Genworth MI Canada Inc.
2011 Annual Report
Enabling Homeownership.
Creating Value.
Genworth MI Canada Inc.
Corporate profile
We are Canada’s leading private mortgage insurer with a history dating back to 1995. our Company,
Genworth MI Canada Inc., known as Genworth Canada, provides default mortgage insurance to Canadian
residential mortgage lenders that enables first-time homebuyers to own a home more affordably.
We are a valued business partner to lenders and have a track record of successful product and service innovations
that benefit both lenders and borrowers. our customer-focused strategy, active risk management platform and
financial strength position us well for delivering ongoing profitability.
As of December 31, 2011, Genworth Canada had $5.4 billion in total assets and $2.7 billion in shareholders’ equity.
the Company is based in oakville, ontario, and has approximately 260 employees across Canada.
COMPETITIVE STRENGTHS
VALUES
Solid
lender
relationships
Best-in-class
service and
technology
Disciplined
risk
management
Collaborative
culture
Heart
Integrity
Financial strength
Excellence
Contents
1 Financial and operating highlights
2 Report to shareholders
4 Customer focus
6 Risk management
8 Financial strength
10 Management roundtable
12 Corporate responsibility
13 Chairman’s Award
14 Corporate governance
16 shareholder information
2
gen WOR TH MI C ana Da In C . 2011 a nnua L Re PO RT
Enabling Homeownership. Creating Value.
We believe in responsible homeownership. Our goal is to make homeownership
more affordable and accessible for Canadians. We do this by promoting prudent
homebuying practices, contributing to responsible lending practices and actively
managing risk. Our strength is in our people. We continually strive to add value to
our lender customers, our shareholders, our communities and our employees.
Financial and Operating Highlights
Net premiums written
Net operating income
Combined ratio
$533 million
$318 million
53 %
Operating
return on equity
Operating earnings per
common share (diluted)
Dividends paid per
common share
13 %
$3.12
$1.57
Book value per share
(diluted)
Operating earnings per share
(diluted)
Operating return on equity
(%)
30
24
18
12
6
0
08
09
10
11
exc. AOCI1
incl. AOCI
5
4
3
2
1
0
08
092
10
11
20
16
12
8
4
0
08
093
10
11
1 Defined as accumulated other comprehensive income (AOCI).
2
3
Including the impact of changes to the premium recognition curve in Q1 2009, operating earnings per share (diluted) would have been $3.23.
Including the impact of changes to the premium recognition curve in Q1 2009, operating return on equity for the year ended December 31, 2009 would have been 16%.
gen WOR TH MI C ana Da I n C . 2011 a nnua L Re PORT
1
Genworth MI Canada Inc.
Focused on shareholder returns
In 2011, genworth MI Canada reported a solid 4% increase in fully diluted earnings
per share, paid attractive dividends to shareholders totalling $1.57 per share, and
increased book value by 10% per share.
Dear Fellow Shareholders:
Our business had another solid year in 2011. We set some
aggressive goals for numerous facets of the business and
made good progress on each of those areas. This was
achieved in a year marked by economic stress in numerous
parts of the globe. as the economy continues to gain
strength and stability, our focus will continue to be on risk
management and portfolio management.
We have seen a number of positive trends, including good
volumes in mortgage origination, continuing improvement
in borrower creditworthiness and stable loss ratios.
Our strategic focus
Our focus is to remain the leading private mortgage insurer
in Canada. By promoting responsible lending practices and
providing innovative solutions, we help Canadians achieve
the dream of homeownership. That is our top priority.
Solid results
genworth MI Canada achieved solid results in 2011,
including $533 million in new premiums written,
$318 million in net operating income, and a 13%
operating return on equity.
We improved our market position with several of Canada’s
mortgage lenders, continued our contributions within the
community, and enhanced our employee engagement
through training and career development opportunities.
Our business is committed to:
• Delivering outstanding service
• Prudently and actively managing our risk
• Maintaining financial flexibility
• Delivering solid and consistent returns
By working with lenders, we help them grow their
mortgage origination businesses through our expertise and
tailored service strategies. We have earned high customer
satisfaction ratings and continue to be the private mortgage
insurer of choice.
We take an active approach to risk management. We
continue to improve our collateral property valuation
process and deepen our analytics at the regional level.
Our objective remains to insure high-quality prime
mortgages that are diversified across lenders, geographies
and loan-to-values.
The business has built a solid balance sheet with strong
capital ratios and modest leverage that supports our plans
for prudent, profitable organic growth. During the year, we
increased our ordinary dividend payout to shareholders in
order to maintain a competitive dividend yield.
Our investment portfolio, with its short duration and ongoing
reinvestment potential, continues to be well positioned.
2
gen WOR TH MI C ana Da In C . 2011 a nnua L Re PO RT
Differentiating Genworth through service excellence
Today, our innovation strategy emphasizes competitive
differentiation through service excellence. We strive to help
our lending partners achieve their business objectives by
providing them with high-touch service, efficient processing
of claims and ongoing training for their new hires.
This strategy builds on strengths for which genworth
Canada is well recognized: fast turnaround times;
dedicated sales, service and underwriting teams; and a
common-sense and holistic approach to underwriting. Our
goal is simply stated: to ensure that genworth Canada
is our lending partners’ mortgage insurer of choice and
a contributor to their business success. We are well
positioned to continue to extend our market leadership.
Investing in our people and our future
genworth Canada has invested substantially in technology,
in our long-tenured employees and in our customer-
focused culture to make our service difference real for
our lending partners.
To protect and preserve the franchise genworth has built,
we need to emphasize two core strategies that are already
at the heart of our Company. First, we need to make sure
the Company continues to have the financial strength to
meet its obligations towards customers and investors.
We achieve that by managing our capital base and
investments prudently, by deepening our understanding
of market dynamics and by constantly sharpening our risk
management and underwriting expertise.
Second, to maintain our position in the Canadian mortgage
insurance market, we need to continue to invest – in
technology, in service, in risk management and in our
people – to reinforce our unwavering focus on being the
mortgage insurer of choice for our customers, every day.
Mortgage insurance is a capital-intensive business, and
genworth Canada continues to demonstrate its willingness
to invest in the business and its people.
Shareholders should have every confidence that our senior
management team will maintain its focus – on smart
decisions, on customers and on shareholder returns.
Thank you for your continuing support.
Brian Hurley
Chairman and Chief Executive Officer
Our priorities
Top line growth
Risk management
Financial strength
• Continue market leadership in
• Insure high-quality, well-diversified,
• Maintain strong capital position with
customer experience
and high-credit-scoring loans
flexibility
• Drive deeper customer market
penetration and diversification
• Target average loss ratio between
35%–40%
• Balance yield versus quality in
managing investment portfolio
• Focus on service innovation
• Continue to strengthen analytical
• Focus on improving return on equity
• Continue focus on competitive
positioning and government relations
expertise
• Continue to expand asset
management strategy
• Target dividend payout ratio of
30%–40%
• Maintain strong credit ratings
gen WOR TH MI C ana Da I n C . 2011 a nnua L Re PORT
3
Genworth MI Canada Inc.
Sales Team
Narrinder Dhanoya-Bhangu
British Columbia
Mark Stamm
Québec
Ann-Marie Reddy
Prairies
[missing: Ruth Roussy, Atlantic]
Debbie McPherson
sVP, sales &
Marketing
Jason Neziol
ontario & GtA
Tracie Michaud
national
Helping Canadians Buy Homes from COAST TO COAST
new Insurance Written
2007–2011
4
genWO RTH MI C anaDa I nC. 201 1 annuaL ReP ORT
Enab ling Ho meowne rs hi p. Cre a ting Value.
Differentiation drives top line growth
at genworth Canada it’s our people that make all the difference. We work
collaboratively with our lending partners to establish responsible lending
practices, fulfill homeownership dreams, promote financial literacy and protect
the soundness and stability of Canada’s housing market.
Committed to enabling responsible
homeownership
Whenever Canadians are ready for the responsibility of
homeownership – no matter where they want to live – we can
help. We work with more than 250 financial institutions, and
since 1995 we’ve made homeownership possible for more
than 1.2 million families across Canada.
Our regional sales teams are supported by risk managers
in each province, who have in-depth knowledge of the local
economy and demographics. Their local expertise ensures that
we apply the same standards of prudent risk management
on each application, allowing us to maintain a strong portfolio
from British Columbia to newfoundland and Labrador and
everywhere in between.
We are also committed to providing prospective homeowners
with the tools they need to understand the homebuying
process and make the right decisions. Through our consumer
website – homeownership.ca – they can assess their financial
situation, evaluate their mortgage options, and access a range
of resources that will help them make smart choices.
Bringing value to our customers
We have an experienced team of account managers and
underwriters working together to give each and every customer
the highest level of service. account managers spend more
than 50% of their day, face-to-face, interacting directly with
our lender customers. The goal of each account manager is to
understand the clients’ business and true needs, and deliver
customized solutions that will help grow their business.
Our underwriters are trained to think outside the box and work
with our customers to approve their files, while still adhering to
our disciplined underwriting approach. We maintain very high
service standards for calls into our customer service centre –
answering 97% of all calls in less than 20 seconds.
We also enhanced our value proposition for the broker segment
through a number of new and innovative tools. We now offer a
full suite of resources including the following:
• GenworthEdge.ca: a dedicated website for easy access
to resources
• My Marketing SourceTM: self-serve branding and
marketing tools
• Mortgage Calculator Apps: innovative mobile
mortgage calculators
• Genworth Development Centre: extensive professional
development training.
Focused on the customer experience
Best-in-class customer service is the cornerstone of our
business.
In 2011, we received the Best Industry Service award from the
Canadian Mortgage Professionals association. Our delivery of
quality customer service, our strong customer-centric vision,
and our commitment to deliver value-added services to today’s
mortgage professionals earned us this recognition.
Customer focused. Knowledgeable. Results driven.
That’s the Genworth Canada Difference.
gen WOR TH MI C ana Da I n C . 2011 a nnua L Re PORT
5
Genworth MI Canada Inc.
Risk Team
Standing:
Tim Watson
Actuary
Sitting:
Craig Sweeney
operational Risk
Standing:
Donna Driver
Investigations
Sitting:
Cindy White
Loss Mitigation
Standing:
Rob Kirby
Loss Mitigation and
Investigations
Standing:
Stuart Levings
Chief operations
offi cer
D Y N A M I C R i s k M a n a g e m e n t A p p r o a c h
Geographical dispersion
Credit score dispersion
(% based on insurance-in-force between 1995–2011)
New Brunswick
1%
Nova Scotia
2%
Quebec
15%
All other
1%
British Columbia
16%
Ontario
46%
Alberta
16%
Saskatchewan
2%
Manitoba
1%
>
– 700
65%
Average
Credit Score
719
no score
3%
>
– 0 < 600
2%
>
– 600 < 660
11%
>
– 660 <700
19%
Loan-to-value distribution
Loan-to-value
Effective Loan-to-Value
Effective loan-to-value
%
6
4
%
1
4
%
0
4
%
3
2
%
4
2
%
7
2
%
6
2
%
5
2
%
3
2
%
6
09
%
6
10
%
2
1
11
%
0
9
%
2
9
%
2
7
%
6
7
%
1
9
%
9
7
%
1
9
%
6
8
%
0
9
%
1
9
%
0
9
%
9
8
%
1
6
%
0
4
05 & Prior
06
07
08
09
10
11
<= 80
> 80–85
> 85–90
> 90–95
Original LTV
Effective LTV
(% based on new insurance written/book year)
6
50
40
30
20
10
0
genWO RTH MI C anaDa I nC. 201 1 annuaL ReP ORT
Effective LTV
Original LTV
09
10
11
* Total of Insurance in Force at Dec 31, 2011
05 & Prior
06
07
08
09
10
11
Geographical Dispersion*
British Columbia
Alberta
Saskatchewan
Manitoba
Ontario
Quebec
Nova Scotia
New Brunswick
All Other
Total
16%
16%
2%
1%
46%
15%
2%
1%
1%
100%
> 90–95
100
> 85–90
80
> 80–85
<=80
60
40
20
0
ltv
<=80%
2009 2010 2011
23% 27% 25%
>80%-85% 6%
6%
12%
>85%-90% 24% 26% 23%
>90%-95% 46% 41% 40%
>95% 1%
0%
0%
100% 100% 100%
Enab ling Ho meowne rs hi p. Cre a ting Value.
High-quality and diversified
insurance portfolio
Risk management is critical to our business. Our rigorous framework enables
us to proactively identify emerging risks such as consumer indebtedness and
affordability, and to mitigate these risks through our concentration limits and
disciplined underwriting approach. We have over 20 years of data and have built
a high-quality, well-diversified insurance portfolio.
Balancing appropriate risk concentrations
High-quality new business means insuring well-diversified
and high-credit-scoring loans. We control the quality of
new risk insured by setting underwriting guidelines and risk
concentration limits to ensure appropriate diversification. We
continuously update our internal proprietary scoring model and
enhance our fraud detection tools to stay on top of emerging
loss trends. These risk pillars are supported by a robust quality
assurance audit program that monitors internal and external
underwriting compliance.
High-credit-scoring loans: Our experience shows that
high credit scores drive better loss performance. Through our
ongoing focus on loan quality, our average credit score for
new insurance written in 2011 was 727. The vast majority of
genworth-insured borrowers have a credit score greater than
700 and the average credit score on our insurance in-force at
the end of 2011 was 719.
average credit score*
2009
2010
2011
Insurance-in force
new insurance written
718
726
719
727
719
727
* The credit scores from all insured high-ratio borrowers were used to calculate the average score.
Lower loan-to-values: Our average loan-to-values have declined.
This is a result of a reduction in the maximum loan-to-value for
refinance loans in 2011, and of the mitigation of housing market
risk by larger down payments. This is positive and results in a
stronger borrower profile.
We underwrite every mortgage we insure
The Canadian mortgage insurance industry operates within a
non-delegated structure where the insurer acts as a second
set of eyes on each application. Our proprietary underwriting
system screens for stacked high-risk factors, such as elevated
servicing ratios and thin credit profiles. By identifying these
factors, we can appropriately underwrite the risks and mitigate
them, resulting in improved overall loan quality.
Loan aging lowers effective insurance exposure
as principal gets paid down and house prices increase, the
original loan-to-value decreases to what we call the “effective
loan-to-value.” The lower the effective loan-to-value the less
likely a mortgage default will result in a claim. Policies originated
prior to 2007 now have a significantly lower risk of default.
Our asset management approach lowers claims
Our asset management program enables our loss mitigation
team to get involved in the default management process
earlier, providing greater efficiency and savings. By taking
control of the real estate sales process and using our own
network of realtors, we have significantly reduced the time
from vacant possession to the sale of a foreclosed property.
Shorter timelines result in lower interest and property
management expenses, and these savings reduce the
ultimate claim.
gen WOR TH MI C ana Da I n C . 2011 a nnua L Re PORT
7
Genworth MI Canada Inc.
