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KANSAS CITY LIFE INSURANCE CO - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

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Amounts are stated in thousands, except share data, or as otherwise noted.


Management's Discussion and Analysis of Financial Condition and Results of
Operations is intended to provide in narrative form the perspective of the
management of Kansas City Life Insurance Company (the Company) on its financial
condition, results of operations, liquidity, and certain other factors that may
affect its future results. The following is a discussion and analysis of the
results of operations for the quarters ended June 30, 2012 and 2011 and the
financial condition of the Company at June 30, 2012. This discussion should be
read in conjunction with the consolidated financial statements and accompanying
notes included in this document, as well as the Company's 2011 Form 10-K.

Overview

Kansas City Life Insurance Company is a financial services company that is
predominantly focused on the underwriting, sales, and administration of life
insurance and annuity 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. For additional information, please refer to the
Overview included in Management's Discussion and Analysis of Financial Condition
and Results of Operations in the Company's 2011 Form 10-K.

Cautionary Statement on Forward-Looking Information


This report reviews the Company's financial condition and results of operations,
and historical information is presented and discussed. Where appropriate,
factors that may affect future financial performance are also identified and
discussed. Certain statements made in this report include "forward-looking
statements" that fall within the meaning of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements include any statement that may
predict, forecast, indicate or imply future results, performance, or
achievements rather than historical facts and may contain words like "believe,"
"expect," "estimate," "project," "forecast," "anticipate," "plan," "will,"
"shall," and other words, phrases, or expressions with similar meaning.

Actual results may differ materially from those included in the forward-looking
statements as a result of risks and uncertainties. Those risks and uncertainties
include, but are not limited to, the risk factors listed in Item 1A. Risk
Factors as filed in the Company's 2011 Form 10-K. For additional information,
please refer to the Overview included in Management's Discussion and Analysis of
Financial Condition and Results of Operations in the Company's 2011 Form 10-K.



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Consolidated Results of Operations

Summary of Results

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The Company earned net income of $8.4 million in the second quarter of 2012
compared to $11.2 million in the second quarter of 2011. Net income per share
was $0.78 in the second quarter of 2012 versus $0.97 in same period in the prior
year. Net income for the first six months of 2012 was $27.8 million, an increase
of $11.9 million or 74% compared to last year. Net income per share for the six
months was $2.50, an increase of $1.11 per share versus the same period one year
earlier. The following table presents variances between the results for the
second quarters and six months ended June 30, 2012 and 2011. Additional
information on these items is presented below.



                                                Quarter Ended                Six Months Ended
                                                   June  30                      June  30
                                               2012 Versus 2011              2012 Versus 2011
Insurance and other revenues                  $            4,888            $            2,643
Net investment income                                     (1,458 )                      (2,640 )
Net realized investment gains                               (496 )                      14,380
Policyholder benefits and interest
credited to policyholder account
balances                                                  (2,022 )                       4,705
Amortization of deferred acquisition
costs                                                     (4,416 )                      (2,733 )
Operating expenses                                          (580 )                       1,323
Income tax expense                                         1,308                        (5,804 )

Total variance                                $           (2,776 )          $           11,874



Sales

The Company measures sales in terms of new premiums and deposits. Sales of
traditional life insurance, immediate annuities, and accident and health
products are reported as premium income for financial statement
purposes. Deposits received from the sale of interest sensitive products,
including universal life insurance, fixed deferred annuities, variable universal
life, variable annuities, and supplementary contracts without life contingencies
are reflected as deposits in the Consolidated Statements of Cash Flows.

The Company's marketing plan for individual products focuses on three main
aspects: providing financial security with respect to life insurance, the
accumulation of long-term value, and future retirement income needs. The primary
emphasis is on the growth of individual life insurance business, including new
premiums for individual life products and new deposits for universal life and
variable universal life products.

Sales are primarily made through the Company's existing sales force. The Company
emphasizes growth of the sales force with the addition of new general agents and
agents. The Company believes that increased sales will result through both the
number and productivity of general agents and agents. In addition, the Company
places an emphasis on training and direct support to the field force to assist
new agents in their start-up phase. In addition, the Company provides support to
existing



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agents to stay abreast of the ever-changing regulatory environment and to
introduce agents to new products and enhanced features of existing products. On
occasion, the Company may also selectively utilize third-party marketing
arrangements to enhance its sales objectives. This allows the Company the
flexibility to identify niches or pursue unique avenues in the existing market
environment and to react quickly to take advantage of opportunities as they
occur.

The Company also markets a series of group products. These products include
group life, dental, disability, and vision products. The primary growth
strategies for these products include increased productivity of the existing
group representatives; planned expansion of the group distribution system; and
to selectively utilize third-party marketing arrangements. Further, growth is to
be supported by the addition of new products to the portfolio, particularly
voluntary-type products.

The following table presents gross premiums by new and renewal business, less
reinsurance ceded, as included in insurance revenues for the second quarters and
six months ended June 30, 2012 and 2011. New premiums are also detailed by
product.



                                                          Quarter Ended
                                                             June 30
                                        2012         % Change         2011         % Change
New premiums:
Individual life insurance             $   4,414              2      $   4,313              5
Immediate annuities                       3,460            234          1,037            (77 )
Group life insurance                        744             64            453             (9 )
Group accident and health insurance       3,199             (5 )        3,367              5

Total new premiums                       11,817             29          9,170            (26 )
Renewal premiums                         37,033              1         36,509              2

Total premiums                           48,850              7         45,679             (5 )
Reinsurance ceded                       (14,645 )           (2 )      (14,878 )            6

Premiums, net                         $  34,205             11      $  30,801            (10 )





                                                         Six Months Ended
                                                             June 30
                                        2012         % Change         2011         % Change
New premiums:
Individual life insurance             $   8,770              1      $   8,724              9
Immediate annuities                       5,168             38          3,746            (62 )
Group life insurance                      1,225             29            947            (16 )
Group accident and health insurance       5,743            (18 )        6,991              7

Total new premiums                       20,906              2         20,408            (20 )
Renewal premiums                         74,283              3         71,955              2

Total premiums                           95,189              3         92,363             (4 )
Reinsurance ceded                       (28,280 )            1        (27,937 )            3

Premiums, net                         $  66,909              4      $  64,426             (7 )



Consolidated total premiums increased $3.2 million or 7% in the second quarter
of 2012 versus the same period in the prior year, as total new premiums
increased $2.6 million or 29% and total renewal premiums increased $0.5 million
or 1%. The increase in total new premiums was largely due to a $2.4 million
increase in immediate annuities. Immediate annuity receipts can have sizeable
fluctuations, as receipts from policyholders largely result from one-time
premiums rather than recurring premiums. In addition, new group life insurance
premiums increased. The increase in consolidated renewal premiums was largely
due to a $0.6 million increase in individual life insurance premiums,
attributable to the Old American segment.



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Consolidated total premiums increased $2.8 million or 3% in the first six months
of 2012 versus one year earlier, reflecting a $0.5 million or 2% increase in
total new premiums and a $2.3 million or 3% increase in total renewal premiums.
The increase in total new premiums was due to a $1.4 million or 38% increase in
new immediate annuity premiums and a $0.3 million increase in new group life
premiums. These improvements were partially offset by a $1.2 million or 18%
decrease in new group accident and health premiums, primarily in the dental and
short-term disability lines. The increase in renewal premiums reflected an
increase in individual life insurance premiums from both the Individual and Old
American segments. In addition, renewal group accident and health premiums
increased, largely from the short-term disability line.

The following table reconciles deposits with the Consolidated Statements of Cash
Flows and provides detail by new and renewal deposits for the second quarters
and six months ended June 30, 2012 and 2011. New deposits are also detailed by
product.



                                                                  Quarter Ended
                                                                     June 30
                                           2012            % Change              2011             % Change
New deposits:
Universal life insurance              $        2,857             (24 )      $        3,750               22
Variable universal life insurance                103             (62 )                 268               35
Fixed deferred annuities                      12,469             (31 )              18,025               58
Variable annuities                             4,642             (24 )               6,142               10

Total new deposits                            20,071             (29 )              28,185               39
Renewal deposits                              35,325              (3 )              36,333                -

Total deposits                        $       55,396             (14 )      $       64,518               14





                                                                  Six Months Ended
                                                                       June 30
                                            2012             % Change               2011             % Change
New deposits:
Universal life insurance               $        6,160               (6 )       $        6,562                1
Variable universal life insurance                 260              (47 )                  493               12
Fixed deferred annuities                       31,619               (4 )               32,917               47
Variable annuities                              8,603              (14 )                9,979              (13 )

Total new deposits                             46,642               (7 )               49,951               22
Renewal deposits                               70,217               (3 )               72,031                3

Total deposits                         $      116,859               (4 )       $      121,982               10



Total new deposits decreased $8.1 million or 29% in the second quarter of 2012
compared with the second quarter of 2011. This change was primarily due to a
$5.6 million or 31% decrease in new fixed deferred annuity deposits and a $1.5
million or 24% decrease in new variable annuity deposits. Total renewal deposits
decreased $1.0 million or 3% in the second quarter of 2012 versus last year,
reflecting a $0.9 million or 33% decrease in renewal variable annuity deposits.
Total new deposits decreased $3.3 million or 7% in the first six months of 2012
compared with the prior year. This decrease was largely due to a $1.4 million or
14% decline in new variable annuity deposits and a $1.3 million or 4% decrease
in new fixed deferred annuity deposits. Total renewal deposits decreased $1.8
million or 3%, reflecting a $2.1 million or 35% decrease in renewal variable
annuity deposits. Partially offsetting this decline, renewal fixed deferred
annuity deposits increased $0.8 million or 5% compared to last year. New sales
and renewals for deposit products have been negatively affected for the second
quarter and first six months of 2012 by continuing low interest rates and the
uncertain economic environment.



