NI Holdings, Inc. 10-K

Item 7A. Quantitative and Qualitative Disclosures 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. The Company has exposure to three principal types of market risk through its investment activities: interest rate risk, credit risk, and equity risk. Our primary market risk exposure is to changes in interest rates. We have not entered, and do 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. Our exposure to interest rate changes primarily results from our 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 the Company’s investment portfolio at December 31, 2021 was 4.35 years. These 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, and are carried as available for sale. We manage the exposure to risks associated with interest rate fluctuations through active management and Board of Directors review of the portfolio and consultation with our outside investment manager. Potential higher interest rates oftentimes correlated to inflation would also reduce the carrying value of our fixed maturity and short-term investments, negatively impacting the Company’s book value in the short-term. Over the long-term, however, higher interest rates would provide an incremental benefit to our net investment income over time as excess cash and proceeds of maturing bonds are reinvested at higher rates. We manage our exposure to interest rate increases by monitoring the duration within our investment portfolio and maintaining maturities that minimize any forced sales within the portfolio. Additionally, we hold certain fixed income securities that 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 we are required to sell fixed income securities in a rising interest rate environment, the Company may recognize investment losses. As a general matter, we attempt to match the durations of assets with 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 management’s tolerance for risk. The table below shows the interest rate sensitivity of the Company’s 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, 2021 and 2020: As of December 31, 2021 As of December 31, 2020 Hypothetical Change in Interest Rate Estimated Change in Fair Value Fair Value Estimated Change in Fair Value Fair Value 200 basis point increase $ (31,975 ) $ 332,676 $ (23,122 ) $ 297,288 100 basis point increase (16,116 ) 348,535 (11,438 ) 308,972 No change — 364,651 — 320,410 100 basis point decrease 16,018 380,669 11,279 331,689 200 basis point decrease 32,119 396,770 23,046 343,456 The interest rate exposure of the Company’s portfolio increased this year compared to last year, as measured by the increased duration of our portfolio. The increase in interest rate exposure was intended to better align the Company’s portfolio with the long-term asset/liability matching target derived from periodic financial modeling of the Company’s business and liabilities. Significant further increases in the portfolio’s interest rate exposure are not expected, aside from normal ongoing fluctuations due to changes in the capital market and interest rate environment. 50 Table of Contents Credit Risk Credit risk is the potential economic loss principally arising from adverse changes in the financial condition of a specific debt issuer. We address this risk by investing primarily in fixed income securities that are rated at least investment grade by Moody’s or an equivalent rating quality. We also independently, and through our outside investment manager, monitor 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 we will incur economic losses due to adverse changes in equity prices. 51 Table of Contents