3. 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:


				Gross		Gross		Estimated
		Amortized		Unrealized		Unrealized		Fair
December 31, 2011		Cost		Gains		Losses		Value
Fixed maturities, available-for-sale, at fair value-
Obligations of states and political subdivisions	$	62,042,929	$	5,583,733	$	13,869	$	67,612,793
Corporate debt securities		12,188,639		1,202,149		148,616		13,242,172
Auction rate securities		4,552,400		-		-		4,552,400
Total	$	78,783,968	$	6,785,882	$	162,485	$	85,407,365
Equity securities, available-for-sale at fair value-
Common stocks and nonredeemable preferred stocks	$	17,652,745	$	4,939,053	$	41,823	$	22,549,975
Total	$	17,652,745	$	4,939,053	$	41,823	$	22,549,975
Short-term investments-
Certificates of deposit and other	$	14,112,262	$	-	$	-	$	14,112,262
Total	$	14,112,262	$	-	$	-	$	14,112,262


				Gross		Gross		Estimated
		Amortized		Unrealized		Unrealized		Fair
December 31, 2010		Cost		Gains		Losses		Value
Fixed maturities, available-for-sale, at fair value-
Obligations of states and political subdivisions	$	64,120,509	$	3,248,821	$	166,690	$	67,202,640
Corporate debt securities		12,258,359		1,123,051		22,737		13,358,673
Auction rate securities		5,405,394		66,850		-		5,472,244
Total	$	81,784,262	$	4,438,722	$	189,427	$	86,033,557
Equity securities, available-for sale at fair value-
Common stocks and nonredeemable preferred stocks	$	9,458,773	$	4,430,175	$	16,578	$	13,872,370
Total	$	9,458,773	$	4,430,175	$	16,578	$	13,872,370
Short-term investments-
Certificates of deposit and other	$	27,203,550	$	-	$	-	$	27,203,550
Total	$	27,203,550	$	-	$	-	$	27,203,550

The scheduled maturities of fixed maturity securities at December 31, 2011 were as follows:


		Available-for-Sale
		Amortized		Fair
		Cost		Value
Due in one year or less	$	7,199,401	$	7,326,825
Due after one year through five years		31,480,952		33,615,289
Due five years through ten years		31,679,226		35,234,049
Due after ten years		8,424,389		9,231,202
Total	$	78,783,968	$	85,407,365

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


		2011		2010

Fixed maturities	$	3,233,988	$	3,411,888
Equity securities		347,843		234,598
Invested cash and other short-term investments		12,725		23,433
Miscellaneous interest		480		1,259
Investment income	$	3,595,036	$	3,671,178

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


		2011			2010
Gross realized gains:
Obligations of states and political subdivisions	$	20,845		$	98,197
Common stocks and nonredeemable preferred stocks		529,810			1,193,029
Auction rate securities		43,200			-
Total		593,855			1,291,226
Gross realized losses:
Obligations of states and political subdivisions		-			(111,500	)
Common stocks and nonredeemable preferred stocks		(247,117	)		(97,157	)
Other than temporary impairment of securities		(280,987	)		(335,551	)
Total		(528,104	)		(544,208	)
Net realized gain	$	65,751		$	747,018

Realized gains and losses are determined on the specific identification method. Also included in net realized gain on sales in the Consolidated Statements of Income are net gains and impairments of other investments and net losses on sales and impairments of property acquired in the settlement of claims totaling $(37,192) and $(92,344) for the twelve months ended December 31, 2011 and 2010, respectively.

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, 2011 and 2010.


		Less than 12 Months					12 Months or Longer						Total
December 31, 2011		Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Obligations of states and
political subdivisions	$	663,666	$	(64	)	$	1,023,180	$	(13,805	)	$	1,686,846	$	(13,869	)
Corporate debt securities		3,015,769		(148,616	)		-		-			3,015,769		(148,616	)
Total fixed maturity
securities	$	3,679,435	$	(148,680	)	$	1,023,180	$	(13,805	)	$	4,702,615	$	(162,485	)
Equity securities		957,072		(40,893	)		104,130		(930	)		1,061,202		(41,823	)
Total temporarily
impaired securities	$	4,636,507	$	(189,573	)	$	1,127,310	$	(14,735	)	$	5,763,817	$	(204,308	)

December 31, 2010
Obligations of states and
political subdivisions	$	7,008,818	$	(166,690	)	$	-	$	-		$	7,008,818	$	(166,690	)
Corporate debt securities		1,077,263		(22,737	)		-		-			1,077,263		(22,737	)
Total fixed maturity
securities	$	8,086,081	$	(189,427	)	$	-	$	-		$	8,086,081	$	(189,427	)
Equity securities		746,388		(7,710	)		220,635		(8,868	)		967,023		(16,578	)
Total temporarily
impaired securities	$	8,832,469	$	(197,137	)	$	220,635	$	(8,868	)	$	9,053,104	$	(206,005	)

