Note 2 – Investments

Available for Sale Securities – Fixed Maturity and Equity Securities

The following tables provide a summary of fixed maturities available for sale and equity securities by original or amortized cost and estimated fair value:

December 31, 2012		Original or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Investments available for sale:
Fixed maturities
U.S. Government and govt. agencies and authorities	$	33,430,165	$	5,457,009	$	0	$	38,887,174
States, municipalities and political subdivisions		160,000		6,637		0		166,637
U.S. special revenue and assessments		2,150,070		153,545		0		2,303,615
Collateralized mortgage obligations		2,241,384		183,409		(8)		2,424,785
Public utilities		399,900		63,662		0		463,562
All other corporate bonds		135,145,198		9,747,565		(1,811,251)		143,081,512
		173,526,717		15,611,827		(1,811,259)		187,327,285
Equity securities		29,497,001		1,303,328		(295,415)		30,504,914
Total	$	203,023,718	$	16,915,155	$	(2,106,674)	$	217,832,199

December 31, 2011		Original or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Investments available for sale:
Fixed maturities
U.S. Government and govt. agencies and authorities	$	56,794,363	$	13,805,565	$	0	$	70,599,928
States, municipalities and political subdivisions		235,000		6,317		0		241,317
Collateralized mortgage obligations		750,944		11,756		(2,973)		759,727
Public utilities		399,887		62,188		0		462,075
All other corporate bonds		49,334,206		4,901,684		(1,715,760)		52,520,130
		107,514,400		18,787,510		(1,718,733)		124,583,177
Equity securities		16,200,043		1,216,286		(116,701)		17,299,628
Total	$	123,714,443	$	20,003,796	$	(1,835,434)	$	141,882,805

The following table provides a summary of fixed maturities by contractual maturity as of December 31, 2012. Actual maturities could differ from contractual maturities due to call or prepayment provisions:

Fixed Maturities Available for Sale December 31, 2012		Amortized Cost		Estimated Fair Value

Due in one year or less	$	4,067,722	$	4,116,580
Due after one year through five years		22,420,385		24,718,707
Due after five years through ten years		105,150,475		113,890,802
Due after ten years		39,643,584		42,173,173
Collateralized mortgage obligations		2,244,551		2,428,023
Total	$	173,526,717	$	187,327,285

By insurance statute, the majority of the Company's investment portfolio is invested in investment grade securities to provide ample protection for policyholders.

Below investment grade debt securities generally provide higher yields and involve greater risks than investment grade debt securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities is usually more limited than for investment grade debt securities. Debt securities classified as below-investment grade are those that receive a Standard & Poor's rating of BB or below.

The Company held, below investment grade investments with an amortized cost of $19,080,167 and $1,843,314 as of December 31, 2012 and 2011, respectively. The investments are all classified as "All other corporate bonds".

The fair value of investments with sustained gross unrealized losses at December 31, 2012 and 2011 are as follows:

December 31, 2012		Less than 12 months			12 months or longer			Total

		Fair value	Unrealized losses		Fair value	Unrealized losses		Fair value	Unrealized losses
Collateralized mortgage obligations	$	4,513	(8)	$	0	0	$	4,513	(8)
All other corporate bonds		13,776,705	(245,846)		385,823	(1,565,405)		14,162,528	(1,811,251)
Total fixed maturities	$	13,781,218	(245,854)	$	385,823	(1,565,405)	$	14,167,041	(1,811,259)

Equity securities	$	594,081	(295,415)	$	0	0	$	594,081	(295,415)

December 31, 2011		Less than 12 months			12 months or longer			Total

		Fair value	Unrealized losses		Fair value	Unrealized losses		Fair value	Unrealized losses
Collateralized mortgage obligations	$	7,008	(36)	$	97,868	(2,937)	$	104,876	(2,973)
All other corporate bonds		3,915,393	(17,574)		1,268,583	(1,698,186)		5,183,976	(1,715,760)
Total fixed maturities	$	3,922,401	(17,610)	$	1,366,451	(1,701,123)	$	5,288,852	(1,718,733)

