NMI Holdings, Inc. Q4 FY2023 Earnings Call

Thank you, Gary. Good afternoon and welcome to the 2023 fourth quarter conference call for National MI. I'm John Swenson, Vice President of Investor Relations and Treasury. Joining us on the call today are Brad Shuster, Executive Chairman; Adam Pollitzer, President and Chief Executive Officer; Ravi Mallela, Chief Financial Officer; and Nick Realmuto, our Controller. Financial results for the quarter were released after the close today. The press release may be accessed on NMI's website located at nationalmi.com under the Investors tab. During the course of this call, we may make comments about our expectations for the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about the factors that could cause actual results or trends to differ materially from those discussed on the call can be found on our website or through our regulatory filings with the SEC. If and to the extent the company makes forward-looking statements, we do not undertake any obligation to update those statements in the future in light of subsequent developments. Further, no one should rely on the fact that the guidance of such statements is current at any time other than the time of this call. Also note that on this call, we may refer to certain non-GAAP measures. In today's press release and on our website, we provided a reconciliation of these measures to the most comparable measures under GAAP. Now, I'll turn the call over to Brad.

Thank you, John, and good afternoon, everyone. I'm pleased to report that in the fourth quarter, National MI again delivered standout operating performance, continued growth in our insured portfolio, and record financial results, capping a year of tremendous success. We closed 2023 with $40.5 billion of total NIW volume and a record $197 billion of high-quality, high-performing primary insurance in force. We delivered broad success in customer development, continued to innovate in the reinsurance market, and once again achieved industry-leading credit performance. In 2023, we generated record GAAP net income of $322.1 million, up 10% compared to 2022. Record diluted earnings per share of $3.84, up 13% compared to 2022, and delivered an 18.2% return on equity. Looking ahead, I'm excited about the opportunity we have to continue to build on our success. As we plan for 2024, we'll continue to focus on our people. They are talented, innovative, and dedicated, and we'll continue to invest in our culture with a focus on collaboration, performance, and impact. We'll continue to differentiate ourselves with our customers. The mortgage market is connected and evolving, and we will work to continue to stand out with our focus on customer service, value-added engagement, and technology leadership. We will prioritize discipline and risk responsibility as we grow our insured portfolio, working to write a large volume of high-quality, high-return business under the protective umbrella of our comprehensive credit risk management framework, and we will continue to focus on building value for our shareholders. Growing earnings, compounding book value, delivering strong mid-teens returns, and prudently distributing excess capital. With that, let me turn it over to Adam.

Thank you, Brad, and good afternoon, everyone. National MI continued to outperform in the fourth quarter, delivering significant new business production, consistent growth in our insured portfolio, and record financial results. We generated $8.9 billion of NIW volume and ended the period with a record $197 billion of high-quality, high-performing primary insurance in force. Total revenue in the fourth quarter was a record $151.4 million, and we delivered GAAP net income of $83.4 million and an 18% return on equity. Overall, we had an exceptionally strong quarter and closed 2023 in a position of real strength. We generated $40.5 billion of NIW volume during the year and exited with $197 billion of primary insurance in force. Our portfolio is the fastest growing, highest quality, and best performing in the MI industry and has enormous embedded value. We now have nearly 630,000 policies outstanding, which helped a record number of borrowers gain access to housing at a time when they needed us most. We enjoyed continued momentum and growth in our customer franchise, activating 70 new lenders in 2023 and ending the year with over 1,500 active accounts. We continue to innovate and find success and broad support in both the capital and reinsurance markets. We completed 4 new reinsurance transactions during the year, further extending our comprehensive credit risk transfer program, and we efficiently returned capital and drove value for shareholders with our upsized share repurchase program. We were once again recognized as a Great Place to Work, our eighth consecutive award, which we view as a reflection of our unique corporate culture and a testament to the hard work and dedication of our talented team. We achieved record full year financial results generating $579 million of total revenue, up 11% compared to 2022; $322 million of GAAP net income, up 10% compared to 2022; $3.84 of diluted earnings per share, up 13% compared to 2022; and an 18.2% return on equity. As we begin 2024, we're encouraged by both the broad resiliency that we've seen in the macro environment and housing market, and by the continued opportunity and discipline that we see across the private MI industry. The housing market has been strong; house prices have reached new highs, declining rates have spurred incremental activity, and underlying strength in the labor market and the recent rally in equity markets have worked to bolster household balance sheets and drive increasing confidence for prospective buyers. The mortgage insurance market environment remains constructive as well, with total MI industry NIW volume estimated at $285 billion in 2023, demonstrating real strength despite the headwind of rising rates through much of the year. Our lender customers and their borrowers continue to rely on us for critical down payment support, and we expect that the private MI market will remain just as strong in 2024, with long-term secular trends continuing to drive attractive new business opportunities. The MI pricing environment remains stable and balanced, allowing us to fully and fairly support lenders and their borrowers, while at the same time appropriately protect risk-adjusted returns and our ability to deliver long-term value for our shareholders. Credit performance continues to track well, with underwriting discipline across the mortgage market, and existing borrowers are well situated with strong credit profiles, record levels of home equity, and for most, fixed monthly payments at historically low note rates. As we look ahead, we're confident the macro environment remains resilient, the private MI market opportunity compelling, and we are well positioned to continue to lead with impact and deliver value for our people, our customers and their borrowers, and our shareholders. We have a strong customer franchise, a talented team driving us forward, an exceptionally high-quality book covered by a comprehensive set of risk transfer solutions, and a robust balance sheet supported by the significant earnings power of our platform. With that, I'll turn it over to Ravi.

Thank you, Adam. We delivered record financial results in the fourth quarter with significant new business production, strong growth in our high-quality insured portfolio, record top line performance, favorable credit experience, continued expense efficiency, and record EPS. Total revenue in the fourth quarter was a record $151.4 million. GAAP net income was $83.4 million or a record $1.01 per diluted share, and our return on equity was 18%. We generated $8.9 billion of NIW, and our primary insurance in force grew to $197 billion, up 1% from the end of the third quarter and 7% compared to the fourth quarter of 2022. Twelve-month persistency was 86.1% in the fourth quarter compared to 86.2% in the third quarter. Persistency remains well above historical trends and continues to serve as an important driver of growth and embedded value in our insured portfolio. Net premiums earned in the fourth quarter were a record $132.9 million compared to $130.1 million in the third quarter. We earned $983,000 from the cancellation of single premium policies in the fourth quarter compared to $864,000 in the third quarter. Net yield for the quarter was 27 basis points, and core yield, which excludes the cost of our reinsurance coverage and the contribution from cancellation earnings, was 34 basis points, both unchanged from the third quarter. Investment income was $18.2 million in the fourth quarter compared to $17.9 million in the third quarter. Total revenue was a record $151.4 million in the fourth quarter, up 2% compared to the third quarter and 14% compared to the fourth quarter of 2022. Underwriting and operating expenses were $29.7 million in the fourth quarter compared to $27.7 million in the third quarter. Our expense ratio was 22.4% compared to 21.3% in the third quarter. We had 5,099 defaults as of December 31 compared to 4,594 as of September 30, and our default rate was 81 basis points at quarter end. Claims expense in the fourth quarter was $8.2 million compared to $4.8 million in the third quarter. Interest expense in the quarter was $8.1 million. Net income was $83.4 million or a record $1.01 per diluted share, up 1% compared to $1 per diluted share in the third quarter and 17% compared to $0.86 per diluted share in the fourth quarter of 2022. Total cash and investments were $2.5 billion at quarter end, including $114 million of cash and investments at the holding company. Shareholders' equity as of December 31 was $1.9 billion and book value per share was $23.81. Book value per share, excluding the impact of net unrealized gains and losses in the investment portfolio, was $25.54, up 4% compared to the third quarter and 17% compared to the fourth quarter of last year. In the fourth quarter, we repurchased $31.5 million of common stock, retiring 1.1 million shares at an average price of $27.60. As of December 31, we had $177 million of repurchase capacity remaining under our existing program. At quarter end, we reported total available assets under PMIERs of $2.7 billion, and risk-based required assets of $1.5 billion. Excess available assets were $1.2 billion. In January, we entered into a new quota share reinsurance treaty and a new excess of loss reinsurance agreement, which together will provide forward flow coverage and comprehensive risk protection for our 2024 new business production at an estimated 5% pre-tax cost of capital. Reinsurance remains a core pillar of our credit risk management strategy and an efficient source of growth capital for our business, and we're pleased to have achieved such favorable outcomes in both the quota share and XOL markets. In January, we also saw significant upward movement in our insurer financial strength and holding company credit ratings from all three major agencies, receiving upgrades from Moody's and S&P and strong investment-grade debt ratings from Fitch. We're pleased that each of the agencies has recognized the continued strength of our counterparty profile, uniquely high-quality insured portfolio, best-in-class credit performance, robust balance sheet and consistently strong financial results with their announcements. Overall, we delivered standout financial results during the fourth quarter with consistent growth in our high-quality insured portfolio and record top line performance, favorable credit experience, and continued expense efficiency driving significant profitability, record EPS, and strong returns. With that, let me turn it back to Adam.

