NMI - Q4 2023

Transcript

Operator (participant)

Good afternoon and welcome to the NMI Holdings Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to John Swenson of management. Please go ahead.

John Swenson (VP of Investor Relations and Treasury)

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 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.

Brad Shuster (Executive Chairman)

Thank you, Jon, 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 at 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 with our customers. The mortgage market is connected and evolving, and we'll work to continue to stand out with our focus on customer service, value-added engagement, and technology leadership. We'll continue to 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. We'll 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.

Adam Pollitzer (President and CEO)

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, and it 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 the capital and reinsurance market. We completed four new reinsurance transactions during the year, further extending our comprehensive credit risk transfer program, and we continue to efficiently return capital and drive 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.

And 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% ROE. 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 both bolster household balance sheets and drive increasing confidence for prospective buyers. The mortgage insurance market environment remains constructive as well.

Total MI industry NIW volume was an estimated $285 billion in 2023, with the market 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 in size 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 an attractive new business opportunity. The MI pricing environment remains stable and balanced as well, 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, with underwriting discipline across the mortgage market and existing borrowers 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 is 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 every day, 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.

Ravi Mallela (CFO)

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. 12-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 the growth and embedded value of 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 31st compared to 4,594 as of September 30th, 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 31st 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 31st, 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 BBB 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.

Adam Pollitzer (President and CEO)

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.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question is from Terry Ma with Barclays. Please go ahead.

Terry Ma (Senior Equity Research Analyst)

Hey, thanks. Good afternoon. I'm just curious, as we look forward and more of the 2021 and 2020 through 2023 vintage is seasoning and reach peak loss, is there a way to think about the trajectory of the default rate or even a normalized loss ratio?

Adam Pollitzer (President and CEO)

Look, I mean, you know, when we look at our claims expense in particular, you know, we had a $28.2 million claims expense in Q4 and a 6.2% loss ratio. And we had a, you know, uptick in defaults, 5,099, and our default rate went up a little bit to 81 basis points. And I think, you know, 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, you know, we've talked about it 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, you know, that you had mentioned, the 2020, 2021, and 2022 books.

Look, they're 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.

Terry Ma (Senior Equity Research Analyst)

Got it. Okay. And then just on the persistency ratio, it's been flat for the past couple 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?

Adam Pollitzer (President and CEO)

Yeah, maybe, Terry, I'll but so obviously we were 86.1% in the quarter. And again, right, 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.

Terry Ma (Senior Equity Research Analyst)

Got it. That's helpful. That's it for me. Thank you.

Operator (participant)

The next question is from Doug Harter with UBS. Please go ahead.

Doug Harter (Equity Research Analyst)

Thanks. Can you talk about your outlook for capital return in 2024, you know, kinda given the strong level of PMIERs and relatively consistent credit quality?

Adam Pollitzer (President and CEO)

Sure. Look, we're, we're delighted with what we've achieved on our repurchase program thus far. Retiring, I think, $148 million or returning $148 million of capital. And if you look at it, actually, so where we've executed, the weighted average price to book for execution since we launched the program in February of 2022 is 1.01x. We're really delighted with, with that execution. We're focused we have $177 million of runway remaining under our existing authorization that runs through year-end 2025, and we're focused on prosecuting that opportunity. We expect that we'll be in the market you know, 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.

Doug Harter (Equity Research Analyst)

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

Adam Pollitzer (President and CEO)

Yeah, look, again, right now we're most focused on the repurchase program and deploying the remaining capacity. We really see repurchase as a way for shareholders to directly participate in the significant value that we're creating. Importantly, right, by releasing capital, whether it's in dividend or repurchase format, we're trying to maintain the right funding balance, right, optimizing between equity, debt, reinsurance usage, and importantly, supporting EPS and ROE outcomes. As I said, we're really pleased with what we've achieved in 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 a common dividend over time, but for right now, we're focused on repurchase and the opportunity we have under the existing authorization.

Terry Ma (Senior Equity Research Analyst)

Great. Thank you, Adam.

Operator (participant)

The next question is from Arren Cyganovich with Citi. Please go ahead.

Arren Cyganovich (VP and Equity Research Analyst in Banks, Consumer/Specialty Finance)

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

Ravi Mallela (CFO)

Yeah. Arren, you know, we've been seeing our yield inflect higher over the last several quarters, and I think in this quarter, we've seen continued strength in core yield. You know, we expect it to remain generally stable and strong. Look, I mean, persistency has helped, certainly, and the rate actions we've taken over the last year and a half have also helped us with providing a stable sort of yield environment. But as always, you know, when you wanna think about it, it's always impacted by reinsurance execution, loss experience because profit commission moves with changes in ceded claims expenses. And we'll just have to see what from a loss perspective how the macroeconomic environment evolves, but, you know, we generally think it'll remain stable and strong.

