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

Edgar Online, Inc.

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 September 30, 2012 and 2011 and the
financial condition of the Company at September 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


The Company earned net income of $4.1 million and $4.5 million in the third
quarters of 2012 and 2011, respectively. Net income per share was $0.38 in the
third quarter of 2012, compared to $0.39 in the same period in the prior year.
Net income for the first nine months of 2012 was $32.0 million, an increase of
$11.5 million or 56% compared to last year. Net income per share for the nine
months was $2.88, an increase of $1.10 per share versus the same period one year
earlier. The following table presents variances between the results for the
third quarters and nine months ended September 30, 2012 and 2011. Additional
information on these items is presented below.



                                                Quarter Ended                  Nine Months Ended
                                                 September 30                    September 30
                                               2012 Versus 2011                2012 Versus 2011
Insurance and other revenues                  $             (459 )            $             2,184
Net investment income                                      1,552                           (1,088 )
Net realized investment gains                               (104 )                         14,276
Policyholder benefits and interest
credited to policyholder account
balances                                                    (277 )                          4,428
Amortization of deferred
acquisition costs                                          4,426                            1,693
Operating expenses                                        (6,350 )                         (5,027 )
Income tax expense                                           878                           (4,926 )

Total variance                                $             (334 )            $            11,540



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. Also, the Company provides support to
existing 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.



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There are No Baby Steps in Sales.

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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 third quarters and
nine months ended September 30, 2012 and 2011. New premiums are also detailed by
product.



                                                                    Quarter Ended
                                                                     September 30
                                             2012             % Change              2011             % Change
New premiums:
Individual life insurance               $        4,284                1        $        4,249                1
Immediate annuities                              2,187               15                 1,903              (72 )
Group life insurance                               624               21                   516               (5 )
Group accident and health insurance              2,894              (12 )               3,301               13

Total new premiums                               9,989                -                 9,969              (31 )
Renewal premiums                                37,453                1                37,079                7

Total premiums                                  47,442                1                47,048               (4 )
Reinsurance ceded                              (14,393 )             (1 )             (14,572 )              9

Premiums, net                           $       33,049                2        $       32,476               (9 )


                                                                  Nine Months Ended
                                                                     September 30
                                             2012             % Change              2011             % Change
New premiums:
Individual life insurance               $       13,054                1        $       12,973                6
Immediate annuities                              7,355               30                 5,649              (66 )
Group life insurance                             1,849               26                 1,463              (13 )
Group accident and health insurance              8,637              (16 )              10,292                9

Total new premiums                              30,895                2                30,377              (24 )
Renewal premiums                               111,736                2               109,034                3

Total premiums                                 142,631                2               139,411               (4 )
Reinsurance ceded                              (42,673 )              -               (42,509 )              5

Premiums, net                           $       99,958                3        $       96,902               (8 )



Consolidated total premiums increased $0.4 million or 1% in the third quarter of
2012 versus the same period in the prior year, as total new premiums were
essentially flat and total renewal premiums increased $0.4 million or 1%. New
immediate annuity premiums increased $0.3 million or 15% and new group life
premiums increased $0.1 million or 21%. These were offset by a $0.4 million
decrease in new group accident and health premiums. Immediate annuity receipts
can have sizeable fluctuations, as receipts from policyholders largely result
from one-time premiums rather than recurring premiums. The decrease in new
accident and health premiums resulted from a decrease in the short-term
disability line, which was partially offset by an increase in dental premiums.
The increase in consolidated renewal premiums reflected an increase in
short-term disability renewal premiums that was partially offset by a decrease
in dental renewal premiums.

Consolidated total premiums increased $3.2 million or 2% in the first nine
months of 2012 versus one year earlier, reflecting a $0.5 million or 2% increase
in total new premiums and a $2.7 million or 2% increase in total renewal
premiums. The increase in total new premiums was due to a $1.7 million or 30%
increase in new immediate annuity premiums and a $0.4 million or 26% increase in
new group life premiums. These improvements were partially offset by a $1.7
million or 16% decrease in new group accident and health premiums, primarily in
the short-term disability line. The increase in renewal premiums reflected an
increase in group accident and health renewal premiums. This increase was
largely from the short-term disability line and a partially offsetting decrease
in dental renewal premiums. In addition, individual life insurance premiums
increased $1.4 million, primarily from the Old American segment.



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



                                                                    Quarter Ended
                                                                    September 30
                                            2012             % Change               2011             % Change
New deposits:
Universal life insurance               $        2,980               25         $        2,391              (39 )
Variable universal life insurance                 144              (21 )                  183              (43 )
Fixed deferred annuities                       11,982              (22 )               15,368              (42 )
Variable annuities                              4,863               18                  4,119               44

Total new deposits                             19,969               (9 )               22,061              (34 )
Renewal deposits                               34,903               (7 )               37,459                6

Total deposits                         $       54,872               (8 )       $       59,520              (14 )


                                                                  Nine Months Ended
                                                                    September 30
                                            2012             % Change               2011             % Change
New deposits:
Universal life insurance               $        9,140                2         $        8,953              (14 )
Variable universal life insurance                 404              (40 )                  676              (11 )
Fixed deferred annuities                       43,601              (10 )               48,285               (1 )
Variable annuities                             13,466               (4 )               14,098               (2 )

Total new deposits                             66,611               (8 )               72,012               (3 )
Renewal deposits                              105,120               (4 )              109,490                4

Total deposits                         $      171,731               (5 )       $      181,502                1



Total new deposits decreased $2.1 million or 9% in the third quarter of 2012
compared with the third quarter of 2011. This change was due to a $3.4 million
or 22% decrease in new fixed deferred annuity deposits. Partially offsetting
this, new variable annuity deposits increased $0.7 million or 18% and new
universal life deposits increased $0.6 million or 25%. Total renewal deposits
decreased $2.6 million or 7% in the third quarter of 2012 versus last year,
reflecting a $3.0 million or 25% decrease in fixed deferred annuity renewal
deposits. Total new deposits decreased $5.4 million or 8% in the first nine
months of 2012 compared with the prior year. This decrease was largely due to a
$4.7 million or 10% decline in new fixed deferred annuity deposits and a $0.6
million or 4% decrease in new variable annuity deposits. Total renewal deposits
decreased $4.4 million or 4%, reflecting a $2.2 million or 7% decrease in fixed
deferred annuity renewal deposits and a $1.0 million or 13% decrease in variable
annuity renewal deposits. New sales and renewals for deposit products have been
negatively affected for the third quarter and the first nine months of 2012 by
continuing low interest rates and the uncertain economic environment.

