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Fair Value Disclosures | 12 Months Ended
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Dec. 31, 2013
Fair Value Disclosures [Abstract] |
Fair Value Disclosures | 9. FAIR VALUE DISCLOSURES Fair Value Option The Company has elected to account for certain of its other financial assets at fair value under the fair value option provisions of FASB ASC 825. The primary reason for electing the fair value option when it first became available in 2008, was to reduce the burden of monitoring the differences between the cost and the fair value of the Company’s investments, previously classified as available for sale securities, including the assessment as to whether the declines are temporary in nature and to further remove an element of management judgment. In addition, the election was made for certain investments that were previously required to be accounted for under the equity method because their fair value measurements were readily obtainable. Such financial assets accounted for at fair value include: •in general, securities that would otherwise qualify for available for sale treatment; • in general, investments in equity method affiliates where the affiliate has all of the attributes in FASB ASC 946-10-15-2 (commonly referred to as investment companies); and • in general, investments in residential loans. The changes in fair value (realized and unrealized gains and losses) of these instruments for which the Company has elected the fair value option are recorded in principal transactions and other income in the consolidated statements of operations. All of the investments for which the Company has elected the fair value option are included as a component of other investments, at fair value in the consolidated balance sheets. The Company recognized net losses of $11,399 and $6,284 related to changes in fair value of investments that are included as a component of other investments, at fair value during the years ended December 31, 2013 and 2012 respectively. The Company recognized net gains of $1,504 related to changes in fair value of investments that are included as a component of other investments, at fair value during the year ended December 31, 2011. Fair Value Measurements In accordance with FASB ASC 820, the Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three level fair value hierarchy. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the hierarchy under FASB ASC 820 are described below: Level 1 Financial assets and liabilities whose values are based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2 Financial assets and liabilities whose values are based on one or more of the following: 1. Quoted prices for similar assets or liabilities in active markets; 2. Quoted prices for identical or similar assets or liabilities in non-active markets; 3. Pricing models whose inputs, other than quoted prices, are observable for substantially the full term of the asset or liability; or 4. Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability. Level 3 Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the level 3 category. As a result, the unrealized gains and losses for assets and liabilities within the level 3 category presented in the tables below may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs. A review of the fair value hierarchy classifications is conducted on a quarterly basis. Changes in the type of inputs may result in a reclassification for certain financial assets or liabilities. There were no transfers between level 1 and level 2 of the fair value hierarchy during the years ended December 31, 2013 and 2012. Reclassifications impacting level 3 of the fair value hierarchy are reported as transfers in or transfers out of the level 3 category as of the beginning of the quarter in which reclassifications occur. The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 and 2012, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.
FAIR VALUE MEASUREMENTS ON A RECURRING BASIS
As of December 31, 2013
(Dollars in Thousands)
|  |  |  |  | Significant |  | Significant
|  |  | Quoted Prices in |  | Other Observable |  | Unobservable
|  |  | Active Markets |  | Inputs |  | Inputs
Assets: | Fair Value |  | (Level 1) |  | (Level 2) |  | (Level 3)
Investments-trading: |  |  |  |  |  |  |  |  |  |  |
U.S. government agency MBS and CMOs | $ | 13,520 |  | $ | - |  | $ | 13,520 |  | $ | -
U.S. government agency debt securities |  | 32,213 |  |  | 45 |  |  | 32,168 |  |  | -
RMBS |  | 1,584 |  |  | - |  |  | 1,584 |  |  | -
U.S. Treasury securities |  | 764 |  |  | 764 |  |  | - |  |  | -
Interests in securitizations (1) |  | 454 |  |  | - |  |  | 268 |  |  | 186
SBA loans |  | 27,719 |  |  | - |  |  | 27,719 |  |  | -
Corporate bonds and redeemable preferred stock |  | 23,562 |  |  | 2,973 |  |  | 20,589 |  |  | -
Foreign government bonds |  | 88 |  |  | - |  |  | 88 |  |  | -
Municipal bonds |  | 16,024 |  |  | - |  |  | 16,024 |  |  | -
Exchange traded funds |  | 6 |  |  | 6 |  |  | - |  |  | -
Certificates of deposit |  | 1,648 |  |  | - |  |  | 1,648 |  |  | -
Equity securities |  | 36 |  |  | 16 |  |  | 20 |  |  | -
Total investments - trading | $ | 117,618 |  | $ | 3,804 |  | $ | 113,628 |  | $ | 186
Other investments, at fair value |  |  |  |  |  |  |  |  |  |  |
EuroDekania (2) | $ | 4,192 |  | $ | - |  | $ | - |  | $ | 4,192
Star Asia (3) (5) |  | 17,104 |  |  | - |  |  | - |  |  | 17,104
Tiptree (4) |  | 2,282 |  |  | - |  |  | 2,282 |  |  | -
Star Asia Special Situations Fund (3) (5) |  | 2,747 |  |  | - |  |  | - |  |  | 2,747
Other equity securities |  | 33 |  |  | 23 |  |  | 10 |  |  | -
