DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount and the estimated fair value of the Company’s financial instruments is summarized below.



	Carrying amount		Estimated fair value
December 31, 2013
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	9,412,497	$	9,412,497
U.S. government-sponsored agencies	146,945,719		146,945,719
Obligations of states and political subdivisions	357,051,689		357,051,689
Commercial mortgage-backed	68,939,577		68,939,577
Residential mortgage-backed	94,179,189		94,179,189
Other asset-backed	12,647,636		12,647,636
Corporate	338,807,706		338,807,706
Total fixed maturity securities available-for-sale	1,027,984,013		1,027,984,013

Equity securities available-for-sale:
Common stocks:
Financial services	28,498,329		28,498,329
Information technology	18,917,368		18,917,368
Healthcare	21,944,614		21,944,614
Consumer staples	13,010,682		13,010,682
Consumer discretionary	21,031,295		21,031,295
Energy	21,117,265		21,117,265
Industrials	17,264,144		17,264,144
Other	17,811,177		17,811,177
Non-redeemable preferred stocks	10,253,400		10,253,400
Total equity securities available-for-sale	169,848,274		169,848,274

Short-term investments	56,165,534		56,165,534

Liabilities:
Surplus notes	25,000,000		10,040,013



	Carrying amount		Estimated fair value
December 31, 2012
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	4,984,902	$	4,984,902
U.S. government-sponsored agencies	162,442,630		162,442,630
Obligations of states and political subdivisions	370,962,114		370,962,114
Commercial mortgage-backed	80,349,182		80,349,182
Residential mortgage-backed	47,789,604		47,789,604
Other asset-backed	11,286,848		11,286,848
Corporate	321,979,577		321,979,577
Total fixed maturity securities available-for-sale	999,794,857		999,794,857

Equity securities available-for-sale:
Common stocks:
Financial services	18,093,388		18,093,388
Information technology	16,925,764		16,925,764
Healthcare	19,023,849		19,023,849
Consumer staples	13,609,527		13,609,527
Consumer discretionary	17,090,547		17,090,547
Energy	19,430,330		19,430,330
Industrials	8,574,816		8,574,816
Other	18,681,440		18,681,440
Non-redeemable preferred stocks	8,864,164		8,864,164
Total equity securities available-for-sale	140,293,825		140,293,825

Short-term investments	53,418,914		53,418,914

Liabilities:
Surplus notes	25,000,000		18,835,954

The estimated fair value of fixed maturity and equity securities is based on quoted market prices, where available. In cases where quoted market prices are not available, fair values are based on a variety of valuation techniques depending on the type of security.

Short-term investments generally include money market funds, U.S. Treasury bills and commercial paper. Short-term investments are carried at fair value, which approximates cost, due to the highly liquid nature of the securities. Short-term securities are classified as Level 1 fair value measurements when the fair value can be validated by recent trades. When recent trades are not available, fair value is deemed to be the cost basis and the securities are classified as Level 2 fair value measurements.

The estimated fair value of the surplus notes is derived by discounting future expected cash flows at a rate deemed appropriate. The discount rate was set at the average of current yields-to-maturity on several insurance company surplus notes that are traded in observable markets, adjusted upward by 50 basis points to reflect illiquidity and perceived risk premium differences. Other assumptions include a 25-year term (the surplus notes have no stated maturity date) and an interest rate that continues at the current 1.35 percent interest rate (3.60 percent at December 31, 2012). The rate is typically adjusted every five years and is based upon the then-current Federal Home Loan Bank borrowing rate for 5-year funds available to Employers Mutual.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value:



	Level 1 -	Unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

	Level 2 -	Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities 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, etc.) or can be corroborated by observable market data.

	Level 3 -	Prices or valuation techniques that require significant unobservable inputs because observable inputs are not available. The unobservable inputs may reflect the Company’s own judgments about the assumptions that market participants would use.

