Investors Heritage Capital 10Q 2012 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT

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

For the quarterly period ended September 30, 2012

000-01999

(Commission file number)

INVESTORS HERITAGE CAPITAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

KENTUCKY		61-6030333
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

200 Capital Avenue, P.O. Box 717
Frankfort, Kentucky 40602
(Address of principal executive offices)

(502) 223-2361
(Registrant’s telephone number, including area code)

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)		Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Securities registered pursuant to Section 12(g) of the Act:

Common Capital Stock par value $1.00 per share

(Title of Class)

Number of outstanding shares as of November 14, 2012 - 1,143,523.349

CONTENTS

	PART I – FINANCIAL INFORMATION
		Page
ITEM 1.	Condensed Consolidated Financial Statements	4
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
ITEM 4.	Controls and Procedures	37



	PART II – OTHER INFORMATION

ITEM 1.	Legal Proceedings	38
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
ITEM 3.	Defaults Upon Senior Securities	38
ITEM 4.	Mine Safety Disclosures	38
ITEM 5.	Other Information	38
ITEM 6.	Exhibits	38


SIGNATURES		39

EXHIBIT 31.1		40
EXHIBIT 31.2		42
EXHIBIT 32		44

PART I – FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Balance Sheets (Unaudited)

	September 30, 2012		December 31, 2011
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost: $394,324,955 and $389,789,791)	$	439,685,524	$	421,640,668
Equity securities (cost: $1,170,006 and $1,099,678)		1,480,201		1,376,140
Mortgage loans on real estate		17,367,236		19,332,470
Policy loans		6,876,835		7,050,892
State-guaranteed receivables		7,636,303		6,468,912
Investment in derivative		684,600		752,700
Other invested assets		1,283,300		1,736,766
Short-term investments		17,094		-
Total investments		475,031,093		458,358,548
Cash and cash equivalents		4,250,651		6,534,616
Accrued investment income		4,601,828		4,978,676
Due premiums		3,519,407		3,697,869
Deferred acquisition costs		16,789,329		16,619,021
Value of business acquired		551,284		674,762
Leased property under capital leases		344,432		505,541
Property and equipment		2,164,592		1,751,706
Cash value of company-owned life insurance		10,564,324		9,899,557
Other assets		1,680,037		1,242,250
Amounts recoverable from reinsurers		52,358,830		47,582,367
Total assets	$	571,855,807	$	551,844,913

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities:
Benefit reserves	$	460,921,576	$	451,421,904
Unearned premium reserves		9,465,756		9,568,125
Policy claims		2,180,537		2,098,959
Liability for deposit-type contracts		3,133,557		3,007,905
Reserves for dividends and endowments and other		469,950		526,480
Total policy liabilities		476,171,376		466,623,373
Deferred federal income tax liability		14,812,051		9,325,937
Obligations under capital leases		345,393		496,958
Notes payable		1,236,450		1,781,337
Accrued pension liability		6,048,656		9,547,038
Other liabilities		3,668,876		6,406,549
Total liabilities		502,282,802		494,181,192

STOCKHOLDERS' EQUITY
Common stock (shares issued: 1,157,042 and 1,152,737)		1,157,042		1,152,737
Paid-in surplus		8,907,997		8,832,222
Accumulated other comprehensive income		24,414,963		13,605,484
Retained earnings		35,093,003		34,073,278
Total stockholders' equity		69,573,005		57,663,721
Total liabilities and stockholders' equity	$	571,855,807	$	551,844,913

See notes to consolidated financial statements.

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Income Statements (Unaudited)

	Quarter Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
REVENUE
Premiums and other considerations	$	17,526,584		$	17,436,621		$	50,632,068		$	42,965,639
Premiums ceded		(5,410,565	)		(3,160,584	)		(14,363,992	)		(8,309,966	)
Net premiums earned		12,116,019			14,276,037			36,268,076			34,655,673

Investment income, net of expenses		5,245,110			4,417,405			15,593,997			12,859,999
Net realized gains (losses) on investments:
Total other-than-temporary impairment losses		-			-			-			-
Portion of loss recognized in other comprehensive income		-			-			-			-
Other net realized investment gains (losses)		249,927			(2,022	)		448,186			36,334
Net realized gains (losses) on investments		249,927			(2,022	)		448,186			36,334
Consideration on reinsurance assumed		-			94,034,978			9,523			94,048,095
Other income		415,825			441,439			1,249,727			1,250,003
Total revenue		18,026,881			113,167,837			53,569,509			142,850,104

BENEFITS AND EXPENSES
Death and other benefits		9,829,253			9,438,412			32,324,798			26,791,807
Guaranteed annual endowments		103,967			108,001			349,201			364,366
Dividends to policyholders		94,774			98,820			331,526			352,392
Increase in benefit reserves and unearned premiums		3,201,772			99,349,004			7,100,162			103,477,756
Acquisition costs deferred		(2,400,294	)		(1,758,703	)		(6,362,851	)		(4,384,921	)
Amortization of deferred acquisition costs		2,108,748			1,735,853			5,831,702			4,728,071
Commissions		1,331,913			1,155,284			3,525,307			2,688,531
Other general and administrative expenses		2,385,935			3,069,946			8,656,620			8,762,303
Total benefits and expenses		16,656,068			113,196,617			51,756,465			142,780,305

INCOME (LOSS) BEFORE FEDERAL INCOME TAXES		1,370,813			(28,780	)		1,813,044			69,799

PROVISION (BENEFIT) FOR FEDERAL INCOME TAXES
Current		342,339			26,884			640,254			190,048
Deferred		68,906			(35,699	)		(96,340	)		(168,670	)
Total federal income taxes		411,245			(8,815	)		543,914			21,378

NET INCOME (LOSS)	$	959,568		$	(19,965	)	$	1,269,130		$	48,421

BASIC AND DILUTED NET INCOME (LOSS) PER SHARE	$	0.83		$	(0.02	)	$	1.10		$	0.04

DIVIDENDS PER SHARE	$	-		$	-		$	0.23		$	0.18

See notes to condensed consolidated financial statements.

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

	Quarter Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011

NET INCOME (LOSS)	$	959,568		$	(19,965	)	$	1,269,130		$	48,421

OTHER COMPREHENSIVE INCOME:
Change in net unrealized gains on available-for-sale securities:
Unrealized holding gains arising during period		6,469,578			8,862,261			13,991,611			12,160,469
Reclassification adjustment for (gains) losses included in income		(249,927	)		2,022			(448,186	)		(36,334	)
Adjustment for effects of deferred acquisition costs		(166,471	)		(59,849	)		(360,841	)		(177,334	)
Net unrealized gains on investments		6,053,180			8,804,434			13,182,584			11,946,801
Change in defined benefit pension plan:
Amortization of actuarial net loss in net periodic pension cost		171,359			131,264			690,197			393,792
Curtailment of defined benefit pension plan		-			-			2,519,152			-
Net change in defined benefit pension plan		171,359			131,264			3,209,349			393,792

Other comprehensive income before income taxes		6,224,539			8,935,698			16,391,933			12,340,593

Income tax expense		2,124,612			3,028,217			5,582,454			4,172,322

OTHER COMPREHENSIVE INCOME, NET OF TAXES		4,099,927			5,907,481			10,809,479			8,168,271

COMPREHENSIVE INCOME	$	5,059,495		$	5,887,516		$	12,078,609		$	8,216,692

See notes to condensed consolidated financial statements.

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)

	Common Stock		Paid-in Surplus		Accumulated Other Comprehensive Income		Retained Earnings			Total Stockholders' Equity

BALANCE, JANUARY 1, 2011	$	1,151,817	$	8,801,514	$	7,482,092	$	33,737,040		$	51,172,463

Net income		-		-		-		48,421			48,421
Other comprehensive income		-		-		8,168,271		-			8,168,271
Cash dividends		-		-		-		(207,327	)		(207,327	)
Issuances of common stock, net		920		30,708		-		(8,564	)		23,064
BALANCE, SEPTEMBER 30, 2011	$	1,152,737	$	8,832,222	$	15,650,363	$	33,569,570		$	59,204,892

BALANCE, JANUARY 1, 2012	$	1,152,737	$	8,832,222	$	13,605,484	$	34,073,278		$	57,663,721

Net income		-		-		-		1,269,130			1,269,130
Other comprehensive income		-		-		10,809,479		-			10,809,479
Cash dividends		-		-		-		(265,129	)		(265,129	)
Issuances of common stock, net		4,305		75,775		-		15,724			95,804
BALANCE, SEPTEMBER 30, 2012	$	1,157,042	$	8,907,997	$	24,414,963	$	35,093,003		$	69,573,005

See notes to condensed consolidated financial statements.

