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, 1998
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 $8,815,780 as of December 31, 1998.
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, 1998
848,116
Documents Incorporated by Reference:
(1) Portions of the Annual Report to the Stockholders for the year ended
December 31, 1998 (Form 10-K, Items 1, 5a, 6, 7 and 8)
(2) Portions of the Proxy Statement dated April 16, 1999, for the Annual
Meeting of Stockholders to be held May 13, 1999 (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 74% 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,
1998. 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, 1998.
During 1994 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 1998 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, 1998 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
writes credit life and credit accident and health insurance (respectively,
"Credit Life" and "Credit A&H", and collectively "Credit Insurance") on a group
basis.
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, 1998, 7% of the total
ordinary insurance in force was comprised of participating policies and of the
7%, 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, 1998, 1% of the
total ordinary insurance in force was comprised of participating policies with
non-guaranteed benefits.
Non-participating life insurance policies represented 93% 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 prearranged
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.
During 1997 IHL introduced group life products designed for the
prearranged 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.
During 1998 IHL introduced a new generation of both individual and group
life products designed for the prearranged funeral market. These products
differ from the 1997 products by offering simplified underwriting for the multi-
pay policies and shorter reduced benefit policies. These new products, called
the "Legacy 2000 Series" were implemented throughout the last two quarters of
1998 and have been well received in the market.
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.
Initially, FSG entered into a marketing agreement with Franklin Life
Insurance Company ("Franklin")to market Franklin's Credit Insurance products
during 1995. However, during the fourth quarter of 1995, IHL and FSG were
advised that Franklin was exiting the Commonwealth of Kentucky as a direct
writer of Credit Insurance products.
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.
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.
In addition, FSG would be able to generate revenues in the form of commissions
from the sale of IHL's Credit Insurance products.
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"), Bankers Life
Insurance Company ("Bankers Life") and American United Life Insurance Company
("AUL"). The AUL agreement was entered into during 1998. Pursuant to those
agreements, the Company's Credit Insurance products sold by Life Investors',
Bankers Life's and AUL's agents will be reinsured to Life Investors, Bankers
Life and AUL, 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 1998 were derived from the
sale of IHL's Credit Insurance products. IHL anticipates 1999 Credit Insurance
gross written premiums to exceed $2 million. During the 3rd Quarter 1998, IHL
was advised that Connecticut General was exiting the market as a reinsurer of
Credit Insurance products. Therefore, during the 4th Quarter 198, IHL and FSG
negotiated new reinsurance agreements with Munich American Reassurance Company,
Atlanta, Georgia ("Munich") and Reliastar Life Insurance Company, Minneapolis,
Minnesota ("Reliaster") whereby effective January 1, 1998 IHL will reinsurance
50% of the risk on all Credit Insurance policies to each reinsurer. 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 44% 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 $222,377,000.
During 1997, IHL converted to group insurance products in the preneed
market in a majority of states. The Legacy 2000 Series introduced during 1998
is also a group product in many 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 278 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. During 1999 IHL anticipates expanding
its preneed operation into several of these states.
Risk. In many cases IHL 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, 1998, approximately $660,887,00, or 24% 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 seventeen 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. $409,884,000 62.14%
Crown Life Insurance Co. 1,579,000 .2%
The Lincoln National Life
Insurance Co. 83,977,000 12.7%
J.M. Limited 1,286,000 .2%
Bankers Life Insurance Co. 107,270,000 16.2%
AEtna Life Insurance Co. 284,000 .04%
Indiana-Kentucky Ins. Co. Ltd. 228,000 .03%
Riverside Reinsurance Ltd. 634,000 .01%
Lancaster Life Insurance Co. 3,961,000 .6%
Business Men's Assurance Co. 5,456,000 .8%
Swiss Re America 1,100,000 .2%
Munich American Reinsurance Co. 41,372,000 6.3%
Life Investors Ins. Co.
of America 3,177,000 .48%
Other Companies (3) 679,000 .1%
TOTAL $660,887,000 100.0%
During 1998, IHL reinsured all of the risk on the Credit Insurance policies sold
by its agents to Connecticut General; however, the reinsurance agreement was
terminated effective December 31, 1998 with respect to new issues. Connecticut
General will not accept the risk on any new policies issued after December 31,
1998; however, Connecticut General will continue to provide reinsurance on all
Credit Insurance policies sold between January 1, 1996 and December 31, 1998.
During 1999, IHL will reinsure all of the risk on the Credit Insurance products
sold by its agents to Munich and Reliastar. As explained above, some of these
risks will also be reinsured to Life Investors, Bankers Life and AUL.
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 1998 for the three years ending December
31, 1998. Other than three minor accounting entries regarding reporting of EDP
equipment, general expenses and receivables, the Examination Report contains no
recommendaitons and no adjustments were made to the statutory financial
statements.
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 2.9 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 3.9 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 5.8 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 8.4 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 1998 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 1998.
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
1998. 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.
Since 1993 IHL has continued to expand its marketing capability in this
area. As a result, IHL steadily increased sales of preneed products. During
1997 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 27% in the prearranged funeral market during 1997 over 1996,
$21,104,000 compared to $16,681,000.
During 1998, 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 11%.
Single premium production for these lines of business was $23,413,000 for 1998
compared to $21,102,00 for 1997 and IHL anticipates continued growth in this
segment of approximately 12-15% during 1999.
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.
In December 1995, Franklin exited the market and 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.
Since 1996 FSG has marketed IHL's Credit Insurance products and will
continue to do so in 1999. However, during 1999 all of the risk on all Credit
Insurance policies sold by IHL will be reinsured with Munich and Reliastar. In
addition, FSG is 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 1998.
FSG also marketed IHL's mortgage protection products, and IHL anticipated
growth of approximately 20% in this segment of its business due to the marketing
efforts of FSG. IHL's management anticipates steady growth in this segment
during 1999 due to FSG's efforts.
Actual growth in 1998 was approximately 25.5%. Premium production in this
area increased $535,663, from $2,076,752 in 1997 to $2,612,415 in 1998.
Management anticipates an increase of approximately 20% during 1999.
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 107. The number of active independent contractual
agents of IHL is 2,188. 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 $38,501.
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, 1998, and is incorporated herein by reference.
(b) Approximate Number of Equity Security Holders
(A) (B)
Number of
Holders
Title of Class of Record 12-31-98
Common Stock 2,370
(c) Dividends
Kentucky Investors, Inc., paid dividends totaling $440,800 to stockholders
in 1998 representing a $.38 per share. The 1999 cash dividend to be paid April
9, 1999, to stockholders of record March 26, 1999 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, 1998, 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 10 - 21in the Annual Report to the Stockholders for
the year ended December 31, 1998, 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, 1998 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 55
Chairman of the Board,
President/1963
Jimmy R. McIver 47
Treasurer/1988
Nancy W. Walton 59 Sister of
First Vice Harry Lee
President/1988 Waterfield II
Robert M. Hardy, Jr. 41 Nephew of
Director, Vice President Harry Lee
and General Waterfield II
Counsel/ 1988
Howard L. Graham 64
Vice President
Corporate Services
1989
Wilma Yeary 67
Secretary/ 1989
Jane S. Jackson 44
Asst. Secretary
1989
Helen S. Wagner 62
Director/ 1986
Gordon Duke 53
Director/ 1991
H. Glenn Doran 73
Director/ 1963
Jerry F. Howell 85
Director/ 1963
Jerry F. Howell, Jr. 57 Son of Jerry
Director/ 1983 F. Howell
David W. Reed 45
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
13, 1999, 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 13, 1999 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 3 and 4 of
the Proxy Statement for the Annual Meeting of Stockholders to be held May 13,
1999, 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 13, 1999,
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, 1998
(pages 24 - 28 and 30 - 33) filed as Exhibit 1:
Consolidated Balance Sheets -- December 31, 1998 and 1997
For each of the three years in the period ended December 31, 1998:
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, 1998, 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, 1998.
(a)3. Listing of Exhibits
Exhibit 1 - Annual Report to the Stockholders for the year ended December
31, 1998.*
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, 1998, and is incorporated herein by
reference.
(b) Reports on Form 8-K
No filing of Form 8-K was made in 1998.
(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 24, 1999 /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 24, 1999
/s/
Robert M. Hardy, Jr.
Vice President and
General Counsel and Director
March 24, 1999
/s/
Jimmy R. McIver
Treasurer
March 24, 1999
/s/
Howard L. Graham
Vice-President
Corporate Services
March 24, 1999
/s/
Jerry F. Howell
Director
March 24, 1999
/s/
Gordon Duke
Director
March 24, 1999
Helen S. Wagner
Director
H. Glenn Doran
Director
David W. Reed
Director
/s/
Jerry F. Howell, Jr.
Director
March 24, 1999
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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 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, 1999
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, 1999, with respect to the consolidated
financial statements and schedule of Kentucky Investors, Inc. and subsidiaries
included in the Annual Report (Form 10-K) for the year ended December 31, 1998.
/s/
Ernst & Young LLP
Louisville, Kentucky
March 24, 1999
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
KENTUCKY INVESTORS, INC.
CONDENSED BALANCE SHEET
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, 1996
1998 1997 1996
------ ------ ------
Assets
Cash and Cash
Equivalents $ 52,484 $ 36,866 $ 36,943
Investment in
Subsidiary 34,106,966 29,878,589 26,071,120
Other Assets 180,487 291,583 221,215
----------- ---------- ----------
$34,339,937 $30,207,038 $26,329,278
=========== =========== ===========
Liabilities:
Notes Payable
to Subsidiary $ 431,035 $ 538,794 $ 646,554
Other
Liabilities 48,753 50,398 65,600
Deferred Taxes 1,635,414 1,531,026 1,459,351
Stockholders'
Equity
Common Stock 848,116 836,895 820,475
Paid in Capital 3,442,248 3,384,061 3,374,615
Unrealized
Appreciation
(depreciation)
of available-
for-sale
securities of
Subsidiary 6,392,746 4,043,101 1,510,225
Retained
Earnings 21,541,625 19,822,763 18,452,458
------------ ---------- -----------
Total Stock-
holders'
Equity $32,224,735 $28,086,820 $24,157,773
----------- ---------- ----------
$34,339,937 $30,207,038 $26,329,278
=========== =========== ===========
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
KENTUCKY INVESTORS, INC.
