NI Holdings, Inc. 10-K

Item 7A. Quantitative and Qualitative Information About Market Risk Market Risk Market risk is the risk that a company will incur losses due to adverse changes in the fair value of financial instruments. NI Holdings has exposure to three principal types of market risk through its investment activities: interest rate risk, credit risk, and equity risk. NI Holdings’ primary market risk exposure is to changes in interest rates. NI Holdings has not entered, and does not plan to enter, into any derivative financial instruments for hedging, trading, or speculative purposes. Interest Rate Risk Interest rate risk is the risk that a company will incur economic losses due to adverse changes in interest rates. NI Holdings’ exposure to interest rate changes primarily results from its significant holdings of fixed income securities. Fluctuations in interest rates have a direct impact on the fair value of these securities. The portfolio duration of the fixed income securities in NI Holdings’ investment portfolio at December 31, 2020 was 3.57 years. The Company’s fixed income securities include U.S. government bonds, securities issued by government agencies, obligations of state and local governments and governmental authorities, and corporate bonds, most of which are exposed to changes in prevailing interest rates and which may experience moderate fluctuations in fair value resulting from changes in interest rates. NI Holdings carries these investments as available for sale. This allows the Company to manage its exposure to risks associated with interest rate fluctuations through active review of its investment portfolio by its management and Board of Directors and consultation with our outside investment manager. Fluctuations in near-term interest rates could have an impact on NI Holdings’ results of operations and cash flows. Certain of these securities may have call features. In a declining interest rate environment, these securities may be called by their issuer and replaced with securities bearing lower interest rates. If NI Holdings is required to sell these securities in a rising interest rate environment, it may recognize investment losses. As a general matter, NI Holdings attempts to match the durations of its assets with the durations of its liabilities. The Company’s investment objectives include maintaining adequate liquidity to meet its operational needs, optimizing its after-tax investment income, and its after-tax total return, all of which are subject to NI Holdings’ tolerance for risk. The table below shows the interest rate sensitivity of NI Holdings’ fixed income securities measured in terms of fair value (which is equal to the carrying value for all of its investment securities that are subject to interest rate changes) at December 31, 2020 and 2019: As of December 31, 2020 As of December 31, 2019 Hypothetical Change in Interest Rate Estimated Change in Fair Value Fair Value Estimated Change in Fair Value Fair Value 200 basis point increase $ (23,122 ) $ 297,288 $ (21,976 ) $ 273,969 100 basis point increase (11,438 ) 308,972 (10,875 ) 285,071 No change — 320,410 — 295,945 100 basis point decrease 11,279 331,689 10,518 306,463 200 basis point decrease 23,046 343,456 21,273 317,218 The interest rate exposure of the Company’s portfolio increased slightly this year compared to last year. The increase in interest rate exposure was driven by several factors, including a decrease in portfolio cash balances and an increase in the allocation within our portfolio to taxable sectors which historically have higher interest rate sensitivity relative to tax-exempt municipals. Further increases in the portfolio’s interest rate exposure are expected as we gradually shift to a higher long-term duration target. Pandemic-related effects did not have a material impact on the portfolio’s interest rate exposure. Credit Risk Credit risk is the potential economic loss principally arising from adverse changes in the financial condition of a specific debt issuer. NI Holdings addresses this risk by investing primarily in fixed income securities that are rated at least investment grade by Moody’s or an equivalent rating quality. NI Holdings also independently, and through its outside investment manager, monitors the financial condition of all of the issuers of fixed income securities in the portfolio. To limit its exposure to risk, the Company employs diversification rules that limit the credit exposure to any single issuer or asset class. Equity Risk Equity price risk is the risk that NI Holdings will incur economic losses due to adverse changes in equity prices. 71 Table of Contents Impact of Inflation Inflation increases consumers’ needs for property and casualty insurance due to the increase in the value of the property insured and any potential liability exposure. Inflation also increases claims incurred by property and casualty insurers as property repairs, replacements, and medical expenses increase. These cost increases reduce profit margins to the extent that rate increases are not implemented on an adequate and timely basis. NI Holdings establishes insurance premiums levels before the amount of losses and LAE, or the extent to which inflation may affect these expenses, are known. Therefore, NI Holdings attempts to anticipate the potential impact of inflation when establishing rates. Although inflation has slowed in recent years, it is still a factor in our economy. In the auto insurance industry, the increasing cost of technology in today’s newer vehicles has increased the repair costs after accidents and also increased the proportion of vehicles considered totaled due to the high cost of repair parts. The private passenger auto insurance industry, including NI Holdings, has experienced upward pressure on loss and LAE ratios as premium levels attempt to maintain pace with this inflation. 72 Table of Contents