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, 1997
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 $7,018,651.20 as of December 31, 1997.
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, 1997
836,895
Documents Incorporated by Reference:
(1) Portions of the Annual Report to the Stockholders for the year ended
December 31, 1997 (Form 10-K, Items 1, 5a, 6, 7 and 8)
(2) Portions of the Proxy Statement dated April 17, 1998, for the Annual
Meeting of Stockholders to be held May 14, 1998 (Form 10-K, Items 10, 11, 12
and 13.)
PART I
Item 1. Business
(a) General
(a) The business of Kentucky Investors, Inc. (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, 1997. 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, 1997.
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 1997 were derived from the
sale of IHL's Credit Insurance products.
IHL
The business segments of the Insurance Subsidiary are identified
and discussed on pages 45-47 of the Annual Report to Stockholders for the year
ended December 31, 1997 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. During 1995, IHL began
phasing out of the Credit Insurance market as an underwriter and since
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. As a result of IHL's growth in the preneed area,
agency relationships have been entered into directly with the funeral home
owner. Management anticipates this trend to continue and, depending on the size
of the funeral home and state law, preneed counselors will also become part of
the agency force. 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 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, 1997, 11% of the total
ordinary insurance in force was comprised of participating policies and of the
11%, approximately 6% 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, 1997, 5% of the
total ordinary insurance in force was comprised of participating policies with
non-guaranteed benefits.
Non-participating life insurance policies represented 89% of the total
ordinary insurance in force.
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 FSG.
As anticipated, during 1997 IHL introduced group life products designed
for the pre-arranged funeral market. Some of these products provide for the
payment of the full face amount at the death of the insured and some provide
graded death benefits during the first year. All of the products provide for
increasing death benefits on a non-guaranteed basis.
It is anticipated that during 1998 IHL will introduce a new generation of
both individual and group life products designed for the pre-arranged funeral
market. These products are being developed and will be implemented as
required state approvals are received.
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 Insurance Company ("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. 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 by providing 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 cedes to Connecticut
General 100% of the risk on all Credit Insurance policies sold by IHL. In
addition to receiving a retention fee, IHL also receives a fee for
administration and claims processing services. It has not been necessary for
IHL to add any employees to assist in the administration of this business. No
additional amounts were expended in order to put IHL's administrative and
claims processing 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. In addition, IHL has
recently entered into a reinsurance agreement with two unaffiliated companies,
Life Investors Insurance Company of America ("Life Investors") and Bankers Life
Insurance Company ("Bankers Life"). Pursuant to those agreements, the Company's
Credit Insurance products sold by Life Investors' and Bankers Life's agents
will be reinsured to Life Investors and Bankers Life, respectively. IHL and FSG
will be paid a retention fee and a marketing fee for services provided. IHL
has continued to seek contracts to operate as an administrator for other
companies which sell Credit Insurance.
FSG will continue to call on banks, finance companies and selected
automobile dealerships to market the Credit Insurance products for IHL. As
anticipated that more than 10% of FSG's revenues for 1997 were derived from the
sale of IHL's Credit Insurance products. IHL anticipates 1998 Credit Insurance
gross written premiums to exceed $2 million; however, as described above, that
business was and will continue to 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 48% 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 has substantially decreased since 1993 and 1994. The reduction of
in-force business since 1993 has been $149,736,000.
During 1997, IHL converted to group insurance products in the preneed
market in a majority of states. Therefore, group life premiums and in-force
business increased significantly while individual premiums and in-force
business decreased commensurately. Group life premiums during 1997 were
$7,324,000 as compared to $3,881,000 in 1996 which is an increase of 89%.
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, Georgia, 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 168 banks and automobile
dealerships.
IHL is also licensed in sixteen other states: 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 is $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 to unaffiliated reinsurers. As of December
31, 1997, approximately $483,043,000, or 18% 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 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.
IHL is party to reinsurance and coinsurance agreements with eighteen non-
affiliated companies. The reinsurers for IHL and amounts of insurance in
force that are reinsured are as follows:
Company Reinsurance Amount Percent of Total
Connecticut General Life
Insurance Co. $323,532,000 67.0%
Crown Life Insurance Co. 3,067,000 .6%
The Lincoln National Life
Insurance Co. 79,366,000 16.4%
J.M. Limited 4,060,000 .8%
Bankers Life Insurance Co. 33,031,000 6.8%
AEtna Life Insurance Co. 619,000 .1%
Indiana-Kentucky Ins. Co. Ltd. 952,000 .2%
Riverside Reinsurance Ltd. 1,630,000 .3%
Pirtle Ltd. 258,000 .1%
Lancaster Life Insurance Co. 3,779,000 .8%
Business Men's Assurance Co. 4,526,000 .9%
Swiss Re America 2,055,000 .4%
Groves Reinsurance Ltd. 464,000 .1%
Munich American Reinsurance Co. 23,407,000 4.9%
Life Investors Ins. Co. of
America 1,672,000 1.0%
Other Companies (3) 625,000 .1%
TOTAL $483,043,000 100.0%
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 1997,
IHL reinsured all of the risk on the Credit Insurance policies sold by its
agents to Connecticut General, and will continue to do so in 1998.
As explained above, some of these risks will also be reinsured to Life
Investors and Bankers Life.
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 1996 for the five
years 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 3.1 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 6.3 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 9.0 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 IHL is responsive
to the current economic environment, the life insurance market is relatively
volatile, and IHL's operating results may vary with those conditions.
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 1997 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 during the last
three years. However, revenues from IHP continued to be less than one percent
of the Company's total revenue for 1997.
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 second
year of operations with revenues of $282,000 in 1996 compared to $171,000 in
1995. The growth pattern continued during 1997 with revenues of $370,000 as
compared to $282,000 in 1996. Even considering this growth, revenues from FSG
will continue to account for less than one percent of the Company's total
revenue for 1997. See Schedule II.
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 purchases made 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
There were no material changes in the Company's holdings during the year
1997. While changes in the life insurance business can be dramatic, 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. During 1996 IHL continued to increase its
marketing operations and to expand into new states, including but not limited
to, Tennessee, Indiana, Illinois, Kansas, South Carolina and Georgia and
experienced growth in premium production of approximately 28 percent in the
prearranged funeral market during 1996 over 1995, $16,681,000 compared to
$13,072,000, as anticipated.
During 1997, the Company focused on increasing its market share in
existing states and expanding into some new areas, including Arkansas. Even
though single premium growth was anticipated to be 12-15%, when combining
ordinary life, group life and individual annuities, actual growth was 26%.
Single premium production for these lines of business was $21,104,00 for 1997
compared to $16,678,000 for 1996 and IHL anticipates continued growth in this
segment of approximately 12-15% during 1998.
Credit Insurance. IHL has marketed and sold Credit Insurance since
1966. 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 marketed
Franklin Life Insurance Company's ("Franklin") Credit Insurance products.
However, 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.
Since 1996 FSG has marketed IHL's Credit Insurance products and will
continue to do so in 1998. In addition, FSG was responsible for marketing
products for unaffiliated companies to financial institutions including
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 anticipated
growth of approximately 3-5 percent in this segment of its business due to the
marketing efforts of FSG. Actual growth during 1996 was 108% due to the fact
that several of FSG's agents who also had agency relationship with other
companies began sending more of the business to IHL. IHL's management
anticipates steady growth in this segment during 1996 due to FSG's efforts.
Actual growth in 1997 exceeded anticipated growth by 48% due to increased
sales activity. Premium production in this area increased $837,752, from
$1,239,000 in 1996 to $2,076,752 in 1997. Management anticipates an increase of
approximately 20% during 1998.
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 108. The number of active independent contractual
agents of IHL is 2,226. 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 $45,192.
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, 1997, and is incorporated herein by reference.
(b) Approximate Number of Equity Security Holders
(A) (B)
Number of Holders
Title of Class of Record 12-31-97
Common Stock 2,448
(c) Dividends
Kentucky Investors, Inc., paid dividends totaling $440,800 to
stockholders in 1997 representing a $.38 per share. The 1998 cash dividend
to be paid April 17, 1998, to stockholders of record April 3, 1998 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, 1997, 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 9-20 in the Annual Report to the Stockholders
for the year ended December 31, 1997, and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The financial statements and notes appear on pages 24-27 and 34-47 in the
Annual Report to Stockholders for the year ended December 31, 1997 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 54
Chairman of the Board,
President/1963
Jimmy R. McIver 46
Treasurer/1988
Nancy W. Walton 58 Sister of
First Vice Harry Lee
President/1988 Waterfield II
Robert M. Hardy, Jr. 40 Nephew of
Director, Vice President Harry Lee
and General Waterfield II
Counsel/1988
Howard L. Graham 63
Vice President
Corporate Services
1989
Wilma Yeary 66
Secretary/1989
Jane S. Jackson 43
Asst. Secretary
1989
Helen S. Wagner 61
Director/1986
Gordon Duke 52
Director/1991
H. Glenn Doran 72
Director/ 1963
Jerry F. Howell 84
Director/ 1963
Jerry F. Howell, Jr. 56 Son of Jerry
Director/ 1983 F. Howell
David W. Reed 44
Director/ 1982
(b) Each of the Directors has occupied the position indicated for a
period of more than five years. Information regarding the business experience
of the Directors who are not officers of the Company is shown on pages 2 and 3
of the Proxy Statement of the Annual Meeting of Shareholders to be held on
May 14, 1998, 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 4 of the Proxy Statement for
the Annual Meeting of Shareholders to be held May 14, 1998 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 and 3 of the Proxy Statement for the Annual Meeting of Stockholders to be
held May 14, 1998, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Certain relationships and related transactions are shown on page 5 of
the Proxy Statement for the Annual Meeting of Stockholders to be held May 14,
1998, 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,
1997 (pages 24-27 and 34-47) filed as Exhibit 1:
Consolidated Balance Sheets -- December 31, 1997 and 1996
For each of the three years in the period ended December 31, 1997:
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a)2. Consolidated Financial Statement Schedules
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, 1997, 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, 1997.
(a)3. Listing of Exhibits
Exhibit 1 - Annual Report to the Stockholders for the year ended December
31, 1997.*
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 December 31, 1994.)
Exhibit 11-- Statements re Computation of Per Share Earnings.**
Exhibit 23-- Consent of Independent Auditors.
Exhibit 27-- Financial Data Schedule.
*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, 1997, and is incorporated herein
by reference.
(b) Reports on Form 8-K
No filing of Form 8-K was made in 1997.
(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 12, 1998 /s/
DATE BY: 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.