Interests in securitizations (1) |  | 35 |  |  | - |  |  | - |  |  | 35
Residential loans |  | 294 |  |  | - |  |  | 294 |  |  | -
Foreign currency forward contracts |  | 190 |  |  | 190 |  |  | - |  |  | -
Total other investments, at fair value | $ | 26,877 |  | $ | 213 |  | $ | 2,586 |  | $ | 24,078
Liabilities |  |  |  |  |  |  |  |  |  |  |
Trading securities sold, not yet purchased: |  |  |  |  |  |  |  |  |  |  |
U.S. government agency MBS | $ | 121 |  | $ | - |  | $ | 121 |  | $ | -
U.S. Treasury securities |  | 38,066 |  |  | 38,066 |  |  | - |  |  | -
Corporate bonds and redeemable preferred stock |  | 10,679 |  |  | - |  |  | 10,679 |  |  | -
Foreign government bonds |  | 26 |  |  | - |  |  | 26 |  |  | -
Municipal bonds |  | 88 |  |  | - |  |  | 88 |  |  | -
Certificates of deposit |  | 524 |  |  | - |  |  | 524 |  |  | -
Total trading securities sold, not yet purchased | $ | 49,504 |  | $ | 38,066 |  | $ | 11,438 |  | $ | -
(1)Primarily comprised of CDOs, CLOs, and ABS. (2)Hybrid Securities Fund—European. (3)Real Estate Fund—Asian. (4)Diversified Fund. (5)On February 20, 2014, the Company announced the completion of the sale of the Company’s ownership interests in the Star Asia Group. See note 31.
FAIR VALUE MEASUREMENTS ON A RECURRING BASIS
As of December 31, 2012
(Dollars in Thousands)
|  |  |  |  | Significant |  | Significant
|  |  | Quoted Prices in |  | Other Observable |  | Unobservable
|  |  | Active Markets |  | Inputs |  | Inputs
Assets: | Fair Value |  | (Level 1) |  | (Level 2) |  | (Level 3)
Investments-trading: |  |  |  |  |  |  |  |  |  |  |
U.S. government agency MBS and CMOs | $ | 34,592 |  | $ | - |  | $ | 34,592 |  | $ | -
U.S. government agency debt securities |  | 21,066 |  |  | - |  |  | 21,066 |  |  | -
RMBS |  | 583 |  |  | - |  |  | 583 |  |  | -
CMBS |  | 12 |  |  | - |  |  | 12 |  |  | -
U.S. Treasury securities |  | 147 |  |  | 147 |  |  | - |  |  | -
Interests in securitizations (1) |  | 352 |  |  | - |  |  | 57 |  |  | 295
SBA loans |  | 15,705 |  |  | - |  |  | 15,705 |  |  | -
Corporate bonds and redeemable preferred stock |  | 56,022 |  |  | 5,643 |  |  | 50,379 |  |  | -
Foreign government bonds |  | 448 |  |  | - |  |  | 448 |  |  | -
Municipal bonds |  | 37,745 |  |  | - |  |  | 37,745 |  |  | -
Certificates of deposit |  | 8,934 |  |  | - |  |  | 8,934 |  |  | -
Equity securities |  | 533 |  |  | 395 |  |  | 138 |  |  | -
Total investments - trading | $ | 176,139 |  | $ | 6,185 |  | $ | 169,659 |  | $ | 295
Other investments, at fair value |  |  |  |  |  |  |  |  |  |  |
EuroDekania (2) | $ | 2,054 |  | $ | - |  | $ | - |  | $ | 2,054
Star Asia (3) (5) |  | 30,169 |  |  | - |  |  | - |  |  | 30,169
Tiptree (4) |  | 2,834 |  |  | - |  |  | - |  |  | 2,834
Star Asia Special Situations Fund (3) (5) |  | 2,503 |  |  | - |  |  | - |  |  | 2,503
Other equity securities |  | 431 |  |  | 24 |  |  | 407 |  |  | -
Interests in securitizations (1) |  | 77 |  |  | - |  |  | - |  |  | 77
Residential loans |  | 255 |  |  | - |  |  | 255 |  |  | -
Total other investments, at fair value | $ | 38,323 |  | $ | 24 |  | $ | 662 |  | $ | 37,637
Liabilities |  |  |  |  |  |  |  |  |  |  |
Trading securities sold, not yet purchased: |  |  |  |  |  |  |  |  |  |  |
U.S. government agency MBS | $ | 13 |  | $ | - |  | $ | 13 |  | $ | -
U.S. Treasury securities |  | 19,722 |  |  | 19,722 |  |  | - |  |  | -
Corporate bonds and redeemable preferred stock |  | 21,976 |  |  | 152 |  |  | 21,824 |  |  | -
Municipal bonds |  | 128 |  |  | - |  |  | 128 |  |  | -
Certificates of deposit |  | 2,325 |  |  | - |  |  | 2,325 |  |  | -
Equity securities |  | 3 |  |  | 3 |  |  | - |  |  | -
Total trading securities sold, not yet purchased | $ | 44,167 |  | $ | 19,877 |  | $ | 24,290 |  | $ | -
(1)Primarily comprised of CDOs, CLOs, and ABS. (2)Hybrid Securities Fund—European. (3)Real Estate Fund—Asian. (4)Diversified Fund. (5)On February 20, 2014, the Company announced the completion of the sale of the Company’s ownership interests in the Star Asia Group. See note 31. The following provides a brief description of the types of financial instruments the Company holds, the methodology for estimating fair value, and the level within the hierarchy of the estimate. The discussion that follows applies regardless of whether the instrument is included in investments-trading; other investments, at fair value; or trading securities sold, not yet purchased. U.S. Government Agency MBS and CMOs: These are securities that are generally traded over-the-counter. The Company generally values these securities using third party quotations such as unadjusted broker-dealer quoted prices or market price quotations from third party pricing services. These valuations are based on a market approach. This is considered a level 2 valuation in the hierarchy. U.S. Government Agency Debt Securities: Callable and non-callable U.S. government agency debt securities are measured primarily based on quoted market prices obtained from third party pricing services. Non-callable U.S. government agency debt securities are generally classified within level 1 and callable U.S. government agency debt securities are classified within level 2 of the valuation hierarchy. RMBS and CMBS: The Company generally values these securities using third party quotations such as unadjusted broker-dealer quoted prices or market price quotations from third party pricing services. These valuations are based on a market approach. The Company generally classifies the fair value of these securities based on third party quotations within level 2 of the valuation hierarchy. U.S. Treasury Securities: U.S. Treasury securities include U.S. Treasury bonds and notes and the fair values of the U.S. Treasury securities are based on quoted prices in active markets. Valuation adjustments are not applied. The Company classifies the fair value of these securities within level 1 of the valuation hierarchy. Interests in Securitizations: Interests in securitizations may be comprised of CDOs, CLOs, and ABS, which may include, but are not limited to, securities backed by auto loans, credit card receivables, or student loans. Where the Company is able to obtain independent market quotations from at least two broker-dealers and where a price within the range of at least two broker-dealers is used or market price quotations from third party pricing services is used, interests in securitizations will generally be classified as level 2 of the valuation hierarchy. These valuations are based on a market approach. The independent market quotations from broker-dealers are generally nonbinding. The Company seeks quotations from broker-dealers that historically have actively traded, monitored, issued, and been knowledgeable about interests in securitizations. The Company generally believes that to the extent that (1) it receives two quotations in a similar range from broker-dealers knowledgeable about interests in securitizations, and (2) the Company believes the broker-dealers gather and utilize observable market information such as new issue activity in the primary market, trading activity in the secondary market, credit spreads versus historical levels, bid-ask spreads, and price consensus among market participants and sources, then classification as level 2 of the valuation hierarchy is appropriate. In the absence of two broker-dealer market quotations, a single broker-dealer market quotation may be used without corroboration of the quote in which case the Company generally classifies the fair value within level 3 of the valuation hierarchy. If quotations are unavailable, prices observed by the Company for recently executed market transactions may be used or valuation models prepared by the Company’s management may be used, which are based on an income approach. These models prepared by the Company’s management include estimates and the valuations derived from them could differ materially from amounts realizable in an open market exchange. Fair values based on internal valuation models prepared by the Company’s management are generally classified within level 3 of the valuation hierarchy. Establishing fair value is inherently subjective given the volatile and sometimes illiquid markets for certain interests in securitizations and requires management to make a number of assumptions, including assumptions about the future of interest rates, discount rates; and the timing of cash flows. The assumptions the Company applies are specific to each security. Although the Company may rely on internal calculations to compute the fair value of certain interest in securitizations, the Company requests and considers indications of fair value from third party pricing services to assist in the valuation process. SBA Loans: SBA loans include loans and SBA interest only strips. In the case of loans, the Company generally values these securities using third party quotations such as unadjusted broker-dealer quoted prices, internal valuation models using observable inputs, or market price quotations from third party pricing services. The Company generally classifies these investments within level 2 of the valuation hierarchy. These valuations are based on a market approach. SBA interest only strips do not trade in an active market with readily available prices. Accordingly, the Company generally uses valuation models to determine fair value and classifies the fair value of the SBA interest only strips within level 3 of the valuation hierarchy. Corporate Bonds, Redeemable Preferred Stock, and Foreign Government Bonds: The Company uses recently executed transactions or third party quotations from independent pricing services to arrive at the fair value of its investments in corporate bonds, redeemable preferred stock, and foreign government bonds. These valuations are based on a market approach. The Company generally classifies the fair value of these bonds within level 2 of the valuation hierarchy. In instances where the fair values of securities are based on quoted prices in active markets (for example with redeemable preferred stock), the Company classifies the fair value of these securities within level 1 of the valuation hierarchy. Municipal Bonds: Municipal bonds, which include obligations of U.S. states, municipalities, and political subdivisions, primarily include bonds or notes issued by U.S. municipalities. The Company generally values these securities using third party quotations such as market price quotations from third party pricing services. The Company generally classifies the fair value of these bonds within level 2 of the valuation hierarchy. The valuations are based on a market approach. In instances where the Company is unable to obtain reliable market price quotations from third party pricing services, the Company will use its own internal valuation models. In these cases, the Company will classify such securities as level 3 within the hierarchy until it is able to obtain third party pricing. Exchange Traded Funds: Exchange traded funds are investment funds that trade in active markets, similar to public company stocks. The fair values of exchange traded funds are based on quoted prices in active markets. Valuation adjustments are not applied. The Company classifies the fair value of these securities