UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549








FORM 10-Q








x
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended June 30, 2009 or


o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from_______to______


Commission file number 2-40764





KANSAS CITY LIFE INSURANCE COMPANY


(Exact name of registrant as specified in its charter)





Missouri
44-0308260(State or other jurisdiction of
(I.R.S. Employerincorporation or organization)
Identification No.)





3520 Broadway, Kansas City, Missouri
(Address of principal executive offices)
64111-2565
(Zip Code)





816-753-7000


Registrant’s telephone number, including area code





Not Applicable




(Former name, former address and former fiscal year, if changed since last report)







Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.


Yes x
No o





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).


Yes o
No o





Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer o
Accelerated filer xNon-accelerated filer o
Smaller reporting company o





Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes o
No x





Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.





Class
Outstanding June 30, 2009Common Stock, $1.25 par
11,538,072 shares











1


KANSAS CITY LIFE INSURANCE COMPANY


TABLE OF CONTENTS








Part I.   Financial Information
3Item 1.  Financial Statements (Unaudited)
3Consolidated Balance Sheets
3Consolidated Statements of Income
4Consolidated Statements of Stockholders' Equity
5Consolidated Statements of Cash Flows
6Notes to Consolidated Financial Statements
7Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
28Item 3.  Quantitative and Qualitative Disclosures About Market Risk
67Item 4.  Controls and Procedures
67Part II.  Other Information
68Item 1.  Legal Proceedings
68Item 1A. Risk Factors
68Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
68Item 4. Submission of Matters to a Vote of Security Holders
69Item 5.  Other Information
70Item 6.  Exhibits
72Signatures
73





2
 Table of Contents


Part IFinancial Information


Item 1.Financial Statements (Unaudited)


Amounts in thousands, except share data, or as otherwise noted








KANSAS CITY LIFE INSURANCE COMPANYCONSOLIDATED BALANCE SHEETSJune 30


December 312009


2008ASSETS

(Unaudited)Investments:Fixed maturity securities available for sale, at fair value

$
2,416,429


$
2,342,873Equity securities available for sale, at fair value


41,600



44,537Mortgage loans


442,319



445,389Real estate


108,444



99,576Policy loans


86,886



88,304Short-term investments


63,057



35,138Total investments


3,158,735



3,055,817Cash


10,237



9,720Accrued investment income


34,890



33,689Deferred acquisition costs


238,487



263,756Value of business acquired


76,948



82,855Reinsurance receivables


168,365



168,390Property and equipment


24,891



25,922Income taxes


12,908



39,628Other assets


29,731



28,749Separate account assets


268,865



258,565Total assets

$
4,024,057


$
3,967,091LIABILITIESFuture policy benefits

$
847,334


$
853,456Policyholder account balances


2,035,306



2,030,656Policy and contract claims


33,568



34,913Other policyholder funds


133,136



125,826Other liabilities


134,854



136,568Separate account liabilities


268,865



258,565Total liabilities


3,453,063



3,439,984STOCKHOLDERS' EQUITYCommon stock, par value $1.25 per shareAuthorized 36,000,000 shares,issued 18,496,680 shares


23,121



23,121Additional paid in capital


39,646



36,281Retained earnings


756,274



750,600Accumulated other comprehensive loss


(92,267
)


(130,799
)Treasury stock, at cost (2009 - 6,958,608 shares;2008 - 7,061,476 shares)


(155,780
)


(152,096
)Total stockholders' equity


570,994



527,107Total liabilities and stockholders' equity

$
4,024,057


$
3,967,091








See accompanying Notes to Consolidated Financial Statements (Unaudited).


3
 Table of Contents





KANSAS CITY LIFE INSURANCE COMPANYCONSOLIDATEDSTATEMENTS OF INCOMEQuarter Ended


Six Months endedJune 30


June 302009


2008


2009


2008REVENUES

(Unaudited)


(Unaudited)Insurance revenues:Premiums

$
43,176


$
45,462


$
89,716


$
89,949Contract charges


26,202



26,527



52,970



53,827Reinsurance ceded


(13,262
)


(13,546
)


(25,801
)


(26,206
)Total insurance revenues


56,116



58,443



116,885



117,570Investment revenues:Net investment income


44,605



45,616



87,744



92,079Realized investment gains, excludingimpairment losses


2,592



1,816



4,006



1,936Net impairment losses recognized in earnings:Total other-than-temporary impairment losses


(4,425
)


(10,225
)


(25,831
)


(10,225
)Portion of impairment losses recognized incomprehensive loss


403



-



15,691



-Net impairment losses recognized in earnings


(4,022
)


(10,225
)


(10,140
)


(10,225
)Total investment revenues


43,175



37,207



81,610



83,790Other revenues


2,459



2,639



4,890



5,248Total revenues


101,750



98,289



203,385



206,608BENEFITS AND EXPENSESPolicyholder benefits


36,400



45,586



85,087



91,072Interest credited to policyholder account balances


21,700



21,674



42,874



43,377Amortization of deferred acquisition costsand value of business acquired


6,727



7,625



19,206



18,737Operating expenses


24,443



21,164



50,697



45,560Total benefits and expenses


89,270



96,049



197,864



198,746Income before income tax expense


12,480



2,240



5,521



7,862Income tax expense


4,436



563



2,025



2,583NET INCOME

$
8,044


$
1,677


$
3,496


$
5,279Other comprehensive income (loss), net of taxes:Change in net unrealized gains and losses onsecurities available for sale

$
44,689


$
(36,609
)

$
45,131


$
(51,350
)Other comprehensive income (loss)


44,689



(36,609
)


45,131



(51,350
)COMPREHENSIVE INCOME (LOSS)

$
52,733


$
(34,932
)

$
48,627


$
(46,071
)


Basic and diluted earnings per share:
Net income

$
0.70


$
0.14


$
0.30


$
0.45





See accompanying Notes to Consolidated Financial Statements (Unaudited).








4
 Table of Contents





KANSAS CITY LIFE INSURANCE COMPANYCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITYSix Months ended


Year ended2009


2008(Unaudited)COMMON STOCK, beginning and end of period

$
23,121


$
23,121ADDITIONAL PAID IN CAPITALBeginning of period


36,281



30,244Excess of proceeds over cost of treasury stock sold


3,365



6,037End of period


39,646



36,281RETAINED EARNINGSBeginning of period


750,600



780,133Cumulative effect of change in accountingprinciple (See Note 6)


8,399



-Net income (loss)


3,496



(17,050
)Stockholder dividends of $0.54 per share(2008 - $1.08)


(6,221
)


(12,483
)End of period


756,274



750,600ACCUMULATED OTHER COMPREHENSIVELOSSBeginning of period


(130,799
)


(19,811
)Cumulative effect of change in accountingprinciple (See Note 6)


(6,599
)


-Other comprehensive income (loss)


45,131



(110,988
)End of period


(92,267
)


(130,799
)TREASURY STOCK, at costBeginning of period


(152,096
)


(129,286
)Cost of 308,654 shares acquired(2008 - 552,520 shares)


(9,528
)


(25,972
)Cost of 411,522 shares sold(2008 - 222,687 shares)


5,844



3,162End of period


(155,780
)


(152,096
)TOTAL STOCKHOLDERS' EQUITY

$
570,994


$
527,107


See accompanying Notes to Consolidated Financial Statements (Unaudited).








5
 Table of Contents





KANSAS CITY LIFE INSURANCE COMPANYCONSOLIDATED STATEMENTS OF CASH FLOWSSix Months Ended June 302009


2008(Unaudited)OPERATING ACTIVITIESNet cash provided (used)

$
18,153


$
(1,791
)INVESTING ACTIVITIESPurchases of investments:Fixed maturity securities


(138,414
)


(143,570
)Equity securities


(1,054
)


(8,204
)Mortgage loans


(17,910
)


(21,688
)Real estate


(11,937
)


(13,724
)Other investment assets


(27,919
)


(6,860
)Sales of investments:Fixed maturity securities


25,631



21,116Equity securities


4,231



4,261Real estate


3,115



20,729Other investment assets


1,418



2,590Maturities and principal paydowns of investments:Fixed maturity securities


108,092



150,623Equity securities


-



263Mortgage loans


20,981



24,778Net dispositions of property and equipment


304



96Net cash provided (used)


(33,462
)


30,410FINANCING ACTIVITIESProceeds from borrowings


-



96,500Repayment of borrowings


(2,900
)


(100,095
)Deposits on policyholder account balances


122,858



98,379Withdrawals from policyholder account balances


(100,653
)


(130,819
)Net transfers from (to) separate accounts


(1,206
)


10,042Change in other deposits


4,267



7,657Cash dividends to stockholders


(6,221
)


(6,288
)Net acquisition of treasury stock


(319
)


(10,091
)Net cash provided (used)


15,826



(34,715
)Increase (decrease) in cash


517



(6,096
)Cash at beginning of year


9,720



12,158Cash at end of period

$
10,237


$
6,062








See accompanying Notes to Consolidated Financial Statements (Unaudited).








6
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)


1.  NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES





The unaudited interim consolidated financial statements, the accompanying notes to these unaudited interim consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations of Kansas City Life Insurance Company include the accounts of the Company and its subsidiaries, principally
Sunset Life Insurance Company of America (Sunset Life) and Old American Insurance Company (Old American).





The unaudited interim consolidated financial statements have been prepared in accordance with United States of America generally accepted accounting principles (GAAP) for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X.  Accordingly, they do not include all of the disclosures required by GAAP
for complete financial statements. As such, these unaudited interim consolidated financial statements should be read in conjunction with the Company’s 2008   Form 10-K.  Management believes that the disclosures are adequate to make the information presented not misleading, and all normal and recurring adjustments necessary to present fairly the financial position at June 30, 2009 and the results of operations for all periods presented have been made.  The results of operations
for any interim period are not necessarily indicative of the Company’s operating results for a full year.





Significant intercompany transactions have been eliminated in consolidation and certain immaterial reclassifications have been made to the prior period results to conform with the current period’s presentation.





The preparation of the unaudited interim 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 unaudited interim 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 Accounting Policies


Presented below is a summary of significant accounting policies used by the Company.  This is not intended to be an exhaustive list of all accounting policies used by the Company.  For a full discussion, please refer to the Company’s 2008 Form 10-K as filed with the Securities and Exchange Commission.





Investments


Investment income is recognized when earned.   Realized gains and losses on the sale of investments are determined on the basis of specific security identification recorded on the trade date. Securities available for sale are stated at fair value.  Unrealized gains and losses, net of adjustments to deferred acquisition
costs (DAC), value of business acquired (VOBA), policyholder account balances and deferred income taxes, are reported as a separate component of accumulated other comprehensive loss in stockholders' equity.  Unrealized losses represent the difference between amortized cost and fair value on the valuation date.  The adjustments to DAC and VOBA represent changes in the amortization of DAC and VOBA that would have been required as a charge or credit to income had such unrealized amounts been
realized.  The adjustment to policyholder account balances represents the increase from using a discount rate that would have been required if such unrealized gains had been realized and the proceeds reinvested at current market interest rates, which were lower than the then-current effective portfolio rate.





The Company’s fair value of fixed maturity and equity securities are determined by management, primarily by relying on external pricing services or brokers.  When external sources are not able to provide prices for certain securities or when the external prices are deemed to be unreliable, the Company utilizes internally
generated matrices and calculations to determine fair value.





The Company reviews and analyzes its securities on an ongoing basis to determine whether impairments exist that are other-than-temporary.  Based upon these analyses, specific securities’ credit impairments may be written down through earnings as a realized investment loss if the security’s value is considered to be
an other-than-temporary impairment.  Non-credit impairments are charged to other comprehensive income (loss).





Investment income on mortgage-backed securities is initially based upon yield, cash flow, and prepayment assumptions at the date of purchase.  Subsequent revisions in those assumptions are recorded using the retrospective method, except for adjustable rate mortgage-backed securities where the prospective method is used.  Under
the retrospective method, the amortized cost of the security is adjusted to the amount that would have existed had the revised assumptions been in place at the time of purchase.  Under the prospective method, future cash flows are estimated and interest income is recognized going forward using the new internal rate of return.  The adjustments to amortized cost under both methods are recorded as a charge or credit to net investment income.


7
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


Mortgage loans are stated at cost, adjusted for amortization of premium and accrual of discount, less a valuation reserve for probable losses.  A loan is considered impaired if it is probable that contractual amounts due will not be collected.  The valuation reserve is determined based upon historical impairment experience,
insurance industry studies and estimates of value for individual loans in foreclosure.  Such estimates are based upon the value of the expected cash flows and the underlying collateral on a net realizable basis. Loans in foreclosure and loans considered to be impaired are placed on a non-accrual status.





Real estate consists of directly owned investments and real estate joint ventures.  Real estate that is directly owned is carried at depreciated cost.  Real estate joint ventures consist primarily of office buildings, industrial warehouses, unimproved land for future development and low income housing tax credit (“LIHTC”)
investments.  Real estate joint ventures are consolidated where required or are valued at cost, adjusted for the Company’s equity in earnings.





Policy loans are carried at cost, less principal payments received.  Short-term investments are stated at cost, adjusted for amortization of premium and accrual of discount.





Valuation of Investments


The Company’s principal investments are in fixed maturity securities, mortgage loans and real estate; all of which are exposed to three primary sources of investment risk: credit, interest rate and liquidity.  The fixed maturity securities, which are all classified as available for sale, are carried at their fair value in
the Company’s balance sheet, with unrealized gains or losses recorded in accumulated other comprehensive loss.  The unrealized gains or losses are recorded net of the adjustment to policyholder account balances to reflect what would have been earned had those gains or losses been realized and the proceeds reinvested.  The Company’s fair value of fixed maturity and equity securities are derived from external pricing sources, brokers, and internal matrices and calculations.  At
June 30, 2009, approximately 91% of the carrying value of these investments were from an external pricing service while 9% were derived from brokers, internal matrices and calculations.  The investment portfolio is monitored regularly to ensure that investments which may be other-than-temporarily impaired are identified in a timely fashion and properly valued, and that impairments due to credit are charged against earnings as realized investment losses.  The valuation of the investment portfolio
involves a variety of assumptions and estimates.





The Company monitors the various markets in which its investments are traded.  The Company utilizes an independent third-party pricing service to determine the majority of its fair values.  For values received by the Company from an independent pricing source, the Company reviews these values for validity.  In
addition, the Company tests a limited number of securities each reporting period to validate reliance on the fair values provided.  When fair values are not available from external service providers, where possible, the Company utilizes quotes from brokers.  When the Company cannot obtain reliable broker pricing, a fair value is determined based upon an assessment of several factors about a specific issue, including but not limited to: the issuer’s industry; liquidity; cash flows; marketability,
ratings and the ability of the issuer to satisfy the obligation; government intervention or regulations; fair value of comparable securities in actively traded or quoted markets; or other factors.  The Company creates a matrix of factors from which to calculate an estimable value.  However, all factors may not be known or publicly available from which to determine a value and, as such, the fair value used by the Company may not be truly indicative of the actual value available in an active
market or an actual exit price if the Company were to place the security for sale in the current market.





The Company has a policy and process in place to identify securities that could potentially have an impairment that is other-than-temporary.  This process involves monitoring market events that could impact issuers’ credit ratings, business climate, management changes, litigation and government actions, and other similar
factors.  This process also involves monitoring late payments, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts, asset quality and cash flow projections as indicators of credit issues.





At the end of each quarter, all securities are reviewed to determine whether impairments exist and whether other-than-temporary impairments should be recorded.  This quarterly process includes an assessment of the credit quality of each investment in the entire securities portfolio.  Additional reporting and review procedures
are conducted for those securities where fair value is less than 90% of amortized cost.  Further, detailed analysis is performed for each issue or issues having experienced a formal restructuring or where the security has experienced material deterioration in fair value or where the fair value is less than 80% of amortized cost.





The Company considers relevant facts and circumstances in evaluating whether the impairment of a security is other-than-temporary.  Relevant facts and circumstances considered include but are not limited to:





·
The current fair value of the security as compared to cost;


8
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


·
The credit rating of the security;


·
The extent and the length of time the fair value has been below cost;


·
The financial position of the issuer, including the current and future impact of any specific events, material declines in the issuer’s revenues, margins, cash positions, liquidity issues, asset quality, debt levels and income results;


·
Significant management or organizational changes;


·
Significant uncertainty regarding the issuer’s industry;


·
Violation of financial covenants;


·
Consideration of information or evidence that supports timely recovery;


·
The Company’s ability to hold a security to maturity or until it recovers in value;


·
Whether the Company intends to sell the investment and whether it is not more likely than not that the Company will be required to sell the investment before recovery of the amortized cost basis; and


·
Other business factors related to the issuer’s industry.





To the extent the Company determines that a security is deemed to be other-than-temporarily impaired, the portion of the impairment that is deemed to be credit is charged to the income statement and the cost basis of the underlying investment is reduced.  The portion of the impairment that is deemed to be non-credit is charged
to other comprehensive income (loss).





There are a number of significant risks and uncertainties inherent in the process of monitoring impairments, determining if an impairment is other-than-temporary and determining the portion of an other-than-temporary impairment that is due to credit.  These risks and uncertainties include but are not limited to:





·
The risk that the Company’s assessment of an issuer’s ability to meet all of its contractual obligations will change based on changes in the credit characteristics of that issuer;


·
The risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated;


·
The risk that the performance of the underlying collateral for securities could deteriorate in the future and the Company’s credit enhancement levels and recovery values do not provide sufficient protection to the Company’s contractual principal and interest;


·
The risk that fraudulent, inaccurate or misleading information could be provided to the Company’s credit, investment and accounting professionals who determine the fair value estimates and accounting treatment for securities;


·
The risk that new information obtained by the Company or changes in other facts and circumstances may lead the Company to change its intent to hold the security to maturity or until it recovers in value;


·
The risk that facts and circumstances change such that it becomes more likely than not that the Company will be required to sell the investment before recovery of the amortized cost basis; and


·
The risk that the methodology or assumptions used to develop estimates of the portion of impairments due to credit prove, over time, to be inaccurate or insufficient.





Any of these situations could result in a charge to income in a future period.  To the extent the Company determines that a security is deemed to be other-than-temporarily impaired, the portion of the impairment that is deemed to be credit is charged to the income statement and the cost basis of the underlying investment is reduced.  The
portion of the impairment that is deemed to be non-credit is charged to other comprehensive income (loss).





Deferred Acquisition Costs and Value of Business Acquired


Deferred acquisition costs (DAC), principally agent commissions and other selling, selection and issue costs, which vary with and are directly related to the production of new business, are capitalized as incurred.  These deferred costs are then amortized in proportion to future premium revenues or the expected future profits
of the business, depending upon the type of product.





When a new block of business is acquired or when an insurance company is purchased, a portion of the purchase price is allocated to a separately identifiable intangible asset, called the value of business acquired (VOBA).  VOBA is established as the actuarially determined present value of future gross profits of the business acquired
and is amortized in proportion to future premium revenues, or the expected future profits, depending on the type of business acquired.





The Company considers the following assumptions to be of significance when evaluating the amortization of DAC and VOBA: expected mortality, interest spreads, surrender rates and expense margins.  Mortality relates to the occurrence of death.  Interest spreads are the difference between the investment returns earned and
the crediting rates of interest applied to


9
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


policyholder account balances.  Surrender rates relate to the relative volume of policy terminations.  Expense margins involve the expenses incurred for maintaining and servicing in-force policies.





At least annually, a review is performed of the models and the assumptions used to develop expected future profits, based upon management’s current view of future events.  DAC is reviewed on an ongoing basis to determine that the unamortized portion does not exceed the expected recoverable amounts.  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 and VOBA in the period, but do not necessarily indicate that a change to the long-term assumptions of future experience is warranted.  If it is determined that it is appropriate to change the long-term assumptions of future experience, then an unlocking adjustment is recognized for the block of business being evaluated.  Certain
assumptions, such as interest spreads and surrender rates, may be interrelated.  As such, unlocking adjustments often reflect revisions to multiple assumptions.  The balances of DAC and VOBA are immediately impacted by any assumption changes, with the change reflected through the income statement as an unlocking adjustment in the amount of DAC or VOBA amortized.  These adjustments can be positive or negative.  The impact of unlocking adjustments from the changes in estimates
for the periods reported are included in the Consolidated Results of Operations and Operating Results by Segment sections of the Management’s Discussion and Analysis of Financial Condition and Results of Operations contained within this document.





The following table reflects the estimated pre-tax impact to DAC and VOBA on universal life, variable universal life, and fixed and variable deferred annuity products that could occur in a twelve-month period for an unlocking adjustment due to reasonably likely changes in significant assumptions.  Changes in assumptions of the
same magnitude in the opposite direction would have an impact of a similar magnitude but opposite direction of the examples provided.




Critical Accounting Estimate
Determination Methodology
Potential Effect on DAC, VOBA and Related ItemsMortality Experience
Based on Company mortality experience.  Industry experience and trends are also considered.
A 2.5% increase in expected mortality experience for all future years would result in a reduction in DAC and VOBA, and a 2% increase in current period amortization.Surrender Rates
Based on Company surrender experience.  Industry experience and trends are also considered.
A 10% increase in expected surrender rates for all future years would result in a reduction in DAC and VOBA, and a 1% increase in current period amortization expense.Interest Spreads
Based on expected future investment returns and expected future crediting rates applied to policyholder account balances; future crediting rates include constraints imposed by policy guarantees.
A 10 basis point reduction in future interest rate spreads would result in a reduction in DAC and VOBA, and a 1% increase in current period amortization expense.Maintenance Expenses
Based on Company experience using an internal expense allocation methodology.
A 10% increase in future maintenance expenses would result in a reduction in DAC and VOBA, and a 1% increase in current period amortization expense.


Separate Accounts


Separate account assets and liabilities arise from the sale of variable life insurance and 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.  Policyholder account deposits and withdrawals, investment income and realized investment gains and losses are excluded from the amounts reported in the Consolidated Statements of Income.  Revenues to the Company from separate accounts consist principally of contract charges, which include maintenance charges, administrative fees and mortality and risk charges.





The total separate account assets were $268.9 million as of June 30, 2009.  Variable life and variable annuity assets comprised 29% and 71% of this amount, respectively.  Guarantees are offered under variable life and variable annuity contracts: a guaranteed minimum death benefit rider is available on certain variable
universal life contracts and guaranteed minimum death benefits are provided on variable annuities.  The guaranteed minimum death benefit rider for variable universal life contracts guarantees the death benefit for specified periods of time, regardless of investment performance,


10
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


provided cumulative premium requirements are met.  The Company introduced a guaranteed minimum withdrawal benefit (GMWB) rider in 2007 that can be added to new or existing variable annuity contracts.  The rider provides a minimum guarantee that the owner can make annual withdrawals equal to 5% of the initial annuity
deposit for twenty years, or for life if withdrawals were started at age 65 or later, regardless of market returns.  The current value of variable annuity separate accounts with the GMWB rider was $43.5 million and the fair value of the GMWB rider was $(0.9) million at June 30, 2009.  The value of the GMWB rider is recorded at fair value.  The change in this value is included in policyholder benefits in the Consolidated Statements of Income.





Future Policy Benefits


The Company establishes liabilities for amounts payable under insurance policies, including traditional life insurance, annuities and accident and health insurance.  Generally, amounts are payable over an extended period of time.  Liabilities for future policy benefits of traditional life insurance have been computed
by a net level premium method based upon estimates at the time of issue for investment yields, mortality and withdrawals.  These estimates include provisions for experience less favorable than initially expected.





Liabilities for future policy benefits of immediate annuities and supplementary contracts with life contingencies are also computed by a net level premium method, based upon estimates at the time of issue for investment yields and mortality.





Liabilities for future policy benefits of accident and health insurance represent estimates of payments to be made on reported insurance claims, as well as claims incurred but not yet reported.  These liabilities are estimated using actuarial analyses and case basis evaluations that are based upon past claims experience, claim
trends and industry experience.





Policyholder Account Balances


Policyholder account balances include universal life insurance, fixed deferred annuity contracts and investment-type contracts.  Liabilities for these policyholder account balances are included without reduction for potential surrender charges and deferred front-end contract charges.  The account balances for universal
life contracts are equal to cumulative premiums, less contract charges and withdrawals, plus interest credited.  The account balances for fixed deferred annuities and investment-type contracts are equal to the cumulative deposits, less any applicable contract charges and withdrawals, plus interest credited.  Front-end contract charges are amortized over the term of the policies.  Policyholder benefits incurred in excess of related policyholder account balances are charged to policyholder
benefits expense.  Interest on policyholder account balances is credited as earned.





Recognition of Revenues


Premiums for traditional life insurance products are reported as revenue when due.  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.  A reserve is provided for the portion of premiums
written which relate to unexpired terms of coverage.





Deposits related to universal life, fixed deferred annuity contracts and investment-type products are credited to policyholder account balances.  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.  The cash flows from deposits are credited to policyholder account balances.  Deposits are not recorded as revenue under FASB Statement No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments.”  Deposits are shown as a Financing Activity in the Consolidated Statements of Cash Flows.





The Company measures its sales or new business production with two components: new premiums recorded and new deposits received.  Premiums and deposits are subdivided into two categories: new and renewal.  New premiums and deposits are measures of sales or new business production.  Renewal premiums and deposits
occur as continuing business from existing customers.





Reinsurance


Reinsurance is one of the tools that the Company uses to accomplish its business objectives.  A variety of reinsurance vehicles are currently in use, including individual and bulk arrangements on both coinsurance and mortality/morbidity only basis.  Reinsurance supports a multitude of corporate objectives, including
managing statutory capital, reducing volatility and surplus strain.  At the customer level, reinsurance increases the Company’s capacity, provides access to additional underwriting expertise, and generally makes it possible for the Company to offer products at competitive levels that could not


11
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


otherwise be made available.  Reinsurance is an actively managed tool that has increased in importance over recent years and will continue to play a role in the Company’s future.





The Company remains contingently liable if the reinsurer should be unable to meet obligations assumed under the reinsurance contract. The Company monitors the relative financial strength and viability of its reinsurance partners. The Company has one reinsurance counterparty whose credit rating was below investment grade at June 30, 2009.
Total GAAP reserves ceded to this reinsurer was $2.7 million at June 30, 2009. Should this reinsurer become insolvent, the Company could recapture the business ceded to this reinsurer, resulting in an increase in GAAP reserves of $2.7 million.





Reinsurance receivables include amounts related to paid benefits and estimated amounts related to unpaid policy and contract claims, future policy benefits and policyholder account balances.





2.  NEW ACCOUNTING PRONOUNCEMENTS





In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157).  SFAS 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities.  SFAS 157 also emphasizes
that fair value is a market-based measurement, not an entity-specific measurement, and established a fair value hierarchy with the highest priority being the quoted price in active markets.  SFAS 157 amended SFAS No. 107, “Disclosure about Fair Value of Financial Instruments.”  This statement became effective for years beginning after November 15, 2007.  The Company adopted SFAS 157 on January 1, 2008 with no material impact to the consolidated financial statements.  Please
see Note 3 – Fair Values for disclosures pertaining to SFAS 157.





In October 2008, the FASB issued FASB Staff Position (FSP) No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active” (FSP FAS 157-3).  FSP FAS 157-3 clarifies the application of FASB Statement No. 157, “Fair Value Measurements,” in a market that is not active
and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active.  The Company adopted FSP FAS 157-3 on issuance, with no material impact to the consolidated financial statements.





In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of SFAS No. 115” (SFAS 159).  SFAS 159 permits an entity to measure certain financial assets and liabilities at fair value.  Under SFAS 159, entities that
elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with a few exceptions, as long as it is applied to the instrument in its entirety.  Once adopted, the fair value option election is irrevocable, unless a new election date occurs.  This statement became effective for years beginning after November 15, 2007.  Upon the adoption of SFAS 159, the
Company was also required to adopt SFAS No. 157 concurrently.  The Company elected to not measure financial assets and liabilities at fair value other than those already prescribed, such as securities available for sale, securities identified in trading portfolios and certain derivatives and hedging activity that the Company participates in.  The Company adopted SFAS 159 on January 1, 2008 with no material impact to the consolidated financial statements.  Please see Note 3 –
Fair Values for additional information pertaining to SFAS 159.





In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS 161).  This statement amends and expands the disclosure requirements of Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  SFAS 161 requires companies
with derivative instruments to disclose information about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under Statement 133, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  This statement became effective for financial statements issued for fiscal years beginning after November 15, 2008.  The Company adopted SFAS 161 on January
1, 2009 with no material impact on the consolidated financial statements.  Please see Note 3 – Fair Values for additional information pertaining to SFAS 161.





In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS 162).  SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements.  This statement became effective on November
15, 2008, following the SEC’s approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.”  The Company adopted SFAS 162 upon issuance, with no material impact on the consolidated financial statements. In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”
(SFAS 168).  SFAS 168 replaces SFAS 162 and identifies the sources of accounting principles and the framework used when preparing interim and


12
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


annual financial statements.  SFAS 168 will be effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The Company will adopt SFAS No. 168 in the third quarter of 2009.





In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts” (SFAS 163).  SFAS 163 clarifies how FASB Statement No. 60, “Accounting and Reporting by Insurance Enterprises,” applies to financial guarantee insurance contracts, including the recognition and measurement
of premium revenue and claim liabilities.  This statement also requires expanded disclosures about financial guarantee insurance contracts.  This statement became effective for financial statements issued for fiscal years beginning after December 15, 2008.  The Company adopted SFAS 163 on January 1, 2009 with no material impact to the consolidated financial statements as it does not sell financial guarantee insurance contracts.





In April 2009, the FASB issued Staff Position No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4 clarifies fair valuation in inactive markets and includes all assets
and liabilities subject to fair valuation measurements.  This staff position requires enhanced disclosures related to fair valued assets and liabilities.  This staff position became effective for financial statements issued for interim and annual periods ending after June 15, 2009.  The Company elected early adoption of FSP FAS 157-4 effective for the period ended March 31, 2009 with no material impact on the unaudited interim consolidated financial statements.  Please
see Note 3 – Fair Values for additional information pertaining to FSP FAS 157-4.





In April 2009, the FASB issued Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS 124-2).  FSP FAS 115-2 and FAS 124-2 provide additional guidance regarding other-than-temporary impairment of debt securities and changes in the recognition
and presentation of debt securities determined to be other-than-temporarily impaired.  The FSP requires an enterprise to bifurcate any other-than-temporary impairment between credit and non-credit impairments and then establishes accounting treatment for each aspect, in current and subsequent periods.  This staff position also requires retroactive application to other-than-temporary impairments recorded in prior periods by making a cumulative-effect adjustment to the opening balance of retained
earnings and accumulated other comprehensive income (loss) in the period of adoption.  This staff position became effective for financial statements issued for interim and annual periods ending after June 15, 2009.  The Company elected to early adopt FSP FAS 115-2 and FAS 124-2 effective for the period ended March 31, 2009 with retroactive application effective January 1, 2009.  For additional information pertaining to FSP FAS 115-2 and FAS 124-2, please see Note 3 – Fair Values
and Note 6 – Accumulated Effect of Change in Accounting Principle.





In April 2009, the FASB issued Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (FSP FAS 107-1 and APB 28-1).  FSP FAS 107-1 and APB 28-1 expands the fair value disclosures required for all financial instruments within the scope of SFAS No. 107 to interim periods.  The
staff position also requires entities to disclose the methods and significant assumptions used to estimate the fair value of financial instruments in financial statements on an interim and annual basis and to highlight any changes from prior periods.  This staff position became effective for financial statements issued for interim and annual periods ending after June 15, 2009.  The Company elected to early adopt FSP FAS 107-1 and APB 28-1 effective for the period ended March 31, 2009 with
no material impact on the unaudited interim consolidated financial statements.  Please see Note 3 – Fair Values for additional information pertaining to FSP FAS 107-1 and APB 28-1.





In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (SFAS 165).  SFAS 165 establishes general accounting standards for events occurring subsequent to the balance sheet date but before the financial statements are issued.  This statement became effective for interim and annual accounting periods
ending after June 15, 2009.  The Company adopted SFAS 165 on issuance, with no material impact to the consolidated financial statements.





All other Standards and Interpretations of those Standards issued during the six months ended June 30, 2009 did not relate to accounting policies and procedures pertinent to the Company at this time.





3.  FAIR VALUES





Fair Values Hierarchy


In accordance with SFAS 157, the Company groups its financial assets and liabilities measured at fair value in three levels, based on the inputs and assumptions used to determine the fair value.  These levels are as follows:


13
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


Level 1 – Valuations are based upon quoted prices for identical instruments traded in active markets.  Level 1 assets include U.S. Treasury Notes and Bonds, other U.S. Government securities and certain common and preferred stocks that are traded by dealers or brokers in active markets.





Level 2 – Valuations are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.  Valuations are obtained from third party
pricing services or inputs that are observable or derived principally from or corroborated by observable market data.  Level 2 assets include debt securities, preferred stocks and asset-backed securities that are model priced by vendors using observable inputs.





Level 3 – Valuations are generated from techniques that use significant assumptions not observable in the market.  These unobservable assumptions reflect the Company’s assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include the use of option pricing
models, discounted cash flow models, spread-based models, and similar techniques, using the best information available in the circumstances.  Level 3 assets include corporate securities and private placements.





Determination of Fair Value


Under SFAS 157, the Company bases fair values on the price that would be received to sell an asset (exit price) or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  It is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable
inputs when developing fair value measurements, in accordance with the fair value hierarchy in SFAS 157.  Accordingly, the Company uses an independent third party pricing service to price a significant portion of its fixed maturity securities and equity securities.





The Company generally obtains only one quote or price per instrument. For those investments that can be priced through the third-party pricing service, the Company reviews prices for unusual fluctuations but generally accepts the price identified from the pricing service. In the event a price is not available from the third-party pricing
service, the Company pursues external pricing from brokers.  Generally, the Company pursues and utilizes only one broker quote per security.  In doing so, the Company solicits only brokers which have previously demonstrated knowledge and experience of the subject security.  If a broker price is not available, the Company determines a carrying value through various valuation techniques that use option pricing models, discounted cash flows, spread-based models or similar techniques
depending upon the specific security to be priced.  Investments for which the Company uses these techniques are primarily for private placement securities.  The Company utilizes available market information, wherever possible, to identify inputs into the carrying value determination, primarily including prices and spreads on comparable securities.





The Company performs an analysis on the prices received from third party security pricing services and independent brokers to ensure that the prices represent a reasonable estimate of the fair value.  The Company corroborates and validates the primary pricing sources through a variety of procedures that include but are not limited
to comparison to additional independent third-party pricing services or brokers, where possible, a review of third party pricing service methodologies, back testing and comparison of prices to actual trades for specific securities where observable data exists.  In addition, in accordance with SFAS 157, the Company analyzed the third-party pricing services’ methodologies and related inputs and has also evaluated the various types of securities in its investment portfolio to determine an appropriate
SFAS 157 fair value hierarchy.





The Company owned six issues of similar securities for which values were not provided from the Company’s primary pricing service as of June 30, 2009.  The Company received quoted prices from brokers for each security and utilized the mid-point of these prices to determine the fair value of these similar securities.





Fair value measurements for assets and liabilities where there exists limited or no observable market data, are calculated using the Company’s own estimates, 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, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability.  Additionally, there may be inherent weaknesses in any calculation technique. Further, changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.





The Company’s own estimates of fair value are 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,
marketability and other items, if applicable; 3)


14
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


discounted cash flow models and margin spreads; 4) bond yield curves; 5) Trace trade quotes; 6) observable market prices and exchange quotes not provided by external pricing services; 7) statement values provided to the Company by fund managers; and 8) option pricing models.





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 in accordance with SFAS No.107.





Assets


Securities Available for Sale


Fixed maturities and equity securities available for sale are recorded at fair value on a recurring basis.  Fair value measurement is based upon quoted prices, if available.  If quoted prices are not available, fair values are determined as described in the preceding paragraphs.





Short-Term Financial Assets


Short-term financial assets include cash and other short-term investments and are carried at historical cost.  The carrying amount is a reasonable estimate of the fair value because of the relatively short time between the purchase of the instrument and its expected repayment or maturity.





Loans


The Company does not record loans at fair value.  As such, valuation techniques discussed herein for loans are primarily for estimating fair value for SFAS No. 107 disclosure purposes.





Fair values of mortgage loans on real estate properties are calculated by discounting contractual cash flows, using discount rates based on current industry pricing or the Company’s estimate of an appropriate risk-adjusted discount rate for loans of similar size, type, remaining maturity and repricing characteristics.





The Company also has loans made to policyholders.  These loans cannot exceed the cash surrender value of the policy.  Fair value is calculated by discounting contractual cash flows, using discount rates based on the Company’s estimate of appropriate risk-adjusted discount rates for these loans.





Liabilities


Investment-Type Liabilities Included in Policyholder Account Balances and Other Policyholder Funds


Fair values for liabilities under investment-type insurance contracts are based upon account value.  The fair values of investment-type insurance contracts included with policyholder account balances for fixed deferred annuities and other policyholder funds for supplementary contracts without life contingencies are estimated to
be their cash surrender values.  In accordance with SFAS No. 107, the fair values of deposits with no stated maturity are equal to the amount payable on demand at the measurement date.





Guaranteed Minimum Withdrawal Benefits (GMWB)


The Company introduced a GMWB rider in 2007 that can be added to new or existing variable annuity contracts.  The rider provides a minimum guarantee that the owner can make annual withdrawals equal to 5% of the initial annuity deposit for twenty years, or for life if withdrawals were started at age 65 or later, regardless of market
returns.  The value of variable annuity separate accounts with the GMWB rider was $43.5 million and the fair value of the rider was $(0.9) million at June 30, 2009.  The value of the GMWB rider is recorded at fair value, and the change in this value is included in policyholder benefits in the Consolidated Statements of 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.  Fair value for GMWB rider contracts results in a Level 3 valuation as it is based on models developed for this purpose 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 risk and issuer non-performance.





Notes Payable


There were no borrowings at June 30, 2009.  All of the amounts included within Notes Payable were in other liabilities in the Consolidated Balance Sheets at December 31, 2008.  The carrying amount of these borrowings was a reasonable estimate of fair value because of the relatively short time between the origination
of the borrowings and their expected repayment and maturities.  See Note 7 - Notes Payable for an explanation of the terms of the debt outstanding.





15
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


Categories Reported at Fair Value


The following table presents categories reported at fair value on a recurring basis.





June 30, 2009Assets:

Total


Level 1


Level 2


Level 3Fixed maturities available for sale

$
2,416,429


$
20,121


$
2,318,604


$
77,704Equity securities available for sale


41,600



10,283



26,176



5,141Total

$
2,458,029


$
30,404


$
2,344,780


$
82,845Liabilities:Other policyholder fundsGuaranteed minimum withdrawal benefits

$
(879
)

$
-


$
-


$
(879
)Total

$
(879
)

$
-


$
-


$
(879
)





December 31, 2008Assets:

Total


Level 1


Level 2


Level 3Fixed maturities available for sale

$
2,342,873


$
15,876


$
2,237,498


$
89,499Equity securities available for sale


44,537



12,504



26,892



5,141Total

$
2,387,410


$
28,380


$
2,264,390


$
94,640Liabilities:Other policyholder fundsGuaranteed minimum withdrawal benefits

$
755


$
-


$
-


$
755Total

$
755


$
-


$
-


$
755





The following table presents the fair value of fixed maturities and equity securities available for sale by pricing source and SFAS 157 hierarchy level as of June 30, 2009.





Quoted Prices inActive Markets


Significant


Significantfor Identical


Observable


UnobservableAssets


Inputs


Inputs(Level 1)


(Level 2)


(Level 3)


TotalFixed maturities available for sale:Priced from external pricing service

$
20,121


$
2,193,089


$
-


$
2,213,210Priced from independent broker quotations


-



118,703



-



118,703Priced from internal matrices and calculations


-



6,812



77,704



84,516Subtotal


20,121



2,318,604



77,704



2,416,429Equity securities available for sale:Priced from external pricing service


10,283



1,851



-



12,134Priced from independent broker quotations


-



-



-



-Priced from internal matrices and calculations


-



24,325



5,141



29,466Subtotal


10,283



26,176



5,141



41,600Total

$
30,404


$
2,344,780


$
82,845


$
2,458,029Percent of Total


1
%


96
%


3
%


100
%








16
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the second quarter and six months ended June 30, 2009 are summarized below:





Quarter ended June 30, 2009Total Realized and Unrealized











Net Gains andGains and (Losses)


Purchases,





Ending


Losses IncludedBeginning





Included in


Sales,





Balance


in Net LossBalance as


Included


Other


Issuances


Net


as of


Relating toof March 31,


in


Comprehensive


and


Transfers


June 30,


Assets Held at2009


Earnings


Income


Settlements


in (out)


2009


June 30, 2009Assets:Fixed maturities availablefor sale

$
76,147


$
-


$
2,297


$
-


$
(740
)

$
77,704


$
2,297Equity securities availablefor sale


5,141



-



-



-



-



5,141



-Total

$
81,288


$
-


$
2,297


$
-


$
(740
)

$
82,845


$
2,297Liabilities:Other policyholder funds-guaranteed minimumwithdrawal benefits

$
396


$
(1,150
)

$
-


$
(125
)

$
-


$
(879
)

$
(1,150
)





Six Months ended June 30, 2009Total Realized and Unrealized











Net Gains andGains and (Losses)


Purchases,





Ending


Losses IncludedBeginning





Included in


Sales,





Balance


in Net LossBalance as


Included


Other


Issuances


Net


as of


Relating toof December 31,


in


Comprehensive


and


Transfers


June 30,


Assets Held at2008


Earnings


Income


Settlements


in (out)


2009


June 30, 2009Assets:Fixed maturities availablefor sale

$
89,499


$
-


$
4,211


$
(60
)

$
(15,946
)

$
77,704


$
4,211Equity securities availablefor sale


5,141



-



-



-



-



5,141



-Total

$
94,640


$
-


$
4,211


$
(60
)

$
(15,946
)

$
82,845


$
4,211Liabilities:Other policyholder funds-guaranteed minimumwithdrawal benefits

$
755


$
(1,685
)

$
-


$
51


$
-


$
(879
)

$
(1,685
)





The roll forward of Level 3 assets begins with the prior period balance and adjusts the balance for the gains or losses (realized and unrealized) that occurred during the current period.  Any new purchases that are identified as Level 3 securities are then added and any sales of securities which were previously identified as Level
3 are subtracted.  Next, any securities which were previously identified as Level 1 or Level 2 securities and which are currently identified as Level 3 are added.   Finally, securities which were previously identified as Level 3 and which are now designated as Level 1 or as Level 2 are subtracted.  The ending balance represents the current fair value of securities which are designated as Level 3.





The roll forward of Level 3 liabilities begins with the prior period balance and adjusts for the realized gains or losses that occurred during the current period.  These realized gains or losses are reflected as policyholder benefits in the Consolidated Statements of Income.  Issuances, or new sales, are then added and
settlements are subtracted.  The ending balance represents the current fair value of liabilities which are designated as Level 3.





The Company had no transfers into Level 3 for the second quarter and six months ended June 30, 2009.


17
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


The table below is a summary of fair value estimates as of June 30, 2009 and December 31, 2008 for financial instruments, as defined by SFAS No.107.  In accordance with SFAS No. 107, the Company has not included assets and liabilities that are not financial instruments in this disclosure.  The total of the fair value
calculations presented do not represent, and should not be construed to represent, the underlying value of the Company.





June 30, 2009


December 31, 2008Carrying


Fair


Carrying


FairValue


Value


Value


ValueInvestments:Fixed maturities available for sale

$
2,416,429


$
2,416,429


$
2,342,873


$
2,342,873Equity securities available for sale


41,600



41,600



44,537



44,537Mortgage loans


442,319



445,671



445,389



449,228Policy loans


86,886



86,886



88,304



88,304Cash and short-term investments


73,294



73,294



44,858



44,858Liabilities:Individual and group annuities


976,892



955,093



956,216



938,023Notes payable


-



-



2,900



2,900Supplementary contracts withoutlife contingencies


59,630



55,657



61,268



54,327





4.  UNREALIZED LOSSES ON SECURITIES





The Company reviews all security investments, particularly including those having unrealized losses.  Further, the Company specifically assesses all investments with greater than 10% declines in fair value and, in general, monitors all security investments as to ongoing risk.  These risks are fundamentally evaluated
through both a qualitative and quantitative analysis of the issuer.  The Company prepares a formal review document no less often than quarterly of all investments with greater than 20% declines in fair value for six months or more, investments that have previously been written down and that remain in an unrealized loss position, and selected investments that have changed significantly from a previous period and that have a decline in fair value greater than 10% of amortized cost.





The Company has a policy and process in place to identify securities that could potentially have an impairment that is other-than-temporary.  This process involves monitoring market events and other items that could impact issuers.  The evaluation includes but is not limited to such factors as the issuer’s stated
intent and ability to make all principal and interest payments when due, near-term business prospects, cash flow and liquidity, credit ratings, business climate, management changes and litigation and government actions.  This process also involves monitoring several factors including late payments, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts, asset quality and cash flow projections, as indicators of credit issues.





The Company considers relevant facts and circumstances in evaluating whether the impairment of a security is other-than-temporary.  Relevant facts and circumstances considered include but are not limited to:





·
The current fair value of the security as compared to cost;


·
The credit rating of the security;


·
The extent and the length of time the fair value has been below cost;


·
The financial position of the issuer, including the current and future impact of any specific events, material declines in the issuer’s revenues, margins, cash positions, liquidity issues, asset quality, debt levels and income results;


·
Significant management or organizational changes;


·
Significant uncertainty regarding the issuer’s industry;


·
Violation of financial covenants;


·
Consideration of information or evidence that supports timely recovery;


·
The Company’s ability to hold a security to maturity or until it recovers in value;


18
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued





·
Whether the Company intends to sell the investment and whether it is not more likely than not that the Company will be required to sell the investment before recovery of the amortized cost basis; and


·
Other business factors related to the issuer’s industry.





To the extent the Company determines that a security is deemed to be other-than-temporarily impaired, the portion of the impairment that is deemed to be credit is charged to the income statement and the cost basis of the underlying investment is reduced.  The portion of the impairment that is deemed to be non-credit is charged
to other comprehensive income (loss).





There are a number of significant risks and uncertainties inherent in the process of monitoring impairments, determining if an impairment is other-than-temporary and determining the portion of an other-than-temporary impairment that is due to credit.  These risks and uncertainties include but are not limited to:





·
The risk that the Company’s assessment of an issuer’s ability to meet all of its contractual obligations will change based on changes in the credit characteristics of that issuer;


·
The risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated;


·
The risk that the performance of the underlying collateral for securities could deteriorate in the future and the Company’s credit enhancement levels and recovery values do not provide sufficient protection to the Company’s contractual principal and interest;


·
The risk that fraudulent, inaccurate or misleading information could be provided to the Company’s credit, investment and accounting professionals who determine the fair value estimates and accounting treatment for securities;


·
The risk that new information obtained by the Company or changes in other facts and circumstances may lead the Company to change its intent to hold the security to maturity or until it recovers in value;


·
The risk that facts and circumstances change such that it becomes more likely than not that the Company will be required to sell the investment before recovery of the amortized cost basis; and


·
The risk that the methodology or assumptions used to develop estimates of the portion of impairments due to credit prove, over time, to be inaccurate or insufficient.





Any of these situations could result in a charge to income in a future period.  To the extent the Company determines that a security is deemed to be other-than-temporarily impaired, the portion of the impairment that is deemed to be credit is charged to the income statement and the cost basis of the underlying investment is reduced.  The
portion of the impairment that is deemed to be non-credit is charged to other comprehensive income (loss).





At June 30, 2009, the Company had gross unrealized losses of $170.1 million on investment securities, including fixed maturity and equity securities that had a fair value of $1.2 billion.  In addition, included in the gross unrealized losses are securities that the Company determined had other-than-temporary impairments in accordance
with FSP FAS 115-2 and FAS 124-2.  Accordingly, the Company bifurcated these impairments between credit and non-credit impairments.  As identified in the Consolidated Statements of Income, the Company had non-credit impairments of $15.7 million on securities considered to be impaired.  As of December 31, 2008, the Company had gross unrealized losses of $231.9 million on investment securities, including fixed maturity and equity securities that had a fair value of $1.5 billion. The
decrease in unrealized losses was primarily attributable to decreased credit and liquidity risk discounts in the pricing of financial assets.  Although these changes affected the broad financial markets, specific sectors, security issuers and security issues were affected differently.  Partially offsetting the decrease in unrealized losses was the implementation of FSP FAS 115-2 and FAS 124-2 in the first quarter.  The Company reviewed all previously-recorded other-than-temporary
impairments of securities to develop an estimate of the portion of such impairments that were not due to credit.  This resulted in an opening balance adjustment to increase gross unrealized losses in the amount of $13.5 million.





Once a security is determined to have met certain of the criteria for consideration as being other-than-temporarily impaired, further information is gathered and evaluated pertaining to the particular security.  If the security is an unsecured obligation, the additional research is a top-down approach with particular emphasis
on the likelihood of the issuer to meet the contractual terms of the obligation.  If the security is secured by an asset or guaranteed by another party, the value of the underlying secured asset or the financial ability of the third party guarantor is evaluated as a secondary source of repayment. Such research is based upon a top-down approach, narrowing to the specific estimates of value and cash flow of the underlying secured asset or guarantor.  If the security is a collateralized obligation,
such as a mortgage-backed or other asset-backed instrument, research is also conducted to 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,


19
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


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.





If a determination is made that an unsecured security, secured security or security with a guaranty of payment by a third party is other-than-temporarily impaired, an estimate is developed of the portion of such impairment that is due to credit.  The estimate of the portion of impairment due to credit is based upon a comparison
of ratings and maturity horizon for the security and relative historical default probabilities from one or more nationally recognized rating organizations.  When appropriate for any given security, sector or period in the business cycle, the historical default probability is adjusted to reflect periods or situations of distress by adding to the default probability increments of standard deviations from mean historical results. The credit impairment analysis is supplemented by estimates of potential
recovery values for the specific security, including the potential impact of the value of any secured assets, in the event of default.  This information is used to determine the Company’s best estimate, derived from probability-weighted cash flows.





If the cash flow for a collateralized security is determined to be less than the amortized cost, the difference is recorded as an other-than-temporary impairment due to credit in the income statement.





The total impairment for any security that is deemed to have an other-than-temporary impairment is recorded in the statement of income as a net realized loss from investments.  The portion of such impairment that is determined to be non-credit-related is deducted from net realized loss in the statement of income and reflected
in other comprehensive income and accumulated other comprehensive income, which is a component of stockholders’ equity in the balance sheets.





As part of the required accounting for unrealized gains and losses, the Company also adjusts the DAC and VOBA assets to recognize the adjustment to those assets as if the unrealized gains and losses from securities classified as available-for-sale actually had been realized.





The following table provides information regarding investment securities with unrealized losses on fixed maturity and equity security investments available for sale as of June 30, 2009.





Less than 12 months


12 months or longer


TotalFair


Unrealized


Fair


Unrealized


Fair


UnrealizedBonds:

Value


Losses


Value


Losses


Value


LossesU.S. Treasury securities andobligations of U.S. Government

$
1,701


$
37


$
3,210


$
122


$
4,911


$
159Federal agencies 1


-



-



-



-



-



-Federal agency issuedmortgage-backed securities 1


2,977



104



5,305



67



8,282



171Subtotal


4,678



141



8,515



189



13,193



330Corporate obligationsIndustrial


65,702



2,900



95,946



9,607



161,648



12,507Energy


44,762



2,747



65,042



2,856



109,804



5,603Technology


649



27



10,375



1,328



11,024



1,355Communications


16,818



2,452



29,886



3,616



46,704



6,068Financial


38,657



7,884



190,357



36,849



229,014



44,733Consumer


27,207



1,732



115,709



8,109



142,916



9,841Public utilities


65,761



4,069



35,311



1,934



101,072



6,003Total corporate obligations


259,556



21,811



542,626



64,299



802,182



86,110Corporate private-labeledmortgage-backed securities


2,944



3,050



185,395



46,806



188,339



49,856Other


58,288



3,593



120,597



26,549



178,885



30,142Redeemable preferred stocks


-



-



4,620



380



4,620



380Fixed maturity securities


325,466



28,595



861,753



138,223



1,187,219



166,818Equity securities:Financial


3,165



1,579



5,653



1,651



8,818



3,230Other


1,415



11



-



-



1,415



11Equity securities


4,580



1,590



5,653



1,651



10,233



3,241Total

$
330,046


$
30,185


$
867,406


$
139,874


$
1,197,452


$
170,059








1Federal agency securities are not backed by the full faith and credit of the U.S. Government.








20
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


5.  COMPREHENSIVE INCOME (LOSS)





Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss).  Other comprehensive income (loss) includes the unrealized investment gains or losses on securities available for sale (net of adjustments for realized investment gains or losses) net of adjustments to DAC, VOBA and policyholder
account balances.  In addition, other comprehensive income (loss) includes the change in the additional minimum pension liability.  Other comprehensive income (loss) also includes deferred income taxes on these items.  The table below provides information about comprehensive income (loss) for the second quarters and six months ended June 30, 2009 and 2008.





Quarter ended June 30


Six Months ended June 302009


2008


2009


2008Total unrealized gains (losses) arising during the year


87,565



(69,226
)

$
85,087



(93,282
)Less:Realized investment gains (losses), excludingimpairment losses


2,595



752



2,843



752Other-than-temporary impairment lossesrecognized in earnings


(4,425
)


(10,225
)


(25,831
)


(10,225
)Other-than-temporary impairment lossesrecognized in comprehensive income (loss)


403



-



15,691



-Net unrealized gains (losses) excluding impairment losses


88,992



(59,753
)


92,384



(83,809
)Minimum pension liability


4,666



-



4,666



-Effect on DAC


(27,418
)


2,992



(30,130
)


4,413Policy holder account balance


-



439



-



396Deferred income taxes


(21,551
)


19,713



(21,789
)


27,650Other comprehensive income (loss)


44,689



(36,609
)


45,131



(51,350
)Net income


8,044



1,677



3,496



5,279Comprehensive income (loss)


52,733



(34,932
)

$
48,627



(46,071
)





The following table provides accumulated balances related to each component of accumulated other comprehensive loss at June 30, 2009.





Unrealized


UnrealizedGain (Loss) on


Gain (Loss) on


Minimum


DAC/Non-Impaired


Impaired


Pension


VOBASecurities


Securities


Liability


Impact


Tax Effect


TotalBeginning of year

$
(189,916
)

$
(2,197
)

$
(48,523
)

$
65,534


$
44,303


$
(130,799
)Cumulative effect of change inaccounting principle


-



(13,507
)


-



3,355



3,553



(6,599
)Other comprehensive income (loss)


100,266



(7,882
)


4,666



(30,130
)


(21,789
)


45,131End of period

$
(89,650
)

$
(23,586
)

$
(43,857
)

$
38,759


$
26,067


$
(92,267
)





21
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


The following table provides a rollforward of credit losses recognized in earnings for the second quarter and six months ended June 30, 2009.





Quarter ended


Six Months endedJune 30


June 302009


2009Credit losses on securities held at beginning of period in othercomprehensive income

$
11,831


$
5,713Additions for credit losses not previously recognized in other-than-temporary impairment


517



6,500Additions for increases in the credit loss for which an other-than-temporary impairment previously recognized when there was nointent to sell the security before recovery of its amortized cost basis


143



278Reductions for securities sold during the period (realized)


(2,072
)


(2,072
)Reductions for securities previously recognized in other


-



-comprehensive loss earnings because of intent to sell the securitybefore recovery of its amortized cost basis


-



-Reductions for increases in cash flows expected to be collectedthat are recognized over the remaining life of the security


(914
)


(914
)Credit losses on securities held at the end of period in othercomprehensive income

$
9,505


$
9,505





6.  ACCUMULATED EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE





Effective for the period ended March 31, 2009, the Company adopted FSP FAS 115-2 and FAS 124-4.  Pursuant to this FSP, the Company reviewed all previously-recorded other-than-temporary impairments of securities and developed an estimate of the portion of such impairments using a methodology consistent with that applied to the
current period other-than-temporary bifurcation of credit and non-credit.  As a result, the Company determined that $13.5 million in previously recorded other-than-temporary impairments had been due to non-credit impairments.





The process used by the Company in estimating the portion of previously recorded other-than-temporary impairments due to credit is consistent with the methodology employed for those securities determined to be other-than-temporarily impaired for the six-month period ended as of June 30, 2009.  Specifically, if the security is
unsecured, secured by an asset or includes a guaranty of payment by a third party, the estimate of the portion of impairment due to credit was based upon a comparison of ratings and maturity horizon for the security relative to historical default probabilities from one or more nationally recognized rating organizations.  When appropriate for any given security, sector or period in the business cycle, the historical default probability was adjusted to reflect periods or situations of distress by adding
to the default probability increments of standard deviations from mean historical results. The credit impairment analysis was supplemented by estimates of potential recovery values for the specific security, including the potential impact of the value of any secured assets, in the event of default.  This information is used to determine the Company’s best estimate, derived from probability-weighted cash flows.





Estimates of impairment due to credit involving collateralized securities were based upon review of projected cash flows relative to amortized cost at the time the security was determined to be other-than-temporarily impaired.  The credit component of the impairment for these securities was determined to be the difference between
the amortized cost of the security and the projected cash flows.





In addition, as an insurance enterprise, the Company must also consider the impact of DAC and VOBA on any realized and unrealized loss and the appropriate tax effect.  The establishment of non-credit impairments to accumulated other comprehensive income in accordance with the FSPs from retained earnings also requires a netting
of applicable DAC and


22
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


VOBA and income taxes.  The methodology by which DAC and VOBA are calculated and applied to realized gains and losses is different than the methodology employed to calculate DAC and VOBA charges on unrealized gains and losses and results in differences among the transfer between retained earnings and accumulated other comprehensive
loss.





In the implementation of this FSP, the Company recorded an opening balance adjustment that increased retained earnings in the amount of $8.4 million and increased accumulated other comprehensive loss in the amount of $6.6 million.  The adjustment to retained earnings consisted of an increase of $8.8 million related to non-credit
impairments taken in prior periods, net of tax.  This adjustment also included a $0.4 million decrease due to offsetting adjustments to DAC and VOBA, net of tax.  The adjustment to accumulated other comprehensive loss consisted of a decrease of $8.8 million related to non


credit impairments taken in prior periods, net of tax.  This adjustment also included a $2.2 million increase due to offsetting adjustments to DAC and VOBA, net of tax.





7.  NOTES PAYABLE





The following table provides information for Notes Payable.





June 30


December 312009


2008Federal Home Loan Bank (FHLB) loans with various maturities anda weighted average interest rate, currently no borrowings, (0.95% atDecember 31, 2008), secured by mortgage-backed securitiestotaling $81,562 ($102,155 at December 31, 2008)

$
-


$
2,900$
-


$
2,900





As a member of the FHLB with a capital investment of $5.1 million, the Company has the ability to borrow on a collateralized basis from the FHLB.  The Company received dividends on the capital investment in the FHLB of less than $0.1 in both the second quarter and six-month periods ended June 30, 2009.  Dividends received
in the second quarter of 2008 were $0.1 million and were $0.2 million in the six-month period ended June 30, 2008.





The Company has unsecured revolving lines of credit of $60.0 million with two major commercial banks with no balances outstanding and which are at variable interest rates, currently $40.0 million at 0.92% and $20.0 million at 1.56%.  These lines of credit will expire in June of 2010.  The Company anticipates renewing
these lines as they come due.





All borrowings are used to enhance liquidity and investment strategies.





8.  INCOME PER SHARE





Due to the Company’s capital structure and the absence of other potentially dilutive securities, there is no difference between basic and diluted earnings per common share for any of the periods reported.  The average number of shares outstanding was 11,514,586 and 11,585,643 for the quarters ended June 30, 2009 and 2008,
respectively.  The average number of shares outstanding was 11,486,599 and 11,649,642 for the six months ended June 30, 2009 and 2008, respectively.





9.  INCOME TAXES





The second quarter income tax expense was $4.4 million or 36% of income before tax for 2009, versus $0.6 million or 25% of income before tax for the prior year period.  The income tax expense for the six months ended June 30, 2009 was $2.0 million or 37% of income before tax, versus $2.6 million or 33% of income before tax for
the prior year period.





The effective income tax rate in the second quarter of 2009 was greater than the prevailing corporate federal income tax rate of 35%.  Favorable permanent differences, primarily from the dividends received deduction, resulted in a benefit of approximately 1% of income before tax.  This favorable difference was offset
by an expense of 2% of income before tax related to the Company’s investments in affordable housing and an increase in the tax contingency.  The effective income tax rate in the six months ended June 30, 2009 was greater than the prevailing corporate income tax rate of 35%.  This was primarily due to an expense of 5% of income before tax related to the Company’s investments in affordable housing and an increase in the tax contingency exceeding the benefit of 3% of income before
tax related to the permanent differences.





23
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


The effective income tax rate in the second quarter of 2008 was lower than the prevailing corporate federal income tax rate of 35%, primarily due to a change in projected effective tax rate, the dividends received deduction and other permanent deductions.  The primary reason for the change in the projected effective tax rate was
a revision to the projected income estimate for the year ending December 31, 2008.  This estimate of earnings is one part of the income tax expense calculation for each reporting period.  This determination resulted in a lower projected effective tax rate for the year, which reduced income tax expense for the second quarter.  The impact of the change in projected effective tax rate was a benefit of approximately 6% of income before tax.  The combined impact of the dividends
received deduction and other permanent differences was a benefit of approximately 4% of income before tax.





The effective income tax rate in the six months ended June 30, 2008 was lower than the prevailing corporate federal income tax rate of 35%, primarily due to the dividends received deduction and other permanent differences.  The combined impact of the dividends received deduction and other permanent differences was 2% of income
before tax.





10.  SEGMENT INFORMATION





The Company has three reportable business segments, which are defined based on the nature of the products and services offered:  Individual Insurance, Group Insurance and Old American. The Individual Insurance segment consists of individual insurance products for both Kansas City Life and Sunset Life. The Individual Insurance
segment is marketed through a nationwide sales force of independent general agents. The Group Insurance segment consists of sales of group life, dental, vision and disability products. This segment is marketed through a nationwide sales force of independent general agents, group brokers and third-party marketing arrangements. Old American consists of individual insurance products designed primarily as final expense products. These products are marketed through a nationwide general agency sales force with exclusive
territories, using direct response marketing to supply agents with leads.





Separate investment portfolios are maintained for each of the three life insurance companies.  However, investment assets and income are allocated to the Group Insurance segment based upon its cash flows and future policy benefit liabilities. Home office functions are fully integrated for all segments in order to maximize economies
of scale. Therefore, operating expenses are allocated to the segments based upon internal cost studies, which are consistent with industry cost methodologies.





Inter-segment revenues are not material. The Company operates solely in the United States and no individual customer accounts for 10% or more of the Company’s revenue.





The following schedule provides the financial performance of each of the three reportable operating segments of the Company.





Individual


Group


Old


IntercompanyInsurance


Insurance


American


Eliminations1


TotalInsurance revenues:Second quarter:
2009

$
28,956


$
11,838


$
15,460


$
(138
)

$
56,1162008


31,134



12,114



15,342



(147
)


58,443Six months:
2009


61,687



24,654



30,826



(282
)


116,8852008


63,170



23,967



30,729



(296
)


117,570Net investment income:Second quarter:
2009

$
41,338


$
133


$
3,134


$
-


$
44,6052008


42,258



134



3,224



-



45,616Six months:
2009


81,255



270



6,219



-



87,7442008


85,336



255



6,488



-



92,079Net income (loss):Second quarter:
2009

$
7,435


$
(573
)

$
1,182


$
-


$
8,0442008


2,014



(1,177
)


840



-



1,677Six months:
2009


2,864



(777
)


1,409



-



3,4962008


5,776



(1,048
)


551



-



5,279





24
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued





1Elimination entries to remove intercompany transactions for life and accident and health insurance were as follows:  insurance revenues from the Group Insurance segment and operating expenses from the Individual Insurance segment to arrive at Consolidated
Statements of Income.





11.  PENSIONS AND OTHER POSTRETIREMENT BENEFITS





Components of net periodic benefit cost:





Pension Benefits


Other BenefitsQuarter ended


Quarter endedJune 30


June 302009


2008


2009


2008Service cost

$
630


$
602


$
93


$
194Interest cost


2,427



1,942



213



349Expected return on plan assets


(1,788
)


(2,465
)


(5
)


(13
)Amortization of:Unrecognized actuarial loss


1,878



600



(235
)


43Unrecognized prior service cost


(192
)


(169
)


(31
)


(93
)Net periodic benefit cost

$
2,955


$
510


$
35


$
480





Pension Benefits


Other BenefitsSix Months ended


Six Months endedJune 30


June 302009


2008


2009


2008Service cost

$
1,118


$
1,180


$
262


$
391Interest cost


3,984



3,804



541



705Expected return on plan assets


(3,685
)


(4,829
)


(15
)


(26
)Amortization of:Unrecognized actuarial loss


2,361



1,176



(200
)


87Unrecognized prior service cost


(323
)


(331
)


(77
)


(188
)Net periodic benefit cost

$
3,455


$
1,000


$
511


$
969





12.  SHARE-BASED PAYMENT





The Company has a long-term incentive plan for senior management that awards participants for the increase in the share price of the Company’s common stock through units (phantom shares) assigned by the Board of Directors. The awards are calculated over three-year intervals on a calendar year basis. At the conclusion of each three-year
interval, participants will receive awards based on the increase in the share price during a defined measurement period, times the number of units. The increase in the share price will be determined based on the change in the share price from the beginning to the end of the three-year interval. 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.





No payments were made during the first six months of 2009 for the three-year interval ended December 31, 2008.  In the first six months of 2008, the plan made a payment of $0.1 million to plan participants for the three-year interval ended December 31, 2007.





At each reporting period, an estimate of the share-based compensation expense is accrued, utilizing the share price at the period end.  No accrual was required for the second quarter of 2009.  The cost of share-based compensation accrued as an operating expense in the second quarter of 2008 was $0.1 million, net of tax.  The
change in accrual for share-based compensation that reduced operating expense in the first six months of 2009 was $0.1 million, net of tax.  The cost of compensation accrued as an operating expense for the six-month period ended June 30, 2008 was $0.2 million, net of tax.





25
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


13.  COMMITMENTS





In the normal course of business, the Company has open purchase and sale commitments.  At June 30, 2009, the Company had purchase commitments to fund mortgage loans and other investments of $13.9 million.  Subsequent to June 30, 2009, the Company entered into commitments to fund additional mortgage loans of $4.0 million
and purchase of affordable housing real estate investments of $6.6 million.





14.  CONTINGENT LIABILITIES





The life insurance industry, including the Company, has been subject to an increase in litigation in recent years. Such litigation has been pursued on behalf of purported classes of policyholders and other claims and legal actions in jurisdictions where juries often award punitive damages, which are grossly disproportionate to actual damages.





Although no assurances can be given and no determinations can be made at this time, management believes that the ultimate liability, if any, with respect to these claims and actions, would have no material effect on the Company’s business, results of operations or financial position.





15.  GUARANTEES AND INDEMNIFICATIONS





The Company is subject to various indemnification obligations issued in conjunction with certain transactions, primarily assumption reinsurance agreements, stock purchase agreements, mortgage servicing agreements, 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. While we are unable to estimate with certainty the ultimate legal and financial liability with respect to these indemnifications, we believe the likelihood is remote that material payments would be required under such indemnifications. The Company believes that such indemnifications would not result in a material adverse effect
on the financial position or results of operations.





16.  SUBSEQUENT EVENTS





On July 27, 2009, the Kansas City Life Board of Directors declared a quarterly dividend of $0.27 per share that will be paid on August 12, 2009 to stockholders of record on August 6, 2009.





Subsequent to June 30, 2009, the credit and liquidity crisis in the United States and throughout the global financial system continued to generate substantial volatility in the financial markets and the banking system.  Should this environment and similar events continue, such subsequent events could have a significant impact
on the Company’s investment portfolio.  The Company has continued to monitor this subsequent event activity and has concluded that the assessment of other-than-temporary impairment as of June 30, 2009 has not changed.





The Company filed two Forms S-8 with the Securities and Exchange Commission on July 9, 2009.  The first Form S-8 was to register an additional 1,100,000 shares of the common shares and plan interests relating to the Thirty-First Amendment and Restatement of the Kansas City Life Insurance Company Savings and Profit Sharing Plan,
as amended for which securities of the same class were registered on a registration statement on Form S-8 previously filed and effective on June 20, 2000.  The second Form S-8 was to register an additional 200,000 shares of the Company’s common stock issued to the Kansas City Life Deferred Compensation Plan (the “Plan”), as amended and the Company’s Deferred Compensation Obligations issued in accordance with and pursuant to the Plan.  In conjunction with these filings,
an additional 114,138 shares of the Company’s common stock were issued from treasury and became outstanding.





The Company filed two Forms S-3 with the Securities and Exchange Commission on July 27, 2009.  The first form S-3 was to register an additional 20,000 shares of common stock contributed to a grantor trust established in connection with the Company’s Pre-2005 Agent’s Deferred Compensation Plan and the Company’s
deferred compensation obligations issued in accordance with and pursuant to the Pre-2005 Agent’s Deferred Compensation Plan.  The second Form S-3 was to register an additional 38,000 shares of common stock contributed to a grantor (rabbi) trust established in connection with the Company’s Agent’s Deferred Compensation Plan and the Company’s deferred compensation obligations issued in accordance with and pursuant to the Agent’s Deferred Compensation Plan.


26
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


Subsequent to June 30, 2009, the Company began discontinuing purchase and sale transactions of the Company’s common stock with employee benefit plans sponsored by the Company.  The Company’s benefit plans will instead conduct such transactions in the open market.





Subsequent events have been evaluated through July 30, 2009, which is the date that the financial statements have been issued.








27
 Table of Contents





Item 2. 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 is intended to provide in narrative form the perspective of the management of Kansas City Life Insurance Company (the Company) on its financial condition, results of operations, liquidity and certain other factors that may affect its future results.  The
following is a discussion and analysis of the results of operations for the second quarters and six months ended June 30, 2009 and 2008 and the financial condition of the Company as of June 30, 2009.  This discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in this document, as well as the Company’s 2008 Form 10-K.





Overview





Kansas City Life Insurance Company (the Company) is a financial services company that is predominantly focused on sales and administration of life and annuity insurance products.  The Company primarily consists of three life insurance companies.  Kansas City Life Insurance Company (Kansas City Life) is the parent company.  Sunset
Life Insurance Company of America (Sunset Life) and Old American Insurance Company (Old American) are wholly-owned subsidiaries.





Kansas City Life markets individual insurance products, including traditional, interest sensitive and variable products through a nationwide sales force of independent general agents and third-party marketing arrangements.  Kansas City Life also markets group insurance products, which include life, dental, vision and disability
products through a nationwide sales force of independent general agents, group brokers and third-party marketing arrangements.  Kansas City Life operates in 48 states and the District of Columbia.





Sunset Life is a life insurance company that maintains its current block of business, but does not produce new sales.  Sunset Life is included in the Individual Insurance segment and its individual insurance products include traditional and interest sensitive products.  Sunset Life operates in 43 states and the District
of Columbia.





Old American sells final expense insurance products nationwide through a general agency system, with exclusive territories, using direct response marketing to supply agents with leads.  Old American’s administrative and accounting operations are part of the Company’s home office but it operates and maintains a separate
and independent field force.  Old American operates in 46 states and the District of Columbia.





The Company offers investment products and broker dealer services through its subsidiary Sunset Financial Services, Inc. (SFS) for both proprietary and non-proprietary variable insurance products, mutual funds and other securities.





The Company operates in the life insurance sector of the financial services industry in the United States.  This industry is highly competitive with respect to pricing, selection of products and quality of service.  No single competitor or any small group of competitors dominates any of the markets in which the Company
operates.  General economic conditions may affect future results.  Interim results are not necessarily indicative of results for the entire year and should be read in conjunction with the Company’s 2008 Form 10-K.





The Company earns revenues primarily from premiums received from the sale of life, annuity and accident and health policies, from earnings on its investment portfolio and from the sale of investment assets.  Revenues from the sale of traditional life insurance and immediate annuity products and accident and health products are
reported as premium income for financial statement purposes.  Considerations for supplemental contracts with life contingencies are reported as part of other revenues.  However, deposits received from the sale of interest sensitive products, namely universal life insurance products, deferred annuities, and annuities and supplemental contracts without life contingencies are not reported as premium revenues, but are instead reported as additions to the policyholders’ account balances and
are reflected as deposits in the Statements of Cash Flows.  Accordingly, revenues on these products are recognized over time in the form of contract charges assessed against policyholder account balances, charges assessed on the early surrender of policyholder account balances and other charges deducted from policyholders’ balances.





The Company’s profitability depends on many factors, which include but are not limited to:





·
The sales of life, annuity, and accident and health products;


·
The rate of mortality, lapse and surrenders of future policy benefits and policyholder account balances;


·
The rate of morbidity, disability and incurrence of other policyholder benefits;


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 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


·
Persistency of existing insurance policies;


·
Interest rates credited to policyholders;


·
The effectiveness of reinsurance programs;


·
The amount of investment assets under management;


·
Investment spreads earned on policyholder account balances;


·
The ability to maximize investment returns and minimize risks such as interest rate risk, credit risk and equity risk;


·
Realized losses on investments;


·
Timely and cost-effective access to liquidity;


·
Management of distribution costs and operating expenses.





Strong sales competition, highly competitive products and a very difficult economic environment present significant challenges to the Company from a new sales perspective.  The Company’s primary emphasis is on expanding sales of individual life products.  The Company’s continued focus is on delivering competitive
products for a reasonable cost, superior customer service, excellent financial strength and superior sales and marketing support to the field force.





The Company generates cash largely through premiums and deposits collected through the sale of insurance products, through the sale of universal life-type and deposit-type products and through investment activity. The principal uses of cash are for the insurance operations, including the purchase of investments, payment of insurance benefits
and other withdrawals from policyholder accounts, operating expenses, premium taxes, and costs related to acquiring new business.  In addition, cash is used to pay income taxes and stockholder dividends as well as to fund potential acquisition opportunities.





Starting in 2007 and continuing into 2009, negative market conditions have significantly impacted the financial markets and accordingly, the Company’s investments and revenues.  The interest rate and credit environment continue to present a significant challenge to the markets as a whole and specifically to companies invested
in fixed maturity and equity securities.  These negative conditions may persist into the future as the credit and equity markets continue to be severely challenged, particularly in the financial services sector.  The Company is broadly diversified and has high quality investments, as 93% of all fixed maturity securities were investment grade at June 30, 2009.  However, as a result of the consolidations currently occurring in the financial services sector, diversification in this
sector will be a challenge until greater market stabilization occurs.  In addition, the U.S. Government’s entrance into private company arrangements and specific guarantees may add further complications to a variety of issues, yet to be fully determined.





The improvement in net income for the second quarter of 2009 compared to the second quarter of 2008 was due to several factors.  First, the Company had a net realized loss of $1.4 million in the second quarter of 2009 compared to $8.4 million in the second quarter of 2008.  In the second quarter of 2009, write-downs
of investments due to the recognition of other-than-temporary impairments totaled $4.0 million, compared to $10.2 million in the second quarter of 2008.  Second, policyholder benefits decreased, reflecting lower death benefits and a reduction in benefit and contract reserves.  Partially offsetting these, income tax expense increased largely due to higher pretax income.  In addition, operating expenses increased due to higher legal fees and pension costs.  The decrease in
net income for the first six months of 2009 compared to the same period in 2008 was also due to several factors.  Net investment income declined and operating expenses increased during the six months.  The increase in operating expenses reflected higher salaries and benefits, legal fees and pension costs.  Partially offsetting these unfavorable variances, policyholder benefits decreased due to lower death benefits and a reduction in benefit and contract reserves.  Also,
the Company had a net realized loss on investments of $6.1 million in the first six months of 2009 compared to $8.3 million one year earlier.





Cautionary Statement on Forward-Looking Information





This report reviews the Company’s financial condition and results of operations, and historical information is presented and discussed.  Where appropriate, factors that may affect future financial performance are also identified and discussed.  Certain statements made in this report include “forward-looking
statements” that fall within the meaning of the Private Securities Litigation Reform Act of 1995.  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.





Actual results may differ materially from those included in the forward-looking statements as a result of risks and uncertainties.  Those risks and uncertainties include, but are not limited to the risk factors listed in Item 1A. Risk Factors and Cautionary Factors that may Affect Future Results as filed in the Company’s
2008 Form 10-K.


29
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


Consolidated Results of Operations





Summary of Results


The Company’s net income increased $6.4 million or 380% in the second quarter of 2009, versus the same quarter in the prior year, to a total of $8.0 million.  Net income per share increased $0.56 or 400% and was $0.70 per share versus $0.14 per share in the second quarter of 2008.  Net income for the six months
decreased $1.8 million or 34% compared to last year, to $3.5 million.  Net income per share decreased $0.15 or 33% and was $0.30 per share.





The largest factor in the increase in the second quarter of 2009 was a $9.2 million or 20% decline in policyholder benefits.  This decline was due to lower death benefits and a reduction in benefit and contract reserves.  Also contributing to the increase in net income was reduced net realized investment losses, which
totaled $1.4 million versus $8.4 million in the second quarter of 2008.  Partially offsetting these, total premiums decreased $2.3 million or 5% as annuity premiums decreased $2.0 million or 55%.  Operating expenses increased $3.3 million, reflecting higher legal fees and pension costs.  Also, income tax expense increased during the second quarter, reflecting higher pretax income.





The decline in net income for the six months versus the same period one year ago largely resulted from a $4.3 million reduction in net investment income and a $5.1 million increase in operating expenses.  These were partially offset by a $6.0 million decrease in policyholder benefits due to lower death benefits and a reduction
in benefit and contract reserves and reduced realized investment losses.  Realized investment losses were $6.1 million in the first six months of 2009 versus $8.3 million in the same period one year ago.





Sales


The Company measures sales in terms of new premiums and deposits.  Premiums are included in insurance revenues in the Consolidated Statements of Income, while deposits are shown as a Financing Activity in the Consolidated Statements of Cash Flows.





The Company’s marketing plan has been to focus its primary growth strategies on individual life insurance business in both the Individual Insurance and Old American segments.  This growth strategy includes new premiums for individual life products and new deposits for universal life and variable universal life products.  The
marketing plan includes strategies to grow the business through the Company’s existing sales force and the addition of new general agents and agents.  The Company believes that growth in both the number of general agents and agents is essential to this strategy.  Accordingly, the Company has placed an emphasis on recruiting new general agents and agents over the past two years and on providing more training and direct support within the field.  In addition, the growth strategy
also encourages a product mix that includes both life and annuity products.  The Company’s marketing and product strategy also allows the Company the flexibility to identify niches in the existing market environments and to react quickly to be able to take advantage of short-term opportunities when they occur.





The Company also markets a series of group products, as identified in the Group Insurance segment discussed below.  These products include group life, dental, disability, and vision products.  The primary growth strategies for this segment include increased productivity of the existing group representatives and continued
expansion of the group distribution system.  Further, growth is to be supported by the addition of new products to the portfolio, particularly voluntary-type products.





The following table reconciles premiums included in insurance revenues and provides detail by new and renewal business for the second quarters and six months ended June 30, 2009 and 2008.  New premiums are also detailed by product.





Quarter ended June 302009


%


2008


%New premiums:Individual life insurance

$
3,419



5


$
3,258



8Immediate annuities


1,641



(55
)


3,613



29Group life insurance


324



(43
)


566



62Group accident and health insurance


2,382



(17
)


2,872



6Total new premiums


7,766



(25
)


10,309



16Renewal premiums


35,410



1



35,153



(3
)Total premiums

$
43,176



(5
)

$
45,462



1





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 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued





Six Months ended June 302009


%


2008


%New premiums:Individual life insurance

$
6,687



4


$
6,411



7Immediate annuities


6,000



(9
)


6,588



74Group life insurance


775



(28
)


1,080



63Group accident and health insurance


4,781



(13
)


5,484



1Total new premiums


18,243



(7
)


19,563



23Renewal premiums


71,473



2



70,386



(2
)Total premiums

$
89,716



-


$
89,949



2





Consolidated total premiums decreased 5% in the second quarter of 2009 versus the same period in the prior year, as total new premiums declined 25% and total renewal premiums increased 1%.  New premiums decreased $2.5 million, largely due to a $2.0 million decrease in immediate annuities.  While a consistent number of
annuity policies were issued, the dollar amount of the policies was lower during the quarter compared to last year, reflecting in part tighter consumer spending.  New individual life premiums increased 5%, as new premiums in the Old American segment increased 17%.  The increase in new premiums from the Old American segment reflects a combination of expanded distribution and improved agent contracts and enhanced distribution expansion.  New group life premiums decreased 43% and new
group accident and health premiums decreased 17%, largely due to lower dental premiums.  Total renewal premiums increased $0.3 million, largely due to an increase in group life premiums.





Total premiums for the six months were flat compared to one year ago.  Total new premiums decreased 7% while total renewal premiums increased 2%.  Total new individual life premiums increased 4%, reflecting a 13% increase in new individual life premiums at the Old American segment.  Offsetting this increase,
new immediate annuities decreased 9%, new group life insurance premiums declined 28% and new group accident and health insurance premiums declined 13%.  The decrease in new group accident and health premiums was largely due to a 20% decline in new dental premiums at the Group Insurance segment.  The Company periodically adjusts its pricing on the dental product to align with its product profit expectations.  Total renewal premiums increased $1.1 million as group life premiums increased
10% and group accident and health premiums increased 7%.  The increase in group accident and health premiums was largely due to an 8% increase in renewal dental premiums.





The following table reconciles deposits with the Consolidated Statements of Cash Flows and provides detail by new and renewal deposits for the second quarters and six months ended June 30, 2009 and 2008.  New deposits are also detailed by product.





Quarter ended June 302009


%


2008


%New deposits:Universal life insurance

$
2,130



(9
)

$
2,346



(13
)Variable universal life insurance


293



(42
)


505



(2
)Fixed deferred annuities


30,016



410



5,885



4Variable annuities


4,901



(33
)


7,302



2Total new deposits


37,340



133



16,038



-Renewal deposits


31,571



(6
)


33,679



(2
)Total deposits

$
68,911



39


$
49,717



(1
)





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 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued





Six Months ended June 302009


%


2008


%New deposits:Universal life insurance

$
3,960



(16
)

$
4,741



(13
)Variable universal life insurance


697



(31
)


1,009



(28
)Fixed deferred annuities


45,328



296



11,435



(5
)Variable annuities


7,761



(48
)


15,011



17Total new deposits


57,746



79



32,196



2Renewal deposits


65,112



(2
)


66,183



(8
)Total deposits

$
122,858



25


$
98,379



(5
)





Total new deposits increased $21.3 million or 133% in the second quarter of 2009 compared with the second quarter of 2008.  This increase was driven by a $24.1 million or 410% increase in new fixed deferred annuity deposits during the second quarter of 2009.  This increase was largely due to sales of a special rate offering
on deferred annuities during the second quarter of 2009.  The Company highlighted marketing of this product to take advantage of an opportunity that was identified in the marketplace.  The significant sales of these annuities can also be attributed to changes in consumer preferences resulting from the volatility in the equity markets.  This volatility, along with the general effects of the recessionary environment, is also reflected in the reduction in sales of new universal life
deposits, new variable universal life deposits and new variable annuities, which declined 9%, 42% and 33%, respectively in the second quarter compared to one year ago.  However, new universal life and variable annuity deposit sales improved in the second quarter of 2009 compared with the first quarter of 2009.  Total renewal deposits decreased $2.1 million or 6% in the second quarter versus last year.  This reduction resulted from declines in the following products: a 3% or $0.7
million in universal life deposits, 9% in variable universal life deposits, 4% in fixed deferred annuity deposits and 33% or $1.0 million in variable annuity deposits.





Total new deposits increased $25.6 million or 79% in the first six months of 2009, compared to the same period one year ago.  This increase was due to a $33.9 million increase in new fixed deferred annuity deposits, which nearly quadrupled the amount of deposits during the first six months of 2008.  Partially offsetting
this increase, new universal life deposits decreased $0.8 million or 16%, new variable universal life deposits declined $0.3 million or 31% and new variable annuity deposits declined $7.3 million or 48%, compared to one year ago.  Total renewal deposits decreased $1.1 million or 2%, as a 5% increase in fixed deferred annuities was offset by a 2% decline in universal life deposits, a 6% decrease in variable universal life deposits and a 5% decrease in variable annuities.





Insurance Revenues


Insurance revenues consist of premiums from traditional insurance products and contract charges less reinsurance ceded.  In the second quarter of 2009, total insurance revenues decreased $2.3 million or 4%, reflecting a 5% decrease in total premiums and a 1% decrease in contract charges.  These declines were partially
offset by a 2% decline in reinsurance ceded premiums.  Total annuity premiums decreased 55%, and total accident and health premiums decreased 4%.  Total individual life premiums were flat compared with last year.  Total group accident and health premiums decreased 3%, while total group life premiums increased 2%.  Total individual life premiums were flat from both the Individual Insurance segment and the Old American segment.





Total insurance revenues decreased $0.7 million or 1% as contract charges decreased $0.9 million or 2% for the six months.  Total premiums were essentially flat and reinsurance ceded decreased $0.4 million or 2%.  Total accident and health premiums increased 2% but were offset by a 9% decline in total annuity premiums.  Total
individual life premiums were also flat compared to last year.  The increase in accident and health premiums reflected an 8% increase in renewal dental premiums.  Total group life premiums increased 3%.  Total individual life premiums were flat in both the Individual Insurance segment and the Old American segment.





Contract charges consist of fees charged on universal life, deposit or investment products.  Total contract charges declined 1% in the second quarter and 2% in the six months.   These declines can largely be attributed to two factors: lower account balances on variable contracts and the runoff of closed blocks.  The
Company has purchased blocks of policies and companies with the express intent of servicing these blocks to achieve purchased profit streams.  The contract charges on these closed blocks declined 2% in the second quarter and 4% for the six months.


32
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 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


Reinsurance ceded decreased 2% in both the second quarter and six months versus last year.  While reinsurance ceded was relatively flat for the Individual Insurance and Group segments, reinsurance ceded in the Old American segment declined 13% in both the second quarter and six months, reflecting the runoff of a large closed block
of reinsured business.





Investment Revenues


Net investment income is stated net of investment expenses.  Net investment income declined 2% in the second quarter and 5% in the six months compared with the same periods one year ago.  Net investment income results were negatively impacted by changes in the Company’s invested asset base and yields available
on the portfolio.  In addition, expenses associated with investment income declined, favorably impacting results.





Gross investment income is largely composed of interest, dividends and other earnings on fixed maturity securities, equity securities, short-term investments, mortgage loans, real estate and policy loans.  Gross investment income declined $1.3 million or 3% in the second quarter of 2009 and $5.1 million or 5% in the six months,
compared with the same periods in 2008.  These decreases primarily resulted from a decline in gross investment income from reduced investment assets and a decline from lower investment yields.  The decline in investment assets reflects declines in book value due to sales, maturities and calls.  The lower yield includes reductions due to lower rates on new fixed-rate investments and rate resets of floating rate notes, reduced values on equity investments, and maturities and calls
on securities with yields greater than the portfolio average.





Investments in mortgage loans totaled $442.3 million at June 30, 2009, down $3.1 million from December 31, 2008.  Almost all of the mortgages were commercial loans on industrial warehouses and office properties.  Mortgage loans are stated at cost, adjusted for amortization of premium and accrual of discount, less a valuation
reserve for probable losses.  A loan is considered impaired if it is probable that contractual amounts due will not be collected.  Loans in foreclosure and loans considered to be impaired are placed on a non-accrual status.  The mortgage loan valuation reserve was $3.4 million at June 30, 2009, unchanged from December 31, 2008.  The valuation reserve for mortgage loans is maintained at a level believed to be adequate by management to absorb estimated credit losses.  Management’s
periodic evaluation and assessment of the adequacy of the valuation reserve is based on known and inherent risks in the portfolio, historical and industry data, current economic conditions and other relevant factors.  The Company had one loan with past-due scheduled payments of more than 60 days at June 30, 2009.  However, subsequent to quarter-end, the loan was paid off in full in accordance with the terms of the note.  No mortgage loans were delinquent or foreclosed upon and transferred
to real estate investments during 2009 or 2008.  No mortgage loans were delinquent at December 31, 2008.  The Company does not hold mortgage loans of any borrower that exceeds 5% of stockholders’ equity.





Investment income from mortgage loans decreased $0.2 million in the second quarter and $0.3 million in the six months compared to one year ago.  These declines were due to lower rates earned on new loans, lower prepayment fees and a lower total volume of loans.





Real estate investments were $108.4 million at June 30, 2009, compared to $99.6 million at December 31, 2008.  Real estate investments consist principally of office buildings and industrial warehouses that are both in use and under development, and investments in multi-family and single-family residential properties, including
affordable housing properties.  The primary monetary benefit received from investments in affordable housing properties is in the form of tax credits, which primarily serve to reduce current and future tax expense rather than increase investment revenues.  The Company also invests in unimproved land for future development.  Properties have been acquired through individual purchases, build-to-suit and speculative development.  The Company generally maintains its ownership
interest in these properties on a direct and joint venture basis with the long-term intention of earning positive cash flow and income by leasing the properties, along with the expectation of realizing capital appreciation upon sale.  The Company periodically sells certain real estate assets when management believes that the market and timing are perceived to be advantageous.  Investment income on real estate was essentially flat in the second quarter but increased 3% in the first six months
of 2009.  Higher rental income resulted from an increase in occupancy in certain real estate properties.





Short-term investments totaled $63.1 million at June 30, 2009, up from $35.1 million at December 31, 2008.  Short-term invested assets consist primarily of money-market funds.  The increase in short-term investments is a reflection of increased receipts from deposit products and the timing of the placement of new long-term
investments.  Income on short-term investments declined $0.1 million in the second quarter and $0.4 million in the first six months of 2009.  These declines were due to a decline in yields.





Investment income is stated net of investment expenses.  Investment expenses decreased $0.3 million or 12% in the second quarter and $0.8 million or 13% in the six months compared to last year.  Interest expense on short-term notes payable


33
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 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


decreased in both the second quarter and six months compared to last year.  The Company has an investment in the Federal Home Loan Bank from which it is allowed to borrow money at favorable interest rates.  The Company periodically borrows and subsequently reinvests these proceeds.  The Company had increased
its borrowings during the first quarter of 2008 and subsequently reduced these borrowings.  The Company had no notes payable outstanding at June 30, 2009.





The following table provides detail concerning realized investment gains and losses for the second quarters and six months ended June 30, 2009 and 2008.





Quarter ended


Six Months endedJune 30


June 302009


2008


2009


2008Gross gains resulting from:Sales of investment securities

$
2,443


$
-


$
2,443


$
3Investment securities called, put and other


101



647



344



1,195Sales of real estate


-



562



661



576Other investment gains


68



-



74



1Total gross gains


2,612



1,209



3,522



1,775Gross losses resulting from:Sales of investment securities


-



(3
)


-



(448
)Investment securities called, put and other


(2
)


-



(2
)


-Other investment losses


(13
)


-



(14
)


-Total gross losses


(15
)


(3
)


(16
)


(448
)Amortization of DAC and VOBA


(5
)


610



500



609Net realized investment gains, excludingimpairment losses


2,592



1,816



4,006



1,936Net impairment losses recognized in earnings:Total other-than-temporary impairment losses


(4,425
)


(10,225
)


(25,831
)


(10,225
)Portion of loss recognized in comprehensiveincome (loss)


403



-



15,691



-Net impairment losses recognized in earnings


(4,022
)


(10,225
)


(10,140
)


(10,225
)Realized investment losses

$
(1,430
)

$
(8,409
)

$
(6,134
)

$
(8,289
)





The Company recorded net realized investment losses of $1.4 million in the second quarter of 2009 compared with $8.4 million in the second quarter of 2008.  During the second quarter of 2009, investment losses of $4.0 million were due to write-downs of certain investment securities that were considered other-than-temporarily impaired.  These
were partially offset by $2.4 million in gains on the sale of investment securities.  All of this amount was realized on the sale of investment securities that had been previously written down due to other-than-temporary impairments. The financial sector and mortgage-related securities have been hit hard by economic pressures, and economic stress has spread to virtually all sectors and asset classes.  This has resulted in large price dislocations that have affected a broad range of securities
and companies.





Net realized investment losses for the six months totaled $6.1 million in 2009 compared to $8.3 million in 2008.  Investment losses of $10.1 million were due to write-downs of investment securities during the six months, $4.0 million from the second quarter and $6.1 million from the first quarter of 2009.  These were
partially offset by $2.4 million in gains on the sale of investment securities, $0.7 million of investment gains on the sale of real estate and $0.3 million of investment gains realized on securities called, put and other.  The net realized investment loss in the first six months of 2008 was largely due to $10.2 million of write-downs of investment securities.  These were partially offset by $0.6 million of investment gains realized on the sale of real estate and $1.2 million of investment
gains realized on securities called, put and other.





The Company’s analysis of securities for the quarter ended June 30, 2009 resulted in the determination that six fixed-maturity issuers (seven securities) had other-than-temporary impairments and were written down by a combined $4.0 million due to credit impairments.  The aggregate impairment for these securities was $4.4
million, and $0.4 million of this amount was determined to be non-credit and was recognizedin other comprehensive loss.  The total fair value of the affected securities after the write-downs was $15.3 million.





34
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 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


Following is a description of the securities that were written down during the second quarter of 2009:





·
Three securities (from two issuers) were mortgage-backed securities that were written down by a total of $0.1 million.  The significant decline in the subprime and non-conforming mortgage markets and the specific performance of the underlying collateral caused the Company’s cash flow projections to be less than the amortized cost of the
securities and creating an other-than-temporary impairment.  These securities had been previously written down due to reduced projected cash flows from the underlying securitizations.


·
One security was a collateralized debt obligation (CDO) that was written down $0.2 million.  This security has been impacted by the rapid rise in delinquencies and foreclosures in the sub-prime and Alt-A mortgage markets, along with a decline in the fair value of securities issued by financial institutions.  Ongoing CDO liquidations
and investor selling have caused extreme declines in market valuations, regardless of individual security performance.  This security had been written down in previous periods.


·
One security from a print media company that filed for bankruptcy protection in 2008 and is currently under reorganization was written down $1.0 million.  The print media industry is highly cyclical and has experienced weakened consumer demand and competition from electronic media.  This security had been previously written down and
continues to be challenged in its market and industry.


·
One security from a global commercial finance company that provides financial products and advisory services to a range of industry sectors was written down $0.5 million.  This company has been affected by the credit crisis, forcing reduced access to liquidity and higher borrowing costs.  The Company determined that a credit-related
impairment had occurred.


·
One security was from a company that provides custom-tailored financing to private and corporate owners of real estate nationwide and was written down $2.2 million.  During the second quarter of 2009, the Company accepted an offer from this company to exchange this security for a security with a longer-dated maturity with an enhanced second lien
priority in the capital structure.  This security had been written down in a previous period.




The Company’s analysis of securities for the quarter ended March 31, 2009 resulted in the determination that six fixed-maturity issuers (seven securities) had other-than-temporary impairments and were written down by a combined $6.1 million due to credit impairments.  The aggregate impairment for these securities was $21.4
million, and $15.3 million of this amount was determined to be non-credit and was recognized in other comprehensive loss.  The total fair value of the affected securities after the write-downs was $21.0 million.





Following is a description of the securities that were written down during the first quarter of 2009:





·
One security was from a mortgage and financial guaranty insurer that was written down $1.6 million.  Mortgage insurers have suffered from the deterioration in the U.S. housing market and mortgage credit market.  Rising mortgage delinquencies and defaults have resulted in rating downgrades for these insurers.  Recent rating
downgrades, combined with the issuer’s need to raise additional capital to meet future payments contributed to the other-than-temporary impairment.


·
One security was from a trucking company that was written down $1.6 million.  As the trucking industry is highly correlated with the general economy, this company has experienced a reduction in shipping volume as a result of the recession.  This company renegotiated its credit facilities in the first quarter, but new covenants placed
significant requirements on the issuer.  These restrictions, combined with the need to retire longer-term debt, place additional stress on cash resources and led to indications of continued weakening performance that the Company believes are other-than-temporary.


·
One security was from a company that develops, manufactures and markets imaging products that was written down $1.2 million.   This company’s past emphasis was in traditional film, which has been largely surpassed by digital photography.  The decline in the economy has negatively affected sales, as the consumer photography
industry is a discretionary item.  The company’s declining revenues and liquidity position led to the other-than-temporary impairment.


·
Two securities (from one issuer) were mortgage-backed securities that were written down by a total of $0.6 million.  The significant decline in the subprime and non-conforming mortgage markets and the specific performance of the underlying collateral caused the Company’s cash flow projections to be less than the amortized cost of the securities
and creating an other-than-temporary impairment.


·
One security was a mortgage-backed security that was written down $0.1 million.  The significant decline in the subprime and non-conforming mortgage markets and the specific performance of the underlying collateral caused the Company’s cash flow projections to be less than the amortized cost of the security and creating an other-than-temporary
impairment.


35
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued





·
One security was written down $1.0 million as the Company accepted a tender offer on the Company’s holdings from an issuer during the second quarter of 2009.





Following is information regarding the other-than-temporarily impaired write-downs of investment securities by sector for the second quarter of 2009: $2.7 million was from the financial sector; $0.1 million was from corporate private-labeled mortgage-backed securities; $0.2 million was from the asset-backed securities sector; and $1.0 million
was from the communications sector.  The other-than-temporarily impaired write-downs of investment securities by sector for the first quarter of 2009 included: $1.5 million from the financial sector; $0.7 million from corporate private-labeled mortgage-backed securities; $2.7 million from the industrial sector; and $1.2 million from the consumer, non-cyclical sector.





The Company’s analysis of securities for the quarter ended June 30, 2008 resulted in the determination that seven fixed-maturity securities had other-than-temporary impairments.  These securities were written down by a combined $10.2 million in the second quarter.  The total fair value of the affected securities
after the write-downs was $16.8 million.





Following is a description of the securities that were written down during the second quarter of 2008:





·
Three of the securities were written down by a total of $3.3 million, primarily as a result of declines in price and rating agency downgrades on debt issues from issuers that have recently completed leveraged buyout (LBO) transactions.  These LBO transactions greatly increased the debt level of each issuer.  One of these securities
had been written down previously, and the other two securities were below cost by 20% or more for at least six consecutive months.


·
Two securities were collateralized debt obligations (CDOs) and were written down by $2.8 million, primarily due to price declines that had persisted for periods longer than the Company considered temporary.  Both securities were below cost by 20% or more for at least six consecutive months.


·
One security was written down by $3.3 million due to combination of a decline in price that had persisted for a period longer than the Company considered temporary, rating agency downgrades and a debt restructuring during the quarter.


·
One security was written down by $0.8 million due to a combination of a decline in price that had persisted for a period longer than the Company considered temporary and a further deterioration in fair value during the second quarter of 2008.





No other-than-temporary impairments were identified during the first quarter of 2008.





Investment Accounting Policy and Analysis of Investments


The Company seeks to protect policyholders’ benefits by optimizing risk and return on an ongoing basis through managing asset and liability cash flows, monitoring credit risk, avoiding high levels of investments that may be redeemed by the issuer, maintaining sufficiently liquid investments and avoiding undue asset concentrations
through diversification, among other things.  The Company has three primary sources of investment risk:





·
Credit risk, relating to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest;


·
Interest rate risk, relating to the market price and/or cash flow associated with changes in market yield and curves; and


·
Liquidity risk, relating to the risk that investments cannot be converted into cash when needed or that the terms for conversion have a negative effect on the Company.





The Company’s ability to manage these risks is essential to the success of the organization.  In particular, the Company devotes considerable resources to the credit analysis of each new investment and the ongoing credit positions.  The majority of the Company’s investments are exposed to varying degrees
of credit risk.  Credit risk is the risk that the value of the investment may decline due to deterioration in the financial strength of the issuer and that the timely or ultimate payment of principal or interest might not occur.  A default by an issuer usually involves some loss of principal to the investor.  Losses can be mitigated by timely sales of affected securities or by active involvement in a restructuring process.  However, there can be no assurance that the efforts
of an investor will lead to favorable outcomes in a bankruptcy or restructuring. Credit risk is managed primarily through industry, issuer, structure and asset diversification.  In addition, the Company’s Investment Committee is appointed by the Board of Directors and is responsible for establishing investment policies and approving or authorizing all investments.





36
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


The following table provides information regarding fixed maturity securities by sector as of June 30, 2009.





Fair Value





Fair Valueof Securities





of SecuritiesTotal





with Gross


Gross


with Gross


GrossFair


%


Unrealized


Unrealized


Unrealized


UnrealizedBonds:

Value


of Total


Gains


Gains


Losses


LossesU.S. Treasury securities andobligations of U.S. Government

$
61,245



2
%

$
56,334


$
2,559


$
4,911


$
159Federal agencies 1


64,632



3
%


64,632



2,165



-



-Federal agency issuedmortgage-backed securities 1


208,426



9
%


200,144



8,190



8,282



171Subtotal


334,303



14
%


321,110



12,914



13,193



330Corporate obligations:Industrial


404,597



17
%


242,949



10,000



161,648



12,507Energy


199,738



8
%


89,934



5,146



109,804



5,603Technology


37,565



2
%


26,541



1,661



11,024



1,355Communications


76,775



3
%


30,071



1,675



46,704



6,068Financial


351,116



14
%


122,102



5,244



229,014



44,733Consumer


312,810



13
%


169,894



7,206



142,916



9,841Public utilities


279,016



12
%


177,944



10,001



101,072



6,003Subtotal


1,661,617



69
%


859,435



40,933



802,182



86,110Corporate private-labeledmortgage-backed securities


210,954



9
%


22,615



583



188,339



49,856Other


204,935



8
%


26,050



1,186



178,885



30,142Redeemable preferred stocks


4,620



-



-



-



4,620



380Total

$
2,416,429



100
%

$
1,229,210


$
55,616


$
1,187,219


$
166,818








1Federal agency securities are not backed by the full faith and credit of the U.S. Government.








37
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


The following table provides information regarding fixed maturity securities by sector as of December 31, 2008.





Fair Value





Fair Valueof Securities





of SecuritiesTotal





with Gross


Gross


with Gross


GrossFair


%


Unrealized


Unrealized


Unrealized


UnrealizedBonds:

Value


of Total


Gains


Gains


Losses


LossesU.S. Treasury securities andobligations of U.S. Government

$
66,019



3
%

$
59,215


$
2,732


$
6,804


$
399Federal agencies 1


76,209



3
%


76,209



4,074



-



-Federal agency issuedmortgage-backed securities 1


221,522



9
%


167,185



4,193



54,337



635Subtotal


363,750



15
%


302,609



10,999



61,141



1,034Corporate obligations:Industrial


368,713



16
%


142,876



6,501



225,837



27,368Energy


189,740



8
%


68,412



4,261



121,328



15,693Technology


35,317



2
%


22,514



1,109



12,803



3,056Communications


66,057



3
%


20,498



699



45,559



7,677Financial


345,564



15
%


79,198



3,430



266,366



45,793Consumer


279,875



12
%


93,269



4,900



186,606



27,458Public utilities


255,624



11
%


116,550



6,013



139,074



10,918Subtotal


1,540,890



67
%


543,317



26,913



997,573



137,963Corporate private-labeledmortgage-backed securities


219,700



9
%


15,219



90



204,481



52,795Other


204,500



9
%


20,665



545



183,835



37,217Redeemable preferred stocks


14,033



-



5,099



52



8,934



1,089Total

$
2,342,873



100
%

$
886,909


$
38,599


$
1,455,964


$
230,098





1Federal agency securities are not backed by the full faith and credit of the U.S. Government.





At December 31, 2008, the Company had $230.1 million in gross unrealized losses on fixed maturities which were partially offset by $38.6 million in gross unrealized gains.  At June 30, 2009, the Company’s unrealized losses had decreased to $166.8 million and were partially offset by $55.6 million in gross unrealized gains.  This
is a reduction of $80.3 million in net unrealized losses in the six-month period.  Approximately 52% of the gross unrealized losses at June 30, 2009 were in the category of corporate obligations.  The financial sector was the single largest contributor to that category, primarily due to the direct and indirect impact of the troubled residential real estate and mortgage markets.  In addition, corporate private-labeled mortgage-backed securities, also related to the residential real
estate and mortgage industries, accounted for 30% of the gross unrealized losses at June 30, 2009.





The following table identifies fixed maturity securities available for sale by rating.





June 30, 2009


December 31, 2008Fair


%


Fair


%Equivalent S&P Rating


Value


of Total


Value


of TotalAAA


$
649,543



27
%

$
751,995



32
%AA



136,475



6
%


193,074



8
%A



653,349



27
%


652,806



29
%BBB



812,305



33
%


639,948



27
%Total investment grade


$
2,251,672



93
%


2,237,823



96
%BB



92,667



4
%


74,961



3
%Other



72,090



3
%


30,089



1
%Total below investment grade



164,757



7
%


105,050



4
%$
2,416,429



100
%

$
2,342,873



100
%





38
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


As of June 30, 2009, 93% of all fixed maturity securities were investment grade compared to 96% at December 31, 2008.  These percentages reflect the high quality of securities maintained by the Company.





Analysis of Unrealized Losses on Securities


The Company reviews all security investments, particularly those having unrealized losses.  Further, the Company specifically assesses all investments with greater than 10% declines in fair value and, in general, monitors all security investments as to ongoing risk.  These risks are fundamentally evaluated through both
a qualitative and quantitative analysis of the issuer.  The Company also prepares a formal review document no less often than quarterly of all investments with greater than 20% declines in fair value for six months or more, investments that have previously been written down and that remain in an unrealized loss position, and selected investments that have changed significantly from a previous period and that have a decline in fair value greater than 10% of amortized cost.





The Company has a policy and process in place to identify securities that could potentially have an impairment that is other-than-temporary.  This process involves monitoring market events and other items that could impact issuers such as:





·
Intent and ability to make all principal and interest payments when due;


·
Near-term business prospects;


·
Cash flow and liquidity;


·
Credit ratings;


·
Business climate;


·
Management changes;


·
Litigation and government actions; and


·
Other similar factors.





This process also involves monitoring several factors including late payments, downgrades by rating agencies, asset quality, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues.





All securities are reviewed to determine whether impairments should be recorded.  This 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.  Further, detailed analysis is performed for each issue or issues having experienced a formal restructuring or where the security has experienced material deterioration in fair value or where the fair value is less than 80% of amortized cost.





The Company considers relevant facts and circumstances in evaluating whether the impairment of a security is other-than-temporary.  Relevant facts and circumstances considered include but are not limited to:





·
The current fair value of the security as compared to cost;


·
The credit rating of the security;


·
The extent and the length of time the fair value has been below cost;


·
The financial position of the issuer, including the current and future impact of any specific events, material declines in the issuer’s revenues, margins, cash positions, liquidity issues, asset quality, debt levels and income results;


·
Significant management or organizational changes;


·
Significant uncertainty regarding the issuer’s industry;


·
Violation of financial covenants;


·
Consideration of information or evidence that supports timely recovery;


·
The Company’s ability to hold a security to maturity or until it recovers in value;


·
Whether the Company intends to sell the investments and whether it is more likely than not that the Company will be required to sell the investment before recovery of the amortized cost basis; and


·
Other business factors related to the issuer’s industry.





To the extent the Company determines that a security is deemed to be other-than-temporarily impaired, the portion of the impairment that is deemed to be credit is charged to the income statement and the cost basis of the underlying investment is reduced.  The portion of the impairment that is deemed to be non-credit is charged
to 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:


39
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued





·
The risk that the Company’s assessment of an issuer’s ability to meet all of its contractual obligations will change based on changes in the credit characteristics of that issuer;


·
The risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated;


·
The risk that the performance of the underlying collateral for securities could deteriorate in the future and the


·
Company’s credit enhancement levels and recovery values do not provide sufficient protection to the Company’s contractual principal and interest;


·
The risk that fraudulent, inaccurate or misleading information could be provided to the Company’s credit, investment and accounting professionals who determine the fair value estimates and accounting treatment for securities;


·
The risk that new information obtained by the Company or changes in other facts and circumstances may lead the Company to change its intent to hold the security to maturity or until it recovers in value;


·
The risk that the facts and circumstances change such that it becomes more likely than not that the Company will be required to sell the investment before recovery of the amortized cost basis; and


·
The risk that the methodology or assumptions used to develop estimates of the portion of impairments due to credit prove, over time, to be inaccurate or insufficient.





Any of these situations could result in a charge to income in a future period.  To the extent the Company determines that a security is deemed to be other-than-temporarily impaired, the portion of the impairment that is deemed to be credit is charged to the income statement and the cost basis of the underlying investment is reduced.  The
portion of the impairment that is deemed to be non-credit is charged to other comprehensive income (loss).





The Company may selectively determine, as part of its individual investment assessment process in relation to specific investments, that it no longer intends to hold a specific issue to its maturity.  If the Company makes this determination and the fair value is less than the cost basis, an analysis of the fair value of the investment
is performed and the investment is written down to the fair value and an other-than-temporary impairment is recorded on this particular position.  Subsequently, the Company seeks to obtain the best possible outcome available for this specific issue and records an investment gain or loss at the disposal date.





Concerns arose during the second half of 2007 regarding subprime mortgage loan defaults.  These difficulties deepened and have expanded through 2009.  Market dislocations have exacerbated credit issues as some historically liquid markets, such as asset-backed commercial paper, auction-rate securities and bank financing
have contracted.  Demand for securitized investments has also fallen significantly.  The Company closely monitors its investments in securities classified as subprime.  Subprime securities include all bonds or portions of bonds where the underlying collateral is made up of home equity loans or first mortgage loans to borrowers whose credit scores at the time of origination were lower than the level recognized in the market as prime.  The Company’s classification of
subprime does not include Alt-A or jumbo loans, unless the collateral otherwise meets the preceding definition.  At June 30, 2009, the Company had investments with subprime residential mortgage exposure of $17.7 million and a related $13.6 million unrealized loss.  This exposure amounted to less than 1% of the Company’s invested assets.  These investments fall under the Company’s normal process for evaluation of other-than-temporarily impaired securities.





40
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


The Company has a significant level of non-U.S. Agency structured securities.  Structured securities include asset-backed, residential mortgage-backed securities, along with collateralized debt obligations, collateralized mortgaged obligations and other collateralized obligations.  The Company monitors these securities
through a combination of an analysis of vintage, credit ratings and other means.





Identified below are tables that divide these investment types among vintage and credit ratings as of June 30, 2009.





Carrying


Amortized


UnrealizedValue


Cost


Losses


%Residential & Non-agency MBS1Investment Grade:Vintage 2003 and earlier

$
93,918


$
98,014


$
(4,096
)


5
%2004


65,638



80,621



(14,983
)


20
%2005


29,285



42,715



(13,430
)


18
%2006


4,400



5,881



(1,481
)


2
%2007


-



-



-



-Total investment grade


193,241



227,231



(33,990
)


45
%Below Investment Grade:Vintage 2003 and earlier


-



-



-



-2004


-



-



-



-2005


27,267



50,944



(23,677
)


31
%2006


2,556



6,615



(4,059
)


5
%2007


2,944



5,993



(3,049
)


4
%Total below investment grade


32,767



63,552



(30,785
)


40
%Other Structured Securities:Investment grade


105,280



111,763



(6,483
)


9
%Below investment grade


40,805



44,974



(4,169
)


6
%Total other


146,085



156,737



(10,652
)


15
%Total structured securities

$
372,093


$
447,520


$
(75,427
)


100
%








1This chart accounts for all vintages owned by the Company.





41
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


Identified below are tables that divide these investment types amount vintage and credit ratings as of December 31, 2008.





Carrying


Amortized


UnrealizedValue


Cost


Losses


%Residential & Non-agency MBS1Investment Grade:Vintage 2003 and earlier

$
105,722


$
113,645


$
(7,923
)


9
%2004


63,843



81,142



(17,299
)


21
%2005


61,672



94,517



(32,845
)


39
%2006


7,740



12,890



(5,150
)


6
%2007


2,005



2,005



-



-Total investment grade


240,982



304,199



(63,217
)


75
%Below Investment Grade:Vintage 2003 and earlier


-



-



-



-2004


-



-



-



-2005


-



-



-



-2006


-



-



-



-2007


-



-



-



-Total below investment grade


-



-



-



-Other Structured Securities:Investment grade


135,625



156,232



(20,607
)


24
%Below investment grade


3,270



4,031



(761
)


1
%Total other


138,895



160,263



(21,368
)


25
%Total structured securities

$
379,877


$
464,462


$
(84,585
)


100
%








1This chart accounts for all vintages owned by the Company.








42
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


The following table provides information regarding investment securities with unrealized losses on fixed maturity and equity security investments available for sale, as of June 30, 2009.





Less than 12 months


12 months or longer


TotalFair


Unrealized


Fair


Unrealized


Fair


UnrealizedBonds:

Value


Losses


Value


Losses


Value


LossesU.S. Treasury securities andobligations of U.S. Government

$
1,701


$
37


$
3,210


$
122


$
4,911


$
159Federal agencies 1


-



-



-



-



-



-Federal agency issuedmortgage-backed securities 1


2,977



104



5,305



67



8,282



171Subtotal


4,678



141



8,515



189



13,193



330Corporate obligationsIndustrial


65,702



2,900



95,946



9,607



161,648



12,507Energy


44,762



2,747



65,042



2,856



109,804



5,603Technology


649



27



10,375



1,328



11,024



1,355Communications


16,818



2,452



29,886



3,616



46,704



6,068Financial


38,657



7,884



190,357



36,849



229,014



44,733Consumer


27,207



1,732



115,709



8,109



142,916



9,841Public utilities


65,761



4,069



35,311



1,934



101,072



6,003Total corporate obligations


259,556



21,811



542,626



64,299



802,182



86,110Corporate private-labeledmortgage-backed securities


2,944



3,050



185,395



46,806



188,339



49,856Other


58,288



3,593



120,597



26,549



178,885



30,142Redeemable preferred stocks


-



-



4,620



380



4,620



380Fixed maturity securities


325,466



28,595



861,753



138,223



1,187,219



166,818Equity securities:Financial


3,165



1,579



5,653



1,651



8,818



3,230Other


1,415



11



-



-



1,415



11Equity securities


4,580



1,590



5,653



1,651



10,233



3,241Total

$
330,046


$
30,185


$
867,406


$
139,874


$
1,197,452


$
170,059





1Federal agency securities are not backed by the full faith and credit of the U.S. Government.








43
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


The following table provides information regarding investment securities with unrealized losses on fixed maturity and equity security investments available for sale, as of December 31, 2008.





Less than 12 months


12 months or longer


TotalFair


Unrealized


Fair


Unrealized


Fair


UnrealizedBonds:

Value


Losses


Value


Losses


Value


LossesU.S. Treasury securities andobligations of U.S. Government

$
1,591


$
260


$
5,213


$
139


$
6,804


$
399Federal agencies 1


-



-



-



-



-



-Federal agency issuedmortgage-backed securities 1


28,933



419



25,404



216



54,337



635Subtotal


30,524



679



30,617



355



61,141



1,034Corporate obligations:Industrial


152,873



11,301



72,964



16,067



225,837



27,368Energy


104,230



12,571



17,098



3,122



121,328



15,693Technology


5,828



1,352



6,975



1,704



12,803



3,056Communications


27,885



3,584



17,674



4,093



45,559



7,677Financial


171,513



18,408



94,853



27,385



266,366



45,793Consumer


124,295



14,605



62,311



12,853



186,606



27,458Public utilities


124,053



8,339



15,021



2,579



139,074



10,918Total corporate obligations


710,677



70,160



286,896



67,803



997,573



137,963Corporate private-labeledmortgage-backed securities


114,480



15,261



90,001



37,534



204,481



52,795Other


125,491



16,342



58,344



20,875



183,835



37,217Redeemable preferred stocks


8,934



1,089



-



-



8,934



1,089Fixed maturity securities


990,106



103,531



465,858



126,567



1,455,964



230,098Equity securities:Financial


852



148



5,693



1,610



6,545



1,758Other


-



-



-



-



-



-Equity securities


852



148



5,693



1,610



6,545



1,758Total

$
990,958


$
103,679


$
471,551


$
128,177


$
1,462,509


$
231,856





1Federal agency securities are not backed by the full faith and credit of the U.S. Government.





At June 30, 2009, $139.9 million or 82% of the gross unrealized losses on fixed maturity and equity securities was attributable to securities having gross unrealized losses of 12 months or longer, compared to $128.2 million or 55% at December 31, 2008.  The largest category was corporate obligations, which accounted for 46% at
June 30, 2009 compared to 53% at December 31, 2008.





At June 30, 2009, $30.2 million or 18% of the gross unrealized losses on fixed maturity and equity securities was attributable to securities having gross unrealized losses of less than 12 months.  This compares to $103.7 million or 45% at December 31, 2008.  Corporate obligations were the largest category, representing
72% and 68%, at June 30, 2009 and December 31, 2008, respectively.





In addition, the Company also considers as part of its monitoring and evaluation process the length of time a security is below cost.  At June 30, 2009, the Company had unrealized losses on its investment portfolio for fixed maturities and equity securities as follows:




·
101 security issues representing 28% of the issues with unrealized losses, including 78% being rated as investment grade, were below cost for less than one year;


·
169 security issues representing 46% of the issues with unrealized losses, including 90% being rated as investment grade, were below cost for one year or more and less than three years; and,


·
97 security issues representing 26% of the issues with unrealized losses, including 85% being rated as investment grade, were below cost for three years or more.





At December 31, 2008, the Company had unrealized losses on its investment portfolio for fixed maturities and equity securities as follows:


44
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued





·
293 security issues representing 61% of the issues with unrealized losses, including 94% being rated as investment grade, were below cost for less than one year;


·
65 security issues representing 13% of the issues with unrealized losses, including 88% being rated as investment grade, were below cost for one year or more and less than three years; and,


·
125 security issues representing 26% of the issues with unrealized losses, including 92% being rated as investment grade, were below cost for three years or more.





The total number of fixed maturities and equity securities with unrealized losses decreased from 483 at December 31, 2008 to 367 at June 30, 2009.  Total security issues that were below cost for one year or more and less than three years increased 160%, as the economic downturn has continued.  The number of security
issues that were below cost for three years or more decreased 22%, as several of these securities have been written down or sold by the Company.





45
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


The following table summarizes the fixed maturity securities with unrealized losses as of June 30, 2009 and December 31, 2008 by ratio of unrealized loss to amortized cost.





June 30, 2009GrossAmortized


Fair


UnrealizedSecurities owned without realized impairment:

Cost


Value


LossesUnrealized losses of 10% or less

$
825,440


$
791,867


$
33,573Unrealized losses of 20% or less and greater than 10%


240,370



206,324



34,046Subtotal


1,065,810



998,191



67,619Unrealized losses greater than 20% :Investment gradeLess than six months


46,541



34,703



11,838Six months or more and less than twelve months


138,676



92,507



46,169Twelve months or greater


12,523



6,340



6,183Total investment grade


197,740



133,550



64,190Below investment gradeLess than six months


3,000



1,262



1,738Six months or more and less than twelve months


27,933



19,117



8,816Twelve months or greater


3,986



2,515



1,471Total below investment grade


34,919



22,894



12,025Unrealized losses greater than 20%


232,659



156,444



76,215Subtotal

$
1,298,469


$
1,154,635


$
143,834Securities owned with previous realized impairment:Unrealized losses of 10% or less

$
1,152


$
1,141


$
11Unrealized losses of 20% or less and greater than 10%


3,432



3,065



367Subtotal


4,584



4,206



378Unrealized losses greater than 20% :Investment gradeLess than six months


10,245



5,347



4,898Six months or more and less than twelve months


5,255



3,918



1,337Twelve months or greater


-



-



-Total investment grade


15,500



9,265



6,235Below investment gradeLess than six months


31,527



16,351



15,176Six months or more and less than twelve months


3,957



2,762



1,195Twelve months or greater


-



-



-Total below investment grade


35,484



19,113



16,371Unrealized losses greater than 20%


50,984



28,378



22,606Subtotal

$
55,568


$
32,584


$
22,984Total unrealized losses

$
1,354,037


$
1,187,219


$
166,818








46
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued





December 31, 2008GrossAmortized


Fair


UnrealizedSecurities owned without realized impairment:

Cost


Value


LossesUnrealized losses of 10% or less

$
885,917


$
842,348


$
43,569Unrealized losses of 20% or less and greater than 10%


397,964



340,187



57,777Subtotal


1,283,881



1,182,535



101,346Unrealized losses greater than 20% :Investment gradeLess than six months


295,534



206,441



89,093Six months or more and less than twelve months


42,755



25,613



17,142Twelve months or greater


-



-



-Total investment grade


338,289



232,054



106,235Below investment gradeLess than six months


45,631



28,490



17,141Six months or more and less than twelve months


4,547



2,098



2,449Twelve months or greater


-



-



-Total below investment grade


50,178



30,588



19,590Unrealized losses greater than 20%


388,467



262,642



125,825Subtotal

$
1,672,348


$
1,445,177


$
227,171Securities owned with previous realized impairment:Unrealized losses of 10% or less

$
2,644


$
2,454


$
190Unrealized losses of 20% or less and greater than 10%


4,031



3,270



761Subtotal


6,675



5,724



951Unrealized losses greater than 20% :Investment gradeLess than six months


6,476



4,635



1,841Six months or more and less than twelve months


-



-



-Twelve months or greater


-



-



-Total investment grade


6,476



4,635



1,841Below investment gradeLess than six months


563



428



135Six months or more and less than twelve months


-



-



-Twelve months or greater


-



-



-Total below investment grade


563



428



135Unrealized losses greater than 20%


7,039



5,063



1,976Subtotal

$
13,714


$
10,787


$
2,927Total unrealized losses

$
1,686,062


$
1,455,964


$
230,098





Total unrealized losses on fixed maturity securities at June 30, 2009 were $166.8 million.  The Company segments these unrealized losses into those on which other-than-temporary impairments have previously been recorded and those that have not been previously written down.





Following is a discussion regarding those securities with unrealized losses on which other-than-temporary impairments have not been recorded.  Total securities owned without other-than-temporary impairment equaled 86% of total unrealized losses.  These securities are further segmented into three primary categories.  The
first category includes total unrealized losses of 10% or less of amortized cost, which totaled $33.6 million or 23% of the total unrealized losses on fixed maturity securities without other-than-temporary impairments.  The second category reflects total unrealized losses of 20% or less and greater than 10%.  This category totaled $34.0 million or 24% of the total unrealized losses without other-than-temporary impairments.  The third category includes total unrealized losses greater
than 20%.  This category totaled $76.2 million or 53% of the total securities without other-than-temporary impairments.





47
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


All securities with unrealized losses greater than 20% are also monitored based upon whether the securities are investment grade or below investment grade.  Securities in the investment grade category had $64.2 million in unrealized losses, while securities rated below investment grade had $12.0 million in unrealized losses at
June 30, 2009.





In addition, securities having unrealized losses greater than 20% are further evaluated based upon the length of time that they have been above the 20% unrealized loss threshold.  Securities in this classification are divided into three different categories, including less than six months, six months or more and less than twelve
months, and twelve months or greater.  The Company had investment grade securities with unrealized losses of greater than 20% that totaled $11.8 million and $46.2 million for less than six months and six or more and less than twelve-month periods, respectively, at June 30, 2009.  The Company had investment grade securities with unrealized losses of greater than 20% for twelve months or greater that totaled $6.2 million.  The Company also had below investment grade securities with
unrealized losses of greater than 20% that totaled $1.7 million for less than six months.  The Company had below investment grade securities with unrealized losses of greater than 20% for six months or more and less than twelve months that totaled $8.8 million at June 30, 2009.  Below investment grade securities with unrealized losses greater than 20% for twelve months or greater totaled $1.5 million.





Following is a discussion regarding those securities with unrealized losses on which other-than-temporary impairments have been recorded as of June 30, 2009.  Total unrealized losses of 20% or less and greater than 10% were $0.4 million or 2% of the total unrealized losses on securities with other-than-temporary impairments.  Total
unrealized losses greater than 20% were $22.6 million or 98% of the total securities with other-than-temporary impairments.





Securities in the investment grade category had $6.2 million in unrealized losses, while securities rated below investment grade had $16.4 million in unrealized losses at June 30, 2009.  The Company had investment grade securities with unrealized losses of greater than 20% that totaled $4.9 million and $1.3 million for less than
six months and six or more and less than twelve-month periods, respectively, at June 30, 2009.  The Company also had below investment grade securities with unrealized losses of greater than 20% that totaled $15.2 million for less than six months.  The Company had below investment grade securities with unrealized losses of greater than 20% for six months or more and less than twelve months that totaled $1.2 million at June 30, 2009.





Total unrealized losses on fixed maturity securities at December 31, 2008 were $230.1 million.  Following is a discussion regarding those securities with unrealized losses on which other-than-temporary impairments have not been recorded.  The Company had investment grade securities with unrealized losses of greater than
20% that totaled $89.1 million for less than six months at December 31, 2008.  This represented 71% of total unrealized losses greater than 20% for this category.  Investment grade securities with unrealized losses for six months or more and less than twelve-months totaled $17.1 million.  The Company also had below investment grade securities with unrealized losses of greater than 20% that totaled $17.1 million for less than six months and $2.4 million for six months or more and
less than twelve-month periods.  The Company had no securities with unrealized losses of greater than 20% for twelve months or greater at December 31, 2008.





Following is a discussion regarding those securities with unrealized losses on which other-than-temporary impairments had been recorded as of December 31, 2008.  The Company had investment grade securities with unrealized losses of greater than 20% that totaled $1.8 million for less than six months at December 31, 2008.  The
Company also had below investment grade securities with unrealized losses of greater than 20% that totaled $0.1 million for less than six months.




The Company had no securities with unrealized losses of greater than 20% for twelve months or greater at December 31, 2008.





48
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


The following table provides information on fixed maturity securities with gross unrealized losses by rating as of June 30, 2009.





GrossFair


%


Unrealized


%Equivalent S&P Rating


Value


of Total


Losses


of TotalAAA


$
279,791



24
%

$
40,218



24
%AA



40,125



3
%


7,738



5
%A



233,776



20
%


29,421



17
%BBB



488,744



41
%


53,487



32
%Total investment grade



1,042,436



88
%


130,864



78
%BB



81,451



7
%


16,161



10
%Other



63,332



5
%


19,793



12
%Total below investment grade



144,783



12
%


35,954



22
%$
1,187,219



100
%

$
166,818



100
%





The following table provides information on fixed maturity securities with gross unrealized losses by rating as of December


31, 2008.





GrossFair


%


Unrealized


%Equivalent S&P Rating


Value


of Total


Losses


of TotalAAA


$
400,841



28
%

$
65,896



29
%AA



79,814



5
%


12,218



5
%A



384,484



26
%


41,718



18
%BBB



499,230



34
%


84,121



36
%Total investment grade


$
1,364,369



93
%

$
203,953



88
%BB



67,694



5
%


17,742



8
%Other



23,901



2
%


8,403



4
%Total below investment grade



91,595



7
%


26,145



12
%$
1,455,964



100
%

$
230,098



100
%





As of June 30, 2009, 88% of the fair value of fixed maturity securities with gross unrealized losses were investment grade compared to 93% at December 31, 2008.  In addition, 78% of gross unrealized losses on fixed maturity securities with unrealized losses were from investment grade securities as of June 30, 2009, compared to
88% at December 31, 2008.  These declines are a direct result of an 18% decline in total fixed maturity securities in an unrealized loss position during 2009.





49
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


The following tables provide the distribution of maturities for fixed maturity investment securities available for sale with unrealized losses as of June 30, 2009 and December 31, 2008.  Expected maturities may differ from these contractual maturities since borrowers may have the right to call or prepay obligations.





June 30, 2009GrossFixed maturity security securities

Fair


Unrealizedavailable for sale:

Value


LossesDue in one year or less

$
29,795


$
2,647Due after one year through five years


216,160



16,134Due after five years through ten years


384,547



42,533Due after ten years


355,477



55,097Total


985,979



116,411Mortgage and asset-backed securities


196,620



50,027Redeemable preferred stocks


4,620



380Total

$
1,187,219


$
166,818





December 31, 2008GrossFixed maturity security securities

Fair


Unrealizedavailable for sale:

Value


LossesDue in one year or less

$
46,704


$
1,188Due after one year through five years


324,178



42,218Due after five years through ten years


472,169



73,157Due after ten years


343,121



59,002Total


1,186,172



175,565Mortgage and asset-backed securities


260,858



53,444Redeemable preferred stocks


8,934



1,089Total

$
1,455,964


$
230,098





Following is a discussion of securities whose fair value had been less than 80% of amortized cost for at least six months at June 30, 2009. The Company has evaluated 48 fixed-maturity securities from 42 issuers in this category, and prepared detailed analyses on these positions.  The Company has considered a wide variety of factors
to determine that these positions were not other-than-temporarily impaired.





·
Nine securities from seven issuers are subprime or Alt-A mortgage-backed securities.  Mortgage-backed securities have suffered indiscriminate price depreciation in the current market, regardless of individual performance or vintage.  All of these securities continue to perform within their contractual obligations.


·
One security is a senior tranche of an asset-backed security structure backed primarily by subprime mortgages on residential properties.  This security has also been affected by the price depreciation in the current market but continues to perform within its contractual obligations.


·
Two securities are commercial mortgage-backed securities (CMBS).  The credit markets have experienced a dislocation that has impacted the price performance of all CMBSs.  However, these securities continue to perform within their contractual obligations.


·
One security is mortgage-backed security backed by subprime collateral.  As previously stated, mortgage-backed securities have suffered indiscriminate price depreciation in the current market, regardless of individual performance or vintage.  This security has a monoline insurance guarantee that is performing according to the terms
of the security.


·
Nine securities from seven issuers from financial institutions that have been impacted by the housing and mortgage credit crisis.  The government has supported these institutions through TARP (Troubled Assets Relief Program) funds.  All of these securities continue to perform within their contractual obligations.


·
One security is from a financial institution that has been impacted by the housing and mortgage credit crisis that has not received TARP assistance.  This security continues to perform within its contractual obligations.


·
Six securities from five issuers are trust preferred securities from issuers that have also been negatively impacted by the housing and mortgage credit crisis and have received TARP funds.  All of these securities continue to perform within their contractual obligations.


·
One security is a subprime asset backed security.  Rising delinquencies and defaults in the subprime and non-conforming mortgage markets have resulted in a severe decline in the market value for these securities.  However, this security continues to perform within its contractual obligations.


50
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued





·
Three securities are from international banking institutions that have been negatively impacted by the effects of both the global credit deterioration and the U.S. housing and mortgage credit crisis.  However, the credit losses have not risen to the level of some of the U.S.-domiciled banking groups, and all have sufficient capital at this time.


·
One security is from a company that sells consumer goods.  Lower sales resulting from a cyclical decline in consumer spending has impacted earnings and cash flows.  However, this security continues to perform within its contractual obligations.


·
One security is an operator of hospital facilities that was part of a leveraged buyout in 2006.  This company is in a strong operating and competitive position and it is paying down its debt.


·
One security is from a consumer goods company related to financial institutions that is highly concentrated in a mature and declining industry.  Traditionally, this company’s emphasis was in producing checks.  Due to the usage of debit and credit cards and electronic bill payment, the demand for checks has declined significantly.  Accordingly,
this company has diversified into manufacturing other products, has good cash availability and no near-term debt due.


·
Three securities from two issuers are real estate investment trusts.  Credit markets have experienced dislocation that has impacted price performance of residential and commercial real estate assets.  These companies maintain unencumbered high quality, well located properties that could be used as collateral for additional liquidity
or creditor support, if needed.


·
One security is from a company that manufactures and sells home improvement and building products.  The residential building and remodeling industry has suffered unparalleled declines due to the housing crisis, resulting in revenue declines.  However, it has favorable capital and liquidity positions.


·
One security is from a company in the office equipment industry.  This is a mature industry that has experienced lower sales due to the decline in the economy.  However, this company continues to generate positive cash flows and achieve debt reduction.


·
One security is a senior tranche of an asset backed security from a company that originates and securitizes new and used automobile loans.  While this company is experiencing elevated credit losses and limited access to funding sources due to the credit crisis, it has continued to execute private securitizations.


·
Two securities are collateralized debt obligations (CDO) that have been impacted by the rapid rise in delinquencies and foreclosures in the sub-prime and Alt-A mortgage markets, along with a decline in the fair value of securities issued by financial institutions.  Ongoing CDO liquidations and investor selling have caused extreme declines in
market valuations, regardless of individual security performance.  Both of these securities continue to perform within their contractual obligations.


·
One security is from a company that operates in the book and magazine publishing industries.  These industries are highly competitive and moderately cyclical and have experienced declines related to the economic downturn.  However, this security continues to perform within its contractual obligations.


·
One security is from a diversified, global company that provides a diverse range of products and services for a wide range of industries including air conditioning systems services, industrial technologies and security technologies. While these industries have been negatively
impacted by the downturn in construction and industrial production, this security continues to perform within its contractual obligations.





·
One security is from a company that participates in a variety of technology sectors including mobile phones, broadband infrastructure and wireless communications infrastructure products.  This company faces strong competition and is challenged to keep up with new technology and the rapid innovation of its competitors.  However, this
security continues to perform within its contractual obligations.


·
One security is from a company involved in entertainment media, outdoor advertising and book publishing.  This company is largely dependent on advertising revenue and is challenged by the shift between advertising in traditional media to digital media.  However, this security continues to perform within its contractual obligations.





The Company has written down certain investments in previous periods.  Securities written down and still owned at June 30, 2009 had a fair value of $42.5 million with a net unrealized loss of $23.6 million, including the impact of the cumulative effect of change in accounting principle.  Comparatively, securities written
down and still owned at December 31, 2008 had a carrying value of $29.2 million and a net unrealized loss of $2.2 million.


51
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued





The Company evaluated the current status of all previously written-down investments to determine whether the Company continues to believe that these investments were still credit-impaired to the extent previously recorded.  The Company’s evaluation process is similar to its impairment evaluation process.  However,
if evidence exists that the Company believes that it will receive all or a materially greater portion of its contractual maturities from securities previously written down, the accretion of income is adjusted in accordance with Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3).”  Accordingly, in the second quarter of 2009, the Company changed its evaluation of one investment.  The Company believes that it will receive
all contractual maturities due on this investment.  This security matures in less than one year and is from an issuer that designs, manufactures and services cars and trucks and provides vehicle-related financing, leasing and insurance.





The Company does not have a material amount of direct or indirect guarantees for the securities in its investment portfolio.  The Company’s direct and indirect exposure to financial guarantors totaled $4.9 million and $46.4 million, respectively at June 30, 2009.  The combined total of direct and indirect exposure
was less than 2% of the Company’s investment assets at June 30, 2009.





Other Revenues


Other revenues consist primarily of supplemental contract considerations, policyholder dividends left with the Company to accumulate, income received on the sale of low income housing tax credits (“LIHTC credits”) and income from the Company’s in-house broker dealer, SFS.  Other revenues decreased $0.2 million
or 7% in the second quarter and $0.4 million or 7% in the six months compared to last year.  The decrease that occurred in the second quarter of 2009 was due to a reduction in fees received from variable product managers, resulting from lower sales of variable products and to lower policyholder dividends left with the Company.  These decreases were partially offset by an increase in revenue due to additional sales of LIHTC investments.  The decrease in the six months was also due
to the reduction in fees received from variable product managers.  These fees are asset-based charges and will fluctuate with the value of the investments in the separate accounts.  In addition, the decrease was also due to lower policyholder dividends left with the Company and lower sales at the Company’s broker dealer from the decline in the financial markets.  These were partially offset by the additional sales of LIHTC investments.





Policyholder Benefits


Policyholder benefits consist of death benefits (mortality), annuity benefits, accident and health benefits, surrenders and the associated increase or decrease in reserves for future policy benefits.  The largest component of policyholder benefits was death benefits for the periods presented.  Death benefits reflect
mortality results.  Mortality will fluctuate from period-to-period and has remained within pricing expectations for the periods presented.





Policyholder benefits decreased $9.2 million or 20% in the second quarter and $6.0 million or 7% in the six months compared to a year ago.  These declines were largely due to lower death benefits and a reduction in benefit and contract reserves.  Mortality, as previously stated, fluctuates from period-to-period.  During
the second quarter, the Company’s mortality experience was favorable compared to other periods presented and resulted in a reduction of death benefits paid in both the second quarter and six months.  The reduction in benefit and contract reserves reflects, in part, the decline in premiums.  In addition, other benefits, including group accident and health, disability, supplemental contracts, annuities and matured endowments, were flat in the second quarter and increased $1.2 million or
4% in the six months.  The increase in other benefits in the six months was largely due to higher disability benefits.





The Company has a guaranteed minimum withdrawal benefit (GMWB) rider for variable annuity contracts that is considered to be a financial derivative and, as such, is accounted for at fair value.  Under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 157, “Fair Value Measurements,”
the Company determines the fair value of the GMWB rider using a risk-neutral valuation method.   At June 30, 2009 the fair value decreased, compared to the fair values at both March 31, 2009 and December 31, 2008 due to favorable returns in the capital markets, decreases in market volatility, increases in risk-free (swap) rates and changes in the reference spread used for issuer discount under SFAS  No. 157.  Accordingly, these annuity riders had decreases in value of $1.3 million in
the second quarter and $1.6 million in the first six months of 2009.





Interest Credited to Policyholder Account Balances


Interest is credited to policyholder account balances subject to minimum guaranteed rates according to terms of the policies or contracts.  Interest credited to policyholder account balances was essentially flat in the second quarter and decreased $0.5 million or 1% in the six months compared with a year ago.  While
policyholder account balances increased during the second quarter of 2009, balances were lower than at June 30, 2008.  Amounts credited are a function of account balances and current


52
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


period crediting rates.  As account balances decline, so will the amount of interest credited to policyholder account balances.  Interest is credited to policyholder account balances for universal life, fixed deferred annuities and other investment products.





Amortization of Deferred Acquisition Costs (DAC) and Value of Business Acquired (VOBA)


Interest-sensitive life insurance and annuity products amortize DAC in proportion to expected future gross profits.  Profit expectations are based upon assumptions of future interest spreads, mortality margins, expense margins and policy and premium persistency experience.  At least annually, a review is performed of
the assumptions related to profit expectations.  If it is determined the assumptions should be revised, the impact of the changes is recorded as a change in DAC amortization in the current period due to an unlocking adjustment.  A similar analysis is performed on VOBA at least annually and, if necessary, adjustments are made in the current period VOBA amortization.





The amortization of DAC increased $1.9 million or 35% in the second quarter and $3.2 million or 21% in the six months.  The increase for the second quarter was largely due to unlocking in the prior year.  While no unlocking adjustment was made during 2009, DAC amortization was reduced by $3.0 million due to unlocking
during the second quarter of 2008.  The largest factor in the increase for the six months was also due to unlocking in the prior year.





VOBA is amortized in concert with each purchased block of business.  Generally, as policies run off, the amortization will decline over time.  The amortization of VOBA decreased $2.8 million or 138% during the second quarter and $2.7 million or 70% in the six months.  These decreases were largely due to two
factors.  First, the Company refined its method for calculating VOBA from a premium-based method to a volume-based method for certain traditional life products during the second quarter of 2009.  Since the establishment of the VOBA, the measure of premium in force has been unstable from period to period due to the way the premium in force is identified and captured. This has resulted in a corresponding volatile amortization of the VOBA unrelated to the actual run off of the in force policies.  Accordingly,
the Company refined its method of estimating VOBA to the use of volume in force instead of premium in force.  Second, the unlocking adjustment on interest-sensitive products in the second quarter of 2009 decreased VOBA amortization by $0.2 million, whereas the unlocking adjustment in the second quarter of 2008 increased VOBA amortization by $0.2 million.





Operating Expenses


Operating expenses consist of commissions and production allowances, net of the capitalization of commission and production allowances, and expenses from the Company’s operations.  Operating expenses increased $3.3 million or 15% in the second quarter and $5.1 million or 11% in the six months compared to last year.  The
increase in the second quarter was largely due to two factors: 1) increased legal fees, largely reflecting the settlement of an existing case; and 2) an increase in pension costs of $2.5 million.  The increase in the six months can be mainly attributed to two factors.  The first factor was higher salaries and benefits, which increased $3.4 million compared to one year ago, resulting from a reduction of staff in an effort to reduce future operating costs and from increased pension
costs.  Second, legal fees increased $1.6 million, reflecting the increase in litigation costs.




Income Taxes


The second quarter income tax expense was $4.4 million or 36% of income before tax for 2009, versus $0.6 million or 25% of income before tax for the prior year period.  The income tax expense for the six months ended June 30, 2009 was $2.0 million or 37% of income before tax, versus $2.6 million or 33% of income before tax for
the prior year period.





The effective income tax rate in the second quarter of 2009 was greater than the prevailing corporate federal income tax rate of 35%.  Favorable permanent differences, primarily from the dividends received deduction, resulted in a benefit of approximately 1% of income before tax.  This favorable difference was offset
by an expense of 2% of income before tax related to the Company’s investments in affordable housing and an increase in the tax contingency.  The effective income tax rate in the six months ended June 30, 2009 was greater than the prevailing corporate income tax rate of 35%.  This was primarily due to an expense of 5% of income before tax related to the Company’s investments in affordable housing and an increase in the tax contingency exceeding the benefit of 3% of income before
tax related to the permanent differences.





The effective income tax rate in the second quarter of 2008 was lower than the prevailing corporate federal income tax rate of 35%, primarily due to a change in projected effective tax rate, the dividends received deduction and other permanent deductions.  The primary reason for the change in the projected effective tax rate was
a revision to the projected income estimate for the year ending December 31, 2008.  This estimate of earnings is one part of the income tax expense calculation for each reporting period.  This determination resulted in a lower projected effective tax rate for the year, which reduced income tax expense for the second quarter.  The impact of the change in projected effective tax rate was a benefit of approximately 6% of income before tax.  The combined impact of the dividends
received deduction and other permanent differences was a benefit of approximately 4% of income before tax.





53
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


The effective income tax rate in the six months ended June 30, 2008 was lower than the prevailing corporate federal income tax rate of 35%, primarily due to the dividends received deduction and other permanent differences.  The combined impact of the dividends received deduction and other permanent differences was 2% of income
before tax.





Operating Results by Segment





The Company has three reportable business segments, which are defined based on the nature of the products and services offered:  Individual Insurance, Group Insurance and Old American.  The Individual Insurance segment consists of individual insurance products for both Kansas City Life and Sunset Life.  The
Individual Insurance segment is marketed through a nationwide sales force of independent general agents and third-party marketing arrangements.  The Group Insurance segment consists of sales of group life, group disability, dental, and vision products.  This segment is marketed through a nationwide sales force of independent general agents, group brokers and third-party marketing arrangements.  Old American consists of individual insurance products designed primarily as final expense
products.  These products are marketed through a nationwide general agency sales force with exclusive territories, using direct response marketing to supply agents with leads.  For more information, refer to Note 10 – Segment Information in the Notes to Consolidated Financial Statements.





