Contract charges declined 3% in 2009 and 2% in 2008. The decline in 2009 can largely be attributed to three factors: lower account balances on variable contracts, lower surrender charges due to a decline in policy surrenders on certain products, and the runoff of closed blocks. The Company has purchased blocks of policies and companies with the intent of servicing these blocks to achieve profit streams but without the expectation to generate new business within these blocks of policies. Total contract charges on these closed blocks equaled 37% of total consolidated contract charges during 2009, compared to 38% in 2008. Total contract charges on closed blocks declined 4% in 2009 compared to 2008, and total contract charges on open blocks of business declined 2% in 2009 compared to 2008. In 2008, policy charges declined due to lower policyholder account balances and increased sales of certain products where the contract charges are not recognized into income immediately. Instead, such charges are deferred as unearned revenues and amortized into income similar to the amortization of deferred acquisition costs (DAC). Another contributing factor in the decrease in 2008 was the unlocking of DAC assumptions in the second quarter of 2008, which further reduced current period recognition of these revenues. The resulting increase in unearned revenues will be recognized into income in proportion to the expected future gross profits of the business. Partially offsetting these, surrender charges increased, largely due to higher surrenders on variable products.
Following is a description of the securities that were written down during the fourth quarter of 2009:
One security was from a company that provides custom-tailored financing to private and corporate owners of real estate nationwide and was written down $0.5 million. During the second quarter of 2009, the Company accepted an offer from this company to exchange this security for a security with a longer-dated maturity with an enhanced second lien priority in the capital structure. This security had been written down in a previous period. This security was sold during the fourth quarter of 2009.
Two securities were CDOs that were written down by a total of $5.1 million. These securities were impacted by the rapid rise in delinquencies and foreclosures in the sub-prime and Alt-A mortgage markets, along with a decline in the fair value of securities issued by financial institutions. Ongoing CDO liquidations and investor selling have caused extreme declines in market valuations, regardless of individual security performance.
securities for the comparative year-end dates include a decline of 8% in AAA-rated securities and an 8% increase in BBB-rated securities.
The evaluation of loan-backed and similar asset-backed securities, particularly including residential mortgage-backed securities, with significant indications of potential other-than-temporary impairment requires significant use of estimates and judgment. Specifically, the Company performs discounted future cash flow calculations to assure the value of the investment is expected to be fully realized. Projections of expected future cash flows are based upon considerations of the performance of the actual underlying assets, including historical delinquencies, defaults, severity of losses incurred, and prepayments, along with the Company’s estimates of future results for these factors. The Company’s estimates of future results are based upon actual historical performance of the underlying assets relative to historical, current and expected general economic conditions, specific conditions related to the underlying assets, industry data, and other factors that are believed to be relevant.
security issues representing 13% of the issues with unrealized losses, including 88% being rated as investment grade, were below cost for one year or more and less than three years; and
Operating expenses consist of commissions net of the capitalization of commissions, expenses from the Company’s operations, and other expenses. Capitalized commissions consist primarily of commissions and non-recurring expenses related to the sale of business. In total, operating expenses increased $5.0 million or 5% in 2009 and $4.5 million or 5% in 2008 compared to one year earlier. The largest factors in the 2009 increase were a $4.2 million increase in pension expense and $3.1 million in separation costs associated with a reduction in staffing. Also contributing to the increase were legal and incentive compensation expenses. Partially offsetting these increases were decreases in salaries, travel expenses and outside labor and services. The primary factors contributing to the increase in 2008 were increased employee and agent medical plan and benefit costs, largely resulting from a reduction of accruals in the prior year, expense associated with affordable housing tax credits, travel expenses, premium taxes and consulting services.
resulting from $0.7 million in current-year amortization of investments exceeding the tax credits earned and $0.3 million of recaptured tax credits previously recognized. In 2008, amortization offset tax credits earned resulting in tax expense of $0.1 million or less than 1%. The income tax rate in 2007 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 tax benefit of $2.0 million or 4% in 2007.
The Company’s analysis of securities for the quarter ended June 30, 2009 resulted in the determination that six fixed-maturity issuers (seven securities) had other-than-temporary impairments affecting the Individual Insurance segment and were written down by a combined $3.6 million.
One security was from a company that provides custom-tailored financing to private and corporate owners of real estate nationwide and was written down $1.8 million. During the second quarter of 2009, the Company accepted an offer from this company to exchange this security for a security with a longer-dated maturity with an enhanced second lien priority in the capital structure. This security had been written down in a previous period.
The Group Insurance segment experienced net losses in each of the three years presented. The net loss in the Group Insurance segment increased $0.8 million in 2009. This increase was largely the result of a decrease in insurance revenues and an increase in policyholder benefits. These were partially offset by a decrease in operating expenses and an increase in income tax benefit. The net loss for this segment decreased $0.5 million in 2008. This decrease was largely the result of an increase in insurance revenues and a decrease in operating expenses. These were partially offset by an increase in policyholder benefits.
Operating expenses consist of commissions, fees to third-party marketing and administrative organizations, and expenses from the Company’s operations. Operating expenses in this segment decreased 3% in 2009 and 2% in 2008. The reduction in 2009 was largely due to a reduction in group administration fees for the disability products. The reduction in 2008 was largely due to a $0.4 million release in legal contingency reserves as a result of a settlement of pending litigation.
offer from this company to exchange this security for a security with a longer-dated maturity with an enhanced second lien priority in the capital structure. This security had been written down in a previous period.
One security was a residential mortgage-backed security that was written down by a total of $0.1 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.
One security was written down by $0.2 million, primarily as a result of a decline in price on a debt security from an issuer that recently completed a LBO transaction. This security had been written down previously.
The Company has defined contribution plans for employees and agents. Prior to the third quarter of 2009, the Company made contributions to these plans through Company stock. These transactions were accounted for as purchases and sales of treasury stock. During the third quarter of 2009, the Company discontinued purchase and sale transactions of the Company’s common stock with employee and agent benefit plans sponsored by the Company. The Company’s benefit plans instead conduct such transactions in the open market. Accordingly, the benefit plans purchased 312,648 shares of treasury stock for $9.6 million (2008 - 375,763 for $17.7 million) and sold 526,708 shares of treasury stock for $12.2 million (2008 - 222,687 for $9.2 million).
On January 8, 2007, the Company completed the sale of Generations Bank, its bank subsidiary, after receiving regulatory approval from the Office of Thrift Supervision. The gain on the sale was $1.9 million and is included in realized investment gains. The bank subsidiary and the results of operations were not material to the financial statements of the Company and are not disclosed separately.
One security was written down by $0.8 million due to a combination of a decline in price that had persisted for a period longer than the Company considered temporary and a further deterioration in fair value during the second quarter of 2008.
As of December 31, 2009, the Company had gross unrealized losses of $93.2 million on investment securities, including fixed maturity and equity securities that had a fair value of $814.4 million. As of December 31, 2008, the Company had gross unrealized losses of $231.9 million on investment securities, including fixed maturity and equity securities that had a fair value of $1.5 billion. The decrease in unrealized losses was primarily attributable to improved pricing of financial assets during the twelve months ended December 31, 2009. These changes affected the broad financial markets and resulted in price improvements in virtually every sector. At December 31, 2009, approximately 8% of the gross unrealized losses were attributable to securities having gross unrealized losses of less than 12 months. This compares to approximately 45% at December 31, 2008. At December 31, 2009, unrealized losses on investments available for sale were primarily due to $42.9 million in unrealized losses on corporate private-labeled residential mortgage-backed securities. In addition, unrealized losses on corporate securities totaled $26.0 million. Based, in part, by the Company’s assessment of expected credit losses of the securities given the performance of the underlying collateral compared to the credit enhancement, the Company concluded that these securities were not other-than-temporarily impaired at December 31, 2009.
The following table provides information regarding fixed maturity securities by asset class at December 31, 2008.
The Company did not hold securities of any corporation and its affiliates that exceeded 10% of stockholders' equity at December 31, 2009 or December 31, 2008.
The following table provides the distribution of maturities for fixed maturity investment securities available for sale as of December 31, 2009. Expected maturities may differ from these contractual maturities since borrowers may have the right to call or prepay obligations.
The Company has pension and other postretirement benefit plans covering substantially all its employees for which the measurement date is December 31.
The postretirement medical plans for the eligible employees, agents, and their dependents are contributory with contributions adjusted annually. The benefits expected to be paid in each year from 2010 through 2014 are $1.2 million each year. The aggregate benefits expected to be paid in the five years from 2015 through 2019 are $7.4 million. The expected benefits to be paid are based on the same assumptions used to measure the Company’s benefit obligation at December 31, 2009. The 2010 contribution for the plan is estimated to be $1.2 million. The Company pays these medical costs as they become due and the plan incorporates cost-sharing features.
The Company has three reportable business segments, which are defined based on the nature of the products and services offered: Individual Insurance, Group Insurance and Old American. The Individual Insurance segment consists of individual insurance products for both Kansas City Life and Sunset Life. The Individual Insurance segment is marketed through a nationwide sales force of independent general agents and third-party marketing arrangements. The Group Insurance segment consists of sales of group life, dental, vision and disability products. This segment is marketed through a nationwide sales force of independent general agents, group brokers and third-party marketing arrangements. Old American consists of individual insurance products designed primarily as final expense products. These products are marketed through a nationwide general agency sales force with exclusive territories, using direct response marketing to supply agents with leads.
3520 Broadway, Kansas City, MO 64111 Contact: Tracy W. Knapp, Chief Financial Officer,
Kansas City Life Insurance Company (NASDAQ: KCLI) was established in 1895 and is based in Kansas City, Missouri. The