Investors Heritage Capital (IHRC) 10-Q 2015 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 endedSeptember 30, 2015

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,
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 ☒   No ☐

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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒    No ☐

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     ☐	Accelerated filer   ☐
Non-accelerated filer       ☐ (Do not check if a smaller reporting company)	Smaller reporting company  ☒

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

Yes ☐   No ☒

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 13, 2015 - 1,117,886.033

2

CONTENTS

		Page
	PART I – FINANCIAL INFORMATION
ITEM 1.	Condensed Consolidated Financial Statements	4
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
ITEM 4.	Controls and Procedures	37
	PART II – OTHER INFORMATION
ITEM 1.	Legal Proceedings	38
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
ITEM 3.	Defaults Upon Senior Securities	38
ITEM4.	Mine Safety Disclosures	38
ITEM 5.	Other Information	38
ITEM 6.	Exhibits	39
SIGNATURES		40
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

3

PART I – FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Balance Sheets (Unaudited)

	September 30,		December 31,
ASSETS	2015		2014
Investments:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost: $396,021,059 and $403,596,261)	$	414,293,373	$	430,117,478
Equity securities (cost: $7,361,656 and $6,331,436)		7,340,705		7,405,819
Mortgage loans on real estate		32,663,124		29,459,436
Policy loans		6,784,617		6,665,493
State-guaranteed receivables		7,719,144		7,917,379
Investments in convertible options		663,950		-
Other invested assets		2,646,099		3,270,848
Total investments		472,111,012		484,836,453
Cash and cash equivalents		8,979,130		1,870,867
Accrued investment income		4,451,587		5,190,740
Due premiums		3,071,348		3,217,136
Deferred acquisition costs		17,371,027		17,847,907
Value of business acquired		246,038		301,037
Leased property under capital leases		471,037		555,251
Property and equipment		928,008		1,000,120
Cash value of company-owned life insurance		13,209,476		12,441,833
Other assets		2,009,642		2,041,050
Amounts recoverable from reinsurers		56,480,489		55,910,993
Total assets	$	579,328,794	$	585,213,387
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities:
Benefit reserves	$	493,974,598	$	490,126,730
Unearned premium reserves		7,879,488		7,812,972
Policy claims		2,681,040		2,821,106
Liability for deposit-type contracts		3,395,175		3,432,793
Reserves for dividends and endowments and other		390,675		391,439
Total policy liabilities		508,320,976		504,585,040
Deferred federal income tax liability		4,382,442		7,785,450
Obligations under capital leases		462,385		553,028
Notes payable		1,809,760		2,508,576
Accrued pension liability		4,704,931		5,141,442
Other liabilities		4,379,000		4,103,365
Total liabilities		524,059,494		524,676,901
STOCKHOLDERS' EQUITY
Common stock (shares issued: 1,117,886 and 1,123,980)		1,117,886		1,123,980
Paid-in surplus		8,913,360		8,908,243
Accumulated other comprehensive income		7,084,144		12,704,319
Retained earnings		38,153,910		37,799,944
Total stockholders' equity		55,269,300		60,536,486
Total liabilities and stockholders' equity	$	579,328,794	$	585,213,387

See notes to condensed consolidated financial statements.

4

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Income Statements (Unaudited)

	Quarter Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
REVENUE
Premiums and other considerations	$	15,429,289		$	16,072,480		$	44,916,211		$	45,915,118
Premiums ceded		(3,304,682	)		(3,681,935	)		(9,738,262	)		(9,867,051	)
Net premiums		12,124,607			12,390,545			35,177,949			36,048,067
Investment income, net of expenses		5,238,037			5,393,294			15,800,897			15,646,900
Net realized gains on investments		600,980			593,272			804,736			662,131
Other income		450,005			327,621			1,195,142			1,202,480
Total revenue		18,413,629			18,704,732			52,978,724			53,559,578
BENEFITS AND EXPENSES
Death and other benefits		10,584,316			10,142,835			33,529,784			31,446,368
Guaranteed annual endowments		93,254			102,357			316,142			326,095
Dividends to policyholders		74,180			81,426			262,741			270,108
Increase in benefit reserves and unearned premiums		2,858,998			3,443,824			6,236,723			7,992,216
Acquisition costs deferred		(1,477,478	)		(1,700,281	)		(4,498,621	)		(5,015,624	)
Amortization of deferred acquisition costs		1,683,094			1,857,955			5,232,649			5,426,506
Commissions		980,682			1,110,624			2,885,027			3,556,685
Other general and administrative expenses		2,581,103			2,403,260			8,469,679			8,069,257
Total benefits and expenses		17,378,149			17,442,000			52,434,124			52,071,611
INCOME BEFORE FEDERAL INCOME TAXES		1,035,480			1,262,732			544,600			1,487,967
PROVISION (BENEFIT) FOR FEDERAL INCOME TAXES
Current		209,683			170,271			329,473			274,989
Deferred		(265,256	)		231,072			(507,766	)		171,401
Total federal income taxes		(55,573	)		401,343			(178,293	)		446,390
NET INCOME	$	1,091,053		$	861,389		$	722,893		$	1,041,577
BASIC AND DILUTED NET INCOME PER SHARE	$	0.98		$	0.77		$	0.64		$	0.92
DIVIDENDS PER SHARE	$	-		$	-		$	0.21		$	0.20

See notes to condensed consolidated financial statements.

5

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

		Quarter Ended September 30,						Nine Months Ended September 30,
		2015			2014			2015			2014
NET INCOME		$	1,091,053		$	861,389		$	722,893		$	1,041,577
OTHER COMPREHENSIVE INCOME (LOSS):
Change in net unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during period			(2,866,815	)		(3,670,059	)		(8,609,887	)		10,975,674
Reclassification adjustment for gains included in income			(606,509	)		(593,272	)		(734,350	)		(662,131	)
Adjustment for effects of deferred acquisition costs			93,198			126,140			257,145			(252,382	)
Net unrealized gains (losses) on investments			(3,380,126	)		(4,137,191	)		(9,087,092	)		10,061,161
Change in defined benefit pension plan:
Amortization of actuarial net loss in net periodic pension cost			190,559			97,604			571,675			292,810
Other comprehensive income (loss) before income taxes			(3,189,567	)		(4,039,587	)		(8,515,417	)		10,353,971
Income tax expense (benefit)			(1,084,454	)		(1,373,461	)		(2,895,242	)		3,520,349
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES	��		(2,105,113	)		(2,666,126	)		(5,620,175	)		6,833,622
COMPREHENSIVE INCOME (LOSS)		$	(1,014,060	)	$	(1,804,737	)	$	(4,897,282	)	$	7,875,199

See notes to condensed consolidated financial statements.

6

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)

						Accumulated
						Other						Total
	Common			Paid-in		Comprehensive			Retained			Stockholders'
	Stock			Surplus		Income			Earnings			Equity
BALANCE, JANUARY 1, 2014	$	1,128,583		$	8,908,243	$	6,751,991		$	36,858,451		$	53,647,268
Net income		-			-		-			1,041,577			1,041,577
Other comprehensive income, net		-			-		6,833,622			-			6,833,622
Cash dividends		-			-		-			(225,717	)		(225,717	)
Repurchases of common stock, net		(3,672	)		-		-			(78,962	)		(82,634	)
BALANCE, SEPTEMBER 30, 2014	$	1,124,911		$	8,908,243	$	13,585,613		$	37,595,349		$	61,214,116
BALANCE, JANUARY 1, 2015	$	1,123,980		$	8,908,243	$	12,704,319		$	37,799,944		$	60,536,486
Net income		-			-		-			722,893			722,893
Other comprehensive loss, net		-			-		(5,620,175	)		-			(5,620,175	)
Cash dividends		-			-		-			(236,035	)		(236,035	)
Repurchases of common stock, net		(6,094	)		5,117		-			(132,892	)		(133,869	)
BALANCE, SEPTEMBER 30, 2015	$	1,117,886		$	8,913,360	$	7,084,144		$	38,153,910		$	55,269,300

See notes to condensed consolidated financial statements.

7

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Nine Months Ended September 30,
	2015			2014
NET CASH PROVIDED BY OPERATING ACTIVITIES	$	6,947,933		$	11,052,080
INVESTING ACTIVITIES
Purchases of available-for-sale securities		(23,018,969	)		(31,220,765	)
Sales of available-for-sale securities		6,764,986			13,981,335
Maturities of available-for-sale securities		23,204,172			22,442,467
Acquisitions of mortgage loans on real estate		(10,312,856	)		(8,997,660	)
Payments of mortgage loans on real estate		7,199,727			2,983,174
Payments of state-guaranteed receivables		611,280			611,280
Purchases of convertible options		(739,809	)		-
Sales and exchanges of convertible options		29,249			-
Net reductions (additions) of other investments		505,625			(116,497	)
Net additions to property and equipment		(247,611	)		(299,123	)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		3,995,794			(615,789	)
FINANCING ACTIVITIES
Policyholder account deposits		3,336,586			3,908,096
Policyholder account withdrawals		(6,103,330	)		(6,069,481	)
Payments on notes payable		(3,030,476	)		(2,602,402	)
Proceeds from notes payable		2,331,660			2,235,967
Dividends paid		(236,035	)		(225,717	)
Repurchases of common stock, net		(133,869	)		(82,634	)
NET CASH USED IN FINANCING ACTIVITIES		(3,835,464	)		(2,836,171	)
INCREASE IN CASH AND CASH EQUIVALENTS		7,108,263			7,600,120
Cash and cash equivalents at beginning of period		1,870,867			4,143,291
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	8,979,130		$	11,743,411

See notes to condensed consolidated financial statements.

8

INVESTORS HERITAGE CAPITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(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 Kentucky, North Carolina, Georgia, Indiana, Michigan, Ohio, Pennsylvania, South Carolina, Tennessee, Texas and Virginia.

NOTE 2 - Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2014, 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, 2015 through the date that these financial statements have been issued.

NOTE 3 – New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance regarding accounting for revenue recognition that identifies the accounting treatment for an entity’s contracts with customers.  Certain contracts, including insurance contracts, are specifically excluded from this guidance.  However, certain other types of contracts may impact the financial statements of insurance providers. In August 2015, the FASB deferred the effective date of this guidance for public entities to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating this guidance, but it is not expected to have a material impact on its consolidated financial statements.

9

In February 2015, the FASB issued guidance regarding the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Under this guidance, previous consolidation conclusions may change and additional disclosures may be required. This guidance is effective for public entities for fiscal years and interim periods within those fiscal years beginning after December 15, 2015. The Company is currently evaluating this guidance, but it is not expected to have a material impact on its consolidated financial statements.

In July 2015, the FASB issued guidance regarding employee benefit accounting. The guidance is divided into three parts. First, the guidance requires a pension plan to use contract value as the only required measure for fully benefit-responsive investment contracts. Second, the guidance simplifies and increases the effectiveness of the investment disclosure requirements for employee benefit plans. Third, the guidance provides benefit plans with a measurement date practical expedient. This guidance is effective for fiscal years beginning after December 15, 2015. The Company is currently evaluating this guidance, but it is not expected to have a material impact on its consolidated financial statements.

All other new accounting standards and updates of existing standards issued through the date of this filing were considered by management and did not relate to accounting policies and procedures pertinent to the Company at this time or were not expected to have a material impact to the consolidated financial statements.

10

NOTE4 – Investments

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

			Gross		Gross
September 30, 2015	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Fixed maturity securities:
U.S. government obligations	$	23,726,172	$	987,727	$	-	$	24,713,899
States and political subdivisions		37,135,156		5,083,117		151,963		42,066,310
Corporate		223,714,895		12,700,391		2,500,952		233,914,334
Foreign		65,514,288		2,359,407		2,737,244		65,136,451
Asset-backed securities		298,636		3,324		-		301,960
Mortgage-backed securities (MBS):
Commercial MBS		6,834,983		291,856		-		7,126,839
Residential MBS		38,548,866		2,284,066		17,475		40,815,457
Corporate redeemable preferred stock		248,063		-		29,940		218,123
Total fixed maturity securities		396,021,059		23,709,888		5,437,574		414,293,373
Equity securities:
U.S. agencies		707,900		-		-		707,900
Mutual funds		318,284		-		13,575		304,709
Corporate common stock		6,335,472		500,426		507,802		6,328,096
Total equity securities		7,361,656		500,426		521,377		7,340,705
Total	$	403,382,715	$	24,210,314	$	5,958,951	$	421,634,078

			Gross		Gross
December 31, 2014	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Fixed maturity securities:
U.S. government obligations	$	28,063,178	$	820,997	$	16,164	$	28,868,011
States and political subdivisions		38,021,271		5,985,975		-		44,007,246
Corporate		224,299,411		15,669,733		930,632		239,038,512
Foreign		63,792,040		2,934,542		751,369		65,975,213
Asset-backed securities		1,432,996		33,501		-		1,466,497
Mortgage-backed securities (MBS):
Commercial MBS		7,869,355		266,831		-		8,136,186
Residential MBS		40,118,010		2,507,809		6		42,625,813
Total fixed maturity securities		403,596,261		28,219,388		1,698,171		430,117,478
Equity securities:
U.S. agencies		707,900		-		-		707,900
Mutual funds		318,284		40,038		-		358,322
Corporate common stock		5,305,252		1,157,718		123,373		6,339,597
Total equity securities		6,331,436		1,197,756		123,373		7,405,819
Total	$	409,927,697	$	29,417,144	$	1,821,544	$	437,523,297

11

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, 2015						December 31, 2014
			Gross		Number				Gross		Number
	Estimated		Unrealized		of		Estimated		Unrealized		of
	Fair Value		Loss		Securities		Fair Value		Loss		Securities
Fixed Maturities:
Less than 12 months:
States and political subdivisions	$	1,598,038	$	151,963		2	$	-	$	-		-
Corporate		38,273,689		2,029,774		38		12,473,068		508,818		7
Foreign		15,333,738		1,196,671		12		10,374,173		310,267		7
Residential MBS		3,420,922		17,475		3		16,862		6		1
Corporate redeemable preferred stock		218,123		29,940		1		-		-		-
Greater than 12 months:
U.S. government obligations		-		-		-		7,736,774		16,164		1
Corporate		3,777,741		471,178		3		3,828,887		421,814		3
Foreign		3,606,250		1,540,573		2		4,724,455		441,102		2
Total fixed maturities		66,228,501		5,437,574		61		39,154,219		1,698,171		21
Equities:
Less than 12 months:
Mutual funds		304,709		13,575		1		-		-		-
Corporate common stock		3,028,571		385,969		21		527,614		103,438		4
Greater than 12 months:
Corporate common stock		210,067		121,833		3		525,865		19,935		4
Total equities		3,543,347		521,377		25		1,053,479		123,373		8
Total	$	69,771,848	$	5,958,951		86	$	40,207,698	$	1,821,544		29

As of September 30, 2015, all of the above fixed maturity securities individually had a fair value to cost ratio equal to or greater than 60% and all of the above equity securities individually had a fair value to cost ratio equal to or exceeding 51%. As of December 31, 2014, 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 equal to or greater than 78%.

