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 [FEE REQUIRED] |
|---|-----------------------------------------------------------------------------------------------------------------------------------|

|   | For the Quarterly Period ended March 31, 2008                            or |
|--------|-----------------------------------------------------------------------------|

| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE                            SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] |
|-----|---------------------------------------------------------------------------------------------------------------------------------------|

|   | 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. Employer       |
| Incorporation or Organization)  | Identification Number) |

 

| 3520 Broadway, Kansas City, Missouri

(Address of Principal Executive Offices) | 64111-2565

(Zip Code) |
|--------------------------------------------------------------------------------|------------------------|

 

Registrant’s Telephone Number, including Area Code:            816-753-7000

 

Not Applicable

(Former name or former address, 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.

|   | Yesx | Noo |
|--------|------|-----|

             

Indicate by check mark whether the Registrant is a large accelerated            filer, an accelerated filer, or a non-accelerated filer, See definition of            “accelerated filer and large accelerated filer” in Rule 12b-2 of the            Exchange Act. (Check one):

|   | Large accelerated filero | Accelerated filer | x | Non-accelerated filero |
|--------|--------------------------|-------------------|---|------------------------|

             

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

|   | Yeso | Nox |
|--------|------|-----|

 

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

 

|   | *Class* | *Outstanding March 31, 2008* |
|--------|---------|------------------------------|

| Common Stock, $1.25 par | 11,637,513 shares |
|-------------------------|-------------------|

 

 

 

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**KANSAS CITY LIFE INSURANCE COMPANY**

**TABLE OF CONTENTS**

 

 

| Part I. Financial                            Information.........................................................................................................                  | 3      |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                               |   |
| Item 1. Financial Statements                            (Unaudited)..........................................................................................                      | 3      |
|                                                                                                                                                                               |   |
| Consolidated Balance                            Sheets...............................................................................................                              | 3      |
|                                                                                                                                                                               |   |
| Consolidated Statements of                            Income........................................................................................                               | 4      |
|                                                                                                                                                                               |   |
| Consolidated Statements of Cash                            Flows..................................................................................                                 | 5      |
|                                                                                                                                                                               |   |
| Notes to Consolidated Financial                            Statements..............................................................................                                | 6      |
|                                                                                                                                                                               |   |
| Item 2. Management’s Discussion and Analysis of                            Financial Condition and Results of                            Operations.......................   | 16     |
|                                                                                                                                                                               |   |
| Item 3. Quantitative and Qualitative Disclosures About                            Market                            Risk.......................................................... | 36     |
|                                                                                                                                                                               |   |
| Item 4. Controls and                            Procedures....................................................................................................                     | 36     |
|                                                                                                                                                                               |   |
|                                                                                                                                                                               |   |
| Part II. Other                            Information.............................................................................................................                 | 37     |
|                                                                                                                                                                               |   |
| Item 1. Legal                            Proceedings.............................................................................................................                  | 37     |
|                                                                                                                                                                               |   |
| Item 4. Submission of Matters to a Vote of Security                            Holders...................................................................                          | 37     |
|                                                                                                                                                                               |   |
| Item 5. Other                            Information............................................................................................................                   | 38     |
|                                                                                                                                                                               |   |
| Item 6.                            Exhibits.........................................................................................................................               | 40     |
|                                                                                                                                                                               |   |
| Signatures................................................................................................................................                                         | 41     |

 

2

 

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**Part            I Financial Information**

**Item 1. Financial Statements (Unaudited)**

Amounts            in thousands, except share data

| **KANSAS CITY LIFE INSURANCE COMPANY**                                                                |
|-------------------------------------------------------------------------------------------------------|
| **CONSOLIDATED BALANCE SHEETS**                                                                       |
|                                                                                                  |   |   |   |
|                                                                                                  | March 31 |   | December 31 |
|                                                                                                  | 2008 |   | 2007 |
| **ASSETS**                                                                                            | (Unaudited) |   |   |
| Investments:                                                                                          |   |   |   |
| Fixed maturity securities available for sale, at fair                            value                | $ 2,647,763  |   | $ 2,631,073  |
| Equity securities available for sale, at fair                            value                        | 62,992  |   | 59,149  |
| Mortgage loans                                                                                        | 440,929  |   | 450,148  |
| Real estate                                                                                           | 94,455  |   | 96,049  |
| Policy loans                                                                                          | 91,434  |   | 92,803  |
| Short-term investments                                                                                | 8,768  |   | 36,522  |
| Total investments                                                                                     | 3,346,341  |   | 3,365,744  |
|                                                                                                  |   |   |   |
| Cash                                                                                                  | 6,829  |   | 12,158  |
| Accrued investment income                                                                             | 40,481  |   | 36,499  |
| Deferred acquisition costs                                                                            | 215,601  |   | 217,512  |
| Value of business acquired                                                                            | 72,472  |   | 73,517  |
| Reinsurance receivables                                                                               | 169,813  |   | 162,340  |
| Property and equipment                                                                                | 27,119  |   | 27,781  |
| Other assets                                                                                          | 37,533  |   | 36,164  |
| Separate account assets                                                                               | 376,728  |   | 420,393  |
| Total assets                                                                                          | $ 4,292,917  |   | $ 4,352,108  |
|                                                                                                  |   |   |   |
| **LIABILITIES**                                                                                       |   |   |   |
| Future policy benefits                                                                                | $ 851,574  |   | $ 851,277  |
| Policyholder account balances                                                                         | 2,063,476  |   | 2,087,965  |
| Policy and contract claims                                                                            | 38,749  |   | 31,742  |
| Other policyholder funds                                                                              | 114,131  |   | 107,109  |
| Notes payable                                                                                         | 41,886  |   | 10,400  |
| Income taxes                                                                                          | 25,549  |   | 40,300  |
| Other liabilities                                                                                     | 116,699  |   | 118,521  |
| Separate account liabilities                                                                          | 376,728  |   | 420,393  |
| Total liabilities                                                                                     | 3,628,792  |   | 3,667,707  |
|                                                                                                  |   |   |   |
| **STOCKHOLDERS' EQUITY**                                                                              |   |   |   |
| Common stock, par value $1.25 per share                                                               |   |   |   |
| Authorized 36,000,000 shares,                                                                         |   |   |   |
| issued 18,496,680 shares                                                                              | 23,121  |   | 23,121  |
| Additional paid in capital                                                                            | 30,970  |   | 30,244  |
| Retained earnings                                                                                     | 780,572  |   | 780,133  |
| Accumulated other comprehensive loss                                                                  | (34,552) |   | (19,811) |
| Treasury stock, at cost (2008 - 6,859,167                            shares;                          |   |   |   |
| 2007 - 6,731,643 shares)                                                                              | (135,986) |   | (129,286) |
| Total stockholders' equity                                                                            | 664,125  |   | 684,401  |
|                                                                                                  |   |   |   |
| Total liabilities and stockholders' equity                                                            | $ 4,292,917  |   | $ 4,352,108  |
| *See accompanying Notes to Consolidated Financial                            Statements (Unaudited).* |

 

 

3

 

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| **KANSAS CITY LIFE INSURANCE COMPANY**                                                                |
|-------------------------------------------------------------------------------------------------------|
| **CONSOLIDATED STATEMENTS OF INCOME                            (Unaudited)**                          |
|                                                                                                  |   |   |   |
|                                                                                                  | Quarter ended March 31 |
|                                                                                                  | 2008 |   | 2007 |
| **REVENUES**                                                                                          |   |   |   |
| Insurance revenues:                                                                                   |   |   |   |
| Premiums                                                                                              | $ 44,487  |   | $ 42,768  |
| Contract charges                                                                                      | 27,300  |   | 28,703  |
| Reinsurance ceded                                                                                     | (12,660) |   | (13,069) |
| Total insurance revenues                                                                              | 59,127  |   | 58,402  |
| Investment revenues:                                                                                  |   |   |   |
| Net investment income                                                                                 | 46,463  |   | 47,084  |
| Realized investment gains                                                                             | 120  |   | 5,124  |
| Other revenues                                                                                        | 2,609  |   | 2,417  |
| Total revenues                                                                                        | 108,319  |   | 113,027  |
|                                                                                                  |   |   |   |
| **BENEFITS AND EXPENSES**                                                                             |   |   |   |
| Policyholder benefits                                                                                 | 45,486  |   | 43,992  |
| Interest credited to policyholder account                            balances                         | 21,703  |   | 22,773  |
| Amortization of deferred acquisition costs                                                            |   |   |   |
| and value of business acquired                                                                        | 11,112  |   | 11,376  |
| Operating expenses                                                                                    | 24,396  |   | 22,710  |
| Total benefits and expenses                                                                           | 102,697  |   | 100,851  |
|                                                                                                  |   |   |   |
| Income before income tax expense                                                                      | 5,622  |   | 12,176  |
|                                                                                                  |   |   |   |
| Income tax expense                                                                                    | 2,020  |   | 3,870  |
|                                                                                                  |   |   |   |
| **NET INCOME**                                                                                        | $ 3,602  |   | $ 8,306  |
|                                                                                                  |   |   |   |
| Basic and diluted earnings per share:                                                                 |   |   |   |
| Net income                                                                                            | $ 0.31  |   | $ 0.70  |
|                                                                                                  |   |   |   |
|                                                                                                  |   |   |   |
| *See accompanying Notes to Consolidated Financial                            Statements (Unaudited).* |

 

4

 

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| **KANSAS CITY LIFE INSURANCE COMPANY**                                                                |
|-------------------------------------------------------------------------------------------------------|
| **CONSOLIDATED STATEMENTS OF CASH FLOWS                            (Unaudited)**                      |
| (amounts in thousands)                                                                                |
|                                                                                                  |   |   |   |
|                                                                                                  | Quarter ended March 31 |
|                                                                                                  | 2008 |   | 2007 |
| **OPERATING ACTIVITIES**                                                                              |   |   |   |
| Net cash provided (used)                                                                              | $ (11,329) |   | $ 5,030  |
|                                                                                                  |   |   |   |
| **INVESTING ACTIVITIES**                                                                              |   |   |   |
| Purchases of investments:                                                                             |   |   |   |
| Fixed maturity securities                                                                             | (135,732) |   | (85,920) |
| Equity securities                                                                                     | (8,204) |   | (771) |
| Mortgage loans                                                                                        | (1,650) |   | (16,326) |
| Real estate                                                                                           | (6,953) |   | (857) |
| Other investment assets                                                                               | -  |   | (378) |
| Sales of investments:                                                                                 |   |   |   |
| Fixed maturity securities                                                                             | 13,451  |   | 9,126  |
| Equity securities                                                                                     | 1,434  |   | -  |
| Real estate                                                                                           | 8,301  |   | 12,995  |
| Other investment assets                                                                               | 29,123  |   | -  |
| Maturities and principal paydowns of                            investments:                          |   |   |   |
| Fixed maturity securities                                                                             | 84,563  |   | 100,639  |
| Equity securities                                                                                     | -  |   | 18  |
| Mortgage loans                                                                                        | 10,869  |   | 13,715  |
| Net (additions) dispositions to property and                            equipment                     | 343  |   | (507) |
| Proceeds from sale of non insurance affiliate                                                         | -  |   | 10,104  |
| Net cash provided (used)                                                                              | (4,455) |   | 41,838  |
|                                                                                                  |   |   |   |
| **FINANCING ACTIVITIES**                                                                              |   |   |   |
| Net proceeds from borrowings                                                                          | 31,486  |   | -  |
| Deposits on policyholder account balances                                                             | 48,662  |   | 52,984  |
| Withdrawals from policyholder account                            balances                             | (67,127) |   | (80,279) |
| Net transfers from separate accounts                                                                  | 3,441  |   | 3,283  |
| Change in other deposits                                                                              | 3,130  |   | 13,747  |
| Cash dividends to stockholders                                                                        | (3,163) |   | (26,897) |
| Net disposition (acquisition) of treasury                            stock                            | (5,974) |   | 260  |
| Net cash provided (used)                                                                              | 10,455  |   | (36,902) |
|                                                                                                  |   |   |   |
| Increase (decrease) in cash                                                                           | (5,329) |   | 9,966  |
| Cash at beginning of year                                                                             | 12,158  |   | 3,908  |
|                                                                                                  |   |   |   |
| Cash at end of period                                                                                 | $ 6,829  |   | $ 13,874  |
|                                                                                                  |   |   |   |
| *See accompanying Notes to Consolidated Financial                            Statements (Unaudited).* |

 

 

5

 

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**Kansas City Life Insurance Company**

**Notes to Consolidated Financial Statements (Unaudited)**

 

***1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING            POLICIES***

 

**Basis of Presentation**

The            unaudited interim consolidated financial statements, the accompanying notes to these            unaudited interim 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 financial statements should be            read in conjunction with the Company’s 2007 Annual Report on 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 March 31, 2008 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.

 

**Business Changes**

On            January 23, 2006, the Company entered into a definitive agreement to sell its bank            subsidiary, Generations Bank, for $10.1 million in cash to Brooke Corporation. On            January 8, 2007, the Company completed the sale of Generations Bank. The gain on the            sale was $1.9 million. The bank subsidiary and the results of operations were not            material to the financial statements of the Company and are not disclosed            separately.

 

**Significant Accounting Policies**

A            complete summary of significant accounting policies is included in Note 1 to the            audited consolidated financial statements included in the Company’s 2007 Annual            Report on Form 10-K.

 

***2. NEW ACCOUNTING PRONOUNCEMENTS***

 

In            September 2005, the Accounting Standards Executive Committee of the American Institute            of Certified Public Accountants (AcSEC) issued Statement of Position 05-1 (SOP            05-1),*“Accounting by Insurance Enterprises for Deferred            Acquisition Costs in Connection with Modifications or Exchanges of Insurance            Contracts”.*SOP 05-1 provides guidance on accounting by            insurance enterprises for deferred acquisition costs on internal replacements of            insurance contracts other than those specifically described in Statement of Financial            Accounting Standards (SFAS) No. 97,*“Accounting and            Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized            Gains and Losses from the Sale of Investments”.*SOP            05-1 defines an internal replacement as a modification in product benefits, features,            rights, or coverages that occurs by exchange of a contract for a new contract, or by            amendment, endorsement, or rider to a contract, or by the election of a feature or            coverage within a contract. SOP 05-1 became effective for internal replacements            occurring in fiscal years beginning after December 31, 2006. Retrospective application            of SOP 05-1 to previously issued consolidated financial statements was not permitted.            SOP 05-1 was adopted on January 1, 2007, with no material impact to the unaudited            interim consolidated financial statements.

 

In            June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation 48            “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 applies to            all uncertain tax positions accounted for under SFAS No.

 

6

 

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**Kansas City Life Insurance Company**

**Notes to Consolidated Financial Statements (Unaudited) –            Continued**

 

109            “Accounting for Income Taxes”. FIN 48 addresses whether tax positions taken            or to be taken on tax returns should be reflected in the financial statements before            they are resolved with the appropriate taxing authority.

 

Previous statements provided no specific guidance related to such            positions. FIN 48 was adopted on January 1, 2007, with no material impact to the            unaudited interim consolidated financial statements.

 

In            September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”.            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 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 unaudited interim            consolidated financial statements. Please see Note 3 – Fair Values for added            disclosures pertaining to SFAS 157.

 

In            February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial            Assets and Financial Liabilities –Including an Amendment of FASB Statement No.            115.” 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 157 concurrently. The            Company adopted SFAS 159 on January 1, 2008 with no material impact to the unaudited            interim consolidated financial statements. Please see Note 3 – Fair Values for            additional information pertaining to SFAS 159.

 

All            other Standards and Interpretations of those Standards issued during the first quarter            of 2008 did not relate to accounting policies and procedures pertinent to the Company            at this time.

 

***3. FAIR VALUES***

 

**Fair Values Hierarchy**

Effective January 1, 2008, in accordance with SFAS 159, 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.

 

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:

 

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 agency securities 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 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

 

 

 

7

 

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**Kansas City Life Insurance Company**

**Notes to Consolidated Financial Statements (Unaudited)**

 

the            asset or liability. Valuation techniques include use of option pricing models,            discounted cash flow models, spread-based models, and similar techniques, using the            best information available in the circumstances.

 

**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.

 

Fair            value measurements for assets and liabilities where there exists limited or no            observable market data, are often 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.

 

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 107.

 

*Assets*

*Securities Available for Sale*

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 measured using independent pricing or other            model-based valuation techniques such as the present value of future cash flows,            adjusted for the security’s credit rating, prepayment assumptions and other            factors, such as credit loss and liquidity assumptions.

 

*Short-Term Financial Assets*

Short-term financial assets include cash 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 107 disclosure            purposes.

 

The            fair value estimates of mortgage loans and policy loans are calculated by discounting            contractual cash flows using discount rates that are estimates of current pricing for            loans with similar characteristics and remaining maturity.

 

Fair            values of mortgage loans on real estate properties are calculated by discounting            contractual cash flows, adjusted for prepayment and credit loss estimates, 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.

 

 

 

 

8

 

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**Kansas City Life Insurance Company**

**Notes to Consolidated Financial Statements (Unaudited)**

 

*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            historical cost. 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 107, the fair values of deposits with no            stated maturity are equal to the amount payable on demand at the measurement            date.

 

*Notes Payable*

All            of the amounts included within Notes Payable were in short-term borrowings at March 31,            2008 and December 31, 2007. 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 6 -Notes Payable            for an explanation of the terms of the debt outstanding.

 

*Categories Reported at Fair Value*

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

 

|                          | March 31, 2008    |
|-------------------------------|-------------------|
|                          | Total             |   | Level 1 |   | Level 2 |   | Level 3 |
| Fixed maturities and equity   |              |   |   |   |   |   |   |
| securities available for sale | $ 2,710,756       |   | $ 12,929 |   | $ 2,582,224 |   | $ 115,603 |
| Total                         | $ 2,710,756       |   | $ 12,929 |   | $ 2,582,224 |   | $ 115,603 |
|                          |              |   |   |   |   |   |   |
|                          | December 31, 2007 |
|                          | Total             |   | Level 1 |   | Level 2 |   | Level 3 |
| Fixed maturities and equity   |              |   |   |   |   |   |   |
| securities available for sale | $ 2,690,222       |   | $ 15,110 |   | $ 2,546,388 |   | $ 128,724 |
| Total                         | $ 2,690,222       |   | $ 15,110 |   | $ 2,546,388 |   | $ 128,724 |
|                          |              |   |   |   |   |   |   |

 

The            changes in Level 3 asset and liabilities measured at fair value on a recurring basis as            of March 31, 2008 are summarized below:

|                                                                                 | Securities |
|--------------------------------------------------------------------------------------|------------|
|                                                                                 | Available  |
|                                                                                 | For Sale   |
| Balance, beginning of period                                                         | $ 128,724  |
| Total gains or losses (realized and                            unrealized)           |       |
| Included in earnings                                                                 | 1          |
| Included in other comprehensive income                                               | (407)      |
| Purchases                                                                            | 4,893      |
| Disposals                                                                            | (12,532)   |
| Transfers in                                                                         | -          |
| Transfers out                                                                        | (5,067)    |
| Non-trading activity                                                                 | (9)        |
| Balance, end of period                                                               | $ 115,603  |
|                                                                                 |       |
| Net losses included in net income relating to assets                            held |       |
| at March 31, 2008                                                                    | $ (205)    |

 

 

9

 

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**Kansas City Life Insurance Company**

**Notes to Consolidated Financial Statements (Unaudited)**

 

The            table below is a summary of fair value estimates as of March 31, 2008 and December 31,            2007 for financial instruments, as defined by SFAS 107. In accordance with SFAS 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.

|                            | March 31, 2008 |   | December 31, 2007 |
|---------------------------------|----------------|--------|-------------------|
|                            | Carrying       |   | Fair              |   | Carrying |   | Fair |
|                            | Amount         |   | Value             |   | Amount |   | Value |
| **Investments:**                |           |   |              |   |   |   |   |
| Fixed maturity and equity       |           |   |              |   |   |   |   |
| securities available for sale   | $ 2,710,755    |   | $ 2,710,755       |   | $ 2,690,222 |   | $ 2,690,222 |
| Mortgage loans                  | 440,929        |   | 478,400           |   | 450,148 |   | 464,211 |
| Policy loans                    | 91,434         |   | 91,434            |   | 92,803 |   | 92,803 |
| Cash and short-term investments | 15,597         |   | 15,597            |   | 48,680 |   | 48,680 |
|                            |           |   |              |   |   |   |   |
| **Liabilities:**                |           |   |              |   |   |   |   |
| Individual and group annuities  | 969,447        |   | 948,031           |   | 987,014 |   | 963,626 |
| Notes payable                   | 41,886         |   | 41,886            |   | 10,400 |   | 10,400 |
| Supplementary contracts without |           |   |              |   |   |   |   |
| life contingencies              | 65,703         |   | 61,492            |   | 67,258 |   | 67,296 |

 

 

***4. UNREALIZED LOSSES ON SECURITIES***

 

The            Company assesses all investments with a greater than 10% decline 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 issuers 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 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: (1) the current fair value of the security as compared            to cost, (2) the extent and the length of time the fair value has been below cost, (3)            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, debt levels and income results, and (4) other business            factors related to the issuer’s industry.

 

There are a number of significant risks and uncertainties inherent in            the process of monitoring impairments and determining if an impairment is            other-than-temporary. These risks and uncertainties include but are not limited to: (1)            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, (2) the risk that the economic outlook will be worse            than expected or have more of an impact on the issuer than anticipated, (3) the risk            that fraudulent information could be provided to the Company’s credit, investment            and accounting professionals who determine the fair value estimates

 

10

 

----

**Kansas City Life Insurance Company**

**Notes to Consolidated Financial Statements (Unaudited) –            Continued**

 

and            accounting treatment for securities, and (4) the risk that new information obtained by            the Company or changes in other facts and circumstances lead the Company to change its            intent to hold the security to maturity or until it recovers in value. Any of these            situations could result in a charge to income in a future period. If the Company            determines that a security is other than temporarily impaired, the difference between            amortized cost and fair value would be charged to income as a realized investment loss,            resulting in a permanent reduction to the cost basis of the underlying            investment.

 

As            of March 31, 2008, the Company had gross unrealized losses of $82.4 million on            investment securities, including fixed maturity and equity securities that had a fair            value of $1.0 billion. As of December 31, 2007, the Company had gross unrealized losses            of $47.0 million on investment securities, including fixed maturity and equity            securities that had a fair value of $1.3 billion. The increase in unrealized losses was            primarily attributable to increased credit and liquidity risk discounts in the pricing            of financial assets during the quarter ended March 31, 2008. Although these changes            affected the broad financial markets, specific sectors, security issuers and security            issues were affected differently.

 

The            following table provides information regarding unrealized losses on investment            securities available for sale, as of March 31, 2008.

|                           | Investment securities with unrealized losses |
|--------------------------------|----------------------------------------------|
|                           | Less than 12 months                          |   | 12 months or longer |   | Total |
|                           | Fair                                         |   | Unrealized |   | Fair |   | Unrealized |   | Fair |   | Unrealized |
| Bonds:                         | Value                                        |   | Losses |   | Value |   | Losses |   | Value |   | Losses |
| U.S. Treasury securities and   |                                         |   |   |   |   |   |   |   |   |   |   |
| obligations of U.S. Government | $ 3,608                                      |   | $ 1 |   | $ 10,080 |   | $ 110 |   | $ 13,688 |   | $ 111 |
| Federal agencies1              | -                                            |   | - |   | - |   | - |   | - |   | - |
| Federal agency issued          |                                         |   |   |   |   |   |   |   |   |   |   |
| mortgage-backed securities1    | 13,780                                       |   | 200 |   | 69,160 |   | 521 |   | 82,940 |   | 721 |
| Corporate obligations          |                                         |   |   |   |   |   |   |   |   |   |   |
| Industrial                     | 42,435                                       |   | 1,331 |   | 69,590 |   | 4,865 |   | 112,025 |   | 6,196 |
| Energy                         | 17,843                                       |   | 475 |   | 18,696 |   | 569 |   | 36,539 |   | 1,044 |
| Technology                     | 6,370                                        |   | 89 |   | 7,833 |   | 841 |   | 14,203 |   | 930 |
| Communications                 | 13,486                                       |   | 663 |   | 22,137 |   | 2,416 |   | 35,623 |   | 3,079 |
| Financial                      | 122,864                                      |   | 11,465 |   | 81,574 |   | 10,388 |   | 204,438 |   | 21,853 |
| Consumer                       | 52,883                                       |   | 2,470 |   | 62,837 |   | 4,755 |   | 115,720 |   | 7,225 |
| Public utilities               | 23,729                                       |   | 715 |   | 13,272 |   | 703 |   | 37,001 |   | 1,418 |
| Total corporate obligations    | 279,610                                      |   | 17,208 |   | 275,939 |   | 24,537 |   | 555,549 |   | 41,745 |
| Corporate private-labeled      |                                         |   |   |   |   |   |   |   |   |   |   |
| mortgage-backed securities     | 177,227                                      |   | 17,242 |   | 65,292 |   | 9,019 |   | 242,519 |   | 26,261 |
| Other                          | 55,452                                       |   | 5,426 |   | 56,390 |   | 6,061 |   | 111,842 |   | 11,487 |
| Redeemable preferred stocks    | 9,859                                        |   | 191 |   | - |   | - |   | 9,859 |   | 191 |
| Fixed maturity securities      | 539,536                                      |   | 40,268 |   | 476,861 |   | 40,248 |   | 1,016,397 |   | 80,516 |
| Equity securities              | 16,308                                       |   | 956 |   | 6,036 |   | 921 |   | 22,344 |   | 1,877 |
| Total                          | $ 555,844                                    |   | $ 41,224 |   | $ 482,897 |   | $ 41,169 |   | $ 1,038,741 |   | $ 82,393 |
|                           |                                         |   |   |   |   |   |   |   |   |   |   |

             

             

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

             

All            securities in the table are expected to continue to perform to the original contractual            terms, which may be at maturity. No securities were considered to be            other-than-temporarily impaired at March 31, 2008.

