Root, Inc. 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk. We are exposed to certain interest and credit rate risks as part of our ongoing business operations. Interest Rate Risk We are exposed to interest rate risk on our investment portfolio. Interest rate risk represents the potential for losses resulting from adverse changes in market interest rates affecting our interest-bearing assets and liabilities. Our fixed maturity investments include United States Treasury and agency securities, municipal securities, corporate debt securities, and asset-backed securities, most of which are sensitive to changes in prevailing interest rates and may experience moderate fluctuations in fair value as a result. The fair market value of a portfolio of debt securities increases or decreases inversely with changes in market interest rates, while net investment income realized from future investments in debt securities increases or decreases along with interest rates. We monitor this exposure through periodic reviews of investment portfolio conducted by management. 85 We are also exposed to interest rate risk through our Amended Term Loan, which bears interest at floating rates based on changes in the SOFR. Rising interest rates could increase our cost of debt, reduce cash available for operations, and have a material adverse effect on our business and financial condition. As of December 31, 2025, a 100-basis-point increase or decrease in SOFR would not have a significant impact on our interest expense during 2026. Credit Risk We are exposed to credit risk on our investment portfolio, reinsurance contracts, and premiums receivable. Credit risk results from uncertainty in a counterparty’s ability to meet its obligations. We monitor our investment portfolio to ensure that credit risk does not exceed prudent levels. We manage the exposure to credit risk in our United States Treasury and agency securities, municipal securities, corporate debt securities, and asset-backed securities portfolio by investing in high credit quality, investment grade securities and diversifying our holdings. We manage the exposure to credit risk in our reinsurance contracts by obtaining reinsurance from a diverse group of reinsurers and monitoring concentration as well as financial strength ratings of the reinsurers to minimize counterparty credit risk. For certain reinsurance partners who are not rated, we require adequate levels of collateral or letters of credit to be available to us in the event of downside scenarios. We manage the exposure to significant losses on our premiums receivable through strategic initiatives focusing on improved customer communication, policy renewal adjustments, and risk segmentation. 86