The Registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Yes X No______
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the most recent date available.
Class Outstanding October 29, 2002
Common Stock, $1.25 par value 11,991,633 shares
All financial statements are presented in thousands, except per share data.
Consolidated
Income Statement (Unaudited)
Quarter ended Nine Months ended
September 30 September 30
2002 2001 2002 2001
Revenues
Insurance revenues:
Premiums and contract charges $ 78,194 69,882 223,782 213,647
Reinsurance ceded (10,641) (8,524) (32,634) (27,216)
Net insurance revenues 67,553 61,358 191,148 186,431
Investment revenues:
Investment income, net 47,138 49,974 145,208 151,548
Realized losses, net (8,919) (2,783) (19,182) (2,975)
Other 3,419 3,780 12,787 12,414
Total revenues 109,191 112,329 329,961 347,418
Benefits and expenses
Policyholder benefits (net of reinsurance ceded:
quarter: $7,193 - 2002, $7,179 - 2001;
nine months: $24,614 - 2002, $22,102 - 2001) 74,351 67,661 211,534 207,424
Amortization of deferred acquisition costs 9,370 8,788 21,092 24,263
Insurance operating expenses (net of commissions ceded:
quarter: $1,252 - 2002, $1,254 - 2001;
nine months: $3,692 - 2002, $5,582 - 2001) 25,811 25,412 75,824 76,788
Total benefits and expenses 109,532 101,861 308,450 308,475
Pretax income (loss) (341) 10,468 21,511 38,943
Federal income taxes:
Current 1,842 983 281 7,022
Deferred (2,984) 703 4,175 2,155
(1,142) 1,686 4,456 9,177
Net income $ 801 8,782 17,055 29,766
Per common share:
Net income, basic and diluted $ 0.07 0.73 1.42 2.47
Cash dividends $ 0.27 0.27 0.81 0.81
See accompanying Notes to Consolidated Financial Statements.
Consolidated
Balance Sheet
September 30 December 31
2002 2001
(Unaudited)
Assets
Investments:
Fixed maturities securities
available for sale, at fair value $ 2,135,106 2,062,193
Equity securities available
for sale, at fair value 58,624 67,759
Mortgage loans, net 439,331 439,546
Short-term investments 165,557 127,984
Other investments 208,391 212,640
Total investments 3,007,009 2,910,122
Cash 20,667 4,365
Deferred acquisition costs 240,159 243,606
Other assets 304,880 301,213
Separate account assets 234,409 305,283
$ 3,807,124 3,764,589
Liabilities and equity
Future policy benefits $ 821,021 815,949
Accumulated contract values 1,698,106 1,640,081
Notes payable 99,921 96,779
Current income taxes payable 8,098 11,652
Other liabilities 333,041 329,161
Separate account liabilities 234,409 305,283
Total liabilities 3,194,596 3,198,905
Stockholders' equity:
Common stock 23,121 23,121
Paid in capital 22,329 21,744
Retained earnings 675,591 668,255
Accumulated other comprehensive
income (loss), net of tax 2,054 (38,806)
Less treasury stock (110,567) (108,630)
Total stockholders' equity 612,528 565,684
$ 3,807,124 3,764,589
See accompanying Notes to Consolidated Financial Statements.
Consolidated
Statement of Cash Flows (Unaudited)
Nine Months ended
September 30
2002 2001
Operating activities
Net cash provided $ 44,627 45,635
Investing activities
Available for sale securities:
Purchases of fixed maturities (571,759) (646,511)
Sales of fixed maturities 263,928 482,338
Maturities and principal paydowns
of fixed maturity investments 273,889 123,039
Purchases of other investments (64,558) (58,598)
Sales, maturities and principal
paydowns of other investments 64,325 57,280
Net purchase of short-term
investments (38,281) (69,452)
Disposition of group life block:
Cash paid net of ceding
commission received - (4,000)
Net cash used (72,456) (115,904)
Financing activities
Policyholder contract deposits 131,425 109,107
Withdrawals of policyholder
contract deposits (81,206) (103,277)
Change in other deposits 1,842 15,257
Dividends paid to stockholders (9,719) (10,486)
Proceeds from borrowings 3,142 56,070
Other, net (1,353) (207)
Net cash provided 44,131 66,464
Increase (decrease) in cash 16,302 (3,805)
Cash at beginning of year 4,365 13,391
Cash at end of period $ 20,667 9,586
See accompanying Notes to Consolidated Financial Statements.
