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Fair Value of Financial Instruments | 9 Months Ended
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Sep. 30, 2022
Fair Value Disclosures [Abstract] |
Fair Value of Financial Instruments | Fair Value of Financial InstrumentsThe Company maximizes the use of observable inputs and minimizes the use of unobservable inputs to the extent possible to measure a financial instrument’s fair value. Observable inputs reflect the assumptions market participants would use in pricing an asset or liability, and are affected by the type of product, whether the product is traded on an active exchange or in the secondary market, as well as current market conditions. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Fair value is estimated by applying the hierarchy discussed in Note (2) Summary of Significant Accounting Policies of our Annual Report on Form 10-K which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized within Level 3 of the fair value hierarchy. The Company’s fair value measurements are based primarily on a market approach, which utilizes prices and other relevant information generated by market transactions involving identical or comparable financial instruments. Sources of inputs to the market approach include third-party pricing services, independent broker quotations and pricing matrices. Management analyzes the third-party valuation methodologies and its related inputs to perform assessments to determine the appropriate level within the fair value hierarchy and to assess reliability of values. Further, management has a process in place to review all changes in fair value that occurred during each measurement period. Any discrepancies or unusual observations are followed through to resolution through the source of the pricing as well as utilizing comparisons, if applicable, to alternate pricing sources. The Company utilizes observable and unobservable inputs within its valuation methodologies. Observable inputs may include: benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. In addition, specific issuer information and other market data is used. Broker quotes are obtained from sources recognized to be market participants. Unobservable inputs may include: expected cash flow streams, default rates, supply and demand considerations and market volatility. Available for Sale Securities, at fair value The fair values of AFS securities are based on prices provided by an independent pricing service and a third-party investment manager. The Company obtains an understanding of the methods, models and inputs used by the independent pricing service and the third-party investment manager by analyzing the investment manager-provided pricing report. The following details the methods and assumptions used to estimate the fair value of each class of AFS securities and the applicable level each security falls within the fair value hierarchy: U.S. Treasury Securities, Obligations of U.S. Government Authorities and Agencies, Obligations of State and Political Subdivisions, Corporate Securities, Asset Backed Securities, and Obligations of Foreign Governments: Fair values were obtained from an independent pricing service and a third-party investment manager. The prices provided by the independent pricing service and third-party investment manager are based on quoted market prices, when available, non-binding broker quotes, or matrix pricing and fall under Level 2 or Level 3 in the fair value hierarchy. Certificates of Deposit: The estimated fair value of certificates of deposit approximate carrying value and fall under Level 1 of the fair value hierarchy. Equity Securities The fair values of publicly traded common and preferred equity securities and exchange traded funds (“ETFs”) are obtained from market value quotations provided by an independent pricing service and fall under Level 1 in the fair value hierarchy. The fair values of non-publicly traded common and