Insurance Revenues

There are No Baby Steps in Sales.


Insurance revenues consist of premiums, net of reinsurance, and contract
charges. In the third quarter of 2012, total insurance revenues decreased $0.4
million or 1%, primarily due to a $1.0 million or 4% decrease in contract
charges compared to the prior year. Partially offsetting the reduction in
contract charges was a $0.6 million or 2% increase in net premiums. The increase
in net premiums largely resulted from a $0.3 million or 15% increase in total
immediate annuity premiums.

Insurance revenues increased $2.8 million or 2% in the first nine months of 2012
compared with the prior year. This increase was due to a $3.1 million or 3%
increase in net premiums, together with an offsetting $0.2 million decrease in
contract charges. The increase in premiums resulted from a $1.7 million or 2%
increase in total individual life insurance premiums, largely from the Old
American segment, and a $1.4 million or 24% 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.



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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. While the Company
is not actively pursuing marketing efforts to generate new sales for these
closed blocks, it has the intent of servicing this business to achieve long-term
profit streams.

Total contract charges on all blocks of business decreased $1.0 million or 4% in
the third quarter of 2012 compared to the same period in 2011. The results for
the third quarter of 2012 were largely due to a $0.5 million decrease in the
amortization of deferred revenue and a $0.3 million decrease in cost of
insurance charges. The decrease in cost of insurance charges was largely due to
the runoff of closed blocks. Amortization of deferred revenue decreased due to
lower actual gross profits on certain lines of business, largely related to
increased reinsurance resulting from unlocking that occurred in the second
quarter of 2012.

Total contract charges on all blocks of business decreased $0.2 million in the
first nine months of 2012 compared to one year earlier. These results reflected
a $0.7 million decrease in cost of insurance charges and a $0.5 million decrease
in expense loads, partially offset by a $1.2 million increase in the
amortization of deferred revenue. In addition to the results discussed above for
the quarter, the amortization of deferred revenue increased during 2012 compared
to the prior year due to a system upgrade during 2011 that led to enhanced
reinsurance modeling capabilities. The decrease in expense loads is attributed
to the increased sale of products with lower expense loads in 2012 than the
prior year. The decline in cost of insurance charges was largely due to the
runoff of closed blocks.

Total contract charges on closed blocks equaled 35% of total consolidated contract charges for both third quarters and 35% and 36% for the first nine months of 2012 and 2011, respectively. Total contract charges on closed blocks decreased 4% in the third quarter and 3% in the first nine months of 2012 compared to the same periods in the prior year. These declines reflect the results 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 1% in the third quarter of 2012 and increased $0.2 million or less
than 1% in the first nine months of 2012, as compared to the same periods in
2011. Reinsurance ceded for the Group segment increased $0.5 million or 17% in
the third quarter and $1.3 million or 16% in the nine months, reflecting
increased disability sales that were largely reinsured. Reinsurance ceded for
the Old American segment declined $0.1 million or 16% in the third quarter and
$0.3 million or 15% in the first nine months of 2012, reflecting the continued
runoff of a large closed block of reinsured business. Reinsurance ceded for the
Individual Insurance segment decreased $0.6 million or 5% in the third quarter
and $0.9 million or 3% in the first nine months of 2012.

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 increased $1.4 million or 3% in the third quarter of 2012 compared with
the third quarter of 2011, as both average invested assets and yields earned
increased. Gross investment income decreased $1.0 million or 1% in the first
nine months of 2012 compared with the prior year, as an increase in average
invested assets was more than offset by lower yields earned.

Fixed maturity securities provided a majority of the Company's investment income during both the quarter and nine months ended September 30, 2012. Income on these investments declined $0.4 million or 1% in the third quarter and $3.1 million or 3% in the first nine months of 2012 compared to the prior year, reflecting declines in yields earned.


Investment income from mortgage loans increased $0.1 million or 1% in the third
quarter and $0.7 million or 3% in the first nine months of 2012 compared to the
same periods in 2011. The improvement in the nine months was largely the result
of prepayment fees received on loans that were paid off prior to maturity.

Investment income from real estate increased $0.5 million or 27% in the third
quarter and $1.1 million or 17% in the nine months compared to last year. These
improvements reflect higher rental income due to an increase in occupancy rates.

In addition, the fair value improved on an alternative investment fund, which
resulted in an increase of investment income of $1.4 million in the third
quarter of 2012 and $0.8 million in the first nine months, compared to the same
periods in 2011.

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.



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The following table provides detail concerning realized investment gains and
losses for the third quarters and nine months ended September 30, 2012 and 2011.



                                              Quarter Ended                                 Nine Months Ended
                                               September 30                                    September 30
                                       2012                    2011                    2012                    2011
Gross gains resulting from:
Sales of investment
securities                        $          399          $          292          $          712          $        3,944
Investment securities
called and other                             304                     105                   1,107                   1,355
Sales of real estate                         113                       -                  16,293                       -

Total gross gains                            816                     397                  18,112                   5,299

Gross losses resulting
from:
Sales of investment
securities                                   (44 )                   (76 )                   (76 )                (1,666 )
Investment securities
called and other                            (236 )                  (118 )                  (440 )                  (297 )
Mortgage loans                                 -                       -                    (178 )                    (3 )

Total gross losses                          (280 )                  (194 )                  (694 )                (1,966 )
Change in allowance for
potential future losses on
mortgage loans                                75                       -                     407                       -
Amortization of DAC and
VOBA                                          (5 )                     7                     (21 )                  (218 )

Net realized investment
gains, excluding impairment
losses                                       606                     210                  17,804                   3,115


Net impairment losses
recognized in earnings:
Total other-than-temporary
impairment losses                           (697 )                  (167 )                (1,153 )                  (674 )
Portion of loss recognized
in othercomprehensive
income                                        47                      17                     197                     131

Net impairment losses
recognized in earnings                      (650 )                  (150 )                  (956 )                  (543 )

Net realized investment
gains (losses)                    $          (44 )        $           60          $       16,848          $        2,572



The Company recorded a net realized investment loss of less than $0.1 million in
the third quarter of 2012, compared with a net realized gain of less than $0.1
million third quarter of 2011. During the third quarter of 2012, investment
gains on sales of real estate totaled $0.1 million. Net realized investment
gains for the first nine months totaled $16.8 million in 2012 compared to $2.6
million in 2011, largely reflecting gains on sales of real estate of $16.3
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 third quarter ended September 30,
2012 resulted in the determination that seven fixed-maturity residential
mortgage-backed securities and one corporate security had other-than-temporary
credit impairments and were written down by a combined $0.6 million. 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 third quarter of 2012, including less than $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 $55.5 million.



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



                                                                                                      Nine Months
                                 Quarter Ended          Quarter Ended          Quarter Ended             Ended
                                   March 31                June 30             September 30           September 30
                                     2012                   2012                   2012                   2012
Bonds:
Corporate obligations:
Individual Insurance            $             -        $             -        $           515        $          515

Total corporate
obligations                     $             -        $             -        $           515        $          515
Corporate private-labeled
residential
mortgage-backed
securities:
Individual Insurance            $           143        $           134        $           129        $          406
Old American                                 17                     12                      6                    35

Total                           $           160        $           146        $           650        $          956

Segment detail:
Individual Insurance            $           143        $           134        $           644        $          921
Old American                                 17                     12                      6                    35

Consolidated total              $           160        $           146        $           650        $          956





                                                                                                         Nine Months
                                    Quarter Ended          Quarter Ended          Quarter Ended             Ended
                                      March 31                June 30             September 30           September 30
                                        2011                   2011                   2011                   2011
Bonds:
Corporate private-labeled
residential mortgage-backed
securities:
Individual Insurance               $           188        $           164        $           141        $          493
Old American                                    23                     18                      9                    50

Total                              $           211        $           182        $           150        $          543

Segment detail:
Individual Insurance               $           188        $           164        $           141        $          493
Old American                                    23                     18                      9                    50

Consolidated total                 $           211        $           182        $           150        $          543



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 September 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          $   138,511             5%     $    

136,365 $ 15,002 $ 2,146 $ 27 Federal agencies 1

                           26,250             1%              26,250            4,183                                     -
Federal agency issued residential
mortgage-backed securities 1                101,235             4%             100,932            9,272                  303                1

Subtotal                                    265,996            10%             263,547           28,457                2,449               28
Corporate obligations:
Industrial                                  554,550            19%             543,263           53,980               11,287            1,749
Energy                                      206,712             7%             204,732           23,894                1,980               17
Communications and technology               225,310             8%             225,310           24,554                    -                -
Financial                                   328,837            11%             312,282           26,232               16,555            1,907
Consumer                                    560,544            19%             553,208           54,172                7,336               14
Public utilities                            296,452            10%             293,217           41,256                3,235              355

Subtotal                                  2,172,405            74%           2,132,012          224,088               40,393            4,042
Corporate private-labeled residential
mortgage-backed securities                  154,567             5%             101,659            3,787               52,908            1,575
Municipal securities                        174,366             6%             171,287           27,755                3,079                5
Other                                       102,080             4%              58,993            6,256               43,087            8,973
Redeemable preferred stocks                   9,211              -               6,690              261                2,521              126

Fixed maturities                          2,878,625            99%           2,734,188          290,604              144,437           14,749
Equity securities                            37,453             1%              36,302            1,893                1,151              106

Total                                   $ 2,916,078           100%     $     2,770,490     $    292,497     $        145,588     $     14,855




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 September 30, 2012, the Company's unrealized losses on investment
securities had decreased to $14.9 million and were offset by $292.5 million in
gross unrealized gains, with 27% of the gross unrealized losses in the category
of corporate obligations. The financial sector was the single largest
contributor to unrealized losses, reflecting the direct and indirect impact of
the troubled residential real estate, mortgage, and auction rate securities
markets. At September 30, 2012, 95% 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 September 30, 2012 and December 31, 2011.



                                     September 30, 2012              December 31, 2011
                                     Fair             %             Fair             %
                                    Value          of Total         Value         of Total
  AAA                            $    132,256             5%     $   161,802             6%
  AA                                  612,085            21%         570,157            21%
  A                                   876,911            30%         799,565            30%
  BBB                               1,046,830            36%         939,373            35%

  Total investment grade            2,668,082            92%       2,470,897            92%
  BB                                   70,294             3%          79,760             3%
  B and below                         140,249             5%         131,485             5%

  Total below investment grade        210,543             8%         211,245             8%

                                 $  2,878,625           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 September 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         $      1,362       $         18     $       784     $          9     $   2,146     $         27
Federal agency issued residential
mortgage-backed securities 1                     10                  -             293                1           303                1

Subtotal                                      1,372                 18           1,077               10         2,449               28
Corporate obligations:
Industrial                                    8,462                430           2,825            1,319        11,287            1,749
Energy                                        1,980                 17               -                -         1,980               17
Communications and technology                     -                  -               -                -             -                -
Financial                                     1,502                  1          15,053            1,906        16,555            1,907
Consumer                                      7,336                 14               -                -         7,336               14
Public utilities                              1,995                  5           1,240              350         3,235              355

Subtotal                                     21,275                467          19,118            3,575        40,393            4,042
Corporate private-labeled
residential mortgage-backed
securities                                        -                  -          52,908            1,575        52,908            1,575
Municipal securities                          3,079                  5               -                -         3,079                5
Other                                             -                  -          43,087            8,973        43,087            8,973
Redeemable preferred stocks                       -                  -           2,521              126         2,521              126

Fixed maturity securities                    25,726                490         118,711           14,259       144,437           14,749

Equity securities                                 -                  -           1,151              106         1,151              106

Total                                  $     25,726       $        490     $   119,862     $     14,365     $ 145,588     $     14,855




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 $14.4 million at September 30, 2012, a decrease of 40% 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 $8.4 million or 84% during the first nine months of 2012. Certain
securities continue to be challenged by the economy and recovering markets, 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 September 30, 2012.



