Companies)
Total
A.M. Best
Rating
A+
A
A+
A-
A-
B
Reinsurance
Recoverable
46,551
$
24,075
20,807
12,374
11,769
10,617
61,747
187,940
$
% of
Recoverable
25%
13%
11%
6%
6%
6%
33%
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.
We monitor several factors that we consider relevant 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 and significant changes or events of the reinsurer. If we believe
that any reinsurer would not be able to satisfy its obligations with us, a separate contingency reserve may be established. At year-
end 2016 and 2015, no reinsurer met these conditions. In addition, we review the credit rating and financial statements of a reinsurer
before entering into any new agreements.
Assumed Reinsurance Arrangements
We 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. This block had $0.9 billion of life insurance in force at both December 31, 2016 and December 31, 2015. This block
generated life insurance premiums of $2.2 million in 2016, $2.3 million in 2015, and $2.4 million in 2014.
We acquired a block of variable universal life insurance policies and variable annuity contracts from American Family Life Insurance
Company 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. This block consisted of $295.7 million of separate account balances at December 31, 2016, which
are included in the financial statements of American Family, compared to $292.4 million at December 31, 2015. This block
consisted of $0.6 million of future policy benefits and $28.5 million in fixed fund balances that are included in policyholder account
balances in the Company’s Consolidated Balance Sheets at December 31, 2016. This block consisted of $0.6 million of future
policy benefits and $26.5 million in fixed fund balances at December 31, 2015.
61
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
17. 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.
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 losses recognized in
other comprehensive income
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 income
Net income
Comprehensive income
Year Ended December 31, 2016
Pre-Tax
Amount
Tax Expense
(Benefit)
Net-of-Tax
Amount
$
$
2,201
(551)
$
771
(193)
1,430
(358)
5,139
(563)
(57)
(2,869)
18,695
2,427
(3,016)
(16)
15,221
$
1,799
(196)
(21)
(1,004)
6,543
850
(1,056)
(6)
5,327
$
3,340
(367)
(36)
(1,865)
12,152
1,577
(1,960)
(10)
9,894
22,316
32,210
$
$
62
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
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)
$
$
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
$
$
Net unrealized 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 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
Net unrealized gains 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
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
63
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, 2016, net of tax.
Unrealized
Gain on
Non-
Impaired
Securities
Unrealized
Gain on
Impaired
Securities
Benefit
Plan
Obligations
DAC/
VOBA/
DRL
Impact
Future
Policy
Benefits
Policyholder
Account
Balances
Total
Beginning of year
$
59,163
$
3,085
$
(53,600) $ (11,069) $ (12,493) $
(296) $ (15,210)
(3,870)
(932)
12,152
1,689
(1,960)
(10)
7,069
3,340
(403)
—
(112)
—
—
2,825
Other comprehensive
income (loss) before
reclassification
Amounts reclassified
from accumulated
other comprehensive
income (loss)
Net current period other
comprehensive income
(loss)
End of year
$
58,633
$
1,750
$
(530)
(1,335)
12,152
(41,448) $
1,577
(9,492) $ (14,453) $
(1,960)
(10)
9,894
(306) $ (5,316)
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 on
Non-
Impaired
Securities
Unrealized
Gain 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)
End of year
$
59,163
$
3,085
$
(51,199)
(56)
(53,180)
1,556
364
7,477
4,913
276
(38,594)
1,981
(1,612)
—
(25)
—
—
344
364
7,452
(53,600) $ (11,069) $ (12,493) $
4,913
(38,250)
276
(296) $ (15,210)
64
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following table presents the pre-tax and the related income tax benefit (expense) components of the amounts reclassified
from accumulated other comprehensive income (loss) to the Consolidated Statements of Comprehensive Income for the years
ended December 31.
2016
2015
2014
Reclassification adjustments related to unrealized gains (losses)
on investment securities:
Net realized investment gains, excluding impairment losses 1
Income tax expense 2
$
Net of taxes
Other-than-temporary impairment losses 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
$
5,139
(1,799)
3,340
(620)
217
(403)
(173)
61
(112)
4,346
(1,521)
2,825
$
$
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.
18. Earnings Per Share
Due to our 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 were 9,683,414 shares during
2016, 10,614,068 shares during 2015, and 10,927,705 shares during 2014. The number of shares outstanding at both December 31,
2016 and December 31, 2015 was 9,683,414.
19. Segment Information
We have 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. 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. We operate solely in the United States and no individual customer accounts for 10% or
more of our revenue.
65
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
The following tables provide selected financial statement items of each of the operating segments for the three years ended
December 31. Intercompany transactions have been eliminated to arrive at Consolidated Statements of Comprehensive Income.
2016
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
Net income
Assets
$
141,557
$
56,967
$
84,429
$
282,953
72,814
10,070
8,108
20,974
—
—
44
86
—
17,763
576
1,256
72,814
27,833
8,728
22,316
4,051,014
8,834
389,565
4,449,413
2015
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
Net income
Assets
$
137,001
$
55,576
$
79,628
$
272,205
74,326
13,411
11,111
25,969
—
—
166
308
—
14,937
1,693
2,949
74,326
28,348
12,970
29,226
4,035,016
9,299
377,558
4,421,873
2014
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
Net income
Assets
$
150,523
$
57,852
$
75,822
$
284,197
76,463
23,668
11,632
27,649
—
—
282
523
—
17,220
1,080
1,818
76,463
40,888
12,994
29,990
4,184,516
9,688
377,663
4,571,867
66
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
20. Quarterly Consolidated Financial Data (unaudited)
The unaudited quarterly results of operations for the years ended December 31 are summarized in the following table.
