SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC

FORM 10-Q

QUARTERLY REPORT

Under Section 13 or 15(d) of the Securities Exchange Act of 1934

FOR THREE AND NINE MONTHS ENDED

SEPTEMBER 30, 2004

Commission File: 0-1999

KENTUCKY INVESTORS, INC.

(Exact Name of registrant as specified in Charter)

KENTUCKY 

(State of Other Jurisdiction of Incorporation or Organization)

61-6030333

(IRS Employer Identification Number)

200 Capital Avenue, P. O. Box 717

Frankfort, Kentucky 40602

(Address of Principal Executive Offices)

Registrant's Telephone Number - (502) 223-2361

Securities registered pursuant to Section 13(g) of the Act:

Common Capital Stock par value $1.00 per share

(Title of Class)

Number of outstanding shares as of September 30, 2004 - 1,129,924.72

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      

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes       No   X  

CONTENTS

PART I - FINANCIAL INFORMATION

Page

ITEM 1.

Consolidated Financial Statements

3

ITEM 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

12

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

20

ITEM 4.

Controls and Procedures

20

PART II - OTHER INFORMATION

ITEM 1.

Legal Proceedings

21

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

21

ITEM 3.

Defaults Upon Senior Securities

21

ITEM 4.

Submission of Matters to a Vote of Security Holders

21

ITEM 5.

Other Information

21

ITEM 6.

Exhibits and Reports on Form 8-K

22

SIGNATURES

22

EXHIBIT 31.1

23

EXHIBIT 31.2

24

EXHIBIT 32

25

PART I - FINANCIAL INFORMATION

ITEM 1. Consolidated Financial Statements

KENTUCKY INVESTORS, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

September 30, 2004

December 31, 2003

Assets

   Investments

     Securities available for sale, at fair

         value:

       Fixed maturities (amortized cost

         2004-$269,568,083; 2003 -

         $265,097,987)

$287,550,049

$284,531,244

       Equity securities (cost: 2004 -

         $4,997,915; 2003 - $4,997,915)

5,955,159

5,872,424

   Mortgage loans on real estate

24,478,146

25,749,708

   Other long term investments

750,957

557,461

   Short term investments

884,399

813,000

   Policy loans

     7,522,699

     7,918,258

       Total investments

327,141,409

325,442,095

   Cash and cash equivalents

3,084,645

5,844,281

   Due and deferred premiums

4,251,882

4,441,828

   Deferred acquisition costs

22,800,044

23,298,369

   Present value of future profits

414,033

482,721

   Leased property under capital leases

138,415

227,822

   Other assets

20,216,658

9,272,869

   Amounts recoverable from reinsurers

    58,492,712

    60,465,147

Total assets

$436,539,798

$429,475,132

Liabilities and Stockholders' Equity

   Liabilities

     Policy liabilities

       Benefit reserves

$331,968,629

$335,604,439

       Unearned premium reserves

15,803,097

17,014,697

       Other policyholders' funds

     3,699,911

     3,728,729

         Total policy liabilities

351,471,637

356,347,865

       Federal income taxes

9,530,898

9,673,564

       Obligations under capital leases

134,939

224,628

       Notes payable

8,915,444

9,033,355

       Other liabilities

     16,158,434

      4,041,199

       Total liabilities

386,211,352

379,320,611

Stockholders' Equity

   Common Stock (shares issued:

     2004 - 1,129,925, 2003 -

1,136,361)

    1,129,925

    1,136,361

   Paid-in surplus

8,549,970

8,549,970

   Accumulated other comprehensive

     income

11,506,539

12,139,714

   Retained earnings

    29,142,012

    28,328,476

       Total stockholders' equity

$  50,328,446

$  50,154,521

Total liabilities and stockholders'

     equity

$436,539,798

$429,475,132

See accompanying notes.

KENTUCKY INVESTORS, INC.

Condensed Consolidated Income Statements (Unaudited)

Three Months Ended September 30

           2004

            2003

REVENUES

   Premiums and other considerations

$  9,125,243 

$10,699,479

   Investment income, net of expenses

4,647,233 

4,386,931

   Realized gain on investments, net

2,050 

343,948

   Other income

      276,080 

      243,853

      Total revenues

$14,050,606 

 $15,674,211

BENEFITS AND EXPENSES

   Death and other policyholder benefits

14,255,743 

  8,092,330 

   Guaranteed annual endowments

148,037 

153,555 

   Dividends to policyholders

137,782 

170,111 

   Increase (decrease) in benefit reserves

     and unearned premiums

(4,438,301)

3,445,070 

   Amortization of deferred acquisition

     costs, net

278,720 

365,997 

   Commissions

611,571 

820,692 

   Other insurance expenses

    2,321,643 

    2,909,933 

      Total benefits and expenses

$13,315,195 

$15,957,688 

Income (loss) from operations before

     federal income tax

$     735,411 

$   (283,477)

Provision (benefit) for income taxes:

   Current

$       15,418 

$   (178,081)

   Deferred

         38,000 

       102,000 

$       53,418 

$     (76,081)

Net income (loss)

$     681,993 

$   (207,396)

Earnings per share, basic and diluted

$           0.60 

$         (0.18)

Dividends per share

$           0.00 

$           0.00 

See accompanying notes.