                                                                                      Gross
                                                  Amortized          Fair           Unrealized
                                                     Cost            Value            Losses
Securities owned without realized impairment:
Unrealized losses of 10% or less                  $   44,169       $  43,156       $      1,013
Unrealized losses of 20% or less and greater
than 10%                                              32,500          27,594              4,906

Subtotal                                              76,669          70,750              5,919

Unrealized losses greater than 20%:
Investment grade
Less than twelve months                                    -               -                  -
Twelve months or greater                               5,854           4,335              1,519

Total investment grade                                 5,854           4,335              1,519

Below investment grade
Less than twelve months                                4,145           2,825              1,320
Twelve months or greater                               3,010           2,308                702

Total below investment grade                           7,155           5,133              2,022

Unrealized losses greater than 20%                    13,009           9,468              3,541

Subtotal                                              89,678          80,218              9,460


Securities owned with realized impairment:
Unrealized losses of 10% or less                      48,841          47,939                902
Unrealized losses of 20% or less and greater
than 10%                                               9,367           8,174              1,193

Subtotal                                              58,208          56,113              2,095

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                                1,590           1,240                350
Twelve months or greater                              10,967           8,017              2,950

Total below investment grade                          12,557           9,257              3,300

Unrealized losses greater than 20%                    12,557           9,257              3,300

Subtotal                                              70,765          65,370              5,395

Total                                             $  160,443       $ 145,588       $     14,855





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



                                                                  Gross
                                    Fair            %           Unrealized          %
                                    Value        of Total         Losses         of Total
   AAA                            $   3,056             2%     $         65             1%
   AA                                30,043            21%            4,935            33%
   A                                  8,404             6%              472             3%
   BBB                               20,425            14%            1,313             9%

   Total investment grade            61,928            43%            6,785            46%
   BB                                 9,545             7%              351             2%
   B and below                       72,964            50%            7,613            52%

   Total below investment grade      82,509            57%            7,964            54%

                                  $ 144,437           100%     $     14,749           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-asset backed securities whose fair
value had been less than 80% of amortized cost for at least six consecutive
months at September 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 institutions                     Institutions impacted by housing and
                                            mortgage crisis. These securities
                                            continue 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. Agency mortgage-backed securities that were determined to
have such indications at September 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.



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The following tables present the range of significant assumptions used in
projecting the future cash flows at September 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.



                                              September 30, 2012
                Initial Default Rate           Initial Severity Rate          Prepayment Speed
    Vintage       Low            High           Low              High          Low         High
    2003             4.7%          4.7%             40%             40%         18.0%       18.0%
    2004             5.7%          7.4%             35%             57%          8.0%       13.0%
    2005             3.0%         15.2%             40%             73%          6.0%       15.0%
    2006             5.1%          6.3%             46%             85%          8.0%       16.0%
    2007            10.2%         10.2%             60%             60%          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 September 30, 2012, the fair value of
investments with subprime residential mortgage exposure was $15.4 million with a
related $2.7 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 September 30, 2012 and December 31, 2011.
These investments are included in the Company's process for evaluation of
other-than-temporarily impaired securities.

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.



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



                                        Fair        Amortized         Unrealized
                                        Value          Cost         Gains (Losses)
     Residential & Non-agency MBS 1
     Investment Grade:
     Vintage 2003 and earlier         $  21,505     $   20,703     $            802
     2004                                28,657         27,543                1,114
     2005                                     -              -                    -
     2006                                     -              -                    -
     2007                                     -              -                    -
     Total investment grade              50,162         48,246             

1,916



     Below Investment Grade:
     Vintage 2003 and earlier                 -              -                    -
     2004                                32,306         31,601                  705
     2005                                77,344         81,364               (4,020 )
     2006                                 7,411          6,763                  648
     2007                                 4,111          4,308                 (197 )
     Total below investment grade       121,172        124,036             

(2,864 )

Other Structured Securities:

     Investment grade                    80,974         80,609                  365
     Below investment grade               2,760          2,722                   38

     Total other                         83,734         83,331                  403

Total structured securities $ 255,068$ 255,613 $

   (545 )




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 $0.5
million at September 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 less than 1% at September 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 September 30, 2012 had a fair value
of $136.1 million with a net unrealized loss of $1.2 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 5% of its
investment portfolio in municipal bond securities and 6% in bond securities from
foreign issuers. Approximately 74% of the Company's foreign securities were from
issuers in Canada, Australia, and Great Britain at September 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 September 30, 2012 was $239.4 million with a net unrealized
gain of $17.9 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 September 30, 2012. The Company's indirect
exposure to financial guarantors totaled $34.8 million, which was approximately
1% of the Company's investments at September 30, 2012. The unrealized gain on
these investments totaled $3.1 million at September 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 3% in the third quarter and
9% in the first nine 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 nine months also reflected
lower supplementary contract considerations.

Policyholder Benefits


Policyholder benefits consist of death benefits, 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. Following is a discussion of significant fluctuations in policyholder
benefits during the periods presented.

Policyholder benefits increased $1.0 million or 2% in the third quarter of 2012
compared to the same period one year earlier. The largest factors were increased
death benefits, net of reinsurance, and increased benefit and contract reserves.
The increase in reserves was largely due to favorable changes in immediate
annuity premiums and benefits and a decrease that occurred during 2011 in
benefit and contract reserves that resulted from system changes and refinements.
Partially offsetting these was the change in the value of the GMWB rider
liability, as discussed below.

Policyholder benefits decreased $3.4 million or 3% in the first nine months
compared to the same period one year ago. The largest single factor in the
decrease in policyholder benefits resulted from a decline in death benefits, net
of reinsurance. Other contributing factors were reductions in group accident and
health benefits, supplementary contract payments, and policy dividends and
coupons. Partially offsetting these was an increase in benefit and contract
reserves. This increase was the result of several factors, including favorable
changes in immediate annuity premiums and benefits and prior year system changes
and refinements. Also, the Company recaptured a block of previously reinsured
policies in the second quarter of 2012 which also contributed to the increase in
reserves. Partially offsetting these items was the change in the value of the
GMWB rider liability, as discussed below.

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 September 30, 2012, the fair value of the liability decreased
$0.2 million compared to the fair value at December 31, 2011. The change in this
liability resulted in a decrease in reserves of $0.2 million in the first nine
months of 2012 compared to an increase in reserves of $3.5 million in the first
nine months of 2011. These changes resulted in a decrease of $3.7 million in the
year-over-year comparison. This fluctuation can be attributed to favorable
capital market returns and a decline in market volatility, partially offset by
declines in interest rates and issuer discount spreads.

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



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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 $0.7 million or 3% in the third
quarter and $1.0 million or 2% in the first nine months of 2012 compared with
the same periods one year earlier. While total policyholder account balances
have increased during 2012, average crediting rates have declined slightly.

Amortization of Deferred Acquisition Costs


The amortization of deferred acquisition costs decreased $4.4 million or 38% in
the third quarter and $1.7 million or 8% in the first nine months of 2012
compared with the prior year. Contributing to the decrease in both periods were
refinements in estimates made during the third quarter of 2011 that increased
the amortization of DAC by $2.4 million in the third quarter of 2011. In
addition, increases in account values decreased the amortization of DAC for
certain products. Partially offsetting these was the impact of unlocking during
the second quarter of 2012. 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.

