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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2021-03-10 compared with 2020-03-09 · 37 added, 23 removed, 38 unchanged (61% of the section changed)

2 unchanged sentences

• equity price risk;

• commodity price risk;

• foreign currency risk;

• interest rate risk;

• credit risk;

• political risk.

4 unchanged sentences

This risk is partly mitigated by the presence of both long and short equity securities as part of our investment strategy.

As of December 31, 2019 , a 10% decline in the price of each of the underlying listed equity securities and equity-based derivative instruments would result in a loss of $9.8 million , or 1.8% , of our Investment Portfolio.

As of December 31, 2020, a 10% decline in the price of each of the underlying listed equity securities and equity-based derivative instruments would result in a $9.2 million loss to our Investment Portfolio.

Computations of the prospective effects of hypothetical equity price changes are based on numerous assumptions, including the maintenance of the existing level and composition of investment securities and should not be relied on as indicative of future results.

Commodity Price Risk

Generally, market prices of commodities are subject to fluctuation.

SILP’s investments periodically include long or short investments in commodities or in derivatives directly impacted by fluctuations in the prices of commodities.

As of December 31, 2020, SILP’s investments included unhedged exposure to changes in gold prices, through physical gold holdings and derivative instruments with underlying exposure to changes in the price of natural gas.

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The following table summarizes the net impact that a 10% increase and decrease in commodity prices would have on the value of our Investment Portfolio as of December 31, 2020.

The below table excludes the indirect effect that changes in commodity prices might have on equity securities in our Investment Portfolio.

10% increase in commodity prices 10% decrease in commodity prices

Commodity Change in

fair value Change in

($ in millions)

Gold $ 1.8 $ (1.8)

Natural Gas 0.5 (0.5)

Total $ 2.2 $ (2.2)

Foreign Currency Risk

Certain of our reinsurance contracts provide that ultimate losses may be payable or calculated in foreign currencies depending on the country of original loss.

Foreign currency exchange rate risk exists to the extent that our foreign currency loss reserves (case reserves and IBNR) are in excess of (or less than) the corresponding foreign currency cash balances and there is an increase (or decrease) in the exchange rate of that foreign currency.

As of December 31, 2019 , we held GBP currency valued at $5.3 million while our exposure to GBP denominated loss reserves (net of funds withheld by cedents) was $1.2 million .

As of December 31, 2019 , a 10% decrease in the U.S.

dollar against the GBP (all else constant) would result in an estimated $0.5 million foreign exchange gain .

Alternatively, a 10% increase in the U.S dollar against the GBP, would result in an estimated $0.5 million foreign exchange loss .

Certain of our reinsurance contracts are denominated in foreign currencies whereby premiums are receivable and losses are payable in foreign currencies.

Foreign currency exchange rate risk exists to the extent that our foreign currency reinsurance balances are in excess of (or less than) the corresponding foreign currency cash balances and there is an increase (or decrease) in the exchange rate of that foreign currency.

While we do not seek to precisely match our liabilities under reinsurance policies that are payable in foreign currencies with investments denominated in such currencies, we continually monitor our exposure to potential foreign currency losses and may use foreign currency cash and cash equivalents or forward foreign currency exchange contracts in an effort to mitigate against adverse foreign currency movements.

As of December 31, 2020, our net exposure to GBP denominated liability balances was £1.3 million.

As of December 31, 2020, a 10% decrease in the U.S.

dollar against the GBP (all else constant) would result in an estimated $0.2 million foreign exchange loss.

Alternatively, a 10% increase in the U.S dollar against the GBP, would result in an estimated $0.2 million foreign exchange gain.

Similarly, as of December 31, 2020, our net exposure to Euro denominated liability balances was €1.5 million.

As of December 31, 2020, a 10% decrease in the U.S.

dollar against the Euro (all else constant) would result in an estimated $0.2 million foreign exchange loss.

Alternatively, a 10% increase in the U.S dollar against the Euro, would result in an estimated $0.2 million foreign exchange gain.

We may also be exposed to foreign currency risk through SILP’s underlying cash, forwards, options and investments in securities denominated in foreign currencies.

1 unchanged sentence

As of December 31, 2020, a 10% increase or decrease in the value of the U.S.

dollar against foreign currencies would have no meaningful impact on the value of our Investment Portfolio.

dollar against other foreign currencies would have no meaningful impact on the value of our Investment Portfolio.

Interest Rate Risk

4 unchanged sentences

Additionally, some of the derivative investments may also be sensitive to interest rates and their value may indirectly fluctuate with changes in interest rates.

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The following table summarizes the impact that a 100 basis point increase or decrease in interest rates would have on the value of our Investment Portfolio as of December 31, 2019 :

100 basis point increase

in interest rates

100 basis point decrease

in interest rates

($ in thousands)

Interest rate swaps

Net exposure to interest rate risk

As of December 31, 2020, a 100 basis points increase or decrease in interest rates would have no meaningful impact on the value of our Investment Portfolio.

We, along with DME Advisors, monitor the net exposure to interest rate risk and generally do not expect changes in interest rates to have a materially adverse impact on our operations.

2 unchanged sentences

We evaluate the financial condition of our notes receivable counterparties and monitor our exposure to them on a regular basis.

We are also exposed to credit risk from our business partners and clients relating to balances receivable under our reinsurance contracts, including premiums receivable, losses recoverable and commission adjustments recoverable.

We monitor the financial strength of our counterparties and assess the collectability of these balances on a regular basis.

We are also exposed to credit risk from our business partners and clients relating to balances receivable under our

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reinsurance contracts, including premiums receivable, losses recoverable and commission adjustments recoverable.

We obtain collateral in the form of funds withheld, trusts and letters of credit from our counterparties to mitigate this credit risk.

We monitor our net exposure to each counterparty relative to the financial strength of our counterparties and assess the collectibility of these balances on a regular basis.

See Note 2 of the accompanying consolidated financial statements for further details on allowance for credit loss on reinsurance assets and notes receivable.

In addition, the securities, commodities, and cash in SILP’s investment portfolio are held with several prime brokers and derivative counterparties, subjecting SILP, and indirectly us, to significant concentration of credit risk.

1 unchanged sentence

Political Risk

Through our assumed reinsurance contracts, we currently provide a limited amount of political risk insurance coverage which is not expected to have a materially adverse impact on our underwriting results.

We are exposed to political risk to the extent that we underwrite business from entities located in foreign markets and to the extent that DME Advisors, on behalf of SILP and subject to our investment guidelines, trades securities that are listed on various U.S.

1 unchanged sentence

The governments in any of these jurisdictions could impose restrictions, regulations or other measures, which may have a material adverse impact on our underwriting operations and investment strategy.

We currently do not have any material political risk exposure relating to our insurance contracts;

however, changes in government laws and regulations may impact our underwriting operations (see “Item 1A.

Risk Factors”).

See “Item 1A.

Risk Factors - We could face unanticipated losses from political instability which could have a material adverse effect on our financial condition and results of operations.”

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

2 unchanged sentences

Not applicable.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk