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KCLI > SEC Filings for KCLI > Form 10-Q on 26-Jul-2013All Recent SEC Filings

Show all filings for KANSAS CITY LIFE INSURANCE CO

Form 10-Q for KANSAS CITY LIFE INSURANCE CO


26-Jul-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Amounts are stated in thousands, except share data, or as otherwise noted. Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide in narrative form the perspective of the management of Kansas City Life Insurance Company (the Company) on its financial condition, results of operations, liquidity, and certain other factors that may affect its future results. The following is a discussion and analysis of the results of operations for the second quarters and six months ended June 30, 2013 and 2012 and the financial condition of the Company at June 30, 2013. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in this document, as well as the Company's 2012 Form 10-K.
Overview
Kansas City Life Insurance Company is a financial services company that is predominantly focused on the underwriting, sales, and administration of life insurance and annuity products. The consolidated entity (the Company) primarily consists of three life insurance companies. Kansas City Life Insurance Company (Kansas City Life) is the parent company. Sunset Life Insurance Company of America (Sunset Life) and Old American Insurance Company (Old American) are wholly-owned subsidiaries. For additional information, please refer to the Overview included in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 2012 Form 10-K.

Reinsurance Assumption Transaction

In April 2013, the Company assumed the transfer of a block of variable life insurance policies and variable annuity contracts from American Family Life Insurance Company. The transfer is comprised of a 100% modified coinsurance transaction for the separate account business and a 100% coinsurance transaction for the corresponding fixed account business. Included in the transaction are ongoing servicing arrangements for this business. During the second quarter and six months of 2013, this transaction contributed contract charges of $4.4 million, policyholder benefits and interest credited to policyholder account balances of $0.9 million, and amortization of deferred acquisition costs of $1.4 million.
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. Actual results may differ materially from those included in the forward-looking statements as a result of risks and uncertainties. Those risks and uncertainties include, but are not limited to, the risk factors listed in Item 1A. Risk Factors as filed in the Company's 2012 Form 10-K. For additional information, please refer to the Overview included in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 2012 Form 10-K. Consolidated Results of Operations
Summary of Results
The Company earned net income of $10.9 million in the second quarter of 2013 compared to $8.4 million in the second quarter of 2012. Net income per share was $0.98 in the second quarter of 2013 versus $0.78 in the same period in the prior year. Net income for the first six months of 2013 was $16.0 million, a decrease of $11.8 million or 42% compared to last year. Net income per share for the six months was $1.45, a decrease of $1.05 per share versus the same period one year earlier.


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The following table presents variances between the results for the second quarters and six months ended June 30, 2013 and 2012.

                                                  Quarter Ended         Six Months Ended
                                                     June 30                 June 30
                                                 2013 Versus 2012       2013 Versus 2012
Insurance and other revenues                   $            6,057     $            11,316
Net investment income                                        (557 )                (2,356 )
Net realized investment gains (losses)                        286                 (15,074 )
Policyholder benefits and interest credited to
policyholder account balances                               2,558                  (3,509 )
Amortization of deferred acquisition costs                 (5,783 )                (6,747 )
Operating expenses                                            574                  (1,968 )
Income tax expense                                           (681 )                 6,539
Total variance                                 $            2,454     $           (11,799 )

