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, 1996
Commission File Number 0-3216
INVESTORS HERITAGE LIFE INSURANCE COMPANY, INC.
(Exact name of registrant as specified in Charter)
KENTUCKY 61-0574893
(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 $4,901,364 as of December 31, 1996.
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, 1996
898,469
Documents Incorporated by Reference:
(1) Portions of the Annual Report to the Stockholders for the year ended
December 31, 1996 (Form 10-K, Items 1, 5a, 6, 7 and 8)
(2) Portions of the Proxy Statement dated April 18, 1997, for the Annual
Meeting of Stockholders to be held May 8, 1997 (Form 10-K, Items 10, 11, 12 and
13.)
PART I
Item 1. Business
(a) General
(a) The business of the Company is life insurance. The Company was
incorporated under the laws of Kentucky on August 31, 1960, and commenced
business in April, 1961. Its principal office is located at 200 Capital
Avenue, Frankfort, Kentucky 40601, telephone number (502) 223-2361. The Company
also owns 96% of Investors Underwriters, Inc., an investment holding company.
Kentucky Investors, Inc., a Kentucky corporation ("KII"), owns 74% of the
Company's stock. In addition, KII wholly owns Investors Heritage Printing, Inc.
("IHP") and Investors Heritage Financial Services Group, Inc. ("FSG"). The
business segments of the Company are identified and discussed on pages 44 and
45 of the Annual Report to Stockholders for the year ended December 31, 1996
and are incorporated herein by reference.
A portfolio of the standard forms of participating, non-participating,
whole life, limited pay, endowment, split-funding, interest-sensitive whole
life, guaranteed issue whole life, universal life, term and group life is
offered by the Company. In addition, the Company has historically written
credit life and credit accident and health insurance (respectively, "Credit
Life" and "Credit A&H", and collectively "Credit Insurance") on a group basis.
During 1995, the Company exited the Credit Insurance market as a direct writer
and experienced insignificant production (less than $500,000) from the Credit
Insurance product lines in 1995.
During 1996 sales operations were conducted through the Ordinary Life
sales division of the Company and through FSG which marketed the Company's
Ordinary and Credit Insurance products and other products for unaffiliated
companies identified below. See "Material Changes and Developments-Credit
Insurance". As anticipated more than 10% of FSG's revenues for 1996 were
derived from the sale of the Company's Credit Insurance products.
Ordinary Life. Ordinary Life sales are under the direct supervision of
the home office using a regionally supervised agency system. The method of
field operation involves independent contractual agents working with district
and regional managers. These managers contract with and train agents who work
under them. The regional managers may have several district managers under
their supervision. As a result of our 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 our
agency force. The Company 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.
The Ordinary Life sales are built around a standard portfolio of life
insurance products with some of the major contributions to in-force business
being a participating ordinary life insurance policy, a guaranteed issue whole
life policy and non-participating life policies.
Some of the participating policies provide for payment of guaranteed
annual endowments of fixed amounts beginning at the end of the second policy
year and continuing through the premium paying period. These policies also have
an annual guaranteed benefit. As of December 31, 1996, 11% of the total
ordinary insurance in force was comprised of participating policies and of the
11%, approximately 6% was comprised of participating policies with some
guaranteed benefit.
Another block of participating policies provides for payment of a
dividend which will purchase additional insurance equal to 5% of the previous
year's total death benefit, including any additional insurance purchased in
prior years. The dividend is not guaranteed. As of December 31, 1996, 5% of the
total ordinary insurance in force was comprised of participating policies with
non-guaranteed benefits.
Non-participating life insurance policies represented 89% of the total
ordinary insurance in force.
Four different guaranteed issue whole life policies were sold through
1993. Each has a policy limit of $10,000 face amount, with graded death
benefits during the first two policy years. Two of the policies are non-
participating with non-guaranteed increases in the death benefit and two of the
policies are participating.
The Company 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, the Company introduced new products designed for the pre-
arranged funeral market. These products are single premium and modal premium
non-participating whole life policies. Single premium policies are sold on a
guaranteed issue basis and modal premium policies are fully underwritten. Both
single and modal premium policies provide for non-guaranteed increasing death
benefits and have a maximum face amount of $25,000. The Company also sells a
mortgage protection product which is being marketed by FSG.
It is anticipated that during 1997 the Company will introduce group
products designed for the prearranged funeral market. These products are in the
process of being approved in various states and will be implemented after
approvals are received.
