Investors Heritage Capital (IHRC) 10-Q 2011 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, 2011

______________________

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 companyx

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

1

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 10, 2011 - 1,152,736.876

2

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	23
ITEM 4.	Controls and Procedures	33
	PART II – OTHER INFORMATION
ITEM 1.	Legal Proceedings	34
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
ITEM 3.	Defaults Upon Senior Securities	34
ITEM 4.	(Removed and Reserved)	34
ITEM 5.	Other Information	34
ITEM 6.	Exhibits	34
SIGNATURES		35
EXHIBIT 31.1		36
EXHIBIT 31.2		38
EXHIBIT 32		40

3

PART I – FINANCIAL INFORMATION

ITEM 1.  Condensed Consolidated Financial Statements

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Balance Sheets (Unaudited)

	September 30,		December 31,
	2011		2010
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost: $390,796,519 and $295,589,089)	$	420,983,601	$	313,456,262
Equity securities (cost: $3,877,775 and $3,877,775)		4,328,997		4,524,771
Mortgage loans on real estate		18,196,986		19,817,478
Policy loans		7,033,510		6,949,374
State-guaranteed receivables		2,769,462		-
Investment in derivative		599,302		-
Other long-term investments		1,462,350		1,454,232
Short-term investments		17,094		491,041
Receivable for securities		14,996,928		-
Total investments		470,388,230		346,693,158
Cash and cash equivalents		15,568,074		2,647,798
Accrued investment income		4,304,595		3,926,591
Due premiums		3,967,633		3,772,069
Deferred acquisition costs		16,930,345		17,450,827
Value of business acquired		720,419		867,881
Leased property under capital leases		50,500		72,461
Property and equipment		1,779,609		1,582,958
Cash value of company-owned life insurance		9,627,751		9,021,432
Other assets		1,345,591		444,340
Amounts recoverable from reinsurers		43,973,073		44,109,932
Total assets	$	568,655,820	$	430,589,447
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities:
Benefit reserves	$	449,421,023	$	348,745,910
Unearned premium reserves		9,386,178		8,726,074
Policy claims		1,988,972		1,887,136
Liability for deposit-type contracts		2,942,320		2,791,261
Reserves for dividends and endowments and other		577,090		535,918
Total policy liabilities		464,315,583		362,686,299
Deferred federal income tax liability		10,602,596		6,598,944
Obligations under capital leases		45,864		57,808
Notes payable		1,588,190		2,533,955
Accrued pension liability		4,818,585		5,606,631
Payable for securities		25,025,115		-
Other liabilities		3,054,995		1,933,347
Total liabilities		509,450,928		379,416,984
STOCKHOLDERS' EQUITY
Common stock (shares issued:  1,152,737 and 1,151,817)		1,152,737		1,151,817
Paid-in surplus		8,832,222		8,801,514
Accumulated other comprehensive income		15,650,363		7,482,092
Retained earnings		33,569,570		33,737,040
Total stockholders' equity		59,204,892		51,172,463
Total liabilities and stockholders' equity	$	568,655,820	$	430,589,447

See notes to consolidated financial statements.

4

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Income Statements (Unaudited)

	Quarter Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
REVENUE
Premiums and other considerations	$	17,436,621		$	11,699,448		$	42,965,639		$	31,713,275
Premiums ceded		(3,160,584	)		(2,386,476	)		(8,309,966	)		(5,979,077	)
Net premiums earned		14,276,037			9,312,972			34,655,673			25,734,198
Investment income, net of expenses		4,417,405			4,293,465			12,859,999			12,808,588
Net realized investment gains (losses) on investments:
Total other-than-temporary impairment losses		-			(225,632	)		-			(225,632	)
Portion of loss recognized in  other comprehensive income		-			-			-			-
Other net realized investment gains (losses)		(2,022	)		1,292,720			36,334			1,870,450
Net realized investment gains (losses) on investments		(2,022	)		1,067,088			36,334			1,644,818
Consideration on reinsurance assumed		94,034,978			3,810,018			94,048,095			3,810,018
Other income		441,439			379,881			1,250,003			1,984,219
Total revenue		113,167,837			18,863,424			142,850,104			45,981,841
BENEFITS AND EXPENSES
Death and other benefits		9,438,412			7,349,254			26,791,807			23,270,784
Guaranteed annual endowments		108,001			110,407			364,366			376,578
Dividends to policyholders		98,820			103,160			352,392			362,799
Increase in benefit reserves and unearned premiums		99,349,004			6,156,589			103,477,756			8,570,540
Acquisition costs deferred		(1,758,703	)		(1,194,623	)		(4,384,921	)		(3,485,347	)
Amortization of deferred acquisition costs		1,735,853			1,420,144			4,728,071			4,118,688
Commissions		1,155,284			634,618			2,688,531			1,872,270
Other general and administrative expenses		3,069,946			2,403,139			8,762,303			7,865,581
Total benefits and expenses		113,196,617			16,982,688			142,780,305			42,951,893
INCOME (LOSS) BEFORE FEDERAL INCOME TAXES		(28,780	)		1,880,736			69,799			3,029,948
PROVISION (BENEFIT) FOR FEDERAL INCOME TAXES
Current		26,884			285,158			190,048			344,543
Deferred		(35,699	)		298,866			(168,670	)		480,816
Total federal income taxes		(8,815	)		584,024			21,378			825,359
NET INCOME (LOSS)	$	(19,965	)	$	1,296,712		$	48,421		$	2,204,589
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE	$	(0.02	)	$	1.13		$	0.04		$	1.92
DIVIDENDS PER SHARE	$	-		$	-		$	0.18		$	0.13

See notes to condensed consolidated financial statements.