Equity securities	$	848,032	(55,141)	$	292,441	(61,560)	$	1,140,473	(116,701)

The following table provides additional information regarding the number of securities that were in an unrealized loss position for greater than or less than twelve months:

	Less than 12 months	12 months or longer	Total
As of December 31, 2012
Fixed maturities	8	3	11
Equity securities	9	0	9
As of December 31, 2011
Fixed maturities	5	6	11
Equity securities	2	1	3

Substantially all of the unrealized losses on fixed maturities available for sale at December 31, 2012 and 2011 are attributable to changes in market interest rates and general disruptions in the credit market subsequent to purchase. The unrealized losses on equity investments were primarily attributable to normal market fluctuations. The Company does not currently intend to sell nor does it expect to be required to sell any of the securities in an unrealized loss position. Based upon the Company's expected continuation of receipt of contractually required principal and interest payments and its intent and ability to retain the securities until price recovery, as well as the Company's evaluation of other relevant factors, the Company deems these securities to be temporarily impaired as of December 31, 2012 and 2011.

Trading Securities

Securities designated as trading securities are reported at fair value, with gains or losses resulting from changes in fair value recognized in net investment income on the Consolidated Statements of Operations. Trading securities include bonds, exchange traded equities, exchange traded options and exchange traded futures. Trading securities carried as liabilities are securities sold short. A gain, limited to the price at which the security was sold short, or a loss, potentially unlimited in size, will be recognized upon the termination of the short sale. The fair value of derivatives included in trading security assets and trading security liabilities as of December 31, 2012 was $6,745,528 and ($6,050,344), respectively. The fair value of derivatives included in trading security assets and trading security liabilities as of December 31, 2011 was $3,217,420 and $(4,187,885), respectively. The derivatives held by the Company are for income generation purposes only.

Earnings from trading securities are classified in cash flows from operating activities.

The following table reflects trading securities revenue charged to net investment income for the periods ended December 31:

		2012		2011

Net unrealized gains (losses)	$	(352,761)	$	(1,604,757)
Net realized gains (losses)		2,918,279		(737,328)
Net unrealized and realized gains (losses)	$	2,565,518	$	(2,342,085)

Mortgage Loans and Discounted Mortgage Loans on Real Estate

The Company, from time to time, acquires mortgage loans through participation agreements with FSNB. FSNB has been able to provide the Company with additional expertise and experience in underwriting commercial and residential mortgage loans, which provide more attractive yields than the traditional bond market. The Company is able to receive participations from FSNB for three primary reasons: 1) FSNB has already reached its maximum lending limit to a single borrower, but the borrower is still considered a suitable risk; 2) the interest rate on a particular loan may be fixed for a long period that is more suitable for UG given its asset-liability structure; and 3) FSNB's loan growth might at times outpace its deposit growth, resulting in FSNB participating such excess loan growth rather than turning customers away. For originated loans, the Company's Management is responsible for the final approval of such loans after evaluation. Before a new loan is issued, the applicant is subject to certain criteria set forth by Company Management to ensure quality control. These criteria include, but are not limited to, a credit report, personal financial information such as outstanding debt, sources of income, and personal equity. Once the loan is approved, the Company directly funds the loan to the borrower. The Company bears all risk of loss associated with the terms of the mortgage with the borrower.

The Company began purchasing discounted commercial mortgage loans in 2009. Management has extensive background and experience in the analysis and valuation of commercial real estate. The discounted loans are available through the FDIC's sale of assets of closed banks and from banks wanting to reduce their loan portfolios. The loans are available on a loan by loan bid process. Once a loan has been acquired, contact is made with the appropriate individuals to begin a dialog with a goal of determining the borrower's willingness to work together. There are generally three paths a discounted loan will take: the borrowers pay as required; a settlement is reached with the loan being paid off at a discounted value; or the loan is foreclosed.