Finance Team
Philip Mayers
Chief Financial offi cer
Samantha Cheung
Investor Relations
Fayeanne Beattie
Finance
Rick Barnett
Investments Management
A S T R O N G F i n a n c i a l F o u n d a t i o n
Net premium written
(in millions)
Net premiums written
Net premium written
(in millions)
($ in millions)
Net premium written
Net premium earned
(in millions)
(in millions)
Net premium earned
(in millions)
Net premiums earned
Net premium earned
(in millions)
($ in millions)
Combined ratio
(%)
Combined ratio
(%)
Loss ratio
Loss ratio
Combined ratio
(%)
(%)
(%)
Loss ratio
(%)
Loss ratio
(%)
4
8
9
4
8
9
4
8
9
6
0
7
6
0
7
6
0
7
2
5
5
3
3
5
2
5
5
3
3
5
0
6
3
0
6
3
0
6
3
0
1
6
3
8
3
1
5
5
4
2
4
2
5
5
4
2
4
1
2
6
2
0
1
1
6
6
8
1
5
4
2
4
1
2
6
2
0
1
1
6
6
8
1
5
1
2
6
3
3
6
4
2
1
6
7
5
0
5
6
4
7
5
3
5
0
5
7
5
3
5
3
5
0
5
3
3
3
3
6
4
2
4
2
4
2
4
7
3
3
3
1
3
7
3
3
3
1
3
7
3
3
3
1
3
9
1
9
1
9
1
08
08
10
07
07
08
09
09
07
09
11
11
11
Investment income
Investment income
Investment income
(in millions)
(in millions)
(in millions)
Net operating income
($ in millions)
08
07
10
10
07
07
091
07
091
091
11
Net operating income
Net operating income
Assets
Net operating income
(in millions)
(in millions)
(in millions)
(in millions)
Investment income
($ in millions)
11
10
11
08
08
10
08
10
091
091
11
07
10
08
Assets
(in millions)
091
11
10
08
07
Assets
(in millions)
4
2
3
0
1
3
7
0
3
0
1
3
3
4
3
4
2
3
8
1
3
7
0
3
0
1
3
3
4
3
4
2
3
8
1
3
7
0
3
0
0
2
8
1
3
3
4
3
8
4
1
9
8
1
3
8
1
0
0
2
9
8
1
9
7
1
0
0
2
9
7
1
9
8
1
3
8
1
3
8
1
1
9
2
,
4
8
4
1
8
4
1
5
1
9
,
4
9
7
1
0
1
2
,
5
1
9
2
,
4
8
9
3
,
5
3
9
3
,
5
0
1
2
,
5
5
1
9
,
4
3
9
3
,
5
5
1
9
,
4
0
1
2
,
5
8
9
3
,
5
1
9
2
,
4
08
10
11
08
11
07
091
07
091
07
10
091
Shareholders’ equity
Shareholders’ equity
Shareholders’ equity
Excluding AOCI1 (in millions)
Excluding AOCI1 (in millions)
Excluding AOCI1 (in millions)
Shareholders’ equity
Including aOCI ($ in millions)
11
11
10
08
10
3
9
3
,
5
3
4
6
,
2
9
8
0
,
2
8
9
3
,
5
6
6
7
,
1
9
8
5
,
2
3
8
6
,
2
3
4
6
,
2
9
8
0
,
2
3
8
6
,
2
3
4
6
,
2
9
8
0
,
2
9
8
5
,
2
6
6
7
,
1
6
6
7
,
1
3
8
6
,
2
9
8
5
,
2
07
08
091
07
10
08
11
091
07
10
08
11
091
10
07
11
08
09
07
10
08
11
09
07
10
08
11
09
10
07
11
08
091
07
10
08
11
091
07
10
08
11
091
10
07
11
08
09
07
10
08
11
09
07
10
08
11
09
10
11
1 Including the impact of changes to the premium recognition curve in Q1 2009, net premiums earned, the loss ratio, and net operating income would have been $710, 36% and $371 million, respectively.
1000
1000
1000
1000
60
60
60
60
60
60
1000
1000
800
600
400
200
0
8
800
600
400
200
0
40
40
40
40
40
40
genWO RTH MI C anaDa I nC. 201 1 annuaL ReP ORT
20
20
20
20
20
20
0
0
0
0
0
0
800
600
400
200
0
800
600
400
200
0
800
600
400
200
0
800
600
400
200
0
250
200
150
50
0
500
500
500
250
250
6000
6000
6000
3300
3300
3300
Genworth MI Canada Inc.
Genworth MI Canada Inc.
Genworth MI Canada Inc.
400
Key Financial Metrics
Key Financial Metrics
Key Financial Metrics
400
400
200
200
December 2011
December 2011
December 2011
300
300
300
(in millions)
(in millions)
(in millions)
2011
150
150
2010
2011
2009
2010
2011
2008
2009
2010
2007
2008
2009
2007
2008
2007
4000
4000
4000
2200
2200
2200
200
Net Premiums Written
Net Premiums Written
Net Premiums Written
533
533
552
200
200
100
100
360
552
533
100
706
360
552
984
706
360
Net Premiums Earned
Net Premiums Earned
Net Premiums Earned
621
612
612
610
621
612
518
610
621
2000
424
518
610
Combined ratio
Combined ratio
Combined ratio
53%
50%
53%
57%
50%
53%
46%
57%
50%
33%
46%
57%
984
706
2000
424
518
33%
46%
984
2000
424
33%
100
100
Loss Ratio
Loss Ratio
33%
Loss Ratio
33%
37%
33%
33%
37%
42%
33%
37%
31%
42%
33%
19%
31%
42%
19%
31%
19%
1100
1100
1100
100
0
50
0
50
0
0
0
0
0
0
0
0
0
Genworth MI Canada Inc.
Genworth MI Canada Inc.
Genworth MI Canada Inc.
Key Financial Metrics
Key Financial Metrics
Key Financial Metrics
December 2011
December 2011
December 2011
(in millions)
(in millions)
(in millions)
2011
2010
2011
2009
2010
2011
2008
2009
2010
2007
2008
2009
2007
2008
2007
Net Operating Income
Net Operating Income
Net Operating Income
Investment Income
Investment Income
Investment Income
318
179
343
318
183
179
307
343
318
324
307
343
310
324
307
189
183
179
200
189
183
148
200
189
310
324
148
200
310
148
Assets
Assets
Assets
5,393
5,398
5,393
5,210
5,398
5,393
4,915
5,210
5,398
4,291
4,915
5,210
4,291
4,915
4,291
Shareholders' Equity (footnote: Excluding AOCI)
Shareholders' Equity (footnote: Excluding AOCI)
Shareholders' Equity (footnote: Excluding AOCI)
2,464
2,468
2,468
2,546
2,464
2,468
2,104
2,546
2,464
1,747
2,104
2,546
1,747
2,104
1,747
Enab ling Ho meowne rs hi p. Cre a ting Value.
Financial strength
genworth Canada delivered another year of solid performance. Our business
model – built on effective risk management, outstanding customer service and
a strong balance sheet – provides the foundation for our financial strength and
ongoing profitability.
Solid financial performance in 2011
We delivered net operating income of $318 million in 2011
with an operating return on equity of 13%. During the year,
the government introduced further government guarantee
product restrictions, which led to a 5% to 10% smaller
high-ratio residential mortgage insurance market. Despite the
smaller origination market, the Company improved its market
penetration through strong sales and service execution,
resulting in net premiums written of $533 million.
The number of net new delinquencies declined by 11% as
delinquencies declined from the 2007 and 2008 books, and
our loss mitigation programs continued to be successful.
Overall, losses on claims rose by 9% during the year to
$225 million, primarily due to reserve strengthening on
existing delinquencies.
unearned premiums of $1.8 billion provide visibility into future
premium revenues. We believe that unearned premiums
include embedded future profits that will be earned over the
next five years.
Minimum capital
Minimum capital
test ratio
test ratio (MCT) (%)
(%)
2
6
1
6
5
1
9
4
1
7
2
1
5
2
1
07
08
09
10
11
Capital management
flexibility
We ended 2011 with $2.7 billion in
shareholders’ equity, a regulatory
minimum capital test ratio of
162% and a modest debt-to-total
capital ratio of 14%. as well, our
operating insurance company
ratings were confirmed during
the year as aa by DBRS and
aa(low) by S&P. Our strong capital
position and high credit ratings
demonstrate our financial strength
and financial flexibility.
gen WOR TH MI C ana Da I n C . 2011 a nnua L Re PORT
Ordinary quarterly dividends on our common shares are
a priority. We increased our quarterly dividend by 12% to
$0.29 per common share in the fourth quarter of 2011. We
will continue to maintain capital flexibility while continuing
to optimize our capital structure to enhance our returns to
shareholders and create shareholder value.
High-quality investment portfolio
Our $5.1 billion investment portfolio generated investment
income of $179 million, including net investment gains. The
portfolio is well positioned with a duration of 3.9 years and the
pre-tax equivalent book yield of 4.3%. We do not expect any
material change in asset mix and actively manage the portfolio
to maintain high credit quality and to deliver solid after-tax
returns while preserving capital and diversifying risk.
Federal fixed
income 17%
Corporate fixed
income 46%
Total:
$5.1 billion
Provincial fixed
income 16%
Preferred
shares 1%
Cash and
other 2%
Common
shares 4%
Guarantee
fund 14%
• 4.3% book yield1
• 3.9 year duration
• 96% of bonds ‘A’ or better
1 Pre-tax equivalent book yield after dividend gross-up of general Portfolio (as at December 31, 2011).
Cash and
cash equivalents
8%
Guarantee
fund
13%
Common
shares
2%
Preferred
shares
1%
9
Federal
government
19%
Provincial
fixed income
12%
Corporate
fixed income
45%
200
160
120
80
40
0
Portfolio Distribution
12/31/2010
Corporate Fixed Income
Federal Government
Provincial Fixed Income
Preferred Shares
Cash and Other
Common Shares
Guarantee Fund
45%
19%
12%
1%
8%
2%
13%
Genworth MI Canada Inc.
Key Financial Metrics
December 2010
Genworth MI Canada Inc.
Management roundtable Q & A
What challenges do you see for your business in the short term?
For any business leader – no matter what country you operate in – the uncertain global
environment has to be a key watch item. While we have weathered the storm relatively
well here in Canada, consumer confidence, sentiment and behaviour can be influenced
by the world around us. For our own market, consumer debt is something we need to
keep a watchful eye on. and this includes other debt in addition to mortgage debt. For us,
maintaining our approach to prudent underwriting and risk management will help maintain
our strong performance.
Brian Hurley
Chairman and
Chief Executive Officer
. . . and how about opportunities?
We are entering 2012 with some solid momentum on numerous fronts. We are making progress on market
penetration, improving our analytics and doing a good job managing our capital. That’s our opportunity – to
continue to build on those key aspects of our business. executing well on one of these levers can be impactful
– but having a focused effort that can drive results simultaneously across various aspects of the business could
have a positive and powerful net effect on the business overall.
How do you view effective capital management?
Our mortgage insurance business consistently generates profits, and as a result, we are self-
funding. We spend a lot of time analyzing how our business would perform under different
economic scenarios and the potential impacts on our capital position. We will continue to
proactively manage our capital base, fund growth opportunities, and meet our dividend
commitments, while maintaining our strong credit ratings. Our capital base is strong, and we
have capital flexibility going forward as a result of our modest leverage and strong regulatory
capital ratios.
How do you approach your investment portfolio and do you anticipate any changes?
We deliberately maintain a high-quality portfolio given our insurance risk profile. This
conservative approach to investments delivers a steady income stream, contributing about
one-third of our net operating income. We primarily focus on high-quality fixed income
investments with a small allocation to dividend-paying equities. Despite the current low rates,
we are maintaining the relatively short duration at 3.9 years so that we can take advantage
of higher rates when the time comes. We are pleased that we were able to generate a 4.3%
yield on the general investment portfolio.
going forward, we expect implementation of the new government guarantee legislation
sometime in 2012 to be positive for the investment portfolio. at that time, the federal
government investments held in the segregated guarantee fund will become a part of our
general portfolio, and we will no longer have to pay certain fees, resulting in increased
investment income.
gen WOR TH MI C ana Da In C . 2011 a nnua L Re PO RT
Philip Mayers
Chief Financial Officer
`
10
How has the way you do business changed over the last three years?
The ability to adapt to change is one of the most important strengths of any organization.
And the changes we have seen over the past three to five years impact not only our industry
but the way all companies do business. The rise of social media has forced us to revisit our
strategy and come up with new ways to differentiate our value proposition. It’s no longer
about product offerings, but about service innovation. We need to constantly reassess our
levels of service to make sure we’re doing all we can to increase customer satisfaction and
loyalty. We have also had to invest in a variety of marketing initiatives to increase brand
awareness and consumer knowledge.
Debbie McPherson
Senior Vice-President,
Sales & Marketing
How do you grow market share in a heavily regulated environment?
We continue to do what we do best – and in our case, that’s providing outstanding service, responding to client
needs, and helping Canadians achieve homeownership responsibly. Our regulatory environment is praised by
countries around the world because of how it has prevented the Canadian economy from the financial crisis seen
in the united States and europe. So although new rules over the last few years have changed the way we can
interact with our clients, they have forced us to think outside the box and find other ways to enhance our service
offering. We added securitized structured products expertise to our sales force, increased our market outreach to
key influencers, such as brokers, real estate agents and builders, and restructured the way our teams interact with
clients to provide a more user-friendly experience at both the account manager level and within underwriting. as a
result, we saw our market share grow in 2011 and we anticipate further growth throughout 2012.
Stuart Levings
Chief Operations
Officer and acting
Chief Risk Officer
To what do you attribute the strength of Genworth’s insurance portfolio?
Our strength lies in our comprehensive approach to risk management, where we focus on
three key areas: writing high-quality new business; portfolio monitoring and analytics; and
mitigating losses when they occur. High-quality business means insuring loans that are well
diversified across credit score, geography and loan-to-value. We look for strong credit profiles
and avoid excess concentrations of risk in any one area. Secondly, we constantly monitor
portfolio performance. We look for trends in distribution and performance at a variety of levels
including geographic region, product, loan-to-value and credit score. And finally, we engage in
active loss mitigation programs. So whether it’s a workout where we are keeping families in
their homes, thereby preventing a claim, or an asset management strategy where we control
the process to reduce costs and overall severity, the end result is improved overall loss
performance.
What are Genworth’s top priorities from a risk and underwriting perspective?
Our main priority in risk management is to make sure we balance our underwriting operations
with the appropriate risk appetite. We want our premiums to accurately reflect the risk that
we take on. Maintaining a high-quality portfolio is critical, and we will not compromise on this.
Diversity across geographies, credit scores, property types and year of origination is essential
so that we are not impacted greatly by a single regional economic event. Driving top analytics,
having a deep knowledge of the factors that drive risk, being smart about loss mitigation, and
balancing risk with good business are key success factors.
gen WOR TH MI C ana Da I n C . 2011 a nnua L Re PORT
11
Genworth MI Canada Inc.
Corporate responsibility
genworth Canada is committed to helping build stronger communities across
Canada. We do this by enabling responsible homeownership, promoting financial
literacy, and supporting local and national causes that our people believe in. Our
values – heart, integrity and excellence – guide our people, in everything they do,
at work and in their communities.
Enabling responsible homeownership
In 2011 we helped 82,219 Canadians achieve their dream of homeownership. We work together with lenders, acting as a
second set of eyes, to make sure that lending decisions are sound and to protect and preserve the stability of our housing
market. We are also committed to educating first-time homebuyers so they can make responsible homeownership decisions.
