EXHIBIT 1
1996 ANNUAL REVIEW
INVESTORS HERITAGE
LIFE INSURANCE COMPANY
KENTUCKY INVESTORS, INC.
TABLE OF CONTENTS
Mission and Strategy Statement 2
Letter to Stockholders 3
Management's Discussion and Analysis 9
Board of Directors 22
In Memoriam and Corporate Officers 23
Kentucky Investors, Inc.
Consolidated Financial Statements 24
Selected Financial Data 28
Report of Independent Auditors 28
Investors Heritage Life Insurance Company
Selected Financial Data 29
Report of Independent Auditors 29
Consolidated Financial Statements 30
Notes to Consolidated Financial Statement 34
Territory Map 47
Stock Prices and Annual Meeting 48
OUR MISSION
The mission of Investors Heritage Life Insurance Company is to provide quality
life insurance products and services, and maintain financial strength for the
benefit of our insureds, stockholders, agents and employees.
Investors Heritage Life Insurance Company is committed to achieving long term
financial objectives by implementing strategies to increase the volume and
quality of insurance in force. We will improve the quality of the delivery
system with programs to enhance the skills and timely response of marketing and
support service functions.
OUR STRATEGY
The strategic plan focuses on timely product development, technology,
education, communication, human resources practices, and market concentration
as key elements to the attainment of financial objectives.
The overall strategy is to provide competitive products and superior quality
services while improving productivity and job enrichment.
LETTER TO OUR SHAREHOLDERS
Considering earnings, asset growth, continued asset quality, sales and
strategic use of our Business Plan, Kentucky Investors, Inc. ("Kentucky
Investors") and Investors Heritage Life Insurance Company ("Investors
Heritage") (collectively, the "Companies") enjoyed during 1996 one of the best
years in their thirty-three year and thirty-six year histories.
Earnings for Kentucky Investors were $1,146,619 or $1.41 per share, up 98% over
1995. Investors Heritage had earnings of $1,601,574, or $1.78 per share, an
increase of 74.5% over the year 1995. Total revenue was $47,780,000 which
was an increase of 8.4% over year-end 1995. A dividend of $.76 per share
was paid to Investors Heritage stockholders and $.38 per share to Kentucky
Investors stockholders.
Assets of Kentucky Investors increased to $226,461,498 and Investors Heritage
assets increased to $228,595,449. Insurance premium sales set a record for
the third consecutive year and for the fifth out of six years of the 1990's.
With 99.3% of fixed income assets rated investment grade by Standard & Poors,
the same as year-end 1995, our basic investment strategy of the past continues
to serve the policyholders and stockholders of the Companies well. The
investment grade rating has been between 98.9% and 100% for each of the years
since 1990. Our average quality rating at year end was AA. None of our fixed
income assets are in default.
In addition, we continue to have an outstanding mortgage loan portfolio. As
of year end 1995, Investors Heritage had $13,900,000 invested in mortgage
loans which represents 7.9% of total invested assets. Investors Heritage has
been successful in adding value to the total investment portfolio
through its mortgage loans by achieving yields that are from 1% to 4.3% higher
than fixed income yields. As of December 31, 1996, we had no nonperforming
mortgage loans which would include loans past due sixty days or more, loans
in the process of foreclosure, restructured loans and real estate acquired
through foreclosure.
As in the past eight years, my Letter to Stockholders has referred to
quality investments and the analysis of asset adequacy performed each
year even though We are only required to do so every three years. Each year
Investors Heritage's asset adequacy model has become more sophisticated and
useful. The analysis shows very favorable results and is explained in more
detail on Page 21 in the Management's Discussion and Analysis.Additionally,
a pie chart showing the Distribution of Invested Assets is on Page 8.
Our administrative capabilities continue to be a key factor in our ability to
be competitive in the ever increasing complexities of today's insurance
products and the markets in which we choose to compete. Investors Heritage is
not only able to develop and monitor our business plan by tracking each
product line monthly, but also able to provide policy information on a daily
basis to policyholders or servicing agents and to provide computer age sales
equipment, software and techniques.
As I have reported each year of this decade, Investors Heritage is
concentrating on three basic insurance markets:
(1) The funeral home market providing Preneed and Final Expense Life
Insurance and Annuity products;
(2) The banking industry providing Credit Life, Credit Accident and
Health, and Mortgage Redemption products;
(3) The traditional Ordinary Life insurance market, particularly the
middle and upper middle income populace.
Record sales during five of the six years of this decade prove that the
marketing element of our business plan is being successfully followed.
Significant development has come in the Preneed funeral home market over the
past several years. Production of Single Life and Annuity products increased
33.6% in 1996. Since 1975, we have sold Final Expense and Preneed products
primarily in North Carolina, but in recent years we have expanded into ten
other states with our Preneed Program, and are making outstanding progress in
those eleven targeted states. A twelfth state will be activated in 1997.
Credit Life production through Investors Heritage Financial Services Group,
Inc., a wholly owned subsidiary of Kentucky Investors ("Financial
Services Group") was strong. Marketing revenues for Financial Services Group
were $282,000 in 1996 compared to $171,000 in 1995. In 1996, the first
year of operation under the agreement with Connecticut General, Investors
Heritage earned administrative and retention fees of $222,069. In addition
production of Mortgage Redemption insurance through financial institutions
increased 108%. In 1996 we expanded the Mortgage Redemption line of business
into Illinois and will explore the potential of this market in two other
states this year.
Traditional Ordinary Life production was steady during 1996, as it has been
for several years. The trend in the industry is for flat or stagnant
traditional Ordinary Life sales. We consider our steady production in
the past few years in this segment of our business positively because of the
strong emphasis we have placed on Preneed and Credit related divisions, thus
drawing resources away from the traditional Ordinary Life business segment.
These results in our three markets are due to the excellent products and
outstanding service provided by our associates in the "field" as well as in our
home office. Throughout the thirty-six year history of Investors Heritage,
we have been fortunate to have extremely qualified and dedicated insurance
representatives and service personnel. We have very positive expectations for
all three marketing divisions in 1997 and beyond.
With mergers and acquisitions regularly taking place by domestic and
foreign insurance conglomerates, we are convinced more than ever that there
is a definite need and place for smaller well-run life insurance companies.
Because of our size and the way we like to do business, Investors
Heritage personnel can get to know our customers (insureds and agents) and
respond quickly to their needs. We believe this gives Investors Heritage a
competitive advantage. Insurance agents, funeral directors and bankers are
looking for this type of customer service to go along with outstanding
products.
Investors Heritage Printing, Inc., a wholly owned subsidiary of Kentucky
Investors, Inc., experienced another outstanding year with increased sales
and profits. In addition to printing all the Investors Heritage material,
outside job orders increased and Community Press, which we purchased in
1995, continues to enjoy success providing syndicated newspaper filler
articles for newspapers throughout the country. In 1995, Investors Heritage
Printing paid its first dividend in the amount of $4,000 to Kentucky
Investors, Inc. This dividend was increased to $46,000 in 1996.
In March, 1997, several parts of Kentucky suffered terrible flooding and
Frankfort was one of the cities affected. Although our offices are located
one-half block from the Kentucky River, we have experienced inconveniences but
very little damage in past years, except for the flood of 1978. A flood wall
which was recently completed in our section of town prevented flooding in
our area. This gives us great expectations that flooding should no longer be a
concern to us as it regards our property.
I, my family and everyone associated with Investors Heritage and Kentucky
Investors lost a dear friend and valuable business colleague with the death of
Board member Joe R. Johnson on July 17, 1996. The top of Page 23 is in memoriam
to Mr. Johnson.
Gordon Duke replaced Mr. Johnson on the Investors Heritage Board. Gordon has
been a member of the Kentucky Investors Board since 1991. He is Executive
Vice President, Webb Companies, and has served the people of Kentucky in a
variety of state government positions, including State Budget Director and
Secretary of the Finance Cabinet.
I am sorry to report that Warner Hines, an original investor and Board member
of Kentucky Investors, Inc. resigned January 20, 1997, because of health
reasons. Warner has served with distinction on the Board of Kentucky Investors
since 1963. His advice and counsel have been most helpful and we will
continue to enjoy his friendship and appreciate his continued interest in the
companies. Mr. Hines' vacancy has not been filled.
In the 25th Annual Report to Stockholders in 1985, Harry Lee Waterfield, our
founder, closed the Management Letter to Stockholders with a statement that I
used in the Annual Review following his death in 1988. I would like to use
that statement again:
"The Investors Heritage 'Doorway to Your Heritage' motto will be the same for
the next twenty-five years as it has been for the first twenty-five. The
Company has an Executive and Administrative staff attuned to the progress
and development of an outstanding insurance organization. They are
conscientious and have abilities to perform for the benefit of our
stockholders and policyholders who have entrusted to each of us in the
organization the confidence and the monetary contribution to develop a growing
company. To all of those and to our legion of friends, we are grateful."
OPTION ADJUSTED VALUE VS TERM STRUCTURE SHIFT GRAPH
A graph appears on this page which shows the results of the Asset Adequacy
Analysis performed by Investors Heritage Life Insurance Company. The graph
demonstrates the option adjusted prices of assets, liabilities, and surplus at
various shifts in the interest rate environment.
DISTRIBUTION OF INVESTED ASSETS GRAPH
A pie chart appears on this page showing the Distribution of Invested Assets
for all of the assets of Investors Heritage Life Insurance Company. The chart
shows the following breakdown: Fixed Maturities 84.3%; Contractual Obligations
of Affiliate:0.4%; Investments in Affiliates:1.3%; Equity Securities 1.5%;
Short Term Investments:0.6%; Policy Loans:3.9%; Other Long Term Investments:
0.1%; Mortgage Loans-R.E.:7.9%.
MANAGEMENT'S DISCUSSION AND ANALYSIS
UTILIZING RESOURCES
During 1996, Investors Heritage Life Insurance Company ("Investors Heritage")
was able to continue to expand its market share in the preneed funeral market.
Additionally, Investors Heritage Financial Services Group, Inc. ("Financial
Services Group") a wholly owned subsidiary of Kentucky Investors, Inc.
("Kentucky Investors") has been successful in securing marketing agreements
with a number of unaffiliated insurers. This has enabled Financial Services
Group and Investors Heritage to continue utilizing their expertise in the
marketing and administration of credit life and credit accident & health
insurance (respectively "Credit Life" and "Credit A&H", and collectively
"Credit Insurance"). Further, through Financial Services Group, Investors
Heritage is able to offer products such as mortgage protection and ordinary
life insurance through financial institutions.
FINANCIAL STRENGTH
The quality of our investment portfolio and the current level of shareholders'
equity of Kentucky Investors and Investors Heritage continues to provide a
sound financial base as we continue to expand our marketing system to offer
competitive, quality products. As of December 31, 1996, 99.3% of the fixed
income portfolio of Investors Heritage was rated investment grade by Standard
and Poor's and none of our fixed income assets or mortgage loans were in
default.
REVENUES
Overall revenues were $47,780,000, $44,076,000 and $46,804,000 in 1996, 1995
and 1994, respectively for Investors Heritage. The changes were due primarily
to the method of presentation of a new ordinary life insurance product and
marketing changes in the Credit Insurance segment. A discussion of the changes
follows. See "Life and Annuity" and "Credit Insurance" below. Additionally,
Investors Heritage has had steady growth in Net Investment Income which
increased 7.8% or $839,000 in 1996 from 1995. The 1995 increase over 1994 was
8.0% or $804,000.
Life and Annuity
Revenues for the Life and Annuity business segment were 10.4% or $4,415,000
higher in 1996 than 1995. The 1995 increase over 1994 was 9.0% or $3,521,000.
These increases came primarily from a new ordinary life single premium product
which was introduced during the second quarter of 1994 and sold in the preneed
funeral market. This new single premium product resulted in a change in the
presentation of certain balance sheet and income items. The previous single
premium policy utilized in this market was interest sensitive in form and
therefore subject to Financial Accounting Standards Board Statement ("FAS") 97
which requires premiums to be considered deposits and not included in revenues.
