Kansas City Life Insurance Company is a financial services company that is predominantly focused on sales and administration of life and annuity insurance products. The consolidated entity (the Company) primarily consists of three life insurance companies. Kansas City Life Insurance Company (Kansas City Life) is the parent company. Sunset Life Insurance Company of America (Sunset Life) and Old American Insurance Company (Old American) are wholly-owned subsidiaries.
The Company earns revenues primarily from premiums received from the sale of life, immediate annuity and accident and health policies, from earnings on its investment portfolio and from the sale of investment assets. Revenues from the sale of traditional life insurance and immediate annuity products and accident and health products are reported as premium income for financial statement purposes. Considerations for supplementary contracts with life contingencies are reported as part of other revenues. However, deposits received from the sale of interest sensitive products, namely universal life insurance products, deferred annuities, and annuities and supplementary contracts without life contingencies are not reported as premium revenues, but are instead reported as additions to the policyholders’ account balances and are reflected as deposits in the Consolidated Statements of Cash Flows. Accordingly, revenues on these products are recognized over time in the form of contract charges assessed against policyholder account balances, charges assessed on the early surrender of policyholder account balances and other charges deducted from policyholders’ balances.
Strong sales competition, highly competitive products and a difficult economic environment present significant challenges to the Company from a new sales perspective. The Company’s primary emphasis is on expanding sales of individual life insurance products. The Company’s continued focus is on delivering competitive products for a reasonable cost, prompt customer service, excellent financial strength and effective sales and marketing support to the field force.
In January of 2007, the Company completed the sale of its bank subsidiary, Generations Bank, for $10.1 million in cash after receiving regulatory approval. The gain on the sale was $1.9 million and was included in realized investment gains. The bank subsidiary and the results of operations were not material to the financial statements of the Company and are not disclosed separately.
The accounting policies below have been identified as critical to the understanding of the results of operations and financial position. The application of these critical accounting policies in preparing the financial statements requires management to use a variety of assumptions and estimates, in particular expectations of current and future mortality, morbidity, persistency, expenses, interest rates and equity market performance. Actual results may differ from these estimates under different assumptions or conditions. The profitability of life insurance and annuity products is dependent on actual experience, and differences between actual experience and pricing assumptions may result in variability of net income (loss) in amounts which may be material. On an ongoing basis, the Company evaluates the estimates, assumptions and judgments based on historical experience and other information that the Company believes to be reasonable under the circumstances. A detailed discussion of significant accounting policies is provided in Note 1 - Nature of Operations and Significant Accounting Policies in the Notes to Consolidated Financial Statements.
Fixed maturity securities, which are classified as available for sale, are carried at their fair value in the Company’s balance sheet, with unrealized gains or losses recorded in accumulated other comprehensive loss. The unrealized gains or losses are recorded net of the adjustment to policyholder account balances to reflect what would have been earned had those gains or losses been realized and the proceeds reinvested. The Company’s fair value of fixed maturity and equity securities are derived from external pricing services, brokers, and internal matrices and calculations. At December 31, 2009, approximately 92% of the carrying value of these investments was from external pricing services and 8% was derived from brokers and internal matrices or calculations. The investment portfolio is monitored regularly to ensure that investments which may be other-than-temporarily impaired are identified in a timely fashion and properly valued. Other-than-temporary impairments that are determined to be due to credit are charged against earnings as realized investment losses. The valuation of the investment portfolio involves a variety of assumptions and estimates.
The Company monitors the various markets in which its investments are traded. The Company utilizes a primary independent third-party pricing service to determine the majority of its fair values. At December 31, 2009 the Company used a second independent third-party pricing service to validate the fair market values provided by the primary pricing service. The Company also used the second pricing service to determine the fair value of certain securities for which the primary pricing service was unable to provide. At December 31, 2009, 91% of the value of the Company’s fixed maturity and equity securities were from the primary third-party pricing service and 1% was from the second independent pricing service. The Company reviews values received from independent pricing sources for validity. In addition, the Company tests a limited number of securities from each independent pricing service each reporting period to further validate reliance on the fair values provided. When fair values are not available from external service providers, where possible, the Company utilizes quotes from brokers. When the Company cannot obtain reliable broker pricing, a fair value is determined based upon an assessment of several factors appropriate for the specific issue, including but not limited to: the issuer’s industry; liquidity; cash flows; marketability, ratings and the ability of the issuer to satisfy the obligation; government intervention or regulations; fair value of comparable securities in actively traded or quoted markets; or other factors. The Company creates a matrix of factors from which to calculate an estimable value. However, all factors may not be known or publicly available from which to determine a value and, as such, the fair value used by the Company may not be truly indicative of the actual value available in an active market or an actual exit price if the Company were to sell the security in the current market.
To the extent the Company determines that a fixed maturity security is deemed to be other-than-temporarily impaired, the portion of the impairment that is deemed to be due to credit is charged to the income statement and the amortized cost basis of the underlying investment is reduced. The portion of the impairment that is deemed to be non-credit is charged to other comprehensive income (loss). Equity securities that are determined to be other-than-temporarily impaired are written down to fair value and the impairment is charged to the income statement.
The Company may selectively determine, as part of its individual investment assessment process in relation to specific investments that it intends to sell a fixed maturity security prior to its maturity. If the Company makes this determination and the fair value is less than the cost basis, an analysis of the fair value of the investment is performed and the amortized cost of the investment is written down to the fair value and an other-than-temporary impairment is recorded on this particular position. Subsequently, the Company seeks to obtain the best possible outcome available for this specific issue and records an investment gain or loss at the disposal date.
At least annually, a review is performed of the models and the assumptions used to develop expected future profits, based upon management’s current view of future events. DAC is reviewed on an ongoing basis to determine that the unamortized portion does not exceed the expected recoverable amounts. Management’s view primarily reflects Company experience but can also reflect emerging trends within the industry. Short-term deviations in experience affect the amortization of DAC and VOBA in the period, but do not necessarily indicate that a change to the long-term assumptions of future experience is warranted. If it is determined that it is appropriate to change the long-term assumptions of future experience, then an unlocking adjustment is recognized for the block of business being evaluated. Certain assumptions, such as interest spreads and surrender rates, may be interrelated. As such, unlocking adjustments often reflect revisions to multiple assumptions. The balances of DAC and VOBA are immediately impacted by any assumption changes, with the change reflected through the income statement as an unlocking adjustment in the amount of DAC or VOBA amortized. These adjustments can be positive or negative. The impact of unlocking adjustments from the changes in estimates for the periods reported are included in the Consolidated Results of Operations and Operating Results by Segment sections of the Management’s Discussion and Analysis of Financial Condition and Results of Operations contained within this document.
A 2.5% increase in expected mortality experience for all future years would result in a reduction in DAC and VOBA, and an increase in current period amortization expense of $4.4 million.
A 10% increase in expected surrender rates for all future years would result in a reduction in DAC and VOBA, and an increase in current period amortization expense of $2.1 million.
A 10 basis point reduction in future interest rate spreads would result in a reduction in DAC and VOBA, and an increase in current period amortization expense of $3.4 million.
A 10% increase in future maintenance expenses would result in a reduction in DAC and VOBA, and an increase in current period amortization expense of $2.2 million.
On an ongoing basis, the Company performs testing and analysis on its blocks of business to ensure that both the assumptions made when the Company purchases a block of business or when the Company sells new policies remain viable. The Company also periodically performs sensitivity testing on these blocks of business to ensure it maintains the capacity to meet an increase in demand in policyholder benefits, namely increased surrenders, policy loans or other policyholder elective withdrawals, especially when financial markets become volatile.
In addition, the Company recognizes the funded status of its defined benefit pension and postretirement plans, measured as the difference between plan assets at fair value and the benefit obligation, on the balance sheet. Changes in the funded status that arise during the period but are not recognized as components of net periodic benefit cost are recognized within other comprehensive income (loss) net of income taxes.
The Company measures sales in terms of new premiums and deposits. Premiums are included in insurance revenues in the Consolidated Statements of Income, while deposits are shown as a Financing Activity in the Consolidated Statements of Cash Flows.
Total new deposits increased $34.8 million or 51%, following a $0.4 million or 1% decrease in 2008. The increase in 2009 was due to a $46.2 million or 152% increase in new fixed deferred annuity deposits. This increase can be attributed to consumer preferences for fixed-rate products resulting from the volatility of the equity markets. This volatility, along with the general effects of the recessionary environment, is also reflected in the reduction in sales of new universal life deposits, new variable universal life deposits and new variable annuities, which declined 10%, 47% and 37%, respectively. The slight decline in 2008 was largely due to a $3.9 million or 13% decline in new variable annuity deposits and a $0.5 million or 22% decline in new variable universal life deposits. These declines reflect the difficult economic environment, increased competition, and the continued impact of alternative products in the marketplace. Mostly offsetting these declines, new fixed deferred annuity deposits increased $4.1 million or 15%. This increase was largely due to an increase in sales that can be partially attributed to changes in consumer preferences resulting from the volatility in the equity markets.
