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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2024-03-05 compared with 2023-03-08 · 47 added, 59 removed, 32 unchanged (77% of the section changed)

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We believe we are principally exposed to the following types of market risk:

• equity price risk;

• commodity price risk;

• foreign currency risk;

• interest rate risk;

• credit risk;

• political risk.

Our financial instruments are subject to a variety of market risks.

The term market risk refers to the risk of loss arising from adverse changes from:

• equity price;

• commodity price;

• foreign currency;

• interest rate (including credit spreads).

We performed a sensitivity analysis below to estimate the effects that market risk exposure could have on the future earnings, fair values or cash flows of our financial instruments.

These represent forward-looking statements of market risk assuming certain adverse market conditions occur.

Actual results in the future may differ materially from these projected results due to actual developments in the global financial markets.

Equity Price Risk

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

At December 31, 2022, a 10% decline in the price of each of the underlying listed equity securities and equity-based derivative instruments would result in an $8.1 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 current composition of SILP’s portfolio.

The computations should not be relied on as indicative of future results.

At December 31, 2023, a 10% decline in the price of each of the underlying listed equity securities and equity-based derivative instruments would result in a $12.3 million (2022:

$8.1 million) unrealized loss in our investment in SILP.

Commodity Price Risk

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

At December 31, 2022, SILP’s investments incorporate unhedged exposure to changes in gold, silver, uranium, and crude oil prices.

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 at December 31, 2022.

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

At December 31, 2023, SILP’s investments incorporate unhedged exposure to changes in gold, uranium, and crude oil prices.

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The following table summarizes the net impact that a 10% movement in commodity prices would have on the fair value of SILP’s investment portfolio.

The below table excludes the indirect effect that changes in commodity prices might have on equity securities in the SILP’s investment portfolio.

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

Commodity Change in

fair value Change in

At December 31, 2023

($ in millions)

Gold $ 3.8 $ (3.8)

Silver 0.3 (0.3)

Uranium 0.8 (0.8)

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Total $ 6.2 $ (6.1)

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

At December 31, 2022

($ in millions)

Gold $ 3.6 $ (3.6)

Uranium 0.3 (0.3)

Crude oil 0.2 (0.2)

Total $ 4.4 $ (4.4)

Foreign Currency Risk

Underwriting Related

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

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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 to mitigate against adverse foreign currency movements.

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Certain cedents, particularly the Lloyd’s syndicates, report to us in foreign currencies even though some or all of the underlying exposure is denominated in U.S.

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We monitor our foreign currency-denominated assets and liabilities on an “underlying exposure” basis without distinguishing between monetary and non-monetary balances.

At December 31, 2022, our underlying exposure to GBP-denominated net reinsurance asset balance was £5.2 million.

At December 31, 2022, a 10% decrease in the U.S.

dollar against the GBP (all else constant) would result in an estimated $0.6 million foreign exchange gain.

Alternatively, a 10% increase in the U.S.

dollar against the GBP would result in an estimated $0.6 million foreign exchange loss.

Similarly, at December 31, 2022, our net underlying exposure to Euro-denominated reinsurance liability balances was €10.5 million.

At December 31, 2022, a 10% decrease in the U.S.

dollar against the Euro (all else constant) would result in an estimated $1.1 million foreign exchange loss.

Alternatively, a 10% increase in the U.S.

dollar against the Euro would result in an estimated $1.1 million foreign exchange gain.

The following table summarizes the net impact of a hypothetical 10% currency rate movement relating to our primary foreign denominated reinsurance net assets or liabilities (including balances held at Lloyd's):

At December 31, 2023

Net Asset (Liability) Exposure 10% increase in currency rate 10% decrease in currency rate

GBP £ 25,337 $ (3,228) $ 3,228

Euro € (13,975) 1,543 (1,543)

Total foreign exchange gain (loss)

$ (1,685) $ 1,685

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At December 31, 2022

Net Asset (Liability) Exposure 10% increase in currency rate 10% decrease in currency rate

GBP £ 5,235 $ (633) $ 633

Euro € (10,526) 1,126 (1,126)

Total foreign exchange gain (loss)

$ 493 $ (493)

Investment in SILP

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

At December 31, 2023, most of SILP’s currency exposures resulting from foreign-denominated securities (longs and shorts) were reduced by offsetting cash balances denominated in the corresponding foreign currencies.

At December 31, 2022, 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.

At December 31, 2023 and 2022, a 10% increase or decrease in the value of the U.S.

dollar against foreign currencies would have no meaningful impact on our investment in SILP.

Interest Rate Risk

The primary market risk exposure for any debt instrument is interest rate risk.

As interest rates rise, the fair value of a long fixed-income portfolio generally falls.

Similarly, falling interest rates generally lead to increases in the fair value of fixed-income securities.

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

The caption “Reinsurance balances receivable” in our consolidated balance sheets incorporates amounts held by cedents, including the Lloyd’s syndicates in which we participate.

These syndicates invest a portion of the premiums withheld in fixed-income and variable-yield securities, which expose us to interest rate risk.

At December 31, 2022, a 100 basis points increase or decrease in interest rates would result in an estimated $2.2 million loss or gain, respectively, which would be recorded in our consolidated statements of operations under the captions “Other income (expense).”

Our restricted cash and cash equivalents earn interest at rates that generally follow the movements of the short-term U.S.

Treasury rates.

At December 31, 2022, a 100 basis points increase or decrease in U.S.

Federal Funds Rate would result in approximately a $5.7 million increase or decrease, respectively, in our interest income on an annualized basis.

Our investment in SILP includes interest-rate sensitive securities, such as corporate and sovereign debt instruments and interest-rate options.

At December 31, 2022, a 100 basis points increase or decrease in interest rates would result in a $4.4 million gain or a $4.9 million loss, respectively, to our Investment Portfolio.

The primary market risk exposure for any debt instrument is interest rate risk, including credit spreads.

Most of our interest rate risk relates to interest rate derivatives held in SILP, and their value may fluctuate with changes in interest rates.

At December 31, 2023, our investment in SILP includes interest-rate sensitive securities, such as corporate and sovereign debt instruments and interest rate derivatives.

A 100 basis points (increase or decrease) in interest rates would result in a $1.6 million gain (2022:

$4.4 million) or a $3.5 million (2022:

$4.9 million) loss, respectively, to our investment in SILP.

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.

Credit risk relates to the uncertainty of a counterparty’s ability to make timely payments in accordance with the terms of the instrument or contract.

Our maximum exposure to credit risk is the carrying value of our financial assets.

We evaluate the financial condition of our business partners and clients relating to balances receivable under our 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.

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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 a significant concentration of credit risk.

While we have no direct control over SILP, DME Advisors regularly monitors the concentration of credit risk with each counterparty and, if appropriate, transfers cash or securities between counterparties or requests collateral to diversify and mitigate this credit risk.

Political Risk

Through our assumed reinsurance contracts, we currently provide a limited amount of political risk insurance coverage.

We do not expect this exposure 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 listed on various U.S.

and foreign exchanges and markets.

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.

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

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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