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, 1999
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 6, 1999
Common Stock, $1.25 par value 12,394,448 shares
Page 1
Kansas City Life Insurance Company
Quarter ended June 30, 1999
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 1998 Annual Report to Stockholders.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Kansas City Life's operating earnings per share declined 37
percent in the second quarter compared with last year to $0.58.
Including realized gains, which declined $2.1 million from last
year's second quarter, net income equaled $0.61 per share, a 42
percent decline. For the six months, operating earnings per
share declined 1 percent to $1.57 and net income per share
declined 13 percent to equal $1.61. Net income included a $4.3
million decline in realized gains. These earnings per share
amounts reflect the two-for-one common stock split that occurred
in June. The operating earnings decline is primarily the result
of mortality declines from the first quarter and an increase in
expenses incurred as a result of the consolidation of Sunset
Life's operations into the home office.
Net investment income decreased 1 percent in the second quarter
but was flat for the six months. The net yield on the
investment portfolio on a cost basis declined to 7.21 percent
from 7.27 percent a year ago. Realized investment gains
declined generally due to rising interest rates which have
resulted in significantly reduced investment calls on the
portfolio. Interest spreads on the interest sensitive products
improved as the yield spreads widened.
Home office operating expenses rose 8 percent versus 1998's
second quarter and rose 4 percent for the six months. During
the quarter almost all of the administrative aspects of Sunset
Life were consolidated into the home office in Kansas City.
This consolidation required a necessary duplication of staffing
at both locations for a time during the quarter to ensure that
the services to both policyholders and agents were as smooth as
possible during this consolidation. In addition, several
one-time expenditures were incurred for travel, consulting and
relocation. The consolidation continues on schedule. The
remaining aspects will be consolidated in the third quarter with
the expected beneficial savings beginning to be realized later
this year.
The following schedule addresses the financial performance of
each of the Company's four reportable operating segments: the
Parent Company, which is divided into individual and group
operations, and its two insurance affiliates.
Kansas City Life Insurance Company
Segment Information
Kansas City Life Sunset Old
Individual Group Life American Total
Revenues from external customers:
Six Months: 1999 $55,941 26,121 13,411 38,357 133,830
1998 56,596 25,993 14,349 40,403 137,341
Second Quarter: 1999 26,367 13,051 5,871 19,303 64,592
1998 30,498 13,124 7,523 20,114 71,259
Investment revenues:
Six Months: 1999 $75,800 600 16,399 7,191 99,990
1998 76,253 563 16,333 7,046 100,195
Second Quarter: 1999 38,399 318 8,287 3,712 50,716
1998 38,921 312 8,313 3,607 51,153
Operating Income (loss):
Six Months: 1999 $13,484 (142) 4,167 1,989 19,498
1998 13,315 (868) 4,858 2,285 19,590
Second Quarter: 1999 4,966 (604) 1,546 1,350 7,258
1998 7,220 (508) 2,824 1,956 11,492
Notes:
1. Intersegment revenues are not material.
2. The above totals agree to the consolidated financial statements.
3. There has been no significant change in segment assets from last year end,
nor has there been any change in the basis of segmentation or the
measurement of segment income.
Kansas City Life - Individual
New annualized premiums declined 16 percent in the second
quarter, as individual life sales were down 9 percent and
flexible annuities declined 23 percent. Non-variable universal
life sales declined 34 percent but were somewhat offset by a 6
percent increase in variable universal life sales. For the six
months, new annualized premiums fell 6 percent as individual
life products declined 24 percent and flexible annuities fell 4
percent. Non-variable universal life sales were down 43 percent
for the six months and variable universal life products were
down 16 percent. Total new variable sales were down 15 percent
for the second quarter and were down 8 percent for the six
months. Variable product sales accounted for 63 percent of
total sales for the six months. On the basis of direct
statutory receipts, new sales declined 14 percent for the six
months. New variable sales fell 11 percent and equaled 62
percent of total new sales.
Total insurance revenues, which include premium renewals and
contract charges on the interest sensitive products, decreased
14 percent for the second quarter and 1 percent for the six
months.
Death benefits rose 1 percent for the quarter but were down 1
percent for the six months. However, mortality experience for
the assumed block of business purchased two years ago was much
worse than expected in the second quarter. Traditional life
surrenders fell 22 percent for the quarter and 30 percent for
the six months. In total, benefits declined 2 percent for this
segment in both the second quarter and six months. Reflecting
the mortality experience, total benefits, as a percent of
operating revenue, equaled 62 percent for the six months up from
the 58 percent for the first quarter, but down slightly from 63
percent a year ago.