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, 1996
1998 1997 1996
------ ------ ------
Income
From printing
services to:
Affiliated
companies $ 302,051 $ 361,013 $ 369,143
Others 140,797 116,328 143,295
Realized Gain/Loss
on Investments 3,700 64
Other services
to subsidiary 203,146 190,478 158,285
Dividends from
subsidiary 505,679 505,636 505,635
Interest and
other income 301,712 228,880 165,687
------------ ---------- --------
$1,457,085 $1,402,399 $1,342,045
Operating
Expenses 628,637 649,917 655,308
------------ ---------- ----------
Operating
income before
equity in
undistributed
earnings of
subsidiary $ 828,448 $ 752,482 $ 686,737
Equity in
undistributed
earnings of
subsidiary for
the year $1,395,689 $ 960,070 $ 581,882
---------- --------- ---------
Income before
provision for
income taxes $2,224,137 $1,712,552 $1,268,619
---------- --------- ----------
Provision for
Income Taxes
Current $ 144,000 $ 118,000 $ 76,000
Deferred 105,000 72,000 46,000
----------- ---------- ---------
$ 249,000 $ 190,000 $ 122,000
----------- ----------- ----------
Income before
cumulative
effect of
accounting
change $1,975,137 $1,522,552 $1,146,619
Cumulative
effect of
accounting
change $ -0- $ -0- $ -0-
----------- ---------- ---------
Income $1,975,137 $1,522,552 $1,146,619
========== ========== ==========
Earnings Per
Share $ 2.34 $ 1.84 $ 1.41
========== ========== ==========
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
KENTUCKY INVESTORS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, 1996
1998 1997 1996
----- ------ ------
NET CASH
PROVIDED
BY OPERATING
ACTIVITIES $ 592,177 $ 548,483 $ 538,549
----------- ----------- -----------
FINANCING
ACTIVITIES
Decrease in
Notes
Payable $ (107,759) $(107,760)$ (101,200)
Dividends (440,800) (440,800) (440,800)
Acquisition of Treasury Stock (28,000)
------------ ----------- ----------
CASH USED BY
FINANCING
ACTIVITIES $ (576,559) $(548,560) $(542,000)
----------- ----------- ------------
INCREASE
(DECREASE)
IN CASH $ 15,618 $ (77) $ (3,451)
Cash and Cash
Equivalents
at beginning
of year $ 36,866 $ 36,943 $ 40,394
----------- ------------ ----------
CASH AND CASH
EQUIVALENTS
AT END OF
YEAR $ 52,484 $ 36,866 $ 36,943
============ ============ ==========
1998 ANNUAL REVIEW
INVESTORS HERITAGE
LIFE INSURANCE COMPANY
KENTUCKY INVESTORS, INC.
TABLE OF CONTENTS
Frankfort's Historical Sites 2
Mission and Strategy Statement 4
Letter to our Shareholders 5
Management's Discussion and Analysis 10
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 Carol Johnson
Many of the Investors Heritage Life Insurance Company employees are shown in
pictures taken at eleven points of interest in Frankfort, Kentucky. These
historical sites are briefly described in order of appearance in the Annual
Review. When in Frankfort we hope you will visit these and many other sites of
interest and historical significance.
Old State Capitol
The Old State Capitol building was designed by Gideon Shyrock and built between
1827-1830, introducing the Greek Revival style west of the Appalachians. Inside
stands a self-supporting stone stairway. It served as the state capitol from
1830-1910. This was the only pro-Union state capitol occupied by the
Confederate Army. After a bitterly contested election, Governor William Goebel
was shot and killed by an assassin on the Capitol lawn in 1899. Garth K.
Ferguson, the maternal grandfather of Harry Lee Waterfield II, Nancy Waterfield
Walton, and RoseGayle Waterfield Hardy, was a Senate page and his father a
Senator at the time of the assassination.
Old Governor's Mansion
When Kentucky was admitted to the Union in 1792 there was no executive
residence. Isaac Shelby, the first Kentucky Governor, lived in a log cabin.
Construction on this home was begun in 1797 and finished in time for the second
governor, James Garrard. In 1956 the house was designated as the official
residence of the Lieutenant Governor of Kentucky. The patio and rose garden
were added during the early 1970's. Our founder, Harry Lee Waterfield was the
first Lt. Governor to reside in the Old Mansion. He and his family lived there
during his two terms from 1956 - 1959 and 1963 -1967. The Old Mansion is the
oldest executive residence still in use in the United States. It was occupied
two years before the White House.
Liberty Hall
This Federalist style house was built in 1796 for Kentucky's first Senator, John
Brown. Brown was a member of the Virginia Legislature and the Old Congress
before statehood. He served in the U.S. Senate from 1792-1805. He was a
soldier under Washington and an aide to Lafayette. In 1810 his wife,
Margaretta, started the first Sunday School west of the Alleghenies in the
garden which became the First Presbyterian Church. Four generations of Browns
lived in the house.
First Presbyterian Church
The Church was organized in 1815 as an outgrowth of the Sunday School begun in
1810 by Margaretta Brown. The present Gothic building was built in 1849.
Although the building was not completed, it was opened for service for visiting
President-elect, Zachary Taylor.
Orlando Brown House
This Greek Revival house was designed by Kentucky architect, Gideon Shyrock, for
the second son of John Brown. The house was built in 1835 and three generations
of Browns lived in the house until 1945.
Singing Bridge
The Singing Bridge spans the Kentucky River linking Bridge Street and St. Clair
in downtown Frankfort. The steel bridge was built in 1893 to replace a covered
wooden bridge. The open grate floor creates a variety of musical pitches
depending on the weight and speed of traffic; thus the St. Clair Street Bridge
is known as the "Singing Bridge".
Executive Mansion
The Executive Mansion was built in 1912 and the exterior was modeled after Marie
Antoinette's villa near the Palace of Versailles. Twenty-two Kentucky Governors
have lived in the Mansion. It was renovated to its original Beaux-Arts style
between 1980-1984, including the formal garden in front.
Kentucky Military History Museum
Kentucky constructed the Old State Arsenal in 1850. It stands on a cliff
overlooking the Kentucky River. The Arsenal was converted to Military History
Museum in 1973.
Daniel Boone Memorial
Daniel Boone was born in Pennsylvania in 1734 and raised in Yadkin County, North
Carolina. He explored Eastern Kentucky and the Bluegrass Region between 1767-
1771. He worked to open a road between Holston Valley, Tennessee, and
Boonesborough, Kentucky, to aid in immigration promoted by the Transylvania
Company. He moved to Missouri with his wife in 1799 where he died in 1820. He
and Rebecca were re-interred in the Frankfort Cemetery in 1845. The Frankfort
Cemetery was incorporated in 1844 and is Kentucky's original rural cemetery.
Kentucky Vietnam Memorial
The Memorial was built in 1988 to honor the more than 125,000 Kentuckians who
served in Vietnam. The name of each of the 1,065 Kentuckians who died in the
war is located so that the shadow of the sundial touches each name on the actual
anniversary of his death. The names of the 22 missing in action or prisoners of
war are placed in front of the sundial where the shadow never falls, paying
special tribute to their personal agony and symbolizing our continued vigil for
their return.
Bibb-Burnley House
This house stands on the site of the first house lived in on Wapping Street. It
was built in 1786. Lt. John B. Bibb, who served during the War of 1812, bought
the property and built the present house in 1845. He served as representative
from Logan County from 1827-1828 and in the Senate from 1830-1834. Bibb was an
amateur horticulturist and developed the Bibb variety of lettuce here.
Executive Department pictured at the Old Capitol.
Jill Greenlief '89, Rob Hardy '87, Harry Lee Waterfield II '61, Whitney
Waterfield '94, Jane Jackson '74;
Howard Graham '65, Mary Reynolds '90, Raymond Carr '72, Ron Johnson '84 and
Wilma Yeary '63.
Financial Services Group & the Actuarial Department pictured at the Old
Governor's Mansion.
Alan Davis '88, Kenya Eastman '84, Rob Goodin '88;
Julie Hunsinger '92, Will Graham '90, Bobby Russell '74, and Michael Dudgeon
'94.
Mission and Strategy
Statements
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.
Benefits Department and Office Services pictured at Liberty Hall.
Missy West '99, Roland Herzel '91, Robin Bowman '83, Tammy Kull '89, Debbie
Beach '76, Alice Taylor '93, Steve Wise '98,
Norman Dickerson '97, Thelma Vitug '96, Harold Minnis '61 and Suzanne Schodorf
'93. Absent from picture Rodney Brooks '97, and Pat Porter '93.
LETTER TO OUR
SHAREHOLDERS
Agency Department pictured at the First Presbyterian Church.
Don Philpot '72, Marlene Terrell '84, Bob Ockerman '91, Lori Cook '96, David
Clark '98, Stephanie Houghlin '98 and Louellen Stivers '87.
Investors Heritage Printing and the Accounting Department pictured at the
Orlando Brown House.
Rick Calvert '94, Steve Riddle '78, Dale Cox '95, Phyllis Cornett '95; Cara
Ballinger '88, Toni Hornback '88,
Dianne Rogers '82, Doug Hippe '65, Jimmy McIver '72, Susie Jones '84. Absent
from picture Epp Williamson '78.
Hard work and successful implementation of our Business Plan over the past
several years resulted in another successful year during 1998. Kentucky
Investors, Inc. ("Kentucky Investors") and Investors Heritage Life Insurance
Company ("Investors Heritage") (collectively the "Companies") had their best
year ever in net gain from operations, with the exception of 1986, when two non-
recurring transactions occurred. Kentucky Investors' net gain was $1,975,137 _
up 30% over year-end 1997. Investors Heritage's net gain from operations was
$2,766,098 _ up 30% over a year ago.
Record Ordinary insurance sales were attained again in 1998. Single Premium
Preneed sales increased 20%; Annual Pay Preneed sales were up 8%; Annual Pay
Final Expense sales were up 10%; Mortgage Protection Single Premium sales sold
through financial institutions were up 30%. Traditional Ordinary Life sales were
up 9.6% with most of this increase from our Payroll Deduction Sales program.
