Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the risk that our financial instruments, which include derivatives, may be negatively impacted by movements in financial market prices or rates such as interest rates, credit spreads, equity securities' prices, and foreign currency exchange rates (refer to Item 1 'Risk and Capital Management' for further details).
We own a substantial amount of assets whose fair values are subject to market risks.
At December 31, 2025, 97% (2024: 96%) of fixed maturities are classified as available for sale, therefore changes in fair values caused by changes in interest rates and foreign currency exchange rates have an immediate impact on other comprehensive income (loss), total shareholders’ equity and book value per common share but do not have an immediate impact on net income (loss). Changes in these market risks impact net income (loss) when, and if, securities are sold , or an impairment charge or an allowance for expected credit losses is recorded.
Equity securities are reported at fair value, with changes in fair values recognized in net income (loss).
At December 31, 2025 and 2024, we also invested in alternative investments including multi-strategy funds, direct lending funds, private equity funds, real estate funds and other privately held investments. These investments are also exposed to market risks, with the changes in fair values immediately reported in net income (loss).
Sensitivity Analysis
The following is a sensitivity analysis of our primary market risk exposures at December 31, 2025 and 2024.
Our policies to address these risks in 2025 were not materially different from 2024. We do not currently anticipate significant changes in our primary market risk exposures or in how those exposures are managed in future reporting periods based on what is known or expected to be in effect in future reporting periods.
Interest Rate and Credit Spread Risk
Interest rate risk includes fluctuations in interest rates and credit spreads that have a direct impact on the fair values of fixed maturities. As interest rates rise and credit spreads widen, the fair value of fixed maturities falls.
We monitor sensitivity to interest rate and credit spread changes by revaluing fixed maturities using a variety of different interest rates (inclusive of credit spreads). We use duration and convexity at the security level to estimate the change in fair value that would result from a change in each security’s yield. Duration measures the price sensitivity of an asset to changes in yield rates. Convexity measures how the duration of the security changes with interest rates. The duration and convexity analysis take into account changes in prepayment expectations for MBS and ABS. The analysis is performed at the security level and aggregated to the asset category levels.
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The following table presents the estimated pre-tax impact on the fair value of fixed maturities classified as available for sale due to an instantaneous increase in the U.S. yield curve of 100 basis points and an additional 100 basis point credit spread widening for corporate debt, non-agency commercial MBS and residential MBS, ABS and municipal bond securities:
Fair value Potential adverse change in fair value
Increase in
interest rate
by 100
basis points Widening of
credit spreads
by 100
basis points Total
At December 31, 2025
U.S. government and agency $ 2,417,901 $ (64,341) $ — $ (64,341)
Non-U.S. government 810,544 (25,922) — (25,922)
Agency RMBS 2,035,352 (105,934) — (105,934)
Securities exposed to credit spreads:
Corporate debt 5,222,433 (164,934) (180,586) (345,520)
CMBS 801,511 (22,024) (26,484) (48,508)
Non-agency RMBS 190,124 (6,723) (6,660) (13,383)
ABS 1,488,067 (18,842) (41,886) (60,728)
Municipals 52,095 (1,934) (1,971) (3,905)
$ 13,018,027 $ (410,654) $ (257,587) $ (668,241)
At December 31, 2024
U.S. government and agency $ 2,802,986 $ (60,634) $ — $ (60,634)
Non-U.S. government 729,939 (22,143) — (22,143)
Agency RMBS 1,184,845 (61,576) — (61,576)
Securities exposed to credit spreads:
Corporate debt 4,842,190 (154,058) (166,011) (320,069)
CMBS 819,608 (21,745) (24,749) (46,494)
Non-agency RMBS 122,536 (5,287) (5,090) (10,377)
ABS 1,539,832 (17,343) (35,727) (53,070)
Municipals 110,817 (3,675) (3,751) (7,426)
$ 12,152,753 $ (346,461) $ (235,328) $ (581,789)
U.S. government agencies have a limited range of spread widening. Therefore, 100 basis points of spread widening for these securities is highly improbable in normal market conditions. Our non-U.S. government debt obligations are highly-rated, and we believe the potential for future widening of credit spreads would also be limited for these securities. Certain of our holdings in non-agency RMBS and ABS have floating interest rates, which mitigate interest rate risk exposure.
The above sensitivity analysis should not be construed as our prediction of future market events, but rather an illustration of the impact of such events.
In addition, our investment in bond mutual funds is exposed to interest rate risk. However, this exposure is largely mitigated by the duration of the underlying securities.
