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.
2003 2002 2001 2000 1999 Revenues: Insurance $ 271,847 $ 247,000 $ 247,470 $ 252,909 $ 251,279 Net investment income 194,763 194,235 203,091 207,174 207,682 Realized investment gains (losses) (29,280) (18,240) (15,748) (3,871) 2,860 Other 8,300 15,140 12,428 14,137 12,278 Total revenues $ 445,630 $ 438,135 $ 447,241 $ 470,349 $ 474,099
Net income $ 14,793 $ 31,549 $ 29,922 $ 49,083 $ 45,045
Cash dividends $ 1.08 $ 1.08 $ 1.08 $ 1.00 $ 0.96
Assets $ 4,551,912 $ 3,867,360 $ 3,775,998 $ 3,650,097 $ 3,623,303 Life insurance in force $ 32,555,108 $ 26,591,093 $ 26,644,910 $ 26,938,904 $ 26,747,316
: 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, 2003 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.
Acquisition On June 30, 2003, the Company purchased all of the issued and outstanding common 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. The financial position and results of operations of GuideOne have been included in the Consolidated Financial Statements using the purchase method of accounting since July 1, 2003. As of October 1, 2003, GuideOne was merged into the operations of Kansas City Life Insurance Company. For segment reporting purposes, GuideOne is included in the Kansas City Life Insurance Company - Individual Insurance Segment.
Increasing competition, which may affect the Company’s ability to sell its products;
Fluctuations in experience regarding current mortality, morbidity, persistency and interest rates relative to expected amounts used in pricing the Company's products;
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.
Premiums on accident and health, disability and dental insurance are reported as earned over the contract period. A reserve is provided for the portion of premiums written which relates to unexpired terms of coverage.
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.
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.
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.
Consolidated Results of Operations In 2003, the Company’s net income decreased $16.8 million from the prior year, to a total of $14.8 million. Net income per share declined 53% in 2003 to $1.24, compared with $2.63 for 2002 and $2.49 for 2001. The decline in net income is attributable to three factors. The first and largest factor was the increase in realized investment losses, which were primarily the result of credit difficulties in three industry sectors: airlines, energy and telecommunications. Second, the DAC amortization expense increased over the prior year due to a more favorable positive DAC unlocking adjustment in 2002 than in 2003. Third, an increase in home office operating expenses was due primarily to increased pension costs.
Net income, excluding the effects of realized investment losses and related tax effects, declined 22% to $33.8 million in 2003, compared to $43.4 million in 2002 and $40.2 million in 2001.
The Company is experiencing the industry trends away from equity products and towards products with fixed rate guarantees. New premiums increased 85% or $31 million in 2003 over the prior year, following a 70% increase in 2002. This growth was primarily due to immediate annuities, which increased 280% in 2003 and 238% in 2002 and reflects the Company’s and industry’s trend towards fixed rate guarantees. New premiums for individual life insurance were up slightly in 2003. In 2003, group accident and health insurance new premiums were flat. Group life insurance was up 36% as the Company attained a sizable new group early in the year. In 2002, new premiums for group accident and health insurance were up 158% over 2001, reflecting a new marketing arrangement to sell dental products. Additionally, the new individual accident and health insurance is the result of the GuideOne acquisition in 2003.
2003 % 2002 % 2001 ------------- ------------- ------------- New premiums Individual life insurance $ 12,247 3 $ 11,847 (1) $ 11,933 Immediate annuities 36,569 280 9,612 238 2,841 Group life insurance 1,952 36 1,437 16 1,244 Group accident and health insurance 12,833 - 12,811 158 4,971 Individual accident and health insurance 2,610 - - - - ------------- ------------- ------------- Total new premiums 66,211 85 35,707 70 20,989 Renewal premiums 144,460 (3) 148,996 (4) 155,406 ------------- ------------- ------------- Total premiums $ 210,671 14 $ 184,703 5 $ 176,395 ============= ============= =============
New deposits increased 42% or $58 million in 2003 over the prior year, following a 39% increase in 2002. In 2003, the growth was driven by fixed annuities, variable annuities and universal life insurance; offset by a decrease in variable universal life insurance. In 2002, the growth was driven by flexible annuities and universal life insurance, with a decrease in both variable annuities and variable universal life insurance. The growth in both 2003 and 2002 was primarily the result of the Company expanding its distribution through independent general agents.
The volatile equity markets of the recent past have influenced consumers’ preferences to shift from variable products to interest sensitive products and more traditional life and annuity insurance products as consumers continue to balance their safety and return objectives. As the investment markets continue to experience volatility and as consumers’ sophistication and awareness regarding the financial markets increases, so too does their desire to have a wide portfolio of potential products from which to choose. Variable insurance products allow policyholders to participate in both the equity and fixed income markets; interest sensitive insurance products combine safety of principal with enhanced and competitive interest returns; while traditional insurance products stress safety of principal and growth over time.
Insurance revenues may be affected by the persistency of policyholders, which may be influenced by economic conditions as well as competitive forces, and fluctuations in mortality experience. The Company’s persistency and mortality experience have been within expectations.
Realized investment losses increased over the past three years from $15.7 million in 2001 to $18.2 million in 2002 and $29.3 million in 2003. The following table provides detail concerning realized investment gains and losses over the three years ended December 31.
Realized Investment Gains and Losses 2003 2002 2001 ------------- ------------- ------------- Gross gains resulting from: Sales of investment securities $ 9,467 $ 9,809 $ 17,971 Investment securities called 2,469 2,148 359 Sales of real estate 9,107 8,644 2,559 ------------- ------------- ------------- Total gross gains 21,043 20,601 20,889 ------------- ------------- ------------- Gross losses resulting from: Sales of investment securities (20,443) (19,216) (16,132) Write-downs of investment securities (29,824) (18,200) (18,054) Investment securities called (839) (1,012) (2,548) Other investment losses (96) (783) (511) ------------- ------------- ------------- Total gross losses (51,202) (39,211) (37,245) Amortization of deferred acquisition costs 879 370 608 ----------- ----------- ----------- Realized investment losses $ (29,280) $ (18,240) $ (15,748) ============= ============= =============
Investment grade $ 2,524,383 $ 2,602,640 92 Below investment grade 206,229 211,845 8 -------------- --------------- $ 2,730,612 $ 2,814,485 ============== ===============
Percent of Invested Assets 2003 2002 ------------------ ------------------ Amount % Amount % -------------------- --------------------- Fixed maturity securities $ 2,814,485 77 $ 2,141,439 70 Equity securities 63,808 2 57,587 2 Mortgage loans 456,656 13 463,150 15 Real estate 112,691 3 93,008 3 Policy loans 114,420 3 108,551 4 Short-term 71,823 2 186,770 6 Other 903 - 4,484 - ------------- ------------- Total $ 3,634,786 100 $ 3,054,989 100 ============== ===== =============== =====
Management of Kansas City Life Insurance Company and its subsidiaries (the Company) is responsible for the preparation and integrity of the consolidated financial statements and other financial information contained in this Annual Report on Form 10-K. The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, and where necessary, include estimates and judgment of management.
Management is responsible for ensuring that these financial statements are not misstated due to material fraud or error. The Company has established and maintains a system of internal control to provide efficient and effective operations, reasonable assurance as to the integrity and reliability of the financial statements, and proper financial disclosure and protection of assets. Qualified personnel in the Company maintain and monitor these internal controls on an ongoing basis for compliance.
The Audit Committee of the Board of Directors, composed solely of outside directors, meets as required but not less than quarterly with the independent auditors, management and internal audit. Each has free and separate access to the Committee. The Committee reviews audit procedures, scope and findings, and the adequacy of the Company’s financial reporting.