Adam Pollitzer (President and CEO)

Yeah, that's the key. It's, Ravi's hit it. You know, 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 the net yield, really based on reinsurance execution and then claims experience, which seems counterintuitive. How does claims experience impact, net premium revenue and net yield? But it's because of the, the profit commission dynamic with our quota shares.

Arren Cyganovich (VP and Equity Research Analyst in Banks, Consumer/Specialty Finance)

Got it. That's helpful. And then, to follow up, maybe on the point of, you know, 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?

Ravi Mallela (CFO)

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

Adam Pollitzer (President and CEO)

Yeah. 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. And so as our claims expense is growing on a net basis, what that means is in almost all scenarios, we've also increased the cession through under the reinsurance programs, and so that will have weighed on profit commission in the quarter. In the quarter, we reported. It's in the press release, the exhibits. It included a $17.3 million provision for current year results offset by $9.8 million of release related to prior years.

Arren Cyganovich (VP and Equity Research Analyst in Banks, Consumer/Specialty Finance)

Thank you.

Operator (participant)

The next question is from Bose George with KBW. Please go ahead.

Bose George (Managing Director)

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

Adam Pollitzer (President and CEO)

No, that's exactly it, right? Ultimately, we sit behind both the borrower's down payment and appreciated equity on the property. 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 defease our exposure, and that's what drives that. It's really about the appreciated equity position of borrowers to stay in default status and ultimately progress through the claim.

Bose George (Managing Director)

Okay. Great. Thanks. And then, you know, your incurred losses on the 2022 vintage, it was, it's 20.9%. I know your claim activity is, you know, very limited there, but do you have an early read for, you know, the actual cra- claim rate versus, you know, the assumptions you were making when you built as, as you built that provision?

Adam Pollitzer (President and CEO)

Yeah. Let me touch on it. So one, obviously, the incurred loss ratio that's reported in it'll be in our K, and it's in the re-release. It really relates to two items, the reason that it stands out relative to other vintages that we disclosed. One is the math behind the calculation itself. What that number represents, it's a cumulative incurred loss ratio that we tally, and 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 periods immediately after or soon after that production period has ended. And second, it does relate, in fact, to some dynamics with that particular book year.

As we're seeing defaults begin to emerge in that book year, which is 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, right? Borrowers who purchased their homes in 2022 didn't benefit from the record COVID HPA rally that those from earlier book years did. That contributes to some increase in modeled loss expectations for that book relative to others and also to our loss picks as those defaults are coming through. Overall, though, what I would say is that our 2022 book year is exceptionally high quality if you look at the contours of the pool, and we're really encouraged by how it's performing. While it's performing worse than earlier vintages, really because of the equity dynamic, it's performing exceptionally well against our original modeled expectations.

Bose George (Managing Director)

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

Adam Pollitzer (President and CEO)

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

Bose George (Managing Director)

Yep. Okay. Great. Thanks.

Operator (participant)

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

Mihir Bhatia (Director and Senior Equity Research Analyst)

Good afternoon. Thank you for taking my question. Wanted to start with, I just, I think you mentioned you had 1,500 active accounts. How much of the market does that cover, and is there a segment of the market where you have an opportunity to grow where we are maybe underrepresented?

Adam Pollitzer (President and CEO)

Yeah. Mihir, it's a good question. So the roughly 1,500 active accounts that we have represent they give us we estimate access to about 95% or so of the addressable MI market, which, for all intents and purposes, is the entire market. There's always going to be a couple of accounts that are large in size that we try really hard and we're not able to access in the near term, and there's gonna be a bunch of smaller accounts that we also but 95% access, when we look at it, that's really a fully representative, access across the entirety of the market.

There are some. There's a very, very small number of larger accounts that have the potential to be needle movers, and we're trying. Our sales team is out there every day looking to continue to build relationships and help us gain access into those accounts, and that could come on over time. The other one, though, is we look at it from a growth standpoint. It's not just white space, what are new accounts that we could access, but it's doing more 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 most prioritized counterparty? And how do we capture more and more of their wallet share, you know, every period that we roll forward? And that's a big focus for us.