Overall, the core block of Ordinary Life business was up 14% during 1998. We
have another ambitious goal for insurance sales during 1999, and the first two
months of the year indicate the goals will be reached.
As a result of a strong economy and our continued concentration in the Credit
Life and Credit Accident & Health Insurance market, Credit Insurance sales were
up in 1998.
The Companies can report again this year that the asset quality is a very strong
point in our operations. At year-end, 100% of fixed income assets were rated
investment grade and only one small residential loan was more than ninety days
past due.
As I have for the past ten years, I refer you to the Analysis of Asset Adequacy
performed each year, even though we are only required to do so every three
years. Each year Investors Heritage's Asset Adequacy Model has become more
sophisticated and useful. As in prior years, the Analysis shows very favorable
results.
A detailed report on activities of the Companies is presented in the
Management's Discussion and Analysis on Pages 10-21 of this Annual Review. You
are encouraged to carefully read the material.
Beginning with the 1995 Annual Review, we reported to stockholders that the
Companies had addressed the Year 2000 issue (Y2K) facing all users of
information services and computers. Again, I want to assure our stockholders and
others who read this Annual Review that the Companies' systems are Y2K
compliant. We began working toward a Y2K solution in 1988 while redesigning our
overall data processing systems. During the past ten years we have upgraded and
tested our systems and have been compliant since 1995.
We recently developed a web site for Investors Heritage. The address is
www.investorsheritage.com. We hope our web site will provide information and
assistance to current Investors Heritage associates, and will be a source of
information for prospective new associates. Hopefully, stockholders will also
find it interesting and informative. We have provided a great deal more
information about our Company than most insurance companies provide. We believe
it will help current and future clients (insureds and sales associates) become
better acquainted with the Company and our service personnel.
The Companies have developed a strategic alliance with Family Assistance, Inc.
to help provide at-need financing and accounts receivable management for our
funeral home associates. We firmly believe that providing needed services for
our sales associates is important. Through eighteen months of study and field
testing, we determined that funeral homes need an outlet for quick financing for
at-need funerals, and need a good system to assist in managing accounts
receivables. The Family Assistance Program has been utilized by a number of
firms for several months, and in December, 1998, we began presenting the Program
to all our funeral home associates. This will enable them to cost effectively
and quickly provide at-need financing, and it also gives them access to a
successful program for managing accounts receivable. We believe this alliance
will be a strong asset in our Preneed market.
Two new officers were named in 1998 to replace officers who are no longer with
Investors Heritage Life Insurance Company.
On June 30, Clair Manson retired after eleven years of outstanding service to
the Companies as Vice President and Chief Actuary. I had the pleasure of hiring
Clair after a lengthy search for just the right person. His work for Investors
Heritage was exemplary. He had an excellent actuarial mind and was able to
explain matters so others of us could understand. He also enjoyed working with
marketing personnel in developing products they wanted and could sell. Clair was
succeeded by Julie Hunsinger who had been Assistant Vice President and Assistant
Actuary since 1992. Julie has an outstanding actuarial background and experience
in financial actuarial work. She also understands the importance of sales and is
good at both creating ideas and listening to others to develop the best possible
products and reporting systems.
John Simmons, who had done an outstanding job as Vice President, Financial
Services (Credit Life and Credit Ordinary sales), resigned in 1997. John had
overseen tremendous growth in our Financial Services Division and successfully
managed the Division through considerable change in this segment of our
business. John was replaced in 1998 by Michael F. Dudgeon, Jr., who is also a
member of the Investors Heritage Board of Directors. Michael has been in Preneed
sales management for Investors Heritage since December, 1994. He has a lifetime
of understanding of the Companies' goals and has great ability to work with
others, to analyze problems or opportunities, and find ways to address them. He
continues to assist in Preneed matters, especially in South Carolina, a state
that shows great promise in the Preneed Division.
We thank John and Clair for their great contributions to our Companies, and we
wish Julie and Michael great success in their new responsibilities.
The pictures in this year's Annual Review are of most members of the home
office administration staff and some of the marketing personnel. We are
fortunate to have dedicated people who are building careers with the Companies.
By each name is the year the employee was hired. Please note the large number of
employees who have 10 or more years with the Companies. One of the key elements
of our success is that the people who manage and administer the operations
believe in the Companies and are investing their time and money in them. They
also are aware of our history and understand and believe in our mission and
goals. Hopefully, this understanding of the Companies helps us provide the
service our clients deserve, and enables us to personalize our service in
relationship to them. In turn, we believe this has translated into success for
shareholders of the Companies.
As we rapidly approach the end of the 20th century and the Year 2000 arrives, we
believe that Investors Heritage Life Insurance Company and Kentucky Investors,
Inc. are well positioned to thrive in our ever-changing, competitive markets. We
diligently look at what we do and how we do it; we constantly seek ways to
improve and move forward. We have an outstanding Company with dedicated
employees and sales associates. We are in attractive unique markets and believe
that opportunities will exist well into the next century for continued
development, growth and profitability.
We look forward to entering the 21st century with our stockholders,
policyholders, and company associates _ remembering our founder's statement
from our beginning in 1960, "We know where we are going; we invite you to go
with us." After thirty-nine years of using this phrase, including me quoting it
at various times since Mr. Waterfield's death in 1988, I believe it is time to
alter his statement a bit. Because of the longtime ownership of the majority of
our stockholders, the number of years that many of our employees and sales
associates have been with us, and the strong relationships developed with our
newest associates, I believe a more fitting statement now is, "We know where we
are going; we are glad you are going with us."
On behalf of the Officers and Board of Directors of the Companies, I want to
express our appreciation to the stockholders for your investment in and your
relationship with the Companies, and look forward to our working together to
continue to build a strong and viable organization.
Underwriting Department pictured at the Singing Bridge.
Norma Smith '69, Nancy Walton '66, Linda Tindall '86, Carolyn Monroe '86,
Charlotte Moore '92 and Kathy Sexton '75.
Underwriting Department pictured at the Governor's Mansion (see photo top page
6)
Twina Keeton '96, Debbie Bright '71, Joyce Wright '91, Marti Smith '82, Rhodonna
Redding '89, Alex Thompson '77, Judy Smith '98, Robert Lewis '98 (Claims).
Information Services pictured at the Kentucky Military History Museum.
Mike Wood '85, April Rogers '93, Bill Leroy '94, Mary Lou Barnard '84,
Lewis Rogers '87, Betty Barnard '70, Larry Lee '94.
Policy Services Department pictured at the Daniel Boone Memorial.
Colleen Hackney '86, David Marraccini '78, Sue Fields '98, Barbara Stratton '86,
Linda Sims '85, Jane Wise '64, Gwyna Stormes '95, Barbara Hawkins '87, Flo
Osborne '84.
Premium Accounting Department pictured at the Kentucky Vietnam Memorial.
Martha Hammons '72, Michelle Johnson '99, Margaret Nichols '88,
Shirley Harrod '94, Michelle Meier '96.
Credit Life Accounting & Human Resources pictured at the Bibb-Burnley House.
Angie Smith '99, Bonnie Conquest '95, Vicky Harrod '96, Jennifer McClain '80,
Joyce Courtney '75, Peggy Kays '67.
MANAGEMENT'S
DISCUSSION AND ANALYSIS
EXPANSION
For the last several years Investors Heritage Life Insurance Company ("Investors
Heritage") has been expanding its market share in the preneed funeral market.
The result has been consistent growth in almost all of the states that were
targeted for expansion. Investors Heritage Financial Services Group, Inc.
("Financial Services Group") a wholly owned subsidiary of Kentucky Investors,
Inc. ("Kentucky Investors") continues to operate under marketing agreements with
Investors Heritage and other unaffiliated insurers. This has proven to be
successful and enabled Financial Services Group and Investors Heritage to
continue utilizing their expertise in the marketing and administration of credit
insurance products. 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 continue to provide a sound
financial base as we strive to expand our marketing system to offer competitive,
quality products. Please see INVESTMENTS, LIQUIDITY AND FUND RESTRICTIONS for a
more detailed discussion.
BUSINESS SEGMENTS
Prior to 1998 segment data was presented on an "industry approach" in accordance
with Financial Accounting Standard Board (FASB) Statement No. 14. FASB
Statement No. 131 became effective for 1998 and superceded Statement No. 14.
Statement No. 131 requires a "management approach" in the presentation of
business segments based on how management internally evaluates the operating
performance of its business units. The segment data that follows has been
prepared in accordance with Statement No. 131. Accordingly, 1997 and 1996 data
have been restated to comply with this new FASB Statement. The former "Life and
Annuity" segment has been divided into two areas, "Preneed and Burial Products"
and "Traditional and Universal Life Products." The former "Credit Life" segment
is now "Credit Insurance Products and Administrative Services" and the former
"Corporate" segment is now "Corporate and Other"." Please refer to the Notes to
the Consolidated Financial Statements for additional information regarding
segment data.
REVENUES
Overall revenues were $57,461,000, $52,497,000 and $47,780,000 in 1998, 1997 and
1996, 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 in the preneed and burial products and our market
expansion of traditional life and credit insurance products with financial
institutions. A discussion of the changes follows. Additionally, Investors
Heritage has experienced steady growth in Net Investment Income which increased
9% or $1,181,000 in 1998 from 1997. The 1997 increase over 1996 was 12% or
$1,429,000.
PRENEED & BURIAL PRODUCTS
The preneed and burial segment includes both life and annuity products sold by
funeral directors or affiliated agents to fund prearranged funerals.
Revenues for the Preneed & Burial business segment were 12% or $4,324,000 higher
in 1998 than 1997. The 1997 increase over 1996 was 11% or $3,782,000.
Insurance sales exceeded production goals set for 1998 by approximately 5%.
Actual production increased approximately 13% in 1998 over 1997, due to
marketing expansion in single premium preneed products. New premiums collected
during 1998, 1997 and 1996 were $23,818,000, $21,168,000 and $16,681,000,
respectively. During 1998, Investors Heritage targeted thirteen states for
developing new accounts. Eighty percent of that goal was reached. Additionally,
Investors Heritage entered into a contractual relationship with nineteen new
accounts in two untargeted two states. This resulted in the goal being exceeded
by seven percent.
