SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
QUARTERLY REPORT
Under Section 13 or 15 (d) of the Securities Exchange Act of 1934
FOR THREE MONTHS ENDED
March 31, 1999
Commission File: 0-1999
KENTUCKY INVESTORS, INC.
(Exact name of registrant as specified in Charter)
KENTUCKY
(State of Other Jurisdiction of Incorporation or Organization)
61-6030333
(IRS Employer Identification Number)
200 Capital Avenue, P. O. Box 717
Frankfort, Kentucky 40602
(Address of Principal Executive Offices)
Registrant's Telephone Number - (502) 223-2361
Securities registered pursuant to Section 13(g) of the Act:
Common Capital Stock par value $1.00 per share
(Title of Class)
Number of outstanding shares as of March 31, 1999 - 848,409
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (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 ____
PART I - CONSOLIDATED FINANCIAL STATEMENTS
ITEM 1. The following consolidated statements have been prepared by management
in accordance with generally accepted accounting principles ("GAAP"). In
management's opinion, all adjustments and certain reclassifications necessary
for a fair statement of financial position at March 31, 1999 and December 31,
1998 and the results of operations for the three months ended March 31, 1999 and
1998 have been made.
KENTUCKY INVESTORS, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, 1999 December 31, 1998
Assets
Investments
Fixed maturities available-for-sale at
fair value (amortized cost:
1999-$185,812,512; 1998-
$181,886,791) $192,959,373 $193,911,467
Mortgage loans on real estate 14,987,494 16,189,127
Other investments 11,971,912 12,271,613
Total investments $219,918,779 $222,372,207
Cash and cash equivalents 4,387,733 2,514,371
Due and deferred premiums 2,880,786 4,129,967
Deferred acquisition costs 28,425,236 27,288,684
Other assets 8,542,003 8,707,915
Amounts recoverable from reinsurers 25,183,637 23,355,631
$289,338,174 $288,368,775
Liabilities and Stockholders' Equity
Liabilities
Benefit reserves $210,683,643 $207,115,725
Unearned premium reserves 20,813,100 20,069,565
Other policyholders' funds 3,768,386 3,924,918
Total policy liabilities $235,265,129 $231,110,208
Other liabilities 12,302,222 12,562,530
Total liabilities $247,567,351 $243,672,738
Minority Interest in Subsidiary $ 11,538,044 $ 12,471,302
Stockholders' Equity
Common stock (shares issued:
1999-848,409; 1998-848,116) $ 848,409 $ 848,116
Paid-in surplus 3,447,417 3,442,248
Accumulated other comprehensive income 4,247,234 6,392,746
Retained earnings 21,689,719 21,541,625
Total stockholders' equity $ 30,232,779 $ 32,224,735
$ 289,338,174 $ 288,368,775
See accompanying notes.
KENTUCKY INVESTORS, INC.
Condensed Consolidated Income Statements (Unaudited)
Three Months Ended March 31
1999 1998
REVENUES
Premiums and other considerations $10,871,846 $10,739,762
Investment income, net of expense 3,670,850 3,397,157
Realized gain on investments, net 17,111 3,882
Other income 204,235 168,926
Total revenues $14,764,042 $14,309,727
BENEFITS AND EXPENSES
Death and other policyholder
benefits $ 6,371,115 $ 6,024,969
Increase in benefit reserves and
unearned premiums 4,480,493 4,208,614
Amortization of deferred
acquisition costs, net (624,681) 23,195
Commissions 1,425,359 1,235,644
Other insurance expenses 2,097,965 2,048,027
Total benefits and expenses $ 13,750,251 $13,540,449
Income from operations before Federal
income tax and minority interest
in net income of subsidiary $ 1,013,791 $ 769,278
Provision for income taxes:
Current $ 50,993 $ 76,046
Deferred 269,399 117,479
$ 320,392 $ 193,525
Income from operations before
minority interest in net income
of subsidiary $ 693,399 $ 575,753
Minority interest in net income
of subsidiary $ 183,920 $ 165,780
Net Income $ 509,479 $ 409,973
Earnings per share $ 0.60 $ 0.49
Dividends per share $ 0.38 $ 0.38
See accompanying notes.
