FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value amounts represent estimates of the consideration that would currently be agreed upon between knowledgeable, willing parties who are under no compulsion to act. 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 classifies its investments in fixed maturities and equity investments as available-for-sale and reports these investments at fair value. The Company's limited liability investment, at fair value, performance shares, subordinated debt and contingent consideration liabilities are measured and reported at fair value.

Fixed maturities and equity investments - 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. 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 investment, at fair value - The fair value of the limited liability investment, at fair value is calculated based on a model that distributes the net equity of 1347 Investors to all classes of membership interests. The model uses quoted market prices and significant market observable inputs.

Performance shares - The performance shares, for which no active market exists, are required to be valued at fair value as determined in good faith by the Company. Such determination of fair value would require the Company to develop a model based upon relevant observable market inputs as well as significant unobservable inputs, including developing a sufficiently reliable estimate for an appropriate discount to reflect the illiquidity and unique structure of the security. The Company determined its model for the performance shares was not sufficiently reliable. As a result, the Company has assigned a fair value of zero to the performance shares. Refer to Note 6, "Investments," for further details regarding the performance shares.

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.

Contingent consideration - The consideration for certain of the Company's acquisitions included 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. The fair value of contingent consideration liabilities is estimated using internal models without relevant observable market inputs. Estimated payments are discounted using present value techniques to arrive at estimated fair value. 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 unaudited consolidated statements of operations as contingent consideration benefit. During the second quarter of 2017, the Company settled its remaining contingent consideration liability; therefore, no contingent consideration liability remains on the consolidated balance sheets as of June 30, 2017.

The Company employs a fair value hierarchy to categorize the inputs it uses in valuation techniques to measure the fair value. The extent of use of quoted market prices (Level 1), valuation models using observable market information (Level 2) and internal models without observable market information (Level 3) in the valuation of the Company's financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016 was as follows:



(in thousands)					June 30, 2017
			Fair Value Measurements at the End of the Reporting Period Using

	Total		Quoted Prices in Active Markets for Identical Assets(Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring fair value measurements:

Assets:
Fixed maturities:
U.S. government, government agencies and authorities	$	26,904	$	—	$	26,904	$	—
States, municipalities and political subdivisions	3,694		—		3,694		—
Mortgage-backed	8,353		—		8,353		—
Asset-backed securities and collateralized mortgage obligations	2,195		—		2,195		—
Corporate	15,819		—		15,819		—
Total fixed maturities	56,965		—		56,965		—
Equity investments:
Common stock	17,616		17,616		—		—
Warrants	1,825		638		1,187		—
Total equity investments	19,441		18,254		1,187		—
Limited liability investment, at fair value	8,220		—		8,220		—
Other investments	7,550		—		7,550		—
Short-term investments	151		—		151		—
Total assets	$	92,327	$	18,254	$	74,073	$	—

Liabilities:
Subordinated debt	$	48,210	$	—	$	48,210	$	—
Total liabilities	$	48,210	$	—	$	48,210	$	—



(in thousands)					December 31, 2016
			Fair Value Measurements at the End of the Reporting Period Using

	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring fair value measurements:

Assets:
Fixed maturities:
U.S. government, government agencies and authorities	$	28,148	$	—	$	28,148	$	—
States municipalities and political subdivisions	3,088		—		3,088		—
Mortgage-backed	8,506		—		8,506		—
Asset-backed securities and collateralized mortgage obligations	3,467		—		3,467		—
Corporate	18,555		—		18,555		—
Total fixed maturities	61,764		—		61,764		—
Equity investments:
Common stock	21,426		21,426		—		—
Warrants	1,804		664		1,140		—
Total equity investments	23,230		22,090		1,140		—
Limited liability investment, at fair value	10,700		—		10,700		—
Other investments	7,975		—		7,975		—
Short-term investments	401		—		401		—
Total assets	$	104,070	$	22,090	$	81,980	$	—

Liabilities:
Subordinated debt	$	43,619	$	—	$	43,619	$	—
Contingent consideration	325		—		—		325
Total liabilities	$	43,944	$	—	$	43,619	$	325

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, 2017 and June 30, 2016:



(in thousands)	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
Contingent consideration:
Beginning balance	$	325		$	1,982		$	325		$	1,982
Settlement of contingent consideration liabilities	(113		)	(1,000		)	(113		)	(1,000		)
Change in fair value of contingent consideration included in net loss	(212		)	(657		)	(212		)	(657		)
Ending balance	$	—		$	325		$	—		$	325