**United States**

**Securities and Exchange Commission**

**Washington, D.C. 20549**

 

**Form 10-Q**

 

**Quarterly Report Under Section 13 or 15 (d) of the**

**Securities Exchange Act of 1934**

 

**For the Quarter ended June 30, 2005**

 

**Commission File No. 2-40764**

 

**Kansas City Life Insurance Company**

**3520 Broadway**

**Kansas City, Missouri 64111-2565**

 

**Phone: (816) 753-7000**

 

**IRS Number:  44-0308260**

 

**Incorporated in the State of Missouri**

 

The Registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. 

 

| Yes | X | No______ |
|-----|---|----------|

 

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

 

| Yes | X | No______ |
|-----|---|----------|

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the most recent date available. 

 

|  
*Class*

*Outstanding July 18, 2005*

Common Stock, $1.25 par value  

11,920,819 shares

 
 

 

 

 

 

**KANSAS CITY LIFE INSURANCE COMPANY**

**TABLE OF CONTENTS**

 

 

Part I.   Financial Information.........................................................................................................

3

 

 

Item 1.  Financial Statements.........................................................................................................

3

 

 

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

3

 

 

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

4

 

 

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

5

 

 

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

6

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.......................  

14

 

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk..........................................................

29

 

 

Item 4.  Controls and Procedures....................................................................................................

30

 

 

 

 

Part II.  Other Information.............................................................................................................

31

 

 

Item 1.  Legal Proceedings.............................................................................................................

31

 

 

Item 5.  Other Information............................................................................................................

32

 

 

Item 6.  Exhibits.........................................................................................................................

34

 

 

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

35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**-2-**

 

**Part I Financial Information**

**Item 1.********Financial Statements**

 

**KANSAS CITY LIFE INSURANCE COMPANY**

**CONSOLIDATED BALANCE SHEETS**

(amounts in thousands, except share data)

 

 

 

 

 

 

June 30

 

December 31

 

 

 

 

 

2005

 

2004

**ASSETS**

 

 

(Unaudited)

 

 

 

Investments:

 

 

 

 

 

 

 

Fixed maturity securities available for sale, at fair value

$

2,976,315 

 

$

2,962,114 

 

Equity securities available for sale, at fair value

 

59,319 

 

 

63,099 

 

Mortgage loans

 

 

461,821 

 

 

430,632 

 

Real estate

 

 

92,266 

 

 

91,519 

 

Policy loans

 

 

105,153 

 

 

108,546 

 

Short-term investments

 

18,740 

 

 

67,980 

 

Other investments

 

1,669 

 

 

2,081 

 

 

 

Total investments

 

3,715,283 

 

 

3,725,971 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

 

 

13,037 

 

 

4,147 

Accrued investment income

 

40,571 

 

 

39,928 

Deferred acquisition costs

 

226,299 

 

 

229,712 

Value of business acquired

 

91,975 

 

 

96,853 

Reinsurance receivables

 

161,275 

 

 

156,839 

Property and equipment

 

30,724 

 

 

31,595 

Other assets

 

 

24,620 

 

 

27,118 

Separate account assets

 

353,195 

 

 

353,983 

 

 

 

Total assets

$

4,656,979 

 

$

4,666,146 

 

 

 

 

 

 

 

 

 

 

**LIABILITIES**

 

 

 

 

 

 

Future policy benefits

$

856,967 

 

$

859,890 

Policyholder account balances

 

2,296,112 

 

 

2,299,647 

Policy and contract claims

 

35,097 

 

 

34,200 

Other policyholder funds

 

95,709 

 

 

96,853 

Notes payable

 

 

67,897 

 

 

92,220 

Income taxes

 

 

57,461 

 

 

53,703 

Other liabilities

 

 

181,949 

 

 

182,754 

Separate account liabilities

 

353,195 

 

 

353,983 

 

 

 

Total liabilities

 

3,944,387 

 

 

3,973,250 

 

 

 

 

 

 

 

 

 

 

**STOCKHOLDERS' EQUITY**

 

 

 

 

 

Common stock, par value $1.25 per share

 

 

 

 

 

 

Authorized 36,000,000 shares,

 

 

 

 

 

 

 

 

issued 18,496,680 shares

 

23,121 

 

 

23,121 

Additional paid in capital

 

24,720 

 

 

24,279 

Retained earnings

 

 

743,444 

 

 

733,499 

Accumulated other comprehensive income 

 

37,211 

 

 

26,231 

Less treasury stock, at cost (2005 - 6,575,861 shares;

 

 

 

 

 

 

2004 - 6,550,287 shares)

 

(115,904)

 

 

(114,234)

 

 

 

Total stockholders' equity

 

712,592 

 

 

692,896 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

$

4,656,979 

 

$

4,666,146 

 

*See accompanying Notes to Consolidated Financial Statements.***

 

**-3-**

 

 

 

**KANSAS CITY LIFE INSURANCE COMPANY**

**CONSOLIDATED STATEMENTS OF INCOME (Unaudited)**

(amounts in thousands, except share data)

 

 

 

 

 

 

Quarter ended June 30

 

Six  Months ended June 30

 

 

 

 

2005

 

2004

 

2005

 

2004

**REVENUES**

 

 

 

 

 

 

 

 

 

 

 

Insurance revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$                

46,036 

 

$                

47,319 

 

$                

92,461 

 

$                

94,370 

 

Contract charges

 

28,135 

 

 

29,381 

 

 

56,897 

 

 

58,530 

 

Reinsurance ceded

 

(14,090)

 

 

(14,342)

 

 

(27,699)

 

 

(26,860)

 

 

 

Total insurance revenues

 

60,081 

 

 

62,358 

 

 

121,659 

 

 

126,040 

Investment revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income

 

46,861 

 

 

48,391 

 

 

95,651 

 

 

99,118 

 

Realized investment gains (losses)

 

(378)

 

 

724 

 

 

957 

 

 

1,527 

Other revenues

 

2,649 

 

 

1,734 

 

 

5,216 

 

 

4,268 

 

 

 

Total revenues

 