Our consumer website – homeownership.ca – gives homebuyers access to the information and tools they need to make safe
and informed decisions.
Promoting financial literacy
As a leader in mortgage education, we are committed to helping homebuyers elevate their financial
understanding. Together with the Canadian association of Credit Counselling Services (CaCCS) we
conducted a series of seminars across Canada teaching the basics of financial fitness and how to
achieve financial goals. We also conducted our annual financial fitness survey with CACCS in order
to keep a pulse on the financial fitness levels of Canadians, their consumer confidence and their
views on homeownership. We continue to work with CACCS to support financial literacy initiatives
across Canada.
Supporting the communities we serve
Last year marked the second year of our “Path to Home” program
– a $1 million three-year commitment to provide homebuilding
grants to Habitat for Humanity affiliates across Canada. Many of our
employees sit on Habitat boards and participate in build projects
throughout the country. It was also the fifth anniversary of our
Meaning of Home Contest – a national writing contest for students
in grades 4, 5 and 6 that has resulted in more than $450,000
being donated by genworth Canada to more than 30 Habitat for
Humanity Canada affiliates.
Photo courtesy of The Guardian newspaper of Prince edward Island.
We also support several other national and international causes, and
once again we achieved a record-breaking united Way campaign,
raising $100,000 in support of united Way programs across Canada.
Many of our employees are also active in their communities and
have contributed their time to various local causes, including: The
British Columbia Society for the Prevention of Cruelty to animals
(Vancouver); eden Foodbank (Mississauga); Hope Cottage (Halifax);
and La Maison Benoît Labre (Montréal).
genworth Canada united Way Campaign Committee, holding
2011 united Way of Oakville award.
12
gen WOR TH MI C ana Da In C . 2011 a nnua L Re PO RT
Chairman’s Award recipients
Yvonne Burghardt-McEwan
Financial Controller
6 years of service
Yvonne was the main driver in
the successful transformation
of the Company’s financial
statements to conform
with IFRS. This project was
a significant undertaking,
requiring extensive research
and understanding of
accounting principles.
Because of Yvonne’s efforts,
the Company’s transition to
IFRS was seamless.
Jay Iyer
Senior Risk analyst
8 years of service
Jay played an instrumental
role in several high-priority
analytical projects. She
consistently went above
and beyond to achieve her
goals. Her portfolio analytical
work provided management
with the necessary detail to
adequately explain results to
investors and our Board. Jay
also acted as a coordinator
for our Habitat for Humanity
involvement.
The annual Chairman’s award of excellence recognizes genworth Canada employees who
consistently work within their teams to maximize business performance while focusing on
the customer and providing innovative solutions.
Jason Neziol
VP, Regional Sales, Ontario & gTa
12 years of service
Jason was extremely
effective in managing the
Ontario Region during
2011 and keeping his
sales team focused on the
necessary activities to grow
our business and support
lenders through servicing,
training and visibility. He
has continued to deepen
relationships with senior-
level customers and is
responsible for several
new high-profile
relationships.
Kimberley Oroszy
Senior Escalation Officer
12 years of service
Kimberley works closely
with our sales teams and our
customers to find solutions
to challenging mortgage
applications. She continually
provides outstanding
customer service while
balancing the needs of
the business. Her efforts
have made a tremendous
contribution to our business
by improving the decision-
making process.
gen WOR TH MI C ana Da I n C . 2011 a nnua L Re PORT
13
Genworth MI Canada Inc.
Good corporate governance
Our Board of Directors has the mandate to supervise the management and affairs
of genworth MI Canada. The Board, directly and through its committees, provides
direction to make sure that the best interests of genworth MI Canada and its
shareholders are maintained. The Board of Directors is committed to maintaining
best practices in contemporary corporate governance.
In conversation with our Lead Director, Sidney Horn
What were some of the Board’s key accomplishments in 2011?
While the financial service and housing sectors have experienced many challenges over the
past few years, we have been able to deliver strong sustainable results to our shareholders,
customers, employees and communities where we do business.
You should have confidence that your Board is committed to maintaining a high standard
of corporate governance. as part of that commitment, we participate in strategic planning
sessions with management each year. The Board has devoted considerable time to becoming
better educated on, and obtaining a better understanding of, the components of the business,
its performance and its challenges. In particular, the Board has spent time learning about
International Financial Reporting Standards (IFRSs), the dynamics of the housing market,
the current regulatory and competitive environment, business risks, and the use of capital.
We believe that a thorough knowledge of the business is critical in order for us to be of
assistance to management in implementing business strategy and achieving goals.
What is the Board’s focus and direction going forward?
We continue to strengthen our capital and risk management
oversight, with a focus on internal risk management controls,
policies and procedures. We also engage directly in discussions
with regulators and key stakeholders on a range of issues. I believe
our open and transparent approach serves shareholders well. By
maintaining a focus on the current environment, this Board can take
steps to position the Company for the future and be able to respond
prudently and quickly to challenges and opportunities as they arise.
This Board is hard-working, thoughtful, and stays well informed.
The Board fully supports and endorses management’s focused
strategy. We are committed to working closely with Brian and his
team to accomplish the objectives at hand.
sidney Horn
Lead Director
14
gen WOR TH MI C ana Da In C . 2011 a nnua L Re PO RT
The Board of Directors
Genworth MI Canada Inc. Board Members
(1) audit Committee
(2) Compensation and
nominating Committee
(3) Risk, Capital and
Investment Committee
(4) Lead Director
(5) Independent
Brian Hurley
Chairman
Chief Executive Officer
Sidney Horn(1)(2)(4)(5)
Robert Brannock
Mr. Hurley is Chairman of the Board and Chief
Executive Officer of the Company. Previously,
he was President, genworth International, with
responsibility for activities in Asia-Pacific, Canada
and Latin america. He joined general electric in
1981 and held various management positions
including President and CeO of genworth
Financial Mortgage Insurance Company Canada
from 1994 to 1996.
Mr. Horn has been a director of genworth Financial
Mortgage Insurance Company Canada since 1995.
He is Chair of the Compensation and nominating
Committee and is the Company’s Lead Director.
Mr. Horn is a partner at Stikeman elliott LLP and
specializes in commercial, corporate and securities
law. He is also a director of astral Media Inc. and the
Wet Seal Inc.
Mr. Brannock is President and Chief executive
Officer of Genworth Financial, Europe. He was
previously a director of genworth Financial
Mortgage Insurance Company Canada from 2007 to
2008. He joined the genworth companies in 1993
and has held various senior management positions
during his tenure.
Robert Gillespie(1)(2)(5)
Brian Kelly(1)(3)(5)
Samuel Marsico(3)
Mr. gillespie has been a director of genworth
Financial Mortgage Insurance Company Canada
since 1995. after holding numerous management
positions with general electric Canada Inc., he held
the position of Chairman and Chief Executive Officer
of general electric Canada Inc. from 1992 to 2005.
In the past, Mr. gillespie was a director of Wescam
Inc., Spinrite Income Fund and Husky Injection
Molding Systems Ltd.
Mr. Kelly has been a director of genworth Financial
Mortgage Insurance Company Canada since 2004
and Chair of its audit Committee since 2005.
Between 1972 and 1993, Mr. Kelly held various
financial management positions within several
general electric businesses, including Chief Financial
Officer of two General Electric Canada businesses.
Mr. Marsico is the Senior Vice-President and
Chief Risk Officer for Genworth Financial, Inc.,
u.S. Mortgage Insurance and International. He
joined genworth Financial Inc., Mortgage Insurance,
in August 1997 as Chief Financial Officer and
has held various senior management positions.
Mr. Marsico holds a CPa designation. Mr. Marsico
is Chair of the Risk, Capital and Investment
Committee.
Leon Roday(2)
Jerome Upton(3)
John Walker(5)
Mr. Roday is the Senior Vice-President, general
Counsel and Secretary of genworth Financial Inc.
Prior to joining genworth Financial Inc. in 1996,
he was a partner at LeBoeuf, Lamb, greene, and
McRae, a U.S. law firm, for 14 years. Mr. Roday
is a member of the new York State and Virginia
bar associations.
Mr. Upton is the Chief Operating Officer,
International Mortgage Insurance, for genworth
Financial Inc. He joined genworth Financial Inc. in
1998 from KPMg Peat Marwick and has held various
senior financial management positions, including
SVP/Chief Financial Officer, International.
Mr. Walker has been a director of genworth
Financial Mortgage Insurance Company Canada
since 1996. He is a founding partner at Walker
Sorensen LLP, specializing in advising insurance
and reinsurance companies. He has served as a
member of the board of directors of a number of
financial institutions, including TD Trust Company
and Concordia Life Insurance Company.
Genworth Financial Mortgage Insurance Company Canada Board Members
All of the people listed as being directors of Genworth MI Canada Inc. are also directors of Genworth Financial Mortgage Insurance Company Canada. In addition to such people, the following
individuals are also directors of Genworth Financial Mortgage Insurance Company Canada:
Heather Nicol
David Gibbins
Ms. nicol joined the Board of genworth Financial Mortgage
Insurance Company Canada in June 2011. She has held several
senior financial management positions, including Chief Financial
Officer for the MaRS Discovery District and Chapters Online,
as well as investment banking roles including Vice-President for
BMO nesbitt Burns (previously Burns Fry Inc.). She was also a
founding board member of Desjardins Credit union.
Mr. gibbins has been a director of genworth Financial Mortgage
Insurance Company Canada since 2007. He is also a director of
Certifi Media and Patient Care Automated Services (P.C.A.S.), two
private corporations. He has held senior financial management
positions including Managing Director, global Head, RBC Capital
Markets.
Genworth Financial Mortgage Insurance Company Canada’s Board of Directors has three (3) committees, an Audit Committee, comprised of the same members as the Company’s Audit Committee;
a Conduct Review Committee, comprised of Brian Kelly, Jerome Upton and John Walker; and a Risk, Capital and Investment Committee, comprised of the same members as the Company’s Risk,
Capital and Investment Committee.
gen WOR TH MI C ana Da I n C . 2011 a nnua L Re PORT
15
Genworth MI Canada Inc.
Shareholder information
Genworth MI Canada Inc.
2060 Winston Park Drive
Suite 300
Oakville, Ontario L6H 5R7
Tel: 905-287-5300
Fax: 905-287-5472
www.genworth.ca
Exchange listing
The Toronto Stock exchange:
Common shares (MIC)
Common shares
as at December 31, 2011, there were
98,666,796 common shares outstanding.
Independent auditor
KPMg LLP
Bay adelaide Centre
333 Bay Street, Suite 4600
Toronto, Ontario M5H 2S5
Registrar and transfer agent
Canadian Stock Transfer Company, Inc.
320 Bay Street, P.O. Box 1
Toronto, Ontario M5H 4a6
Tel: 416-643-5000
Fax: 416-643-5570
www.canstockta.com
all inquiries related to address changes,
elimination of multiple mailings, transfer of
MIC shares, dividends or other shareholder
account issues should be forwarded to the
offices of Canadian Stock Transfer Company.
Investor relations
Shareholders, security analysts and
investment professionals should direct
inquiries to:
Samantha Cheung
Vice-President, Investor Relations
samantha.cheung@genworth.com
Additional financial information has been
filed electronically with various securities
regulators in Canada through the System
for electronic Document analysis and
Retrieval (SEDAR) and with the Office of
the Superintendent of Financial Institutions
(OSFI) as the primary regulator for the
Company’s subsidiary, genworth Financial
Mortgage Insurance Company of Canada.
The Company holds a conference call
following the release of its quarterly results.
These calls are archived in the Investor
section of the Company’s website.
Annual general meeting of shareholders
Date: Thursday, June 14, 2012
Time: 10:30 a.m. (eST)
Location: Le Meridien King edward Hotel
The Belgravia Room
37 King Street east
Toronto, Ontario M5C 1e9
2011 common share dividend dates
The declaration and payment of dividends
and the amount thereof are at the discretion
of the Board, which takes into account
the Company’s financial results, capital
requirements, available cash flow and other
factors the Board considers relevant from
time to time.
Eligible dividend designation
For purposes of the dividend tax credit
rules contained in the Income Tax act
(Canada) and any corresponding provincial
or territorial tax legislation, all dividends
(and deemed dividends) paid by genworth
MI Canada Inc. to Canadian residents are
designated as eligible dividends. unless
stated otherwise, all dividends (and deemed
dividends) paid by the Company hereafter
are designated as eligible dividends for the
purposes of such rules.
Information for shareholders outside
of Canada
Dividends paid to residents in countries
with which Canada has bilateral tax treaties
are generally subject to the 15% Canadian
non-resident withholding tax. There is no
Canadian tax on gains from the sale of
shares (assuming ownership of less than
25%) or debt instruments of the Company
owned by non-residents not carrying on
business in Canada. no government in
Canada levies estate taxes or succession
duties.
Board of Directors
Complaints about the Company’s internal
accounting controls or auditing matters
or any other concerns may be addressed
directly to the Board of Directors or the
audit Committee at:
Board of Directors
genworth MI Canada Inc.
c/o Winsor Macdonell, Secretary
2060 Winston Park Drive
Suite 300
Oakville, Ontario L6H 5R7
Tel: 905-287-5484
Corporate ombudsperson
Concerns related to compliance with
the law, genworth policies or government
contracting requirements may be
directed to:
Genworth ombudsperson
2060 Winston Park Drive
Suite 300
Oakville, Ontario L6H 5R7
Tel: 905-287-5510
Canada-ombudsperson@genworth.com
Disclosure documents
Corporate governance, disclosure and other
investor information is available online
from the Investor Relations pages of the
Company’s website at http://investor.
genworthmicanada.ca.
Cautionary statements
The cautionary statements included in
the Company’s Management’s Discussion
and analysis and annual Information Form,
including the “Special note regarding
forward-looking statements” and the
“Non-IFRS financial measures,” also
apply to this annual Report and all
information and documents included
herein. These documents can be found
at www.sedar.com.
Dividend declaration dates
Declaration date
Record date
Date payable
amount per
common share
Regular dividend February 1, 2011
February 15, 2011 March 1, 2011
Regular dividend May 2, 2011
May 16, 2011
June 1, 2011
Regular dividend July 27, 2011
august 15, 2011
September 1, 2011
Regular dividend november 3, 2011 november 15, 2011 December 1, 2011
Special dividend november 3, 2011 november 15, 2011 December 1, 2011
$0.26
$0.26
$0.26
$0.29
$0.50
16
gen WOR TH MI C ana Da In C . 2011 a nnua L Re PO RT
m
o
c
.
r
i
m
b
.
w
w
w
o
s
s
e
d
a
r
I
s
l
l
i
M
n
a
y
r
B
r
i
m
b
y
b
d
e
n
g
i
s
e
D
www.genworth.ca
gen WOR TH MI C ana Da I n C . 2011 a nnua L Re PORT
We make
homeownership
possible.
17
Genworth MI Canada Inc.
2060 Winston Park Drive
Suite 300
Oakville, Ontario L6H 5R7
Tel: 905-287-5300
Fax: 905-287-5472
www.genworth.ca
FSC logo
Genworth MI Canada Inc.