5

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)

	Common Stock		Paid-in Surplus		Accumulated Other Comprehensive Income		Retained Earnings			Stockholders' Equity
BALANCE, JANUARY 1, 2010	$	1,141,767	$	8,716,135	$	4,495,103	$	31,321,874		$	45,674,879
Comprehensive income:
Net income		-		-		-		2,204,589			2,204,589
Change in net unrealized appreciation on available-for-sale securities		-		-		10,190,682		-			10,190,682
Change in unrealized pension benefits		-		-		240,633		-			240,633
Change in fair value of hedging instrument		-		-		2,358		-			2,358
Total comprehensive income											12,638,262
Cash dividends		-		-		-		(149,364	)		(149,364	)
Issuances of common stock, net		10,050		85,379		-		125,113			220,542
BALANCE, SEPTEMBER 30, 2010	$	1,151,817	$	8,801,514	$	14,928,776	$	33,502,212		$	58,384,319
BALANCE, JANUARY 1, 2011	$	1,151,817	$	8,801,514	$	7,482,092	$	33,737,040		$	51,172,463
Comprehensive income:
Net income		-		-		-		48,421			48,421
Change in net unrealized appreciation on available-for-sale securities		-		-		7,908,368		-			7,908,368
Change in unrealized pension benefits		-		-		259,903		-			259,903
Total comprehensive income											8,216,692
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

See notes to condensed consolidated financial statements.

6

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Nine Months Ended September 30,
	2011			2010
NET CASH PROVIDED BY OPERATING ACTIVITIES	$	98,511,815		$	10,795,941
INVESTING ACTIVITIES
Purchases of available-for-sale securities		(120,557,202	)		(49,689,061	)
Sales of available-for-sale securities		2,045,000			21,195,906
Maturities of available-for-sale securities		22,907,170			19,113,181
Acquisitions of mortgage loans on real estate		(1,737,500	)		(2,276,000	)
Payments of mortgage loans on real estate		3,352,808			2,554,961
Purchases of state-guaranteed receivables		(2,767,717	)		-
Purchase of derivative investment		(645,000	)		-
Cost of acquisitions of short-term investments		(24,028,034	)		(245,001	)
Sales and maturities of short-term investments		24,501,981			-
Net change in payable (receivable) for securities		15,027,548			-
Net acquisitions (reductions) of other investments		(92,254	)		(59,155	)
Net additions to property and equipment		(396,479	)		(106,030	)
NET CASH USED IN INVESTING ACTIVITIES		(82,389,679	)		(9,511,199	)
FINANCING ACTIVITIES
Receipts from universal life policies credited to policyholder account balances		4,240,220			4,507,176
Return of policyholder account balances on universal life policies		(6,312,052	)		(6,865,317	)
Payments on notes payable		(3,686,294	)		(2,602,663	)
Proceeds from notes payable		2,740,529			2,051,988
Dividends paid		(207,327	)		(149,364	)
Issuances of common stock, net		23,064			220,542
NET CASH USED IN FINANCING ACTIVITIES		(3,201,860	)		(2,837,638	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		12,920,276			(1,552,896	)
Cash and cash equivalents at beginning of period		2,647,798			5,730,782
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	15,568,074		$	4,177,886

See notes to consolidated financial statements.

7

INVESTORS HERITAGE CAPITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2011

(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 policies 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 the Commonwealths of Kentucky and Virginia, and the States of North Carolina, Tennessee, Indiana, Texas, Georgia, Ohio, South Carolina and Michigan.

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, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2010, 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, 2011 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 is effective for fiscal years beginning after December 15, 2011 and interim periods within those years. Early adoption as of the beginning of a fiscal year is permitted. The guidance is to be applied prospectively upon the date of adoption, with retrospective application permitted, but not required. We plan to adopt this guidance effective January 1, 2012. We are in the process of assessing the impact of the guidance on our financial statements; however, we currently do not expect to experience a significant impact as a result of this new guidance.

8

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. The guidance is effective for interim and annual periods beginning after December 15, 2011 and no early adoption is permitted. The Company is currently evaluating this guidance; however, we currently do not expect to experience a significant impact as a result of this new guidance.

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 is effective for the quarter ending March 31, 2012.  Early adoption is permitted.  The updated guidance will result in a change in the presentation of the Company’s financial statements but will not have any impact on the Company’s results of operations, financial position or liquidity. Management has not yet determined whether it will early adopt this guidance or what method of presentation will be used in complying with this guidance.

9

NOTE 4 – Investments

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

			Gross		Gross
September 30, 2011	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Fixed maturity securities:
U.S. government obligations	$	52,624,014	$	4,269,047	$	-	$	56,893,061
States and political subdivisions		46,968,961		6,070,630		-		53,039,591
Corporate		205,955,661		13,831,090		1,125,117		218,661,634
Foreign		26,961,705		2,691,493		224,638		29,428,560
Asset-backed securities		5,090,288		482,464		773		5,571,979
Mortgage-backed securities (MBS):
Commercial MBS		8,371,978		373,958		-		8,745,936
Residential MBS		44,823,912		3,818,928		-		48,642,840
Total fixed maturity securities		390,796,519		31,537,610		1,350,528		420,983,601
Equity securities:
U.S. agencies		552,800		-		-		552,800
Mutual funds		2,106,380		252,106		23,989		2,334,497
Nonredeemable corporate preferred		990,000		10,940		-		1,000,940
Corporate common stock		228,595		226,533		14,368		440,760
Total equity securities		3,877,775		489,579		38,357		4,328,997
Total	$	394,674,294	$	32,027,189	$	1,388,885	$	425,312,598

			Gross		Gross
December 31, 2010	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Fixed maturity securities:
U.S. government obligations	$	36,241,751	$	2,039,206	$	459	$	38,280,498
States and political subdivisions		46,017,006		1,586,463		560,751		47,042,718
Corporate		141,595,890		9,591,286		513,357		150,673,819
Foreign		20,326,137		2,331,581		128,818		22,528,900
Asset-backed securities		5,719,748		477,989		1,533		6,196,204
Mortgage-backed securities (MBS):
Commercial MBS		8,061,043		363,836		-		8,424,879
Residential MBS		37,627,514		2,731,312		49,582		40,309,244
Total fixed maturity securities		295,589,089		19,121,673		1,254,500		313,456,262
Equity securities:
U.S. agencies		552,800		-		-		552,800
Mutual funds		2,106,380		472,991		8,146		2,571,225
Nonredeemable corporate preferred		990,000		-		42,810		947,190
Corporate common stock		228,595		226,533		1,572		453,556
Total equity securities		3,877,775		699,524		52,528		4,524,771
Total	$	299,466,864	$	19,821,197	$	1,307,028	$	317,981,033