2016:
Total revenues
First
Second
Third
Fourth
$
112,554
$
108,524
$
112,209
$
111,735
Total benefits and expenses
106,321
101,002
102,055
104,600
Net income
Per common share,
basic and diluted
2015:
Total revenues
Total benefits and expenses
Net income
Per common share,
basic and diluted
4,257
5,242
7,193
5,624
0.44
0.54
0.74
0.58
$
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
21. Statutory Information and Stockholder Dividends Restriction
The following table 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.
2016
2015
2014
Net gain from operations
$
11,457
$
27,390
$
27,167
Net income
Capital and surplus
12,457
323,304
29,149
297,612
26,697
338,422
The change in capital and surplus in 2016 was largely attributable to a $19.9 million reduction in the liability for pension and
OPEB, net income of $12.5 million, and a $7.0 million increase in net unrealized gains. These changes were partially offset by
stockholder dividends paid of $10.5 million and a $4.6 million increase in asset valuation reserve. 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.
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, 2016 in the above table includes
capital and surplus of $25.5 million for Old American and $32.4 million for Sunset Life.
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 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. We believe that Kansas City Life, as the parent company, has sufficient cash resources, independent of dividends
paid by its affiliates, to satisfy its own stockholder dividend payments. In addition, we believe 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 2017 is $32.3 million, 10% of
December 31, 2016 capital and surplus. The maximum stockholder dividends payable by Old American without prior approval
in 2017 is $2.6 million, 10% of December 31, 2016 capital and surplus. The maximum stockholder dividends payable by Sunset
67
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Life without prior approval in 2017 is $3.2 million, 10% of December 31, 2016 capital and surplus. We believe that the statutory
limitations impose no practical restrictions on the dividend payment plans of our three insurance companies.
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 700% to 1,000%, well in
excess of the control level at December 31, 2016.
We are required to deposit a defined amount of assets with state regulatory authorities. Such assets had a statutory carrying value
of $12.1 million at both December 31, 2016 and December 31, 2015 and $12.2 million at December 31, 2014.
22. Commitments, Contingent Liabilities, Guarantees, and Indemnifications
Commitments
In the normal course of business, we have open purchase and sale commitments. At December 31, 2016, we had purchase
commitments to fund mortgage loans of $15.9 million.
Subsequent to December 31, 2016 we entered into commitments to fund additional mortgage loans of $20.8 million.
Contingent Liabilities
We 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.
We 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 our business, financial position, or results
of operations.
In accordance with applicable accounting guidelines, we establish 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, we establish 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, we do not believe that any litigation, proceeding, or other matter to which we are a party
or otherwise involved will have a material adverse effect on our financial condition or cash flows. However, in light of the
uncertainties involved in such matters, we are unable to predict the outcome or the timing of the ultimate resolution of these matters.
We 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. 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 us or our employees, which could have a material
adverse effect on our financial statements. The Missouri Department of Insurance most recently completed an examination based
upon our statutory financial statements for the year ended December 31, 2014 for Kansas City Life, Sunset Life, and Old American.
No recommendations or financial adjustments were required of any of the insurance companies as a result of that examination.
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 our analysis to date, we believe that we have 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 our financial statements.
68
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements–(Continued)
Guarantees and Indemnifications
We are 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. We are unable to estimate with certainty the ultimate legal and financial liability
with respect to these indemnifications. We believe 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 our financial position
or financial statements.
23. Subsequent Events
We evaluated events that occurred subsequent to December 31, 2016 through March 13, 2017, the date the consolidated financial
statements were issued.
On January 23, 2017, the Kansas City Life Board of Directors declared a quarterly dividend of $0.27 per share, paid on February 8,
2017 to stockholders of record on February 2, 2017.
There have been no other subsequent events that occurred during such period that require disclosure in, or adjustment to, the
consolidated financial statements as of and for the year ended December 31, 2016.
69
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 sheet as of December 31, 2016, and the related consolidated statements of comprehensive
income, stockholders’ equity, and cash flows for the year then ended, 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
accounting principles generally accepted in the United States of America; 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 audit. We conducted our audit
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 its subsidiaries as of December 31, 2016, and the results of its operations and its cash
flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Prior Year Audited by Other Auditors
The consolidated financial statements as of December 31, 2015 and for the years ended December 31, 2015 and 2014, were audited
by other auditors and their report thereon, dated March 10, 2016, expressed an unmodified opinion.
/s/ BKD, LLP
Kansas City, Missouri
March 13, 2017
70
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 provides, in narrative form, the
perspective of the management of Kansas City Life Insurance Company on its financial condition, results of operations, liquidity,
and certain other factors that may affect future results. The terms "the Company," "we," "us," and "our" are used to refer to Kansas
City Life Insurance Company and its subsidiaries. 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 non-insurance subsidiaries that individually and collectively are not material. This
discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in this
document.