Credit Insurance. Credit Insurance is generally sold through banks,
finance companies and automobile dealerships and is offered in connection with
the extension of credit by these institutions. The amount of the insurance is
designed to cover the amount of the loan, with the financial institutions being
the beneficiary of the insurance policy to the extent of the unpaid balance of
the loan. Credit Insurance production is generally dependent on consumer debt.
In times of low unemployment, reasonable interest rates and a steadily
improving economy, consumer debt increases; therefore, Credit Insurance sales
increase. When the economy slows, consumer debt slows and therefore Credit
Insurance sales decrease.
During the fourth quarter of 1994, the Company began phasing out of the
Credit Insurance market as a direct writer and premium production from Credit
Insurance during 1995 was less than $500,000, as anticipated. The Company
continued to provide the administration and claims processing services for the
Credit Insurance operations. FSG entered into a marketing agreement with
Franklin Life Insurance Company ("Franklin") to market Franklin's Credit
Insurance products during 1995.
During the fourth quarter of 1995, the Company and FSG were advised that
Franklin was exiting the Commonwealth of Kentucky as a direct writer of Credit
Insurance products. FSG immediately began negotiations with several
unaffiliated insurance companies to market Credit Insurance for them.
Simultaneously, FSG initiated discussions with unaffiliated insurance companies
regarding a transaction where the Credit Insurance business would be written by
the Company and all of the risk would be immediately reinsured to the
unaffiliated insurance company. A reinsurance transaction was viewed favorably
because the Company would be able to generate an alternate source of income
through fees from administration and claim processing services provided. In
addition, FSG would be able to maintain its revenues in the form of commissions
from the sale of the Company's Credit Insurance products.
In December, 1995, the Company entered into a reinsurance agreement with
The Connecticut General Life Insurance Company, Bloomfield, Connecticut
("Connecticut General") under the terms of which the Company cedes to
Connecticut General all of the risk on all Credit Insurance policies sold by
the Company. In addition to receiving a retention fee, the Company also
receives a fee for administration and claims processing services. It has not
been necessary for the Company to add any employees to assist in the
administration of this business. No additional amounts were required to be
expended in order to utilize the Company's administrative and claims
processing capabilities. 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. The Company has continued
to seek contracts to operate as an administrator for other companies which sell
Credit Insurance, and has recently entered into a reinsurance agreement with
another unaffiliated company, Life Investors, whereby the Company's Credit
Insurance products sold by Life Investors' agents will be reinsured to Life
Investors. The Company and FSG will be paid a retention fee and a marketing fee
for services provided.
FSG will continue to call on banks, finance companies and selected
automobile dealerships to market the Credit Insurance products. Credit
Insurance gross written premiums during 1996 were $8,746,000, as anticipated
and are expected to exceed $10,000,000 during 1997. As described above, that
business was and will continue to be ceded to Connecticut General and Life
Investors. Approximately 9% of the total life insurance in force is Credit
Insurance, all of which was written directly by the Company.
In addition to selling Credit Insurance, some of the Company's 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. During 1996
premium production in this area was up 108%. Premiums produced in 1995 were
$597,000 as compared to $1,239,000 in 1996. The Company anticipates continued
growth in this area of approximately 20% during 1997. The Company's mortgage
insurance products will continue to be marketed through FSG.
Group Life. Group life accounts for the remaining 54% of in-force
business. Since 1990, the Company 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, the Company's participation
in the FEGLI Program has substantially decreased since 1993. The reduction of
in-force business since 1993 has been $132,510,000.
As stated above, the Company is in the process of converting to group
insurance products in the preneed market. As the group preneed products are
introduced, group life premiums and in-force business will increase
significantly while individual premiums and in-force business will decrease
commensurately.
Principal Markets. The principal markets for the Company'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. The Company has licensed ordinary agents and
regional managers throughout these states. The Company also has licensed credit
life agents in over 75 banks and automobile dealerships throughout the
Commonwealth of Kentucky.
The Company is also licensed in sixteen other states: Alabama, Arkansas,
Mississippi, and Louisiana in the South and Southeast; Colorado, Missouri, New
Mexico, North Dakota, South Dakota, Oklahoma, Montana, Nebraska, Arizona and
Utah in the West; and Michigan in the North. The business in these states is
written mostly through general agents.
Risk. The Company in many cases requires evidence of insurability before
issuing individual life policies including, in some cases, a medical
examination or a statement by an attending physician. Home office underwriters
review the evidence of insurability required and approve the issuance of the
policy in accordance with the application if the risk is acceptable. Some
applicants who are substandard risks are rejected, but many are offered
policies with higher premiums, restricted coverages or reduced benefits during
the first two policy years. The majority of the single premium business is
written through the prearranged funeral market without evidence of
insurability, relying on safeguards such as product design, limits on the
amount of coverage, and premiums which recognize the resultant higher level of
claims.
