KANSAS CITY LIFE INSURANCE COMPANY
2020 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............................................................................................................................................... 69
Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................. 70
Risk Factors............................................................................................................................................................................. 82
Financial Information
Amounts in thousands, except share data, security counts, claim 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: 2020 - $2,797,990; 2019 - $2,776,856)
Equity securities, at fair value
(cost: 2020 - $5,933; 2019 - $10,614)
Mortgage loans
Real estate
Policy loans
Short-term investments
Other investments
Total investments
Cash
Accrued investment income
Deferred acquisition costs
Reinsurance recoverables
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
Treasury stock, at cost (2020 and 2019 - 8,813,266 shares)
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2020
2019
$
3,118,980
$
2,951,137
6,647
601,607
165,403
84,447
119,116
10,838
4,107,038
7,203
31,413
276,425
391,439
186,453
463,041
5,463,012
1,383,674
2,231,640
71,344
175,131
229,443
463,041
4,554,273
23,121
41,025
933,092
152,802
(241,301)
908,739
5,463,012
$
$
$
11,272
577,699
183,016
87,499
75,426
9,156
3,895,205
14,234
32,142
286,682
378,772
181,629
431,201
5,219,865
1,331,215
2,237,700
55,997
170,776
182,245
431,201
4,409,134
23,121
41,025
928,380
59,506
(241,301)
810,731
5,219,865
$
$
$
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 investment gains
Total investment revenues
Other revenues
Total revenues
BENEFITS AND EXPENSES
Policyholder benefits
Interest credited to policyholder account balances
Amortization of deferred acquisition costs
Operating expenses
Total benefits and expenses
Income before income tax expense
Income tax expense
NET INCOME
COMPREHENSIVE INCOME (LOSS),
NET OF TAXES
Changes in:
Year Ended December 31,
2020
2019
2018
$ 223,756
$ 223,227
$ 193,593
126,722
350,478
145,684
21,835
167,519
5,913
523,910
125,886
349,113
148,349
9,133
157,482
6,098
512,693
116,916
310,509
141,315
2,840
144,155
6,368
461,032
280,970
257,621
227,202
78,792
42,141
106,093
507,996
15,914
744
78,520
35,948
111,154
483,243
29,450
5,023
74,308
40,616
101,720
443,846
17,186
1,514
$
15,170
$
24,427
$
15,672
Net unrealized gains (losses) on
securities available for sale
Effect on deferred acquisition costs, value of business
acquired, and deferred revenue liabilities
Policyholder liabilities
Benefit plan obligations
Other comprehensive income (loss)
$ 115,900
$ 129,609
$
(65,062)
(7,809)
(15,882)
1,087
93,296
(11,608)
(15,987)
3,042
105,056
8,867
11,354
(5,823)
(50,664)
COMPREHENSIVE INCOME (LOSS)
$ 108,466
$ 129,483
$
(34,992)
Basic and diluted earnings per share:
Net income
$
1.57
$
2.52
$
1.62
See accompanying Notes to Consolidated Financial Statements
4
Kansas City Life Insurance Company
Consolidated Statements of Stockholders’ Equity
Year Ended December 31,
2020
2019
2018
COMMON STOCK, beginning and end of year
$
23,121
$
23,121
$
23,121
ADDITIONAL PAID IN CAPITAL, beginning and end of year
41,025
41,025
41,025
RETAINED EARNINGS
Beginning of year
Net income
Stockholder dividends (2020, 2019, and 2018 - $1.08 per share)
Cumulative effect of adoption of new accounting principle
End of year
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Beginning of year
Other comprehensive income (loss)
Cumulative effect of adoption of new accounting principle
End of year
928,380
15,170
914,411
24,427
908,022
15,672
(10,458)
(10,458)
(10,457)
—
—
1,174
933,092
928,380
914,411
59,506
93,296
—
(45,550)
105,056
—
6,288
(50,664)
(1,174)
152,802
59,506
(45,550)
TREASURY STOCK, at cost, beginning and end of year
(241,301)
(241,301)
(241,301)
TOTAL STOCKHOLDERS’ EQUITY
$ 908,739
$ 810,731
$ 691,706
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 and amortization
Acquisition costs capitalized
Amortization of deferred acquisition costs
Net 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
Property and equipment
Sales or maturities, calls, and principal paydowns:
Fixed maturity securities
Equity securities
Mortgage loans
Real estate
Policy loans
Other investments
Property and equipment
Year Ended December 31,
2020
2019
2018
$
15,170
$
24,427
$
15,672
1,978
8,538
(44,151)
42,141
(21,835)
(12,667)
33,050
(34,520)
(2,923)
21,113
5,894
3,321
8,367
(48,443)
35,948
(9,133)
(12,576)
32,274
(43,516)
5,960
3,503
132
3,453
5,802
(43,389)
40,616
(2,840)
52,937
26,248
(32,096)
2,477
(3,798)
65,082
(344,098)
(342,477)
(275,591)
(380)
(109,060)
(2,610)
(8,706)
(3,702)
(1,844)
—
(25,036)
(1,975)
(10,969)
(2,712)
(2,379)
(58)
(65,557)
(7,282)
(9,469)
(2,074)
(20,448)
344,071
263,411
307,167
5,000
85,111
29,898
11,758
4,204
25
4,000
87,157
3,084
11,535
2,176
5,572
824
75,636
12,734
11,685
2,712
932
(12,930)
(62,447)
—
Net purchases of short-term investments
Acquisition of Grange Life, net of cash acquired
Receipts from post-acquisition purchase price adjustments
(43,690)
(16,714)
—
—
—
1,663
Net cash used
(34,023)
(23,664)
(44,166)
6
Kansas City Life Insurance Company
Consolidated Statements of Cash Flows (Continued)
FINANCING ACTIVITIES
Deposits on policyholder account balances
Withdrawals from policyholder account balances
Net transfers from separate accounts
Change in other deposits
Cash dividends to stockholders
Post-acquisition contingent liability fulfillment
Net cash provided
Increase (decrease) in cash
Cash at beginning of year
Cash at end of year
Year Ended December 31,
2020
2019
2018
$
220,549
$
223,058
$
217,344
(200,717)
(207,242)
(206,444)
8,794
2,930
(10,458)
—
21,098
(7,031)
14,234
3,500
(2,666)
(10,458)
(115)
6,077
(17,455)
31,689
$
7,203
$
14,234
$
4,386
(3,560)
(10,457)
—
1,269
22,185
9,504
31,689
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 four life insurance
companies. Kansas City Life Insurance Company (Kansas City Life) is the parent company. Sunset Life Insurance Company
of America (Sunset Life), Old American Insurance Company (Old American), and Grange Life Insurance Company (Grange
Life) are wholly-owned insurance 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 17 -
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, Old American, and Grange Life. Significant intercompany
transactions have been eliminated in consolidation and certain immaterial reclassifications have been made to prior period
results to conform with the current period’s presentation.
COVID-19 Pandemic
The global outbreak of COVID-19 was classified as a pandemic during the first quarter of 2020. The impact of the COVID-19
pandemic on our financial condition and results of operations continues to evolve. The duration and the severity depend on
certain developments, including the effect of the pandemic on financial markets. Certain negative financial impacts occurred in
2020 as a result of the COVID-19 pandemic. These include increased policyholder benefit payments, largely from death
benefits; deferrals of interest and principal on certain investments; reduced investment income from lower available interest
rates; and increases in certain operating expenses. Other negative financial impacts could occur including, but not limited to,
asset impairments; defaults, delinquencies or additional deferrals on the Company’s mortgage loan and real estate portfolios; a
reduction in sales; additional increases in policyholder benefits; and continued increases in certain expenses.
The United States Federal Government has provided multiple relief packages and support aimed at protecting individuals and
businesses from the health and economic impacts of the COVID-19 pandemic. On March 27, 2020, the United States
government signed into law the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The CARES Act provides
wide-ranging economic relief to individuals and businesses. Please refer to Note 11 - Income Taxes for additional information
on how the CARES Act impacted the Company during 2020. We continue to evaluate the full impact of the CARES Act on our
business, as well as other relief packages approved by the government. All other relief packages issued through the date of this
filing were not anticipated to impact the Company at this time or were not expected to have a material impact to the
consolidated financial statements.
Business Changes
There were no business changes during 2020 or 2019.
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, goodwill and other intangibles, value of business acquired (VOBA), deferred revenue liability
(DRL), policyholder account balances, future policy benefits, policy and contract claim liabilities, reinsurance, and pension and
other postemployment benefits.
8
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
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 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 liabilities, 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 liabilities 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 determined to be other-than-temporary. Other-than-temporary impairment losses are reported as a
component of investment revenues in the Consolidated Statements of Comprehensive Income, which also presents the amount
of non-credit impairment losses for certain fixed maturity securities that are reported in Accumulated Other Comprehensive
Income (Loss). See Note 3 - Investments for additional discussion of our considerations related to other-than-temporary
impairments. For additional information regarding fair value, please see Note 4 - Fair Value Measurements.
Equity securities are carried at fair value. Changes in the fair value of equity securities are recognized through net investment
gains and losses.
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 with amounts 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 their outstanding principal amount.
Short-term investments include highly-liquid investments in institutional money market funds that are carried at net asset value
(NAV).
The Company has hedge positions classified as derivatives that are included in Other Investments in the Consolidated Balance
Sheets. These derivative assets are recorded at fair value and are established in relation to the Company's indexed universal life
portfolio. The index credit portion of the reserves associated with the indexed universal life products are considered to be
embedded derivatives and are accounted for at fair value and are included in Policyholder Account Balances in the
Consolidated Balance Sheets. The value of the reserves will fluctuate depending on market conditions. However, this
fluctuation is largely offset by a corresponding change in the realized gains or losses on these derivatives. Changes in market
values can result in significant fluctuations to realized gains and losses in the Consolidated Statements of Comprehensive
Income.
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, with the exception of premiums on callable
9
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
fixed maturity securities, which are amortized to the earliest call date. 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 or at the time of acquisition 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 or at the time of acquisition. 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
Future policy benefits
2020
$ 1,036,898
2019
$ 1,004,148
314,417
32,359
$ 1,383,674
292,590
34,477
$ 1,331,215
Policyholder Account Balances
Policyholder account balances are deposit-type contracts, including universal life insurance and fixed 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 annuity products ranged from 1.00% to 5.50% in 2020, 2019, and 2018.
The following table provides detail about the composition of policyholder account balances at December 31.
Universal life insurance
Fixed annuities
Immediate annuities and supplementary
contracts without life contingencies
Policyholder account balances
2020
$ 1,089,556
1,089,134
2019
$ 1,087,984
1,096,588
52,950
$ 2,231,640
53,128
$ 2,237,700
10
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
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 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.
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
Change in DAC due to the change in unrealized
investment gains or losses
Balance at end of year
2020
2019
$
286,682
$
291,168
44,151
(54,069)
11,928
48,443
(48,375)
12,427
(12,267)
(16,981)
$
276,425
$
286,682
Value of Business Acquired
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 Accounting Standards Codification (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 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 an expense recorded in the current period.
11
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
The following table provides information about VOBA at December 31.
Balance at beginning of year
Gross amortization
Accrual of interest
Change in VOBA due to the change in unrealized
investment gains or losses
Balance at end of year
2020
2019
$
12,530
$
20,306
(4,623)
929
(4,230)
1,097
(1,587)
(4,643)
$
7,249
$
12,530
Interest accrued on the VOBA of one block of business was at the rates of 4.21% on the interest sensitive life block and 5.25%
on the traditional life block, based upon the credited rates of the VOBA policies. The VOBA on a separate acquired block of
business used a 7.00% interest rate on the traditional life portion and a 5.40% interest rate on the interest sensitive portion,
based upon rates appropriate at the time of acquisition.
Goodwill and Intangible Asset
We established goodwill for the future economic benefits arising from the acquisition of Grange Life. Goodwill was initially
valued at $43.0 million at December 31, 2018. Subsequent to December 31, 2018, certain post-acquisition adjustments, as
defined under the contract, were made that resulted in a decrease of $0.7 million in goodwill. The goodwill balance was $42.3
million at both December 31, 2020 and December 31, 2019. Goodwill is included in Other Assets in the Consolidated Balance
Sheets. Under GAAP, goodwill is assessed at least annually for impairment rather than being amortized. As a result of our
impairment assessment, we determined that goodwill was not impaired at December 31, 2020.
The acquisition of Grange Life generated an amortizable intangible asset, which is the difference between the fair value and
book value of the net reserve liabilities acquired. We evaluated the fair value and book value of all other assets and liabilities
acquired and no other intangible assets were recognized at acquisition. The intangible asset was valued at $19.2 million at
December 31, 2020 and $20.0 million at December 31, 2019 and is included in Other Assets in the Consolidated Balance
Sheets.
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. Deferred revenue liabilities are included in Other Policyholder Funds in the
Consolidated Balance Sheets and totaled $35.2 million at December 31, 2020 and $37.7 million at December 31, 2019. 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.
Unlocking and Refinements in Estimates
Models and assumptions used to develop expected gross profits for interest sensitive and variable insurance products are
reviewed at least annually 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.
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.
12
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
The following tables summarize 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.
2020:
Unlocking
Refinement in estimate
2019:
Unlocking
Refinement in estimate
2018:
Unlocking
Refinement in estimate
DAC
Amortization
VOBA
Amortization
DRL
Contract
Charges
Net Impact
to Pre-Tax
Income
$
$
(5,219)
—
(5,219)
$
$
(1,593)
—
(1,593)
$
$
3,838
—
3,838
$
$
(2,974)
—
(2,974)
DAC
Amortization
VOBA
Amortization
DRL
Contract
Charges
Net Impact
to Pre-Tax
Income
$
$
(350)
708
358
$
$
(538)
—
(538)
$
$
763
17
780
$
$
(125)
725
600
DAC
Amortization
VOBA
Amortization
DRL
Contract
Charges
Net Impact
to Pre-Tax
Income
$
$
(884)
71
(813)
$
$
(644)
—
(644)
$
$
920
—
920
$
$
(608)
71
(537)
The unlocking in 2020 primarily resulted from interest rate fluctuations. The unlocking in 2019 primarily resulted from
unlocking surrender rates and reinsurance as well as refinements of expense loads. These were partially offset by interest rate
fluctuations. The unlocking in 2018 primarily resulted from interest rate fluctuations. In addition, we recorded a $0.4 million
reserve increase in 2020, a $0.2 million reserve decrease in 2019, and a $0.2 million reserve increase in 2018 related to the
impacts of unlocking.
Additional refinements were made in 2019 as a result of the completed review of Grange Life valuation models. Most
refinements were the result of replacing simpler, more aggregate type calculations or assumptions with more detailed plan
specifications or assumptions. We recorded a $3.2 million reserve decrease in 2019 related to the Grange Life model
refinements. In addition, these refinements resulted in a $0.4 million increase in DAC included in the table above.
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 policyholder benefits, was a decrease of $3.4 million in 2020, an increase of
$4.1 million in 2019, and a decrease of $0.7 million in 2018.
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 12 - 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
13
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
account assets and liabilities, which are equal, are recorded at fair value based upon the 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. See Note 7 - Separate
Accounts for further details.
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 GMWB rider is included in Other Policyholder Funds in the Consolidated Balance Sheets. The rider is considered
to be a financial derivative and, as such, is accounted for at fair value. The value of the rider 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 Note 4 - Fair Value Measurements and Note 7 - Separate Accounts for further
details.
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. 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. See Note 14 - Reinsurance for additional information pertaining to our significant reinsurers, along with
additional information pertaining to reinsurance.
Future Policy Benefits 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.
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.
Property and Equipment
Property and equipment are stated at cost, depreciated over estimated useful lives using the straight-line method, and are
included in Other Assets in the Consolidated Balance Sheets. The home office complex is depreciated over 10 years to 50 years
and furniture and equipment is depreciated over 3 years to 10 years. The following table provides information about property
and equipment at December 31.
Land
Home office complex
Furniture and equipment
Accumulated depreciation
Property and equipment
2020
2019
$
$
766
21,591
35,962
58,319
(38,936)
19,383
$
$
766
21,562
35,373
57,701
(35,198)
22,503
Depreciation expense totaled $3.7 million during 2020, $2.5 million during 2019, and $1.8 million during 2018.
14
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
Recognition of 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. Premiums are
reported net of reinsurance, as applicable.
Contract Charges
Contract charges consist of cost of insurance, expense loads, the amortization of unearned revenues, and surrender charges on
policyholder account balances. Cost of insurance relates to charges for mortality. These charges are applied to the excess of
the mortality benefit over the account value for universal life policies. Expense loads are amounts that are assessed against the
policyholder balance as consideration for origination and maintenance of the contract. Surrender charges are fees on
policyholder account balances upon cancellation or withdrawal of policyholder account balances consistent with policy terms.
An additional component of contract charges is the recognition over time of the DRL for certain fixed and variable universal
life policies. This liability arises from front-end loads on such policies and is recognized into the Consolidated Statements of
Comprehensive Income in a manner similar to the amortization of DAC. If it is determined that it is appropriate to change the
assumptions of future experience, then an unlocking adjustment is recognized for the block of business being evaluated. See
the Unlocking and Refinements in Estimates section above for additional information.
Deposits
Deposits related to universal life, fixed 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.
Revenues from Contracts with Customers
We have certain types of non-insurance and non-investment revenue from contracts with customers. 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. These revenues equaled less than 1% of our total revenues for the years ended December 31,
2020 and December 31, 2019 and are not material to our consolidated financial statements.
Realized Gains (Losses)
We realize investment gains and losses from several sources, including write-downs of investments, the change in the
allowance for mortgage loan losses, sales of investment securities and real estate, and the change in fair value of equity
securities and derivative instruments.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return that includes Kansas City Life, Sunset Life, Old
American, and non-life insurance companies. Grange Life files a separate federal income tax return.
Deferred income taxes are recorded based on the differences between the tax bases of assets and liabilities and the amounts at
which they are reported in the consolidated financial statements. Recorded amounts are adjusted to reflect changes in income
tax rates and other tax law provisions as they become enacted.
Deferred income tax assets are subject to ongoing evaluation of whether such assets will be realized. The ultimate realization of
deferred income tax assets generally depends on the reversal of deferred tax liabilities and the generation of future taxable
income and realized gains during the periods in which temporary differences become deductible. Deferred income taxes
include future deductible differences relating to unrealized losses on investment securities. We evaluate the character and
timing of unrealized gains and losses to determine whether future taxable amounts are sufficient to offset future deductible
amounts. A valuation allowance against deferred income tax assets may be required if future taxable income of an appropriate
amount and character is not expected.
15
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
2. New Accounting Pronouncements
Accounting Pronouncements Adopted During 2020
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-13
Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This update modifies the
disclosure requirements for fair value measurements in ASC Topic 820 Fair Value Measurement. Specific fair value
measurement disclosure requirements are removed, modified, or added. This guidance is effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2019. The Company adopted this guidance effective January 1,
2020. The guidance did not impact our earnings or financial position as the modifications only impact disclosures.
In August 2018, the FASB issued ASU No. 2018-14 Disclosure Framework - Changes to the Disclosure Requirements for
Defined Benefit Plans. This update modifies the disclosure requirements in ASC Subtopic 715-20 Compensation - Retirement
Benefits - Defined Benefit Plans for employers that sponsor defined benefit pension or other postretirement plans. Specific fair
value measurement disclosure requirements are removed, added, or clarified. This guidance is effective for fiscal years ending
after December 15, 2020. The Company adopted this guidance effective December 31, 2020. The guidance did not impact our
earnings or financial position as the modifications only impact disclosures.
Accounting Pronouncements Issued, Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13 Measurement of Credit Losses on Financial Instruments. Under this
guidance, the incurred loss impairment methodology currently used 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 concerning our credit loss estimates. The measurement of expected credit losses will be based on
current, historical, and forecasted information that impacts the collectability of the reported amount. Any credit losses related
to available for sale debt securities will be recorded through a valuation allowance that is established and adjusted over time.
The valuation allowance will be based on the probability of loss over the life of the instrument. Our investments subject to this
guidance include, but are not limited to, fixed maturity securities available for sale, mortgage loans, and reinsurance
recoverables. Additional disclosures will be required to provide 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. The
original effective date for this guidance, including subsequently issued amendments, was for fiscal years beginning after
December 15, 2020 and interim periods within those fiscal years. In November 2019, the FASB deferred the effective date of
this guidance to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are
currently evaluating this guidance.
In August 2018, the FASB issued ASU No. 2018-12 Targeted Improvements to the Accounting for Long-Duration Contracts.
This update modifies the existing recognition, measurement, presentation, and disclosure requirements in ASC 944 Financial
Services - Insurance (Topic 944). It focuses on improving the timeliness of recognizing changes in the liability for future
policy benefits and requires that the discount rate assumption be updated at each reporting date. It simplifies the accounting for
certain market-based options or guarantees associated with deposit contracts by requiring insurance entities to measure them at
fair value. It also simplifies the amortization of deferred acquisition costs by requiring amortization on a constant level basis
over the expected term of the related contracts. The original effective date for this guidance was for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2020. In November 2020, the FASB deferred the effective date
of this guidance to fiscal years beginning after December 15, 2024, and interim periods within fiscal years beginning after
December 15, 2025. 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 Securities
Securities by Asset Class
The following table provides amortized cost and fair value of fixed maturity securities by asset class at December 31, 2020.
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
Amortized
Cost
Gross
Unrealized
Gains
Losses
$
161,524
$
19,910
$
—
—
95,934
257,458
431,133
157,735
221,551
420,577
641,557
327,993
9,976
29,886
42,211
16,128
28,844
46,226
66,517
44,958
5
—
—
5
72
252
16
572
528
174
Fair
Value
$
181,429
—
105,910
287,339
473,272
173,611
250,379
466,231
707,546
372,777
2,200,546
244,884
1,614
2,443,816
14,568
218,709
103,709
3,000
1,670
45,014
2,288
206
—
5
1,334
—
16,238
263,718
104,663
3,206
Total
$ 2,797,990
$
323,948
$
2,958
$ 3,118,980
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 fixed maturity securities by asset class at December 31, 2019.
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
Amortized
Cost
Gross
Unrealized
Gains
Losses
$
180,659
$
11,666
$
1,379
107
107,865
289,903
438,868
162,863
231,255
365,621
653,215
288,736
8,491
20,264
22,366
11,627
17,265
21,775
31,352
20,807
19
—
53
72
79
6
5
454
348
383
Fair
Value
$
192,306
1,486
116,303
310,095
461,155
174,484
248,515
386,942
684,219
309,160
2,140,558
125,192
1,275
2,264,475
18,420
240,057
76,417
11,501
1,844
28,303
1,059
575
—
165
1,444
—
20,264
268,195
76,032
12,076
Total
$ 2,776,856
$
177,237
$
2,956
$ 2,951,137
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, 2020
December 31, 2019
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Due in one year or less
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
119,638
852,605
930,841
704,520
187,386
3,000
$
121,163
924,353
$
131,443
771,772
$
132,475
802,526
1,048,706
1,061,818
1,131,759
812,915
208,637
3,206
593,664
206,658
11,501
649,790
222,511
12,076
Total
$ 2,797,990
$ 3,118,980
$ 2,776,856
$ 2,951,137
18
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
Unrealized Losses on Investments
At the end of each quarter, all fixed maturity 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 fixed maturity security and whether it is more likely than not that we will be required
to sell a fixed maturity 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
19
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
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 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. No impairments of this kind were recorded in the year ended December 31,
2020. The Company recorded a $0.6 million impairment of this kind in the year ended December 31, 2019. No impairments of
this kind were recorded in the year ended December 31, 2018.
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. If an
impairment is deemed necessary, it 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. We identified 10 non-U.S. agency mortgage-backed securities that were determined to have such indications at
both December 31, 2020 and December 31, 2019. 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. Impairments of this kind totaling less than $0.1 million were recorded
in the year ended December 31, 2020. No impairments of this kind were recorded in the years ended December 31, 2019 or
December 31, 2018.
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 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, 2020.
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
Total
Less Than 12 Months
Fair
Value
Unrealized
Losses
12 Months or Longer
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
$
1,917
$
5
$
—
$
—
$
1,917
$
—
1,917
10,613
4,277
2,442
15,023
12,819
12,202
57,376
1,218
6,935
—
5
72
252
16
324
528
174
1,366
5
21
8
8
—
—
—
5,643
—
—
5,643
—
16,188
$ 67,446
$
1,397
$ 21,839
$
—
—
—
—
—
248
—
—
248
—
1,313
1,561
8
1,925
10,613
4,277
2,442
20,666
12,819
12,202
63,019
1,218
23,123
$
89,285
$
5
—
5
72
252
16
572
528
174
1,614
5
1,334
2,958
1 Federal agency securities are not backed by the full faith and credit of the U.S. Government.
The following table provides information regarding fixed maturity 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, 2019.
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
Total
Less Than 12 Months
Fair
Value
Unrealized
Losses
12 Months or Longer
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
$
6,249
$
10
$
8,778
$
9
$
15,027
$
2,304
8,553
6,116
3,078
1,074
12,327
22,540
21,795
66,930
12,328
10,298
$ 98,109
$
53
63
54
6
4
84
273
249
670
165
44
942
15
8,793
3,066
—
1,999
5,520
8,975
5,224
24,784
—
16,100
$ 49,677
$
—
9
25
—
1
370
75
134
605
—
1,400
2,014
2,319
17,346
9,182
3,078
3,073
17,847
31,515
27,019
91,714
12,328
26,398
$ 147,786
$
19
53
72
79
6
5
454
348
383
1,275
165
1,444
2,956
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 the number of fixed maturity securities 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
2020
2019
41
4
—
45
63
6
14
83
We do not consider the unrealized losses related to these securities to be credit-related. The unrealized losses at both
December 31, 2020 and December 31, 2019 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.
The following table summarizes investments in fixed maturity securities available for sale with unrealized losses at
December 31, 2020.
Amortized
Cost
Fair
Value
Gross
Unrealized
Losses
Securities owned without 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
Securities owned with realized impairment:
Unrealized losses of 10% or less
Unrealized losses of 20% or less and greater than 10%
Unrealized losses greater than 20%
Subtotal
Total
88,214
$
85,919
$
1,983
90,197
1,780
87,699
—
2,046
2,046
—
—
—
2,046
92,243
—
—
—
—
—
1,586
1,586
—
—
—
1,586
89,285
—
—
—
—
2,295
203
2,498
—
460
460
—
—
—
460
2,958
—
—
—
—
$
92,243
$
89,285
$
2,958
22
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
The following table summarizes investments in fixed maturity securities available for sale with unrealized losses at
December 31, 2019.
Amortized
Cost
Fair
Value
Gross
Unrealized
Losses
Securities owned without 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
Securities owned with realized impairment:
Unrealized losses of 10% or less
Unrealized losses of 20% or less and greater than 10%
Unrealized losses greater than 20%
Subtotal
Total
149,834
$
147,016
$
908
770
150,742
147,786
2,818
138
2,956
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
150,742
147,786
2,956
—
—
—
—
—
—
—
—
—
—
—
—
$
150,742
$
147,786
$
2,956
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, 2020.
AAA
AA
A
BBB
Total investment grade
BB
B and below
Total below investment grade
Fair
Value
%
of Total
Gross
Unrealized
Losses
%
of Total
$
4,997
26,847
23,219
29,407
84,470
3,229
1,586
4,815
6 % $
30 %
26 %
33 %
95 %
3 %
2 %
5 %
—
1,609
263
408
2,280
218
460
678
— %
54 %
9 %
14 %
77 %
7 %
16 %
23 %
$
89,285
100 % $
2,958
100 %
23
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
The following table provides information on fixed maturity securities available for sale with unrealized losses by actual or
equivalent Standard & Poor’s rating at December 31, 2019.
AAA
AA
A
BBB
Total investment grade
BB
B and below
Total below investment grade
Fair
Value
%
of Total
Gross
Unrealized
Losses
%
of Total
$
5,946
50,797
50,612
39,446
146,801
—
985
985
4 % $
34 %
34 %
27 %
99 %
— %
1 %
1 %
56
1,755
398
733
2,942
—
14
14
$
147,786
100 % $
2,956
2 %
59 %
14 %
25 %
100 %
— %
— %
— %
100 %
Our residential mortgage-backed securities, commercial mortgage-backed securities, and asset-backed securities that were rated
below investment grade represented 27% of the fair value of the total below investment grade securities as of December 31,
2020, compared to 43% at December 31, 2019.
We held no non-income producing securities at December 31, 2020 or December 31, 2019.
We did not hold securities of any corporation and its affiliates that exceeded 10% of stockholders' equity at December 31, 2020
or December 31, 2019.
24
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
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.
Fair
Value
2020
Amortized
Cost
Unrealized
Gains (Losses)
2
1,668
1,670
954
—
954
Corporate private-labeled residential mortgage-backed securities:
Investment grade
Below investment grade
Total residential & non-agency mortgage-backed securities
$
1,575
$
1,573
$
14,663
16,238
12,995
14,568
Other structured securities:
Investment grade
Below investment grade
Total other structured securities
Total structured securities
Corporate private-labeled residential mortgage-backed securities:
Investment grade
Below investment grade
Total residential & non-agency mortgage-backed securities
Other structured securities:
Investment grade
Below investment grade
Total other structured securities
Total structured securities
104,663
103,709
—
104,663
—
103,709
$
120,901
$
118,277
$
2,624
Fair
Value
2019
Amortized
Cost
Unrealized
Gains (Losses)
$
1,626
$
1,583
$
18,638
20,264
76,032
—
76,032
16,837
18,420
76,417
—
76,417
$
96,296
$
94,837
$
43
1,801
1,844
(385)
—
(385)
1,459
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
Additions for increases (decreases) 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
2020
2019
2018
$
4,445
$
4,381
$
4,399
19
(580)
584
(520)
—
(18)
Credit losses on securities held at the end of the year
$
3,884
$
4,445
$
4,381
25
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
The following table provides the net unrealized gains (losses) reported in Accumulated Other Comprehensive Income (Loss) on
our investments in securities available for sale, at December 31.