The Company uses an independent pricing source to obtain the estimated fair values of a majority of its securities, subject to an internal validation. The fair values are based on quoted market prices, where available. This is typically the case for equity securities and money market funds, which are accordingly classified as Level 1 fair value measurements. In cases where quoted market prices are not available, fair values are based on a variety of valuation techniques depending on the type of security. Fixed maturity securities and various short-term investments in the Company’s portfolio may not trade on a daily basis; however, observable inputs are utilized in their valuations, and these securities are therefore classified as Level 2 fair value measurements. Following is a brief description of the various pricing techniques used by the independent pricing source for different asset classes.


•	U.S. Treasury securities (including bonds, notes, and bills) are priced according to a number of live data sources, including active market makers and inter-dealer brokers. Prices from these sources are reviewed based on the sources’ historical accuracy for individual issues and maturity ranges.

•

U.S. government-sponsored agencies and corporate securities (including fixed-rate corporate bonds and medium-term notes) are priced by determining a bullet (non-call) spread scale for each issuer for maturities going out to forty years. These spreads represent credit risk and are obtained from the new issue market, secondary trading, and dealer quotes. An option adjusted spread model is incorporated to adjust spreads of issues that have early redemption features. The final spread is then added to the U.S. Treasury curve.

•

Obligations of states and political subdivisions are priced by tracking and analyzing actively quoted issues and reported trades, material event notices and benchmark yields. Municipal bonds with similar characteristics are grouped together into market sectors, and internal yield curves are constructed daily for these sectors. Individual bond evaluations are extrapolated from these sectors, with the ability to make individual spread adjustments for attributes such as discounts, premiums, alternative minimum tax, and/or whether or not the bond is callable.

•

Mortgage-backed and asset-backed securities are first reviewed for the appropriate pricing speed (if prepayable), spread, yield and volatility. The securities are priced with models using spreads and other information solicited from Wall Street buy- and sell-side sources, including primary and secondary dealers, portfolio managers, and research analysts. To determine a tranche’s price, first the benchmark yield is determined and adjusted for collateral performance, tranche level attributes and market conditions. Then the cash flow for each tranche is generated (using consensus prepayment speed assumptions including, as appropriate, a prepayment projection based on historical statistics of the underlying collateral). The tranche-level yield is used to discount the cash flows and generate the price. Depending on the characteristics of the tranche, a volatility-driven, multi-dimensional single cash flow stream model or an option-adjusted spread model may be used. When cash flows or other security structure or market information is not available, broker quotes may be used.

On a quarterly basis, the Company receives from its independent pricing service a list of fixed maturity securities, if any, that were priced solely from broker quotes. For these securities, fair value may be determined using the broker quotes, or by the Company using similar pricing techniques as the Company’s independent pricing service. Depending on the level of observable inputs, these securities would be classified as Level 2 or Level 3 fair value measurements. At December 31, 2013 seven securities were priced solely from broker quotes (none at December 31, 2012), but those securities were reported as Level 2 fair value measurements due to the broker quote prices approximating the Company's price estimates obtained by applying pricing techniques with observable inputs.

A small number of the Company’s securities are not priced by the independent pricing service. One is an equity security that is reported as a Level 3 fair value measurement at December 31, 2013 and 2012, since no reliable observable inputs are used in its valuation. This equity security continues to be reported at the fair value obtained from the Securities Valuation Office (SVO) of the National Association of Insurance Commissioners (NAIC). The SVO establishes a per share price for this security based on an annual review of that company’s financial statements, typically performed during the second quarter. The other securities not priced by the Company’s independent pricing service at December 31, 2013 include six fixed maturity securities (three at December 31, 2012). Two of these fixed maturity securities, classified as Level 3 fair value measurements, are corporate securities that convey premium tax benefits and are not publicly traded. The fair values for these securities are based on discounted cash flow analyses. The other fixed maturity securities are classified as Level 2 fair value measurements. The fair values for these fixed maturity securities were obtained from either the SVO or the Company’s investment custodian using similar pricing techniques as the Company’s independent pricing service.

Presented in the table below are the estimated fair values of the Company’s financial instruments as of December 31, 2013 and 2012.