Risk is integral to insurance but, as is customary in the insurance
business, the Company obtains reinsurance with respect to amounts in excess of
its retention limits. The maximum limit of retention by the Company 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 was $100,000 per life. Excess
coverages are reinsured externally. As of December 31, 1996; approximately
$316,499,000, or 12% of total life insurance in force was reinsured with non-
affiliated well established insurance companies.The Company would become liable
for the reinsured risks if the reinsurers could not meet their obligations.
The Company is party to a number of reinsurance and coinsurance
agreements with non-affiliated companies. Approximately $316,499,000 of
insurance in force for the Company was reinsured with eighteen companies. The
reinsurers for the Company and amounts of insurance in force that are reinsured
are as follows:
COMPANY REINSURANCE AMOUNT PERCENT OF TOTAL
Connecticut General Life
Insurance Co. $187,567,000 59.3%
Crown Life Insurance Co. 11,350,000 3.6%
The Lincoln National Life
Ins. Co. 83,510,000 26.4%
J.M. Limited 9,162,000 2.9%
Banc One Kentucky Ins. Co. 508,000 .2%
AEtna Life Insurance Co. 1,099,000 .4%
Indiana-Kentucky Ins. Co. Ltd. 2,063,000 .6%
Riverside Reinsurance Ltd. 2,981,000 .9%
Pirtle Ltd. 1,146,000 .4%
Lancaster Life Insurance Co. 3,595,000 1.1%
Business Men's Assurance Co. 6,234,000 2.0%
Swiss Re America 2,675,000 .8%
Groves Reinsurance Ltd. 1,037,000 .3%
Munich American Reinsurance Co. 2,792,000 .9%
Other Companies (4) 780,000 .2%
TOTAL $316,499,000 100.0%
AEtna and Crown Life reinsured Credit Life and Credit A&H policies sold
between July 1, 1988 and June 30, 1992. These reinsurance agreements were
terminated with respect to new issues by the Company during 1991 and 1992,
respectively. Neither reinsurer accepted the risk on any new policies issued
after the termination date of each agreement; however, both AEtna and Crown
Life continue to provide reinsurance on all Credit Insurance policies sold
prior to March 16, 1991 (AEtna) and June 30, 1992 (Crown Life). During 1996,
the Company reinsured all of the risk on the Credit Insurance policies sold by
its agents to Connecticut General, and will continue to do so in 1997. As
explained above, some of these risks will also be reinsured to Life Investors.
The Company has not experienced a reinsurer default under any of the
reinsurance agreements to which the Company is a party. Further, the Company
has no knowledge of and does not anticipate any material default in any
existing reinsurance obligations.
Regulation of Insurance. The business of the Company is subject to
regulation and supervision by the insurance regulatory authority of each state
in which the Company is licensed to do business. Such regulators grant licenses
to transact business; regulate trade practices; approve policy forms; license
agents; 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, the Company is licensed by the
Kentucky Department of Insurance and is subject to its examination and
regulations. The most recent examination was completed during 1996 for the five
years ending December 31, 1994. The Company received an excellent report.
Kentucky law now requires an examination every three years; therefore, it is
anticipated that the Company's next examination will commence during 1998 for
the three years ending December 31, 1997.
In December of 1992, the NAIC adopted a "Risk Based Capital for Life
and/or Health Insurers Model Act" (the "Model Act") which was designed to
identify inadequately capitalized life and health insurers. The Model Act
defines two key measures: (i) adjusted capital, which equals an insurer's
statutory capital and surplus plus its asset valuation reserve, plus one-half
its liability for policyholder dividends ("Adjusted Capital") and (ii)
authorized control level risk based capital ("RBC"). RBC is determined by a
complex formula which is intended to take into account the various risks
assumed by an insurer. Should an insurer's Adjusted Capital fall below certain
prescribed levels (defined in terms of its RBC), the Model Act provides for the
following four different levels of regulatory attention:
"Company Action Level:" This level of review is triggered if an insurer's
Adjusted Capital is less than 200 percent of its RBC.The insurer is required to
submit a plan to the appropriate regulatory authority that discusses proposed
corrective action. The Company's Adjusted Capital is more than 3 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. The Company's Adjusted Capital is more than 4.1 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. The
Company's Adjusted Capital is more than 6.1 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. The Company's Adjusted
Capital is more than 8.8 times the amount required.
