Kansas City Life Insurance Co.
Annual Report 2017

Plain-text annual report

KANSAS CITY LIFE INSURANCE COMPANY 2017 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............................................................................................................................................... 72 Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................. 73 Risk Factors ............................................................................................................................................................................ 84 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: 2017 - $2,442,488; 2016 - $2,438,718) Equity securities available for sale, at fair value (amortized cost: 2017 - $19,236; 2016 - $23,289) Mortgage loans Real estate Policy loans Short-term investments Other investments Total investments Cash Accrued investment income Deferred acquisition costs Reinsurance recoverables Property and equipment Other assets Separate account assets Total assets LIABILITIES Future policy benefits Policyholder account balances Policy and contract claims Other policyholder funds Other liabilities Separate account liabilities Total liabilities STOCKHOLDERS' EQUITY Common stock, par value $1.25 per share Authorized 36,000,000 shares, issued 18,496,680 shares Additional paid in capital Retained earnings Accumulated other comprehensive income (loss) Treasury stock, at cost (2017 and 2016 - 8,813,266 shares) Total stockholders’ equity Total liabilities and stockholders’ equity December 31 2017 2016 $ 2,535,064 $ 2,530,907 20,770 649,542 193,219 78,175 32,195 2,424 3,511,389 9,504 31,119 277,182 185,647 10,493 85,524 419,812 4,530,670 953,239 2,051,311 36,503 172,850 159,800 419,812 3,793,515 23,121 41,025 908,022 6,288 (241,301) 737,155 4,530,670 $ $ $ 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 $ $ $ 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 (benefit) Income tax expense (benefit) NET INCOME COMPREHENSIVE INCOME (LOSS), NET OF TAXES Change in net unrealized gains (losses) on securities available for sale 1 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 2016 2015 2017 $ $ 179,936 114,017 293,953 $ 171,819 111,134 282,953 160,175 112,030 272,205 145,825 150,608 157,150 4,518 5,509 6,248 — (7) (7) 150,336 6,413 450,702 210,799 72,921 34,721 102,892 421,333 29,369 (22,172) (563) (57) (620) 155,497 6,572 445,022 211,866 72,814 27,833 101,465 413,978 31,044 8,728 $ $ $ $ 51,541 $ 22,316 $ 2,042 1,942 66 6,439 10,489 62,030 5.32 $ $ $ (288) (1,960) (10) 12,152 9,894 32,210 2.30 $ $ $ (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 29,226 (43,803) 4,913 276 364 (38,250) (9,024) 2.75 1 Net of related adjustments to policyholder account balances, future policy benefits, deferred acquisition costs, value of business acquired, and deferred revenue liability. See accompanying Notes to Consolidated Financial Statements 4 Kansas City Life Insurance Company Consolidated Statements of Stockholders’ Equity Year Ended December 31 2016 2015 2017 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 (2017, 2016, and 2015 - $1.08 per share) Cumulative effect of adoption of new accounting principle (see Note 2) End of year ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Beginning of year Other comprehensive income (loss) Cumulative effect of adoption of new accounting principle (see Note 2) End of year TREASURY STOCK, at cost Beginning of year Cost of shares acquired (2017 and 2016 - 0 shares; 2015 - 1,142,351 shares) Cost of shares sold (2017 and 2016 - 0 shares; 2015 - 560 shares) End of year 41,025 — 41,025 41,025 — 41,025 41,007 18 41,025 868,054 51,541 (10,458) (1,115) 856,196 22,316 (10,458) — 838,508 29,226 (11,538) — 908,022 868,054 856,196 (5,316) 10,489 1,115 6,288 (15,210) 9,894 — 23,040 (38,250) — (5,316) (15,210) (241,301) — — (241,301) — — (182,917) (58,392) 8 (241,301) (241,301) (241,301) TOTAL STOCKHOLDERS’ EQUITY $ 737,155 $ 685,583 $ 663,831 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 Net acquisition of property and equipment Net cash provided (used) Year Ended December 31 2016 2015 2017 $ 51,541 $ 22,316 $ 29,226 3,026 5,727 (41,845) 34,721 (4,511) 2,294 12,583 (28,338) (25,741) 5,059 14,516 (332,552) (45) (105,354) (5,304) (11,006) (1,242) 326,923 4,075 85,891 2,205 12,722 1,786 (4,669) (1,874) (28,444) 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 6 Kansas City Life Insurance Company Consolidated Statements of Cash Flows (Continued) FINANCING ACTIVITIES Deposits on policyholder account balances $ 226,313 $ 215,688 $ 217,929 Year Ended December 31 2016 2015 2017 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 (203,249) 5,625 (4,429) (10,458) — 13,802 (205,372) 7,670 572 (10,458) — 8,100 (222,907) 9,026 3,954 (11,538) (58,366) (61,902) (126) 9,630 9,504 $ 1,779 7,851 9,630 $ (3,160) 11,011 7,851 $ 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 18 - 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. 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 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 different from 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 8 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) 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 affordable housing real estate joint ventures. Real estate joint ventures are consolidated when required. The initial cost of the non-consolidated affordable housing real estate joint ventures 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 include highly-liquid investments in institutional money market funds that are carried at net asset value (NAV). 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-reported (IBNR). These liabilities are estimated using actuarial analyses and case basis evaluations that are based upon past claims experience, claim trends, and industry experience. The following table provides detail about the composition of future policy benefits at December 31. Life insurance Immediate annuities and supplementary contracts with life contingencies Accident and health insurance 2017 2016 $ 645,088 $ 638,231 275,268 32,883 273,285 32,127 Future policy benefits $ 953,239 $ 943,643 9 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) 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. If it is determined that our established reserves are not adequate, additional reserves will be added. Crediting rates for universal life insurance and fixed deferred annuity products ranged from 1.00% to 5.50% in 2017, 2016, and 2015. The following table provides detail about the composition of policyholder account balances at December 31. Universal life insurance Fixed deferred annuities $ 2017 919,022 1,078,819 $ 2016 921,669 1,075,576 Immediate annuities and supplementary contracts without life contingencies 53,470 54,483 Policyholder account balances $ 2,051,311 $ 2,051,728 Deferred Acquisition Costs 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 under existing guidance. Policy acquisition costs associated with traditional life products are 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 2017 2016 2015 $ 271,089 $ 267,936 $ 249,195 41,845 (48,064) 13,343 (49) (982) 277,182 $ $ 32,004 (41,375) 13,542 (201) (817) 271,089 37,714 (41,832) 13,484 (18) 9,393 $ 267,936 Value of Business Acquired 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. However, 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 life 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 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 2017 2016 2015 $ $ 23,090 (4,925) 1,471 (6) 667 $ 24,283 (4,215) 1,591 (14) 1,445 $ 20,297 $ 23,090 $ 24,655 (5,679) 1,795 (5) 3,517 24,283 Interest accrued on the VOBA of one block was at the rates of 4.22% 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 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 in the following section. 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 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 Consolidated Statements of Comprehensive Income 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 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. Positive numbers are increases to income and negative numbers are reductions to income. 2017: Unlocking Refinement in estimate 2016: Unlocking Refinement in estimate 2015: Unlocking Refinement in estimate DAC Amortization VOBA Amortization DRL Contract Charges Net Impact to Pre-Tax Income $ $ (344) (1,378) (1,722) $ $ (1,246) — (1,246) DAC Amortization VOBA Amortization $ $ 5,918 (82) 5,836 $ $ 536 — 536 DAC Amortization VOBA Amortization $ $ 6,380 — 6,380 $ $ (862) — (862) $ $ $ $ $ $ (46) 2,004 1,958 $ $ (1,636) 626 (1,010) DRL Contract Charges Net Impact to Pre-Tax Income (1,153) 178 (975) $ $ 5,301 96 5,397 DRL Contract Charges Net Impact to Pre-Tax Income (2,344) — (2,344) $ $ 3,174 — 3,174 12 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) The unlocking and refinements in estimates resulted in a net $1.0 million reduction to pre-tax income in 2017 and net increases to pre-tax income of $5.4 million in 2016 and $3.2 million in 2015. The unlocking in 2017 was primarily driven by low interest rates and the implementation of specific cost of insurance charges for certain plans. 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. In addition, we had a $0.3 million reserve increase in 2017, a $3.7 million reserve increase in 2016, and a $0.3 million reserve decrease in 2015 related to the impacts of unlocking. The impact to pre-tax income of all adjustments related to unlocking and refinements in estimates, including insurance revenues, amortization of DAC and VOBA, and policy holder benefits, was a decrease of $1.3 million in 2017, an increase of $1.7 million in 2016, and an increase of $3.5 million in 2015. 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. The components of benefit cost are included in Operating Expenses in the Consolidated Statements of Comprehensive Income. See Note 13 - 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 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-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 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. The rider is considered to be a financial derivative and, as such, is accounted for at fair value. 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 could 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 indemnity reinsurance agreements with other insurance companies to support sales of selected 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 15 - Reinsurance. Future policy benefits and other related assets are not reduced for reinsurance ceded 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 large 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 used for direct business. We also 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 in the Consolidated Balance Sheets. 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. 13 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) 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 cancelation 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. 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 2017 2016 2015 $ $ 120,367 87,795 26,222 59,569 293,953 $ $ 114,852 84,100 27,034 56,967 282,953 $ $ 104,599 83,013 29,017 55,576 272,205 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. On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act of 2017 (the TCJA), which significantly changes the existing U.S. tax laws, including a reduction in the corporate tax rate from 35% to 21%, as well as other changes. As a result of enactment of the legislation, the Company received an additional one-time income tax benefit of $30.5 million during December of 2017, primarily related to the remeasurement of certain deferred tax assets and liabilities. 