| INVESTORS HERITAGE
		Capital Corporation
2009
 

 
 
INVESTORS			HERITAGE 
Capital Corporation  
2009 Annual Review                  
**TABLE OF CONTENTS**   
2
LETTER TO OUR STOCKHOLDERS
4
IN MEMORIAM
5
MANAGEMENT'S DISCUSSION AND ANALYSIS
15
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
16
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
17
CONSOLIDATED FINANCIAL STATEMENTS
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
40
BOARD OF DIRECTORS & CORPORATE OFFICERS
40
NOTICE OF ANNUAL MEETING
 

 

**LETTER TO OURSTOCKHOLDERS**

 

To our stockholders, 

 

**NAME CHANGE**

 

In May 2009, our stockholdersapproved changing the name of Kentucky Investors, Inc. to Investors HeritageCapital Corporation (ticker symbol "IHRC").  The name change enables us tobetter utilize the recognized name of our major holding, Investors Heritage LifeInsurance Company and enables us to better market our third party administrative("TPA") service and other activities that involve both the parent company andthe life insurance company.  

 

**MANAGEMENT CHANGES**

 

Investors Heritage Life willsee several management changes in 2010.  We have been very fortunate to havelong time, loyal and dedicated employees.  Two of these employees are retiringthis year.  They epitomize the family atmosphere we have created here.  Both arenot only long time employees, but have also brought their own family memberson-board over the years.  

 

Jane Wise, Vice President ofPolicyowner Service for Investors Heritage Life, retired at the end of February2010.  Jane completed a career of 45 years and three months with us.  Her entirecareer was devoted to the Policyowner Service Department.  She joined thecompany in November 1964 and was promoted to Assistant Director in 1975,Director in 1978, Assistant Vice President in 1985 and Vice President in 1988. Jane's policy knowledge and skill with customers have led Investors HeritageLife to be recognized as a company that provides excellent service topolicyowners and sales associates alike.  She has developed a skilled andwell-trained department to be left in very capable hands.  Kate Andry, a fiveyear employee of the department, has assumed leadership of the department asDirector.  We extend our great thanks to Jane for her outstanding and devotedservice to our companies.  

 

In January, Don Philpot, AgencyVice President announced he would retire at the end of July 2010 after 30 yearsand ten months of service to Investors Heritage Life.  Don and I have had briefdiscussions about possible retirement over the past several years and he hasdecided the time is right for this change.  After retirement Don will still beactive with us on a part-time basis managing a life sales brokerage agency.  Donhas spent his Investors Heritage Life career building long lasting relationshipswith our sales force. 

 

Michael Dudgeon, currently VicePresident of Financial Services, will assume Don's position in August.  Michaelhas led the Financial Division since 1997.  Prior to 1997, he worked in ourAgency Department as a Preneed Manager.  

 

The timing of this change workswell because we have entered into a letter of intent with the Kentucky BankersAssociation's insurance agency, KenBanc Insurance Services, Inc., wherebyKenBanc will assume the marketing and sales management of our credit relatedlife insurance products in Kentucky financial institutions.  Investors HeritageLife will continue underwriting, claims management and overall administration ofthe block of business.  This realignment of service allows Michael to assume hisnew position in August and allows the three other Financial Services employeesto perform other important services for Investors Heritage Life.  We anticipatethat this restructuring will reduce expenses related to this segment of ourbusiness by approximately 50%.

 

Kenya Eastman, a 26 yearInvestors Heritage Life employee, has moved from her position as FinancialServices Administrative Assistant to Director of Agency and Credit LifeAccounting.  This position was previously held by our dear friend and 30 yearemployee, Jennifer McClain.  Jennifer passed away in February 2010.  Please seepage 3 for our memoriam to four great friends lost in 2009 and 2010. 

 

**FINANCIAL RESULTS**

 

Investors Heritage CapitalCorporation experienced a much improved year financially during 2009 compared to2008.  The other-than-temporary-impairments (OTTI) in 2009, resulting from theeconomic meltdown that began in our country in the fall of 2008, occurred duringthe first half of the year and were considerably less in 2009 compared to 2008. Please refer to page 10 of the Management's Discussion and Analysis for anexplanation of the OTTI for both years.   We do not currently anticipate anyadditional OTTI during 2010. The economic crisis has calmed and hopefully theworst has passed.  Although the economy is not fully recovered yet, it doesappear to be on the mend and many companies seem to have taken steps to confrontthe crisis and exist in this economic situation.  We anticipate positivefinancial results for Investors Heritage Capital in 2010.

 

2

 

 

**LETTER TO OURSTOCKHOLDERS**

 

**SALES AND OTHER INCOME**

 

Although the economy hasclearly had an effect on sales, I am very pleased to report that we experiencedan increase in preneed sales in our funeral home market.  However credit relatedlife insurance sales in our bank market were depressed as a result of tightenedcredit and lending.  The credit related insurance sales are up and down with theeconomy, lending practices and loan demand.  We expect sales in this market toimprove as the economy recovers.  

 

We haveentered into a letter of intent and hope to sign definitive agreements in latespring 2010 with a very strong sales organization that we anticipate willproduce a considerable amount of new premium over the next several years.  Theywill be marketing a more traditional life insurance product to their clientbase, expanding our market, and in time marketing to our existing client baseand other sources.  

 

A growing segment of ouroperation is the service we provide as a TPA.  Investors Heritage Life performsadministrative work for non-affiliated companies on a fee for service basis.  Wemarket these services through our Corporate Development Department, and wecurrently provide TPA services for eight non-affiliated companies.  OurCorporate Development Department also works to find life companies to purchaseor blocks of life insurance business to acquire.  Even though we did not make anacquisition in 2009, we reviewed several opportunities and decided not to pursuethem.  

 

**DIVIDEND**

 

Investors Heritage Life andIHCC returned to profitability during 2009 although the OTTI resulted in lowerprofits than anticipated.  Investors Heritage Capital Corporation is paying amodest dividend to stockholders of $.13 per share.  Last year was the first timein 33 years a dividend was not paid.  We are proud to be able to do this duringthis challenging economy and hope financial results in the future will enable usto continue paying a dividend at some level in the years ahead.

