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, real estate investments and subordinated debt 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 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 Company's investment in 1347 Investors as well as the underlying investments of Net Lease and Argo Holdings. 1347 Investors owns common stock in Limbach Holdings, Inc., a publicly traded company. Net Lease owns investments in limited liability companies that hold investment properties. 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 the Company's investment in 1347 Investors 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. This investment is categorized in Level 2 of the fair value hierarchy.

•

The fair value of Net Lease's investments in limited liability companies is based upon the net asset values of the underlying investments companies as a practical expedient to estimate fair value. The Company applies the net asset value practical expedient to Net Lease's limited liability investments on an investment-by-investment basis unless it is probable that the Company will 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.

Real estate investments - The fair value of real estate investments involves a combination of the market and income valuation techniques. Under this approach, a market-based capitalization rate is derived from comparable transactions, adjusted for any unique characteristics of each asset, and applied to the asset under consideration. The cap rates used during underwriting and subsequent valuation incorporate the consideration of risks of vacancy and collection loss, administrative costs of owning net leased assets and possible capital expenditures that could be determined a landlord expense. 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.

Warrant liability - As described in Note 13, "Debt," the Company issued the KWH Warrants on March 1, 2019. The KWH Warrants 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 the warrant liability is estimated using an internal model without relevant observable market inputs. The significant inputs used in the model include an enterprise value multiple applied to earnings before interest, tax, depreciation and amortization. The implied enterprise value is reduced by the remaining debt associated with the KWH Loan to determine an implied equity value. The liability classified warrants are categorized in Level 3 of the fair value hierarchy.

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, 2019 and December 31, 2018 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, 2019
	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)		Measured at Net Asset Value
Recurring fair value measurements:

Assets:
Fixed maturities:
U.S. government, government agencies and authorities	$	15,046	$	—	$	15,046	$	—	$	—
States, municipalities and political subdivisions	601		—		601		—		—
Mortgage-backed	2,454		—		2,454		—		—
Corporate	2,686		—		2,686		—		—
Total fixed maturities	20,787		—		20,787		—		—
Equity investments:
Common stock	179		179		—		—		—
Warrants	23		16		7		—		—
Total equity investments	202		195		7		—		—
Limited liability investments, at fair value	33,047		—		6,298		4,635		22,114
Real estate investments	10,662		—		—		10,662		—
Other investments	895		—		895		—		—
Short-term investments	154		—		154		—		—
Total assets	$	65,747	$	195	$	28,141	$	15,297	$	22,114

Liabilities:
Subordinated debt	$	50,224	$	—	$	50,224	$	—	$	—
Warrant liability	307		—		—		307		—
Total liabilities	$	50,531	$	—	$	50,224	$	307	$	—



(in thousands)					December 31, 2018
			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)		Measured at Net Asset Value
Recurring fair value measurements:

Assets:
Fixed maturities:
U.S. government, government agencies and authorities	$	5,547	$	—	$	5,547	$	—	$	—
States municipalities and political subdivisions	607		—		607		—		—
Mortgage-backed	3,186		—		3,186		—		—
Corporate	2,920		—		2,920		—		—
Total fixed maturities	12,260		—		12,260		—		—
Equity investments:
Common stock	801		801		—		—		—
Warrants	55		19		36		—		—
Total equity investments	856		820		36		—		—
Limited liability investments, at fair value	26,015		—		206		4,124		21,685
Real estate investments	10,662		—		—		10,662		—
Other investments	2,079		—		2,079		—		—
Short-term investments	152		—		152		—		—
Total assets	$	52,024	$	820	$	14,733	$	14,786	$	21,685

Liabilities:
Subordinated debt	$	50,023	$	—	$	50,023	$	—	$	—
Total liabilities	$	50,023	$	—	$	50,023	$	—	$	—

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, 2019 and June 30, 2018:



