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 MONTHS ENDED

June 30, 2002

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 June 30, 2002 - 1,137,265.72

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___

PART I - CONSOLIDATED FINANCIAL STATEMENTS 

ITEM 1. 

The following condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States (GAAP). In management's opinion, all adjustments and certain reclassifications necessary for a fair statement of financial position at June 30, 2002 and December 31, 2001 and the results of operations for the three month periods ended June 30, 2002 and December 31, 2001 have been made. 

KENTUCKY INVESTORS, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

June 30, 2002

December 31, 2001

Assets

   Investments

     Fixed maturities available for sale at

       fair value (amortized cost

       2002-$243,284,845 - - 2001 -

       $235,124,000

$256,174,278 

$243,831,823 

   Investment in affiliate

4,000,000 

- 

   Mortgage loans on real estate

23,597,277 

24,710,790 

   Short term investments

720,000 

837,560 

   Other investments

   10,134,929 

     9,925,227 

       Total investments

$294,626,484 

$279,305,400 

   Cash and cash equivalents

7,511,190 

6,432,594 

   Due and deferred premiums

4,723,518 

4,544,329 

   Deferred acquisition costs

25,308,219 

24,930,081 

   Present value of future profits

477,439 

514,585 

   Leased property under capital leases

377,737 

449,033 

   Goodwill

- 

970,862 

   Other assets

7,353,515 

6,926,941 

   Amounts recoverable from reinsurers

    65,676,835 

    66,704,355 

$406,054,937 

$390,778,180 

Liabilities and Stockholders' Equity

   Liabilities

     Policy liabilities

       Benefit reserves

$316,958,444 

$306,419,302 

       Unearned premium reserves

20,439,890 

21,550,803 

       Other policyholders' funds

     4,396,390 

     4,648,807 

         Total policy liabilities

$341,794,724 

$332,618,912 

       Federal income taxes

7,840,038 

6,233,425 

       Obligations under capital leases

374,098 

443,544 

       Notes payable

6,218,434 

2,244,074 

       Other liabilities

     4,670,200 

     6,310,572 

       Total liabilities

$360,897,494 

$347,850,527 

Stockholders' Equity

   Common Stock (shares issued:

     2002 - 1,137,266 - 2001 - - 1,132,960

$    1,137,266 

$    1,132,960 

   Paid-in surplus

8,448,599 

8,413,332 

   Accumulated other comprehensive

     Income

8,142,709 

5,737,351 

   Retained earnings

    27,428,869 

    27,644,010 

       Total stockholders' equity

$  45,157,443 

$  42,927,653 

$406,054,937 

$390,778,180 

See accompanying notes.

KENTUCKY INVESTORS, INC.

Condensed Consolidated Income Statements (Unaudited)

Three Months Ended June 30

            2002

             2001

REVENUES

   Premiums and other considerations

$13,660,126 

$12,897,136 

   Investment income, net of expenses

4,510,271 

4,566,480 

   Realized gain on investments, net

359,534 

66,960 

   Other income

      334,113 

      276,831 

      Total revenues

$18,864,044 

$17,807,407 

BENEFITS AND EXPENSES

   Death and other policyholder benefits

$  7,745,221 

$  7,357,860 

   Guaranteed annual endowments

202,884 

210,601 

   Dividends to policyholders

196,033 

200,319 

   Increase in benefit reserves and unearned

     Premiums

5,640,713 

4,984,883 

   Amortization of deferred acquisition

     costs, net

(69,634)

(234,507)

   Commissions

1,423,727 

1,472,285 

   Other insurance expenses

    2,862,476 

    2,630,242 

      Total benefits and expenses

$18,001,420 

$16,621,683 

Income from operations before Federal

   income tax

$     862,624 

$  1,185,724 

Provision for Federal income taxes:

   Current

$     (9,460)

$    105,909 

   Deferred

       340,972 

      285,000 

$     331,512 

$    390,909 

Net Income

$     531,112 

$    794,815 

Earnings per share

$           0.47 

$          0.71 

Dividends per share

$           0.38 

$          0.38 

See accompanying notes.

KENTUCKY INVESTORS, INC.