The independent auditors, KPMG LLP, are elected by the Board of Directors to audit the financial statements and render an opinion thereon. Management has made all corporate records and related data available to the independent auditors. Furthermore, management believes that all representations made to the independent auditors were valid and appropriate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kansas City Life Insurance Company and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
December 31 2003 2002 ASSETS Investments: Fixed maturities available for sale, at fair value (amortized cost: 2003 - $2,730,612; 2002 - $2,137,667) $ 2,814,485 $ 2,141,439 Equity securities available for sale, at fair value (cost: 2003 - $62,203; 2002 - $58,728) 63,808 57,587 Mortgage loans 456,656 463,150 Real estate 112,691 93,008 Policy loans 114,420 108,551 Short-term investments 71,823 186,770 Other investments 903 4,484 Total investments 3,634,786 3,054,989
Cash 20,029 14,645 Accrued investment income 39,132 36,465 Receivables, net 9,181 6,850 Property and equipment, net 32,981 36,013 Deferred acquisition costs 241,057 246,286 Value of business acquired 106,334 75,322 Reinsurance recoverable 151,577 140,214 Other assets 12,144 11,714 Separate account assets 304,691 244,862 Total assets $ 4,551,912 $ 3,867,360
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 23,310 22,605 Retained earnings 688,800 686,847 Accumulated other comprehensive income (loss) 23,418 (24,437) Less treasury stock, at cost (2003 - 6,572,087 shares; 2002 - 6,500,497 shares) (114,211) (110,639) Total stockholders' equity 644,438 597,497
BENEFITS AND EXPENSES Policyholder benefits 208,102 187,460 183,084 Interest credited to policyholder account balances 92,278 87,587 87,396 Amortization of deferred acquisition costs and value of business acquired 37,908 30,969 35,344 Operating expenses 98,111 94,298 109,877 Total benefits and expenses 436,399 400,314 415,701
Basic and diluted earnings per share: Net income $ 1.24 $ 2.63 $ 2.49
COMMON STOCK, beginning and end of year $ 23,121 $ 23,121 $ 23,121
ADDITIONAL PAID IN CAPITAL Beginning of year 22,605 21,744 20,109 Excess of proceeds over cost of treasury stock sold 705 861 1,635
RETAINED EARNINGS Beginning of year 686,847 668,255 651,324 Net income 14,793 31,549 29,922 Stockholder dividends of $1.08 per share (2002 - $1.08; 2001 - $1.08) (12,840) (12,957) (12,991)
TREASURY STOCK, at cost Beginning of year (110,639) (108,630) (107,020) Cost of 96,472 shares acquired (2002 - 67,470 shares; 2001 - 71,054 shares) (3,925) (2,535) (2,692) Cost of 24,882 shares sold (2002 - 37,025 shares; 2001 - 76,205 shares) 353 526 1,082
FINANCING ACTIVITIES Proceeds from borrowings 35,061 59,562 102,589 Repayment of borrowings (634) (59,100) (47,330) Deposits on policyholder contracts 338,089 272,110 236,378 Withdrawals from policyholder account balances (180,801) (153,814) (177,758) Net transfers to separate accounts (9,427) (14,856) (38,957) Change in other deposits 2,629 4,409 28,662 Cash dividends to stockholders (12,840) (12,957) (12,991) Disposition (acquisition) of treasury stock, net (2,867) (1,148) 25 Net cash provided 169,210 94,206 90,618
GuideOne has not prepared historical financial statements in conformity with generally accepted accounting principles. Accordingly, historical information is not available from which to develop pro forma results of operations for the past two years.
Mortgage loans are stated at cost, adjusted for amortization of premium and accrual of discount, less an allowance for probable losses. A loan is considered impaired if it is probable that contractual amounts due will not be collected. The allowance for probable losses is based upon historical impairment experience, including an estimate of probable impairment of any delinquent or defaulted loans. Such estimates are based upon the value of the expected cash flows and the underlying collateral on a net realizable basis. Loans in foreclosure and loans considered to be impaired are placed on a non-accrual status.
Balance at beginning of year $ 246,286 $ 243,606 $ 244,960 Capitalization of commissions, sales and issue expenses 29,575 27,868 27,917 Amortization (30,915) (23,813) (27,766) Amortization due to realized investment losses 879 370 608 Change in DAC due to unrealized investment gains (4,768) (1,745) (2,113) -------------- ------------- -------------
In 2003, VOBA was established in the amount of $38,005 from the purchase of GuideOne. The following table provides information about VOBA at December 31.
