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KCLI > SEC Filings for KCLI > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for KANSAS CITY LIFE INSURANCE CO | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for KANSAS CITY LIFE INSURANCE CO


8-Nov-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 third quarters and nine months ended September 30, 2013 and 2012 and the financial condition of the Company at September 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 Transaction

In April 2013, the Company acquired a block of variable life insurance policies and variable annuity contracts from American Family Life Insurance Company. The transfer was 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 third quarter of 2013, this transaction contributed contract charges of $4.3 million, policyholder benefits and interest credited to policyholder account balances of $0.9 million, and amortization of deferred acquisition costs of $1.3 million. During the first nine months of 2013, this transaction contributed contract charges of $8.7 million, policyholder benefits and interest credited to policyholder account balances of $1.8 million, and amortization of deferred acquisition costs of $2.7 million.
Immaterial Correction of Error

During the third quarter of 2013, the Company identified an immaterial correction of an error in the presentation of net premiums and policyholder benefits resulting from the incorrect recognition of premiums related to the conversion of fixed deferred annuity contracts to immediate annuities with life contingencies. The impact of the correction was an equal and offsetting increase to policyholder benefits. The error resulted in no impact to net income, earnings per share, stockholders' equity or cash flows. The Company understated the presentation of net premiums and policyholder benefits by $15.7 million in the first quarter of 2013 and $8.4 million in the second quarter of 2013. This error has been corrected in the presentation on the statement of comprehensive income for the nine months ended September 30, 2013. The error was insignificant to any previous periods presented.
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 $7.1 million in the third quarter of 2013 compared to $4.1 million in the third quarter of 2012. Net income per share was $0.65 in the third quarter of 2013 versus $0.38 in the same period in the prior year. Net income for the


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first nine months of 2013 was $23.1 million, a decrease of $8.8 million or 28% compared to last year. Net income per share for the nine months was $2.10, a decrease of $0.78 per share versus the same period one year earlier.

The following table presents variances between the results for the third quarters and nine months ended September 30, 2013 and 2012.

                                                  Quarter Ended         Nine Months Ended
                                                   September 30            September 30
                                                 2013 Versus 2012        2013 Versus 2012
Insurance and other revenues                   $           15,968     $             51,355
Net investment income                                      (2,684 )                 (5,040 )
Net realized investment gains (losses)                      1,905                  (13,169 )
Policyholder benefits and interest credited to
policyholder account balances                             (10,800 )                (38,380 )
Amortization of deferred acquisition costs                 (2,096 )                 (8,843 )
Operating expenses                                          2,283                      315
Income tax expense                                         (1,598 )                  4,941
Total variance                                 $            2,978     $             (8,821 )

Net income increased $3.0 million in the third quarter of 2013 compared to the same period in 2012. This resulted from a $15.5 million increase in insurance revenues, a $1.9 million increase in net realized investment gains, a $2.3 million decrease in operating expenses, and a $0.5 million decrease in interest credited to policyholder account balances. Partially offsetting these were an $11.3 million increase in policyholder benefits, a $2.7 million decrease in net investment income and a $2.1 million increase in the amortization of deferred acquisition costs.
Net income decreased $8.8 million in the first nine months of 2013 compared to the same period in 2012. The largest factor in this decrease was a $13.2 million reduction in net realized investment gains. Also contributing to the decline in net income was a $5.0 million decline in net investment income and an $8.8 million increase in amortization of deferred acquisition costs. Partially offsetting these items was a $9.1 million increase in contract charges and a $1.9 million reduction in interest credited to policyholder account balances. In addition, a $41.5 million increase in net premiums was mostly offset by a $40.3 million increase in policyholder benefits. The fluctuations in net premiums and policyholder benefits were largely the result of the correction of an error in the presentation of fixed deferred annuity contracts converted to immediate annuities with life contingencies, as previously described. 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.


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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 adjusts the ongoing pricing to support benefit and profit expectations.
The following table presents gross premiums by new and renewal business, less reinsurance ceded, as included in insurance revenues, for the third quarters and nine months ended September 30, 2013 and 2012. New premiums are also detailed by product.

                                               Quarter Ended September 30
                                       2013       % Change       2012       % Change
New premiums:
Individual life insurance           $  4,105        (4 )%     $  4,284         1  %
Immediate annuities                   11,200       412  %        2,187        15  %
Group life insurance                     742        19  %          624        21  %
Group accident and health insurance    3,596        24  %        2,894       (12 )%
Total new premiums                    19,643        97  %        9,989         -  %
Renewal premiums                      38,294         2  %       37,453         1  %
Total premiums                        57,937        22  %       47,442         1  %
Reinsurance ceded                    (14,233 )      (1 )%      (14,393 )      (1 )%
Net premiums                        $ 43,704        32  %     $ 33,049         2  %