2011 Financial Report
Enabling Homeownership.
Creating Value.
Genworth MI Canada Inc.
We are Canada’s leading private mortgage insurer with a history dating back to 1995. Known as Genworth Canada, “The
Homeownership Company,” we provide 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.
We are a valued business partner to lenders and have a track record of successful product and service innovations that benefit both
lenders and borrowers. Our customer-focused strategy, active risk management platform and financial strength position us well for
delivering ongoing profitability.
As of December 31, 2011, Genworth Canada had $5.4 billion in total assets and $2.7 billion in shareholders’ equity. The Company is
based in Oakville, Ontario, and has approximately 260 employees across Canada.
C O N T E N T S
1 Management’s discussion and analysis
32 Consolidated financial statements
33
Management statement on responsibility
for financial reporting
34
Independent auditors’ report to the shareholders
35 Consolidated financial statements and notes
93 Glossary
95 Five-year financial review
96 2010 and 2011 quarterly information
IBC Shareholder information
Management’s Discussion and Analysis
For the fourth quarter and year ended December 31, 2011
February 23, 2012
Genworth MI Canada Inc. (“Genworth Canada” or the “Company”) completed its initial public offering (“IPO”) on July 7, 2009.
The full three and twelve-month results and prior-period comparative results for the Company reflect the consolidation of the Company
and its subsidiaries, including Genworth Financial Mortgage Insurance Company Canada (the “Insurance Subsidiary”). The Insurance
Subsidiary is engaged in mortgage insurance in Canada and is regulated by the Office of the Superintendent of Financial Institutions
(“OSFI”) as well as financial services regulators in each province.
Management’s Discussion and Analysis
The following Management’s Discussion and Analysis (“MD&A”) of the financial condition and results of operations as approved
by the Company’s board of directors (the “Board”) is prepared for the three months and the years ended December 31, 2011 and
December 31, 2010.
Effective January 1, 2010, the Company adopted International Financial Reporting Standards (“IFRSs”). The audited condensed
consolidated annual financial statements of the Company were prepared in accordance with IFRSs. This MD&A should be read in
conjunction with these financial statements.
Interpretation
Unless the context otherwise requires, all references in this MD&A to “Genworth Canada” or the “Company” refer to Genworth MI
Canada Inc. and its subsidiaries.
Unless the context otherwise requires, all financial information is presented on an IFRSs basis.
Forward-looking statements
This document contains forward-looking statements that involve certain risks. The Company’s actual results could differ materially from these forward-looking
statements. For more information, please read “Special Note Regarding Forward-Looking Statements” at the end of this document.
Non-IFRSs financial measures
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 operating income
and return on operating income. Other non-IFRSs measures include shareholders equity excluding AOCI, insurance in force, new insurance written, MCT ratio,
delinquency ratio, severity on claims paid, operating earnings per common share (basic and diluted), book value per common share (basic and diluted; including
and excluding AOCI), dividends paid per common share, 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. See “Non-IFRSs Financial Measures” at the end of this MD&A for a reconciliation of operating income to net
income, and operating earnings per common share to earnings per common share. These measures are defined in the Company’s glossary, which is posted on the
Company’s website at http://investor.genworthmicanada.ca and can be accessed by clicking on the “Glossary of Terms” link in the Investor Resources subsection
on the left navigation bar.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
1
Management’s discussion and analysis
For the fourth quarter and year ended December 31, 2011
Overall performance
Business background
Genworth Canada is the leading private-sector residential mortgage insurer in Canada and has been providing mortgage insurance in
Canada since 1995. The Company has built a broad underwriting and distribution platform across the country that provides customer-
focused products and support services to the vast majority of Canada’s residential mortgage lenders and originators. Genworth Canada
underwrites mortgage insurance for residential properties in all provinces and territories of Canada and has the leading market share
among private mortgage insurers. The Canada Mortgage and Housing Corporation (“CMHC”), a crown corporation, is the Company’s
main competitor.
Seasonality
The mortgage insurance business is seasonal. Premiums written vary each quarter, while net premiums earned, investment income
and sales, underwriting and administrative expenses are relatively stable from quarter to quarter. The variations in premiums written
are driven by mortgage origination activity and associated mortgage insurance policies written, which typically peak in the spring
and summer months. Losses on claims vary from quarter to quarter, primarily as the result of prevailing economic conditions and
characteristics of the insurance in-force portfolio, such as size, age, seasonality and geographic mix of delinquencies. Typically, losses on
claims increase during the winter months.
Outlook
The mortgage insurance business is affected by changes in economic, employment and housing market trends. More specifically, the
housing market is affected by trends in interest rates, home price changes, mortgage origination volume, mortgage delinquencies and
changes in the regulatory environment.
The current forecast of selected economic indicators for 2011 and 2012 is presented in the table below.
Canadian economic indicators
National unemployment rate
5-year Government of Canada bond yield
Change in national average home price
2011 2012 forecast
7.5%(1)
1.28%(2)
7%(3)
7.4%(4)
2.10%(5)
0%(6)
Source:
(1) Statistics Canada Labour Force Survey – December unemployment rate (January 6, 2012).
(2) Bloomberg – 5-year Government of Canada bond yield as at December 30, 2011.
(3) Teranet – National Bank National Composite House Price IndexTM for November 2011 (January 25, 2012).
(4) Management estimate based on consensus economic forecast of the major bank economists (December 2011).
(5) RBC Financial Markets Monthly – 5-year Government of Canada bond yield forecasted as at December 31, 2012 (January 12, 2012).
(6) Management estimate based on Canadian Real Estate Association estimate for 2012 (November 15, 2011).
The Company remains focused on continuing to grow its market share by executing its customer-focused sales and service strategies.
At the same time, the Company intends to maintain a high-quality insurance portfolio through active risk management.
While the Company’s earned premiums have benefited from amortization of previous large books of business over the past several
quarters, that benefit will continue to decrease in the coming quarters as the large 2007 and 2008 books mature past their peak earnings
period, and the earned premiums from the relatively smaller 2009 and 2010 books are recognized. Unearned premiums were $1.8 billion
at December 31, 2011.
The Company anticipates that, in the upcoming quarter, losses on claims and the associated loss ratio will be impacted by the typical
seasonal increases in delinquencies during the winter months. Overall, the Company expects that its loss ratio for 2012 should remain in
the 35% to 40% range.
2
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
The Company continues to actively manage its approximately $5 billion investment portfolio. This portfolio comprises primarily highly
rated fixed income securities. The Company’s asset mix includes a small allocation to preferred shares and dividend-paying common
shares, which currently offer higher pre-tax equivalent yields. The investment portfolio is well positioned, with a relatively short portfolio
duration of 3.9 years and $437 million of maturities occurring in 2012.
The Company manages its capital to ensure capital efficiency and flexibility. At the end of the fourth quarter, the Insurance Subsidiary’s
minimum capital test (“MCT”) was 162%, or 17 points higher than its current internal target of 145%. The Company plans to maintain
its capital strength and operate above the Insurance Subsidiary’s internal target and intends to maintain a strong capital position to
provide the flexibility necessary to support its in-force insurance, to fund growth opportunities, to maintain strong credit ratings and to
optimize returns to shareholders.
With a strong financial position including $1.8 billion of unearned premiums and $2.7 billion of shareholders’ equity, the Company is
well positioned as the leading private mortgage insurer through its significant scale, execution of customer-focused sales and service
strategies, proactive risk management of its insurance portfolio, and prudent investment management.
Recent developments
On October 4, 2011, OSFI released a final guideline (the “OFSI Guidelines”) reflecting changes to the MCT originally outlined in the
December 2010 Discussion Paper on OSFI’s Proposed Changes to the Minimum Capital Test. The changes include refining the asset
risk factors applied to balance sheet assets and adding new capital charges for interest rate risk and foreign exchange risk. Interest rate
risk is the risk of economic loss resulting from changes in interest rates related to interest rate–sensitive assets and liabilities. Foreign
exchange risk is the risk of loss resulting from fluctuations in currency exchange rates. The estimated impact of these changes as at
January 1, 2012 is approximately seven points reduction in the MCT ratio to 155%. The ultimate impact of these changes may increase
or decrease subject to future regulatory developments. The Company expects that it will continue to exceed its internal MCT ratio target
of 145% following the changes set out in the OFSI Guideline that took effect on January 1, 2012.
On June 26, 2011, the Protection of Residential Mortgage or Hypothecary Insurance Act (“PRMHIA”) was passed by Parliament. The
stated purposes of the PRMHIA are “(a) to authorize the Minister to provide protection in respect of certain mortgage or hypothecary
insurance contracts in order to support the efficient functioning of the housing finance market and the stability of the financial system in
Canada; and (b) to mitigate the risks arising from the provision of that protection.”(1)
While the PRMHIA does not change the level of government guarantee provided on privately insured mortgages, it formalizes in
legislation the existing mortgage insurance arrangements with private mortgage insurers, including the rules for government-backed
insured mortgages and the terms for the existing agreement between the Insurance Subsidiary and the Canadian government (the
“Government Guarantee Agreement”). The Government Guarantee Agreement will terminate when the provisions of PRMHIA come
into force. The provisions of the PRMHIA come into force when the regulations referenced in the legislation are finalized.
(1) Protection of Residential Mortgage or Hypothecary Insurance Act, S.C. 2011, c.15, s.20.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
3
Management’s discussion and analysis
For the fourth quarter and year ended December 31, 2011
The key provisions of the PRMHIA are as follows:
•
•
The Company can only insure risk in respect of eligible mortgage loans and other risks as permitted by regulations.
The government can establish by regulation various criteria for approved mortgage insurers. This includes, but is not limited to, the
fee that the insurer will pay for the guarantee, the reinsurance activities that can be conducted, business activities beyond insuring
eligible mortgages, and information made available to the public.
•
The Company’s existing Government Guarantee Agreement will terminate when the PRMHIA becomes effective. All risks covered
by the Government Guarantee Agreement will continue to be covered under the PRMHIA.
• Upon termination of the Government Guarantee Agreement, the government guarantee fund will no longer exist. All investments
and money held in the guarantee fund will revert to the Company. It is anticipated that the Company will pay a fee to the
Government of Canada similar to the risk premium paid under the existing Government Guarantee Agreement. At present, the
government guarantee fund (net of the related deferred tax impact) is deducted from capital available for MCT purposes.
•
The Minister of Finance may require the Company to maintain capital above that required to be maintained under the Insurance
Companies Act (the “ICA”).
While the Company does not anticipate any significant changes to its current or future business prospects as a result of the legislative
change to the Government Guarantee Agreement, a full assessment of the impact on the Company’s business cannot be completed
until the regulations referenced in the legislation have been finalized.
Results of operations
This is the fourth quarter that the Company has reported its unaudited financial results in accordance with IFRSs. Certain accounting
and measurement methods previously applied under Canadian generally accepted accounting principles (“Canadian GAAP”) were
amended to comply with IFRSs. To date, the transition to IFRSs has not increased or decreased the volatility of financial results relative
to Canadian GAAP. The Company is monitoring developments in standards, notably IFRS 4 – Insurance Contracts (“IFRS 4”), that may
introduce volatility to financial results in the future. A detailed discussion of the impact of the transition from Canadian GAAP to IFRSs
can be found in the “Changes in Accounting Policies” section of this MD&A.
4
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
The following table sets forth certain financial information for the three and twelve months ended December 31, 2011 and 2010.
(in millions, unless otherwise specified)
Income statement data
Net premiums written
Net premiums earned
Losses on claims and expenses:
Losses on claims
Expenses
Total losses on claims and expenses
Net underwriting income
Net investment income
Interest expense
Income before income taxes
Net income
Net operating income1
Selected ratios and other items
Insurance in force
New insurance written
Loss ratio
Expense ratio
Combined ratio
Operating return on equity(1)
MCT ratio
Delinquency ratio
Severity on claims paid
Earnings per common share (basic)
Earnings per common share (diluted)
Operating earnings per common share (basic)1
Operating earnings per common share (diluted)1
For the quarter ended Dec. 31,
For the twelve months
ended Dec. 31,
2011
2010
2011
2010
$
123
$
134
$
533
$
156
156
62
26
88
68
43
(6)
106
79
50
28
78
78
44
(4)
118
85
612
225
101
326
287
179
(23)
443
323
552
621
206
103
309
312
183
(8)
486
348
$
79
$
84
$
318
$
343
$ 265,776
6,224
39%
17%
56%
13%
162%
0.20%
31%
0.80
0.80
0.80
0.80
$
$
$
$
$ 244,725
6,537
32%
18%
50%
14%
156%
0.26%
30%
0.81
0.80
0.81
0.80
$
$
$
$
$ 265,776
26,586
37%
17%
53%
13%
162%
0.20%
32%
3.18
3.17
3.13
3.12
$
$
$
$
$ 244,725
27,468
33%
17%
50%
14%
156%
0.26%
27%
3.08
3.05
3.04
3.01
$
$
$
$
Weighted average number of common shares outstanding
Basic
Diluted
98,666,796 104,789,394
98,890,074 105,908,690
101,686,715
102,003,573
112,850,311
113,940,471
Notes: Amounts may not total due to rounding.
(1)
This is a financial measure not calculated based on IFRSs. See the “Non-IFRSs Financial Measures” section at the end of this MD&A for additional information.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
5
Management’s discussion and analysis
For the fourth quarter and year ended December 31, 2011
The following tables set forth the impact of transition to IFRSs on net income and net operating income for the three and twelve months
ended December 31, 2010. A detailed discussion of the impact of the transition from Canadian GAAP to IFRSs can be found in the
“Changes in Accounting Policies” section of this MD&A.
(in thousands)
Canadian GAAP net income
Employee future benefits – prior service costs
Employee future benefits – net actuarial gains or losses
Share-based compensation
Tax impact of above changes
Tax adjustment – treatment of IPO expenses
Total impact of transition to IFRSs
IFRSs net income
(in thousands)
Net operating income reported under Canadian GAAP
Total impact of transition to IFRSs
Net operating income reported under IFRSs
Fourth quarter highlights
Compared to the fourth quarter of 2010:
For the quarter
ended Dec. 31, 2010
For the twelve months
ended Dec. 31, 2010
$ 84,328
62
3
638
(207)
—
496
$ 84,824
$ 348,726
245
15
698
(282)
(1,420)
(744)
$ 347,982
For the quarter
ended Dec. 31, 2010
For the twelve months
ended Dec. 31, 2010
$ 83,951
496
$ 84,447
$ 343,448
(744)
$ 342,704
• Net income decreased by $6 million, or 7%, and net operating income decreased by $5 million, or 6%, to $79 million. These
decreases were attributable primarily to an increase in losses on claims.
• Net premiums written decreased by $11 million, or 8%, to $123 million, which the Company believes was due to a smaller
•
•
residential housing market.
Premiums earned were flat at $156 million.
Losses on claims increased by $11 million, or 22%, to $62 million, primarily as the result of reserve strengthening on the existing
delinquencies from the 2007 and 2008 books, particularly in Alberta, which was partially offset by an accrual for expected recoveries.
•
The MCT ratio was 162%, an increase of six points, primarily due to the increase in retained earnings from the Company’s
continued profitability and the net increase in unrealized gains of the investment portfolio.
