Kentucky Central Insurance Company
Encyclopedia
Kentucky Central Life Insurance Company (KCL) was one of the largest Life Insurance
companies in the United States
, writing policies in 49 states and the District of Columbia until its collapse in 1993. At the time of the collapse Kentucky Central had over $43 billion in life in force making it the seventh largest insurance collapse in United States history, and at the time the largest business collapse in Kentucky history.
until 1959 when controlling interest in the company was purchased by Garvice Kincaid who was also named CEO of KCL until his death. Already one of the most successful businessmen in Kentucky, Kincaid owned interests in radio and television broadcasting, banking, finance, real estate, and was also a managing parter in his own law firm when he purchased KCL.
In 1963, Kincaid announced plans to move the company to Lexington, Kentucky
in an attempt to consolidate his many business interests in the Central Kentucky region. Kentucky Central's move came during a “golden era” of business in Lexington as the city's economy moved from being agrarian in nature (centering around the tobacco and Thoroughbred
industry) as other major corporations such as IBM
, Ashland Oil, and Jerrico moved to or began expanding operations in the city.
As Lexington and Kentucky Central grew during the late 1960s and early 1970s, Kincaid had a vision for the future of the city and the financial resources available to make his vision a reality. During this time he began investing profits from KCL into various business ventures including real estate development projects in the downtown Lexington area. The centerpiece of his vision would be Kincaid Towers
a 22-floor high rise at a cost of $20 million, that took nearly six year to complete.
Kincaid would not live to see his dream of Kentucky Central becoming the cornerstone of Lexington as a financial center of the southeast when he died in 1975. He was succeeded as CEO by William “Bud” Burnett who would run the company through an additional boom in the companies insurance, real estate, banking, agricultural and broadcasting businesses. However, he was also at the helm of KCL when the company began its collapse.
Kincaid trusted the Webb Brothers to such an extent that he when loaning money for real estate and property development he would only require Dudley Webb to sign a personal guarantee contract for the loans. This basic contract only assured that the guarantees would not be enforced unless the Webb's diverted money from the project or if the project fell into dissolution. In either case the real estate would revert back to Kentucky Central.
Bud Burnett continued this agreement with the Webb Brothers where he would loan them funds for real estate projects with the agreement that the guarantees would only be enforced if the project fell into dissolution or if funds were found to be misappropriated or embezzled by the Webb's. This agreement would eventually be one of the factors leading to the downfall of Kentucky Central.
During Burnett's tenure as CEO Kentucky Central through the Webb Brothers began developing even more properties under this arrangement. One reason for the increase in development between the two parties was the downtown revitalization projects associated with Lexington hosting the 1985 NCAA Men's and 1986 Women's Final Four, and the expansion of development projects throughout the Continental United States. Lexington's “new downtown” financed by KCL and developed and managed by the Webb Brothers were viewed in the local media as a success story, however less than ten years later both parties would be in deep financial trouble.
The contractual arrangement between Kentucky Central and the Webb Brothers along with similar agreements with other local business leaders began to put a strain on Kentucky Central by the end of the 1980s. Multiple construction and development projects were later sited in court documents as being detrimental to the financial stability of the company. One such example was a 23-story development in the San Francisco, California financial district that was built by the Webb Brothers with a loan of $46 million from Kentucky Central. When the Webb's could not sell the development, the property (valued at $25–30 million) reverted back to KCL. It was eventually sold for $19 million at a loss of $27 million dollars. Other examples of similar arrangement took place with Webb developments in New Orleans, Colorado Springs, and Lexington
. Kentucky Central's association with the Webb Brothers was not their only financial misstep and there were other more glaring and questionable business practices in the companies final days, two of which center around former Kentucky Governor Wallace Wilkinson. Wilkinson and Burnett had been long-time friends and business associates. Burnett had supported Wilkinson's 1987 Gubernatorial campaign, and Wilkinson appointed Burnett to the University of Kentucky
Board of Trustees in 1988.