As of December 31, 2011, the Company held $4,702,615 in fixed maturity securities with unrealized losses of $162,485. As of December 31, 2010, the Company held $8,086,081 in fixed maturity securities with unrealized losses of $189,427. 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, 2011, the Company held $1,061,202 in equity securities with unrealized losses of $41,823. As of December 31, 2010, the Company held $967,023 in equity securities with unrealized losses of $16,578. 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 13 and 26 securities had unrealized losses at December 31, 2011 and December 31, 2010, 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 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 intent not to sell. During 2010, the Company recorded an other-than-temporary impairment charge in the amount of $382,692 related to securities, of which, $281,156 was related to Level 3 ARS that have had a history of being below cost and a change in intent not to sell. Other-than-temporary impairment charges are included in net realized gain on investments in the Consolidated Statements of Income.

Valuation Hierarchy. 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.

Valuation Techniques. 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.

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. Their fair value is principally based on market values obtained from a third party pricing service. Factors that are used in determining their 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 the pricing service, although as discussed below, the Company does consult other price resources when confirming that the prices it obtains reflect the fair values of the instruments in accordance with 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, 2011 and 2010, 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 third party 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 ARS because quoted prices were unavailable due to the failure of auctions. Some of the inputs to this model are unobservable in the market and are significant—therefore, the Company utilizes another third party pricing service to assist in the determination of fair market value of these securities. That 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, 2011 and 2010:


	2011		2010
Cumulative probability of earning maximum rate until maturity	0.0-0.1	%	0.0-0.8	%
Cumulative probability of principle returned prior to maturity	95.4-98.7	%	85.3-98.6	%
Cumulative probability of default at some future point	1.3-4.6	%	1.4-14.7	%

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 2011 and 2010, the difference in the low and high values of the ranges was approximately three percent of the carrying value of the Company's ARS.

The Company's ARS portfolio is comprised entirely of investment grade student loan ARS. The par value of the ARS bonds was $5,000,000 and $5,900,000 as of December 31, 2011 and 2010, respectively, with approximately 79.6% and 82.2% as of December 31, 2011 and 2010, respectively, guaranteed by the U.S. Department of Education.

The following table presents, by level, the financial assets carried at fair value measured on a recurring basis as of December 31, 2011 and 2010. 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, 2011		Level 1		Level 2		Level 3		Total
Equity
Common stock and nonredeemable preferred stock	$	22,549,975	$	-	$	-	$	22,549,975
Fixed Maturities
Obligations of states and political subdivisions*		-		67,612,793		1,834,700		69,447,493
Corporate debt securities*		-		13,242,172		2,717,700		15,959,872
Total	$	22,549,975	$	80,854,965	$	4,552,400	$	107,957,340


As of December 31, 2010		Level 1		Level 2		Level 3		Total
Equity Securities
Common stock and nonredeemable preferred stock	$	13,872,370	$	-	$	-	$	13,872,370
Fixed Maturities
Obligations of states and political subdivisions*		-		67,202,640		2,618,844		69,821,484
Corporate debt securities*		-		13,358,673		2,853,400		16,212,073
Total	$	13,872,370	$	80,561,313	$	5,472,244	$	99,905,927

*Denotes fair market value obtained from pricing services.

There were no transfers into or out of Levels 1 and 2 during 2011. The following table presents a reconciliation of the Company's assets measured at fair value using significant unobservable inputs (Level 3) as defined for the period ended December 31, 2011 and 2010:


Changes in fair value during the year ended December 31:		2011			2010
Beginning balance at January 1	$	5,472,244		$	10,097,795
Redemptions and sales		(900,000	)		(4,938,500	)
Realized gain – included in net realized gain on investments		43,199			78,270
Realized loss – included in net realized gain on investments		(101,861	)		(392,656	)
Unrealized gain - included in other comprehensive income		38,818			627,335
Ending balance at December 31	$	4,552,400		$	5,472,244

Certain cost method investments are measured at estimated fair value on a non-recurring basis, such as investments that are impaired during the period and recorded at estimated fair value in the Consolidated Financial Statements as of December 31, 2011 and 2010. The following table summarizes the corresponding estimated fair value hierarchy of such investments at December 31, 2011 and 2010 and the related impairments recognized:


										Total
										Estimated
										Fair
	Valuation									Market		Impairment
December 31, 2011	Method	Impaired	Level 1		Level 2			Level 3		Value		Losses
Cost method
investments	Fair Value	Yes	$	-	$	-	$	58,281	$	58,281	$	(28,904	)
Other assets	Fair Value	Yes		-		-		17,000		17,000		(15,500	)
Total cost method
investments and other
assets			$	-	$	-	$	75,281	$	75,281	$	(44,404	)


December 31, 2010
Cost method
investments	Fair Value	Yes	$	-	$	-	$	52,625	$	52,625	$	(47,141	)
Other assets	Fair Value	Yes		-		-		-		-		(47,550	)
Total cost method
investments and other
assets			$	-	$	-	$	52,625	$	52,625	$	(94,691	)

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.