Net unrealized gains
Amounts resulting from:
DAC, VOBA, and DRL
Policyholder liabilities
Deferred income taxes
Total
2020
2019
2018
$
320,990
$
174,281
$
10,219
(25,982)
(45,582)
(52,380)
(16,096)
(25,480)
(27,866)
$
197,046
$
104,839
$
(1,402)
(5,244)
(748)
2,825
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
2020
2019
2018
$
107,125
$
108,421
$
100,162
612
26,804
22,586
5,758
318
160
1,019
28,257
20,919
5,974
1,345
118
1,013
29,260
21,760
5,667
878
120
163,363
(17,679)
166,053
(17,704)
158,860
(17,545)
$
145,684
$
148,349
$
141,315
Investment Gains (Losses)
The following table provides net investment gains (losses) by major category for the years ended December 31.
2020
2019
2018
Fixed maturity securities
$
4,955
$
Equity securities
Mortgage loans
Real estate
2,249
(18)
14,649
Net investment gains
$
21,835
$
2,139
4,112
293
2,589
9,133
$
$
(367)
(2,005)
143
5,069
2,840
26
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
The following table provides detail concerning investment gains and losses for the year ended December 31.
2020
2019
2018
Gross gains resulting from:
Sales of investment securities
Investment securities called and other
Real estate
Disposal of affordable housing real estate joint venture
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
Change in fair value:
Equity securities
Derivative instruments
Total change in fair value
Net realized investment gains, excluding
other-than-temporary impairment losses
Net impairment losses recognized in earnings:
Other-than-temporary impairment losses on
fixed maturity securities
Portion of loss recognized in other
comprehensive income (loss)
Net other-than-temporary impairment losses
recognized in earnings
$
283
$
138
$
4,776
14,889
—
19,948
(5)
(80)
(240)
—
(325)
(18)
66
2,183
2,249
21,854
—
(19)
(19)
2,654
2,589
—
5,381
(62)
(7)
—
—
(69)
293
847
3,265
4,112
9,717
(580)
(4)
(584)
228
1,282
4,754
315
6,579
(1,839)
(70)
—
(807)
(2,716)
950
(735)
(1,238)
(1,973)
2,840
—
—
—
Net investment gains
$
21,835
$
9,133
$
2,840
The portion of loss recognized in Other Comprehensive Income (Loss) represents the non-credit portion of current or prior
other-than-temporary impairment. Other-than-temporary impairments of less than $0.1 million were recorded in earnings
during the year ended December 31, 2020. Other-than-temporary impairments of $0.6 million were recorded in earnings during
the year ended December 31, 2019. No other-than-temporary impairments were recorded in earnings during the year ended
December 31, 2018.
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. The increase in proceeds in 2018 primarily reflected the sale of fixed maturity securities to fund
the acquisition of Grange Life.
Proceeds
$
18,899
$
9,615
$
83,145
2020
2019
2018
27
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
Mortgage Loans
Investments in mortgage loans totaled $601.6 million at December 31, 2020, compared to $577.7 million at December 31,
2019. 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 $2.9 million at December 31, 2020 and $2.8 million at December 31, 2019. 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 from any single borrower that exceed 5% of stockholders' equity.
Commercial mortgage loans represented 15% of our total investments at both December 31, 2020 and December 31, 2019.
New commercial loans, including refinanced loans, totaled $116.6 million during 2020 and $29.7 million during 2019. 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 should the loan default. Any recourse requirement deemed necessary is determined as
part of the underwriting requirements of each loan. We added 42 new loans to the portfolio during 2020, and 85% of the total
balance of these loans had some amount of recourse requirement. The average loan-to-value ratio for the overall portfolio was
46% at December 31, 2020, down from 47% at December 31, 2019. This ratio is 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 $1.9 million at December 31, 2020 and $1.7 million at
December 31, 2019. We have certain mortgage loans that have an unamortized premium, totaling $0.1 million at both
December 31, 2020 and December 31, 2019.
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
2020
2019
$
604,461
$
580,535
(2,854)
(2,836)
$
601,607
$
577,699
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 2012
$
2012
2013
2014
2015
2016
2017
2018
2019
2020
2020
23,801
34,702
24,691
23,100
85,634
123,992
83,921
60,198
28,729
115,693
%
of Total
4 % $
6 %
4 %
4 %
14 %
21 %
14 %
10 %
5 %
18 %
2019
39,478
42,054
31,109
33,954
98,288
136,019
104,592
65,560
29,481
—
%
of Total
7 %
7 %
5 %
6 %
17 %
23 %
18 %
11 %
6 %
— %
Principal outstanding
$
604,461
100 % $
580,535
100 %
28
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
The following table identifies mortgage loans by geographic location at December 31.
Pacific
South Atlantic
East north central
West south central
West north central
Middle Atlantic
Mountain
East south central
New England
2020
%
of Total
2019
%
of Total
$
115,867
19 % $
115,868
92,688
91,255
84,346
64,368
58,146
47,787
41,928
8,076
15 %
15 %
14 %
11 %
10 %
8 %
7 %
1 %
88,154
83,758
82,542
67,408
59,610
45,552
29,258
8,385
20 %
15 %
14 %
14 %
12 %
10 %
8 %
5 %
2 %
Principal outstanding
$
604,461
100 % $
580,535
100 %
The following table identifies the concentration of mortgage loans by state greater than 5% of total at December 31.
$
California
Texas
Ohio
Minnesota
Florida
New Jersey
All others
Principal outstanding
$
2020
85,805
83,655
50,293
44,063
41,847
31,667
267,131
604,461
%
of Total
14 % $
14 %
8 %
7 %
7 %
5 %
45 %
100 % $
2019
92,618
81,741
38,983
50,966
21,545
33,883
260,799
580,535
%
of Total
16 %
14 %
7 %
9 %
4 %
6 %
44 %
100 %
The following table identifies mortgage loans by property type at December 31.
2020
%
of Total
2019
%
of Total
Industrial
Office
Retail
Other 1
Principal outstanding
$
$
421,181
70 % $
386,688
115,610
36,498
31,172
604,461
19 %
6 %
5 %
100 % $
125,013
36,935
31,899
580,535
1 The Other category consists principally of medical properties and apartments.
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
2020
7,749
26,370
234,786
335,556
%
of Total
1 % $
4 %
39 %
56 %
2019
3,184
41,566
166,175
369,610
Principal outstanding
$
604,461
100 % $
580,535
29
67 %
22 %
6 %
5 %
100 %
%
of Total
1 %
7 %
29 %
63 %
100 %
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
The following table identifies the commercial mortgage portfolio by current loan balance as a percentage of the appraised value
at the time of origination at December 31.
70% or greater
50% to 69%
Less than 50%
2020
$
72,403
337,336
194,722
%
of Total
2019
%
of Total
12 % $
87,776
56 %
32 %
292,982
199,777
15 %
50 %
35 %
100 %
Principal outstanding
$
604,461
100 % $
580,535
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. Concentration risk exposes us to potential losses from an economic downturn, certain catastrophes, and natural
disasters that may affect geographic locations where we have mortgage loans. We would not expect an occurrence in any of
these geographic locations 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 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 a total outstanding balance of $7.6 million during the
year ended December 31, 2020. We refinanced four loans with a total outstanding balance of $4.7 million during the year
ended December 31, 2019. None of these refinancings were the result of troubled debt restructuring.
At December 31, 2020, we did not have any loan defaults. However, we are working with our borrowers to understand
potential strain resulting from the current economic environment. As of December 31, 2020, no material contract
modifications, deferrals, or forbearance agreements had been executed. No deferrals or forbearance agreements were granted
on our mortgage loan portfolio during the third or fourth quarters of 2020. However, certain short-term deferrals of principal
and interest on a small portion of the mortgage loan portfolio were granted during the second quarter of 2020 related to the
COVID-19 pandemic and the associated economic impacts. The mortgage loan deferrals that were granted in the second
quarter of 2020 have concluded and the deferred amounts are expected to be fully repaid in 2021. We continue to closely
monitor our mortgage loan portfolio and work closely with borrowers who are negatively impacted by the COVID-19
pandemic.
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 20 - Commitments, Contingent Liabilities, Guarantees, and Indemnifications.
30
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
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
2020
2019
$
30,356
$
33,955
159,322
(48,325)
141,353
24,050
170,055
(46,431)
157,579
25,437
$
165,403
$
183,016
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 $29.7 million during 2020, $2.7 million during 2019, and $12.5 million during 2018.
We had $24.1 million in real estate joint ventures at December 31, 2020, compared with $25.4 million at December 31, 2019.
We are the holder of all shares in three subsidiary real estate joint ventures with a combined carrying value of $20.3 million at
both December 31, 2020 and December 31, 2019. 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, 2020 or 2019.
During 2020, certain tenants were granted real estate rent deferrals as a result of strains from the current economic environment.
We expect that these tenants will be brought current within the agreed-upon terms and will be returned to the original payment
schedules during 2021. We continue to monitor our real estate portfolio regarding additional strain resulting from the current
economic environment.
We had non-income producing commercial real estate, consisting of vacant properties and properties under development, of
$10.6 million at December 31, 2020, compared to $10.0 million at December 31, 2019. In addition, $11.8 million of our real
estate joint ventures were non-income producing at December 31, 2020 compared to $11.6 million at December 31, 2019.
31
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
Fixed Maturity and Equity Securities
Fixed maturity securities available for sale and equity securities 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.
Short-Term Investments
Short-term investments include highly-liquid investments in institutional money market funds that are carried at NAV. The
carrying value of short-term investments approximates the fair value and are categorized as Level 1. Fair value is provided for
disclosure purposes only.
Other Investments
Other investments include hedge positions classified as derivatives that are established in relation to the Company's indexed
universal life portfolio. These positions are recorded at fair value and are classified 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.
Reserves established in relation to the Company's hedge positions on its indexed universal life portfolio are considered to be
financial derivatives and are accounted for at fair value. These reserves are classified as level 3.
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.
32
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
Determination of Fair Value
We utilized external third-party pricing services at both December 31, 2020 and December 31, 2019 to determine the majority
of our fair values on fixed maturity and equity securities. At December 31, 2020, approximately 92% of the carrying value of
these investments was from an external pricing service, 5% was from brokers, and 3% was derived from internal matrices and
calculations. At December 31, 2019, approximately 96% of the carrying value of these investments was from an external
pricing service, 3% 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 2012 Individual Annuity Reserving 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.
33
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.
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
Other investments
Separate account assets
Total
Percent of total
Liabilities:
Policyholder account balances:
Indexed universal life
Other policyholder funds:
Level 1
Level 2
Level 3
Total
2020
$ 16,192
—
$
165,237
—
$
—
16,192
105,910
271,147
—
—
—
—
—
—
—
—
—
—
—
16,192
396
119,116
—
—
$ 135,704
473,272
173,611
250,379
466,231
707,546
372,777
2,443,816
16,238
263,718
104,663
3,206
3,102,788
6,251
—
5,946
463,041
$ 3,578,026
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
181,429
—
105,910
287,339
473,272
173,611
250,379
466,231
707,546
372,777
2,443,816
16,238
263,718
104,663
3,206
3,118,980
6,647
119,116
5,946
463,041
$ 3,713,730
4 %
96 %
— %
100 %
$
—
$
—
$
5,402
$
5,402
Guaranteed minimum withdrawal benefits
Separate account liabilities
Total
—
—
—
—
463,041
463,041
$
2,201
—
7,603
$
2,201
463,041
470,644
$
$
1 Federal agency securities are not backed by the full faith and credit of the U.S. Government.
34
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
Level 1
Level 2
Level 3
Total
2019
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
Other investments
Separate account assets
Total
Percent of total
Liabilities:
Policyholder account balances:
Indexed universal life
Other policyholder funds:
$ 15,745
$
176,561
$
—
—
15,745
—
—
—
—
—
—
—
—
—
—
—
1,486
116,303
294,350
461,155
174,484
248,515
386,942
684,219
309,160
2,264,475
20,264
268,195
76,032
12,076
15,745
2,935,392
483
75,426
—
—
10,789
—
—
431,201
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,363
—
$
192,306
1,486
116,303
310,095
461,155
174,484
248,515
386,942
684,219
309,160
2,264,475
20,264
268,195
76,032
12,076
2,951,137
11,272
75,426
4,363
431,201
$ 91,654
$ 3,377,382
$
4,363
$ 3,473,399
3 %
97 %
— %
100 %
$
—
$
—
$
3,603
$
3,603
Guaranteed minimum withdrawal benefits
Separate account liabilities
Total
—
—
—
$
—
431,201
(959)
—
(959)
431,201
$
431,201
$
2,644
$
433,845
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)
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.
Beginning balance
Included in earnings
Included in other comprehensive
income (loss)
Purchases, issuances, sales and
other dispositions:
Purchases
Issuances
Sales
Other dispositions
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
Assets
Other
Investments
2020
Liabilities
Indexed
Universal Life
GMWB
$
4,363
$
(3,483)
—
807
—
(894)
—
(793)
$
3,603
1,799
—
—
—
—
—
—
$
—
$
5,402
$
(959)
3,221
—
—
1,398
—
(1,459)
—
2,201
2019
Liabilities
Other
Investments
Indexed
Universal Life
Indexed
Universal Life
$
498
$
352
$
3,265
3,251
—
2,702
—
(2,102)
—
4,363
—
—
—
—
—
3,603
$
$
(3,648)
1,338
—
—
412
—
939
(959)
Other dispositions
Ending balance
$
Broker pricing for our derivatives uses observable inputs for similar publicly traded instruments. During 2020, they were
transferred from Level 3 to Level 2. We did not have any transfers between any levels during the years ended December 31,
2019 or December 31, 2018.
We use the Black Scholes valuation method, including parameters for market volatility, risk-free rate, and index level, for the
indexed universal life liabilities categorized as Level 3. We also use a 100% persistency assumption. Persistency of the
business is an unobservable input.
36
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
The following table presents the valuation method for the GMWB liability categorized as Level 3, as well as the unobservable
inputs used in the valuation of those financial instruments at December 31, 2020.
Embedded Derivative -
GMWB
2,201 Actuarial cash flow
model
Fair Value
$
Valuation
Technique
Unobservable
Inputs
Mortality
Lapse
Benefit Utilization
Range
85% of the 2012 IAR
Table
0%-12% depending on
product/duration/
funded status of
guarantee
0%-80% depending on
age/duration/funded
status of guarantee
The following table presents the valuation method for the GMWB liability categorized as Level 3, as well as the unobservable
inputs used in the valuation of those financial instruments at December 31, 2019.
