A.M. Best has affirmed the financial strength rating (FSR) of A (Excellent) and the issuer credit rating (ICR) of “a” of Kansas City Life Insurance Company (Kansas City Life) [NASDAQ: KCLI]. Concurrently, A.M. Best has affirmed the FSR of A- (Excellent) and the ICRs of “a-” of Kansas City Life’s wholly owned subsidiary, Sunset Life Insurance Company of America (Sunset Life) and its final expense life insurance subsidiary, Old American Insurance Company (Old American). The outlook for all ratings is stable. All companies are domiciled in Kansas City, MO.

The ratings of Kansas City Life reflect its statutory profitability, more-than-adequate risk-adjusted capitalization and strong balance sheet. The company maintains a diversified product portfolio consisting of ordinary life insurance, fixed and variable annuities and group health and life products. Kansas City Life continues to focus on the growth of its ordinary life insurance products, primarily universal life insurance, utilizing its core general agencies, along with a complementary third-party distribution system. While its consistent ordinary life business has enabled the company to maintain its statutory profitability, earnings continue to be impacted by tightening interest spreads, declining investment yields and fluctuating mortality experience. Moreover, A.M. Best notes that statutory profitability in 2013 was lower due to a one-time ceding commission associated with the execution of a reinsurance transaction with American Family Life Insurance Company, which resulted in the acquisition of a closed block of variable life and annuities. Going forward, the transaction is expected to be accretive to earnings while adding scale to its fee-based businesses. Despite the fluctuations of statutory earnings in recent years, Kansas City Life’s ability to deliver a consistently profitable operating performance, together with a reduction in the level of stockholder dividends, has enabled the company to maintain a more-than-adequate level of risk-adjusted capitalization. Furthermore, A.M. Best believes that the organization’s capital is of high quality as reserves related to Regulation XXX and Guideline AXXX are self-funded by Kansas City Life, with minimal use of financial or operating leverage.

Partially offsetting these positive rating factors is Kansas City Life’s lack of overall premium growth in its ordinary life business over the past five years. The company has been unable to sustain any consistent premium growth during that time frame, mostly due to the prolonged low interest rate environment, intense competition within the life insurance marketplace and limited agent growth. A.M. Best is also concerned about Kansas City Life’s ongoing exposure to disintermediation risk in a rising interest rate environment, as fixed annuities account for approximately 40% of general account reserves, a sizable portion of which is not subject to surrender charges. In addition, a large portion of reserves are subject to high minimum interest rate guarantees, which could result in further spread compression in future periods should interest rates remain at current levels.

Additionally, A.M. Best remains concerned with the relatively high exposure to commercial mortgages. Although commercial mortgage loans as a percentage of the total investment portfolio has been decreasing in recent years, it still represents over one and a half times capital and surplus. However, these concerns are partially mitigated by the consistent performance of the commercial mortgage loan portfolio.

A.M. Best believes the potential for positive rating actions on Kansas City Life is unlikely in the near term due primarily to inconsistent statutory earnings and direct premium growth. Factors that could lead to a negative rating action include a material deterioration in risk-adjusted capital, a decline in operating earnings or life insurance sales growth below the industry average.

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Key insurance criteria reports utilized:

  • A.M. Best’s Liquidity Model for U.S. Life Insurers
  • Rating Members of Insurance Groups
  • Rating Run-Off Insurers and Specialists
  • Risk Management and the Rating Process for Insurance Companies
  • Understanding BCAR for U.S. and Canadian Life/Health Insurers

This press release relates to rating(s) that have been published on A.M. Best's website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best’s Ratings & Criteria Center.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2015 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

A.M. Best CompanyTom ZitelliSenior Financial Analyst(908) 439-2200, ext. 5412tom.zitelli@ambest.comorTom RosendaleAssistant Vice President(908) 439-2200, ext. 5201thomas.rosendale@ambest.comorChristopher SharkeyManager, Public Relations(908) 439-2200, ext. 5159christopher.sharkey@ambest.comorJim PeavyAssistant Vice President, Public Relations(908) 439-2200, ext. 5644james.peavy@ambest.com

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