Condensed Consolidated Income Statements (Unaudited)

Six Months Ended June 30

            2002

             2001

REVENUES

   Premiums and other considerations

$27,554,894 

$25,217,854 

   Investment income, net of expenses

8,984,484 

9,078,223 

   Realized gain on investments, net

691,262 

165,555 

   Other income

      560,890 

      526,290 

      Total revenues

$37,791,530 

$34,987,922 

BENEFITS AND EXPENSES

   Death and other policyholder benefits

$ 16,153,921 

$ 15,108,689 

   Guaranteed annual endowments

377,260 

392,497 

   Dividends to policyholders

368,648 

374,218 

   Increase in benefit reserves and unearned

     Premiums

11,330,121 

9,514,020 

   Amortization of deferred acquisition

     costs, net

(597,562)

(724,332)

   Commissions

2,932,296 

2,997,876 

   Other insurance expenses

    5,540,950 

    5,070,300 

      Total benefits and expenses

$36,105,634 

$32,733,268 

Income from operations before Federal

   income tax and cumulative effect of

   change in accounting principle

$  1,685,896 

$  2,254,654 

Provision for Federal income taxes:

   Current

$     151,056 

$     149,663 

   Deferred

       352,972 

       618,000 

$     504,028 

$     767,663 

Income before cumulative effect of change

   in accounting principle

$  1,181,868 

$  1,486,991 

Cumulative effect of change in

   accounting principle

$   (970,862)

$                0 

Net Income

$     211,006 

$  1,486,991 

Earnings per share:

   Before cumulative effect of change in

      accounting principle

$           1.04 

$           1.31 

   Cumulative effect of change in

      accounting principle

$         (0.86)

$           0.00 

Earnings per share

$           0.18 

$           1.31 

Dividends per share

$           0.38 

$           0.38 

See accompanying notes.

KENTUCKY INVESTORS, INC.

Condensed Consolidated Statements of Cash Flow (Unaudited)

Six Months Ended June 30

2002

2001

Net cash provided by operating activities

$    9,156,308 

$    11,209,315 

Investing activities

   Securities available-for-sale:

     Purchases

$(39,622,360)

$  (20,984,515)

     Sales and maturities

27,767,811 

12,516,556 

   Other investments:

     Cost of acquisition

(906,507)

(3,425,007)

     Sales and maturities

1,910,169 

3,389,568 

   Other investing activities

       (311,466)

            (2,825)

Net cash used by investing activities

$(11,162,353)

$   (8,506,223)

Financing activities

   Receipts from universal life policies

     credited to policyholders account

     Balances

$   3,571,597 

$     2,597,870 

   Return of policyholder account balances

     on universal life policies

(4,098,333)

(4,231,618)

   Net proceeds from notes payable

3,974,360 

353,848 

   Other financing activities

      (362,983)

       (876,324)

Net cash provided (used) by financing

   Activities

$   3,084,641 

$   (2,156,224)

Increase in cash and cash equivalents

$   1,078,596 

$        546,868 

Cash and cash equivalents at beginning

    of period

     6,432,594 

       3,324,447 

Cash and cash equivalents at end of period

$   7,511,190 

$     3,871,315 

See accompanying notes.

KENTUCKY INVESTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2002

(Unaudited)

NOTE A - Nature of Operations: Kentucky Investors, Inc. (Kentucky Investors) is the holding company of Investors Heritage Life Insurance Company (Investors Heritage), Investors Heritage Printing, Inc., a printing company and Investors Heritage Financial Services Group, Inc., an insurance marketing company. These entities are collectively hereinafter referred to as the “Company”. The operations of Kentucky Investors are principally that of its life insurance company, Investors Heritage. The operations of the non-insurance subsidiaries of Kentucky Investors account for less than 1% of the Company’s total operations.

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

NOTE B - Basis of Presentation: The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and 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 six months ended June 30, 2002, are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2001, included in the Company’s Annual Report on Form 10-K.

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

Certain prior period amounts have been reclassified to conform to the current period presentation.

NOTE C - Earnings per Share: Earnings per share of common stock were computed based on the weighted average number of common shares outstanding during each period. The number of shares used in this computation for the Company is 1,134,192 and 1,137,081 for June 30, 2002 and 2001, respectively.