Insurance revenues consist of premiums and contract charges less reinsurance ceded. Insurance revenues increased $5.5 million or 2% to $241.7 million in 2009, compared to a $4.3 million or 2% increase in 2008. The improvement in 2009 resulted from a $10.0 million or 6% increase in premiums. Total annuity premiums increased $9.5 million or 75% and total accident and health premiums increased $1.0 million or 2%. The improvement in premiums was partially offset by a $3.3 million or 3% decrease in contract charges and a $1.2 million or 2% increase in reinsurance ceded. The increase in insurance revenues in 2008 was largely due to a $5.3 million or 3% increase in premiums and a $1.4 million or 2% decrease in reinsurance ceded. These were partially offset by a $2.4 million or 2% decrease in contract charges. Total annuity premiums increased $4.5 million or 55% and accident and health premiums increased $0.8 million or 2% in 2008 compared to a year earlier.
In the same manner as DAC, 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 is recorded as a change in the revenue reported in the current period as an unlocking adjustment.
The Company uses reinsurance as a means to mitigate its risks and to reduce the earnings volatility from claims. Reinsurance ceded premiums increased $1.2 million to $54.9 million in 2009 from $53.6 million in 2008. In 2007, reinsurance ceded was $55.0 million. The increase in 2009 was largely in the Group Insurance segment, reflecting an increase in sales from a third-party arrangement that is 100% reinsured.
Net investment income was flat in 2009, following a 7% decline in 2008. Net investment income was $177.4 million in both 2009 and 2008, compared with $190.4 million in 2007. Net investment income results in 2009 were impacted by a decline in the Company’s invested asset base and a slight improvement in yields from the portfolio. Net investment income results in 2008 were impacted by declines in both the invested asset base and yields earned on the portfolio. In addition, expenses associated with investment income declined in both 2009 and 2008, favorably impacting results.
The following table provides asset class detail of the investment portfolio. Fixed maturity and equity securities represented 76% of the entire investment portfolio at December 31, 2009, down from 78% at December 31, 2008.
issuer to redeem the securities at a particular price. Depending upon the terms of the call provision and price at which the security was purchased, a gain or loss may be realized.
Following is information regarding the other-than-temporarily impaired write-downs of investment securities by sector for 2009. The other-than-temporarily impaired write-downs of securities during the fourth quarter included: $5.7 million from the financial sector; $0.1 million from the asset-backed securities sector; $0.6 million from the industrial sector; and $0.1 million from the residential mortgage-backed securities sector. The other-than-temporarily impaired write-downs for the third quarter included: $1.8 million from the financial sector; $0.3 million from the residential mortgage-backed securities sector; and $0.2 million from the communications sector. The other-than-temporarily impaired write-downs of investment securities by sector for the second quarter of 2009 included the following: $2.7 million from the financial sector; $0.1 million from the residential mortgage-backed securities sector; $0.2 million from the asset-backed securities sector; and $1.0 million from the communications sector. The other-than-temporarily impaired write-downs of investment securities by sector for the first quarter of 2009 included: $1.5 million from the financial sector; $0.7 million from the residential mortgage-backed securities sector; $2.7 million from the industrial sector; and $1.2 million from the consumer, non-cyclical sector.
Other-than-temporarily impaired write-downs of investment securities by sector for 2008 included: $27.1 million from the financial sector; $13.2 million from asset-backed securities; $6.8 million from the government sector; $4.2 million from the consumer, cyclical sector; $4.2 million from the mortgage securities sector; $3.3 million from the communications sector; $2.1 million from the industrial sector; and $1.8 million from the consumer, non-cyclical sector. This same information for 2007 was: $3.3 million from the consumer, cyclical sector and $0.7 million from the communications sector.
Two securities, one issuer a parent organization of the other, were from financial guarantee insurance companies that provide credit enhancement for bond issuers as well as investment management services and were written down by a total of $5.2 million. These issuers had also experienced declines in value related to the mortgage credit crisis, including significant and continuing reductions in capital and liquidity positions. These securities were sold during the fourth quarter of 2009.
The Company’s analysis of securities for the quarter ended September 30, 2009 resulted in the determination that five fixed-maturity issuers (seven securities) had other-than-temporary impairments and were written down by a combined $2.3 million due to credit impairments. The aggregate impairment for these securities was $2.5 million, and $0.2 million of this amount was determined to be non-credit and was recognized in other comprehensive income (loss).
Following is a description of the securities that were written down during the third quarter of 2009:
Four securities (from two issuers) were residential mortgage-backed securities that were written down by a total of $0.3 million. The significant decline in the subprime and non-conforming mortgage markets and the specific performance of the underlying collateral caused the Company’s cash flow projections to be less than the amortized cost of the securities and created an other-than-temporary impairment. Three of these securities had been previously written down due to reduced projected cash flows from the underlying securitizations.
One security was from a company that provides custom-tailored financing to private and corporate owners of real estate nationwide and was written down $2.2 million. During the second quarter of 2009, the Company accepted an offer from this company to exchange this security for a security with a longer-dated maturity with an enhanced second lien priority in the capital structure. This security had been written down in a previous period.
The Company’s analysis of securities for the quarter ended March 31, 2009 resulted in the determination that six fixed-maturity issuers (seven securities) had other-than-temporary impairments and were written down by a combined $6.1 million due to credit impairments. The aggregate impairment for these securities was $21.4 million, and $15.3 million of this amount was determined to be non-credit and was recognized in other comprehensive income (loss).
Following is a description of the securities that were written down during the first quarter of 2009:
One security was from a mortgage and financial guaranty insurer that was written down $1.6 million. Mortgage insurers have suffered from the deterioration in the U.S. housing market and mortgage credit market. Rising mortgage delinquencies and defaults have resulted in rating downgrades for these insurers. Recent rating
Two securities (from one issuer) were residential mortgage-backed securities that were written down by a total of $0.6 million. The significant decline in the subprime and non-conforming mortgage markets and the specific performance of the underlying collateral caused the Company’s cash flow projections to be less than the amortized cost of the securities and created an other-than-temporary impairment.
Following is a description of the securities that were written down during the third quarter of 2008:
Two securities, one issuer a parent organization of the other, were from financial guarantee insurance companies that provide credit enhancement for bond issuers as well as investment management services and were written down by a total of $4.9 million. These issuers had also experienced declines in value related to the mortgage credit crisis and had been downgraded to a negative outlook.
One security was from a supplier of auto parts for light trucks and sport-utility vehicles. The deteriorating truck and sport-utility vehicle markets of the auto industry, combined with the sharp decline in value and recent ratings declines, resulted in a $2.1 million write-down.
The Company’s analysis of securities for the quarter ended June 30, 2008 resulted in the determination that seven fixed-maturity securities had other-than-temporary impairments. These securities were written down by a combined $10.2 million in the second quarter. The total fair value of the affected securities after the write-downs was $16.8 million.
The Company seeks to protect policyholders’ benefits by optimizing risk and return on an ongoing basis through managing asset and liability cash flows, monitoring credit risk, avoiding high levels of investments that may be redeemed by the issuer, maintaining sufficiently liquid investments and avoiding undue asset concentrations through diversification, among other things. The Company has three primary sources of investment risk:
Liquidity risk, relating to the risk that investments cannot be converted into cash when needed or that the terms for conversion have a negative effect on the Company.
At December 31, 2009, the Company’s unrealized losses on fixed maturities had decreased to $93.0 million and were offset by $91.8 million in gross unrealized gains. At December 31, 2008, the Company had $231.4 million in gross unrealized losses on fixed maturities which were partially offset by $38.6 million in gross unrealized gains. At December 31 2009, 67% of the fixed maturities portfolio had unrealized gains, a significant improvement from 38% at December 31, 2008. At December 31, 2009, 28% of the total gross unrealized losses were in the category of corporate obligations. The financial sector was the single largest contributor to this category, primarily due to the direct and indirect impact of the troubled residential real estate and mortgage markets. In addition, corporate private-labeled residential mortgage-backed securities, also related to the residential real estate and mortgage industries, accounted for 46% of the total gross unrealized losses at December 31, 2009. The category of corporate obligations was the area with the greatest decrease in unrealized losses for the two comparative year-end dates, as this figure decreased from $138.0 million to $26.0 million.
The Company’s residential mortgage-backed securities, commercial mortgage-backed securities and asset-backed securities that were rated below investment grade at year-end 2009 were 4% of the total, compared to 2% at year-end 2008. The Company’s below investment grade fixed maturity securities at December 31, 2009 included 99% corporate obligations and 1% collateralized debt obligations. Comparatively, the Company’s below investment grade fixed maturity securities at December 31, 2008 included 98% corporate obligations and 2% collateralized debt obligations.
The Company reviews all security investments, particularly those having unrealized losses. Further, the Company specifically assesses all investments with greater than 10% declines in fair value and, in general, monitors all security investments as to ongoing risk. These risks are fundamentally evaluated through both a qualitative and quantitative analysis of the issuer. The Company also prepares a formal review document no less often than quarterly of all investments with greater than 20% declines in fair value for six months or more, investments that have previously been written down and that remain in an unrealized loss position, and selected investments that have changed significantly from a previous period and that have a decline in fair value greater than 10% of amortized cost.