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 acquisition of new business; expenses from
the Company's operations; the amortization of VOBA; and other expenses.
Operating expenses increased $6.4 million or 26% in the third quarter of 2012
and $5.0 million or 7% in the first nine months compared to last year. The
increase in the third quarter was largely due to increased salaries and employee
benefit costs, increased legal fees, and an increase in depreciation on a
long-lived asset. The increased depreciation expense of $3.7 million resulted
from of a change in accounting estimate for a long-lived asset, as described in
Note 3. The increase in the nine months reflected increases in salaries and
employee benefit costs, legal fees, and the depreciation on a long-lived asset.
These were partially offset by a decline in the amount charged to allowance for
doubtful accounts for agent receivables.

The amortization of VOBA decreased $0.3 million or 19% in the third quarter of
2012 and $0.1 million or 2% in the first nine months of 2012 compared to the
same periods one year earlier. The decrease in the third quarter of 2012
reflected $0.5 million in less amortization as the traditional life insurance
block from the Old American segment became fully amortized at December 31, 2011.
The increase in VOBA in the first nine months of 2012 reflected a $1.4 million
decrease resulting from the fully amortized traditional life insurance block
from in the Old American segment. Offsetting this, VOBA amortization increased
during the nine months due to unlocking that occurred during the second quarter
of 2012.

Income Taxes

The third quarter income tax expense was $2.1 million or 34% of income before
tax for 2012, versus $3.0 million or 40% of income before tax for the prior year
period. The income tax expense for the nine months ended September 30, 2012 was
$16.2 million or 34% of income before tax, versus $11.3 million or 36% of income
before tax for the prior year period.

The effective income tax rate was less than the prevailing corporate federal
income tax rate of 35% in the third quarter of 2012. Permanent differences,
including the dividends-received deduction, resulted in a benefit of
approximately 2% of income before tax. Partially offsetting the benefit from
permanent differences was tax expense of approximately 1% of income before tax
related to investments in affordable housing.

The effective income tax rate was less than the prevailing corporate federal
income tax rate of 35% in the nine months ended September 30, 2012, primarily
due to permanent differences that resulted in a benefit of approximately 1% of
income before tax.

The effective income tax rate in the third quarter of 2011 and for the nine
months ended September 30, 2011 was greater than the prevailing corporate
federal income tax rate of 35%, primarily due to adjustments related to the
Company's investments in affordable housing. The affordable housing adjustments
resulted in a tax expense of approximately 5% and 1% of income before tax in the
third quarter and nine months ended September 30, 2011, respectively.

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



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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 third quarters and nine months ended September 30, 2012 and
2011:



                                              Quarter Ended                             Nine Months Ended
                                               September 30                                September 30
                                        2012                  2011                  2012                  2011
Insurance revenues:
Premiums, net                      $        3,151        $        2,950        $       11,029        $        9,238
Contract charges                           24,464                25,427                75,187                75,413

Total insurance revenues                   27,615                28,377                86,216                84,651
Investment revenues:
Net investment income                      41,444                40,031               122,899               123,798
Net realized investment gains,
excluding impairment losses                   665                   209                17,890                 3,149
Net impairment losses
recognized in earnings:
Total other-than-temporary
impairment losses                            (691 )                (157 )              (1,118 )                (607 )
Portion of impairment losses
recognized in other
comprehensive income                           47                    16                   197                   114

Net impairment losses
recognized in earnings                       (644 )                (141 )                (921 )                (493 )

Total investment revenues                  41,465                40,099               139,868               126,454
Other revenues                              2,110                 2,176                 6,523                 7,162

Total revenues                             71,190                70,652               232,607               218,267


Policyholder benefits                      21,730                21,775                64,096                66,799
Interest credited to
policyholder account balances              20,436                21,119                61,371                62,366
Amortization of deferred
acquisition costs                           3,701                 8,267                10,438                11,750
Operating expenses                         20,960                13,869                53,094                45,797

Total benefits and expenses                66,827                65,030               188,999               186,712


Income before income tax
expense                                     4,363                 5,622                43,608                31,555

Income tax expense                          1,365                 2,280                14,419                11,171

Net income                         $        2,998        $        3,342        $       29,189        $       20,384





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The net income for this segment in the third quarter of 2012 was $3.0 million,
compared to $3.3 million in the third quarter of 2011. This change was primarily
the result of lower insurance revenues and higher operating expenses. Partially
offsetting these, net investment income increased, along with lower amortization
of deferred acquisition costs and interest credited to policyholder account
balances.

Net income for this segment was $29.2 million for the first nine months of 2012,
an increase of $8.8 million from the first nine months of 2011. Contributing to
this improvement were increases in net realized investment gains and insurance
revenues, along with lower policyholder benefits, amortization of deferred
acquisition costs, and interest credited to policyholder account balances.
Partially offsetting these changes was a decrease in net investment income and
increased operating expenses.

Total insurance revenues for this segment decreased $0.8 million or 3% in the
third quarter of 2012 compared with the same period in the prior year. Total
premiums decreased $0.4 million or 3%, reflecting a $0.6 million decrease in
individual life premiums that was partially offset by a $0.3 million increase in
immediate annuity premiums. Contract charges decreased $1.0 million or 4%, and
reinsurance ceded premiums decreased $0.6 million or 5%.

Total insurance revenues for this segment increased $1.6 million or 2% for the
first nine months of 2012 compared to one year earlier. Total premiums increased
$0.9 million or 2%, reflecting a $1.4 million or 24% increase in immediate
annuity premiums that was partially offset by a $0.5 million or 1% decrease in
individual life premiums. Contract charges decreased $0.2 million and
reinsurance ceded premiums decreased $0.9 million or 3%.