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Nine Months Ended September 30,
	2012			2011

NET CASH PROVIDED BY OPERATING ACTIVITIES	$	4,146,457		$	98,511,815
INVESTING ACTIVITIES
Purchases of available-for-sale securities		(30,571,100	)		(120,557,202	)
Sales of available-for-sale securities		5,836,594			2,045,000
Maturities of available-for-sale securities		20,007,088			22,907,170
Acquisitions of mortgage loans on real estate		(2,165,000	)		(1,737,500	)
Payments of mortgage loans on real estate		4,125,114			3,352,808
Purchases of state-guaranteed receivables		(1,247,494	)		(2,767,717	)
Payments of state-guaranteed receivables		426,780			-
Purchase of derivative instrument		-			(645,000	)
Acquisitions of short-term investments		(34,188	)		(24,028,034	)
Sales and maturities of short-term investments		17,094			24,501,981
Net change in payable for securities		(87,103	)		15,027,548
Net reductions (additions) in other investments		627,523			(92,254	)
Net additions to property and equipment		(623,697	)		(396,479	)
NET CASH USED IN INVESTING ACTIVITIES		(3,688,389	)		(82,389,679	)
FINANCING ACTIVITIES
Receipts from universal life policies credited to policyholder account balances		4,295,466			4,240,220
Return of policyholder account balances on universal life policies		(6,323,287	)		(6,312,052	)
Payments on notes payable		(3,286,553	)		(3,686,294	)
Proceeds from notes payable		2,741,666			2,740,529
Dividends paid		(265,129	)		(207,327	)
Issuances of common stock, net		95,804			23,064
NET CASH USED IN FINANCING ACTIVITIES		(2,742,033	)		(3,201,860	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(2,283,965	)		12,920,276
Cash and cash equivalents at beginning of period		6,534,616			2,647,798
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	4,250,651		$	15,568,074

See notes to consolidated financial statements.

INVESTORS HERITAGE CAPITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Unaudited)

NOTE 1 - Nature of Operations

Investors Heritage Capital Corporation is the holding company of Investors Heritage Life Insurance Company; Investors Heritage Printing, Inc., a printing company; Investors Heritage Financial Services Group, Inc., an insurance marketing company; is the sole member of At Need Funding, LLC, a limited liability company that provides advance funding of funerals in exchange for the irrevocable assignment of life insurance policy proceeds from other nonaffiliated companies; and is the sole member of Heritage Funding, LLC, a limited liability company that invests in various business ventures. These entities are collectively hereinafter referred to as the “Company”. In excess of 99% of Investors Heritage Capital’s consolidated revenue is generated by Investors Heritage Life.

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

NOTE 2 - Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles 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 U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2011, as included in our Annual Report on Form 10-K.

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

Management has evaluated all events subsequent to September 30, 2012 through the date that these financial statements have been issued.

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

NOTE 3 – New Accounting Pronouncements

In October 2010, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. Under the new guidance, acquisition costs are to include only those costs that are directly related to the acquisition or renewal of insurance contracts by applying a model similar to the accounting for loan origination costs. An entity may defer incremental direct costs of contract acquisition that are incurred in transactions with independent third parties or employees as well as the portion of employee compensation and other costs directly related to underwriting, policy issuance and processing, medical inspection, and contract selling for successfully negotiated contracts. Additionally, an entity may capitalize as a deferred acquisition cost only those advertising costs meeting the capitalization criteria for direct-response advertising. This change became effective for fiscal years beginning after December 15, 2011 and interim periods within those years. We adopted this guidance effective January 1, 2012. The adoption of this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.

In May 2011, the FASB issued new guidance concerning fair value measurements and disclosure. The new guidance is the result of joint efforts by the FASB and the International Accounting Standards Board to develop a single, converged fair value framework on how to measure fair value and the necessary disclosures concerning fair value measurements. This guidance became effective for interim and annual periods beginning after December 15, 2011. The Company’s adoption of this guidance resulted in a change in certain fair value footnote disclosures but did not have any effect on the Company’s results of operations, financial position or liquidity.

In June 2011, the FASB issued updated guidance to increase the prominence of items reported in other comprehensive income by eliminating the option of presenting components of comprehensive income as part of the statement of changes in stockholders’ equity. The updated guidance requires that all non-owner changes in stockholders’ equity be presented either as a single continuous statement of comprehensive income or in two separate but consecutive statements. The updated guidance is to be applied retrospectively and became effective for the quarter ending March 31, 2012. The Company adopted this guidance utilizing two separate but consecutive statements. The Company’s adoption of this guidance resulted in a change in the presentation of the Company’s consolidated financial statements but did not have any impact on the Company’s results of operations, financial position or liquidity.

NOTE 4 – Investments

Investments in available-for-sale securities are summarized as follows:

September 30, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Fixed maturity securities:
U.S. government obligations	$	48,389,286	$	4,797,691	$	-	$	53,186,977
States and political subdivisions		46,927,818		7,752,066		-		54,679,884
Corporate		204,015,017		23,971,029		12,678		227,973,368
Foreign		48,789,025		4,586,680		41,676		53,334,029
Asset-backed securities		4,543,313		344,430		590		4,887,153
Mortgage-backed securities (MBS):
Commercial MBS		7,080,251		461,814		-		7,542,065
Residential MBS		34,580,245		3,501,803		-		38,082,048
Total fixed maturity securities		394,324,955		45,415,513		54,944		439,685,524
Equity securities:
U.S. agencies		681,300		-		-		681,300
Mutual funds		318,283		16,287		-		334,570
Corporate common stock		170,423		293,908		-		464,331
Total equity securities		1,170,006		310,195		-		1,480,201
Total	$	395,494,961	$	45,725,708	$	54,944	$	441,165,725

December 31, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Fixed maturity securities:
U.S. government obligations	$	52,208,593	$	4,134,415	$	-	$	56,343,008
States and political subdivisions		47,104,054		6,067,945		-		53,171,999
Corporate		199,007,279		14,999,595		603,218		213,403,656
Foreign		36,303,830		3,324,085		447,179		39,180,736
Asset-backed securities		5,041,278		438,652		735		5,479,195
Mortgage-backed securities (MBS):
Commercial MBS		7,893,233		414,233		-		8,307,466
Residential MBS		42,231,524		3,523,084		-		45,754,608
Total fixed maturity securities		389,789,791		32,902,009		1,051,132		421,640,668
Equity securities:
U.S. agencies		552,800		-		-		552,800
Mutual funds		318,283		52,253		-		370,536
Corporate common stock		228,595		234,535		10,326		452,804
Total equity securities		1,099,678		286,788		10,326		1,376,140
Total	$	390,889,469	$	33,188,797	$	1,061,458	$	423,016,808

The following table summarizes, for all securities in an unrealized loss position as of the balance sheet dates, the estimated fair value, pre-tax gross unrealized loss and number of securities by length of time that those securities have been continuously in an unrealized loss position.

	September 30, 2012						December 31, 2011
	Estimated Fair Value		Gross Unrealized Loss		Number of Securities		Estimated Fair Value		Gross Unrealized Loss		Number of Securities
Fixed Maturities:
Less than 12 months:
Corporate	$	663,659	$	8,958		2	$	20,516,939	$	603,218		20
Foreign		3,212,070		26,422		1		1,875,940		122,315		1
Asset-backed securities		-		-		-		58,892		735		1
Greater than 12 months:
Corporate		244,280		3,720		1		-		-		-
Foreign		965,140		15,254		1		653,350		324,864		1
Asset-backed securities		59,037		590		1		-		-		-
Total fixed maturities		5,144,186		54,944		6		23,105,121		1,051,132		23

Equities:
Less than 12 months:
Corporate common stock		-		-		-		100,804		10,326		1
Total equities		-		-		-		100,804		10,326		1

Total	$	5,144,186	$	54,944		6	$	23,205,925	$	1,061,458		24

As of September 30, 2012, all of the above fixed maturity securities individually had a fair value to cost ratio equal to or greater than 97% and the equity securities had a fair value to cost ratio equal to or exceeding 100%. As of December 31, 2011, except for one fixed maturity security with a fair value to cost ratio of 67%, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 89% and the equity securities noted above had a fair value to cost ratio of over 90%.

The Company’s decision to record an impairment loss is primarily based on whether the security’s fair value is likely to remain significantly below its book value in light of all the factors considered. Factors that are considered include the length of time the security’s fair value has been below its carrying amount, the severity of the decline in value, the credit worthiness of the issuer, and the coupon and/or dividend payment history of the issuer. The Company also assesses whether it intends to sell or whether it is more likely than not that it may be required to sell the security prior to its recovery in value. For any fixed maturity securities that are other-than-temporarily impaired, the Company determines the portion of the other-than-temporary impairment that is credit-related and the portion that is related to other factors. The credit-related portion is the difference between the expected future cash flows and the amortized cost basis of the fixed maturity security, and that difference is charged to earnings. The non-credit-related portion representing the remaining difference to fair value is recognized in other comprehensive income (loss). Only in the case of a credit-related impairment where management has the intent to sell the security, or it is more likely than not that it will be required to sell the security before recovery of its cost basis, is a fixed maturity security adjusted to fair value and the resulting losses recognized in realized gains (losses) in the consolidated statements of income. Any other-than-temporary impairments on equity securities are recorded in the consolidated statements of income in the periods incurred as the difference between fair value and cost. Based on our review, the Company experienced no other-than-temporary impairments during the quarters or nine months ended September 30, 2012 or 2011.

Management believes that the Company will fully recover its cost basis in the securities held at September 30, 2012, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature. The temporary impairments shown herein are primarily the result of the current interest rate environment rather than credit factors that would imply other-than-temporary impairment.

