SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) of the
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal year ended December 31, 1995
Commission File Number 0-1999
KENTUCKY INVESTORS, INC.
(Exact name of registrant as specified in Charter)
KENTUCKY 61-6030333
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification Number)
200 Capital Avenue, Frankfort, Kentucky 40601
(Address of Principal Executive Offices)
Registrant's telephone number, including area code 502 223-2361
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common $1 Par Value
Name of Each Exchange on Which Registered
NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
Common Capital Stock Par Value $1.00 Per Share
(Title of Class)
Indicate by check mark whether the registrant (l) 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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this form 10-K
or any amendment to this Form 10-K. (X)
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant $5,365,211.25 as of December 31, 1995.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class
Common Capital Stock
Outstanding at December 31, 1995
811,128
Documents Incorporated by Reference:
(1) Portions of the Annual Report to the Stockholders for the year ended
December 31, 1995 (Form 10-K, Items 1, 5a, 6, 7 and 8)
(2) Portions of the Proxy Statement dated April 19, 1996, for the Annual
Meeting of Stockholders to be held May 9,1996 (Form 10-K, Items 10, 11, 12 and
13.)
PART I
Item 1. Business
(a) General
(a) The business of the Company is the holder of the majority interest
in a life insurance company, and total interest in a printing company and an
insurance marketing company which was formed in 1994. The home office of the
Company, the insurance subsidiary, the printing subsidiary and the marketing
subsidiary are located at 200 Capital Avenue, Frankfort, Kentucky 40601. The
telephone number is (502) 223-2361. Kentucky Investors, Inc., now owns 73% of
Investors Heritage Life Insurance Company, Frankfort, Kentucky ("IHL" or the
"Insurance Subsidiary") and 100% of Investors Heritage Printing, Inc. ("IHP")
and Investors Heritage Financial Services Group, Inc. ("FSG"). IHP and FSG are
collectively hereinafter referred to as the "Non-insurance Subsidiaries". IHL,
IHP and FSG are collectively hereinafter referred to as the "Subsidiaries". IHL
owns 96% of Investors Underwriters, Inc., an investment holding company. While
the Company continues to expand the Non-insurance Subsidiaries, less than 1% of
the Company's total operations were generated by the Non-insurance Subsidiaries
for the year ended December 31, 1995. The Non-insurance Subsidiaries' total
assets and stockholder equity comprised less than 1% in the aggregate of the
Company's reported total assets and stockholder equity as of December 31, 1995.
Due to the fact that IHL was not a direct writer of Credit Insurance
products during 1995, the Company formed FSG, a wholly-owned marketing company
which marketed and will continue to market a variety of products to financial
institutions for a number of other unaffiliated companies as well as IHL. As
anticipated more than 10% of FSG's revenues during 1995 were derived from
Franklin Life Insurance Company, Springfield, Illinois, ("Franklin") from the
sale of Franklin's Credit Insurance products.
IHL
The business segments of the Insurance Subsidiary are identified and
discussed on page 45 & 46 of the Annual Report to Stockholders for the year
ended December 31, 1995 and are incorporated herein by reference. A portfolio of
the standard forms of participating, non-participating, whole life, limited pay,
endowments, split-funding, interest-sensitive whole life, guaranteed issue whole
life, universal life, term and group life are offered by IHL. In addition, IHL
has historically written credit life and credit accident and health insurance
(respectively, "Credit Life" and "Credit A&H", and collectively "Credit
Insurance") on a group basis; and during 1995, IHL began phasing out of the
Credit Insurance market as a direct writer and experienced insignificant
production (less than $500,000) from the Credit Insurance products.
Ordinary Life. Ordinary Life sales are under the direct supervision of
the home office using a regionally supervised agency system. The method of
field operation involves independent contractual agents working with district
and regional managers. These managers contract with and train agents who work
under them. The regional managers may have several district managers under
their supervision.
IHL also sells business through general agents or brokers who may
represent one or more companies.
Approximately 37% of total insurance in force is Ordinary life.
As stated above, the Ordinary Life sales are built around a standard
portfolio of life insurance policies with some of the major contributions to in-
force business being a participating ordinary life insurance policy, a
guaranteed issue whole life policy and non-participating life policies.
Some of the participating policies provide for payment of guaranteed
annual endowments of fixed amounts beginning at the end of the second policy
year and continuing through the premium paying period. These policies also have
an annual guaranteed benefit. As of December 31, 1995, 12% of the total
ordinary insurance in force was comprised of participating policies and of the
12%, approximately 7% was comprised of participating policies with some
guaranteed benefit.
Another block of participating policies provides for payment of a
dividend which will purchase additional insurance equal to 5% of the previous
year's total death benefit, including any additional insurance purchased in
prior years. The dividend is not guaranteed. As of December 31, 1995, 5% of
the total ordinary insurance in force was comprised of participating policies
with non-guaranteed benefits.
Non-participating life insurance policies represented 88% of the total
ordinary insurance in force.
Four different guaranteed issue whole life policies were sold through
1993. Each has a policy limit of $10,000 face amount, with graded death
benefits during the first two policy years. Two of the policies are non-
participating with non-guaranteed increases in the death benefit and two of the
policies are participating.
IHL also issues two non-participating interest-sensitive single premium
whole life policies based on simplified underwriting. These policies provide
for payment of the full face amount at the death of the insured and for
increasing death benefits on a non-guaranteed basis.
During 1994, IHL introduced new products designed for the pre-arranged
funeral market. These products are single premium and modal premium non-
participating whole life policies. Single premium policies are sold on a
guaranteed issue basis and modal premium policies are fully underwritten. Both
single and modal premium policies provide for non-guaranteed increasing death
benefits and have a maximum face amount of $25,000. IHL also introduced a new
mortgage protection product which is being marketed by Financial Services Group.
Although it was anticipated that during 1995 IHL would introduce group
products designed for the pre-arranged funeral market, those products are still
in the design phase and were not introduced.
Credit Insurance. Credit Insurance is generally sold through banks,
finance companies and automobile dealerships and is offered in connection with
the extension of credit by financial institutions. The amount of the insurance
is designed to cover the amount of the loan with the financial institution being
the beneficiary of the insurance policy to the extent of the unpaid balance of
the loan. Credit Insurance production is dependent on consumer debt. In times
of low unemployment, reasonable interest rates and a steadily improving economy,
consumer debt increases; therefore, Credit Insurance sales increase. When the
economy slows, consumer debt slows and therefore Credit Insurance sales
decrease.
During the fourth quarter of 1994, IHL began exiting this market as a
direct writer and premium production from Credit Insurance during 1995 was less
than $500,000, as anticipated. IHL continued to provide the administration of
the Credit Insurance operations. FSG entered into a marketing agreement with
Franklin to market Franklin's Credit Insurance products during 1995.
During the fourth quarter of 1995, IHL and FSG were advised that Franklin
Life was exiting the Commonwealth of Kentucky as a direct writer of Credit
Insurance products. FSG immediately began negotiating with a number of
unaffiliated insurance companies to market Credit Insurance products for them.
Simultaneously, FSG initiated discussions with unaffiliated companies regarding
a transaction where the Credit Insurance business would be written by IHL and
all of the risk insured would be immediately reinsured to the unaffiliated
company. A reinsurance transaction was viewed favorably because IHL would be
able to generate an alternative source of income through fees from
administration and claims processing of Credit Insurance. In addition, FSG
would be able to generate revenues in the form of commissions from the sale of
IHL's Credit Insurance products.
In December, 1995, IHL entered into a reinsurance agreement with The
Connecticut General Life Insurance Company, Bloomfield, Connecticut
("Connecticut General") under the terms of which IHL will cede to Connecticut
General 100% of the risk on all Credit Insurance policies sold by IHL. In
addition to receiving a retention fee, IHL will also receive a fee for
administration and claims processing services. Other than adding one to three
employees, no additional amounts are anticipated to be required to be expended
in order to put IHL's administrative capabilities to use. Employees will be
added only when warranted.
It was and continues to be management's belief that the number of Credit
Insurance providers in the Commonwealth of Kentucky is contracting as a result
of two Kentucky domestic insurers exiting the Credit Insurance market.
Management believed there would be opportunities to administer Credit Insurance
business in Kentucky for non-domestic insurers that are expected to replace
exiting insurers. This belief has come to fruition in an alternate way through
the reinsurance agreement with Connecticut General. IHL will continue to seek
contracts to operate as an administrator for other companies which sell Credit
Insurance.
FSG will call on banks, finance companies and selected automobile
dealerships to market the Credit Insurance products for IHL. It is anticipated
that more than 10% of FSG's revenues for 1996 will be derived from the sale of
IHL's Credit Insurance products. IHL anticipates 1996 Credit Insurance gross
written premiums to exceed $10 million; however, as described above, that
business will be ceded to Connecticut General. Approximately 9% of the total
life insurance in force is Credit Insurance, all of which was written directly
by IHL.
In addition to selling Credit Insurance, some IHL bank agents obtain an
ordinary life license enabling them to sell mortgage insurance that might be
required in excess of the statutory credit life limitation enacted by each state
where our Credit Insurance products are sold. The mortgage insurance sales
operations will continue to be conducted through FSG.
Group Life. Group life accounts for the remaining 54% of in-force
business.
Since 1990, IHL has participated in the Federal Employee Group Life
Insurance (FEGLI) Program, which is administered by Metropolitan Life Insurance
Company. As a result of the termination of the Commonwealth of Kentucky group
life contract, on November 30, 1992, IHL's participation in the FEGLI Program
was substantially decreased during 1993 and 1994. The reduction from 1992 to
1993 was $195,690,000 to $721,775,000 and from 1993 to 1994 the reduction was
$53,011,000 to $668,764,000. From 1994 to 1995 the reduction was $34,106,000 to
$634,658,000.
Principal Markets. The principal markets for IHL's products are in the
Commonwealths of Kentucky and Virginia, and the States of North Carolina, South
Carolina, Ohio, Indiana, Florida, Tennessee, Illinois, Kansas, West Virginia and
Texas. IHL has licensed ordinary agents and regional managers throughout these
states and credit life agents in over 75 banks and automobile dealerships.
IHL is also licensed in sixteen other states: Georgia, Alabama,
Arkansas, Mississippi, and Louisiana in the South and Southeast; Colorado,
Missouri, New Mexico, North Dakota, South Dakota, Oklahoma, Montana, Nebraska,
Arizona and Utah in the West; and Michigan in the North. The business in these
states is written mostly through general agents.
Risk. IHL in many cases requires evidence of insurability before issuing
individual life policies including, in some cases, a medical examination or a
statement by an attending physician. Home office underwriters review the
evidence of insurability required and approve the issuance of the policy in
accordance with the application if the risk is acceptable. Some applicants who
are substandard risks are rejected, but many are offered policies with higher
premiums, restricted coverages or reduced benefits during the first two policy
years. The majority of the single premium business is written through the
prearranged funeral market without evidence of insurability, relying on
safeguards such as product design, limits on the amount of coverage, and
premiums which recognize the resultant higher level of claims.
Risk is integral to insurance but, as is customary in the insurance
business, IHL obtains reinsurance with respect to amounts in excess of its
retention limits. The maximum limit of retention by IHL on its standard
contract for any one life was $100,000 plus the amount of the return of premium
benefits, if any. The maximum is reduced for sub-standard classes of risk. The
maximum retention on Credit Life is also $100,000 per life. Excess coverages
are reinsured externally. As of December 31, 1995, approximately $180,265,000,
or 8% of total life insurance in force was reinsured with non-affiliated well
established insurance companies. IHL would become liable for the reinsured
risks if the reinsurers could not meet their obligations.
IHL is party to a number of reinsurance and coinsurance agreements with
non-affiliated companies. Approximately $180,265,000 of insurance in force for
IHL was reinsured with seventeen companies. The reinsurers for IHL and amounts
of insurance in force that are reinsured are as follows:
Company Reinsurance Amount Percent of Total
Crown Life Insurance Co. $53,359,000 29.6%
The Lincoln National Life Ins. Co.75,440,000 41.9%
J.M. Limited 17,703,000 9.8%
LNB Life Insurance Co. 4,948,000 2.8%
AEtna Life Insurance Co. 2,252,000 1.2%
Indiana-Kentucky Ins. Co. Ltd. 3,552,000 2.0%
Riverside Reinsurance Ltd. 4,807,000 2.7%
Pirtle Ltd. 2,860,000 1.6%
Lancaster Life Insurance Co. 4,012,000 2.2%
Business Men's Assurance Co. 4,139,000 2.3%
North American Reinsurance Co. 2,625,000 1.5%
Groves Reinsurance Ltd. 1,811,000 1.0%
Munich American Reinsurance Co. 1,865,000 1.0%
Other Companies (4) 856,000 .4%
TOTAL $180,265,000 100.0%
AEtna and Crown Life reinsured Credit Life and Credit A&H policies sold between
July 1, 1988 and June 30, 1992. These reinsurance agreements were terminated
with respect to new issues by IHL during 1991 and 1992, respectively. Neither
reinsurer accepted the risk on any new policies issued after the termination
date of each agreement. However, both AEtna and Crown Life continue to provide
reinsurance on all Credit Insurance policies sold prior to March 16, 1991
(AEtna) and June 30, 1992 (Crown Life). During 1996, IHL will reinsure all of
the risk on the Credit Insurance policies sold by its agents to Connecticut
General.
IHL has not experienced a reinsurer default under any of the reinsurance
agreements to which IHL is a party. Further, IHL has no knowledge of and does
not anticipate any material default in any existing reinsurance obligation.
Regulation of Insurance. The business of IHL is subject to regulation
and supervision by the insurance regulatory authority of each state in which IHL
is licensed to do business. Such regulators grant licenses to transact
business; regulate trade practices; approve policy forms; license agents;
approve certain premium rates; establish minimum reserve and loss ratio
requirements; review form and content of required financial statements;
prescribe types and amounts of investments permitted; and assure that capital,
surplus and solvency requirements are met. Insurance companies can also be
required under the solvency or guaranty laws of most states in which they do
business to pay assessments up to prescribed limits to fund policyholder losses
or liabilities of insolvent insurance companies. They are also required to file
detailed annual reports with supervisory agencies, and records of their business
are subject to examination at any time. Under the rules of the National
Association of Insurance Commissioners (the "NAIC"), a self-regulatory
organization of state insurance commissioners, insurance companies are examined
periodically by one or more of the regulatory authorities.
Domiciled in the Commonwealth of Kentucky, IHL is licensed by the
Kentucky Department of Insurance and is subject to its examination and
regulations. The quadrennial audit was completed during 1990 for the four years
ending December 31, 1989. IHL received an excellent report. IHL received its
most recent quadrennial examination during 1995. IHL anticipates conclusion on
or before the end of the second quarter of 1996. The examination will cover the
five year period ending December 31, 1994. Kentucky law now requires an
examination every three years; therefore it is anticipated that IHL's next
examination will commence during 1998 for the three years ending December 31,
1997.
In December of 1992, the NAIC adopted a "Risk Based Capital for Life
and/or Health Insurers Model Act" (the "Model Act") which was designed to
identify inadequately capitalized life and health insurers. The Model Act
defines two key measures: (i) adjusted capital, which equals an insurer's
statutory capital and surplus plus its asset valuation reserve, plus one-half
its liability for policyholder dividends ("Adjusted Capital") and (ii)
authorized control level risk based capital ("RBC"). RBC is determined by a
complex formula which is intended to take into account the various risks assumed
by an insurer. Should an insurer's Adjusted Capital fall below certain
prescribed levels (defined in terms of its RBC), the Model Act provides for the
following four different levels of regulatory attention:
"Company Action Level:" This level of review is triggered if an
insurer's Adjusted Capital is less than 200 percent of its RBC. The insurer is
required to submit a plan to the appropriate regulatory authority that discusses
proposed corrective action. IHL's Adjusted Capital is more than 3.2 times the
required amount.
"Regulatory Action Level": This level of review is triggered if an
insurer's Adjusted Capital is less than 150% of its RBC. The regulatory
authority formally requires the insurer to submit an RBC plan, and performs a
special examination of the insurer and issues an order specifying corrective
actions. IHL's Adjusted Capital is more than 4.2 times the required amount.
"Authorized Control Level": This level of review is triggered if an
insurer's Adjusted Capital is less than 100% of its RBC. The regulatory
authority is authorized to take whatever action it deems necessary. IHL's
Adjusted Capital is more than 6.4 times the required amount.
"Mandatory Control Level": This level of review is triggered if an
insurer's Adjusted Capital falls below 70% of its RBC. The regulatory authority
is required to place the insurer under its control. IHL's Adjusted Capital is
more than 9.1 times the amount required.
Since the Adjusted Capital levels of IHL currently exceed all of the
regulatory action levels as defined by the NAIC's Model Act, the Model Act
currently has no impact on the Company's operations or financial condition.
Competition. The life insurance business is highly competitive. With
the introduction of universal life and other interest sensitive products in
recent years, competition with other financial institutions has increased. The
industry includes both stock and mutual companies, including some of the largest
financial institutions in the United States. While the business is responsive
to the current economic environment, changes are not quite so volatile, and
there are indications that, except for Credit Life, the life insurance market is
stable, even in times of stress for other companies.
IHL differentiates itself through its marketing techniques, product
features, customer service and reputation. IHL maintains its competitive
position by its focus on areas which have historically proven profitable. Those
areas include single premium pre-need products, modal premium final expense
products, traditional whole life products, mortgage protection products and
level term products. IHL's competitive position is maintained by its ability to
provide quality customer service throughout the distribution system. Other
competitive strengths include IHL's asset/liability management system, a quality
investment portfolio which provides liquidity and IHL's non-leveraged financial
position.
The business of IHL is not seasonal.
Dividend income from the Insurance Subsidiary for 1995 amounted to
approximately $503,988.Other Subsidiaries. IHP does job printing for IHL as
well as numerous unaffiliated sources. This includes the printing of the
application forms and other office forms required by IHL.
While the income from IHP is not a significant factor in the Company's
overall business, a number of significant changes were made during 1994 and the
Company experienced continued growth and improved profitability for IHP during
1995. However, revenues from IHP continue to be less than one percent of the
Company's total revenue for 1995.
As anticipated the formation and operation of FSG generated additional
revenue to the Company. Although this additional revenue is not a significant
factor in the Company's overall business, FSG experienced growth in its first
year of operations with revenues of $171,000. Even considering this growth,
revenues from FSG will continue to account for less than one percent of the
Company's total revenue for 1996.
Additionally, the Company earns fees for other services performed for
the
Insurance Subsidiary. The fees are paid by the Insurance Subsidiary for the
necessary supervision and coordination required to provide a common policy for
all the companies. The supervision results in a coordination of contracts with
the various independent agents, common sales brochures, and a savings to each
company in the area of printing and purchasing. The Company purchases blanket
fidelity bonds to include employees of all subsidiary companies at a savings
when compared to purchase by individual companies. The group life,
hospitalization, and the retirement programs for the various companies are also
administered by the Company. These fees are not significant to the Company's
total revenue. The Company also has revenue from other investments, but it is
not a significant factor in its business.
