filings.toolsItem 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
4K characters. Original on sec.gov · Markdown
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 effective duration of the investment portfolio and the average number of years held for its liabilities (i.e., policy claims and debt obligations). The effective duration for the fixed maturity portfolio (including cash and cash equivalents) was 3.0 years and 2.6 years at December 31, 2025 and 2024, 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 effective duration at December 31, 2025:
| Effective | |||||||||||
| Duration | |||||||||||
| ($ in thousands) | (Years) | Fair Value | |||||||||
| U.S. government and government agencies | 4.7 | $ | 3,998,038 | ||||||||
| Mortgage-backed securities | 4.3 | 4,810,392 | |||||||||
| Corporate | 3.0 | 8,687,411 | |||||||||
| Foreign government | 2.9 | 1,875,589 | |||||||||
| State and municipal | 2.7 | 1,866,758 | |||||||||
| Loans receivable | 2.4 | 419,074 | |||||||||
| Asset-backed securities | 1.3 | 3,810,346 | |||||||||
| Cash and cash equivalents | 0.0 | 1,957,438 | |||||||||
| Total | 3.0 | $ | 27,425,046 |
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, 2025 would be as follows:
| (In thousands) | Estimated Fair Value | Change in Fair Value | |||||||||
| Change in interest rates: | |||||||||||
| 300 basis point rise | $ | 24,844,553 | $ | (2,580,493) | |||||||
| 200 basis point rise | 25,687,653 | (1,737,393) | |||||||||
| 100 basis point rise | 26,564,356 | (860,690) | |||||||||
| Base scenario | 27,425,046 | — | |||||||||
| 100 basis point decline | 28,182,512 | 757,466 | |||||||||
| 200 basis point decline | 28,826,079 | 1,401,033 | |||||||||
| 300 basis point decline | 29,451,916 | 2,026,869 | |||||||||
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.
Previous: Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS · Next: Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA