Fair Value Measurement

Valuation of Financial Assets and Liabilities

The FASB has established a valuation hierarchy for disclosure of the inputs used to measure estimated fair value of financial assets and liabilities, such as securities. This hierarchy categorizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs 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 estimated 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. Estimated fair value is principally based on market values obtained from a third party pricing service. Factors that are used in determining estimated 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, 2016 and December 31, 2015, 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 are classified as Level 2 because the pricing service from which the Company has obtained estimated fair values for these instruments uses valuation models that use observable market inputs in addition to trading 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 securities ("ARS") because quoted prices are unavailable due to failed auctions. The Company’s ARS portfolio, which was comprised entirely of an investment grade student loan ARS, was sold during the first quarter of 2016. The par value of this security was $1,000,000 as of December 31, 2015, with approximately 97.0% 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 utilized another third party pricing service to assist in the determination of the estimated fair market value of these securities. This service used a proprietary valuation model that considered 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 pricing service provided a range of values to the Company for its ARS. The Company recorded the estimated fair value based on the midpoint of the range and believes that this valuation is the most reasonable estimate of fair value. In 2015, the difference in the low and high values of the ranges was approximately one to four percent of the carrying value of the Company’s ARS.

The following table presents, by level, the financial assets carried at estimated fair value measured on a recurring basis as of March 31, 2016 and December 31, 2015. The table does not include cash on hand and also does not include assets that are measured at historical cost or any basis other than fair value. Level 3 assets are comprised solely of ARS.



As of March 31, 2016	Level 1		Level 2		Level 3		Total
Short-term investments	$	7,520,069	$	—	$	—	$	7,520,069
Equity securities:
Common stock	37,681,569		—		—		37,681,569
Fixed maturities:
Obligations of U.S. states, territories and political subdivisions*	—		88,650,329		—		88,650,329
Corporate debt securities*	—		17,733,494		—		17,733,494
Total	$	45,201,638	$	106,383,823	$	—	$	151,585,461



As of December 31, 2015	Level 1		Level 2		Level 3		Total
Short-term investments	$	6,865,406	$	—	$	—	$	6,865,406
Equity securities:
Common stock	37,513,464		—		—		37,513,464
Fixed maturities:
Obligations of U.S. states, territories and political subdivisions*	—		87,640,140		—		87,640,140
Corporate debt securities*	—		17,486,344		939,900		18,426,244
Total	$	44,378,870	$	105,126,484	$	939,900	$	150,445,254

*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, 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 respective 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 estimated 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. These items are included in other investments 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.

The carrying amounts and estimated fair values of these financial instruments (please note investments carried at estimated fair value are disclosed in a previous table) as of March 31, 2016 and December 31, 2015 are presented in the following table:



As of March 31, 2016	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash	$	21,873,731	$	21,873,731	$	21,873,731	$	—	$	—
Cost-basis investments	3,727,074		4,135,512		—		—		4,135,512
Accrued dividends and interest	1,320,942		1,320,942		1,320,942		—		—
Total	$	26,921,747	$	27,330,185	$	23,194,673	$	—	$	4,135,512



As of December 31, 2015	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash	$	21,790,068	$	21,790,068	$	21,790,068	$	—	$	—
Cost-basis investments	3,588,314		3,684,020		—		—		3,684,020
Accrued dividends and interest	1,004,126		1,004,126		1,004,126		—		—
Total	$	26,382,508	$	26,478,214	$	22,794,194	$	—	$	3,684,020

The following table presents a reconciliation of the Company’s assets measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3), which are all ARS securities, for the period ended March 31, 2016 and the year ended December 31, 2015:



Changes in fair value during the period ended:	2016			2015
Beginning balance at January 1	$	939,900		$	939,100
Redemptions and sales	(1,000,000		)	—
Realized gain – included in net realized gain on investments	74,996			—
Unrealized (loss) gain – included in other comprehensive income	(14,896		)	800
Ending balance, net	$	—		$	939,900

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 March 31, 2016 and December 31, 2015. The following table summarizes the corresponding estimated fair value hierarchy of such investments at March 31, 2016 and December 31, 2015 and the related impairments recognized:

As of March 31, 2016

Valuation

Method

Impaired

Level 1

Level 2

Level 3

Total at

Estimated

Fair

Value

Impairment

Losses

Cost-basis investments

Fair Value

—

Total cost-basis investments

—



As of December 31, 2015	Valuation Method	Impaired	Level 1		Level 2		Level 3		Total at Estimated Fair Value		Impairment Losses
Cost-basis investments	Fair Value	Yes	$	—	$	—	$	163,350	$	163,350	$	(233,069	)
Total cost-basis investments			$	—	$	—	$	163,350	$	163,350	$	(233,069	)