Fair Value Measurement

Valuation of Financial Assets and Liabilities

The Financial Accounting Standards Board ("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 March 31, 2014 and December 31, 2013, 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 March 31, 2014 and December 31, 2013, with approximately 97.0% as of March 31, 2014 and December 31, 2013, 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 March 31, 2014 and December 31, 2013:



	2014	2013
Cumulative probability of earning maximum rate until maturity	—%	—%
Cumulative probability of principal returned prior to maturity	95.5%	95.6%
Cumulative probability of default at some future point	4.5%	4.4%

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 2014 and 2013, the difference in the low and high values of the ranges was between 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 March 31, 2014 and December 31, 2013. 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 March 31, 2014	Level 1		Level 2		Level 3		Total
Short-term Investments	$	8,941,000	$	—	$	—	$	8,941,000
Equity Securities
Common stock and nonredeemable preferred stock	36,286,771		—		—		36,286,771
Fixed Maturities
Obligations of states and political subdivisions*	—		70,915,065		—		70,915,065
Corporate debt securities*	—		19,011,098		933,400		19,944,498
Total	$	45,227,771	$	89,926,163	$	933,400	$	136,087,334



As of December 31, 2013	Level 1		Level 2		Level 3		Total
Short-term Investments	$	7,926,373	$	—	$	—	$	7,926,373
Equity Securities
Common stock and nonredeemable preferred stock	36,144,065		—		—		36,144,065
Fixed Maturities
Obligations of states 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

*Denotes fair market value obtained from pricing services.

There were no transfers into or out of Levels 1, 2 or 3 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 market value of the underlying entity. These items are included in prepaid expenses and other assets in the Consolidated Balance Sheets.

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 contingent consideration was estimated based on the discounted value of 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 10. This item is included in accounts payable and accrued liabilities in the Consolidated Balance Sheets.

The carrying amounts and fair values of these financial instruments (please note investments are disclosed in a previous table) as of March 31, 2014 and December 31, 2013 are presented in the following table:



As of March 31, 2014	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash	$	20,592,694	$	20,592,694	$	20,592,694	$	—	$	—
Cost-basis investments	2,268,417		2,478,305		—		—		2,478,305
Accrued dividends and interest	1,124,075		1,124,075		1,124,075		—		—
Total Financial Assets	$	23,985,186	$	24,195,074	$	21,716,769	$	—	$	2,478,305
Financial Liabilities
Contingent consideration	$	341,250	$	341,250	$	—	$	—	$	341,250
Total Financial Liabilities	$	341,250	$	341,250	$	—	$	—	$	341,250



As of December 31, 2013	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash	$	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 Financial Assets	$	26,560,888	$	26,702,761	$	24,633,459	$	—	$	2,069,302
Financial Liabilities
Contingent consideration	$	341,250	$	341,250	$	—	$	—	$	341,250
Total Financial Liabilities	$	341,250	$	341,250	$	—	$	—	$	341,250

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 period ended March 31, 2014 and the year ended December 31, 2013:



Changes in fair value during the period ended:	2014			2013
Beginning balance at January 1	$	935,700		$	932,200
Redemptions and sales	—			—
Realized gain – included in net realized gain on investments	—			—
Unrealized (loss) gain - included in other comprehensive income	(2,300		)	3,500
Ending balance, net	$	933,400		$	935,700

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 acquisition consideration, for the period ended March 31, 2014 and the year ended December 31, 2013:



Changes in fair value during the period ended:	2014		2013
Beginning balance at January 1	$	341,250	$	691,250
Addition of contingent consideration	—		—
Payment for contingent consideration	—		(350,000		)
Ending balance, net	$	341,250	$	341,250

Certain cost method 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 March 31, 2014 and December 31, 2013. The following table summarizes the corresponding estimated fair value hierarchy of such investments at March 31, 2014 and December 31, 2013 and the related impairments recognized:



As of March 31, 2014	Valuation Method	Impaired	Level 1		Level 2		Level 3		Total at Estimated Fair Value		Impairment Losses
Cost method investments	Fair Value	Yes	$	—	$	—	$	22,682	$	22,682	$	(10,062	)
Total cost method investments			$	—	$	—	$	22,682	$	22,682	$	(10,062	)



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