Thank you, Ravi. Overall, we had a terrific quarter capping a record year in which we delivered broad success in customer development, continued to innovate in the reinsurance market, once again achieved industry-leading credit performance, and generated exceptionally strong financial results with record profitability, significant growth in book value per share, and an 18.2% return on equity. Looking ahead, we're confident in our ability to continue to lead with impact and deliver value for our people, our customers, and their borrowers, and our shareholders. Thank you for joining us today. I'll now ask the operator to come back on so we can take your questions.

The first question is from Terry Ma with Barclays.

So I'm just curious, as we look forward in more of the 2021 and 2022 through 2023 vintages season and reached peak loss. Is there a way to think about the trajectory of the default rate or even a normalized loss ratio?

Look, I mean when we look at our claims expense in particular, we had an $8.2 million claims expense in Q4 and a 6.2% loss ratio. We had an uptick in defaults to 5,099, and our default rate went up a little bit to 81 basis points. I think we see a little bit of an upward trend in the quarter, but we're really encouraged by the quality and credit performance in our portfolio. But maybe to look forward here, Terry, we've talked about it in a little while. The default population, we expected it to increase because, frankly, there's just natural growth and seasoning of the portfolio, in particular, the books that you mentioned, the 2020, 2021, and 2022 books, which are coming into a period of normal loss occurrence. But really, the performance has been strong, and we're really encouraged by just looking ahead at what's happening.

Got it. Okay. And then just on the persistency ratio. It's been flat for the past couple of quarters. Have we reached kind of like a natural plateau here? And is that sustainable going forward? Or is there something that may serve as a catalyst to bring that lower?

Yes. Maybe, Terry, I'll start. So obviously, we were at 86.1% in the quarter. And again, we're well above historical norms, and strong persistency is helping us to drive continued growth and embedded value in the insured portfolio. We expect that our persistency will remain well above historical trends as we progress through 2024. But as you said, we don't expect that it will increase from here, and we'll likely see some natural trending off of the current peak as we run through the year.

The next question is from Doug Harter with UBS.

Can you talk about your outlook for capital return in 2024 kind of given the strong level of PMIERs and relatively consistent credit quality?

Sure. Look, we're delighted with what we've achieved on our repurchase program thus far, retiring $148 million of capital. If you look at it in terms of where we've executed the weighted average price to book for execution since we launched the program in February of '22, it is 1.01 times. We're really delighted with that execution. We're focused. We have $177 million of runway remaining under our existing authorization that runs through year-end 2025. We're focused on prosecuting that opportunity. We expect that we'll be in the market. We'll always depend on where valuation is and what we see immediately in front of us, but on a roughly ratable basis through the expiry of the program.

And I guess how are you thinking about the dividend as one of the tools in returning capital?

