On October 25, 2004, the Company entered into a definitive agreement to sell its bank subsidiary, Generations Bank, for $10.1 million to Generations Bancorp, with an expected gain on the sale of approximately $1.9 million. This transaction is subject to regulatory approval by the Office of Thrift Supervision and is expected to close during the third quarter of 2005. The bank subsidiary and the results of operations are not material to the financial statements of the Company and are not disclosed separately.
On December 14, 2004, the Company signed an asset purchase agreement to sell its administrative claims paying services contracts as a defined block of business to The Epoch Group, L. C. for $0.2 million on January 1, 2005. The administrative claims paying services, marketed as KCL Benefit Solutions, are part of the group insurance business segment. One-half of the purchase price is due in February 2005. The other half is due in subsequent years, subject to certain persistency contingencies. This block of business and the results of operations are not material to the financial statements of the Company and are not disclosed separately.
On June 30, 2003, the Company acquired all of the issued and outstanding stock of GuideOne Life Insurance Company (GuideOne) from GuideOne Financial Group, Inc. and GuideOne Mutual Company. The purchase price of the acquisition was $59.4 million and added $393.1 million in assets on the acquisition date, including an identifiable intangible asset called the value of business acquired (VOBA) of $38.0 million. The financial position and results of operations of GuideOne have been included in these financial statements on a GAAP basis using the purchase method of accounting since July 1, 2003. As of October 1, 2003, GuideOne was merged into Kansas City Life Insurance Company. For segment reporting purposes, GuideOne is included in the Kansas City Life - Individual Insurance segment.
The acquisition of GuideOne expanded the scope of the Company’s individual insurance business, including the introduction of new marketing opportunities through an exclusive marketing arrangement with the agents of the GuideOne Mutual Company (property casualty insurance carrier and former parent). The Company has benefited from efficiencies and improved economies of scale in terms of managing and administering the acquired insurance business.
Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that may predict, forecast, indicate or imply future results, performance or achievements rather than historical facts and may contain words like “believe,” “expect,” “estimate,” “project,” “forecast,” “anticipate,” “plan,” “will,” “shall,” and other words, phrases or expressions with similar meaning.
Fluctuations in experience regarding current mortality, morbidity, persistency and interest rates relative to expected amounts used in pricing the Company’s products;
Changes in assumptions related to deferred acquisition costs and the value of business acquired;
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 significant judgments and estimates concerning future results or other developments, including the likelihood, timing or amount of one or more future transactions. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, estimates, assumptions and judgments are evaluated based on historical experience and various other information believed to be reasonable under the circumstances. For a detailed discussion of other significant accounting policies, see Note 1 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements.
Premiums for traditional life insurance products are reported as revenue when due. Traditional insurance products include whole life, term life, immediate annuities and supplementary contracts with life contingencies.
Deposits relate to insurance products that include universal life, variable life, variable annuities, fixed deferred annuities and deposit products without life contingencies. The cash flows from deposits are credited to policyholder account balances. Deposits are not recorded as revenue, but revenues from such contracts consist of amounts assessed against policyholder account balances for mortality, policy administration and surrender charges, and are recognized in the period in which the services are provided.
Reinsurance is one of the tools that the Company uses to accomplish its business objectives. A variety of reinsurance vehicles are currently in use including bulk, excess, and quota share arrangements on both coinsurance and morality/morbidity only basis. Reinsurance supports a multitude of corporate objectives including managing statutory
capital, reducing volatility, reducing surplus strain, and protecting against mortality deterioration on closed blocks. At the customer level it increases our capacity, provides access to additional underwriting expertise, and generally makes it possible for us to offer products at competitive levels that we could not otherwise bring to market without reinsurance support. Reinsurance is an actively managed tool that has increased in importance over recent years and will continue to play a role in the Company’s future.
Policyholder account balances include universal life insurance, fixed deferred annuity contracts and investment-type contracts. The account balances for universal life contracts are equal to cumulative premiums, less contract charges, 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 plus interest credited. The profitability of these products is also dependent on principal assumptions similar to traditional insurance products, and differences between actual experience and pricing assumptions may result in variability of net income in amounts which may be material.