/s/
Harry Lee Waterfield II
Chairman of the Board
and President
March 12, 1998
/s/
Robert M. Hardy, Jr.
Vice President and
General Counsel and Director
March 12, 1998
/s/
Jimmy R. McIver
Treasurer
March 12, 1998
/s/
Howard L. Graham
Vice-President
Corporate Services
March 12, 1998
/s/
Jerry F. Howell
Director
March 12, 1998
/s/
Gordon Duke
Director
March 12, 1998
/s/
Helen S. Wagner
Director
March 12, 1998
/s/
H. Glenn Doran
Director
March 12, 1998
/s/
David W. Reed
Director
March 12, 1998
/s/
Jerry F. Howell, Jr.
Director
March 12, 1998
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, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
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.
/s/
Ernst & Young LLP
Louisville, Kentucky
March 24, 1998
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 24, 1998, with respect to the
consolidated financial statements and schedule of Kentucky Investors, Inc. and
subsidiaries included or incorporated by reference in the Annual Report (Form
10-K) for the year ended December 31, 1997.
/s/
Ernst & Young LLP
Louisville, Kentucky
March 24, 1998
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
KENTUCKY INVESTORS, INC.
CONDENSED BALANCE SHEET
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, 1995
1997 1996 1995
------ ------ ------
Assets
Cash and Cash
Equivalents $ 36,866 $ 36,943 $ 40,394
Investment in
Subsidiary 29,878,589 26,071,120 26,679,315
Other Assets 291,583 221,215 136,391
----------- ----------- -----------
$30,207,038 $26,329,278 $26,856,100
=========== =========== ===========
Liabilities:
Notes Payable
to Subsidiary $ 538,794 $ 646,554 $ 747,754
Other
Liabilities 50,398 65,600 52,985
Deferred Taxes 1,531,026 1,459,351 1,413,821
Stockholders'
Equity
Common Stock 836,895 820,475 811,128
Paid in Capital 3,384,061 3,374,615 3,374,704
Unrealized
Appreciation
(depreciation)
of available-
for-sale
securities of
Subsidiary 4,043,101 1,510,225 2,916,509
Retained
Earnings 19,822,763 18,452,458 17,539,199
---------- ---------- ----------
Total Stock-
holders'
Equity $28,086,820 $24,157,773 $24,641,540
----------- ----------- -----------
$30,207,038 $26,329,275 $26,856,100
=========== =========== ===========
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
KENTUCKY INVESTORS, INC.
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, 1995
1997 1996 1995
------ ------ ------
Income
From printing
services to:
Affiliated
companies $ 361,013$ 369,143 $399,240
Others 116,328 143,295 79,604
Realized Gain/Loss
on Investments 64 (596)
Other services
to subsidiary 190,478 158,285 64,389
Dividends from
subsidiary 505,636 505,635 505,635
Interest and
other income 228,880 165,687 148,961
----------- ---------- --------
$1,402,399$1,342,045$1,197,233
Operating
Expenses 649,917 655,308 627,152
---------- --------- ---------
Operating
income before
equity in
undistributed
earnings of
subsidiary $ 752,482$ 686,737 $570,081
Equity in
undistributed
earnings of
subsidiary for
the year 960,070 581,882 44,851
---------- --------- ---------
Income before
provision for
income taxes $1,712,552$1,268,619 $614,932
---------- --------- ---------
Provision for
Income Taxes
Current $ 118,000 $ 76,000 $48,000
Deferred 72,000 46,000 12,000
------------- --------- ---------
$ 190,000$ 122,000$ 60,000
------------- --------- ---------
Income before
cumulative
effect of
accounting
change $1,522,552$1,146,619 $554,932
Cumulative
effect of
accounting
change $ -0- $ -0- $ -0-
--------- ---------- -------
Net Income $1,522,552$1,146,619 $554,932
========== ========= ========
Earnings Per
Share $ 1.84$ 1.41 $ .71
========== ========== ========
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
KENTUCKY INVESTORS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, 1995
1997 1996 1995
------ ------ ------
NET CASH
PROVIDED
BY OPERATING
ACTIVITIES $ 548,483 $ 538,549 $ 542,186
----------- ----------- -----------
FINANCING
ACTIVITIES
Decrease in
Notes
Payable $(107,760)$ (101,200) $ (87,913)
Dividends (440,800) (440,800) (440,800)
---------- ----------- -----------
CASH USED BY
FINANCING
ACTIVITIES $(548,560) $(542,000) $(528,713)
---------- ---------- ----------
INCREASE
(DECREASE)
IN CASH $ (77) $ (3,451) $ 13,473
Cash and Cash
Equivalents
at beginning
of year $ 36,943 $ 40,394 $ 26,921
--------- --------- ---------
CASH AND CASH
EQUIVALENTS
AT END OF
YEAR $ 36,866 $ 36,943 $ 40,394
========= ========= =========
1997 ANNUAL REVIEW
INVESTORS HERITAGE
LIFE INSURANCE COMPANY
KENTUCKY INVESTORS, INC.
TABLE OF CONTENTS
Mission and Strategy Statement 2
Letter to our Shareholders 3
Management's Discussion and Analysis 9
In Memoriam 21
Board of Directors 22
Corporate Officers 23
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
Stock Prices and Annual Meeting 48
Photos by Lucy Johnson
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.
LETTER TO OUR
SHAREHOLDERS
Thanks to a great sales organization and Home office staff, Kentucky Investors,
Inc. ("Kentucky Investors") and Investors Heritage Life Insurance Company
("Investors Heritage") (collectively the "Companies") experienced another
outstanding year With increased sales, profits and asset growth.
Net income for Kentucky Investors was $1,522,552 _ an increase of 33% over 1996
and Earnings Per Share increased 30% to $1.84 per share. Investors Heritage had
net income of $2,126,575 for an increase of 33% over 1996. Earnings Per Share
for Investors Heritage were up 33% to $2.36 per share.
In an effort to increase statutory surplus while continuing to provide a return
to our stockholders, the Board of Directors declared the same dividend as the
past few years. Kentucky Investors was $.38 per share and Investors Heritage
was $.76 per share.
The Statutory Surplus and the Asset Valuation Reserve ("AVR") of Investors
Heritage for the year increased $1,017,374 in spite of the planned write-down
of the statutory value of the home office real estate to depreciated cost and
the increase in statutory reserves for a block of burial association policies.
But for these items, Statutory Surplus and AVR would have increased $1,844,808.
At year end assets of each company totaled over a quarter of a billion dollars.
Kentucky Investors assets totaled $256,872,362 for an increase of $31,874,925
or 14% above year-end 1996. Investors Heritage assets grew $31,514,684 or 14%
over year-end 1996 to $258,654,312.
Total Stockholders Equity of Kentucky Investors grew 16% to $28,086,820 and for
Investors Heritage Stockholders Equity increased $5,031,652 or 13% to
$42,703,680.
Record insurance sales were accomplished once again in 1997, with a 21%
increase over 1996 production. Our Preneed and Final Expense sales experienced
strong growth as we continue to strengthen our position in the fast growing
funeral home market. Production of Preneed Single Premium Life and Annuity
products increased 25%. We are contracted with over 500 funeral homes in twelve
states and expect to strengthen our position in these states this year while
adding three new states to our Preneed production during 1998. Even though we
have been very successful in the Preneed and Final Expense market, we are
always trying to find ways to offer better products. Just as we improved our
products a few years ago, we will be introducing a new generation of Preneed
products this year. Our sales management team is very excited about the new
Preneed and Final Expense policies, the Legacy 2000 Series, to be introduced by
the end of the second quarter of 1998. It is anticipated that the Legacy 2000
Series will improve our position with all existing accounts and help us develop
new accounts in our targeted states.
Credit Life production through Investors Heritage Financial Services Group,
Inc. ("Financial Services Group"), a wholly owned subsidiary of Kentucky
Investors, was once again very strong. This is attributable to both our
continued dedication to this market and the robust economy. Marketing revenues
for Financial Services Group were $370,040 for 1997, compared to $281,266 for
1996.
Additionally, sales of Mortgage Redemption products through financial
institutions increased 68% over 1996. We believe sales potential in this area
is strong, and we will continue to give this market special attention. In
addition, we are working on product approvals which will allow us to expand the
Credit and Mortgage Redemption products into other states.
Traditional Ordinary Life sales were steady during the year and we began two
activities in the second and third quarters of 1997 that we believe will become
significant production segments in the future. Market research performed during
the past two years indicates that one area of growth for Ordinary Life sales is
the sale of Life Insurance to funeral home owners for estate planning purposes.
During the second quarter of 1997 we commenced an insurance sales program for
funeral directors in need of estate planning. We are very pleased with the
results, and the response certainly indicates a need for this program. We
anticipate growth in this area during 1998.
Although we have had a very good payroll deduction administration system for a
number of years, we have never concentrated on payroll deduction sales. During
the third quarter of 1997, a payroll deduction marketing organization joined us
and has shown strong results. We hope to expand this payroll deduction sales
program in an orderly fashion over the next few years.
After two years of increased sales and profits, Investors Heritage Printing,
Inc., a wholly owned subsidiary of Kentucky Investors, experienced a small
decrease in sales and profits as a result of a decrease both in printing orders
from Investors Heritage and outside job orders. For the third consecutive year
Investors Heritage Printing paid a dividend to Kentucky Investors, Inc.
The 1997 dividend was $41,000 which was 11% less than the previous year.
Service to stockholders, policyholders and agents is extremely important.
Investors Heritage has always taken pride in the service we provide and the
manner in which we work with our clients. Through the years we have been keenly
aware of the advantages of technology and have developed an outstanding
technical support system for accounting, financial reporting, marketing and
policy and agent information.
Our Information Systems Department was extremely busy during 1997. Two of the
major projects were the development of a new Ordinary Life insurance claims
processing system and the addition of an imaging system to our new business and
underwriting department. Both of these new systems and other projects will
enhance the efficiency of our workforce and decrease unit cost.
Market conduct compliance is an important area in the insurance industry and we
continue to work toward full implementation of an enhanced compliance program.
We are developing a program that will meet our specific needs, and we
anticipate completion of a compliance manual and the implementation of internal
compliance audit procedures during 1998.
In the 1995 Annual Review we reported to you that the companies had addressed
the Year 2000 issue facing all users of Information Services. Once again, I
want to assure stockholders and other readers of this report that Investors
Heritage and Kentucky Investors are Year 2000 compliant. This is another
testimony to the alertness and forward thinking of our Information Services
staff.
As in years past, asset quality is a very strong point for Investors Heritage
and Kentucky Investors. At year-end 100% of fixed income assets were rated
investment grade and only one small residential mortgage loan was more than
ninety days past due.
