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

SEPTEMBER 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 September 30, 2002 - 1,138,558.72

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  

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 September 30, 2002 and December 31, 2001 and the results of operations for the three month and nine month periods ended September 30, 2002 and December 31, 2001 have been made.

KENTUCKY INVESTORS, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

September 30, 2002

December 31, 2001

Assets

   Investments

     Fixed maturities available for sale at

       fair value (amortized cost

       2002-$252,206,960 - - 2001 -

       $235,124,000

$277,817,684 

$243,831,823 

   Investment in affiliate

4,000,000 

- 

   Mortgage loans on real estate

23,493,112 

24,710,790 

   Other long term investments

938,311 

409,658 

   Short term investments

820,000 

837,560 

   Other investments

      9,629,403 

     9,515,569 

       Total investments

$316,698,510 

$279,305,400 

   Cash and cash equivalents

7,597,057 

6,432,594 

   Due and deferred premiums

4,895,289 

4,544,329 

   Deferred acquisition costs

24,218,870 

24,930,081 

   Present value of future profits

458,866 

514,585 

   Leased property under capital leases

323,287 

449,033 

   Goodwill

- 

970,862 

   Other assets

6,615,676 

6,926,941 

   Amounts recoverable from reinsurers

    64,205,589 

    66,704,355 

$425,013,144 

$390,778,180 

Liabilities and Stockholders' Equity

   Liabilities

     Policy liabilities

       Benefit reserves

$321,382,500 

$306,419,302 

       Unearned premium reserves

20,007,840 

21,550,803 

       Other policyholders' funds

     4,070,082 

     4,648,807 

         Total policy liabilities

$345,460,422 

$332,618,912 

       Federal income taxes

12,018,124 

6,233,425 

       Obligations under capital leases

323,619 

443,544 

       Notes payable

6,529,017 

2,244,074 

       Other liabilities

     7,164,310 

     6,310,572 

       Total liabilities

$371,495,492 

$347,850,527 

Stockholders' Equity

   Common Stock (shares issued:

     2002 - 1,138,559, 2001 - 1,132,960

$    1,138,559 

$    1,132,960 

   Paid-in surplus

8,458,341 

8,413,332 

   Accumulated other comprehensive

     income

16,061,335 

5,737,351 

   Retained earnings

    27,859,417 

    27,644,010 

       Total stockholders' equity

$  53,517,652 

$  42,927,653 

$425,013,144 

$390,778,180 

See accompanying notes.

KENTUCKY INVESTORS, INC.

Condensed Consolidated Income Statements (Unaudited)

Three Months Ended September 30

            2002

             2001

REVENUES

   Premiums and other considerations

$12,945,156 

$12,723,215 

   Investment income, net of expenses

4,795,397 

4,595,800 

   Realized gain on investments, net

97,719 

408,112 

   Other income

      266,748 

      309,880 

      Total revenues

$18,105,020 

$18,037,007 

BENEFITS AND EXPENSES

   Death and other policyholder benefits

$  8,238,988 

$  7,250,746 

   Guaranteed annual endowments

157,572 

163,317 

   Dividends to policyholders

168,099 

175,827 

   Increase in benefit reserves and unearned

     premiums

4,784,484 

5,140,765 

   Amortization of deferred acquisition

     costs, net

154,463 

(263,258)

   Commissions

1,270,716 

1,575,621 

   Other insurance expenses

    2,657,353 

    2,577,456 

      Total benefits and expenses

$17,431,675 

$16,620,474 

Income from operations before federal

   income tax

$     673,345 

$  1,416,533 

Provision for federal income taxes:

   Current

$     140,045 

$    224,772 

   Deferred

       115,381 

      243,000 

$     255,426 

$    467,772 

Net income

$     417,919 

$    948,761 

Earnings per share

$           0.37 

$          0.79 

Dividends per share

$                 - 

$                - 

See accompaying notes.

KENTUCKY INVESTORS, INC.

Condensed Consolidated Income Statements (Unaudited)

Nine Months Ended September 30

2002

2001

REVENUES

   Premiums and other considerations

$40,500,050 

$37,941,069 

   Investment income, net of expenses

13,779,881 

13,674,023 

   Realized gain on investments, net

788,981 

573,667 

   Other income

      827,638 

      836,170 

      Total revenues

$55,896,550 

$53,024,929 

BENEFITS AND EXPENSES

   Death and other policyholder benefits

$ 24,392,909 

$22,359,435 

   Guaranteed annual endowments

534,832 

555,814 

   Dividends to policyholders

536,747 

550,045 

   Increase in benefit reserves and unearned

     premiums

16,114,605 

14,654,785 

   Amortization of deferred acquisition

     costs, net

(443,099)

(987,590)

   Commissions

4,203,012 

4,573,497 

   Other insurance expenses

    8,198,303 

    7,647,756 

      Total benefits and expenses

$53,537,309 

$49,353,742 

Income from operations before federal

   income tax and cumulative effect of

   change in accounting principle

$  2,359,241 

$  3,671,187 

Provision for federal income taxes:

   Current

$     291,101 

$     374,435 

   Deferred

       468,353 

       861,000 

$     759,454 

$  1,235,435 

Income before cumulative effect of change

   in accounting principle

$  1,599,787 

$  2,435,752 

Cumulative effect of change in

   accounting principle

$   (970,862)

$                0 

Net income

$     628,925 

$  2,435,752 

Earnings per share:

   Before cumulative effect of change in

      accounting principle

$           1.41 

$           2.04 

   Cumulative effect of change in

      accounting principle

$         (0.86)

$           0.00 

Earnings per share

$           0.55 

$           2.04 

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

2002

2001

Net cash provided by operating activities

$    17,900,537 

$     17,108,452 

Investing activities

   Securities available-for-sale:

     Purchases

$(57,951,396)

$  (36,455,935)

     Sales and maturities

37,650,781 

24,842,678 

   Other investments:

     Cost of acquisition

(2,302,777)

(3,617,822)

     Sales and maturities

2,786,863 

4,061,114 

   Other investing activities

       (326,966)

              1,409 

Net cash used by investing activities

$(20,143,495)

$  (11,168,556)

Financing activities

   Receipts from universal life policies

     credited to policyholders account

     balances

$   5,238,987 

$     2,597,870 

   Return of policyholder account balances

     on universal life policies

(5,783,807)

(6,036,723)

   Net proceeds from notes payable

4,284,943 

307,663 

   Other financing activities

      (332,702)

       (840,322)

Net cash provided (used) by financing

   activities

$   3,407,421 

$   (3,971,512)

Increase in cash and cash equivalents

$   1,164,463 

$     1,968,384 

Cash and cash equivalents at beginning

    of period

     6,432,594 

       3,324,447 

Cash and cash equivalents at end of period

$   7,597,057 

$     5,292,831 

See accompanying notes.

KENTUCKY INVESTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 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, Investors Heritage Financial Services Group, Inc., an insurance marketing company, and Family Assignment Services, 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. 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 nine months ended September 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 1,135,375 and 1,194,322 for September 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., Investors Heritage Financial Services Group, Inc. and Family Assignment Services LLC, after elimination of intercompany amounts, are presented.

Three Months Ended

September 30, 2002

September 30, 2001

Revenues:

   Preneed & Burial Products

$13,952,924 

$13,593,375 

   Traditional & Universal Life Products

3,373,288 

3,296,266 

   Credit Insurance Products &

      Administrative Services

51,206 

209,027 

   Corporate & Other

       727,602 

       938,339 

$18,105,020 

$18,037,007 

Pre-Tax Income (Loss) from Operations:

   Preneed & Burial Products

$      326,993 

$     465,461 

   Traditional & Universal Life Products

72,671 

340,441 

   Credit Insurance Products &

      Administrative Services

319 

(27,372)

   Corporate & Other

       273,362 

       638,003 

$     673,345 

$  1,416,533 

Nine Months Ended

September 30, 2002

September 30, 2001

Revenues:

   Preneed & Burial Products

$43,219,130 

$40,657,394 

   Traditional & Universal Life Products

9,943,036 

9,905,023 

   Credit Insurance Products &

      Administrative Services

167,911 

318,677 

   Corporate & Other

    2,566,473 

    2,143,835 

$55,896,550 

$53,024,929 

Pre-Tax Income from Operations:

   Preneed & Burial Products

$     292,498 

$  1,570,952 

   Traditional & Universal Life Products

823,802 

1,061,646 

   Credit Insurance Products &

      Administrative Services

6,955 

74,460 

   Corporate & Other

     1,235,986 

      964,129 

$  2,359,241 

$  3,671,187 

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, net of related tax, are as follows:

Three Months Ended

September 30, 2002

September 30, 2001

Net income

$      417,919 

$       948,761 

Net unrealized gains on

  available-for-sale securities

     7,918,626 

   4,516,925 

Comprehensive income

$   8,336,545 

$    5,465,686 

Nine Months Ended

September 30, 2002

September 30, 2001

Net income

$      628,925 

$    2,435,752 

Net unrealized gains on

  available-for-sale securities

   10,323,984 

      5,489,414 

Comprehensive income

$ 10,952,909 

$    7,925,166 

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

September 30, 2001

Amount

Per Share

Net income, as reported

$     948,761 

$       0.79 

Amortization of goodwill

        12,136 

        0.01 

Pro forma net income

$     960,897 

$       0.80 

Nine Months Ended

September 30, 2001

Amount

Per Share

Net income, as reported

$  2,435,752 

$       2.04 

Amortization of goodwill

        36,408 

        0.03 

Pro forma net income

$  2,472,160 

$       2.07 

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. At September 30, 2002, interest payable on this note was $47,500. The Company has guaranteed a $2,000,000 line-of-credit note with a financial institution, with interest to be paid monthly at a rate equal to the prime rate and due September 30, 2003. At September 2002, $466,423 was outstanding on this note. The purpose of this line of credit is to provide advance funding for funerals in exchange for an assignment of life insurance policies from other unaffiliated companies.