Nonperformance
Risk
0.20%-1.11%
Embedded Derivative -
GMWB
(959) Actuarial cash flow
model
Fair Value
$
Valuation
Technique
Unobservable
Inputs
Mortality
Lapse
Benefit Utilization
Range
85% of the 2012 IAR
Table
0%-12% depending on
product/duration/
funded status of
guarantee
0%-80% depending on
age/duration/funded
status of guarantee
Nonperformance
Risk
0.42%-1.16%
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. Unobservable inputs include mortality, lapse, benefit utilization, and nonperformance risk
adjustments. 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
2020
2019
Increase/(Decrease)
in millions
$
(0.2)
0.4
1.3
(0.5)
(0.1)
0.2
1.0
(0.4)
37
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.
2020
Fair Value
Level 1
Level 2
Level 3
Total
Carrying
Value
Assets:
Investments:
Fixed maturity securities
$
16,192
$ 3,102,788
$
Equity securities
Mortgage loans
Policy loans
Short-term investments
Other investments
Separate account assets
Liabilities:
Individual and group annuities
Supplementary contracts and annuities
without life contingencies
Policyholder account balances - indexed
universal life
Other policyholder funds - GMWB
Separate account liabilities
396
—
—
119,116
—
—
—
—
—
—
—
6,251
—
—
—
5,946
463,041
—
—
634,336
84,447
—
—
—
$ 3,118,980
$ 3,118,980
6,647
634,336
84,447
119,116
5,946
463,041
6,647
601,607
84,447
119,116
5,946
463,041
—
1,071,186
1,071,186
1,089,134
—
—
—
463,041
52,547
52,547
52,950
5,402
2,201
—
5,402
2,201
5,402
2,201
463,041
463,041
Assets:
Investments:
Fixed maturity securities
$
Equity securities
Mortgage loans
Policy loans
Short-term investments
Other investments
Separate account assets
Liabilities:
Individual and group annuities
Supplementary contracts and annuities
without life contingencies
Policyholder account balances - indexed
universal life
Other policyholder funds - GMWB
Separate account liabilities
2019
Fair Value
Level 1
Level 2
Level 3
Total
Carrying
Value
$
$ 2,935,392
10,789
—
—
—
—
431,201
—
—
597,577
87,499
—
4,363
—
$ 2,951,137
11,272
597,577
$ 2,951,137
11,272
577,699
87,499
75,426
4,363
87,499
75,426
4,363
431,201
431,201
—
1,077,538
1,077,538
1,096,588
—
—
—
52,186
52,186
53,128
3,603
(959)
3,603
(959)
3,603
(959)
431,201
—
431,201
431,201
15,745
483
—
—
75,426
—
—
—
—
—
—
—
38
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.
Agent receivables, net
(allowance $1,084; 2019 - $1,482)
Investment-related financing receivables:
Mortgage loans, net
(allowance $2,854; 2019 - $2,836)
Total financing receivables
2020
2019
$
2,184
$
2,432
601,607
577,699
$
603,791
$
580,131
Agent Receivables
We have certain agent receivables that are classified as financing receivables. These receivables from agents 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.
2020
2019
Gross
Receivables
Allowance
Net
Receivables
Gross
Receivables
Allowance
Net
Receivables
Agent specific loans
Other agent receivables
Total
$
$
2,354
3,268
289
795
$
1,084
$
1,559
2,184
$
1,245
2,669
3,914
$
$
$
600
882
1,482
$
645
1,787
2,432
914
$
$
625
$
The following table details the activity of the allowance for doubtful accounts on agent receivables at December 31. Any
recoveries are included as deductions.
Beginning of year
Additions
Deductions
End of year
2020
2019
$
1,482
$
1,496
44
(442)
50
(64)
$
1,084
$
1,482
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.
39
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
2020
2019
$
551,240
$
508,501
53,221
(2,854)
72,034
(2,836)
$
601,607
$
577,699
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 - Investments, 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.
There was one mortgage loan that was past due at December 31, 2020. This mortgage loan was paid off during the first quarter
of 2021. There were no mortgage loans that were past due at December 31, 2019. We had no troubled loans that were
restructured or modified during 2020 or 2019.
The following table presents an aging schedule for delinquent payments for both principal and interest by property type at
December 31, 2020.
Amount of Payments Past Due
Book Value
30-59 Days
60-89 Days
> 90 Days
Total
Industrial
$
3,903
$
Office
Retail
Other
Total
—
—
—
$
3,903
$
83
—
—
—
83
$
$
83
—
—
—
83
$
165
$
—
—
—
$
165
$
331
—
—
—
331
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
2020
2019
$
$
2,836
542
(524)
$
2,854
$
3,129
139
(432)
2,836
We increased the allowance for mortgage loan losses less than $0.1 million in 2020. We decreased the allowance for mortgage
loan losses $0.3 million in 2019, primarily due to the lower volume of loans.
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.
40
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
Macro-environmental and elevated risk profile considerations:
•
•
•
•
•
•
Current industry conditions, inclusive of the COVID-19 pandemic, that are affecting the market, including rental and
vacancy rates;
Perceived market liquidity;
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 fair value, less
costs to sell the property at the time of foreclosure, 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.
6. Variable Interest Entities (VIEs)
We invest in certain affordable housing and real estate joint ventures. These VIEs are included in Real Estate in the
Consolidated Balance Sheets.
The assets held in affordable housing real estate joint venture VIEs are primarily residential real estate properties that are
restricted to provide affordable housing under federal or state programs for varying periods of time. The restrictions primarily
apply to the rents that may be paid by tenants residing in the properties during the term of an agreement to remain in the
affordable housing program. Investments in these joint ventures are equity interests in partnerships or limited liability
companies that may or may not participate in profits or residual value. Our investments in these entities generate a return
primarily through the realization of federal and state income tax credits and other tax benefits, such as tax deductions from
operating losses of the investments, over specified time periods. We amortize the initial cost of the investment in proportion to
the tax credits and other tax benefits received and recognize the net investment performance in the Consolidated Statements of
Comprehensive Income as a component of Income Tax Expense. The tax credits reduce tax expense while the amortization
increases tax expense.
41
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
The following table provides information regarding our VIEs that generate tax credits and related amortization for the years
ended December 31.
Federal income tax credits realized
Amortization
2020
2019
2018
$
$
1,697
1,093
$
2,608
1,421
2,752
1,452
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, 2020, December 31,
2019, or December 31, 2018.
Investments in the affordable housing and real estate joint ventures are interests that absorb portions of the VIE's expected
losses. These investments also receive portions of expected residual returns of the VIE's net assets exclusive of variable
interests. We make an assessment of whether we are the primary beneficiary of a VIE at the time of the initial investment and
on an ongoing basis thereafter. We consider many factors when making this determination based upon a review of the
underlying investment agreement and other information related to the specific investment. The first factor is whether we have
the ability to direct the activities of a VIE that most significantly impact the VIE's economic performance. The power to direct
the activities of the VIE is generally vested in the managing general partner or managing member of the VIE, which is not the
position held by us in these investments. Other factors include the entity's equity investment at risk, decision-making abilities,
obligations to absorb economic risks, the right to receive economic rewards of the entity, and the extent to which we share in
the VIE's expected losses and residual returns.
The following table presents the carrying amount and maximum exposure to loss relating to VIEs for which we hold a variable
interest, but are not the primary beneficiary, and which had not been consolidated at December 31, 2020 and December 31,
2019. The table includes investments in five real estate joint ventures and eight affordable housing real estate joint ventures at
December 31, 2020 and five real estate joint ventures and 16 affordable housing real estate joint ventures at December 31,
2019.
Real estate joint ventures
Affordable housing real estate joint ventures
Total
2020
2019
Carrying
Amount
Maximum
Exposure
to Loss
Carrying
Amount
Maximum
Exposure
to Loss
$
$
21,327
$
21,327
$
21,224
$
2,723
24,050
$
27,512
48,839
$
4,213
25,437
$
21,224
29,818
51,042
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, 2020 and December 31, 2019, we had no equity commitments outstanding to the real estate joint venture
VIEs. At December 31, 2020 and December 31, 2019, we had no contingent commitments to fund additional equity
contributions for operating support to real estate joint venture VIEs.
In addition, the maximum exposure to loss on affordable housing joint ventures included $22.1 million of losses which could be
realized if the tax credits received by the VIEs were recaptured at December 31, 2020, compared to $21.4 million at
December 31, 2019. 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
42
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
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.
During the fourth quarter of 2020, one tenant was granted rent deferral as a result of strains from the current economic
environment. We expect that this tenant will be brought current within the agreed-upon terms and will be returned to the
original payment schedule during 2021. We continue to monitor our real estate joint venture portfolio regarding additional
strain resulting from the current economic environment.
7. 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 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 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 $463.0 million at December 31, 2020 and $431.2 million at December 31, 2019.
Variable universal life and variable annuity assets comprised 30% and 70% of total separate account assets in both 2020 and
2019.
The following table provides a reconciliation of activity within separate account liabilities at December 31.
Balance at beginning of year
Deposits on variable policyholder contracts
Transfers to general account
Investment performance
Policyholder benefits and withdrawals
Contract charges
Balance at end of year
2020
2019
$
431,201
$
373,734
26,320
(6,376)
62,550
(38,222)
(12,432)
21,654
(884)
86,897
(37,677)
(12,523)
$
463,041
$
431,201
We offer a GMWB rider that can be added to new or existing variable annuity contracts. The value of the separate accounts
with the GMWB rider was recorded at fair value of $118.5 million at December 31, 2020. The fair value of the separate
accounts with the GMWB rider was $120.2 million at December 31, 2019. The GMWB guarantee liability was $2.2 million at
December 31, 2020 and $(1.0) million at December 31, 2019. 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 $463.0 million at December 31, 2020 and
$431.2 million at December 31, 2019, and corresponding separate account liabilities of an equal amount. The fixed-rate funds
for these policies are included in our general account as Policyholder Account Balances. The Future Policy Benefits for the
direct block approximated $0.5 million at both December 31, 2020 and December 31, 2019.
In addition, we have an assumed closed block of variable universal life and variable annuity business that totaled $369.9 million
at December 31, 2020 and $327.7 million at December 31, 2019. 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 $32.8 million at December 31, 2020 and $31.6 million at
December 31, 2019 are included in our general account as Policyholder Account Balances. The Future Policy Benefits for the
assumed block approximated $0.5 million at December 31, 2020 and $0.6 million at December 31, 2019.
43
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
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.
Separate account balances for variable annuity contracts were $323.5 million at December 31, 2020 and $303.8 million at
December 31, 2019. The total reserve held for variable annuity GMDB was less than $0.1 million at both December 31, 2020
and December 31, 2019. 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, 2020 and 2019 is provided below:
2020
Net
Amount
at Risk
Separate
Account
Balance
Weighted
Average
Attained
Age
Separate
Account
Balance
2019
Net
Amount
at Risk
Weighted
Average
Attained
Age
$ 246,060
$
119
62.9
$ 234,373
$
166
62.2
9,737
7,115
—
17
72.1
9,387
70.5
6,983
49
23
60,600
$ 323,512
$
2,197
2,333
64.4
63.6
53,024
$ 303,767
$
2,768
3,006
71.1
68.9
64.6
63.0
Return of net deposits
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
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
2020
2019
$
4,037
$
15,240
86,654
21,769
161,628
34,184
323,512
$
$
1,692
16,314
84,734
20,146
151,476
29,405
303,767
44
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
8. 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 by segment 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.
Gross liability at end of year
$
1 The incurred benefits related to prior years’ unpaid accident and health claims reflect the change in these liabilities.
Gross liability at beginning of year
Less reinsurance recoverable
Net liability at beginning of year
Incurred benefits related to:
Current year
Prior years 1
Total incurred benefits
Paid benefits related to:
Current year
Prior years
Total paid benefits
Net liability at end of year
Reinsurance recoverable
Gross liability at beginning of year
Less reinsurance recoverable
Net liability at beginning of year
Incurred benefits related to:
Current year
Prior years 1
Total incurred benefits
Paid benefits related to:
Current year
Prior years
Total paid benefits
Net liability at end of year
Reinsurance recoverable
2020
Individual
Insurance
Group
Insurance
Old
American
Consolidated
$
659
$
32,169
$
3,952
$
36,780
(455)
204
(23,983)
8,186
66
22
88
35
63
98
194
412
606
24,148
(802)
23,346
20,013
3,512
23,525
8,007
23,565
$
31,572
$
(3,921)
31
31
11
42
1
42
43
30
2,565
2,595
$
(28,359)
8,421
24,245
(769)
23,476
20,049
3,617
23,666
8,231
26,542
34,773
2019
Individual
Insurance
Group
Insurance
Old
American
Consolidated
$
831
$
31,188
$
4,434
$
36,453
(541)
290
31
(70)
(39)
15
32
47
204
455
659
(23,796)
7,392
28,201
(398)
27,803
23,557
3,452
27,009
8,186
23,983
$
32,169
$
(4,402)
32
(28,739)
7,714
48
(5)
43
17
27
44
31
3,921
3,952
$
28,280
(473)
27,807
23,589
3,511
27,100
8,421
28,359
36,780
Gross liability at end of year
$
1 The incurred benefits related to prior years’ unpaid accident and health claims reflect the change in these liabilities.
45
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
Gross liability at beginning of year
Less reinsurance recoverable
Net liability at beginning of year
Incurred benefits related to:
Current year
Prior years 1
Total incurred benefits
Paid benefits related to:
Current year
Prior years
Total paid benefits
Net liability at end of year
Reinsurance recoverable
2018
Individual
Insurance
Group
Insurance
Old
American
Consolidated
$
657
$
27,945
$
5,438
$
34,040
(372)
285
(21,231)
6,714
(5,346)
92
(26,949)
7,091
32
75
107
11
91
102
290
541
831
27,526
(647)
26,879
23,150
3,051
26,201
7,392
23,796
$
31,188
$
48
(68)
(20)
18
22
40
32
4,402
4,434
$
27,606
(640)
26,966
23,179
3,164
26,343
7,714
28,739
36,453
Gross liability at end of year
$
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.
Individual Insurance Segment:
Individual accident and health
$
Group life
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
2020
2019
2018
$
606
—
$
659
—
42,860
5,743
49,209
31,572
3,573
35,145
2,595
12,105
14,700
33,252
5,286
39,197
32,169
3,256
35,425
3,952
7,273
11,225
831
30
27,141
4,289
32,291
31,188
1,994
33,182
4,434
6,814
11,248
$
99,054
$
85,847
$
76,721
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 $0.7 million at December 31, 2020 and $0.6 million at
December 31, 2019. 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
46
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
frequencies, incurred-but-not-reported liabilities, or any other unpaid claims liabilities for the long-term disability product
during the years presented.
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, 2020 was $5.2 million, consisting of an undiscounted amount of $6.6
million and an aggregated discount amount deducted of $1.4 million. Discount rates ranged from 2.25% to 6.60% 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, 2020. The information about incurred claims development for the years ended
December 31, 2012 to December 31, 2019 is presented as unaudited supplementary information.