The Company has a policy and process in place to identify securities that could potentially have an impairment that is other-than-temporary. This process involves monitoring market events and other items that could impact issuers such as:
The Company’s intent and ability to hold an equity security until it recovers in value;
To the extent the Company determines that a fixed maturity security is deemed to be other-than-temporarily impaired, the portion of the impairment that is deemed to be due to credit is charged to the income statement and the cost basis of the underlying investment is reduced. The portion of the impairment that is deemed to be non-credit is charged to other
comprehensive income (loss). Equity securities that are determined to be other-than-temporarily impaired are written down to fair value and the impairment is charged to the income statement.
The Company has a significant level of non-U.S. Agency structured securities. Structured securities include asset-backed, residential mortgage-backed securities, along with collateralized debt obligations, collateralized mortgage obligations and other collateralized obligations. The Company monitors these securities through a combination of an analysis of vintage, credit ratings and other means.
1 This chart accounts for all vintages owned by the Company.
Identified below are tables that divide these investment types among vintage and credit ratings as of December 31, 2008.
The following table provides information regarding investment securities with unrealized losses on fixed maturity and equity security investments available for sale, as of December 31, 2008.
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,
The Company had investment grade securities with unrealized losses of greater than 20% that totaled $5.6 million for twelve months or greater of the year at December 31, 2009. The Company had below investment grade securities with unrealized losses of greater than 20% that totaled $17.7 million. The Company had below investment grade securities with unrealized losses of greater than 20% for twelve months or greater that totaled $15.7 million at December 31, 2009.
As of December 31, 2009, 86% of the fair value of fixed maturity securities with gross unrealized losses was investment grade compared to 93% at December 31, 2008. In addition, 68% of gross unrealized losses on fixed maturity securities with unrealized losses were from investment grade securities as of December 31, 2009, compared to 88% at December 31, 2008. These declines are the result of a 44% decline in total fixed maturity securities in an unrealized loss position along with an increase in below investment grade fixed maturity investments during 2009.
The following tables provide the distribution of maturities for fixed maturity investment securities available for sale with unrealized losses as of December 31, 2009 and December 31, 2008. Expected maturities may differ from these contractual maturities since borrowers may have the right to call or prepay obligations.
on these positions. The Company has considered a wide variety of factors to determine that these positions were not other-than-temporarily impaired.
Four securities are subprime or Alt-A residential mortgage-backed securities. Residential mortgage-backed securities have suffered indiscriminate price depreciation in the current market, regardless of individual performance or vintage. However, all of these securities continue to perform within their contractual obligations.
One security is a senior tranche of a residential mortgage-backed security backed by Alt-A non-conforming mortgages on residential properties. The issuer was closed by the Office of Thrift Supervision in July of 2009, but it continues to service prior securitized loans as a subsidiary of a bank that acquired it in March of 2009. This security continues to perform within its contractual obligations.
Three securities from three issuers are from financial institutions that have been impacted by the housing and mortgage credit crisis. The government has supported these institutions through TARP funds. All of these securities continue to perform within their contractual obligations.
One security is from a financial institution that has been impacted by the housing and mortgage credit crisis but has not received TARP assistance. This security continues to perform within its contractual obligations.
Amortization of Deferred Acquisition Costs (DAC) and Value of Business Acquired (VOBA)
Interest-sensitive life insurance and annuity products amortize DAC in proportion to expected future gross profits. Profit expectations are based upon assumptions of future interest spreads, mortality margins, expense margins and policy and premium persistency experience. At least annually, a review is performed of the assumptions related to profit expectations. If it is determined the assumptions should be revised, the impact of the changes is recorded as a change in DAC amortization in the current period due to an unlocking adjustment. A similar analysis is performed on VOBA at least annually and, if necessary, adjustments are made in the current period VOBA amortization.
An adjustment was reflected in the fourth quarter of 2007 that related to deferred tax expense attributable to years 2004 and prior through 2006. The unrecorded deferred tax expense (benefit) in 2004 and prior, 2005 and 2006 was $1.1 million, ($0.3) million and ($0.3) million, respectively.
The Company’s investments in affordable housing increased tax expense in 2009 and 2008 due to the amortization of the affordable housing investments exceeding the tax credits earned and the recapture of tax credits previously recognized. The effect of the investments in affordable housing on the effective tax rate was a tax expense of $1.0 million or 6% in 2009,
The Company has three reportable business segments, which are defined based on the nature of the products and services offered: Individual Insurance, Group Insurance and Old American. The Individual Insurance segment consists of individual insurance products for both Kansas City Life and Sunset Life. The Individual Insurance segment is marketed through a nationwide sales force of independent general agents and third-party marketing arrangements. The Group Insurance segment consists of sales of group life, group disability, dental and vision products. This segment is marketed through a nationwide sales force of independent general agents, group brokers and third-party marketing arrangements. Old American consists of individual insurance products designed primarily as final expense products. These products are marketed through a nationwide general agency sales force with exclusive territories, using direct response marketing to supply agents with leads. For more information, refer to Note 10 - Segment Information in the Notes to Consolidated Financial Statements.
This segment’s products are primarily marketed through a nationwide sales force of independent general agents. The Individual Insurance segment is central to the Company’s overall performance and produced 55% of consolidated insurance revenues in 2009, up from 54% in 2008.
Total premiums for this segment increased $8.8 million or 15% in 2009 compared to a $4.7 million or 9% increase in 2008. Total new premiums increased $9.3 million or 51%, as new immediate annuity premiums increased $9.5 million or 75%. The increase in immediate annuity sales represents continuing demand for guaranteed benefit and retirement income products by consumers and an increase in sales from a third-party arrangement. Total new premiums increased $4.3 million or 31% in 2008 versus 2007, reflecting a $4.5 million or 55% increase in new immediate annuity premiums. Total renewal premiums decreased $0.5 million or 1% in 2009, largely due to a $0.3 million or 1% decline in renewal individual life premiums. Total renewal premiums increased $0.4 million or 1% in 2008 compared to 2007, reflecting a $0.6 million or 2% increase in individual life insurance premiums.
Contract charges declined $3.3 million in 2009 and $2.4 million in 2008. The decline in 2009 can largely be attributed to three factors: lower account balances on variable contracts, lower surrender charges due to a decline in policy surrenders on certain products, and the runoff of closed blocks. While total contract charges did not fluctuate significantly in 2008, three of the components had fluctuations. Amortization of deferred revenue declined compared to a year earlier, as the Company experienced increased sales of certain products where expense loads are deferred and amortized into earnings in future
periods. Changes in unlocking in the second quarter of 2008 also contributed to the decrease in year-to-date deferred revenue. Reserve loads decreased, also resulting from increased sales of products where expense loads are deferred. Partially offsetting these changes, surrender charges increased from increased surrenders on variable products.
In the fourth quarter, the Company experienced $1.9 million of net impairment losses on the Company’s real estate joint ventures, specifically attributable to investments in affordable housing funds. The Company is a limited partner in several joint ventures whose underlying investments are in affordable housing properties. These properties generate federal and/or state tax credits and have a residual value in the properties that requires the funds to operate as a real estate joint venture investment. In one property fund, an impairment of $1.6 million resulted from the transfer of the residual interest in certain properties in exchange for contingent future benefits. An additional impairment of $0.3 million was recorded due to the foreclosure of certain properties in a second property fund.
The Company’s analysis of securities for the quarter ended December 31, 2009 resulted in the determination that eight fixed-maturity issuers (nine securities) had other-than-temporary impairments affecting the Individual Insurance segment and were written down by a combined $5.4 million.
One security was from a company that provides custom-tailored financing to private and corporate owners of real estate nationwide and was written down $0.4 million. During the second quarter of 2009, the Company accepted an offer from this company to exchange this security for a security with a longer-dated maturity with an enhanced second lien priority in the capital structure. This security had been written down in a previous period. This security was sold during the fourth quarter of 2009.
Two securities, one issuer a parent organization of the other, were from financial guarantee insurance companies that provide credit enhancement for bond issuers as well as investment management services and were written down by a total of $4.2 million. These issuers had also experienced declines in value related to the mortgage credit crisis, including significant and continuing reductions in capital and liquidity positions. These securities were sold during the fourth quarter of 2009.
The Company’s analysis of securities for the quarter ended September 30, 2009 resulted in the determination that five fixed-maturity issuers (seven securities) had other-than-temporary impairments affecting the Individual Insurance segment and were written down by a combined $1.9 million.
Four securities (from two issuers) were residential mortgage-backed securities that were written down by a total of $0.3 million. The significant decline in the subprime and non-conforming mortgage markets and the specific performance of the underlying collateral caused the Company’s cash flow projections to be less than the amortized cost of the securities and created an other-than-temporary impairment. These securities had been previously written down due to reduced projected cash flows from the underlying securitizations.
One security from a print media company that filed for bankruptcy protection in 2008 and is currently under reorganization was written down $0.2 million. The print media industry is highly cyclical and has experienced weakened consumer demand and competition from electronic media. This security had been previously written down and continues to be challenged in its market and industry. This security was exchanged for a replacement security during the third quarter of 2009.
One security was from a financial institution that had been impacted by the housing and mortgage credit crisis and had been supported through TARP funds. This company has experienced large losses in its real estate loan portfolios and has had an increase in non-performing loans over the past year. This security was written down by a total of $1.1 million before it was sold during the third quarter of 2009.