Overview
Our profitability depends on many factors, which include but are not limited to:
• The sale of traditional and interest sensitive life, 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 our 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 our financial position and financial statements.
Statement on Forward-Looking Information
This report reviews the consolidated financial condition and results of operations of Kansas City Life Insurance Company. 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 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 our ability to sell our products and retain
business;
•
Increasing competition in the recruitment and retention 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 our 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, our products or services; and
• Unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations.
No assurances can be given 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.
71
Consolidated Results of Operations
Summary of Results
We earned net income of $22.3 million in 2016 compared to $29.2 million in 2015. Net income per share was $2.30 in 2016
versus $2.75 in 2015. Contributing to the 2016 decline in net income was a decrease in net investment income and increases in
policyholder benefits and operating expenses. Partially offsetting these items were increases in net premiums and net realized
investment gains and a decrease in interest credited to policyholder account balances. Additional information on these items is
presented below.
The following table presents condensed consolidated results of operations for the years ended December 31.
2016
2015
% Change
Revenues:
Insurance and other revenues
Net investment income
Net realized investment gains
Benefits and expenses:
Policyholder benefits and interest credited
to policyholder account balances
Amortization of deferred acquisition costs
Operating expenses
Income tax expense
Net income
$
$
289,525
150,608
4,889
284,680
27,833
101,465
8,728
22,316
$
$
279,934
157,150
3,767
273,047
28,348
97,260
12,970
29,226
3 %
(4)%
30 %
4 %
(2)%
4 %
(33)%
(24)%
Insurance Revenues
Insurance revenues consist of premiums, net of reinsurance, from the sale of traditional individual and group life insurance products,
immediate annuities, and accident and health products, as well as contract charges from interest sensitive and deposit-type products.
The level of new sales, the type of products sold, the persistency of policies, general economic conditions, and competitive forces
affect insurance revenues.
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.
2016
% Change
2015
New premiums:
Traditional life insurance
$
Immediate annuities
Group life insurance
Group accident and health insurance
Total new premiums
Renewal premiums
Total premiums
Reinsurance ceded
20,291
27,388
2,785
12,876
63,340
165,678
229,018
(57,199)
10% $
25%
18%
7%
16%
2%
6%
1%
Net premiums
$
171,819
7% $
18,466
21,843
2,364
12,072
54,745
161,827
216,572
(56,397)
160,175
Consolidated total premiums increased $12.4 million or 6% in 2016 compared to 2015. New premiums increased $8.6 million
or 16% in 2016 compared to the prior year. The largest factor in this improvement was a $5.5 million or 25% increase in new
immediate annuity premiums. Immediate annuity receipts can have sizeable fluctuations, as receipts from policyholders largely
result from one-time premiums. In addition, new traditional life insurance premiums increased $1.8 million or 10% and new
group life premiums increased $0.4 million or 18%. Also, new group accident and health premiums increased $0.8 million or 7%,
primarily from the long-term disability line, which is significantly reinsured. Renewal premiums increased $3.8 million or 2%
in 2016 compared to 2015, reflecting a $3.8 million or 3% increase in renewal traditional life premiums. The increases in both
new and renewal traditional life insurance premiums were largely from the Old American segment.
72
Deposits related to universal life, fixed deferred annuity contracts, and investment-type products are not recorded as revenue.
Revenues from such contracts consist of amounts assessed on 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. The following table provides detail by new and renewal deposits for the two
years ended December 31. New deposits are also detailed by product.
2016
% Change
2015
New deposits:
Universal life insurance
$
13,327
— % $
13,314
Variable universal life insurance
Fixed annuities
Variable annuities
Total new deposits
Renewal deposits
268
50,250
9,799
73,644
142,044
(12)%
23 %
(49)%
— %
(2)%
303
40,874
19,160
73,651
144,278
Total deposits
$
215,688
(1)% $
217,929
General economic conditions and interest rates available in the marketplace influence new deposits on interest sensitive products.
In addition, fluctuations in the equity markets influence the variable life and annuity products. 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 were essentially unchanged in 2016 compared to 2015. A $9.4 million or 23% increase in new fixed annuity
deposits was offset by a $9.4 million or 49% decline in new variable annuity deposits. Total renewal deposits decreased $2.2
million or 2% in 2016 compared to the prior year, as renewal deposits decreased for universal life, variable universal life, and
fixed annuities. Partially offsetting these was an increase in renewal variable annuity deposits.
Contract charges result from charges and fees on interest-sensitive and deposit-type products. We maintain both open blocks of
business and closed blocks of business. The closed blocks of business reflect products and entities that have been purchased and
for which we are not actively pursuing marketing efforts to generate new sales. We continue to service these policies to support
customers and to meet long-term profit objectives as these blocks of business decline over time. Total contract charges on closed
blocks equaled 41% of total consolidated contract charges during 2016, down from 43% in 2015. Contract charges are also
potentially impacted by unlocking adjustments, as discussed below.
Total contract charges decreased $0.9 million or 1% in 2016 relative to the prior year. This decline reflected decreases in charges
and fees on our closed blocks of business. These were partially offset by increased amortization of deferred revenue, primarily
resulting from variances in deferred revenue unlocking adjustments during 2016 versus 2015. An unlocking adjustment decreased
the amortization of deferred revenue $1.0 million during 2016. This compares to an unlocking adjustment that decreased deferred
revenue amortization $2.3 million during 2015.