 

**APPRECIATION**

 

I appreciate the understandingof our stockholders during these unprecedented economic times.  I am fortunateto work with a great team comprised of our Board of Directors, administrativeand sales management personnel, home office employees and sales associates.  Ouroperations have been tested by this economy and we are performing well.  Thestrength of our management and Board allows us to adapt and change whennecessary while maintaining our core competencies.  To that end, we continue tostress premium production in our primary lines of business, preneed, finalexpense and credit insurance, as well as attempting to expand into new areas ofmore traditional life insurance sales.  In addition, we are utilizing ourexisting administrative service expertise to increase revenues from TPA serviceswith very little added expense.  We believe this diversification best preparesus for changes in the world today and tomorrow, keeps us looking forward forvarious opportunities and best utilizes the skills and strengths of our team.

 

 

 

Respectfully submitted,

 

/s/ Harry Lee Waterfield II

 

Harry Lee Waterfield II

Chairman, Chief Executive Officer 

 

3

 

 

**INMEMORIAM**

 

**DR. JERRY FONCE HOWELL, JR.**

 

Dr. Howell was a board memberof Investors Heritage Capital Corporation since May 12, 1983 and of InvestorsHeritage Life Insurance Company since January 15, 1987.  He was a distinguishededucator, environmentalist, civic leader and philanthropist.  Dr. Howell was onthe staff of Morehead State University, Morehead, Kentucky, from 1972 until hisretirement in 1997.  He was director of the Environmental Education Center. During his career he chaired the Department of Biological and EnvironmentalSciences, started the MSU Water Testing Laboratory, and helped introduceenvironmental education into the statewide public school curriculum inKentucky.  Dr. Howell and his father co-founded a scholarship endowment to helpstudents in Appalachia attend college.  That endowment is now managed by theChristian Appalachian Project.  Dr. Howell is survived by his wife, Lois TaylorHowell, who is also a retired MSU faculty member.

 

**STEVE LAKEY**

 

Steve was associated withInvestors Heritage Life Insurance Company for 18 years.  He managed preneed andfinal expense sales in parts of western North Carolina and northeast Tennessee. Prior to joining us in January 1991, Steve had a very successful 22 year careerin the life insurance industry.  Steve was a real ambassador for our company andalways willing to go the extra mile in working with his funeral home accounts,agents and other company personnel.  

 

**FRANK WANNER WAGNER, JR. **

 

Frank was the husband of boardmember Helen Wagner.  He was a great friend, stockholder in our organization andhe drove Helen to every monthly board meeting since she joined the board in1986.  Frank was a talented jazz pianist, a retired home builder, real estatedeveloper and a member of the Owensboro Rotary Club with 36 years perfectattendance.  In addition to Helen, he is survived by Dr. Elizabeth WagnerBozeman, Frank Wanner Wagner III and four grandchildren.  

 

**JENNIFER STIVERS McCLAIN**

 

Jennifer was our Director of Agency and Credit LifeAccounting.  She joined the IHLIC family in August 1980 and worked in thatdepartment since her hire.  Her knowledge of our commission systems as well asother aspects of the company was vast.  Jennifer battled breast cancercourageously since she was diagnosed in the fall of 2007.  While receivingcancer treatments, she remained dedicated to her work.  She worked remotely fromthe hospital during chemotherapy treatments and from home when unable to come toFrankfort.  Jennifer had a love of music and theatre.  She participated inseveral theatre groups and directed the hand bell choir and children's choir ather church.  Jennifer is survived by her husband of 29 years, Mitch McClain,their daughters, Carissa (Randy) Sanford; Jordan (Andrew) Lardner;granddaughter, Jillian Sanford; parents, Lonnie and Louellen Stivers andgrandmother, Janette Stivers.  

 

4

 

 

**MANAGEMENT'S DISCUSSION AND ANALYSIS**

 

**EXECUTIVE OVERVIEW**

The following discussion highlights significant factors impacting theconsolidated operating results and financial condition of Investors HeritageCapital Corporation ("Investors Heritage Capital"), formerly known as KentuckyInvestors, Inc. prior to name change effective June 1, 2009, and itssubsidiaries (collectively referred to as "we", "us", "our" or the "Company") asof and for the year ended December 31, 2009, as compared with the year endedDecember 31, 2008.  This supplementary financial information should be read inconjunction with the Consolidated Financial Statements and related Notes, all ofwhich are integral parts of the following analysis of our results of operationsand financial position.

 

Investors Heritage Capital is the parent company of Investors Heritage LifeInsurance Company ("Investors Heritage Life"), Investors Heritage FinancialServices Group, Inc. ("Investors Heritage Financial"), Investors HeritagePrinting, Inc., and is the sole member of At Need Funding, LLC and HeritageFunding, LLC.  Investors Heritage Capital and each subsidiary are domiciled inthe Commonwealth of Kentucky.  Approximately 99% of Investors Heritage Capital'sconsolidated revenue is generated by Investors Heritage Life. 

 

**MAJOR MARKETS AND NEW AFFILIATIONS**

We continue to focus themajority of our sales efforts in the preneed funeral market.  We haveestablished a strong marketing base allowing us to maintain solid premiumproduction in our core market while operating in the currently unfavorableeconomic and interest rate environment.

 

Investors Heritage Financial operates under marketingagreements with Investors Heritage Life.  These arrangements have provensuccessful and enabled Investors Heritage Financial and Investors Heritage Lifeto utilize their expertise in the marketing and administration of creditinsurance products.  Further, Investors Heritage Financial enables InvestorsHeritage Life to offer mortgage protection and ordinary life insurance productsthrough financial institutions.  Additionally, Investors Heritage Financial hasmarketing relationships with other unaffiliated insurance companies to provideproducts not currently offered by Investors Heritage Life.

 

Investors Heritage Life provides third partyadministrative services to eight unaffiliated companies, including two newagreements entered during 2009.  These agreements, for various levels ofadministrative services on behalf of each company, generate fee income forInvestors Heritage Life.  The level of fee income is expected to increase as themore recently formed companies grow and enhance their operations.