Since the Adjusted Capital levels of the Company currently exceed all of
the regulatory action levels as defined by the NAIC's Model Act, the Model Act
currently has no impact on the Company's operations or financial condition.
Competition. The life insurance business is highly competitive. With the
introduction of universal life and other interest sensitive products in recent
years, competition with other financial institutions has increased. The
industry includes both stock and mutual companies, including some of the
largest financial institutions in the United States. While the business is
responsive to the current economic environment, changes are not quite so
volatile, and there are indications that, except for Credit Life, the life
insurance market is stable, even in times of stress for other companies.
The Company differentiates itself through its marketing techniques,
product features, customer service and reputation. The Company 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. The Company's competitive position is
maintained by its ability to provide quality customer service throughout the
distribution system. Other competitive strengths include the Company's
asset/liability management system, a quality investment portfolio which
provides liquidity and the Company's non-leveraged financial position.
The business of the Company is not seasonal.
(b) Material Changes and Developments
While changes in the life insurance business are not as dramatic as in
other forms of business, new product development and innovative sales methods
must be ongoing to meet the current economic times. The Company believes that
growth from increased sales is directly related to the constant attention paid
to revising and selling the products developed by the Company.
Ordinary Production. The Company 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 include the sale of
modal premium and single premium ordinary life policies which are sold to fund
a specific prearranged funeral contract. The Company expanded its marketing
capability for this market through the 1993 acquisition of marketing assets and
agents from Legacy One, Inc., a former independent marketing agent for the
Company. As a result, the Company steadily increased sales during 1993 and
1994. The actual increase in 1994 over 1993 in overall ordinary premium
production was approximately 21%, significantly higher than the 10-12% increase
anticipated by management, and the increase in 1995 over 1994 was approximately
11%, as anticipated.During 1996 the Company continued to increase its marketing
operations and to expand into new states, including but not limited to,
Tennessee, Indiana, Illinois, Kansas, South Carolina and Georgia, and
experienced growth in premium production of approximately 28 percent in the
prearranged funeral market during 1996 over 1995, $16,681,000 compared to
$13,072,000. The Company anticipates continued growth in this segment of
approximately 12-15% during 1997.
Credit Insurance. From 1988 to 1991, the Company substantially increased
sales of Credit Insurance to $37 million and reinsured substantial portions of
the Credit Life and Credit A&H business with AEtna and Crown Life. However,
during 1992 the Company decreased Credit Insurance production to the pre-1988
annual premium levels of $8-10 million. As a result of the anticipated
decreased in production, the reinsurance agreement with Crown Life was
terminated effective for policies written after June 30, 1992. See "Business-
Risk". Desired levels of Credit Insurance production were reached in 1993 and
1994.
Throughout 1994 the Company continued to closely monitor Credit Life and
Credit A&H claims and make adjustments in the claims administration process.
Claim ratios on Credit A&H have stabilized. The Company continues to closely
monitor the claims paying process to make certain that proper payments are
being made in accordance with the policy.
The Company's Credit Insurance operation continued to be strong
throughout 1994 in financial institutions and with a selected number of
automobile dealers participating in either a reinsurance program or the
Company's commission structure. However, during 1994 the Company decided to
exit the Credit Insurance market as a direct writer. The driving factor behind
this decision was the desire of the Company's Board of Directors and management
to improve and strengthen the Company's surplus and profitability.
Historically, the Credit A&H line has not been a profitable segment of the
Company's business; however, when balanced with the Credit Life line,
acceptable profit margins were achieved. Since 1991, the profitability of the
lines diminished due to increased losses on the Credit A&H line and shrinking
profit margins on the Credit Life line. Therefore, since other lines of
business have been and continue to show strong growth and profits, and the
continued sale of Credit A&H inhibited growth of the Company's surplus and the
full realization of profits from other lines of business, management and the
Board of Directors determined that it was in the best interest of the Company
and its stockholders to discontinue as a direct writer of Credit Life and
Credit A&H.
Realizing the significant contribution of our financial marketing group,
which was successful in increasing the Company'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, KII formed FSG as a wholly-owned
subsidiary. During 1996, FSG marketed the Company's Credit Insurance products
and will continue to do so in 1997. In addition, FSG was responsible for
marketing products for unaffiliated companies to financial institutions
including Individual Disability (Illinois Mutual Life and Casualty Company),
Involuntary Unemployment Insurance (Vesta Fire Insurance Corp.), and GAP, which
covers the excess of the loan amount over the value of the collateral if the
collateral is a total loss (General Electric Capital Assurance Company). The
Company was not a direct writer of any of these products during 1996.