For the Years Ended December 31,
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total of
IBNR
Liabilities
Plus
Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
$ 1,132 $ 1,087 $
999 $
993 $ 1,116 $ 1,104 $ 1,118 $ 1,130 $ 1,138 $
806
836
868
815
955
989
838
799
918
838
768
701
822
770
697
854
728
643
869
735
646
1,694 1,552 1,382 1,412 1,284
2,038 1,727 1,513 1,436
2,473 2,192 2,135
2,056 2,036
1,483
$ 11,762
—
—
—
—
—
—
—
—
687
630
234
185
228
239
250
280
285
111
Year
Incurred
2012
2013
2014
2015
2016
2017
2018
2019
2020
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, 2020. The information about paid claims development for the years ended
December 31, 2012 to December 31, 2019 is presented as unaudited supplementary information.
Year
Incurred
2012
2013
2014
2015
2016
2017
2018
2019
2020
For the Years Ended December 31,
2012
2013
2014
2015
2016
2017
2018
2019
2020
$
91 $
373 $
91
499 $
336
605 $
449
675 $
501
733 $
537
797 $
564
856 $
600
71
276
100
411
390
164
481
491
505
162
499
531
626
549
208
517
545
690
703
681
251
910
630
550
561
736
785
869
752
162
All outstanding liabilities before 2012, net of reinsurance
Liabilities for claims and claim adjustment expenses, net of reinsurance
Total $ 5,955
$
826
$ 6,633
47
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
2020
2019
$
$
6,633
5,472
6,538
5,535
12,105
12,073
28,762
4,280
33,042
60,723
—
(6,816)
—
53,907
28,631
5,532
34,163
45,832
—
(6,221)
—
39,611
Total gross liability for unpaid claims and claim
adjustment expenses
$
99,054
$
85,847
The following table provides the historical average annual percentage payout of incurred claims by age, net of reinsurance, at
December 31, 2020.
Group long-term disability
11.20 % 28.20 % 12.40 %
7.00 %
3.70 %
1
2
Years
3
4
5
48
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
9. 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 4% of total statutory premiums in 2020 and 6% in 2019. Assumed
participating business from the acquisition of closed blocks of business accounted for 95% of total participating statutory
premiums in 2020 and 99% in 2019. Participating business equaled 5% of total life insurance in force at both December 31,
2020 and December 31, 2019. Assumed participating business accounted for 97% of total participating life insurance in force
at both December 31, 2020 and December 31, 2019.
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.
10. Debt
We had no notes payable outstanding at December 31, 2020 or December 31, 2019.
As a member of the Federal Home Loan Bank of Des Moines (FHLB) with a capital investment of $4.9 million at
December 31, 2020, we have the ability to borrow on a collateralized basis from the FHLB. Dividends received on the capital
investment totaled $0.1 million for the year ended December 31, 2020, $0.2 million for the year ended December 31, 2019, and
$0.1 million for the year ended December 31, 2018.
We had unsecured revolving lines of credit with three major commercial banks that totaled $80.0 million at both December 31,
2020 and December 31, 2019, with no balances outstanding. The lines of credit are at variable interest rates based upon short-
term indices and will mature in June and July of 2021. 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.
The Company has access to secured borrowings through repurchase agreements with two financial counterparties. The
Company had no transactions that occurred under these agreements during 2020 and had no outstanding borrowings as of
December 31, 2020. The Company had no transactions that occurred under these agreements during the year ended December
31, 2019 and had no outstanding borrowings as of December 31, 2019. Any borrowings drawn under these agreements require
a variable interest rate based upon short-term indices and approval from the counterparty at the time of the transaction. No
securities are currently pledged under these agreements.
11. Income Taxes
The following table provides information about income taxes for the years ended December 31.
Current income tax expense (benefit)
Deferred income tax expense (benefit)
Adjustment to deferred taxes for enacted
changes in tax laws
Total income tax expense
2020
2019
2018
$
6,695
$
4,597
$
(5,951)
—
744
$
426
—
$
5,023
$
(505)
1,743
276
1,514
The following table provides information about taxes paid for the years ended December 31.
Cash paid (refund) for income taxes
$
3,667
$
(938)
$
(963)
2020
2019
2018
49
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
Impact of CARES Act
Permanent differences and other
Remeasurement of deferred taxes for enacted
changes in tax laws
Effective income tax rate
2020
2019
2018
21 %
(6) %
(7) %
(3) %
— %
5 %
21 %
(8) %
— %
4 %
— %
17 %
21 %
(10) %
— %
(4) %
2 %
9 %
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
Tax carryovers
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
2020
2019
$
26,040
$
18,781
6,774
400
2,523
35,737
4,268
67,408
28,549
1,522
3,558
105,305
69,568
1,790
71,358
$
$
6,468
1,124
2,581
28,954
3,673
36,600
33,431
2,631
3,338
79,673
50,719
(145)
50,574
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, and tax planning strategies that are prudent and feasible. 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
2017. We are not currently under examination by the Internal Revenue Service (IRS).
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 2020, 2019, or 2018.
We had no material uncertain tax positions at December 31, 2020 or December 31, 2019.
50
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
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
Stockholders’ equity:
Related to:
2020
2019
2018
$
744
$
5,023
$
1,514
Change in net unrealized gains on securities available
for sale
Effect on DAC, VOBA, and DRL
Change in policyholder liabilities
Change in benefit plan obligations
30,809
(2,076)
(4,222)
289
34,453
(3,086)
(4,249)
809
(17,295)
2,357
3,018
(1,548)
Total income tax expense (benefit) included in financial statements $
25,544
$
32,950
$
(11,954)
The CARES Act was signed into law on March 27, 2020 in an effort to provide fast and direct economic assistance to
Americans during the COVID-19 health crisis. The CARES Act has several income tax provisions that we have utilized, which
have had a direct impact on our effective tax rate and income tax expense for 2020. The benefits that will apply to us include,
but are not limited to, the ability to carry back net operating losses and the acceleration of the recovery of Alternative Minimum
Tax (AMT) credits. The 7% decrease in the effective tax rate noted above for 2020 is primarily the result of our ability to carry
back net operating losses from the taxable years 2018 through 2020, which are taxed at a federal income tax rate of 21%, to the
taxable years 2013 through 2017, which are taxed at a federal income tax rate of 35%.
51
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
12. Pensions and Other Postemployment Benefits
We have pension and other postemployment benefit plans covering substantially all of our employees for which the annual
measurement date is December 31.
The Kansas City Life Cash Balance Pension Plan (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 pension plan at December 31, 2010, participants will
continue to earn years of service for vesting purposes under the pension plan with respect to their benefits accrued through
December 31, 2010. In addition, the cash balance account will continue to earn annual interest. Pension 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%. Annual interest was calculated using 5.00% for 2020 and 2019.
The benefits expected to be paid in each year from 2021 through 2025 are as follows: $9.8 million in 2021; $8.5 million in
2022; $9.8 million in 2023; $8.6 million in 2024; and $8.3 million in 2025. The aggregate benefits expected to be paid in the
five years from 2026 through 2030 are $37.7 million. The expected benefits to be paid are based on the same assumptions used
to measure the Company’s benefit obligation at December 31, 2020 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 2021 contribution
for the pension 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
2020
41 %
14 %
45 %
—%
Target
Allocation
28% - 48%
10% - 20%
30% - 60%
0% - 10%
2019
38 %
14 %
48 %
— %
Target
Allocation
28% - 48%
10% - 20%
30% - 60%
0% - 10%
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.
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 pension 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 current assumption for the expected long-term rate of return on plan assets is 6.29%. 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 pension plan. Effective January 1, 2021, the
assumption for the expected long-term rate of return on plan assets was reduced to 5.77%.
The assumed discount rate used to determine the benefit obligation was 2.00% for pension benefits and was 2.33% for
postemployment benefits. The discount rates were determined by reference to the FTSC Pension Discount Curve (formerly the
Citigroup Pension Liability Yield Curve) on December 31, 2020. 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.
52
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
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 2021 through 2025 are as follows: $0.7 million in 2021; $0.8
million in 2022; $0.8 million in 2023; $0.8 million in 2024; and $0.8 million in 2025. The aggregate benefits expected to be
paid in the five years from 2026 through 2030 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, 2020. The 2021 contribution for the
postemployment medical plans is estimated to be $0.7 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 2020, 2019, and 2018. 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 2020, 2019, and 2018.
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 $2.6 million in 2020, $2.5 million in 2019, and
$2.3 million in 2018. 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 2020, 2019, or 2018.
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.
Significant sources of actuarial gains and losses for the pension plan included the impact of changes to the discount rate of
$10.5 million during 2020 and $12.1 million during 2019. The pension plan included gains from asset returns compared to
expected returns of $9.7 million in 2020 and $15.5 million in 2019. The mortality assumption and lump sum interest changes
resulted in gains of $1.9 million in 2020 and $2.3 million in 2019. The significant sources of actuarial gains and losses for
other postretirement benefits included the impact of changes to the discount rate of $2.1 million in 2020 and $2.5 million and
2019 and gains from updated claims costs of $1.1 million in 2020.
53
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
Service cost
Interest cost
Plan participants' contributions
Actuarial loss
Benefits paid
Pension Benefits
OPEB
2020
2019
2020
2019
$
125,931
$
121,586
$
18,942
$
16,389
—
3,494
—
8,828
(8,011)
—
4,615
—
10,803
(11,073)
184
576
486
876
(959)
169
663
462
2,208
(949)
Benefit obligation at end of year
$
130,242
$
125,931
$
20,105
$
18,942
Change in plan assets:
Fair value of plan assets at beginning of year $
Return on plan assets
Plan participants' contributions
Company contributions
Benefits paid
151,704
$
134,014
$
18,926
—
3,028
(8,011)
24,735
—
4,028
(11,073)
$
—
—
486
473
(959)
Fair value of net plan assets at end of year $
165,647
$
151,704
$
—
$
—
—
462
487
(949)
—
Under/(over) funded status at end of year
$
(35,405)
$
(25,773)
$
20,105
$
18,942
Amounts recognized in accumulated other
comprehensive income (loss):
Net loss (gain)
Prior service credit
Total accumulated other comprehensive
income (loss)
Other changes in plan assets and benefit
obligations recognized in other
comprehensive income (loss):
Unrecognized actuarial net (gain) loss
Amortization of net gain (loss)
Amortization of prior service credit
Total (gain) loss recognized in other
comprehensive income (loss)
Pension Benefits
OPEB
2020
2019
2020
2019
$
66,035
$
69,392
$
(8,755)
$
(10,670)
(1,274)
(1,340)
—
—
$
64,761
$
68,052
$
(8,755)
$
(10,670)
Pension Benefits
OPEB
2020
2019
2020
2019
$
(843)
$
(4,709)
$
876
$
(2,514)
66
(2,874)
66
1,039
—
2,208
1,458
—
$
(3,291)
$
(7,517)
$
1,915
$
3,666
54
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
Weighted average assumptions used to determine
benefit obligations at December 31:
Discount rate
Weighted average assumptions used to determine
net periodic benefit cost for years ended
December 31:
Discount rate
Expected return on plan assets
Pension Benefits
OPEB
2020
2019
2020
2019
2.00 %
2.88 %
2.33 %
3.10 %
2.88 %
6.29 %
3.96 %
7.15 %
3.10 %
— %
4.13 %
—
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
Collective trust
Limited partnerships
Other invested assets
Cash and cash equivalents
Receivables
2020
2019
$
159
$
8,206
30,844
114,177
11,852
10
334
65
248
9,698
29,650
102,147
9,858
13
11
79
Fair value of assets at end of year
$
165,647
$
151,704
55
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
The following tables provide the fair value hierarchy, as described in Note 4 - Fair Value Measurements, 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
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
Collective trust
Limited partnerships
Investments at fair value
Level 1
Level 2
Level 3
Total
2020
—
—
30,844
—
30,844
$
159
$
8,206
—
—
8,365
$
—
—
—
10
10
159
8,206
30,844
10
39,219
114,177
11,852
165,248
$
Level 1
Level 2
Level 3
Total
2019
—
—
29,650
—
29,650
$
248
$
9,698
—
—
9,946
$
—
—
—
13
13
248
9,698
29,650
13
39,609
102,147
9,858
$
151,614
1 These investments are valued based on net asset value per unit. These values are provided by the fund as a practical
expedient and have not been classified in the fair value hierarchy.
The following table discloses the changes in Level 3 pension plan assets measured at fair value on a recurring basis for the
years ended December 31.
Beginning balance
Losses realized and unrealized
Ending balance
2020
2019
$
$
13
(3)
10
$
$
25
(12)
13
56
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
The following table provides the components of net periodic benefit cost (credit) 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 credit
Total recognized in other
comprehensive income (loss)
Total recognized in net periodic
benefit cost (credit) and other
comprehensive income (loss)
Pension Benefits
2020
2019
2018
2020
OPEB
2019
2018
$
—
$
—
$
—
$
3,494
(9,255)
4,615
(9,223)
4,274
(10,177)
$
184
576
—
$
169
663
—
223
631
—
2,514
(66)
(3,313)
2,874
(66)
(1,800)
2,394
(66)
(3,575)
(1,039)
(1,458)
(1,292)
—
(279)
—
(626)
(3,291)
(7,517)
7,950
1,915
3,666
(100)
(538)
(579)
$
(6,604) $
(9,317) $
4,375
$
1,636
$
3,040
$
(1,117)
For measurement purposes, the annual increase in the per capita cost of covered health care benefits was assumed to be 6.50%,
decreasing gradually to 5.00% in 2030 and thereafter.
57
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
13. Share-Based Payment
The Kansas City Life Insurance Company Omnibus Incentive Plan (long-term incentive plan) includes a long-term incentive
benefit for senior management. The long-term incentive 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, 2020.
Defined
Measurement
Period
2018-2020
2019-2021
2020-2022
2021-2023*
Number
of Units
155,297
126,898
129,114
114,167
* Effective January 1, 2021
Grant
Price
$45.62
$35.12
$32.70
$37.39
The Company did not make a cash payment under the long-term incentive plan during 2020 for the three-year interval ended
December 31, 2019. The Company did not make a cash payment under the long-term incentive plan during 2019 for the three-
year interval ended December 31, 2018. The Company made a payment of $0.2 million during 2018 for the three-year interval
ended December 31, 2017. The cost of share-based compensation accrued as operating expense during 2020 was $0.6 million,
net of tax. The cost of share-based compensation accrued as an operating expense during 2019 was less than $0.1 million, net
of tax. The change in accrual that reduced operating expense during 2018 was $0.4 million, net of tax.
58
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
14. 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
2020
2019
2018
$
52,334
$
52,752
$
53,084
(32,884)
4,121
(32,889)
4,337
(33,265)
4,601
$
23,571
$
24,200
$
24,420
$
265,564
$
266,345
$
201,823
(94,074)
4,855
(96,263)
4,717
(59,134)
2,992
$
176,345
$
174,799
$
145,681
$
$
58,131
$
59,681
$
58,884
(10,720)
(11,253)
(10,972)
47,411
$
48,428
$
47,912
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 $11.9 million at December 31, 2020 and $13.4 million at December 31,
2019. The reserve for future policy benefits ceded under this agreement was $7.3 million at December 31, 2020 and $8.1
million at December 31, 2019.
