KANSAS CITY LIFE INSURANCE CO – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Amounts are stated in thousands, except share data, or as otherwise noted. Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide in narrative form the perspective of the management ofKansas 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 second quarters and six months endedJune 30, 2013 and 2012 and the financial condition of the Company atJune 30, 2013 . 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 2012 Form 10-K. OverviewKansas 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) andOld 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 2012 Form 10-K.
Reinsurance Assumption Transaction
InApril 2013 , the Company assumed the transfer of a block of variable life insurance policies and variable annuity contracts fromAmerican Family Life Insurance Company . The transfer is comprised of a 100% modified coinsurance transaction for the separate account business and a 100% coinsurance transaction for the corresponding fixed account business. Included in the transaction are ongoing servicing arrangements for this business. During the second quarter and six months of 2013, this transaction contributed contract charges of$4.4 million , policyholder benefits and interest credited to policyholder account balances of$0.9 million , and amortization of deferred acquisition costs of$1.4 million . 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 2012 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 2012 Form 10-K. Consolidated Results of Operations Summary of Results The Company earned net income of$10.9 million in the second quarter of 2013 compared to$8.4 million in the second quarter of 2012. Net income per share was$0.98 in the second quarter of 2013 versus$0.78 in the same period in the prior year. Net income for the first six months of 2013 was$16.0 million , a decrease of$11.8 million or 42% compared to last year. Net income per share for the six months was$1.45 , a decrease of$1.05 per share versus the same period one year earlier. 38
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The following table presents variances between the results for the second quarters and six months ended
Quarter Ended Six Months Ended June 30 June 30 2013 Versus 2012 2013 Versus 2012 Insurance and other revenues $ 6,057 $
11,316
Net investment income (557 ) (2,356 ) Net realized investment gains (losses) 286 (15,074 ) Policyholder benefits and interest credited to policyholder account balances 2,558 (3,509 ) Amortization of deferred acquisition costs (5,783 ) (6,747 ) Operating expenses 574 (1,968 ) Income tax expense (681 ) 6,539 Total variance $ 2,454 $ (11,799 ) Net income increased$2.5 million in the second quarter of 2013 compared to the same period in 2012. Two of the largest factors in the increase were a$2.0 million decrease in policyholder benefits and a$5.8 million increase in insurance revenues. Also contributing to the increase in net income were decreases in interest credited to policyholder account balances and operating expenses, along with an increase in net realized investment gains. Partially offsetting these was a decrease in net investment income and an increase in amortization of deferred acquisition costs. Net income decreased$11.8 million in the first six months of 2013 compared to the same period in 2012. The largest factor in this decrease was a$15.1 million decrease in net realized investment gains. Also contributing to the decline in net income was a decrease in net investment income and increases in policyholder benefits, amortization of deferred acquisition costs, and operating expenses. Partially offsetting these items was an increase in insurance revenues and a decrease in interest credited to policyholder account balances. Additional information on these items is presented below. 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. Consumer preferences and customer choices are very hard to predict and significantly influence life and annuity insurance purchases. The Company attempts to provide a varied portfolio of products that support consumer needs and is constantly assessing new products and opportunities. Sales of the Company's products 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. The Company also places an emphasis on training and direct support to the field force to assist new agents in their start-up phase. In addition, the Company provides support to existing agents to stay abreast of the ever-changing regulatory environment and to introduce agents to new products and enhanced features of existing products. The Company also selectively utilizes third-party marketing arrangements to enhance its sales objectives. This allows the Company the flexibility to identify niches or pursue unique opportunities in the existing markets and to react quickly to take advantage of opportunities when 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. The Company evaluates the profitability of sales to groups and will adjust the ongoing pricing to support benefit and profit expectations. 39
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The following table presents gross premiums by new and renewal business, less reinsurance ceded, as included in insurance revenues, for the second quarters and six months endedJune 30, 2013 and 2012. New premiums are also detailed by product. Quarter Ended June 30 2013 % Change 2012 % Change New premiums: Individual life insurance$ 4,423 - %$ 4,414 2 % Immediate annuities 2,857 (17 )% 3,460 234 % Group life insurance 800 8 % 744 64 % Group accident and health insurance 3,618 13 % 3,199 (5 )% Total new premiums 11,698 (1 )% 11,817 29 % Renewal premiums 38,037 3 % 37,033 1 % Total premiums 49,735 2 % 48,850 7 % Reinsurance ceded (14,740 ) 1 % (14,645 ) (2 )% Net premiums$ 34,995 2 %$ 34,205 11 % Six Months Ended June 30 2013 % Change 2012 % Change New premiums: Individual life insurance$ 8,793 - %$ 8,770 1 % Immediate annuities 9,337 81 % 5,168 38 % Group life insurance 1,485 21 % 1,225 29 % Group accident and health insurance 6,764 18 % 5,743 (18 )% Total new premiums 26,379 26 % 20,906 2 % Renewal premiums 75,629 2 % 74,283 3 % Total premiums 102,008 7 % 95,189 3 % Reinsurance ceded (28,313 ) - % (28,280 ) 1 % Net premiums$ 73,695 10 %$ 66,909 4 % Consolidated total premiums increased$0.9 million or 2% in the second quarter of 2013 versus the same period in the prior year. Total new premiums decreased$0.1 million or 1%, while total renewal premiums increased$1.0 million or 3%. The decrease in total new premiums was driven by a$0.6 million or 17% decrease in new immediate annuity premiums. Immediate annuity receipts can have sizeable fluctuations, as receipts from policyholders largely result from one-time premium additions rather than a smaller recurring premium. Partially offsetting this, new group accident and health insurance premiums increased$0.4 million or 13%, largely from the dental and life product lines. The increase in renewal premiums was largely due to a$0.4 million or 2% increase in individual life insurance premiums, primarily from the Old American segment. Group accident and health renewal premiums increased$0.4 million or 4%, reflecting an increase in the renewals for the short-term disability product line. In addition, group life premium renewals increased$0.3 million or 14%. Consolidated total premiums increased$6.8 million or 7% in the first six months of 2013 versus one year earlier, reflecting a$5.5 million or 26% increase in new premiums and a$1.3 million or 2% increase in renewal premiums. The increase in new premiums was due to a$4.2 million or 81% increase in new immediate annuity premiums and a$1.0 million or 18% increase in new group accident and health premiums. The increase in new group accident and health premiums was largely in the dental line. The increase in renewal premiums was primarily due to a$1.2 million or 2% increase in individual life insurance premiums, principally from the Old American segment. 40
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The following table reconciles deposits with the Consolidated Statements of Cash Flows and provides detail by new and renewal deposits for the second quarters and six months endedJune 30, 2013 and 2012. New deposits are also detailed by product. Quarter Ended June 30 2013 % Change 2012 % Change New deposits: Universal life insurance$ 4,613 61 %$ 2,857 (24 )% Variable universal life insurance 560 444 % 103 (62 )% Fixed deferred annuities 12,986 4 % 12,469 (31 )% Variable annuities 6,614 42 % 4,642 (24 )% Total new deposits 24,773 23 % 20,071 (29 )% Renewal deposits 39,938 13 % 35,325 (3 )% Total deposits$ 64,711 17 %$ 55,396 (14 )% Six Months Ended June 30 2013 % Change 2012 % Change New deposits: Universal life insurance$ 10,027 63 %$ 6,160 (6 )% Variable universal life insurance 1,126 333 % 260 (47 )% Fixed deferred annuities 21,633 (32 )% 31,619 (4 )% Variable annuities 9,614 12 % 8,603 (14 )% Total new deposits 42,400 (9 )% 46,642 (7 )% Renewal deposits 74,085 6 % 70,217 (3 )% Total deposits$ 116,485 - %$ 116,859 (4 )% Total new deposits increased$4.7 million or 23% in the second quarter of 2013 compared with the second quarter of 2012. The two largest components of this increase were a$2.4 million or 51% increase in new variable life and annuity deposits and a$1.8 million or 61% increase in new universal life deposits. Total renewal deposits increased$4.6 million or 13% in the second quarter of 2013 versus last year. The reinsurance assumption transaction on variable products increased renewal deposits$7.3 million in the second quarter. Excluding this transaction, renewal premiums decreased$2.7 million or 8%, reflecting a$2.5 million or 25% decline in fixed deferred annuity renewal deposits. Total new deposits decreased$4.2 million or 9% in the first six months of 2013 compared with the prior year. This decrease resulted from a$10.0 million or 32% decrease in new fixed deferred annuity deposits. Partially offsetting this decline, new universal life deposits increased$3.9 million , new variable annuity deposits increased$1.0 million , and new variable universal life