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EX-32 - EXHIBIT 32 - Investors Heritage Capital Corpihcc10q3q09ex32.htm
EX-31 - EXHIBIT 31.1 - Investors Heritage Capital Corpihcc10q3q09ex31_1.htm
EX-31 - EXHIBIT 31.2 - Investors Heritage Capital Corpihcc10q3q09ex31_2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q


 

QUARTERLY REPORT

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

 

For the quarterly period ended September 30, 2009


 

0-1999

(Commission file number)

 

INVESTORS HERITAGE CAPITAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

KENTUCKY

 

61-6030333

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)

 

200 Capital Avenue, P.O. Box 717

Frankfort, Kentucky 40602

(Address of principal executive offices)

 

(502) 223-2361

(Registrant's telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes [X]   No [  ]

 

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

 

 Yes [  ]    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  [X]

 

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

 

Yes [  ]   No [X]

 

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

 

Common Capital Stock par value $1.00 per share

(Title of Class)

 

Number of outstanding shares as of November 12, 2009 1,135,764.356

 

 


 

CONTENTS

 

 

 

PART I -- FINANCIAL INFORMATION

 
   

Page

ITEM 1.

Condensed Consolidated Financial Statements

4

ITEM 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

21

ITEM 4T.

Controls and Procedures

29

     
     
     
 

PART II -- OTHER INFORMATION

 
     

ITEM 1.

Legal Proceedings

30

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

ITEM 3.

Defaults Upon Senior Securities

30

ITEM 4.

Submission of Matters to a Vote of Security Holders

30

ITEM 5.

Other Information

30

ITEM 6.

Exhibits

30

     
     

 

SIGNATURES

 

31

     

EXHIBIT 31.1           

 

32

EXHIBIT 31.2           

 

34

EXHIBIT 32

 

36

 

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

 

2009

 

2008

  Investments:

       

    Securities available-for-sale, at fair value:

       

      Fixed maturities (amortized cost: $285,974,328 and $282,335,626)

 

$  301,725,844

 

$  285,430,376

      Equity securities (cost: $4,056,869 and $4,040,062)

 

4,353,641

 

3,938,177

    Mortgage loans on real estate

 

21,273,116

 

22,512,438

    Policy loans

 

6,969,923

 

6,971,949

    Other long-term investments

 

883,678

 

1,021,741

    Short-term investments

 

-

 

25,000

    Total investments

 

335,206,202

 

319,899,681

         

  Cash and cash equivalents

 

2,816,813

 

2,819,257

  Accrued investment income

 

3,441,636

 

4,338,974

  Due premiums

 

3,494,657

 

3,618,390

  Deferred acquisition costs

 

18,930,540

 

19,882,671

  Present value of future profits

 

17,291

 

30,260

  Leased property under capital leases

 

171,316

 

283,695

  Property and equipment

 

1,793,057

 

1,702,331

  Cash value of company-owned life insurance

 

8,414,816

 

7,764,223

  Other assets

 

356,124

 

338,182

  Amounts recoverable from reinsurers

 

46,539,047

 

49,523,594

   

$  421,181,499

 

$  410,201,258

         

LIABILITIES AND STOCKHOLDERS' EQUITY

       

  LIABILITIES

       

    Policy liabilities:

       

      Benefit reserves

 

$  342,348,811

 

$  342,065,366

      Unearned premium reserves

 

10,048,189

 

12,154,938

      Policy claims

 

1,454,284

 

1,504,744

      Liability for deposit-type contracts

 

2,755,905

 

2,733,214

      Reserves for dividends and endowments and other

 

530,468

 

524,797

      Total policy liabilities

 

357,137,657

 

358,983,059

    Deferred federal income tax liability

 

5,558,214

 

1,292,352

    Obligations under capital leases

 

177,509

 

284,307

    Notes payable

 

2,577,465

 

3,701,506

    Accrued pension liability

 

5,390,293

 

5,641,941

    Other liabilities

 

2,340,825

 

1,990,538

    Total liabilities

 

373,181,963

 

371,893,703

         

  STOCKHOLDERS' EQUITY

       

    Common stock (shares issued:  1,135,754 and 1,120,686)

 

1,135,754

 

1,120,686

    Paid-in surplus

 

8,737,898

 

8,705,492

    Accumulated other comprehensive income (loss)

 

6,059,930

 

(2,542,413)

    Retained earnings

 

32,065,954

 

31,023,790

    Total stockholders' equity

 

47,999,536

 

38,307,555

   

$  421,181,499

 

$  410,201,258

         

 

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,

 

2009

 

2008

 

2009

 

2008

REVENUE

             

  Premiums and other considerations

$     9,987,378 

 

$     11,728,363 

 

$     30,705,939 

 

$     34,205,627 

  Premiums ceded

(1,644,520)

 

(3,297,029)

 

(6,239,601)

 

(9,523,970)

    Net premiums earned

8,342,858 

 

8,431,334 

 

24,466,338 

 

24,681,657 

               

  Investment income, net of expenses

4,327,540 

 

4,401,634 

 

13,111,084 

 

13,354,889 

  Net realized investment gains (losses)

709,595 

 

(2,907,145)

 

(156,981)

 

(2,907,527)

  Other income

327,706 

 

272,868 

 

837,164 

 

824,789 

    Total revenue

13,707,699 

 

10,198,691 

 

38,257,605 

 

35,953,808 

 

             

BENEFITS AND EXPENSES

             

  Death and other benefits

6,082,136 

 

7,101,104 

 

22,450,114 

 

23,722,447 

  Guaranteed annual endowments

113,712 

 

122,129 

 

390,087 

 

417,455 

  Dividends to policyholders

101,702 

 

114,309 

 

359,037 

 

416,602 

  Increase in benefit reserves

             

    and unearned premiums

2,885,874 

 

1,929,152 

 

4,363,769 

 

3,812,794 

  Acquisition costs deferred

(1,031,266)

 

(1,184,285)

 

(3,504,120)

 

(3,540,392)

  Amortization of deferred acquisition costs

1,282,590 

 

1,338,976 

 

3,900,989 

 

4,027,483 

  Commissions

639,803 

 

584,751 

 

1,784,707 

 

1,653,302 

  Other insurance expenses

2,249,348 

 

2,199,905 

 

7,864,333 

 

7,174,503 

    Total benefits and expenses

12,323,899 

 

12,206,041 

 

37,608,916 

 

37,684,194 

               

INCOME (LOSS) BEFORE

             

  FEDERAL INCOME TAXES

1,383,800 

 

(2,007,350)

 

648,689 

 

(1,730,386)

               

PROVISION (BENEFIT) FOR

             

  FEDERAL INCOME TAXES

             

    Current

196,876 

 

102,370 

 

368,932 

 

236,345 

    Deferred

180,071 

 

(578,819)

 

(192,229)

 

(647,056)

 

376,947 

 

(476,449)

 

176,703 

 

(410,711)

               
               

NET INCOME (LOSS)

$      1,006,853 

 

$     (1,530,901)

 

$         471,986 

 

$     (1,319,675)

               
               

BASIC AND DILUTED NET EARNINGS

             

  (LOSS) PER SHARE

$               0.89 

 

$              (1.37)

 

$               0.42 

 

$              (1.18)

               

DIVIDENDS PER SHARE

$                     - 

 

$                     - 

 

$                    - 

 

$               0.38 

               
               

 

See notes to condensed consolidated financial statements.