preferred stocks are based on prices derived from multiples of comparable public companies and fall under Level 3 in the fair value hierarchy. Loans, at fair value Corporate Loans: These loans are comprised of middle market loans and bank loans and are generally classified under either Level 2 or Level 3 in the fair value hierarchy. To determine fair value, the Company uses quoted prices, including those provided from pricing vendors, which provide coverage of secondary market participants, where available. The values represent a composite of mark-to-market bid/offer prices. In certain circumstances, the Company will make its own determination of fair value of loans based on internal models and other unobservable inputs. Mortgage Loans Held for Sale: Mortgage loans held for sale are generally classified under Level 2 in the fair value hierarchy and fair value is based upon forward sales contracts with third-party investors, including estimated loan costs. Derivative Assets and Liabilities Derivatives for our mortgage business are primarily comprised of IRLCs, forward delivery contracts and TBA mortgage backed securities. The fair value of these instruments is based upon valuation pricing models, which represent the amount the Company would expect to receive or pay at the balance sheet date to exit the position. Our mortgage origination subsidiaries issue IRLCs to their customers, which are carried at estimated fair value on the Company’s condensed consolidated balance sheets. The estimated fair values of these commitments are generally calculated by reference to the value of the underlying loan associated with the IRLC net of costs to produce and an expected pull through assumption. The fair values of these commitments generally fall under Level 3 in the fair value hierarchy. Our mortgage origination subsidiaries manage their exposure by entering into forward delivery commitments with loan investors. For loans not locked with investors under a forward delivery commitment, the Company enters into hedge instruments, primarily TBAs, to protect against movements in interest rates. The fair values of TBA mortgage backed securities and forward delivery contracts generally fall under Level 2 in the fair value hierarchy. The remaining derivatives are generally comprised of a combination of swaps, options and short positions, which are generally classified as Level 2 in the fair value hierarchy. In addition, the Fortegra Additional Warrant (Warburg) is a derivative liability and classified as Level 3 in the fair value hierarchy. See Note (17) Stockholders’ Equity for additional information regarding the Fortegra Additional Warrant. Corporate Bonds Corporate bonds are generally classified under Level 2 in the fair value hierarchy and fair value is provided by a third-party investment manager, based on quoted market prices. We perform internal price verification procedures monthly to ensure that the prices provided are reasonable. Trade Claims Trade claims represent unsecured claims of bankrupt companies and are generally classified under Level 3 in the fair value hierarchy. The fair value is determined using valuation methodologies that consider a range of factors, including but not limited to the price at which the investment was acquired, the nature of the investment, local market conditions, current and projected operating performance, and financing transactions subsequent to the acquisition of the investment. The inputs are intended to reflect the assumptions a market participant would use in pricing the asset or liability. Securities Sold, Not Yet Purchased Securities sold, not yet purchased are generally classified under Level 1 or Level 2 in the fair value hierarchy, based on the leveling of the securities sold short, and fair value is provided by a third-party investment manager, based on quoted market prices. We perform internal price verification procedures monthly to ensure that the prices provided are reasonable. Mortgage Servicing Rights Mortgage servicing rights are classified under Level 3 in the fair value hierarchy and fair value is provided by a third-party valuation service. Various observable and unobservable inputs are used to determine fair value, including discount rate, cost to service and weighted average prepayment speed. The following tables present the Company’s fair value hierarchies for financial assets and liabilities, measured on a recurring basis:
| As of September 30, 2022
| Quoted prices in active markets Level 1 |  | Other significant observable inputs Level 2 |  | Significant unobservable inputs Level 3 |  | Fair value
Assets: |  |  |  |  |  |  |
Available for sale securities, at fair value: |  |  |  |  |  |  |
U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | — |  |  | $ | 356,759 |  |  | $ | — |  |  | $ | 356,759 |
Obligations of state and political subdivisions | — |  |  | 49,301 |  |  | — |  |  | 49,301 |
Obligations of foreign governments | — |  |  | 2,349 |  |  | — |  |  | 2,349 |
Certificates of deposit | 1,357 |  |  | — |  |  | — |  |  | 1,357 |
Asset backed securities | — |  |  | 15,982 |  |  | 220 |  |  | 16,202 |
Corporate securities | — |  |  | 158,113 |  |  | — |  |  | 158,113 |
Total available for sale securities, at fair value | 1,357 |  |  | 582,504 |  |  | 220 |  |  | 584,081 |
Loans, at fair value: |  |  |  |  |  |  |
Corporate loans | — |  |  | 2,455 |  |  | 10,129 |  |  | 12,584 |
Mortgage loans held for sale | — |  |  | 58,200 |  |  | — |  |  | 58,200 |
Total loans, at fair value | — |  |  | 60,655 |  |  | 10,129 |  |  | 70,784 |
Equity securities: |  |  |  |  |  |  |
Invesque | 19,190 |  |  | — |  |  | — |  |  | 19,190 |
Fixed income ETFs | 52,078 |  |  | — |  |  | — |  |  | 52,078 |
Other equity securities | 7,238 |  |  | — |  |  | 6,597 |  |  | 13,835 |
Total equity securities | 78,506 |  |  | — |  |  | 6,597 |  |  | 85,103 |
Other investments, at fair value: |  |  |  |  |  |  |
Corporate bonds | — |  |  | 41,494 |  |  | — |  |  | 41,494 |
Derivative assets | 17 |  |  | 6,232 |  |  | 1,505 |  |  | 7,754 |
Other | — |  |  | — |  |  | 324 |  |  | 324 |
Total other investments, at fair value | 17 |  |  | 47,726 |  |  | 1,829 |  |  | 49,572 |
Mortgage servicing rights (1) | — |  |  | — |  |  | 41,912 |  |  | 41,912 |
Total | $ | 79,880 |  |  | $ | 690,885 |  |  | $ | 60,687 |  |  | $ | 831,452 |
Liabilities: (2) |  |  |  |  |  |  |
Securities sold, not yet purchased | $ | 14,578 |  |  | $ | 36,660 |  |  | $ | — |  |  | $ | 51,238 |
Derivative liabilities | — |  |  | 7,715 |  |  | — |  |  | 7,715 |
Fortegra Additional Warrants (Warburg) | — |  |  | — |  |  | 6,230 |  |  | 6,230 |
Contingent consideration payable | — |  |  | — |  |  | 2,871 |  |  | 2,871 |
Total | $ | 14,578 |  |  | $ | 44,375 |  |  | $ | 9,101 |  |  | $ | 68,054 |
(1) Included in other assets. (2) Included in other liabilities and accrued expenses.
| As of December 31, 2021
| Quoted prices in active markets Level 1 |  | Other significant observable inputs Level 2 |  | Significant unobservable inputs Level 3 |  | Fair value
Assets: |  |  |  |  |  |  |
Available for sale securities, at fair value: |  |  |  |  |  |  |
U.S. Treasury securities and obligations of U.S. government authorities and agencies | $ | — |  |  | $ | 351,178 |  |  | $ | — |  |  | $ | 351,178 |
Obligations of state and political subdivisions | — |  |  | 58,660 |  |  | — |  |  | 58,660 |
Obligations of foreign governments | — |  |  | 2,590 |  |  | — |  |  | 2,590 |
Certificates of deposit | 2,696 |  |  | — |  |  | — |  |  | 2,696 |
Asset backed securities | — |  |  | 16,832 |  |  | 615 |  |  | 17,447 |
Corporate securities | — |  |  | 144,877 |  |  | — |  |  | 144,877 |
Total available for sale securities, at fair value | 2,696 |  |  | 574,137 |  |  | 615 |  |  | 577,448 |
Loans, at fair value: |  |  |  |  |  |  |
Corporate loans | — |  |  | 5,002 |  |  | 2,097 |  |  | 7,099 |
Mortgage loans held for sale | — |  |  | 98,484 |  |  | — |  |  | 98,484 |
