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Note 21 - Fair Value of Financial Instruments | 6 Months Ended
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Jun. 30, 2023
Notes to Financial Statements |
Fair Value Disclosures [Text Block] | NOTE 21 FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best evidenced by quoted bid or ask price, as appropriate, in an active market. Where bid or ask prices are not available, such as in an illiquid or inactive market, the closing price of the most recent transaction of that instrument subject to appropriate adjustments as required is used. Where quoted market prices are not available, the quoted prices of similar financial instruments or valuation models with observable market-based inputs are used to estimate the fair value. These valuation models may use multiple observable market inputs, including observable interest rates, foreign exchange rates, index levels, credit spreads, equity prices, counterparty credit quality, corresponding market volatility levels and option volatilities. Minimal management judgment is required for fair values calculated using quoted market prices or observable market inputs for models. Greater subjectivity is required when making valuation adjustments for financial instruments in inactive markets or when using models where observable parameters do not exist. Also, the calculation of estimated fair value is based on market conditions at a specific point in time and may not be reflective of future fair values. For the Company's financial instruments carried at cost or amortized cost, the book value is not adjusted to reflect increases or decreases in fair value due to market fluctuations, including those due to interest rate changes, as it is the Company's intention to hold them until there is a recovery of fair value, which may be to maturity. The Company employs a fair value hierarchy to categorize the inputs it uses in valuation techniques to measure the fair value. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1:
| • | Level 1 – Quoted prices for identical instruments in active markets.
| • | Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
| • | Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are not observable.
The Company classifies its investments in fixed maturities as available-for-sale and reports these investments at fair value. The Company's equity investments, limited liability investments, at fair value, subordinated debt, derivative contracts (interest rate swap and trust preferred debt repurchase options) and contingent consideration are measured and reported at fair value. Fixed maturities - Fair values of fixed maturities for which no active market exists are derived from quoted market prices of similar instruments or other third-party evidence. All classes of the Company’s fixed maturities, primarily consisting of investments in US. Treasury bills and government bonds; obligations of states, municipalities and political subdivisions; mortgage-backed securities; and corporate securities, are classified as Level 2. Level 2 is applied to valuations based upon quoted prices for similar assets in active markets; quoted prices for identical or similar assets in markets that are inactive; or valuations based on models where the significant inputs are observable or can be corroborated by observable market data. The Company engages a third-party vendor who utilizes third-party pricing sources and primarily employs a market approach to determine the fair values of our fixed maturities. The market approach includes primarily obtaining prices from independent third-party pricing services as well as, to a lesser extent, quotes from broker-dealers. Our third-party vendor also monitors market indicators, as well as industry and economic events, to ensure pricing is appropriate. All classes of our fixed maturities are valued using this technique. The Company has obtained an understanding of our third-party vendor’s valuation methodologies and inputs. Fair values obtained from our third-party vendor are not adjusted by the Company. The following is a description of the significant inputs, by asset class, used by the third-party pricing services to determine the fair values of our fixed maturities included in Level 2:
| • | U.S. government, government agencies and authorities are generally priced using the market approach. Inputs generally consist of trades of identical or similar securities, quoted prices in inactive markets and maturity.
| • | States, municipalities and political subdivisions are generally priced using the market approach. Inputs generally consist of trades of identical or similar securities, quoted prices in inactive markets, new issuances and credit spreads.
| • | Mortgage-backed and asset-backed securities are generally priced using the market approach. Inputs generally consist of trades of identical or similar securities, quoted prices in inactive markets, expected prepayments, expected credit default rates, delinquencies and issue specific information including, but not limited to, collateral type, seniority and vintage.
| • | Corporate securities are generally priced using the market approach using pricing vendors. Inputs generally consist of trades of identical or similar securities, quoted prices in inactive markets, issuer rating, benchmark yields, maturity and credit spreads.
