Note 8. 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.

Level 1 measurements

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.

Level 2 measurements

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, 2019, 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.

Derivatives: Derivatives are reported at fair market value utilizing a third-party pricing source.

Investment escrow: The Company holds in escrow as of December 31, 2019, cash that will be used to settle a mortgage loan that did not close until January 2020.

Level 3 measurements

Mortgage loans on real estate, held for investment: Mortgage loans are carried at their principal value as there are no traded market values for these loans.

Other invested assets: Short-term equipment leases are carried at their principal value as there are no traded market values for these leases.

Preferred stock: The preferred stock investment was recorded at its principal value as there was no traded market values for this stock.

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.

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.

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, 2019 and 2018.


			Significant
	Quoted		Other		Significant
	In Active		Observable		Unobservable		Estimated
	Markets		Inputs		Inputs		Fair
	(Level 1)		(Level 2)		(Level 3)		Value
December 31, 2019
Financial assets
Fixed maturities:
U.S. government obligations	$	—	$	2,081,224	$	—	$	2,081,224
Mortgage-backed securities		—		798,608		—		798,608
Asset-backed securities		—		95,247,824		—		95,247,824
States and political subdivisions — general obligations		—		249,282		—		249,282
States and political subdivisions — special revenue		—		25,291		—		25,291
Corporate		—		18,839,632		—		18,839,632
Total fixed maturities		—		117,241,861		—		117,241,861
Mortgage loans on real estate, held for investment		—		—		13,810,041		13,810,041
Derivatives		—		575,294		—		575,294
Investment escrow		—		3,899,986		—		3,899,986
Other invested assets		—		—		2,468,947		2,468,947
Preferred stock		—		—		500,000		500,000
Total Investments	$	—	$	121,717,141	$	16,778,988	$	138,496,129
Financial liabilities
Embedded derivative for equity-indexed contracts	$	—	$	576,634	$	—		576,634
December 31, 2018
Fixed maturities:
U.S. government obligations	$	—	$	1,995,951	$	—	$	1,995,951
Mortgage-back securities		—		1,004,051		—		1,004,051
States and political subdivisions - general obligations		—		263,184		—		263,184
States and political subdivisions - special revenue		—		25,173		—		25,173
Corporate		—		14,095,824		—		14,095,824
Total fixed maturities	$	—	$	17,384,183	$	—	$	17,384,183

There were no transfers of financial instruments between Level 1, Level 2, and Level 3 during the years ended December 31, 2019 or 2018.

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, 2019 and 2018, respectively:


	December 31, 2019
			Fair Value Measurements Using
			Quoted Prices in
			Active Markets		Significant Other		Significant
			for Identical Assets		Observable		Unobservable
	Carrying		and Liabilities		Inputs		Inputs		Fair
	Amount		(Level 1)		(Level 2)		(Level 3)		Value
Assets:
Policy loans	$	106,014	$	—	$	—	$	106,014	$	106,014
Cash		43,716,205		43,716,205		—		—		43,716,205
Liabilities:
Policyholder deposits (Deposit-type contracts)		171,168,785		—		—		171,168,785		171,168,785


	December 31, 2018
			Fair Value Measurements Using
			Quoted Prices in
			Active Markets		Significant Other		Significant
			for Identical Assets		Observable		Unobservable
	Carrying		and Liabilities		Inputs		Inputs		Fair
	Amount		(Level 1)		(Level 2)		(Level 3)		Value
Assets:
Policy loans	$	43,843	$	—	$	—	$	43,843	$	43,843
Cash		2,832,567		2,832,567		—		—		2,832,567
Liabilities:
Policyholder deposits (Deposit-type contracts)		7,234,927		—		—		7,234,927		7,234,927
Notes payable		18,938,705		—		—		18,938,705		18,938,705

The following table presents a reconciliation of the beginning balance for all investments measured at fair value on a recurring basis using level three inputs during the years ended December 31, 2019 and 2018.


							Total gains		Total gains
	Beginning						Included in		Ending Balance
	Balance		Additions		Sales		Income		Value
Assets
Policy loans	$	43,843	$	62,171	$	—	$	—	$	106,014
Mortgage loans on real estate, held for investment		—		15,036,179		1,226,138		—		13,810,041
Other invested assets		—		17,287,325		14,849,555		31,177		2,468,947
Preferred stock		—		500,000		—		—		500,000
Total Investments	$	43,843	$	32,885,675	$	16,075,693	$	31,177	$	16,885,002