During the third and fourth quarters of 2012, the Company sold its investment in Farmers Bank Capital Corporation common stock. An other-than-temporary impairment had previously been recorded on this holding. For the nine months ended September 30, 2012 the gain associated with the portion of this stock sold totaled $63,431, with an additional gain of $58,545 recognized during the fourth quarter for the remaining stock sold. We have no remaining assets for which other-than-temporary impairments have been recorded.

Net unrealized gains for investments classified as available-for-sale are presented below, net of the effect on deferred income taxes and deferred acquisition costs assuming that the appreciation (depreciation) had been realized.

	September 30, 2012			December 31, 2011
Net unrealized appreciation on available-for sale securities	$	45,670,764		$	32,127,339
Adjustment to deferred acquisition costs		(1,348,503	)		(987,662	)
Deferred income taxes		(15,296,367	)		(10,805,092	)
Net unrealized appreciation on available-for sale securities	$	29,025,894		$	20,334,585

The amortized cost and fair value of fixed maturity securities at September 30, 2012, by contractual maturity, are presented below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available-for-Sale
	Amortized Cost		Fair Value
Due in one year or less	$	24,061,461	$	24,628,683
Due after one year through five years		67,172,082		74,233,158
Due after five years through ten years		175,486,713		196,617,608
Due after ten years		85,944,203		98,581,962
Due at multiple maturity dates		41,660,496		45,624,113
Total	$	394,324,955	$	439,685,524

Proceeds for the quarters and nine months ended September 30, 2012 and 2011 from sales and maturities of investments in available-for-sale securities, as well as gross gains and gross losses realized, are presented below.

	Quarter Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Proceeds from sales and maturities	$	6,723,467		$	7,647,299		$	25,843,682		$	24,952,170
Gross realized gains		251,815			-			455,444			44,611
Gross realized losses		(1,888	)		(2,022	)		(7,258	)		(8,277	)

Presented below is investment information, including the accumulated quarter and year-to-date change in net unrealized investment gains or losses. Additionally, the table shows the change in net unrealized investment gains (losses) and the amount of realized investment gains (losses) on fixed maturities and equity securities for the quarters and nine months ended September 30, 2012 and 2011.

	Quarter Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012		2011
Change in unrealized investment gains (losses):
Available-for-sale:
Fixed maturities	$	6,239,402		$	9,294,499		$	13,509,692	$	12,319,909
Equity securities		(19,751	)		(430,215	)		33,733		(195,774	)
Realized investment gains (losses):
Available-for-sale:
Fixed maturities	$	186,496		$	(2,022	)	$	384,755	$	36,334
Equity securities		63,431			-			63,431		-

The Company is required to hold assets on deposit for the benefit of policyholders in accordance with statutory rules and regulations. At September 30, 2012 and December 31, 2011, these required deposits had a total amortized cost of $22,699,767 and $22,821,430, respectively.

During the third quarter of 2011, the Company began purchasing investments in state-guaranteed receivables. These investments represent an assignment of the future rights to cash flows from lottery winners purchased at a discounted price. Payments on these investments are made by state run lotteries and guaranteed by the states. The state-guaranteed receivables are carried at their amortized cost basis on the balance sheet. At September 30, 2012, the amortized cost and estimated fair value of state-guaranteed receivables, by contractual maturity, are summarized as follows:

	Amortized Cost		Fair Value
Due in one year or less	$	530,772	$	539,024
Due after one year through five years		2,268,886		2,480,038
Due after five years through ten years		2,547,330		3,225,677
Due after ten years		2,289,315		3,429,969
Total	$	7,636,303	$	9,674,708

The amortized cost of state-guaranteed receivables, by state, is summarized as follows:

	September 30, 2012		December 31, 2011
New York	$	3,953,149	$	4,043,425
Massachusetts		2,729,305		1,815,672
Pennsylvania		271,088		106,417
California		199,223		209,073
Texas		194,950		185,021
Georgia		193,319		-
Ohio		95,269		109,304
Total	$	7,636,303	$	6,468,912

During the third quarter of 2011, the Company purchased a $3,000,000 position in a Morgan Stanley market-indexed note. The note pays 1% interest annually and matures in six years. At maturity, the Company participates at 110% of any increase in the Dow Jones Industrial Average since the purchase date, but is guaranteed against market-related downside risk. Accordingly, a portion of the investment is classified as a derivative and bifurcated for reporting purposes. The derivative portion, having a cost basis of $645,000 calculated at 21.5% of the total value of the purchase price of the note, is reported as an investment in derivative on the balance sheet. The remaining non-derivative portion of the note is reported within fixed maturities on the balance sheet. This derivative is marked-to-market through the income statement, with the change in value reported as a component of investment income on the income statement.

Major categories of net investment income are summarized as follows:

	Quarter Ended September 30,					Nine Months Ended September 30,
	2012		2011			2012			2011
Fixed maturities	$	4,866,812	$	4,155,889		$	14,583,269		$	12,029,643
Equity securities		13,637		33,560			41,021			109,553
Mortgage loans on real estate		356,252		345,236			1,027,434			985,247
Policy loans		123,004		123,985			367,497			364,718
State-guaranteed receivables		118,680		1,744			346,676			1,744
Gain (loss) on investment in derivative		4,800		(45,698	)		(68,100	)		(45,698	)
Other		22,987		41,889			79,383			132,351
Gross investment income		5,506,172		4,656,605			16,377,180			13,577,558
Investment expenses		261,062		239,200			783,183			717,559
Net investment income	$	5,245,110	$	4,417,405		$	15,593,997		$	12,859,999

NOTE 5 – Fair Values of Financial Instruments

The fair value of a financial instrument is the estimated amount at which the instrument could be exchanged in an orderly transaction between knowledgeable, unrelated, willing parties, i.e., not in a forced transaction. The estimated fair value of a financial instrument may differ from the amount that could be realized if the security was sold in an immediate sale, e.g., a forced transaction. Additionally, the valuation of investments is more subjective when markets are less liquid due to the lack of market based inputs, which may increase the potential that the estimated fair value of an investment is not reflective of the price at which an actual transaction would occur.

The Company holds fixed maturities and equity securities that are measured and reported at fair market value on the balance sheet. The Company is also required to disclose fair value estimates for other financial instruments not required to be carried at market value on the balance sheet. The Company determines the fair market values of its financial instruments based on the fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value, as follows:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The unobservable inputs reflect the Company’s own assumptions about the inputs that market participants would use.

The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into the three-level fair value hierarchy. If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the valuation inputs, or their ability to be observed, may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the beginning of the quarter in which the reclassifications occur.

Valuation of Investments Reported at Fair Value in Financial Statements

The Company’s Level 1 investments include equity securities that are traded in an active exchange market, as well as one U.S. agency equity security whose value is set by government statute.

The Company’s Level 2 investments include fixed maturities with quoted prices that are traded less frequently than exchange-traded instruments or instruments whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes the majority of our fixed maturities, where fair values are obtained from a nationally recognized, third-party pricing service.

The Company’s Level 3 investments include financial instruments whose value cannot be obtained through a pricing service and must be determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category currently includes one private equity investment and three fixed maturities where independent pricing inputs were not able to be obtained for a significant portion of the underlying assets. For the fixed maturities within this level, the Company utilizes the assistance of its third-party investment advisor to estimate the fair value based on non-binding broker quotes and internal models using unobservable assumptions about market participants. For the private equity investment, the Company establishes fair value based on the most recent trading activity as well as a review of the underlying financial statements of the entity. The Company’s Level 3 segment also includes the investment in derivative related to the bifurcated equity-indexed portion of a market-indexed note. The value of the derivative portion of this investment was derived from an option pricing model that utilizes the current Dow Jones Industrial Average compared to the strike price in the note, along with various other market assumptions including those regarding volatility and dividend yields.

The following table presents the Company’s fair value hierarchy for those financial instruments measured and reported at fair value on a recurring basis as of September 30, 2012 and December 31, 2011, respectively.

	September 30, 2012
	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. government obligations	$	-	$	53,186,977	$	-	$	53,186,977
States and political subdivisions		-		54,679,884		-		54,679,884
Corporate		-		225,891,325		2,082,043		227,973,368
Foreign		-		53,334,029		-		53,334,029
Asset-backed securities		-		4,887,153		-		4,887,153
Mortgage-backed securities:
Commercial MBS		-		7,542,065		-		7,542,065
Residential MBS		-		38,082,048		-		38,082,048
Total fixed maturities	$	-	$	437,603,481	$	2,082,043	$	439,685,524

Equity securities:
U.S. agencies	$	681,300	$	-	$	-	$	681,300
Mutual funds		334,570		-		-		334,570
Corporate common stock		112,331		-		352,000		464,331
Total equity securities	$	1,128,201	$	-	$	352,000	$	1,480,201

Investment in derivative	$	-	$	-	$	684,600	$	684,600

	December 31, 2011
	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. government obligations	$	-	$	56,343,008	$	-	$	56,343,008
States and political subdivisions		-		53,171,999		-		53,171,999
Corporate		-		211,270,577		2,133,079		213,403,656
Foreign		-		39,180,736		-		39,180,736
Asset-backed securities		-		5,479,195		-		5,479,195
Mortgage-backed securities:
Commercial MBS		-		8,307,466		-		8,307,466
Residential MBS		-		45,754,608		-		45,754,608
Total fixed maturities	$	-	$	419,507,589	$	2,133,079	$	421,640,668

Equity securities:
U.S. agencies	$	552,800	$	-	$	-	$	552,800
Mutual funds		370,536		-		-		370,536
Corporate common stock		100,804		-		352,000		452,804
Total equity securities	$	1,024,140	$	-	$	352,000	$	1,376,140

Investment in derivative	$	-	$	-	$	752,700	$	752,700

The following tables provide a summary of changes in fair value of our Level 3 financial instruments reported at fair value for the quarters and nine months ended September 30, 2012 and 2011, respectively.

