UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT

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

For the quarterly period ended September 30, 2017

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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   ☒
			Emerging growth company   ☐

1

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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 November 14, 2017 - 1,111,015.345

2

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	28
ITEM 4.	Controls and Procedures	40
PART II – OTHER INFORMATION
ITEM 1.	Legal Proceedings	41
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
ITEM 3.	Defaults Upon Senior Securities	41
ITEM 4.	Mine Safety Disclosures	41
ITEM 5.	Other Information	41
ITEM 6.	Exhibits	42

SIGNATURES	42
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

3

PART I – FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Balance Sheets

	(Unaudited)
	September 30,		December 31,
	2017		2016
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost: $355,672,429 and $350,196,848)	$	374,330,586	$	365,949,349
Equity securities (cost: $9,081,785 and $8,080,073)		10,681,755		9,154,718
Mortgage loans on real estate		39,216,439		41,302,392
Policy loans		6,386,451		6,336,277
State-guaranteed receivables		11,367,127		11,584,681
Investments in convertible options		1,323,070		983,950
Other invested assets		957,262		1,951,830
Total investments		444,262,690		437,263,197
Cash and cash equivalents		2,574,709		3,297,917
Accrued investment income		4,066,419		4,433,680
Due premiums		2,798,969		2,768,774
Deferred acquisition costs		15,100,954		15,712,181
Value of business acquired		109,535		155,264
Leased property under capital leases		51,285		75,841
Property and equipment, net		971,505		915,494
Cash value of company-owned life insurance		14,587,713		13,855,560
Other assets		2,469,489		2,435,867
Amounts recoverable from reinsurers		93,008,718		98,444,173
Total assets	$	580,001,986	$	579,357,948
LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES
Policy liabilities:
Benefit reserves	$	487,920,368	$	492,963,963
Unearned premium reserves		7,840,825		8,100,042
Policy claims		2,207,664		2,637,220
Liability for deposit-type contracts		3,344,562		3,351,107
Reserves for dividends and endowments and other		368,361		384,401
Total policy liabilities		501,681,780		507,436,733
Deferred federal income tax liability		4,718,218		3,256,943
Obligations under capital leases		45,595		72,209
Notes payable		317,508		971,851
Accrued pension liability		5,699,728		6,021,264
Deferred revenue on reinsurance ceded		1,315,759		1,431,647
Other liabilities		7,071,897		3,982,356
Total liabilities		520,850,485		523,173,003
STOCKHOLDERS' EQUITY
Common stock (shares issued: 1,109,666 and 1,106,351)		1,109,666		1,106,351
Paid-in surplus		8,913,360		8,913,360
Accumulated other comprehensive income		8,074,349		5,493,892
Retained earnings		41,054,126		40,671,342
Total stockholders' equity		59,151,501		56,184,945
Total liabilities and stockholders' equity	$	580,001,986	$	579,357,948

See notes to condensed consolidated financial statements.

4

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Income Statements (Unaudited)

	Quarter Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
REVENUE
Premiums and other considerations	$	12,531,336		$	13,836,244		$	38,210,867		$	39,545,191
Premiums ceded		(2,646,279	)		(2,935,363	)		(7,429,219	)		(8,195,013	)
Net premiums		9,885,057			10,900,881			30,781,648			31,350,178
Investment income, net of expenses		5,003,475			5,330,853			14,989,671			16,330,658
Net realized gains (losses) on investments:
Total other-than-temporary impairment losses		-			(118,267	)		-			(118,267	)
Other net realized investment gains		424,795			1,046,183			673,483			1,620,472
Total net realized gains on investments		424,795			927,916			673,483			1,502,205
Other income		605,538			409,186			1,730,672			1,142,095
Total revenue		15,918,865			17,568,836			48,175,474			50,325,136
BENEFITS AND EXPENSES
Death and other benefits		10,988,211			10,363,008			35,577,458			32,324,120
Guaranteed annual endowments		88,966			91,569			294,174			304,657
Dividends to policyholders		69,040			73,603			226,465			230,792
Increase in benefit reserves and unearned premiums		312,181			1,652,885			122,245			3,550,345
Acquisition costs deferred		(1,159,772	)		(1,256,830	)		(3,454,821	)		(3,621,389	)
Amortization of deferred acquisition costs		1,416,947			1,497,933			4,037,243			4,410,013
Commissions		756,128			829,201			2,391,201			2,356,672
Other general and administrative expenses		2,438,558			2,658,821			8,094,348			8,407,300
Total benefits and expenses		14,910,259			15,910,190			47,288,313			47,962,510
INCOME BEFORE FEDERAL INCOME TAXES		1,008,606			1,658,646			887,161			2,362,626
PROVISION (BENEFIT) FOR FEDERAL INCOME TAXES
Current		12,745			347,532			89,843			544,151
Deferred		239,407			(287,264	)		131,948			(307,888	)
Total federal income taxes		252,152			60,268			221,791			236,263
NET INCOME	$	756,454		$	1,598,378		$	665,370		$	2,126,363
BASIC AND DILUTED NET INCOME PER SHARE	$	0.68		$	1.44		$	0.60		$	1.91
DIVIDENDS PER SHARE	$	-		$	-		$	0.25		$	0.21

See notes to condensed consolidated financial statements.

5

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

	Quarter Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
NET INCOME	$	756,454		$	1,598,378		$	665,370		$	2,126,363
OTHER COMPREHENSIVE INCOME (LOSS):
Change in net unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during period		(62,820	)		1,565,397			3,965,776			21,823,115
Reclassification adjustment for gains included in income		(412,924	)		(927,916	)		(534,795	)		(1,492,973	)
Adjustment for effects of deferred acquisition costs		61,873			(87,465	)		(28,804	)		(586,423	)
Net unrealized gains (losses) on investments		(413,871	)		550,016			3,402,177			19,743,719
Change in defined benefit pension plan:
Amortization of actuarial net loss in net periodic pension cost		169,202			184,293			507,607			552,880
Other comprehensive income (loss) before income taxes		(244,669	)		734,309			3,909,784			20,296,599
Income tax expense (benefit)		(83,186	)		249,666			1,329,327			6,900,844
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES		(161,483	)		484,643			2,580,457			13,395,755
COMPREHENSIVE INCOME	$	594,971		$	2,083,021		$	3,245,827		$	15,522,118

See notes to condensed consolidated financial statements.

6

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)

						Accumulated
						Other					Total
	Common			Paid-in		Comprehensive		Retained			Stockholders'
	Stock			Surplus		Income		Earnings			Equity
BALANCE, JANUARY 1, 2016	$	1,117,647		$	8,913,360	$	757,161	$	38,462,834		$	49,251,002
Net income		-			-		-		2,126,363			2,126,363
Other comprehensive income, net		-			-		13,395,755		-			13,395,755
Cash dividends		-			-		-		(234,706	)		(234,706	)
Repurchases of common stock, net		(10,941	)		-		-		(211,162	)		(222,103	)
BALANCE, SEPTEMBER 30, 2016	$	1,106,706		$	8,913,360	$	14,152,916	$	40,143,329		$	64,316,311
BALANCE, JANUARY 1, 2017	$	1,106,351		$	8,913,360	$	5,493,892	$	40,671,342		$	56,184,945
Net income		-			-		-		665,370			665,370
Other comprehensive income, net		-			-		2,580,457		-			2,580,457
Cash dividends		-			-		-		(279,271	)		(279,271	)
Issuances of common stock, net		3,315			-		-		(3,315	)		-
BALANCE, SEPTEMBER 30, 2017	$	1,109,666		$	8,913,360	$	8,074,349	$	41,054,126		$	59,151,501

See notes to condensed consolidated financial statements.

7

INVESTORS HERITAGE CAPITAL CORPORATION

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Nine Months Ended September 30,
	2017			2016
NET CASH PROVIDED BY OPERATING ACTIVITIES	$	825,486		$	3,916,385
INVESTING ACTIVITIES
Purchases of available-for-sale securities		(33,336,816	)		(19,875,700	)
Sales of available-for-sale securities		6,300,505			55,563,518
Maturities of available-for-sale securities		21,182,849			17,111,207
Acquisitions of mortgage loans on real estate		(6,934,650	)		(17,126,902	)
Payments of mortgage loans on real estate		8,898,402			9,875,929
Purchases of state-guaranteed receivables		-			(2,753,509	)
Payments of state-guaranteed receivables		793,530			629,530
Purchases of convertible options		(278,631	)		(62,185	)
Sales and exchanges of convertible options		324,557			10,536
Net change in payable (receivable) for securities		1,778,840			20,541
Net reductions of other investments		944,394			644,141
Net additions to property and equipment		(156,887	)		(40,459	)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		(483,907	)		43,996,647
FINANCING ACTIVITIES
Policyholder account deposits		1,755,599			3,428,616
Policyholder account withdrawals		(1,886,772	)		(6,318,742	)
Payments on notes payable		(2,398,673	)		(2,065,106	)
Proceeds from notes payable		1,744,330			1,790,974
Dividends paid		(279,271	)		(234,706	)
Repurchases of common stock, net		-			(222,103	)
NET CASH USED IN FINANCING ACTIVITIES		(1,064,787	)		(3,621,067	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(723,208	)		44,291,965
Cash and cash equivalents at beginning of period		3,297,917			3,619,663
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	2,574,709		$	47,911,628

See notes to condensed consolidated financial statements.

8

INVESTORS HERITAGE CAPITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(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. Investors Heritage Life is currently licensed in 37 states. The principal markets for the Company’s products are in Kentucky, North Carolina, Tennessee, Georgia, Ohio, Virginia, Indiana, Michigan, Texas, South Carolina, Pennsylvania and Illinois.

NOTE 2 - Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2016, 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.

Certain reclassifications have been made to the prior period financial statements and footnotes shown herein to conform to current period presentation. These reclassifications had no effect on previously reported net income or stockholders’ equity.

Management has evaluated all events subsequent to September 30, 2017 through the date that these financial statements have been issued.

NOTE 3 – New Accounting Pronouncements

In March 2017, the Financial Accounting Standards Board (“the FASB”) issued new guidance shortening the amortization period for the premium component of callable debt securities purchased at a premium. The guidance requires the premium to be amortized to the earliest call date. This change does not apply to securities held at a discount. The guidance will be effective for us on January 1, 2019, with early adoption permitted. We are in process of evaluating the impact the guidance may have on the Company’s consolidated financial statements.

9

In March 2017, the FASB issued updated guidance to improve the presentation of net periodic pension cost and net periodic postretirement cost. This guidance requires that an employer disaggregate the service cost component from the other components of net benefit cost. This guidance also provides explicit guidance on the presentation of the service cost component and the other components of net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization. The guidance will be effective for us on January 1, 2018, with early adoption permitted. We are in process of evaluating the impact the guidance will have on the Company’s consolidated financial statements.

All other new accounting standards and updates of existing standards issued through the date of this filing were considered by management and did not relate to accounting policies and procedures pertinent to the Company at this time or were not expected to have a material impact to the consolidated financial statements. Refer to the footnotes to the consolidated financial statements for the year ended December 31, 2016, 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.

10

NOTE 4 – Investments

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

September 30, 2017	Amortized		Gross Unrealized		Gross Unrealized		Fair
	Cost		Gains		Losses		Value
Available-for-sale securities:
Fixed maturities:
U.S. government obligations	$	21,299,421	$	297,174	$	-	$	21,596,595
States and political subdivisions		30,679,646		4,596,685		-		35,276,331
Corporate		209,814,274		10,237,411		612,544		219,439,141
Foreign		56,017,357		2,738,389		11,441		58,744,305
Mortgage-backed securities (MBS):
Commercial MBS		8,699,078		230,007		-		8,929,085
Residential MBS		28,694,355		1,283,880		37,385		29,940,850
Corporate redeemable preferred stock		468,298		44,694		108,713		404,279
Total fixed maturity securities		355,672,429		19,428,240		770,083		374,330,586
Equity securities:
U.S. agencies		707,900		-		-		707,900
Mutual funds		318,284		71,255		-		389,539
Corporate common stock		7,667,125		1,805,888		329,222		9,143,791
Corporate nonredeemable preferred stock		388,476		52,049		-		440,525
Total equity securities		9,081,785		1,929,192		329,222		10,681,755
Total	$	364,754,214	$	21,357,432	$	1,099,305	$	385,012,341

December 31, 2016	Amortized		Gross Unrealized		Gross Unrealized		Fair
	Cost		Gains		Losses		Value
Available-for-sale securities:
Fixed maturities:
U.S. government obligations	$	21,882,312	$	360,723	$	9,416	$	22,233,619
States and political subdivisions		35,403,214		4,153,294		31,260		39,525,248
Corporate		202,578,595		9,355,481		953,527		210,980,549
Foreign		51,081,850		1,731,092		283,363		52,529,579
Mortgage-backed securities (MBS):
Commercial MBS		6,717,214		198,857		-		6,916,071
Residential MBS		32,065,365		1,314,373		72,741		33,306,997
Corporate redeemable preferred stock		468,298		14,140		25,152		457,286
Total fixed maturity securities		350,196,848		17,127,960		1,375,459		365,949,349
Equity securities:
U.S. agencies		707,900		-		-		707,900
Mutual funds		318,284		28,840		-		347,124
Corporate common stock		6,665,413		1,370,651		335,020		7,701,044
Corporate nonredeemable preferred stock		388,476		10,174		-		398,650
Total equity securities		8,080,073		1,409,665		335,020		9,154,718
Total	$	358,276,921	$	18,537,625	$	1,710,479	$	375,104,067

11

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

	September 30, 2017						December 31, 2016
			Gross		Number				Gross		Number
	Estimated		Unrealized		of		Estimated		Unrealized		of
	Fair Value		Loss		Securities		Fair Value		Loss		Securities
Fixed maturities:
Less than 12 months:
U.S. government obligations	$	-	$	-		-	$	7,892,992	$	9,416		2
States and political subdivisions		-		-		-		968,740		31,260		1
Corporate		20,841,110		560,459		17		30,370,227		753,570		27
Foreign		1,141,012		11,441		5		10,215,322		283,355		11
Residential MBS		2,785,924		37,385		3		3,003,214		72,741		2
Corporate redeemable preferred stock		-		-		-		17,488		493		1
Greater than 12 months:
Corporate		3,091,141		52,085		4		2,997,784		199,957		2
Foreign		-		-		-		197,700		8		1
Corporate redeemable preferred stock		139,349		108,713		1		205,423		24,659		1
Total fixed maturities		27,998,536		770,083		30		55,868,890		1,375,459		48
Equity securities:
Less than 12 months:
Corporate common stock		1,259,585		285,763		10		1,004,821		136,117		6
Greater than 12 months:
Corporate common stock		150,285		43,459		2		873,083		198,903		7
Total equities		1,409,870		329,222		12		1,877,904		335,020		13
Total	$	29,408,406	$	1,099,305		42	$	57,746,794	$	1,710,479		61

At September 30, 2017, 99.9% of the fixed maturity portfolio had a fair value to amortized cost ratio of greater than 80%, and 98.1% of the equity securities portfolio had a fair value to cost ratio of greater than 80%. At December 31, 2016, 100% of the fixed maturity portfolio had a fair value to amortized cost ratio of greater than 80%, and 94.3% of the equity securities portfolio had a fair value to cost ratio of greater than 80%.