Basis of Presentation
The unaudited consolidated financial statements, the accompanying notes to these financial statements and the accompanying Management’s Discussion and Analysis of Operations of Kansas City Life Insurance Company include the accounts of the Company and its subsidiaries, principally Sunset Life Insurance Company of America (Sunset Life) and Old American Insurance Company (Old American). These items have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial reporting and with the instructions to Form 10-Q of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements and as such, these unaudited interim financial statements should be read in conjunction with the Company’s 2001 Form 10-K and the Annual Report to Stockholders. Management believes that the disclosures are adequate to make the information presented not misleading and all normal and recurring adjustments necessary to present fairly the financial position at September 30, 2002, and the results of its operations for all periods presented have been made. The results of operations for any interim period are not necessarily indicative of the Company’s operating results for a full year.
Significant intercompany transactions have been eliminated in consolidation and certain reclassifications have been made to the prior year results to conform with the current year’s presentation.
Critical Accounting Policies and Estimates
GAAP requires management to make certain estimates and assumptions, which affect amounts reported in the financial statements and accompanying notes. As such, the Company combines its actual experience with selected estimates in the preparation of its financial statements. The calculations used to estimate various components in the financial statements are necessarily complex and involve large amounts of data. Assumptions and estimates involve judgment and by their nature can be subject to revision over time.
The calculation of life insurance policy reserves is dependent upon estimates of future events. These estimates require judgments based upon the Company’s past experience and estimates and assumptions about future mortality, persistency and interest rates. At any given time, earnings variability may result from changes in actual experience such as mortality or persistency, as well as changes in estimates of future experience.
Deferred acquisition costs, principally agent commissions and other selling, selection and issue costs which vary with and are directly related to the production of insurance revenue, are capitalized as incurred and amortized over future premium payments or the expected future profits of the business, depending on the type of products. Profit expectations are based upon estimates of future interest spreads, mortality margins, operating expenses and surrender experience. These estimates involve judgment, are reviewed not less than annually and are compared to actual experience on an ongoing basis. If it is determined that the assumptions related to interest sensitive and variable products should be revised as to the profit expectations for the business, the assumptions are unlocked, or changed, with the impact of the change flowing through the current period’s earnings.
The Company maintains a diversified securities portfolio. The Company’s securities available for sale are carried at fair market value in the Company’s balance sheet. The Company receives fair values for its securities portfolio from a variety of external sources. Various measures have been taken to manage the portfolio’s credit and interest rate risks as discussed in the Company’s 2001 Annual Report to Stockholders. The Company performs a rigorous review of its securities’ fair values on an ongoing basis to determine changes in the value of the portfolio. Several factors are analyzed in evaluating these securities including an analysis of the company, its industry, valuation levels and subsequent developments. Based upon these inputs, the Company reduces its securities values when it determines that impairments, in accordance with GAAP, have occurred.
Accounting Developments
The Financial Accounting Standards Board (FASB) issued Financial Accounting Standard (FAS) No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," in April 2002. This Standard addresses an array of topics from leases to the extinguishment of debt. The Company will adopt FAS No. 145 on January 1, 2003 and it is not anticipated to have an impact on reported results.
FAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” was issued by the FASB in July 2002. This Standard addresses financial accounting and reporting for costs associated with exit or disposal activities, specifically the recognition of a liability for costs associated with these activities. FAS No. 146 addresses these activities initiated after December 31, 2002. This Standard is not anticipated to have an impact on reported results.
Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive income, which includes unrealized gains or losses on securities available for sale and unfunded pension liabilities. Comprehensive income equaled $57.9 million and $67.3 million for the nine months ended September 30, 2002 and 2001, and $24.4 million and $35.0 million for the third quarter of 2002 and 2001, respectively. For the periods presented, comprehensive income varies from net income solely due to changes in unrealized gains and losses on securities, net of applicable taxes.
