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.
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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.
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Our investments are exposed to varying degrees of credit risk. Credit risk is the risk that the value of the investment may decline
due to deterioration in the financial strength of the issuer and that the timely or ultimate payment of principal or interest might not
occur. A default by an issuer usually involves some loss of principal to the investor. Losses can be mitigated by timely sales of
affected securities or by active involvement in a restructuring process. However, there can be no assurance that the efforts of an
investor will lead to favorable outcomes in a bankruptcy or restructuring.
We attempt to mitigate credit risk by diversifying the investment portfolio across a broad range of issuers, investment sectors and
security types, and by limiting the amount invested in any particular entity. We also invest in securities collateralized or supported
by physical assets, guarantees by insurers or other providers of financial strength, and other sources of secondary or contingent
payment. These securities can improve the likelihood of payment according to contractual terms and increase recovery amounts
in the case of issuer default, bankruptcy, or restructuring.
Interest rate fluctuations could negatively affect our spread income or otherwise impact our business.
Interest rate fluctuations or sustained low interest rate environments could negatively affect earnings because the profitability of
certain products depends in part on interest rate spreads. These products include fixed deferred annuities, single premium immediate
annuities, interest-sensitive whole life, universal life, and the fixed portion of variable universal life insurance and variable annuity
business. In addition, we offer riders, including guaranteed minimum withdrawal benefits and guaranteed minimum death benefits.
Changes in interest rates or sustained low interest rate environments may reduce both the profitability and the return on invested
capital.
Some of our products, principally fixed annuities, interest-sensitive whole life, universal life, and the fixed portion of variable
universal life insurance and variable annuity business, have interest rate guarantees that expose us to the risk that changes in interest
rates will reduce the spread, or the difference between the amounts we are required to credit to policyholder contracts and the
amounts earned on general account investments. Because many of our policies have guaranteed minimum interest or crediting
rates, spreads could decrease and potentially become negative. Declines in spread or instances where the returns on the general
account investments are not sufficient to support the interest rate guarantees on these products could have a material adverse effect
on our financial statements. In addition, in periods of increasing interest rates, we may not be able to replace the assets in the
general account with higher yielding assets needed to fund the higher crediting rates that may be necessary to keep interest sensitive
products competitive. Therefore, we may have to accept a lower spread and profitability or face a decline in sales, loss of existing
contracts from non-renewed maturities, early withdrawals, or surrenders. In periods of declining interest rates, we may have to
reinvest the cash received from interest or return of principal on investments in lower yielding instruments then available. Moreover,
issuers of fixed income investment securities and borrowers related to our commercial mortgage investments may prepay these
obligations in order to borrow at lower market rates, which may increase our risk to have to reinvest at lower rates. Increases in
interest rates may cause increased surrenders of insurance products. In periods of increasing interest rates, policy loans and
surrenders and withdrawals of life insurance policies and annuity contracts may increase, as policyholders seek to buy products
with higher returns. These outflows may require investment assets to be sold at a time when the prices of those assets are lower
because of the increase in market interest rates, which may result in realized investment losses. Further, higher interest rates may
result in significant unrealized losses on investments. These net unrealized losses could have a negative effect on stockholders'
equity. This could negatively impact the ability to pay policyholder and stockholder dividends. In addition, higher interest rates
may reduce the fair value of policyholders' separate account investments, which may reduce our revenues from asset-based
management fees.
While we develop and maintain asset/liability management programs and procedures designed to identify and mitigate the effect
on spread income in rising or falling interest rate environments, no assurance can be given that changes in interest rates will not
affect such spreads or that our evaluation of fluctuations will be correct or allow for timely modifications. Additionally, our asset/
liability management programs incorporate assumptions about the relationship between short-term and long-term interest rates
(i.e., the slope of the yield curve) and relationships between risk-adjusted and risk-free interest rates, market liquidity, and
policyholder behavior in periods of changing interest rates and other factors. The effectiveness of our asset/liability management
programs and procedures may be negatively affected whenever actual results differ from these assumptions.
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Prolonged periods of low interest rates can affect policyholder behavior and negatively impact earnings.
As interest rates decline, policyholders may become more likely to extend the retention or duration of fixed-rate products previously
purchased and may seek alternatives to fixed-rate products for new purchases. Policyholders may add premiums or deposits to
existing policies or contracts with terms upon which we are no longer offering on new products. Many of the products sold in
earlier periods may have minimum guaranteed interest crediting rates or other features that are greater than those being offered in
the current low interest rate environment. Additionally, cash flows from existing investments, including interest and principal
payments, may be reinvested at lower interest rates relative to prior periods. As a result, a prolonged low interest rate environment
can result in significant changes to cash flows, lower investment income, compressed product spreads, reduced earnings, and
increased surplus strain. In addition, we may change our risk profiles in regards to selecting investment opportunities to reduce
the impact on earnings.
The change from a low interest rate environment to an environment of increasing interest rates can affect policyholder behavior
and negatively impact earnings.
The change from a period of low interest rates to a period of significantly higher and increasing interest rates may cause policyholders
to surrender policies or to make early withdrawals in order to maximize their returns. Accordingly, we may become more susceptible
to increased surrenders and withdrawals on policies, as surrender charges and other features that help protect us from increased
or unexpected policyholder withdrawals or lapses are ineffective. Increases in policyholder surrenders, withdrawals, or lapses
could negatively affect our operating results and liquidity.
Our valuation of fixed maturity and equity securities include estimations and assumptions and could result in changes to
investment valuations that may have a material adverse effect on our financial statements.
Fixed maturity securities, equity securities, and short-term investments are reported at fair value in the Consolidated Balance
Sheets and represent the majority of total cash and invested assets. During periods of market disruption, including periods of
significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, it may be difficult to value certain securities
if trading becomes less frequent and/or market data becomes less observable. There may be certain asset classes that were previously
acquired and valued in active markets with significant observable data that 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.
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The determination of the amount of realized and unrealized impairments and allowances established on our investments is
highly subjective and could materially impact our financial position or financial statements.
The determination of the amount of impairments and allowances varies by investment type and is based upon our evaluation and
assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised
as conditions change and new information becomes available. There can be no assurance that the assumptions, methodologies,
and judgments employed in these evaluations and assessments will be accurate or sufficient in later periods. As a result, additional
impairments may need to be realized or allowances provided in future periods. Further, historical trends may not be indicative of
future impairments or allowances.
Additionally, we consider a wide range of factors about security issuers and we use our best judgment in evaluating the cause of
the decline in the fair value of the security and in assessing the prospects for recovery. Inherent in management’s evaluation of
the security are assumptions and estimates about the operations of the issuer, its future earnings potential, and the ability and
timeliness of the security’s recovery in fair value.
We could be forced to sell investments at a loss to meet policyholder withdrawals.
Many of our products allow policy and contract holders to withdraw their funds under defined circumstances. We manage liabilities
and attempt to align the investment portfolio so as to provide and maintain sufficient liquidity to support anticipated withdrawal
demands, contract benefits, and maturities. While we own a significant amount of liquid assets, a certain portion of 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.
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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.
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