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Insurance Revenues


Insurance revenues consist of premiums, net of reinsurance, and contract
charges. In the second quarter of 2012, total insurance revenues increased $5.2
million or 10%, reflecting a $3.4 million or 11% increase in net premiums and a
$1.8 million or 8% increase in contract charges compared to the prior year. The
increase in net premiums resulted from a $0.8 million or 3% increase in total
individual life premiums, largely from the Old American segment, and a $2.4
million increase in total immediate annuity premiums.

Insurance revenues increased $3.2 million or 3% in the first six months of 2012
compared with the prior year. This increase was due to a $2.5 million or 4%
increase in net premiums and a $0.7 million or 1% increase in contract charges.
The increase in net premiums largely resulted from a $1.6 million or 3% increase
in total individual life insurance premiums, also largely from the Old American
segment, and a $1.2 million or 29% increase in total immediate annuity premiums.

Contract charges consist of cost of insurance, expense loads, amortization of
unearned revenues, and surrender charges on policyholder account balances.
Certain contract charges are not recognized in income immediately but are
deferred and amortized into income in proportion to the expected future gross
profits of the business, in a manner similar to 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.

Contract charges are impacted by the sales of new products and the persistency
of both existing and closed blocks of business. The closed blocks of business
reflect policies and companies that the Company has purchased but to which the
Company is not actively pursuing marketing efforts to generate new sales and has
the intent of servicing to achieve long-term profit streams.

Total contract charges on all blocks of business increased $1.8 million or 8% in
the second quarter of 2012 compared to the same periods in 2011. The increase in
the second quarter of 2012 was largely due to a $2.5 million increase in the
amortization of deferred revenue. Amortization of deferred revenue increased
$1.8 million during the second quarter of 2012 due to unlocking. This unlocking
was due to changes in the interest and mortality margins that resulted in a
decrease to the deferred revenue liability. Conversely, deferred revenue
decreased $1.8 million during second quarter 2011 due to unlocking. The 2011
unlocking was primarily the result of the implementation of a new industry
mortality table and the impact of a system upgrade specific to reinsurance.

Total contract charges on all blocks of business increased $0.7 million in the
first six months of 2012 compared to one year earlier. In addition to the
results discussed above for the quarter, the amortization of deferred revenue
increased during 2012 due to a system upgrade that occurred during 2011 that led
to enhanced reinsurance modeling capabilities. Partially offsetting this
increase was a $0.4 million decrease in both expense loads and cost of insurance
charges. The decrease in expense loads resulted from a decline in value of
variable annuities held in the separate accounts, reflecting the existing market
conditions. The decline in cost of insurance charges was largely due to the
runoff of closed blocks.

Total contract charges on closed blocks equaled 34% and 37% of total
consolidated contract charges in the second quarters of 2012 and 2011, and 35%
and 36% for the first six months of 2012 and 2011, respectively. Total contract
charges on closed blocks decreased 1% in the second quarter and 2% in the first
six months of 2012 compared to the same periods in the prior year. These
declines reflect the runoff of the closed blocks. Total contract charges on
open, or ongoing, blocks of business increased 13% in the second quarter and 4%
in the first six months, reflecting in part new sales of these products and the
unlocking discussed above.

The Company uses reinsurance as a means to mitigate its risks and to reduce the
earnings volatility from claims. Reinsurance ceded premiums decreased $0.2
million or 2% in the second quarter of 2012 and increased $0.3 million or 1% in
the first six months of 2012, as compared to the same periods in 2011.
Reinsurance ceded for the Group segment increased $0.1 million or 4% in the
second quarter and $0.9 million or 15% in the six months, reflecting increased
disability sales that were largely reinsured. Reinsurance ceded for the Old
American segment declined $0.1 million or 12% in the second quarter and $0.2
million or 15% in the first six months of 2012, reflecting the continued runoff
of a large closed block of reinsured business. Reinsurance ceded for the
Individual Insurance segment decreased $0.3 million or 3% in the second quarter
and $0.3 million or 2% in the first six months of 2012.



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Investment Revenues


Gross investment income is largely composed of interest, dividends and other
earnings on fixed maturity securities, equity securities, short-term
investments, mortgage loans, real estate, and policy loans. Gross investment
income decreased $1.0 million or 2% in the second quarter and $2.5 million or 3%
in the first six months of 2012 compared with the same periods in 2011. While
average invested assets increased in both the second quarter and first six
months during 2012, these changes were more than offset by lower yields earned
on certain investments.

Fixed maturity securities provided a majority of the Company's investment income
during both the quarter and six months ended June 30, 2012. Income on these
investments declined $1.1 million or 3% in the second quarter and $2.7 million
or 4% in the first six months of 2012 compared to the prior year, reflecting
declines in yields earned.

Investment income from mortgage loans decreased 1% in the second quarter and
increased 4% in the first six months of 2012 compared to the same periods in
2011. The improvement in the six months was largely the result of higher
mortgage loan portfolio holdings in the first six months of 2012 compared to the
first six months of 2011, as the Company increased the mortgage loan balance
through purchases made during 2011.

Net investment income is stated net of investment expenses. Investment expenses
increased $0.4 million or 15% in the second quarter of 2012 and $0.2 million or
3% in the first six months of 2012 compared to the same periods in 2011. These
changes were largely attributable to increased real estate expenses.

The Company realizes investment gains and losses from several sources, including
write-downs of investments and sales of investment securities and real estate.
Many securities purchased by the Company contain call provisions, which allow
the 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.

The following table provides detail concerning realized investment gains and losses for the second quarters and six months ended June 30, 2012 and 2011.



                                                     Quarter Ended                         Six Months Ended
                                                        June 30                                June 30
                                               2012                2011                2012                2011
Gross gains resulting from:
Sales of investment securities             $           -      $        3,341      $          313      $        3,652
Investment securities called and other               595                 387                 803               1,250
Sales of real estate                               1,010                   -              16,180                   -

Total gross gains                                  1,605               3,728              17,296               4,902

Gross losses resulting from:
Sales of investment securities                       (32 )            (1,590 )               (32 )            (1,590 )
Investment securities called and other              (151 )              (125 )              (204 )              (179 )
Mortgage loans                                       (13 )                 -                (178 )                (3 )

Total gross losses                                  (196 )            (1,715 )              (414 )            (1,772 )
Change in allowance for potential future
losses on mortgage loans                             (32 )                 -                 332                   -
Amortization of DAC and VOBA                         (16 )              (120 )               (16 )              (225 )

Net realized investment gains, excluding
impairment losses                                  1,361               1,893              17,198               2,905


Net impairment losses recognized in
earnings:
Total other-than-temporary impairment
losses                                              (188 )              (238 )              (456 )              (507 )
Portion of loss recognized in other
comprehensive income                                  42                  56                 150                 114

Net impairment losses recognized in
earnings                                            (146 )              (182 )              (306 )              (393 )

Net realized investment gains              $       1,215      $        1,711      $       16,892      $        2,512





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The Company recorded a net realized investment gain of $1.2 million in the
second quarter of 2012, compared with a $1.7 million net realized investment
gain in the second quarter of 2011. During the second quarter of 2012,
investment gains on sales of real estate totaled $1.0 million. Net realized
investment gains for the first six months totaled $16.9 million in 2012 compared
to $2.5 million in 2011, largely reflecting gains on sales of real estate of
$16.2 million. In the above table, investment securities called and other
includes, but is not limited to, principal payments and sinking funds.

The Company's analysis of securities for the second quarter ended June 30, 2012
resulted in the determination that eight fixed-maturity residential
mortgage-backed securities had other-than-temporary impairments and were written
down by a combined $0.1 million due to credit impairments. These residential
mortgage-backed securities had incremental losses, reflecting deterioration in
the present value of expected future cash flows. The additional losses from
these residential mortgage-backed securities totaled $0.2 million in the second
quarter of 2012, including $0.1 million that was determined to be non-credit and
was recognized in other comprehensive income. The total fair value of the
affected securities after the write-downs was $65.7 million.

The following table summarizes securities with other-than-temporary impairments
recognized in earnings by business segment during the first and second quarters
of 2012 and 2011 by asset class:



                                                                                            Six Months
                                            Quarter Ended           Quarter Ended             Ended
                                              March 31                June  30               June 30
                                                2012                    2012                   2012
Bonds:
Corporate private-labeled
residential mortgage-backed
securities:
Individual Insurance                       $           143         $           134         $        277
Group Insurance                                          -                       -                    -
Old American                                            17                      12                   29

Total                                      $           160         $           146         $        306

Segment detail:
Individual Insurance                       $           143         $           134         $        277
Group Insurance                                          -                       -                    -
Old American                                            17                      12                   29

Consolidated total                         $           160         $           146         $        306





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                                                                                            Six Months
                                            Quarter Ended           Quarter Ended             Ended
                                              March 31                June  30               June 30
                                                2011                    2011                   2011
Bonds:
Corporate private-labeled
residential mortgage-backed
securities:
Individual Insurance                       $           188         $           164         $        352
Group Insurance                                          -                       -                    -
Old American                                            23                      18                   41

Total                                      $           211         $           182         $        393

Segment detail:
Individual Insurance                       $           188         $           164         $        352
Group Insurance                                          -                       -                    -
Old American                                            23                      18                   41

Consolidated total                         $           211         $           182         $        393



Analysis of Investments

The Company seeks to protect policyholders' benefits and achieve a desired level
of organizational profitability 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 primary sources of investment risk to which the Company is exposed include
credit risk, interest rate risk, and liquidity risk. The Company's ability to
manage these risks is essential to the success of the organization. In
particular, the Company devotes considerable resources to both the credit
analysis of each new investment and to ongoing credit positions. A default by an
issuer usually involves some loss of principal to the investor. Losses can be
mitigated by timely sales of affected securities or by active involvement in a
restructuring process. However, there can be no assurance that the efforts of an
investor will lead to favorable outcomes in a bankruptcy or restructuring.
Credit risk is managed primarily through industry, issuer, and structure
diversification.



