Kestrel Group LtdKG
Kestrel Group Ltd Fair Value Disclosure
Fair Value Measurements
a) Fair Values of Financial Instruments measured at fair value
ASC 825, "Disclosure About Fair Value of Financial Instruments", requires all entities to disclose the fair value of their financial instruments for both assets and liabilities recognized and not recognized within the balance sheet, and for which it is practicable to estimate fair value. The following describes the valuation techniques used by the Company to determine the fair value of financial instruments measured at fair value held at December 31, 2025.
U.S. government and U.S. agency bonds — Bonds issued by the U.S. Treasury, the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation, Government National Mortgage Association, Federal National Mortgage Association and the Federal Farm Credit Banks Funding Corporation. The fair values of U.S. treasury bonds are based on quoted market prices in active markets, and are included in the Level 1 fair value hierarchy. We believe the market for U.S. treasury bonds is an actively traded market given the high level of daily trading volume. The fair values of U.S. agency bonds are determined using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads for these securities are observable market inputs, the fair values of U.S. agency bonds are included in the Level 2 fair value hierarchy.
Non-U.S. government bonds — These securities are generally priced by independent pricing services. The Pricing Service may use current market trades for securities with similar quality, maturity and coupon. If no such trades are available, the Pricing Service typically uses analytical models which may incorporate spreads, interest rate data and market/sector news. As the significant inputs used to price non-U.S. government bonds are observable market inputs, the fair values of non-U.S. government and bonds are included in the Level 2 fair value hierarchy.
Collateralized loan obligations ("CLO") - These asset backed securities are originated by a variety of financial institutions that on acquisition are rated BBB-/Baa3 or higher. These securities are priced by independent pricing services and brokers. The pricing provider applies dealer quotes and other available trade information, prepayment speeds, yield curves and credit spreads to the valuation. As the significant inputs used to price the CLO are observable market inputs, the fair values are included in the Level 2 fair value hierarchy.
Commercial mortgage-backed securities ("CMBS") - These asset backed securities are originated by a variety of financial institutions that on acquisition are rated BBB-/Baa3 or higher. These securities are priced by independent pricing services and brokers. The pricing provider applies dealer quotes and other available trade information, prepayment speeds, yield curves and credit spreads to the valuation. As the significant inputs used to price the CMBS are observable market inputs, the fair values are included in the Level 2 fair value hierarchy.
Corporate and municipal bonds — Bonds issued by corporations, U.S. state and municipality entities or agencies. that on acquisition are rated BBB-/Baa3 or higher. These securities are generally priced by independent pricing services. The credit spreads are sourced from broker/dealers, trade prices and new issue market. Where pricing is unavailable from pricing services, custodian pricing or non-binding quotes are obtained from broker-dealers to estimate fair values. As significant inputs used to price corporate and municipal bonds are observable market inputs, fair values are included in the Level 2 fair value hierarchy.
Equity securities - Equity securities can include publicly traded common stocks, and privately held common and preferred stocks. The fair value of publicly traded common stocks is primarily priced by pricing services, reflecting the closing price quoted for the final trading day of the period. These investments are carried at fair value using observable market pricing data and is included in the Level 1 fair value hierarchy. Any unrealized gains or losses on the investment is recorded in net income in the reporting period in which it occurs. The privately held common and preferred stocks are valued using significant inputs that are unobservable where there is little or no market activity. Unadjusted third party pricing sources or management's assumptions and internal valuation models may be used to determine the fair values, therefore, these investments are classified as Level 3 in the fair value hierarchy.
Other investments — Includes unquoted investments comprised of the following types of investments:
•Privately held investments: These are direct equity investments in common and preferred shares of privately held entities. The fair values are estimated using quarterly financial statements and/or recent private market transactions and thus included under Level 3 of the fair value hierarchy due to unobservable market data used for valuation.
•Private credit funds: These are privately held equity investments in common stock of entities that lend money valued using the most recently available or quarterly NAV statements as provided by the external fund manager or third-party administrator and therefore measured using the NAV as a practical expedient.
•Private equity funds: These are comprised of private equity funds, private equity co-investments with sponsoring entities and investments in real estate limited partnerships and joint ventures. The fair value is estimated based on the most recently available NAV as advised by the external fund manager or third-party administrator. The fair values are therefore measured using the NAV as a practical expedient.
•Investments in direct lending entities: These investments are carried at their fair market value with any changes in fair value reported in realized and unrealized gains (losses) during the period. These investments are included in Level 3 of the fair value hierarchy due to unobservable market data used for valuation.
•Due to a lag in the valuations of certain funds reported by the investment managers, the Company may record changes in valuation with up to a three-month lag. The Company regularly reviews and discusses fund performance with the investment managers or sponsors to corroborate the reasonableness of the reported NAV and to assess whether any events have occurred within the lag period that would affect the valuation of the investments.
5. Fair Value Measurements (continued)
•Equity method investments: The Company elected the fair value option for certain of its equity method investments, and these investments are reported at their fair values with any changes in fair value reported in realized and unrealized gains (losses) during the period. These are included in Level 3 of the fair value hierarchy due to unobservable market data used for valuation.
Contingent Receivables - The Company holds a contingent receivable related to a prior private equity investment in the insurance distribution industry. Pursuant to the terms of the asset purchase agreement, the Company will receive a series of distributions. The Company uses unobservable inputs to estimate the net present value of these potential distributions and the expected proceeds are classified as a receivable and reported in Other Assets on the Consolidated Balance Sheet. Under ASC 805, the earn out consideration for this receivable is adjusted to fair value at each reporting period with any changes in fair value reported immediately in income through foreign exchange and other gains (losses) on the consolidated income statement.
Derivative Instruments - The Company entered into a retroactive reinsurance contract that is accounted for as a derivative. This reinsurance contract provides indemnification to an insured or cedant as a result of a change in a variable as opposed to an identifiable insurable event. The Company considers this contract to be part of its underwriting operations. This derivative is initially valued at cost which approximates fair value. In subsequent measurement periods, the fair value of this derivative is determined using internally developed discounted cash flow models using appropriate discount rates. The selection of an appropriate discount rate is judgmental and is the most significant unobservable input used in the valuation of this derivative.
The fair value changes in the underwriting-related derivative instrument are included in other insurance revenue (expense), net. The derivative liability on retroactive reinsurance is presented as part of accrued expenses and other liabilities. A significant increase (decrease) in this input in isolation may result in a significantly lower (higher) fair value measurement for the derivative contract. As the significant inputs used to price the derivative are unobservable, the fair values of this contract is classified as Level 3 in the fair value hierarchy.
b) Fair Value Hierarchy
The Company’s estimates of fair value for its financial assets and financial liabilities are based on the framework established in ASC 820. The framework is based on the inputs used in valuation and gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuation methodology whenever available. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active trading markets and the lowest priority to unobservable inputs that reflect significant market assumptions.
At December 31, 2025, the Company classified its financial instruments measured at fair value on a recurring basis in the following valuation hierarchy:
| December 31, 2025 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Fair Value Based on NAV Practical Expedient | Total Fair Value | |||||||||||||||||||||||||||
Fixed maturities | ||||||||||||||||||||||||||||||||
| U.S. treasury bonds | $ | 43,673 | $ | — | $ | — | $ | — | $ | 43,673 | ||||||||||||||||||||||
| U.S. agency bonds – mortgage-backed | — | 21,618 | — | — | 21,618 | |||||||||||||||||||||||||||
| Non-U.S. government bonds | — | 27,275 | — | — | 27,275 | |||||||||||||||||||||||||||
| Collateralized loan obligations | — | 62,624 | — | — | 62,624 | |||||||||||||||||||||||||||
| Corporate bonds | — | 7,977 | — | — | 7,977 | |||||||||||||||||||||||||||
| Equity securities | — | 4,838 | 6,910 | — | 11,748 | |||||||||||||||||||||||||||
| Contingent receivable | — | — | 9,955 | — | 9,955 | |||||||||||||||||||||||||||
Other investments | — | — | 135,018 | 38,340 | 173,358 | |||||||||||||||||||||||||||
| Total Assets measured at Fair Value | $ | 43,673 | $ | 124,332 | $ | 151,883 | $ | 38,340 | $ | 358,228 | ||||||||||||||||||||||
As a percentage of total assets | 4.3 | % | 12.3 | % | 15.0 | % | 3.8 | % | 35.4 | % | ||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
| Underwriting-related derivative liability | $ | — | $ | — | $ | 3,984 | $ | — | $ | 3,984 | ||||||||||||||||||||||
| December 31, 2024 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3)(1) | Fair Value Based on NAV Practical Expedient | Total Fair Value | |||||||||||||||||||||||||||
The Company utilizes the Pricing Service to assist in determining the fair value of its investments; however, management is ultimately responsible for all fair values presented in the Company’s financial statements. This includes responsibility for monitoring the fair value process, ensuring objective and reliable valuation practices, and pricing of assets and liabilities and use of pricing sources. The Company analyzes and reviews the information and prices received from the Pricing Service to ensure that the prices provided represent a reasonable estimate of fair value.
5. Fair Value Measurements (continued)
The Pricing Service was utilized to estimate fair value measurements for 100.0% of our fixed maturity investments at December 31, 2025. The Pricing Service utilizes market quotations for fixed maturity securities that have quoted market prices in active markets. Since fixed maturities other than U.S. treasury bonds generally do not trade actively on a daily basis, the Pricing Service prepares estimates of fair value measurements using relevant market data, benchmark curves, sector groupings and matrix pricing and these have been classified as Level 2 within the fair value hierarchy.
