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FAIR VALUE MEASUREMENTS | 9 Months Ended
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Sep. 30, 2023
Fair Value Disclosures [Abstract] |
FAIR VALUE MEASUREMENTS | FAIR VALUE MEASUREMENTS The Company determines fair value based on assumptions that market participants would use in pricing an asset or a liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels: •Level 1 inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. •Level 2 inputs: Other than quoted prices in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. •Level 3 inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. Recurring Fair Value Measurements—The assets and liabilities measured at estimated fair value on a recurring basis and their corresponding placement in the fair value hierarchy are presented in the tables below.
| Fair Value Hierarchy
As of September 30, 2023 | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets: |  |  |  |  |  |  |
Life settlement policies | $ | — |  |  | $ | — |  |  | $ | 83,585,374 |  |  | $ | 83,585,374 |
Available-for-sale securities, at fair value | — |  |  | — |  |  | 1,000,000 |  |  | 1,000,000 |
Other investments | — |  |  | — |  |  | 1,650,000 |  |  | 1,650,000 |
S&P 500 options | 1,494,744 |  |  | — |  |  | — |  |  | 1,494,744 |
Other assets | 998,469 |  |  | — |  |  | — |  |  | 998,469 |
Total assets held at fair value | $ | 2,493,213 |  |  | $ | — |  |  | $ | 86,235,374 |  |  | $ | 88,728,587 |
Liabilities: |  |  |  |  |  |  |
Long-term debt | $ | — |  |  | $ | — |  |  | $ | 59,544,907 |  |  | $ | 59,544,907 |
Private placement warrants | — |  |  | — |  |  | 3,382,000 |  |  | 3,382,000 |
Total liabilities held at fair value: | $ | — |  |  | $ | — |  |  | $ | 62,926,907 |  |  | $ | 62,926,907 |
| Fair Value Hierarchy
As of December 31, 2022 | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets: |  |  |  |  |  |  |
Life settlement policies | $ | — |  |  | $ | — |  |  | $ | 13,809,352 |  |  | $ | 13,809,352 |
Available-for-sale securities, at fair value | — |  |  | — |  |  | 1,000,000 |  |  | 1,000,000 |
Other investments | — |  |  | — |  |  | 1,300,000 |  |  | 1,300,000 |
S&P 500 options | 890,829 |  |  | — |  |  | — |  |  | 890,829 |
Total assets held at fair value | $ | 890,829 |  |  | $ | — |  |  | $ | 16,109,352 |  |  | $ | 17,000,181 |
Liabilities: |  |  |  |  |  |  |
Long-term debt | $ | — |  |  | $ | — |  |  | $ | 28,249,653 |  |  | $ | 28,249,653 |
Total liabilities held at fair value: | $ | — |  |  | $ | — |  |  | $ | 28,249,653 |  |  | $ | 28,249,653 |
Life Settlement Policies—For all policies purchased after June 30, 2023, the Company accounts for owned life settlement policy using the fair value method. Prior to June 30, 2023, the Company elected to use either the fair value method or the investment method (cost, plus premiums paid). The valuation method is chosen upon contract acquisition and is irrevocable. For policies carried at fair value, the Company utilizes valuation services of a third-party actuarial firm, who values the contracts using Level 3 unobservable inputs, including actuarial assumptions, such as life expectancies and cash flow discount rates. The valuation model is based on a discounted cash flow analysis and is sensitive to changes in the discount rate used. The Company utilized a discount rate of 18% for the policies with face values under $2 million and a discount rate of 24% for the policies with face values of $2 million and over at September 30, 2023 and 12% for all policies at December 31, 2022, respectively, for policy valuation, which is based on economic and company-specific factors. The Company re-evaluates its discount rates at the end of every reporting period in order to reflect the estimated discount rates that could reasonably be used in a market transaction involving the Company’s portfolio of life settlements. The determination to use a higher discount rate at September 30, 2023 for policies with face values over $2 million is due to the inherent risk in larger face value policies during the three months ended September 30, 2023. Discount Rate Sensitivity—22% was determined to be the weighted average discount rate used to estimate the fair value of policies held by LMA and its investment funds. If the discount rate increased or decreased by 2 percentage points and the other assumptions used to estimate fair value remained the same, the change in estimated fair value as of September 30, 2023, would be as follows:
As of September 30, 2023 | Fair Value |  | Change in Fair Value
Rate Adjustment |
+2% | $ | 78,288,612 |  |  | $ | (5,296,762) |
No change | 83,585,374 |  |  |