Court documents showed that shortly after Wilkinson's election victory in 1987 he sold a hotel property in Frankfort, Kentucky
assessed at just over $6 million to a subsidiary of Kentucky Central for $12.6 million, more than twice the assessed value. Also Wilkinson and his wife failed to make interest payments on $11.4 million worth of industrial revenue bonds used to construct a high rise condominium in downtown Lexington in which Kentucky Central served as guarantor. No legal attempt was formally made to have the Wilkinson's pay the interest until after the company went into liquidation.
Wilkinson, the Webb Brothers and other business associates also received loans from Kentucky Central at interest well below the market rate. The Bank of Louisville received rates at well below market value as well as other prominent Central Kentucky figures including former University of Kentucky Athletic Director Larry Ivy and former Kentucky basketball coach Rick Pitino. This practice of issuing loans for high amounts at well under market interest rates also lead to the financial instability of Kentucky Central.
For twenty-three years the accounting firm of Deloitte & Touche served as the auditor of Kentucky Central's accounting and financial records. During this period the firm never reported any financial irregularities within the company when in fact many glaring examples were evident. One example involved Bruce Burnett (the son of CEO Bud Burnett) an independent insurance agent in Lexington who had failed to turn over millions in Kentucky Central premiums paid by customers to the company, and the company in turn never sought payment until after the liquidation. In 1996 Bruce Burnett pled guilty to theft and fraud charges in the case and was sentenced to three years in state prison.
Ill with brain cancer Bud Burnett died soon after Kentucky Central was declared insolvent and liquidation proceedings began in early 1994. One year later Jefferson-Pilot assumed the companies life and annuity responsibilities and provided $250 million in related support. Bankers Trust Company purchased nearly $225 million in real estate holding from KCL . Two Lexington media outlets (WVLK-590 AM
radio and WKYT-27
television), as well as WYMT-TV
in Hazard
were also sold. WVLK is now owned by Cumulus Media
and the two television stations are owned by Gray Television
.
Other business interests were sold to various companies and over thirty lawsuits were filed in Kentucky courts to recoup funds. One of the initial lawsuits filed by the state was against the KCL Board of Directors and the estate of the late Bud Burnett seeking $200 million in damages. Also sued by the liquidators were Dudley, Donald (and his wife) Julie Webb as well as former governor Wallace Wilkinson. The Webb's were sued for $108 million, but settled after years of litigation for a combined $ 3.85 million.
was accused by his opponent then Governor Ernie Fletcher
of having a role in the collapse of Kentucky Central. Beshear's law firm, Stites & Harbison, was hired to serve as general counsel to liquidator Donald Stephens, who was the state insurance commissioner.
However, Stites & Harbison already represented the Bank of Louisville, whose holdings included millions of dollars of securities put up as collateral for a loan connected to Kentucky Central in a complicated real estate deal. Stephens asked another law firm in 1995 to look into allegations that Stites & Harbison had a conflict of interest representing the Office of Insurance while continuing to represent the Bank of Louisville. The report claimed Beshear was not directly involved but had "general knowledge" of the conflict of interest and should have told the insurance commissioner. Later a Jefferson County
judge reviewed the case and found no legal or ethical violations on the part of Beshear.
Fletcher attempted to use the issue to show that a conflict of interest prevented Beshear from saving the company and drew a comparison between Beshear and Enron
executives at the time of that companies collapse. However, the former Governor's attempts failed as he lost his re-election bid to Beshear by nearly 200,000 votes (18%).
Life insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
companies in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, writing policies in 49 states and the District of Columbia until its collapse in 1993. At the time of the collapse Kentucky Central had over $43 billion in life in force making it the seventh largest insurance collapse in United States history, and at the time the largest business collapse in Kentucky history.
History
Kentucky Central was a small regional life insurance company based in Louisville, KentuckyLouisville, Kentucky
Louisville is the largest city in the U.S. state of Kentucky, and the county seat of Jefferson County. Since 2003, the city's borders have been coterminous with those of the county because of a city-county merger. The city's population at the 2010 census was 741,096...
until 1959 when controlling interest in the company was purchased by Garvice Kincaid who was also named CEO of KCL until his death. Already one of the most successful businessmen in Kentucky, Kincaid owned interests in radio and television broadcasting, banking, finance, real estate, and was also a managing parter in his own law firm when he purchased KCL.
