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

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

  Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide in narrative form the perspective of the management of Kansas City Life Insurance Company (the Company) on its financial condition, results of operations, liquidity, and certain other factors that may affect its future results. The following is a discussion and analysis of the results of operations for the quarters ended September 30, 2012 and 2011 and the financial condition of the Company at September 30, 2012. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in this document, as well as the Company's 2011 Form 10-K.  Overview  Kansas City Life Insurance Company is a financial services company that is predominantly focused on the underwriting, sales, and administration of life insurance and annuity products. The consolidated entity (the Company) primarily consists of three life insurance companies. Kansas City Life Insurance Company (Kansas City Life) is the parent company. Sunset Life Insurance Company of America (Sunset Life) and Old American Insurance Company (Old American) are wholly-owned subsidiaries. For additional information, please refer to the Overview included in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 2011 Form 10-K.  

Cautionary Statement on Forward-Looking Information

  This report reviews the Company's financial condition and results of operations, and historical information is presented and discussed. Where appropriate, factors that may affect future financial performance are also identified and discussed. Certain statements made in this report include "forward-looking statements" that fall within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that may predict, forecast, indicate or imply future results, performance, or achievements rather than historical facts and may contain words like "believe," "expect," "estimate," "project," "forecast," "anticipate," "plan," "will," "shall," and other words, phrases, or expressions with similar meaning.  Actual results may differ materially from those included in the forward-looking statements as a result of risks and uncertainties. Those risks and uncertainties include, but are not limited to, the risk factors listed in Item 1A. Risk Factors as filed in the Company's 2011 Form 10-K. For additional information, please refer to the Overview included in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 2011 Form 10-K.                                           37 

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Consolidated Results of Operations

Summary of Results

  The Company earned net income of $4.1 million and $4.5 million in the third quarters of 2012 and 2011, respectively. Net income per share was $0.38 in the third quarter of 2012, compared to $0.39 in the same period in the prior year. Net income for the first nine months of 2012 was $32.0 million, an increase of $11.5 million or 56% compared to last year. Net income per share for the nine months was $2.88, an increase of $1.10 per share versus the same period one year earlier. The following table presents variances between the results for the third quarters and nine months ended September 30, 2012 and 2011. Additional information on these items is presented below.                                                    Quarter Ended                  Nine Months Ended                                                  September 30                    September 30                                                2012 Versus 2011                2012 Versus 2011 Insurance and other revenues                  $             (459 )            $             2,184 Net investment income                                      1,552                           (1,088 ) Net realized investment gains                               (104 )                         14,276 Policyholder benefits and interest credited to policyholder account balances                                                    (277 )                          4,428 Amortization of deferred acquisition costs                                          4,426                            1,693 Operating expenses                                        (6,350 )                         (5,027 ) Income tax expense                                           878                           (4,926 )  Total variance                                $             (334 )            $            11,540    Sales  The Company measures sales in terms of new premiums and deposits. Sales of traditional life insurance, immediate annuities, and accident and health products are reported as premium income for financial statement purposes. Deposits received from the sale of interest sensitive products, including universal life insurance, fixed deferred annuities, variable universal life, variable annuities, and supplementary contracts without life contingencies are reflected as deposits in the Consolidated Statements of Cash Flows.  The Company's marketing plan for individual products focuses on three main aspects: providing financial security with respect to life insurance, the accumulation of long-term value, and future retirement income needs. The primary emphasis is on the growth of individual life insurance business, including new premiums for individual life products and new deposits for universal life and variable universal life products.  Sales are primarily made through the Company's existing sales force. The Company emphasizes growth of the sales force with the addition of new general agents and agents. The Company believes that increased sales will result through both the number and productivity of general agents and agents. In addition, the Company places an emphasis on training and direct support to the field force to assist new agents in their start-up phase. Also, the Company provides support to existing agents to stay abreast of the ever-changing regulatory environment and to introduce agents to new products and enhanced features of existing products. On occasion, the Company may also selectively utilize third-party marketing arrangements to enhance its sales objectives. This allows the Company the flexibility to identify niches or pursue unique avenues in the existing market environment and to react quickly to take advantage of opportunities as they occur.  The Company also markets a series of group products. These products include group life, dental, disability, and vision products. The primary growth strategies for these products include increased productivity of the existing group representatives; planned expansion of the group distribution system; and to selectively utilize third-party marketing arrangements. Further, growth is to be supported by the addition of new products to the portfolio, particularly voluntary-type products.                                           38 

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  The following table presents gross premiums by new and renewal business, less reinsurance ceded, as included in insurance revenues for the third quarters and nine months ended September 30, 2012 and 2011. New premiums are also detailed by product.                                                                        Quarter Ended                                                                      September 30                                              2012             % Change              2011             % Change New premiums: Individual life insurance               $        4,284                1        $        4,249                1 Immediate annuities                              2,187               15                 1,903              (72 ) Group life insurance                               624               21                   516               (5 ) Group accident and health insurance              2,894              (12 )               3,301               13  Total new premiums                               9,989                -                 9,969              (31 ) Renewal premiums                                37,453                1                37,079                7  Total premiums                                  47,442                1                47,048               (4 ) Reinsurance ceded                              (14,393 )             (1 )             (14,572 )              9  Premiums, net                           $       33,049                2        $       32,476               (9 )                                                                     Nine Months Ended                                                                      September 30                                              2012             % Change              2011             % Change New premiums: Individual life insurance               $       13,054                1        $       12,973                6 Immediate annuities                              7,355               30                 5,649              (66 ) Group life insurance                             1,849               26                 1,463              (13 ) Group accident and health insurance              8,637              (16 )              10,292                9  Total new premiums                              30,895                2                30,377              (24 ) Renewal premiums                               111,736                2               109,034                3  Total premiums                                 142,631                2               139,411               (4 ) Reinsurance ceded                              (42,673 )              -               (42,509 )              5  Premiums, net                           $       99,958                3        $       96,902               (8 )    Consolidated total premiums increased $0.4 million or 1% in the third quarter of 2012 versus the same period in the prior year, as total new premiums were essentially flat and total renewal premiums increased $0.4 million or 1%. New immediate annuity premiums increased $0.3 million or 15% and new group life premiums increased $0.1 million or 21%. These were offset by a $0.4 million decrease in new group accident and health premiums. Immediate annuity receipts can have sizeable fluctuations, as receipts from policyholders largely result from one-time premiums rather than recurring premiums. The decrease in new accident and health premiums resulted from a decrease in the short-term disability line, which was partially offset by an increase in dental premiums. The increase in consolidated renewal premiums reflected an increase in short-term disability renewal premiums that was partially offset by a decrease in dental renewal premiums.  Consolidated total premiums increased $3.2 million or 2% in the first nine months of 2012 versus one year earlier, reflecting a $0.5 million or 2% increase in total new premiums and a $2.7 million or 2% increase in total renewal premiums. The increase in total new premiums was due to a $1.7 million or 30% increase in new immediate annuity premiums and a $0.4 million or 26% increase in new group life premiums. These improvements were partially offset by a $1.7 million or 16% decrease in new group accident and health premiums, primarily in the short-term disability line. The increase in renewal premiums reflected an increase in group accident and health renewal premiums. This increase was largely from the short-term disability line and a partially offsetting decrease in dental renewal premiums. In addition, individual life insurance premiums increased $1.4 million, primarily from the Old American segment.                                           39

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  The following table reconciles deposits with the Consolidated Statements of Cash Flows and provides detail by new and renewal deposits for the third quarters and nine months ended September 30, 2012 and 2011. New deposits are also detailed by product.                                                                        Quarter Ended                                                                     September 30                                             2012             % Change               2011             % Change New deposits: Universal life insurance               $        2,980               25         $        2,391              (39 ) Variable universal life insurance                 144              (21 )                  183              (43 ) Fixed deferred annuities                       11,982              (22 )               15,368              (42 ) Variable annuities                              4,863               18                  4,119               44  Total new deposits                             19,969               (9 )               22,061              (34 ) Renewal deposits                               34,903               (7 )               37,459                6  Total deposits                         $       54,872               (8 )       $       59,520              (14 )                                                                     Nine Months Ended                                                                     September 30                                             2012             % Change               2011             % Change New deposits: Universal life insurance               $        9,140                2         $        8,953              (14 ) Variable universal life insurance                 404              (40 )                  676              (11 ) Fixed deferred annuities                       43,601              (10 )               48,285               (1 ) Variable annuities                             13,466               (4 )               14,098               (2 )  Total new deposits                             66,611               (8 )               72,012               (3 ) Renewal deposits                              105,120               (4 )              109,490                4  Total deposits                         $      171,731               (5 )       $      181,502                1    Total new deposits decreased $2.1 million or 9% in the third quarter of 2012 compared with the third quarter of 2011. This change was due to a $3.4 million or 22% decrease in new fixed deferred annuity deposits. Partially offsetting this, new variable annuity deposits increased $0.7 million or 18% and new universal life deposits increased $0.6 million or 25%. Total renewal deposits decreased $2.6 million or 7% in the third quarter of 2012 versus last year, reflecting a $3.0 million or 25% decrease in fixed deferred annuity renewal deposits. Total new deposits decreased $5.4 million or 8% in the first nine months of 2012 compared with the prior year. This decrease was largely due to a $4.7 million or 10% decline in new fixed deferred annuity deposits and a $0.6 million or 4% decrease in new variable annuity deposits. Total renewal deposits decreased $4.4 million or 4%, reflecting a $2.2 million or 7% decrease in fixed deferred annuity renewal deposits and a $1.0 million or 13% decrease in variable annuity renewal deposits. New sales and renewals for deposit products have been negatively affected for the third quarter and the first nine months of 2012 by continuing low interest rates and the uncertain economic environment.  