Mihir Bhatia (Director and Senior Equity Research Analyst)

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

Ravi Mallela (CFO)

Sure. I mean, look, we're always focused on managing with discipline and efficiency, and 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. And look, it's supportive of an 18% ROE. And so, you know, from a comparative basis, we also feel really good. We have the lowest expense base by a wide margin and the lowest expense ratio. And so, you know, we're thinking about the quarter in particular. You know, there were certain local, non-income tax-related items. We had incentive-based compensation items that came through and small movements sort of up and down across the range of categories that really led to the quarter-over-quarter difference. And look, you know, we're happy about where we are, how we've done.

We don't typically provide expense guidance, but maybe I'll highlight a few items. Look, first, we manage the business, again, with discipline and efficiency. We're pleased with how we did how Q4 developed. As we look out, you know, we do expect to see some growth in net operating expenses from a dollar perspective as we continue to invest in people and systems. But really, as we progress through the year, we're really pleased where we are right now.

Adam Pollitzer (President and CEO)

You know, it's well said, Ravi. The one other item I would note just as we get into the Q1, we actually see a little bit of a seasonal dynamic in expenses, typically.

The one item that comes through with consistency in the first quarter is we get a pickup, usually, related to the reset of payroll taxes and our FICA contribution and then some increases in 401(k) contributions that generally happen at the start of the year.

Mihir Bhatia (Director and Senior Equity Research Analyst)

Got it. That's helpful. Then just my last question. I think in response to Doug's questions about, you know, the dividend, you had mentioned being able to extract dividends from the primary operating company. Can you just remind us where you are with that? Are you able to do that today, or are you still, like, in building more, like, because of the statute-free capital rules? I know they're a little different, so thank you.

Adam Pollitzer (President and CEO)

Yeah. Great. So I'll just highlight one item. What I said is to increase our ability to extract dividends. So we are able to take out ordinary course dividends from NMIC today. In 2023, we had $98 million of ordinary course dividend capacity. We extracted $98 million in May of 2023. Based on our performance through the course of the year in 2023 and where our balance sheet sits at the end of the year, we have $96 million of ordinary course dividend capacity available to us to extract from NMIC in 2024. And so what we're looking at as we think about planning the prospect of incremental capital distributions, the form of those distributions, there's a range of items that go into it outside of just what we can take out of the opco.

One of those items that we're focused on is making sure we maintain that strong pipeline and over time see a growth.

Mihir Bhatia (Director and Senior Equity Research Analyst)

Got it. That's helpful. Thank you so much for taking my questions.

Operator (participant)

The next question is from Rick Shane with JPMorgan. Please go ahead.

Rick Shane (Managing Director and Senior Equity Research Analyst)

Thanks, guys, for taking my questions. Most have actually been asked and answered, but I wanna 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, is, as you cited, the default rate is 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 that 2022 vintage borrowers are overly reliant on the possibility of being able to refinance. It's sort of the classic buy the house, rent the mortgage. And do you think that borrowers in that cohort may have looked at interest rates, said, "Yes, they're really high, but I know they're gonna be lower, and now we're stuck"?

Adam Pollitzer (President and CEO)

Yeah. Rick, so your, your read of the data is right, and your question is a terrific one. Look, I, I will reiterate, though. 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 applied the same rigor to risk selection and mix in shaping our 2022 production as we've always done. We also, importantly, sourced comprehensive reinsurance protection for our 2022 vintage production, again, just as we have always done. So there's really no notable differences that you could observe in the underlying borrowers, from a, a borrower, a loan level, a geographic, or a product risk attribute standpoint. The one key difference, that we do expect will come to come through is coming through already is just the difference in the embedded equity position.

Now, your question about are they are this a cohort of borrowers that were perhaps more reliant on expectations that they could refinance alone? It's one of the real reasons that we find Rate GPS to be so powerful because that dynamic is coming through the market. It's actually come through in a more pronounced way, not in 2022 but in 2023. And where we see that expressed is the increase anywhere in any given period in 2023, about 5%-10% of the market, we estimate, was from a product profile standpoint temporary buy-down products. So these are loans with really introductory teaser rates that will automatically after a year and then again after two years, typically, see their rates move higher unless the borrower's able to refinance. That is an area of emerging risk that we observed very early on in 2023, late 2022.