Earnings Per Share
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 periods reported. The weighted average number of shares outstanding were 11,998,980 and 12,027,518 for the nine months ended September 30, 2002 and 2001, and 11,988,139 and 12,025,105 for the third quarter of 2002 and 2001, respectively.
Federal Income Taxes
Income taxes have been provided using the liability method. Under that method, deferred tax assets and liabilities are determined based on the differences between their financial reporting and their tax bases and are measured using the Federal income tax rate. The effective tax rate was 20.7 percent for this year’s nine months versus 23.6 percent last year. Actual tax rates differ from the enacted rates primarily due to tax credits received from affordable housing investments.
The Company borrows short-term funds through its membership with the Federal Home Loan Bank (FHLB) and reinvests those funds at higher rates thereby earning an interest spread on those funds. These activities also contribute significantly to the Company’s liquidity position by providing established lines of credit for borrowing and by adding high quality liquid securities that could be sold if liquidity is needed. As a member of the FHLB with a capital investment of $9.0 million, the Company has the ability to borrow up to twenty times its capital investment, or $179.7 million, from the FHLB when collateralized. As of September 30, 2002, the Company had short-term borrowings with the FHLB totaling $95.0 million with various maturities and a weighted average interest rate of 2.47 percent. These borrowings are secured by mortgage-backed securities totaling $120.5 million. Additionally, the Company has overnight Federal funds borrowings totaling $3.7 million with a daily maturity, an interest rate of 2.22 percent and secured by specific securities. The Company has a $0.7 million real estate loan due December 2010, with an interest rate of 7.50 percent, secured by the property. Finally, the Company has a $0.5 million construction loan related to an investment property due July 2003 with an interest rate of 8.00 percent. This note will be forgiven in total if certain construction terms are met by that date. Total borrowings equaled $99.9 million at quarter end.
Company operations have been classified and summarized into four reportable segments. The segments, generally classified along company lines, are based upon distribution method, product portfolio and target market. The Parent Company is divided into two segments. The Kansas City Life - Individual segment consists of sales of variable life and annuities, interest sensitive products and traditional life insurance products by an agency sales force to individuals. The Kansas City Life – Group segment consists of sales of group life, disability and dental products and administrative services only (ASO) by the Company’s agency sales force and appointed group agents. The Sunset Life segment consists of sales of interest sensitive and traditional products by an agency sales force. The Old American segment markets whole life final expense products primarily to seniors through an agency sales force.
Separate investment portfolios are maintained for each of the companies. However, investments are allocated to the group segment based upon its cash flows. Its investment income is modeled using the year of investment method. Home office functions are fully integrated for the three companies in order to maximize economies of scale. Therefore, operating expenses are allocated to the segments based upon internal cost studies, which are consistent with industry cost methodologies.
The following schedule addresses the financial performance of each of the Company's four reportable operating segments.
Kansas City Life Sunset Old
Individual Group Life American Total
(in thousands)
Insurance revenues:
Nine months: 2002 $83,478 42,022 12,555 53,093 191,148
2001 75,205 38,322 18,240 54,664 186,431
Third quarter: 2002 32,099 14,112 3,664 17,678 67,553
2001 24,522 12,421 6,277 18,138 61,358
Investment income, net:
Nine months: 2002 $108,410 307 24,263 12,228 145,208
2001 113,420 425 25,142 12,561 151,548
Third quarter: 2002 35,291 90 7,808 3,949 47,138
2001 37,360 64 8,393 4,157 49,974
Net income:
Nine months: 2002 $ 7,906 (1,521) 6,623 4,047 17,055
2001 18,083 214 5,590 5,879 29,766
Third quarter: 2002 (703) (707) 783 1,428 801
2001 4,401 (1,034) 2,877 2,538 8,782
Intersegment revenues are not material and there has been no significant change in segment assets from last year-end. The Company operates solely in the United States and no individual customer accounts for 10 percent or more of the Company’s revenue.
Under state insurance guaranty fund laws, insurance companies may be assessed up to prescribed limits for policyholder losses that result from insolvent or rehabilitated companies. Mandatory assessments may be partially recovered through a reduction of future premium taxes in some states. The Company does not believe that such assessments will be materially different from amounts already provided for in the financial statement.
