5. Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels are defined as follows:

· Level 1 — inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date.

· Level 2 — inputs to the valuation methodology include quoted prices in markets that are not active or quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

· Level 3 — inputs to the valuation methodology are unobservable, reflecting the entity’s own assumptions about assumptions market participants would use in pricing the asset or liability.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Fair value is a market based measure considered from the perspective of a market participant who holds the asset or owes the liabilities rather than an entity specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the assets or liabilities at the measurement date. The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company also evaluates various factors to determine whether certain transactions are orderly and may make adjustments to transactions or quoted prices when the volume and level of activity for an asset or liability have decreased significantly.

The above conditions could cause certain assets and liabilities to be reclassified from Level 1 to Level 2/Level 3 or Level 2 to Level 3. The inputs or methodology used for valuing the assets or liabilities are not necessarily an indication of the risk associated with the assets and liabilities.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

For assets and liabilities measured at fair value in the unaudited condensed consolidated financial statements:

Marketable securities — The estimated fair value of investments in marketable securities is based on quoted market prices.

VIE and other finance receivables and VIE long-term debt issued by securitization and permanent financing trusts, at fair market value — The estimated fair value of VIE and other finance receivables and VIE long-term debt issued by securitization and permanent financing trusts, at fair value is determined based on a discounted cash flow model using expected future collections discounted at a calculated rate as described below.

For guaranteed structured settlements and annuities, the Company allocates the projected cash flows based on the waterfall of the securitization and permanent financing trusts (collectivity the “Trusts”). The waterfall includes fees to operate the Trusts (servicing fees, admin fees, etc.), note holder principal and note holder interest. Many of the Trusts have various tranches of debt that have varying subordinations in the waterfall calculation (Note 10). The remaining cash flows, net of those obligations, are considered a residual interest which is projected to be paid to the Company’s retained interest holders.

The projected finance receivable cash flows used to pay the obligations of the Trusts are discounted using a calculated rate derived from the fair value interest rates of the debt in the Trusts. The fair value interest rate of the debt is derived using a swap curve and applying a calculated spread using the Company’s most recent securitization as a benchmark. The calculated spread is adjusted for the specific attributes of the debt in the Trusts, such as years to maturity and credit grade. The debt’s fair value interest rates are applied to the projected future cash payments paid on the principal and interest to derive the debt’s fair value. The debt’s fair value interest rates are blended using the debt’s principal balance to obtain a weighted average fair value interest rate; this rate is used to determine the value of the finance receivables’ asset cash flows. In addition, the Company considers transformation cost and profit margin associated with its securitizations to derive the fair value of its finance receivables’ asset cash flows. The finance receivables’ residual cash flows remaining after the projected obligations of the Trusts are satisfied are discounted using a separate yield based on an assumed rating of the residual tranche (6.77% and 7.85% as of March 31, 2014 and December 31, 2013, respectively, with a weighted average life of 20 years as of both dates).

The residual cash flows are adjusted for a loss assumption of 0.25% over the life of the finance receivables in its fair value calculation. Finance receivable cash flows, including the residual asset cash flows, are included in VIE and other finance receivables, at fair market value in the Company’s condensed consolidated balance sheets. The associated debt’s projected future cash payments for principal and interest are included in VIE long-term debt issued by securitization and permanent financing trusts, at fair market value.

For finance receivables not yet securitized, the Company uses the calculated spreads, as well as considering transformation costs and profit margin, from its most recent securitization to determine the fair value yield adjusting for expected losses and applying the residual yield for the cash flows the Company projects would make up the retained interest in a securitization.

For the Company’s Life Contingent Structured Settlements (“LCSS”) receivables and long-term debt issued by its related permanent financing trusts, the blended weighted average discount rate of the LCSS receivables at the time of borrowing (which occurs frequently throughout the year) is used to determine the fair value of the receivables’ cash flows. The residual cash flows relating to the LCSS receivables are discounted using a separate yield based on the assumed rating to the residual tranche reflecting the life contingent feature of these receivables.

Life settlement contracts, at fair market value — The fair values of life settlement contracts are determined by reference to the transfer price of similar life settlement contracts under a discounted cash flow calculation that takes into account the net death benefit under the policy, estimated future premium payments and the life expectancy of the insured, as well as other qualitative factors regarding market participants assumptions. Life expectancy is determined on a policy-by-policy basis using the results of medical underwriting performed by independent agencies.

