Investors Heritage Capital Corp - FORM 10-Q

Attached files

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EX-32.1 - EXHIBIT 32.1 - Investors Heritage Capital Corp	ex32-1.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

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT

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

For the quarterly period ended June 30, 2016

000-01999

(Commission file number)

INVESTORS HERITAGE CAPITAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

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

200 Capital Avenue,
Frankfort, Kentucky 40602
(Address of principal executive offices)

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

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

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒ No ☐

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

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

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

Yes ☐ No ☒

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

Common Capital Stock par value $1.00 per share

(Title of Class)

Number of outstanding shares as of August 12, 2016 - 1,106,706.033

CONTENTS

	PART I – FINANCIAL INFORMATION
		Page
ITEM 1.	Condensed Consolidated Financial Statements	4
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
ITEM 4.	Controls and Procedures	37



	PART II – OTHER INFORMATION

ITEM 1.	Legal Proceedings	38
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
ITEM 3.	Defaults Upon Senior Securities	38
ITEM 4.	Mine Safety Disclosures	38
ITEM 5.	Other Information	38
ITEM 6.	Exhibits	38


SIGNATURES		39

EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

PART I – FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Balance Sheets (Unaudited)

	June 30,		December 31,
	2016		2015
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost: $387,382,055 and $399,525,617)	$	415,853,414	$	409,146,807
Equity securities (cost: $7,452,666 and $7,452,666)		8,459,281		7,616,789
Mortgage loans on real estate		43,282,023		33,174,131
Policy loans		6,559,575		6,702,911
State-guaranteed receivables		9,871,982		7,692,959
Investments in convertible options		874,911		957,405
Other invested assets		2,156,380		2,379,451
Total investments		487,057,566		467,670,453
Cash and cash equivalents		6,201,730		3,619,663
Accrued investment income		4,910,275		5,149,612
Due premiums		2,838,266		2,946,218
Deferred acquisition costs		16,191,043		17,237,522
Value of business acquired		191,626		225,276
Leased property under capital leases		222,876		381,432
Property and equipment, net		880,134		909,151
Cash value of company-owned life insurance		13,352,552		13,191,773
Other assets		2,150,566		2,374,292
Amounts recoverable from reinsurers		55,457,841		56,332,692
Total assets	$	589,454,475	$	570,038,084

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities:
Benefit reserves	$	493,186,746	$	493,369,378
Unearned premium reserves		8,027,343		8,119,385
Policy claims		2,547,349		2,584,088
Liability for deposit-type contracts		3,351,408		3,400,836
Reserves for dividends and endowments and other		382,615		388,193
Total policy liabilities		507,495,461		507,861,880
Deferred federal income tax liability		7,736,330		1,105,776
Obligations under capital leases		212,152		377,259
Notes payable		1,426,362		1,433,448
Accrued pension liability		5,869,591		6,075,376
Other liabilities		4,480,984		3,933,343
Total liabilities		527,220,880		520,787,082

STOCKHOLDERS' EQUITY
Common stock (shares issued: 1,106,721 and 1,117,647)		1,106,721		1,117,647
Paid-in surplus		8,913,360		8,913,360
Accumulated other comprehensive income		13,668,273		757,161
Retained earnings		38,545,241		38,462,834
Total stockholders' equity		62,233,595		49,251,002
Total liabilities and stockholders' equity	$	589,454,475	$	570,038,084

See notes to condensed consolidated financial statements.

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Income Statements (Unaudited)

	Quarter Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
REVENUE
Premiums and other considerations	$	13,046,158		$	14,760,176		$	25,708,947		$	29,486,922
Premiums ceded		(2,363,041	)		(3,069,515	)		(5,259,650	)		(6,433,580	)
Net premiums		10,683,117			11,690,661			20,449,297			23,053,342

Investment income, net of expenses		5,544,138			5,339,048			10,999,805			10,562,860
Net realized gains on investments		247,577			44,928			574,289			203,756
Other income		379,312			394,696			732,909			745,137
Total revenue		16,854,144			17,469,333			32,756,300			34,565,095

BENEFITS AND EXPENSES
Death and other benefits		10,583,399			11,221,406			21,961,112			22,945,468
Guaranteed annual endowments		113,947			119,492			213,088			222,888
Dividends to policyholders		77,640			104,276			157,189			188,561
Increase in benefit reserves and unearned premiums		1,691,160			2,104,229			1,897,460			3,377,725
Acquisition costs deferred		(1,241,476	)		(1,632,799	)		(2,364,559	)		(3,021,143	)
Amortization of deferred acquisition costs		1,497,003			1,916,392			2,912,080			3,549,555
Commissions		836,355			1,006,981			1,527,471			1,904,345
Other general and administrative expenses		2,907,137			3,023,507			5,748,479			5,888,576
Total benefits and expenses		16,465,165			17,863,484			32,052,320			35,055,975

INCOME (LOSS) BEFORE FEDERAL INCOME TAXES		388,979			(394,151	)		703,980			(490,880	)

PROVISION (BENEFIT) FOR FEDERAL INCOME TAXES
Current		86,360			39,753			196,619			119,790
Deferred		10,885			(138,291	)		(20,624	)		(242,510	)
Total federal income taxes		97,245			(98,538	)		175,995			(122,720	)

NET INCOME (LOSS)	$	291,734		$	(295,613	)	$	527,985		$	(368,160	)

BASIC AND DILUTED NET INCOME (LOSS) PER SHARE	$	0.26		$	(0.26	)	$	0.47		$	(0.33	)

DIVIDENDS PER SHARE	$	-		$	-		$	0.21		$	0.21

See notes to condensed consolidated financial statements.

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

	Quarter Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015

NET INCOME (LOSS)	$	291,734		$	(295,613	)	$	527,985		$	(368,160	)

OTHER COMPREHENSIVE INCOME (LOSS):
Change in net unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during period		9,796,312			(10,742,624	)		20,257,718			(5,743,072	)
Reclassification adjustment for losses (gains) included in income		(238,345	)		30,987			(565,057	)		(127,841	)
Adjustment for effects of deferred acquisition costs		(240,771	)		283,000			(498,958	)		163,947
Net unrealized gains (losses) on investments		9,317,196			(10,428,637	)		19,193,703			(5,706,966	)
Change in defined benefit pension plan:
Amortization of actuarial net loss in net periodic pension cost		184,294			190,558			368,587			381,116

Other comprehensive income (loss) before income taxes		9,501,490			(10,238,079	)		19,562,290			(5,325,850	)

Income tax expense (benefit)		3,230,507			(3,480,946	)		6,651,178			(1,810,788	)

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES		6,270,983			(6,757,133	)		12,911,112			(3,515,062	)

COMPREHENSIVE INCOME (LOSS)	$	6,562,717		$	(7,052,746	)	$	13,439,097		$	(3,883,222	)

See notes to condensed consolidated financial statements.