Balance at beginning of year $ 75,322 $ 82,478 $ 90,056 Purchase of GuideOne Life 38,005 - - Gross amortization (14,716) (14,252) (15,374) Accrual of interest 7,723 7,096 7,796 ------------- ------------- -------------
The accrual of interest for Old American VOBA was calculated at a 13% interest rate for the life block and a 7.0% rate for the accident and health block. For the GuideOne acquisition VOBA, a 5.4% interest rate was used on the interest sensitive block, a 4.3% interest rate was used on the deferred annuity block and a 5.3% interest rate was used on the traditional life block. For the VOBA on an acquired block of business a 7% interest rate was used on the traditional life portion and a 5.4% interest rate was used on the interest sensitive portion.
Separate account assets and liabilities arise from the sale of variable life insurance and annuity products. The Separate Account represents funds segregated for the benefit of certain policyholders who bear the investment risk. The assets are legally segregated and are not subject to claims which may arise from any other business of the Company. The separate account assets and liabilities, which are equal, are recorded at fair value. Policyholder account deposits and withdrawals, investment income and realized investment gains and losses are excluded from the amounts reported in the Consolidated Statements of Income. Revenues to the Company from separate accounts consist principally of contract charges, which include maintenance charges, administrative fees and mortality and risk charges.
2003 2002 2001 ---------- ---------- ---------- Balance at beginning of year $ 244,862 $ 305,283 $ 325,460
Deposits on variable policyholder contracts 68,447 57,949 83,384 Transfers to general account (24,318) (5,961) (6,101) Investment performance 50,402 (75,277) (59,134) Policyholder benefits (21,836) (23,207) (23,692) Contract charges (12,866) (13,925) (14,634) ---------- ---------- ----------
Deposits related to universal life 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.
Liabilities for future policy benefits of immediate annuities and supplementary contracts with life contingencies are also computed by a net level premium method, based upon estimates at the time of issue for investment yields and mortality. Mortality assumptions are based upon table A2000 without adjustment.
The following table provides detail about future policy benefits at December 31.
Crediting rates for universal life insurance and flexible annuity products ranged from 3.00% to 6.25% (2002 -- 3.00% to 7.25%; 2001 -- 3.00% to 7.25%).
The following table provides detail about policyholder account balances at December 31.
Participating business at year-end approximates 7% of statutory premiums and 8% of the life insurance in force. The amount of dividends to be paid is determined annually by the Board of Directors. Provision has been made in the liability for future policy benefits to allocate amounts to participating policyholders on the basis of dividend scales contemplated at the time the policies were issued. Additional provisions have been made for policyholder dividends in excess of the original scale, which have been declared by the Board of Directors.
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.
Due to the Company’s capital structure and lack of other potentially dilutive securities, there is no difference between basic and diluted earnings per common share for any of the years or periods reported. The weighted average number of shares outstanding during the year was 11,944,291 shares (2002 -- 11,997,733 shares; 2001 -- 12,027,241 shares). The number of shares outstanding at year-end was 11,924,593 (2002 -- 11,996,183).
The Financial Accounting Standards Board (FASB) issued Financial Accounting Standard (FAS) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” in April 2003. This Standard amends and clarifies financial accounting and reporting for derivative instruments and for hedging activities under FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This FAS was adopted on July 1, 2003 with no material impact.
The FASB issued FAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” in May 2003. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This FAS was adopted on July 1, 2003 with no material impact. The FASB has proposed additional Interpretations to FAS No. 150 which may require application in future periods.
FASB Interpretation (FIN) 46, “Consolidation of Variable Interest Entities,” was issued January 2003. This is an interpretation of Accounting Research Bulletin (ARB) No. 51, “Consolidated Financial Statements.” This interpretation requires the consolidation of entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual terms or other financial interests in the entity. This interpretation was adopted July 1, 2003 and had no material impact. Subsequently in December 2003, the FASB issued a revision known as FIN 46R, which replaces FASB Interpretation (FIN) 46. The Company will be required to apply FIN 46R to variable interest entities created after December 31, 2003. This revised interpretation will be adopted on January 1, 2004, and will have no material impact.