Notes receivable, at fair market value — The fair values of notes receivable are determined based on the discounted present value of future expected cash flows using management’s best estimates of the key assumptions regarding credit losses and discount rates determined to be commensurate with the risks involved. The Company does not expect prepayment on the finance receivables underlying the notes receivable and accordingly, no significant change in the fair value is expected as a result of prepayment. The notes receivable are expected to mature in 2018. As of March 31, 2014, the amortized cost and fair value of the notes receivable was $5.7 million and $5.9 million, respectively. As of December 31, 2013, the amortized cost and fair value of the notes receivable was $6.2 million and $5.6 million, respectively.

VIE derivative liabilities, at fair value — The fair value of interest rate swaps, is based on pricing models which consider current interest rates, and the amount and timing of cash flows (Note 12).

Assets and liabilities for which fair value is only disclosed:

VIE and other finance receivables, net of allowance for losses — The fair value of structured settlement, annuity, and lottery receivables was estimated based on the present value of future expected cash flows using discount rates commensurate with the risks involved. The fair value of presettlement funding transactions and attorney cost financing was based on expected losses and historical loss experience associated with the respective receivables using management’s best estimates of the key assumptions regarding credit losses.

Other receivables, net of allowance for losses — The estimated fair value of advances receivable and certain other receivables, which are generally recovered in less than three months, is equal to the carrying amount. The carrying value of other receivables which have expected recoverability of greater than three months, which consist primarily of a note receivable, have been estimated based on the present value of future expected cash flows using management’s best estimate of the key assumptions, including discount rates commensurate with the risks involved.

Installment obligations payable — Installment obligations payable are reported at contract value determined based on changes in the measuring indices selected by the obligees under the terms of the obligations over the lives of the obligations. The fair value of installment obligations payable is estimated to be equal to carrying value.

Term loan payable — The carrying value of the term loan approximates its fair value. In December 2013, and in connection with the Company’s repayment of $123.0 million of the new term loan, the new senior secured credit facility was further amended to, among other things, adjust the Company’s interest rate (Note 11).

VIE borrowings under revolving credit facilities and other similar borrowings — The estimated fair value of borrowings under revolving credit facilities and other similar borrowings is based on the borrowing rates currently available to the Company for debt with similar terms and remaining maturities. The Company estimates that the carrying value of its lines of credit, which bear interest at a variable rate, approximates fair value.

VIE long-term debt — The estimated fair value of VIE long-term debt is based on fair value borrowing rates available to the Company based on recently executed transactions with similar underlying collateral characteristics, reflecting the specific terms and conditions of the debt.

The following table sets forth the Company’s assets and liabilities that are carried at fair value on the Company’s condensed consolidated balance sheets as of March 31, 2014 and December 31, 2013:

	Quoted Prices in Active		Significant Other		Significant
	Markets for Identical Assets		Observable Inputs		Unobservable Inputs		Total at
	Level 1		Level 2		Level 3		Fair Value
	(Dollars in thousands)
March 31, 2014 (Unaudited):
Assets
Marketable Securities:
Equity securities
US large cap	$	40,055	$	—	$	—	$	40,055
US mid cap	9,938		—		—		9,938
US small cap	9,660		—		—		9,660
International	18,564		—		—		18,564
Other equity	973		—		—		973
Total equity securities	79,190		—		—		79,190
Fixed income securities
US fixed income	22,711		—		—		22,711
International fixed income	3,284		—		—		3,284
Other fixed income	29		—		—		29
Total fixed income securities	26,024		—		—		26,024
Other securities
Cash & cash equivalents	8,435		—		—		8,435
Alternative investments	841		—		—		841
Annuities	2,192		—		—		2,192
Total other securities	11,468		—		—		11,468
Total marketable securities	116,682						116,682
VIE and other finance receivables at fair market value	—		—		4,060,132		4,060,132
Notes receivable at fair market value	—		—		5,855		5,855
Life settlements contracts, at fair market value (1)	—		—		—		—
Total Assets	$	116,682	$	—	$	4,065,987	$	4,182,669

Liabilities
VIE long-term debt issued by securitization and permanent financing trusts at fair market value	—		—		3,666,583		3,666,583
VIE derivative liabilities, at fair market value	—		71,488		—		71,488
Total Liabilities	$	—	$	71,488	$	3,666,583	3,738,071

(1) Included in other assets on the Company’s unaudited condensed consolidated balance sheet.