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)

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

BALANCE, JANUARY 1, 2015	$	1,123,980		$	8,908,243	$	12,704,319		$	37,799,944		$	60,536,486

Net loss		-			-		-			(368,160	)		(368,160	)
Other comprehensive loss, net		-			-		(3,515,062	)		-			(3,515,062	)
Cash dividends		-			-		-			(236,035	)		(236,035	)
Repurchases of common stock, net		(6,426	)		-		-			(134,051	)		(140,477	)
BALANCE, JUNE 30, 2015	$	1,117,554		$	8,908,243	$	9,189,257		$	37,061,698		$	56,276,752

BALANCE, JANUARY 1, 2016	$	1,117,647		$	8,913,360	$	757,161		$	38,462,834		$	49,251,002

Net income		-			-		-			527,985			527,985
Other comprehensive income, net		-			-		12,911,112			-			12,911,112
Cash dividends		-			-		-			(234,706	)		(234,706	)
Repurchases of common stock, net		(10,926	)		-		-			(210,872	)		(221,798	)
BALANCE, JUNE 30, 2016	$	1,106,721		$	8,913,360	$	13,668,273		$	38,545,241		$	62,233,595

See notes to condensed consolidated financial statements.

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended June 30,
	2016			2015

NET CASH PROVIDED BY OPERATING ACTIVITIES	$	3,122,011		$	2,346,146
INVESTING ACTIVITIES
Purchases of available-for-sale securities		(14,300,913	)		(11,114,105	)
Sales of available-for-sale securities		12,897,692			4,019,517
Maturities of available-for-sale securities		14,501,960			12,346,103
Acquisitions of mortgage loans on real estate		(13,879,587	)		(6,457,488	)
Payments of mortgage loans on real estate		3,771,151			5,003,914
Purchases of state-guaranteed receivables		(2,370,769	)		-
Payments of state-guaranteed receivables		499,270			431,020
Purchases of convertible options		(62,185	)		-
Sales of convertible options		10,536			-
Net change in payable (receivable) for securities		110,109			-
Net reductions (additions) of other investments		366,407			300,753
Net additions to property and equipment		(32,327	)		(234,544	)
NET CASH PROVIDED BY INVESTING ACTIVITIES		1,511,344			4,295,170
FINANCING ACTIVITIES
Policyholder account deposits		2,390,095			2,222,624
Policyholder account withdrawals		(3,977,793	)		(3,957,542	)
Payments on notes payable		(1,210,748	)		(2,185,492	)
Proceeds from notes payable		1,203,662			1,813,490
Dividends paid		(234,706	)		(236,035	)
Repurchases of common stock, net		(221,798	)		(140,477	)
NET CASH USED IN FINANCING ACTIVITIES		(2,051,288	)		(2,483,432	)
INCREASE IN CASH AND CASH EQUIVALENTS		2,582,067			4,157,884
Cash and cash equivalents at beginning of period		3,619,663			1,870,867
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	6,201,730		$	6,028,751

See notes to condensed consolidated financial statements.

INVESTORS HERITAGE CAPITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

(Unaudited)

NOTE 1 - Nature of Operations

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

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

NOTE 2 - Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2015, as included in our Annual Report on Form 10-K.

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

Management has evaluated all events subsequent to June 30, 2016 through the date that these financial statements have been issued.

NOTE 3 – New Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board issued new guidance for the accounting for credit losses on financial instruments. A new model, referred to as the current expected credit losses model, requires an entity to determine credit-related impairment losses for financial instruments held at amortized cost and to estimate these expected credit losses over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider historical and current information, reasonable and supportable forecasts, as well as estimates of prepayments. The estimated credit losses, and subsequent adjustment to loss estimates, will be recorded through an allowance account which is deducted from the amortized cost of the financial instrument, with the offset recorded in current earnings. The guidance also modifies the impairment model for available-for-sale debt securities. The new model will require an estimate of expected credit losses only when the fair value is below the amortized cost of the asset, thus the length of time the fair value of an available-for-sale debt security has been below the amortized cost will no longer affect the determination of whether a credit loss exists. In addition, credit losses on available-for-sale debt securities will be limited to the difference between the security’s amortized cost basis and its fair value. The updated guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for periods beginning after December 15, 2018. The Company is evaluating the impact of the adoption of this guidance on its financial position and results of operations.

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. Refer to the footnotes to the consolidated financial statements for the year ended December 31, 2015, as included in our Annual Report on Form 10-K, for previously issued standards that have not yet been adopted that are considered applicable to the Company’s current operations.

NOTE 4 – Investments

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

			Gross		Gross
June 30, 2016	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Fixed maturity securities:
U.S. government obligations	$	22,783,361	$	1,359,033	$	-	$	24,142,394
States and political subdivisions		36,199,903		6,656,933		154,888		42,701,948
Corporate		224,308,283		16,573,912		1,270,799		239,611,396
Foreign		61,685,959		3,261,737		951,455		63,996,241
Mortgage-backed securities (MBS):
Commercial MBS		6,783,460		529,598		-		7,313,058
Residential MBS		34,688,939		2,512,438		-		37,201,377
Corporate redeemable preferred stock		932,150		92,487		137,637		887,000
Total fixed maturity securities		387,382,055		30,986,138		2,514,779		415,853,414
Equity securities:
U.S. agencies		707,900		-		-		707,900
Mutual funds		318,284		42,074		-		360,358
Corporate common stock		6,426,482		1,558,280		593,739		7,391,023
Total equity securities		7,452,666		1,600,354		593,739		8,459,281
Total	$	394,834,721	$	32,586,492	$	3,108,518	$	424,312,695

			Gross		Gross
December 31, 2015	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Fixed maturity securities:
U.S. government obligations	$	23,373,714	$	642,038	$	-	$	24,015,752
States and political subdivisions		36,830,198		4,511,826		136,585		41,205,439
Corporate		229,425,035		10,338,999		4,587,896		235,176,138
Foreign		65,010,084		1,731,076		4,682,638		62,058,522
Asset-backed securities		143,552		457		-		144,009
Mortgage-backed securities (MBS):
Commercial MBS		6,830,520		148,314		15,592		6,963,242
Residential MBS		37,200,599		1,776,233		62,255		38,914,577
Corporate redeemable preferred stock		711,915		-		42,787		669,128
Total fixed maturity securities		399,525,617		19,148,943		9,527,753		409,146,807
Equity securities:
U.S. agencies		707,900		-		-		707,900
Mutual funds		318,284		-		14,253		304,031
Corporate common stock		6,426,482		702,497		524,121		6,604,858
Total equity securities		7,452,666		702,497		538,374		7,616,789
Total	$	406,978,283	$	19,851,440	$	10,066,127	$	416,763,596

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

	June 30, 2016						December 31, 2015
			Gross		Number				Gross		Number
	Estimated		Unrealized		of		Estimated		Unrealized		of
	Fair Value		Loss		Securities		Fair Value		Loss		Securities
Fixed Maturities:
Less than 12 months:
States and political subdivisions	$	-	$	-		-	$	1,613,415	$	136,585		2
Corporate		2,793,561		155,505		2		55,039,213		3,873,158		52
Foreign		1,600,560		6,777		3		24,154,510		1,418,143		20
Commercial MBS		-		-		-		1,447,694		15,592		2
Residential MBS		-		-		-		3,320,890		62,255		2
Corporate redeemable preferred stock		110,426		137,637		1		669,128		42,787		2
Greater than 12 months:
States and political subdivisions		1,595,113		154,888		2		-		-		-
Corporate		14,927,912		1,115,294		11		5,533,581		714,738		4
Foreign		10,405,650		944,678		7		6,007,156		3,264,495		4
Total fixed maturities		31,433,222		2,514,779		26		97,785,587		9,527,753		88