A contingent liability exists with respect to reinsurance, which may become a liability of the Company in the unlikely event that the reinsurers should be unable to meet obligations assumed under existing reinsurance contracts. Reinsurers’ solvency is reviewed periodically.
In recent years, the life insurance industry, including the Company and its subsidiaries, has been subject to an increase in litigation pursued on behalf of purported classes of insurance purchasers questioning the conduct of insurers in the marketing of their products. In addition, the Company and its subsidiaries are defendants in, or subject to other claims or legal actions. Some of these claims and legal actions are in jurisdictions where juries are given substantial latitude in assessing damages, including punitive 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 other claims and legal actions, would have no material effect on the Company’s business, results of operations and financial position.
In connection with the settlement in one such suit, Sunset Life notified affected policyholders and subsequently received written claims. After providing benefits for affected claimants, the Company reassessed the remaining legal liability established in 2001 and released $2.3 million of the liability as a reduction to legal expenses during the second quarter.
The Company had open purchase commitments for the funding of $3.3 million in mortgage loans, $1.8 million in joint ventures, and $6.8 million in fixed assets.
This filing contains forward-looking statements and information that are based on management’s current expectations as of the date of this document within the meaning of the Securities Litigation Reform Act of 1995. The words “anticipate”, “believe”, estimate” and “expect”, and similar expressions, are intended to identify forward-looking statements which are subject to risks, uncertainties, assumptions and other factors that may cause the actual results of the Company to be materially different from those reflected in such forward-looking statements. Factors that could cause the Company’s future results to differ materially from expectations include:
| (1) | General economic and business conditions; | |
| (2) | Changes in interest rates; | |
| (3) | The performance of the stock market; | |
| (4) | Increased competition in the sale of insurance and annuities; | |
| (5) | Customer response to new products, distribution channels and marketing initiatives; | |
| (6) | Changes in the Federal income tax laws and regulations which may affect the relative tax advantages of some of the Company's products; | |
| (7) | Insurance regulatory changes or actions; and | |
| (8) | Ratings assigned to the Company and its subsidiaries by independent rating organizations. |
There can be no assurance that other factors not currently anticipated by management will not also materially and adversely affect the Company. The Company does not intend to update these forward-looking statements prior to its next required filing with the Securities and Exchange Commission.
Kansas City Life’s basic and diluted net income per share declined 90 percent in the third quarter to equal $.07 and 43 percent in the nine months to equal $1.42. The decline in earnings can primarily be attributed to two factors. The first factor was a significant increase in realized investment losses, which increased $4.0 million in the quarter and $10.5 million in the nine months, net of applicable taxes. The overall economy and market conditions remain challenging. Substantial realized investment losses have been experienced throughout the insurance industry. Excluding these losses, income per share declined 38 percent in the quarter and 7 percent in the nine months. The second factor was an increase in policyholder benefit ratios for the quarter and nine months.
The results for the nine months continued to benefit from two factors that occurred earlier in the year. The assumptions used to determine the amortization of deferred acquisition costs were unlocked or adjusted during the second quarter. This unlocking of assumptions reflects changes in expected future experience on certain products where experience has been better than originally anticipated. Additionally, the class action lawsuit brought against Sunset Life was settled early this year. Based upon the settlement, and after contacting affected policyholders, the adequacy of the liability for this case was reassessed and was reduced $2.3 million in the second quarter.
Premiums and contract charges rose 12 percent in the third quarter and 5 percent in the nine months. Life premiums increased 22 percent in the third quarter and 9 percent in the nine months, largely due to strong annuity sales. Accident and health premiums rose 14 percent in the third quarter and 10 percent in the nine months, principally due to increased group dental premiums. Reinsurance ceded premiums totaled $32.6 million in the nine months, a 20 percent, or $5.4 million, increase over last year. This increase reflects the reinsurance agreement Sunset Life entered into on January 1, 2002 whereby 80 percent of the mortality risk on certain of its traditional and universal life policies was ceded.
