UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

**FORM 10-K**

 

 

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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] |
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|  
For the Fiscal Year ended December 31, 2004

 
[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

 
For the Transition Period from  

to  

 
Commission File Number 2-40764

 

**KANSAS CITY LIFE INSURANCE COMPANY**

(Exact Name of Registrant as Specified in its Charter)

 

 
Missouri  

44-0308260  

 
(State or Other Jurisdiction of  

(I.R.S. Employer

 
 
Incorporation or Organization)  

Identification Number)

 

 
3520 Broadway, Kansas City, Missouri  

64111-2565  

 
(Address of Principal Executive Offices)  

(Zip Code)

 

Registrant's Telephone Number, including Area Code:   816-753-7000

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

 
Name of Each Exchange on

Title of Each Class  

Which Registered  

 
 

None

None

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

 

None

(Title of Class)

 

Indicate by check mark whether 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 (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  

X  

No  

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)

 

Yes  

X  

No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

As of December 31, 2004, 11,946,393 shares of the Company's capital stock par value $1.25 were outstanding, and the aggregate market value of the common stock (based upon the average bid and asked price according to Company records) of Kansas City Life Insurance Company held by non-affiliates was approximately $175,754,915.

 

 

 

**KANSAS CITY LIFE INSURANCE COMPANY**

**TABLE OF CONTENTS**

 

 

PART I.................................................................................................................................

3

 

 

Item 1.  Business......................................................................................................................

3

Item 2.  Properties.....................................................................................................................

3

Item 3.  Legal Proceedings..............................................................................................................

4

Item 4.  Submission of Matters to a Vote of Security Holders............................................................................

4

 

 

PART II..................................................................................................................................

5

 

 

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity  

Securities.........................................................................................................................................

5

Item 6.  Selected Financial Data..........................................................................................................

7

                                                                                         Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations......................................

8

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk......................................................................

27

Item 8.  Financial Statements and Supplementary Data......................................................................................

30

Consolidated Balance Sheets............................................................................................................

30

Consolidated Statements of Income......................................................................................................

31

Consolidated Statements of Stockholders’ Equity...................................................................................

32

Consolidated Statements of Cash Flows...................................................................................................

33

Notes to Consolidated Financial Statements...............................................................................................

34

Report of Independent Registered Public Accounting Firm...................................................................................

61

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............................................

63

Item 9A.  Controls and Procedures............................................................................................................

63

Item 9B.  Other Information..................................................................................................................

63

 

 

PART III..................................................................................................................................

64

 

 

Item 10.  Directors and Executive Officers of the Registrant..............................................................................

64

Item 11.  Executive Compensation..........................................................................................................

67

Item 12.  Security Ownership of Certain Beneficial Owners and Management......................................................................

70

Item 13.  Certain Relationships and Related Transactions....................................................................................

75

Item 14.  Principal Accounting Fees and Services..............................................................................................

75

 

 

PART IV.....................................................................................................................................

76

 

 

Item 15.  Exhibits, Financial Statement Schedules............................................................................................

76

 

 

Signatures................................................................................................................................

78

 

Supplemental Information...............................................................................................................................

79

 

 

Schedule I – Summary of Investments – Other Than Investments in Related Parties..............................................

79

Schedule II – Condensed Financial Information of Registrant.......................................................................

80

Schedule III – Supplementary Insurance Information................................................................................

83

Schedule IV – Reinsurance Information.............................................................................................

84

Schedule V – Valuation and Qualifying Accounts....................................................................................

85

 

 

 

 

**PART I**

 

**Item 1****.****BUSINESS**

 

Kansas City Life Insurance Company (KCL or the Company) was incorporated under the assessment laws of Missouri in 1895 as the Bankers Life Association.  In 1900, its present corporate title was adopted and it was reorganized as a legal reserve company in 1903.  

 

The Company primarily operates in four business segments:  Kansas City Life Insurance Company, divided between its individual and group businesses, and its two insurance subsidiaries, Sunset Life Insurance Company of America (Sunset Life) and Old American Insurance Company (Old American).  KCL markets its individual products, principally term, traditional, interest sensitive and variable products, through a nationwide sales force of independent general agents and these products generate 51% of consolidated revenues from customers.  The group products, largely life, dental, disability and administrative claims paying services only, are marketed by a nationwide sales force of independent general agents and group brokers, along with third party marketing arrangements.  Group revenues account for 17% of revenues from customers.  Kansas City Life operates in 48 states and the District of Columbia.  Sunset Lifemarkets term, traditional, interest sensitive and traditional products to individuals through a sales force of independent general agents.  Sunset Life operates in 43 states and the District of Columbia.  This segment provides 6% of revenues from customers.  The Old American segment sells final expense insurance products nationwide through its general agency system, with exclusive territories, using direct response marketing to supply agents with leads.  Old American operates in 46 states and the District of Columbia and accounts for 26% of consolidated revenues from customers.

 

Old American and Sunset Life’s administrative and accounting operations are part of KCL's home office.  However, each entity operates a separate and independent field force.

 

KCL and its subsidiaries are subject to state regulations in their states of domicile and in the states in which they do business.  Although the federal government generally does not regulate the business of insurance, federal initiatives often have an impact on the business in a variety of ways, including the taxation of insurance companies and the tax treatment of insurance products.

 

KCL and its subsidiaries have 546 full time employees located in the home office.  The Company considers relations with its employees to be good.

 

The Company operates in the life insurance sector of the financial services industry in the United States.  The industry is highly competitive with respect to pricing, selection of products and quality of service.  No single competitor or any small group of competitors dominate any of the markets in which the Company operates.

 

*Access to Public Filings*

 

KCL provides access to its annual report on Form 10-K, and will provide access as they become available during the year for all quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed with the Securities and Exchange Commission (SEC) under the 1934 Act, free of charge.  These documents may be accessed on KCL’s website at the following address:  http://www.kclife.com/ and will be provided as soon as is practicable after filing with the SEC, although not always on the same day.  They may also be found on the SEC’s website at http://www.sec.gov.