	Quarter Ended September 30, 2012
	Corporate			Asset- Backed Securities		Corporate Common Stock		Investment in Derivative		Total
Beginning balance	$	2,089,651		$	-	$	352,000	$	679,800	$	3,121,451
Transfers into Level 3		-			-		-		-		-
Transfers out of Level 3		-			-		-		-		-
Purchases		-			-		-		-		-
Sales		(52,974	)		-		-		-		(52,974	)
Total gains or losses:
Included in earnings		-			-		-		4,800		4,800
Included in other comprehensive income		45,366			-		-		-		45,366
Ending balance	$	2,082,043		$	-	$	352,000	$	684,600	$	3,118,643

	Quarter Ended September 30, 2011
	Corporate			Asset- Backed Securities		Corporate Common Stock		Investment in Derivative		Total
Beginning balance	$	2,166,832		$	-	$	344,000	$	-	$	2,510,832
Transfers into Level 3		-			-		-		-		-
Transfers out of Level 3		-			-		-		-		-
Purchases		-			-		-		-		-
Sales		(40,790	)		-		-		-		(40,790	)
Total gains or losses:
Included in earnings		-			-		-		-		-
Included in other comprehensive income		6,070			-		-		-		6,070
Ending balance	$	2,132,112		$	-	$	344,000	$	-	$	2,476,112

	Nine Months Ended September 30, 2012
	Corporate			Asset- Backed Securities		Corporate Common Stock		Investment in Derivative			Total
Beginning balance	$	2,133,079		$	-	$	352,000	$	752,700		$	3,237,779
Transfers into Level 3		-			-		-		-			-
Transfers out of Level 3		-			-		-		-			-
Purchases		-			-		-		-			-
Sales		(102,008	)		-		-		-			(102,008	)
Total gains or losses:
Included in earnings		-			-		-		(68,100	)		(68,100	)
Included in other comprehensive income		50,972			-		-		-			50,972
Ending balance	$	2,082,043		$	-	$	352,000	$	684,600		$	3,118,643

	Nine Months Ended September 30, 2011
	Corporate			Asset- Backed Securities			Corporate Common Stock		Investment in Derivative		Total
Beginning balance	$	-		$	387,863		$	344,000	$	-	$	731,863
Transfers into Level 3		1,701,785			-			-		-		1,701,785
Transfers out of Level 3		-			(387,863	)		-		-		(387,863	)
Purchases		400,000			-			-		-		400,000
Sales		(74,051	)		-			-		-		(74,051	)
Total gains or losses:
Included in earnings		-			-			-		-		-
Included in other comprehensive income		104,378			-			-		-		104,378
Ending balance	$	2,132,112		$	-		$	344,000	$	-	$	2,476,112

The Company experienced no transfers between Level 1 and Level 2 during the quarters or nine months ended September 30, 2012 or 2011. The Company experienced no transfers between Level 2 and Level 3 during the quarter or nine months ended September 30, 2012. The Company had one asset-backed security that transferred from Level 3 to Level 2 during the nine months ended September 30, 2011. The Company had two corporate fixed maturities that transferred from Level 2 to Level 3 during the nine months ended September 30, 2011. Transfers in and/or (out) of Level 3 are primarily attributable to changes in the availability of market observable information and re-evaluation of the observability of pricing inputs.

The unrealized gains (losses) on Level 3 investments are recorded as a component of accumulated other comprehensive income (loss), net of tax, in accordance with required accounting for our available-for-sale portfolio.

Financial Instruments Disclosed, but not Carried, at Fair Value

The following disclosure presents the carrying values and estimated fair values of the Company’s financial instruments disclosed, but not carried, at fair value as of September 30, 2012 and December 31, 2011, and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis. The fair values for insurance contracts other than investment-type contracts are not required to be disclosed. The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment was required to interpret market data to develop these estimates. Accordingly, the estimates are not necessarily indicative of the amounts which could be realized in a current market exchange. The use of different market assumptions or estimation methodologies may have a material effect on the fair value amounts.

	September 30, 2012
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets:
Mortgage loans on real estate:
Commercial	$	17,349,912	$	18,091,945	$	-	$	18,091,945	$	-
Residential		17,324		18,598		-		18,598		-
Policy loans		6,876,835		6,876,835		-		-		6,876,835
State-guaranteed receivables		7,636,303		9,674,708		-		9,674,708		-
Other invested assets		1,283,300		1,283,300		-		-		1,283,300
Cash and cash equivalents		4,250,651		4,250,651		4,250,651		-		-
Accrued investment income		4,601,828		4,601,828		-		-		4,601,828
Cash value of company-owned life insurance		10,564,324		10,564,324		-		-		10,564,324

Liabilities:
Policyholder deposits (Investment-type contracts)		55,120,116		59,196,044		-		-		59,196,044
Policy claims		2,180,537		2,180,537		-		-		2,180,537
Obligations under capital leases		345,393		345,393		-		-		345,393
Notes payable		1,236,450		1,237,229		-		-		1,237,229

	December 31, 2011
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets:
Mortgage loans on real estate:
Commercial	$	19,311,670	$	20,050,148	$	-	$	20,050,148	$	-
Residential		20,800		23,593		-		23,593		-
Policy loans		7,050,892		7,050,892		-		-		7,050,892
State-guaranteed receivables		6,468,912		7,924,353		-		7,924,353		-
Other invested assets		1,736,766		1,736,766		-		-		1,736,766
Cash and cash equivalents		6,534,616		6,534,616		6,534,616		-		-
Accrued investment income		4,978,676		4,978,676		-		-		4,978,676
Cash value of company-owned life insurance		9,899,557		9,899,557		-		-		9,899,557

Liabilities:
Policyholder deposits (Investment-type contracts)		54,545,769		57,795,323		-		-		57,795,323
Policy claims		2,098,959		2,098,959		-		-		2,098,959
Obligations under capital leases		496,958		496,958		-		-		496,958
Notes payable		1,781,337		1,782,661		-		-		1,782,661

The following methods and assumptions were used in estimating the fair value disclosures for financial instruments in the accompanying financial statements and notes thereto:

Mortgage loans on real estate: The fair values for mortgage loans are estimated using discounted cash flow analyses, using the actual spot rate yield curve in effect at the end of each period, as determined by recent new loan activity.

State-guaranteed receivables: The fair values for state-guaranteed receivables are estimated using discounted cash flow analyses, using the average Citigroup Pension Liability Index in effect at the end of each period.

Cash and cash equivalents: The carrying amounts reported for these financial instruments approximate their fair values given the highly liquid nature of the instruments.

Cash value of company-owned life insurance: The carrying values and fair values for these policies are based on the current cash surrender values of the policies.

Investment-type contracts: The fair value for liabilities under investment-type insurance contracts (accumulation annuities) is calculated using a discounted cash flow approach. Cash flows were projected using actuarial assumptions and discounted to the valuation date using risk-free rates adjusted for credit risk and the nonperformance risk of the liabilities.

Notes payable: The fair values for notes payable on commercial loans with fixed interest rates are estimated using discounted cash flow analyses, assuming current interest rate assumptions for similar borrowings based on information gathered from market loan brokers. The fair value for notes payable with floating interest rates and promissory notes approximate the unpaid principal balances on such notes.

Policy loans, other invested assets, accrued investment income, policy claims and obligations under capital leases: The carrying values of these instruments approximate their fair values and are disclosed in Level 3 of the hierarchy.

NOTE 6 - 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 weighted average number of shares outstanding for the quarters ended September 30, 2012 and 2011 were 1,156,783 and 1,152,782, respectively. The weighted average number of shares outstanding for the nine months ended September 30, 2012 and 2011 were 1,155,083 and 1,152,200, respectively.

NOTE 7 - Segment Data

The Company operates in four segments as shown in the following table. All segments include both individual and group insurance. Identifiable revenues, expenses and assets are assigned directly to the applicable segment. Net investment income, realized gains and losses, and invested assets are generally allocated to the insurance and the corporate segments in proportion to policy liabilities and stockholders' equity, respectively. Certain assets, such as property and equipment and leased property under capital leases, are allocated between the Administrative and financial services segment and the Corporate and other segment. Investors Heritage Financial revenue and income associated with credit administrative services is assigned to the Administrative and financial services segment, along with fees relative to third party administrative services. Any remaining revenue and income is assigned to the Corporate and other segment. Results for the parent company, Investors Heritage Printing, At Need Funding and Heritage Funding, after elimination of intercompany amounts, are allocated to the Corporate and other segment.