Yes. Look, again, right now, we're most focused on the repurchase program and deploying the remaining capacity. We see repurchase as a way for shareholders to directly participate in the significant value that we're creating. By releasing capital, whether it's in dividend or repurchase format, we're trying to maintain the right funding balance, optimizing between equity, debt, reinsurance usage and supporting EPS and ROE outcomes. We're really pleased with what we've achieved and the execution we have under the repurchase program. For now, that is our primary focus. We like the flexibility that our repurchase program affords us but as we continue to perform and grow, the dividend stream that we can extract from our primary operating company, we may have an ability to introduce common dividends over time. But for right now, we're focused on repurchase and the opportunity we have under the existing authorization.

The next question is from Arren Cyganovich with Citi.

Your core premium yield has been pretty stable here. What are your thoughts into 2024? Do you expect to see more stability on the premium side?

Yes. Arren, we've been seeing our yields inflect higher over the last several quarters. In this quarter, we've seen continued strength. In core yield, we expect it to remain generally stable and strong. Persistency has certainly helped, and the rate actions we've taken over the last year and a half have also supported a stable yield environment. But as always, when you think about it, yields are always impacted by reinsurance execution, loss experience because profit commissions move with changes in ceded claims expenses. We'll just have to see from a loss perspective how the macroeconomic environment evolves, but we generally think it will remain stable and strong.

Yes, that's the key. Ravi said it. Core yield, we expect will be generally stable through the course of the year, and that's a real positive for us. We'll see potentially some fluctuation in net yield, really based on reinsurance execution and claims experience, which is counterintuitive; claims experience impacts net premium revenue and net yield because of the profit commission dynamic with our quota shares.

Got it. That's helpful. And then to follow up, maybe on the point of reinsurance costs and ceded claims. Are those trending? Are you seeing any kind of increase in that? And then just quickly, did you say how much, if there was a reserve release in this quarter?

Look, Arren, maybe just touching on reinsurance. We're pleased that we just placed our forward flow quota share in excess of loss treaties that provides us with comprehensive risk protection for our 2024 NIW production. We really have no other immediate execution needs, and we'll look for opportunities to further refine and enhance as we achieve and innovate when we see opportunities in the marketplace. When you think about the new quota share and the XOLs, they're going to come on with an incremental amount of cost, but we think a lot of that will be offset by the amortization of our existing reinsurance deals. So net-net, pretty flat in terms of the impact.

Yes. In terms of the run-through for profit commission and reserve movement in the quarter, we had an $8.2 million claims expense in the quarter, which is obviously up. As our claims expense is growing, on a net basis, what that means is in almost all scenarios, we've increased the session through our reinsurance program. That will weigh on profit commission in the quarter. In the quarter, we reported it in the press release, the exhibits included a $17.3 million provision for current year results offset by $9.8 million of release related to prior years.

The next question is from Bose George with KBW.

I wanted to go back to credit. First, a reasonably large percentage of your claims are being settled without payment. Are those generally more seasoned loans with more equity or any other way to sort of categorize those?

No, that's exactly it. Ultimately, we sit behind both the borrower's down payment and appreciated equity on a property, and in the event that we have a claim that progresses, or a default that progresses to claim where there's significant embedded equity, we're effectively able to harvest that to defuse our exposure, and that's what drives that. It's really about the appreciated equity position of the borrower, who stays in default status and ultimately progresses through the plan.

Okay, great. And then, your incurred losses on the 2022 vintage are at 20.9%. I know your claim activity is very limited there, but do you have an early read for the actual claim rate versus the assumptions you're making as you built that provision?