 

**Item 2****.****PROPERTIES**

 

KCL's home office is located at 3520 Broadway in Kansas City, Missouri.  The Company owns and wholly occupies two five story buildings on an eight acre site.

 

The Company owns various other properties held for investment.

 

 

 

 

 

 

**Item 3****.****LEGAL PROCEEDINGS**

 

The life insurance industry, including the Company and its subsidiaries, has been subject to an increase in litigation in recent years.  Such litigation has been pursued on behalf of purported classes of insurance purchasers, often questioning the conduct of insurers in the marketing of their products. 

 

In addition to the above, the Company and its subsidiaries are defendants in, or subject to other claims or legal actions.  Some of these claims and legal actions are in jurisdictions where juries are given substantial latitude in assessing damages, including punitive damages.  Although no assurances can be given and no determinations can be made at this time, management believes that the ultimate liability, if any, with respect to these other claims and legal actions would have no material effect on the Company’s business, results of operations or financial position.

 

**Item 4****.****SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

 

**PART II**

 

**Item 5****.****MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

**STOCKHOLDER INFORMATION**

 

**CORPORATE HEADQUARTERS**

Kansas City Life Insurance Company

3520 Broadway

Post Office Box 219139

Kansas City, Missouri 64121-9139

Telephone:  (816) 753-7000 

Fax: (816) 753-4902

Internet: http://www.kclife.com

E-mail: kclife@kclife.com

 

**NOTICE OF ANNUAL MEETING**

The annual meeting of stockholders will be held at  

9 a.m. Thursday, April 21, 2005, at Kansas City Life's corporate headquarters.

 

**TRANSFER AGENT**

Cheryl Keefer, Assistant Secretary

Kansas City Life Insurance Company

Post Office Box 219139

Kansas City, Missouri 64121-9139

 

**10-K REQUEST**

Stockholders may request a free copy of Kansas City Life's Form 10-K, as filed with the Securities and Exchange Commission, by writing to Secretary, Kansas City Life Insurance Company.

 

**SECURITY HOLDERS**

As of January 31, 2005, Kansas City Life had approximately 585 security holders, including individual participants in security position listings.

 

 

**STOCK AND DIVIDEND INFORMATION**

**Stock Quotation Symbol**

NASDAQ—KCLI

 

The following table presents the high and low prices for the Company’s common stock for the periods indicated and the dividends declared per share during such periods.

 

 

 

 

 

Bid

 

 

Dividend

 

 

High

 

 

Low

 

 

Paid

 

*(per share)***

**2004:**

 

 

 

 

 

 

 

 

First quarter

$

47.86 

 

$

42.05 

 

$

0.27 

Second quarter

 

43.19 

 

 

36.65 

 

 

0.27 

Third quarter

 

44.59 

 

 

39.60 

 

 

0.27 

Fourth quarter

 

49.99 

 

 

39.50 

 

 

0.27 

 

 

 

 

 

$

1.08 

**2003:**

 

 

 

 

 

 

 

 

First quarter

$

43.22 

 

$

37.50 

 

$

0.27 

Second quarter

 

45.23 

 

 

39.27 

 

 

0.27 

Third quarter

 

49.12 

 

 

40.01 

 

 

0.27 

Fourth quarter

 

48.43 

 

 

44.16 

 

 

0.27 

 

 

 

 

 

$

1.08 

 

 

 

 

 

 

A quarterly dividend of $.27 per share was paid February 22, 2005.

 

NASDAQ market quotations are compiled according to Company records and may reflect inter-dealer prices, without markup, markdown or commission and may not necessarily represent actual transactions.                                   

 

 

 

**Item 6****.****SELECTED FINANCIAL DATA**

 

**SELECTED FINANCIAL DATA**

(amounts in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2004

 

2003

 

2002

 

2001

 

2000

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance revenues

$

250,101 

 

$

272,644 

 

$

248,581 

 

$

249,085 

 

$

254,387 

 

Net investment income

 

197,975 

 

 

194,763 

 

 

194,235 

 

 

203,091 

 

 

207,174 

 

Realized investment gains (losses)

 

45,929 

 

 

(29,280)

 

 

(18,240)

 

 

(15,748)

 

 

(3,871)

 

Other revenues

 

8,468 

 

 

9,387 

 

 

14,779 

 

 

11,270 

 

 

13,215 

 

 

Total revenues

$

502,473 

 

$

447,514 

 

$

439,355 

 

$

447,698 

 

$

470,905 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

57,687 

 

$

14,793 

 

$

31,549 

 

$

29,922 

 

$

49,083 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income, basic and diluted

$

4.83 

 

$

1.24 

 

$

2.63 

 

$

2.49 

 

$

4.08 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends to stockholders

$

1.08 

 

$

1.08 

 

$

1.08 

 

$

1.08 

 

$

1.00 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

$

58.00 

 

$

54.04 

 

$

49.81 

 

$

47.04 

 

$

44.28 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

$

4,666,146 

 

$

4,549,687 

 

$

3,865,252 

 

$

3,774,106 

 

$

3,648,236 

Notes payable

 

92,220 

 

 

133,670 

 

 

97,241 

 

 

96,779 

 

 

41,520 

Stockholders' equity

 

692,896 

 

 

644,438 

 

 

597,497 

 

 

565,684 

 

 

532,254 

Life insurance in force

$

30,980,928 

 

$

32,216,624 

 

$

26,591,093 

 

$

26,644,910 

 

$

26,938,904 

 

 

**Item 7****:****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations analyzes the consolidated financial condition, changes in financial position and results of operations for the three years ended December 31, 2004 of Kansas City Life Insurance Company and its consolidated subsidiaries.  The discussion should be read in conjunction with the Consolidated Financial Statements and Notes.  All dollar amounts are in thousands except share data.

