Investors Heritage Capital Corp - FORM 10-K - EX-13 - EXHIBIT 13

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - Investors Heritage Capital Corp	Financial_Report.xls
EX-23 - EXHIBIT 23 - Investors Heritage Capital Corp	ex23.htm
EX-31.2 - EXHIBIT 31.2 - Investors Heritage Capital Corp	ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Investors Heritage Capital Corp	ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - Investors Heritage Capital Corp	ex32-1.htm
10-K - FORM 10-K - Investors Heritage Capital Corp	ihrc20141231_10k.htm

Exhibit 13

		investors Heritage





		2014 annual review







	table of contents


3		letter to our stockholders

5		management's discussion and analysis

21		management's report on internal control over financial reporting

22		report of independent registered public accounting firm

23		consolidated financial statements

28		notes to consolidated financial statements

56		corporate information

LETTER

TO OUR STOCKHOLDERS

Investors Heritage Capital Corporation and Investors Heritage Life Insurance Company had another solid year as we maintained our core markets and strategically expanded into new areas. In 2014 we worked to improve our internet capabilities for the public and our sales associates, developed new products and entered new sales markets. Continuing these efforts and recruiting in all markets are priorities for 2015.

In 2014 we hired two new Preneed Sales Managers. Recruitment of new funeral homes is a top priority for our Agency Department and sales managers. Sales of our Heritage FX final expense product, were down primarily due to ending our relationship with a national general agent responsible for most of the sales. In 2013 we entered the group association market and began selling group term insurance. Sales in this market continued to provide steady premium income. Another major market involves the sale of wealth preservation products through our marketing partnership with Puritan Financial. We were very pleased that direct sales exceeded expectations.

Our Third Party Administration work for non-affiliated companies continues to be an important segment of our operation. We added one new client in 2014. We will continue to provide outstanding service to our current clients and look to increase our client base in the future.

I hope that you will refer to the Management’s Discussion and Analysis beginning on page 5 for a more detailed report on our 2014 activities and financial results.

We unveiled our redesigned public website in 2014 (www.investorsheritage.com or www.ihlic.com). The site provides product information for consumers and producers, corporate governance and financial information, policy service forms, and job listings. We receive numerous service requests and inquiries weekly through the online service form.

On February 27, 2015, we launched our new “Doorway” agent portal for producers. We believe the new portal will not only be a benefit to our current sales associates, but will be a strong recruitment tool in our core and new markets. Users will have access to issued and pending policy information, completed and pending claim information as well as current and past commissions. Quotes for current products may also be generated and stored in the portal. Claims, applications, policy service forms and other documents can be uploaded to the home office through the portal. This portal will allow agents and managers to more closely monitor and manage their business. Features of the portal still in development include electronic applications and a premium payment system. Electronic applications are expected to streamline the underwriting and issue process as well as increase the number of completed/issued applications. Since the release we have received very positive feedback.

Larry Benton, our Preneed Sales Manager for Georgia, retired on January 1, 2015 after 18 years with us. Larry has been a great asset to Investors Heritage Life. He has brought on a number of Georgia funeral directors that have become great producers and friends to the Company. We wish Larry and his wife, Kathy, all the best in retirement.

Larry was instrumental in finding his replacement, Trev Fuller. Trev is a licensed funeral director and has varied experience in the funeral industry including preneed sales, casket sales as well as founding a pet cremation service. We hired Trev effective October 27, 2014 giving the two of them time to transition effectively.

We began planning for Larry’s retirement several years in advance and he released his South Carolina responsibilities when we had the opportunity to make a hire in that area. In February 2014, Jake Foxworth joined the Investors Heritage team as a Preneed Sales Manager for South Carolina and parts of North Carolina. Jake has 13 years of preneed experience with two other funeral service and insurance providers.

LETTER

TO OUR STOCKHOLDERS

Longtime employee, Bobby Russell, retired on February 28, 2014 after a 39 year career with us. During that time he held many positions with the Company. He retired as Vice President of Human Resources. We appreciate Bobby’s outstanding service to our Company and wish the best for him and his wife, Debbie. After working with Bobby for several years, Thomas Bookout, a ten year employee, has assumed the position of Assistant Vice President of Human Resources. During his ten years, Thomas has worked in nearly every department gaining an understanding of the various jobs and the type of person needed for those jobs.

Retired Vice President of Corporate Services, Howard Lee Graham, passed away on June 1, 2014. Howard was a longtime employee and dear friend to the Company and the Waterfield family. He retired in 2002 after nearly 37 years of service and then served on our Board of Directors until retiring in 2013. He was an outstanding contributor to our success and growth.

Our dedicated home office staff and sales personnel are vital to our past and continued success. I want to thank them all for their hard work and dedication. I also want to thank our Board of Directors for their support and thoughtful advice and counsel through the years.

	Respectfully submitted,


	Harry Lee Waterfield II
	Chairman, Chief Executive Officer

MANAGEMENT’S

DISCUSSION & ANALYSIS

EXECUTIVE OVERVIEW

The following discussion highlights significant factors impacting the consolidated operating results and financial condition of Investors Heritage Capital Corporation (“Investors Heritage Capital”) and its subsidiaries (collectively referred to as “we”, “us”, “our” or the “Company”) as of and for the year ended December 31, 2014, as compared with the year ended December 31, 2013. This supplementary financial information should be read in conjunction with the consolidated financial statements and related notes, all of which are integral parts of the following analysis of our results of operations and financial position.

Investors Heritage Capital is the parent company of Investors Heritage Life Insurance Company (“Investors Heritage Life”), Investors Heritage Financial Services Group, Inc. (“Investors Heritage Financial”), Investors Heritage Printing, Inc., and is the sole member of At Need Funding, LLC and Heritage Funding, LLC. Investors Heritage Capital and each subsidiary are domiciled in the Commonwealth of Kentucky. In excess of 99% of Investors Heritage Capital’s consolidated revenue is generated by Investors Heritage Life.

MAJOR MARKETS AND NEW AFFILIATIONS

Investors Heritage Life offers a full line of life insurance products including, but not limited to, whole life, term life, single premium life, multi-pay life and annuities. Investors Heritage Life’s primary lines of business are insurance policies and annuities utilized to fund preneed funeral contracts, policies sold in the senior wealth transfer market, final expense insurance, credit life and credit disability insurance, group term insurance sold through associations, and term life and reducing term life sold through financial institutions. We continue to actively develop new products and diversify distribution systems in order to broaden our marketing base.

We focus significant sales efforts in the preneed funeral market. We have established a strong marketing base allowing us to maintain solid premium production in our core market.

We currently market two products geared toward wealth preservation in the senior market – the Heritage Solution, a single premium life policy, and the Heritage Provider, a ten pay whole life and single premium immediate annuity combination. These products are currently being sold exclusively through our partnership with Puritan Financial Group and are being underwritten and issued using a third party underwriter with significant experience in that market. Prior to January 1, 2013, this business was being reinsured under a 50% coinsurance arrangement with Puritan Life Insurance Company of America. Effective January 1, 2013, this coinsurance agreement was amended to reinsure 25% of new business. Additionally, these products were re-priced effective January 1, 2013 to account for lower required valuation rates and the current economic environment. The statutory reserves ceded under this agreement are secured by a trust account located within the Commonwealth of Kentucky. Premiums generated during the years ended December 31, 2014 and 2013 from this partnership totaled approximately $10,918,000 and $10,591,000, respectively.

During 2013, Investors Heritage Life began assuming 75% of the risks on certain policies sold by Puritan Life Insurance Company of America and Sterling Investors Life Insurance Company. The products being assumed are identical to the Heritage Solution and Heritage Provider products currently being written by Investors Heritage Life. However, these reinsurance arrangements allow us to participate in the profitability of these products in certain states where we are not currently marketing. Premiums assumed under these agreements totaled approximately $3,310,000 and $10,033,000 for the years ended December 31, 2014 and 2013, respectively.

MANAGEMENT’S

DISCUSSION & ANALYSIS

On November 5, 2012, we entered into a loan agreement to borrow $2,000,000 in order to fund a credit agreement to Puritan Financial Companies, Inc. On November 25, 2014, this note was amended to extend the maturity date to November 25, 2019 to correlate with an amendment to the Puritan promissory note and marketing agreement, as discussed further below. The amended loan agreement calls for interest to be paid quarterly at a rate of 0.25% under the prime rate. The note requires monthly principal payments of at least $15,000 beginning December 5, 2014 with a balloon payment upon maturity. There is no penalty for prepayment. This note is collateralized with 55,000 shares of Investors Heritage Life Insurance Company common stock.

The borrowed funds were utilized to fund a credit agreement to Puritan Financial Companies, Inc. for $2,000,000, with interest at a rate of 1.75% above the prime rate. The promissory note and the marketing agreement with Puritan Financial Group were amended on August 28, 2014 to extend the maturity date to August 28, 2019. These amendments allow the Company to withhold 15% of Puritan Financial’s earned commissions on certain products to pay down the note. Additionally, the amended note calls for quarterly payments of principal and interest and requires Puritan Financial to pay at least $400,000 annually toward the outstanding balance of the note from 2015 until the balance is paid in full. Any unpaid principal balance together with all accrued interest shall be due and payable with a balloon payment upon maturity. Under this credit agreement, Puritan Financial Companies, Inc. and its wholly-owned subsidiary Puritan Financial Group have committed to an increased level of new business production on behalf of the Company. Additionally, Puritan Financial Companies, Inc. has issued warrants for 2,000,000 shares of common stock to the Company in exchange for this funding. This note is further collateralized by all the stock and other assets of Puritan Financial Companies, Inc. and each of its affiliated companies. Puritan Financial Companies, Inc. has another credit facility with a senior lender and the Company has a subordinate interest to the senior lender in all of the collateral which is security for this loan. The outstanding balance on this note receivable, which is included within other invested assets on the balance sheet, was $1,860,043 and $2,000,000 at December 31, 2014 and 2013, respectively.

We also marketed our Heritage Advantage final expense product through a third party national master general agent distribution system with an established record and extensive experience in this market. However, in late-2013, we ceased marketing this product in order to limit the production volume to effectively manage the initial surplus strain associated with the product. Premiums generated on this product during 2013 totaled approximately $1,797,000.

Investors Heritage Financial operates under marketing agreements with Investors Heritage Life. These arrangements have enabled Investors Heritage Financial and Investors Heritage Life to utilize their expertise in the marketing and administration of credit insurance products. Further, Investors Heritage Financial enables Investors Heritage Life to offer mortgage protection and ordinary life insurance products through financial institutions.

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

MANAGEMENT’S

DISCUSSION & ANALYSIS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

We hold fixed maturities and equity interests in a variety of companies. Additionally, we originate, underwrite and manage commercial mortgage loans, and we purchase residential mortgage loans through the secondary market. We also own certain investments in state-guaranteed receivables consisting of the future cash flow rights from lottery prize winners. We continuously evaluate all of our investments based on current economic conditions, credit loss experience and other developments. We evaluate the difference between the cost/amortized cost and estimated fair value of our investments to determine whether any decline in fair value is other-than-temporary in nature. This determination involves a degree of uncertainty.

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

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

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

MANAGEMENT’S

DISCUSSION & ANALYSIS

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

Our fixed maturities are Level 2 instruments, for which the fair value is derived from readily available pricing services utilizing recent trades and broker information. Certain liquid equity securities are considered Level 1 instruments and are valued based on publicly available market quotes in an active market. We hold approximately $384,000 in Level 3 financial instruments, comprising 0.1% of our total investments carried at fair value. Fair value for these instruments is derived from unobservable inputs such as non-binding broker quotes and internal models using unobservable assumptions about market participants.

Deferred Acquisition Costs

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

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

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

Policy Liabilities

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

MANAGEMENT’S

DISCUSSION & ANALYSIS

Income Taxes

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

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

Employee Benefit Plans

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

At December 31, 2014, our unfunded status with respect to our defined benefit pension plan was $5,141,442, compared to an unfunded status of $2,887,843 at December 31, 2013. This decline in funded status is due primarily to a decrease in the discount rate used to measure plan liabilities from 5% to 3.75%. The estimated net loss that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost in 2015 is approximately $762,000. We currently expect to contribute $300,000 to our plan during 2015, although this contribution is subject to change based on the results of current year funding analyses to be performed by plan actuaries. We continually monitor the performance of plan assets and growth in liabilities and funding necessities, utilizing independent and experienced consultants to assist in plan management.

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

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance regarding accounting for revenue recognition that identifies the accounting treatment for an entity’s contracts with customers. Certain contracts, including insurance contracts, are specifically excluded from this guidance. This guidance is effective for public entities for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. We have not yet adopted this guidance, but it is not expected to have a material impact on our financial position, cash flows or results of operations.

