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, 2000
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 July 28, 2000
Common Stock, $1.25 par value 12,036,627 shares
Kansas City Life Insurance Company
Quarter ended June 30, 2000
Part I
Item 1. Financial Statements
Incorporated by reference from the Quarterly Report to Stockholders (pages 4
through 8). See the attached exhibit. These interim financial statements should
be read in conjunction with the Company's 1999 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 nearly doubled in the second
quarter to equal $1.15. Including realized gains and losses, which changed
minimally year to year, net income per share equaled $1.14, an increase of 87
percent over last year. For the six months, operating income per share increased
41 percent to equal $2.21 and net income per share increased 39 percent to equal
$2.23. The substantial increase in earnings reflected three factors. First, last
year's second quarter results were considerably below historical trend due to
poor mortality experience and Sunset Life relocation costs. Second, earnings
this quarter benefited approximately $4.0 million from the unlocking of
assumptions related to the amortization of deferred acquisition costs on the
interest sensitive products. Actual earnings experience on these products has
been more favorable than these assumptions originally indicated. Thus, the
assumptions have been revised to reflect these favorable variances resulting in
the reduced amortization of additional acquisition costs. Third, this year's
results have been boosted by decreased operating expenses resulting from the
consolidation of Sunset Life's operations into the home office in Kansas City.
Net investment income increased 2 percent in the second quarter and 1 percent in
the first half. Increased portfolio yields overcame a slight decline in earning
assets. However, investment margins narrowed somewhat on the interest sensitive
products.
Home office operating expenses decreased 9 percent in the second quarter and 5
percent in the first half. As mentioned above, the decrease is largely due to
the savings resulting from the consolidation of Sunset Life's operations into
the parent's home office in 1999.
Kansas City Life - Individual
In the second quarter, new annualized premiums increased 24 percent largely due
to variable universal life sales, which increased 16 percent and variable
annuity sales, which increased 56 percent. These increases were partially offset
as non-variable universal life sales decreased 36 percent and flexible annuity
sales decreased 25 percent. For the six months, new annualized premiums
increased 10 percent. Variable universal life sales increased 40 percent and
variable annuity sales increased 35 percent. Additionally, traditional life
sales increased 21 percent versus last year. Partially offsetting these
increases, non-variable universal life sales decreased 27 percent and flexible
annuity sales declined 42 percent. Variable product sales accounted for 78
percent of total sales for the six months, up from 63 percent last year. On the
basis of direct statutory receipts, new sales increased 11 percent versus last
year on the strength of new variable sales, which increased 31 percent and
equaled 80 percent of total new sales. New non-variable universal life sales
fell 30 percent, individual annuities fell 69 percent and flexible annuities
declined 28 percent.
Total insurance revenues, which include premium renewals and contract charges on
the interest sensitive products, declined three percent for this segment in both
the second quarter and the first half.
Total benefits for this segment decreased 2 percent in the second quarter and 3
percent in the six months. Death benefits increased 14 percent in the second
quarter and 7 percent in the six months, reflecting less favorable mortality
experience versus last year. Total surrenders increased 3 percent in the second
quarter and increased 18 percent in the six months. Total benefits, as a percent
of operating revenue, equaled 59 percent in the first half, up from 55 percent
in the first quarter, but down from 62 percent a year ago. As mentioned earlier,
unlocking on deferred acquisition costs resulted in a one-time decrease of
approximately $2.0 million to the deferred acquisition cost amortization for
this line. Operating income increased by 62 percent in the second quarter and by
29 percent in the first half.
This segment provided 40 percent of consolidated insurance revenues in the six
months and 66 percent of consolidated operating income, compared with 42 percent
and 69 percent, respectively, a year ago.
Kansas City Life - Group
Results for the second quarter improved $0.8 million versus last year. Thus, for
the first six months, the group segment contributed 2 percent of consolidated
operating income, compared to a loss a year ago. This improvement is primarily
the result of improved sales revenues and a decline in the claims ratio, which
decreased from 76 percent last year to 73 percent. Group sales, in terms of new
annualized premiums, increased 9 percent in the second quarter but declined 5
percent in the first half. However, excluding the stop loss line, which was
discontinued late last year, new annualized premiums increased 21 percent in the
second quarter and 14 percent in the six months. Group sales were lead by the
dental line, which grew 20 percent in the second quarter and 24 percent in the
six months. Partially offsetting these increases, group life sales declined 43
percent in the second quarter and 47 percent in the six months. Group sales
provided 10 percent of consolidated new annualized premiums, the same as last
year.