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.

12

Based on our review, the Company experienced no other-than-temporary impairments during the quarter or nine months ended September 30, 2017. During the quarter ended September 30, 2016, the Company recognized an other-than-temporary impairment on one real estate common stock totaling $118,267. This stock was sold during the quarter ended September 30, 2017 resulting in a realized gain of $21,679. The Company experienced no additional other-than-temporary impairments during the quarter or nine months ended September 30, 2016.

Management believes that the Company will fully recover its cost basis in the securities held at September 30, 2017, 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 had been realized.

	September 30,			December 31,
	2017			2016
Net unrealized appreciation on available-for sale securities	$	20,258,127		$	16,827,146
Adjustment to deferred acquisition costs		(489,888	)		(461,084	)
Deferred income taxes		(6,721,202	)		(5,564,461	)
Net unrealized appreciation on available-for sale securities	$	13,047,037		$	10,801,601

The amortized cost and fair value of fixed maturity securities at September 30, 2017, 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	$	16,406,735	$	16,718,204
Due after one year through five years		103,138,732		108,767,451
Due after five years through ten years		134,265,906		139,780,380
Due after ten years		45,023,343		50,648,429
Due at multiple maturity dates		56,369,415		58,011,843
Corporate redeemable preferred stock		468,298		404,279
Total	$	355,672,429	$	374,330,586

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 September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Proceeds from sales and maturities	$	9,352,441		$	45,275,073		$	27,483,354		$	72,674,725
Gross realized gains		464,170			1,772,703			594,355			2,345,537
Gross realized losses		(51,246	)		(844,787	)		(59,560	)		(852,564	)

13

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

	Quarter Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017		2016
Change in net unrealized investment gains (losses):
Securities available-for-sale:
Fixed maturities	$	(246,776	)	$	670,151		$	2,905,656	$	19,459,568
Equity securities		(228,968	)		(32,670	)		525,325		870,574
Net realized investment gains (losses):
Securities available-for-sale:
Fixed maturities	$	(6,332	)	$	880,055		$	102,508	$	1,445,112
Equity securities		419,256			47,861			432,287		47,861
Investments in convertible options		11,871			-			138,688		9,232

The Company is required to hold assets on deposit for the benefit of policyholders in accordance with statutory rules and regulations. At September 30, 2017 and December 31, 2016, these required deposits had a total fair value of $20,459,290 and $22,724,783, respectively.

The Company also engages in commercial and residential mortgage lending. As of September 30, 2017, investments in commercial and residential properties comprised 25.5% and 74.5%, respectively, of the Company’s mortgage portfolio. At December 31, 2016, investments in commercial and residential properties comprised 26.2% and 73.8%, respectively, of the Company’s mortgage portfolio.

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

The Company purchases 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.

At September 30, 2017 and December 31, 2016, there were no non-performing loans, loans past due by more than 90 days, loans on nonaccrual status, loans in process of foreclosure, or restructured loans. The Company experienced no mortgage loan defaults during the quarters or nine months ended September 30, 2017 and 2016.

14

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

	September 30,		December 31,
	2017		2016
Ohio	$	8,175,611	$	3,083,440
Texas		4,306,175		5,191,186
Florida		4,226,742		5,253,110
Illinois		3,955,293		4,787,454
Missouri		3,388,345		3,107,289
California		3,253,601		3,591,584
Georgia		3,147,841		3,487,991
Kentucky		2,095,494		2,402,800
Arizona		921,290		1,490,538
New Jersey		723,839		1,196,156
North Carolina		691,257		757,004
Virginia		665,092		800,635
Tennessee		650,725		1,048,452
Indiana		643,813		893,431
Nevada		474,417		479,182
Pennsylvania		464,273		479,720
Colorado		446,489		1,190,873
Michigan		222,939		126,750
West Virginia		194,091		225,578
Utah		158,094		343,533
Massachusetts		147,601		169,681
Kansas		133,590		134,396
Idaho		129,827		142,745
Oregon		-		487,824
Washington		-		231,939
South Carolina		-		199,101
Total	$	39,216,439	$	41,302,392

The Company owns certain investments in state-guaranteed receivables. These investments represent an assignment of the future rights to cash flows from lottery winners purchased at a discounted price. Payments on these investments are made by state run lotteries and guaranteed by the states. The state-guaranteed receivables are carried at their amortized cost basis on the balance sheet. At September 30, 2017, 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	$	1,022,946	$	1,035,816
Due after one year through five years		4,355,471		4,766,148
Due after five years through ten years		4,255,579		5,207,903
Due after ten years		1,733,131		2,834,198
Total	$	11,367,127	$	13,844,065

15

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

	September 30,		December 31,
	2017		2016
New York	$	3,273,829	$	3,446,349
Massachusetts		3,206,661		3,126,011
Georgia		1,984,941		2,012,845
Ohio		1,044,953		1,177,425
Washington		681,865		653,235
Indiana		433,728		417,811
Pennsylvania		316,429		318,019
Texas		275,425		261,396
California		149,296		171,590
Total	$	11,367,127	$	11,584,681

The Company holds certain investments in convertible fixed maturity and equity securities. Convertible securities feature an option allowing for a portion of the security to be converted into a common equity position of the underlying issuer in exchange for a lower coupon or preferred dividend 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. At September 30, 2017 and December 31, 2016, the total fair value of our investments in convertible options was $1,323,070 and $983,950, respectively. For the quarter and nine months ended September 30, 2017, we recognized a gain on our investments in convertible options of $152,936 and $246,358, respectively, relative to the mark-to-market adjustment. For the quarter and nine months ended September 30, 2016, we recognized a gain (loss) on our investments in convertible options of $99,192 and ($44,184), respectively, relative to the mark-to-market adjustment.

Major categories of net investment income are summarized as follows:

	Quarter Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Fixed maturities	$	4,031,648	$	4,387,984	$	12,254,682	$	13,928,873
Equity securities		93,937		111,063		286,048		242,713
Mortgage loans on real estate		652,453		642,705		1,917,596		1,966,079
Policy loans		117,997		121,616		348,683		365,071
State-guaranteed receivables		188,546		172,946		575,976		480,469
Gain (loss) on investments inconvertible options		152,936		99,192		246,358		(44,184	)
Other		28,967		53,360		149,352		165,674
Gross investment income		5,266,484		5,588,866		15,778,695		17,104,695
Investment expenses		263,009		258,013		789,024		774,037
Net investment income	$	5,003,475	$	5,330,853	$	14,989,671	$	16,330,658

NOTE 5 – Fair Values of Financial Instruments

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

16

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

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

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

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

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

Valuation of Investments Reported at Fair Value in Financial Statements

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

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

17

The following table presents the Company’s fair value hierarchy for those financial instruments measured and reported at fair value on a recurring basis.