 

**Overview**

 

Kansas City Life Insurance Company (the Company) is a financial services company.  The Company offers a full line of term, traditional, interest sensitive, and variable life and annuity insurance products, in addition to a wide variety of group life and group accident and health insurance products; and is licensed in 48 states and the District of Columbia.  The Company’s principal subsidiaries are Sunset Life Insurance Company of America (Sunset Life) and Old American Insurance Company (Old American).  Sunset Life is a full line life insurance and annuity carrier and is licensed in 43 states and the District of Columbia.  Most Sunset Life agents are also licensed to sell products of Kansas City Life Insurance Company.  Old American, which specializes in final expense insurance for seniors, is licensed in 46 states and the District of Columbia.  The Company offers investment products and broker dealerservices through its subsidiary Sunset Financial Services, Inc. (SFS) for both its proprietary and non-proprietary variable insurance products and mutual funds.  The Company offers banking services through its subsidiary Generations Bank, such as deposit accounts, loans and internet banking.  However, in late 2004 the Company signed a definitive sales agreement to sell Generations Bank, pending regulatory approvals in 2005.

 

**Business Changes**

 

On October 25, 2004, the Company entered into a definitive agreement to sell its bank subsidiary, Generations Bank, for $10.1 million to Generations Bancorp, with an expected gain on the sale of approximately $1.9 million.  This transaction is subject to regulatory approval by the Office of Thrift Supervision and is expected to close during the third quarter of 2005.  The bank subsidiary and the results of operations are not material to the financial statements of the Company and are not disclosed separately.

 

On December 14, 2004, the Company signed an asset purchase agreement to sell its administrative claims paying services contracts as a defined block of business to The Epoch Group, L. C. for $0.2 million on January 1, 2005.  The administrative claims paying services, marketed as KCL Benefit Solutions, are part of the group insurance business segment.  One-half of the purchase price is due in February 2005.  The other half is due in subsequent years, subject to certain persistency contingencies.  This block of business and the results of operations are not material to the financial statements of the Company and are not disclosed separately.

 

On June 30, 2003, the Company acquired all of the issued and outstanding stock of GuideOne Life Insurance Company (GuideOne) from GuideOne Financial Group, Inc. and GuideOne Mutual Company.  The purchase price of the acquisition was $59.4 million and added $393.1 million in assets on the acquisition date, including an identifiable intangible asset called the value of business acquired (VOBA) of $38.0 million.  The financial position and results of operations of GuideOne have been included in these financial statements on a GAAP basis using the purchase method of accounting since July 1, 2003.  As of October 1, 2003, GuideOne was merged into Kansas City Life Insurance Company.  For segment reporting purposes, GuideOne is included in the Kansas City Life - Individual Insurance segment.

 

The acquisition of GuideOne expanded the scope of the Company’s individual insurance business, including the introduction of new marketing opportunities through an exclusive marketing arrangement with the agents of the GuideOne Mutual Company (property casualty insurance carrier and former parent).  The Company has benefited from efficiencies and improved economies of scale in terms of managing and administering the acquired insurance business.

 

**Cautionary Statement on Forward-Looking Information**

 

This report reviews the Company’s financial condition and results of operations, and historical information is presented and discussed.  Where appropriate, factors that may affect future financial performance are also identified and discussed.  Certain statements made in this report include “forward-looking statements” that fall within the meaning of the Private 

 

 

Securities Litigation Reform Act of 1995.  Forward-looking statements include any statement that may predict, forecast, indicate or imply future results, performance or achievements rather than historical facts and may contain words like “believe,” “expect,” “estimate,” “project,” “forecast,” “anticipate,” “plan,” “will,” “shall,” and other words, phrases or expressions with similar meaning.  

 

Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by the forward-looking statements.  Factors that could cause the Company’s future results to differ materially from expected results include, but are not limited to:

 

**•**

Changes in general economic conditions, including the performance of financial markets and interest rates; 

**•**

Increasing competition, which may affect the Company’s ability to sell its products;

**•**

Customer and agent response to new products, distribution channels and marketing initiatives;

**•**

Fluctuations in experience regarding current mortality, morbidity, persistency and interest rates relative to expected amounts used in pricing the Company’s products;

**•**

Changes in assumptions related to deferred acquisition costs and the value of business acquired;

**•**

Regulatory, accounting or tax changes that may affect the cost of, or the demand for, the Company’s products or services;

**•**

Unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations.  

 

The Company cannot give assurances that such statements will prove to be correct.  Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

 

**Critical Accounting Policies and Estimates**

 

The accounting policies below have been identified as critical to the understanding of the results of operations and financial position.  The application of these critical accounting policies in preparing the financial statements requires management to use significant judgments and estimates concerning future results or other developments, including the likelihood, timing or amount of one or more future transactions.  Actual results may differ from these estimates under different assumptions or conditions.  On an ongoing basis, estimates, assumptions and judgments are evaluated based on historical experience and various other information believed to be reasonable under the circumstances.  For a detailed discussion of other significant accounting policies, see Note 1 – Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements.

 

***Recognition of Revenues***

Premiums for traditional life insurance products are reported as revenue when due.  Traditional insurance products include whole life, term life, immediate annuities and supplementary contracts with life contingencies.  

 

Premiums on accident and health, disability and dental insurance are reported as earned ratably over the contract period in proportion to the amount of insurance protection provided.  A reserve is provided for the portion of premiums written which relates to unexpired terms of coverage.

 

Deposits relate to insurance products that include universal life, variable life, variable annuities, fixed deferred annuities and deposit products without life contingencies.  The cash flows from deposits are credited to policyholder account balances.  Deposits are not recorded as revenue, but revenues from such contracts consist of amounts assessed against policyholder account balances for mortality, policy administration and surrender charges, and are recognized in the period in which the services are provided.