14 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) 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 During 2017 In February 2018, the Financial Accounting Standards Board (FASB) issued ASU No. 2018-02 Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The newly enacted TCJA lowered the corporate income tax rate to 21%. Current GAAP requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting periods that includes the enactment date. The reduction of the corporate income tax rate is required to be included in income from continuing operations. However, items within accumulated other comprehensive income (loss) were subject to historical tax rates. These are referred to as stranded tax effects in the guidance. This guidance permits a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the change in the federal corporate income tax rate. The reclassification is the difference between the historical corporate income tax rate and the newly enacted 21% corporate income tax rate and can be applied either retrospectively or in the period of adoption. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We early-adopted this guidance effective December 31, 2017 with application in the period of adoption, resulting in a reclassification of $1.1 million between retained earnings and accumulated other comprehensive income (loss). Accounting Pronouncements Adopted During 2018 In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606). Topic 606 requires companies to recognize revenue that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. As an insurance enterprise, our primary sources of revenue are excluded from this guidance, including insurance premiums, contract charges, and investment revenues. We have certain types of non-insurance and non-investment revenue from contracts with customers that fall under this guidance. These revenues are recognized when obligations under the terms of the contract are satisfied. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for those services. For these revenues, the performance obligation is fulfilled as services are rendered. Revenues from contracts with customers identified under Topic 606 are not material, totaling less than 1% of our total revenues for the year ended December 31, 2017. Effective January 1, 2018, the Company adopted ASU No. 2014-09 through the modified retrospective approach with no material impact to 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. We currently hold equity securities classified as available for sale securities that are measured at fair value with changes in fair value recognized through other comprehensive income (loss). Upon adoption of this guidance, changes in fair value of equity securities will be recognized through net income, which may cause an increase in volatility in the Consolidated Statements of Comprehensive Income. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption allowed. We adopted this guidance effective January 1, 2018 with no material impact to our consolidated financial statements as we have limited ownership in equity investments. 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 adopted this guidance effective January 1, 2018 with no material impact to our consolidated financial statements. In March 2017, the FASB issued guidance to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. This guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. We adopted this guidance effective January 1, 2018 with no material impact to our consolidated financial statements. 15 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) Accounting Pronouncements Issued, Not Yet Adopted 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 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 March 2017, the FASB issued guidance to amend the amortization period for certain purchased callable debt securities held at a premium. The amortization period for premiums is being shortened to the earliest call date. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. 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. 16 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) 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, 2017. 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 Amortized Cost Gross Unrealized Gains Losses Fair Value $ 128,087 $ 4,653 $ 210 $ 132,530 28,248 156,335 484,395 175,403 235,219 253,346 564,621 258,341 1,971,325 33,281 182,678 84,355 14,514 2,442,488 19,236 2,053 6,706 18,128 7,835 11,860 8,670 14,418 11,148 72,059 2,910 20,913 510 410 103,508 1,544 43 253 946 1,274 430 569 2,361 1,394 6,974 — 349 3,356 — 10,932 10 30,258 162,788 501,577 181,964 246,649 261,447 576,678 268,095 2,036,410 36,191 203,242 81,509 14,924 2,535,064 20,770 $ 2,461,724 $ 105,052 $ 10,942 $ 2,555,834 1 Federal agency securities are not backed by the full faith and credit of the U.S. Government. 17 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, 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. 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, 2017 December 31, 2016 Amortized Cost Fair Value Amortized Cost Fair Value Due in one year or less $ 137,483 $ 139,713 $ 177,007 $ 180,934 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 769,096 1,003,469 429,651 88,275 14,514 794,260 1,034,593 457,002 94,572 14,924 751,986 1,020,233 372,488 102,458 14,546 788,759 1,043,340 394,254 110,144 13,476 Total $ 2,442,488 $ 2,535,064 $ 2,438,718 $ 2,530,907 No material derivative financial instruments were held during the years ended December 31, 2017, 2016, or 2015. 18 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 19 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 14 non-U.S. agency mortgage-backed securities that were determined to have such indications at December 31, 2017. We identified 16 non-U.S. agency mortgage-backed securities that were determined to have such indications at December 31, 2016. 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. 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. 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. No impairments were recorded in the year ended December 31, 2017 and $0.6 million of impairments were recorded in the year ended December 31, 2016. 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. 20 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) The following table provides information regarding fixed maturity and equity securities available for sale with unrealized losses by asset class and by length of time that individual securities have been in a continuous unrealized loss position at December 31, 2017. 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 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 $ 18,428 $ 121 $ 5,011 $ 7,992 26,420 45,927 30,670 24,804 49,488 82,018 23,249 256,156 14,151 13,748 310,475 2,101 42 163 477 202 106 290 1,000 189 2,264 96 107 2,630 10 29 5,040 21,142 23,879 11,004 8,697 43,194 32,871 140,787 5,666 35,519 187,012 — 89 1 90 469 1,072 324 279 1,361 1,205 4,710 253 3,249 8,302 — $ 23,439 $ 8,021 31,460 67,069 54,549 35,808 58,185 125,212 56,120 396,943 19,817 49,267 497,487 2,101 210 43 253 946 1,274 430 569 2,361 1,394 6,974 349 3,356 10,932 10 $ 312,576 $ 2,640 $ 187,012 $ 8,302 $ 499,588 $ 10,942 1 Federal agency securities are not backed by the full faith and credit of the U.S. Government. 21 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) The following table provides information regarding fixed maturity and equity securities available for sale with unrealized losses by asset class and by length of time that individual securities have been in a continuous unrealized loss position 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. 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 2017 2016 136 52 12 200 160 20 8 188 We do not consider the unrealized losses related to these securities to be credit-related. The unrealized losses at both December 31, 2017 and December 31, 2016 primarily related 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. 22 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) The following table summarizes investments in fixed maturity and equity securities available for sale with unrealized losses at December 31, 2017. Amortized Cost Fair Value Unrealized Losses Securities owned without realized impairment: Unrealized losses of 10% or less $ 483,758 $ 475,738 $ 24,959 508,717 22,104 497,842 — — — — — — — — — — — — — — 8,020 2,855 10,875 — — — — — — — 508,717 497,842 10,875 1,813 — 1,813 1,746 — 1,746 — — — — — — — — — — — — — — 1,813 1,746 67 — 67 — — — — — — — 67 $ 510,530 $ 499,588 $ 10,942 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 summarizes investments in fixed maturity and equity securities available for sale with unrealized losses at December 31, 2016. Amortized Cost Fair Value 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 24 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) The following table provides information on fixed maturity securities available for sale with unrealized losses by actual or equivalent Standard & Poor’s rating at December 31, 2017. AAA AA A BBB Total investment grade BB B and below Total below investment grade Fair Value % of Total Unrealized Losses % of Total $ 18,736 84,309 163,721 199,697 466,463 9,866 21,158 31,024 4% $ 17% 33% 40% 94% 2% 4% 6% 519 2,118 2,253 2,902 7,792 634 2,506 3,140 5% 19% 21% 26% 71% 6% 23% 29% $ 497,487 100% $ 10,932 100% The following table provides information on fixed maturity securities available for sale with 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 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% Residential mortgage-backed securities, commercial mortgage-backed securities, and asset-backed securities that were rated below investment grade were 36% at December 31, 2017 and 34% at December 31, 2016 of the total mortgage-backed and asset-backed securities. 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, 2017 Fair Value Unrealized Losses December 31, 2016 Fair Value Unrealized Losses Fixed maturity securities available for sale: Due in one year or less $ 5,104 $ 4 $ 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 Total $ 752 5,131 5,002 10,889 43 — 10,932 43,474 344,940 114,661 506,802 226 9,851 516,879 $ $ $ 87,744 285,746 110,869 489,463 8,024 — 497,487 25 113 516 9,525 6,997 17,151 1 1,195 18,347 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) We held no non-income producing securities at December 31, 2017. We held one non-income producing security with a carrying value of $0.4 million at December 31, 2016. This security was previously written down due to other-than-temporary impairment and was sold in 2017. We did not hold securities of any corporation and its affiliates that exceeded 10% of stockholders' equity at December 31, 2017 or 2016. We monitor 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. Corporate Private-Labeled Residential 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 Corporate Private-Labeled Residential 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 2017 Amortized Cost Unrealized Gains (Losses) $ 1,847 $ 1,818 $ 34,344 36,191 66,598 14,911 81,509 31,463 33,281 67,652 16,703 84,355 $ 117,700 $ 117,636 $ 29 2,881 2,910 (1,054) (1,792) (2,846) 64 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) 26 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) The following table provides a reconciliation of credit losses recognized in earnings on fixed maturity securities 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 $ 13,224 $ 20,350 $ 17,889 2017 2016 2015 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 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 7 (8,819) 74 (7,179) 2,481 — (13) 4,399 $ (21) 13,224 $ (20) 20,350 $ 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 2017 2016 2015 $ 94,110 $ 92,896 $ 95,765 (12,674) (19,248) (368) (12,980) 48,840 $ (14,603) (22,235) (470) (19,454) 36,134 $ (17,030) (19,219) (454) (20,670) 38,392 $ 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 investments Total Less investment expenses Net investment income 2017 2016 2015 $ 103,438 $ 109,799 $ 116,713 928 30,686 21,669 5,421 296 105 1,093 30,694 18,738 5,558 130 295 1,023 31,662 17,059 5,774 8 177 162,543 (16,718) 145,825 $ 166,307 (15,699) 150,608 $ 172,416 (15,266) 157,150 $ 27 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) Realized Gains (Losses) The following table provides net realized investment gains (losses) by major category for the years ended December 31. Fixed maturity securities Equity securities Mortgage loans Real estate Amortization of DAC, VOBA, and DRL Net realized investment gains 2017 2016 2015 $ $ 2,470 1,608 (758) 1,235 (44) 4,511 $ $ 5,066 (190) (769) 955 (173) 4,889 $ $ 569 49 (1,041) 4,228 (38) 3,767 The following table provides detail concerning realized investment gains and losses for the 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 ventures 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 2017 2016 2015 $ 837 $ 3,702 1,236 5,775 (449) (5) (1) (12) (467) (746) (44) $ 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) 4,518 5,509 6,248 — (7) (563) (57) (7) 4,511 $ (620) 4,889 $ $ (2,189) (292) (2,481) 3,767 The portion of loss recognized in other comprehensive income (loss) represents the non-credit portion of current or prior other- than-temporary impairment. Corporate private-labeled residential mortgage-backed and other securities had impairments recorded in earnings of less than $0.1 million, $0.1 million, and $0.3 million for the years ended December 31, 2017, 2016, and 2015, respectively. No corporate obligations had impairments recorded in earnings during 2017. One equity security had an impairment recorded in earnings of $0.5 million during 2016. This was a 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. 