Equity Price Risk
Our portfolio of equity securities, excluding the bond mutual funds, has exposure to equity price risk. This risk is defined as the potential loss in fair value resulting from adverse changes in stock prices. The global equity portfolio is managed to a benchmark composite index, which consists of a blend of the S&P 500 and MSCI World indices. Changes in the underlying indices have a corresponding impact on the overall portfolio. At December 31, 2025, the fair value of equity securities, excluding the bond mutual funds was $436 million (2024: $323 million). At December 31, 2025, the impact of a 20% decline in the overall market prices of our equity exposures would be $87 million (2024: $65 million), on a pre-tax basis.
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Our investment in multi-strategy funds has significant exposure to equity strategies with net long positions. At December 31, 2025, the fair value of multi-strategy funds was $12 million (2024: $25 million). At December 31, 2025, the impact of an instantaneous 15% decline in the fair value of our investment in multi-strategy funds woul d be $2 million (2024 : $4 million ), on a pre-tax basis.
Foreign Currency Risk
The following table presents a sensitivity analysis of total net foreign currency exposures on total shareholders' equity:
AUD CAD EUR GBP JPY Other Total
At December 31, 2025
Net managed assets (liabilities), excluding derivatives $ 135,286 $ 413,949 $ 9,895 $ 56,488 $ (15,568) $ 131,181 $ 731,231
Foreign currency derivatives, net (101,675) (406,676) 55,158 (52,193) 9,947 (157,982) (653,421)
Net managed foreign currency exposure 33,611 7,273 65,053 4,295 (5,621) (26,801) 77,810
Other net foreign currency exposure — 263 116 147 — 1 527
Total net foreign currency exposure $ 33,611 $ 7,536 $ 65,169 $ 4,442 $ (5,621) $ (26,800) $ 78,337
Net foreign currency exposure as a percentage of total shareholders’ equity 0.5 % 0.1 % 1.0 % 0.1 % (0.1 %) (0.4 %) 1.2 %
Pre-tax impact of net foreign currency exposure on shareholders’ equity given a hypothetical 10% rate movement (1)
$ 3,361 $ 754 $ 6,517 $ 444 $ (562) $ (2,680) $ 7,834
At December 31, 2024
Net managed assets (liabilities), excluding derivatives $ 87,511 $ 366,541 $ (344,739) $ 15,836 $ (38,893) $ 88,887 $ 175,143
Foreign currency derivatives, net (69,834) (356,150) 290,800 36,430 35,648 (112,409) (175,515)
Net managed foreign currency exposure 17,677 10,391 (53,939) 52,266 (3,245) (23,522) (372)
Other net foreign currency exposure — 55 (607) 19 — 1 (532)
Total net foreign currency exposure $ 17,677 $ 10,446 $ (54,546) $ 52,285 $ (3,245) $ (23,521) $ (904)
Net foreign currency exposure as a percentage of total shareholders’ equity 0.3 % 0.2 % (0.9 %) 0.9 % (0.1 %) (0.4 %) — %
Pre-tax impact of net foreign currency exposure on shareholders’ equity given a hypothetical 10% rate movement (1)
$ 1,768 $ 1,045 $ (5,455) $ 5,229 $ (325) $ (2,352) $ (90)
(1) Assumes 10% appreciation in underlying currencies relative to the U.S. dollar.
The Company manages foreign currency risk by seeking to match its foreign-denominated net liabilities under insurance and reinsurance contracts with cash and investments that are denominated in the same currencies.
The functional currency of the Company and the majority of its subsidiaries is the U.S. dollar. Monetary assets and liabilities under insurance and reinsurance contracts denominated in foreign currency are remeasured to the functional currency at the rates of exchange in effect at the balance sheet date with the resulting foreign exchange losses (gains) recognized in net income (loss). Foreign currency losses (gains) related to available for sale investment securities denominated in foreign currency represents an unrealized appreciation (depreciation) in the market value of the securities and are recognized in accumulated other comprehensive income (loss) ("AOCI") in total shareholders’ equity. The recognition treatment of foreign losses (gains) related to our net insurance liabilities and investments can create volatility in net income (loss) that is largely offset by foreign losses (gains) included in AOCI in total shareholders’ equity.
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Net Managed Foreign Currency Exposure
Our net managed foreign currency exposure is subject to internal risk tolerance standards. For significant foreign currency exposures, defined as those where net asset/liability position exceeds the greater of 1% of total shareholders' equity or $50 million, the value of assets denominated in those currencies should fall within a range of 90 - 110% of liabilities denominated in the same currency. In addition, aggregate foreign currency exposure is subject to the same tolerance range. We may use derivative instruments to maintain net managed foreign currency exposures within our risk tolerance levels.
Other Net Foreign Currency Exposure
In 2025 and 2024, other net foreign currency exposure primarily consisted of residual foreign currency exposure from externally managed portfolios where the external manager hedges the foreign currency exposure.
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