 

 

11

 

----

**Kansas City Life Insurance Company**

**Notes to Consolidated Financial Statements (Unaudited) –            Continued**

 

***5. COMPREHENSIVE INCOME (LOSS)***

 

Comprehensive income (loss) is comprised of net income and other            comprehensive income (loss). Other comprehensive income (loss) includes the unrealized            investment gains or losses on securities available for sale (net of reclassification            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 pension liability. Other comprehensive income (loss) also            includes deferred income taxes on these items.

 

For            the first quarter of 2008, comprehensive loss was $11.1 million, which consisted of net            income of $3.6 million and other comprehensive loss of $14.7 million. The increase in            unrealized losses was primarily attributable to increased credit and liquidity risk            discounts in the pricing of financial assets during the quarter ended March 31, 2008.            Although these changes affected the broad financial markets, specific sectors, security            issuers and security issues were affected differently. For the first quarter of 2007,            comprehensive income was $15.9 million, which consisted of net income of $8.3 million            and other comprehensive income of $7.6 million. The other comprehensive income of $7.6            million was due primarily to an increase in unrealized investment gains as a result of            a decrease in interest rates over the quarter.

 

***6. NOTES PAYABLE***

 

The            following table provides information for Notes Payable.

|                                                                                          | March 31 |   | December 31 |
|-----------------------------------------------------------------------------------------------|----------|--------|-------------|
|                                                                                          | 2008     |   | 2007        |
| Federal Home Loan Bank (FHLB) loans with various                            maturities and    |     |   |        |
| a weighted average interest rate, currently 3.03%                            ,                |     |   |        |
| (4.87% at December 31, 2007) secured by mortgage-backed                            securities |     |   |        |
| totaling $138,791 ($135,355 at December 31,                            2007).                 | $ 41,886 |   | $ 10,400    |
|                                                                                          | $ 41,886 |   | $ 10,400    |
|                                                                                          |     |   |        |

             

As a            member of the FHLB with a capital investment of $8.6 million, the Company has the            ability to borrow on a collateralized basis from the FHLB. The Company earned dividends            at an annualized rate of 4.50% on the capital investment in the FHLB for the first            quarter of 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 2.95%. Both lines of credit will expire during 2008, and it is expected that            the Company will renew these facilities at then-current market conditions.

             

All            borrowings are used to enhance liquidity and investment strategies. Maturities on notes            payable are $41.9 million, due in 2008.

 

***7. 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 weighted average number of shares outstanding was            11,710,608 and 11,856,385 for the first quarters of 2008 and 2007,            respectively.

 

 

 

 

12

 

----

**Kansas City Life Insurance Company**

**Notes to Consolidated Financial Statements (Unaudited) –            Continued**

 

***8. INCOME TAXES***

 

The            first quarter income tax expense was $2.0 million or 36% of income before tax for 2008,            versus $3.9 million or 32% of income before tax for the prior year period.

 

The            effective income tax rate in 2008 was higher than the prevailing corporate federal            income tax rate of 35% primarily due to additional interest accrued on uncertain tax            positions in prior years.

 

The            effective income tax rate in 2007 was lower than the prevailing corporate federal            income tax rate of 35% primarily due to income tax credits generated from the            Company’s investments in affordable housing. The effect of the affordable housing            tax credits on the effective tax rate in the prior year period was a benefit of            approximately 3% of income before tax.

 

In            March 2008, the Company corrected a current and deferred income tax item relative to            December 31, 2007. The Company determined that statutory tax reserves were not correct,            which resulted in a change between current and deferred income taxes of $4.5 million.            The total tax expense and the total tax liability as disclosed on all financial            statements were correct, as reported in the Company’s 2007 Form 10-K. This            correction only affected disclosure items in Note 6 - Income Taxes and does not            materially change any reporting presentations.

 

***9. 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 of the Company. However, investments are allocated to the Group            Insurance segment based upon its cash flows. Its investment income is modeled using the            year of investment method. Home office functions are fully integrated for the three            companies 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 in the            United States and no individual customer accounts for 10% or more of the            Company’s revenue.

 

 

 

 

 

 

 

 

 

13

 

----

**Kansas City Life Insurance Company**

**Notes to Consolidated Financial Statements (Unaudited) –            Continued**

 

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

|                   |   |   | Individual |   | Group          |   | Old            |   | Intercompany  |   |     |
|------------------------|--------|--------|------------|--------|----------------|--------|----------------|--------|---------------|--------|----------|
|                   |   |   | Insurance  |   | Insurance      |   | American       |   | Eliminations1 |   | Total    |
| Insurance revenues:    |   |   |       |   |           |   |           |   |          |   |     |
| First quarter:         | 2008   |   | $ 32,036   |   | $ 11,853  |   | $ 15,387  |   | $ (149)       |   | $ 59,127 |
|                   | 2007   |   | 31,440     |   | 11,399    |   | 15,714    |   | (151)         |   | 58,402   |
|                   |   |   |       |   |           |   |           |   |          |   |     |
| Net investment income: |   |   |       |   |           |   |           |   |          |   |     |
| First quarter:         | 2008   |   | $ 43,078   |   | $ 121     |   | $ 3,264   |   | $ -      |   | $ 46,463 |
|                   | 2007   |   | 43,704     |   | 65        |   | 3,315     |   | -        |   | 47,084   |
|                   |   |   |       |   |           |   |           |   |          |   |     |
| Net income (loss):     |   |   |       |   |           |   |           |   |          |   |     |
| First quarter:         | 2008   |   | $ 3,762    |   | $ 129     |   | $ (289)        |   | $ -      |   | $ 3,602  |
|                   | 2007   |   | 8,027      |   | (192)          |   | 471       |   | -        |   | 8,306    |

 

1 Elimination 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            were eliminated to arrive at Consolidated Statements of Income.

 

***10. PENSIONS AND OTHER POSTRETIREMENT BENEFITS***

 

Components of net periodic benefit cost:

|                            | Pension Benefits |   | Other Benefits |
|---------------------------------|------------------|--------|----------------|
|                            | Quarter ended    |   | Quarter ended  |
|                            | March 31         |   | March 31       |
|                            | 2008             |   | 2007           |   | 2008 |   | 2007 |
|                            |             |   |           |   |   |   |   |
| Service cost                    | $ 578       |   | $ 564     |   | $ 197  |   | $ 204  |
| Interest cost                   | 1,862       |   | 1,856     |   | 356  |   | 327  |
| Expected return on plan assets  | (2,364)          |   | (2,132)        |   | (13) |   | (14) |
| Amortization of:                |             |   |           |   |   |   |   |
| Unrecognized actuarial loss     | 576         |   | 749       |   | 44  |   | 28  |
| Unrecognized prior service cost | (162)            |   | (162)          |   | (95) |   | (94) |
| Net periodic benefit cost       | $ 490       |   | $ 875     |   | $ 489  |   | $ 451  |
|                            |             |   |           |   |   |   |   |

 

***11. 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.

 

14

 

----

**Kansas City Life Insurance Company**

**Notes to Consolidated Financial Statements (Unaudited) –            Continued**

 

In            the first quarter of 2008, the plan made a payment of $0.1 million to plan participants            for the three-year interval ended December 31, 2007. A payment of $1.0 million was made            in the first quarter of 2007. At each reporting period an estimate of the share-based            compensation expense is accrued, utilizing the share price at the period end. The cost            of compensation accrued as an operating expense in the first quarter of 2008 was $244            and the associated tax benefit was $86. In the first quarter of 2007, the accrual for            incentive compensation was reduced, lowering operating expense $339 and increasing tax            expense $119.

 

***12. COMMITMENTS***

 

In            the normal course of business, the Company has open purchase and sale commitments. At            March 31, 2008, the Company had purchase commitments to fund mortgage loans and other            investments of $19.2 million. Subsequent to March 31, 2008, the Company entered into            commitments to fund additional mortgage loans of $5.8 million.

 

***13. 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.

 

***14. 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.

 

 

15

 

----

**Item 2. Management’s Discussion and Analysis of Financial            Condition and Results of Operations**

 

Except            as otherwise noted, amounts are stated in thousands, except share data.

 

**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.

 

Forward-looking statements are subject to known and unknown risks,            uncertainties and other factors that may cause actual results to differ materially from            those contemplated by the forward-looking statements. Factors that could cause the            Company’s future results to differ materially from expected results include, but            are not limited to:

 

|   | **•** | Changes in general economic conditions, including the                            performance of financial markets and interest rates; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Increasing competition and changes in customer behavior,                            which may affect the Company’s ability to sell its products and                            retain business; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Customer and agent response to new products,                            distribution channels and marketing initiatives; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Fluctuations in experience regarding current mortality,                            morbidity, persistency and interest rates relative to expected amounts                            used in pricing the Company’s products; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Changes in assumptions related to deferred acquisition                            costs and the value of business acquired; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Regulatory, accounting or tax changes that may affect                            the cost of, or the demand for, the Company’s products or                            services; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Unanticipated changes in industry trends and ratings                            assigned by nationally recognized rating organizations. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|

 

The            Company cannot give assurances that such statements will prove to be correct. Given            these risks and uncertainties, investors should not place undue reliance on            forward-looking statements as a prediction of actual results.

             

**Consolidated Results of Operations**

 

***Summary of Results***

The            Company’s net income decreased $4.7 million or 57% in the first quarter of 2008,            versus the same quarter in the prior year, to a total of $3.6 million. Net income per            share decreased $0.39 or 56% and totaled $0.31 per share versus $0.70 per share in last            year's first quarter. The decline in the first quarter results was largely due to a            $5.0 million decrease in realized investment gains compared with a year ago.

 

Insurance revenues rose in the first quarter, reflecting an increase in            immediate annuity premiums. Contract charges on policyholder account balances declined            $1.4 million. Net investment income declined compared with a year ago. Policyholder            benefits increased over the prior year. Partially offsetting these items was a decrease            in interest credited to policyholder account balances. Finally, income tax expense            decreased versus a 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 (Unaudited), while deposits            are shown as a Financing Activity in the Consolidated Statements of Cash Flows            (Unaudited). The first set of tables below reconciles premiums included in insurance            revenues and provides detail by new and renewal business. New premiums are also            detailed by product. The second set of tables reconciles deposits with the Consolidated            Statements of Cash Flows (Unaudited) and provides detail by new and renewal deposits.            New deposits are also detailed by product.

 

16

 

----

The            Company’s marketing plan has been to focus its primary growth strategies on            individual life insurance business, which includes new premiums for individual life            products and new deposits for universal life and variable universal life products. In            addition, the growth strategy also encourages a product mix between fixed annuity,            immediate annuity, variable annuity and life products, which encourages the sale of all            individual products. The marketing plan also includes strategies to grow the business            through its existing sales force and the addition of new agents and general            agents.

 

Consolidated total premiums increased 4% in the first quarter versus the            same period in the prior year. New premiums increased 33% while renewal premiums            declined 2%. New premiums increased $2.3 million, largely due to a $2.0 million            improvement in immediate annuity premiums. New individual life premiums increased 6%,            which includes a 13% increase in new premiums in the Old American segment. New group            life premiums increased 64%, while new group accident and health premiums decreased 3%.            The Company exited the stop loss market during 2006 but continued to process existing            business until the stop loss contracts expired in 2007. Excluding this product line            from 2007 premiums, results show a 5% increase in total premiums, a 43% increase in            total new premiums and a 20% increase in new group accident and health premiums. The            increase in new group accident and health premiums was largely due to an 18% increase            in group dental premiums.