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

Three Months Ended

June 30, 2002

June 30, 2001

Revenues:

   Preneed & Burial Products

$14,437,796 

$13,797,495 

   Traditional & Universal Life Products

3,366,132 

3,428,337 

   Credit Insurance Products &

      Administrative Services

59,236 

(11,487) 

   Corporate & Other

    1,000,880 

       593,062 

$18,864,044 

$17,807,407 

Pre-Tax Income from Operations:

   Preneed & Burial Products

$       37,857 

$     652,181 

   Traditional & Universal Life Products

252,550 

340,588 

   Credit Insurance Products &

      Administrative Services

11,181 

55,893 

   Corporate & Other

       561,036 

       137,062 

$     862,624 

$  1,185,724 

Six Months Ended

June 30, 2002

June 30, 2001

Revenues:

   Preneed & Burial Products

$29,266,206 

$27,064,019 

   Traditional & Universal Life Products

6,569,748 

6,608,757 

   Credit Insurance Products &

      Administrative Services

116,705 

109,650 

   Corporate & Other

    1,838,871 

    1,205,496 

$37,791,530 

$34,987,922 

Pre-Tax Income  (Loss) from Operations:

   Preneed & Burial Products

$     (34,495)

$  1,105,491 

   Traditional & Universal Life Products

751,131 

721,205 

   Credit Insurance Products &

      Administrative Services

6,636 

101,832 

   Corporate & Other

      962,624 

      326,126 

$  1,685,896 

$  2,254,654 

NOTE E - Federal Income Taxes: Current taxes are provided based on estimates of the projected effective annual tax rate. Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

NOTE F – Comprehensive Income: The components of comprehensive income (loss), net of related tax, are as follows:

Three Months Ended

June 30, 2002

June 30, 2001

Net income

$      531,112 

$       794,815 

Net unrealized gains (losses) on available-for-sale

  securities

     4,812,742 

   (1,527,859) 

Comprehensive income (loss)

$   5,343,854 

$    (733,044) 

Six Months Ended

June 30, 2002

June 30, 2001

Net income

$      211,006 

$    1,486,991 

Net unrealized gains on available-for-sale

  securities

     2,405,358 

        972,489 

Comprehensive income

$   2,616,364 

$    2,459,480 

NOTE G – New Accounting Pronouncements: In June 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 141, “Business Combinations”, which eliminates the pooling-of-interest method of accounting for business combinations and requires the use of the purchase method. In addition, SFAS 141 requires the reassessment of intangible assets to determine if they are appropriately classified either separately or within goodwill. SFAS 141 is effective for business combinations initiated after June 30, 2001. The Company adopted SFAS 141 on January 1, 2002, with no material impact on the financial statements.

In June 2001, the FASB also issued SFAS 142, “Goodwill and Other Intangible Assets,” which eliminates the amortization of goodwill and other acquired intangible assets with indefinite economic useful lives. SFAS 142 requires, at least annually, an impairment test of goodwill and other intangible assets with indefinite useful lives. The Company adopted SFAS 142 on January 1, 2002.

In accordance with the provisions of SFAS 142, the Company ceased amortization of goodwill and all intangible assets with indefinite useful lives. The Company has performed the requisite transitional impairment tests for these assets as of January 1, 2002 and $970,862 of goodwill, associated with the 1981 acquisition of Investors Heritage of the South and the 1982 acquisition of Commercial Travelers Life Insurance Company, was recorded as a cumulative effect of a change in accounting principle in the first quarter of 2002.

A reconciliation of the previously reported 2001 statement of income information to pro forma amounts that reflect the elimination of amortization of goodwill is presented below:

Three Months Ended

June 30, 2001

Amount

Per Share

Net income, as reported

$     794,815 

$       0.71 

Amortization of goodwill

        12,136 

        0.01 

Pro forma net income

$     806,951 

$       0.72 

Six Months Ended

June 30, 2001

Amount

Per Share

Net income, as reported

$  1,486,991 

$       1.31 

Amortization of goodwill

        24,272 

        0.02 

Pro forma net income

$  1,511,263 

$       1.33 

NOTE H – Notes Payable: On June 28, 2002, Kentucky Investors entered into long

term debt with Cherokee National Life Insurance Company (Cherokee) of Macon, Georgia, in the amount of $4,000,000, with interest to be paid quarterly at a rate equal to the prime rate, and due on June 28, 2007.  The funds were used to purchase 400,000 shares of Cherokee common stock valued at $4,000,000. No interest has been paid on this note in 2002.