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 wheremanagement has the intent to sell the security, or it is more likely than not that it will be required to sell the security before recovery of its cost basis,is a fixed maturity security adjusted to fair value and the resulting losses recognized in realized gains (losses) in the consolidated statements of income. Any other-than-temporary impairments on equity securities are recorded in the consolidated statements of income in the periods incurred as the difference between fair value and cost. Based on our review, the Company experienced no other-than-temporary impairments during the quarters or nine months ended September 30, 2015 or 2014.

12

Management believes that the Company will fully recover its cost basis in the securities held at September 30, 2015, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature. The temporary impairments shown herein are primarily the result of the current interest rate environment rather than credit factors that would imply other-than-temporary impairment.

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,
	2015			2014
Net unrealized appreciation on available-for sale securities	$	18,251,363		$	27,595,600
Adjustment to deferred acquisition costs		(454,505	)		(711,650	)
Deferred income taxes		(6,050,931	)		(9,140,543	)
Net unrealized appreciation on available-for sale securities	$	11,745,927		$	17,743,407

The amortized cost and fair value of fixed maturity securities at September 30, 2015, 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	$	7,664,802	$	7,783,345
Due after one year through five years		91,304,690		98,919,866
Due after five years through ten years		179,176,060		181,280,986
Due after ten years		50,575,950		55,722,618
Due at multiple maturity dates		67,051,494		70,368,435
Corporate redeemable preferred stock		248,063		218,123
Total	$	396,021,059	$	414,293,373

Proceeds for the quarters and nine months ended September 30, 2015 and 2014 from sales and maturities of investments in available-for-sale securities, as well as gross gains and gross losses realized, are presented below.

	Quarter Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Proceeds from sales and maturities	$	13,603,538		$	19,194,823		$	29,969,158		$	36,423,802
Gross realized gains		606,915			611,566			857,095			785,376
Gross realized losses		(406	)		(18,294	)		(122,745	)		(123,245	)

13

The table below shows the change in net unrealized investment gains (losses) and the amount of realized investment gains (losses) on fixed maturities and equity securities in addition to realized investment gains on mortgage loans for the quarters and nine months ended September 30, 2015 and 2014.

	Quarter Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Change in net unrealized investmentgains (losses):
Securities available-for-sale:
Fixed maturities	$	(2,751,428	)	$	(4,179,008	)	$	(8,248,903	)	$	9,722,385
Equity securities		(721,896	)		(84,323	)		(1,095,334	)		591,158
Net realized investment gains (losses):
Securities available-for-sale:
Fixed maturities	$	-		$	593,895		$	90,859		$	662,083
Equity securities		606,509			(623	)		643,491			48
Mortgage loans on real estate		-			-			75,915			-
Investments in convertible options		(5,529	)		-			(5,529	)		-

The Company is required to hold assets on deposit for the benefit of policyholders in accordance with statutory rules and regulations. At September 30, 2015 and December 31, 2014, these required deposits had a total fair value of $23,280,207 and $23,951,372, respectively.

The Company also engages in commercial and residential mortgage lending. As of September 30, 2015, investments in commercial and residential properties comprised 33.5% and 66.5%, respectively, of the Company’s mortgage portfolio. At December 31, 2014, investments in commercial and residential properties comprised 41.9% and 58.1%, respectively, of the Company’s mortgage portfolio.

All commercial mortgage loans are either originated in-house or through two mortgage brokers, are secured by first mortgages on the real estate and generally carry personal guarantees by the borrowers. Loan-to-value ratios of 80% or less and debt service coverage from existing cash flows of 115% or higher are generally required. We minimize credit risk in our mortgage loan portfolio through various methods, including stringently underwriting the loan request, maintaining small average loan balances, and reviewing larger mortgage loans on an annual basis.

The Company purchases residential mortgage loans through the secondary market. Each mortgage loan opportunity is reviewed individually, considering both the value of the underlying property and the credit worthiness of the borrower. We are utilizing a third party servicer to administer these loans.

As of September 30, 2015 and December 31, 2014, there were no non-performing loans, loans on nonaccrual status, loans 90 days past due or more, loans in process of foreclosure, or restructured loans. The Company experienced no mortgage loan defaults during the quarters or nine months ended September 30, 2015 and 2014.

14

The Company’s investments in mortgage loans, by state, are as follows:

	September 30,		December 31,
	2015		2014
Illinois	$	5,900,430	$	3,392,446
Texas		5,842,343		2,290,700
Florida		4,067,765		6,047,236
California		3,373,985		4,806,451
Kentucky		3,299,038		3,492,854
Georgia		2,652,028		3,123,530
Ohio		1,721,232		1,805,093
Tennessee		923,652		1,054,671
Arizona		775,755		927,600
Indiana		763,433		95,434
Missouri		530,176		267,996
West Virginia		419,536		440,725
Pennsylvania		374,790		-
Nevada		374,363		-
North Carolina		356,727		359,308
New Jersey		248,979		252,612
South Carolina		230,163		248,815
Colorado		223,109		225,772
Massachusetts		208,908		239,399
Idaho		163,001		174,433
Kansas		135,639		136,442
Utah		78,072		77,919
Total	$	32,663,124	$	29,459,436

The Company owns certain investments in state-guaranteed receivables. These investments represent an assignment of the future rights to cash flows from lottery winners purchased at a discounted price. Payments on these investments are made by state run lotteries and guaranteed by the states. The state-guaranteed receivables are carried at their amortized cost basis on the balance sheet. At September 30, 2015, 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	$	714,500	$	723,349
Due after one year through five years		2,620,123		2,848,554
Due after five years through ten years		3,055,607		3,746,986
Due after ten years		1,328,914		1,848,424
Total	$	7,719,144	$	9,167,313

15

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

	September 30,		December 31,
	2015		2014
New York	$	3,483,293	$	3,694,805
Massachusetts		1,995,344		1,969,570
Georgia		1,454,579		1,467,774
Pennsylvania		315,729		299,851
Texas		239,867		227,649
California		177,173		188,131
Ohio		53,159		69,599
Total	$	7,719,144	$	7,917,379

During the third quarter of 2015, the Company began purchasing investments in convertible fixed maturity securities. Convertible securities feature an option allowing for a portion of the security to be converted into an equity position of the underlying issuer in exchange for a lower coupon rate. In accordance with FASB accounting guidance, this convertible feature must be bifurcated and reported separately on the balance sheet at fair value, with adjustments in fair value recognized in the income statement. Accordingly, the convertible options within our portfolio are reported as investments in convertible options on the balance sheet, and the mark-to-market adjustment associated with the changes in fair value of the convertible options are reported as gains (losses) on investments in convertible options as a component of net investment income. As of September 30, 2015, the total fair value of our investments in convertible options was $663,950. For the quarter and nine months ended September 30, 2015, we recognized a loss on our investments in convertible options of $41,082 relative to the mark-to-market adjustment. Additionally, we recognized a net realized investment loss of $5,529 upon the exchange of one convertible security.

Major categories of net investment income are summarized as follows: 

	Quarter Ended September 30,					Nine Months Ended September 30,
	2015			2014		2015			2014
Fixed maturities	$	4,517,133		$	4,930,579	$	13,713,883		$	14,369,420
Equity securities		55,400			58,733		192,180			186,211
Mortgage loans on real estate		545,945			391,596		1,730,040			1,048,296
Policy loans		126,798			121,585		368,784			356,962
State-guaranteed receivables		134,770			137,889		413,045			422,403
Loss on investments in convertible options		(41,082	)		-		(41,082	)		-
Other		47,741			56,486		168,772			173,972
Gross investment income		5,386,705			5,696,868		16,545,622			16,557,264
Investment expenses		148,668			303,574		744,725			910,364
Net investment income	$	5,238,037		$	5,393,294	$	15,800,897		$	15,646,900

NOTE 5 – Fair Values of Financial Instruments

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

16

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

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

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

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

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

Valuation of Investments Reported at Fair Value in Financial Statements

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

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

The Company’s Level 3 investments include financial instruments whose value cannot be obtained through a pricing service and must be determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category currently includes one private equity investment where independent pricing inputs were not able to be obtained. For fixed maturities that may fall within this level, the Company utilizes the assistance of its third-party investment advisor to estimate the fair value based on non-binding broker quotes and internal models using unobservable assumptions about market participants. For the private equity investment, the Company establishes fair value based on the most recent trading activity as well as a review of the underlying financial statements of the entity.

17

The following table presents the Company’s fair value hierarchy for those financial instruments measured and reported at fair value on a recurring basis as of September 30, 2015 and December 31, 2014.

	September 30, 2015
	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. government obligations	$	-	$	24,713,899	$	-	$	24,713,899
States and political subdivisions		-		42,066,310		-		42,066,310
Corporate		-		233,914,334		-		233,914,334
Foreign		-		65,136,451		-		65,136,451
Asset-backed securities		-		301,960		-		301,960
Mortgage-backed securities:
Commercial MBS		-		7,126,839		-		7,126,839
Residential MBS		-		40,815,457		-		40,815,457
Corporate redeemable preferred stock		-		218,123		-		218,123
Total fixed maturities	$	-	$	414,293,373	$	-	$	414,293,373
Equity securities:
U.S. agencies	$	707,900	$	-	$	-	$	707,900
Mutual funds		304,709		-		-		304,709
Corporate common stock		5,976,096		-		352,000		6,328,096
Total equity securities	$	6,988,705	$	-	$	352,000	$	7,340,705
Investments in convertible options	$	-	$	663,950	$	-	$	663,950

	December 31, 2014
	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. government obligations	$	-	$	28,868,011	$	-	$	28,868,011
States and political subdivisions		-		44,007,246		-		44,007,246
Corporate		-		239,038,512		-		239,038,512
Foreign		-		65,975,213		-		65,975,213
Asset-backed securities		-		1,466,497		-		1,466,497
Mortgage-backed securities:
Commercial MBS		-		8,136,186		-		8,136,186
Residential MBS		-		42,625,813		-		42,625,813
Total fixed maturities	$	-	$	430,117,478	$	-	$	430,117,478
Equity securities:
U.S. agencies	$	707,900	$	-	$	-	$	707,900
Mutual funds		358,322		-		-		358,322
Corporate common stock		5,955,597		-		384,000		6,339,597
Total equity securities	$	7,021,819	$	-	$	384,000	$	7,405,819

18

The following table provides a summary of changes in fair value of our Level 3 financial instruments reported at fair value for the quarters and nine months ended September 30, 2015 and 2014.

	Quarter Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015			2014
Corporate common stock:
Beginning balance	$	352,000	$	384,000	$	384,000		$	384,000
Transfers into Level 3		-		-		-			-
Transfers out of Level 3		-		-		-			-
Purchases		-		-		-			-
Sales		-		-		-			-
Total gains or losses:
Included in earnings		-		-		-			-
Included in other comprehensive income		-		-		(32,000	)		-
Ending balance	$	352,000	$	384,000	$	352,000		$	384,000

The Company experienced no transfers between Level 1 and Level 2 during the quarters or nine months ended September 30, 2015 or 2014. The Company experienced no transfers between Level 2 and Level 3 during the quarters or nine months ended September 30, 2015 or 2014. 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.

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Financial Instruments Disclosed, but not Carried, at Fair Value

The following disclosure presents the carrying values and estimated fair values of the Company’s financial instruments disclosed, but not carried, at fair value as of September 30, 2015 and December 31, 2014, and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis. The fair values for insurance contracts other than investment-type contracts are not required to be disclosed. The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment was required to interpret market data to develop these estimates. Accordingly, the estimates are not necessarily indicative of the amounts which could be realized in a current market exchange. The use of different market assumptions or estimation methodologies may have a material effect on the fair value amounts.

	September 30, 2015
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Assets:
Mortgage loans on real estate:
Commercial	$	10,926,869	$	11,381,087	$	-	$	-	$	11,381,087
Residential		21,736,255		23,700,043		-		-		23,700,043
Policy loans		6,784,617		6,784,617		-		-		6,784,617
State-guaranteed receivables		7,719,144		9,167,313		-		9,167,313		-
Other invested assets		2,646,099		2,646,099		-		-		2,646,099
Cash and cash equivalents		8,979,130		8,979,130		8,979,130		-		-
Accrued investment income		4,451,587		4,451,587		-		-		4,451,587
Cash value of company-owned life insurance		13,209,476		13,209,476		-		-		13,209,476
Liabilities:
Policyholder deposits (Investment-type contracts)		52,736,316		55,141,396		-		-		55,141,396
Policy claims		2,681,040		2,681,040		-		-		2,681,040
Obligations under capital leases		462,385		462,385		-		-		462,385
Notes payable		1,809,760		1,809,760		-		-		1,809,760

	December 31, 2014
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Assets:
Mortgage loans on real estate:
Commercial	$	12,961,492	$	13,693,557	$	-	$	-	$	13,693,557
Residential		16,497,944		18,392,927		-		-		18,392,927
Policy loans		6,665,493		6,665,493		-		-		6,665,493
State-guaranteed receivables		7,917,379		9,719,006		-		9,719,006		-
Other invested assets		3,270,848		3,270,848		-		-		3,270,848
Cash and cash equivalents		1,870,867		1,870,867		1,870,867		-		-
Accrued investment income		5,190,740		5,190,740		-		-		5,190,740
Cash value of company-owned life insurance		12,441,833		12,441,833		-		-		12,441,833
Liabilities:
Policyholder deposits (Investment-type contracts)		53,318,598		55,486,262		-		-		55,486,262
Policy claims		2,821,106		2,821,106		-		-		2,821,106
Obligations under capital leases		553,028		553,028		-		-		553,028
Notes payable		2,508,576		2,508,576		-		-		2,508,576

20

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

Mortgage loans on real estate: The fair values for mortgage loans are estimated using discounted cash flow analyses. For commercial mortgage loans, the discount rate was assumed to be the interest rate of the last commercial mortgage originated by the Company. For residential mortgage loans, the discount rate was assumed to be the average yield on recent purchases less an expense factor.

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

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

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

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

Notes payable: The fair values for notes payable with floating interest rates and promissory notes approximate the unpaid principal balances on such notes.

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

NOTE 6 - Earnings per Share

Earnings per share of common stock were computed based on the weighted average number of common shares outstanding during each period. The weighted average number of shares outstanding for the quarters ended September 30, 2015 and 2014 were 1,117,605 and 1,125,247, respectively. The weighted average number of shares outstanding for the nine months ended September 30, 2015 and 2014 were 1,121,130 and 1,127,006, respectively.

21

NOTE 7 - Segment Data

The Company operates in four segments as shown in the following table. All segments include both individual and group insurance. Identifiable revenues, expenses and assets are assigned directly to the applicable segment. Net investment income, realized gains and losses, and invested assets are generally allocated to the insurance and the corporate segments in proportion to policy liabilities and stockholders' equity, respectively. Certain assets, such as property and equipment and leased property under capital leases, are allocated between the administrative and financial services segment and the corporate and other segment. Investors Heritage Financial revenue 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 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,
	2015			2014			2015			2014
Revenue:
Preneed and burial products	$	13,064,662		$	12,737,829		$	37,451,666		$	36,329,237
Traditional and universal life products		4,763,360			5,456,879			13,859,163			15,554,141
Administrative and financial services		397,378			275,076			1,037,432			901,085
Corporate and other		188,229			234,948			630,463			775,115
Total revenue	$	18,413,629		$	18,704,732		$	52,978,724		$	53,559,578
Pre-tax income (loss) from operations:
Preneed and burial products	$	590,199		$	487,638		$	(309,668	)	$	128,924
Traditional and universal life products		364,982			687,998			640,179			969,175
Administrative and financial services		83,689			90,797			201,412			204,706
Corporate and other		(3,390	)		(3,701	)		12,677			185,162
Total pre-tax income (loss)	$	1,035,480		$	1,262,732		$	544,600		$	1,487,967

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; nondeductible travel and entertainment expenses; and non-taxable effects of company-owned life insurance premiums, cash value growth, and death benefit proceeds.

We file U.S. federal income tax returns and income tax returns in various state jurisdictions. Our 2012 through 2014 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.

22

NOTE 9 – Other Comprehensive Income (Loss)

The following tables present the pretax components of the Company’s other comprehensive income (loss), and the related income tax expense (benefit) for each component, for the quarters and nine months ended September 30, 2015 and 2014.

	Quarter Ended September 30, 2015
				Income Tax
				Expense
	Pretax			(Benefit)			Net of Tax
Other comprehensive loss:
Change in net unrealized gains on available-for-sale securities:
Unrealized holding losses arising during period	$	(2,866,815	)	$	(1,106,939	)	$	(1,759,876	)
Reclassification adjustment for gains included in income		(606,509	)		(73,993	)		(532,516	)
Adjustment for effect of deferred acquisition costs		93,198			31,688			61,510
Net unrealized losses on investments		(3,380,126	)		(1,149,244	)		(2,230,882	)
Change in defined benefit pension plan:
Amortization of actuarial net loss in net periodic pension cost		190,559			64,790			125,769
Total other comprehensive loss	$	(3,189,567	)	$	(1,084,454	)	$	(2,105,113	)

	Quarter Ended September 30, 2014
				Income Tax
				Expense
	Pretax			(Benefit)			Net of Tax
Other comprehensive loss:
Change in net unrealized gains on available-for-sale securities:
Unrealized holding losses arising during period	$	(3,670,059	)	$	(1,366,178	)	$	(2,303,881	)
Reclassification adjustment for gains included in income		(593,272	)		(83,355	)		(509,917	)
Adjustment for effect of deferred acquisition costs		126,140			42,887			83,253
Net unrealized losses on investments		(4,137,191	)		(1,406,646	)		(2,730,545	)
Change in defined benefit pension plan:
Amortization of actuarial net loss in net periodic pension cost		97,604			33,185			64,419
Total other comprehensive loss	$	(4,039,587	)	$	(1,373,461	)	$	(2,666,126	)

23

	Nine Months Ended September 30, 2015
				Income Tax
				Expense
	Pretax			(Benefit)			Net of Tax
Other comprehensive loss:
Change in net unrealized gains on available-for-sale securities:
Unrealized holding losses arising during period	$	(8,609,887	)	$	(3,068,836	)	$	(5,541,051	)
Reclassification adjustment for gains included in income		(734,350	)		(108,206	)		(626,144	)
Adjustment for effect of deferred acquisition costs		257,145			87,430			169,715
Net unrealized losses on investments		(9,087,092	)		(3,089,612	)		(5,997,480	)
Change in defined benefit pension plan:
Amortization of actuarial net loss in net periodic pension cost		571,675			194,370			377,305
Total other comprehensive loss	$	(8,515,417	)	$	(2,895,242	)	$	(5,620,175	)

	Nine Months Ended September 30, 2014
				Income Tax
				Expense
	Pretax			(Benefit)			Net of Tax
Other comprehensive income:
Change in net unrealized gains on available-for-sale securities:
Unrealized holding gains arising during period	$	10,975,674		$	3,603,731		$	7,371,943
Reclassification adjustment for gains included in income		(662,131	)		(97,127	)		(565,004	)
Adjustment for effect of deferred acquisition costs		(252,382	)		(85,810	)		(166,572	)
Net unrealized gains on investments		10,061,161			3,420,794			6,640,367
Change in defined benefit pension plan:
Amortization of actuarial net loss in net periodic pension cost		292,810			99,555			193,255
Total other comprehensive income	$	10,353,971		$	3,520,349		$	6,833,622

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.

24

The change in the components of the Company’s accumulated other comprehensive income, net of tax, for the nine months ended September 30, 2015 and 2014 are as follows:

	Unrealized Gains			Defined			Accumulated
	(Losses) on			Benefit			Other
	Available-For-Sale			Pension			Comprehensive
	Securities			Plan			Income
For the nine months ended September 30, 2015:
Beginning balance	$	17,743,407		$	(5,039,088	)	$	12,704,319
Other comprehensive loss before reclassifications		(5,371,336	)		-			(5,371,336	)
Amounts reclassified from accumulated other comprehensive income		(626,144	)		377,305			(248,839	)
Net current period other comprehensive income (loss)		(5,997,480	)		377,305			(5,620,175	)
Ending balance	$	11,745,927		$	(4,661,783	)	$	7,084,144
For the nine months ended September 30, 2014:
Beginning balance	$	9,916,148		$	(3,164,157	)	$	6,751,991
Other comprehensive income before reclassifications		7,205,371			-			7,205,371
Amounts reclassified from accumulated other comprehensive income		(565,004	)		193,255			(371,749	)
Net current period other comprehensive income		6,640,367			193,255			6,833,622
Ending balance	$	16,556,515		$	(2,970,902	)	$	13,585,613

The following table presents the pretax and the related income tax components of the amounts reclassified from the Company’s accumulated other comprehensive income to the Company’s consolidated statement of income for the quarters and nine months ended September 30, 2015 and 2014.

	Quarter Ended September 30,						Nine Months Ended September 30,
Reclassification Adjustments	2015			2014			2015			2014
Unrealized gains on available-for-sale securities:
Realized gains on sale of securities(a)	$	606,509		$	593,272		$	734,350		$	662,131
Income tax expense(c)		(73,993	)		(83,355	)		(108,206	)		(97,127	)
Net of tax		532,516			509,917			626,144			565,004
Defined benefit pension plan:
Amortization of actuarial net loss(b)		(190,559	)		(97,604	)		(571,675	)		(292,810	)
Income tax benefit(c)		64,790			33,185			194,370			99,555
Net of tax		(125,769	)		(64,419	)		(377,305	)		(193,255	)
Total reclassifications for the period	$	406,747		$	445,498		$	248,839		$	371,749

(a) These items appear within net realized gains on investments in the consolidated income statements.

(b) These items are included in the computation of net periodic pension cost (see Note 10).

(c) These items appear within federal income taxes in the consolidated income statements.

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NOTE 10 – Employee Benefit Plans

Investors Heritage Capital Corporation sponsors a noncontributory defined benefit pension plan, which was frozen in 2012 with respect to new benefit accruals. Participants in the plan at the time it was frozen may still continue to earn vesting credit towards their pension plan benefit. The following table provides the components of our net periodic benefit cost:

	Quarter Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Service cost	$	-		$	-		$	-		$	-
Interest cost		222,565			261,263			667,697			783,791
Expected return on plan assets		(293,069	)		(299,418	)		(879,208	)		(898,255	)
Recognized actuarial net loss		190,559			97,604			571,675			292,810
Net periodic pension cost	$	120,055		$	59,449		$	360,164		$	178,346

We previously disclosed in our financial statements for the year ended December 31, 2014 that the Company expected to contribute $300,000 to our defined benefit pension plan during 2015. As of September 30, 2015, the Company had contributed $225,000 to the plan.

NOTE11–Notes Payable

The Company renewed the Investors Heritage Capital Corporation Line of Credit and the At Need Funding Line of Credit during the first quarter of 2015. The Investors Heritage Capital Corporation Line of Credit remains for $150,000 with a new maturity date of March 24, 2017. Interest is paid on this note monthly at the prime rate, with a floor of 3.25%. The At Need Funding Line of Credit was increased to $1,500,000 with a new maturity date of March 24, 2017. Interest is paid on this note monthly at the prime rate, which is currently 3.25%.

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

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, policies sold in the senior wealth transfer market, final expense insurance, credit life and credit disability insurance, group term insurance sold through associations, and term life and reducing term life sold through financial institutions. We continue to actively develop new products and diversify distribution systems in order to broaden our marketing base.

In our preneed and burial product segment, we currently market the Legacy Gold and Heritage FX Final Expense products. The Legacy Gold life insurance and annuity product series is sold in the preneed market in conjunction with prearranged funerals. The Legacy Gold series includes both single premium and multi-pay policies, and both underwritten and guaranteed issue options are available. The Heritage FX Final Expense product is a non-participating whole life insurance product with simplified underwriting, sold in the final expense market. The Heritage FX product is structured to allow increased production while mitigating surplus strain through the use of reinsurance.

Within our traditional and universal life products segment, we currently market two products geared toward wealth preservation in the senior market – the Heritage Solution, a single premium life policy, and the Heritage Provider, a ten pay whole life and single premium immediate annuity combination. These products are currently being sold exclusively through our partnership with Puritan Financial Group and are being underwritten and issued using a third party underwriter with significant experience in that market. Prior to January 1, 2013, this business was being reinsured under a 50% coinsurance arrangement with Puritan Life Insurance Company of America. Effective January 1, 2013, this coinsurance agreement was amended to reinsure 25% of new business. This reinsurance agreement was terminated with respect to new business effective July 31, 2015, after which time we now maintain 100% of new business being produced under the marketing agreement.

Investors Heritage Life assumes 75% of the risks on certain policies sold by Puritan Life Insurance Company of America and Sterling Investors Life Insurance Company. The products being assumed are identical to the Heritage Solution and Heritage Provider products currently being written by Investors Heritage Life. However, these reinsurance arrangements allow us to participate in the profitability of these products in certain states where we are not currently marketing. These reinsurance agreements were also terminated with respect to new business effective July 31, 2015.

Our traditional and universal life products also include the HLW Choice Whole Life product and the Heritage Protector IV product. The HLW Choice Whole Life product is designed with numerous options and with flexibility to achieve our customers’ goals. The Heritage Protector IV product is a term product marketed primarily by banks and other financial institutions in conjunction with consumer credit.

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We introduced an association group term product during the second half of 2013. This product provides a monthly renewable term benefit and is being marketed to various association groups.

We also market the Heritage Youth Protector, which is a combination term/whole life plan marketed to parents and grandparents, with issue ages of 0-22. The policy is a term policy until age 25 at which time it automatically converts to a whole life policy with increased premium. Waiver of premium and guaranteed insurability option riders are also available. Initial coverage may be purchased in $5,000 increments from $5,000 to $20,000 per child, with single or annual payment options to age 25. At age 25, the policy becomes an annual pay plan.

We utilize a combination of yearly renewable term reinsurance and coinsurance to cede life insurance coverage in excess of our desired retention limits, which in most cases is $25,000 per life. Most of our business is written in the smaller face amount markets and, in the past, claims on larger-case ordinary business caused income fluctuations. This lower retention level has stabilized earnings fluctuations. The lowered retention was achieved by maintaining the established reinsurance treaties and adding additional yearly renewable term treaties for amounts between our desired net amount at risk and the previous retention of $100,000.

Investors Heritage Life continues to market its third party administrative (“TPA”) services as an additional revenue source. These agreements, for various levels of administrative services on behalf of each company, generate fee income for Investors Heritage Life. We currently have four TPA clients for which we provide tailored services to meet each client’s individual business needs. Two former life insurance holding company clients terminated their agreements effective October 1, 2015 in order to begin performing that work in-house. We have been able to perform our TPA services using our existing in-house resources.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. Preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We evaluate our estimates continually, including those related to investments, deferred acquisition costs, value of business acquired, policy liabilities, income taxes, employee benefit plans, 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 commercial mortgage loans, and we purchase residential mortgage loans through the secondary market. We also own certain investments in state-guaranteed receivables consisting of the future cash flow rights from lottery prize winners. We continuously evaluate all of our investments based on current economic conditions, credit loss experience and other developments. We evaluate the difference between the cost/amortized cost and estimated fair value of our investments to determine whether any decline in fair value is other-than-temporary in nature. This determination involves a degree of uncertainty.

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If a decline in the fair value of a security is determined to be temporary, the decline is recognized in other comprehensive income (loss) within stockholders’ equity. If a decline in a security’s fair value is considered to be other-than-temporary, we then determine the proper treatment for the other-than-temporary impairment. For fixed maturities, the amount of any other-than-temporary impairment related to a credit loss is recognized in earnings and reflected as a reduction in the cost basis of the security; and the amount of any other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss) with no change to the cost basis of the security.  For equity securities, the amount of any other-than-temporary impairment is recognized in earnings and reflected as a reduction in the cost basis of the security.

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

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

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

Our fixed maturities are Level 2 instruments, for which the fair value is derived from readily available pricing services utilizing recent trades and broker information. Certain liquid equity securities are considered Level 1 instruments and are valued based on publicly available market quotes in an active market. We hold $352,000 in Level 3 financial instruments, comprising 0.1% of our total investments carried at fair value. Fair value for these instruments is derived from unobservable inputs such as non-binding broker quotes and internal models using unobservable assumptions about market participants.

Deferred Acquisition Costs

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

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

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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. We utilize in-house actuaries in developing our actuarial assumptions and estimates and in monitoring such assumptions and estimates against actual experience.

Income Taxes

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

Under current tax law, we are allowed to utilize the small life insurance company deduction to limit the federal taxable income associated with Investors Heritage Life annually. Changes in tax law or the growth of the Company’s tax basis assets to an amount greater than $500 million could limit our ability to utilize this deduction in future years, which could give rise to higher current federal income tax expense.

Employee Benefit Plans

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

During 2014, the Society of Actuaries released new mortality tables and a new mortality improvement scale for consideration with respect to defined benefit plan liability measurement. We have not yet adopted these new tables with respect to our plan given that more analysis is needed to determine their applicability and impact on our plan structure. While we do not currently expect these tables to have a significant impact on our plan, it is possible that their use could result in a significant increase in plan liabilities once fully analyzed and implemented. We currently anticipate adopting the new mortality tables for financial reporting as of December 31, 2015.

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We previously disclosed in our financial statements for the year ended December 31, 2014 that we expected to contribute $300,000 to our defined benefit pension plan during 2015. As of September 30, 2015, the Company had contributed $225,000 to the plan.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance regarding accounting for revenue recognition that identifies the accounting treatment for an entity’s contracts with customers.  Certain contracts, including insurance contracts, are specifically excluded from this guidance.  However, certain other types of contracts may impact the financial statements of insurance providers. In August 2015, the FASB deferred the effective date of this guidance for public entities to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. We are currently evaluating this guidance, but we do not expect it to have a material impact on our consolidated financial statements.

In February 2015, the FASB issued guidance regarding the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Under this guidance, previous consolidation conclusions may change and additional disclosures may be required. This guidance is effective for public entities for fiscal years and interim periods within those fiscal years beginning after December 15, 2015. We are currently evaluating this guidance, but we do not expect it to have a material impact on our consolidated financial statements.

In July 2015, the FASB issued guidance regarding employee benefit accounting. The guidance is divided into three parts. First, the guidance requires a pension plan to use contract value as the only required measure for fully benefit-responsive investment contracts. Second, the guidance simplifies and increases the effectiveness of the investment disclosure requirements for employee benefit plans. Third, the guidance provides benefit plans with a measurement date practical expedient. This guidance is effective for fiscal years beginning after December 15, 2015. We are currently evaluating this guidance, but we do not expect it to have a material impact on our consolidated financial statements.

All other new accounting standards and updates of existing standards issued through the date of this filing were considered by management and did not relate to accounting policies and procedures pertinent to the Company at this time or were not expected to have a material impact to the consolidated financial statements.

INVESTMENTS, LIQUIDITY AND CAPITAL RESOURCES

Investments

We maintain a sound, conservative investment strategy. At September 30, 2015, 87.8% of our total invested assets consisted of fixed income securities, compared to 88.7% at December 31, 2014. At September 30, 2015 and December 31, 2014, our fixed income investments were 97.5% investment grade, as rated by Standard & Poor’s. The Standard & Poor’s average quality rating of our fixed income portfolio holdings as of September 30, 2015 and December 31, 2014 was A.

We have reviewed our investment portfolio and do not believe that there are any securities that are other-than-temporarily impaired at September 30, 2015. None of our fixed income assets are in default and there has been no material change in the distribution of our fixed income portfolio. We recorded no other-than-temporary impairment charges in the consolidated statements of income during the quarters or nine months ended September 30, 2015 or 2014.

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We continuously monitor the investment risk within our portfolio, including the risk associated with subprime lending with our CMO investments. As of September 30, 2015, we have no investments with any level of direct subprime exposure. Additionally, we have no Alt-A bond exposure within our current holdings.

We have an investment advisory agreement with an independent third-party investment advisor to purchase common and preferred stocks in stable areas within the real estate sector. The investment advisor has a history of strong performance within these markets. The majority of these funds have been invested in a diversified assortment of regularly traded, exchange listed common stocks. As of September 30, 2015, the largest individual stock position within this group is approximately $393,000. We believe the unrealized losses in our common stock portfolio are temporary in nature given the credit quality of the issuers. We believe that these investments will generate positive future results by providing a slightly increased and fully managed exposure to equity markets.

Additionally, we engage in commercial and residential mortgage lending. As of September 30, 2015, investments in commercial properties comprised 33.5% of our mortgage portfolio. Our commercial mortgage loans are either originated in-house or through two mortgage brokers, are secured by first mortgages on the real estate and generally carry personal guarantees by the borrowers. Loan-to-value ratios of 80% or less and debt service coverage from existing cash flows of 115% or higher are generally required. We minimize credit risk in our mortgage loan portfolio through various methods, including stringently underwriting the loan request, maintaining small average loan balances, and reviewing larger mortgage loans on an annual basis.

As of September 30, 2015, investments in residential properties comprised 66.5% of our mortgage portfolio. We purchase residential mortgage loans through the secondary market. Each mortgage loan opportunity is reviewed individually, considering both the value of the underlying property and the credit worthiness of the borrower. We are utilizing a third party servicer to administer these loans. We currently anticipate evaluating and making additional residential mortgage loan investments assuming they meet our investment goals and criteria.

We are familiar with our mortgage loan markets and given our low loan-to-value ratios, we do not believe that there is a significant risk of loss on our mortgage loan portfolio. We have been successful in adding value to the total investment portfolio through mortgage loan originations and secondary market purchases due to the fact that yields realized from the mortgage loan portfolio are generally higher than yields realized from fixed income investments. Value has also been added because the mortgage loan portfolio has consistently performed well. As of September 30, 2015, we had no non-performing loans, loans on nonaccrual status, loans 90 days past due or more, loans in process of foreclosure, or restructured loans.

As of September 30, 2015, our average loan balance is $183,501 and the average loan-to-value is 62%. The largest loan currently held is $942,563. Our mortgage loans are spread across properties located in 22 states, with approximately 77.0% of our loans located in the states of Illinois, Texas, Florida, California, Kentucky, and Georgia. At September 30, 2015 and December 31, 2014, 6.9% and 6.1% of invested assets consisted of mortgage loans, respectively.

We own certain 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, 2015, we held approximately $7,719,000 in state-guaranteed receivables, with the largest concentrations in the states of New York, Massachusetts and Georgia totaling approximately $3,483,000, $1,995,000 and $1,455,000, respectively. At September 30, 2015 and December 31, 2014, 1.6% of invested assets consisted of state-guaranteed receivables.

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During the third quarter of 2015, with the assistance and under the active management of our external third party investment advisor, we began purchasing investments in convertible fixed maturity securities. Convertible securities feature an option allowing for a portion of the security to be converted into an equity position of the underlying issuer in exchange for a lower coupon rate. In accordance with FASB accounting guidance, this convertible feature must be bifurcated and reported separately on the balance sheet at fair value, with adjustments in fair value recognized in the income statement. Accordingly, the convertible options within our portfolio are reported as investments in convertible options on the balance sheet, and the mark-to-market adjustment associated with the changes in fair value of the convertible options are reported as gains (losses) on investments in convertible options as a component of net investment income. As of September 30, 2015, the total fair value of our investments in convertible options was $663,950. For the quarter and nine months ended September 30, 2015, we recognized a loss on our investments in convertible options of $41,082 relative to the mark-to-market adjustment. Additionally, we recognized a net realized investment loss of $5,529 upon the exchange of one convertible security.

Liquidity and Capital Resources

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

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

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

Investors Heritage 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.

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.

We renewed the Investors Heritage Capital Corporation Line of Credit and the At Need Funding Line of Credit during the first quarter of 2015. The Investors Heritage Capital Corporation Line of Credit remains for $150,000 with a new maturity date of March 24, 2017. Interest is paid on this note monthly at the prime rate, with a floor of 3.25%. The At Need Funding Line of Credit was increased to $1,500,000 with a new maturity date of March 24, 2017. Interest is paid on this note monthly at the prime rate, which is currently 3.25%.

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, 2015, we are in compliance with all debt covenant requirements.

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

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

RESULTS OF OPERATIONS

Overview

Premiums earned (net of reinsurance) were $12,124,607 for the third quarter of 2015 (a decrease of 2.1% compared to the third quarter of 2014) and $35,177,949 for the nine months ended September 30, 2015 (a decrease of 2.4% compared to the corresponding period in 2014). This decrease is primarily due to lower direct and assumed premiums relative to the Puritan product offerings in comparison to the corresponding periods in 2014.

Net investment income was $5,238,037 for the third quarter of 2015 (a decrease of 2.9% compared to the third quarter of 2014) and $15,800,897 for the nine months ended September 30, 2015 (an increase of 1.0% compared to the corresponding period in 2014). The decrease in the current quarter investment income is primarily due to income earned in the third quarter of 2014 on the call of one particular bond. The increase in net investment income for the nine month period is primarily driven by increased income generated by our investments in residential mortgage loans. Our mortgage loan portfolio provides greater investment yields than the current fixed maturity market. Low new fixed maturity investment yields continue to put downward pressure on our investment income. We continue to seek high quality investments while considering alternative investments that can be used to enhance future investment income.

Net realized gains were $600,980 and $804,736 for the quarter and nine months ended September 30, 2015, respectively, compared to $593,272 and $662,131 for the quarter and nine months ended September 30, 2014, respectively. The realized gains recognized in the third quarter of 2015 were principally attributable to common stock capital gains taken. We experienced no other-than-temporary impairments during the quarters or nine months ended September 30, 2015 or 2014.

Other income was $450,005 for the third quarter of 2015 (an increase of 37.4% compared to the third quarter of 2014) and $1,195,142 for the nine months ended September 30, 2015 (a decrease of 0.6% compared to the corresponding period in 2014). The increase in the current quarter is due primarily to increases in policy counts for our life insurance company clients as well as acquisition conversion work performed on behalf of a TPA client. The decrease for the nine month period is due to $141,907 of net life insurance proceeds received under a company-owned life insurance policy upon the death of a former board member during the second quarter of 2014.