10

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, 2011						December 31, 2010
			Gross		Number				Gross		Number
	Estimated		Unrealized		of		Estimated		Unrealized		of
	Fair Value		Loss		Securities		Fair Value		Loss		Securities
Fixed Maturities:
Less than 12 months:
U.S. government obligations	$	-	$	-		-	$	155,391	$	459		2
States and political subdivisions		-		-		-		15,633,403		560,751		21
Corporate		42,983,865		1,125,117		41		14,585,855		438,252		11
Foreign		7,650,750		58,146		4
Asset-backed securities		58,854		773		1		446,468		1,533		2
Residential MBS		-		-		-		2,784,372		49,582		2
Greater than 12 months:
Corporate		-		-		-		1,926,720		75,105		2
Foreign		811,030		166,492		1		846,630		128,818		1
Total fixed maturities		51,504,499		1,350,528		47		36,378,839		1,254,500		41
Equities:
Less than 12 months:
Mutual funds		573,338		23,989		1		310,138		8,146		1
Nonredeemable corporate preferred		-		-		-		947,190		42,810		1
Corporate common stock		96,760		14,368		1		109,556		1,572		1
Total equities		670,098		38,357		2		1,366,884		52,528		3
Total	$	52,174,597	$	1,388,885		49	$	37,745,723	$	1,307,028		44

As of September 30, 2011, all of the above fixed maturity securities individually had a fair value to cost ratio equal to or greater than 82% and the equity securities had a fair value to cost ratio equal to or exceeding 87%.  As of December 31, 2010, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 86% and the equity securities noted above had a fair value to cost ratio of over 95%.  At September 30, 2011 and December 31, 2010, the Company’s fixed maturity securities were 97.0% and 99.0% investment grade, respectively, as rated by Standard & Poor’s.

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 quarter or nine months ended September 30, 2011.

11

As of September 30, 2010, the Company recognized an other-than-temporary impairment for its Farmers Capital Bank Corporation common stock holding due to the severity and length of the decline in market value.  This impairment generated a total pre-tax impairment charge of $225,632.  The Company expects to continue to hold this stock; however, no information could be documented to support the recovery in value of the stock in the near term.  The Company experienced no other-than-temporary impairments beyond the Farmers Capital Bank impairment during the quarter or nine months ended September 30, 2010.

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,			December 31,
	2011			2010
Net unrealized appreciation on
available-for sale securities	$	30,638,304		$	18,514,169
Adjustment to deferred acquisition costs		(940,556	)		(763,222	)
Deferred income taxes		(10,317,700	)		(6,279,267	)
Net unrealized appreciation on
available-for sale securities	$	19,380,048		$	11,471,680

The amortized cost and fair value of fixed maturity securities at September 30, 2011, 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		Fair
	Cost		Value
Due in one year or less	$	14,148,191	$	14,364,129
Due after one year through five years		77,933,304		83,177,983
Due after five years through ten years		149,443,913		160,061,255
Due after ten years		96,075,221		105,991,458
Due at multiple maturity dates		53,195,890		57,388,776
Total	$	390,796,519	$	420,983,601

Proceeds for the quarters ended September 30, 2011 and 2010 from sales and maturities of investments in available-for-sale securities were $7,647,299 and $22,530,232, respectively.  Gross gains of $0 and $1,304,398 and gross losses of $2,022 and $11,678 were realized on those sales during the quarters ended September 30, 2011 and 2010, respectively.  Proceeds for the nine months ended September 30, 2011 and 2010 from sales and maturities of investments in available-for-sale securities were $24,952,170 and $40,309,087, respectively.  Gross gains of $44,611 and $1,886,727 and gross losses of $8,277 and $16,277 were realized on those sales during the nine months ended September 30, 2011 and 2010, respectively.

12

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, 2011 and 2010.

	Quarter Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Change in unrealized investment
gains (losses):
Available-for-sale:
Fixed maturities	$	9,294,499		$	4,922,121		$	12,319,909		$	15,595,409
Equity securities		(430,215	)		371,290			(195,774	)		301,536
Realized investment gains (losses):
Available-for-sale:
Fixed maturities	$	(2,022	)	$	1,270,617		$	36,334		$	1,848,347
Equity securities		-			(203,529	)		-			(203,529	)

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.  As of September 30, 2011, the Company holds $2,769,462 in state-guaranteed receivables, comprised of nine investments in the state of New York totaling $2,333,980 and three investments in the state of Massachusetts totaling $435,482.  At September 30, 2011, the amortized cost and estimated fair value of state-guaranteed receivables, by contractual maturity, are summarized as follows:

	Amortized		Fair
	Cost		Value
Due in one year or less	$	332,208	$	326,887
Due after one year through five years		1,084,999		1,120,957
Due after five years through ten years		716,608		822,968
Due after ten years		635,647		888,571
Total	$	2,769,462	$	3,159,383

During the third quarter of 2011, the Company also 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 in any increase in the Dow Jones Industrial Average since the purchase date, but is guaranteed against 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.  As of September 30, 2011, the derivative investment is valued at $599,302 with a corresponding loss recognized on the mark-to-market adjustment of $45,698.

13

Major categories of net investment income are summarized as follows:

	Quarter Ended September 30,					Nine Months Ended September 30,
	2011			2010		2011			2010
Fixed maturities	$	4,157,633		$	3,929,533	$	12,031,387		$	11,776,333
Equity securities		33,560			36,644		109,553			109,209
Mortgage loans on real estate		345,236			396,112		985,247			1,142,614
Policy loans		123,985			122,369		364,718			357,477
Loss on investment in derivative		(45,698	)		-		(45,698	)		-
Other		41,889			35,608		132,351			103,359
		4,656,605			4,520,266		13,577,558			13,488,992
Investment expenses		239,200			226,801		717,559			680,404
	$	4,417,405		$	4,293,465	$	12,859,999		$	12,808,588

NOTE 5 – Fair Values of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  We also consider the impact on fair value of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity.