 

***Sales or New Business Production***

The Company measures its sales or new business production with two components: new premiums recorded and new deposits received.  Premiums and deposits are subdivided into two categories: new and renewal.  New premiums and deposits are a measure of sales or new business production.  Renewal premiums and deposits occur as continuing business from existing customers. 

 

***Reinsurance***

Reinsurance is one of the tools that the Company uses to accomplish its business objectives.  A variety of reinsurance vehicles are currently in use including bulk, excess, and quota share arrangements on both coinsurance and morality/morbidity only basis.  Reinsurance supports a multitude of corporate objectives including managing statutory 

 

 

capital, reducing volatility, reducing surplus strain, and protecting against mortality deterioration on closed blocks.  At the customer level it increases our capacity, provides access to additional underwriting expertise, and generally makes it possible for us to offer products at competitive levels that we could not otherwise bring to market without reinsurance support.  Reinsurance is an actively managed tool that has increased in importance over recent years and will continue to play a role in the Company’s future. 

 

***Future Policy Benefits***

The Company establishes liabilities for amounts payable under insurance policies, including traditional life insurance, immediate annuities and accident and health insurance.  Generally, benefits are payable over an extended period of time and the reserves established for future policy benefits are dependent on the assumptions used in the pricing of the products.  Principal assumptions used in pricing policies and in the establishment of reserves for future policy benefits are mortality, morbidity, expenses, persistency, investment returns and inflation.  Differences between actual experience and assumptions used in the pricing of these policies and in the establishment of liabilities may result in variability of net income in amounts which may be material.

 

***Policyholder Account Balances***

Policyholder account balances include universal life insurance, fixed deferred annuity contracts and investment-type contracts.  The account balances for universal life contracts are equal to cumulative premiums, less contract charges, plus interest credited.  The account balances for fixed deferred annuities and investment-type contracts are equal to the cumulative deposits less any applicable contract charges plus interest credited.  The profitability of these products is also dependent on principal assumptions similar to traditional insurance products, and differences between actual experience and pricing assumptions may result in variability of net income in amounts which may be material.

 

***Deferred Acquisition Costs (DAC) and Value of Business Acquired (VOBA)***

Deferred acquisition costs (DAC), principally agent commissions and other selling, selection and issue costs, which vary with and are directly related to the production of new business, are capitalized as incurred.  These deferred costs are then amortized in proportion to future premium revenues or the expected future profits of the business, depending upon the type of product.  Profit expectations are based upon assumptions of future interest spreads, mortality margins, expense margins and policy and premium persistency experience.  These assumptions involve judgment and are compared to actual experience on an ongoing basis.  On an annual basis a review is performed and if it is determined that the assumptions related to the profit expectations for interest sensitive and variable insurance products should be revised, the impact of the change is reported in the current period’s income as an unlocking adjustment.

 

When new business is acquired, a portion of the purchase price is allocated to a separately identifiable intangible asset, called the value of business acquired (VOBA).  VOBA is established as the actuarially determined present value of future gross profits of the business acquired and is amortized in proportion to future premium revenues or the expected future profits, depending on the type of business acquired.  Similar to DAC, the assumptions regarding future experience can affect the carrying value of VOBA, including interest spreads, mortality, expense margins and policy and premium persistency experience.  Significant changes in these assumptions can impact the carrying balance of VOBA and produce changes that must be reflected in the current period’s income as an unlocking adjustment.

 

***Investments***

The Company’s principal investments are in fixed maturity securities, mortgage loans and real estate; all of which are exposed to three primary sources of investment risk: credit, interest rate and liquidity.  The fixed maturity securities, which are all classified as available for sale, are carried at their fair value in the Company’s balance sheet.  The investment portfolio is monitored regularly to ensure that investments which may be other than temporarily impaired are identified in a timely fashion and properly valued, and that impairments are charged against earnings as realized investment losses.  The valuation of the investment portfolio involves a variety of assumptions and estimates, especially for investments that are not actively traded.  Fair values are obtained from a variety of external sources. 

 

The Company has a policy and process in place to identify securities that could potentially have an impairment that is other than temporary.  This process involves monitoring market events that could impact issuers’ credit ratings, business climate, management changes, litigation and government actions, and other similar factors.  This process also involves monitoring late payments, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues.

 

At the end of each quarter, all securities are reviewed where market value is less than ninety percent of amortized cost for six months or more to determine whether impairments need to be taken.  The analysis focuses on each issuer’s ability 

 

 

to service its debts and the length of time the security has been trading below cost.  This quarterly process includes an assessment of the credit quality of each investment in the entire securities portfolio.

 

The Company considers relevant facts and circumstances in evaluating whether the impairment of a security is other than temporary.  Relevant facts and circumstances considered include (1) the length of time the fair value has been below cost; (2) the financial position of the issuer, including the current and future impact of any specific events; and (3) the Company’s ability and intent to hold the security to maturity or until it recovers in value.  To the extent the Company determines that a security is deemed to be other than temporarily impaired, the difference between amortized cost and fair value would be charged to income as a realized investment loss.

 

There are a number of significant risks and uncertainties inherent in the process of monitoring impairments and determining if an impairment is other than temporary.  These risks and uncertainties include (1) the risk that the Company’s assessment of an issuer’s ability to meet all of its contractual obligations will change based on changes in the credit characteristics of that issuer, (2) the risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated, (3) the risk that fraudulent information could be provided to the Company’s investment professionals who determine the fair value estimates and other than temporary impairments, and (4) the risk that new information obtained by the Company or changes in other facts and circumstances lead the Company to change its intent to hold the security to maturity or until it recovers in value.  Anyof these situations could result in a charge to income in a future period.

 

***Income Taxes***

Deferred income taxes are recorded on the differences between the tax bases of assets and liabilities and the amounts at which they are reported in the consolidated financial statements.  Recorded amounts are adjusted to reflect changes in income tax rates and other tax law provisions as they become enacted.  