	Quoted Prices in Active		Significant Other		Significant
	Markets for Identical Assets		Observable Inputs		Unobservable Inputs		Total at
	Level 1		Level 2		Level 3		Fair Value
	(Dollars in thousands)
December 31, 2013:
Assets
Marketable Securities:
Equity securities
US large cap	$	41,821	$	—	$	—	$	41,821
US mid cap	9,769		—		—		9,769
US small cap	10,212		—		—		10,212
International	19,938		—		—		19,938
Other equity	936		—		—		936
Total equity securities	82,676		—		—		82,676
Fixed income securities
US fixed income	26,713		—		—		26,713
International fixed income	4,089		—		—		4,089
Other fixed income	29		—		—		29
Total fixed income securities	30,831		—		—		30,831
Other securities
Cash & cash equivalents	5,534		—		—		5,534
Alternative investments	705		—		—		705
Annuities	2,208		—		—		2,208
Total other securities	8,447		—		—		8,447
Total marketable securities	121,954						121,954
VIE and other finance receivables at fair market value	—		—		3,870,649		3,870,649
Notes receivable at fair market value	—		—		5,610		5,610
Life settlements contracts, at fair market value (1)	—		—		—		—
Total Assets	$	121,954	$	—	$	3,876,259	$	3,998,213

Liabilities
VIE long-term debt issued by securitization and permanent financing trusts at fair market value	—		—		3,431,283		3,431,283
VIE derivative liabilities, at fair market value	—		70,296		—		70,296
Total Liabilities	$	—	$	70,296	$	3,431,283	3,501,579

(1) Included in other assets on the Company’s condensed consolidated balance sheet.

The following table sets forth the Company’s quantitative information about its Level 3 fair value measurements as of March 31, 2014 and December 31, 2013, respectively:

					Range
	Fair Value		Valuation Technique	Unobservable Input	(Weighted Average)
	(Dollars in thousands)
March 31, 2014 (Unaudited):
Assets
VIE and other finance receivables, at fair market value	$	4,060,132	Discounted cash flow	Discount rate	2.57% - 12.81% (4.01%)
Notes receivable, at fair market value	5,855		Discounted cash flow	Discount rate	6.77% (6.77%)
Life settlement contracts, at fair market value	—		Model actuarial pricing	Life expectancy Discount rate	11 to 247 months (145) 18.50% (18.50%)
Total Assets	$	4,065,987

Liabilities
VIE long-term debt issued by securitization and permanent financing trusts, at fair market value	3,666,583		Discounted cash flow	Discount rate	0.58% - 12.70% (3.69%)
Total Liabilities	$	3,666,583

					Range
	Fair Value		Valuation Technique	Unobservable Input	(Weighted Average)
	(Dollars in thousands)
December 31, 2013:
Assets
VIE and other finance receivables, at fair market value	$	3,870,649	Discounted cash flow	Discount rate	2.79% - 13.69% (4.33%)
Notes receivable, at fair market value	5,610		Discounted cash flow	Discount rate	7.85% (7.85%)
Life settlement contracts, at fair market value	—		Model actuarial pricing	Life expectancy Discount rate	14 to 250 months (148) 18.50% (18.50%)
Total Assets	$	3,876,259

Liabilities
VIE long-term debt issued by securitization and permanent financing trusts, at fair market value	3,431,283		Discounted cash flow	Discount rate	0.73% - 12.70% (3.94%)
Total Liabilities	$	3,431,283

A significant unobservable input used in the fair value measurement of all of the Company’s assets and liabilities measured at fair value using unobservable inputs (Level 3) is the discount rate. Significant increases (decreases) in the discount rate used to estimate fair value in isolation would result in a significantly lower (higher) fair value measurement of the corresponding asset or liability. An additional significant unobservable input used in the fair value measurement of the life settlement contracts, at fair value, is life expectancy. Significant increases (decreases) in the life expectancy used to estimate the fair value of life settlement contracts in isolation would result in a significantly lower (higher) fair value measurement.

The changes in assets measured at fair value using significant unobservable inputs (Level 3) during the three months ended March 31, 2014 and 2013 were as follows:

	VIE and other finance receivables, at fair market value			Life settlement contracts, at fair market value			Notes receivable, at fair market value			Total
	(Dollars in thousands)
Balance as of December 31, 2012	$	3,615,188		$	1,724		$	8,074		$	3,624,986
Total gains (losses):
Included in earnings / losses	289,987			(65		)	—			289,922
Included in other comprehensive gain	—			—			154			154
Purchases	95,911			—			—			95,911
Premiums paid	—			233			—			233
Sales	—			—			—			—
Lapsed policies	—			—			—			—
Interest accreted	36,103			—			—			36,103
Payments received	(99,034		)	—			(1,222		)	(100,256		)
Maturities	—			—			—			—
Asset distribution	(9,615		)	(1,892		)	—			(11,507		)
Transfers in and/or out of Level 3	—			—			—			—
Balance as of March 31, 2013	$	3,928,540		$	—		$	7,006		3,935,546
The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held as of:
March 31, 2013	$	289,987		$	(12	)	$	—		$	289,975