And so we price for that, and we are actively managing the mix of temporary buy-down product that comes through. We have nearly none of that business coming through our portfolio, and we're sitting well behind where the market is, anywhere from 5%-10%, depending really on how interest rates charted in late 2022 and through the course of 2023. So yes, that is something that will impact the 2022, late 2022, and 2023 production broadly for the high LTV market. That's not really gonna be a contributor for us because we took steps early on to make sure that we were managing the flow of that risk coming in.

Rick Shane (Managing Director and Senior Equity Research Analyst)

Got it. Okay. Very, very helpful. And again, yeah, recognizing that we are trying to glean trends off of very, very small numbers, so it is and wanna be careful about that. So I appreciate the answer.

Operator (participant)

The next question is from Mark Hughes with Truist Securities. Please go ahead.

Mark Hughes (Analyst)

Yeah. Thank you. Good afternoon. Adam, you talked about the private MI market being just as strong in 2024. Is that kinda your view of the opportunity for new insurance written?

Adam Pollitzer (President and CEO)

Yeah. Maybe overall, look, we expect that 2024's gonna be similar to 2023, right? As we look at it, 2023 was a very strong year where long-term secular drivers of demand and activity continue to come through, where we had resiliency in house prices that, not only support credit but higher house prices also mean incrementally larger loan sizes. And 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. And then, look, given that interest rate, we've had some movement, but they're still sitting at or above 7%. We see affordability constraints driving an increasing number of borrowers towards the private MI market for down payment support. And so this year, we tally it. The market was right about $285 billion. We expect a similarly attractive market environment in 2024.

Then really, we may have, I'd say, some upside potential if we see moderation in rates, and that has, you know, could potentially spur some incremental activity.

Mark Hughes (Analyst)

Your net investment income, could you give the new money yield in the quarter? Generally speaking, do you think that's gonna continue to trend up?

Ravi Mallela (CFO)

Yeah. Mark, you know, really what we're seeing in terms of new money opportunities, we're seeing a blended average rate of around 5%. And then, you know, I think maybe it's just worthwhile to talk a little bit about Q4. Our Q4 NII developed sort of exactly how we expected it, with growth in the quarter coming sort of in a more muted way because of our purchase of tax and loss bonds early in October. And I, you know, if you remember, these are IRS instruments that allow us to take a deduction for our contingency reserve and defer cash taxes. But they're non-interest-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, which means we redirected about $80 million of short-term liquidity that actually had been generating investment income in Q3 but didn't in Q4. And so if you look from the quarter-to-quarter basis, you see sort of not as much of an increase, in terms of net investment income. But really, our NII has benefited both from the growing size of our investment portfolio and increasing yields that we've been able to capture on new investments. And we expect those trends to continue. I mean, we're generating significant operating cash flows every day, which drives consistent and significant growth in our asset base. And, you know, with the current interest rate environment, it presents us with an attractive opportunity to capture new money rates that are above our portfolio yield.

Adam Pollitzer (President and CEO)

Yeah. And look, this is a really nice tailwind for us as we look forward and think about performance, right? Every dollar of incremental net investment income flows straight to the bottom line. There's almost no marginal cost associated with it, the minimal amounts of, you know, third-party management cost. So every dollar really flows straight to the bottom line. And given the leverage that we have from an asset, invested asset to equity standpoint, every 100 basis points of improvement in our portfolio yield, that dollar-for-dollar isn't just pre-tax. It means we will see roughly 100 basis points of ROE improvement as well. So every point of portfolio yield improvement is a point of ROE support. And that's a terrific one as we look forward given the new money rates that we're capturing now in the portfolio.

Mark Hughes (Analyst)

Appreciate it. Thank you.

Operator (participant)

The next question is from Eric Hagen with BTIG. Please go ahead.

Eric Hagen (Managing Director and Mortgage and Specialty Finance Analyst)

Yeah. We got BTIG here. So, you know, in the NIW that was written for the industry last year, you know, how much variability would you say there was within that volume in the first place? Like, if you wanted to take materially more or even less risk, would you say that opportunity was even available in the NIW that was written for the industry last year? And at lower interest rates and higher growth for the industry overall, do you feel like the credit profile would actually take on more range, if you will?

Adam Pollitzer (President and CEO)

Yeah. Look, I mean, risk is real, right? And even in generally buoyant markets, there are real distinctions between borrowers, between loans, between geographies. And so it is, you know, 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 interconnected. So we would expect that there'll still be opportunities to continue to do that and not just opportunities. There's gonna be a real need to do that in 2024. Even if the market is the same size and the profile of the risk pool coming through is identical, there's a pretty broad dispersion of risk coming into the market, and we need to stay proactive in our stance towards managing that.

