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Note 20 - Fair Value of Financial Instruments
 3 Months Ended
Mar. 31, 2025
Notes to Financial Statements  
Fair Value Disclosures [Text Block]

NOTE 20 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:

 

 

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Level 1 – Quoted prices for identical instruments in active markets.

 

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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.

 

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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 limited liability investment, at fair value, subordinated debt 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:

 

 

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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.

 

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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.

 

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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.

 

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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.

 

Limited liability investment, at fair value - Limited liability investment, at fair value, include the underlying investments of Argo Holdings. Argo Holdings makes investments in limited liability companies and limited partnerships that hold investments in private operating companies.

 

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.

 

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 revenue (expense). The contingent consideration liabilities are categorized in Level 3 of the fair value hierarchy.

 

 

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The fair value of Ravix's contingent consideration liability was estimated by applying the Monte Carlo simulation method to forecast achievement of gross profit which resulted in the maximum of $4.5 million in total payments to the former owners of Ravix through October 2024.  Key inputs in the valuation included forecasted gross profit, gross profit volatility, discount rate and discount term.  During 2022 and 2023, Ravix made payments to the former owners totaling $1.1 million.  The remaining contingent liability of $3.4 million was due to be paid in October 2024.  Ravix made a payment of $0.7 million during the fourth quarter of 2024.  In accordance with the terms of the purchase agreement, any unpaid portion will bear interest at an annual rate of 6.0%.  In February 2025, the Ravix contingent consideration liability and related accrued interest was paid in full.   At March 31, 2025 and  December 31, 2024, the unpaid contingent consideration liability due to the former owners of Ravix was zero and $2.7 million, respectively.  Accrued interest on the unpaid contingent consideration liability, which is included in accrued expenses and other liabilities in the consolidated balance sheet, was zero and less than $0.1 million at  March 31, 2025 and  December 31, 2024, respectively.  

 

 

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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 March 31, 2025 and December 31, 2024 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 March 31, 2025 and December 31, 2024 are as follows. 

 

(in thousands)

 

March 31, 2025

 
  

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

 
  

Total

  

(Level 1)

  

(Level 2)

  

(Level 3)

 

Recurring fair value measurements:

                
                 

Assets:

                

Fixed maturities:

                

U.S. government, government agencies and authorities

 $13,506  $—  $13,506  $— 

States, municipalities and political subdivisions

  2,549   —   2,549   — 

Mortgage-backed

  9,560   —   9,560   — 

Asset-backed

  1,323   —   1,323   — 

Corporate

  10,018   —   10,018   — 

Total fixed maturities

  36,956   —   36,956   — 

Limited liability investment, at fair value

  2,860   —   —   2,860 

Total assets

 $39,816  $—  $36,956  $2,860 
                 

Liabilities:

                

Subordinated debt

 $13,375  $—  $13,375  $— 

Total liabilities

 $13,375  $—  $13,375  $— 

 

(in thousands)

 

December 31, 2024

 
  

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

 
  

Total

  

(Level 1)

  

(Level 2)

  

(Level 3)

 

Recurring fair value measurements:

                
                 

Assets:

                

Fixed maturities:

                

U.S. government, government agencies and authorities

 $13,354  $—  $13,354  $— 

States municipalities and political subdivisions

  2,775   —   2,775   — 

Mortgage-backed

  9,886   —   9,886   — 

Asset-backed

  1,326   —   1,326   — 

Corporate

  9,622   —   9,622   — 

Total fixed maturities

  36,963   —   36,963   — 

Limited liability investment, at fair value

  2,859   —   —   2,859 

Total assets

 $39,822  $—  $36,963  $2,859 
                 

Liabilities:

                

Subordinated debt

 $13,409  $—  $13,409  $— 

Contingent consideration

  2,725   —   —   2,725 

Total liabilities

 $16,134  $—  $13,409  $2,725 

 

The following table provides a reconciliation of the fair value of recurring Level 3 fair value measurements for the three months ended March 31, 2025 and March 31, 2024:

 

(in thousands)

 

Three months ended March 31,

 
  

2025

  

2024

 

Assets:

        

Limited liability investment, at fair value:

        

Beginning balance

 $2,859  $3,496 

Distributions received

  —   (115)

Realized gains included in net loss

  —   115 

Change in fair value of limited liability investment, at fair value included in net loss

  1   (8)

Ending balance

 $2,860  $3,488 

Unrealized losses (gains) on limited liability investments, at fair value held at end of period:

        

Included in net loss

 $1  $(8)

Included in other comprehensive income (loss)

 $—  $— 

Ending balance - assets

 $2,860  $3,488 

Liabilities:

        

Contingent consideration:

        

Beginning balance

 $2,725  $3,105 

Settlements of contingent consideration liabilities

 $(2,725) $— 

Change in fair value of contingent consideration included in net loss

  —   270 

Ending balance

 $—  $3,375 

Unrealized gains recognized on contingent consideration liability held at end of period:

        

Included in net loss

 $—  $270 

Included in other comprehensive income (loss)

 $—  $— 

Ending balance - liabilities

 $—  $3,375 

 

The following table summarizes the valuation techniques and significant unobservable inputs utilized in determining fair values for the Company's financial assets and liabilities that are categorized as Level 3 at March 31, 2025:

 

  

Fair Value

      

Categories

  (in thousands) 

Valuation Techniques

Unobservable Inputs

  Input Value(s) 

Limited liability investment, at fair value

 $2,860 

Market approach

Valuation multiples

 

1.0x - 9.0x

 

 

The following table summarizes the valuation techniques and significant unobservable inputs utilized in determining fair values for the Company's financial assets and liabilities that are categorized as Level 3 at December 31, 2024:

 

  

Fair Value

       

Categories

  (in thousands) 

Valuation Techniques

Unobservable Inputs

  Input Value(s) 

Limited liability investment, at fair value

 $2,859 

Market approach

Valuation multiples

 

1.0x - 9.0x

 

Contingent consideration

 $2,725 

Option-based income approach

Discount rate

  8.25%
      

Risk-free rate

  4.96%
      

Expected volatility

  9.0%

 

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 months ended March 31, 2025 and  March 31, 2024, 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 months ended March 31, 2025 and March 31, 2024. 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.

 

Indefinite-lived intangible assets are recorded at carrying value, and, if impaired, are adjusted to fair value using Level 3 inputs.  Refer to Note 8, "Intangible Assets" for further information regarding the process of determining the fair value of indefinite-lived intangible assets and the impairment charges recorded for the three months ended March 31, 2025 and  March 31, 2024.

 

As further discussed in Note 5, "Acquisitions and Discontinued Operations," the Company acquired Bud's Plumbing on March 14, 2025 and provisionally allocated the purchase price to the assets acquired and liabilities assumed. The fair values of intangible assets associated with the acquisition of Bud's Plumbing were determined to be Level 3 under the fair value hierarchy.

 

The following table summarizes the valuation techniques and significant unobservable inputs utilized in determining fair values for these Level 3 measurements:

 

  

Fair Value

       

Categories

 

(in thousands)

 

Valuation Techniques

Unobservable Inputs

 

Input Value(s)

 

Customer relationships

 $500 

Multi-period excess earnings

Growth rate

  3.0%
      

Attrition rate

  30.0%
      

Discount rate

  18.0%

Trade name

 $3,100 

Relief from royalty

Royalty rate

  5.0%
      

Discount rate

  17.0%