SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
QUARTERLY REPORT
Under Section 13 or 15 (d) of the Securities Exchange Act of 1934
FOR THREE MONTHS ENDED
March 31, 1999
Commission File: 0-3216
INVESTORS HERITAGE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in Charter)
KENTUCKY
(State of Other Jurisdiction of Incorporation or Organization)
61-0574893
(IRS Employer Identification Number)
200 Capital Avenue, P. O. Box 717
Frankfort, Kentucky 40602
(Address of Principal Executive Offices)
Registrant's Telephone Number - (502) 223-2361
Securities registered pursuant to Section 13(g) of the Act:
Common Capital Stock par value $1.00 per share
(Title of Class)
Number of outstanding shares as of March 31, 1999 - 904,439
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes X No ____
PART I - CONSOLIDATED FINANCIAL STATEMENTS
ITEM 1. The following consolidated statements have been prepared by management
in accordance with generally accepted accounting principles ("GAAP"). In
management's opinion, all adjustments and certain reclassifications necessary
for a fair statement of financial position at March 31, 1999 and December 31,
1998 and the results of operations for the three months ended March 31, 1999 and
1998 have been made.
INVESTORS HERITAGE LIFE INSURANCE COMPANY
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, 1999 December 31, 1998
Assets
Investments
Fixed maturities available-for-sale at
fair value (amortized cost:
1999-$185,812,512; 1998-
$181,886,791) $192,959,373 $193,911,467
Mortgage loans on real estate 14,987,494 16,189,127
Other investments 14,142,142 14,457,293
Total investments $222,089,009 $224,557,887
Cash and cash equivalents 4,267,073 2,461,887
Due and deferred premiums 2,880,786 4,129,967
Deferred acquisition costs 28,425,236 27,288,684
Other assets 8,156,895 8,030,475
Amounts recoverable from reinsurers 25,183,637 23,355,631
$291,002,636 $289,824,531
Liabilities and Stockholders' Equity
Liabilities
Policy liabilities:
Benefit reserves $210,683,643 $207,115,725
Unearned premium reserves 20,813,100 20,069,565
Other policyholders' funds 3,768,386 3,924,918
Total policy liabilities $235,265,129 $231,110,208
Other liabilities 10,749,616 10,878,407
Total liabilities $246,014,745 $241,988,615
Stockholders' Equity
Common stock (shares issued:
1999-904,439; 1998-904,373) $ 1,447,902 $ 1,447,797
Paid-in surplus 3,777,035 3,777,101
Accumulated other comprehensive income 5,714,710 8,594,131
Retained earnings 34,048,244 34,016,887
Total stockholders' equity $ 44,987,891 $ 47,835,916
$291,002,636 $289,824,531
See accompanying notes.
INVESTORS HERITAGE LIFE INSURANCE COMPANY
Condensed Consolidated Income Statements (Unaudited)
Three Months Ended March 31
1999 1998
REVENUES
Premiums and other considerations $10,871,846 $10,739,762
Investment income, net of expense 3,752,975 3,480,141
Realized gain on investments, net 25,459 17,567
Other income 89,590 71,706
Total revenues $14,739,870 $14,309,176
BENEFITS AND EXPENSES
Death and other policyholder
benefits $ 6,371,114 $ 6,024,969
Increase in benefit reserves and
unearned premiums 4,480,493 4,208,614
Amortization of deferred
acquisition costs, net (624,681) 23,195
Commissions 1,425,359 1,235,644
Other insurance expenses 2,091,585 2,024,876
Total benefits and expenses $13,743,870 $13,517,298
Income from operations before Federal
income tax $ 996,000 $ 791,878
Provision for income taxes:
Current $ 11,000 $ 45,695
Deferred 267,880 120,599
$ 278,880 $ 166,294
Net Income $ 717,120 $ 625,584
Earnings per share $ 0.79 $ 0.69
Dividends per share $ 0.76 $ 0.76
See accompanying notes.