KENTUCKY INVESTORS, INC.
Condensed Consolidated Statements of Cash Flow (Unaudited)
Three Months Ended March 31
1999 1998
Net cash provided by operating activities $ 5,739,822 $ 6,033,983
Investing activities
Securities available-for-sale:
Purchases $ (9,030,419) $ (6,315,929)
Sales and maturities 5,281,318 l,369,978
Other investments:
Cost of acquisition (68,593) (900,580)
Sales and maturities 1,405,253 790,597
Other investing activities (99,345) (29,555)
Net cash used by investing activities $ (2,511,786) $ (5,085,489)
Financing Activities
Receipts from universal life policies
credited to policyholder
account balances $ 1,066,762 $ 1,343,773
Return of policyholder account
balances on universal
life policies (2,065,513) (1,607,306)
Other financing activities (355,923) (311,301)
Net cash used by financing activities $ (1,354,674) $ (574,834)
Increase in cash and cash equivalents $ 1,873,362 $ 373,660
Cash and cash equivalents at beginning
of period 2,514,371 2,939,453
Cash and cash equivalents at end of period $ 4,387,733 $ 3,313,113
See accompanying notes.
KENTUCKY INVESTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
NOTE A - Nature of Operations: Kentucky Investors, Inc. (the Company) is a
holding company with a majority interest in Investors Heritage Life Insurance
Company (Investors Heritage), and a total interest in Investors Heritage
Printing, Inc., a printing company and Investors Heritage Financial Services
Group, Inc., an insurance marketing company. The operations of the Company are
principally that of its life insurance company, Investors Heritage. The
operations of the non-insurance subsidiaries of the Company accounts for less
than 1% of the Company's total operations.
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.
NOTE B - Basis of Presentation: The accompanying unaudited condensed
consolidated financial statements of the Company and subsidiaries have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 1999, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended December 31, 1998,
included in the Company's Annual Report on Form 10-K.
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 C - Earnings per Share: Earnings per share of common stock were computed
based on the weighted average number of common shares outstanding during each
period. The number of shares used in this computation for Kentucky Investors is
847,534 and 838,090 for March 31, 1999 and 1998, respectively.
NOTE D - Segment Data: Investors Heritage operates in four segments as shown in
the following table. All segments include both individual and group insurance.
Identifiable revenues and expenses are assigned directly to the applicable
segment. Net investment income is generally allocated to the insurance and the
corporate segments in proportion to policy liabilities and stockholders' equity,
respectively. Corporate segment results for the parent company, Investors
Heritage Printing, Inc., and Investors Heritage Financial Services Group, after
elimination of intercompany amounts, are presented.
March 31, 1999 March 31, 1998
Revenues:
Preneed & Burial Products $10,838,617 $10,349,976
Traditional & Universal Life
Products 3,414,610 3,492,832
Credit Insurance Products &
Administrative Services 70,577 48,629
Corporate & Other 440,238 418,290
$14,764,042 $14,309,727
Pre-Tax Income from Operations:
Preneed & Burial Products $ 794,996 $ 570,050
Traditional & Universal Life
Products 205,457 295,138
Credit Insurance Products &
Administrative Services (60,715) (130,756)
Corporate & Other 74,053 34,846
$ 1,013,791 $ 769,278
NOTE E - Federal Income Taxes: Current taxes are provided based on estimates of
the projected effective annual tax rate. Deferred 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.