The Company holds fixed maturities and equity securities that are measured and reported at fair 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. The Company’s Level 1 assets and liabilities include fixed maturities and equity securities that are traded in an active exchange market, as well as certain U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.

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. The Company’s Level 2 assets and liabilities include fixed maturities with quoted prices that are traded less frequently than exchange-traded instruments or assets and liabilities 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 U.S. Government and agency mortgage-backed fixed maturities and corporate fixed maturities.  This category also includes the Company’s investment in derivative as the value equates to 21.5% of the fair value of the total investment, whose value is calculated in accordance with Level 2 principles.

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 Company’s Level 3 assets and liabilities include financial instruments whose value is 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 generally includes certain private equity investments and asset-backed securities where independent pricing inputs were not able to be obtained for a significant portion of the underlying assets.

14

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.

The following table presents the Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010, respectively.

	September 30, 2011
	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. government obligations	$	-	$	56,893,061	$	-	$	56,893,061
States and political subdivisions		-		53,039,591		-		53,039,591
Corporate		-		216,529,522		2,132,112		218,661,634
Foreign		-		29,428,560		-		29,428,560
Asset-backed securities		-		5,571,979		-		5,571,979
Mortgage-backed securities:
Commercial MBS		-		8,745,936		-		8,745,936
Residential MBS		-		48,642,840		-		48,642,840
Total fixed maturities	$	-	$	418,851,489	$	2,132,112	$	420,983,601
Equity securities:
U.S. agencies	$	552,800	$	-	$	-	$	552,800
Mutual funds		2,334,497		-		-		2,334,497
Nonredeemable corporate preferred		-		1,000,940		-		1,000,940
Corporate common stock		96,760		-		344,000		440,760
Total equity securities	$	2,984,057	$	1,000,940	$	344,000	$	4,328,997
Investment in derivative	$	-	$	599,302	$	-	$	599,302

	December 31, 2010
	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. government obligations	$	-	$	38,280,498	$	-	$	38,280,498
States and political subdivisions		-		47,042,718		-		47,042,718
Corporate		-		150,673,819		-		150,673,819
Foreign		-		22,528,900		-		22,528,900
Asset-backed securities		-		5,808,341		387,863		6,196,204
Mortgage-backed securities:
Commercial MBS		-		8,424,879		-		8,424,879
Residential MBS		-		40,309,244		-		40,309,244
Total fixed maturities	$	-	$	313,068,399	$	387,863	$	313,456,262
Equity securities:
U.S. agencies	$	552,800	$	-	$	-	$	552,800
Mutual funds		2,571,225		-		-		2,571,225
Nonredeemable corporate preferred		-		947,190		-		947,190
Corporate common stock		109,556		-		344,000		453,556
Total equity securities	$	3,233,581	$	947,190	$	344,000	$	4,524,771

15

At September 30, 2011, Level 3 financial instruments consisted of three corporate fixed maturities and one common stock, where trading has been limited.  At December 31, 2010, Level 3 financial instruments consisted of one asset-backed security and one common stock, where trading has been limited.  The fair values for these securities were primarily determined through the use of non-binding broker quotes and internal models using unobservable assumptions about market participants.  Fair values for Level 1 and Level 2 assets are primarily based on quoted prices in the market obtained via pricing services, which use observable inputs in developing such rates.

The following table provides a summary of changes in fair value of our Level 3 financial instruments for the quarters and nine months ended September 30, 2011 and 2010, respectively.

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

	Quarter Ended September 30, 2010
	U.S.						Asset-		Nonredeemable			Corporate
	Government						Backed		Corporate			Common
	Obligations			Corporate			Securities		Preferred			Stock		Total
Beginning balance	$	1,046,280		$	4,884,956		$	-	$	-		$	344,000	$	6,275,236
Transfers into Level 3		-			-			-		1,032,810			-		1,032,810
Transfers out of Level 3		(1,046,280	)		(4,866,256	)		-		-			-		(5,912,536	)
Total gains or losses:
Included in earnings		-			9,056			-		-			-		9,056
Included in other comprehensive income		-			(7,356	)		-		(72,810	)		-		(80,166	)
Net purchases (sales)		-			(20,400	)		-		-			-		(20,400	)
Ending balance	$	-		$	-		$	-	$	960,000		$	344,000	$	1,304,000

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	Nine Months Ended September 30, 2011
	U.S.					Asset-			Nonredeemable		Corporate
	Government					Backed			Corporate		Common
	Obligations		Corporate			Securities			Preferred		Stock		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	)
Total gains or losses:
Included in earnings		-		-			-			-		-		-
Included in other comprehensive income		-		104,378			-			-		-		104,378
Purchases		-		400,000			-			-		-		400,000
Sales		-		(74,051	)		-			-		-		(74,051	)
Ending balance	$	-	$	2,132,112		$	-		$	-	$	344,000	$	2,476,112

	Nine Months Ended September 30, 2010
	U.S.						Asset-			Nonredeemable			Corporate
	Government						Backed			Corporate			Common
	Obligations			Corporate			Securities			Preferred			Stock		Total
Beginning balance	$	775,000		$	4,573,606		$	436,855		$	-		$	342,400	$	6,127,861
Transfers into Level 3		-			-			-			1,032,810			-		1,032,810
Transfers out of Level 3		(1,821,280	)		(4,866,256	)		(411,077	)		-			-		(7,098,613	)
Total gains or losses:
Included in earnings		-			9,056			-			-			-		9,056
Included in other comprehensive income		49,092			416,462			11,923			(72,810	)		1,600		406,267
Net purchases (sales)		997,188			(132,868	)		(37,701	)		-			-		826,619
Ending balance	$	-		$	-		$	-		$	960,000		$	344,000	$	1,304,000

The Company experienced no transfers between Level 1 and Level 2 during the quarter or nine months ended September 30, 2011.  The Company experienced no transfers between Level 2 and Level 3 during the quarter ended September 30, 2011.  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 one nonredeemable preferred stock that transferred from Level 2 to Level 3 during the quarter ended September 30, 2010 (transferred from Level 1 to Level 3 for the nine months ended September 30, 2010).  Trading for this preferred stock has become more limited, which restricts the use of Level 1 and Level 2 inputs into pricing.  The Company has one U.S. government obligation and four corporate securities which transferred from Level 3 to level 2 during the quarter ended September 30, 2010.  Additionally, the Company had one U.S. government obligation which transferred from Level 3 to Level 2 during the quarter ended March 31, 2010 as well as one asset-backed security which transferred from Level 3 to Level 2 during the quarter ended June 30, 2010.  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.