(b) Material Changes and Developments
With the exception of the formation of FSG, there were no material
changes in the Company's holdings during the year 1995. While changes in the
life insurance business are not as dramatic as in other forms of business, new
product development and innovative sales methods must be ongoing to meet the
current economic times. IHL, however, believes that growth from increased sales
is directly related to the constant attention paid to revising and selling the
products developed by IHL.
Ordinary Production. IHL is working diligently to increase ordinary
product sales. The largest increase in this area has been the final expense and
prearranged funeral sales. Final expense sales include the sale of lower face
amount ordinary life insurance products, the purpose of which is to pay the
insured's final expenses. Prearranged funeral sales includes the sale of modal
premium and single premium ordinary life policies which are sold to fund a
specific prearranged funeral contract.
IHL expanded its marketing capability for this market through the 1993
acquisition of marketing assets and agents from Legacy One, Inc., a former
independent marketing agent for IHL. As a result, IHL steadily increased sales
during 1993 and 1994. The actual increase in 1994 over 1993 in overall ordinary
premium production was approximately 21%, significantly higher than the 10-12%
increase anticipated by management. IHL is continuing to increase its marketing
operations and to expand into new states, including but not limited to,
Tennessee, Indiana, Illinois, Kansas and South Carolina. With the introduction
of several new products and expansion into new states, IHL experienced continued
growth in premium production of 11 percent in the prearranged funeral market
during 1995, as anticipated, and anticipates growth in premium production in
this market of 10-12 percent during 1996.
Credit Insurance. From 1988 to 1991, IHL substantially increased sales
of Credit Insurance to $37 million and reinsured substantial portions of the
Credit Life and Credit A&H business with AEtna and Crown Life. However, during
1992 IHL decreased Credit Insurance production to the pre-1988 annual premium
levels of $8-10 million. As a result of the anticipated decrease in production,
the reinsurance agreement with Crown Life was terminated effective for policies
written after June 30, 1992, as set forth above. See "Business-Risk". Desired
levels of Credit Insurance production were reached in 1993 and 1994.
Throughout 1994, IHL continued to closely monitor Credit Life and Credit
A&H claims and make adjustments in the claims administration process. Claim
ratios on Credit A&H have stabilized. IHL will continue to closely monitor the
claims paying process to make certain that proper payments are being made in
accordance with the policy.
IHL's Credit Insurance operation continued to be strong throughout 1994
in financial institutions and with a selected number of automobile dealers
participating in either a reinsurance program or IHL's commission structure.
However, during 1994 IHL decided to exit the Credit Insurance market as a direct
writer during 1995. The driving factor behind this decision was the desire of
IHL's Board of Directors and management to improve and strengthen IHL's surplus
and profitability. Historically, the Credit A&H line has not been a profitable
segment of the Company's business; however, when balanced with the Credit Life
line, acceptable profit margins were achieved. Since 1991, the profitability of
the lines diminished due to increased losses on the Credit A&H line and
shrinking profit margins on the Credit Life line. Therefore, since other lines
of business have been and continue to show strong growth and profits, and the
continued sale of Credit A&H inhibits growth of the Company's surplus and the
full realization of profits from other lines of business, management and the
Board of Directors determined that it was in the best interest of the Company
and its stockholders to discontinue as a direct writer of Credit Life and Credit
A&H.
Realizing the significant contribution of our financial marketing group,
which was successful in increasing IHL's Credit Insurance production to record
levels during the late 1980's and early 1990's, and realizing the significant
relationship our employees have developed with the financial institutions in the
Commonwealth of Kentucky, the Company formed FSG. During 1995 FSG was
responsible for marketing a myriad of products for unaffiliated companies to
financial institutions including Credit Life and Credit A&H (Franklin),
Individual Disability (Illinois Mutual Life and Casualty Company), Involuntary
Unemployment Insurance (Vesta Fire Insurance Corp.), and GAP, which covers the
excess of the loan amount over the value of the collateral if the collateral is
a total loss (General Electric Capital Assurance Company). IHL was not a
direct writer of any of these products during 1995. FSG also marketed IHL's
mortgage protection products, and IHL experienced growth of approximately 3-5
percent in this segment of its business due to the marketing efforts of FSG, as
anticipated. IHL's management anticipates steady growth in this segment during
1996 due to FSG's efforts.
During the fourth quarter of 1995, FSG and IHL were advised that
Franklin
was exiting the Commonwealth of Kentucky as a direct writer of Credit Insurance
products. FSG immediately began negotiating with a number of unaffiliated
insurance companies to market Credit insurance products for them. In addition,
FSG initiated discussions with unaffiliated companies whereby the Credit
Insurance policies would be written by IHL and all of the risk would be
immediately reinsured to the unaffiliated company.
Under a reinsurance arrangement, IHL would generate alternative revenues
from retention fees and fees for administration and claims processing.
Additionally, FSG would continue to generate revenues in the form of
commissions. Therefore, in December 1995 IHL entered into a reinsurance
agreement with Connecticut General under the terms of which all of the risk on
all Credit Insurance policies sold by IHL would be reinsured with Connecticut
General.
The decision to reenter the Credit Insurance market as a direct writer
required careful consideration of the decision to exit the market during 1995.
The driving factors behind the decision to reenter were the ability to structure
the reinsurance transaction with a highly rated insurance company, the ability
to protect, improve and strengthen IHL's surplus and profitability, the ability
to utilize our Credit Insurance administration and claims processing
capabilities and the ability to generate alternative sources of revenue for
IHL.
The structure of the reinsurance agreement with Connecticut General accomplishes
each of these goals and FSG has been successful in retaining the majority of the
Credit Insurance agency accounts and has successfully recruited another
unaffiliated agency which is anticipated to more than double overall gross
written Credit Insurance premiums and will therefore further enhance FSG's
revenues.
Employees. The Company does not have any employees. The Company's
officers perform various functions described in item 9(a) above; however, they
are not paid a salary by the Company for performing such functions. The number
of persons employed by IHL is 113. The number of active independent contractual
agents of IHL is 2,344. Management of IHL considers its relationship with the
employees and agents to be satisfactory.
Item 2. Properties
The Company owns no real estate, but the Company and the printing company
rent office space from IHL. The total rental fee is $883 per month. The
printing equipment and machines in the print shop, owned by the printing
subsidiary have a net book value of $57,254.
Item 3. Legal Proceedings
There are no legal proceedings to which the Registrant is a party.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Matters
(a) The information relative to the market value of the Company's stock
appears on the inside back cover in the Annual Report to the Stockholders for
the year ended December 31, 1995, and is incorporated herein by reference.
(b) Approximate Number of Equity Security Holders
(A) (B)
Number of Holders
Title of Class of Record 12-31-95
Common Stock 2,593
(c) Dividends
Kentucky Investors, Inc., paid dividends totaling $440,800 to
stockholders in 1995 representing a $.38 per share. The 1996 cash dividend to
be paid April 12, 1996, to stockholders of record March 29, 1996 is $.38 per
share.
Item 6. Selected Financial Data
Selected financial data for the past five years appears on page 28 in the
Annual Report to the Stockholders for the year ended December 31, 1995, and is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of financial condition and results
of operations appears on pages 9-21 in the Annual Report to the Stockholders for
the year ended December 31, 1995, and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The financial statements and notes appear on page 24-27 and 34-46 in the
Annual Report to Stockholders for the year ended December 31, 1995 and are
incorporated herein by reference. See Part IV, Item 14.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) The Executive officers and directors of the Company are:
Name, Position & Year Family
Became Officer/Director Age Relationship
Harry Lee Waterfield II 52
Chairman of the Board,
President/1963
Jimmy R. McIver 44
Treasurer/1988
Nancy W. Walton 56 Sister of
First Vice Harry Lee
President/ 1988 Waterfield II
Robert M. Hardy, Jr. 38 Nephew of
Director, General Harry Lee
Counsel/ 1988 Waterfield II
Howard L. Graham 61
Vice President
Corporate Services
1989
Wilma Yeary 64
Secretary/ 1989
Jane S. Jackson 41
Asst. Secretary
1989
Helen S. Wagner 59
Director/ 1986
Gordon Duke 50
Director/ 1991
H. Glenn Doran 70
Director/ 1963
Jerry F. Howell 82
Director/ 1963
Jerry F. Howell, Jr. 54 Son of Jerry
Director/ 1983 F. Howell
David W. Reed 42
Director/ 1982
Warner Hines 68
Director/ 1963
(b) Each of the Directors has occupied the position indicated for a
period of more than five years except Mr. Duke who was elected to the Board in
May, 1991 to fill the unexpired term of Mr. Ralph Mills who retired due to
health reasons. Information regarding the business experience of the Directors
who are not officers of the Company is shown on pages 3 and 4 of the Proxy
Statement of the Annual Meeting of Shareholders to be held on May 9, 1996, and
is incorporated herein by reference.
There have been no events under any bankruptcy act, no criminal
proceedings and no judgments or injunctions material to the evaluation of the
ability and integrity of any Director or Executive Officer during the past five
years.
Officers are appointed annually by the Board of Directors at the Board
meeting immediately following the Annual Meeting of Shareholders. There are no
arrangements or any understandings between any officer and any other person
pursuant to which the office was selected.
Item 11. Executive Compensation and Transactions
Information regarding compensation of executive officers and transactions
with executive officers and directors is not restated in this Annual Report
because the response to this item is shown on page 5 of the Proxy Statement for
the Annual Meeting of Shareholders to be held May 9, 1996 and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security ownership by Officers Directors, and management, is not restated
in this Form 10-K because the response to this item is shown on pages 2, 3 & 4
of the Proxy Statement for the Annual Meeting of Stockholders to be held May 9,
1996, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Certain relationships and related transactions are shown on the last page
of the Proxy Statement for the Annual Meeting of Stockholders to be held May 9,
1996, under the heading "Certain Relationships and Related Transactions" and
are incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)1. Financial Statements incorporated herein by reference in Item 8 to
the Company's Annual Report to Stockholders for the year ended December 31, 1995
(pages 24-27 and 34-46) filed as Exhibit 1:
Consolidated Balance Sheets -- December 31, 1995 and 1994
For the years ended December 31, 1995, 1994 and 1993:
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flow
Notes to Consolidated Financial Statements
(a)2. Financial Statement Schedule
Schedule II -- Condensed Financial Information of Registrant
The financial statements and schedules of Investors Heritage Life
Insurance Company, as incorporated by reference in its Annual Report on Form 10-
K filed with the Securities & Exchange Commission for the year ended December
31, 1995, are incorporated herein by reference.
All other schedules have been omitted as not applicable, not required, or
the required information has been included in the financial statements, notes
thereto, or are incorporated herein by reference to the Annual Report on Form
10-K of Investors Heritage Life Insurance Company for the year ended December
31, 1995.
(a)3. Listing of Exhibits
Exhibit 1 - Annual Report to the Stockholders for the year ended December
31, 1995.
Exhibit 3.1-- Articles of Incorporation of the Company, as amended.
Exhibit 3.2-- By-Laws of the Company, as amended. (Incorporated by
reference as Exhibit 3.2 of the Company's Annual Report on Form 10-K/A-1 for the
year ended Decmeber 31, 1994.)
Exhibit 11-- Statements re Computation of Per Share Earnings.**
Exhibit 23 - Consent of Independent Auditors.
The material included in this Report shall not be deemed to be "filed"
with the Commission or otherwise subject to the liabilities of Section 18 of the
Act, except to the extent that this registrant specifically incorporates it in
its Annual Report on this Form 10-K by reference.
Exhibit 11 is not restated in this Form 10-K because the information
required is contained in Note A to the Consolidated Financial Statements,
"Common Stock and Earnings per Share", on page 37 of the Annual Report to the
Stockholders for the year ended December 31, 1995, and is incorporated herein by
reference.
(b) Reports on Form 8-K
No filing of Form 8-K was made in the fourth quarter, 1995.
(c) See Item 14(a)(3) above.
(d) Financial Statement Schedules - The response to this portion of
Item 14 is submitted as a separate section of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized.
KENTUCKY INVESTORS, INC.
March 14, 1996 BY: /s/
DATE Harry Lee Waterfield II
ITS: Chairman of the Board and President
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report is signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
DATE
/s/
Chairman of the Board
Harry Lee Waterfield II
and President 3-14-96
/s/
Robert M. Hardy, Jr.
General Counsel 3-14-96
/s/
Jimmy R. McIver
Treasurer 3-14-96
/s/
Howard L. Graham
Vice President
Corporate Services 3-14-96
/s/
Jerry F. Howell
Director 3-14-96
/s/
Gordon Duke
Director 3-14-96
/s/
Warner Hines
Director 3-14-96
/s/
Helen S. Wagner
Director 3-14-96
/s/
H. Glenn Doran
Director 3-14-96
/s/
David W. Reed
Director 3-14-96
/s/
Jerry F. Howell, Jr.
Director 3-14-96
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Kentucky Investors, Inc.
We have audited the consolidated financial statements of Kentucky
Investors, Inc. and subsidiaries listed in the accompanying Index to financial
statements (Item 14(a)). Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Kentucky Investors, Inc. and subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note A to the consolidated financial statements, the
Company changed its method of accounting for certain investments in debt
securities in 1994. Also, as discussed in Note A to the consolidated financial
statement, the Company changed its method of accounting for income taxes in
1993.
/s/
Ernst & Young LLP
Louisville, Kentucky
March 15, 1996
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 NO. 33-46722-01) pertaining to the Kentucky Investors, Inc.
and Affiliated Companies 401(k) Savings Plan and Trust Agreement and in the
related prospectus of our report dated March 15, 1996, with respect to the
consolidated financial statements and schedule of Kentucky Investors, Inc.
included in the Annual Report (Form 10-K) for the year ended December 31, 1995.
/s/
Ernst & Young LLP
Louisville, Kentucky
March 25, 1996
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
KENTUCKY INVESTORS, INC.
CONDENSED BALANCE SHEET
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, 1993
1995 1994 1993
---- ---- ----
Assets
Cash and Cash
Equivalents $ 40,394 $ 26,921 $ 25,607
Investment in
Subsidiary 26,679,315 20,464,463 22,414,555
Other Assets 136,391 119,570 73,496
----------- ----------- -----------
$26,856,100 $20,610,954 $22,513,658
=========== =========== ===========
Liabilities:
Notes Payable
to Subsidiary $ 747,754 $ 835,667 $ 877,267
Other
Liabilities 52,985 15,829 14,704
Deferred Taxes 1,413,821 1,402,043 1,315,461
Stockholders'
Equity
Common Stock 811,128 779,895 771,786
Paid in Capital 3,374,704 3,357,178 3,284,091
Unrealized
Appreciation
(depreciation)
of available-
for-sale
securities of
Subsidiary 2,916,509 (2,756,991) 494,933
Retained
Earnings 17,539,199 16,977,333 15,755,416
----------- ----------- -----------
Total Stock-
holders'
Equity $24,641,540 $18,357,415 $20,306,226
----------- ----------- -----------
$26,856,100 $20,610,954 $22,513,658
=========== =========== ===========
SCHEDULE II - CONDENSED FINANCIAL INFORMATION FO REGISTRANT
(CONTINUED)
KENTUCKY INVESTORS, INC.
CONDENSED INCOME STATEMENT
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, 1993
1995 1994 1993
---- ---- ----
Income
From printing
services to:
Affiliated
companies $ 399,240 $ 362,148 $ 279,111
Others 79,604 88,943 106,507
Realized Gain/Loss
on Investments (596)
Other services
to subsidiary 64,389 39,564 38,674
Dividends from
subsidiary 505,635 492,328 478,282
Interest and
other income 148,961 13,182 1,821
----------- ----------- -----------
$ 1,197,233 $ 996,165 $ 904,395
Operating
Expenses 627,152 458,014 469,356
----------- ----------- -----------
Operating
income before
equity in
undistributed
earnings of
subsidiary $ 570,081 $ 538,151 $ 435,039
Equity in
undistributed
earnings of
subsidiary for
the year 44,851 1,092,548 1,101,775
----------- ----------- -----------
Income before
provision for
income taxes $ 614,932 $ 1,630,699 $ 1,536,814
------------ ----------- ------------
Provision for
Income Taxes
Current $ 48,000 $ 21,000 $ 11,000
Deferred 12,000 87,000 83,000
----------- ----------- ------------
$ 60,000 $ 108,000 $ 94,000
----------- ----------- ------------
Income before
cumulative
effect of
accounting
change $ 554,932 $ 1,522,699 $ 1,442,814
Cumulative
effect of
accounting
change $ -0- $ -0- $ (250,000)
----------- ----------- -----------
Net Income $ 554,932 $ 1,522,699 $ 1,192,814
=========== =========== ===========
Earnings Per
Share $ .71 $ 1.97 $ 1.55
=========== ========== ============
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
KENTUCKY INVESTORS, INC.
CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
---- ---- ----
NET CASH
PROVIDED
BY OPERATING
ACTIVITIES $ 542,186 $ 472,114 $ 445,929
---------- ---------- ----------
FINANCING
ACTIVITIES
Decrease in
Notes
Payable $( 87,913) $( 41,600) $( 35,973)
Dividends (440,800) (429,200) (417,600)
---------- ---------- ----------
CASH USED BY
FINANCING
ACTIVITIES $(528,713) $(470,800) $(453,573)
---------- ---------- ----------
INCREASE
(DECREASE)
IN CASH $ 13,473 $ 1,314 $( 7,644)
Cash and Cash
Equivalents
at beginning
of year 26,921 25,607 33,251
---------- ---------- ----------
CASH AND CASH
EQUIVALENTS
AT END OF
YEAR $ 40,394 $ 26,921 $ 25,607
========== ========== ===========
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
KENTUCKY INVESTORS, INC.
KNOW ALL MEN BY THESE PRESENTS:
That I, Harry Lee Waterfield, a citizen and resident of Clinton,
Hickman County, Kentucky, do, under and pursuant to the laws of the Commonwealth
of Kentucky, in order to form a corporation for the purposes hereinafter set
out, hereby certify as follows:
ARTICLE I.
The name of the corporation shall be:
KENTUCKY INVESTORS, INC.
ARTICLE II.
The purposes for which the corporation is formed, the nature of the
business and the objects and purposes to be transacted, promoted and carried on
are:
(a) To engage in the ownership, management and operation of insurance
companies through majority owned subsidiary companies only, but not to engage in
the transaction of the business of insurance nor, in any manner, to transact the
business of insurance as an insurer.
In the conduct and operation of companies hereinabove described, the
corporation is authorized to purchase, own and hold securities of insurance
companies as majority owned subsidiary companies and, particularly, to purchase,
own and hold the voting stock of newly organized insurance companies in
accordance with applicable state and federal laws.
(b) As an incidental and secondary purpose, to engage in the real
estate business, either directly or through subsidiary companies, and to
purchase, acquire, hold, improve, sell, convey, assign, release, mortgage,
encumber, lease and deal in real estate of every kind and nature; to construct
building; to develop residential and business sub-divisions for sale or lease
and to do all things incidental thereto.