                                              Nine Months Ended September 30
                                       2013        % Change       2012       % Change
New premiums:
Individual life insurance           $  12,898        (1 )%     $ 13,054         1  %
Immediate annuities                    44,609       507  %        7,355        30  %
Group life insurance                    2,227        20  %        1,849        26  %
Group accident and health insurance    10,360        20  %        8,637       (16 )%
Total new premiums                     70,094       127  %       30,895         2  %
Renewal premiums                      113,922         2  %      111,736         2  %
Total premiums                        184,016        29  %      142,631         2  %
Reinsurance ceded                     (42,546 )       -  %      (42,673 )       -  %
Net premiums                        $ 141,470        42  %     $ 99,958         3  %

Consolidated total premiums increased $10.5 million in the third quarter of 2013 versus the same period in the prior year. Total new premiums increased $9.7 million and total renewal premiums increased $0.8 million or 2%. As previously discussed, the Company corrected an error in the presentation of fixed deferred annuity contracts converted to immediate annuities with life contingencies. This change resulted in an increase of $8.9 million to new immediate annuity premiums in the third quarter of 2013. Excluding this change, total premiums increased $1.6 million or 3% in the third quarter and total new premiums increased $0.7 million or 7%. The increase in total new premiums reflected a $0.7 million or 24% increase in new group accident and health insurance premiums, largely from the dental product line. The increase in renewal premiums resulted from a $0.9 million or 4% increase in individual life insurance premiums, primarily from the Old American segment.
Consolidated total premiums increased $41.4 million in the nine months of 2013 versus one year earlier. Total new premiums increased $39.2 million compared to one year earlier. Excluding the correction of an error, as previously described, total premiums increased $8.4 million or 6% and total new premiums increased $6.2 million or 20%. The increase in new premiums was partially the result of an increase in new immediate annuity premiums, which can have sizeable fluctuations based upon changes in financial conditions, alternative and competitive products, and consumer preferences. Policyholder reserves for immediate annuity premiums are established on an equal and offsetting basis, and an increase in premiums results in an increase to reserves on a comparative basis. The increase in new premiums also reflected a $1.7 million or 20% improvement in new group accident and health premiums, largely in the dental line. This increase was primarily the result of expanded marketing activity. The increase


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in renewal premiums was primarily due to a $2.1 million or 3% increase in individual life insurance premiums, principally from the Old American segment. This increase is primarily the result of higher sales in earlier periods. The following table reconciles deposits with the Consolidated Statements of Cash Flows and provides detail by new and renewal deposits for the third quarters and nine months ended September 30, 2013 and 2012. New deposits are also detailed by product.

                                            Quarter Ended September 30
                                    2013      % Change      2012       % Change
New deposits:
Universal life insurance          $  4,086      37  %     $  2,980       25  %
Variable universal life insurance      135      (6 )%          144      (21 )%
Fixed annuities                     10,849      (9 )%       11,982      (22 )%
Variable annuities                   6,025      24  %        4,863       18  %
Total new deposits                  21,095       6  %       19,969       (9 )%
Renewal deposits                    39,623      14  %       34,903       (7 )%
Total deposits                    $ 60,718      11  %     $ 54,872       (8 )%



                                            Nine months ended September 30
                                     2013        % Change       2012       % Change
New deposits:
Universal life insurance          $   14,113       54  %     $   9,140        2  %
Variable universal life insurance      1,261      212  %           404      (40 )%
Fixed annuities                       32,482      (26 )%        43,601      (10 )%
Variable annuities                    15,639       16  %        13,466       (4 )%
Total new deposits                    63,495       (5 )%        66,611       (8 )%
Renewal deposits                     113,708        8  %       105,120       (4 )%
Total deposits                    $  177,203        3  %     $ 171,731       (5 )%

Total new deposits increased $1.1 million or 6% in the third quarter of 2013 compared with the third quarter of 2012. The two largest components were increases of $1.2 million or 24% in new variable annuity deposits and $1.1 million or 37% in new universal life deposits. Partially offsetting these, new fixed annuity deposits decreased $1.1 million or 9%. Total renewal deposits increased $4.7 million or 14% in the third quarter of 2013 versus last year. The reinsurance transaction on variable products increased renewal deposits $6.4 million in the third quarter. Excluding this transaction, renewal deposits decreased $1.7 million or 5%, reflecting a $1.3 million or 47% decline in variable annuity renewal deposits. Universal life and fixed annuity deposits can have sizeable fluctuations based upon changes in financial conditions, alternative and competitive products, and consumer preferences. Total new deposits decreased $3.1 million or 5% in the nine months of 2013 compared with the prior year. This decrease resulted from an $11.1 million or 26% decrease in new fixed annuity deposits. Partially offsetting this decline, new universal life deposits increased $5.0 million or 54%, new variable annuity deposits increased $2.2 million or 16%, and new variable universal life deposits increased $0.9 million or 212%. Total renewal deposits increased $8.6 million or 8% in the nine months of 2013. The reinsurance transaction on variable products increased renewal deposits $13.7 million in the nine months. Excluding this transaction, renewal deposits decreased $5.1 million or 5%. This was due to a $3.1 million or 11% decrease in fixed annuity renewal deposits, a $0.8 million or 10% decline in variable universal life renewal deposits, a $0.7 million or 1% decline in universal life renewal deposits, and a $0.6 million or 9% decrease in variable annuity renewal deposits.
Insurance Revenues
Insurance revenues consist of premiums, net of reinsurance, and contract charges. In the third quarter of 2013, total insurance revenues increased $15.5 million or 27%, reflecting a $10.7 million or 32% increase in premiums, net of reinsurance, and a $4.9 million or 20% increase in contract charges. The increase in net premiums reflected higher direct individual life and accident and health premiums, as well as the correction of an error in the presentation of fixed deferred annuity contracts converted to immediate annuities with life contingencies, as previously described. Excluding the correction of the error, net premiums increased $1.7 million or 5% in the third quarter of 2013. The increase in contract charges was due, in part, to the reinsurance transaction on