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



                                                                  Quarter Ended
                                                                   September 30
                                         2012               % Change               2011              % Change
New premiums:
Individual life insurance           $        1,119                 (6 )       $        1,194                (7 )
Immediate annuities                          2,187                 15                  1,903               (72 )

Total new premiums                           3,306                  7                  3,097               (61 )
Renewal premiums                            10,393                 (5 )               10,970                 4

Total premiums                              13,699                 (3 )               14,067               (24 )
Reinsurance ceded                          (10,548 )               (5 )              (11,117 )               6

Premiums, net                       $        3,151                  7         $        2,950               (63 )





                                                                Nine Months Ended
                                                                   September 30
                                         2012               % Change               2011              % Change
New premiums:
Individual life insurance           $        3,445                 (9 )       $        3,783                (2 )
Immediate annuities                          7,355                 30                  5,649               (66 )

Total new premiums                          10,800                 15                  9,432               (54 )
Renewal premiums                            31,527                 (1 )               31,998                 2

Total premiums                              42,327                  2                 41,430               (20 )
Reinsurance ceded                          (31,298 )               (3 )              (32,192 )               1

Premiums, net                       $       11,029                 19         $        9,238               (54 )



Total new premiums for this segment increased $0.2 million or 7% in the third
quarter of 2012. 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 decreased $0.6 million or 5% compared
to last year, due to a decline in individual life renewal premiums.

Total new premiums for this segment increased $1.4 million or 15% in the first
nine months of 2012 versus the prior year. This improvement also resulted from
increased immediate annuities. Total renewal premiums decreased 1%, reflecting
lower individual life and annuity renewal premiums.



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



                                                                 Quarter Ended
                                                                  September 30
                                           2012            % Change              2011            % Change
New deposits:
Universal life insurance              $        2,980              25        $        2,391             (39 )
Variable universal life insurance                144             (21 )                 183             (43 )
Fixed deferred annuities                      11,982             (22 )              15,368             (42 )
Variable annuities                             4,863              18                 4,119              44

Total new deposits                            19,969              (9 )              22,061             (34 )
Renewal deposits                              34,903              (7 )              37,459               6

Total deposits                        $       54,872              (8 )      $       59,520             (14 )





                                                                  Nine Months Ended
                                                                    September 30
                                            2012             % Change               2011             % Change
New deposits:
Universal life insurance               $        9,140                2         $        8,953              (14 )
Variable universal life insurance                 404              (40 )                  676              (11 )
Fixed deferred annuities                       43,601              (10 )               48,285               (1 )
Variable annuities                             13,466               (4 )               14,098               (2 )

Total new deposits                             66,611               (8 )               72,012               (3 )
Renewal deposits                              105,120               (4 )              109,490                4

Total deposits                         $      171,731               (5 )       $      181,502                1



Total new deposits decreased $2.1 million or 9% in the third quarter of 2012
compared to last year, reflecting a $3.4 million or 22% decrease in new fixed
deferred annuity deposits. Partially offsetting this, new variable annuity
deposits increased $0.7 million or 18% and new universal life deposits increased
$0.6 million or 25%. Total renewal deposits decreased $2.6 million or 7% in the
third quarter of 2012. This decrease was due to a $3.0 million or 25% decline in
fixed deferred annuity renewal deposits. Total new deposits decreased $5.4
million or 8% in the first nine months of 2012 compared with the prior year.
This decrease reflected a $4.7 million or 10% decline in new fixed deferred
annuity deposits and a $0.6 million or 4% decline in new variable annuity
deposits. Total renewal deposits decreased $4.4 million or 4% in the first nine
months of 2012. This decline resulted from a $2.2 million or 7% decrease in
fixed deferred annuity renewal deposits and a $1.0 million or 13% decrease in
variable annuity renewal deposits. New sales and renewals for deposit products
have been negatively affected for the third quarter and the first nine months of
2012 by continuing low interest rates and the uncertain economic environment.

Total contract charges decreased $1.0 million or 4% in the third quarter of 2012
compared to the third quarter of 2011. This largely resulted from decreases in
cost of insurance charges and the amortization of deferred revenue. The decrease
in cost of insurance charges was largely due to the runoff of closed blocks.
Amortization of deferred revenue decreased due to lower actual gross profits on
certain lines of business, largely related to increased reinsurance resulting
from unlocking that occurred in the second quarter of 2012. Total contract
charges on the closed blocks equaled 35% of total consolidated contract charges
in both the third quarters of 2012 and 2011. Total contract charges on closed
blocks declined 4% in the third 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, decreased 4% in the third quarter of 2012.

Total contract charges decreased $0.2 million in the first nine months of 2012
compared to one year earlier, reflecting decreases in cost of insurance charges
and expense loads. These were partially offset by an increase in the
amortization of deferred revenue. 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 and led to enhanced reinsurance
modeling capabilities. The decrease in expense loads is attributed to the
increased sale of products with lower expense loads in 2012 than the prior year.
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 nine months of 2012 compared to 36% in the first
nine months of 2011. Total contract charges on closed blocks declined 3% in the
first nine months of 2012, while total contract charges on open blocks of
business increased 1%.



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Net investment income increased $1.4 million or 4% in the third quarter of 2012
compared to the third quarter of 2011, as both average invested assets and
yields earned increased. Net investment income decreased $0.9 million in the
first nine months of 2012 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 $17.0 million in the first nine months of
2012 compared to a net gain of $2.7 million in the first nine 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 three quarters of 2012 and 2011.

Other revenues decreased 3% in the third quarter and 9% in the first nine 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 nine months also reflected lower supplementary contract
considerations.

Policyholder benefits were flat for the third quarter of 2012 compared to the
prior year. However, a decrease in supplementary contract payments was partially
offset by an increase in benefit and contract reserves. Several factors
contributed to the increase in benefit and contract reserves, including
favorable changes in immediate annuity premiums and benefits and prior year
system changes and refinements. Partially offsetting these items was the change
in the value of the GMWB rider liability.

Policyholder benefits decreased $2.7 million or 4% in the first nine months of
2012 compared to the prior year. The largest factor in this decrease was death
benefits, net of reinsurance. Other factors contributing to the decrease in
policyholder benefits were reduced supplementary contract payments, dividends,
and coupons. Partially offsetting this was an increase in benefit and contract
reserves. This increase was the result of several factors, including favorable
changes in immediate annuity premiums and benefits and prior year system changes
and refinements. Also, the Company recaptured a block of previously reinsured
policies in the second quarter of 2012 which also contributed to the increase in
reserves. Partially offsetting these items was the change in the value of the
GMWB rider liability.

Interest credited to policyholder account balances decreased 3% in the third
quarter and 2% in the first nine 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 decreased $4.6 million in the
third quarter and $1.3 million in the first nine months of 2012 compared with
the prior year. Contributing to the decrease in both periods were the
aforementioned refinements in estimates made during the third quarter of 2011
that increased the amortization of DAC by $2.4 million in the third quarter of
2011. In addition, increases in account values decreased the amortization of DAC
for certain products. Partially offsetting these was the impact of unlocking
during the second quarter of 2012. 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.

