Investors Heritage Capital Corp - FORM 10-Q

Attached files

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EX-31.2 - EXHIBIT 31.2 - Investors Heritage Capital Corp	ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - Investors Heritage Capital Corp	ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - Investors Heritage Capital Corp	ex31-1.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 March 31, 2011

000-01999

(Commission file number)

INVESTORS HERITAGE CAPITAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

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

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

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

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

Yes x No o

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

Yes o No o

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

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

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

Yes o No x

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

Common Capital Stock par value $1.00 per share

(Title of Class)

Number of outstanding shares as of May 4 , 2011 - 1,151,817.276

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	20
ITEM 4.	Controls and Procedures	27



	PART II – OTHER INFORMATION

ITEM 1.	Legal Proceedings	28
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
ITEM 3.	Defaults Upon Senior Securities	28
ITEM 4.	(Removed and Reserved)	28
ITEM 5.	Other Information	28
ITEM 6.	Exhibits	28


SIGNATURES		29

EXHIBIT 31.1		30
EXHIBIT 31.2		32
EXHIBIT 32		34

PART I - FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Balance Sheets (Unaudited)

	March 31,		December 31,
ASSETS	2011		2010
Investments:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost: $298,767,885 and $295,589,089)	$	315,069,217	$	313,456,262
Equity securities (cost: $3,877,775 and $3,877,775)		4,768,509		4,524,771
Mortgage loans on real estate		18,965,707		19,817,478
Policy loans		6,908,128		6,949,374
Other long-term investments		1,385,526		1,454,232
Short-term investments		-		491,041
Total investments		347,097,087		346,693,158

Cash and cash equivalents		1,622,226		2,647,798
Accrued investment income		3,745,025		3,926,591
Due premiums		3,840,766		3,772,069
Deferred acquisition costs		17,277,022		17,450,827
Value of business acquired		808,291		867,881
Leased property under capital leases		51,651		72,461
Property and equipment		1,813,365		1,582,958
Cash value of company-owned life insurance		9,062,010		9,021,432
Other assets		670,904		444,340
Amounts recoverable from reinsurers		43,454,730		44,109,932
Total assets	$	429,443,077	$	430,589,447

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities:
Benefit reserves	$	348,513,764	$	348,745,910
Unearned premium reserves		8,607,012		8,726,074
Policy claims		1,759,918		1,887,136
Liability for deposit-type contracts		2,818,027		2,791,261
Reserves for dividends and endowments and other		535,404		535,918
Total policy liabilities		362,234,125		362,686,299
Deferred federal income tax liability		6,109,690		6,598,944
Obligations under capital leases		47,793		57,808
Notes payable		1,746,880		2,533,955
Accrued pension liability		5,343,949		5,606,631
Other liabilities		3,699,215		1,933,347
Total liabilities		379,181,652		379,416,984

STOCKHOLDERS' EQUITY
Common stock (shares issued: 1,151,817 and 1,151,817)		1,151,817		1,151,817
Paid-in surplus		8,801,514		8,801,514
Accumulated other comprehensive income		6,754,991		7,482,092
Retained earnings		33,553,103		33,737,040
Total stockholders' equity		50,261,425		51,172,463
Total liabilities and stockholders' equity	$	429,443,077	$	430,589,447

See notes to consolidated financial statements.

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Income Statements (Unaudited)

	Quarter Ended March 31,
	2011			2010
REVENUE
Premiums and other considerations	$	11,657,643		$	9,278,184
Premiums ceded		(2,351,388	)		(1,369,412	)
Net premiums earned		9,306,255			7,908,772

Investment income, net of expenses		4,226,594			4,263,570
Net realized investment gains (losses) on investments:
Total other-than-temporary impairment losses		-			-
Portion of loss recognized in
other comprehensive income		-			-
Other net realized investment gains (losses)		(5,989	)		72,811
Net realized investment gains (losses) on investments		(5,989	)		72,811
Consideration on reinsurance assumed		13,117			-
Other income		413,615			313,550
Total revenue		13,953,592			12,558,703

BENEFITS AND EXPENSES
Death and other benefits		8,891,119			8,503,713
Guaranteed annual endowments		119,540			126,239
Dividends to policyholders		112,179			117,733
Increase in benefit reserves and unearned premiums		1,091,303			729,085
Acquisition costs deferred		(1,125,942	)		(1,112,037	)
Amortization of deferred acquisition costs		1,360,862			1,283,927
Commissions		597,513			586,868
Other general and administrative expenses		2,848,864			2,864,880
Total benefits and expenses		13,895,438			13,100,408

INCOME (LOSS) BEFORE FEDERAL INCOME TAXES		58,154			(541,705	)

PROVISION (BENEFIT) FOR FEDERAL INCOME TAXES
Current		104,443			(10,812	)
Deferred		(86,632	)		(136,749	)
Total federal income taxes		17,811			(147,561	)

NET INCOME (LOSS)	$	40,343		$	(394,144	)

BASIC AND DILUTED NET INCOME (LOSS) PER SHARE	$	0.04		$	(0.35	)

DIVIDENDS PER SHARE	$	0.18		$	0.13

See notes to condensed consolidated financial statements.

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)

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

BALANCE, JANUARY 1, 2010	$	1,141,767	$	8,716,135		$	4,495,103		$	31,321,874		$	45,674,879

Comprehensive income:
Net loss		-		-			-			(394,144	)		(394,144	)
Change in net unrealized appreciation on available-for-sale securities		-		-			2,250,050			-			2,250,050
Change in unrealized pension benefits		-		-			64,586			-			64,586
Change in fair value of hedging instrument		-		-			2,358			-			2,358
Total comprehensive income													1,922,850
Cash dividends		-		-			-			(160,821	)		(160,821	)
Issuances of common stock, net		2,053		(9,331	)		-			52,425			45,147
BALANCE, MARCH 31, 2010	$	1,143,820	$	8,706,804		$	6,812,097		$	30,819,334		$	47,482,055

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

Comprehensive income:
Net income		-		-			-			40,343			40,343
Change in net unrealized appreciation on available-for-sale securities		-		-			(813,735	)		-			(813,735	)
Change in unrealized pension benefits		-		-			86,634			-			86,634
Total comprehensive loss													(686,758	)
Cash dividends		-		-			-			(224,280	)		(224,280	)
BALANCE, MARCH 31, 2011	$	1,151,817	$	8,801,514		$	6,754,991		$	33,553,103		$	50,261,425

See notes to condensed consolidated financial statements.

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Three Months Ended March 31,
	2011			2010


NET CASH PROVIDED BY OPERATING ACTIVITIES	$	2,863,343		$	1,517,247

INVESTING ACTIVITIES
Securities available-for-sale:
Purchases		(14,316,950	)		(11,352,867	)
Sales and maturities		10,996,472			8,493,520
Other investments:
Cost of acquisitions		(910,029	)		(972,529	)
Sales and maturities		2,363,531			999,919
Net additions to property and equipment		(288,436	)		(90,970	)
NET CASH USED IN INVESTING ACTIVITIES		(2,155,412	)		(2,922,927	)
FINANCING ACTIVITIES
Receipts from universal life policies credited to policyholder account balances		1,489,457			1,495,480
Return of policyholder account balances on universal life policies		(2,435,885	)		(2,213,560	)
Payments on notes payable		(1,873,445	)		(942,345	)
Proceeds from notes payable		1,086,370			675,972
Issuances of common stock, net		-			45,147
NET CASH USED IN FINANCING ACTIVITIES		(1,733,503	)		(939,306	)
DECREASE IN CASH AND CASH EQUIVALENTS		(1,025,572	)		(2,344,986	)
Cash and cash equivalents at beginning of period		2,647,798			5,730,782
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,622,226		$	3,385,796

See notes to consolidated financial statements.