Insurance Revenues

  Insurance revenues consist of premiums, net of reinsurance, and contract charges. In the third quarter of 2012, total insurance revenues decreased $0.4 million or 1%, primarily due to a $1.0 million or 4% decrease in contract charges compared to the prior year. Partially offsetting the reduction in contract charges was a $0.6 million or 2% increase in net premiums. The increase in net premiums largely resulted from a $0.3 million or 15% increase in total immediate annuity premiums.  Insurance revenues increased $2.8 million or 2% in the first nine months of 2012 compared with the prior year. This increase was due to a $3.1 million or 3% increase in net premiums, together with an offsetting $0.2 million decrease in contract charges. The increase in premiums resulted from a $1.7 million or 2% increase in total individual life insurance premiums, largely from the Old American segment, and a $1.4 million or 24% increase in total immediate annuity premiums.  Contract charges consist of cost of insurance, expense loads, amortization of unearned revenues, and surrender charges on policyholder account balances. Certain contract charges are not recognized in income immediately but are deferred and amortized into income in proportion to the expected future gross profits of the business, in a manner similar to DAC. Profit expectations are based upon assumptions of future interest spreads, mortality margins, expense margins, and policy and premium persistency experience. At least annually, a review is performed of the assumptions related to profit expectations. If it is determined the assumptions should be revised, the impact is recorded as a change in the revenue reported in the current period as an unlocking adjustment.                                           40

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  Contract charges are impacted by the sales of new products and the persistency of both existing and closed blocks of business. The closed blocks of business reflect policies and companies that the Company has purchased. While the Company is not actively pursuing marketing efforts to generate new sales for these closed blocks, it has the intent of servicing this business to achieve long-term profit streams.  Total contract charges on all blocks of business decreased $1.0 million or 4% in the third quarter of 2012 compared to the same period in 2011. The results for the third quarter of 2012 were largely due to a $0.5 million decrease in the amortization of deferred revenue and a $0.3 million decrease in cost of insurance charges. The decrease in cost of insurance charges was largely due to the runoff of closed blocks. Amortization of deferred revenue decreased due to lower actual gross profits on certain lines of business, largely related to increased reinsurance resulting from unlocking that occurred in the second quarter of 2012.  Total contract charges on all blocks of business decreased $0.2 million in the first nine months of 2012 compared to one year earlier. These results reflected a $0.7 million decrease in cost of insurance charges and a $0.5 million decrease in expense loads, partially offset by a $1.2 million increase in the amortization of deferred revenue. In addition to the results discussed above for the quarter, the amortization of deferred revenue increased during 2012 compared to the prior year due to a system upgrade during 2011 that led to enhanced reinsurance modeling capabilities. The decrease in expense loads is attributed to the increased sale of products with lower expense loads in 2012 than the prior year. The decline in cost of insurance charges was largely due to the runoff of closed blocks.  

Total contract charges on closed blocks equaled 35% of total consolidated contract charges for both third quarters and 35% and 36% for the first nine months of 2012 and 2011, respectively. Total contract charges on closed blocks decreased 4% in the third quarter and 3% in the first nine months of 2012 compared to the same periods in the prior year. These declines reflect the results discussed above.

  The Company uses reinsurance as a means to mitigate its risks and to reduce the earnings volatility from claims. Reinsurance ceded premiums decreased $0.2 million or 1% in the third quarter of 2012 and increased $0.2 million or less than 1% in the first nine months of 2012, as compared to the same periods in 2011. Reinsurance ceded for the Group segment increased $0.5 million or 17% in the third quarter and $1.3 million or 16% in the nine months, reflecting increased disability sales that were largely reinsured. Reinsurance ceded for the Old American segment declined $0.1 million or 16% in the third quarter and $0.3 million or 15% in the first nine months of 2012, reflecting the continued runoff of a large closed block of reinsured business. Reinsurance ceded for the Individual Insurance segment decreased $0.6 million or 5% in the third quarter and $0.9 million or 3% in the first nine months of 2012.  

Investment Revenues

  Gross investment income is largely composed of interest, dividends and other earnings on fixed maturity securities, equity securities, short-term investments, mortgage loans, real estate, and policy loans. Gross investment income increased $1.4 million or 3% in the third quarter of 2012 compared with the third quarter of 2011, as both average invested assets and yields earned increased. Gross investment income decreased $1.0 million or 1% in the first nine months of 2012 compared with the prior year, as an increase in average invested assets was more than offset by lower yields earned.  

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

  Investment income from mortgage loans increased $0.1 million or 1% in the third quarter and $0.7 million or 3% in the first nine months of 2012 compared to the same periods in 2011. The improvement in the nine months was largely the result of prepayment fees received on loans that were paid off prior to maturity.  Investment income from real estate increased $0.5 million or 27% in the third quarter and $1.1 million or 17% in the nine months compared to last year. These improvements reflect higher rental income due to an increase in occupancy rates.  In addition, the fair value improved on an alternative investment fund, which resulted in an increase of investment income of $1.4 million in the third quarter of 2012 and $0.8 million in the first nine months, compared to the same periods in 2011.  The Company realizes investment gains and losses from several sources, including write-downs of investments and sales of investment securities and real estate. Many securities purchased by the Company contain call provisions, which allow the issuer to redeem the securities at a particular price. Depending upon the terms of the call provision and price at which the security was purchased, a gain or loss may be realized.                                           41 

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  The following table provides detail concerning realized investment gains and losses for the third quarters and nine months ended September 30, 2012 and 2011.                                                  Quarter Ended                                 Nine Months Ended                                                September 30                                    September 30                                        2012                    2011                    2012                    2011 Gross gains resulting from: Sales of investment securities                        $          399          $          292          $          712          $        3,944 Investment securities called and other                             304                     105                   1,107                   1,355 Sales of real estate                         113                       -                  16,293                       -  Total gross gains                            816                     397                  18,112                   5,299  Gross losses resulting from: Sales of investment securities                                   (44 )                   (76 )                   (76 )                (1,666 ) Investment securities called and other                            (236 )                  (118 )                  (440 )                  (297 ) Mortgage loans                                 -                       -                    (178 )                    (3 )  Total gross losses                          (280 )                  (194 )                  (694 )                (1,966 ) Change in allowance for potential future losses on mortgage loans                                75                       -                     407                       - Amortization of DAC and VOBA                                          (5 )                     7                     (21 )                  (218 )  Net realized investment gains, excluding impairment losses                                       606                     210                  17,804                   3,115   Net impairment losses recognized in earnings: Total other-than-temporary impairment losses                           (697 )                  (167 )                (1,153 )                  (674 ) Portion of loss recognized in othercomprehensive income                                        47                      17                     197                     131  Net impairment losses recognized in earnings                      (650 )                  (150 )                  (956 )                  (543 )  Net realized investment gains (losses)                    $          (44 )        $           60          $       16,848          $        2,572    The Company recorded a net realized investment loss of less than $0.1 million in the third quarter of 2012, compared with a net realized gain of less than $0.1 million third quarter of 2011. During the third quarter of 2012, investment gains on sales of real estate totaled $0.1 million. Net realized investment gains for the first nine months totaled $16.8 million in 2012 compared to $2.6 million in 2011, largely reflecting gains on sales of real estate of $16.3 million. In the above table, investment securities called and other includes, but is not limited to, principal payments and sinking funds.  The Company's analysis of securities for the third quarter ended September 30, 2012 resulted in the determination that seven fixed-maturity residential mortgage-backed securities and one corporate security had other-than-temporary credit impairments and were written down by a combined $0.6 million. These residential mortgage-backed securities had incremental losses, reflecting deterioration in the present value of expected future cash flows. The additional losses from these residential mortgage-backed securities totaled $0.2 million in the third quarter of 2012, including less than $0.1 million that was determined to be non-credit and was recognized in other comprehensive income. The total fair value of the affected securities after the write-downs was $55.5 million.                                           42 

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  The following table summarizes securities with other-than-temporary impairments recognized in earnings by business segment during the first, second, and third quarters of 2012 and 2011 by asset class:                                                                                                          Nine Months                                  Quarter Ended          Quarter Ended          Quarter Ended             Ended                                    March 31                June 30             September 30           September 30                                      2012                   2012                   2012                   2012 Bonds: Corporate obligations: Individual Insurance            $             -        $             -        $           515        $          515  Total corporate obligations                     $             -        $             -        $           515        $          515 Corporate private-labeled residential mortgage-backed securities: Individual Insurance            $           143        $           134        $           129        $          406 Old American                                 17                     12                      6                    35  Total                           $           160        $           146        $           650        $          956  Segment detail: Individual Insurance            $           143        $           134        $           644        $          921 Old American                                 17                     12                      6                    35  Consolidated total              $           160        $           146        $           650        $          956                                                                                                               Nine Months                                     Quarter Ended          Quarter Ended          Quarter Ended             Ended                                       March 31                June 30             September 30           September 30                                         2011                   2011                   2011                   2011 Bonds: Corporate private-labeled residential mortgage-backed securities: Individual Insurance               $           188        $           164        $           141        $          493 Old American                                    23                     18                      9                    50  Total                              $           211        $           182        $           150        $          543  Segment detail: Individual Insurance               $           188        $           164        $           141        $          493 Old American                                    23                     18                      9                    50  Consolidated total                 $           211        $           182        $           150        $          543    Analysis of Investments  The Company seeks to protect policyholders' benefits and achieve a desired level of organizational profitability by optimizing risk and return on an ongoing basis through managing asset and liability cash flows, monitoring credit risk, avoiding high levels of investments that may be redeemed by the issuer, maintaining sufficiently liquid investments and avoiding undue asset concentrations through diversification, among other things.  The primary sources of investment risk to which the Company is exposed include credit risk, interest rate risk, and liquidity risk. The Company's ability to manage these risks is essential to the success of the organization. In particular, the Company devotes considerable resources to both the credit analysis of each new investment and to ongoing credit positions. A default by an issuer usually involves some loss of principal to the investor. Losses can be mitigated by timely sales of affected securities or by active involvement in a restructuring process. However, there can be no assurance that the efforts of an investor will lead to favorable outcomes in a bankruptcy or restructuring. Credit risk is managed primarily through industry, issuer, and structure diversification.                                           43 

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

                                                                            Fair Value                            Fair Value                                                                         of Securities                        of Securities                                            Total                         with Gross           Gross            with Gross           Gross                                            Fair             %            Unrealized         Unrealized         Unrealized         Unrealized                                            Value         of Total           Gains             Gains              Losses             Losses U.S. Treasury securities and obligations of U.S. Government          $   138,511             5%     $    

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

                           26,250             1%              26,250            4,183                                     - Federal agency issued residential mortgage-backed securities 1                101,235             4%             100,932            9,272                  303                1  Subtotal                                    265,996            10%             263,547           28,457                2,449               28 Corporate obligations: Industrial                                  554,550            19%             543,263           53,980               11,287            1,749 Energy                                      206,712             7%             204,732           23,894                1,980               17 Communications and technology               225,310             8%             225,310           24,554                    -                - Financial                                   328,837            11%             312,282           26,232               16,555            1,907 Consumer                                    560,544            19%             553,208           54,172                7,336               14 Public utilities                            296,452            10%             293,217           41,256                3,235              355  Subtotal                                  2,172,405            74%           2,132,012          224,088               40,393            4,042 Corporate private-labeled residential mortgage-backed securities                  154,567             5%             101,659            3,787               52,908            1,575 Municipal securities                        174,366             6%             171,287           27,755                3,079                5 Other                                       102,080             4%              58,993            6,256               43,087            8,973 Redeemable preferred stocks                   9,211              -               6,690              261                2,521              126  Fixed maturities                          2,878,625            99%           2,734,188          290,604              144,437           14,749 Equity securities                            37,453             1%              36,302            1,893                1,151              106  Total                                   $ 2,916,078           100%     $     2,770,490     $    292,497     $        145,588     $     14,855     

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

U.S. Government.                                            44 

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

                                                                            Fair Value                            Fair Value                                                                         of Securities                        of Securities                                            Total                         with Gross           Gross            with Gross           Gross                                            Fair             %            Unrealized         Unrealized         Unrealized         Unrealized                                            Value         of Total           Gains             Gains              Losses             Losses U.S. Treasury securities and obligations of U.S. Government          $   134,437             5%     $       133,478     $     13,856     $            959     $         12 Federal agencies 1                           25,881             1%              25,881            3,480                    -                - Federal agency issued residential mortgage-backed securities 1                119,637             4%             118,694            9,901                  943                2  Subtotal                                    279,955            10%             278,053           27,237                1,902               14 Corporate obligations: Industrial                                  486,880            18%             461,425           43,710               25,455              860 Energy                                      171,711             6%             171,711           19,131                    -                - Communications and technology               201,393             7%             194,154           16,566                7,239              156 Financial                                   318,078            12%             250,403           15,155               67,675            5,890 Consumer                                    496,487            18%             481,033           43,788               15,454              263 Public utilities                            296,337            11%             280,475           38,094               15,862            1,366  Subtotal                                  1,970,886            72%           1,839,201          176,444              131,685            8,535 Corporate private-labeled residential mortgage-backed securities                  156,902             6%              53,304            1,856              103,598           12,620 Municipal securities                        168,522             6%             164,613           18,316                3,909               61 Other                                        94,656             4%              38,253            3,576               56,403            9,235 Redeemable preferred stocks                  11,221             1%               5,226              226                5,995              740  Fixed maturities                          2,682,142            99%           2,378,650          227,655              303,492           31,205 Equity securities                            36,689             1%              35,566            1,873                1,123              135  Total                                   $ 2,718,831           100%     $     2,414,216     $    229,528     $        304,615     $     31,340     

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

U.S. Government.

   At December 31, 2011, the Company had $31.3 million in gross unrealized losses on investment securities which were offset by $229.5 million in gross unrealized gains. At September 30, 2012, the Company's unrealized losses on investment securities had decreased to $14.9 million and were offset by $292.5 million in gross unrealized gains, with 27% of the gross unrealized losses in the category of corporate obligations. The financial sector was the single largest contributor to unrealized losses, reflecting the direct and indirect impact of the troubled residential real estate, mortgage, and auction rate securities markets. At September 30, 2012, 95% of the total fair value of the fixed maturities portfolio had unrealized gains, compared to 89% at December 31, 2011.                                           45 

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  The Company maintains a high quality securities portfolio. The following table identifies fixed maturity securities available for sale by actual or equivalent Standard & Poor's rating at September 30, 2012 and December 31, 2011.                                         September 30, 2012              December 31, 2011                                      Fair             %             Fair             %                                     Value          of Total         Value         of Total   AAA                            $    132,256             5%     $   161,802             6%   AA                                  612,085            21%         570,157            21%   A                                   876,911            30%         799,565            30%   BBB                               1,046,830            36%         939,373            35%    Total investment grade            2,668,082            92%       2,470,897            92%   BB                                   70,294             3%          79,760             3%   B and below                         140,249             5%         131,485             5%    Total below investment grade        210,543             8%         211,245             8%                                   $  2,878,625           100%     $ 2,682,142           100%    The following table provides information regarding fixed maturity and equity security investments available for sale with unrealized losses by length of time, at September 30, 2012.                                                 Less Than 12 Months               12 Months or Longer                    Total                                            Fair            Unrealized         Fair          Unrealized        Fair         Unrealized                                           Value              Losses           Value           Losses          Value          Losses U.S. Treasury securities and obligations of U.S. Government         $      1,362       $         18     $       784     $          9     $   2,146     $         27 Federal agency issued residential mortgage-backed securities 1                     10                  -             293                1           303                1  Subtotal                                      1,372                 18           1,077               10         2,449               28 Corporate obligations: Industrial                                    8,462                430           2,825            1,319        11,287            1,749 Energy                                        1,980                 17               -                -         1,980               17 Communications and technology                     -                  -               -                -             -                - Financial                                     1,502                  1          15,053            1,906        16,555            1,907 Consumer                                      7,336                 14               -                -         7,336               14 Public utilities                              1,995                  5           1,240              350         3,235              355  Subtotal                                     21,275                467          19,118            3,575        40,393            4,042 Corporate private-labeled residential mortgage-backed securities                                        -                  -          52,908            1,575        52,908            1,575 Municipal securities                          3,079                  5               -                -         3,079                5 Other                                             -                  -          43,087            8,973        43,087            8,973 Redeemable preferred stocks                       -                  -           2,521              126         2,521              126  Fixed maturity securities                    25,726                490         118,711           14,259       144,437           14,749  Equity securities                                 -                  -           1,151              106         1,151              106  Total                                  $     25,726       $        490     $   119,862     $     14,365     $ 145,588     $     14,855     

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

U.S. Government.                                              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, at December 31, 2011.                                               Less Than 12 Months              12 Months or Longer                    Total                                           Fair          Unrealized         Fair          Unrealized        Fair         Unrealized                                          Value            Losses           Value           Losses          Value          Losses U.S. Treasury securities and obligations of U.S. Government        $          -     $          -     $   

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

                   649                -             294                2           943                2  Subtotal                                       649                -           1,253               14         1,902               14 Corporate obligations: Industrial                                  25,455              860               -                -        25,455              860 Communications and technology                7,239              156               -                -         7,239              156 Financial                                   51,273            2,107          16,402            3,783        67,675            5,890 Consumer                                    11,765              119           3,689              144        15,454              263 Public utilities                             4,710              344          11,152            1,022        15,862            1,366  Subtotal                                   100,442            3,586          31,243            4,949       131,685            8,535 Corporate private-labeled residential mortgage-backed securities                                  41,734            2,668          61,864            9,952       103,598           12,620 Municipal securities                             -                -           3,909               61         3,909               61 Other                                        9,257              921          47,146            8,314        56,403            9,235 Redeemable preferred stocks                  2,939              115           3,056              625         5,995              740  Fixed maturity securities                  155,021            7,290         148,471           23,915       303,492           31,205  Equity securities                               69              104           1,054               31         1,123              135  Total                                 $    155,090     $      7,394     $   149,525     $     23,946     $ 304,615     $     31,340     

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

U.S. Government.