As I have for the past nine years, I refer you to the Analysis of Asset
Adequacy performed each year, even though we are required to only do so every
three years. Each year Investors Heritage's Asset Adequacy Model has become
more sophisticated and useful. The Analysis shows very favorable results that
are explained in more detail beginning on Page 19 in Management's Discussion
and Analysis. Additionally, pie charts showing the distribution of invested
assets are on Page 8.
During 1997, several key associates of Investors Heritage and Kentucky
Investors, Inc. died. We enjoyed our friendship with these fine people; I
appreciate their contributions to the success of the Companies and all their
friends and Investors Heritage and Kentucky Investors will miss them.
A Memoriam to Warner Hines, a former board member of Kentucky Investors, Inc.,
is on Page 21, and a Memoriam to Mabel Alfrey, Frank Linville, Eugene McKee,
Curtis Pope, Warren Million, and Norris Wright is on Page 21.
With the strong competition and the unique insurance markets on which we
concentrate, funeral directors and bankers often ask us, "How do you compete
with the big boys?", or, "Why should I do business with Investors Heritage?"
Good questions! Our response is, "First, look at our products and check our
track record on these products, and you will find that they stack up very
favorably." Then, we stress our dedication to service to insureds and agents,
and that can be confirmed by contacting people who represent Investors
Heritage.
However, the distinguishing factor that is most difficult to express is the
underlying attitude, philosophy, or personality_call it what you will_of the
individuals who make Investors Heritage a company that people stay with after
they join us.
The Spirit of Investors Heritage may best be expressed through one of the
hobbies of our founder, Harry Lee Waterfield. Besides being a politician,
newspaperman, business executive and family man, Mr. Waterfield was also a
farmer. After he left his farm in West Kentucky, his love of the land was
expressed in his gardens, both at home and at the Home Office. Mr. Waterfield
believed that honesty, loyalty, and friendship were the key ingredients in an
individual's personal and business life. If the first two existed, nurturing
friendships would enable business relationships to flourish like beautiful
flowers. If the spirit of Investors Heritage and Kentucky Investors can be
expressed, it is in the sheer joy brought by developing business relationships
that become friendships. Those relationships, like flowers, can be nurtured
into a thing of long lasting beauty.
Our goal for 1998 and beyond will be to continue to build strong lasting
friendships, deserving of our honest effort to provide outstanding products and
service to our clients, stockholders, and friends.
On behalf of the Boards of Directors, sales organizations, and home office
staff, thank you for your continued friendship and support.
/s/
Harry Lee Waterfield II
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.
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: 86.0%; Contractual
Obligations of Affiliates: 0.2%; Investments in Affiliates: 1.0%; Equity
Securities 1.6%; Short Term Investments: 0.6%; Policy Loans: 3.5%; Other Long
Term Investments: 0.2%; Mortgage Loans-R.E.: 6.9%.
MANAGEMENT'S
DISCUSSION AND ANALYSIS
SIGNIFICANT GROWTH
Investors Heritage Life Insurance Company ("Investors Heritage") has been
expanding its market share in the preneed funeral market for the last several
years. As a result, our marketing territory has grown as well as our financial
strength. Investors Heritage Financial Services Group, Inc. ("Financial
Services Group") a wholly owned subsidiary of Kentucky Investors, Inc.
("Kentucky Investors") continues to be successful operating under the marketing
agreements with Investors Heritage and other unaffiliated insurers. This has
enabled Financial Services Group and Investors Heritage to continue utilizing
their expertise in the marketing and administration of credit life and credit
accident & health insurance (respectively "Credit Life" and "Credit A&H", and
collectively "Credit Insurance"). Further, through Financial Services Group,
Investors Heritage is able to offer products such as mortgage protection and
ordinary life insurance through financial institutions.
FINANCIAL STRENGTH
The quality of our investment portfolio and the current level of shareholders'
equity of Kentucky Investors and Investors Heritage continues to provide a
sound financial base as we strive to expand our marketing system to offer
competitive, quality products. As of December 31, 1997, 100% of the fixed
income portfolio of Investors Heritage was rated investment grade by Standard &
Poor's. None of our fixed income assets were in default and only one small
($31,800) residential mortgage loan was non-performing (more than 90 days past
due).
REVENUES
Overall revenues were $52,497,000, $47,780,000 and $44,076,000 in 1997, 1996
and 1995, respectively for Investors Heritage. The increases were due primarily
to our growth as a provider of quality preneed products, growth in invested
assets due to increased sales and our market expansion of both ordinary life
and credit insurance products with financial institutions. A discussion of
the changes follows. See "Life and Annuity" and "Credit Insurance" below.
Additionally, Investors Heritage has experienced steady growth in Net
Investment Income which increased 12% or $1,429,000 in 1997 from 1996. The 1996
increase over 1995 was 8% or $839,000.
Life and Annuity
Revenues for the Life and Annuity business segment were 9% or $4,331,000 higher
in 1997 than 1996. The 1996 increase over 1995 was 10% or $4,415,000.
Ordinary life sales exceeded production goals set for 1997. Ordinary life
production increased approximately 21% in 1997 over 1996, due to marketing
expansion in single premium preneed and mortgage protection products. New life
and annuity premiums and deposits collected during 1997, 1996 and 1995 were
$25,177,000, $20,925,000 and $16,164,000, respectively. During 1997, Investors
Heritage continued to expand its preneed funeral and final expense marketing
operation in eleven states, including Kentucky, North Carolina, Tennessee,
Indiana, Illinois, Missouri, Georgia, Virginia, West Virginia, Florida and
South Carolina. Several accounts were also added in Arkansas.
Premium production continues to be strong in North Carolina, $9,797,000 in 1997
compared to $8,163,000 in 1996. However, due to the successful expansion of our
marketing operation noted above, preneed premiums from North Carolina agents
accounted for 46% of the total preneed premiums collected in 1997 compared to
49% for 1996. Premium collections from Kentucky were 19% of total for 1997 and
20% for 1996. Other states showing significant gains were Georgia, Ohio and
Virginia. 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 1998 over 1997 in the range of 10-
12%.
Increase in Net Investment Income earned by life and annuity products also
contributed to the overall increase in Revenues. Net investment income
increased 16% in 1997 compared to 1996 and 12% in 1996 compared to 1995.
Revenues from annuity products increased $360,000 from 1996 to 1997 and
increased $119,000 from 1995 to 1996. Annuity revenues were $2,270,000,
$1,910,000 and $1,791,000 for 1997, 1996 and 1995 respectively. Annuity
products are sold primarily in conjunction with Investors Heritage's marketing
activities in the preneed funeral market.
During 1997 Investors Heritage began marketing certain preneed products on a
group basis. Premium revenues from these products totaled $3,721,000. Group
life revenues from all sources were $7,386,000, $3,925,000 and $4,034,000 for
1997, 1996 and 1995, respectively. Investors Heritage will continue to market
certain preneed products on a group basis. This will continue to generate
additional revenues for the group life segment.
Credit Insurance
As previously reported to our stockholders, Investors Heritage began to phase
out of Credit Insurance as an underwriter in 1994; however, Financial Services
Group and Investors Heritage wanted to continue to utilize their marketing and
administrative capabilities and generate alternative revenues from marketing
and retention fees and fees for administration and claims processing.
Therefore, in December 1995, Financial Services Group assisted in procuring a
reinsurance agreement between Investors Heritage and The Connecticut General
Life Insurance Company ("Connecticut General") pursuant to which all
underwriting related risks on Credit Insurance policies sold by Investors
Heritage and subject to the reinsurance agreement were reinsured with
Connecticut General.
In addition, Financial Services Group has obtained reinsurance relationships
for Investors Heritage with two other companies, Life Investors Insurance
Company of America and Bankers Life Insurance Company. Both of these agreements
generate marketing and retention fees, but not administration fees. In
addition to generating alternate sources of revenue which ultimately protect,
improve and strengthen surplus, maintaining our presence in the Credit
Insurance market further strengthened the favorable relationship with Kentucky
financial institutions.
Revenues are $131,000, ($362,000) and ($802,000) for 1997, 1996 and 1995,
respectively. As anticipated, revenues from the Credit Insurance segment were
negative in 1996 and 1995 because policies written in 1994 and 1993 which were
cancelled prior to maturity required refunds of unearned premiums.
Accident and Health
Revenues for this segment have been $97,000, $597,000 and $1,126,000 for 1997,
1996 and 1995, respectively. Prior to 1997, most of the business produced by
this segment related to assumed business. During 1996, Investors Heritage no
longer assumed policies sold in connection with this reinsurance agreement.
Accordingly, the segment's revenues have declined significantly. The related
assumed group accident and health insurance in force at the end of 1997 should
all expire during 1998 with no material effect on net income.
The remaining revenues from this segment relate to a closed block of business
of individual health insurance which was sold directly by Investors Heritage.
Corporate
Revenues from the Corporate segment, measured primarily by stockholders' paid-
in capital, contributed surplus, earned surplus and property and equipment was
$1,086,000 in 1997, $693,000 in 1996 and $1,315,000 in 1995. During 1996 this
segment experienced a $506,000 realized capital loss from the sale of
approximately $21,000,000 of lower yielding fixed income investments. The
proceeds from these sales were reinvested into higher yielding fixed income
securities that increased our overall investment yield 20.5 basis points and
will provide an annual pre-tax increase of $287,000 to investment income.
OPERATING RESULTS
Investors Heritage's Net Income for 1997 was up $525,000 or 33% from 1996 and
for 1996 was up $685,000 or 75% from 1995. Kentucky Investors' Net Income for
1997 was up $376,000 from 1996 or 33% and for 1996 was up $592,000 or 107% from
1995.
Earnings per share were $2.36, $1.78 and $1.02 for 1997, 1996 and 1995,
respectively for Investors Heritage. Earnings per share were $1.84, $1.41 and
$0.71 during the same periods for Kentucky Investors.
Life and Annuity
Pre-Tax Income (Income from Operations Before Federal Income Tax) for the Life
and Annuity business segment of Investors Heritage was $3,143,000, $2,295,000
and $1,143,000 for 1997, 1996 and 1995, respectively. The increase in Pre-Tax
Income in 1997 when compared to 1996 is the result of actively managing its
investment portfolio and policyholder benefits. A significant increase in
production in 1997 compared to 1996 from sales in the preneed market has also
improved investment income attributable to this segment. However, current
market conditions, including competitive pricing for this segment and the low
interest rate environment, have narrowed profits generated from current year
sales. Another factor was discontinuing the issuance of legal reserve policies
to members of dissolved mutual burial associations in North Carolina during
1996.
