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Fair Value Measurement
 3 Months Ended
Mar. 31, 2012
Fair Value Measurement [Abstract]  
Fair Value Measurement

Note 6 - Fair Value Measurement

     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 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, 2012 and December 31, 2011, 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 auction rate securities ("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 the fair market value of these securities on a quarterly basis. 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 March 31, 2012 and December 31, 2011:

  2012   2011  
Cumulative probability of earning maximum rate until maturity 0.0-0.2 % 0.0-0.1 %
Cumulative probability of principal returned prior to maturity 95.7-98.6%   95.4-98.7%  
Cumulative probability of default at some future point 1.4-4.3 % 1.3-4.6 %
Liquidity risk premium 4.0-4.5 % 4.5-5.0 %

 

     Significant increases or decreases in any of the inputs in isolation would 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. On a quarterly basis, review of the valuation is performed by the Company with significant changes in quarter over quarter values compared to changes to the current economic environment. The Company believes that the midpoint valuation is the most reasonable estimate of fair value. In 2012 and 2011, the difference in the low and high values of the ranges was between approximately three and four 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 $4,000,000 and $5,000,000 as of March 31, 2012 and December 31, 2011, respectively, with approximately 75.2% and 79.6% as of March 31, 2012 and December 31, 2011, 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 March 31, 2012 and December 31, 2011. 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.

As of March 31, 2012   Level 1   Level 2   Level 3   Total
Short-term Investments $ 8,571,468 $ - $ - $ 8,571,468
Equity Securities                
Common stock and nonredeemable preferred stock   26,824,431   -   -   26,824,431
Fixed Maturities                
Obligations of states and political subdivisions*   -   65,654,123   934,200   66,588,323
Corporate Debt Securities*   -   17,791,037   2,763,500   20,554,537
Total $ 35,395,899 $ 83,445,160 $ 3,697,700 $ 122,538,759

 

As of December 31, 2011   Level 1   Level 2   Level 3   Total
Short-term Investments $ 14,112,262 $ - $ - $ 14,112,262
Equity Securities                
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 $ 36,662,237 $ 80,854,965 $ 4,552,400 $ 122,069,602

 

*Denotes fair market value obtained from pricing services.

 

     There were no transfers into or out of Levels 1 and 2 during the period. The following table presents a reconciliation of the Company's assets measured at fair value using significant unobservable inputs (Level 3) for the period ended March 31, 2012 and the year ended December 31, 2011:

Changes in fair value during the period ended:   2012     2011  
Beginning balance at January 1 $ 4,552,400   $ 5,472,244  
Redemptions and sales   (1,000,000 )   (900,000 )
Realized gain-included in realized (loss) gain on investments   40,057     43,199  
Realized loss-included in realized (loss) gain on investments   -     (101,861 )
Unrealized gain-included in other comprehensive income   105,243     38,818  
Ending balance $ 3,697,700   $ 4,552,400  

 

     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.

The Company uses various financial instruments in the normal course of its business. The following tables present the carrying value and fair value of the Company's financial assets disclosed, but not carried, at fair value at March 31, 2012 and December 31, 2011, and the level within the fair value hierarchy at which such assets are measured.

As of March 31, 2012:

        Estimated Fair              
Financial Assets   Carrying Value   Value   Level 1   Level 2     Level 3
Cash $ 16,465,383 $ 16,465,383 $ 16,465,383 $   - $ -
Cost-basis investment   1,371,329   1,757,994   -     -   1,371,329
Accrued dividends and interest   962,560   962,560   52,272     -   910,288
Total $ 18,799,272 $ 19,185,937 $ 16,517,655 $   - $ 2,281,617
 
As of December 31, 2012                      
Cash $ 18,042,258 $ 18,042,258 $ 18,042,258 $   - $ -
Cost-basis investment   1,303,887   1,688,262   -     -   1,303,887
Accrued dividends and interest   1,108,156   1,108,156   39,857     -   1,068,299
Total $ 20,454,301 $ 20,838,676 $ 18,082,115 $   - $ 2,372,186

 

     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 March 31, 2012 and December 31, 2011. There were no assets valued at fair market value on a non-recurring basis as of March 31, 2012.

 

The following table summarizes the corresponding estimated fair value hierarchy of such investments at December 31, 2011 and the related impairments recognized.

                    Total at      
  Valuation                 Estimated   Impairment  
December 31, 2011 Method Impaired Level 1 Level 2   Level 3   Fair 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 )