Genworth MI Canada Inc. Reports Third Quarter 2016 Results Including Net Operating Income of $93 Million

Premiums Earned: $162 million, up 3% Q/Q
Loss Ratio: 25%, up 4 points Q/Q
Net Operating Income: $93 million, up 1% Y/Y
Fully Diluted Operating EPS: $1.02, up 2% Y/Y
Increase in quarterly dividend of $0.02 or 5% from $0.42 to $0.44 per common share

TORONTO, Nov. 3, 2016 /CNW/ - Genworth MI Canada Inc. (the "Company") (TSX: MIC) today reported third quarter 2016 net income of $98 million or $1.07 earnings per fully diluted common share, net operating income of $93 million or $1.02 operating earnings per fully diluted common share, and an operating return on equity of 11%.

"We are pleased with our strong business results this quarter, particularly our loss performance, which continues to develop in line with our expectations." said Stuart Levings, President and CEO. "While the recent mortgage insurance eligibility rule changes have garnered much attention, we believe the near-term impact on our earnings will be somewhat muted given the premiums to be earned from our $2.1 billion of unearned premiums. Furthermore, we believe these changes will lead to a stronger, more robust risk profile for our business and the market impact will gradually abate as borrowers evolve and adapt to the new requirements."

Key Third Quarter 2016 Financial Results And Operational Metrics:

  • New insurance written from transactional insurance was $6.9 billion, a decrease of $1.5 billion, or 18%, compared to the same quarter in the prior year primarily, as a result of targeted underwriting changes in select markets and a smaller transactional insurance market size. As a result of typical seasonality, transactional new insurance written increased by $1.1 billion, or 19%, as compared to the prior quarter.

  • Premiums written from transactional insurance were $201 million. This represents a decrease of $35 million, or 15%, from the prior year's period, primarily due to a decline in new insurance written, which was partially offset by a 3% higher average premium rate resulting from the June 2015 premium rate increase. Compared to the prior quarter, premiums written increased by $30 million, or 18%, primarily due to seasonality.

  • New insurance written from portfolio insurance on low loan-to-value mortgages was $6.5 billion, an increase of $0.4 billion compared to the same quarter in the prior year. Compared to the prior quarter, new insurance written from portfolio insurance decreased by $19.4 billion. This decrease was primarily due to significantly higher demand for portfolio insurance in the second quarter in advance of the July 1, 2016 regulatory changes, which generally limits portfolio insurance to only those mortgages that will be used in CMHC securitization programs.

  • Premiums written from portfolio insurance were $22 million, representing a decrease of $1 million compared to the same quarter in the prior year and a decrease of $56 million compared to the prior quarter.

  • Premiums earned of $162 million were $14 million, or 10%, higher than the same quarter in the prior year due to the higher level of premiums written in recent years. When compared to the prior quarter, premiums earned were $4 million, or 3% higher. The unearned premiums reserve was $2.1 billion at the end of the quarter, up $115 million from December 31, 2015. These unearned premiums will be recognized as premiums earned over time in accordance with the Company's historical pattern of loss emergence.

  • New delinquencies, net of cures, of 493, were 53 higher than the same quarter in the prior year primarily due to an increase in Alberta (159), partially offset by decreases in Ontario (63), Quebec (23), and the Pacific region (17). Compared to the prior quarter, new delinquencies, net of cures, increased 141, primarily due to an increase in Alberta (109) and Quebec (30).

  • The loss ratio for the quarter was 25% as a percentage of premiums earned, compared to 21% in the prior quarter and 21% in the same quarter in the prior year period. Losses on claims of $41 million were $10 million higher than the same quarter in the prior year, primarily due to oil-producing regions which experienced an increase in new delinquencies, net of cures, and an increase in the average reserve per delinquency. Losses on claims increased by $8 million from the prior quarter, primarily due to pressure in oil-producing regions.

  • The number of delinquencies outstanding of 2,027 represented an increase of 312 delinquencies, as compared to the same quarter in the prior year, including an increase of 360 delinquencies in Alberta. Compared to the prior quarter, the number of delinquencies outstanding increased by 66 delinquencies primarily due to oil-producing regions.

  • Expenses were $33 million during the quarter resulting in an expense ratio of 20%, as a percentage of premiums earned. This ratio was one percentage point higher than both the same quarter in the prior year and the prior quarter and is consistent with the Company's expected operating range of 18% to 20%.

  • Net Investment income, excluding realized and unrealized investment gains and losses, of $44 million was $2 million, or 6%, higher than the same quarter in the prior year, primarily due to an increase in the amount of invested assets. Net investment income, excluding realized and unrealized investment gains and losses, was consistent with the prior quarter.

  • The Company's investment portfolio had a market value of $6.2 billion at the end of the quarter. The portfolio had a pre-tax equivalent book yield of 3.2% and duration of 3.8 years as at September 30, 2016 each of which remained consistent with the prior quarter.