28 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) 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 years ended December 31. Proceeds $ 35,655 $ 42,603 $ 39,954 2017 2016 2015 Non-Cash Investing Activity There were no non-cash investing transactions in 2017. 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. Mortgage Loans Investments in mortgage loans totaled $649.5 million at December 31, 2017, compared to $630.9 million at December 31, 2016. 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 $4.1 million at December 31, 2017 and $3.3 million at December 31, 2016. 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 both December 31, 2017 and December 31, 2016. New commercial loans, including refinanced loans, totaled $113.7 million during 2017 and $171.3 million during 2016. 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 may 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 39 new loans to the portfolio during 2017, and 79% of the total balance of these loans had some amount of recourse requirement. No new loans were purchased from institutional lenders during 2017 or 2016. The average loan-to-value ratio for the overall portfolio was 47% at December 31, 2017, down from 48% at December 31, 2016. 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 $1.8 million at December 31, 2017 and $1.7 million at December 31, 2016. We have certain mortgage loans that have an unamortized premium, totaling $0.2 million at both December 31, 2017 and December 31, 2016. 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 2017 2016 $ $ 653,621 (4,079) 649,542 $ $ 634,222 (3,333) 630,889 29 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) The following table summarizes the amount of mortgage loans at December 31, 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 2008 $ 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2017 21,002 10,048 7,765 10,872 37,516 63,132 45,312 47,403 134,202 163,961 112,408 % of Total 3% $ 2% 1% 2% 6% 10% 7% 7% 21% 24% 17% 2016 32,885 14,821 8,951 16,257 49,822 87,607 59,003 51,758 143,606 169,512 — % of Total 5% 2% 1% 3% 8% 14% 9% 8% 23% 27% —% Principal outstanding $ 653,621 100% $ 634,222 100% The following table identifies mortgage loans by geographic location at December 31. 2017 % of Total 2016 % of Total West south central East north central Pacific South Atlantic West north central Middle Atlantic Mountain East south central New England $ 111,676 17% $ 119,443 88,741 123,777 103,180 69,580 62,635 62,757 27,352 3,923 13% 19% 16% 11% 9% 10% 4% 1% 97,635 95,555 89,961 75,492 64,396 59,557 29,251 2,932 19% 15% 15% 14% 12% 10% 9% 5% 1% Principal outstanding $ 653,621 100% $ 634,222 100% The following table identifies the concentration of mortgage loans by state greater than 5% of total at December 31. $ Texas California Minnesota Ohio New Jersey Florida All others Principal outstanding $ 2017 108,142 99,647 50,445 39,296 37,851 — 318,240 653,621 % of Total 16% $ 15% 8% 6% 6% —% 1 49% 100% $ 2016 115,676 76,746 53,637 40,903 39,401 34,508 273,351 634,222 % of Total 18% 12% 9% 7% 6% 5% 43% 100% 1 Concentration was less than 5% at December 31, 2017. 30 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) The following table identifies mortgage loans by property type at December 31. 2017 % of Total 2016 % of Total Industrial Office Medical Other 1 $ 408,061 62% $ 374,116 156,296 25,934 63,330 24% 4% 10% 161,277 26,731 72,098 Principal outstanding $ 653,621 100% $ 634,222 1 The Other category consists principally of apartments and retail properties. 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 2017 9,726 71,493 95,143 477,259 % of Total 1% $ 11% 15% 73% 2016 15,680 75,360 94,833 448,349 Principal outstanding $ 653,621 100% $ 634,222 The following table identifies the commercial mortgage portfolio by current loan balance at December 31. 59% 25% 4% 12% 100% % of Total 2% 12% 15% 71% 100% 2017 % of Total 2016 % of Total $5 million or greater $ 139,234 21% $ 134,195 $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 60,824 63,671 125,853 183,682 80,357 10% 10% 19% 28% 12% 41,313 55,588 127,731 188,359 87,036 $ 653,621 100% $ 634,222 100% 21% 6% 9% 20% 30% 14% 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. 2017 % of Total 2016 % of Total 70% or greater 50% to 69% Less than 50% $ 90,010 14% $ 93,724 357,223 206,388 55% 31% 336,722 203,776 Principal outstanding $ 653,621 100% $ 634,222 15% 53% 32% 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 those 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 retaining loans that meet our underwriting and pricing parameters. We refinanced seven loans with outstanding balances of $8.4 million during the year ended December 31, 2017. We refinanced eleven loans with outstanding balances of $17.5 million during the year ended December 31, 2016. 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, the commitment fee is retained. For additional information, please see Note 21 - 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 2017 2016 $ 35,574 $ 36,425 162,781 (34,235) 164,120 29,099 159,510 (31,196) 164,739 30,882 $ 193,219 $ 195,621 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 $2.1 million during 2017, $1.4 million during 2016, and $20.0 million during 2015. We had $29.1 million in real estate joint ventures at year-end 2017, compared with $30.9 million at year-end 2016. We are the holder of all shares in three subsidiary real estate ventures with a combined carrying value of $20.9 million at year-end 2017 and $20.3 million at year-end 2016. Each of the three subsidiaries holds a 50% interest in these separate joint ventures and all are based in Urbandale, Iowa. The Company periodically reviews its real estate and real estate joint ventures for impairment and tests for recoverability whenever events or changes in circumstances indicate the carrying value may not be recoverable and exceeds its estimated fair value. For equity method investees, we consider financial and other information provided by the investee as well as other known information, including recent market activity and prospects for future activity, in determining whether an impairment has occurred. Based on our reviews performed, we concluded that no impairment existed as of December 31, 2017 or 2016. We had non-income producing commercial real estate, consisting of vacant properties and properties under development, of $13.1 million at December 31, 2017, compared to $8.5 million at December 31, 2016. In addition, $10.5 million of our real estate joint ventures were non-income producing at December 31, 2017 compared to $13.0 million at December 31, 2016. 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 a third-party pricing service 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 includes balances on hand and deposits in banks and other financial institutions. Short-term investments include highly- liquid investments in institutional money market funds that are carried at NAV. 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's contract. 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 that 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 Included in Other Policyholder Funds 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 utilized external third-party pricing services at both December 31, 2017 and December 31, 2016 to determine the majority of our fair values on investment securities available for sale. At December 31, 2017, approximately 97% of the carrying value of these investments was from an external pricing service, 2% was from brokers, and 1% was derived from internal matrices and calculations. At December 31, 2016, 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. We review prices received from service providers for reasonableness and unusual fluctuations but generally accept the price identified from the pricing service. In the event a price is not available from the 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 the third-party pricing service 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 pricing source through a variety of procedures that include but are not limited to: comparison to 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 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 the third-party pricing service. 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 2017 Assets: 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 Short-term investments Separate account assets Total Percent of total Liabilities: Other policyholder funds: $ 12,748 $ 119,782 $ — 12,748 — — — — — — — — — — — 12,748 5,214 32,195 — 50,157 $ 30,258 150,040 501,577 181,964 246,649 261,447 576,678 268,095 2,036,410 36,191 203,242 81,509 14,924 2,522,316 15,556 — 419,812 $ 2,957,684 2% 98% — — — — — — — — — — — — — — — — — — — $ 132,530 30,258 162,788 501,577 181,964 246,649 261,447 576,678 268,095 2,036,410 36,191 203,242 81,509 14,924 2,535,064 20,770 32,195 419,812 $ 3,007,841 —% 100% (3,252) — (3,252) $ $ (3,252) 419,812 416,560 $ $ $ Guaranteed minimum withdrawal benefits $ Separate account liabilities Total $ — — — $ $ — 419,812 419,812 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 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 Short-term investments Separate account assets Total Percent of total Liabilities: $ 12,108 $ 140,757 $ — — 12,108 — — — — — — — — — — — 12,108 4,950 27,526 — 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 — — — — — — — — — — — — — 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 27,526 373,256 $ 44,584 $ 2,910,701 $ 400 $ 2,955,685 2% 98% —% 100% Other policyholder funds: Guaranteed minimum withdrawal benefits Separate account liabilities Total $ $ — — — $ $ — 373,256 373,256 $ $ (2,158) — (2,158) $ $ (2,158) 373,256 371,098 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: 2017 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 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 $ 400 11 (83) — — (328) — — — (2,158) (1,419) — — 449 — (124) — — (3,252) $ — $ 2016 Assets Liabilities Fixed maturity securities available for sale $ 577 $ — 91 — — — (268) — — $ 400 $ GMWB (2,778) 1,237 — — 430 — (1,047) — — (2,158) 37 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) 2015 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 $ 759 $ (193) 306 — — — (295) — — $ 577 $ GMWB (1,094) (1,488) — — 330 — (526) — — (2,778) 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, 2017, 2016, or 2015. 