Equities:
Less than 12 months:
Mutual funds		-		-		-		304,031		14,253		1
Corporate common stock		1,116,712		368,871		10		2,449,672		473,551		15
Greater than 12 months:
Corporate common stock		614,128		224,868		8		183,960		50,570		3
Total equities		1,730,840		593,739		18		2,937,663		538,374		19

Total	$	33,164,062	$	3,108,518		44	$	100,723,250	$	10,066,127		107

At June 30, 2016, 99.9% of the fixed maturity portfolio had a fair value to amortized cost ratio of greater than 80% and 93.7% of the equity securities portfolio had a fair value to cost ratio of greater than 80%. At December 31, 2015, 97.4% of the fixed maturity portfolio had a fair value to amortized cost ratio of greater than 80%, and 93.4% of the equity securities portfolio had a fair value to cost ratio of greater than 80%. At June 30, 2016 and December 31, 2015, 37.5% and 54.5%, respectively, of the total gross unrealized losses shown above were comprised of fixed maturity securities in the basic industrial sector while 22.6% of the gross unrealized losses were comprised of fixed maturity securities in the energy sector, respectively. The majority of these unrealized losses were attributable to credit spread widening across the energy sector and metals/mining subsectors associated with sharp declines in commodity prices. Energy-related companies have been negatively impacted by the rapid decline in oil prices, which has pressured revenues and margins. The metal/mining sub-sector companies are experiencing lower demand for coal, copper, iron ore and other minerals due to the economic slowdown in China in addition to sluggish demand in the United States and Europe and tightening environmental regulation. While the market values of these securities remain below book value, the market values have rebounded significantly as of June 30, 2016.

At June 30, 2016 and December 31, 2015, the unrealized losses associated with our equity securities were primarily attributable to unrealized losses on real estate sector stocks. The increase in unrealized losses is primarily due to equity market conditions rather than credit concerns associated with the positions.

The Company’s decision to record an impairment loss is primarily based on whether the security’s fair value is likely to remain significantly below its book value in light of all the factors considered. Factors that are considered include the length of time the security’s fair value has been below its carrying amount, the severity of the decline in value, the credit worthiness of the issuer, and the coupon and/or dividend payment history of the issuer. The Company also assesses whether it intends to sell or whether it is more likely than not that it may be required to sell the security prior to its recovery in value. For any fixed maturity securities that are other-than-temporarily impaired, the Company determines the portion of the other-than-temporary impairment that is credit-related and the portion that is related to other factors. The credit-related portion is the difference between the expected future cash flows and the amortized cost basis of the fixed maturity security, and that difference is charged to earnings. The non-credit-related portion representing the remaining difference to fair value is recognized in other comprehensive income (loss). Only in the case of a credit-related impairment where management has the intent to sell the security, or it is more likely than not that it will be required to sell the security before recovery of its cost basis, is a fixed maturity security adjusted to fair value and the resulting losses recognized in realized gains/losses in the consolidated statements of income. Any other-than-temporary impairments on equity securities are recorded in the consolidated statements of income in the periods incurred as the difference between fair value and cost. Based on our review, the Company experienced no other-than-temporary impairments during the quarters or six months ended June 30, 2016 or 2015.

Management believes that the Company will fully recover its cost basis in the securities held at June 30, 2016, 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 and economic environment rather than credit factors that would imply other-than-temporary impairment.

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

	June 30,			December 31,
	2016			2015
Net unrealized appreciation on available-for sale securities	$	29,477,974		$	9,785,313
Adjustment to deferred acquisition costs		(748,359	)		(249,401	)
Deferred income taxes		(9,768,069	)		(3,242,210	)
Net unrealized appreciation on available-for sale securities	$	18,961,546		$	6,293,702

The amortized cost and fair value of fixed maturity securities at June 30, 2016, 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	$	10,199,092	$	10,416,859
Due after one year through five years		93,847,639		101,522,646
Due after five years through ten years		174,242,762		182,598,133
Due after ten years		46,249,495		54,377,447
Due at multiple maturity dates		61,910,917		66,051,329
Corporate redeemable preferred stock		932,150		887,000
Total	$	387,382,055	$	415,853,414

Proceeds from sales and maturities of investments in available-for-sale securities, as well as gross gains and gross losses realized, are presented below.

	Quarter Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Proceeds from sales and maturities	$	11,342,518		$	3,545,600		$	27,399,652		$	16,365,620
Gross realized gains		239,937			89,388			572,834			250,180
Gross realized losses		(1,592	)		(120,375	)		(7,777	)		(122,339	)

The table below shows the change in net unrealized investment gains (losses) and the amount of realized investment gains (losses) on fixed maturities and equity securities in addition to realized investment gains on mortgage loans.

	Quarter Ended June 30,					Six Months Ended June 30,
	2016		2015			2016		2015
Change in net unrealized investment gains (losses):
Securities available-for-sale:
Fixed maturities	$	9,021,186	$	(10,207,115	)	$	18,850,169	$	(5,497,475	)
Equity securities		536,781		(504,522	)		842,492		(373,438	)
Net realized investment gains (losses):
Securities available-for-sale:
Fixed maturities	$	238,345	$	-		$	565,057	$	90,859
Equity securities		-		(30,987	)		-		36,982
Mortgage loans on real estate		-		75,915			-		75,915
Investments in convertible options		9,232		-			9,232		-

The Company is required to hold assets on deposit for the benefit of policyholders in accordance with statutory rules and regulations. At June 30, 2016 and December 31, 2015, these required deposits had a total fair value of $22,886,347 and $22,899,132, respectively.

The Company also engages in commercial and residential mortgage lending. As of June 30, 2016, investments in commercial and residential properties comprised 21.8% and 78.2%, respectively, of the Company’s mortgage portfolio. At December 31, 2015, investments in commercial and residential properties comprised 32.1% and 67.9%, respectively, of the Company’s mortgage portfolio.

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

The Company purchases single family 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 utilize third party servicers to administer these loans.

As of June 30, 2016 and December 31, 2015, there were no non-performing loans, loans on nonaccrual status, loans in process of foreclosure, or restructured loans. As of June 30, 2016, the Company held one mortgage loan with a balance of $682,669 that is past due by more than 90 days. Subsequent to June 30, 2016, the Company’s mortgage loan servicer formally filed a notice of intent to foreclose on this property. Based on the most recent appraisal of this property, the Company expects to collect all principal and accrued interest on this loan in the event of foreclosure. The Company had no mortgage loans past due by more than 90 days as of December 31, 2015. The Company experienced no other mortgage loan defaults during the quarters or six months ended June 30, 2016 and 2015.