NOTE F - Comprehensive Income: The components of comprehensive income (loss),
net of related tax, for the three months ended March 31, 1999 and 1998 are as
follows:
March 31, 1999 March 31, 1998
Net income $ 509,479 $ 409,973
Net unrealized gains (losses) on
available-for-sale (2,145,512) 215,765
securities
Comprehensive income (loss) $(1,636,033) $ 625,738
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Kentucky Investors, Inc. (the "Company") is incorporated under the laws of the
Commonwealth of Kentucky and is the holder of the majority interest in Investors
Heritage Life Insurance Company ("Investors Heritage") which is a life insurance
company also incorporated under the laws of the Commonwealth of Kentucky. In
addition, the Company wholly owns Investors Heritage Financial Services Group,
Inc. ("FSG"), an insurance marketing company which was formed in 1994, and
Investors Heritage Printing, Inc. ("IHP"), a printing company that provides
printing to the Insurance Company and other unaffiliated parties.
Investors Heritage offers a full line of life insurance products including, but
not limited to, whole life, term life, single premium life, multi-pay life and
annuities. Investors Heritage's primary lines of business are insurance policies
and annuities utilized to fund preneed funeral contracts, credit life and credit
disability insurance, and term life and reducing term life sold through
financial institutions. During 1998 Investors Heritage introduced the Legacy
2000 Series of products to the preneed funeral market. The Company's operating
earnings are derived primarily from revenues generated from the sale of these
products by Investors Heritage, plus the Company's investment results, including
realized gains (losses), less interest credited, benefits to policyholders and
expenses.
While the Company continues to expand the operations of FSG and IHP, less than
1% of the Company's total operations were generated by those subsidiaries. As
expected, more than 10% of FSG's revenues during the first quarter 1999 were
derived from the sale of the Investors Heritage's credit insurance products.
The Company anticipates a dividend to be paid by FSG during the second, third
and fourth quarters in 1999. The Company anticipates a small dividend to be
declared and paid by IHP during 1999.
The Company's primary uses of cash are operating expenses and dividend payments,
and the Company's principal source of cash is the dividend paid to it by
Investors Heritage. Therefore, the remainder of the discussion will deal with
the financial condition and results of operations of Investors Heritage.
Investments, Liquidity and Capital Resources
Premiums, which include mortality and expense charges, and investment income are
the Investors Heritage's primary sources of cash flow used to meet short-term
and long-term cash requirements.
The Investors Heritage's short-term obligations consist primarily of
policyholder benefits and operating expenses. Investors Heritage has
historically been able to meet these obligations out of operating cash, premiums
and investment income.
Management is not aware of any commitments or unusual events that could
materially affect capital resources. Neither the Company nor Investors Heritage
has any long-term or short-term external debt. However, the Company 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.
Investors Heritage has maintained a sound, conservative investment strategy. At
March 31, 1999, 86.9% of invested assets consisted of fixed income public bonds
compared to 86.4% at December 31, 1998. Fixed income assets are managed by
Charter Oak Capital Management, Inc., an independent portfolio manager.
Additionally, Investors Heritage also engages in commercial and residential
mortgage lending with approximately 92% 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. At March 31, 1999, 6.7% of invested
assets consisted of mortgage loans compared to 7.2% at December 31, 1998.
$1,074,000 of the decrease is due to the early pay-off of several mortgage loans
as a result of the sale or refinancing of the property. Management anticipates
funding several new mortgage loan investments during the remainder of 1999 to
maintain a similar or slightly higher percentage of mortgage loans to total
invested assets.
Investors Heritage's conservative approach in the product development area and
the strength and stability of its fixed income and mortgage loan portfolios
provide adequate liquidity both in the short-term and the long-term. At March
31, 1999 Investors Heritage's fixed income investments were 100% investment
grade as rated by Standard & Poor's, unchanged from December 31, 1998. None of
Investors Heritage's fixed income assets are in default and there has been no
material change in the distribution of its fixed income portfolio.