INVESTORS HERITAGE CAPITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

NOTE A - Nature of Operations

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

Our principal operations involve the sale and administration of various insurance and annuity products, including, but not limited to, participating and non-participating whole life, limited pay life, universal life, annuity contracts, credit life, credit accident and health and group insurance policies. The principal markets for the Company’s products are in the Commonwealths of Kentucky and Virginia, and the States of North Carolina, 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 quarter ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2010, as included in our Annual Report on Form 10-K.

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

Management has evaluated all events subsequent to March 31, 2011 through the date that these financial statements have been issued.

NOTE C – New Accounting Pronouncements

In October 2010, the FASB issued authoritative guidance to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. Under the new guidance, acquisition costs are to include only those costs that are directly related to the acquisition or renewal of insurance contracts by applying a model similar to the accounting for loan origination costs. An entity may defer incremental direct costs of contract acquisition that are incurred in transactions with independent third parties or employees as well as the portion of employee compensation and other costs directly related to underwriting, policy issuance and processing, medical inspection, and contract selling for successfully negotiated contracts. Additionally, an entity may capitalize as a deferred acquisition cost only those advertising costs meeting the capitalization criteria for direct-response advertising. This change is effective for fiscal years beginning after December 15, 2011 and interim periods within those years. Early adoption as of the beginning of a fiscal year is permitted. The guidance is to be applied prospectively upon the date of adoption, with retrospective application permitted, but not required. We plan to adopt this guidance effective January 1, 2012. We are in the process of assessing the impact of the guidance on our financial statements, however, we currently do not expect to experience a significant impact as a result of this new guidance.

NOTE D – Investments

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

			Gross		Gross
March 31, 2011	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Fixed maturity securities:
U.S. government obligations	$	35,171,748	$	1,681,710	$	6,409	$	36,847,049
States and political subdivisions		45,875,748		1,595,493		503,787		46,967,454
Corporate		144,524,072		8,937,805		536,523		152,925,354
Foreign		21,299,977		2,043,203		108,000		23,235,180
Asset-backed securities		5,337,544		429,540		-		5,767,084
Mortgage-backed securities (MBS):
Commercial MBS		8,812,957		363,055		-		9,176,012
Residential MBS		37,745,839		2,469,845		64,600		40,151,084
Total fixed maturity securities		298,767,885		17,520,651		1,219,319		315,069,217
Equity securities:
U.S. agencies		552,800		-		-		552,800
Mutual funds		2,106,380		625,169		-		2,731,549
Nonredeemable corporate preferred		990,000		-		18,440		971,560
Corporate common stock		228,595		284,005		-		512,600
Total equity securities		3,877,775		909,174		18,440		4,768,509
Total	$	302,645,660	$	18,429,825	$	1,237,759	$	319,837,726

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

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.

	March 31, 2011						December 31, 2010
			Gross		Number				Gross		Number
	Estimated		Unrealized		of		Estimated		Unrealized		of
	Fair Value		Loss		Securities		Fair Value		Loss		Securities
Fixed Maturities:
Less than 12 months:
U.S. government obligations	$	1,131,517	$	6,409		3	$	155,391	$	459		2
States and political subdivisions		12,890,197		503,787		18		15,633,403		560,751		21
Corporate		22,559,333		536,523		20		14,585,855		438,252		11
Asset-backed securities		-		-		-		446,468		1,533		2
Residential MBS		4,634,932		64,600		3		2,784,372		49,582		2
Greater than 12 months:
Corporate		-		-		-		1,926,720		75,105		2
Foreign		868,140		108,000		1		846,630		128,818		1
Total fixed maturities		42,084,119		1,219,319		45		36,378,839		1,254,500		41

Equities:
Less than 12 months:
Mutual funds		-		-		-		310,138		8,146		1
Nonredeemable corporate preferred		971,560		18,440		1		947,190		42,810		1
Corporate common stock		-		-		-		109,556		1,572		1
Total equities		971,560		18,440		1		1,366,884		52,528		3

Total	$	43,055,679	$	1,237,759		46	$	37,745,723	$	1,307,028		44

As of March 31, 2011, all of the above fixed maturity securities individually had a fair value to cost ratio equal to or greater than 88% and the equity securities noted above had a fair value to cost ratio of over 98%. As of December 31, 2010, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 86% and the equity securities noted above had a fair value to cost ratio of over 95%. At March 31, 2011 and December 31, 2010, the Company’s fixed maturity securities were 99.0% investment grade as rated by Standard & Poor’s.

