Securities and Exchange Commission
Washington, D. C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Quarter ended September 30, 1997
Commission File No. 2-40764
Kansas City Life Insurance Company
3520 Broadway
Kansas City, Missouri 64111-2565
Phone: (816) 753-7000
IRS Number: 44-0308260
Incorporated in the State of Missouri
The Registrant (1) has filed all reports required to be filed by section 13 or
15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the most recent date available.
Class Outstanding at October 6, 1997
Common Stock, $2.50 par value 6,190,996 shares
Kansas City Life Insurance Company
Quarter ended September 30, 1997
Part I
Item 1. Financial Statements
Incorporated by reference from the Quarterly Report to Stockholders (pages 4
through 7) see the attached exhibit. These interim financial statements should
be read in conjunction with the Company's 1996 Annual Report to Stockholders.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Operating earnings per share for the third quarter decreased 12 percent from
last year. For the nine months, operating earnings per share equaled $4.28 a
share, a 13 percent decrease. Net income per share rose 27 percent in the third
quarter, and increased $0.30, or 6 percent, from $5.10 to $5.40 per share for
the nine months. Bolstering the net income numbers is a $5.3 million increase in
realized gains for the third quarter, and $9.1 million for the nine months.
During the third quarter, the Company acquired a block of 100,000 universal and
traditional life policies for $62.4 million in cash. Related tax benefits
reduced the transaction's net cost to $51 million. The internally funded
acquisition was structured as a coinsurance transaction. The purchase adds $27
million in additional insurance revenues per year, $330 million in assets and
liabilities, and $3.8 billion in insurance in force. The acquisition had a
minor, accretive impact to the quarter's earnings.
Sales
Consolidated new annualized premiums increased 35 percent in the third quarter,
building on the momentum of a 7 percent increase in the second quarter. For the
nine months, new premiums rose 13 percent as sales of variable products, which
are comprised of variable universal life and annuities, have experienced 160
percent growth. New premiums from all other lines of business increased by 4
percent for the quarter, but declined 5 percent year-to-date. These results were
not impacted by the acquisition mentioned above. Life insurance in force totaled
$26.4 billion at period end, a 26 percent annualized increase from last year
end. Excluding the acquired block, there was a 2 percent annualized increase in
insurance in force.
<PAGE>
Insurance Revenues
Excluding the acquired block, insurance revenues rose 6 percent for the third
quarter and 5 percent for the nine months. Including the acquisition, total
insurance revenues increased 9 percent year-to-date. Life premiums rose 8
percent for the quarter due to the acquisition and growth in both individual and
group life premiums. Year-to-date, life premiums are up 1 percent. Accident and
health premiums increased 14 percent for the third quarter and 19 percent for
the first three quarters of the year principally due to the group dental line.
Contract charge revenues on interest sensitive products increased 7 percent for
the quarter and 6 percent for the nine months, excluding the impact of the
acquired block.
Investment Revenues
Investment income, excluding the effects of the above acquisition, declined 1
percent, in line with investment assets on a book basis. As previously mentioned
investment gains rose $5.3 million in the third quarter and $9.1 million for the
nine months due principally to calls in the securities portfolio and sales of
investment real estate.
Benefits
Total benefits, excluding the acquisition, increased 2 percent. Death benefits
rose 12 percent, life insurance surrenders decreased 10 percent, and other
benefits increased 3 percent. Mortality experience has been considerably less
favorable than last year. However, mortality experience fluctuates
period-to-period by its nature. The increase in other benefits stems mostly from
the group health lines of business. Total policy benefits and increase in future
policy benefits equaled 59.2 percent of revenues thus far in 1997 compared to
60.5 percent through three quarters of 1996.
Other Expenses
Home office operating expenses, excluding the acquired block, rose 9 percent in
the quarter and 7 percent in the nine months. The increase is largely focused in
the group and individual marketing areas in support of efforts to increase
revenues.
<PAGE>
Liquidity and Capital Resources
Statements made in the Company's 1996 Annual Report to Stockholders remain
pertinent.