Premium production remains strong in North Carolina. However, due to the
successful expansion of our marketing operation noted above, preneed premiums
from North Carolina agents accounted for 42% of the total preneed premiums
collected in 1998 compared to 46% for 1997. Premium collections from Kentucky
were 25% of the total for 1998 and 19% for 1997. Other states showing
significant gains were Georgia, Indiana, South Carolina and West Virginia.
Management plans to continue to develop the preneed funeral market and
anticipates increases in single premium production for 1999 over 1998 in the
range of 8-12%.
Increase in Net Investment Income earned by preneed and burial products also
contributed to the overall increase in Revenues. Net investment income
increased 14% in 1998 compared to 1997 and 20% in 1997 compared to 1996. Net
investment income did not increase as significantly in 1998 compared to 1997 due
to the decline in interest rates on investments under current market conditions.
Kentucky Investors, Inc. has contracted with a firm that provides an at-need
financing program and an accounts receivable/cash management system for funeral
homes. This program will be offered to existing Preneed funeral home clients as
well as funeral homes that do not currently sell the Investors Heritage Preneed
insurance products. New preneed accounts are anticipated as a result.
TRADITIONAL & UNIVERSAL LIFE PRODUCTS
This segment includes traditional life and group life insurance products,
annuities (primarily qualified) and universal life products. This will continue
to be a sales division within Investors Heritage.
Revenues for 1998, 1997 and 1996 were $14,146,000, $13,950,000 and $13,454,000,
respectively. New premiums collected during 1998, 1997 and 1996 were $3,663,000,
$4,073,000 and $4,244,000, respectively. The decrease in premiums results from
the emphasis being placed on single premium production. Net investment income
for this segment increased 3% in 1998 compared to 1997 and 6% in 1997 compared
to 1996. The increase in net investment income was not as significant in 1998
compared to 1997 due to the decline in premium production and the decline in
interest rates on investments under current market conditions.
Product updates are anticipated for the more traditional lines offered by
Investors Heritage. Estate planning sales for funeral directors and their
families is a marketing unit within the traditional life division and the
Investors Heritage business plan includes expansion of this unit during 1999.
Financial Services Group will also continue to market traditional insurance
products of Investors Heritage through banks and other financial institutions.
CREDIT INSURANCE PRODUCTS & ADMINISTRATIVE SERVICES
This segment includes the marketing and administration of credit life and credit
accident & health insurance products (respectively "Credit Life" and "Credit
A&H", and collectively "Credit Insurance").
Credit insurance premiums written during 1998, 1997 and 1996 were $17,385,000,
$13,683,000 and $8,739,000, respectively. All of the related underwriting risk
is being reinsured 100% with major, well-known life companies. In addition,
Financial Services Group has obtained reinsurance relationships for Investors
Heritage with three other companies. Each of these agreements generates
marketing and retention fees, but not administration fees.
Revenues for this segment are $307,000, $152,000 and ($330,000) for 1998, 1997
and 1996, respectively. As anticipated, revenues from the Credit Insurance
segment were negative in 1996 because policies written and insured by Investors
Heritage in 1994 and 1993 that were cancelled prior to maturity, required
refunds of unearned premiums.
CORPORATE & OTHER
This segment consists of corporate accounts measured primarily by stockholders'
paid-in capital, contributed surplus, earned surplus, property and equipment,
investments in affiliates and other minor business lines which include group
annuities and group and individual accident and health products.
Revenues from this segment were $1,689,000 in 1998, $1,400,000 in 1997 and
$1,443,000 in 1996. The most significant reason for the increase in revenues
during 1998 was a $209,000 realized capital gain. Realized losses occurred
during 1997 and 1996.
Prior to 1997, most of the accident and health business produced by this segment
related to assumed business. During 1996, Investors Heritage stopped assuming
policies sold in connection with this reinsurance agreement. Accordingly,
revenues (net of realized gain/loss activity) have declined.
OPERATING RESULTS
Investors Heritage's Net Income for 1998 increased $640,000 or 30% from 1997 and
for 1997 increased $525,000 or 33% from 1996. Kentucky Investors' Net Income
for 1998 increased $453,000 or 30% from 1997 and for 1997 increased $376,000 or
33% from 1996.
Earnings per share were $3.06, $2.36 and $1.78 for 1998, 1997 and 1996,
respectively for Investors Heritage. Earnings per share were $2.34, $1.84 and
$1.41 during the same periods for Kentucky Investors.
PRENEED & BURIAL PRODUCTS
Pre-Tax Income (Income from Operations Before Federal Income Tax) for this
business segment of Investors Heritage was $2,579,000, $2,524,000 and $913,000
for 1998, 1997 and 1996, respectively. The increase in Pre-Tax Income in 1998
and 1997 when compared to 1996 is the result of actively managing its investment
portfolio and reduced levels of relative policyholder benefits and expenses
related to in force business. However, current market conditions, including
competitive pricing for this segment and the low interest rate environment
continue to narrow profits generated from new sales.
TRADITIONAL & UNIVERSAL LIFE PRODUCTS
Pre-Tax Income for this segment was $1,343,000, $852,000 and $1,528,000 in 1998,
1997 and 1996, respectively. Higher than expected unreinsured claims and
expense levels in 1997 reduced Pre-Tax Income considerably. 1998 and 1996 were
close to projections for revenues and expenses.
CREDIT INSURANCE PRODUCTS & ADMINSTRATIVE SERVICES
Pre-Tax Losses were $395,000, $666,000 and $579,000 for 1998, 1997 and 1996.
Losses have been generated by the run-off of Credit Insurance and the related
deferred acquisition costs amortization. In 1999, this line's performance
should improve due to the growth of the income from fully reinsured business and
reduced amortization from run-off business.
CORPORATE & OTHER
Pre-Tax Income (Loss) for this segment was $333,000, ($7,000) and ($306,000) for
1998, 1997 and 1996, respectively. Realized gains of $209,000 allocated to this
segment during 1998 were the primary reason for the improvement in Pre-Tax
Income.
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
all three companies.
During 1998, Financial Services Group's fourth full year of operation, revenues
were $452,000 up 22% or $81,000 compared to 1997, and dividends in the aggregate
amount of $171,000 were paid to Kentucky Investors. Revenues from Heritage
Printing were $456,000 in 1998, down 5% compared to $482,000 in 1997, and
Heritage Printing paid $10,000 in dividends to Kentucky Investors in 1998.
Management of Heritage Printing will continue to work to improve revenues from
unaffiliated sources as well as to provide printing services for Investors
Heritage. Revenues from these sources constitute less than 1% of Kentucky
Investors' overall Revenues in 1998 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 reorganizations,
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. A pie chart showing the Distribution of Invested Assets is
on page 15. 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, 1998, 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 methodically diversifying the portfolio over the last 10
years.
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: 86.4%; Contractual Obligations of
Affiliates: 0.2%; Investments in Affiliates: 0.8%; Equity Securities 1.5%;
Short Term Investments: 0.5%; Policy Loans: 3.2%; Other Long Term Investments:
0.2%; Mortgage Loans-R.E.: 7.2%.
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, 1998 are $193.9 million and AA, respectively. At year-end 1998 the fixed
income portfolio was allocated as follows: 53.7% - corporate; 12.0% -
government; 19.7% - mortgage-backed securities; 9.2% - foreign; 4.3% - asset
backed securities; and 1.1% - states and political subdivisions. Within the
corporate bond sector, the portfolio is also diversified with 38.0% of that
sector invested in bank and finance, 46.4% in industrial and miscellaneous, and
15.6% in utilities. Pie charts showing the Distribution of Fixed Income Assets
and Distribution of Corporate Bonds are located on page 16 and 17.
The fixed income portfolio also includes $38.2 million (at fair value) of
mortgage-backed securities ("MBS") which represents 17% of total invested assets
and 20% 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.
DISTRIBUTION OF FIXED INCOME ASSETS GRAPH
A pie chart appears on this page showing the Distribution of Fixed Income
Assets. The chart shows the following breakdown: Corporate: 53.7%;
Government: 12.0%; Mortgage-backed Securities: 19.7%; Foreigns: 9.2%; Asset-
backed Securities; 4.3%; States & Political Subdivisions: 1.1%.
There have been concerns expressed by rating agencies, various regulators and
other constituencies regarding investments in MBS's by insurers and other
financial institutions. Although these highly rated securities provide
excellent credit quality, their liquidity and risk must be monitored. Except
for two commercial backed mortgages of approximately $1.5 million, 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 71% 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 CMO's
variability in yields on the portfolio is not significant in relation to the
yield and cash flows of the total invested assets of Investors Heritage. More
importantly, Investors Heritage has no exposure to the more volatile, high-risk
CMO's, such as those structured to share in residual cash flows or which receive
only interest payments. Except for one sequential pay CMO of approximately
$999,000, the CMO's 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 these CMO's are structured to
provide more certain cash flows to the investor and therefore have reduced
prepayment risk.
DISTRIBUTION OF CORPORATE BONDS GRAPH
A pie chart appears on this page showing the Distribution of Corporate Bonds
Graph. This chart shows the following breakdown: Industrial and Miscellaneous:
46.4%; Bank and Finance: 38%; Utilities: 15.6%.
Pass-throughs comprise the remainder of MBS owned by Investors Heritage,
representing approximately 29% 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 approximately 93% 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 $294,348 and the average loan to value is 50.6%. The
largest loan currently held by Investors Heritage is $983,378. Investors
Heritage has $16.2 million invested in mortgage loans which represents 8% of
total invested assets. The portfolio is diversified across various property
types as follows: 19.2% - office; 32.4% - retail; 7.5% -industrial; 6.1% - 1 to
4 family; 19.2% - apartments; and 15.6% - other. A pie chart showing the
Distribution of Mortgage Loans is located above.
DISTRIBUTION OF MORTGAGE LOANS
A pie chart appears on this page showing the Distribution of Mortgage Loans.
This chart shows the following breakdown: Retail: 32.4%; Apartments: 19.2%;
Office Properties: 19.2%; Residential (1-4 families): 6.1%; Industrial: 7.5%;
Other: 15.6%.