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, 2017. Embedded Derivative - GMWB Fair Value $ (3,252) 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 0.39%-1.17% 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, 2016. Embedded Derivative - GMWB (2,158) 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 0.77%-1.32% 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 2017 2016 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. Assets: Investments: Fixed maturity securities available for sale $ Equity securities available for sale Mortgage loans Policy loans Short-term investments Cash Separate account assets Liabilities: Individual and group annuities Supplementary contracts and annuities without life contingencies Separate account liabilities Other policyholder funds - GMWB 2017 Fair Value Level 1 Level 2 Level 3 Total Carrying Value 12,748 $ 2,522,316 $ — $ 2,535,064 $ 2,535,064 5,214 15,556 — — 32,195 9,504 — — — — — — — — — 419,812 — — 419,812 — — 658,706 78,175 — — — 20,770 658,706 78,175 32,195 9,504 20,770 649,542 78,175 32,195 9,504 419,812 419,812 1,059,263 1,059,263 1,078,819 52,094 — (3,252) 52,094 419,812 (3,252) 53,470 419,812 (3,252) 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 Short-term investments Cash Separate account assets Liabilities: Individual and group annuities Supplementary contracts and annuities without life contingencies Separate account liabilities Other policyholder funds - GMWB — — — — 373,256 — — 373,256 — — — 27,526 9,630 — — — — — 40 400 — 636,801 79,893 — — — $ 2,530,907 $ 2,530,907 23,996 636,801 79,893 27,526 9,630 373,256 23,996 630,889 79,893 27,526 9,630 373,256 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) 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 $817; 2016 - $660) Investment-related financing receivables: Mortgage loans, net (allowance $4,079; 2016 - $3,333) 2017 2016 $ 1,719 $ 1,661 649,542 630,889 Total financing receivables $ 651,261 $ 632,550 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. 2017 2016 Gross Receivables Allowance Net Receivables Gross Receivables Allowance Net Receivables Agent specific loans Other agent receivables Total $ $ 1,234 1,302 2,536 $ $ 609 208 817 $ $ 625 1,094 1,719 $ $ 988 1,333 2,321 $ $ 346 314 660 $ $ 642 1,019 1,661 The following table details the activity of the allowance for doubtful accounts on agent receivables at December 31. Any recoveries are included as deductions. 2017 2016 Beginning of year Additions Deductions End of year $ $ 660 302 (145) 817 $ $ 1,197 210 (747) 660 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 2017 2016 $ 576,980 $ 566,865 76,641 (4,079) $ 649,542 $ 67,357 (3,333) 630,889 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 at December 31. 2017: Industrial Office Medical Other Total 2016: Industrial Office Medical Other Total Book Value 30-59 Days Amount of Payments Past Due 60-89 Days > 90 Days Total $ $ $ $ $ 482 — 4,921 — 5,403 $ 5 — 75 — 80 $ $ — $ — $ — 75 — 75 — 1,500 — $ 1,500 $ — $ — $ — $ — $ — 4,922 — 4,922 $ — 75 — 75 $ — 75 — 75 $ — 600 — 600 $ 5 — 1,650 — 1,655 — — 750 — 750 There were two mortgage loans that were over 30 days past due at December 31, 2017. One loan was over 30 days past due. Payment was subsequently received on this loan and it was brought current in 2018. The other loan was over 90 days past due and was in the process of foreclosure at both December 31, 2017 and 2016. We had no troubled loans that were restructured or modified in 2017 or 2016. The following table details the activity within the allowance for mortgage loan losses at December 31. Any recoveries are reflected as deductions. Beginning of year Provision Deductions End of year 2017 2016 3,333 $ 2,659 746 — 674 — 4,079 $ 3,333 $ $ 42 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) The Company increased the allowance for mortgage loan losses $0.7 million in 2017, primarily due to a specific reserve recorded on a certain loan. 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 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. On December 22, 2017, the newly enacted TCJA changed the expected statutory tax rate for tax years beginning January 1, 2018. The change in tax rate from 35% to 21% requires a remeasurement of the unamortized asset related to affordable housing investments. This remeasurement resulted in a decrease to the asset and a nonrecurring increase in amortization of $0.8 million that is included in income tax benefit in the Consolidated Statements of Comprehensive Income and the table below. 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 Amortization related to tax rate change 2017 2016 2015 $ 2,752 1,592 768 $ 2,752 1,543 — 2,752 1,232 — 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. No impairments were recorded during the years ended December 31, 2017, 2016, or 2015. 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. 44 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) The following table presents the carrying amount and maximum exposure to loss relating to VIEs for which we hold a variable interest, but are not the primary beneficiary, and which had not been consolidated at December 31, 2017 and December 31, 2016. The table includes investments in five real estate joint ventures and 17 affordable housing real estate joint ventures at December 31, 2017 and investments in five real estate joint ventures and 19 affordable housing real estate joint ventures at December 31, 2016. Real estate joint ventures Affordable housing real estate joint ventures Total 2017 2016 Carrying Amount Maximum Exposure to Loss Carrying Amount Maximum Exposure to Loss $ $ 21,761 7,338 29,099 $ $ 21,761 33,354 55,115 $ $ 21,098 9,784 30,882 $ $ 21,098 34,215 55,313 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. At December 31, 2017 and December 31, 2016, 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, 2017 included $18.7 million of losses which could be realized if the tax credits received by the VIEs were recaptured, compared to $14.6 million at December 31, 2016. 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 2017 2016 $ $ 766 21,063 19,502 41,331 (30,838) $ 10,493 $ 766 21,988 41,237 63,991 (48,138) 15,853 Depreciation expense totaled $1.5 million during 2017, $1.7 million during 2016, and $1.6 million during 2015. During 2017, based on updated information received, we determined the carrying value of one of our fixed assets exceeded the fair value. We reduced the carrying value of the fixed asset by $5.7 million to reflect its current fair value, which is included in Operating Expenses in the Consolidated Statements of Comprehensive Income. 45 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) 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 $419.8 million at December 31, 2017 and $373.3 million at December 31, 2016. Variable universal life and variable annuity assets comprised 28% and 72% of this amount in both 2017 and 2016. The following table provides a reconciliation of activity within separate account liabilities at December 31. 2017 2016 2015 Balance at beginning of year $ 373,256 $ 372,924 $ 406,501 Deposits on variable policyholder contracts Transfers to general account Investment performance Policyholder benefits and withdrawals Contract charges Balance at end of year 27,969 (2,286) 65,678 (32,123) (12,682) 419,812 $ 23,344 (3,880) 28,489 (34,991) (12,630) 373,256 $ 32,306 (5,726) (13,720) (33,083) (13,354) 372,924 $ 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 $131.9 million at December 31, 2017. The fair value of the separate accounts with the GMWB rider was $116.5 million at December 31, 2016. The GMWB guarantee liability was $(3.3) million at December 31, 2017 and $(2.2) million at December 31, 2016. 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 fees are received. 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 $419.8 million at December 31, 2017 and $373.3 million at December 31, 2016, 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 both December 31, 2017 and December 31, 2016. In addition, we have an assumed closed block of variable universal life business that totaled $331.0 million at December 31, 2017 and $295.7 million at December 31, 2016. 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 of $30.2 million at December 31, 2017 and $28.5 million at December 31, 2016 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, 2017 and December 31, 2016. 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 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. 46 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) Separate account balances for variable annuity contracts were $301.8 million at December 31, 2017 and $268.7 million at December 31, 2016. The total reserve held for variable annuity GMDB was less than $0.1 million at December 31, 2017 and was $0.1 million at December 31, 2016. 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, 2017 and 2016 is provided below: 2017 Net Amount at Risk Separate Account Balance Weighted Average Attained Age Separate Account Balance 2016 Net Amount at Risk Weighted Average Attained Age Return of net deposits $ 237,877 $ 289 61.1 $ 211,861 $ 2,122 60.7 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 8,903 7,216 2 27 68.8 8,046 431 68.5 67.8 6,977 66 67.4 47,771 $ 301,767 $ 2,527 2,845 63.3 61.8 41,840 $ 268,724 $ 5,303 7,922 62.7 61.4 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 2017 2016 $ 2,426 $ 18,673 87,741 18,814 147,233 26,880 2,345 19,078 81,117 14,552 128,489 23,143 $ 301,767 $ 268,724 47 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) 9. Unpaid Claims Liability and 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 for the years ended December 31. Classified as policy and contract claims, but excluded from these tables due to immateriality, are amounts recorded for group life, individual life, and deferred annuities. The amounts for 2017 and 2016 are audited while the amounts for 2015 are unaudited. 2017 Individual Insurance Group Insurance Old American Consolidated Gross liability at beginning of year $ 785 $ 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 $ (445) 340 27 57 84 3 136 139 285 372 657 $ $ 26,020 (19,850) 6,170 $ 5,341 (5,260) 81 32,146 (25,555) 6,591 26,836 (430) 26,406 22,758 3,104 25,862 6,714 21,231 27,945 87 (53) 34 12 11 23 92 5,346 5,438 $ $ 26,950 (426) 26,524 22,773 3,251 26,024 7,091 26,949 34,040 1 The incurred benefits related to prior years’ unpaid accident and health claims reflect the change in these liabilities. December 31, 2016 Individual Insurance Group Insurance Old American Consolidated Gross liability at beginning of year $ 995 $ 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 $ (595) 400 65 5 70 36 94 130 340 445 785 $ $ 26,045 (20,142) 5,903 $ 6,132 (6,054) 78 33,172 (26,791) 6,381 26,069 (503) 25,566 22,264 3,035 25,299 6,170 19,850 26,020 128 (64) 64 49 12 61 81 5,260 5,341 $ $ 26,262 (562) 25,700 22,349 3,141 25,490 6,591 25,555 32,146 1 The incurred benefits related to prior years’ unpaid accident and health claims reflect the change in these liabilities. 48 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) December 31, 2015 Individual Insurance Group Insurance Old American Consolidated Gross liability at beginning of year $ 1,276 $ 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 $ (761) 515 93 (36) 57 56 116 172 400 595 995 $ $ 25,345 (19,369) 5,976 $ 8,070 (7,992) 78 34,691 (28,122) 6,569 26,067 (356) 25,711 22,827 2,957 25,784 5,903 20,142 26,045 113 (58) 55 37 18 55 78 6,054 6,132 $ $ 26,273 (450) 25,823 22,920 3,091 26,011 6,381 26,791 33,172 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 at December 31. The amounts for 2017 and 2016 are audited while the amounts for 2015 are unaudited. 2017 2016 2015 Individual Insurance Segment: Individual accident and health $ 657 $ 785 $ 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 18,506 3,047 22,210 27,945 1,846 29,791 5,438 6,240 11,678 16,624 3,221 20,630 26,020 1,671 27,691 5,341 6,361 11,702 995 20,936 2,310 24,241 26,045 1,962 28,007 6,132 6,524 12,656 $ 63,679 $ 60,023 $ 64,904 For short-duration contracts, IBNR 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 both December 31, 2017 and 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. 