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

	June 30,		December 31,
	2016		2015
Illinois	$	5,917,877	$	6,046,408
Florida		5,907,808		3,906,034
Texas		5,771,393		5,694,612
California		4,808,811		3,366,434
Georgia		3,383,614		2,671,788
Kentucky		2,615,536		3,241,793
Arizona		2,261,096		774,060
Missouri		2,176,074		1,342,845
Ohio		1,996,066		1,692,354
Colorado		1,381,786		222,364
New Jersey		1,305,637		247,723
Tennessee		1,104,402		895,607
Indiana		902,821		759,139
North Carolina		767,573		353,275
Utah		586,496		77,939
Oregon		490,573		-
Nevada		482,577		373,359
Pennsylvania		361,219		370,323
West Virginia		245,766		412,250
South Carolina		212,729		225,881
Massachusetts		187,932		205,469
Idaho		151,033		159,073
Kansas		134,907		135,401
Virginia		128,297		-
Total	$	43,282,023	$	33,174,131

The Company owns certain investments in state-guaranteed receivables. These investments represent an assignment of the future rights to cash flows from lottery winners purchased at a discounted price. Payments on these investments are made by state run lotteries and guaranteed by the states. The state-guaranteed receivables are carried at their amortized cost basis on the balance sheet. At June 30, 2016, the amortized cost and estimated fair value of state-guaranteed receivables, by contractual maturity, are summarized as follows:

	Amortized		Fair
	Cost		Value
Due in one year or less	$	964,249	$	979,659
Due after one year through five years		3,349,031		3,698,492
Due after five years through ten years		3,739,262		4,721,001
Due after ten years		1,819,440		2,824,363
Total	$	9,871,982	$	12,223,515

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

	June 30,		December 31,
	2016		2015
New York	$	3,503,994	$	3,496,115
Georgia		2,065,032		1,432,022
Massachusetts		1,984,696		1,991,601
Washington		683,831		-
Indiana		456,953		-
Ohio		426,365		54,171
Pennsylvania		332,510		294,968
Texas		252,668		243,939
California		165,933		180,143
Total	$	9,871,982	$	7,692,959

During the third quarter of 2015, the Company began purchasing investments in convertible fixed maturity securities. Convertible securities feature an option allowing for a portion of the security to be converted into an equity position of the underlying issuer in exchange for a lower coupon rate. In accordance with FASB accounting guidance, this convertible feature must be bifurcated and reported separately on the balance sheet at fair value, with adjustments in fair value recognized in the income statement. Accordingly, the convertible options within our portfolio are reported as investments in convertible options on the balance sheet, and the mark-to-market adjustment associated with the changes in fair value of the convertible options are reported as gains (losses) on investments in convertible options as a component of net investment income. As of June 30, 2016 and December 31, 2015, the total fair value of our investments in convertible options was $874,911 and $957,405, respectively. For the quarter and six months ended June 30, 2016, we recognized a gain (loss) on our investments in convertible options of $38,044 and ($143,376), respectively, relative to the mark-to-market adjustment.

Major categories of net investment income are summarized as follows:

	Quarter Ended June 30,				Six Months Ended June 30,
	2016		2015		2016			2015
Fixed maturities	$	4,614,528	$	4,558,942	$	9,540,889		$	9,196,750
Equity securities		64,361		73,489		131,650			136,780
Mortgage loans on real estate		733,462		625,699		1,323,374			1,184,095
Policy loans		122,145		123,246		243,455			241,986
State-guaranteed receivables		170,981		137,600		307,523			278,275
Gain (loss) on investments in convertible options		38,044		-		(143,376	)		-
Other		58,629		60,379		112,314			121,031
Gross investment income		5,802,150		5,579,355		11,515,829			11,158,917
Investment expenses		258,012		240,307		516,024			596,057
Net investment income	$	5,544,138	$	5,339,048	$	10,999,805		$	10,562,860

NOTE 5 – Fair Values of Financial Instruments

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

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

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

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

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

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

Valuation of Investments Reported at Fair Value in Financial Statements

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

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

	June 30, 2016
	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. government obligations	$	-	$	24,142,394	$	-	$	24,142,394
States and political subdivisions		-		42,701,948		-		42,701,948
Corporate		-		239,611,396		-		239,611,396
Foreign		-		63,996,241		-		63,996,241
Mortgage-backed securities:
Commercial MBS		-		7,313,058		-		7,313,058
Residential MBS		-		37,201,377		-		37,201,377
Corporate redeemable preferred stock		-		887,000		-		887,000
Total fixed maturities	$	-	$	415,853,414	$	-	$	415,853,414

Equity securities:
U.S. agencies	$	707,900	$	-	$	-	$	707,900
Mutual funds		360,358		-		-		360,358
Corporate common stock		6,943,023		-		448,000		7,391,023
Total equity securities	$	8,011,281	$	-	$	448,000	$	8,459,281

Investments in convertible options	$	-	$	874,911	$	-	$	874,911

	December 31, 2015
	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. government obligations	$	-	$	24,015,752	$	-	$	24,015,752
States and political subdivisions		-		41,205,439		-		41,205,439
Corporate		-		235,176,138		-		235,176,138
Foreign		-		62,058,522		-		62,058,522
Asset-backed securities		-		144,009		-		144,009
Mortgage-backed securities:
Commercial MBS		-		6,963,242		-		6,963,242
Residential MBS		-		38,914,577		-		38,914,577
Corporate redeemable preferred stock		-		669,128		-		669,128
Total fixed maturities	$	-	$	409,146,807	$	-	$	409,146,807

Equity securities:
U.S. agencies	$	707,900	$	-	$	-	$	707,900
Mutual funds		304,031		-		-		304,031
Corporate common stock		6,252,858		-		352,000		6,604,858
Total equity securities	$	7,264,789	$	-	$	352,000	$	7,616,789

Investments in convertible options	$	-	$	957,405	$	-	$	957,405

The following table provides a summary of changes in fair value of our Level 3 financial instruments reported at fair value.

	Quarter Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Corporate common stock:
Beginning balance	$	448,000	$	352,000	$	352,000	$	384,000
Transfers into Level 3		-		-		-		-
Transfers out of Level 3		-		-		-		-
Purchases		-		-		-		-
Sales		-		-		-		-
Total gains or losses:
Included in earnings		-		-		-		-
Included in other comprehensive income		-		-		96,000		(32,000	)
Ending balance	$	448,000	$	352,000	$	448,000	$	352,000

The Company experienced no transfers between Level 1 and Level 2 during the quarters or six months ended June 30, 2016 or 2015. The Company experienced no transfers between Level 2 and Level 3 during the quarters or six months ended June 30, 2016 or 2015. Transfers in and/or out of Level 3 are primarily attributable to changes in the availability of market observable information and re-evaluation of the observability of pricing inputs.

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

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 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.

