Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market
Risk
Market risk is the risk that a company will incur
losses due to adverse changes in the fair value of financial instruments. We have exposure to three principal types of market risk through
our investment activities: interest rate risk, credit risk, and equity risk. Our primary market risk exposure is to changes in interest
rates. We have not entered, and do not plan to enter, into any derivative financial instruments for hedging, trading, or speculative purposes.
Interest Rate Risk
Interest rate risk is the risk that a company will
incur economic losses due to adverse changes in interest rates. Our exposure to interest rate changes primarily results from our significant
holdings of fixed income securities. Fluctuations in interest rates have a direct impact on the fair value of these securities.
We develop our investment strategies based on a number
of factors, including estimated duration of reserve liabilities, short and long-term liquidity needs, general economic conditions, expected
rates of inflation and regulatory requirements. The portfolio duration of the fixed income securities in our investment portfolio at December
31, 2023 was 4.52 years. These fixed income securities include U.S. government bonds, securities issued by government agencies, obligations
of state and local governments and governmental authorities, and corporate bonds, most of which are exposed to changes in prevailing interest
rates. These fixed income securities may experience significant fluctuations in fair value resulting from changes in interest rates and
are carried as available for sale. We manage the exposure to risks associated with interest rate fluctuations through active management
and consultation with our outside fixed income portfolio manager.
Higher interest rates, oftentimes correlated to inflation,
reduce the carrying value of our fixed income and short-term investments, negatively impacting the Company’s book value in the short-term.
Over the long-term, however, higher interest rates provide an incremental benefit to our net investment income over time as excess cash
and proceeds of maturing bonds are reinvested at higher rates. We manage our exposure to interest rate increases by monitoring the duration
within our investment portfolio and maintaining maturities that minimize forced sales within the portfolio.
Additionally, we hold certain fixed income securities
that have call features. In a potential declining interest rate environment, these securities may be called by their issuer and replaced
with securities bearing lower interest rates.
If we are required to sell fixed income securities
in a rising interest rate environment, we may recognize investment losses.
The table below shows the interest rate sensitivity
of our fixed income securities measured in terms of fair value (which is equal to the carrying value for all of our investment securities
that are subject to interest rate changes) at December 31, 2023 and 2022:
As of December 31, 2023
As of December 31, 2022
Hypothetical Change in Interest Rate
Estimated Change
in Fair Value
Fair Value
Estimated Change
in Fair Value
Fair Value
200 basis point increase
$ (31,125 )
$ 316,606
$ (26,433 )
$ 276,891
100 basis point increase
(15,826 )
331,905
(13,504 )
289,820
No change
—
347,731
—
303,324
100 basis point decrease
16,199
363,930
13,986
317,310
200 basis point decrease
32,572
380,303
28,347
331,671
The interest
rate exposure of our portfolio was proportionately consistent in the current year compared to the prior year, which is expected given
the generally consistent composition and duration of the fixed income portfolio over this time.
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Credit Risk
Credit risk is the potential economic loss principally
arising from adverse changes in the financial condition of a specific debt issuer. We address this risk by investing primarily in fixed
income securities that are rated investment grade by Moody’s Investors Services, Inc. or an equivalent rating quality. We also work
in conjunction with our outside fixed income portfolio manager to monitor the financial condition of all of the issuers of fixed income
securities in the portfolio. Additionally, our investment policy includes diversification rules that limit the credit exposure to any
single issuer or asset class.
Equity Risk
Equity price risk is the risk that we will incur
economic losses due to adverse changes in equity prices. Our equity portfolio is subject to a variety of risk factors, including general
economic conditions which influence the performance of the underlying industries and companies within those industries. Industry and company-specific
risks also have the potential to substantially affect the value of our portfolio. Our investment policy helps mitigate these risks by
diversifying the portfolio and establishing parameters to help manage exposures.
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