At December 31, 2025, no securities in our fixed maturity investment portfolio were priced using a non-binding quotation from a broker and/or custodian as opposed to the Pricing Service. At December 31, 2025, the Company did not adjust any pricing provided to it based on the review performed by its investment managers. There were no transfers to or from Level 3 during the year ended December 31, 2025.
c) Level 3 Financial Instruments
At December 31, 2025, the Company holds Level 3 financial instruments which include total investments of $141,928, a contingent receivable of $9,955 which is included in other assets, and an underwriting-related derivative liability of $3,984 on a reinsurance contract written by GLS which is included in accrued expenses and other liabilities.
The Level 3 investments include collateralized investments in direct lending entities of $53,275 at December 31, 2025 which are carried at fair market value using significant unobservable inputs. These direct loans are illiquid, require long-term capital commitments and significant judgment was used in determining its valuation using discounted cash flows. However, collateral is held in excess of the fair value of this investment. Due to significant unobservable inputs required in its valuation, investments in direct lending entities are classified as Level 3 in the fair value hierarchy.
The fair values for privately held equity investments of $9,742 are estimated using quarterly unaudited capital and financial statements provided by the investee, option pricing models or market comparable transactions, where applicable. Any changes to the financial information provided by the investee or unobservable inputs could result in a significantly higher or lower valuation at the reporting date. Due to significant unobservable inputs in these valuations, the Company classifies the fair values as Level 3 in the fair value hierarchy.
The Company has elected the fair value option for certain of its equity method investments at the acquisition date. Their fair value of $78,911 are presented in other investments and estimated using quarterly unaudited capital and financial statements provided by the investee, discounted cash flows and option pricing models, where applicable. Any changes to the financial information provided by the investee or unobservable inputs could result in a significantly higher or lower valuation at the reporting date. Due to significant unobservable inputs in valuations, the Company classifies the fair values as Level 3 within the fair value hierarchy.
The Company holds a contingent receivable related to a prior private equity investment in the insurance distribution industry where the Company will receive a series of distributions under terms of the asset purchase agreement. The net present value of these potential distributions is $9,955 which was reported in Other Assets on the Consolidated Balance Sheet at December 31, 2025. Under ASC 805, the earn out consideration for this receivable is adjusted to fair value using discounted cash flows at each reporting period with any changes in fair value reported immediately in net income. Due to significant unobservable inputs in its valuation, the Company classifies the fair value of this contingent receivable as Level 3 within the fair value hierarchy.
The fair value of underwriting-related derivative instruments of $3,984 is determined using a discounted cash flow model in which the Company examines current market conditions, historical results as well as contract specific information that may impact future cash flows in order to assess the reasonableness of inputs used in the valuation model. Due to significant unobservable inputs in these valuations, the Company classifies the fair values as Level 3 within the fair value hierarchy.
The following table shows the reconciliation of beginning and ending balances for financial assets measured at fair value on a recurring basis using Level 3 inputs for the year ended December 31, 2025. The Company includes any related interest and dividend income in net investment income and thus are excluded from the reconciliation in the table below:
| For the Year Ended December 31, | 2025 | |||||||
| Balance - beginning of period | $ | — | ||||||
| Acquired Level 3 financial assets | 147,143 | |||||||
| Purchases | 5,496 | |||||||
| Sales | (1,239) | |||||||
Net realized and unrealized gains recognized in the statement of income | 5,321 | |||||||
| Transfers out of Level 3 into Level 2 | (4,838) | |||||||
| Total Level 3 investments - end of period | $ | 151,883 | ||||||
5. Fair Value Measurements (continued)
The following table provides a summary of quantitative information regarding the significant unobservable inputs used in determining the fair value of other investments measured at fair value on a recurring basis under the Level 3 classification at December 31, 2025:
| Financial Instrument | Fair Value | Valuation Technique | Significant Unobservable Valuation Inputs | Range of Unobservable Inputs (Low/High/Weighted Average) | Impact of Increases in Inputs | ||||||||||||||||||||||||||||||||||||
