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Fair Values of Financial Instruments
 12 Months Ended
Dec. 31, 2013
Fair Values of Financial Instruments [Abstract]  
Fair Values of Financial Instruments

Note 4. Fair Values of Financial Instruments

     Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. We use valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, accounting standards establish 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: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
  • Level 2: Significant other 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.
  • Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

     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.

     A description of the valuation methodologies used for assets measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

     Fixed maturities: Fixed maturities are recorded at fair value on a recurring basis utilizing a third-party pricing source. The valuations are reviewed and validated quarterly through random testing by comparisons to separate pricing models or other third party pricing services. For the period ended December 31, 2013, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third party prices were changed from the values received. Securities with prices based on validated quotes from pricing services are reflected within Level 2.

     Equity securities, available for sale: Equity securities consist principally of common stock of publicly and privately traded companies and preferred stock of publicly traded companies. The fair values of publicly traded equity securities are based on quoted market prices in active markets for identical assets and are classified within Level 1 in the fair value hierarchy. The fair values of a portion of our preferred equity securities are based on prices obtained from independent pricing services and these securities are generally classified within Level 2 in the fair value hierarchy.

     Equity method investments: The equity method investments are comprised of the Company's investments in First Wyoming and Hot Dot. These securities have no active trading and the fair value for these securities is not readily determinable. Therefore, these investments have been omitted from the following fair value disclosure tables.

     Cash and cash equivalents and short-term investments: The carrying value of cash and cash equivalents and short-term investments approximate the fair value because of the short maturity of the instruments.

      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. Policy loans are categorized as Level 3 in the fair value hierarchy.

      Notes Receivable: Fair values for short-term notes receivable approximate carrying value. The carrying amount is a reasonable estimate of the fair value because of the relatively short time between the origination of the loan and its expected repayment. These receivables are categorized as Level 3 in the fair value hierarchy.

      Mortgage loans on real estate, held for investment: The fair values of mortgage loans on real estate, held for investment are estimated by discounting scheduled cash flows through the scheduled maturities of the loans, using interest rates currently being offered for similar loans to borrowers with similar credit ratings. As part of the Old Reliance purchase agreement, the seller guaranteed the performance of the mortgage loans and accordingly we believe book value is equal to fair value. We periodically evaluate the financial condition of the seller and his guarantee. We know of no circumstances that indicated that the guarantor would be unable to perform nor are any loans non-performing such that his guarantee would be triggered. Mortgage loans are categorized as Level 3 in the fair value hierarchy.

      Investment-type contracts: The fair value for direct and assumed 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 nonperformance risk of the liabilities. Liabilities under investment-type insurance contracts that are wholly ceded by Capital Reserve to a non-affiliated reinsurer are carried at cash surrender value which approximates fair value. The fair values for insurance contracts other than investment-type contracts are not required to be disclosed. These liabilities are categorized as Level 3 in the fair value hierarchy.

      Surplus notes: The fair value for surplus notes is calculated using a discounted cash flow approach. Cash flows are projected utilizing scheduled repayments and discounted to the valuation date using market rates currently available for debt with similar remaining maturities. These notes are structured such that all interest is paid at maturity. In the following fair value measurement tables, the Company has included accrued interest expense of approximately $164,000 and $132,000 in carrying value of the surplus notes as of December 31, 2013 and 2012, respectively. These liabilities are categorized as Level 3 in the fair value hierarchy.

     The following table presents the Company's fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of December 31, 2013 and 2012.