109,213 

 

 

113,207 

 

 

223,483 

 

 

230,953 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**BENEFITS AND EXPENSES**

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits

 

43,711 

 

 

45,490 

 

 

89,435 

 

 

95,958 

Interest credited to policyholder account balances

 

22,698 

 

 

23,038 

 

 

45,908 

 

 

47,347 

Amortization of deferred acquisition costs 

 

 

 

 

 

 

 

 

 

 

 

 

and value of business acquired

 

8,640 

 

 

10,612 

 

 

19,305 

 

 

20,460 

Operating expenses

 

22,508 

 

 

23,872 

 

 

46,286 

 

 

49,611 

 

 

 

Total benefits and expenses

 

97,557 

 

 

103,012 

 

 

200,934 

 

 

213,376 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

 

11,656 

 

 

10,195 

 

 

22,549 

 

 

17,577 

 ******

 ******

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

3,231 

 

 

2,673 

 

 

6,164 

 

 

4,460 

 **

 **

 

 

 

 

 

 

 

 

 

 

 

 

 

**NET INCOME**

$

8,425 

 

$

7,522 

 

$

16,385 

 

$

13,117 

 **

 **

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

0.71 

 

$

0.63 

 

$

1.37 

 

$

1.10 

 

 

*See accompanying Notes to Consolidated Financial Statements.***

 

 

 

 

 

 

**-4-**

 

 

 

 

**KANSAS CITY LIFE INSURANCE COMPANY**

**CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)**

(amounts in thousands)

 

 

 

 

 

 

Six Months ended June 30

 

 

 

 

2005

 

2004

**OPERATING ACTIVITIES**

 

 

 

 

 

Net cash provided

$

23,287 

 

$

38,744 

 

 

 

 

 

 

 

 

 

**INVESTING ACTIVITIES**

 

 

 

 

 

Purchases of investments:

 

 

 

 

 

 

Fixed maturity securities

 

(302,895)

 

 

(475,685)

 

Equity securities

 

(1,433)

 

 

(2,077)

 

Mortgage loans

 

(64,943)

 

 

(26,252)

 

Real estate

 

(7,119)

 

 

(6,158)

 

Other investment assets

 

(383,549)

 

 

(398,673)

Sales of investments:

 

 

 

 

 

 

Fixed maturity securities

 

89,312 

 

 

80,424 

 

Equity securities

 

5,226 

 

 

2,476 

 

Real estate

 

5,845 

 

 

9,356 

 

Other investment assets

 

436,594 

 

 

436,985 

Maturities and principal paydowns of investments:

 

 

 

 

 

 

Fixed maturity securities

 

204,964 

 

 

247,509 

 

Mortgage loans

 

34,804 

 

 

56,507 

Net additions to property and equipment 

 

(433)

 

 

(712)

 

 

Net cash provided (used)

 

16,373 

 

 

(76,300)

 

 

 

 

 

 

 

 

 

**FINANCING ACTIVITIES**

 

 

 

 

 

Proceeds from borrowings

 

22,264 

 

 

1,306 

Repayment of borrowings

 

(46,587)

 

 

(5,759)

Deposits on policyholder account balances

 

126,008 

 

 

139,090 

Withdrawals from policyholder account balances

 

(119,253)

 

 

(103,294)

Net transfers to separate accounts

 

318 

 

 

(7,805)

Change in other deposits

 

(5,851)

 

 

2,093 

Cash dividends to stockholders

 

(6,439)

 

 

(6,545)

Net disposition (acquisition) of treasury stock

 

(1,230)

 

 

139 

 

 

Net cash provided (used)

 

(30,770)

 

 

19,225 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash

 

8,890 

 

 

(18,331)

Cash at beginning of year

 

4,147 

 

 

20,029 

 

 

 

 

 

 

 

 

 

Cash at end of period

$

13,037 

 

$

1,698 

 

 

*See accompanying Notes to Consolidated Financial Statements.***

 

 

 

 

 

 

**-5-**

 

 

 

**Kansas City Life Insurance Company**

**Notes to Consolidated Financial Statements**

(amounts in thousands, except share data)

 

***1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES***

 

**Basis of Presentation**

The unaudited consolidated financial statements, the accompanying notes to these financial statements and Management’s Discussion and Analysis of Operations of Kansas City Life Insurance Company include the accounts of the Company and its subsidiaries, principally Sunset Life Insurance Company of America (Sunset Life), and Old American Insurance Company (Old American).  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.  As of October 1, 2003, GuideOne was merged into Kansas City Life Insurance Company.  

 

The unaudited consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles (GAAP) for interim financial reporting and with the instructions to Form 10-Q of Regulation S-X.  Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements and as such, these unaudited interim financial statements should be read in conjunction with the Company's 2004 Form 10-K and the 2004 Annual Report to Stockholders.  Management believes that the disclosures are adequate to make the information presented not misleading, and all normal and recurring adjustments necessary to present fairly the financial position at June 30, 2005 and the results of its operations for all periods presented have been made.  The results of operations for any interim period are not necessarily indicative of the Company’s operating results for a full year. 

 

Significant intercompany transactions have been eliminated in consolidation and certain reclassifications have been made to the prior year results to conform with the current year’s presentation.  

 

**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 has been approved by the Office of Thrift Supervision and is expected to close in the third quarter of 2005.  The bank subsidiary and the results of its 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 was received in February 2005.  The other half is due in subsequent years, subject to certain persistency requirements.  This block of business and the results of operations are not material to the financial statements of the Company and are not disclosed separately.

 

**Significant Accounting Policies**

These significant accounting policies should be read in conjunction with statements and disclosures made in the Company’s 2004 Form 10-K as filed with the United States Securities and Exchange Commission. 

 

The preparation of the consolidated financial statements requires management of the Company to make estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the period.  These estimates are inherently subject to change and actual results could differ from these estimates.