All other Standards and Interpretations of those Standards issued during 2003 did not relate to accounting policies and procedures pertinent to the Company at this time.
2003 2002 2001 ---------- --------- --------- Net investment income: Fixed maturities $ 142,704 $ 141,242 $ 147,610 Equity securities 4,645 2,479 7,533 Mortgage loans 36,658 35,559 33,343 Real estate 11,009 12,002 10,735 Policy loans 7,536 7,502 7,818 Short-term 2,537 5,187 4,649 Other 2,699 4,746 5,883 ---------- --------- --------- 207,788 208,717 217,571 Less investment expenses (13,025) (14,482) (14,480) ---------- --------- ---------
Unrealized gains (losses) on the Company’s investments in securities follow, at December 31.
Fixed maturities 2,730,612 112,281 28,408 2,814,485 Equity securities 62,203 2,119 514 63,808 ----------------- -------------- ------------- ------------------
The following table provides information regarding unrealized losses on investments available for sale, as of December 31, 2003.
Investments with unrealized losses Less than 12 months 12 months or longer Total Fair Unrealized Fair Unrealized Fair Unrealized Bonds: Value Losses Value Losses Value Losses U.S. govt. & agency $ 2,512 $ 84 $ 6,236 $ 12 $ 8,748 $ 96 Public utility 7,737 391 23,624 1,328 31,361 1,719 Corporate 339,085 9,372 67,918 5,965 407,003 15,337 Mortgage-backed 457,433 6,872 9,598 429 467,031 7,301 Other 114,562 3,949 2,585 5 117,147 3,954 Redeemable preferred stocks 90 1 - - 90 1
Total $ 939,369 $ 21,129 $ 110,090 $ 7,793 $ 1,049,459 $ 28,922
Securities that have a market price less than 90% of amortized cost or which have exhibited a significant price decline are identified for review to determine the reasons for the decline. Securities which have exhibited such declines for a period of 6 months or greater are segregated for further analysis in order to determine if the price decline is other than temporary.
Due in one year or less $ 52,803 $ 53,445 Due after one year through five years 323,479 341,927 Due after five years through ten years 555,589 580,622 Due after ten years 740,373 768,499 Mortgage-backed bonds 1,058,368 1,069,992 ---------------- ----------------
The Company has commitments to originate mortgage loans of $4,980, which expire in 2004.
No mortgage loans were foreclosed upon and transferred to real estate investments during the past two years.
Two mortgage loans were acquired in the sale of real estate during the year for $4,075 (2002 -- $6,085).
2003 2002 --------------- ------------- Penntower office building, at cost: Land $ 1,106 $ 1,106 Building 19,577 19,173 Less accumulated depreciation (12,984) (12,523) Other investment properties, at cost: Land 19,653 15,302 Buildings 73,984 59,793 Less accumulated depreciation (18,430) (16,100) --------------- ------------- Real estate, commercial 82,906 66,751 Real estate joint ventures 29,785 26,257 --------------- ------------- $ 112,691 $ 93,008 =============== =============
Two Construction loans related to investment properties dated July 2002 and December 2003 with interest rates of 8.00%, forgiven when construction of the buildings is complete. 963 505 ------------ ----------- $ 133,670 $ 97,241 ============== =============
With the exception of the real estate and construction loans, all borrowings are used to enhance liquidity and investment strategies. Interest paid on all borrowings equaled $1,961 (2002 -- $2,325; 2001 -- $3,975). The interest expense on all borrowings totaled $2,610 (2002 -- $3,281; 2001 -- $4,036).
Stockholder dividends may not exceed statutory unassigned surplus. Additionally, under Missouri law, the Company must have the prior approval of the Missouri Director of Insurance in order to pay a dividend exceeding the greater of statutory net gain from operations for the preceding year or 10% of statutory stockholders' equity at the end of the preceding year. The maximum payable in 2004 without prior approval is $101,978, the statutory net gain from operations. The Company believes these statutory limitations impose no practical restrictions on its dividend payment plans.