   Gross unrealized losses on fixed maturity and equity security investments attributable to securities having gross unrealized losses of 12 months or longer were $14.4 million at September 30, 2012, a decrease of 40% from $23.9 million at December 31, 2011. The largest component of this decrease was from the corporate private-labeled residential mortgage-backed securities category, which decreased $8.4 million or 84% during the first nine months of 2012. Certain securities continue to be challenged by the economy and recovering markets, and the Company continues to monitor the cash flows on each of these investments.                                           47 

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

                                                                                         Gross                                                   Amortized          Fair           Unrealized                                                      Cost            Value            Losses Securities owned without realized impairment: Unrealized losses of 10% or less                  $   44,169       $  43,156       $      1,013 Unrealized losses of 20% or less and greater than 10%                                              32,500          27,594              4,906  Subtotal                                              76,669          70,750              5,919  Unrealized losses greater than 20%: Investment grade Less than twelve months                                    -               -                  - Twelve months or greater                               5,854           4,335              1,519  Total investment grade                                 5,854           4,335              1,519  Below investment grade Less than twelve months                                4,145           2,825              1,320 Twelve months or greater                               3,010           2,308                702  Total below investment grade                           7,155           5,133              2,022  Unrealized losses greater than 20%                    13,009           9,468              3,541  Subtotal                                              89,678          80,218              9,460   Securities owned with realized impairment: Unrealized losses of 10% or less                      48,841          47,939                902 Unrealized losses of 20% or less and greater than 10%                                               9,367           8,174              1,193  Subtotal                                              58,208          56,113              2,095  Unrealized losses greater than 20%: Investment grade Less than twelve months                                    -               -                  - Twelve months or greater                                   -               -                  -  Total investment grade                                     -               -                  -  Below investment grade Less than twelve months                                1,590           1,240                350 Twelve months or greater                              10,967           8,017              2,950  Total below investment grade                          12,557           9,257              3,300  Unrealized losses greater than 20%                    12,557           9,257              3,300  Subtotal                                              70,765          65,370              5,395  Total                                             $  160,443       $ 145,588       $     14,855                                             48 

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

                                                                                         Gross                                                   Amortized          Fair           Unrealized                                                      Cost            Value            Losses Securities owned without realized impairment: Unrealized losses of 10% or less                  $  154,445       $ 151,008       $      3,437 Unrealized losses of 20% or less and greater than 10%                                              53,042          45,689              7,353  Subtotal                                             207,487         196,697             10,790  Unrealized losses greater than 20%: Investment grade: Less than twelve months                                4,946           3,752              1,194 Twelve months or greater                                 908             450                458  Total investment grade                                 5,854           4,202              1,652  Below investment grade: Less than twelve months                                8,210           5,977              2,233 Twelve months or greater                                   -               -                  -  Total below investment grade                           8,210           5,977              2,233  Unrealized losses greater than 20%                    14,064          10,179              3,885  Subtotal                                             221,551         206,876             14,675   Securities owned with realized impairment: Unrealized losses of 10% or less                      37,639          36,420              1,219 Unrealized losses of 20% or less and greater than 10%                                              24,789          20,843              3,946  Subtotal                                              62,428          57,263              5,165  Unrealized losses greater than 20%: Investment grade: Less than twelve months                                    -               -                  - Twelve months or greater                                   -               -                  -  Total investment grade                                     -               -                  -  Below investment grade: Less than twelve months                               29,391          23,178              6,213 Twelve months or greater                              22,585          17,298              5,287  Total below investment grade                          51,976          40,476             11,500  Unrealized losses greater than 20%                    51,976          40,476             11,500  Subtotal                                             114,404          97,739             16,665  Total                                             $  335,955       $ 304,615       $     31,340                                             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 at September 30, 2012.                                                                      Gross                                     Fair            %           Unrealized          %                                     Value        of Total         Losses         of Total    AAA                            $   3,056             2%     $         65             1%    AA                                30,043            21%            4,935            33%    A                                  8,404             6%              472             3%    BBB                               20,425            14%            1,313             9%     Total investment grade            61,928            43%            6,785            46%    BB                                 9,545             7%              351             2%    B and below                       72,964            50%            7,613            52%     Total below investment grade      82,509            57%            7,964            54%                                    $ 144,437           100%     $     14,749           100%    The following table provides information on fixed maturity securities with gross unrealized losses by actual or equivalent Standard & Poor's rating at December 31, 2011.                                                                      Gross                                     Fair            %           Unrealized          %                                     Value        of Total         Losses         of Total    AAA                            $  32,245            11%     $      4,475            14%    AA                                 8,986             3%              125             1%    A                                 32,550            11%            1,207             4%    BBB                               65,557            21%            2,925             9%     Total investment grade           139,338            46%            8,732            28%    BB                                45,845            15%            4,063            13%    B and below                      118,309            39%           18,410            59%     Total below investment grade     164,154            54%           22,473            72%                                    $ 303,492           100%     $     31,205           100%    The following is a discussion of all non-asset backed securities whose fair value had been less than 80% of amortized cost for at least six consecutive months at September 30, 2012. The Company has considered a wide variety of factors to determine that these positions were not other-than-temporarily impaired.                     Security                                Description  Financial institutions                     Institutions impacted by housing and                                             mortgage crisis. These securities                                             continue to perform within                                             contractual obligations.   The discounted future cash flow calculation typically becomes the primary determinant of whether any portion and to what extent an unrealized loss is due to credit on loan-backed and similar asset-backed securities with significant indications of potential other-than-temporary impairment. Such indications typically include below investment grade ratings and significant unrealized losses for an extended period of time, among other factors. The Company identified 17 non-U.S. Agency mortgage-backed securities that were determined to have such indications at September 30, 2012 and December 31, 2011. Discounted future cash flow analysis was performed for each of these securities to determine if any portion of the impairment was due to credit and deemed to be other-than-temporary. The discount rate used in calculating the present value of future cash flows was the investment yield at the time of purchase for each security. The initial default rates were assumed to remain constant over a 24-month time frame and grade down thereafter, reflecting the general perspective of a more stabilized residential housing environment in the future.                                           50 

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  The following tables present the range of significant assumptions used in projecting the future cash flows at September 30, 2012 and December 31, 2011. The Company believes that the assumptions below are reasonable because they are based upon the actual results of the underlying security collateral.                                                  September 30, 2012                 Initial Default Rate           Initial Severity Rate          Prepayment Speed     Vintage       Low            High           Low              High          Low         High     2003             4.7%          4.7%             40%             40%         18.0%       18.0%     2004             5.7%          7.4%             35%             57%          8.0%       13.0%     2005             3.0%         15.2%             40%             73%          6.0%       15.0%     2006             5.1%          6.3%             46%             85%          8.0%       16.0%     2007            10.2%         10.2%             60%             60%          8.0%        8.0%                                                 December 31, 2011                 Initial Default Rate           Initial Severity Rate          Prepayment Speed     Vintage       Low            High           Low              High          Low         High     2003             3.9%          3.9%             40%             40%         18.0%       18.0%     2004             4.9%          7.7%             40%             56%          8.0%       13.0%     2005             3.5%         13.7%             40%             68%          6.0%       15.0%     2006             4.9%         10.0%             52%             90%          8.0%       18.0%     2007             8.8%          8.8%             66%             66%          8.0%        8.0%   For loan-backed and similar asset-backed securities, the determination of any amount of impairment that is due to credit is based upon the present value of projected future cash flows being less than the amortized cost of the security. This amount is recognized as a realized loss in the Company's Consolidated Statements of Comprehensive Income and the carrying value of the security is written down by the same amount. The portion of an impairment that is determined not to be due to credit is recorded as a component of accumulated other comprehensive income in the Consolidated Balance Sheets.  Significant unrealized losses on securities can continue for extended periods of time, particularly for certain individual securities. While this can be an indication of potential credit impairments, it can also be an indication of illiquidity in a particular sector or security. In addition, the fair value of an individual security can be heavily influenced by the complexities of varying market sentiment or uncertainty regarding the prospects for an individual security. This has been the situation in the non-U.S. Agency mortgage-backed securities market in recent periods. Based upon the process described above, the Company is best able to determine if and to what extent credit impairment may exist in these securities by performing present value calculations of projected future cash flows at the conclusion of each reporting period. By reviewing the most recent data available regarding the security and other relevant industry and market factors, the Company can modify assumptions used in the cash flow projections and determine the best estimate of the portion of any impairment that is due to credit at the conclusion of each period.  The Company closely monitors its investments in securities classified as subprime. Subprime securities include all bonds or portions of bonds where the underlying collateral is made up of home equity loans or first mortgage loans to borrowers whose credit scores at the time of origination were lower than the level recognized in the market as prime. The Company's classification of subprime does not include Alt-A or jumbo loans, unless the collateral otherwise meets the preceding definition. At September 30, 2012, the fair value of investments with subprime residential mortgage exposure was $15.4 million with a related $2.7 million unrealized loss. At December 31, 2011, the Company had investments with subprime residential mortgage exposure of $17.4 million and a related $3.5 million unrealized loss. This exposure amounted to less than 1% of the Company's invested assets at both September 30, 2012 and December 31, 2011. These investments are included in the Company's process for evaluation of other-than-temporarily impaired securities.  The Company has a significant level of non-U.S. Agency structured securities. Structured securities include asset-backed, residential mortgage-backed securities, along with collateralized debt obligations, collateralized mortgage obligations and other collateralized obligations. The Company monitors these securities through a combination of an analysis of vintage, credit ratings and other factors.                                           51 

