New Government Guarantee Legislative Framework, Effective January 1, 2013, Enhances Genworth MI Canada's Financial Position
Company's claims-paying ability is strengthened
TORONTO, Dec. 20, 2012 /CNW/ - Genworth MI Canada Inc. (the "Company" or "Genworth Canada") (TSX: MIC) reported today on the expected impact of the Protection of Residential Mortgage or Hypothecary Insurance Act (Canada) ("PRMHIA"). On January 1, 2013, PRMHIA will come into force and establish a legislative framework that replaces the current guarantee agreement the Company has with the Federal Government (the "Guarantee Agreement").
Under the current Guarantee Agreement between Genworth Financial Mortgage Insurance Company Canada ("GFMICC") and the Government, GFMICC contributes an amount equal to 10.5% of gross premiums written to a trust fund ("the Guarantee Fund") and pays a risk premium to the federal government. On September 30, 2012, the investments and accrued income held in the Guarantee Fund totaled approximately $980 million. The Guarantee Fund is accounted for as an asset on the Company's balance sheet. Contributions to the Guarantee Fund are deductible in the calculation of taxable income, and income earned by the Guarantee Fund is not taxed until monies are withdrawn. Any withdrawals from the Guarantee Fund are included as taxable income. Upon the withdrawal of monies from the Guarantee Fund, the Guarantee Agreement requires the payment of exit fees equal to 1% of the amount of the fund for each year from the effective date of the Guarantee Agreement (February 1992) to the date of withdrawal up to a maximum of 25%.
"The implementation of PRMHIA will be positive for Genworth Canada and the Canadian Mortgage market" said Brian Hurley, Chairman and Chief Executive Officer. "The elimination of the Guarantee Fund will strengthen Genworth Canada's claims-paying ability by approximately $675 million and will result in a one-time increase in its net book value."
Effective January 1, 2013, the specific impact of PRMHIA is as follows:
- The level of federal government guarantee of insured mortgages will remain at 90 percent.
- All mortgages that were previously insured by GFMICC and covered by the Guarantee Agreement will continue to be covered under PRMHIA.
- The maximum outstanding insured exposure for private insured mortgages will be increased from $250 billion to $300 billion. The current risk premium is being replaced by a risk fee payable by the Company to the federal government equal to 2.25 percent of gross premiums written.
- GFMICC's insurance activities will continue to be restricted to insuring mortgages that meet the government guarantee mortgage insurance eligibility guideline.
- The Guarantee Agreement and all obligations under it, including the requirement for a Guarantee Fund and payment of exit fees related to it, will be terminated. As a result the Company will reverse, in the 4th quarter 2012, the liability it had been accruing for the exit fee. The Company expects the pre-tax impact of this reversal to be approximately $166 million related to exit fees accrued in 2011 and prior years and a further $20 million accrued for the first nine months of 2012. This will result in a net increase in Shareholders' Equity excluding Accumulated Other Comprehensive Income of approximately $135 million.
- The amount held in the Guarantee Fund will revert to the Company on January 1, 2013 and the Company's taxable income will increase by the same amount (the Company's operating income on a GAAP basis will not be affected). The resulting increase in income taxes payable is expected to be approximately $255 million, which the Company has already provided for in its financial statements.
- The Company expects that GFMICC's regulatory capital available will increase by approximately $675 million from the elimination of the Guarantee Fund and the reversal of the exit fees previously accrued, net of the related income tax effect. This will increase its Minimum Capital Test (MCT) ratio by approximately 45 percentage points to over 200%.
- The Guarantee Fund is being eliminated in favour of a higher MCT ratio. The Minister of Finance advised the Company today that under PRMHIA and the Insurance Companies Act (Canada) the minimum MCT ratio for GFMICC will be 175%. In conjunction with this new target, GFMICC will increase its internal MCT target capital ratio on January 1, 2013 to 185% and expects to operate above 190% MCT in the normal course.
The new government guarantee legislative framework confirms the important role of private mortgage insurance in the Canadian marketplace. The Company believes that these changes strengthen its balance sheet and claims-paying ability thereby further reducing the likelihood of the government guarantee ever being invoked.
IFRSs and Non-IFRSs Financial Measures
The Company's consolidated financial statements are prepared in accordance with IFRSs. To supplement its financial statements, the Company uses select non-IFRSs financial measures. Non-IFRSs measures used by the Company to analyze performance include underwriting ratios such as loss ratio, expense ratio and combined ratio, as well as other performance measures such as net operating income and return on operating income. Other non-IFRSs measures used by the Company include shareholders' equity excluding accumulated other comprehensive income ("AOCI"), insurance in-force, new insurance written, minimal capital test ratio ("MCT"), delinquency ratio, severity on claims paid, operating earnings per common share of the Company (basic and diluted), book value per common share (basic and diluted; including and excluding AOCI), dividends paid per common share of the Company, and portfolio duration. The Company believes that these non-IFRSs financial measures provide meaningful supplemental information regarding its performance and may be useful to investors because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision making. Non-IFRSs measures do not have standardized meanings and are unlikely to be comparable to any similar measures presented by other companies. These measures are defined in the Company's glossary, which is posted on the investor section of the Company's website. To access the glossary, click on the "Glossary of Terms" link under "Investor Resources" subsection on the left navigation bar. A reconciliation of non-IFRSs financial measures to the most recently comparable measures calculated in accordance with IFRSs can be found in Management's Discussion and Analysis filed with the Company's most recent financial statements, which are available on the Company's website and on SEDAR at www.sedar.com.
Cautionary Note Regarding Forward-Looking Statements
This press release includes certain forward-looking statements. These forward-looking statements include, but are not limited to, the Company's plans, objectives, expectations and intentions, and other statements contained in this release that are not historical facts. These statements may be identified by their use of words such as "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "seek", "propose", "estimate", "expect", or similar expressions, as they relate to the Company are intended to identify forward-looking statements. Specific forward-looking statements in this document include, but are not limited to, statements with respect to the Company's expectations regarding the Canadian government's proposed changes to the guarantee regime regarding residential mortgages, the anticipated effects of the implementation of PRMHIA on the Company, the Company's future operation and MCT ratio under PRMHIA, and the Company's beliefs as to housing demand and home price appreciation, unemployment rates, the Company's future operating and financial results, sales expectations regarding premiums written, capital expenditure plans, dividend policy and the ability to execute on its future operating, investing and financial strategies. These statements are inherently subject to significant risks, uncertainties and changes in circumstances, many of which are beyond the Company's control. The Company's actual results may differ materially from those expressed or implied by such forward-looking statements, including as a result of changes in global, political, economic, business, competitive, market and regulatory factors, and the other risks described in the Company's Annual Information Form. Other than as required by applicable laws, the Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.
About Genworth MI Canada Inc.
Genworth MI Canada Inc. (TSX: MIC), through its subsidiary, Genworth Financial Mortgage Insurance Company Canada, has been the leading Canadian private residential mortgage insurer since 1995. Known as Genworth Canada, the Company provides default mortgage insurance to Canadian residential mortgage lenders that enables low down payment borrowers to own a home more affordably and stay in their homes during difficult financial times. Genworth Canada combines technological and service excellence with risk management expertise to deliver innovation to the mortgage marketplace. As of September 30, 2012, Genworth Canada had $5.6 billion total assets and $2.9 billion shareholders' equity. Based in Oakville, Ontario, Genworth Canada employs approximately 260 people across Canada. Find out more at www.genworth.ca.
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