This segment provided 42 percent of insurance revenues for the
six months and 69 percent of the operating income compared with
41 percent and 68 percent last year.
Kansas City Life - Group
In the second quarter, the group segment recorded a loss, as the
claims ratios increased during the quarter. The loss for the
six months was $0.7 million less than a year ago. This
improvement in the stop loss and dental lines was due to
improved claims ratios.
Group sales, in terms of new annualized premiums, rose 26
percent in the quarter and 27 percent for the six months. Group
sales provided 10 percent of consolidated annualized premiums,
up from 8 percent last year. These sales were led by group
life, which more than doubled, and dental, which grew 18 percent.
In total, the group segment provided 20 percent of consolidated
insurance revenues for the six months compared with 19 percent
last year.
Sunset Life
Sunset Life's new annualized premiums declined 31 percent in the
second quarter and 25 percent for the six months. Total
individual life sales were down 51 percent for the quarter and
39 percent for the six months. However, traditional life sales,
largely term, were up 20 percent for the six months. Sales of
flexible annuities were up 21 percent for the second quarter but
were down 4 percent for the six months. Sunset Life contributed
7 percent of total new annualized premiums during the first six
months versus 9 percent in 1998.
Insurance revenues decreased 4 percent reflecting the sales
results. Benefits, as a percent of operating revenues, equaled
44 percent, down from 48 percent a year ago. This decline is
primarily due to improved mortality compared with a year ago.
Total benefits declined 9 percent, reflecting a similar decline
in death benefits.
Insurance operating expenses rose 21 percent for the six months
versus 1998. This increase is attributable to the consolidation
efforts. As mentioned above, the operations are being
consolidated from Olympia to Kansas City resulting in additional
expenses being incurred in both Kansas City and Olympia during
the transition effort. However, anticipated cost savings will
begin to emerge the latter half of this year.
In total for Sunset Life, operating income declined 14 percent
but contributed 13 percent of consolidated operating revenues
and 21 percent of operating income for the six months.
Old American
New annualized premiums declined 10 percent in the second
quarter and were down 5 percent for the six months. Old
American provided 7 percent of consolidated sales, consistent
with the previous year. This segment also provided 29 percent
of consolidated insurance revenues for the six months, the same
as last year.
Total benefits declined 10 percent for the quarter and 11
percent for the six months. Benefits, as a percent of operating
revenues, equaled 59 percent compared with 64 percent a year
ago. This improvement was due to improved mortality and
partially due to the sale of the home health care block of
business last year.
Operating income for this segment declined 13 percent for the
six months to equal 10 percent of consolidated operating income,
down from 12 percent last year.
Liquidity and Capital Resources
Statements made in the Company's 1998 Annual Report to
Stockholders remain pertinent.
Liquidity is not a concern for the Company. For the six months,
cash provided from operating activities nearly doubled to $33.8
million. Funds from all sources totaled $457.8 million, a 2
percent increase over last year. During the first six months,
the Company made new investments in excess of one-third of a
billion dollars. During the second quarter the Company borrowed
$30.0 million in order to leverage the borrowed monies. At June
30, 1999, separate accounts totaled $189.5 million, an increase
of $46.5 million from year end.
Assets totaled $3.6 billion at June 30, 1999, the same as year
end. However, excluding unrealized investment gains, assets
grew at a 6 percent annualized growth rate. Consolidated
insurance in force totaled $26.2 billion, a 3 percent decline on
an annualized basis. Book value per share totaled $42.96, a
decline of 16 percent on an annualized basis. However,
excluding changes in unrealized investment gains and losses,
book value per share equaled $43.54, a 5 percent annualized
growth.
During the first six months, the Company purchased 14,000 shares
of its common stock for $567,000 under the stock repurchase
program announced last January.
Year 2000 (Y2K) Compliance
Kansas City Life is closely monitoring its ability, and the
ability of its primary vendors and business partners, to
successfully operate in the year 2000. Kansas City Life
continues the assessment and resolution of potential problems in
both its information technology (IT) systems and in its
non-information technology systems. At the present time, the
Company is approximately 90 to 95 percent complete with
resolving its IT issues and anticipates that it will have
completed its year 2000 IT compliant issues by the end of the
third quarter. For the remainder of the year, the Company plans
to continue its testing and to finalize contingency plans. The
Company's non-IT systems are fully compliant. The Company is
actively monitoring the compliance programs of those third
parties with which the Company has business relationships as
well as modifying its contingency plans based upon those
assessments. These third parties are continuing to progress
well, but the Company will continue to monitor these third
parties until full compliance is achieved. The incremental cost
of the Company's compliance effort generally has been expensed
as incurred and has not been material thus far, estimated at
less than $700,000, nor are additional costs expected to be
material in the future. The forecast costs, consequences of the
year 2000 problem, and the dates on which the Company believes
it will complete its various year 2000 computer modifications
are based on its best estimates, which, in turn, were based on
numerous assumptions of future events, including third-party
modification and compliance plans, continued availability of
resources, and other factors. The Company cannot be sure that
these estimates will be achieved or that the assumptions are
accurate, and actual results could differ materially from those
anticipated.