-2% | 89,102,871 |  |  | 5,517,497 |
Credit Exposure to Insurance Companies—The following table provides information about the life insurance issuer concentrations that exceed 10% of total face value or 10% of total fair value of the Company’s life insurance policies as of September 30, 2023:
Carrier | Percentage of Face Value |  | Percentage of Fair Value |  | Carrier Rating
American General Life Insurance Company | 11.0 | % |  | 13.0 | % |  | A+
Transamerica | 14.0 | % |  | 16.0 | % |  | A
The following table provides a roll forward of the fair value of life insurance policies for the nine months-ended September 30, 2023:
Fair value at December 31, 2022 | $ | 13,809,352 |
Policies purchased | 116,053,728 |
Realized gain (loss) on matured/sold policies | 9,688,422 |
Premiums paid | (2,500,623) |
Unrealized gain(loss) on held policies | 14,259,665 |
Change in estimated fair value | 21,447,464 |
Matured/sold policies | (70,225,793) |
Premiums paid | 2,500,623 |
Fair value at September 30, 2023 | $ | 83,585,374 |
Long-Term Debt—See Note 13 for background information on the market-indexed debt. The Company has elected the fair value option in accounting for the instruments. Fair value is determined using Level 3 inputs. The valuation methodology is based on the Black-Scholes-Merton option-pricing formula and a discounted cash flow analysis. Inputs to the Black-Scholes-Merton model include (i) the S&P 500 Index price, (ii) S&P 500 Index volatility, (iii) a risk-free rate based on data published by the US Treasury, and (iv) a term assumption based on the contractual term of the LMATT Notes. The discounted cash flow analysis includes a discount rate that is based on the implied discount rate developed by calibrating a valuation model to the purchase price on the initial investment date. The implied discount rate is evaluated for reasonableness by benchmarking it to yields on actively traded comparable securities. The total change in fair value of the debt resulted in a loss of $760,457. This loss is comprised of $777,131, net of tax, which is included within accumulated other comprehensive income and $238,902 net of tax, which is included in equity of noncontrolling interests resulting from risk-adjusted valuation scenarios. The Company recognized a gain of $2,088,797 on the change in fair value of the debt resulting from risk-free valuation scenarios, which is included within (Gain)/loss on change in fair value of debt within the condensed consolidated statement of operations and comprehensive income for the three months ended September 30, 2023. The total change in fair value of the debt resulted in a gain of $1,945,461. This gain is comprised of $952,661, net of tax, which is included within accumulated other comprehensive income and $295,348 net of tax, which is included in equity of noncontrolling interests resulting from risk-adjusted valuation scenarios. The Company recognized a loss of $309,865 on the change in fair value of the debt resulting from risk-free valuation scenarios, which is included within (Gain) loss on change in fair value of debt within the condensed consolidated statement of operations and comprehensive income for the nine months ended September 30, 2023. The following table provides a roll forward of the fair value of the issued notes for the nine months ended September 30, 2023:
Fair value at December 31, 2022 | $ | 28,249,653 |
Debt issued to third parties | 88,618,714 |
Unrealized loss on change in fair value (risk-free) | 309,865 |
Unrealized loss on change in fair value (credit-adjusted) included in OCI | 1,635,596 |
Change in estimated fair value resulted into gain | 1,945,461 |
Fair value at September 30, 2023 | $ | 118,813,828 |
Private Placement Warrants—Simultaneously with the closing of the Initial Public Offering, ERES consummated the sale of 8,900,000.00 warrants (the “Private Placement Warrants”) to East Sponsor, LLC (the “Sponsor”), which included the sale of an additional 900,000.00 Private Placement Warrants in connection with the full exercise by the underwriters of their over-allotment option on August 25, 2020, at a price of $1.00 per Private Placement Warrant, for an aggregate purchase price of 8,900,000.00. Each Private Placement Warrant is exercisable for one share of Class A common stock at a price of $11.50 per share, subject to adjustment. The Private Placement Warrants are identical to the Public Warrants underlying the Units sold in the Initial Public Offering, except that (x) the Private Placement Warrants and the shares of Class A common stock issuable upon the exercise of the Private Placement Warrants will not be transferable, assignable or salable until 30 days after the