	Quarter Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011

Revenue:
Preneed and burial products	$	12,433,393		$	106,342,055		$	37,401,694		$	127,567,866
Traditional and universal life products		5,028,839			6,317,887			14,610,689			13,736,940
Administrative and financial services		357,449			493,019			1,090,662			1,154,746
Corporate and other		207,200			14,876			466,464			390,552
Total revenues	$	18,026,881		$	113,167,837		$	53,569,509		$	142,850,104

Pre-tax income (loss) from operations:
Preneed and burial products	$	905,756		$	(350,263	)	$	1,074,170		$	(763,134	)
Traditional and universal life products		403,491			227,527			734,411			720,073
Administrative and financial services		103,104			169,214			249,833			239,470
Corporate and other		(41,538	)		(75,258	)		(245,370	)		(126,610	)
Total pre-tax income (loss) from operations	$	1,370,813		$	(28,780	)	$	1,813,044		$	69,799

NOTE 8 – Federal Income Taxes

The provision for federal income taxes is based on the estimated effective annual tax rate. Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Income before federal income taxes differs from taxable income principally due to the dividends-received deduction; the 404(k) dividend deduction; the small life insurance company tax deduction; and non-taxable effects of company-owned life insurance premiums, cash value growth, and death benefit proceeds.

We file U.S. federal income tax returns and income tax returns in various state jurisdictions. Our 2009 through 2011 U.S. federal tax years remain subject to income tax examination by tax authorities. We have no known uncertain tax benefits within our provision for income taxes. In addition, we do not believe the Company will be subject to any penalties or interest relative to any open tax years and, therefore, have not accrued any such amounts. However, should such a circumstance arise, it is our policy to classify any interest and penalties (if applicable) as income tax expense in the financial statements.

NOTE 9 – Other Comprehensive Income

The following tables present the pretax components of the Company’s other comprehensive income, and the related income tax expense (benefit) for each component, for the quarters and nine months ended September 30, 2012 and 2011.

	Quarter Ended September 30, 2012									Nine Months Ended September 30, 2012
	Pretax			Income Tax Expense (Benefit)			Net of Tax			Pretax			Income Tax Expense (Benefit)			Net of Tax
Other comprehensive income:
Change in net unrealized gains on available-for-sale securities:
Unrealized holding gains arising during period	$	6,469,578		$	2,186,414		$	4,283,164		$	13,991,611		$	4,744,726		$	9,246,885
Reclassification adjustment for gains included in income		(249,927	)		(63,464	)		(186,463	)		(448,186	)		(130,765	)		(317,421	)
Adjustment for effect of deferred acquisition costs		(166,471	)		(56,600	)		(109,871	)		(360,841	)		(122,686	)		(238,155	)
Net unrealized gains on investments		6,053,180			2,066,350			3,986,830			13,182,584			4,491,275			8,691,309
Change in defined benefit pension plan:
Amortization of actuarial net loss in net periodic pension cost		171,359			58,262			113,097			690,197			234,667			455,530
Curtailment of defined benefit pension plan		-			-			-			2,519,152			856,512			1,662,640
Net change in defined benefit pension plan		171,359			58,262			113,097			3,209,349			1,091,179			2,118,170

Total other comprehensive income	$	6,224,539		$	2,124,612		$	4,099,927		$	16,391,933		$	5,582,454		$	10,809,479

	Quarter Ended September 30, 2011									Nine Months Ended September 30, 2011
	Pretax			Income Tax Expense (Benefit)			Net of Tax			Pretax			Income Tax Expense (Benefit)			Net of Tax
Other comprehensive income:
Change in net unrealized gains on available-for-sale securities:
Unrealized holding gains arising during period	$	8,862,261		$	2,995,705		$	5,866,556		$	12,160,469		$	4,110,856		$	8,049,613
Reclassification adjustment for (gains) losses included in income		2,022			8,231			(6,209	)		(36,334	)		(12,129	)		(24,205	)
Adjustment for effect of deferred acquisition costs		(59,849	)		(20,349	)		(39,500	)		(177,334	)		(60,294	)		(117,040	)
Net unrealized gains on investments		8,804,434			2,983,587			5,820,847			11,946,801			4,038,433			7,908,368
Change in defined benefit pension plan:
Amortization of actuarial net loss in net periodic pension cost		131,264			44,630			86,634			393,792			133,889			259,903
Curtailment of defined benefit pension plan		-			-			-			-			-			-
Net change in defined benefit pension plan		131,264			44,630			86,634			393,792			133,889			259,903

Total other comprehensive income	$	8,935,698		$	3,028,217		$	5,907,481		$	12,340,593		$	4,172,322		$	8,168,271

Realized gains and losses on the sales of investments are determined based upon the specific identification method and include provisions for other-than-temporary impairments where appropriate.

The change in the components of the Company’s accumulated other comprehensive income for the nine months ended September 30, 2012 and 2011 are as follows:

	Unrealized Gains on Available-For-Sale Securities		Defined Benefit Pension Plan			Accumulated Other Comprehensive Income
For the nine months ended September 30, 2012:
Beginning balance	$	20,334,585	$	(6,729,101	)	$	13,605,484
Other comprehensive income		8,691,309		2,118,170			10,809,479
Ending balance	$	29,025,894	$	(4,610,931	)	$	24,414,963

For the nine months ended September 30, 2011:
Beginning balance	$	11,471,680	$	(3,989,588	)	$	7,482,092
Other comprehensive income		7,908,368		259,903			8,168,271
Ending balance	$	19,380,048	$	(3,729,685	)	$	15,650,363

NOTE 10 – Employee Benefit Plans

We sponsor a noncontributory defined benefit pension plan which covers substantially all employees. Benefits are based on years of service and the highest consecutive 60 months average earnings within the last 120 months of credited service. Benefits are funded based on actuarially-determined amounts. On May 10, 2012, the Board of Directors of the Company authorized an amendment to the IHCC Employee Retirement Plan (the “Pension Plan”) which provides that all future benefit accruals and compensation increases under the Pension Plan shall automatically cease for all individuals who are participants under the Pension Plan as of June 30, 2012. The amendment also allows such participants to continue to earn vesting credit towards their Pension Plan benefit on and after June 30, 2012.

The following table provides the components of our net periodic benefit cost:

	Quarter Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011

Service cost	$	-		$	130,194		$	322,916		$	390,582
Interest cost		247,561			252,986			783,205			758,958
Expected return on plan assets		(328,621	)		(285,862	)		(954,151	)		(857,586	)
Recognized actuarial net loss		171,359			131,264			690,197			393,792
Net periodic benefit cost	$	90,299		$	228,582		$	842,167		$	685,746

Additionally, on June 21, 2012, the Board of Directors of the Company authorized an amendment to the IHCC Retirement Savings Plan and Trust (the “Old 401(k) Plan”), under which, effective June 30, 2012, participants in the Old 401(k) Plan shall not be eligible to elect to defer and contribute compensation earned to the Old 401(k) Plan; the Company will not make any matching contributions to the Old 401(k) Plan; and the Old 401(k) Plan will not accept rollover contributions.

On June 21, 2012, the Board of Directors of the Company also adopted a new traditional 401(k) retirement plan, the IHCC 401(k) Retirement Plan (the “Retirement Plan”). Employees will be eligible to participate in the Retirement Plan on the first day of employment. Under the Retirement Plan, the Company will match employee contributions dollar for dollar up to 4% of employee compensation deferrals. Employees who have met certain employment criteria may also be eligible to receive an additional allocation after the end of each plan year. The Retirement Plan became effective July 1, 2012.

NOTE 11 – Subsequent Event

On November 5, 2012, the Company entered into a new loan agreement to borrow $2,000,000. The loan calls for interest to be paid quarterly at a rate of 0.25% under the prime rate and has a maturity date of November 5, 2017. The note requires quarterly principal payments of $45,000 beginning July 5, 2015 with a balloon payment upon maturity. There is no penalty for prepayment. This note is collateralized with 55,000 shares of Investors Heritage Life Insurance Company common stock.

The borrowed funds were utilized to fund a credit agreement to Puritan Financial Companies, Inc. for $2,000,000, with interest at a rate of 1.75% above the prime rate. The maturity date on this loan is April 1, 2016. This note requires quarterly payments of interest only beginning on January 5, 2013. The unpaid principal balance together with all accrued interest shall be due and payable with a balloon payment upon maturity. Under this credit agreement, Puritan Financial Companies, Inc. and its wholly-owned subsidiary Puritan Financial Group, Inc. have committed to an increased level of new business production on behalf of the Company. Additionally, Puritan Financial Companies, Inc. has issued warrants for 2,000,000 shares of common stock to the Company in exchange for this funding. This note is further collateralized by all the stock and other assets of Puritan Financial Companies, Inc. and each of its affiliated companies. Puritan Financial Companies, Inc. has another credit facility with a senior lender and the Company has a subordinate interest to the senior lender in all of the collateral which is security for this loan.

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

GENERAL

Investors Heritage Capital Corporation 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. Investors Heritage Capital also wholly owns Investors Heritage Financial Services Group, Inc., a Kentucky insurance marketing company; Investors Heritage Printing, Inc., a Kentucky printing company that provides printing to Investors Heritage Life and other unaffiliated parties; is the sole member of At Need Funding, LLC, a Kentucky limited liability company that provides advance funding of funerals in exchange for the irrevocable assignment of life insurance policy proceeds from other nonaffiliated companies; and is the sole member of Heritage Funding, LLC, a limited liability company that was formed to invest in various business ventures but is currently dormant.