Market and Interest Rate Risk Analysis
Statements made in the 1998 Annual Report to Stockholders
pertaining to the market and interest rate risk analysis remain
pertinent. As mentioned in the Annual Report, the primary
market risk affecting Kansas City Life concerns interest rates.
As market interest rates fluctuate so will the Company's
investment portfolio and its stockholders' equity. At June 30,
1999, the Company had an unrealized investment loss of $13.2
million, net of related taxes and deferred policy acquisition
costs. This represents a $58.7 million decline from the $45.5
million unrealized gain reported at the beginning of the year.
This decline is the result of increased market interest rates.
Part II: Other Information
(a) Exhibits: None.
(b) Reports on 8-K: There were no reports on Form 8-K filed for the three
months ended June 30, 1999.
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 9, 1999
KANSAS CITY LIFE INSURANCE COMPANY
Quarter ended June 30, 1999
EXHIBIT
Quarterly Report to Stockholders
Consolidated
Balance Sheet
(in thousands)
June 30 December 31
1999 1998
------------- -------------
Assets
Investments:
Fixed maturities:
Securities available for sale,
at market $ 2,037,992 2,094,362
Securities held to maturity,
at amortized cost 105,954 115,504
Equity securities available
for sale, at market 117,162 100,749
Mortgage loans 331,555 315,706
Policy loans 120,788 122,860
Other 125,577 142,387
------------- -------------
2,839,028 2,891,568
Deferred acquisition costs 222,858 218,957
Other assets 332,761 323,881
Separate account assets 189,467 143,008
------------- -------------
$ 3,584,114 3,577,414
============= =============
Liabilities and equity
Future policy benefits $ 827,372 822,343
Accumulated contract values 1,711,506 1,731,262
Other liabilities 323,346 302,868
Separate account liabilities 189,467 143,008
------------- -------------
Total liabilities 3,051,691 2,999,481
Stockholders' equity:
Capital stock 23,121 23,121
Paid in capital 18,185 17,633
Accumulated other comprehensive
income (loss) (13,231) 45,466
Retained earnings 594,847 581,074
Less treasury stock (90,499) (89,361)
------------- -------------
532,423 577,933
------------- -------------
$ 3,584,114 3,577,414
============= =============
Notes:
* Comprehensive income (loss) equals $(38,760,000) and
$30,908,000 for 1999 and 1998, respectively,
and $(25,797,000) and $17,076,000 for the second quarter
of 1999 and 1998. This varies from net income
due to unrealized gains or losses on securities.
* These interim financial statements should be read in
conjunction with the Company's 1998 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.
* Income per common share is based upon the weighted
average number of shares outstanding during the six
months, 12,402,810 shares (12,389,594 shares - 1998).
* These financial statements are unaudited but, in
management's opinion, include all adjustments
necessary for a fair presentation of the results.
* Certain amounts from the prior year's financial statements
have been reclassified to conform with the current
year's presentation.