The Company has a policy and process in place to identify securities that could potentially have an impairment that is other than temporary. This process involves monitoring market events that could impact issuers’ credit ratings, business climate, management changes, litigation and government actions, and other similar factors. This process also involves monitoring late payments, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues.
There are a number of significant risks and uncertainties inherent in the process of monitoring impairments and determining if an impairment is other than temporary. These risks and uncertainties include (1) the risk that the Company’s assessment of an issuer’s ability to meet all of its contractual obligations will change based on changes in the credit characteristics of that issuer, (2) the risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated, (3) the risk that fraudulent information could be provided to the Company’s investment professionals who determine the fair value estimates and other than temporary impairments, and (4) the risk that new information obtained by the Company or changes in other facts and circumstances lead the Company to change its intent to hold the security to maturity or until it recovers in value. Any of these situations could result in a charge to income in a future period.
In 2004, the Company’s net income increased $42.9 million from the prior year, to a total of $57.7 million. Net income per share increased 290% in 2004 to $4.83, compared with $1.24 for 2003 and $2.63 for 2002. The change was primarily due to an increase in realized investment gains. In late December 2004, the Company sold a significant real estate property that generated $26.4 million in realized investment gains, net of income taxes.
The Company’s effective income tax rate increased in 2004 from a tax rate benefit of 60% in 2003 to a tax rate expense of 29%. This change was primarily due to the increase in realized investment gains in 2004. The Company’s effective income tax rate decreased in 2003 from a tax expense of 17% in 2002, to a tax rate benefit of 60%. This change was primarily due to the increase in realized investment losses in 2003. The Company’s effective income tax rate was reduced by low income housing tax credits by 5% in 2004, 41% in 2003 and 12% in 2002; and the resolution and settlement of prior year income tax liabilities.
There was a decline in premiums and deposits from 2003, which was largely the result of lower sales of fixed deferred and immediate annuities. These declines were due to a change in consumer preferences for fixed-rate products in the low interest rate environment and changes made by the Company to its fixed deferred and immediate annuity products and distribution efforts. In August of 2003, the Company introduced a new fixed deferred annuity with lower interest
guarantees that replaced previous products with higher interest guarantees. In addition, the Company has focused its distribution efforts on agencies that write a balanced mix of life and annuity products, which has resulted in a lower volume of annuity sales.
New Individual life insurance premium sales increased 10% for 2004 and 3% for 2003. These increases were due to the addition of GuideOne at June 30, 2003 and an overall emphasis on life insurance sales. In 2004, new group life premium sales decreased 23% and new group accident and health premium sales decreased 8%. In 2003, new group life premium sales increased 36%, and new group accident and health premium sales were level. Third party group marketing arrangements continue to generate sales in both the long-term disability and stop loss lines. Renewal premiums grew 2% in 2004 after declining 4% in 2003.
New deposits declined 41% in 2004 after increasing 42% in 2003, largely due to fixed deferred annuity sales which decreased 52% in 2004 but increased 45% in 2003. New deposits on universal life products increased 14% in 2004 and 19% in 2003. For 2004, new variable annuity deposits decreased 16% while new variable universal life deposits increased 10%. Sales of variable products have remained slow during 2004, reflecting the moderate performance of the equity markets. Renewal deposits increased 9% for 2004 and 6% for 2003.
