Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to interest rate risk related to borrowings in various businesses. These risks result primarily from changes in SOFR rates and the spread over SOFR rates related to the credit risks of our businesses.
For fixed rate debt, interest rate fluctuations generally affect the fair value of our liabilities, but do not impact our earnings. Therefore, interest rate risk does not have a significant impact on our fixed rate debt obligations until such obligations mature or until we elect to prepay and refinance such obligations. If interest rates have risen at the time our fixed rate debt matures or is refinanced, our future earnings could be adversely affected by additional borrowing costs. Conversely, lower interest rates at the time of maturity or refinancing may lower our overall interest expense. As of December 31, 2024, the Company’s insurance subsidiary had $125.0 million and $150.0 million of general purpose fixed rate debt outstanding maturing in 2057 and 2064, respectively.
For general purpose floating rate debt, interest rate fluctuations primarily affect interest expense and cash flows. If market interest rates rise, our earnings could be adversely affected by an increase in interest expense. In contrast, lower interest rates may reduce our interest expense and improve our earnings, except to the extent that our borrowings are subject to interest rate floors. The floating interest rate risk of asset based financing is generally offset as the financing and the purchased financial asset are generally subject to the same interest rate risk. As of December 31, 2024, the Company’s insurance subsidiary had $35.0 million of floating rate corporate debt with a weighted average rate of 9.5% compared to $165.0 million of floating rate corporate debt as of December 31, 2023, with a weighted average rate of 7.3%. For floating rate risk of other asset based financing such as borrowings to finance acquisitions of real estate, we generally hedge our exposure to the variability of the benchmark index with an interest rate swap. As of December 31, 2024 and 2023, Tiptree’s holding company had no general purpose floating rate debt as it was repaid in June 2022.
Our consolidated results include investments in bonds, loans or other interest bearing instruments. The fair values of such investments fluctuate in response to changes in market interest rates. Increases and decreases in interest rates generally translate into decreases and increases in fair values of these instruments. Some of these investments bear a floating rate of interest which subjects the Company to cash flow risk based upon changes in the underlying interest rate index. As noted above in the discussion of risks related to floating rate borrowings, the Company mitigates a significant amount of our floating rate risk by matching the funding of such investments with borrowings based upon the same interest rate index. Additionally, fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, relative values of alternative investments, the liquidity of the instrument and other general market conditions.
As of December 31, 2024, we had $1,157.3 million invested in interest bearing instruments, which represents 74.8% of the total investment portfolio (including cash and cash equivalents). The estimated effects of a hypothetical increase in interest rates of 100 bps would result in a decrease to the fair value of the portfolio by $38.7 million. As of December 31, 2023, we had $879.6 million invested in interest bearing instruments, which represented 66% of the total investment portfolio. The estimated effects of a hypothetical increase in interest rates of 100 bps would result in a decrease to the fair value of the portfolio by $26.8 million.
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Credit Risk
We are exposed to credit risk in the form of available for sale securities, investments in loans, and other investments as follows:
($ in thousands) As of December 31,
2024 2023
Available for sale securities, at fair value (1)
Obligations of state and political subdivisions
$ 38,675 $ 45,459
Corporate securities 598,134 254,598
Asset backed securities 22,860 26,186
Certificates of deposit
1,145 1,724
Obligations of foreign governments 51,472 4,557
Loans, at fair value (2)
Corporate loans 10,272 11,218
Other investments (3)
Corporate bonds, at fair value 3,331 62,081
Debentures 25,320 25,648
Investment in credit fund 21,332 11,830
Other — 7,201
Total $ 772,541 $ 450,502
(1) The Company also holds investments in U.S. Treasury securities and obligations of U.S. government authorities and agencies of $395.6 million and $470.1 million as of December 31, 2024 and 2023, respectively. These investments do not represent a credit risk and are excluded.
(2) The Company also holds investments in mortgage loans held for sale of $71.1 million and $58.3 million as of December 31, 2024 and 2023, respectively. These investments do not represent a credit risk and are excluded.
(3) The Company also holds other investments of $3.1 million and $4.3 million as of December 31, 2024 and 2023, respectively. These investments do not represent a credit risk and are excluded.
Credit risk within the Company’s investments represents the exposure to the adverse changes in the creditworthiness of individual investment holdings, issuers, groups of issuers, industries, and countries. Our policy is to invest in high-quality securities and to limit investments in the instruments that are either unrated or rated below investment grade. As of December 31, 2024 and 2023, 84% and 72%, respectively, of the investments subject to credit risk had investment grade ratings.