deposits increased$0.9 million . Total renewal deposits increased$3.9 million or 6% in the first six months of 2013. The reinsurance assumption transaction on variable products increased renewal deposits$7.3 million in the six months. Excluding this transaction, renewal premiums decreased$3.4 million or 5%. This was largely due to a$3.1 million or 16% decrease in fixed deferred annuity renewal deposits and a$0.6 million or 11% decline in variable universal life renewal deposits. Partially offsetting these, variable annuity renewal deposits increased$0.7 million or 18%. Insurance Revenues Insurance revenues consist of premiums, net of reinsurance, and contract charges. In the second quarter of 2013, total insurance revenues increased$5.8 million or 10%, reflecting a$0.8 million or 2% increase in premiums net of reinsurance and a$5.0 million or 20% increase in contract charges. The increase in contract charges was due, in part, to the reinsurance assumption transaction on variable products with American Family. This transaction contributed$4.4 million to contract charges in the second quarter of 2013. Excluding this transaction, total insurance revenues increased$1.5 million or 3% in the second quarter of 2013, reflecting a$0.9 million or 3% increase in premiums net of reinsurance and a$0.6 million or 2% increase in contract charges. Direct individual life premiums increased$0.7 million or 2% and direct accident and health premiums increased$0.8 million or 6%, while direct immediate annuity premiums decreased$0.6 million or 18%, compared with one year earlier. Total insurance revenues increased$11.0 million or 9% in the first six months of 2013 compared with the prior year, reflecting a$6.8 million or 10% increase in net premiums and a$4.2 million or 8% increase in contract charges. The American Family 41
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reinsurance assumption transaction contributed$4.4 million to contract charges. Excluding this transaction, total insurance revenues increased$6.7 million or 6% in the first six months of 2013 compared with the prior year, due to a$6.9 million or 10% increase in premiums net of reinsurance. 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 are amortized into income in proportion to the expected future gross profits of the business, in a manner similar to deferred acquisition costs (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. Total contract charges on all blocks of business increased$5.0 million or 20% in the second quarter of 2013 compared to the second quarter of 2012. As discussed previously, the American Family transaction contributed$4.4 million to contract charges in the second quarter of 2013. Excluding this transaction, total contract charges on all blocks of business increased$0.6 million or 2% in the second quarter of 2013 compared to the second quarter of 2012. Amortization of deferred revenue increased$0.4 million or 27%, largely due to an unlocking adjustment associated primarily with mortality and interest margins. Reserve loads increased$0.4 million or 12%. Partially offsetting these, cost of insurance charges decreased$0.2 million , largely due to the runoff of closed blocks. Total contract charges on all blocks of business increased$4.2 million or 8% in the first six months of 2013 compared to one year earlier. The American Family reinsurance assumption transaction contributed$4.4 million to contract charges. Excluding this transaction, total contract charges on all blocks of business decreased$0.2 million in the first six months of 2013. Reserve loads increased$0.7 million or 10%. Partially offsetting these, cost of insurance charges decreased$0.4 million , due to the runoff of closed blocks. In addition, amortization of deferred revenue decreased$0.2 million or 11%. Contract charges are impacted by the sales of new products and the persistency of both existing and closed blocks of business. The closed blocks of business reflect policies and companies that the Company has purchased but to which the Company is not actively pursuing marketing efforts to generate new sales. The Company services these policies to achieve long-term profit streams. Total contract charges on closed blocks equaled 42% and 34% of total consolidated contract charges in the second quarters of 2013 and 2012, and 39% and 35% in the first six months of 2013 and 2012, respectively. The increase in each period in 2013 can be attributed to the reinsurance assumption transaction with American Family, which is considered a closed block. Excluding this transaction, total contract charges on closed blocks equaled 28% and 34% of total consolidated contract charges in the second quarters of 2013 and 2012, and 31% and 35% for the first six months of 2013 and 2012, respectively. These declines reflect the runoff of business. Total contract charges on open, or ongoing, blocks of business increased 5% in the second quarter and 1% in the six months, in part reflecting new sales of these products in addition to the unlocking discussed above. Reinsurance ceded premiums were essentially flat in the second quarter and first six months of 2013 compared to one year earlier. The Company uses reinsurance as a means to mitigate its risks and to reduce the earnings volatility from claims. Investment Revenues Gross investment income is largely composed of interest, dividends and other earnings on fixed maturity securities, equity securities, short-term investments, mortgage loans, real estate, and policy loans. Gross investment income decreased$0.7 million or 1% in the second quarter and$2.2 million or 2% in the first six months of 2013 compared with the same periods in 2012. While average invested assets increased, this was more than offset by lower yields earned on certain investments for both periods. Fixed maturity securities provided a majority of the Company's investment income during the quarter and six months endedJune 30, 2013 . Income on these investments declined$2.7 million or 8% in the second quarter and$4.6 million in the first six months of 2013 compared to the same periods in 2012, reflecting declines in average invested assets and yields earned. Investment income from commercial mortgage loans increased$1.0 million or 11% in the second quarter and$1.4 million or 8% in the first six months of 2013 compared to the prior year. This improvement was largely the result of higher mortgage loan portfolio holdings during the first half of 2013 compared to the prior year, as the Company significantly increased its holdings in mortgage loans in recent periods. 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. 42
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The Company recorded a net realized investment gain of$1.5 million in the second quarter of 2013, compared with a$1.2 million net realized investment gain in the second quarter of 2012. During the second quarter of 2013, the Company recorded$1.5 million in gains from investment securities called. Net realized investment gains for the first six months totaled$1.8 million in 2013 compared to$16.9 million in 2012. Gains of$16.2 million in 2012 were due to sales of real estate as compared to virtually no realized gains on real estate in 2013. In addition, the Company recorded$2.2 million in gains from investment securities called in the first six months of 2013. The Company's analysis of securities for the second quarter endedJune 30, 2013 resulted in the determination that seven fixed maturity securities had other-than-temporary impairments and were written down by a combined$0.2 million due to credit impairments. These seven securities accounted for all of the other-than-temporary impairments in the second quarter of 2013. 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$0.3 million in the second quarter of 2013, including$0.1 million that was determined to be non-credit and was recognized in other comprehensive income. The total fair value of the affected securities after the write-downs was$65.6 million . Analysis of Investments The Company seeks to protect policyholders' benefits and achieve a desired level of organizational profitability by optimizing risk and return on an ongoing basis through managing asset and liability cash flows, monitoring credit risk, avoiding high levels of investments that may be redeemed by the issuer, maintaining sufficiently liquid investments and avoiding undue asset concentrations through diversification, among other things. The primary sources of investment risk to which the Company is exposed include credit risk, interest rate risk, and liquidity risk. The Company's ability to manage these risks is essential to the success of the organization. In particular, the Company devotes considerable resources to both the credit analysis of each new investment and to ongoing credit positions. A default by an issuer usually involves some loss of principal to the investor. Losses can be mitigated by timely sales of affected securities or by active involvement in a restructuring process. However, there can be no assurance that the efforts of an investor will lead to favorable outcomes in a bankruptcy or restructuring. Credit risk is managed primarily through industry, issuer, and structure diversification. For additional information regarding the Company's asset/liability management program, please see the Asset/Liability Management section within Item 7A: Quantitative and Qualitative Disclosures About Market Risk in the Company's 2012 Form 10-K. 43
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The following table provides information regarding fixed maturity and equity securities by asset class at