Insurance revenues consist of premiums and contract charges, less reinsurance ceded. Insurance revenues were down 8% or $22.5 million in 2004 at $250.1 million, while 2003 was up 10% over 2002. Premiums were down 11% in 2004 after increasing 14% in 2003. Contract charges earned in 2004 increased due to the addition of GuideOne’s portfolio of universal life and fixed deferred annuity products for a full year. Prior to 2003, contract charges had decreased due to a reduction in policy expense loads assessed against policyholder account balances. Reinsurance ceded has increased from $43.2 million in 2002 to $48.8 million in 2003 and $54.5 million in 2004. The Company has expanded its use of reinsurance over the past few years and uses reinsurance as a means to mitigate its risks. In 2004, reinsurance ceded increased $5.7 million over 2003, primarily due to group accident and health products. This reinsurance reduces the Company’s adverse fluctuations on the more volatile long-term disability and stop loss products. In addition, the
Net investment income increased slightly in 2004 to $198.0 million, an increase of $3.2 million over 2003. In 2004, the volume of invested assets increased over the year, but the impact to investment income was partially offset by lower investment yields. In 2003, the income from higher asset levels was directly offset by lower investment yields.
Included in net investment income, income from fixed maturity securities increased by $10.4 million or 7% in 2004 from the prior year. This improvement was due, in part, to increased balances of fixed maturity security investments of $147.6 million or 5%. In addition, the Company changed the mix of fixed maturity securities, as mortgage-backed securities declined $77.9 million and corporate bonds increased $205.1 million. Partially offsetting the improved income from fixed maturity securities was a decline in income from mortgage loans of $3.3 million and short-term and other investments of $3.8 million. The decline in income from mortgage loans was primarily due to prepayments of commercial mortgages, which resulted in a $26.0 million reduction in mortgage loan balances during 2004.
The Company realizes investment gains and losses in the normal course of business from several sources. The most consistent source of realized gains and losses is from investment security sales. Although sales of securities have resulted in significant net losses during 2002 and 2003, sales of securities resulted in a net gain of $0.3 million in 2004. Sales of securities are generally the result of changes in the relative credit position of the issue or issuer, along with the requirements of managing the Company’s asset and liability position. Other sources of realized investment gains and losses include write-downs of investment securities, investment securities that are called, sales of real estate and other miscellaneous investment gains and losses.
The most significant source of realized investment gain or loss during the past three years was the $44.7 million in realized gains from sales of real estate recorded during 2004. More than 90% of these gains were from the sale of the Company’s 50% interest in a portfolio of properties near Paradise Valley Mall, referred to as Paradise Village properties in Phoenix, Arizona. The property interests were sold in two transactions that were completed in late December 2004 for a total of $54.3 million. Fifty million of this total was attributable to the Company selling most of the property interests to the other 50% owner. The remaining $4.3 million represented the sale of certain properties to a third party.
The Company has a long history of investment in real estate. Real estate investments totaled $91.5 million at December 31, 2004 and $112.7 million at December 31, 2003. Property types include office, industrial, multi-family and single-family residential. Properties have been acquired through individual purchases, build-to-suit and speculative development, and acquisition of other life insurance company investment portfolios. The Company generally maintains its ownership interest in these properties with the long-term intention of earning positive cash flow and income by leasing the properties, along with the expectation of realizing capital appreciation upon sale. As evidenced by the realized investment gains from sales of real estate of $44.7 million in 2004, $9.1 million in 2003 and $8.6 million in 2002, the Company periodically sells certain real estate assets.
The following table provides credit quality information on fixed maturity securities as determined by one of the nationally recognized ratings firms as of December 31, 2004.
The accompanying consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America (GAAP) and include the accounts of Kansas City Life Insurance Company and its subsidiaries, principally Sunset Life Insurance Company of America (Sunset Life) and Old American Insurance Company (Old American). All material intercompany accounts and transactions have been eliminated in consolidation. Certain amounts in prior years have been reclassified to conform with the current year presentation.
VOBA 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 support the value of VOBA, 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 accrual of interest for Old American VOBA was calculated at a 13% interest rate for the life block and a 7% rate for the accident and health block. For the GuideOne acquisition VOBA, a 5.2% interest rate was used on the interest sensitive block, a 4.1% interest rate was used on the deferred annuity block and a 5.3% interest rate was used on the traditional life block. For the VOBA on an acquired block of business a 7% interest rate was used on the traditional life portion and a 5.4% interest rate was used on the interest sensitive portion. The interest rates used in the calculation of VOBA are based on rates appropriate at the time of acquisition.