INVESTORS HERITAGE LIFE INSURANCE COMPANY
Condensed Consolidated Statements of Cash Flow (Unaudited)
Three Months Ended March 31
1999 1998
Net cash provided by operating activities $ 5,976,931 $ 6,324,740
Investing activities
Securities available-for-sale:
Purchases $ (9,030,419) $ (6,315,929)
Sales and maturities 5,281,318 l,369,978
Other investments:
Cost of acquisition (72,948) (900,581)
Sales and maturities 1,434,124 838,876
Other investing activities (99,345) (29,555)
Net cash used by investing activities $ (2,487,270) $ (5,037,211)
Financing Activities
Receipts from universal life policies
credited to policyholder
account balances $ 1,066,762 $ 1,343,773
Return of policyholder account
balances on universal
life policies (2,065,513) (1,607,306)
Other financing activities (685,724) (705,503)
Net cash used by financing activities $ (1,684,475) $ (969,036)
Increase in cash and cash equivalents $ 1,805,186 $ 318,493
Cash and cash equivalents at beginning
of period 2,461,887 2,902,587
Cash and cash equivalents at end of period $ 4,267,073 $ 3,221,080
See accompanying notes.
INVESTORS HERITAGE LIFE INSURANCE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
NOTE A - Nature of Operations: Kentucky Investors, Inc. (Kentucky Investors) is
the holding company of Investors Heritage Life Insurance Company (the
Company), Investors Heritage Printing, Inc., a printing company and Investors
Heritage Financial Services Group, Inc., an insurance marketing company.
The Company's operations involve the sale and administration of various
insurance and annuity products, including, but not limited to, participating,
non-participating, whole life, limited pay, universal life, annuity contracts,
credit life, credit accident and health and group insurance policies. The
principal markets for the Company products are in the Commonwealths of
Kentucky and Virginia, and the states of North Carolina, South Carolina, Ohio,
Indiana, Florida, Tennessee, Illinois, Georgia, West Virginia and Texas.
NOTE B - Basis of Presentation: The accompanying unaudited condensed
consolidated financial statements of the Company and subsidiary have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 1999, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended December 31, 1998,
included in the Company's Annual Report on Form 10-K.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
NOTE C - Earnings per Share: Earnings per share of common stock were computed
based on the weighted average number of common shares outstanding during each
period. The number of shares used in this computation for Investors Heritage is
904,430 and 905,534 for March 31, 1999 and 1998, respectively.
NOTE D - Segment Data: The Company operates in four segments as shown in
the following table. All segments include both individual and group insurance.
Identifiable revenues and expenses are assigned directly to the applicable
segment. Net investment income is generally allocated to the insurance and the
corporate segments in proportion to policy liabilities and stockholders' equity,
respectively.
March 31, 1999 March 31, 1998
Revenues:
Preneed & Burial Products $10,838,617 $10,349,976
Traditional & Universal Life
Products 3,414,610 3,492,832
Credit Insurance Products &
Administrative Services 70,577 48,629
Corporate & Other 416,066 417,739
$14,739,870 $14,309,176
Pre-Tax Income from Operations:
Preneed & Burial Products $ 794,996 $ 570,050
Traditional & Universal Life
Products 205,457 295,138
Credit Insurance Products &
Administrative Services (60,715) (130,756)
Corporate & Other 56,262 57,446
$ 996,000 $ 791,878
NOTE E - Federal Income Taxes: Current taxes are provided based on estimates of
the projected effective annual tax rate. Deferred taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes.
NOTE F - Comprehensive Income: The components of comprehensive income (loss),
net of related tax, for the three months ended March 31, 1999 and 1998 are as
follows:
March 31, 1999 March 31, 1998
Net income $ 717,120 $ 625,584
Net unrealized gains (losses) on
available-for-sale (2,879,421) 289,330
securities
Comprehensive income (loss) $(2,162,301) $ 914,914
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Investors Heritage Life Insurance Company (the "Company") is a life insurance
company incorporated under the laws of the Commonwealth of Kentucky. The
Company offers a full line of life insurance products including, but not limited
to, whole life, term life, single premium life, multi-pay life and annuities.
The Company's primary lines of business are insurance policies and annuities
utilized to fund preneed funeral contracts, credit life and credit disability
insurance, and term life and reducing term life sold through financial
institutions. During 1998 the Company introduced the Legacy 2000 Series of
products to the preneed funeral market. The Company's operating earnings are
derived primarily from revenues generated from the sale of life insurance
policies plus the Company's investment results, including realized gains
(losses), less interest credited, benefits to policyholders and expenses.
Investments, Liquidity and Capital Resources
Premiums, which include mortality and expense charges, and investment income are
the Company's primary sources of cash flow used to meet short-term and long-term
cash requirements.