The new product is not interest sensitive and is subject to the requirements of
FAS 60. Under FAS 60 revenues are considered to be premiums and not deposits,
thereby increasing premium income.
In addition, under FAS 97 deferred acquisition costs for interest sensitive
policies are capitalized and amortized over the life of the policy in
proportion to expected gross profits. Under FAS 60 deferred acquisition costs
for policies that are not interest sensitive are capitalized and amortized in
proportion to premiums over the premium payment period. Therefore, since these
FAS 60 products are single premium products, no acquisition costs are
capitalized.
This results in a decrease to deferrals of acquisition-related costs. The
effect on the financial statements of this change is offset, however, by the
change in the reserve as the acquisition-related costs are utilized to reduce
the required benefit reserve under the FAS 60 reserving methodology.
Ordinary life sales were in line with production goals set for 1996. Ordinary
life production increased approximately 29% in 1996 over 1995, as anticipated,
due in large part to marketing advances in single premium preneed and mortgage
protection products. New life and annuity premiums and deposits collected
during 1996, 1995 and 1994 were $20,925,000, $16,164,000 and $14,872,000,
respectively. During 1996, Investors Heritage continued to expand its preneed
funeral and final expense marketing operation in eleven states, including
Kentucky, North Carolina, Tennessee, Indiana, Illinois, Missouri, Georgia,
Virginia, West Virginia, Florida and South Carolina. Additionally, Investors
Heritage improved its position in the preneed funeral market in Kentucky where
single premium production was up 71% in 1996 compared to 1995.
Investors Heritage continues a strong marketing operation in North Carolina.
However, due to the successful expansion of our marketing operation noted
above, preneed premiums from North Carolina agents accounted for only 49% of
the total preneed premiums collected in 1996 compared to 57% for 1995. Premium
collections from Kentucky were 20% of total for 1996 and 15% for 1995. Other
states showing significant gains were Georgia and Tennessee. Management plans
to continue to develop the preneed funeral market as well as market other
traditional life insurance products and anticipates increases in single premium
production for 1997 over 1996 in the range of 12-15%.
Increase in Net Investment Income earned by life and annuity products also
contributed to the overall increase in Revenues. Net investment income
increased 11.7% in 1996 compared to 1995 and 10.1% in 1995 compared to 1994.
Revenues from annuity products increased $119,000 from 1995 to 1996 and
decreased $294,000 from 1994 to 1995. Annuity revenues were $1,910,000,
$1,791,000, and $2,085,000 for 1996, 1995 and 1994, respectively. The annuity
products are sold primarily in conjunction with Investors Heritage's marketing
activities in the preneed funeral market.
Group Life revenues have decreased for the past three years. Investors Heritage
withdrew participation in the Federal Employees Group Life Program in late 1994
because the non-underwritten conversions that Investors Heritage was required
to accept exceeded its individual limits for life insurance. It is important to
note that during 1997 Investors Heritage anticipates marketing certain preneed
products on a group basis. This will generate additional revenues for the group
life segment and revenues for the individual life segment will decrease
accordingly.
Credit Insurance
As reported to our stockholders in prior years, Investors Heritage began to
phase out of Credit Insurance as a direct writer in the third quarter of 1994.
During 1995 Investors Heritage continued to provide Credit Insurance
administrative operations as a result of Financial Services Group entering into
a marketing agreement with Franklin Life Insurance Company ("Franklin"). In the
fourth quarter of 1995 Franklin exited the Credit Insurance market as a result
of a change in ownership.
Financial Services Group and Investors Heritage wanted to continue to utilize
their marketing and administrative capabilities and generate alternative
revenues from marketing and retention fees and fees for administration and
claims processing. Therefore, in December 1995, Financial Services Group
procured a reinsurance agreement between Investors Heritage and the Connecticut
General Life Insurance Company ("Connecticut General") pursuant to which all
the risk on all Credit Insurance policies sold by Investors Heritage are
reinsured with Connecticut General.
Careful consideration was given by Investors Heritage prior to reentering the
Credit Insurance market as a direct writer. The primary considerations were
that the reinsurance transaction was with a highly rated insurance company,
Investors Heritage would be able to utilize its capabilities as a Credit
Insurance administrator and generate alternate sources of revenues which will
ultimately protect, improve and strengthen surplus. In addition, the reentry
into the Credit Insurance market further strengthened the favorable
relationship with Kentucky financial institutions.
Partly as a result of the marketing changes over the past three years the
revenues for Credit insurance have decreased as anticipated. Revenues are
($362,000), ($802,000) and $5,431,000 for 1996, 1995 and 1994, respectively.
Investors Heritage has written a negligible amount of direct Credit Insurance
since 1994 that was not reinsured. Revenues from the Credit Insurance segment
will continue to remain small because policies that were written in 1994 and
1993 which were not reinsured will continue to mature.
Accident and Health
Most of this segment has been from insurance assumed from other insurers.
Revenues for this segment have been $597,000, $1,126,000 and $1,139,000 for
1996, 1995 and 1994, respectively. During the year, the insurer that had been
ceding business to Investors Heritage advised they would be assuming all of the
risks for 1996 business written.
The remaining revenues from this segment relate to a closed block of business
of individual health insurance which was sold directly by Investors Heritage.
Corporate
Revenues from the Corporate segment, measured primarily by stockholders'
paid-in capital, contributed surplus, earned surplus and property and equipment
was $693,000 in 1996, $1,315,000 in 1995 and $1,318,000 in 1994. During 1996
this segment experienced a $506,000 realized capital loss from the sale of
approximately $21,000,000 of lower yielding fixed income investments. The
proceeds from these sales were reinvested into higher yielding fixed income
securities that increased our overall investment yield 20.5 basis points and
will provide an annual pre-tax increase of $287,000 to investment income.
Reallocation of Segment Data
The 1996 and 1995 segment data shown in Note I to the Consolidated Financial
Statements was developed using a revised allocation methodology. Such change in
approach was applied and amounts for 1994 have been restated. This change in
approach was made to enhance the allocation of costs and revenues to coincide
with resources used by the segment and revenues earned.
The primary changes occurred in Investment Income, net of expenses and other
insurance expenses. For 1994 revenues for the Life and Annuities segment
increased $446,000. Revenues for the Corporate segment decreased $497,000.
Pre-Tax Income from Operations for the Life and Annuities segment increased
$115,000 and Pre-Tax Income from Operations for the Corporate segment decreased
$193,000. The effect on other segment classifications was immaterial.
OPERATING RESULTS
Investors Heritage's Net Income for 1996 was up $685,000 or 74.7% from 1995 and
down $1,484,000 or 61.8% in 1995 compared to 1994. Kentucky Investors' Net
Income for 1996 was up $592,000 or 106.6% from 1995 and down $968,000 or 63.6%
in 1995 compared to 1994.
Earnings per share were $1.78, $1.02 and $2.66 for 1996, 1995 and 1994,
respectively for Investors Heritage. Earnings per share were $1.41, $0.71 and
$1.97 during the same periods for Kentucky Investors.
Life and Annuity
Pre-tax income (Income from Operations Before Federal Income Tax) for the Life
and Annuity business segment of Investors Heritage was $2,295,000, $1,143,000
and $2,868,000 for 1996, 1995 and 1994, respectively. The increase in Pre-Tax
Income in 1996 when compared to 1995 is primarily attributable to discontinuing
the issuance of legal reserve policies to members of dissolved mutual burial
associations in North Carolina during 1996. Management intends to limit future
issues of legal reserve policies to those that are paid up.
Credit Life and Credit Accident and Health
As noted above, during the third quarter of 1994 Investors Heritage began the
process of phasing out of the Credit Life and Credit A&H market as a direct
writer. Since that time this block of business has been decreasing at a
significant rate due to the short duration (approximately a two-year average
term) of the policies. Pre-Tax Losses were $604,000, $826,000, and $1,095,000
for 1996, 1995 and 1994. The improvement in this segment in 1996 and 1995
compared to 1994 is due primarily to policy reserves being released as the
business matures which in turn is offset by claims and the amortization of
policy acquisition costs.
Policy reserve decreases in 1996, 1995 and 1994 were $2,382,000, $5,521,000
and $1,781,000. Claim expenses were $758,000, $1,928,000 and $2,501,000.
Amortization of Deferred Acquisition Expense was $1,216,000, $2,863,000 and
$1,287,000. These three areas, in the aggregate, increased or (decreased) Pre-
Tax Income by $408,000, $730,000 and ($2,007,000) for 1996, 1995 and 1994,
respectively.
Accident and Health
Pre-Tax Income for the Group and Individual Accident and Health segment was
$25,000, $108,000 and $430,000 for 1996, 1995 and 1994, respectively. The
majority of this segment is from Involuntary Unemployment Insurance written on
a group basis and assumed from another insurer. During 1996 the insurer advised
Investors Heritage that they would begin assuming all of the risk. The
remainder of this segment is individual health insurance relating to a closed
block of business written directly by Investors Heritage.
Corporate
Pre-tax income (loss) for the Corporate segment was ($160,000), $460,000 and
$589,000 for 1996, 1995 and 1994, respectively. A $506,000 realized capital
loss from the sale of lower yielding fixed income securities during the year
caused a significant decrease in the pre-tax income in this segment for
Investors Heritage. A federal income tax refund of approximately $256,000 is
expected to be received in 1997 after the realized loss is applied to prior
years' capital gains. The increased use of surplus for the sale of new Ordinary
Life business by Investors Heritage has also contributed to a reduction in the
pre-tax income of the Corporate segment.
The statutory capital and surplus of Investors Heritage decreased $2,244,000 in
1996, following an increase of $1,194,000 in 1995 and $1,706,000 in 1994.
During 1995 negotiations were completed with the Kentucky Department of
Insurance (the "Department") with regard to the valuation of certain assets
held by Investors Heritage. Under the agreement reached, Investors Heritage
would write down the statutory value of the home office real estate owned from
market to depreciated cost over a five-year period and would write down to zero
its investment in the common stock of its affiliates over a three-year period.
In addition, during 1996 an agreement was reached with the Department to write
down to zero an investment in notes from Kentucky Investors, over a seven-year
period.
At the end of 1996 Investors Heritage management requested and was granted
permission to accelerate the write down of investments in affiliated common
stock and notes of affiliates as of December 31, 1996. The accelerated write
down was requested primarily for two reasons: 1) the capital adequacy ratio of
Investors Heritage as determined by a nationally recognized insurance company
rating service was significantly improved by the elimination of affiliated
investments from the rating formula, and 2) the immediate write down of those
assets to zero will eliminate the strain on capital and surplus in future years
and allow Investors Heritage to generate positive capital and surplus growth
from its on-going operations. For Generally Accepted Accounting Principals
("GAAP") reporting purposes the home office real estate is already carried at
depreciated cost and the notes and common stock are carried at cost.
While adjusting the statutory value of these assets constitutes a change in the
long-standing method of valuation which had been approved by the Department, it
is not anticipated that these adjustments will affect Investors Heritage's
financial position or net income based on generally accepted accounting
principles, or its statutory net income. For additional discussion on this
issue, refer to Note H to the Consolidated Financial Statements.
INVESTMENTS, LIQUIDITY AND FUND RESTRICTIONS
Investors Heritage's investment portfolio continues to provide financial
stability. It is management's opinion that Kentucky Investors and Investors
Heritage have adequate cash flows both on a long-term and short-term basis as
evidenced by the Consolidated Statements of Cash Flows presented in this Annual
Review. Investors Heritage's internal cash flows are derived from insurance
premiums and investments. The cash flows of Kentucky Investors are derived from
the dividends paid to it by Investors Heritage, Financial Services Group and
Investors Heritage Printing, Inc. ("Heritage Printing"). Management anticipates
these cash flows to experience steady growth due to improved profitability of
Financial Services Group and Heritage Printing.
