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, 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 October 31, 2000
Common Stock, $1.25 par value 12,016,228 shares
Kansas City Life Insurance Company
Quarter ended September 30, 2000
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 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 for the third quarter rose 21
percent over last year to equal $1.20. Including realized gains and losses, net
income per share equaled $1.21, an increase of 11 percent over last year. For
the nine months, operating income per share rose 33 percent to equal $3.41 and
net income per share rose 27 percent to equal $3.44. The increase in third
quarter's earnings was due to expanded profit margins resulting from improved
mortality experience and from reduced operating expenses. The increase for the
nine months was due to these two items as well as to the unlocking of deferred
acquisition cost assumptions which benefited earnings $4.0 million, as mentioned
in the second quarter's report.
Net investment income decreased 1 percent in the third quarter and was flat for
the nine months. Realized investment gains and losses will vary from period to
period at management's discretion and/or due to economic conditions. Investment
margins narrowed slightly for the interest sensitive products but expanded
somewhat for the traditional products. Investable funds generated by the
variable products are segregated into separate accounts and do not generate
investment income for the Company.
Home office operating expenses were flat in the third quarter, but decreased 3
percent in the nine months. The decrease was largely due to the savings
resulting from the consolidation of Sunset Life's operations into the parent's
home office in 1999. These savings emerged even after the absorption of start up
costs associated with the development of Generations Bank, which opened its
doors on July 3.
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:
<TABLE>
<CAPTION>
Kansas City Life Insurance Company
Segment Information
Kansas City Life Sunset Old
Individual Group Life American Total
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers:
Nine months: 2000 $ 81,368 41,880 21,687 56,165 201,100
1999 85,777 39,596 20,433 57,306 203,112
Third quarter: 2000 26,833 13,487 7,109 18,557 65,986
1999 29,836 13,475 7,022 18,949 69,282
Investment revenues:
Nine months: 2000 $ 116,415 544 25,839 12,261 155,059
1999 118,309 817 24,976 11,011 155,113
Third quarter: 2000 38,984 174 8,864 4,185 52,207
1999 39,899 217 8,608 3,820 52,544
Operating income:
Nine months: 2000 $ 26,300 476 8,381 5,894 41,051
1999 22,104 (212) 5,600 4,230 31,722
Third quarter: 2000 8,892 (121) 3,203 2,512 14,486
1999 8,620 (70) 1,433 2,241 12,224
<FN>
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.
</FN>
</TABLE>
Kansas City Life - Individual
Total new annualized premiums declined 4 percent in the third quarter.
Non-variable universal life sales increased 8 percent during the quarter and
variable annuities increased 2 percent. These increases were offset by a 6
percent decline in variable universal life sales, an 18 percent decrease in
non-variable flexible annuity sales and a 14 percent decline in traditional life
sales. For the nine months, new annualized premiums rose 5 percent. Variable
universal life sales increased 23 percent, variable annuity sales increased 24
percent, and traditional life sales increased 10 percent. Partially offsetting
these increases, non-variable universal life sales declined 16 percent and
non-variable flexible annuity sales declined 36 percent. Variable product sales
accounted for 78 percent of this segment's total sales for the nine months, up
from 66 percent a year ago.
This segment provided 78 percent of consolidated new annualized premiums for the
nine months, compared to 74 percent a year ago. On the basis of direct statutory
receipts, new sales increased 5 percent over last year on the strength of new
variable sales, which increased 20 percent and equaled 81 percent of total new
sales. New non-variable universal life sales declined 22 percent and new
flexible annuities declined 22 percent.
Total insurance revenues, which include premium renewals and contract charges on
the interest sensitive products, declined 11 percent in the third quarter and 6
percent in the nine months.
Total benefits for this segment decreased 7 percent in the third quarter and 5
percent in the nine months. Death benefits increased 2 percent in the third
quarter and 5 percent in the nine months. Mortality experience for this segment
was less favorable versus last year. Traditional life surrenders declined 1
percent in the third quarter but increased 11 percent in the nine months
compared to increases of 3 percent and 18 percent in the second quarter and
first half, respectively. Total benefits, as a percent of operating revenue,
equaled 59 percent at the nine months, compared to 61 percent a year ago.
Operating income increased by 3 percent in the third quarter and by 19 percent
in the nine months. This segment provided 40 percent of consolidated insurance
revenues in the nine months and 64 percent of consolidated operating income,
compared with 42 percent and 70 percent, respectively, last year.