49 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) 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, 2017 was $4.3 million, consisting of an undiscounted amount of $5.2 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, 2017. The amounts for 2017 and 2016 are audited while the amounts for 2015 and earlier are unaudited. For the Years Ended December 31, Total of IBNR Liabilities Plus Expected Development on Reported Claims Cumulative Number of Reported Claims 2012 2013 2014 2015 2016 2017 December 31, 2017 $ 1,132 $ 1,087 $ 806 999 836 868 $ 993 $ 1,116 $ 1,104 $ 815 955 989 838 799 918 1,694 838 768 701 1,552 2,038 Total $ 7,001 — — — — — 631 624 234 182 226 224 143 Year Incurred 2012 2013 2014 2015 2016 2017 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, 2017. The amounts for 2017 and 2016 are audited while the amounts for 2015 and earlier are unaudited. Year Incurred 2012 2013 2014 2015 2016 2017 For the Years Ended December 31, $ 91 $ $ 373 91 $ 499 336 71 $ 605 449 276 100 2012 2013 2014 2015 2016 2017 675 501 411 390 164 Total All outstanding liabilities before 2012, net of reinsurance Liabilities for claims and claim adjustment expenses, net of reinsurance $ $ $ $ 733 537 481 491 505 162 2,909 1,079 5,171 50 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) 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. 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 2017 2016 $ $ 5,171 4,139 9,310 25,220 6,409 31,629 27,891 — (5,151) — 22,740 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 $ 63,679 $ 60,023 The following table provides the historical average annual percentage payout of incurred claims by age, net of reinsurance, at December 31, 2017. Group long-term disability 10.18% 28.95% 14.27% 8.32% 5.30% 1 2 Years 3 4 5 51 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) 10. 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 7% of total statutory premiums in 2017, compared to 8% in 2016. Assumed participating business from the acquisition of closed blocks of business accounted for 99% of total participating statutory premiums in both 2017 and 2016. Participating business equaled 10% of total life insurance in force at December 31, 2017, compared to 11% at December 31, 2016. Assumed participating business accounted for 97% of total participating life insurance in force at both December 31, 2017 and December 31, 2016. 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. 11. Debt We had no notes payable at December 31, 2017 or December 31, 2016. As a member of the Federal Home Loan Bank of Des Moines (FHLB) with a capital investment of $4.8 million at December 31, 2017, 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 2017, 2016, and 2015. We have three unsecured revolving lines of credit with two major commercial banks. The lines available totaled $70.0 million at December 31, 2017 and December 31, 2016 with no balances outstanding. The lines of credit are at variable interest rates based upon short-term indices and will mature in June of 2018. We anticipate renewing these lines of credit as they come due. One line of credit includes a $10.0 million portion that can be unconditionally canceled by the lending institution at its discretion at any time. 12. Income Taxes The following table provides information about income taxes for the years ended December 31. Current income tax expense Deferred income tax expense (benefit) Adjustment to deferred taxes for enacted changes in tax laws Total income tax expense (benefit) 2017 2016 2015 $ $ 4,784 3,531 (30,487) (22,172) $ $ $ 5,069 3,659 — 9,048 3,922 — 8,728 $ 12,970 The following table provides information about taxes paid for the years ended December 31. Cash paid for income taxes $ 3,569 $ 4,933 $ 5,754 2017 2016 2015 52 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) 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 Remeasurement of deferred taxes for enacted changes in tax laws Effective income tax rate 2017 2016 2015 35 % (2)% (2)% (106)% (75)% 35 % (5)% (2)% — % 28 % 35 % (4)% — % — % 31 % 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 VOBA Property and equipment Deferred tax liabilities Net deferred tax liability Current tax asset Income taxes payable 2017 2016 7,626 7,523 5,233 20,382 4,017 19,756 37,738 4,262 1,491 67,264 46,882 (3,081) 43,801 $ $ 18,327 18,760 6,725 43,812 6,431 32,476 60,216 8,081 4,797 112,001 68,189 (1,937) 66,252 $ $ 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 2014. 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 Reductions for tax positions of prior years End of year 2017 2016 $ $ — $ — — $ 535 (535) — 53 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) Our policy is to recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense. The Company recognized no tax benefit related to tax penalty and interest expense in 2017. 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 2015. We had no material uncertain tax positions at December 31, 2017 or December 31, 2016. Income tax expense (benefit) is recorded in various places in our financial statements, as detailed below, for the years ended December 31. Income tax expense (benefit) Stockholders’ equity: Related to: 2017 2016 2015 $ (22,172) $ 8,728 $ 12,970 Change in net unrealized gains on securities available for sale Effect on DAC, VOBA, and DRL Change in future policy benefits Change in policyholder account balances Change in benefit plan obligations Total income tax expense (benefit) included in financial statements $ 426 675 1,045 36 3,467 (16,523) (1,004) 850 (1,056) (6) 6,543 $ 14,055 $ (27,600) 4,013 2,646 149 196 (7,626) Beginning January 1, 2018, the TCJA imposes a limitation on tax reserves based upon the greater of net surrender value or 92.81% of the reserve method prescribed by the NAIC which covers such contracts as of the date the reserve is determined. The Company has elected to apply SEC Staff Accounting Bulletin No. 118 (SAB 118) as permitted by the FASB. SAB 118 was issued on December 22, 2017 to address the application of GAAP in situations where a company does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the TCJA. We have recognized the provisional tax impacts related to the change in the methodology employed to calculate tax reserves. As a result, we have recorded a deferred tax asset and offsetting deferred tax liability of $7.4 million in our financial statements for the year ended December 31, 2017. The provisional amount has been recorded as we do not have the information available in appropriate detail to analyze and calculate the amount required under the change in methodology. The ultimate impact may differ, potentially materially, from the provisional amount due to additional analysis, changes in our interpretations or assumptions, or additional regulatory guidance that may be issued, among other things. The accounting is expected to be completed during the year ended December 31, 2018. 54 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) 13. Pensions and Other Postemployment Benefits 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 or pension 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 5.00%. 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. Prior to January 1, 2017, the interest crediting rate was the greater of 5.50% 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 2018 through 2022 are as follows: $9.4 million in 2018; $9.7 million in 2019; $9.1 million in 2020; $9.0 million in 2021; and $8.7 million in 2022. The aggregate benefits expected to be paid in the five years from 2023 through 2027 are $43.2 million. The expected benefits to be paid are based on the same assumptions used to measure the Company’s benefit obligation at December 31, 2017 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 2018 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 2017 2016 46% 22% 25% 7% Target Allocation 33% - 43% 23% - 33% 26% - 42% 0% - 2% 41% 30% 28% 1% Certain of our pension plan assets consist of investments in pooled separate accounts. The 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 2018. 55 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) 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. Effective January 1, 2018, the assumption for the expected long-term rate of return on plan assets was reduced to 7.15%. The assumed discount rate used to determine the benefit obligation was 3.30% for pension benefits and was 3.52% for postemployment benefits. The discount rates were determined by reference to the Citigroup Pension Liability Yield Curve on December 31, 2017. 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 2017. These tables were updated because of additional mortality information and reflect more recent modifications. These modifications generally reduced 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 $1.1 million in the Plan's benefit obligation at December 31, 2017. 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 2018 through 2022 are as follows: $0.6 million in 2018; $0.6 million in 2019; $0.7 million in 2020; $0.7 million in 2021; and $0.7 million in 2022. The aggregate benefits expected to be paid in the five years from 2023 through 2027 are $4.3 million. The expected benefits to be paid are based on the same assumptions used to measure the Company’s benefit obligation at December 31, 2017. The 2018 contribution for the postemployment medical plans is estimated to be $0.6 million. The Company pays these medical costs as they become due and the postemployment 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 both 2017 and 2016, and $0.1 million in 2015. Non-contributory deferred compensation plans for eligible agents based upon earned first year commissions are also offered. Contributions to these plans were $0.3 million in 2017, $0.2 million in 2016, and $0.3 million in 2015. 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 savings plans were $2.2 million in 2017 and $2.1 million in both 2016 and 2015. We may contribute 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 2017, 2016, or 2015. We recognize the funded status of our 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. 56 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) The following tables provide information regarding pension benefits and other postemployment benefits (OPEB) for the years ended December 31. Change in projected benefit obligation: Benefit obligation at beginning of year $ 133,862 $ 144,395 $ 23,060 $ 34,616 Pension Benefits OPEB 2017 2016 2017 2016 Service cost Interest cost Plan participants' contributions Plan changes Actuarial (gain) loss Benefits paid Benefit obligation at end of year $ Change in plan assets: Fair value of plan assets at beginning of year $ Return on plan assets Plan participants' contributions Company contributions Benefits paid Fair value of net plan assets at end of year $ — 4,725 — — 5,188 (9,543) 134,232 $ — 5,333 — (1,538) (1,504) (12,824) 133,862 $ 307 910 461 — (5,613) (893) 18,232 $ 518 1,452 496 — (13,055) (967) 23,060 134,293 $ 130,858 $ — $ 18,206 — 4,051 (9,543) 147,007 10,231 — 6,028 (12,824) 134,293 (431) $ $ — 461 432 (893) — $ — — 496 471 (967) — 18,232 $ 23,060 OPEB 2017 2016 (13,657) (100) $ (8,877) (925) (13,757) $ (9,802) $ $ $ $ Funded status at end of year $ (12,775) Pension Benefits 2017 2016 Amounts recognized in accumulated other comprehensive income (loss): Net loss (gain) Prior service credit Total accumulated other comprehensive income (loss) $ $ 69,091 (1,472) 67,619 $ $ 75,108 (1,538) 73,570 Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss): Unrecognized actuarial net gain Unrecognized prior service credit Amortization of net gain (loss) Amortization of prior service credit Total (gain) loss recognized in other comprehensive income (loss) Pension Benefits OPEB 2017 2016 2017 2016 $ $ (3,379) — (2,638) 66 (2,333) (1,538) (2,649) — $ $ (5,613) — 833 825 (13,055) — (96) 976 $ (5,951) $ (6,520) $ (3,955) $ (12,175) 57 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) Plans with underfunded accumulated benefit obligation: Projected benefit obligation Accumulated benefit obligation Fair value of plan assets Weighted average assumptions used to determine benefit obligations at December 31: Pension Benefits OPEB 2017 2016 2017 2016 $ 134,232 $ 133,862 $ 134,232 147,007 133,862 134,293 $ — — — — — — Discount rate 3.30% 3.69% 3.52% 4.02% Weighted average assumptions used to determine net periodic benefit cost for years ended December 31: Discount rate Expected return on plan assets 3.69% 7.50% 3.84% 7.50% 4.02% —% 4.26% — The following table presents the fair value of each major category of pension plan assets at December 31. Fixed maturity securities: U.S. Government Industrial and public utility Investment funds: Mutual funds Hedge fund Collective trust Limited partnerships Other invested assets Cash and cash equivalents Receivables 2017 2016 $ 479 $ 11,773 51,074 6,434 49,381 12,035 25 9,685 6,148 666 16,050 44,548 18,679 42,995 10,443 14 723 178 Fair value of assets at end of year 147,034 134,296 Liabilities: Accrued liabilities Total liabilities 27 27 3 3 Fair value of net plan assets at end of year $ 147,007 $ 134,293 58 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. Fixed maturity securities: U.S. 