 

Investors Heritage Life has a strategic agreement withthe Kentucky Bankers Association ("KBA"), forming a partnership to jointlymarket credit insurance and related products to Kentucky financial institutionsand to serve in an administrative capacity for KenBanc Reinsurance Company,Ltd., the KBA's wholly-owned captive insurance company.  This arrangementgenerates fee income for Investors Heritage Life and commission income forInvestors Heritage Financial.  We have executed a letter of intent with the KBAand its insurance agency subsidiary whereby KenBanc Reinsurance Company wouldassume all marketing responsibilities for credit insurance products writtenthrough financial institutions in the Commonwealth of Kentucky.  InvestorsHeritage Life will continue to provide insurance products to be marketed as wellas all back office administrative services related to the credit insuranceoperations.  We anticipate that the definitive agreements will be executed on orbefore the end of the second quarter in 2010. 

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

The discussion and analysis of our financial conditionand results of operations is based on our Consolidated Financial Statements,which have been prepared in accordance with U.S. generally accepted accountingprinciples.  Preparation of these financial statements requires us to makeestimates and judgments that affect the reported amounts of assets, liabilities,revenues and expenses.  We evaluate our estimates continually, including thoserelated to investments, deferred acquisition costs, present value of futureprofits, policy liabilities, income taxes, accrued pension expense, regulatoryrequirements, contingencies and litigation.  We base such estimates onhistorical experience and other assumptions believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparent fromother sources.  Actual results may differ from these estimates under differentassumptions or conditions.  We believe the following accounting policies,judgments and estimates are the most critical to the preparation of ourConsolidated Financial Statements.

 

5

 

 

**MANAGEMENT'S DISCUSSION AND ANALYSIS**

 

***Investments in FixedMaturities, Equity Securities and Mortgage Loans***

We hold fixed maturities andequity interests in a variety of companies.  Additionally, we originate,underwrite and manage mortgage loans.  We continuously evaluate all of ourinvestments based on current economic conditions, credit loss experience andother developments.  We evaluate the difference between the cost/amortized costand estimated fair value of our investments to determine whether any decline infair value is other-than-temporary in nature.  This determination involves adegree of uncertainty.  If a decline in the fair value of a security isdetermined to be temporary, the decline is recognized in other comprehensiveincome (loss) within stockholders' equity. If a decline in a security's fairvalue is considered to be other-than-temporary, we then determine the propertreatment for the other-than-temporary impairment.  For fixed maturities, theamount of any other-than-temporary impairment related to a credit loss isrecognized in earnings and reflected as a reduction in the cost basis of thesecurity; and the amount of any other-than-temporary impairment related to otherfactors is recognized in other comprehensive income (loss) with no change to thecost basis of the security.  For equity securities, the amount of anyother-than-temporary impairment is recognized in earnings and reflected as areduction in the cost basis of the security.

 

The assessment of whether adecline in fair value is considered temporary or other-than-temporary includesmanagement's judgment as to the financial position and future prospects of theentity issuing the security. It is not possible to accurately predict when itmay be determined that a specific security will become impaired.  Future adversechanges in market conditions, poor operating results of underlying investmentsand defaults on mortgage loan payments could result in losses or an inability torecover the current carrying value of the investments, thereby possiblyrequiring an impairment charge in the future.  Likewise, if a change occurs inour intent to sell temporarily impaired securities prior to maturity or recoveryin value, or if it becomes more likely than not that we will be required to sellsuch securities prior to recovery in value or maturity, a future impairmentcharge could result.

 

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

 

***Deferred AcquisitionCosts***

The recovery of deferredacquisition costs is dependent on the future profitability of the underlyingbusiness for which acquisition costs were incurred.  Each reporting period, weevaluate the recoverability of the unamortized balance of deferred acquisitioncosts.  We consider estimated future gross profits or future premiums, expectedmortality or morbidity, interest earned and credited rates, persistency andexpenses in determining whether the balance is recoverable.  If we determine aportion of the unamortized balance is not recoverable, it is immediately chargedto amortization expense.  The assumptions we use to amortize and evaluate therecoverability of the deferred acquisition costs involve significant judgment. A revision to these assumptions may impact future financial results.

 

Deferred acquisition costs related to annuities and universal life insuranceproducts are deferred to the extent deemed recoverable and amortized in relationto the present value of actual and expected gross profits on the policies. Tothe extent that realized gains and losses on securities result in adjustments todeferred acquisition costs related to annuities, such adjustments are reflectedas 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 unrealizedgains (losses) from securities had actually been realized. This adjustment isincluded in the change in net unrealized appreciation (depreciation) onavailable-for-sale securities, a component of "Accumulated Other ComprehensiveIncome (Loss)" in the stockholders' equity section of the balance sheet.

 

***Policy Liabilities***

Estimating liabilities for our long-duration insurance contracts requiresmanagement to make various assumptions, including policyholder persistency,mortality rates, investment yields, discretionary benefit increases, newbusiness pricing, and operating expense levels.  We evaluate historicalexperience for these factors when assessing the need

 

6

 

 

**MANAGEMENT'S DISCUSSION AND ANALYSIS**

 

for changing currentassumptions.  However, since many of these factors are interdependent andsubject to short-term volatility during the long-duration contract period,substantial judgment is required.  Actual experience may emerge differently fromthat originally estimated.  Any such difference would be recognized in thecurrent year's consolidated statement of income.

 

***Income Taxes***

We evaluate our deferred incometax assets, which partially offset our deferred tax liabilities, for anynecessary valuation allowances.  In doing so, we consider our ability andpotential for recovering income taxes associated with such assets, which involvesignificant judgment.  Revisions to the assumptions associated with anynecessary valuation allowances would be recognized in the financial statementsin the period in which such revisions are made.  

 

***Accrued Pension Expense***

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

 

The Pension Protection Act of2006 was passed by Congress and signed by the President on August 17, 2006 toaddress the funding mechanisms of pension plans. The Act alters the traditionalformula under which plan liabilities must be funded, and it may result insignificantly increased future funding costs depending on investment returns.

 

***New AccountingPronouncements***

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

 

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

 

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

 

Refer to Notes B and C to our consolidated financialstatements for more explanation of the above-mentioned new pronouncements aswell as for the required disclosures.