	September 30, 2017
	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. government obligations	$	-	$	21,596,595	$	-	$	21,596,595
States and political subdivisions		-		35,276,331		-		35,276,331
Corporate		-		219,439,141		-		219,439,141
Foreign		-		58,744,305		-		58,744,305
Mortgage-backed securities:
Commercial MBS		-		8,929,085		-		8,929,085
Residential MBS		-		29,940,850		-		29,940,850
Corporate redeemable preferred stock		-		404,279		-		404,279
Total fixed maturities	$	-	$	374,330,586	$	-	$	374,330,586
Equity securities:
U.S. agencies	$	707,900	$	-	$	-	$	707,900
Mutual funds		389,539		-		-		389,539
Corporate common stock		8,679,791		-		464,000		9,143,791
Corporate nonredeemable preferred stock		-		440,525		-		440,525
Total equity securities	$	9,777,230	$	440,525	$	464,000	$	10,681,755
Investments in convertible options	$	-	$	1,323,070	$	-	$	1,323,070

	December 31, 2016
	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. government obligations	$	-	$	22,233,619	$	-	$	22,233,619
States and political subdivisions		-		39,525,248		-		39,525,248
Corporate		-		210,980,549		-		210,980,549
Foreign		-		52,529,579		-		52,529,579
Mortgage-backed securities:
Commercial MBS		-		6,916,071		-		6,916,071
Residential MBS		-		33,306,997		-		33,306,997
Corporate redeemable preferred stock		-		457,286		-		457,286
Total fixed maturities	$	-	$	365,949,349	$	-	$	365,949,349
Equity securities:
U.S. agencies	$	707,900	$	-	$	-	$	707,900
Mutual funds		347,124		-		-		347,124
Corporate common stock		7,253,044		-		448,000		7,701,044
Corporate nonredeemable preferred stock		-		398,650		-		398,650
Total equity securities	$	8,308,068	$	398,650	$	448,000	$	9,154,718
Investments in convertible options	$	-	$	983,950	$	-	$	983,950

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

	Quarter Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Corporate common stock:
Beginning balance	$	464,000	$	448,000	$	448,000	$	352,000
Transfers into Level 3		-		-		-		-
Transfers out of Level 3		-		-		-		-
Purchases		-		-		-		-
Sales		-		-		-		-
Total gains or losses:
Included in earnings		-		-		-		-
Included in other comprehensive income		-		-		16,000		96,000
Ending balance	$	464,000	$	448,000	$	464,000	$	448,000

The Company experienced no transfers between Level 1 and Level 2 during the quarters or nine months ended September 30, 2017 or 2016. The Company experienced no transfers between Level 2 and Level 3 during the quarters or nine months ended September 30, 2017 or 2016. 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 on Level 3 investments are recorded as a component of accumulated other comprehensive income, net of tax, in accordance with required accounting for our available-for-sale portfolio.

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Financial Instruments Disclosed, but not Carried, at Fair Value

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

	September 30, 2017
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Assets:
Mortgage loans on real estate:
Commercial	$	10,008,415	$	10,132,174	$	-	$	-	$	10,132,174
Residential		29,208,024		32,406,602		-		-		32,406,602
Policy loans		6,386,451		6,386,451		-		-		6,386,451
State-guaranteed receivables		11,367,127		13,844,065		-		13,844,065		-
Other invested assets		957,262		957,262		-		-		957,262
Cash and cash equivalents		2,574,709		2,574,709		2,574,709		-		-
Accrued investment income		4,066,419		4,066,419		-		-		4,066,419
Cash value of company-owned life insurance		14,587,713		14,587,713		-		-		14,587,713
Liabilities:
Policyholder deposits (Investment-type contracts)		50,025,946		49,441,522		-		-		49,441,522
Policy claims		2,207,664		2,207,664		-		-		2,207,664
Obligations under capital leases		45,595		45,595		-		-		45,595
Notes payable		317,508		317,508		-		-		317,508

	December 31, 2016
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Assets:
Mortgage loans on real estate:
Commercial	$	10,819,996	$	11,084,097	$	-	$	-	$	11,084,097
Residential		30,482,396		33,992,592		-		-		33,992,592
Policy loans		6,336,277		6,336,277		-		-		6,336,277
State-guaranteed receivables		11,584,681		13,938,824		-		13,938,824		-
Other invested assets		1,951,830		1,951,830		-		-		1,951,830
Cash and cash equivalents		3,297,917		3,297,917		3,297,917		-		-
Accrued investment income		4,433,680		4,433,680		-		-		4,433,680
Cash value of company-owned life insurance		13,855,560		13,855,560		-		-		13,855,560
Liabilities:
Policyholder deposits (Investment-type contracts)		51,870,288		51,304,889		-		-		51,304,889
Policy claims		2,637,220		2,637,220		-		-		2,637,220
Obligations under capital leases		72,209		72,209		-		-		72,209
Notes payable		971,851		971,851		-		-		971,851

20

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

Mortgage loans on real estate: The fair values for mortgage loans are estimated using discounted cash flow analyses. For commercial mortgage loans, the discount rate was assumed to be the interest rate of the last commercial mortgage 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 September 30, 2017 and 2016 were 1,109,666 and 1,106,710, respectively. The weighted average number of shares outstanding for the nine months ended September 30, 2017 and 2016 were 1,107,845 and 1,113,337, respectively.

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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 September 30,				Nine Months Ended September 30,
	2017		2016		2017			2016
Revenue:
Preneed and burial products	$	12,673,559	$	14,280,983	$	38,950,962		$	40,136,824
Traditional and universal life products		2,400,392		2,641,376		7,020,879			8,601,946
Administrative and financial services		496,321		364,967		1,373,296			1,045,289
Corporate and other		348,593		281,510		830,337			541,077
Total revenue	$	15,918,865	$	17,568,836	$	48,175,474		$	50,325,136
Pre-tax income (loss) from operations:
Preneed and burial products	$	409,870	$	1,189,337	$	(11,498	)	$	1,526,801
Traditional and universal life products		362,493		184,732		660,378			564,699
Administrative and financial services		127,293		142,640		346,183			267,796
Corporate and other		108,950		141,937		(107,902	)		3,330
Total pre-tax income	$	1,008,606	$	1,658,646	$	887,161		$	2,362,626

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; amortization of deferred revenue on reinsurance ceded which was previously taxed at inception of the reinsurance agreement; 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 2014 through 2016 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.

