Kansas City Life markets individual insurance products, including traditional, interest sensitive and variable products through a nationwide sales force of independent general agents and third-party marketing arrangements. Kansas City Life also markets group insurance products, which include life, dental, vision and disability products through a nationwide sales force of independent general agents, group brokers and third-party marketing arrangements. Kansas City Life operates in 48 states and the District of Columbia.
Gross investment income is largely composed of interest, dividends and other earnings on fixed maturity securities, equity securities, short-term investments, mortgage loans, real estate and policy loans. Gross investment income was flat compared with 2008, as a decline in investment assets was mostly offset by an increase in investment yields. The decline in investment assets largely reflects declines in book value due to sales, maturities and calls. The increase in investment yields was largely due to a higher return on an alternative investment fund compared to last year. In 2009, this investment added gross investment income of $2.2 million. However, as a result of the significant decline in the economic environment experienced in 2008, this investment resulted in a decline in gross investment income of $4.0 million in the prior year. Gross investment income declined $13.7 million or 7% in 2008 compared with 2007. This decrease primarily resulted from a $7.2 million decline in gross investment income on reduced investment assets and a $6.5 million decline from lower investment yields. The decline in investment assets includes declines in book value due to sales, maturities and calls along with a decline in fair values. The decline from lower yields was largely due to a reduction in income from the alternative investment fund mentioned above. In 2007, this investment added gross investment income of $2.7 million.
Real estate investments were $114.1 million at December 31, 2009 and $99.6 million at December 31, 2008. Real estate investments consist principally of industrial warehouses, office buildings and investments in multi-family and single-family residential properties, including affordable housing properties. The primary monetary benefit received from investments in affordable housing properties is in the form of tax credits, which primarily serve to reduce current and future tax expense rather than increase investment revenues. The Company also invests in unimproved land for future development. Properties have been acquired through individual purchases, build-to-suit and speculative development. The Company generally maintains its ownership interest in these properties on a direct and joint venture basis 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. The Company periodically sells certain real estate assets when management believes that the market and timing are perceived to be advantageous. Real estate investments comprised 3% of the investment portfolio at both December 31, 2009 and 2008. Investment income on real estate increased 9% in 2009, following a 4% decrease in 2008. The increase in 2009 primarily resulted from an increase in occupancy in certain real estate properties. While higher rental income resulted in 2008 from an increase in occupancy in certain real estate properties, investment income on real estate joint ventures declined.
Short-term investments totaled $138.7 million at December 31, 2009, up $103.6 million from December 31, 2008. Short-term invested assets consist primarily of money-market funds. The large increase in short-term investments in 2009 reflects sales and maturities of long-term investments which had not been reinvested at year-end. Income from short-term investments declined $0.7 million or 73% in 2009 and declined $2.7 million or 72% in 2008. The decline experienced in 2009 was primarily the result of a decline in yields. The decline in 2008 was largely due to lower short-term invested assets and a decline in short-term yields.
The Company recorded net realized investment losses of $10.1 million in 2009 and $52.3 million in 2008 and net realized investment gains of $5.4 million in 2007. During 2009, investment losses of $21.1 million were due to write-downs of investment securities and investments in affordable housing funds that were considered other-than-temporarily impaired, including $8.7 million from the fourth quarter, $2.3 million from the third quarter, $4.0 million from the second quarter, and $6.1 million from the first quarter. These were partially offset by $9.5 million in gains on the sale of investment securities, $0.9 million of investment gains realized on securities called and put, and $0.7 million of investment gains on the sale of real estate. During 2008, investment losses of $62.7 million were due to write-downs of investment securities, including $20.0 million from the fourth quarter, $32.5 million from the third quarter and $10.2 million from the second quarter. These losses were partially offset by $5.2 million of investment gains realized on the sale of real estate and $2.7 million of investment gains realized on securities called, put and other. During both 2009 and 2008, the financial markets were significantly affected by economic pressures and the residential mortgage crisis. These pressures have resulted in large price dislocations that have affected many securities and companies, particularly in the financial sector.
This process also involves monitoring several factors including late payments, downgrades by rating agencies, asset quality, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues.
The extent and the length of time the fair value has been below amortized cost;
Concerns arose during the second half of 2007 regarding subprime mortgage loan defaults. These difficulties deepened and expanded through 2009. Market dislocations have exacerbated credit issues as some historically liquid markets, such as asset-backed commercial paper, auction-rate securities and bank financing have contracted. Demand for securitized investments has also fallen significantly. The Company closely monitors its investments in securities classified as subprime. Subprime securities include all bonds or portions of bonds where the underlying collateral is made up of home equity loans or first mortgage loans to borrowers whose credit scores at the time of origination were lower than the level recognized in the market as prime. The Company’s classification of subprime does not include Alt-A or jumbo loans, unless the collateral otherwise meets the preceding definition. At December 31, 2009, the Company had investments with subprime residential mortgage exposure of $20.9 million and a related $8.0 million unrealized loss. This exposure amounted to less than 1% of the Company’s invested assets. These investments are included in the Company’s normal process for evaluation of other-than-temporarily impaired securities.
Following is a discussion regarding those securities with unrealized losses on which other-than-temporary impairments have not been recorded. Total securities owned without other-than-temporary impairment equaled 73% of total unrealized losses. These securities are further segmented into three primary categories. The first category includes total unrealized losses of 10% or less of amortized cost, which totaled $25.2 million or 37% of the total unrealized losses on fixed maturity securities without other-than-temporary impairments. The second category reflects total unrealized losses of 20% or less and greater than 10%. This category totaled $15.0 million or 22% of the total unrealized losses without other-than-temporary impairments. The third category includes total unrealized losses greater than 20%. This category totaled $27.5 million or 41% of the total securities without other-than-temporary impairments.