 

7

 

 

**MANAGEMENT'S DISCUSSION AND ANALYSIS**

 

In May 2009, the FASB issued new guidance thatestablished general accounting standards and disclosure for events occurringsubsequent to the balance sheet date but before the financial statements areissued.  This guidance became effective for interim and annual accountingperiods ending after June 15, 2009.  The Company adopted this guidance uponissuance, with no material impact to the consolidated financial statements.

 

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

 

**BUSINESS SEGMENTS**

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

 

--       ***Preneed and Burial Products*** segment includes both lifeand annuity products sold by funeral directors or affiliated agents to fundprearranged funerals or to provide for the insured's final expenses.

 

--       ***Traditional and Universal Life Products***segment includestraditional life, group life, annuities and universal life products. 

 

--       ***Credit Insurance and Administrative Services*** segmentincludes the marketing and administration of credit life and credit accident andhealth insurance products.

 

--       ***Corporate and Other*** segment consists of corporateaccounts primarily including stockholders' paid-in capital, earned surplus,property and equipment and other minor business lines which include groupannuities and group and individual accident and health products.  This segmentalso includes fees generated from our third party administration arrangements. Additionally, realized gains and losses, including realized losses as a resultof other-than-temporary impairments, are allocated to this segment.

 

Please see Note I to theConsolidated Financial Statements for additional information regarding segmentdata.

 

**OPERATING RESULTS**

Consolidated Operations

Total consolidated revenuesincreased approximately $4,771,000 and net income (loss) increased approximately$1,989,000 in 2009 compared with 2008.  These increases primarily reflect theother-than-temporary impairment charge taken on Lehman Brothers bonds during thethird quarter of 2008.  Our impairments are further discussed in the Corporateand Other segment discussion.

 

Preneed & Burial Products

Revenues for the preneed and burial products businesssegment increased approximately $778,000 in 2009 compared to 2008.  Thisincrease is due to increased preneed sales from the Legacy Gold preneed productseries.  Our pre-tax income (loss) increased approximately $186,000 in 2009compared to prior year.  This improvement was driven by the correspondingincrease in sales revenue, favorable claims history compared to prior periodsand the allowable reduction of certain death benefit crediting rates. 

 

8

 

 

**MANAGEMENT'S DISCUSSION AND ANALYSIS**

 

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

 

**Preneed Premium Production**
**First Year and Single**
**Year Ended December 31**
 
  
**2009** 
**2008** 
North Carolina
$
6,602,233
$ 
7,754,552 
Kentucky 
5,852,321 
5,523,149 
Tennessee 
2,799,008 
2,520,406 
Georgia 
1,692,715 
1,382,253 
Indiana 
1,464,507 
968,970 
Virginia 
1,377,530 
1,321,524 
South Carolina 
653,453 
494,028 
Michigan 
492,032 
268,391 
Ohio 
347,316 
327,921 
Illinois 
272,277 
261,377 
All Other States 
462,677 
1,055,555 
**   TOTAL**
$
22,016,069
$
21,878,126 
 

In late 2007, we introduced theLegacy Gold product series, a generation of life insurance and annuity productsmarketed in conjunction with prearranged funerals.  As a part of the process, weperformed detailed analysis of the preneed market and of the characteristics ofour particular block of business.  We believe that the result of these effortsis a very marketable product that balances profitability with competitivecommissions and death benefit growth to provide adequate proceeds to coverfuneral expenses and personal needs.  Underwritten and guaranteed issue optionsare available.  This product series replaced the Legacy Protector and LegacyPreferred series of life insurance and annuity products during early 2008.

 

During the fourth quarter of2008, we introduced the Heritage Final Expense II product as a replacement forour original Heritage Final Expense product sold in the final expense markets. The new product incorporates the 2001 CSO table while also improving themarketability and profitability of the product.

 

Traditional & Universal Life Products

Revenues for 2009 decreased approximately $7,000 whilepre-tax income decreased approximately $507,000.  Revenues from this segment areprimarily derived from the sale of term insurance products through banks, forwhich demand fluctuates along with economic conditions.  New sales and incomehave suffered due to the tightening of consumer credit markets.  The change inpre-tax income is primarily attributable to these lower sales coupled withfluctuations in death claims between periods.

 

Investors Heritage Financialmarkets traditional insurance products through banks and other financialinstitutions.  Currently, Investors Heritage Financial services 257 financialinstitutions and other retail outlets contracted through Investors HeritageLife.  Investors Heritage Financial markets Investors Heritage Life products andcontinues to expand the portfolio of products available to our regular ordinaryinsurance agents by offering products of other unaffiliated companies.  For anumber of years, we have provided outlets for our agents with substandardbusiness that Investors Heritage Life will not accept.  Investors HeritageFinancial has provided "second to die" policies, substandard life policies,larger term policies and health insurance products through other unaffiliatedinsurance companies.  Investors Heritage Financial receives a fee for providingthose services and the outlook for increased fee income from this marketingarrangement is positive.

 

We utilize a combination of yearly renewable term reinsurance and coinsurance tocede life insurance coverage in excess of our $25,000 per life retention limit. Most of our business is written in the smaller face amount markets and, in thepast, claims on larger-case ordinary business caused income fluctuations.  Thislower retention level has stabilized earnings fluctuations in this segment.  Thelowered retention was achieved by maintaining the established reinsurancetreaties and adding additional yearly renewable term treaties for amountsbetween $25,000 net amount at risk and the previous retention of $100,000.

 

9

 

 

**MANAGEMENT'S DISCUSSION AND ANALYSIS**

 

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

 

Credit Insurance & Administrative Services

Thissegment includes the marketing and administration of credit life and creditaccident and health insurance products. We reinsure 100% of the relatedunderwriting risk currently produced within this segment.  Accordingly, revenueis generated primarily from marketing and initiation fees as well as servicingand administering the credit business for our reinsurers. Because the revenue isfee-based, segment performance is in direct relation to new premium productioncoupled with fees generated as premiums are earned. Premium production withinthis segment is also significantly affected by economic conditions within ourcredit markets, particularly Kentucky.  Revenues for this segment decreasedapproximately $159,000 in 2009 while pre-tax income decreased approximately$119,000.  These decreases in revenue and pre-tax income are directly related tolower premium production within this segment of the business due to currenteconomic and lending conditions.