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 $7.1 million or 51% in the
third quarter and $7.3 million or 16% in the first nine months of 2012 compared
with the same periods one year earlier. The increases for both periods were
largely attributable to higher salaries and employee benefit costs, legal fees,
and depreciation on a long-lived asset.

The amortization of VOBA increased $0.2 million or 18% in the third quarter and
$1.3 million or 32% in the first nine months of 2012 compared to one year
earlier. The increase in the third quarter reflected higher amortization of VOBA
on certain policies due to improved mortality. The increase in the nine months
was largely due to unlocking that occurred during the second quarter of 2012.



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Group Insurance


The following table presents financial data of the Group Insurance business
segment for the third quarters and nine months ended September 30, 2012 and
2011:



                                           Quarter Ended                              Nine Months Ended
                                           September 30                                 September 30
                                    2012                   2011                  2012                   2011
Insurance revenues:
Premiums, net                  $       12,316         $       12,613        $       36,580         $       37,413

Total insurance revenues               12,316                 12,613                36,580                 37,413
Investment revenues:
Net investment income                     132                    133                   392                    420
Other revenues                             35                     38                   108                    113

Total revenues                         12,483                 12,784                37,080                 37,946


Policyholder benefits                   6,590                  6,289                20,203                 21,373
Operating expenses                      6,058                  6,433                17,372                 17,360

Total benefits and
expenses                               12,648                 12,722                37,575                 38,733


Income (loss) before
income tax expense
(benefit)                                (165 )                   62                  (495 )                 (787 )

Income tax expense
(benefit)                                 (57 )                   22                  (173 )                 (275 )

Net income (loss)              $         (108 )       $           40        $         (322 )       $         (512 )



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



                                                           Quarter Ended September 30
                                          2012             % Change              2011             % Change
New premiums:
Group life insurance                 $          624               21        $          516               (5 )
Group dental insurance                        1,261               51                   834              (54 )
Group disability insurance                    1,605              (34 )               2,425              118
Other group insurance                            28              (33 )                  42              500

Total new premiums                            3,518               (8 )               3,817               10
Renewal premiums                             12,156                4                11,672               14

Total premiums                               15,674                1                15,489               13
Reinsurance ceded                            (3,358 )             17                (2,876 )             30

Premiums, net                        $       12,316               (2 )      $       12,613                9





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                                                         Nine Months Ended September 30
                                          2012             % Change              2011             % Change
New premiums:
Group life insurance                 $        1,849               26        $        1,463              (13 )
Group dental insurance                        3,226                -                 3,213              (47 )
Group disability insurance                    5,293              (24 )               6,967              110
Other group insurance                           118                5                   112               11

Total new premiums                           10,486              (11 )              11,755                6
Renewal premiums                             35,939                5                34,166                6

Total premiums                               46,425                1                45,921                6
Reinsurance ceded                            (9,845 )             16                (8,508 )             30

Premiums, net                        $       36,580               (2 )      $       37,413                2



Total new premiums decreased $0.3 million or 8% in the third quarter of 2012
compared with the prior year. This decrease was driven by a decline in new group
disability premiums of $0.8 million or 34%. Partially offsetting this was a $0.4
million or 51% increase in new dental premiums and a $0.1 million or 21%
increase in new group life premiums. Renewal premiums increased $0.5 million or
4% in the third quarter, reflecting an increase in short-term disability renewal
premiums that was partially offset by a decline in dental renewal premiums.

Total new premiums decreased $1.3 million or 11% in the first nine months of
2012, compared to one year earlier. This decrease was largely due to a $2.0
million or 33% decline in new short-term disability premiums. Partially
offsetting this change, new group life premiums increased $0.4 million or 26%.
Renewal premiums increased $1.8 million or 5% in the nine months, as an increase
in disability renewal premiums was partially offset by a decrease in dental
renewal premiums.

The Company uses reinsurance in several of its group product lines to help
mitigate risk. Reinsurance premiums increased $0.5 million or 17% in the third
quarter and $1.3 million or 16% in the first nine months of 2012 compared to the
prior year. The increase in both periods was largely due to an increase in
short-term disability renewal premiums that are highly reinsured.

Policyholder benefits consist of death benefits, accident and health benefits,
and the associated increase or decrease in reserves for future policy benefits.
Policyholder benefits increased $0.3 million or 5% in the third quarter and
decreased $1.2 million or 5% in the nine months compared to the prior year. The
increase during the third quarter was largely due to higher benefits paid for
the dental product line. The decrease in the nine months was largely due to a
reduction in the benefits paid for the group life and dental product lines.

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 third quarter and 55% for the first nine months of 2012, compared
to 50% in the third quarter and 57% first nine months of 2011. The policyholder
benefit ratios for the dental product line were approximately 68% in the third
quarter and 70% first nine months of 2012, compared to approximately 62% in the
third quarter and 72% first nine months of 2011.

Operating expenses consist of commissions, fees to third-party marketing and
administrative organizations, and expenses from the Company's operations.
Operating expenses decreased $0.4 million or 6% in the third quarter and were
essentially flat in the nine months. The decrease in the third quarter was
largely due to lower commission expenses associated with the disability and
dental products.



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Old American


The following table presents financial data for the Old American business
segment for the third quarters and nine months ended September 30, 2012 and
2011:



                                                 Quarter Ended                               Nine Months Ended
                                                 September 30                                  September 30
                                          2012                   2011                   2012                   2011
Insurance revenues:
Premiums, net                        $       17,680         $       17,048         $       52,644         $       50,655

Total insurance revenues                     17,680                 17,048                 52,644                 50,655
Investment revenues:
Net investment income                         3,069                  2,929                  8,998                  9,159
Net realized investment gains,
excluding impairment losses                     (59 )                    1                    (86 )                  (34 )
Net impairment losses
recognized in earnings:
Total other-than-temporary
impairment losses                                (6 )                  (10 )                  (35 )                  (67 )
Portion of impairment losses
recognized in other
comprehensive income                              -                      1                      -                     17

Net impairment losses
recognized in earnings                           (6 )                   (9 )                  (35 )                  (50 )

Total investment revenues                     3,004                  2,921                  8,877                  9,075
Other revenues                                    1                      1                     12                     14

Total revenues                               20,685                 19,970                 61,533                 59,744


Policyholder benefits                        11,180                 10,476                 34,947                 34,507
Amortization of deferred
acquisition costs                             3,450                  3,310                  9,735                 10,116
Operating expenses                            4,023                  4,426                 11,812                 14,203

