Note 4 - Fair Value Measurements

3 Months Ended

Mar. 31, 2023

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 funds 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, 2023 and 2022.

The table below presents the amounts of assets and liabilities measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022:   

	March 31, 2023
	Total		Level 1		Level 2		Level 3
	(unaudited)
Fixed maturities:
US Treasury securities	$	740,816	$	740,816	$	-	$	-
Corporate bonds		16,348,633		-		16,172,633		176,000
Municipal bonds		5,649,804		-		5,649,804		-
Redeemable preferred stock		3,426,328		-		3,426,328		-
Term loans		18,154,908		-		-		18,154,908
Mortgage backed and asset backed securities		21,396,176		-		21,002,426		393,750
Total fixed maturities		65,716,665		740,816		46,251,191		18,724,658
Equities:
Common stock		6,129,740		6,034,240		95,500		-
Preferred stock		1,448,771		-		1,448,771		-
Total equities		7,578,511		6,034,240		1,544,271		-
Other invested assets		1,985,441		-		-		1,985,441
Reinsurance contract allocated hedge		726,077		-		-		726,077
Total	$	76,006,694	$	6,775,056	$	47,795,462	$	21,436,176

	December 31, 2022
	Total		Level 1		Level 2		Level 3
Fixed maturities:
US Treasury securities	$	1,025,087	$	1,025,087	$	-	$	-
Corporate bonds		15,869,078		-		15,687,478		181,600
Municipal bonds		5,420,409		-		5,420,409		-
Redeemable preferred stock		3,355,615		-		3,355,615		-
Term loans		18,149,718		-		-		18,149,718
Mortgage backed and asset backed securities		21,496,170		-		21,099,920		396,250
Total fixed maturities		65,316,077		1,025,087		45,563,422		18,727,568
Equities:
Common stock		6,024,224		5,929,624		94,600		-
Preferred stock		1,370,820		-		1,370,820		-
Total equities		7,395,044		5,929,624		1,465,420		-
Other invested assets		1,760,777		-		-		1,760,777
Reinsurance contract allocated hedge		724,998		-		-		724,998
Total	$	75,196,896	$	6,954,711	$	47,028,842	$	21,213,343

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

				Mortgage
For the Three Months Ended March 31, 2023	Corporate			Backed			Term			Hedge
(unaudited)	Bonds			Securities			Loans			Derivative
Fair value, beginning of period	$	181,600		$	396,250		$	18,149,718		$	724,998
Principal payment		(5,600	)		(2,500	)		(135,042	)
Acquisition		-			-			109,837			-
Investment related gains		-			-			30,395			1,079
Fair value, end of period	$	176,000		$	393,750		$	18,154,908		$	726,077

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 less an allowance for credit losses.

Reinsurance contract allocated hedge: 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, 2023 and December 31, 2022 are as follows: 

	March 31, 2023
	(unaudited)
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	4,044,010	$	4,044,010	$	4,044,010	$	-	$	-
Mortgage loans on real estate		25,284,983		25,284,983		-		-		25,284,983
Investment income due and accrued		2,189,269		2,189,269		-		-		2,189,269
Reinsurance contract allocated hedge		726,077		726,077		-		-		726,077
Policy loans		35,747		35,747		-		-		35,747
Total Financial Assets (excluding available for sale investments)	$	32,280,086	$	32,280,086	$	4,044,010	$	-	$	28,236,076
Financial Liabilities:
Federal Home Loan Bank advance	$	1,000,000	$	1,000,000	$	-	$	-	$	1,000,000
Policyholder deposits in deposit-type contracts		78,341,879		65,582,459		-		-		65,582,459
Total Financial Liabilities	$	79,341,879	$	66,582,459	$	-	$	-	$	66,582,459

	December 31, 2022
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	4,091,507	$	4,091,507	$	4,091,507	$	-	$	-
Mortgage loans on real estate		23,790,073		23,790,073		-		-		23,790,073
Investment income due and accrued		2,086,365		2,086,365		-		-		2,086,365
Reinsurance contract allocated hedge		724,998		724,998		-		-		724,998
Policy loans		34,980		34,980		-		-		34,980
Total Financial Assets (excluding available for sale investments)	$	30,727,923	$	30,727,923	$	4,091,507	$	-	$	26,636,416
Financial Liabilities:
Federal Home Loan Bank advance	$	1,000,000	$	1,000,000	$	-	$	-	$	1,000,000
Policyholder deposits in deposit-type contracts		79,035,350		67,741,524		-		-		67,741,524
Total Financial Liabilities	$	80,035,350	$	68,741,524	$	-	$	-	$	68,741,524