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The following table provides information regarding fixed maturity and equity securities by asset class at June 30, 2012.



                                                                         Fair Value                           Fair Value
                                                                        of Securities                        of Securities
                                           Total                         with Gross           Gross           with Gross           Gross
                                           Fair             %            Unrealized         Unrealized        Unrealized         Unrealized
                                           Value         of Total           Gains             Gains             Losses             Losses
U.S. Treasury securities and
obligations of U.S. Government          $   135,892             4%     $    

134,213 $ 14,308 $ 1,679 $ 22 Federal agencies 1

                           26,123             1%              26,123            4,061                   -                1
Federal agency issued residential
mortgage-backed securities 1                106,439             4%             105,813            9,281                 626                -

Subtotal                                    268,454             9%             266,149           27,650               2,305               23
Corporate obligations:
Industrial                                  544,941            19%             520,208           48,437              24,733            1,727
Energy                                      193,676             7%             184,096           20,692               9,580               46
Communications and technology               219,485             8%             215,432           20,097               4,053               28
Financial                                   316,822            11%             283,253           20,753              33,569            2,624
Consumer                                    535,552            19%             520,485           47,467              15,067               53
Public utilities                            292,514            10%             276,538           39,068              15,976              485

Subtotal                                  2,102,990            74%           2,000,012          196,514             102,978            4,963
Corporate private-labeled residential
mortgage-backed securities                  151,638             5%              81,428            2,711              70,210            8,694
Municipal securities                        174,148             6%             170,177           25,510               3,971               26
Other                                       103,178             4%              57,993            4,771              45,185            8,081
Redeemable preferred stocks                  15,842             1%              12,382              328               3,460              222

Fixed maturities                          2,816,250            99%           2,588,141          257,484             228,109           22,009
Equity securities                            37,184             1%              36,057            1,815               1,127              130

Total                                   $ 2,853,434           100%     $     2,624,198     $    259,299     $       229,236     $     22,139




1 Federal agency securities are not backed by the full faith and credit of the

U.S. Government.




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The following table provides information regarding fixed maturity and equity securities by asset class at December 31, 2011.



                                                                         Fair Value                           Fair Value
                                                                        of Securities                        of Securities
                                           Total                         with Gross           Gross           with Gross           Gross
                                           Fair             %            Unrealized         Unrealized        Unrealized         Unrealized
                                           Value         of Total           Gains             Gains             Losses             Losses
U.S. Treasury securities and
obligations of U.S. Government          $   134,437             5%     $       133,478     $     13,856     $           959     $         12
Federal agencies 1                           25,881             1%              25,881            3,480                   -                -
Federal agency issued residential
mortgage-backed securities 1                119,637             4%             118,694            9,901                 943                2

Subtotal                                    279,955            10%             278,053           27,237               1,902               14
Corporate obligations:
Industrial                                  486,880            18%             461,425           43,710              25,455              860
Energy                                      171,711             6%             171,711           19,131                   -                -
Communications and technology               201,393             7%             194,154           16,566               7,239              156
Financial                                   318,078            12%             250,403           15,155              67,675            5,890
Consumer                                    496,487            18%             481,033           43,788              15,454              263
Public utilities                            296,337            11%             280,475           38,094              15,862            1,366

Subtotal                                  1,970,886            72%           1,839,201          176,444             131,685            8,535
Corporate private-labeled residential
mortgage-backed securities                  156,902             6%              53,304            1,856             103,598           12,620
Municipal securities                        168,522             6%             164,613           18,316               3,909               61
Other                                        94,656             4%              38,253            3,576              56,403            9,235
Redeemable preferred stocks                  11,221             1%               5,226              226               5,995              740

Fixed maturities                          2,682,142            99%           2,378,650          227,655             303,492           31,205
Equity securities                            36,689             1%              35,566            1,873               1,123              135

Total                                   $ 2,718,831           100%     $     2,414,216     $    229,528     $       304,615     $     31,340




1 Federal agency securities are not backed by the full faith and credit of the

U.S. Government.



At December 31, 2011, the Company had $31.3 million in gross unrealized losses
on investment securities which were offset by $229.5 million in gross unrealized
gains. At June 30, 2012, the Company's unrealized losses on investment
securities had decreased to $22.1 million and were offset by $259.3 million in
gross unrealized gains, with 22% of the gross unrealized losses in the category
of corporate obligations. The financial sector was the single largest
contributor to unrealized losses in this category, reflecting the direct and
indirect impact of the troubled residential real estate and mortgage markets. In
addition, 39% of the gross unrealized losses were in the category of corporate
private-labeled residential mortgage-backed securities, also due to the troubled
residential real estate and mortgage markets. At June 30, 2012, 92% of the total
fair value of the fixed maturities portfolio had unrealized gains, compared to
89% at December 31, 2011.



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The Company maintains a high quality securities portfolio. The following table
identifies fixed maturity securities available for sale by actual or equivalent
Standard & Poor's rating at June 30, 2012 and December 31, 2011.



                                        June 30, 2012                December 31, 2011
                                     Fair             %             Fair             %
                                     Value         of Total         Value         of Total
   AAA                            $   133,497             5%     $   161,802             6%
   AA                                 606,522            22%         570,157            21%
   A                                  850,741            30%         799,565            30%
   BBB                              1,022,645            36%         939,373            35%

   Total investment grade           2,613,405            93%       2,470,897            92%
   BB                                  69,852             2%          79,760             3%
   B and below                        132,993             5%         131,485             5%

   Total below investment grade       202,845             7%         211,245             8%

                                  $ 2,816,250           100%     $ 2,682,142           100%



The following table provides information regarding fixed maturity and equity
security investments available for sale with unrealized losses by length of
time, at June 30, 2012.



                                            Less Than 12 Months              12 Months or Longer                    Total
                                          Fair           Unrealized         Fair          Unrealized        Fair         Unrealized
                                          Value            Losses           Value           Losses          Value          Losses
U.S. Treasury securities and
obligations of U.S. Government         $       900      $          8     $  

779 $ 14 $ 1,679 $ 22 Federal agency issued residential mortgage-backed securities 1

                   333                 -             293                1           626                1

Subtotal                                     1,233                 8           1,072               15         2,305               23
Corporate obligations:
Industrial                                  24,733             1,727               -                -        24,733            1,727
Energy                                       9,580                46               -                -         9,580               46
Communications and technology                4,053                28               -                -         4,053               28
Financial                                   17,959               258          15,610            2,366        33,569            2,624
Consumer                                    14,480                46             587                7        15,067               53
Public utilities                             9,236                74           6,740              411        15,976              485

Subtotal                                    80,041             2,179          22,937            2,784       102,978            4,963
Corporate private-labeled
residential mortgage-backed
securities                                       -                 -          70,210            8,694        70,210            8,694
Municipal securities                         3,078                18             893                8         3,971               26
Other                                            -                 -          45,185            8,081        45,185            8,081
Redeemable preferred stocks                      -                 -           3,460              222         3,460              222

Fixed maturity securities                   84,352             2,205         143,757           19,804       228,109           22,009

Equity securities                                -                 -           1,127              130         1,127              130

Total                                  $    84,352      $      2,205     $   144,884     $     19,934     $ 229,236     $     22,139




1 Federal agency securities are not backed by the full faith and credit of the

U.S. Government.




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The following table provides information regarding fixed maturity and equity
security investments available for sale with unrealized losses by length of
time, at December 31, 2011.



                                           Less Than 12 Months              12 Months or Longer                    Total
                                          Fair          Unrealized         Fair          Unrealized        Fair         Unrealized
                                         Value            Losses           Value           Losses          Value          Losses
U.S. Treasury securities and
obligations of U.S. Government        $          -     $          -     $   

959 $ 12 $ 959 $ 12 Federal agency issued residential mortgage-backed securities 1

                   649                -             294                2           943                2

Subtotal                                       649                -           1,253               14         1,902               14
Corporate obligations:
Industrial                                  25,455              860               -                -        25,455              860
Communications and technology                7,239              156               -                -         7,239              156
Financial                                   51,273            2,107          16,402            3,783        67,675            5,890
Consumer                                    11,765              119           3,689              144        15,454              263
Public utilities                             4,710              344          11,152            1,022        15,862            1,366

Subtotal                                   100,442            3,586          31,243            4,949       131,685            8,535
Corporate private-labeled
residential mortgage-backed
securities                                  41,734            2,668          61,864            9,952       103,598           12,620
Municipal securities                             -                -           3,909               61         3,909               61
Other                                        9,257              921          47,146            8,314        56,403            9,235
Redeemable preferred stocks                  2,939              115           3,056              625         5,995              740

Fixed maturity securities                  155,021            7,290         148,471           23,915       303,492           31,205

Equity securities                               69              104           1,054               31         1,123              135

Total                                 $    155,090     $      7,394     $   149,525     $     23,946     $ 304,615     $     31,340




1 Federal agency securities are not backed by the full faith and credit of the

U.S. Government.