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

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

     Total investment grade              50,162         48,246             

1,916

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

     Total below investment grade       121,172        124,036             

(2,864 )

Other Structured Securities:

     Investment grade                    80,974         80,609                  365      Below investment grade               2,760          2,722                   38       Total other                         83,734         83,331                  403 

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

   (545 )     

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

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

                                            Fair        Amortized         Unrealized                                          Value          Cost         Gains (Losses)

     Residential & Non-agency MBS: 1      Investment Grade:      Vintage 2003 and earlier          $  27,700     $   26,974     $            726      2004                                 29,682         28,693                  989      2005                                      -              -                    -      2006                                      -              -                    -      2007                                      -              -                    -       Total investment grade               57,382         55,667                1,715        Below Investment Grade:      Vintage 2003 and earlier                  -              -                    -      2004                                 34,497         34,821                 (324 )      2005                                 72,619         87,447              (14,828 )      2006                                  6,960          7,309                 (349 )      2007                                  3,868          4,864                 (996 )       Total below investment grade        117,944        134,441            

(16,497 )

Other Structured Securities:

     Investment grade                     71,793         72,998               (1,205 )      Below investment grade                3,179          3,444                 (265 )       Total other                          74,972         76,442               (1,470 ) 

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

 (16,252 )     

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

   Total unrealized losses on non-U.S. Agency structured securities totaled $0.5 million at September 30, 2012, compared to $16.3 million at December 31, 2011. Total unrealized losses on these securities as a percent of total amortized cost totaled less than 1% at September 30, 2012, an improvement from 6% at year-end 2011.  The Company has written down certain investments in previous periods. Securities written down and continuing to be owned at September 30, 2012 had a fair value of $136.1 million with a net unrealized loss of $1.2 million.  The Company evaluated the current status of all investments previously written-down to assess the ongoing expectations of amounts to be collected. The Company's evaluation process is similar to its impairment evaluation process. If evidence exists that the Company believes that it will receive all or a materially greater portion of its contractual maturities from securities previously written down, the accretion of income is adjusted. The Company did not change its evaluation of any investments under this process during the first six months of 2012 or 2011.                                           53 

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  The Company maintains a diversified investment portfolio, including 5% of its investment portfolio in municipal bond securities and 6% in bond securities from foreign issuers. Approximately 74% of the Company's foreign securities were from issuers in Canada, Australia, and Great Britain at September 30, 2012. The Company has no holdings in European sovereign debt and all investments are denominated in U.S. dollars. The fair value of the Company's securities from foreign issuers at September 30, 2012 was $239.4 million with a net unrealized gain of $17.9 million. This compares to a fair value of $199.5 million with a net unrealized gain of $8.7 million at December 31, 2011.  The Company does not have a material amount of direct or indirect guarantees for the securities in its investment portfolio. The Company did not have any direct exposure to financial guarantors at September 30, 2012. The Company's indirect exposure to financial guarantors totaled $34.8 million, which was approximately 1% of the Company's investments at September 30, 2012. The unrealized gain on these investments totaled $3.1 million at September 30, 2012. The Company's indirect exposure to financial guarantors at December 31, 2011 totaled $36.8 million, which was approximately 1% of the Company's investments. Total unrealized gains on these investments totaled $1.7 million at December 31, 2011.  

Other Revenues

  Other revenues consist primarily of supplementary contract considerations; policyholder dividends left with the Company to accumulate; income received on the sale of low income housing tax credit (LIHTC) investments by a subsidiary of the Company; and fees charged on products and sales from the Company's broker-dealer subsidiary. Other revenues decreased 3% in the third quarter and 9% in the first nine months of 2012 compared to the same periods one year earlier. The decreases in both periods reflected lower income from the sale of LIHTC investments. In addition, the decrease in the nine months also reflected lower supplementary contract considerations.  

Policyholder Benefits

  Policyholder benefits consist of death benefits, immediate annuity benefits, accident and health benefits, surrenders, other benefits, and the associated increase or decrease in reserves for future policy benefits. The largest component of policyholder benefits was death benefits for the periods presented. Death benefits reflect mortality results, after consideration of the impact of reinsurance. Mortality will fluctuate from period to period. However, mortality experience has generally remained within pricing expectations for the periods presented. Following is a discussion of significant fluctuations in policyholder benefits during the periods presented.  Policyholder benefits increased $1.0 million or 2% in the third quarter of 2012 compared to the same period one year earlier. The largest factors were increased death benefits, net of reinsurance, and increased benefit and contract reserves. The increase in reserves was largely due to favorable changes in immediate annuity premiums and benefits and a decrease that occurred during 2011 in benefit and contract reserves that resulted from system changes and refinements. Partially offsetting these was the change in the value of the GMWB rider liability, as discussed below.  Policyholder benefits decreased $3.4 million or 3% in the first nine months compared to the same period one year ago. The largest single factor in the decrease in policyholder benefits resulted from a decline in death benefits, net of reinsurance. Other contributing factors were reductions in group accident and health benefits, supplementary contract payments, and policy dividends and coupons. Partially offsetting these was an increase in benefit and contract reserves. This increase was the result of several factors, including favorable changes in immediate annuity premiums and benefits and prior year system changes and refinements. Also, the Company recaptured a block of previously reinsured policies in the second quarter of 2012 which also contributed to the increase in reserves. Partially offsetting these items was the change in the value of the GMWB rider liability, as discussed below.  The Company has a GMWB rider for variable annuity contracts that is considered to be a financial derivative and, as such, is accounted for at fair value. The Company determines the fair value of the GMWB rider using a risk-neutral valuation method. The value of the riders will fluctuate depending on market conditions. At September 30, 2012, the fair value of the liability decreased $0.2 million compared to the fair value at December 31, 2011. The change in this liability resulted in a decrease in reserves of $0.2 million in the first nine months of 2012 compared to an increase in reserves of $3.5 million in the first nine months of 2011. These changes resulted in a decrease of $3.7 million in the year-over-year comparison. This fluctuation can be attributed to favorable capital market returns and a decline in market volatility, partially offset by declines in interest rates and issuer discount spreads.  

Interest Credited to Policyholder Account Balances

  Interest is credited to policyholder account balances according to terms of the policies or contracts for universal life, fixed deferred annuities, and other investment-type products. There are minimum levels of interest crediting assumed in certain policies or contracts, as well as allowances for adjustments to be made to reflect current market conditions in certain policies                                           54

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  or contracts. Accordingly, the Company reviews and adjusts crediting rates as necessary and appropriate. Amounts credited are a function of account balances and current period crediting rates. As account balances fluctuate, so will the amount of interest credited to policyholder account balances. Interest credited to policyholder account balances decreased $0.7 million or 3% in the third quarter and $1.0 million or 2% in the first nine months of 2012 compared with the same periods one year earlier. While total policyholder account balances have increased during 2012, average crediting rates have declined slightly.  

Amortization of Deferred Acquisition Costs

  The amortization of deferred acquisition costs decreased $4.4 million or 38% in the third quarter and $1.7 million or 8% in the first nine months of 2012 compared with the prior year. Contributing to the decrease in both periods were refinements in estimates made during the third quarter of 2011 that increased the amortization of DAC by $2.4 million in the third quarter of 2011. In addition, increases in account values decreased the amortization of DAC for certain products. Partially offsetting these was the impact of unlocking during the second quarter of 2012. Unlocking in 2012 resulted in an increase to the DAC asset of $1.3 million and was primarily attributable to refinements in mortality, interest, and persistency assumptions.  

Operating Expenses

  Operating expenses consist of incurred commission expense from the sale of insurance products, net of the deferral of certain commissions and certain expenses directly associated with the acquisition of new business; expenses from the Company's operations; the amortization of VOBA; and other expenses. Operating expenses increased $6.4 million or 26% in the third quarter of 2012 and $5.0 million or 7% in the first nine months compared to last year. The increase in the third quarter was largely due to increased salaries and employee benefit costs, increased legal fees, and an increase in depreciation on a long-lived asset. The increased depreciation expense of $3.7 million resulted from of a change in accounting estimate for a long-lived asset, as described in Note 3. The increase in the nine months reflected increases in salaries and employee benefit costs, legal fees, and the depreciation on a long-lived asset. These were partially offset by a decline in the amount charged to allowance for doubtful accounts for agent receivables.  The amortization of VOBA decreased $0.3 million or 19% in the third quarter of 2012 and $0.1 million or 2% in the first nine months of 2012 compared to the same periods one year earlier. The decrease in the third quarter of 2012 reflected $0.5 million in less amortization as the traditional life insurance block from the Old American segment became fully amortized at December 31, 2011. The increase in VOBA in the first nine months of 2012 reflected a $1.4 million decrease resulting from the fully amortized traditional life insurance block from in the Old American segment. Offsetting this, VOBA amortization increased during the nine months due to unlocking that occurred during the second quarter of 2012.  Income Taxes  The third quarter income tax expense was $2.1 million or 34% of income before tax for 2012, versus $3.0 million or 40% of income before tax for the prior year period. The income tax expense for the nine months ended September 30, 2012 was $16.2 million or 34% of income before tax, versus $11.3 million or 36% of income before tax for the prior year period.  The effective income tax rate was less than the prevailing corporate federal income tax rate of 35% in the third quarter of 2012. Permanent differences, including the dividends-received deduction, resulted in a benefit of approximately 2% of income before tax. Partially offsetting the benefit from permanent differences was tax expense of approximately 1% of income before tax related to investments in affordable housing.  The effective income tax rate was less than the prevailing corporate federal income tax rate of 35% in the nine months ended September 30, 2012, primarily due to permanent differences that resulted in a benefit of approximately 1% of income before tax.  The effective income tax rate in the third quarter of 2011 and for the nine months ended September 30, 2011 was greater than the prevailing corporate federal income tax rate of 35%, primarily due to adjustments related to the Company's investments in affordable housing. The affordable housing adjustments resulted in a tax expense of approximately 5% and 1% of income before tax in the third quarter and nine months ended September 30, 2011, respectively.  