	June 30, 2016
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Assets:
Mortgage loans on real estate:
Commercial	$	9,428,111	$	9,777,129	$	-	$	-	$	9,777,129
Residential		33,853,912		36,532,039		-		-		36,532,039
Policy loans		6,559,575		6,559,575		-		-		6,559,575
State-guaranteed receivables		9,871,982		12,223,515		-		12,223,515		-
Other invested assets		2,156,380		2,156,380		-		-		2,156,380
Cash and cash equivalents		6,201,730		6,201,730		6,201,730		-		-
Accrued investment income		4,910,275		4,910,275		-		-		4,910,275
Cash value of company-owned life insurance		13,352,552		13,352,552		-		-		13,352,552

Liabilities:
Policyholder deposits (Investment-type contracts)		52,556,249		56,111,534		-		-		56,111,534
Policy claims		2,547,349		2,547,349		-		-		2,547,349
Obligations under capital leases		212,152		212,152		-		-		212,152
Notes payable		1,426,362		1,426,362		-		-		1,426,362

	December 31, 2015
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Assets:
Mortgage loans on real estate:
Commercial	$	10,655,107	$	11,080,145	$	-	$	-	$	11,080,145
Residential		22,519,024		24,679,435		-		-		24,679,435
Policy loans		6,702,911		6,702,911		-		-		6,702,911
State-guaranteed receivables		7,692,959		9,094,934		-		9,094,934		-
Other invested assets		2,379,451		2,379,451		-		-		2,379,451
Cash and cash equivalents		3,619,663		3,619,663		3,619,663		-		-
Accrued investment income		5,149,612		5,149,612		-		-		5,149,612
Cash value of company-owned life insurance		13,191,773		13,191,773		-		-		13,191,773

Liabilities:
Policyholder deposits (Investment-type contracts)		52,694,746		53,880,242		-		-		53,880,242
Policy claims		2,584,088		2,584,088		-		-		2,584,088
Obligations under capital leases		377,259		377,259		-		-		377,259
Notes payable		1,433,448		1,433,448		-		-		1,433,448

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

Mortgage loans on real estate: The fair values for mortgage loans are estimated using discounted cash flow analyses. For commercial mortgage loans, the discount rate was assumed to be the interest rate of the last commercial mortgage 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.

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

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

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

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

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

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

NOTE 6 - Earnings per Share

Earnings per share of common stock were computed based on the weighted average number of common shares outstanding during each period. The weighted average number of shares outstanding for the quarters ended June 30, 2016 and 2015 were 1,115,726 and 1,121,876, respectively. The weighted average number of shares outstanding for the six months ended June 30, 2016 and 2015 were 1,116,687 and 1,122,922, respectively.

NOTE 7 - Segment Data

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

	Quarter Ended June 30,					Six Months Ended June 30,
	2016		2015			2016			2015

Revenue:
Preneed and burial products	$	13,098,661	$	12,255,597		$	25,855,841		$	24,387,004
Traditional and universal life products		3,164,177		4,653,339			5,960,570			9,095,803
Administrative and financial services		353,115		337,960			680,322			640,054
Corporate and other		238,191		222,437			259,567			442,234
Total revenue	$	16,854,144	$	17,469,333		$	32,756,300		$	34,565,095

Pre-tax income (loss) from operations:
Preneed and burial products	$	116,617	$	(653,019	)	$	337,464		$	(899,867	)
Traditional and universal life products		168,796		203,619			379,967			275,197
Administrative and financial services		62,719		60,137			125,156			117,723
Corporate and other		40,847		(4,888	)		(138,607	)		16,067
Total pre-tax income (loss)	$	388,979	$	(394,151	)	$	703,980		$	(490,880	)

NOTE 8 – Federal Income Taxes

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

We file U.S. federal income tax returns and income tax returns in various state jurisdictions. Our 2012 through 2015 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.

NOTE 9 – Other Comprehensive Income (Loss)

The following tables present the pretax components of the Company’s other comprehensive income (loss), and the related income tax expense (benefit) for each component.

	Quarter Ended June 30, 2016
				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	$	9,796,312		$	3,330,746		$	6,465,566
Reclassification adjustment for gains included in income		(238,345	)		(81,037	)		(157,308	)
Adjustment for effect of deferred acquisition costs		(240,771	)		(81,862	)		(158,909	)
Net unrealized gains on investments		9,317,196			3,167,847			6,149,349
Change in defined benefit pension plan:
Amortization of actuarial net loss in net periodic pension cost		184,294			62,660			121,634

Total other comprehensive income	$	9,501,490		$	3,230,507		$	6,270,983

	Quarter Ended June 30, 2015
				Income Tax
				Expense
	Pretax			(Benefit)			Net of Tax
Other comprehensive loss:
Change in net unrealized gains on available-for-sale securities:
Unrealized holding losses arising during period	$	(10,742,624	)	$	(3,641,269	)	$	(7,101,355	)
Reclassification adjustment for losses included in income		30,987			(687	)		31,674
Adjustment for effect of deferred acquisition costs		283,000			96,220			186,780
Net unrealized losses on investments		(10,428,637	)		(3,545,736	)		(6,882,901	)
Change in defined benefit pension plan:
Amortization of actuarial net loss in net periodic pension cost		190,558			64,790			125,768

Total other comprehensive loss	$	(10,238,079	)	$	(3,480,946	)	$	(6,757,133	)

	Six Months Ended June 30, 2016
				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	$	20,257,718		$	6,887,624		$	13,370,094
Reclassification adjustment for gains included in income		(565,057	)		(192,119	)		(372,938	)
Adjustment for effect of deferred acquisition costs		(498,958	)		(169,646	)		(329,312	)
Net unrealized gains on investments		19,193,703			6,525,859			12,667,844
Change in defined benefit pension plan:
Amortization of actuarial net loss in net periodic pension cost		368,587			125,319			243,268

Total other comprehensive income	$	19,562,290		$	6,651,178		$	12,911,112

	Six Months Ended June 30, 2015
				Income Tax
				Expense
	Pretax			(Benefit)			Net of Tax
Other comprehensive loss:
Change in net unrealized gains on available-for-sale securities:
Unrealized holding losses arising during period	$	(5,743,072	)	$	(1,961,897	)	$	(3,781,175	)
Reclassification adjustment for gains included in income		(127,841	)		(34,213	)		(93,628	)
Adjustment for effect of deferred acquisition costs		163,947			55,742			108,205
Net unrealized losses on investments		(5,706,966	)		(1,940,368	)		(3,766,598	)
Change in defined benefit pension plan:
Amortization of actuarial net loss in net periodic pension cost		381,116			129,580			251,536

Total other comprehensive loss	$	(5,325,850	)	$	(1,810,788	)	$	(3,515,062	)

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.