Gross unrealized losses on fixed maturity and equity security investments
attributable to securities having gross unrealized losses of 12 months or longer
were $19.9 million at June 30, 2012, a decrease of 17% from $23.9 million at
December 31, 2011. The largest component of this decrease was from the corporate
private-labeled residential mortgage-backed securities category, which decreased
$1.3 million or 13% during the first six months of 2012. These securities
continue to be challenged by the economy and the Company continues to monitor
the cash flows on each of these investments.



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The following table summarizes the Company's investments in securities available for sale with unrealized losses at June 30, 2012.



                                                                  June 30, 2012
                                                                                     Gross
                                                   Amortized         Fair          Unrealized
                                                      Cost           Value           Losses
Securities owned without realized impairment:
Unrealized losses of 10% or less                   $  104,608      $ 102,949      $      1,659
Unrealized losses of 20% or less and greater
than 10%                                               36,702         31,992             4,710

Subtotal                                              141,310        134,941             6,369

Unrealized losses greater than 20%:
Investment grade
Less than twelve months                                 4,946          3,766             1,180
Twelve months or greater                                  908            465               443

Total investment grade                                  5,854          4,231             1,623

Below investment grade
Less than twelve months                                 4,273          3,104             1,169
Twelve months or greater                                3,010          2,167               843

Total below investment grade                            7,283          5,271             2,012

Unrealized losses greater than 20%                     13,137          9,502             3,635

Subtotal                                              154,447        144,443            10,004


Securities owned with realized impairment:
Unrealized losses of 10% or less                       33,294         31,815             1,479
Unrealized losses of 20% or less and greater
than 10%                                               40,730         34,841             5,889

Subtotal                                               74,024         66,656             7,368

Unrealized losses greater than 20%:
Investment grade
Less than twelve months                                     -              -                 -
Twelve months or greater                                    -              -                 -

Total investment grade                                      -              -                 -

Below investment grade
Less than twelve months                                 1,553          1,240               313
Twelve months or greater                               21,351         16,897             4,454

Total below investment grade                           22,904         18,137             4,767

Unrealized losses greater than 20%                     22,904         18,137             4,767

Subtotal                                               96,928         84,793            12,135

Total                                              $  251,375      $ 229,236      $     22,139





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The following table summarizes the Company's investments in securities available for sale with unrealized losses at December 31, 2011.



                                                                December 31, 2011
                                                                                      Gross
                                                  Amortized          Fair           Unrealized
                                                     Cost            Value            Losses
Securities owned without realized impairment:
Unrealized losses of 10% or less                  $  154,445       $ 151,008       $      3,437
Unrealized losses of 20% or less and greater
than 10%                                              53,042          45,689              7,353

Subtotal                                             207,487         196,697             10,790

Unrealized losses greater than 20%:
Investment grade:
Less than twelve months                                4,946           3,752              1,194
Twelve months or greater                                 908             450                458

Total investment grade                                 5,854           4,202              1,652

Below investment grade:
Less than twelve months                                8,210           5,977              2,233
Twelve months or greater                                   -               -                  -

Total below investment grade                           8,210           5,977              2,233

Unrealized losses greater than 20%                    14,064          10,179              3,885

Subtotal                                             221,551         206,876             14,675


Securities owned with realized impairment:
Unrealized losses of 10% or less                      37,639          36,420              1,219
Unrealized losses of 20% or less and greater
than 10%                                              24,789          20,843              3,946

Subtotal                                              62,428          57,263              5,165

Unrealized losses greater than 20%:
Investment grade:
Less than twelve months                                    -               -                  -
Twelve months or greater                                   -               -                  -

Total investment grade                                     -               -                  -

Below investment grade:
Less than twelve months                               29,391          23,178              6,213
Twelve months or greater                              22,585          17,298              5,287

Total below investment grade                          51,976          40,476             11,500

Unrealized losses greater than 20%                    51,976          40,476             11,500

Subtotal                                             114,404          97,739             16,665

Total                                             $  335,955       $ 304,615       $     31,340





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The following table provides information on fixed maturity securities with gross
unrealized losses by actual or equivalent Standard & Poor's rating at June 30,
2012.



                                                                  Gross
                                    Fair            %           Unrealized          %
                                    Value        of Total         Losses         of Total
   AAA                            $   3,332             1%     $        109             1%
   AA                                41,735            18%            4,261            19%
   A                                 15,504             7%              484             2%
   BBB                               56,719            25%            1,983             9%

   Total investment grade           117,290            51%            6,837            31%
   BB                                14,965             7%            1,071             5%
   B and below                       95,854            42%           14,101            64%

   Total below investment grade     110,819            49%           15,172            69%

                                  $ 228,109           100%     $     22,009           100%



The following table provides information on fixed maturity securities with gross
unrealized losses by actual or equivalent Standard & Poor's rating at
December 31, 2011.



                                                                  Gross
                                    Fair            %           Unrealized          %
                                    Value        of Total         Losses         of Total
   AAA                            $  32,245            11%     $      4,475            14%
   AA                                 8,986             3%              125             1%
   A                                 32,550            11%            1,207             4%
   BBB                               65,557            21%            2,925             9%

   Total investment grade           139,338            46%            8,732            28%
   BB                                45,845            15%            4,063            13%
   B and below                      118,309            39%           18,410            59%

   Total below investment grade     164,154            54%           22,473            72%

                                  $ 303,492           100%     $     31,205           100%



The following is a discussion of all non-residential mortgage-backed securities
whose fair value had been less than 80% of amortized cost for at least six
consecutive months at June 30, 2012. The Company has considered a wide variety
of factors to determine that these positions were not other-than-temporarily
impaired.



                 Security                                Description
 Financial institution                      Institution impacted by housing and
                                            mortgage crisis. The security
                                            continues to perform within
                                            contractual obligations.

 Collateralized debt obligation             Impacted by delinquencies and
                                            foreclosures in subprime and Alt-A
                                            markets and extreme declines in
                                            market valuations regardless of
                                            individual security performance.
                                            There continues to be
                                            overcollateralization within the
                                            structure and the investment
                                            continues to perform within
                                            contractual obligations.


The discounted future cash flow calculation typically becomes the primary
determinant of whether any portion and to what extent an unrealized loss is due
to credit on loan-backed and similar asset-backed securities with significant
indications of potential other-than-temporary impairment. Such indications
typically include below investment grade ratings and significant unrealized
losses for an extended period of time, among other factors. The Company
identified 17 non-U.S.



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Agency mortgage-backed securities that were determined to have such indications
at June 30, 2012 and December 31, 2011. Discounted future cash flow analysis was
performed for each of these securities to determine if any portion of the
impairment was due to credit and deemed to be other-than-temporary. The discount
rate used in calculating the present value of future cash flows was the
investment yield at the time of purchase for each security. The initial default
rates were assumed to remain constant over a 24-month time frame and grade down
thereafter, reflecting the general perspective of a more stabilized residential
housing environment in the future.

The following tables present the range of significant assumptions used in projecting the future cash flows at June 30, 2012 and December 31, 2011. The Company believes that the assumptions below are reasonable because they are based upon the actual results of the underlying security collateral.



                                                 June 30, 2012
                Initial Default Rate           Initial Severity Rate          Prepayment Speed
    Vintage      Low             High           Low              High          Low         High
    2003            4.2%           4.2%             40%             40%         18.0%       18.0%
    2004            5.7%           7.7%             40%             55%          8.0%       13.0%
    2005            3.4%          15.1%             40%             74%          6.0%       15.0%
    2006            4.6%           6.8%             51%             85%          8.0%       16.0%
    2007            9.9%           9.9%             65%             65%          8.0%        8.0%




                                               December 31, 2011
                Initial Default Rate           Initial Severity Rate          Prepayment Speed
    Vintage      Low             High           Low              High          Low         High
    2003            3.9%           3.9%             40%             40%         18.0%       18.0%
    2004            4.9%           7.7%             40%             56%          8.0%       13.0%
    2005            3.5%          13.7%             40%             68%          6.0%       15.0%
    2006            4.9%          10.0%             52%             90%          8.0%       18.0%
    2007            8.8%           8.8%             66%             66%          8.0%        8.0%


For loan-backed and similar asset-backed securities, the determination of any
amount of impairment that is due to credit is based upon the present value of
projected future cash flows being less than the amortized cost of the security.
This amount is recognized as a realized loss in the Company's Consolidated
Statements of Comprehensive Income and the carrying value of the security is
written down by the same amount. The portion of an impairment that is determined
not to be due to credit is recorded as a component of accumulated other
comprehensive income in the Consolidated Balance Sheets.

Significant unrealized losses on securities can continue for extended periods of
time, particularly for certain individual securities. While this can be an
indication of potential credit impairments, it can also be an indication of
illiquidity in a particular sector or security. In addition, the fair value of
an individual security can be heavily influenced by the complexities of varying
market sentiment or uncertainty regarding the prospects for an individual
security. This has been the situation in the non-U.S. Agency mortgage-backed
securities market in recent periods. Based upon the process described above, the
Company is best able to determine if and to what extent credit impairment may
exist in these securities by performing present value calculations of projected
future cash flows at the conclusion of each reporting period. By reviewing the
most recent data available regarding the security and other relevant industry
and market factors, the Company can modify assumptions used in the cash flow
projections and determine the best estimate of the portion of any impairment
that is due to credit at the conclusion of each period.

The Company closely monitors its investments in securities classified as
subprime. Subprime securities include all bonds or portions of bonds where the
underlying collateral is made up of home equity loans or first mortgage loans to
borrowers whose credit scores at the time of origination were lower than the
level recognized in the market as prime. The Company's classification of
subprime does not include Alt-A or jumbo loans, unless the collateral otherwise
meets the preceding definition. At June 30, 2012, the fair value of investments
with subprime residential mortgage exposure was $16.7 million with a related
$2.5 million unrealized loss. At December 31, 2011, the Company had investments
with subprime residential mortgage exposure of $17.4 million and a related $3.5
million unrealized loss. This exposure amounted to less than 1% of the Company's
invested assets at both June 30, 2012 and December 31, 2011. These investments
are included in the Company's process for evaluation of other-than-temporarily
impaired securities.