In 1963, Kincaid announced plans to move the company to Lexington, Kentucky
Lexington, Kentucky
Lexington is the second-largest city in Kentucky and the 63rd largest in the US. Known as the "Thoroughbred City" and the "Horse Capital of the World", it is located in the heart of Kentucky's Bluegrass region...
in an attempt to consolidate his many business interests in the Central Kentucky region. Kentucky Central's move came during a “golden era” of business in Lexington as the city's economy moved from being agrarian in nature (centering around the tobacco and Thoroughbred
Thoroughbred
The Thoroughbred is a horse breed best known for its use in horse racing. Although the word thoroughbred is sometimes used to refer to any breed of purebred horse, it technically refers only to the Thoroughbred breed...
industry) as other major corporations such as IBM
IBM
International Business Machines Corporation or IBM is an American multinational technology and consulting corporation headquartered in Armonk, New York, United States. IBM manufactures and sells computer hardware and software, and it offers infrastructure, hosting and consulting services in areas...
, Ashland Oil, and Jerrico moved to or began expanding operations in the city.
As Lexington and Kentucky Central grew during the late 1960s and early 1970s, Kincaid had a vision for the future of the city and the financial resources available to make his vision a reality. During this time he began investing profits from KCL into various business ventures including real estate development projects in the downtown Lexington area. The centerpiece of his vision would be Kincaid Towers
Kincaid Towers
The Kincaid Towers is a 22-floor high-rise in Lexington, Kentucky. It is located along Vine Street between Broadway and Mill Street. Its exterior is polished buff concrete with blue tinted glass, with terraces on the 5th, 10th, 14th, and 21st floor . It has a three-story atrium, and a skywalk that...
a 22-floor high rise at a cost of $20 million, that took nearly six year to complete.
Kincaid would not live to see his dream of Kentucky Central becoming the cornerstone of Lexington as a financial center of the southeast when he died in 1975. He was succeeded as CEO by William “Bud” Burnett who would run the company through an additional boom in the companies insurance, real estate, banking, agricultural and broadcasting businesses. However, he was also at the helm of KCL when the company began its collapse.
Association With the Webb Brothers
During Lexington's building boom of the early 1970s Kincaid entered into a business partnership with brothers Donald and Dudley Webb. The Webb Brothers like Kincaid were natives of Kentucky's Appalachian region who had previously conducted business with one of Kincaid's banking interests. Kincaid trusted the Webb's to carry out his vision of a modern downtown Lexington and the two parties entered into a number of business transactions, many of which were backed by loans from Kentucky Central. In these arrangements Kentucky Central would loan the Webb Brother's money to develop real estate projects and the brothers would pay back loans on their various properties.Kincaid trusted the Webb Brothers to such an extent that he when loaning money for real estate and property development he would only require Dudley Webb to sign a personal guarantee contract for the loans. This basic contract only assured that the guarantees would not be enforced unless the Webb's diverted money from the project or if the project fell into dissolution. In either case the real estate would revert back to Kentucky Central.
Bud Burnett continued this agreement with the Webb Brothers where he would loan them funds for real estate projects with the agreement that the guarantees would only be enforced if the project fell into dissolution or if funds were found to be misappropriated or embezzled by the Webb's. This agreement would eventually be one of the factors leading to the downfall of Kentucky Central.
During Burnett's tenure as CEO Kentucky Central through the Webb Brothers began developing even more properties under this arrangement. One reason for the increase in development between the two parties was the downtown revitalization projects associated with Lexington hosting the 1985 NCAA Men's and 1986 Women's Final Four, and the expansion of development projects throughout the Continental United States. Lexington's “new downtown” financed by KCL and developed and managed by the Webb Brothers were viewed in the local media as a success story, however less than ten years later both parties would be in deep financial trouble.
