ALBERTA MUNICIPAL INSURANCE EXCHANGE

Notes to the Financial Statements

Year ended December 31, 2022, with comparative information for 2021

7. Financial risk management (continued):

Market risk:

Market risk is the risk of adverse financial impact as a consequence of market movements such as currency exchange rates, interest rates and other price changes. Market risk arises due to fluctuations in both the value of the assets held and the value of liabilities.

The Exchange has established policies and procedures in order to manage market risk.

Interest rate risk management:

Interest rate risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

Fluctuations in interest rates have a direct impact on the market valuation of the Exchange’s fixed income securities portfolio and liability values. Historical data and current information is used to profile the ultimate claim settlement patterns by class of insurance, which is then used in a broad sense to develop an investment policy and strategy. Generally the investment income will move with interest rates over the long-term. Short-term interest rate fluctuations will generally create unrealized gains or losses. Generally, the Exchange’s investment income will be reduced during sustained periods of lower interest rates as higher yielding fixed income securities are called, mature, or are sold and the proceeds are reinvested at lower rates, and will likely result in unrealized gains in the value of fixed income securities the Exchange continues to hold, as well as realized gains to the extent the relevant securities are sold. During periods of rising interest rates, the market value of the Exchange’s existing fixed income securities will generally decrease and unrealized gains on fixed income securities will likely be reduced or result in unrealized losses.

Interest rate

sensitivity analysis:

The sensitivity analysis below has been determined based on the theoretical exposure to interest rates at the statement of financial position date.

As at December 31, 2022, management estimates that an immediate hypothetical 100 basis point, or 1%, parallel increase in interest rates would decrease the market value of the fixed income investments (excluding cash) by $1,032,285 (December 31, 2021 - $1,036,520), representing 2.08% (2021 - 2.03%) of the $49,517,278 (December 31, 2021 - $51,181,852) fair value fixed income investments portfolio. Conversely, a 100 basis point decrease in interest rates would increase the market value of the fixed income investments by the same amount. If it was necessary to complete an unexpected immediate liquidation of assets to meet policy obligations, interest rate fluctuations could result in realized gains or losses greater than the change in reserve values.

Computations of the prospective effects of hypothetical interest rate changes are based on numerous assumptions, including the maintenance of the existing level and composition of fixed income investment assets at the indicated date, and are not indicative of future results. The analysis in this section is based on the following assumptions: 1) the investments in the Exchange’s portfolio are not impaired; 2) interest rates and equity prices move independently; 3) shifts in the yield curve are parallel; and, 4) credit and liquidity risks have not been considered.

The Exchange's method for assessing sensitivity to interest rate fluctuations has not changed significantly from the prior year.