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 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


Individual Insurance


The following table presents financial data of the Individual Insurance business segment for the second quarters and six months ended June 30, 2009 and 2008:





Quarter ended


Six Months endedJune 30


June 302009


2008


2009


2008Insurance revenues:Premiums

$
13,446


$
15,430


$
29,253


$
29,997Contract charges


26,202



26,527



52,970



53,827Reinsurance ceded


(10,692
)


(10,823
)


(20,536
)


(20,654
)Total insurance revenues


28,956



31,134



61,687



63,170Investment revenues:Net investment income


41,338



42,258



81,255



85,336Realized investment gains, excludingimpairment losses


2,341



1,749



3,732



1,833Net impairment losses recognized in earnings:Total other-than-temporary impairment losses


(3,972
)


(9,700
)


(23,199
)


(9,700
)Portion of loss recognized in comprehensiveloss


395



-



13,587



-Net impairment losses recognized in earnings


(3,577
)


(9,700
)


(9,612
)


(9,700
)Total investment revenues


40,102



34,307



75,375



77,469Other revenues


2,418



2,585



4,810



5,125Total revenues


71,476



68,026



141,872



145,764Policyholder benefits


17,857



25,766



46,843



51,781Interest credited to policyholder account balances


21,700



21,674



42,874



43,377Amortization of deferred acquisition costsand value of business acquired


3,615



4,483



12,438



12,089Operating expenses


16,799



13,389



35,215



29,937Total benefits and expenses


59,971



65,312



137,370



137,184Income before income tax expense


11,505



2,714



4,502



8,580Income tax expense


4,070



700



1,638



2,804Net income

$
7,435


$
2,014


$
2,864


$
5,776





Net income for this segment in the second quarter was $7.4 million, an increase of $5.4 million from $2.0 million in the second quarter of 2008.  The largest factor in the improvement in 2009 was a $7.9 million decrease in policyholder benefits.  This decrease largely resulted from lower death benefits and a reduction
in benefit and contract reserves.  Also contributing to the improvement was a $6.7 million decrease in realized investment losses.  These were partially offset by a $2.0 million decrease in total premiums, a $0.9 million decrease in net investment income, and a $3.4 million increase in operating expenses.  Also, income tax expense increased $3.4 million, largely due to the increase in pretax income.





Net income for the six months for this segment was $2.9 million, a decrease of $2.9 million or 50% compared to the first six months of 2008.  This decline was largely due a $4.1 million reduction in net investment income and a $5.3 million increase in operating expenses.  These were partially offset by a $4.9 million
decline in policyholder benefits, also primarily reflecting lower death benefits.  Also, net realized investment losses were $2.0 million lower than a year ago.





Total insurance revenues for this segment decreased 7% in the second quarter and 2% in the six months compared with last year.  In the second quarter, total premiums decreased 13%, as annuity premiums decreased 55%.  While a consistent number of annuity policies were issued, the dollar amount of the policies was lower
during the quarter compared to last year.   Contract charges and reinsurance ceded premiums both declined 1% in the second quarter.  The decline in contract charges can largely be attributed to lower account balances on variable contracts and the runoff of closed blocks.  In the six months, total premiums declined 2%, reflecting a 9% decrease in annuity premiums.  Contract charges declined 2% and reinsurance ceded premiums declined 1%.








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 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


The following table reconciles premiums included in insurance revenues and provides detail by new and renewal business for the second quarters and six months ended June 30, 2009 and 2008.  New premiums are also detailed by product.





Quarter ended June 302009


%


2008


%New premiums:Individual life insurance

$
1,329



(9
)

$
1,467



3Immediate annuities


1,641



(55
)


3,613



29Total new premiums


2,970



(42
)


5,080



20Renewal premiums


10,476



1



10,350



(3
)Total premiums

$
13,446



(13
)

$
15,430



3





Six Months ended June 302009


%


2008


%New premiums:Individual life insurance

$
2,650



(7
)

$
2,842



-Immediate annuities


6,000



(9
)


6,588



74Total new premiums


8,650



(8
)


9,430



43Renewal premiums


20,603



-



20,567



(2
)Total premiums

$
29,253



(2
)

$
29,997



9





Total new premiums for this segment decreased 42% compared with the second quarter of 2008, which the Company largely attributes to the difficult recessionary environment.  New individual life insurance premiums decreased $0.1 million or 9% and new immediate annuity premiums decreased $2.0 million or 55%.  The decrease
in annuity premiums resulted from a lower dollar amount of the policies issued on a consistent number of policies during the quarter compared to last year.  Total renewal premiums increased 1%, reflecting a 1% increase in renewal individual life premiums.





Total premiums for the six months decreased 2% versus a year ago.  Total new premiums decreased 8% while total renewal premiums were flat.  New individual life insurance premiums and new immediate annuity premiums declined 7% and 9%, respectively.





The following table reconciles deposits with the Consolidated Statements of Cash Flows and provides detail by new and renewal deposits for the second quarters ended and six months ended June 30, 2009 and 2008.  New deposits are also detailed by product.





Quarter Ended June 302009


%


2008


%New deposits:Universal life insurance

$
2,130



(9
)

$
2,346



(13
)Variable universal life insurance


293



(42
)


505



(2
)Fixed deferred annuities


30,016



410



5,885



4Variable annuities


4,901



(33
)


7,302



2Total new deposits


37,340



133



16,038



-Renewal deposits


31,571



(6
)


33,679



(2
)Total deposits

$
68,911



39


$
49,717



(1
)





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 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued





Six Months ended June 302009


%


2008


%New deposits:Universal life insurance

$
3,960



(16
)

$
4,741



(13
)Variable universal life insurance


697



(31
)


1,009



(28
)Fixed deferred annuities


45,328



296



11,435



(5
)Variable annuities


7,761



(48
)


15,011



17Total new deposits


57,746



79



32,196



2Renewal deposits


65,112



(2
)


66,183



(8
)Total deposits

$
122,858



25


$
98,379



(5
)





Total new deposits increased $21.3 million or 133% in the second quarter of 2009, reflecting a $24.1 million or 410% increase in new fixed deferred annuity deposits compared to one year ago.  This increase was partially offset by a $2.4 million or 33% decrease in new variable annuity deposits.  In addition, new universal
life deposits declined $0.2 million or 9% and new variable universal life deposits declined $0.2 million or 42% compared to last year.  Total renewal deposits decreased $2.1 million or 6% in the second quarter, as universal life deposits decreased 3%, variable universal life deposits decreased 9%, fixed deferred annuity deposits decreased 4% and variable annuity deposits decreased 33%.  This increase was largely due to sales of a special rate offering on deferred annuities during the second
quarter of 2009.  The Company highlighted marketing of this product to take advantage of an opportunity that was identified in the marketplace.  The significant sales of these annuities can also be attributed to changes in consumer preferences resulting from the volatility in the equity markets.  The declines in variable annuities, variable universal life and universal life reflect the difficult economic environment.  However, new universal life and variable annuity deposit
sales improved in the second quarter of 2009 compared with the first quarter of 2009.





Total new deposits increased $25.6 million or 79% during the first six months of 2009.  This increase was due to a $33.9 million increase in new fixed deferred annuity deposits, which almost quadrupled the deposits from one year ago.  Partially offsetting this increase, new universal life deposits decreased $0.8 million
or 16%, new variable universal life deposits declined $0.3 million or 31% and new variable annuity deposits declined $7.3 million or 48%, compared to one year ago.  Total renewal deposits decreased $1.1 million or 2%, as a 5% increase in fixed deferred annuities was offset by a 2% decline in universal life deposits, a 6% decrease in variable universal life deposits and a 5% decrease in variable annuities.





Net investment income decreased 2% in the second quarter and 5% in the six months, reflecting reduced investment assets for both periods.  Yields available in the market increased slightly in the second quarter, but were down for the six months compared to one year ago.  This segment experienced a $1.2 million realized
investment loss in the second quarter of 2009 and a $5.9 million investment loss in the first six months, compared to $8.0 million and $7.9 million in the same periods in 2008, respectively.  Write-downs of certain investment securities totaled $3.6 million in the second quarter and $9.6 million in the first six months of 2009.





The Company’s analysis of securities for the quarter ended June 30, 2009 resulted in the determination that six fixed-maturity issuers (seven securities) had other-than-temporary impairments affecting the Individual Insurance segment and were written down by a combined $3.6 million.  The total fair value of the affected
securities after the write-downs was $13.6 million.




Following is a description of the securities that were written down during the second quarter of 2009:





·
Three securities (from two issuers) were mortgage-backed securities that were written down by a total of $0.1 million.  The significant decline in the subprime and non-conforming mortgage markets and the specific performance of the underlying collateral caused the Company’s cash flow projections to be less than the amortized cost of the
securities and creating an other-than-temporary impairment.  These securities had been previously written down due to reduced projected cash flows from the underlying securitizations.


·
One security was a collateralized debt obligation (CDO) that was written down $0.2 million.  This security has been impacted by the rapid rise in delinquencies and foreclosures in the sub-prime and Alt-A mortgage markets, along with a decline in the fair value of securities issued by financial institutions.  Ongoing CDO liquidations
and investor selling have caused extreme declines in market valuations, regardless of individual security performance.  This security had been written down before in previous periods.


·
One security from a print media company that filed for bankruptcy protection in 2008 and is currently under reorganization was written down $1.0 million.  The print media industry is highly cyclical and has experienced


57
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 Kansas City Life Insurance Company
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weakened consumer demand and competition from electronic media.  This security had been previously written down and continues to be challenged in its market and industry.


·
One security from a global commercial finance company that provides financial products and advisory services to a range of industry sectors was written down $0.5 million.  This company has been affected by the credit crisis, facing reduced access to liquidity and higher borrowing costs.  The Company determined that a credit-related
impairment had occurred.


·
One security was from a company that provides custom-tailored financing to private and corporate owners of real estate nationwide and was written down $1.8 million.  During the second quarter of 2009, the Company accepted an offer from this company to exchange this security for a security with a longer-dated maturity with an enhanced second lien
priority in the capital structure.  This security had been written down in a previous period.




The Company’s analysis of securities for the first quarter of 2009 resulted in the determination that investments in six fixed-maturity issuers (seven specific securities) had other-than-temporary impairments affecting the Individual Insurance segment.  These securities were written down by a combined $6.0 million due to
credit.  The aggregate impairment for these securities was $19.2 million, and $13.2 million of this amount was determined to be non-credit and was recognized in other comprehensive loss.The total fair value of the affected securities after the write-downs was $19.8 million.





Following is a description of the securities that were written down during the first quarter of 2009:





·
One security was from a mortgage and financial guaranty insurer that was written down $1.6 million.  Mortgage insurers have suffered from the deterioration in the U.S. housing market and mortgage credit market.  Rising mortgage delinquencies and defaults have resulted in rating downgrades for these insurers.  Recent rating
downgrades, combined with the issuer’s need to raise additional capital to meet future payments contributed to the other-than-temporary impairment.


·
One security was from a trucking company that was written down $1.6 million.  As the trucking industry is highly correlated with the general economy, this company has experienced a reduction in shipping volume as a result of the recession.  This company renegotiated its credit facilities in the first quarter, but new covenants placed
significant requirements on the issuer.  These restrictions, combined with the need to retire longer-term debt, place additional stress on cash resources and led to indications of continued weakening performance that the Company believes are other-than-temporary.


·
One security was from a company that develops, manufactures and markets imaging products that was written down $1.2 million.   This company’s past emphasis was in traditional film, which has been largely surpassed by digital photography.  The decline in the economy has negatively affected sales, as the consumer photography
industry is a discretionary item.  The company’s declining revenues and liquidity position led to the other-than-temporary impairment.


·
Two securities (from one issuer) were mortgage-backed securities that were written down by a total of $0.5 million.  The significant decline in the subprime and non-conforming mortgage markets and the specific performance of the underlying collateral caused the Company’s cash flow projections to be less than the amortized cost of the securities
and creating an other-than-temporary impairment.


·
One security was a mortgage-backed security that was written down $0.1 million.  The significant decline in the subprime and non-conforming mortgage markets and the specific performance of the underlying collateral caused the Company’s cash flow projections to be less than the amortized cost of the securities and creating an other-than-temporary
impairment.


·
One security was written down $1.0 million as the Company accepted a tender offer on the Company’s holdings from an issuer during the second quarter of 2009.





The Company’s analysis of securities for the quarter ended June 30, 2008 resulted in the determination that seven fixed-maturity securities had other-than-temporary impairments affecting the Individual Segment.  These securities were written down by a combined $9.7 million in the second quarter.  The total fair
value of the affected securities after the write-downs was $15.2 million.





Following is a description of the securities that were written down during the second quarter of 2008:





·
Three of the securities were written down by a total of $3.0 million, primarily as a result of declines in price and rating agency downgrades on debt issues from issuers that have recently completed leveraged buyout (LBO) transactions.  These LBO transactions greatly increased the debt level of each issuer.  One of these securities
had


58
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 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


been written down previously, and the other two securities were below cost by 20% or more for at least six consecutive months.


·
Two securities were collateralized debt obligations (CDOs) and were written down by $2.6 million, primarily due to price declines that had persisted for periods longer than the Company considered temporary.  Both securities were below cost by 20% or more for at least six consecutive months.


·
One security was written down by $3.3 million due to combination of a decline in price that had persisted for a period longer than the Company considered temporary, rating agency downgrades and a debt restructuring during the quarter.


·
One security was written down by $0.8 million due to a combination of a decline in price that had persisted for a period longer than the Company considered temporary and a further deterioration in fair value during the second quarter of 2008.





No other-than-temporary impairments were identified during the first quarter of 2008.





Other revenues decreased $0.2 million or 6% in the second quarter and $0.3 million or 6% in the six months, compared to a year ago.  The decrease that occurred in the second quarter of 2009 was due to a reduction in fees received from variable product managers resulting from lower sales of variable products and lower policyholder
dividends left with the Company.  The decrease was partially offset by an increase in revenue due to additional sales of LIHTC investments.  The decrease in the six months was due to the reduction in fees received from variable product managers and lower policyholder dividends left with the Company.  In addition, the Company experienced lower sales from the Company’s in-house broker dealer, reflecting the decline in the financial markets.  These were partially offset
by the additional sales of LIHTC investments.




Policyholder benefits decreased $7.9 million or 31% in the second quarter and $4.9 million or 10% in the six months, compared to the prior year.  These declines were largely due to a reduction in benefit and contract reserves and a reduction in death benefits net of reinsurance.  During the second quarter, the Company’s
mortality experience was favorable for this segment compared to other periods presented and resulted in a reduction of death benefits paid in both the second quarter and six months.  The reduction in benefit and contract reserves reflects, in part, the decline in premiums.  In addition, other benefits increased 4% in both the second quarter and six months, largely due to higher disability benefits.





The Company has a guaranteed minimum withdrawal benefit (GMWB) rider for variable annuity contracts that is considered to be a financial derivative and, as such, is accounted for at fair value.  Under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 157, “Fair Value Measurements,”
the Company determines the fair value of the GMWB rider using a risk-neutral valuation method.   At June 30, 2009 the fair value decreased, compared to the fair values at both March 31, 2009 and December 31, 2008 due to favorable returns in the capital markets, decreases in market volatility, increases in risk-free (swap) rates and changes in the reference spread used for issuer discount under FAS No. 157.  Accordingly, these annuity riders had decreases in value of $1.3 million in the
second quarter and $1.6 million in the first six months of 2009.





Interest is credited to policyholder account balances according to terms of the policy.  There are minimum rates of crediting prescribed in certain policies as well as adjustments that can be made to the initial crediting rate. Accordingly, the Company reviews and, as necessary, adjusts crediting rates on policies.  Interest
credited to policyholder account balances increased slightly in the second quarter and declined $0.5 million or 1% in the six months.  Amounts credited are a function of account balances and the rate of crediting.  The decrease in interest credited to policyholder account balances during the six months was largely due to a decline in policyholder account balances. While policyholder account balances increased during the second quarter of 2009, balances were lower than at June 30, 2008.





The amortization of DAC and VOBA decreased 19% in the second quarter and increased 3% in the six months.  Amortization of DAC increased $2.0 million in the second quarter and $3.1 million in the six months.  The increase for the second quarter was largely due to unlocking in the prior year.  While no unlocking
adjustment was made during 2009, DAC amortization was reduced by $3.0 million due to unlocking during the second quarter of 2008.  The largest factor in the increase for the six months was also due to the prior year unlocking.





VOBA is amortized in concert with each purchased block of business.  Accordingly, as policies run off, the amortization will decline over time.  In addition, VOBA is evaluated each period for unlocking adjustments.  The amortization of VOBA decreased $2.9 million in the second quarter and $2.7 million in the
six months compared to a year ago.  These decreases were largely due to two factors.  First, the Company refined its method for calculating VOBA from a premium-based method to a volume-based method for certain traditional life products during the second quarter of 2009.  Since the establishment of the VOBA, the measure of premium in force has been unstable from period to period due to the way the premium in force is


59
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 Kansas City Life Insurance Company
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identified and captured. This has resulted in a corresponding volatile amortization of the VOBA unrelated to the actual run off of the in force policies.  Accordingly, the Company refined its method of estimating VOBA to the use of volume in force instead of premium in force.  Second, the unlocking adjustment in
the second quarter of 2009 decreased VOBA amortization by $0.2 million, whereas the unlocking adjustment in the second quarter of 2008 increased VOBA amortization by $0.2 million.





Operating expenses consist of commissions and production allowances, net of the capitalization of commission and production allowances, and expenses from the Company’s operations.  Operating expenses increased $3.4 million or 25% in the second quarter and $5.3 million or 18% in the six months.  The increase in
the second quarter largely resulted from three factors: increased legal fees, largely reflecting the settlement of a legal case; increased commissions reflecting the increased sales of fixed annuity deposits; and increased pension costs.  The increase in the six months can mainly be attributed to two factors.  The first factor was higher salaries and benefits, which increased $3.7 million  compared to one year ago, resulting from a reduction of staff in an effort to reduce future
operating costs and from increased pension costs.  Second, legal fees increased $1.6 million, reflecting an increase in litigation costs.


60
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 Kansas City Life Insurance Company
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Group Insurance


The following table presents financial data of the Group Insurance business segment for the second quarters and six months ended June 30, 2009 and 2008:





Quarter ended


Six Months endedJune 30


June 302009


2008


2009


2008Insurance revenues:Premiums

$
13,619


$
13,925


$
28,286


$
27,649Reinsurance ceded


(1,781
)


(1,811
)


(3,632
)


(3,682
)Total insurance revenues


11,838



12,114



24,654



23,967Investment revenues:Net investment income


133



134



270



255Other revenues


40



54



79



122Total revenues


12,011



12,302



25,003



24,344Policyholder benefits


8,395



9,160



16,996



16,546Operating expenses


4,498



4,914



9,203



9,369Total benefits and expenses


12,893



14,074



26,199



25,915Income (loss) before income tax expense (benefit)


(882
)


(1,772
)


(1,196
)


(1,571
)Income tax expense (benefit)


(309
)


(595
)


(419
)


(523
)Net income (loss)

$
(573
)

$
(1,177
)

$
(777
)

$
(1,048
)





The net loss for this segment totaled $0.6 million for the second quarter of 2009 compared with a $1.2 million loss in 2008.  The improvement for the quarter was primarily due to a $0.8 million or 8% decrease in policyholder benefits.  Partially offsetting this change was a $0.3 million or 2% decrease in premiums.  The
net loss for the six months was $0.8 million versus a $1.0 million loss one year ago.  The improvement was due to a $0.6 million or 2% increase in premiums and a $0.2 million or 2% decrease in operating expenses.  Partially offsetting these changes, policyholder benefits increased $0.5 million or 3% from the prior year.





Total insurance revenues for the Group Insurance segment decreased $0.3 million or 2% in the second quarter compared to last year.  This decline was the result of a combination of 2% decrease in premiums and a 2% decrease in reinsurance ceded.  Total insurance revenues for the six months increased $0.7 million or 3%,
as premiums increased 2% and reinsurance ceded decreased 1%.





The following table reconciles premiums included in insurance revenues and provides detail by new and renewal business for the second quarters and six months ended June 30, 2009 and 2008.  New premiums are also detailed by product.





Quarter ended June 302009


%


2008


%New premiums:Group life insurance

$
324



(43
)

$
566



62Group dental insurance


1,691



(28
)


2,347



43Group disability insurance


681



49



456



23Other group insurance


10



(86
)


69



(90
)Total new premiums


2,706



(21
)


3,438



12Renewal premiums


10,913



4



10,487



(1
)Total premiums

$
13,619



(2
)

$
13,925



2





61
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 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued





Six Months ended June 302009


%


2008


%New premiums:Group life insurance

$
775



(28
)

$
1,080



63Group dental insurance


3,551



(20
)


4,435



30Group disability insurance


1,158



27



914



27Other group insurance


72



(47
)


135



(89
)Total new premiums


5,556



(15
)


6,564



8Renewal premiums


22,730



8



21,085



-Total premiums

$
28,286



2


$
27,649



2





Total new premiums decreased 21% while total renewal premiums increased 4% during the second quarter compared to last year.  New dental premiums decreased 28% and new group life premiums decreased 43%.  These declines occurred in comparison with 2008, which experienced higher premiums as a reflection of the expansion
in the group distribution system during 2008.  The increase in renewal premiums was largely due to a 13% increase in life premiums and a 5% increase in dental premiums.





Total new premiums for the six months decreased 15% while total renewal premiums increased 8% compared to a year ago.  New dental premiums decreased 20% and new group life premiums decreased 28%.  As mentioned above, these declines occurred in comparison with 2008, which experienced higher premiums as a reflection of
the expansion of the group distribution system in the prior year.  The increase in renewal premiums was largely due to an 8% increase in dental premiums and a 10% increase in life premiums.





Policyholder benefits decreased $0.8 million or 8% in the second quarter compared to last year.  The decrease was largely due to decreases in benefits for the life, dental, and weekly disability product lines.  Policyholder benefits for the six months increased $0.5 million or 3% compared to a year ago.  The
increase was primarily due to the increase in benefits in the dental product line.  The $0.3 million increase in benefits in the dental product line reflects, in part, the increase in new dental business during 2008.  It is typical for new dental business to report an increase in benefits in the first policy year.  As the business ages, the benefit ratio falls more in line with renewal expectations.  Management monitors this ratio on an ongoing basis and adjusts future
renewal premiums, as necessary, in order to achieve profitability expectations on individual groups, as it did in 2009 following the large premium increase in 2008.





Operating expenses consist of commissions, fees to third party marketing and administrative organizations, and expenses from the Company’s operations.  Operating expenses decreased 8% in the second quarter and 2% in the six months.  The decrease in the second quarter was due to a reduction in group administration
fees for the multiple employer trust product line and a reduction in group direct expenses.  The decrease for the six months was largely due to the items mentioned above for the second quarter.  These were partially offset by a release in legal contingency reserves in the first quarter of 2008 as a result of a settlement of pending litigation, which affects the comparison from year to year.





Improvement efforts for this segment continue to be focused in three primary areas.  First, emphasis is placed on the growth of the in-force business.  Increased productivity from existing group representatives and the continued expansion of the group distribution system are priorities for growth.  This segment
is also seeking additional third-party arrangements to advance its sales objectives.  Second, improvement in administrative efficiency is targeted through the increased use of technology, which should ultimately reduce expenses.  Finally, this segment added a new voluntary disability product to the portfolio in 2008 and will introduce a new voluntary life product later in 2009.  Voluntary products tend to be more profitable and management believes that this business line can become
a larger share of the group marketplace.


62
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 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


Old American Insurance Company


The following table presents financial data of the Old American Insurance Company business segmentfor the second quarters and six months ended June 30, 2009 and 2008:





Quarter ended


Six Months endedJune 30


June 302009


2008


2009


2008Insurance revenues:Premiums

$
16,249


$
16,254


$
32,459


$
32,599Reinsurance ceded


(789
)


(912
)


(1,633
)


(1,870
)Total insurance revenues


15,460



15,342



30,826



30,729Investment revenues:Net investment income


3,134



3,224



6,219



6,488Realized investment gains, excludingimpairment losses


251



67



274



103Net impairment losses recognized in earnings:Total other-than-temporary impairment losses


(453
)


(525
)


(2,632
)


(525
)Portion of loss recognized in comprehensiveloss


8



-



2,104



-Net impairment losses recognized in earnings


(445
)


(525
)


(528
)


(525
)Total investment revenues


2,940



2,766



5,965



6,066Other revenues


1



-



1



1Total revenues


18,401



18,108



36,792



36,796Policyholder benefits


10,148



10,660



21,248



22,745Amortization of deferred acquisition costsand value of business acquired


3,112



3,142



6,768



6,648Operating expenses


3,284



3,008



6,561



6,550Total benefits and expenses


16,544



16,810



34,577



35,943Income before income tax expense


1,857



1,298



2,215



853Income tax expense


675



458



806



302Net income

$
1,182


$
840


$
1,409


$
551





Net income for this segment was $1.2 million in the second quarter compared to $0.8 million in the prior year.  The increase in net income for the second quarter reflected a $0.5 million or 5% decrease in policyholder benefits and a $0.3 million or 58% decrease in realized investment losses.  These were partially offset
by a $0.3 million or 9% increase in operating expenses.  Net income for the six months was $1.4 million versus $0.6 million for the six months of 2008.  The increase in net income was primarily due to a $1.5 million or 7% decrease in policyholder benefits.  This was partially offset by a $0.3 million or 4% decrease in net investment income and a $0.1 million or 2% increase in amortization of deferred acquisition costs and value of business acquired.