During 1996, Financial Services Group's second full year of operation, revenues
were $282,000 up 65% or $111,000 compared to 1995, and dividends in the
aggregate amount of $67,000 were paid to Kentucky Investors. In addition,
revenues from Heritage Printing were $517,000 in 1996, up 7% compared to
$483,000 in 1995, and Heritage Printing paid $46,000 in dividends to Kentucky
Investors in 1996. Management of Heritage Printing will continue to work to
improve revenues from unaffiliated sources as well as providing printing
services for Investors Heritage. Revenues from these sources constituted less
than 1% of Kentucky Investors' overall Revenues in 1996 and management is
working on the continued growth and profitability of both Financial Services
Group and Heritage Printing.
Management is not aware of any commitments or unusual events that could
materially affect Kentucky Investors' or Investors Heritage's capital
resources. Further, there is no long-term or short-term external debt. Other
than the items disclosed in Note H to the Consolidated Financial Statements and
the increased regulatory reporting requirements which generally increase
administrative expenses, management is not aware of any current recommendations
by any regulatory authority which if implemented would have any material effect
on Investors Heritage's liquidity, capital resources or operations. Management
does not perceive a need for any external financing and there are no plans to
acquire same. However, Kentucky Investors and Investors Heritage will continue
to explore various opportunities including corporate acquisitions and
purchasing blocks of business from other companies, which may dictate a need
for either long-term or short-term debt. There are no restrictions as to use of
funds except the restriction on Investors Heritage as to the payment of cash
dividends to shareholders which is discussed in more detail in Note G to the
Consolidated Financial Statements.
Since inception, Investors Heritage has maintained a sound, conservative
investment strategy. Investors Heritage's fixed income portfolio of public
bonds is managed by an independent portfolio manager, Charter Oak Capital
Management, Inc. ("Charter Oak"). As of December 31, 1996, 84.3% of Investors
Heritage's total invested assets are managed by Charter Oak pursuant to
specific investment guidelines which have been approved by the Board of
Directors. Since the inception of Investors Heritage's relationship with
Charter Oak, the primary objectives have been to maintain the quality and
integrity of the fixed income portfolio while improving the total return on
investments. These goals have been accomplished by further diversifying the
portfolio methodically over the last 8 years.
The fixed income portfolio is diversified among sectors. The market value and
the Standard & Poor's average quality rating of this portfolio as of December
31, 1996 are $147.6 million and AA, respectively. The market value of this
portfolio at year end 1995 was $137.4 million. At year end 1996 the fixed
income portfolio was allocated as follows: 52.8% - corporate; 14.2% -
government; 23.0% - mortgage-backed securities; 5.2% - foreigns; 3.4% - asset
backed securities; and 1.4% - tax exempt. Within the corporate bond sector, the
portfolio is also diversified with 41.3% of that sector invested in bank and
finance, 42.9% in industrial and miscellaneous, and 15.8% in utilities. Pie
charts showing the Distribution of Fixed Income Assets and Distribution of
Corporate Bonds are located on page 17.
The fixed income portfolio also includes $34.0 million (at carrying value) of
mortgage-backed securities ("MBS") which represents 19.4% of total invested
assets and 23.0% of the fixed income portfolio. Mortgage-backed securities add
value to the portfolio and Charter Oak has provided the expertise to purchase
MBS with the confidence that the credits have been properly analyzed and that
the investment properly suits the asset and liability needs of Investors
Heritage.
There have been concerns expressed by rating agencies, various regulators and
other constituencies regarding investments in MBS by insurers and other
financial institutions. Although these highly rated securities provide
excellent credit quality, their liquidity and risk must be monitored. All of
the collateral of the MBS owned by Investors Heritage are guaranteed by the
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC").
The FNMA and FHLMC securities are structured either as publicly-traded
collateralized mortgage obligations ("CMO") or pass-throughs. Unlike most
corporate or real estate debt, the primary concern with a MBS is uncertainty of
timing of cash flows due to prepayment assumptions rather than the possibility
of loss of principal.
Investors Heritage's CMO holdings represent approximately 55.5% of the total
MBS portfolio. When these securities are purchased at a discount or premium,
the income yield will vary with changes in prepayment speeds due to the change
in accretion of discount or amortization of premium, as well as the timing of
the basic principal and interest cash flows. The overall impact of the CMO's
variability in yields on the portfolio is not significant in relation to the
yield and cash flows of the total invested assets of Investors Heritage. More
importantly, Investors Heritage has no exposure to the more volatile, high-risk
CMO's, such as those structured to share in residual cash flows or which
receive only interest payments. Except for one sequential pay CMO of
approximately $935,000, the CMO's held by Investors Heritage are either planned
amortization class ("PAC") bonds, including one planned amortization class-Z
account ("PAC-Z"), or support class ("SUP") bonds, both of which are structured
to provide a more certain cash flows to the investor and therefore have reduced
prepayment risk.
DISTRIBUTION OF FIXED INCOME ASSETS GRAPH
AND DISTRIBUTION OF CORPORATE BONDS GRAPH
Two pie charts appear on this page showing the Distribution of Fixed Income
Assets and the Distribution of Corporate Bonds. The Fixed Income Chart shows
the following breakdown: corporate 52.8%; government: 14.2%; mortgage-backed
securities: 23.0%; foreigns: 5.2%; asset-backed securities; 3.4%; tax exempt:
1.4%. The Corporate Bond Chart shows the following breakdown: bank and
finance: 41.3%; industrial and miscellaneous: 42.9%; utilities 15.8%.
DISTRIBUTION OF MORTGAGE LOANS GRAPH
A pie chart appears on this page showing the Distribution of Mortgage Loans.
This chart shows the following breakdown: retail: 37.1%; apartments: 23.1%;
office properties: 16.9%; Residential (1 to 4 family): 3.2%; industrial:
9.7%; other 10%.
Pass-throughs comprise the remainder of MBS owned by Investors Heritage,
representing approximately 44.5% of the total MBS portfolio. Pass-throughs are
GNMA, FNMA or FHLMC guaranteed MBS which, simply stated, pass-through interest
and principal payments to the investors in accordance with their respective
ownership percentage.
Additionally, Investors Heritage also engages in commercial and residential
mortgage lending with more than 95% of these investments being in commercial
properties. All mortgage loans are originated in-house and all loans are
secured by first mortgages on the real estate. Loan to value ratios of 80% or
less and debt service coverage from existing cash flows of 115% are generally
required. Investors Heritage minimizes credit risk in its mortgage loan
portfolio through various methods, including stringently underwriting the loan
request, maintaining small average loan balances, reviewing its larger mortgage
loans on an annual basis and diversifying the portfolio by property type. The
average loan balance is $261,921 and the average loan to value is 55%. The
largest loan currently held by Investors Heritage is $780,000. Investors
Heritage has $13.9 million invested in mortgage loans which represents 7.9% of
total invested assets. The portfolio is diversified across various property
types as follows: 16.9% - office; 37.1% - retail; 9.7% -industrial; 3.2% - 1 to
4 family; 23.1% - apartments; and 10.0% - other. A pie chart showing the
Distribution of Mortgage Loans is located on Page 18.
Although approximately 80.3% of Investors Heritage's mortgage loans are located
in the various geographic regions of Kentucky, Investors Heritage is familiar
with its mortgage loan markets and is not aware of any negative factors or
trends which would have a material impact on the local economies where
Investors Heritage's mortgage loan properties are located. Investors Heritage
has been successful in adding value to the total investment portfolio through
its mortgage loan originations due to the fact that yields realized from the
mortgage loan portfolio are from 1 to 4.3 percent higher than yields realized
from fixed income investments. Further, value has been added because the
mortgage loan portfolio has consistently performed well. As of December 31,
1996, Investors Heritage had no non-performing mortgage loans, which would
include loans past due 60 days or more, loans in process of foreclosure,
restructured loans and real estate acquired through foreclosure.
The strength of our liquidity is found in our conservative approach in the
product development area and in the strength and stability of our fixed income
portfolio and our mortgage loans. For 1996, Investors Heritage's fixed income
investments were 99.3% investment grade as rated by Standard & Poor's,
unchanged from 99.3% for 1995. None of Investors Heritage's fixed income assets
are in default. Liquidity is also managed by laddering maturities of our fixed
income portfolio. The average duration of our fixed income investments is 5.2
years with approximately $5.7 million due within 12 months and approximately
$31.1 million due within the following four years. Historically management has
anticipated that all such investments will be held until maturity. However, one
of the responsibilities of our independent portfolio manager is to constantly
monitor the credit rating of our fixed income investments to determine if
rating changes of any investment requires action by management.
In accordance with FAS 115, which was implemented effective January 1, 1994,
debt securities that Investors Heritage did not have the positive intent and
ability to hold-to-maturity and all marketable equity securities were
reclassified as available-for-sale and are carried at fair value. Unrealized
gains and losses on securities classified as available-for-sale are carried as
a separate component of Stockholders' Equity, net of taxes, and an adjustment to
deferred acquisition costs. The Balance Sheets reflect this reclassification.
Because management believes it is prudent to have the ability to sell a fixed
income investment if market conditions warrant such action, approximately 94% of
the fixed income portfolio of Investors Heritage was classified as available-
for-sale during 1994. The remainder of the fixed income portfolio was
classified as being held-to-maturity and those investments were carried at
amortized cost.
However, as explained in detail in Note A to the Consolidated Financial
Statements, in 1995 Investors Heritage reclassified its held-to-maturity
securities so that all of Investors Heritage's fixed income securities are now
classified as available-for-sale. The decision to change the classification was
based primarily on two factors. First, during the Kentucky Department of
Insurance examination, Investors Heritage was advised that the Department was
going to require Investors Heritage to write down four local municipal bonds
because the Standard Valuation Office of the National Association of Insurance
Commissioners refused to value them. Rather than write the assets down to zero,
management and the Board of Directors determined that it was in Investors
Heritage's best interest to sell the securities. The second reason for the
reclassification in 1995 was the pronouncement issued by the Financial
Accounting Standards Board allowing a window of opportunity to reclassify
securities from a held-to-maturity portfolio to available-for-sale without
tainting Investors Heritage's FAS 115 classifications. During 1996, all
acquired fixed maturities and equity securities were classified as available-
for-sale.
A key element of profitability and risk management is the asset/liability
management process. To test its financial strength and investment strategy,
Investors Heritage has performed asset adequacy analyses (cash flow testing) for
the last several years. Although regulatory requirements dictate this process
be done every three years, Investors Heritage performs these analyses every
year. This asset/liability management process is designed to monitor product
and asset characteristics that affect future profitability and risk management
strategies.
Dynamic models of both assets and liabilities were created to project financial
results under several different interest rate scenarios. Items taken into
account on the asset side include maturity and liquidity risks, asset
diversification and quality considerations. On the liability side, interest
crediting strategies and policyholder and agent behavior (lapses, loans,
withdrawals and premium flow) are directly related to the interest rate
environment being tested.
These tests demonstrate very favorable financial results for the assets and
liabilities of Investors Heritage held as of December 31, 1996. As indicated by
the price behavior curves shown in Page 7 of this Annual Review, there is always
a substantial positive difference between the present value of our assets as
compared to the present values of our liabilities. Our cash flow testing has
proven our investment strategy to be sound. Positive surplus is projected at
the end of ten years for each of the interest scenarios tested. Because it is a
vital tool in monitoring our financial stability, Management will continue to
refine the cash flow testing process.
CONSOLIDATION
The accompanying consolidated financial statements of Kentucky Investors and
Investors Heritage include the accounts of their respective majority-owned
subsidiaries, after elimination of intercompany transactions. This discussion
and analysis is intended for both Investors Heritage and Kentucky Investors
because their respective financial statements are similar in presentation and
identical in most cases.