MANAGEMENT’S

DISCUSSION & ANALYSIS

In August 2014, the FASB issued guidance that requires management to evaluate whether there are concerns or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date the financial statements are issued. Disclosures are required when certain criteria are met. This guidance is effective for annual periods ending after December 15, 2016 and for annual periods and interim periods thereafter. We have not yet adopted this guidance, but it is not expected to have a material impact on the consolidated financial statements.

In January 2014, the FASB issued updated guidance for troubled debt restructurings clarifying when an in substance repossession or foreclosure occurs, and when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The new guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2014. This guidance can be elected for prospective adoption or by using a modified retrospective transition method. We have not yet adopted this guidance, but it is not expected to have a significant impact on our consolidated financial position, results of operations or financial statement disclosures.

In April 2014, the FASB issued updated guidance that changes the criteria for reporting discontinued operations and introduces new disclosures. The new guidance is effective prospectively to new disposals and new classifications of disposal groups as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. Early adoption is permitted for new disposals or new classifications as held for sale that have not been reported in financial statements previously issued or available for issuance. We have not yet adopted this guidance, but it is not expected to have a significant impact on our consolidated financial position, results of operations or financial statement disclosures.

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

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. Accordingly, our business segments are as follows:

■

Preneed and Burial Products segment includes both life and annuity products sold by funeral directors or affiliated agents to fund prearranged funerals or to provide for the insured’s final expenses.

■

Traditional and Universal Life Products segment includes senior wealth transfer products, traditional life, group life, certain annuities and universal life products.

■

Administrative and Financial Services segment includes the administration of credit life and credit accident and health insurance products as well as the fees generated from our third party administration arrangements.

■

Corporate and Other segment consists of corporate accounts primarily including stockholders' paid-in capital, earned surplus, property and equipment, company-owned life insurance and other minor business lines which include group annuities and group and individual accident and health products.

Please see Note 9 to the consolidated financial statements for additional information regarding segment data.

MANAGEMENT’S

DISCUSSION & ANALYSIS

OPERATING RESULTS

Consolidated Operations

Consolidated revenues decreased approximately $9,223,000 during 2014. This decrease was primarily driven by a decrease in direct and assumed premiums and a reduction in net realized investment gains.

We experienced a decrease in net premiums of approximately $8,118,000, or 14.6%, during 2014. This decrease was predominantly due to lower assumed premiums from the Puritan product offerings as compared to the prior year, the discontinuation of our Heritage Advantage product sold through the national master general agent distribution system, and unanticipated weather-related impacts that hampered new sales across all segments during the first quarter of 2014.

Net investment income increased approximately $502,000, or 2.4%, during 2014 due primarily to increased investment income generated by our investments in residential mortgage loans and dividend-paying common stocks coupled with reduced investment expense allocations. Our mortgage loan portfolio provides greater investment yields than the current fixed maturity market. Low new fixed maturity investment yields continue to put downward pressure on our investment income. We continue to seek high quality investments while considering alternative investments that can be used to enhance future investment income.

Net realized gains were $710,632 and $2,485,505 during 2014 and 2013, respectively. The 2014 realized gains primarily resulted from the sales of certain high-yield fixed maturities as we attempted to reduce our portfolio allocation to this investment class. The realized gains during 2013 include significant gains taken as part of our strategic initiative to take certain unrealized gains into operations. During 2013, we also recognized a realized loss of $14,006 relative to the demolition of a Company-owned building. We experienced no other-than-temporary impairments during these periods.

Other income increased approximately $169,000, or 11.9%, during 2014. This increase is primarily due to $141,907 of net life insurance proceeds received under a company-owned life insurance policy upon the death of a former board member.

Total benefits and expenses decreased approximately $8,792,000, or 11.3%, during 2014. This decrease is primarily driven by the change in reserves, decreased claims and decreased commissions associated with our lower premium volume. These changes were partially offset by an increase in net amortization of deferred acquisition costs attributable to lower expense deferrals due to the reduction in new business in the current year. Additionally, we experienced an increase in other general expenses caused both by a reduction in expenses allocated to investment income as well as smaller increases in other general expense categories, including employee salary and benefits.

At December 31, 2013, death and other benefits includes an additional amount totaling $2,380,617 relative to a comparison of our life insurance policies against the Social Security Death Master File. This comparison was performed in compliance with a recently enacted Kentucky state law which follows a model law adopted by the National Conference of Insurance Legislators. This amount primarily affects the traditional and universal life segment, along with a much smaller impact on the final expense portion of the preneed and burial segment. We are in the process of researching the potential matches to determine that a valid claim exists, to locate beneficiaries and to pay benefits accordingly.

MANAGEMENT’S

DISCUSSION & ANALYSIS

After providing for federal income taxes, our net income was $1,266,184 with net income per share of $1.12 for 2014 as compared to net income of $1,795,686 and net income per share of $1.58 for 2013.

We declared a dividend of $0.20 per share on February 13, 2014 to shareholders of record on March 14, 2014. This dividend was paid on April 7, 2014. We declared a dividend of $0.25 per share on February 14, 2013 to shareholders of record on March 15, 2013. This dividend was paid on April 7, 2013.

Preneed & Burial Products

Revenues for the preneed and burial products business segment decreased approximately $2,012,000, or 4.1%, in 2014 compared to 2013. This anticipated decrease was primarily due to our decision to discontinue our Heritage Advantage product sold through the national master general agent distribution system along with the unanticipated weather-related impact that affected new sales of our preneed products during the first quarter of 2014. Our pre-tax income decreased approximately $850,000 in 2014, resulting in a pre-tax loss of approximately $34,000. This decrease was driven primarily by the reduction in sales volume which was partially offset by the change in reserves and reductions in claims and commissions associated with the reduced sales.

The table below provides the detail of premiums for the top ten producing states for this segment:

Preneed Premium Production
First Year and Single
Year Ended December 31

	2014		2013
North Carolina	$	6,572,901	$	7,128,956
Kentucky		6,068,600		6,095,194
Tennessee		3,843,423		4,124,860
Georgia		2,370,391		2,423,090
Ohio		1,872,173		1,896,344
Virginia		1,840,765		1,731,368
Indiana		1,177,977		1,384,911
Illinois		464,044		295,469
South Carolina		414,214		513,940
Michigan		410,401		400,329
All Other States		869,826		1,405,512
TOTAL	$	25,904,715	$	27,399,973

We currently market the Legacy Gold and Heritage FX Final Expense products within this segment. The Legacy Gold life insurance and annuity product series is sold in the preneed market in conjunction with prearranged funerals. The Legacy Gold series includes both single premium and multi-pay policies, and both underwritten and guaranteed issue options are available. The Heritage FX Final Expense product was introduced during the third quarter of 2013 as a replacement for the Heritage Final Expense II product. The Heritage FX product is a non-participating whole life insurance product with simplified underwriting, sold in the final expense market. The Heritage FX product is structured to allow increased production while mitigating surplus strain through the use of reinsurance.

MANAGEMENT’S

DISCUSSION & ANALYSIS

Traditional & Universal Life Products

Revenues for 2014 decreased approximately $7,424,000, or 25.9%, while pre-tax income increased approximately $318,000. The decrease in revenue was primarily due to lower assumed premiums received from the Puritan product offerings in comparison to the prior year. Revenue was also impacted by the reduction in realized investment gains due to the 2013 strategic sales effort of certain fixed maturities in order to realize capital gains. The increase in pre-tax income was primarily due to increased profits generated from the Puritan business.

Within this segment, we currently market two products geared toward wealth preservation in the senior market – the Heritage Solution, a single premium life policy, and the Heritage Provider, a ten pay whole life and single premium immediate annuity combination. These products are currently being sold exclusively through our partnership with Puritan Financial Group and are being underwritten and issued using a third party underwriter with significant experience in that market. Prior to January 1, 2013, this business was being reinsured under a 50% coinsurance arrangement with Puritan Life Insurance Company of America. Effective January 1, 2013, this coinsurance agreement was amended to reinsure 25% of new business. Additionally, these products were re-priced effective January 1, 2013 to account for lower required valuation rates and the current economic environment.

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

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

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

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

MANAGEMENT’S

DISCUSSION & ANALYSIS

Administrative & Financial Services

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

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

Revenues for this segment increased approximately $29,000, or 2.4%, in 2014 while pre-tax income decreased approximately $22,000. The increase in revenues was primarily due to an increase in fees generated from our third party administrative relationships. The decrease in pre-tax income was primarily due to higher general expenses in comparison to the prior year.

Corporate & Other

Corporate & 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 from this segment increased approximately $185,000, or 23.2%, in 2014, while pre-tax income increased $123,000. The increases in revenues and pre-tax income were primarily due to the receipt of $141,907 of net life insurance proceeds under a company-owned life insurance policy upon the death of a former board member.

During 2014, Investors Heritage Financial's revenues were approximately $152,000, down $14,000 compared to 2013. Investors Heritage Financial paid dividends to Investors Heritage Capital totaling $85,000 during 2014. Revenues from Investors Heritage Printing were approximately $154,000 in 2014, down $21,000 compared to 2013. Investors Heritage Printing paid dividends to Investors Heritage Capital totaling $10,000 during 2014. Revenues from At Need Funding were approximately $100,000 in 2014, up $4,000 compared to 2013. At Need Funding paid no distributions to Investors Heritage Capital during 2014. Revenues from all non-Investors Heritage Life sources constitute less than 1% of total consolidated revenues in 2014, and management is working on the continued growth and profitability of each of the non-life subsidiaries.

INVESTMENTS, LIQUIDITY AND CAPITAL RESOURCES

Investments

Together with our outside investment advisor and portfolio manager, we manage the fixed income investment portfolio to achieve the Company’s investment goals, which include the diversification of credit risk, the maintenance of adequate portfolio liquidity, the management of interest rate risk and the maximization of investment returns. The primary investment objectives are to maintain the quality and integrity of the fixed income portfolio while improving the total return on investments.

MANAGEMENT’S

DISCUSSION & ANALYSIS

We maintain a sound, conservative investment strategy. As of December 31, 2014, 88.7% of our total invested assets consisted of fixed income securities, compared to 90.8% at December 31, 2013. At December 31, 2014 and 2013, our fixed income investments were 98.5% and 96.0% investment grade, respectively, as rated by Standard & Poor's. The Standard & Poor's average quality rating of our fixed income portfolio holdings as of December 31, 2014 was A. None of our investments are in default.

The fixed income portfolio is diversified among sectors. At December 31, 2014 and 2013, the fixed income portfolio was allocated as follows:

	December 31
	2014			2013
Corporate:
Bank and finance		14.3	%		13.7	%
Industrial and miscellaneous		41.4	%		40.8	%
Government		6.7	%		8.3	%
Mortgage-backed securities		11.8	%		12.4	%
Foreign		15.3	%		13.8	%
Asset-backed securities		0.3	%		0.7	%
States and political subdivisions		10.2	%		10.3	%

The fixed maturities and equity securities within our portfolio are in a net unrealized gain position of approximately $27,596,000 at December 31, 2014. Please see Note 3 to the consolidated financial statements for additional information regarding these fair values.

The fixed income portfolio includes approximately $50,762,000 (at fair value) of non-U.S. Government mortgage-backed securities ("MBS"). MBS have historically added value to the portfolio and our outside investment advisor has provided the expertise to purchase MBS with confidence that the credit ratings have been properly analyzed and that the investment properly suits our asset and liability needs.

There have been concerns expressed by rating agencies, various regulators and other constituencies regarding investments in MBS by insurers and other financial institutions. Although these highly rated securities provide excellent credit quality, their liquidity risk must be monitored. Except for seven commercial-backed mortgages of approximately $8,136,000, all of the collateral of the MBS owned are guaranteed by the Government National Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC").

The FNMA and FHLMC securities are structured either as publicly traded collateralized mortgage obligations ("CMO") or pass-throughs. Unlike most corporate or real estate debt, the primary concern with MBS is the uncertainty of timing of cash flows due to prepayment assumptions rather than the possibility of loss of principal.

MANAGEMENT’S

DISCUSSION & ANALYSIS

CMO holdings represent approximately 28% of the total MBS portfolio. In accordance with relevant accounting guidance, when these securities are purchased at a discount or premium, the income yield will vary with changes in prepayment speeds due to the change in accretion of discount or amortization of premium, as well as the timing of the basic principal and interest cash flows. The overall impact of the CMO’s variability in yields on the portfolio has not been significant in relation to the yield and cash flows of the total invested assets. More importantly, the investment portfolio has no exposure to more volatile, high-risk CMO’s, such as those structured to share in residual cash flows. Except for two sequential pay CMO’s totaling approximately $5,270,000, the CMO’s held are either planned amortization class bonds or support class bonds, both of which are structured to provide more certain cash flows to the investor and therefore have reduced prepayment risk. Based on our analysis of the investment portfolio, there are no impairment issues with respect to our CMO’s.