 

Consolidated renewal premiums declined 2% compared with 2007. This            decrease was largely the result of a 4% decline in the Old American segment and a            decline in renewal premiums from closed blocks of business. Partially offsetting this            decrease, group life renewal premiums increased 2% and total individual life renewal            premiums in the Individual Insurance segment increased 1%.

|                                | Quarter ended March 31 |
|-------------------------------------|------------------------|
|                                | 2008                   | % |   | 2007 | % |
| New premiums:                       |                   |   |   |   |   |
| Individual life insurance           | $ 3,153                | 6  |   | $ 2,975 | (8) |
| Immediate annuities                 | 2,975                  | 200  |   | 992 | (42) |
| Group life insurance                | 514                    | 64  |   | 314 | 32  |
| Group accident and health insurance | 2,612                  | (3) |   | 2,696 | (5) |
| Total new premiums                  | 9,254                  | 33  |   | 6,977 | (13) |
| Renewal premiums                    | 35,233                 | (2) |   | 35,791 | - |
| Total premiums                      | $ 44,487               | 4  |   | $ 42,768 | (2) |
|                                |                   |   |   |   |   |

 

Total new deposits increased $0.6 million or 4% in the first quarter.            New universal life sales decreased 13%, new variable universal life sales decreased 43%            and new fixed deferred annuities decreased 12%. These declines can largely be            attributed to the economic environment, increased competition and the continued impact            of alternative products. Offsetting these declines, new variable annuity deposits            increased 37%. Sales of variable annuity deposits were aided by the addition of the            guaranteed minimum withdrawal benefit rider that was introduced in 2007. Renewal            deposits declined 13% in the first quarter. Renewal universal life, variable universal            life, and variable annuity deposits declined, while fixed deferred annuity deposits            increased.

|                              | Quarter ended March 31 |
|-----------------------------------|------------------------|
|                              | 2008                   | % |   | 2007 | % |
| New deposits:                     |                   |   |   |   |   |
| Universal life insurance          | $ 2,395                | (13) |   | $ 2,751 | 14  |
| Variable universal life insurance | 504                    | (43) |   | 884 | 19  |
| Fixed deferred annuities          | 5,550                  | (12) |   | 6,328 | 2  |
| Variable annuities                | 7,709                  | 37  |   | 5,633 | 13  |
| Total new deposits                | 16,158                 | 4  |   | 15,596 | 9  |
| Renewal deposits                  | 32,504                 | (13) |   | 37,388 | (1) |
| Total deposits                    | $ 48,662               | (8) |   | $ 52,984 | 2  |

 

 

17

 

----

***Insurance Revenues***

Insurance revenues consist of premiums and contract charges less            reinsurance ceded. In the first quarter of 2008, total insurance revenues increased 1%            as premiums increased 4% and reinsurance ceded declined 3%. Partially offsetting these,            contract charges declined 5%. Total annuity premiums almost tripled in the first            quarter compared to last year while total accident and health premiums declined 2% and            total individual life premiums were flat. Total group life premiums increased 10%,            while total individual life premiums from the Individual Insurance segment were flat            and total individual life premiums from the Old American segment declined            2%.

             

Contract charges decreased 5% for the first quarter. As identified in            previous reports, expense loads were corrected by $1.7 million for the portion            representing unearned revenues in the second quarter of 2007, of which $1.4 million was            attributable to earlier periods. Reinsurance ceded decreased 3% in the first quarter.            Reinsurance ceded on group products declined, largely due to the elimination of the            stop loss business. Reinsurance ceded also declined in the Old American segment,            reflecting the runoff of a large closed block of reinsured business.

 

***Investment Revenues***

Net            investment income declined 1% compared to a year ago. This decline was largely the            result of a decrease in investment assets. This decrease was partially offset by a            reduction in investment expenses and a slight increase in the overall portfolio            yields.

 

The            Company recorded net realized investment gains of $0.1 million in the first quarter of            2008 compared with $5.1 million in the first quarter of 2007. The realized investment            gain in 2007 was due to the sale of real estate properties, which generated realized            investment gains of $3.3 million, and a $1.9 million gain from the sale of Generations            Bank. The following table provides detail concerning realized investment gains and            losses for the first quarters of 2008 and 2007.

|                                     | Quarter ended |
|------------------------------------------|---------------|
|                                     | March 31      |
| **Realized Investment Gains and Losses** | 2008          |   | 2007 |
| Gross gains resulting from:              |          |   |   |
| Sales of investment securities           | $ 362    |   | $ 3  |
| Investment securities called             | 189      |   | 718  |
| Sales of real estate                     | 14       |   | 3,340  |
| Sale of Generations Bank                 | -        |   | 1,904  |
| Other investment gains                   | 1        |   | -  |
| Total gross gains                        | 566      |   | 5,965 |
| Gross losses resulting from:             |          |   |   |
| Sales of investment securities           | (445)         |   | (750) |
| Investment securities called             | -             |   | (33) |
| Total gross losses                       | (445)         |   | (783) |
| Amortization of DAC and VOBA             | (1)           |   | (58) |
| Realized investment gains                | $ 120    |   | $ 5,124  |
|                                     |          |   |   |

 

***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 cashflows, 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 |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Equity risk, relating to the adverse fluctuations in a                            particular equity position. |
|--------|------------|---------------------------------------------------------------------------------------------------------------|

 

18

 

----

The            Company’s ability to manage these risks is essential to the success of the            Company. In particular, the Company devotes considerable resources to the credit            analysis of each new investment and the ongoing credit positions. 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.

 

The            following table provides information regarding fixed maturities by sector as of March            31, 2008.

|                           | March 31, 2008 |
|--------------------------------|----------------|
|                           |           |   | Carrying Value |   |   |   | Carrying Value |   |   |
|                           |           |   | of Securities |   |   |   | of Securities |   |   |
|                           | Total          |   | with Gross |   | Gross |   | with Gross |   | Gross |
|                           | Carrying       |   | Unrealized |   | Unrealized |   | Unrealized |   | Unrealized |
| Bonds:                         | Value          |   | Gains |   | Gains |   | Losses |   | Losses |
| U.S. Treasury securities and   |           |   |   |   |   |   |   |   |   |
| obligations of U.S. Government | $ 73,733       |   | $ 60,045 |   | $ 2,588 |   | $ 13,688 |   | $ 111 |
| Federal agencies1              | 88,220         |   | 88,220 |   | 3,507 |   | - |   | - |
| Federal agency issued          |           |   |   |   |   |   |   |   |   |
| mortgage-backed securities1    | 223,633        |   | 140,693 |   | 2,410 |   | 82,940 |   | 721 |
| Corporate obligations          |           |   |   |   |   |   |   |   |   |
| Industrial                     | 402,818        |   | 290,793 |   | 13,979 |   | 112,025 |   | 6,196 |
| Energy                         | 216,462        |   | 179,923 |   | 11,945 |   | 36,539 |   | 1,044 |
| Technology                     | 38,033         |   | 23,830 |   | 1,468 |   | 14,203 |   | 930 |
| Communications                 | 87,047         |   | 51,424 |   | 2,245 |   | 35,623 |   | 3,079 |
| Financial                      | 420,706        |   | 216,268 |   | 7,736 |   | 204,438 |   | 21,853 |
| Consumer                       | 300,469        |   | 184,749 |   | 8,082 |   | 115,720 |   | 7,225 |
| Public utilities               | 245,686        |   | 208,685 |   | 13,260 |   | 37,001 |   | 1,418 |
| Total corporate obligations    | 1,711,221      |   | 1,155,672 |   | 58,715 |   | 555,549 |   | 41,745 |
| Corporate private-labeled      |           |   |   |   |   |   |   |   |   |
| mortgage-backed securities     | 259,403        |   | 16,884 |   | 341 |   | 242,519 |   | 26,261 |
| Other                          | 276,624        |   | 164,782 |   | 1,687 |   | 111,842 |   | 11,487 |
| Redeemable preferred stocks    | 14,929         |   | 5,070 |   | 33 |   | 9,859 |   | 191 |
| Fixed maturity securities      | $ 2,647,763    |   | $ 1,631,366 |   | $ 69,281 |   | $ 1,016,397 |   | $ 80,516 |
|                           |           |   |   |   |   |   |   |   |   |

 

 

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

 

 

 

 

 

 

 

 

 

 

19

 

----

The            following table provides information regarding fixed maturities by sector as of            December 31, 2007.

 

|                           | December 31, 2007 |
|--------------------------------|-------------------|
|                           |              |   | Carrying Value |   |   |   | Carrying Value |   |   |
|                           |              |   | of Securities |   |   |   | of Securities |   |   |
|                           | Total             |   | with Gross |   | Gross |   | with Gross |   | Gross |
|                           | Carrying          |   | Unrealized |   | Unrealized |   | Unrealized |   | Unrealized |
| Bonds:                         | Value             |   | Gains |   | Gains |   | Losses |   | Losses |
| U.S. Treasury securities and   |              |   |   |   |   |   |   |   |   |
| obligations of U.S. Government | $ 72,440          |   | $ 52,853 |   | $ 1,638 |   | $ 19,587 |   | $ 409 |
| Federal agencies1              | 105,471           |   | 93,281 |   | 2,527 |   | 12,190 |   | 113 |
| Federal agency issued          |              |   |   |   |   |   |   |   |   |
| mortgage-backed securities1    | 228,841           |   | 62,402 |   | 1,047 |   | 166,439 |   | 2,977 |
| Corporate obligations          |              |   |   |   |   |   |   |   |   |
| Industrial                     | 438,593           |   | 276,653 |   | 11,209 |   | 161,940 |   | 6,358 |
| Energy                         | 212,829           |   | 157,104 |   | 9,883 |   | 55,725 |   | 946 |
| Technology                     | 37,802            |   | 26,902 |   | 1,104 |   | 10,900 |   | 794 |
| Communications                 | 95,004            |   | 53,680 |   | 2,989 |   | 41,324 |   | 2,242 |
| Financial                      | 447,863           |   | 203,810 |   | 6,915 |   | 244,053 |   | 13,439 |
| Consumer                       | 305,914           |   | 161,514 |   | 6,752 |   | 144,400 |   | 5,337 |
| Public utilities               | 253,141           |   | 194,279 |   | 11,318 |   | 58,862 |   | 1,284 |
| Total corporate obligations    | 1,791,146         |   | 1,073,942 |   | 50,170 |   | 717,204 |   | 30,400 |
| Corporate private-labeled      |              |   |   |   |   |   |   |   |   |
| mortgage-backed securities     | 246,205           |   | 48,403 |   | 590 |   | 197,802 |   | 4,910 |
| Other                          | 182,043           |   | 36,583 |   | 1,161 |   | 145,460 |   | 6,236 |
| Redeemable preferred stocks    | 4,927             |   | - |   | - |   | 4,927 |   | 124 |
| Fixed maturity securities      | $ 2,631,073       |   | $ 1,367,464 |   | $ 57,133 |   | $ 1,263,609 |   | $ 45,169 |

 

 

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

             

At            December 31, 2007, the Company had $45.2 million in gross unrealized losses on fixed            maturities which were offset by $57.1 million in gross unrealized gains. At March 31,            2008, the Company’s unrealized losses had increased to $80.5 million but were            partially offset by $69.3 million in gross unrealized gains. Approximately 52% of the            gross unrealized losses at March 31, 2008 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 market. In addition, at March 31, 2008, corporate private-labeled            mortgage-backed securities, also related to the residential real estate and mortgage            industry, accounted for 33% of the gross unrealized losses. This represented an            increase from 11% at December 31, 2007.

 

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

|                              | March 31, 2008 |   | December 31, 2007 |
|------------------------------|----------------|--------|-------------------|
|                         | Fair           |   | %                 |   | Fair |   | % |
| Equivalent S&P Rating    | Value          |   | of Total          |   | Value |   | of Total |
| AAA                          | $ 935,269      |   | 35%               |   | $ 885,230 |   | 34% |
| AA                           | 219,301        |   | 8%                |   | 215,383 |   | 8% |
| A                            | 670,997        |   | 26%               |   | 665,713 |   | 25% |
| BBB                          | 680,860        |   | 26%               |   | 703,897 |   | 27% |
| Total investment grade       | $ 2,506,427    |   | 95%               |   | 2,470,223 |   | 94% |
| BB                           | 96,066         |   | 3%                |   | 115,493 |   | 4% |
| Other                        | 45,270         |   | 2%                |   | 45,357 |   | 2% |
| Total below investment grade | 141,336        |   | 5%                |   | 160,850 |   | 6% |
|                         | $ 2,647,763    |   | 100%              |   | $ 2,631,073 |   | 100% |

 

 

20

 

----

As            of March 31, 2008, 95% of all fixed maturity securities were investment grade,            reflecting the high quality of securities maintained by the company.