 

Corporate & Other

Corporate & Other consists ofcorporate accounts measured primarily by stockholders' paid-in capital,contributed surplus, earned surplus, property and equipment, and other minorbusiness lines which include group annuities and group and individual accidentand health products. This segment also includes fees generated from our thirdparty administrative arrangements as well as the impact of realized investmentgains and losses.  Revenues from this segment in 2009 increased approximately$4,159,000 and pre-tax income (loss) increased $3,823,000.  The increase inrevenues and pre-tax income is primarily due to other-than-temporary impairmentlosses taken during 2008 relative to our Lehman Brothers bonds and two FifthThird mutual funds.

 

During 2009, we recognized twoother-than-temporary impairment charges, although significantly smaller in totalthan those recognized during 2008. The Company impaired its$2,000,000 par value CIT Group Holdings bond as a result of negative informationrelative to the lack of a government bailout during the second quarter of 2009. This impairment was considered fully credit-related, resulting in a charge tothe income statement before tax of $954,877 as of June 30, 2009.  This chargerepresented the difference between the amortized cost basis of the security andits fair value as of that date as management could not assert that it did nothave the intent to sell the security.  We also impaired an ALCOA bond as of June30, 2009, based on our intent to sell the security before recovery, generating apre-tax credit-related loss of $22,953.  We sold these bonds during the thirdquarter of 2009 at a total additional realized loss of $267,299.  We experiencedno additional other-than-temporary impairments during 2009.

 

During 2009, Investors HeritageFinancial's revenues were approximately $237,000, down $92,000 compared to 2008,and dividends in the aggregate amount of $138,000 were paid to InvestorsHeritage Capital.  Revenues from Investors Heritage Printing were approximately$363,000 in 2009, down $3,000 compared to 2008.  Investors Heritage Printing didnot pay any dividends to Investors Heritage Capital.  Management of InvestorsHeritage Printing continues to focus on improving revenues from unaffiliatedsources while providing printing services for Investors Heritage Life.  Revenuesfrom At Need Funding were approximately $91,000 in 2009, down $15,000 comparedto 2008.  At Need Funding paid distributions of $48,000 to Investors HeritageCapital in 2009.  Revenues from all non-Investors Heritage Life sourcesconstitute less than 1% of total consolidated revenues in 2009 and management isworking on the continued growth and profitability of each of the non-lifesubsidiaries.

 

**INVESTMENTS, LIQUIDITY AND CAPITAL RESOURCES**

 

***Investments***

Together with our outsideinvestment advisor and portfolio manager, we manage the fixed income investmentportfolio to achieve the Company's investment goals, which include thediversification of credit risk, the maintenance of adequate portfolio liquidity,the management of interest rate risk and the maximization of investmentreturns.  

 

Since inception, we have maintained a sound, conservativeinvestment strategy.  As of December 31, 2009, 90.0% of our total investedassets consisted of fixed income securities, compared to 89.2% at December 31,2008.  The primary investment objectives are to maintain the quality andintegrity of the fixed income portfolio while improving the total return oninvestments.

 

10

 

 

**MANAGEMENT'S DISCUSSION AND ANALYSIS**

 

The fixed income portfolio isdiversified among sectors.  The Standard & Poor's average quality rating of ourfixed income portfolio holdings as of December 31, 2009 is AA-.  At December 31,2009 and 2008, the fixed income portfolio was allocated as follows:

 
  
**December 31**  
**2009** 
**2008**
Corporate:    
Bank and finance
9.2% 
16.5% 
Industrial and miscellaneous
38.4% 
31.8%
Government
14.4% 
8.8%
Mortgage-backed			securities
18.5% 
23.0%
Foreign
7.4% 
7.9%
Asset-backed			securities
2.2% 
4.0%
States and			political subdivisions
9.9% 
8.0%
 

The fixed maturities and equitysecurities within our portfolio are in a net unrealized gain position ofapproximately $12,538,000 at December 31, 2009.  Please see Note C to theConsolidated Financial Statements for additional information regarding thesefair values.

 

The fixed income portfolioincludes approximately $54,651,000 (at fair value) of mortgage-backed securities("MBS").  MBS have historically added value to the portfolio and our outsideinvestment advisor has provided the expertise to purchase MBS with confidencethat the credit ratings have been properly analyzed and that the investmentproperly suits our asset and liability needs.

 

There have been concernsexpressed by rating agencies, various regulators and other constituenciesregarding investments in MBS by insurers and other financial institutions. Although these highly rated securities provide excellent credit quality, theirliquidity risk must be monitored.  Except for seven commercial-backed mortgagesof approximately $6,965,000, all of the collateral of the MBS owned areguaranteed by the Government National Mortgage Association ("GNMA"), FederalNational Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation("FHLMC").

 

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

 

CMO holdings represent approximately 22% of the total MBSportfolio.  In accordance with relevant accounting guidance, when thesesecurities are purchased at a discount or premium, the income yield will varywith changes in prepayment speeds due to the change in accretion of discount oramortization of premium, as well as the timing of the basic principal andinterest cash flows.  The overall impact of the CMO's variability in yields onthe portfolio has not been significant in relation to the yield and cash flowsof the total invested assets.  More importantly, the investment portfolio has noexposure to more volatile, high-risk CMO's, such as those structured to share inresidual cash flows.  Except for one sequential pay CMO of approximately$51,000, the CMO's held are either planned amortization class bonds or supportclass bonds, both of which are structured to provide more certain cash flows tothe investor and therefore have reduced prepayment risk.  Based on our analysisof the investment portfolio, there are no impairment issues with respect to ourCMO's.

 

Pass-throughs comprise theremainder of MBS owned, representing approximately 78% of the total MBSportfolio.  Pass-throughs are FNMA or FHLMC guaranteed MBS that, simply stated,pass through interest and principal payments to the investors in accordance withtheir respective ownership percentage.