Although approximately 71.5% 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 originations due to the fact that yields realized from the
mortgage loan portfolio are from 1.875 to 4.65 basis points higher than yields
realized from fixed income investments. Value has also been added because the
mortgage loan portfolio has consistently performed well. As of December 31,
1998, 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 $44,701. 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 1998, Investors Heritage's fixed income
investments were 100% investment grade as rated by Standard & Poor's, unchanged
from 100% for 1997. 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 5.3 years
with approximately $10.7 million due within 12 months and approximately $30.3
million due within the following four years. Historically management has
anticipated that all such investments will be held until maturity. However, one
of the responsibilities of our independent portfolio manager is to constantly
monitor the credit rating of our fixed income investments to determine if rating
changes of any investment requires action by management. 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.
OPTION ADJUSTED VALUE VS TERM STRUCTURE SHIFT
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.
MARKET RISK EXPOSURES
Measuring market risk is a key function of our asset/liability management
process. To test financial risk and investment strategy, Investors Heritage
performs an asset adequacy analysis each year. Dynamic models of both assets
and liabilities are created to project financial results under several shifts in
the current interest rate environment. Results show that the company's exposure
to a relative 10% increase or decrease in the interest rates prevalent at
December 31, 1998 is a net loss of less than $250,000. A graph of the total
price behavior curve tested is shown on Page 19 of this Annual Review.
Items taken into account on the asset side include prepayment 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 dynamically modeled in relationship to
the particular interest rate environment tested. Although Investors Heritage is
careful to ensure that these assumptions are consistent with the best available
data, interest-sensitive cash flows cannot be forecast with certainty, and can
deviate significantly from the assumptions made. Because asset and liability
durations are continually changing as new policyholder contracts are issued and
as new investments are added to the portfolio, Investors Heritage manages its
balance sheet on an ongoing basis, and its net exposure to changes in interest
rates may vary over time.
REGULATORY MATTERS
The statutory capital and surplus of Investors Heritage decreased $121,000 in
1998 following an increase of $882,000 in 1997. Depressed market values of
unaffiliated common stock at year-end 1998 compared to year-end 1997 contributed
most significantly to the decrease. The writedown of home office real estate
from market value to depreciated cost required by the Kentucky Department of
Insurance and reserve strengthening for the North Carolina burial associations
business block produced a $827,000 charge to surplus for both 1997 and 1998.
1999 will be the last year for these two items.
For Generally Accepted Accounting Principles ("GAAP") reporting purposes, the
home office real estate is already carried at depreciated cost and the notes and
affiliated 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.
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
1995, Investors Heritage's systems were in full compliance with all Year 2000
Issue requirements and it is anticipated that there will be 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 issue has been
nominal.
Although Investors Heritage does not anticipate any major interruption of
business activities, that will be dependent, in part, upon the activities of
third parties. Management has initiated formal communications with all of its
significant reinsurers, vendors, and financial institutions and has been advised
that all are either in full compliance or anticipate being in full compliance
prior to June 30, 1999. Even though Investors Heritage has assessed and
continues to assess third party issues, it has no direct ability to influence
the compliance actions of such parties. Accordingly, there can be no guarantee
that the systems of other companies on which Investors Heritage relies will be
Year 2000 compliant, leading to an adverse effect on future operating results of
Investors Heritage.
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.
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
Frankfort, Kentucky
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
Treasurer IKPF
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
Julie Hunsinger
Vice President and Chief ActuaryI
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
Michael F. Dudgeon, Jr.
Vice President, Financial Services I
Vice President F
William H. Keller, M.D.
Medical Director I
Ernst & Young
Independent Auditor IK
I Investors Heritage Life Insurance Company
F Investors Heritage Financial Services Group, Inc.
K Kentucky Investors, Inc.
P Investors Heritage Printing, Inc.
KENTUCKY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 and 1997
ASSETS 1998 1997
INVESTMENTS
Securities available-for-sale, at fair value:
Fixed maturities
(amortized cost:
1998-$181,886,791;
1997-$164,680,115) $193,911,467 $171,782,911
Equity securities
(cost: 1998-$913,714;
1997-$912,465) 3,378,471 3,169,376
Mortgage loans on
real estate 16,189,127 13,734,791
Policy loans 7,203,344 6,976,601
Other long-term
investment 488,828 453,106
Short-term investments 1,200,970 1,361,165
____________ ____________
Total investments $222,372,207 $197,477,950
Cash and cash equivalents 2,514,371 2,939,453
Accrued investment income 3,098,930 2,905,504
Due and deferred premiums 4,129,967 4,014,177
Deferred acquisition costs 27,288,684 27,225,643
Leased property under
capital leases 404,877 -0-
Property and equipment 1,604,618 1,748,579
Goodwill 2,088,642 1,966,843
Other assets 1,510,848 1,649,596
Amounts recoverable from
reinsurers 23,355,631 16,944,617
____________ ____________
$288,368,775 $256,872,362
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities:
Benefit
reserves $207,115,725 $189,398,071
Unearned premium reserves
20,069,565 14,460,410
Policy claims 2,086,316 2,256,654
Other policyholders' funds:
Dividend & endowment accumulations
1,053,972 1,030,218
Reserves for dividends & endowments & other
784,630 887,768
____________ ____________
Total policy liabilities
$231,110,208 $208,033,121
Federal income taxes 8,122,499 5,574,113
Obligations under
capital leases 407,462 -0-
Other liabilities 4,032,569 3,936,137
____________ ____________
Total liabilities
$243,672,738 $217,543,371
____________ ____________
MINORITY INTEREST IN SUBSIDIARY
$ 12,471,302 $ 11,242,171
____________ ____________
STOCKHOLDERS' EQUITY
Common stock (shares issued:
1998-848,116; 1997-836,895)
$ 848,116 $ 836,895
Paid-in surplus 3,442,248 3,384,061
Accumulated other comprehensive income
6,392,746 4,043,101
Retained earnings 21,541,625 19,822,763
____________ ____________
Total stockholders' equity
$ 32,224,735 $ 28,086,820
____________ ____________
$288,368,775 $ 256,872,362
============ =============
See notes to consolidated financial statements.
KENTUCKY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
1998 1997 1996
REVENUES
Premiums and other considerations
$42,638,289 $39,129,106 $ 36,354,025
Investment income, net of expenses
14,167,232 12,972,322 11,528,961
Realized gain (loss) on investments, net
126,179 (33,794) (488,126)
Other income 776,612 639,248 566,804
___________ ___________ ____________
Total revenue $57,708,312 $52,706,882 $ 47,961,664
___________ ___________ ____________
BENEFITS AND EXPENSES
Death and other benefits $20,767,497 $19,218,783 $19,134,559
Guaranteed annual
endowments 800,041 835,220 867,200
Dividends to policyholders 626,325 743,582 647,279
Increase in benefit reserves and
unearned premiums 18,400,657 16,112,923 12,587,751
Acquisition costs deferred(7,006,366) (6,862,085) (6,139,949)
Amortization of deferred acquisition costs
6,497,263 6,946,659 6,904,477
Commissions 5,231,882 4,702,676 4,382,830
Other insurance expenses 8,380,727 8,165,730 7,935,471
___________ ___________ ___________
Total benefits and expenses
$53,698,026 $49,863,488 $46,319,618
___________ ___________ ___________
Income from operations before
Federal Income Tax and minority
interest in net income of subsidiary
$ 4,010,286 $ 2,843,394 $ 1,642,046
___________ ___________ ___________
Provision for income taxes
Current $ 362,000 $ 497,000 $ 437,000
Deferred 952,000 264,000 (360,000)
____________ ____________ __________
$ 1,314,000 $ 761,000 $ 77,000
____________ ____________ __________
income from operations before
minority interest in net income
of subsidiary $ 2,696,286 $ 2,082,394 $ 1,565,046
MINORITY INTEREST IN NET INCOME
OF SUBSIDIARY 721,149 559,842 418,427
____________ ____________ ___________
Net Income $ 1,975,137 $ 1,522,552 $ 1,146,619
============ ============ ============
Earnings Per Share $ 2.34 $ 1.84 $ 1.41
============ ============ ============
See notes to consolidated financial statements.