Investors Heritage Life offers a full line of life insurance products including, but not limited to, whole life, term life, single premium life, multi-pay life and annuities. Investors Heritage Life’s primary lines of business are insurance policies and annuities utilized to fund preneed funeral contracts, credit life and credit disability insurance, and term life and reducing term life sold through financial institutions.

In our preneed markets we use the Legacy Gold product series, a generation of life insurance and annuity products sold in conjunction with prearranged funerals. In developing this product, we performed detailed analysis of the preneed market and of the characteristics of our particular block of business. Underwritten and guaranteed issue options are available.

We also market the Heritage Final Expense II product as a replacement for our original Heritage Final Expense product sold in the final expense markets. The Heritage Final Expense II product incorporates the 2001 CSO table while also improving the marketability and profitability of the product.

During 2011, we entered into a sales agreement with a third party national master general agent to write a new final expense policy designed specifically for their sales organization. The master general agent has an established record and extensive experience in this market. The product is being issued using simplified tele-underwriting techniques through an experienced third party underwriting firm.

The products within our traditional and universal life line have been updated to incorporate the 2001 CSO table while enhancing the marketability and profitability of these products. The HLW Choice Whole Life replaced the Life Paid Up at 95 and the Heritage Protector IV replaced the Heritage Protector III.

During the second quarter of 2011, we introduced two products geared toward wealth preservation in the senior market – the Heritage Solution, a single premium life policy, and the Heritage Provider, a ten pay whole life and single premium immediate annuity combination. These products are currently being sold exclusively through our partnership with Puritan Financial Group and are being underwritten and issued using a third party underwriter with significant experience in that market. This business is being reinsured under a 50% coinsurance arrangement with a life insurance company affiliated with Puritan Financial Group.

Investors Heritage Life continues to market its third party administrative (“TPA”) services as an additional revenue source. These agreements, for various levels of administrative services on behalf of each company, generate fee income for Investors Heritage Life. We currently have five TPA clients for which we provide tailored services to meet each client’s individual business needs. We have been able to perform our TPA services using our existing in-house resources.

During the third quarter of 2011, we assumed the covered obligations of the Texas Life, Accident, Health, and Hospital Service Insurance Guaranty Association related to a block of preneed policies originally issued by Memorial Service Life Insurance Company. We received cash in exchange for assuming the covered obligations. We assumed estimated net policy liabilities totaling approximately $93,904,000 in exchange for cash totaling approximately $93,909,000. Given that the liabilities assumed approximated the consideration received, we did not establish an asset for value of business acquired. We expect this acquisition to benefit us by lowering per policy fixed expenses as well as providing long-term profitability within the block of business.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. Preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We evaluate our estimates continually, including those related to investments, deferred acquisition costs, value of business acquired, policy liabilities, income taxes, accrued pension expense, regulatory requirements, contingencies and litigation. We base such estimates on historical experience and other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following accounting policies, judgments and estimates are the most critical to the preparation of our consolidated financial statements.

Investments in Fixed Maturities, Equity Securities, Mortgage Loans and State-Guaranteed Receivables

We hold fixed maturities and equity interests in a variety of companies. Additionally, we originate, underwrite and manage mortgage loans. During 2011, we also began purchasing investments in state-guaranteed receivables consisting of the future cash flow rights from lottery prize winners. We continuously evaluate all of our investments based on current economic conditions, credit loss experience and other developments. We evaluate the difference between the cost/amortized cost and estimated fair value of our investments to determine whether any decline in fair value is other-than-temporary in nature. This determination involves a degree of uncertainty. If a decline in the fair value of a security is determined to be temporary, the decline is recognized in other comprehensive income (loss) within stockholders’ equity. If a decline in a security’s fair value is considered to be other-than-temporary, we then determine the proper treatment for the other-than-temporary impairment. For fixed maturities, the amount of any other-than-temporary impairment related to a credit loss is recognized in earnings and reflected as a reduction in the cost basis of the security; and the amount of any other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss) with no change to the cost basis of the security. For equity securities, the amount of any other-than-temporary impairment is recognized in earnings and reflected as a reduction in the cost basis of the security.

The assessment of whether a decline in fair value is considered temporary or other-than-temporary includes management’s judgment as to the financial position and future prospects of the entity issuing the security. It is not possible to accurately predict when it may be determined that a specific security will become impaired. Future adverse changes in market conditions, poor operating results of underlying investments and defaults on mortgage loan payments could result in losses or an inability to recover the current carrying value of the investments, thereby possibly requiring an impairment charge in the future. Likewise, if a change occurs in our intent to sell temporarily impaired securities prior to maturity or recovery in value, or if it becomes more likely than not that we will be required to sell such securities prior to recovery in value or maturity, a future impairment charge could result.

If an other-than-temporary impairment related to a credit loss occurs with respect to a bond, we amortize the reduced book value back to the security’s expected recovery value over the remaining term of the bond. We continue to review the security for further impairment that would prompt another write-down in the book value.

We classify our fixed maturities and equity securities as available-for-sale and carry them at fair value on the balance sheet, with unrealized appreciation (depreciation) relating to temporary market value changes recorded as an adjustment to other comprehensive income (loss), net of deferred acquisition costs and federal income taxes. Fair value for these investments is determined using Accounting Standards Codification principles covering Level 1, Level 2 and Level 3 instruments as further discussed in Note 5 to the consolidated financial statements.

The majority of our fixed maturities are Level 2 instruments, for which the fair value is derived from readily available pricing services utilizing recent trades and broker information. Certain liquid equity securities are considered Level 1 instruments and are valued based on publicly available market quotes in an active market. We hold approximately $3,119,000 in Level 3 financial instruments reported at fair value in the consolidated financial statements, comprising 0.7% of our total investments carried at fair value. Fair value for these instruments is derived from unobservable inputs such as non-binding broker quotes and internal models using unobservable assumptions about market participants.

Deferred Acquisition Costs

The recovery of deferred acquisition costs is dependent on the future profitability of the underlying business for which acquisition costs were incurred. Each reporting period, we evaluate the recoverability of the unamortized balance of deferred acquisition costs. We consider estimated future gross profits or future premiums, expected mortality or morbidity, interest earned and credited rates, persistency and expenses in determining whether the balance is recoverable. If we determine a portion of the unamortized balance is not recoverable, it is immediately charged to amortization expense. The assumptions we use to amortize and evaluate the recoverability of the deferred acquisition costs involve significant judgment. A revision to these assumptions may impact future financial results.

Deferred acquisition costs related to annuities and universal life insurance products are deferred to the extent deemed recoverable and amortized in relation to the present value of actual and expected gross profits on the policies. To the extent that realized gains and losses on securities result in adjustments to deferred acquisition costs related to annuities, such adjustments are reflected as a component of the amortization of deferred acquisition costs.

Deferred acquisition costs related to annuities are also adjusted, net of tax, for the change in amortization that would have been recorded if the unrealized gains (losses) from securities had actually been realized. This adjustment is included in the change in net unrealized gains (losses) on available-for-sale securities, a component of "Accumulated Other Comprehensive Income (Loss)" in the stockholders' equity section of the balance sheet.

Policy Liabilities

Estimating liabilities for our long-duration insurance contracts requires management to make various assumptions, including policyholder persistency, mortality rates, investment yields, discretionary benefit increases, new business pricing, and operating expense levels. We evaluate historical experience for these factors when assessing the need for changing current assumptions. However, since many of these factors are interdependent and subject to short-term volatility during the long-duration contract period, substantial judgment is required. Actual experience may emerge differently from that originally estimated. Any such difference would be recognized in the current year’s consolidated statement of income. We utilize in-house actuaries in developing our actuarial assumptions and estimates and in monitoring such assumptions and estimates against actual experience.

Income Taxes

We evaluate our deferred income tax assets, which partially offset our deferred tax liabilities, for any necessary valuation allowances. In doing so, we consider our ability and potential for recovering income taxes associated with such assets, which involve significant judgment. Revisions to the assumptions associated with any necessary valuation allowances would be recognized in the consolidated financial statements in the period in which such revisions are made.

Employee Benefit Plans

We maintain a defined benefit retirement plan on behalf of our employees. Measurement of the future benefit obligations associated with this plan involves significant judgment, particularly in regard to the expected long-term rate of return on plan assets and the current discount rate used to calculate the present value of future obligations. The long-term rate of return for plan assets is determined based on an analysis of historical returns on invested assets, anticipated future fixed income, equity investment markets, and diversification needs. Long term trends are evaluated relative to current market factors such as inflation, interest rates and investment strategies, including risk management, in order to assess the assumptions as applied to the plan. The discount rate utilized is determined based on reviews of market indices commonly used to measure such liabilities in the industry. Changes in our assumptions can significantly impact the accrued pension liability and net periodic benefit expense recorded in the consolidated financial statements. Additionally, funding of plan liabilities is sensitive to changes in investment returns as well as regulatory changes, which can significantly impact our consolidated financial statements.

On May 10, 2012, the Board of Directors of the Company authorized an amendment to the IHCC Employee Retirement Plan (the “Pension Plan”) which provides that all future benefit accruals and compensation increases under the Pension Plan shall automatically cease for all individuals who are participants under the Pension Plan as of June 30, 2012. The amendment also allows such participants to continue to earn vesting credit towards their Pension Plan benefit on and after June 30, 2012.

