Investments in Securities and Fair Value

The aggregate fair value, gross unrealized holding gains, gross unrealized holding losses, and amortized cost for securities by major security type at December 31 were as follows:



December 31, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Fixed maturities, available-for-sale, at fair value:
General obligations of U.S. States, territories and political subdivisions	$	38,449,309	$	1,922,862	$	184,351	$	40,187,820
Issuer obligations of U.S. States, territories and political subdivisions special revenue	30,874,571		1,234,130		204,800		31,903,901
Corporate debt securities	17,736,608		789,840		108,456		18,417,992
Auction rate securities	919,672		16,028		—		935,700
Total	$	87,980,160	$	3,962,860	$	497,607	$	91,445,413
Equity securities, available-for-sale at fair value:
Common stocks and nonredeemable preferred stocks	$	22,200,369	$	14,052,780	$	109,084	$	36,144,065
Total	$	22,200,369	$	14,052,780	$	109,084	$	36,144,065
Short-term investments:
Certificates of deposit and money market funds	$	7,926,373	$	—	$	—	$	7,926,373
Total	$	7,926,373	$	—	$	—	$	7,926,373



December 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Fixed maturities, available-for-sale, at fair value:
General obligations of U.S. States, territories and political subdivisions	$	38,658,463	$	3,211,445	$	—	$	41,869,908
Issuer obligations of U.S. States, territories and political subdivisions special revenue	18,933,299		1,909,106		10,455		20,831,950
Corporate debt securities	17,064,697		1,252,973		14,750		18,302,920
Auction rate securities	917,214		14,986		—		932,200
Total	$	75,573,673	$	6,388,510	$	25,205	$	81,936,978
Equity securities, available-for sale at fair value:
Common stocks and nonredeemable preferred stocks	$	21,229,114	$	7,373,056	$	91,237	$	28,510,933
Total	$	21,229,114	$	7,373,056	$	91,237	$	28,510,933
Short-term investments:
Certificates of deposit and money market funds	$	13,567,648	$	—	$	—	$	13,567,648
Total	$	13,567,648	$	—	$	—	$	13,567,648

The special revenue category for both periods presented includes over 30 individual bonds with revenue sources from a broad variety of industry sectors.

The scheduled maturities of fixed maturity securities at December 31, 2013 were as follows:



	Available-for-Sale
	Amortized Cost		Fair Value
Due in one year or less	$	8,685,106	$	8,848,668
Due after one year through five years	57,287,230		60,170,845
Due five years through ten years	14,159,839		14,285,208
Due after ten years	7,847,985		8,140,692
Total	$	87,980,160	$	91,445,413

Earnings on investments for the years ended December 31 were as follows:



	2013		2012		2011
Fixed maturities	$	2,997,901	$	3,154,131	$	3,233,988
Equity securities	890,917		815,674		347,843
Invested cash and other short-term investments	5,754		10,576		12,725
Miscellaneous interest	36		30		480
Investment income	$	3,894,608	$	3,980,411	$	3,595,036

Gross realized gains and losses on sales of available-for-sale securities for the years ended December 31 are summarized as follows:



	2013			2012			2011
Gross realized gains:
General obligations of U.S. States, territories and political subdivisions	$	—		$	250		$	386
Corporate	—			52,396			20,459
Common stocks and nonredeemable preferred stocks	369,673			450,461			529,811
Auction rate securities	—			211,061			43,199
Total	369,673			714,168			593,855
Gross realized losses:
Common stocks and nonredeemable preferred stocks	(180,169		)	(91,975		)	(247,117		)
Other than temporary impairment of securities	—			(93,436		)	(280,987		)
Total	(180,169		)	(185,411		)	(528,104		)
Net realized gain	$	189,504		$	528,757		$	65,751
Net realized gains (losses) on other investments:
Impairments of other assets and investments	$	(34,070	)	$	(6,504	)	$	(44,404	)
Gain on other assets and investments	48,946			543,986			30,238
Loss on other assets and investments	(8,580		)	—			(23,026		)
Total	$	6,296		$	537,482		$	(37,192	)
Net Realized Gain	$	195,800		$	1,066,239		$	28,559

Realized gains and losses are determined on the specific identification method.