17

The following disclosure contains the estimated fair values of financial instruments, as of September 30, 2011 and December 31, 2010.  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, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Assets:
Fixed maturities	$	420,983,601	$	420,983,601	$	313,456,262	$	313,456,262
Equity securities		4,328,997		4,328,997		4,524,771		4,524,771
Mortgage loans on real estate:
Commercial		18,175,084		18,501,936		19,792,428		20,524,312
Residential		21,902		22,823		25,050		26,498
Policy loans		7,033,510		7,033,510		6,949,374		6,949,374
State-guaranteed receivables		2,769,462		3,159,383		-		-
Investment in derivative		599,302		599,302		-		-
Other long-term investments		1,462,350		1,462,350		1,454,232		1,454,232
Short-term investments		17,094		17,094		491,041		491,041
Cash and cash equivalents		15,568,074		15,568,074		2,647,798		2,647,798
Accrued investment income		4,304,595		4,304,595		3,926,591		3,926,591
Cash value of company-owned life insurance		9,627,751		9,627,751		9,021,432		9,021,432
Liabilities:
Policyholder deposits (Investment-type contracts)	$	54,580,124	$	57,792,905	$	54,276,322	$	52,169,944
Policy claims		1,988,972		1,988,972		1,887,136		1,887,136
Obligations under capital leases		45,864		45,864		57,808		57,808
Notes payable		1,588,190		1,581,997		2,533,955		2,489,222

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

Fixed maturities and equity securities:  The fair values for fixed maturities and equity securities (including redeemable preferred stocks) are based on the principles previously discussed.

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.

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.

Investment in derivative:  The fair value of the investment in derivative is calculated at 21.5% of the total fair value of the underlying market-indexed note derived utilizing the principles for fixed maturities as previously discussed.

Cash and cash equivalents, short-term investments, policy loans, accrued investment income and other long-term investments:  The carrying amounts reported for these financial instruments approximate their fair values.

18

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.

The fair values for insurance contracts other than investment-type contracts are not required to be disclosed.

Policy claims and obligations under capital leases:  The carrying amounts reported for these liabilities approximate their fair value.

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.

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, 2011 and 2010 were 1,152,782 and 1,151,817, respectively.  The weighted average number of shares outstanding for the nine months ended September 30, 2011 and 2010 were 1,152,200 and 1,146,593, respectively.

NOTE 7 - Segment Data

Effective December 31, 2010, the Company revised its reporting segments to correlate with the way in which it now manages and views its business.  The previous segment entitled “Credit insurance and administrative services” is now changed to be “Administrative and financial services”.  Given that our credit insurance income is now driven by administrative fees and given our focus on third party administration, we have combined these revenue streams into a distinct segment.  Additionally, we now allocate realized gains (losses), including the effects of other-than-temporary impairments, across our product lines rather than accumulating them within the “Corporate and other” segment as had been done in prior periods.  Accordingly, the 2010 amounts presented within this footnote have been revised to correlate with the revised segment methodology.

19

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,
	2011			2010		2011			2010
Revenue:
Preneed and burial products	$	106,342,055		$	15,579,393	$	127,567,866		$	35,756,822
Traditional and universal life products		6,317,887			2,652,058		13,736,940			7,803,933
Administrative and financial services		493,019			323,972		1,154,746			900,560
Corporate and other		14,876			308,001		390,552			1,520,526
	$	113,167,837		$	18,863,424	$	142,850,104		$	45,981,841
Pre-tax income (loss) from operations:
Preneed and burial products	$	(350,263	)	$	1,143,979	$	(763,134	)	$	1,517,933
Traditional and universal life products		227,527			520,406		720,073			556,728
Administrative and financial services		169,214			100,445		239,470			192,433
Corporate and other		(75,258	)		115,906		(126,610	)		762,854
	$	(28,780	)	$	1,880,736	$	69,799		$	3,029,948

The Company’s assets by segment at September 30, 2011 and December 31, 2010 are as follows:

	September 31,		December 31,
	2011		2010
Assets:
Preneed and burial products	$	379,630,328	$	282,761,577
Traditional and universal life products		73,237,380		69,028,683
Administrative and financial services		10,614,464		9,958,773
Corporate and other		105,173,648		68,840,414
	$	568,655,820	$	430,589,447

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.

20

We file U.S. federal income tax returns and income tax returns in various state jurisdictions. Our 2008 through 2010 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 – Comprehensive Income

The components of comprehensive income, net of related federal income taxes, are as follows:

	Quarter Ended September 30,					Nine Months Ended September 30,
	2011			2010		2011		2010
Total net unrealized gains
arising during the period	$	5,818,825		$	4,456,432	$	7,944,702	$	11,835,500
Less: Net realized investment gains (losses)		(2,022	)		1,067,088		36,334		1,644,818
Net unrealized gains		5,820,847			3,389,344		7,908,368		10,190,682
Change in unrealized pension benefits		86,634			111,461		259,903		240,633
Change in fair value of hedging instrument		-			-		-		2,358
Net income (loss)		(19,965	)		1,296,712		48,421		2,204,589
Total comprehensive income	$	5,887,516		$	4,797,517	$	8,216,692	$	12,638,262

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.

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.

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

	Quarter Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Service cost	$	130,194		$	134,853		$	390,582		$	323,995
Interest cost		252,986			277,725			758,958			752,955
Expected return on plan assets		(285,862	)		(243,022	)		(857,586	)		(726,752	)
Recognized net loss		131,264			168,880			393,792			364,595
Net periodic benefit cost	$	228,582		$	338,436		$	685,746		$	714,793

We previously disclosed in our financial statements for the year ended December 31, 2010 that we expected to contribute $1,440,000 to our pension plan in 2011. As of September 30, 2011, $1,080,000 had been contributed. We presently anticipate contributing an additional $360,000 to fund our pension plan in 2011.