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 $577.8 million at December 31, 2020 and
$628.4 million at December 31, 2019. Premiums totaled $5.6 million during 2020, $5.7 million during 2019, and $6.2 million
during 2018.
Reinsurance recoverables were $391.4 million at year-end 2020, consisting of reserves ceded of $351.4 million and claims
ceded of $40.0 million. Reinsurance recoverables were $378.8 million at year-end 2019, consisting of reserves ceded of $347.7
million and claims ceded of $31.1 million.
In 2018, Grange Life completed a 100% recapture of a block of business previously ceded to Colorado Bankers Life Insurance
Company. The block of business recaptured approximated $54.5 million of deferred annuity reserves.
The maximum retention on any one life during 2020 and 2019 was $0.5 million for ordinary life plans and $0.1 million for
group coverage.
59
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, 2020, along with their A.M. Best credit rating.
A.M. Best
Rating
SCOR Global Life USA Reinsurance Company
RGA Reinsurance Company
Transamerica Life Insurance Company
Swiss Re Life & Health America, Inc
Other (26 Companies)
A+
A+
A
A+
Total
Reinsurance
Recoverable
99,352
$
99,173
41,931
23,309
127,674
391,439
$
% of
Recoverable
25 %
25 %
11 %
6 %
33 %
100 %
A contingent liability exists with respect to reinsurance, which may become a liability of the Company in the unlikely event that
the reinsurers should be unable to meet obligations assumed under reinsurance contracts. The solvency of reinsurers is
reviewed annually.
We monitor several factors that we consider relevant as to the ongoing ability of a reinsurer to meet the obligations of the
reinsurance agreements. These factors include the credit rating of the reinsurer and significant changes or events of the
reinsurer. If we believe that any reinsurer would not be able to satisfy its obligations with us, a separate contingency reserve
may be established. At year-end 2020 and 2019, 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 $606.2 million of life insurance in force at December 31, 2020 and $660.8 million of
life insurance in force at December 31, 2019. This block generated life insurance premiums of $1.9 million in 2020 and $2.0
million in both 2019 and 2018.
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 $369.9 million of separate account balances at
December 31, 2020, which are included in the financial statements of American Family, compared to $327.7 million at
December 31, 2019. This block consisted of $0.5 million of future policy benefits and $32.8 million in fixed fund balances that
are included in Policyholder Account Balances in the Company’s Consolidated Balance Sheets at December 31, 2020. This
block consisted of $0.6 million of future policy benefits and $31.6 million in fixed fund balances at December 31, 2019.
60
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
15. 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).
Year Ended December 31, 2020
Tax Expense
(Benefit)
Net-of-Tax
Amount
Pre-Tax
Amount
Net unrealized gains arising during the year:
Fixed maturity 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
Effect on DAC, VOBA, and DRL
Change in policyholder liabilities
Change in benefit plan obligations
Other comprehensive income
Net income
Comprehensive income
$
151,735
$
31,864
$
119,871
5,045
1,059
3,986
—
(19)
146,709
(9,885)
(20,104)
1,376
—
(4)
30,809
(2,076)
(4,222)
289
$
118,096
$
24,800
$
—
(15)
115,900
(7,809)
(15,882)
1,087
93,296
15,170
$
108,466
61
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
Year Ended December 31, 2019
Tax Expense
(Benefit)
Net-of-Tax
Amount
Pre-Tax
Amount
Net unrealized gains arising during the year:
Fixed maturity 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
Effect on DAC, VOBA, and DRL
Change in policyholder liabilities
Change in benefit plan obligations
Other comprehensive income
Net income
Comprehensive income
$
166,201
$
34,902
$
131,299
2,723
(580)
(4)
164,062
(14,694)
(20,236)
3,851
572
(122)
(1)
34,453
(3,086)
(4,249)
809
2,151
(458)
(3)
129,609
(11,608)
(15,987)
3,042
$
132,983
$
27,927
$
105,056
24,427
$
129,483
Year Ended December 31, 2018
Tax Expense
(Benefit)
Net-of-Tax
Amount
Pre-Tax
Amount
Net unrealized losses arising during the year:
Fixed maturity securities
Less reclassification adjustments:
Net realized investment losses, 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
Effect on DAC, VOBA, and DRL
Change in policyholder liabilities
Change in benefit plan obligations
Other comprehensive loss
Net income
Comprehensive loss
$
(82,724)
$
(17,372)
$
(65,352)
(367)
(77)
(290)
—
—
(82,357)
11,224
14,372
(7,371)
—
—
(17,295)
2,357
3,018
(1,548)
—
—
(65,062)
8,867
11,354
(5,823)
$
(64,132)
$
(13,468)
$
(50,664)
15,672
$
(34,992)
62
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, 2020, net of tax.
Unrealized
Gain on
Non-
Impaired
Securities
Unrealized
Gain on
Impaired
Securities
Benefit
Plan
Obligations
DAC/
VOBA/DRL
Impact
Policyholder
Liabilities
Total
$
136,264
$
1,417
$
(45,330) $
(12,715) $
(20,130) $
59,506
120,056
(185)
1,087
(7,809)
(15,882)
97,267
(3,986)
15
—
—
—
(3,971)
116,070
(170)
1,087
(7,809)
(15,882)
93,296
$
252,334
$
1,247
$
(44,243) $
(20,524) $
(36,012) $
152,802
Beginning of year
Other comprehensive
income (loss) before
reclassification
Amounts reclassified
from accumulated
other comprehensive
income (loss)
Net current-period other
comprehensive income
(loss)
End of year
The following table provides accumulated balances related to each component of Accumulated Other Comprehensive Income
(Loss) at December 31, 2019, net of tax.
Unrealized
Gain on
Non-
Impaired
Securities
Unrealized
Gain on
Impaired
Securities
Benefit
Plan
Obligations
DAC/
VOBA/DRL
Impact
Policyholder
Liabilities
Total
$
6,555
$
1,517
$
(48,372) $
(1,107) $
(4,143) $
(45,550)
131,860
(561)
3,042
(11,608)
(15,987)
106,746
(2,151)
461
—
—
—
(1,690)
129,709
(100)
3,042
(11,608)
(15,987)
105,056
$
136,264
$
1,417
$
(45,330) $
(12,715) $
(20,130) $
59,506
Beginning of year
Other comprehensive
income (loss) before
reclassification
Amounts reclassified
from accumulated
other comprehensive
income (loss)
Net current-period other
comprehensive income
(loss)
End of year
63
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.
Reclassification adjustments related to unrealized gains (losses)
on investment securities:
Net realized investment gains (losses), excluding impairment
losses 1
Income tax benefit (expense) 2
Net of taxes
Other-than-temporary impairment losses 1
Income tax benefit 2
Net of taxes
Total pre-tax reclassifications
Total income tax benefit (expense)
Total reclassification, net taxes
2020
2019
2018
$
5,045
$
2,723
$
(1,059)
3,986
(19)
4
(15)
5,026
(1,055)
(572)
2,151
(584)
123
(461)
2,139
(449)
$
3,971
$
1,690
$
(367)
77
(290)
—
—
—
(367)
77
(290)
1 (Increases) decreases Net Investment Gains in the Consolidated Statements of Comprehensive Income.
2 (Increases) decreases Income Tax Expense in the Consolidated Statements of Comprehensive Income.
16. 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 was 9,683,414
shares during 2020, 2019, and 2018. The number of shares outstanding at both December 31, 2020 and December 31, 2019
was 9,683,414.
17. 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 Kansas City Life, Sunset Life, Grange Life, and the assumed reinsurance transactions. The Group
Insurance segment consists of sales of group life, dental, vision, disability, accident, and critical illness 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. Separate investment portfolios are maintained for Kansas City Life, Sunset Life, Old
American, and Grange Life 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.
64
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
Interest credited to policyholder
account balances
Amortization of deferred
acquisition costs
Income tax expense (benefit)
Net income (loss)
Assets
Insurance revenues
Interest credited to policyholder
account balances
Amortization of deferred
acquisition costs
Income tax expense
Net income
Assets
2020
Individual
Insurance
Group
Insurance
Old
American
Consolidated
$
189,081
$
62,695
$
98,702
$
350,478
78,792
21,444
793
15,327
4,989,424
—
20,697
(953)
(3,562)
78,792
42,141
744
15,170
462,150
5,463,012
—
—
904
3,405
11,438
2019
Individual
Insurance
Group
Insurance
Old
American
Consolidated
$
190,041
$
63,091
$
95,981
$
349,113
78,520
15,506
4,163
21,191
4,772,243
—
20,442
302
1,137
78,520
35,948
5,023
24,427
435,616
5,219,865
—
—
558
2,099
12,006
2018
Individual
Insurance
Group
Insurance
Old
American
Consolidated
Insurance revenues
Interest credited to policyholder
account balances
Amortization of deferred
acquisition costs
Income tax expense
Net income
Assets
$
156,604
$
61,632
$
92,273
$
310,509
74,308
20,916
854
12,198
4,552,270
—
—
574
2,160
10,550
—
19,700
86
1,314
74,308
40,616
1,514
15,672
408,666
4,971,486
65
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
18. Quarterly Consolidated Financial Data (unaudited)
The unaudited quarterly results of operations for the years ended December 31 are summarized in the following table.
2020:
Total revenues
First
Second
Third
Fourth
$
123,035
$
146,772
$
128,005
$
126,098
Total benefits and expenses
123,446
125,464
129,033
130,053
Net income (loss)
Per common share,
basic and diluted
2019:
Total revenues
150
16,969
(1,199)
(750)
0.02
1.75
(0.13)
(0.07)
First
Second
Third
Fourth
$
130,103
$
129,884
$
126,441
$
126,265
Total benefits and expenses
125,154
123,455
120,983
113,651
Net income
Per common share,
basic and diluted
4,035
5,281
4,522
10,589
0.42
0.54
0.47
1.09
19. 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.
2020
2019
2018
Net gain (loss) from operations
$
(1,287)
$
5,965
$
11,529
Net income
Capital and surplus
11,554
265,341
6,929
260,804
15,510
278,157
The increase in capital and surplus in 2020 compared to 2019 was largely attributable to net income of $11.6 million, the
change in reserve valuation basis of $9.9 million, and the change in net deferred taxes of $7.9 million. These were partially
offset by the change in nonadmitted assets of $12.9 million, the change in asset valuation reserve of $0.7 million, the change in
net unrealized capital gains (losses) of $1.0 million, and the payment of $10.5 million of stockholder dividends.
Kansas City Life recognizes its 100% ownership in Old American, Sunset Life, and Grange Life under the equity method with
subsidiary earnings recorded through surplus on a statutory accounting basis. Capital and surplus at December 31, 2020 in the
above table includes capital and surplus of $18.8 million for Old American, $25.0 million for Sunset Life, and $37.5 million for
Grange 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.
66
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
The maximum stockholder dividends payable by Kansas City Life without prior approval in 2021 is $26.5 million, 10% of
December 31, 2020 capital and surplus. The maximum stockholder dividends payable by Old American without prior approval
in 2021 is $1.9 million, 10% of December 31, 2020 capital and surplus. The maximum stockholder dividends payable by
Sunset Life without prior approval in 2021 is $2.5 million, 10% of December 31, 2020 capital and surplus.
Grange Life is subject to the laws in Ohio, its state of domicile. The maximum stockholder dividends payable by Grange Life
without prior approval in 2021 is $3.8 million, 10% of December 31, 2020 capital and surplus.
We believe that the statutory limitations impose no practical restrictions on the dividend payment plans of our three insurance
companies.
On December 31, 2020, Sunset Life ceded 100% of its insurance business to Kansas City Life. This transaction was
determined to be on a non-economic basis in accordance with prescribed statutory accounting rules. Accordingly, assets and
liabilities were transferred at the lower of book value or fair value. Approximately $255.1 million in policyholder-related
liabilities and assets corresponding to those liabilities were transferred from Sunset Life to Kansas City Life. Kansas City Life
will administer the business on a go-forward basis.
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 four insurance companies was within the range of
approximately 590% to 1,900%, well in excess of the control level at December 31, 2020.
We are required to deposit a defined amount of assets with state regulatory authorities. Such assets had a statutory carrying
value of $16.2 million at December 31, 2020, $16.3 million at December 31, 2019, and $14.7 million at December 31, 2018.
20. Commitments, Contingent Liabilities, Guarantees, and Indemnifications
Commitments
In the normal course of business, we have open purchase and sale commitments. At December 31, 2020, we had purchase
commitments to fund mortgage loans of $19.9 million.
Subsequent to December 31, 2020, we entered into commitments to fund additional mortgage loans of $14.9 million.
Contingent Liabilities
On March 1, 2019, the Delaware Department of Insurance requested Scottish Re (US) be placed in rehabilitation. Kansas City
Life has ceded some of its business to Scottish Re (US), a subsidiary of Scottish Re Group. Based on the information currently
available, the Company does not have sufficient information to make an assessment of the likelihood of any loss related to this
matter. The Company will continue to closely monitor developments related to the rehabilitation proceeding.
Kansas City Life is involved in various pending or threatened legal proceedings, including purported class actions, arising from
the conduct of business both in the ordinary course and otherwise. In some of the matters, very large and/or indeterminate
amounts, including punitive and treble damages, are sought.
Due to the unpredictable nature of litigation, the outcome of a litigation matter and the amount or range of potential loss can be
difficult to ascertain. We establish liabilities for litigation and other loss contingencies when available information indicates
both that a loss is probable and the amount of the loss can be reasonably estimated. Some matters could require us to pay
damages or make other expenditures or establish accruals in amounts that cannot be estimated as of December 31, 2020. Based
on information currently known by management, management does not believe any such expenditures are likely to have a
material adverse effect on Kansas City Life’s financial condition.
67
Kansas City Life Insurance Company
Notes to Consolidated Financial Statements – (Continued)
Cost of Insurance Litigation
We are a defendant in three very similar putative class actions that allege that we applied cost of insurance rates in excess of
amounts permitted by the terms of certain universal life insurance policies.
The three cases are:
• Meek v. KCL, filed in the U.S. District Court for the Western District of Missouri, in which the plaintiff seeks to
represent all similar universal life policyholders residing outside of the State of Missouri and seeks damages on behalf
of all such policyholders.
•
•
Karr v. KCL, filed in the 16th District Court for the State of Missouri (Jackson County), in which plaintiff seeks to
represent all similar universal life policyholders residing in the State of Missouri and seeks damages on behalf of all
such policyholders.
Sheldon v. KCL, filed in the 16th District Court for the State of Missouri (Jackson County), in which plaintiff seeks to
represent all similar variable universal life policyholders and seeks damages on behalf of all such policyholders.
We are vigorously defending each of these matters.