<TABLE>
KENTUCKY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK SURPLUS INCOME EARNINGS EQUITY
________ ________ _____________ _________ _____________
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996
$811,128 $3,374,704 $2,916,509 $17,539,199 $24,641,540
Comprehensive Income:
Net Income
1,146,619 1,146,619
Change in net unrealized appreciation
on available-for-sale securities
(1,406,284) (1,406,284)
Total Comprehensive Income (259,665)
Cash Dividend (344,611) (344,611)
Issuance of common stock, net
9,347 (89) 111,251 120,509
________ __________ ___________ ___________ ___________
BALANCE, DECEMBER 31, 1996
$820,475 $3,374,615 $1,510,225 $18,452,458 $24,157,773
Comprehensive Income:
Net Income 1,522,552 1,522,552
Change in net unrealized appreciation
on available-for-sale securities
2,532,876 2,532,876
Total Comprehensive Income 4,055,428
Cash Dividend (349,285) (349,285)
Issuance of common stock, net
16,420 9,446 197,038 222,904
________ __________ ___________ ___________ ___________
BALANCE, DECEMBER 31, 1997
$836,895 $3,384,061 $4,043,101 $19,822,763 $28,086,820
Comprehensive Income:
Net Income 1,975,137 1,975,137
Change in net unrealized appreciation
on available-for-sale securities
2,349,645 2,349,645
Total Comprehensive Income 4,324,782
Cash Dividend (354,926) (354,926)
Issuance of common stock, net
11,221 58,187 98,651 168,059
________ __________ ___________ ___________ __________
BALANCE, DECEMBER 31, 1998
$848,116 $3,442,248 $6,392,746 $21,541,625 $32,224,735
========== ========== ========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
KENTUCKY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
1998 1997 1996
OPERATING ACTIVITIES
Net Income $ 1,975,137 $ 1,522,552 $ 1,146,619
Adjustments to reconcile net income
to net cash provided by operating activities:
Increase in Benefit Reserves
25,220,661 22,663,249 18,302,594
Change in Claims Liability
(170,338) 662,113 (71,408)
Change in Other Policyholder Funds
(79,384) (30,697) (151,680)
Amortization of Deferred Acquisition Costs
6,497,263 6,946,659 6,904,477
Policy Acquisition Costs Deferred
(7,006,366) (6,862,085) (6,139,949)
Realized Loss (Gain) on Investments
(209,187) 33,794 488,126
Increase in Accrued Investment Income
(193,426) (492,401) (273,267)
Change in Other Assets and Other Liabilities
646,584 672,582 395,311
Provision for Deferred Federal Income Taxes
952,000 264,000 (360,000)
Federal Income Tax -0- -0- (250,438)
Change in Due and Deferred Premiums
(115,790) 66,306 633,574
Net Adjustment for Premium and
Discount on Investments
269,283 206,299 256,456
Depreciation and Other Amortization
201,157 394,116 336,406
Change in Minority Interest and Other
487,559 468,090 321,608
Change in Amounts Recoverable from Reinsurers
(6,411,014) (7,325,846) (5,954,989)
__________ __________ __________
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 22,064,139 $ 19,188,731 $ 15,583,440
____________ ____________ ____________
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases $(30,462,168) $(47,713,033) $(46,706,125)
Sales and Maturities 13,194,144 28,565,612 32,427,878
Other Investments:
Cost of Acquisition (4,857,026) (2,912,452) (2,478,676)
Sales and Maturities 2,300,420 2,482,421 1,651,805
Net Additions to Property and Equipment
(583,872) (48,574) (366,597)
____________ ___________ ___________
NET CASH USED BY INVESTING
ACTIVITIES $(20,408,502) $(19,626,026) $(15,471,715)
____________ ___________ ___________
FINANCING ACTIVITIES
Receipts from universal life policies credited to
policyholder account balances
$ 4,356,590 $ 6,074,832 $ 4,949,560
Return of policyholder account balances on
universal life policies (6,250,442) (5,256,212) (4,570,049)
Issuances of Common Stock 168,059 222,904 120,509
Dividends (354,926) (349,285) (344,611)
___________ ___________ ________
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES $ (2,080,719) $ 692,239 $ 155,409
___________ _____________ ____ ________
INCREASE (DECREASE) IN CASH
$ (425,082)$ 254,944 $ 267,134
Cash and cash equivalents at beginning of year
2,939,453 2,684,509 2,417,375
______________ ___________ ____________
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 2,514,371 $ 2,939,453 $ 2,684,509
============== ============= =============
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)
1998 1997 1996 1995 1994
Total Revenue $ 57,708 $ 52,707 $ 47,962 $ 44,005 $ 46,656
Total Benefits & Expenses
53,698 49,863 46,320 43,191 44,039
Net Income 1,975 1,523 1,147 555 1,523
Earnings Per Share
2.34 1.84 1.41 .71 1.97
Total Assets 288,369 256,872 224,997 208,045 191,367
Total Liabilities
243,673 217,543 190,997 173,288 164,902
Debt 407 -0- -0- -0- -0-
Cash Dividends
Per Share .38 .38 .38 .38 .37
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, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/
Ernst & Young LLP
Louisville, Kentucky
March 24, 1999
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)
1998 1997 1996 1995 1994
Premiums $ 42,638 $ 39,129 $ 36,354 $ 33,061 $ 36,444
Net Investment Income
14,264 13,083 11,654 10,815 10,011
Net Income 2,766 2,127 1,602 917 2,401
Earnings Per Share
3.06 2.36 1.78 1.02 2.66
Total Assets 289,825 258,654 227,140 210,490 194,262
Policy Reserves
227,185 203,858 180,377 161,695 155,179
Debt 407 -0- -0- -0- -0-
Cash Dividends Per Share
.76 .76 .76 .76 .74
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,
1998 and 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997,
and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/
Ernst & Young LLP
Louisville, Kentucky
March 24, 1999
Investors Heritage Life Insurance Company
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 and 1997
ASSETS 1998 1997
INVESTMENTS
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost:
1998-$181,886,791;
1997-$164,680,115) $193,911,467 $171,782,911
Equity securities (cost: 1998
and 1997-$912,458) 3,377,213 3,169,370
Mortgage loans on
real estate 16,189,127 13,734,791
Policy loans 7,203,344 6,976,601
Other long-term investments 437,221 403,106
Short-term investments 1,170,970 1,211,165
____________ ____________
$222,289,342 $197,277,944
Investments in affiliates 1,837,510 1,975,382
Contractual obligations of
affiliate 431,035 538,794
____________ ____________
Total investments $224,557,887 $199,792,120
Cash and cash equivalents 2,461,887 2,902,587
Accrued investment income 3,097,421 2,904,861
Due and deferred premiums 4,129,967 4,014,177
Deferred acquisition costs 27,288,684 27,225,643
Leased property under capital
leases 404,877 -0-
Property and equipment 1,566,117 1,703,387
Goodwill 1,508,780 1,574,381
Other assets 1,453,280 1,592,539
Amounts recoverable from
reinsurers 23,355,631 16,944,617
____________ ____________
$289,824,531 $258,654,312
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities:
Benefit reserves $207,115,725 $189,398,071
Unearned premium
reserves 20,069,565 14,460,410
Policy claims 2,086,316 2,256,654
Other policyholders' funds:
Dividend & endowment accumulations
1,053,972 1,030,218
Reserves for dividends & endowments & other
784,630 887,768
____________ ____________
Total policy
liabilities $231,110,208 $208,033,121
Federal income taxes 6,487,085 4,043,087
Obligations under capital
leases 407,462 -0-
Other liabilities 3,983,860 3,874,424
____________ ____________
Total liabilities $241,988,615 $215,950,632
____________ ____________
STOCKHOLDERS' EQUITY
Common stock (shares issued:
1998-904,373; 1997-905,611) $ 1,447,797 $ 1,449,778
Paid-in surplus 3,777,101 3,776,625
Accumulated other comprehensive
income 8,594,131 5,502,914
Retained earnings 34,016,887 31,974,363
____________ ____________
Total stockholders' equity
$ 47,835,916 $ 42,703,680
____________ ____________
$289,824,531 $ 58,654,312
============= ============
See notes to consolidated financial statements.
Investors Heritage Life Insurance Company
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
1998 1997 1996
REVENUES
Premiums and other
considerations $42,638,289 $39,129,106 $36,354,025
Investment income, net
of expenses 14,264,246 13,083,006 11,653,732
Realized gain (loss)
on investments, net 209,186 (19,346) (489,685)
Other income 349,310 304,280 261,524
___________ ___________ ___________
Total revenue $57,461,031 $52,497,046 $47,779,596
___________ ___________ ___________
BENEFITS AND EXPENSES
Death and other
benefits $20,767,497 $19,218,783 $19,134,559
Guaranteed annual
endowments 800,041 835,220 867,200
Dividends to
policyholders 626,325 743,582 647,279
Increase in benefit reserves and
unearned
premiums 18,400,657 16,112,923 12,587,751
Acquisition costs
deferred (7,006,366) (6,862,085) (6,139,949)
Amortization of deferred
acquisition costs 6,497,263 6,946,659 6,904,477
Commissions 5,231,882 4,702,676 4,382,830
Other insurance
expenses 8,283,634 8,096,713 7,839,875
___________ ___________ ___________
Total benefits
and expenses $53,600,933 $49,794,471 $46,224,022
___________ ___________ ___________
Income from operations before
Federal Income Tax $ 3,860,098 $ 2,702,575 $ 1,555,574
___________ ___________ ___________
Provision for income taxes
Current $ 247,000 $ 384,000 $ 360,000
Deferred 847,000 192,000 (406,000)
___________ ___________ ___________
$ 1,094,000 $ 576,000 $ (46,000)
___________ ___________ ___________
Net Income $ 2,766,098 $ 2,126,575 $ 1,601,574
============ ============ ============
Earnings Per Share $ 3.06 $ 2.36 $ 1.78
============ ============ ============
See notes to consolidated financial statements.