 

**Consolidated Results of Operations**

 

In 2004, the Company’s net income increased $42.9 million from the prior year, to a total of $57.7 million.  Net income per share increased 290% in 2004 to $4.83, compared with $1.24 for 2003 and $2.63 for 2002.  The change was primarily due to an increase in realized investment gains.  In late December 2004, the Company sold a significant real estate property that generated $26.4 million in realized investment gains, net of income taxes.  

 

Net income, excluding the effects of realized investment gains and losses and related tax effects, decreased 18% to  $27.8 million in 2004, compared to $33.8 million in 2003 and $43.4 million in 2002.  

 

Total revenues grew 12%, largely due to net realized investment gains in 2004 compared with net realized investment losses a year ago.  This improvement, coupled with increases in net investment income and contract charges, primarily from the GuideOne acquisition, more than offset the decline in premiums and the increase in reinsurance ceded.

 

The Company’s effective income tax rate increased in 2004 from a tax rate benefit of 60% in 2003 to a tax rate expense of 29%.  This change was primarily due to the increase in realized investment gains in 2004.  The Company’s effective income tax rate decreased in 2003 from a tax expense of 17% in 2002, to a tax rate benefit of 60%.  This change was primarily due to the increase in realized investment losses in 2003.  The Company’s effective income tax rate was reduced by low income housing tax credits by 5% in 2004, 41% in 2003 and 12% in 2002; and the resolution and settlement of prior year income tax liabilities.

 

***Sales***

The Company measures sales in terms of new premiums and deposits.  Premiums are included in insurance revenues in the Consolidated Statements of Income, while deposits are shown in the Consolidated Statements of Cash Flows.  The first set of tables below reconciles premiums included in insurance revenues and provides detail by new and renewal business.  New premiums are also detailed by product.  The second set of tables reconciles deposits with the Consolidated Statements of Cash Flows and provides detail by new and renewal deposits.  New deposits are also detailed by product.

 

There was a decline in premiums and deposits from 2003, which was largely the result of lower sales of fixed deferred and immediate annuities.  These declines were due to a change in consumer preferences for fixed–rate products in the low interest rate environment and changes made by the Company to its fixed deferred and immediate annuity products and distribution efforts. In August of 2003, the Company introduced a new fixed deferred annuity with lower interest 

 

 

guarantees that replaced previous products with higher interest guarantees.  In addition, the Company has focused its distribution efforts on agencies that write a balanced mix of life and annuity products, which has resulted in a lower volume of annuity sales.

 

New premiums declined 38% in 2004, primarily due to a 61% decrease in immediate annuity sales.  In 2003, new premiums rose 85% versus 2002, primarily due to a 280% increase in the sale of immediate annuities.  Annuity sales slowed in the second half of 2003, due in part to the Company’s emphasis on life insurance sales and changes in the marketplace.  Immediate annuity sales in 2004 were 47% greater than 2002.  

 

New Individual life insurance premium sales increased 10% for 2004 and 3% for 2003.  These increases were due to the addition of GuideOne at June 30, 2003 and an overall emphasis on life insurance sales.  In 2004, new group life premium sales decreased 23% and new group accident and health premium sales decreased 8%.  In 2003, new group life premium sales increased 36%, and new group accident and health premium sales were level.  Third party group marketing arrangements continue to generate sales in both the long-term disability and stop loss lines.  Renewal premiums grew 2% in 2004 after declining 4% in 2003.  

 

 

 

 

2004

%

 

2003

%

 

2002

New premiums:

 

 

 

 

 

 

 

 

 

 

 

Individual life insurance

$

13,420 

10 

 

$

12,247 

3 

 

$

11,847 

 

Immediate annuities

 

14,137 

(61)

 

 

36,569 

280 

 

 

9,612 

 

Group life insurance

 

1,507 

(23)

 

 

1,952 

36 

 

 

1,437 

 

Group accident and health insurance

 

11,755 

(8)

 

 

12,833 

- 

 

 

12,811 

 

Individual accident and health insurance

 

416 

(84)

 

 

2,610 

- 

 

 

-

 

 

Total new premiums

 

41,235 

(38)

 

 

66,211 

85 

 

 

35,707 

Renewal premiums

 

147,646 

2 

 

 

145,257 

(4)

 

 

150,577 

Total premiums

$

188,881 

(11)

 

$

211,468 

14 

 

$

186,284 

 

New deposits declined 41% in 2004 after increasing 42% in 2003, largely due to fixed deferred annuity sales which decreased 52% in 2004 but increased 45% in 2003.  New deposits on universal life products increased 14% in 2004 and 19% in 2003.  For 2004, new variable annuity deposits decreased 16% while new variable universal life deposits increased 10%.  Sales of variable products have remained slow during 2004, reflecting the moderate performance of the equity markets.  Renewal deposits increased 9% for 2004 and 6% for 2003.

 

 

 

 

2004

%

 

2003

%

 

2002

New deposits:

 

 

 

 

 

 

 

 

 

 

 

Universal life insurance

$

10,784 

14 

 

$

9,448 

19 

 

$

7,947 

 

Variable universal life insurance

 

3,407 

10 

 

 

3,093 

(58)

 

 

7,316 

 

Fixed deferred annuities

 

69,769 

(52)

 

 

145,057 

45 

 

 

100,148 

 

Variable annuities

 

32,356 

(16)

 

 

38,293 

68 

 

 

22,795 

 

 

Total new deposits

 

116,316 

(41)

 

 

195,891 

42 

 

 

138,206 

Renewal deposits

 

154,817 

9 

 

 

142,198 

6 

 

 

133,904 

Total deposits

$

271,133 

(20)

 

$

338,089 

24 

 

$

272,110 

                               