•
The transition to IFRSs did not have a material impact on the Company’s financial results or key ratios.
6
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
The following table sets forth the quarterly results of operations for the Company’s business:
(in millions, unless otherwise specified)
Net premiums written
Net premiums earned
Losses on claims and expenses:
Losses on claims
Expenses
Total losses on claims and expenses
Net underwriting income
Investment income:
Interest and dividend income, net of investment expenses
Net gains on investments(1)
Guarantee fund earnings
Total investment income
Interest expense
Income before income taxes
Provision for income taxes
Net income
Adjustment to net income:
Net gains on investments, net of taxes
Net operating income
Effective tax rate
Operating return on equity
For the quarter ended
December 31,
Increase (decrease) and
percentage change
2011
2010(2)
Q4’11 vs. Q4’10
$
$
123
156
$
$
134
156
$
$
62
26
88
68
42
1
—
43
(6)
106
26
79
—
50
28
78
78
43
1
1
44
(4)
118
33
85
(1)
$
79
$
84
$
25%
13%
28%
14%
(11)
—
11
(2)
10
(8)%
0%
22%
(7)%
13%
(10)
(13)%
(1)
—
(1)
(1)
2
(12)
(7)
(6)
(1)
(5)
—
—
(2)%
0%
NM
(2)%
50%
(10)%
(21)%
(7)%
NM
(6)%
(3) pts
(1) pts
Notes: Amounts may not total due to rounding. The Company defines NM as “not meaningful” for increases or decreases greater than 100%.
(1)
(2) Detailed discussion of the impact of transition from Canadian GAAP to IFRSs can be found in the “Changes in Accounting Policies” section of this MD&A.
Includes net realized gains (losses) on sale of available-for-sale investments and change in unrealized gains (losses) on fair value through profit or loss (FVTPL) investments.
Fourth quarter 2011 compared to fourth quarter 2010
New insurance written on high loan-to-value mortgages decreased by $0.5 billion, or 9%, to $5.2 billion in the fourth quarter of 2011
as compared to the prior year’s period, primarily due to a $0.8 billion decrease in new insurance written on refinance transactions.
New insurance written on purchase transactions of high loan-to-value mortgages increased by $0.3 billion, or 6%, to $4.2 billion. As
compared to the prior year’s period, the Company believes new insurance written was impacted by a smaller residential housing
market, particularly for high loan-to-value refinance transactions, which the Company believes was related to the government guarantee
product changes that reduced the maximum amortization from 35 to 30 years and reduced the maximum loan-to-value ratio on refinance
transactions from 90% to 85%.
Net premiums written decreased by $11 million, or 8%, to $123 million in the fourth quarter of 2011 as compared to the prior year’s
period. Improved market penetration was offset by lower new insurance written for high loan-to-value mortgages, resulting from a
smaller residential housing market this quarter as compared to the prior year’s period. Premiums from low loan-to-value mortgages of
$5 million were comparable to those of the prior year’s period.
Net premiums earned were flat at $156 million in the fourth quarter of 2011 as compared to the prior year’s period as declining earnings
from the large 2007 and 2008 books were offset by the increasing earnings from the smaller 2010 and 2011 books. Net premiums
earned included $13 million of additional premiums earned, resulting from the quarterly update to the premium recognition curve,
consistent with the prior year’s period.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
7
Management’s discussion and analysis
For the fourth quarter and year ended December 31, 2011
Losses on claims increased by $11 million, or 22%, to $62 million, as compared to the prior year’s period. The Company continues to
realize savings from its loss mitigation programs, including workout and asset management initiatives. During the three months ended
December 31, 2011, loss reserves were strengthened to reflect continued pressure and the resulting increase in severity, primarily from
the 2007 and 2008 books, particularly in Alberta.
The reserve strengthening was partially offset by a $21 million accrual for expected recoveries related to paid claims and loss reserves
that decreased losses on claims and increased salvage and subrogation recoverable. When claims are paid, the Company typically
obtains a legally enforceable judgment against the borrowers for the amount of the loss incurred. The Company actively engages in
collection activities to recover monies from borrowers under these judgments and has built a history of successful collection activities
over the past three years. As a result, the Company can now reliably estimate the expected recovery rate and recorded a $21 million
accrual for recoveries.
Expenses decreased by $2 million, or 7%, to $26 million, as compared to the prior year’s period, primarily as a result of lower stock-
based compensation expense and lower professional fees.
Total investment income, including guarantee fund earnings and net investment gains, decreased by $1 million, or 2%, to $43 million
in the fourth quarter of 2011 as compared to the prior year’s period. Interest and dividend income from the general investment
portfolio decreased by $1 million, or 2%, to $42 million as a $1 million increase in dividend income in the current quarter was offset
by a $2 million decrease in interest income, partially the result of additional income from a bond call in the comparative period. While
investment income declined, as compared to the prior year’s period, the pre-tax equivalent book yield increased to 4.3%, as compared
to 4.2% in the prior year’s period, primarily due to the favourable impact of the increase in non-taxable dividend income in the fourth
quarter of 2011. Net investments gains were $1 million in the fourth quarter of 2011, due to modest equity portfolio repositioning, as
compared to net investment gains of $1 million in the fourth quarter of 2010, arising primarily from the recovery in market value of
FVTPL investments in 2010.
Interest expense increased by $2 million, or 50%, to $6 million in the three months ended December 31, 2011, as compared to the prior
year’s period, as a result of a $150 million increase in debt outstanding on December 16, 2010. The $150 million debt was outstanding
during the full period in the three months ended December 31, 2011, as compared to only 15 days in the prior year’s period.
The effective tax rate decreased by three points to 25% in the fourth quarter ended December 31, 2011 as compared to the prior year’s
period. This decrease is primarily the result of lower substantively enacted income tax rates in 2011 compared to 2010 and an increase
in non-taxable dividend income.
2011 highlights
Compared to the twelve months ended December 31, 2010:
• Net income and net operating income decreased by 7% to $323 million and $318 million, respectively, attributable primarily to
higher losses on claims, lower earned premium and a full year of interest expense related to the debentures issued in the second
and fourth quarters of 2010.
• Net premiums written decreased by 3% to $533 million, which the Company believes was the result of improved market
penetration offset by a smaller residential housing market.
•
Premiums earned decreased by 1% to $612 million as the contribution to earned premium from the large 2007 and 2008 books
decreased, partially offset by an increased contribution to earned premium from the smaller 2010 and 2011 books.
•
Losses on claims increased by 9% to $225 million, due primarily to a higher average claim size for Alberta delinquencies from the
2007 and 2008 books and reserve strengthening in the fourth quarter of 2011, which was partially offset by an accrual for expected
recoveries.
•
The MCT ratio was 162%, an increase of six points, primarily due to the increase in retained earnings from the Company’s
continued profitability and an increase in net unrealized gains on the investment portfolio.
•
The transition to IFRSs did not have a material impact on the Company’s financial results or key ratios.
8
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
The following table sets forth the results of operations for the Company’s business:
(in millions, unless otherwise specified)
Net premiums written
Net premiums earned
Losses on claims and expenses:
Losses on claims
Expenses
Total losses on claims and expenses
Net underwriting income
Investment income:
Interest and dividend income, net of investment expenses
Net gains on investments(1)
Guarantee fund earnings
Total investment income
Interest expense
Income before income taxes
Provision for income taxes
Net income
Adjustment to net income:
Net gains on investments, net of taxes
Net operating income
Effective tax rate
Operating return on equity
For the twelve months ended
December 31
Increase (decrease) and
percentage change
2011
2010(2)
2011 vs. 2010
$
$
$
$
533
612
225
101
326
287
169
7
3
179
(23)
443
120
323
(5)
$
$
552
621
206
103
309
312
172
8
4
183
(8)
486
138
348
(5)
$
318
$
343
$
27%
13%
28%
14%
(19)
(9)
19
(2)
17
(25)
(3)
(1)
(1)
(4)
15
(43)
(18)
(25)
—
(25)
—
—
(3)%
(1)%
9%
(2)%
6%
(8)%
(2)%
(13)%
(25)%
(2)%
NM
(9)%
(13)%
(7)%
0%
(7)%
(1) pts
(1) pts
Notes: Amounts may not total due to rounding. The Company defines NM as “not meaningful” for increases or decreases greater than 100%.
(1)
(2) Detailed discussion of the impact of transition from Canadian GAAP to IFRSs can be found in the “Changes in Accounting Policies” section of this MD&A.
Includes net realized gains (losses) on sale of available-for-sale investments and change in unrealized losses on fair value through profit or loss (FVTPL) investments.
Full year 2011 compared to full year 2010
New insurance written on high loan-to-value mortgages decreased by $1.3 billion, or 6%, to $22 billion in the twelve months ended
December 31, 2011 as compared to the prior year’s period, primarily due to a $1.8 billion decrease in new insurance written on refinance
transactions. New insurance written on purchase transactions of high loan-to-value mortgages marginally increased by $0.5 billion, or
3%, to $17 billion, as compared to the prior year’s period. The Company believes that improved market penetration was offset by a
smaller residential housing market, particularly for high loan-to-value refinance transactions, which the Company believes was related
to the government guarantee product changes, in March and April 2011, which reduced the maximum amortization from 35 to 30 years
and reduced the maximum loan-to-value ratio on refinance transactions from 90% to 85%.
Net premiums written decreased by $19 million, or 3%, to $533 million in the twelve months ended December 31, 2011 as compared to
the prior year’s period. Improved market penetration, as estimated by the Company, was offset by a smaller residential housing market
for high loan-to-value transactions, primarily fewer refinance transactions, for a net decrease of $23 million on the Company’s high loan-
to-value business as compared to the prior year’s period. Offsetting this decrease, the Company’s low loan-to-value business increased
by $4 million as compared to the prior year’s period.
Net premiums earned decreased by $9 million, or 1%, to $612 million in the twelve months ended December 31, 2011 as compared
to the prior year’s period, as the large 2007 and 2008 books contributed less to premiums earned, partially offset by an increased
contribution from the smaller 2010 and 2011 books. Net premiums earned included $39 million of additional premiums earned, resulting
from quarterly updates to the premium recognition curve, as compared to $48 million in the prior year’s period.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
9
Management’s discussion and analysis
For the fourth quarter and year ended December 31, 2011
Losses on claims increased by $19 million, or 9%, to $225 million in the twelve months ended December 31, 2011 as compared
to the prior year’s period. The Company continues to realize savings from its loss mitigation programs, including workout and asset
management initiatives. During the twelve months ended December 31, 2011, loss reserves were strengthened to reflect increased
severity primarily from the 2007 and 2008 books, particularly in Alberta, which offset the benefits from improved housing and job
markets in the rest of Canada. The Company believes that the Alberta housing market has improved over the last twelve months but
remains a buyer’s market. As a result, the average paid claim severity in Alberta remains elevated at $103,000, and the average paid
claim severity on a national basis increased by five points to 32%. The reserve strengthening on existing delinquencies was offset by an
11% decline in the number of net new delinquencies in 2011, as compared to the prior year’s period, and an adjustment for expected
recoveries, which resulted in a $21 million decrease to losses on claims and a corresponding increase to subrogation recoverable.
Expenses decreased by $2 million, or 2%, to $101 million in the twelve months ended December 31, 2011, as compared to the prior
year’s period, as lower stock-based compensation expense offset higher expenses from lower net deferred policy acquisition costs.
Total investment income, including government guarantee fund earnings and net investment gains, decreased by $4 million, or 2%, to
$179 million in the twelve months ended December 31, 2011 as compared to the prior year’s period. Interest and dividend income from
the general portfolio decreased by $3 million, or 2%, to $169 million as compared to the prior year’s period. An increase of $6 million
in dividend income in the twelve months ended December 31, 2011 was offset by a decrease of approximately $9 million in interest
income driven by reinvestment rate pressures. While investment income declined as compared to the prior year’s period, the pre-tax
equivalent book yield increased to 4.3%, as compared to 4.1% in the prior year’s period, due primarily to the favourable impact of the
increase in non-taxable dividend income. Government guarantee fund earnings decreased by $1 million as compared to the prior year’s
period, primarily due to the increase in exit fees as compared to the prior year’s period. Net investments gains were $7 million for the
twelve months ended December 31, 2011, due to modest equity portfolio repositioning and the recovery of the FVTPL investments that
were sold in the second quarter of 2011, as compared to net investment gains of $8 million for the twelve months ended December 31,
2010, due to modest realized gains and the recovery of FVTPL investments in 2010.
Interest expense increased by $15 million in the twelve months ended December 31, 2011, to $23 million as a result of the issuance of
$275 million in debt on June 29, 2010 and $150 million in debt on December 16, 2010. During 2011, the debt was outstanding during
the full annual period.
The effective tax rate decreased by one point to 27% in the twelve months ended December 31, 2011 as compared to the prior year’s
period. This decrease is primarily the result of lower substantively enacted income tax rates in 2011 and an increase in non-taxable
dividend income in 2011, partially offset by a favourable $5 million adjustment in 2010 realized upon filing of the 2009 year-end tax return
and a further favourable adjustment of $4 million in 2010 resulting from a decrease in substantively enacted income tax rates applicable
to the Company’s deferred taxes. Income taxes for the twelve months ended December 31, 2011 include $2 million of additional tax
expense related to an adjustment in the tax rate used to calculate deferred taxes related to the government guarantee fund.
Loss and expense ratios
The following table sets forth selected ratios for the three and twelve months ended December 31, 2011 and 2010:
For the quarter ended
December 31
Increase/
(decrease)
For the twelve months ended
December 31
Increase/
(decrease)
2011
39%
17%
56%
2010 Q4’11 vs. Q4’10
32%
18%
50%
7 pts
(1) pt
6 pts
2011
37%
17%
53%
2010
2011 vs. 2010
33%
17%
50%
4 pts
—
3 pts
Loss ratio
Expense ratio
Combined ratio
Note: Amounts may not total due to rounding.
10
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
Three months ended December 31, 2011 compared to three months ended December 31, 2010
The loss ratio increased by seven points to 39% for the quarter ended December 31, 2011 as compared to the prior year’s period,
primarily as a result of reserve strengthening partially offset by an accrual for expected recoveries.
The expense ratio decreased by one point to 17% for the quarter ended December 31, 2011 as compared to the prior year’s period. The
decrease was primarily the result of lower stock-based compensation expense and professional fees.
Full year ended December 31, 2011 compared to full year ended December 31, 2010
The loss ratio increased by four points for the twelve months ended December 31, 2011 as compared to the prior year’s period, primarily
due to reserve strengthening and Alberta loss pressure partially offset by an accrual for expected recoveries.
The expense ratio remained flat at 17% for the twelve months ended December 31, 2011 as compared to the prior year’s period. A
decrease in stock-based compensation expense was offset by higher expenses from lower net deferred policy acquisition costs.