Pass-throughs comprise the remainder of MBS owned, representing approximately 72% of the total MBS portfolio. Pass-throughs are FNMA or FHLMC guaranteed MBS that, simply stated, pass through interest and principal payments to the investors in accordance with their respective ownership percentage.

We continuously monitor the investment risk within our portfolio, including the risk associated with subprime lending with our CMO investments. As of December 31, 2014, we have no investments with any level of direct subprime exposure. Additionally, we have no Alt-A bond exposure within our current holdings.

During the second quarter of 2013, we entered into an investment advisory agreement to purchase common and preferred stocks in stable areas within the real estate sector. The investment advisor has a history of strong performance within these markets. The majority of these funds have been invested in a diversified assortment of regularly traded, exchange listed common stocks. As of December 31, 2014, the largest individual stock position within this sector had a fair value of approximately $284,000. We believe the unrealized losses in our common stock portfolio are temporary in nature given the credit quality of the issuers. We believe that this investment will generate positive future results by providing a slightly increased and fully managed exposure to equity markets.

During the third quarter of 2013, we initiated a program to strategically sell certain fixed maturities to generate realized gains within the investment portfolio. We generated total gross realized gains on fixed maturity sales, including the effects of the strategic sales, of approximately $2,513,000 on fixed maturity sales and maturity proceeds totaling approximately $93,161,000. Included within these amounts is the sale of our $3,000,000 Morgan Stanley market-indexed note for $3,918,083, generating a realized gain of $918,083. This realized gain was partially offset by the reduction in investment income previously recognized that was associated with the removal of the mark-to-market adjustment.

Additionally, Investors Heritage Life engages in commercial and residential mortgage lending. As of December 31, 2014 and 2013, 41.9% and 79.6%, respectively, of these investments were in commercial properties. Our commercial mortgage loans are either originated in-house or through two mortgage brokers, are secured by first mortgages on the real estate and generally carry personal guarantees by the borrowers. Loan-to-value ratios of 80% or less and debt service coverage from existing cash flows of 115% or higher are generally required. We minimize credit risk in our mortgage loan portfolio through various methods, including stringently underwriting the loan request, maintaining small average loan balances, and reviewing larger mortgage loans on an annual basis.

During the third quarter of 2013, we began evaluating and purchasing residential mortgage loans through the secondary market. We review each mortgage loan opportunity individually, considering both the value of the underlying property and the credit worthiness of the borrower. We are utilizing a third party servicer to administer these loans. We purchased residential mortgages through the secondary market totaling approximately $14,010,000 and $2,116,000 during 2014 and 2013, respectively. We currently anticipate evaluating and making additional residential mortgage loan investments assuming they meet our investment goals and criteria.

MANAGEMENT’S

DISCUSSION & ANALYSIS

As of December 31, 2014, our average loan balance is $218,218 and the average loan-to-value is 58%. The largest loan currently held is $966,665. Our mortgage loans are spread across properties located in 21 states, with approximately 70.8% of our loans located in the states of Florida, California, Kentucky, Illinois, and Georgia. At December 31, 2014 and 2013, 6.1% and 4.0% of invested assets consisted of mortgage loans, respectively.

The portfolio consists of the following property types:

	December 31
	2014			2013
Residential		52.7	%		11.4	%
Retail		35.3	%		68.1	%
Apartments		5.4	%		9.0	%
Office		2.3	%		4.0	%
Medical		1.9	%		3.2	%
Industrial		1.5	%		2.8	%
Other		0.9	%		1.5	%

We are familiar with our mortgage loan markets and given our low loan-to-value ratios, we do not believe that there is a significant risk of loss on our mortgage loan portfolio. We have been successful in adding value to the total investment portfolio through mortgage loan originations and secondary market purchases due to the fact that yields realized from the mortgage loan portfolio are generally higher than yields realized from fixed income investments. Value has also been added because the mortgage loan portfolio has consistently performed well. As of December 31, 2014 and 2013, we had no non-performing mortgage loans, which would include loans past due 90 days or more, loans in process of foreclosure, restructured loans and real estate acquired through foreclosure.

We own certain investments in state-guaranteed receivables. These investments represent an assignment of the future rights to cash flows from lottery winners purchased at a discounted price. Payments on these investments are made by state run lotteries and guaranteed by the states. As these payment streams are secured by the states themselves, a key function of our due diligence is the assessment of the states’ ability to meet these obligations. Additionally, each state generally withholds income tax from each payment for which we must file for reimbursement of such tax annually. We carry the state-guaranteed receivables at their amortized cost basis on the balance sheet. As of December 31, 2014, we held approximately $7,917,000 in state-guaranteed receivables, with the largest concentrations in the states of New York, Massachusetts and Georgia totaling approximately $3,695,000, $1,970,000 and $1,468,000, respectively. At December 31, 2014 and 2013, 1.6% and 1.8%, respectively, of invested assets consisted of state-guaranteed receivables.

Liquidity and Capital Resources

The quality of our investment portfolio and the current level of stockholders' equity continue to provide a sound financial base as we strive to expand our marketing system and to offer competitive, quality products. Our investment portfolio continues to provide financial stability. It is management's opinion that we have adequate cash flows both on a long-term and short-term basis as evidenced by the net cash flows provided by operating activities in the consolidated statements of cash flows. Investors Heritage Life’s primary sources of cash flows used to meet short-term and long-term cash requirements are insurance premiums, which include mortality and expense charges, investment income, and administrative service fees.

MANAGEMENT’S

DISCUSSION & ANALYSIS

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

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

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

The stability of our liquidity is found in our conservative approach to product development and in the strength and stability of our fixed income portfolio and mortgage loans. Liquidity is also managed by laddering maturities of our fixed income portfolio. The average duration of our fixed income investments is 5.6 years with approximately $8,969,000 due within twelve months and approximately $75,338,000 due within the following four years. Historically, management has anticipated that all such investments will be held until maturity. However, one of the responsibilities of our independent portfolio manager is to constantly monitor the credit rating of our fixed income investments to determine if rating changes of any investment requires action by management. As explained in detail in Note 1 to the consolidated financial statements, all fixed income securities and all marketable equity securities are classified as available-for-sale and are carried at fair value.

On November 25, 2014, Investors Heritage Capital entered into a line of credit agreement for $1,500,000, maturing on November 25, 2016. This line of credit is designated for the purpose of funding the purchase of agent debit balance receivables from Investors Heritage Life. These agent debit balance receivables will be purchased by Investors Heritage Capital at a discount with servicing retained by Investors Heritage Life. Borrowings under the line of credit will be collateralized by the agent debit balances. This line of credit requires interest to be paid monthly at the prime rate. We have not yet borrowed any amounts under this line of credit.

On November 5, 2012, we entered into a loan agreement to borrow $2,000,000 in order to fund a credit agreement to Puritan Financial Companies, Inc. On November 25, 2014, this note was amended to extend the maturity date to November 25, 2019 to correlate with an amendment to the Puritan credit agreement, as discussed further below. The amended loan agreement calls for interest to be paid quarterly at a rate of 0.25% under the prime rate. The note requires monthly principal payments of at least $15,000 beginning December 5, 2014 with a balloon payment upon maturity. There is no penalty for prepayment. This note is collateralized with 55,000 shares of Investors Heritage Life Insurance Company common stock. At December 31, 2014, the outstanding principal balance on the bank note was $1,781,010.

MANAGEMENT’S

DISCUSSION & ANALYSIS

The borrowed funds were utilized to fund a credit agreement to Puritan Financial Companies, Inc. for $2,000,000, with interest at a rate of 1.75% above the prime rate. This agreement was amended on August 28, 2014 to extend the maturity date to August 28, 2019. This note allows the Company to withhold 15% of Puritan Financial’s earned commissions on certain products to pay down the note. Additionally, the amended note calls for quarterly payments of principal and interest and requires Puritan Financial to pay at least $400,000 annually toward the outstanding balance of the note from 2015 until the balance is paid in full. Any unpaid principal balance together with all accrued interest shall be due and payable with a balloon payment upon maturity. Under this credit agreement, Puritan Financial Companies, Inc. and its wholly-owned subsidiary Puritan Financial Group have committed to an increased level of new business production on behalf of the Company. Additionally, Puritan Financial Companies, Inc. has issued warrants for 2,000,000 shares of common stock to the Company in exchange for this funding. This note is further collateralized by all the stock and other assets of Puritan Financial Companies, Inc. and each of its affiliated companies. Puritan Financial Companies, Inc. has another credit facility with a senior lender and the Company has a subordinate interest to the senior lender in all of the collateral which is security for this loan. The outstanding balance on this note receivable, which is included within other invested assets on the balance sheet, was $1,860,043 at December 31, 2014.

Effective September 27, 2013, we renewed for two years our $1,000,000 line of credit for At Need Funding, which is used for the purpose of funding at-need funerals secured by the assignment of verified, incontestable life insurance policies. Effective September 27, 2013, we also renewed for two years our $150,000 Investors Heritage Capital operating line of credit. These lines of credit require interest to be paid monthly at the prime rate, with a floor of 3.25%. At December 31, 2014, the outstanding principal balance on the At Need Funding line of credit was $727,566. At December 31, 2014, there was no amount outstanding on the operating line of credit.

On February 3, 2005, Investors Heritage Capital borrowed $3,650,000 to finance the purchase of certain home office property previously owned by Investors Heritage Life at a purchase price of $3,650,000. The proceeds received by Investors Heritage Life were used to repay their surplus notes to Investors Heritage Capital. Additionally, Investors Heritage Capital used such proceeds to repay the $3,000,000 bank note outstanding at December 31, 2004. This transaction was approved by the Kentucky Department of Insurance. The remaining balance on this note was paid in full during 2014.

We are a member of the Federal Home Loan Bank of Cincinnati, Ohio by way of our investment in shares of their common stock. As a member, we have access to both short-term and long-term borrowings at below market rates. Borrowings under this program are collateralized by securities within our investment portfolio. To this point, we have not needed to access this borrowing capacity.

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 as of December 31, 2014, and we are in compliance with all debt covenant requirements.

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

Other than the items disclosed in Note 7 to the consolidated financial statements and increased federal and state regulatory reporting requirements which generally increase administrative expenses, management is not aware of any current recommendations by any regulatory authority which, if implemented, would have any material effect on our liquidity, capital resources or operations.

MANAGEMENT’S

DISCUSSION & ANALYSIS

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 shareholders that is discussed in more detail in Note 7 to the consolidated financial statements.

REGULATORY MATTERS

The statutory capital and surplus of Investors Heritage Life increased approximately $656,000 in 2014. The increase in statutory capital and surplus in 2014 is due primarily to net income and unrealized appreciation on equity securities, which were partially offset by an increase in the asset valuation reserve and dividends paid to Investors Heritage Capital totaling $275,000 during 2014. Investors Heritage Life produced a statutory operating gain of approximately $774,000 and $671,000 in 2014 and 2013, respectively, before the effect of the realized gains (losses). For additional discussion on statutory accounting practices refer to Note 8 to the consolidated financial statements.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements as of December 31, 2014.

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 our products, investment spreads and yields or the earnings and profitability of our activities.

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 laws 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.

MANAGEMENT’S report on internal

control over financial reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles. Our accounting policies and internal controls over financial reporting, established and maintained by management, are under the general oversight of our Audit Committee.

Our internal control over financial reporting includes those policies and procedures that:

■

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

■

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

■

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has assessed our internal control over financial reporting as of December 31, 2014. The standard measures adopted by management in making its evaluation are the measures in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based upon its assessment, management has concluded that our internal control over financial reporting is effective at December 31, 2014, and that there were no material weaknesses in our internal control over financial reporting as of that date.