Total contract charges on closed blocks decreased 5% in 2016 compared to 2015, reflecting the runoff of the business. Total
contract charges on open, or ongoing, blocks of business increased 2% compared to the prior year. This increase largely resulted
from variances in the deferred revenue unlocking adjustments.
Investment Revenues
Gross investment income decreased $6.1 million or 4% in 2016 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
$0.4 million or 3% in 2016 compared to 2015, primarily due to an increase in real estate expenses.
Fixed maturity securities provide a majority of our investment income. Fixed maturity securities totaled 73% of our investments
at December 31, 2016 compared to 74% at December 31, 2015. Income from these investments declined $6.9 million or 6%
compared to 2015, reflecting lower average invested assets and lower yields earned.
Investment income from commercial mortgage loans decreased $1.0 million or 3% in 2016. This decline was due to lower yields
earned that were partially offset by a higher average mortgage loan portfolio balance compared to the prior year.
Investment income from real estate properties increased $1.7 million or 10% in 2016, largely due to the purchase and development
of real estate. However, real estate expenses also increased as a result of these purchases.
73
We recorded net realized investment gains of $4.9 million in 2016. Gains recorded in 2016 included $1.3 million from sales of
investment securities, $4.3 million of investment securities called, and $1.1 million from the sale of real estate. Partially offsetting
these gains were investment losses of $1.3 million, primarily due to the write-down of one security that was considered other-
than-temporarily impaired. Also partially offsetting these gains was a $0.7 million increase in the allowance for mortgage loan
losses.
Policyholder Benefits
Policyholder benefits, net of reinsurance, 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 increased $13.1 million or 7% in 2016 compared to 2015, resulting from an increase 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 $2.3
million increase in benefit and contract reserves. This change included a $0.6 million increase in reserves in 2016 and a $1.7
million decrease in reserves in 2015. This fluctuation is primarily due to decreases in risk-free swap rates. Also contributing to
the reserve change was an $5.5 million increase in immediate annuity premiums, which results in an increase to the change in
reserves on an equal and offsetting basis. In addition, the change in reserves reflected a $1.1 million increase in reserves on interest
bonuses for certain policies and a $2.6 million reserve increase on the secondary guaranteed universal life product that resulted
from unlocking and refinements. This compares to a $0.3 million decrease in reserves on interest bonuses for certain policies in
2015. Partially offsetting these changes, death benefits, net of reinsurance, decreased $1.0 million in 2016 compared to 2015.
Interest Credited to Policyholder Account Balances
Interest credited to policyholder account balances decreased $1.5 million or 2% in 2016 compared to 2015. This decline was due
to lower average crediting rates and a decrease in policyholder account balances compared to one year earlier.
Total policyholder account balances decreased $4.4 million or less than 1% during 2016. The average interest rate credited to
policyholder account balances was 3.55% in 2016 compared to 3.60% in 2015 and 3.67% in 2014. Investment yields on the assets
matched to these liabilities were 4.62% in 2016 compared to 4.86% in 2015 and 5.03% in 2014.
Amortization of DAC
The amortization of DAC decreased $0.5 million or 2% in 2016 compared to the prior year. This decline resulted from several
factors, including lower investment income in 2016 and improved market returns in 2016 from separate accounts. In addition, an
unlocking adjustment decreased DAC amortization $5.9 million in 2016, compared to an unlocking adjustment that decreased
DAC amortization $6.4 million in 2015. The unlocking in 2016 was associated with favorable adjustments for mortality, which
was in part offset by adjustments related to interest rates. The unlocking in 2015 was associated with favorable adjustments for
mortality and expenses, partially offset by adjustments related to interest rates. Partially offsetting these items, DAC amortization
increased on traditional life products. This increase was due to increased terminations, largely from the Old American segment,
reflecting the growing block of business in this segment.
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 our operations,
the amortization of VOBA, and other expenses. Operating expenses increased $4.2 million or 4% in 2016. This increase was
primarily due to higher compensation costs that were partially offset by a decrease in VOBA amortization.
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 decreased $1.3 million or 32% in 2016. This decrease is largely attributable to an
unlocking adjustment that decreased VOBA amortization $0.5 million in 2016 compared to an unlocking adjustment that increased
VOBA amortization $0.9 million in 2015.
Income Taxes
We recorded income tax expense of $8.7 million or 28% of income before tax in 2016, compared to income tax expense of $13.0
million or 31% of income before tax in 2015. The decrease in the effective tax rate in 2016 versus 2015 was primarily due to
permanent differences and tax credits from affordable housing investments having a greater impact due to lower pretax income,
and to a decrease in expense from prior year taxes.
The effective income tax rate was lower than the prevailing corporate federal income tax rate of 35% in 2016 and 2015, primarily
due to permanent differences, including the dividends-received deduction, and tax credits from affordable housing investments.
74
Analysis of Investments
This analysis of investments should be read in conjunction with Note 3 included in this document.
The following table provides asset class detail of the investment portfolio at December 31. Fixed maturity and equity securities
represented 73% of the investment portfolio at December 31, 2016 compared to 75% at December 31, 2015.