 

5

 


 

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)

 

         

Accumulated

       
         

Other

     

Total

 

Common

 

Paid-in

 

Comprehensive

 

Retained

 

Stockholders'

 

Stock

 

Surplus

 

Income (Loss)

 

Earnings

 

Equity

                   

BALANCE, JANUARY 1, 2008

$1,117,851

 

$8,650,907

 

$    1,902,238 

 

$32,886,104 

 

$44,557,100 

                   

Comprehensive loss:

                 

  Net loss

-

 

-

 

 

(1,319,675)

 

(1,319,675)

  Change in net unrealized appreciation

                 

    on available-for-sale securities

-

 

-

 

(5,442,504)

 

 

(5,442,504)

  Change in unrealized pension benefits

-

 

-

 

122,168 

 

 

122,168 

  Change in fair value of hedging instrument

-

 

-

 

2,749 

 

 

2,749 

    Total comprehensive loss

               

(6,637,262)

  Cash dividends

-

 

-

 

 

(422,959)

 

(422,959)

  Issuances (repurchases) of

                 

    common stock, net

1,624

 

49,326

 

 

(12,591)

 

38,359 

BALANCE, SEPTEMBER 30, 2008

$1,119,475

 

$8,700,233

 

$  (3,415,349)

 

$31,130,879 

 

$37,535,238 

                   

BALANCE, JANUARY 1, 2009

$1,120,686

 

$8,705,492

 

$  (2,542,413)

 

$31,023,790 

 

$38,307,555  

                   

Cumulative effect of a change in

                 

    accounting principle

-

 

-

 

(272,157)

 

272,157 

 

Comprehensive income:

                 

  Net income

-

 

-

 

 

471,986 

 

471,986 

  Change in net unrealized appreciation

                 

    on available-for-sale securities

-

 

-

 

8,594,147 

 

 

8,594,147 

  Change in unrealized pension benefits

-

 

-

 

276,800 

 

 

276,800 

  Change in fair value of hedging instrument

-

 

-

 

3,553 

 

 

3,553 

    Total comprehensive income

               

9,346,486 

  Issuances (repurchases) of

                 

    common stock, net

15,068

 

32,406

 

 

298,021 

 

345,495 

BALANCE, SEPTEMBER 30, 2009

$1,135,754

 

$8,737,898

 

$   6,059,930 

 

$32,065,954 

 

$47,999,536 

                   

 

See notes to condensed consolidated financial statements.

 

6

 


 

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

     

Nine Months Ended September 30,

     

2009

   

2008

             
             

NET CASH PROVIDED BY OPERATING ACTIVITIES

   

$   5,338,467 

   

$   6,089,497 

             

INVESTING ACTIVITIES 

           

  Securities available-for-sale:

           

    Purchases

   

(57,518,256)

   

(17,276,585)

    Sales and maturities

   

54,004,491 

   

27,918,021 

  Other investments:

           

    Cost of acquisitions

   

(684,008)

   

(909,350)

    Sales and maturities

   

2,088,419 

   

2,918,415 

  Net additions to property and equipment

   

(244,724)

   

(257,413)

             

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

   

(2,354,078)

   

12,393,088 

FINANCING ACTIVITIES

           

  Receipts from universal life policies credited to

           

    policyholder account balances

   

5,265,003 

   

5,641,005 

  Return of policyholder account balances on universal life policies

   

(7,473,290)

   

(6,639,078)

  Payments on notes payable

   

(2,624,171)

   

(2,438,972)

  Proceeds from notes payable

   

1,500,130 

   

2,047,500 

  Dividends paid

   

   

(422,959)

  Issuances (repurchases) of common stock, net

   

345,495 

   

38,359 

             

NET CASH USED IN FINANCING ACTIVITIES

   

(2,986,833)

   

(1,774,145)

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

   

(2,444)

   

16,708,440 

  Cash and cash equivalents at beginning of period

   

2,819,257 

   

1,238,194 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   

$   2,816,813 

   

$   17,946,634 

             

 

See notes to condensed consolidated financial statements.

 

7

 


 

INVESTORS HERITAGE CAPITAL CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(Unaudited)

 

NOTE A - Nature of Operations

Investors Heritage Capital Corporation (formerly known as Kentucky Investors, Inc. prior to name change effective June 1, 2009) 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". Approximately 99% of Investors Heritage Capital's consolidated revenue is generated by Investors Heritage Life.

 

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

 

NOTE B - 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 nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2008, 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.

 

NOTE C - New Accounting Pronouncements

In April 2009, the Financial Accounting Standards Board ("FASB") issued new guidance regarding the recognition and presentation of other-than-temporary impairments.  The new guidance requires entities to separate an other-than-temporary impairment of a fixed maturity security into two components when there are credit related and non-credit related losses associated with the impaired fixed maturity security for which management asserts that it does not have the intent to sell the security, and it is not more likely than not that it will be required to sell the security before recovery of its cost basis.  The amount of the other-than-temporary impairment related to a credit loss is recognized in earnings, and the amount of the other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss).  We elected to early adopt this guidance effective January 1, 2009.  As a result of the adoption of this guidance, we recognized a cumulative effect adjustment of $272,157 (net of deferred income tax of $137,326) to move non-credit related other-than-temporary impairments previously recognized in earnings for the year ended December 31, 2008 from retained earnings to accumulated other comprehensive income (loss) for fixed maturity securities held at the date of adoption.

 

8

 


 

In April 2009, the FASB issued new guidance to clarify fair valuation in inactive markets and includes all assets and liabilities subject to fair value measurements.  Under this guidance, if an entity determines that there has been a significant decrease in the volume and level of activity for the asset or the liability in relation to the normal market activity for the asset or liability (or similar assets or liabilities), then transactions or quoted prices may not accurately reflect fair value.   In addition, if there is evidence that the transaction for the asset or liability is not orderly, the entity shall place little, if any weight on that transaction price as an indicator of fair value.   We elected to early adopt this guidance effective January 1, 2009, and its adoption did not have a material impact on our consolidated financial condition or results of operations.

 

In April 2009, the FASB issued new guidance to expand the fair value disclosures required for financial instruments for interim periods.  The guidance also requires entities to disclose the methods and significant assumptions used to estimate the fair value of financial instruments in financial statements on an interim and annual basis and to highlight any changes from prior periods.  This guidance was effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.   We adopted this guidance effective for the second quarter of 2009.

 

In May 2009, the FASB issued new guidance that established general accounting standards and disclosure for events occurring subsequent to the balance sheet date but before the financial statements are issued.  This guidance became effective for interim and annual accounting periods ending after June 15, 2009.  The Company adopted this guidance upon issuance, with no material impact to the consolidated financial statements.  See Note K - Subsequent Events.

 

In June 2009, the FASB issued guidance to reorganize existing U.S. accounting and reporting standards issued by the FASB and other private sector standard setters into a single source of authoritative accounting principles arranged by topic (the "Codification"). The Codification replaced previous guidance related to the same issue and became effective for interim and annual reporting periods ending after September 15, 2009.  The Company adopted it upon issuance, with no material impact to the consolidated financial statements.

 

9

 


 

NOTE D - Investments

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

 

               

September 30, 2009

       

Gross Unrealized Losses

   
 

Amortized
Cost

 

Gross
Unrealized
Gains

 

12 Months
or Less

Greater Than
12 Months

 

Fair
Value

Fixed maturity securities:

         

     

U.S. government obligations

$    41,117,792

 

$    2,290,020

 

$         25,260

$                 -

 

$    43,382,552

States and political subdivisions

28,343,562

 

1,382,037

 

13,152

93,920

 

29,618,527

Corporate

136,384,099

 

8,900,161

 

36,729

1,147,493

 

144,100,038

Foreign

20,445,114

 

2,053,668

 

-

292,902

 

22,205,880

Asset-backed securities

6,487,243

 

424,651

 

103,845

11,867

 

6,796,182

Mortgage-backed securities (MBS):

         

     

  Commercial MBS

7,035,541

 

39,094

 

-

107,863

 

6,966,772

  Residential MBS

46,160,977

 

2,494,916

 

-

-

 

48,655,893

Total fixed maturity securities

285,974,328

 

17,584,547

 

178,986

1,654,045

 

301,725,844

Equity securities:

         

     

  U.S. agencies

552,800

 

-

 

-

-

 

552,800

  Mutual funds

2,059,843

 

200,622

 

85,455

15,475

 

2,159,535

  Nonredeemable corporate preferred

990,000

 

-

 

92,500

-

 

897,500

  Corporate common stock

454,226

 

289,580

 

-

-

 

743,806

Total equity securities

4,056,869

 

490,202

 

177,955

15,475

 

4,353,641

Total

$  290,031,197

 

$   18,074,749

 

$        356,941

$    1,669,520

 

$   306,079,485

           

     
               

December 31, 2008

       

Gross Unrealized Losses

   
 

Amortized
Cost

 

Gross
Unrealized
Gains

 

12 Months
or Less

Greater Than
12 Months

 

Fair
Value

Fixed maturity securities:

         

     

U.S. government obligations

$    22,387,095

 

$    2,763,378

 

$                   -

$                  -

 

$    25,150,473

States and political subdivisions

22,443,720

 

521,626

 

102,320

109,990

 

22,753,036

Corporate

140,156,197

 

3,369,812

 

1,821,035

4,034,601

 

137,670,373

Foreign

20,735,082

 

2,403,250

 

207,574

319,957

 

22,610,801

Asset-backed securities

11,892,227

 

39,362

 

148,789

279,173

 

11,503,627

Mortgage-backed securities

64,721,305

 

2,028,284

 

181,872

825,651

 

65,742,066

Total fixed maturity securities

282,335,626

 

11,125,712

 

2,461,590

5,569,372

 

285,430,376

Total equity securities

4,040,062

 

436,404

 

538,289

-

 

3,938,177

Total

$  286,375,688

 

$  11,562,116

 

$    2,999,879

$    5,569,372

 

$  289,368,553

 

10

 


 

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

 

       

Gross

   

September 30, 2009

 

Estimated

 

Unrealized

 

Number of

   

Fair Value

 

Loss

 

Securities

Fixed Maturities:

           

Fewer than 6 months:

           

  U.S. government obligations

 

$        954,300

 

$           25,260

 

1

  States and political subdivisions

 

2,030,680

 

13,152

 

1

  Corporate

 

1,104,270

 

835

 

1

7-12 months:

           

  Corporate

 

340,000

 

35,894

 

1

  Asset-backed securities

 

475,432

 

103,845

 

1

Greater than 12 months:

           

  States and political subdivisions

 

906,080

 

93,920

 

1

  Corporate

 

14,658,750

 

1,147,493

 

15

  Foreign

 

1,677,420

 

292,902

 

2

  Asset-backed securities

 

51,010

 

11,867

 

1

  Commercial MBS

 

3,926,342

 

107,863

 

4

Total fixed maturities

 

26,124,284

 

1,833,031

 

28

 

           

Equities:

           

7-12 months:

           

  Mutual funds

 

673,202

 

85,455

 

1

  Nonredeemable corporate preferred

 

897,500

 

92,500

 

1

Greater than 12 months:

           

  Mutual funds

 

302,809

 

15,475

 

1

Total equities

 

1,873,511

 

193,430

 

3

 

           

Total

 

$      27,997,795

 

$        2,026,461

 

31

             
             
             

 

     

Gross

   

December 31, 2008

 

Estimated

 

Unrealized

 

Number of

 

 

Fair Value

 

Loss

 

Securities

Fixed Maturities:

           

Fewer than 6 months

 

$      29,639,437

 

$       1,137,770

 

29

7-12 months

 

23,011,682

 

1,323,820

 

22

Greater than 12 months

 

33,855,448

 

5,569,372

 

47

Total fixed maturities

 

86,506,567

 

8,030,962

 

98

 

           

Equities:

           

Fewer than 6 months

 

1,520,803

 

538,289

 

3

Total equities

 

1,520,803

 

538,289

 

3

             

Total

 

$      88,027,370

 

$       8,569,251

 

101

 

As of September 30, 2009, all of the above fixed maturity securities individually had a fair value to cost ratio equal to or greater than 74% and the equity securities noted above had a fair value to cost ratio of over 88%.  As of December 31, 2008, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 61% and the equity securities noted above had a fair value to cost ratio of over 65%.  At September 30, 2009 and December 31, 2008, the Company's fixed maturity securities were 98.1% and 99.9% investment grade, respectively, as rated by Standard & Poor's.

 

11

 


 

The Company's decision to record an impairment loss is primarily based on whether the security's fair value is likely to remain significantly below its book value in light of all the factors considered. Factors that are considered include the length of time the security's fair value has been below its carrying amount, the severity of the decline in value, the credit worthiness of the issuer, and the coupon and/or dividend payment history of the issuer.  The Company also assesses whether it intends to sell or whether it is more likely than not that it may be required to sell the security prior to its recovery in value.  For any fixed maturity securities that are other-than-temporarily impaired, the Company determines the portion of the other-than-temporary impairment that is credit-related and the portion that is related to other factors. The credit-related portion is the difference between the expected future cash flows and the amortized cost basis of the fixed maturity security, and that difference is charged to earnings. The non-credit-related portion representing the remaining difference to fair value is recognized in other comprehensive income (loss). Only in the case of a credit-related impairment where management has the intent to sell the security, or it is more likely than not that it will be required to sell the security before recovery of its cost basis, is a fixed maturity security adjusted to fair value and the resulting losses recognized in realized gains/losses in the consolidated statements of income.  Any other-than-temporary impairments on equity securities are recorded in the consolidated statements of income in the periods incurred as the difference between fair value and cost.

 

Based on our review, the Company recorded two other-than-temporary impairments during the second quarter of 2009.  The Company impaired its $2,000,000 par value CIT Group Holdings bond as a result of recent negative information relative to a potential government bailout.  This impairment was considered fully credit-related, resulting in a charge to the income statement before tax of $954,877 as of June 30, 2009.  This charge represents the difference between the amortized cost basis of the security and its fair value as management cannot assert that it does not have the intent to sell the security.  The Company also impaired an ALCOA bond as of June 30, 2009, based on its intent to sell the security before recovery, generating a pre-tax credit-related loss of $22,953.  The Company sold these bonds during the third quarter of 2009 at an additional realized loss of $267,299.  The Company has experienced no additional other-than temporary impairments during 2009.