Operating Results by Segment

  The Company has three reportable business segments, which are defined based on the nature of the products and services offered: Individual Insurance, Group Insurance, and Old American. The Individual Insurance segment consists of individual insurance products for both Kansas City Life and Sunset Life. The Individual Insurance segment is marketed through a nationwide sales force of independent general agents and third-party marketing arrangements. The Group Insurance segment consists of sales of group life, group disability, dental, and vision products. This segment is marketed through a nationwide                                           55

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  sales force of independent general agents, group brokers, and third-party marketing arrangements. Old American consists of individual insurance products designed largely as final expense products. These products are marketed through a nationwide general agency sales force with exclusive territories, using direct response marketing to supply agents with leads. For more information, refer to Note 15 - Segment Information in the Notes to Consolidated Financial Statements (Unaudited).                                           56 

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Individual Insurance

  The following table presents financial data of the Individual Insurance business segment for the third quarters and nine months ended September 30, 2012 and 2011:                                                  Quarter Ended                             Nine Months Ended                                                September 30                                September 30                                         2012                  2011                  2012                  2011 Insurance revenues: Premiums, net                      $        3,151        $        2,950        $       11,029        $        9,238 Contract charges                           24,464                25,427                75,187                75,413  Total insurance revenues                   27,615                28,377                86,216                84,651 Investment revenues: Net investment income                      41,444                40,031               122,899               123,798 Net realized investment gains, excluding impairment losses                   665                   209                17,890                 3,149 Net impairment losses recognized in earnings: Total other-than-temporary impairment losses                            (691 )                (157 )              (1,118 )                (607 ) Portion of impairment losses recognized in other comprehensive income                           47                    16                   197                   114  Net impairment losses recognized in earnings                       (644 )                (141 )                (921 )                (493 )  Total investment revenues                  41,465                40,099               139,868               126,454 Other revenues                              2,110                 2,176                 6,523                 7,162  Total revenues                             71,190                70,652               232,607               218,267   Policyholder benefits                      21,730                21,775                64,096                66,799 Interest credited to policyholder account balances              20,436                21,119                61,371                62,366 Amortization of deferred acquisition costs                           3,701                 8,267                10,438                11,750 Operating expenses                         20,960                13,869                53,094                45,797  Total benefits and expenses                66,827                65,030               188,999               186,712   Income before income tax expense                                     4,363                 5,622                43,608                31,555  Income tax expense                          1,365                 2,280                14,419                11,171  Net income                         $        2,998        $        3,342        $       29,189        $       20,384                                             57 

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  The net income for this segment in the third quarter of 2012 was $3.0 million, compared to $3.3 million in the third quarter of 2011. This change was primarily the result of lower insurance revenues and higher operating expenses. Partially offsetting these, net investment income increased, along with lower amortization of deferred acquisition costs and interest credited to policyholder account balances.  Net income for this segment was $29.2 million for the first nine months of 2012, an increase of $8.8 million from the first nine months of 2011. Contributing to this improvement were increases in net realized investment gains and insurance revenues, along with lower policyholder benefits, amortization of deferred acquisition costs, and interest credited to policyholder account balances. Partially offsetting these changes was a decrease in net investment income and increased operating expenses.  Total insurance revenues for this segment decreased $0.8 million or 3% in the third quarter of 2012 compared with the same period in the prior year. Total premiums decreased $0.4 million or 3%, reflecting a $0.6 million decrease in individual life premiums that was partially offset by a $0.3 million increase in immediate annuity premiums. Contract charges decreased $1.0 million or 4%, and reinsurance ceded premiums decreased $0.6 million or 5%.  Total insurance revenues for this segment increased $1.6 million or 2% for the first nine months of 2012 compared to one year earlier. Total premiums increased $0.9 million or 2%, reflecting a $1.4 million or 24% increase in immediate annuity premiums that was partially offset by a $0.5 million or 1% decrease in individual life premiums. Contract charges decreased $0.2 million and reinsurance ceded premiums decreased $0.9 million or 3%.  The following table presents gross premiums by new and renewal business, less reinsurance ceded, as included in insurance revenues for the third quarters and nine months ended September 30, 2012 and 2011. New premiums are also detailed by product.                                                                      Quarter Ended                                                                    September 30                                          2012               % Change               2011              % Change New premiums: Individual life insurance           $        1,119                 (6 )       $        1,194                (7 ) Immediate annuities                          2,187                 15                  1,903               (72 )  Total new premiums                           3,306                  7                  3,097               (61 ) Renewal premiums                            10,393                 (5 )               10,970                 4  Total premiums                              13,699                 (3 )               14,067               (24 ) Reinsurance ceded                          (10,548 )               (5 )              (11,117 )               6  Premiums, net                       $        3,151                  7         $        2,950               (63 )                                                                      Nine Months Ended                                                                    September 30                                          2012               % Change               2011              % Change New premiums: Individual life insurance           $        3,445                 (9 )       $        3,783                (2 ) Immediate annuities                          7,355                 30                  5,649               (66 )  Total new premiums                          10,800                 15                  9,432               (54 ) Renewal premiums                            31,527                 (1 )               31,998                 2  Total premiums                              42,327                  2                 41,430               (20 ) Reinsurance ceded                          (31,298 )               (3 )              (32,192 )               1  Premiums, net                       $       11,029                 19         $        9,238               (54 )    Total new premiums for this segment increased $0.2 million or 7% in the third quarter of 2012. This improvement resulted from increased sales of immediate annuities. Immediate annuity receipts can have sizeable fluctuations, as receipts from policyholders largely result from one-time premiums rather than recurring premiums. Total renewal premiums decreased $0.6 million or 5% compared to last year, due to a decline in individual life renewal premiums.  Total new premiums for this segment increased $1.4 million or 15% in the first nine months of 2012 versus the prior year. This improvement also resulted from increased immediate annuities. Total renewal premiums decreased 1%, reflecting lower individual life and annuity renewal premiums.                                           58

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  The following table provides detail by new and renewal deposits for the third quarters and nine months ended September 30, 2012 and 2011. New deposits are also detailed by product.                                                                     Quarter Ended                                                                   September 30                                            2012            % Change              2011            % Change New deposits: Universal life insurance              $        2,980              25        $        2,391             (39 ) Variable universal life insurance                144             (21 )                 183             (43 ) Fixed deferred annuities                      11,982             (22 )              15,368             (42 ) Variable annuities                             4,863              18                 4,119              44  Total new deposits                            19,969              (9 )              22,061             (34 ) Renewal deposits                              34,903              (7 )              37,459               6  Total deposits                        $       54,872              (8 )      $       59,520             (14 )                                                                        Nine Months Ended                                                                     September 30                                             2012             % Change               2011             % Change New deposits: Universal life insurance               $        9,140                2         $        8,953              (14 ) Variable universal life insurance                 404              (40 )                  676              (11 ) Fixed deferred annuities                       43,601              (10 )               48,285               (1 ) Variable annuities                             13,466               (4 )               14,098               (2 )  Total new deposits                             66,611               (8 )               72,012               (3 ) Renewal deposits                              105,120               (4 )              109,490                4  Total deposits                         $      171,731               (5 )       $      181,502                1    Total new deposits decreased $2.1 million or 9% in the third quarter of 2012 compared to last year, reflecting a $3.4 million or 22% decrease in new fixed deferred annuity deposits. Partially offsetting this, new variable annuity deposits increased $0.7 million or 18% and new universal life deposits increased $0.6 million or 25%. Total renewal deposits decreased $2.6 million or 7% in the third quarter of 2012. This decrease was due to a $3.0 million or 25% decline in fixed deferred annuity renewal deposits. Total new deposits decreased $5.4 million or 8% in the first nine months of 2012 compared with the prior year. This decrease reflected a $4.7 million or 10% decline in new fixed deferred annuity deposits and a $0.6 million or 4% decline in new variable annuity deposits. Total renewal deposits decreased $4.4 million or 4% in the first nine months of 2012. This decline resulted from a $2.2 million or 7% decrease in fixed deferred annuity renewal deposits and a $1.0 million or 13% decrease in variable annuity renewal deposits. New sales and renewals for deposit products have been negatively affected for the third quarter and the first nine months of 2012 by continuing low interest rates and the uncertain economic environment.  Total contract charges decreased $1.0 million or 4% in the third quarter of 2012 compared to the third quarter of 2011. This largely resulted from decreases in cost of insurance charges and the amortization of deferred revenue. The decrease in cost of insurance charges was largely due to the runoff of closed blocks. Amortization of deferred revenue decreased due to lower actual gross profits on certain lines of business, largely related to increased reinsurance resulting from unlocking that occurred in the second quarter of 2012. Total contract charges on the closed blocks equaled 35% of total consolidated contract charges in both the third quarters of 2012 and 2011. Total contract charges on closed blocks declined 4% in the third quarter of 2012 compared to the same period in 2011. Total contract charges on open blocks of business, where there is ongoing marketing for new sales, decreased 4% in the third quarter of 2012.  Total contract charges decreased $0.2 million in the first nine months of 2012 compared to one year earlier, reflecting decreases in cost of insurance charges and expense loads. These were partially offset by an increase in the amortization of deferred revenue. In addition to the results discussed above for the quarter, the amortization of deferred revenue increased during 2012 due to a system upgrade that occurred during 2011 and led to enhanced reinsurance modeling capabilities. The decrease in expense loads is attributed to the increased sale of products with lower expense loads in 2012 than the prior year. The decline in cost of insurance charges was largely due to the runoff of closed blocks.  Total contract charges on the closed blocks equaled 35% of total consolidated contract charges in the first nine months of 2012 compared to 36% in the first nine months of 2011. Total contract charges on closed blocks declined 3% in the first nine months of 2012, while total contract charges on open blocks of business increased 1%.                                           59 