Equity investments - Fair values of equity investments, including warrants, reflect quoted market values based on latest bid prices, where active markets exist, or models based on significant market observable inputs, where no active markets exist. Limited liability investments, at fair value - Limited liability investments, at fair value include the underlying investments of Net Lease and Argo Holdings. Prior to the second quarter of 2023, Net Lease owned investments in limited liability companies that held investment properties. Net Lease sold its final investment property during its first quarter of 2023, and as a result, the Net Lease's investment in its underlying investments is zero at June 30, 2023. Argo Holdings makes investments in limited liability companies and limited partnerships that hold investments in search funds and private operating companies.
| • | The fair value of Net Lease's investments in limited liability companies was based upon the net asset values of the underlying investments in companies as a practical expedient to estimate fair value. The Company applied the net asset value practical expedient to Net Lease's limited liability investments on an investment-by-investment basis unless it was probable that the Company would sell a portion of an investment at an amount different from the net asset value of the investment. Investments that are measured at fair value using the net asset value practical expedient are not required to be classified using the fair value hierarchy.
| • | The fair value of Argo Holdings' limited liability investments that hold investments in search funds is based on the initial investment in the search funds. The fair value of Argo Holdings' limited liability investments that hold investments in private operating companies is valued using a market approach including valuation multiples applied to corresponding performance metrics, such as earnings before interest, tax, depreciation and amortization; revenue; or net earnings. The selected valuation multiples were estimated using multiples provided by the investees and review of those multiples in light of investor updates, performance reports, financial statements and other relevant information. These investments are categorized in Level 3 of the fair value hierarchy.
Subordinated debt - The fair value of the subordinated debt is calculated using a model based on significant market observable inputs and inputs developed by a third party. These inputs include credit spread assumptions developed by a third party and market observable swap rates. The subordinated debt is categorized in Level 2 of the fair value hierarchy. Derivative contract - interest rate swap - As described in Note 10, "Derivatives," the Company entered into an interest rate swap agreement effective April 1, 2021 to convert the variable interest rate on a portion of the 2020 KWH Loan to a fixed interest rate. The interest rate swap contract is measured and reported at fair value and is included in other receivables in the consolidated balance sheets at June 30, 2023 and December 31, 2022. The fair value of the interest rate swap contract is estimated using inputs which the Company obtains from the counterparty and is determined using a discounted cash flow analysis on the expected cash flows of the derivative. The discounted cash flow valuation technique reflects the contractual term of the derivative contract, including the period to maturity, and uses observable market based inputs, including quoted mid-market prices or third-party consensus pricing, interest rate curves and implied volatilities. The interest rate swap contract is categorized in Level 2 of the fair value hierarchy. Derivative contracts - trust preferred debt repurchase options - As described in Note 10, "Derivatives," the Company entered into three TruPs Options contracts during the third quarter of 2022. During the first quarter of 2023, the Company executed the TruPs Options contracts. The TruPs Options contracts are measured and reported at fair value and are included in other assets in the consolidated balance sheet at December 31, 2022. The fair value of the TruPs Options contracts was estimated using the binomial lattice model. Key inputs in the valuation included credit spread assumptions, interest rate volatility, debt coupon interest rate and time to maturity. The TruPs Options contracts are categorized in Level 3 of the fair value hierarchy. Contingent consideration - The consideration for the Company's acquisitions of Ravix and CSuite includes future payments to the former owners that are contingent upon the achievement of certain targets over future reporting periods. Liabilities for contingent consideration are measured and reported at fair value and are included in accrued expenses and other liabilities in the consolidated balance sheets. Contingent consideration liabilities are revalued each reporting period. Changes in the fair value of contingent consideration liabilities can result from changes to one or multiple inputs, including adjustments to the discount rates or changes in the assumed achievement or timing of any targets. Any changes in fair value are reported in the consolidated statements of operations as non-operating other expense. The contingent consideration liabilities are categorized in Level 3 of the fair value hierarchy.
| • | The fair value of Ravix's contingent consideration liability is estimated by applying the Monte Carlo simulation method to forecast achievement of gross profit which may result in up to $4.5 million in total payments to the former owners of Ravix through October 2024. Key inputs in the valuation include forecasted gross profit, gross profit volatility, discount rate and discount term. The estimated fair value of the Ravix contingent consideration liability at June 30, 2023 and December 31, 2022 was $3.3 million and $3.2 million, respectively.
| • | The fair value of CSuite's contingent consideration liability is estimated by applying the Monte Carlo simulation method to forecast achievement of gross revenue which may result in up to $3.6 million in total payments to the former owners of CSuite through November 2025. Key inputs in the valuation include forecasted gross revenue, gross revenue volatility, discount rate and discount term. The estimated fair value of the CSuite contingent consideration liability at June 30, 2023 and December 31, 2022 was zero.