Kansas City Life - Group
Net income for the nine months was $0.7 million more than last year. This
improvement was primarily the result of improved sales revenues and a decline in
the claims ratio, which decreased from 75 percent last year to 73 percent this
year.
Group sales, in terms of new annualized premiums, declined 18 percent in the
third quarter and 9 percent in the nine months. However, excluding the stop loss
line, which was discontinued late last year, new annualized premiums declined 6
percent in the third quarter but increased 7 percent in the nine months. The
group segment provided 9 percent of consolidated annualized premiums for the
nine months, versus 10 percent last year. Group sales were lead by the dental
line, which declined 18 percent in the third quarter and rose 8 percent in the
nine months.
Total benefits for this segment, as a percent of revenues, equaled 62 percent
for the third quarter, versus 61 percent a year ago. For the nine months, this
ratio was 61 percent, compared to 62 percent a year ago. This segment provided
21 percent of consolidated insurance revenues in the nine months compared to 19
percent a year ago and 1 percent of operating earnings compared with a loss last
year.
Sunset Life
Sunset Life's new annualized premiums declined 54 percent in the third quarter
and 37 percent in the nine months. 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 nine months, down from 8 percent a year ago.
Total insurance revenues declined 4 percent in the third quarter, but increased
3 percent in the nine months. Total benefits for this segment decreased 18
percent in the third quarter, but increased 8 percent in the nine months.
However, this is an improvement compared to increases of 42 percent in the
second quarter and 30 percent in the first half. Death benefits declined 21
percent in the third quarter but increased 3 percent in the nine months. These
are improvements from a 10 percent decline in the second quarter and a 21
percent increase in the first half. These improvements result from mortality
experience, which improved in the third quarter, but still trails last year's
experience. Surrenders of traditional life products more than doubled in the
third quarter and rose 29 percent in the nine months. Total benefits, as a
percent of operating revenue equaled 51 percent in the nine months, up from 49
percent last year. However, for the third quarter this was 46 percent versus 58
percent in last year's third quarter.
Insurance operating expenses declined 9 percent in the third quarter and 17
percent in the nine months, reflecting savings resulting from the consolidation
of Sunset Life's operations into the home office.
Sunset Life's operating income more than doubled in the third quarter and
increased by half in the nine months. Sunset Life contributed 11 percent of
consolidated insurance revenues and 21 percent of consolidated operating income
in the nine months, versus 10 percent and 18 percent, respectively, last year.
For the third quarter, this segment contributed 22 percent of consolidated
operating income compared with 12 percent last year.
Old American
Old American's new annualized premiums increased 1 percent in both the third
quarter and the nine months. This segment contributed 7 percent of total new
annualized premiums, the same as last year. On the basis of statutory direct
receipts, new sales were level with last year.
Total insurance revenues declined 2 percent in both the third quarter and the
nine months. Total benefits declined 4 percent in the third quarter and 1
percent in the nine months. Mortality experience improved slightly in the third
quarter and the nine months. Surrenders increased 25 percent in the third
quarter and 18 percent in the nine months. Total benefits as a percent of
operating revenue equaled 55 percent in the third quarter and 58 percent in the
nine months compared with 57 percent and 59 percent in the prior year,
respectively. Old American's operating expenses declined 1 percent in the third
quarter and 6 percent in the nine months.
Operating income for this segment increased 12 percent in the third quarter and
39 percent in the nine months. This segment provided 14 percent of consolidated
operating income and 28 percent of consolidated insurance revenues for the nine
months, compared to 13 percent and 28 percent, respectively, last year.
Changes in Reporting Regulations
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and for Hedging Activities," provides comprehensive, consistent standards for
the recognition and measurement of derivative and hedging activities. The
standard is effective January 1, 2001, and is being evaluated for its effect on
Kansas City Life and to ensure its implementation in a timely manner. It is
currently anticipated that the guideline will not have a significant impact on
the Company's reported results.
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 nine months, cash provided
from operating activities declined 28 percent to $34.4 million. Funds from all
sources totaled $551.2 million, a 22 percent decline from last year. At
September 30, 2000 the Company had $30.0 million of short-term borrowings, down
$39.5 million from year end. The Company uses these borrowings in order to
pursue interest spread strategies. At September 30, 2000, separate accounts and
other investments generated by the variable line totaled $358 million, a 39
percent annualized increase from year end.
Assets totaled $3.6 billion, the same as at year end. Excluding unrealized
investment gains and losses, assets totaled $3.7 billion, level with year end.
Consolidated insurance in force totaled $26.9 billion, a 1 percent increase on
an annualized basis. Book value per share totaled $44.31, an increase of 11
percent on an annualized basis. Excluding unrealized investment gains and
losses, book value per share equaled $47.99, an annualized growth of 8 percent.