KENTUCKY INVESTORS, INC.

Condensed Consolidated Income Statements (Unaudited)

Nine Months Ended September 30

           2004

            2003

REVENUES

   Premiums and other considerations

$28,341,874 

$31,932,317 

   Investment income, net of expenses

13,690,102 

13,617,978 

   Realized gain on investments, net

156,351 

869,028 

   Other income

   1,042,314 

      802,574 

      Total revenues

$43,230,641 

$47,221,897 

BENEFITS AND EXPENSES

   Death and other policyholder benefits

33,296,340 

  24,971,581 

   Guaranteed annual endowments

506,940 

518,703 

   Dividends to policyholders

501,047 

535,485 

   Increase (decrease) in benefit reserves

     and unearned premiums

(2,730,773)

8,775,856 

   Amortization of deferred acquisition

     costs, net

907,525 

763,588 

   Commissions

1,930,072 

2,655,419 

   Other insurance expenses

    7,121,869 

    8,650,792 

      Total benefits and expenses

$41,533,020 

$46,871,424 

Income from operations before

     federal income tax

$  1,697,621 

$     350,473 

Provision for income taxes:

   Current

$       47,483 

$      44,077 

   Deferred

      207,000 

       41,000 

$     254,483 

$      85,077 

Net income

$  1,443,138 

$    265,396 

Earnings per share, basic and diluted

$           1.27 

$          0.23 

Dividends per share

$           0.38 

$          0.38 

See accompanying notes.

KENTUCKY INVESTORS, INC.

Condensed Consolidated Statements of Cash Flow (Unaudited)

Nine Months Ended September 30

2004

2003

Net cash provided by operating activities

$  1,402,647 

$   9,552,300 

Investing activities

   Securities available-for-sale:

     Purchases

(26,421,743)

(63,780,653)

     Sales and maturities

21,799,264 

54,081,908 

   Other investments:

     Cost of acquisition

(1,932,481)

(3,688,420)

     Sales and maturities

3,334,707 

3,215,695 

   Other investing activities

        35,712 

      (256,012)

Net cash used by investing activities

(3,184,541)

(10,427,482)

Financing activities

   Receipts from universal life policies

     credited to policyholder account

     balances

6,008,518 

5,873,353 

   Return of policyholder account balances

     on universal life policies

(6,232,310)

(5,773,247)

   Payments on notes payable

(561,911)

(625,726)

   Proceeds from notes payable

444,000 

214,042 

   Other financing activities

    (636,039)

     (303,484)

Net cash used by financing activities

    (977,742)

     (615,062)

Decrease in cash and cash

     equivalents

(2,759,636)

(1,490,244)

Cash and cash equivalents at beginning

    of period

    5,844,281 

    7,773,597 

Cash and cash equivalents at end of period

$  3,084,645 

$  6,283,353 

See accompanying notes.

KENTUCKY INVESTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004

(Unaudited)

NOTE A - Nature of Operations: Kentucky Investors, Inc. is the holding company of Investors Heritage Life Insurance Company, Investors Heritage Printing, Inc., a printing company, Investors Heritage Financial Services Group, Inc., an insurance marketing company, and is the sole member of At Need Funding, LLC, a limited liability company that provides advance funding of funerals in exchange for the irrevocable assignment of life insurance policies from other nonaffiliated companies. These entities are collectively hereinafter referred to as the "Company". The operations of Kentucky Investors are principally that of its life insurance company, Investors Heritage Life. The operations of the non-insurance subsidiaries of Kentucky Investors account for less than 2% of the Company's total operations.

The Company's operations involve the sale and administration of various insurance and annuity products, including, but not limited to, participating, non-participating, whole life, limited pay, universal life, annuity contracts, credit life, credit accident and health and group insurance policies. The principal markets for the Company's products are in the Commonwealths of Kentucky and Virginia, and the states of North Carolina, South Carolina, Ohio, Indiana, Florida, Tennessee, Illinois, Georgia, West Virginia, Michigan, Mississippi, Alabama and Maryland.