Assets and Liabilities Measured at Fair Value on a Recurring Basis The balances of the Company's financial assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of June 30, 2023 and December 31, 2022 are as follows. Certain investments in limited liability companies that are measured at fair value using the net asset value practical expedient are not required to be classified using the fair value hierarchy, but are presented in the following tables to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets:
(in thousands) |  | June 30, 2023 |
|  | Fair Value Measurements at the End of the Reporting Period Using |
|  |  |  |  |  | Quoted Prices in |  |  | Significant |  |  | Significant |  |  |  |  |
|  |  |  |  |  | Active Markets for |  |  | Other Observable |  |  | Unobservable |  |  |  |  |
|  |  |  |  |  | Identical Assets |  |  | Inputs |  |  | Inputs |  |  | Measured at |
|  | Total |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | Net Asset Value |
Recurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government, government agencies and authorities |  | $ | 14,145 |  |  | $ | — |  |  | $ | 14,145 |  |  | $ | — |  |  | $ | — |
States, municipalities and political subdivisions |  |  | 3,069 |  |  |  | — |  |  |  | 3,069 |  |  |  | — |  |  |  | — |
Mortgage-backed |  |  | 8,042 |  |  |  | — |  |  |  | 8,042 |  |  |  | — |  |  |  | — |
Asset-backed |  |  | 1,367 |  |  |  | — |  |  |  | 1,367 |  |  |  | — |  |  |  | — |
Corporate |  |  | 9,570 |  |  |  | — |  |  |  | 9,570 |  |  |  | — |  |  |  | — |
Total fixed maturities |  |  | 36,193 |  |  |  | — |  |  |  | 36,193 |  |  |  | — |  |  |  | — |
Equity investments - common stock |  |  | 2,935 |  |  |  | 2,935 |  |  |  | — |  |  |  | — |  |  |  | — |
Limited liability investments, at fair value |  |  | 3,688 |  |  |  | — |  |  |  | — |  |  |  | 3,688 |  |  |  | — |
Derivative contract - interest rate swap |  |  | 204 |  |  |  | — |  |  |  | 204 |  |  |  | — |  |  |  | — |
Total assets |  | $ | 43,020 |  |  | $ | 2,935 |  |  | $ | 36,397 |  |  | $ | 3,688 |  |  | $ | — |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Subordinated debt |  | $ | 12,544 |  |  | $ | — |  |  | $ | 12,544 |  |  | $ | — |  |  | $ | — |
Contingent consideration |  |  | 3,283 |  |  |  | — |  |  |  | — |  |  |  | 3,283 |  |  |  | — |
Total liabilities |  | $ | 15,827 |  |  | $ | — |  |  | $ | 12,544 |  |  | $ | 3,283 |  |  | $ | — |
(in thousands) |  | December 31, 2022 |
|  | Fair Value Measurements at the End of the Reporting Period Using |
|  |  |  |  |  | Quoted Prices in |  |  | Significant |  |  | Significant |  |  |  |  |
|  |  |  |  |  | Active Markets for |  |  | Other Observable |  |  | Unobservable |  |  |  |  |
|  |  |  |  |  | Identical Assets |  |  | Inputs |  |  | Inputs |  |  | Measured at |
|  | Total |  |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |  |  | Net Asset Value |
Recurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government, government agencies and authorities |  | $ | 15,080 |  |  | $ | — |  |  | $ | 15,080 |  |  | $ | — |  |  | $ | — |
States municipalities and political subdivisions |  |  | 2,232 |  |  |  | — |  |  |  | 2,232 |  |  |  | — |  |  |  | — |
Mortgage-backed |  |  | 8,412 |  |  |  | — |  |  |  | 8,412 |  |  |  | — |  |  |  | — |
Asset-backed |  |  | 1,610 |  |  |  | — |  |  |  | 1,610 |  |  |  | — |  |  |  | — |
Corporate |  |  | 10,257 |  |  |  | — |  |  |  | 10,257 |  |  |  | — |  |  |  | — |
Total fixed maturities |  |  | 37,591 |  |  |  | — |  |  |  | 37,591 |  |  |  | — |  |  |  | — |
Equity investments - common stock |  |  | 153 |  |  |  | 153 |  |  |  | — |  |  |  | — |  |  |  | — |
Limited liability investments, at fair value |  |  | 17,059 |  |  |  | — |  |  |  | — |  |  |  | 3,196 |  |  |  | 13,863 |
