DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2013

DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS [Abstract]

DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS

8.       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		Estimated
	amount		fair value
March 31, 2013
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	4,970,799	$	4,970,799
U.S. government-sponsored agencies		161,772,309		161,772,309
Obligations of states and political subdivisions		363,157,080		363,157,080
Commercial mortgage-backed		72,673,740		72,673,740
Residential mortgage-backed		60,165,897		60,165,897
Other asset-backed		10,610,721		10,610,721
Corporate		320,763,813		320,763,813
Total fixed maturity securities available-for-sale		994,114,359		994,114,359
Equity securities available-for-sale:
Common stocks:
Financial services		23,704,631		23,704,631
Information technology		14,927,793		14,927,793
Healthcare		21,191,636		21,191,636
Consumer staples		16,159,278		16,159,278
Consumer discretionary		17,599,933		17,599,933
Energy		23,261,841		23,261,841
Industrials		9,926,315		9,926,315
Other		20,204,612		20,204,612
Non-redeemable preferred stocks		8,934,759		8,934,759
Total equity securities available-for-sale		155,910,798		155,910,798
Short-term investments		60,946,630		60,946,630
Liabilities:
Surplus notes		25,000,000		10,738,321

	Carrying		Estimated
	amount		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 for the surplus notes (the surplus notes have no stated maturity date) and an interest rate that continues at the current 1.35 percent interest rate (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 value of a majority of its securities, subject to an internal validation.  The fair value is 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 value is 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 March 31, 2013 and December 31, 2012, the Company did not hold any fixed maturity securities that were priced solely from broker quotes.

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 March 31, 2013 and December 31, 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.  This review is typically performed during the second quarter, and resulted in a fair value for the shares held by the Company of $2,401 at March 31, 2013 and December 31, 2012.  The other securities not priced by the Company's independent pricing service at March 31, 2013 are two fixed maturity securities (three fixed maturity securities were not priced by the Company's independent pricing service at December 31, 2012).  These fixed maturity securities are classified as Level 2 fair value measurements.  The fair values for these fixed maturity securities were obtained from the SVO and the Company's investment custodian using independent pricing services which utilize 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 March 31, 2013 and December 31, 2012.

			Fair value measurements at March 31, 2013 using
			Quoted
			prices in		Significant
			active markets		other		Significant
			for identical		observable		unobservable
			assets		inputs		inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
Financial instruments reported at fair value on recurring basis:
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	4,970,799	$	-	$	4,970,799	$	-
U.S. government-sponsored agencies		161,772,309		-		161,772,309		-
Obligations of states and political subdivisions		363,157,080		-		363,157,080		-
Commercial mortgage-backed		72,673,740		-		72,673,740		-
Residential mortgage-backed		60,165,897		-		60,165,897		-
Other asset-backed		10,610,721		-		10,610,721		-
Corporate		320,763,813		-		320,763,813		-
Total fixed maturity securities available-for-sale		994,114,359		-		994,114,359		-
Equity securities available-for-sale:
Common stocks:
Financial services		23,704,631		23,702,230		-		2,401
Information technology		14,927,793		14,927,793		-		-
Healthcare		21,191,636		21,191,636		-		-
Consumer staples		16,159,278		16,159,278		-		-
Consumer discretionary		17,599,933		17,599,933		-		-
Energy		23,261,841		23,261,841		-		-
Industrials		9,926,315		9,926,315		-		-
Other		20,204,612		20,204,612		-		-
Non-redeemable preferred stocks		8,934,759		8,934,759		-		-
Total equity securities available-for-sale		155,910,798		155,908,397		-		2,401
Short-term investments		60,946,630		60,946,630		-		-
Financial instruments not reported at fair value:
Liabilities:
Surplus notes		10,738,321		-		-		10,738,321

			Fair value measurements at December 31, 2012 using
			Quoted
			prices in		Significant
			active markets		other		Significant
			for identical		observable		unobservable
			assets		inputs		inputs
Description	Total		(Level 1)		(Level 2)		(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 three months ended March 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)
	Equity securities
	available-for-sale,
	financial services		Total
Balance at December 31, 2011	$	2,250	$	2,250
Unrealized gains included in other comprehensive income		-		-
Balance at March 31, 2012	$	2,250	$	2,250
Balance at December 31, 2012	$	2,401	$	2,401
Unrealized gains included in other comprehensive income		-		-
Balance at March 31, 2013	$	2,401	$	2,401

There were no transfers into or out of Levels 1 or 2 during the three months ended March 31, 2013 or 2012.  It is the Company's policy to recognize transfers between levels at the beginning of the reporting period.