 

***Analysis of Unrealized Losses on Securities***

The            Company has a credit risk department that reviews all new security investments,            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’s credit risk department 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 |
|--------|------------|-----------------------------------|

|   | **•** | Other similar factors |
|--------|------------|-----------------------|

             

This            process also involves monitoring several factors including late payments, downgrades by            rating agencies, 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: (1) the current fair value of the security as compared            to cost, (2) the extent and the length of time the fair value has been below cost, (3)            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, debt levels and income results, (4) significant management            or organizational changes, (5) significant uncertainty regarding the issuer’s            industry, (6) violation of financial covenants, and (7) other business factors related            to the issuer’s industry.

 

There are a number of significant risks and uncertainties inherent in            the process of monitoring impairments and determining if an impairment is            other-than-temporary. These risks and uncertainties include but are not limited to: (1)            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, (2) the risk that the economic outlook will be worse            than expected or have more of an impact on the issuer than anticipated, (3) the risk            that fraudulent information could be provided to the Company’s credit, investment            and accounting professionals who determine the fair value estimates and accounting            treatment for securities, and (4) the risk that new information obtained by the Company            or changes in other facts and circumstances lead the Company to change its intent to            hold the security to maturity or until it recovers in value. Any of these situations            could result in a charge to income in a future period. If the Company determines that a            security is other than temporarily impaired, the difference between amortized cost and            fair value would be charged to income as a realized investment loss, resulting in a            permanent reduction to the cost basis of the underlying investment.

             

             

21

 

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

|                           | Investment securities with unrealized losses |
|--------------------------------|----------------------------------------------|
|                           | Less than 12 months                          |   | 12 months or longer |   | Total |
|                           | Fair                                         |   | Unrealized |   | Fair |   | Unrealized |   | Fair |   | Unrealized |
| Bonds:                         | Value                                        |   | Losses |   | Value |   | Losses |   | Value |   | Losses |
| U.S. Treasury securities and   |                                         |   |   |   |   |   |   |   |   |   |   |
| obligations of U.S. Government | $ 3,608                                      |   | $ 1 |   | $ 10,080 |   | $ 110 |   | $ 13,688 |   | $ 111 |
| Federal agencies1              | -                                            |   | - |   | - |   | - |   | - |   | - |
| Federal agency issued          |                                         |   |   |   |   |   |   |   |   |   |   |
| mortgage-backed securities1    | 13,780                                       |   | 200 |   | 69,160 |   | 521 |   | 82,940 |   | 721 |
| Corporate obligations          |                                         |   |   |   |   |   |   |   |   |   |   |
| Industrial                     | 42,435                                       |   | 1,331 |   | 69,590 |   | 4,865 |   | 112,025 |   | 6,196 |
| Energy                         | 17,843                                       |   | 475 |   | 18,696 |   | 569 |   | 36,539 |   | 1,044 |
| Technology                     | 6,370                                        |   | 89 |   | 7,833 |   | 841 |   | 14,203 |   | 930 |
| Communications                 | 13,486                                       |   | 663 |   | 22,137 |   | 2,416 |   | 35,623 |   | 3,079 |
| Financial                      | 122,864                                      |   | 11,465 |   | 81,574 |   | 10,388 |   | 204,438 |   | 21,853 |
| Consumer                       | 52,883                                       |   | 2,470 |   | 62,837 |   | 4,755 |   | 115,720 |   | 7,225 |
| Public utilities               | 23,729                                       |   | 715 |   | 13,272 |   | 703 |   | 37,001 |   | 1,418 |
| Total corporate obligations    | 279,610                                      |   | 17,208 |   | 275,939 |   | 24,537 |   | 555,549 |   | 41,745 |
| Corporate private-labeled      |                                         |   |   |   |   |   |   |   |   |   |   |
| mortgage-backed securities     | 177,227                                      |   | 17,242 |   | 65,292 |   | 9,019 |   | 242,519 |   | 26,261 |
| Other                          | 55,452                                       |   | 5,426 |   | 56,390 |   | 6,061 |   | 111,842 |   | 11,487 |
| Redeemable preferred stocks    | 9,859                                        |   | 191 |   | - |   | - |   | 9,859 |   | 191 |
| Fixed maturity securities      | 539,536                                      |   | 40,268 |   | 476,861 |   | 40,248 |   | 1,016,397 |   | 80,516 |
| Equity securities              | 16,308                                       |   | 956 |   | 6,036 |   | 921 |   | 22,344 |   | 1,877 |
| Total                          | $ 555,844                                    |   | $ 41,224 |   | $ 482,897 |   | $ 41,169 |   | $ 1,038,741 |   | $ 82,393 |
|                           |                                         |   |   |   |   |   |   |   |   |   |   |

             

             

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

             

             

             

             

             

             

             

             

             

             

             

             

22

 

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The            following table provides information regarding unrealized losses on fixed maturity and            equity security investments available for sale, as of December 31, 2007.

|                           | Investment securities with unrealized losses |
|--------------------------------|----------------------------------------------|
|                           | Less than 12 months                          |   | 12 months or longer |   | Total |
|                           | Fair                                         |   | Unrealized |   | Fair |   | Unrealized |   | Fair |   | Unrealized |
| Bonds:                         | Value                                        |   | Losses |   | Value |   | Losses |   | Value |   | Losses |
| U.S. Treasury securities and   |                                         |   |   |   |   |   |   |   |   |   |   |
| obligations of U.S. Government | $ 100                                        |   | $ - |   | $ 19,487 |   | $ 409 |   | $ 19,587 |   | $ 409 |
| Federal agencies1              | -                                            |   | - |   | 12,190 |   | 113 |   | 12,190 |   | 113 |
| Federal agency issued          |                                         |   |   |   |   |   |   |   |   |   |   |
| mortgage-backed securities1    | 12,404                                       |   | 125 |   | 154,035 |   | 2,852 |   | 166,439 |   | 2,977 |
| Corporate obligations          |                                         |   |   |   |   |   |   |   |   |   |   |
| Industrial                     | 44,881                                       |   | 1,278 |   | 117,059 |   | 5,080 |   | 161,940 |   | 6,358 |
| Energy                         | 23,286                                       |   | 139 |   | 32,439 |   | 807 |   | 55,725 |   | 946 |
| Technology                     | 2,996                                        |   | 27 |   | 7,904 |   | 767 |   | 10,900 |   | 794 |
| Communications                 | 14,598                                       |   | 250 |   | 26,726 |   | 1,992 |   | 41,324 |   | 2,242 |
| Financial                      | 114,432                                      |   | 5,304 |   | 129,621 |   | 8,135 |   | 244,053 |   | 13,439 |
| Consumer                       | 33,000                                       |   | 495 |   | 111,400 |   | 4,842 |   | 144,400 |   | 5,337 |
| Public utilities               | 22,050                                       |   | 219 |   | 36,812 |   | 1,065 |   | 58,862 |   | 1,284 |
| Total corporate obligations    | 255,243                                      |   | 7,712 |   | 461,961 |   | 22,688 |   | 717,204 |   | 30,400 |
| Corporate private-labeled      |                                         |   |   |   |   |   |   |   |   |   |   |
| mortgage-backed securities     | 96,276                                       |   | 1,715 |   | 101,526 |   | 3,195 |   | 197,802 |   | 4,910 |
| Other                          | 60,656                                       |   | 4,228 |   | 84,804 |   | 2,008 |   | 145,460 |   | 6,236 |
| Redeemable preferred stocks    | 4,927                                        |   | 124 |   | - |   | - |   | 4,927 |   | 124 |
| Fixed maturity securities      | 429,606                                      |   | 13,904 |   | 834,003 |   | 31,265 |   | 1,263,609 |   | 45,169 |
| Equity securities              | 4,576                                        |   | 687 |   | 5,800 |   | 1,157 |   | 10,376 |   | 1,844 |
| Total                          | $ 434,182                                    |   | $ 14,591 |   | $ 839,803 |   | $ 32,422 |   | $ 1,273,985 |   | $ 47,013 |
|                           |                                         |   |   |   |   |   |   |   |   |   |   |

 

             

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

             

At            March 31, 2008, approximately 50% of the gross unrealized losses from the fixed            maturity portfolio was attributable to securities having gross unrealized losses of            less than 12 months. This compares to December 31, 2007, when 31% of the gross            unrealized losses were less than 12 months. The financial sector in corporate            obligations and corporate private-labeled mortgage-backed securities experienced the            largest changes during the quarter.

 

 

 

 

 

 

 

 

 

 

23

 

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The            following table summarizes the fixed maturity securities with unrealized losses as of            March 31, 2008 and December 31, 2007 by ratio of unrealized loss to amortized            cost.

|                                                                             | March 31, 2008 |
|----------------------------------------------------------------------------------|----------------|
|                                                                             |           |   |   |   | Gross |
|                                                                             | Amortized      |   | Fair |   | Unrealized |
|                                                                             | Cost           |   | Value |   | Losses |
| Unrealized losses of 10% or less                                                 | $ 829,239      |   | $ 797,994 |   | $ 31,245 |
| Unrealized losses of 20% or less and greater than                            10% | 195,924        |   | 169,669 |   | 26,255 |
| Subtotal                                                                         | 1,025,163      |   | 967,663 |   | 57,500 |
| Unrealized losses greater than 20% :                                             |           |   |   |   |   |
| Investment grade                                                                 |           |   |   |   |   |
| Less than six months                                                             | 49,298         |   | 34,609 |   | 14,689 |
| Six months or more and less than twelve                            months        | 4,750          |   | 2,803 |   | 1,947 |
| Twelve months or greater                                                         | -              |   | - |   | - |
| Total investment grade                                                           | 54,048         |   | 37,412 |   | 16,636 |
| Below investment grade                                                           |           |   |   |   |   |
| Less than six months                                                             | 10,483         |   | 7,460 |   | 3,023 |
| Six months or more and less than twelve                            months        | 7,219          |   | 3,862 |   | 3,357 |
| Twelve months or greater                                                         | -              |   | - |   | - |
| Total below investment grade                                                     | 17,702         |   | 11,322 |   | 6,380 |
| Unrealized losses greater than 20%                                               | 71,750         |   | 48,734 |   | 23,016 |
| Total unrealized losses                                                          | $ 1,096,913    |   | $ 1,016,397 |   | $ 80,516 |
|                                                                             |           |   |   |   |   |

|                                                                             | December 31, 2007 |
|----------------------------------------------------------------------------------|-------------------|
|                                                                             |              |   |   |   | Gross |
|                                                                             | Amortized         |   | Fair |   | Unrealized |
|                                                                             | Cost              |   | Value |   | Losses |
| Unrealized losses of 10% or less                                                 | $ 1,221,745       |   | $ 1,191,230 |   | $ 30,515 |
| Unrealized losses of 20% or less and greater than                            10% | 67,748            |   | 58,444 |   | 9,304 |
| Subtotal                                                                         | 1,289,493         |   | 1,249,674 |   | 39,819 |
| Unrealized losses greater than 20% :                                             |              |   |   |   |   |
| Investment grade                                                                 |              |   |   |   |   |
| Less than six months                                                             | 9,246             |   | 6,938 |   | 2,308 |
| Six months or more and less than twelve                            months        | -                 |   | - |   | - |
| Twelve months or greater                                                         | -                 |   | - |   | - |
| Total investment grade                                                           | 9,246             |   | 6,938 |   | 2,308 |
| Below investment grade                                                           |              |   |   |   |   |
| Less than six months                                                             | 10,039            |   | 6,997 |   | 3,042 |
| Six months or more and less than twelve                            months        | -                 |   | - |   | - |
| Twelve months or greater                                                         | -                 |   | - |   | - |
| Total below investment grade                                                     | 10,039            |   | 6,997 |   | 3,042 |
| Unrealized losses greater than 20%                                               | 19,285            |   | 13,935 |   | 5,350 |
| Total unrealized losses                                                          | $ 1,308,778       |   | $ 1,263,609 |   | $ 45,169 |

 

Total unrealized losses on fixed maturity securities at March 31, 2008            were $80.5 million. The Company segments these unrealized losses into three primary            categories. The first category includes total unrealized losses of 10% or less of            amortized cost, which totaled $31.2 million or 39% of the total unrealized losses on            fixed maturity securities. The second category reflects total unrealized losses of 20%            or less and greater than 10%. This category totaled $26.3 million or 32% of the total            unrealized losses. The third category shows total unrealized losses greater than 20%.            This category totaled $23.0 million or 29% of the total.

 

24

 

----

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 $16.6 million in unrealized losses,            while securities rated below investment grade had $6.4 million in unrealized            losses.

 

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 $14.7 million and $1.9 million for            less than six months and six or more and less than twelve-month periods, respectively.            The Company also had below investment grade securities with unrealized losses of            greater than 20% that totaled $3.0 million and $3.4 million for less than six months            and six or more and less than twelve-month periods, respectively. The Company had no            securities with unrealized losses of greater than 20% for twelve months or            greater.