The Company’s decision to record an impairment loss is primarily based on whether the security’s fair value is likely to remain significantly below its book value in light of all the factors considered. Factors that are considered include the length of time the security’s fair value has been below its carrying amount, the severity of the decline in value, the credit worthiness of the issuer, and the coupon and/or dividend payment history of the issuer. The Company also assesses whether it intends to sell or whether it is more likely than not that it may be required to sell the security prior to its recovery in value. For any fixed maturity securities that are other-than-temporarily impaired, the Company determines the portion of the other-than-temporary impairment that is credit-related and the portion that is related to other factors. The credit-related portion is the difference between the expected future cash flows and the amortized cost basis of the fixed maturity security, and that difference is charged to earnings. The non-credit-related portion representing the remaining difference to fair value is recognized in other comprehensive income (loss). Only in the case of a credit-related impairment where management has the intent to sell the security, or it is more likely than not that it will be required to sell the security before recovery of its cost basis, is a fixed maturity security adjusted to fair value and the resulting losses recognized in realized gains (losses) in the consolidated statements of income. Any other-than-temporary impairments on equity securities are recorded in the consolidated statements of income in the periods incurred as the difference between fair value and cost. Based on our review, the Company experienced no other-than-temporary impairments during the quarters ended March 31, 2011 or 2010.

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

	March 31,			December 31,
	2011			2010
Net unrealized appreciation on
available-for sale securities	$	17,192,066		$	18,514,169
Adjustment to deferred acquisition costs		(702,106	)		(763,222	)
Deferred income taxes		(5,832,015	)		(6,279,267	)
Net unrealized appreciation on
available-for sale securities	$	10,657,945		$	11,471,680

The amortized cost and fair value of fixed maturity securities at March 31, 2011, by contractual maturity, are presented below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available-for-Sale
	Amortized		Fair
	Cost		Value
Due in one year or less	$	18,124,146	$	18,667,488
Due after one year through five years		74,444,518		79,425,376
Due after five years through ten years		90,029,560		96,179,608
Due after ten years		69,610,865		71,469,649
Due at multiple maturity dates		46,558,796		49,327,096
Total	$	298,767,885	$	315,069,217

Proceeds for the quarters ended March 31, 2011 and 2010 from sales and maturities of investments in available-for-sale securities were $10,996,472 and $8,493,520, respectively. Gross gains of $268 and $77,410 and gross losses of $6,257 and $4,599 were realized on those sales during the quarters ended March 31, 2011 and 2010, 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 quarters ended March 31, 2011 and 2010.

	Quarter Ended March 31,
	2011			2010
Change in unrealized investment
gains (losses):
Available-for-sale:
Fixed maturities	$	(1,565,841	)	$	3,373,648
Equity securities		243,738			132,592
Realized investment gains (losses):
Available-for-sale:
Fixed maturities	$	(5,989	)	$	72,811
Equity securities		-			-

Major categories of net investment income are summarized as follows:

	Quarter Ended March 31,
	2011		2010
Fixed maturities	$	3,948,905	$	3,926,945
Mortgage loans on real estate		326,447		377,554
Other		190,424		185,872
		4,465,776		4,490,371
Investment expenses		239,182		226,801
	$	4,226,594	$	4,263,570

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 quarter in which the reclassifications occur.