BOARD OF DIRECTORS
Harry Lee Waterfield II
Chairman of the Board I K a b c d e f g h
Frankfort, Kentucky
Dr. Adron Doran I a b e
Lexington, Kentucky
H. Glenn Doran I K c d f g
Murray, Kentucky
Michael F. Dudgeon, Jr. I c
Columbia, South Carolina
Gordon C. Duke I K d g
Frankfort, Kentucky
Robert M. Hardy, Jr. I K a d f g h
Frankfort, Kentucky
Warner Hines K g
Frankfort, Kentucky
Jerry F. Howell I K a b c d e h
Leesburg, Florida
Dr. Jerry F. Howell, Jr. I K c f
Morehead, Kentucky
David W. Reed K h
Gilbertsville, Kentucky
Helen Wagner I K b f
Owensboro, Kentucky
I Investors Heritage Life Insurance Company
d Investors Heritage Life Finance Committee
K Kentucky Investors, Inc.
e Investors Heritage Life Compensation Committee
a Investors Heritage Life Executive Committee
f Kentucky Investors Executive Committee
b Investors Heritage Life Nominating Committee
g Kentucky Investors Finance Committee
c Investors Heritage Life Audit Committee
h Kentucky Investors Nominating Committee
IN MEMORIAM
Joe R. Johnson, retired Treasurer of Investors Heritage Life Insurance Company,
died July 17, 1996. Joe was an attorney and banker in his hometown of Clinton,
Kentucky, and in 1964, he moved to Frankfort, Kentucky, as Deputy Commissioner,
Department of Banking. On January 1, 1969, he joined Investors Heritage Life
Insurance Company as Treasurer, Assistant General Counsel, and Board member. He
retired as Treasurer and General Counsel May 31, 1988. He was a member of the
Board of Directors at the time of his death.
Mr. Johnson was a tremendous asset to Investors Heritage and Kentucky Investors.
He was deeply involved in the investment functions of the companies and provided
invaluable advice on many areas of corporate management as a company officer and
Board member.
Mr. Johnson will be missed by his many friends.
CORPORATE OFFICERS
Harry Lee Waterfield II Nancy W. Walton
Chairman of the Board, President, VicePresident,UnderwritingI
Chief Executive Officer IKPF First Vice PresidentK
Jimmy R. McIver Clair S. Manson
TreasurerIKPF Vice President, Chief ActuaryI
Wilma Yeary CPS John E. Simmons
SecretaryIK Vice President, Financial ServicesI
Vice President, Marketing F
Jane S. Jackson Jane Wise
Assistant SecretaryIK Vice President, Policy ServicesI
SecretaryPF
Howard L. Graham Margaret J. Kays
Vice President, Corporate Vice President, Human ResourcesI
Services IK
Raymond L. Carr Don R. Philpot
Vice President, Vice President, AgencyI
Administrative Operations &
Computer ServicesI
Robert M. Hardy, Jr. N. Douglas Hippe
Vice President & General Vice President, AccountingI
Counsel IK
Vice President, Legal F
Rick Calvert
Vice PresidentP
William H. Keller, M.D. Ernst & Young
Medical DirectorI Independent AuditorIK
I Investors Heritage Life Insurance Company
K Kentucky Investors, Inc.
F Investors Heritage Financial Services Group, Inc.
P Investors Heritage Printing, Inc.
KENTUCKY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 and 1995
ASSETS 1996 1995
INVESTMENTS
Securities available-for-sale, at fair value:
Fixed maturities $147,584,051 $137,401,716
Equity securities 2,607,926 2,566,023
Mortgage loans on real estate
13,881,835 13,058,464
Policy loans 6,894,715 6,869,039
Other long-term investments
217,681 301,733
Short-term investments 1,096,899 1,133,021
------------ ------------
Total investments
$172,283,107 $161,329,996
Cash and cash equivalents 2,684,509 2,417,375
Accrued investment income 2,413,103 2,139,836
Due and deferred premiums 4,080,483 4,714,057
Deferred acquisition costs 27,921,174 28,260,113
Property and equipment 1,990,856 1,881,038
Goodwill 2,070,108 2,149,735
Other assets 1,935,326 1,489,184
Amounts recoverable from
reinsurers 9,618,771 3,663,782
------------ ------------
$224,997,437 $208,045,116
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities:
Benefit reserves $171,094,370 $155,182,145
Unearned premium reserves
9,282,242 6,512,362
Policy claims 1,594,541 1,665,949
Other policyholders' funds:
Dividend & endowment accumulations
1,049,919 1,033,503
Reserves for dividends & endowments & other
898,764 1,066,860
------------ ----------
$183,919,836 $165,460,819
Federal income taxes 3,528,349 5,119,540
Other liabilities 3,549,285 2,707,832
------------ ------------
Total liabilities
$190,997,470 $173,288,191
------------ ------------
MINORITY INTEREST IN SUBSIDIARY
$ 9,842,194 $ 10,115,385
------------ -------------
STOCKHOLDERS' EQUITY
Common stock
$ 820,475 $ 811,128
Paid-in surplus 3,374,615 3,374,704
Unrealized appreciation
on available-for-sale securities
1,510,225 2,916,509
Retained earnings 18,452,458 17,539,199
------------ ------------
Total stockholders' equity
$ 24,157,773 $ 24,641,540
------------ ------------
$ 224,997,437 $208,045,116
============ ============
See notes to consolidated financial statements.
KENTUCKY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
1996 1995 1994
REVENUES
Premiums and other considerations
$ 36,354,025 $33,061,376 $36,443,762
Investment income, net of expenses
11,528,961 10,674,159 9,872,482
Realized gain (loss) on investments, net
(488,126) 29,898 235,959
Other income
566,804 239,178 103,491
----------- ----------- -----------
Total revenue
$ 47,961,664 $ 44,004,611 $46,655,694
------------ ------------ -----------
BENEFITS AND EXPENSES
Death and other benefits
$19,134,559 $ 17,291,402 $17,666,871
Guaranteed annual endowments
867,200 890,056 921,148
Dividends to policyholders
647,279 784,506 852,398
Increase in benefit reserves and
unearned premiums
12,587,751 11,157,960 8,183,045
Acquisition costs deferred
(5,130,000) (4,981,000) (9,019,000)
Amortization of deferred acquisition costs
5,894,528 6,085,957 10,092,870
Commissions 4,382,830 4,177,725 8,007,178
Other insurance expenses
7,935,471 7,784,249 7,334,849
----------- ------------ -----------
Total benefits and expenses
$46,319,618 $ 43,190,855 $44,039,359
----------- ------------ -----------
Income from operations before
Federal Income Tax and minority
interest in net income of subsidiary
$ 1,642,046 $ 813,756 $ 2,616,335
------------ ------------ -----------
Provision for income taxes
Current
$ 437,000 $ 687,000 $ 1,044,000
Deferred
(360,000) (668,000) (583,000)
-------------- -------------- -------------
$ 77,000 $ 19,000 $ 461,000
-------------- -------------- -------------
income from operations before
minority interest in net income
of subsidiary
$ 1,565,046 $ 794,756 $ 2,155,335
MINORITY INTEREST IN NET INCOME
OF SUBSIDIARY
418,427 239,824 632,636
------------ -------------- ------------
Net Income $ 1,146,619 $ 554,932 $ 1,522,699
============ ============== ============
Earnings Per Share
$ 1.41 $ .71 $ 1.97
============ ============== ============
See notes to consolidated financial statements.
KENTUCKY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
UNREALIZED
APPRECIATION
(DEPRECIATION) ON
COMMON PAID-IN AVAILABLE-FOR-SALE RETAINED
STOCK SURPLUS SECURITIES EARNINGS
------ ------- ------------------ --------
BALANCE, JANUARY 1, 1994
$771,786 $3,284,091 $ 494,933 $15,755,416
Adjustment to beginning balance
for change in accounting method
2,050,923
Net Income 1,522,699
Cash Dividend (318,462)
Change in net unrealized
appreciation (depreciation) (5,302,847)
Issuance of common
stock, net
8,109 73,087 17,680
--------- --------- --------------- -----------
BALANCE, DECEMBER 31, 1994
$779,895 $3,357,178 $ (2,756,991) $16,977,333
Net Income 554,932
Cash Dividend (332,079)
Change in net unrealized
appreciation (depreciation) 5,673,500
Issuance of common
stock, net
31,233 17,526 339,013
-------- ---------- -------------- -----------
BALANCE, DECEMBER 31, 1995
$811,128 $3,374,704 $ 2,916,509 $17,539,199
Net Income 1,146,619
Cash Dividend (344,611)
Change in net unrealized
appreciation (depreciation) (1,406,284)
Issuance of common
stock, net
9,347 (89) 111,251
-------- --------- ------------ -----------
BALANCE, DECEMBER 31, 1996
$820,475 $3,374,615 $ 1,510,225 $18,452,458
======== ========== ============ ===========
<FN>
See notes to consolidated financial statements.
KENTUCKY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
1996 1995 1994
OPERATING ACTIVITIES
Net Income $ 1,146,619 $ 554,932 $ 1,522,699
Adjustments to reconcile net income
to net cash provided by operating activities:
Increase (decrease) in Benefit Reserves
18,302,594 7,175,593 (216,474)
Change in Claims Liability
(71,408) (169,736) (513,266)
Change in Other Policyholder Funds
(151,680) (1,135,436) 74,249
Amortization of Deferred Acquisition Costs
5,894,528 6,085,957 10,092,870
Policy Acquisition Costs Deferred
(5,130,000) (4,981,000) (9,019,000)
Realized Loss (Gain) on Investments
488,126 (29,898) (235,959)
Increase in Accrued Investment Income
(273,267) (6,075) (157,020)
Change in Other Assets and
Other Liabilities
395,311 24,363 (947,234)
Provision for Deferred Federal Income Taxes
(360,000) (668,000) (583,000)
Federal Income Tax (250,438) (612) (949,646)
Change in Due and Deferred Premiums
633,574 (348,413) (138,862)
Net Adjustment for Premium and
Discount on Investments
256,456 112,387 224,422
Depreciation and Other Amortization
336,406 358,920 354,724
Change in Minority Interest and Other
321,608 (2,335) 340,751
Change in Amounts Recoverable from Reinsurers
(5,954,989) 4,773,358 10,103,840
---------- --------- ----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $15,583,440 $ 11,744,005 $ 9,953,094
=========== ============ =============
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases $(46,706,125) $(19,036,132) $ (25,428,933)
Sales and Maturities
32,427,878 8,946,675 8,103,582
Securities held-to-maturity:
Purchases -0- -0- (962,730)
Sales and Maturities -0- 204,084 6,127,887
Other Investments:
Cost of Acquisition (2,478,676) (2,290,555) (1,489,150)
Sales and Maturities
1,651,805 1,297,428 2,220,019
Net Additions to Property and Equipment
(366,597) (180,422) (44,160)
---------- ------------ ----------
NET CASH USED BY INVESTING
ACTIVITIES $ (15,471,715) $(11,058,922) $(11,473,485)
============= ============ ============
FINANCING ACTIVITIES
Receipts from universal life policies credited to
policyholder account balances
$ 4,949,560 $ 3,352,687 $ 5,096,198
Return of policyholder account balances on
universal life policies
(4,570,049) (4,012,800) (4,087,252)
Issuances (Purchases) of Common Stock
120,509 387,772 98,876
Dividends (344,611) (332,079) (318,462)
------------- ------------- -----------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES $ 155,409 $ (604,420) $ 789,360
============== ============== ============
INCREASE (DECREASE) IN CASH
$ 267,134 $ 80,663 $ (731,031)
Cash and cash equivalents at beginning of year
2,417,375 2,336,712 3,067,743
-------------- -------------- ------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 2,684,509 $ 2,417,375 $ 2,336,712
============== ============== ============
See notes to consolidated financial statements.
KENTUCKY INVESTORS, INC.