Statement of financial position highlights and selected financial data
(in millions, unless otherwise specified)
Investments:
General portfolio
Government guarantee fund
Other assets
Total assets
Unearned premium reserves
Loss reserves
Long-term debt
Other liabilities
Total liabilities
Shareholders’ equity excluding AOCI
Accumulated other comprehensive income (“AOCI”)
Shareholders’ equity
Total liabilities and shareholders’ equity
Selected ratios
MCT ratio
Book value per common share
Book value per common share including AOCI (basic)
Book value per common share excluding AOCI (basic)
Number of common shares outstanding (basic)(1)
Book value per common share including AOCI (diluted)
Book value per common share excluding AOCI (diluted)
Number of common shares outstanding (diluted)(1)
Dividends paid per common share during the year(2)
As at
December 31,
As at
December 31,
Increase (decrease) and
percentage change
2011
2010(3)
2011 vs. 2010
$
$
4,332
731
330
5,393
1,824
169
422
295
2,710
2,468
215
2,683
5,393
$
$
4,490
646
262
5,398
1,902
207
422
279
2,810
2,464
124
2,589
5,398
$
$
(157)
85
68
(5)
(78)
(38)
—
16
(100)
4
91
94
(5)
(3)%
13%
26%
0%
(4)%
(18)%
—
6%
(4)%
0%
73%
4%
0%
162%
156%
—
6 pts
$
$
27.19
25.02
24.70
$
23.52
$
98,666,796 104,789,394
24.44
$
23.27
$
99,584,424 105,907,205
0.92
$
26.94
24.78
1.57
$
$
$
2.49
$
$
1.50
(6,122,598)
2.50
$
1.51
$
(6,322,781)
0.65
$
10%
6%
(6)%
10%
6%
(6)%
71%
Notes: Amounts may not total due to rounding. The Company defines NM as “not meaningful” for increases or decreases greater than 100%.
(1) The difference between basic and diluted number of common shares outstanding is caused by the potentially dilutive impact of the grant of share-based compensation units.
(2) Dividends paid per common share reflect payment for the years ended December 31, 2011 and December 31, 2010. The fourth quarter 2011 included a special dividend of $0.50.
(3)
Certain accounting and measurement methods previously applied under Canadian GAAP were amended to comply with IFRSs. The comparative figures for 2010 have been restated to
reflect these adjustments. A detailed discussion of the impact of transition from Canadian GAAP to IFRSs can be found in the “Changes in Accounting Policies” section of this MD&A.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
11
Management’s discussion and analysis
For the fourth quarter and year ended December 31, 2011
The table below shows the one-year development of the Company’s loss reserves for the five most recent completed years.
Reserve Development Analysis
(in millions, unless otherwise specified)
Total loss reserves, at the beginning of the year
Paid claims for prior years’ delinquent loans
Loss reserves for prior years’ delinquent loans,
at the end of the year (A)
Favourable (unfavourable) development
As a percentage of beginning loss reserves
Loss reserves for current year’s delinquent loans,
at the end of the year (B)
Total loss reserves at the end of the year (–A+B)
Note: Amounts may not total due to rounding.
As at
Dec. 31,
As at
Dec. 31,
As at
Dec. 31,
$
$
2010
236
(200)
(67)
(31)
(13)%
$
$
2009
172
(160)
(71)
(59)
(34)%
$
$
2011
207
(214)
(45)
(52)
(25)%
124
169
$
$
$
As at
Dec. 31,
2008
89
(67)
(33)
(11)
(13)%
$
$
As at
Dec. 31,
2007
66
(36)
(7)
23
35%
82
89
140
166
139
$
207
$
236
$
172
$
The Company experienced adverse reserve development in 2011 of $52 million, or 25% of the opening unpaid claims balance, due
primarily to higher claims severity, particularly in Alberta, and a higher number of incurred but not reported claims. The Company’s loss-
reserving methodology is reviewed on a quarterly basis and incorporates the most currently available information.
Financial instruments and other instruments
Portfolio of invested assets
As of December 31, 2011, the Company had total cash, cash equivalents and invested assets of $4.3 billion in the general portfolio and
$731 million in the government guarantee fund established under the Government Guarantee Agreement. Unrealized gains on available-
for-sale (“AFS”) securities were $250 million in the general portfolio and $67 million in the government guarantee fund.
12
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
The following tables provide the diversification of assets by asset class and credit rating in each of the two portfolios.
Asset Class
(in millions, unless otherwise specified)
Fair value
%
Unrealized
gains
Fair value
%
As at December 31, 2011
As at December 31, 2010
General portfolio
AFS
Asset-backed securities
Corporate fixed income
Financials
Energy
Infrastructure
All other sectors
Total corporate fixed income
Short-term federal T-bills
Federal fixed income
Provincial fixed income
Total government fixed income
Preferred shares
Financials
Industrial
Energy
Total preferred shares
Common shares
Energy
Financials
Communication
All other sectors
Total common shares
Fair value through profit and loss (“FVTPL”)
Other invested assets
Total invested assets
Cash and cash equivalents
$
168
4%
$
9
$
252
1,253
308
258
384
2,203
46
808
810
1,618
12
1
10
23
65
26
40
70
202
—
4,260
72
29%
7%
6%
9%
51%
1%
18%
19%
37%
1%
0%
0%
1%
1%
1%
1%
1%
5%
0%
98%
2%
72
22
21
24
139
—
37
65
102
—
—
—
—
—
(1)
—
2
1
—
250
—
1,231
302
252
309
2,095
7
944
607
1,551
67
1
9
77
45
19
22
32
118
38
4,138
351
6%
27%
7%
6%
7%
47%
0%
21%
13%
34%
1%
0%
0%
2%
1%
0%
0%
1%
3%
1%
92%
8%
Total invested assets and cash – general portfolio
$
4,332
100%
$
250
$
4,490
100%
Government guarantee fund
Federal fixed income – AFS
Cash and cash equivalents
Total invested assets and cash – guarantee fund
Accrued income and contributions
Accrued exit fees and due to others
Net guarantee fund assets
Total invested assets and cash
$
$
$
$
908
1
909
16
(194)
731
5,063
100%
0%
$
100%
$
$
$
67(1) $
—
67
—
67
317
$
$
$
779
11
790
18
(162)
646
5,135
Note: Amounts may not total due to rounding.
(1) The $67 million unrealized gain is gross of the $14 million of market value related primarily to exit fees.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
99%
1%
100%
13
Management’s discussion and analysis
For the fourth quarter and year ended December 31, 2011
Credit Rating – General Portfolio (Excluding Common Shares)
(in millions, unless otherwise specified)
Cash and cash equivalents
AAA
AA
A
BBB
Below BBB
$
Fair value
72
1,254
1,509
1,140
155
—
As at December 31, 2011
As at December 31, 2010
%
2%
30%
37%
28%
4%
—
Unrealized
gains
Fair value
$
$
—
60
113
69
7
—
351
1,337
1,427
1,134
122
—
%
8%
30%
33%
26%
3%
—
Total invested assets and cash (excluding common shares) $
4,130
100%
$
249
$
4,371
100%
Note: Amounts may not total due to rounding.
General portfolio
The Company manages its general portfolio assets to meet liquidity, credit quality, diversification and yield objectives by investing
primarily in fixed income securities, including federal and provincial government bonds and corporate bonds, which include asset-backed
securities and mortgage loans on commercial real estate. The Company also holds other invested assets, which include short-term
investments, preferred shares and common shares. In all cases, investments are required to comply with restrictions imposed by laws
and insurance regulatory authorities as well as the Company’s investment policy, which has been approved by the Board.
To diversify management styles and to broaden credit resources, the Company has split these assets between two external Canadian
investment managers. The Company works with these managers to optimize the performance of the portfolios within the stated
investment objectives outlined in its investment policy. The policy takes into account the current and expected condition of capital
markets, the historical return profiles of various asset classes and the variability of those returns over time, the availability of assets,
diversification needs and benefits, regulatory capital required to support the various asset types, security ratings and other material
variables likely to affect the overall performance of the Company’s investment portfolio. Compliance with the investment policy is
monitored by the Company and reviewed at least quarterly with the Company’s management-level investment committee and the Risk,
Capital and Investment Committee of the Board.
As at the end of the fourth quarter 2011, the investment portfolio had duration of 3.9 years.
Cash and cash equivalents
Cash and cash equivalents consist primarily of cash in bank accounts and government treasury bills with original maturities of 90 days or
less. The Company determines its target cash holdings based on near-term liquidity needs, market conditions and perceived favourable
future investment opportunities. The Company’s cash holdings decreased from $351 million as of December 31, 2010 to $72 million
as of December 31, 2011, or 79%. The decrease is attributed mainly to the $160 million substantial issuer bid that was completed on
June 30, 2011 and to dividend payments made during the year.
Federal and provincial government fixed income securities
The Company’s investment policy requires that a minimum of 30% of the investment portfolio be invested in sovereign fixed income
securities. As of December 31, 2011, 18% of the portfolio was invested in federal securities, down from 21% at the end of 2010.
Provincial holdings were 19% of the portfolio, up from 13% at the end of 2010.
14
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
Corporate fixed income securities
Allocations to corporate fixed income securities are determined based on their relative value to federal government fixed income
securities and adjusted for the carrying charge for the increased capital holdings required under regulations set by OSFI. As of
December 31, 2011, approximately 51% of the investment portfolio was held in corporate fixed income securities, up by 4% from 47%
as at the end of 2010. Securities rated below A were $155 million, or 4% of invested assets, as of December 31, 2011. The investment
policy limits the percentage of the portfolio that can be invested in any single issuer or group of related issuers.
Financial sector exposure represents 29% of the general portfolio, or approximately 57% of the corporate fixed income securities, as
financial institutions represent greater than 50% of the corporate issuances of fixed income securities in the Canadian marketplace. The
Company continuously monitors and repositions its exposure to the financial services sector.
Asset-backed securities
The Company has invested approximately 4% of the general portfolio in a combination of consumer finance securitizations and
commercial mortgage-backed securities to provide yield enhancement. As of December 31, 2011, all of these securities were rated AAA.
Common shares
The Company has $202 million invested in high dividend-yield common shares as of December 31, 2011, representing 5% of the
general portfolio. Approximately one-third of the common shares purchased were issued by the Canadian energy sector. The remaining
balance was issued primarily by the financial and communications sectors.
Preferred shares
The Company has $23 million invested in preferred shares as of December 31, 2011, representing 1% of the general portfolio.
Approximately 52% of the preferred shares were issued by Canadian financial institutions. The Company’s investment guidelines require
that preferred shares be rated P-1 or P-2 at the time of purchase.
Government guarantee fund assets
In accordance with the terms of the Government Guarantee Agreement, all funds deposited into the government guarantee fund are
held in a revenue trust account separate from all other assets of the Company. On the Company’s financial statements, government
guarantee fund assets reflect the Company’s interest in the assets held in the government guarantee fund, including accrued income
and net of exit fees. The assets of the government guarantee fund are permitted to be invested in cash and securities issued by the
Government of Canada or agencies unconditionally guaranteed by the Government of Canada. The government guarantee fund will be
eliminated when the PRMHIA comes into force.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
15
Management’s discussion and analysis
For the fourth quarter and year ended December 31, 2011
Summary of quarterly results
The table shown below presents select income statement line items and certain key performance indicators for the last eight quarters.
(in millions, unless otherwise specified)
Q4’11
Q3’11
Q2’11
IFRSs(1)
Q1’11
Q4’10
Q3’10
Q2’10
Q1’10
Net premiums written
$ 123
$
160
$
149
$
101
$
134
$
166
$
157
$
94
Net premiums earned
Losses on claims
Net underwriting income
Investment income,
including net gains(2)
Net income
Adjustment to net income:
Losses (gains) on investments,
net of taxes
Net operating income
$
Selected ratios:
Loss ratio
Expense ratio
Combined ratio
Earnings per common
share (basic)
Earnings per common
share (diluted)
Operating earnings per
common share (basic)
Operating earnings per
common share (diluted)
Operating return on equity
156
62
68
43
79
—
79
39%
17%
56%
149
54
71
45
81
151
50
77
45
83
155
59
71
46
80
156
50
78
44
85
155
47
83
49
94
(1)
(2)
(2)
$
80
$
81
$
78
$
(1)
84
(3)
$
91
$
36%
16%
52%
33%
16%
49%
38%
17%
55%
32%
18%
50%
30%
17%
47%
154
49
80
41
85
1
86
32%
16%
48%
156
59
71
49
84
(3)
82
$
38%
16%
55%
$ 0.80
$
0.82
$
0.79
$
0.77
$
0.81
$ 0.83
$
0.73
$ 0.72
$ 0.80
$
0.82
$
0.79
$
0.76
$
0.80
$ 0.83
$
0.72
$ 0.71
$ 0.80
$
0.81
$
0.78
$
0.75
$
0.81
$ 0.81
$
0.73
$ 0.70
$ 0.80
13%
$
0.81
13%
$
$
0.77
13%
0.74
13%
$
0.80
14%
$ 0.80
14%
$
0.72
13%
$ 0.69
13%
Note: Amounts may not total due to rounding.
(1)
Certain accounting and measurement methods previously applied under Canadian GAAP were amended to comply with IFRSs. The comparative figures for 2010 have been restated to
reflect these adjustments. A detailed discussion of the impact of transition from Canadian GAAP to IFRSs can be found in the “Changes in Accounting Policies” section of this MD&A.
Includes realized gain (loss) on sale of AFS and change in unrealized gain (loss) on FVTPL investments.
(2)
Liquidity
The purpose of liquidity management is to ensure there is sufficient cash to meet all of the Company’s financial commitments and
obligations as they fall due. The Company believes it has the flexibility to obtain, from current cash holdings and ongoing operations,
the funds needed to fulfill its cash requirements during the current financial year and to satisfy regulatory capital requirements. The
Company maintains a portion of its investment portfolio in cash and liquid securities to meet working capital requirements and other
financial commitments. At December 31, 2011, the Company held liquid assets of $451 million maturing within one year, including
$72 million in cash and the remaining in bonds and debentures and short-term investments.
The Company has five primary sources of funds, consisting of premiums written from operations, investment income, cash and
short-term investments, investment maturities or sales, and proceeds from the issuance of debt and equity. In addition, 37%, or
$1,618 million, of the Company’s investment portfolio comprises federal and provincial government securities for which there is a
highly liquid market. Funds are used primarily for operating expenses, claims payments, and interest expense, as well as dividends
and other distributions to shareholders.
16
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
As of December 31, 2011, the Company carried 2%, or $72 million, of its invested assets as cash and cash equivalents.
The Company leases office space, office equipment, computer equipment and automobiles. Future minimum rental commitments for
non-cancellable leases with initial or remaining terms of one year or more consist of the following at December 31, 2011:
Contractual obligations
Payment dates due by period (in thousands)
Long-term debt
Capital lease obligations
Operating leases
Purchase obligations
Other long-term obligations
Total contractual obligations
Total
Less than
1 year
$
$ 425,000
—
10,175
—
—
$
—
—
2,223
—
—
1–3
years
—
—
3,553
—
—
4–5
years
After 5
years
$ 150,000 $ 275,000
—
1,307
—
—
—
3,092
—
—
$ 435,175
$ 2,223
$ 3,553
$ 153,092 $ 276,307
Operating lease expense for the year ended December 31, 2011 was $2,890 (2010 – $2,754).