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

	March 31, 2011
	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. government obligations	$	-	$	36,847,049	$	-	$	36,847,049
States and political subdivisions		-		46,967,454		-		46,967,454
Corporate		-		150,822,699		2,102,655		152,925,354
Foreign		-		23,235,180		-		23,235,180
Asset-backed securities		-		5,767,084		-		5,767,084
Mortgage-backed securities:
Commercial MBS		-		9,176,012		-		9,176,012
Residential MBS		-		40,151,084		-		40,151,084
Total fixed maturities	$	-	$	312,966,562	$	2,102,655	$	315,069,217

Equity securities:
U.S. agencies	$	552,800	$	-	$	-	$	552,800
Mutual funds		2,731,549		-		-		2,731,549
Nonredeemable corporate preferred		-		971,560		-		971,560
Corporate common stock		168,600		-		344,000		512,600
Total equity securities	$	3,452,949	$	971,560	$	344,000	$	4,768,509

	December 31, 2010
	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. government obligations	$	-	$	38,280,498	$	-	$	38,280,498
States and political subdivisions		-		47,042,718		-		47,042,718
Corporate		-		150,673,819		-		150,673,819
Foreign		-		22,528,900		-		22,528,900
Asset-backed securities		-		5,808,341		387,863		6,196,204
Mortgage-backed securities:
Commercial MBS		-		8,424,879		-		8,424,879
Residential MBS		-		40,309,244		-		40,309,244
Total fixed maturities	$	-	$	313,068,399	$	387,863	$	313,456,262

Equity securities:
U.S. agencies	$	552,800	$	-	$	-	$	552,800
Mutual funds		2,571,225		-		-		2,571,225
Nonredeemable corporate preferred		-		947,190		-		947,190
Corporate common stock		109,556		-		344,000		453,556
Total equity securities	$	3,233,581	$	947,190	$	344,000	$	4,524,771

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

The following table provides a summary of changes in fair value of our Level 3 financial instruments for the quarters ended March 31, 2011 and 2010, respectively.

	Quarter Ended March 31, 2011
	U.S.						Asset-			Corporate
	Government						Backed			Common
	Obligations			Corporate			Securities			Stock		Total
Beginning balance	$	-		$	-		$	387,863		$	344,000	$	731,863
Transfers into Level 3		-			1,701,785			-			-		1,701,785
Transfers out of Level 3		-			-			(387,863	)		-		(387,863	)
Total gains or losses:													-
Included in earnings		-			-			-			-		-
Included in other
comprehensive income		-			34,534			-			-		34,534
Purchases		-			400,000			-			-		400,000
Sales		-			(33,664	)		-			-		(33,664	)
Ending balance	$	-		$	2,102,655		$	-		$	344,000	$	2,446,655


	Quarter Ended March 31, 2010
	U.S.						Asset-			Corporate
	Government						Backed			Common
	Obligations			Corporate			Securities			Stock		Total
Beginning balance	$	775,000		$	4,573,606		$	436,855		$	342,400	$	6,127,861
Transfers into Level 3		-			-			-			-		-
Transfers out of Level 3		(787,793	)		-			-			-		(787,793	)
Total gains or losses:													-
Included in earnings		-			-			-			-		-
Included in other
comprehensive income		12,793			109,658			11,723			1,600		135,774
Net purchases (sales)		-			(111,952	)		(37,501	)		-		(149,453	)
Ending balance	$	-		$	4,571,312		$	411,077		$	344,000	$	5,326,389

The Company had one asset-backed security that transferred from Level 3 to Level 2 during the quarter ended March 31, 2011. The Company had two corporate fixed maturities which transferred from Level 2 to Level 3 during the quarter ended March 31, 2011. Transfers in and/or (out) of Level 3 are primarily attributable to changes in the availability of market observable information and re-evaluation of the observability of pricing inputs.

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

The following disclosure contains the estimated fair values of financial instruments, as of March 31, 2011 and December 31, 2010. The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment was required to interpret market data to develop these estimates. Accordingly, the estimates are not necessarily indicative of the amounts which could be realized in a current market exchange. The use of different market assumptions or estimation methodologies may have a material effect on the fair value amounts.