The Company's short-term obligations consist primarily of policyholder benefits
and operating expenses. The Company has historically been able to meet these
obligations out of operating cash, premiums and investment income.
Management is not aware of any commitments or unusual events that could
materially affect capital resources. The Company has no long-term or short-term
external debt. However, the Company will continue to explore various
opportunities including corporate reorganizations, acquisitions and purchasing
blocks of business from other companies, which may dictate a need for either
long-term or short-term debt.
The Company has maintained a sound, conservative investment strategy. At March
31, 1999, 86.9% of invested assets consisted of fixed income public bonds
compared to 86.4% at December 31, 1998. Fixed income assets are managed by
Charter Oak Capital Management, Inc., an independent portfolio manager.
Additionally, the Company also engages in commercial and residential mortgage
lending with approximately 92% of these investments being in commercial
properties. All mortgage loans are originated in-house and all loans are secured
by first mortgages on the real estate. At March 31, 1999, 6.7% of invested
assets consisted of mortgage loans compared to 7.2% at December 31, 1998.
$1,074,000 of the decrease is due to the early pay-off of several mortgage loans
as a result of the sale or refinancing of the property. Management anticipates
funding several new mortgage loan investments during the remainder of 1999 to
maintain a similar or slightly higher percentage of mortgage loans to total
invested assets.
The Company's conservative approach in the product development area and the
strength and stability of its fixed income and mortgage loan portfolios provide
adequate liquidity both in the short-term and the long-term. At March 31, 1999
the Company's fixed income investments were 100% investment grade as rated by
Standard & Poor's, unchanged from December 31, 1998. None of the Company's fixed
income assets are in default and there has been no material change in the
distribution of the Company's fixed income portfolio.
The Company's principal long-term obligations are fixed contractual obligations
incurred in the sale of its life insurance products. The premium charged for
these products are based on conservative and actuarially sound assumptions as to
mortality, persistency and interest. The Company believes these assumptions
will produce revenues sufficient to meet its future contractual benefit
obligations and operating expenses, and provide an adequate profit margin.
Results of Operations
Total premium income (net of reinsurance) increased 1.2% when compared to the
first quarter of 1998. Net investment income for the first quarter 1999
increased 7.8% compared to the first quarter of 1998 primarily due to the
increase in the Company's asset base. Overall Revenue for the first quarter
1999 increased 3.0% when compared to the first quarter 1998.
Total Benefits and Expenses were 1.7% higher in the first quarter 1999 when
compared to the same quarter of 1998. After providing for federal income taxes,
Net Income was $717,120 with Earnings per share of $0.79 for the first three
months of 1999 as compared to Net Income of $625,584 and Earnings per share of
$0.69 for the same period in 1998.
Business Segments
Management internally evaluates the performance of Company operations by the
following business segments:
Preneed & Burial Products includes both life and annuity products sold by
funeral directors or affiliated agents to fund prearranged funerals. Revenues
for this segment were 4.7% higher for the first quarter of 1999 when compared to
the same period of 1998. The increase is due to increased sales of the Company's
Legacy 2000 Series of Preneed and Burial Products used in the pre-arranged
funeral and final expense markets. Pre-Tax Income from Operations during the
first quarter 1999 was 39.5% higher than the comparable period for 1998 due
primarily to higher than anticipated sales of non-single premium Legacy 2000
Series products combined with the new commission structure on those products.
The Company plans to continue its expansion of territory and recruitment of
agents in the Preneed and Burial insurance market.
Traditional & Universal Life Products includes traditional life and group life
insurance products, annuities (primarily qualified) and universal life products.
Revenues for this segment were 2.2% lower for the first quarter of 1999 when
compared to the first quarter of 1998. Pre-Tax Income from Operations for the
first quarter 1999 was 30.4% lower than the comparable period for 1998 primarily
due to lower than anticipated profits in the Company's traditional whole life
participating product as well as the increased administrative cost of
maintaining a block of reduced paid-up business. Revenues for the first quarter
1999 were slightly lower than projected. Pre-Tax Income for the same period was
lower than projected, primarily due to higher than projected claims. Management
anticipates improvement in this segment during the balance of 1999.
Credit Insurance Products & Administrative Services includes the marketing and
administration of credit life and credit accident & health insurance products.
Revenues were 45.1% higher and Pre- tax income has improved 53.6% for the first
quarter of 1999 when compared to the first quarter of 1998 primarily due to the
reduction in the run-off of a closed block of credit business combined with
increased service fees on new credit business. All of the related underwriting
risk currently produced is being reinsured 100% with highly-rated life
companies.