Net income increased $2.5 million in the second quarter of 2013 compared to the same period in 2012. Two of the largest factors in the increase were a $2.0 million decrease in policyholder benefits and a $5.8 million increase in insurance revenues. Also contributing to the increase in net income were decreases in interest credited to policyholder account balances and operating expenses, along with an increase in net realized investment gains. Partially offsetting these was a decrease in net investment income and an increase in amortization of deferred acquisition costs.
Net income decreased $11.8 million in the first six months of 2013 compared to the same period in 2012. The largest factor in this decrease was a $15.1 million decrease in net realized investment gains. Also contributing to the decline in net income was a decrease in net investment income and increases in policyholder benefits, amortization of deferred acquisition costs, and operating expenses. Partially offsetting these items was an increase in insurance revenues and a decrease in interest credited to policyholder account balances. Additional information on these items is presented below. Sales
The Company measures sales in terms of new premiums and deposits. Sales of traditional life insurance, immediate annuities, and accident and health products are reported as premium income for financial statement purposes. Deposits received from the sale of interest sensitive products, including universal life insurance, fixed deferred annuities, variable universal life, variable annuities, and supplementary contracts without life contingencies are reflected as deposits in the Consolidated Statements of Cash Flows. The Company's marketing plan for individual products focuses on three main aspects: providing financial security with respect to life insurance, the accumulation of long-term value, and future retirement income needs. The primary emphasis is on the growth of individual life insurance business, including new premiums for individual life products and new deposits for universal life and variable universal life products. Consumer preferences and customer choices are very hard to predict and significantly influence life and annuity insurance purchases. The Company attempts to provide a varied portfolio of products that support consumer needs and is constantly assessing new products and opportunities.
Sales of the Company's products are primarily made through the Company's existing sales force. The Company emphasizes growth of the sales force with the addition of new general agents and agents. The Company believes that increased sales will result through both the number and productivity of general agents and agents. The Company also places an emphasis on training and direct support to the field force to assist new agents in their start-up phase. In addition, the Company provides support to existing agents to stay abreast of the ever-changing regulatory environment and to introduce agents to new products and enhanced features of existing products. The Company also selectively utilizes third-party marketing arrangements to enhance its sales objectives. This allows the Company the flexibility to identify niches or pursue unique opportunities in the existing markets and to react quickly to take advantage of opportunities when they occur.
The Company also markets a series of group products. These products include group life, dental, disability, and vision products. The primary growth strategies for these products include increased productivity of the existing group representatives; planned expansion of the group distribution system; and to selectively utilize third-party marketing arrangements. Further, growth is to be supported by the addition of new products to the portfolio. The Company evaluates the profitability of sales to groups and will adjust the ongoing pricing to support benefit and profit expectations.


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The following table presents gross premiums by new and renewal business, less reinsurance ceded, as included in insurance revenues, for the second quarters and six months ended June 30, 2013 and 2012. New premiums are also detailed by product.

                                                  Quarter Ended June 30
                                       2013       % Change       2012       % Change
New premiums:
Individual life insurance           $  4,423         -  %     $  4,414         2  %
Immediate annuities                    2,857       (17 )%        3,460       234  %
Group life insurance                     800         8  %          744        64  %
Group accident and health insurance    3,618        13  %        3,199        (5 )%
Total new premiums                    11,698        (1 )%       11,817        29  %
Renewal premiums                      38,037         3  %       37,033         1  %
Total premiums                        49,735         2  %       48,850         7  %
Reinsurance ceded                    (14,740 )       1  %      (14,645 )      (2 )%
Net premiums                        $ 34,995         2  %     $ 34,205        11  %



                                                Six Months Ended June 30
                                       2013       % Change       2012       % Change
New premiums:
Individual life insurance           $  8,793          - %     $  8,770         1  %
Immediate annuities                    9,337         81 %        5,168        38  %
Group life insurance                   1,485         21 %        1,225        29  %
Group accident and health insurance    6,764         18 %        5,743       (18 )%
Total new premiums                    26,379         26 %       20,906         2  %
Renewal premiums                      75,629          2 %       74,283         3  %
Total premiums                       102,008          7 %       95,189         3  %
Reinsurance ceded                    (28,313 )        - %      (28,280 )       1  %
Net premiums                        $ 73,695         10 %     $ 66,909         4  %