within level 1 of the valuation hierarchy. Equity Securities : The fair value of equity securities that represent investments in publicly traded companies (common or preferred shares, options, warrants, and other equity investments) are determined using the closing price of the security as of the reporting date. These are securities which are traded on a recognized liquid exchange. This is considered a level 1 value in the valuation hierarchy. In some cases, the Company has owned options or warrants in newly publicly traded companies when the option or warrant itself is not publicly traded. In those cases, the Company used an internal valuation model and classified the investment within level 3 of the valuation hierarchy. The non-exchange traded equity options and warrants were measured using the Black-Scholes model with key inputs impacting the valuation including the underlying security price, implied volatility, dividend yield, interest rate curve, strike price, and maturity date. Once the securities underlying the options or warrants (not the options or warrants themselves) have quoted prices available in an active market, the Company attributes a value to the warrants using the Black-Scholes model based on the respective price of the options or warrants and the quoted prices of the securities underlying the options or warrants and key observable inputs. In this case, the Company will generally classify the options or warrants as level 2 within the valuation hierarchy because the inputs to the valuation model are now observable. If the option or warrant itself begins to trade on a liquid exchange, the Company will discontinue using a valuation model and will begin to use the public exchange price at which point it will be classified as level 1 in the valuation hierarchy. Other equity securities represent investments in investment funds and other non-publicly traded entities. Substantially all of these other entities have the attributes of investment companies as described in FASB ASC 946-15-2. The Company estimates the fair value of these entities using the reported net asset value per share as of the reporting date in accordance with the “practical expedient” provisions related to investments in certain entities that calculate net asset value per share (or its equivalent) included in FASB ASC 820 for all entities except Star Asia. The Company generally classifies these estimates within either level 2 of the valuation hierarchy if its investment in the entity is currently redeemable or level 3 if its investment is not currently redeemable. As described in more detail in note 31, the Company sold its investment in Star Asia Special Situations Fund in February 2014 along with its investment in Star Asia and certain other related entities. According to ASC 820, when a sale is considered probable as of the measurement date at an amount other than the underlying NAV per share, the reporting entity should not use the practical expedient in determining fair value. Therefore, the Company determined the fair value of its investment in Star Asia Special Situations Fund by utilizing a valuation model that took into account the terms and conditions of the sale in February 2014. Prior to the second quarter of 2013, the Company carried its investment in Tiptree based on the underlying net asset value per share of the fund in accordance with the “practical expedient” provisions discussed above and the Company classified the fair value estimate within level 3 of the valuation hierarchy. Beginning with the second quarter of 2013, the Company changed the way it calculates the fair value of its investment in Tiptree. During the second quarter of 2013, Tiptree completed a reorganization. As a result of that reorganization, the Company’s investment in Tiptree can be exchanged into shares of Tiptree Inc. based on a stated exchange ratio (which is generally fixed, but can be adjusted for certain events, such as stock dividends or stock splits). Tiptree Inc. is publicly traded over the counter. Therefore, beginning with the second quarter of 2013, the Company has calculated the fair value of its investment in Tiptree by using the closing over the counter price for Tiptree Inc. and adjusting for the exchange ratio. Based on this pricing methodology, the Company began classifying the fair value of its investment in Tiptree as level 2 within the valuation hierarchy during the second quarter of 2013. In the case of Star Asia, prior to December 31, 2013, the Company utilized a valuation model to determine fair value, which used a market approach and generally classifies its investment within level 3 of the valuation hierarchy. Star Asia accounts for itself as an investment company as described in ASC 946, Financial Services—Investment Companies. As an investment company, Star Asia carries its assets at fair value and reports net asset value (“NAV”) per share to its investors. However, Star Asia issued subordinated debt securities in 2009 at a significant discount to par. Upon issuance, Star Asia did not elect the fair value option for these liabilities and was not required to do so under ASC 946. Over time, it is the Company’s assessment that the fair value of the subordinated debt securities has diverged from its carrying value. Because Star Asia’s published NAV is calculated using the amortized cost of these subordinated debt securities, the Company had concluded it would be appropriate to adjust Star Asia’s reported NAV to recalculate it as if Star Asia’s subordinated debt were recorded at fair value as opposed to its historical amort ized cost. The Company estimated the fair value of Star Asia’s subordinated debt securities by projecting the remaining debt cash outflows and discounting them at an estimated market rate as of the reporting date, w hich wa s derived from similar non-investment grade long term subordinated debt issuances. The Company used a discount rate of 6.82% as of December 31, 2012, in determining the fair value of Star Asia’s subordinated debt securities. If the Company had used Star Asia’s unadjusted NAV, rather than the Company’s financial model described above in determining the fair value of the Company’s investment in Star Asia, the Company would have recorded its investment in Star Asia at a value of $39,998 as of December 31, 2012, as compared to the fair value as determined by the Company’s internal valuation model of $30,169, as of December 31, 2012. As described in more detail in note 31, the Company sold its investment in Star Asia on February 20, 2014 along with its investment in Star Asia Special Situations Fund and certain other related entities. Therefore, the Company determined the fair value of its investment in Star Asia by utilizing a valuation model that took into account the terms and conditions of the sale in February 2014, as opposed to the valuation model described in the immediately preceding two paragraphs (which was used historically by the Company). Residential Loans: Management utilizes home price indices to value the residential loans. Previously, management had considered adjustments to these indices but elected at the beginning of 2012 not to adjust the indices. Adjustments to the index implied a level 3 valuation. The methodology using an unadjusted index, which is considered an observable input, implies a level 2 valuation. Certificates of Deposit: The fair value of certificates of deposit is estimated using valuations provided by third party pricing services. Certificates of deposit are generally categorized in level 2 of the valuation hierarchy. Derivatives: Foreign C urrency Forward Contracts Foreign currency forward contracts are exchange-traded derivatives which transact on an exchange that is deemed to be active. The fair value of the foreign currency forward contracts is based on current quoted market prices. Valuation adjustments are not applied. These are considered a level 1 value in the hierarchy. See note 10. TBAs The Company generally values these securities using third party quotations such as unadjusted broker-dealer quoted prices or market price quotations from third party pricing services. TBAs are generally classified within level 2 of the fair value hierarchy. If there is limited transaction activity or less transparency to observe market based inputs to valuation models, TBAs are classified in level 3 of the fair value hierarchy. U.S. government agency MBS and CMOs include TBAs. Unrealized gains on TBAs are included in investments-trading on the Company’s consolidated balance sheets and unrealized losses on TBAs are included in trading securities sold, not yet purchased on the Company’s consolidated balance sheets. See note 10. Level 3 Financial Assets and Liabilities Financial Instruments Measured at Fair Value on a Recurring Basis The following table presents additional information about assets and liabilities measured at fair value on a recurring basis and for which the Company has utilized level 3 inputs to determine fair value.
LEVEL 3 INPUTS
For the Year Ended December 31, 2013
(Dollars in Thousands)
|  | December 31, 2012 |  | Net trading |  | Principal transactions and other income |  | Transfers out of Level 3 |  | Purchases |  | Sales |  | December 31, 2013 |  | Change in unrealized gains /(losses) for the period included in earnings (1)
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investments-trading |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interests in securitizations (2) |  | $ | 295 |  | $ | 82 |  | $ | - |  | $ | - |  | $ | - |  | $ | (191) |  | $ | 186 |  | $ | (111)
SBA loans |  |  | - |  |  | 213 |  |  | - |  |  | - |  |  | 37 |  |  | (250) |  |  | - |  |  | -
Total investments-trading |  | $ | 295 |  | $ | 295 |  | $ | - |  | $ | - |  | $ | 37 |  | $ | (441) |  | $ | 186 |  | $ | (111)
Other investments, at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equity Securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
EuroDekania (3) |  | $ | 2,054 |  | $ | - |  | $ | 1,167 |  | $ | - |  | $ | 971 |  | $ | - |  | $ | 4,192 |  | $ | 1,167
Star Asia (4) (6) |  |  | 30,169 |  |  | - |  |  | (13,065) |  |  | - |  |  | - |  |  | - |  |  | 17,104 |  |  | (13,065)
Tiptree (5) |  |  | 2,834 |  |  | - |  |  | - |  |  | (2,834) |  |  | - |  |  | - |  |  | - |  |  | -
Star Asia Special Situations Fund (4) (6) |  |  | 2,503 |  |  | - |  |  | 152 |  |  | - |  |  | 302 |  |  | (210) |  |  | 2,747 |  |  | 152
Total equity securities |  |  | 37,560 |  |  | - |  |  | (11,746) |  |  | (2,834) |  |  | 1,273 |  |  | (210) |  |  | 24,043 |  |  | (11,746)
Interest in securitizations (2) |  |  | 77 |  |  | - |  |  | (42) |  |  | - |  |  | - |  |  | - |  |  | 35 |  |  | (42)
Total other investments, fair value |  | $ | 37,637 |  | $ | - |  | $ | (11,788) |  | $ | (2,834) |  | $ | 1,273 |  | $ | (210) |  | $ | 24,078 |  | $ | (11,788)
(1) Represents the change in unrealized gains and losses for the period included in earnings for assets held at the end of the reporting period. (2)Primarily comprised of CDOs, CLOs, and ABS. (3)Hybrid Securities Funds—European. (4)Real Estate Funds—Asian. (5)Diversified Fund. (6)On February 20, 2014, the Company announced the completion of the sale of the Company’s ownership interests in the Star Asia Group. See note 31.