	March 31, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Assets:
Fixed maturities	$	315,069,217	$	315,069,217	$	313,456,262	$	313,456,262
Equity securities		4,768,509		4,768,509		4,524,771		4,524,771
Mortgage loans on real estate:
Commercial		18,941,680		19,536,301		19,792,428		20,524,312
Residential		24,027		25,237		25,050		26,498
Policy loans		6,908,128		6,908,128		6,949,374		6,949,374
Other long-term investments		1,385,526		1,385,526		1,454,232		1,454,232
Short-term investments		-		-		491,041		491,041
Cash and cash equivalents		1,622,226		1,622,226		2,647,798		2,647,798
Accrued investment income		3,745,025		3,745,025		3,926,591		3,926,591
Cash value of company-owned
life insurance		9,062,010		9,062,010		9,021,432		9,021,432

Liabilities:
Policyholder deposits
(Investment-type contracts)	$	54,168,175	$	51,691,455	$	54,276,322	$	52,169,944
Policy claims		1,759,918		1,759,918		1,887,136		1,887,136
Obligations under capital leases		47,793		47,793		57,808		57,808
Notes payable		1,746,880		1,801,806		2,533,955		2,489,222

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

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

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

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.

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 quarters ended March 31, 2011 and 2010 were 1,151,817 and 1,142,354, respectively.

NOTE G - Segment Data

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

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

	Quarter Ended March 31,
	2011			2010

Revenue:
Preneed and burial products	$	10,721,442		$	9,569,040
Traditional and universal life products		2,696,066			2,549,485
Administrative and financial services		361,807			258,325
Corporate and other		174,277			181,853
	$	13,953,592		$	12,558,703

Pre-tax income (loss) from operations:
Preneed and burial products	$	(297,054	)	$	(265,893	)
Traditional and universal life products		238,739			(214,144	)
Administrative and financial services		55,588			41,945
Corporate and other		60,881			(103,613	)
	$	58,154		$	(541,705	)

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; the small life insurance company tax deduction; and non-taxable effects of company-owned life insurance premiums, cash value growth, and death benefit proceeds.

We file U.S. federal income tax returns and income tax returns in various state jurisdictions. Our 2007 through 2010 U.S. federal tax years remain subject to income tax examination by tax authorities. We have no known uncertain tax benefits within our provision for income taxes. In addition, we do not believe the Company will be subject to any penalties or interest relative to any open tax years and, therefore, have not accrued any such amounts. However, should such a circumstance arise, it is our policy to classify any interest and penalties (if applicable) as income tax expense in the financial statements.

NOTE I – Comprehensive Income

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

	Quarter Ended March 31,
	2011			2010

Total net unrealized gains (losses)
arising during the period	$	(819,724	)	$	2,322,861
Less: Net realized investment gains (losses)		(5,989	)		72,811
Net unrealized gains (losses)		(813,735	)		2,250,050
Change in unrealized pension benefits		86,634			64,586
Change in fair value of hedging instrument		-			2,358
Net income (loss)		40,343			(394,144	)
Total comprehensive income (loss)	$	(686,758	)	$	1,922,850

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 March 31,
	2011			2010

Service cost	$	130,194		$	94,571
Interest cost		252,986			237,615
Expected return on plan assets		(285,862	)		(241,865	)
Recognized net loss		131,264			97,858
Net periodic benefit cost	$	228,582		$	188,179

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

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

GENERAL

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

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

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

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

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

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

Investments in Fixed Maturities, Equity Securities 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.

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

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

Policy Liabilities

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

Income Taxes

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

Accrued Pension Expense

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

New Accounting Pronouncements

In October 2010, the FASB issued authoritative guidance to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. Under the new guidance, acquisition costs are to include only those costs that are directly related to the acquisition or renewal of insurance contracts by applying a model similar to the accounting for loan origination costs. An entity may defer incremental direct costs of contract acquisition that are incurred in transactions with independent third parties or employees as well as the portion of employee compensation and other costs directly related to underwriting, policy issuance and processing, medical inspection, and contract selling for successfully negotiated contracts. Additionally, an entity may capitalize as a deferred acquisition cost only those advertising costs meeting the capitalization criteria for direct-response advertising. This change is effective for fiscal years beginning after December 15, 2011 and interim periods within those years. Early adoption as of the beginning of a fiscal year is permitted. The guidance is to be applied prospectively upon the date of adoption, with retrospective application permitted, but not required. We plan to adopt this guidance effective January 1, 2012. We are in the process of assessing the impact of the guidance on our financial statements; however, we currently do not expect to experience a significant impact as a result of this new guidance.