Fair Value Fair Value of Securities of Securities Total with Gross Gross with Gross Gross Fair % Unrealized Unrealized Unrealized Unrealized Value of Total Gains Gains Losses Losses U.S. Treasury securities and obligations of U.S. Government$ 126,604 4 %$ 111,448 $ 9,098 $ 15,156 $ 573 Federal agencies 1 23,055 1 % 23,055 2,990 - - Federal agency issued residential mortgage-backed securities 1 73,471 3 % 73,181 6,236 290 1 Subtotal 223,130 8 % 207,684 18,324 15,446 574 Corporate obligations: Industrial 526,501 20 % 397,558 31,032 128,943 5,872 Energy 212,714 8 % 152,855 17,120 59,859 2,962 Communications and technology 219,487 8 % 188,884 14,699 30,603 1,172 Financial 295,165 11 % 263,610 20,606 31,555 1,687 Consumer 504,672 19 % 396,309 31,008 108,363 4,125 Public utilities 270,331 10 % 259,248 29,686 11,083 646 Subtotal 2,028,870 76 % 1,658,464 144,151 370,406 16,464 Corporate private-labeled residential mortgage-backed securities 134,354 5 % 101,714 5,031 32,640 720 Municipal securities 153,535 6 % 150,482 15,333 3,053 17 Other 97,754 4 % 40,535 4,193 57,219 5,716 Redeemable preferred stocks 9,008 - % - - 9,008 1,166 Fixed maturities 2,646,651 99 % 2,158,879 187,032 487,772 24,657 Equity securities 35,550 1 % 23,882 1,667 11,668 656 Total$ 2,682,201 100 %$ 2,182,761 $ 188,699 $ 499,440 $ 25,313 1 Federal agency securities are not backed by the full faith and credit of the U.S. Government. 44
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The following table provides information regarding fixed maturity and equity securities by asset class at
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$ 136,051 5 %$ 134,062 $ 14,302 $ 1,989 $ 25 Federal agencies 1 26,069 1 % 26,069 3,999 - - Federal agency issued residential mortgage-backed securities 1 91,985 3 % 91,569 8,381 416 4 Subtotal 254,105 9 % 251,700 26,682 2,405 29 Corporate obligations: Industrial 545,883 19 % 517,017 51,645 28,866 377 Energy 211,249 8 % 209,267 22,473 1,982 14 Communications and technology 221,600 8 % 218,891 23,283 2,709 15 Financial 313,874 11 % 305,633 27,487 8,241 1,467 Consumer 526,238 19 % 509,095 49,395 17,143 70 Public utilities 286,127 10 % 274,543 39,840 11,584 102 Subtotal 2,104,971 75 % 2,034,446 214,123 70,525 2,045 Corporate private-labeled residential mortgage-backed securities 148,131 5 % 134,081 4,033 14,050 754 Municipal securities 167,984 6 % 167,984 27,141 - - Other 104,744 4 % 62,849 6,494 41,895 8,192 Redeemable preferred stocks 8,206 - % 6,695 266 1,511 44 Fixed maturities 2,788,141 99 % 2,657,755 278,739 130,386 11,064 Equity securities 20,061 1 % 19,788 1,956 273 90 Total$ 2,808,202 100 %$ 2,677,543 $ 280,695 $ 130,659 $ 11,154
1 Federal agency securities are not backed by the full faith and credit of the
AtDecember 31, 2012 , the Company had$11.2 million in gross unrealized losses on investment securities, which were offset by$280.7 million in gross unrealized gains. AtJune 30, 2013 , the Company's unrealized losses on investment securities had increased to$25.3 million and were offset by$188.7 million in gross unrealized gains. AtJune 30, 2013 , 65% of the gross unrealized losses were in the category of corporate obligations. The industrial sector was the single largest contributor to this category, reflecting the impact of rising interest rates during the year. In addition, the other category also contributed to total unrealized losses. This category contains asset-backed securities whose fair values have been impacted by reduced liquidity and the auction-rate structure of certain securitizations. For many of the securities in the other category, the fair value is not the primary determinant for impairment. The Company evaluates these investments for impairment based upon their expected cash flows. AtJune 30, 2013 , 82% of the total fair value of the fixed maturities portfolio had unrealized gains, a decrease from 95% atDecember 31, 2012 . 45
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The following table identifies fixed maturity securities available for sale by actual or equivalent Standard & Poor's rating atJune 30, 2013 andDecember 31, 2012 . June 30, 2013 December 31, 2012 Fair % Fair % Value of Total Value of Total AAA$ 95,891 4 %$ 114,276 4 % AA 515,585 19 % 576,113 21 % A 860,253 33 % 857,265 31 % BBB 992,665 38 % 1,067,373 38 % Total investment grade 2,464,394 94 % 2,615,027 94 % BB 63,250 2 % 39,084 1 % B and below 119,007 4 % 134,030 5 % Total below investment grade 182,257 6 % 173,114 6 %$ 2,646,651 100 %$ 2,788,141 100 % The following table provides information regarding fixed maturity and equity security investments available for sale with unrealized losses by length of time atJune 30, 2013 . 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$ 14,617 $ 569 $ 539 $ 4$ 15,156 $ 573 Federal agency issued residential mortgage-backed securities 1 - - 290 1 290 1 Subtotal 14,617 569 829 5 15,446 574 Corporate obligations: Industrial 128,943 5,872 - - 128,943 5,872 Energy 59,859 2,962 - - 59,859 2,962 Communications and technology 30,603 1,172 - - 30,603 1,172 Financial 26,637 750 4,918 937 31,555 1,687 Consumer 108,363 4,125 - - 108,363 4,125 Public utilities 11,083 646 - - 11,083 646 Subtotal 365,488 15,527 4,918 937 370,406 16,464 Corporate private-labeled residential mortgage-backed securities 32,640 720 - - 32,640 720 Municipal securities 3,053 17 - - 3,053 17 Other 15,274 475 41,945 5,241 57,219 5,716 Redeemable preferred stocks 9,008 1,166 - - 9,008 1,166 Fixed maturity securities 440,080 18,474 47,692 6,183 487,772 24,657 Equity securities 11,552 599 116 57 11,668 656 Total$ 451,632 $ 19,073 $ 47,808 $ 6,240 $ 499,440 $ 25,313
1 Federal agency securities are not backed by the full faith and credit of the
U.S. Government . 46
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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 atDecember 31, 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$ 1,328 $ 18$ 661 $ 7$ 1,989 $ 25 Federal agency issued residential mortgage-backed securities 1 124 3 292 1 416 4 Subtotal 1,452 21 953 8 2,405 29 Corporate obligations: Industrial 28,866 377 - - 28,866 377 Energy 1,982 14 - - 1,982 14 Communications and technology 2,709 15 - - 2,709 15 Financial - - 8,241 1,467 8,241 1,467 Consumer 17,143 70 - - 17,143 70 Public utilities 11,584 102 - - 11,584 102 Subtotal 62,284 578 8,241 1,467 70,525 2,045 Corporate private-labeled residential mortgage-backed securities - - 14,050 754 14,050 754 Other - - 41,895 8,192 41,895 8,192 Redeemable preferred stocks - - 1,511 44 1,511 44 Fixed maturity securities 63,736 599 66,650 10,465 130,386 11,064 Equity securities - - 273 90 273 90 Total$ 63,736 $ 599 $ 66,923 $ 10,555 $ 130,659 $ 11,154
1 Federal agency securities are not backed by the full faith and credit of the
Gross unrealized losses on fixed maturity and equity security investments attributable to securities having gross unrealized losses of 12 months or longer was$6.2 million atJune 30, 2013 , a decrease from$10.6 million atDecember 31, 2012 . The largest component of this decrease was from the other category, which decreased$3.0 million . The three classes of investments with the largest amount of unrealized losses atJune 30, 2013 were from the industrial sector, the consumer sector, and the other category. The other category is largely composed of asset-backed securities whose fair values have been impacted by reduced liquidity and the auction-rate structure of certain securitizations. For many of the securities in the other category, the fair value is not the primary determinant for impairment. The Company evaluates these investments for impairment based upon their expected cash flows. The Company continues to monitor these investments as defined in Note 3 - Investments. Please refer to that note for further information. 47
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The following table summarizes the Company's investments in securities available for sale with unrealized losses atJune 30, 2013 and should be considered in conjunction with information in Note 3 - Investments. Gross Amortized Fair Unrealized Cost Value Losses Securities owned without realized impairment: Unrealized losses of 10% or less$ 426,144 $ 409,440 $ 16,704 Unrealized losses of 20% or less and greater than 10% 53,571 47,469
6,102
Subtotal 479,715 456,909
22,806
Unrealized losses greater than 20%: Investment grade: Less than twelve months - - - Twelve months or greater 908 593 315 Total investment grade 908 593 315 Below investment grade: Less than twelve months - - - Twelve months or greater 173 116 57 Total below investment grade 173 116 57 Unrealized losses greater than 20% 1,081 709
372
Subtotal 480,796 457,618
23,178
Securities owned with realized impairment: Unrealized losses of 10% or less 33,360 32,640
720
Unrealized losses of 20% or less and greater than 10% 8,549 7,590
959
Subtotal 41,909 40,230
1,679
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 - - - Twelve months or greater 2,048 1,592 456 Total below investment grade 2,048 1,592 456 Unrealized losses greater than 20% 2,048 1,592 456 Subtotal 43,957 41,822 2,135 Total$ 524,753 $ 499,440 $ 25,313 48
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The following table summarizes the Company's investments in securities available for sale with unrealized losses atDecember 31, 2012 and should be considered in conjunction with information in Note 3 - Investments. Gross Amortized Fair Unrealized Cost Value Losses Securities owned without realized impairment: Unrealized losses of 10% or less$ 72,980 $ 72,154 $ 826 Unrealized losses of 20% or less and greater than 10% 40,283 34,300
5,983
Subtotal 113,263 106,454
6,809
Unrealized losses greater than 20%: Investment grade: Less than twelve months - - - Twelve months or greater 908 500 408 Total investment grade 908 500 408 Below investment grade: Less than twelve months - - - Twelve months or greater 173 98 75 Total below investment grade 173 98 75 Unrealized losses greater than 20% 1,081 598
483
Subtotal 114,344 107,052
7,292
Securities owned with realized impairment: Unrealized losses of 10% or less 14,803 14,050
753
Unrealized losses of 20% or less and greater than 10% 2,289 1,928
361
Subtotal 17,092 15,978
1,114
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 - - - Twelve months or greater 10,377 7,629 2,748 Total below investment grade 10,377 7,629 2,748 Unrealized losses greater than 20% 10,377 7,629 2,748 Subtotal 27,469 23,607 3,862 Total$ 141,813 $ 130,659 $ 11,154 49