One security from a print media company that filed for bankruptcy protection in 2008 and was under reorganization was written down $1.0 million. The print media industry is highly cyclical and has experienced weakened consumer demand and competition from electronic media. This security had been previously written down.
mortgage delinquencies and defaults have resulted in rating downgrades for these insurers. Recent rating downgrades, combined with the issuer’s need to raise additional capital to meet future payments contributed to the other-than-temporary impairment.
One security was from a trucking company that was written down $1.6 million. As the trucking industry is highly correlated with the general economy, this company has experienced a reduction in shipping volume as a result of the recession. This company renegotiated its credit facilities in the first quarter of 2009, but new covenants placed significant requirements on the issuer. These restrictions, combined with the need to retire longer-term debt, placed additional stress on cash resources and led to indications of continued weakening performance that the Company believed to be other-than-temporary.
Two securities were written down by $2.8 million, primarily as a result of declines in price and rating agency downgrades on debt issues from issuers that completed leveraged buyout transactions during 2008. One of these securities was subsequently sold during the fourth quarter of 2008.
Four securities (two issuers) were perpetual preferred securities that were written down $3.3 million. These securities had been negatively impacted by the housing and mortgage credit crisis and have received TARP funds.
Two securities, one issuer a parent organization of the other, are financial guarantee insurance companies that provide credit enhancement for bond issuers as well as investment management services and were written down by a total of $3.9 million. These issuers had also experienced declines in value related to the mortgage credit crisis and had been downgraded to a negative outlook.
One security was from a bank holding company that recently filed for bankruptcy. This holding company was the parent of a large nationwide bank that was recently taken over by the Office of Thrift Supervision and the FDIC was appointed as its receiver. As a result of the bankruptcy filing, this security was written down $0.8 million.
Following is a description of the securities that were written down during the second quarter of 2008:
Two securities were CDOs and were written down by $2.6 million, primarily due to price declines that had persisted for periods longer than the Company considered temporary. Both securities were below cost by 20% or more for at least six consecutive months.
The Company’s analysis of fixed maturity securities for the quarter ended December 31, 2007 resulted in the determination that two securities had other-than-temporary declines which were written down by $3.5 million.
Following is a description of securities that were written down during the fourth quarter of 2007:
One security was below cost by 20% or more for more than six consecutive months and was the subject of a recent leveraged buyout that was finalized during the fourth quarter of 2007, which greatly increased the debt level of the company. Accordingly, the Company wrote down this security $2.8 million at year-end 2007.
The Company had no securities that it identified as other-than-temporarily impaired during the first, second and third quarters of 2007 for this segment.
Interest is credited to policyholder account balances according to terms of the policy. There are minimum rates of crediting prescribed in certain policies, as well as adjustments that can be made to the initial crediting rate. Accordingly, the Company reviews and, as necessary, adjusts crediting rates on policies. Interest credited to policyholder account balances decreased $0.2 million or less than 1% in 2009 and $4.3 million or 5% in 2008 compared with the prior year periods. The consistent results in 2009 are largely the result of two factors. First, while policyholder account balances declined in early 2009, the balances have steadily increased during the year. Second, crediting rates have increased on certain products, such as deferred annuities, but have decreased on others. The decline in 2008 was primarily due to a combination of lower policyholder account balances and reduced crediting rates.
VOBA is amortized in concert with each purchased block of business. Accordingly, as policies run off, the amortization will decline over time. VOBA amortization decreased 58% in 2009 compared to 2008 and 32% in 2008 compared with 2007.
The following table presents financial data for the Group Insurance business segment for the years ended December 31.
The Company offers several insurance products in the Group Insurance segment: dental, group life, vision, and short- and long-term disability. The Group Insurance segment markets its group products primarily to small and mid-size organizations. Products are sold through group representatives targeting a nationwide network of independent general agents and group brokers, along with the Company’s career general agents. This sales network is this segment’s core distribution system. Additionally, the Company enters into selective third-party marketing arrangements to market group products. This segment generated 20% of the Company’s consolidated insurance revenues in 2009, a decrease from 21% in 2008.
Policyholder benefits consist of death benefits (mortality), accident and health benefits and the associated increase or decrease in reserves for future policy benefits. Policyholder benefits increased $0.8 million or 3% in 2009, largely due to an increase in group life claims compared to 2008. Policyholder benefits increased $2.9 million or 10% in 2008, as a result of an increase in dental benefits. Increased benefits in the dental product line in 2008 reflected, in part, the increase in new dental business in 2008. It is typical for new dental business to report an increase in benefits in the first policy year. As the business ages, the benefit ratio falls more in line with renewal expectations. Management monitors this ratio on an ongoing basis and adjusts future renewal premiums, as necessary, in order to achieve profitability expectations on individual groups.
The Old American segment sells final expense insurance products nationwide through its general agency system with exclusive territories. This segment provides agents with sales leads using direct response marketing. This segment produced 26% of consolidated insurance revenues in 2009 and 2008.
Net income for this segment increased $1.5 million or 384% in 2009 to $1.8 million, following a $2.5 million or 87% decline in net income in 2008. The largest factor in the increase in 2009 was a decline in policyholder benefits. Additional positive factors were an increase in insurance revenues and a reduction in realized investment losses. Partially offsetting these was an increase in operating expenses. The decline in net income for 2008 was primarily due to increased realized investment losses, increased policyholder benefits, a decline in insurance revenues and a decline in net investment income. These changes were partially offset by a decline in operating expenses.
Net investment income increased 1% in 2009, following a 5% decline in 2008. The increase in 2009 reflected a decrease in investment assets that was offset by higher yields earned on the investment portfolio. The increase in yields was largely due to an increase in income from an alternative investment fund. In 2009, this investment added gross investment income of $0.1 million. However, as a result of the significant decline in the economic environment experienced last year, this investment resulted in a decline in gross investment income of $0.2 million in 2008. The decrease in net investment income in 2008 primarily reflects reduced investment assets and a reduction in yields from the investment portfolio. The decline from lower yields was largely due to a reduction in income from an alternative investment fund as mentioned above. In 2007, this investment added gross investment income of $0.2 million.
In the fourth quarter of 2009, the Company experienced write-downs on two of the Company’s real estate joint ventures within the Old American segment. These investments were written down by $0.3 million when the Company determined that there were no remaining future benefits expected from these investments.
The Company’s analysis of securities for the quarter ended December 31, 2009 resulted in the determination that three fixed-maturity securities (from two issuers) had other-than-temporary impairments affecting the Old American segment and were written down by a combined $1.1 million. These three securities were sold during the fourth quarter of 2009.
One security was from a company that provides custom-tailored financing to private and corporate owners of real estate nationwide and was written down $0.1 million. During the second quarter of 2009, the Company accepted an offer from this company to exchange this security for a security with a longer-dated maturity with an enhanced second lien priority in the capital structure. This security had been written down in a previous period.
One security was a residential mortgage-backed security that was written down by less than $0.1 million. The significant decline in the subprime and non-conforming mortgage markets and the specific performance of the underlying collateral caused the Company’s cash flow projections to be less than the amortized cost of the security and created an other-than-temporary impairment. This security had been previously written down due to reduced projected cash flows from the underlying securitizations.
The Company’s analysis of securities for the quarter ended June 30, 2009 resulted in the determination that two fixed-maturity securities had other-than-temporary impairments affecting the Old American segment and were written down by a combined $0.4 million.
One security was a residential mortgage-backed security that was written down by less than $0.1 million. The significant decline in the subprime and non-conforming mortgage markets and the specific performance of the underlying collateral caused the Company’s cash flow projections to be less than the amortized cost of the securities and created an other-than-temporary impairment. This security had been previously written down due to reduced projected cash flows from the underlying securitizations.
The Company’s analysis of securities for the quarter ended March 31, 2009 resulted in the determination that one fixed-maturity security had an other-than-temporary impairment affecting the Old American segment. This investment was written down by $0.1 million in the first quarter.
Following is a description of the security that was written down during the first quarter of 2009:
The Company’s analysis of securities for the quarter ended December 31, 2008 resulted in the determination that two securities had other-than-temporary impairments affecting the Old American segment. These securities were written down by a combined $0.5 million in the fourth quarter.
One security was written down by $0.3 million, primarily as a result of a decline in price on a debt security from an issuer that completed a LBO transaction during 2008. This security had also been written down during the second quarter of 2008.
A collateralized debt obligation (CDO) security was written down by $0.2 million, primarily due to a price decline that had persisted for a period longer than the Company considered temporary and the deteriorating performance of the collateral. This security had also been written down during the second quarter of 2008.
Two securities, one issuer a parent organization of the other, are financial guarantee insurance companies that provide credit enhancement for bond issuers as well as investment management services and were written down by a total of $1.0 million. These issuers had also experienced declines in value related to the mortgage credit crisis and had recently been downgraded to a negative outlook.
The Company’s analysis of securities for the quarter ended June 30, 2008 resulted in the determination that three fixed-maturity securities had other-than-temporary impairments affecting the Old American segment. These securities were written down by a combined $0.5 million in the second quarter.
One security was written down by $0.1 million due to a combination of a decline in price that had persisted for a period longer than the Company considered temporary and a further deterioration in fair value during the second quarter of 2008.
by 20% or more for more than six consecutive months and was the subject of a recent leveraged buyout. The transaction was finalized during the fourth quarter of 2007, which greatly increased the debt level of the company.