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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 September 30, 2017
				Income Tax
				Expense
	Pretax			(Benefit)			Net of Tax
Other comprehensive income (loss):
Change in net unrealized losses on available-for-sale securities:
Unrealized holding losses arising during period	$	(62,820	)	$	(21,358	)	$	(41,462	)
Reclassification adjustment for gains included in income		(412,924	)		(140,394	)		(272,530	)
Adjustment for effect of deferred acquisition costs		61,873			21,037			40,836
Net unrealized losses on investments		(413,871	)		(140,715	)		(273,156	)
Change in defined benefit pension plan:
Amortization of actuarial net loss in net periodic pension cost		169,202			57,529			111,673
Total other comprehensive loss	$	(244,669	)	$	(83,186	)	$	(161,483	)

	Quarter Ended September 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	$	1,565,397		$	532,235		$	1,033,162
Reclassification adjustment for gains included in income		(927,916	)		(315,492	)		(612,424	)
Adjustment for effect of deferred acquisition costs		(87,465	)		(29,737	)		(57,728	)
Net unrealized gains on investments		550,016			187,006			363,010
Change in defined benefit pension plan:
Amortization of actuarial net loss in net periodic pension cost		184,293			62,660			121,633
Total other comprehensive income	$	734,309		$	249,666		$	484,643

23

	Nine Months Ended September 30, 2017
				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	$	3,965,776		$	1,348,364		$	2,617,412
Reclassification adjustment for gains included in income		(534,795	)		(181,830	)		(352,965	)
Adjustment for effect of deferred acquisition costs		(28,804	)		(9,793	)		(19,011	)
Net unrealized gains on investments		3,402,177			1,156,741			2,245,436
Change in defined benefit pension plan:
Amortization of actuarial net loss in net periodic pension cost		507,607			172,586			335,021
Total other comprehensive income	$	3,909,784		$	1,329,327		$	2,580,457

	Nine Months Ended September 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	$	21,823,115		$	7,419,859		$	14,403,256
Reclassification adjustment for gains included in income		(1,492,973	)		(507,611	)		(985,362	)
Adjustment for effect of deferred acquisition costs		(586,423	)		(199,383	)		(387,040	)
Net unrealized gains on investments		19,743,719			6,712,865			13,030,854
Change in defined benefit pension plan:
Amortization of actuarial net loss in net periodic pension cost		552,880			187,979			364,901
Total other comprehensive income	$	20,296,599		$	6,900,844		$	13,395,755

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.

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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 nine months ended September 30, 2017:
Beginning balance	$	10,801,601		$	(5,307,709	)	$	5,493,892
Other comprehensive income before reclassifications		2,598,401			-			2,598,401
Amounts reclassified from accumulated other comprehensive income		(352,965	)		335,021			(17,944	)
Net current period other comprehensive income		2,245,436			335,021			2,580,457
Ending balance	$	13,047,037		$	(4,972,688	)	$	8,074,349
For the nine months ended September 30, 2016:
Beginning balance	$	6,293,702		$	(5,536,541	)	$	757,161
Other comprehensive income before reclassifications		14,016,216			-			14,016,216
Amounts reclassified from accumulated other comprehensive income		(985,362	)		364,901			(620,461	)
Net current period other comprehensive income		13,030,854			364,901			13,395,755
Ending balance	$	19,324,556		$	(5,171,640	)	$	14,152,916

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 September 30,						Nine Months Ended September 30,
Reclassification Adjustments	2017			2016			2017			2016
Unrealized gains on available-for-sale securities:
Realized gains on sale of securities (a)	$	412,924		$	927,916		$	534,795		$	1,492,973
Income tax expense (c)		(140,394	)		(315,492	)		(181,830	)		(507,611	)
Net of tax		272,530			612,424			352,965			985,362
Defined benefit pension plan:
Amortization of actuarial net loss (b)		(169,202	)		(184,293	)		(507,607	)		(552,880	)
Income tax benefit (c)		57,529			62,660			172,586			187,979
Net of tax		(111,673	)		(121,633	)		(335,021	)		(364,901	)
Total reclassifications for the period	$	160,857		$	490,791		$	17,944		$	620,461

(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).

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

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NOTE 10 – Employee Benefit Plans

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

	Quarter Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Service cost	$	-		$	-		$	-		$	-
Interest cost		234,177			247,609			702,530			742,829
Expected return on plan assets		(251,356	)		(275,502	)		(754,066	)		(826,507	)
Recognized actuarial net loss		169,202			184,293			507,607			552,880
Net periodic pension cost	$	152,023		$	156,400		$	456,071		$	469,202

We previously disclosed in our financial statements for the year ended December 31, 2016 that the Company expected to contribute $360,000 to our defined benefit pension plan during 2017. As of September 30, 2017, the Company had contributed $270,000 to the plan.

NOTE 11 – Notes Payable

Effective March 24, 2017, the Company renewed the Investors Heritage Capital Corporation operating line of credit and the At Need Funding line of credit. The Investors Heritage Capital Corporation line of credit was increased to $300,000 while the At Need Funding line of credit was reduced to $1,000,000. The maturity date for both lines of credit is March 24, 2019. Interest is paid on the lines of credit monthly at the prime rate, with a floor of 3.75%.

During April 2017, Puritan Financial Companies, Inc. repaid all outstanding principal and interest relative to the Company’s outstanding credit agreement in exchange for a release from the obligations under its marketing agreement with the Company. The Company used the funds received to repay all outstanding principal and interest relative to its bank loan agreement entered to fund this transaction in 2012.

NOTE 12 – Subsequent Event

On October 27, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among the Company, Aquarian Investors Heritage Holdings LLC, a Delaware limited liability company (“Parent”), and Aquarian Investors Heritage Acquisition Co., a Kentucky corporation and a direct, wholly-owned subsidiary of Parent (“Merger Sub”). At the time of the closing of the transactions contemplated by the Merger Agreement (the “Effective Time”), Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation as a wholly-owned subsidiary of Parent (the “Merger”).

At the Effective Time, each share of common stock of the Company (the “Company Common Stock”) issued and outstanding immediately prior to the Effective Time (other than certain excluded shares and the Contributed Shares (as defined below)) shall be converted automatically into and shall thereafter represent the right to receive an amount, in cash, equal to $44.75, without interest (the “Merger Consideration”). Each share of Company Common Stock owned by any direct or indirect wholly-owned subsidiary of the Company shall represent the right to receive the Merger Consideration. Certain shareholders of the Company (the “Contributing Shareholders”) and Parent have entered into a Contribution Agreement, dated October 27, 2017 (the “Contribution Agreement”), pursuant to which the Contributing Shareholders have committed to contribute 185,418.476 shares of Company Common Stock beneficially owned by them (the “Contributed Shares”) in exchange for equity interests in Parent.

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Consummation of the Merger is also subject to the satisfaction or waiver of certain customary closing conditions, including, among others: (i) the requisite regulatory approvals set forth in the Merger Agreement having been obtained, including approvals and notices to be filed with applicable state insurance regulators; (ii) the satisfaction of the conditions precedent to the obligations of certain lenders to fund certain loan obligations to an affiliate of Parent to be utilized to fund a material portion of the aggregate Merger Consideration; and (iii) the continuing employment of Harry Lee Waterfield II, Raymond L. Carr, Robert M. Hardy, Jr., Larry J. Johnson II and Julie Hunsinger Mink.

The Company filed Form 8-K with the Securities and Exchange Commission on October 27, 2017, and additional information regarding the transaction is available in the Form 8-K which can be found on the Company website at www.ihlic.com or on the Securities and Exchange Commission website at http://www.sec.gov/edgar/searchedgar/companysearch.html.