  • Net operating income of $93 million was $1 million higher relative to the same quarter in the prior year primarily due to higher premiums earned, which were partially offset by higher losses on claims. Net operating income was $5 million lower than the prior quarter primarily due to higher losses on claims, which were partially offset by higher premiums earned.

  • Operating return on equity was 11% for the quarter, a modest decrease from the same quarter in the prior year and the prior quarter.

  • The regulatory capital ratio or Minimum Capital Test ("MCT") ratio was approximately 236%, 51 percentage points higher than the Company's internal target MCT ratio of 185% and 16 percentage points higher than the Company's holding target MCT ratio of 220%.

  • The Company estimates that its outstanding balance of insured mortgages as at June, 2016, was approximately $221 billion, or 50% of the original insured amount. The outstanding balance of insured mortgages are reported on a one quarter lag.

Dividends

On August 26, 2016, the Company paid a quarterly dividend of $0.42 per common share.

The Company also announced today that its Board of Directors approved a dividend payment of $0.44 per common share, payable on November 25, 2016, to shareholders of record at the close of business on November 16, 2016. This dividend represents an increase of $0.02 or 5% over the Company's last quarterly dividend. The Company has increased its dividend in each of the last seven years. 

Shareholders' Equity

As at September 30, 2016, shareholders' equity was $3.6 billion, representing a book value including accumulated other comprehensive income ("AOCI") of $39.01 per common share on a fully diluted basis, which was 8% higher than the same quarter in the prior year. Excluding AOCI, shareholders' equity was $3.5 billion, representing a book value of $37.21 per common share on a fully diluted basis, which was 7% higher than the same quarter in the prior year.  

Credit and Debt Ratings

The Company's issuer credit rating by DBRS Ratings Limited is 'A' high (stable) and the financial strength rating of the Company's primary operating subsidiary is 'AA' (stable).  The Company's credit rating by Standard & Poor's is 'BBB+' (stable) and the financial strength of the Company's primary operating subsidiary is 'A+' (stable). 

Regulatory Changes

On September 23, 2016, the Office of the Superintendent of Financial Institutions ("OSFI") released a draft advisory for comment titled "Capital Requirements for Federally Regulated Mortgage Insurers" as noted in Genworth MI Canada's press release dated September 23, 2016.  The proposed framework is more risk sensitive and incorporates additional risk attributes, including credit score, remaining amortization and outstanding loan balance. The finalized advisory is expected to come into force on January 1, 2017, replacing OSFI's current advisory, "Interim Capital Requirements for Mortgage Insurance Companies", which has been in effect since January 2015.

Under the new capital framework set forth in the draft advisory, the current Holding Target of 220% will be recalibrated to the OSFI Supervisory MCT Target of 150%.  Based on the new framework, the Company estimates that its pro forma MCT ratio as at September 30, 2016 would have been in the range of 155% to 158%.   In addition, the Company held $181 million of cash and investments as at September 30, 2016 and has access to a $100 million credit facility that is undrawn.  These resources could be used to enhance the capital level of the Company. As a result, the Company expects to be compliant with the new framework upon its implementation on January 1, 2017, subject to business and market conditions.

On October 3, 2016, the Minister of Finance announced a number of mortgage insurance eligibility rule changes, including the requirement to use the posted 5-year mortgage rate published by the Bank of Canada to determine borrower debt service ratios starting October 17, 2016. After the Company's review of these changes, it expects that the transactional market size and its transactional new insurance written in 2017 may decline by approximately 15% to 25% reflecting expected changes to borrower home buying patterns, including the purchase of lower priced properties and higher downpayments.

As the result of clarifications provided by the Department of Finance after the October 3, 2016 public announcement, the Company now expects that portfolio new insurance written in 2017 may decline by approximately 25% to 35% as compared to the normalized run rate after the July 1, 2016 regulatory changes for portfolio insurance. The new mortgage rules prohibit insuring low loan-to-value refinanced mortgages and most investor mortgages originated by lenders on or after October 17, 2016. 

The impact on any future premiums written from the smaller market size should be partly offset by potential premium rate increases, in response to the higher capital requirements arising from OSFI's draft capital advisory.  With an unearned premiums reserve of $2.1 billion as at September 30, 2016, premiums earned in the next 12 to 18 months will continue to benefit from the relatively higher level of premiums written in 2014 through 2016.  As a result, there should be limited near-term impact on the level of premiums earned.

On October 21, 2016, the government launched a public consultation on a policy option that would require mortgage lenders to manage a portion of loan losses on insured mortgage that default, known as "lender risk sharing". This could transfer some risk borne by mortgage insurers and taxpayers to lenders. The comment period for this consultation ends on February 28, 2017. The Company will participate in the consultation, however it is too early to comment on the potential impact of this process and its ultimate outcome.