LEVEL 3 INPUTS
For the Year Ended December 31, 2012
(Dollars in Thousands)
|  |  | December 31, 2011 |  |  | Net trading |  |  | Principal transactions and other income |  |  | Transfers out of Level 3 |  |  | Purchases |  |  | Sales |  |  | December 31, 2012 |  | Change in unrealized gains /(losses) for the period included in earnings (1)
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investments-trading |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
RMBS |  | $ | 4,932 |  | $ | 17 |  | $ | - |  | $ | - |  | $ | 171 |  | $ | (5,120) |  | $ | - |  | $ | -
Interests in securitizations (2) |  |  | 221 |  |  | 126 |  |  | - |  |  | - |  |  | 2,861 |  |  | (2,913) |  |  | 295 |  |  | 63
Equity securities |  |  | 35 |  |  | (104) |  |  | - |  |  | (57) |  |  | 126 |  |  | - |  |  | - |  |  | -
Total investments-trading |  | $ | 5,188 |  | $ | 39 |  | $ | - |  | $ | (57) |  | $ | 3,158 |  | $ | (8,033) |  | $ | 295 |  | $ | 63
Other investments, at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equity Securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
EuroDekania (3) |  | $ | 2,370 |  | $ | - |  | $ | (331) |  | $ | - |  | $ | 15 |  | $ | - |  | $ | 2,054 |  | $ | (331)
Star Asia (4) (6) |  |  | 37,358 |  |  | - |  |  | (7,274) |  |  | - |  |  | 85 |  |  | - |  |  | 30,169 |  |  | (7,274)
Tiptree (5) |  |  | 2,533 |  |  | - |  |  | 301 |  |  | - |  |  | - |  |  | - |  |  | 2,834 |  |  | 301
Star Asia Special Situations Fund (4) (6) |  |  | - |  |  | - |  |  | 662 |  |  | - |  |  | 1,841 |  |  | - |  |  | 2,503 |  |  | 662
Other |  |  | 132 |  |  | - |  |  | (41) |  |  | (91) |  |  | - |  |  | - |  |  | - |  |  | -
Total equity securities |  |  | 42,393 |  |  | - |  |  | (6,683) |  |  | (91) |  |  | 1,941 |  |  | - |  |  | 37,560 |  |  | (6,642)
Interest in securitizations (2) |  |  | 88 |  |  | - |  |  | (11) |  |  | - |  |  | - |  |  | - |  |  | 77 |  |  | (11)
Residential loans |  |  | 267 |  |  | - |  |  | - |  |  | (267) |  |  | - |  |  | - |  |  | - |  |  | -
Total other investments, fair value |  | $ | 42,748 |  | $ | - |  | $ | (6,694) |  | $ | (358) |  | $ | 1,941 |  | $ | - |  | $ | 37,637 |  | $ | (6,653)
(1)Represents the change in unrealized gains and losses for the period included in earnings for assets held at the end of the reporting period. (2)Primarily comprised of CDOs, CLOs, and ABS. (3)Hybrid Securities Funds—European. (4)Real Estate Funds—Asian. (5)Diversified Fund. (6)On February 20, 2014, the Company announced the completion of the sale of the Company’s ownership interests in the Star Asia Group. See note 31. The circumstances that would result in transferring certain financial instruments from level 2 to level 3 of the valuation hierarchy would typically include what the Company believes to be a decrease in the availability, utility, and reliability of observable market information such as new issue activity in the primary market, trading activity in the secondary market, credit spreads versus historical levels, bid-ask spreads, and price consensus among market participants and sources. Investments-trading: During the year ended December 31, 2013, there were no transfers into or out of level 3 of the valuation hierarchy. During the year ended December 31, 2012, there were no transfers into level 3 of the valuation hierarchy. During the year ended December 31, 2012, there were transfers out of level 3 of the valuation hierarchy of $57 related to certain equity warrants, which were transferred during the fourth quarter of 2012 into level 2. Once the securities underlying the warrants had quoted prices available in an active market, the Company attributed a value to the warrants using the Black-Scholes model based on the respective price of the warrants and the quoted prices of the securities underlying the warrants and key observable inputs. In this case, the Company reclassified the warrants as a level 2 within the valuation hierarchy. Other investments, at fair value: During the year ended December 31, 2013, the Company transferred $2,834 of its investment in Tiptree from level 3 to level 2 of the valuation hierarchy. During the year ended December 31, 2012, the Company transferred $267 of residential loans from level 3 to level 2 of the valuation hierarchy. In addition, during the fourth quarter of 2012, the Company transferred $91 in certain warrants from level 3 to level 2 of the valuation hierarchy. Once the securities underlying the warrants had quoted prices available in an active market, the Company attributed a value to the warrants using the Black-Scholes model based on the respective price of the warrants and the quoted prices of the securities underlying the warrants and key observable inputs. In this case, the Company reclassified the warrants as a level 2 within the valuation hierarchy. During the year ended December 31, 2012, there were no transfers into level 3 of the valuation hierarchy. The following table provides the quantitative information about level 3 fair value measurements as of December 31, 2013 and 2012, respectively:
QUANTITATIVE INFORMATION ABOUT LEVEL 3 FAIR VALUE MEASUREMENTS
(Dollars in Thousands)
|  |  |  |  |  |  |  |  | Significant |  |  |  |  |  | Range of
|  |  | Fair Value |  |  | Valuation |  |  | Unobservable |  |  | Weighted |  |  | Significant
|  |  | December 31, 2013 |  |  | Technique |  |  | Inputs |  |  | Average |  |  | Inputs
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other investments, at fair value |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Star Asia |  | $ | 17,104 |  |  | Allocated sale price |  |  | Relative fair value of assets sold |  |  | 77.3% |  |  | 74.9% - 79.1%
Star Asia Special Situations Fund |  | $ | 2,747 |  |  | Allocated sale price |  |  | Relative fair value of assets sold |  |  | 12.4% |  |  | 12.0% - 12.7%
QUANTITATIVE INFORMATION ABOUT LEVEL 3 FAIR VALUE MEASUREMENTS
(Dollars in Thousands)
|  |  |  |  |  |  |  |  | Significant |  |  |  |  |  | Range of
|  |  | Fair Value |  |  | Valuation |  |  | Unobservable |  |  | Weighted |  |  | Significant
|  |  | December 31, 2012 |  |  | Technique |  |  | Inputs |  |  | Average |  |  | Inputs
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other investments, at fair value |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Star Asia |  | $ | 30,169 |  |  | Adjusted NAV |  |  | Discount rate |  |  | 6.82% |  |  | 6.82%
|  |  |  |  |  |  |  |  | on debt |  |  |  |  |  |
Sensitivity of Fair Value to Changes in Significant Unobservable Inputs For recurring fair value measurements categorized within level 3 of the fair value hierarchy, the sensitivity of the fair value measurement to changes in significant unobservable inputs and interrelationships between those unobservable inputs (if any) are described below: •Equity investments in investment funds and other non-publicly traded entities. With respect to the fair value measurement of investment funds and other non-publicly traded entities for which the Company uses the underlying net asset value per share to determine the fair value of the Company’s respective investment, a significant increase (decrease) in the net asset value per share, which is linked to the underlying financial performance of the respective entity, would result in a significantly higher (lower) fair value measurement. • Equity investment in Star Asia and Star Asia Special Situations Fund – 2013 With respect to the Company’s investment in Star Asia and Star Asia Special situations fund as of December 31, 2013, the Company concluded it would be appropriate to base its fair value estimate on the terms and conditions of the sale of these assets which was completed in February 2014 (see note 31). As the sale involved multiple investments, the key assumption in the valuation is the relative fair value of Star Asia Special Situations Fund and Star Asia as compared to the total fair value of all the entities sold. • Equity investment in Star Asia - 2012 With respect to the Company’s investment in Star Asia for which the Company has concluded it would be appropriate to adjust Star Asia’s reported NAV to recalculate it as if Star Asia’s subordinated debt were recorded at fair value as opposed to its historical cost. The Company estimates the fair value of Star Asia’s subordinated debt securities by projecting the remaining debt cash outflows and discounting them at an estimated market discount rate. Any change in the discount rate used in this calculation, which is linked to market yields for similar non-investment grade long term subordinated debt issuances, may result in a significant higher (lower) fair value measurement. Investments in Certain Entities That Calculate Net Asset Value Per Share (Or Its Equivalent) The following table presents additional information about investments in certain entities that calculate net asset value per share (regardless of whether the “practical expedient” provisions of FASB ASC 820 have been applied) which are measured at fair value on a recurring basis at December 31, 2013 and 2012:
FAIR VALUE MEASUREMENTS OF INVESTMENTS IN CERTAIN ENTITIES
THAT CALCULATE NET ASSET VALUE PER SHARE (OR ITS EQUIVALENT)
|  |  | Fair Value |  |  |  |  |  |  |  |  |
|  |  | December 31, 2013 |  |  |  |  |  |  |  |  |
|  |  | (dollars in thousands) |  |  | Unfunded Commitments |  |  | Redemption Frequency |  |  | Redemption Notice Period
Other investments, at fair value |  |  |  |  |  |  |  |  |  |  |  |
EuroDekania (a) |  | $ | 4,192 |  |  | N/A |  |  | N/A |  |  | N/A
Star Asia (b) |  |  | 17,104 |  |  | N/A |  |  | N/A |  |  | N/A
Tiptree (c) |  |  | 2,282 |  |  | N/A |  |  | N/A |  |  | N/A
Star Asia Special Situations Fund (d) |  |  | 2,747 |  |  | N/A |  |  | N/A |  |  | N/A