 

The Company recognized certain other-than-temporary impairments relative to Bank of America and JP Morgan bonds during the fourth quarter of 2008.  Upon adoption of new FASB guidance effective January 1, 2009 as discussed in Note C, a cumulative effect adjustment was made to reflect the fact that the other-than-temporary impairments on the Bank of America and JP Morgan bonds were not credit-related but rather were related to other factors in the marketplace as management asserted that it did not have the intent to sell, and it was not more likely than not that it would be required to sell the securities before recovery of their cost basis.  Since March 31, 2009, the cost basis in the JP Morgan securities had substantially recovered.  As such, the JP Morgan securities were sold during the second quarter at a net gain.  The Company continues to assert that it does not have the intent to sell, and it is not more likely than not that it will be required to sell the Bank of America securities before recovery of their cost basis.

 

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,

 

2009

 

2008

Net unrealized appreciation on

     

  available-for sale securities

$  16,048,288 

 

$     2,992,865 

  Adjustment to deferred acquisition costs

(710,243)

 

(154,982)

  Deferred income taxes

(5,561,894)

 

(1,383,722)

Net unrealized appreciation on

     

  available-for sale securities

$    9,776,151 

 

$    1,454,161 

 

12

 


 

The amortized cost and fair value of fixed maturity securities at September 30, 2009, 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

$       7,645,231

 

$       7,785,825

Due after one year through five years

79,501,123

 

84,769,018

Due after five years through ten years

91,581,247

 

95,468,473

Due after ten years

54,050,209

 

58,079,863

Due at multiple maturity dates

53,196,518

 

55,622,665

Total

$   285,974,328

 

$   301,725,844

 

 

Proceeds for the three months ended September 30, 2009 and 2008 from sales and maturities of investments in available-for-sale securities were $27,272,705 and $16,810,338, respectively.  Gross gains of $978,863 and $652,896 and gross losses of $269,268 and $1,886 were realized on those sales during the three month periods ended September 30, 2009 and 2008, respectively.  Proceeds for the nine months ended September 30, 2009 and 2008 from sales and maturities of investments in available-for-sale securities were $54,004,491 and $27,918,021, respectively.  Gross gains of $1,105,215 and $654,354 and gross losses of $1,262,196 and $3,725 were realized on those sales during the nine months ended September 30, 2009 and 2008, respectively.

 

Presented below is investment information, including the accumulated quarter and year-to-date change in net unrealized investment gains or losses.  Additionally, the table shows the change in net unrealized investment gains (losses) and the amount of realized investment gains (losses) on fixed maturities and equity securities for the three and nine months ended September 30, 2009 and 2008.

 

 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

2009

 

2008

 

2009

 

2008

Change in unrealized investment

             

   gains (losses):

             

  Available-for-sale:

             

  Fixed maturities

$    9,083,994

 

$   (6,262,442)

 

$   12,656,766 

 

$ (10,225,851)

  Equity securities

129,924

 

(6,405)

 

398,657 

 

(500,892)

Realized investment gains (losses):

             

  Available-for-sale:

             

  Fixed maturities

$       709,595

 

$   (2,907,145)

 

$      (156,981)

 

$   (2,907,527)

  Equity securities

-

 

 

 

 

Major categories of net investment income are summarized as follows:

 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

2009

 

2008

 

2009

2008

Fixed maturities

$    3,999,087

 

$    3,943,815

 

$    12,010,567

$    11,947,262

Mortgage loans on real estate

356,406

 

410,875

 

1,166,386

1,345,927

Other

192,015

 

256,671

 

594,005

690,865

 

4,547,508

 

4,611,361

 

13,770,958

13,984,054

Investment expenses

219,968

 

209,727

 

659,874

629,165

 

$    4,327,540

 

$    4,401,634

 

$    13,111,084

$    13,354,889

 

13

 


 

NOTE E - Fair Values of Financial Instruments

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

 

The Company holds fixed maturities and equity securities that are measured and reported at fair market value on the balance sheet.  The Company determines the fair market values of its financial instruments based on the fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputs that may be used to measure fair value, as follows:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities. The Company's Level 1 assets and liabilities include fixed maturities and equity securities that are traded in an active exchange market, as well as certain U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.

 

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company's Level 2 assets and liabilities include fixed maturities with quoted prices that are traded less frequently than exchange-traded instruments or assets and liabilities whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes U.S. Government and agency mortgage-backed fixed maturities and corporate fixed maturities.

 

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company's Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments and asset-backed securities where independent pricing inputs were not able to be obtained for a significant portion of the underlying assets.

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.

 

14

 


 

The following table presents the Company's fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of September 30, 2009 and December 31, 2008, respectively.

 

 

 September 30, 2009

 

 Level 1

 

 Level 2

 

 Level 3

 

 Total

Fixed maturities:

             

U.S. government obligations

$                   -

 

$  40,287,872

 

$    3,094,680

 

$    43,382,552

States and political subdivisions

-

 

29,618,527

 

-

 

29,618,527

Corporate

-

 

138,268,495

 

5,831,542

 

144,100,037

Foreign

-

 

22,205,880

 

-

 

22,205,880

Asset-backed securities

-

 

6,320,750

 

475,433

 

6,796,183

Mortgage-backed securities:

             

  Commercial MBS

-

 

6,966,772

 

-

 

6,966,772

  Residential MBS

-

 

48,655,893

 

-

 

48,655,893

Total fixed maturities

$                   -

 

$ 292,324,189

 

$    9,401,655

 

$  301,725,844

 

             

Equity securities:

             

U.S. agencies

$        552,800

 

$                   -

 

$                   -

 

$         552,800

Mutual funds

2,159,535

 

-

 

-

 

2,159,535

Nonredeemable corporate preferred

897,500

 

-

 

-

 

897,500

Corporate common stock

401,406

 

-

 

342,400

 

743,806

Total equity securities

$     4,011,241

 

$                   -

 

$       342,400

 

$      4,353,641

 

             

 

 December 31, 2008

 

 Level 1

 

 Level 2

 

 Level 3

 

 Total

 

             

Fixed maturities

$                   -

 

$ 277,204,295

 

$    8,226,081

 

$  285,430,376

Equity securities

3,595,777

 

-

 

342,400

 

3,938,177

 

At September 30, 2009, Level 3 financial instruments consisted of five corporate fixed maturities, one U.S. government obligation, one asset-backed security, one corporate redeemable preferred stock and one common stock, where trading has been limited.  At December 31, 2008, Level 3 financial instruments consisted of four corporate fixed maturities, one U.S. government obligation, two asset-backed securities, one corporate redeemable preferred stock and one common stock, where trading has been limited.  The fair values for these securities were primarily determined through the use of non-binding broker quotes and internal models using unobservable assumptions about market participants.

 

15

 


 

The following table provides a summary of changes in fair value of our Level 3 financial instruments for the three and nine months ended September 30, 2009 and 2008, respectively.