Credit Life and Credit Accident and Health
As noted above, during the third quarter of 1994 Investors Heritage 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 $662,000, $604,000 and $826,000 for
1997, 1996 and 1995. Higher claims experience in this segment during 1997
when compared to the previous year is the primary reason for a larger pre-tax
loss.
Accident and Health
Pre-Tax Income (Loss) for the Group and Individual Accident and Health segment
was ($77,000), $25,000 and $108,000 for 1997, 1996 and 1995, respectively.
The majority of this segment is from Involuntary Unemployment Insurance written
primarily before 1996. Deferred Acquisition Expense of $240,000 was amortized
on this group business during 1997 due to the policies maturing. The remainder
of this segment is individual health insurance relating to a closed block of
business written directly by Investors Heritage.
Corporate
Pre-Tax Income (Loss) for the Corporate segment was $299,000, ($160,000) and
$460,000 for 1997, 1996 and 1995, respectively. A $506,000 realized capital
loss from the sale of lower yielding fixed income securities during 1996
caused a significant decrease in the pre-tax income in this segment for
Investors Heritage. A federal income tax refund of approximately $247,000 was
received in 1997 after the realized loss was applied to prior years' capital
gains.
The statutory capital and surplus of Investors Heritage increased $882,000 in
1997 following a decrease of $2,244,000 in 1996.
The decrease in 1996 was the result of Investors Heritage management's request,
which was granted by the Kentucky Department of Insurance ("DOI"), to
accelerate the write down of investments in affiliated common stock and notes
of affiliates as of December 31, 1996. Pursuant to a 1995 agreement with DOI,
Investors Heritage was scheduled to write down these investments over a seven
year period. The accelerated write down was requested primarily for two
reasons: 1) the capital adequacy ratio of Investors Heritage as determined by
a nationally recognized insurance company rating service was significantly
improved by the elimination of affiliated investments from the rating formula,
and 2) the immediate write down of those assets to zero will eliminate the
strain on capital and surplus in future years and allow Investors Heritage to
generate positive capital and surplus growth from its ongoing operations.
For Generally Accepted Accounting Principals ("GAAP") reporting purposes the
home office real estate is already carried at depreciated cost and the notes
and common stock are carried at cost. As anticipated, these adjustments did not
affect Investors Heritage'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.
INVESTMENTS, LIQUIDITY AND FUND RESTRICTIONS
The investment portfolio of Investors Heritage continues to provide financial
stability. It is management's opinion that Kentucky Investors and Investors
Heritage 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. Investors Heritage's internal cash flows are derived from insurance
premiums and investments. The cash flows of Kentucky Investors are derived from
the dividends paid to it by Investors Heritage, Financial Services Group and
Investors Heritage Printing, Inc. ("Heritage Printing"). Management anticipates
these cash flows to experience steady growth due to improved profitability of
Financial Services Group and Heritage Printing.
During 1997, Financial Services Group's second full year of operation, revenues
were $371,000, up 32% or $89,000 compared to 1996, and dividends in the
aggregate amount of $108,000 were paid to Kentucky Investors. In addition,
revenues from Heritage Printing were $482,000 in 1997, down 7% compared to
$517,000 in 1996, and Heritage Printing paid $41,000 in dividends to Kentucky
Investors in 1997. Management of Heritage Printing will continue to work to
improve revenues from unaffiliated sources as well as providing printing
services for Investors Heritage. Revenues from these sources constitute less
than 1% of Kentucky Investors' overall Revenues in 1997 and management is
working on the continued growth and profitability of both Financial Services
Group and Heritage Printing.
Management is not aware of any commitments or unusual events that could
materially affect Kentucky Investors' or Investors Heritage'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 Investors Heritage'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, Kentucky Investors and Investors Heritage 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 on Investors Heritage as to the payment of cash
dividends to shareholders which is discussed in more detail in Note G to the
Consolidated Financial Statements.
Since inception, Investors Heritage has maintained a sound, conservative
investment strategy. Investors Heritage's fixed income portfolio of public
bonds is managed by an independent portfolio manager, Charter Oak Capital
Management, Inc. ("Charter Oak"). As of December 31, 1997, 86% of Investors
Heritage's total invested assets are managed by Charter Oak pursuant to
specific investment guidelines which have been approved by the Board of
Directors. Since the inception of Investors Heritage's relationship with
Charter Oak, 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 9 years.
The fixed income portfolio is diversified among sectors. The market value and
the Standard & Poor's average quality rating of this portfolio as of December
31, 1997 are $171.8 million and AA, respectively. The market value of this
portfolio at year end 1996 was $147.6 million. At year end 1997 the fixed
income portfolio was allocated as follows: 52.7% - corporate; 13.7% -
government; 20.9% - mortgage-backed securities; 9.0% - foreign; 2.5% - asset
backed securities; and 1.2% - states and political subdivisions. Within the
corporate bond sector, the portfolio is also diversified with 37.1% of that
sector invested in bank and finance, 44.9% in industrial and miscellaneous, and
18.0% 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 $36.0 million (carrying value) of
mortgage-backed securities ("MBS") which represents 18% of total invested
assets and 21% of the fixed income portfolio. Mortgage-backed securities add
value to the portfolio and Charter Oak 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 Investors
Heritage.
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 Investors Heritage 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.
Investors Heritage's CMO holdings represent approximately 66% of the total MBS
portfolio. When these securities are purchased at a discount or premium, the
income 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 CMOs'
variability in yields on the portfolio is not significant in relation to the
yield and cash flows of the total invested assets of Investors Heritage. More
importantly, Investors Heritage has no exposure to the more volatile, high-risk
CMOs, such as those structured to share in residual cash flows or to receive
only interest payments. Except for one sequential pay CMO of approximately
$980,000, the CMOs held by Investors Heritage are either planned amortization
class ("PAC") bonds, including one planned amortization class-Z account ("PAC-
Z"), or support class ("SUP") bonds, both of which are structured to provide
more certain cash flows to the investor and therefore have reduced prepayment
risk.
Pass-throughs comprise the remainder of MBS owned by Investors Heritage,
representing approximately 34% 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, Investors Heritage also engages in commercial and residential
mortgage lending with more than 94% 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 115% are generally
required. Investors Heritage 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 diversifying the portfolio by property type. The
average loan balance is $259,147 and the average loan to value is 49.7%. The
largest loan currently held by Investors Heritage is $821,628. Investors
Heritage has $13.7 million invested in mortgage loans which represents 7% of
total invested assets. The portfolio is diversified across various property
types as follows: 16.7% - office; 37.9% - retail; 9.3% -industrial; 4.3% - 1
to 4 family; 18.8% - apartments; and 13.0% - other. A pie chart showing the
Distribution of Mortgage Loans is located on Page 18.
Although approximately 68.5% of Investors Heritage's mortgage loans are located
in the various geographic regions of Kentucky, Investors Heritage 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
Investors Heritage's mortgage loan properties are located. Investors Heritage
has been successful in adding value to the total investment portfolio through
its mortgage loan origination's due to the fact that yields realized from the
mortgage loan portfolio are from 1.5 to 4.6 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,
1997, Investors Heritage had only one non-performing mortgage loan, which would
include loans past due 90 days or more, loans in process of foreclosure,
restructured loans and real estate acquired through foreclosure. The non-
performing mortgage loan, which is more than 90 days past due, is a Residential
Mortgage with an outstanding balance of $31,793. 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 1997, Investors Heritage's fixed income
investments were 100% investment grade as rated by Standard & Poor's, an
increase from 99.3% for 1996. None of Investors Heritage'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 5.7
years with approximately $5.0 million due within 12 months and approximately
$31.4 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.
DISTRIBUTION OF FIXED INCOME ASSETS GRAPH
AND DISTRIBUTION OF CORPORATE BONDS GRAPH
Two pie charts appear 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 52.7%; government: 13.7%; mortgage-backed
securities: 20.9%; foreigns: 9.0%; asset-backed securities; 2.5%; tax exempt:
1.2%. The Coporate Bond Chart shows the following breakdown: bank and finance:
37.1%; industrial and miscellaneous: 44.9%; utilities 18.0%.
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: 37.9%; apartments: 18.8%;
office properties: 16.7%; Residential (1 to 4 family): 4.3%; industrial:
9.3%; other 13.0%.
In accordance with FAS 115, which was implemented effective January 1, 1994,
debt securities held by Investors Heritage are required to be classified
either as being available-for-sale and carried at fair value or as being
held-to-maturity and carried at amortized cost. As explained in detail in Note
A to the Consolidated Financial Statements, all of Investors Heritage's fixed
income securities and all marketable equity securities are classified as
available-for-sale and are carried at fair value.
A key element of profitability and risk management is the asset/liability
management process. To test its financial strength and investment strategy,
Investors Heritage has performed asset adequacy analyses (cash flow testing)
for the last several years. Although regulatory requirements dictate this
process be done every three years, Investors Heritage 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 Investors Heritage held as of December 31, 1997. 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.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written using 2-
digits rather than 4-digits to define the applicable year. Any computer program
that has time sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculation causing disruption of operations, including, among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
Investors Heritage recognized the Year 2000 Issue in 1988 and began working on
a solution at that time. The Information Systems Department has worked
diligently to make modifications to existing software so that the Year 2000
Issue will not pose significant operational problems for its computer systems.
As of year end 1997, Investors Heritage was in full compliance with all Year
2000 Issue requirements and has determined that it has no exposure to
contingencies related to the Year 2000 Issue for the products it has sold.
The cost to implement system changes related to the Year 2000 has been
immaterial to the overall operations of Investors Heritage.
Additionally, management has initiated formal communications with all of its
significant reinsurers, vendors, and financial institutions and the Company has
been advised that all are either in full compliance or anticipate being in full
compliance by year end 1998. However, there can be no guarantee that the
systems of other companies on which Investors Heritage relies would not have an
adverse effect on its systems.
FORWARD-LOOKING STATEMENTS
The Companies have made a number of forward-looking statements in this document
that are subject to risks and uncertainties. Forward-looking statements include
the information concerning possible or assumed future results of operations and
those preceded by, followed by or that include the words "believes," "expects,"
"anticipates" or similar expressions. Such forward-looking statements are based
on the Companies' beliefs as to their competitive position in their industry
and the factors affecting their business. Factors that could cause actual
results to differ materially from the forward-looking statements include, but
are not limited to, a change in population demographics, development of
alternative products, a change in economic conditions, and changes in current
federal income tax laws. In addition, there can be no assurance that (i) the
Companies have correctly identified and assessed all of the factors affecting
their business; (ii) the publicly available and other information on which the
Companies have based their analysis is complete or correct; (iii) the
Companies' analysis are correct; or (iv) the companies' strategy, which is
based in part on these analysis, will be successful.