Total loans, at fair value | — |  |  | 103,486 |  |  | 2,097 |  |  | 105,583 |
Equity securities: |  |  |  |  |  |  |
Invesque | 34,814 |  |  | — |  |  | — |  |  | 34,814 |
Fixed income ETFs | 53,154 |  |  | — |  |  | — |  |  | 53,154 |
Other equity securities | 49,309 |  |  | — |  |  | 1,206 |  |  | 50,515 |
Total equity securities | 137,277 |  |  | — |  |  | 1,206 |  |  | 138,483 |
Other investments, at fair value: |  |  |  |  |  |  |
Corporate bonds | — |  |  | 38,965 |  |  | — |  |  | 38,965 |
Derivative assets | 113 |  |  | 569 |  |  | 7,514 |  |  | 8,196 |
Trade claims | — |  |  | — |  |  | 19,737 |  |  | 19,737 |
Other | — |  |  | — |  |  | 441 |  |  | 441 |
Total other investments, at fair value | 113 |  |  | 39,534 |  |  | 27,692 |  |  | 67,339 |
Mortgage servicing rights (1) | — |  |  | — |  |  | 29,833 |  |  | 29,833 |
Total | $ | 140,086 |  |  | $ | 717,157 |  |  | $ | 61,443 |  |  | $ | 918,686 |
Liabilities: (2) |  |  |  |  |  |  |
Securities sold, not yet purchased | $ | 242 |  |  | $ | — |  |  | $ | — |  |  | $ | 242 |
Derivative liabilities | — |  |  | 2,141 |  |  | — |  |  | 2,141 |
Contingent consideration payable | — |  |  | — |  |  | 200 |  |  | 200 |
Total | $ | 242 |  |  | $ | 2,141 |  |  | $ | 200 |  |  | $ | 2,583 |
(1) Included in other assets. (2) Included in other liabilities and accrued expenses. |  |  |  |  |  |  |
Transfers between Level 2 and 3 were a result of subjecting third-party pricing on assets to various liquidity, depth, bid-ask spread and benchmarking criteria as well as assessing the availability of observable inputs affecting their fair valuation. The following table presents additional information about assets that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value for the following periods:
| For the Nine Months Ended September 30,
| 2022 |  | 2021
Balance at January 1, | $ | 61,443 |  |  | $ | 33,455 |
Net realized and unrealized gains or losses included in: |  |  |
Earnings | 8,572 |  |  | 12,664 |
OCI | 305 |  |  | (178) |
Origination of IRLCs | 42,722 |  |  | 84,034 |
Purchases | — |  |  | 15,336 |
Sales and repayments | (3,802) |  |  | (11,382) |
Conversions to mortgage loans held for sale | (48,731) |  |  | (83,976) |
Settlement of trade claims | (19,169) |  |  | — |
Exchange of bonds for term loans | 12,243 |  |  | — |
Exchange of trade receivables for equity securities | 7,104 |  |  | — |
Balance at September 30, | $ | 60,687 |  |  | $ | 49,953 |
Changes in unrealized gains (losses) included in earnings related to assets still held at period end | (5,171) |  |  | $ | 2,298 |
Changes in unrealized gains (losses) included in OCI related to assets still held at period end | $ | (395) |  |  | $ | (178) |
The following table presents the range and weighted average (WA) used to develop significant unobservable inputs for the fair value measurements of Level 3 assets and liabilities.
| As of |  |  |  |  |  | As of
| September 30, 2022 |  | December 31, 2021 |  | Valuation technique |  | Unobservable input(s) |  | September 30, 2022 |  | December 31, 2021
Assets | Fair value |  |  |  | Range |  | WA (1) |  | Range |  | WA (1)
IRLCs | $ | 1,505 |  |  | $ | 7,514 |  |  | Internal model |  | Pull through rate |  | 55% | to | 95% |  | 66% |  | 55% | to | 95% |  | 66%
Mortgage servicing rights | 41,912 |  |  | 29,833 |  |  | External model |  | Discount rate |  | 9% | to | 14% |  | 9% |  | 10% | to | 12% |  | 9%
| Cost to service |  | $65 | to | $80 |  | $71 |  | $65 | to | $80 |  | $71
| Prepayment speed |  | 5% | to | 84% |  | 9% |  | 5% | to | 100% |  | 15%
Trade claims | — |  |  | 19,737 |  |  | Internal model |  | Plan projected recovery rate |  | N/A |  | 15% | to | 18% |  | 17%
Equity securities | 6,549 |  |  | — |  |  | Internal model |  | Forecast EBITDAR |  | $728,000 | to | $1,039,000 |  | N/A |  | N/A
Corporate loans and related receivables | 10,129 |  |  | — |  |  | Internal model |  | EBITDA |  | $188,000 |  | N/A |  | N/A