NOTE 11 – Acquisitions

During the third quarter of 2011, the Company 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.  The Company received cash in exchange for assuming the covered obligations.  The Company assumed estimated net policy liabilities totaling approximately $94,033,000 in exchange for cash totaling approximately $94,029,000.  The Company did not establish an asset for value of business acquired due to the small difference between the liabilities assumed and the cash received on this transaction.  These amounts are subject to change based on additional accounting settlements during the fourth quarter, although any such settlements are not expected to be significant.

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Note 12 – Notes Payable

The Company renewed the Investors Heritage Capital Corporation Line of Credit and the At Need Funding Line of Credit during the third quarter of 2011.  The Investors Heritage Capital Corporation Line of Credit remains for $150,000 with a new maturity date of September 27, 2013.  The At Need Funding Line of Credit is now for $1,000,000 with a new maturity date of September 29, 2013.  Interest is paid on both notes monthly at the prime rate, with a floor of 3.25%.

Note 13 – Subsequent Event

During October 2011, the Company liquidated its equity positions in three Fifth Third mutual funds, two for which we had previously recognized other-than-temporary impairment losses during 2008.  A realized gain totaling $495,272 was recognized on these sales.  These sales resulted in a tax loss of $349,692.  The Company expects to be able to fully utilize this capital loss on current year and future returns, if necessary.

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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 policies 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.

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, after over a year of development effort, we began marketing policies in partnership with Puritan Financial Corporation.  These products – the Heritage Solution, a single premium life policy, and the Heritage Provider, a ten pay whole life and single premium immediate annuity combination – are geared toward wealth preservation in the senior market.  Premium generated during the nine months ended September 30, 2011 from this partnership totaled approximately $5,734,000.  We are currently negotiating a reinsurance arrangement whereby we would cede 50% of the premiums and associated benefit and expense items to an affiliated life insurance company of Puritan Financial Corporation.  If and when entered, this arrangement would be retroactive to all sales generated under the partnership.  While such a reinsurance arrangement would impact earned premiums, increases in reserves and other associated expense items, the net income impact is expected to be minimal.

Investors Heritage Life continues to market its third-party administrative (“TPA”) services as an additional revenue source.  We currently have nine TPA clients for which we provide tailored services to meet each client’s individual business needs. We have been able to perform services for these clients using our existing in-house resources.  We have been given notice of termination relative to three TPA clients effective February 1, 2012.  However, we have entered into a new arrangement with one client expected to begin during the fourth quarter of 2011.

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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 $94,033,000 in exchange for cash totaling approximately $94,029,000.  Given the small difference between the liabilities assumed and the consideration received, we did not establish an asset for value of business acquired.  These amounts are subject to change based on additional accounting settlements during the fourth quarter, although any such settlements are not expected to be significant.  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. However, we have encountered a short-term negative effect on net income during the third quarter of 2011 due to the challenges of investing this large amount of cash in the current investment market.  As of September 30, 2011, the majority of the cash has been invested and we expect more favorable results on this block during the fourth quarter of 2011 and beyond.

Our primary uses of cash are ongoing operating expenses, debt service and dividend payments. Our principal sources of cash are the dividends paid to us by Investors Heritage Life and Investors Heritage Financial in addition to rent paid by Investors Heritage Life under the terms of a building lease. Investors Heritage Life’s principal sources of cash are proceeds received from the sale of life insurance policies, administrative service fees and investment income, including realized gains (losses), less interest credited and benefits to policyholders and expenses. 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are 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, present value of future profits, 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 the third quarter of 2011, we have also begun 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 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 recorded as an unrealized loss in 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.

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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 value.

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 appreciation (depreciation) 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.

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 financial statements in the period in which such revisions are made.

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Accrued Pension Expense

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, rate of compensation increases and the current discount rate used to calculate the present value of future obligations.  Changes in these assumptions can significantly impact the accrued pension liability and net periodic benefit expense recorded in the financial statements.  Additionally, funding of plan liabilities is sensitive to changes in investment returns as well as regulatory changes, which can significantly impact our financial statements.

New Accounting Pronouncements

In October 2010, the 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 is effective for fiscal years beginning after December 15, 2011 and interim periods within those years. Early adoption as of the beginning of a fiscal year is permitted. The guidance is to be applied prospectively upon the date of adoption, with retrospective application permitted, but not required. We plan to adopt this guidance effective January 1, 2012. We are in the process of assessing the impact of the guidance on our financial statements; however, we currently do not expect to experience a significant impact as a result of this new guidance.

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. The guidance is effective for interim and annual periods beginning after December 15, 2011 and no early adoption is permitted. We are currently evaluating this guidance; however, we currently do not expect to experience a significant impact as a result of this new guidance.

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 is effective for the quarter ending March 31, 2012.  Early adoption is permitted.  The updated guidance will result in a change in the presentation of our financial statements but will not have any impact on our results of operations, financial position or liquidity.  We have not yet determined whether we will early adopt this guidance or what method of presentation will be used in complying with this guidance.

INVESTMENTS, LIQUIDITY AND CAPITAL RESOURCES

Investments

Investors Heritage Life maintains a sound, conservative investment strategy. At September 30, 2011, 89.5% of invested assets consisted of fixed income securities compared to 90.4% at December 31, 2010. At September 30, 2011 and December 31, 2010, Investors Heritage Life’s fixed income investments were 97.0% and 99.0% investment grade as rated by Standard & Poor’s.

