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, 2000
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, 2000 - 1,143,007.16
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 accounting principles generally accepted in the United States
("GAAP"). In management's opinion, all adjustments and certain
reclassifications necessary for a fair statement of financial position at March
31, 2000 and December 31, 1999 and the results of operations for the three
months ended March 31, 2000 and 1999 have been made.
KENTUCKY INVESTORS, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, 2000 December 31, 1999
Assets
Investments
Fixed maturities available-for-sale at
fair value (amortized cost:
2000-$199,874,770; 1999-
$198,948,096) $196,769,668 $195,009,506
Mortgage loans on real estate 20,009,169 17,795,599
Other investments 11,525,691 11,309,144
Total investments $228,304,528 $224,114,249
Cash and cash equivalents 3,167,861 2,428,652
Due and deferred premiums 4,343,343 4,440,484
Deferred acquisition costs 23,587,293 23,341,062
Other assets 8,238,485 8,250,136
Amounts recoverable from reinsurers 28,739,906 28,640,627
$296,381,416 $291,215,210
Liabilities and Stockholders' Equity
Liabilities
Policy liabilities
Benefit reserves $229,672,905 $226,449,401
Unearned premium reserves 23,929,875 24,163,694
Other policyholders' funds 3,961,040 3,843,000
Total policy liabilities $257,563,820 $254,456,095
Other liabilities 7,026,420 5,730,240
Total liabilities $264,590,240 $260,186,335
Stockholders' Equity
Common stock (shares issued:
2000-1,143,007; 1999-1,154,880) $ 1,143,007 $ 1,154,880
Paid-in surplus 8,361,405 8,499,592
Accumulated other comprehensive loss (1,410,336) (2,313,784)
Retained earnings 23,697,100 23,688,187
Total stockholders' equity $ 31,791,176 $ 31,028,875
$296,381,416 $291,215,210
See accompanying notes.
KENTUCKY INVESTORS, INC.
Condensed Consolidated Income Statements (Unaudited)
Three Months Ended March 31
2000 1999
REVENUES
Premiums and other considerations $12,072,877 $10,871,846
Investment income, net of expenses 4,094,961 3,670,850
Realized gain on investments, net 103,816 17,111
Other income 219,779 204,235
Total revenues $16,491,433 $14,764,042
BENEFITS AND EXPENSES
Death and other policyholder
benefits $ 7,585,810 $ 5,998,699
Guaranteed annual endowments 189,953 197,834
Dividends to policyholders 172,212 174,582
Increase in benefit reserves and
unearned premiums 4,111,432 4,480,493
Amortization of deferred
acquisition costs, net (341,774) (624,681)
Commissions 1,566,929 1,425,359
Other insurance expenses 2,296,209 2,097,965
Total benefits and expenses $15,580,771 $13,750,251
Income from operations before Federal
income tax and minority interest
in net income of subsidiary $ 910,662 $ 1,013,791
Provision for income taxes:
Current $ 86,970 $ 50,993
Deferred 222,696 269,399
$ 309,666 $ 320,392
Income from operations before
minority interest in net income
of subsidiary $ 600,996 $ 693,399
Minority interest in net income
of subsidiary $ 0 $ 183,920
Net Income $ 600,996 $ 509,479
Earnings per share $ 0.52 $ 0.60
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
2000 1999
Net cash provided by operating activities $ 5,424,644 $ 5,739,822
Investing activities
Securities available-for-sale:
Purchases $ (4,964,008) $ (9,030,419)
Sales and maturities 4,016,347 5,281,318
Other investments:
Cost of acquisition (3,012,734) (68,593)
Sales and maturities 873,121 1,405,253
Other investing activities (52,994) (99,345)
Net cash used by investing activities $ (3,140,268) $ (2,511,786)
Financing Activities
Receipts from universal life policies
credited to policyholder
account balances $ 1,182,192 $ 1,066,762
Return of policyholder account
balances on universal
life policies (2,129,839) (2,065,513)
Other financing activities (597,520) (355,923)
Net cash used by financing activities $ (1,545,167) $(1,345,674)
Increase in cash and cash equivalents $ 739,209 $ 1,873,362
Cash and cash equivalents at beginning
of period 2,428,652 2,514,371
Cash and cash equivalents at end of period $ 3,167,861 $ 4,387,733
See accompanying notes.