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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 atJune 30, 2013 . Gross Fair % Unrealized % Value of Total Losses of Total AAA$ 18,276 4 %$ 724 3 % AA 76,072 15 % 3,925 16 % A 141,228 29 % 6,032 24 % BBB 190,565 39 % 9,743 40 % Total investment grade 426,141 87 % 20,424 83 % BB 17,227 4 % 1,843 7 % B and below 44,404 9 % 2,390 10 % Total below investment grade 61,631 13 % 4,233 17 %$ 487,772 100 %$ 24,657 100 % The following table provides information on fixed maturity securities with gross unrealized losses by actual or equivalent Standard & Poor's rating atDecember 31, 2012 . Gross Fair % Unrealized % Value of Total Losses of Total AAA$ 518 - % $ 5 - % AA 31,910 25 % 4,586 41 % A 12,325 9 % 542 5 % BBB 54,461 42 % 1,387 13 % Total investment grade 99,214 76 % 6,520 59 % BB 5,249 4 % 161 1 % B and below 25,923 20 % 4,383 40 % Total below investment grade 31,172 24 % 4,544 41 %$ 130,386 100 %$ 11,064 100 %
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
Security Description Financial institution Institution impacted by housing and mortgage crisis. The security continues to perform within contractual obligations. The discounted future cash flow calculation typically becomes the primary determinant of whether any portion and to what extent an unrealized loss is due to credit on loan-backed and similar asset-backed securities with significant indications of potential other-than-temporary impairment. Such indications typically include below investment grade ratings and significant unrealized losses for an extended period of time, among other factors. The Company identified 23 and 21 non-U.S. Agency mortgage-backed securities that were determined to have such indications atJune 30, 2013 andDecember 31, 2012 , respectively. 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. 50
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The following tables present the range of significant assumptions used in projecting the future cash flows of the Company's residential mortgage-backed securities, commercial mortgage-backed securities, and asset-backed securities atJune 30, 2013 andDecember 31, 2012 . The Company believes that the assumptions below are reasonable and they are based largely upon the actual historical results of the underlying security collateral.June 30, 2013 Initial Default Rate Initial Severity Rate
Prepayment Speed Vintage Low High Low High Low High 2003 0.8 % 4.5 % 35 % 40 % 16.0 % 28.0 % 2004 1.0 % 8.0 % 35 % 54 % 8.0 % 20.0 % 2005 5.4 % 14.4 % 40 % 64 % 6.0 % 18.0 % 2006 5.3 % 6.2 % 38 % 90 % 8.0 % 16.0 % 2007 11.7 % 11.7 % 58 % 58 % 8.0 % 8.0 % December 31, 2012 Initial Default Rate Initial Severity Rate Prepayment Speed Vintage Low High Low High Low High 2003 1.0 % 4.6 % 35 % 56 % 16.0 % 28.0 % 2004 1.0 % 6.8 % 35 % 53 % 8.0 % 18.0 % 2005 4.7 % 15.1 % 40 % 74 % 6.0 % 15.0 % 2006 5.9 % 6.2 % 49 % 90 % 8.0 % 16.0 % 2007 10.5 % 10.5 % 58 % 58 % 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 years. 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. AtJune 30, 2013 , the fair value of investments with subprime residential mortgage exposure was$13.1 million with a related$0.8 million unrealized loss. AtDecember 31, 2012 , the fair value of investments with subprime residential mortgage exposure was$14.7 million with a related$2.2 million unrealized loss. This exposure amounted to less than 1% of the Company's invested assets at bothJune 30, 2013 andDecember 31, 2012 . These investments are included in the Company's process for evaluation of other-than-temporarily impaired securities. The Company has a significant level of non-U.S. Agency structured securities. Structured securities include asset-backed, residential mortgage-backed securities, along with collateralized debt obligations, collateralized mortgage obligations and other collateralized obligations. The Company monitors these securities through a combination of an analysis of vintage, credit ratings, and other factors. 51
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The following tables divide these investment types among vintage and credit ratings at
Fair Amortized Value Cost Unrealized Gains (Losses) Residential & Non-agency MBS: 1 Investment Grade: Vintage 2003 and earlier$ 16,115 $ 15,307 $ 808 2004 10,241 10,096 145 2005 - - - 2006 - - - 2007 - - - Total investment grade 26,356 25,403 953 Below Investment Grade: Vintage 2003 and earlier - - - 2004 41,484 39,609 1,875 2005 70,675 70,952 (277 ) 2006 6,535 6,161 374 2007 4,347 3,872 475 Total below investment grade 123,041 120,594
2,447
OtherStructured Securities : Investment grade 51,480 52,214 (734 ) Below investment grade 15,333 17,137 (1,804 ) Total other 66,813 69,351 (2,538 ) Total structured securities$ 216,210 $ 215,348 $
862
1 This chart accounts for all vintages owned by the Company. 52
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The following tables divide these investment types among vintage and credit ratings at
Fair Amortized Unrealized Value Cost Gains (Losses) Residential & Non-agency MBS: 1 Investment Grade: Vintage 2003 and earlier$ 19,426 $ 18,667 $ 759 2004 26,163 25,186 977 2005 - - - 2006 - - - 2007 - - - Total investment grade 45,589 43,853 1,736 Below Investment Grade: Vintage 2003 and earlier - - - 2004 31,415 30,760 655 2005 75,636 78,334 (2,698 ) 2006 7,369 6,536 833 2007 4,359 4,209 150 Total below investment grade 118,779 119,839 (1,060 )Other Structured Securities : Investment grade 65,481 67,250 (1,769 ) Below investment grade 2,559 2,378 181 Total other 68,040 69,628 (1,588 )
Total structured securities
1 This chart accounts for all vintages owned by the Company.
Total unrealized gains on non-U.S. Agency structured securities totaled$0.9 million atJune 30, 2013 , compared to an unrealized loss of$0.9 million atDecember 31, 2012 . Total unrealized gains on these securities as a percent of total amortized cost totaled less than 1% atJune 30, 2013 . The Company has written down certain investments in previous periods. Securities written down and continuing to be owned atJune 30, 2013 had a fair value of$132.9 million with net unrealized gains of$4.5 million . The Company evaluated the current status of all investments previously written-down to determine whether the Company continues to believe that these investments were still credit-impaired to the extent previously recorded. 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 second quarters of 2013 or 2012. The Company maintains a diversified investment portfolio, including 4% of its investment portfolio in municipal bond securities and 7% in bond securities from foreign issuers atJune 30, 2013 . Approximately 70% of the Company's foreign securities were from issuers inCanada ,Australia , andGreat Britain atJune 30, 2013 . The Company has no holdings in European sovereign debt and all of these investments are denominated in U.S. dollars. The fair value of the Company's securities from foreign issuers atJune 30, 2013 was$240.6 million with a net unrealized gain of$6.3 million . This compares to a fair value of$238.9 million with a net unrealized gain of$17.9 million atDecember 31, 2012 . The Company did not have any material direct exposure to financial guarantors atJune 30, 2013 . The Company's indirect exposure to financial guarantors totaled$28.4 million , which was 1% of the Company's investment assets atJune 30, 2013 . The unrealized gain on these investments totaled$2.2 million atJune 30, 2013 . The Company's indirect exposure to financial guarantors atDecember 31, 2012 totaled$34.7 million , which was 1% of the Company's investment assets. Total unrealized gains on these investments totaled$3.3 million atDecember 31, 2012 . 53
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Policyholder Benefits Policyholder benefits consist of death benefits, immediate annuity benefits, accident and health benefits, surrenders, interest, 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. Policyholder benefits decreased$2.0 million or 5% in the second quarter of 2013 compared to the same period one year earlier. This largely resulted from a$6.1 million decrease in benefit and contract reserves. Several factors contributed to this decrease. The Company refined its reserve calculation estimate for new traditional life insurance issues in 2013 related to adjustments used for modal premiums. The refinements allow for improved calculations of the reserve liability and resulted in a decrease to the reserve liability of$1.4 million in the second quarter of 2013. The refinements also resulted in a corresponding increase to the amortization of DAC, which largely offset the impact to net income. In addition, changes in the fair value of the GMWB rider resulted in a$2.0 million decrease in benefit and contract reserves. Also contributing to the change in benefits during 2013 was the recapture of a block of previously reinsured policies in the second quarter of 2012, which increased benefit and contract reserves in 2012. Finally, benefit and contract reserves decreased due to lower sales of immediate annuities in the second quarter of 2013 compared to the second quarter of 2012. Reserves are established on a nearly one-for-one basis with immediate annuity sales, and a decrease in sales results in a decrease to reserves on a comparative basis. Partially offsetting the decrease in benefit and contract reserves, death benefits, net of reinsurance, increased$3.5 million and life surrenders increased$0.6 million or 23%. Policyholder benefits increased$4.9 million or 6% in the first six months compared to the same period one year ago. This increase resulted from a$8.0 million or 16% increase in death benefits, net of reinsurance, reflecting less favorable mortality results. Partially offsetting the increase in death benefits was a$4.2 million decrease in benefit and contract reserves. Several factors contributed to this decrease. The Company refined its reserve calculation estimate for new traditional life insurance issues in 2013 related to adjustments used for modal premiums. The refinements allow for improved calculations of the reserve liability and resulted in a decrease to the reserve liability of$3.1 million in the first six months of 2013. The refinements also resulted in a corresponding increase to the amortization of