NMI Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 14, 2024

There are 11 speakers on the call.

Operator

Good afternoon And welcome to the NMI Holdings 4th Quarter 2023 Earnings Conference Call.

Operator

All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to John Swenson of Management. Please go ahead.

Speaker 1

Thank you, Gary. Good afternoon, and welcome to the 2023 4th Conference Call for National Airlines. 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 Malela, Chief Financial Officer and Nick Realmuto, our Controller. The actual results for the quarter were released after the close today.

Speaker 1

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 in the future in light of subsequent developments.

Speaker 1

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've provided a reconciliation of these measures to the most comparable measures under GAAP. Now, I'll turn the call over to Brad.

Speaker 2

Thank you, John, and good afternoon, everyone. I'm pleased to report that in the Q4, 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 $40,500,000,000 of total NIW volume and a record $197,000,000,000 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 $322,100,000 up 10% compared to 2022.

Speaker 2

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.

Speaker 2

The mortgage market is connected and evolving And we'll continue 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. And 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.

Speaker 3

Thank you, Brad, and good afternoon, everyone. National Mi continued to outperform in the 4th quarter, delivering significant new business production, consistent growth in our insured portfolio and record financial results. We generated $8,900,000,000 of NIW volume and ended the period with a record $197,000,000,000 of high quality, high performing primary insurance in force. Total revenue in the 4th quarter was a record $151,400,000 and we delivered GAAP net income of $83,400,000 and an 18% return on equity. Overall, we had an exceptionally strong quarter and closed 2023 in a position of real strength.

Speaker 3

We generated $40,500,000,000 of NIW volume during the year and exited with $197,000,000,000 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 1500 active accounts. We continue to innovate and find success and broad support in the capital and reinsurance market.

Speaker 3

We completed 4 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 8th 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 $579,000,000 of total revenue, up 11% compared to 2022 $322,000,000 of GAAP net income, up 10% compared to 2022, dollars 3.84 of diluted earnings per share, up 13% compared to 2022 and hit 18.2% ROE. As we begin 2024, we're encouraged by both the broad resiliency that we've seen in the macro environment housing market and by the continued opportunity and discipline that we see across the Private MI Industry.

Speaker 3

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 market have worked to both bolster household balance sheet and drive increasing confidence for prospective buyers. The mortgage insurance market environment remains constructive as well. Total MI Industry NIW volume was an estimated $285,000,000,000 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.

Speaker 3

And 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.

Speaker 3

With that, I'll turn it over to Ravi. Thank you, Adam. We delivered record financial results in the 4th 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 4th quarter was a record $151,400,000 GAAP net income was $83,400,000 for a record $1.01 per diluted share, and our return on equity was 18%. We generated $8,900,000,000 of NIW and our primary insurance in force grew to 197,000,000,000 up 1% from the end of the 3rd quarter and 7% compared to the Q4 of 2022.

Speaker 3

12 month persistency was 86.1% in the 4th quarter compared to 86.2% in the 3rd quarter. Persistency remains well above historical trend and continues to serve as an important driver of the growth and embedded value of our insured portfolio. Net premiums earned in the 4th quarter were a record $132,900,000 compared to 130 $100,000 in the 3rd quarter. We earned $983,000 from the cancellation of single premium policies in the 4th quarter compared to $864,000 in the 3rd 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 3rd quarter.

Speaker 3

Investment income was $18,200,000 in the 4th quarter compared to $17,900,000 in the 3rd quarter. Total revenue was a record $151,400,000 in the 4th quarter, up 2% compared to the 3rd quarter and 14% compared to the Q4 of 2022. Underwriting and operating expenses were $29,700,000 in the 4th quarter compared to $27,700,000 in the 3rd quarter. Our expense ratio was 22.4% compared to 21.3% in the 3rd 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.