Fixed maturity securities
Equity securities
Mortgage loans
Real estate
Policy loans
Short-term investments
Other investments
Total
2016
$ 2,530,907
23,996
630,889
195,621
79,893
27,526
1,388
$ 3,490,220
%
of Total
2015
%
of Total
72% $ 2,580,845
25,325
1%
589,960
18%
168,097
6%
81,392
2%
22,474
1%
—
380
100% $ 3,468,473
74%
1%
17%
5%
2%
1%
—
100%
Fixed maturity securities were the largest component of our total investments at December 31, 2016. The largest categories of
fixed maturity securities at December 31, 2016 consisted of 80% in corporate securities, 6% in municipal securities, and 6% in
U.S. Treasury securities and obligations of the U.S. Government. Fixed maturity securities had unrealized gains of $110.5 million
and unrealized losses of $18.3 million at December 31, 2016.
We use actual or equivalent Standard & Poor's ratings to determine the investment grading of fixed maturity securities. Our fixed
maturity securities that were rated above investment grade were 96% at December 31, 2016, compared to 95% at December 31,
2015.
The fair value of fixed maturity securities with unrealized losses was $516.9 million at December 31, 2016, compared with $567.2
million one year earlier. This decrease primarily reflected a tightening in overall market spreads during 2016. In particular, the
energy asset class experienced improved performance during the year. At December 31, 2016, 94% of security investments with
an unrealized loss were investment grade and accounted for 85% of the total unrealized losses. At December 31, 2015, 94% of
securities with an unrealized loss were investment grade and accounted for 88% of the total unrealized losses. At December 31,
2016, we had $111.9 million in gross unrealized gains on fixed maturity and equity securities that offset $19.0 million in gross
unrealized losses. At December 31, 2015, we had $128.6 million in gross unrealized gains on fixed maturity and equity securities
that offset $32.8 million in gross unrealized losses. At December 31, 2016, 79% of the fixed maturity and equity securities portfolio
had unrealized gains, up slightly from 78% at December 31, 2015. We had a decrease in gross unrealized losses in most categories
from year-end 2015 to year-end 2016 due to changes in interest rates and market spreads during 2016. Gross unrealized losses
on fixed maturity and equity securities for less than 12 months accounted for $12.5 million or 66% of the security values in a gross
unrealized loss position at December 31, 2016. Gross unrealized losses on fixed maturity and equity security investments of 12
months or longer decreased from $9.6 million at December 31, 2015 to $6.5 million at December 31, 2016.
Our residential mortgage-backed securities, commercial mortgage-backed securities, and asset-backed securities that were rated
below investment grade were 34% at December 31, 2016 and 41% at December 31, 2015. This decrease was largely attributable
to the sale of selected investments.
We have written down certain investments in previous periods. Fixed maturity securities written down and still owned at December
31, 2016 had a fair value of $47.0 million and net unrealized gains of $2.7 million, compared to the December 31, 2015 fair value
of $80.7 million and net unrealized gains of $4.6 million. Additional information identified or further deteriorations could result
in impairments in future periods.
We evaluated the current status of all investments previously written down to determine whether we believe that these investments
remained credit-impaired to the extent previously recorded. Our evaluation process is similar to our impairment evaluation process.
If evidence exists that we will receive the contractual cash flows from securities previously written down, the accretion of income
is adjusted. We did not change our evaluation of any investments under this process during 2016 or 2015.
Investments in mortgage loans totaled $630.9 million at December 31, 2016, up from $590.0 million at December 31, 2015. The
commercial mortgage loan portfolio increased $40.9 million during 2016, as new loans exceeded the regularly scheduled payments
and the volume of prepaid loans. Mortgage loan principal paydowns increased $21.1 million in 2016 compared to 2015, primarily
due to a higher dollar volume of prepaid loans. Our mortgage loans are secured by commercial real estate. These loans are stated
75
at the outstanding principal balance, adjusted for amortization of premium and accrual of discount, less an allowance for loan
losses. We believe this allowance is at a level adequate to absorb estimated credit losses and was $3.3 million at December 31,
2016 and $2.7 million at December 31, 2015. For additional information on our mortgage loan portfolio, please see Note 3.
Investments in real estate totaled $195.6 million at December 31, 2016 and $168.1 million at December 31, 2015. The increase
in real estate investments is largely attributable to purchases and improvements made in 2016. In the third quarter of 2016, we
purchased a developed property that resulted in an increase of $29.6 million. In addition, we sold a developed property in the first
quarter of 2016 that resulted in a realized gain of $1.0 million before applicable income taxes.
76
Liquidity and Capital Resources
Liquidity
We meet 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 as they may occur. 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, we have 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, we use cash for other purposes,
including the payment of stockholder dividends and income taxes. There can be no assurance that we will continue to generate
cash flows at or above current levels or that our ability to borrow under the current credit facilities will be maintained.
We perform cash flow testing and add 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, we have several sources
of cash flow available to meet our needs.
Net cash provided by operating activities was $20.9 million for the year ended December 31, 2016. The primary sources of cash
from operating activities in 2016 were premium receipts and net investment income. The primary uses of cash from operating
activities in 2016 were for the payment of policyholder benefits and operating expenses. Net cash used by investing activities
was $27.2 million. The primary sources of cash were sales, maturities, calls, and principal paydowns of investments totaling
$406.6 million. Offsetting these, investment purchases, including new mortgage loans and new policy loans, totaled $427.8
million. Net cash provided by financing activities was $8.1 million, primarily including $10.3 million of deposits, net of
withdrawals, on policyholder account balances and $7.7 million of net transfers from separate accounts. Partially offsetting these
were the payment of $10.5 million in stockholder dividends.