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

report on inDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Investors Heritage Capital Corporation

We have audited the accompanying consolidated balance sheets of Investors Heritage Capital Corporation (“the Company”) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income (loss), stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Investors Heritage Capital Corporation as of December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Louisville, Kentucky

March 20, 2015

INVESTORS HERITAGE CAPITAL CORPORATION

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2014 AND 2013

	2014		2013
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost: 2014 - $403,596,261; 2013- $402,396,191)	$	430,117,478	$	417,909,105
Equity securities (cost: 2014 - $6,331,436; 2013 - $5,888,361)		7,405,819		5,818,333
Mortgage loans on real estate		29,459,436		18,601,722
Policy loans		6,665,493		6,674,887
State-guaranteed receivables		7,917,379		8,085,107
Other invested assets		3,270,848		3,181,182
Total investments		484,836,453		460,270,336

Cash and cash equivalents		1,870,867		4,143,291
Accrued investment income		5,190,740		5,191,253
Due premiums		3,217,136		3,368,008
Deferred acquisition costs		17,847,907		18,822,481
Value of business acquired		301,037		386,056
Leased property under capital leases		555,251		1,005,523
Property and equipment		1,000,120		1,042,748
Cash value of company-owned life insurance		12,441,833		11,808,248
Other assets		2,041,050		1,901,946
Amounts recoverable from reinsurers		55,910,993		55,669,088
Total assets	$	585,213,387	$	563,608,978

LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES
Policy liabilities:
Benefit reserves	$	490,126,730	$	480,151,818
Unearned premium reserves		7,812,972		8,189,640
Policy claims		2,821,106		3,672,474
Liability for deposit-type contracts		3,432,793		3,283,960
Reserves for dividends and endowments and other		391,439		408,555
Total policy liabilities		504,585,040		495,706,447
Deferred federal income tax liability		7,785,450		4,604,891
Obligations under capital leases		553,028		943,488
Notes payable		2,508,576		3,031,942
Accrued pension liability		5,141,442		2,887,843
Other liabilities		4,103,365		2,787,099
Total liabilities		524,676,901		509,961,710

STOCKHOLDERS' EQUITY
Common stock (shares issued: 2014-1,123,980; 2013-1,128,583)		1,123,980		1,128,583
Paid-in surplus		8,908,243		8,908,243
Accumulated other comprehensive income		12,704,319		6,751,991
Retained earnings		37,799,944		36,858,451
Total stockholders' equity		60,536,486		53,647,268
Total liabilities and stockholders' equity	$	585,213,387	$	563,608,978

See Notes to Consolidated Financial Statements.

INVESTORS HERITAGE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

	2014			2013
REVENUE
Premiums and other considerations	$	61,116,195		$	69,653,412
Premiums ceded		(13,687,074	)		(14,105,855	)
Net premiums		47,429,121			55,547,557

Investment income, net of expenses		21,162,735			20,661,142
Net realized gains on investments		710,632			2,485,505
Other income		1,595,300			1,426,170
Total revenue		70,897,788			80,120,374

BENEFITS AND EXPENSES
Death and other benefits		40,568,665			42,913,542
Guaranteed annual endowments		413,135			426,582
Dividends to policyholders		339,945			399,017
Increase in benefit reserves and unearned premiums		11,522,583			17,919,752
Acquisition costs deferred		(6,678,626	)		(8,738,111	)
Amortization of deferred acquisition costs		7,359,964			7,464,380
Commissions		4,564,713			7,008,578
Other general and administrative expenses		11,111,572			10,600,064
Total benefits and expenses		69,201,951			77,993,804

INCOME BEFORE FEDERAL INCOME TAXES		1,695,837			2,126,570

PROVISION (BENEFIT) FOR FEDERAL INCOME TAXES
Current		315,444			430,429
Deferred		114,209			(99,545	)
Total federal income taxes		429,653			330,884


NET INCOME	$	1,266,184		$	1,795,686


BASIC AND DILUTED NET EARNINGS PER SHARE	$	1.12		$	1.58

See Notes to Consolidated Financial Statements.

INVESTORS HERITAGE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

	2014			2013

NET INCOME	$	1,266,184		$	1,795,686

OTHER COMPREHENSIVE INCOME (LOSS):
Change in net unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during period		12,863,346			(26,280,225	)
Reclassification adjustment for gains included in income		(710,632	)		(2,499,511	)
Adjustment for effects of deferred acquisition costs		(293,231	)		894,503
Net unrealized gains (losses) on investments		11,859,483			(27,885,233	)
Change in defined benefit pension plan:
Actuarial net gain (loss) on pension plan		(3,231,218	)		2,839,812
Amortization of actuarial net loss in net periodic pension cost		390,413			772,646
Net change in defined benefit pension plan		(2,840,805	)		3,612,458

Other comprehensive income (loss) before income taxes		9,018,678			(24,272,775	)

Income tax expense (benefit)		3,066,350			(8,485,042	)

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES		5,952,328			(15,787,733	)

COMPREHENSIVE INCOME (LOSS)	$	7,218,512		$	(13,992,047	)

See Notes to Consolidated Financial Statements.

INVESTORS HERITAGE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

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

BALANCE, JANUARY 1, 2013	$	1,141,886		$	8,908,243	$	22,539,724		$	35,642,931		$	68,232,784

Net income		-			-		-			1,795,686			1,795,686
Other comprehensive loss, net		-			-		(15,787,733	)		-			(15,787,733	)
Cash dividends		-			-		-			(285,471	)		(285,471	)
Repurchases of common stock, net		(13,303	)		-		-			(294,695	)		(307,998	)
BALANCE, DECEMBER 31, 2013	$	1,128,583		$	8,908,243	$	6,751,991		$	36,858,451		$	53,647,268

Net income		-			-		-			1,266,184			1,266,184
Other comprehensive income, net		-			-		5,952,328			-			5,952,328
Cash dividends		-			-		-			(225,717	)		(225,717	)
Repurchases of common stock, net		(4,603	)		-		-			(98,974	)		(103,577	)
BALANCE, DECEMBER 31, 2014	$	1,123,980		$	8,908,243	$	12,704,319		$	37,799,944		$	60,536,486

See Notes to Consolidated Financial Statements.

INVESTORS HERITAGE CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

	2014			2013
OPERATING ACTIVITIES
Net income	$	1,266,184		$	1,795,686
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized gains on investments		(710,632	)		(2,485,505	)
Expense (benefit) for deferred federal income taxes		114,209			(99,545	)
Amortization of deferred acquisition costs		7,359,964			7,464,380
Acquisition costs deferred		(6,678,626	)		(8,738,111	)
Net adjustment for premium and discount on investments		(278,027	)		(39,768	)
Depreciation and other amortization		735,741			752,103
Change in value of derivative investment		-			(2,400	)
Changes in operating assets and liabilities:
Accrued investment income		513			(27,470	)
Due premiums		150,872			54,621
Cash value of company-owned life insurance		(633,585	)		(963,759	)
Amounts recoverable from reinsurers		(241,905	)		(1,871,963	)
Benefit reserves		12,701,323			18,848,611
Policy claims		(851,368	)		1,777,747
Liability for deposit-type contracts		148,833			136,502
Reserves for dividends and endowments and other		(17,116	)		(37,461	)
Other assets and other liabilities		199,497			(1,891,668	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		13,265,877			14,672,000
INVESTING ACTIVITIES
Purchases of available-for-sale securities		(47,681,113	)		(105,730,100	)
Sales of available-for-sale securities		18,366,907			36,136,804
Maturities of available-for-sale securities		28,079,553			58,762,403
Acquisitions of mortgage loans on real estate		(14,310,374	)		(3,637,086	)
Payments of mortgage loans on real estate		3,475,019			1,659,724
Payments of state-guaranteed receivables		725,540			595,540
Sale of investment in derivative		-			645,000
Net reductions (additions) in other investments		(80,272	)		331,865
Net additions to property and equipment		(157,822	)		(194,856	)
NET CASH USED IN INVESTING ACTIVITIES		(11,582,562	)		(11,430,706	)
FINANCING ACTIVITIES
Receipts from universal life policies credited to policyholder account balances		4,932,397			5,142,181
Return of policyholder account balances on universal life policies		(8,035,476	)		(9,209,949	)
Payments on notes payable		(3,614,374	)		(3,864,471	)
Proceeds from notes payable		3,091,008			3,417,800
Repurchases of common stock, net		(103,577	)		(307,998	)
Dividends paid		(225,717	)		(285,471	)
NET CASH USED IN FINANCING ACTIVITIES		(3,955,739	)		(5,107,908	)
DECREASE IN CASH AND CASH EQUIVALENTS		(2,272,424	)		(1,866,614	)
Cash and cash equivalents at beginning of year		4,143,291			6,009,905
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	1,870,867		$	4,143,291

SUPPLEMENTAL INFORMATION
Cash paid during year for federal income taxes	$	181,385		$	722,770

See Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED

financial STATEMENTS

NOTE 1 - Nature of Operations and Accounting Policies

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

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

Basis of Presentation: The accompanying consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).

Principles of Consolidation: The consolidated financial statements include the accounts of the wholly-owned subsidiaries of Investors Heritage Capital, which are Investors Heritage Life and its subsidiary, Investors Underwriters, Inc., Investors Heritage Printing, Investors Heritage Financial, At Need Funding and Heritage Funding. Intercompany transactions are eliminated in the Company's consolidated financial statements.

Use of Estimates: The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Investments: The Company classifies all fixed maturities and equity securities as available-for-sale. Securities classified as available-for-sale are carried at fair value with unrealized appreciation (depreciation) relating to temporary market value changes recorded as an adjustment to other comprehensive income (loss), net of adjustments to deferred acquisition costs and federal income taxes.

Premiums and discounts on fixed maturity investments are amortized into income using the interest method. Anticipated prepayments on mortgage-backed securities are considered in the determination of the effective yield on such securities. If a difference arises between anticipated prepayments and actual prepayments, the carrying amounts of the investments are adjusted with a corresponding charge or credit to interest income.

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, as discussed in further detail in Note 2 to the consolidated financial statements.

If an other-than-temporary impairment occurs with respect to a bond, the reduced book value is amortized back to the security’s expected recovery value over the remaining term of the bond. The Company continues to review the security for further impairment that would prompt another write-down in the value.

Mortgage loans are carried at their aggregate principal balance, adjusted for any unamortized premium or discount.

NOTES TO CONSOLIDATED

financial STATEMENTS

Policy loans are carried at their aggregate principal balance.

State-guaranteed receivables represent an assignment of the future rights to cash flows from lottery winners purchased at a discounted price. Payments on these investments are made by state run lotteries and guaranteed by the states. The state-guaranteed receivables are carried at their amortized cost basis.

Other invested assets include real estate investments and notes receivable. Real estate investments are carried at cost less accumulated depreciation. Notes receivable are carried at their aggregate principal balance.

Short-term investments represent securities with maturity dates within one year but exceeding three months. These securities are carried at amortized cost, which approximates fair value.

Cash equivalents include money market funds on deposit at various financial institutions with contractual maturity dates within three months at the time of purchase.

Deferred Acquisition Costs: Commissions and other acquisition costs, which vary with and are primarily related to the production of new business, are deferred and amortized over the life of the related policies (refer to Revenues and Expenses discussed later regarding amortization methods). Recoverability of deferred acquisition costs is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense.

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 fixed income 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 and universal life insurance products 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.

Value of Business Acquired: Value of business acquired represents the estimated value assigned to the insurance in force of the assumed policy obligations at the date of acquisition of a block of policies. Amortization of value of business acquired recognized in 2014 and 2013 totaled $85,019 and $127,611, respectively. Accumulated amortization was $620,319 and $535,300 at December 31, 2014 and 2013, respectively. Estimated annual amortization will be approximately $76,000, $70,000, $63,000, $44,000, and $13,000 in 2015 through 2019, respectively.

Property and Equipment: Property and equipment is carried at cost less accumulated depreciation, using principally the straight-line method. Accumulated depreciation on property and equipment was $3,860,908 and $3,728,657 at December 31, 2014 and 2013, respectively.

Capital Leases: During 2014, the Company entered into five new capital leases totaling $13,450 at inception. During 2013, the Company entered into four new capital leases totaling $752,861 at inception. One of the 2013 leases included a sale-leaseback transaction with a non-affiliated third party whereby the Company sold certain leasehold improvement assets with a depreciated book value totaling $670,048. The Company then leased these assets back from the third party over three years under a dollar buyout lease. The total monthly payment on this lease is $21,863.

NOTES TO CONSOLIDATED

financial STATEMENTS

Total lease payments for 2014 and 2013 relating to previously existing capital leases were $501,379 and $352,775, respectively. Future minimum lease payments for 2015 through 2019 are $331,392; $256,637; $6,520; $632; and $0, respectively. The present value of net minimum lease payments at December 31, 2014 was $553,028, which is equal to the total future minimum lease payments of $595,181 less imputed interest of $42,153. Accumulated amortization on the leased property was $992,449 and $586,237 at December 31, 2014 and 2013, respectively.

Cash Value of Company-Owned Life Insurance: The Company holds life insurance policies on key members of the organization. These policies are reported at the current cash surrender values of the policies.

Benefit Reserves and Policyholder Deposits: Reserves on traditional life and accident and health insurance products are calculated using the net level premium method based upon estimated future investment yields, mortality, withdrawals and other assumptions, including dividends on participating policies. The assumptions used for prior year issues are locked in. Current year issues are reserved using updated assumptions determined by reviewing the Company's past experience and include a provision for possible unfavorable deviation.