The change in the components of the Company’s accumulated other comprehensive income, net of tax, are as follows:

	Unrealized Gains			Defined			Accumulated
	(Losses) on			Benefit			Other
	Available-For-Sale			Pension			Comprehensive
	Securities			Plan			Income
For the six months ended June 30, 2016:
Beginning balance	$	6,293,702		$	(5,536,541	)	$	757,161
Other comprehensive income before reclassifications		13,040,782			-			13,040,782
Amounts reclassified from accumulated other comprehensive income		(372,938	)		243,268			(129,670	)
Net current period other comprehensive income		12,667,844			243,268			12,911,112
Ending balance	$	18,961,546		$	(5,293,273	)	$	13,668,273

For the six months ended June 30, 2015:
Beginning balance	$	17,743,407		$	(5,039,088	)	$	12,704,319
Other comprehensive loss before reclassifications		(3,672,970	)		-			(3,672,970	)
Amounts reclassified from accumulated other comprehensive income		(93,628	)		251,536			157,908
Net current period other comprehensive income (loss)		(3,766,598	)		251,536			(3,515,062	)
Ending balance	$	13,976,809		$	(4,787,552	)	$	9,189,257

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.

	Quarter Ended June 30,						Six Months Ended June 30,
Reclassification Adjustments	2016			2015			2016			2015
Unrealized gains (losses) on available-for-sale securities:
Realized gains (losses) on sale of securities ^(a)	$	238,345		$	(30,987	)	$	565,057		$	127,841
Income tax expense ^(c)		(81,037	)		(687	)		(192,119	)		(34,213	)
Net of tax		157,308			(31,674	)		372,938			93,628

Defined benefit pension plan:
Amortization of actuarial net loss ^(b)		(184,294	)		(190,558	)		(368,587	)		(381,116	)
Income tax benefit ^(c)		62,660			64,790			125,319			129,580
Net of tax		(121,634	)		(125,768	)		(243,268	)		(251,536	)

Total reclassifications for the period	$	35,674		$	(157,442	)	$	129,670		$	(157,908	)

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

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

NOTE 10 – Employee Benefit Plans

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

	Quarter Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015

Service cost	$	-		$	-		$	-		$	-
Interest cost		247,610			222,566			495,220			445,132
Expected return on plan assets		(275,502	)		(293,070	)		(551,005	)		(586,139	)
Recognized actuarial net loss		184,294			190,558			368,587			381,116
Net periodic pension cost	$	156,402		$	120,054		$	312,802		$	240,109

We previously disclosed in our financial statements for the year ended December 31, 2015 that the Company expected to contribute $300,000 to our defined benefit pension plan during 2016. As of June 30, 2016, the Company had contributed $150,000 to the plan.

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

GENERAL

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

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

In our preneed and burial product segment, we currently market the Legacy Gold and Heritage Final Expense products. The Legacy Gold life insurance and annuity product series is sold in the preneed market in conjunction with prearranged funerals. The Legacy Gold series includes both single premium and multi-pay policies, and both underwritten and guaranteed issue options are available. The Heritage Final Expense product is a non-participating whole life insurance product with simplified underwriting, sold in the final expense market.

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

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

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

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

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

We utilize a combination of yearly renewable term reinsurance and coinsurance to cede life insurance coverage in excess of our desired retention limits. In recent years, we have maintained our retention limits in most cases at $25,000 per life, utilizing a combination of established product specific reinsurance treaties along with yearly renewable term treaties for policies where we had previously maintained more than this limit. At the end of the second quarter of 2016, we approved an increase in our individual life retention to $50,000 per life where allowable under our reinsurance agreements. We are in the process of evaluating and either replacing or modifying our existing individual life yearly renewable term reinsurance agreements in order to effect this increase in retention. We anticipate that this change will better align our retention with our current capital, reduce reinsurance costs and allow for us to maintain a greater share of the anticipated profitability of our products.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

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

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

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

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

Our fixed maturities are Level 2 instruments, for which the fair value is derived from readily available pricing services utilizing recent trades and broker information. Certain liquid equity securities are considered Level 1 instruments and are valued based on publicly available market quotes in an active market. We hold $448,000 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 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.

Income Taxes

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

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

Employee Benefit Plans

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

During 2014, the Society of Actuaries released new mortality tables and a new mortality improvement scale for consideration with respect to defined benefit plan liability measurement. Effective December 31, 2015, our plan began utilizing new mortality tables and improvement scales, developed by plan consulting actuaries utilizing the principles underlying the guidance from the Society of Actuaries along with allowable adjustments where warranted.

We previously disclosed in our financial statements for the year ended December 31, 2015 that we expected to contribute $300,000 to our defined benefit pension plan during 2016. As of June 30, 2016, the Company had contributed $150,000 to the plan.

New Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board issued new guidance for the accounting for credit losses on financial instruments. A new model, referred to as the current expected credit losses model, requires an entity to determine credit-related impairment losses for financial instruments held at amortized cost and to estimate these expected credit losses over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider historical and current information, reasonable and supportable forecasts, as well as estimates of prepayments. The estimated credit losses, and subsequent adjustment to loss estimates, will be recorded through an allowance account which is deducted from the amortized cost of the financial instrument, with the offset recorded in current earnings. The guidance also modifies the impairment model for available-for-sale debt securities. The new model will require an estimate of expected credit losses only when the fair value is below the amortized cost of the asset, thus the length of time the fair value of an available-for-sale debt security has been below the amortized cost will no longer affect the determination of whether a credit loss exists. In addition, credit losses on available-for-sale debt securities will be limited to the difference between the security’s amortized cost basis and its fair value. The updated guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for periods beginning after December 15, 2018. We are evaluating the impact of the adoption of this guidance on the Company’s financial position and results of operations.

INVESTMENTS, LIQUIDITY AND CAPITAL RESOURCES

Investments

We maintain a sound, conservative investment strategy. At June 30, 2016, 85.4% of our total invested assets consisted of fixed income securities, compared to 87.5% at December 31, 2015. At June 30, 2016 and December 31, 2015, our fixed income investments were 95.9% and 97.5% investment grade, respectively, as rated by Standard & Poor’s. The Standard & Poor’s average quality rating of our fixed income portfolio holdings as of June 30, 2016 and December 31, 2015 was A.

We have reviewed our investment portfolio and do not believe that there are any securities that are other-than-temporarily impaired at June 30, 2016. None of our fixed income assets are in default and there has been no material change in the distribution of our fixed income portfolio. We recorded no other-than-temporary impairment charges in the consolidated statements of income during the quarters or six months ended June 30, 2016 or 2015.

At June 30, 2016, 99.9% of our fixed maturity portfolio had a fair value to amortized cost ratio of greater than 80% and 93.7% of our equity securities portfolio had a fair value to cost ratio of greater than 80%. At December 31, 2015, 97.4% of our fixed maturity portfolio had a fair value to amortized cost ratio of greater than 80%, and 93.4% of our equity securities portfolio had a fair value to cost ratio of greater than 80%. At June 30, 2016 and December 31, 2015, 37.5% and 54.5%, respectively, of the total gross unrealized losses in our fixed maturities and equities portfolio were comprised of fixed maturity securities in the basic industrial sector while 22.6% of the gross unrealized losses were comprised of fixed maturity securities in the energy sector, respectively. The majority of these unrealized losses were attributable to credit spread widening across the energy sector and metals/mining subsectors associated with sharp declines in commodity prices. Energy-related companies have been negatively impacted by the rapid decline in oil prices, which has pressured revenues and margins. The metal/mining sub-sector companies are experiencing lower demand for coal, copper, iron ore and other minerals due to the economic slowdown in China in addition to sluggish demand in the United States and Europe and tightening environmental regulation. While the market values of these securities remain below book value, the market values have rebounded significantly as of June 30, 2016.