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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 factors.

The following tables divide these investment types among vintage and credit
ratings at June 30, 2012.



                                                                      Unrealized
                                          Fair        Amortized         Gains
                                          Value          Cost          (Losses)
       Residential & Non-agency MBS 1
       Investment Grade:
       Vintage 2003 and earlier         $  23,518     $   22,658     $        860
       2004                                28,996         27,829            1,167
       2005                                     -              -                -
       2006                                     -              -                -
       2007                                     -              -                -

       Total investment grade              52,514         50,487            2,027


       Below Investment Grade:
       Vintage 2003 and earlier                 -              -                -
       2004                                32,865         32,631              234
       2005                                72,879         83,762          (10,883 )
       2006                                 7,248          6,996              252
       2007                                 3,958          4,544             (586 )

Total below investment grade 116,950 127,933 (10,983 )

Other Structured Securities:

       Investment grade                    80,886         80,952              (66 )
       Below investment grade               3,017          3,238             (221 )

       Total other                         83,903         84,190             (287 )

Total structured securities $ 253,367$ 262,610 $ (9,243 )

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




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The following tables divide these investment types among vintage and credit ratings at December 31, 2011.



                                         Fair        Amortized         Unrealized
                                         Value          Cost         Gains (Losses)
     Residential & Non-agency MBS: 1
     Investment Grade:
     Vintage 2003 and earlier          $  27,700     $   26,974     $            726
     2004                                 29,682         28,693                  989
     2005                                      -              -                    -
     2006                                      -              -                    -
     2007                                      -              -                    -

     Total investment grade               57,382         55,667                1,715


     Below Investment Grade:
     Vintage 2003 and earlier                  -              -                    -
     2004                                 34,497         34,821                 (324 )
     2005                                 72,619         87,447              (14,828 )
     2006                                  6,960          7,309                 (349 )
     2007                                  3,868          4,864                 (996 )

     Total below investment grade        117,944        134,441            

(16,497 )

Other Structured Securities:

     Investment grade                     71,793         72,998               (1,205 )
     Below investment grade                3,179          3,444                 (265 )

     Total other                          74,972         76,442               (1,470 )

Total structured securities $ 250,298$ 266,550 $

 (16,252 )




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



Total unrealized losses on non-U.S. Agency structured securities totaled $9.2
million at June 30, 2012, compared to $16.3 million at December 31, 2011. Total
unrealized losses on these securities as a percent of total amortized cost
totaled 4% at June 30, 2012, an improvement from 6% at year-end 2011.

The Company has written down certain investments in previous periods. Securities
written down and continuing to be owned at June 30, 2012 had a fair value of
$132.2 million with a net unrealized loss of $9.8 million.

The Company evaluated the current status of all investments previously
written-down to assess the ongoing expectations of amounts to be collected. The
Company's evaluation process is similar to its impairment evaluation process. If
evidence exists that the Company believes that it will receive all or a
materially greater portion of its contractual maturities from securities
previously written down, the accretion of income is adjusted. The Company did
not change its evaluation of any investments under this process during the first
six months of 2012 or 2011.



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The Company maintains a diversified investment portfolio, including less than 5%
of its investment portfolio in municipal bond securities and 6% in bond
securities from foreign issuers. Approximately 60% of the Company's foreign
securities were form issuers in Canada and Australia at June 30, 2012. The
Company has no holdings in European sovereign debt and all investments are
denominated in U.S. dollars. The fair value of the Company's securities from
foreign issuers at June 30, 2012 was $230.5 million with a net unrealized gain
of $14.0 million. This compares to a fair value of $199.5 million with a net
unrealized gain of $8.7 million at December 31, 2011.

The Company does not have a material amount of direct or indirect guarantees for
the securities in its investment portfolio. The Company did not have any direct
exposure to financial guarantors at June 30, 2012. The Company's indirect
exposure to financial guarantors totaled $36.5 million, which was approximately
1% of the Company's investments at June 30, 2012. The unrealized gain on these
investments totaled $2.5 million at June 30, 2012. The Company's indirect
exposure to financial guarantors at December 31, 2011 totaled $36.8 million,
which was approximately 1% of the Company's investments. Total unrealized gains
on these investments totaled $1.7 million at December 31, 2011.

Other Revenues


Other revenues consist primarily of supplementary contract considerations;
policyholder dividends left with the Company to accumulate; income received on
the sale of low income housing tax credit (LIHTC) investments by a subsidiary of
the Company; and fees charged on products and sales from the Company's
broker-dealer subsidiary. Other revenues decreased 13% in the second quarter and
11% in the first six months of 2012 compared to the same periods one year
earlier. The decreases in both periods reflected lower income from the sale of
LIHTC investments. In addition, the decrease in the six months also reflected
lower supplementary contract considerations.

Policyholder Benefits


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

Policyholder benefits increased $2.4 million or 6% in the second quarter of 2012
compared to the same period one year earlier. This increase largely resulted
from an increase in benefit and contract reserves. Several factors contributed
to this increase, including a $2.4 million increase in immediate annuity
receipts in the second quarter, which results in a nearly one-for-one increase
in benefit and contract reserves. In addition, the change in the fair value of
the GMWB rider resulted in a $1.0 million increase in benefit and contract
reserves, and the Company recaptured a block of previously reinsured policies
that resulted in an increase of $0.8 million in reserves in the second quarter.
Partially offsetting the increase in benefit and contract reserves, death
benefits, net of reinsurance, decreased $3.0 million in the second quarter of
2012 versus 2011. Also contributing to the decrease in policyholder benefits was
a reduction in group dental benefits, as discussed in the Group Insurance
segment analysis.

Policyholder benefits decreased $4.4 million or 5% in the first six months
compared to the same period one year ago. The largest single factor in the
decrease in policyholder benefits resulted from a $7.7 million decline in death
benefits, net of reinsurance. Other benefits declined $2.4 million, net of
reinsurance, primarily reflecting reduced group accident and health benefits.
Partially offsetting these decreases, the Company had an increase in benefit and
contract reserves. This increase resulted from several factors, including a $1.2
million increase in immediate annuity receipts and a $0.4 million increase in
benefit and contract reserves from the increased value of the GMWB rider. The
Company also recaptured a block of previously reinsured policies, which resulted
in an increase of $0.8 million in reserves for the six months.

The Company has a GMWB rider for variable annuity contracts that is considered
to be a financial derivative and, as such, is accounted for at fair value. The
Company determines the fair value of the GMWB rider using a risk-neutral
valuation method. The value of the riders will fluctuate depending on market
conditions. At June 30, 2012, the fair value of the liability increased
$0.5 million compared to the fair value at December 31, 2011. This fluctuation
can be attributed to declines in interest rates and issuer discount spreads,
partially offset by favorable capital market returns and market volatilities.



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Interest Credited to Policyholder Account Balances


Interest is credited to policyholder account balances according to terms of the
policies or contracts for universal life, fixed deferred annuities, and other
investment-type products. There are minimum levels of interest crediting assumed
in certain policies or contracts, as well as allowances for adjustments to be
made to reflect current market conditions in certain policies or contracts.
Accordingly, the Company reviews and adjusts crediting rates as necessary and
appropriate. Amounts credited are a function of account balances and current
period crediting rates. As account balances fluctuate, so will the amount of
interest credited to policyholder account balances. Interest credited to
policyholder account balances decreased 2% in the second quarter and 1% in the
first six months of 2012 compared with the same periods one year earlier. While
total policyholder account balances have increased during 2012, average
crediting rates declined slightly.

Amortization of Deferred Acquisition Costs


The amortization of deferred acquisition costs increased $4.4 million in the
second quarter and $2.7 million in the first six months of 2012 compared with
the prior year. These increases were primarily the result of unlocking.
Unlocking in 2012 resulted in an increase to the DAC asset of $1.3 million and
was primarily attributable to refinements in mortality, interest, and
persistency assumptions. In 2011, the Company unlocked assumptions that resulted
in a change in estimate, increasing the DAC asset $7.8 million. The unlocking
was primarily the result of changes in assumptions about future mortality
experience, including the use of a new industry mortality table and changes in
reinsurance.

Operating Expenses

Operating expenses consist of incurred commission expense from the sale of
insurance products, net of the deferral of certain commissions and certain
expenses directly associated with the attainment of new business; expenses from
the Company's operations; the amortization of VOBA; and other expenses.
Operating expenses increased $0.6 million or 2% in the second quarter of 2012
and decreased $1.3 million or 3% in the first six months compared to last year.
The increase in the second quarter was largely due to the increase in VOBA
amortization, which is discussed below. The decrease in the six months reflected
a decline in pension expense and a decline in the amount charged to allowance
for doubtful accounts for agent receivables. Partially offsetting these,
salaries expense and legal fees increased.

The amortization of VOBA is included in operating expenses. VOBA is amortized
with each purchased block of business over a defined period. Generally, as
policies run off, the amortization will decline over time. In addition, VOBA is
evaluated on an ongoing basis for unlocking adjustments. If necessary,
adjustments are made in the current period VOBA amortization. The amortization
of VOBA increased $0.8 million or 31% in the second quarter of 2012 and $0.2
million or 4% in the first six months of 2012 compared to the same periods one
year earlier. The increase in VOBA amortization during 2012 was largely due to
unlocking. The Company had an unlocking adjustment due to the reassessment of
interest and mortality margins on certain interest sensitive products which
increased the amortization of VOBA $2.4 million in both the second quarter and
the first six months of 2012. In comparison, the Company had an unlocking
adjustment on certain interest sensitive products which increased the
amortization of VOBA $0.9 million in both the second quarter and the six months
of 2011. Partially offsetting this, the VOBA associated with the traditional
life insurance block from the Old American segment became fully amortized at
December 31, 2011, thus resulting in no amortization for this item in 2012
compared to $1.0 million in the first six months of 2011.