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  Net investment income increased $1.4 million or 4% in the third quarter of 2012 compared to the third quarter of 2011, as both average invested assets and yields earned increased. Net investment income decreased $0.9 million in the first nine months of 2012 compared to one year earlier, as an increase in average invested assets was offset by a decline in yields earned. Also, this segment had a net realized gain of $17.0 million in the first nine months of 2012 compared to a net gain of $2.7 million in the first nine months of 2011.  Please see Consolidated Results of Operations in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for a table that provides securities that were written down through earnings by business segment for the first three quarters of 2012 and 2011.  Other revenues decreased 3% in the third quarter and 9% in the first nine months of 2012 compared to the same periods one year earlier. The decreases in both periods reflected lower income from the sale of LIHTC investments. In addition, the decrease in the nine months also reflected lower supplementary contract considerations.  Policyholder benefits were flat for the third quarter of 2012 compared to the prior year. However, a decrease in supplementary contract payments was partially offset by an increase in benefit and contract reserves. Several factors contributed to the increase in benefit and contract reserves, including favorable changes in immediate annuity premiums and benefits and prior year system changes and refinements. Partially offsetting these items was the change in the value of the GMWB rider liability.  Policyholder benefits decreased $2.7 million or 4% in the first nine months of 2012 compared to the prior year. The largest factor in this decrease was death benefits, net of reinsurance. Other factors contributing to the decrease in policyholder benefits were reduced supplementary contract payments, dividends, and coupons. Partially offsetting this was an increase in benefit and contract reserves. This increase was the result of several factors, including favorable changes in immediate annuity premiums and benefits and prior year system changes and refinements. Also, the Company recaptured a block of previously reinsured policies in the second quarter of 2012 which also contributed to the increase in reserves. Partially offsetting these items was the change in the value of the GMWB rider liability.  Interest credited to policyholder account balances decreased 3% in the third quarter and 2% in the first nine months of 2012 compared to the same periods one year earlier. While total policyholder account balances increased in 2012, average crediting rates declined slightly.  The amortization of deferred acquisition costs decreased $4.6 million in the third quarter and $1.3 million in the first nine months of 2012 compared with the prior year. Contributing to the decrease in both periods were the aforementioned refinements in estimates made during the third quarter of 2011 that increased the amortization of DAC by $2.4 million in the third quarter of 2011. In addition, increases in account values decreased the amortization of DAC for certain products. Partially offsetting these was the impact of unlocking during the second quarter of 2012. Unlocking in 2012 resulted in an increase to the DAC asset of $1.3 million and was primarily attributable to refinements in mortality, interest, and persistency assumptions.  Operating expenses consist of incurred commissions, net of the capitalization of commissions, expenses from the Company's operations, the amortization of VOBA, and other expenses. Operating expenses increased $7.1 million or 51% in the third quarter and $7.3 million or 16% in the first nine months of 2012 compared with the same periods one year earlier. The increases for both periods were largely attributable to higher salaries and employee benefit costs, legal fees, and depreciation on a long-lived asset.  The amortization of VOBA increased $0.2 million or 18% in the third quarter and $1.3 million or 32% in the first nine months of 2012 compared to one year earlier. The increase in the third quarter reflected higher amortization of VOBA on certain policies due to improved mortality. The increase in the nine months was largely due to unlocking that occurred during the second quarter of 2012.                                           60 

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Group Insurance

  The following table presents financial data of the Group Insurance business segment for the third quarters and nine months ended September 30, 2012 and 2011:                                               Quarter Ended                              Nine Months Ended                                            September 30                                 September 30                                     2012                   2011                  2012                   2011 Insurance revenues: Premiums, net                  $       12,316         $       12,613        $       36,580         $       37,413  Total insurance revenues               12,316                 12,613                36,580                 37,413 Investment revenues: Net investment income                     132                    133                   392                    420 Other revenues                             35                     38                   108                    113  Total revenues                         12,483                 12,784                37,080                 37,946   Policyholder benefits                   6,590                  6,289                20,203                 21,373 Operating expenses                      6,058                  6,433                17,372                 17,360  Total benefits and expenses                               12,648                 12,722                37,575                 38,733   Income (loss) before income tax expense (benefit)                                (165 )                   62                  (495 )                 (787 )  Income tax expense (benefit)                                 (57 )                   22                  (173 )                 (275 )  Net income (loss)              $         (108 )       $           40        $         (322 )       $         (512 )    The following table presents gross premiums by new and renewal business, less reinsurance ceded, as included in insurance revenues for the third quarters and nine months ended September 30, 2012 and 2011. New premiums are also detailed by product.                                                               Quarter Ended September 30                                           2012             % Change              2011             % Change New premiums: Group life insurance                 $          624               21        $          516               (5 ) Group dental insurance                        1,261               51                   834              (54 ) Group disability insurance                    1,605              (34 )               2,425              118 Other group insurance                            28              (33 )                  42              500  Total new premiums                            3,518               (8 )               3,817               10 Renewal premiums                             12,156                4                11,672               14  Total premiums                               15,674                1                15,489               13 Reinsurance ceded                            (3,358 )             17                (2,876 )             30  Premiums, net                        $       12,316               (2 )      $       12,613                9                                             61 

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   Table of Contents                                                          Nine Months Ended September 30                                           2012             % Change              2011             % Change New premiums: Group life insurance                 $        1,849               26        $        1,463              (13 ) Group dental insurance                        3,226                -                 3,213              (47 ) Group disability insurance                    5,293              (24 )               6,967              110 Other group insurance                           118                5                   112               11  Total new premiums                           10,486              (11 )              11,755                6 Renewal premiums                             35,939                5                34,166                6  Total premiums                               46,425                1                45,921                6 Reinsurance ceded                            (9,845 )             16                (8,508 )             30  Premiums, net                        $       36,580               (2 )      $       37,413                2    Total new premiums decreased $0.3 million or 8% in the third quarter of 2012 compared with the prior year. This decrease was driven by a decline in new group disability premiums of $0.8 million or 34%. Partially offsetting this was a $0.4 million or 51% increase in new dental premiums and a $0.1 million or 21% increase in new group life premiums. Renewal premiums increased $0.5 million or 4% in the third quarter, reflecting an increase in short-term disability renewal premiums that was partially offset by a decline in dental renewal premiums.  Total new premiums decreased $1.3 million or 11% in the first nine months of 2012, compared to one year earlier. This decrease was largely due to a $2.0 million or 33% decline in new short-term disability premiums. Partially offsetting this change, new group life premiums increased $0.4 million or 26%. Renewal premiums increased $1.8 million or 5% in the nine months, as an increase in disability renewal premiums was partially offset by a decrease in dental renewal premiums.  The Company uses reinsurance in several of its group product lines to help mitigate risk. Reinsurance premiums increased $0.5 million or 17% in the third quarter and $1.3 million or 16% in the first nine months of 2012 compared to the prior year. The increase in both periods was largely due to an increase in short-term disability renewal premiums that are highly reinsured.  Policyholder benefits consist of death benefits, accident and health benefits, and the associated increase or decrease in reserves for future policy benefits. Policyholder benefits increased $0.3 million or 5% in the third quarter and decreased $1.2 million or 5% in the nine months compared to the prior year. The increase during the third quarter was largely due to higher benefits paid for the dental product line. The decrease in the nine months was largely due to a reduction in the benefits paid for the group life and dental product lines.  The policyholder benefit ratio is derived by dividing policyholder benefits, net of reinsurance, by total net premiums. The ratio for the Group Insurance segment was 54% in the third quarter and 55% for the first nine months of 2012, compared to 50% in the third quarter and 57% first nine months of 2011. The policyholder benefit ratios for the dental product line were approximately 68% in the third quarter and 70% first nine months of 2012, compared to approximately 62% in the third quarter and 72% first nine months of 2011.  Operating expenses consist of commissions, fees to third-party marketing and administrative organizations, and expenses from the Company's operations. Operating expenses decreased $0.4 million or 6% in the third quarter and were essentially flat in the nine months. The decrease in the third quarter was largely due to lower commission expenses associated with the disability and dental products.                                           62 