CONSOLIDATION
The accompanying consolidated financial statements of Kentucky Investors and
Investors Heritage include the accounts of their respective majority-owned
subsidiaries, after elimination of intercompany transactions. This discussion
and analysis is intended for both Investors Heritage and Kentucky Investors
because their respective financial statements are similar in presentation and
identical in most cases.
IN MEMORIAM
PICTURES OF THE DECEASED INDIVIDUALS APPEAR ON THIS PAGE.
Warner Hines, an original investor in Kentucky Investors, Inc., died a few
months after resigning from the Kentucky investors Board. He served with
distinction on the Board for thirty-three years.
Mabel Alfrey, a retired school teacher, was an agent of Investors Heritage
since June 22, 1964. In the sixties and seventies she was among our leading
producers every year.
Frank Linville was an outstanding agent for Investors Heritage for eighteen
years. he qualified for conventions on a regular basis.
Eugene McKee was one of our top agents and an annual award winner who worked in
the eastern part of Kentucky as well as the southern tip of Ohio and part of
West Virginia.
Curtis Pope was an excellent personal producer and district manager. He was
also renowned for his barbecuing expertise and provided barbecue for many
Investors Heritage "pig pickins" in Sampson County, North Carolina..
Warren Million had an outstanding forty-two year career in the insurance
business and his last eight years as Assistant Vice President of Investors
Heritage. One of the key contacts for our field personnel, he was appreciated
for his friendliness and willingness to get things done for our agents and
insureds.
Norris Wright was a funeral director and owner, along with his wife, of Stamey
Funeral Home. Their funeral home is a leading producer of preneed and final
expense for Investors Heritage.
BOARD OF DIRECTORS
Harry Lee Waterfield II
Chairman of the Board I K a b c d e f g h
Frankfort, Kentucky
Dr. Adron Doran I a b e
Lexington, Kentucky
H. Glenn Doran I K c d f g
Murray, Kentucky
Michael F. Dudgeon, Jr. I c
Columbia, South Carolina
Gordon C. Duke I K d g
Frankfort, Kentucky
Robert M. Hardy, Jr. I K a d f g h
Frankfort, Kentucky
Jerry F. Howell I K a b c d e h
Leesburg, Florida
Dr. Jerry F. Howell, Jr. I K c f
Morehead, Kentucky
David W. Reed K h
Gilbertsville, Kentucky
Helen Wagner I K b f
Owensboro, Kentucky
I Investors Heritage Life Insurance Company
K Kentucky Investors, Inc.
a Investors Heritage Life Executive Committee
b Investors Heritage Life Nominating Committee
c Investors Heritage Life Audit Committee
d Investors Heritage Life Finance Committee
e Investors Heritage Life Compensation Committee
f Kentucky Investors Executive Committee
g Kentucky Investors Finance Committee
h Kentucky Investors Nominating Committee
CORPORATE OFFICERS
Harry Lee Waterfield II Nancy W. Walton
Chairman, President and Vice President, Underwriting I
Chief Executive Officer IKPF First Vice President K
Jimmy R. McIver Clair S. Manson
Treasurer IKPF Vice President and Chief Actuary I
Wilma Yeary Jane Wise
Secretary IK Vice President, Policy Services I
Jane S. Jackson Margaret J. Kays
Assistant Secretary IK Vice President, Human Resources I
SecretaryPF
Howard L. Graham Don R. Philpot
Vice President, Corporate Services IK Vice President, Agency I
Raymond L. Carr N. Douglas Hippe
Vice President, Vice President, Accounting I
Administrative Operations and
Computer Services I
Robert M. Hardy, Jr. Rick Calvert
Vice President and General Counsel IK Vice President P
Vice President, Legal F
William H. Keller, M.D. Ernst & Young
Medical Director I Independent Auditor IK
I Investors Heritage Life Insurance Company
K Kentucky Investors, Inc.
F Investors Heritage Financial Services Group, Inc.
P Investors Heritage Printing, Inc.
KENTUCKY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 and 1996
ASSETS 1997 1996
INVESTMENTS
Securities available-for-sale,
at fair value:
Fixed maturities $171,782,911 $147,584,051
Equity securities 3,169,376 2,607,926
Mortgage loans on real estate 13,734,791 13,881,835
Policy loans 6,976,601 6,894,715
Other long-term investments 453,106 217,681
Short-term investments 1,361,165 1,096,899
____________ _____________
Total investments $197,477,950 $172,283,107
Cash and cash equivalents 2,939,453 2,684,509
Accrued investment income 2,905,504 2,413,103
Due and deferred premiums 4,014,177 4,080,483
Deferred acquisition costs 27,225,643 27,921,174
Property and equipment 1,748,579 1,990,856
Goodwill 1,966,843 2,070,108
Other assets 1,649,596 1,935,326
Amounts recoverable from reinsurers 16,944,617 9,618,771
____________ ____________
$256,872,362 $224,997,437
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities:
Benefit reserves $189,398,071 $171,094,370
Unearned premium reserves 14,460,410 9,282,242
Policy claims 2,256,654 1,594,541
Other policyholders' funds:
Dividend & endowment
accumulations 1,030,218 1,049,919
Reserves for dividends
& endowments & other 887,768 898,764
____________ ____________
Total policy
liabilities $208,033,121 $183,919,836
Federal income taxes 5,574,113 3,528,349
Other liabilities 3,936,137 3,549,285
___________ ____________
Total
liabilities $217,543,371 $190,997,470
___________ ___________
MINORITY INTEREST IN SUBSIDIARY
$ 11,242,171 $ 9,842,194
____________ ___________
STOCKHOLDERS' EQUITY
Common stock $ 836,895 $ 820,475
Paid-in surplus 3,384,061 3,374,615
Unrealized appreciation
on available-for-sale
securities 4,043,101 1,510,225
Retained earnings 19,822,763 18,452,458
____________ ____________
Total
stockholders'
equity $ 28,086,820 $ 24,157,773
____________ ___________
$256,872,362 $224,997,437
============ ============
See notes to consolidated financial statements.
KENTUCKY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
1997 1996 1995
REVENUES
Premiums and other
considerations $39,129,106 $ 36,354,025 $33,061,376
Investment income,
net of expenses 12,972,322 11,528,961 10,674,159
Realized gain (loss)
on investments, net (33,794) (488,126) 29,898
Other income 639,248 566,804 239,178
___________ ____________ ___________
Total revenue $52,706,882 $ 47,961,664 $44,004,611
___________ ____________ ___________
BENEFITS AND EXPENSES
Death and other
benefits $19,218,783 $ 19,134,559 $17,291,402
Guaranteed annual
endowments 835,220 867,200 890,056
Dividends to
policyholders 743,582 647,279 784,506
Increase in benefit
reserves and
unearned premiums 16,112,923 12,587,751 11,157,960
Acquisition costs
deferred (5,401,000) (5,130,000) (4,981,000)
Amortization of
deferred acquisition
costs 5,485,574 5,894,528 6,085,957
Commissions 4,702,676 4,382,830 4,177,725
Other insurance
expenses 8,165,730 7,935,471 7,784,249
___________ ____________ ___________
Total benefits
and expenses $49,863,488 $ 46,319,618 $43,190,855
___________ ____________ ___________
Income from operations before
Federal Income Tax
and minority
interest in net
income of
subsidiary $ 2,843,394 $ 1,642,046 $ 813,756
___________ ___________ ____________
Provision for income taxes
Current $ 497,000 $ 437,000 $ 687,000
Deferred 264,000 (360,000) (668,000)
___________ ____________ ____________
$ 761,000 $ 77,000 $ 19,000
___________ ____________ ____________
income from operations before
minority interest
in net income
of subsidiary $ 2,082,394 $ 1,565,046 $ 794,756
MINORITY INTEREST IN NET INCOME
OF SUBSIDIARY 559,842 418,427 239,824
___________ ____________ ___________
Net Income $ 1,522,552 $ 1,146,619 $ 554,932
=========== ============ ===========
Earnings Per Share $ 1.84 $ 1.41 $ .71
=========== ============ ==========
See notes to consolidated financial statements.
<TABLE>
KENTUCKY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION) ON
COMMON PAID-IN AVAILABLE-FOR-SALE RETAINED
STOCK SURPLUS SECURITIES EARNINGS
_________ _________ _________________ _________
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995
$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
Net Income 1,146,619
Cash Dividend (344,611)
Change in net unrealized
appreciation (depreciation) (1,406,284)
Issuance of common
stock, net
9,347 (89) 111,251
________ __________ ___________ ___________
BALANCE, DECEMBER 31, 1996
$820,475 $3,374,615 $ 1,510,225 $18,452,458
Net Income 1,522,552
Cash Dividend (349,285)
Change in net unrealized
appreciation (depreciation) 2,532,876
Issuance of common
stock, net
16,420 9,446 197,038
________ __________ ___________ ___________
BALANCE, DECEMBER 31, 1997
$836,895 $3,384,061 $ 4,043,101 $19,822,763
======== = ======== =========== ===========
See notes to consolidated financial statements.