Balance as of December 31, 2013	$	3,870,649		$	—		$	5,610		$	3,876,259
Total gains (losses):
Included in earnings / losses	165,714			—			—			165,714
Included in other comprehensive gain	—			—			404			404
Purchases	92,397			—			—			92,397
Premiums paid	—			—			—			—
Sales	—			—			—			—
Lapsed policies	—			—			—			—
Interest accreted	42,452			—			—			42,452
Payments received	(111,080		)	—			(159		)	(111,239		)
Maturities	—			—			—			—
Asset distribution	—			—			—			—
Transfers in and/or out of Level 3	—			—			—			—
Balance as of March 31, 2014	$	4,060,132		$	—		$	5,855		$	4,065,987
The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held as of:
March 31, 2014	$	165,714		$	—		$	—		$	165,714

The changes in liabilities measured at fair value using significant unobservable inputs (Level 3) during the three months ended March 31, 2014 and 2013 were as follows:

	VIE long-term debt issued by securitizations and permanent financing trusts
	(Dollars in thousands)
Balance as of December 31, 2012	$	3,229,591
Total (gains) losses:
Included in earnings / losses	167,692
Issuances	220,801
Interest accreted	(11,151		)
Repayments	(59,866		)
Transfers in and/or out of Level 3	—
Balance as of March 31, 2013	$	3,547,067
The amount of total (gains) losses for the period included in earnings attributable to the change in unrealized gains or losses relating to long- term debt still held as of:
March 31, 2013	$	167,692
Balance as of December 31, 2013	$	3,431,283
Total (gains) losses:
Included in earnings / losses	76,940
Issuances	237,792
Interest accreted	(7,855		)
Repayments	(71,577		)
Transfers in and/or out of Level 3	—
Balance as of March 31, 2014	$	3,666,583
The amount of total (gains) losses for the period included in earnings attributable to the change in unrealized gains or losses relating to long- term debt still held as of:
March 31, 2014	$	76,940

Realized and unrealized gains and losses included in earnings in the accompanying unaudited condensed consolidated statements of operations for the three months ended March 31, 2014 and 2013 are reported in the following revenue categories:

	VIE and other finance receivables and long- term debt		Life settlement contracts income
	(Dollars in thousands)
Total gains (losses) included in earnings in the three months ended March 31, 2014	$	88,774	$	—

Unrealized gains (losses) for the three months ended March 31, 2014 relating to assets still held as of March 31, 2014	$	88,774	$	—

Total gains (losses) included in earnings in the three months ended March 31, 2013	$	122,295	$	(65	)

Unrealized gains (losses) for the three monts ended March 31, 2013 relating to assets still held as of March 31, 2013	$	122,295	$	(12	)

The Company discloses fair value information about financial instruments, whether or not recognized at fair value in the Company’s condensed consolidated balance sheets, for which it is practicable to estimate that value. As such, the estimated fair values of the Company’s financial instruments are as follows:

	March 31,				December 31,
	2014				2013
	(Dollars in thousands)
	Estimated				Estimated
	Fair		Carrying		Fair		Carrying
	Value		Amount		Value		Amount
Financial assets
Marketable securities	$	116,682	$	116,682	$	121,954	$	121,954
VIE and other finance receivables, at fair market value	4,060,132		4,060,132		3,870,649		3,870,649
VIE and other finance receivables, net of allowance for losses (1)	127,177		134,057		126,502		132,992
Notes receivable, at fair market value	5,855		5,855		5,610		5,610
Other receivables, net of allowance for losses (1)	12,912		12,912		13,529		13,529

Financial liabilities
VIE derivative liabilities, at fair market value	71,488		71,488		70,296		70,296
VIE borrowings under revolving credit facilities and other similar borrowings (1)	55,997		55,519		42,275		41,274
VIE long-term debt (1)	143,093		148,329		147,112		150,802
VIE long-term debt issued by securitization and permanent financing trusts, at fair market value	3,666,583		3,666,583		3,431,283		3,431,283
Installment obligations payable (1)	116,682		116,682		121,954		121,954
Term loan payable (1)	434,934		434,934		434,184		434,184

(1) These represent financial instruments not recorded in the condensed consolidated balance sheets at fair value. Such financial instruments would be classified as Level 3 within the fair value hierarchy.