NATIONAL HEALTHCARE CORP 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk. Market risk represents the potential economic loss arising from adverse changes in the fair value of financial instruments. Currently, our exposure to market risk relates primarily to our fixed–income and equity portfolios. These investment portfolios are exposed primarily to, but not limited to, interest rate risk, credit risk, equity price risk, and concentration risk. We also have exposure to market risk that includes our cash and cash equivalents. The Company's senior management has established comprehensive risk management policies and procedures to manage these market risks. Interest Rate Risk The fair values of our fixed–income investments fluctuate in response to changes in market interest rates. Increases and decreases in prevailing interest rates generally translate into decreases and increases, respectively, in the fair values of those instruments. Additionally, the fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, the liquidity of the instrument and other general market conditions. At September 30, 2024, we have available for sale marketable debt securities in the amount of $123,911,000. The fixed maturity portfolio is comprised of investments with primarily short–term and intermediate–term maturities. The fixed maturity portfolio allows our insurance company subsidiaries to achieve an adequate risk–adjusted return while maintaining sufficient liquidity to meet obligations. As of September 30, 2024, our credit facility bears interest at variable interest rates. Currently, we have an outstanding balance on our credit facility of $147.0 million. Based on our outstanding balance on the credit facility, a 1% change in interest rates would change interest cost by approximately $1,470,000. Our cash and cash equivalents consist of highly liquid investments with a maturity of less than three months when purchased. As a result of the short–term nature of our cash instruments, a hypothetical 1% change in interest rates would have minimal impact on our future earnings and cash flows related to these instruments. We do not currently use any derivative instruments to hedge our interest rate exposure. We have not used derivative instruments for trading purposes and the use of such instruments in the future would be subject to approvals by the Investment Committee of the Board of Directors. Credit Risk Credit risk is managed by diversifying the fixed maturity portfolio to avoid concentrations in any single industry group or issuer and by limiting investments in securities with lower credit ratings. 39 Table of Contents Equity Price and Concentration Risk Our marketable equity securities are recorded at their fair market value based on quoted market prices. Thus, there is exposure to equity price risk, which is the potential change in fair value due to a change in quoted market prices. At September 30, 2024, the fair value of our marketable equity securities is approximately $187,755,000. Of the $187.8 million equity securities portfolio, our investment in NHI comprises approximately $137.1 million, or 73.0%, of the total fair value. We manage our exposure to NHI by closely monitoring the financial condition, performance, and outlook of the company. Hypothetically, a 10% change in quoted market prices would result in a related increase or decrease in the fair value of our equity investments of approximately $18.8 million. At September 30, 2024, our equity securities had net unrealized gains of $139.9 million. Of the $139.9 million of unrealized gains, $112.3 million is related to our investment in NHI.