Eric Hagen: Okay, that’s interesting. Going back to the expenses for a second. Is there a way to quantify the amount of operating leverage? Do you feel like it’s 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 cost maybe in the reinsurance market you’re able to achieve?
Adam Pollitzer: Yes, absolutely. Let me touch on operating leverage. Look, obviously, there’s always going to be certain variable costs that 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. 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 footprint from a head count standpoint for our overall system profile at a $200 billion portfolio even if we were to have a $300 billion in short portfolio or larger.
And so there’s always going to be some operating leverage — positive operating leverage that’s embedded there. I think as we look forward though, 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, 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. 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.
Operator: The next question is a follow-up from Bose George with KBW.
Bose George: So just a quick follow-up. Ravi, you made a comment about net interest income and the impact of, I think, the bonds, there was some tax benefit, 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?
Ravi Mallela: Both. They’re actually unrelated items. 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 [indiscernible] 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.
Adam Pollitzer: So tax and loss bonds are purely a statutory item. They don’t impact tax rate. They don’t impact our GAAP ETR 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 is valuable from a cash tax standpoint and a regulatory capital standpoint but has no impact other than the fact that the name of tax and loss bonds is completely separate from the tax expense and our effective tax rate in any period.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Adam Pollitzer: Thank you again for joining us. We’ll be participating in the Bank of America Insurance and Financial Services Conference on February 22 and the RBC Financial Institutions Conference on March 5th. We look forward to speaking with you again soon.
Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