Consolidated total premiums increased $0.9 million or 2% in the second quarter of 2013 versus the same period in the prior year. Total new premiums decreased $0.1 million or 1%, while total renewal premiums increased $1.0 million or 3%. The decrease in total new premiums was driven by a $0.6 million or 17% decrease in new immediate annuity premiums. Immediate annuity receipts can have sizeable fluctuations, as receipts from policyholders largely result from one-time premium additions rather than a smaller recurring premium. Partially offsetting this, new group accident and health insurance premiums increased $0.4 million or 13%, largely from the dental and life product lines. The increase in renewal premiums was largely due to a $0.4 million or 2% increase in individual life insurance premiums, primarily from the Old American segment. Group accident and health renewal premiums increased $0.4 million or 4%, reflecting an increase in the renewals for the short-term disability product line. In addition, group life premium renewals increased $0.3 million or 14%.
Consolidated total premiums increased $6.8 million or 7% in the first six months of 2013 versus one year earlier, reflecting a $5.5 million or 26% increase in new premiums and a $1.3 million or 2% increase in renewal premiums. The increase in new premiums was due to a $4.2 million or 81% increase in new immediate annuity premiums and a $1.0 million or 18% increase in new group accident and health premiums. The increase in new group accident and health premiums was largely in the dental line. The increase in renewal premiums was primarily due to a $1.2 million or 2% increase in individual life insurance premiums, principally from the Old American segment.


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The following table reconciles deposits with the Consolidated Statements of Cash Flows and provides detail by new and renewal deposits for the second quarters and six months ended June 30, 2013 and 2012. New deposits are also detailed by product.

                                              Quarter Ended June 30
                                    2013      % Change      2012       % Change
New deposits:
Universal life insurance          $  4,613        61 %    $  2,857      (24 )%
Variable universal life insurance      560       444 %         103      (62 )%
Fixed deferred annuities            12,986         4 %      12,469      (31 )%
Variable annuities                   6,614        42 %       4,642      (24 )%
Total new deposits                  24,773        23 %      20,071      (29 )%
Renewal deposits                    39,938        13 %      35,325       (3 )%
Total deposits                    $ 64,711        17 %    $ 55,396      (14 )%



                                              Six Months Ended June 30
                                     2013       % Change       2012       % Change
New deposits:
Universal life insurance          $  10,027       63  %     $   6,160       (6 )%
Variable universal life insurance     1,126      333  %           260      (47 )%
Fixed deferred annuities             21,633      (32 )%        31,619       (4 )%
Variable annuities                    9,614       12  %         8,603      (14 )%
Total new deposits                   42,400       (9 )%        46,642       (7 )%
Renewal deposits                     74,085        6  %        70,217       (3 )%
Total deposits                    $ 116,485        -  %     $ 116,859       (4 )%

Total new deposits increased $4.7 million or 23% in the second quarter of 2013 compared with the second quarter of 2012. The two largest components of this increase were a $2.4 million or 51% increase in new variable life and annuity deposits and a $1.8 million or 61% increase in new universal life deposits. Total renewal deposits increased $4.6 million or 13% in the second quarter of 2013 versus last year. The reinsurance assumption transaction on variable products increased renewal deposits $7.3 million in the second quarter. Excluding this transaction, renewal premiums decreased $2.7 million or 8%, reflecting a $2.5 million or 25% decline in fixed deferred annuity renewal deposits.
Total new deposits decreased $4.2 million or 9% in the first six months of 2013 compared with the prior year. This decrease resulted from a $10.0 million or 32% decrease in new fixed deferred annuity deposits. Partially offsetting this decline, new universal life deposits increased $3.9 million, new variable annuity deposits increased $1.0 million, and new variable universal life deposits increased $0.9 million. Total renewal deposits increased $3.9 million or 6% in the first six months of 2013. The reinsurance assumption transaction on variable products increased renewal deposits $7.3 million in the six months. Excluding this transaction, renewal premiums decreased $3.4 million or 5%. This was largely due to a $3.1 million or 16% decrease in fixed deferred annuity renewal deposits and a $0.6 million or 11% decline in variable universal life renewal deposits. Partially offsetting these, variable annuity renewal deposits increased $0.7 million or 18%.
Insurance Revenues
Insurance revenues consist of premiums, net of reinsurance, and contract charges. In the second quarter of 2013, total insurance revenues increased $5.8 million or 10%, reflecting a $0.8 million or 2% increase in premiums net of reinsurance and a $5.0 million or 20% increase in contract charges. The increase in contract charges was due, in part, to the reinsurance assumption transaction on variable products with American Family. This transaction contributed $4.4 million to contract charges in the second quarter of 2013. Excluding this transaction, total insurance revenues increased $1.5 million or 3% in the second quarter of 2013, reflecting a $0.9 million or 3% increase in premiums net of reinsurance and a $0.6 million or 2% increase in contract charges. Direct individual life premiums increased $0.7 million or 2% and direct accident and health premiums increased $0.8 million or 6%, while direct immediate annuity premiums decreased $0.6 million or 18%, compared with one year earlier.