FSG will continue to market the Company's mortgage protection products.
Management anticipated growth of approximately 3-5 percent in this segment of
the Company's business during 1996 due to the marketing efforts of FSG. Actual
growth during 1996 was 108% due to the fact that several of FSG's agents who
also had agency relationships with other companies began sending more of the
business to the Company.
During the fourth quarter of 1995, FSG and the Company were advised that
Franklin was exiting the Commonwealth of Kentucky as a direct writer of Credit
Insurance products. FSG immediately began negotiating with a number of
unaffiliated insurance companies to market Credit insurance products for them.
In addition, FSG began negotiating a potential transaction with unaffiliated
companies where the Credit Insurance policies would be written by the Company
and all of the risk would be immediately reinsured to the unaffiliated company.
Under a reinsurance arrangement, the Company would generate alternative
revenues from retention fees and fees for administration and claims processing.
Additionally, FSG will continue to generate revenues in the form of
commissions. Therefore, in December 1995 the Company entered into a
reinsurance agreement with Connecticut General under the terms of which all of
the risk on all Credit Insurance policies sold by the Company would be
reinsured with Connecticut General.
The decision to reenter the Credit Insurance market as a direct writer
required careful consideration of the decision to exit the market during 1995.
The driving factors behind the decision to reenter were the ability to
structure the reinsurance transaction with a highly rated insurance company,
the ability to protect, improve and strengthen the Company's surplus and
profitability, the ability to utilize our Credit Insurance administration and
claims processing capabilities and the ability to generate alternative sources
of revenue for the Company. The structure of the reinsurance agreement with
Connecticut General accomplishes each of these goals. Further, FSG has been
successful in retaining the majority of the Credit Insurance agency accounts
and has successfully recruited another unaffiliated agency which is anticipated
to more than double overall gross written Credit Insurance premiums and will
therefore further enhance FSG's revenues.
Employees. The number of persons employed by the Company is 111. The
number of active independent contractual agents of the Company is 2,250.
Management of the Company considers its relationship with the employees and
agents to be satisfactory.
Item 2. Properties
The physical property of the Registrant consists of the home office
building and grounds, owned in fee, at 200 Capital Avenue, Frankfort, Kentucky.
Adjacent to the home office, the Company owns additional property on Second
Street and on Shelby Street in Frankfort, Kentucky. One building is used for
Agency and Company meetings; one building is a print shop used by IHP, one
building is used for supplies and additional storage; and one building is
leased to a commercial tenant. The Company also leases office space at One
Harbison Way, Suite 106, Columbia, South Carolina 29212.
Item 3. Legal Proceedings
There are no legal proceedings to which the Registrant is a party which
are material to the overall financial condition or the results of operations of
the Company.
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, 1996, and is incorporated herein by reference.
(b) Approximate Number of Equity Security Holders
(A) (B)
Title of Class Number of Holders
Common Stock of Record 12-31-96
2,834
(c) Dividends
Cash dividends paid in 1996 amounted to $684,442 or $.76 per share. The
1996 cash dividend, to be paid April 11, 1997, is $.76 per share, payable to
stockholders of record March 27, 1997.
Item 6. Selected Financial Data
Selected financial data for the past five years appears on page 29 in the
Annual Report to the Stockholders for the year ended December 31, 1996, and is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of financial condition and results
of operations appears on pages 9-21 in the Annual Report to the Stockholders
for the year ended December 31, 1996, and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and notes appear on page 29
through 46 in the Annual Report to Stockholders for the year ended December 31,
1996, 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 53
Chairman of the Board,
President/1963
Jimmy R. McIver 45
Treasurer/1988
Wilma Yeary 65
Secretary/1989
Jane S. Jackson 42
Assistant Secretary/1989
Howard L. Graham 62
Vice President, Corporate
Services/1969
Loretta Jane Wise 50
Vice President, Policy
Service/1988
Nancy W. Walton 57 Sister of
Vice President, Harry Lee
Underwriting/1975 Waterfield II
N. Douglas Hippe 58
Vice President,
Accounting/1974
Raymond L. Carr 48
Vice President,
Administration
Operations/1977
John E. Simmons 44
Vice President,
Credit Life/Office
Services/1986
Donald R. Philpot 59
Vice President,
Agency/1981
Margaret J. Kays 65
Vice President,
Human Resources/1993
Helen S. Wagner 60
Director/1986
Jerry F. Howell 83
Director/1964
Jerry F. Howell, Jr. 55 Son of Jerry
Director/1987 F. Howell
Robert M. Hardy, Jr. 39 Nephew of
Vice President & General Counsel, Harry Lee
Director/1986 Waterfield II
Michael F. Dudgeon 35 Nephew of
Director/1988 Harry Lee
Waterfield II
Adron Doran 87
Director/1972
H. Glenn Doran 71
Director/1992
Clair S. Manson 69
Vice President,
Chief Actuary/1987
Gordon C. Duke 51
Director/1996
(b) The principal occupation of each of the Officers listed above for
the past five years has been that as indicated, except for Margaret J. Kays.