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

GENERAL

Investors Heritage Capital Corporation (“Investors Heritage Capital” or the “Company”) 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 previously provided printing to Investors Heritage Life and other unaffiliated parties but which is currently dormant; 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 have recently marketed 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 have historically been sold through our partnership with Puritan Financial Group and are being underwritten and issued using a third party underwriter with significant experience in that market. During April 2017, the Company’s exclusive partnership with Puritan Financial Group was terminated in exchange for repayment of the Company’s outstanding note receivable from Puritan Financial Companies, Inc. We used the funds received to repay all outstanding principal and interest relative to our bank loan agreement entered to fund this transaction in 2012. The Company is currently considering possible marketing alternatives for this product line.

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. Investors Heritage Life also assumed 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 written directly 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.

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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 also market an association group term product. This product provides a monthly renewable term benefit and is being marketed to various association groups.

Additionally, we 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 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.

Effective September 30, 2016, we entered into a 100% coinsurance agreement with Southland National Insurance Corporation (“SNIC”) whereby we reinsured an existing block of deferred fixed annuities to SNIC. The total liabilities reinsured as of September 30, 2016 were approximately $44,024,000 and deferred acquisition costs associated with this block were approximately $329,000. We transferred cash to SNIC under the agreement totaling approximately $41,921,000. In order to generate cash, we sold fixed maturity securities generating pre-tax net realized capital gains totaling approximately $880,000. In accordance with GAAP guidance, the initial ceding commission received on this transaction was deferred and will be recognized into income over the expected life of the reinsurance contract, which is 20 years. The initial ceding commission, net of tax, was $1,471,858 and is presented separately on the balance sheet as deferred revenue on reinsurance ceded. We recognized $37,522 and $115,888 of income associated with the amortization of the deferred revenue during the quarter and nine months ended September 30, 2017, respectively. Under the terms of the reinsurance agreement, we will continue to administer this business and will be paid administrative fees by SNIC. SNIC will also maintain a trust account further securing the statutory liabilities ceded.

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 provide tailored administrative services for five unaffiliated life insurance companies, which includes a new client added in September 2016. We have received notice of termination from one client effective October 31, 2017. We have been able to perform our TPA services using our existing in-house resources.

MERGER TRANSACTION

On October 27, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among the Company, Aquarian Investors Heritage Holdings LLC, a Delaware limited liability company (“Parent”), and Aquarian Investors Heritage Acquisition Co., a Kentucky corporation and a direct, wholly owned subsidiary of Parent (“Merger Sub”). At the time of the closing of the transactions contemplated by the Merger Agreement (the “Effective Time”), Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation as a wholly-owned subsidiary of Parent (the “Merger”).

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At the Effective Time, each share of common stock of the Company (the “Company Common Stock”) issued and outstanding immediately prior to the Effective Time (other than certain excluded shares and the Contributed Shares (as defined below)) shall be converted automatically into and shall thereafter represent the right to receive an amount, in cash, equal to $44.75, without interest (the “Merger Consideration”). Each share of Company Common Stock owned by any direct or indirect wholly owned subsidiary of Company shall represent the right to receive the Merger Consideration. Certain shareholders of the Company (the “Contributing Shareholders”) and Parent have entered into a Contribution Agreement dated as of October 27, 2017 (the “Contribution Agreement”), pursuant to which the Contributing Shareholders have committed to contribute approximately 185,418.476 shares of Company Common Stock beneficially owned by them (the “Contributed Shares”) in exchange for equity interests in Parent.

Consummation of the Merger is also subject to the satisfaction or waiver of certain customary closing conditions, including, among others: (i) the requisite regulatory approvals set forth in the Merger Agreement having been obtained including approvals and notices to be filed with applicable state insurance regulators; (ii) the satisfaction of the conditions precedent to the obligations of certain lenders to fund certain loan obligations to an affiliate of Parent to be utilized to fund a material portion of the aggregate Merger Consideration; and (iii) the continuing employment of Harry Lee Waterfield II, Raymond L. Carr, Robert M. Hardy, Jr, Larry J. Johnson II and Julie Hunsinger Mink.

The Company filed Form 8-K with the Securities and Exchange Commission on October 27, 2017, and additional information regarding the transaction is available in the Form 8-K which can be found on the Company website at www.ihlic.com or on the Securities and Exchange Commission website at http://www.sec.gov/edgar/searchedgar/companysearch.html.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

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

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

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

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

Our fixed maturities are Level 2 instruments, for which the fair value is derived from readily available pricing services utilizing recent trades and broker information. Certain liquid equity securities are considered Level 1 instruments and are valued based on publicly available market quotes in an active market. Our corporate nonredeemable preferred stocks are also Level 2 instruments as fair value is derived from pricing services using recent trades and broker information. We hold $464,000 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.

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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 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. Additionally, changes in corporate tax rates could have a significant impact on deferred tax assets and liabilities presented in the financial statements.

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.

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We previously disclosed in our financial statements for the year ended December 31, 2016 that we expected to contribute $360,000 to our defined benefit pension plan during 2017. As of September 30, 2017, we had contributed $270,000 to the plan.

New Accounting Pronouncements

In March 2017, the Financial Accounting Standards Board (“the FASB”) issued new guidance shortening the amortization period for the premium component of callable debt securities purchased at a premium. The guidance requires the premium to be amortized to the earliest call date. This change does not apply to securities held at a discount. The guidance will be effective for us on January 1, 2019, with early adoption permitted. We are in process of evaluating the impact the guidance may have on our consolidated financial statements.

In March 2017, the FASB issued updated guidance to improve the presentation of net periodic pension cost and net periodic postretirement cost. This guidance requires that an employer disaggregate the service cost component from the other components of net benefit cost. This guidance also provides explicit guidance on the presentation of the service cost component and the other components of net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization. The guidance will be effective for us on January 1, 2018, with early adoption permitted. We are in process of evaluating the impact the guidance will have on our consolidated financial statements.

All other new accounting standards and updates of existing standards issued through the date of this filing were considered by management and did not relate to accounting policies and procedures pertinent to the Company at this time or were not expected to have a material impact to the consolidated financial statements. Refer to the footnotes to the consolidated financial statements for the year ended December 31, 2016, 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.

INVESTMENTS, LIQUIDITY AND CAPITAL RESOURCES

Investments

We maintain a sound, conservative investment strategy. At September 30, 2017, 84.3% of our total invested assets consisted of fixed income securities, compared to 83.7% at December 31, 2016. At September 30, 2017 and December 31, 2016, our fixed income investments were 97.1% and 97.7% investment grade, respectively, as rated by Standard & Poor’s. The Standard & Poor’s average quality rating of our fixed income portfolio holdings as of September 30, 2017 and December 31, 2016 was A. None of our fixed income investments are in default and there has been no material change in the distribution of our fixed income portfolio.

At September 30, 2017, 99.9% of our fixed maturity portfolio had a fair value to amortized cost ratio of greater than 80% and 98.1% of our equity securities portfolio had a fair value to cost ratio of greater than 80%. At December 31, 2016, 100% of our fixed maturity portfolio had a fair value to amortized cost ratio of greater than 80%, and 94.3% of our equity securities portfolio had a fair value to cost ratio of greater than 80%.