Derivative contract - interest rate swap |  |  | 326 |  |  |  | — |  |  |  | 326 |  |  |  | — |  |  |  | — |
Derivative contract - trust preferred debt repurchase options |  |  | 19,034 |  |  |  |  |  |  |  | — |  |  |  | 19,034 |  |  |  | — |
Total assets |  | $ | 74,163 |  |  | $ | 153 |  |  | $ | 37,917 |  |  | $ | 22,230 |  |  | $ | 13,863 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Subordinated debt |  | $ | 67,811 |  |  | $ | — |  |  | $ | 67,811 |  |  | $ | — |  |  | $ | — |
Contingent consideration |  |  | 3,218 |  |  |  | — |  |  |  | — |  |  |  | 3,218 |  |  |  | — |
Total liabilities |  | $ | 71,029 |  |  | $ | — |  |  | $ | 67,811 |  |  | $ | 3,218 |  |  | $ | — |
The following table provides a reconciliation of the fair value of recurring Level 3 fair value measurements for the three and six months ended June 30, 2023 and June 30, 2022:
(in thousands) |  | Three months ended June 30, |  |  | Six months ended June 30, |
|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Limited liability investments, at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 3,442 |  |  | $ | 3,751 |  |  | $ | 3,196 |  |  | $ | 4,022 |
Contributions |  |  | — |  |  |  | — |  |  |  | 35 |  |  |  | — |
Distributions received |  |  | (92 | ) |  |  | (164 | ) |  |  | (202 | ) |  |  | (211 | )
Realized gains included in net (loss) income |  |  | 106 |  |  |  | 164 |  |  |  | 216 |  |  |  | 197 |
Change in fair value of limited liability investments, at fair value included in net (loss) income |  |  | 232 |  |  |  | (338 | ) |  |  | 443 |  |  |  | (595 | )
Ending balance |  | $ | 3,688 |  |  | $ | 3,413 |  |  | $ | 3,688 |  |  | $ | 3,413 |
Unrealized losses (gains) on limited liability investments, at fair value held at end of period: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in net (loss) income |  | $ | 232 |  |  | $ | (338 | ) |  | $ | 443 |  |  | $ | (595 | )
Included in other comprehensive (loss) income |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Derivative - trust preferred debt repurchase options: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | — |  |  | $ | — |  |  | $ | 19,034 |  |  | $ | — |
Exercise of options included in net (loss) income |  |  | — |  |  |  | — |  |  |  | (17,668 | ) |  |  | — |
Change in fair value of derivative assets included in net (loss) income |  |  | — |  |  |  | — |  |  |  | (1,366 | ) |  |  | — |
Ending balance |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Unrealized gains recognized on derivative assets held at end of period: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in net (loss) income |  | $ | — |  |  | $ | — |  |  | $ | (1,366 | ) |  | $ | — |
Included in other comprehensive (loss) income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Ending balance - assets |  | $ | 3,688 |  |  | $ | 3,413 |  |  | $ | 3,688 |  |  | $ | 3,413 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contingent consideration: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 3,218 |  |  | $ | 2,767 |  |  | $ | 3,218 |  |  | $ | 2,458 |
Change in fair value of contingent consideration included in net (loss) income |  |  | 65 |  |  |  | 1,192 |  |  |  | 65 |  |  |  | 1,501 |
Ending balance |  | $ | 3,283 |  |  | $ | 3,959 |  |  | $ | 3,283 |  |  | $ | 3,959 |
Unrealized gains recognized on contingent consideration liability held at end of period: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in net (loss) income |  | $ | 65 |  |  | $ | 1,192 |  |  | $ | 65 |  |  | $ | 1,501 |
Included in other comprehensive (loss) income |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Ending balance - liabilities |  | $ | 3,283 |  |  | $ | 3,959 |  |  | $ | 3,283 |  |  | $ | 3,959 |