</TABLE>
KENTUCKY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
1997 1996 1995
OPERATING ACTIVITIES
Net Income $ 1,522,552 $ 1,146,619 $ 554,932
Adjustments to
reconcile net income
to net cash provided
by operating activities:
Increase in Benefit
Reserves 22,663,249 18,302,594 7,175,593
Change in Claims Liability
662,113 (71,408) (169,736)
Change in Other Policyholder Funds
(30,697) (151,680) (1,135,436)
Amortization of Deferred Acquisition Costs
5,485,574 5,894,528 6,085,957
Policy Acquisition Costs Deferred
(5,401,000) (5,130,000) (4,981,000)
Realized Loss (Gain) on Investments
33,794 488,126 (29,898)
Increase in Accrued Investment Income
(492,401) (273,267) (6,075)
Change in Other Assets and
Other Liabilities
672,582 395,311 24,363
Provision for Deferred Federal Income Taxes
264,000 (360,000) (668,000)
Federal Income Tax
-0- (250,438) (612)
Change in Due and Deferred Premiums
66,306 633,574 (348,413)
Net Adjustment for Premium and
Discount on Investments
206,299 256,456 112,387
Depreciation and Other Amortization
394,116 336,406 358,920
Change in Minority Interest and Other
468,090 321,608 (2,335)
Change in Amounts Recoverable from Reinsurers
(7,325,846) (5,954,989) 4,773,358
____________ ____________ ____________
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 19,188,731 $ 15,583,440 $ 11,744,005
____________ ____________ ____________
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases $(47,713,033) $(46,706,125) $(19,036,132)
Sales and Maturities
28,565,612 32,427,878 8,946,675
Securities held-to-maturity:
Sales and Maturities -0- -0- 204,084
Other Investments:
Cost of Acquisition
(2,912,452) (2,478,676) (2,290,555)
Sales and Maturities
2,482,421 1,651,805 1,297,428
Net Additions to Property and Equipment
(48,574) (366,597) (180,422)
____________ ____________ ____________
NET CASH USED BY INVESTING
ACTIVITIES $(19,626,026) $(15,471,715) $(11,058,922)
____________ ____________ ____________
FINANCING ACTIVITIES
Receipts from universal life policies credited to
policyholder account balances
$ 6,074,832 $ 4,949,560 $ 3,352,687
Return of policyholder account balances on
universal life policies
(5,256,212) (4,570,049) (4,012,800)
Issuances of Common Stock
222,904 120,509 387,772
Dividends (349,285) (344,611) (332,079)
____________ ____________ ____________
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES $ 692,239 $ 155,409 $ (604,420)
____________ ___________ _____________
INCREASE IN CASH $ 254,944 $ 267,134 $ 80,663
Cash and cash
equivalents at
beginning of year 2,684,509 2,417,375 2,336,712
____________ ___________ ____________
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 2,939,453 $ 2,684,509 $ 2,417,375
============ =========== ============
See notes to consolidated financial statements.
KENTUCKY INVESTORS, INC.
SELECTED FINANCIAL DATA
KENTUCKY INVESTORS, INC. AND SUBSIDIARIES
(000's omitted except for Earnings and Cash Dividends Per Share)
1997 1996 1995 1994 1993
Total Revenue $ 52,707 $ 47,962 $ 44,005 $ 46,656 $ 45,388
Total Benefits &
Expenses 49,863 46,320 43,191 44,039 43,091
Net Income 1,523 1,147 555 1,523 1,193
Earnings Per Share 1.84 1.41 .71 1.97 1.55
Total Assets 256,872 224,997 208,045 191,367 198,230
Total Liabilities 217,543 190,997 173,288 164,902 168,984
Long Term Debt -0- -0- -0- -0- -0-
Cash Dividends
Per Share .38 .38 .38 .37 .36
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, 1997 and 1996,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
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, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/
Ernst & Young LLP
Louisville, Kentucky
March 24, 1998
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)
1997 1996 1995 1994 1993
Premiums $ 39,129 $ 36,354 $ 33,061 $ 36,444 $ 34,966
Net Investment Income 13,083 11,654 10,815 10,011 9,748
Net Income 2,127 1,602 917 2,401 2,302
Earnings Per Share 2.36 1.78 1.02 2.66 2.54
Total Assets 258,654 227,140 210,490 194,262 201,197
Policy Reserves 203,858 180,377 161,695 155,179 154,387
Long Term Debt -0- -0- -0- -0- -0-
Cash Dividends Per Share .76 .76 .76 .74 .72
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,
1997 and 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. 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, 1997
and 1996, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles.
/s/
Ernst & Young LLP
Louisville, Kentucky
March 24, 1998
Investors Heritage Life Insurance Company
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 and 1996
ASSETS 1997 1996
INVESTMENTS
Securities available-for-sale, at fair value:
Fixed maturities $171,782,911 $147,584,051
Equity securities 3,169,370 2,607,818
Mortgage loans on real estate 13,734,791 13,881,835
Policy loans 6,976,601 6,894,715
Other long-term investments 403,106 217,681
Short-term investments 1,211,165 968,899
____________ ____________
$197,277,944 $172,154,999
Investments in affiliates 1,975,382 2,188,840
Contractual obligations of affiliate
538,794 646,554
____________ ____________
Total investments
$199,792,120 $174,990,393
Cash and cash equivalents 2,902,587 2,647,566
Accrued investment income 2,904,861 2,412,713
Due and deferred premiums 4,014,177 4,080,483
Deferred acquisition costs 27,225,643 27,921,174
Property and equipment 1,703,387 1,942,789
Goodwill 1,574,381 1,639,982
Other assets 1,592,539 1,885,757
Amounts recoverable from reinsurers 16,944,617 9,618,771
____________ ____________
$258,654,312 $227,139,628
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities:
Benefit reserves $189,398,071 $171,094,370
Unearned premium reserves 14,460,410 9,282,242
Policy claims 2,256,654 1,594,541
Other policyholders' funds:
Dividend & endowment
accumulations 1,030,218 1,049,919
Reserves for dividends
& endowments & other 887,768 898,764
____________ ____________
Total policy liabilities
$208,033,121 $183,919,836
Federal income taxes 4,043,087 2,068,998
Other liabilities 3,874,424 3,478,766
____________ ____________
Total liabilities
$215,950,632 $189,467,600
____________ ____________
STOCKHOLDERS' EQUITY
Common stock $ 1,449,778 $ 1,441,718
Paid-in surplus 3,776,625 3,776,625
Unrealized appreciation
on available-for-sale
securities 5,502,914 2,044,219
Retained earnings 31,974,363 30,409,466
____________ ____________
Total stockholders'
equity $ 42,703,680 $ 37,672,028
____________ ____________
$258,654,312 $227,139,628
============ ============
See notes to consolidated financial statements.
Investors Heritage Life Insurance Company
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
1997 1996 1995
REVENUES
Premiums and other
considerations $39,129,106 $36,354,025 $33,061,376
Investment income,
net of expenses 13,083,006 11,653,732 10,815,048
Realized gain (loss)
on investments, net (19,346) (489,685) 57,048
Other income 304,280 261,524 142,934
___________ ___________ ___________
Total revenue $52,497,046 $47,779,596 $44,076,406
___________ ___________ ___________
BENEFITS AND EXPENSES
Death and other benefits $19,218,783 $19,134,559 $17,291,402
Guaranteed annual endowments
835,220 867,200 890,056
Dividends to policyholders 743,582 647,279 784,506
Increase in benefit reserves and
unearned premiums 16,112,923 12,587,751 11,157,960
Acquisition costs
deferred (5,401,000) (5,130,000) (4,981,000)
Amortization of deferred
acquisition costs 5,485,574 5,894,528 6,085,957
Commissions 4,702,676 4,382,830 4,177,725
Other insurance expenses 8,096,713 7,839,875 7,785,215
___________ ___________ ___________
Total benefits and expenses
$49,794,471 $46,224,022 $43,191,821
___________ ___________ ___________
Income from operations before
Federal Income Tax $ 2,702,575 $ 1,555,574 $ 884,585
___________ ___________ ___________
Provision for income taxes
Current $ 384,000 $ 360,000 $ 648,000
Deferred 192,000 (406,000) (680,000)
___________ ___________ ___________
$ 576,000 $ (46,000) $ 32,000)
___________ ___________ ___________
Net Income $ 2,126,575 $ 1,601,574 $ 916,585
============ ============ ===========
Earnings Per Share $ 2.36 $ 1.78 $ 1.02
============ ============ ===========
See notes to consolidated financial statements.
<TABLE>
Investors Heritage Life Insurance Company
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION) ON
COMMON PAID-IN AVAILABLE-FOR-SALE RETAINED
STOCK SURPLUS SECURITIES EARNINGS
________ ________ _________________ ___________
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995
$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
Net cost of common stock
sold (purchased)
(1,462) 67 (22,369)
__________ __________ ___________ __________
BALANCE, DECEMBER 31, 1995
$1,441,797 $3,776,427 $ 3,948,035 $29,493,727
Net Income 1,601,574
Cash Dividend (684,442)
Change in net unrealized
appreciation (depreciation) (1,903,816)
Net cost of common stock
sold (purchased)
(79) 198 (1,393)
__________ __________ ___________ __________
BALANCE, DECEMBER 31, 1996
$1,441,718 $3,776,625 $ 2,044,219 $30,409,466
Net Income 2,126,575
Cash Dividend (684,580)
Change in net unrealized
appreciation (depreciation) 3,458,695
Net cost of common stock
sold (purchased)
8,060 122,902
__________ __________ ___________ ___________
BALANCE, DECEMBER 31, 1997
$1,449,778 $3,776,625 $ 5,502,914 $31,974,363
========== ========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
Investors Heritage Life Insurance Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
1997 1996 1995
OPERATING ACTIVITIES
Net Income $ 2,126,575 $ 1,601,574 $ 916,585
Adjustments to reconcile net income
to net cash provided by operating activities:
Increase in Benefit Reserves
22,663,249 18,302,594 7,175,593
Change in Claims Liability
662,113 (71,408) (169,736)
Change in Other Policyholder Funds
(30,697) (151,680) (1,135,436)
Amortization of Deferred Acquisition Costs
5,485,574 5,894,528 6,085,957
Policy Acquisition Costs Deferred
(5,401,000) (5,130,000) (4,981,000)
Realized Loss (Gain) on Investments
19,346 489,685 (57,048)
Increase in Accrued Investment Income
(492,148) (273,380) (6,114)
Change in Other Assets and
Other Liabilities 688,876 378,800 260
Provision for Deferred Federal Income Taxes
192,000 (406,000) (680,000)
Federal Income Tax (5,807) (250,481) (411)
Change in Due and Deferred Premiums
66,306 633,574 (348,413)
Net Adjustment for Premium and
Discount on Investments
206,299 256,456 112,387
Depreciation and Other Amortization
348,513 313,192 313,464
Change in Amounts Recoverable from Reinsurers
(7,325,846) (5,954,989) 4,773,358
____________ ____________ ____________
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 19,203,353 $ 15,632,465 $ 11,999,446
____________ ____________ ____________
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases $(47,713,033) $(46,706,125) $(19,036,132)
Sales and Maturities
28,565,612 32,427,878 8,946,675
Securities held-to-maturity:
Sales and Maturities -0- -0- 204,084
Other Investments:
Cost of Acquisition
(2,840,452) (2,465,182) (2,297,975)
Sales and Maturities
2,818,049 2,054,548 1,770,165
Net Additions to Property and Equipment
(43,510) (366,596) (149,910)
____________ ____________ ____________
NET CASH USED BY INVESTING
ACTIVITIES $(19,213,334) $(15,055,477) $(10,563,093)
____________ ____________ ____________
FINANCING ACTIVITIES
Receipts from universal life policies credited to
policyholder account balances
$ 6,074,832 $ 4,949,560 $ 3,352,687
Return of policyholder account balances
on universal life policies
(5,256,212) (4,570,049) (4,012,800)
Repurchase of Common Stock
130,962 (1,472) (23,831)
Dividends (684,580) (684,442) (685,219)
____________ ____________ ____________
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES $ 265,002 $ (306,403) $ 1,369,163)
____________ ____________ ____________
INCREASE IN CASH $ 255,021 $ 270,585 $ 67,190
Cash and cash equivalents at beginning of year
2,647,566 2,376,981 2,309,791
____________ ____________ ____________
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 2,902,587 $ 2,647,566 $ 2,376,981
============= ============ ============
See notes to consolidated financial statements.