ARTICLE III.
The duration of life of the corporation shall be perpetual.
ARTICLE IV.
The property of the stockholders shall not be subject to the debts of
the corporation.
ARTICLE V.
The address of the registered office of the corporation in the
Commonwealth of Kentucky shall be: 521 Southland Drive, Lexington, Fayette
County, Kentucky, and the name and address of its registered agent shall be:
Harry Lee Waterfield, 521 Southland Drive, Lexington, Kentucky.
ARTICLE VI.
The total authorized number of shares of stock in the corporation
shall be one million two hundred twenty-five thousand (1,225,000), each being of
the par value of One Dollar ($1.00). All shares shall have equal voting power
of one (1) vote for each share.
ARTICLE VII.
There is but one class of shares and there are no preferences,
qualifications, limitations or restrictions granted or imposed upon such shares.
ARTICLE VIII.
The amount of paid in capital with which the corporation shall begin
business is One Thousand Dollars ($1,000.00).
ARTICLE IX.
The name and address of the Incorporator and the number of shares
subscribed and paid in are:
Harry Lee Waterfield
521 Southland Drive
Lexington, Kentucky 1,000 shares
ARTICLE X.
The number of directors of the corporation shall be not less than five
(5) nor more than twenty-five (25), the exact number of which shall be
determined from time to time by the stockholders.
All powers of the corporation not otherwise fixed by law or by these
Articles shall be vested in the Board of Directors which shall have authority to
make and promulgate such By-Laws for the operation of the corporation as are not
inconsistent with the laws of the Commonwealth of Kentucky or these Articles.
ARTICLE XI.
The corporation shall have the right to purchase or redeem its own
shares in the manner provided by law. Any shares so acquired may be carried as
Treasury shares and may be sold or cancelled and the capital stock reduced, as
the Board of Directors may determine and in such manner as is consistent with
the laws of the Commonwealth of Kentucky.
ARTICLE XII.
Transfers of stock in the corporation shall be made by its officers
and must be made upon the books of the corporation.
IN TESTIMONY WHEREOF, witness the signature of the incorporator, this
the twelfth day of July, 1963.
/s/
Harry Lee Waterfield
STATE OF KENTUCKY...)
COUNTY OF FRANKLIN..)
I, the undersigned, a Notary Public for the State of Kentucky at
Large, do hereby certify that the foregoing Articles of Incorporation were this
day produced before me by Harry Lee Waterfield, the incorporator therein named,
who acknowledged the execution of the same to be his own act and deed.
Witness my hand this the twelfth day of July, 1963.
My commission expires September 24, 1964.
/s/
Mildred Gardenhire
Notary Public, State of Ky at Large
FILED AND RECORDED
HENRY H. CARTER
JULY 18, 1968
SECRETARY OF STATE OF KENTUCKY
FRANKFORT, KENTUCKY
AMENDED ARTICLES OF INCORPORATION
OF
KENTUCKY INVESTORS, INC.
We, the undersigned, being the President and Secretary, respectively,
of Kentucky Investors, Inc., a corporation organized, created and existing under
the laws of the Commonwealth of Kentucky, do hereby certify that at a meeting of
the shareholders of the company duly called and held on May 14, 1970, at which a
majority of the shareholders were present in person or by proxy, adopted by a
majority vote of those present in person or by proxy the following amendment to
the Articles of Incorporation of Kentucky Investors, Inc., amending Article II
thereof so that, as amended, the same shall read as follows:
ARTICLE II.
The purposes for which the corporation is formed, the nature of the
business and objects and purposes to be transacted, promoted and carried on
shall be to engage in any lawful act, business or activity for which
corporations may be organized under the law of the Commonwealth of Kentucky.
IN WITNESS WHEREOF, these Amended Articles of Incorporation have been
executed by Harry Lee Waterfield and Robert M. Hardy as present President and
Secretary, respectively, of the company.
/s/
Harry Lee Waterfield, President
/s/
Robert M. Hardy, Secretary
STATE OF KENTUCKY.....)
COUNTY OF FRANKLIN....)
On this the 14th day of May, 1970, there personally appeared before
me, a Notary Public in and for the State and County aforesaid, Harry Lee
Waterfield, President, and Robert M. Hardy, Secretary, of Kentucky Investors,
Inc., a Kentucky corporation, each of whom acknowledged their signatures to the
Amended Articles of Incorporation to be his act and deed, and the act and deed
of said corporation, and certified the time and manner of adoption.
/s/
Gene M. Brown, Notary Public
My commission expires 4-12-73.
I hereby certify that this instrument has been drafted by:
/s/
Joseph J. Leary
Attorney at Law
Lawyers Building
206 St. Clair Street
Frankfort, Kentucky 40601
ORIGINAL COPY FILED AND RECORDED
ELMER BEGLEY
MAY 15, 1970
SECRETARY OF STATE OF KENTUCKY
FRANKFORT, KENTUCKY
AMENDMENT TO THE ARTICLES OF
INCORPORATION OF KENTUCKY INVESTORS, INC.
Kentucky Investors, Inc., a Kentucky corporation, by its President,
Harry Lee Waterfield, and its Assistant Secretary, Gene M. Brown, does hereby
certify that at a regular meeting of the stockholders duly called and held at
Frankfort, Kentucky, on the 9th day of May, 1974, at 11 A.M. (CDT), at which
meeting a majority of said stockholders entitled to vote at said meeting were
present in person or by proxy by an affirmative vote of more than a majority of
the stockholders entitled to vote thereupon, Article X of the Articles of
Incorporation was amended so that as amended, Article X provides as follows:
"The number of Directors of the corporation shall be nine. The nine
members shall be divided into three classes, each consisting of three
members. The term of office of Directors of the first class shall
expire at the first annual meeting of the shareholders after their
election; that of the second class shall expire at the second annual
meeting after their election, and that of the third class shall expire
at the third annual meeting after their election. AT each annual
meeting after such classification, the number of Directors equal to
the number of the class whose term expires at the time of such meeting
shall be elected to hold office until the third succeeding annual
meeting. In the event of any vacancy occurring in the Board of
Directors, it shall be filled by the affirmative vote of a majority of
the remaining Directors, and shall be for the unexpired term of his
predecessor in office.
All powers of the corporation not otherwise fixed by law or
by these Articles shall be vested in the Board of Directors,
which shall have authority to make and promulgate such By-
Laws for the operation of the corporation as are not
inconsistent with the laws of the Commonwealth of Kentucky
or these Articles."
IN WITNESS WHEREOF, Kentucky Investors, Inc. has caused its name and
corporate seal to be affixed hereto by Harry Lee Waterfield, its President, and
Gene M. Brown, its Assistant Secretary.
This 16th day of May, 1974.
Kentucky Investors, Inc.
/s/
BY: Harry Lee Waterfield, President
/s/
BY: Gene M. Brown, Assistant Secretary
ORIGINAL COPY
FILED
SECRETARY OF STATE OF KENTUCKY
FRANKFORT, KENTUCKY
May 16, 1974
Thelma L. Stovall
Secretary of State
FILED MAY 22, 1974
LLOYD T. RUSSELL, CFCC
COMMONWEALTH OF KENTUCKY.......)
COUNTY OF FRANKLIN.......................)
I, the undersigned Notary Public in and for the State and County
aforesaid, do hereby certify that on this day the foregoing Amendment to the
Articles of Incorporation of Kentucky Investors, Inc. was produced before me in
my County and was acknowledged by Harry Lee Waterfield and Gene M. Brown, by me
personally known to be the President and Assistant Secretary, respectively, of
Kentucky Investors, Inc., a Kentucky corporation, to be their act and deed as
such officers and the act and deed of such corporation.
Witness my hand and seal of office this the 16th day of May, 1974.
My commission expires January 26, 1978.
/s/
Wilma Yeary, Notary Public
This document prepared by:
/s/
Joe R. Johnson
Attorney at Law
200 Capital Avenue
Frankfort, Kentucky 40601
VERIFICATION FORM
STATE OF KENTUCKY.......)
COUNTY OF FRANKLIN.....)
I, Wilma Yeary, a notary public, do hereby certify that on this 6th
day of May, 1974, personally appeared before me Harry Lee Waterfield, who, being
by me first duly sworn, declared that he is the President of Kentucky Investors,
Inc. that he signed the foregoing document as President of the corporation, and
that the statements therein contained are true.
/s/
Wilma Yeary, Notary Public
My commission expires the 26th day of January, l978.
AMENDMENT TO THE ARTICLES OF
INCORPORATION OF KENTUCKY INVESTORS, INC.
Kentucky Investors, Inc., a Kentucky corporation, by its President,
Harry Lee Waterfield II, and its Secretary, Jane S. Jackson, does hereby certify
that at a regular meeting of the stockholders duly called and held at Frankfort,
Kentucky, on the 12th day of May, 1988, at 11:00 A.M., at which meeting a
majority of said stockholders entitled to vote at said meeting were present in
person or by proxy by an affirmative vote of more than a majority of the
stockholders entitled to vote thereupon, Article VI of the Articles of
Incorporation was amended so that as amended, Article VI provides an additional
paragraph as follows:
"The shareholders of the corporation shall not have a
preemptive right to acquire the corporation's unissued
shares."
IN WITNESS WHEREOF, Kentucky Investors, Inc. has caused its name and
corporate seal to be affixed hereto by Harry Lee Waterfield II, its President,
and Jane S. Jackson, its Secretary.
This 23rd day of February, 1989.
KENTUCKY INVESTORS, INC.
/s/
BY: Harry Lee Waterfield, II, President
/s/
BY: Jane S. Jackson, Secretary
APPROVED
OFFICE OF THE ATTORNEY GENERAL
FRANKFORT, KENTUCKY
BY: JOSEPH R. JOHNSON, AAG 2/23/89
RECEIVED AND FILED
FEBRUARY 23, 2989
BREMER EHRLER
SECRETARY OF STATE
COMMONWEALTH OF KENTUCKY
FILED 2-23-89
DONALD C. HULETTE, CFCC
COMMONWEALTH OF KENTUCKY.......)
COUNTY OF FRANKLIN.............)
I, the undersigned Notary Public in and for the State and County
aforesaid, do hereby certify that on this day the foregoing Amendment to the
Articles of Incorporation of Kentucky Investors, Inc. was produced before me in
my County and was acknowledged by Harry Lee Waterfield II and Jane S. Jackson,
by me personally known to be the President and Secretary, respectively, of
Kentucky Investors, Inc., a Kentucky corporation, to be their act and deed as
such officers and the act and deed of such corporation.
Witness my hand and seal of office this the 23rd day of February,
1989.
My Commission expires 1-23-90.
/s/
Dianne A. Rogers, Notary Public
This document prepared by:
/s/
Robert M. Hardy, Jr.
Attorney at Law
200 Capital Avenue
Frankfort, Kentucky 40601
VERIFICATION FORM
STATE OF KENTUCKY... ...)
COUNTY OF FRANKLIN......)
I, Dianne A. Rogers, a Notary Public, do hereby certify that on this
23rd day of February, 1989, personally appeared before me Harry Lee Waterfield
II, who, being by me first duly sworn, declared that he is the President of
Kentucky Investors, Inc., that he signed the foregoing document as President of
the corporation, and that the statements therein contained are true.
/s/
Dianne A. Rogers, Notary Public
My Commission Expires 1-23-90.
AMENDMENT TO THE ARTICLES OF
INCORPORATION OF KENTUCKY INVESTORS, INC.
Kentucky Investors, Inc., a Kentucky corporation, by its President,
Harry Lee Waterfield II, and its Secretary, Wilma Yeary, does hereby certify
that at a regular meeting of the stockholders duly called and held at Frankfort,
Kentucky, on the 11th day of May, 1989, at 11:00 A.M., at which meeting a
majority of said stockholders entitled to vote at said meeting were present in
person or by proxy, by an affirmative vote or more than a majority of the
stockholders entitled to vote thereupon, Article VII was added to the Articles
of Incorporation to read as follows:
"A director of the Company shall not be personally liable to
the Company or its stockholders for monetary damages for
breach of his duties as a director, except for liability (i)
for any transaction in which the interest of the Company or
its stockholders; (ii) for acts or omissions not in good
faith or which involve intentional misconduct or are known
to the director to be in violation of law; (iii) for any
vote for or assent to an unlawful distribution to
stockholders as prohibited under KRS 271B.8-330; or (iv) for
any transaction from which the director derived an improper
personal transaction from which the director derived an
improper personal benefit. Any repeal or modification of
this Article by the stockholders of the Company shall not
adversely affect any limitation on the liability of a
director of the Company for matters arising prior to the
time of such repeal or modification."
IN WITNESS WHEREOF, Kentucky Investors, Inc. has caused its name and
corporate seal to be affixed hereto by Harry Lee Waterfield II, its President,
and Wilma Yeary, its Secretary.
This 30th day of May, 1989.
KENTUCKY INVESTORS, INC.
/s/
BY: Harry Lee Waterfield II, President
/s/
BY: Wilma Yeary, Secretary
RECEIVED AND FILED JUNE 2, 1989
BREMER EHRLER
SECRETARY OF STATE
COMMONWEALTH OF KENTUCKY
FILED JUNE 14, 1989
DONALD C. HULETTE, CFCC
VERIFICATION FORM
STATE OF KENTUCKY ........)
COUNTY OF FRANKLIN........)
I, Jane S. Jackson, a Notary Public, do hereby certify that on the
30th day of May, 1989, personally appeared before me Harry Lee Waterfield II,
who, being by me first duly sworn, declared that he is the President of Kentucky
Investors, Inc., that he signed the foregoing document as President of the
corporation, and that the statements therein contained are true.
/s/
Jane S. Jackson, Notary Public
My Commission Expires 11-11-92.
COMMONWEALTH OF KENTUCKY........)
COUNTY OF FRANKLIN..............)
I, the undersigned Notary Public in and for the State and County
aforesaid, do hereby certify that on this day the foregoing Amendment to the
Articles of Incorporation of Kentucky Investors, Inc. was produced before me in
my county and was acknowledged by Harry Lee Waterfield II and Wilma Yeary, by me
personally known to be the President and Secretary, respectively, of Kentucky
Investors, Inc., a Kentucky corporation, to be their act and deed as such
officers and the act and deed of such corporation.
Witness my hand and seal of office this the 30th day of May, l989.
My Commission expires 11-11-92.
/s/
Jane S. Jackson, Notary Public
This document prepared by
/s/
Robert M. Hardy, Jr.
Attorney at Law
200 Capital Avenue
Frankfort, Kentucky 40601
STATE OF KENTUCKY
COUNTY OF FRANKLIN
I, DONALD C. HULETTE, CLERK OF SAID COUNTY COURT, HEREBY CERTIFY THAT THE
FOREGOING INSTRUMENT HAS BEEN DULY RECORDED, ARTICLES OF INCORPORATION, BOOK 26
PAGE 400 IN MY SAID OFFICE. 6-14-89
DONALD C. HULETTE, CLERK
AMENDMENT TO THE ARTICLES OF
INCORPORATION OF KENTUCKY INVESTORS, INC.
Kentucky Investors, Inc., a Kentucky corporation, by its President,
Harry Lee Waterfield II, and its Secretary, Wilma Yeary, does hereby certify
that at a regular meeting of the stockholders duly called and held at Frankfort,
Kentucky, on the 11th day of May, 1995, at 11:00 A.M., at which meeting a
majority of said stockholders entitled to vote at said meeting were present in
person or by proxy, by an affirmative vote of more than a majority of the
stockholders entitled to vote thereupon, the Company's Articles of Incorporation
were amended to read as follows:
1. Article VI of the Company's Articles of Incorporation was amended to
read:
"The total authorized number of shares of stock in the corporation
shall be four million (4,000,000), each being of the par value of One
Dollar ($1.00). All shares shall have equal voting power of one (l) vote
for each share."
2. Article X of the Company's Articles of Incorporation was amended to
read:
"The number of Directors of the corporation shall be nine. The nine
members shall be divided into three classes, each consisting of three
members. The term of office of Directors of the first class shall expire
at the first annual meeting of the shareholders after their election; that
of the second class shall expire at the second annual meeting after their
election, and that of the third class shall expire at the third annual
meeting after their election. At each annual meeting after such
classification, the number of Directors equal to the number of the class
whose term expires at the time of such meeting shall be elected to hold
office until the third succeeding annual meeting. In the event of any
vacancy occurring in the Board of Directors, it shall be filled by the
affirmative vote of a majority of the remaining Directors, and shall be for
the unexpired term of his predecessor in office.
At a meeting of shareholders called expressly for that purpose,
Directors shall be removed, but only upon a showing of cause, by a vote of
the majority of the shareholders then entitled to vote at the election of
Directors, provided that if less than the entire Board of Directors is
removed, no Director may be removed if the votes cast against his removal
would be sufficient to elect him if then cumulatively voted at an election
of the entire Board of Directors.
All powers of the corporation not otherwise fixed by law or by these
Articles shall be vested in the Board of Directors, which shall have
authority to make and promulgate such By-Laws for the operation of the
corporation as are not inconsistent with the laws of the Commonwealth of
Kentucky or these Articles."
3. Article XIII was added to the Company's Articles of Incorporation to
read:
"Anything contained in these Articles of Incorporation or the By-laws
to the contrary notwithstanding and notwithstanding that a lesser
percentage may be specified or permitted by law, the affirmative vote of
the holders of at least two-thirds of the voting power of all of the then
outstanding shares of the corporation entitled to vote generally in the
election of Directors, voting together as a single class, shall be required
to alter, amend or repeal any provision of Article X."
4. Article XIV was added to the Company's Articles of Incorporation to
read:
"The corporation elects to be included under and subject to the
provisions of Kentucky Revised Statutes Section 271B.12-200 through Section
271B.12-230 as they may be amended from time to time by the General
Assembly of the Commonwealth of Kentucky, generally, without qualification
or limitation."
IN WITNESS WHEREOF, Kentucky Investors, Inc. has caused its name and
corporate seal to be affixed hereto by Harry Lee Waterfield II, its President
and Wilma Yeary, its Secretary.
This 17th day of May, 1995.
KENTUCKY INVESTORS, INC.
BY:/s/
Harry Lee Waterfield II, President
BY:/s/
Wilma Yeary, Secretary
VERIFICATION FORM
STATE OF KENTUCKY )
) SS
COUNTY OF FRANKLIN )
I, Jane S. Jackson, a Notary Public, do hereby certify that on the
17th day of May, 1995, personally appeared before me Harry Lee Waterfield II,
who, being by me first duly sworn, declared that he is the President of Kentucky
Investors, Inc., that he signed the foregoing document as President of the
corporation, and that the statements therein contained are true.
/s/ Jane S. Jackson
Notary Public
My Commission Expires 11-11-96.
COMMONWEALTH OF KENTUCKY )
)
COUNTY OF FRANKLIN )
I, the undersigned Notary Public in and for the State and County
aforesaid, do hereby certify that on this day the foregoing Amendment to the
Articles of Incorporation of Kentucky Investors, Inc. was produced before me in
my County and was acknowledged by Harry Lee Waterfield II and Wilma Yeary, by me
personally known to be the President and Secretary, respectively, of Kentucky
Investors, Inc., a Kentucky corporation, to be their act and deed as such
officers and the act and deed of such corporation.