Total benefits and expenses were $17,378,149 for the third quarter of 2015 (a decrease of 0.4% compared to the third quarter of 2014) and $52,434,124 for the nine months ended September 30, 2015 (an increase of 0.7% compared to the corresponding period in 2014). The increase for the nine month period is primarily driven by an increase in death benefits due to negative mortality experience in both our preneed and final expense segment as well as the traditional and ordinary segment, an increase in the net amortization of deferred acquisition costs in excess of new deferrals as compared to the prior period, and an increase in our actuarially determined net periodic pension expense.

After providing for federal income taxes, our net income was $1,091,053 with net income per share of $0.98 for the third quarter of 2015 as compared to net income of $861,389 with net income per share of $0.77 for the third quarter of 2014. Our net income was $722,893 with net income per share of $0.64 for the nine months ended September 30, 2015 compared to net income of $1,041,577 with net income per share of $0.92 for the nine months ended September 30, 2014.

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We declared a dividend of $0.21 per share on February 12, 2015 to shareholders of record on March 20, 2015. This dividend was paid on April 7, 2015.

Business Segments 

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

Preneed & Burial Products

Preneed and burial products include both life and annuity products sold by funeral directors or affiliated agents to fund prearranged funerals. Revenues for this segment were $13,064,662 for the third quarter of 2015 (an increase of 2.6% compared to the third quarter of 2014) and $37,451,666 for the nine months ended September 30, 2015 (an increase of 3.1% compared to the corresponding period in 2014). These increases are predominantly due to stronger sales of our preneed products and increased realized gains in comparison to the prior period.

Pre-tax income (loss) from operations was $590,199 and ($309,668) for the quarter and nine months ended September 30, 2015, respectively, compared to pre-tax income of $487,638 and $128,924 for the quarter and nine months ended September 30, 2014, respectively. The increase in pre-tax income for the current quarter was due primarily to our increase in earned premiums and investment income in the current quarter. The decrease in pre-tax income for the nine month period was driven primarily by the previously mentioned increases in death benefits due to negative mortality experience during 2015 as well as by the increase in the net amortization of deferred acquisition costs in excess of new deferrals as compared to the prior period.

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 $4,763,360 for the third quarter of 2015 (a decrease of 12.7% compared to the third quarter of 2014) and $13,859,163 for the nine months ended September 30, 2015 (a decrease of 10.9% compared to the corresponding period in 2014). These decreases were primarily due to the reduction in direct and assumed premiums generated from the Puritan product offerings in comparison to the prior period.

Pre-tax income from operations was $364,982 and $640,179 for the quarter and nine months ended September 30, 2015, respectively, compared to pre-tax income of $687,998 and $969,175 for the quarter and nine months ended September 30, 2014, respectively. These changes in pre-tax income were driven by the reduction in premiums from the Puritan product offerings as well as our negative mortality experience within this line during the current year.

Administrative & Financial Services

Administrative and financial services include the administration of credit life and credit accident and health insurance products. We reinsure 100% of the related underwriting risk on credit products 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.

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In addition to credit administration, this segment includes fees generated relative to our third party administrative relationships. We currently provide tailored administrative services for four unaffiliated life insurance 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. Two former life insurance holding company clients terminated their agreements effective October 1, 2015 in order to begin performing that work in-house.

Revenues for this segment were $397,378 for the third quarter of 2015 (an increase of 44.5% compared to the third quarter of 2014) and $1,037,432 for the nine months ended September 30, 2015 (an increase of 15.1% compared to the corresponding period in 2014). Pre-tax income from operations was $83,689 and $201,412 for the quarter and nine months ended September 30, 2015, respectively, compared to pre-tax income of $90,797 and $204,706 for the quarter and nine months ended September 30, 2014. The revenue increases are due to the fact that our life insurance company clients have experienced increased policy counts which have resulted in an increase in our monthly fees. Additionally, we performed additional conversion work during the current quarter as a result of an acquisition by one of our TPA clients. While revenue has increased, our pre-tax income has decreased slightly due to the fact that we are now allocating additional internal overhead expense to this line in comparison to the prior periods as a result of the time being spent on those clients.

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 $188,229 for the third quarter of 2015 (a decrease of 19.9% compared to the third quarter of 2014) and $630,463 for the nine months ended September 30, 2015 (a decrease of 18.7% compared to the corresponding period in 2014). Pre-tax income (loss) from operations was ($3,390) and $12,677 for the quarter and nine months ended September 30, 2015, respectively, compared to pre-tax income (loss) from operations of ($3,701) and $185,162 for the quarter and nine months ended September 30, 2014. Results for the quarter and nine months ended September 30, 2015 included a mark-to market adjustment on our investments in convertible options that reduced investment income by $41,082. Additionally, results for the nine months ended September 30, 2014 included $141,907 of net life insurance proceeds received under a company-owned life insurance policy upon the death of a former board member.

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 nine months ended September 30, 2015, Investors Heritage Capital received dividends of $105,000 and $35,000 from Investors Heritage Financial and Investors Heritage Printing, respectively. Investors Heritage Capital received no dividends from Investors Heritage Life or distributions from At Need Funding. The potential exists for dividend payments and distributions over the remainder of 2015 as any needs arise.

Federal Income Taxes 

The provision (benefit) for federal income taxes is based on our expected 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; nondeductible travel and entertainment expenses; and non-taxable effects of company-owned life insurance premiums, cash value growth and death benefit proceeds. Our effective tax rate was (5.4%) and (32.7%) for the quarter and nine months ended September 30, 2015, respectively, compared to 31.8% and 30.0% for the quarter and nine months ended September 30, 2014, respectively. These reductions in our effective tax rates are due principally to the current year impact of the small life deduction and our non-taxable company-owned life insurance cash value growth in comparison to our total current year taxable income.

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OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements as of September 30, 2015.

FORWARD LOOKING INFORMATION 

We caution readers regarding certain forward-looking statements contained in this report and in any other statements made by us or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Statements using verbs such as “expect”, “anticipate”, “believe” or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements which represent our beliefs concerning future levels of sales and redemptions of Investors Heritage Life’s products, investment spreads and yields, or our earnings and profitability.

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

ITEM 4.Controls and Procedures

As of the end of the period covered by this Form 10-Q, we performed an evaluation, under the supervision and with the participation of management, including our Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in this Quarterly Report on Form 10-Q. There have been no changes in our internal control over financial reporting identified by that evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during this most recent quarter or subsequent to the date we carried out our evaluation.

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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 13, 2015, 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

(a) There were no sales of unregistered securities during the period covered by this report.

(b) Not applicable.

(c) The following table provides information about issuer repurchases of securities for the period covered by this report:

					Total Number of		Maximum Number
	Total		Average		Shares Purchased as		of Shares That May
	Number		Price		Part of Publicly		Yet Be Purchased
	of Shares		Paid Per		Announced Plans		Under the Plans
Period	Purchased		Share		or Programs		or Programs
July 1, 2015 - July 31, 2015		-	$	-		-		-
August 1, 2015 - August 31, 2015		-		-		-		-
September 1, 2015 - September 30, 2015		-		-		-		-

ITEM 3.Defaults Upon Senior Securities

None 

ITEM 4.Mine Safety Disclosures

None 

ITEM 5.Other Information

None 

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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 HERITAGECAPITAL CORPORATION
	BY: /s/Harry Lee Waterfield II
	Harry Lee Waterfield II
DATE: November 13, 2015	President
	BY: /s/Larry Johnson
	Larry Johnson
DATE: November 13, 2015	Vice President - Chief Financial Officer

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