Net investment income declined 6 percent in the third quarter and 4 percent in the nine months. The portfolio’s net yield declined 56 basis points primarily due to reinvestment rates that were below the portfolio’s overall yield. Both the rise in realized investment losses and the historically low market yields reflect the difficult economy and volatile financial markets. A majority of the net realized losses incurred during the nine months were in the energy, airline and telecommunications sectors, whose difficulties have been widely publicized for the past several quarters.
Following is a table that details gross realized investment gains and losses.
Quarter ended Nine Months ended
September 30 September 30
2002 2001 2002 2001
(in thousands)
Gross gains resulting from:
Sales of securities $ 508 5,778 6,451 12,641
Securities called 1,491 30 3,215 145
Sales of real estate and joint ventures 2,563 1,118 2,563 3,843
Total gross gains 4,562 6,926 12,229 16,629
Gross losses resulting from:
Sales of securities 10,227 (4,436) (13,814) (11,967)
Adjustment in book value of securities (3,101) (4,689) (16,483) (5,646)
Securities called (372) (631) (1,073) (2,038)
Sales of real estate and joint ventures (9) (511) (213) (511)
Total gross losses 13,709 (10,267) (31,583) (20,162)
Related deferred policy acquisition costs 228 558 172 558
Net realized losses $ (8,919) (2,783) (19,182) (2,975)
The Company regularly evaluates the quality of its investment portfolio. In a diversified portfolio, there will be, from time-to-time, certain investments that suffer market price deterioration due to a wide variety of factors. To the extent that the Company believes that these fluctuations represent an other than temporary decline in value or when the Company believes that it is more likely than not that it will not receive all of its contractual cash flows from an investment made by the Company, the investment’s value is adjusted by charging off the loss against income. The Company’s analysis identified $3.1 million in other than temporary declines in value in the third quarter and $16.5 million in the nine months.
Policy benefits, as a percent of revenues excluding realized gains and losses, equaled 60.6 percent versus 59.2 percent a year ago. For the third quarter, the policy benefits ratio was 62.9 percent versus 58.8 percent in last year’s third quarter. These increased ratios reflected increased group dental claims ratios, increased sales of single premium immediate annuities in the third quarter and a slight increase or worsening in overall mortality experience. The immediate annuities, by their nature, serve to increase the policy benefits ratios since policy reserves rise nearly as much as the premiums received on this business.
Acquisition expenses, consisting of commissions, production allowances and the amortization of deferred policy acquisition costs less the capitalization of acquisition costs, rose 8 percent in the third quarter but declined 7 percent in the nine months. The decline in acquisition costs for the nine months was attributable to the unlocking of deferred acquisition cost amortization assumptions, as discussed above. Home office operating expenses rose 1 percent in the third quarter but declined 3 percent in the nine months. These expenses were impacted favorably by the reduction of the liability for the settlement of a class action lawsuit as discussed above.
The following section addresses the financial performance of each of the Company's four reportable operating segments.
Kansas City Life - Individual
Sales, in terms of new annualized premiums, increased 51 percent in the third quarter. Sales of fixed annuities more than doubled and non-variable universal life sales increased 61 percent. Partially offsetting these increases, variable universal life and annuity sales declined 37 percent. For the nine months, new annualized premiums rose 24 percent as fixed annuities and non-variable universal life sales more than doubled while variable universal life and annuity sales declined 43 percent. Variable product sales accounted for 28 percent of this segment’s total sales for the nine months, versus 61 percent a year ago. These results reflect the lagging stock market’s impact on the sales of variable products and on consumers’ current preference for more stable investment returns. This segment provided 77 percent of consolidated new annualized premiums in the nine months, virtually the same as a year ago.
Total insurance revenues for this segment, which include total premiums and contract charges on the interest sensitive and variable products, rose 31 in the quarter and 11 percent in the nine months, largely due to increased fixed annuity sales. Ceded premiums rose 7 percent in the quarter and 6 percent in the nine months.
Policy benefits rose 22 percent in the third quarter and 5 percent in the nine months. Benefits as a percent of revenues excluding realized gains and losses equaled 62.0 percent, up from 59.8 percent a year ago.
