Note 3 - Fair Value Disclosures

6 Months Ended

Jun. 30, 2024

Notes to Financial Statements

Fair Value Disclosures [Text Block]

3. FAIR VALUE DISCLOSURES

Fair value is defined as the price in the principal market that would be received for an asset to facilitate an orderly transaction between market participants on the measurement date. The fair value of certain financial instruments is determined based on their underlying characteristics and relevant transactions in the marketplace. GAAP guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance also describes three levels of inputs that may be used to measure fair value.

The following are the levels of the fair value hierarchy and a brief description of the type of valuation inputs that are used to establish each level:

● Level 1 is applied to valuations based on readily available, unadjusted quoted prices in active markets for identical assets.

● Level 2 is applied to valuations based upon quoted prices for similar assets in active markets, quoted prices for identical or similar assets in inactive markets, or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities) or can be corroborated by observable market data.

● Level 3 is applied to valuations that are derived from techniques in which one or more of the significant inputs are unobservable. Financial assets are classified based upon the lowest level of significant input that is used to determine fair value.

As a part of the process to determine fair value, management utilizes widely recognized, third-party pricing sources to determine fair values. Management has obtained an understanding of the third-party pricing sources’ valuation methodologies and inputs. The following is a description of the valuation techniques used for financial assets that are measured at fair value, including the general classification of such assets pursuant to the fair value hierarchy.

Corporate, Agencies, and Municipal Bonds—The pricing vendor employs a multi-dimensional model which uses standard inputs including (listed in order of priority for use) benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers, and other reference data. The pricing vendor also monitors market indicators, as well as industry and economic events. All bonds valued using these techniques are classified as Level 2. All Corporate, Agencies, and Municipal securities are deemed Level 2.

Mortgage-backed Securities (MBS), Collateralized Mortgage Obligations (CMO), Commercial Mortgage-backed Securities (CMBS) and Asset-backed Securities (ABS)—The pricing vendor evaluation methodology includes principally interest rate movements and new issue data. Evaluation of the tranches (non-volatile, volatile, or credit sensitivity) is based on the pricing vendors’ interpretation of accepted modeling and pricing conventions. This information is then used to determine the cash flows for each tranche, benchmark yields, pre-payment assumptions, and to incorporate collateral performance. To evaluate CMO volatility, an option adjusted spread model is used in combination with models that simulate interest rate paths to determine market price information. This process allows the pricing vendor to obtain evaluations of a broad universe of securities in a way that reflects changes in yield curve, index rates, implied volatility, mortgage rates, and recent trade activity. MBS, CMBS, CMO, and ABS with corroborated and observable inputs are classified as Level 2. All MBS, CMBS, CMO, and ABS holdings are deemed Level 2.

U.S. Treasury Bonds, Common Stocks and Exchange Traded Funds—U.S. treasury bonds and exchange traded equities have readily observable price levels and are classified as Level 1 (fair value based on quoted market prices). All common stock holdings are deemed Level 1.

Preferred Stock—Preferred stocks do not have readily observable prices but do have quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets in markets that are not active; and inputs other than quoted prices and are classified as Level 2. All preferred stock holdings are deemed Level 2.

Due to the relatively short-term nature of cash, short-term investments, accounts receivable, and accounts payable, their carrying amounts are reasonable estimates of fair value. Other invested assets include notes receivable, stock, a limited partnership, a SAFE investment, Funds at Lloyd's, and membership in the FHLBC. Notes receivable are carried at outstanding balance plus accrued interest. Stock is at fair value when available. The limited partnership and Funds at Lloyds are accounted for under the equity method. The SAFE investment and the membership in FHLBC are carried at cost.

Assets measured at fair value on a recurring basis as of June 30, 2024, are summarized below:

			Significant
	Quoted in Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
AFS securities
Fixed maturity securities
U.S. treasury	$	1,305,930	$	—	$	—	$	1,305,930
MBS/ABS/CMBS		—		46,381,480		—		46,381,480
Corporate		—		42,672,106		—		42,672,106
Municipal		—		19,163,206		—		19,163,206
Redeemable preferred stocks		—		173,279		—		173,279
Total fixed maturity securities		1,305,930		108,390,071		—		109,696,001
Equity securities
Common stocks		13,599,230		—		—		13,599,230
Perpetual preferred stocks		—		2,900,343		—		2,900,343
Total equity securities		13,599,230		2,900,343		—		16,499,573
Total marketable investments measured at fair value	$	14,905,160	$	111,290,414	$	—	$	126,195,574

Assets measured at fair value on a recurring basis as of December 31, 2023, are summarized below:

			Significant
	Quoted in Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
AFS securities
Fixed maturity securities
U.S. treasury	$	1,289,774	$	—	$	—	$	1,289,774
MBS/ABS/CMBS		—		47,020,328		—		47,020,328
Corporate		—		42,981,718		—		42,981,718
Municipal		—		19,493,317		—		19,493,317
Redeemable preferred stocks		—		170,560		—		170,560
Total fixed maturity securities		1,289,774		109,665,923		—		110,955,697
Equity securities
Common stocks		12,191,621		—		—		12,191,621
Perpetual preferred stocks		—		2,896,296		—		2,896,296
Total equity securities		12,191,621		2,896,296		—		15,087,917
Total marketable investments measured at fair value	$	13,481,395	$	112,562,219	$	—	$	126,043,614

As noted in the previous tables, the Company has no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of June 30, 2024 or December 31, 2023. Additionally, there were no securities transferred in or out of Levels 1 and 2 during the six-month periods ended June 30, 2024 and 2023.