 

 

 

**-6-**

 

 

 

**Kansas City Life Insurance Company**

**Notes to Consolidated Financial Statements – (Continued)**

 

The Company maintains a diversified securities portfolio.  The Company’s securities available for sale are carried at fair value in the Company’s balance sheet.  The Company receives fair values for its securities portfolio from a variety of external sources.  Various measures have been taken to manage the portfolio’s credit and interest rate risks, as discussed in the Company’s 2004 Form 10-K and the 2004 Annual Report to Stockholders.  The Company performs a review of its securities' fair values on an ongoing basis to determine changes in the value of the portfolio.  Several factors are analyzed in evaluating these securities, including an analysis of the issuing company, its industry, valuation levels and subsequent developments.  Based upon these inputs, the Company establishes its securities values in accordance with GAAP.

 

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.  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 a new block of 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 are reflected in the current period’s income as an unlocking adjustment.

 

Premiums for traditional life insurance products are reported as revenue when due.  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 relate to unexpired terms of coverage.

 

Deposits related to universal life, fixed deferred annuity contracts and investment-type products are credited to policyholder account balances.  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.

 

The Company establishes liabilities for amounts payable under insurance policies, including traditional life insurance, annuities and accident and health insurance.  Generally, amounts are payable over an extended period of time and the profitability of the products is dependent on the assumptions used in the pricing of the products.  Principal assumptions used in pricing policies and in the establishment of liabilities 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.

 

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 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.

 

**-7-**

 

 

 

**Kansas City Life Insurance Company**

**Notes to Consolidated Financial Statements – (Continued)**

 

In the normal course of business, the Company cedes risks to other insurers primarily to protect the Company against adverse fluctuations in mortality experience.  The Company also assumes risks ceded by other companies.  Reinsurance is effected on individual risks and through various pooling arrangements.  Business is reinsured primarily through yearly renewable term and coinsurance agreements.  Under yearly renewable term insurance, the Company pays annual premiums and the reinsurer reimburses claims paid related to this coverage.  Under coinsurance, the reinsurer receives a proportionate share of the premiums less applicable commissions and is liable for a corresponding share of policy benefits.  The Company remains contingently liable if the reinsurer should be unable to meet obligations assumed under the reinsurance contract.

 

Reinsurance receivables includes amounts related to paid benefits and estimated amounts related to unpaid policy and contract claims, future policy benefits and policyholder account balances.  The cost of reinsurance is accounted for over the terms of the underlying reinsured policies using assumptions consistent with those used to account for the policies.

 

**New Accounting Pronouncements**

In March 2004, the Emerging Issues Task Force reached further consensus on Issue No. 03-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-1”).  EITF 03-1 provides guidance for determining the meaning of “other-than-temporarily impaired” and its application to certain debt and equity securities within the scope of Statement of Financial Accounting Standards No. 115 “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”) and investments accounted for under the cost method.  The guidance requires that investments which have declined in value due to credit concerns or solely due to changes in interest rates must be recorded as other-than-temporarily impaired unless the Corporation can assert and demonstrate its intention to hold the security for a period of time sufficient to allow fora recovery of fair value up to or beyond the cost of the investment, which might mean maturity.  This issue also requires disclosures assessing the ability and intent to hold investments in instances in which an investor determines that an investment with a fair value less than cost is not other-than-temporarily impaired.

 

The guidance in EITF 03-1 was effective for other-than-temporary impairment evaluations made in reporting periods beginning after June 15, 2004.  However, the guidance contained in paragraphs 10-20 of this Issue in EITF Abstracts has been delayed by FASB Staff Position (FSP) EITF Issue 03-1-1, “The Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, ‘The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,’” posted on September 30, 2004.  At the November 2004 meeting, the FASB staff indicated that the Board is expected to undertake a comprehensive reconsideration of the guidance in EITF 03-1 and that the measurement and recognition guidance in paragraphs 10-20 of that Issue continue to be deferred by FSP EITF Issue 03-1-1.  However, other provisions of EITF 03-1, including its disclosure requirements, have not been deferred. The disclosure requirements continue to be effective in annual financial statements for fiscal years ending after December 15, 2003, for investments accounted for under FASB Statements of Financial Accounting Standards 115 and 124.  For all other investments within the scope of this Issue, the disclosures continue to be effective in annual financial statements for fiscal years ending after June 15, 2004.

 

In June 2005, the Financial Accounting Standards Board (FASB) decided not to provide additional guidance on the meaning of other-than-temporary impairment, but directed the staff to issue proposed FSP EITF 03-1-a, “Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1,” as final.  The final FSP will supersede EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” and EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.”  The final FSP (retitled FSP FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”) will replace the guidance set forth in paragraphs 10-18 of Issue 03-1 with references to existing other-than-temporary impairment guidance, such as FASBStatement No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, SEC Staff Accounting Bulletin No. 59, “Accounting for Noncurrent Marketable Equity Securities”, and APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.”  FSP FAS 115-1 will codify the guidance

 

**-8-**

 

 

 

**Kansas City Life Insurance Company**

**Notes to Consolidated Financial Statements – (Continued)**

 

set forth in EITF Topic D-44 and clarify that an investor should recognize an impairment loss no later than when the impairment is deemed other than temporary, even if a decision to sell has not been made.  The FASB decided that FSP FAS 115-1 would be effective for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005.  The FASB directed the staff to proceed to a draft of a final FSP for vote by written ballot.

 

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123 (revised 2004) "Accounting for Stock-Based Compensation" (“FAS 123R”).  This statement requires recognition in the financial statements of the fair-value-based measurement method of stock-based compensation issued to employees.  FAS 123R is effective January 1, 2006.  Historically the Company has expensed all stock-based compensation using a fair-value-based measurement method.  However, the Company is currently evaluating FAS 123R but does not believe this new standard will have a material impact in the financial statements.  

 

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 “Accounting Changes and Error Corrections” (“FAS 154”).  The Statement replaces APB Opinion No. 20 and FAS 3.  FAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine the effects, then other rules apply.  FAS 154 is effective January 1, 2006.  Currently the Company is not aware of any circumstances that require the application of FAS 154, and thus there is no anticipated impact in the financial statements.

 

All other Standards and Interpretations of those Standards issued during 2005 did not relate to accounting policies and procedures pertinent to the Company at this time.