DAC, which largely offset the impact to net income. In addition, the change in the fair value of the GMWB rider resulted in a$2.5 million decrease in benefit and contract reserves. Also contributing to the decrease was the recapture of a block of previously reinsured policies in the second quarter of 2012, which increased benefit and contract reserves in 2012. The Company has a guaranteed minimum withdrawal benefit (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. AtJune 30, 2013 , the fair value of the liability decreased$2.0 million compared to the fair value atDecember 31, 2012 . This fluctuation can be attributed to favorable returns in the capital markets, increases in risk-free swap rates, and reduced market volatility. These were partially offset by declines in 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 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$0.5 million or 3% in the second quarter and$1.4 million or 3% in the first six months of 2013 compared with the same periods one year earlier. These declines were due to lower average crediting rates as well as a decrease in policyholder account balances compared with the same periods one year earlier. Amortization of DAC Total amortization of deferred acquisition costs increased$5.8 million or 113% in the second quarter and$6.7 million or 52% in the first six months of 2013 compared to the prior year. These increases were due, in part, to the reinsurance assumption transaction on variable products with American Family. This transaction contributed$1.4 million to DAC amortization in both the second quarter and six months of 2013. Excluding this transaction, the amortization of deferred acquisition costs increased$4.4 million or 85% in the second quarter and$5.3 million or 41% in the first six months of 2013 compared with the prior year. These increases were primarily the result of an unlocking adjustment that increased DAC amortization$0.2 million in the second quarter and six months of 2013, as compared to an unlocking adjustment that decreased DAC amortization of$1.3 million in the second quarter and six months of 2012. As indicated above, the Company also had a refinement in its reserve method effective with the first quarter of 2013 that impacts the amortization of each quarter. This change increased DAC amortization approximately$1.4 million for the second quarter and$3.1 million for the six months of 2013. However, this change in reserve method has virtually no impact 54
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to the net income. 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 assumption. Operating Expenses Operating expenses consist of incurred commission expense from the sale of insurance products, net of the deferral of certain commissions and certain expenses directly associated with the attainment of new business, expenses from the Company's operations, the amortization of VOBA, and other expenses. Operating expenses decreased$0.6 million or 2% in the second quarter and increased$2.0 million or 4% in the first six months of 2013 compared to one year earlier. The decrease in the second quarter was largely due to a decline in the amortization of VOBA, as discussed below. Partially offsetting this were fees related to the short-term arrangement for the servicing of the American Family business. The results for the six months reflected increases in employee salaries and benefits, depreciation expense, and fees related to the American Family servicing arrangement. Partially offsetting these were declines in legal fees and amortization of VOBA. The amortization of VOBA is included in operating expenses. Generally, as policies run off, the amortization will decline over time. In addition, VOBA is evaluated on an ongoing basis for unlocking adjustments. If necessary, adjustments are made in the current period VOBA amortization. The amortization of VOBA decreased$1.1 million or 33% in the second quarter of 2013 and$0.8 million or 20% in the first six months of 2013 compared to the same periods one year earlier. The decrease in VOBA amortization was largely due to an unlocking adjustment which increased the amortization of VOBA$0.9 million in both the second quarter and the first six months of 2013. In addition, the Company had refinements in methodology that increased VOBA amortization$0.3 million . In comparison, the Company had an unlocking adjustment on certain interest sensitive products which increased the amortization of VOBA$2.4 million in both the second quarter and the first six months of 2012. Income Taxes The second quarter income tax expense was$5.2 million or 32% of income before tax for 2013, versus$4.5 million or 35% of income before tax for the prior year period. The income tax expense for the six months endedJune 30, 2013 was$7.5 million or 32% of income before tax, versus$14.1 million or 34% of income before tax for the prior year period. The effective income tax rate was lower than the prevailing corporate federal income tax rate of 35% in the second quarter of 2013 primarily due to permanent differences and investments in affordable housing. Permanent differences, including the dividends-received deduction, resulted in a benefit of approximately 1% of income before tax. Investments in affordable housing resulted in a benefit of approximately 2% of income before tax. The effective income tax rate was equal to the prevailing corporate federal income tax rate of 35% in the second quarter of 2012. Permanent differences, including the dividends-received deduction, resulted in a benefit of approximately 1% of income before tax. Additionally, investments in affordable housing resulted in a benefit of approximately 1% of income before tax. Offsetting these items was tax expense of approximately 2% of income before tax related to a change in the projected effective tax rate, which was largely based upon historical and year-to-date pretax income. The effective income tax rate was lower than the prevailing corporate federal income tax rate of 35% for the six months endedJune 30, 2013 and 2012. Permanent differences, including the dividends-received deduction, resulted in a benefit of approximately 1% of income before tax for the six months endedJune 30, 2013 and 2012. Investments in affordable housing resulted in a benefit of approximately 2% of income before tax for the six months endedJune 30, 2013 . 55
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Operating Results by Segment The Company has three reportable business segments, which are defined based on the nature of the products and services offered:Individual Insurance, Group Insurance, and Old American.The Individual Insurance segment consists of individual insurance products for both Kansas City Life and Sunset Life. In addition, the reinsurance assumption transaction with American Family, as previously discussed, is included with theIndividual Insurance segment. Specific significant impacts by financial statement line are highlighted for comparison purposes.The Individual Insurance segment is marketed through a nationwide sales force of independent general agents and third-party marketing arrangements.The Group Insurance segment consists of sales of group life, group disability, dental, and vision products. This segment is marketed through a nationwide sales force of independent general agents, group brokers, and third-party marketing arrangements. Old American consists of individual insurance products designed largely as final expense products. These products are marketed through a nationwide general agency sales force with exclusive territories, using direct response marketing to supply agents with leads. For more information, refer to Note 14 - Segment Information in the Notes to Consolidated Financial Statements.Individual Insurance The following table presents financial data of theIndividual Insurance business segment for the second quarters and six months endedJune 30, 2013 and 2012. Quarter Ended Six Months Ended June 30 June 30 2013 2012 2013 2012 Insurance revenues: Net premiums$ 3,839 $ 4,442 $ 12,022 $ 7,878 Contract charges 30,611 25,590 54,959 50,723 Total insurance revenues 34,450 30,032 66,981 58,601 Investment revenues: Net investment income 39,801 40,334 79,170 81,455 Net realized investment gains, excluding other-than-temporary impairment losses 1,707 1,421 2,162 17,225 Net impairment losses recognized in earnings: Total other-than-temporary impairment losses (272 ) (177 ) (458 ) (427 ) Portion of impairment losses recognized in other comprehensive income (loss) 46 43 120 150 Net other-than-temporary impairment losses recognized in earnings (226 ) (134 ) (338 ) (277 ) Total investment revenues 41,282 41,621 80,994 98,403 Other revenues 2,521 2,274 4,719 4,413 Total revenues 78,253 73,927 152,694 161,417 Policyholder benefits 21,101 23,009 48,076 42,366 Interest credited to policyholder account balances 19,865 20,377 39,528 40,935 Amortization of deferred acquisition costs 6,679 2,727 10,571 6,737 Operating expenses 16,742 17,635 33,512 32,134 Total benefits and expenses 64,387 63,748 131,687 122,172 Income before income tax expense 13,866 10,179 21,007 39,245 Income tax expense 4,401 3,475 6,613 13,054 Net income$ 9,465 $ 6,704 $ 14,394 $ 26,191 The net income for this segment in the second quarter of 2013 was$9.5 million compared to$6.7 million in the second quarter of 2012. Factors contributing to the increase were lower policyholder benefits, interest credited to policyholder account balances, 56