No other-than-temporarily impairments were identified for this segment in the first, second and third quarters of 2007.
Policyholder benefits consist of death benefits (mortality), accident and health benefits, surrenders, and the associated increase or decrease in reserves for future policy benefits. Policyholder benefits decreased 4% in 2009, following a 3% increase in 2008. The decline in 2009 was largely due to lower death benefits, which decreased $2.9 million or 7% for the year. Partially offsetting this was an increase in benefit and contract reserves, resulting from less reserves released due to death. The increase in 2008 was largely due to higher death benefits and surrenders, but these changes were partially offset by reserve release. The increase in death benefits reflected adverse mortality experienced during 2008. While mortality results were different for 2009 and 2008, both years were within the range of anticipated mortality.
The policyholder benefit ratio (policyholder benefits divided by total revenues, excluding realized investment gains and losses) was lower in 2009 compared to 2008 but was consistent with 2007. Higher revenues, primarily from an increase in new premiums and lower death benefits, contributed to the decrease in the policyholder benefits ratio in 2009. Lower revenues, primarily from reduced renewal premiums and increased policyholder benefits, contributed to the increase in the policyholder benefits ratio in 2008.
The current economic climate has tightened the financial and liquidity conditions of policyholders. The changing economic environment and the recent credit crisis may produce the need for individual policyholder liquidity in future periods and
Net cash used by investing activities was $69.4 million in 2009, and net cash provided by investing activities was $48.9 million and $84.1 million in 2008 and 2007, respectively. The Company’s new investments in fixed maturity and equity securities were $326.5 million in 2009, compared to $259.4 million during 2008 and $328.3 million during 2007. New investments in mortgage loans were $59.7 million in 2009, $49.3 million in 2008, and $54.8 million in 2007. In 2009, $103.6 million was used in the purchase of other investment assets, which consisted of the net purchases of short-term investments. The large increase in short-term investments in 2009 reflects sales of long-term investments which had not been reinvested at year-end. Sales of fixed maturity securities increased $101.3 million in 2009 compared to 2008 from $33.5 million to $134.8 million. During 2009, the Company decreased its net purchases of real estate investments to $21.3 million, down from $30.1 million in 2008, but up from $4.5 million in 2007. Approximately 15% of the securities portfolio was sold, called or matured in 2009, compared with 12% in 2008 and 14% in 2007. The Company had $47.5 million in mortgage loan maturities and principal pay downs in 2009, compared with $54.0 million in 2008 and $58.4 million in 2007. During 2009, the Company had sales of real estate investments of $4.1 million, compared with $30.6 million in 2008 and $22.5 million in 2007. During these three years, the Company sold several real estate properties which resulted in realized gains.
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.
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 December 31, 2009, there were no outstanding balances with the FHLB, down from $2.9 million at December 31, 2008. The decrease was due to net pay downs of $2.9 million in borrowings from FHLB in the first quarter of the year. At December 31, 2008, the outstanding balance in notes payable was from the FHLB, had maturities of less than one year and was secured by financial assets.
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 of the Company at December 31.
The ratio of equity to assets less separate accounts increased by 2% in 2009. Stockholders’ equity increased $101.3 million from year-end 2008. The increase was largely due to increases in unrealized investment gains and positive net income. Stockholders’ equity per share, or book value, equaled $54.33 for year-end 2009, an 18% increase for the year.
The stock repurchase program was extended by the Board of Directors through January 2011 to permit the purchase of up to one million of the Company’s shares on the open market, which would represent approximately 9% of the shares currently outstanding. During 2009, the Company purchased 84,173 of its shares under the stock repurchase program for $2.3 million (2008 - 181,661 for $8.2 million).
The Company had no outstanding borrowings. Borrowings include short-term debt as described in the previous section - Debt and Short-Term Borrowing.
The Company’s mortgage loan commitments provide funding to originate commercial mortgage loans. Mortgage loan commitments generally do not extend beyond 90 days. Other investments are primarily commitments to fund affordable housing project obligations and to fund a construction loan.
The contractual obligations reported above exclude the Company’s liability of $6.6 million for unrecognized tax benefits. The Company cannot make a reasonably reliable estimate of the amount and period of related future payments for such liability.
The Company’s investment portfolio moved from a net unrealized loss position in 2008 to a net unrealized gain in 2009. The change was primarily attributable to improved pricing of financial assets during the twelve months ended December 31, 2009. The change affected the broad financial markets and resulted in price improvement in virtually every sector. At year-end, the fair value of the securities portfolio exceeded its book value by $0.2 million.
Due to the complex nature of interest rate movements and their uneven effects on the value of fixed income investments, the Company uses sophisticated computer programs to help consider potential changes in the value of the portfolio. Assuming that changes occur equally over the entire term structure of interest rates or yield curve, it is estimated that a 100 basis point increase in rates would translate to a $123.9 million loss of fair value for the $2.5 billion securities portfolio. Conversely, a 100 basis point rate decrease would translate to a $129.0 million increase in fair value.
Market changes rarely follow a linear pattern in one direction for any length of time. Within any diversified portfolio, an investor will likely find embedded options, both puts and calls, that change the structure of the cash flow stream. Residential mortgage-backed securities are particularly sensitive to interest rate changes. As long-term interest rates fall, homeowners become more likely to refinance their mortgage or move up to a larger home, causing a prepayment of the outstanding mortgage principal, which must then be reinvested at a lower rate. Should interest rates rise suddenly, prepayments expected by investors may decrease, extending the duration of a mortgage pool. This represents a further interest rate risk to investors.
As interest rates rise, policyholders may become more likely to surrender policies or to borrow against cash values, often to meet sudden needs in an inflationary environment or to invest in higher yielding opportunities elsewhere. This risk of disintermediation may force the Company to liquidate parts of its portfolio at a time when the fair value of fixed income investments is falling. If interest rates fall, the Company may also be forced to invest new cash receipts at levels below the minimum guaranteed rates payable to policyholders, eroding profit margins. The Company can usually adapt to small sudden changes in interest rates or even large changes that occur over longer periods of time. However, cash flow may increase or decrease over the course of the business cycle. Therefore, the Company takes steps to ensure that adequate liquidity is available to meet obligations in a timely manner. To this end, the Company utilizes an asset/liability management program, and the Company maintains lines of credit with commercial banks and other short-term borrowing arrangements with financial institutions.
The Company’s investments are also exposed to varying degrees of credit risk. Credit risk is the risk that the value of the investment may decline due to deterioration in the financial strength of the issuer and that the timely or ultimate payment of principal or interest might not occur. A default by an issuer usually involves some loss of principal to the investor. Losses can be mitigated by timely sales of affected securities or by active involvement in a restructuring process. However, there can be no assurance that the efforts of an investor will lead to favorable outcomes in a bankruptcy or restructuring. Information about the write-down of investment securities is provided in the table of Realized Investment Gains and Losses, under the section Consolidated Results of Operations in Item 6. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
As market interest rates fluctuate, so will the value of the Company's investment portfolio and its stockholders' equity. At December 31, 2009, the Company had an unrealized investment gain of $0.8 million (net of related taxes, and amounts allocable to policyholder account balances and deferred acquisition costs), compared to an $82.3 million loss at year-end 2008. This change from a net unrealized loss position to a net unrealized gain position was primarily the result of overall improvement in the market value of investment securities.
Kansas City Life’s asset/liability management programs and procedures involve the monitoring of asset and liability durations for various product lines, cash flow testing under various interest rate scenarios to evaluate the potential sensitivity of assets and liabilities to interest rate movements, and the continuous rebalancing of assets and liabilities with respect to yield, risk, and cash flow characteristics.
Cash flows and effective durations of the asset and liability portfolios are measured at points in time and are affected by changes in the level and term structure of interest rates, as well as changes in policyholder behavior. Further, durations are managed on an individual product level, and an aggregate portfolio basis. As a result, differences typically exist between the duration, cash flows and yields of assets versus liabilities on an individual portfolio and aggregate basis. The Company’s asset/liability management programs and procedures enable management to monitor the changes, which have both positive and negative correlations among certain portfolios, and to make adjustments to asset mix, liability crediting rates and product terms so as to manage risk and profitability over time.
The Company was not required to invest at levels below minimum guaranteed rates payable to policyholders in 2009 or 2008. The Company aggregates similar policyholder liabilities into portfolios and then matches specific investments with these liability portfolios. In 2009 and 2008, all of the Company’s portfolios had investment yields that exceeded the crediting rates on the matched liabilities. The Company monitors this risk on an ongoing basis. Should investment rates available in the marketplace fall below the Company’s minimum guaranteed rates, the Company would assess the facts and conditions available at that time and develop an appropriate plan to suit that environment.
The table below details (in millions) the nature of expected cash flows from the securities portfolio, including the cash flows from residential mortgage-backed securities pools, corporate bonds and commercial mortgages. Calls and prepayments represent the principal amount expected to return to the Company. Total principal equals invested cash scheduled to return in each year, including maturities, calls, sinking funds and prepayments.
The preparation of the consolidated financial statements requires management of the Company to make estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the period. These estimates are inherently subject to change and actual results could differ from these estimates. Included among the material (or potentially material) reported amounts and disclosures that require extensive use of estimates are the fair value of certain invested assets, deferred acquisition costs, value of business acquired, future policy benefits, policy and contract claim liabilities, pension and other postretirement benefits and the valuation allowance on deferred income tax assets.