 

Total unrealized losses on fixed maturity securities at December 31,            2007 were $45.2 million. The Company segments these unrealized losses into three            primary categories. The first category includes total unrealized losses of 10% or less            of amortized cost, which totaled $30.5 million or 67% of the total unrealized losses on            fixed maturity securities. The second category reflects total unrealized losses of 20%            or less and greater than 10%. This category totaled $9.3 million or 21% of the total            unrealized losses. The third category shows total unrealized losses greater than 20%.            This category totaled $5.4 million or 12% of the total.

 

Securities with unrealized losses greater than 20% are also monitored            based upon whether the securities are above or below investment grade. Investment grade            securities in this category had $2.3 million in unrealized losses, while securities            rated below investment grade had $3.1 million in unrealized losses.

 

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 12 months,            and 12 months or greater. The Company had investment grade securities with unrealized            losses of greater than 20% that totaled $2.3 million for less than six months. The            Company had no investment grade or below investment grade securities with unrealized            losses of greater than 20% for six months or more and less than twelve months. The            Company had below investment grade securities with unrealized losses of greater than            20% that totaled $3.0 million for less than six months. The Company had no below            investment grade securities with unrealized losses of more than 20% for twelve months            or greater.

 

The            following table provides information on fixed maturity securities with gross unrealized            losses by rating as of March 31, 2008.

|                         | March 31, 2008 |
|------------------------------|----------------|
|                         |           |   |   |   | Gross |   |   |
|                         | Fair           |   |   |   | Unrealized |   |   |
| Equivalent S&P Rating    | Value          |   | % |   | Losses |   | % |
| AAA                          | $ 423,636      |   | 42% |   | $ 34,130 |   | 42% |
| AA                           | 43,495         |   | 4% |   | 3,643 |   | 4% |
| A                            | 210,563        |   | 21% |   | 13,467 |   | 17% |
| BBB                          | 259,904        |   | 25% |   | 15,811 |   | 20% |
| Total investment grade       | 937,598        |   | 92% |   | 67,051 |   | 83% |
| BB                           | 46,948         |   | 5% |   | 5,608 |   | 7% |
| Other                        | 31,851         |   | 3% |   | 7,857 |   | 10% |
| Total below investment grade | 78,799         |   | 8% |   | 13,465 |   | 17% |
|                         | $ 1,016,397    |   | 100% |   | $ 80,516 |   | 100% |
|                         |           |   |   |   |   |   |   |

 

 

 

 

25

 

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The            following table provides information on fixed maturity securities with gross unrealized            losses by rating as of December 31, 2007.

|                         | December 31, 2007 |
|------------------------------|-------------------|
|                         |              |   |   |   | Gross |   |   |
|                         | Fair              |   |   |   | Unrealized |   |   |
| Equivalent S&P Rating    | Value             |   | % |   | Losses |   | % |
| AAA                          | $ 528,319         |   | 42% |   | $ 13,798 |   | 31% |
| AA                           | 75,853            |   | 6% |   | 1,611 |   | 4% |
| A                            | 272,486           |   | 21% |   | 10,064 |   | 22% |
| BBB                          | 312,246           |   | 25% |   | 11,485 |   | 25% |
| Total investment grade       | 1,188,904         |   | 94% |   | 36,958 |   | 82% |
| BB                           | 47,775            |   | 4% |   | 5,319 |   | 12% |
| Other                        | 26,930            |   | 2% |   | 2,892 |   | 6% |
| Total below investment grade | 74,705            |   | 6% |   | 8,211 |   | 18% |
|                         | $ 1,263,609       |   | 100% |   | $ 45,169 |   | 100% |
|                         |              |   |   |   |   |   |   |

 

As            of March 31, 2008, 92% of the carrying value for fixed maturity securities with gross            unrealized losses were investment grade, compared to 94% at December 31,            2007.

 

The            following tables provide the distribution of maturities for fixed maturity investment            securities available for sale with unrealized losses as of March 31, 2008 and December            31, 2007. Expected maturities may differ from these contractual maturities since            borrowers may have the right to call or prepay obligations.

 

The            following tables provide information on fixed maturity securities available for sale as            of March 31, 2008 and December 31, 2007.

|                                   | March 31, 2008 |
|----------------------------------------|----------------|
|                                   |           |   | Gross |
| Fixed maturity security securities     | Fair           |   | Unrealized |
| available for sale:                    | Value          |   | Losses |
| Due in one year or less                | $ 14,821       |   | $ 626 |
| Due after one year through five years  | 146,536        |   | 10,558 |
| Due after five years through ten years | 272,230        |   | 19,547 |
| Due after ten years                    | 237,448        |   | 22,558 |
| Total                                  | 671,035        |   | 53,289 |
| Mortgage and asset-backed securities   | 335,503        |   | 27,036 |
| Redeemable preferred stocks            | 9,859          |   | 191 |
| Total                                  | $ 1,016,397    |   | $ 80,516 |
|                                   |           |   |   |

 

 

 

 

 

 

 

 

26

 

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|                                   | December 31, 2007 |
|----------------------------------------|-------------------|
|                                   |              |   | Gross |
| Fixed maturity security securities     | Fair              |   | Unrealized |
| available for sale:                    | Value             |   | Losses |
| Due in one year or less                | $ 36,096          |   | $ 187 |
| Due after one year through five years  | 245,585           |   | 8,898 |
| Due after five years through ten years | 302,597           |   | 13,482 |
| Due after ten years                    | 287,270           |   | 13,550 |
| Total                                  | 871,548           |   | 36,117 |
| Mortgage and asset-backed securities   | 387,134           |   | 8,928 |
| Redeemable preferred stocks            | 4,927             |   | 124 |
| Total                                  | $ 1,263,609       |   | $ 45,169 |

 

The            Company’s analysis identified no securities with other-than-temporary impairment            in the first quarters of 2008 or 2007.

 

Following is a discussion of securities where fair value had been less            than 80% of amortized cost for at least six months as of March 31, 2008. The Company            has evaluated the three fixed maturity securities in this category, and prepared            detailed analyses on each position. The Company has evaluated and considered a wide            variety of factors on which it bases its decision whether to determine these positions            as being other than temporarily impaired.

 

The            first security is an issue from a company that provides outsourcing services for            residential and commercial customers. It is part of a cyclical industry that is            correlated to the housing market. This company recently completed a leveraged buyout            which greatly increased its debt and corresponding interest payments. While it recorded            a net loss for 2007, revenues were stable and the company has a strong market position            in an industry that is believed to have favorable long-term prospects. Although there            could be weakness in revenue growth in the short-term due to the downturn of the            housing market, the company has positive cash flow and no debt maturities for several            years.

 

The            second security is a collateralized debt obligation (CDO). In recent quarters, the            credit markets have experienced a dislocation that has impacted the valuation of many            CDO investments. The deterioration of the housing and mortgage markets have played a            leading role in this credit crisis and many CDOs have underlying collateral that is            directly or indirectly related to mortgages. However, this security is comprised            primarily of senior secured bank loans with certain protective triggers, including            minimum over-collateralization and minimum interest coverage. Restrictions on            investments include maximum issuer concentration and maximum industry concentration.            This security is currently in compliance with all quality and performance tests and has            maintained an investment grade rating.

 

The            third security is from a company that is a leading diversified real estate finance            company, focusing on the production and servicing of residential mortgages. Due to the            downturns experienced in the residential real estate and housing markets, home prices            have fallen and delinquencies have increased. Companies involved in residential            mortgage lending have taken write-downs in recent quarters. This company’s losses            have grown and loan production has fallen. The parent of the issuer has shown its            belief in the long-term value of this company by contributing support to improve its            capital position through direct capital infusions and the purchase and retirement of a            portion of the company’s debt. Although the company reports sufficient cash and            liquidity for operations, further capital infusions from the parent will likely be            needed to fund near-term debt maturities, including the debt position owned by the            Company that becomes due in 27 months. The parent of the issuer has stated its intent            and is believed to have the financial ability to support the company through this            period.

 

 

 

27

 

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The            Company has written down certain investments in previous periods. Securities previously            written down and still owned as of March 31, 2008 and December 31, 2007 are identified            in the tables below.

|                                                                      | March 31, 2008    |
|---------------------------------------------------------------------------|-------------------|
|                                                                      | Carrying          |   | Fair |   | Unrealized |
| Time owned since write-down:                                              | Amount            |   | Value |   | gain/(loss) |
| Less than six months                                                      | $ 6,136           |   | $ 4,536 |   | $ (1,600) |
| Six months or more and less than twelve                            months | -                 |   | - |   | - |
| Twelve months or greater                                                  | 483               |   | 994 |   | 511 |
| Total                                                                     | $ 6,619           |   | $ 5,530 |   | $ (1,089) |
|                                                                      |              |   |   |   |   |
|                                                                      | December 31, 2007 |
|                                                                      | Carrying          |   | Fair |   | Unrealized |
| Time owned since write-down:                                              | Amount            |   | Value |   | gain/(loss) |
| Less than six months                                                      | $ 6,136           |   | $ 6,136 |   | $ - |
| Six months or more and less than twelve                            months | -                 |   | - |   | - |
| Twelve months or greater                                                  | 483               |   | 1,003 |   | 520 |
| Total                                                                     | $ 6,619           |   | $ 7,139 |   | $ 520 |

             

The            Company is exposed to risk that issuers of securities owned by the Company will default            or that interest rates, or credit spreads or liquidity factors will change and cause a            decrease in the value of its investments. With mortgage-backed securities, the Company            is also exposed to prepayment and extension risks. As interest rates change, the rate            at which these securities pay down principal may change. These risks are mitigated by            investing in high-grade securities and managing the maturities and cash flows of            investments and liabilities to the greatest extent possible.

             

Concerns arose during the second half of 2007            regarding subprime mortgage loan defaults.  Market dislocations have            exacerbated this issue as some sources of liquidity, such as asset-backed            commercial paper, auction-rate markets and bank financing have            contracted.  Demand for investments securitized by home loans has also fallen            significantly, making it more difficult for mortgage loan originators to sell their            loans profitably.  Home prices continue to fall, which hinders potential            sales and loan refinancings that might otherwise avert defaults.  These            issues have largely been centered around increasing delinquencies and default rates by            subprime borrowers. Many investors have shunned securities backed by home loans,            regardless of the actual quality of the underlying assets, sending market values for            this entire class of securities downward.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 March 31, 2008, the Company had            investments with subprime residential mortgage exposure of $38.5 million and a related            $3.8 million unrealized loss.  This exposure amounted to 1% of the Company’s            invested assets and all such assets were valued based on external pricing            sources.

 

***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. Death benefits accounted for 66% of policyholder benefits            in the first quarter, compared to 68% a year ago. Policyholder benefits increased $1.5            million or 3% in the first quarter. Contributing to the increase, individual life            surrenders increased $0.3 million or 11% compared to a year ago. Other benefits            increased 5%, largely due to lower ceded other benefits primarily resulting from the            termination of the stop loss business.

 

***Interest Credited to Policyholder Account            Balances***

Interest credited to policyholder account balances decreased $1.1            million or 5% in the first quarter, largely due to lower policyholder account balances.            Interest was credited to policyholder account balances for universal life, fixed            deferred annuities and other investment-type products.

 

28

 

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

Certain life insurance and annuity products require that DAC is            amortized in proportion to the 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 annually and if necessary, adjustments are made in the current            period VOBA amortization.

 

The            amortization of DAC and VOBA decreased 2% in the first quarter. VOBA is amortized in            concert with each purchased block of business. Accordingly, as policies run off, the            amortization will decline over time. The amortization of VOBA declined 4% in the first            quarter of 2008 compared with 2007. The amortization of DAC was affected in the quarter            from two primary items. First, an increase in DAC amortization resulted from additional            DAC expense from variable products, which have been impacted by the financial            markets’ negative fluctuations in the first quarter. Second, partially offsetting            these items, the Company corrected an amortization error from prior periods in which it            had overstated DAC amortization. Commissions from a specific group of policies were            incorrectly calculated. This correction primarily involved several prior years and            totaled $0.7 million. The prior period impact was not material and totaled $0.1 million            in each year from 2007 to 2001. There were no unlocking adjustments in the first            quarters of 2008 and 2007 for either DAC or VOBA.

 

***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 $1.7 million or 7% in the            first quarter of 2008. This increase was largely the result of higher insurance            operating expenses of $1.3 million, primarily due to increases in salaries and employee            benefits and differences in the timing of the incurral of other expenses. Commissions            and production allowances increased $0.2 million, reflecting the overall increase in            insurance premiums.

