Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk. The fair value of the Company’s investments is subject to risks of fluctuations in credit quality and interest rates. The Company uses various models and stress test scenarios to monitor and manage interest rate risk. The Company attempts to manage its interest rate risk by maintaining an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities (i.e., policy claims and debt obligations). The average duration for the fixed maturity portfolio was 3.2 and 3.3 years at December 31, 2014 and 2013, respectively.

In addition, the fair value of the Company’s international investments is subject to currency risk. The Company attempts to manage its currency risk by matching its foreign currency assets and liabilities where considered appropriate.

The following table outlines the groups of fixed maturity securities and their average duration at December 31, 2014:



	Effective
	Duration
(Dollars in thousands)	(Years)	Fair Value
Cash and cash equivalents	—	$	674,441
U. S. government securities	3.7	803,388
State and municipal	4.3	4,453,398
Corporate	2.7	5,205,426
Foreign government	2.7	941,826
Mortgage-backed securities	3.2	1,321,768
Loans receivable	2.5	325,219
Total	3.2	$	13,725,466

Duration is a common measure of the price sensitivity of fixed maturity securities to changes in interest rates. The Company determines the estimated change in fair value of the fixed maturity securities, assuming parallel shifts in

the yield curve for treasury securities while keeping spreads between individual securities and treasury securities static. The estimated fair value at specified levels at December 31, 2014 would be as follows:



(In thousands)	Estimated Fair Value		Change in Fair Value
Change in interest rates:
300 basis point rise	$	12,385,952	$	(1,339,514	)
200 basis point rise	12,823,926		(901,540		)
100 basis point rise	13,271,448		(454,018		)
Base scenario	13,725,466		—
100 basis point decline	14,176,637		451,171
200 basis point decline	14,610,529		885,063
300 basis point decline	15,007,036		1,281,570

Arbitrage investing differs from other types of investments in that its focus is on transactions and events believed likely to bring about a change in value over a relatively short time period (usually four months or less). The Company believes that this makes arbitrage investments less vulnerable to changes in general stock market conditions. Potential changes in market conditions are also mitigated by the implementation of hedging strategies, including short sales.

Additionally, the arbitrage positions are generally hedged against market declines by purchasing put options, selling call options or entering into swap contracts. The Company's merger arbitrage securities are primarily exposed to the risk of completion of announced deals, which are subject to regulatory as well as transactional and other risks.

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