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 June 30, 1998
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 July 13, 1998
Common Stock, $2.50 par value 6,192,525 shares
Page 1
Kansas City Life Insurance Company
Quarter ended June 30, 1998
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 1997 Annual Report to Stockholders.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Earnings were much improved in the second quarter. Operating earnings per share
rose 33 percent in the quarter to $1.85 and 4 percent for the six months to
$3.16. Including realized investment gains, which increased nearly $1.0 million
in the second quarter, net income per share rose 37 percent to $2.11 for the
quarter and rose 5 percent for the six months to total $3.68 per share. This
increase was the result of improved mortality at all three insurance companies.
These results for 1998 include a block of business acquired in the third quarter
of 1997. Therefore, where appropriate, the block's results have been excluded
from the following analysis in order to provide more valid comparisons.
Sales Performance
Marketing momentum remained strong in the second quarter. Consolidated new
annualized premiums rose 52 percent in the second quarter and 48 percent for the
six months. As in the first quarter, the variable products continued to lead the
sales growth providing $34.1 million in new premiums for the six months, an
increase of $24.3 million over 1997. Non-variable universal life annualized
premiums grew 12 percent in the second quarter and 19 percent for the six
months. Flexible annuity premiums were flat for the six months but grew 7
percent in the quarter. Only traditional life and group product sales declined.
Variable products comprised 50 percent of new sales in the quarter and 47
percent for the six months. Life insurance in-force totaled $26.4 billion at
June 30, 1998, a 2 percent annualized decline from last year end.
Insurance Revenues
Total insurance revenues grew 13 percent for the six months as reported on the
attached earnings statement. However, excluding the effects of the purchased
block, life insurance premiums declined slightly in the second quarter although
they remained up 4 percent for the six months. Insurance revenues rose 4 percent
for the six months as did life insurance premiums. Revenues associated with
contract charges on interest sensitive products were up 6 percent for the six
months. Accident and health premiums declined 3 percent for the first half due
to decreases in group dental and stop/loss products premiums.
Investment Revenues
Net investment income rose 11 percent for the quarter and 7 percent for the six
months. However, excluding the purchased block, net investment income fell 3
percent. The net yield on the investment portfolio declined 19 basis points as
yields available in the marketplace were below the overall portfolio yield.
Realized gains from the investment portfolio were nearly $1.0 million greater
than the prior year. These gains vary at management's discretion in managing the
portfolio's overall return.
Benefits
Excluding the purchased block, total benefits rose 3 percent for the first half,
the same as the first quarter and equaled 61.9 percent of operating revenues
compared with 60.9 percent last year. Death benefits were flat compared with
last year and improved at each of the insurance companies compared with the
first quarter. Surrenders of traditional life insurance rose 18 percent in the
first half, but were little changed as a percent of cash values available to be
surrendered. Group claims ratios deteriorated in the stop loss and dental lines
in the second quarter. Claims in home health care deteriorated somewhat in the
second quarter but are still in line with the first quarter.
Other Expenses
Home office operating expenses increased 3 percent in the first half of 1998.
This expense growth results from continued emphasis on individual and group
marketing efforts. This expense increase compares favorably to a 23 percent
growth in direct statutory premiums for the six months.
Liquidity and Capital Resources
Statements made in the Company's 1997 Annual Report to Stockholders remain
pertinent.
For the six months, cash provided from operating activities and net cash inflows
from contract deposits totaled $4.7 million. However, this is a decline from
prior periods due to two factors. First, an increasing sizable portion of the
Company's premiums are coming from variable products. The variable products
direct most of the investable cash from these products into separate accounts
and thus are not available for general investments. Second, flexible annuity
outflows have increased both in dollar terms and as a percentage of values
available to be surrendered. Liquidity needs are not a concern as the Company
made new investments totaling $383.9 million during the first half, a $100
million increase versus last year.
Assets totaled $3.5 billion at June 30, 1998, a 4 percent annualized rate from
last year end. Book value per share improved 10 percent on an annualized basis,
to $89.77 a share. Excluding the impact of changes in unrealized investment
gains since the beginning of the year, book value grew at a 7 percent annualized
rate.
The Company remains on schedule to complete its year 2000 system conversions in
a timely manner. The Company has developed a comprehensive plan insuring that
all systems remain viable. The schedule is slated to have all conversion
completed by the first quarter of 1999, at the latest. Conversion costs are
expensed as incurred and incremental costs in this regard are expected to remain
minor.