SELECTED FINANCIAL DATA
KENTUCKY INVESTORS, INC. AND SUBSIDIARIES
(000's omitted except for Earnings and Cash Dividends Per Share)
1996 1995 1994 1993 1992
Total Revenue $ 47,962 $ 44,005 $ 46,656 $ 45,388 $ 45,567
Total Benefits & Expenses
46,320 43,191 44,039 43,091 44,597
Net Income 1,147 555 1,523 1,193 516
Earnings Per
Share 1.41 .71 1.97 1.55 .65
Total Assets 224,997 208,045 191,367 198,230 171,119
Total
Liabilities 190,997 173,288 164,902 168,984 142,987
Long Term Debt -0- -0- -0- -0- -0-
Cash Dividends
Per Share .38 .38 .37 .36 .36
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Kentucky Investors, Inc.
We have audited the accompanying consolidated balance sheets of
Kentucky Investors, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Kentucky
Investors, Inc. and subsidiaries at December 31, 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.
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/
Louisville, Kentucky
March 25, 1997
Investors Heritage Life Insurance Company
SELECTED FINANCIAL DATA
INVESTORS HERITAGE LIFE INSURANCE COMPANY AND SUBSIDIARY
(000's omitted except for Earnings and Cash Dividends Per Share)
1996 1995 1994 1993 1992
Premiums $ 36,354 $ 33,061 $ 36,444 $ 34,966 $ 34,671
Net Investment
Income 11,654 10,815 10,011 9,748 10,021
Net Income 1,602 917 2,401 2,302 915
Earnings Per
Share 1.78 1.02 2.66 2.54 1.00
Total Assets 227,140 210,490 194,262 201,197 173,885
Policy
Reserves 180,377 161,695 155,179 154,387 127,158
Long Term Debt -0- -0- -0- -0- -0-
Cash Dividends
Per Share .76 .76 .74 .72 .72
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Investors Heritage Life Insurance Company
We have audited the accompanying consolidated balance sheets of
Investors Heritage Life Insurance Company and subsidiary as of December 31,
1996 and 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Investors
Heritage Life Insurance Company and subsidiary at December 31, 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.
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/
Louisville, Kentucky
March 25, 1997
Investors Heritage Life Insurance Company
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 and 1995
ASSETS 1996 1995
INVESTMENTS
Securities available-for-sale, at fair value:
Fixed maturities $147,584,051 $137,401,716
Equity securities 2,607,818 2,565,936
Mortgage loans on real estate
13,881,835 13,058,464
Policy loans 6,894,715 6,869,039
Other long-term investments
217,681 301,733
Short-term investments 968,899 1,103,021
----------- -----------
$172,154,999 $161,299,909
Investments in affiliates
2,188,840 2,309,438
Contractual obligations of affiliate
646,554 747,753
------------ -----------
Total investments $174,990,393 $164,357,100
Cash and cash equivalents 2,647,566 2,376,981
Accrued investment income 2,412,713 2,139,333
Due and deferred premiums 4,080,483 4,714,057
Deferred acquisition costs 27,921,174 28,260,113
Property and equipment 1,942,789 1,823,784
Goodwill 1,639,982 1,705,583
Other assets 1,885,757 1,449,163
Amounts recoverable from reinsurers
9,618,771 3,663,782
----------- -----------
$227,139,628 $210,489,896
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities:
Benefit reserves $171,094,370 $155,182,145
Unearned premium reserves
9,282,242 6,512,362
Policy claims 1,594,541 1,665,949
Other policyholders' funds:
Dividend & endowment accumulations
1,049,919 1,033,503
Reserves for dividends & endowments & other
898,764 1,066,860
----------- ------------
Total policy liabilities
$183,919,836 $165,460,819
Federal income taxes 2,068,998 3,705,719
Other liabilities 3,478,766 2,663,372
------------ ------------
Total liabilities
$189,467,600 $171,829,910
------------ ------------
STOCKHOLDERS' EQUITY
Common stock $ 1,441,718 $ 1,441,797
Paid-in surplus 3,776,625 3,776,427
Unrealized appreciation
on available-for-sale securities
2,044,219 3,948,035
Retained earnings 30,409,466 29,493,727
------------ ------------
Total stockholders' equity
$ 37,672,028 $ 38,659,986
------------ ------------
$227,139,628 $210,489,896
============ ============
See notes to consolidated financial statements.
Investors Heritage Life Insurance Company
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
1996 1995 1994
REVENUES
Premiums and other considerations
$36,354,025 $33,061,376 $36,443,762
Investment income, net of expenses
11,653,732 10,815,048 10,010,654
Realized gain (loss) on investments, net
(489,685) 57,048 346,697
Other income 261,524 142,934 3,078
----------- ----------- -----------
Total revenue $47,779,596 $44,076,406 $46,804,191
----------- ----------- -----------
BENEFITS AND EXPENSES
Death and other benefits $19,134,559 $17,291,402 $17,666,871
Guaranteed annual
endowments 867,200 890,056 921,148
Dividends to policyholders 647,279 784,506 852,398
Increase in benefit reserves and
unearned premiums 12,587,751 11,157,960 8,183,045
Acquisition costs deferred (5,130,000) (4,981,000) (9,019,000)
Amortization of deferred acquisition costs
5,894,528 6,085,957 10,092,870
Commissions 4,382,830 4,177,725 8,007,178
Other insurance expenses 7,839,875 7,785,215 7,307,693
------------ ------------ -------------
Total benefits and expenses
$46,224,022 $43,191,821 $44,012,203
----------- ----------- -------------
Income from operations before
Federal Income Tax $ 1,555,574 $ 884,585 $ 2,791,988
------------ ----------- -----------
Provision for income taxes
Current $ 360,000 $ 648,000 $ 1,061,000
Deferred (406,000) (680,000) (670,000)
------------ ----------- -----------
$ (46,000) $ (32,000) $ 391,000
------------ ----------- -----------
Net Income $ 1,601,574 $ 916,585 $ 2,400,988
============ =========== ===========
Earnings Per Share $ 1.78 $ 1.02 $ 2.66
============ =========== ===========
See notes to consolidated financial statements.
Investors Heritage Life Insurance Company
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
UNREALIZED
APPRECIATION
(DEPRECIATION) ON
COMMON PAID-IN AVAILABLE-FOR-SALE RETAINED
STOCK SURPLUS SECURITIES EARNINGS
----- ------- ------------------ --------
BALANCE, JANUARY 1, 1994
$1,449,010 $3,775,383 $ 673,320 $27,641,304
Adjustment to beginning balance
for change in accounting method
2,790,241
Net Income 2,400,988
Cash Dividend (666,892)
Change in net unrealized
appreciation (depreciation) (7,199,469)
Cost of common stock
purchased (5,751) 977 (90,670)
---------- ---------- ------------ -----------
BALANCE, DECEMBER 31, 1994
$1,443,259 $3,776,360 $(3,735,908) $29,284,730
Net Income 916,585
Cash Dividend (685,219)
Change in net unrealized
appreciation (depreciation) 7,683,943
Cost of common stock
purchased
(1,462) 67 (22,369)
--------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 1995
$1,441,797 $3,776,427 $ 3,948,035 $29,493,727
Net Income 1,601,574
Cash Dividend (684,442)
Change in net unrealized
appreciation (depreciation) (1,903,816)
Cost of common stock
purchased (79) 198 (1,393)
---------- --------- ----------- ----------
BALANCE, DECEMBER 31, 1996
$1,441,718 $3,776,625 $ 2,044,219 $30,409,466
========== ========== =========== ===========
<FN>
See notes to consolidated financial statements.
Investors Heritage Life Insurance Company
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
1996 1995 1994
OPERATING ACTIVITIES
Net Income $ 1,601,574 $ 916,585 $ 2,400,988
Adjustments to reconcile net income
to net cash provided by operating activities:
Increase (decrease) in Benefit Reserves
18,302,594 7,175,593 (216,474)
Change in Claims Liability
(71,408) (169,736) (513,266)
Change in Other Policyholder Funds
(151,680) (1,135,436) 74,249
Amortization of Deferred Acquisition Costs
5,894,528 6,085,957 10,092,870
Policy Acquisition Costs Deferred
(5,130,000) (4,981,000) (9,019,000)
Realized Loss (Gain) on Investments
489,685 (57,048) (346,697)
Increase in Accrued Investment Income
(273,380) (6,114) (156,711)
Change in Other Assets and
Other Liabilities 378,800 260 (921,683)
Provision for Deferred Federal Income Taxes
(406,000) (680,000) (670,000)
Federal Income Tax (250,481) (411) (951,504)
Change in Due and Deferred Premiums
633,574 (348,413) (138,862)
Net Adjustment for Premium and
Discount on Investments
256,456 112,387 224,422
Depreciation and Other Amortization
313,192 313,464 350,838
Change in Amounts Recoverable from Reinsurers
(5,954,989) 4,773,358 10,103,840
----------- ---------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 15,632,465 $ 11,999,446 $ 10,313,010
------------ ------------ -------------
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases $(46,706,125) $(19,036,132) $ (25,428,933)
Sales and Maturities
32,427,878 8,946,675 8,214,320
Securities held-to-maturity:
Purchases -0- -0- (962,730)
Sales and Maturities -0- 204,084 6,127,887
Other Investments:
Cost of Acquisition
(2,465,182) (2,297,975) (1,511,189)
Sales and Maturities
2,054,548 1,770,165 2,309,447
Net Additions to Property and Equipment
(366,596) (149,910) (39,790)
---------- ----------- ------------
NET CASH USED BY INVESTING
ACTIVITIES $(15,055,477) $(10,563,093) $ (11,290,988)
------------ ------------- -------------
FINANCING ACTIVITIES
Receipts from universal life policies credited to
policyholder account balances
$ 4,949,560 $ 3,352,687 $ 5,096,198
Return of policyholder account balances
on universal life policies
(4,570,049) (4,012,800) (4,087,252)
Repurchase of Common Stock
(1,472) (23,831) (96,421)
Dividends (684,442) (685,219) (666,892)
------------ ------------ -----------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES $ (306,403) $ (1,369,163) $ 245,633
------------ ------------- ------------
INCREASE (DECREASE) IN CASH
$ 270,585 $ 67,190 $ (732,345)
Cash and cash equivalents at beginning of year
2,376,981 2,309,791 3,042,136
------------ ------------ -------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 2,647,566 $ 2,376,981 $ 2,309,791
============ ============ =============
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KENTUCKY INVESTORS, INC.
Investors Heritage Life Insurance Company
NOTE A - Nature of Operations and Accounting Policies
Kentucky Investors, Inc. (Kentucky Investors) is the holding company of
Investors Heritage Life Insurance Company (Investors Heritage), Investors
Heritage Printing, Inc., a printing company and Investors Heritage Financial
Services Group, Inc., an insurance marketing company. Ninety-nine percent of
Kentucky Investors operations are generated by Investors Heritage.
Investors Heritage's operations involve the sale and administration of various
insurance and annuity products, including, but not limited to, participating,
non-participating, whole life, limited pay, universal life, annuity contracts,
credit life, credit accident and health and group insurance policies. The
principal markets for Investors Heritage products are in the Commonwealths of
Kentucky and Virginia, and the states of North Carolina, South Carolina, Ohio,
Indiana, Florida, Tennessee, Illinois, Georgia, West Virginia and Texas.
Basis of Presentation: The accompanying consolidated financial statements of
Kentucky Investors, Inc. and subsidiaries and Investors Heritage Life Insurance
Company and subsidiary have been prepared in accordance with generally accepted
accounting principles (GAAP). Investors Heritage also submits financial
statements to insurance regulatory authorities based on statutory accounting
practices which differ from GAAP.