INVESTMENTS, LIQUIDITY AND CAPITAL RESOURCES

Investments

Investors Heritage Life maintains a sound, conservative investment strategy. At March 31, 2011, 90.8% of invested assets consisted of fixed income securities compared to 90.4% at December 31, 2010. At March 31, 2011 and December 31, 2010, Investors Heritage Life’s fixed income investments were 99.0% investment grade as rated by Standard & Poor’s.

We have reviewed our investment portfolio and do not believe that there are additional securities that are other-than-temporarily impaired at March 31, 2011 beyond the impairments already taken in previous periods. None of Investors Heritage Life’s fixed income assets are in default and there has been no material change in the distribution of its fixed income portfolio. We recorded no other-than-temporary impairment charges in the consolidated statements of income during the quarters ended March 31, 2011 and 2010.

We continuously monitor the investment risk within our portfolio, including the risk associated with subprime lending with our CMO investments. As of March 31, 2011, we have only one CMO, with a fair value of approximately $61,000, 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 March 31, 2011, 5.5% of invested assets consisted of mortgage loans compared to 5.7% at December 31, 2010. We anticipate maintaining a similar to slightly higher percentage of mortgage loans to total invested assets into the near future. As of March 31, 2011, Investors Heritage Life had no non-performing mortgage loans, which would include loans past due 180 days or more, loans in process of foreclosure, restructured loans and real estate acquired through foreclosure.

Liquidity and Capital Resources

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

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

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

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

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

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

We assess our compliance with prescribed debt covenant requirements as outlined in the terms of each debt agreement at least annually, if not otherwise required in the debt agreement. Management has assessed our position and as of March 31, 2011, we are in compliance with all debt covenant requirements.

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

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

RESULTS OF OPERATIONS

Overview

Premiums earned (net of reinsurance) were $9,306,255 for the first quarter of 2011 (an increase of 17.7% compared to the first quarter of 2010). This increase is predominantly due to increased sales of our current product offerings in addition to premiums received on the recently acquired Texas block of business. Our current product offerings are performing well, although current economic conditions continue to limit disposable income typically used as a source for new sales in many of our markets.

Net investment income was $4,226,594 for the first quarter of 2011 (a decrease of 0.9% compared to the first quarter of 2010). The current economic environment continues to put significant pressure on new investment yields.

Net realized gains (losses) were ($5,989) and $72,811 for the three month periods ended March 31, 2011 and 2010, respectively. These gains (losses) were recognized in the normal course of business, and we experienced no other-than-temporary impairments during the quarters ended March 31, 2011 and 2010.

Consideration on reinsurance assumed totaled $13,117 for the quarter ended March 31, 2011 compared to no such revenue for the quarter ended March 31, 2010. This amount represented a payment from the Texas Life, Accident, Health, and Hospital Service Insurance Guaranty Association in settlement of certain additional policy liabilities determined to be assumed within the context of the Texas Memorial Life Insurance Company transaction completed during 2010.

Other income was $413,615 for the first quarter of 2011 (an increase of 31.9% compared to the first quarter of 2010). Our revenues received from our TPA arrangements have significantly increased over the same period in the prior year due to new relationships as well as expanded activity in one current relationship.

Total revenue was $13,953,592 for the first quarter of 2011 (an increase of 11.1% compared to the first quarter of 2010).

Total benefits and expenses were $13,895,438 for the first quarter of 2011 (an increase of 6.1% compared to the first quarter of 2010). This increase is primarily driven by the increase in reserves relative to our increased sales volume as well as increased claims associated with our higher sales volume and larger policy count derived from the assumption of the Texas Memorial block of life insurance policies during the third quarter of 2010.

After providing for federal income taxes, our net income was $40,343 with net income per share of $0.04 for the first quarter of 2011 as compared to a net loss of $394,144 and a net loss per share of $0.35 for the first quarter of 2010.