Benefit reserves and policyholder deposits on universal life and investment-type products are determined by using the retrospective deposit method and represent the policy account value before consideration of surrender charges. In addition, unearned revenues are included as a part of the benefit reserve.

The mortality assumptions for regular ordinary business are based on the 1955-60 Basic Table, Select and Ultimate, for plans issued prior to 1982; the 1965-70 Basic Table, Select and Ultimate, for plans issued in 1982 through 1984; the 1975-80 Basic Table, Select and Ultimate, for plans issued after 1984; the 2001 Valuation Basic Table, Select and Ultimate, for plans issued after 2008; and on the Company's experience for final expense and preneed plans.

Reinsurance: The Company assumes and cedes reinsurance under various agreements providing greater diversification of business, allowing management to control exposure to potential losses arising from large risks, and providing additional capacity for growth. Amounts recoverable from reinsurers are estimated in a manner consistent with the related liabilities associated with the reinsured policies. At December 31, 2014 and 2013, amounts recoverable from reinsurers were $55,910,993 and $55,669,088, respectively. These amounts included reserves ceded to reinsurers of $55,154,752 and $54,256,096 at December 31, 2014 and 2013, respectively.

Unearned Premium Reserves: Credit life unearned premium reserves are calculated for level and reducing coverage certificates using the monthly pro rata and Rule of 78's methods, respectively. Credit accident and health unearned premium reserves are determined based upon the Rule of 78's.

Policy Claims: Policy claims are based on reported claims plus estimated incurred but not reported claims developed from trends of historical data applied to current exposure.

At December 31, 2014 and 2013, the Company’s policy claims liability includes an estimate of $940,600 and $1,679,764, respectively, for outstanding claims relative to a comparison of our life insurance policies against the Social Security Death Master File. This comparison was performed in compliance with a recently enacted Kentucky state law which follows a model law adopted by the National Conference of Insurance Legislators. This amount primarily affects the traditional and universal life segment, along with a much smaller impact on the final expense portion of the preneed and burial segment. The Company is in the process of researching the potential matches to determine that a valid claim exists, to locate beneficiaries and to pay benefits accordingly.

NOTES TO CONSOLIDATED

financial STATEMENTS

Liability for Deposit-Type Contracts: Liability for deposit-type contracts consists of supplemental contracts without life contingencies, premium deposit funds and dividends and endowments left on deposit at interest.

Participating Policies: Participating business approximates 15% and 17% of ordinary life insurance in force at December 31, 2014 and 2013, respectively. Premiums relative to participating business comprised approximately 3% of net premiums for the years ended December 31, 2014 and 2013. Participating dividends are accrued as declared by the Board of Directors of Investors Heritage Life. For participating policies that are not a part of the Texas Memorial Life or Memorial Service Life policy acquisitions, the liability for future policy benefits for participating policies was determined based on the Net Level Premium Reserve Method, 3% interest, and the 1941 CSO Mortality and 1958 CSO Mortality tables. All guaranteed benefits were considered in calculating these reserves. Deferred acquisition costs are amortized in proportion to expected gross profits.

The liability for future policy benefits of the Texas Memorial Life and Memorial Service Life blocks of participating business was determined based on the 2001 CSO and 1980 CSO Mortality tables, respectively. While these policies are participating, no future dividends are anticipated on this block of policies.

The average assumed investment yields used in determining expected gross profits ranged from 3.56% to 9.17% (for the current and all future years, an assumed investment yield of 4.50% was utilized).

Federal Income Taxes: The Company utilizes the liability method to account for income taxes. Under such method, deferred tax assets and liabilities are determined based on differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates.

Revenues and Expenses: Revenues on traditional life and accident and health insurance products consist of direct and assumed premiums reported as earned when due. Liabilities for future policy benefits, including unearned premium reserves on accident and health policies and unreleased profits on limited-pay life policies, are provided and acquisition costs are amortized by associating benefits and expenses with earned premiums to recognize related profits over the life of the contracts. Acquisition costs are amortized over the premium paying period using the net level premium method. Traditional life insurance products are treated as long duration contracts since they are ordinary whole life insurance products, which generally remain in force for the lifetime of the insured. The accident and health insurance products are treated as long duration contracts because they are non-cancelable.

Revenues for universal life and investment-type products consist of investment income and policy charges for the cost of insurance and policy initiation and administrative fees. Expenses include interest credited to policy account balances, actual administrative expenses and benefit payments in excess of policy account balances.

Other income consists principally of third party administrative service fees along with servicing and administration fees relative to credit insurance administered for our reinsurers.

Common Stock and Earnings per Share: The par value per share is $1.00 with 4,000,000 shares authorized. Earnings per share of common stock were computed based on the weighted average number of common shares outstanding during each year. The weighted average number of shares outstanding during 2014 and 2013 were 1,126,365 and 1,137,156 shares, respectively. The Company paid cash dividends per share of $0.20 and $0.25 in 2014 and 2013, respectively.

NOTES TO CONSOLIDATED

financial STATEMENTS

Subsequent Events: Management has evaluated all events subsequent to December 31, 2014 through the date that these consolidated financial statements were available to be issued.

New Accounting Standards: In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance regarding accounting for revenue recognition that identifies the accounting treatment for an entity’s contracts with customers. Certain contracts, including insurance contracts, are specifically excluded from this guidance. This guidance is effective for public entities for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company has not yet adopted this guidance, but it is not expected to have a material impact on its financial position, cash flows or results of operations.

In August 2014, the FASB issued guidance that requires management to evaluate whether there are concerns or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date the financial statements are issued. Disclosures are required when certain criteria are met. This guidance is effective for annual periods ending after December 15, 2016 and for annual periods and interim periods thereafter. The Company has not yet adopted this guidance, but it is not expected to have a material impact on the consolidated financial statements.

In January 2014, the FASB issued updated guidance for troubled debt restructurings clarifying when an in substance repossession or foreclosure occurs, and when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The new guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2014. This guidance can be elected for prospective adoption or by using a modified retrospective transition method. The Company has not yet adopted this guidance, but it is not expected to have a significant impact on the Company’s consolidated financial position, results of operations or financial statement disclosures.

In April 2014, the FASB issued updated guidance that changes the criteria for reporting discontinued operations and introduces new disclosures. The new guidance is effective prospectively to new disposals and new classifications of disposal groups as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. Early adoption is permitted for new disposals or new classifications as held for sale that have not been reported in financial statements previously issued or available for issuance. The Company has not yet adopted this guidance, but it is not expected to have a significant impact on the Company’s consolidated financial position, results of operations or financial statement disclosures.

NOTES TO CONSOLIDATED

financial STATEMENTS

NOTE 2 - Investments

The Company limits credit risk by investing primarily in investment grade securities and by diversifying its investment portfolio among government and corporate bonds and mortgage loans. The Company manages its fixed income portfolio to diversify between and within industry sectors. Investments in available-for-sale securities at December 31 are summarized as follows:

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

2013	Amortized		Gross Unrealized		Gross Unrealized		Fair
	Cost		Gains		Losses		Value
Available-for-sale securities:
U.S. government obligations	$	34,485,660	$	793,701	$	703,570	$	34,575,791
States and political subdivisions		39,910,030		3,145,632		60,898		42,994,764
Corporate		217,659,449		12,535,411		2,251,886		227,942,974
Foreign		56,960,366		2,081,436		1,395,450		57,646,352
Asset-backed securities		2,677,953		109,417		-		2,787,370
Mortgage-backed securities (MBS):
Commercial MBS		4,252,765		160,955		-		4,413,720
Residential MBS		46,449,968		1,443,228		345,062		47,548,134
Total fixed maturity securities		402,396,191		20,269,780		4,756,866		417,909,105
Equity securities:
U.S. agencies		687,000		-		-		687,000
Mutual funds		318,283		1,356		-		319,639
Corporate common stock		4,883,078		422,880		494,264		4,811,694
Total equity securities		5,888,361		424,236		494,264		5,818,333
Total	$	408,284,552	$	20,694,016	$	5,251,130	$	423,727,438

NOTES TO CONSOLIDATED

financial STATEMENTS

The following table summarizes, for all securities in an unrealized loss position at December 31, 2014 and 2013, 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.

	December 31, 2014						December 31, 2013
			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	$	-	$	-		-	$	17,401,555	$	703,570		3
States and political subdivisions		-		-		-		1,239,103		60,898		2
Corporate		12,473,068		508,818		7		56,249,758		2,076,123		37
Foreign		10,374,173		310,267		7		26,858,417		1,395,450		15
Residential MBS		16,862		6		1		18,187,588		345,062		4
Greater than 12 months:
U.S. government obligations		7,736,774		16,164		1		-		-		-
Corporate		3,828,887		421,814		3		1,072,341		175,763		1
Foreign		4,724,455		441,102		2		-		-		-
Total fixed maturities		39,154,219		1,698,171		21		121,008,762		4,756,866		62

Equities:
Less than 12 months:
Corporate common stock		527,614		103,438		4		2,806,072		494,264		24
Greater than 12 months:
Corporate common stock		525,865		19,935		4		-		-		-
Total equities		1,053,479		123,373		8		2,806,072		494,264		24

Total	$	40,207,698	$	1,821,544		29	$	123,814,834	$	5,251,130		86

As of December 31, 2014, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 86% and the equity securities noted above had a fair value to cost ratio of over 78%. As of December 31, 2013, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 84% and all of our equity securities had a fair value to cost ratio equal to or greater than 70%.

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 years ended December 31, 2014 or 2013.

NOTES TO CONSOLIDATED

financial STATEMENTS

Management believes that the Company will fully recover its cost basis in the securities held at December 31, 2014, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature. The temporary impairments shown herein are primarily the result of the current interest rate environment rather than credit factors that would imply other-than-temporary impairment.

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

	December 31
	2014			2013
Net unrealized appreciation on available-for sale securities	$	27,595,600		$	15,442,886
Adjustment to deferred acquisition costs		(711,650	)		(418,419	)
Deferred income taxes		(9,140,543	)		(5,108,319	)
Net unrealized appreciation on available-for sale securities	$	17,743,407		$	9,916,148

The amortized cost and fair value of debt securities at December 31, 2014, 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	$	8,968,681	$	9,162,988
Due after one year through five years		75,338,168		82,333,643
Due after five years through ten years		189,328,076		198,251,026
Due after ten years		56,143,960		63,199,501
Due at multiple maturity dates		73,817,376		77,170,320
Total	$	403,596,261	$	430,117,478

Proceeds for the years ended December 31, 2014 and 2013 from sales and maturities of investments in available-for-sale securities, as well as gross gains and gross losses realized, are presented below.

	2014			2013
Proceeds from sales and maturities	$	46,446,460		$	94,899,207
Gross realized gains		974,260			2,613,961
Gross realized losses		(263,628	)		(114,450	)

NOTES TO CONSOLIDATED

financial STATEMENTS

Presented below is investment information, including the accumulated and annual change in net unrealized investment gains or losses. Additionally, the table shows the annual change in net unrealized investment gains (losses) and the amount of realized investment gains (losses) on debt and equity securities for the years ended December 31, 2014 and 2013.

	2014		2013
Change in unrealized investment gains (losses):
Available-for-sale:
Fixed maturities	$	11,008,303	$	(28,440,122	)
Equity securities		1,144,411		(339,614	)
Realized investment gains (losses):
Available-for-sale:
Fixed maturities	$	682,604	$	2,505,340
Equity securities		28,028		(5,829	)

In addition to the realized investment gains and losses above, the Company also experienced a realized loss of $14,006 during the year ended December 31, 2013 relative to the demolition of a building owned by the Company.

During the third quarter of 2013, the Company initiated a program to strategically sell certain fixed maturities to generate realized gains within the investment portfolio. This program was completed prior to December 31, 2013 and led to the increase in realized investment gains shown above for 2013.

The Company is required to hold assets on deposit for the benefit of policyholders in accordance with statutory rules and regulations. At December 31, 2014 and 2013, these required deposits had a total fair value of $23,951,372 and $25,209,390, respectively.

The Company also engages in commercial and residential mortgage lending. As of December 31, 2014, investments in commercial and residential properties comprised 41.9% and 58.1%, respectively, of the Company’s mortgage portfolio. At December 31, 2013, investments in commercial and residential properties comprised 79.6% and 20.4%, respectively, of the Company’s mortgage portfolio.

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

During 2013, the Company began evaluating and purchasing residential mortgage loans through the secondary market. Each mortgage loan opportunity is reviewed individually, considering both the value of the underlying property and the credit worthiness of the borrower. We are utilizing a third party servicer to administer these loans. We purchased residential mortgages through the secondary market totaling approximately $14,010,000 and $2,116,000 during 2014 and 2013, respectively.