Income Taxes


The second quarter income tax expense was $4.5 million or 35% of income before
tax for 2012, versus $5.8 million or 34% of income before tax for the prior year
period. The income tax expense for the six months ended June 30, 2012 was $14.1
million or 34% of income before tax, versus $8.3 million or 34% of income before
tax for the prior year period.

The effective income tax rate was equal to the prevailing corporate federal
income tax rate of 35% in the second quarter of 2012. Permanent differences,
including the dividends-received deduction, resulted in a benefit of
approximately 1% of income before tax. Additionally, investments in affordable
housing resulted in a benefit of approximately 1% of income before tax.
Offsetting these items was tax expense of approximately 2% of income before tax
related to a change in the projected effective tax rate, which was largely based
upon historical and year-to-date pretax income.

The effective income tax rate was lower than the prevailing corporate federal
income tax rate of 35% in the second quarter of 2011 primarily due to permanent
differences, resulting in a benefit of approximately 1% of income before tax.

The effective income tax rate was lower than the prevailing corporate federal
income tax rate of 35% for the six months ended June 30, 2012 and 2011.
Permanent differences, including the dividends-received deduction, resulted in a
benefit of approximately 1% of income before tax.



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Operating Results by Segment


The Company has three reportable business segments, which are defined based on
the nature of the products and services offered: Individual Insurance, Group
Insurance, and Old American. The Individual Insurance segment consists of
individual insurance products for both Kansas City Life and Sunset Life. The
Individual Insurance segment is marketed through a nationwide sales force of
independent general agents and third-party marketing arrangements. The Group
Insurance segment consists of sales of group life, group disability, dental, and
vision products. This segment is marketed through a nationwide sales force of
independent general agents, group brokers, and third-party marketing
arrangements. Old American consists of individual insurance products designed
largely 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 15 - Segment Information in the Notes to Consolidated Financial Statements
(Unaudited).



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Individual Insurance


The following table presents financial data of the Individual Insurance business
segment for the second quarters and six months ended June 30, 2012 and 2011:



                                                  Quarter Ended                Six Months Ended
                                                     June 30                        June 30
                                               2012           2011           2012            2011
Insurance revenues:
Premiums, net                                $  4,442       $  1,790       $   7,878       $   6,288
Contract charges                               25,590         23,752          50,723          49,986

Total insurance revenues                       30,032         25,542          58,601          56,274
Investment revenues:
Net investment income                          40,334         41,654          81,455          83,767
Net realized investment gains, excluding
impairment losses                               1,421          2,017          17,225           2,940
Net impairment losses recognized in
earnings:
Total other-than-temporary impairment
losses                                           (177 )         (216 )          (427 )          (450 )
Portion of impairment losses recognized
in other comprehensive income                      43             52             150              98

Net impairment losses recognized in
earnings                                         (134 )         (164 )          (277 )          (352 )

Total investment revenues                      41,621         43,507          98,403          86,355
Other revenues                                  2,274          2,620           4,413           4,986

Total revenues                                 73,927         71,669         161,417         147,615


Policyholder benefits                          23,009         20,139          42,366          45,024
Interest credited to policyholder account
balances                                       20,377         20,766          40,935          41,247
Amortization of deferred acquisition
costs                                           2,727         (2,214 )         6,737           3,483
Operating expenses                             17,635         16,383          32,134          31,928

Total benefits and expenses                    63,748         55,074         122,172         121,682


Income before income tax expense               10,179         16,595          39,245          25,933

Income tax expense                              3,475          5,658          13,054           8,891

Net income                                   $  6,704       $ 10,937       $  26,191       $  17,042





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The net income for this segment in the second quarter of 2012 was $6.7 million,
a decrease of $4.2 million from the second quarter of 2011. The decline was
primarily the result of increased policyholder benefits, operating expenses, and
amortization of deferred acquisition costs, along with lower net investment
income. These were partially offset by an increase in insurance revenues.

Net income for this segment was $26.2 million for the first six months of 2012,
an increase of $9.1 million from the first six months of 2011. Contributing to
this improvement were increases in net realized investment gains and insurance
revenues, along with lower policyholder benefits. Partially offsetting these
changes was an increase in amortization of deferred acquisition costs.

Total insurance revenues for this segment increased $4.5 million or 18% in the
second quarter of 2012 compared with the same period in the prior year. Total
premiums increased $2.4 million or 18%, reflecting a $2.4 million increase in
immediate annuity premiums. Contract charges increased $1.8 million or 8%, and
reinsurance ceded premiums were flat.

Total insurance revenues for this segment increased $2.3 million or 4% for the
first six months of 2012 compared to one year earlier. Total premiums increased
$1.3 million or 5%, reflecting a $1.2 million or 29% increase in immediate
annuity premiums. Contract charges increased $0.7 million and reinsurance ceded
premiums were flat.

The following table presents gross premiums by new and renewal business, less
reinsurance ceded, as included in insurance revenues for the second quarters and
six months ended June 30, 2012 and 2011. New premiums are also detailed by
product.



                                                     Quarter Ended
                                                        June 30
                                 2012           % Change            2011           % Change
New premiums:
Individual life insurance   $        1,172             (4 )    $        1,219             (5 )
Immediate annuities                  3,460            234               1,037            (77 )

Total new premiums                   4,632            105               2,256            (61 )
Renewal premiums                    10,591              -              10,607              1

Total premiums                      15,223             18              12,863            (21 )
Reinsurance ceded                  (10,781 )           (3 )           (11,073 )           (1 )

Premiums, net               $        4,442            148      $        1,790            (65 )


                                                    Six Months Ended
                                                        June 30
                                 2012           % Change            2011           % Change
New premiums:
Individual life insurance   $        2,326            (10 )    $        2,589              -
Immediate annuities                  5,168             38               3,746            (62 )

Total new premiums                   7,494             18               6,335            (49 )
Renewal premiums                    21,134              1              21,028              1

Total premiums                      28,628              5              27,363            (18 )
Reinsurance ceded                  (20,750 )           (2 )           (21,075 )           (1 )

Premiums, net               $        7,878             25      $        6,288            (48 )





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Total new premiums for this segment increased $2.4 million in the second quarter
of 2012, more than double the total new premiums in the same period one year
earlier. This improvement resulted from increased sales of immediate annuities.
Immediate annuity receipts can have sizeable fluctuations, as receipts from
policyholders largely result from one-time premiums rather than recurring
premiums. Total renewal premiums were flat compared to last year.

Total new premiums for this segment increased $1.2 million or 18% in the first
six months of 2012 versus the prior year. This improvement also resulted from
increased immediate annuities. Total renewal premiums increased 1%, due to
higher individual life premiums.

The following table provides detail by new and renewal deposits for the second
quarters and six months ended June 30, 2012 and 2011. New deposits are also
detailed by product.



                                                                 Quarter Ended
                                                                    June 30
                                      2012               % Change                2011                % Change
New deposits:
Universal life insurance         $        2,857                (24 )        $        3,750                  22
Variable universal life
insurance                                   103                (62 )                   268                  35
Fixed deferred annuities                 12,469                (31 )                18,025                  58
Variable annuities                        4,642                (24 )                 6,142                  10

Total new deposits                       20,071                (29 )                28,185                  39
Renewal deposits                         35,325                 (3 )                36,333                   -

Total deposits                   $       55,396                (14 )        $       64,518                  14





                                                             Six Months Ended
                                                                  June 30
                                      2012              % Change               2011              % Change
New deposits:
Universal life insurance         $        6,160                (6 )       $        6,562                 1
Variable universal life
insurance                                   260               (47 )                  493                12
Fixed deferred annuities                 31,619                (4 )               32,917                47
Variable annuities                        8,603               (14 )                9,979               (13 )

Total new deposits                       46,642                (7 )               49,951                22
Renewal deposits                         70,217                (3 )               72,031                 3

Total deposits                   $      116,859                (4 )       $      121,982                10



Total new deposits decreased $8.1 million or 29% in the second quarter of 2012
compared to last year, reflecting a $5.6 million or 31% decrease in new fixed
deferred annuity deposits and a $1.5 million or 24% decrease in new variable
annuity deposits. Total renewal deposits decreased $1.0 million or 3% in the
second quarter of 2012. This decrease was due to a $0.9 million decline in
renewal variable annuity deposits. Total new deposits decreased $3.3 million or
7% in the first six months of 2012 compared with the prior year. This decrease
reflected a $1.4 million decline in new variable annuity deposits and a $1.3
million decline in new fixed deferred annuity deposits. Total renewal deposits
decreased $1.8 million or 3% in the first six months of 2012. This decline
resulted from a $2.1 million decrease in renewal variable annuity deposits. New
sales and renewals for deposit products have been negatively affected for the
second quarter and first six months of 2012 by continuing low interest rates and
the uncertain economic environment.