Total unrealized losses on securities available for sale at December 31, 2008 were $231.9 million. Following is a discussion regarding those securities with unrealized losses on which other-than-temporary impairments have not been recorded. The Company had investment grade securities with unrealized losses of greater than 20% that totaled $89.4 million for less than six months at December 31, 2008. This represented 70% of total unrealized losses greater than 20% for this category. Investment grade securities with unrealized losses for six months or more and less than twelve-months totaled $17.3 million. The Company also had below investment grade securities with unrealized losses of greater than 20% that totaled $18.1 million for less than six months and $2.4 million for six months or more and less than twelve-month periods. The Company had no below investment grade securities with unrealized losses of greater than 20% for twelve months or greater at December 31, 2008.
One security is from a specialty retailer of items for the home, such as appliances and electronics. This security is backed by a revolving pool of secured customer installment loans and private label credit card receivables originated and serviced by the sponsor company. This company has been negatively impacted by the general rise in consumer defaults and delinquency rates and a recent ratings downgrade. However, this security continues to perform within its contractual obligations.
One security was from a trucking company that was written down $0.6 million. As the trucking industry is highly correlated with the general economy, this company had experienced a reduction in shipping volume as a result of the recession. This company renegotiated its credit facilities in the first quarter of 2009, but new covenants placed significant requirements on the issuer. These restrictions, combined with the need to retire longer-term debt, placed additional stress on cash resources and led to indications of continued weakening performance that the Company believed to be other-than-temporary. This security had been written down in a previous period. This security was sold during the fourth quarter of 2009.
could result in increased surrenders and policy loans on existing policies. The Company performs cash flow testing and adds various levels of stress testing to potential surrender and policy loan levels in order to assess current and near-term cash and liquidity needs. In the event of increased surrenders and other cash needs, the Company has several sources of cash flow, as mentioned above, to meet these needs.
The Company leases its mainframe computer and certain related support equipment. The Company is also a lessee of an office building with a 20-year lease that began in 1989 with two five-year renewal options. In 1998, the Company assigned the interest in the lease to a third-party for the remainder of the lease period. The Company’s lease on the office building expired at December 31, 2009.
The Company holds a diversified portfolio of investments that includes cash, bonds, preferred stocks, residential mortgage-backed securities, commercial mortgages and real estate. Each of these investments is subject, in varying degree, to market risks that can affect their return and their fair value. A majority of these assets are debt instruments of corporations or U.S. Government Sponsored Enterprises (GSE) and are considered fixed income investments. Thus, the primary market risks affecting the Company’s portfolio are interest rate risk, credit risk and liquidity risk.
To the extent the Company determines that a fixed maturity security is deemed to be other-than-temporarily impaired, the portion of the impairment that is deemed to be due to credit is charged to the income statement and the cost basis of the underlying investment is reduced. The portion of the impairment that is deemed to be non-credit is charged to other comprehensive income (loss). Equity securities that were determined to be other-than-temporarily impaired are written down to fair value and the impairment is charged to the income statement.
of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. The Company utilizes a primary independent third-party pricing service to determine the majority of its fair values. At December 31, 2009, the Company used a second independent third-party pricing service to validate the fair market values provided by the primary pricing service. The Company also used the second pricing service to determine the fair value of certain securities for which the primary pricing service was unable to provide.
The following table provides amortized cost and fair value for securities by asset class at December 31, 2008.
The Company’s analysis of fixed maturity securities for the quarter ended December 31, 2009 resulted in the determination that eight fixed-maturity issuers (nine securities) had other-than-temporary impairments and were written down by a combined $6.5 million due to credit impairments. The aggregate impairment for these securities was $6.7 million, and $0.2 million of this amount was determined to be non-credit and was recognized in other comprehensive income (loss).
Five securities were residential mortgage-backed securities that were written down by a total of $0.2 million. The significant decline in the subprime and non-conforming mortgage markets and the specific performance of the underlying collateral caused the Company’s cash flow projections to be less than the amortized cost of the securities and created an other-than-temporary impairment. Two of these securities had been previously written down due to reduced projected cash flows from the underlying securitizations.
One security was from a mortgage and financial guaranty insurer that was written down $1.6 million. Mortgage insurers have suffered from the deterioration in the U.S. housing market and mortgage credit market. Rising mortgage delinquencies and defaults have resulted in rating downgrades for these insurers. Recent rating downgrades, combined with the issuer’s need to raise additional capital to meet future payments contributed to the other-than-temporary impairment.
The Company had no commitments to buy or sell real estate investments at December 31, 2009. The Company had commitments to fund affordable housing project obligations of $7.4 million at December 31, 2009.
Sunset Life entered into a yearly renewable term reinsurance agreement January 1, 2002, whereby it ceded 80% of its retained mortality risk on traditional and universal life policies. As of December 31, 2009, the insurance in force ceded approximated $1.7 billion (2008 - $1.8 billion) and premiums totaled $8.9 million.
On January 25, 2010, the Kansas City Life Board of Directors declared a quarterly dividend of $ 0.27 per share, paid on February 10, 2010 to stockholders of record on February 4, 2010.
All other information required by this Schedule is shown in Note 12 - Reinsurance in the Notes to Consolidated Financial Statements.
Operating expenses increased $2.4 million or 11% during the fourth quarter, primarily reflecting an increase in pension expense. Operating expenses increased $5.0 million or 5% for the year, reflecting increases in pension expense, separation costs related to a reduction in staff, and increased legal fees.