As of December 31, 2014 and 2013, there were no non-performing loans, loans on nonaccrual status, loans 90 days past due or more, loans in process of foreclosure, or restructured loans. The Company experienced no mortgage loan defaults during 2014 or 2013.

NOTES TO CONSOLIDATED

financial STATEMENTS

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

	December 31
	2014		2013
Florida	$	6,047,236	$	2,622,740
California		4,806,451		942,036
Kentucky		3,492,854		3,740,272
Illinois		3,392,446		540,634
Georgia		3,123,530		2,339,300
Texas		2,290,700		2,432,643
Ohio		1,805,093		1,599,450
Tennessee		1,054,671		1,203,184
Arizona		927,600		506,134
West Virginia		440,725		467,480
North Carolina		359,308		589,779
Missouri		267,996		-
New Jersey		252,612		258,239
South Carolina		248,815		250,826
Massachusetts		239,399		283,341
Colorado		225,772		230,782
Idaho		174,433		188,882
Kansas		136,442		-
Indiana		95,434		10,935
Utah		77,919		-
Alabama		-		395,065
Total	$	29,459,436	$	18,601,722

At December 31, 2014, the Company held various real estate investments for the production of income totaling $1,123,089, which is reported net of accumulated depreciation of $561,459. At December 31, 2013, the Company’s real estate investments totaled $1,111,679, net of accumulated depreciation of $536,565.

The Company owns certain investments in state-guaranteed receivables. These investments represent an assignment of the future rights to cash flows from lottery winners purchased at a discounted price. Payments on these investments are made by state run lotteries and guaranteed by the states. At December 31, 2014, the amortized cost and estimated fair value of state-guaranteed receivables, by contractual maturity, are summarized as follows:

	State-Guaranteed Receivables
	Amortized		Fair
	Cost		Value
Due in one year or less	$	746,216	$	754,778
Due after one year through five years		2,500,881		2,739,016
Due after five years through ten years		3,040,771		3,837,237
Due after ten years		1,629,511		2,387,975
Total	$	7,917,379	$	9,719,006

NOTES TO CONSOLIDATED

financial STATEMENTS

The outstanding balance of state-guaranteed receivables, by state, as of December 31, 2014 and 2013 is summarized as follows:

	December 31
	2014		2013
New York	$	3,694,805	$	3,880,368
Massachusetts		1,969,570		1,927,350
Georgia		1,467,774		1,500,719
Pennsylvania		299,851		284,756
Texas		227,649		212,447
California		188,131		195,593
Ohio		69,599		83,874
Total	$	7,917,379	$	8,085,107

Prior to the third quarter of 2013, the Company owned a $3,000,000 position in a Morgan Stanley market-indexed note, which paid 1% interest annually and matured in six years from the issue date. At maturity, the Company would have participated at 110% of any increase in the Dow Jones Industrial Average since the purchase date, but was guaranteed against market-related downside risk. Accordingly, a portion of the investment was classified as a derivative and bifurcated for reporting purposes. The derivative portion, having a cost basis of $645,000 calculated at 21.5% of the total value of the purchase price of the note, was reported as an investment in derivative on the balance sheet. The remaining non-derivative portion of the note was reported within fixed maturities on the balance sheet. This derivative was marked-to-market through the income statement, with the change in value reported as a component of investment income on the income statement. This investment was sold during the third quarter of 2013 for $3,918,083, generating a realized gain of $918,083. Additionally, there was an increase in current year investment income associated with the removal of the mark-to-market adjustment, as shown below.

Major categories of net investment income are summarized as follows:

	2014		2013
Fixed maturities	$	18,957,838	$	19,254,558
Equity securities		270,306		169,784
Mortgage loans on real estate		1,497,721		1,109,776
Policy loans		478,712		478,750
State-guaranteed receivables		557,812		568,978
Gain on investment in derivative		-		2,400
Other		232,606		229,825
Gross investment income		21,994,995		21,814,071
Investment expenses		832,260		1,152,929
Net investment income	$	21,162,735	$	20,661,142

NOTE 3 - Fair Values of Financial Instruments

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

NOTES TO CONSOLIDATED

financial STATEMENTS

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

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

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

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

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

Valuation of Investments Reported at Fair Value in Financial Statements

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

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

The Company’s Level 3 investments include financial instruments whose value cannot be obtained through a pricing service and must be determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category currently includes one private equity investment where independent pricing inputs were not able to be obtained. For fixed maturities that may fall within this level, the Company utilizes the assistance of its third-party investment advisor to estimate the fair value based on non-binding broker quotes and internal models using unobservable assumptions about market participants. For the private equity investment, the Company establishes fair value based on the most recent trading activity as well as a review of the underlying financial statements of the entity. The Company’s Level 3 instruments also included the investment in derivative related to the bifurcated equity-indexed portion of a market-indexed note prior to its sale during the third quarter of 2013. The value of the derivative portion of this investment was derived from an option pricing model that utilizes the Dow Jones Industrial Average as of the measurement date compared to the strike price in the note, along with various other market assumptions including those regarding volatility and dividend yields.

NOTES TO CONSOLIDATED

financial STATEMENTS

The following table presents the Company’s fair value hierarchy for those financial instruments measured and reported at fair value on a recurring basis as of December 31, 2014 and 2013.

	December 31, 2014
	Level 1		Level 2		Level 3		Total

U.S. government obligations	$	-	$	28,868,011	$	-	$	28,868,011
States and political subdivisions		-		44,007,246		-		44,007,246
Corporate		-		239,038,512		-		239,038,512
Foreign		-		65,975,213		-		65,975,213
Asset-backed securities		-		1,466,497		-		1,466,497
Mortgage-backed securities:
Commercial MBS		-		8,136,186		-		8,136,186
Residential MBS		-		42,625,813		-		42,625,813
Total fixed maturities	$	-	$	430,117,478	$	-	$	430,117,478


U.S. agencies	$	707,900	$	-	$	-	$	707,900
Mutual funds		358,322		-		-		358,322
Corporate common stock		5,955,597		-		384,000		6,339,597
Total equity securities	$	7,021,819	$	-	$	384,000	$	7,405,819

	December 31, 2013
	Level 1		Level 2		Level 3		Total

U.S. government obligations	$	-	$	34,575,791	$	-	$	34,575,791
States and political subdivisions		-		42,994,764		-		42,994,764
Corporate		-		227,942,974		-		227,942,974
Foreign		-		57,646,352		-		57,646,352
Asset-backed securities		-		2,787,370		-		2,787,370
Mortgage-backed securities:
Commercial MBS		-		4,413,720		-		4,413,720
Residential MBS		-		47,548,134		-		47,548,134
Total fixed maturities	$	-	$	417,909,105	$	-	$	417,909,105


U.S. agencies	$	687,000	$	-	$	-	$	687,000
Mutual funds		319,639		-		-		319,639
Corporate common stock		4,427,694		-		384,000		4,811,694
Total equity securities	$	5,434,333	$	-	$	384,000	$	5,818,333

NOTES TO CONSOLIDATED

financial STATEMENTS

The following table provides a summary of changes in fair value of our Level 3 financial instruments for the years ended December 31, 2014 and 2013.

	Year Ended December 31, 2014
			Corporate		Investment
			Common		in
	Corporate		Stock		Derivative		Total
Beginning balance	$	-	$	384,000	$	-	$	384,000
Transfers into Level 3		-		-		-		-
Transfers out of Level 3		-		-		-		-
Purchases		-		-		-		-
Sales		-		-		-		-
Total gains or losses:
Included in earnings		-		-		-		-
Included in other comprehensive loss		-		-		-		-
Ending balance	$	-	$	384,000	$	-	$	384,000

	Year Ended December 31, 2013
				Corporate		Investment
				Common		in
	Corporate			Stock		Derivative			Total
Beginning balance	$	3,834,470		$	384,000	$	642,600		$	4,861,070
Transfers into Level 3		-			-		-			-
Transfers out of Level 3		(3,834,470	)		-		-			(3,834,470	)
Purchases		-			-		-			-
Sales		-			-		(645,000	)		(645,000	)
Total gains or losses:
Included in earnings		-			-		2,400			2,400
Included in other comprehensive loss		-			-		-			-
Ending balance	$	-		$	384,000	$	-		$	384,000

The Company experienced no transfers between Level 1 and Level 2 during the years ended December 31, 2014 or 2013. The Company experienced no transfers between Level 2 and Level 3 during the year ended December 31, 2014. The Company experienced four transfers of corporate fixed maturities from Level 3 to Level 2 during the year ended December 31, 2013. 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, other than the investment in derivative, 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 unrealized gains (losses) on the investment in derivative are reported in earnings as a component of investment income.

NOTES TO CONSOLIDATED

financial STATEMENTS

Financial Instruments Disclosed, but not Carried, at Fair Value

The following disclosure presents the carrying values and estimated fair values of the Company’s financial instruments disclosed, but not carried, at fair value as of December 31, 2014 and 2013, and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis. The fair values for insurance contracts other than investment-type contracts are not required to be disclosed. The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment was required to interpret market data to develop these estimates. Accordingly, the estimates are not necessarily indicative of the amounts which could be realized in a current market exchange. The use of different market assumptions or estimation methodologies may have a material effect on the fair value amounts.

	December 31, 2014
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Assets:
Mortgage loans on real estate:
Commercial	$	12,961,492	$	13,693,557	$	-	$	-	$	13,693,557
Residential		16,497,944		18,392,927		-		-		18,392,927
Policy loans		6,665,493		6,665,493		-		-		6,665,493
State-guaranteed receivables		7,917,379		9,719,006		-		9,719,006		-
Other invested assets		3,270,848		3,270,848		-		-		3,270,848
Cash and cash equivalents		1,870,867		1,870,867		1,870,867		-		-
Accrued investment income		5,190,740		5,190,740		-		-		5,190,740
Cash value of company-owned life insurance		12,441,833		12,441,833		-		-		12,441,833

Liabilities:
Policyholder deposits (Investment-type contracts)		53,318,598		55,486,262		-		-		55,486,262
Policy claims		2,821,106		2,821,106		-		-		2,821,106
Obligations under capital leases		553,028		553,028		-		-		553,028
Notes payable		2,508,576		2,508,576		-		-		2,508,576

	December 31, 2013
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Assets:
Mortgage loans on real estate:
Commercial	$	15,478,188	$	16,128,845	$	-	$	16,128,845	$	-
Residential		3,123,534		3,273,306		-		3,273,306		-
Policy loans		6,674,887		6,674,887		-		-		6,674,887
State-guaranteed receivables		8,085,107		9,392,660		-		9,392,660		-
Other invested assets		3,181,182		3,181,182		-		-		3,181,182
Cash and cash equivalents		4,143,291		4,143,291		4,143,291		-		-
Accrued investment income		5,191,253		5,191,253		-		-		5,191,253
Cash value of company-owned life insurance		11,808,248		11,808,248		-		-		11,808,248

Liabilities:
Policyholder deposits (Investment-type contracts)		53,476,853		53,396,538		-		-		53,396,538
Policy claims		3,672,474		3,672,474		-		-		3,672,474
Obligations under capital leases		943,488		943,488		-		-		943,488
Notes payable		3,031,942		3,033,122		-		-		3,033,122

NOTES TO CONSOLIDATED

financial STATEMENTS

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

Mortgage loans on real estate: The fair values for mortgage loans are estimated using discounted cash flow analyses. For commercial mortgage loans, the discount rate was assumed to be the interest rate of the last commercial mortgage acquired by the Company. For residential mortgage loans, the discount rate was assumed to be the average yield on recent purchases less an expense factor. These investment fair values were moved from Level 2 to Level 3 in the fair value hierarchy during 2014 given the expansion of our residential mortgage loan activity and the unobservable inputs used to determine those fair values.

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

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

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

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

Notes payable: The fair values for notes payable 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 approximate the unpaid principal balances on such notes.

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

NOTES TO CONSOLIDATED

financial STATEMENTS

NOTE 4 - Federal Income Taxes

Deferred income 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. Significant components of the Company’s deferred tax liabilities and assets as of December 31 are as follows:

	2014		2013
Deferred tax liabilities:
Policy acquisition costs	$	2,954,747	$	3,452,732
Net unrealized gain on available-for-sale securities		9,140,543		5,108,319
Due premiums		1,068,415		1,145,646
Other		861,193		889,576
Total deferred tax liabilities		14,024,898		10,596,273

Deferred tax assets:
Benefit reserves		3,229,901		3,540,549
Other policyholder funds		376,530		474,581
AMT credit carryforwards		511,673		501,101
Accrued pension liability		1,748,090		981,867
Other		373,254		493,284
Total deferred tax assets		6,239,448		5,991,382
Net deferred tax liabilities	$	7,785,450	$	4,604,891

The Company periodically reviews its gross deferred tax assets for recoverability. At December 31, 2014 and 2013, the Company is able to demonstrate that the benefit of its gross deferred tax assets is fully recoverable.