Capital Resources
We believe existing capital resources provide adequate support for the current level of business activities, as identified in the
following table at December 31.
Total assets, excluding separate accounts
Total stockholders' equity
Ratio of stockholders' equity to assets, excluding separate accounts
2016
2015
$
4,076,157
$
4,048,949
685,583
17%
663,831
16%
Stockholders’ equity increased $21.8 million from year-end 2015. This increase was attributable to earnings during the year and
the change in the liability for pension and OPEB. Stockholders’ equity per share, or book value, equaled $70.80 at year-end 2016,
an increase from $68.55 at year-end 2015.
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 unrealized losses on investments, related taxes, policyholder account balances,
future policy benefits, DAC, VOBA, and DRL), totaled $36.1 million at December 31, 2016, a $2.3 million decrease from December
31, 2015.
Our statutory equity exceeds the minimum capital deemed necessary to support our insurance business, as determined by the risk-
based capital calculations and guidelines established by the National Association of Insurance Commissioners. We believe these
statutory limitations impose no practical restrictions on future dividend payment plans. See further discussion in Note 21 - Statutory
Information and Stockholder Dividends Restriction.
During the year ended December 31, 2015, we purchased 15,092 shares and sold 400 shares of treasury stock in transactions with
our employee stock ownership plan for a net increase in treasury stock of $0.7 million. During 2015, we terminated our 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, we 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.
In January 2017, the Board of Directors authorized the purchase of up to one million of our shares on the open market through
January 2018. During 2016, there were no shares purchased under this authorization. During 2015, we purchased 215,548 of our
shares under this authorization for $9.8 million.
77
In December 2015, we completed a reverse/forward stock-split transaction. This transaction occurred as part of a 1-for-250 reverse
stock split of our common stock. We purchased approximately 906,500 shares or 9% of the outstanding shares for $47.6 million.
We subsequently completed a 250-for-1 forward stock split for each one share of our common stock (including each fractional
share of such class of stock in excess of one share).
On January 23, 2017, the Board of Directors declared a quarterly dividend of $0.27 per share that was paid February 8, 2017 to
stockholders of record at February 2, 2017.
Minimum Rate Guarantees
Our rate guarantees for those products with minimum crediting rate provisions are identified in the following table. 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 81% of total policyholder account
balances were at the minimum guaranteed rate as of December 31, 2016 compared to 83% at December 31, 2015.
0% to 1%
$
$
13,955
$
Fixed
Deferred
Annuities
209,318
321,297
416,341
51,252
December 31, 2016
Universal
Life
Variable Life
and Annuities
Supplemental
Contracts and
Annuities
Without Life
Contingencies
7,973
$
27,428
12,625
6,456
$
Total
234,278
653,396
745,406
418,648
3,032
95,867
8,134
—
208,804
308,306
360,940
892,005
$
998,208
$
$
107,033
$
54,482
$
2,051,728
December 31, 2015
Fixed
Deferred
Annuities
Universal
Life
Variable Life
and Annuities
$
$
172,230
345,466
424,524
54,933
997,153
$
$
8,555
$
200,698
314,613
375,751
899,617
$
2,794
94,467
7,960
—
105,221
Supplemental
Contracts and
Annuities
Without Life
Contingencies
8,175
$
25,177
14,330
6,453
54,135
$
Total
191,754
665,808
761,427
437,137
2,056,126
$
$
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
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. We make 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 us 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.
78
The following table provides deferred annuity contract values within maturity date ranges. The values and date ranges provided
below do not necessarily represent our expected outflow of funds from these contracts, as these cash flows may be significantly
impacted by the needs and decisions of the contract owners.
2016
%
of Total
2015
%
of Total
One year or less
$
133,829
13% $
124,393
Two years
Three years
Four years
Five years
Six years or more
Total
$
56,104
45,176
59,360
57,961
645,778
998,208
6%
4%
6%
6%
65%
100% $
53,209
40,981
45,676
62,643
670,251
997,153
13%
5%
4%
5%
6%
67%
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, 2016 and 2015.
None
Less than 5%
5% and greater
Total
2016
638,844
172,734
186,630
998,208
$
$
%
of Total
64% $
17%
19%
100% $
2015
646,440
149,646
201,067
997,153
%
of Total
65%
15%
20%
100%
Asset/Liability Management
Our 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.
We believe our asset/liability management programs and procedures, along with certain product features, provide protection for
us 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. Our 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.
We aggregate similar policyholder liabilities into portfolios and then match specific investments with these liability portfolios. In
2016 and 2015, all of our portfolios had investment yields that exceeded the crediting rates on the matched liabilities. We monitor
the risk to portfolio investment margins on an ongoing basis.
We perform cash flow scenario testing through models of our 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 risk exists that our 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
79
to generate liquidity through borrowing, asset sales, or other means. We believe that our asset/liability management programs will
provide sufficient liquidity to enable us to fulfill our obligation to pay benefits under our various insurance and deposit contracts.