The following table summarizes the valuation techniques and significant unobservable inputs utilized in determining fair values for the Company's investments that are categorized as Level 3 at June 30, 2023:
Categories |  | Fair Value |  | Valuation Techniques | Unobservable Inputs |  | Input Value(s) |
Limited liability investments, at fair value |  | $ | 3,688 |  | Market approach | Valuation multiples |  | 1.0x - 9.0x |
Contingent consideration |  | $ | 3,283 |  | Option-based income approach | Discount rate |  |  | 8.25 | %
|  |  |  |  |  | Risk-free rate |  | 4.30 | %
|  |  |  |  |  | Expected volatility |  | 13.00 | %
The following table summarizes the valuation techniques and significant unobservable inputs utilized in determining fair values for the Company's investments that are categorized as Level 3 at December 31, 2022:
Categories |  | Fair Value |  | Valuation Techniques | Unobservable Inputs |  | Input Value(s) |
Limited liability investments, at fair value |  | $ | 3,196 |  | Market approach | Valuation multiples |  | 1.0x - 9.0x |
Derivative - trust preferred debt repurchase options |  | $ | 19,034 |  | Binomial lattice option approach | Credit spread |  |  | 8.95 | %
|  |  |  |  |  | Interest rate volatility |  | 2.3 | %
|  |  |  |  |  | Debt coupon interest rate |  | 8.72%-8.87% |
|  |  |  |  |  | Time to maturity (in years) |  | 10.4 - 10.59 |
Contingent consideration |  | $ | 3,218 |  | Option-based income approach | Discount rate |  |  | 8.25 | %
|  |  |  |  |  | Risk-free rate |  | 4.44 | %
|  |  |  |  |  | Expected volatility |  | 13.0 | %
Investments Measured Using the Net Asset Value per Share Practical Expedient The following table summarizes investments for which fair value is measured using the net asset value per share practical expedient at June 30, 2023:
|  | Fair Value |  |  |  |  |  |  |  | Redemption |
Category |  | (in thousands) |  |  | Unfunded Commitments |  | Redemption Frequency |  |  | Notice Period |
Limited liability investments, at fair value |  | $ | — |  |  | n/a |  | n/a |  |  | n/a |
The following table summarizes investments for which fair value is measured using the net asset value per share practical expedient at December 31, 2022:
|  | Fair Value |  |  |  |  |  |  |  | Redemption |
Category |  | (in thousands) |  |  | Unfunded Commitments |  | Redemption Frequency |  |  | Notice Period |
Limited liability investments, at fair value |  | $ | 13,863 |  |  | n/a |  | n/a |  |  | n/a |
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis Certain assets and liabilities are measured at fair value on a nonrecurring basis, including assets that are adjusted for observable price changes or written down to fair value as a result of an impairment. For the three and six months ended June 30, 2023 and June 30, 2022, the Company did not record any adjustments to the fair value of its investments in private companies for observable price changes. The Company did not record any impairments related to investments in private companies for the three and six months ended June 30, 2023 and June 30, 2022. To determine the fair value of investments in these private companies, the Company considered rounds of financing and third-party transactions, discounted cash flow analyses and market-based information, including comparable transactions, trading multiples and changes in market outlook, among other factors. The Company has classified the fair value measurements of these investments in private companies as Level 3 because they involve significant unobservable inputs.

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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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