Ms. Kays was elected Vice President, Human Resources in 1993. Prior to that
time, Ms. Kays served as the Company's Assistant Vice President, Credit Life
Accounting. Each of the Directors has occupied the position indicated for a
period of more than five years with the exception of H. Glenn Doran and Gordon
Duke. Mr. Doran was elected to the Board in July of 1992 and Mr. Duke was
elected to the Board in 1996. Each filled vacancies caused by the untimely
death of another Board member. Information regarding the business experience of
the Directors who are not officers of the Company is shown on pages 2, 3 and 4
of the Proxy Statement for the Annual Meeting of Shareholders to be held on May
8, 1997, and is incorporated herein by reference.
There have been no events under any bankruptcy act, no criminal
proceedings and no judgments or injunctions material to the evaluation of the
ability and integrity of any Director or Executive Officer during the past five
years.
Officers are appointed annually by the Board of Directors at the Board
meeting immediately following the Annual Meeting of Shareholders. There are no
arrangements or any understandings between any officer and any other person
pursuant to which the office was selected.
Item 11. Executive Compensation and Transactions
Information regarding compensation of executive officers and transactions
with executive officers and directors is not restated in this Annual Report
because the response to this item is shown on page 5 & 6 of the Proxy Statement
for the Annual Meeting of Shareholders to be held May 8, 1997 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 Annual Report because the response to this item is shown on
pages 2, 3 & 4 of the Proxy Statement for the Annual Meeting of Stockholders
to be held May 8, 1997, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Certain relationships and related transactions are shown on page 7 of the
Proxy Statement for the Annual Meeting of Stockholders to be held May 8, 1997,
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,
1996 (pages 30-46) filed as Exhibit 1:
Consolidated Balance Sheets -- December 31, 1996 and 1995
For the years ended December 31, 1996, 1995 and 1994:
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flow
Notes to Consolidated Financial Statements
(a)2. Financial Statement Schedule
Schedule I -- Summary of Investments -- Other than Investments in Related
Parties
Schedule III -- Supplementary Insurance Information
Schedule IV -- Reinsurance
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, 1996, 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, 1996.
(a)3. Listing of Exhibits
Exhibit 1 - Annual Report to the Stockholders for the year ended December
31, 1996.*
Exhibit 3.1-- Articles of Incorporation of the Company, as amended.
Exhibit 3.2-- By-Laws of the Company, as amended.
Exhibit 11-- Statements re Computation of Per Share Earnings.**
Exhibit 23 - Consent of Independent Auditors.
*The material included in this Report shall not be deemed to be "filed"
with the Commission or otherwise subject to the liabilities of Section 18 of
the Act, except to the extent that this registrant specifically incorporates it
in its Annual Report on this Form 10-K by reference.
**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, 1996 and is
incorporated herein by reference.
(b) Reports on Form 8-K
No filing of Form 8-K was made in the fourth quarter, 1996.
(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.
Investors Heritage Life Insurance Company
March 27, 1997 /s/
DATE BY: Harry Lee Waterfield II
ITS: Chairman of the Board, President and
Chief Executive Officer
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,
President and Chief
Executive Officer
March 27, 1997
/s/
Jimmy R. McIver
Treasurer
March 27, 1997
/s/
Howard L. Graham
Vice President,
Corporate Services
March 27, 1997
/s/
Jerry F. Howell
Director
March 27, 1997
/s/
H. Glenn Doran
Director
March 27, 1997
/s/
Helen S. Wagner
Director
March 27, 1997
/s/
Adron Doran
Director
March 27, 1997
/s/
Robert M. Hardy, Jr.
Vice President,
General Counsel and Director
March 27, 1997
/s/
Jerry F. Howell, Jr.
Director
March 27, 1997
/s/
Michael F. Dudgeon, Jr.