Presented below is a summary of significant accounting policies used by the Company.
Investment income on residential mortgage-backed securities is initially based upon yield, cash flow, and prepayment assumptions at the date of purchase. Subsequent revisions in those assumptions are recorded using the retrospective method, except for adjustable rate residential mortgage-backed securities where the prospective method is used. Under the
retrospective method the amortized cost of the security is adjusted to the amount that would have existed had the revised assumptions been in place at the time of purchase. Under the prospective method, future cash flows are estimated and interest income is recognized going forward using the new effective yield to maturity. The adjustments to amortized cost under both methods are recorded as a charge or credit to net investment income. The Company bases its historical results from individual securities and internal assessments of likely future results for these securities. These results are based upon validations and comparisons to similar securities provided by third parties such as rating agency analysis.
The Company monitors the various markets in which its investments are traded. The Company utilizes a primary independent third-party pricing service to determine the majority of its fair values. At December 31, 2009, the Company used a second third-party pricing service to validate the fair market values provided by the primary pricing service. The Company also used the second pricing service to determine the fair value of certain securities for which the primary pricing service was unable to provide. The Company reviews values received from independent pricing sources for validity. In addition, the Company tests a limited number of securities from each independent pricing service each reporting period to further validate reliance on the fair values provided. When fair values are not available from external service providers, where possible, the Company utilizes quotes from brokers. When the Company cannot obtain reliable broker pricing, a fair value is determined based upon an assessment of several factors appropriate for the specific issue, including but not limited to: the issuer’s industry; liquidity; cash flows; marketability, ratings and the ability of the issuer to satisfy the obligation; government intervention or regulations; fair value of comparable securities in actively traded or quoted markets; or other factors. The Company creates a matrix of factors from which to calculate an estimable value. However, all factors may not be known or publicly available from which to determine a value and, as such, the fair value used by the Company may not be truly indicative of the actual value available in an active market or an actual exit price if the Company were to sell the security in the current market.
The Company may selectively determine, as part of its individual investment assessment process in relation to specific investments that it no longer intends to hold a specific issue to its maturity. If the Company makes this determination and the fair value is less than the cost basis, an analysis of the fair value of the investment is performed and the investment is written down to the fair value and an other-than-temporary impairment is recorded on this particular position. Subsequently, the Company seeks to obtain the best possible outcome available for this specific issue and records an investment gain or loss at the disposal date.
Deferred acquisition costs (DAC), principally agent commissions and other selling, selection and issue costs, which vary with and are directly related to the production of new business, are capitalized as incurred. These deferred costs are then amortized in proportion to future premium revenues or the expected future profits of the business, depending upon the type of product. Profit expectations are based upon assumptions of future interest spreads, mortality margins, expense margins and policy and premium persistency experience. These assumptions involve judgment and are compared to actual experience on an ongoing basis. If it is determined that the assumptions related to the profit expectations for interest sensitive and variable insurance products should be revised, the impact of the change is reported in the current period’s income as an unlocking adjustment. There was no DAC unlocking adjustment for the year ended 2009 (2008 - $3.0 million; 2007 - $3.4 million). Prior year adjustments reduced the amortization of DAC.
DAC is reviewed on an ongoing basis to determine that the unamortized portion does not exceed the expected recoverable amounts. If it is determined from emerging experience that the premium margins or gross profits are insufficient to amortize deferred acquisition costs, then the asset will be adjusted downward with the adjustment recorded as an expense in the current period. No impairment adjustments have been recorded in the years presented. The DAC asset is adjusted to reflect the impact of unrealized gains and losses on fixed maturity securities available for sale, as described in the Investments section of Note 1. The change in DAC from unrealized losses on fixed maturity securities was $(52.1) million for year ended 2009 (2008 - $51.2 million; 2007 - $(0.7) million).
The accrual of interest for Old American VOBA was calculated at a 13.0% interest rate for the life block and a 7.0% rate for the accident and health block. In 2009, interest was accrued on the GuideOne acquisition VOBA at the rates of 4.55% on the interest sensitive life block, 4.12% on the deferred annuity block and 5.25% on the traditional life block. The VOBA on a separate acquired block of business used a 7.0% interest rate on the traditional life portion and a 5.4% interest rate on the interest sensitive portion. The interest rates used in the calculation of VOBA are based on rates appropriate at the time of acquisition. The expected amortization of VOBA each year over the next five years, 2010 through 2014, is $7,236, $6,638, $4,537, $4,308, and $3,905, respectively.
The Company introduced a guaranteed minimum withdrawal benefit (GMWB) rider in 2007 that can be added to new or existing variable annuity contracts. The rider provides an enhanced withdrawal benefit that guarantees a stream of income payments to an owner or annuitant, regardless of the contract account value. The current value of variable annuity separate accounts with the GMWB rider was $57.9 million (2008 - $31.1 million) and the guarantee liability was $(1.6) million at
As of December 31, 2009, separate account balances for variable annuity contracts were $221.7 million. The total reserve held for variable annuity GMDB was $0.3 million. Additional information related to the GMDB and related separate account balances and net amount at risk (the amount by which the GMDB exceeds the account balance) as of December 31, 2009 is provided below:
Policyholder account balances include universal life insurance, fixed deferred annuity contracts and investment-type contracts. Liabilities for these policyholder account balances are included without reduction for potential surrender charges and deferred front-end contract charges. The account balances for universal life contracts are equal to cumulative premiums, less contract charges and withdrawals, plus interest credited. The account balances for fixed deferred annuities and investment-type contracts are equal to the cumulative deposits, less any applicable contract charges and withdrawals, plus interest credited. Front-end contract charges are deferred and amortized over the term of the policies. Policyholder benefits incurred in excess of related policyholder account balances are charged to policyholder benefits expense. Interest on policyholder account balances is credited as earned.
Crediting rates for universal life insurance and fixed deferred annuity products ranged from 3.00% to 5.50% in 2009 (2008 - 3.00% to 5.50%; 2007 - 3.00% to 5.50%).
Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes the change in 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, taxes and policyholder account balances. Other comprehensive income (loss) also includes deferred income taxes on these items. In addition, the Company recognizes the funded status of its defined benefit pension and postretirement plans, measured as the difference between plan assets at fair value and the benefit obligation, on the balance sheet. Changes in the funded status that arise during the period but are not recognized as components of net periodic benefit cost are recognized within other comprehensive income (loss) net of income taxes.
In September 2006, the FASB issued new guidance to provide a single definition of fair value, together with a framework for measuring it, and required additional disclosure about the use of fair value to measure assets and liabilities. The FASB emphasized that fair value is a market-based measurement, not an entity-specific measurement, and it established a fair value hierarchy with the highest priority being the quoted price in active markets. This guidance became effective for years beginning after November 15, 2007. The Company adopted it on January 1, 2008 with no material impact to the consolidated financial statements.
In February 2007, the FASB issued new guidance to permit an entity to measure certain financial assets and liabilities at fair value. Under this guidance, entities that elect the fair value option 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 guidance became effective for years beginning after November 15, 2007. The Company adopted it on January 1, 2008 with no material impact to the consolidated financial statements. 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 April 2009, the FASB issued new guidance regarding other-than-temporary impairment of debt securities and changes in the recognition and presentation of debt securities determined to be other-than-temporarily impaired. The guidance requires an enterprise to bifurcate any other-than-temporary impairment between credit and non-credit impairments and then establish accounting treatment for each aspect, in current and subsequent periods. Retroactive application became required to other-than-temporary impairments recorded in prior periods by making a cumulative-effect adjustment to the opening balance of retained earnings and accumulated other comprehensive income (loss) in the period of adoption. This guidance became effective for financial statements issued for interim and annual periods ending after June 15, 2009. The Company elected early adoption effective for the period ended March 31, 2009 with retroactive application effective January 1, 2009. For additional information pertaining to this guidance, please see Note 14 - Accumulated Effect of Change in Accounting Principle.
In June 2009, the FASB issued new guidance to improve financial reporting by enterprises involved with variable interest entities (VIEs). This guidance changes the approach to determining a VIE’s primary beneficiary and requires companies to continuously reassess whether investments in VIEs must be consolidated. This guidance became effective for interim and annual accounting periods beginning after November 15, 2009. The Company adopted it on January 1, 2010 with no material impact to the consolidated financial statements.
In accordance with FASB ASC 820, “Fair Value Measurements and Disclosures,” 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 3 - Valuations are generated from techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models, spread-based models, and similar techniques, using the best information available in the circumstances.
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
The Company reviews prices received from service providers for unusual fluctuations but generally accepts the price identified from the pricing services. In the event a price is not available from the third-party pricing services, the Company pursues external pricing from brokers. Generally, the Company pursues and utilizes only one broker quote per security. In doing so, the Company solicits only brokers which have previously demonstrated knowledge and experience of the subject security. If a broker price is not available, the Company determines a carrying value through various valuation techniques that include using option pricing models, discounted cash flows, spread-based models or similar techniques depending upon the specific security to be priced. These techniques are primarily applied to private placement securities. The Company utilizes available market information, wherever possible, to identify inputs into the fair value determination, primarily including prices and spreads on comparable securities.