Cash provided from operating activities decreased 51 percent for the nine
months, principally reflecting a shift in product mix toward variable and group
products, and increased benefit payments. Funds from all sources topped $1
billion, up considerably due to the insurance block acquisition and increased
investment sales.
Assets totaled $3.4 billion reflecting both normal growth and growth due to the
acquisition. Unrealized gains and losses on available-for-sale securities
increased markedly due to declining interest rates in the market place. Reported
book value per share equaled $82.38, a 14 percent annualized improvement since
last year end. Excluding unrealized gains, book value per share rose 7 percent.
Financial Accounting Standards Board (FASB) Statement No. 130, "Reporting
Comprehensive Income" will be adopted in the first quarter of 1998 and will
require disclosure of comprehensive income which includes the change in
unrealized investment gains and losses. The comprehensive income amount is
expected to be more volatile than net income. FASB statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" is
currently under study by management and will be implemented by year end 1998.
<PAGE>
Part II: Other Information
Item 6.
(a) Exhibits: None
(b) On September 5, 1997, the Company filed a report on Form 8-K announcing that
it had reached agreement to purchase a block of insurance from Security Benefit
Life Insurance Company. A copy of the press release containing information about
the transaction was included with the filing.
On September 24, 1997, the Company filed a report on Form 8-K indicating that it
had acquired through a coinsurance agreement a block of approximately 100,000
traditional and interest sensitive life insurance policies from Security Benefit
Life Insurance Company, and received approximately $300 million in cash equal to
the policy reserves, less a ceding commission of $62.4 million representing the
consideration paid by the Company for the acquired policies. A copy of the
Coinsurance and Servicing Agreement dated September 4, 1997 between Kansas City
Life Insurance Company and Security Benefit Life Insurance Company was included
with the filing.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KANSAS CITY LIFE INSURANCE COMPANY
/s/Richard L. Finn
Richard L. Finn
Senior Vice President, Finance
/s/John K. Koetting
John K. Koetting
Vice President and Controller
/s/C. John Malacarne
C. John Malacarne
Vice President, General Counsel and Secretary
Date: November 13, 1997
KANSAS CITY LIFE INSURANCE COMPANY
Quarter ended June 30, 1997
EXHIBIT
Quarterly Report to Stockholders
Consolidated
Balance Sheet
(in thousands)
September 30 December 31
1997 1996
------------- -------------
Assets
Investments:
Fixed maturities:
Securities available for sale,
at market $ 2,031,438 1,759,153
Securities held to maturity,
at amortized cost 166,809 248,433
Equity securities available
for sale, at market 91,941 79,018
Mortgage loans 252,989 246,493
Real estate 39,717 43,750
Real estate joint ventures 41,396 28,356
Policy loans 123,896 94,412
Short-term 56,592 19,642
Other 7,500 0
------------- -------------
2,812,278 2,519,257
Deferred acquisition costs 207,620 207,020
Other assets 318,232 214,517
Separate account assets 42,399 13,916
------------- -------------
$ 3,380,529 2,954,710
============= =============
Liabilities and equity
Future policy benefits $ 797,347 701,560
Accumulated contract values 1,760,277 1,544,714
Other liabilities 270,231 231,656
Separate account liabilities 42,399 13,916
------------- -------------
Total liabilities 2,870,254 2,491,846
Stockholders' equity:
Capital stock 23,121 23,121
Paid in capital 15,961 14,761
Unrealized gains on
securities available for sale 24,817 2,963
Retained earnings 534,978 509,748
Less treasury stock (88,602) (87,729)
------------- -------------
510,275 462,864
------------- -------------
$ 3,380,529 2,954,710
============= =============
Notes:
* These financial statements are unaudited but, in management's opinion,
include all adjustments necessary for a fair presentation of the results.
* Income per common share is based upon the weighted average number of shares
outstanding during the nine months, 6,189,738 shares (6,187,677 shares -
1996).
* These interim financial statements should be read in conjunction with the
Company's 1996 Annual Report to Stockholders. The results of operations for
any interim period are not necessarily indicative of the Company's operating
results for a full year.