Total contract charges increased $1.8 million or 8% in the second quarter of
2012 compared to the second quarter of 2011. This largely resulted from an
increase in the amortization of deferred revenue. Amortization of deferred
revenue increased $1.8 million during the second quarter of 2012 due to
unlocking. The unlocking in 2012 was due to changes in the interest and
mortality margins that resulted in a decrease to the deferred revenue liability.
Conversely, the amortization of deferred revenue decreased $1.8 million during
second quarter 2011 due to unlocking. The 2011 unlocking was primarily the
result of the implementation of a new industry mortality table and the impact of
a system upgrade specific to reinsurance. Total contract charges on the closed
blocks equaled 34% of total consolidated contract charges in the second quarter
of 2012 compared to 37% in the second quarter of 2011. Total contract charges on
closed blocks declined 1% in the second quarter of 2012 compared to the same
period in 2011. Total contract charges on open blocks of business, where there
is ongoing marketing for new sales, increased 13% in the first six months of
2012.



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Total contract charges increased $0.7 million in the first six months of 2012
compared to one year earlier, due to the increase in the amortization of
deferred revenue described above. In addition to the results discussed above for
the quarter, the amortization of deferred revenue increased during 2012 due to a
system upgrade that occurred during 2011 that led to enhanced reinsurance
modeling capabilities. Partially offsetting this increase was a $0.4 million
decrease in both expense loads and cost of insurance charges. The decrease in
expense loads resulted from a decline in value of variable annuities held in the
separate accounts, reflecting the existing market conditions. The decline in
cost of insurance charges was largely due to the runoff of closed blocks. Total
contract charges on the closed blocks equaled 35% of total consolidated contract
charges in the first six months of 2012 compared to 36% in the first six months
of 2011. Total contract charges on closed blocks declined 2% in the first six
months of 2012, while total contract charges on open blocks of business
increased 4%.

Net investment income decreased $1.3 million or 3% in the second quarter of 2012
compared to the second quarter of 2011, as an increase in average invested
assets was offset by a decline in yields earned. Also, this segment experienced
a net realized investment gain of $1.3 million in the second quarter of 2012
compared to a net gain of $1.9 million in the second quarter of 2011. Net
investment income decreased $2.3 million in the first six months of 2011
compared to one year earlier, as an increase in average invested assets was
offset by a decline in yields earned. Also, this segment had a net realized gain
of $16.9 million in the first six months of 2012 compared to a net gain of $2.6
million in the first six months of 2011.

Please see Consolidated Results of Operations in Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations for a table that
provides securities that were written down through earnings by business segment
for the first two quarters of 2012 and 2011.

Other revenues decreased 13% in the second quarter and 11% in the first six months of 2012 compared to the same periods one year earlier. The decreases in both periods reflected lower income from the sale of LIHTC investments. In addition, the decrease in the six months also reflected lower supplementary contract considerations.


Policyholder benefits increased $2.9 million or 14% in the second quarter of
2012 compared to the prior year. This increase was largely due to an increase in
benefit and contract reserves. One contributing factor was a $2.4 million
increase in sales of immediate annuities, which results in a nearly one-for-one
increase in benefit and contract reserves. In addition, the change in the fair
value of the GMWB rider resulted in a $1.0 million increase in benefit and
contract reserves, and the Company recaptured a block of previously reinsured
policies that resulted in an increase of $0.8 million in reserves in the second
quarter. Partially offsetting the increase in reserves, death benefits, net of
reinsurance, decreased $2.6 million. This change reflected favorable mortality
experience.

Policyholder benefits decreased $2.7 million or 6% in the first six months of
2012 compared to the prior year. Death benefits, net of reinsurance ceded,
decreased $6.3 million. Partially offsetting this favorable mortality
experience, benefit and contract reserves increased. The reserve increase was
largely due to a $1.2 million increase in sales of immediate annuities and a
$0.4 million change in the fair value of the GMWB rider, as discussed above. The
Company also recaptured a block of previously reinsured policies that resulted
in an increase of $0.8 million in reserves for the six months.

Interest credited to policyholder account balances decreased 2% in the second
quarter and 1% in the first six months of 2012 compared to the same periods one
year earlier. While total policyholder account balances increased in 2012,
average crediting rates declined slightly.

The amortization of deferred acquisition costs increased $4.9 million in the
second quarter and $3.3 million in the first six months of 2012 compared with
the prior year. These increases were largely the result of unlocking. Unlocking
in 2012 resulted in an increase to the DAC asset of $1.3 million and was
primarily attributable to refinements in mortality, interest, and persistency
assumptions. In 2011, the Company unlocked assumptions that resulted in a change
in estimate, increasing the DAC asset $7.8 million. The unlocking was primarily
the result of changes in assumptions about future mortality experience including
the use of a new industry mortality table and change in reinsurance.



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Operating expenses consist of incurred commissions, net of the capitalization of
commissions, expenses from the Company's operations, the amortization of VOBA,
and other expenses. Operating expenses increased $1.3 million or 8% in the
second quarter and $0.2 million or less than 1% in the first six months of 2012
compared with the same periods one year earlier. The largest factor in this
increase for both periods was higher amortization of VOBA, as discussed below.

The amortization of VOBA increased $1.3 million or 63% in the second quarter and
$1.1 million or 37% in the first six months of 2012 compared to one year
earlier. The increase in VOBA amortization during 2012 was largely due to
unlocking. The Company had an unlocking adjustment due to the reassessment of
interest and mortality margins on certain interest sensitive products which
increased the amortization of VOBA $2.4 million in both the second quarter and
the first six months of 2012. Comparatively, during the second quarter of 2011,
the Company had an unlocking adjustment on certain interest sensitive products
which increased the amortization of VOBA $0.9 million in both the second quarter
and the six months.



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Group Insurance


The following table presents financial data of the Group Insurance business
segment for the second quarters and six months ended June 30, 2012 and 2011:



                                          Quarter Ended                               Six Months Ended
                                             June 30                                       June 30
                                    2012                  2011                   2012                   2011
Insurance revenues:
Premiums, net                  $       12,197        $       12,246         $       24,264         $       24,800

Total insurance revenues               12,197                12,246                 24,264                 24,800
Investment revenues:
Net investment income                     132                   142                    260                    287
Other revenues                             36                    38                     73                     75

Total revenues                         12,365                12,426                 24,597                 25,162


Policyholder benefits                   6,591                 7,477                 13,613                 15,084
Operating expenses                      5,589                 5,183                 11,314                 10,927

Total benefits and
expenses                               12,180                12,660                 24,927                 26,011


Income (loss) before
income tax expense
(benefit)                                 185                  (234 )                 (330 )                 (849 )

Income tax expense
(benefit)                                  64                   (82 )                 (116 )                 (297 )


Net income (loss)              $          121        $         (152 )       $         (214 )       $         (552 )



The following table presents gross premiums by new and renewal business, less
reinsurance ceded, as included in insurance revenues for the second quarters and
six months ended June 30, 2012 and 2011. New premiums are also detailed by
product.



                                                                 Quarter Ended
                                                                    June 30
                                          2012             % Change              2011             % Change
New premiums:
Group life insurance                 $          744               64        $          453               (9 )
Group dental insurance                        1,033                3                 1,001              (52 )
Group disability insurance                    2,105              (10 )               2,332              114
Other group insurance                            61               79                    34              (13 )

Total new premiums                            3,943                3                 3,820                3
Renewal premiums                             11,599                -                11,640                1

Total premiums                               15,542                -                15,460                2
Reinsurance ceded                            (3,345 )              4                (3,214 )             45

Premiums, net                        $       12,197                -        $       12,246               (5 )





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                                                                Six Months Ended
                                                                    June 30
                                          2012             % Change              2011             % Change
New premiums:
Group life insurance                 $        1,225               29        $          947              (16 )
Group dental insurance                        1,965              (17 )               2,379              (44 )
Group disability insurance                    3,688              (19 )               4,542              106
Other group insurance                            90               29                    70              (26 )

Total new premiums                            6,968              (12 )               7,938                4
Renewal premiums                             23,783                6                22,494                3

Total premiums                               30,751                1                30,432                3
Reinsurance ceded                            (6,487 )             15                (5,632 )             30

Premiums, net                        $       24,264               (2 )      $       24,800               (2 )



Total new premiums increased $0.1 million or 3% in the second quarter of 2012
and decreased $1.0 million or 12% in the six months compared with the prior
year. New group life premiums increased $0.3 million or 64% in the second
quarter and $0.3 million or 29% in the six months. These were partially offset
by a decrease in new group disability premiums of $0.2 million or 10% in the
second quarter and $0.9 million or 19% in the six months. Also contributing to
the decline in the six months, new dental premiums decreased $0.4 million or
17%. Total renewal premiums remained flat in the second quarter and increased
$1.3 million or 6% in the six months. The increase in the six months was
primarily driven by renewals on the short-term disability product.

The Company uses reinsurance in several of its group product lines to help
mitigate risk. Reinsurance premiums increased $0.1 million or 4% in the second
quarter and $0.9 million or 15% in the first six months of 2012 compared to the
prior year. The increase in the six months was largely due to an increase in
short-term disability renewal premiums.

Policyholder benefits consist of death benefits, accident and health benefits,
and the associated increase or decrease in reserves for future policy benefits.
Policyholder benefits declined $0.9 million or 12% in the second quarter and
$1.5 million or 10% in the six months compared to the prior year. These results
were largely due to a reduction in the benefits paid for the dental product
line. This reduction reflects the changes that this segment made to the dental
product line during 2011 to improve profitability, including increased pricing
and better claim cost controls.

The policyholder benefit ratio is derived by dividing policyholder benefits, net
of reinsurance, by total net premiums. The ratio for the Group Insurance segment
was 54% in the second quarter and 56% for the first six months of 2012, compared
to 61% in both the second quarter and first six months of 2011. These decreases
were primarily the result of the decline in dental benefits previously
mentioned. The policyholder benefit ratio for the dental product line decreased
from approximately 77% in both the second quarter and first six months of 2011
to approximately 72% in both the second quarter and first six months of 2012.