 

We continuously monitor theinvestment risk within our portfolio, including the risk associated withsubprime lending with our CMO investments.  As of December 31, 2009, we haveonly one CMO, with a fair value of approximately $56,000, which has any level ofdirect subprime exposure.  Based on our analysis, we believe this 

11

 

 

**MANAGEMENT'S DISCUSSION AND ANALYSIS**

 

investment is of high qualityand expect no losses as a result of the current subprime concerns. Additionally, we have no Alt-A bond exposure within our current holdings.

 

We also engage in commercialand residential mortgage lending, with approximately 99.9% of these investmentsin commercial properties.  All mortgage loans are either originated in-house orthrough two mortgage brokers, and all loans are secured by first mortgages onthe real estate.  Loan to value ratios of 80% or less and debt service coveragefrom existing cash flows of 115% or higher are generally required.  We minimizecredit risk in our mortgage loan portfolio through various methods, includingstringently underwriting the loan request, maintaining small average loanbalances, reviewing larger mortgage loans on an annual basis and diversifyingthe portfolio by property type.  The average loan balance is $390,431 and theaverage loan to value is 36%.  The largest loan currently held is $887,138.  Wehave approximately $20,693,000 invested in mortgage loans, which represents 6.3%of total invested assets.  The portfolio is diversified across various propertytypes as follows:

 
 
**December 31** 
**2009** 
**2008**
Office 
26.7% 
27.0%
Retail
57.9% 
57.8%
Industrial
4.4% 
4.4%
Medical
3.7% 
3.6%
Apartments
5.5% 
5.5%
Other
1.8% 
1.7%
 

We are familiar with ourmortgage loan markets and given our low loan-to-value ratios, we do not believethat the current economic crisis will have a material negative impact on ourmortgage loan portfolio.  We have been successful in adding value to the totalinvestment portfolio through mortgage loan originations due to the fact thatyields realized from the mortgage loan portfolio are generally 100 to 300 basispoints higher than yields realized from fixed income investments.  Value hasalso been added because the mortgage loan portfolio has consistently performedwell.  As of December 31, 2009 and 2008, we had no non-performing mortgageloans, which would include loans past due 90 days or more, loans in process offoreclosure, restructured loans and real estate acquired through foreclosure.

 

***Liquidity and CapitalResources***

The quality of our investmentportfolio and the current level of stockholders' equity continue to provide asound financial base as we strive to expand our marketing system and to offercompetitive, quality products.  Our investment portfolio continues to providefinancial stability.  It is management's opinion that we have adequate cashflows both on a long-term and short-term basis as evidenced by the net cashflows provided by operating activities in the consolidated statements of cashflows presented in this Annual Review.  Such cash flows were primarily derivedfrom insurance premiums, investment income and administrative service fees.

 

The stability of our liquidity is found in ourconservative approach to product development and in the strength and stabilityof our fixed income portfolio and mortgage loans.  At December 31, 2009, ourfixed income investments were 97.7% investment grade as rated by Standard &Poor's. Other than our two Lehman Brothers bonds impaired during 2008, none ofour investments are in default.  Liquidity is also managed by ladderingmaturities of our fixed income portfolio. The average duration of our fixedincome investments is 4.6 years with approximately $8,563,000 due within twelvemonths and approximately $88,864,000 due within the following four years. Historically, management has anticipated that all such investments will be helduntil maturity.  However, one of the responsibilities of our independentportfolio manager is to constantly monitor the credit rating of our fixed incomeinvestments to determine if rating changes of any investment requires action bymanagement.  As explained in detail in Note A to the Consolidated FinancialStatements, all fixed income securities and all marketable equity securities areclassified as available-for-sale and are carried at fair value.

Effective September29, 2009, we entered into a $2,000,000 line of credit for At Need Funding,maturing on September 29, 2010.  This line of credit is used for the purpose offunding at-need funerals secured by the assignment of verified, incontestablelife insurance policies.  On September 16, 2009, we also entered into a $150,000operating line of credit, maturing on September 16, 2010.  Both of these linesof credit were with a new provider as replacements for previously existing linesof credit that were not renewed at June 30, 2009.  These 

 

12

 

 

**MANAGEMENT'S DISCUSSION AND ANALYSIS**

 

lines of credit require interest to be paid monthly atthe prime rate, with a floor of 3.25%.  At December 31, 2009, the outstandingprincipal balance on the At Need Funding line of credit was $662,720.  AtDecember 31, 2009, there was no amount outstanding on the operating line ofcredit.

 

On June 1, 2005, we renewed ourexisting bank note in the amount of $1,434,257 with interest paid monthly at arate of 1% under the prime rate.  In conjunction with this note, we purchased aninterest rate cap to hedge exposure to interest rate risk.  The interest ratecap limits the interest rate that can be charged over the remaining term tomaturity of the note to no greater than 6.5%.  At December 31, 2009, $160,757remained outstanding on this note.

 

On February 3, 2005, InvestorsHeritage Capital borrowed $3,650,000 to finance the purchase of certain homeoffice property previously owned by Investors Heritage Life at a purchase priceof $3,650,000.  The note is an amortizing loan with a fixed interest rate of5.05% and with a maturity date of March 1, 2015.  The proceeds received byInvestors Heritage Life were used to repay their surplus notes to InvestorsHeritage Capital.  Additionally, Investors Heritage Capital used the proceeds torepay the $3,000,000 bank note outstanding at December 31, 2004.  Thistransaction was approved by the Kentucky Department of Insurance.  At December31, 2009, $2,143,439 remained outstanding on this note. 

 

On November 23, 2004, we issueda promissory note in the amount of $643,200 with an interest rate of 4%, dueDecember 31, 2008.  The note was issued in exchange for common stock from one ofour board members.  This note was fully paid during 2008.

 

On February 4, 2008, we issueda promissory note in the amount of $135,600 with an interest rate of 4%, dueFebruary 4, 2012.  This note was issued in exchange for a block of common stockfrom one of our stockholders under our right of first refusal.  At December 31,2009, $103,668 remained outstanding on this note.

 

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

 

We assess our compliance withprescribed debt covenant requirements as outlined in the terms of each debtagreement at least annually, if not otherwise required in the debt agreement. Management has assessed our position as of December 31, 2009, and we are incompliance with all debt covenant requirements.