Regulatory 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. In November 2020, the Missouri Department of Insurance
completed a statutory-basis examination for the year ended December 31, 2019 for Kansas City Life, Sunset Life, and Old
American. No recommendations or financial adjustments were required as a result of that examination. In November 2020, the
Ohio Department of Insurance completed a statutory-basis examination of Grange Life for the year ended December 31, 2019.
No recommendations or financial adjustments were required as a result of that examination.
The life insurance industry has been the subject of significant regulatory and legal activities regarding the use of the U.S. Social
Security Administration's Death Master File (“Death Master File”) in the claims process. Certain states have proposed, and
many other states are considering, new legislation and regulations related to unclaimed life insurance benefits and the use of the
Death Master File in the claims process. Based on our analysis to date, we believe that we have adequately reserved for
contingencies from a change in statute or regulation. Ongoing regulatory developments and other future requirements related to
this matter may result in additional payments or costs that could be significant and could have a material adverse effect on our
financial statements.
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.
21. Subsequent Events
We evaluated events that occurred subsequent to December 31, 2020 through March 5, 2021, the date the consolidated financial
statements were issued and have identified the following subsequent event.
On January 25, 2021, the Kansas City Life Board of Directors declared a quarterly dividend of $0.27 per share, paid on
February 10, 2021 to stockholders of record on February 4, 2021.
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, 2020.
68
Independent Auditor's Report
The Audit Committee and Stockholders
Kansas City Life Insurance Company
Kansas City, Missouri
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, 2020 and 2019, and the related consolidated statements of
comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31,
2020, 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, 2020 and 2019, and the results of their
operations and their cash flows for each of the years in the three-year period ended December 31, 2020, in accordance with
accounting principles generally accepted in the United States of America.
Required Supplementary Information
Accounting principles generally accepted in the United States of America require that the incurred and paid claims development
information for the years 2012 through 2019 in Note 8 be presented to supplement the basic financial statements. Such
information is the responsibility of management and, although not a part of the basic financial statements, is required by the
Financial Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic
financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures
to the required supplementary information in accordance with auditing standards generally accepted in the United States of
America, which consisted of inquiries of management about the methods of preparing the information and comparing the
information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge
we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the
information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any
assurance.
/s/ BKD, LLP
Kansas City, Missouri
March 5, 2021
69
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 Kansas City Life Insurance Company management 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), Old American Insurance Company (Old
American), and Grange Life Insurance Company (Grange Life) are wholly-owned insurance 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 surrender 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 availability of reinsurance opportunities and 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;
•
•
•
•
•
•
•
•
• Management of distribution costs and operating expenses;
• Management of the operations of our affiliates;
• Management of blocks of business acquired through reinsurance assumption transactions; and
•
The ability to integrate acquisitions and to achieve anticipated operating efficiencies.
General economic conditions may affect future results. Financial market volatility can significantly impact 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. In addition, the COVID-19 pandemic has caused increased economic uncertainty, financial
market volatility, significant stress to businesses, decreased consumer confidence, and increased unemployment. These
conditions may persist into the future, affecting our financial position and financial statements. However, future conditions are
highly uncertain and difficult to predict.
70
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 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;
Unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations;
The ability to integrate acquisitions and achieve anticipated operating efficiencies and the ability to preserve goodwill
that results from acquisitions;
Results of litigation we may be involved in; and
The extent of the impacts resulting from catastrophic events such as natural disasters, pandemics, including
COVID-19, and terrorist attacks.
No assurances can be given that such statements will prove to be correct. Given these risks and uncertainties, investors should
not place undue reliance on forward-looking statements as a prediction of actual results.
71
Consolidated Results of Operations
Summary of Results
We earned net income of $15.2 million in 2020 compared to $24.4 million in 2019. Net income per share was $1.57 in 2020
versus $2.52 in 2019.
The following table presents condensed consolidated results of operations for the years ended December 31.
2020
2019
% Change
Revenues:
Insurance and other revenues
Net investment income
Net investment gains
Benefits and expenses:
$
$
356,391
145,684
21,835
355,211
148,349
9,133
Policyholder benefits and interest credited
to policyholder account balances
Amortization of deferred acquisition costs
Operating expenses
Income tax expense
359,762
42,141
106,093
744
336,141
35,948
111,154
5,023
Net income
$
15,170
$
24,427
— %
(2) %
139 %
7 %
17 %
(5) %
(85) %
(38) %
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 Company uses a sales approach which generally involves personal interaction with our clients. Social distancing
guidelines brought on by the COVID-19 pandemic have made this sales style more challenging. In addition, the underwriting
process often requires obtaining medical and other evidence for insurability. This support has slowed during this challenging
time, as medical and paramedical support has been unavailable or significantly slower in completing the required medical
examinations. Recognizing the challenges that this environment brings, we have made strides to minimize the effects of this
new environment. We have implemented more remote styles of client interaction, created electronic applications, and
streamlined medical examination requirements for underwriting.
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.
2020
2019
% Change
New premiums:
Traditional life insurance
$
24,663
$
Immediate annuities
Group life insurance
Group accident and health insurance
Total new premiums
Renewal premiums
Total premiums
Reinsurance ceded
Net premiums
(9) %
(15) %
(2) %
(15) %
(12) %
2 %
(1) %
(3) %
— %
25,221
2,804
9,065
61,753
266,797
328,550
26,963
29,778
2,853
10,633
70,227
260,517
330,744
(104,794)
223,756
$
(107,517)
223,227
$
72
Consolidated total premiums decreased $2.2 million or 1% in 2020 compared to 2019, as an $8.5 million or 12% decline in new
premiums was partially offset by a $6.3 million or 2% increase in renewal premiums. The decline in new premiums included a
$2.3 million or 9% decrease in new traditional life insurance premiums and a $4.6 million or 15% decrease in new immediate
annuity premiums. Immediate annuity receipts can have sizeable fluctuations, as receipts from policyholders largely result
from one-time or periodic premiums. Also, new group accident and health insurance premiums decreased $1.6 million or 15%,
primarily from the dental and disability lines. Small and medium-sized businesses have been negatively impacted by the
COVID-19 pandemic. As a result of this, sales to these businesses have become more difficult, which has resulted in lower
sales of our group accident and health products. The increase in renewal premiums was largely due to a $5.6 million or 3%
increase in renewal traditional life insurance premiums, reflecting increases for both the Individual and Old American
segments. In addition, renewal group life premiums increased $0.7 million or 5% compared to one year earlier.
Deposits related to interest sensitive life (universal life, indexed universal life, and variable universal life), fixed annuity
contracts, and variable annuities 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
2020
2019
% Change
$
10,874
$
47,640
15,291
73,805
13,411
47,461
10,078
70,950
146,744
152,108
$
220,549
$
223,058
(19) %
— %
52 %
4 %
(4) %
(1) %
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 between periods. Further, as described above, the COVID-19 pandemic and the related economic impacts have
affected both new and renewal deposits.
Total new deposits increased $2.9 million or 4% in 2020 compared to 2019. This resulted from a $5.2 million or 52% increase
in new variable annuity deposits. Partially offsetting this, new interest sensitive deposits decreased $2.5 million or 19%. The
decline in new interest sensitive life deposits was largely due to a decrease in new universal life deposits, which includes the
impact of the discontinuance of the secondary guarantee universal life product for new sales in 2020. Total renewal deposits
declined $5.4 million or 4% in 2020 versus the prior year. Renewal interest sensitive life deposits decreased $2.0 million or
2%, renewal fixed annuity deposits decreased $2.7 million or 14%, and renewal variable annuity deposits decreased $0.7
million or 8%. The results for renewal interest sensitive life deposits included a $1.2 million or 9% increase in renewal indexed
universal life deposits that was offset by a $2.6 million or 3% decrease in renewal universal life deposits and a $0.6 million or
3% decrease in renewal variable universal life deposits. The COVID-19 pandemic and the low interest rate environment have
contributed to declines in both new and renewal deposits.
Contract charges result from charges and fees on interest-sensitive and deposit-type products. Contract charges consist of cost
of insurance, expense loads, the amortization of unearned revenues, and surrender charges assessed on policyholder account
balance withdrawals. 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 $0.8 million or 1% in 2020 compared to 2019. Contract charges on open blocks increased $2.3
million or 3% versus the prior year and reflected higher deferred revenue, largely resulting from unlocking. Unlocking
increased deferred revenue $3.8 million in 2020 compared to an increase of $0.8 million in 2019. Contract charges on closed
blocks decreased $1.4 million or 3% in 2020 compared to 2019, reflecting the runoff of the blocks of business. Total contract
charges on closed blocks equaled 41% of total consolidated contract charges during 2020, down from 43% in 2019.
73
Investment Revenues
Gross investment income decreased $2.7 million or 2% in 2020 compared to one year earlier. This decline reflected higher
average invested assets that were offset by lower overall yields earned and available on certain investments.
Fixed maturity securities provide a majority of our investment income. Fixed maturity securities totaled 76% of our
investments at both December 31, 2020 and December 31, 2019. Income from these investments decreased $1.3 million or 1%
in 2020 compared to 2019 as higher average invested assets were offset by lower yields earned.
Investment income from commercial mortgage loans declined $1.5 million or 5% in 2020 versus 2019. This decline reflected
lower average investments and lower yields earned compared to the prior year. Mortgage loan deferrals were granted in the
second quarter of 2020 related to the COVID-19 pandemic and the associated economic impacts. These deferrals have
concluded. The repayments on these deferrals remain on schedule and are expected to be fully repaid in 2021. There were no
new deferrals or forbearance agreements granted on our mortgage loan portfolio during the third or fourth quarters of 2020
related to the COVID-19 pandemic and the associated economic impacts. We continue to closely monitor our mortgage loan
portfolio and work closely with borrowers who are negatively impacted by the COVID-19 pandemic.
Investment income from real estate increased $1.6 million or 8% in 2020 compared to the prior year. This increase largely
resulted from increased occupancy at certain real estate rental properties and from annual rent increases. Forbearance was
granted to nine of our tenants during 2020. Real estate rent deferrals totaled less than 1% of total real estate income for the year
ended December 31, 2020. The modified terms did not result in any defaults. We continue to closely monitor our real estate
portfolio and work closely with tenants who are negatively impacted by the COVID-19 pandemic.
Investment Gains (Losses)
We recorded net realized investment gains of $21.8 million in 2020 compared to net investment gains of $9.1 million in 2019,
an increase of $12.7 million year-over-year. Sales of real estate and joint ventures resulted in a net gain of $14.6 million in
2020 compared to a net gain of $2.6 million in 2019. The largest factor in the increase in 2020 was the sale of an industrial real
estate property that generated a net gain of $14.9 million. Investment securities sales and calls generated a net gain of $5.0
million during 2020 compared to a net gain of $2.7 million during 2019. Partially offsetting these, the change in fair value of
derivative instruments resulted in a gain of $2.2 million in 2020 compared to a gain of $3.3 million in 2019. In addition, the
change in fair value of equity securities resulted in a gain of less than $0.1 million in 2020 compared to a gain of $0.8 million in
2019.
In addition, we increased our allowance for mortgage loan losses less than $0.1 million in 2020 compared to a decrease in the
allowance of $0.3 million in 2019. The decrease in the allowance for mortgage loan losses in 2019 was primarily due to the
lower volume of loans.
We recognized impairments of less than $0.1 million on our securities portfolio during 2020 We recognized impairments on
the securities portfolio of $0.6 million during 2019. We will continue to monitor and evaluate our portfolio for potential strain
in the individual holdings and sectors due to the added stress in the current economic environment.
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 increased $23.3 million or 9% in 2020 compared to 2019. Death benefits, net of reinsurance, increased
$28.1 million or 20% versus the prior year. Overall, death benefits have increased in 2020 in part due to specifically identified
COVID-19 deaths as well as other pandemic-related effects. Mortality cost resulting from the COVID-19 pandemic was 8% of
the total mortality cost for 2020. Mortality cost is defined as death benefits net of reinsurance and reserves released. Benefit
and contract reserves increased $2.3 million or 7% compared to one year earlier. This increase was largely due to the
refinements of the valuation models used for Grange Life that decreased benefit and contract reserves in 2019.
Amortization of DAC
The amortization of DAC increased $6.2 million or 17% in 2020 compared to the prior year, largely due to an increase in
unlocking and refinements in estimates compared to the prior year. DAC unlocking adjustments and refinements in estimates
increased DAC amortization $5.2 million in 2020 compared to DAC unlocking adjustments and refinements in estimates that
decreased DAC amortization $0.4 million in 2019. The unlocking in 2020 primarily resulted from interest rate fluctuations.
The unlocking in 2019 primarily resulted from unlocking surrender rates and reinsurance as well as refinements of expense
loads. These were partially offset by interest rate fluctuations.
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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 intangibles, and other expenses. Operating expenses decreased $5.1 million or 5%
in 2020 compared to 2019. The COVID-19 pandemic has impacted our expenses, including a reduction in travel expenses, new
business costs, and agent meeting expenses. Agent meeting expenses declined as we cancelled all of our agent conferences for
2020. This cancellation also impacted the capitalization of deferrable expenses. In addition, compensation costs decreased,
reflecting lower salaries expense and a decline in the market value of our pension plan compared to the prior year. Also,
outside labor decreased versus the prior year. These declines were partially offset by an increase in legal expenses, software
expenses, and lower capitalized commissions. In addition, the amortization of VOBA increased in 2020 compared to 2019,
largely due to unlocking. VOBA unlocking increased Operating Expenses $1.6 million in 2020 compared to an increase of $0.5
million in 2019.
Income Taxes
We recorded an income tax expense of $0.7 million or 5% of income before tax in 2020. We recorded an income tax expense
of $5.0 million or 17% of income before tax in 2019. The decrease in income tax expense in 2020 was primarily related to
lower pre-tax income compared to the prior year period. The decrease in the effective tax rate was primarily due to tax credits
from affordable housing investments and permanent differences, including the dividends-received deduction, and the impact of
the CARES Act having more impact on the effective tax rate due to a decrease in pre-tax income.
The effective income tax rate was lower than the prevailing corporate federal income tax rate of 21% for both 2020 and 2019.
The lower effective income tax rate for 2020 was primarily due to tax credits from affordable housing investments, permanent
differences, which includes the dividends-received deduction, and the impact of the CARES Act. The lower effective tax rate
for 2019 was primarily due to tax credits from affordable housing investments and permanent differences, which includes the
dividends-received deduction.
The CARES Act is intended to provide immediate economic assistance to both businesses and individuals. The CARES Act
provides the opportunity to carry back net operating losses, accelerates the recoverability of any remaining Alternative
Minimum Tax (AMT) credits, and provides more specific impacts associated with small business loans, payroll taxes, and other
items. We are able to take advantage of certain aspects of the Act, while many aspects do not apply to us. We continue to
assess the opportunities available to us under the CARES Act and will apply the applicable aspects available to us within our
business framework. For additional information, please see Note 11 - Income Taxes.