On a historical basis, we have not needed to liquidate assets to ensure sufficient cash flows. We maintain borrowing lines on a
secured and unsecured basis to provide additional liquidity, if needed.
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Risk Factors
The operating results of life insurance companies have historically been subject to significant fluctuations. The factors which
could affect our 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:
We operate in a mature and highly competitive industry, which could limit our ability to grow sales or maintain our position
in the industry and negatively affect profitability.
Life insurance is a mature and highly competitive industry. We encounter 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.
We may be unable to attract and retain agencies and agents.
We sell insurance and annuity products through independent agents and agencies. These agencies and agents are not captive and
may sell products of our competitors. Sales and our financial results could be adversely affected if we are unsuccessful in attracting
agencies and agents. Our ability to retain agents and agencies is dependent upon a number of factors, including: our ability to
maintain a competitive compensation system while also offering products with competitive features and benefits for policyholders;
our ability to maintain a level of service and support activities that effectively support the needs of agents and agencies; and our
ability to approve and monitor sales and business practices of agents and agencies that are consistent with regulatory requirements
and our expectations.
Our results may be negatively affected should actual experience differ from management’s assumptions and estimates.
We make certain assumptions regarding mortality, persistency, expenses, interest rates, tax liability, business mix, policyholder
behavior, and other factors appropriate for the type of business results we expect 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 our financial statements. These assumptions are used in the operations of our business in making decisions that are crucial to
our success, including the pricing of products and expense structures relating to products. Our actual experience and changes in
estimates are reflected in our financial statements. Our actual experience may vary from period to period and from established
assumptions, potentially resulting in variability in the financial statements.
We establish and carry a reserve liability based on current 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, current 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 we use to estimate various components of our financial statements are complex and involve analyzing and
interpreting large quantities of data. We employ 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, our financial
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.
81
Risk management policies and procedures may leave us exposed to unidentified or unanticipated risk, which could negatively
affect business or result in losses.
We have devoted significant resources to develop risk management policies and procedures and will continue to do so in the future.
However, the policies and procedures that we use to identify, monitor, and manage risks may not be fully effective. Many of the
methods of managing risk and exposure 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 or fully identify or evaluate the magnitude of existing
or future exposure, which could be significantly greater than the historical measures or our evaluation indicate. 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 we currently deem to be immaterial may adversely
affect our business and/or our financial statements.
A rating downgrade could adversely affect our ability to compete and increase the number or value of policies surrendered.
Our financial strength rating, which is intended to measure our ability to meet policyholder obligations, may be an important
consideration affecting public confidence in some of our products and, as a result, our competitiveness. A downgrade in our rating
could adversely affect our ability to sell 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. We cannot predict what actions rating organizations may take or what actions we may be required to take in response to
the actions of the rating organizations.
Reinsurance Risks:
Our reinsurers could fail to meet assumed obligations or be subject to adverse developments that could impact us.
We follow the insurance practice of reinsuring a portion of the risks under the policies we issue, known as ceding. We cede
significant amounts of insurance to other insurance companies through reinsurance. This reinsurance makes the assuming reinsurer
liable to us for the reinsured portion of the risk. However, reinsurance does not discharge us from our primary obligation to pay
policyholders for losses insured under the policies that are issued. Therefore, we are subject to the credit risk of our reinsurers.
The failure of one or more of our reinsurers could negatively impact our financial position or financial statements.
Our ability to compete is dependent on the availability of reinsurance, cost of reinsurance, or other substitute capital market
solutions.
The premium rates we charge 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 us for the reinsurance. Therefore, if the cost of
reinsurance were to increase for existing business, if reinsurance were to become unavailable for new business, or if alternatives
to reinsurance were not available, we may be exposed to reduced profitability and cash flow strain, or may not be able to sell or
price new business at competitive rates.
Recently, access to reinsurance has become more costly for us, 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. If the reinsurance market further contracts, our ability
to continue to offer our products on terms favorable to us could be adversely impacted.
Investment Risks:
Our investments are subject to market and credit risks.
We hold a diversified portfolio of investments that primarily includes fixed maturity securities, equity securities, mortgage loans,
and real estate. Each of these investments is subject, in varying degree, to market risks that can affect their return and their fair
value.
Our invested assets, primarily including fixed maturity securities, are subject to customary risks of credit defaults and changes in
fair value. The value of our mortgage loan and real estate portfolios also depend on the financial condition of the borrowers and
tenants occupying the properties which we have financed. Factors that may affect the overall default rate on and fair value of our
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.
82
Our 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.
We attempt 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. We also invest 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.
Interest rate fluctuations could negatively affect our spread income or otherwise impact our 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, we offer 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 our 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 us to the risk that changes in interest
rates will reduce the spread, or the difference between the amounts we are required to credit to policyholder contracts and the
amounts earned on general account investments. Because many of our 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 our financial statements. In addition, in periods of increasing interest rates, we 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. Therefore, we 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, we 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 our commercial mortgage investments may prepay these
obligations in order to borrow at lower market rates, which may increase our risk to have to reinvest at lower rates. Increases in
interest rates may cause increased surrenders 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 our revenues from asset-based
management fees.