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and operating expenses, along with an increase in net realized investment gains. Partially offsetting these was a decrease in net investment income and an increase in the amortization of deferred acquisition costs. Net income for this segment was$14.4 million for the first six months of 2013 compared to$26.2 million in the same period in 2012. The largest factor in the decline was$15.1 million of lower net realized gains in 2013 compared to 2012. Other factors contributing to the decline were increases in policyholder benefits, amortization of deferred acquisition costs, and operating expenses along with lower net investment income. Partially offsetting these changes were increased insurance revenues and decreased interest credited to policyholder account balances. In the second quarter of 2013, total insurance revenues increased$4.4 million or 15%, as a$5.0 million or 20% increase in contract charges was partially offset by a$0.6 million or 14% decrease in net premiums. The increase in contract charges was due in part to the reinsurance assumption transaction on variable products with American Family. This transaction contributed$4.4 million to contract charges in the second quarter of 2013. Excluding this transaction, total insurance revenues for this segment increased$0.1 million or less than 1% in the second quarter of 2013 compared with the same period in the prior year. While contract charges increased$0.6 million or 2%, premiums net of reinsurance decreased$0.5 million or 11%. Total insurance revenues increased$8.4 million or 14% for this segment in the first six months of 2013 compared with the prior year, reflecting a$4.1 million or 53% increase in net premiums and a$4.2 million or 8% increase in contract charges. The American Family reinsurance assumption transaction contributed$4.4 million to contract charges. Excluding this transaction, total insurance revenues for this segment increased$4.1 million or 7% in the first six months of 2013 compared to one year earlier, reflecting a$4.2 million or 81% increase in immediate annuity premiums. The following table presents gross premiums by new and renewal business, less reinsurance ceded, as included in insurance revenues for the second quarters and six months endedJune 30, 2013 and 2012. New premiums are also detailed by product. Quarter Ended June 30 2013 % Change 2012 % Change New premiums: Individual life insurance$ 1,209 3 %$ 1,172 (4 )% Immediate annuities 2,857 (17 )% 3,460 234 % Total new premiums 4,066 (12 )% 4,632 105 % Renewal premiums 10,364 (2 )% 10,591 - % Total premiums 14,430 (5 )% 15,223 18 % Reinsurance ceded (10,591 ) (2 )% (10,781 ) (3 )% Net premiums$ 3,839 (14 )%$ 4,442 148 % Six Months Ended June 30 2013 % Change 2012 % Change New premiums: Individual life insurance$ 2,355 1 %$ 2,326 (10 )% Immediate annuities 9,337 81 % 5,168 38 % Total new premiums 11,692 56 % 7,494 18 % Renewal premiums 20,914 (1 )% 21,134 1 % Total premiums 32,606 14 % 28,628 5 % Reinsurance ceded (20,584 ) (1 )% (20,750 ) (2 )% Net premiums$ 12,022 53 %$ 7,878 25 % Total new premiums for this segment decreased$0.6 million or 12% in the second quarter of 2013 compared to the same period one year earlier, reflecting a$0.6 million or 17% decrease in new immediate annuity premiums. Immediate annuity receipts can have sizeable fluctuations, as receipts from policyholders largely result from one-time premiums rather than recurring premiums. Total renewal premiums declined$0.2 million or 2% compared to last year, due to a$0.2 million or 2% decrease in individual life premiums. 57
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Total new premiums for this segment increased$4.2 million or 56% in the first six months of 2013, due to a$4.2 million or 81% increase in new immediate annuity premiums. New immediate annuity premiums are largely from one-time receipts that fluctuate from period-to-period. Total renewal premiums decreased$0.2 million or 1%, reflecting a decline in individual life premiums. The following table provides detail by new and renewal deposits for the second quarters and six months endedJune 30, 2013 and 2012. New deposits are also detailed by product. Quarter Ended June 30 2013 % Change 2012 % Change New deposits: Universal life insurance$ 4,613 61 %$ 2,857 (24 )% Variable universal life insurance 560 444 % 103 (62 )% Fixed deferred annuities 12,986 4 % 12,469 (31 )% Variable annuities 6,614 42 % 4,642 (24 )% Total new deposits 24,773 23 % 20,071 (29 )% Renewal deposits 39,938 13 % 35,325 (3 )% Total deposits$ 64,711 17 %$ 55,396 (14 )% Six Months Ended June 30 2013 % Change 2012 % Change New deposits: Universal life insurance$ 10,027 63 %$ 6,160 (6 )% Variable universal life insurance 1,126 333 % 260 (47 )% Fixed deferred annuities 21,633 (32 )% 31,619 (4 )% Variable annuities 9,614 12 % 8,603 (14 )% Total new deposits 42,400 (9 )% 46,642 (7 )% Renewal deposits 74,085 6 % 70,217 (3 )% Total deposits$ 116,485 - %$ 116,859 (4 )% Total new deposits increased$4.7 million or 23% in the second quarter of 2013 compared to last year, reflecting a$2.0 million or 42% increase in new variable annuity deposits, a$1.8 million or 61% increase in new universal life deposits, a$0.5 million or 4% increase in new fixed deferred annuity deposits, and a$0.5 million or 444% increase in new variable universal life deposits. Total renewal deposits increased$4.6 million or 13% in the second quarter of 2013. The reinsurance assumption transaction on variable products increased renewal deposits$7.3 million in the second quarter. Excluding this transaction, renewal premiums decreased$2.7 million or 8%. These results reflected a$2.5 million or 25% decrease in fixed deferred annuity renewal deposits that was partially offset by a$0.2 million or 9% increase in variable annuity renewal deposits. Fluctuations in the variable life and variable annuity deposits tend to be impacted by the market environment fluctuations. Total new deposits decreased$4.2 million or 9% in the first six months of 2013 compared with the prior year. This decrease reflected a$10.0 million or 32% decline in new fixed deferred annuity deposits, largely reflecting decreased one-time annuity deposits. Partially offsetting this, new universal life deposits increased$3.9 million or 63%, new variable annuity deposits increased$1.0 million or 12%, and new variable universal life deposits increased$0.9 million or 333%. Total renewal deposits increased$3.9 million or 6% in the first six months of 2013. The reinsurance assumption transaction on variable products increased renewal deposits$7.3 million in the six months. Excluding this transaction, renewal deposits decreased$3.4 million or 5%, reflecting the following decreases:$3.1 million or 16% in fixed deferred annuity renewal deposits;$0.6 million or 11% in variable universal life renewal deposits; and$0.5 million or 1% decline in universal life renewal deposits. Partially offsetting these, variable annuity renewal deposits increased$0.7 million or 18%. Total contract charges on all blocks of business increased$5.0 million or 20% in the second quarter of 2013 compared to the second quarter of 2012. The increase in contract charges was due in part to the reinsurance assumption transaction on variable products with American Family. This transaction contributed$4.4 million to contract charges in the second quarter of 2013. Excluding this transaction, total contract charges on all blocks of business increased$0.6 million or 2% in the second quarter of 2013 compared to the second quarter of 2012, largely due to an unlocking adjustment. 58
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Total contract charges on all blocks of business increased$4.2 million or 8% in the first six months of 2013 compared to one year earlier. The American Family reinsurance assumption transaction contributed$4.4 million to contract charges. Excluding this transaction, total contract charges on all blocks of business decreased$0.2 million in the first six months of 2013 compared to one year earlier. Total contract charges on closed blocks increased 47% in the second quarter and 22% in the first six months of 2013, due to the reinsurance assumption transaction with American Family that is considered a closed block. Excluding this transaction, total contract charges on closed blocks declined 3% in the second quarter of 2013 compared to the second quarter of 2012, reflecting the runoff of business. Total contract charges on open blocks of business, where there is ongoing marketing for new sales, increased 5% in the second quarter of 2013. Net investment income decreased$0.5 million or 1% in the second quarter of 2013 compared to the second quarter of 2012, as an increase in average invested assets was offset by a decline in yields earned. This segment experienced a net realized investment gain of$1.5 million in the second quarter of 2013 compared to$1.3 million in the second quarter of 2012. Net investment income decreased$2.3 million or 3% in the first six months of 2013 compared to one year earlier, as an increase in average invested assets was more than offset by lower yields earned. This segment experienced a net realized investment gain of$1.8 million in the first six months of 2013 compared to$16.9 million in the first six months of 2012. As identified earlier, the Company had realized gains from the sale of certain real estate investments in the first quarter of 2012 that generated$15.2 million in gains with no comparable sales in 2013. Policyholder benefits decreased$1.9 million or 8% in the second quarter of 2013 compared to the prior year, largely due to a$5.0 million decrease in benefit and contract reserves. Several factors contributed to this decrease. The Company refined its reserve calculation estimate for new traditional life insurance issues in 2013 related to adjustments used for modal premiums. The refinements allow for improved calculations of the reserve liability and resulted in a decrease to the reserve liability of$0.5 million in the second quarter of 2013. The refinements also resulted in a corresponding increase to the amortization of DAC, which largely eliminated the impact to net income. In addition, changes in the fair value of the GMWB rider resulted in a$2.0 million decrease in benefit and contract reserves. Also contributing to the decrease was the recapture of a block of previously reinsured policies in the second quarter of 2012, which increased benefit and contract reserves in 2012. Finally, benefit and contract reserves decreased due to lower sales of immediate annuities in the second quarter of 2013 compared to the second quarter of 2012. Partially offsetting the reduction in benefit and contract reserves, death benefits, net of reinsurance ceded, increased$2.7 