KENTUCKY INVESTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
NOTE A - Nature of Operations: 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. These
entities are collectively hereinafter referred to as the "Company". The
operations of Kentucky Investors are principally that of its life insurance
company, Investors Heritage. The operations of the non-insurance subsidiaries
of Kentucky Investors account for less than 1% of the Company's total
operations.
The Company'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 the Company's 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, Arizona and
Texas.
NOTE B - Basis of Presentation: The accompanying unaudited condensed
consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States
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 accounting principles generally accepted
in the United States 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, 2000, are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000. For further
information, refer to the consolidated financial statements and footnotes
thereto for the year ended December 31, 1999, included in the Company's Annual
Report on Form 10-K.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
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 the Company is
1,147,139 and 847,534 for March 31, 2000 and 1999, respectively.
NOTE D - Segment Data: The Company 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.
Three Months Ended
March 31, 2000 March 31, 1999
Revenues:
Preneed & Burial Products $12,405,238 $10,787,302
Traditional & Universal Life Products 3,348,604 3,390,179
Credit Insurance Products &
Administrative Services 169,890 77,472
Corporate & Other 567,701 509,089
$16,491,433 $14,764,042
Pre-Tax Income from Operations:
Preneed & Burial Products $ 378,325 $ 697,581
Traditional & Universal Life Products 154,436 167,325
Credit Insurance Products &
Administrative Services 85,352 (10,886)
Corporate & Other 292,549 159,771
$ 910,662 $ 1,013,791
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, are as follows:
Three Months Ended
March 31, 2000 March 31, 1999
Net income $ 600,996 $ 509,479
Net unrealized gains (losses) on
available-for-
sale securities 903,448 (2,145,512)
Comprehensive income (loss) $ 1,504,444 $ (1,636,033)
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 wholly owns Investors Heritage Life Insurance
Company ("Investors Heritage"), a life insurance company also incorporated under
the laws of the Commonwealth of Kentucky, 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 Investors Heritage and other unaffiliated parties.
Effective December 31, 1999, the Company and Investors Heritage completed a
statutory share exchange ("Share Exchange") whereby the Company acquired 100% of
the outstanding shares of common stock of Investors Heritage. The Share
Exchange did not have the effect of changing control of Investors Heritage since
the Company owned 74% of the outstanding common stock of Investors Heritage
prior to the effective date of the transaction.
The corporate management structure of Investors Heritage and the Company did not
change as a result of the Share Exchange. Investors Heritage continues to be an
authorized Kentucky domestic life insurance company and will continue to operate
as it has in the past. There have been no changes in the officers or directors
of either Investors Heritage or the Company on or since the date of the Share
Exchange.
The acquisition of the remaining 26% of the outstanding common stock of
Investors Heritage from its minority stockholders was accounted for as a
purchase and the Investors Heritage results of operations are included in the
consolidated financial statements subsequent to the date of acquisition. The
Share Exchange was a tax free exchange and, accordingly, the deferred tax
liability of the Company was offset against the purchase price.
The net purchase price for the minority stockholders' interest in Investors
Heritage was approximately $5,200,000 (including costs associated with the
acquisition of approximately $324,000 and reduction of the deferred tax
liability of approximately $1,833,000).
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 2000 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 2000. The Company anticipates a small dividend to be
declared and paid by IHP during 2000.
The Company's primary uses of cash are operating expenses and dividend payments,
and the Company's principal sources of cash are the dividends paid to it by
Investors Heritage, FSG and IHP. Investors Heritage's principal sources of cash
are from the sale of life insurance policies and investment income, including
realized gains (losses), less benefits to policyholders and expenses.