Witness my hand and seal of office this the 17th day of May, 1995.
My Commission Expires 11-11-96.
/s/ Jane S. Jackson
Notary Public
This document prepared by
/s/
Robert M. Hardy, Jr.
Attorney at Law
200 Capital Avenue
Frankfort, Kentucky 40601
File May 19, 1995 at 9:09 a.m.
Donald C. Hulette
Franklin County Court Clerk
Received and Filed May 19, 1995 at 8:51 a.m.
Bob Babbage
Secretary of State
Commonwealth of Kentucky
EXHIBIT 1
1995 ANNUAL REVIEW
KENTUCKY INVESTORS, INC.
INVESTORS HERITAGE
LIFE INSURANCE COMPANY
TABLE OF CONTENTS
Mission and Strategy Statement 2
Letter to Stockholders 3
Management's Discussion and Analysis 9
Corporate Officers 22
Kentucky Investors, Inc.
Consolidated Financial Statements 24
Selected Financial Data 28
Report of Independent Auditors 28
Investors Heritage Life Insurance Company
Selected Financial Data 29
Report of Independent Auditors 29
Consolidated Financial Statements 30
Notes to Consolidated Financial Statement 34
Board of Directors 47
Stock Prices and Annual Meeting 48
Photography by Lucy Johnson
Page 1
OUR MISSION
The mission of Investors Heritage Life Insurance Company is to provide quality
life insurance products and services, and maintain financial strength for the
benefit of our insureds, stockholders, agents and employees.
Investors Heritage Life Insurance Company is committed to achieving long term
financial objectives by implementing strategies to increase the volume and
quality of insurance in force. We will improve the quality of the delivery
system with programs to enhance the skills and timely response of marketing and
support service functions.
OUR STRATEGY
The strategic plan focuses on timely product development, technology,
education,
communication, human resources practices, and market concentration as key
elements to the attainment of financial objectives.
The overall strategy is to provide competitive products and superior quality
services while improving productivity and job enrichment.
Page 2
LETTER TO OUR SHAREHOLDERS
Kentucky Investors, Inc. ("Kentucky Investors") and Investors Heritage Life
Insurance Company ("Investors Heritage") (collectively the "Companies")
continued during 1995 to respond to market conditions and marketing
opportunities. Most of my comments to you relate to the sales and
administrative activities of the Companies that ultimately lead to the
financial results reported in the Management's Discussion & Analysis. First,
however, I would like to address two specific items which provide and improve
the financial strength of the Companies: the quality of our investments and
the asset/liability management process.
As in the past, the quality rating of our fixed income assets continues to
be
outstanding with an average rating of AA. Investors Heritage purchases only
investment grade bonds. At the end of 1995, 99.3% of our fixed income assets
(corporate bonds, US government agency paper and treasury bills) were rated
investment grade by Standard & Poor's. This compares to 99.2% in 1994 and 100%
in 1993. None of our fixed income assets are in default. At year end
Investors
Heritage had only one small mortgage loan ($46,526) more than sixty days
past due out of a mortgage loan portfolio of $13.1 Million. The pie chart on
Page 8 shows the Distribution of Invested Assets.
Additionally, we continue to perform an Asset Adequacy Analysis each
year, as we have done since 1991, even though we are required to do so every
three years. As in prior years, these tests demonstrated very favorable
results for the assets and liabilities of Investors Heritage held as of
December 31, 1995. Since 1991, Investors Heritage's model has become more
sophisticated and more useful. We are using the model for a variety of
applications beyond the required cash flow testing. For example, we can now
compare actual to expected results for specific product lines or explore the
outcomes of different marketing strategies. The model will be used
extensively this next year when working to comply with the new "Illustration
Actuary" requirements promulgated by the National Association of Insurance
Commissioners. The next logical step is financial projections and dynamic
solvency testing.
A very important result of the Asset Adequacy Analysis is illustrated by
the graph on Page 7. These curves show the option adjusted prices of assets,
liabilities and surplus at various shifts in the interest rate environment.
Note that surplus remains at relatively the same level regardless of the
magnitude of the interest rate shifts. The asset/liability management
process is outstanding, and in combination with the quality and
distribution
of assets clearly illustrates the strength of Investors Heritage's portfolio.
We believe this process is an integral part of proper management of the
Companies and we will continue to expand and refine it.
Page 3
A myriad of changes has occurred in our industry during the past several
years. Investors Heritage and Kentucky Investors have had the ability to adapt
to these changes due in large part to our investment in technology over the
years and our ability to create software geared to our products to take
advantage of the technology. Further, we have concentrated sales efforts in
specific markets and as a result, have seen the continued development
of a dynamic and successful sales organization.
Our investment in technology has enabled us to move forward in providing
administrative service as products become more complex and marketing and
financial reporting requirements rapidly expand. It has also enabled us to
cost effectively modernize sales practices using personal computers and
laptop computers throughout our distribution system, especially in funeral
homes and financial institutions as well as our base Ordinary Life
agents who choose to use them. Financial institutions selling Credit
related products can utilize software for personal computers that among
other things calculates rates and coverages and completes the application
process.
We are currently working on a plan to have software available for use in
our funeral home accounts that will enable Preneed and Final Expense
applications to be completed by a personal computer rather than requiring the
manual process of filling out the application. We anticipate
implementation of this new technology by the end of the second quarter.
This will be in addition to providing sales presentation information, up to
date death benefit information, and premium remittance through disks or
telecommunications.
You may have seen news reports of a major computer problem facing most users
of Information Services (computers). The problem is created with the
impending arrival of the year 2000 and a computer system's ability to correctly
process dates. Without going into the complicated details as to the
reason for the future service problems, I want to assure stockholders that
Investors Heritage and Kentucky Investors recognized this problem and acted a
number of years ago to solve it. As we implemented normal changes to
our Information Services, we took the necessary steps to handle the processing
of dates from the year 2000 and beyond. Therefore, we will not face the
herculean task and enormous cost of the changes facing many users of
Information Services in the next four years.
In the Preneed and Final Expense markets where products are sold by funeral
directors or affiliated agents to fund prearranged funerals, there are a
small number of companies competing. Investors Heritage is not the largest in
the field in terms of asset size or market share, but we are making progress
each year.
Page 4
For twenty years North Carolina has been our major state in the funeral home
market. In recent years, as Preneed sales started to come to the forefront
we have expanded to several other states, targeting eleven for special
attention. We have assembled a truly outstanding marketing team who have
done an outstanding job getting funeral homes to join Investors Heritage. In
1995, Preneed sales were up 11% over 1994. Seven of the eleven targeted
states had significantly increased sales and more importantly, the sales
organization in most of these states has begun to really take shape and develop
into the type of sales operation we want.
Last year we reported we were phasing out of the Credit Insurance market as a
direct writer but would continue marketing Credit Life and Credit Accident
& Health for Franklin Life Insurance Company ("Franklin") through Investors
Heritage Financial Services Group, Inc. (FSG), a wholly owned marketing
subsidiary of Kentucky Investors. We successfully did that during the
last quarter of 1994 and all of 1995. However, Franklin advised us in December
that they were getting out of the Credit Insurance business as result of a
change in ownership.
We re-examined our position in the Credit Insurance market and determined that
we could, and should, continue to generate alternative sources of revenue by
marketing and administering Credit insurance products. Investors Heritage
entered into a reinsurance agreement with Connecticut General Life Insurance
Company at the end of 1995 that enables us to take advantage of our
marketing through FSG and the administrative expertise of Investors Heritage
in the financial institutions market. All of the Credit insurance business
produced by FSG will be reinsured with Connecticut General.
We are pleased with FSG's first year of operation. FSG was able to retain the
vast majority of accounts during the transition at year end 1994. With the exit
of Franklin, FSG presented Investors Heritage with new opportunities and the
possibility to fully utilize our capabilities in administering the Credit
Insurance business. Additionally, FSG has improved its prospects by bringing in
another marketing group that has historically produced more than twice FSG's
production.
Our traditional Ordinary Life sales were slightly higher than last year and
we anticipate them to remain steady in 1996. It sometimes appears that
agents selling more traditional life insurance products receive little
attention due to the emphasis placed on the funeral home and Credit related
market. However, that is not our intent. We will continue to emphasize
traditional Ordinary Life insurance sales. Most of the technology utilized
for the special markets is also used for our traditional Ordinary products.
1995 was a very eventful year for Investors Heritage Printing, Inc., a
wholly owned subsidiary of Kentucky Investors. New marketing efforts
were successful and new equipment and internal technology mentioned last
Page 5
year improved our base of operation. In 1995, we purchased Community and
Suburban Press, one of the oldest printing operations in Frankfort, Kentucky.
For the past several years Community Press' primary work was syndicated
newspaper filler articles which we will continue to emphasize. This purchase
together with an increase from our own marketing efforts increased our job
printing and enabled us to more fully utilize our equipment and staff. For
the first time ever, Investors Heritage Printing paid a dividend to Kentucky
Investors.
For a number of years within the Life insurance industry, there have been
many consolidations, buyouts and mergers. State regulations, driven to a great
extent by the NAIC and many other requirements by other governing bodies
drive up administrative costs and make it common discussion and concern
within the industry that small companies will find it too costly and
complicated to compete in the future.
Management totally agrees that costs have gone up, sometimes unnecessarily from
so many new requirements, but we have over the years taken steps that help
us conform to the requirements as cost efficiently as possible. Groundwork
investment over time has spread out these costs for us to some extent. By
concentrating on specific markets and looking for, and finding, alternative
sources of income, thereby utilizing our marketing and administrative
capabilities, we are confident we will continue to be a solid small company
that will be able to compete and thrive in the future.
The investment and continued confidence of the stockholders of Investors
Heritage and Kentucky Investors have enabled both Companies to succeed and
are truly appreciated. We are also very proud of the hard work and dedication
for success by our sales and administrative staff. We are on the move with
great expectations for the future. On behalf of the Board of Directors, I
thank all associated with Investors Heritage and Kentucky Investors for your
interest and support throughout our first thirty-five years.
Respectfully submitted,
/s/
Harry Lee Waterfield II signature
Page 6
OPTION ADJUSTED VALUE VS TERM STRUCTURE SHIFT GRAPH
A graph appears on this page which shows the results of the Asset Adequacy
Analysis performed by Investors Heritage Life Insurance Company. The graph
demonstrates the option adjusted prices of assets, liabilities, and surplus at
various shifts in the interest rate environment.
Page 7
DISTRIBUTION OF INVESTED ASSETS GRAPH
A pie chart appears on this page showing the Distribution of Invested Assets
for
all of the assets of Investors Heritage Life Insurance Company. The chart shows
the following breakdown: Fixed Maturities:83.6%; Contractual w/Affiliates:0.5%;
Investments in Affiliates:1.4%; Equity Securities 1.5%; Short Term
Investments:0.7%; Policy Loans: 4.2%; Other Long Term Investments: 0.2%;
Mortgage Loans: 7.9%.
Page 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
EXPANSION IN OPERATIONS
During 1995, Kentucky Investors, Inc. ("KII") expanded its base of operations
and Investors Heritage Life Insurance Company ("IHL") continued to expand its
market share in the preneed funeral market. While IHL is focusing on the
preneed funeral market, other methods of utilizing all of our resources to the
fullest extent are continually explored. IHL's decision to exit the credit
insurance market as a direct writer initiated the formation of Investors
Heritage Financial Services Group, Inc. ("FSG"), a wholly owned subsidiary of
KII.
FSG entered into marketing agreements with a number of unaffiliated insurers
and
was and will continue to be responsible for marketing several products to
financial institutions including credit life, credit accident and health
(respectively "Credit Life" and "Credit A&H" and collectively "Credit
Insurance"), Individual Disability, Involuntary Unemployment Insurance and GAP
(which covers the excess of the loan value over the value of the collateral in
the event the collateral is a total loss). FSG also marketed and will continue
to market IHL's mortgage protection products and other ordinary life products
for IHL. Management anticipates steady growth in this area of IHL's business
due to the continued marketing efforts of FSG. In addition, as explained in
more detail below, during 1996 FSG will also market IHL's Credit Insurance
products.
FINANCIAL STRENGTH
The quality of our investment portfolio and the current level of shareholders'
equity of KII and IHL continues to provide a sound financial base as we
continue to expand our marketing system to offer competitive, quality products.
As of December 31, 1995, 99.3% of the fixed income portfolio of IHL was rated
investment grade by Standard and Poor's and none of our fixed income assets
were
in default. At December 31, 1995, IHL had only one small mortgage loan which
was more than 60 days past due. All other mortgage loans are performing.
REVENUES
Overall revenues were $44,076,000,$46,804,000 and $45,426,000 in 1995, 1994 and
1993, respectively for IHL. The changes were due primarily to the method of
presentation of a new ordinary life insurance product and marketing changes in
the Credit Insurance segment. A discussion of the changes follows. See "Life
and Annuity" and "Credit Insurance" below. Additionally, IHL has had steady
growth in Net Investment Income which increased $804,000 in 1995 from 1994. The
1994 increase over 1993 was $263,000.
Page 9
Life and Annuity
Revenues for the Life and Annuity business segment were $3,521,000 higher in
1995 than 1994. The 1994 increase over 1993 was $5,219,000. These increases
came primarily from a new ordinary life single premium product which was
introduced during the second quarter of 1994 and sold in the preneed funeral
market. This new single premium product resulted in a change in the
presentation of certain balance sheet and income items. The previous single
premium policy utilized in this market was interest sensitive in form and
therefore subject to Financial Accounting Standards Board Statement ("FAS") 97
which requires premiums to be considered deposits and not included in revenues.
The new product is not interest sensitive and is subject to the requirements of
FAS 60. Under FAS 60 revenues are considered to be premiums and not deposits,
thereby increasing premium income.
In addition, under FAS 97 deferred acquisition costs for interest sensitive
policies are capitalized and amortized over the life of the policy in
proportion
to expected gross profits. Under FAS 60 deferred acquisition costs for policies
that are not interest sensitive are capitalized and amortized in proportion to
premiums over the premium payment period. Therefore, since these FAS 60
products are single premium products, no acquisition costs are capitalized.
This results in a decrease to deferrals of acquisition-related costs. The
effect on the financial statements of this change is offset, however, by the
change in the reserve as the acquisition-related costs are utilized to reduce
the required benefit reserve under the FAS 60 reserving methodology.
Ordinary life sales were in line with production goals set for 1995. Ordinary
life production increased approximately 11% in 1995 over 1994, as anticipated,
due in large part to marketing advances in Kentucky. New life and annuity
premiums and deposits collected during 1995, 1994 and 1993 were $16,164,000,
$14,872,000 and $12,948,000, respectively. During 1995, IHL expanded its
preneed funeral and final expense marketing operation in several new states,
including but not limited to, Tennessee, Indiana, Illinois, Missouri, Georgia,
Virginia, Florida and South Carolina. Additionally, IHL improved its position
in the preneed funeral market in Kentucky where single premium production was
up
39%. IHL's marketing operation in North Carolina continues to be strong. North
Carolina accounts produced approximately 56% of IHL's single premium
production.
Management plans to continue to develop the preneed funeral market as well as
market other traditional life insurance products and anticipates increases in
single premium production for 1996 over 1995 in the range of 10-12%.
Page 10
Increase in Net investment income earned by ordinary life products also
contributed to the overall increase in Revenues. Net investment income
increased 10.2% in 1995 compared to 1994 and 4.8% in 1994 compared to 1993.
Revenues from annuity products decreased $294,101 from 1994 to 1995 and
increased $205,556 from 1993 to 1994. Annuity revenues were $1,791,445,
$2,085,546 and $1,879,990 for 1995, 1994 and 1993, respectively. The annuity
products are sold almost exclusively in conjunction with IHL's marketing
activities in the preneed funeral market.
Group Life revenues have decreased for the past three years for two primary
reasons. First, IHL withdrew participation in the Federal Employees Group Life
Program in late 1994 because the non-underwritten conversions that IHL was
required to accept exceeded its individual limits for life insurance. Second,
in 1993 IHL terminated two co-insurance agreements under which risks had been
assumed on group life policies. All of the reinsured group life policies were
recaptured by the respective reinsurer on a mutually acceptable basis.The one-
time pre-tax gain in 1993 on these recapture transactions was approximately
$637,000.
Credit Insurance
As reported last year, during the third quarter of 1994 IHL began the process
of
phasing out of the Credit Life and Credit A&H market as a direct writer. As a
result, 1995 revenues were down $6,233,000 from 1994, as anticipated. Revenues
from 1993 to 1994 were also down $1,625,000. Direct premiums from the Credit
Insurance segment, net of refunds of unearned premiums were ($544,000),
$5,757,000 and, $5,901,000 for 1995, 1994 and 1993, respectively.
During 1995,IHL continued to provide the administration of the Credit Insurance
operations and FSG entered into a marketing agreement with Franklin Life
Insurance Company ("Franklin") to market Franklin's Credit Insurance products.
In addition,IHL continued to look for relationships with unaffiliated companies
which would allow IHL to provide its administrative and claims processing
services for Credit Insurance products.
In the fourth quarter of 1995, FSG and IHL were advised that Franklin was
exiting the Credit Insurance market as a result of a change in ownership. FSG
immediately began negotiating with a number of unaffiliated insurance companies
to market Credit Insurance products for them. In addition, FSG initiated
discussions regarding a potential transaction with unaffiliated companies where
the Credit Insurance policies would be written by IHL and all of the risk would
be immediately reinsured to the unaffiliated company.
Page 11
Under a reinsurance arrangement,IHL would be able to utilize its administrative
capabilities and generate alternative revenues from retention fees and fees for
administration and claims processing while protecting its surplus and
profitability from other lines. Additionally, FSG will continue to generate
revenues in the form of commissions. In December 1995, IHL entered into a
reinsurance agreement with The Connecticut General Life Insurance Company
("Connecticut General") pursuant to which all of the risk on all Credit
Insurance policies sold by IHL would be reinsured with Connecticut General.
The decision to reenter the Credit Insurance market as a direct writer required
careful consideration. The driving factors behind the decision were the ability
to structure the reinsurance transaction with a highly rated insurance company,
the ability to protect,improve and strengthen IHL's surplus, and the ability to
utilize IHL's Credit Insurance administration and claims processing
capabilities
while generating alternative sources of revenue for IHL. The structure of the
reinsurance agreement with Connecticut General accomplishes each of these
goals.
In addition, FSG has been successful in retaining the majority of the Credit
Insurance agency accounts and has successfully recruited another unaffiliated
agency which is anticipated to more than double overall gross written Credit
Insurance premiums, and will therefore further enhance FSG's revenues.
Accident and Health
Revenues for this segment have experienced little change the last two years
after a significant decrease in 1994 compared to 1993 of $1,924,000. Revenues
for 1995 were $1,126,000 compared to $1,139,000 for 1994. Virtually all of this
segment has been from insurance assumed from other insurers. The individual
assumed reinsurance agreement was terminated as of December 31, 1993 due to the
insurer's decision to withdraw from the major medical insurance market.