Current income tax expense (benefit) $ 9,580 $ (5,019) $ 9,116 Deferred income tax expense (benefit) (15,142) 11,291 (7,498) -------------- ------------- --------------
Total income tax expense (benefit) $ (5,562) $ 6,272 $ 1,618 ============== ============= ==============
Federal income tax rate 35 % 35 % 35 % Special tax credits (41) (12) (15) Prior years' taxes, including Federal taxes relating to closed tax years (51) (7) (14) Other permanent differences (3) 1 (1) -------------- ------------- --------------
2003 2002 -------------- -------------- Deferred tax assets: Future policy benefits $ 58,648 $ 53,372 Employee retirement benefits 19,532 21,141 Tax carryovers 14,831 3,088 Other 2,361 1,771 -------------- -------------- Gross deferred tax assets 95,372 79,372 -------------- -------------- Deferred tax liabilities: Basis differences between tax and GAAP accounting for investments 10,342 3,434 Unrealized investment gains 25,258 754 Capitalization of deferred acquisition costs, net of amortization 45,338 48,423 Value of business acquired 37,217 26,363 Property and equipment, net 7,299 6,149 Other 6,836 7,886 -------------- -------------- Gross deferred tax liabilities 132,290 93,009 -------------- -------------- Net deferred tax liability 36,918 13,637 Current tax liability - 1,902 -------------- -------------- Income taxes payable $ 36,918 $ 15,539 ============== ==============
Federal income taxes paid this year equaled $8,442 (2002 -- $2,500; 2001 -- $2,350).
The income tax expense is recorded in various places in the Company’s financial statements as detailed below, for the years ended December 31.
The postretirement medical plans for the employees, full-time agents, and their dependents are contributory with contributions adjusted annually. The benefits expected to be paid in each year from 2004 through 2008 are $860, $900, $940, $1,040, and $1,150 respectively. The aggregate benefits expected to be paid in the five years from 2009 - 2013 are $7,380. The expected benefits to be paid are based on the same assumptions used to measure the Company’s benefit obligation at December 31, 2003. The 2004 contribution for the plan is estimated to be $860. The Company pays these medical costs as due and the plan incorporates cost-sharing features.
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans. There has not been sufficiently reliable information available on which to measure the effects of the Act. Since the Company is a sponsor of a postretirement health care plan that provides prescription drug benefits, the Company has elected to defer accounting recognition under FASB Staff Position (FSP) No. 106-1. This election of deferral has been provided because the specific authoritative guidance on the accounting for the federal subsidy is pending, and that guidance, when issued, may require the Company to change previously reported information. Since accounting recognition has been deferred, the impact of the Act has been excluded from the calculation of the accumulated postretirement benefit obligation and net postretirement benefit costs.
Pension Benefits Other Benefits -------------------------- -------------------------- 2003 2002 2003 2002 ---- ---- ---- ----
Change in plan assets: Fair value of plan assets at beginning of year $ 82,394 $ 87,696 $ 1,390 $ 1,457 Return on plan assets 14,523 (2,351) 66 75 Company contributions 6,719 8,520 - - Benefits paid (9,599) (11,471) (247) (142) ---------------------------- ---------------------------- Fair value of plan assets at end of year $ 94,037 $ 82,394 $ 1,209 $ 1,390 ============================ ============================
The assumed growth rate of health care costs has a significant effect on the benefit amounts reported, as the table below demonstrates.