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 Fixed maturity securities: U.S. 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 2017 $ — $ 479 $ — $ — 51,074 — 51,074 11,773 — — 12,252 — — 25 25 479 11,773 51,074 25 63,351 6,434 49,381 12,035 131,201 $ Level 1 Level 2 Level 3 Total 2016 $ — $ 666 $ — $ — 44,548 — 44,548 16,050 — — 16,716 — — 14 14 666 16,050 44,548 14 61,278 18,679 42,995 10,443 $ 133,395 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 Gains (losses) realized and unrealized Ending balance 2017 2016 $ $ 14 11 25 $ $ 32 (18) 14 59 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 (gain) 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 2016 2017 2015 2017 $ — $ — $ — $ 4,725 (9,638) 2,638 (66) (2,341) 5,333 (9,403) 2,649 — (1,421) 5,424 (9,919) 2,400 — (2,095) 307 910 — (833) (825) (441) OPEB 2016 $ 518 $ 1,452 — 96 (976) 1,090 2015 686 1,402 — 471 (1,146) 1,413 (5,951) (6,520) 1,934 (3,955) (12,175) (2,493) $ (8,292) $ (7,941) $ (161) $ (4,396) $ (11,085) $ (1,080) 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 2018. Actuarial net loss (gain) Prior service credit Pension Benefits $ 2,394 $ (66) OPEB (1,292) (100) 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 $ 160 $ Postemployment benefit obligation 2,877 (126) (2,322) For measurement purposes, the annual increase in the per capita cost of covered health care benefits was assumed to be 7.25%, decreasing gradually to 5.00% in 2028 and thereafter. 60 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) 14. 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, 2017. Defined Measurement Period 2015-2017 2016-2018 2017-2019 2018-2020* Number of Units 165,527 134,828 130,017 155,297 Grant Price $47.87 $43.495 $48.01 $45.62 * Effective January 1, 2018 The plan made a payment of $0.5 million during 2017 for the three-year interval ended December 31, 2016 and a payment of $1.7 million during 2016 for the three-year interval ended December 31, 2015. The plan made a payment of $3.8 million during 2015 for the three-year interval ended December 31, 2014. The change in accrual that reduced operating expense during 2017 was $0.1 million, net of tax. The cost of share-based compensation accrued as an operating expense during 2016 was $0.9 million, net of tax. The change in accrual that reduced operating expense during 2015 was $0.1 million, net of tax. 61 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) 15. 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 $ $ $ 2017 2016 2015 $ 28,592 (13,357) 3,217 $ 28,838 (13,245) 3,409 28,104 (13,296) 3,666 18,452 $ 19,002 $ 18,474 $ 178,318 (47,306) 2,232 $ 171,314 (47,122) 2,304 159,692 (46,262) 2,415 $ 133,244 $ 126,496 $ 115,845 $ $ 57,324 (10,632) 46,692 $ $ 55,400 (10,077) 45,323 $ $ 54,465 (10,135) 44,330 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 $17.2 million at December 31, 2017 and $19.4 million at December 31, 2016. The reserve for future policy benefits ceded under this agreement was $10.2 million at December 31, 2017 and $11.5 million at December 31, 2016. 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 $763.4 million at December 31, 2017 and $828.5 million at December 31, 2016. Premiums totaled $6.5 million during 2017, $6.8 million during 2016, and $7.0 million during 2015. Reinsurance recoverables were $185.6 million at year-end 2017, consisting of reserves ceded of $172.0 million and claims ceded of $13.6 million. 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. The maximum retention on any one life during 2017 and 2016 was $0.5 million for ordinary life plans and $0.1 million for group coverage. 62 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, 2017, 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 44,745 $ 23,093 21,430 12,135 10,513 10,222 63,509 185,647 $ % of Recoverable 24% 12% 12% 7% 6% 5% 34% 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 2017 and 2016, 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 $796.6 million of life insurance in force at December 31, 2017 and $863.7 million of life insurance in force at December 31, 2016. This block generated life insurance premiums of $2.1 million in 2017, $2.2 million in 2016, and $2.3 million in 2015. 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 $331.0 million of separate account balances at December 31, 2017, which are included in the financial statements of American Family, compared to $295.7 million at December 31, 2016. This block consisted of $0.6 million of future policy benefits and $30.2 million in fixed fund balances that are included in Policyholder Account Balances in the Company’s Consolidated Balance Sheets at December 31, 2017. This block consisted of $0.6 million of future policy benefits and $28.5 million in fixed fund balances at December 31, 2016. 63 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) 16. Comprehensive Income (Loss) Comprehensive income (loss) is comprised of net income and other comprehensive income (loss). Other comprehensive income (loss) includes the unrealized investment gains or losses on securities available for sale (net of reclassifications for realized investment gains or losses), net of adjustments to DAC, VOBA, DRL, future policy benefits, and policyholder account balances. 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 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 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 Year Ended December 31, 2017 Pre-Tax Amount Tax Expense (Benefit) Net-of-Tax Amount $ 2,854 $ 1,001 $ 827 289 2,474 — (7) 1,214 9,906 1,929 2,987 102 $ 16,138 $ 866 — (2) 426 3,467 675 1,045 36 5,649 $ $ 1,853 538 1,608 — (5) 788 6,439 1,254 1,942 66 10,489 51,541 62,030 64 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) 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 $ $ 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) $ $ 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 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 65 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, 2017, net of tax. This table reflects the adoption of the FASB guidance regarding the reclassification of certain stranded tax effects from accumulated other comprehensive income (loss) that we adopted effective December 31, 2017. 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 $ 58,633 $ 1,750 $ (41,448) $ (9,492) $ (14,453) $ (306) $ (5,316) Other comprehensive income before reclassification Amounts reclassified from accumulated other comprehensive income (loss) Net current period other comprehensive income Cumulative effect of adoption of new accounting principle 2,357 34 6,439 1,225 1,942 66 12,063 (1,608) 749 5 39 — 29 — 6,439 1,254 1,942 — 66 (1,574) 10,489 End of year $ 72,172 $ 2,174 $ 12,790 385 (1,774) (7,540) (42,549) $ (10,012) $ (15,206) $ (2,695) (51) (291) $ 1,115 6,288 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) 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) (3,870) (932) 12,152 1,689 (1,960) (10) 7,069 3,340 (403) — (112) — — 2,825 12,152 (41,448) $ 1,577 (9,492) $ (14,453) $ (1,960) (10) 9,894 (306) $ (5,316) 66 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. 2017 2016 2015 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 $ 2,474 (866) 1,608 $ 5,139 (1,799) 3,340 (7) 2 (5) (44) 15 (29) (620) 217 (403) (173) 61 (112) 2,423 (849) 1,574 $ 4,346 (1,521) 2,825 $ $ 3,048 (1,067) 1,981 (2,481) 869 (1,612) (38) 13 (25) 529 (185) 344 1 (Increases) decreases net realized investment gains (losses) on the Consolidated Statements of Comprehensive Income. 2 (Increases) decreases income tax expense on the Consolidated Statements of Comprehensive Income. 17. Earnings per Share Due to 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 2017 and 2016, and 10,614,068 shares during 2015. The number of shares outstanding at both December 31, 2017 and December 31, 2016 was 9,683,414. 18. 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 of America and no individual customer accounts for 10% or more of our revenue. 67 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 years ended December 31. Intercompany transactions have been eliminated to arrive at Consolidated Statements of Comprehensive Income. Insurance revenues (customer revenues) Interest credited to policyholder account balances Amortization of deferred acquisition costs Income tax expense (benefit) Net income Assets 2017 Individual Insurance Group Insurance Old American Consolidated $ 145,449 $ 59,569 $ 88,935 $ 293,953 72,921 15,916 (16,687) 41,005 4,120,410 — 72,921 18,805 (6,395) 8,846 34,721 (22,172) 51,541 400,550 4,530,670 — — 910 1,690 9,710 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 68 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) 19. Quarterly Consolidated Financial Data (unaudited) The unaudited quarterly results of operations for the years ended December 31 are summarized in the following table. 2017: Total revenues First Second Third Fourth $ 111,237 $ 115,277 $ 112,014 $ 112,174 Total benefits and expenses 103,983 107,360 102,671 5,168 5,612 6,648 107,319 34,113 Net income Per common share, basic and diluted 2016: Total revenues 0.53 0.58 0.69 3.52 $ 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 4,257 5,242 7,193 5,624 0.44 0.54 0.74 0.58 20. 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. 2017 2016 2015 Net gain from operations $ 14,440 $ 11,457 $ 27,390 Net income Capital and surplus 15,977 307,501 12,457 323,304 29,149 297,612 The decrease in capital and surplus in 2017 was largely attributable to changes in net deferred income tax of $25.1 million, stockholder dividends paid of $10.5 million, and changes in net unrealized capital losses of $10.2 million. These changes were partially offset by net income of $16.0 million, a $10.4 million reduction in the liability for pension and OPEB, and a $4.2 million decrease in nonadmitted assets. The change in net deferred income tax largely resulted from the remeasurement of deferred taxes to reflect the reduced corporate federal income tax rate of 21% as defined under the TCJA. 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. 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, 2017 in the above table includes capital and surplus of $21.7 million for Old American and $25.2 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. 69 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) The maximum stockholder dividends payable by Kansas City Life without prior approval in 2018 is $30.8 million, 10% of December 31, 2017 capital and surplus. The maximum stockholder dividends payable by Old American without prior approval in 2018 is $2.3 million, 10% of December 31, 2017 capital and surplus. The maximum stockholder dividends payable by Sunset Life without prior approval in 2018 is $2.5 million, 10% of December 31, 2017 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 1,100%, well in excess of the control level at December 31, 2017. We are required to deposit a defined amount of assets with state regulatory authorities. Such assets had a statutory carrying value of $12.3 million at December 31, 2017 and $12.1 million at both December 31, 2016 and December 31, 2015. 