Consequently the reinsured policies were recaptured from IHL which accounts for
almost all of the decrease in revenues from 1993 to 1994.
The remainder of the individual health insurance relates to a closed block of
business which was sold directly by IHL.
Corporate
The Corporate segment, measured primarily by stockholders' paid-in capital,
contributed surplus, earned surplus and property and equipment has had only a
slight change between 1995 and 1994. There was a decrease of $292,000 between
1994 and 1993. Lower investment yields in recent years are the primary reason
for the decrease.
Page 12
Reallocation of Segment Data
For 1995 the segment data shown in Note I to the Consolidated Financial
Statements was developed using a revised allocation methodology. Such change in
approach was applied and amounts have been restated for the 1994 and 1993
segment data. This change in approach was made to enhance the allocation of
costs and revenues to coincide with resources used by the segment and revenues
earned.
The primary changes occurred in Investment Income, net of expenses and Other
insurance expenses. Revenues for the Life and Annuities segment increased
$446,000 for 1994 and $458,000 for 1993. Revenues for the Corporate segment
decreased $497,000 for 1994 and $519,000 for 1993. Pre-Tax Income from
Operations for the Life and Annuities segment increased $115,000 for 1994 and
$513,000 for 1993. Pre-Tax Income from Operations for the Corporate segment
decreased $193,000 in 1994 and $379,000 in 1993. The effect on other segment
classifications was immaterial.
OPERATING RESULTS
IHL's Net Income for 1995 was down $1,484,000 or 61.8%,from 1994 and up $99,000
or 4.3% in 1994 compared to 1993. KII's Net Income for 1995 was down $968,000
or 63.6% from 1994 and up $330,000 or 27.7% in 1994 compared to 1993.
Earnings per share were $1.02, $2.66 and $2.54 for 1995, 1994 and 1993,
respectively for IHL. Earnings per share were $0.71, $1.97 and $1.55 during the
same periods for KII.
Life and Annuity
IHL's pre-tax income (Income from Operations Before Federal Income Tax) for the
Life and Annuity business segment was $1,143,000, $2,868,000 and $2,866,000 for
1995, 1994 and 1993, respectively. The decrease in Pre-Tax Income in 1995 when
compared to 1994 is primarily attributable to the following:
The issuance of legal reserve policies to members of dissolved mutual burial
associations in North Carolina. Management believed it was prudent to issue
these policies to open new marketing channels in the preneed insurance sector
and believes it has been successful in gaining market share as a result.
Management intends on limiting future issues of legal reserve policies to those
that are paid up.
A decrease in investment interest spread (i.e., interest earned over interest
credited) on IHL's annuity business. During the fourth quarter of 1995, IHL
realigned its interest crediting rates commensurate with its earned rates.
A higher volume of claims with lower face amounts which are within IHL's
retention were paid in 1995 compared to 1994.
Page 13
Credit Life and Credit Accident and Health
As noted above, during the third quarter of 1994 IHL began the process of
phasing out of the Credit Life and Credit A&H market as a direct writer. Since
that time this block of business has been decreasing at a significant rate due
to the short duration (approximately a two-year average term) of the policies.
Pre-Tax Losses were $826,000, $1,095,000 and $1,521,000 for 1995,1994 and 1993.
The improvement in this segment is due primarily to policy reserves being
released as the business matures which in turn is offset by claims and the
amortization of policy acquisition costs.
Policy reserve decreases in 1995, 1994 and 1993 were $5,521,000, $1,781,000 and
$3,343,000. Claim expenses were $1,928,000, $2,501,000 and $3,387,000.
Amortization of Deferred Acquisition Expense was $2,863,000, $1,287,000 and
$3,704,000. These three areas, in the aggregate, increased or (decreased) Pre-
Tax Income by $730,000, ($2,007,000) and ($3,748,000) for 1995, 1994 and 1993
respectively.
Accident and Health
Pre-Tax Income for the Group and Individual Accident and Health segment was
$108,000, $430,000 and $396,000 for 1995, 1994 and 1993, respectively. The
majority of this segment is from Involuntary Unemployment Insurance written
on a
group basis. Until 1995 it was about equally divided between direct writings
and assumed reinsurance. In 1994 the direct writings were discontinued which
accounts for the decrease in Pre-Tax Income in 1995. The remainder of this
segment is individual health insurance relating to a closed block of business
written directly by IHL.
Corporate
Pre-tax income for the Corporate segment was $460,000,$589,000 and $707,000 for
1995, 1994 and 1993, respectively. Primarily due to a decrease in investment
yield resulting from lower interest rates, and the increased use of surplus for
the sale of new Ordinary Life business, IHL experienced a reduction in the pre-
tax income for the last two years in this segment.
The statutory capital and surplus of IHL increased $1,194,000 in 1995,following
an increase of $1,706,000 in 1994 and $1,629,000 in 1993. During the year IHL
completed its negotiations with the Kentucky Department of Insurance (the
"Department") with regard to the valuation of certain assets held by IHL. Under
the agreement reached with the Department, IHL will write down the statutory
value of the home office real estate owned from market to depreciated cost over
a five-year period and will write down to zero its investment in the common
stock of its affiliates over a three-year period. For GAAP reporting purposes
the home office real estate is already carried at depreciated cost and the
common stock is carried at cost. While adjusting the statutory value of these
assets constitutes a change in IHL's long-standing method of valuation which
had
been approved by the Department, it is not anticipated that these adjustments
will affect IHL's financial position or net income based on generally accepted
accounting principles, or its statutory net income. For additional discussion
on this issue, refer to Note H to the Consolidated Financial Statements.
Page 14
INVESTMENTS, LIQUIDITY AND FUND RESTRICTIONS
IHL's investment portfolio continues to provide financial stability. It is
management's opinion that KII and IHL have adequate cash flows both on a long-
term and short-term basis as evidenced by the Consolidated Statements of Cash
Flows presented in this Annual Review. IHL's internal cash flows are derived
from insurance premiums and investments. The cash flows of KII are derived from
the dividends paid to it by IHL, FSG and Investors Heritage Printing, Inc.
("IHP"). Management anticipates these cash flows to experience steady growth
due to improved profitability of FSG and IHP. During 1995, FSG's first full
year of operation, revenues were $171,000 and FSG paid a dividend to KII in
December 1995 in the amount of $32,000. In addition, revenues from IHP were
$483,000 in 1995, up 6.2% compared to $451,000 in 1994, and IHP paid a dividend
to KII for the first time since its inception. Management of IHP will continue
to work to improve revenues from unaffiliated sources as well as providing
printing services for IHL. While revenues from these sources constitute less
than 1% of KII's overall revenues, management is working on the continued
growth and profitability of both FSG and IHP.
Management is not aware of any commitments or unusual events that could
materially affect KII's or IHL's capital resources. Further, there is no long-
term or short-term external debt. Other than the items disclosed in Note H to
the Consolidated Financial Statements and the increased regulatory reporting
requirements which generally increase administrative expenses, management is
not
aware of any current recommendations by any regulatory authority which if
implemented would have any material effect on IHL's liquidity, capital
resources
or operations. Management does not perceive a need for any external financing
and there are no plans to acquire same. However, KII and IHL will continue to
explore various opportunities including corporate acquisitions and purchasing
blocks of business from other companies, which may dictate a need for either
long-term or short-term debt. There are no restrictions as to use of funds
except the restriction to IHL as to the payment of cash dividends to
shareholders which is discussed in more detail in Note G to the Consolidated
Financial Statements.
Page 15
Since inception, IHL has maintained a sound, conservative investment strategy.
IHL's fixed income portfolio of public bonds is managed by an independent
portfolio manager, Aeltus Investment Management, Inc. ("Aeltus"). As of
December 31, 1995, 83.6% of IHL's total invested assets are managed by Aeltus
pursuant to specific investment guidelines which have been approved by the
Board
of Directors. Since the inception of IHL's relationship with Aeltus, the
primary objectives have been to maintain the quality and integrity of the fixed
income portfolio while improving the total return on investments. These goals
have been accomplished by further diversifying the portfolio methodically over
the last 7 years.
The fixed income portfolio is diversified among sectors. The market value and
the Standard & Poor's average quality rating of this portfolio are $137.4
million and AA, respectively. The market value of this portfolio at year end
1994 was $114.9 million. At year end the fixed income portfolio was allocated
as follows: 50.1% - corporate; 18.6% - government; 23.7% - mortgage-backed
securities; 3.8% - foreigns; 2.3% - asset backed securities; and 1.5% - tax
exempt. Within the corporate bond sector, the portfolio is also diversified
with 32.0% of that sector invested in bank and finance, 44.3% in industrial and
miscellaneous, and 23.7% in utilities. Pie charts showing the Distribution of
Fixed Income Assets and Distribution of Corporate Bonds are located on page 17.
The fixed income portfolio also includes $32.5 million (at carrying value) of
mortgage-backed securities ("MBS") which represents 19.8% of total invested
assets and 23.7% of the fixed income portfolio. Mortgage-backed securities add
value to the portfolio and Aeltus has provided the expertise to purchase MBS
with the confidence that the credits have been properly analyzed and that the
investment properly suits the asset and liability needs of IHL.
There have been concerns expressed by rating agencies, various regulators and
other constituencies regarding investments in MBS by insurers and other
financial institutions. Although these highly rated securities provide
excellent credit quality, their liquidity and risk must be monitored. All of
the collateral of the MBS owned by IHL are guaranteed by the Government
National
Mortgage Association ("GNMA"), Federal National Mortgage Association("FNMA") or
Federal Home Loan Mortgage Corporation ("FHLMC").
The FNMA and FHLMC securities are structured either as publicly-traded
collateralized mortgage obligations ("CMO") or pass-throughs. Unlike most
corporate or real estate debt, the primary concern with a MBS is uncertainty of
timing of cash flows due to prepayment assumptions rather than the possibility
of loss of principal.
IHL's CMO holdings represent approximately 46.9% of the total MBS portfolio.
When these securities are purchased at a discount or premium, the income
Page 16
DISTRIBUTION OF FIXED INCOME ASSETS GRAPH
AND
DISTRIBUTION OF CORPORATE BONDS GRAPH
Two pie charts appears on this page showing the Distribution of Fixed Income
Assets and the Distribution of Corporate Bonds. The Fixed Income Chart shows
the following breakdown: corporate: 50.1%; government: 18.6%; mortgage-backed
securities: 23.7%; foreigns: 3.8%; asset-backed securities: 2.3%; tax exempt:
1.5%. The Corporate Bond Chart shows the following breakdown: bank and
finance: 32.0%; industrial and miscellaneous: 44.3%; utilities 23.7%.
Page 17
DISTRIBUTION OF MORTGAGE LOANS GRAPH
A pie chart appears on this page showing the Distribution of Mortgage Loans.
This chart shows the following breakdown: retail: 35.9%; apartments: 26.9%;
office properties: 16.5%; 1 to 4 family: 4.0%; industrial: 2.2%; other 14.5%.
Page 18
yield will vary with changes in prepayment speeds due to the change in
accretion
of discount or amortization of premium, as well as the timing of the basic
principal and interest cash flows. The overall impact of the CMO's variability
in yields on the portfolio is not significant in relation to the yield and cash
flows of the total invested assets of IHL. More importantly, IHL has no
exposure to the more volatile, high-risk CMO's, such as those structured to
share in residual cash flows or which receive only interest payments. The CMO's
held by KII are primarily planned amortization class ("PAC") or support ("SUP")
class bonds (except for one sequential pay CMO of approximately $980,000) which
are structured to provide a more certain cash flow to the investor and
therefore have reduced prepayment risk.
Pass-throughs are the largest type of MBS owned by IHL, representing
approximately 53.1% of the total MBS portfolio. Pass-throughs are GNMA, FNMA or
FHLMC guaranteed MBS which, simply stated pass-through interest and principal
payments to the investors in accordance with their respective ownership
percentage.
Additionally, IHL also engages in commercial and residential mortgage lending
with more than 90% of these investments being in commercial properties. All
mortgage loans are originated in-house and all loans are secured by first
mortgages on the real estate. Loan to value ratios of 80% or less and debt
service coverage from existing cash flows of 120% are generally required. IHL
minimizes credit risk in its mortgage loan portfolio through various methods,
including stringently underwriting the loan request, maintaining small average
loan balances, reviewing its larger mortgage loans on an annual basis and
diversification by property type. The average loan balance is $246,386 and the
largest loan currently held by IHL is $685,469. IHL has $13.1 million invested
in mortgage loans which represents 7.9% of total invested assets. The portfolio
is diversified across various property types as follows: 16.5% - office
properties; 35.9% - retail; 2.2% -industrial; - 4.0% 1 to 4 family; 26.9% -
apartments; and 14.5% - other. A pie chart showing the Distribution of Mortgage
Loans is located on Page 18.
Although approximately 83% of IHL's mortgage loans are located in the various
geographic regions of Kentucky, IHL is familiar with its mortgage loan markets
and is not aware of any negative factors or trends which would have a material
impact on the local economies where IHL's mortgage loan properties are located.
IHL has been successful in adding value to the total investment portfolio
through its mortgage loan originations due to the fact that yields realized
from
the mortgage loan portfolio are from 2 to 4.5 percent higher than yields
realized from fixed income investments. Further, value has been added because
the mortgage loan portfolio has consistently performed well. As of December 31,
1995, IHL had only one non-performing mortgage loan, which would include loans
past due 60 days or more, loans in process of foreclosure, restructured loans
and real estate acquired through foreclosure The non-performing mortgage loan,
which is more
Page 19
than 60 days past due, is a residential mortgage with an outstanding balance of
$46,526 and the property securing the loan has a fair market value of $75,000.
The strength of our liquidity is found in our conservative approach in the
product development area and in the strength and stability of our fixed income
portfolio and our mortgage loans. For 1995, IHL's fixed income investments were
99.3% investment grade as rated by Standard & Poor's,an increase from 99.2% for
1994. None of KII's fixed income assets are in default. Liquidity is also
managed by laddering maturities of our fixed income portfolio. The average
duration of our fixed income investments is 4.4 years with approximately $3.7
million due within 12 months and approximately $43.3 million due within the
following four years. Historically management has anticipated that all such
investments will be held until maturity. However, one of the responsibilities
of our independent portfolio manager is to constantly monitor the credit rating
of our fixed income investments to determine if rating changes of any
investment requires action by management.
In accordance with FAS 115, which was implemented effective January 1, 1994,
debt securities that IHL did not have the positive intent and ability to hold-
to-maturity and all marketable equity securities were reclassified as
available-
for-sale and are carried at fair value. Unrealized gains and losses on
securities classified as available-for-sale are carried as a separate component
of Stockholders' Equity, net of taxes, and an adjustment
to deferred acquisition
costs. The Balance Sheets reflect this reclassification. Because management
believes it is prudent to have the ability to sell a fixed income investment if
market conditions warrant such action, approximately 94% of the fixed income
portfolio of IHL was classified as available-for-sale during 1994. The
remainder of the fixed income portfolio was classified as being
hold-to-maturity and those investments were carried at amortized cost.
However, as explained in detail in Note A to the Consolidated Financial
Statements, in 1995 IHL reclassified its hold-to-maturity securities so that
all
of IHL's fixed income securities are now classified as available-for-sale. The
decision to change the classification was based primarily on two factors.
First, during the Kentucky Department of Insurance examination, IHL was advised
that the Department was going to required IHL to write down four local
municipal
bonds because the Standard Valuation Office of the National Association of
Insurance Commissioners refused to value them. Rather than write the assets
down to zero, management and the Board of Directors determined that it was in
IHL's best interest to sell the securities. The second reason for the
reclassification was the pronouncement issued by the Financial Accounting
Standards Board allowing a window of opportunity to reclassify securities from
a
hold-to-maturity portfolio to available-for-sale without tainting IHL's FAS 115
classifications.
Page 20
As described in the President's Letter to Stockholders, a key element of
profitability and risk management is the asset/liability management process. To
test its financial strength and investment strategy, IHL has performed asset
adequacy analyses (cash flow testing) for the last several years. Although
regulatory requirements dictate this process be done every three years, IHL
performs these analyses every year. This asset/liability management process is
designed to monitor product and asset characteristics that affect future
profitability and risk management strategies. Dynamic models of both assets and
liabilities were created to project financial results under several different
interest rate scenarios. Items taken into account on the asset side include
maturity and liquidity risks, asset diversification and quality considerations.
On the liability side, interest crediting strategies and policyholder and agent
behavior (lapses, loans, withdrawals and premium flow) are directly related to
the interest rate environment being tested.
These tests demonstrate very favorable financial results for the assets and
liabilities of IHL held as of December 31, 1995. As indicated by the price
behavior curves shown in Page 7 of this Annual Review, there is always a
substantial positive difference between the present value of our assets as
compared to the present values of our liabilities. Our cash flow testing has
proven our investment strategy to be sound. Positive surplus is projected at
the end of ten years for each of the interest scenarios tested. Because it is a
vital tool in monitoring our financial stability, Management will continue to
refine the cash flow testing process.
CONSOLIDATION
The accompanying consolidated financial statements of Kentucky Investors, Inc.
and Investors Heritage Life Insurance Company include the accounts of their
respective majority-owned subsidiaries, after elimination of intercompany
transactions. This discussion and analysis is intended for both Investors
Heritage Life Insurance Company and Kentucky Investors, Inc. because their
respective financial statements are similar in presentation and identical in
most cases.
Page 21
CORPORATE OFFICERS
OFFICERS
Harry Lee Waterfield II Nancy W. Walton
Chairman of the Board, President, Vice President, UnderwritingI
Chief Executive Officer IKPF First Vice PresidentK
Jimmy R. McIver Clair S. Manson
TreasurerIKPF Vice President, Chief ActuaryI
Robert M. Hardy, Jr. John E. Simmons
General Counsel IK Vice President, Credit Life
Vice President, Legal F & Office ServicesI
Vice President, Marketing F
Wilma Yeary CPS Jane Wise
SecretaryIK Vice President, Policy ServicesI
Jane S. Jackson Margaret J. Kays
Assistant SecretaryIK Vice President, Human
SecretaryPF Resources I
Howard L. Graham Don R. Philpot
Vice President, Corporate Vice President, AgencyI
Services IK
Raymond L. Carr H. Douglas Hippe
Vice President, Vice President, AccountingI
Administrative Operations &
Computer ServicesI Rick Calvert
Vice PresidentP
William H. Keller, M.D. Ernst & Young
Medical DirectorI (not pictured) Independent AuditorIK
I Investors Heritage Life Insurance Company
K Kentucky Investors, Inc.
F Investors Heritage Financial Services Group, Inc.
P Investors Heritage Printing, Inc.