Consolidated
Income Statement
(Thousands, except per share data)
Quarter ended Six Months ended
June 30 June 30
1999 1998 1999 1998
------- ------- ------- -------
Revenues
Insurance revenues:
Premiums:
Life insurance $ 24,531 27,956 52,336 54,052
Accident and health 10,560 10,705 20,823 21,073
Contract charges 26,015 27,649 53,248 54,929
Investment revenues:
Investment income, net 50,715 51,152 99,990 100,194
Realized gains 368 2,434 677 4,961
Other 3,488 4,950 7,424 7,289
------- ------- ------- -------
Total revenues 115,677 124,846 234,498 242,498
------- ------- ------- -------
Benefits and expenses
Policy benefits:
Death benefits 28,647 26,055 56,156 58,062
Surrenders of life insurance 3,865 4,932 7,426 9,765
Other benefits 18,384 20,086 34,437 36,990
Increase in benefit and contract reserve 19,764 23,857 40,266 42,780
Amortization of policy acquisition costs 9,560 8,600 20,035 17,117
Insurance operating expenses 24,939 22,707 48,068 45,954
------- ------- ------- -------
Total benefits and expenses 105,159 106,237 206,388 210,668
------- ------- ------- -------
Pretax income 10,518 18,609 28,110 31,830
------- ------- ------- -------
Federal income taxes:
Current 5,119 4,899 10,954 9,663
Deferred (2,096) 637 (2,781) (647)
------- ------- ------- -------
3,023 5,536 8,173 9,016
------- ------- ------- -------
Net income $ 7,495 13,073 19,937 22,814
======= ======= ======= =======
Per common share:
Operating income $ 0.58 0.93 1.57 1.58
Realized investment gains, net 0.03 0.13 0.04 0.26
------- ------- ------- -------
Net income $ 0.61 1.06 1.61 1.84
======= ======= ======= =======
CONSOLIDATED
STATEMENT OF CASH FLOWS
(in thousands)
Six Months ended
June 30
1999 1998
Operating activities
Net cash provided $33,799 17,248
Investing activities
Purchases of fixed maturity investments (297,030) (318,881)
Sales of fixed maturity investments 149,424 179,522
Maturities and principal paydowns of
fixed maturity investments 115,379 118,667
Purchases of other investments (64,356) (64,991)
Sales, maturities and principal paydowns
of other investments 32,889 36,611
Net sales of short-term investments 18,929 9,540
Net cash used (44,765) (39,532)
Financing activities
Policyowner contract deposits 77,340 88,322
Withdrawals of policyowner
contract deposits (91,541) (100,791)
Dividends paid to stockholders (5,955) (5,576)
Proceeds from borrowings 30,000 0
Other, net (3,074) (1,502)
Net cash provided (used) 6,770 (19,547)
Decrease in cash (4,196) (41,831)
Cash at beginning of year 16,763 50,927
Cash at end of period $12,567 9,096
Kansas City Life Insurance Company
Second Quarter Report
Message from the President and CEO
Kansas City Life's strong earnings growth in the first quarter was not
sustained in the second quarter. Operating earnings fell 37 percent in the
second quarter, from $.93 a share last year to $.58 a share this quarter.
Operating earnings declined slightly for the first half of the year, from $1.58
a share in 1998 to $1.57 a share this year. Realized investment gains declined
$4.3 million in the six months and $2.1 million in the second quarter. Therefore
net income decreased 12 percent in the first half to $1.61 a share, and
decreased 42 percent in the second quarter to $.61 a share.
Mortality experience at each of our operating companies was excellent in
the first quarter but generally returned to historical trends during the second
quarter. Additionally, mortality experience in the block of insurance purchased
two years ago was considerably worse than expected in the second quarter. The
quarter's earnings were also restrained by costs associated with the relocation
of Sunset Life's operations into the home office in Kansas City. The relocation
effort resulted in duplicate staffing in Olympia and Kansas City for a portion
of the quarter and one-time expenditures were incurred for costs such as travel
and consulting. This effort is proceeding on schedule and according to plan and
should provide beneficial cost savings beginning later this year.
Sales momentum generally slowed in the second quarter. New annualized
premiums declined 8 percent in the first half due to a 17 percent decline in the
second quarter. Percentage declines in variable product sales mirrored these
results, and these products contributed just over half of the Company's sales.
Universal life sales declined 46 percent in the six months while sales of
flexible annuities were down 1 percent. Progress was made in our group products
where sales rose 27 percent, led by dental and group life. Life insurance in
force declined slightly to $26.2 billion.
Insurance revenues in the attached earnings statement declined 3 percent in
the half and 8 percent in the quarter. Life premiums declined 3 percent for the
six months while accident and health premiums decreased 1 percent. However,
excluding 1998 premiums associated with the home health care block sold late
last year, accident and health premiums rose 7 percent, reflecting growth in the
group stop loss and dental lines. Contract charges on our interest sensitive and
variable products declined 3 percent in the first half.
Investment income was unchanged for the six months and decreased 1 percent
in the second quarter as investment assets, on a cost basis, grew 2 percent over
the past twelve months. The portfolio's net yield declined to 7.21 percent from
7.27 percent a year ago. Realized investment gains declined in the period
principally due to reduced calls on the securities portfolio as market interest
rates rose.
Book value per share declined to $42.96 due to reductions in the market
value of our marked-to-market investments as a result of rising interest rates.
Excluding these unrealized losses, book value equaled $43.54 a share, a 5
percent annualized increase for the six months.
A regular quarterly dividend of $.24 a share was declared by the Board of
Directors. The dividend will be paid August 23 to stockholders of record on
August 9.
/s/ R. Philip Bixby
Includes our subsidiaries:
Sunset Life Insurance
Company of America
Old American
Insurance Company
Post Office Box 219139
Kansas City, Missouri 64121-9139
Listing: OTC
Stock Symbol: KCLI
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