			Fair value measurements using
December 31, 2013	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Financial instruments reported at fair value on recurring basis:
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	9,412,497	$	—	$	9,412,497	$	—
U.S. government-sponsored agencies	146,945,719		—		146,945,719		—
Obligations of states and political subdivisions	357,051,689		—		357,051,689		—
Commercial mortgage-backed	68,939,577		—		68,939,577		—
Residential mortgage-backed	94,179,189		—		94,179,189		—
Other asset-backed	12,647,636		—		12,647,636		—
Corporate	338,807,706		—		336,832,053		1,975,653
Total fixed maturity securities available-for-sale	1,027,984,013		—		1,026,008,360		1,975,653

Equity securities available-for-sale:
Common stocks:
Financial services	28,498,329		28,495,722		—		2,607
Information technology	18,917,368		18,917,368		—		—
Healthcare	21,944,614		21,944,614		—		—
Consumer staples	13,010,682		13,010,682		—		—
Consumer discretionary	21,031,295		21,031,295		—		—
Energy	21,117,265		21,117,265		—		—
Industrials	17,264,144		17,264,144		—		—
Other	17,811,177		17,811,177		—		—
Non-redeemable preferred stocks	10,253,400		10,253,400		—		—
Total equity securities available-for-sale	169,848,274		169,845,667		—		2,607

Short-term investments	56,165,534		56,165,534		—		—

Financial instruments not reported at fair value:
Liabilities:
Surplus notes	10,040,013		—		—		10,040,013



			Fair value measurements using
December 31, 2012	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Financial instruments reported at fair value on recurring basis:
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	4,984,902	$	—	$	4,984,902	$	—
U.S. government-sponsored agencies	162,442,630		—		162,442,630		—
Obligations of states and political subdivisions	370,962,114		—		370,962,114		—
Commercial mortgage-backed	80,349,182		—		80,349,182		—
Residential mortgage-backed	47,789,604		—		47,789,604		—
Other asset-backed	11,286,848		—		11,286,848		—
Corporate	321,979,577		—		321,979,577		—
Total fixed maturity securities available-for-sale	999,794,857		—		999,794,857		—

Equity securities available-for-sale:
Common stocks:
Financial services	18,093,388		18,090,987		—		2,401
Information technology	16,925,764		16,925,764		—		—
Healthcare	19,023,849		19,023,849		—		—
Consumer staples	13,609,527		13,609,527		—		—
Consumer discretionary	17,090,547		17,090,547		—		—
Energy	19,430,330		19,430,330		—		—
Industrials	8,574,816		8,574,816		—		—
Other	18,681,440		18,681,440		—		—
Non-redeemable preferred stocks	8,864,164		8,864,164		—		—
Total equity securities available-for-sale	140,293,825		140,291,424		—		2,401

Short-term investments	53,418,914		42,062,664		11,356,250		—

Financial instruments not reported at fair value:
Liabilities:
Surplus notes	18,835,954		—		—		18,835,954

Presented in the table below is a reconciliation of the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2013 and 2012. Any unrealized gains or losses on these securities are recognized in other comprehensive income. Any gains or losses from disposals or impairments of these securities are reported as realized investment gains or losses in net income.



	Fair value measurements using significant unobservable inputs (Level 3)
	Fixed maturity securities available-for-sale, corporate			Equity securities available-for-sale, financial services		Total
Balance at December 31, 2011	$	—		$	2,250	$	2,250
Unrealized gains included in other comprehensive income	—			151		151
Balance at December 31, 2012	—			2,401		2,401
Purchases	1,971,303			—		1,971,303
Settlements	(944		)	—		(944		)
Unrealized gains included in other comprehensive income	5,294			206		5,500
Balance at December 31, 2013	$	1,975,653		$	2,607	$	1,978,260

There were no transfers into or out of Levels 1 or 2 during 2013 or 2012. It is the Company’s policy to recognize transfers between levels at the beginning of the reporting period.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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