The following table reconciles premiums included in insurance revenues and provides detail by new and renewal business for the second quarters and six months ended June 30, 2009 and 2008.





Quarter ended June 302009


%


2008


%New premiums

$
2,090



17


$
1,791



13Renewal premiums


14,159



(2
)


14,463



(4
)Total premiums

$
16,249



-


$
16,254



(3
)





63
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued





Six Months ended June 302009


%


2008


%New premiums

$
4,037



13


$
3,569



13Renewal premiums


28,422



(2
)


29,030



(4
)Total premiums

$
32,459



-


$
32,599



(3
)





Insurance revenues increased 1% in the second quarter and were flat in the six months compared with the prior year.  Total new premiums increased $0.3 million or 17% in the second quarter and $0.5 million or 13% in the six months, while total renewal premiums declined $0.3 million or 2% in the second quarter and $0.6 million or
2% in the six months.  The increase in new premiums reflects a combination expanded distribution and improved agent contracts.  Old American continues to focus on the recruitment and development of new agencies and agents, along with a continued focus on improved production from existing agencies and agents.





Net investment income declined $0.1 million or 3% in the second quarter and $0.3 million or 4% in the six months compared with 2008.  These declines primarily reflect reduced investment assets and a reduction in yields available in the market.  Old American also had a $0.2 million realized investment loss in the second
quarter and a $0.3 million realized investment loss in the six months.  This compares to realized investment losses of $0.5 million and $0.4 million in the same periods during 2008, respectively.  Write-downs of certain investment securities totaled $0.4 million in the second quarter and $0.5 million in the first six months of 2009.





The Company’s analysis of securities for the quarter ended June 30, 2009 resulted in the determination that two fixed-maturity securities had other-than-temporary impairments affecting the Old American segment and were written down by a combined $0.4 million.  The total fair value of the affected securities after the write-downs
was $1.7 million.





Following is a description of the securities that were written down during the second quarter of 2009:





·
One security was a mortgage-backed security that was written down by less than $0.1 million.  The significant decline in the subprime and non-conforming mortgage markets and the specific performance of the underlying collateral caused the Company’s cash flow projections to be less than the amortized cost of the securities and creating an
other-than-temporary impairment.  This security had been previously written down due to reduced projected cash flows from the underlying securitizations.


·
One security was from a company that provides custom-tailored financing to private and corporate owners of real estate nationwide and was written down $0.4 million.  During the second quarter of 2009, the Company accepted an offer from this company to exchange this security for a security with a longer-dated maturity with an enhanced second lien
priority in the capital structure.  This security had been written down in a previous period.




The Company’s analysis of securities for the quarter ended March 31, 2009 resulted in the determination that one fixed-maturity security had an other-than-temporary impairment affecting the Old American segment.  This investment was written down by $0.1 million in the first quarter.  The fair value of the investment
after the write-down was $1.2 million.





Following is a description of the security that was written down during the first quarter of 2009:





·
One security was a mortgage-backed security that was written down by a total of $0.1 million.  The significant decline in the subprime and non-conforming mortgage markets and the specific performance of the underlying collateral caused the Company’s cash flow projections to be less than the amortized cost of the securities and creating
an other-than-temporary impairment.





The Company’s analysis of securities for the quarter ended June 30, 2008 resulted in the determination that three fixed-maturity securities had other-than-temporary impairments affecting the Old American segment.  These securities were written down by a combined $0.5 million in the second quarter.  The total fair
value of the affected securities after the write-downs was $1.6 million.








64
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


Following is a description of the security that was written down during the second quarter of 2008:





·
One security was written down by $0.2 million, primarily as a result of a decline in price on a debt security from an issuer that recently completed a leveraged buyout (LBO) transaction.  This security had been written down previously.


·
A collateralized debt obligation (CDO) security was written down by $0.2 million, primarily due to a price decline that had persisted for a period longer than the Company considered temporary.  The security was below cost by 20% or more for at least six consecutive months.


·
One security was written down by $0.1 million due to a combination of a decline in price that had persisted for a period longer than the Company considered temporary and a further deterioration in fair value during the second quarter of 2008.





No other-than-temporary impairments were identified during the first quarter of 2008.





Policyholder benefits decreased $0.5 million or 5% in the second quarter and $1.5 million or 7% in the six months versus last year.  These changes were largely the result of a decline in death benefits, which decreased $1.0 million or 10% in the second quarter and $2.3 million or 12% in the six months compared with the prior year.   These
decreases reflect improved mortality experience for this segment.  Partially offsetting the death benefits were the release of reserves on these policies.





Amortization of deferred acquisition costs and value of business acquired remained flat in the second quarter and increased $0.1 million or 2% in the six months compared to a year ago.  The increase was primarily due to an increase in the DAC asset, as more insurance policies were issued.





Operating expenses consist of commissions and production allowances, net of the capitalization of commission and production allowances, and expenses from the Company’s operations.  These expenses increased $0.3 million or 9% in the second quarter and were flat in the six months, compared to a year ago.  The increase
in the second quarter reflects increased premium taxes from the increase in new sales.





Liquidity and Capital Resources





Statements made in the Company's 2008 Form 10-K remain pertinent, as the Company’s liquidity position is materially unchanged from year-end 2008.





Management believes that the Company has sufficient sources of liquidity to satisfy operational requirements and to finance expansion plans and strategic initiatives for the remainder of 2009.  Primary sources of cash flow are premiums, other insurance considerations and deposits, receipts for policyholder accounts, investment
sales and maturities, investment income and access to credit from other financial institutions.  In addition, the Company has credit facilities that are available for additional working capital needs or investment opportunities.  The principal uses of cash are for the insurance operations, including the purchase of investments, payment of insurance benefits, operating expenses, dividends, income taxes, withdrawals from policyholder accounts and costs related to acquiring new business.  There
can be no assurance that the Company will continue to generate cash flows at or above current levels or that the ability to borrow under the current credit facilities will be maintained.





The current economic climate has tightened the financial and liquidity conditions of policyholders.  The difficult economic environment and the credit crisis may produce the need for individual policyholder liquidity and could result in increased surrenders and policy loans on existing policies.  The Company performs
cash flow testing and adds various levels of stress testing to potential surrender and policy loan levels in order to assess current and near-term cash and liquidity needs.  In the event of increased surrenders and other cash needs, the Company has several sources of cash flow, as mentioned above, to meet these needs.





Cash from operations increased $19.9 million versus the same period a year ago.  Contributing to the increase were several items.  Cash benefit payments, largely from death claims, decreased $4.5 million and life surrenders decreased $0.8 million.  Offsetting these items was a $5.8 million decrease in net investment
income and a $3.6 million decrease in premium receipts. Cash is also affected by increases and decreases in the Company’s net receivables and net payables.  Reinsurance receivables established at the time claims are paid decreased $2.4 million.  In addition, income taxes payable increased $16.5 million and accounts payable and accrued expenses increased $11.3 million in the first six months compared to the same period a year ago. Partially offsetting these was a $7.0 million decrease
in other policy funds compared to a year earlier.





65
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


Net cash used from investing activities was $33.5 million, down from $30.4 million in net cash provided a year ago.  The Company’s new investments in fixed maturity and equity securities were $139.5 million for the six months, an 8% decrease from $151.8 million a year ago.  New investments in mortgage loans were
$17.9 million for the six months, down from $21.7 million a year ago.  During the first six months of 2009, the Company decreased its purchases of real estate to $11.9 million, versus $13.7 million in 2008.  Sales and maturities of fixed maturity and equity securities totaled $138.0 million for the first six months, a 22% decrease versus a year ago.  During the first six months of 2009, the Company had sales of real estate investments of $3.1 million, down from $20.7 million a year
ago.  The Company had $21.0 million in mortgage loan maturities and principal paydowns for the six months, compared to $24.8 million a year ago.





Net cash provided from financing activities was $15.8 million, up from $34.7 million in net cash used a year ago. This change was primarily the result of three items.  First, deposits on policyholder account balances net of withdrawals were $22.2 million at June 30, 2009.  However, at June 30, 2008 withdrawals on policyholder
account balances net of deposits were $32.4 million.  This resulted in a $54.6 million increase year over year.  Second, the net acquisition of treasury stock, reflecting open market purchases and net purchases from employee benefit plans, totaled $0.3 million, a change of $9.8 million versus last year.   Third, net transfers to separate accounts totaled $1.2 million, compared to $10.0 million in net transfers from separate accounts, an $11.2 million decrease in cash in 2009.





The above information excludes net proceeds from variable insurance products.  These proceeds are segregated into separate accounts and are not held in the Company’s general investments because the policyholders, rather than the Company, assume the underlying investment risks.





Debt and Short-term Borrowing


The Company and certain subsidiaries have access to borrowing capacity through their membership affiliation with the Federal Home Loan Bank of Des Moines (FHLB). At June 30, 2009, there were no outstanding balances with the FHLB and there were $2.9 million in outstanding borrowings at year-end 2008. The decrease was due to net pay downs
of $2.9 million in borrowings from FHLB in the first three months of the year.  The Company has access to unsecured revolving lines of credit of $60.0 million with two major commercial banks with no balances outstanding.  These lines of credit will expire in June of 2010.  The Company anticipates renewing these lines of credit as they come due.





Capital Resources


The Company considers existing capital resources to be more than adequate to support the current level of business activities.  In addition, the Company’s statutory equity exceeds the minimum capital deemed necessary to support its insurance business, as determined by the risk-based capital calculations and guidelines established
by the National Association of Insurance Commissioners.





The following table shows the capital adequacy for the Company.





June 30


December 312009


2008Total assets less separate accounts

$
3,755,192


$
3,708,526Total stockholders' equity


570,994



527,107Ratio of stockholders' equityto assets less separate accounts


15
%


14
%





The ratio of equity to assets less separate accounts increased 1% through the six months ended June 30, 2009.  Unrealized investment losses on available for sale securities, which are included as a part of stockholders’ equity (net of securities gains, related taxes, policyholder account balances and deferred acquisition
costs), totaled $48.4 million at June 30, 2009.  This represents a decrease of $33.9 million in unrealized losses from the $82.3 million in unrealized investment losses at year-end 2008.





Stockholders’ equity increased $43.9 million from year-end 2008.  The increase was largely due to a decrease in unrealized investment losses and net income.





The Company has defined contribution plans for employees and agents whereby shares of Company stock may be purchased or sold.  Also, the Company makes contributions to these plans through Company stock.  These transactions are accounted for as purchases and sales of treasury stock.  Accordingly, in the first
six months of 2009, the benefit plans purchased 308,654 shares of treasury stock and sold 411,522 shares of treasury stock for a net change in paid-in-capital and treasury stock of $3.7 million.





66
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


Through the six months ended June 30, 2009, the Company did not purchase any shares under the stock repurchase program.  In 2008, the Company purchased 181,661 of its shares for $8.2 million.  Under this program, the Company may purchase up to one million shares on the open market through January 2010.





The Company filed two Forms S-8 with the Securities and Exchange Commission on July 9, 2009.  The first Form S-8 was to register an additional 1,100,000 shares of the common shares and plan interests relating to the Thirty-First Amendment and Restatement of the Kansas City Life Insurance Company Savings and Profit Sharing Plan,
as amended for which securities of the same class were registered on a registration statement on Form S-8 previously filed and effective on June 20, 2000.  The second Form S-8 was to register an additional 200,000 shares of the Company’s common stock issued to the Kansas City Life Deferred Compensation Plan (the “Plan”), as amended and the Company’s Deferred Compensation Obligations issued in accordance with and pursuant to the Plan.  In conjunction with these filings,
an additional 114,138 shares of the Company’s common stock were issued from treasury and became outstanding.





The Company filed two Forms S-3 with the Securities and Exchange Commission on July 27, 2009.  The first form S-3 was to register an additional 20,000 shares of common stock contributed to a grantor trust established in connection with the Company’s Pre-2005 Agent’s Deferred Compensation Plan and the Company’s
deferred compensation obligations issued in accordance with and pursuant to the Pre-2005 Agent’s Deferred Compensation Plan.  The second Form S-3 was to register an additional 38,000 shares of common stock contributed to a grantor (rabbi) trust established in connection with the Company’s Agent’s Deferred Compensation Plan and the Company’s deferred compensation obligations issued in accordance with and pursuant to the Agent’s Deferred Compensation Plan.





Subsequent to June 30, 2009, the Company began discontinuing purchase and sale transactions of the Company’s common stock with employee benefit plans sponsored by the Company.  The Company’s benefit plans will instead conduct such transactions in the open market.





On July 27, 2009, the Board of Directors declared a quarterly dividend of $0.27 per share, unchanged from the prior year that will be paid August 12, 2009 to stockholders of record as of August 6, 2009.





Current legislative activities are not expected to have a significant impact on the ongoing operations of the Company.





Item 3.Quantitative and Qualitative Disclosures About Market Risk





In the most recent reporting periods, extreme occurrences of volatility beyond historical norms have impacted the markets for the Company’s fixed income and equity securities.  This volatility has impacted liquidity, credit risk, fair value of investments and the term structure of interest rates.  These extreme
events have not fully abated and prolonged periods of such volatility represent a new, heightened risk for all financial institutions.  These ongoing events could negatively affect the Company and policyholder activity, such as a reduction in sales, increased policy surrenders and increased policy loans.  The Company has factored these heightened risks into its risk management processes and its disclosures of financial condition.





Please refer to the Company’s 2008 Form 10-K for a more complete discussion of quantitative and qualitative disclosures about market risk.





Item 4.Controls and Procedures





As required by Exchange Act Rule 13a-15(b), Kansas City Life Insurance Company management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of the Company’s disclosure controls and procedures as defined in Exchange Act
Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report. As required by Exchange Act 13a-15(d), Kansas City Life Insurance Company management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes
occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting. Based on that evaluation, there has been no such change during the period covered by this report.


67
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


Part II:  Other Information





Item 1.Legal Proceedings





The life insurance industry, including the Company and its subsidiaries, has been subject to an increase in litigation in recent years. Such litigation has been pursued on behalf of purported classes of insurance purchasers, often questioning the conduct of insurers in the marketing of their products.





In addition to the above, the Company and its subsidiaries are defendants in, or subject to other claims or legal actions. Some of these claims and legal actions are in jurisdictions where juries are given substantial latitude in assessing damages, including punitive damages. Although no assurances can be given and no determinations can
be made at this time, management believes that the ultimate liability, if any, with respect to these other claims and legal actions would have no material effect on the Company’s business, results of operations or financial position.





Item 1A.Risk Factors and Cautionary Factors that may Affect Future Results





Risk factors and cautionary factors have not changed materially from those disclosed in the Company’s 2008 Form 10-K.





Item 2.Unregistered Sales of Equity Securities and Use of Proceeds





Issuer Purchases of Equity Securities




TotalNumber of





Total Number of


Maximum NumberShares





Shares Purchased


of Shares that MayPurchased


Average


as a Part of


Yet be PurchasedOpen Market/


Purchase Price


Publicly Announced


Under thePeriod

Benefit Plans


Paid per Share


Plans or Programs


Plans or Programs1/01/09 - 1/31/09


-
1


-



-



1,000,000(19,316
)2

$
42.452/1/09 - 2/28/09


-
1


-



-



1,000,000(13,297
)2

$
27.393/1/09 - 3/31/09


-
1


-



-



1,000,0006,076
2

$
34.284/1/09-4/30/09


-
1


-



-



1,000,000(23,274
)2

$
34.225/1/09-5/31/09


-
1


-



-



1,000,000(88,502
)2

$
26.716/1/09-6/30/09


-
1


-



-



1,000,00035,445
2

$
26.31Total


(102,868
)






-


1On January 26, 2009, the Company’s Board of Directors authorized the repurchase of up to 1,000,000 shares of its common stock.  The Company did not purchase any shares under this program during the second quarter of 2009.





2Included in this column are the total net shares purchased or sold from benefit plans sponsored by the Company during the consecutive months of January through June 2009.





68
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


The Company filed two Forms S-8 with the Securities and Exchange Commission on July 9, 2009.  The first Form S-8 was to register an additional 1,100,000 shares of the common shares and plan interests relating to the Thirty-First Amendment and Restatement of the Kansas City Life Insurance Company Savings and Profit Sharing Plan,
as amended for which securities of the same class were registered on a registration statement on Form S-8 previously filed and effective on June 20, 2000.  The second Form S-8 was to register an additional 200,000 shares of the Company’s common stock issued to the Kansas City Life Deferred Compensation Plan (the “Plan”), as amended and the Company’s Deferred Compensation Obligations issued in accordance with and pursuant to the Plan.  In conjunction with these filings,
an additional 114,138 shares of the Company’s common stock were issued from treasury and became outstanding.





The Company filed two Forms S-3 with the Securities and Exchange Commission on July 27, 2009.  The first form S-3 was to register an additional 20,000 shares of common stock contributed to a grantor trust established in connection with the Company’s Pre-2005 Agent’s Deferred Compensation Plan and the Company’s
deferred compensation obligations issued in accordance with and pursuant to the Pre-2005 Agent’s Deferred Compensation Plan.  The second Form S-3 was to register an additional 38,000 shares of common stock contributed to a grantor (rabbi) trust established in connection with the Company’s Agent’s Deferred Compensation Plan and the Company’s deferred compensation obligations issued in accordance with and pursuant to the Agent’s Deferred Compensation Plan.





Subsequent to June 30, 2009, the Company began discontinuing purchase and sale transactions of the Company’s common stock with employee benefit plans sponsored by the Company.  The Company’s benefit plans will instead conduct such transactions in the open market.





Item 4. Submission of Matters to a Vote of Security Holders





On April 23, 2009, the Annual Stockholders Meeting was held at 3520 Broadway, Kansas City, Missouri. At this meeting, there were 11,584,319 shares outstanding and eligible to vote, and 8,076,891 shares were represented at the meeting either in person or by proxy.  The shares represented at the meeting either in person or by proxy
have been corrected due to a reporting error in the 10-Q for the first quarter of 2009.  Accordingly the table of the votes has been corrected.








The following Directors received the number of votes indicated and were elected for a three-year term:





R. Philip Bixby
8,076,475Michael Braude
8,076,475John C. Cozad
8,076,474Tracy W. Knapp
8,076,467Mark A. Milton
8,076,474








69
 Table of Contents


Item 5.Other Information





3520 Broadway, Kansas City, MO 64111                                                                           Contact: Tracy
W. Knapp, Chief Financial Officer,


(816)
753-7299, Ext. 8216





For Immediate Release: July 30, 2009, press release reporting financial results for the second quarter of 2009.





Kansas City Life Announces Second Quarter 2009 Results





Kansas City Life Insurance Company recorded net income of $8.0 million or $0.70 per share in the second quarter of 2009, an increase of $6.4 million from net income of $1.7 million or $0.14 per share for the same quarter in the prior year.  The improved earnings in the second quarter of 2009 were largely due to lower realized
losses from the write-down of investments, favorable changes in policyholder benefits from reduced death benefit payments and contract reserves, and reduced amortization of deferred acquisition costs and value of business acquired.





Net income for the first six months of 2009 was $3.5 million or $0.30 per share compared with $5.3 million or $0.45 per share in the prior year.  Realized investment losses decreased $2.2 million and policyholder benefits declined $6.0 million.  These favorable changes were partially offset by a decline in insurance
revenues and net investment income, along with increased operating expenses.





Premiums from new sales of individual life insurance increased 5% during the second quarter and 4% for the first half of 2009, and total renewal premiums increased 1% and 2% for the same respective periods.  These results were driven by increases in new life insurance sales of 17% and 13% in the Old American segment during the
second quarter and six months, respectively.  Old American primarily sells traditional life insurance to the senior market.  On a consolidated basis, total insurance revenues declined by $2.3 million for the quarter and $0.7 million for the six months, due to reduced sales of immediate annuities, new group life, and new group accident and health insurance.  Also contributing to the decrease were contract charges, which declined 1% for the quarter and 2% for the six months.  The
reduced contract charges reflected a decline in account balances on variable contracts and the runoff of closed blocks of business.





Total deposits increased $19.2 million or 39% for the quarter and $24.5 million or 25% for the six months, due to increased sales of fixed deferred annuities.  These increases were partially offset by lower sales of universal life insurance, variable life insurance, and variable annuities for both periods.





Net investment income declined versus the prior year in both the second quarter and six months, reflecting the difficult recessionary environment.  Lower yields and a lower volume of investment assets for these respective periods resulted in the reduced net investment income.  However, improvements in the market conditions
led to reduced write-downs on investments from other-than-temporary impairments in both the quarter and six months.  Realized investment losses declined $7.0 million in the quarter and $2.2 million for the six months.





Total benefits and expenses decreased $6.8 million or 7% for the second quarter and $0.9 million or less than 1% for the six months, compared with the same period a year earlier.  The decline in benefits was largely the result of lower policyholder benefits from improved mortality experience and lower benefit and contract reserves
in both the second quarter and six months.





The amortization of deferred policy acquisition costs (DAC) and the value of business acquired (VOBA) declined $0.9 million for the second quarter but increased $0.5 million for the six months.  In 2008, the Company unlocked interest margins and mortality assumptions that reduced the amortization of DAC by $3.0 million.  In
2009, the Company unlocked assumptions and reduced the amortization of VOBA in the amount of $0.2 million, along with a $2.5 million reduction in the amortization of VOBA due to a refined method of calculating VOBA amortization.  The refinement to the amortization methodology is intended to provide for improved matching of the amortization to the business in-force on selected products.





Operating expenses increased $3.3 million in the second quarter and $5.1 million for the six months.  The increase during the second quarter was primarily due to increased legal and pension costs.  The increase for the six months primarily reflected increased severance costs associated with reductions in staff and higher
pension costs.





On July 27, 2009, the Kansas City Life Board of Directors declared a quarterly dividend of $0.27 per share that will be paid on August 12, 2009 to stockholders of record as of August 6, 2009.





70
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


The financial markets and economy showed definite signs of stabilization and improvement during the first half of 2009, particularly during the second quarter.  Evidence of these changes can be seen in the Company’s improved earnings for the second quarter and the net unrealized loss position on the Company’s investment
securities, which improved by approximately $78.8 million or 41% before tax at June 30, 2009 relative to December 31, 2008. Further, the Company continues to maintain a high-quality investment portfolio and a strong capital position.  These attributes allow the Company to actively consider opportunities for growth while remaining focused on our long-term commitment of providing Security Assured, our promise to our valued customers.





Kansas City Life Insurance Company (NASDAQ: KCLI) was established in 1895 and is based in Kansas City, Missouri. The Company’s primary business is providing financial protection through the sale of life insurance and annuities. The Company’s revenues were $374.3 million in 2008, and assets and life insurance in force were $4.0
billion and $30.3 billion, respectively, as of December 31, 2008. The Company operates in 49 states and the District of Columbia. For more information, please visit www.kclife.com.














KANSAS CITY LIFE INSURANCE COMPANYCONDENSED CONSOLIDATED INCOME STATEMENT (Unaudited)(amounts in thousands, except share data)Quarter ended


Six Months endedJune 30


June 302009


2008


2009


2008Revenues

$
101,750


$
98,289


$
203,385


$
206,608Net income

$
8,044


$
1,677


$
3,496


$
5,279Net income per share,basic and diluted

$
0.70


$
0.14


$
0.30


$
0.45Dividends paid

$
0.27


$
0.27


$
0.54


$
0.54Average number of shares outstanding


11,514,586



11,585,643



11,486,599



11,649,642











71
 Table of Contents
 Kansas City Life Insurance Company
 Notes to Consolidated Financial Statements (Unaudited)-Continued


Item 6.Exhibits.





(a)
Exhibits:





31(a)
Section 302 Certification.31(b)
Section 302 Certification.32(a)
Section 1350 Certification.














72
 Table of Contents


SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.








KANSAS CITY LIFE INSURANCE COMPANY(Registrant)










/s/ R. Philip Bixby


R. Philip Bixby


President, Chief Executive Officer


and Chairman of the Board











/s/ Tracy W. Knapp


Tracy W. Knapp


Senior Vice President, Finance








Date:  July 30, 2009