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We have reviewed our investment portfolio and do not believe that there are additional securities that are other-than-temporarily impaired at September 30, 2011 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 quarter or nine months ended September 30, 2011.  As of September 30, 2010, we recognized an other-than-temporary impairment for our Farmers Capital Bank Corporation common stock holding due to the severity and length of the decline in market value.  While the issuer had positive earnings during 2010 and had shown financial progress, the stock continued to show no improvement in value, and had been in an unrealized loss position in excess of 12 months.  We expect to continue to hold this stock; however, no information could be documented to support the recovery in value of the stock in the near term.  This impairment generated a total pre-tax impairment charge of $225,632.  We experienced no other-than-temporary impairments beyond the Farmers Capital Bank impairment during the quarter or nine months ended September 30, 2010.

Subsequent to September 30, 2011, we decided to liquidate our Fifth Third mutual fund holdings, two for which we had previously recognized other-than-temporary impairments during 2008.  These sales resulted in a realized gain during the fourth quarter of $495,272 along with a capital loss for tax purposes of $349,692.  Based on our earnings history and unrealized gains within our investment portfolio, we expect to be able to fully utilize the tax capital loss during the current year as well as future years, if necessary.

We continuously monitor the investment risk within our portfolio, including the risk associated with subprime lending with our CMO investments.  As of September 30, 2011, 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 the current 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, and all loans are secured by first mortgages on the real estate.  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, reviewing larger mortgage loans on an annual basis and diversifying the portfolio by property type.  At September 30, 2011, 3.9% of invested assets consisted of mortgage loans compared to 5.7% at December 31, 2010. We anticipate maintaining a similar to slightly higher percentage of mortgage loans to total invested assets into the near future. As of September 30, 2011, 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, 2011, we hold $2,769,462 in state-guaranteed receivables, comprised of nine investments in the state of New York totaling $2,333,980 and three investments in the state of Massachusetts totaling $435,482.  We anticipate purchasing additional state-guaranteed receivables during the fourth quarter of 2011.  At September 30, 2011, 0.6% of invested assets consisted of state-guaranteed receivables.

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During the third quarter of 2011, we also 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 any downside risk.  The equity-linked portion of the investment is classified as a derivative and bifurcated for reporting purposes.  The derivative portion, equal to 21.5% of the total value of the purchase price of the note, 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, 2011, the derivative investment is valued at $599,302 with a corresponding loss recognized on the mark-to-market adjustment of $45,698.

Liquidity and Capital Resources

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

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.

During the first quarter of 2011, we paid the remaining outstanding balance on a promissory note issued to one of our stockholders for the purchase of common stock held under a right of first refusal.

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, 2011, 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.

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RESULTS OF OPERATIONS

Overview

Premiums earned (net of reinsurance) were $14,276,037 for the third quarter of 2011 (an increase of 53.3% compared to the third quarter of 2010) and $34,655,673 for the nine months ended September 30, 2011 (an increase of 34.7% compared to the corresponding period in 2010).  This increase is predominantly due to increased sales of our current product offerings, including the new Puritan product offering introduced during the second quarter of 2011, in addition to premiums received on the recently acquired Texas blocks of business.  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 $4,417,405 for the third quarter of 2011 (an increase of 2.9% compared to the third quarter of 2010) and $12,859,999 for the nine months ended September 30, 2011 (an increase of 0.4% compared to the corresponding period in 2010).  These increases are due to our increased invested asset base due to the recent acquisition of the Memorial Service block of life insurance policies.  Due to the present investment climate, the cash received in this transaction was not fully invested for most of the third quarter, which negatively affected investment income.  However, we were able to invest the majority of the cash received by the end of the third quarter of 2011, which is anticipated to lead to increased earnings in future periods.  The current economic environment also continues to put pressure on new investment yields.

Net realized gains (losses) were ($2,022) and $36,334 for the three and nine month periods ended September 30, 2011, respectively, compared with $1,067,088 and $1,644,818 for the three and nine month periods ended September 30, 2010, respectively.  The large gains recognized in 2010 relate to those taken on our previously impaired Lehman bonds which were sold coupled with other gains taken to help offset the tax loss associated with the Lehman bonds.  These gains in 2010 were somewhat offset by the other-than-temporary impairment recognized on our Farmers Capital Bank stock holding during the third quarter of 2010.  The activity during 2011 is all in the normal course of business, and we experienced no other-than-temporary impairments during the three and nine month periods ended September 30, 2011.

Consideration on reinsurance assumed totaled $94,034,978 and $94,048,095 for the three and nine month periods ended September 30, 2011 compared to $3,810,018 for the three and nine month periods ended September 30, 2010.  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 2010 amount represented the payment from the Texas Life, Accident, Health and Hospital Service Insurance Guaranty Association in settlement of the assumed policy liabilities on policies previously issued by Texas Memorial Life Insurance Company.

Other income was $441,439 for the third quarter of 2011 (an increase of 16.2% compared to the third quarter of 2010) and $1,250,003 for the nine months ended September 30, 2011 (a decrease of 37.0% compared to the corresponding period in 2010).  The increase for the quarter is due to continued increases in revenues received from our TPA arrangements due to both new relationships and expanded work within existing relationships.  The decrease for the nine month period is due to the proceeds received during 2010 under one of our company-owned life insurance policies.  Excluding those proceeds of approximately $903,000, other income would have also increased for the nine month period by approximately 16%.  We have been given notice of termination relative to three TPA clients effective February 1, 2012.  However, we have entered into a new arrangement with one client expected to begin during the fourth quarter of 2011.

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Total revenue was $113,167,837 for the third quarter of 2011 compared to $18,863,424 for the third quarter of 2010 and $142,850,104 for the nine months ended September 30, 2011 compared to $45,981,841 for the corresponding period in 2010.

Total benefits and expenses were $113,196,617 for the third quarter of 2011 compared to $16,982,688 for the third quarter of 2010 and $142,780,305 for the nine months ended September 30, 2011 compared to $42,951,893 for the corresponding period in 2010.  This increase is primarily driven by the increase in reserves relative to our assumption of the Memorial Service block of life insurance policies during the third quarter of 2011.  Additionally, we have experienced increasing reserves, 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.  Finally, general and administrative expenses have increased for the three and nine month periods ended September 30, 2011 primarily due to increased benefit and employee salary expenses, some of which have been driven by new employees added due to our recent acquisitions, as well as amortization expense of the value of business acquired on the acquisition of the Texas Memorial block of life insurance policies.