|  | $ | 26,325 |  |  |  |  |  |  |  |  |
|  |  | Fair Value |  |  |  |  |  |  |  |  |
|  |  | December 31, 2012 |  |  |  |  |  |  |  |  |
|  |  | (dollars in thousands) |  |  | Unfunded Commitments |  |  | Redemption Frequency |  |  | Redemption Notice Period
Other investments, at fair value |  |  |  |  |  |  |  |  |  |  |  |
EuroDekania (a) |  | $ | 2,054 |  |  | N/A |  |  | N/A |  |  | N/A
Star Asia (b) |  |  | 30,169 |  |  | N/A |  |  | N/A |  |  | N/A
Tiptree (c) |  |  | 2,834 |  |  | N/A |  |  | N/A |  |  | N/A
Star Asia Special Situations Fund (d) |  |  | 2,503 |  | $ | 321 |  |  | N/A |  |  | N/A
|  | $ | 37,560 |  |  |  |  |  |  |  |  |
N/A – Not applicable. (a)EuroDekania’s investment strategy is to make investments in hybrid capital securities that have attributes of debt and equity, primarily in the form of subordinated debt issued by insurance companies, banks and bank holding companies based primarily in Western Europe; widely syndicated leveraged loans issued by European corporations; CMBS, including subordinated interests in first mortgage real estate loans; and RMBS and other ABS backed by consumer and commercial receivables. The majority of the assets are denominated in Euros and U.K. Pounds Sterling. The fair value of the investment in this category has been estimated using the net asset value per share of the investment in accordance with the “practical expedient” provisions of FASB ASC 820. (b)Star Asia’s investment strategy is to make investments in Asian real estate structured finance investments, including CMBS, corporate debt of REITs and real estate operating companies, whole loans, mezzanine loans, and other commercial real estate fixed income investments. The fair value of the investment in this category has been estimated using an internal valuation model that uses a market approach. If the Company had used Star Asia’s unadjusted reported net asset value to determine its fair value, the carrying value of its investment in Star Asia would have been $30,261 as of December 31, 2013 and $39,998 as of December 31, 2012. On February 20, 2014, the Company announced the completion of the sale of the Company’s ownership interests in the Star Asia Group. See note 31. (c)The investment strategy of Tiptree is focused on investing in (a) specialty finance companies; (b) alternative asset management companies; and (c) diversified credit assets and related equity interests. Tiptree primarily seeks to acquire majority ownership interests in its investees. Prior to June 30, 2013, the fair value of this investment had been estimated using the net asset value per share of the investment in accordance with the “practical expedient” provisions of FASB ASC 820. Beginning with the second quarter of 2013, the Company calculates the fair value of its investment in Tiptree by using the closing over the counter price for Tiptree Inc. and adjusting for the exchange ratio. As of December 31, 2013 and 2012, the Company owned approximately 1% of Tiptree. (d) The Star Asia Special Situations Fund’s investment strategy is to make investments in real estate and securities backed by real estate in Japan. The Star Asia Special Situations Fund is a closed end fund that does not allow investor redemptions. It has an initial life of three years which can be extended under certain circumstances for up to two years. Prior to December 31, 2013, t he fair value of the investment in this category has been estimated using the net asset value per share of the investment in accordance with the “practical expedient” provisions of FASB ASC 820. The Company’s unfunded commitment was denominated in Japanese Yen and fluctuated based on the foreign exchange spot rate used at any particular period. See note 29. As described in more detail in note 31, the Company sold its investment in Star Asia Special Situations Fund in February 2014 along with its investment in Star Asia and certain other related entities. According to ASC 820, when a sale is considered probable as of the measurement date at an amount other than the underlying NAV per share, the reporting entity should not use the practical expedient in determining fair value. Therefore, the Company determined the fair value of its investment in Star Asia Special Situations Fund as of December 31, 2013, by utilizing a valuation model that took into account the terms and conditions of the sale in February 2014.

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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/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13537-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13433-108611 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=25499696&loc=d3e19207-110258 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13504-108611 + Details
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