* Certain amounts from the prior financial statements have been reclassified to
conform with the current presentation.
<PAGE>
Consolidated
Income Statement
(in thousands, except per share data)
Quarter ended Nine Months ended
September 30 September 30
1997 1996 1997 1996
------- ------- ------- -------
Revenues
Insurance revenues:
Premiums:
Life insurance $ 27,602 25,629 78,239 77,485
Accident and health 11,111 9,717 32,865 27,574
Contract charges 26,097 19,528 66,983 58,544
Investment revenues:
Investment income, net 50,587 46,885 143,864 140,246
Realized gains 6,337 1,032 10,632 1,502
Other 3,198 2,133 9,564 7,271
------- ------- ------- -------
Total revenues 124,932 104,924 342,147 312,622
------- ------- ------- -------
Benefits and expenses
Policy benefits:
Death benefits 24,735 21,329 75,552 63,909
Surrenders of life insurance 4,287 3,684 11,350 11,439
Other benefits 18,243 17,320 50,809 48,082
Increase in benefit and contract reserve 25,435 23,189 64,684 65,786
Amortization of policy acquisition costs 10,074 7,340 26,706 22,305
Insurance operating expenses 24,550 19,036 65,988 56,353
Interest expense 515 0 515 1
------- ------- ------- -------
Total benefits and expenses 107,839 91,898 295,604 267,875
------- ------- ------- -------
Pretax income 17,093 13,026 46,543 44,747
------- ------- ------- -------
Federal income taxes:
Current (4,068) 5,189 7,599 18,731
Deferred 9,403 (1,477) 5,547 (5,540)
------- ------- ------- -------
5,335 3,712 13,146 13,191
------- ------- ------- -------
Net income $ 11,758 9,314 33,397 31,556
======= ======= ======= =======
Per common share
Operating income $ 1.23 1.39 4.28 4.94
Realized gains, net 0.67 0.11 1.12 0.16
------- ------- ------- -------
Net income $ 1.90 1.50 5.40 5.10
======= ======= ======= =======
<PAGE>
CONSOLIDATED
STATEMENT OF CASH FLOWS
(in thousands)
Nine Months ended
September 30
1997 1996
Operating activities
Net cash provided $16,905 34,546
Investing activities Investments called or matured:
Fixed maturities available for sale 124,905 125,447
Fixed maturities held to maturity 84,700 54,915
Equity securities available for sale 21,181 8,378
Mortgage loans 35,264 34,860
Other 2,117 7,083
Investments sold:
Fixed maturities available for sale 334,807 77,739
Real estate joint ventures 9,441 6,961
Other 5,061 3,047
Investments made:
Fixed maturities available for sale (695,455) (331,294)
Equity securities available for sale (37,504) (13,623)
Mortgage loans (42,049) (34,305)
Real estate joint ventures (15,698) (2,067)
Decrease (increase) in short-term investments, net (36,969) 10,397
Other (7,500) (1,972)
Acquisition of life block:
Cash received net of purchase price paid 212,904 0
Other, net (2,729) 348
Net cash used (7,524) (54,086)
Financing activities
Policyowner contract deposits 154,721 130,812
Withdrawals of policyowner
contract deposits (129,726) (106,628)
Dividends paid to stockholders (8,167) (7,794)
Other, net (274) 406
Net cash provided 16,554 16,796
Increase (decrease) in cash 25,935 (2,744)
Cash at beginning of year 4,577 9,612
Cash at end of period $30,512 6,868
<PAGE>
Message from the President
Kansas City Life's operating earnings continued to trail last year's record
level. Operating earnings declined 12 percent in the third quarter and are 13
percent lower for the nine months. However, due to substantial increases in
realized investment gains, net income rose 26 percent in the third quarter and 6
percent for the nine months.
Operating earnings have been pressured by less favorable mortality results at
our insurance affiliates. Though mortality experience in the parent company's
individual lines improved considerably in the third quarter, adverse claims were
experienced in the group dental line.