In conjunction with the curtailment of the Pension Plan, our actuarially-determined accrued pension liability was remeasured at June 30, 2012. This remeasurement resulted in a reduction in our accrued pension liability of $2,519,152, net of deferred taxes of $856,512, as a result of the curtailment of the plan. The estimated net loss that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost during 2012 is estimated to be $861,556, with $690,197 amortized for the nine months ended September 30, 2012. We continually monitor the performance of plan assets and growth in liabilities and funding necessities, utilizing independent and experienced consultants to assist in plan management.

We expect these changes in our employee benefit plans to mitigate future uncertainty with respect to defined benefit pension plans while also maintaining a competitive benefit package for our employees.

New Accounting Pronouncements

INVESTMENTS, LIQUIDITY AND CAPITAL RESOURCES

Investments

Investors Heritage Life maintains a sound, conservative investment strategy. At September 30, 2012, 92.6% of invested assets consisted of fixed income securities compared to 92.0% at December 31, 2011. At September 30, 2012 and December 31, 2011, Investors Heritage Life’s fixed income investments were 96.1% and 96.8% investment grade, respectively, as rated by Standard & Poor’s.

We have reviewed our investment portfolio and do not believe that there are additional securities that are other-than-temporarily impaired at September 30, 2012 beyond the impairments already taken in previous periods. None of Investors Heritage Life’s fixed income assets are in default and there has been no material change in the distribution of its fixed income portfolio. We recorded no other-than-temporary impairment charges in the consolidated statements of income during the quarters or nine months ended September 30, 2012 or 2011.

During the third and fourth quarters of 2012, we sold our investment in Farmers Bank Capital Corporation common stock. An other-than-temporary impairment had previously been recorded on this holding. For the nine months ended September 30, 2012 the gain associated with the portion of this stock sold totaled $63,431, with an additional gain of $58,545 recognized during the fourth quarter for the remaining stock sold. We have no remaining assets for which other-than-temporary impairments have been recorded.

We continuously monitor the investment risk within our portfolio, including the risk associated with subprime lending with our CMO investments. As of September 30, 2012, we have only one CMO, with a fair value of approximately $59,000, which has any level of direct subprime exposure. Based on our analysis, we believe this investment is of high quality and expect no losses as a result of subprime concerns.

Additionally, Investors Heritage Life engages in commercial and residential mortgage lending, with approximately 99.9% of these investments being in commercial properties. All mortgage loans are either originated in-house or through two mortgage brokers, are secured by first mortgages on the real estate and generally carry personal guarantees by the borrowers. Loan to value ratios of 80% or less and debt service coverage from existing cash flows of 115% or higher are generally required. We minimize credit risk in our mortgage loan portfolio through various methods, including stringently underwriting the loan request, maintaining small average loan balances, and reviewing larger mortgage loans on an annual basis. At September 30, 2012, 3.7% of invested assets consisted of mortgage loans compared to 4.2% at December 31, 2011. We anticipate maintaining a similar to slightly higher percentage of mortgage loans to total invested assets into the near future. As of September 30, 2012, Investors Heritage Life had no non-performing mortgage loans, which would include loans past due 180 days or more, loans in process of foreclosure, restructured loans and real estate acquired through foreclosure.

During the third quarter of 2011, we began purchasing investments in state-guaranteed receivables. These investments represent an assignment of the future rights to cash flows from lottery winners purchased at a discounted price. Payments on these investments are made by state run lotteries and guaranteed by the states. As these payment streams are secured by the states themselves, a key function of our due diligence is the assessment of the states’ ability to meet these obligations. Additionally, each state generally withholds income tax from each payment for which we must file for reimbursement of such tax annually. We carry the state-guaranteed receivables at their amortized cost basis on the balance sheet. As of September 30, 2012, we held approximately $7,636,000 in state-guaranteed receivables, with the largest concentrations in the states of New York and Massachusetts totaling approximately $3,953,000 and $2,729,000, respectively. At September 30, 2012, 1.6% of invested assets consisted of state-guaranteed receivables compared to 1.4% at December 31, 2011.

During the third quarter of 2011, we purchased a $3,000,000 position in a Morgan Stanley market-indexed note. The note pays 1% interest annually and matures in six years. In exchange for the reduced interest rate, the investment provides a protected level of equity market exposure. At the maturity date, we participate at 110% of any increase in the Dow Jones Industrial Average as compared to the purchase date, but our principal is guaranteed against market-related downside risk. We remain subject to counterparty credit risk associated with the issuer, Morgan Stanley, just as we would with any other fixed maturity or equity security within our portfolio. The equity-linked portion of the investment is classified as a derivative and bifurcated for reporting purposes. The derivative portion is reported as an investment in derivative on the balance sheet. This derivative is required to be marked-to-market through the income statement, with the change in value reported as a component of investment income on the income statement. As of September 30, 2012 and December 31, 2011, the derivative investment was valued at $684,600 and $752,700, respectively. We recognized an increase in investment income of $4,800 relative to the mark-to-market adjustment on this investment during the quarter ended September 30, 2012 and a decrease in investment income of $68,100 during the nine months ended September 30, 2012, compared to a decrease in investment income relative to the mark-to-market adjustment of $45,698 for the quarter and nine months ended September 30, 2011.

Liquidity and Capital Resources

Investors Heritage Life’s primary sources of cash flow used to meet short-term and long-term cash requirements are primarily insurance premiums, which include mortality and expense charges, investment income, and administrative service fees.

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

Investors Heritage Life’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. We believe these assumptions will produce revenues sufficient to meet our future contractual benefit obligations and operating expenses, and provide an adequate profit margin.

Investors Heritage Life’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.

Investors Heritage Capital’s principal sources of cash flow are rental income and dividends from its subsidiaries. Investors Heritage Capital’s principal long-term obligations are payments on long-term debt.

We assess our compliance with prescribed debt covenant requirements as outlined in the terms of each debt agreement at least annually, if not otherwise required in the debt agreement. Management has assessed our position and as of September 30, 2012, we are in compliance with all debt covenant requirements.

We are not aware of any commitments or unusual events that could materially affect capital resources. We have the option to prepay certain notes payable at our discretion prior to their maturity dates.

We will continue to explore various opportunities including mergers and acquisitions and purchasing blocks of business from other companies, which may dictate a need for either long-term or short-term debt. There are no restrictions as to use of funds except the restriction on Investors Heritage Life as to the payment of cash dividends to Investors Heritage Capital.

RESULTS OF OPERATIONS

Overview

Premiums earned (net of reinsurance) were $12,116,019 for the third quarter of 2012 (a decrease of 15.1% compared to the third quarter of 2011) and $36,268,076 for the nine months ended September 30, 2012 (an increase of 4.7% compared to the corresponding period in 2011). The decrease during the third quarter is due to a coinsurance agreement executed with respect to our Puritan partnership during the fourth quarter of 2011. This agreement was not in place for the third quarter of 2011. The increase for the nine month period was predominantly due to increased sales of our current product offerings, including our preneed products and the Puritan product offering introduced during the second quarter of 2011, in addition to premiums received on the recently acquired Texas blocks of business and through the sale of our new final expense policy. Our current product offerings are performing well, although current economic conditions continue to limit disposable income typically used as a source for new sales in many of our markets.

Net investment income was $5,245,110 for the third quarter of 2012 (an increase of 18.7% compared to the third quarter of 2011) and $15,593,997 for the nine months ended September 30, 2012 (an increase of 21.3% compared to the corresponding period in 2011). This increase is due to our larger invested asset base as a result of the recent acquisition of the Memorial Service block of life insurance policies. The current economic environment also continues to put pressure on new investment yields.

Consideration on reinsurance assumed totaled $0 and $9,523 for the three and nine month periods ended September 30, 2012 compared to $94,034,978 and $94,048,095 for the three and nine month periods ended September 30, 2011. The 2011 amount primarily represents the payment from the Texas Life, Accident, Health, and Hospital Service Insurance Guaranty Association in settlement of assumed policy liabilities on policies previously issued by Memorial Service Life Insurance Company. The 2012 amounts represent ongoing adjustments in the cash payments from the Texas Life, Accident, Health and Hospital Service Insurance Guaranty Association in settlement of those assumed policy liabilities.

Net realized gains (losses) were $249,927 and $448,186 for the quarter and nine months ended September 30, 2012, respectively, compared to ($2,022) and $36,334 for the quarter and nine months ended September 30, 2011, respectively. The activity during each of these periods was in the normal course of business, and we experienced no other-than-temporary impairments during the quarters or nine months ended September 30, 2012 or 2011.

Other income was $415,825 for the third quarter of 2012 (a decrease of 5.8% compared to the third quarter of 2011) and $1,249,727 for the nine months ended September 30, 2012 (a decrease of $276 compared to the corresponding period in 2011). The decrease is due to the recent loss of certain smaller TPA clients during the third quarter of 2012.