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variable products with American Family. This transaction contributed $4.3 million to contract charges in the third quarter of 2013. Excluding this transaction, contract charges increased $0.6 million or 2%.

Total insurance revenues increased $50.6 million in the first nine months of 2013 compared with the prior year, reflecting a $41.5 million increase in net premiums and a $9.1 million or 12% increase in contract charges. The increase in net premiums reflected higher direct individual life and accident and health premiums, as well as the correction of an error in the presentation of fixed deferred annuity contracts converted to immediate annuities with life contingencies, as previously described. Excluding the correction of the error, net premiums increased $8.5 million or 9% in the nine months. The reinsurance transaction contributed $8.7 million to contract charges. Excluding this transaction, contract charges increased $0.4 million or 1%.
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 $4.9 million or 20% in the third quarter of 2013 compared to the third quarter of 2012. As discussed previously, the reinsurance transaction contributed $4.3 million to contract charges in the third quarter of 2013. Excluding this transaction, total contract charges on all blocks of business increased $0.6 million or 2% in the third quarter of 2013 compared to the third quarter of 2012. Amortization of deferred revenue increased $0.4 million or 92%, largely reflecting improved profitability. Reserve loads increased $0.3 million or 9%. Partially offsetting these, cost of insurance charges decreased $0.1 million, largely due to the runoff of closed blocks.
Total contract charges on all blocks of business increased $9.1 million or 12% in the first nine months of 2013 compared to one year earlier. The reinsurance transaction contributed $8.7 million to contract charges. Excluding this transaction, total contract charges on all blocks of business increased $0.4 million in the first nine months of 2013. Reserve loads increased $1.0 million or 10%. Partially offsetting these, cost of insurance charges decreased $0.6 million, due to the runoff of closed blocks.
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 products 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 43% and 35% of total consolidated contract charges in the third quarters of 2013 and 2012, and 40% and 35% in the first nine months of 2013 and 2012, respectively. The increase in each period in 2013 can be attributed to the reinsurance transaction with American Family, which is considered a closed block. Excluding this transaction, total contract charges on closed blocks equaled 29% and 35% of total consolidated contract charges in the third quarters of 2013 and 2012, and 30% and 35% for the first nine 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 third quarter and 3% in the nine months, in part reflecting new and ongoing product sales.
Reinsurance ceded premiums decreased 1% in the third quarter but were essentially flat in the nine 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. No significant changes have been made or are contemplated to the Company's plans or direction with regard to its ongoing use of ceded reinsurance.
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 $2.7 million or 6% in the third quarter and $4.9 million or 3% in the first nine months of 2013 compared with the same periods in 2012. While average invested assets increased, this was more than offset by lower overall yields earned and available on certain investments for both periods. Fixed maturity securities provided a majority of the Company's investment income during the quarter and nine months ended September 30, 2013. Income on these investments declined $3.0 million or 9% in the third quarter and $7.6 million or 8% in the first nine 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 decreased $0.1 million or 1% in the third quarter and increased $1.4 million or 5% in the first nine months of 2013 compared to the prior year. The reduction in the third quarter was due to lower yields and prepayment fees compared to last year. Prepayment fees can result from favorable interest rates available to borrowers that allow them to pay off their obligations earlier than anticipated. The improvement in the nine months was largely the result of higher


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mortgage loan portfolio holdings during 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.
The Company recorded a net realized investment gain of $1.9 million in the third quarter of 2013, compared with a net realized investment loss of less than $0.1 million in the third quarter of 2012. During the third quarter of 2013, the Company recorded $2.3 million in gains from investment securities called. Net realized investment gains for the first nine months totaled $3.7 million in 2013 compared to $16.9 million in 2012. Gains of $16.3 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 $4.8 million in gains from investment securities called in the first nine months of 2013.
The Company's analysis of securities for the third quarter ended September 30, 2013 resulted in the determination that eight fixed maturity securities had other-than-temporary impairments and were written down by a combined $0.1 million due to credit impairments. These eight securities accounted for all of the other-than-temporary impairments in the third quarter of 2013. These residential mortgage-backed securities had incremental losses, reflecting modest deterioration in the present value of expected future cash flows. The additional losses from these residential mortgage-backed securities totaled $0.1 million in the third quarter of 2013, including less than $0.1 million that was determined to be non-credit and was recognized in other comprehensive income (loss). The total fair value of the affected securities after the write-downs was $55.1 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 . . .

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