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. Ninety-nine percent 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, Georgia, 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. In 1994 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. Intercompany transactions are eliminated in the Kentucky
Investors consolidated financial statements. The accompanying Investors
Heritage financial statements include intercompany transactions with Kentucky
Investors and other affiliates which are not eliminated.
Investments: In accordance with Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", Kentucky Investors and Investors Heritage classifies 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.
During 1995 the Financial Accounting Standards Board (FASB) 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 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. During 1996 and 1997, all acquired fixed maturities and equity
securities were classified as available-for-sale. 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 (refer to Revenues and
Expenses discussed later 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
$3,498,084 and $3,270,717 at December 31, 1997 and 1996, respectively.
Accumulated depreciation on property and equipment of Investors Heritage was
$3,407,860 and $3,188,432 at December 31, 1997 and 1996, respectively.
Goodwill: Goodwill for Investors Heritage is being amortized over forty years
using the straight-line method. Accumulated amortization was $1,049,616 and
$984,015 at December 31, 1997 and 1996, 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 used for prior year issues are locked in. Current
year issues are reserved for using updated assumptions determined by reviewing
the Company's past experience and includes a provision 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.
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. In accordance with
SFAS No. 113 reserves ceded to reinsurers of $15,998,475 and $8,915,237 at
December 31, 1997 and 1996, respectively, 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.
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 11% of ordinary life insurance in force. Participating dividends
are accrued as declared by the Board of Directors of Investors Heritage. The
liability for future policy benefits for participating policies was determined
based on the Net Level Premium Reserve Method, 3% interest, and the 1941 CSO
Mortality and 1958 CSO Mortality tables. All guaranteed benefits were
considered in calculating these reserves. The average assumed investment yields
used in determining expected gross margins ranged from 3.56% to 9.17% (for the
current and all future years an assumed investment yield of 6.80% was
utilized). Unamortized acquisition costs associated with participating
business are amortized in proportion to expected gross margins.
Federal Income Taxes: Kentucky Investors and Investors Heritage utilize the
liability method in accordance with FASB Statement 109 "Accounting for Incomes
Taxes" to account for income taxes. Under such 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.
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 on accident and health policies and unreleased profits on limited-pay
life policies, 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 since 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-cancellable.
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 (shares issued at December
31, 1997: 836,895; 1996: 820,475; and 1995: 811,128). 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 829,725 in 1997, 813,754 in 1996, and 783,820 in 1995. Cash
dividends per share were $.38 in 1997, 1996, and 1995.
The stated value of Investors Heritage common stock was $1,449,778, $1,441,718,
and $1,441,797 at December 31, 1997, 1996 and 1995, respectively. 2,000,000
shares were authorized at December 31, 1997, 1996 and 1995 (shares issued at
December 31, 1997: 905,611; 1996: 900,574; and 1995: 900,623). Earnings per
share of common stock were computed based on the weighted average number of
common shares outstanding during each year: 902,739 in 1997, 900,508 in 1996
and 901,151 in 1995. Cash dividends per share were $.76 in 1997, 1996, and
1995.
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.
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 $9,405,000 of the loans outstanding at December 31, 1997 were to
borrowers located in Kentucky. All loans are secured by a first mortgage on the
property.
Investments in available-for-sale securities are summarized as follows:
1997 Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
____________ ____________ ___________ ____________
Available-for-sale securities:
U.S. Government Obligations
$ 22,472,841 $1,060,540 $ -0- $ 23,533,381
States and Political Subdivisions
1,990,527 40,043 -0- 2,030,570
Corporate 90,409,024 4,396,915 515 94,805,424
Foreign 14,680,336 733,064 -0- 15,413,400
Mortgage-Backed
Securities 35,127,387 910,684 37,935 36,000,136
____________ ____________ ___________ _____________
Total Fixed
Maturity
Securities $164,680,115 $7,141,246 $ 38,450 $171,782,911
Equity
Securities 912,458 2,261,561 4,649 3,169,370
____________ ____________ ___________ _____________
Total $165,592,573 $9,402,807 $ 43,099 $174,952,281
============ ============ =========== =============
1996 Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
____________ ____________ ___________ ____________
Available-for-sale securities:
U.S. Government
Obligations $ 20,134,443 $ 782,131 $ -0- $ 20,916,574
States and Political Subdivisions
1,988,971 27,399 11,260 2,005,110
Corporate 81,835,543 1,669,954 518,419 82,987,078
Foreign 7,573,874 132,769 31,043 7,675,600
Mortgage-Backed Securities
34,116,401 450,104 566,816 33,999,689
____________ ____________ ___________ ____________
Total Fixed Maturity Securities
$145,649,232 $3,062,357 $1,127,538 $147,584,051
Equity Securities
1,034,333 1,618,600 45,115 2,607,818
______________ ____________ ___________ _____________
Total $146,683,565 $4,680,957 $1,172,653 $150,191,869
============== ============ =========== =============
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
1997 1996
_____________________________
Net unrealized appreciation on
available-for-sale securities $ 9,359,708 $ 3,508,304
Adjustment to deferred acquisition
costs (1,021,959) (411,002)
Deferred income taxes (2,834,835) (1,053,083)
____________ ___________
Net unrealized appreciation on
available-for-sale securities
for Investors Heritage $ 5,502,914 $ 2,044,219
Minority shareholders' interest (1,459,813) (533,994)
____________ ___________
Net unrealized appreciation on
available-for-sale securities
for Kentucky Investors $ 4,043,101 $ 1,510,225
============ ===========
The amortized cost and fair value of debt securities at December 31, 1997, by
contractual maturity, are presented below. 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.
Available-for-Sale
Amortized Fair
Cost Value
____________________________
Due in one year or less $ 4,972,744 $ 5,015,147
Due after one year through five years 30,437,167 31,414,637
Due after five years through ten years 32,483,119 33,920,169
Due after ten years 52,569,086 55,924,740
Due at multiple maturity dates 44,217,999 45,508,218
____________ ____________
Total $164,680,115 $171,782,911
============ ============
Proceeds during 1997, 1996 and 1995 from sales and maturities of investments in
available-for-sale securities were $28,565,510, $32,427,878 and $8,946,675
respectively. Gross gains of $360,679, $101,509 and $86,647 and gross losses of
$392,895, $633,122 and $50,315 were realized on those sales during 1997, 1996
and 1995, respectively. Proceeds from sales and maturities of investments in
held-to-maturity securities were $204,084 for 1995. Gross gains of $2,135 and
gross losses of $7,964 were realized on those sales.
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, 1997, 1996 and
1995:
1997 1996 1995
Change in unrealized investment gain (loss):
Available-for-sale:
Debt securities $5,167,977 $(3,629,100) $12,275,195
Equity securities 683,427 318,943 501,508
Held-to-maturity:
Debt securities $ -0- $ -0- $ 466,504
Realized investment gain (loss):
Available-for-sale:
Debt securities $ (47,341) $ (449,194) $ 35,957
Equity securities 15,125 (38,221) 375
Held-to-maturity:
Debt securities $ -0- $ -0- $ (5,829)
In 1995 there were sales of $146,914 of held-to-maturity securities with a
realized loss of $7,705. The Company sold these securities for statutory
purposes since they were not valued by the NAIC Securities Valuation Office.
Net realized gains of $1,876 resulted 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.
Major categories of investment income for Investors Heritage are summarized as
follows:
1997 1996 1995
Fixed maturities $11,329,773 $ 9,865,087 $ 9,084,878
Mortgage loans on real estate 1,212,102 1,222,649 1,124,147
Other 975,897 927,817 961,604
___________ ___________ ___________
$13,517,772 $ 12,015,553 $ 11,170,629
Investment expenses 434,766 361,821 355,581
___________ ___________ ___________
$13,083,006 $ 11,653,732 $ 10,815,048
=========== ============ ============
Investors Heritage is required to hold assets on deposit for the benefit of
policyholders in accordance with statutory rules and regulations. At December
31, 1997 and 1996, these required deposits had book values of $23,696,655 and
$23,180,262, respectively.
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
1997 1996
Investors Heritage Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Fixed maturities $171,782,911 $171,782,911 $147,584,051 $147,584,051
Equity securities 3,169,370 3,169,370 2,607,818 2,607,818
Mortgages on real estate:
Commercial 12,939,239 13,929,217 13,224,490 14,281,466
Residential 795,552 863,184 657,345 719,947
Policy loans 6,976,601 6,976,601 6,894,715 6,894,715
Other long-term
investments 403,106 403,106 217,681 217,681
Short-term
investments 1,211,165 1,211,165 968,899 968,899
Investments in
affiliates 1,975,382 5,116,936 2,188,840 4,370,971
Contractual obligations
of affiliate 538,794 538,794 646,554 646,554
Cash and cash
equivalents 2,902,587 2,902,587 2,647,566 2,647,566
Accrued investment
income 2,904,861 2,904,861 2,412,713 2,412,713
Liabilities:
Policyholder deposits
(investment-type
contracts) $ 55,303,701 $ 49,947,246 $ 51,339,544 $ 46,075,179
Policy claims 2,256,654 2,256,654 1,594,541 1,594,541
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/Affiliate Transactions
Investors Heritage's investment in the common stock of its parent, Kentucky
Investors, either directly or indirectly, was valued at December 31, 1997:
Cost: $1,975,382; Market: $5,116,936 and at December 31, 1996: Cost:
$2,188,840; Market: $4,370,971. Additionally, Investors Heritage holds notes
receivable from Kentucky Investors with unpaid principal balances of $538,794
and $646,554 at December 31, 1997 and 1996, respectively, with variable
interest rates and due dates ranging from 2000 to 2004. Kentucky Investors
owns approximately 73% of Investors Heritage. Sales of Kentucky Investors
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.
