Note 3. 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 and they are 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 and they are 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 by us 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 September 30, 2015, 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 of preferred stock of publicly traded companies. 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 Capital Corporation (First Wyoming) and Pacific Northwest. 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 fair value disclosure tables.

Cost method investments: The cost method investments are comprised of equity holdings of New Mexico Capital Corp and Northstar Financial Corporation. 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 fair value disclosure tables.

Cash 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.

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

Deposit-type contracts: The fair value for direct and assumed liabilities under 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 nonperformance risk of the liabilities. Liabilities under deposit-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. 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 should be paid annually, and if not paid shall be cumulative. In the following fair value tables, the Company has included accrued interest expense, which is recorded in the accounts payable and accrued expenses, of approximately $221,218 and $196,927 in carrying value of the surplus notes as of September 30, 2015 and December 31, 2014, 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 September 30, 2015 and December 31, 2014.

			Significant
		Quoted	Other			Significant
		In Active	Observable			Unobservable	Estimated
		Markets	Inputs			Inputs	Fair
		(Level 1)	(Level 2)			(Level 3)	Value
September 30, 2015
Fixed maturities:
U.S. government obligations	$	-	$	3,702,131	$	-	$	3,702,131
States and political subdivisions — general obligations		-		387,908		-		387,908
States and political subdivisions — special revenue		-		146,951		-		146,951
Corporate		-		16,361,553		-		16,361,553
Total fixed maturities	$	-	$	20,598,543	$	-	$	20,598,543
December 31, 2014
Fixed maturities:
U.S. government obligations	$	-	$	3,772,754	$	-	$	3,772,754
States and political subdivisions — general obligations		-		1,029,008		-		1,029,008
States and political subdivisions — special revenue		-		1,221,850		-		1,221,850
Corporate		-		12,930,578		-		12,930,578
Total fixed maturities		-		18,954,190		-		18,954,190
Equity securities:
Preferred corporate stock		-		75,000		-		75,000
Total equity securities		-		75,000		-		75,000
Total	$	-	$	19,029,190	$	-	$	19,029,190

There were no transfers of financial instruments between any levels during the nine months ended September 30, 2015 or during the year ended December 31, 2014.

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. As of September 30, 2015 and December 31, 2014, there were no financial assets or financial liabilities measured at fair value on a non-recurring basis. Equity securities carried at cost are privately purchased common stocks for 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 September 30, 2015 and December 31, 2014, respectively:

	September 30, 2015
			Fair Value Measurements at 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:
Policy loans	$	418,422	$	-	$	-	$	418,422	$	418,422
Cash		1,209,132		1,209,132		-		-		1,209,132
Liabilities:
Policyholder deposits
(Deposit-type contracts)		17,765,124		-		-		17,765,124		17,765,124
Surplus notes and accrued interest payable		771,218		-		-		765,340		765,340

	December 31,2014
			Fair Value Measurements at Date Using
			Quoted Prices in
			Active Markets
			for Identical		Significant Other		Significant
			Assets and		Observable		Unobservable
	Carrying		Liabilities		Inputs		Inputs		Fair
	Amount		(Level1)		(Level 2)		(Level 3)		Value
Assets:
Mortgage loans on real estate held for
investment	$	349,386	$	-	$	-	$	349,386	$	349,386
Policy loans		374,186		-		-		374,186		374,186
Cash		2,310,047		2,310,047		-		-		2,310,047
Liabilities:
Policyholder deposits
(Deposit-type contracts)		16,461,061		-		-		16,461,061		16,461,061
Surplus notes and accrued interest payable		746,927		-		-		739,042		739,042