(Siloutte of picture on next page)
Page 22
PICTURE OF CORPORATE OFFICERS
Page 23
KENTUCKY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 and 1994
ASSETS 1995 1994
INVESTMENTS
Securities available-for-sale,
at fair value:
Fixed maturities $137,401,716 $108,804,461
Equity securities 2,566,023 2,002,745
Securities held-to-maturity,
at amortized cost -0- 6,580,321
Mortgage loans on real estate 13,058,464 11,844,582
Policy loans 6,869,039 6,842,862
Other long-term investments 301,733 301,401
Short-term investments 1,133,021 1,380,890
Total investments $161,329,996 $137,757,262
Cash and cash equivalents 2,417,375 2,336,712
Accrued investment income 2,139,836 2,133,761
Due and deferred premiums 4,714,057 4,365,644
Deferred acquisition costs 28,260,113 30,499,435
Property and equipment 1,881,038 1,955,204
Goodwill 2,149,735 2,254,067
Other assets 1,489,184 1,627,755
Amounts recoverable from reinsurers 3,663,782 8,437,140
$208,045,116 $191,366,980
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities:
Benefit reserves $155,182,145 $140,072,351
Unearned premium reserves 6,512,362 15,106,676
Policy claims 1,665,949 1,835,685
Other policyholders' funds:
Dividend & endowment accumulations 1,033,503 1,095,079
Reserves for dividends & endowments
& other 1,066,860 2,140,720
Total policy liabilities $165,460,819 $160,250,511
Federal income taxes 5,119,540 1,829,837
Other liabilities 2,707,832 2,822,040
Total liabilities $173,288,191 $164,902,388
MINORITY INTEREST IN SUBSIDIARY $ 10,115,385 $ 8,107,177
STOCKHOLDERS' EQUITY
Common stock $ 811,128 $ 779,895
Paid-in surplus 3,374,704 3,357,178
Unrealized appreciation (depreciation)
of available-for-sale securities 2,916,509 (2,756,991)
Retained earnings 17,539,199 16,977,333
Total stockholders' equity $ 24,641,540 $ 8,357,415
$208,045,116 $191,366,980
See notes to consolidated financial statements.
Page 24
KENTUCKY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 and 1993
1995 1994 1993
REVENUES
Premiums and other
considerations $33,061,376 $36,443,762 $34,966,088
Investment income,
net of expenses 10,674,159 9,872,482 9,602,605
Realized gain on
investments, net 29,898 235,959 642,661
Other income 239,178 103,491 176,258
Total revenue $44,004,611 $46,655,694 $45,387,612
BENEFITS AND EXPENSES
Death and other benefits $17,291,402 $17,666,871 $19,182,945
Guaranteed annual endowments 890,056 921,148 951,286
Dividends to policyholders 784,506 852,398 954,400
Increase in benefit reserves
and unearned premiums 11,157,960 8,183,045 3,586,337
Acquisition costs deferred (4,981,000) (9,019,000) (9,754,000)
Amortization of deferred
acquisition costs 6,085,957 10,092,870 12,315,997
Commissions 4,177,725 8,007,178 8,779,813
Other insurance expenses 7,784,249 7,334,849 7,074,391
Total benefits and
expenses $43,190,855 $44,039,359 $43,091,169
Income from operations before
Federal Income Tax and minority
interest in net income of
subsidiary $ 813,756 $ 2,616,335 $ 2,296,443
Provision for income taxes
Current $ 687,000 $ 1,044,000 $ 2,699,000
Deferred (668,000) (583,000) (2,277,000)
$
19,000 $ 461,000 $ 422,000
INCOME FROM OPERATIONS BEFORE
MINORITY INTEREST IN NET INCOME
OF SUBSIDIARY AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE $794,756 $ 2,155,335 $ 1,874,443
MINORITY INTEREST IN NET INCOME
OF SUBSIDIARY 239,824 632,636 613,629
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE -0- -0- (68,000)
NET INCOME $554,932 $ 1,522,699 $ 1,192,814
EARNINGS PER SHARE $.71 $1.97 $1.55
See notes to consolidated financial statements.
Page 25
<TABLE>
KENTUCKY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 and 1993
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION
OF AVAILABLE-
COMMON PAID-IN FOR SALE RETAINED
STOCK SURPLUS SECURITIES EARNINGS
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993 $774,660 $3,284,091
$ 461,601 $14,902,122
Net Income 1,192,814
Cash Dividend (309,257)
Cumulative effect of
accounting change (81,000)
Change in net unrealized
appreciation (depreciation) 114,332
Cost of common stock
purchased, net (2,874) (30,263)
BALANCE, DECEMBER 31, 1993 $771,786 $3,284,091 $ 494,933 $15,755,416
Adjustment to beginning balance
for change in accounting method 2,050,923
Net Income 1,522,699
Cash Dividend (318,462)
Change in net unrealized
appreciation (depreciation) (5,302,847)
Issuance of common
stock, net 8,109 73,087 17,680
BALANCE, DECEMBER 31, 1994 $779,895 $3,357,178 $(2,756,991) $16,977,333
Net Income 554,932
Cash Dividend (332,079)
Change in net unrealized
appreciation (depreciation) 5,673,500
Issuance of common
stock, net 31,233 17,526 339,013
BALANCE, DECEMBER 31, 1995 $811,128 $3,374,704 $ 2,916,509 $17,539,199
<F>
See notes to consolidated financial statements.
</TABLE>
Page 26
<TABLE>
KENTUCKY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 and 1993
<CAPTION>
1995 1994 1993
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net Income $ 554,932 $ 1,522,699 $ 1,192,814
Adjustments to reconcile net income
to net cash provided by operating activities:
Increase (decrease) in Benefit Reserves 7,175,593 (216,474) 19,468,453
Change in Claims Liability (169,736) (513,266) (791,946)
Change in Other Policyholder Funds (1,135,436) 74,249 461,346
Amortization of Deferred Acquisition Costs 6,085,957 10,092,870 12,315,997
Policy Acquisition Costs Deferred (4,981,000) (9,019,000) (9,754,000)
Realized Gain on Investments (29,898) (235,959) (642,661)
Increase in Accrued Investment Income (6,075) (157,020) (148,471)
Change in Other Assets and
Other Liabilities 24,363 (947,234) 554,864
Provision for Deferred Federal Income Taxes (668,000) (583,000) (2,277,000)
Federal Income Tax (612) (949,646) 800,944
Change in Due and Deferred Premiums (348,413) (138,862) 63,731
Net Adjustment for Premium and
Discount on Investments 112,387 224,422 139,248
Depreciation and Other Amortization 358,920 354,724 359,445
Change in Minority Interest and Other (2,335) 340,751 409,404
Change in Amounts Recoverable from Reinsurers 4,773,358 10,103,840 (16,724,496)
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 11,744,005 $ 9,953,094 $ 5,427,672
<CAPTION>
INVESTING ACTIVITIES
<S> <C> <C> <C>
Securities available-for-sale:
Purchases $(19,036,132) $(25,428,933) $ (41,313)
Sales and Maturities 8,946,675 8,103,582285,334
Securities held-to-maturity:
Purchases -0- (962,730) (43,673,683)
Sales and Maturities 204,084 6,127,887 33,391,890
Other Investments:
Cost of Acquisition (2,290,555) (1,489,150) (3,467,828)
Sales and Maturities 1,297,428 2,220,019 2,105,927
Net Additions to Property and Equipment (180,422) (44,160) (168,277)
NET CASH USED BY INVESTING
ACTIVITIES $(11,058,922) $(11,473,485) $(11,567,950)
<CAPTION>
FINANCING ACTIVITIES
<S> <C> <C> <C>
Receipts from universal life policies credited to
policyholder account balances $ 3,352,687 $ 5,096,198 $ 10,962,224
Return of policyholder account balances on
universal life policies (4,012,800) (4,087,252) (3,202,170)
Issuances (Purchases) of Common Stock 387,772 98,876 (33,137)
Dividends (332,079) (318,462) (309,257)
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES $ (604,420) $ 789,360 $ 7,417,660
INCREASE (DECREASE) IN CASH $ 80,663 $ (731,031) $ 1,277,382
Cash and cash equivalents at beginning of year 2,336,712 3,067,743 1,790,361
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 2,417,375 $ 2,336,712 $ 3,067,743
<FN>
See notes to consolidated financial statements.
</TABLE>
Page 27
<TABLE>
KENTUCKY INVESTORS, INC.
SELECTED FINANCIAL DATA
KENTUCKY INVESTORS, INC. AND SUBSIDIARIES
(000's omitted except for Earnings and Cash Dividends Per Share)
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Total Revenue $ 44,005 $ 46,656 $ 45,388 $ 45,567 $ 45,349
Total Benefits & Expenses 43,191 44,039 43,091 44,597 44,548
Net Income 555 1,523 1,193 516 418
Earnings Per Share .71 1.97 1.55 .65 .52
Total Assets 208,045 191,367 198,230 171,119 161,562
Total Liabilities 173,288 164,902 168,984 142,987 133,172
Long Term Debt -0- -0- -0- -0- -0-
Cash Dividends Per Share .38 .37 .36 .36 .36
</TABLE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Kentucky Investors, Inc.
We have audited the accompanying consolidated balance sheets of Kentucky
Investors, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, stockholders' equity, and cash
flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Kentucky
Investors, Inc. and subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Note A to the consolidated financial statements, the Company
changed its method of accounting for certain investments in debt securities in
1994. Also, as discussed in Note A to the consolidated financial
statements, the Company changed its method of accounting for income taxes in
1993.
Louisville, Kentucky
March 15, 1996
Page 28
<TABLE>
INVESTORS HERITAGE LIFE INSURANCE COMPANY
SELECTED FINANCIAL DATA
INVESTORS HERITAGE LIFE INSURANCE COMPANY AND SUBSIDIARY
(000's omitted except for Earnings and Cash Dividends Per Share)
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Premiums $ 33,061 $ 36,444 $ 34,966 $ 34,671 $
34,857
Net Investment Income 10,815 10,011 9,748 10,021 9,711
Net Income 917 2,401 2,302 915 699
Earnings Per Share 1.02 2.66 2.54 1.00 .76
Total Assets 210,490 194,262 201,197 173,885 163,925
Policy Reserves 161,695 155,179 154,387 127,158 115,979
Long Term Debt -0- -0- -0- -0- -0-
Cash Dividends Per Share .76 .74 .72 .72 .72
</TABLE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Investors Heritage Life Insurance Company
We have audited the accompanying consolidated balance sheets of Investors
Heritage Life Insurance Company and subsidiary as of December 31, 1995 and
1994, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Investors
Heritage
Life Insurance Company and subsidiary at December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Note A to the consolidated financial statements, the Company
changed its method of accounting for certain investments in debt securities
in 1994. Also, as discussed in Note A to the consolidated financial
statements, the Company changed its method of accounting for income taxes in
1993.
Louisville, Kentucky
March 15, 1996
Page 29
INVESTORS HERITAGE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 and 1994
ASSETS 1995 1994
INVESTMENTS
Securities available-for-sale,
at fair value:
Fixed maturities $137,401,716 $108,804,461
Equity securities 2,565,936 2,002,678
Securities held-to-maturity,
at amortized cost -0- 6,580,321
Mortgage loans on real estate 13,058,464 11,844,582
Policy loans 6,869,039 6,842,862
Other long-term investments 301,733 301,401
Short-term investments 1,103,021 1,330,890
$161,299,909 $137,707,195
Investments in affiliates 2,309,438 2,679,684
Contractual obligations of
affiliate 747,753 835,666
Total investments $164,357,100 $141,222,545
Cash and cash equivalents 2,376,981 2,309,791
Accrued investment income 2,139,333 2,133,219
Due and deferred premiums 4,714,057 4,365,644
Deferred acquisition costs 28,260,113 30,499,435
Property and equipment 1,823,784 1,921,737
Goodwill 1,705,583 1,771,184
Other assets 1,449,163 1,601,275
Amounts recoverable from
reinsurers 3,663,782 8,437,140
$210,489,896 $194,261,970
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities:
Benefit reserves $155,182,145 $140,072,351
Unearned premium reserves 6,512,362 15,106,676
Policy claims 1,665,949 1,835,685
Other policyholders' funds:
Dividend & endowment
accumulations 1,033,503 1,095,079
Reserves for dividends
& endowments & other 1,066,860 2,140,720
Total policy liabilities $165,460,819 $160,250,511
Federal income taxes 3,705,719 427,794
Other liabilities 2,663,372 2,815,224
Total liabilities $171,829,910 $163,493,529
STOCKHOLDERS' EQUITY
Common stock $ 1,441,797 $ 1,443,259
Paid-in surplus 3,776,427 3,776,360
Unrealized appreciation
(depreciation)of
available-for-sale securities 3,948,035 (3,735,908)
Retained earnings 29,493,727 29,284,730
Total stockholders' equity $ 38,659,986 $ 30,768,441
$210,489,896 $194,261,970
See notes to consolidated financial statements.
Page 30
INVESTORS HERITAGE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 and 1993
1995 1994 1993
REVENUES
Premiums
and other considerations $33,061,376 $36,443,762 $34,966,088
Investment income,
net of expenses 10,815,048 10,010,654 9,747,813
Realized gain
on investments, net 57,048 346,697 642,661
Other income 142,934 3,078 69,440
Total revenue $44,076,406 $46,804,191 $45,426,002
BENEFITS AND EXPENSES
Death and other benefits $17,291,402 $17,666,871 $19,182,945
Guaranteed annual
endowments 890,056 921,148 951,286
Dividends to
policyholders 784,506 852,398 954,400
Increase in benefit
reserves and
unearned premiums 11,157,960 8,183,045 3,586,337
Acquisition costs
deferred (4,981,000) (9,019,000) (9,754,000)
Amortization of deferred
acquisition costs 6,085,957 10,092,870 12,315,997
Commissions 4,177,725 8,007,178 8,779,813
Other insurance expenses 7,785,215 7,307,693 6,961,195
Total benefits and
expenses $43,191,821 $44,012,203 $42,977,973
INCOME FROM
OPERATIONS BEFORE
FEDERAL INCOME TAX $ 884,585 $ 2,791,988 $ 2,448,029
Provision for income taxes
Current $ 648,000 $ 1,061,000 $ 2,688,000
Deferred (680,000) (670,000) (2,360,000)
$ (32,000) $ 391,000 $ 328,000
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE $ 916,585 $ 2,400,988 $ 2,120,029
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE -0- -0- 182,000
NET INCOME $ 916,585 $ 2,400,988 $ 2,302,029
EARNINGS PER SHARE $1.02 $2.66 $2.54
See notes to consolidated financial statements.
Page 31
<TABLE>
INVESTORS HERITAGE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 and 1993
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION)OF RETAINED
COMMON PAID-IN AVAILABLE-FOR-SALE
STOCK SURPLUS SECURITIES EARNINGS
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993 $1,455,358 $3,774,115 $ 630,726 $26,025,963
Net Income 2,302,029
Cash Dividend (653,157)
Cumulative effect
of accounting change (110,000) 66,435
Change in net unrealized
appreciation (depreciation) 152,594
Cost of common stock
purchased (6,348) 1,268 (99,966)
BALANCE, DECEMBER 31, 1993 $1,449,010 $3,775,383 $ 673,320 $27,641,304
Adjustment to beginning balance
for change in accounting method 2,790,241
Net Income 2,400,988
Cash Dividend (666,892)
Change in net unrealized
appreciation (depreciation) (7,199,469)
Cost of common stock
purchased (5,751) 977 (90,670)
BALANCE, DECEMBER 31, 1994 $1,443,259 $3,776,360 $(3,735,908) $29,284,730
Net Income 916,585
Cash Dividend (685,219)
Change in net unrealized
appreciation (depreciation) 7,683,943
Cost of common stock
purchased (1,462) 67 (22,369)
BALANCE, DECEMBER 31, 1995 $1,441,797 $3,776,427 $ 3,948,035 $29,493,727
<FN>
See notes to consolidated financial statements.
</TABLE>
Page 32
INVESTORS HERITAGE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 and 1993
1995 1994 1993
OPERATING ACTIVITIES
Net Income $ 916,585 $ 2,400,988 $ 2,302,029
Adjustments to reconcile net income
to net cash provided by operating activities:
Increase (decrease) in Benefit
Reserves 7,175,593 (216,474) 19,468,453
Change in Claims Liability (169,736) (513,266) (791,946)
Change in Other Policyholder
Funds (1,135,436) 74,249 461,346
Amortization of Deferred
Acquisition Costs 6,085,957 10,092,870 12,315,997
Policy Acquisition Costs
Deferred (4,981,000) (9,019,000) (9,754,000)
Realized Gain on Investments (57,048) (346,697) (642,661)
Increase in Accrued Investment
Income (6,114) (156,711) (148,537)
Change in Other Assets and
Other Liabilities 260 (921,683) 534,618
Provision for Deferred Federal
Income Taxes (680,000) (670,000) (2,360,000)
Federal Income Tax (411) (951,504) 552,874
Change in Due and Deferred
Premiums (348,413) (138,862) 63,731
Net Adjustment for Premium and
Discount on Investments 112,387 224,422 139,248
Depreciation and Other Amortization 313,464 350,838 355,936
Change in Amounts Recoverable
from Reinsurers 4,773,358 10,103,840 (16,724,496)
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 11,999,446 $10,313,010 $ 5,772,592
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases $(19,036,132)
$ 25,428,933) $ (41,313)
Sales and Maturities 8,946,675 8,214,320 285,334
Securities held-to-maturity:
Purchases -0- (962,730) (43,673,683)
Sales and Maturities 204,084 6,127,887 33,391,890
Other Investments:
Cost of Acquisition (2,297,975) (1,511,189) (3,427,456)
Sales and Maturities 1,770,165 2,309,447 2,145,356
Net Additions to Property
and Equipment (149,910) (39,790) (168,277)
NET CASH USED BY INVESTING
ACTIVITIES
$(10,563,093)$(11,290,988) $(11,488,149)
FINANCING ACTIVITIES
Receipts from universal
life policies credited to
policyholder account balances $ 3,352,687 $ 5,096,198 $ 10,962,224
Return of policyholder account
balances on universal life policies (4,012,800) (4,087,252) (3,202,170)
Repurchase of Common Stock (23,831) (96,421) (106,314)
Dividends (685,219) (666,892) (653,157)
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES $ (1,369,163) $ 245,633 $ 7,000,583
INCREASE (DECREASE) IN CASH $ 67,190 $ (732,345) $ 1,285,026
Cash and cash equivalents
at beginning of year $ 2,309,791 3,042,136 1,757,110
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 2,376,981$ 2,309,791 $ 3,042,136
See notes to consolidated financial statements.
Page 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KENTUCKY INVESTORS, INC.
INVESTORS HERITAGE LIFE INSURANCE COMPANY
NOTE A - Nature of Operations and Accounting Policies
Kentucky Investors, Inc. (Kentucky Investors) is the holding company of
Investors Heritage Life Insurance Company (Investors Heritage), Investors
Heritage Printing, Inc., a printing company and Investors Heritage Financial
Services Group, Inc., an insurance marketing company formed in 1994. 99% of
Kentucky Investors operations are generated by Investors Heritage.