ITEM 2.

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

General

Kentucky Investors, Inc. 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, and Investors Heritage Printing, Inc., a Kentucky printing company that provides printing to Investors Heritage and other unaffiliated parties.

Investors Heritage offers a full line of life insurance products including, but not limited to, whole life, term life, single premium life, multi-pay life and annuities. Investors Heritage's primary lines of business is 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 introduced a new whole life final expense product during the third quarter of 2001. The new product, Heritage Final Expense replaced the Legacy 2000 Final Expense series and is being marketed through funeral homes and independent agencies. Investors Heritage entered into a reinsurance agreement with Munich American Reassurance Company with regard to this new product to help reduce the initial surplus strain and minimize fluctuations in future profits.

Investors Heritage also provides term insurance products, both on a decreasing and a level basis. During 2001 a new Term to 95 product was introduced that replaced the Level Best Term product. We will continue to provide our decreasing term policy that is primarily sold through financial institutions.

The Company's operating earnings are derived primarily from revenues generated from the sale of insurance products by Investors Heritage, plus the Company's investment results, including realized gains (losses), less interest credited, benefits to policyholders and expenses.

While the Company continues to expand the operations of Financial Services Group and  Heritage Printing, less than 1% of the Company's total operations were generated by those subsidiaries. As expected, more than 10% of Financial Services Group's revenues during the second quarter 2002 were derived from the sale of Investors Heritage's credit insurance products. The Company anticipates a dividend to be paid by Financial Services Group during the third quarter in 2002. A small dividend was declared and paid by Heritage Printing during 2002.

The Company's primary uses of cash are operating expenses, debt service and dividend payments, and the Company's principal sources of cash are the dividends paid to it by Investors Heritage, Financial Services Group and Heritage Printing. Investors Heritage's principal sources of cash are from the sale of life insurance policies and investment income, including realized gains (losses), less benefits to policyholders and expenses. Therefore, the remainder of the discussion will deal with the financial condition and results of operations of Investors Heritage.

Investments, Liquidity and Capital Resources

Premiums, which include mortality and expense charges, and investment income are Investors Heritage's primary sources of cash flow used to meet short-term and long-term cash requirements.

Investors Heritage's short-term obligations consist primarily of policyholder benefits and operating expenses. Investors Heritage has historically been able to meet these obligations out of operating cash, premiums and investment income.

Management is not aware of any commitments or unusual events that could materially affect capital resources. During the fourth quarter of 2000 Kentucky Investors borrowed $2,000,000 on a long-term basis; and an additional $400,000 was borrowed during the second quarter of 2001, however, there is no short-term external debt. Kentucky Investors utilized $200,000 of the loan amount to reduce debt to Investors Heritage and $1,800,000 was loaned to Investors Heritage in exchange for a surplus note. The note calls for Investors Heritage to pay, on or before the first day of each quarter, interest at an 8.5% annual rate, upon prior approval by the Kentucky Department of Insurance. Such interest may be paid out of Investors Heritage's earned surplus, operating income, or paid-in and contributed surplus. In the second quarter of 2002 the Company acquired 400,000 shares of common stock of Cherokee National Life Insurance Company (Cherokee) in exchange for the Company’s promissory note in the amount of $4,000,000. Interest will be paid quarterly at a rate equal to the prime rate and the note is due June 28, 2007. The Company also has a $150,000 line-of-credit note with a bank, of which $95,001 is outstanding at June 30, 2002.

The Company and Investors Heritage will continue to explore various opportunities including corporate reorganizations, acquisitions and purchasing blocks of business from other companies, which may dictate a need for either long-term or short-term debt.

During the first quarter 2002, the Board of Directors directed that there be submitted to the shareholders at the annual meeting a proposed amendment to the Articles of Incorporation to authorize the issuance of 8,000,000 shares of a new class of undesignated, non-voting preferred stock. On May 9, 2002, at the Annual Meeting of Shareholders, the shareholders approved the proposed amendment. The Board of Directors will establish and designate different series within the new class of preferred stock and fix and determine the relative rights and preferences of each new series. To date no shares have been issued and the Company has no current plans to issue such shares.