Debt outstanding
The following table provides details of the Company’s long-term debt:
Date issued
Maturity date
Principal amount outstanding (in millions)
Fixed annual rate
Semi-annual interest payments due each year on
Series 1
Series 2
June 29, 2010
June 15, 2020
$275
5.68%
June 15, December 15
December 16, 2010
December 15, 2015
$150
4.59%
June 15, December 15
The Company’s debentures are rated AA (Low) by Dominion Bond Rating Service (“DBRS”) and A- (Positive Outlook) by Standard &
Poor’s (“S&P”).
The principal debt covenants associated with the debentures are as follows:
1. A negative pledge under which the Company will not assume or create any security interest (other than permitted encumbrances)
unless the debentures are secured equally and ratably with (or prior to) such obligation.
2. The Company will not, nor will it permit any of its subsidiaries to, amalgamate, consolidate or merge with or into any other
person or liquidate, wind-up or dissolve itself unless (a) the Company or one of its wholly owned subsidiaries is the continuing or
successor company or (b) if the successor company is not a wholly owned subsidiary, at the time of, and after giving effect to, such
transaction no event of default and no event that, after notice or lapse of time, or both, would become an event of default shall
have happened and be continuing under the trust indenture, in each case subject to certain exceptions and limitations set forth in
the trust indenture.
3. The Company will not request that the rating agencies withdraw their ratings of the debentures.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
17
Management’s discussion and analysis
For the fourth quarter and year ended December 31, 2011
In the case of certain events of default under the terms of the debentures issued by the Company in 2010, the aggregate unpaid
principal amount of such debentures, together with all accrued and unpaid interest thereon and any other amounts owing with respect
thereto, shall become immediately due and payable. The events of default that would trigger such an acceleration of payment include if
the Company takes certain voluntary insolvency actions, such as instituting proceedings for its winding up, liquidation or dissolution, or
consents to the filing of such proceedings against it; or if involuntary insolvency proceedings go uncontested by the Company or are not
dismissed within a specified time period, or the final order sought in such proceedings is granted against the Company.
For more specific details on the terms and conditions of the debentures, please see the trust indenture of the Company dated June 29,
2010, a copy of which is available on the System for Electronic Document Analysis and Retrieval (“SEDAR”) website at www.sedar.com.
Share repurchase
On May 9, 2011, the Company made an offer (the “Offer”) to repurchase up to $160 million of its common shares validly tendered to
the Offer, by way of a modified Dutch auction and proportional tenders. On June 30, 2011, in accordance with the terms of the Offer,
the Company repurchased 6,153,846 common shares for cancellation at a price of $26.00 per common share, for an aggregate purchase
price of approximately $160 million. Genworth Financial, Inc., through its wholly owned subsidiary, Brookfield Life Assurance Company
Limited, participated in the Offer by making a proportional tender, and after the share repurchase on June 30, 2011 Genworth Financial,
Inc. continues to hold approximately 57.5% of the outstanding common shares of the Company.
Investments
Investments in bonds and debentures, including government guarantee fund investments, and preferred and common shares are
classified either as AFS or FVTPL, and their fair value is determined using quoted market prices. FVTPL investments are recorded at fair
value, with realized gains and losses on sale and changes in the fair value of these investments recorded in net investment income in
the income statement.
AFS investments are recorded at fair value, with changes in the fair value of these investments recorded in unrealized gains and losses,
which are included in other comprehensive income (“OCI”). Realized gains and losses on sale, as well as losses from other-than-temporary
declines in value of AFS investments, are reclassified from AOCI and recorded in net investment income in the income statement.
Interest income from fixed income securities is recognized on an accrual basis using the effective interest method and reported as
interest in the income statement. Dividends are recognized when the shareholders’ right to receive payment is established, which is the
ex-dividend date, and are reported in dividends in the income statement.
Investment sales and purchases are recorded at the investments’ trade dates. Realized gains or losses recorded on investment sales are
measured as the difference between cash received for the investment and the cost of the investment at the trade date, and reported as
net investment gains (losses) in the income statement.
Financial assets not carried at FVTPL are assessed for impairment at each reporting period. Impairment losses are recognized by
reclassifying losses from AOCI to net income.
Capital expenditures
The Company’s capital expenditures primarily relate to technology investments aimed at improving operational efficiency and
effectiveness for sales, underwriting, risk management and loss mitigation. For the three and twelve months ended December 31,
2011, the Company invested approximately $1 million and $3 million, respectively, for risk management and underwriting technologies.
The Company expects that future capital expenditures will continue to be focused on underwriting and risk management technology
improvements. The Company expects that capital expenditures in 2012 will be in the $3 million to $5 million range.
18
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
Regulatory capital management
The Insurance Subsidiary is regulated by OSFI. Under the MCT, an insurer calculates a ratio of capital available to capital required in a
prescribed manner. Mortgage insurers are required to maintain a minimum ratio of core capital (capital available as defined for MCT
purposes, but excluding subordinated debt) to required capital of 100%. As a result of the customized methodology applied to the
policy liabilities of mortgage insurers and the risk profile of the Insurance Subsidiary, OSFI has established a minimum supervisory
capital target of 120% for the Insurance Subsidiary. To maintain an adequate margin above this supervisory minimum, in July 2010 the
Insurance Subsidiary revised its internal MCT ratio target to 145%.
Capital above the amount required to meet the Insurance Subsidiary’s MCT ratio targets could be used to support organic growth of the
business and, if distributed to Genworth Canada, to repurchase common shares of the Company, to declare and pay dividends or other
distributions, for acquisitions, or for such other uses as permitted by law and that may be approved by the Board.
The MCT ratio of the Insurance Subsidiary at the end of December 31, 2011 was 162%, representing a one-point sequential increase
over the third quarter, primarily resulting from the increase in fourth-quarter retained earnings and a net increase in unrealized gains in
the investment portfolio.
On October 4, 2011, OSFI released the OSFI Guidelines reflecting changes to the MCT that were originally outlined in the
December 2010 Discussion Paper on OSFI’s Proposed Changes to the Minimum Capital Test. The changes include refining the asset
risk factors applied to balance sheet assets and adding new capital charges for interest rate risk and foreign exchange risk. Interest
rate risk is the risk of economic loss resulting from changes in interest rates related to interest rate–sensitive assets and liabilities.
Foreign exchange risk is the risk of loss resulting from fluctuations in currency exchange rates. The estimated impact of these changes
as at January 1, 2012 is approximately seven points of reduction in the MCT ratio to 155%. The ultimate impact of these changes
may increase or decrease subject to future regulatory developments. The Company expects that it will continue to exceed its internal
MCT ratio target of 145% following the changes set out in the OFSI Guidelines that took effect on January 1, 2012.
Restrictions on dividends and capital transactions
The Company’s Insurance Subsidiary is subject to certain restrictions with respect to dividend and capital transactions. The ICA prohibits
directors from declaring or paying any dividend on shares of an insurance company if there are reasonable grounds for believing that a
company is, or the payment of the dividend would cause the company to be, in contravention of applicable requirements to maintain
adequate capital, liquidity and assets. The ICA also requires an insurance company to notify OSFI of the declaration of a dividend at
least 15 days prior to the date fixed for its payment. Similarly, the ICA prohibits the purchase for cancellation of any shares issued by an
insurance company or the redemption of any redeemable shares or other similar capital transactions if there are reasonable grounds for
believing that the company is, or the payment would cause the company to be, in contravention of applicable requirements to maintain
adequate capital, liquidity and assets. Share cancellation or redemption would also require the prior approval of OSFI. Finally, OSFI has
broad authority to take actions that could restrict the ability of an insurance company to pay dividends.
Financial strength ratings
The Insurance Subsidiary has financial strength ratings from both S&P and DBRS. Although the Insurance Subsidiary is not required to
have ratings to conduct its business, ratings are helpful to maintain confidence in an insurer and in the marketing of its products. The
Insurance Subsidiary is rated AA- (Very Strong), with a positive outlook, by S&P, and AA (Superior), with a stable outlook, by DBRS. The
ratings from S&P were affirmed in June 2011, and the ratings from DBRS were confirmed in September 2011.
The Company has a counterparty credit rating and debenture ratings from S&P of A-, with a positive outlook, and an issuer rating from
DBRS of AA (Low). The rating from S&P is a function of the financial strength rating on the Company’s Insurance Subsidiary and its
structural subordination to the policyholders of its Insurance Subsidiary. S&P has applied its standard notching criteria of three notches
between an operating company and a holding company, the Insurance Subsidiary and the Company, respectively. The rating from DBRS
is a function of the structural subordination of the parent’s financial obligations relative to those of the regulated operating subsidiary.
DBRS applied a one-notch differential between the Insurance Subsidiary and the Company.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
19
Management’s discussion and analysis
For the fourth quarter and year ended December 31, 2011
Share-based compensation
Employee stock options (“Options”), upon being exercised, provide employees with a choice between being compensated in common
shares of the Company or in cash equal to the net proceeds from the sale of the common shares. These types of awards are commonly
referred to as stock options with tandem stock appreciation rights. Options granted by the Company are measured at fair value using
the Black-Scholes valuation model at the end of each reporting period and recognized as compensation expense over the Option vesting
period, with a corresponding entry to share-based compensation liabilities.
Employee Restricted Share Units (“RSUs”) entitle employees to receive an amount equal to the fair market value of the Company’s
common shares and may be settled in common shares or cash. RSUs granted by the Company are measured at the quoted market
value of the Company’s common shares at the end of each reporting period and are recorded as compensation expense over the RSU
vesting period, with a corresponding entry to share-based compensation liabilities.
Directors’ Deferred Share Units (“DSUs”) entitle eligible members of the Board to receive an amount equal to the fair market value of
the Company’s common shares as compensation for director services rendered for the period, and may be settled in common shares
or cash. The DSUs granted by the Company are measured at the quoted market value of the Company’s common shares at the end of
each reporting period and are recorded as compensation expense in the period the awards are granted, with a corresponding entry to
share-based compensation liabilities.
Performance Share Units (“PSUs”) entitle senior executive employees to receive an amount equal to the fair market value of the
Company’s common shares as compensation if the Company meets certain performance conditions based on the Company’s earnings
per common share, return on equity and contribution margin associated with underwriting income and investment income at the end of
a three-year period. The PSUs granted by the Company are measured at the quoted market value of the Company’s common shares at
the end of each reporting period and are recorded as compensation expense over the PSU vesting period with a corresponding entry to
share-based compensation liabilities, based on management’s best estimate of the outcome of the performance conditions.
Critical accounting estimates and judgments
The preparation of consolidated financial statements in accordance with IFRSs requires management to make estimates and judgments
that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts
of revenue and expenses during the reporting periods covered by the financial statements. The principal financial statement components
subject to measurement uncertainty are outlined below as accounting estimates and judgments. Actual results may differ from the
estimates used, and such differences may be material.
Accounting estimates
Premiums earned
Mortgage insurance premiums are deferred and then taken into underwriting revenues over the terms of the related policies. The
rates or formulae under which premiums are earned relate to the loss emergence pattern in each year of coverage. In order to match
premiums earned to losses on claims, premiums written are recognized as premiums earned using a factor-based premium recognition
curve. In constructing the premium recognition curve, the Company applies actuarial forecasting techniques to historical loss data
to determine expected loss development and the related loss emergence pattern. The actuarial forecasting techniques incorporate
economic assumptions that impact future losses and loss development including unemployment rates, interest rates and expected
changes in house prices. The premium recognition curve is reviewed on a quarterly basis based on the most current available historical
loss data and economic assumptions and is updated as required. The impact of the experience update for the three months and
twelve months ended December 31, 2011 is a $13 million and $39 million increase in premiums earned, respectively, as compared
to a $13 million and $48 million increase in premiums earned in the three months and twelve months ended December 31, 2010.
The Company will continue to assess its loss experience on a quarterly basis and make adjustments as appropriate to the premium
recognition curve.
20
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
Deferred policy acquisition costs
Deferred policy acquisition costs comprise premium taxes, appraisal costs, certain employee compensation, and other expenses that
relate directly to acquisition of new mortgage insurance business. Policy acquisition costs are deferred and amortized to income in
proportion to and over the periods in which premiums are earned. The Company estimates the expenses that are eligible for deferral,
based on the nature of the expenses incurred and the results of time and activity studies performed to identify the portion of time that
the Company’s employees incur in the acquisition of new mortgage insurance business.
Subrogation recoverable
The Company estimates the fair value of real estate owned that is included in subrogation recoverable, based on third-party property
appraisals or other types of third-party valuations deemed to be more appropriate for a particular property.
The Company estimates the borrower recoveries related to claims paid and loss reserves that are included in subrogation recoverable,
based on historical recovery experience.
Loss reserves
Loss reserves represent the amount needed to provide for the expected ultimate net cost of settling claims, including adjustment
expenses related to defaults by borrowers (both reported and unreported) that have occurred on or before the balance sheet date. Loss
reserves are discounted to take into account the time value of money and include a supplemental provision for adverse deviation. Loss
reserves are recognized when the first scheduled mortgage payment is missed by a mortgage borrower. In determining the ultimate
claim amount, the Company estimates the expected recovery from the property that is securing the insured loan, and the legal, property
maintenance and other loss adjustment expenses incurred in the claim settlement process. Loss reserves consist of individual case
reserves, incurred but not reported (“IBNR”) reserves, and supplemental loss reserves for potential adverse development.
For the purpose of quantifying case reserves, the Company analyzes each reported delinquent loan on a case-by-case basis and
establishes a case reserve based on the expected loss, if any. The ultimate expected claim amount is influenced significantly by housing
market conditions, changes in property values and the condition of properties in default. Accordingly, case reserves include a provision
for adverse development, primarily to address a potential decline in property value.
The Company establishes reserves for IBNR based on the reporting lag from the date of the first missed payment to the balance sheet
date for mortgages in default that have not been reported to the Company. IBNR is calculated using estimates of expected claim
frequency and claim severity based on the most current available historical loss data.
In order to discount loss reserves to present value, the Company’s external appointed actuary determines a discount rate based on the
book yield of the Company’s general investment portfolio.
The Company’s external appointed actuary develops a margin for adverse deviation based on assessment of the adequacy of the
Company’s loss reserves and with reference to the current and future expected condition of the Canadian housing market and its impact
on the expected development of losses. The Company determines a supplemental provision for adverse deviation (“PFAD”) based on
the margin developed by the actuary.
The process for the establishment of loss reserves relies on the judgment and opinions of a number of individuals, on historical
precedent and trends, on prevailing legal and economic trends and on expectations as to future developments. This process involves
risks that actual results will deviate, perhaps substantially, from the best estimates made. These risks vary in proportion to the length of
the estimation period and the volatility of each component comprising the liability.
Utilization of tax losses
As at December 31, 2011, the Company has recognized $10 million of tax losses. Management considers it probable that future taxable
profits will be available against which these tax losses can be utilized.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
21
Management’s discussion and analysis
For the fourth quarter and year ended December 31, 2011
Share-based compensation
The fair value of Options is measured using the Black-Scholes valuation model. Measurement inputs are the common share price on
the measurement date, the exercise price of the instrument, expected volatility, the weighted average expected life of the instrument,
expected dividends and the risk-free rate. Expected volatility is estimated based on the mean volatility of the general index of Canadian
financial companies and the Company’s average historical volatility. The volatility of Canadian financial companies is used to supplement
the volatility calculation given that the Company has limited common share price history. The weighted-average expected life of the
instrument is estimated based on historical experience of affiliated companies. The dividend yield is estimated based on historical
dividends and the Company’s long-term expectations. The risk-free rate is determined with reference to Government of Canada bonds.