21. Commitments, Contingent Liabilities, Guarantees, and Indemnifications Commitments In the normal course of business, we have open purchase and sale commitments. At December 31, 2017, we had purchase commitments to fund mortgage loans of $6.5 million. Subsequent to December 31, 2017 we entered into commitments to fund additional mortgage loans of $7.8 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 70 Kansas City Life Insurance Company Notes to Consolidated Financial Statements – (Continued) 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. 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. 22. Subsequent Events We evaluated events that occurred subsequent to December 31, 2017 through February 26, 2018, the date the consolidated financial statements were issued. On January 22, 2018, the Kansas City Life Board of Directors declared a quarterly dividend of $0.27 per share, paid on February 7, 2018 to stockholders of record on February 1, 2018. 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, 2017. 71 The Audit Committee and Stockholders Kansas City Life Insurance Company Independent Auditor's Report We have audited the accompanying consolidated financial statements of Kansas City Life Insurance Company and subsidiaries, which comprise the consolidated balance sheets as of December 31, 2017 and 2016, and the related consolidated statements of comprehensive income, stockholders’ equity and cash flows for the years 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kansas City Life Insurance Company and its subsidiaries as of December 31, 2017 and 2016, and the results of their operations and their cash flows for the years 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 and for the year ended December 31, 2015, were audited by other auditors and their report thereon, dated March 10, 2016, expressed an unmodified opinion. /s/ BKD, LLP Kansas City, Missouri February 26, 2018 72 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 its 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. We also have 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; 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, which often can be extreme in nature, can significantly impact the financial markets and our investments, revenues, and policyholder benefits. 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. 73 Consolidated Results of Operations Summary of Results We earned net income of $51.5 million in 2017 compared to $22.3 million in 2016. Net income per share was $5.32 in 2017 versus $2.30 in 2016. Contributing to the higher income in 2017 were a decrease in income tax expense and an increase in insurance revenues. Partially offsetting these items was a decrease in net investment income and increases in amortization of deferred acquisition costs and operating expenses. Additional information on these items is presented below. The following table presents condensed consolidated results of operations for the years ended December 31. 2017 2016 % Change Revenues: Insurance and other revenues Net investment income Net realized investment gains Benefits and expenses: $ $ 300,366 145,825 4,511 289,525 150,608 4,889 Policyholder benefits and interest credited to policyholder account balances Amortization of deferred acquisition costs Operating expenses Income tax expense (benefit) Adjustment to deferred taxes for enacted changes in tax laws Net income 283,720 34,721 102,892 8,315 284,680 27,833 101,465 8,728 (30,487) — $ 51,541 $ 22,316 4 % (3)% (8)% — % 25 % 1 % (5)% — % 131 % 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. Insurance revenues are impacted by the level of new sales, the type of products sold, the persistency of policies, general economic conditions, and competitive forces. The following table presents gross premiums on new and renewal business, less reinsurance ceded, for the years ended December 31. New premiums are also detailed by product. 2017 2016 % Change New premiums: Traditional life insurance $ Immediate annuities Group life insurance Group accident and health insurance Total new premiums Renewal premiums Total premiums Reinsurance ceded $ 21,793 26,589 3,197 11,681 63,260 174,614 237,874 (57,938) Net premiums $ 179,936 $ 20,291 27,388 2,785 12,876 63,340 165,678 229,018 (57,199) 171,819 7 % (3)% 15 % (9)% — % 5 % 4 % 1 % 5 % 74 Consolidated total premiums increased $8.9 million or 4% in 2017 compared to 2016. Total new premiums were essentially flat compared to the prior year. New traditional life premiums increased $1.5 million or 7%, largely from the Individual Insurance segment. In addition, new group life premiums increased $0.4 million or 15%. Partially offsetting this was a $1.2 million or 9% decrease in new group accident and health premiums, as a $1.9 million decline in new long-term disability premiums was partially offset by a $0.7 million increase in new dental premiums. In addition, new immediate annuity premiums declined $0.8 million or 3%. Immediate annuity receipts can have sizeable fluctuations, as receipts from policyholders largely result from one-time premiums. Total renewal premiums increased $8.9 million or 5% in 2017 compared to 2016, reflecting a $5.0 million or 4% increase in renewal traditional life premiums, a $3.2 million or 8% increase in renewal group accident and health premiums, and a $0.8 million or 8% increase in renewal group life premiums. The increase in renewal traditional life insurance premiums was largely from the Old American segment and the increase in renewal group accident and health premiums was primarily from the long-term disability line. Deposits related to interest sensitive life (universal life, indexed universal life, and variable 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 as contract charges in the Consolidated Statements of Comprehensive Income. The following table provides detail by new and renewal deposits for the years ended December 31. New deposits are also detailed by product. New deposits: Interest sensitive life Fixed annuities Variable annuities Total new deposits Renewal deposits Total deposits 2017 2016 % Change $ $ 14,506 57,249 15,092 86,847 13,595 50,250 9,799 73,644 139,466 142,044 $ 226,313 $ 215,688 7 % 14 % 54 % 18 % (2)% 5 % 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 increased $13.2 million or 18% in 2017 compared to 2016. This improvement was due to a $7.0 million or 14% increase in new fixed annuity deposits, a $5.3 million or 54% increase in new variable annuity deposits, and a $0.9 million or 7% increase in new interest sensitive life deposits. The increase in new interest sensitive life deposits was from the indexed universal life products. Total renewal deposits declined $2.6 million or 2% in 2017 versus one year earlier, largely due to a $1.9 million or 15% decrease in renewal variable annuity deposits and a $1.1 million or 4% decrease in renewal variable universal life deposits. This was partially offset by a $0.8 million or 1% increase in renewal interest sensitive life deposits. Contract charges result from charges and fees on interest-sensitive and deposit-type products. We maintain both open blocks 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. Contract charges are also potentially impacted by unlocking adjustments, as discussed below. Total contract charges increased $2.9 million or 3% in 2017 relative to the prior year. Contract charges on open blocks increased $4.4 million or 6% and contract charges on closed blocks declined $1.5 million or 3% in 2017 compared to the prior year. The largest factor in the increase in contract charges on open blocks in 2017 was the variance in deferred revenue unlocking adjustments and refinements in estimates during 2017 compared to 2016. Deferred revenue unlocking adjustments and refinements in estimates increased contract charges $2.0 million in 2017, primarily due to the implementation of specific cost of insurance charges for certain plans. Unlocking adjustments and refinements in estimates in 2016 decreased contract charges $1.0 million, primarily due to changes in earned rate expectations. Total contract charges on closed blocks equaled 39% of total consolidated contract charges during 2017, down from 41% in 2016. The decline in contract charges on closed blocks in 2017 reflected the runoff of the business. 75 Investment Revenues Gross investment income decreased $3.8 million or 2% in 2017 compared to one year earlier. This decline reflected lower overall yields earned and available on certain investments that were partially offset by higher average invested assets. In addition, investment expenses increased $1.0 million or 6% in 2017 compared to 2016, primarily due to an increase in real estate expenses. Fixed maturity securities provide a majority of our investment income. Fixed maturity securities totaled 72% of our investments at December 31, 2017 compared to 73% at December 31, 2016. Income from these investments declined $6.4 million or 6% in 2017 compared to 2016, reflecting lower average invested assets and lower yields earned. Investment income from commercial mortgage loans was essentially flat in 2017 compared to one year earlier. Lower prepayment fees and lower yields earned were offset by a higher average mortgage loan portfolio balance compared to the prior year. Investment income from real estate increased $2.8 million or 15% in 2017 compared to the prior year. This improvement reflected higher rental income from the acquisition of new properties, increased occupancy, and lease rates. Partially offsetting these improvements, real estate expenses also increased as a result of the acquisition of new properties. We recorded net realized investment gains of $4.5 million in 2017. Gains recorded in 2017 included $0.8 million from sales of investment securities, $2.1 million from investment securities called, and $1.2 million from the sale of real estate. 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 and policyholder account balances. The largest component of policyholder benefits was death benefits for the periods presented. Death benefits reflect mortality results, after consideration of the impact of reinsurance. Policyholder benefits decreased $1.1 million or 1% in 2017 compared to 2016. A $2.3 million or 1% increase in surrenders and benefits, net of reinsurance was offset by a $3.4 million or 18% decrease in benefit and contract reserves. Several factors contributed to the decrease in reserves. Changes in the fair value of the GMWB rider resulted in a $1.7 million decrease in benefit and contract reserves compared to the prior year. The results in 2017 reflected improvements in the capital markets. Also contributing to the decrease in reserves was a $0.8 million decline in immediate annuity premiums, which results in a decrease to the change in reserves on an equal and offsetting basis. In addition, the change in reserves included a $0.3 million decrease in reserves on interest bonuses for certain policies that resulted from unlocking and refinements in 2017. This compares to 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 in 2016. The difference in these unlocking and refinements resulted in a net decrease in reserves of $3.4 million in 2017 compared to 2016. Amortization of DAC The amortization of DAC increased $6.9 million or 25% in 2017 compared to the prior year. This increase primarily reflects unlocking adjustments and refinements in estimates that increased DAC amortization $1.7 million in 2017 compared to unlocking adjustments and refinements in estimates that decreased DAC amortization $5.8 million in 2016. The unlocking in 2017 was primarily driven by low interest rates and the implementation of specific cost of insurance charges for certain plans. The unlocking in 2016 was associated with favorable adjustments for mortality, partially offset by adjustments related to interest rates. In addition, amortization of DAC increased $1.0 million at the Old American segment due to the overall growth of the business. Partially offsetting the increases, DAC amortization decreased due to improved separate account performance. 