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. We develop our investment strategies based on a number of factors, including estimated duration of reserve liabilities, short and long-term liquidity needs, general economic conditions, expected rates of inflation and regulatory requirements. The portfolio duration of the fixed income securities in the Company’s investment portfolio at December 31, 2022 was 4.55 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. These fixed income securities may experience significant 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 consultation with our outside fixed income portfolio manager. Higher interest rates, oftentimes correlated to inflation, 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 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 forced sales within the portfolio. Additionally, we hold certain fixed income securities that have call features. In a potential 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. 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, 2022 and 2021: As of December 31, 2022 As of December 31, 2021 Hypothetical Change in Interest Rate Estimated Change in Fair Value Fair Value Estimated Change in Fair Value Fair Value 200 basis point increase $ (26,433 ) $ 276,891 $ (31,975 ) $ 332,676 100 basis point increase (13,504 ) 289,820 (16,116 ) 348,535 No change — 303,324 — 364,651 100 basis point decrease 13,986 317,310 16,018 380,669 200 basis point decrease 28,347 331,671 32,119 396,770 The interest rate exposure of the Company’s portfolio was proportionately consistent in the current year compared to the prior year, which is expected given the generally consistent composition and duration of the fixed income portfolio over this time. 46 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 investment grade by Moody’s Investors Services, Inc. or an equivalent rating quality. We also work in conjunction with our outside fixed income portfolio manager to monitor the financial condition of all of the issuers of fixed income securities in the portfolio. Additionally, the Company’s investment policy includes 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. Our equity portfolio is subject to a variety of risk factors, including general economic conditions which influence the performance of the underlying industries and companies within those industries. Industry and company-specific risks also have the potential to substantially affect the value of our portfolio. The Company’s investment policy helps mitigate these risks by diversifying the portfolio and establishing parameters to help manage exposures. 47 Table of Contents