Note 4 - Fair Value Measurements

3 Months Ended

Mar. 31, 2022

Notes to Financial Statements

Fair Value Disclosures [Text Block]

Note 4.     Fair Value Measurements

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. The Company uses a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

● Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement rate.

● Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

● Level 3 inputs are unobservable for the asset or liability and reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Investments, available for sale: Fair values of available for sale fixed maturity securities are provided by a third party pricing service. The pricing service uses a variety of sources to determine fair value of securities. The Company’s fixed maturity securities are highly liquid, which allows for a high percentage of the portfolio to be priced through pricing sources.

Equity securities: Fair values for equity securities are also provided by a third party pricing service and are derived from active trading on national market exchanges.

Embedded derivative: The fair value of embedded derivatives associated with funds withheld reinsurance treaty is determined upon a total return swap technique with reference to the fair value of the investments held by the ceding company that support the Company’s fund withheld asset with an adjustment for a credit valuation adjustment. The fair value of the underlying assets is generally based upon market observable inputs with industry standard valuation techniques. The valuation also requires certain significant inputs, which are generally not observable and accordingly, the valuation is considered level 3 in the fair value hierarchy. The Company’s utilization of a credit-valuation adjustment did not have a material effect on the change in fair value of the embedded derivative for the three months ended March 31, 2022 and 2021.

The table below presents the amounts of assets measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021:   

	March 31, 2022
	Total		Level 1		Level 2		Level 3
	(unaudited)
Fixed maturities:
US Treasury securities	$	421,509	$	-	$	421,509	$	-
Corporate bonds		19,330,678		-		19,149,078		181,600
Municipal bonds		6,312,911		-		6,312,911		-
Redeemable preferred stock		3,912,946		-		3,912,946		-
Mortgage backed and asset backed securities		5,404,195		-		5,404,195		-
Total fixed maturities		35,382,239		-		35,200,639		181,600
Equities:
Common stock		7,164,863		7,071,763		93,100		-
Preferred stock		1,629,038		-		1,629,038		-
Total equities		8,793,901		7,071,763		1,722,138		-
Funds withheld embedded derivative		262,551		-		-		262,551
Total	$	44,438,691	$	7,071,763	$	36,922,777	$	444,151

	December 31, 2021
	Total		Level 1		Level 2		Level 3
Fixed maturities:
US Treasury securities	$	447,765	$	-	$	447,765	$	-
Corporate bonds		21,321,279		-		21,139,679		181,600
Municipal bonds		6,963,358		-		6,963,358		-
Redeemable preferred stock		3,621,526		-		3,621,526		-
Mortgage backed and asset backed securities		5,588,729		-		5,588,729		-
Total fixed maturities		37,942,657		-		37,761,057		181,600
Equities:
Common stock		7,319,584		7,226,584		93,000		-
Preferred stock		1,837,609		-		1,837,609		-
Total equities		9,157,193		7,226,584		1,930,609		-
Funds withheld embedded derivative		544,768		-		-		544,768
Total	$	47,644,618	$	7,226,584	$	39,691,666	$	726,368

The reconciliations for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) are as follows:

For the Three Months Ended March 31, 2022	Corporate		Funds
	Bonds		Withheld
Fair value, beginning of period	$	181,600	$	544,768
Investment related losses		-		(282,217	)
Fair value, end of period	$	181,600	$	262,551

The Company discloses the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discussed below:

Cash and cash equivalents: The carrying amounts approximate fair value because of the short maturity of these instruments.

Investment income due and accrued: The carrying amounts approximate fair value because of the short maturity of these instruments.

Mortgage loans on real estate: Mortgage loans are carried at their unpaid principal value as that is considered the fair market values for these loans.

Funds withheld: The carrying value of funds withheld at interest approximates fair value as funds are specifically identified in the agreement. The fair value of the specified funds is based on the fair value of the underlying assets that are held by the ceding company.  The ceding company uses a variety of sources and pricing methodologies, which are not transparent to the Company and may include significant unobservable inputs to value the securities held in distinct portfolios, therefore the valuation of these funds withheld assets are considered Level 3 in the fair value hierarchy.

Policy loans: Policy loans are stated at unpaid principal balances. As these loans are fully collateralized by the cash surrender value of the underlying insurance policies, the carrying value of the policy loans approximates their fair value.

Federal Home Loan Bank Advances: FHLB advances are stated at the outstanding principal balances and the carrying value approximates fair value.

Policyholder deposits in deposit-type contracts: The fair value for policyholder deposits deposit-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.

The estimated fair values of the Company’s financial assets and liabilities at March 31, 2022 and December 31, 2021 are as follows:

	March 31, 2022
	(unaudited)
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	9,426,154	$	9,426,154	$	9,426,154	$	-	$	-
Mortgage loans on real estate		3,226,212		3,226,212		-		-		3,226,212
Investment income due and accrued		513,894		513,894		-		-		513,894
Funds withheld		49,010,741		49,273,292		-		-		49,273,292
Policy loans		213,970		213,970		-		-		213,970
Total Financial Assets (excluding available for sale investments)	$	62,390,971	$	62,653,522	$	9,426,154	$	-	$	53,227,368
Financial Liabilities:
Federal Home Loan Bank advance	$	2,000,000	$	2,000,000	$	-	$	-	$	2,000,000
Policyholder deposits in deposit-type contracts		76,552,926		73,006,033		-		-		73,006,033
Total Financial Liabilities	$	78,552,926	$	75,006,033	$	-	$	-	$	75,006,033

	December 31, 2021
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	7,955,348	$	7,955,348	$	7,955,348	$	-	$	-
Mortgage loans on real estate		3,653,142		3,653,142		-		-		3,653,142
Investment income due and accrued		698,504		698,504		-		-		698,504
Funds withheld		48,474,206		49,018,974		-		-		49,018,974
Policy loans		173,341		173,341		-		-		173,341
Total Financial Assets (excluding available for sale investments)	$	60,954,541	$	61,499,309	$	7,955,348	$	-	$	53,543,961
Financial Liabilities:
Federal Home Loan Bank advance	$	2,000,000	$	2,000,000	$	-	$	-	$	2,000,000
Policyholder deposits in deposit-type contracts		75,567,873		78,359,733		-		-		78,359,733
Total Financial Liabilities	$	77,567,873	$	80,359,733	$	-	$	-	$	80,359,733