We continuously monitor the investment risk within our portfolio, including the risk associated with subprime lending with our CMO investments. As of June 30, 2016, we have no investments with any level of direct subprime exposure. Additionally, we have no Alt-A bond exposure within our current holdings.

We have an investment advisory agreement with an independent third-party investment advisor to purchase common and preferred stocks in stable areas within the real estate sector. The investment advisor has a history of strong performance within these markets. The majority of these funds have been invested in a diversified assortment of regularly traded, exchange listed common stocks. As of June 30, 2016, the largest individual stock position within this group had a fair value of approximately $504,000. We believe the unrealized losses in our common stock portfolio are temporary in nature given the credit quality of the issuers. We believe that these investments will generate positive future results by providing a slightly increased and fully managed exposure to equity markets.

Additionally, we engage in commercial and residential mortgage lending. As of June 30, 2016 and December 31, 2015, investments in commercial properties comprised 21.8% and 32.1%, respectively, of our mortgage portfolio. Our commercial and residential apartment building mortgage loans are either originated in-house or through two mortgage brokers, are secured by first mortgages on the real estate and generally carry personal guarantees by the borrowers. Loan-to-value ratios of 80% or less and debt service coverage from existing cash flows of 115% or higher are generally required. We minimize credit risk in our mortgage loan portfolio through various methods, including stringently underwriting the loan request, maintaining small average loan balances, and reviewing larger mortgage loans on an annual basis.

As of June 30, 2016 and December 31, 2015, investments in residential mortgage loans comprised 78.2% and 67.9%, respectively, of our mortgage portfolio. We purchase single family 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 utilize third party servicers to administer these loans. We currently anticipate evaluating and making additional residential mortgage loan investments assuming they meet our investment goals and criteria.

As of June 30, 2016, our average loan balance is $167,760 and the average loan-to-value is 62%. The largest loan currently held has a balance of $917,589. Our mortgage loans are spread across properties located in 24 states, with approximately 65.6% of our loans located in the states of Illinois, Texas, Florida, California, Kentucky, and Georgia. At June 30, 2016 and December 31, 2015, 8.9% and 7.1% of invested assets consisted of mortgage loans, respectively.

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 June 30, 2016 and December 31, 2015, there were no non-performing loans, loans on nonaccrual status, loans in process of foreclosure, or restructured loans. As of June 30, 2016, we held one mortgage loan with a balance of $682,669 that is past due by more than 90 days. Subsequent to June 30, 2016, our mortgage loan servicer formally filed a notice of intent to foreclose on this property. Based on the most recent appraisal of this property, we expect to collect all principal and accrued interest on this loan in the event of 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 June 30, 2016, we held approximately $9,872,000 in state-guaranteed receivables, with the largest concentrations in the states of New York, Georgia and Massachusetts totaling approximately $3,504,000, $2,065,000 and $1,985,000, respectively. At June 30, 2016 and December 31, 2015, 2.0% of invested assets consisted of state-guaranteed receivables.

During the third quarter of 2015, with the assistance and under the active management of our external third party investment advisor, we began purchasing investments in convertible fixed maturity securities. Convertible securities feature an option allowing for a portion of the security to be converted into an equity position of the underlying issuer in exchange for a lower coupon rate. In accordance with FASB accounting guidance, this convertible feature must be bifurcated and reported separately on the balance sheet at fair value, with adjustments in fair value recognized in the income statement. Accordingly, the convertible options within our portfolio are reported as investments in convertible options on the balance sheet, and the mark-to-market adjustment associated with the changes in fair value of the convertible options are reported as gains (losses) on investments in convertible options as a component of net investment income. As of June 30, 2016 and December 31, 2015, the total fair value of our investments in convertible options was $874,911 and $957,405. For the quarter and six months ended June 30, 2016, we recognized a gain (loss) on our investments in convertible options of $38,044 and ($143,376), respectively, relative to the mark-to-market adjustment.

Liquidity and Capital Resources

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

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

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

Investors Heritage Capital’s principal sources of cash flow are rental income, dividends from its subsidiaries and proceeds received under company-owned life insurance policies. Investors Heritage Capital’s principal long-term obligations are payments on long-term debt and stock purchased under the put option through the IHCC Retirement Savings Plan and Trust, which is now frozen with respect to new contributions.

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

We assess our compliance with prescribed debt covenant requirements as outlined in the terms of each debt agreement at least annually, if not otherwise required in the debt agreement. Management has assessed our position and as of June 30, 2016, we are in compliance with all debt covenant requirements.

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

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

RESULTS OF OPERATIONS

Overview

Premiums earned (net of reinsurance) were $10,683,117 for the second quarter of 2016 (a decrease of 8.6% compared to the second quarter of 2015) and $20,449,297 for the six months ended June 30, 2016 (a decrease of 11.3% compared to the corresponding period in 2015). This decrease is primarily due to lower direct and assumed premiums relative to the Puritan product offerings in comparison to the corresponding periods in 2015.

Net investment income was $5,544,138 for the second quarter of 2016 (an increase of 3.8% compared to the second quarter of 2015) and $10,999,805 for the six months ended June 30, 2016 (an increase of 4.1% compared to the corresponding period in 2015). The increases in investment income are primarily due to investment income earned on the make whole call of a bond in the first quarter of 2016, an increase in investment income earned on mortgage loans and state-guaranteed receivables associated with our increased investments in these areas. These increases were partially offset for the six month period by the loss recognized on our convertible options due to the mark-to-market adjustment, although the amount of the loss improved during the second quarter. We continue to seek high quality investments while considering alternative investments that can be used to enhance future investment income.

Net realized gains were $247,577 and $574,289 for the quarter and six months ended June 30, 2016, respectively, compared to $44,928 and $203,756 for the quarter and six months ended June 30, 2015, respectively. A significant portion of the realized gains recognized during the six months ended June 30, 2016 were principally attributable to gains realized on the strategic sale of certain bonds in order to reduce single issuer exposures. The remaining activity during the periods was in the normal course of business. We experienced no other-than-temporary impairments during the quarters or six months ended June 30, 2016 or 2015.

Other income was $379,312 for the second quarter of 2016 (a decrease of 3.9% compared to the second quarter of 2015) and $732,909 for the six months ended June 30, 2016 (a decrease of 1.6% compared to the corresponding period in 2015). These decreases are primarily due to the reduction in income generated by Investors Heritage Printing as it ceased ongoing operations at the end of 2015. The decreases have been partially offset by increases in our third party administrative fees for our life insurance company clients as their policy counts have increased.

Total benefits and expenses were $16,465,165 for the second quarter of 2016 (a decrease of 7.8% compared to the second quarter of 2015) and $32,052,320 for the six months ended June 30, 2016 (a decrease of 8.6% compared to the corresponding period in 2015). These decreases are primarily due to reduced death benefits due to more favorable mortality experience in comparison to the prior periods, a reduction in the increase in reserves due to the lower new premium volume previously discussed, and reduced general and administrative expenses.