Net income for this segment declined 116 percent in the third quarter and 56 percent in the nine months. As previously mentioned, major factors in this decline were an increase in net realized investment losses, which rose from $3.4 million last year to $14.3 million this year, and increased policyholder benefit ratios. This segment provided 44 percent of consolidated insurance revenues and 46 percent of consolidated net income, versus 40 percent and 61 percent, respectively, last year.
Kansas City Life - Group
Group sales, in terms of new annualized premiums, rose 16 percent in the third quarter and 26 percent in the nine months. This segment provided 10 percent of consolidated annualized premiums in the nine months, the same as last year. Group sales were led by the dental line, which accounted for 74 percent of total group sales and increased 23 percent over last year. This increase is due in part to the addition of a new dental third-party administrator this year, as mentioned in earlier reports. Also, group life sales rose 81 percent over last year.
Group insurance revenues rose 10 percent in the nine months, largely due to growth in the dental line. This segment provided 22 percent of consolidated insurance revenues compared to 21 percent a year ago.
The Group segment experienced a $0.7 million loss in the third quarter and a $1.5 million loss in the nine months. A slight increase in the claims ratio coupled with increased commissions, reflective of the increased sales, and increased third party administration charges depressed operating results.
Sunset Life
Sunset Life’s new annualized premiums more than tripled in the third quarter as fixed annuity sales increased dramatically. Also, traditional life sales rose 10 percent. Partially offsetting these, universal life sales declined 19 percent. In the nine months, new annualized premiums rose 90 percent as fixed annuity sales more than tripled. Partially offsetting these, traditional life sales declined 27 percent and non-variable universal life sales declined 31 percent. This segment contributed 7 percent of total new annualized premiums in the nine months, versus 4 percent last year.
Total insurance revenues declined 42 percent in the third quarter and 31 percent in the nine months. However, as previously mentioned, ceded premiums increased significantly from last year due to a reinsurance agreement that Sunset Life entered into at the beginning of the year. Excluding ceded premiums, insurance revenues declined 2 percent versus last year for the nine months and 8 percent for the quarter.
Policy benefits, as a percent of revenues excluding realized gains and losses equaled 50.2 percent in the nine months, down from 53.9 percent a year ago. For the third quarter this ratio was 46.3 percent, down from 48.9 percent last year. This was primarily due to more favorable mortality experience.
Sunset Life’s net income declined 73 percent in the third quarter but rose 19 percent in the nine months. Net realized investment losses increased $2.3 million in both the third quarter and the nine months. Excluding net realized investment losses, income declined 23 percent in the third quarter and rose 44 percent in the nine months. The third quarter decline was largely due to a decrease in net investment income. As previously mentioned, results for the nine months benefited from the $2.3 million reduction in operating expenses in the second quarter related to the settlement of the class action lawsuit against Sunset Life. This segment contributed 6 percent of consolidated insurance revenues and 39 percent of consolidated net income in the nine months, versus 10 percent and 19 percent, respectively, last year.
Old American
Old American’s new annualized premiums rose 6 percent in the third quarter but declined 2 percent in the nine months. This segment contributed 6 percent of consolidated new annualized premiums in the nine months, down from 8 percent last year.
Insurance revenues declined 3 percent in both the third quarter and the nine months. Policy benefits equaled 57.7 percent of revenues excluding realized gains and losses, compared to 58.0 percent last year. For the third quarter this ratio equaled 55.7 percent, virtually identical with last year.
Net income for this segment declined 44 percent in the third quarter and 31 percent in the nine months. A large factor in this decline was an increase in net realized investment losses of $1.5 million in the third quarter and $3.0 million in the nine months. Income excluding realized investment losses, net of applicable income taxes, declined 6 percent in the third quarter but rose 2 percent for the nine months. A decline in net investment income contributed to the quarter’s decline. This segment provided 24 percent of consolidated net income and 28 percent of consolidated insurance revenues, versus 20 percent and 29 percent, respectively, last year.
Statements made in the Company’s 2001 Annual Report to Stockholders remain pertinent, as the Company’s liquidity position is materially unchanged from year-end.
Funds received from the sales, maturities and principal pay downs of investments totaled $602.1 million, a 9 percent decline from last year. Funds received from financing activities declined $22.3 million. A net increase in policyholder contract deposits was more than offset by a decline in borrowings.