We have reviewed our investment portfolio and do not believe that there are any securities that are other-than-temporarily impaired as of September 30, 2017. We recorded no other-than-temporary impairment charges in the consolidated statements of income during the quarter or nine months ended September 30, 2017. During the quarter ended September 30, 2016, we recognized an other-than-temporary impairment on one real estate common stock totaling $118,267. This stock was sold during the quarter ended September 30, 2017 resulting in a realized gain of $21,679. We experienced no additional other-than-temporary impairments during the quarter or nine months ended September 30, 2016.

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We continuously monitor the investment risk within our portfolio, including the risk associated with subprime lending with our CMO investments. As of September 30, 2017, we have no investments with any level of direct subprime exposure. Additionally, we have no Alt-A bond exposure within our current holdings.

We have an investment advisory agreement with an independent third-party investment advisor to purchase common and preferred stocks in stable areas within the real estate sector. The investment advisor has a history of strong performance within these markets. The majority of these funds have been invested in a diversified assortment of regularly traded, exchange listed common stocks. As of September 30, 2017, the largest individual stock position within this group had a fair value of approximately $468,000. 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. At September 30, 2017 and December 31, 2016, investments in commercial properties comprised 25.5% and 26.2%, respectively, of our mortgage portfolio. Our commercial mortgage loans are either originated in-house or through two mortgage brokers, are secured by first mortgages on the real estate and generally carry personal guarantees by the borrowers. Loan-to-value ratios of 80% or less and debt service coverage from existing cash flows of 115% or higher are generally required. We minimize credit risk in our mortgage loan portfolio through various methods, including stringently underwriting the loan request, maintaining small average loan balances, and reviewing larger mortgage loans on an annual basis.

As of September 30, 2017 and December 31, 2016, investments in residential mortgage loans comprised 74.5% and 73.8%, 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.

As of September 30, 2017, our average loan balance is $139,065 and the average loan-to-value is 63%. The largest loan currently held has a balance of $986,464. Our mortgage loans are spread across properties located in 23 states. At September 30, 2017 and December 31, 2016, 8.8% and 9.4% 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 September 30, 2017 and December 31, 2016, there were no non-performing mortgage loans, loans past due by more than 90 days, loans on nonaccrual status, loans in process of foreclosure, or restructured loans. We experienced no mortgage loan defaults during the quarters or nine months ended September 30, 2017 and 2016.

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 where allowable by law. We carry the state-guaranteed receivables at their amortized cost basis on the balance sheet. As of September 30, 2017, we held approximately $11,367,000 in state-guaranteed receivables, with the largest concentrations in the states of New York, Massachusetts and Georgia totaling approximately $3,274,000, $3,207,000 and $1,985,000, respectively. At September 30, 2017 and December 31, 2016, 2.6% of invested assets consisted of state-guaranteed receivables.

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Under the management of our primary external investment advisor, we own certain investments in convertible fixed maturity and equity securities. Convertible securities feature an option allowing for a portion of the security to be converted into a common position of the underlying issuer in exchange for a lower coupon or preferred dividend rate. In accordance with FASB accounting guidance, this convertible feature must be bifurcated and reported separately on the balance sheet at fair value, with adjustments in fair value recognized in the income statement. Accordingly, the convertible options within our portfolio are reported as investments in convertible options on the balance sheet, and the mark-to-market adjustment associated with the changes in fair value of the convertible options are reported as gains (losses) on investments in convertible options as a component of net investment income. As of September 30, 2017 and December 31, 2016, the total fair value of our investments in convertible options was $1,323,070 and $983,950, respectively. For the quarter and nine months ended September 30, 2017, we recognized a gain on our investments in convertible options of $152,936 and $246,358, respectively, relative to the mark-to-market adjustment. For the quarter and nine months ended September 30, 2016, we recognized a gain (loss) on our investments in convertible options of $99,192 and ($44,184), 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 debt service payments 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.

Effective March 24, 2017, we renewed the Investors Heritage Capital Corporation operating line of credit and the At Need Funding line of credit. The Investors Heritage Capital Corporation line of credit was increased to $300,000 while the At Need Funding line of credit was reduced to $1,000,000. The maturity date for both lines of credit is March 24, 2019. Interest is paid on the lines of credit monthly at the prime rate, with a floor of 3.75%.

We assess our compliance with prescribed debt covenant requirements as outlined in the terms of each debt agreement at least annually, if not otherwise required in the debt agreement. Management has assessed our position and as of September 30, 2017, we are in compliance with all debt covenant requirements.

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

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

RESULTS OF OPERATIONS

Overview

Premiums earned (net of reinsurance) were $9,885,057 for the third quarter of 2017 (a decrease of 9.3% compared to the third quarter of 2016) and $30,781,648 for the nine months ended September 30, 2017 (a decrease of 1.8% compared to the corresponding period in 2016). The decrease for the current quarter is primarily due to a reduction in preneed sales from one marketing organization that was acquired during 2017. The decrease for the nine months ended September 30, 2017 is primarily due to the reduction in direct premiums associated with the sale of our wealth preservation products as previously discussed.

Net investment income was $5,003,475 for the third quarter of 2017 (a decrease of 6.1% compared to the third quarter of 2016) and $14,989,671 for the nine months ended September 30, 2017 (a decrease of 8.2% compared to the corresponding period in 2016). These decreases in investment income are primarily due to the sale of approximately $41,779,000 in fixed maturities near the end of the third quarter of 2016 to fund the new annuity reinsurance agreement with SNIC, investment income earned on the make whole call of a bond in the first quarter of 2016, and the reduction in mortgage loan investments due to payoffs on residential mortgages. These reductions in investment income were partially offset by increases in investment income due to the mark-to-market adjustment on our convertible option investments totaling approximately $54,000 and $291,000 for the quarter and nine months ended September 30, 2017, respectively, compared to the corresponding periods in 2016. We continue to seek high quality investments while considering alternative investments that can be used to enhance future investment income.

Net realized gains were $424,795 and $673,483 for the quarter and nine months ended September 30, 2017, respectively, compared to $927,916 and $1,502,205 for the quarter and nine months ended September 30, 2016, respectively. The realized gains recognized during the quarter and nine months ended September 30, 2017 were in the normal course of our portfolio management. We experienced no other-than-temporary impairments during the quarters or nine months ended September 30, 2017. The realized gains recognized during the quarter and nine months ended September 30, 2016 were primarily attributable to gains realized on the strategic sale of certain bonds to fund the SNIC reinsurance agreement, gains taken earlier in 2016 to reduce single issuer exposures, and equity gains recognized on the sale of certain real estate common stocks. Additionally, we recognized one other-than-temporary impairment on a real estate common stock totaling $118,267 during the quarter and nine months ended September 30, 2016.

Other income was $605,538 for the third quarter of 2017 (an increase of 48.0% compared to the third quarter of 2016) and $1,730,672 for the nine months ended September 30, 2017 (an increase of 51.5% compared to the corresponding period in 2016). These increases are primarily due to administrative fees received from the SNIC reinsurance agreement, increased policy counts and associated service needs for our TPA clients, and the addition of a new life insurance company TPA client during September 2016.

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Total benefits and expenses were $14,910,259 for the third quarter of 2017 (a decrease of 6.3% compared to the third quarter of 2016) and $47,288,313 for the nine months ended September 30, 2017 (a decrease of 1.4% compared to the corresponding period in 2016). The key factors associated with these decreases are a reduction in the amortization of deferred acquisition costs net of deferrals, a reduction in the increase in reserves in comparison to the prior periods, and a reduction in general and administrative expenses due to expense control efforts. These reductions are partially offset by an increase in death benefits due to unfavorable mortality experience.