 

**Comprehensive Income (Loss)**

Comprehensive income (loss) is comprised of net income and other comprehensive income (loss).  Other comprehensive income (loss) includes the unrealized investment gains or losses on securities available for sale (net of reclassification adjustments for realized investment gains or losses) net of deferred acquisition costs, and the change in the additional minimum pension liability.  Other comprehensive income (loss) includes deferred income taxes on these items.

 

For the second quarter of 2005, comprehensive income was $41.9 million, which consisted of net income of $8.4 million and other comprehensive income of $33.4 million.  For the second quarter of 2004, comprehensive loss was $49.0 million, which consisted of net income of $7.5 million and other comprehensive loss of $56.5 million.  

 

For the six months ended 2005, comprehensive income was $27.4 million, which consisted of net income of $16.4 million and other comprehensive income of $11.0 million.  For the six months ended 2004, comprehensive loss was $17.5 million, which consisted of net income of $13.1 million and other comprehensive loss of $30.6 million.

 

**Income Per Share**

Due to the Company’s capital structure and the absence of other potentially dilutive securities, there is no difference between basic and diluted earnings per common share for any of the periods reported.  The weighted average number of shares outstanding were 11,925,998 and 11,926,817 for the six months ended 2005 and 2004, respectively.

 

**Income Taxes**

The second quarter income tax expense was $3.2 million or 28% of income before tax for 2005, versus $2.7 million or 26% of income before tax for the prior year period.  The six months ended income tax expense was $6.2 million or 27% of income before tax for 2005, versus $4.5 million or 25% of income before tax for the prior year period.  

 

The income tax rate in both 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 $0.8 

 

**-9-**

 

 

 

**Kansas City Life Insurance Company**

**Notes to Consolidated Financial Statements – (Continued)**

 

million or 7% of income before tax for the second quarter of 2005, and a benefit of $1.0 million or 10% of income before tax for the second quarter 2004.  The effect of the affordable housing credits on the effective tax rate was a benefit of $1.5 million or 7% of income before tax for the six months ended 2005, and a benefit of $2.0 million or 11% of income before tax for the six months ended 2004.  

 

***2.  SEGMENT INFORMATION***

 

Company operations have been classified and summarized into four reportable segments.  The segments, while generally classified along Company lines, are based upon distribution method, product portfolio and target market.  The Parent Company is divided into two segments. The Kansas City Life – Individual Insurance segment consists of sales of variable life and annuities, interest sensitive products and traditional life insurance products through a nationwide sales force of independent general agents.  GuideOne is included in the Kansas City Life – Individual Insurance segment.  The Kansas City Life - Group Insurance segment consists of sales of group life, disability, stop loss and dental products.  Also, this segment offered administrative claims paying services, marketed as KCL Benefit Solutions, through year-end 2004.  Group Insurance segment products and services are marketed by a nationwidesales force of independent general agents and group brokers, along with third party marketing arrangements.  The Sunset Life segment consists of sales of interest sensitive and traditional products through a nationwide sales force of independent general agents.  Effective June 30, 2005, the Sunset Life segment will no longer sell new term life insurance and the Sunset Life agents will be encouraged to become licensed to sell Kansas City Life individual insurance and annuity products.  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.

 

Separate investment portfolios are maintained for each of the companies.  However, investments are allocated to the Group Insurance segment based upon its cash flows.  Its investment income is modeled using the year of investment method.  Home office functions are fully integrated for the three companies in order to maximize economies of scale.  Therefore, operating expenses are allocated to the segments based upon internal cost studies, which are consistent with industry cost methodologies.

 

Inter-segment revenues are not material. The Company operates solely in the United States and no individual customer accounts for 10% or more of the Company's revenue.

 

 

 

 

 

 

 

 

 

 

 

**-10-**

 

 

 

**Kansas City Life Insurance Company**

**Notes to Consolidated Financial Statements – (Continued)**

 

The following schedule provides, in thousands, the financial performance of each of the four reportable operating segments of the Company.  

 

 

 

 

 

 

Kansas City Life

 

 

Sunset

 

 

Old

 

 

 

 

 

 

 

 

Individual

 

 

Group

 

 

Life

 

 

American

 

 

Total

Insurance revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second quarter:

2005

 

$

30,319 

 

$

10,028 

 

$

3,195 

 

$

16,539 

 

$

60,081 

 

 

2004

 

 

31,532 

 

 

10,597 

 

 

3,279 

 

 

16,950 

 

 

62,358 

 

Six months:

2005

 

$

61,596 

 

$

19,932 

 

$

6,912 

 

$

33,219 

 

$

121,659 

 

 

2004

 

 

63,178 

 

 

21,621 

 

 

7,229 

 

 

34,012 

 

 

126,040 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second quarter:

2005

 

$

36,752 

 

$

55 

 

$

6,846 

 

$

3,208 

 

$

46,861 

 

 

2004

 

 

37,833 

 

 

69 

 

 

7,222 

 

 

3,267 

 

 

48,391 

 

Six months:

2005

 

$

75,644 

 

$

120 

 

$

13,489 

 

$

6,398 

 

$

95,651 

 

 

2004

 

 

78,238 

 

 

149 

 

 

14,186 

 

 

6,545 

 

 

99,118 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second quarter:

2005

 

$

6,048 

 

$

(729)

 

$

1,565 

 

$

1,541 

 

$

8,425 

 

 

2004

 

 

4,369 

 

 

(1,040)

 

 

2,562 

 

 

1,631 

 

 

7,522 

 

Six months:

2005

 

$

13,050 

 

$

(1,477)

 

$

2,940 

 

$

1,872 

 

$

16,385 

 

 

2004

 

 

8,318 

 

 

(1,350)

 

 

3,912 

 

 

2,237 

 

 

13,117 

 

 

***3.  PENSIONS AND OTHER POSTRETIREMENT BENEFITS***

 

Components of net periodic benefit cost:

 

 

Pension Benefits

 

Other Benefits

 

 

Quarter ended

 

Quarter ended

 