While we develop and maintain asset/liability management programs and procedures designed to identify and 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 or that our evaluation of fluctuations will be correct or allow for timely modifications. Additionally, our 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 our asset/liability management
programs and procedures may be negatively affected whenever actual results differ from these assumptions.
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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 we are 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, we may change our 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, we may become more susceptible
to increased surrenders and withdrawals on policies, as surrender charges and other features that help protect us from increased
or unexpected policyholder withdrawals or lapses are ineffective. Increases in policyholder surrenders, withdrawals, or lapses
could negatively affect our operating results and liquidity.
Our valuation of fixed maturity and equity securities include estimations and assumptions and could result in changes to
investment valuations that may have a material adverse effect on our financial statements.
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 our financial
statements.
Equity market volatility could negatively impact our profitability.
We are exposed to equity market volatility in the following ways:
• We have exposure to equity price risk through investments. However, this exposure is limited due to the relatively small
equity portfolio held during the periods presented.
• We earn investment management fees and mortality and expense fee income based upon the value of assets held in our
separate accounts from both 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 customers from purchasing variable universal life and annuity products that
have returns linked to the performance of the equity markets. This volatility may also result in existing customers
withdrawing cash values or reducing investments in those products.
• We have 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
could result 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.
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The determination of the amount of realized and unrealized impairments and allowances established on our investments is
highly subjective and could materially impact our financial position or financial statements.
The determination of the amount of impairments and allowances varies by investment type and is based upon our 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, we consider a wide range of factors about security issuers and we use our 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.
We could be forced to sell investments at a loss to meet policyholder withdrawals.
Many of our products allow policy and contract holders to withdraw their funds under defined circumstances. We manage liabilities
and attempt to align the investment portfolio so as to provide and maintain sufficient liquidity to support anticipated withdrawal
demands, contract benefits, and maturities. While we own a significant amount of liquid assets, a certain portion of investment
assets are relatively illiquid. If we experience unanticipated withdrawal or surrender activity, we could exhaust other sources of
liquidity and be forced to liquidate assets, possibly on unfavorable terms. If we are forced to dispose of assets on unfavorable
terms, it could have an adverse effect on our financial statements and financial condition.
Regulatory Risks:
Insurance companies are highly regulated and are subject to numerous legal restrictions and regulations.
We are subject to government regulation in each of the states in which we conduct business. Such regulation is vested in state
agencies having broad administrative and, in some instances, discretionary power dealing with many aspects of our 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.
We 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 us 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 we own and operate real property,
state, federal, and local environmental laws could affect us. We 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 us if enacted
into law.
We are 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 us to conduct 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. We are uncertain as to all of the impacts that new legislation will have and cannot provide assurance that
it will not adversely affect our financial statements.
New accounting rules or changes to existing accounting rules could negatively impact our financial results.
We are required to comply with GAAP, as promulgated by the FASB. GAAP is subject to constant review and change 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
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impact our financial statements. Accordingly, we can give no assurance that future changes to GAAP will not have a negative
impact on us.
In addition, we are 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 us. 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. We cannot predict whether or in what manner reforms will be enacted and, if so, whether the enacted
reforms will positively or negatively affect us. 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. We can give no assurance
that future changes to SAP or components of SAP will not have a negative impact on us.
Catastrophic Event Risk:
We are exposed to the risks of climate change, natural disasters, pandemics, terrorism, or other acts that could adversely affect
our operations.
While we have 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 us. Climate change, a natural disaster, a pandemic, or an outbreak of an easily communicable disease could adversely
affect the mortality or morbidity experience of us or our 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 our
business. The possible macroeconomic effects of climate change, natural disasters, or pandemics could also adversely affect our
financial statements.
Information Technology Risk:
The failure of our cybersecurity controls, other information system security controls, or the controls of our third-party providers
may result in the unauthorized disclosure of sensitive or confidential corporate or customer information. Such failures could
damage our reputation and hinder our ability to conduct business. Further, our contingency planning and disaster recovery
programs may be insufficient to address unanticipated events. In addition, our reputation could be damaged by inaccurate
presentations made in social media.
As part of the normal course of business, we use computer systems to collect, process, and retain sensitive and confidential corporate
and customer information. In addition, we use third-party vendors and cloud technology on a limited basis for storage, processing,
and data support of certain activities. We rely on commercial technologies and third parties to maintain the security of that
information. Our information systems are subject to computer viruses, malicious software code, and other unauthorized computer-
related actions. Preventive actions taken by the Company to reduce the risk of cyber-incidents and to protect our 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 could severely damage our reputation, expose us to an increase in the
risk of litigation, disrupt our operations, cause incurrence of significant technical, legal, and operating expenses, or otherwise harm
our business.
We are highly dependent on our ability to access our computer systems to perform the necessary business functions, such as
processing premium payments, processing claim payments, administration of policy data, providing customer support, managing
our 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 our computer systems
to become inaccessible to our employees and customers for an extended period of time. Our disaster recovery program may be
insufficient to deal with such an unanticipated event. This could result in an adverse impact to our 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 our ability to conduct business, damage to our reputation,
result in substantial remediation costs, and potentially subject us to regulatory sanctions, legal claims, or other unidentified
consequences.
While we have limited social media content, we recognize that social media outlets are independent of us and our security measures.
Inaccurate presentations based upon incorrect information or assumptions could be distributed via social media outlets and could
harm us and our reputation.
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