The Company performs an analysis on the prices received from third-party security pricing services and independent brokers to ensure that the prices represent a reasonable estimate of the fair value. The Company corroborates and validates the pricing sources through a variety of procedures that include but are not limited to comparison to additional independent third-party pricing services or brokers, where possible, a review of third-party pricing service methodologies, back testing and comparison of prices to actual trades for specific securities where observable data exists. In addition, the Company analyzes the third-party pricing services’ methodologies and related inputs and also evaluates the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy.
Fair value measurements for assets and liabilities where there exists limited or no observable market data are calculated using the Company’s own estimates, based on current interest rates, credit spreads, liquidity premium or discount, the economic and competitive environment, unique characteristics of the asset or liability and other pertinent factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique. Further, changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.
The Company’s own estimates of fair value are derived in a number of ways including, but not limited to: 1) pricing provided by brokers, where the price indicates reliability as to value; 2) fair values of comparable securities, incorporating a spread adjustment for maturity differences, collateralization, credit quality, liquidity and other items, if applicable; 3) discounted cash flow models and margin spreads; 4) bond yield curves; 5) observable market prices and exchange transaction information not provided by external pricing services; 6) statement values provided to the Company by fund managers; and 7) option pricing models.
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value for financial instruments not recorded at fair value in accordance with FASB ASC 825, “Financial Instruments.”
Short-term financial assets include cash and other short-term investments and are carried at historical cost. The carrying amount is a reasonable estimate of the fair value because of the relatively short time between the purchase of the instrument and its expected repayment or maturity.
The Company does not record loans at fair value. As such, valuation techniques discussed herein for loans are primarily for estimating fair value.
Fair values for liabilities under investment-type insurance contracts are based upon account value. The fair values of investment-type insurance contracts included with policyholder account balances for fixed deferred annuities and other policyholder funds for supplementary contracts without life contingencies are estimated to be their cash surrender values. The fair values of deposits with no stated maturity are equal to the amount payable on demand at the measurement date.
The Company had no short term borrowings at December 31, 2009. All of the amounts included within Notes Payable were in short-term borrowings at December 31, 2008. The carrying amount of these borrowings was a reasonable estimate of fair value because of the relatively short time between the origination of the borrowings and their expected repayment and maturities. Please see Note 5 - Notes Payable for an explanation of the terms of the debt outstanding.
The following table presents the fair value of fixed maturities and equity securities available for sale by pricing source and fair value hierarchy level as of December 31, 2009.
The roll forward of Level 3 liabilities begins with the prior period balance and adjusts for the realized gains or losses that occurred during the current period. These realized gains or losses are reflected as policyholder benefits in the Consolidated Statements of Income. Issuances, or new sales, are then added and settlements are subtracted. The ending balance represents the current fair value of liabilities which are designated as Level 3. The guaranteed minimum withdrawal benefits balance totaled $0.8 million at December 31, 2008. This balance decreased in value by $2.4 million during 2009, largely due to favorable returns in the capital markets.
The table below is a summary of fair value estimates as of December 31, 2009 and December 31, 2008 for financial instruments. 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.
The following table provides investment revenues by major category for the years ended December 31.
The following table provides the change in the net unrealized gains (losses) reported in other comprehensive income.
Two securities, one issuer a parent organization of the other, were from financial guarantee insurance companies that provide credit enhancement for bond issuers as well as investment management services and were written down by a total of $5.2 million. These issuers had also experienced declines in value related to the mortgage credit crisis,
including significant and continuing reductions in capital and liquidity positions. These securities were sold during the fourth quarter of 2009.
Three securities (from two issuers) were residential mortgage-backed securities that were written down by a total of $0.1 million. The significant decline in the subprime and non-conforming mortgage markets and the specific performance of the underlying collateral caused the Company’s cash flow projections to be less than the amortized cost of the securities and created an other-than-temporary impairment. These securities had been previously written down due to reduced projected cash flows from the underlying securitizations.
One security was a collateralized debt obligation (CDO) that was written down $0.2 million. This security had been impacted by the rapid rise in delinquencies and foreclosures in the subprime and Alt-A mortgage markets, along with a decline in the fair value of securities issued by financial institutions. Ongoing CDO liquidations and investor selling had caused extreme declines in market valuations, regardless of individual security performance. This security had been written down in previous periods.
One security was a residential mortgage-backed security that was written down $0.1 million. The significant decline in the subprime and non-conforming mortgage markets and the specific performance of the underlying collateral caused the Company’s cash flow projections to be less than the amortized cost of the security and created an other-than-temporary impairment.
One security that is a financial services company involved in automotive and real estate financing and mortgage lending was written down by $0.6 million and subsequently sold during the fourth quarter of 2008.
Two of the securities were preferred stocks of government-sponsored agencies that were written down by a total of $6.5 million. These entities buy and hold mortgages and issue and sell guaranteed residential mortgage-backed securities to facilitate housing ownership. They are now operated in conservatorship by the U.S. government and their existing common and preferred stock securities are severely diluted. Dividend payments were suspended, driving the fair value of these securities down.
Two securities from the same issuer were from an investment banking firm that filed for bankruptcy during the third quarter of 2008 and were written down by a total of $9.2 million. This firm was part of the financial industry that was hit hard by the mortgage credit crisis. After a severe decline in equity valuations, the inability to obtain short-term funding and the failure to find an acquirer forced this firm to file for Chapter 11 bankruptcy.
One security provides custom-tailored financing to private and corporate owners of real estate nationwide. This security had a rating decline to below investment grade status combined with continued price deterioration and was written down $2.8 million.
One security was from a bank holding company that had recently filed for bankruptcy. This holding company was the parent of a large nationwide bank that was recently taken over by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation (FDIC) was appointed as its receiver. As a result of the bankruptcy filing, this security was written down $0.8 million.
Three of the securities were written down by a total of $3.3 million, primarily as a result of declines in price and rating agency downgrades on debt issues from issuers that had recently completed leveraged buyout (LBO) transactions. These LBO transactions greatly increased the debt level of each issuer. One of these securities had
been written down previously, and the other two securities were below cost by 20% or more for at least six consecutive months.
Two securities were CDOs and were written down by $2.8 million, primarily due to price declines that had persisted for periods longer than the Company considered temporary. Both securities were below cost by 20% or more for at least six consecutive months.
No other-than-temporary impairments were identified during the first, second and third quarters of 2007.
The following table provides information regarding unrealized losses on investments available for sale, as of December 31, 2008.
security issues representing 36% of the issues with unrealized losses, including 93% being rated as investment grade, were below cost for less than one year;
security issues representing 23% of the issues with unrealized losses, including 81% being rated as investment grade, were below cost for three years or more.
All securities with unrealized losses greater than 20% are also monitored based upon whether the securities are investment grade or below investment grade. Securities in the investment grade category had $21.8 million in unrealized losses, while securities rated below investment grade had $5.7 million in unrealized losses at December 31, 2009.
The Company held one non-income producing security with a carrying value of $2.7 million at December 31, 2009 (2008 - one security with a carrying value of $1.5 million). This security was previously written down due to other-than-temporary impairment and placed on non-accrual status.
The table below provides sales of investment securities available for sale, excluding maturities and calls, for the years ended December 31, 2009.
No derivative financial instruments were held during the three years ended December 31, 2009.
Subprime securities include all bonds or portion 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 at prime. The Company’s classification of subprime does not include Alt-A or jumbo loans, unless the collateral otherwise meets the preceding definition. At December 31, 2009, the Company had investments with subprime residential mortgage exposure of $20.9 million and a related $8.0 million unrealized loss. This exposure amounted to less than 1% of the Company’s invested assets.
The Company had non-income producing real estate of $28.1 million consisting of vacant properties and properties under development at December 31, 2009 (2008 - $29.2 million).
1 The incurred benefits related to prior years’ unpaid accident and health claims reflect the change in these liabilities.
The Company borrows money to enhance liquidity and investment strategies, depending upon timing and specific circumstances. The following table provides information for notes payable as of December 31.
There were no outstanding notes payable as of December 31, 2009.
The Company is required to deposit a defined amount of assets with state regulatory authorities. Such assets had an aggregate carrying value of $11.6 million at December 31, 2009 (2008 - $12.1 million; 2007 - $12.7 million).
A valuation allowance must be established for any portion of the deferred tax asset which is believed not to be realizable. Based predominately upon review of the Company’s anticipated future earnings, reversal of future taxable differences, the available capital loss carryback period, tax planning strategies that are prudent and feasible, and our ability and intent to hold securities until their recovery, in management's opinion, it is more likely than not that the Company will realize the benefit of its deferred tax asset.
Federal income taxes paid during 2009 were $6.5 million (2008 - $9.9 million; 2007 - $14.6 million).
The Company and its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. In general, the Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for years prior to 2006. The Company is not currently under examination by the Internal Revenue Service.