Investors Heritage's principal long-term obligations are fixed contractual
obligations incurred in the sale of its life insurance products. The premium
charged for these products are based on conservative and actuarially sound
assumptions as to mortality, persistency and interest. Investors Heritage
believes these assumptions will produce revenues sufficient to meet its future
contractual benefit obligations and operating expenses, and provide an adequate
profit margin.
Results of Operations
Total premium income (net of reinsurance) increased 1.2% when compared to the
first quarter of 1998. Net investment income for the first quarter 1999
compared to the first quarter of 1998 increased 7.8% primarily due to the
increase in Investors Heritage's asset base. Overall Revenue for the first
quarter 1999 increased 3.0% when compared to the first quarter of 1998.
Total Benefits and Expenses were 1.7% higher in the first quarter of 1999 when
compared to the same quarter of 1998. After providing for federal income taxes,
the Company's Net Income was $509,479 with Earnings per share of $0.60 for the
first three months of 1999 as compared to Net Income of $409,973 and Earnings
per share of $0.49 for the same period in 1998. After providing for federal
income taxes the Net Income for Investors Heritage was $717,120 with Earnings
per share of $0.79 for the first three months of 1999 as compared to Net Income
of $625,584 and Earnings per share of $0.69 for the same period in 1998. During
the first quarter 1999 the Company's Board of Directors declared a dividend of
$0.36 per share to be paid April 9, 1999, to shareholders of record on March 26,
1999.
Business Segments
Management internally evaluates the performance of Investors Heritage operations
by the following business segments:
Preneed & Burial Products includes both life and annuity products sold by
funeral directors or affiliated agents to fund prearranged funerals. Revenues
for this segment were 4.7% higher for the first quarter of 1999 when compared to
the same period of 1998. The increase is due to increased sales of Investors
Heritage's Legacy 2000 Series of Preneed and Burial Products used in the preneed
funeral and final expense markets. Pre-Tax Income from Operations for the first
quarter 1999 was 39.5% higher than the comparable period for 1998 due primarily
to higher than anticipated sales of non-single premium Legacy 2000 Series
Preneed & Burial products combined with the new commission structure on those
products. Investors Heritage plans to continue its expansion of territory and
recruitment of agents in the Preneed and Burial insurance market.
Traditional & Universal Life Products includes traditional life and group life
insurance products, annuities (primarily qualified) and universal life products.
Revenues for this segment were 2.2% lower for the first quarter of 1999 when
compared to the first quarter of 1998. Pre-Tax Income from Operations for the
first quarter 1999 was 30.4% lower than the comparable period for 1998 primarily
due to lower than anticipated profits in Investors Heritage's traditional whole
life participating product as well as the increased administrative cost of
maintaining a block of reduced paid-up business. Revenues for the first quarter
1999 were slightly lower than projected. Pre-Tax Income for the first quarter
1999 was lower than projected, primarily due to higher than projected claims.
Management anticipates improvement in this segment during the balance of 1999.
Credit Insurance Products & Administrative Services includes the marketing and
administration of credit life and credit accident & health insurance products.
Revenues were 45.1% higher and Pre- tax income has improved 53.6% for the first
quarter of 1999 when compared to the first quarter of 1998 primarily due to the
reduction in the run-off of a closed block of credit business combined with
increased service fees on new credit business. All of the related underwriting
risk currently produced is being reinsured 100% with highly-rated life
companies.
Corporate & Other consists of corporate accounts measured primarily by
stockholders' paid-in capital, contributed surplus, earned surplus, property and
equipment, and other minor business lines which include group annuities and
group and individual accident and health products. Revenues and Pre-Tax Income
experienced a moderate increase for the first quarter of 1999 when compared to
the first quarter of 1998. The increases in Revenues and Pre-Tax Income are
primarily due to an increase in printing income from IHP and marketing income
from FSG.
Federal Income Taxes
Current taxes are provided based on estimates of the projected effective annual
tax rate. Deferred 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. As GAAP income increases
over taxable income due to these temporary differences, the effective tax rate
will increase. The effective tax rate was 32% at March 31, 1999 compared to 25%
for March 31, 1998.