 

***Income Taxes***

The            first quarter income tax expense was $2.0 million or 36% of income before tax for 2008,            versus $3.9 million or 32% of income before tax for the prior year period.

 

The            effective income tax rate in 2008 was higher than the prevailing corporate federal            income tax rate of 35% primarily due to additional interest accrued on uncertain tax            positions in prior years.

 

The            effective income tax rate in 2007 was lower than the prevailing corporate federal            income tax rate of 35% primarily due to income tax credits generated from the            Company’s investments in affordable housing. The effect of the affordable housing            tax credits on the effective tax rate in the prior year period was a benefit of            approximately 3% 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, and dental 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. Refer to Note 9 - Segment Information in the Notes to the            Consolidated Financial Statements (Unaudited).

 

 

 

 

29

 

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***Individual Insurance***

The            following table presents financial data of the Individual Insurance business segment            for the first quarters of 2008 and 2007:

 

|                                                                          | Quarter ended  |
|-------------------------------------------------------------------------------|----------------|
|                                                                          | March 31       |
|                                                                          | 2008           |   | 2007 |
| Insurance revenues:                                                           |           |   |   |
| Premiums                                                                      | $ 14,567  |   | $ 12,584  |
| Contract charges                                                              | 27,300    |   | 28,703  |
| Reinsurance ceded                                                             | (9,831)        |   | (9,847) |
| Total insurance revenues                                                      | 32,036    |   | 31,440  |
| Investment revenues:                                                          |           |   |   |
| Net investment income                                                         | 43,078    |   | 43,704  |
| Realized investment gains                                                     | 84        |   | 5,128  |
| Other revenues                                                                | 2,540     |   | 2,344  |
| Total revenues                                                                | 77,738    |   | 82,616  |
|                                                                          |           |   |   |
| Policyholder benefits                                                         | 26,015    |   | 25,177  |
| Interest credited to policyholder account                            balances | 21,703    |   | 22,773  |
| Amortization of deferred acquisition costs                                    |           |   |   |
| and value of business acquired                                                | 7,606     |   | 8,204  |
| Operating expenses                                                            | 16,548    |   | 14,686  |
| Total benefits and expenses                                                   | 71,872    |   | 70,840  |
|                                                                          |           |   |   |
| Income before income tax expense                                              | 5,866     |   | 11,776  |
|                                                                          |           |   |   |
| Income tax expense                                                            | 2,104     |   | 3,749  |
|                                                                          |           |   |   |
| Net income                                                                    | $ 3,762   |   | $ 8,027  |

 

 

Premium information is provided in the table below.

 

|                      | Quarter ended March 31 |
|---------------------------|------------------------|
|                      | 2008                   | % |   | 2007 | % |
| New premiums:             |                   |   |   |   |   |
| Individual life insurance | $ 1,375                | (2) |   | $ 1,398 | (14) |
| Immediate annuities       | 2,975                  | 200  |   | 992 | (42) |
| Total new premiums        | 4,350                  | 82  |   | 2,390 | (28) |
| Renewal premiums          | 10,217                 | -  |   | 10,194 | -  |
| Total premiums            | $ 14,567               | 16  |   | $ 12,584 | (7) |

 

 

 

 

30

 

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Deposit information is provided in the table below.

|                              | Quarter ended March 31 |
|-----------------------------------|------------------------|
|                              | 2008                   | % |   | 2007 | % |
| New deposits:                     |                   |   |   |   |   |
| Universal life insurance          | $ 2,395                | (13) |   | $ 2,751 | 14  |
| Variable universal life insurance | 504                    | (43) |   | 884 | 19  |
| Fixed deferred annuities          | 5,550                  | (12) |   | 6,328 | 2  |
| Variable annuities                | 7,709                  | 37  |   | 5,633 | 13  |
| Total new deposits                | 16,158                 | 4  |   | 15,596 | 9  |
| Renewal deposits                  | 32,504                 | (13) |   | 37,388 | (1) |
| Total deposits                    | $ 48,662               | (8) |   | $ 52,984 | 2  |

 

Net            income for this segment in the first quarter was $3.8 million, a decrease of $4.3            million from 2007. The decline in the first quarter was largely the result of a $5.0            million decrease in realized investment gains in the first quarter of 2008 versus a            year ago. Also contributing to the decline, net investment income declined $0.6            million, policyholder benefits rose $0.8 million and operating expenses increased $1.9            million. Partially offsetting these were a $0.6 million increase in insurance revenues,            a $1.1 million decrease in interest credited to policyholder account balances, and a            $1.6 million decrease in income tax expense.

 

Insurance revenues for this segment increased 2% in the first quarter            compared with last year. Total premiums increased 16%, primarily due to significantly            greater immediate annuity sales. Individual life premiums were flat compared with the            first quarter of 2007. Contract charges decreased 5% in the first quarter, while total            reinsurance ceded was flat compared with a year ago. As previously mentioned, expense            loads were corrected by $1.7 million for the portion representing unearned revenues in            the second quarter of 2007, of which $1.4 million was attributable to prior            periods.

 

New            individual life premiums decreased 2% compared with the first quarter of 2007. New            immediate annuity premiums tripled, reflecting consumer preferences during the period.            Total renewal premiums were flat compared to a year ago. Total new deposits increased            4% for the first quarter. This increase resulted from a 37% increase in variable            annuity sales, but this was partially offset by a 13% decrease in universal life sales,            a 43% decrease in variable universal life sales and a 12% decrease in fixed deferred            annuity business. The declines can largely be attributed to increased competition,            changing consumer preferences and the continued impact of alternative products. Renewal            deposits declined 13% in the first quarter compared to a year ago. Renewal deposits of            universal life, variable universal life, and variable annuity deposits declined, while            fixed deferred annuity deposits increased.

 

Net            investment income decreased 1% in the first quarter, primarily due to reduced            investment assets. This decline was partially offset by reduced investment expenses and            a slight increase in investment yields. This segment experienced a $0.1 million            realized investment gain for the first quarter of 2008 versus $5.0 million for the same            period a year ago. The gains in 2007 were largely due to the sale of certain real            estate properties. In addition, the Company completed the sale of Generations Bank for            $10.1 million, generating a gain of $1.9 million.

 

Policyholder benefits increased 3% in the first quarter compared with a            year ago, largely due to an increase in benefit and contract reserves. This primarily            resulted from the increase in immediate annuity premiums, where reserves are            established virtually on a one-for-one basis with premiums. This increase was partially            offset by a decline in death benefits during the quarter.

 

Interest credited to policyholder account balances decreased $1.1            million or 5% in the first quarter compared with a year ago. This decrease was largely            due to lower policyholder account balances.

 

The            amortization of DAC and VOBA decreased 7% in the first quarter. VOBA is amortized in            concert with each purchased block of business. Accordingly, as policies run off, the            amortization will decline over time. The amortization of VOBA declined 6% in the first            quarter of 2008 compared with 2007. The amortization of DAC was affected in the quarter            from two primary items. First, an increase in DAC amortization resulted from additional            DAC expense from variable products, which have been impacted by the negative            performance of the financial markets in the first quarter. Second, partially offsetting            these items, the Company corrected an amortization error from prior periods in which it            had overstated DAC amortization. Commissions from a specific group of            policies

 

31

 

----

were            incorrectly calculated. This correction primarily involved several prior years and            totaled $0.7 million. The prior period impact was not material and totaled $0.1 million            in each year from 2007 to 2001. There were no unlocking adjustments in the first            quarters of 2008 and 2007 for either DAC or VOBA.

 

Operating expenses increased $1.9 million or 13% in the first quarter            compared with the prior year. Operating expenses consist of commissions and production            allowances, net of the capitalization of commissions and production allowances, and            expenses from the Company’s operations. The impact of reduced capitalization of            commissions and production allowances increased expense $0.4 million versus a year ago.            In addition, insurance operating expenses rose $1.2 million, largely reflecting higher            salaries and employee benefits and increased software costs.

 

***Group Insurance***

The            following table presents financial data of the Group Insurance business segment for the            first quarters of 2008 and 2007:

 

|                                                                         | Quarter ended  |
|------------------------------------------------------------------------------|----------------|
|                                                                         | March 31       |
|                                                                         | 2008           |   | 2007 |
| Insurance revenues:                                                          |           |   |   |
| Premiums                                                                     | $ 13,724  |   | $ 13,536  |
| Reinsurance ceded                                                            | (1,871)        |   | (2,137) |
| Total insurance revenues                                                     | 11,853    |   | 11,399  |
| Investment revenues:                                                         |           |   |   |
| Net investment income                                                        | 121       |   | 65  |
| Other revenues                                                               | 68        |   | 72  |
| Total revenues                                                               | 12,042    |   | 11,536  |
|                                                                         |           |   |   |
| Policyholder benefits                                                        | 7,386     |   | 7,357  |
| Operating expenses                                                           | 4,455     |   | 4,453  |
| Total benefits and expenses                                                  | 11,841    |   | 11,810  |
|                                                                         |           |   |   |
| Income (loss) before income tax expense                            (benefit) | 201       |   | (274) |
|                                                                         |           |   |   |
| Income tax expense (benefit)                                                 | 72        |   | (82) |
|                                                                         |           |   |   |
| Net income (loss)                                                            | $ 129     |   | $ (192) |

 

 

 

 

 

 

 

 

 

32

 

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Premium            information is provided in the table below.

 

|                       | Quarter ended March 31 |
|----------------------------|------------------------|
|                       | 2008                   | % |   | 2007 | % |
| New premiums:              |                   |   |   |   |   |
| Group life insurance       | $ 514                  | 64  |   | $ 314 | 32  |
| Group dental insurance     | 2,088                  | 18  |   | 1,763 | 12  |
| Group disability insurance | 458                    | 30  |   | 351 | (3) |
| Other group insurance      | 66                     | (89) |   | 582 | (35) |
| Total new premiums         | 3,126                  | 4  |   | 3,010 | (2) |
| Renewal premiums           | 10,598                 | 1  |   | 10,526 | 7  |
| Total premiums             | $ 13,724               | 1  |   | $ 13,536 | 5  |

 

Insurance revenues for the Group Insurance segment increased $0.5            million or 4% in the first quarter compared to last year. This improvement was the            result of a 1% increase in premiums and a 12% decline in reinsurance ceded. Total new            premiums increased 4% and renewal premiums increased 1%. New group life premiums rose            64%, new disability premiums increased 30% and new dental premiums increased 18%. This            segment exited the stop loss market during 2006 but continued to process existing            business until the stop loss contracts expired in 2007. Excluding this line from the            ongoing product lines, total premiums increased 5% and total new premiums increased            25%. The 12% decrease in reinsurance premiums was primarily due to the termination of            the stop loss business. A major portion of the stop loss premiums was reinsured in            order to manage the potential risks associated with this product line.

 

Policyholder benefits were flat compared to the first quarter of 2007.            Death benefits in the group life product line decreased $0.2 million or 15%. Benefits            paid on dental claims increased 16%, but were partially offset by a 52% decline in the            long-term disability product and a 38% decline in the short-term disability product.            The claims ratio (total policyholder benefits divided by total insurance revenues) for            this segment decreased from 65% in the first quarter of 2007 to 62% in 2008.

 

Operating expenses consist of commissions, fees to third party            partnerships and expenses from the Company’s operations. Operating expenses were            flat in the first quarter of 2008 compared with the same period in 2007.

 

Net            income for this segment totaled $0.1 million for the first quarter of 2008 compared            with a $0.2 million loss in 2007. This improvement was primarily due to increased            insurance revenues and improved benefit ratios. Improvement efforts continue to be            focused in three primary areas. First, emphasis is being placed on the growth of the            in-force business. This segment has targeted increased productivity of the existing            group representatives and to continue to expand the group distribution system. The            second area of focus for the improvement is to increase the use of technology to            achieve improved administrative efficiency, which would ultimately reduce expenses. The            third area of focus is to add new products to the portfolio, particularly voluntary            products which tend to be more profitable and will increasingly become a larger share            of the group marketplace.

