Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ($ in thousands)
Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments, as a result of changes in market rates and prices, such as interest rates (inclusive of credit spreads), foreign currency exchange rates and other relevant market rate or price changes. Market risk is, in part, a function of the markets in which the underlying assets are traded. The Company’s market-risk-sensitive financial instruments are primarily entered into for purposes other than trading. As discussed further below, the Company’s primary market risk exposures include those from changes in interest rates, foreign currency exchange rates and equity market values.
• The primary market risks for fixed maturity and short-term investment securities are interest rate risk and foreign exchange rate risk. Octave’s investment portfolio includes securities denominated both in U.S. dollars and foreign currencies, which are sensitive to changes in interest rates and foreign currency exchange rates. Our fixed maturity investments are generally classified as available-for-sale, with the effect of market movements recognized immediately through Other comprehensive income, or through Net income when securities are sold or when an impairment charge is recorded.
• Octave invests in a limited partnership reported within Other investments. This fund is subject to equity value changes driven primarily by changes to their respective net
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asset value (“NAV”). Octave’s share of the changes of the equity value of the fund is reported through Net income.
Octave utilizes various systems, models and sensitivity scenarios to monitor and manage market risk. These models include estimates, made by management, which utilize current and historical market information. This market information is considered in management’s judgments about adverse sensitivity scenarios that are reasonably possible to occur in the near-term. The impact of these scenarios does not consider the possibility of simultaneous movement in other market rates or prices, actions of management or other factors that could lessen or worsen actual results. For these reasons, the valuation results from these models could differ materially from amounts actually realized in the market.
Market Risk Sensitivities
Interest Rate Risk. Financial instruments within Octave's continuing operations for which fair value may be affected by changes in interest rates consist primarily of fixed maturity investment securities. Increases to interest rates would result in declines in the fair value of our fixed maturity investment portfolio. Octave performs scenario testing to measure the potential for losses in volatile markets. These scenario tests include parallel and non-parallel shifts in the benchmark interest rate curve.
The following table summarizes the estimated change in fair value of our fixed maturity investment portfolio from a hypothetical immediate increase in interest rates of 100 basis points across the yield curve as of December 31, 2025 and 2024:
December 31, 2025 2024
Fair value of fixed maturity and short-term investments $ 268,737 $ 284,621
Pre-tax impact of 100 basis point increase in interest rates
Decrease in dollars $ (4,143) $ (4,952)
As a percent of fair value 2 % 2 %
Foreign Currency Risk. Octave's ID subsidiary, Octave Ventures, has short-term investments denominated in British pounds sterling and is a party to foreign exchange forward contracts at December 31, 2025. These financial instruments would experience fair value losses if the U.S. dollar strengthened relative to the British pounds sterling. The following table summarizes the estimated decrease in fair value of these financial instruments assuming immediate 20% strengthening of the U.S. dollar relative to the British pounds sterling as of December 31, 2025 and 2024:
December 31, 2025 2024
Fair value of investments denominated in currencies other than the U.S. dollar $ 18,750 $ 16,604
Pre-tax loss from 20% strengthening of the U.S. dollar $ (3,750) $ (3,321)
Fair value of FX forward contracts $ (8) $ (317)
Pre-tax loss from 20% strengthening of the U.S. dollar $ (4,800) $ (3,936)
Equity Sensitivity. Octave’s investment portfolio includes a partnership interest in a private equity fund. The table below summarizes the decrease in fair value of Octave’s pooled fund investment that would occur assuming an immediate and uniform 10% decline in NAV of the fund. The selection of a 10% fair value stress is made only as an illustration of the hypothetical impact of adverse market movements on Octave’s investments with equity value sensitivity. Actual market shocks could have materially different results.
December 31, 2025 2024
Fair value of investments in pooled funds $ 7,454 $ 7,499
Pre-tax impact of 10% decline in NAV of the funds $ (745) $ (750)
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