The reconciliation of income tax attributable to operations computed at the federal statutory tax rate to income tax expense is as follows:

	2014			2013

Statutory federal income tax rate		34.0	%		34.0	%
Small life insurance company deduction		(2.5	)		(18.0	)
Dividends-received deduction		(1.4	)		(1.2	)
Defined contribution plan dividend		(1.3	)		(1.4	)
Nondeductible COLI expense		(7.2	)		(4.9	)
Nontaxable COLI life insurance proceeds		(2.8	)		-
Nondeductible travel & meals expense		1.3			0.8
True-up of provision to actual		4.4			1.7
Other		0.8			4.6

Effective income tax rate		25.3	%		15.6	%

We file U.S. federal income tax returns and income tax returns in various state jurisdictions. Our 2011 through 2014 U.S. federal tax years remain subject to income tax examination by tax authorities. We have no known uncertain tax benefits within our provision for income taxes. In addition, we do not believe the Company will be subject to any penalties or interest relative to any open tax years and, therefore, have not accrued any such amounts. However, should such a circumstance arise, it is our policy to classify any interest and penalties (if applicable) as income tax expense in the consolidated financial statements.

NOTES TO CONSOLIDATED

financial STATEMENTS

NOTE 5 - Notes Payable

On November 25, 2014, Investors Heritage Capital entered into a line of credit agreement for $1,500,000, maturing on November 25, 2016. This line of credit is designated for the purpose of funding the purchase of agent debit balance receivables from Investors Heritage Life. These agent debit balance receivables will be purchased at a discount by Investors Heritage Capital with servicing retained by Investors Heritage Life. Borrowings under the line of credit will be collateralized by the agent debit balances. This line of credit requires interest to be paid monthly at the prime rate. The Company has not yet borrowed any amounts under this line of credit.

On November 5, 2012, the Company entered into a loan agreement to borrow $2,000,000 in order to fund a credit agreement to Puritan Financial Companies, Inc. On November 25, 2014, this note was amended to extend the maturity date to November 25, 2019 to correlate with an amendment to the Puritan promissory note and marketing agreement, as discussed further below. The amended loan agreement calls for interest to be paid quarterly at a rate of 0.25% under the prime rate. The note requires monthly principal payments of at least $15,000 beginning December 5, 2014 with a balloon payment upon maturity. There is no penalty for prepayment. This note is collateralized with 55,000 shares of Investors Heritage Life Insurance Company common stock.

As stated above, the borrowed funds were utilized to fund a credit agreement to Puritan Financial Companies, Inc. for $2,000,000, with interest at a rate of 1.75% above the prime rate. The promissory note and the marketing agreement with Puritan Financial Group were amended on August 28, 2014 to extend the maturity date to August 28, 2019. These amendments allow the Company to withhold 15% of Puritan Financial’s earned commissions on certain products to pay down the note. Additionally, the amended note calls for quarterly payments of principal and interest and requires Puritan Financial to pay at least $400,000 annually toward the outstanding balance of the note from 2015 until the balance is paid in full. Any unpaid principal balance together with all accrued interest shall be due and payable with a balloon payment upon maturity. Under this credit agreement, Puritan Financial Companies, Inc. and its wholly-owned subsidiary Puritan Financial Group have committed to an increased level of new business production on behalf of the Company. Additionally, Puritan Financial Companies, Inc. has issued warrants for 2,000,000 shares of common stock to the Company in exchange for this funding. This note is further collateralized by all the stock and other assets of Puritan Financial Companies, Inc. and each of its affiliated companies. Puritan Financial Companies, Inc. has another credit facility with a senior lender and the Company has a subordinate interest to the senior lender in all of the collateral which is security for this loan. The outstanding balance on this note receivable, which is included within other invested assets on the balance sheet, was $1,860,043 and $2,000,000 at December 31, 2014 and 2013, respectively.

Effective September 27, 2013, the Company renewed its $1,000,000 line of credit for At Need Funding, maturing on September 25, 2015. This line of credit is used for the purpose of funding at-need funerals secured by the assignment of verified, incontestable life insurance policies. Effective September 27, 2013, the Company also renewed its $150,000 operating line of credit, maturing on September 25, 2015. These lines of credit require interest to be paid monthly at the prime rate, with a floor of 3.25%.

NOTES TO CONSOLIDATED

financial STATEMENTS

Information relative to the Company’s outstanding notes payable at December 31, 2014 and 2013 is as follows:

2014	Outstanding		Current			Maturity	Interest		Interest
	Principal		Interest Rate			Date	Expense		Paid
At Need Funding line of credit	$	727,566		3.25	%	9/25/2015	$	20,887	$	20,641
Bank note		1,781,010		3.00	%	11/25/2019		58,308		59,270

2013	Outstanding		Current			Maturity	Interest		Interest
	Principal		Interest Rate			Date	Expense		Paid
Mortgage note	$	562,910		5.05	%	3/1/2015	$	38,365	$	40,155
At Need Funding line of credit		506,240		3.25	%	9/25/2015		16,555		16,555
Bank note		1,962,792		3.00	%	11/5/2017		60,188		55,289

NOTE 6 - Employee Benefit Plans

The Company sponsors the IHCC Employee Retirement Plan (the “Pension Plan”), which is a noncontributory defined benefit pension plan that was frozen in 2012 with respect to new benefit accruals. Participants in the plan at the time it was frozen may still continue earn vesting credit towards their Pension Plan benefit.

The following table provides additional details relative to the Pension Plan as of December 31.

	2014			2013
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	21,315,600		$	23,872,644
Service cost		-			-
Interest cost		1,045,055			668,720
Actuarial (gain) loss		3,687,960			(2,575,030	)
Benefits paid		(1,073,273	)		(650,734	)
Benefit obligation at end of year		24,975,342			21,315,600

Change in plan assets:
Fair value of plan assets at beginning of year		18,427,757			16,661,125
Actual return on plan assets		1,654,416			1,457,366
Employer contributions		825,000			960,000
Benefits paid		(1,073,273	)		(650,734	)
Fair value of plan assets at end of year		19,833,900			18,427,757

Funded status		(5,141,442	)		(2,887,843	)
Unrecognized net actuarial loss		7,634,982			4,794,177
Net amount recognized as prepaid benefit cost	$	2,493,540		$	1,906,334

Components of net periodic benefit cost:
Service cost	$	-		$	-
Interest cost		1,045,055			668,720
Expected return on plan assets		(1,197,674	)		(1,192,584	)
Amortization of net (gain) loss		390,413			772,646
Net periodic benefit cost	$	237,794		$	248,782

Accumulated benefit obligation	$	24,975,342		$	21,315,600

NOTES TO CONSOLIDATED

financial STATEMENTS

The portion of the accrued pension liability included in accumulated other comprehensive income at December 31, 2014 is $7,634,982, which has been recorded net of related tax of $2,595,894. The portion of the accrued pension liability included in accumulated other comprehensive income at December 31, 2013 is $4,794,177, which has been recorded net of related tax of $1,630,020. These amounts are solely the result of unamortized actuarial net losses not yet amortized into income.

The estimated net loss that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost during 2015 is $762,233.

Actuarial assumptions used at December 31, 2014 and 2013 to determine benefit obligations and net periodic benefit cost are as follows:

	December 31
	2014			2013
Discount rate		3.75	%		5.00	%
Expected return on plan assets		6.50	%		7.00	%

The long-term rate of return for plan assets is determined based on an analysis of historical returns on invested assets, anticipated future fixed income, equity investment markets, and diversification needs. Long term trends are evaluated relative to current market factors such as inflation, interest rates and investment strategies, including risk management, in order to assess the assumptions as applied to the plan.

The Company employs a conservative investment strategy whereby the majority of invested assets are held in appropriate investments for defined benefit pension plans, including a small portion of plan assets held in common stock of the Company. The Company uses an independent third party to administer its retirement plan. Plan assets are held in a trust account and include a diversified assortment of pooled separate accounts as well as Company common stock. The fair value of plan assets as of December 31, 2014 and 2013 are as follows:

	December 31
	2014		2013

Pooled separate accounts	$	19,168,950	$	17,778,307
Company common stock - 31,000 shares		664,950		649,450

Pooled separate accounts held by the Pension Plan at December 31, 2014 and 2013 are considered Level 2 assets and are valued at the net asset value (“NAV”) of units held by the Pension Plan at year end. The NAV is determined by dividing the net assets, at fair value, of the fund by the number of units outstanding on the day of valuation. Pooled separate accounts are comprised, primarily, of shares of registered investment companies held through subaccounts of a separate account of an insurance company. The NAV as adjusted (for mutual fund dividends, mutual fund splits and administrative maintenance charges and other items) and reported by the insurance company approximates fair value of the investments. The investments are redeemable at the adjusted NAV under agreements with the insurance company. However, it is possible that the redemption rights may be restricted or eliminated in the future. Due to the nature of the investments, changes in the market conditions, liquidity requirements, and the economic environment may significantly affect the NAV of the registered investment companies and, consequently, the fair value of the Pension Plan's investments.

NOTES TO CONSOLIDATED

financial STATEMENTS

Shares of Company common stock held by the plan at December 31, 2014 and 2013 are considered Level 2 assets and are valued based on observable inputs, such as quoted prices in markets with limited activity. Dividends of $6,200 and $7,750 were paid to the plan in 2014 and 2013, respectively, on the Company common stock. The plan made no purchases or sales of Company common stock during 2014 or 2013.

A summary of the allocation of plan assets by investment type as of December 31, 2014 and 2013 is as follows:

	December 31
	2014			2013
Fixed income pooled separate accounts		67	%		61	%
Equity pooled separate accounts		30	%		35	%
Company common stock		3	%		4	%

The Company expects to contribute approximately $300,000 to its pension plan in 2015.

The following estimated future benefit payments are expected to be paid:

	Pension Benefits

2015	$	2,470,000
2016		1,480,000
2017		2,160,000
2018		1,290,000
2019		1,290,000
2020-2024		7,410,000

The Company sponsors a 401(k) defined contribution plan known as the IHCC Retirement Savings Plan and Trust (the “Old 401(k) Plan”), which was frozen in 2012 relative to allowable new contributions. The only remaining investments held within the Old 401(k) Plan consist of Company stock. Upon distribution of the Company stock by the Old 401(k) Plan, the participant has the right to hold the stock, sell the stock on the open market, subject to a right of first refusal in favor of the Company, or sell the stock back to the Company at its then fair market value as determined by an independent appraiser. Under the put option, the Company has the right to purchase the stock in substantially equal annual installments over a period not exceeding five years.

The Company also sponsors a traditional 401(k) retirement plan, the IHCC 401(k) Retirement Plan (the “Retirement Plan”). Employees are eligible to participate in the Retirement Plan on the first day of employment. Under the Retirement Plan, the Company matches employee contributions dollar for dollar up to 4% of employee compensation deferrals. Employees who have met certain employment criteria may also be eligible to receive an additional allocation after the end of each plan year.

NOTES TO CONSOLIDATED

financial STATEMENTS

Information relative to the assets within both the Old 401(k) Plan and the Retirement Plan as of December 31, 2014 and 2013, along with employer contributions expensed and dividends paid on Company stock for the years then ended, are as follows:

	December 31
	2014		2013

Old 401(k) Plan
Company common stock:
Shares held		294,467		331,559
Fair value	$	6,316,313	$	6,863,275

Retirement Plan
Mutual funds - fair value	$	2,119,209	$	1,635,830

	For the Year Ended December 31
	2014		2013

Old 401(k) Plan
Employer contributions	$	-	$	-
Dividends on Company stock		66,312		86,286

Retirement Plan
Employer contributions	$	466,926	$	316,206

In addition, the Company sponsors a deferred compensation plan for selected executive officers. Information relative to the assets within the deferred compensation plan as of December 31, 2014 and 2013, along with employer contributions expensed and dividends paid on Company stock for the years then ended, are as follows:

	December 31
	2014		2013

Company common stock:
Shares held		21,020		20,820
Fair value	$	450,889	$	430,984
Mutual funds - fair value		140,770		69,136
Cash and cash equivalents		5,816		3,486

	For the Year Ended December 31
	2014		2013

Employer contributions	$	35,010	$	24,978
Dividends on Company stock		4,164		5,220

NOTE 7 - Stockholders' Equity and Dividend Restrictions

Statutory restrictions limit the amount of dividends which may be paid by Investors Heritage Life. Generally, dividends during any year may not be paid, without prior regulatory approval, in excess of the lesser of (a) 10 percent of statutory surplus as of the preceding December 31, or (b) statutory net gain from operations for the preceding year. For 2015, the maximum dividend that Investors Heritage Life can pay to Investors Heritage Capital without regulatory approval is $773,505.