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, Investors Heritage Printing, Inc., a Kentucky printing company that provides printing to Investors Heritage and other unaffiliated parties, and Family Assignment Services, 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 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, Heritage Printing and Family Assignment Services, 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 third quarter 2002 were derived from the sale of Investors Heritage's credit insurance products. During the first nine months of 2002, the Company received dividends from Financial Services Group and Heritage Printing in the amount of $281,000 and $20,000, respectively. The Company anticipates another dividend payment from Financial Services Group during the fourth quarter in 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. 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 has also guaranteed another $2,000,000 line-of-credit note with a financial institution on behalf of Family Assignment Services, of which $466,423 was outstanding at September 30, 2002. The purpose of this line of credit is to provide advance funding for funerals in exchange for an assignment of life insurance policies from other unaffiliated companies.

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 an additional 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 September 30, 2002, 87.7% 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 97% 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 September 30, 2002, 7.4% 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 September 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 third quarter 2002 increased 1.7% when compared to the third quarter of 2001 and increased 6.7% for the first nine months of 2002 when compared to the same period in 2001, due primarily to increases in pre-need sales. Net investment income for the third quarter 2002 compared to the third quarter of 2001 increased 4.3% and increased less than 1% for the first nine months of 2002 when compared to the same period in 2001. The increase is primarily due to a larger asset base, however 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 has impacted the rate of return on our investment portfolio. Overall revenue for the third quarter 2002 increased less than 1.0% when compared to the third quarter of 2001 and increased 5.4% for the first nine months of 2002 when compared to the same period in 2001.

Total Benefits and Expenses were 4.9% higher in the third quarter of 2002 when compared to the same quarter of 2001 and 8.5% higher for the first nine 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 $417,919 with Earnings per share of $0.37 for the third quarter of 2002 as compared to Net Income of $948,761 and Earnings per share of $0.73 for the same period in 2001. The Company’s Net Income (before cumulative effect of change in accounting principle) was $1,599,787 with Earnings per share of $1.41 for the first nine months of 2002 as compared to Net Income of $2,435,752 and Earnings per share of $2.04 for the first nine 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 September 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 2.6% higher for the third quarter of 2002 when compared to the same period of 2001 and 6.3% higher in the first nine 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 from Operations for the third quarter 2002 was $326,993 compared to $465,461 for the same period for 2001 and $292,498 for the first nine months of 2002 compared to $1,570,952 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 2.3% higher for the third quarter of 2002 when compared to the third quarter of 2001 and 0.4% higher for the first nine months of 2002 when compared to the same period in 2001. Revenues on this segment are primarily derived from the sales of term insurance products through banks. The sales are tied to loan demand, which has been fairly flat this year and has shown insignificant fluctuations throughout each quarter. Pre-Tax Income from Operations for the third quarter 2002 was 78.7% lower than the third quarter of 2001 and 22.4% lower in the first nine months of 2002 compared to the same period in 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 $51,206 for the third quarter compared to $209,027 for the same period for 2001 and $167,911 for the first nine months of 2002 compared to $318,677 for the same period in 2001. Pre-Tax Income (Loss) from Operations was $319 for the third quarter of 2002 compared to $(27,372) for the third quarter of 2001 and $6,955 for the first nine months of 2002 compared to $74,460 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 22.5% lower and Pre-Tax Income from Operations was 57.2% lower for the third quarter of 2002 when compared to the third quarter 2001. Revenues were 19.7% higher for the first nine months of 2002 when compared to the same period in 2001 and Pre-Tax Income from Operations was 28.2% higher for the first nine months of 2002 when compared to the same period in 2001. The increases for the nine months in 2002 are primarily due to higher realized gains from the sale of investments. The decreases for the third quarter of 2002 when compared to the third quarter of 2001 are primarily due to the timing of those realized gains.

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 32.2% at September 30, 2002 compared to 33.7% for September 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.

ITEM 4. Controls and Procedures

Within the 90 days prior to the filing date of this Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in Rule 13a-14 of the Securities Exchange Act of 1934.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in this Quarterly Report on Form 10-Q. There have been no significant changes in the Company's internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

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: November 8, 2002

      President

/s/ Raymond L. Carr

BY: Raymond L. Carr

DATE: November 8, 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 8th day of November, 2002, that the Form 10-Q for the Quarter ended September 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: November 8, 2002

      President

/s/ Raymond L. Carr

BY: Raymond L. Carr

DATE: November 8, 2002

      Vice President - Chief Financial Officer

I, Harry Lee Waterfield II, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Kentucky Investors, Inc.;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:

(a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared,

(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"), and

(c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors:

(a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and,

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and,

6.

The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 8, 2002

By: /s/ Harry Lee Waterfield II

Harry Lee Waterfield II

President

I, Raymond L. Carr, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Kentucky Investors, Inc.;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:

(a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared,

(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"), and

(c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors:

(a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and,

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and,

6.

The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 8, 2002

By: /s/ Raymond L. Carr

Raymond L. Carr

Vice President - Chief Financial Officer