Detailed Operating Results and Financial Supplement

For more information on the Company's operating results, please refer to the Company's Management's Discussion and Analysis as posted on SEDAR and available at www.sedar.com.

This Press Release, as well as the Company's third quarter 2016 consolidated Financial Statements, Management's Discussion and Analysis and Financial Supplement are also posted on the Investor section of the Company's website (http://investor.genworthmicanada.ca).  Investors are encouraged to review all of these materials. 

Earnings Call

The Company's third quarter earnings call will be held on November 4, 2016 at 10:00 AM ET (Local: 416-204-9498, Toll free: 1-800-505-9568, Conference ID: 2554928).  The call is accessible via telephone and by audio webcast on the Company's website.  If listening via webcast, participants are encouraged to pre-register for the webcast through the Company's website.  Slides to accompany the call will be posted just prior to its start.  A replay of the call will be available until December 3, 2016 (Local: 647-436-0148, Toll-free 1-888-203-1112, Replay Passcode 2554928).  The webcast will also be available for replay on the Company's website for a period of at least approximately 45 days following the conference call.                      

About Genworth MI Canada Inc.

Genworth MI Canada Inc. (TSX: MIC) through its subsidiary, Genworth Financial Mortgage Insurance Company Canada (Genworth Canada), is the largest private residential mortgage insurer in Canada.  The Company provides mortgage default insurance to Canadian residential mortgage lenders, making homeownership more accessible to first-time homebuyers. Genworth Canada differentiates itself through customer service excellence, innovative processing technology, and a robust risk management framework. For more than two decades, Genworth Canada has supported the housing market by providing thought leadership and a focus on the safety and soundness of the mortgage finance system.  As at September 30, 2016, the Company had $6.6 billion total assets and $3.6 billion shareholders' equity. Find out more at www.genworth.ca.

Consolidated Financial Highlights

($ millions, except per share amounts)

Three Months
Ended September 30
(Unaudited)

Nine Months
Ended September 30
(Unaudited)

2016

2015

2016

2015

Transactional new insurance written1

$6,868

$8,341

$16,050

$19,012

Portfolio new insurance written1

6,539

6,123

36,963

16,101

Total new insurance written1

13,407

14,464

$53,013

35,113

Premiums written

223

260

588

595

Premiums earned

162

148

474

435

Losses on claims

41

31

110

87

Expenses

33

28

91

82

Net underwriting income

88

89

272

266

Investment income (interest and dividends, net of expenses) 1

44

42

130

125

Realized gains on sale of investments

2

-

2

25

Realized and unrealized gains (losses) on derivatives, foreign
exchange and impairment loss

5

(3)

(11)

4

Total net investment income

51

39

121

154

Net income

$98

$90

$277

$301

Net operating income1

$93

$92

$283

$280

Basic weighted average common shares outstanding

91,852,491

91,794,296

91,819,480

92,465,491

Diluted weighted average common shares outstanding

91,857,866

92,209,495

91,831,211

92,931,839

Fully diluted earnings per common share

$1.07

$0.96

$3.01

$3.19

Fully diluted operating earnings per common share1

$1.02

$1.00

$3.09

$3.02

Fully diluted book value per common share, incl. AOCI1

$39.01

$36.14

$39.01

$36.14

Fully diluted book value per common share, excl. AOCI1

$37.21

$34.80

$37.21

$34.80

Loss ratio1

25%

21%

23%

20%

Combined ratio1

45%

40%

42%

39%

Operating return on equity1

11%

12%

11%

12%

Minimum Capital Test ratio (MCT) 1

236%

228%

236%

228%

Delinquency ratio1, 2

0.10%

0.10%

0.10%

0.10%

 

1

This is a financial measure not calculated based on International Financial Reporting Standards ("IFRS").  See the "Non-IFRS Financial Measures" section of this press release for additional information. The MCT ratio as at September 30, 2016 is based on the Company's estimate.

2

Based on original insured loans in-force for which coverage term has not expired and excludes delinquencies that have been incurred but not reported.

Non-IFRS financial measures

To supplement the Company's consolidated financial statements, which are prepared in accordance with IFRS, the Company uses non-IFRS financial measures to analyze performance. The Company's key performance indicators and certain other information included in this press release include non-IFRS financial measures. Such non-IFRS financial measures used by the Company to analyze performance include net operating income, operating earnings per Common Share (basic), operating earnings per common share (diluted), shareholders' equity excluding accumulated other comprehensive income ("AOCI"), operating return on equity. Other non-IFRS financial measures used by the Company to analyze performance for which no comparable IFRS measure is available include insurance in-force, new insurance written, loss ratio, expense ratio, combined ratio, operating return on equity, MCT ratio, delinquency ratio, investment yield, average reserve per delinquency, credit score, gross debt service ratio, ordinary dividend payout ratio, workout penetration, cures, effective tax rate, gross debt service ratio, book value per common share (basic) including AOCI, book value per Common Share (basic) excluding AOCI, book value per common share (diluted) including AOCI, book value per Common Share (diluted) excluding AOCI, and dividends paid per common share. The Company believes that these non-IFRS 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-IFRS financial measures do not have standardized meanings and are unlikely to be comparable to any similar measures presented by other companies.