 

Management is not aware of anyother commitments or unusual events that could materially affect our capitalresources.  We have the option to prepay certain notes payable at our discretionprior to their maturity dates.

 

Other than the items disclosedin Note G to the Consolidated Financial Statements and the increased federal andstate regulatory reporting requirements which generally increase administrativeexpenses, management is not aware of any current recommendations by anyregulatory authority which, if implemented, would have any material effect onour liquidity, capital resources or operations.

 

We will continue to explorevarious opportunities, including mergers and acquisitions and purchasing blocksof business from other companies, which may dictate a need for either long-termor short-term debt.  There are no restrictions as to use of funds except therestriction on Investors Heritage Life as to the payment of cash dividends toshareholders that is discussed in more detail in Note G to the ConsolidatedFinancial Statements. 

 

**REGULATORY MATTERS**

The statutory capital andsurplus of Investors Heritage Life increased approximately $1,323,000 in 2009. The increase in statutory capital and surplus in 2009 is primarily related to2009 net income coupled with additional admissible deferred tax assets under newtemporary statutory accounting guidance for 2009 and 2010.  Investors HeritageLife produced a statutory operating gain of approximately $1,329,000 and$1,170,000 in 2009 and 2008, respectively, before the effect of the realizedgains (losses).  For additional discussion on statutory accounting practicesrefer to Note H to the Consolidated Financial Statements*.*

 

13

 

 

**MANAGEMENT'S DISCUSSION AND ANALYSIS**

 

**OFF-BALANCE SHEETARRANGEMENTS**

We have no off-balance sheetarrangements as of December 31, 2009.

 

**FORWARD LOOKINGINFORMATION**

We caution readers regarding certain forward-lookingstatements contained in this report and in any other statements made by, or onbehalf of, the Company, whether or not in future filings with the Securities andExchange Commission.  Forward-looking statements are statements not based onhistorical 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 involveforward-looking statements.  Without limiting the foregoing, forward-lookingstatements include statements which represent our beliefs concerning futurelevels of sales and redemptions of our products, investment spreads and yieldsor the earnings and profitability of our activities.

 

Forward-looking statements arenecessarily based on estimates and assumptions that are inherently subject tosignificant 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 differmaterially from those expressed in any forward-looking statements made by, or onbehalf of, the Company.  Whether or not actual results differ materially fromforward-looking statements may depend on numerous foreseeable and unforeseeablefactors and developments.  Some of these may be national in scope, such asgeneral economic conditions, changes in tax laws and changes in interest rates. Some may be related to the insurance industry generally, such as pricingcompetition, regulatory developments, industry consolidation and the effects ofcompetition in the insurance business from other insurance companies and otherfinancial institutions operating in our market area and elsewhere.  Others mayrelate to the Company specifically, such as credit, volatility and other risksassociated with our investment portfolio.  We caution that such factors are notexclusive.  We disclaim any obligation to update forward-looking information.

 

14

 

 

**MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

 

Management of the Company is responsible forestablishing and maintaining adequate internal control over financial reporting.The Company's internal control over financial reporting is designed to providereasonable assurances regarding the reliability of financial reporting and thepreparation of the Consolidated Financial Statements of the Company inaccordance with U.S. generally accepted accounting principles. The Company'saccounting policies and internal controls over financial reporting, establishedand maintained by management, are under the general oversight of the Company'sAudit Committee. 

 

The Company's internalcontrol over financial reporting includes those policies and procedures that:

 

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

 

--       provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with U.S.generally accepted accounting principles, and that receipts and expenditures arebeing made only in accordance with authorizations of the Company's managementand directors; and

 

--       provide reasonable assurance regarding prevention or timely detectionof unauthorized acquisition, use or disposition of assets that could have amaterial effect on the financial statements. 

 

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

 

Management has assessed the Company's internal control over financial reportingas of December 31, 2009. The standard measures adopted by management in makingits evaluation are the measures in the Internal-Control Integrated Frameworkpublished by the Committee of Sponsoring Organizations of the TreadwayCommission. 

 

Based upon its assessment, management has concluded that the Company's internalcontrol over financial reporting is effective at December 31, 2009, and thatthere were no material weaknesses in the Company's internal control overfinancial reporting as of that date.

 

This annual report does not include an attestation report of the Company'sindependent registered public accounting firm regarding internal control overfinancial reporting. Management's report was not subject to attestation by theCompany's registered public accounting firm pursuant to temporary rules of theSecurities and Exchange Commission that permit the Company to provide onlymanagement's report in this annual report.

 

15

 

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

The Board of Directorsand Shareholders 

Investors HeritageCapital Corporation

 

We have audited the accompanying consolidated balance sheets of InvestorsHeritage Capital Corporation (the Company), formerly Kentucky Investors, Inc.,as of December 31, 2009 and 2008, and the related consolidated statements ofincome, shareholders' equity, and cash flows for the years then ended.   Thesefinancial statements are the responsibility of the Company's management.  Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we planand perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. We were not engaged to perform anaudit of the Company's internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as a basisfor designing audit procedures  that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany's internal control over financial reporting.  Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, inall material respects, the consolidated financial position of Investors HeritageCapital Corporation at December 31, 2009 and 2008, and the consolidated resultsof its operations and its cash flows for the years then ended, in conformitywith U.S. generally accepted accounting principles.

 

As discussed in Note A to the consolidated financial statements, in connectionwith implementing new accounting standards, the Company changed its method ofaccounting for other-than-temporary impairments of investments in fixed maturitysecurities in 2009.