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 $1.4 million or 1% in 2017 compared to one year earlier. This increase was primarily due to the reduction in fair value of a long-lived asset and to an increase in VOBA amortization. These were partially offset by lower compensation costs and legal fees. VOBA is evaluated on an ongoing basis for unlocking adjustments. If necessary, adjustments are made to the current period VOBA amortization. The amortization of VOBA increased $0.8 million or 32% in 2017. This increase was largely due to unlocking adjustments that increased VOBA amortization $1.2 million in 2017. This compares to unlocking adjustments that decreased VOBA amortization $0.5 million in 2016. The unlocking in 2017 was primarily driven by lower interest rates. The unlocking in 2016 was associated with favorable adjustments for mortality, expenses, surrenders, and premium persistency, partially offset by adjustments related to interest rates. 76 Income Taxes We recorded an income tax benefit of $22.2 million or 75% of income before tax in 2017. We recorded an income tax expense of $8.7 million or 28% of income before tax in 2016. The decrease in the effective tax rate in 2017 versus 2016 was due to permanent differences, tax credits from affordable housing investments, and the remeasurement of deferred taxes to reflect the reduced corporate federal income tax rate of 21%. The impact of the TCJA provided a $30.5 million benefit. The effective income tax rate was lower than the prevailing corporate federal income tax rate of 35% in 2017 and 2016, due to permanent differences, including the dividends-received deduction, tax credits from affordable housing investments, and the remeasurement of deferred taxes to reflect the reduced corporate federal income tax rate of 21% as a result of the TCJA. For additional information, please see Note 12 - Income Taxes. 77 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 securities Equity securities Mortgage loans Real estate Policy loans Short-term investments Other investments Total 2017 $ 2,535,064 20,770 649,542 193,219 78,175 32,195 2,424 $ 3,511,389 % of Total 2016 % of Total 72% $ 2,530,907 23,996 1% 630,889 18% 195,621 6% 79,893 2% 27,526 1% 1,388 — 100% $ 3,490,220 72% 1% 18% 6% 2% 1% — 100% Fixed maturity securities were the largest component of our total investments at December 31, 2017. The largest categories of fixed maturity securities at December 31, 2017 consisted of 80% in corporate securities, 8% in municipal securities, and 5% in U.S. Treasury securities and obligations of the U.S. Government. Fixed maturity securities had unrealized gains of $103.5 million and unrealized losses of $10.9 million at December 31, 2017. 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 97% at December 31, 2017, compared to 96% at December 31, 2016. The fair value of fixed maturity securities with unrealized losses was $497.5 million at December 31, 2017, compared with $516.9 million one year earlier. This decrease primarily reflected a tightening in overall market spreads during 2017. In particular, the energy asset class experienced improved performance during the year. At December 31, 2017, 94% of security investments with an unrealized loss were investment grade and accounted for 71% of the total unrealized losses. At December 31, 2016, 94% of securities with an unrealized loss were investment grade and accounted for 85% of the total unrealized losses. At December 31, 2017, we had $105.1 million in gross unrealized gains on fixed maturity and equity securities that offset $10.9 million in gross 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, 2017, 80% of the fixed maturity and equity securities portfolio had unrealized gains, up slightly from 79% at December 31, 2016. We had a decrease in gross unrealized losses in most categories from year-end 2016 to year-end 2017 due to changes in interest rates and market spreads during 2017. Gross unrealized losses on fixed maturity and equity securities for less than 12 months accounted for $2.6 million or 24% of the security values in a gross unrealized loss position at December 31, 2017. Gross unrealized losses on fixed maturity and equity security investments of 12 months or longer increased from $6.5 million at December 31, 2016 to $8.3 million at December 31, 2017. Residential mortgage-backed securities, commercial mortgage-backed securities, and asset-backed securities that were rated below investment grade were 36% at December 31, 2017 and 34% at December 31, 2016 of the total mortgage-backed and asset-backed securities. This increase was primarily due to paydowns in the investment grade portion of the portfolio. We have written down certain investments in previous periods. Fixed maturity securities written down and still owned at December 31, 2017 had a fair value of $33.2 million and net unrealized gains of $2.8 million, compared to the December 31, 2016 fair value of $47.0 million and net unrealized gains of $2.7 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 2017 or 2016. Investments in mortgage loans totaled $649.5 million at December 31, 2017, up from $630.9 million at December 31, 2016. The commercial mortgage loan portfolio increased $18.6 million during 2017, as new loans exceeded the regularly scheduled payments and the volume of prepaid loans. Mortgage loan principal paydowns decreased $26.3 million in 2017 compared to 2016, primarily 78 due to a lower dollar volume of prepaid loans. Our mortgage loans are secured by commercial real estate. These loans are stated 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 $4.1 million at December 31, 2017 and $3.3 million at December 31, 2016. For additional information on our mortgage loan portfolio, please see Note 3. Investments in real estate totaled $193.2 million at December 31, 2017 and $195.6 million at December 31, 2016. The decrease was largely due to the sale of an undeveloped property that resulted in a realized gain of $1.1 million before applicable income taxes. 79 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 $14.5 million for the year ended December 31, 2017. The primary sources of cash from operating activities in 2017 were premium receipts and net investment income. The primary uses of cash from operating activities in 2017 were for the payment of policyholder benefits and operating expenses. Net cash used by investing activities was $28.4 million. The primary sources of cash were sales, maturities, calls, and principal paydowns of investments totaling $433.6 million. Offsetting these, investment purchases, including new mortgage loans and new policy loans, totaled $455.5 million. Net cash provided by financing activities was $13.8 million, primarily including $23.1 million of deposits, net of withdrawals, on policyholder account balances and $5.6 million of net transfers from separate accounts. Partially offsetting these was 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 2017 2016 $ 4,110,858 $ 4,076,157 737,155 18% 685,583 17% Stockholders’ equity increased $51.6 million from year-end 2016. This increase was attributable to earnings during the year and the change in the liability for pension and OPEB. Included in the increase in earnings in 2017 was the remeasurement of deferred taxes to reflect the reduced corporate federal income tax rate of 21%. Stockholders’ equity per share, or book value, equaled $76.13 at year-end 2017, an increase from $70.80 at year-end 2016. 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 $48.8 million at December 31, 2017, a $12.7 million increase from December 31, 2016. 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 NAIC. We believe these statutory limitations impose no practical restrictions on future dividend payment plans. See further discussion in Note 20 - Statutory Information and Stockholder Dividends Restriction. In January 2018, the Board of Directors authorized the purchase of up to one million of our shares on the open market through January 2019. No shares were purchased under this authorization during 2017 or 2016. 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). 80 On January 22, 2018, the Board of Directors declared a quarterly dividend of $0.27 per share that was paid February 7, 2018 to stockholders of record at February 1, 2018. 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 78% of total policyholder account balances were at the minimum guaranteed rate as of December 31, 2017 compared to 81% at December 31, 2016. December 31, 2017 Universal Life Variable Life and Annuities Fixed Deferred Annuities 267,984 289,354 392,230 54,275 $ 1,003,843 $ 220,961 301,349 339,840 887,761 0% to 1% $ $ 25,611 $ Greater than 1% to 3% Greater than 3% to 4% Greater than 4% Total $ 106,237 $ December 31, 2016 Supplemental Contracts and Annuities Without Life Contingencies 7,899 $ 28,053 11,561 5,957 53,470 $ Total 304,990 633,133 713,116 400,072 $ 2,051,311 Supplemental Contracts and Annuities Without Life Contingencies 7,973 $ 27,428 12,625 6,456 $ Total 234,278 653,396 745,406 418,648 3,496 94,765 7,976 — 3,032 95,867 8,134 — 0% to 1% $ $ 13,955 $ Universal Life Variable Life and Annuities Fixed Deferred Annuities 209,318 321,297 416,341 51,252 208,804 308,306 360,940 892,005 Greater than 1% to 3% Greater than 3% to 4% Greater than 4% Total $ 998,208 $ $ 107,033 $ 54,482 $ 2,051,728 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. 81 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. 2017 % of Total 2016 % of Total One year or less $ 131,096 13% $ 133,829 Two years Three years Four years Five years Six years or more Total 67,697 55,664 54,772 55,352 639,262 7% 5% 5% 6% 64% $ 1,003,843 100% $ 56,104 45,176 59,360 57,961 645,778 998,208 13% 6% 4% 6% 6% 65% 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 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, 2017 and 2016. None Less than 5% 5% and greater Total $ 2017 620,635 198,180 185,028 % of Total 62% $ 20% 18% $ 1,003,843 100% $ 2016 638,844 172,734 186,630 998,208 % of Total 64% 17% 19% 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 2017 and 2016, 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 82 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. 83 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 assistance that effectively supports 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 we increase 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. 84 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. 85 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. 86 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 will be 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. • The Company has a defined benefit pension plan that is frozen. Declining financial markets could have several impacts on this plan including but not limited to: a decrease in the plan's investment values; additional pension expense; a reduction in comprehensive income; and an increase in contributions. In addition, the funding requirements of our pension plan are sensitive to interest rate changes. Should interest rates decrease, plan liabilities may increase. Should interest rates increase, plan assets may decrease. 87 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 our 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 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, anti-terrorism laws, and federal income tax regulations. 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 impact our financial statements. Accordingly, we can give no assurance that future changes to GAAP will not have a negative impact on us. 88 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. This could adversely affect the marketing or administration of our business. The possible macroeconomic effects of climate change, natural disasters, pandemics, or terrorism 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 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. 89 

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