NOTE B - Basis of Presentation: The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2003, as included in the C ompany's Annual Report on Form 10-K.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

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.

Income

Shares

Per Share

Amount

Three months ended September 30, 2004

Basic EPS

Net income

$   681,993 

1,129,925 

$       0.60

Dilutive effect of common equivalent shares of

   stock options

                 -

        3,012 

               -

Diluted EPS

Net income

$   681,993 

1,132,937 

$       0.60

Three months ended September 30, 2003

Basic EPS

Net loss

$ (207,396)

1,148,510 

$    (0.18)

Dilutive effect of common equivalent shares of

   stock options

                 -

                -

               -

Diluted EPS

Net loss

$ (207,396)

1,148,510 

$   ( 0.18)

Income

Shares

Per Share

Amount

Nine months ended September 30, 2004

Basic EPS

Net income

$ 1,443,138 

1,131,874 

$     1.27 

Dilutive effect of common equivalent shares of

   stock options

                 -

       3,012 

              -

Diluted EPS

Net income

$ 1,443,138 

1,134,886 

$     1.27 

Nine months ended September 30, 2003

Basic EPS

Net income

$   265,396 

1,148,510 

$     0.23 

Dilutive effect of common equivalent shares of

   stock options

                 -

        9,778 

              -

Diluted EPS

Net income loss

$   265,396 

1,158,288 

$      0.23 

Pursuant to the Company's stock option and stock appreciation rights plan, there were 66,000 outstanding options, having an exercise price of $23.00 per share as of September 30, 2004. The Company's stock price decreased from $26.55 per share at December 31, 2003 to $24.10 at September 30, 2004. Accordingly, the Company recognized a decrease in stock compensation expense associated with such options of $161,700 for the nine month period ended September 30, 2004.

NOTE D - Segment Data: The Company operates in four segments as shown in the following table. All segments include both individual and group insurance. Identifiable revenues and expenses are assigned directly to the applicable segment. Net investment income is generally allocated to the insurance and the corporate segments in proportion to policy liabilities and stockholders' equity, respectively. Corporate segment results for the parent company, Investors Heritage Printing, Inc., Investors Heritage Financial Services Group, Inc. and At Need Funding LLC, after elimination of intercompany amounts, are presented.

Three Months Ended

September 30, 2004

September 30, 2003

Revenues:

   Preneed & Burial Products

$10,620,866 

$12,004,079 

   Traditional & Universal Life Products

2,859,449 

2,746,014 

   Credit Insurance Products &

      Administrative Services

45,086 

78,474 

   Corporate & Other

       525,205 

     845,644 

$14,050,606 

$15,674,211 

Pre-Tax Income (Loss) from Operations:

   Preneed & Burial Products

$     602,617 

$   (397,587)

   Traditional & Universal Life Products

174,841 

(184,079)

   Credit Insurance Products &

      Administrative Services

10,947 

6,218 

   Corporate & Other

       (52,994)

      291,971 

$   735,411 

$   (283,477)

Nine Months Ended

September 30, 2004

September 30, 2003

Revenues:

   Preneed & Burial Products

$32,086,609 

$35,412,122 

   Traditional & Universal Life Products

8,771,036 

8,987,969 

   Credit Insurance Products &

      Administrative Services

133,211 

235,343 

   Corporate & Other

    2,239,785 

    2,586,463 

$43,230,641 

$47,221,897 

Pre-Tax Income (Loss) from Operations:

   Preneed & Burial Products

$     331,158 

$   (713,445)

   Traditional & Universal Life Products

604,287 

199,748 

   Credit Insurance Products &

      Administrative Services

36,195 

22,542 

   Corporate & Other

       725,981 

       841,628 

$   1,697,621 

$     350,473 

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. Income before federal income taxes differs from taxable income principally due to the small life insurance company tax deduction and dividends-received tax deduction. Other factors affecting this difference during the nine month period include the following non taxable events: a death benefit received by the Company on a company owned life insurance policy; a decrease in stock compensation expense associated with the Company's stock option plan relative to a decline in the value of Company stock options; and the release of the Company's previously non taxable self insurance reserve.