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
Investors Heritage's primary sources of cash flow used to meet short-term and
long-term cash requirements.
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 debt. The Company has a $150,000 line-of-credit note with a
bank, of which $83,000 is outstanding at March 31, 2000. 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, 2000, 86.2% of invested assets consisted of fixed income public bonds
compared to 86.9% at December 31, 1999. 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 91% 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, 2000, 8.8% of invested
assets consisted of mortgage loans compared to 7.9% at December 31, 1999.
Management anticipates funding several new mortgage loan investments during the
remainder of 2000 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, 2000, Investors Heritage's fixed income investments were 100% investment
grade as rated by Standard & Poor's, unchanged from December 31, 1999. 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 premiums
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 11.0% when compared to the
first quarter of 1999 due to a significant increase in pre-need sales during
March. Net investment income for the first quarter 2000 compared to the first
quarter of 1999 increased 11.6% primarily due to the increase in Investors
Heritage's asset base. Overall Revenue for the first quarter 2000 increased
11.7% when compared to the first quarter of 1999.
Total Benefits and Expenses were 13.3% higher in the first quarter of 2000 when
compared to the same quarter of 1999 primarily due to higher than expected
claims. After providing for federal income taxes, the Company's Net Income was
$600,996 with Earnings per share of $0.52 for the first three months of 2000 as
compared to Net Income of $509,479 and Earnings per share of $0.60 for the same
period in 1999. During the first quarter 2000 the Company's Board of Directors
declared a dividend of $0.38 per share to be paid April 7, 2000, to shareholders
of record on March 24, 2000.
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 15.0% higher for the first quarter of 2000 when compared
to the same period of 1999. The increase is due to a significant increase in
sales during March from the 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 2000 was 45.8% lower than the
comparable period for 1999 due primarily to higher than anticipated claims which
were approximately 40% higher than the first quarter of 1999. 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 1.2% lower for the first quarter of 2000 when
compared to the first quarter of 1999. Pre-Tax Income from Operations for the
first quarter 2000 was 7.7% lower than the comparable period for 1999. Revenues
for the first quarter 2000 were slightly lower than projected. Pre-Tax Income
from Operations for the first quarter 2000 was lower than projected, primarily
due to higher than projected claims.
Credit Insurance Products & Administrative Services includes the marketing and
administration of credit life and credit accident & health insurance products.
Revenues were 119.3% higher and Pre-Tax Income from Operations has significantly
improved for the first quarter of 2000 when compared to the first quarter of
1999 primarily due to the reduction in the run-off of a closed block of credit
business combined with a higher than expected reinsurance refund received during
the first quarter of 2000. 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 were 11.5% higher
and Pre-Tax Income from Operations was 83.1% higher for the first quarter of
2000 when compared to the first quarter of 1999. The increases are primarily
due to realized gains from the sale of investments and policy reserves released
due to the reinsuring of a closed block of individual accident and health
business, both of which occurred in the first quarter of 2000.
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. The effective tax rate
was 34% at March 31, 2000 compared to 31.6% for March 31, 1999. The increase in
the effective tax rate is due primarily to the reduced benefit of the small life
insurance company deduction resulting from an increase in net income.
Impact of Year 2000
On January 1, 2000, the Company did not experience any significant Year 2000
related problems. Further, the Company does not anticipate any interruptions of
business in the future due to Year 2000 Issues; however, there can be no
guarantee that the systems of other companies on which the Company relies will
continue to perform in a manner compliant with Year 2000 systems requirements.
Non-performance of third parties could lead to an adverse effect on future
operating results of 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 to claims arising out of
its operations in the normal course of business. As of May 9, 2000, 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 filed for the quarter ended March 31, 2000.
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 10, 2000
/s/
BY: JIMMY R. MCIVER
TREASURER
DATE: May 10, 2000
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