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Fair Value Definition and Hierarchy (Tables)

9 Months Ended

Sep. 30, 2020

Financial assets and liabilities carried at fair value on a recurring basis

The Company’s financial assets and liabilities carried at fair value on a recurring basis, including the level in the fair value hierarchy, on September 30, 2020 and December 31, 2019 are presented below (in thousands).


	As of September 30, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Investments in put options	$	11,584	$	—	$	—	$	11,584
Investments in life insurance policies	—		—		787,260		787,260

	As of December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Investments in life insurance policies	$	—	$	—	$	796,039	$	796,039

Reconciliation of level 3 investments

The following table reconciles the beginning and ending fair value of our Level 3 investments in our portfolio of life insurance policies (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Beginning balance	$	794,706	$	799,266	$	796,039	$	747,922
Total gain in earnings(1)	6,021		14,181		23,476		48,031
Purchases	—		711		—		32,250
Settlements(2)	(13,467)		(6,640)		(32,255)		(20,685)
Transfers into Level 3	—		—		—		—
Transfers out of Level 3	—		—		—		—
Ending balance	$	787,260	$	807,518	$	787,260	$	807,518

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(1)Net change in fair value

(2)Policy maturities at initial cost basis

Quantitative information about the significant unobservable inputs

The following table provides quantitative information about the significant unobservable inputs used in the fair value measurement of the Company’s Level 3 fair value assets:


	As of September 30, 2020			As of December 31, 2019
Weighted-average age of insured, years*	82.9			82.4
Age of insured range, years	63-100			62-101
Weighted-average life expectancy, months*	82.8			86.2
Life expectancy range, months	0-240			0-240
Average face amount per policy (in thousands)	$	1,777		$	1,756
Discount rate	8.25		%	8.25		%

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(*)Weighted-average by face amount of policy benefits

Concentration of risk - change in life expectancy estimates

Life expectancy estimates and market discount rates for a portfolio of life insurance policies are inherently uncertain and the effect of changes in estimates may be significant. For example, if the life expectancy estimates were increased or decreased by four and eight months on each outstanding policy, and the discount rates were increased or decreased by 1% and 2%, with all other variables held constant, the fair value of our investment in life insurance policies would increase or decrease as summarized below (in thousands):


	Change in Life Expectancy Estimates
	Minus 8 months		Minus 4 months		Plus 4 months		Plus 8 months
September 30, 2020	$	98,909	$	46,028	$	(62,483)	$	(115,452)
December 31, 2019	$	113,812	$	57,753	$	(55,905)	$	(111,340)
	Change in Discount Rate
	Minus 2%		Minus 1%		Plus 1%		Plus 2%
September 30, 2020	$	84,613	$	40,314	$	(36,802)	$	(70,497)
December 31, 2019	$	91,890	$	43,713	$	(39,790)	$	(76,118)

Schedule of carrying amounts and estimated fair values of the Company's financial instruments

The carrying amounts and estimated fair values of the Company’s financial instruments not recorded at fair value were as noted in the tables below (in thousands).


	As of September 30, 2020
	Level in Fair Value Hierarchy	Carrying Amount		Estimated Fair Value
Financial assets:
Cash, cash equivalents and restricted cash	1	$	109,756	$	109,756
Life insurance policy benefits receivable, net	1	36,418		36,418
Loans receivable, net of allowance for loan losses and discount	3	227,047		257,764
Fees receivable	1	31,571		31,571
Financial liabilities:
Senior credit facility	2	$	203,907	$	213,117
L Bonds and Seller Trust L bonds	2	1,521,411		1,638,227
Other borrowings	2	100,178		101,368
Other liabilities	1	57,056		57,056


	As of December 31, 2019
	Level in Fair Value Hierarchy	Carrying Amount		Estimated Fair Value
Financial assets:
Cash, cash equivalents and restricted cash	1	$	99,331	$	99,331
Life insurance policy benefits receivable, net	1	23,031		23,031
Loans receivable, net of allowance for loan losses and discount	3	232,344		232,344
Fees receivable	1	29,168		29,168
Financing receivables from affiliates	2	67,153		59,608
Financial liabilities:
Senior credit facility with LNV Corporation	2	$	174,390	$	184,587
L Bonds and Seller Trust L Bonds	2	1,293,530		1,390,288
Other borrowings	2	153,086		153,086
Other liabilities	1	44,352		44,352

- Definition

Tabular disclosure of all significant concentrations of risk, including credit risk and market risk, arising from all financial instruments (as defined), whether from an individual counterparty or groups of counterparties. The disclosure concerning concentrations of risk may consist of the following information: (1) for concentrations of credit risk disclosure may include: (a) information about the (shared) activity, region, or economic characteristic that identifies the concentration, (b) the maximum amount of loss due to credit risk that, based on the gross fair value of the financial instrument, the entity would incur if parties to the financial instruments that make up the concentration failed completely to perform according to the terms of the contracts and the collateral or other security, if any, for the amount due proved to be of no value to the entity, (c) the policy of requiring collateral or other security to support financial instruments subject to credit risk, information about the entity's access to that collateral or other security, and the nature and a brief description of the collateral or other security supporting those financial instruments, and (d) the policy of entering into master netting arrangements to mitigate the credit risk of financial instruments, information about the arrangements for which the entity is a party, and a brief description of the terms of those arrangements, including the extent to which they would reduce the entity's maximum amount of loss due to credit risk and (2) for disclosure of quantitative information about the market risks of financial instruments that is consistent with the way the company manages or adjusts those risks, disclosure may include: (a) more details about current positions and perhaps activity during the period, (b) the hypothetical effects on comprehensive income (or net assets), or annual income, of several possible changes in market prices, (c) a gap analysis of interest rate re-pricing or maturity dates, (d) the duration of the financial instruments, (e) the entity's value at risk from derivatives and from other positions at the end of the reporting period and the average value at risk during the year, or (f) other ways of reporting quantitative information as internally developed.

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