Note 5 - Fair Values of Financial Instruments

9 Months Ended

Sep. 30, 2011

Fair Value Disclosures [Text Block]

NOTE 5 – Fair Values of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  We also consider the impact on fair value of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity.

The Company holds fixed maturities and equity securities that are measured and reported at fair market value on the balance sheet.  The Company determines the fair market values of its financial instruments based on the fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputs that may be used to measure fair value, as follows:

Level 1 - Quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets and liabilities include fixed maturities and equity securities that are traded in an active exchange market, as well as certain U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2 - 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 for substantially the full term of the assets or liabilities. The Company’s Level 2 assets and liabilities include fixed maturities with quoted prices that are traded less frequently than exchange-traded instruments or assets and liabilities whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes U.S. Government and agency mortgage-backed fixed maturities and corporate fixed maturities.  This category also includes the Company’s investment in derivative as the value equates to 21.5% of the fair value of the total investment, whose value is calculated in accordance with Level 2 principles.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company’s Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments and asset-backed securities where independent pricing inputs were not able to be obtained for a significant portion of the underlying assets.

The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into the three-level fair value hierarchy.  If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.  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 quarter in which the reclassifications occur.

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, 2011 and December 31, 2010, respectively.

	September 30, 2011
	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. government obligations	$	-	$	56,893,061	$	-	$	56,893,061
States and political subdivisions		-		53,039,591		-		53,039,591
Corporate		-		216,529,522		2,132,112		218,661,634
Foreign		-		29,428,560		-		29,428,560
Asset-backed securities		-		5,571,979		-		5,571,979
Mortgage-backed securities:
Commercial MBS		-		8,745,936		-		8,745,936
Residential MBS		-		48,642,840		-		48,642,840
Total fixed maturities	$	-	$	418,851,489	$	2,132,112	$	420,983,601
Equity securities:
U.S. agencies	$	552,800	$	-	$	-	$	552,800
Mutual funds		2,334,497		-		-		2,334,497
Nonredeemable corporate preferred		-		1,000,940		-		1,000,940
Corporate common stock		96,760		-		344,000		440,760
Total equity securities	$	2,984,057	$	1,000,940	$	344,000	$	4,328,997
Investment in derivative	$	-	$	599,302	$	-	$	599,302

	December 31, 2010
	Level 1		Level 2		Level 3		Total
Fixed maturities:
U.S. government obligations	$	-	$	38,280,498	$	-	$	38,280,498
States and political subdivisions		-		47,042,718		-		47,042,718
Corporate		-		150,673,819		-		150,673,819
Foreign		-		22,528,900		-		22,528,900
Asset-backed securities		-		5,808,341		387,863		6,196,204
Mortgage-backed securities:
Commercial MBS		-		8,424,879		-		8,424,879
Residential MBS		-		40,309,244		-		40,309,244
Total fixed maturities	$	-	$	313,068,399	$	387,863	$	313,456,262
Equity securities:
U.S. agencies	$	552,800	$	-	$	-	$	552,800
Mutual funds		2,571,225		-		-		2,571,225
Nonredeemable corporate preferred		-		947,190		-		947,190
Corporate common stock		109,556		-		344,000		453,556
Total equity securities	$	3,233,581	$	947,190	$	344,000	$	4,524,771

At September 30, 2011, Level 3 financial instruments consisted of three corporate fixed maturities and one common stock, where trading has been limited.  At December 31, 2010, Level 3 financial instruments consisted of one asset-backed security and one common stock, where trading has been limited.  The fair values for these securities were primarily determined through the use of non-binding broker quotes and internal models using unobservable assumptions about market participants.  Fair values for Level 1 and Level 2 assets are primarily based on quoted prices in the market obtained via pricing services, which use observable inputs in developing such rates.

The following table provides a summary of changes in fair value of our Level 3 financial instruments for the quarters and nine months ended September 30, 2011 and 2010, respectively.