Total | $ | 60,095 |  |  | $ | 57,084 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fortegra Additional Warrants (Warburg) | $ | 6,230 |  |  | $ | — |  |  | External model |  | Discount rate |  | 3% | to | 5% |  | 3.3% |  | N/A
|  |  | Implied Equity Volatility |  | 40% | to | 50% |  | 45% |
Contingent consideration payable - ITC | 2,671 |  |  | — |  |  | Cash Flow model |  | Forecast Cash EBITDA |  | $2,500 | to | $4,000 |  | N/A |  | N/A
|  | Cash Flow model |  | Forecast Underwriting EBITDA |  | $— | to | $2,000 |  | N/A |  | N/A
Contingent consideration payable - Smart AutoCare | 200 |  |  | 200 |  |  | Cash Flow model |  | Forecast Cash EBITDA |  | $20,000 | to | $30,000 |  | N/A |  | $20,000 | to | $30,000 |  | N/A
|  | Actuarial analysis |  | Assumed Claim Liabilities |  | $55,000 |  | $55,000
Total | $ | 9,101 |  |  | $ | 200 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(1) Unobservable inputs were weighted by the relative fair value of the instruments. The following table presents the carrying amounts and estimated fair values of financial assets and liabilities that are not recorded at fair value and their respective levels within the fair value hierarchy:
| As of September 30, 2022 |  | As of December 31, 2021
| Level within fair value hierarchy |  | Fair value |  | Carrying value |  | Level within fair value hierarchy |  | Fair value |  | Carrying value
Assets: |  |  |  |  |  |  |  |  |  |  |
Debentures (1) | 2 |  | $ | 24,961 |  |  | $ | 24,961 |  |  | 2 |  | $ | 21,057 |  |  | $ | 21,057 |
Notes receivable, net | 2 |  | 114,091 |  |  | 114,091 |  |  | 2 |  | 89,788 |  |  | 89,788 |
Total assets |  |  | $ | 139,052 |  |  | $ | 139,052 |  |  |  |  | $ | 110,845 |  |  | $ | 110,845 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |
Debt, net | 3 |  | $ | 270,731 |  |  | $ | 273,856 |  |  | 3 |  | $ | 419,599 |  |  | $ | 403,193 |
Total liabilities |  |  | $ | 270,731 |  |  | $ | 273,856 |  |  |  |  | $ | 419,599 |  |  | $ | 403,193 |
(1) Included in other investments. Debentures: Since interest rates on debentures are at current market rates for similar credit risks, the carrying amount approximates fair value. These values are net of allowance for doubtful accounts. Notes Receivable, net: To the extent that carrying amounts differ from fair value, fair value is determined based on contractual cash flows discounted at market rates for similar credits. Categorized under Level 2 in the fair value hierarchy. See Note (7) Notes and Accounts Receivable, net. Debt: The carrying value, which approximates fair value of LIBOR based debt, represents the total debt balance at face value excluding the unamortized discount. The fair value of the Junior subordinated notes is determined based on dealer quotes. Categorized under Level 3 in the fair value hierarchy. Additionally, the following financial assets and liabilities on the condensed consolidated balance sheets are not carried at fair value, but whose carrying amounts approximate their fair value: Cash and Cash Equivalents: The carrying amounts of cash and cash equivalents are carried at cost which approximates fair value. Categorized under Level 1 in the fair value hierarchy. Accounts and Premiums Receivable, net, Retrospective Commissions Receivable and Other Receivables: The carrying amounts approximate fair value since no interest rate is charged on these short duration assets. Categorized under Level 2 in the fair value hierarchy. See Note (7) Notes and Accounts Receivable, net. Due from Brokers, Dealers, and Trustees and Due to Brokers, Dealers and Trustees: The carrying amounts are included in other assets and other liabilities and accrued expenses and approximate their fair value due to their short term nature. Categorized under Level 2 in the fair value hierarchy.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI https://asc.fasb.org/extlink&oid=126976982&loc=d3e19207-110258 + Details
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