***Insurance Revenues***

Insurance revenues consist of premiums and contract charges, less reinsurance ceded.  Insurance revenues were down 8% or $22.5 million in 2004 at $250.1 million, while 2003 was up 10% over 2002.  Premiums were down 11% in 2004 after increasing 14% in 2003.  Contract charges earned in 2004 increased due to the addition of GuideOne’s portfolio of universal life and fixed deferred annuity products for a full year.  Prior to 2003, contract charges had decreased due to a reduction in policy expense loads assessed against policyholder account balances.  Reinsurance ceded has increased from $43.2 million in 2002 to $48.8 million in 2003 and $54.5 million in 2004.  The Company has expanded its use of reinsurance over the past few years and uses reinsurance as a means to mitigate its risks.  In 2004, reinsurance ceded increased $5.7 million over 2003, primarily due to group accident and health products.  Thisreinsurance reduces the Company’s adverse fluctuations on the more volatile long-term disability and stop loss products.  In addition, the 

 

 

GuideOne acquisition resulted in an increase to reinsurance ceded in the individual life and individual accident and health product lines.   

 

Insurance revenues are affected by the level of new sales, the type of products sold, and the persistency of policyholders, all of which may be influenced by economic conditions, as well as competitive forces.  Consumers continue to desire a broad portfolio of products with safety and competitive return objectives, which the Company strives to provide.  The Company’s full range of products, including its variable insurance products, allow policyholders to participate in both the equity and fixed income markets; and, interest sensitive and traditional insurance products combine safety of principal with competitive interest returns.

 

***Investment Revenues***

Net investment income increased slightly in 2004 to $198.0 million, an increase of $3.2 million over 2003.  In 2004, the volume of invested assets increased over the year, but the impact to investment income was partially offset by lower investment yields.  In 2003, the income from higher asset levels was directly offset by lower investment yields.

 

Included in net investment income, income from fixed maturity securities increased by $10.4 million or 7% in 2004 from the prior year.  This improvement was due, in part, to increased balances of fixed maturity security investments of $147.6 million or 5%.  In addition, the Company changed the mix of fixed maturity securities, as mortgage-backed securities declined $77.9 million and corporate bonds increased $205.1 million.  Partially offsetting the improved income from fixed maturity securities was a decline in income from mortgage loans of $3.3 million and short-term and other investments of $3.8 million.  The decline in income from mortgage loans was primarily due to prepayments of commercial mortgages, which resulted in a $26.0 million reduction in mortgage loan balances during 2004. 

 

As discussed above, the Company recorded net realized investment gains in 2004 of $45.9 million.  This was a $75.2 million improvement from net realized investment losses of $29.3 million in 2003.  The change was largely due to the sale of a significant real estate property.  The following table provides detail concerning realized investment gains and losses over the three years ended December 31.

 

**Realized Investment Gains and Losses**

2004

 

2003

 

2002

Gross gains resulting from:

 

 

 

 

 

 

 

 

 

Sales of investment securities

$

8,545 

 

$

9,467 

 

$

9,809 

 

Investment securities called

 

1,242 

 

 

2,469 

 

 

2,148 

 

Sales of real estate

 

44,735 

 

 

9,107 

 

 

8,644 

 

Other investment gains

 

443 

 

 

- 

 

 

- 

 

 

Total gross gains

 

54,965 

 

 

21,043 

 

 

20,601 

Gross losses resulting from:

 

 

 

 

 

 

 

 

 

Sales of investment securities

 

(8,237)

 

 

(20,443)

 

 

(19,216)

 

Write-downs of investment securities

 

(555)

 

 

(29,824)

 

 

(18,200)

 

Investment securities called

 

(476)

 

 

(839)

 

 

(1,012)

 

Other investment losses

 

(72)

 

 

(96)

 

 

(783)

 

 

Total gross losses

 

(9,340)

 

 

(51,202)

 

 

(39,211)

Amortization of deferred acquisition costs

 

304 

 

 

879 

 

 

370 

Realized investment gains (losses)

$

45,929 

 

$

(29,280)

 

$

(18,240)

 

The Company realizes investment gains and losses in the normal course of business from several sources.  The most consistent source of realized gains and losses is from investment security sales.  Although sales of securities have resulted in significant net losses during 2002 and 2003, sales of securities resulted in a net gain of $0.3 million in 2004.  Sales of securities are generally the result of changes in the relative credit position of the issue or issuer, along with the requirements of managing the Company’s asset and liability position.  Other sources of realized investment gains and losses include write-downs of investment securities, investment securities that are called, sales of real estate and other miscellaneous investment gains and losses.

 

Many securities purchased by the Company contain call provisions, which allow the issuer to redeem the securities at a particular price.  Depending upon the terms of the call provision and price at which the security was purchased, a realized gain or loss may be realized.  Called securities have resulted in net realized gains during 2004 and the two prior years.

 

 

 

 

The most significant source of realized investment gain or loss during the past three years was the $44.7 million in realized gains from sales of real estate recorded during 2004.  More than 90% of these gains were from the sale of the Company’s 50% interest in a portfolio of properties near Paradise Valley Mall, referred to as Paradise Village properties in Phoenix, Arizona.  The property interests were sold in two transactions that were completed in late December 2004 for a total of $54.3 million.  Fifty million of this total was attributable to the Company selling most of the property interests to the other 50% owner.  The remaining $4.3 million represented the sale of certain properties to a third party.

 

The Company has a long history of investment in real estate.  Real estate investments totaled $91.5 million at December 31, 2004 and $112.7 million at December 31, 2003.  Property types include office, industrial, multi-family and single-family residential.  Properties have been acquired through individual purchases, build-to-suit and speculative development, and acquisition of other life insurance company investment portfolios.  The Company generally maintains its ownership interest in these properties with the long-term intention of earning positive cash flow and income by leasing the properties, along with the expectation of realizing capital appreciation upon sale.  As evidenced by the realized investment gains from sales of real estate of $44.7 million in 2004, $9.1 million in 2003 and $8.6 million in 2002, the Company periodically sells certain real estate assets.