During the nine months, the Company purchased 126,200 shares of its common stock
for $4.0 million under the stock repurchase program. Under this program, the
Company may purchase up to one million shares during 2000.
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 September 30, 2000, the
Company had an unrealized investment loss of $44.4 million, net of related taxes
and deferred policy acquisition costs, down from the $53.4 million unrealized
loss reported at year end 1999. This decrease is primarily the result of
decreased interest rates in the corporate bond market during the nine months.
Part II: Other Information
Item 6.
(a) Exhibits - Report on Form 8-K dated August 18, 2000 and incorporated by
reference herein.
(b) Reports on Form 8-K - the Company filed a report on Form 8-K dated August
18, 2000 announcing that the Executive Committee of the Board of Directors had
engaged the accounting firm of KPMG LLP as independent accountants for the
Registrant. The work of Ernst & Young LLP was terminated concurrently with the
engagement of KPMG LLP.
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 6, 2000
Consolidated
Balance Sheet
(in thousands)
September 30 December 31
2000 1999
------------- -------------
Assets
Investments:
Fixed maturities:
Securities available for sale,
at market $ 1,948,435 1,999,215
Securities held to maturity,
at amortized cost 89,733 107,606
Equity securities available
for sale, at market 106,080 115,968
Mortgage loans 369,786 340,704
Short-term 26,846 19,380
Other 198,472 197,868
------------- -------------
2,739,352 2,780,741
Cash 7,767 22,355
Deferred acquisition costs 243,738 236,370
Other assets 307,845 321,919
Separate account assets 336,609 259,899
------------- -------------
$ 3,635,311 3,621,284
============= =============
Liabilities and equity
Future policy benefits $ 821,206 829,556
Accumulated contract values 1,634,300 1,688,706
Notes Payable 30,000 69,500
Current Income taxes payable 7,130 7,870
Other liabilities 272,483 271,948
Separate account liabilities 336,609 259,899
------------- -------------
Total liabilities 3,101,728 3,127,479
Stockholders' equity:
Capital stock 23,121 23,121
Paid in capital 19,920 18,498
Accumulated other comprehensive loss (50,039) (59,095)
Retained earnings 646,663 614,278
Less treasury stock (106,082) (102,997)
------------- -------------
533,583 493,805
------------- -------------
$ 3,635,311 3,621,284
============= =============
Notes:
* Comprehensive income (loss) equals $50,472,000 and
$(41,718,000), for 2000 and 1999, respectively,
and $27,711,000 and $(2,958,000) for the third 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 period,
12,037,380 shares (12,370,974 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 prior financial statements
have been reclassified to conform with the current
presentation.
Consolidated
Income Statement
(in thousands, except per share data)
Quarter ended Nine Months ended
September 30 September 30
2000 1999 2000 1999
------- ------- ------- -------
Revenues
Insurance revenues:
Premiums:
Life insurance $ 25,103 26,713 74,605 79,049
Accident and health 10,772 10,813 33,124 31,636
Contract charges 26,609 28,663 81,877 81,912
Investment revenues:
Investment income, net 52,207 52,544 155,059 155,113
Realized gains 139 1,842 561 2,519
Other 3,502 3,094 11,494 10,516
------- ------- ------- -------
Total revenues 118,332 123,669 356,720 360,745
------- ------- ------- -------
Benefits and expenses
Policy benefits:
Death benefits 27,377 28,152 86,156 84,308
Surrenders of life insurance 3,922 3,775 12,540 11,201
Other benefits 18,810 18,870 54,541 53,307
Increase in benefit and contract reserves 16,701 21,136 53,341 61,401
Amortization of policy acquisition costs 7,245 7,259 18,527 27,294
Insurance operating expenses 24,125 24,976 72,962 75,623
------- ------- ------- -------
Total benefits and expenses 98,180 104,168 298,067 313,134
------- ------- ------- -------
Pretax income 20,152 19,501 58,653 47,611
------- ------- ------- -------
Federal income taxes:
Current 3,680 4,226 14,997 15,180
Deferred 1,896 1,853 2,240 (928)
------- ------- ------- -------
5,576 6,079 17,237 14,252
------- ------- ------- -------
Net income $ 14,576 13,422 41,416 33,359
======= ======= ======= =======
Per common share
Operating income $ 1.20 0.99 3.41 2.56
Realized investment gains, net 0.01 0.10 0.03 0.14
------- ------- ------- -------
Net income $ 1.21 1.09 3.44 2.70
======= ======= ======= =======
Cash dividends $ 0.25 0.24 0.75 0.72
CONSOLIDATED
STATEMENT OF CASH FLOWS
(in thousands)
Nine Months ended
September 30
2000 1999
Operating activities
Net cash provided $34,417 47,512
Investing activities
Purchases of fixed maturities available for sale (243,191) (475,250)
Sales of fixed maturities available for sale 236,207 263,554