 

June 30

 

June 30

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

610 

 

$

587 

 

$

87 

 

$

189 

Interest cost

 

2,007 

 

 

1,814 

 

 

213 

 

 

351 

Expected return on plan assets

 

(2,046)

 

 

(1,620)

 

 

(16)

 

 

(19)

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

Unrecognized actuarial loss (gain)

 

790 

 

 

835 

 

 

(23)

 

 

6 

 

Unrecognized prior service cost

 

(178)

 

 

(162)

 

 

- 

 

 

- 

Net periodic benefits cost

$

1,183 

 

$

1,454 

 

$

261 

 

$

527 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**-11-**

 

 

 

**Kansas City Life Insurance Company**

**Notes to Consolidated Financial Statements – (Continued)**

 

 

 

 

Pension Benefits

 

Other Benefits

 

 

Six Months ended

 

Six Months ended

 

 

June 30

 

June 30

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

1,164 

 

$

1,171 

 

$

280 

 

$

378 

Interest cost

 

3,828 

 

 

3,618 

 

 

588 

 

 

703 

Expected return on plan assets

 

(3,902)

 

 

(3,230)

 

 

(33)

 

 

(38)

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

Unrecognized actuarial loss

 

1,508 

 

 

1,665 

 

 

- 

 

 

13 

 

Unrecognized prior service cost

 

(340)

 

 

(324)

 

 

- 

 

 

- 

Net periodic benefits cost

$

2,258 

 

$

2,900 

 

$

835 

 

$

1,056 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act (“the Act”) was signed into law.  The Act includes a federal subsidy to sponsors of retiree health plans that provide a prescription drug benefit that is at least actuarially equivalent to the benefit to be provided under Medicare Part D.  As of December 31, 2004, the Company evaluated the provisions of the Act and determined that the benefits provided by the Company’s postretirement benefit plans were actuarially equivalent thereto, and estimated the accumulated postretirement benefit obligation (“APBO”) to incorporate the impact of the Act.  As of December 31, 2004, the estimated reduction to the APBO was $7.1 million, and this change did not have a material impact on the net periodic postretirement benefit cost for the year ended December 31, 2004.

 

On June 17, 2005, the Company amended the Kansas City Life Insurance Company Employee Benefits Plan and the Kansas City Life Insurance Company Agent and General Agent Health and Dental Plan (“the Plans”), to eliminate prescription drug coverage as of January 1, 2006.  Since prescription drug coverage to retirees will become available under the Act on January 1, 2006, participants of the Plans will be able to obtain coverage under the Medicare Prescription Drug Plan as of this date.

 

Although a re-measurement of the APBO has not been calculated, it is estimated that the amendment to the Plans resulted in an additional reduction of the APBO of $11.0 million.  It is also estimated that the change from this amendment to the Plans did not have a material impact on the net periodic postretirement benefit cost for the period ended June 30, 2005.

 

***4.  COMMITMENTS***

 

In the normal course of business the Company has open purchase and sale commitments.  At June 30, 2005, the Company had purchase commitments of $12.1 million and sales commitments of $3.2 million.  Subsequent to June 30, 2005, the Company entered into purchase commitments of $0.5 million.  Typically, these purchase and sales commitments are for mortgage loans, real estate and affordable housing investments.  On July 1, 2005, one of the sale commitments for commercial real estate was settled with net proceeds of $2.3 million and resulted in a realized gain of $0.7 million.  

 

***5.  CONTINGENT LIABILITIES***

 

The life insurance industry, including the Company, has been subject to an increase in litigation in recent years.  Such litigation has been pursued on behalf of purported classes of policyholders and other claims and legal actions in jurisdictions where juries often award punitive damages, which are grossly disproportionate to actual damages.  

 

 

**-12-**

 

 

 

**Kansas City Life Insurance Company**

**Notes to Consolidated Financial Statements – (Continued)**

 

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 claims and actions, would have no material effect on the Company’s business, results of operations or financial position.

 

***6.  GUARANTEES AND INDEMNIFICATIONS***

 

The Company is subject to various indemnification obligations issued in conjunction with certain transactions, primarily assumption reinsurance agreements, stock purchase agreements, mortgage servicing agreements and borrowing agreements whose terms range in duration and often are not explicitly defined.  Generally, a maximum obligation is not explicitly stated; therefore, the overall maximum amount of the obligation under the indemnifications cannot be reasonably estimated.  While we are unable to estimate with certainty the ultimate legal and financial liability with respect to these indemnifications, we believe the likelihood is remote that material payments would be required under such indemnifications, and therefore such indemnifications would not result in a material adverse effect on our business, financial position or results of operations.

 

 

**-13-**

 

 

 

**Item 2.********Management's Discussion and Analysis of Financial Condition and Results of Operations**

 

**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.  

 

**Consolidated Results of Operations**

 

In the second quarter of 2005, the Company’s net income increased $0.9 million versus the prior year quarter, to a total of $8.4 million.  Net income per share increased to $0.71 per share versus $0.63 per share in last year's second quarter.  For the first six months of 2005, net income increased $3.3 million to equal $16.4 million, and net income per share increased to $1.37 per share versus $1.10 per share for the prior year period.  This improvement resulted primarily from reduced benefits and expenses, which more than offset declines in revenues.  Policyholder benefits decreased, largely due to reduced individual life benefits and group accident and health benefits.  Interest credited decreased, resulting from lower crediting rates.  Amortization of deferred acquisition costs also decreased due to an unlocking of assumptions in the second quarter of 2005.  Finally, operating expenses decreased,primarily due to cost savings resulting from the integration of GuideOne operations into the home office.  These reductions in benefits and expenses were partially offset by a decrease in contract charges.  Accident and health premiums decreased, primarily from the group dental line.  Net investment income declined 3% for both the second quarter and six months due to reduced investment yields and increased investment expense associated with real estate.   

