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Note 4 - Investments

9 Months Ended

Sep. 30, 2013

NOTE 4 – Investments

Investments in available-for-sale securities are summarized as follows:

September 30, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Fixed maturity securities:
U.S. government obligations	$	37,820,939	$	1,321,518	$	376,113	$	38,766,344
States and political subdivisions		41,688,611		3,682,333		36,713		45,334,231
Corporate		217,067,499		13,006,952		2,210,279		227,864,172
Foreign		54,839,273		2,656,775		1,514,104		55,981,944
Asset-backed securities		3,351,821		147,493		-		3,499,314
Mortgage-backed securities (MBS):
Commercial MBS		5,009,021		205,747		-		5,214,768
Residential MBS		45,670,958		1,957,381		-		47,628,339
Corporate redeemable preferred stock		361,720		-		36,889		324,831
Total fixed maturity securities		405,809,842		22,978,199		4,174,098		424,613,943
Equity securities:
U.S. agencies		687,000		-		-		687,000
Mutual funds		318,283		7,803		-		326,086
Corporate common stock		4,033,275		268,954		486,313		3,815,916
Corporate nonredeemable preferred stock		155,268		-		20,442		134,826
Total equity securities		5,193,826		276,757		506,755		4,963,828
Total	$	411,003,668	$	23,254,956	$	4,680,853	$	429,577,771

December 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Fixed maturity securities:
U.S. government obligations	$	47,634,952	$	4,263,920	$	-	$	51,898,872
States and political subdivisions		46,323,487		7,522,997		-		53,846,484
Corporate		207,553,209		23,818,640		93,765		231,278,084
Foreign		50,000,420		4,748,130		11,680		54,736,870
Asset-backed securities		4,460,090		289,373		529		4,748,934
Mortgage-backed securities (MBS):
Commercial MBS		6,429,641		407,386		-		6,837,027
Residential MBS		31,968,578		3,008,564		-		34,977,142
Total fixed maturity securities		394,370,377		44,059,010		105,974		438,323,413
Equity securities:
U.S. agencies		681,300		-		-		681,300
Mutual funds		318,283		3,054		-		321,337
Corporate common stock		117,468		266,532		-		384,000
Total equity securities		1,117,051		269,586		-		1,386,637
Total	$	395,487,428	$	44,328,596	$	105,974	$	439,710,050

The following table summarizes, for all securities in an unrealized loss position as of the balance sheet dates, the estimated fair value, pre-tax gross unrealized loss and number of securities by length of time that those securities have been continuously in an unrealized loss position.

	September 30, 2013						December 31, 2012
	Estimated Fair Value		Gross Unrealized Loss		Number of Securities		Estimated Fair Value		Gross Unrealized Loss		Number of Securities
Fixed Maturities:
Less than 12 months:
U.S. government obligations	$	12,598,904	$	376,113		3	$	-	$	-		-
States and political subdivisions		713,288		36,713		1		-		-		-
Corporate		55,415,549		2,210,279		41		4,648,363		88,805		5
Foreign		27,580,179		1,514,104		16		988,320		11,680		1
Corporate redeemable preferred stock		324,831		36,889		8		-		-		-
Greater than 12 months:
Corporate		-		-		-		243,040		4,960		1
Asset-backed securities		-		-		-		59,097		529		1
Total fixed maturities		96,632,751		4,174,098		69		5,938,820		105,974		8

Equities:
Less than 12 months:
Corporate common stock		3,054,622		486,313		31		-		-		-
Corporate nonredeemable preferred stock		134,826		20,442		2		-		-		-
Total equities		3,189,448		506,755		33		-		-		-

Total	$	99,822,199	$	4,680,853		102	$	5,938,820	$	105,974		8

As of September 30, 2013, all of the above fixed maturity securities individually had a fair value to cost ratio equal to or greater than 83% and the equity securities had a fair value to cost ratio equal to or exceeding 68%. As of December 31, 2012, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 96% and the equity securities noted above had a fair value to cost ratio equal to or exceeding 100%.

The Company’s decision to record an impairment loss is primarily based on whether the security’s fair value is likely to remain significantly below its book value in light of all the factors considered. Factors that are considered include the length of time the security’s fair value has been below its carrying amount, the severity of the decline in value, the credit worthiness of the issuer, and the coupon and/or dividend payment history of the issuer. The Company also assesses whether it intends to sell or whether it is more likely than not that it may be required to sell the security prior to its recovery in value. For any fixed maturity securities that are other-than-temporarily impaired, the Company determines the portion of the other-than-temporary impairment that is credit-related and the portion that is related to other factors. The credit-related portion is the difference between the expected future cash flows and the amortized cost basis of the fixed maturity security, and that difference is charged to earnings. The non-credit-related portion representing the remaining difference to fair value is recognized in other comprehensive income (loss). Only in the case of a credit-related impairment where management has the intent to sell the security, or it is more likely than not that it will be required to sell the security before recovery of its cost basis, is a fixed maturity security adjusted to fair value and the resulting losses recognized in realized gains (losses) in the consolidated statements of income. Any other-than-temporary impairments on equity securities are recorded in the consolidated statements of income in the periods incurred as the difference between fair value and cost. Based on our review, the Company experienced no other-than-temporary impairments during the quarters or nine months ended September 30, 2013 or 2012.

Management believes that the Company will fully recover its cost basis in the securities held at September 30, 2013, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature. The temporary impairments shown herein are primarily the result of the current interest rate environment rather than credit factors that would imply other-than-temporary impairment.

Net unrealized gains for investments classified as available-for-sale are presented below, net of the effect on deferred income taxes and deferred acquisition costs assuming that the appreciation (depreciation) had been realized.

	September 30, 2013			December 31, 2012
Net unrealized appreciation on available-for sale securities	$	18,574,103		$	44,222,622
Adjustment to deferred acquisition costs		(514,131	)		(1,312,922	)
Deferred income taxes		(6,321,537	)		(14,821,597	)
Net unrealized appreciation on available-for sale securities	$	11,738,435		$	28,088,103

The amortized cost and fair value of fixed maturity securities at September 30, 2013, by contractual maturity, are presented below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available-for-Sale
	Amortized		Fair
	Cost		Value
Due in one year or less	$	3,501,324	$	3,551,783
Due after one year through five years		67,647,273		74,113,360
Due after five years through ten years		190,847,087		197,532,851
Due after ten years		92,772,459		96,248,011
Due at multiple maturity dates		50,679,979		52,843,107
Corporate redeemable preferred stock		361,720		324,831
Total	$	405,809,842	$	424,613,943

Proceeds for the quarters and nine months ended September 30, 2013 and 2012 from sales and maturities of investments in available-for-sale securities, as well as gross gains and gross losses realized, are presented below.

	Quarter Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Proceeds from sales and maturities	$	47,541,392		$	6,723,467		$	76,205,748		$	25,843,682
Gross realized gains		2,436,585			251,815			2,544,968			455,444
Gross realized losses		(17,779	)		(1,888	)		(48,905	)		(7,258	)

Presented below is investment information, including the accumulated quarter and year-to-date change in net unrealized investment gains or losses. Additionally, the table shows the change in net unrealized investment gains (losses) and the amount of realized investment gains (losses) on fixed maturities and equity securities for the quarters and nine months ended September 30, 2013 and 2012.

	Quarter Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Change in unrealized investment gains (losses):
Available-for-sale:
Fixed maturities	$	(3,668,612	)	$	6,239,402		$	(25,148,935	)	$	13,509,692
Equity securities		(107,730	)		(19,751	)		(499,584	)		33,733
Realized investment gains:
Available-for-sale:
Fixed maturities	$	2,383,513		$	186,496		$	2,473,160		$	384,755
Equity securities		35,293			63,431			22,903			63,431

In addition to the realized investment gains and losses above, the Company also experienced a realized loss of $14,006 during the nine months ended September 30, 2013 relative to the demolition of a building owned by the Company.

During the third quarter of 2013, the Company initiated a program to strategically sell certain fixed maturities to generate realized gains within the investment portfolio. The Company completed all of the identified sales prior to September 30, 2013.

The Company is required to hold assets on deposit for the benefit of policyholders in accordance with statutory rules and regulations. At September 30, 2013 and December 31, 2012, these required deposits had a total fair value of $25,562,891 and $26,169,953, respectively.

The Company owns certain investments in state-guaranteed receivables. These investments represent an assignment of the future rights to cash flows from lottery winners purchased at a discounted price. Payments on these investments are made by state run lotteries and guaranteed by the states. The state-guaranteed receivables are carried at their amortized cost basis on the balance sheet. At September 30, 2013, the amortized cost and estimated fair value of state-guaranteed receivables, by contractual maturity, are summarized as follows:

	Amortized Cost		Fair Value
Due in one year or less	$	700,932	$	708,325
Due after one year through five years		2,436,995		2,596,551
Due after five years through ten years		2,858,089		3,377,206
Due after ten years		2,065,039		2,738,787
Total	$	8,061,055	$	9,420,869

The amortized cost of state-guaranteed receivables, by state, is summarized as follows:

	September 30, 2013		December 31, 2012
New York	$	3,861,199	$	3,973,862
Massachusetts		1,909,363		1,838,166
Georgia		1,521,928		1,531,078
Pennsylvania		284,989		270,657
California		192,369		202,563
Texas		208,900		198,260
Ohio		82,307		97,083
Total	$	8,061,055	$	8,111,669

Prior to the third quarter of 2013, the Company owned a $3,000,000 position in a Morgan Stanley market-indexed note, which paid 1% interest annually and matured in six years from the issue date. At maturity, the Company would have participated at 110% of any increase in the Dow Jones Industrial Average since the purchase date, but was guaranteed against market-related downside risk. Accordingly, a portion of the investment was classified as a derivative and bifurcated for reporting purposes. The derivative portion, having a cost basis of $645,000 calculated at 21.5% of the total value of the purchase price of the note, was reported as an investment in derivative on the balance sheet. The remaining non-derivative portion of the note was reported within fixed maturities on the balance sheet. This derivative was marked-to-market through the income statement, with the change in value reported as a component of investment income on the income statement. This investment was sold during the third quarter of 2013 for $3,918,083, generating a realized gain of $918,083. This realized gain was partially offset by the reduction in investment income previously recognized that was associated with the removal of the mark-to-market adjustment, as shown below.

Major categories of net investment income are summarized as follows:

	Quarter Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013		2012
Fixed maturities	$	4,874,638		$	4,866,812	$	14,480,549	$	14,583,269
Equity securities		50,970			13,637		100,701		41,021
Mortgage loans on real estate		264,056			356,252		816,454		1,027,434
Policy loans		121,699			123,004		357,789		367,497
State-guaranteed receivables		140,790			118,680		430,666		346,676
Gain (loss) on investment in derivative		(240,600	)		4,800		2,400		(68,100	)
Other		57,099			22,987		176,112		79,383
Gross investment income		5,268,652			5,506,172		16,364,671		16,377,180
Investment expenses		282,654			261,062		847,674		783,183
Net investment income	$	4,985,998		$	5,245,110	$	15,516,997	$	15,593,997