Speaker 3

Claims expense in the 4th quarter was 8,200,000 compared to $4,800,000 in the 3rd quarter. Interest expense in the quarter was 8,100,000 Net income was $83,400,000 or a record $1.01 per diluted share, up 1% compared to $1 per diluted share in the 3rd quarter and 17% compared to $0.86 per diluted share in the Q4 of 2022. Total cash and investments were $2,500,000,000 at quarterend, including $114,000,000 of cash and investments at the holding company. Shareholders' equity as of December 31 was $1,900,000,000 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 3rd quarter and 17% compared to the Q4 of last year. In the Q4, we repurchased $31,500,000 of common stock, retiring 1,100,000 shares at an average price of $27.60 As of December 31, we had 177,000,000 of repurchase capacity remaining under our existing program.

Speaker 3

At quarter end, we reported total available assets under PMIERs of $2,700,000,000 and risk based required assets of 1,500,000,000 Excess available assets were $1,200,000,000 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% pretax 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 3 major agencies, receiving upgrades from Moody's and S and P and strong investment grade debut readings 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 announcement.

Speaker 3

Overall, We delivered standout financial results during the Q4 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.

Speaker 3

Thank you for joining us today. I'll now ask the operator to come back on so we can take your questions.

Operator

The first question is from Terry Ma with Barclays. Please go ahead.

Speaker 4

Hey, thanks. Good afternoon. I'm just curious as we look forward and more of the 2021 through 2023 vintages season and ReachBeat loss, Is there a way to think about the trajectory of the default rate or even a normalized loss ratio?

Speaker 3

Look, I mean, when we look at our claims expense in particular, we had a $8,200,000 claims expense in Q4 and a 6.2% loss ratio. And we had an uptick in default 5,099 And our default rate went up a little bit to 81 basis points. And 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 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 had mentioned, the 2020, 2021 and 2022 books, look, they're coming into a period of normal loss occurrence.

Speaker 3

But really the performance has been strong and we're really encouraged by just looking ahead at what's happened.

Speaker 4

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?

Speaker 4

Or is there something that may serve as a catalyst to bring that lower?

Speaker 3

Yes, maybe Terry, I'll put it. 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.

Speaker 5

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

Operator

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

Speaker 6

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

Speaker 7

Sure.

Speaker 3

Look, we're delighted with what we've achieved on our repurchase program thus far, retiring, I think, $148,000,000 returning $148,000,000 of capital. If you look at it actually as to 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 that execution. We're focused we have 177,000,000 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.

Speaker 3

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.

Speaker 6

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

Speaker 3

Yes. 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. And importantly, right, 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 importantly supporting EPS and ROE outcomes. As I said, 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.

Speaker 3

We like the flexibility that a 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.

Speaker 6

Great. Thank you, Adam.

Operator

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

Speaker 8

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

Speaker 3

Yes. Aaron, 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, 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.

Speaker 3

But as always, When you want to think about it, we're 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 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.

Speaker 3

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 is counterintuitive how does claims experience impact net premium revenue and net yield, but it's because of the profit commission dynamic with our photoshares.

Speaker 8

Got it. That's helpful. And then to follow-up, maybe on the point of reinsurance costs and ceded claims, are those how 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?

Speaker 3

Look, maybe touching on reinsurance. Look, we're really pleased that we just placed our forward flow of quota share in excess of loss treaties, look, provides us with comprehensive risk protection for our 2024 NIW production. And so we really have no other immediate execution needs. And look, we'll look for opportunities to further refine and enhance as we achieve, and innovate when we see in the marketplace. But when you think about the new quota share and the XOLs, they're going to 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.

Speaker 3

So net net pretty flat in terms of the impact. Yes. And in terms of the run through for profit commission and reserve movement in the quarter, We had an $8,200,000 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 session through under the reinsurance programs. And so that will have weighed on profit commission in the quarter.

Speaker 3

In the quarter, we reported it's in the press release, the exhibits, it included a $17,300,000 provision for current year results offset by $9,800,000 of release related to prior years.

Speaker 5

Thank you.

Operator

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

Speaker 7

Hey, everyone. Good afternoon. I wanted to go back to credit. First, recently a 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?

Speaker 3

No, that's exactly it, right. 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 ease 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 bank.

Speaker 7

Okay, great. Thanks. And then your incurred losses on the 2022 vintage, it's 20.9%. Know your claim activity is very limited there, but do you have an early read for the actual print claim rate versus The assumptions you're making when you build as you build that provision?