| Private equity investments - preferred shares | 4,578 | Market comparable companies & Option Pricing Models | Value Change - Market/Industry Factors | (3.0)% | 5.0% | (0.3)% | Higher fair value | ||||||||||||||||||||||||||||||||||
| Private equity investments - preferred shares | 2,332 | Value Change - Company Performance | 10.0% | 10.0% | 10.0% | Higher fair value | |||||||||||||||||||||||||||||||||||
| Term to Exit | 3.0 years | 3.0 years | 3.0 years | Lower fair value | |||||||||||||||||||||||||||||||||||||
| Equity Volatility | 40.0% | 65.0% | 56.6% | Lower fair value | |||||||||||||||||||||||||||||||||||||
| Private equity investments - preferred shares | 1,559 | Market comparable companies & Option Pricing Models | Value Change - Market/Industry Factors | (3.0)% | 7.5% | 1.7% | Higher fair value | ||||||||||||||||||||||||||||||||||
| Private equity investments - preferred shares | 1,273 | Value Change - Company Performance | 10.0% | 10.0% | 10.0% | Higher fair value | |||||||||||||||||||||||||||||||||||
| Term to Exit | 2.5 years | 3.0 years | 2.7 years | Lower fair value | |||||||||||||||||||||||||||||||||||||
| Equity Volatility | 65.0% | 92.5% | 80.1% | Lower fair value | |||||||||||||||||||||||||||||||||||||
| Investment in direct lending entities | 53,275 | Discounted cash flows | Discount rate | 22.0% | 22.0% | 22.0% | Lower fair value | ||||||||||||||||||||||||||||||||||
| — | Discounted cash flows | Discount Rate | 10.0% | 25.0% | 18.0% | Lower fair value | |||||||||||||||||||||||||||||||||||
| Silverstone Ventures | 27,911 | Term to Exit | 3.0 years | 9.0 years | 3.6 years | Lower fair value | |||||||||||||||||||||||||||||||||||
| Extell Hudson Waterfront Holdings | Discounted cash flows & option pricing models | Discount Rate | 6.8% | 6.8% | 6.8% | Lower fair value | |||||||||||||||||||||||||||||||||||
| Exit Cap Rate | 5.5% | 5.5% | 5.5% | Lower fair value | |||||||||||||||||||||||||||||||||||||
| 51,000 | Equity Volatility | 37.4% | 37.4% | 37.4% | Lower fair value | ||||||||||||||||||||||||||||||||||||
| Term to Exit | 5.7 years | 5.7 years | 5.7 years | Lower fair value | |||||||||||||||||||||||||||||||||||||
| Discount for Lack of Marketability - OPM | 15.0% | 18.0% | 16.5% | Lower fair value | |||||||||||||||||||||||||||||||||||||
| Discount for Lack of Marketability | 10.0% | 10.0% | 10.0% | Lower fair value | |||||||||||||||||||||||||||||||||||||
| Total Level 3 Investments | $ | 141,928 | |||||||||||||||||||||||||||||||||||||||
| Contingent Receivable | $ | 9,955 | Discounted cash flows & Option pricing models | EBITDA & Commission Discount Rate | 9.2 | % | 9.2 | % | 9.2 | % | Lower fair value | ||||||||||||||||||||||||||||||
| EBITDA & Commission Equity Volatility Rate | 25.0 | % | 25.0 | % | 25.0 | % | Lower fair value | ||||||||||||||||||||||||||||||||||
| Underwriting-related derivative liability | $ | 3,984 | Discounted cash flows | Duration matched discount rates | 5.5% | 5.5% | 5.5% | Lower fair value | |||||||||||||||||||||||||||||||||
5. Fair Value Measurements (continued)
d) Financial Instruments Disclosed, But Not Carried, at Fair Value
The fair value of financial instruments accounting guidance also applies to financial instruments disclosed, but not carried at fair value, except for certain financial instruments related to insurance contracts.
At December 31, 2025, the carrying values of cash equivalents (including restricted amounts), accrued investment income, reinsurance balances receivable and certain other assets and liabilities approximate fair values due to their inherent short duration. As these financial instruments are not actively traded, the fair values of these financial instruments are classified as Level 2 in the fair value hierarchy.
At December 31, 2025, the carrying value of the net loan receivable from related party approximates fair value. The fair value of this loan is primarily determined by estimating expected future cash flows and discounting them using current interest rates for similar loans with similar credit risk. As the net loan receivable from related party is not actively traded, its fair value is classified as Level 3 in the fair value hierarchy.
The fair values of the Company's outstanding Senior Notes for the respective periods (as defined in Note 7. Long-Term Debt) are based on indicative market pricing obtained from a third-party pricing service which uses observable market inputs, and therefore the fair values of these liabilities are classified as Level 2 in the fair value hierarchy. The following table presents the respective carrying values and fair values for the Company's outstanding Senior Notes as at December 31, 2025:
| December 31, | 2025 | |||||||||||||
| Carrying Value | Fair Value | |||||||||||||
2016 Senior Notes - MHLA – 6.625% | $ | 110,000 | $ | 57,200 | ||||||||||
2013 Senior Notes - MHNC – 7.75% | 152,361 | 96,292 | ||||||||||||
| Total Senior Notes | $ | 262,361 | $ | 153,492 | ||||||||||
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.