Director
March 27, 1997
/s/
Gordon C. Duke
Director
March 27, 1997
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Investors Heritage Life Insurance Company
We have audited the consolidated financial statements of Investors
Heritage Life Insurance Company and subsidiary listed in the accompanying Index
to financial statements (Item 14(a)). Our audits also included the financial
statement schedules listed in the Index at Item 14(a). These financial
statements and schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedules 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 Investors Heritage Life Insurance Company and subsidiary at December 31,
1996 and 1995, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. Also, in our
opinion, the financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
As discussed in Note A to the consolidated financial statements, the
Company changed its method of accounting for certain investments in debt
securities in 1994.
/s/
Ernst & Young LLP
Louisville, Kentucky
March 25, 1997
CONSENT OF INDEPENDENT AUDITORS
EXHIBIT 23
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 25, 1997, with respect to the consolidated
financial statements and schedules of Investors Heritage Life Insurance Company
included in the Annual Report (Form 10-K) for the year ended December 31, 1996.
/s/
Ernst & Young LLP
Louisville, Kentucky
March 25, 1997
INVESTORS HERITAGE LIFE INSURANCE COMPANY AND SUBSIDIARY
SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED
PARTIES
DECEMBER 31, 1996
AMOUNT AT
WHICH
MARKET SHOWN IN THE
TYPE OF INVESTMENT COST VALUE BALANCE
SHEET
Fixed maturity securities
available-for-sale:
Bonds:
United States and government
agencies and authorities $ 20,134,443 $ 20,916,574 $ 20,916,574
States and political 1,988,971 2,005,110 2,005,110
subdivisions
Foreign 7,573,874 7,675,600 7,675,600
Mortgage-backed
securities 34,116,401 33,999,689 33,999,689
Corporate 81,814,543 82,942,752 82,942,752
Redeemable preferred stock 21,000 44,326 44,326
----------- ----------- -----------
Total $145,649,232 $147,584,051 $147,584,051
============ ============ ============
Equity securities,
available for sale:
Common stocks:
Banks, trusts &
insurance companies $ 392,280 $ 1,991,292 $ 1,991,292
Industrial, misc.
and all other 331,004 292,664 292,664
Nonredeemable preferred
stocks 311,049 323,862 323,862
------------ ------------ --------------
Total $ 1,034,333 $ 2,607,818 $ 2,607,818
============ ============ ==============
Total securities
available for sale: $146,683,565 $150,191,869 $150,191,869
============ ============= ============
Mortgage loans
on real
estate 13,881,835 XXXXXXXX 13,881,835
Policy loans 6,894,715 XXXXXXXX 6,894,715
Other long term
investments 217,681 XXXXXXXX 217,681
Short-term
investments 968,899 XXXXXXXX 968,899
------------ --------- ------------
Total investments $168,646,695 XXXXXXXX $172,154,999
============ ============ ==============
INVESTORS HERITAGE LIFE INSURANCE COMPANY
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1996
SEGMENT
Life Credit Accident Corporate Total
and (Life & Health
Annuities and
A&H)
$ $ $ $ $
Deferred
Policy
Acquisi-
tion
Costs 26,867,679 669,447 384,048 -0- 27,921,174
Future
Policy
Benefits,
Lossess,
Claims &
Loss
Expenses 170,672,825 290,776 130,769 -0- 171,094,370
Unearned
Premium 4,413 8,578,377 699,452 -0- 9,282,242
Other
Policy
Claims &
Benefits
Payable 3,042,248 433,913 67,063 -0- 3,543,224
Premiums
Revenue 36,329,602 (506,630) 31,053 -0- 36,354,025
Net
Invest-
ment
Income
(1) and
(3) 8,894,825 82,614 48,005 2,048,603 11,164,047
Benefits
claims,
Losses &
Settle-
ment
Expenses 19,419,843 757,693 471,502 -0- 20,649,038
Amorti-
zation
Deferred
Acquisi-
tion
Costs 4,379,445 1,215,569 299,514 -0- 5,894,528
Other
Operating
Expenses
(2) 5,125,814 904,319 144,268 918,304 7,092,705
(1) Net investment income is allocated in proportion to policy liabilities and
stockholders' equity.
(2) Other operating expenses are assigned directly to the applicable segment.
(3) Includes realized investment gains or losses.