The Company invests in a variety of assets including bonds, preferred stocks, mortgage-backed securities, commercial mortgage loans and real estate. Additionally, the Company borrows short-term funds as a spread strategy through its membership with the FHLB. The Company borrows from the FHLB and reinvests those funds at higher rates, thereby earning an interest spread on those funds. These activities also contribute significantly to the Company’s liquidity position by providing established lines of credit for borrowing and by adding high quality liquid securities that could be sold if liquidity is needed. At September 30, 2002, the Company had short-term borrowings with the FHLB totaling $95.0 million and total borrowings from all sources of $99.9 million.
The Company believes that the current level of cash, securities available for sale, and short-term investments in combination with net cash from operations will be adequate to cover its near-term cash obligations. Asset and liability maturities and yields are monitored as an important consideration for each type of insurance product. The Company, as an ongoing matter, monitors benefit and expense projections of future cash requirements. As part of this process, the Company performs cash flow testing under a variety of scenarios to ensure funds will be available as needed to meet current and future policyholder obligations. The Company’s investment strategy is developed with these needs and requirements in mind. Additionally, the Company takes these matters into account as it develops and designs new products and as it enhances its existing product portfolio. There can be no assurances, however, that future experiences will be similar to historical experience due to factors such as the interest rate environment.
Funds available for investment generated from variable products are segregated into separate accounts and do not generate investment income for the Company. At September 30, 2002, separate accounts and other investments generated by variable products totaled $283.4 million, a 17 percent decline from year-end 2001.
Stockholders’ equity increased $46.8 million as the accumulated other comprehensive income rose $40.9 million from year-end, due to an increase in net unrealized gains associated with securities. Book value per share equaled $51.08, a 9 percent increase from year-end.
Consolidated insurance in force totaled $26.6 billion, in line with year-end 2001.
During the nine months, the Company did not purchase any of its shares under the stock repurchase program. Under this program, the Company may purchase up to one million shares on the open market during 2002.
The Board of Directors declared a quarterly dividend of $.27 per share, unchanged from last year.
Current legislative activities are not expected to have a significant impact on the ongoing operations of the Company.
Statements made in the 2001 Annual Report to Stockholders regarding the market and interest rate risk analysis remain pertinent.
Kansas City Life holds a diversified portfolio of investments that includes cash, bonds, preferred stocks, mortgage-backed securities, commercial mortgages and real estate. Each of these investments is subject, in varying degree, to market risks that can affect their ability to earn a competitive return and the return affects their fair value. Thus the primary market risks affecting the Company are interest rate and credit risks.
Interest rate risk arises from the price sensitivity of fixed income securities to changes in interest rates. Coupon and dividend income represents the greatest portion of an investment’s total return for most fixed income instruments. As interest rates fall, the coupon and dividend streams of older, higher-paying investments become relatively more valuable than newer, lower-yielding opportunities. Therefore the market value of the older, high-paying investments increases. The opposite effect occurs when interest rates rise. The changes in fair market price of such investments are inversely related to changes in market interest rates.
The majority of the Company’s investments are exposed to varying degrees of credit risk - the risk that the value of the investment may decline due to deterioration in the financial strength of the issuer, and that the timely payment of principal or interest might not occur.
Over the past three years, credit defaults in the marketplace have increased significantly. The increase in the default rate may be attributed to several factors, including the economic slowdown experienced by the U.S. economy, the increased use of leverage by corporate issuers, fraud, and adverse legal judgments against corporations, among others. A default by a rated issuer usually involves some loss of principal to the investor. Such loss can be mitigated by timely sales of affected securities or by active involvement in a restructuring process, which preserves the value of the underlying entity. However, there can be no assurance that the efforts of an investor will lead to favorable outcomes in a bankruptcy or restructuring. The Company mitigates this risk by diversifying the investment portfolio across a broad range of issuers, investment sectors and security types and by investing substantial amounts of the portfolio in instruments carrying a security lien against tangible asset collateral. Pledged collateral that retains its value increases bondholder recovery amounts in the case of bankruptcy or restructuring.