Total benefits and expenses were $16,656,068 for the third quarter of 2012 compared to $113,196,617 for the third quarter of 2011 and $51,756,465 for the nine months ended September 30, 2012 compared to $142,780,305 for the corresponding period in 2011. The 2011 amounts include the significant increase in net policy liabilities of approximately $94,033,000 relative to our assumption of the Memorial Service block of life insurance policies during the third quarter of 2011. Exclusive of these assumed net policy liabilities included in the 2011 amounts, we have experienced a decrease in total benefits and expenses of 13.1% for the three month period and an increase of 6.2% for the nine month period. The decrease during the current quarter is primarily due to an increase in net acquisition costs deferred primarily related to the Puritan sales. Additionally, general expenses have decreased primarily due to recent changes in our employee benefit plan programs. The increase for the nine month period is primarily driven by increased claims and increased commissions associated with our higher sales volume and the larger policy count derived from our assumptions of both the Memorial Service and Texas Memorial blocks of life insurance policies.

After providing for federal income taxes, our net income was $959,568 with net income per share of $0.83 for the third quarter of 2012 as compared to a net loss of $19,965 and a net loss per share of $0.02 for the third quarter of 2011. Our net income for the nine months ended September 30, 2012 was $1,269,130 with net income per share of $1.10 as compared to net income of $48,421 and net income per share of $0.04 for the nine months ended September 30, 2011.

We declared a dividend of $0.23 per share on February 16, 2012 to shareholders of record on March 16, 2012. This dividend was paid on April 7, 2012.

Business Segments

FASB guidance requires a "management approach" in the presentation of business segments based on how management internally evaluates the operating performance of business units. The discussion of segment operating results that follows is being provided based on segment data prepared using this methodology.

Preneed & Burial Products

Preneed and Burial Products include both life and annuity products sold by funeral directors or affiliated agents to fund prearranged funerals. Revenues for this segment were $12,433,393 for the third quarter of 2012 compared to $106,342,055 for the third quarter of 2011 and $37,401,694 for the nine months ended September 30, 2012 compared to $127,567,866 for the corresponding period in 2011. The decrease is predominantly due to the acquisition of the Memorial Service block of life insurance policies during the third quarter of 2011 as previously discussed. Excluding the effects of consideration on reinsurance assumed associated with our acquisitions from the Texas Life, Accident, Health, and Hospital Service Insurance Guaranty Association during 2012 and 2011, revenues increased approximately 1.0% for the quarter and 11.6% for the nine months ended September 30, 2012. This increase is predominantly due to the previously mentioned stronger sales of our existing preneed and final expense products and ongoing premium income generated as a result of the recent acquisitions, along with increased net investment income.

Pre-tax income from operations was $905,756 and $1,074,170 for the quarter and nine months ended September 30, 2012, respectively, as compared to a pre-tax loss from operations of $350,263 and $763,134 for the quarter and nine months ended September 30, 2011, respectively. The improvement in pre-tax income was driven by increased sales, increased premium and reduction of unit expenses due to recent acquisitions, and an adjustment to preneed death benefit crediting rates early in 2012. Additionally, while we continue to face crediting rate spread pressure due to lower investment income yields, our increased invested asset base has contributed to our improvement in pre-tax income. Finally, the reserve increases on the acquisition of the Memorial Service block of life insurance policies during the third quarter of 2011 were significantly larger than the associated earned investment income on that block during that quarter of 2011 due to the delay in investing the cash received in the acquisition.

Traditional & Universal Life Products

Traditional and Universal Life Products include traditional life and group life insurance products, certain annuities and universal life products. Revenues for this segment were $5,028,839 for the third quarter of 2012 (a decrease of 20.4% compared to the third quarter of 2011) and $14,610,689 for the nine months ended September 30, 2012 (an increase of 6.4% compared to the corresponding period in 2011). The decrease for the third quarter is primarily due to the significant immediate sales that occurred in the Puritan product offering during the introduction in 2011. The increase for the nine month period is primarily due to sales of the Puritan product offering, as it was not introduced until the second quarter of 2011. Pre-tax income from operations was $403,491 and $734,411 for the quarter and nine months ended September 30, 2012, respectively, as compared to pre-tax income of $227,527 and $720,073 for the quarter and nine months ended September 30, 2011, respectively. The increase in pre-tax income is primarily attributable to strong sales and reductions in unit expenses.

Administrative & Financial Services

Administrative and Financial Services includes the administration of credit life and credit accident and health insurance products. We reinsure 100% of the related underwriting risk currently produced within this segment. Accordingly, credit product revenue is generated primarily from initiation fees as well as fees for servicing and administering the credit business for our reinsurers. Because the credit product revenue is fee-based, performance is in direct relation to new premium production coupled with fees generated as premiums are earned. Premium production within this segment is also significantly affected by economic conditions within our credit markets, particularly Kentucky.

In addition to credit administration, this segment includes fees generated relative to our third party administrative relationships. We currently provide tailored administrative services for five unaffiliated companies, comprised of three life insurance companies and two holding companies. Services provided to each company vary based on their needs and can include some or all aspects of back-office accounting, actuarial services and policy administration.

Revenues for this segment were $357,449 for the third quarter of 2012 (a decrease of 27.5% compared to the third quarter of 2011) and $1,090,662 for the nine months ended September 30, 2012 (a decrease of 5.5% compared to the corresponding period in 2011). Pre-tax income from operations was $103,104 and $249,833 for the quarter and nine months ended September 30, 2012, respectively, as compared to pre-tax income of $169,214 and $239,470 for the quarter and nine months ended September 30, 2011, respectively. The revenue and pre-tax income decreases are primarily related to the loss of certain smaller TPA clients compared to the prior periods.

Corporate & Other

Corporate and Other consists of corporate accounts measured primarily by stockholders’ paid-in capital, contributed surplus, earned surplus, property and equipment, corporate-owned life insurance and other minor business lines which include group annuities and group and individual accident and health products. Revenues for this segment were $207,200 and $466,464 for the quarter and nine months ended September 30, 2012, respectively, as compared to $14,876 and $390,552 for the quarter and nine months ended September 30, 2011, respectively. This increase is primarily driven by an increase in net investment income earned during the periods coupled with a decrease in service commission expense within Investors Heritage Financial. Pre-tax loss from operations was $41,538 and $245,370 for the quarter and nine months ended September 30, 2012, respectively, as compared to a pre-tax loss of $75,258 and $126,610 for the quarter and nine months ended September 30, 2011, respectively. The increases in revenue for this segment have primarily driven the decrease in the current quarter pre-tax loss from operations.

While we continue to expand the operations of Investors Heritage Financial, Investors Heritage Printing, At Need Funding and Heritage Funding, less than 1% of our consolidated revenues were generated by those subsidiaries. During the first nine months of 2012, Investors Heritage Capital received dividends of $225,000 from Investors Heritage Financial and $100,000 in distributions from At Need Funding. The potential exists for dividend payments from Investors Heritage Financial and distributions from At Need Funding over the remainder of 2012 as any needs arise.

Federal Income Taxes

The provision (benefit) for federal income taxes is based on the estimated effective annual tax rate. Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Income before federal income taxes differs from taxable income principally due to the dividends-received deduction; the 404(k) dividend deduction; the small life insurance company tax deduction; and non-taxable effects of company-owned life insurance premiums, cash value growth and death benefit proceeds. Our effective tax rate was 30.0% for the quarter and nine months ended September 30, 2012 compared with 30.6% for the quarter and nine months ended September 30, 2011, respectively.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements as of September 30, 2012.

FORWARD LOOKING INFORMATION

We caution readers regarding certain forward-looking statements contained in this report and in any other statements made by us or on our behalf, 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 our beliefs concerning future levels of sales and redemptions of Investors Heritage Life’s products, investment spreads and yields, or our earnings and profitability.

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 our 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 us or on our behalf. 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 our market area and elsewhere. Others may relate to us specifically, such as credit, volatility and other risks associated with our investment portfolio. We caution that such factors are not exclusive. We disclaim any obligation to update forward-looking information.

ITEM 4. Controls and Procedures

As of the end of the period covered by this Form 10-Q, we performed an evaluation, under the supervision and with the participation of management, including our Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our 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 changes in our internal control over financial reporting identified by that evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during this most recent quarter or subsequent to the date we carried out our evaluation.

PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings

Investors Heritage Capital is not involved in any legal proceedings. From time to time Investors Heritage Life is involved in litigation relating to claims arising out of its operations in the normal course of business. As of November 14, 2012, Investors Heritage Life is not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our financial condition or results of operations.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

No share repurchases were made pursuant to a publicly announced plan or program. All share repurchases were shares tendered by original stockholders under our right of first refusal or by employees as part of our 401(k) plan.

ITEM 3. Defaults Upon Senior Securities

None

ITEM 4. Mine Safety Disclosures

None

ITEM 5. Other Information

None

ITEM 6. Exhibits

31.1 & 31.2	Certifications pursuant to Securities and Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32	Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS**	XBRL Instance
101.SCH**	XBRL Taxonomy Extension Schema
101.CAL**	XBRL Taxonomy Extension Calculation
101.DEF**	XBRL Taxonomy Extension Definition
101.LAB**	XBRL Taxonomy Extension Labels
101.PRE**	XBRL Taxonomy Extension Presentation

XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

SIGNATURES

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

	INVESTORS HERITAGE CAPITAL CORPORATION

	BY: /s/Harry Lee Waterfield II
	Harry Lee Waterfield II
DATE: November 14, 2012	President

	BY: /s/Raymond L. Carr
	Raymond L. Carr
DATE: November 14, 2012	Vice President - Chief Financial Officer

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Investors Heritage Capital (IHRC) Inactive 10-Q2012 Q3 Quarterly report

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