 

 

 

                                                                                                                                           /s/ Ernst & Young LLP

 

 

Cincinnati, Ohio

March 19, 2010

 

16

 

 

**INVESTORSHERITAGE CAPITAL CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

**DECEMBER 31,2009 AND 2008**

 

**ASSETS** 
**2009** 
**2008**
			  Investments:    
			      Securities available-for-sale, at fair value:    
			      Fixed maturities (amortized cost: 2009 - $282,864,572; 2008-			$282,335,626)
$
295,242,583
$
285,430,376 
			      Equity securities (cost: 2009 - $4,063,905; 2008 - $4,040,062) 
4,223,604 
3,938,177 
			    Mortgage loans on real estate 
20,692,866 
22,512,438 
			    Policy loans 
6,923,418 
6,971,949 
			    Other long-term investments 
1,026,604 
1,021,741 
			    Short-term investments 
- 
25,000 
			    Total investments
$
328,109,075
$
319,899,681      
			  Cash and cash equivalents 
5,730,782 
2,819,257 
			  Accrued investment income 
4,013,402 
4,338,974 
  Due			premiums 
3,613,278 
3,618,390 
			  Deferred acquisition costs 
18,703,379 
19,882,671 
			  Present value of future profits 
12,968 
30,260 
			  Leased property under capital leases 
143,653 
283,695 
			  Property and equipment 
1,746,849 
1,702,331 
			  Cash value of company-owned life insurance 
8,671,833 
7,764,223 
			  Other assets 
312,852 
338,182 
			  Amounts recoverable from reinsurers 
47,521,019 
49,899,675  
$
418,579,090
$
410,577,339      
**LIABILITIES AND STOCKHOLDERS'			EQUITY**    
**  LIABILITIES**    
			     Policy liabilities:    
			          Benefit reserves
$
343,935,852
$
343,736,288 
			          Unearned premium reserves 
10,543,520 
12,154,938 
			          Policy claims 
1,582,684 
1,504,744 
			          Liability for deposit-type contracts 
2,742,986 
2,733,214 
			          Reserves for dividends and endowments and other  
425,419 
524,797 
			          Total policy liabilities
$
359,230,461
$
360,653,981 
			     Deferred federal income tax liability 
4,285,842 
852,106 
			     Obligations under capital leases 
147,644 
284,307 
			     Notes payable 
3,070,584 
3,701,506 
			     Accrued pension liability 
4,304,257 
5,641,941 
			     Other liabilities 
1,865,423 
1,990,538 
			     Total liabilities
$
372,904,211
$
373,124,379      
**  STOCKHOLDERS' EQUITY**    
			     Common stock (shares issued:  2009-1,141,767; 2008-1,120,686)
$
1,141,767
$
1,120,686 
			     Paid-in surplus 
8,716,135 
8,705,492 
			     Accumulated other comprehensive income (loss) 
4,495,103 
(2,542,413)
			     Retained earnings 
31,321,874 
30,169,195 
			     Total stockholders' equity
$
45,674,879
$
37,452,960  
$
418,579,090
$
410,577,339 
 

See Notes toConsolidated Financial Statements.

 

17

 

 

**INVESTORSHERITAGE CAPITAL CORPORATION**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**FOR THE YEARSENDED DECEMBER 31, 2009 AND 2008**

 
  
**2009** 
**2008**
**REVENUE**    
			   Premiums and other considerations
$
43,002,904 
$
44,114,715 
			   Premiums ceded 
(10,074,796) 
(12,323,567)
			      Net premiums earned 
32,928,108  
31,791,148      
			   Investment income, net of expenses 
17,401,340  
17,747,806 
			   Net realized gains (losses) on investments:    
			      Total other-than-temporary impairment losses 
(977,830) 
(4,885,289)
			      Portion of loss recognized in other comprehensive income 
-  
- 
			      Other net realized investment gains 
834,724  
753,260 
			   Total net realized losses on investments 
(143,106) 
(4,132,029)
			   Other income 
1,168,228  
1,176,619 
			      Total revenue
$
51,354,570 
$
46,583,544      
**BENEFITS AND EXPENSES**    
			   Death and other benefits
$
30,541,741 
$
30,649,424 
			   Guaranteed annual endowments 
499,584  
534,238 
			   Dividends to policyholders 
378,841  
524,362 
			   Increase in benefit reserves and unearned premiums 
6,011,688  
5,143,606 
			   Acquisition costs deferred 
(4,822,433) 
(4,853,258)
			   Amortization of deferred acquisition costs 
5,617,214  
5,683,710 
			   Commissions 
2,430,795  
2,137,825 
			   Other insurance expenses 
10,229,890  
9,679,286 
			      Total benefits and expenses
$
50,887,320 
$
49,499,193      
**INCOME (LOSS) BEFORE FEDERAL INCOME TAXES**
$
467,250 
$
(2,915,649)     
**PROVISION (BENEFIT) FOR FEDERAL INCOME TAXES**    
			   Current
$
263,332 
$
291,846 
			   Deferred 
(230,306) 
(1,652,989) 
$
33,026 
$
(1,361,143)          
**NET INCOME (LOSS)**
$
434,224 
$
(1,554,506)          
**BASIC AND DILUTED NET EARNINGS (LOSS) PER SHARE**
$
0.38 
$
(1.39)
 

See Notes toConsolidated Financial Statements.

 

18

 

 

**INVESTORSHERITAGE CAPITAL CORPORATION**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS' EQUITY**

**FOR THE YEARSENDED DECEMBER 31, 2009 AND 2008**

 
      
**Accumulated**          
**Other**   
**Total**  
**Common** 
**Paid-in** 
**Comprehensive** 
**Retained** 
**Stockholders'**  
**Stock** 
**Surplus** 
**Income (Loss)** 
**Earnings** 
**Equity**           
**BALANCE, JANUARY 1, 2008**
$
1,117,851
$
8,650,907
$
1,902,238 
$
32,136,643 
$
43,807,639            
**Comprehensive loss:**          
  Net loss 
- 
- 
-  
(1,554,506) 
(1,554,506)
  Change in net unrealized			appreciation          
    on available-for-sale			securities 
- 
- 
(1,964,271) 
-  
(1,964,271)
  Change in unrealized pension			benefits 
- 
- 
(2,483,493) 
-  
(2,483,493)
  Change in fair value of			hedging instrument
- 
- 
3,113  
-  
3,113 
    Total comprehensive loss         
(5,999,157)
Cash dividends 
- 
- 
-  
(422,959) 
(422,959)
Issuances of common stock, net 
2,835 
54,585 
-  
10,017  
67,437 
**BALANCE, DECEMBER 31, 2008**
$
1,120,686
$
8,705,492
$
(2,542,413)
$
30,169,195 
$
37,452,960            
  Cumulative effect of a change			in          
    accounting principle 
-  |
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