Investors Heritage owns the home office real estate and leases the property to
its parent, Kentucky Investors and its subsidiaries. Lease payments made by
Kentucky Investors and its subsidiaries to Investors Heritage (and included in
its statement of income) during 1997, 1996 and 1995 were $13,090, $13,395 and
$12,882, respectively. The carrying value of the home office real estate at
December 31, 1997 and 1996 was $1,130,844 and $1,360,040, respectively. The
effects of the lease are eliminated in Kentucky Investors statement of income.
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:
Investors Heritage 1997 1996
Deferred tax liabilities:
Policy acquisition costs $ 7,393,000 $7,547,000
Net unrealized gain on
available-for-sale securities 2,835,000 1,053,000
Other 348,000 360,000
___________ ___________
Total deferred tax
liabilities $10,576,000 $8,960,000
Deferred tax assets:
Benefit reserves $ 6,116,000 $6,432,000
Other 417,000 459,000
___________ __________
Total deferred tax assets $ 6,533,000 $6,891,000
___________ __________
Net deferred tax liabilities of
Investors Heritage $ 4,043,000 $2,069,000
Kentucky Investors
Deferred tax liability:
Undistributed earnings
in subsidiary 1,531,000 1,459,000
___________ __________
Net deferred tax
liabilities of
Kentucky Investors $ 5,574,000 $3,528,000
=========== ==========
Federal income taxes in the consolidated balance sheets include deferred taxes.
In 1997 and 1996, taxes recoverable of $91,000 and $337,000, 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:
1997 1996 1995
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 (16.5)% (37.9)% (63.8)%
Dividend exclusion and tax-exempt income(1.0)% (2.1)% (5.0)%
Increase (decrease) in valuation - (16.2)% 27.6 %
Alternative minimum taxes 2.8 % 2.0 % -
Purchase accounting differences. .8 % .5 % 2.3 %
Other, net 1.2 % 16.8 % 1.3 %
______ ______ ______
Effective income tax rate-
Investors Heritage 21.3 % (2.9)% (3.6)%
Consolidating adjustments 5.5 % 7.6 % 5.9 %
______ ______ ______
Effective income tax rate-
Kentucky Investors 26.8 % 4.7% 2.3 %
======= ====== ======
At December 31, 1997 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 $27,000,000, 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 $131,757, $65,693 and $34,750 in
1997, 1996 and 1995, respectively. Investors Heritage made income tax payments
of $385,000, $620,000 and $445,614 in 1997, 1996 and 1995, 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 unconsolidated parent company
and Investors Heritage Printing, Inc. are immaterial, they are not separately
presented.
1997 1996 1995
Components of pension expense:
Service cost $ 238,817 $ 295,721 $ 222,492
Interest cost 382,866 343,151 289,538
Actual return on plan assets (474,553) (335,567) (296,918)
Net amortization and deferral 144,685 86,299 10,667
__________ __________ __________
Net periodic pension
expense $ 291,815 $ 389,604 $ 225,779
__________ __________ __________
Plan assets at fair value $4,771,638 $4,057,709 $3,460,959
__________ __________ __________
Actuarial present value of
projected benefit obligation:
Accumulated benefit
obligations:
Vested $4,489,521 $3,863,849 $3,356,652
Nonvested 56,259 49,321 45,880
__________ __________ ___________
$4,545,780 $3,913,170 $3,402,532
Provision for future
salary increase 1,116,283 1,260,781 1,172,820
__________ __________ ___________
Total projected
benefit obligation $5,662,063 $5,173,951 $4,575,352
__________ __________ ___________
Projected benefit obligation
in excess of fair value
of plan assets $ 890,425 $1,116,242 $1,114,393
Unrecognized net loss (1,115,533) (1,133,852) (1,255,751)
Unrecognized transition asset 136,574 170,717 204,861
Unrecognized prior service
credit 231,676 -0- -0-
__________ __________ __________
Accrued Pension Cost $ 143,142 $ 153,107 $ 63,503
========== ========== ===========
Excess of plan assets over
accumulated benefit obligations $ 225,858 $ 144,539 $ 58,427
========== ========== ==========
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 7.5% for 1997 and 1996. The rate of increase
in future compensation levels was 5% for 1997, 1996 and 1995. The expected
long-term rate of return on plan assets was 9% in 1997, 1996 and 1995. 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 1997, 1996
and 1995 were $171,000, $156,000, and $150,000, 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 $9,458,601 at December 31, 1997.
NOTE H - Statutory Accounting Practices
Investors Heritage's statutory-basis capital and surplus was $13,700,023 and
$12,818,202 at December 31, 1997 and 1996; respectively. Statutory-basis net
income was $1,294,586, $1,422,626, and $2,063,471 for the years ended December
31, 1997, 1996 and 1995, 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 (the
"Department"). "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 1998, 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 Department's 1995 quadriennial examination of Investors Heritage,
previously permitted admitted assets were required to be written-down over
periods ranging from 3 to 7 years. During 1996, the Company accelerated the
write-downs for all of the stipulated assets, except for the write-down
associated with the home office real estate. The net reduction to capital and
surplus for all write-downs recognized during 1996 was $2,966,919 (net of
offsetting effect to AVR). In 1997, the home-office real estate, which
represents the sole remaining asset not yet fully written-down to the
prescribed value, was amortized in accordance with the Department's write-down
schedule by $475,646. The remaining balance associated with the home office
real estate to be written-down in future years is $951,292. These adjustments
had no effect, other than requiring disclosure, on Kentucky Investors or
Investors Heritage's financial statements prepared in accordance with generally
accepted accounting principles.
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.
1997 1996 1995
(000's omitted)
Revenue:
Life & Annuities $ 51,183 $ 46,852 $ 42,437
Credit(Life & A&H) 131 (362) (802)
Accident & Health 97 597 1,126
Corporate 1,086 693 1,315
_________ _________ __________
$ 52,497 $ 47,780 $ 44,076
========= ========= ==========
Pre-Tax Income from Operations:
Life & Annuities $ 3,143 $ 2,295 $ 1,143
Credit(Life & A&H) (662) (604) (826)
Accident & Health (77) 25 108
Corporate 299 (160) 460
__________ __________ ___________
$ 2,703 $ 1,556 $ 885
========== ========== ===========
Assets:
Life & Annuities $ 201,167 $ 179,728 $ 163,834
Credit(Life & A&H) 16,053 10,329 8,186
Accident & Health 1,407 933 1,692
Corporate 40,027 36,150 36,778
_________ _________ __________
$ 258,654 $ 227,140 $ 210,490
========= ========= ==========
Amortization and Depreciation Expense:
Life & Annuities $ 4,836 $ 4,433 $ 2,874
Credit(Life & A&H) 475 1,227 2,672
Accident & Health 240 300 605
Corporate 283 248 248
_________ _________ __________
$ 5,834 $ 6,208 $ 6,399
========= ========= ==========
Investors Heritage ceded 100% of the risks associated with its credit life and
accident insurance written during 1997 and 1996 through coinsurance agreements
with various companies. Investors Heritage administers the ceded credit life
and accident insurance for an agreed-upon fee. During 1997 and 1996, Investors
Heritage recognized $505,400 and $410,062, respectively, of fee income
associated with these reinsurance arrangements. Ceded benefit and claim
reserves associated with these reinsurance arrangements at December 31, 1997
and 1996 were $11,460,482 and $5,451,435, respectively. Additionally, Investors
Heritage 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 $14,468,000, $9,978,000 and $1,135,000 in 1997, 1996
and 1995, respectively and commissions and expense allowances received were
$8,657,000, $5,795,000 and $166,000 in 1997, 1996 and 1995, respectively.
Unearned premium reserves were reduced by $13,785,000 and $7,325,000 at
December 31, 1997 and 1996, respectively, for credit-related reinsurance
transactions. Benefit recoveries associated with Investors Heritage ceded
reinsurance contracts were $1,956,000, $1,421,000 and $2,773,000 in 1997, 1996
and 1995, respectively. Investors Heritage remains contingently liable on all
ceded insurance should any reinsurer be unable to meet their obligations.
Assumed reinsurance premiums were $2,855,000, $3,734,000 and $4,348,000 in
1997, 1996 and 1995, 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.
Stock Information
Stock Prices
OTC Bulletin Board MARKET QUOTATIONS
Investors Heritage
Life Insurance Company
1997 MARKET PRICE RANGE
March June Sept. Dec.
26 - 28 26 - 29 26 - 29 26 1/2 - 29
1997 Annual Dividend Per Share - $.76
1996 MARKET PRICE RANGE
March June Sept. Dec.
26 - 27 1/2 26 - 28 26 - 28 26 - 28
1996 Annual Dividend Per share - $.76
Kentucky Investors
1997 MARKET PRICE RANGE
March June Sept. Dec.
13 1/2 - 14 1/4 13 3/4 - 14 5/8 14 3/4 - 15 3/4 16-16 1/2
1997 Annual Dividend Per Share - $.38
1996 MARKET PRICE RANGE
March June Sept. Dec.
12 7/8 - 13 3/4 13 - 13 3/4 13 - 13 5/8 13 - 13 3/4
1996 Annual Dividend Per Share - $.38
The stock of both companies is quoted on the OTC Bulletin Board. 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 1998 cash dividend to be paid to its stockholders by Investors Heritage
Life on April 17, 1998 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 1998 meeting of shareholders of Investors Heritage Life Insurance Company
is scheduled for 10 a.m. on Thursday, May 14, 1998, 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
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 171,782,911
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 3,169,376
<MORTGAGE> 13,734,791
<REAL-ESTATE> 0
<TOTAL-INVEST> 197,477,950
<CASH> 2,939,453
<RECOVER-REINSURE> 370,450
<DEFERRED-ACQUISITION> 27,225,643
<TOTAL-ASSETS> 256,872,362
<POLICY-LOSSES> 189,398,071
<UNEARNED-PREMIUMS> 14,460,410
<POLICY-OTHER> 2,256,654
<POLICY-HOLDER-FUNDS> 1,917,986
<NOTES-PAYABLE> 0
0
0
<COMMON> 836,895
<OTHER-SE> 27,249,925
<TOTAL-LIABILITY-AND-EQUITY> 256,872,362
39,129,106
<INVESTMENT-INCOME> 12,972,322
<INVESTMENT-GAINS> (33,794)
<OTHER-INCOME> 639,248
<BENEFITS> 19,218,783
<UNDERWRITING-AMORTIZATION> 84,574
<UNDERWRITING-OTHER> 30,560,131
<INCOME-PRETAX> 2,843,394
<INCOME-TAX> 761,000
<INCOME-CONTINUING> 2,082,394
<DISCONTINUED> 0
<EXTRAORDINARY> 559,842
<CHANGES> 0
<NET-INCOME> 1,522,552
<EPS-PRIMARY> 1.84
<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>