 

***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.

 

**-14-**

 

 

 

For the second quarter, a 15% increase in immediate annuity premium was partially offset by a 9% decrease in new individual life premium sales.  For the six months, new individual life sales declined by 2% while immediate annuity premium sales increased 34%.  For the second quarter, new group life premium sales decreased 21% and new group accident and health premiums declined 32%.  For the six months, new group life premium sales decreased 15% and new group accident and health premiums declined 34%.  The loss of a sizeable group dental case at mid-year 2004 contributed to this decline.  Renewal premiums declined 2% for the second quarter and 1% for the six months.    

 

 

 

 

Quarter ended June 30

 

 

 

2005

%

 

2004

%

New premiums:

 

 

 

 

 

 

 

 

Individual life insurance

$

3,172 

(9)

 

$

3,488 

23 

 

Immediate annuities

 

3,932 

15 

 

 

3,429 

(75)

 

Group life insurance

 

311 

(21)

 

 

394 

61 

 

Group accident and health insurance

 

2,268 

(32)

 

 

3,351 

28 

 

Individual accident and health insurance

 

- 

- 

 

 

(334)

- 

 

 

Total new premiums

 

9,683 

(6)

 

 

10,328 

(46)

Renewal premiums

 

36,353 

(2)

 

 

36,991 

6 

Total premiums

$

46,036 

(3)

 

$

47,319 

(13)

 

 

 

 

Six Months ended June 30

 

 

 

2005

%

 

2004

%

New premiums:

 

 

 

 

 

 

 

 

Individual life insurance

$

6,054 

(2)

 

$

6,196 

16 

 

Immediate annuities

 

8,470 

34 

 

 

6,307 

(69)

 

Group life insurance

 

687 

(15)

 

 

811 

54 

 

Group accident and health insurance

 

4,729 

(34)

 

 

7,171 

47 

 

Individual accident and health insurance

 

- 

- 

 

 

308 

- 

 

 

Total new premiums

 

19,940 

(4)

 

 

20,793 

(33)

Renewal premiums

 

72,521 

(1)

 

 

73,577 

4 

Total premiums

$

92,461 

(2)

 

$

94,370 

(7)

 

Total new deposits declined 27% in the second quarter and 26% in the six months.  Fixed deferred annuities decreased 27% in the second quarter and 32% in the six months.  The Company has focused its distribution efforts on agencies that write a balanced mix of life and annuity products, resulting in a lower volume of deposit sales of fixed deferred annuities.  New deposits on variable universal life decreased 54% in the second quarter and 37% in the six months.  New deposits on universal life products decreased 24% in the second quarter and 16% in the six months.  Renewal deposits were flat in the second quarter and increased 4% in the six months, largely due to increased renewal deposits from fixed deferred annuities and variable annuities.  In total, deposits declined 12% in the second quarter and 9% in the six months.

 

 

 

 

 

 

**-15-**

 

 

 

 

 

 

 

Quarter ended June 30

 

 

 

2005

%

 

2004

%

New deposits:

 

 

 

 

 

 

 

 

Universal life insurance

$

2,504 

(24)

 

$

3,306 

60 

 

Variable universal life insurance

 

615 

(54)

 

 

1,350 

117 

 

Fixed deferred annuities

 

13,346 

(27)

 

 

18,223 

(45)

 

Variable annuities

 

6,710 

(26)

 

 

9,008 

17 

 

 

Total new deposits

 

23,175 

(27)

 

 

31,887 

(27)

Renewal deposits

 

39,018 

- 

 

 

38,860 

13 

Total deposits

$

62,193 

(12)

 

$

70,747 

(9)

 

 

 

 

Six Months ended June 30

 

 

 

2005

%

 

2004

%

New deposits:

 

 

 

 

 

 

 

 

Universal life insurance

$

4,686 

(16)

 

$

5,547 

29 

 

Variable universal life insurance

 

1,248 

(37)

 

 

1,981 

12 

 

Fixed deferred annuities

 

25,492 

(32)

 

 

37,605 

(40)

 

Variable annuities

 

13,899 

(14)

 

 

16,202 

12 

 

 

Total new deposits

 

45,325 

(26)

 

 

61,335 

(27)

Renewal deposits

 

80,683 

4 

 

 

77,755 

14 

Total deposits

$

126,008 

(9)

 

$

139,090 

(8)

                               

***Insurance Revenues***

Insurance revenues consist of premiums and contract charges, less reinsurance ceded.  Insurance revenues decreased 4% in the second quarter and 3% for the first six months.  Increases in immediate annuity premiums were more than offset by a decline in life premiums and accident and health premiums.  Immediate annuity premiums increased 14% in the second quarter, while life insurance premiums declined 1%.  Life insurance premiums declined 2% in the six months, while immediate annuity premiums increased 35% over last year.  The Company made some changes to its immediate annuity product line in 2004, which resulted in lower sales during the year.  However, immediate annuity sales have increased in 2005, largely due to an increase in average premium per policy.  Accident and health premiums decreased 11% for the second quarter and 12% for the six months.  This decline was largely the result of theCompany’s group accident and health sales, which declined 10% for the second quarter or $1.0 million and 9% in the six months or $2.0 million.  A major factor in this decline was the loss of a large dental case at mid-year 2004.  Consolidated total premiums decreased 3% or $1.3 million, in the second quarter of 2005 and 2% or $1.9 million in the first six months.  

 

Contract charges decreased 4% for the second quarter and 3% for the six months.  Specifically, contract charges decreased $1.0 million in the second quarter of 2005 as a result of an unlocking adjustment.  Certain contract charges for universal life insurance are not recognized in income immediately but are deferred as unearned revenues and are amortized into income in a manner similar to the amortization of deferred acquisition costs or DAC.  These contract charges, which are recorded as unearned revenues, are recognized into income in proportion to the expected future gross profits of the business.  In the same manner as DAC, profit expectations are based upon assumptions of future interest spreads, mortality margins, expense margins and policy and premium persistency experience.  At least annually, a review is performed of the assumptions related to profit expectations.  If it is determined theassumptions should be revised the impact is recorded as a change in the revenue reported in the current period as an unlocking adjustment.  