The following table presents the gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous loss position at December 31, 2013 and 2012:



	Less than 12 Months					12 Months or Longer					Total
December 31, 2013	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
General obligations of U.S. states, territories and political subdivisions	$	4,198,012	$	(184,351	)	$	—	$	—		$	4,198,012	$	(184,351	)
Special revenue obligations of U.S. states territories and political subdivisions	11,010,093		(204,800		)	—		—			11,010,093		(204,800		)
Corporate debt securities	5,942,570		(108,456		)	—		—			5,942,570		(108,456		)
Total fixed maturity securities	$	21,150,675	$	(497,607	)	$	—	$	—		$	21,150,675	$	(497,607	)
Equity securities	2,035,971		(72,998		)	244,929		(36,086		)	2,280,900		(109,084		)
Total temporarily impaired securities	$	23,186,646	$	(570,605	)	$	244,929	$	(36,086	)	$	23,431,575	$	(606,691	)



December 31, 2012
Special revenue obligations of U.S. states territories and political subdivisions	$	1,236,906	$	(10,455	)	$	—	$	—	$	1,236,906	$	(10,455	)
Corporate debt securities	985,250		(14,750		)	—		—		985,250		(14,750		)
Total fixed maturity securities	$	2,222,156	$	(25,205	)	$	—	$	—	$	2,222,156	$	(25,205	)
Equity securities	2,551,215		(91,237		)	—		—		2,551,215		(91,237		)
Total temporarily impaired securities	$	4,773,371	$	(116,442	)	$	—	$	—	$	4,773,371	$	(116,442	)

As of December 31, 2013, the Company held $21,150,675 in fixed maturity securities with unrealized losses of $497,607. As of December 31, 2012, the Company held $2,222,156 in fixed maturity securities with unrealized losses of $25,205. The decline in fair value of the fixed maturity securities can be attributed primarily to changes in market interest rates and changes in credit spreads over Treasury securities. Because the Company does not have the intent to sell these securities and likely will not be compelled to sell them before it can recover its cost basis, the Company does not consider these investments to be other-than-temporarily impaired.

As of December 31, 2013, the Company held $2,280,900 in equity securities with unrealized losses of $109,084. As of December 31, 2012, the Company held $2,551,215 in equity securities with unrealized losses of $91,237. The unrealized losses related to holdings of equity securities were caused by market changes that the Company considers to be temporary. Since the Company has the intent and ability to hold these equity income securities until a recovery of fair value, the Company does not consider these investments other-than-temporarily impaired.

Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been below cost, the financial condition and prospects of the issuer (including credit ratings and analyst reports) and macro-economic changes. A total of 26 and 7 securities had unrealized losses at December 31, 2013 and December 31, 2012, respectively. Reviews of the values of securities are inherently uncertain and the value of the investment may not fully recover, or may decline in future periods resulting in a realized loss. During 2013, the Company did not record any other-than-temporary impairment charges related to securities. During 2012, the Company recorded an other-than-temporary impairment charge in the amount of $93,436 related to securities. During 2011, the Company recorded an other-than-temporary impairment charge in the amount of $280,987 related to securities, of which, $101,861 was related to Level 3 ARS that have had a history of being below cost and a change in the intent not to sell. Other-than-temporary impairment charges are included in net realized gain on investments in the Consolidated Statements of Income.

Valuation of Financial Assets and Liabilities

The FASB has established a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value of financial assets and liabilities, such as securities. This hierarchy categorizes the inputs into three broad levels as follows. Level 1 inputs to the valuation methodology are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value.

A financial instrument’s classification within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement—consequently, if there are multiple significant valuation inputs that are categorized in different levels of the hierarchy, the instrument’s hierarchy level is the lowest level (with Level 3 being the lowest level) within which any significant input falls.

Debt and Equity Securities

The Level 1 category includes equity securities that are measured at fair value using quoted active market prices.

The Level 2 category includes fixed maturity investments such as corporate bonds, U.S. government and agency bonds and municipal bonds. Fair value is principally based on market values obtained from a third party pricing service. Factors that are used in determining fair market value include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. The Company receives one quote per security from a third party pricing service, although as discussed below, the Company does consult other pricing resources when confirming that the prices it obtains reflect the fair values of the instruments in accordance with Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. Generally, quotes obtained from the pricing service for instruments classified as Level 2 are not adjusted and are not binding. As of December 31, 2013 and December 31, 2012, the Company did not adjust any Level 2 fair values.

A number of the Company’s investment grade corporate bonds are frequently traded in active markets, and trading prices are consequently available for these securities. However, these securities were classified as Level 2 because the pricing service from which the Company has obtained fair values for these instruments uses valuation models which use observable market inputs in addition to traded prices. Substantially all of the input assumptions used in the service’s model are observable in the marketplace or can be derived or supported by observable market data.

The Level 3 category only includes the Company’s investments in student loan auction rate securities (“ARS”) because quoted prices were unavailable due to the failure of auctions. The Company’s ARS portfolio is comprised entirely of investment grade student loan ARS. The par value of these securities was $1,000,000 as of December 31, 2013 and December 31, 2012, with approximately 97.0% as of December 31, 2013 and December 31, 2012, guaranteed by the U.S. Department of Education.

Some of the inputs to ARS valuation are unobservable in the market and are significant; therefore, the Company utilizes another third party pricing service to assist in the determination of the fair market value of these securities. This service uses a proprietary valuation model that considers factors such as the following: the financial standing of the issuer; reported prices and the extent of public trading in similar financial instruments of the issuer or comparable companies; the ability of the issuer to obtain required financing; changes in the economic conditions affecting the issuer; pricing by other dealers in similar securities; time to maturity; and interest rates. The following table summarizes some key assumptions the service used to determine fair value as of December 31, 2013 and 2012:



	2013	2012
Cumulative probability of earning maximum rate until maturity	—%	—%
Cumulative probability of principle returned prior to maturity	95.6%	96.1%
Cumulative probability of default at some future point	4.4%	3.9%

Significant increases or decreases in any of the inputs in isolation could result in significant changes to the fair value measurement. Generally, increases in default probabilities and liquidity risk premiums lower the fair market value while increases in principal being returned and earning maximum rates increase fair market values.

Based upon these inputs and assumptions, the pricing service provides a range of values to the Company for its ARS. The Company records the fair value based on the midpoint of the range and believes that this valuation is the most reasonable estimate of fair value. In 2013 and 2012, the difference in the low and high values of the ranges was approximately zero and four percent of the carrying value of the Company’s ARS.

The following table presents, by level, the financial assets carried at fair value measured on a recurring basis as of December 31, 2013 and 2012. The table does not include cash on hand and also does not include assets which are measured at historical cost or any basis other than fair value. Level 3 assets are comprised solely of ARS.



As of December 31, 2013	Level 1		Level 2		Level 3		Total
Short Term	$	7,926,373	$	—	$	—	$	7,926,373
Equity Securities:
Common stock and nonredeemable preferred stock	36,144,065		—		—		36,144,065
Fixed Maturities:
Obligations of U.S. States, territories and political subdivisions*	—		72,091,721		—		72,091,721
Corporate debt securities*	—		18,417,992		935,700		19,353,692
Total	$	44,070,438	$	90,509,713	$	935,700	$	135,515,851



As of December 31, 2012	Level 1		Level 2		Level 3		Total
Short Term	$	13,567,648	$	—	$	—	$	13,567,648
Equity Securities:
Common stock and nonredeemable preferred stock	28,510,933		—		—		28,510,933
Fixed Maturities:
Obligations of U.S. States, territories and political subdivisions*	—		62,701,858		—		62,701,858
Corporate debt securities*	—		18,302,920		932,200		19,235,120
Total	$	42,078,581	$	81,004,778	$	932,200	$	124,015,559

*Denotes fair market value obtained from pricing services.

There were no transfers into or out of Levels 1 and 2 during the period.

To help ensure that fair value determinations are consistent with ASC 820 fair value measurements, prices from our pricing services go through multiple review processes to ensure appropriate pricing. Pricing procedures and inputs used to price each security include, but are not limited to, the following: unadjusted quoted market prices for identical securities such as stock market closing prices; non-binding quoted prices for identical securities in markets that are not active; interest rates; yield curves observable at commonly quoted intervals; volatility; prepayment speeds; loss severity; credit risks and default rates. The Company reviews the procedures and inputs used by its pricing services and verifies a sample of the services’ quotes by comparing them to values obtained from other pricing resources. In the event the Company disagrees with a price provided by its pricing services, the service reevaluates the price to corroborate the market information and then reviews inputs to the evaluation in light of potentially new market data. The Company believes that these processes and inputs result in appropriate classifications and fair values consistent with ASC 820.