Year 2000 Compliance
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 and the Company recognized the Year 2000 Issue in 1988 and
began working on a solution at that time. The Company relies on Investors
Heritage's systems and Investors Heritage's expertise to provided Year 2000
compliance. The Investors Heritage 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 and the Company.
Forward Looking Information
The Company cautions readers regarding certain forward-looking statements
contained in this report and in any other statements made by, or on behalf of,
the Company, whether or not in future filings with the Securities and Exchange
Commission (the "SEC"). Forward-looking statements are statements not based on
historical information and which relate to future operations, strategies,
financial results, or other developments. Statements using verbs such as
"expect," "anticipate," "believe" or words of similar import generally involve
forward-looking statements. Without limiting the foregoing, forward-looking
statements include statements which represent the Company's beliefs concerning
future levels of sales and redemptions of Investors Heritage's products,
investment spreads and yields, or the earnings and profitability of the
Company's or Investors Heritage's activities.
Forward-looking statements are necessarily based on estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Company's control
and many of which are subject to change. These uncertainties and contingencies
could cause actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company. Whether or
not actual results differ materially from forward-looking statements may depend
on numerous foreseeable and unforeseeable factors and developments. Some of
these may be national in scope, such as general economic conditions, changes in
tax law and changes in interest rates. Some may be related to the insurance
industry generally, such as pricing competition, regulatory developments,
industry consolidation and the effects of competition in the insurance business
from other insurance companies and other financial institutions operating in the
Company's market area and elsewhere. Others may relate to the Company
specifically, such as credit, volatility and other risks associated with the
Company's investment portfolio. The Company cautions that such factors are not
exclusive. The Company disclaims any obligation to update forward-looking
information.
PART II _ OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any legal proceedings. From time to time
Investors Heritage is involved in litigation relating claims arising out of its
operations in the normal course of business. As of May 10, 1999, Investors
Heritage is not a party to any legal proceedings, the adverse outcome of which,
in management's opinion, individually or in the aggregate, would have a material
adverse effect on Investors Heritage's or the Company's financial condition or
results of operations.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits.
Exhibit 27 - Financial Data Schedule.
b) Reports on Form 8-K
No reports on Form 8-K were for the quarter ended March 31,1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KENTUCKY INVESTORS, INC.
/s/
BY: HARRY LEE WATERFIELD II
PRESIDENT
DATE: May 12, 1999
/s/
BY: JIMMY R. MCIVER
TREASURER
DATE: May 12, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 192,959,373
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 3,191,984
<MORTGAGE> 14,987,494
<REAL-ESTATE> 0
<TOTAL-INVEST> 219,918,779
<CASH> 4,387,733
<RECOVER-REINSURE> 438,740
<DEFERRED-ACQUISITION> 28,425,236
<TOTAL-ASSETS> 289,338,174
<POLICY-LOSSES> 210,683,643
<UNEARNED-PREMIUMS> 20,813,100
<POLICY-OTHER> 1,925,777
<POLICY-HOLDER-FUNDS> 1,842,609
<NOTES-PAYABLE> 0
0
0
<COMMON> 848,409
<OTHER-SE> 29,384,370
<TOTAL-LIABILITY-AND-EQUITY> 289,338,174
10,163,111
<INVESTMENT-INCOME> 3,670,850
<INVESTMENT-GAINS> 17,111
<OTHER-INCOME> 204,235
<BENEFITS> 5,295,392
<UNDERWRITING-AMORTIZATION> (624,681)
<UNDERWRITING-OTHER> 8,370,805
<INCOME-PRETAX> 1,013,791
<INCOME-TAX> 320,392
<INCOME-CONTINUING> 693,399
<DISCONTINUED> 0
<EXTRAORDINARY> 183,920
<CHANGES> 0
<NET-INCOME> 509,479
<EPS-PRIMARY> .60
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