Investment income, excluding the effects of the acquired block discussed below,
declined 1 percent for the nine months, in line with the decline in investment
assets on a book basis. Realized investment gains rose $9 million for the nine
months principally due to sales of investment real estate and calls on the
securities portfolio.
During the third quarter, the Company acquired a block of universal and
traditional life insurance for $51 million in cash, net of related tax benefits.
The purchase was structured as a coinsurance transaction. The acquisition was
funded internally and is expected to be accretive and to benefit earnings from
the outset. We expect to accomplish two goals with this purchase, improve the
return earned on our excess capital and leverage our administrative capabilities
in order to lower unit costs. The acquisition adds $27 million a year in
insurance revenues, $330 million in assets and liabilities, and $3.8 billion of
insurance in force.
Sales of variable universal life and annuities fueled strong sales results for
the Company. Third quarter sales, in terms of net annualized premiums, rose by
35 percent. For the nine months, new premiums rose 13 percent due in large
measure to the 160 percent growth in variable premiums. New premiums from all
other lines of business rose by 4 percent for the quarter, but declined 5
percent year-to-date. These results were not impacted by the acquisition
discussed above. Total insurance revenues rose considerably in the attached
earnings statement since revenues from the acquired block are included in the
data for 1997 but not for 1996. Excluding these revenues, insurance revenues
rose 5 percent in the nine months and 6 percent in the third quarter.
Insurance in force equals $26.4 billion, a 26 percent annualized increase from
last year end. Excluding the acquired block, insurance in force rose 2 percent
on an annualized basis.
Book value per share rose to $82.38 a share from $74.79 at last year end.
Excluding unrealized gains on the available-for-sale securities, book value per
share rose 7 percent on an annualized basis.
For the fourth consecutive year, the Ward Financial Group has named Kansas City
Life as one of the 50 safest and best-performing life insurance companies in the
United States. This award is based upon operating and financial data for the
previous five years.
The Board of Directors approved a $.44 a share quarterly dividend payable on
November 24 to stockholders of record on November 10. The dividend is unchanged
from last quarter.
/s/ W. E. Bixby
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 2,031,438<F1>
<DEBT-CARRYING-VALUE> 166,809<F2>
<DEBT-MARKET-VALUE> 172,269<F2>
<EQUITIES> 91,941<F3>
<MORTGAGE> 252,989
<REAL-ESTATE> 81,113<F4>
<TOTAL-INVEST> 2,755,686
<CASH> 78,843
<RECOVER-REINSURE> 95,805
<DEFERRED-ACQUISITION> 207,620
<TOTAL-ASSETS> 3,380,529
<POLICY-LOSSES> 797,347
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 35,628
<POLICY-HOLDER-FUNDS> 1,888,100<F5>
<NOTES-PAYABLE> 0
0
0
<COMMON> 23,121
<OTHER-SE> 487,154
<TOTAL-LIABILITY-AND-EQUITY> 3,380,529
111,104
<INVESTMENT-INCOME> 143,864
<INVESTMENT-GAINS> 10,632
<OTHER-INCOME> 76,547
<BENEFITS> 202,395
<UNDERWRITING-AMORTIZATION> 26,706
<UNDERWRITING-OTHER> 3,117<F6>
<INCOME-PRETAX> 46,543
<INCOME-TAX> 13,146
<INCOME-CONTINUING> 33,397
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,397
<EPS-PRIMARY> 5.40
<EPS-DILUTED> 5.40
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Debt securities held for sale represent FASB 115 available for sale fixed
maturity securities reported on a current value basis, and do not include
trading securities or securities held to maturity.
<F2>Debt securities represent FASB 115 held to maturity fixed maturity
securities, and do not include trading securities or securities available for
sale.
<F3>Equity securities include equity securities that are available for sale,
under FASB 115.
<F4>Real estate includes real estate joint ventures.
<F5>Policyholder funds include accumulated contract values as defined by FASB
97, dividend and coupon accumulations and other policyowner funds.
<F6>Underwriting expenses represent amortization of the value of purchased
insurance in force.
</FN>
</TABLE>