75
Analysis of Investments
This analysis of investments should be read in conjunction with Note 3 - Investments included in this document.
The following table provides asset class detail of the investment portfolio at December 31.
Fixed maturity securities
Equity securities
Mortgage loans
Real estate
Policy loans
Short-term investments
Other investments
Total
2020
$ 3,118,980
6,647
601,607
165,403
84,447
119,116
10,838
$ 4,107,038
%
of Total
2019
%
of Total
76 % $ 2,951,137
11,272
— %
577,699
15 %
183,016
4 %
87,499
2 %
75,426
3 %
9,156
—
100 % $ 3,895,205
76 %
— %
15 %
5 %
2 %
2 %
—
100 %
Fixed maturity securities were the largest component of our total investments at December 31, 2020 and December 31, 2019.
The largest categories of fixed maturity securities at December 31, 2020 consisted of 78% in corporate securities, 8% in
municipal securities, and 6% in U.S. Treasury securities and obligations of the U.S. Government.
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 investment grade were 98% at both December 31, 2020 and December 31, 2019.
The fair value of fixed maturity securities with unrealized losses was $89.3 million at December 31, 2020, compared with
$147.8 million one year earlier. This decrease primarily reflected falling interest rates and tighter corporate bond spreads
during 2020. At December 31, 2020, 95% of security investments with an unrealized loss were investment grade and accounted
for 77% of the total unrealized losses. At December 31, 2019, 99% of securities with an unrealized loss were investment grade
and accounted for 100% of the total unrealized losses.
At December 31, 2020, we had $323.9 million in gross unrealized gains on fixed maturity securities that offset $3.0 million in
gross unrealized losses. At December 31, 2019, we had $177.2 million in gross unrealized gains on fixed maturity and equity
securities that offset $3.0 million in gross unrealized losses. At December 31, 2020, 97% of the fixed maturity securities
portfolio had unrealized gains, up from 95% at December 31, 2019. Gross unrealized losses on fixed maturity securities for
less than 12 months totaled $1.4 million and accounted for 76% of the security values in a gross unrealized loss position at
December 31, 2020. Gross unrealized losses on fixed maturity security investments of 12 months or longer decreased from
$2.0 million at December 31, 2019 to $1.6 million at December 31, 2020.
Residential mortgage-backed securities, commercial mortgage-backed securities, and asset-backed securities that were rated
below investment grade were 7% at December 31, 2020 and 8% at December 31, 2019 of the total mortgage-backed and asset-
backed securities. This decrease was primarily due to a reduction in the below investment grade portion of the portfolio during
2020.
We have written down certain investments in previous periods. Fixed maturity securities written down and still owned at
December 31, 2020 had a fair value of $13.6 million and net unrealized gains of $1.6 million, compared to the December 31,
2019 fair value of $20.5 million and net unrealized gains of $1.8 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 2020 or
2019.
Investments in mortgage loans totaled $601.6 million at December 31, 2020, up from $577.7 million at December 31, 2019.
The commercial mortgage loan portfolio increased $23.9 million during 2020, as the volume of new loans exceeded the
regularly scheduled payments and prepayments. 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 $2.9 million at
76
December 31, 2020 and $2.8 million at December 31, 2019. As previously mentioned, we granted deferrals of principal and
interest payments on a small number of mortgage loans during 2020. These mortgage loan deferrals have concluded and the
repayments are expected to be fully repaid in 2021. For additional information on our mortgage loan portfolio, please see Note
3 - Investments.
Investments in real estate totaled $165.4 million at December 31, 2020 and $183.0 million at December 31, 2019. This
decrease was largely due to the sale of one investment property in 2020 that resulted in a realized gain of $14.9 million before
applicable income taxes. As previously mentioned, certain tenants were granted real estate rent deferrals during 2020. We
expect that these tenants will be brought current within the agreed-upon terms and will be returned to the original payment
schedules during 2021.
77
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 $5.9 million for the year ended December 31, 2020. The primary sources of cash
from operating activities in 2020 were premium receipts and net investment income. The primary uses of cash from operating
activities in 2020 were for the payment of policyholder benefits and operating expenses. Net cash used from investing activities
was $34.0 million. The primary sources of cash were sales, maturities, calls, and principal paydowns of investments totaling
$480.0 million. Partially offsetting these, investment purchases, including new mortgage loans and new policy loans, totaled
$468.6 million. In addition, net purchases of short-term investments totaled $43.7 million. Net cash provided by financing
activities was $21.1 million, primarily including $19.8 million of deposits, net of withdrawals, on policyholder account
balances and $8.8 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
2020
2019
$
4,999,971
$
4,788,664
908,739
18%
810,731
17%
Stockholders’ equity increased $98.0 million from year-end 2019. This increase largely reflected fluctuations in the fair value
of investments that resulted from falling interest rates and tighter corporate bond spreads. Stockholders’ equity per share, or
book value, equaled $93.84 at year-end 2020, an increase from $83.72 at year-end 2019.
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 $197.0 million at December 31, 2020, a $92.2 million
increase from December 31, 2019.
Our statutory equity exceeds the minimum capital deemed necessary to support our insurance business, as determined by the
risk-based capital calculations and guidelines established by the National Association of Insurance Commissioners (NAIC).
We believe these statutory limitations impose no practical restrictions on future dividend payment plans. See further discussion
in Note 19 - Statutory Information and Stockholder Dividends Restriction.
In January 2021, the Board of Directors authorized the purchase of up to one million of our shares on the open market through
January 2022. No shares were purchased under this authorization during 2020 or 2019. The timing and amount of any share
repurchases will be determined by our management based on market conditions and other factors.
On January 25, 2021, the Board of Directors declared a quarterly dividend of $0.27 per share that was paid February 10, 2021
to stockholders of record at February 4, 2021.
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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 low 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 74% of total
policyholder account balances were at the minimum guaranteed rate as of December 31, 2020 compared to 75% at
December 31, 2019.
December 31, 2020
Fixed
Annuities
Universal
Life
Variable Life
and Annuities
Supplemental
Contracts and
Annuities
Without Life
Contingencies
Total
0% to 1%
$
399,657
$
73,337
$
4,659
$
2,644
$
480,297
Greater than 1% to 3%
Greater than 3% to 4%
Greater than 4%
Total
184,441
377,931
51,937
309,775
303,985
371,411
93,321
8,236
—
31,774
14,554
3,978
619,311
704,706
427,326
$ 1,013,966
$ 1,058,508
$
106,216
$
52,950
$ 2,231,640
December 31, 2019
Fixed
Annuities
Universal
Life
Variable Life
and Annuities
Supplemental
Contracts and
Annuities
Without Life
Contingencies
Total
0% to 1%
$
334,953
$
52,925
$
3,140
$
2,802
$
393,820
Greater than 1% to 3%
Greater than 3% to 4%
Greater than 4%
Total
243,222
389,397
55,565
305,064
313,768
385,411
93,866
7,261
—
28,006
17,438
4,882
670,158
727,864
445,858
$ 1,023,137
$ 1,057,168
$
104,267
$
53,128
$ 2,237,700
Fixed Annuity Contracts
Fixed 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 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.
79
The following table provides fixed annuity contract values within maturity date ranges as of December 31. 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.
2020
%
of Total
2019
%
of Total
One year or less
$
130,614
13 % $
202,396
Two years
Three years
Four years
Five years
Six years or more
Total
78,935
59,334
44,125
47,954
653,004
8 %
6 %
4 %
5 %
52,551
63,005
45,622
48,327
64 %
611,236
$ 1,013,966
100 % $ 1,023,137
20 %
5 %
6 %
4 %
5 %
60 %
100 %
Fixed 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 annuities by summary ranges of
applicable surrender charges as of December 31.
None
Less than 5%
5% and greater
Total
2020
%
of Total
2019
%
of Total
$
628,761
62 % $
616,394
180,218
204,987
18 %
20 %
200,299
206,444
$ 1,013,966
100 % $ 1,023,137
60 %
20 %
20 %
100 %
Asset/Liability Management
Our asset/liability management programs and procedures involve the monitoring of asset and liability durations for various
product lines, cash flow testing under various interest rate scenarios to evaluate the potential sensitivity of assets and liabilities
to interest rate movements, and the continuous rebalancing of assets and liabilities with respect to yield, risk, and cash flow
characteristics.
We believe our asset/liability management programs and procedures, along with certain product features, provide protection for
us against the effects of changes in interest rates under various scenarios.
Cash flows and effective durations of the asset and liability portfolios are measured at points in time and are affected by
changes in the level and term structure of interest rates, as well as changes in policyholder behavior. Further, durations are
managed on an individual product level, and an aggregate portfolio basis. As a result, differences typically exist between the
duration, cash flows, and yields of assets versus liabilities on an individual portfolio and aggregate basis. Our asset/liability
management programs and procedures enable management to monitor the changes, which have varying correlations among
certain portfolios, and to make adjustments to asset mix, liability crediting rates, and product terms so as to manage risk and
profitability over time.
We aggregate similar policyholder liabilities into portfolios and then match specific investments with these liability portfolios.
In 2020 and 2019, all of our portfolios had investment yields near or in excess of crediting rates on 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
80
periods. Excess liquidity, in turn, could result in reduced profitability on one or more product lines. Insufficient liquidity could
result in the need to generate liquidity through borrowing, asset sales, or other means. We believe that our asset/liability
management programs will provide sufficient liquidity to enable us to fulfill our obligation to pay benefits under our various
insurance and deposit contracts. On a historical basis, we have not needed to liquidate assets to ensure sufficient cash flows.
We maintain borrowing lines on a secured and unsecured basis to provide additional liquidity, if needed.
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Risk Factors
The operating results of life insurance companies have historically been subject to significant fluctuations. The factors which
could affect our future results include, but are not limited to, general economic conditions and the known trends and
uncertainties which are discussed more fully below.
Strategic and Operational Risks:
We operate in a mature and highly competitive industry, which could limit our ability to grow sales or maintain our position
in the industry and negatively affect profitability.
Life insurance is a mature and highly competitive industry. We encounter significant competition in all lines of business from
other insurance companies, many of which may have greater financial resources, a greater market share, a broader range of
products, lower product prices, better name recognition, greater actual or perceived financial strength, higher claims-paying
ratings, the ability to assume a greater level of risk, lower operating or financing costs, or lower profitability expectations.
In recent years, there has been substantial consolidation and convergence among companies in the financial services industry,
resulting in increased competition from large, well-capitalized financial services firms. Furthermore, many of these larger
competitors may have lower operating costs and an ability to absorb greater risk while maintaining their financial strength
ratings, thereby allowing them to price their products more competitively.
Changes in demographics, particularly the aging of the population, and the decline in the number of agents in the industry, may
affect the sales of life insurance products. Also, as technology evolves, customers and agents may be able to compare products
of any particular company with any other, which could lead to increased competition as well as changes in agent or customer
behavior, including persistency, that differs from past behavior.
We may be unable to attract and retain agencies and agents.
We sell insurance and annuity products through independent agents and agencies. These agencies and agents are not captive
and may sell products of our competitors. Sales and our financial results could be adversely affected if we are unsuccessful in
attracting agencies and agents. Our ability to retain agents and agencies is dependent upon a number of factors, including: our
ability to maintain a competitive compensation system while also offering products with competitive features and benefits for
policyholders; our ability to maintain a level of service and 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 change 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.
82
Risk management policies and procedures may not be fully effective and could 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
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.
Projected operating results for acquisitions may not be achieved and the ability to integrate acquisitions and achieve
anticipated operating efficiencies may not be successful.
Actual operating results may vary significantly from projected results of acquired companies and blocks of business. Projected
operating results are estimates of future results based on assumptions made by management at the time of the acquisition.
General economic, political, and market conditions may have a material impact on the reliability of these projections. We may
not be able to realize the projected value of acquired assets or we may underestimate the value of the liabilities assumed. Our
financial position and results of operations could be negatively impacted if the projections are materially inaccurate. This could
result in the write-down of acquired assets, impairment to goodwill, impairment to intangible assets, increases to assumed
liabilities, and other negative impacts to our financial statements.
We may not achieve efficient operational integration of acquisitions or may not achieve operating efficiencies that were
projected at the time of acquisition. Failure to achieve either or both of these could result in increased expenses and negatively
impact our financial position and results of operations.
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.
83
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, 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,
state and federal regulations, and general economic conditions, as well as particular circumstances affecting the businesses of
individual borrowers and tenants.
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 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.
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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.
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 statutory 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
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•
•
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.
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
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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.
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.
The effects of the COVID-19 outbreak have disrupted our operations and could adversely affect our business, financial
condition, and results of operations.
The widespread outbreak of COVID-19 has created significant volatility, uncertainty, and disruption in economic activity and
financial markets globally. The global and domestic response to the COVID-19 outbreak continues to evolve. Since March,
2020, many state and local governments issued directives that have impacted and limited the behavior of citizens and
businesses. The Company, as a financial institution, is classified as an essential business. We have instituted our business
continuity plan and our home office remains open to ensure that we remain fully operational.
The COVID-19 pandemic has impacted the activities of our customers, agents, and employees. The pandemic has increased
mortality nationwide, raising the risk of increased mortality at our various life insurance subsidiaries, particularly with our final
expense subsidiary which serves a population that is particularly at-risk from this virus. Many of our products also include cash
values that may be needed by our customers to meet financial needs during business disruptions at non-essential companies.
Sales could also decline because agents are unable to meet with customers and potential customers to complete the application
process. At an employee level, many of our employees are working remotely or are periodically onsite to perform essential
business functions and maintain business continuity. However, further spread of the disease could impact our employees in
many ways, including their ability to complete their work either remotely or in the office. This could result in delays in
processing receipts and payments or supporting the needs of policy and contract holders. The implementation of government-
issued quarantines could also impede the ability of employees to complete the necessary work at the home office or could result
in the closure of the home office.
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The extent of the impact of the COVID-19 pandemic on our financial performance will depend on numerous evolving factors
and future developments, which are uncertain and cannot be predicted at this time. Such factors and developments include, but
are not limited to: the duration, severity and spread of the outbreak; actions taken by government authorities to contain and
mitigate COVID-19 and the effectiveness of such actions; the effect on the U.S. and global economies and financial markets
and actions taken in response; the overall impact on the businesses of our customers, agents, partners, and vendors; the health of
and effect on our workforce; the future effects to our operational and financial results due to the changes we have made to
protect the safety and well-being of our employees and future operational disruptions or challenges we may face; increased
cybersecurity and information security risk as a result of the transition of our employees to a remote work environment; and
how quickly and to what extent normal economic and operating conditions may resume. Negative financial impacts that could
occur include, but are not limited to, asset impairments, defaults or delinquencies in our mortgage loan portfolio, vacancies in
occupancy in our real estate portfolio, a reduction in sales, a reduction in business retention, an increase in policyholder
benefits, and an increase in operating expenses. While certain outcomes have been noted from the impacts of the pandemic, the
full extent to which the COVID-19 pandemic may impact our business, financial condition or results of operations is uncertain
and will continue to evolve over time.
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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