Fair Values of Financial Instruments

12 Months Ended

Dec. 31, 2016

Investments, All Other Investments [Abstract]

Fair Values of Financial Instruments

Note 5. 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, 2016, 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.

Cash: 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.

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. The fair values for insurance contracts other than deposit-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 $261,971 and $229,405 in carrying value of the surplus notes as of December 31, 2016 and 2015, 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, 2016 and 2015.

			Significant
	Quoted		Other		Significant
	In Active		Observable		Unobservable		Estimated
	Markets		Inputs		Inputs		Fair
	(Level 1)		(Level 2)		(Level 3)		Value
December 31, 2016
Fixed maturities:
U.S. government obligations	$	-	$	3,224,219	$	-	$	3,224,219
States and political subdivisions — general obligations		-		381,395		-		381,395
States and political subdivisions — special revenue		-		277,735		-		277,735
Corporate		-		23,855,590		-		23,855,590
Total fixed maturities	$	-	$	27,738,939	$	-	$	27,738,939
December 31, 2015
Fixed maturities:
U.S. government obligations	$	-	$	3,193,499	$	-	$	3,193,499
States and political subdivisions — general obligations		-		995,051		-		995,051
States and political subdivisions — special revenue		-		273,336		-		273,336
Corporate		-		18,809,391		-		18,809,391
Total fixed maturities	$	-	$	23,271,277	$	-	$	23,271,277

There were no transfers of financial instruments between Level 1 and Level 2 during the years ended December 31, 2016 or 2015.

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.

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, 2016 and 2015, respectively:

	December 31, 2016
			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	$	412,583	$	-	$	-	$	412,583	$	412,583
Cash and cash equivalents		661,545		661,545		-		-		661,545
Liabilities:
Policyholder deposits
(Deposit-type contracts)		16,012,567		-		-		16,012,567		16,012,567
Surplus notes and accrued interest payable		811,971		-		-		808,602		808,602

		December 31, 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	$	420,775	$	-	$	-	$	420,775	$	420,775
Cash and cash equivalents		1,192,336		1,192,336		-		-		1,192,336
Liabilities:
Policyholder deposits
(Investment-type contracts)		13,897,421		-		-		13,897,421		13,897,421
Surplus notes and accrued interest payable		779,405		-		-		768,022		768,022