After providing for federal income taxes, our net income was $291,734 with net income per share of $0.26 for the second quarter of 2016 compared to a net loss of $295,613 with a net loss per share of $0.26 for the second quarter of 2015. Our net income was $527,985 with net income per share of $0.47 for the six months ended June 30, 2016 compared to a net loss of $368,160 with a net loss per share of $0.33 for the six months ended June 30, 2015.

We declared a dividend of $0.21 per share on February 11, 2016 to shareholders of record on March 18, 2016. This dividend was paid on April 7, 2016.

Business Segments

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

Preneed & Burial Products

Preneed and burial products include both life and annuity products sold by funeral directors or affiliated agents to fund prearranged funerals. Revenues for this segment were $13,098,661 for the second quarter of 2016 (an increase of 6.9% compared to the second quarter of 2015) and $25,855,841 for the six months ended June 30, 2016 (an increase of 6.0% compared to the corresponding period in 2015). These increases were predominantly due to stronger sales of our preneed products driven both by sales within existing relationships as well as new agent relationships coupled with increased investment income and realized gains in comparison to the prior period.

Pre-tax income from operations was $116,617 and $337,464 for the quarter and six months ended June 30, 2016, respectively, compared to a pre-tax loss of $653,019 and $899,867 for the quarter and six months ended June 30, 2015, respectively. The increases in pre-tax income were due primarily to the revenue increases discussed above, lower sales management expenses, and more favorable mortality experience in comparison to the prior period.

Traditional & Universal Life Products

Traditional and universal life products include traditional life and group life insurance products, certain annuities and universal life products. Revenues for this segment were $3,164,177 for the second quarter of 2016 (a decrease of 32.0% compared to the second quarter of 2015) and $5,960,570 for the six months ended June 30, 2016 (a decrease of 34.5% compared to the corresponding period in 2015). These decreases were primarily due to the reduction in direct and assumed premiums generated from the Puritan product offerings in comparison to the prior period.

Pre-tax income from operations was $168,796 and $379,967 for the quarter and six months ended June 30, 2016, respectively, compared to pre-tax income of $203,619 and $275,197 for the quarter and six months ended June 30, 2015, respectively. While new sales of the Puritan product offerings were significantly reduced, the increases in investment income and capital gains along with favorable mortality experience when compared to prior periods resulted in increased pre-tax income for the six month period.

Administrative & Financial Services

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

In addition to credit administration, this segment includes fees generated relative to our third party administrative relationships. We currently provide tailored administrative services for four unaffiliated life insurance companies. Services provided to each company vary based on their needs and can include some or all aspects of back-office accounting, actuarial services and policy administration. Two former life insurance holding company clients terminated their agreements effective October 1, 2015 in order to begin performing that work in-house.

Revenues for this segment were $353,115 for the second quarter of 2016 (an increase of 4.5% compared to the second quarter of 2015) and $680,322 for the six months ended June 30, 2016 (an increase of 6.3% compared to the corresponding period in 2015). Pre-tax income from operations was $62,719 and $125,156 for the quarter and six months ended June 30, 2016, respectively, compared to pre-tax income of $60,137 and $117,723 for the quarter and six months ended June 30, 2015, respectively. The increases in revenue and pre-tax income were due to the fact that our life insurance company clients have experienced increased policy counts which have resulted in an increase in our monthly fees.

Corporate & Other

Corporate and other consists of corporate accounts measured primarily by stockholders’ paid-in capital, contributed surplus, earned surplus, property and equipment, corporate-owned life insurance and other minor business lines which include group annuities and group and individual accident and health products. Revenues for this segment were $238,191 for the second quarter of 2016 (an increase of 7.1% compared to the second quarter of 2015) and $259,567 for the six months ended June 30, 2016 (a decrease of 41.3% compared to the corresponding period in 2015). Pre-tax income (loss) from operations was $40,847 and ($138,607) for the quarter and six months ended June 30, 2016, respectively, compared to pre-tax income (loss) of ($4,888) and $16,067 for the quarter and six months ended June 30, 2015, respectively. Results for the quarter and six months ended June 30, 2016 were significantly impacted by the mark-to market adjustment on our investments in convertible options that increased investment income by $38,044 for the quarter and reduced investment income by $143,376 for the six month period.

While we continue to focus on expanding the operations of Investors Heritage Financial and At Need Funding, less than 1% of our consolidated revenues were generated by our non-life subsidiaries. During the six months ended June 30, 2016, Investors Heritage Capital received dividends of $60,000 from Investors Heritage Financial. Investors Heritage Capital received no dividends or distributions from its other subsidiaries. The potential exists for dividend payments and distributions over the remainder of 2016 as any needs arise.

Federal Income Taxes

The provision (benefit) for federal income taxes is based on our expected effective annual tax rate. Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Income before federal income taxes differs from taxable income principally due to the dividends-received deduction; the 404(k) dividend deduction; the small life insurance company tax deduction; nondeductible travel and entertainment expenses; and non-taxable effects of company-owned life insurance premiums, cash value growth and death benefit proceeds. Our estimated effective tax rate was 25.0% for the quarters and six months ended June 30, 2016 and 2015, respectively.

OFF-BALANCE SHEET ARRANGEMENTS

We have no significant off-balance sheet arrangements as of June 30, 2016.

FORWARD LOOKING INFORMATION

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

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

ITEM 4. Controls and Procedures

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

PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings

Investors Heritage Capital is not involved in any legal proceedings. From time to time Investors Heritage Life is involved in litigation relating to claims arising out of its operations in the normal course of business. As of August 12, 2016, Investors Heritage Life is not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our financial condition or results of operations.

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

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

(b)	Not applicable.

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

Total Number of

Maximum Number

Total

Average

Shares Purchased as

of Shares That May

Number

Price

Part of Publicly

Yet Be Purchased

of Shares

Paid Per

Announced Plans

Under the Plans

Period

Purchased

Share

or Programs

April 1, 2016 - April 30, 2016

May 1, 2016 - May 31, 2016

255

20.30

June 1, 2016 - June 30, 2016

10,671

20.30

ITEM 3. Defaults Upon Senior Securities

None

ITEM 4. Mine Safety Disclosures

None

ITEM 5. Other Information

None

ITEM 6. Exhibits

31.1 &

31.2

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

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

101.INS**

XBRL Instance

101.SCH**

XBRL Taxonomy Extension Schema

101.CAL**

XBRL Taxonomy Extension Calculation

101.DEF**

XBRL Taxonomy Extension Definition

101.LAB**

XBRL Taxonomy Extension Labels

101.PRE**

XBRL Taxonomy Extension Presentation

XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

SIGNATURES

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

	INVESTORS HERITAGE CAPITAL CORPORATION

	BY: /s/Harry Lee Waterfield II
	Harry Lee Waterfield II
DATE: August 12, 2016	President

	BY: /s/Larry Johnson
	Larry Johnson
DATE: August 12, 2016	Vice President - Chief Financial Officer

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