million or 21%, as mortality experience was less favorable. Policyholder benefits increased$5.7 million or 13% in the first six months of 2013 compared to the prior year. Death benefits, net of reinsurance ceded, increased$6.8 million or 25%, as mortality experience was less favorable. Partially offsetting this, benefit and contract reserves decreased$1.9 million . Several factors contributed to this decrease. The Company refined its reserve calculation estimate for new traditional life insurance issues in 2013 related to adjustments used for modal premiums. The refinements allow for improved calculations of the reserve liability and resulted in a decrease to the reserve liability of$1.1 million in the first six months of of 2013. The refinements also resulted in a corresponding increase to the amortization of DAC, which largely offset the impact to net income. In addition, the change in the fair value of the GMWB rider resulted in a$2.5 million decrease in benefit and contract reserves. Partially offsetting these, benefit and contract reserves increased due to higher sales of immediate annuities in the first six months of 2013 compared to the prior year. Interest credited to policyholder account balances decreased$0.5 million or 3% in the second quarter and$1.4 million or 3% in the first six months of 2013 compared to one year earlier. These declines were due to lower average crediting rates, as well as a decrease in total policyholder account balances. The amortization of deferred acquisition costs increased$4.0 million or 145% in the second quarter and$3.8 million or 57% in the first six months of 2013 compared with the prior year. These increases were due in part to the reinsurance assumption transaction on variable products with American Family. This transaction contributed$1.4 million to DAC amortization in both the second quarter and six months of 2013. Excluding this transaction, the amortization of deferred acquisition costs increased$2.5 million or 93% in the second quarter and$2.4 million or 36% in the first six months of 2013 compared with the prior year. These increases were primarily the result of an unlocking adjustment that increased DAC amortization$0.2 million in the second quarter and six months of 2013. This compares to an unlocking adjustment that decreased DAC amortization of$1.3 million in the second quarter and six months of 2012. As indicated above, the Company also had a refinement in its reserve method effective with the first quarter of 2013 that impacts the amortization of the each quarter. This change increased DAC amortization approximately$0.4 million for the second quarter and$0.8 million for the six months of 2013. However, as indicated above, this change in reserve method has virtually no impact to the net income. 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. 59
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Operating expenses decreased$0.9 million or 5% in the second quarter and increased$1.4 million or 4% in the first six months of 2013 compared with one year earlier. The increase in the second quarter was largely due to fees related to the short-term arrangement for the servicing on the American Family business. This was partially offset by a decline in the amortization of VOBA and lower employee salaries and benefits. The increase in the six months reflected higher depreciation expense and fees related to the American Family servicing arrangement. Partially offsetting these were declines in legal fees and amortization of VOBA. The decreases in VOBA amortization were largely due to unlocking, which increased the amortization of VOBA$0.9 million in both the second quarter and the first six months of 2013. In comparison, the Company had an unlocking adjustment due to the reassessment of interest and mortality margins on certain interest sensitive products, which increased the amortization of VOBA$2.4 million in both the second quarter and the first six months of 2012.Group Insurance The following table presents financial data of theGroup Insurance business segment for the second quarters and six months endedJune 30, 2013 and 2012. Quarter Ended Six Months Ended June 30 June 30 2013 2012 2013 2012 Insurance revenues: Net premiums$ 13,025 $ 12,197 $ 25,551 $ 24,264 Total insurance revenues 13,025 12,197 25,551 24,264 Investment revenues: Net investment income 118 132 249 260 Other revenues 36 36 70 73 Total revenues 13,179 12,365 25,870 24,597 Policyholder benefits 6,728 6,591 13,566 13,613 Operating expenses 5,901 5,589 11,458 11,314 Total benefits and expenses 12,629 12,180 25,024 24,927 Income (loss) before income tax expense (benefit) 550 185 846 (330 ) Income tax expense (benefit) 192 64 296 (116 ) Net income (loss)$ 358 $ 121 $ 550 $ (214 ) The following table presents gross premiums by new and renewal business, less reinsurance ceded, as included in insurance revenues, for the second quarters and six months endedJune 30, 2013 and 2012. New premiums are also detailed by product. Quarter Ended June 30 % % 2013 Change 2012 Change New premiums: Group life insurance$ 800 8 %$ 744 64 % Group dental insurance 1,865 81 % 1,033 3 % Group disability insurance 1,730 (18 )% 2,105 (10 )% Other group insurance 23 (62 )% 61 79 % Total new premiums 4,418 12 % 3,943 3 % Renewal premiums 12,298 6 % 11,599 - % Total premiums 16,716 8 % 15,542 - % Reinsurance ceded (3,691 ) 10 % (3,345 ) 4 % Net premiums$ 13,025 7 %$ 12,197 - % 60
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Table of Contents Six Months Ended June 30 % % 2013 Change 2012 Change New premiums: Group life insurance$ 1,485 21 %$ 1,225 29 % Group dental insurance 3,541 80 % 1,965 (17 )% Group disability insurance 3,178 (14 )% 3,688 (19 )% Other group insurance 45 (50 )% 90 29 % Total new premiums 8,249 18 % 6,968 (12 )% Renewal premiums 24,095 1 % 23,783 6 % Total premiums 32,344 5 % 30,751 1 % Reinsurance ceded (6,793 ) 5 % (6,487 ) 15 % Net premiums$ 25,551 5 %$ 24,264 (2 )% This segment uses direct sales representatives managed by the home office group marketing division, independent third-party distributors, and the Company's agent and general agent field force. Sales from internal producers accounted for approximately 74% of this segment's total premiums during the second quarter and six months of 2013, while sales from third-party providers made up the remaining portion of sales. No one third-party provider accounts for a majority of this segment's sales. New group premiums increased$0.5 million or 12% in the second quarter of 2013 compared with the same period in 2012. The increase in the second quarter of 2013 was primarily due to a$0.8 million or 81% increase in new dental premiums. The increase in the dental product line continues to reflect improved competitive pricing and sales in a new market not previously targeted in the prior year by this line's sales force. Partially offsetting this increase was a$0.4 million or 23% decrease in new short-term disability sales. New group premiums increased$1.3 million of 18% for the first six months of 2013 versus the prior year. This increase primarily resulted from a$1.6 million or 80% increase in new dental premiums and a$0.3 million or 21% increase in group life premiums. Partially offsetting these increases was a$0.6 million decrease in new short-term disability sales. Renewal premiums increased$0.7 million or 6% in the second quarter of 2013 compared with the prior year. This increase was largely the result of a$0.3 million or 14% increase in group life premiums and a$0.7 million increase in short-term disability premiums. Partially offsetting these increases was a$0.2 million decrease in dental premiums. Renewal premiums for the six months increased$0.3 million or 1%, largely from a$0.2 million or 5% increase in group life premiums and a$0.9 million increase in short-term disability premiums. Partially offsetting these was a$0.6 million or 5% decrease in group dental premiums and a$0.2 million or 7% decrease in long term disability premiums. This segment monitors product pricing and profitability on its insured groups. Depending upon the resulting profitability, premiums may be adjusted on underperforming groups to achieve expected returns for specific cases in targeted product lines, which can affect both premiums and benefits. This segment uses reinsurance in several of its product lines to help mitigate risk and to allow for a higher level and volume of sales and profitability. Reinsurance premiums increased$0.3 million in both the second quarter and six months endedJune 30, 2013 as compared with 2012. Total policyholder benefits for this segment consist of death benefits, accident and health benefits, and the associated increase or decrease in reserves for future policy benefits. Policyholder benefits increased$0.1 million or 2% in the second quarter and were flat for the six months compared with the same periods in the prior year. Total benefits for the group life product line increased in the second quarter of 2013, but were largely offset by decreases in the long-term disability and dental lines. Total benefits increased for the group life and dental product lines in the first six months of 2013, but were mostly offset by a decrease in long-term disability benefits. This segment identifies a policyholder benefit ratio, which is derived by dividing policyholder benefits, net of reinsurance, by total revenues. This ratio allows for a measure of the comparability of improvement in this segment's ability to monitor the relative overall success of product changes related to contract benefits. The ratio for theGroup Insurance segment was 52% for the second quarter of 2013, compared to 54% for the same period in 2012. The claims ratio also improved for the six months, declining to 53% compared to 56% in the prior year. For the second quarter and the six months, the largest improvement was noted in the dental product line, which resulted from improved underwriting results and expansion of the preferred provider network. 61