Investors Heritage has maintained a sound, conservative investment strategy. At June 30, 2002, 86.9% of invested assets consisted of fixed income public bonds compared to 87.3% at December 31, 2001. Fixed income assets are managed by Conning Asset Management Company, an independent portfolio manager.

Additionally, Investors Heritage also engages in commercial and residential mortgage lending with approximately 94% 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 June 30, 2002, 8.0% of invested assets consisted of mortgage loans compared to 8.8% at December 31, 2001. Management anticipates funding several new mortgage loan investments during the remainder of 2002 to maintain a similar to slightly higher percentage of mortgage loans to total invested assets.

Investors Heritage's conservative approach in the product development area and the strength and stability of its fixed income and mortgage loan portfolios provide adequate liquidity both in the short-term and the long-term. At June 30, 2002 Investors Heritage's fixed income investments were 100% investment grade as rated by Standard & Poor's, compared to 99.6% at December 31, 2001. None of Investors Heritage's fixed income assets are in default and there has been no material change in the distribution of its fixed income portfolio.

Investors Heritage's principal long-term obligations are fixed contractual obligations incurred in the sale of its life insurance products. The premiums charged for these products are based on conservative and actuarially sound assumptions as to mortality, persistency and interest. Investors Heritage believes these assumptions will produce revenues sufficient to meet its future contractual benefit obligations and operating expenses, and provide an adequate profit margin.

Results of Operations

Total premium income (net of reinsurance) for the second quarter 2002 increased 5.9% when compared to the second quarter of 2001 and increased 9.3% for the first six months of 2002 when compared to the same period in 2001, due primarily to increases in pre-need sales. Net investment income for the second quarter 2002 compared to the second quarter of 2001 decreased 1.2% and decreased 1% for the first six months of 2002 when compared to the same period in 2001. The decrease is primarily due to the lower yield rates on new asset purchases, and the change in the amortization schedules of mortgage-backed securities due to higher than anticipated pre-payments. Overall Revenue for the second quarter 2002 increased 5.9% when compared to the second quarter of 2001 and increased 8% for the first six months of 2002 when compared to the same period in 2001.

Total Benefits and Expenses were 8.3% higher in the second quarter of 2002 when compared to the same quarter of 2001 and 10.3% higher for the first six months of 2002 when compared to the same period in 2001 primarily due to higher premium production in pre-need sales and higher claims overall. After providing for federal income taxes, the Company's Net Income was $531,112 with Earnings per share of $0.47 for the second three months of 2002 as compared to Net Income of $794,815 and Earnings per share of $0.71 for the same period in 2001. The Company’s Net Income (before cumulative effect of change in accounting principle) was $1,181,868 with Earnings per share of $1.04 for the first six months of 2002 as compared to Net Income of $1,486,991 and Earnings per share of $1.31 for the first six months of the same period in 2001.

SFAS No. 142 "Goodwill and Other Intangible Assets" was adopted during the first quarter of 2002. This resulted in an after-tax charge of $970,862 during the first quarter of 2002 related to the impairment of goodwill.  The impaired goodwill was associated with the 1981 and 1982 acquisitions of Investors Heritage Life Insurance Company of the South and Commercial Travelers Life Insurance Company, respectively. The charge is reported separately in the Company’s Consolidated Statements of Income as a "Cumulative Effect of Change in Accounting Principle". After the charge, the goodwill balance at June 30, 2002 is $-0-. Under the new accounting standards, there will no longer be a charge for normal amortization of goodwill.

A dividend of $0.38 per share was paid April 5, 2002, to shareholders of record on March 22, 2002.

Business Segments

Management internally evaluates the performance of Investors Heritage operations by the following business segments:

Preneed & Burial Products include both life and annuity products sold by funeral directors or affiliated agents to fund prearranged funerals. Revenues for this segment were 4.6% higher for the second quarter of 2002 when compared to the same period of 2001 and 8.1% higher in the first six months of 2002 when compared to the same period of 2001. The increase is due to a significant increase in sales from Investors Heritage's Legacy 2000 Series of Preneed Products used in the preneed funeral market. Pre-Tax Income (Loss) from Operations for the second quarter 2002 was $37,857 compared to $652,181 for the same period for 2001 and $(34,495) for the first six months of 2002 compared to $1,105,491 for the same period for 2001. The decrease in 2002 compared to 2001 is due primarily to higher mortality, reduced investment income due to lower interest rates on investments in fixed maturities and higher state premium taxes due to the increase in sales. Investors Heritage plans to continue its expansion of territory and recruitment of agents in the Preneed and Burial insurance market.