 

 

                         Quarter Ended September 30, 2009

 

July 1,

 

Realized

 

Unrealized

           

 

2009

 

Gains

 

Gains

 

 Purchases

 

Transfers

 

Ending

 

Balance

 

(Losses)

 

(Losses)

 

(Sales)

 

In (Out)

 

Balance

 

                     

Fixed maturities:

                     

  U.S. Government obligations

$      999,700

 

$                -

 

$        66,930 

 

$   1,879,076 

 

$      148,974 

 

$   3,094,680

  Corporate

6,191,597

 

-

 

459,048 

 

(819,103)

 

 

5,831,542

  Asset-backed securities

1,614,960

 

-

 

(10,079)

 

(35,935)

 

(1,093,513)

 

475,433

  Total fixed maturities

$   8,806,257

 

-

 

$      515,899 

 

$   1,024,038 

 

$    (944,539)

 

$   9,401,655

Equity securities:

                     

  Corporate common stock

$      342,400

 

$                -

 

$                  - 

 

$                 - 

 

$                  - 

 

$      342,400

  Total equity securities

$      342,400

 

$                -

 

$                  - 

 

$                 - 

 

$                  - 

 

$      342,400

 

                     

 

                         Quarter Ended September 30, 2008

 

July 1,

 

Realized

 

Unrealized

           

 

2008

 

Gains

 

Gains

 

Purchases

 

Transfers

 

Ending

 

Balance

 

(Losses)

 

(Losses)

 

(Sales)

 

In (Out)

 

Balance

 

                     

Fixed maturities

$   7,662,264

 

$                -

 

$       (43,378)

 

$   1,964,375 

 

$       756,929 

 

$ 10,340,190

Equity securities

320,000

 

-

 

 

 

 

320,000

 

                     

 

                     

 

                         Nine Months Ended September 30, 2009

 

January 1,

 

Realized

 

Unrealized

           

 

2009

 

Gains

 

Gains

 

Purchases

 

Transfers

 

Ending

 

Balance

 

(Losses)

 

(Losses)

 

(Sales)

 

In (Out)

 

Balance

 

                     

Fixed maturities:

                     

  U.S. Government obligations

$   2,037,998

 

$                -

 

$        48,997 

 

$   2,471,481 

 

$  (1,463,796)

 

$   3,094,680

  Corporate

4,588,512

 

-

 

416,277 

 

826,753 

 

 

5,831,542

  Asset-backed securities

1,599,571

 

-

 

75,383 

 

(106,008)

 

(1,093,513)

 

475,433

  Total fixed maturities

$   8,226,081

 

$                -

 

$      540,657 

 

$   3,192,226 

 

$  (2,557,309)

 

$   9,401,655

Equity securities:

                     

  Corporate common stock

$      342,400

 

$                -

 

$                  - 

 

$                  - 

 

$                  - 

 

$      342,400

  Total equity securities

$      342,400

 

$                -

 

$                  - 

 

$                  - 

 

$                  - 

 

$      342,400

 

                     

 

                         Nine Months Ended September 30, 2008

 

January 1,

 

Realized

 

Unrealized

           

 

2008

 

Gains

 

Gains

 

Purchases

 

Transfers

 

Ending

 

Balance

 

(Losses)

 

(Losses)

 

(Sales)

 

In (Out)

 

Balance

 

                     

Fixed maturities

$   6,940,640

 

$                -

 

$     (316,924)

 

$   1,964,375 

 

$   1,752,099 

 

$ 10,340,190

Equity securities

320,000

 

-

 

 

 

 

320,000

 

 

 

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.

 

16

 


 

The following disclosure contains the estimated fair values of financial instruments, as of September 30, 2009 and December 31, 2008.  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, 2009

 

December 31, 2008

 

Carrying

Fair

 

Carrying

Fair

 

Amount

Value

 

Amount

Value

Assets:

 

     

 

  Fixed maturities

$ 301,725,844

$ 301,725,844

 

$ 285,430,376

$ 285,430,376

  Equity securities

4,353,641

4,353,641

 

3,938,177

3,938,177

  Mortgage loans on real estate:

 

     

 

    Commercial

21,243,306

21,173,962

 

22,480,039

23,517,378

    Residential

29,810

31,615

 

32,399

35,509

  Policy loans

6,969,923

6,969,923

 

6,971,949

6,971,949

  Other long-term investments

883,678

883,678

 

1,021,741

1,021,741

  Short-term investments

-

-

 

25,000

25,000

  Cash and cash equivalents

2,816,813

2,816,813

 

2,819,257

2,819,257

  Accrued investment income

3,441,636

3,441,636

 

4,338,974

4,338,974

  Cash value of company-owned

 

     

 

    life insurance

8,414,816

8,414,816

 

7,764,223

7,764,223

   

     

 

Liabilities:

 

     

 

  Policyholder deposits

 

     

 

     (Investment-type contracts)

$  51,231,331

$  50,607,556

 

$  51,491,954

$  48,926,107

  Policy claims

1,454,284

1,454,284

 

1,504,744

1,504,744

  Obligations under capital leases

177,509

177,509

 

284,307

284,307

  Notes payable

2,577,465

2,268,982

 

3,701,506

3,485,607

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

17

 


 

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

 

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

 

NOTE F - Earnings per Share and Stock-Based Compensation

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 three months ended September 30, 2009 and 2008 were 1,126,157 and 1,117,670, respectively.  The weighted average number of shares outstanding for the nine months ended September 30, 2009 and 2008 were 1,131,731 and 1,115,714, respectively.

 

The Company's only outstanding stock options and stock appreciation rights were issued in 1999. We recognize all share-based payments to employees as compensation expense in the consolidated income statement utilizing the modified prospective method. Under this method, our stock-based compensation is reported in the balance sheets as a liability based on the intrinsic value of the award, and compensation expense is measured as the change in intrinsic value. 

 

As of September 24, 2009, the previously issued and outstanding 61,125 options expired and were not exercised.  We recognized no change in compensation expense relative to the outstanding options for the three months ended September 30, 2009 compared to a decrease in compensation expense relative to the outstanding options of $33,619 for the three months ended September 30, 2008.  We recognized a decrease in compensation expense relative to the outstanding options of $213,938 for the nine months ended September 30, 2009 compared to a decrease in compensation expense of $241,444 associated with such options for the nine months ended September 30, 2008. These changes in compensation expense were based on changes in the market value of the Company's stock compared to the exercise price of the options as of those dates.

 

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NOTE G - Segment Data

We operate in four segments as shown in the following table. All segments include both individual and group insurance. Identifiable revenues and expenses are assigned directly to the applicable segment. Net investment income is generally allocated to the insurance and the corporate segments in proportion to policy liabilities and stockholders' equity, respectively. Realized gains and losses, including realized losses as a result of other-than-temporary impairments, are allocated to the Corporate and Other segment.  Investors Heritage Financial revenue and income associated with credit administrative services is assigned to that segment, with any remaining revenue and income 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,

 

2009

2008

 

2009

2008

   

     

 

Revenue:

 

     

 

  Preneed and burial products

$ 10,076,652

$ 10,211,243 

 

$ 29,715,427

$ 29,561,499 

  Traditional and universal life products

2,465,125

2,482,270 

 

7,476,965

8,075,527 

  Credit insurance products and

 

     

 

    administrative services

66,355

108,515 

 

243,451

311,655 

  Corporate and other

1,099,567

(2,603,337)

 

821,762

(1,994,873)

 

$ 13,707,699

$ 10,198,691 

 

$ 38,257,605

$ 35,953,808 

   

     

 

Pre-tax income (loss) from operations:

 

     

 

  Preneed and burial products

$      504,928

$      491,347 

 

$      256,844

$       (47,332)

  Traditional and universal life products

56,724

160,428 

 

90,142

320,478 

  Credit insurance products and

 

     

 

    administrative services

49,165

73,993 

 

155,100

218,463 

  Corporate and other

772,983

(2,733,118)

 

146,603

(2,221,995)

 

$    1,383,800

(2,007,350)

 

$      648,689

$  (1,730,386)

 

 

NOTE H - 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 and the small life insurance company tax deduction.