FOR THE YEAR ENDED DECEMBER 31, 1995
SEGMENT
Life Credit Accident Corporate Total
and (Life & Health
Annuities and
A&H)
$ $ $ $ $
Deferred
Policy
Acquisi-
tion
Costs 25,845,535 1,885,016 529,562 -0- 28,260,113
Future
Policy
Benefits,
Lossess,
Claims &
Loss
Expenses 154,363,644 608,600 209,901 -0- 155,182,145
Unearned
Premium 7,473 5,539,142 965,747 -0- 6,512,362
Other
Policy
Claims &
Benefits
Payable 3,415,505 262,739 88,068 -0- 3,766,312
Premiums
Revenue 33,185,006 (1,167,524)1,043,894 -0- 33,061,376
Net
Invest-
ment
Income
(1) and
(3) 9,251,927 365,529 82,783 1,171,857 10,872,096
Benefits
claims,
Losses &
Settle-
ment
Expenses 33,529,515 (3,593,030) 187,439 -0- 30,123,924
Amorti-
zation
Deferred
Acquisi-
tion
Costs 2,809,459 2,673,578 602,920 -0- 6,085,957
Other
Operating
Expenses
(2) 5,147,730 992,599 234,049 607,562 6,981,940
(1) Net investment income is allocated in proportion to policy liabilities and
stockholders' equity.
(2) Other operating expenses are assigned directly to the applicable segment.
(3) Includes realized investment gains or losses.
FOR THE YEAR ENDED DECEMBER 31, 1994
SEGMENT
Life Credit Accident Corporate Total
and (Life & Health
Annuities and
A&H)
$ $ $ $ $
Deferred
Policy
Acquisi-
tion
Costs 25,124,359 4,747,594 627,482 -0- 30,499,435
Future
Policy
Benefits,
Lossess,
Claims &
Loss
Expenses 137,272,524 2,608,173 191,654 -0- 140,072,351
Unearned
Premium 10,717 13,917,874 1,178,085 -0- 15,106,676
Other
Policy
Claims &
Benefits
Payable 4,684,333 313,573 73,578 -0- 5,071,484
Premiums
Revenue 30,529,592 4,876,595 1,037,575 -0- 36,443,762
Net
Invest-
ment
Income
(1) and
(3) 7,940,980 520,975 83,895 1,811,501 10,357,351
Benefits
claims,
Losses &
Settle-
ment
Expenses 27,282,303 720,440 (379,281) -0- 27,623,462
Amorti-
zation
Deferred
Acquisi-
tion
Costs 4,226,129 4,961,903 904,838 -0- 10,092,870
Other
Operating
Expenses
(2) 4,208,623 874,651 180,311 768,624 6,032,209
(1) Net investment income is allocated in proportion to policy liabilities and
stockholders' equity.
(2) Other operating expenses are assigned directly to the applicable segment.
(3) Includes realized investment gains or losses.
INVESTORS HERITAGE LIFE INSURANCE COMPANY AND SUBSIDIARY
SCHEDULE IV - REINSURANCE
FOR THE YEAR ENDED DECEMBER 31, 1996
Accident
Life Premium, and
Insurance Life Health TOTAL
In Force Insurance Insurance PREMIUMS
$ $ $ $
Gross Amount 1,388,230,107 39,614,360 3,244,892 42,859,252
Ceded to
other
Companies 316,499,131 6,619,435 3,358,570 9,978,005
Assumed
from other
Companies 1,216,370,893 3,379,319 354,983 3,734,302
Net Amount 2,288,101,869 36,374,244 241,305 36,615,549
Percentage
of Amount
Assumed to
Net 53% 9% 147% 10%
FOR THE YEAR ENDED DECEMBER 31, 1995
Accident
Life Premium, and
Insurance Life Health TOTAL
In Force Insurance Insurance PREMIUMS
$ $ $ $
Gross Amount 1,301,580,403 30,088,838 (97,463) 29,991,375
Ceded to
other
Companies 180,264,855 807,810 327,654 1,135,464
Assumed
from other
Companies 1,235,769,597 3,477,443 870,956 4,348,399
Net Amount 2,357,085,145 32,758,471 445,839 33,204,310
Percentage
of Amount
Assumed to
Net 52% 11% 195% 13%
FOR THE YEAR ENDED DECEMBER 31, 1994
Accident
Life Premium, and
Insurance Life Health TOTAL
In Force Insurance Insurance PREMIUMS
$ $ $ $
Gross Amount 1,533,680,499 30,789,709 2,539,118 33,328,827
Ceded to
other
Companies 280,015,000 919,336 501,149 1,420,485
Assumed
from other
Companies 1,284,986,501 3,930,203 608,295 4,538,498
Net Amount 2,538,652,000 33,800,576 2,646,264 36,446,840
Percentage
of Amount
Assumed to
Net 51% 12% 23% 12%