Assessing the Impact of AM Best's Rating Actions on Kansas City Life and Subsidiaries

The recent rating actions by AM Best on Kansas City Life Insurance Company (KCL) and its subsidiaries underscore the complex interplay between litigation risks, capital allocation, and strategic risk management in the insurance sector. As a critical barometer of financial strength, AM Best's outlook revisions and rating affirmations provide valuable insights into how insurers navigate legal challenges while maintaining operational resilience. This analysis examines the implications of these rating changes for KCL and its subsidiaries, focusing on their risk management frameworks and capital strategies in a litigation-driven environment.

AM Best's Rating Actions: A Mixed Signal

AM Best revised the outlooks for KCL and its subsidiaries to negative in December 2025, citing litigation risks tied to universal life cost-of-insurance (COI) charges and capital pressures. However, the ratings themselves-such as KCL's affirmed Financial Strength Rating (FSR) of A- (Excellent)-reflect the company's "very strong" balance sheet strength and "appropriate" enterprise risk management (ERM) practices. Grange Life Insurance Company, a subsidiary operating as a closed block of business since 2020, faced a downgrade due to declining risk-adjusted capitalization and a limited business profile. In contrast, Old American Insurance Company retained a stable outlook, supported by its strong balance sheet and narrow business focus.

This divergence highlights the nuanced approach AM Best takes in evaluating subsidiaries with distinct risk profiles. For KCL, the negative outlook primarily stems from its exposure to multi-jurisdictional litigation, which could strain capital growth plans despite its robust capital base of $4 billion in admitted assets.

Litigation Risks and Strategic Responses

KCL's proposed $45 million settlement to resolve COI-related class-action lawsuits exemplifies its proactive approach to mitigating litigation risks. The settlement, targeting 88,000 policyholders across universal life and variable universal life policies, has been consolidated under a single court review, streamlining resolution efforts. Notably, KCL has not admitted wrongdoing, framing the settlement as a strategic move to avoid prolonged legal costs and reputational damage.

However, the financial impact of such settlements is significant. According to a report by Stueve Siegel, the $45 million payout is expected to pressure KCL's risk-adjusted capitalization metrics, at least in the short term. This aligns with AM Best's concerns about the company's ability to sustain capital growth amid ongoing legal challenges in the Western District of Missouri and the Central District of California.

Capital Allocation: Balancing Short-Term Pressures and Long-Term Resilience

KCL's capital allocation strategies have been pivotal in navigating these challenges. Following the litigation-related capital outflows, AM Best initially revised its outlook to negative. However, subsequent actions by KCL-such as optimizing available capital and improving risk-adjusted capitalization-prompted AM Best to revise the outlook back to stable in late 2025. This shift reflects the company's success in aligning its capital plans with Best's Capital Adequacy Ratio (BCAR) benchmarks, with its risk-based capital ratio returning to historical levels.

Management has emphasized confidence in future earnings and operational synergies to offset short-term financial strains. This optimism is grounded in KCL's "very strong" balance sheet and its ability to leverage cross-business efficiencies, particularly in its core life insurance operations. For subsidiaries like Grange Life, however, the path to capital recovery is more constrained, given its closed-block status and limited business profile.

Implications for Investors

For investors, the AM Best rating actions highlight the importance of monitoring both legal developments and capital management practices. While KCL's affirmed FSR of A- and its stable outlook suggest resilience, the negative outlook for Grange Life underscores the fragility of subsidiaries with narrow business models. The $45 million settlement, though costly, may ultimately reduce future litigation risks and stabilize policyholder relations, offering long-term benefits.

Moreover, KCL's ability to recalibrate its capital allocation-evidenced by AM Best's revised stable outlook-demonstrates effective risk management. Investors should watch for further improvements in risk-adjusted capitalization and the company's capacity to navigate regulatory scrutiny without compromising operational performance.

Conclusion

AM Best's rating actions on KCL and its subsidiaries reveal a company grappling with litigation-driven risks while executing a strategic capital plan to preserve financial strength. By addressing legal challenges proactively and optimizing capital allocation, KCL has demonstrated its commitment to balancing short-term pressures with long-term stability. For investors, the key takeaway is that robust ERM and agile capital management remain critical in an environment where legal uncertainties can swiftly impact creditworthiness.