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Operating expenses consist of commissions, fees to third-party marketing and administrative organizations, and expenses from the Company's operations. Operating expenses for this segment increased$0.3 million or 6% for the second quarter and$0.1 million or 1% for the six months. These increases largely reflect increased third-party administration charges and premium taxes from sales. Old American The following table presents financial data of the Old American business segment for the second quarters and six months endedJune 30, 2013 and 2012. Quarter Ended Six Months Ended June 30 June 30 2013 2012 2013 2012 Insurance revenues: Net premiums$ 18,230 $ 17,664 $ 36,319 $ 34,964 Total insurance revenues 18,230 17,664 36,319 34,964 Investment revenues: Net investment income 2,959 2,969 5,869 5,929 Net realized investment gains (losses), excluding other-than-temporary impairment losses 25 (60 ) 16 (27 ) Net impairment losses recognized in earnings: Total other-than-temporary impairment losses - (11 ) (1 ) (29 ) Portion of impairment losses recognized in other comprehensive income (loss) (5 ) (1 ) (21 ) - Net other-than-temporary impairment losses recognized in earnings (5 ) (12 ) (22 ) (29 ) Total investment revenues 2,979 2,897 5,863 5,873 Other revenues 1 2 2 11 Total revenues 21,210 20,563 42,184 40,848 Policyholder benefits 11,401 11,676 23,020 23,767 Amortization of deferred acquisition costs 4,225 2,394 9,198 6,285 Operating expenses 3,960 3,952 8,235 7,789 Total benefits and expenses 19,586 18,022 40,453 37,841 Income before income tax expense 1,624 2,541 1,731 3,007 Income tax expense 596 969 636 1,146 Net income$ 1,028 $ 1,572 $ 1,095 $ 1,861 Net income for this segment totaled$1.0 million for the second quarter of 2013 compared to$1.6 million in the second quarter of 2012. Net income for this segment totaled$1.1 million for the six months compared to$1.9 million in the first half of 2012. The decrease in both the second quarter and the six months of 2013 was largely due to three factors. First, this segment had an increase in death benefits, as mortality was not as favorable in 2013 compared to the prior quarter and prior year-to-date. Second, the amortization of DAC increased in both periods. Finally, operating expenses increased in both the second quarter and six months. These items were partially offset by an increase in net premiums. 62
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The following table presents gross premiums by new and renewal business, less reinsurance ceded, as included in insurance revenues for the second quarters and six months endedJune 30, 2013 and 2012. Quarter Ended June 30 2013 % Change 2012 %
Change
New individual life premiums$ 3,214 (1 )%$ 3,242 5 % Renewal premiums 15,474 4 % 14,941 4 % Total premiums 18,688 3 % 18,183 4 % Reinsurance ceded (458 ) (12 )% (519 ) (12 )% Net premiums$ 18,230 3 %$ 17,664 5 % Six Months Ended June 30 2013 % Change 2012 % Change New individual life premiums$ 6,438 - %$ 6,444 5 % Renewal premiums 30,817 4 % 29,563 3 % Total premiums 37,255 3 % 36,007 3 % Reinsurance ceded (936 ) (10 )% (1,043 ) (15 )% Net premiums$ 36,319 4 %$ 34,964 4 % Total new premiums were essentially flat in both the second quarter and first six months of 2013 compared to the prior year. Total renewal premiums increased$0.5 million or 4% in the second quarter and$1.3 million or 4% for the six months compared to the prior year. The Company has experienced an increase in renewal premiums, which is the result of steady growth in new sales in prior periods. However, new sales growth has slowed in 2013, due to lower productivity and periodic agent turnover. The Company continues to focus on recruitment and development of new agencies and agents, along with generating improved production from existing agencies and agents. Net investment income was flat in the second quarter of 2013 and decreased less than$0.1 million or 1% in the six months of 2013 versus the same periods in the prior year. While the Company's average invested assets increased versus the prior year, the overall portfolio yield declined. Policyholder benefits decreased$0.3 million or 2% in the second quarter and$0.7 million or 3% for the first six months of 2013 versus the prior year's same periods. This decrease was largely due to a decrease in benefit and contract reserves, but this was partially offset by an increase in death benefits, net of reinsurance. The increase in death benefits reflects, in part, the growth of sales in recent years. In addition, the Company changed its reserving methodology on a portion of its business. The refinements allow for improved calculations of the reserve liability. While this change reduced reserves$0.9 million in the second quarter and$2.0 million in the first six months of 2013 in the policyholder benefits line item, virtually offsetting this decrease was a corresponding increase in the amortization of deferred acquisition costs. The amortization of DAC increased$1.8 million or 76% in the second quarter and$2.9 million or 46% for the first six months of 2013. These increases were largely due to the change in reserving methodology that increased amortization$1.0 million in the second quarter and$2.3 million in the six months of 2013, as noted above. Operating expenses were flat in the second quarter of 2013 but increased$0.4 million or 6% in the first six months of 2013 versus the same periods last year. In the second quarter of 2013, increased home office operating expenses reflecting increased agent costs were offset by an increase in capitalized commissions. For the six months, operating expenses increased in part due to increased agent costs and increased reimbursements for management fees from the parent company associated with salaries and benefits. 63
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Liquidity and Capital Resources Liquidity Statements made in the Company's 2012 Form 10-K remain pertinent, as the Company's liquidity position is materially unchanged from year-end 2012. Net cash provided by operating activities was$21.9 million in the six months endedJune 30, 2013 . The primary sources of cash from operating activities in the first six months of 2013 were premium receipts and net investment income. The primary uses of cash from operating activities in the first six months of 2013 were for the payment of policyholder benefits and operating expenses. Net cash used by investing activities was$2.2 million . The primary sources of cash were sales, maturities, calls, and principal paydowns of investments totaling$199.4 million . Offsetting these, the Company's new investments totaled$173.7 million and a reinsurance assumption transaction used$34.3 million . Net cash used for financing activities was$19.8 million , primarily including$16.9 million of withdrawals, net of deposits, from policyholder account balances and 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 theFHLB . AtJune 30, 2013 andDecember 31, 2012 , there were no outstanding balances with theFHLB . The Company has access to unsecured revolving lines of credit of$60.0 million with two major commercial banks with no balances outstanding. These lines of credit will mature in June of 2014. The Company anticipates renewing these lines of credit as they come due. Capital Resources The Company considers existing capital resources to be adequate to support the current level of business activities. In addition, the Company's statutory equity exceeds the minimum capital deemed necessary to support its insurance business, as determined by the risk-based capital calculations and guidelines established by theNational Association of Insurance Commissioners . The Company believes these statutory limitations impose no practical restrictions on its dividend payment plans. The following table shows the capital adequacy for the Company.June 30
2013
2012
Total assets, excluding separate accounts$ 4,149,163 $
4,185,652
Total stockholders' equity 728,490
750,401
Ratio of stockholders' equity to assets, excluding separate accounts
18%
18%
The ratio of equity to assets less separate accounts was 18% atDecember 31, 2012 andJune 30, 2013 . Stockholders' equity decreased$21.9 million from year-end 2012. Unrealized investment gains on available for sale securities, which are included as a part of accumulated comprehensive income and stockholders' equity (net of securities losses, related taxes, policyholder account balances, future policy benefits, and DAC), totaled$70.6 million atJune 30, 2013 . This represents a decrease of$36.6 million in net unrealized gains from the$107.2 million in net unrealized investment gains at year-end 2012. The decrease in net unrealized gains reflects a decrease in fair value on fixed maturity securities available for sale, which was partially offset by a decrease in the DAC and deferred revenue liability related to these unrealized investment gains. In addition, stockholders' equity was favorably impacted by a reduction in the portion of unrealized gains attributable to DAC. This change was due to enhanced system capabilities and more accurate estimates. The stock repurchase program was extended by the Board of Directors throughJanuary 2014 to permit the purchase of up to one million of the Company's shares on the open market. During the first six months of 2013 and 2012, the Company made purchases of$0.4 million and$2.3 million , respectively, under this plan. During the six months endedJune 30, 2013 , the employee stock ownership plan purchased 363 shares of treasury stock for less than$0.1 million . The employee stock ownership plan held 25,209 shares of the Company's stock atJune 30, 2013 . OnJuly 22, 2013 , the Board of Directors declared a quarterly dividend of$0.27 per share, unchanged from the prior year. The dividend will be paidAugust 7, 2013 to stockholders of record as ofAugust 1, 2013 . Total stockholder dividends paid were$6.0 million and$6.1 million for the six months endedJune 30, 2013 and 2012, respectively. 64
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VALUE LINE INC – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
LIFEPOINT HOSPITALS, INC. – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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