Total insurance revenues increased $11.0 million or 9% in the first six months of 2013 compared with the prior year, reflecting a $6.8 million or 10% increase in net premiums and a $4.2 million or 8% increase in contract charges. The American Family


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reinsurance assumption transaction contributed $4.4 million to contract charges. Excluding this transaction, total insurance revenues increased $6.7 million or 6% in the first six months of 2013 compared with the prior year, due to a $6.9 million or 10% increase in premiums net of reinsurance.
Contract charges consist of cost of insurance, expense loads, amortization of unearned revenues, and surrender charges on policyholder account balances. Certain contract charges are not recognized in income immediately but are deferred and are amortized into income in proportion to the expected future gross profits of the business, in a manner similar to deferred acquisition costs (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 the assumptions should be revised, the impact is recorded as a change in the revenue reported in the current period as an unlocking adjustment.
Total contract charges on all blocks of business increased $5.0 million or 20% in the second quarter of 2013 compared to the second quarter of 2012. As discussed previously, the American Family transaction contributed $4.4 million to contract charges in the second quarter of 2013. Excluding this transaction, total contract charges on all blocks of business increased $0.6 million or 2% in the second quarter of 2013 compared to the second quarter of 2012. Amortization of deferred revenue increased $0.4 million or 27%, largely due to an unlocking adjustment associated primarily with mortality and interest margins. Reserve loads increased $0.4 million or 12%. Partially offsetting these, cost of insurance charges decreased $0.2 million, largely due to the runoff of closed blocks.
Total contract charges on all blocks of business increased $4.2 million or 8% in the first six months of 2013 compared to one year earlier. The American Family reinsurance assumption transaction contributed $4.4 million to contract charges. Excluding this transaction, total contract charges on all blocks of business decreased $0.2 million in the first six months of 2013. Reserve loads increased $0.7 million or 10%. Partially offsetting these, cost of insurance charges decreased $0.4 million, due to the runoff of closed blocks. In addition, amortization of deferred revenue decreased $0.2 million or 11%.
Contract charges are impacted by the sales of new products and the persistency of both existing and closed blocks of business. The closed blocks of business reflect policies and companies that the Company has purchased but to which the Company is not actively pursuing marketing efforts to generate new sales. The Company services these policies to achieve long-term profit streams. Total contract charges on closed blocks equaled 42% and 34% of total consolidated contract charges in the second quarters of 2013 and 2012, and 39% and 35% in the first six months of 2013 and 2012, respectively. The increase in each period in 2013 can be attributed to the reinsurance assumption transaction with American Family, which is considered a closed block. Excluding this transaction, total contract charges on closed blocks equaled 28% and 34% of total consolidated contract charges in the second quarters of 2013 and 2012, and 31% and 35% for the first six months of 2013 and 2012, respectively. These declines reflect the runoff of business. Total contract charges on open, or ongoing, blocks of business increased 5% in the second quarter and 1% in the six months, in part reflecting new sales of these products in addition to the unlocking discussed above.
Reinsurance ceded premiums were essentially flat in the second quarter and first six months of 2013 compared to one year earlier. The Company uses reinsurance as a means to mitigate its risks and to reduce the earnings volatility from claims. Investment Revenues
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 decreased $0.7 million or 1% in the second quarter and $2.2 million or 2% in the first six months of 2013 compared with the same periods in 2012. While average invested assets increased, this was more than offset by lower yields earned on certain investments for both periods.
Fixed maturity securities provided a majority of the Company's investment income during the quarter and six months ended June 30, 2013. Income on these investments declined $2.7 million or 8% in the second quarter and $4.6 million in the first six months of 2013 compared to the same periods in 2012, reflecting declines in average invested assets and yields earned.
Investment income from commercial mortgage loans increased $1.0 million or 11% in the second quarter and $1.4 million or 8% in the first six months of 2013 compared to the prior year. This improvement was largely the result of higher mortgage loan portfolio holdings during the first half of 2013 compared to the prior year, as the Company significantly increased its holdings in mortgage loans in recent periods.
The Company realizes investment gains and losses from several sources, including write-downs of investments and sales of investment securities and real estate. Many securities purchased by the Company contain call provisions, which allow the issuer to redeem the securities at a particular price. Depending upon the terms of the call provision and price at which the security was purchased, a gain or loss may be realized.