 

Reinsurance ceded decreased 2% in the second quarter but increased 3% for the six months.  The increase for the year was largely due to new and renewal sales on individual life products, and sales on certain group long-term disability and stop loss products where the Company reinsurers 80% or more of its sales.    

 

**-16-**

 

 

 

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 declined 3% for both the second quarter and six months.  The lower investment income was due to reduced investment yields and increased investment expense of $1.1 million, including $1.9 million associated with real estate.  The overall investment markets continue to be a challenging environment for companies whose primary assets are in fixed maturity securities.       

 

The Company recorded realized investment losses for the second quarter of $0.4 million versus realized investment gains of $0.7 million in last year's second quarter.  The Company recorded realized investment gains for the six months of $1.0 million compared to $1.5 million a year ago.  The following table provides detail concerning realized investment gains and losses for the second quarter and six month periods of 2005 and 2004.

 

 

 

 

Quarter ended

 

Six Months ended

 

 

 

June 30

 

June 30

**Realized Investment Gains and Losses**

2005

 

2004

 

2005

 

2004

Gross gains resulting from:

 

 

 

 

 

 

 

 

 

 

 

 

Sales of investment securities

$

404 

 

$

1,894 

 

$

1,298 

 

$

4,659 

 

Investment securities called

 

- 

 

 

41 

 

 

804 

 

 

349 

 

Sales of real estate

 

281 

 

 

1,304 

 

 

291 

 

 

1,590 

 

Other investment gains

 

525 

 

 

- 

 

 

1,050 

 

 

- 

 

 

Total gross gains

 

1,210 

 

 

3,239 

 

 

3,443 

 

 

6,598 

Gross losses resulting from:

 

 

 

 

 

 

 

 

 

 

 

 

Sales of investment securities

 

(1,461)

 

 

(2,075)

 

 

(2,279)

 

 

(3,781)

 

Write-downs of investment securities

 

- 

 

 

(555)

 

 

- 

 

 

(555)

 

Investment securities called

 

(87)

 

 

(94)

 

 

(136)

 

 

(1,009)

 

 

Total gross losses

 

(1,548)

 

 

(2,724)

 

 

(2,415)

 

 

(5,345)

Amortization of deferred acquisition costs

 

(40)

 

 

209 

 

 

(71)

 

 

274 

Realized investment gains (losses)

$

(378)

 

$

724 

 

$

957 

 

$

1,527 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company regularly evaluates the quality of its investment portfolio.  Occasionally, in a diversified portfolio, certain investments may suffer market price deterioration due to a wide variety of factors.  Distressed securities are placed onto watch lists that are then further analyzed to identify any specific securities that the Company believes may have experienced other than temporary declines in fair value.  To the extent that the Company believes these fluctuations represent an other than temporary decline in value, the value of the investment is adjusted by a charge to income as a realized investment loss.  The Company's analysis identified no securities with other than temporary impairment in the second quarter of 2005 and for the six months ended 2005.

 

As of June 30, 2005, the Company had investments with unrealized losses of $18.2 million on investments with a fair value of $0.9 billion.  As of December 31, 2004, the Company had investments with unrealized losses of $19.3 million on investments with a fair value of $1.0 billion.  

 

***Policyholder Benefits***

Policyholder benefits consist of death benefits (mortality), annuity benefits, accident and health benefits, and surrenders.  These benefits are shown net of reinsurance and the corresponding change in the reserve liability for future policy benefits.  Policyholder benefits decreased 4% or $1.8 million in the second quarter and 7% or $6.5 million in the six months. 

 

**-17-**

 

 

The decline in these benefits largely resulted from declines in death benefits and accident and health benefits.  The decline in death benefits reflects favorable mortality experience.  Benefits paid on accident and health business declined primarily due to a decline in the group dental product line which was the result of the mid-year 2004 loss of a sizable dental group.     

 

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

Interest was credited to policyholder account balances for universal life, fixed deferred annuities and other investment-type products.  Interest credited to policyholder account balances decreased 1% in the second quarter and 3% in the six months, due to lower crediting rates which were primarily the result of reduced investment yields.  

 

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

For the second quarter of 2005, the amortization of DAC was $6.9 million compared with $8.9 million for 2004.  DAC amortization for the six months totaled $15.9 million versus $16.8 million in 2004.  In the second quarter of 2005, the amortization of DAC decreased by $2.2 million due to an unlocking adjustment.

 

For certain life insurance and annuity products, DAC is amortized in proportion to the expected future gross profits of the business.  Profit expectations are based upon assumptions of future interest spreads, mortality margins, expense margins and policy and premium persistency experience.  At least annually, a review is performed of the assumptions related to profit expectations.  If it is determined the assumptions should be revised, the impact of the change is recorded as a change in DAC amortization in the current period due to an unlocking adjustment.

 

The amortization of VOBA was $1.7 million in both the second quarter of 2005 and 2004.  VOBA amortization for the six months was $3.4 million in 2005 and $3.6 million in 2004.

 

***Operating Expenses***

Operating expenses consist of commissions and production allowances, the capitalization of commissions and production allowances on certain products, expenses associated with operations, insurance related taxes and other expenses.  Operating expenses decreased 6% in the second quarter of 2005 and 7% for the six months.  Commissions and production allowances declined $1.3 million for the second quarter and $1.6 million for the six months in relation to sales results.  These changes were partially offset by a decline in the capitalization of these costs.  Expense savings, as expected, are being achieved through the integration of GuideOne Life’s operations into the home office which was completed in late 2004.  Thus far in 2005, the Company has realized $1.7 million in reduced expenses associated with the integration of GuideOne operations.  

 

***Income Taxes***

The second quarter income tax expense was $3.2 million or 28% of income before tax for 2005, versus $2.7 million or 26% of income before tax for the prior year period.  The six months ended income tax expense was $6.2 million or 27% of income before tax for 2005, versus $4.5 million or 25% of income before tax for the prior year period.  

 

The income tax rate in both 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 $0.8 million or 7% of income before tax for the second quarter of 2005, and a benefit of $1.0 million or 10% of income before tax for the second quarter of 2004.  The effect of the affordable housing credits on the effective tax rate was a benefit of $1.5 million or 7% of income before tax for the six months ended 2005, and a benefit of $2.0 million or 11% of income before tax for the six months ended 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 2 - Segment Information in the Notes to the Consolidated Financial Statements. 