Sales of equity securities available for sale 34,831 19,984
Maturities and principal paydowns of
fixed maturity investments:
Available for sale 61,963 137,206
Held to maturity 20,855 10,490
Purchases of other investments (83,746) (78,023)
Sales, maturities and principal paydowns
of other investments 32,918 40,452
Decrease (increase) in short-term investments (7,619) 44,118
Net cash provided (used) 52,218 (37,469)
Financing activities
Policyowner contract deposits 101,754 114,615
Withdrawals of policyowner
contract deposits (152,784) (133,181)
Dividends paid to stockholders (9,031) (8,925)
Treasury stock acquired (4,502) (11,223)
Proceeds from borrowings 25,400 30,000
Repayment of borrowings (64,900) 0
Other, net 2,840 1,087
Net cash used (101,223) (7,627)
Decrease (increase) in cash (14,588) 2,416
Cash at beginning of year 22,355 16,763
Cash at end of period $7,767 19,179
Message from the President and CEO
Kansas City Life achieved a 21 percent increase in operating earnings in
the third quarter to $1.20 a share due to expanded profit margins resulting from
improved mortality experience and reduced operating expenses. The nine months'
operating earnings rose 33 percent to $3.41 a share due to these two items and
the unlocking of deferred acquisition cost assumptions. Net income, which was
impacted by a decline in realized investment gains, rose 11 percent in the
quarter to $1.21 a share and 27 percent for the nine months to $3.44 per share.
Our strong earnings performance arose principally from the three factors
noted above. First, mortality experience fluctuates over time, but it has been
particularly favorable this year in both the block of insurance acquired three
years ago and at our insurance affiliates. Second, home office operating
expenses declined 3 percent largely due to efficiencies gained through the
consolidation of Sunset Life's operations into the home office. These savings
emerged even as we absorbed start up costs associated with developing a bank and
actively managing our customer relationships. These two initiatives are expected
to leverage our customer base in order to increase revenues and stockholder
value. Third, as discussed last quarter we changed, or unlocked, assumptions
associated with the amortization of deferred acquisition costs in the second
quarter. This benefited pretax earnings $4.0 million in that quarter. The change
reflects our anticipation that we will achieve wider profit margins on our
universal life business than originally assumed, primarily due to improved
mortality experience.
Sales, in terms of new annualized premiums, remained level through the nine
months, but declined 10 percent in the third quarter. Sales of variable products
rose 23 percent for the nine months, but the growth slowed in the third quarter.
The line provided 61 percent of consolidated new premiums. Assets generated by
the variable business rose 39 percent, annualized, to total $358 million.
Offsetting the variable line's success, sales of interest sensitive products
declined, reflecting general consumer preference for variable products. However,
given the current volatile financial markets, Kansas City Life remains well
positioned by offering variable, interest sensitive and traditional products to
the marketplace. Kansas City Life will introduce a new fixed rate annuity
product later this year and its second generation of variable universal life and
annuity products early next year. Life insurance in force has risen 1 percent
this year to $26.9 billion.
Insurance revenues in the attached financial statements declined slightly
in both the quarter and nine months. Modest growth in accident and health
premiums, provided by the group dental line, was offset by a decline in life
insurance premiums and a leveling off of the growth in contract charges.
Investment income was unchanged as the investment portfolio declined 1
percent from a year ago. Investable funds generated by the variable products are
partitioned off in separate accounts and do not benefit the Company's investment
earnings. Investment margins narrowed slightly for the interest sensitive
products but expanded somewhat for the traditional products.
Jack D. Hayes, Senior Vice President, Marketing, has announced his
retirement. Jack headed Kansas City Life's marketing efforts for the past seven
years and guided the Company into variable products. He will be succeeded by
Bret L. Benham, currently Vice President, Agency Marketing.
Book value rose to $44.31 a share. Excluding unrealized gains and losses on
the securities portfolio due to changes in market interest rates, book value
rose 8 percent, annualized, to $47.99 a share.
A regular quarterly dividend of $.25 a share was approved by the Board of
Directors to be paid November 20 to stockholders of record on November 6.