For this segment, total benefits as a percent of revenues, equaled 62 percent
for the second quarter, down from 69 percent last year. For the six months, this
ratio totaled 61 percent, down slightly from 63 percent last year. In total, the
group segment provided 21 percent of consolidated insurance revenues in the
second quarter, up slightly from 20 percent last year.
Sunset Life
Sunset Life's new annualized premiums increased 10 percent in the second quarter
but fell 26 percent in the first half. While progress is being made, the impact
is still being felt from last year's change in senior marketing management and
the consolidation of Sunset's operations into the home office. Sunset Life
contributed 5 percent of total new annualized premiums during the first six
months, down from 7 percent a year ago.
Total insurance revenues increased 15 percent in the second quarter and 10
percent in the six months. Total benefits for this segment increased 42 percent
in the second quarter and 30 percent in the first half. Death benefits declined
10 percent in the second quarter but increased 21 percent in the first half.
Mortality experience improved in the second quarter, but still trails last
year's experience. Total surrenders increased 31 percent in the second quarter
and 7 percent in the first half. Total benefits, as a percent of operating
revenue equaled 54 percent in the first half, up from 45 percent a year ago.
Unlocking of deferred acquisition amortization assumptions resulted in a
decrease of approximately $2.0 million in the amortization of deferred
acquisition costs. Insurance operating expenses declined 20 percent in the
second quarter and 21 percent in the six months, reflecting savings resulting
from the consolidation of Sunset Life's operations into the home office.
This segment's operating income increased by more than three-fourths in the
second quarter and by 24 percent in the six months. This segment contributed 11
percent of consolidated insurance revenues and 19 percent of consolidated
operating income in the six months, compared with 10 percent and 21 percent,
respectively, a year ago.
Old American
Old American's new annualized premiums increased 2 percent in the second quarter
and 1 percent in the first half. Old American contributed 7 percent of total new
annualized premiums, consistent with the previous year.
Total insurance revenues declined 2 percent in both the second quarter and the
first half. Total benefits decreased 5 percent for the second quarter, but were
flat for the six months. Mortality experience improved in the second quarter and
was unchanged for the first half. Surrenders rose 13 percent in the second
quarter and 15 percent in the six months. Total benefits as a percent of
operating revenue equaled 59 percent in the first half, down from 65 percent at
the first quarter, but level with a year ago. This segment's operating expenses
declined 15 percent in the second quarter and 9 percent in the six months.
Operating income for this segment almost doubled in the second quarter and
increased by 70 percent in the six months. This segment provided 13 percent of
consolidated operating income and 28 percent of consolidated insurance revenues
for the six months, compared to 10 percent and 29 percent, respectively, last
year.
Liquidity and Capital Resources
Statements made in the Company's Annual Report to Stockholders remain pertinent.
Liquidity is not a concern for the Company. For the six months, cash provided
from operating activities declined 2 percent to $33.1 million. Funds from all
sources totaled $401.9 million, a 12 percent decrease from last year. At June
30, 2000 the Company had $34.5 million of short-term borrowings, down $35.0
million from year end. The Company uses these borrowings in order to pursue
interest spread strategies. At period end, separate accounts totaled $308.9
million, an increase of $49.0 million from year end.
Assets totaled $3.6 billion, the same as year end. Excluding unrealized
investment gains and losses, assets remained flat with last year. Consolidated
insurance in force totaled $27.3 billion, a 4 percent increase on an annualized
basis. Book value per share totaled $42.26, an increase of 7 percent on an
annualized basis. Excluding changes in unrealized investment gains and losses,
book value per share equaled $47.04, an annualized growth of 8 percent.
During the first half, the Company purchased 123,000 shares of its common stock
for $3.9 million under the stock repurchase program. The Company may purchase up
to one million shares during 2000 under this program.
The Board of Directors declared a quarterly dividend of $.25 per share, a 4
percent increase over last year's dividend of $.24 per share. Market and
Interest Rate Risk Analysis
Statements made in the 1999 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, 2000, the Company
had an unrealized investment loss of $57.5 million, net of related taxes and
deferred policy acquisition costs, up from the $53.4 million unrealized loss
reported at year end 1999. This increase is primarily the result of increased
interest rates in the corporate bond market during the six months.