 

**-18-**

 

 

***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 second quarters and first six months of 2005 and 2004 and are reconciled to the financial statements contained herein (in thousands):

 

 

 

 

 

Quarter ended

 

Six Months ended

 

 

 

 

June 30

 

June 30

 

 

 

 

2005

 

2004

 

2005

 

2004

Insurance revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$                

14,160 

 

$                

14,000 

 

$                

28,459 

 

$                

27,696 

 

Contract charges

 

22,418 

 

 

23,641 

 

 

45,668 

 

 

47,068 

 

Reinsurance ceded

 

(6,259)

 

 

(6,109)

 

 

(12,531)

 

 

(11,586)

 

 

 

Total insurance revenues

 

30,319 

 

 

31,532 

 

 

61,596 

 

 

63,178 

Investment revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income

 

36,752 

 

 

37,833 

 

 

75,644 

 

 

78,238 

 

Realized investment gains (losses)

 

(248)

 

 

565 

 

 

669 

 

 

1,333 

Other revenues

 

2,504 

 

 

1,081 

 

 

4,770 

 

 

2,510 

 

 

 

Total revenues

 

69,327 

 

 

71,011 

 

 

142,679 

 

 

145,259 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits

 

25,635 

 

 

25,858 

 

 

50,218 

 

 

54,966 

Interest credited to policyholder account balances

18,531 

 

 

18,972 

 

 

37,672 

 

 

39,043 

Amortization of deferred acquisition costs 

 

 

 

 

 

 

 

 

 

 

 

 

and value of business acquired

 

4,490 

 

 

5,795 

 

 

10,025 

 

 

10,599 

Operating expenses

 

12,550 

 

 

14,600 

 

 

27,101 

 

 

29,879 

 

 

 

Total benefits and expenses

 

61,206 

 

 

65,225 

 

 

125,016 

 

 

134,487 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

 

8,121 

 

 

5,786 

 

 

17,663 

 

 

10,772 

 ******

 ******

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

2,073 

 

 

1,417 

 

 

4,613 

 

 

2,454 

 **

 **

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

6,048 

 

$

4,369 

 

$

13,050 

 

$

8,318 

 

 

Premium information is provided in the table below.

 

 

 

 

Quarter ended June 30

 

 

 

2005

%

 

2004

%

New premiums:

 

 

 

 

 

 

 

 

Individual life insurance

$

1,283 

(12)

 

$

1,460 

82 

 

Immediate annuities

 

3,859 

13 

 

 

3,429 

(75)

 

Individual accident and health insurance

 

- 

- 

 

 

(334)

- 

 

 

Total new premiums

 

5,142 

13 

 

 

4,555 

(68)

Renewal premiums

 

9,018 

(5)

 

 

9,445 

47 

Total premiums

$

14,160 

1 

 

$

14,000 

(33)

 

 

 

**-19-**

 

 

 

 

 

 

 

Six Months ended June 30

 

 

 

2005

%

 

2004

%

New premiums:

 

 

 

 

 

 

 

 

Individual life insurance

$

2,636 

4 

 

$

2,525 

46 

 

Immediate annuities

 

8,294 

33 

 

 

6,245 

(69)

 

Individual accident and health insurance

 

- 

- 

 

 

308 

- 

 

 

Total new premiums

 

10,930 

20 

 

 

9,078 

(59)

Renewal premiums

 

17,529 

(6)

 

 

18,618 

47 

Total premiums

$

28,459 

3 

 

$

27,696 

(20)

 

 

Deposit information is provided in the table below.

 

 

 

 

Quarter ended June 30

 

 

 

2005

%

 

2004

%

New deposits:

 

 

 

 

 

 

 

 

Universal life insurance

$

2,356 

(11)

 

$

2,639 

82 

 

Variable universal life insurance

 

615 

(54)

 

 

1,350 

117 

 

Fixed deferred annuities

 

12,629 

(28)

 

 

17,548 

(43)

 

Variable annuities

 

6,710 

(26)

 

 

9,008 

17 

 

 

Total new deposits

 

22,310 

(27)

 

 

30,545 

(25)

Renewal deposits

 

31,690 

3 

 

 

30,766 

16 

Total deposits

$

54,000 

(12)

 

$

61,311 

(8)

 

 

 

 

 

Six Months ended June 30

 

 

 

2005

%

 

2004

%

New deposits:

 

 

 

 

 

 

 

 

Universal life insurance

$

4,418 

(5)

 

$

4,644 

57 

 

Variable universal life insurance

 

1,248 

(37)

 

 

1,981 

12 

 

Fixed deferred annuities

 

24,272 

(33)

 

 

36,094 

(34)

 

Variable annuities

 

13,899 

(14)

 

 

16,202 

12 

 

 

Total new deposits

 

43,837 

(26)

 

 

58,921 

(20)

Renewal deposits

 

66,391 

8 

 

 

61,511 

15 

Total deposits

$

110,228 

(8)

 

$

120,432 

(5)

 

Net income for this segment in the second quarter was $6.0 million, an increase of $1.7 million from 2004.  In addition, net income was $13.1 million for the six months, which was an increase of $4.7 million from 2004.  These improvements were largely due to lower policyholder benefits, reduced interest crediting to policyholders, reduced amortization of DAC and expense reductions associated with the integration of GuideOne into the home office.  This segment contributed 72% of consolidated net income for the second quarter 2005, up from 58% in 2004, and contributed 80% for the six months of 2005, up from 63% in 2004.  This segment also contributed 63% of consolidated revenues for the second quarter and 64% for the six months.

 

Insurance revenues for this segment decreased 4% in the second quarter and 3% in the six months.  Contract charges decreased 5% in the second quarter and 3% in the six months, contributing to the decline in insurance revenues.  The decline in contract charges was largely due to the unlocking adjustment of $1.0 million previously discussed. |
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