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Old American

  The following table presents financial data for the Old American business segment for the third quarters and nine months ended September 30, 2012 and 2011:                                                     Quarter Ended                               Nine Months Ended                                                  September 30                                  September 30                                           2012                   2011                   2012                   2011 Insurance revenues: Premiums, net                        $       17,680         $       17,048         $       52,644         $       50,655  Total insurance revenues                     17,680                 17,048                 52,644                 50,655 Investment revenues: Net investment income                         3,069                  2,929                  8,998                  9,159 Net realized investment gains, excluding impairment losses                     (59 )                    1                    (86 )                  (34 ) Net impairment losses recognized in earnings: Total other-than-temporary impairment losses                                (6 )                  (10 )                  (35 )                  (67 ) Portion of impairment losses recognized in other comprehensive income                              -                      1                      -                     17  Net impairment losses recognized in earnings                           (6 )                   (9 )                  (35 )                  (50 )  Total investment revenues                     3,004                  2,921                  8,877                  9,075 Other revenues                                    1                      1                     12                     14  Total revenues                               20,685                 19,970                 61,533                 59,744   Policyholder benefits                        11,180                 10,476                 34,947                 34,507 Amortization of deferred acquisition costs                             3,450                  3,310                  9,735                 10,116 Operating expenses                            4,023                  4,426                 11,812                 14,203  Total benefits and expenses                  18,653                 18,212                 56,494                 58,826   Income before income tax expense                                       2,032                  1,758                  5,039                    918  Income tax expense                              790                    674                  1,936                    360  Net income                           $        1,242         $        1,084         $        3,103         $          558    Net income for this segment totaled $1.2 million in the third quarter of 2012 compared to $1.1 million in the prior year. The increase in net income for the third quarter reflected a $0.6 million increase in insurance revenues, a $0.1 million increase in net investment income, and a $0.4 million decrease in operating expenses. These were partially offset by a $0.7 million increase in policyholder benefits. Net income for the first nine months of 2012 was $3.1 million compared to $0.6 million for the same period in 2011. The increase in net income in the first nine months of 2012 reflected a $2.0 million increase in insurance revenues, a $0.4 million decrease in the amortization of DAC, and a $2.4 million decrease in operating expenses. These were partially offset by a $0.2 million decrease in net investment income and a $0.4 million increase in policyholder benefits.                                           63 

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  The following table presents gross premiums by new and renewal business, less reinsurance ceded, as included in insurance revenues for the third quarters and nine months ended September 30, 2012 and 2011.                                                                     Quarter Ended                                                                   September 30                                           2012             % Change              2011             % Change New individual life premiums         $        3,165                4        $        3,055                5 Renewal premiums                             15,002                3                14,572                3  Total premiums                               18,167                3                17,627                3 Reinsurance ceded                              (487 )            (16 )                (579 )            (12 )  Premiums, net                        $       17,680                4        $       17,048                4                                                                  Nine Months Ended                                                                   September 30                                           2012             % Change              2011             % Change New individual life premiums         $        9,609                5        $        9,190               10 Renewal premiums                             44,565                3                43,274                2  Total premiums                               54,174                3                52,464                3 Reinsurance ceded                            (1,530 )            (15 )              (1,809 )            (12 )  Premiums, net                        $       52,644                4        $       50,655                4    Total new premiums increased $0.1 million or 4% in the third quarter and $0.4 million or 5% in the nine months, while total renewal premiums increased $0.4 million or 3% in the third quarter and $1.3 million or 3% in the nine months. The increases in premiums reflect a combination of expanded distribution efforts and improved agency productivity. Old American continues to focus on the recruitment and development of new agencies and agents, along with improved production from existing agencies and agents. In addition, proactive territorial management by agencies and the home office have contributed to the increased sales.  Net investment income increased $0.1 million or 5% in the third quarter as both average invested assets and yields earned increased. Net investment income decreased $0.2 million or 2% in the first nine months as an increase in average invested assets was more than offset by lower yields earned.  Please see Consolidated Results of Operations in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for a table that provides securities that were written down through earnings by business segment for the first three quarters of 2012 and 2011.  Policyholder benefits increased $0.7 million or 7% in the third quarter versus last year. The increase was largely due to a $0.6 million increase in death benefits, net of reinsurance, and a $0.3 million increase in benefit and contract reserves. Policyholder benefits increased $0.4 million or 1% in the first nine months of 2012 compared with the prior year. This increase was due to a $1.0 million increase in benefit and contract reserves. Partially offsetting this change was a $0.4 million decrease in death benefits and a $0.2 million decrease in life surrenders. The increase in reserves occurred in both the third quarter and nine months of 2012, can largely be attributed to the increase in both sales and retention of business. Mortality fluctuations occur each period, and the Company monitors these fluctuations in relation to its pricing expectations. While death benefits decreased during the first nine months of 2012, the results remained within pricing expectations.  Amortization of DAC increased $0.1 million or 4% in the third quarter but decreased $0.4 million or 4% in the nine months compared to one year earlier. The decline in the nine months was primarily due to the implementation of ASU No. 2010-26, as described in Note 7 - Change in Accounting Principle and Change in Accounting Estimate.  Operating expenses decreased $0.4 million or 9% in the third quarter and $2.4 million or 17% in the nine months compared to one year earlier. The decreases in both periods were largely due to reduced agent meeting costs. In addition, salaries and benefits decreased in the nine months. Also contributing to the decreases for both periods was lower amortization of VOBA, due to the traditional life insurance block being fully amortized at December 31, 2011. This resulted in less VOBA amortization of $0.5 million and $1.4 million in the third quarter and first nine months of 2012, respectively, compared to the same periods in the prior year. Capitalized commissions increased in the nine months, primarily related to the implementation of ASU No. 2010-26, as described in Note 3.                                           64 

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Liquidity and Capital Resources

Liquidity

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

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

Debt and Short-Term Borrowing

  The Company and certain subsidiaries have access to borrowing capacity through their membership affiliation with the Federal Home Loan Bank of Des Moines (FHLB). At September 30, 2012, there were no outstanding balances with the FHLB, and there were no outstanding balances at year-end 2011. The Company has access to unsecured revolving lines of credit of $60.0 million with two major commercial banks with no balances outstanding. These lines of credit will expire in June of 2013. The Company anticipates renewing these lines of credit as they come due.  Capital Resources  The Company considers existing capital resources to be adequate to support the current level of business activities. In addition, the Company's statutory equity exceeds the minimum capital deemed necessary to support its insurance business, as determined by the risk-based capital calculations and guidelines established by the National Association of Insurance Commissioners. The Company believes these statutory limitations impose no practical restrictions on its dividend payment plans.  

The following table shows the capital adequacy for the Company.

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

710,705

Ratio of stockholders' equity to assets, excluding separate accounts

                                                 18%       

17%

   The ratio of equity to assets less separate accounts increased from 17% at December 31, 2011 to 18% at September 30, 2012. Unrealized investment gains on available for sale securities, which are included as a part of stockholders' equity (net of securities losses, related taxes, policyholder account balances, future policy benefits, and DAC), totaled $112.1 million at September 30, 2012. This represents an increase of $31.0 million in net unrealized gains from the $81.1 million in net unrealized investment gains at December 31, 2011. Stockholders' equity increased $45.7 million from year-end 2011, largely due to growth in retained earnings from increased net income experienced in the first nine months of 2012. In addition, the Company experienced growth in accumulated other comprehensive income, reflecting the increase in net unrealized gains.  The stock repurchase program was extended by the Board of Directors through January 27, 2013 to permit the purchase of up to one million of the Company's shares on the open market. During the first nine months of 2012, the Company purchased 72,126 shares under the stock repurchase program for $2.3 million. Through the nine months ended September 30, 2011, the Company purchased 121,241 shares of stock under the stock repurchase program for $3.7 million.  During the nine months ended September 30, 2012, the Company purchased 2,669 shares and sold 660 shares of treasury stock from the Company's employee stock ownership plan for a net increase in treasury stock of $0.1 million. During the six months ended June 30, 2012, the Company purchased 8,098 shares and sold 18,588 shares of treasury stock from the Company's deferred compensation plans for a net decrease in treasury stock of $0.5 million.                                           65

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  During the second quarter of 2012, the Company reclassified 188,621 shares from other assets to treasury stock. Please see the discussion of the immaterial correction in Note 1 - Nature of Operations and Significant Accounting Policies for additional information.  On October 22, 2012, the Board of Directors declared a quarterly dividend of $0.27 per share, unchanged from the prior year, which will be paid November 7, 2012 to stockholders of record as of November 1, 2012. Total stockholder dividends paid were $9.1 million and $9.3 million in the first nine months ended September 30, 2012 and 2011, respectively. 

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