 

We file U.S. federal income tax returns and income tax returns in various state jurisdictions. Our 2006 through 2008 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.

 

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NOTE I - Comprehensive Income (Loss)

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

 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

2009

 

2008

 

2009

 

2008

               

Total net unrealized gains (losses)

             

   arising during the period

$    6,562,204

 

$    (5,615,934)

 

$   8,437,166 

 

$   (8,350,031)

Less: Net realized investment gains (losses)

709,595

 

(2,907,145)

 

(156,981)

 

(2,907,527)

Net unrealized gains (losses)

5,852,609

 

(2,708,789)

 

8,594,147 

 

(5,442,504)

Change in unrealized pension benefits

92,267

 

40,723 

 

276,800 

 

122,168 

Change in fair value of hedging instrument

1,133

 

(746)

 

3,553 

 

2,749 

Net income (loss)

1,006,853

 

(1,530,901)

 

471,986 

 

(1,319,675)

Total comprehensive income (loss)

$    6,952,862

 

$    (4,199,713)

 

$   9,346,486 

 

$   (6,637,262)

 

 

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

 

NOTE J - Employee Benefit Plans

We sponsor a noncontributory defined benefit pension plan which covers substantially all employees. Benefits are based on years of service and the highest consecutive 60 months average earnings within the last 120 months of credited service. Benefits are funded based on actuarially-determined amounts.

 

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

 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

2009

2008

 

2009

2008

   

     

 

Service cost

$        94,516 

$        92,727 

 

$      283,548 

$      278,183 

Interest cost

235,174 

218,053 

 

705,521 

654,161 

Expected return on plan assets

(170,573)

(229,467)

 

(511,717)

(688,403)

Recognized net loss

139,798 

61,701 

 

419,394 

185,103 

Net periodic benefit cost

$      298,915 

$      143,014 

 

$      896,746 

$      429,044 

 

 

We previously disclosed in our financial statements for the year ended December 31, 2008 that we expected to contribute $972,000 to our pension plan in 2009. As of September 30, 2009, $729,000 had been contributed. We presently anticipate contributing an additional $243,000 to fund our pension plan in 2009.

 

NOTE K - Notes Payable

Effective September 29, 2009, the Company entered into a $2,000,000 line of credit for At Need Funding, maturing on September 29, 2010.  On September 16, 2009, the Company also entered into a $150,000 operating line of credit, maturing on September 16, 2010.  Both of these lines of credit were with a new provider as replacements for previously existing lines of credit that were not renewed at June 30, 2009.  These lines of credit require interest to be paid monthly at the prime rate, with a floor of 3.25%.  As of September 30, 2009, there were no outstanding balances relative to these lines of credit. 

 

NOTE L - Subsequent Events

Subsequent events or transactions have been evaluated for potential recognition or disclosure through November 12, 2009, which is the date that the financial statements have been issued.

 

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

 

GENERAL

 

Investors Heritage Capital Corporation (formerly known as Kentucky Investors, Inc. prior to name change effective June 1, 2009) 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 invests in various business ventures.

 

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

 

In late 2007, we introduced the Legacy Gold product series, a generation of life insurance and annuity products marketed in conjunction with prearranged funerals.  As a part of the process, we performed detailed analysis of the preneed market and of the characteristics of our particular block of business.  We believe that the result of these efforts is a very marketable product that balances profitability with competitive commissions and death benefit growth to provide adequate proceeds to cover funeral expenses and personal needs.  Underwritten and guaranteed issue options are available.  This product series replaced the Legacy Protector and Legacy Preferred series of life insurance and annuity products during early 2008.

 

The Heritage Final Expense product is sold in the final expense markets.  Introduced in 2002, it is reinsured on an 80% quota share basis exclusively with Munich American Reassurance Company.  This reinsurance arrangement has helped to reduce first year statutory surplus strain associated with new sales and should provide a stable profit stream for the future.  During the fourth quarter of 2008, this product was replaced by the new Heritage Final Expense II product, which incorporates the 2001 CSO table while also improving the marketability and profitability of the product.

 

In late 2008 we updated two of our products within this line to incorporate the 2001 CSO table while enhancing the marketability and profitability of these products.  The HLW Choice Whole Life replaced the Life Paid Up at 95 and the Heritage Protector IV replaced the Heritage Protector III.

 

Investors Heritage Life continues to market its third-party administrative ("TPA") services as an additional revenue source.  We currently have six TPA clients for which we provide tailored services to meet each client's individual business needs. We have been able to perform services for these clients using our existing in-house resources.

 

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

 

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

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

 

Investments in Fixed Maturities, Equity Securities and Mortgage Loans

We hold fixed maturities and equity interests in a variety of companies.  Additionally, we originate, underwrite and manage mortgage loans.  We continuously evaluate all of our investments based on current economic conditions, credit loss experience and other developments.  We evaluate the difference between the cost/amortized cost and estimated fair value of our investments to determine whether any decline in value is other-than-temporary in nature.  This determination involves a degree of uncertainty.  If a decline in the fair value of a security is determined to be temporary, the decline is recorded as an unrealized loss in stockholders' equity. If a decline in a security's fair value is considered to be other-than-temporary, we then determine the proper treatment for the other-than-temporary impairment.  For fixed maturities, the amount of any other-than-temporary impairment related to a credit loss is recognized in earnings and reflected as a reduction in the cost basis of the security; and the amount of any other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss) with no change to the cost basis of the security.  For equity securities, the amount of any other-than-temporary impairment is recognized in earnings and reflected as a reduction in the cost basis of the security.

 

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

 

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

 

Deferred Acquisition Costs

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

 

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

 

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

 

Policy Liabilities

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

 

Income Taxes

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

 

Accrued Pension Expense

We maintain a defined benefit retirement plan on behalf of our employees.  Measurement of the future benefit obligations associated with this plan involves significant judgment, particularly in regard to the expected long-term rate of return on plan assets, rate of compensation increases and the current discount rate used to calculate the present value of future obligations.  Changes in these assumptions can significantly impact the accrued pension liability and net periodic benefit expense recorded in the financial statements.

 

The Pension Protection Act of 2006 was passed by legislators and signed by the President on August 17, 2006 to address the funding mechanisms of pension plans. The Act alters the traditional formula under which plan liabilities must be funded, and it may result in significantly increased future funding costs depending on investment returns.  Although increased contributions are not yet required under the funding formula, we have voluntarily increased the projected contribution to our pension plan for 2009 by approximately $100,000 above our prior year contribution.