Investors Heritage's operations involve the sale and administration of various
insurance and annuity products, including, but not limited to, participating,
non-participating, whole life, limited pay, universal life, annuity contracts,
credit life, credit accident and health and group insurance policies. The
principal markets for Investors Heritage products are in the Commonwealths of
Kentucky and Virginia, and the states of North Carolina, South Carolina, Ohio,
Indiana, Florida, Tennessee, Illinois, Kansas, West Virginia and Texas.
Basis of Presentation: The accompanying consolidated financial statements of
Kentucky Investors, Inc. and subsidiaries and Investors Heritage Life
Insurance
Company and subsidiary have been prepared in accordance with generally accepted
accounting principles (GAAP). Investors Heritage also submits financial
statements to insurance regulatory authorities based on statutory accounting
practices which differ from GAAP.
Principles of Consolidation: The consolidated financial statements include the
majority-owned subsidiaries of Kentucky Investors which are Investors Heritage
Printing, Inc., Investors Heritage and its subsidiary, Investors Underwriters,
Inc., and Investors Heritage Financial Services Group, Inc. Kentucky Investors
formed Investors Heritage Financial Services Group, a wholly-owned marketing
company which markets a variety of products for a number of companies as well
as
Investors Heritage's mortgage protection products to financial institutions in
1994. Intercompany transactions are eliminated in consolidation.
Investments: Effective January 1, 1994, Kentucky Investors and Investors
Heritage adopted Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". In
accordance with SFAS No. 115, Kentucky Investors and Investors Heritage
classified its fixed maturities and equity securities as available-for-sale or
held-to-maturity. Under SFAS No. 115, securities classified as held-to-maturity
are carried at amortized cost. Available-for-sale classified securities are
carried at fair value with appreciation (depreciation) relating to temporary
market value changes recorded as an adjustment to stockholders' equity. The
effect of SFAS No. 115 resulted in an increase to stockholders' equity (net of
adjustments to deferred policy acquisition costs and deferred federal income
taxes) of $2,050,923 and $2,790,241 for Kentucky Investors and Investors
Heritage, respectively, to reflect the January 1, 1994, net unrealized gains on
securities classified as available-for-sale previously carried at amortized
cost. The adoption of SFAS No. 115 had no effect on Kentucky Investors or
Investors Heritage net income. During 1995 the Financial Accounting Standards
Board declared a one time "holiday" from SFAS No. 115 restrictions relating to
the transfer of held-to-maturity classified securities to the
available-for-sale
classification. Specifically, FASB decided that companies would be allowed a
one time reassessment of their classification of securities. Pursuant to the
"holiday" Kentucky Investors and Investors Heritage reclassified its held-to-
maturity securities to
Page 34
NOTES
NOTE A - Continued
available-for-sale. This was completed effective November 30, 1995. On that
date the amortized cost, related gross unrealized gain and related gross
unrealized loss were $6,377,043, $251,188 and $46,733, respectively. Equity
securities are carried at fair value.
Premiums and discounts on fixed maturity investments are amortized into income
using the interest method. Anticipated prepayments on mortgage-backed
securities are considered in the determination of the effective yield on such
securities. If a difference arises between anticipated prepayments and actual
prepayments, the carrying value of the investment is adjusted with a
corresponding charge or credit to interest income.
Realized gains and losses on the sale of investments are determined based upon
the specific identification method and include provisions for other-than-
temporary impairments where appropriate.
Mortgage loans, policy loans and other long-term investments are carried at
unpaid balances. Short term investments represent securities with maturity
dates within one year but exceeding three months. These securities are carried
at amortized cost.
Cash equivalents include money market funds on deposit at various financial
institutions with contractual maturity dates within three months at the time of
purchase.
Deferred Acquisition Costs: Commissions and other acquisition costs which vary
with and are primarily related to the production of new business are deferred
and amortized over the life of the related policies. See Revenues and Expenses
regarding amortization methods. Recoverability of deferred acquisition costs is
evaluated annually by comparing the current estimate of the present value of
expected pretax future profits to the unamortized asset balance. If such
current estimate is less than the existing balance,the difference is charged to
expense.
Property and Equipment: Property and equipment is carried at cost less
accumulated depreciation, using principally the straight-line method.
Accumulated depreciation on property and equipment of Kentucky Investors was
$3,705,560 and $3,507,133 at December 31, 1995 and 1994, respectively.
Accumulated depreciation on property and equipment of Investors Heritage was
$3,632,463 and $3,440,760 at December 31, 1995 and 1994, respectively.
Goodwill: Goodwill for Investors Heritage is being amortized over forty years
using the straight-line method. Accumulated amortization was $918,414 and
$852,813 at December 31, 1995 and 1994, respectively.
Benefit Reserves and Policyholder Deposits: Reserves on traditional life and
accident and health insurance products are calculated using the net level
premium method based upon estimated future investment yields, mortality,
withdrawals and other assumptions, including dividends on participating
policies. The assumptions are locked in and based on projections of past
experience and include provisions for possible unfavorable deviation.
Benefit reserves and policyholder deposits on universal life and investment-
type products are determined by using the retrospective deposit method and
represent the policy account value before consideration of surrender charges.
In addition, unearned revenues are included as a part of the benefit reserve.
Page 35
NOTES
NOTE A - Continued
The mortality assumptions for regular ordinary business are based on the
1955-60
Basic Table, Select and Ultimate, for plans issued prior to 1982, the 1965-70
Basic Table, Select and Ultimate, for plans issued in 1982 through 1984, the
1975-80 Basic Table, Select and Ultimate, for plans issued after 1984 and on
the
Company's experience for final expense plans.
Reinsurance: Kentucky Investors and Investors Heritage assume and cede
reinsurance under various agreements providing greater diversification of
business, allowing management to control exposure to potential losses arising
from large risks, and providing additional capacity for growth. Amounts
recoverable from reinsurers are estimated in a manner consistent with the
related liabilities associated with the reinsured policies. During 1993,
Investors Heritage reached agreements with two insurers for the recapture of
certain assumed group life policies. This resulted in a $637,000 gain from
operations before tax in 1993. In accordance with SFAS No. 113 reserves ceded
to reinsurers of $3,361,687 are shown gross on the balance sheets of Kentucky
Investors and Investors Heritage.
Unearned Premium Reserves: Credit life unearned premium reserves are calculated
for level and reducing coverage using the monthly pro rata and Rule of 78's
methods, respectively. Credit accident and health unearned premium reserves are
determined based upon the Rule of 78's in 1995, 1994 and 1993. In 1992, credit
accident and health unearned premium reserves were determined as the mean of
the
pro rata and Rule of 78's reserves. The change increased Investors Heritage's
1993 income from operations before tax by $370,000.
Policy Claims: Policy claims are based on known liabilities plus estimated
future liabilities developed from trends of historical data applied to current
exposure.
Other Policyholders' Funds: Other policyholders' funds consist primarily of
dividends and endowments left on deposit at interest. Participating business
approximates 12% of ordinary life insurance in force. Participating dividends
are accrued as declared by the Board of Directors of Investors Heritage.
Federal Income Taxes: Effective January 1, 1993, Kentucky Investors and
Investors Heritage changed their method of accounting for income taxes in
accordance with FASB Statement 109, "Accounting for Income Taxes". Under
Statement 109, the liability method is required to be used in accounting for
income taxes. Under that method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and the tax
bases of assets and liabilities and are measured using the enacted tax rates.
The cumulative effect of adopting Statement 109 as of January 1, 1993 was to
decrease net income by $68,000 ($ .09 per share) and increase net income by
$182,000 ($ .20 per share) for Kentucky Investors and Investors Heritage,
respectively.
Revenues and Expenses: Revenues on traditional life and accident and health
insurance products consist of direct and assumed premiums reported as earned
when due. Liabilities for future policy benefits, including unearned premium
reserves, are provided and acquisition costs are amortized by associating
benefits and expenses with earned premiums to recognize related profits over
the
life of the contracts. Acquisition costs are amortized over the premium paying
period using the net level premium method. Traditional life insurance products
are treated as long duration contracts based on the fact that they are ordinary
whole life insurance products which generally remain in force for the lifetime
of the insured. The accident and health insurance products are treated as long
duration contracts because they are non-cancelable.
Page 36
NOTES
NOTE A - Continued
Revenues for universal life and investment-type products consist of investment
income and policy charges for the cost of insurance and policy initiation and
administrative fees. Expenses include interest credited to policy account
balances, actual administrative expenses and benefit payments in excess of
policy account balances.
Deferred policy acquisition costs related to universal life and investment-type
products are amortized as a uniform percentage of each year's expected gross
profits, over the life of the policies. Amortization is unlocked for
significant changes in expected versus actual gross profits, including the
effects of realized gains or losses.
Common Stock and Earnings per Share: The par value per share for Kentucky
Investors is $1.00 with 1,225,000 shares authorized and 811,128, 779,895 and
771,786 shares issued at December 31, 1995, 1994 and 1993, respectively.
Earnings per share of common stock were computed based on the weighted average
number of common shares outstanding during each year. The number of common
shares used in this computation was 783,820 in 1995, 772,109 in 1994, and
769,570 in 1993. Cash dividends per share were $.38 in 1995, $.37 in 1994, and
$.36 in 1993.
The stated value of Investors Heritage common stock was $1,441,797, $1,443,259
and $1,449,010 at December 31, 1995, 1994 and 1993, respectively. 2,000,000
shares were authorized at December 31, 1995, 1994 and 1993 and 900,623,
901,537,
and 905,131 shares were issued at December 31, 1995, 1994 and 1993,
respectively. Earnings per share of common stock were computed based on the
weighted average number of common shares outstanding during each year: 901,151
in 1995, 902,115 in 1994, and 906,989 in 1993. Cash dividends per share were
$.76 in 1995, $.74 in 1994, and $.72 in 1993.
Reclassifications: Certain prior year amounts have been reclassified to conform
to the 1995 presentations.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and
accompanying notes. Actual results could differ from those estimates.
New Accounting Pronouncements: Kentucky Investors and Investors Heritage have
elected to adopt SFAS No. 120, "Accounting and Reporting by Mutual Life
Insurance Enterprises and by Insurance Enterprises for Certain Long Duration
Participating Contracts", effective January 1, 1996 to account for their
participating life insurance policies. Management has evaluated the impact of
adoption to be immaterial to the financial statements of both Kentucky
Investors and Investors Heritage.
NOTE B - Investments
Investors Heritage limits credit risk by emphasizing investment grade
securities and by diversifying its investment portfolio among government and
corporate bonds and mortgage loans. Investors Heritage manages its fixed
income portfolio to diversify between and within industry sectors. Mortgage
loans are issued at loan to value ratios not exceeding 80 percent.
Approximately $10,815,000 of the loans outstanding at December 31, 1995 were to
borrowers located in Kentucky. All loans are secured by a first mortgage on the
property.
Page 37
NOTES
NOTE B - Continued
Investments in available-for-sale and held-to-maturity securities
are summarized as follows:
<TABLE>
1995 Gross Gross
<CAPTION> Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available-for-sale securities:
<S> <C> <C> <C> <C>
U.S. Government
Obligations
$ 24,214,107 $1,364,794 $ 15,497 $ 25,563,404
States and Political
Subdivisions 1,987,512 73,488 -0- 2,061,000
Corporate 68,935,613 3,138,499 78,479 71,995,633
Foreign 5,015,069 260,071 -0- 5,275,140
Mortgage-Backed Securities 31,685,496 921,819 100,776 32,506,539
Total Fixed Maturity Securities $131,837,797 $5,758,671 $194,752$137,401,716
Equity Securities 1,311,393 1,347,552 93,009 2,565,936
Total
$133,149,190 $7,106,223 $287,761 $139,967,652
1994 Gross Gross
<CAPTION> Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available-for-sale securities:
<S> <C> <C> <C> <C>
U.S. Government Obligations
$ 29,489,371 $ 153,353 $1,331,031 $ 28,311,693
Corporate 63,925,650 174,999 4,263,242 59,837,407
Mortgage-Backed Securities 22,100,716 40,446 1,485,801 20,655,361
Total Fixed Maturity
Securities
$115,515,737 $ 368,798 $7,080,074 $108,804,461
Equity Securities 1,249,643 928,388 175,353 2,002,678
Total
$116,765,380 $ ,297,186 $ ,255,427 $110,807,139
Held-to-maturity securities:
States and Political
Subdivisions
$ 3,804,470 $ 31,498 $ 315,210 $ 3,520,758
Corporate 1,164,154 -0- 34,154 1,130,000
Mortgage-Backed Securities 1,611,697 -0- 148,638 1,463,059
Total
$ 6,580,321 $ 31,498 $ 498,002 $ 6,113,817
</TABLE>
In accordance with SFAS No. 115, net unrealized gains (losses) for investments
classified as available-for-sale are shown, net of the effect on deferred income
taxes and deferred policy acquisition costs assuming that the appreciation
(depreciation) had been realized. A summary follows:
December 31 December 31
1995 1994
Net unrealized appreciation
(depreciation) on available-
for-sale securities
$ 6,818,462 $ (5,958,241)
Adjustment to deferred
acquisition costs (836,591) 297,774
Deferred income taxes
(2,033,836) 1,924,559
Net unrealized appreciation
(depreciation) on
available-for-sale securities for
Investors Heritage
$ 3,948,035 $ (3,735,908)
Minority shareholders'
interest
(1,031,526) 978,917
Net unrealized appreciation
(depreciation) on
available-for-sale securities for
Kentucky Investors
$ 2,916,509 $ (2,756,991)
The amortized cost and fair value of debt securities at December 31, 1995, by
contractual maturity, are presented on the following page. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Page 38
NOTES
NOTE B - Continued
Available-for-Sale
Amortized Fair
Cost Value
Due in one year or less
$ 3,647,354 $ 3,708,957
Due after one year
through five years 41,873,594 43,283,787
Due after five years
through ten years 40,405,170 42,383,431
Due after ten years 12,266,568 13,482,102
Due at multiple maturity
dates 33,645,111 34,543,439
Total
$131,837,797 $137,401,716
Proceeds during 1995 and 1994 from sales and maturities of investments in
available-for-sale securities were $8,946,675 and $8,214,320, respectively.
Gross gains of $86,647 and $170,625 and gross losses of $50,315 and $35,599
were realized on those sales during 1995 and 1994, respectively. Proceeds
during 1995 and 1994 from sales and maturities of investments in held-to-
maturity securities were $204,084 and $6,127,887, respectively. Gross gains of
$2,135 and $116,525 and gross losses of $7,964 and $8,012, respectively, were
realized on those sales. Proceeds from sales and maturities of investments in
debt securities were $33,391,890 for 1993. Gross gains of $821,051 and gross
losses of $82,890 were realized on those sales in 1993.
Presented below is investment information for Investors Heritage, including the
accumulated and annual change in net unrealized investment gain or loss.
Additionally, the table below shows the annual change in net unrealized
investment gain (loss) and the amount of realized investment gain (loss) on
debt
and equity securities for the years ended December 31, 1995, 1994 and 1993:
1995 1994 1993
Change in unrealized
investment gain (loss):
Available-for-sale:
Debt securities $12,275,195 $(6,711,276) $ -0-
Equity securities 501,508 (267,147) 231,774
Held-to-maturity
(held for investment
prior to 1994):
Debt securities $ 466,504 $(5,663,480) $1,265,728
Realized investment
gain (loss):
Available-for-sale:
Debt securities $ 35,957 $ 134,213 $ -0-
Equity securities 375 813 1,605
Held-to-maturity
(held-for-investment
prior to 1994):
Debt securities $ (5,829) $ 108,513 $ 738,161
In 1995 there were sales of $146,914 of held-to-maturity securities with a
realized loss of $7,705. For statutory purposes the Company sold these
securities since they were not valued by the NAIC Securities Valuation Office.
Net realized gains of $1,876 result from prepayments and calls of held-to-
maturity securities in 1995. As previously mentioned in Note A, the balance of
held-to-maturity securities was transferred to available-for-sale on November
30, 1995. There were no sales of held-to-maturity securities in 1994. Realized
gains above in 1994 ($108,513) result from prepayments and calls of held-to-
maturity securities.
Page 39
NOTES
NOTE B - Continued
Major categories of investment income for Investors Heritage are summarized as
follows:
1995 1994 1993
Fixed maturities
$ 9,084,878 $ 8,210,890$ 7,934,808
Mortgage loans on
real estate 1,124,147 1,230,481 1,205,962
Other 961,604 908,508 951,670
___________ ___________ ___________
$11,170,629 $10,349,879 $10,092,440
Investment expenses 355,581 339,225 344,627
$10,815,048 $10,010,654$ 9,747,813
Investors Heritage and Kentucky Investors are required to hold assets on
deposit
for the benefit of policyholders in accordance with statutory rules and
regulations. At December 31, 1995 and 1994, these required deposits had book
values of $22,290,293 and $22,374,245, respectively, for Kentucky Investors and
Investors Heritage.
NOTE C - Fair Values of Financial Instruments
The following disclosure of the estimated fair values of financial instruments
is made in accordance with the requirements of SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments". The estimated fair value amounts have
been determined using available market information and appropriate valuation
methodologies. However, considerable judgement was necessarily required to
interpret market data to develop these estimates. Accordingly, the estimates
are not necessarily indicative of the amounts which could be realized in a
current market exchange. The use of different market assumptions or estimation
methodologies may have a material effect on the fair value amounts. The
following table relates solely to Investors Heritage. Carrying values and fair
values for Kentucky Investors approximate those shown for Investors Heritage,
except for the investments in and obligations of affiliates recognized by
Investors Heritage which are eliminated for Kentucky Investors reporting.
December 31, 1995
Investors Heritage Carrying Fair
Value Value
Assets:
Fixed maturities $137,401,716 $137,401,716
Equity securities 2,565,936 2,565,936
Mortgages on real
estate - commercial 12,353,835 13,627,306
Mortgages on real
estate - residential 704,629 793,064
Policy loans 6,869,039 6,869,039
Other long-term
investments 301,733 301,733
Short-term investments 1,103,021 1,103,021
Investments in
affiliates 2,309,438 4,406,088
Contractual obligations
of affiliate 747,753 747,753
Cash and cash equivalents 2,376,981 2,376,981
Accrued investment income 2,139,333 2,139,333
Liabilities:
Policyholder deposits
(investment-type
contracts) $ 48,243,071 $ 43,049,666
Policy claims 1,665,949 1,665,949
Page 40
NOTES
NOTE C - Continued
The following methods and assumptions were used in estimating the "fair value"
disclosures for financial instruments in the accompanying financial statements
and notes thereto:
Cash, cash equivalents, short-term investments, policy loans, accrued
investment
income, other long term investments and contractual obligations of affiliates:
The carrying amounts reported for these financial instruments approximate their
fair values.
Fixed maturity, equity securities, and investments in affiliates: The fair
values for fixed maturity, equity securities (including redeemable preferred
stocks) and investments in affiliates are based on quoted market prices.
Mortgage loans: The fair values for mortgage loans are estimated using
discounted cash flow analyses, using the actual spot rate yield curve in effect
at December 31.