Premiums for traditional life insurance products are reported as revenue when due. Premiums on accident and health, disability and dental insurance are reported as earned ratably over the contract period in proportion to the amount of insurance protection provided. A reserve is provided for the portion of premiums written which relates to unexpired terms of coverage.
Liabilities for future policy benefits of accident and health insurance represent estimates of payments to be made on reported insurance claims, as well as claims incurred but not yet reported. These liabilities are estimated using actuarial analyses and case basis evaluations, based upon past claims experience, claim trends and industry experience.
Crediting rates for universal life insurance and fixed deferred annuity products ranged from 3.00% to 5.75% (2003 - 3.00% to 6.25%; 2002 - 3.00% to 7.25%).
Reinsurance recoverable includes amounts related to paid benefits and estimated amounts related to unpaid policy and contract claims, future policy benefits and policyholder account balances. At December 31, 2004, there were no reinsurers with overdue balances. The cost of reinsurance is accounted for over the terms of the underlying reinsured policies using assumptions consistent with those used to account for the policies.
Due to the Company's capital structure and the absence of other potentially dilutive securities, there is no difference between basic and diluted earnings per common share for any of the years or periods reported. The weighted average number of shares outstanding during the year was 11,932,109 shares (2003 - 11,944,291 shares; 2002 - 11,997,733 shares). The number of shares outstanding at year-end was 11,946,393 (2003 - 11,924,593).
Financial Accounting Standards Board (FASB) Interpretation (FIN) 46, "Consolidation of Variable Interest Entities," was issued in January 2003. This is an interpretation of Accounting Research Bulletin (ARB) No. 51, "Consolidated Financial Statements." This interpretation requires the consolidation of entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual terms or other financial interests in the entity. This interpretation was adopted July 1, 2003 and had no material impact. Subsequently, in December 2003, the FASB issued a revision known as FIN 46R, which replaces FIN 46. The Company is required to apply FIN 46R to variable interest entities created after December 31, 2003. This revised interpretation was adopted on January 1, 2004, with no material impact.
In March 2004, the Emerging Issues Task Force reached further consensus on Issue No. 03-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-1”). EITF 03-1 provides guidance for determining the meaning of “other-than-temporarily impaired” and its application to certain debt and equity securities within the scope of Statement of Financial Accounting Standards No. 115 “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”) and investments accounted for under the cost method. The guidance requires that investments which have declined in value due to credit concerns or solely due to changes in interest rates must be recorded as other-than-temporarily impaired unless the Corporation can assert and demonstrate its intention to hold the security for a period of time sufficient to allow for a recovery of fair value up to or beyond the cost of the investment, which might mean maturity. This issue also requires disclosures assessing the ability and intent to hold investments in instances in which an investor determines that an investment with a fair value less than cost is not other-than-temporarily impaired.
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“the Act”) was signed into law. This Act introduces a prescription drug benefit under Medicare (Medicare Part D), as well as a federal subsidy to sponsors of retiree health benefits. On May 19, 2004, the FASB issued Staff Position No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Modernization Act of 2003 (“FSP 106-2”). FSP 106-2 provides guidance on the accounting for the effects of the Act. FSP 106-2 was adopted on December 31, 2004, with no material impact.
For those securities with unrealized losses for less than twelve months there were 265 issues with a carrying value of $727,042, and unrealized losses of $9,108. Of this portfolio, 99.0% were investment grade (rated AAA through BBB-) at December 31, 2004, with associated unrealized losses of $9,048. The unrealized losses on these securities can primarily be attributed to changes in market interest rates and credit spreads since the securities were acquired.
For those securities with unrealized losses for twelve months or longer, there were 165 issues with a carrying value of $289,617, and unrealized losses of $10,170. Of this portfolio, 95.9% were investment grade at December 31, 2004, with associated unrealized losses of $9,516.
The table below summarizes the fixed maturity securities with unrealized losses as of December 31, 2004.