 

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New Accounting Pronouncements

In April 2009, the FASB issued new guidance regarding the recognition and presentation of other-than-temporary impairments.  The new guidance requires entities to separate an other-than-temporary impairment of a fixed maturity security into two components when there are credit related and non-credit related losses associated with the impaired fixed maturity security for which management asserts that it does not have the intent to sell the security, and it is not more likely than not that it will be required to sell the security before recovery of its cost basis.  The amount of the other-than-temporary impairment related to a credit loss is recognized in earnings, and the amount of the other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss).  We elected to early adopt this guidance effective January 1, 2009.  As a result of the adoption of this guidance, we recognized a cumulative effect adjustment of $272,157 (net of deferred income tax of $137,326) to move non-credit related other-than-temporary impairments previously recognized in earnings for the year ended December 31, 2008 from retained earnings to accumulated other comprehensive income (loss) for fixed maturity securities held at the date of adoption.

 

In April 2009, the FASB issued new guidance to clarify fair valuation in inactive markets and includes all assets and liabilities subject to fair value measurements.  Under this guidance, if an entity determines that there has been a significant decrease in the volume and level of activity for the asset or the liability in relation to the normal market activity for the asset or liability (or similar assets or liabilities), then transactions or quoted prices may not accurately reflect fair value.   In addition, if there is evidence that the transaction for the asset or liability is not orderly, the entity shall place little, if any weight on that transaction price as an indicator of fair value.   We elected to early adopt this guidance effective January 1, 2009, and its adoption did not have a material impact on our consolidated financial condition or results of operations.

 

In April 2009, the FASB issued new guidance to expand the fair value disclosures required for financial instruments for interim periods.  The guidance also requires entities to disclose the methods and significant assumptions used to estimate the fair value of financial instruments in financial statements on an interim and annual basis and to highlight any changes from prior periods.  This guidance was effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.   We adopted this guidance effective for the second quarter of 2009.

 

Refer to Notes D and E to our condensed consolidated financial statements for more explanation of the above-mentioned new pronouncements as well as for the required disclosures.

 

In May 2009, the FASB issued new guidance that established general accounting standards and disclosure for events occurring subsequent to the balance sheet date but before the financial statements are issued.  This guidance became effective for interim and annual accounting periods ending after June 15, 2009.  The Company adopted this guidance upon issuance, with no material impact to the consolidated financial statements.  Refer to Note L to our condensed consolidated financial statement for disclosures relative to subsequent events.

 

In June 2009, the FASB issued guidance to reorganize existing U.S. accounting and reporting standards issued by the FASB and other private sector standard setters into a single source of authoritative accounting principles arranged by topic (the "Codification"). The Codification replaced previous guidance related to the same issue and became effective for interim and annual reporting periods ending after September 15, 2009.  The Company adopted it upon issuance, with no material impact to the consolidated financial statements.

 

INVESTMENTS, LIQUIDITY AND CAPITAL RESOURCES

 

Investments

Investors Heritage Life maintains a sound, conservative investment strategy. At September 30, 2009, 90.0% of invested assets consisted of fixed income securities compared to 89.2% at December 31, 2008. At September 30, 2009 and December 31, 2008, Investors Heritage Life's fixed income investments were 98.1% and 99.9% investment grade, respectively, as rated by Standard & Poor's.

 

24

 

 


 

Based on our review, the Company recorded two other-than-temporary impairments during the second quarter of 2009.  The Company impaired its $2,000,000 par value CIT Group Holdings bond as a result of recent negative information relative to a potential government bailout.  This impairment was considered fully credit-related, resulting in a charge to the income statement before tax of $954,877 as of June 30, 2009.  This charge represents the difference between the amortized cost basis of the security and its fair value as management cannot assert that it does not have the intent to sell the security.  The Company also impaired an ALCOA bond as of June 30, 2009, based on its intent to sell the security before recovery, generating a pre-tax credit-related loss of $22,953.  The Company sold these bonds during the third quarter of 2009 at an additional realized loss of $267,299.  The Company has experienced no additional other-than temporary impairments during 2009.

 

During 2008, we recognized an other-than-temporary impairment loss relative to the two Lehman Brothers Holdings bonds in our portfolio that are in default, each with a par value of $2,000,000.  While we have written down these securities to fair value, we continue to work with our investment advisor to estimate a recovery value on the bonds.  Our current estimates are that we will ultimately recover anywhere from approximately 21%-60% of the par value on the bonds.  We are amortizing the bond values up to the low end of this range, and we do not intend to sell these securities nor is it more likely than not that we will be required to sell these securities in expectation of future recoveries.

 

We have reviewed our investment portfolio and do not believe that there are additional securities that are other-than-temporarily impaired at September 30, 2009 beyond those impairments already taken.  Other than the Lehman Brothers Holdings bonds, none of Investors Heritage Life's fixed income assets are in default and there has been no material change in the distribution of its fixed income portfolio.

 

We continuously monitor the investment risk within our portfolio, including the risk associated with subprime lending with our CMO investments.  As of September 30, 2009, we have only one CMO, with a fair value of approximately $51,000, which has any level of direct subprime exposure.  Based on our analysis, we believe this investment is of high quality and expect no losses as a result of the current subprime concerns.

 

Additionally, Investors Heritage Life engages in commercial and residential mortgage lending, with approximately 99.9% of these investments being in commercial properties. All mortgage loans are either originated in-house or through two mortgage brokers, and all loans are secured by first mortgages on the real estate.  Loan to value ratios of 80% or less and debt service coverage from existing cash flows of 115% or higher are generally required.  We minimize credit risk in our mortgage loan portfolio through various methods, including stringently underwriting the loan request, maintaining small average loan balances, reviewing larger mortgage loans on an annual basis and diversifying the portfolio by property type.  At September 30, 2009, 6.3% of invested assets consisted of mortgage loans compared to 7.0% at December 31, 2008. We anticipate maintaining a similar to slightly higher percentage of mortgage loans to total invested assets into the near future. As of September 30, 2009, Investors Heritage Life had one non-performing mortgage loan, which would include loans past due 180 days or more, loans in process of foreclosure, restructured loans and real estate acquired through foreclosure.  The outstanding balance on this loan was $162,744 at September 30, 2009.  This loan was repaid in full subsequent to the end of the quarter.

 

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Liquidity and Capital Resources

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

 

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

 

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

 

Investors Heritage Life's conservative approach in the product development area and the strength and stability of its fixed income and mortgage loan portfolios provide adequate liquidity both in the short-term and the long-term.

 

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

 

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, 2009, we are in compliance with all debt covenant requirements.

 

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

 

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

 

Effective September 29, 2009, the Company entered into a $2,000,000 line of credit for At Need Funding, maturing on September 29, 2010.  On September 16, 2009, the Company also entered into a $150,000 operating line of credit, maturing on September 16, 2010.  Both of these lines of credit were with a new provider as replacements for previously existing lines of credit that were not renewed at June 30, 2009.  These lines of credit require interest to be paid monthly at the prime rate, with a floor of 3.25%.  As of September 30, 2009, there were no outstanding balances relative to these lines of credit. 

 

RESULTS OF OPERATIONS

 

Overview

Premiums earned (net of reinsurance) were $8,342,858 for the third quarter of 2009 (a decrease of 1.0% compared to the third quarter of 2008) and $24,466,338 for the nine months ended September 30, 2009 (a decrease of 0.9% compared to the corresponding period in 2008).  The current poor economic conditions continue to limit disposable income typically used as a source for new sales in many of our markets.