After providing for federal income taxes, our net income was $756,454 with net income per share of $0.68 for the third quarter of 2017 compared to net income of $1,598,378 with net income per share of $1.44 for the third quarter of 2016. Our net income was $665,370 with net income per share of $0.60 for the nine months ended September 30, 2017 compared to net income of $2,126,363 with net income per share of $1.91 for the nine months ended September 30, 2016.

We declared a dividend of $0.25 per share on March 16, 2017 to shareholders of record on March 27, 2017. This dividend was paid on April 7, 2017.

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 $12,673,559 for the third quarter of 2017 (a decrease of 11.3% compared to the third quarter of 2016) and $38,950,962 for the nine months ended September 30, 2017 (a decrease of 3.0% compared to the corresponding period in 2016). These decreases were primarily due to lower investment income associated with the reduction in invested assets due to the SNIC reinsurance agreement and lower realized capital gains in comparison to the prior periods due to the investment liquidations used to fund the SNIC reinsurance agreement. These decreases were partially offset by stronger sales of our preneed products driven both by sales within existing relationships as well as new agent relationships.

Pre-tax income (loss) from operations was $409,870 and ($11,498) for the quarter and nine months ended September 30, 2017, respectively, compared to pre-tax income of $1,189,337 and $1,526,801 for the quarter and nine months ended September 30, 2016, respectively. The reductions in pre-tax income are primarily driven by the revenue decreases discussed above.

Traditional & Universal Life Products

Traditional and universal life products include traditional life and group life insurance products, certain annuities and universal life products. Revenues for this segment were $2,400,392 for the third quarter of 2017 (a decrease of 9.1% compared to the third quarter of 2016) and $7,020,879 for the nine months ended September 30, 2017 (a decrease of 18.4% compared to the corresponding period in 2016). These decreases were primarily due to lower investment income associated with the reduction in invested assets due to the SNIC reinsurance agreement, lower realized gains in comparison to the prior periods due to the investment liquidations used to fund the SNIC reinsurance agreement, and a reduction in premium income as we seek to identify new distribution channels for our wealth preservation products in addition to the fact that we are currently focusing much of our marketing efforts on our preneed and final expense products.

Pre-tax income from operations was $362,493 and $660,378 for the quarter and nine months ended September 30, 2017, respectively, compared to pre-tax income of $184,732 and $564,699 for the quarter and nine months ended September 30, 2016, respectively. The increases in pre-tax income are primarily attributable to a reduction in reserves and commission expense in comparison to the prior periods along with a reduction in general and administrative expenses due to expense control efforts. These reductions are partially offset by an increase in death benefits due to unfavorable mortality experience within this segment in addition to the revenue decreases previously discussed.

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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 five unaffiliated life insurance companies, which includes a new client added in September 2016. We have received notice of termination from one client effective October 31, 2017. Services provided to each company vary based on their needs and can include some or all aspects of back-office accounting, actuarial services and policy administration.

Revenues for this segment were $496,321 for the third quarter of 2017 (an increase of 36.0% compared to the third quarter of 2016) and $1,373,296 for the nine months ended September 30, 2017 (an increase of 31.4% compared to the corresponding period in 2016). Pre-tax income from operations was $127,293 and $346,183 for the quarter and nine months ended September 30, 2017, respectively, compared to pre-tax income of $142,640 and $267,796 for the quarter and nine months ended September 30, 2016, respectively. The increases in revenue and year-to-date pre-tax income were primarily due to the addition of one new client and the fact that our existing life insurance company clients have experienced increased policy counts and additional service needs which resulted in an increase in our monthly fees. The small reduction in pre-tax income for the third quarter of 2017 was principally due to expense allocations compared to the corresponding period in the prior year.

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 $348,593 for the third quarter of 2017 (an increase of 23.8% compared to the third quarter of 2016) and $830,337 for the nine months ended September 30, 2017 (an increase of 53.5% compared to the corresponding period in 2016). Pre-tax income (loss) from operations was $108,950 and ($107,902) for the quarter and nine months ended September 30, 2017, respectively, compared to $141,937 and $3,330 for the quarter and nine months ended September 30, 2016, respectively. The changes in revenues are primarily due to the impact of the mark-to market adjustment on our investments in convertible options for each of the corresponding periods. The changes in pre-tax income (loss) are due both to the impact of the mark-to-market adjustments on our investments in convertible options in addition to increased expenses associated with the merger transaction previously discussed.

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 nine months ended September 30, 2017, Investors Heritage Capital received dividends of $110,000 from Investors Heritage Financial and distributions of $100,000 from At Need Funding. The potential exists for dividend payments and distributions over the remainder of 2017 as any needs arise.

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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; amortization of deferred revenue on reinsurance ceded which was previously taxed at inception of the reinsurance agreement; 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 quarter and nine months ended September 30, 2017. Our estimated effective tax rate was 3.6% and 10.0% for the quarter and nine months ended September 30, 2016, respectively.

OFF-BALANCE SHEET ARRANGEMENTS

We have no significant off-balance sheet arrangements as of September 30, 2017.

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.

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ITEM 4. Controls and Procedures

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

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PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings

Investors Heritage Capital is not involved in any legal proceedings. From time to time Investors Heritage Life is involved in litigation relating to claims arising out of its operations in the normal course of business. As of November 14, 2017, Investors Heritage Life is not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our financial condition or results of operations. 

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

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

(b) Not applicable.

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

					Total Number of		Maximum Number
	Total		Average		Shares Purchased as		of Shares That May
	Number		Price		Part of Publicly		Yet Be Purchased
	of Shares		Paid Per		Announced Plans		Under the Plans
Period	Purchased		Share		or Programs		or Programs
July 1, 2017 - July 31, 2017		-	$	-		-		-
August 1, 2017 - August 31, 2017		-		-		-		-
September 1, 2017 - September 30, 2017		-		-		-		-

ITEM 3. Defaults Upon Senior Securities

None

ITEM 4. Mine Safety Disclosures

None

ITEM 5. Other Information

None

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ITEM 6. Exhibits

2.1	Agreement and Plan of Merger, dated as of October 27, 2017, by and among Investors Heritage Capital Corporation, Aquarian Investors Heritage Holdings LLC, and Aquarian Investors Heritage Acquisition Co. is incorporated by reference as Exhibit 2.1 to the Company’s Form 8-K filed on 10-27-17
2.2	Voting Agreement, dated as of October 27, 2017, by and among Aquarian Investors Heritage Holdings LLC and the Voting Agreement Shareholders is incorporated by reference as Exhibit 2.2 to the Company’s Form 8-K filed on 10-27-17
2.3	Contribution Agreement, dated as of October 27, 2017, by and among Aquarian Investors Heritage Holdings LLC and the Contributing Shareholders is incorporated by reference as Exhibit 2.3 to the Company’s Form 8-K filed on 10-27-17
31.1	Chief Executive Officer certification 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.
31.2	Chief Financial Officer certification 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: November 14, 2017	President
	BY: /s/Larry Johnson
	Larry Johnson
DATE: November 14, 2017	Vice President - Chief Financial Officer

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