After providing for federal income taxes, our net loss was $19,965 with a net loss per share of $0.02 for the third quarter of 2011 as compared to net income of $1,296,712 and net income per share of $1.13 for the third quarter of 2010.  Our net income for the nine months ended September 30, 2011 was $48,421 with net income per share of $0.04 as compared to net income of $2,204,589 and net income per share of $1.92 for the nine months ended September 30, 2010.

We declared a dividend of $0.18 per share on February 10, 2011 to shareholders of record on March 18, 2011. This dividend was paid on April 7, 2011.

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.  Effective December 31, 2010, we changed the way we manage and view our segments.  We changed our previous segment entitled “Credit Insurance and Administrative Services” to be “Administrative and Financial Services”.  Given that our credit insurance income is now driven by administrative fees and our focus on third party administration, we have combined these revenue streams into a distinct segment.  Third party administration fees were previously reported within the “Corporate and Other” segment.  Additionally, we now allocate realized gains (losses), including the effects of other-than-temporary impairments, across our product lines rather than accumulating them within the “Corporate and Other” segment.  The discussion of segment operating results that follows is being provided based on segment data prepared using this methodology.  For comparability, 2010 segment information has been revised to conform to current year presentation.

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 $106,342,055 for the third quarter of 2011 compared to $15,579,393 for the third quarter of 2010 and $127,567,866 for the nine months ended September 30, 2011 compared to $35,756,822 for the corresponding period in 2010.  This increase 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 the two block of business acquisitions from the Texas Life, Accident, Health, and Hospital Service Insurance Guaranty Association during 2011 and 2010, revenues increased approximately 4.6% for the quarter and 4.9% for the nine months ended September 30, 2011.  This increase is predominantly due to the previously mentioned stronger sales of our existing products and ongoing premium income generated as a result of the recent acquisitions, which were somewhat offset by lower investment yields.

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Pre-tax loss from operations was $350,263 and $763,134 for the three and nine month periods ended September 30, 2011 as compared to pre-tax income of $1,143,979 and $1,517,933 for the three and nine month periods ended September 30, 2010.  The higher current year pre-tax loss was driven by reserve increases and higher claims in this segment as well as crediting rate spread pressure due to lower investment income yields.  In particular, the reserve increases on the acquisition of the Memorial Service block of life insurance policies were significantly larger than the associated earned investment income on that block during the third quarter of 2011 due to the delay in investing the cash received in the acquisition.  As most of these funds have been invested as of September 30, 2011, we expect performance to begin to improve on this block.  Additionally, pre-tax income in 2010 was assisted by realized gains allocated to this segment that were recognized primarily during the third quarter of 2010 to offset the capital loss recognized on the sale of our Lehman Brothers holdings.

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 $6,317,887 for the third quarter of 2011 (an increase of 138.2% compared to the third quarter of 2010) and $13,736,940 for the nine months ended September 30, 2011 (an increase of 76.0% compared to the corresponding period in 2010).  Revenues on this segment are partially derived from the sale of term insurance products through banks, for which demand fluctuates along with economic conditions. While consumer credit markets remain tight, our recent products have performed well.  Additionally, our new Puritan product offering introduced during the second quarter of 2011 has contributed significantly to our sales growth, although the possibility of a reinsurance agreement on this product may result in a reduction of the premium revenue in future periods.  Pre-tax income from operations was $227,527 and $720,073 for the three and nine month periods ended September 30, 2011 as compared to $520,406 and $556,728 for the three and nine month periods ended September 30, 2010.  The increase in pre-tax income for the nine month period is primarily attributable to improved claims within this segment along with the increase in sales.  The decrease in pre-tax income for the three month period is due primarily to realized gains allocated to this segment that were recognized primarily during the third quarter of 2010 to offset the capital loss recognized on the sale of our Lehman Brothers holdings.

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 nine unaffiliated companies, comprised of five life insurance companies and four 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.  We have been given notice of termination relative to three TPA clients effective February 1, 2012.  However, we have entered into a new arrangement with one client expected to begin during the fourth quarter of 2011.

Revenues for this segment were $493,019 for the third quarter of 2011 (an increase of 52.2% compared to the third quarter of 2010) and $1,154,746 for the nine months ended September 30, 2011 (an increase of 28.2% compared to the corresponding period in 2010).  Pre-tax income from operations was $169,214 and $239,470 for the three and nine month periods ended September 30, 2011 as compared to $100,445 and $192,433 for the three and nine month periods ended September 30, 2010.  The revenue and pre-tax income increases are primarily related to the amount and timing of service fees generated from our third party administration relationships compared to the prior period.

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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 $14,876 and $390,552 for the three and nine month periods ended September 30, 2011 as compared to $308,001 and $1,520,526 for the three and nine month periods ended September 30, 2010.  Pre-tax loss from operations was $75,258 and $126,610 for the three and nine month periods ended September 30, 2011 as compared to pre-tax income of $115,906 and $762,854 for the three and nine month periods ended September 30, 2010.  The decline in revenues and pre-tax income is primarily due to the proceeds of approximately $903,000 received during 2010 with respect to one of our company-owned life insurance policies.  The decreases are also due to realized gains allocated to this segment that were recognized primarily during the third quarter of 2010 to offset the capital loss recognized on the sale of our Lehman Brothers holdings.  Finally, the mark-to-market adjustment on the derivative investment also contributed to the reduction in the third quarter of 2011.

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 2011, Investors Heritage Capital received no dividends from Investors Heritage Financial and no distributions from At Need Funding.  However, the potential exists for dividend payments from Investors Heritage Financial and distributions from At Need Funding over the remainder of 2011 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 30.6% for the quarter and nine months ended September 30, 2011 compared with 31.1% and 27.2% for the quarter and nine months ended September 30, 2010.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements as of September 30, 2011.

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.

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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.

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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, 2011, 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. (Removed and Reserved)

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.
32.1	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.

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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, 2011	President
	BY: /s/Raymond L. Carr
	Raymond L. Carr
DATE:  November 14, 2011	Vice President - Chief Financial Officer

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