Speaker 3

Yes, let me touch on. So one, obviously, The incurred loss ratio that's reported in Italy and our K and it's in the release, it really relates to 2 items. 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.

Speaker 3

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 purchase 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 and also to our loss picks as those defaults are coming through.

Speaker 3

Overall though, what I would say is that our 2022 book year is exceptionally high quality if you look at 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 model's expectations.

Speaker 7

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

Speaker 3

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

Speaker 7

Yes. Okay, great. Thanks.

Operator

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

Speaker 5

Good afternoon. Thank you for taking my question. I wanted to start with I think you mentioned you had 1500 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?

Speaker 3

Yes. It's a good question. So the roughly 1500 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 going to 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.

Speaker 3

The other one though as 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 every period that we roll forward and that's a big focus for us.

Speaker 5

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

Speaker 2

Sure. I

Speaker 3

mean, look, we're always focused on managing with discipline and 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 lowtomid20s expense ratio area. And look, it's supportive of an 18% ROE. And so from a Comparative basis, we also feel really good.

Speaker 3

We have the lowest expense base by wide margin and the lowest expense ratio. And We're thinking about the quarter in particular. 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 a range of categories that really led to the quarter over quarter difference. And look, we're happy about where we how we've done.

Speaker 3

And we don't typically provide guidance, but maybe I'll highlight a few items. So first, we manage the business again with discipline and efficiency. We're pleased with how Q4 developed. And as we look out, 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.

Speaker 3

It's well said Ravi. The one other item I would note just as we get into Q1, we always we actually see a little bit of a seasonal dynamic in expenses typically. The one item that comes through with consistency in the Q1 is we get a pickup usually related to the reset of payroll taxes and our FICA contribution and then some increases in 401 that generally happen at the start of the year.

Speaker 5

Got it. That's helpful. And then just my last question. I think In response to Doug's questions about another dividend, you had mentioned being able to extract dividends from the primary operating company. Can you just remind us where you are with that?

Speaker 5

Are you able to do that today? Or are you still like building more like from the speaker of the statutory capital rules? I know they're a little different. Thank you.

Speaker 3

Yes, Rich. 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 $98,000,000 of ordinary capacity, we extracted $98,000,000 in May of 2023.

Speaker 3

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 $96,000,000 of ordinary course dividend capacity available to us to extract from MMIC in 2024. And so what we're looking at as we think about planning the prospect of incremental capital The form of those distributions, there's a range of items that go into it outside of just what can we take out of the OpCo. But one of those items that we're focused on is making sure we maintain that strong pipeline and over time see a growth.

Speaker 5

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

Operator

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

Speaker 9

Thanks guys for taking my questions. Most have actually been asked and answered, but I want to talk a little bit about the seasoning of the 2022 vintage versus the 21 vintage and the 2020 vintage, if you sort of compare them on a static basis after 18 months of seasoning, Adam, 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 22 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 going to be lower and now we're stuck?

Speaker 3

Yes, Rick. So your read of the data is right and your question is a terrific one. Look, 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 apply The same rigor to risk selection and mix in shaping our 2022 production as we've always done.

Speaker 3

We also importantly forced 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 borrower, a loan level, a geographic or a product risk attribute standpoint. The one key difference that we do expect will come through is coming through already is just the difference in the embedded equity position. 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.

Speaker 3

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% to 10% of the market we estimate was from a product profile standpoint was temporary buy down products. So these are loans with really introductory teaser rates that will automatically after a year and then again after 2 years typically see their rates move higher unless the borrower is 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 to our portfolio And we're sitting well behind where the market is anywhere from 5% to 10%, depending really on how interest rates charted in late 2022 and through the course of 2023.

Speaker 3

So yes, that is something that will impact the 2022 late 2022 And 2023 production broadly for the high LCV market, that's not really going to be a contributor for us because we took steps early on to make sure that we were the flow of that risk coming in.

Speaker 9

Got it. Okay. Very helpful. And again, recognizing that we are trying to glean trends off of very, very small numbers. So it is and want to be careful about that.

Speaker 9

So I appreciate the answer.

Operator

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

Speaker 5

Yes, thank you. Good afternoon. Adam, you talked about the private in line market being just strong in 2024. Is that Your view of the opportunity for new insurance written?