(in thousands)	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018
Assets:
Limited liability investments, at fair value:
Beginning balance	$	4,060		$	1,634		$	4,124		$	1,397
Purchases	599			504			674			978
Distributions received	(14		)	(70		)	(338		)	(562		)
Realized gains included in net (loss) income	14			—			83			251
Change in fair value of limited liability investments, at fair value included in net (loss) income	(24		)	15			92			19
Ending balance	$	4,635		$	2,083		$	4,635		$	2,083
Unrealized gains recognized in net (loss) income on limited liability investments, at fair value held at end of period	$	—		$	15		$	116		$	38
Real estate investments:
Beginning balance	$	10,662		$	10,662		$	10,662		$	10,662
Change in fair value of real estate investments included in net (loss) income	—			—			—			—
Ending balance	$	10,662		$	10,662		$	10,662		$	10,662
Unrealized gains recognized in net (loss) income on real estate investments held at end of period	$	—		$	—		$	—		$	—
Ending balance - assets	$	15,297		$	12,745		$	15,297		$	12,745
Liabilities:
Warrant liability:
Beginning balance	$	317		$	—		$	—		$	—
Issuance of warrants	—			—			361			—
Change in fair value of warrant liability included in net (loss) income	(10		)	—			(54		)	—
Ending balance - liabilities	$	307		$	—		$	307		$	—
Unrealized gains recognized in net (loss) income on warrant liability held at end of period	$	(10	)	$	—		$	(54	)	$	—

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, 2019 :



Categories	Fair Value		Valuation Techniques	Unobservable Inputs	Input Value(s)
Limited liability investments, at fair value	$	4,635	Market approach	Valuation multiples	5.0x-8.8x
Real estate investments	$	10,662	Market and income approach	Cap rates	7.5	%
Warrant liability	$	307	Market approach	Valuation multiple	6.0x



Categories	Fair Value		Valuation Techniques	Unobservable Inputs	Input Value(s)
Limited liability investments, at fair value	$	4,124	Market approach	Valuation multiples	5.0x-8.8x
Real estate investments	$	10,662	Market and income approach	Cap rates	7.5	%

All transfers are recognized by the Company at the beginning of each reporting period. Transfers between Levels 2 and 3 generally relate to whether significant unobservable inputs are used for the fair value measurements. There were no transfers between levels in 2019 or 2018.

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, 2019:



Category	Fair Value (in thousands)		Unfunded Commitments	Redemption Frequency	Redemption Notice Period
Limited liability investments, at fair value	$	22,114	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, 2018:



Category	Fair Value (in thousands)		Unfunded Commitments	Redemption Frequency	Redemption Notice Period
Limited liability investments, at fair value	$	21,685	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 months ended June 30, 2019 and June 30, 2018, the Company recorded adjustments to increase the fair value of an certain investments in private companies for observable price changes of zero and $0.2 million, respectively, ($0.0 million and $0.2 million for the six months ended June 30, 2019 and June 30, 2018, respectively), which are included in net change in unrealized gain (loss) on private company investments in the consolidated statements of operations. The Company recorded no write-downs for other-than-temporary impairments related to investments in private companies for the three and six months ended June 30, 2019 and June 30, 2018. 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.

As further discussed in Note 5, "Acquisition and Discontinued Operations," the Company acquired Geminus on March 1, 2019. The fair values of intangible assets and deferred service fees associated with the acquisition of Geminus 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:



Categories	Fair Value		Valuation Techniques	Unobservable Inputs	Input Value(s)
Customer relationships	$	3,732	Multi-period excess earnings	Growth rate	3.0	%
				Attrition rate	20.0	%
				Discount rate	13.0	%
Trade names	$	1,974	Relief from royalty	Royalty rate	0.25% - 2.0%
				Discount rate	13.0	%
Deferred service fees - Penn	$	8,734	Bottom-up	Normal profit margin	15.5	%
				Total direct costs	70.3	%
				Discount rate	5.0	%
Deferred service fees - Prime	$	1,830	Bottom-up	Normal profit margin	8.5	%
				Total direct costs	69.8	%
				Discount rate	5.0	%