Changes in Reporting Regulations
Financial Accounting Standard No. 131, "Disclosures About Segments of an
Enterprise and Related Information," establishes requirements for annual and
interim reporting of segment information including products and services,
geographic areas and major customers. Kansas City Life is studying these
requirements and will adopt this standard by year end 1998.
In June, 1998, the Financial Accounting Standards Board adopted Standard No. 133
"Accounting for Derivative Instruments and Hedging Activities," effective for
years beginning after June 15, 1999. This statement establishes the measurement,
recording and disclosure requirements for derivative instruments and hedging
activities. At this time, the Company does not have any derivative instruments
or hedging activities.
Part II: Other Information
Item 6.
(a) Exhibits: None
(b) Reports on 8-K: There were no reports on Form 8-K filed for the three months
ended June 30, 1998.
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: August 12, 1998
KANSAS CITY LIFE INSURANCE COMPANY
Quarter ended June 30, 1998
EXHIBIT
Quarterly Report to Stockholders
Consolidated
Balance Sheet
(in thousands)
June 30 December 31
1998 1997
------------- -------------
Assets
Investments:
Fixed maturities:
Securities available for sale,
at market $ 2,062,158 2,004,516
Securities held to maturity,
at amortized cost 125,485 145,661
Equity securities available
for sale, at market 114,616 114,986
Mortgage loans 296,198 270,054
Real estate, net 42,927 36,764
Real estate joint ventures 42,755 43,347
Policy loans 121,774 123,186
Short-term 64,787 74,341
Other 7,500 7,500
------------- -------------
2,878,200 2,820,355
Deferred acquisition costs 217,232 209,826
Other assets 299,612 351,291
Separate account assets 106,146 57,980
------------- -------------
$ 3,501,190 3,439,452
============= =============
Liabilities and equity
Future policy benefits $ 811,172 803,738
Accumulated contract values 1,732,994 1,755,133
Other liabilities 295,000 292,007
Separate account liabilities 106,146 57,980
------------- -------------
Total liabilities 2,945,312 2,908,858
Stockholders' equity:
Capital stock 23,121 23,121
Paid in capital 16,804 16,256
Accumulated other
comprehensive income 44,542 36,448
Retained earnings 560,953 543,715
Less treasury stock (89,542) (88,946)
------------- -------------
555,878 530,594
------------- -------------
$ 3,501,190 3,439,452
============= =============
Notes:
* Comprehensive income equals $30,908,000 and $21,815,000, net of taxes for
1998 and 1997, respectively, and $17,076,000 and $31,748,000 for the
quarter in 1998 and 1997, respectively. Unrealized gains or losses on
securities generate the difference compared to net income above.
* These financial statements are unaudited but, in management's opinion,
provide a fair presentation of the results.
* Income per common share is based upon the weighted average number of shares
outstanding during the quarter, 6,194,797 shares (6,189,331 shares - 1997).
* These interim financial statements should be read in conjunction with the
Company's 1997 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 year's financial statements have been
reclassified to conform with the current year's presentation.
Consolidated
Income Statement
(in thousands, except per share data)
Quarter ended Six Months ended
June 30 June 30
1998 1997 1998 1997
------- ------- ------- -------
Revenues
Insurance revenues:
Premiums:
Life insurance $ 25,637 25,990 52,866 50,637
Accident and health 10,705 11,022 21,073 21,754
Contract charges 26,747 20,429 54,027 40,885
Investment revenues:
Investment income, net 51,152 46,233 100,194 93,277
Realized gains 2,434 1,472 4,961 4,295
Other 4,950 3,690 7,289 6,367
------- ------- ------- -------
Total revenues 121,625 108,836 240,410 217,215
------- ------- ------- -------
Benefits and expenses Policy benefits:
Death benefits 26,055 27,012 58,062 50,817
Surrenders of life insurance 4,716 3,420 9,479 7,063
Other benefits 20,086 16,537 36,990 32,566
Increase in benefit and contract reserve 20,852 19,831 40,978 39,249
Amortization of policy acquisition costs 8,600 7,966 17,117 16,632
Insurance operating expenses 22,707 21,367 45,954 41,438
------- ------- ------- -------
Total benefits and expenses 103,016 96,133 208,580 187,765
------- ------- ------- -------
Pretax income 18,609 12,703 31,830 29,450
------- ------- ------- -------
Federal income taxes:
Current 4,899 4,427 9,663 11,667
Deferred 637 (1,229) (647) (3,856)
------- ------- ------- -------
5,536 3,198 9,016 7,811
------- ------- ------- -------
Net income $ 13,073 9,505 22,814 21,639
======= ======= ======= =======
Per common share
Operating income $ 1.85 1.39 3.16 3.05
Realized gains, net 0.26 0.15 0.52 0.45
------- ------- ------- -------
Net income $ 2.11 1.54 3.68 3.50
======= ======= ======= =======
CONSOLIDATED
STATEMENT OF CASH FLOWS
(in thousands)
Six Months ended
June 30
1998 1997
Operating activities
Net cash provided (used) ($3,842) 11,698