Principles of Consolidation: The consolidated financial statements include the
majority-owned subsidiaries of Kentucky Investors which are Investors Heritage
Printing, Inc., Investors Heritage and its subsidiary, Investors Underwriters,
Inc., and Investors Heritage Financial Services Group, Inc. Kentucky Investors
formed Investors Heritage Financial Services Group, a wholly-owned marketing
company which markets a variety of products for a number of companies as well
as Investors Heritage's mortgage protection products to financial institutions
in 1994. Intercompany transactions are eliminated in the Kentucky Investors
consolidated financial statements. The accompanying Investors Heritage
financial statements include intercompany transactions with Kentucky Investors
and other affiliates which are not eliminated.
Investments: Effective January 1, 1994, Kentucky Investors and Investors
Heritage adopted Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". In
accordance with SFAS No. 115, Kentucky Investors and Investors Heritage
classified its fixed maturities and equity securities as available-for-sale or
held-to-maturity. Under SFAS No. 115, securities classified as
held-to-maturity are carried at amortized cost. Available-for-sale classified
securities are carried at fair value with appreciation (depreciation) relating
to temporary market value changes recorded as an adjustment to stockholders'
equity. The effect of SFAS No. 115 resulted in an increase to stockholders'
equity (net of adjustments to deferred policy acquisition costs and deferred
federal income taxes) of $2,050,923 and $2,790,241 for Kentucky Investors and
Investors Heritage, respectively, to reflect the January 1, 1994, net
unrealized gains on securities classified as available-for-sale previously
carried at amortized cost. The adoption of SFAS No. 115 had no effect on
Kentucky Investors or Investors Heritage net income.
NOTES
NOTE A - Continued
During 1995 the Financial Accounting Standards Board declared a one time
"holiday" from SFAS No. 115 restrictions relating to the transfer of held-to-
maturity classified securities to the available-for-sale classification.
Specifically, FASB decided that companies would be allowed a one time
reassessment of their classification of securities. Pursuant to the "holiday"
Kentucky Investors and Investors Heritage reclassified its held-to-maturity
securities to available-for-sale. This was completed effective November 30,
1995. On that date the amortized cost, related gross unrealized gain and
related gross unrealized loss were $6,377,043, $251,188 and $46,733,
respectively. During 1996, all acquired fixed maturities and equity
securities were classified as available-for-sale. Equity securities are
carried at fair value.
Premiums and discounts on fixed maturity investments are amortized into income
using the interest method. Anticipated prepayments on mortgage-backed
securities are considered in the determination of the effective yield on such
securities. If a difference arises between anticipated prepayments and actual
prepayments, the carrying value of the investment is adjusted with a
corresponding charge or credit to interest income.
Realized gains and losses on the sale of investments are determined based upon
the specific identification method and include provisions for other-than-
temporary impairments where appropriate.
Mortgage loans, policy loans and other long-term investments are carried at
unpaid balances. Short term investments represent securities with maturity
dates within one year but exceeding three months. These securities are carried
at amortized cost.
Cash equivalents include money market funds on deposit at various financial
institutions with contractual maturity dates within three months at the time of
purchase.
Deferred Acquisition Costs: Commissions and other acquisition costs which vary
with and are primarily related to the production of new business are deferred
and amortized over the life of the related policies (refer to Revenues and
Expenses discussed later in this note regarding amortization methods).
Recoverability of deferred acquisition costs is evaluated annually by comparing
the current estimate of the present value of expected pretax future profits to
the unamortized asset balance. If such current estimate is less than the
existing balance, the difference is charged to expense.
Property and Equipment: Property and equipment is carried at cost less
accumulated depreciation, using principally the straight-line method.
Accumulated depreciation on property and equipment of Kentucky Investors was
$3,270,717 and $3,705,560 at December 31, 1996 and 1995, respectively.
Accumulated depreciation on property and equipment of Investors Heritage was
$3,188,432 and $3,632,463 at December 31, 1996 and 1995, respectively.
Goodwill: Goodwill for Investors Heritage is being amortized over forty years
using the straight-line method. Accumulated amortization was $984,015 and
$918,414 at December 31, 1996 and 1995, respectively.
Benefit Reserves and Policyholder Deposits: Reserves on traditional life and
accident and health insurance products are calculated using the net level
premium method based upon estimated future investment yields, mortality,
withdrawals and other assumptions, including
NOTES
NOTE A - Continued
dividends on participating policies. The assumptions are locked in and based on
projections of past experience and include provisions for possible unfavorable
deviation.
Benefit reserves and policyholder deposits on universal life and investment-
type products are determined by using the retrospective deposit method and
represent the policy account value before consideration of surrender charges.
In addition, unearned revenues are included as a part of the benefit reserve.
The mortality assumptions for regular ordinary business are based on the
1955-60 Basic Table, Select and Ultimate, for plans issued prior to 1982, the
1965-70 Basic Table, Select and Ultimate, for plans issued in 1982 through
1984, the 1975-80 Basic Table, Select and Ultimate, for plans issued after 1984
and on the Company's experience for final expense plans.
Reinsurance: Kentucky Investors and Investors Heritage assume and cede
reinsurance under various agreements providing greater diversification of
business, allowing management to control exposure to potential losses arising
from large risks, and providing additional capacity for growth. Amounts
recoverable from reinsurers are estimated in a manner consistent with the
related liabilities associated with the reinsured policies. In accordance with
SFAS No. 113 reserves ceded to reinsurers of $8,915,237 and $3,361,687 at
December 31, 1996 and 1995, respectively are shown gross on the balance sheets
of Kentucky Investors and Investors Heritage.
Unearned Premium Reserves: Credit life unearned premium reserves are calculated
for level and reducing coverage using the monthly pro rata and Rule of 78's
methods, respectively. Credit accident and health unearned premium reserves are
determined based upon the Rule of 78's.
Policy Claims: Policy claims are based on known liabilities plus estimated
future liabilities developed from trends of historical data applied to current
exposure.
Other Policyholders' Funds: Other policyholders' funds consist primarily of
dividends and endowments left on deposit at interest. Participating business
approximates 11% of ordinary life insurance in force. Participating dividends
are accrued as declared by the Board of Directors of Investors Heritage. The
liability for future policy benefits for participating policies was determined
based on the Net Level Premium Reserve Method, 3% interest, and the 1941 CSO
Mortality and 1958 CSO Mortality tables. All guaranteed benefits were
considered in calculating these reserves. The average assumed investment yields
used in determining expected gross margins ranged from 3.56% to 9.17% (for the
current and all future years an assumed investment yield of 6.80% was
utilized). Acquisition costs are amortized in proportion to expected gross
margins.
Federal Income Taxes: Kentucky Investors and Investors Heritage utilize the
liability method in accordance with FASB Statement 109 "Accounting for Incomes
Taxes" to account for income taxes. Under such method, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and the tax bases of assets and liabilities and are measured using the enacted
tax rates.
Revenues and Expenses: Revenues on traditional life and accident and health
insurance products consist of direct and assumed premiums reported as earned
when due. Liabilities for future policy benefits, including unearned premium
reserves, are provided and acquisition costs are amortized by associating
benefits and expenses with earned
NOTES
NOTE A - Continued
premiums to recognize related profits over the life of the contracts.
Acquisition costs are amortized over the premium paying period using the net
level premium method. Traditional life insurance products are treated as long
duration contracts since they are ordinary whole life insurance products which
generally remain in force for the lifetime of the insured. The accident and
health insurance products are treated as long duration contracts because they
are non-cancellable.
Revenues for universal life and investment-type products consist of investment
income and policy charges for the cost of insurance and policy initiation and
administrative fees. Expenses include interest credited to policy account
balances, actual administrative expenses and benefit payments in excess of
policy account balances.
Deferred policy acquisition costs related to universal life and investment-type
products are amortized as a uniform percentage of each year's expected gross
profits, over the life of the policies. Amortization is unlocked for
significant changes in expected versus actual gross profits, including the
effects of realized gains or losses.
Common Stock and Earnings per Share: The par value per share for Kentucky
Investors is $1.00 with 1,225,000 shares authorized (shares issued at December
31, 1996: 820,475; 1995: 811,128; and 1994: 779,895). Earnings per share of
common stock were computed based on the weighted average number of common
shares outstanding during each year. The number of common shares used in this
computation was 813,754 in 1996, 783,820 in 1995, and 772,109 in 1994. Cash
dividends per share were $.38 in 1996 and in 1995, and $.37 in 1994.
The stated value of Investors Heritage common stock was $1,441,718, $1,441,797,
and $1,443,259 at December 31, 1996, 1995 and 1994, respectively. 2,000,000
shares were authorized at December 31, 1996, 1995 and 1994 (shares issued at
December 31, 1996: 900,574; 1995: 900,623; and 1994: 901,537). Earnings per
share of common stock were computed based on the weighted average number of
common shares outstanding during each year:900,508 in 1996, 901,151 in 1995 and
902,115 in 1994. Cash dividends per share were $.76 in 1996 and in 1995, and
$.74 in 1994.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
NOTE B - Investments
Investors Heritage limits credit risk by emphasizing investment grade
securities and by diversifying its investment portfolio among government and
corporate bonds and mortgage loans. Investors Heritage manages its fixed
income portfolio to diversify between and within industry sectors. Mortgage
loans are issued at loan to value ratios not exceeding 80 percent.
Approximately $11,148,000 of the loans outstanding at December 31, 1996 were to
borrowers located in Kentucky. All loans are secured by a first mortgage on the
property.
NOTES
NOTE B - Continued
Investments in available-for-sale securities are summarized as follows:
1996
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available-for-sale securities:
U.S. Government Obligations
$ 20,134,443 $ 782,131 $ -0- $ 20,916,574
States and Political Subdivisions
1,988,971 27,399 11,260 2,005,110
Corporate 81,835,543 1,669,954 518,419 82,987,078
Foreign 7,573,874 132,769 31,043 7,675,600
Mortgage-Backed Securities
34,116,401 450,104 566,816 33,999,689
------------- ----------- --------- -------------
Total Fixed Maturity Securities
$ 145,649,232 $ 3,062,357 $1,127,538 $ 147,584,051
Equity Securities 1,034,333 1,618,600 45,115 2,607,818
------------- ----------- ---------- -------------
Total $ 146,683,565 $ 4,680,957 $1,172,653 $ 150,191,869
============= =========== ========== =============
1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available-for-sale securities:
U.S. Government Obligations
$ 24,214,107 $1,364,794 $ 15,497 $ 25,563,404
States and Political Subdivisions
1,987,512 73,488 -0- 2,061,000
Corporate 68,935,613 3,138,499 78,479 71,995,633
Foreign 5,015,069 260,071 -0- 5,275,140
Mortgage-Backed Securities
31,685,496 921,819 100,776 32,506,539
------------- ---------- ------------ ------------
Total Fixed Maturity Securities
$131,837,797 $5,758,671 $ 194,752 $137,401,716
Equity Securities 1,311,393 1,347,552 93,009 2,565,936
------------ ---------- ------------ ------------
Total
$133,149,190 $7,106,223 $ 287,761 $139,967,652
============ ========== ============ ============
In accordance with SFAS No. 115, net unrealized gains (losses) for investments
classified as available-for-sale are shown, net of the effect on deferred
income taxes and deferred policy acquisition costs assuming that the
appreciation (depreciation) had been realized. A summary follows:
December 31
1996 1995
------------------
Net unrealized appreciation on
available-for-sale securities $ 3,508,304 $ 6,818,462
Adjustment to deferred acquisition costs (411,002) (836,591)
Deferred income taxes (1,053,083) (2,033,836)
----------- ---------
Net unrealized appreciation on
available-for-sale securities for Investors Heritage
$ 2,044,219 $ 3,948,035
Minority shareholders' interest (533,994) (1,031,526)
Net unrealized appreciation on ----------- -----------
available-for-sale securities for Kentucky Investors
$ 1,510,225 $ 2,916,509
=========== ===========
The amortized cost and fair value of debt securities at December 31, 1996, by
contractual maturity, are presented on the following page. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations
with or without call or prepayment penalties.
Available-for-Sale
Amortized Fair
Cost Value
-----------------
Due in one year or less $ 5,567,485 $ 5,668,525
Due after one year through five years 30,362,453 31,136,827
Due after five years through ten years 35,069,943 35,604,927
Due after ten years 38,566,440 39,188,883
Due at multiple maturity dates 36,082,911 35,984,889
-------------- -------------
Total $ 145,649,232 $ 147,584,051
NOTES
NOTE B - Continued
Proceeds during 1996 and 1995 from sales and maturities of investments in
available-for-sale securities were $32,427,878 and $8,946,675, respectively.
Gross gains of $101,509 and $86,647 and gross losses of $633,122 and $50,315
were realized on those sales during 1996 and 1995, respectively. Proceeds from
sales and maturities of investments in held-to-maturity securities were
$204,084 for 1995. Gross gains of $2,135 and gross losses of $7,964 were
realized on those sales.
Presented below is investment information for Investors Heritage, including the
accumulated and annual change in net unrealized investment gain or loss.
Additionally, the table below shows the annual change in net unrealized
investment gain (loss) and the amount of realized investment gain (loss) on
debt and equity securities for the years ended December 31, 1996, 1995 and
1994:
1996 1995 1994
Change in unrealized investment gain (loss):
Available-for-sale:
Debt securities $(3,629,100) $12,275,195 $(6,711,276)
Equity securities 318,943 501,508 (267,147)
Held-to-maturity:
Debt securities $ -0- $ 466,504 $(5,663,480)
Realized investment gain (loss):
Available-for-sale:
Debt securities $ (449,194) $ 35,957 $ 134,213
Equity securities (38,221) 375 813
Held-to-maturity:
Debt securities $ -0- $ (5,829) $ 108,513
In 1995 there were sales of $146,914 of held-to-maturity securities with a
realized loss of $7,705. The Company sold these securities for statutory
purposes since they were not valued by the NAIC Securities Valuation Office.
Net realized gains of $1,876 resulted from prepayments and calls of held-to-
maturity securities in 1995. As previously mentioned in Note A, the balance of
held-to-maturity securities was transferred to available-for-sale on November
30, 1995. There were no sales of held-to-maturity securities in 1994. Realized
gains in 1994 presented above ($108,513) resulted from prepayments and calls
of held-to-maturity securities.
Major categories of investment income for Investors Heritage are summarized as
follows:
1996 1995 1994
Fixed mat urities $ 9,865,087 $ 9,084,878 $ 8,210,890
Mortgage loans on real estate 1,222,649 1,124,147 1,230,481
Other 927,817 961,604 908,508
------------ ------------- ------------
$ 12,015,553 $ 11,170,629 $ 10,349,879
Investment expenses 361,821 355,581 339,225
------------ ------------- ------------
$ 11,653,732 $ 10,815,048 $ 10,010,654
============ ============= ============
Investors Heritage is required to hold assets on deposit for the benefit of
policyholders in accordance with statutory rules and regulations. At December
31, 1996 and 1995, these required deposits had book values of $23,180,262 and
$22,290,293, respectively.
NOTES
NOTE C - Fair Values of Financial Instruments
The following disclosure of the estimated fair values of financial instruments
is made in accordance with the requirements of SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments". The estimated fair value amounts have
been determined using available market information and appropriate valuation
methodologies. However, considerable judgement was necessarily required to
interpret market data to develop these estimates. Accordingly, the estimates
are not necessarily indicative of the amounts which could be realized in a
current market exchange. The use of different market assumptions or estimation
methodologies may have a material effect on the fair value amounts. The
following table relates solely to Investors Heritage. Carrying values and fair
values for Kentucky Investors approximate those shown for Investors Heritage,
except for the investments in and obligations of affiliates recognized by
Investors Heritage which are eliminated for Kentucky Investors reporting.
December 31
1996 1995
Investors Heritage Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Fixed maturities $147,584,051 $147,584,051 $137,401,716 $137,401,716
Equity securities 2,607,818 2,607,818 2,565,936 2,565,936
Mortgages on real estate:
Commercial 13,224,490 14,281,466 12,353,835 13,627,306
Residential 657,345 719,947 704,629 793,064
Policy loans 6,894,715 6,894,715 6,869,039 6,869,039
Other long-term
investments 217,681 217,681 301,733 301,733
Short-term investments 968,899 968,899 1,103,021 1,103,021
Investments in
affiliates 2,188,840 4,370,971 2,309,438 4,406,088
Contractual obligations
of affiliate 646,554 646,554 747,753 747,753
Cash and cash
equivalents 2,647,566 2,647,566 2,376,981 2,376,981
Accrued investment
income 2,412,713 2,412,713 2,139,333 2,139,333
Liabilities:
Policyholder deposits
(investment-type contracts)
$ 51,339,544 $ 46,075,179 $ 48,243,071 $ 43,049,666
Policy claims 1,594,541 1,594,541 1,665,949 1,665,949
The following methods and assumptions were used in estimating the "fair value"
disclosures for financial instruments in the accompanying financial statements
and notes thereto:
Cash, cash equivalents, short-term investments, policy loans, accrued
investment income, other long term investments and contractual obligations of
affiliates: The carrying amounts reported for these financial instruments
approximate their fair values.
Fixed maturity, equity securities, and investments in affiliates: The fair
values for fixed maturity, equity securities (including redeemable preferred
stocks) and investments in affiliates are based on quoted market prices.
Mortgage loans: The fair values for mortgage loans are estimated using
discounted cash flow analyses, using the actual spot rate yield curve in effect
at December 31.
Investment-type contracts: The fair values for the liabilities under
investment-type insurance contracts are calculated as surrender values on these
contracts.
Policy claims: The carrying amounts reported for policy claims approximate
their fair value.
The fair values for insurance contracts other than investment contracts are not
required to be disclosed under SFAS No. 107.
NOTES
NOTE D - Investment in Affiliates/Contractual Obligation of Affiliate
Investors Heritage's investment in the common stock of its parent, Kentucky
Investors, either directly or indirectly, was at December 31, 1996: Cost:
$2,188,840; Market: $4,370,971 and at December 31, 1995: Cost: $2,309,438;
Market: $4,406,088. Additionally, Investors Heritage holds notes receivable
from Kentucky Investors with unpaid principal balances of $646,554 and $747,753
at December 31, 1996 and 1995, respectively, with variable interest rates and
due dates from 2000 to 2004. Kentucky Investors owns approximately 74% of
Investors Heritage. Sales of Kentucky Investors common stock owned by Investors
Heritage are reported by Kentucky Investors as stock issuances. The
consideration received from such sales is recorded by Kentucky Investors as
follows: an adjustment to common stock at par value of securities sold, an
adjustment to retained earnings for the cost of securities sold in excess of
par value, and an adjustment to paid in surplus for the difference in
consideration received and cost of the securities paid by Investors Heritage.
NOTE E - Federal Income Tax
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets as of December 31 are as
follows:
Investors Heritage 1996 1995
Deferred tax liabilities:
Policy acquisition costs $ 7,547,000 $ 7,972,000
Net unrealized gain on available-for-sale securities
1,053,000 2,034,000
Other 360,000 235,000
----------- ------------
Total deferred tax liabilities
$ 8,960,000 $ 10,241,000
Deferred tax assets:
Benefit reserves $ 6,432,000 $ 6,286,000
Other 459,000 501,000
----------- -------------
Total deferred tax assets
$ 6,891,000 $ 6,787,000
Valuation allowance for deferred tax assets
-0- (252,000)
----------- ------------
Net deferred tax assets
$ 6,891,000 $ 6,535,000
----------- ------------
Net deferred tax liabilities of
Investors Heritage $ 2,069,000 $ 3,706,000
Kentucky Investors
Deferred tax liability:
Undistributed earnings in subsidiary
1,459,000 1,414,000
---------- ------------
Net deferred tax liabilities of
Kentucky Investors $ 3,528,000 $ 5,120,000
=========== ============
Federal income taxes in the consolidated balance sheets include deferred taxes.
In 1996 and 1995, taxes recoverable of $337,000 and $77,000, respectively is
included in other assets in the consolidated balance sheets.
NOTES
NOTE E - Continued
The reconciliation of income tax attributable to operations computed at the
federal statutory tax rate to income tax expense is:
1996 1995 1994
Statutory federal income tax rate 35.0 % 35.0 % 35.0 %
Graduated tax rate (1.0)% (1.0)% (1.0)%
Small life insurance company deduction (37.9)% (63.8)% (19.5)%
Dividend exclusion and tax-exempt
income (2.1)% (5.0)% (1.7)%
Increase (decrease) in valuation (16.2)% 27.6 %
Alternative minimum taxes 2.0 %
Purchase accounting differences. .5 % 2.3 % .7 %
Other, net 16.8 % 1.3 % .5 %
------- ------ ------
Effective income tax rate_
Investors Heritage (2.9)% (3.6)% 14.0 %
Consolidating adjustments 7.6% 5.9 % 3.6 %
------- ------ ------
Effective income tax rate_
Kentucky Investors 4.7% 2.3 % 17.6 %
===== ===== ======
At December 31, 1996 approximately $4,000,000 of the retained earnings of
Investors Heritage represents earnings prior to 1984 which accumulated in an
account known as policyholders' surplus, which was not subject to income
taxation. In certain circumstances, including if distributions are made to
stockholders in excess of approximately $26,000,000, Investors Heritage could
be subject to additional federal income tax unrelated to its normal taxable
income. No provision for such income tax has been provided for as management
foresees no events which would result in such tax being incurred.
Kentucky Investors made income tax payments of $65,693, $34,750 and $29,200 in
1996, 1995 and 1994, respectively. Investors Heritage made income tax payments
of $620,000, $445,614 and $2,450,000 in 1996, 1995 and 1994, respectively.
NOTE F - Employee Benefit Plans
Kentucky Investors and Investors Heritage participate in a noncontributory
retirement plan which covers substantially all employees. Benefits are based on
years of service and the highest consecutive 60 months average earnings within
the last 120 months of credited service. Benefits are funded based on
actuarially-determined amounts.
The following tables provide additional details for Kentucky Investors on a
consolidated basis. Because the amounts for the unconsolidated parent company
and Investors Heritage Printing, Inc. are immaterial, they are not separately
presented.
1996 1995 1994
Components of pension expense:
Service cost $ 295,721 $ 222,492 $ 212,612
Interest cost 343,151 289,538 244,073
Actual return on plan assets (335,567) (296,918) (269,622)
Net amortization and deferral 86,299 10,667 71,269
------------ ----------- -----------
Net periodic pension
expense $ 389,604 $ 225,779 $ 258,332
------------ ----------- -----------
Plan assets at fair value $ 4,057,709 $ 3,460,959 $ 3,050,765
NOTES
NOTE F - Continued
1996 1995 1994
Actuarial present value of projected benefit obligation:
Accumulated benefit obligations:
Vested $3,863,849 $ 3,356,652 $ 2,537,144
Nonvested 49,321 45,880 35,477
---------- ----------- -----------
$3,913,170 $ 3,402,532 $ 2,572,621
Provision for future salary increase
1,260,781 1,172,820 833,712
---------- ----------- -----------
Total projected benefit obligation
$5,173,951 $ 4,575,352 $ 3,406,333
Projected benefit obligation in excess
of fair value of plan assets
$1,116,242 $ 1,114,393 $ 355,568
Unrecognized net loss (1,133,852) (1,255,751) (506,848)
Unrecognized transition asset 170,717 204,861 239,004
---------- ----------- -----------
ACCRUED PENSION COST $ 153,107 $ 63,503 $ 87,724
========== =========== ===========
Excess of plan assets over
accumulated benefit obligations
$ 144,539 $ 58,427 $ 478,144
========== =========== ===========
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 7.5% for 1996 and 1995. The rate of increase
in future compensation levels was 5% for 1996, 1995 and 1994. The expected
long-term rate of return on plan assets was 9% in 1996, 1995 and 1994. Plan
assets represent a deposit administration fund of Investors Heritage.