 

33

 

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***Old American Insurance Company***

The            following table presents financial data of the Old American Insurance Company business            segment for the first quarters of 2008 and 2007:

 

|                                                                         |           |
|------------------------------------------------------------------------------|----------------|
|                                                                         | Quarter ended  |
|                                                                         | March 31       |
|                                                                         | 2008           |   | 2007 |
| Insurance revenues:                                                          |           |   |   |
| Premiums                                                                     | $ 16,345  |   | $ 16,799  |
| Reinsurance ceded                                                            | (958)          |   | (1,085) |
| Total insurance revenues                                                     | 15,387    |   | 15,714  |
| Investment revenues:                                                         |           |   |   |
| Net investment income                                                        | 3,264     |   | 3,315  |
| Realized investment gains (losses)                                           | 36        |   | (4) |
| Other revenues                                                               | 1         |   | 1  |
| Total revenues                                                               | 18,688    |   | 19,026  |
|                                                                         |           |   |   |
| Policyholder benefits                                                        | 12,085    |   | 11,458  |
| Amortization of deferred acquisition costs                                   |           |   |   |
| and value of business acquired                                               | 3,506     |   | 3,172  |
| Operating expenses                                                           | 3,542     |   | 3,722  |
| Total benefits and expenses                                                  | 19,133    |   | 18,352  |
|                                                                         |           |   |   |
| Income (loss) before income tax expense                            (benefit) | (445)          |   | 674  |
|                                                                         |           |   |   |
| Income tax expense (benefit)                                                 | (156)          |   | 203  |
|                                                                         |           |   |   |
| Net income (loss)                                                            | $ (289)        |   | $ 471  |
|                                                                         |           |   |   |

 

Premium            information is provided in the table below.

 

|             | Quarter ended March 31 |
|------------------|------------------------|
|             | 2008                   | % |   | 2007 | % |
|             |                   |   |   |   |   |
| New premiums     | $ 1,778                | 13  |   | $ 1,577 | (3) |
| Renewal premiums | 14,567                 | (4) |   | 15,222 | (5) |
| Total premiums   | $ 16,345               | (3) |   | $ 16,799 | (4) |

 

The            net loss for this segment was $0.3 million in the first quarter of 2008, versus net            income of $0.5 million a year ago. The decrease in net income was largely the result of            an increase in policyholder benefits, higher amortization of DAC and a decline in            insurance revenues. These were partially offset by a reduction in income tax            expense.

 

Insurance revenues decreased 2% in first quarter versus last year. New            premiums increased 13%, while renewal premiums declined 4%. The increase in new            premiums reflects a combination of product, compensation and distribution changes,            which have improved this segment’s competitive position. Old American continues            to focus

 

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on            the recruitment and development of new agencies and agents, along with improved            production from existing agencies and agents.

 

Net            investment income declined $0.1 million or 2% in the first quarter of 2008 compared            with 2007. An increase in investment assets was partially offset by a decrease in            investment yields.

 

Policyholder benefits increased $0.6 million or 5% versus last year.            This increase was largely the result of a $0.9 million increase in death benefits            compared with the prior year. Partially offsetting this increase was a release in            reserves on these policies.

 

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 decreased $0.2 million or 5%. This decrease            was largely the result of a decrease in salaries and benefits and a reduction in lead            production expenses.

 

**Liquidity and Capital Resources**

 

Statements made in the Company's 2007 Form 10-K remain pertinent, as the            Company’s liquidity position is materially unchanged from year-end            2007.

 

The            Company meets liquidity requirements primarily through positive cash flows from            operations. The Company has sufficient sources of liquidity to satisfy operational            requirements. 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. 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.

 

Cash            from operations decreased $16.4 million versus the same period a year ago. Several            factors contributed to this decline. Cash benefit payments, largely from death claims,            increased $4.7 million while cash received from gross investment income declined $2.5            million. Cash is also affected by increases and decreases in the Company’s net            receivables and net payables. The Company’s claim liability increased $8.3            million, largely driven by one claim which totaled $6.0 million. Partially offsetting            this increase, reinsurance receivables, which are primarily receivables established at            the time death claims are paid, increased $9.2 million. However, the one large death            claim mentioned above was also nearly fully reinsured and accounted for $5.9 million of            this total. Finally, the Company reduced accounts payable and suspense accounts $4.4            million in the first quarter.

 

Net            cash used in investing activities was $4.5 million in the first quarter of 2008,            compared to net cash provided of $41.8 million for the same period in 2007. The            Company’s new investments in fixed maturity and equity securities were $143.9            million in the first quarter, up from $86.7 million a year ago. New investments in            mortgage loans were $1.7 million for the quarter, compared with $16.3 million last            year. During the first quarter of 2008, the Company increased its purchases of real            estate to $7.0 million, versus $0.9 million in 2007. Approximately 4% of the securities            portfolio was sold, called or matured in the first quarters of both 2008 and 2007. The            Company had $10.9 million in mortgage loan maturities and principal paydowns in the            first quarter, compared to $13.7 million last year. During the first quarter of 2008,            the Company had sales of real estate investments of $8.3 million, down from $13.0            million a year ago. In addition, the sale of Generations Bank resulted in proceeds of            $10.1 million in 2007.

 

Net            cash provided from financing activities was $10.5 million for the quarter, compared            with $36.9 million in cash used in the first quarter 2007. This change was primarily            the result of four items. First, the Company had net proceeds from borrowings of $31.5            million during the first quarter of 2008. Second, dividends paid to stockholders were            $3.2 million in the first quarter of 2008, compared to $26.9 million a year ago.            Dividends in the first quarter in 2007 included both a one-time special dividend and            the regular quarterly dividend in 2007. Third, withdrawals from policyholder account            balances declined $13.2 million from a year ago. Fourth, the net acquisition of            treasury stock increased $6.2 million versus a year ago, reflecting purchases from            employee benefit plans and the stock repurchase program.

 

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.

 

35

 

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***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 March            31, 2008, outstanding balances in notes payable to the FHLB were $41.9 million. All            outstanding balances have maturities of less than one year and are secured by financial            assets.

 

Borrowings were $41.9 million at March 31, 2008, up from $10.4 million            at year-end 2007. The increase in borrowings was due to additional borrowing from FHLB,            which increased $31.5 million in the quarter. The Company has access to unsecured            revolving lines of credit of $60.0 million with two major commercial banks with no            balances outstanding. Both lines of credit will expire during 2008, and it is expected            that the Company will renew these facilities.

 

***Capital Resources***

The            Company considers existing capital resources to be more than adequate to support the            current level of business activities.

 

The            following table shows the capital adequacy for the Company.

 

|                                | March 31    |   | December 31 |
|-------------------------------------|-------------|--------|-------------|
|                                | 2008        |   | 2007        |
| Total assets less separate accounts | $ 3,916,189 |   | $ 3,931,715 |
| Total stockholders' equity          | 664,125     |   | 684,401     |
| Ratio of stockholders' equity       |        |   |        |
| to assets less separate accounts    | 17%         |   | 17%         |

 

The            ratio of equity to assets less separate accounts has remained relatively constant.            Unrealized investment losses on available for sale securities, which are included as a            part of stockholders’ equity, totaled $7.1 million at March 31, 2008 (net of            securities gains and losses, related taxes, policyholder account balances and deferred            acquisition costs). This represents an increase of $14.7 million in losses from the            $7.6 million unrealized investment gains at year-end 2007.

 

Stockholders’ equity decreased $20.3 million from year-end. The            decrease was largely due to increases in unrealized investment losses and treasury            stock. 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 quarter of 2008, the benefit            plans purchased 102,129 shares of treasury stock for $4.8 million and sold 25,559            shares of treasury stock for $1.1 million.

 

During the first quarter of 2008, the Company purchased 50,954 of its            shares under the stock repurchase program for $2.3 million. Under this program, the            Company may purchase up to one million shares on the open market through January            2009.

 

On            April 28, 2008, the Board of Directors declared a quarterly dividend of $0.27 per            share, unchanged from the prior year that will be paid May 13, 2008 to stockholders of            record as of May 8, 2008.

 

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** 

 

Market risks have not changed materially from those disclosed in the            Company’s 2007 Annual Report on Form 10-K.

 

**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

 

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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.

 

37

 

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

 

On            April 24, 2008, the Annual Stockholders Meeting was held at 3520 Broadway, Kansas City,            Missouri. At this meeting, there were 11,723,778 shares outstanding and eligible to            vote, and 10,671,231 shares were represented at the meeting either in person or by            proxy.

 

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

 

| Walter E. Bixby      | 10,427,672 |
|----------------------|------------|
| Kevin G. Barth       | 10,448,832 |
| Nancy Bixby Hudson   | 10,427,672 |
| Daryl D. Jensen      | 10,449,272 |
| William A Schalekamp | 10,449,272 |

 

The            following Directors continued their term of office after the meeting:

 

| William R. Blessing  | R. Philip Bixby    |
|----------------------|--------------------|
| Richard L. Finn      | Michael Braude     |
| Cecil R. Miller      | Tracy W. Knapp     |
| Bradford T. Nordholm | E. Larry Winn, Jr. |

 

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**Item 5. Other Information**

 

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

|   | (816) 753-7299, Extension 8216 |
|--------|--------------------------------|

 

| **For Immediate Release:**May                            2, 2008, press release reporting financial results for the first                            quarter of 2008. |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

**Kansas City Life Announces First Quarter 2008 Results**

             

Kansas City Life Insurance Company recorded net income of $3.6 million            or $0.31 per share for the first quarter ended March 31, 2008, a decrease from $8.3            million or $0.70 per share in the prior year. The reduced net income was primarily due            to $5.0 million less in realized investment gains from the first quarter 2007, along            with lower net investment income and increased policyholder benefits and operating            expenses. Partially offsetting the impact of these changes, insurance revenues            increased 1%.

 

The            Company continues to focus its resources on increasing sales of life insurance            products. Recruiting and retention of general agents and agents, along with the            continued introduction of new products and enhancements to existing products are key            means by which the Company expects to grow life insurance sales.

 

New            sales results for the Company were largely positive in the first quarter. New insurance            premiums increased 33% compared with the prior year while new deposits increased 4%            versus a year ago. The increase in new premiums primarily resulted from a $2.0 million            increase in sales of immediate annuities. In addition, new individual life premiums            increased 6% and new group life insurance sales increased 64%. However, new deposits on            universal life insurance declined $0.4 million or 13% and variable universal life            insurance declined $0.4 million or 43%.

 

The            decline in net investment income was due to a decrease in investment assets, but this            was partially offset by a slight improvement in investment yields and reduced            investment expenses from real estate activities. In addition, the decline in realized            investment gains from the prior year was the result of reduced sales of real estate            investments and the one-time sale of a bank subsidiary.

 

Policyholder benefits increased due to the discontinuance of a product            in the Group Insurance segment, but the impact of the increase was largely offset by            lower interest credited to policyholder account balances as a result of lower account            balances. Operating expenses increased for comparative first quarter periods due to            increased compensation, employee benefits and the timing of other expenses.

 

After beginning with weakening subprime residential mortgage performance            in the second half of 2007, credit and liquidity problems in the financial markets            worsened in the first quarter of 2008. The impact of the deteriorating home mortgage            market has become broad-based and beset the overall economy. Reduced values on            investment securities caused net unrealized losses on the Company’s fixed            maturity investments to increase during the quarter. However, the Company continues to            maintain a sound and diversified portfolio of investments with approximately 1% of            total investment assets in subprime mortgage securities. Overall, 95% of the            Company’s investment securities were rated investment grade at March 31, 2008            versus 94% at December 31, 2007. Further, 92% of those securities having unrealized            losses at March 31, 2008 were rated investment grade.

 

On            April 28, 2008, the Board of Directors declared a quarterly dividend of $0.27 per            share, payable on May 13, to stockholders of record on May 8, 2008.

 

The            first quarter was a very difficult environment for financial services companies.            However, Kansas City Life’s financial strength and core values provide the            ability for the Company to weather these cyclical events and pursue opportunities for            growth at the same time. We are very excited about our plans and opportunities for            2008, including the delivery of new products and initiatives to further expand            distribution through growth of the general agency system. And, we will continue to            offer policyholders and investors the same commitment of Security Assured that we have            for generations.

 

 

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Kansas            City Life Announces

First            Quarter 2008 Results

May 2,            2008; Page Two

 

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 $439.2 million in 2007, and assets and life insurance in force            were $4.4 billion and $31.1 billion, respectively, as of December 31, 2007. The Company            operates in 49 states and the District of Columbia. For more information, please visit            www.kclife.com.

 

 

 

|                                          | Quarter ended |
|-----------------------------------------------|---------------|
|                                          | March 31      |
|                                          | 2008          |   | 2007 |
| Revenues                                      | $ 108,319     |   | $ 113,027 |
|                                          |          |   |   |
| Net income                                    | $ 3,602       |   | $ 8,306 |
|                                          |          |   |   |
| Net income per share,                         |          |   |   |
| basic and diluted                             | $ .31         |   | $ .70 |
|                                          |          |   |   |
|                                          |          |   |   |
| Dividends paid                                | $ .27         |   | $ 2.27 |
|                                          |          |   |   |
| Weighted average number of shares outstanding | 11,710,608    |   | 11,856,385 |

 

 

 

40

 

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**Item 6. Exhibits.**

 

|   | (a) | Exhibits: |
|--------|-----|-----------|

             

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

 

 

 

41

 

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**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:            April 30, 2008

 

 

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