Yes. Let me touch on it. The incurred loss ratio reported, will be in our K; it's in the release. It relates to two items. The reason that it stands out relative to other vintages we disclosed is the math behind the calculation itself. What that number represents is a cumulative incurred loss ratio that we tally, so it’s cumulative claims expense divided by cumulative net premiums earned. Because our 2022 book is newer, it has accumulated fewer years of premium revenue than earlier book years, which it will over time, but it can skew the presentation in, I’ll call it, the period immediately after or soon after that production period has ended. The second relates, in fact, to some dynamics with that particular book year. As we're seeing defaults begin to emerge in that book year, it’s natural, it happens with all vintages as they season; they are coming through with less embedded equity than defaults from earlier book years for natural reasons. Borrowers who purchased their homes in 2022 didn't benefit from the record COVID HPA rally that those from earlier book years did, and that contributes to some increase in model loss expectations for that book relative to others, as well as our loss picks as those defaults are coming through. Overall, though, I would say our 2022 book year is exceptionally high quality. If you look at the contours of the pool, we're really encouraged by how it's performing; while it’s performing worse than earlier vintages due to the equity dynamic, it's performing exceptionally well against our original modeled expectations.

Okay, that's great. If it continues to perform better than expectations, I mean, eventually, that loss ratio declines, right? And I guess you'll release reserves to reflect that. Is that how that plays out over time?

Yes, Bose. And obviously, we'll have to see where that trends go over time.

The next question is from Mihir Bhatia with Bank of America.

I wanted to start by asking how much of the market is covered by your 1,500 active accounts. Is there a segment of the market where you see potential for growth where you might be underrepresented?

Yes, it's a good question. The roughly 1,500 active accounts that we have represent access to about 95% or so of the addressable MI market, which for all intents and purposes is the entire market. There will always be a couple of accounts that are large in size that we try really hard to access and aren't able to reach in the near term, and there will be a bunch of smaller accounts that we also look to access, but 95% access represents really a fully representative access across the entirety of the market. There are some very small number of larger accounts that have the potential to become needle movers, and we’re trying; our sales team is out there every day looking to build relationships and help us gain access into those accounts and that could come on over time. The other opportunity for growth isn't just white space, it's what we can do with our existing customers. How do we bring them value; how do we bring them thought leadership; how do we prove ourselves as their best and prioritized counterparty, and how do we capture more and more of their wallet share every period that we roll forward? That's a big focus for us.

Got it. In terms of the expense ratio, maybe there's a slight pickup this quarter. Anything to call out there? And just if you can share your expense outlook for next year, whether in dollar terms or ratios.

Sure. I mean, look, we're always focused on managing with discipline and efficiency. We're pleased to have delivered a 22.4% expense ratio. It's in line with our long-run expectations around being in that low to mid-20s expense ratio area, which is supportive of an 18% return on equity. From a comparative basis, we also feel really good. We have the lowest expense base by a wide margin and the lowest expense ratio. Thinking about the quarter, there were certain local non-income tax-related items; we had incentive-based compensation items that came through, along with small movements up and down across a range of categories that led to the quarter-over-quarter difference. We are happy about how we've done. We don't typically provide expense guidance but I'll highlight a few items: we manage the business with discipline and efficiency, expect to see some growth in net operating expenses from a dollar perspective as we continue to invest in people and systems. But as we progress through the year, we’re pleased with where we are right now.

Well said, Ravi. The one other item I would note as we enter Q1 is that we typically see a little bit of a seasonal dynamic in expenses. One item that comes through with consistency in the first quarter is a pickup, usually related to the reset of payroll taxes and our FICA contributions, along with some increases in 401(k) contributions that typically happen at the start of the year.

Got it. That's helpful. My last question: I think in response to Doug's questions about the dividend, you mentioned being able to extract dividends from the primary operating company. Can you remind us where you are with that? Are you able to do that today? Or are you still building more because of the statutory capital rules? I know they're a little different.

Yes, so I'll just highlight what I said regarding our ability to extract dividends. We are able to take out ordinary course dividends from NMIC. In 2023, we had $98 million of ordinary course dividend capacity, and we extracted $98 million in May 2023. Based on our performance through the course of 2023 and the position of our balance sheet at the end of the year, we have $96 million of ordinary course dividend capacity available to extract from NMIC in 2024. What we're considering as we think about planning the prospect of incremental capital distributions, the form of those distributions, there are a range of factors that go into it outside of just our ability to take out funds from the OpCo. But maintaining a strong pipeline is paramount as we move forward.

The next question is from Rick Shane with JPMorgan.

Most have actually been asked and answered, but I want to talk a little bit about the seasoning of the 2022 vintage versus the 2021 vintage and the 2020 vintage. If you sort of compare them on a static basis after 18 months of seasoning, Adam, you cited the default rate being up, call it, 25 basis points, maybe 83 or 84 versus 58 on a static pool basis for the 2021. I'm curious if one of the other factors here is that you think the 2022 vintage borrowers are overly reliant on the possibility of refinancing, sort of the classic buy the house, rent to mortgage. Do you think that borrowers in that cohort may have looked at interest rates and said, yes, they're really high, but I know they're going to be lower and now we're stuck?

Yes, Rick. So your read of the data is right, and your question is a terrific one. Look, I will reiterate that our 2022 book is performing really well. If you look at the underlying contours, it is high quality, just like the rest of the portfolio. We apply the same rigor to risk selection and mix in shaping our 2022 production as we've always done. We also importantly source comprehensive reinsurance protection for our 2022 vintage production, again, just as we have always done. There are really no notable differences you can observe in the underlying borrowers from a borrower, loan level, geographic, or a product risk standpoint. The one key difference that we do expect will come through is the difference in the embedded equity position. Now your question about whether this cohort of borrowers was perhaps more reliant on expectations that they could refinance alone; it's one of the real reasons we find Rate GPS to be so powerful because that dynamic is occurring in the market. It's actually come through in a more pronounced way, not in 2022, but in 2023. We estimate that in any given period in 2023, about 5% to 10% of the market came from a product profile standpoint, which was temporary buydown products. These are loans with really introductory teaser rates that automatically will increase after a year, and again after two years, typically seeing their rates move higher unless the borrower is able to refinance. That's an area of emerging risk that we observed very early on in 2023, late 2022, and so we price for that and actively manage the mix of temporary buydown products that come through. We have nearly none of that business within our portfolio and we're sitting well behind where the market is anywhere from 5% to 10%, depending on how interest rates moved in late 2022 and through 2023. So yes, that will impact the 2022 and late 2022, and the 2023 production broadly. For the high LTV market, that's not really going to be a contributor for us because we took steps early on to manage the flow of that risk coming in.

The next question is from Mark Hughes with Truist Securities.

Adam, you talked about the private MI market being just strong in 2024. Is that kind of your view of the opportunity for new insurance written?

Yes. Overall, we expect that 2024 will be similar to 2023. As we look at it, 2023 was a very strong year where long-term secular drivers of demand and activity continued to come through, with resiliency in house prices that not only supports credit, but higher house prices mean incrementally larger loan sizes. Since our ratable exposure is the size of the loan, not the number of units, higher priced homes with higher loan sizes are also helpful. Given that interest rates remain around or above 7%, we see affordability constraints driving an increasing number of borrowers towards the private MI market for down payment support. We tally the market in 2023 at roughly $285 billion, and we expect a similarly attractive market environment in 2024. There may be some upside potential if we see moderation in rates which could spur some incremental activity.

And then your net investment income, could you give the new money yield in the quarter? And generally speaking, do you think that's going to continue to trend up?

Yes, Mark. In terms of new money opportunities, we're seeing a blended average rate of around 5%. It may be worthwhile to talk a little bit about Q4. Our Q4 NII developed exactly how we expected, with growth in the quarter coming in a muted way due to our purchase of tax and loss bonds early in October. If you remember, these are IRS instruments that allow us to take a deduction for our contingency reserve and defer cash taxes, but there are noninterest-bearing securities, and that had an impact on our NII trend from Q3 to Q4. We purchased about $80 million of those tax and loss bonds, redirecting about $80 million of short-term liquidity that was generating investment income in Q3 but didn't in Q4. From a quarter-to-quarter basis, we see a missed increase in net investment income. Our NII has benefited from growing investment portfolio size and increasing yields captured on new investments, and we expect those trends to continue. We generate significant operating cash flows every day, which drives consistent and significant growth in our asset base. The current interest rate environment presents an attractive opportunity to capture new money rates that are above our portfolio yield.

Yes, this is a nice tailwind for us going forward. Every dollar of incremental net investment income flows straight to the bottom line. There’s almost no marginal cost associated with the de minimis amount of third-party management costs. Therefore, every dollar truly flows straight to the bottom line, and given the leverage from an asset to equity standpoint, every 100 basis points of improvement in portfolio yield translates to roughly a 100 basis points of improvement in return on equity as well. Thus, every basis point of portfolio yield improvement supports ROE, which is terrific as we look forward given the new money rates we're capturing now in the portfolio.

The next question is from Eric Hagen with KPMG.

So in the NIW that was written for the industry last year, how much variability would you say there was within that volume in the first place? If you wanted to take materially more or even less risk, is that an opportunity that was even available in the NIW that was written last year? At lower interest rates and higher growth for the industry overall, do you feel like the credit profile would actually take on more range?

Yes. Look, risk is real; even in generally buoyant markets, there are real distinctions between borrowers, loans, and geographies. It is a variable and we are very actively managing the mix of risk that's coming through across a range of borrower, loan level, product, and geographic risk attributes, and all of those are interconnected. We would expect that there will still be opportunities to continue doing that, and not just opportunity — there's going to be a real need to do that in 2024. Even if the market size remains the same, the risk profile coming through will vary, and we need to stay proactive in our risk management.

Is there a way to quantify the amount of operating leverage you feel is embedded in the business? Do you feel like you have an estimate for how much more insurance you can bring into the portfolio and the corresponding increase in expenses? Or just how to think about that? And then how do you feel that the operating leverage actually translates to lower costs in the reinsurance market you're able to achieve?

Yes, absolutely. Let's touch on operating leverage. Obviously, there are certain variable costs incurred, and Ravi talked about continuing to invest in our people and systems. But by and large, our business operates on a fixed cost model. There is significant ability to scale the portfolio without needing to make wholesale changes to our expense profile. That's been the case and continues to be the case now. We have 238 employees working hard every day. We don’t see the need for dramatic changes in headcount, whether we have a $200 billion or a $300 billion portfolio; there will always be positive operating leverage that’s embedded here. As we look forward, our long-term targets have been to deliver a low to mid-20% expense ratio. We are fully there today, with the absolute lowest dollar footprint in the industry and at or near the lowest expense ratios. We still aim to manage our business with discipline to maintain that leadership regarding expense management and portfolio growth. Our goals are strong mid-teens returns. In terms of reinsurance and the impact of operating leverage, there isn’t a direct link between our operating expense profile and outcomes in the reinsurance market. However, there is a critical link that ties back to our investor day discussions; because we operate with competitive expense structures, it allows us to be more selective with risk-taking than others in the market. This dynamic is strategic; it allows us to achieve best-in-class returns while maintaining proactive discipline towards our risk mix. Although operating expenses do not directly correlate to reinsurance results, they do influence our risk management strategy and ultimately lead to better outcomes in reinsurance.

The next question is a follow-up from Bose George with KBW.

So just a quick follow-up. Ravi, you made a comment about net interest income and the impact of, I think, the bonds. There was some tax benefit on some of the bonds. The tax rate was a little lower than usual. So is that kind of the offset; the investment income didn't go up as much, and the tax rate was a little lower?

Both. They're actually unrelated items. The tax rate going down was a benefit from exercising certain stock options during the period. It was somewhat offset by some limitations during the period. The change in tax rate quarter-over-quarter didn't really have anything to do with net investment income.

So tax and loss bonds are purely a statutory item. They don’t impact the tax rate or our GAAP effective tax rate at all. It's an instrument available uniquely to MI companies, valuable from a cash tax standpoint and a regulatory capital standpoint, but has no impact other than the fact that the name suggests. Tax and loss bonds are completely separate from tax expense and our effective tax rate in any period.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you again for joining us. We'll be participating in the Bank of America Insurance and Financial Services Conference on February 22 and the RBC Financial Institutions Conference on March 5th. We look forward to speaking with you again soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.