Investments and Fair Value Measurements

9 Months Ended

Sep. 30, 2015

INVESTMENTS AND FAIR VALUE MEASUREMENTS

The Company's recurring financial assets and liabilities subject to fair value measurements are as follows:



	Fair Value Measurements as of September 30, 2015
Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds	$	101,960	$	101,960	$	—	$	—
Certificates of deposit	3,465		—		3,465		—
Bonds	12,368		12,368		—		—
Investment securities available for sale
Equity securities	106,976		106,976		—		—
Mutual funds invested in fixed income securities	54,864		54,864		—		—
Fixed income securities
U.S. Government securities	35,433		—		35,433		—
Corporate securities	54,741		—		54,741		—
U.S. mortgage backed securities	6,351		—		6,351		—
Commercial mortgage-backed securities	14,537		—		14,537		—
U.S. asset backed securities	13,360		—		13,360		—
Index-linked U.S. bonds	2,114		—		2,114		—
Total fixed income securities	126,536		—		126,536		—

Warrants (1)	577		—		—		577
Total	$	406,746	$	276,168	$	130,001	$	577

Liabilities:
Fair value of derivatives embedded within convertible debt	$	149,739	$	—	$	—	$	149,739


(1)	Warrants are 1,000,000 warrants to purchase Ladenburg Thalmann Financial Services Inc. (“LTS”) common stock received on November 4, 2011 which were carried at $577 as of September 30, 2015 and are included in “Other assets.” The Company recognized a loss of $1,765 for the nine months ended September 30, 2015 related to the change in fair value of the Warrants.



	Fair Value Measurements as of December 31, 2014
Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds	$	205,180	$	205,180	$	—	$	—
Certificates of deposit	3,462		—		3,462		—
Bonds	4,868		4,868		—		—
Investment securities available for sale
Equity securities	154,192		153,666		526		—
Mutual funds invested in fixed income securities	59,826		59,826		—		—
Fixed income securities
U.S. Government securities	35,446		—		35,446		—
Corporate securities	56,248		7,397		48,851		—
U.S. Government and federal agency	4,770		—		4,770		—
Commercial mortgage-backed securities	16,508		—		16,508		—
U.S. asset-backed securities	16,955		—		16,955		—
Index-linked U.S. bonds	2,098		—		2,098		—
Total fixed income securities	132,025		7,397		124,628		—

Warrants (1)	2,342		—		—		2,342
Total	$	561,895	$	430,937	$	128,616	$	2,342

Liabilities:

Fair value of derivatives embedded within convertible debt	$	169,386	$	—	$	—	$	169,386


(1)	Warrants include 1,000,000 of LTS Warrants received on November 4, 2011 which were carried at $2,342 as of December 31, 2014 and are included in “Other assets.” The Company recognized income of $584 for the year ended December 31, 2014 related to the change in fair value of the Warrants. The Company recognized income of $868 for the nine months ended September 30, 2014.

The fair value of the Level 2 certificates of deposit are based on prices posted by the financial institutions. The fair value of investment securities available for sale included in Level 1 are based on quoted market prices from various stock exchanges. The Level 2 investment securities available for sale are based on quoted market prices of securities that are thinly traded.

The fair value of derivatives embedded within convertible debt was derived using a valuation model. These derivatives have been classified as Level 3. The valuation model assumes future dividend payments by the Company and utilizes interest rates and credit spreads based upon the implied debt rate of the 5.50% Convertible Notes due 2020 to determine the fair value of the derivatives embedded within the convertible debt. The changes in fair value of derivatives embedded within convertible debt are presented on the Condensed Consolidated Statements of Operations.

The value of the embedded derivatives is contingent on changes in implied interest rates of the convertible debt, the Company's stock price, stock volatility as well as projections of future cash and stock dividends over the term of the debt. The interest rate component of the value of the embedded derivative is computed by calculating an equivalent non-convertible, unsecured and subordinated borrowing cost. This rate is determined by calculating the implied rate on the Company's 2020 Convertible Notes when removing the embedded option value within the convertible security. This rate is based upon market observable inputs and influenced by the Company's stock price, convertible bond trading price, risk free interest rates and stock volatility.

The fair value of the warrants was derived using the Black-Scholes model and has been classified as Level 3. The assumptions used under the Black-Scholes model in computing the fair value of the warrants are based on contractual term of the warrants, volatility of the underlying stock based on the historical quoted prices of the underlying stock, assumed future dividend payments and a risk-free rate of return.

The unobservable inputs related to the valuations of the Level 3 assets and liabilities are as follows at September 30, 2015:



	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value at
	September 30, 2015		Valuation Technique	Unobservable Input	Range (Actual)

Warrant	$	577	Option model	Stock price	$	2.11
				Exercise price	$	1.68
				Term (in years)	1.1
				Volatility	39.23		%
				Dividend rate	—
				Risk-free return	0.70		%

Fair value of derivatives embedded within convertible debt	$	149,739	Discounted cash flow	Assumed annual stock dividend	5		%
				Assumed annual cash dividend	$	1.60
				Stock price	$	22.61
				Convertible trading price (as a percentage of par value)	111.63		%
				Volatility	18.72		%
				Risk-free rate	Term structure of US Treasury Securities
				Implied credit spread	6.0% - 6.5% (6.14%)

The unobservable inputs related to the valuations of the Level 3 assets and liabilities are as follows at December 31, 2014:



	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value at
	December 31, 2014		Valuation Technique	Unobservable Input	Range (Actual)

Warrants	$	2,342	Option model	Stock price	$	3.95
				Exercise price	$	1.68
				Term (in years)	1.8
				Volatility	44.42		%
				Dividend rate	—
				Risk-free return	0.70		%

Fair value of derivatives embedded within convertible debt	$	169,386	Discounted cash flow	Assumed annual stock dividend	5		%
				Assumed annual cash dividend	$	1.60
				Stock price	$	21.31
				Convertible trading price	106.8		%
				Volatility	16.00		%
				Implied credit spread	6.25% - 7.25% (6.75%)

In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required to record assets and liabilities at fair value on a nonrecurring basis. Generally, assets and liabilities are recorded at fair value on a nonrecurring basis as a result of impairment charges. The Company had no nonrecurring nonfinancial assets subject to fair value measurements as of September 30, 2015 and December 31, 2014.

- 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.

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