Eric Hagen (Managing Director and Mortgage and Specialty Finance Analyst)

Okay. That's interesting. You know, going back to the expenses for a second, is there a way to, like, quantify the amount of operating leverage you feel like is embedded in the business? Like, do you feel like you have an estimate for how much more insurance you can bring into the portfolio and what the corresponding increase in expenses would be, or is, or just, you know, how to think about that? And then how do you feel like the operating leverage actually translates to lower costs, maybe in the reinsurance market you're able to achieve?

Adam Pollitzer (President and CEO)

Yeah. Absolutely. Well, let me touch on operating leverage. Look, obviously, there's always going to be certain variable costs that we incur. And Ravi talked about continuing to invest in our people and our systems. But by and large, our business is, is, is really a fixed-cost model. And so there's significant, significant ability to continue to scale the portfolio without needing to make wholesale changes to our expense profile. That's been the case for quite some time. It continues to be the case now. We have 238 employees who are working hard, and they're committed every day. We don't see a need to dramatically change our, our footprint from a headcount standpoint or our overall system profile at a $200 billion portfolio, even if we were to have a $300 billion insured portfolio or larger.

So there's always going to be some operating leverage, the positive operating leverage that's embedded there. I think as we look forward, though, you know, we've signaled for a while now that our long-term targets are to deliver a low- to mid-20% expense ratio. We are fully there today, right, with the absolute lowest dollars of expense footprint in the industry and at or near the lowest expense ratios. It's still our goal to manage our business with discipline and maintain that leadership as to where that operating leverage and portfolio growth relative to expense discipline will lead our expense ratio over time. I think right now, you know, we're still focused on maintaining that long-term low- to mid-20s as a target that we think will allow us to ultimately support the return objectives that we have for our business. Strong mid-teens.

In terms of reinsurance, and the impact from operating leverage, there's really not a direct link between our operating expense profile and the outcomes that we achieve in the reinsurance market. But there is a critical link that we talked about during Investor Day and that we introduced and talked about on our last earnings call. And it's the fact that because we are so disciplined from an operating expense standpoint, it really gives us unique flexibility to be far more selective from a risk-taking standpoint than others in the market, right? It's the strategic value. It's very clear all the time, lower expenses, right, industry-leading expense base, smallest footprint in the industry by a wide margin. There's a financial impact that's easy to see. But the strategic value, we think, is often overlooked.

And it's the strategic value that feeds directly into our risk management approach, right? Because with an expense advantage, we simply don't need to write higher concentrations of higher-risk, higher-yielding business to cover our operating base. We could achieve the return objectives that we have for our business, really best-in-class returns while also taking the most proactive and disciplined stance towards managing our mix of business. And so while it's not direct, because our expense advantage feeds directly into our risk management strategy, it's the risk management, right, our credit discipline, the profile of our production that does yield differentiated outcomes in the reinsurance market. So they're connected, and expense ultimately allows us to do things that, in the end, help us achieve better outcomes in the reinsurance market, but it's not a direct sort of read-through one-for-one.

Eric Hagen (Managing Director and Mortgage and Specialty Finance Analyst)

Good stuff. I appreciate you guys.

Operator (participant)

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

Bose George (Managing Director)

Yeah. Thanks. 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 a tax benefit, I guess, on some of the bonds. The tax rate was a little lower than usual. Is that kinda the offset, the investment income, you know, didn't go up as much, and the tax rate was a little lower?

Ravi Mallela (CFO)

Both. They're actually unrelated items. You know, the tax rate going down in the quarter was really, really a benefit that really came through of exercising certain stock options in the period. And it was a little bit offset by some 162 limitations during the period. But the tax really, the change in the tax rate quarter-over-quarter didn't really have anything to do with net investment income. It was.

Adam Pollitzer (President and CEO)

So tax and loss bonds are purely a statutory item. They don't impact tax rate. They don't impact our GAAP EPS at all. It's just instead of paying cash taxes, we purchase what are known as tax and loss bonds. It's an instrument that's uniquely available to MI companies.

It's valuable from a cash tax standpoint and a regulatory capital standpoint, but it has no impact other than the fact that the name is tax and loss bonds. It's completely separate from the tax expense and our effective tax rate in any period.

Bose George (Managing Director)

Oh. Okay. Great. That's helpful. Thank you.

Operator (participant)

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

Adam Pollitzer (President and CEO)

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

Operator (participant)

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