”The Kentucky Enron”
One reason for the push into the real estate and property development market was due to higher than expected payouts on certain high-risk life insurance products. Kentucky Central had set sales goals which could not be met under the financial conditions given, meaning that the company felt they had to push as much revenue as possible out of their real estate investments. This would eventually lead to fewer internal controls and a risky business plan.The contractual arrangement between Kentucky Central and the Webb Brothers along with similar agreements with other local business leaders began to put a strain on Kentucky Central by the end of the 1980s. Multiple construction and development projects were later sited in court documents as being detrimental to the financial stability of the company. One such example was a 23-story development in the San Francisco, California financial district that was built by the Webb Brothers with a loan of $46 million from Kentucky Central. When the Webb's could not sell the development, the property (valued at $25–30 million) reverted back to KCL. It was eventually sold for $19 million at a loss of $27 million dollars. Other examples of similar arrangement took place with Webb developments in New Orleans, Colorado Springs, and Lexington
Lexington, Kentucky
Lexington is the second-largest city in Kentucky and the 63rd largest in the US. Known as the "Thoroughbred City" and the "Horse Capital of the World", it is located in the heart of Kentucky's Bluegrass region...
. Kentucky Central's association with the Webb Brothers was not their only financial misstep and there were other more glaring and questionable business practices in the companies final days, two of which center around former Kentucky Governor Wallace Wilkinson. Wilkinson and Burnett had been long-time friends and business associates. Burnett had supported Wilkinson's 1987 Gubernatorial campaign, and Wilkinson appointed Burnett to the University of Kentucky
University of Kentucky
The University of Kentucky, also known as UK, is a public co-educational university and is one of the state's two land-grant universities, located in Lexington, Kentucky...
Board of Trustees in 1988.
Court documents showed that shortly after Wilkinson's election victory in 1987 he sold a hotel property in Frankfort, Kentucky
Frankfort, Kentucky
Frankfort is a city in Kentucky that serves as the state capital and the county seat of Franklin County. The population was 27,741 at the 2000 census; by population it is the 5th smallest state capital in the United States...
assessed at just over $6 million to a subsidiary of Kentucky Central for $12.6 million, more than twice the assessed value. Also Wilkinson and his wife failed to make interest payments on $11.4 million worth of industrial revenue bonds used to construct a high rise condominium in downtown Lexington in which Kentucky Central served as guarantor. No legal attempt was formally made to have the Wilkinson's pay the interest until after the company went into liquidation.
Wilkinson, the Webb Brothers and other business associates also received loans from Kentucky Central at interest well below the market rate. The Bank of Louisville received rates at well below market value as well as other prominent Central Kentucky figures including former University of Kentucky Athletic Director Larry Ivy and former Kentucky basketball coach Rick Pitino. This practice of issuing loans for high amounts at well under market interest rates also lead to the financial instability of Kentucky Central.
For twenty-three years the accounting firm of Deloitte & Touche served as the auditor of Kentucky Central's accounting and financial records. During this period the firm never reported any financial irregularities within the company when in fact many glaring examples were evident. One example involved Bruce Burnett (the son of CEO Bud Burnett) an independent insurance agent in Lexington who had failed to turn over millions in Kentucky Central premiums paid by customers to the company, and the company in turn never sought payment until after the liquidation. In 1996 Bruce Burnett pled guilty to theft and fraud charges in the case and was sentenced to three years in state prison.
Collapse
The financial irregularities, loans granted at well under market rates, and failure to collect deficiencies through personal guarantees against over 30 different borrowers on loans during the late 1980s and early 1990s left Kentucky Central with financial losses in excess of $141 million dollars. On February 12, 1993 the Commonwealth of Kentucky Department of Insurance seized Kentucky Central and after an extensive audit found the company to be insolvent. After nearly a century in business one of the nation's leading life insurance companies was effectively out of business and over 1000 employees were without work.Ill with brain cancer Bud Burnett died soon after Kentucky Central was declared insolvent and liquidation proceedings began in early 1994. One year later Jefferson-Pilot assumed the companies life and annuity responsibilities and provided $250 million in related support. Bankers Trust Company purchased nearly $225 million in real estate holding from KCL . Two Lexington media outlets (WVLK-590 AM
WVLK (AM)
WVLK is a radio station serving the Lexington, Kentucky area with a News/Talk format. This station broadcasts on AM frequency 590 kHz and is under ownership of Cumulus Media.-Programming:...