Corporate & Other consists of corporate accounts measured primarily by
stockholders' paid-in capital, contributed surplus, earned surplus, property and
equipment, investments in affiliates and other minor business lines which
include group annuities and group and individual accident and health products.
Revenues were 0.4% lower for the first quarter of 1999 when compared to the same
period of 1998. Pre-Tax Income was 2.1% lower for the first quarter of 1999
when compared to the first quarter of 1998. The decreases in Revenues and Pre-
Tax Income are primarily due to the continued run-off of a closed block of group
accident and health insurance and claims associated with that block.
Federal Income Taxes
Current taxes are provided based on estimates of the projected effective annual
tax rate.
Deferred taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. The effective tax rate was 28% at
March 31, 1999 compared to 21% for March 31, 1998. The increase in the
effective tax rate is due primarily to the reduced benefit of the small
life insurance company deduction resulting from an increase in net income.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs being written using 2-
digits rather than 4-digits to define the applicable year. Any computer program
that has time sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculation causing disruption of operations, including, among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
The Company recognized the Year 2000 Issue in 1988 and began working on a
solution at that time. The Information Systems Department has worked diligently
to make modifications to existing software so that the Year 2000 Issue will not
pose significant operational problems for its computer systems. As of year end
1995, the Company's systems were in full compliance with all Year 2000 Issue
requirements and it is anticipated that there will be no exposure to
contingencies related to the Year 2000 Issue for the products it has sold. The
cost to implement system changes related to the Year 2000 issue has been
nominal.
Although the Company does not anticipate any major interruption of business
activities, that will be dependent, in part, upon the activities of third
parties. Management has initiated formal communications with all of its
significant reinsurers, vendors, and financial institutions and has been advised
that all are either in full compliance or anticipate being in full compliance
prior to June 30, 1999. Even though the Company has assessed and continues to
assess third party issues, it has no direct ability to influence the compliance
actions of such parties. Accordingly, there can be no guarantee that the
systems of other companies on which Investors Heritage relies will be Year 2000
compliant, leading to an adverse effect on future operating results of the
Company.
Forward Looking Information
The Company cautions readers regarding certain forward-looking statements
contained in this report and in any other statements made by, or on behalf of,
the Company, whether or not in future filings with the Securities and Exchange
Commission (the "SEC"). Forward-looking statements are statements not based on
historical information and which relate to future operations, strategies,
financial results, or other developments. Statements using verbs such as
"expect," "anticipate," "believe" or words of similar import generally involve
forward-looking statements. Without limiting the foregoing, forward-looking
statements include statements which represent the Company's beliefs concerning
future levels of sales and redemptions of the Company's products, investment
spreads and yields, or the earnings and profitability of the Company's
activities.
Forward-looking statements are necessarily based on estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Company's control
and many of which are subject to change. These uncertainties and contingencies
could cause actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company. Whether or
not actual results differ materially from forward-looking statements may depend
on numerous foreseeable and unforeseeable factors and developments. Some of
these may be national in scope, such as general economic conditions, changes in
tax law and changes in interest rates. Some may be related to the insurance
industry generally, such as pricing competition, regulatory developments,
industry consolidation and the effects of competition in the insurance business
from other insurance companies and other financial institutions operation in the
Company's market area and elsewhere. Others may relate to the Company
specifically, such as credit, volatility and other risks associated with the
Company's investment portfolio. The Company cautions that such factors are not
exclusive. The Company disclaims any obligation to update forward-looking
information.
PART II _ OTHER INFORMATION
Item 1. Legal Proceedings
From time to time the Company is involved in litigation relating claims arising
out of its operations in the normal course of business. As of May 10, 1999, the
Company is not a party to any legal proceedings, the adverse outcome of which,
in management's opinion, individually or in the aggregate, would have a material
adverse effect on the Company's financial condition or results of operations.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 27 - Financial Data Schedule.
b) Reports on Form 8-K
No reports on Form 8-K were for the quarter ended March 31,1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INVESTORS HERITAGE LIFE INSURANCE COMPANY
/s/
BY: HARRY LEE WATERFIELD II
PRESIDENT
DATE: May 12, 1999
/s/
BY: JIMMY R. MCIVER
TREASURER
DATE: May 12, 1999