 

The Company maintained its interests in the Paradise Village properties for more than twenty years.  During this period, the land was improved and primarily retail properties were developed and leased.  As with the entirety of the Company’s real estate portfolio, the Paradise Village properties were consistently evaluated for continued holding or sale.  Changes in the demographic and competitive markets near the properties, along with relative values of retail properties in the Phoenix, Arizona market were factors in the Company’s decision to sell the Paradise Village properties.

 

Other investment gains and losses can include the impact of a variety of smaller investment transactions.  These can include changes in the Company’s valuation reserve for losses in the commercial mortgage portfolio.

 

The following table provides credit quality information on fixed maturity securities as determined by one of the nationally recognized ratings firms as of December 31, 2004.  

 

 

 

 

 

 

 

 

% of

Investment

 

Amortized

 

 

Fair

 

Fair

Quality

 

Cost

 

 

Value

 

Value

 

 

 

 

 

 

 

 

Investment grade

$

2,742,881 

 

$

2,830,075 

 

96 

Below investment grade

 

120,900 

 

 

132,039 

 

4 

 

$

2,863,781 

 

$

2,962,114 

 

 

 

In recent years, the bond and equity markets have been adversely affected by large bankruptcy filings, defaults by companies within certain industries and broad sector difficulties combined with a stressed economy.  Among the industry sectors that were particularly affected were airlines, energy and telecommunications.  

 

At the end of each quarter, all securities are reviewed where market value is less than ninety percent of amortized cost for six months or more to determine whether impairments need to be taken.  The analysis focuses on each issuer’s ability to service its debts and the length of time the security has been trading below cost.  This quarterly process includes an assessment of the credit quality of each investment in the entire securities portfolio.  The Company considers relevant facts and circumstances in evaluating whether the impairment of a security is other than temporary.  Relevant facts and circumstances considered include (1) the length of time the fair value has been below cost; (2) the financial position of the issuer, including the current and future impact of any specific events; and (3) the Company’s ability and intent to hold the security to maturity or until it recovers in value.  Tothe extent the Company determines that a security is deemed to be other than temporarily impaired, the difference between amortized cost and fair value is charged to income as a realized investment loss.  The Company's analysis identified $0.6 million in other than temporary declines in value in 2004.  For 2003, the Company recorded a $29.8 million in other than temporary declines in value, which were largely due to investments in the airline industry.  At year-end 2004, there were no investment securities in a distressed position greater than six months.  

 

The following table provides asset class detail of the investment portfolio.  Fixed maturity and equity securities represented 81% of the entire investment portfolio, up from 79% in 2003.  This increase in the proportion of investment 

 

 

securities was primarily due to the purchase of additional corporate bonds from policyholder cash flows and reductions in mortgage loans, real estate, policy loans and short-term investments.

 

**Percent of Invested Assets**

2004

 

2003

 

 

Amount

 

%

 

Amount

 

%

Fixed maturity securities

$

2,962,114 

 

79 

 

$

2,814,485 

 

77 

Equity securities

 

63,099 

 

2 

 

 

63,808 

 

2 

Mortgage loans

 

430,632 

 

12 

 

 

456,656 

 

13 

Real estate

 

91,519 

 

2 

 

 

112,691 

 

3 

Policy loans

 

108,546 

 

3 

 

 

114,420 

 

3 

Short-term

 

67,980 

 

2 

 

 

71,823 

 

2 

Other

 

2,081 

 

- 

 

 

903 

 

- 

 

Total

$

3,725,971 

 

100

 

$

3,634,786 

 

100

 

The securities portfolio had unrealized gains, net of related taxes, of $52.1 million at year-end 2004. The portfolio was broadly diversified across sectors.  A variety of measures have been employed to manage the portfolio’s credit and interest rate risks, as discussed later in this document in Item 7A – Quantitative and Qualitative Disclosures About Market Risk.

 

Mortgage loans comprise 12% of the investment portfolio, down from 13% at the end of 2003.  Approximately 95% of the mortgages are commercial loans on industrial warehouses and office properties.  None of the loans have been restructured nor have there been any loans in foreclosure over the past two years.  Prepayments rose in both 2004 and 2003 due to the lower interest rate environment.  The portfolio’s estimated fair value exceeded its carrying value by $13.0 million as of year-end 2004.  In 2003, the portfolio’s estimated fair value exceeded its carrying value by $21.6 million.  The Company does not hold mortgage loans of any borrower that exceeds 5% of stockholders’ equity.

 

Real estate investments represented approximately 2% of the investment portfolio, down from 3% in 2003.  The decline in real estate assets was primarily the result of the sale of the Paradise Village properties in Phoenix, Arizona.  The sale price totaled $54.3 million and the transaction was completed in late December 2004.  The buyer of the real estate assumed the outstanding debt on the property of $15.3 million.  This sale generated a $26.4 million realized gain, net of income taxes.  

 

Real estate investments consist principally of office buildings, industrial warehouses that are both in use and under development, and investments in multi-family and single-family residential properties, including affordable housing.  The real estate properties’ estimated fair value is well above the carrying value.  Real estate sales generated $44.7 million in net gains this year, compared to $9.1 million and $8.6 million in 2003 and 2002, respectively.

 

***Policyholder Benefits***

Policyholder benefits consist of death benefits (mortality), annuity benefits, accident and health benefits, surrenders and the associated increase or decrease in reserves for future policy benefits.  Policyholder benefits decreased 11% or $22.8 million in 2004 and increased 11% or $20.6 million in 2003.  The major factor was the change in reserves for future policy benefits due to immediate annuity sales.

 

Death benefits were up 1% in 2004, primarily as a result of a full year’s inclusion of the business obtained in the GuideOne acquisition compared to the six months of 2003.  Excluding the effect of the GuideOne acquisition, there was no significant variation in mortality experience over the period 2002 through 2004.  