radio and WKYT-27
WKYT-TV
WKYT-TV is the CBS-affiliated television station in Lexington, Kentucky, serving the east-central part of Kentucky. Through cable, the station also reaches much of eastern, southern & northern Kentucky. Its transmitter is located in Lexington, east of the intersection of I-75 & US 60...
television), as well as WYMT-TV
WYMT-TV
WYMT-TV is the CBS-affiliated television station for Hazard, Kentucky. It broadcasts a high definition digital signal on VHF channel 12 from a transmitter south of the city in Perry County. Owned by Gray Television, the station is sister to Lexington's CBS affiliate WKYT-TV. Although it identifies...
in Hazard
Hazard, Kentucky
As of the census of 2000, there were 4,806 people, 1,946 households, and 1,266 families residing in the city. The population density was 684.6 people per square mile . There were 2,291 housing units at an average density of 326.4 per square mile...
were also sold. WVLK is now owned by Cumulus Media
Cumulus Media
Cumulus Media, Inc. is the second largest Owner and Operator of AM and FM radio stations in the United States, behind Clear Channel Communications, operating 570 stations in 150 markets as of September 16, 2011. The company also owns Cumulus Media Networks...
and the two television stations are owned by Gray Television
Gray Television
Gray Television, Inc. is a communications company headquartered in Atlanta, Georgia, with administrative offices in Albany, Georgia.Established in 1946 by James H...
.
Other business interests were sold to various companies and over thirty lawsuits were filed in Kentucky courts to recoup funds. One of the initial lawsuits filed by the state was against the KCL Board of Directors and the estate of the late Bud Burnett seeking $200 million in damages. Also sued by the liquidators were Dudley, Donald (and his wife) Julie Webb as well as former governor Wallace Wilkinson. The Webb's were sued for $108 million, but settled after years of litigation for a combined $ 3.85 million.
Steve Beshear Controversy
During the 2007 Gubernatorial campaign Democratic candidate Steve BeshearSteve Beshear
Steven Lynn "Steve" Beshear is an American politician who is the 61st Governor of the Commonwealth of Kentucky. A Democrat, Beshear previously served in the Kentucky House of Representatives from 1974 to 1979, was the state's Attorney General from 1980 to 1983, and was Lieutenant Governor from...
was accused by his opponent then Governor Ernie Fletcher
Ernie Fletcher
Ernest Lee "Ernie" Fletcher is a Republican politician from the U.S. state of Kentucky. In 1999, he was elected to the first of three consecutive terms in the United States House of Representatives; he resigned in 2003 after being elected the 60th governor of Kentucky and served in that office...
of having a role in the collapse of Kentucky Central. Beshear's law firm, Stites & Harbison, was hired to serve as general counsel to liquidator Donald Stephens, who was the state insurance commissioner.
However, Stites & Harbison already represented the Bank of Louisville, whose holdings included millions of dollars of securities put up as collateral for a loan connected to Kentucky Central in a complicated real estate deal. Stephens asked another law firm in 1995 to look into allegations that Stites & Harbison had a conflict of interest representing the Office of Insurance while continuing to represent the Bank of Louisville. The report claimed Beshear was not directly involved but had "general knowledge" of the conflict of interest and should have told the insurance commissioner. Later a Jefferson County
Jefferson County, Kentucky
As of the census of 2000, there were 693,604 people, 287,012 households, and 183,113 families residing in the county. The population density was . There were 305,835 housing units at an average density of...
judge reviewed the case and found no legal or ethical violations on the part of Beshear.
Fletcher attempted to use the issue to show that a conflict of interest prevented Beshear from saving the company and drew a comparison between Beshear and Enron
Enron
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 22,000 staff and was one of the world's leading electricity, natural gas, communications, and pulp and paper companies, with...
executives at the time of that companies collapse. However, the former Governor's attempts failed as he lost his re-election bid to Beshear by nearly 200,000 votes (18%).