Operating expenses consist of commissions, fees to third-party marketing and
administrative organizations, and expenses from the Company's operations.
Operating expenses increased $0.4 million or 8% in the second quarter and $0.4
million or 4% in the six months. These increases were largely due to higher
commission expenses associated with the life and dental products.



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Old American


The following table presents financial data for the Old American business
segment for the second quarters and six months ended June 30, 2012 and 2011:



                                                     Quarter Ended               Six Months Ended
                                                        June 30                       June 30
                                                  2012           2011           2012           2011
Insurance revenues:
Premiums, net                                   $ 17,664       $ 16,899       $ 34,964       $ 33,607

Total insurance revenues                          17,664         16,899         34,964         33,607
Investment revenues:
Net investment income                              2,969          3,097          5,929          6,230
Net realized investment gains, excluding
impairment losses                                    (60 )         (124 )          (27 )          (35 )
Net impairment losses recognized in
earnings:
Total other-than-temporary impairment losses         (11 )          (22 )          (29 )          (57 )
Portion of impairment losses recognized in
other comprehensive income                            (1 )            4              -             16

Net impairment losses recognized in earnings (12 ) (18 )

       (29 )          (41 )

Total investment revenues                          2,897          2,955          5,873          6,154
Other revenues                                         2              8             11             13

Total revenues                                    20,563         19,862         40,848         39,774


Policyholder benefits                             11,676         11,249         23,767         24,031
Amortization of deferred acquisition costs         2,394          2,919          6,285          6,806
Operating expenses                                 3,952          5,066          7,789          9,777

Total benefits and expenses                       18,022         19,234         37,841         40,614


Income (loss) before income tax expense
(benefit)                                          2,541            628          3,007           (840 )

Income tax expense (benefit)                         969            240          1,146           (314 )


Net income (loss)                               $  1,572       $    388       $  1,861       $   (526 )



Net income for this segment totaled $1.6 million in the second quarter compared
to $0.4 million in the prior year. The increase in net income for the second
quarter reflected a $0.8 million increase in insurance revenues, a $0.5 million
decrease in amortization of DAC and a $1.1 million decrease in operating
expenses. These were partially offset by a $0.4 million increase in policyholder
benefits and a $0.7 million increase in income tax expense. Net income for the
first six months of 2012 was $1.9 million compared to a $0.5 million net loss
for the first six months of 2011. The increase in net income in the first six
months of 2012 reflected a $1.4 million increase in insurance revenues, a $0.3
million decrease in policyholder benefits, a $0.5 million decrease in the
amortization of DAC, and a $2.0 million decrease in operating expenses. These
were partially offset by a $0.3 million decrease in net investment income and a
$1.5 million increase in income tax expense.



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The following table presents gross premiums by new and renewal business, less
reinsurance ceded, as included in insurance revenues for the second quarters and
six months ended June 30, 2012 and 2011.



                                                                   Quarter Ended
                                                                      June 30
                                         2012               % Change                2011               % Change
New individual life premiums        $        3,242                  5          $        3,094                 10
Renewal premiums                            14,941                  4                  14,396                  2

Total premiums                              18,183                  4                  17,490                  4
Reinsurance ceded                             (519 )              (12 )                  (591 )              (16 )

Premiums, net                       $       17,664                  5          $       16,899                  4


                                                                  Six Months Ended
                                                                      June 30
                                         2012               % Change                2011               % Change
New individual life premiums        $        6,444                  5          $        6,135                 13
Renewal premiums                            29,563                  3                  28,702                  2

Total premiums                              36,007                  3                  34,837                  4
Reinsurance ceded                           (1,043 )              (15 )                (1,230 )              (12 )

Premiums, net                       $       34,964                  4          $       33,607                  4



Total new premiums increased $0.1 million or 5% in the second quarter and $0.3
million or 5% in the six months, while total renewal premiums increased $0.5
million or 4% in the second quarter and $0.9 million or 3% in the six months.
The increase in premiums reflects a combination of expanded distribution efforts
and improved agency productivity. Old American continues to focus on the
recruitment and development of new agencies and agents, along with improved
production from existing agencies and agents. In addition, proactive territorial
management by agencies and the home office have contributed to the increased
sales.

Net investment income decreased $0.1 million or 4% in the second quarter and
$0.3 million or 5% in the first six months of 2012 compared with the prior year.
These declines were largely due to a reduction in yields available in the
market.

Please see Consolidated Results of Operations in Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations for a table that
provides securities that were written down through earnings by business segment
for the first two quarters of 2012 and 2011. This section also contains a table
that provides detail regarding individual investment securities by business
segment that were written down through earnings during the first six months of
2012 and 2011.

Policyholder benefits increased $0.4 million or 4% in the second quarter versus
last year. The increase was largely due to an increase in benefit and contract
reserves. Policyholder benefits decreased $0.3 million or 1% in the first six
months of 2012 compared with the prior year, largely due to lower death
benefits. Partially offsetting this change was a $0.7 million increase in
reserves. The increase in reserves occurred in the second quarter and six months
of 2012, largely from the increase in premiums. Mortality fluctuations occur
each period, and the Company monitors these fluctuations in relation to its
pricing expectations. While death benefits decreased during the first six months
of 2012, the results remained within pricing expectations.

Amortization of DAC decreased $0.5 million or 18% in the second quarter and $0.5
million or 8% in the six months compared to a year ago. The declines were
primarily due to the implementation of ASU No. 2010-26, as described in Note 7 -
Change in Accounting Principle.

Operating expenses decreased $1.1 million or 22% in the second quarter and $2.0
million or 20% in the six months compared to a year ago. The decreases in both
periods were largely due to lower salary and benefit expenses, as well as
reduced agent meeting costs. Also contributing to the decreases were lower
amortization of VOBA, due to the traditional life insurance block being fully
amortized at December 31, 2011. Capitalized commissions increased in the six
months, primarily related to the implementation of ASU No. 2010-26, as described
in Note 7 - Change in Accounting Principle.



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Liquidity and Capital Resources

Liquidity

Statements made in the Company's 2011 Form 10-K remain pertinent, as the Company's liquidity position is materially unchanged from year-end 2011.


Net cash used for operating activities was $2.0 million in the six months ended
June 30, 2012. The primary sources of cash from operating activities in the
first six months of 2012 were premium receipts and net investment income. The
primary uses of cash from operating activities in the first six months of 2012
were for the payment of policyholder benefits and operating expenses. Net cash
used for investing activities was $22.2 million. The primary sources of cash
were sales, maturities, calls, and principal paydowns of investments totaling
$206.6 million. Included in this total, the Company had sizable real estate
sales in the first six months of 2012. Offsetting these, the Company's new
investments totaled $260.6 million. Net cash provided by financing activities
was $19.4 million, primarily including $30.1 million of deposits net of
withdrawals from policyholder account balances.

Debt and Short-term Borrowing


The Company and certain subsidiaries have access to borrowing capacity through
their membership affiliation with the Federal Home Loan Bank of Des Moines
(FHLB). At June 30, 2012, there were no outstanding balances with the FHLB, and
there were no outstanding balances at year-end 2011. The Company has access to
unsecured revolving lines of credit of $60.0 million with two major commercial
banks with no balances outstanding. These lines of credit will expire in June of
2013. The Company anticipates renewing these lines of credit as they come due.

Capital Resources


The Company considers existing capital resources to be adequate to support the
current level of business activities. In addition, the Company's statutory
equity exceeds the minimum capital deemed necessary to support its insurance
business, as determined by the risk-based capital calculations and guidelines
established by the National Association of Insurance Commissioners. The Company
believes these statutory limitations impose no practical restrictions on its
dividend payment plans.

The following table shows the capital adequacy for the Company.



                                                        June 30              December 31
                                                           2012                  2011
Total assets, excluding separate accounts           $      4,143,798       $     4,081,633
Total stockholders' equity                                   737,032        

710,705

Ratio of stockholders' equity to assets,
excluding separate accounts                                      18%                   17%


The ratio of equity to assets less separate accounts increased from 17% at
December 31, 2011 to 18% at June 30, 2012. Unrealized investment gains on
available for sale securities, which are included as a part of stockholders'
equity (net of securities losses, related taxes, policyholder account balances,
future policy benefits, and DAC), totaled $93.9 million at June 30, 2012. This
represents an increase of $12.8 million in net unrealized gains from the $81.1
million in net unrealized investment gains at year-end 2011. Stockholders'
equity increased $26.3 million from year-end 2011. This improvement was largely
due to growth in retained earnings, primarily driven by the increased net income
experienced in the first six months of 2012.



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Table of Contents


The stock repurchase program was extended by the Board of Directors through
January 27, 2013 to permit the purchase of up to one million of the Company's
shares on the open market. During the first six months of 2012, the Company
purchased 72,126 shares under the stock repurchase program for $2.3 million. The
Company made no purchases of stock under this plan in the first six months of
2011.

During the six months ended June 30, 2012, the Company purchased 10,699 shares
and sold 19,014 shares of treasury stock from the Company's employee stock
ownership plan and deferred compensation plans for a net change in treasury
stock of $0.3 million. During the second quarter of 2012, the Company
reclassified 188,621 shares from other assets to treasury stock. Please see the
discussion of the immaterial correction in Note 1 - Nature of Operations and
Significant Accounting Policies for additional information.

On July 23, 2012, the Board of Directors declared a quarterly dividend of $0.27
per share, unchanged from the prior year, which will be paid August 8, 2012 to
stockholders of record as of August 2, 2012. Total stockholder dividends paid
were $6.1 million and $6.2 million in the first six months ended June 30, 2012
and 2011, respectively.
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