Kentucky Investors and Investors Heritage also sponsor a 401(k) defined
contribution plan. Matching contributions to the plan expensed for 1996, 1995
and 1994 were $156,000, $150,000, and $131,000, respectively.
NOTE G - Stockholders' Equity and Dividend Restrictions
Statutory restrictions limit the amount of dividends which may be paid by
Investors Heritage. Generally, dividends during any year may not be paid,
without prior regulatory approval, in excess of the lessor of (a) 10 percent of
statutory stockholders' equity as of the preceding December 31, or
(b) statutory net income for the preceding year. In addition, dividends are
limited to the amount of unassigned surplus reported for statutory purposes,
which was $8,707,742 at December 31, 1996.
NOTE H - Statutory Accounting Practices
Investors Heritage's statutory-basis capital and surplus was $12,818,202 and
$15,061,860 at December 31, 1996 and 1995; respectively. Statutory-basis net
income was $1,422,626, $2,063,471, and $2,486,925 for the years ended December
31, 1996, 1995 and 1994, respectively.
Principle adjustments to statutory amounts to derive GAAP amounts include: a)
costs of acquiring new policies are deferred and amortized; b) benefit reserves
are calculated using more realistic investment, mortality and withdrawal
assumptions; c) deferred income taxes are provided; d) value of business
acquired and goodwill are established for acquired companies; and e) accounting
for certain investments in debt securities.
Investors Heritage is domiciled in the Commonwealth of Kentucky and prepares
its statutory-basis financial statements in accordance with accounting
practices prescribed or permitted by the Kentucky Department of Insurance.
"Prescribed" statutory accounting practices include state laws, regulations,
and general administrative rules, as well as a variety of publications of the
National Association of Insurance Commissioners ("NAIC"). "Permitted"
statutory accounting practices encompass all accounting practices that are not
prescribed; such practices may differ from state to state, may differ from
company to company.
NOTES
NOTE H - continued
company within a state, and may change in the future. The NAIC currently is in
the process of recodifying statutory accounting practices, the result of which
is expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in
1999, will likely change, to some extent, prescribed statutory accounting
practices, and may result in changes to the accounting practices that insurance
enterprises use to prepare their statutory financial statements. It is not
feasible to discuss the expected impact to the Company of the recodification of
statutory accounting practices since no changes have been determined with any
certainty.
In 1995 Investors Heritage entered into an agreement with the Kentucky
Department of Insurance (the "Department") with regard to the valuation of
certain assets held by Investors Heritage. Under the agreement Investors
Heritage would write down the statutory value
of the home office real estate owned from market to depreciated cost over a
five-year period and would write down to zero its investment in the common
stock of Investors Underwriters, Inc. (subsidiary) and its investment in the
common stock of Kentucky Investors over a three-year period. During 1995 the
assets were written down by $1,527,826. After consideration of the Asset
Valuation Reserve (AVR) related to the write downs the net effect to statutory
surplus at December 31, 1995 was a reduction of $395,071.
At December 31, 1995, the Department permitted Investors Heritage to carry its
notes receivable from Kentucky Investors at its unpaid balance of $747,753.
During 1996, the Department informed Investors Heritage that its notes
receivable from Kentucky Investors would have to be written down to zero over a
seven year period.
At the end of 1996, Investors Heritage requested and was granted permission by
the Department to accelerate the write downs of its investments in common stock
of affiliates and its notes receivable from Kentucky Investors (previously
agreed-upon to be recognized over future years) to be recognized entirely
during 1996. Home office real estate owned will continue to be written down to
depreciated cost over the agreed-upon five year period. The amount of the
writedown to be recognized in future years associated with the home office real
estate owned is $1,426,938. The effect on capital and surplus at December 31,
1996 attributable to the previously agreed-upon writedown plan and attributable
to the 1996 acceleration was $1,797,640 and $2,089,120, respectively. The net
effect on capital and surplus for all writedowns recognized during 1996 was a
reduction of $2,966,919 after consideration of the offsetting effect to AVR.
The acceleration of writedowns in 1996 was requested by Investors Heritage
primarily for two reasons: 1) the capital adequacy ratio of Investors Heritage
as determined by a nationally recognized insurance company rating service was
significantly improved by the elimination of affiliated investments from the
rating formula, and 2) the immediate writedown of such assets to zero in 1996
will eliminate the strain on capital and surplus in future years and allow
Investors Heritage to generate positive capital and surplus growth from its on-
going operations.
NOTE I - Segment and Reinsurance Data
Investors Heritage operates in four segments as shown in the following tables.
All segments except Corporate include both individual and group insurance.
Identifiable revenues, expenses and assets are assigned directly to the
applicable segment. Net investment income and invested assets are generally
allocated to the insurance and the corporate segments in proportion to policy
liabilities and stockholders' equity, respectively. Certain assets, such as
property and equipment, are assigned to the Corporate segment. Goodwill has
been allocated
NOTES
NOTE I - continued
to the insurance lines based upon the mix of business of companies acquired.
Corporate segment results for the parent company, Investors Heritage Printing,
Inc., and Investors Heritage Financial Services Group are immaterial, after
elimination of intercompany amounts, and are not presented.
1996 1995 1994
(000's omitted)
Revenue:
Life & Annuities $ 46,852 $ 42,437 $ 38,916
Credit(Life & A&H) (362) (802) 5,431
Accident & Health 597 1,126 1,139
Corporate 693 1,315 1,318
--------- ---------- ---------
$ 47,780 $ 44,076 $ 46,804
========= ========== =========
Pre-Tax Income from Operations:
Life & Annuities $ 2,295 $ 1,143 $ 2,868
Credit(Life & A&H) (604) (826) (1,095)
Accident & Health 25 108 430
Corporate (160) 460 589
--------- ---------- ---------
$ 1,556 $ 885 $ 2,792
========= ========== =========
Assets:
Life & Annuities $ 179,728 $ 163,834 $ 143,789
Credit(Life & A&H) 10,329 8,186 20,107
Accident & Health 933 1,692 1,811
Corporate 36,150 36,778 28,555
-------- ---------- --------
$ 227,140 $ 210,490 $ 194,262
========= ========== =========
Amortization and Depreciation Expense:
Life & Annuities $ 4,433 $ 2,874 $ 4,303
Credit(Life & A&H) 1,227 2,672 4,971
Accident & Health 300 605 906
Corporate 248 248 264
-------- ---------- ----------
$ 6,208 $ 6,399 $ 10,444
========= ========== ==========
For 1995, the development of segment data was derived using a revised
allocation methodology. Such change in approach was applied and amounts have
been restated for the 1994 segment data presented above. This change in
approach was made to enhance the allocation of costs and revenues to coincide
with resources used by the segment and revenues earned. As a result of this
change, revenues for the Life and Annuities segment increased $446,000 for
1994. Revenues for the Corporate segment decreased $497,000 for 1994. Pre-Tax
Income from Operations for the Life and Annuities segment increased $115,000
for 1994. Pre-Tax Income from Operations for the Corporate segment decreased
$193,000 in 1994. The effect on other segment classifications presented above
was immaterial. The 1996 segment information was developed using a consistent
approach with that used to derive the 1995 and 1994 information presented
above.
Investors Heritage ceded 100% of the risks associated with its credit life and
accident insurance written during 1996 through a coinsurance agreement with
Connecticut General Life Insurance Company. Investors Heritage administers the
ceded credit life and accident insurance for an agreed-upon fee. During 1996,
Investors Heritage recognized $410,062 of
NOTES
NOTE I - continued
fee income associated with this reinsurance arrangement. Benefit and claim
reserves ceded to Connecticut General Life Insurance Company associated with
this reinsurance arrangement at December 31, 1996 were $5,451,435.
Additionally, Investors Heritage utilizes yearly renewable term reinsurance to
cede life insurance coverage in excess of its retention limit which has been
set at $100,000. Total premiums ceded amounted to $9,978,000 and $1,135,000 in
1996 and 1995, respectively, and commissions and expense allowances received
were $5,795,000 and $166,000 in 1996 and 1995, respectively. Unearned premium
reserves were reduced by $7,325,000 and $2,048,000 at December 31, 1996 and
1995, respectively, for credit-related reinsurance transactions. Benefit
recoveries associated with Investors Heritage ceded reinsurance contracts were
$1,421,000 and $2,773,000 in 1996 and 1995, respectively. Investors Heritage
remains contingently liable on all ceded insurance should any reinsurer be
unable to meet their obligations. Assumed reinsurance premiums were $3,734,000
and $4,348,000 in 1996 and 1995, respectively.
NOTE J - Contingent Liabilities
Investors Heritage is named as a defendant in a number of legal actions arising
primarily from claims made under insurance policies. Management and its legal
counsel are of the opinion that the settlement of those actions will not have a
material adverse effect on Investors Heritage's financial position or results
of operations.
In most of the states in which Investors Heritage is licensed to do business,
guaranty fund assessments may be taken as a credit against premium taxes over a
five year period. These assessments, brought about by the insolvency of life
and health insurers, are levied at the discretion of the various state guaranty
fund associations to cover association obligations. There has been a
significant increase in recent years of guaranty fund assessments. There is no
reasonable way to determine if the assessments will increase or decrease in the
future, but management is of the opinion that the effect would not be material
on the financial position or results of operations of either Investors Heritage
or Kentucky Investors because of the use of premium tax off-sets.
TERRITORY
A map appears on this page which highlights the states in which the Company is
licensed to do business. These states are Alabama, Arizona, Arkansas, Colorado,
Florida, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Michigan,
Mississippi, Missouri, Montana, Nebraska, New Mexico, North Carolina, North
Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah,
Virginia, West Virginia.
The Company logo appears also on this page with Company address.
Investors Heritage Life Insurance Company
200 Capital Avenue
Frankfort, Kentucky 40601
Stock Information
Stock Prices
NASDAQ OVER-THE-COUNTER MARKET QUOTATIONS
Investors Heritage Life Insurance Company
1996 MARKET PRICE RANGE
March 26-28
June 26-28
Sept. 26-28
Dec. 26-28
1996 Annual Dividend Per Share - $.76
1995 MARKET PRICE RANGE
March 26-28
June 26-28
Sept. 26-28
Dec. 26-28
1995 Annual Dividend Per share - $.76
Kentucky Investors, Inc.
1996 MARKET PRICE RANGE
March 12 7/8 13 3/4
June 13 13 3/4
Sept. 13 13 5/8
Dec. 13 13 3/4
1996 Annual Dividend Per Share - $.38
1995 MARKET PRICE RANGE
March 12 1/2 13 1/2
June 12 1/2 13 1/2
Sept. 12 3/4 13 3/4
Dec. 12 3/4 13 3/4
1995 Annual Dividend Per Share - $.38
The stock of both companies is traded on over-the-counter market. Both stocks
are on the NASDAQ system. The quotations reflect inter-dealer prices, without
retail mark-up, mark-down, or commission, and may not represent actual
transactions. The symbol for Investors Heritage Life is INLF and the symbol
for Kentucky Investors is KINV.
The 1997 cash dividend to be paid to its stockholders by Investors Heritage
Life on April 11, 1997 is $.76 per share, and the cash dividend to be paid on
the same date to its shareholders by Kentucky Investors is $.38 per share.
ANNUAL MEETING
The 1997 meeting of shareholders of Investors Heritage Life Insurance Company
is scheduled for 10 a.m. on Thursday, May 8, 1997, at the company auditorium,
Second and Shelby Streets, Frankfort, Kentucky. The annual meeting of
shareholders of Kentucky Investors, Inc., is scheduled for the same date and
location at 11 a.m.
FORM 10-K
A copy of the Form 10-K Annual Report to the Securities and Exchange Commission
for either Company can be obtained upon request to the Secretary of that
company.
TRANSFER AGENT
Investors Heritage Life Insurance Company
Stock Transfer Department
P.O. Box 717
Frankfort, Kentucky 40602
(502) 223-2364 - EXT. 305