Investment-type contracts: The fair values for the liabilities under
investment-type insurance contracts are calculated as surrender values on these
contracts.
Policy claims: The carrying amounts reported for policy claims approximate
their fair value.
The fair values for insurance contracts other than investment contracts are not
required to be disclosed under SFAS No. 107.
NOTE D - Investment in Affiliates/Contractual Obligation of Affiliate
Investors Heritage's investment in the common stock of its parent, Kentucky
Investors, either directly or indirectly, was at December 31, 1995: Cost
$2,309,438, Market $4,406,088 and at December 31, 1994: Cost $2,679,684, Market
$4,710,107. Additionally, Investors Heritage owns several notes due from
Kentucky Investors, with variable interest rates and due dates from 1999 to
2004. Kentucky Investors owns approximately 74% of Investors Heritage. Sales
of common stock owned by Investors Heritage are reported by Kentucky Investors
as stock issuances. The consideration received from such sales is recorded by
Kentucky Investors as follows: an adjustment to common stock at par value of
securities sold, an adjustment to retained earnings for the cost of securities
sold in excess of par value, and an adjustment to paid in surplus for the
difference in consideration received and cost of the securities paid by
Investors Heritage.
NOTE E - Federal Income Tax
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets as of December 31 are as
follows:
Page 41
NOTES
NOTE E - Continued
Investors Heritage 1995 1994
Deferred tax liabilities:
Policy acquisition costs$ 7,972,000 $8,416,000
Net unrealized gain on
available-for-sale
securities 2,034,000 -0-
Other 235,000 176,000
Total deferred tax
liabilities $ 10,241,000 $8,592,000
Deferred tax assets:
Benefit reserves $ 6,286,000 $5,712,000
Other 501,000 527,000
Net unrealized losses on
available-for-sale securities -0- 1,925,000
Total deferred tax
assets $ 6,787,000 $8,164,000
Valuation allowance
for deferred tax assets (252,000) -0-
Net deferred tax assets $ 6,535,000 $8,164,000
Net deferred tax
liabilities of
Investors Heritage $ 3,706,000 $ 428,000
Kentucky Investors
Deferred tax liability:
Undistributed earnings
in subsidiary 1,414,000 1,402,000
Net deferred tax
liabilities of
Kentucky Investors $ 5,120,000 $1,830,000
A valuation allowance was recorded on net deferred tax assets exclusive of the
liability related to the net unrealized gain on available-for-sale securities.
The valuation allowance was established to record the net asset at its
estimated realizable value.
Federal income taxes in the consolidated balance sheets include deferred taxes
and in 1993, taxes currently payable. In 1995, taxes recoverable of $77,000 and
$-0- for Investors Heritage and Kentucky Investors, respectively, is included
in other assets in the consolidated balance sheets.
The reconciliation of income tax attributable to operations computed at the
federal statutory tax rate to income tax expense is:
1995 1994 1993
Statutory federal
income tax rate 35.0 % 35.0 % 35.0 %
Graduated tax rate (1.0)% (1.0)% (1.0)%
Small life insurance
company deduction (63.8)% (19.5)% (14.5)%
Dividend exclusion
and tax-exempt income(5.0)% (1.7)% (2.4)%
Increase in valuation 27.6 %
Alternative minimum
taxes (2.5)%
Purchase accounting
differences 2.3 % .7 % .7 %
Other, net 1.3 % .5 % (1.9)%
Effective income tax rate-
Investors Heritage (3.6)% 14.0 % 13.4 %
Consolidating
adjustments 5.9 % 3.6 % 5.0 %
Effective income tax rate-
Kentucky Investors 2.3 % 17.6 % 18.4 %
Page 42
NOTES
NOTE E - Continued
At December 31, 1995 approximately $4,000,000 of the retained earnings of
Investors Heritage represents earnings prior to 1984 which accumulated in an
account known as policyholders' surplus, which was not subject to income
taxation. In certain circumstances, including if distributions are made to
stockholders in excess of approximately $6,900,000, Investors Heritage could be
subject to additional federal income tax unrelated to its normal taxable
income.
No provision for such income tax has been provided for as management
foresees no events which would result in such tax being incurred.
Kentucky Investors made income tax payments of $34,750, $29,200 and $6,000 in
1995, 1994 and 1993, respectively. Investors Heritage made income tax payments
of $445,614, $2,450,000 and $2,005,000 in 1995, 1994, and 1993, respectively.
NOTE F - Employee Benefit Plans
Kentucky Investors and Investors Heritage participate in a noncontributory
retirement plan which covers substantially all employees. Benefits are based on
years of service and the highest consecutive 60 months average earnings within
the last 120 months of credited service. Benefits are funded based on
actuarially determined amounts.
The following tables provide additional details for Kentucky Investors on a
consolidated basis. Because the amounts for the parent company and Investors
Heritage Printing, Inc. are immaterial, they are not separately presented.
1995 1994 1993
Components of pension
expense:
Service cost $ (222,492) $ (212,612) $ (164,415)
Interest cost (289,538) (244,073) (212,520)
Actual return on
plan assets 296,918 269,622 252,606
Net amortization and
deferral (10,667) (71,269) (67,913)
Net periodic pension
expense $ (225,779) $ (258,332) $ 92,242)
Plan assets at
fair value $ 3,460,959 $ 3,050,765 $ 2,558,190
Actuarial present value
of projected benefit
obligation:
Accumulated benefit
obligations:
Vested $(3,356,652) $(2,537,144)$ (2,224,048)
Nonvested (45,880) (35,477) (26,889)
$(3,402,532) $ 2,572,621)$ (2,250,937)
Provision for future
salary increase (1,172,820) (833,712) (898,393)
Total projected benefit
obligation $(4,575,352) $(3,406,333)$ (3,149,330)
Projected benefit
obligation in excess
of fair value of plan
assets $(1,114,393) $ (355,568)$ (591,140)
Unrecognized net loss 1,255,751 506,848 800,896
Unrecognized transition
asset (204,861) (239,004) (273,148)
ACCRUED PENSION COST $ (63,503) $ (87,724)$ (63,392)
Excess of plan assets over
accumulated benefit
obligations $ 58,427 $ 478,144$ 307,253
Page 43
NOTES
NOTE F - Continued
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 7.5% and 8.5% for 1995 and 1994, respectively.
The rate of increase in future compensation levels was 5% for 1995, 1994 and
1993. The expected long-term rate of return on plan assets was 9% in 1995, 1994
and 1993. Plan assets represent a deposit administration fund of Investors
Heritage.
Kentucky Investors and Investors Heritage also sponsor a 401(k) defined
contribution plan. Matching contributions to the plan expensed for 1995, 1994
and 1993 were $150,000, $131,000, and $138,000, respectively.
NOTE G - Stockholders' Equity and Dividend Restrictions
Statutory restrictions limit the amount of dividends which may be paid by
Investors Heritage. Generally, dividends during any year may not be paid,
without prior regulatory approval, in excess of the lessor of (a) 10 percent of
statutory stockholders' equity as of the preceding December 31, or (b)statutory
net income for the preceding year. In addition, dividends are limited to the
amount of unassigned surplus reported for statutory purposes, which was
$10,950,126 at December 31, 1995.
NOTE H - Statutory Accounting Practices
Stockholders' equity, as reported by Investors Heritage, was $15,061,860 and
$13,867,715 at December 31, 1995 and 1994, respectively. The statutory net
income was $2,063,471, $2,486,925, and $523,908 for the years ending December
31, 1995, 1994 and 1993, respectively.
Principle adjustments to statutory amounts to derive GAAP amounts include: a)
costs of acquiring new policies are deferred and amortized; b) benefit reserves
are calculated using more realistic investment, mortality and withdrawal
assumptions; c) deferred income taxes are provided; d) value of business
acquired and goodwill are established for acquired companies; and e) accounting
for certain investments in debt securities.
Investors Heritage is domiciled in the Commonwealth of Kentucky and prepares
its
statutory-basis financial statements in accordance with accounting practices
prescribed or permitted by the Kentucky Department of Insurance. "Prescribed"
statutory accounting practices include state laws, regulations, and general
administrative rules, as well as a variety of publications of the National
Association of Insurance Commissioners ("NAIC"). "Permitted" statutory
accounting practices encompass all accounting practices that are not
prescribed;
such practices may differ from state to state, may differ from company to
company within a state, and may change in the future. The NAIC currently is in
the process of recodifying statutory accounting practices, the result of which
is expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in
1997, will likely change, to some extent, prescribed statutory accounting
practices, and may result in changes to the accounting practices that insurance
enterprises use to prepare their statutory financial statements. It is not
feasible to discuss the expected impact to the Company of the recodification of
statutory accounting practices since no changes have been determined with any
certainty.
During the year Investors Heritage completed its negotiations with the Kentucky
Department of Insurance (the "Department") with regard to the valuation of
certain assets held by Investors Heritage. Under the agreement reached with the
Department, Investors Heritage will write down the statutory value of the home
office real estate owned from market to depreciated cost over a five-year
period and will write down to zero its investment in the
Page 44
NOTES
NOTE H - continued
common stock of Investors Underwriters, Inc. (subsidiary) and its investment in
the common stock of Kentucky Investors over a three-year period. During 1995
the assets were written down by $1,527,826. After consideration of the Asset
Valuation Reserve (AVR) related to the write downs the net effect to statutory
surplus was a reduction of $395,071. The remaining write downs as of December
31, 1995 to be taken over the next four years against statutory surplus, before
consideration of AVR, will be approximately $5,178,000.
NOTE I - Segment and Reinsurance Data
Investors Heritage operates in four segments as shown in the following tables.
All segments except Corporate include both individual and group insurance.
Identifiable revenues, expenses and assets are assigned directly to the
applicable segment. Net investment income and invested assets are generally
allocated to the insurance and the corporate segments in proportion to policy
liabilities and stockholders' equity, respectively. Certain assets, such as
property and equipment, are assigned to the Corporate segment. Goodwill has
been allocated to the insurance lines based upon the mix of business of
companies acquired. Corporate segment results for the parent company, Investors
Heritage Printing, Inc., and Investors Heritage Financial Services Group are
immaterial, after elimination of intercompany amounts, and are not presented.
1995 1994 1993
(000's omitted)
Revenue:
Life & Annuities $ 42,437 $ 38,916 $ 33,697
Credit(Life & A&H) (802) 5,431 7,056
Accident & Health 1,126 1,139 3,063
Corporate 1,315 1,318 1,610
$ 44,076 $ 46,804 $ 45,426
Pre-Tax Income from Operations:
Life & Annuities $ 1,143 $ 2,868 $ 2,866
Credit(Life & A&H) (826) (1,095) (1,521)
Accident & Health 108 430 396
Corporate 460 589 707
$ 885 $ 2,792 $ 2,448
Assets:
Life & Annuities $ 163,834 $ 143,789 $ 133,911
Credit(Life & A&H) 8,186 20,107 33,556
Accident & Health 1,692 1,811 2,861
Corporate 36,778 28,555 30,869
$ 210,490 $ 194,262 $ 01,197
Amortization and
Depreciation Expense:
Life & Annuities $ 2,874 $ 4,303 $ 3,968
Credit(Life & A&H) 2,672 4,971 7,451
Accident & Health 605 906 962
Corporate 248 264 291
$ 6,399 $ 10,444 $ 12,672
Page 45
NOTES
NOTE I - continued
For 1995, the development of segment data was derived using a revised
allocation
methodology. Such change in approach was applied and amounts have been restated
for the 1994 and 1993 segment data presented above. This change in approach was
made to enhance the allocation of costs and revenues to coincide with resources
used by the segment and revenues earned. As a result of this change, revenues
for the Life and Annuities segment increased $446,000 for 1994 and $458,000 for
1993. Revenues for the Corporate segment decreased $497,000 for 1994 and
$519,000 for 1993. Pre-Tax Income from Operations for the Life and Annuities
segment increased $115,000 for 1994 and $513,000 for 1993. Pre-Tax Income from
Operations for the Corporate segment decreased $193,000 in 1994 and $379,000 in
1993. The effect on other segment classifications presented above was
immaterial.
Investors Heritage cedes a portion of its credit life and accident insurance
through coinsurance agreements and utilizes yearly renewable term reinsurance
to
cede life insurance coverage in excess of its retention limit which has been
set
at $100,000. Total premiums ceded amounted to $1,135,000 and $1,420,000 in 1995
and 1994, respectively, and commissions and expense allowances received were
$166,000 and $317,000 in 1995 and 1994, respectively. Unearned premium reserves
were reduced by $2,048,000 and $5,296,000 at December 31, 1995 and 1994,
respectively, for credit reinsurance transactions. Investors Heritage remains
contingently liable on all ceded insurance should any reinsurer be unable to
meet their obligations. Assumed reinsurance premiums were $4,348,000 and
$4,538,000 in 1995 and 1994, respectively.
NOTE J - Contingent Liabilities
Investors Heritage is named as a defendant in a number of legal actions arising
primarily from claims made under insurance policies. Management and its legal
counsel are of the opinion that the settlement of those actions will not have a
material adverse effect on Investors Heritage's financial position or results
of operations.
In most of the states in which Investors Heritage is licensed to do business,
guaranty fund assessments may be taken as a credit against premium taxes over a
five year period. These assessments, brought about by the insolvency of life
and health insurers, are levied at the discretion of the various state guaranty
fund associations to cover association obligations. There has been a
significant increase in recent years of guaranty fund assessments. There is no
reasonable way to determine if the assessments will increase or decrease in the
future, but management is of the opinion that the effect would not be material
on the financial position or results of operations of either Investors Heritage
or Kentucky Investors because of the use of premium tax off-sets.
On March 14, 1996, Investors Heritage received a letter from Crown Life
Insurance Company, a coinsurer of certain credit life and credit accident and
health policies sold by Investors Heritage, regarding certain disagreements in
the terms of their reinsurance agreement. Because of these disagreements, Crown
Life contends that Investors Heritage owes to them approximately $1,000,000.
Investors Heritage has not completed its investigation in order to respond to
Crown Life's assertions, but based on its preliminary assessment Investors
Heritage disagrees and intends to vigorously defend its position.
Page 46
BOARD OF DIRECTORS
Harry Lee Waterfield II
Chairman of the Board I K a b c d e f g h
Frankfort, Kentucky
Warner Hines K g
Frankfort, Kentucky
Dr. Adron Doran I a b e
Lexington, Kentucky
Jerry F. Howell I K a b c d e h
Leesburg, Florida
H. Glenn Doran I K c d f g
Murray, Kentucky
Dr. Jerry F. Howell, Jr. I K c f
Morehead, Kentucky
Michael F. Dudgeon, Jr. I c
Columbia, South Carolina
Joe R. Johnson I d
Frankfort, Kentucky
Gordon C. Duke K g
Frankfort, Kentucky
David W. Reed K h
Gilbertsville, Kentucky
Robert M. Hardy, Jr. I K a f g h
Frankfort, Kentucky
Helen Wagner K b f
Owensboro, Kentucky
I Investors Heritage Life Insurance Company
d Investors Heritage Life Finance Committee
K Kentucky Investors, Inc.
e Investors Heritage Life Compensation Committee
a Investors Heritage Life Executive Committee
f Kentucky Investors Executive Committee
b Investors Heritage Life Nominating Committee
g Kentucky Investors Finance Committee
c Investors Heritage Life Audit Committee
h Kentucky Investors Nominating Committee
STOCK INFORMATION
Stock Prices
NASDAQ OVER-THE-COUNTER MARKET QUOTATIONS
(Investors Heritage
Life Insurance Company and Kentucky Investors Inc. Logos)
Investors Heritage Life Insurance Company
1995 MARKET PRICE RANGE
26-28 March
26-28 June
26-28 Sept.
26-28 Dec.
1995 Annual Dividend Per Share - $.76
1994 MARKET PRICE RANGE
26-28 March
26-28 June
26-28 Sept.
26-28 Dec.
1994 Annual Dividend Per share - $.74
Kentucky Investors, Inc.
1995 MARKET PRICE RANGE
12 1/2 - 13 1/2 March
12 1/2 - 13 1/2 June
12 3/4 - 13 3/4 Sept.
12 3/4 - 13 3/4 Dec.
1995 Annual Dividend Per Share - $.38
1994 MARKET PRICE RANGE
12 1/2 - 13 1/2 March
12 1/2 - 13 1/2 June
12 1/2 - 13 1/2 Sept.
12 1/2 - 13 1/2 Dec.
1994 Annual Dividend Per Share - $.37
The stock of both companies is traded on over-the-counter market. Both stocks
are on the NASDAQ system. The quotations reflect inter-dealer prices, without
retail mark-up, mark-down, or commission, and may not represent actual
transactions. The symbol for Investors Heritage Life is INLF and the symbol for
Kentucky Investors is KINV.
The 1996 cash dividend to be paid to its stockholders by Investors Heritage
Life
on April 12, 1996 is $.76 per share, and the cash dividend to be paid on the
same date to its shareholders by Kentucky Investors is $.38 per share.
ANNUAL MEETING
The 1996 meeting of shareholders of Investors Heritage Life Insurance Company
is
scheduled for 10 a.m. on Thursday, May 9, 1996, at the company auditorium,
Second and Shelby Streets, Frankfort, Kentucky. The annual meeting of
shareholders of Kentucky Investors, Inc., is scheduled for the same date and
location at 11 a.m.
FORM 10-K
A copy of the Form 10-K Annual Report to the Securities and Exchange Commission
for either Company can be obtained upon request to the Secretary of that
company.
TRANSFER AGENT
Investors Heritage Life Insurance Company
Stock Transfer Department
P.O. Box 717
Frankfort, Kentucky 40602
(502) 223-2364 - EXT. 305
Page 48
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 137,401,716
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,566,023
<MORTGAGE> 13,058,464
<REAL-ESTATE> 0
<TOTAL-INVEST> 161,329,996
<CASH> 2,417,375
<RECOVER-REINSURE> 79,430
<DEFERRED-ACQUISITION> 28,260,113
<TOTAL-ASSETS> 208,045,116
<POLICY-LOSSES> 155,182,145
<UNEARNED-PREMIUMS> 6,512,362
<POLICY-OTHER> 1,665,949
<POLICY-HOLDER-FUNDS> 2,100,363
<NOTES-PAYABLE> 0
0
0
<COMMON> 811,128
<OTHER-SE> 23,830,412
<TOTAL-LIABILITY-AND-EQUITY> 208,045,116
33,061,376
<INVESTMENT-INCOME> 10,674,159
<INVESTMENT-GAINS> 29,898
<OTHER-INCOME> 239,178
<BENEFITS> 17,291,402
<UNDERWRITING-AMORTIZATION> 1,104,957
<UNDERWRITING-OTHER> 24,794,496
<INCOME-PRETAX> 813,756
<INCOME-TAX> 19,000
<INCOME-CONTINUING> 794,756
<DISCONTINUED> 0
<EXTRAORDINARY> 239,824
<CHANGES> 0
<NET-INCOME> 554,932
<EPS-PRIMARY> .71
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