Traditional & Universal Life Products include traditional life and group life insurance products, annuities (primarily qualified) and universal life products. Revenues for this segment were 1.8% lower for the second quarter of 2002 when compared to the second quarter of 2001 and 0.6% lower for the first six months of 2002 when compared to the same period in 2001. The decrease in revenues is primarily from a decrease in loan demand associated with the sales of term insurance products through banks. Pre-Tax Income from Operations for the second quarter 2002 was 25.8% lower than the second quarter of 2001 primarily because of higher mortality and general insurance expenses associated with the sales, issuance and administration costs of these products.

Credit Insurance Products and Administrative Services include the marketing and administration of credit life and credit accident & health insurance products. Revenues for 2002 were $59,236 for the second quarter compared to $(11,487) for the same period for 2001 and $116,705 for the first six months of 2002 compared to $109,650 for the same period in 2001. Pre-Tax Income from Operations was $11,181 for the second quarter of 2002 compared to $55,893 for the second quarter of 2001 and $6,636 for the first six months of 2002 compared to $101,832 for the same period in 2001. The decreases are primarily due to the reduction in the need for credit insurance because of a decrease in consumer loan demand. With less production there was a related reduction in service fee income for this segment. All of the related underwriting risk currently produced is being reinsured 100% with highly-rated life companies.

Corporate & Other consists of corporate accounts measured primarily by stockholders' paid-in capital, contributed surplus, earned surplus, property and equipment, and other minor business lines which include group annuities and group and individual accident and health products. Revenues were 68.8% higher and Pre-Tax Income from Operations was 309.3% higher for the second quarter of 2002 when compared to the first quarter 2001. Revenues were 52.5% higher for the first six months of 2002 when compared to the same period in 2001 and Pre-Tax Income from Operations was 195.2% higher for the first six months of 2002 when compared to the same period in 2001.  The increases are primarily due to realized gains from the sale of investments.

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 29.9% at June 30, 2002 compared to 34.1% for June 30, 2001. The decrease in the effective tax rate is due primarily to the increased benefit of the small life insurance company deduction resulting from a decrease in net income.

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. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Statements using verbs such as "expect", "anticipate", "believe" or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements which represent the Company's beliefs concerning future levels of sales and redemptions of Investors Heritage's products, investment spreads and yields, or the earnings and profitability of the Company's or Investors Heritage's activities.

Forward-looking statements are necessarily based on estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control and many of which are subject to change. These uncertainties and contingencies could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable factors and developments. Some of these may be national in scope, such as general economic conditions, changes in tax law and changes in interest rates. Some may be related to the insurance industry generally, such as pricing competition, regulatory developments, industry consolidation and the effects of competition in the insurance business from other insurance companies and other financial institutions operating in the Company's market area and elsewhere. Others may relate to the Company specifically, such as credit, volatility and other risks associated with the Company's investment portfolio. The Company cautions that such factors are not exclusive. The Company disclaims any obligation to update forward-looking information.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.

There have been no significant changes in the Company's market risks since December 31, 2001. Refer to the Annual Report to the stockholders for the year ended December 31, 2001 for reference purposes.

SIGNATURES
 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

KENTUCKY INVESTORS, INC.

/s/ Harry Lee Waterfield II

BY: Harry Lee Waterfield II

DATE: August 14, 2002

      President

/s/ Raymond L. Carr

BY: Raymond L. Carr

DATE: August 14, 2002

      Vice President - Chief Financial Officer

     Harry Lee Waterfield II and Raymond L. Carr, being the President and Vice President, Chief Financial Officer, respectively, of Kentucky Investors, Inc., hereby certify as of this 14th day of August, 2002, that the Form 10-Q for the Quarter ended June 30, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Kentucky Investors, Inc.

KENTUCKY INVESTORS, INC.

/s/ Harry Lee Waterfield II

BY: Harry Lee Waterfield II

DATE: August 14, 2002

      President

/s/ Raymond L. Carr

BY: Raymond L. Carr

DATE: August 14, 2002

      Vice President - Chief Financial Officer