Total benefits and expenses                  18,653                 18,212                 56,494                 58,826


Income before income tax
expense                                       2,032                  1,758                  5,039                    918

Income tax expense                              790                    674                  1,936                    360

Net income                           $        1,242         $        1,084         $        3,103         $          558



Net income for this segment totaled $1.2 million in the third quarter of 2012
compared to $1.1 million in the prior year. The increase in net income for the
third quarter reflected a $0.6 million increase in insurance revenues, a $0.1
million increase in net investment income, and a $0.4 million decrease in
operating expenses. These were partially offset by a $0.7 million increase in
policyholder benefits. Net income for the first nine months of 2012 was $3.1
million compared to $0.6 million for the same period in 2011. The increase in
net income in the first nine months of 2012 reflected a $2.0 million increase in
insurance revenues, a $0.4 million decrease in the amortization of DAC, and a
$2.4 million decrease in operating expenses. These were partially offset by a
$0.2 million decrease in net investment income and a $0.4 million increase in
policyholder benefits.



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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 third quarters and
nine months ended September 30, 2012 and 2011.



                                                                 Quarter Ended
                                                                  September 30
                                          2012             % Change              2011             % Change
New individual life premiums         $        3,165                4        $        3,055                5
Renewal premiums                             15,002                3                14,572                3

Total premiums                               18,167                3                17,627                3
Reinsurance ceded                              (487 )            (16 )                (579 )            (12 )

Premiums, net                        $       17,680                4        $       17,048                4


                                                               Nine Months Ended
                                                                  September 30
                                          2012             % Change              2011             % Change
New individual life premiums         $        9,609                5        $        9,190               10
Renewal premiums                             44,565                3                43,274                2

Total premiums                               54,174                3                52,464                3
Reinsurance ceded                            (1,530 )            (15 )              (1,809 )            (12 )

Premiums, net                        $       52,644                4        $       50,655                4



Total new premiums increased $0.1 million or 4% in the third quarter and $0.4
million or 5% in the nine months, while total renewal premiums increased $0.4
million or 3% in the third quarter and $1.3 million or 3% in the nine months.
The increases in premiums reflect 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 increased $0.1 million or 5% in the third quarter as both
average invested assets and yields earned increased. Net investment income
decreased $0.2 million or 2% in the first nine months as an increase in average
invested assets was more than offset by lower yields earned.

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 three quarters of 2012 and 2011.

Policyholder benefits increased $0.7 million or 7% in the third quarter versus
last year. The increase was largely due to a $0.6 million increase in death
benefits, net of reinsurance, and a $0.3 million increase in benefit and
contract reserves. Policyholder benefits increased $0.4 million or 1% in the
first nine months of 2012 compared with the prior year. This increase was due to
a $1.0 million increase in benefit and contract reserves. Partially offsetting
this change was a $0.4 million decrease in death benefits and a $0.2 million
decrease in life surrenders. The increase in reserves occurred in both the third
quarter and nine months of 2012, can largely be attributed to the increase in
both sales and retention of business. Mortality fluctuations occur each period,
and the Company monitors these fluctuations in relation to its pricing
expectations. While death benefits decreased during the first nine months of
2012, the results remained within pricing expectations.

Amortization of DAC increased $0.1 million or 4% in the third quarter but
decreased $0.4 million or 4% in the nine months compared to one year earlier.
The decline in the nine months was primarily due to the implementation of ASU
No. 2010-26, as described in Note 7 - Change in Accounting Principle and Change
in Accounting Estimate.

Operating expenses decreased $0.4 million or 9% in the third quarter and $2.4
million or 17% in the nine months compared to one year earlier. The decreases in
both periods were largely due to reduced agent meeting costs. In addition,
salaries and benefits decreased in the nine months. Also contributing to the
decreases for both periods was lower amortization of VOBA, due to the
traditional life insurance block being fully amortized at December 31, 2011.
This resulted in less VOBA amortization of $0.5 million and $1.4 million in the
third quarter and first nine months of 2012, respectively, compared to the same
periods in the prior year. Capitalized commissions increased in the nine months,
primarily related to the implementation of ASU No. 2010-26, as described in Note
3.



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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 provided by operating activities was $1.7 million in the nine months
ended September 30, 2012. The primary sources of cash from operating activities
in the first nine months of 2012 were premium receipts and net investment
income. The primary uses of cash from operating activities in the first nine
months of 2012 were for the payment of policyholder benefits and operating
expenses. Net cash used for investing activities was $33.1 million. The primary
sources of cash were sales, maturities, calls, and principal paydowns of
investments totaling $293.1 million. Offsetting these, the Company's new
investments totaled $348.1 million. Net cash provided by financing activities
was $28.1 million, primarily including $42.2 million of deposits net of
withdrawals from policyholder account balances, and reflecting the payment of
stockholder dividends.

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 September 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.



                                                        September 30         December 31
                                                            2012                2011
Total assets, excluding separate accounts              $    4,186,447       $   4,081,633
Total stockholders' equity                                    756,422       

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 September 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 $112.1 million at September 30, 2012.
This represents an increase of $31.0 million in net unrealized gains from the
$81.1 million in net unrealized investment gains at December 31, 2011.
Stockholders' equity increased $45.7 million from year-end 2011, largely due to
growth in retained earnings from increased net income experienced in the first
nine months of 2012. In addition, the Company experienced growth in accumulated
other comprehensive income, reflecting the increase in net unrealized gains.

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 nine months of 2012, the Company
purchased 72,126 shares under the stock repurchase program for $2.3 million.
Through the nine months ended September 30, 2011, the Company purchased 121,241
shares of stock under the stock repurchase program for $3.7 million.

During the nine months ended September 30, 2012, the Company purchased 2,669
shares and sold 660 shares of treasury stock from the Company's employee stock
ownership plan for a net increase in treasury stock of $0.1 million. During the
six months ended June 30, 2012, the Company purchased 8,098 shares and sold
18,588 shares of treasury stock from the Company's deferred compensation plans
for a net decrease in treasury stock of $0.5 million.



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Table of Contents


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 October 22, 2012, the Board of Directors declared a quarterly dividend of
$0.27 per share, unchanged from the prior year, which will be paid November 7,
2012 to stockholders of record as of November 1, 2012. Total stockholder
dividends paid were $9.1 million and $9.3 million in the first nine months ended
September 30, 2012 and 2011, respectively.
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