Part II: Other Information
Item 1. Legal Proceedings
In recent years, the life insurance industry, including the Company, has been
subject to an increase in litigation, pursued on behalf of purported classes of
insurance purchasers questioning the conduct of insurers in the marketing of
their products. The Company believes that the actions described below and in
previous filings are part of this trend. The Company denies all allegations of
wrongdoing in these lawsuits and has been defending them vigorously.
In the previously reported case, Wright, etc., v. Sunset Life Insurance Company
of America, Circuit Court of Clarke County, Alabama, Case No. CV-98-120-M,
plaintiff alleged that Sunset Life breached her universal life contract when it
sent her a letter advising that her policy was underfunded and she needed to pay
additional premiums in order to maintain the current level of death benefit.
Plaintiff sought unspecified damages for breach of contract and unjust
enrichment, and alleged a putative class in which she sought to represent
herself and others similarly situated nationwide. Subsequently, plaintiff
surrendered her policy and plaintiff's attorney dismissed her as a plaintiff and
filed an amended complaint substituting plaintiff's husband, beneficiary of the
policy, as plaintiff. On June 5, 2000, the trial court granted Sunset Life's
motion to strike and/or dismiss the amended complaint, and further granted
Sunset Life's motion for summary judgment as to the original complaint.
Bette Schwager, On Behalf of Herself and All Others Similarly Situated, v.
Kansas City Life Insurance Company, United States District Court for the Western
District of Texas, Austin Division, Case No. A-00-CA-424-JN. This case was
originally filed in the 345th Judicial District Court for Travis County, Texas
on June 8, 2000 as Case No. GN-001652. The plaintiff alleges that the Company,
through its agents, misrepresented the number of premiums that would be payable
on and the terms of life insurance policies issued by the Company. Plaintiff
further alleges that an agent of the Company represented that the premiums on
the policy insuring her husband would "vanish" when he reached age 67, and that
premiums on policies insuring her own life would "vanish" when she reached
retirement age. Further, plaintiff alleges that based upon these and other
misrepresentations, she used the cash value in other insurance policies to
purchase policies from the Company. Plaintiff alleges she recently learned her
premiums will never vanish under the policies. Plaintiff alleges fraud,
fraudulent concealment, unfair discrimination, breach of contract, breach of
fiduciary duty/constructive fraud, and negligent misrepresentation. Plaintiff
seeks compensatory and punitive damages, reasonable attorney fees and costs as
well as equitable and injunctive relief including reformation of the policies to
conform with plaintiff's expectations, imposition of a constructive trust upon
the policy proceeds, and an injunction to prevent the Company from canceling
plaintiff's and other class members' policies. Plaintiff further alleges that
the Company's conduct was part of a statewide fraudulent scheme and common
course of conduct, and seeks to certify a class composed of all persons and
entities who have (or had at the time of termination) an ownership interest in
one or more of the Company's permanent policies from and after January 1, 1986
to the present. The Company filed a Notice of Removal to the United States
District Court for the Western District of Texas on July 11, 2000. Management
denies the allegations of the complaint, including the existence of a
certifiable class, and intends to defend this case vigorously.
In addition to the above, the Company and certain of its subsidiaries are
defendants in litigation seeking punitive damages. Some of these lawsuits are in
jurisdictions where juries sometime award punitive damages grossly
disproportionate to the actual damages.
Although no assurances can be given and no determinations can be made at this
time as to the outcome of any particular lawsuit or proceeding, management
believes that the relief ultimately granted to plaintiffs in these lawsuits, if
any, would have no material effect on the Company's business, results of
operations and financial position.
Item 6.
Reports on 8-K: There were no reports on Form 8-K filed for the six months ended
June 30, 2000.