completion of a Business Combination, subject to certain limited exceptions, (y) the Private Placement Warrants will be exercisable on a cashless basis and be non-redeemable so long as they are held by the initial purchasers or their permitted transferees and (z) the Private Placement Warrants and the shares of Class A common stock issuable upon exercise of the Private Placement Warrants will be entitled to registration rights. If the Private Placement Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants. Private Placement Warrants were accounted for as liabilities in accordance with ASC 815-40. The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented separately in the condensed consolidated statements of operations. The Private Placement Warrants were considered a Level 3 fair value measurement using a binomial lattice model in a risk-neutral framework. The binomial lattice model’s primary unobservable input utilized in determining the fair value of the Private Placement Warrants is the expected volatility of the common stock. The implied volatility as of the reporting date was derived from observable public warrant traded price provided by Bloomberg LP. The following table presents the key assumptions in the analysis:
| Private Placement Warrants
Expected implied volatility | de minimis
Risk-free interest rate | 4.09%
Term to expiration | 5.0 years
Exercise price | $11.50
Common Stock Price | $10.03
Dividend Yield | —%
Other Noncurrent Assets: S&P 500 Options—In February 2022, LMATT Series 2024, Inc., which the Company consolidates for financial reporting, purchased and sold S&P 500 call and put options through a broker. The Company purchased and sold additional S&P 500 call options through a broker in June 2022 through their 100% owned and fully consolidated subsidiaries LMATT Growth Series 2.2024, Inc. and LMATT Growth and Income Series 1.2026, Inc. The options are exchange traded, and fair value is determined using Level 1 inputs of quoted market prices as of the condensed consolidated balance sheets dates. Changes in fair value are classified as unrealized (gain)/loss on investments within the condensed consolidated statements of operations and comprehensive income. Financial Instruments Measured at Fair Value on a Nonrecurring Basis—The following financial assets, composed of equity securities without readily determinable fair values, are adjusted to fair value when observable price changes are identified, or an impairment charge is recognized. Such fair value measurements are based predominantly on Level 3 inputs. Available-for-Sale Investment—The Convertible Promissory Note is classified as an available-for-sale security. Available-for-sale investments are subsequently measured at fair value. Unrealized holding gains and losses are excluded from earnings and reported in other comprehensive income until realized. The Company determines fair value of its available-for-sale investments using unobservable inputs by considering the initial investment value, next round financing, and the likelihood of conversion or settlement based on the contractual terms in the agreement. The Company initially purchased a $250,000 convertible promissory note from the issuer in 2021 and then on January 7, 2022, the Company purchased an additional $250,000 convertible promissory note from the same issuer and then an additional $500,000 in October 2022. As of September 30, 2023 and December 31, 2022, the Company evaluated the fair value of its Promissory Note and determined that the fair value approximates the carrying value of $1,000,000 and $1,000,000, respectively. Other Investments—The Company determines fair value using Level 3 inputs under the measurement alternative. These investments are recorded at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Impairment is assessed qualitatively. As of September 30, 2023, and December 31, 2022, the Company did not identify any impairment indicators and determined that the carrying value of $1,650,000 and $1,300,000 is the fair value for these equity investments in privately held companies, given that there have been no observable price changes. Financial Instruments Where Carrying Value Approximates Fair Value—Th e carrying value of cash, cash equivalents, accounts receivables, and due to affiliates approximates fair value due to the short-term nature of their maturities.

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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 -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Publisher FASB -URI https://asc.fasb.org//1943274/2147482106/820-10-50-2 + Details
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