NOTE F - Comprehensive Income: The components of comprehensive income, net of related tax, are as follows:

Three Months Ended

September 30, 2004 

September 30, 2003

Net income (loss)

$      681,993 

$    (207,396)

Net unrealized gains (losses) on

  available-for-sale securities, net of tax

     3,942,959 

   (3,590,451)

Comprehensive income (loss)

$   4,624,952 

$ (3,797,847)

Nine Months Ended

September 30, 2004 

September 30, 2003

Net income

$    1,443,138 

$      265,396 

Net unrealized losses on

  available-for-sale securities, net of tax

       (633,175)

      (684,072)

Comprehensive income (loss)

$       809,963 

$    (418,676)

NOTE G - Notes Payable: Information relative to the Company's material notes payable at September 30, 2004 is as follows:

Outstanding

Current

Interest

Interest

Description

Principal

Interest Rate

Expense

Paid

Fifth Third Bank Note

$3,000,000

4.25%

$ 83,438

$ 77,896

Cherokee National Note

4,000,000

4.75%

122,556

122,500

At Need Funding Line of

    Credit

336,000

4.75%

11,454

11,658

Fifth Third Bank Note

1,553,924

3.75%

39,295

39,203

Farmers Bank Line of

    Credit

1

3.75%

782

816

Chrysler Financial

25,519

-%

-

-

NOTE H - Employee Benefit Plans: The Company participates 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 table provides the components of the net periodic benefit cost:

Three Months Ended

September 30, 2004

September 30, 2003

Service cost

$   80,391 

$   92,175 

Interest cost

160,876 

164,624 

Expected return on plan assets

(153,075)

(163,955)

Amortization of prior service cost

(5,265)

(8,775)

Amortization of net loss

     41,129 

     35,261 

Net periodic benefit cost

$ 124,056 

$ 119,330 

Nine Months Ended

September 30, 2004

September 30, 2003

Service cost

$ 241,174 

$ 276,527 

Interest cost

482,630 

493,871 

Expected return on plan assets

(459,225)

(491,865)

Amortization of prior service cost

(15,794)

(26,327)

Amortization of net loss

   123,389 

   105,782 

Net periodic benefit cost

$ 372,174 

$ 357,988 

Effective August 10, 2004, the Company cash surrendered its deposit administration fund, which was the most significant component of plan assets, held with Investors Heritage and invested these proceeds with an outside advisor in a diversified pension portfolio predominantly including equity securities and bonds.

The Company previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute $540,000 to its pension plan in 2004. As of September 30, 2004, $405,000 had been contributed. The Company presently anticipates contributing an additional $135,000 to fund its pension plan in 2004.

NOTE I - Investments: During the third quarter of 2004, the Company began participating in a securities lending program, primarily for investment yield enhancement purposes, with third parties, mostly large brokerage firms. Securities loaned are treated as financing arrangements and the unrestricted collateral received is recorded in other assets, with an offsetting liability recorded in other liabilities to account for the Company's obligation to return the collateral. The Company obtains collateral in an amount equal to 102% of the fair value of domestic securities loaned, monitors the market value of securities loaned on a daily basis and obtains additional collateral as necessary. At September 30, 2004, fixed income securities with a carrying value of $11,940,000 were on loan under this agreement. Income earned relative to this program was $4,315 for the period ended September 30, 2004.

NOTE J - Unusual or Infrequent Events: During June 2004, the Company recognized approximately $226,000 in miscellaneous income arising from the death proceeds payable to the Company as owner and beneficiary of a life insurance policy carried on a previous member of management.

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

General

Kentucky Investors is incorporated under the laws of the Commonwealth of Kentucky and wholly owns Investors Heritage Life Insurance Company, a life insurance company also incorporated under the laws of the Commonwealth of Kentucky. Kentucky Investors also wholly owns Investors Heritage Financial Services Group, Inc., a Kentucky insurance marketing company which was formed in 1994, Investors Heritage Printing, Inc., a Kentucky printing company that provides printing to Investors Heritage Life and other unaffiliated parties, and is the sole member of At Need Funding, LLC, a Kentucky limited liability company that provides advance funding of funerals in exchange for the irrevocable assignment of life insurance policies from other nonaffiliated companies.

Investors Heritage Life offers a full line of life insurance products including, but not limited to, whole life, term life, single premium life, multi-pay life and annuities. Investors Heritage Life'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.

Investors Heritage Life introduced a new product series during the first quarter of 2003, the Legacy Protector and Legacy Preferred pre-need product series, which replaced the Legacy 2000 series. These new plans were designed to help combat a challenging economic environment and increased mortality anti-selection. In general, commissions are slightly lower, guaranteed benefits have been moved further from issue, reserves have been adjusted to better reflect experience, and an underwritten plan has been added.

Investors Heritage Life's final expense product is the Heritage Final Expense, which was introduced during 2002 and replaced the Legacy 2000 Final Expense series. This product is being marketed through funeral homes and independent agencies. It is reinsured on an 80% quota share basis with Munich American Reassurance Company to help reduce first year surplus strain associated with new sales and minimize fluctuations in future profits.