The amortized cost and fair value of investments in securities available for sale at December 31, 2004, are as follows.
The amortized cost and fair value of investments in securities available for sale at December 31, 2003, are as follows.
The table below provides sales of investment securities available for sale, excluding maturities and calls, for the year ended December 31.
The Company does not hold securities of any corporation and its affiliates, which exceeded 10% of stockholders' equity.
Following is the distribution of maturities for fixed maturity investment securities available for sale as of December 31, 2004. Expected maturities may differ from these contractual maturities since borrowers may have the right to call or prepay obligations.
Most of the Company’s mortgage loans are secured by commercial real estate and are carried net of a valuation reserve of $4,368 (2003 - $4,801). The valuation reserve for mortgage loans is maintained at a level believed adequate by management to absorb estimated probable credit losses. Management’s periodic evaluation and assessment of the adequacy of the valuation reserve is based on known and inherent risks in the portfolio, historical and industry data, current economic conditions and other relevant factors. No mortgage loans were foreclosed upon and transferred to real estate investments during the past two years. Also, there were no delinquent mortgage loans at December 31, 2004.
The Company sold its interest in real estate near the Paradise Valley Mall in Phoenix, Arizona, for a total sales price of $54.3 million in two transactions. A buyer of certain real estate assumed the outstanding debt on the property of $15.3 million. These transactions were completed in late December 2004 and resulted in a realized gain of $26.4 million, net of income taxes.
The liability for unpaid accident and health claims is included with "policy and contract claims" on the Consolidated Balance Sheets. Claim adjustment expenditures are expensed as incurred and were not material in any year presented. Activity in the liability follows.
Two real estate loans with interest rates between 7.50% and 7.75% and
Note Payable due June 2005, related to the purchase of GuideOne Life
Insurance Company, with an interest rate equal to the prime rate
The Company has unsecured revolving lines of credit of $60.0 million with two major commercial banks with no balances outstanding, and which are at variable interest rates - currently at 2.95%. Both lines of credit will expire during 2005, and it is expected that the Company will renew these facilities.
With the exception of the real estate and construction loans, all borrowings are used to enhance liquidity and investment strategies. Interest paid on all borrowings equaled $1,574 (2003 - $1,961; 2002 - $2,325). The interest expense on all borrowings totaled $1,694 (2003 - $1,925; 2002 - $2,352).
Maturities on notes payable are as follows in millions: $90.8 due in 2005; none due in 2006 or 2007; $0.8 due in 2008; none due in 2009; and $0.6 due thereafter.
Stockholder dividends may not exceed statutory unassigned surplus. Additionally, under Missouri law, the Company must have the prior approval of the Missouri Director of Insurance in order to pay dividends in any consecutive twelve-month period exceeding the greater of statutory net gain from operations for the preceding year or 10% of statutory stockholders' equity at the end of the preceding year. The maximum payable in 2005 without prior approval is $35,064, the statutory net gain from operations. The Company believes these statutory limitations impose no practical restrictions on its dividend payment plans.
The following tables provide information about income taxes and a reconciliation of the Federal income tax rate to the Company’s effective income tax rate for the years ended December 31.
The income tax expense is recorded in various places in the Company's financial statements as detailed below, for the years ended December 31.
This allocation of pension assets is within the targeted mix by asset class: fixed income securities 40-60%, equity securities 40-60%, and other assets 0-10%. The strategic goal is to achieve an optimal rate of return at an acceptable level of investment risk in order to provide for the payment of benefits.
The postretirement medical plans for the employees, full-time agents, and their dependents are contributory with contributions adjusted annually. The benefits expected to be paid in each year from 2005 through 2009 are $970, $860, $940, $1,020, and $1,070 respectively. The aggregate benefits expected to be paid in the five years from 2010 - 2014 are $6,110. The expected benefits to be paid are based on the same assumptions used to measure the Company’s benefit obligation at December 31, 2004. The 2005 contribution for the plan is estimated to be $970. The Company pays these medical costs as due and the plan incorporates cost-sharing features.