 

26

 


 

Net investment income was $4,327,540 for the third quarter of 2009 (a decrease of 1.7% compared to the third quarter of 2008) and $13,111,084 for the nine months ended September 30, 2009 (a decrease of 1.8% compared to the corresponding period in 2008).  The fluctuating economic environment continues to put pressure on new investment yields.

 

Net realized gains (losses) were $709,595 and ($156,981) for the three and nine month periods ended September 30, 2009.  The year-to-date losses were primarily driven by the realized loss taken on our CIT Group Holdings bond, as previously discussed.  This loss was somewhat offset during the third quarter by gains taken on the sale of certain securities nearing maturity in the next few years.

 

Total revenue was $13,707,699 for the third quarter of 2009 (an increase of 34.4% compared to the third quarter of 2008) and $38,257,605 for the nine months ended September 30, 2009 (an increase of 6.4% compared to the corresponding period in 2008).  These increases primarily reflect the other-than-temporary impairment charge taken on Lehman Brothers bonds during the third quarter of 2008.

 

Total benefits and expenses were $12,323,899 in the third quarter of 2009 (an increase of 1.0% compared to the third quarter of 2008) and $37,608,916 for the nine months ended September 30, 2009 (a decrease of 0.2% compared to the corresponding period in 2008).  While employee salary and benefit expenses have increased since prior year, these increases have been somewhat offset by the decrease in new business generated coupled with the allowable reduction of certain death benefit crediting rates.

 

After providing for federal income taxes, our net income was $1,006,853 with earnings per share of $0.89 for the third quarter of 2009 as compared to a net loss of $1,530,901 and a net loss per share of $1.37 for the third quarter of 2008.  Our net income for the nine months ended September 30, 2009 was $471,986 with earnings per share of $0.42 compared with a net loss of $1,319,675 and a net loss per share of $1.18 for the nine months ended September 30, 2008.

 

In light of recent losses due to other-than-temporary impairments, we elected not to pay our typical annual dividend during 2009.

 

Business Segments 

We internally evaluate the performance of our operations by the following four business segments:

 

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 $10,076,652 for the third quarter of 2009 (a decrease of 1.3% compared to the third quarter of 2008) and $29,715,427 for the nine months ended September 30, 2009 (an increase of 0.5% compared to the corresponding period in 2008).  The small decrease for the quarter is driven by the current poor economic conditions, however, sales remain up slightly year-to-date for the Legacy Gold preneed product series.  Pre-tax income from operations was $504,928 and $256,844 for the three and nine month periods ended September 30, 2009 compared to pre-tax income (loss) from operations of $491,347 and ($47,332) for the three and nine month periods ended September 30, 2008.  This improvement was driven by the corresponding increase in sales revenue, favorable claims history compared to prior periods and the allowable reduction of certain death benefit crediting rates.

 

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Traditional and Universal Life Products include traditional life and group life insurance products, certain annuities and universal life products. Revenues for this segment were $2,465,125 for the third quarter of 2009 (a decrease of 0.7% compared to the third quarter of 2008) and $7,476,965 for the nine months ended September 30, 2009 (a decrease of 7.4% compared to the corresponding period in 2008).  Revenues on this segment are primarily derived from the sale of term insurance products through banks, for which demand fluctuates along with economic conditions. New sales have suffered due to the tightening of consumer credit markets.  Pre-tax income from operations was $56,724 and $90,142 for the three and nine month periods ended September 30, 2009 compared to pre-tax income of $160,428 and $320,478 for the three and nine month periods ended September 30, 2008. The changes in pre-tax income are primarily attributable to lower sales coupled with fluctuations in death claims between periods.

 

Credit Insurance Products and Administrative Services include the marketing and administration of credit life and credit accident and health insurance products. We reinsure 100% of the related underwriting risk currently produced within this segment.  Accordingly, revenue is generated primarily from servicing and administering the credit business for our reinsurers. Because the revenue is fee-based, segment 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.  Revenues for this segment were $66,355 for the third quarter of 2009 (a decrease of 38.9% compared to the third quarter of 2008) and $243,451 for the nine months ended September 30, 2009 (a decrease of 21.9% compared to the corresponding period in 2008).  Pre-tax income from operations was $49,165 and $155,100 for the three and nine month periods ended September 30, 2009 compared to $73,993 and $218,463 for the three and nine month periods ended September 30, 2008.  These decreases in revenue and pre-tax income are directly related to lower premium production within this segment of the business due to current economic and lending conditions.

 

Corporate and Other consists of corporate accounts measured primarily by stockholders' paid-in capital, contributed surplus, earned surplus, property and equipment, and other minor business lines which include group annuities and group and individual accident and health products. This segment also includes fees generated from our TPA arrangements as well as the impact of realized investment gains and losses.  Revenues, including net realized investment gains (losses), for this segment were $1,099,567 and $821,762 for the three and nine month periods ended September 30, 2009.  Pre-tax income from operations was $772,983 and $146,603 for the three and nine month periods ended September 30, 2009. The current period improvement over prior periods was due to the fact that we sold certain near-term bonds to take capital gains in an effort to offset the loss experienced on the CIT bond.  The negative results in prior year were also the result of the other-than-temporary impairment taken on Lehman Brothers bonds, as previously discussed.

 

While we continue to expand the operations of Investors Heritage Financial, Investors Heritage Printing, At Need Funding and Heritage Funding, approximately 1% of our consolidated revenues were generated by those subsidiaries. Approximately 8% of Investors Heritage Financial's revenue for the nine months ended September 30, 2009 was derived from the sale of Investors Heritage Life's credit insurance products. During the first nine months of 2009, Investors Heritage Capital received dividends from Investors Heritage Financial totaling $83,000 and received distributions from At Need Funding of $33,000. We anticipate further dividend payments from Investors Heritage Financial and distributions from At Need Funding during the remainder of 2009.

 

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 and the small life insurance company tax deduction. The effective tax rate was 27.2% for both the three and nine month periods ended September 30, 2009, respectively, compared to 23.7% for both the three and nine month periods ended September 30, 2008.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We have no off-balance sheet arrangements as of September 30, 2009.

 

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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 4T. 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 significant changes in our internal controls or in other factors which could significantly affect internal controls 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 12, 2009, Investors Heritage Life is not a party to any legal proceedings, the adverse outcome of which, in management's opinion, individually or in the aggregate, would have a material adverse effect on our financial condition or results of operations. 

 

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

 

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

 

ITEM 3. Defaults Upon Senior Securities

 

None 

 

ITEM 4. Submission of Matters to a Vote of Security Holders

 

None

 

ITEM 5. Other Information

 

None

 

ITEM 6. Exhibits

 

31.1 & 
31.2  

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

 

 

32.1 

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

 

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SIGNATURES

 

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

 

 

 

INVESTORS HERITAGE CAPITAL CORPORATION

 

 

 

BY: /s/Harry Lee Waterfield II

 

Harry Lee Waterfield II

DATE: November 12, 2009

President

 

 

 

BY: /s/Raymond L. Carr

 

Raymond L. Carr

DATE: November 12, 2009

Vice President - Chief Financial Officer

 

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