Mihir Bhatia: 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, right?
Ravi Mallela: 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 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 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 how we’ve done.
And we don’t typically provide expense guidance but maybe I’ll highlight a few items. But 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.
Adam Pollitzer: 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 first quarter is we get a pickup usually related to the reset of payroll taxes and our FICA [ph] contribution and then some increases in 401(k) contributions that generally happen at the start of the year.
Mihir Bhatia: Got it. That’s helpful. And then just my last question. I think in response to Doug’s questions about 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 building more like from — because of the statutory capital rules? I know they’re a little different.
Adam Pollitzer: Yes, so I’ll just highlight 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 can we take out of the OpCo [ph]. But one of those items that we’re focused on is making sure we maintain that strong pipeline and over time, see a growth.
Operator: The next question is from Rick Shane with JPMorgan.
Rick Shane: Most have actually been asked and answered but I want to talk a little bit about the seasoning of the ’22 vintage versus the ’21 vintage and the ’20 vintage. If you sort of compare them on a static basis after 18 months of seasoning, Adam, is — 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 ’21. 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, sort of the classic buy the house, rent to 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.
Adam Pollitzer: 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. We also importantly source 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.
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 express 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 buydown 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 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 buydown 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 ’22 and through the course of 2023. So yes, that is something that will impact the 2022 — late ’22 and 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 make sure that we were managing the flow of that risk coming in.
Rick Shane: Got it. Okay, very helpful. And again, recognizing that we are trying to glean trends off of very, very small numbers. So — and I want to be careful about that. So I appreciate the answer.
Operator: The next question is from Mark Hughes with Truist Securities.
Mark Hughes: 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?
Adam Pollitzer: Yes. Maybe overall, look, we expect that ’24 is going to be similar to ’23, right? As we look at it, ’23 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 rates, we have some movements 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 ’24. And then really we may have, I’d say, some upside potential if we see moderation in rates and that has — could potentially spur some incremental activity.
Mark Hughes: 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?
Ravi Mallela: 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 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 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 which means we redirected about $80 million of short-term liquidity that actually has 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 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: 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 the de minimis amount of third-party management costs. 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.
Operator: The next question is from Eric Hagen with KPMG [ph].
Eric Hagen: 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 in 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 for the industry overall, do you feel like the credit profile would actually take on more range, if you will?
Adam Pollitzer: 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 will still be opportunities to continue to do that and not just opportunity. There’s going to 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.