NOTES TO CONSOLIDATED

financial STATEMENTS

NOTE 8 - Statutory Accounting Practices

Investors Heritage Life's statutory-basis capital and surplus was $20,868,262 and $20,212,394 at December 31, 2014 and 2013, respectively. Statutory-basis net income was $848,303 and $1,233,527 for 2014 and 2013, respectively.

Principal adjustments to statutory amounts to derive GAAP amounts include: a) costs of acquiring new policies are deferred and amortized; b) benefit reserves are calculated using more realistic investment, mortality and withdrawal assumptions; c) changes in deferred taxes associated with timing differences are recorded in net income rather than directly to equity; d) value of business acquired and goodwill established for acquired companies differ from admitted statutory goodwill; e) accounting for certain investments in debt securities is at fair value with unrealized gains and losses reported as a separate component of equity; f) statutory asset valuation reserves and interest maintenance reserves are eliminated; and g) items treated as cumulative effect adjustments under statutory accounting principles.

NOTE 9 - Segment Data

The Company operates in four segments. 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.

NOTES TO CONSOLIDATED

financial STATEMENTS

Information relative to our operating segments is as follows:

	2014			2013

	(000's omitted)
Revenue:
Preneed and burial products	$	47,445		$	49,457
Traditional and universal life products		21,226			28,650
Administrative and financial services		1,244			1,215
Corporate and other		983			798
	$	70,898		$	80,120

Pre-tax income (loss) from operations:
Preneed and burial products	$	(34	)	$	816
Traditional and universal life products		1,286			968
Administrative and financial services		284			306
Corporate and other		160			37
	$	1,696		$	2,127

Assets:
Preneed and burial products	$	375,219		$	375,905
Traditional and universal life products		120,377			109,777
Administrative and financial services		9,496			9,937
Corporate and other		80,121			67,990
	$	585,213		$	563,609

Amortization and depreciation expense:
Preneed and burial products	$	5,458		$	5,866
Traditional and universal life products		1,987			1,726
Administrative and financial services		278			264
Corporate and other		373			360
	$	8,096		$	8,216

Included in the corporate and other revenue and pre-tax income above and as a component of other income in the consolidated statement of income for the year ended December 31, 2014 is $141,907 of net life insurance proceeds received under a company-owned life insurance policy upon the death of a former board member.

At December 31, 2013, the Company’s death and other benefits include an additional amount totaling $2,380,617 relative to a comparison of our life insurance policies against the Social Security Death Master File. This comparison was performed in compliance with a recently enacted Kentucky state law which follows a model law adopted by the National Conference of Insurance Legislators. This amount primarily affects the traditional and universal life segment, along with a much smaller impact on the final expense portion of the preneed and burial segment. The Company is in the process of researching the potential matches to determine that a valid claim exists, to locate beneficiaries and to pay benefits accordingly.

NOTE 10 - Reinsurance

The Company ceded 100% of the risks associated with its credit life and accident insurance written during 2014 and 2013 through coinsurance agreements with various companies. The Company administers the ceded credit life and accident insurance for an agreed-upon fee. During 2014 and 2013, the Company received $242,327 and $272,264, respectively, of fee income associated with these reinsurance arrangements, which is recognized in the administrative and financial services segment in the preceding table in Note 9. Ceded benefit and claim reserves associated with these reinsurance arrangements at December 31, 2014 and 2013 were $8,789,529 and $9,243,869, respectively. Additionally, unearned premium reserves were reduced by $7,810,299 and $8,186,589 at December 31, 2014 and 2013, respectively, for credit-related reinsurance transactions. The Company utilizes yearly renewable term reinsurance to cede life insurance coverage in excess of its retention limit.

NOTES TO CONSOLIDATED

financial STATEMENTS

Investors Heritage Life cedes 85% of life and annuity policy obligations assumed from Franklin American Life Insurance Company to Scottish Re (US) (formerly ceded to Scottish Annuity and Life Insurance Company (Cayman) Ltd. prior to novation between the companies in 2014). Benefit reserves ceded to Scottish and included in the amounts recoverable from reinsurers approximated $19,806,000 and $21,092,000 at December 31, 2014 and 2013, respectively. An escrow account has been established by Scottish to secure Investors Heritage Life's ceded benefit obligations.

Investors Heritage Life coinsures policy obligations written through its relationship with Puritan Financial Group to Puritan Life Insurance Company of America (“Puritan”). Benefit reserves ceded to Puritan and included in the amounts recoverable from reinsurers approximated $16,931,000 and $14,281,000 at December 31, 2014 and 2013, respectively. Puritan maintains a trust account in Kentucky to secure Investors Heritage Life's ceded benefit obligations.

During 2013, Investors Heritage Life began assuming 75% of the risks on certain policies sold by Puritan and Sterling Investors Life Insurance Company. The products being assumed are identical to the Heritage Solution and Heritage Provider products currently being written by Investors Heritage Life. However, these reinsurance arrangements allow us to participate in the profitability of these products in certain states where we are not currently marketing. Premiums assumed under these agreements totaled approximately $3,310,000 and $10,033,000 for the years ended December 31, 2014 and 2013, respectively.

Reinsurance ceded and assumed amounts included in the consolidated statements of income are as follows:

	2014		2013

Premiums ceded	$	13,687,074	$	14,105,855
Premiums assumed		3,346,657		10,044,766
Commission and expense allowances		3,443,836		3,238,144
Benefit recoveries		7,703,390		8,157,180

The Company remains contingently liable on all ceded insurance should any reinsurer be unable to meet their obligations.

NOTES TO CONSOLIDATED

financial STATEMENTS

NOTE 11 – Other Comprehensive Income

The following tables present the pretax components of the Company’s other comprehensive income, and the related income tax expense (benefit) for each component, for the years ended December 31, 2014 and 2013.

	Year Ended December 31, 2014
				Income Tax
				Expense
	Pretax			(Benefit)			Net of Tax
Other comprehensive income:
Change in net unrealized gains on available-for-sale securities:
Unrealized holding gains arising during period	$	12,863,346		$	4,356,021		$	8,507,325
Reclassification adjustment for gains included in income		(710,632	)		(224,098	)		(486,534	)
Adjustment for effect of deferred acquisition costs		(293,231	)		(99,699	)		(193,532	)
Net unrealized gains on investments		11,859,483			4,032,224			7,827,259
Change in defined benefit pension plan:
Actuarial net loss on pension plan		(3,231,218	)		(1,098,614	)		(2,132,604	)
Amortization of actuarial net loss in net periodic pension cost		390,413			132,740			257,673
Net change in defined benefit pension plan		(2,840,805	)		(965,874	)		(1,874,931	)

Total other comprehensive income	$	9,018,678		$	3,066,350		$	5,952,328

	Year Ended December 31, 2013
				Income Tax
				Expense
	Pretax			(Benefit)			Net of Tax
Other comprehensive loss:
Change in net unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during period	$	(26,280,225	)	$	(9,697,464	)	$	(16,582,761	)
Reclassification adjustment for gains included in income		(2,499,511	)		(319,944	)		(2,179,567	)
Adjustment for effect of deferred acquisition costs		894,503			304,130			590,373
Net unrealized gains (losses) on investments		(27,885,233	)		(9,713,278	)		(18,171,955	)
Change in defined benefit pension plan:
Actuarial net gain on pension plan		2,839,812			965,536			1,874,276
Amortization of actuarial net loss in net periodic pension cost		772,646			262,700			509,946
Net change in defined benefit pension plan		3,612,458			1,228,236			2,384,222

Total other comprehensive loss	$	(24,272,775	)	$	(8,485,042	)	$	(15,787,733	)

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.

NOTES TO CONSOLIDATED

financial STATEMENTS

The change in the components of the Company’s accumulated other comprehensive income for the years ended December 31, 2014 and 2013 are as follows:

	Unrealized Gains			Defined			Accumulated
	(Losses) on			Benefit			Other
	Available-For-Sale			Pension			Comprehensive
	Securities			Plans			Income
For the year ended December 31, 2014:
Beginning balance	$	9,916,148		$	(3,164,157	)	$	6,751,991
Other comprehensive income (loss) before reclassifications		8,313,793			(2,132,604	)		6,181,189
Amounts reclassified from accumulated other comprehensive income		(486,534	)		257,673			(228,861	)
Net current period other comprehensive income (loss)		7,827,259			(1,874,931	)		5,952,328
Ending balance	$	17,743,407		$	(5,039,088	)	$	12,704,319

For the year ended December 31, 2013:
Beginning balance	$	28,088,103		$	(5,548,379	)	$	22,539,724
Other comprehensive income (loss) before reclassifications		(15,992,388	)		1,874,276			(14,118,112	)
Amounts reclassified from accumulated other comprehensive income		(2,179,567	)		509,946			(1,669,621	)
Net current period other comprehensive income (loss)		(18,171,955	)		2,384,222			(15,787,733	)
Ending balance	$	9,916,148		$	(3,164,157	)	$	6,751,991

The following table presents the pretax and the related income tax components of the amounts reclassified from the Company’s accumulated other comprehensive income to the Company’s consolidated statement of income for the years ended December 31, 2014 and 2013.

	Year Ended December 31,
Reclassification Adjustments	2014			2013
Unrealized gains on available-for-sale securities:
Realized gains on sale of securities ^(a)	$	710,632		$	2,499,511
Income tax expense ^(c)		(224,098	)		(319,944	)
Net of tax		486,534			2,179,567

Defined benefit pension plans:
Amortization of actuarial net loss ^(b)		(390,413	)		(772,646	)
Income tax benefit ^(c)		132,740			262,700
Net of tax		(257,673	)		(509,946	)

Total reclassifications for the period	$	228,861		$	1,669,621

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

(b) These items are included in the computation of net periodic benefit cost (see Note 6).

NOTES TO CONSOLIDATED

financial STATEMENTS

NOTE 12 - Contingent Liabilities

The Company is named as a defendant in several legal actions arising primarily from claims made under insurance policies. Management and its legal counsel are of the opinion that the settlement of those actions will not have a material adverse effect on the financial position or results of operations.

In most of the states in which the Company is licensed to do business, guaranty fund assessments may be taken as a credit against premium taxes over a five-year period. These assessments, brought about by the insolvency of life and health insurers, are levied at the discretion of the various state guaranty fund associations to cover association obligations. It is management's opinion that the effect of any future assessments would not be material to the financial position or results of operations of the Company because of the use of premium tax offsets.

CORPORATE

INFORMATION

BOARD OF DIRECTORS

HARRY LEE WATERFIELD II		Chairman of the Board President Chief Executive Officer			Executive Committee Finance Committee Nominating Committee Frankfort, Kentucky

GEORGE R. BURGESS, JR.	Executive Committee Nominating Committee Frankfort, Kentucky			ROBERT M. HARDY, JR.		Executive Vice President, General Counsel Executive Committee Finance Committee Frankfort, Kentucky

HAROLD G. DORAN, JR.	Audit Committee Executive Committee Finance Committee Murray, Kentucky			DAVID W. REED		Audit Committee Nominating Committee Gilbertsville, Kentucky

GORDON C. DUKE	Audit Committee Finance Committee Frankfort, Kentucky			HELEN S. WAGNER		Executive Committee Nominating Committee Daniel Island, South Carolina

MICHAEL F. DUDGEON, JR.	Finance Committee Frankfort, Kentucky

CORPORATE OFFICERS

RAYMOND L. CARR	Executive Vice President, Chief Operating Officer Frankfort, Kentucky		JANE S. JACKSON			Corporate Secretary Frankfort, Kentucky

LARRY J. JOHNSON II, CPA	Vice President, Chief Financial Officer Frankfort, Kentucky		SHANE S. MITCHELL, CPA			Treasurer Frankfort, Kentucky

MOUNTJOY CHILTON MEDLEY LLP	Independent Registered Public Accounting Firm Louisville, Kentucky

ANNUAL MEETING	The 2015 annual meeting of shareholders of Investors Heritage Capital Corporation is scheduled for 11:00 a.m. on May 14, 2015 at the Company auditorium, Second and Shelby Streets, Frankfort, Kentucky.

FORM 10-K	A copy of the Form 10-K Annual Report to the Securities and Exchange Commission for the Company can be obtained at www.investorsheritage.com or upon request to the Secretary.

TRANSFER AGENT	Investors Heritage Life Insurance Company Stock Transfer Department P.O. Box 717 Frankfort, KY 40602-0717 Phone: 800.422.2011 502.209.1009

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