See the "Non-IFRS financial measures" section at the end of the Company's Management's Discussion and Analysis for a reconciliation of net operating income to net income, total net investment income to interest and dividend income, net of investment expenses, operating earnings per common share (basic) to earnings per common share (basic), operating earnings per common share (diluted) to earnings per common share (diluted), and shareholders' equity excluding AOCI to shareholders' equity.

Definitions of key non-IFRS financial measures and explanations of why these measures are useful to investors and management can be found in the Company's "Glossary", in the "Non-IFRS financial measures" section at the end of the Company's Management's Discussion and Analysis.

Caution regarding forward looking information and statements

Certain statements made in this press release contain forward-looking information within the meaning of applicable securities laws ("forward-looking statements"). When used in this press release, the words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "seek", "propose", "estimate", "expect", and 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 effect of the Canadian government guarantee legislative framework, the impact of proposed guideline changes by the Office of the Superintendent of Financial Institutions Canada and legislation introduced in connection with the Protection of Residential Mortgage or Hypothecary Insurance Act and the effect of changes to the government guarantee mortgage eligibility rules, 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.

The forward-looking statements contained herein are based on certain factors and assumptions, certain of which appear proximate to the applicable forward-looking statements contained herein. Inherent in the forward-looking statements are known and unknown risks, uncertainties and other factors beyond the Company's ability to control or predict, that may cause the actual results, performance or achievements of the Company, or developments in the Company's business or in its industry, to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements. Actual results or developments may differ materially from those contemplated by the forward-looking statements.

The Company's actual results and performance could differ materially from those anticipated in these forward-looking statements as a result of both known and unknown risks, including: the continued availability of the Canadian government's guarantee of private mortgage insurance on terms satisfactory to the Company; the Company's expectations regarding its revenues, expenses and operations; the Company's plans to implement its strategy and operate its business; the Company's expectations regarding the compensation of directors and officers; the Company's anticipated cash needs and its estimates regarding its capital expenditures, capital requirements, reserves and its needs for additional financing; the Company's plans for and timing of expansion of service and products; the Company's ability to accurately assess and manage risks associated with the policies that are written; the Company's ability to accurately manage market, interest and credit risks; the Company's ability to maintain ratings, which may be affected by the ratings of its majority shareholder, Genworth Financial, Inc.; interest rate fluctuations; a decrease in the volume of high loan-to-value mortgage originations; the cyclical nature of the mortgage insurance industry; changes in government regulations and laws mandating mortgage insurance; the acceptance by the Company's lenders of new technologies and products; the Company's ability to attract lenders and develop and maintain lender relationships; the Company's competitive position and its expectations regarding competition from other providers of mortgage insurance in Canada; anticipated trends and challenges in the Company's business and the markets in which it operates; changes in the global or Canadian economies; a decline in the Company's regulatory capital or an increase in its regulatory capital requirements; loss of members of the Company's senior management team; potential legal, tax and regulatory investigations and actions; the failure of the Company's computer systems; and potential conflicts of interest between the Company and its majority shareholder, Genworth Financial, Inc.

This is not an exhaustive list of the factors that may affect any of the Company's forward-looking statements. Some of these and other factors are discussed in more detail in the Company's Annual Information Form (the "AIF") dated March 16, 2016. Investors and others should carefully consider these and other factors and not place undue reliance on the forward-looking statements. Further information regarding these and other risk factors is included in the Company's public filings with provincial and territorial securities regulatory authorities (including the Company's AIF) and can be found on the System for Electronic Document Analysis and Retrieval ("SEDAR") website at www.sedar.com. The forward-looking statements contained in this press release represent the Company's views only as of the date hereof. Forward-looking statements contained in this press release are based on management's current plans, estimates, projections, beliefs and opinions and the assumptions related to these plans, estimates, projections, beliefs and opinions may change, and are presented for the purpose of assisting the Company's securityholders in understanding management's current views regarding those future outcomes and may not be appropriate for other purposes. While the Company anticipates that subsequent events and developments may cause the Company's views to change, the Company does not undertake to update any forward-looking statements, except to the extent required by applicable securities laws.

SOURCE Genworth MI Canada

For further information: Investors - Jonathan Pinto, 905-287-5482 or jonathan.pinto@genworth.com; Media - Susan Carter, 905-287-5520 or susan.carter@genworth.com

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