Investing activities
Investments called or matured:
Decrease (increase) in short-term investments, net 9,540 (5,493)
Fixed maturities available for sale 98,259 60,592
Fixed maturities held to maturity 20,408 53,714
Equity securities available for sale 11,215 12,738
Mortgage loans 11,634 26,148
Other 1,231 1,298
Investments sold:
Fixed maturities available for sale 179,522 101,935
Equity securities available for sale 4,522 921
Other 3,748 1,687
Investments made:
Fixed maturities available for sale (318,881) (202,342)
Equity securities available for sale (16,219) (19,526)
Mortgage loans (38,857) (29,386)
Real estate (7,261) (430)
Real estate joint ventures (1,636) (14,521)
Other (1,018) (6,385)
Other, net 4,261 (1,798)
Net cash used (39,532) (20,848)
Financing activities
Policyowner contract deposits 110,680 92,765
Withdrawals of policyowner
contract deposits (102,059) (79,079)
Dividends paid to stockholders (5,576) (5,445)
Other, net (1,502) 126
Net cash provided 1,543 8,367
Decrease in cash (41,831) (783)
Cash at beginning of year 50,927 4,577
Cash at end of period $9,096 3,794
Message from the President
Earnings rebounded in the second quarter as mortality experience improved
significantly over the first quarter. Operating earnings per share equaled $1.85
for the second quarter and $3.16 for the six months, an improvement of 33
percent for the quarter and 4 percent for the six months. Net income per share,
which includes realized investment gains, equaled $2.11 for the quarter and
$3.68 for the six months, an increase of 37 percent and 5 percent, respectively.
In the first quarter, the Company's mortality experience compared unfavorably to
the prior year at each of our life insurance companies. However, this experience
improved considerably at all three companies during the second quarter and
mortality experience for the six months was generally in line with last year.
Sales momentum continues to build at Kansas City Life. New annualized premiums
are 48 percent ahead of a year ago with sales up 52 percent in the second
quarter alone. This growth was focused in the variable lines of business, which
provided $34.1 million of new premiums in the six months. Sales growth in all of
the other individual lines at the parent company was offset by declines in sales
at the affiliates and in the group line of business.
Total insurance revenues in the attached earnings statement grew 13 percent for
the six months. Excluding insurance revenues from the block of business which we
acquired in last year's third quarter, revenues rose 4 percent. Life insurance
premiums increased 4 percent due to single premium annuity growth. Accident and
health premiums declined 3 percent. Contract charges generated by our variable
and interest sensitive products rose 6 percent. Insurance in force totals $26.4
billion, down slightly from the first of the year.
Investment income grew 7 percent for the six months and 11 percent in the second
quarter. This growth reflects the acquisition noted above. Excluding the effects
of this transaction, investment income declined 5 percent for the six months
reflecting modest portfolio growth and a 19 basis point decline in the portfolio
yield. Narrowed interest margins on our interest sensitive products continued to
restrain earnings growth.
Home office operating expenses increased 3 percent principally due to increased
expenditures in our individual and group marketing areas. This operating expense
growth compares favorably to a 23 percent increase in direct statutory premiums
for the six months.
Cash provided from operations, as shown in the accompanying statement of cash
flows, turned negative this quarter. This reflects the sizable portion of our
business which is coming from the variable line and which is directed to the
separate account and not available for investment in the general account.
Book value equals $89.77 a share, a 10 percent annualized increase from the
beginning of the year. Excluding the impact of unrealized investment gains on
our investment portfolio, book value rose at a 7 percent annualized rate.
Kansas City Life will pay a quarterly dividend of $.45 a share
on August 24 to shareholders of record on August 10. This
dividend is unchanged from last quarter.
/s/ R. Philip Bixby
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<NAME> KANSAS CITY LIFE INSURANCE COMPANY
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<F1>Debt securities held for sale represent FASB 115 available for sale fixed
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<F2>Debt securities represent FASB 115 held to maturity fixed maturity
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<F3>Equity securities include equity securities that are available for sale,
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<F4>Real estate includes real estate joint ventures.
<F5>Policyholder funds include accumulated contract values as defined by FASB
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