Non-contributory defined contribution retirement plans for general agents and eligible sales agents provide supplemental payments based upon earned agency first year individual life and annuity commissions. Contributions to these plans were $106 (2003 - $132; 2002 - $132). Non-contributory deferred compensation plans for eligible agents based upon earned first year commissions are also offered. Contributions to these plans were $1,057 (2003 - $614; 2002 - $711).
Savings plans for eligible employees and agents match employee and agent contributions up to 6% of salary and 2.5% of agent’s prior year paid commissions, respectively. Contributions to the plan were $1,699 (2003 - $1,437; 2002 - $1,452). 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 this year or in the prior two years.
Company operations have been classified and summarized into four reportable segments. The segments, while generally classified along Company lines, are based upon distribution method, product portfolio and target market. The Parent Company is divided into two segments. The Kansas City Life - Individual segment consists of sales of variable life and annuities, interest sensitive products and traditional life insurance products through a nationwide sales force of independent general agents. GuideOne is included in the Kansas City Life - Individual Segment. The Kansas City Life - Group segment consists of sales of group life, disability, stop loss, dental products and administrative claims paying services. Group segment products and services are marketed by a nationwide sales force of independent general agents and group brokers, along with third party marketing arrangements. The Sunset Life segment consists of sales of interest sensitive and traditional products through a sales force of independent general agents. The Old American segment sells final expense insurance products nationwide through its general agency system with exclusive territories, using direct response marketing to supply agents with leads.
Inter-segment revenues are not material. The Company operates solely in the United States and no individual customer accounts for 10% or more of the Company's revenue. Customer revenues consist of insurance revenues and other revenues.
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 $69.7 million as of this year-end. The reserve for future policy benefits ceded under this agreement was $33,222 (2003 - $35,704).
Kansas City Life acquired a block of traditional life and universal life products in 1997. As of this year-end, the block had $2.1 billion of life insurance in force (2003 - $2.3 billion). The block generated life insurance premiums of $2,838 (2003 - $3,120).
The carrying amounts for cash, short-term investments and policy loans as reported in the accompanying balance sheet approximate their fair values. The fair values for securities were based on quoted market prices, where available. For those securities not actively traded, fair values were estimated using values obtained from independent pricing services or, in the case of private placements, were estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality and maturity of the investments. Fair values for mortgage loans were based upon discounted cash flow analyses using an interest rate assumption above comparable U.S. Treasury rates. The fair value of bank deposits, checking, savings and money market accounts was the amount payable on demand.
At year-end 2004, all of the Company’s notes payable had a carrying value which approximated their fair value. The Company’s other liabilities are generally short-term in nature and their carrying value approximates their fair value.
The life insurance industry, including the Company, has been subject to an increase in litigation in recent years. Such litigation has been pursued on behalf of purported classes of policyholders and other claims and legal actions in jurisdictions where juries often award punitive damages, which are grossly disproportionate to actual damages. Although no assurances can be given and no determinations can be made at this time, management believes that the ultimate liability, if any, with respect to these claims and actions, would have no material effect on the Company’s business, results of operations or financial position.
The Company is subject to various indemnification obligations issued in conjunction with certain transactions, primarily assumption reinsurance agreements, stock purchase agreements, mortgage servicing agreements and borrowing agreements whose terms range in duration and often are not explicitly defined. Generally, a maximum obligation is not explicitly stated; therefore, the overall maximum amount of the obligation under the indemnifications cannot be reasonably estimated. While the Company is unable to estimate with certainty the ultimate legal and financial liability with respect to these indemnifications, the Company believes 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 business, financial position or results of operations.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kansas City Life Insurance Company and subsidiaries as of December 31, 2004 and December 31, 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with United States of America generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We have audited management’s assessment, included in the accompanying Management’s Assessment of Internal Control Over Financial Reporting appearing under Item 9A, that Kansas City Life Insurance Company and subsidiaries (the Company) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.