<TABLE>
Investors Heritage Life Insurance Company
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK SURPLUS INCOME EARNINGS EQUITY
________ ________ _____________ __________ ___________
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996
$1,441,797 $3,776,427 $3,948,035 $29,493,727 $38,659,986
Comprehensive Income:
Net Income 1,601,574 1,601,574
Change in net unrealized appreciation
on available-for-sale securities
(1,903,816) (1,903,816)
Total Comprehensive Income (302,242)
Cash Dividend (684,442) (684,442)
Net cost of common stock
sold (purchased)
(79) 198 (1,393) (1,274)
__________ __________ ___________ ___________ __________
BALANCE, DECEMBER 31, 1996
$1,441,718 $3,776,625 $2,044,219 $30,409,466 $37,672,028
Comprehensive Income:
Net Income 2,126,575 2,126,575
Change in net unrealized appreciation
on available-for-sale securities
3,458,695 3,458,695
Total Comprehensive Income 5,585,270
Cash Dividend (684,580) (684,580)
Net cost of common stock sold
8,060 122,902 130,962
__________ __________ ___________ ___________ _________
BALANCE, DECEMBER 31, 1997
$1,449,778 $3,776,625 $5,502,914 $31,974,363 $42,703,680
Comprehensive Income:
Net Income 2,766,098 2,766,098
Change in net unrealized appreciation
on available-for-sale securities
3,091,217 3,091,217
Total Comprehensive Income 5,857,315
Cash Dividend (687,745) (687,745)
Net cost of common stock
sold (purchased)
(1,981) 476 (35,829) (37,334)
__________ __________ ___________ ___________ __________
BALANCE, DECEMBER 31, 1998
$1,447,797 $3,777,101 $8,594,131 $34,016,887 $47,835,916
========== ========== ========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
Investors Heritage Life Insurance Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
1998 1997 1996
OPERATING ACTIVITIES
Net Income $ 2,766,098 $ 2,126,575 $ 1,601,574
Adjustments to reconcile net income
to net cash provided by operating activities:
Increase in Benefit
Reserves 25,220,661 22,663,249 18,302,594
Change in Claims
Liability (170,338) 662,113 (71,408)
Change in Other Policyholder
Funds (79,384) (30,697) (151,680)
Amortization of Deferred
Acquisition Costs 6,497,263 6,946,659 6,904,477
Policy Acquisition Costs
Deferred (7,006,366) (6,862,085) (6,139,949)
Realized Loss (Gain) on
Investments (209,187) 19,346 489,685
Increase in Accrued
Investment Income (192,560) (492,148) (273,380)
Change in Other Assets and
Other Liabilities 656,157 688,876 378,800
Provision for Deferred Federal
Income Taxes 847,000 192,000 (406,000)
Federal Income Tax 4,554 (5,807) (250,481)
Change in Due and Deferred
Premiums (115,790) 66,306 633,574
Net Adjustment for Premium and
Discount on Investments
269,283 206,299 256,456
Depreciation and Other Amortization
381,866 348,513 313,192
Change in Amounts Recoverable
from Reinsurers (6,411,014) (7,325,846) (5,954,989)
___________ _________ _________
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 22,458,243 $ 19,203,353 $ 15,632,465
__________ ___________ ___________
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases $(30,460,916) $(47,713,033) $(46,706,125)
Sales and Maturities 13,194,144 28,565,612 32,427,878
Other Investments:
Cost of Acquisition (4,951,926) (2,840,452) (2,465,182)
Sales and Maturities 2,522,558 2,818,049 2,054,548
Net Additions to Property
and Equipment (583,872) (43,510) (366,596)
__________ __________ __________
NET CASH USED BY INVESTING
ACTIVITIES $(20,280,012) $(19,213,334) $(15,055,477)
____________ ___________ ___________
FINANCING ACTIVITIES
Receipts from universal life policies
credited to policyholder
account balances $ 4,356,590 $ 6,074,832 $ 4,949,560
Return of policyholder account
balances on universal
life policies (6,250,442) (5,256,212) (4,570,049)
Repurchase of Common Stock (37,334) 130,962 (1,472)
Dividends (687,745) (684,580) (684,442)
_________ __________ _________
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES $ (2,618,931) $ 265,002 $ (306,403)
___________ ____________ ___________
INCREASE (DECREASE) IN CASH
$ (440,700) $ 255,021 $ 270,585
Cash and cash equivalents at
beginning of year 2,902,587 2,647,566 2,376,981
____________ ___________ _____________
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 2,461,887 $ 2,902,587 $ 2,647,566
============= ============= ==============
See notes to consolidated financial statements.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
KENTUCKY INVESTORS, INC.
IINVESTORS 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 classify all fixed
maturities and equity securities as available-for-sale. Under SFAS No. 115,
securities classified as available-for-sale are carried at fair value with
appreciation (depreciation) relating to temporary market value changes recorded
as an adjustment to other comprehensive income.
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
$3,366,812 and $3,498,084 at December 31, 1998 and 1997, respectively.
Accumulated depreciation on property and equipment of Investors Heritage was
$3,275,397 and $3,407,860 at December 31, 1998 and 1997, respectively.
Capital Leases: During 1998 Investors Heritage acquired new computer equipment
through a three-year capital lease. Lease payments for 1998 were $48,646.
Future minimum lease payments for 1999, 2000 and 2001 are $163,668, $163,668 and
$115,023, respectively. The present value of net minimum lease payments at
December 31, 1998 was $407,462, which is equal to the total future minimum lease
payments of $442,359 less imputed interest of $34,897. Accumulated amortization
on the leased property was $43,603 at December 31, 1998.
Goodwill: Goodwill for Investors Heritage is being amortized over forty years
using the straight-line method. Accumulated amortization was $1,115,217 and
$1,049,616 at December 31, 1998 and 1997, 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 $22,616,183 and $15,998,475 at
December 31, 1998 and 1997, 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 7% 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
affects of realized gains or losses.
Common Stock and Earnings per Share: The par value per share for Kentucky
Investors is $1.00 with 4,000,000 shares authorized (shares issued at December
31, 1998: 848,116; 1997: 836,895; and 1996: 820,475). 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 843,251 in 1998, 829,725 in 1997, and 813,754 in 1996. Cash
dividends per share were $.38 in 1998, 1997, and 1996.
The stated value of Investors Heritage common stock was $1,447,797, $1,449,778,
and $1,441,718, at December 31, 1998, 1997 and 1996, respectively. 2,000,000
shares were authorized at December 31, 1998, 1997 and 1996 (shares issued at
December 31, 1998: 904,373; 1997: 905,611; and 1996: 900,574). Earnings per
share of common stock were computed based on the weighted average number of
common shares outstanding during each year: 904,334 in 1998, 902,739 in 1997 and
900,508 in 1996. Cash dividends per share were $.76 in 1998, 1997, and 1996.
Accumulated Other Comprehensive Income: As of January 1, 1998 the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or stockholders'
equity. SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in stockholders' equity, to be included in other comprehensive income. Prior
year financial statements have been reclassified to conform to this requirement.
The reclassification amounts (net of 34% tax) for the years ended December 31,
1998, 1997 and 1996 are summarized as follows:
1998 1997 1996
Net unrealized gain (loss) arising
during period $3,215,115 $3,426,479 $(2,435,429)
Reclassification adjustment for net (gains)
losses included in net income
(123,898) 32,216 531,613
__________ __________ __________
Net unrealized gain (loss) on certain
securities for Investors Heritage
$3,091,217 $3,458,695 $(1,903,816)
Minority interest in other comprehensive
income (741,572) (925,819) 497,532
__________ __________ __________
Net unrealized gain (loss) on certain
securities for Kentucky Investors
$2,349,645 $2,532,876 $(1,406,284)
========== ========== ===========
Reclassifications: Certain prior year amounts have been reclassified to conform
to the 1998 presentations.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
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 $11,571,000 of the loans outstanding at December 31, 1998 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:
1998 Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
_________ _________ _________ _________
Available-for-sale securities:
U.S. Government
Obligations $ 21,741,471 $ 1,509,437 $ -0- $ 23,250,908
States and Political
Subdivisions 1,992,186 72,464 -0- 2,064,650
Corporate 105,089,331 7,586,323 42,515 112,633,139
Foreign 16,445,886 1,360,974 -0- 17,806,860
Mortgage-Backed
Securities 36,617,917 1,537,993 -0- 38,155,910
___________ ___________ ______________ ____________
Total Fixed Maturity
Securities $181,886,791 $12,067,191 $ 42,515 $ 193,911,467
Equity Securities 912,458 2,468,604 3,849 3,377,213
___________ __________ ______________ ______________
Total $182,799,249 $14,535,795 $ 46,364 $ 197,288,680
============ =========== ============== ==============
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 7,935 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
============ ========== =========== ============
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
1998 1997
__________ _________
Net unrealized appreciation on
available-for-sale securities $14,489,431 $ 9,359,708
Adjustment to deferred acquisition costs (1,468,021) (1,021,959)
Deferred income taxes (4,427,279) (2,834,835)
____________ ____________
Net unrealized appreciation on
available-for-sale securities
for Investors Heritage $ 8,594,131 $ 5,502,914
Minority shareholders' interest (2,201,385) (1,459,813)
_____________ _____________
Net unrealized appreciation on
available-for-sale securities for
Kentucky Investors $ 6,392,746 $ 4,043,101
============ ============
The amortized cost and fair value of debt securities at December 31, 1998, 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 $ 10,552,763 $ 10,670,368
Due after one year through five years 28,989,260 30,323,538
Due after five years through ten years 51,306,378 55,049,785
Due after ten years 43,844,302 48,624,741
Due at multiple maturity dates 47,194,088 49,243,035
____________ _____________
Total $181,886,791 $193,911,467
============ =============
Proceeds during 1998, 1997 and 1996 from sales and maturities of investments in
available-for-sale securities were $13,194,150, $28,565,510 and $32,427,878
respectively. Gross gains of $162,746, $360,679 and $101,509 and gross losses
of $38,848, $392,895 and $633,122 were realized on those sales during 1998, 1997
and 1996, respectively.