	Quarter Ended September 30, 2011
	U.S.					Asset-		Nonredeemable		Corporate
	Government					Backed		Corporate		Common
	Obligations		Corporate			Securities		Preferred		Stock		Total
Beginning balance	$	-	$	2,166,832		$	-		-	$	344,000	$	2,510,832
Transfers into Level 3		-		-			-		-		-		-
Transfers out of Level 3		-		-			-		-		-		-
Total gains or losses:
Included in earnings		-		-			-		-		-		-
Included in other comprehensive income		-		6,070			-		-		-		6,070
Purchases		-		-			-		-		-		-
Sales		-		(40,790	)		-		-		-		(40,790	)
Ending balance	$	-	$	2,132,112		$	-	$	-	$	344,000	$	2,476,112

	Quarter Ended September 30, 2010
	U.S.						Asset-		Nonredeemable			Corporate
	Government						Backed		Corporate			Common
	Obligations			Corporate			Securities		Preferred			Stock		Total
Beginning balance	$	1,046,280		$	4,884,956		$	-	$	-		$	344,000	$	6,275,236
Transfers into Level 3		-			-			-		1,032,810			-		1,032,810
Transfers out of Level 3		(1,046,280	)		(4,866,256	)		-		-			-		(5,912,536	)
Total gains or losses:
Included in earnings		-			9,056			-		-			-		9,056
Included in other comprehensive income		-			(7,356	)		-		(72,810	)		-		(80,166	)
Net purchases (sales)		-			(20,400	)		-		-			-		(20,400	)
Ending balance	$	-		$	-		$	-	$	960,000		$	344,000	$	1,304,000

	Nine Months Ended September 30, 2011
	U.S.					Asset-			Nonredeemable		Corporate
	Government					Backed			Corporate		Common
	Obligations		Corporate			Securities			Preferred		Stock		Total
Beginning balance	$	-	$	-		$	387,863		$	-	$	344,000	$	731,863
Transfers into Level 3		-		1,701,785			-			-		-		1,701,785
Transfers out of Level 3		-		-			(387,863	)		-		-		(387,863	)
Total gains or losses:
Included in earnings		-		-			-			-		-		-
Included in other comprehensive income		-		104,378			-			-		-		104,378
Purchases		-		400,000			-			-		-		400,000
Sales		-		(74,051	)		-			-		-		(74,051	)
Ending balance	$	-	$	2,132,112		$	-		$	-	$	344,000	$	2,476,112

	Nine Months Ended September 30, 2010
	U.S.						Asset-			Nonredeemable			Corporate
	Government						Backed			Corporate			Common
	Obligations			Corporate			Securities			Preferred			Stock		Total
Beginning balance	$	775,000		$	4,573,606		$	436,855		$	-		$	342,400	$	6,127,861
Transfers into Level 3		-			-			-			1,032,810			-		1,032,810
Transfers out of Level 3		(1,821,280	)		(4,866,256	)		(411,077	)		-			-		(7,098,613	)
Total gains or losses:
Included in earnings		-			9,056			-			-			-		9,056
Included in other comprehensive income		49,092			416,462			11,923			(72,810	)		1,600		406,267
Net purchases (sales)		997,188			(132,868	)		(37,701	)		-			-		826,619
Ending balance	$	-		$	-		$	-		$	960,000		$	344,000	$	1,304,000

The Company experienced no transfers between Level 1 and Level 2 during the quarter or nine months ended September 30, 2011.  The Company experienced no transfers between Level 2 and Level 3 during the quarter ended September 30, 2011.  The Company had one asset-backed security that transferred from Level 3 to Level 2 during the nine months ended September 30, 2011.  The Company had one nonredeemable preferred stock that transferred from Level 2 to Level 3 during the quarter ended September 30, 2010 (transferred from Level 1 to Level 3 for the nine months ended September 30, 2010).  Trading for this preferred stock has become more limited, which restricts the use of Level 1 and Level 2 inputs into pricing.  The Company has one U.S. government obligation and four corporate securities which transferred from Level 3 to level 2 during the quarter ended September 30, 2010.  Additionally, the Company had one U.S. government obligation which transferred from Level 3 to Level 2 during the quarter ended March 31, 2010 as well as one asset-backed security which transferred from Level 3 to Level 2 during the quarter ended June 30, 2010.  Transfers in and/or (out) of Level 3 are primarily attributable to changes in the availability of market observable information and re-evaluation of the observability of pricing inputs.

The unrealized gains (losses) on Level 3 investments are recorded as a component of accumulated other comprehensive income (loss), net of tax, in accordance with required accounting for our available-for-sale portfolio.

The following disclosure contains the estimated fair values of financial instruments, as of September 30, 2011 and December 31, 2010.  The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies.  However, considerable judgment was required to interpret market data to develop these estimates.  Accordingly, the estimates are not necessarily indicative of the amounts which could be realized in a current market exchange.  The use of different market assumptions or estimation methodologies may have a material effect on the fair value amounts.

	September 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Assets:
Fixed maturities	$	420,983,601	$	420,983,601	$	313,456,262	$	313,456,262
Equity securities		4,328,997		4,328,997		4,524,771		4,524,771
Mortgage loans on real estate:
Commercial		18,175,084		18,501,936		19,792,428		20,524,312
Residential		21,902		22,823		25,050		26,498
Policy loans		7,033,510		7,033,510		6,949,374		6,949,374
State-guaranteed receivables		2,769,462		3,159,383		-		-
Investment in derivative		599,302		599,302		-		-
Other long-term investments		1,462,350		1,462,350		1,454,232		1,454,232
Short-term investments		17,094		17,094		491,041		491,041
Cash and cash equivalents		15,568,074		15,568,074		2,647,798		2,647,798
Accrued investment income		4,304,595		4,304,595		3,926,591		3,926,591
Cash value of company-owned life insurance		9,627,751		9,627,751		9,021,432		9,021,432
Liabilities:
Policyholder deposits (Investment-type contracts)	$	54,580,124	$	57,792,905	$	54,276,322	$	52,169,944
Policy claims		1,988,972		1,988,972		1,887,136		1,887,136
Obligations under capital leases		45,864		45,864		57,808		57,808
Notes payable		1,588,190		1,581,997		2,533,955		2,489,222

The following methods and assumptions were used in estimating the “fair value” disclosures for financial instruments in the accompanying financial statements and notes thereto:

Fixed maturities and equity securities:  The fair values for fixed maturities and equity securities (including redeemable preferred stocks) are based on the principles previously discussed.

Mortgage loans on real estate:  The fair values for mortgage loans are estimated using discounted cash flow analyses, using the actual spot rate yield curve in effect at the end of each period.

State-guaranteed receivables:  The fair values for state-guaranteed receivables are estimated using discounted cash flow analyses, using the average Citigroup Pension Liability Index in effect at the end of each period.

Investment in derivative:  The fair value of the investment in derivative is calculated at 21.5% of the total fair value of the underlying market-indexed note derived utilizing the principles for fixed maturities as previously discussed.

Cash and cash equivalents, short-term investments, policy loans, accrued investment income and other long-term investments:  The carrying amounts reported for these financial instruments approximate their fair values.

Cash value of company-owned life insurance:  The carrying values and fair values for these policies are based on the current cash surrender values of the policies.

Investment-type contracts:  The fair value for liabilities under investment-type insurance contracts (accumulation annuities) is calculated using a discounted cash flow approach.  Cash flows were projected using actuarial assumptions and discounted to the valuation date using risk-free rates adjusted for credit risk and the nonperformance risk of the liabilities.

The fair values for insurance contracts other than investment-type contracts are not required to be disclosed.

Policy claims and obligations under capital leases:  The carrying amounts reported for these liabilities approximate their fair value.

Notes payable:  The fair values for notes payable on commercial loans with fixed interest rates are estimated using discounted cash flow analyses, assuming current interest rate assumptions for similar borrowings based on information gathered from market loan brokers.  The fair value for notes payable with floating interest rates and promissory notes approximate the unpaid principal balances on such notes.