The Kansas City Life Pension Plan was amended and restated effective January 1, 1998 as the Kansas City Life Cash Balance Pension Plan. Plan benefits are based on a cash balance account consisting of credits to the account based upon an employee’s years of service, compensation and interest credits on account balances calculated using the greater of the average 30-year Treasury bond rate for November of each year or 5.5%. The benefits expected to be paid in each year from 2010 through 2014 are $8.7 million, $10.2 million, $10.3 million, $10.1 million, and $11.6 million, respectively. The aggregate benefits expected to be paid in the five years from 2015 through 2019 are $58.1 million. The expected benefits to be paid are based on the same assumptions used to measure the Company’s benefit obligation at December 31, 2009 and include estimated future employee service. The 2010 contribution for the plan has not been determined. The asset allocation of the fair value of pension plan assets at December 31 was:
Certain of the Company’s pension plan assets consist of investments in separate accounts. Net asset value (NAV) of the separate accounts is calculated in a manner consistent with U.S. GAAP for investments companies and is determinative of their fair value. Several of the separate accounts invest in publicly quoted mutual funds or actively managed stocks. The fair value of the underlying mutual funds or stock is used to determine the NAV of the separate account, which is not publicly quoted. Some of the separate accounts also invest in fixed income securities. The fair value of the underlying securities is based on quoted prices of similar assets and used to determine the NAV of the separate account. Sale of plan assets may be at values less than NAV and certain redemption restrictions may apply.
The current assumption for the expected long-term rate of return on plan assets is 8.0%. This assumption is determined by analyzing: 1) historical average returns, 2) historical data on the volatility of returns, 3) current yields available in the
Savings plans for eligible employees and agents match employee and agent contributions up to 6% of salary and 2.5% of agents’ prior year paid commissions, respectively. Contributions to the plan in 2009 were $1.3 million (2008 - $1.8 million; 2007 - $1.2 million). The Company may contribute an additional profit sharing amount up to 4% of salary for eligible employees, depending upon corporate profits. The Company made no profit sharing contribution in 2009 or in the prior two years.
A non-contributory trusteed employee stock ownership plan covers substantially all salaried employees. No contributions have been made to this plan since 1992.
On January 1, 2009, the agents are covered under a fully insured third-party provider health plan. This plan includes Medicare prescription drug coverage.
The estimated net loss and prior service cost for the other postretirement plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next year is $0 and ($0.2 million), respectively.
compensation charged as an operating expense during 2008 was $0.1 million, net of tax. The cost of compensation that reduced operating expense during 2007 was $0.4 million, net of tax.
Insurance revenues, as shown in the Consolidated Statements of Income, consist of premiums and contract charges, less reinsurance ceded. Insurance revenues are defined as “customer revenues” for segment reporting purposes. Other revenues consist primarily of supplementary contact considerations, policyholder dividends left with the Company to accumulate, income received on the sale of low income housing tax credits by a subsidiary of the Company and fees charged on products and sales from the Company’s broker-dealer subsidiary. Customer revenues are added to other revenues, net investment income and realized investment gains (losses) to reconcile to the Company’s total revenues. Benefits and expenses are specifically and directly identified and recorded by segment. Certain expenses may also be allocated as necessary.
Old American has a coinsurance agreement that reinsures certain whole life policies issued by Old American prior to December 1, 1986. These policies had a face value of $40.9 million as of December 31, 2009. The reserve for future policy benefits ceded under this agreement was $21.9 million (2008 - $24.0 million).
Reinsurance receivables were $179.3 million at year end 2009, consisting of reserves ceded of $165.7 million and claims ceded of $13.6 million.
The following table reflects the Company’s material reinsurance partners along with their Standard and Poor’s credit rating and the amounts ceded to each reinsurer at December 31, 2009.
The Company’s reinsurance recoverable totaled $179.4 million at December 31, 2009, comprised of $130.4 million in life insurance and $49.0 million in accident and health business. The Company had one reinsurance partner whose credit rating was below investment grade at December 31, 2009. Total in-force business identified with this reinsurer was $490.2 million and total GAAP reserves ceded to this reinsurer were $3.0 million at December 31, 2009. Should this reinsurer become insolvent, the Company may recapture the business ceded to this reinsurer, resulting in an increase in GAAP reserves of $3.0 million.
The tables below provide information about comprehensive income (loss) for the years ended December 31.
In the implementation of this guidance, the Company recorded an opening balance adjustment that increased retained earnings in the amount of $8.4 million and increased accumulated other comprehensive loss in the amount of $6.6 million. The adjustment to retained earnings consisted of an increase of $8.8 million related to non-credit impairments taken in prior periods, net of tax. This adjustment also included a $0.4 million decrease due to offsetting adjustments to DAC and VOBA, net of tax. The adjustment to accumulated other comprehensive loss consisted of a decrease of $8.8 million related to non-credit impairments taken in prior periods, net of tax. This adjustment also included a $2.2 million increase due to offsetting adjustments to DAC and VOBA, net of tax.
The unaudited quarterly results of operations for the years ended December 31, 2009 and 2008 are summarized in the table below.
In the normal course of business, the Company has open purchase and sale commitments. At December 31, 2009, the Company had purchase commitments to fund mortgage loans and other investments of $15.2 million. At December 31, 2009, the Company also had a commitment to fund a construction-to-permanent loan that is subject to the borrower’s performance.
Subsequent to December 31, 2009, the Company entered into commitments to fund additional mortgage loans and other investments of $3.1 million. Additionally the Company also had a commitment to fund another construction-to-permanent loan that is subject to the borrower’s performance.
The Company is subject to various indemnification obligations issued in conjunction with certain transactions, primarily assumption reinsurance agreements, stock purchase agreements, mortgage servicing agreements, tax credit assigment 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. The Company is unable to estimate with certainty the ultimate legal and financial liability with respect to these indemnifications. The Company believes that the likelihood is remote that material payments would be required under such indemnifications and therefore such indemnifications would not result in a material adverse effect on the financial position or results of operations.
Separate investment portfolios are maintained for each of the three life insurance companies of the Company. However, investment income is allocated to the Group Insurance segment based upon its cash flows and future policy benefit liabilities.
Operating expenses are allocated to the segments based upon internal cost studies, which are consistent with industry cost methodologies.
As required by Exchange Act Rule 13a-15(b), Kansas City Life Insurance Company management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of the Company’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report. As required by Exchange Act 13a-15(d), Kansas City Life Insurance Company management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting. Based on that evaluation, there has been no such change during the period covered by this report. The independent registered public accounting firm that audited the financial statements included in the annual report containing the disclosure required by this Item has issued an attestation report on the registrant’s internal control over financial reporting.
For Immediate Release: February 26, 2010, press release reporting financial results for the fourth quarter of 2009.
Net income for 2009 was $10.7 million or $0.93 per share compared with a net loss of $17.1 million or $1.47 per share in the prior year. This significant improvement was primarily due to decreased realized investment losses, which declined $42.2 million, along with an increase in insurance revenues of $5.5 million. Insurance revenues improved primarily due to sales of new individual life products at Old American Insurance Company (OAIC) and increased sales of immediate annuity products. Partially offsetting these improvements were an increase in operating expenses of $5.0 million, an increase in reserves associated with the sale of immediate annuities and an increase in income tax expense.
The financial markets improved significantly during 2009. This enabled improved strengthening of consumer demand for insurance products and the Company’s investment performance. Premiums from new sales during the fourth quarter were $12.7 million, an increase of $2.8 million or 28% versus the prior year. Sales growth in the fourth quarter resulted from increased sales of new life insurance in the OAIC segment, which improved $0.6 million or 32% compared to one year ago. In addition, sales of immediate annuities increased $1.7 million or 47% and new group accident and health premiums increased $0.4 million or 17%. Renewal premiums for the fourth quarter declined $1.1 million or 3%, primarily from decreases in individual life and group accident and health products. New premiums for 2009 increased $10.0 million or 26% compared to 2008. This growth reflected strong immediate annuity sales, which grew $9.5 million or 75%, and a $1.5 million or 20% increase in life insurance sales from OAIC. Partially offsetting these increases were declines in new group life and group accident and health products.
New universal life sales increased 11% for the comparative fourth quarters. In addition, these fourth quarter sales were the strongest period of production during both 2008 and 2009. Total new deposits for the year increased $34.8 million or 51%, primarily from a $46.2 million increase in fixed deferred annuity sales.
After beginning the year in a period of deep recession, the economy began to stabilize during 2009. Accordingly, Kansas City Life experienced improved sales and investment performance. The Company’s strong capital and liquidity position offered it the ability to withstand the difficult economic pressures. The Company’s securities portfolio maintained a position of high quality with 94% of these investments rated as investment grade at December 31, 2009. Stockholders’ equity improved $101.3 million, primarily reflecting the change to a net unrealized gain position on security investments. Further, the Company’s relative competitive position and financial strength improved during this economic downturn. These improvements included increased agency recruiting and production, new investments, a reduced operating expense structure, and positioning of the Company for both organic growth and opportunistic investments. The Company has not wavered from its commitment to the protection of its policyholders, to return value to its investors and to be a strong and viable business partner to its agents and general agents. The Company continues to offer value and opportunity to its customers while also offering the desired strength and stability of the past. Security Assured is the Company’s goal of today and the promise of tomorrow.
Company’s primary business is providing financial protection through the sale of life insurance and annuities. The Company’s revenues were $419.6 million in 2009, and assets and life insurance in force were $4.2 billion and $30.7 billion, respectively, as of December 31, 2009. The Company operates in 49 states and the District of Columbia. For more information, please visit www.kclife.com.