During 2012 and 2011, the Company acquired $22,244,731 and $11,123,386 in mortgage loans, respectively, including both regular participation mortgage loans as well as discounted mortgage loans. FSNB services the mortgage loan portfolio of the Company. The Company pays FSNB a .25% servicing fee on these loans and a one-time fee at loan origination of .50% of the original loan amount to cover costs incurred by FSNB relating to the processing and establishment of the loan.

During 2012 and 2011, the maximum and minimum lending rates for mortgage loans were:

	2012		2011
	Maximum rate	Minimum rate	Maximum rate	Minimum rate
Commercial Loans	10.00%	3.21%	18.00%	3.24%
Residential Loans	8.00%	6.00%	8.00%	7.00%

Most mortgage loans are first position loans. Loans issued are generally limited to no more than 80% of the appraised value of the property.

The Company has in place a monitoring system to provide Management with information regarding potential troubled loans. Letters are sent to each mortgagee when the loan becomes 30 days or more delinquent. Management is provided with a monthly listing of loans that are 60 days or more past due along with a brief description of what steps are being taken to resolve the delinquency. All loans 90 days or more past due are placed on a non-performing status and classified as delinquent loans. Quarterly, coinciding with external financial reporting, the Company reviews each delinquent loan and determines how each delinquent loan should be classified. Management believes the current internal controls surrounding the mortgage loan selection process provide a quality portfolio with minimal risk of foreclosure and/or negative financial impact.

Management has conservatively decided to place the loans in the discounted mortgage loan portfolio on a non-accrual status, due to the instability of the borrowers. The Company additionally only recognizes any discount once the Company's entire basis in a loan has been recovered.

On the remainder of the mortgage loan portfolio, interest accruals are analyzed based on the likelihood of repayment. In no event will interest continue to accrue when accrued interest along with the outstanding principal exceeds the net realizable value of the property. The Company does not utilize a specified number of days delinquent to cause an automatic non-accrual status.

A mortgage loan reserve is established and adjusted based on Management's quarterly analysis of the portfolio and any deterioration in value of the underlying property which would reduce the net realizable value of the property below its current carrying value. The Company acquired the discounted mortgage loans at below fair value, therefore no reserve for delinquent loans is deemed necessary. Those not currently paying are being vigorously worked by Management. The current discounted commercial mortgage loan portfolio has an average price of 36.1% of face value and Management has determined that this deep discount provides a financial cushion or built in allowance for any of the loans that are not currently performing within the portfolio of loans purchased. The mortgage loan reserve was $0 at December 31, 2012 and 2011.

The following table summarizes the number loans held in the discounted mortgage loan portfolio and the carrying value of the loans as of December 31, 2012:

Payment Frequency	Number of Loans		Carrying Value

No payments received	13	$	5,558,962
One-time payment received	3		0
Irregular payments received	17		7,681,387
Regular payments received	23		13,096,604
Total	56	$	26,336,953

The following table summarizes discounted mortgage loan holdings of the Company for the periods ended December 31:

		2012		2011
In good standing	$	3,945,701	$	6,657,971
Overdue interest over 90 days		3,368,750		5,907,192
Restructured		7,685,690		7,726,156
In process of foreclosure		11,336,812		7,176,601
Total discounted mortgage loans	$	26,336,953	$	27,467,920
Total foreclosed discounted mortgage loans during the year	$	2,603,017	$	21,059,386

Investment Real Estate

Real estate acquired through foreclosure, consisting of properties obtained through foreclosure proceedings or acceptance of a deed in lieu of foreclosure, is reported on an individual asset basis at the lower of cost or fair value, less disposal costs. Fair value is determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources. When properties are acquired through foreclosure, any excess of the loan balance at the time of foreclosure over the fair value of the real estate held as collateral is recognized and charged to the income statement. Based upon Management's evaluation of the real estate acquired through foreclosure, additional expense is recorded when necessary in an amount sufficient to reflect any declines in estimated fair value. Gains and losses recognized on the disposition of the properties are recorded as realized gains and losses in the consolidated statements of income.