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The Company recorded a net realized investment gain of $1.5 million in the second quarter of 2013, compared with a $1.2 million net realized investment gain in the second quarter of 2012. During the second quarter of 2013, the Company recorded $1.5 million in gains from investment securities called. Net realized investment gains for the first six months totaled $1.8 million in 2013 compared to $16.9 million in 2012. Gains of $16.2 million in 2012 were due to sales of real estate as compared to virtually no realized gains on real estate in 2013. In addition, the Company recorded $2.2 million in gains from investment securities called in the first six months of 2013.
The Company's analysis of securities for the second quarter ended June 30, 2013 resulted in the determination that seven fixed maturity securities had other-than-temporary impairments and were written down by a combined $0.2 million due to credit impairments. These seven securities accounted for all of the other-than-temporary impairments in the second quarter of 2013. These residential mortgage-backed securities had incremental losses, reflecting deterioration in the present value of expected future cash flows. The additional losses from these residential mortgage-backed securities totaled $0.3 million in the second quarter of 2013, including $0.1 million that was determined to be non-credit and was recognized in other comprehensive income. The total fair value of the affected securities after the write-downs was $65.6 million. Analysis of Investments
The Company seeks to protect policyholders' benefits and achieve a desired level of organizational profitability by optimizing risk and return on an ongoing basis through managing asset and liability cash flows, monitoring credit risk, avoiding high levels of investments that may be redeemed by the issuer, maintaining sufficiently liquid investments and avoiding undue asset concentrations through diversification, among other things.
The primary sources of investment risk to which the Company is exposed include credit risk, interest rate risk, and liquidity risk. The Company's ability to manage these risks is essential to the success of the organization. In particular, the Company devotes considerable resources to both the credit analysis of each new investment and to ongoing credit positions. A default by an issuer usually involves some loss of principal to the investor. Losses can be mitigated by timely sales of affected securities or by active involvement in a restructuring process. However, there can be no assurance that the efforts of an investor will lead to favorable outcomes in a bankruptcy or restructuring. Credit risk is managed primarily through industry, issuer, and structure diversification.
For additional information regarding the Company's asset/liability management program, please see the Asset/Liability Management section within Item 7A:
Quantitative and Qualitative Disclosures About Market Risk in the Company's 2012 Form 10-K.


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The following table provides information regarding fixed maturity and equity securities by asset class at June 30, 2013.

                                                           Fair Value                           Fair Value
                                                          of Securities                        of Securities
                                Total                      with Gross           Gross           with Gross           Gross
                                Fair            %          Unrealized         Unrealized        Unrealized         Unrealized
                                Value       of Total          Gains             Gains             Losses             Losses
U.S. Treasury securities
and
obligations of U.S.
Government                  $   126,604          4 %    $       111,448     $      9,098     $        15,156     $        573
Federal agencies 1               23,055          1 %             23,055            2,990                   -                -
Federal agency issued
residential
   mortgage-backed
. . .
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