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

Business Segments

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

Preneed & Burial Products

Preneed and Burial Products include both life and annuity products sold by funeral directors or affiliated agents to fund prearranged funerals. Revenues for this segment were $10,721,442 for the first quarter of 2011 (an increase of 12.0% compared to the first quarter of 2010). This increase is predominantly due to the previously mentioned stronger sales and premiums generated from the acquisition of the Texas Memorial block of insurance policies, which were somewhat offset by lower investment yields. Pre-tax loss from operations was $297,054 and $265,893 for the three month periods ended March 31, 2011 and 2010, respectively. The higher current year pre-tax loss was driven by the previously mentioned reserve increases and higher claims in this segment as well as crediting rate spread pressure due to lower investment income yields.

Traditional & Universal Life Products

Traditional and Universal Life Products include traditional life and group life insurance products, certain annuities and universal life products. Revenues for this segment were $2,696,066 for the first quarter of 2011 (an increase of 5.7% compared to the first quarter of 2010). Revenues on this segment are primarily derived from the sale of term insurance products through banks, for which demand fluctuates along with economic conditions. While consumer credit markets remain tight, our recent products have performed well. Pre-tax income (loss) from operations was $238,739 and ($214,144) for the three month periods ended March 31, 2011 and 2010, respectively. The increase in pre-tax income was primarily attributable to improved claims within this segment along with the increase in sales.

Administrative & Financial Services

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

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

Revenues for this segment were $361,807 for the first quarter of 2011 (an increase of 40.1% compared to the first quarter of 2010). Pre-tax income from operations was $55,588 and $41,945 for the three month periods ended March 31, 2011 and 2010, respectively. These increases in revenue and pre-tax income are primarily related to the increase in service fees generated from our third party administration relationships compared to the prior period.

Corporate & Other

Corporate and Other consists of corporate accounts measured primarily by stockholders’ paid-in capital, contributed surplus, earned surplus, property and equipment, corporate-owned life insurance and other minor business lines which include group annuities and group and individual accident and health products. Revenues for this segment were $174,277 and $181,853 for the three month periods ended March 31, 2011 and 2010, respectively. Pre-tax income (loss) from operations was $60,881 and ($103,613) for the three month periods ended March 31, 2011 and 2010, respectively. While revenues were comparable between periods, pre-tax income was positively impacted by improved earnings within the non-life subsidiaries, most significantly within Investors Heritage Printing.

While we continue to expand the operations of Investors Heritage Financial, Investors Heritage Printing, At Need Funding and Heritage Funding, less than 1% of our consolidated revenues were generated by those subsidiaries. During the first three months of 2011, Investors Heritage Capital received no dividends from Investors Heritage Financial and no distributions from At Need Funding. However, we anticipate dividend payments from Investors Heritage Financial and distributions from At Need Funding during the remainder of 2011.

Federal Income Taxes

The provision (benefit) for federal income taxes is based on the estimated effective annual tax rate. Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Income before federal income taxes differs from taxable income principally due to the dividends-received deduction; the 404(k) dividend deduction; the small life insurance company tax deduction; and non-taxable effects of company-owned life insurance premiums, cash value growth and death benefit proceeds. Our effective tax rate was 30.6% and 27.2% for the quarters ended March 31, 2011 and 2010, respectively.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements as of March 31, 2011.

FORWARD LOOKING INFORMATION

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

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

ITEM 4. Controls and Procedures

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

PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings

Investors Heritage Capital is not involved in any legal proceedings. From time to time Investors Heritage Life is involved in litigation relating to claims arising out of its operations in the normal course of business. As of May 12, 2011, Investors Heritage Life is not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our financial condition or results of operations.

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

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

ITEM 3. Defaults Upon Senior Securities

None

ITEM 4. (Removed and Reserved)

ITEM 5. Other Information

None

ITEM 6. Exhibits

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

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

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: May 12, 2011	President

	BY: /s/Raymond L. Carr
	Raymond L. Carr
DATE: May 12, 2011	Vice President - Chief Financial Officer

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