Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our investment portfolios at December 31, 2024, include interest rate-sensitive securities, mainly fixed income securities. Our fixed income securities portfolio is comprised primarily of investment grade (investments receiving Standard & Poor's Global Ratings (“S&P”) or an equivalent rating of BBB- or above) corporate securities, U.S. government and agency securities, municipal obligations, and other asset-backed securities (“ABS”), and mortgage-backed securities (“MBS”). Our main objective is to maximize after-tax investment income and maintain sufficient liquidity to meet policyholder obligations while minimizing market risk, which is the potential economic loss from adverse fluctuations in the price of the securities that we hold for investment. We consider many factors when establishing our investment policy, including credit ratings, investment concentrations, regulatory requirements, anticipated fluctuation of interest rates, durations and market conditions in developing investment strategies. We classify our fixed-maturity securities as available-for-sale and report any unrealized gains or losses, net of deferred income taxes, as a component of other comprehensive income within our stockholders’ equity. As such, any material temporary changes in their fair value can adversely impact the carrying value of our stockholders’ equity. Unrealized gains and losses for any equity securities held are reported in our consolidated statement of operations as a component of net realized and unrealized gains and losses.
Interest Rate Risk
On November 7, 2022, the Company amended its Credit Agreement to replace LIBOR with an alternative benchmark rate. Borrowings under the Credit Facilities bear interest at rates equal to either (1) a rate determined by reference to SOFR, plus an applicable margin and a credit adjustment spread equal to 0.10% or (2) a base rate determined by reference to the highest of (a) the “prime rate” of Regions Bank, (b) the federal funds rate plus 0.50%, and (c) the adjusted term SOFR in effect on such day for an interest period of one month plus 1.00%, plus an applicable margin, eliminating any reference to LIBOR.
Our exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest rates. Our fixed income securities portfolio contains interest rate-sensitive instruments, and its performance could be adversely affected by changes in interest rates resulting from governmental monetary policies, domestic and international economic and political conditions, and other factors beyond our control. All else being equal, a rise in interest rates will decrease the fair value of our existing fixed income investments, and a decline in interest rates will increase the fair value of our existing fixed income investments. However, new and reinvested money used to purchase fixed income securities would benefit from rising interest rates and would be negatively impacted by falling interest rates. We seek to mitigate our interest rate risk associated with holding fixed income investments by monitoring and managing the effective duration of our portfolio to maximize yield while managing interest rate risk at an acceptable level.
The duration of the financial instruments held in our portfolio that are subject to interest rate risk was 3.07 years at December 31, 2024 and 3.08 years at December 31, 2023. Credit risk results from uncertainty in a counterparty’s ability to meet its obligations. Credit risk is managed by maintaining a high credit quality fixed maturity securities portfolio. As of December 31, 2024, the estimated weighted-average credit quality rating of the fixed maturity securities portfolio was A, at fair value, at December 31, 2023 our average credit quality rating was an A+.
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The following table illustrates the impact of hypothetical changes in interest rates to the fair value of our fixed-maturity securities at December 31, 2024 (in thousands, except percentages):
Hypothetical Change in Interest rates Estimated Fair Value After Change Change In Estimated Fair
Value Percentage Increase
(Decrease) in Estimated
Fair Value
300 basis point increase $ 595,448 $ (60,108) (9) %
200 basis point increase $ 615,475 $ (40,081) (6) %
100 basis point increase $ 635,510 $ (20,045) (3) %
100 basis point decrease $ 675,609 $ 20,054 3 %
200 basis point decrease $ 695,673 $ 40,117 6 %
300 basis point decrease $ 715,721 $ 60,166 9 %
Credit risk can expose us to potential losses arising principally from adverse changes in the financial condition of the issuer of our fixed-maturity securities. The Company’s Investment Committee has the responsibility to create, oversee, implement and review investment policies. The Investment Committee is responsible for ensuring the policies mitigate this risk by investing in fixed-maturity securities that are generally investment grade and by diversifying our investment portfolio to avoid concentrations in any single issuer or market sector.
The following table presents the composition of our fixed-maturity portfolio by rating at December 31, 2024 (in thousands, except percentages):
Comparable Rating Amortized
Cost % of Total
Amortized Cost
Fair Value % of Total
Fair Value
AAA $ 51,468 7 % $ 47,357 7 %
AA+, AA, AA- $ 379,303 55 % $ 354,390 55 %
A+, A, A- $ 152,321 22 % $ 147,059 22 %
BBB+, BBB, BBB-, BB $ 109,599 16 % $ 106,655 16 %
Not rated $ 99 — % $ 94 — %
Total $ 692,790 100 % $ 655,555 100 %
Below investment grade securities have different characteristics than investment grade corporate fixed-maturity securities. Risk of loss from default by the borrower is greater with below-investment grade securities. Typically, below investment grade securities are generally unsecured and are often subordinated to other creditors of the issuer. Also, issuers of below-grade securities usually have higher levels of debt and are more sensitive to adverse economic conditions, such as recession or increasing interest rates, than investment grade issuers.
Our equity investment portfolio at December 31, 2024 consisted of membership shares held of FHLB common stock which are carried at cost. The estimated fair value of the FHLB common stock was based on the amount we would receive if our memberships were canceled, as the membership cannot be sold.
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The following table illustrates the composition of our equity portfolio at December 31, 2024 (in thousands):
Estimated
Fair Value % of Total
Estimated
Fair value
Stocks by sector:
Financial $ — 0 %
Energy — 0 %
Other 1,936 100 %
Subtotal $ 1,936 100 %
Mutual Funds and ETF by type:
Equity $ — 0 %
Subtotal $ — 0 %
Total $ 1,936 100 %
Foreign Currency Exchange Risk
At December 31, 2024, we did not have any material exposure to foreign currency related risk.
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