Other Financial Instruments

The Company uses various financial instruments in the normal course of its business. In the measurement of the fair value of certain financial instruments, other valuation techniques were utilized if quoted market prices were not available. These derived fair value estimates are significantly affected by the assumptions used. Additionally, ASC 820 excludes from its scope certain financial instruments including those related to insurance contracts, pension and other postretirement benefits, and equity method investments.

In estimating the fair value of the financial instruments presented, the Company used the following methods and assumptions:

Cash and cash equivalents

The carrying amount for cash and cash equivalents is a reasonable estimate of fair value due to the short-term maturity of these investments.

Cost-basis investments

The estimated fair value of cost-basis investments is calculated from the book value of the underlying entities, which is not materially different from the fair value of the underlying entity.

Accrued dividends and interest

The carrying amount for accrued dividends and interest is a reasonable estimate of fair value due to the short-term maturity of these assets.

Contingent consideration

The fair value of the contingent consideration was estimated based on the discounted value of the future cash flows. Contingent consideration consists of additional monies the Company may become obligated to pay based on the future performance of a business the Company acquired, as discussed in Note 18.

The carrying amounts and fair values of these financial instruments (please note investments are disclosed in a previous table) as of December 31, 2013 and 2012 are presented in the following table:



As of December 31, 2013
Financial Assets	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Cash and cash equivalents	$	23,626,761	$	23,626,761	$	23,626,761	$	—	$	—
Cost-basis investments	1,927,429		2,069,302		—		—		2,069,302
Accrued dividends and interest	1,006,698		1,006,698		1,006,698		—		—
Total	$	26,560,888	$	26,702,761	$	24,633,459	$	—	$	2,069,302

Financial Liabilities
Contingent consideration	$	341,250	$	341,250	$	—	$	—	$	341,250
Total	$	341,250	$	341,250	$	—	$	—	$	341,250



As of December 31, 2012
Financial Assets	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Cash and cash equivalents	$	20,810,018	$	20,810,018	$	20,810,018	$	—	$	—
Cost-basis investments	1,871,315		1,952,323		—		—		1,952,323
Accrued dividends and interest	1,037,447		1,037,447		1,037,447		—		—
Total	$	23,718,780	$	23,799,788	$	21,847,465	$	—	$	1,952,323

Financial Liabilities
Contingent consideration	$	691,250	$	691,250	$	—	$	—	$	691,250
Total	$	691,250	$	691,250	$	—	$	—	$	691,250

The following table presents a reconciliation of the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3), which are all ARS securities, for the twelve months ended December 31, 2013 and 2012:



Changes in fair value during the year ended December 31:	2013		2012
Beginning balance at January 1	$	932,200	$	4,552,400
Redemptions and sales	—		(3,900,000		)
Realized gain – included in net realized gain on investments	—		211,061
Realized loss – included in net realized gain on investments	—		—
Unrealized gain - included in other comprehensive income	3,500		68,739
Ending balance at December 31	$	935,700	$	932,200

The following table presents a reconciliation of the Company’s liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3), consisting solely of contingent consideration, for the twelve months ended December 31, 2013 and 2012:



Changes in fair value during the period ended:	2013			2012
Beginning balance at January 1	$	691,250		$	—
Addition of contingent consideration	—			691,250
Payment for contingent consideration	(350,000		)	—
Ending balance, net	$	341,250		$	691,250

Certain cost-basis investments are measured at estimated fair value on a non-recurring basis, such as investments that are determined to be other-than temporarily impaired during the period and recorded at estimated fair value in the Consolidated Financial Statements as of December 31, 2013 and 2012. The following table summarizes the corresponding estimated fair value hierarchy of such investments at December 31, 2013 and 2012 and the related impairments recognized:



December 31, 2013	Valuation Method	Impaired	Level 1		Level 2		Level 3		Total at Estimated Fair Value		Impairment Losses
Cost-basis investments	Fair Value	Yes	$	—	$	—	$	32,744	$	32,744	$	(34,070	)
Total cost method investments and other assets			$	—	$	—	$	32,744	$	32,744	$	(34,070	)



December 31, 2012	Valuation Method	Impaired	Level 1		Level 2		Level 3		Total at Estimated Fair Value		Impairment Losses
Cost-basis investments	Fair Value	Yes	$	—	$	—	$	36,406	$	36,406	$	(6,504	)
Total cost method investments and other assets			$	—	$	—	$	36,406	$	36,406	$	(6,504	)