One Percentage Point Change in the Growth Rate Increase Decrease -------- --------
Service and interest cost components $ 483 $ (366) Postretirement benefit obligation 5,552 (4,300)
Pension Benefits Other Benefits ------------------------------------ ----------------------------------- 2003 2002 2001 2003 2002 2001 ----------- ----------- ----------- ----------- ----------- -----------
Service cost $ 2,335 $ 2,223 $ 1,940 $ 755 $ 676 $ 708 Interest cost 7,215 7,564 7,442 1,406 1,423 1,345 Expected return on plan assets (6,441) (7,467) (7,252) (76) (80) (79) Amortization of: Unrecognized net (gain) loss 3,321 1,708 1,523 26 (12) (24) Unrecognized prior service cost (647) (647) (647) - - - Unrecognized net transition asset - (105) (206) - - - -------------------------------------- -------------------------------------- Net periodic benefits cost $ 5,783 $ 3,276 $ 2,800 $ 2,111 $ 2,007 $ 1,950 ====================================== ======================================
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.
2002: Revenues from customers $ 109,593 $ 61,264 $ 18,346 $ 72,937 $ 262,140 Net investment income 145,538 390 32,147 16,160 194,235 Segment income (loss) 15,629 (1,610) 10,492 7,038 31,549 Other significant noncash items: Increase in policy reserves 65,884 219 19,708 4,777 90,588 Amortization of deferred acquisition costs 11,100 - 4,118 8,595 23,813 Amortization of value of business acquired 3,832 - - 3,324 7,156 Interest expense 1,787 - - 565 2,352 Income tax expense (benefit) 2,321 (690) 1,073 3,568 6,272
2001: Revenues from customers $ 104,847 $ 57,389 $ 24,789 $ 72,873 $ 259,898 Net investment income 152,517 510 33,343 16,721 203,091 Segment income (loss) 22,991 (692) (1,501) 9,124 29,922 Other significant noncash items: Increase in policy reserves 52,740 469 18,641 5,855 77,705 Amortization of deferred acquisition costs 17,034 - 247 10,485 27,766 Amortization of value of business acquired 4,104 - - 3,474 7,578 Interest expense 3,254 - - 782 4,036 Income tax expense 3,322 (296) (3,672) 2,264 1,618
Land $ 766 $ 766 Home office complex 20,613 20,585 Furniture and equipment 41,609 49,691 ----------- ---------- 62,988 71,042
Unrealized Minimum Gain (Loss) Pension on Securities Liability Total ------------- --------- ----- 2003: Unrealized holding gains arising during the year $ 43,616 $ - $ 43,616 Less: Realized losses included in net income (39,231) - (39,231) ----------------- -------------- --------------- Net unrealized gains 82,847 - 82,847 Decrease in minimum pension liability - 3,615 3,615 Effect on deferred acquisition costs (4,768) - (4,768) Policyholder account balances (8,070) - (8,070) Deferred income taxes (24,504) (1,265) (25,769) ----------------- -------------- ---------------
Unrealized Minimum Gain (Loss) Pension on Securities Liability Total ------------- --------- -----
The carrying amounts for cash, short-term investments and policy loans as reported in the accompanying balance sheet approximate their fair values. The fair values for securities are based on quoted market prices, where available. For those securities not actively traded, fair values are estimated using values obtained from independent pricing services or, in the case of private placements, are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality and maturity of the investments. Fair values for mortgage loans are based upon discounted cash flow analyses using an interest rate assumption above comparable U.S. Treasury rates.
Fair values for the Company’s insurance contracts other than investment contracts are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk.
At year-end 2003, 14% of the Company’s notes payable had a carrying value of $19.1 million with a fair value of $19.5 million. For the remaining 86% of notes payable the carrying value approximated fair value.
The Company’s other liabilities are generally short-term in nature and their carrying value approximates their fair value.
The unaudited quarterly results of operations for the years ended December 31, 2003 and 2002 are summarized in the table below.
First Second Third Fourth ----- ------ ----- ------ 2003: Total revenues $ 91,054 $ 107,010 $ 120,958 $ 126,608
2002: Total revenues $ 111,326 $ 105,608 $ 102,046 $ 119,155
In recent years the life insurance industry, including the Company, has been subject to an increase in litigation pursued on behalf of purported classes of policyholders and to other claims and legal actions in jurisdictions where juries often award punitive damages which are grossly disproportionate to actual 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 claims and actions, would have no material effect on the Company’s business, results of operations and financial position.