In addition, our mortgage business also underwrites mortgage loans for the purpose of selling them into the secondary market. Due to the relatively short holding period, the credit risk associated with mortgage loans held for sale is not expected to be significant.
See Note (6) Investments to the consolidated financial statements for more information regarding our investments in loans by type.
Market Risk
We are primarily exposed to market risk related to the following investments:
($ in thousands) As of December 31, 2024 As of December 31, 2023
Insurance Tiptree Capital - Other Total Insurance Tiptree Capital - Other Total
Invesque
$ — $ — $ — $ 719 $ 3,442 $ 4,161
Exchange traded funds
5,075 — 5,075 1,349 — 1,349
Other equity securities 99,393 4,152 103,545 25,045 37,753 62,798
Total equity securities $ 104,468 $ 4,152 $ 108,620 $ 27,113 $ 41,195 $ 68,308
A 10% increase or decrease in the fair value of such investments would result in $10.8 million and $6.8 million of unrealized gains and losses as of December 31, 2024 and 2023, respectively.
Foreign Currency Exchange Rate Ris k
We have foreign currency exchange rate risk associated with certain assets and liabilities related to our foreign operations. At December 31, 2024 and 2023, 88% and 93%, respectively of our invested assets were denominated in United States (U.S.)
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Dollars. At that date, the largest foreign currency denominated asset balances were fixed income securities denominated in British Pound Sterling and Euros reported within available for sale securities, at fair value. At December 31, 2024 and 2023, 87% and 92%, respectively, of our insurance subsidiary’s combined unpaid premiums and deferred revenue were denominated in U.S. Dollars.
Counterparty Risk
We are subject to counterparty risk to the extent that we engage in derivative activities for hedging or other purposes. As of December 31, 2024 and 2023, the total fair value of derivative assets subject to counterparty risk, including the effect of any legal right of offset, totaled $3.1 million and $4.0 million, respectively. We generally manage our counterparty risk to derivative counterparties by entering into contracts with counterparties of high credit quality.
Total reinsurance recoverables and prepaid reinsurance premiums were $2,039.1 million and $1,854.4 million of December 31, 2024 and 2023, respectively. Of those amounts, $835.3 million and $870.5 million, respectively, related to contracts with third-party captives in which we hold collateral or receive letters of credit in excess of the reinsurance receivables. The remainder is held with high quality reinsurers, substantially all of which have a rating of A or better by A.M. Best. As of December 31, 2024, the non-affiliated reinsurers from whom our insurance business has the largest reinsurance receivable balances represented $220.4 million, or 10.8% of the total, and included: Allianz Global Risks US Insurance Company (AM Best Rating: A+ rated), Allianz Reinsurance America, Inc. (AM Best Rating: A+ rated), and Ferian Re, LTD (AM Best Rating: Not Rated). Receivable balances from authorized reinsurers, such as the Allianz companies noted above, do not require collateral based on the authorized status of the parties. Receivable balances from unauthorized reinsurers are collateralized by assets on hand, assets held in trust accounts, and/or letters of credit. The Company monitors collateral values, authorization status, financial statements and AM Best ratings of its reinsurers periodically. As of December 31, 2024, the Company does not believe there is a risk of loss due to the concentration of credit risk in the reinsurance program given the related collateralization or reinsurer AM Best rating.
($ in thousands) As of December 31,
2024 2023
Third-party captives
Reinsurance receivables and prepaid reinsurance premiums $ 835,331 $ 870,511
Collateral $ 1,105,124 $ 1,035,728
% Collateralized 132 % 119 %
Professional Reinsurers
Reinsurance receivables and prepaid reinsurance premiums $ 1,203,805 $ 983,900
Collateral $ 350,871 $ 643,853
% Collateralized 29 % 65 %
Total
Reinsurance receivables and prepaid reinsurance premiums $ 2,039,136 $ 1,854,410
Collateral $ 1,455,995 $ 1,679,581
% Collateralized 71 % 91 %
We were also exposed to counterparty risk of approximately $286.3 million and $265.9 million as of December 31, 2024 and 2023, respectively, related to our retrospective commission arrangements; associated risks are offset by the Company’s contractual ability to withhold future commissions against the retrospective balances. In addition, we are exposed to counterparty risk of approximately $138.2 million and $134.1 million as of December 31, 2024 and 2023, respectively, related to our premium financing business. The risk associated with such arrangements is mitigated by the fact that we have the contractual ability to cancel the insurance policy and have premiums refunded to us by the insurer in the event of a counterparty default.
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