Analysis of Investment Operations

The following table reflects the Company's net investment income for the periods ended December 31:

		2012		2011

Fixed maturities	$	7,490,812	$	4,277,019
Equity securities		1,745,375		971,008
Trading securities		2,565,518		(2,342,085)
Mortgage loans		1,022,895		645,838
Discounted mortgage loans		4,186,155		8,231,832
Real estate		8,384,417		6,820,847
Policy loans		809,885		807,389
Short-term investments		0		156,527
Cash and cash equivalents		7,647		8,396
Total consolidated investment income		26,212,704		19,576,771
Investment expenses		(7,693,447)		(8,378,606)
Consolidated net investment income	$	18,519,257	$	11,198,165

The following table reflects the Company's net realized investments gains and losses for the periods ended December 31:

2012		Gross Realized Gains		Gross Realized (Losses)		Net Realized Gains (Losses)

Fixed maturities	$	9,816,015	$	(409,745)	$	9,406,270
Real estate		4,533,747		(14,194)		4,519,553
Common stock		566,894		0		566,894
Fixed maturities – OTTI		0		(12,680)		(12,680)
Common stock – OTTI		0		(174,725)		(174,725)
Total realized gains (losses)	$	14,916,656	$	(611,344)	$	14,305,312

2011		Gross Realized Gains		Gross Realized (Losses)		Net Realized Gains (Losses)

Fixed maturities	$	9,290,554	$	(376,567)	$	8,913,987
Equity securities		0		(126,193)		(126,193)
Real estate		7,371,693		(50,634)		7,321,059
Mortgage loans		0		(203,440)		(203,440)
Real estate – OTTI		0		(3,360,430)		(3,360,430)
Mortgage loans – OTTI		0		(982,354)		(982,354)
Total realized gains (losses)	$	16,662,247	$	(5,099,618)	$	11,562,629

Other-Than-Temporary Impairments

The Company regularly reviews its investment securities for factors that may indicate that a decline in fair value of an investment is other than temporary. The factors considered by Management in its regular review to identify and recognize other-than-temporary impairment losses on fixed maturities include, but are not limited to: the length of time and extent to which the fair value has been less than cost; the Company's intent to sell, or be required to sell, the debt security before the anticipated recovery of its remaining amortized cost basis; the financial condition and near-term prospects of the issuer; adverse changes in ratings announced by one or more rating agencies; subordinated credit support, whether the issuer of a debt security has remained current on principal and interest payments; current expected cash flows; whether the decline in fair value appears to be issuer specific or, alternatively, a reflection of general market or industry conditions, including the effect of changes in market interest rates. If the Company intends to sell a debt security, or it is more likely than not that it would be required to sell a debt security before the recovery of its amortized cost basis, the entire difference between the security's amortized cost basis and its fair value at the balance sheet date would be recognized by a charge to other-than-temporary losses in the Consolidated Statements of Operations.

Equity securities may experience other-than-temporary impairments in the future based on the prospects for full recovery in value in a reasonable period of time and the Company's ability and intent to hold the security to recovery. If a decline in fair value is judged by Management to be other-than-temporary or Management does not have the intent or ability to hold a security, a loss is recognized by a charge to other-than-temporary impairment losses in the Consolidated Statements of Operations.

Based on Management's review of the investment portfolio, the Company recorded the following losses for other-than-temporary impairments in the Consolidated Statements of Operations for the periods ended December 31:

		2012		2011

Other than temporary impairments:
Common stock	$	174,725	$	0
Discounted mortgage loans		0		982,354
Real estate		0		3,360,430
States, municipalities and political subdivisions		12,680		0
Total other than temporary impairments	$	187,405	$	4,342,784

The other-than-temporary impairments recognized during 2012 were due to Management's assessment and consideration of the length of time the securities have remained in an unrealized loss position.

The other-than-temporary impairments recognized during 2011 were due to appraisal valuations and Management's analysis of discounted mortgage loans and real estate. The mortgage loans and real estate were written down to better reflect current expected market values.

Investments on Deposit

The Company had investments with a fair value of $11,660,630 and $10,998,036 on deposit with various state insurance departments as of December 31, 2012 and 2011, respectively.