          Significant            
    Quoted   Other   Significant      
    in Active   Observable   Unobservable   Estimated
    Markets   Inputs   Inputs   Fair
       (Level 1)      (Level 2)      (Level 3)      Value
December 31, 2013                        
       Fixed maturities:                        
              U.S. government obligations   $      -   $      2,463,095   $      -   $      2,463,095
              States and political subdivisions - general obligations     -     1,040,295     -     1,040,295
              States and political subdivisions - special revenue     -     1,454,392     -     1,454,392
              Corporate     -     9,232,925     -     9,232,925
       Total fixed maturities     -     14,190,707     -     14,190,707
       Equity securities:                        
              Preferred corporate stock     -     75,000     -     75,000
       Total equity securities     -     75,000     -     75,000
       Total   $ -   $ 14,265,707   $ -   $ 14,265,707
December 31, 2012                        
       Fixed maturities:                        
              U.S. government obligations   $ -   $ 2,216,725   $ -   $ 2,216,725
              States and political subdivisions - general obligations     -     1,198,435     -     1,198,435
              States and political subdivisions - special revenue     -     1,724,153     -     1,724,153
              Corporate     -     5,394,150     -     5,394,150
       Total fixed maturities     -     10,533,463     -     10,533,463
       Equity securities:                        
              Common corporate stock     1,175,977     -     -     1,175,977
              Preferred corporate stock     -     75,000     -     75,000
       Total equity securities     1,175,977     75,000     -     1,250,977
       Total   $ 1,175,977   $ 10,608,463   $ -   $ 11,784,440

     There were no transfers of financial instruments between Level 1 and Level 2 during the years ended December 31, 2013 or 2012.

      Accounting standards require disclosure of 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 basis are discussed above. There were no financial assets or financial liabilities measured at fair value on a non-recurring basis. Equity securities carried at cost are privately placed common stocks for several recently formed holding companies organized for the purpose of forming life insurance subsidiaries. These common stocks are recorded using the cost basis of accounting. These securities have no active trading and the fair value for these securities is not readily determinable. The Company does not control these entities economically, and therefore does not consolidate these entities.

      The following disclosure contains the carrying values, estimated fair values and their corresponding placement in the fair value hierarchy, for financial assets and financial liabilities as of December 31, 2013 and 2012, respectively:

    December 31, 2013
          Fair Value Measurements at Reporting Date Using      
          Quoted Prices in                  
          Active Markets                  
          for Identical   Significant Other   Significant      
          Assets and   Observable   Unobservable      
    Carrying   Liabilities   Inputs   Inputs   Fair
      Amount     (Level 1)     (Level 2)     (Level 3)     Value
Assets:                              
       Mortgage loans on real estate, held for                              
              investment   $     665,569   $     -   $     -   $     690,591   $     690,591
       Policy loans     369,513     -     -     369,513     369,513
       Notes receivable     27,383     -     -     27,383     27,383
       Short-term investments     1,180,314     1,180,314     -     -     1,180,314
       Cash and cash equivalents     3,377,978     3,377,978     -     -     3,377,978
Liabilities:                              
       Policyholder deposits                              
              (Investment-type contracts)     14,739,655     -     -     14,739,655     14,739,655
       Surplus Notes and Accrued Interest Payable     714,000     -     -     704,192     704,192

    December 31, 2012
          Fair Value Measurements at Reporting Date Using      
          Quoted Prices in                  
          Active Markets                  
          for Identical   Significant Other   Significant      
          Assets and   Observable   Unobservable      
    Carrying   Liabilities   Inputs   Inputs   Fair
      Amount     (Level 1)     (Level 2)     (Level 3)     Value
Assets:                              
       Mortgage loans on real estate, held for                              
              investment   $    677,011   $    -   $    -   $    706,434   $    706,434
       Policy loans     274,664     -     -     274,664     274,664
       Notes receivable     27,383     -     -     27,383     27,383
       Short-term investments     1,171,280     1,171,280     -     -     1,171,280
       Cash and cash equivalents     4,346,555     4,346,555     -     -     4,346,555
Liabilities:                              
       Policyholder deposits                              
              (Investment-type contracts)     12,865,671     -     -     13,163,620     13,163,620
       Surplus Notes and Accrued Interest Payable     782,000     -     -     777,218     777,218