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 4, 2000
Kansas City Life Insurance Company
Quarter ended June 30, 2000
EXHIBIT
Quarterly Report to Stockholders
Consolidated
Balance Sheet
(in thousands)
June 30 December 31
2000 1999
------------- -------------
Assets
Investments:
Fixed maturities:
Securities available for sale,
at market $ 1,961,638 1,999,215
Securities held to maturity,
at amortized cost 90,814 107,606
Equity securities available
for sale, at market 103,788 115,968
Mortgage loans 352,197 340,704
Short-term 17,295 19,380
Other 199,238 197,868
------------- -------------
2,724,970 2,780,741
Cash 17,013 22,355
Deferred acquisition costs 245,057 236,370
Other assets 325,762 321,919
Separate account assets 308,925 259,899
------------- -------------
$ 3,621,727 3,621,284
============= =============
Liabilities and equity
Future policy benefits $ 824,758 829,556
Accumulated contract values 1,647,362 1,688,706
Notes Payable 34,500 69,500
Income taxes payable 6,190 7,870
Other liabilities 291,288 271,948
Separate account liabilities 308,925 259,899
------------- -------------
Total liabilities 3,113,023 3,127,479
Stockholders' equity:
Capital stock 23,121 23,121
Paid in capital 19,711 18,498
Accumulated other comprehensive
income (loss) (63,174) (59,095)
Retained earnings 635,094 614,278
Less treasury stock (106,048) (102,997)
------------- -------------
508,704 493,805
------------- -------------
$ 3,621,727 3,621,284
============= =============
Notes:
* Comprehensive income (loss) equals $22,761,000 and
$(38,760,000) for 2000 and 1999, respectively,
and $7,852,000 and $(25,797,000) for the second quarter
of 2000 and 1999. This varies from net income
due to unrealized gains or losses on securities.
* 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 six months,
12,036,642 shares (12,402,810 shares - 1999).
* These interim financial statements should be read in
conjunction with the Company's 1999 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 prioryear's financial statements
have been reclassified to conform with the current year's
presentation.
* Segment information totals agree to the consolidated
financial statements. Intersegment revenues are not material.
There has been no significant change in segment assets
from last year end, nor has there been any changes in the
basis of segmentation or the measure of segment income.
Consolidated
Income Statement
(in thousands, except per share data)
Quarter ended Six Months ended
June 30 June 30
2000 1999 2000 1999
------- ------- ------- -------
Revenues
Insurance revenues:
Premiums:
Life insurance $ 23,869 24,531 49,502 52,336
Accident and health 11,300 10,560 22,352 20,823
Contract charges 27,193 26,016 55,719 53,249
Investment revenues:
Investment income, net 53,175 52,076 103,817 102,569
Realized gains (64) 368 422 677
Other 3,819 3,486 7,993 7,422
------- ------- ------- -------
Total revenues 119,292 117,037 239,805 237,076
------- ------- ------- -------
Benefits and expenses
Policy benefits:
Death benefits 30,008 28,647 58,779 56,156
Surrenders of life insurance 4,147 3,865 8,618 7,426
Other benefits 18,366 18,384 35,731 34,437
Increase in benefit and contract reserve 19,375 19,763 37,092 40,265
Amortization of policy acquisition costs 2,694 9,560 11,282 20,035
Insurance operating expenses 25,163 26,300 49,802 50,647
------- ------- ------- -------
Total benefits and expenses 99,753 106,519 201,304 208,966
------- ------- ------- -------
Pretax income 19,539 10,518 38,501 28,110
------- ------- ------- -------
Federal income taxes:
Current 5,130 5,119 11,317 10,954
Deferred 687 (2,096) 344 (2,781)
------- ------- ------- -------
5,817 3,023 11,661 8,173
------- ------- ------- -------
Net income $ 13,722 7,495 26,840 19,937
======= ======= ======= =======
Per common share
Operating income $ 1.15 0.58 2.21 1.57
Realized gains, net (0.01) 0.03 0.02 0.04
------- ------- ------- -------
Net income $ 1.14 0.61 2.23 1.61
======= ======= ======= =======
Cash dividends $ 0.25 0.24 0.50 0.48
CONSOLIDATED
STATEMENT OF CASH FLOWS
(in thousands)
Six Months ended
June 30
2000 1999
Operating activities
Net cash provided $33,103 33,799
Investing activities
Purchases of fixed maturities available for sale (173,486) (297,030)
Sales of fixed maturities available for sale 156,830 149,424
Sales of equity securities available for sale 28,926 7,609
Maturities and principal paydowns of
fixed maturity investments:
Available for sale 47,220 105,941
Held to maturity 19,855 9,438
Purchases of other investments (56,922) (64,356)
Sales, maturities and principal paydowns
of other investments 19,182 25,280
Net sales of short-term investments 2,296 18,929
Net cash provided (used) 43,901 (44,765)
Financing activities
Policyowner contract deposits 69,040 77,340
Withdrawals of policyowner
contract deposits (108,525) (91,541)
Dividends paid to stockholders (6,024) (5,955)
Proceeds from borrowings 25,400 30,000
Repayment of borrowings (60,400) 0
Other, net (1,837) (3,074)
Net cash provided (used) (82,346) 6,770
Decrease in cash (5,342) (4,196)
Cash at beginning of year 22,355 16,763
Cash at end of period $17,013 12,567
Kansas City Life Insurance Company
2000 Second Quarter Report
Message from the President and CEO
Kansas City Life achieved substantial earnings and sales growth in both the
second quarter and first half of the year. Operating earnings per share nearly
doubled in the second quarter to $1.15 while the six months' earnings improved
41 percent to $2.21 a share. Since there was little change in realized
investment gains in the periods, net income increased largely in line with
operating earnings. Net income per share rose 87 percent and 39 percent in the
quarter and six months, respectively. Last year's second quarter, which was
hampered by poor mortality experience and Sunset relocation costs, was a weak
quarter historically.