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, 1998, 1997 and 1996:
1998 1997 1996
Change in unrealized investment gain (loss):
Available-for-sale:
Debt securities $ 4,921,880 $ 5,167,977 $ (3,629,100)
Equity securities 207,843 683,427 318,943
Realized investment gain (loss):
Available-for-sale:
Debt securities $ 123,892 $ (47,341) $ (449,194)
Equity securities 6 15,125 (38,221)
Major categories of investment income for Investors Heritage are summarized as
follows:
1998 1997 1996
Fixed maturities $12,442,337 $11,329,773 $ 9,865,087
Mortgage loans on real estate 1,311,727 1,212,102 1,222,649
Other 1,029,835 975,897 927,817
__________ ___________ ___________
$14,783,899 $13,517,772 $12,015,553
Investment expenses 519,653 434,766 361,821
___________ ___________ ___________
$14,264,246 $13,083,006 $11,653,732
========= =========== ===========
Investors Heritage is required to hold assets on deposit for the benefit of
policyholders in accordance with statutory rules and regulations. At December
31, 1998 and 1997, these required deposits had book values of $23,571,493 and
$23,696,655, 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
1998 1997
Investors Heritage Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Fixed maturities $193,911,467 $193,911,467 $171,782,911 $171,782,911
Equity securities 3,377,213 3,377,213 3,169,370 3,169,370
Mortgages on real estate:
Commercial 15,010,785 16,971,064 12,939,239 13,929,217
Residential 1,178,342 1,355,737 795,552 863,184
Policy loans 7,203,344 7,203,344 6,976,601 6,976,601
Other long-term
investments 437,221 437,221 403,106 403,106
Short-term investments 1,170,970 1,170,970 1,211,165 1,211,165
Investments in affiliates 1,837,510 5,531,175 1,975,382 5,116,936
Contractual obligations
of affiliate 431,035 431,035 538,794 538,794
Cash and cash equivalents 2,461,887 2,461,887 2,902,587 2,902,587
Accrued investment income 3,097,421 3,097,421 2,904,861 2,904,861
Liabilities:
Policyholder deposits
(investment-type \
contracts) $ 56,519,216 $ 52,220,665 $ 55,303,701 $49,947,246
Policy claims 2,086,316 2,086,316 2,256,654 2,256,654
Obligations under capital
leases 407,462 407,462 -0- -0-
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 and obligations under capital leases: The carrying amounts
reported for these liabilities 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, 1998:
Cost: $1,837,510; Market: $5,531,175 and at December 31, 1997: Cost: $1,975,382;
Market: $5,116,936. Additionally, Investors Heritage holds notes receivable
from Kentucky Investors with unpaid principal balances of $431,035 and $538,794
at December 31, 1998 and 1997, respectively, with variable interest rates and
due dates ranging from 2000 to 2004. Kentucky Investors owns approximately 74%
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 1998, 1997 and 1996 were $13,298, $13,090 and
$13,395, respectively. The carrying value of the home office real estate at
December 31, 1998 and 1997 was $1,079,426 and $1,130,844, 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 1998 1997
Deferred tax liabilities:
Policy acquisition costs $ 7,541,000 $ 7,393,000
Net unrealized gain on
available-for-sale securities 4,427,000 2,835,000
Other 453,000 348,000
______________ _____________
Total deferred tax
liabilities $ 12,421,000 $10,576,000
Deferred tax assets:
Benefit reserves $ 5,517,000 $ 6,116,000
Other 417,000 417,000
____________ ___________
Total deferred tax
assets $ 5,934,000 $ 6,533,000
____________ ____________
Net deferred tax liabilities of
Investors Heritage $ 6,487,000 $ 4,043,000
Kentucky Investors
Deferred tax liability:
Undistributed earnings
in subsidiary 1,635,000 1,531,000
____________ __________
Net deferred tax liabilities of
Kentucky Investors $ 8,122,000 $ 5,574,000
============ ============
Federal income taxes in the consolidated balance sheets include deferred taxes
and in 1998, taxes currently payable. In 1997, taxes recoverable of $91,000 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:
1998 1997 1996
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 (7.5)% (16.5)% (37.9)%
Dividend exclusion and tax-exempt income (.6)% (1.0)% (2.1)%
Increase (decrease) in valuation ._ ._ (16.2)%
Alternative minimum taxes 1.4% 2.8 % 2.0 %
Purchase accounting differences. .6% .8 % .5 %
Other, net .4% 1.2 % 16.8 %
______ ______ ______
Effective income tax rate_
Investors Heritage 28.3% 21.3 % (2.9)%
Consolidating adjustments 4.5% 5.5 % 7.6%
______ ______ ______
Effective income tax rate_
Kentucky Investors 32.8% 26.8 % 4.7%
===== ===== ====
At December 31, 1998 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 made at December 31, 1998.
Kentucky Investors made income tax payments of $135,653, $131,757 and $65,693 in
1998, 1997 and 1996, respectively. Investors Heritage made income tax payments
of $151,000, $385,000 and $620,000 in 1998, 1997 and 1996, respectively.
NOTE F - Employee Benefit Plans
As of January 1, 1998 the Company adopted SFAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits", which revises prior
disclosure requirements. The following tables have been reclassified to conform
with SFAS No. 132.
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.
1998 1997 1996
Change in benefit obligation:
Benefit obligation at
beginning of year $5,662,063 $5,173,951 $ 4,575,352
Service cost 251,795 238,817 295,721
Interest cost 430,739 382,866 343,151
Actuarial (gain) loss 72,114 (71,167) (1,456)
Benefits paid (404,779) (62,404) (38,817)
__________ __________ ___________
Benefit obligation at
end of year $6,011,932 $5,662,063 $ 5,173,951
__________ __________ ___________
Change in plan assets:
Fair value of plan assets at
beginning of year $4,771,638 $4,057,709 $ 3,460,959
Actual return on plan
assets 468,683 474,553 335,567
Employer contribution 252,000 301,780 300,000
Benefits paid (404,779) (62,404) (38,817)
__________ __________ ___________
Fair value of plan assets at
end of year $5,087,542 $4,771,638 $ 4,057,709
__________ __________ ___________
Funded status $ (924,390) $ (890,425) $(1,116,242)
Unrecognized net actuarial
loss 1,065,329 1,115,533 1,133,852
Unrecognized transition
asset (102,430) (136,574) (170,717)
Unrecognized prior service
credit (196,573) (231,676) -0-
__________ __________ ___________
Accrued pension cost $ (158,064) $ (143,142) $ (153,107)
========== ========== ===========
Components of net periodic benefit cost:
Service cost $ 251,795 $ 238,817 $ 295,721
Interest cost 430,739 382,866 343,151
Expected return on plan
assets (468,683) (474,553) (335,567)
Recognized net loss 122,318 213,931 120,443
Amortization of prior service
cost (35,103) (35,103) -0-
Amortization of transition
asset (34,144) (34,143) (34,144)
__________ __________ ___________
Net periodic benefit
cost $ 266,922 $ 291,815 $ 389,604
=========== =========== ===========
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 7.5% for 1998 and 1997. The rate of increase
in future compensation levels was 5% for 1998, 1997 and 1996. The expected
long-term rate of return on plan assets was 9% in 1998, 1997 and 1996. 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 1998, 1997
and 1996 were $186,000, $171,000, and $156,000, 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
$9,375,173 at December 31, 1998.
NOTE H - Statutory Accounting Practices
Investors Heritage's statutory-basis capital and surplus was $13,579,260 and
$13,700,023 at December 31, 1998 and 1997, respectively. Statutory-basis net
income was $1,297,550, $1,294,586, and $1,422,626 for the years ended December
31, 1998, 1997 and 1996, 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"). Currently, "prescribed" statutory accounting practices are
interspersed throughout state insurance laws and regulations, 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. In 1998, the NAIC adopted codified statutory accounting principles
("Codification"). Codification will likely change, to some extent, prescribed
statutory accounting practices and may result in changes to the accounting
practices that Investors Heritage uses to prepare its statutory-basis financial
statements. Codification will require adoption by the various states before it
becomes the prescribed statutory basis of accounting for insurance companies
domesticated within those states. Accordingly, before Codification becomes
effective for Investors Heritage, Kentucky must adopt Codification as the
prescribed basis of accounting on which domestic insurers must report their
statutory basis results to the Department. At this time it is anticipated that
Kentucky will adopt Codification. Management has not yet determined the impact
of Codification on Investors Heritage statutory basis financial statements.
During the Department's 1995 quadrennial examination of Investors Heritage,
previously permitted admitted assets were required to be written-down. In 1998,
the home-office real estate, representing 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 during 1999 is $475,646.
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
Prior to 1998 segment data has been presented on an "industry approach" in
accordance with SFAS No. 14. SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", became effective for 1998 and superceded
SFAS No. 14. SFAS No. 131 requires a "management approach" (how management
internally evaluates the operating performance of its business units) in the
presentation of business segments. The segment data that follows has been
prepared in accordance with SFAS No. 131. Previously reported information has
been restated to comply with the new requirements.
Investors Heritage operates in four segments as shown in the following table.
All segments 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 and investments in affiliates, 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.
1998 1997 1996
(000's omitted)
Revenue:
Preneed & Burial Products $ 41,319 $ 36,995 $ 33,213
Traditional & Universal Life
Products 14,146 13,950 13,454
Credit Insurance Products &
Administrative Services 307 152 (330)
Corporate & other 1,689 1,400 1,443
_________ _________ _________
$ 57,461 $ 52,497 $ 47,780
========= ========= =========
Pre-Tax Income from Operations:
Preneed & Burial Products $ 2,686 $ 2,524 $ 913
Traditional & Universal Life
Products 1,236 852 1,528
Credit Insurance Products &
Administrative Services (395) (666) (579)
Corporate & other 333 (7) (306)
_________ ________ _________
$ 3,860 $ 2,703 $ 1,556
========= ========= =========
Assets:
Preneed & Burial Products $ 139,993 $123,111 $104,708
Traditional & Universal Life
Products 75,168 72,586 69,600
Credit Insurance Products &
Administrative Services 21,987 15,385 9,724
Corporate & other 52,677 47,572 43,108
_________ ________ ________
$ 289,825 $258,654 $227,140
========= ======== ========
Amortization and Depreciation Expense:
Preneed & Burial Products $ 4,056 $ 4,361 $ 4,328
Traditional & Universal Life
Products 2,249 1,951 1,281
Credit Insurance Products &
Administrative Services 149 460 1,216
Corporate & other 425 523 393
_________ ________ _________
$ 6,879 $ 7,295 $ 7,218
========= ======== =========
Investors Heritage ceded 100% of the risks associated with its credit life and
accident insurance written during 1998, 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 1998, 1997
and 1996, Investors Heritage received $612,081, $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, 1998 and 1997 were $17,310,827 and $11,460,482, 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 $18,123,000, $14,468,000 and
$9,978,000 in 1998, 1997 and 1996, respectively and commissions and expense
allowances received were $10,900,000, $8,657,000 and $5,795,000 in 1998, 1997
and 1996, respectively. Unearned premium reserves were reduced by $19,859,000
and $13,785,000 at December 31, 1998 and 1997, respectively, for credit-related
reinsurance transactions. Benefit recoveries associated with Investors Heritage
ceded reinsurance contracts were $2,403,000, $1,956,000 and $1,421,000 in 1998,
1997 and 1996, respectively. Investors Heritage remains contingently liable on
all ceded insurance should any reinsurer be unable to meet their obligations.
Assumed reinsurance premiums were $2,787,000, $2,855,000 and $3,734,000 in 1998,
1997 and 1996, 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
1998 MARKET PRICE RANGE
March June Sept. Dec.
26 - 26 1/2 26 1/2 - 28 26 - 28 25 - 26 1/2
1998 Annual Dividend Per Share - $.76
1997 MARKET PRICE RANGE
March June Sept. Dec.
26 - 28 26 - 29 26 - 29 26 1/2 - 29
1997 Annual Dividend Per Share - $.76
Kentucky Investors
1998 MARKET PRICE RANGE
March June Sept. Dec.
16 - 16-3/4 17 - 20 20 - 20-1/2 18 - 20
1998 Annual Dividend Per Share - $.38
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
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 1999 cash dividend to be paid to its stockholders by Investors Heritage Life
on April 9, 1999 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 1999 meeting of shareholders of Investors Heritage Life Insurance Company is
scheduled for 10 a.m. on Thursday, May 13, 1999, 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
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