 

Policyholder benefits for group accident and health declined in both 2004 and 2003, primarily due to the elimination of certain third party marketing arrangements.

 

***Interest Credited to Policyholder Account Balances***

Interest was credited to policyholder account balances for universal life, fixed deferred annuities and other investment-type products.  The amount of interest credited is a function of the crediting rate and account balances, and account balances are impacted by deposits, benefits, surrenders and contract charges.  Interest credited to policyholder account balances increased $4.2 million in 2004 and $4.7 million in 2003 due to higher account balances.  The higher account balances were due to the GuideOne acquisition in 2003 and new and renewal deposits.  The impact of increased account 

 

 

balances was partially offset by lower crediting rates.  The average interest rate credited to policyholder account balances was 4.59% in 2004, 4.95% in 2003 and 5.35% in 2002.**

 

***Amortization of Deferred Acquisition Costs (DAC) and Value of Business Acquired (VOBA)***

In 2004, the amortization of DAC was $33.2 million compared with $31.1 million for 2003.  The increase is largely due to the unlocking of DAC assumptions in 2003, which reduced the amortization of DAC by $1.8 million.  The Company evaluates the assumptions used in the amortization of deferred acquisition costs on a regular basis.  As warranted by a combination of historical results and expected future trends, the Company may unlock these assumptions and, accordingly, increase or decrease the deferred acquisition costs.  As a result, the amortization of DAC decreased in 2003 and 2002 in the amount of $1.8 million and $8.4 million, respectively.  In 2004, the Company’s experience was in line with assumptions established in 2003 and unlocking of the assumptions and the resultant change in DAC was not material to the financial statements.  

 

The amortization of VOBA was $7.4 million in 2004, $7.0 million in 2003 and $7.2 million in 2002.  Additional VOBA of $38.0 million was established on June 30, 2003 due to the acquisition of GuideOne.

 

***Operating Expenses***

Operating expenses consist of commissions and production allowances, the capitalization of commission and production allowances on certain products, and expenses from company operations.  In total, operating expenses declined 1% in 2004 due to the decline in commissions and the capitalization thereon.  However, expenses from operations increased in 2004 primarily due to three factors.  First, an increase in independent public accounting firm fees due to the requirements of the Sarbanes-Oxley Act.  Second, the Company’s consolidation of business activities of the GuideOne acquisition into the home office.  Finally, in 2003, the Company received a reimbursement on a legal claim that resulted in a reduction of legal fees.  Operating expenses increased in 2003 due to increased commissions and increased pension expense.      

 

***Income Taxes***

In 2004, the Company recorded income tax expense of $24.0 million or 29% of income before tax, versus a tax benefit of $5.6 million or 60% of income before tax for 2003.  The income tax for 2002 was an expense of $6.3 million or 17% of income before tax.  Income taxes will fluctuate depending upon items such as net income, realized investment gains and losses and affordable housing tax credits.

 

The income tax rate in the three years was reduced by tax credits generated from the Company’s investments in affordable housing.  The effect of the affordable housing credits on the effective tax rate was a benefit of $4.2 million or 5% of income before tax and a benefit of $3.7 million or 40% for 2004 and 2003, respectively.  The effect of the affordable housing credits for 2002 was a benefit of $4.5 million or 12% of income before tax.

 

The Company establishes contingent tax liabilities, when appropriate, to provide for potential challenges by taxing jurisdictions.  In 2003, the Company’s effective tax rate was reduced by the reversal of a contingent tax liability relating to 1999, a tax year that closed in 2003.  The reversal of previously accrued taxes was a benefit of $4.1 million or 44% of income before tax for 2003.  There were no reversals of previously accrued taxes in 2004.

 

**Operating Results by Segment**

 

The Company manages its performance through four business segments: the individual insurance business of Kansas City Life in the parent company, the group insurance operation in the parent company, and its two life insurance subsidiaries: Sunset Life and Old American. The following describes and analyzes the financial performance of each of these four segments. Refer to Note 8 - Segment Information in the Notes to the Consolidated Financial Statements. 

 

 

 

***Kansas City Life Insurance Company – Individual Insurance***

The following table presents financial data of the Kansas City Life Insurance Company – Individual Insurance business segment for the years ended December 31.

 

 

 

 

2004

 

2003

 

2002

Insurance revenues:

 

 

 

 

 

 

 

 

 

Premiums

$                

56,580 

 

$                

72,611 

 

$                

39,938 

 

Contract charges

 

92,889 

 

 

86,957 

 

 

81,258 

 

Reinsurance ceded

 

(23,842)

 

 

(21,523)

 

 

(17,039)

 

 

 

Total insurance revenues

 

125,627 

 

 

138,045 

 

 

104,157 

Investment revenues:

 

 

 

 

 

 

 

 

 

Net investment income

 

156,522 

 

 

151,316 

 

 

145,538 

 

Realized investment gains (losses)

 

45,646 

 

 

(18,755)

 

 

(13,308)

Other revenues

 

5,314 

 

 

6,135 

 

 

6,517 

 

 

 

Total revenues

 

333,109 

 

 

276,741 

 

 

242,904 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits

 

107,649 

 

 

117,570 

 

 

88,476 

Interest credited to policyholder account balances

 

79,398 

 

 

75,113 

 

 

68,912 

Amortization of deferred acquisition costs 

 

 

 

 

 

 

 

 

 

and value of business acquired

 

21,347 

 

 

19,544 

 

 

14,932 

Operating expenses

 

59,478 

 

 

58,087 

 

 

52,634 

 

 

 

Total benefits and expenses

 

267,872 

 

 

270,314 

 

 

224,954 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense (benefit)

 

65,237 

 

 

6,427 

 

 

17,950 

 ******

 ******

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

19,313 

 

 

(4,466)

 

 

2,321 

 **

 **

 

 

 

 

 

 

 

 

 

 

Net income

$

45,924 

 

$

10,893 

 

$

15,629 |