Speaker 3

Yes. Maybe overall, look, We expect that 2024 is going to 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 have 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 have 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.

Speaker 3

And so this year, we tally it, the market was right about $285,000,000,000 We expect a similarly attractive market environment in 2024. And then really, we may have, I think, some upside potential if we see moderation in rates and that has could potentially spur some incremental activity.

Speaker 5

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

Speaker 7

continue to trend up?

Speaker 3

Yes, Mark, really what we're seeing in terms of new money opportunities, we're seeing a blended average rate of around 5%. And then 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 if you remember, these are IRS instruments that allow us to take a deduction for our contingency reserve and deferred 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 $80,000,000 of those tax and loss bonds, which means we redirected about $80,000,000 of short term liquidity that actually has been generating investment income in Q3, but didn't in Q4.

Speaker 3

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 with the current interest rate environment, it presents us with an attractive opportunity to capture new money rates that are above our portfolio yield.

Speaker 3

Yes. And look, this is a really nice tailwind for us as we look forward and think about performance. Every dollar of incremental net investment income flows straight to the bottom line. There's almost no marginal cost associated with it, de minimis amounts of 3rd party management costs. So every dollar really flows straight to the bottom line.

Speaker 3

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 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.

Speaker 5

Appreciate it. Thank you.

Operator

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

Speaker 10

We got BTIG here. 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? Like if you wanted to take materially more or even less risk, is that 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 the industry overall, do you feel like the credit profile would actually take on more range, if you will?

Speaker 3

Yes. 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 a 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

Speaker 10

not just opportunities. There's going to

Speaker 3

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.

Speaker 10

Okay, that's interesting. Going back to the expenses for a second, is there a way to quantify the amount of operating leverage you feel like is embedded in the business? But 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 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

Speaker 3

Yes, absolutely. Let me touch on operating leverage. Look, obviously, there's always going to be certain variable costs we incurred and Ravi talked about continuing to invest in our people and our systems. But by and large, our business is really a fixed cost model. And so there is significant, significant ability to continue to scale the portfolio without needing to make wholesale changes to our expense profile.

Speaker 3

That's been the case for quite some time. It continues to be the case now. We have 238 employees We're working hard and they're committed every day. We don't see a need to dramatically change our footprint from a headcount standpoint For our overall system profile, at a $200,000,000,000 portfolio, even if we were to have a $300,000,000,000 in short portfolio or larger. So there's always going to be some operating leverage, the positive operating leverage that's embedded there.

Speaker 3

I think as we look forward though, we signaled For a while now that our long term target are to deliver a lowtomid20 percent expense ratio. We are fully there today, right, with The absolute lowest dollars of expense footprint in the industry and atornearthelowestexpense ratio. 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 discipline will lead our expense ratio over time. I think right now, 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 There's not a direct link between our operating expense profile and the outcomes that we achieve in the reinsurance market.

Speaker 3

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.

Speaker 3

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 return, 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.

Speaker 3

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 1 for 1.

Speaker 10

Great stuff. I appreciate you guys.

Operator

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

Speaker 7

Yes, thanks. So just a quick follow-up. Ravi, you made a comment about net interest income and the impact of I think the bonds or some tax benefit, I guess 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?

Speaker 3

Bose, they're actually unrelated items. The tax rate going down in the quarter was really a benefit that really came through of exercising certain stock options in the period. And it was a little bit offset by some by 1 100 and 62 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. So tax and loss bonds are purely a statutory item. They don't impact tax rate.

Speaker 3

They don't impact our GAAP EPR at all. It's just instead of paying cash taxes, we purchased what are known as tax and loss bonds. It's an instrument that's uniquely available to MI Companies And it's valuable from a cash tax standpoint and a regulatory capital standpoint, but it has no impact other than the fact that name of tax and loss bonds is completely separate from the tax expense and our effective tax rate in any period.

Speaker 7

Okay, great. That's helpful. Thank you.

Operator

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

Speaker 3

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 5. We look forward to speaking with you again soon.

Operator

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

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Earnings Conference Call
NMI Q4 2023
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