As market interest rates fluctuate, so will the Company’s investment portfolio and its stockholders’ equity. At September 30, 2002, the Company had a net unrealized investment gain of $16.7 million, net of related taxes and deferred policy acquisition costs, compared to a $24.1 million net unrealized loss reported at year-end 2001. This increase is primarily the result of changes in the term structure of interest rates, volatility in credit spreads within the corporate bond market, and the realization of losses on certain securities. The Company continues its practice of the limited use of derivatives as a form of risk mitigation.
The Company markets certain variable products. The policyholder assumes essentially all the investment earnings risk for the portion of the account balance invested in the separate accounts. However, the Company assesses certain charges based on the policy account values and changes to the account values can affect the Company’s earnings. The portion of the policyholder’s account balance invested in the fixed general account, if any, is affected by the spreads between interest yields on investments and rates credited to the policyholder’s accounts.
Based on their evaluation, as of a date within 90 days of the filing of this Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded the Company’s disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934) are effective. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
In recent years, the life insurance industry, including the Company and its subsidiaries, has been subject to an increase in litigation pursued on behalf of purported classes of insurance purchasers questioning the conduct of insurers in the marketing of their products.
In the previously reported case of Wilner v. Sunset Life Insurance Company, Dean Delevie, et al, Case No. SC051573, the Superior Court of the State of California, County of Los Angeles, on February 28, 2002 approved a settlement of a nation-wide class action lawsuit focusing on universal life sales practices by Sunset Life. The Superior Court’s approval of the settlement has now become final. With certain limited exceptions, the class that is bound by the terms of the settlement includes persons and entities who at any time during the class period (January 1, 1982 through December 31, 2001) had an ownership interest in one or more of Sunset Life’s universal life policies during the class period. In order to obtain relief under the settlement, members of the Settlement Class were required to file a Claim Form postmarked or received by the Claims Administrator before April 29, 2002. Based upon settlement results in the second quarter, management was of the opinion that the reserve established for this settlement in 2001 was more than adequate to discharge all of Sunset’s obligations arising out of this matter and released $2.3 million from the reserve. Management has reviewed the reserve at the end of the third quarter and found it to be adequate.
There has been no material change in the posture or status of any other litigation previously reported by the Company as an ongoing or active case.
In addition to the above, the Company and its subsidiaries are defendants in, or subject to other claims or legal actions. Some of these claims and legal actions are in jurisdictions where juries are given substantial latitude in assessing damages, including punitive 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 other claims and legal actions, would have no material effect on the Company’s business, results of operations and financial position.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/R. Philip Bixby R. Philip Bixby President, CEO and Vice Chairman of the Board /s/Tracy W. Knapp Tracy W. Knapp Senior Vice President, Finance and CFO
Date: November 8, 2002
KANSAS CITY LIFE INSURANCE COMPANY
SECTION 906 CERTIFICATION
Third Quarter 2002
The undersigned certify that the registrant’s Form 10-Q report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d) and that information contained in the report fairly represents, in all material respects, the financial condition and results of operations of the registrant.
/s/R. Philip Bixby R. Philip Bixby President, CEO and Vice Chairman of the Board /s/Tracy W. Knapp Tracy W. Knapp Senior Vice President, Finance and CFO
Date: November 8, 2002
KANSAS CITY LIFE INSURANCE COMPANY
SECTION 906 CERTIFICATION
Third Quarter 2002
I, R. Philip Bixby, President, CEO and Vice Chairman of the Board of Kansas City Life Insurance Company, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Kansas City Life Insurance Company; |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
| 4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, and including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | |
| b) | evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and | |
| c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: |
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and | |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and |
| 6. | The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
/s/R. Philip Bixby R. Philip Bixby President, CEO and Vice Chairman of the Board
Date: November 8, 2002
KANSAS CITY LIFE INSURANCE COMPANY
SECTION 906 CERTIFICATION
Third Quarter 2002
I, Tracy W. Knapp, Senior Vice President, Finance and CFO of Kansas City Life Insurance Company, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Kansas City Life Insurance Company; |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
| 4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, and including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | |
| b) | evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and | |
| c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: |
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and | |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and |
| 6. | The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
/s/Tracy W. Knapp Tracy W. Knapp Senior Vice President, Finance and CFO
Date: November 8, 2002