Earnings growth was driven principally by two factors. First, pretax
earnings benefited by approximately $4.0 million in the second quarter from the
unlocking of the original assumptions related to the amortization of deferred
acquisition costs on the interest sensitive products. Actual earnings experience
has been more favorable than these assumptions anticipated, and they have been
revised to reflect these favorable variations. Second, home office operating
expenses declined 9 percent in the quarter and 5 percent in the first half due
in large measure to the improved operating efficiencies realized by the
assimilation of Sunset Life's operations into the home office.
Sales, in terms of new annualized premiums, rose 20 percent in the quarter
and 5 percent for the six months. Strong growth in variable universal life and
annuity products, 45 percent for the quarter and 37 percent for the first half,
offset sales declines in the interest sensitive products. Variable products
contributed nearly two-thirds of this year's sales. Sales of group products,
despite the discontinuance this year of the stop loss line, grew 9 percent in
the quarter, but declined 5 percent year to date. Excluding the stop loss line,
group sales rose 14 percent in the first half largely due to improved group
dental sales. Insurance in force topped $27 billion for the first time, growing
4 percent on an annualized basis.
Insurance premiums were unchanged in the quarter but declined 2 percent in
the six months. Contract charge revenues, generated by the variable and interest
sensitive lines of business, increased 5 percent in both the quarter and the
first half.
Investment earnings rose 2 percent in the quarter and 1 percent year to
date. A 34 basis point rise in the portfolio's earned yield ovecame a slight
decline in earning assets. However, investment margins narrowed somewhat on our
interest sensitive products.
Generations Bank, our new banking affiliate, was capitalized at $6.0
million at the end of the quarter. The bank began offering a package of new
financial products on July 3rd.
Book value per share equals $42.26, a 7 percent annualized increase from
the beginning of the year. Excluding the effects of unrealized investment gains
and losses, book value equals $47.04 a share, an 8 percent annualized increase.
This year Kansas City Life has purchased 123,000 of its shares on the open
market at a cost of $3.9 million. The Board of Directors previously approved the
purchase of up to one million shares.
The Board of Directors approved a quarterly dividend of $.25 a share
payable August 21st to stockholders of record on August 7th.
Segment Information
Quarter ended Six Months ended
June 30 June 30
2000 1999 2000 1999
Revenues from external customers:
KCL individual $25,612 26,367 54,535 55,941
KCL group 14,503 13,052 28,393 26,121
Sunset Life 7,392 5,871 15,030 13,411
Old American 18,674 19,303 37,608 38,357
Total $66,181 64,593 135,566 133,830
Investment revenues:
KCL individual $40,276 39,748 78,396 78,411
KCL group 183 318 370 600
Sunset Life 8,636 8,300 16,975 16,368
Old American 4,080 3,710 8,076 7,190
Total $53,175 52,076 103,817 102,569
Operating income (loss):
KCL individual $8,054 4,965 17,408 13,483
KCL group 220 (604) 597 (142)
Sunset Life 2,796 1,545 5,178 4,167
Old American 2,692 1,350 3,382 1,989
Total $13,762 7,256 26,565 19,497
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