Service and performance conditions attached to Options, RSUs and PSUs are not taken into account in determining fair value. However,
the Company records share-based compensation expense only to the extent that the share-based awards are expected to vest based on
the Company’s best estimate of the outcome of the service and performance conditions.
Employee future benefits
Actuarial valuations of benefit liabilities for pension and other post-employment benefit plans are performed as at December 31 of each
year, based on the Company’s assumptions on the discount rate, rate of compensation increase, retirement age, mortality and the trend
in the health care cost rate. The discount rate is determined by the Company with reference to AA credit-rated bonds that have maturity
dates approximating the Company’s obligation terms at period end and are denominated in the same currency as the benefit obligations.
Other assumptions are determined with reference to long-term expectations.
Accounting judgments
Objective evidence of impairment
As of each balance sheet date, the Company evaluates AFS financial assets in an unrealized loss position for objective evidence of
impairment.
For investments in bonds and debentures, evaluation of whether impairment has occurred is based on the Company’s best estimate
of the cash flows expected to be collected at the individual investment level. The Company considers all available information relevant
to the collectability of the investment, including information about past events, current conditions, and reasonable and supportable
forecasts. Estimating such cash flows is a quantitative and qualitative process that incorporates information received from third-party
sources along with certain internal assumptions and judgments regarding the future performance of any underlying collateral for asset-
backed securities. Where possible, this data is benchmarked against third-party sources. Impairments for bonds and debentures in an
unrealized loss position are deemed to exist when the Company does not expect full recovery of the amortized cost of the investment,
based on the estimate of cash flows expected to be collected, or when the Company intends to sell the investment prior to recovery
from its unrealized loss position.
For equity investments, the Company recognizes an impairment loss in the period in which it is determined that an investment has
experienced significant or prolonged losses and is not expected to recover its cost within a reasonable period. The Company determines
what constitutes a reasonable period on a security-by-security basis, based upon consideration of all the evidence available, including the
magnitude of an unrealized loss and its duration. In any event, this period does not exceed 18 months for common equity investments.
22
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
Changes in accounting policies
International Financial Reporting Standards
This is the fourth quarter that the Company reports its unaudited financial results in accordance with IFRSs, including comparative
financial results and an opening statement of financial position as at January 1, 2010 (“the transition date”). The explanatory paragraphs
and financial tables that follow describe the Company’s experience with IFRSs transition and the impact of IFRSs adoption on its
financial results.
IFRSs transition
The transition to IFRSs has not resulted in material changes to the Company’s retained earnings at the transition date or its earnings for
the current and comparative periods. Accordingly, there has been no material impact on the Company’s regulatory capital requirements
due to transition.
IFRSs transition has resulted in additional financial disclosure requirements for the Company. The Company has developed financial
reporting processes necessary to complete such disclosures including establishing procedures for the collection and timely reporting of
additional information.
The transition to IFRSs has had no impact on the Company’s underwriting and claims management system or other IT source systems
that support the Company’s financial statement balances. Consequently, there have also been no material changes to systems of
internal controls upon transition.
First-time adoption of IFRSs
In its transition to IFRSs, the Company applied IFRS 1 – First-Time Adoption of International Financial Reporting Standards
(“IFRS 1”). IFRS 1 generally requires retrospective adoption of IFRSs. However, it also provides certain mandatory exceptions and
elective exemptions from retrospective adoption. The mandatory exception and the elective exemption taken by the Company are
described below.
Mandatory exception
Estimates
Hindsight was not used to create or revise estimates, and, accordingly, the estimates previously made by the Company under Canadian
GAAP are consistent with their application under IFRSs.
Elective exemption
Business combinations
The Company has applied the business combinations exemption in IFRS 1 to not apply IFRS 3 – Business Combinations (“IFRS 3”)
retrospectively to past business combinations. Accordingly, the Company has not restated business combinations that took place prior
to the transition date.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
23
Management’s discussion and analysis
For the fourth quarter and year ended December 31, 2011
IFRSs’ impact
The following tables set forth the impact of transition to IFRSs on the Company’s income statement for the three and the twelve
months ended December 31, 2010.
(in thousands of dollars except per share data)
Net premiums written
Net premiums earned
Underwriting revenues
Losses on claims and expenses:
Losses on claims
Expenses
Total losses on claims and expenses
For the three months ended
December 31, 2010
For the twelve months ended
December 31, 2010
Canadian
GAAP
Effect of
transition
to IFRSs
IFRSs
Canadian
GAAP
Effect of
transition
to IFRSs
$ 134,123
$
156,186
156,188
50,398
28,387
78,785
—
—
—
$ 134,123
$ 551,603
$
156,186
620,834
156,188
620,929
—
(703)(2)
50,398
27,684
206,410
103,823
(703)
78,082
310,233
—
—
—
—
(958)2
(958)
IFRSs
$ 551,603
620,834
620,929
206,410
102,865
309,275
Net underwriting income
77,403
703
78,106
310,696
958
311,654
Investment income
44,497
—
44,497
183,119
Interest expense
Income before income taxes
Provision for income taxes
Net income
Net operating income(1)
Operating return on equity
Operating earnings per
common share (diluted)
4,294
117,606
33,278
$
$
84,328
83,950
$
$
14%
—
703
207
496
496
—
4,294
8,322
118,309
33,485
485,493
136,767
—
—
958
1,702
183,119
8,322
486,451
138,469
$
$
84,824
84,447
$ 348,726
$ 343,448
$
$
(744)
(744)
$ 347,982
$ 342,704
14%
14%
—
14%
$
0.79
—
$
0.80
$
3.01
—
$
3.01
Note: Amounts may not total due to rounding.
(1)
(2)
This is a financial measure not calculated based on IFRSs. See the “Non-IFRSs Financial Measures” section in this MD&A for additional information.
The effect of transition to IFRSs on total expenses in the fourth quarter of 2010 is a decrease of $703 thousand and comprises a decrease to employee future benefits related to prior service
costs of $62 thousand, a decrease to employee future benefits related to net actuarial gains or losses of $3 thousand and a decrease to share-based compensation of $638 thousand. The
effect of transition to IFRSs on total expenses in the twelve months ended December 31, 2010 is a decrease of $958 thousand and comprises a decrease to employee future benefits related
to prior service costs of $245 thousand, a decrease to employee future benefits related to net actuarial gains or losses of $15 thousand and a decrease to share-based compensation of
$698 thousand.
24
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
The following table sets forth the impact of transition to IFRSs on the Company’s statements of financial position as at January 1 and
December 31, 2010.
(in thousands)
Investments:
General portfolio
Government guarantee fund
Other assets
Total assets
Unearned premium reserves
Loss reserves
Long-term debt
Deferred tax liability
Other liabilities
Total liabilities
Shareholders’ equity
AOCI
December 31, 2010
January 1, 2010
Canadian
GAAP
Effect of
transition
to IFRSs
IFRSs
Canadian
GAAP
Effect of
transition
to IFRSs
$
$
$
$ 4,489,536
645,733
262,932
$ 5,398,201
$ 1,902,164
206,611
421,566
215,428
63,207
2,808,976
2,589,225
124,369
—
—
—
—
$ 4,489,536
645,733
262,932
$ 4,409,814
576,417
223,695
$ 5,398,201
$ 5,209,926
—
—
—
(147)
705
$ 1,902,164
206,611
421,566
215,281
63,912
$ 1,971,396
236,181
—
203,218
155,904
$
$
$
—
—
—
—
—
—
—
(14)
53
IFRSs
$ 4,409,814
576,417
223,695
$ 5,209,926
$ 1,971,396
236,181
—
203,204
155,957
558
2,809,534
2,566,699
39
2,566,738
(558)
—
2,588,667
124,369
2,643,227
96,924
(39)
—
2,643,188
96,924
Shareholders’ equity excluding AOCI
2,464,856
(558)
2,464,298
2,546,303
(39)
2,546,264
Total liabilities and shareholders’ equity
$ 5,398,201
$
—
$ 5,398,201
$ 5,209,926
$
—
$ 5,209,926
The following table sets forth the impact of conversion to IFRSs on net income and net operating income for the four quarters of 2010.
(in thousands)
Canadian GAAP net income
Employee future benefits – prior service costs
Employee future benefits – net actuarial gains or losses
Share-based compensation
$
Total impact on expenses
Tax impact of above changes
Tax adjustment – treatment of IPO expenses
Total impact of transition to IFRSs
Q1’10
84,092
61
4
265
330
(102)
—
228
$
Q2’10
Q3’10
85,349
61
4
(512)
$ 94,957
61
4
307
$
Q4’10
84,328
62
3
638
FY’10
$ 348,726
245
15
698
(447)
137
—
(310)
372
(110)
(1,420)
(1,158)
703
(207)
—
496
958
(282)
(1,420)
(744)
IFRSs net income
$
84,320
$
85,039
$ 93,799
$
84,824
$ 347,982
(in thousands)
Net operating income reported under Canadian GAAP
Total impact of transition to IFRSs
$
Q1’10
81,461
228
Q2’10
Q3’10
Q4’10
FY’10
$
85,921
(310)
$ 92,116
(1,158)
$
83,950
496
$ 343,448
(744)
Net operating income reported under IFRS
$
81,689
$
85,611
$ 90,958
$
84,446
$ 342,704
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
25
Management’s discussion and analysis
For the fourth quarter and year ended December 31, 2011
IFRSs’ impact on expenses
Mandatory accounting policy changes
Employee future benefits
Under Canadian GAAP, prior service costs relating to plan amendments to a defined benefit plan are deferred and amortized over the
average service lives of active employees. Under IFRSs, prior service costs are recognized as an expense on a straight-line basis until
the benefits are vested. To the extent that the benefits are vested upon introduction of amendments to a defined benefit plan, the prior
service costs are expensed immediately.
Share-based compensation
The Company granted share-based compensation to certain employees that provides the choice of settlement in cash or common
shares of the Company. The Company accounted for these share-based compensation arrangements by reference to their intrinsic value
under Canadian GAAP based on the assumption that these benefits will be settled in cash. Under IFRSs, the related liability has been
adjusted to reflect the fair value of the outstanding share-based compensation.
Elected accounting policy changes
Employee future benefits
Under Canadian GAAP, the Company deferred net actuarial gains or losses relating to its defined benefit plans within a 10% corridor
of the defined benefit obligations. While IFRSs currently permit this approach and other systematic and unbiased methods that provide
for faster recognition of net actuarial gains or losses, the standards also permit the recognition of net actuarial gains or losses directly
in OCI without subsequent reclassification of the net gains or losses to income. The Company has elected to recognize net actuarial
gains or losses in OCI and report them in retained earnings. On January 1, 2013, upon the adoption of the revised standard IAS 19 –
Employee Benefits, the recognition of net actuarial gains or losses directly in OCI without subsequent reclassification to income will
become mandatory.
IFRSs’ impact on tax
Under Canadian GAAP, previously unrecognized tax benefits for the year ended December 31, 2009 relating to financing costs incurred
in connection with the Company’s IPO were recognized in consolidated net income when the benefits met recognition criteria in the
quarter ended December 31, 2010. These tax benefits would have been recognized directly in share capital if they met recognition
criteria at the time of the IPO. IFRSs require backward tracing of tax expenses or benefits. Accordingly, the Company reclassified the
benefits from income to share capital in the period in which the benefits met recognition criteria. With the exception of this adjustment
and the tax effect of other IFRSs adjustments, no other material differences have been identified in the recognition and measurement of
taxes under IFRSs.
IFRSs development
The Company is monitoring developments in standards that are expected to change subsequent to the transition date.
Investments
IFRS 9 – Financial Instruments (“IFRS 9”) was issued in November 2009, superseding IAS 39 – Financial Instruments: Recognition and
Measurement, with an original adoption date of January 1, 2013. In July 2011, the International Accounting Standards Board (“IASB”)
voted to have the implementation date moved from January 1, 2013 to January 1, 2015. This new standard will impact the Company’s
financial statements significantly because the standard will require all financial instruments to be accounted for either at amortized cost
or at fair value, with fair value changes recorded in income. The AFS category, which permits entities to account for changes in fair
value of financial instruments in OCI, and where the vast majority of the Company’s financial instruments are currently recorded, will
cease to exist.
26
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
On December 16, 2011, the IASB issued the Mandatory Effective Date of IFRS 9 and the Transition Disclosures, which amends IFRS 9
to require application for annual periods beginning on or after January 1, 2015, rather than January 1, 2013. IFRS 9 is also amended so
that it does not require the restatement of comparative period financial statements for the initial application of the classification and
measurement requirements of IFRS 9, but instead requires modified disclosures on transition to IFRS 9.
Insurance contracts
On July 30, 2010, the IASB issued an Exposure Draft (“ED”) on Phase II of IFRS 4, which is intended to result in a single, consistent
recognition and measurement standard for insurance contracts internationally. The ED continues to apply the same definition for
insurance contracts as set out in the existing standard. At the same time, it modifies the scope to require the accounting for financial
guarantee contracts as insurance contracts under IFRS 4.
The ED does not include a proposed transition date. The IASB may align the mandatory adoption of IFRS 9 for insurers to coincide with
the adoption of Phase II of IFRS 4.
The most significant changes to IFRS 4 pertain to the recognition and measurement of insurance contracts. The IASB is proposing that
an insurer measure its insurance liabilities using a model based on fulfillment cash flows. The insurance liability is to comprise (i) the
unbiased, probability-weighted average of future cash flows that are expected to arise as the insurer fulfills its obligation under an
insurance contract discounted to present value; and (ii) a risk adjustment to reflect the uncertainty about the amount and timing of the
future cash flows. Both the cash flows and the risk margin are to be re-measured each reporting period. In addition to the fulfillment
cash flows, the ED requires that the measurement of an insurance contract include a residual margin. The residual margin represents a
calibration that eliminates positive differences between expected premiums and expected claims, handling expenses and incremental
policy acquisition costs at the inception of the insurance contract. The residual margin is not re-measured but is released over the
insurance contract coverage period. Policy acquisition costs directly attributable to the acquisition of insurance contracts may be included
in the determination of fulfillment cash flows. All other acquisition costs are expensed as incurred.
At the date of transition, the ED requires that an insurer measure each portfolio of insurance contracts based on fulfillment cash flows.
If a difference between the insurer’s existing insurance liabilities and the new measurement arises, that difference is recognized directly
in retained earnings. Any existing balances of deferred acquisition costs are also derecognized at the transition date. Thus, to the extent
that the Company’s existing unearned premium balance exceeds fulfillment cash flows plus risk margin, the excess is recorded directly
in retained earnings and is no longer released into income over the insurance contract coverage period based on the expected loss
emergence pattern. The ED’s proposals regarding transition are expected to be re-deliberated by the IASB.
The ED is in its preliminary stages and is subject to change. Comments on the ED were submitted to the IASB by November 30,
2010. Based on commentary received from stakeholders, the IASB has continued to deliberate the proposed accounting for insurance
contracts and has targeted to complete its review and issue a final standard in the first half of 2012.
Risk management
Risk management is a critical part of the Company’s business. The Company has an enterprise risk management framework that
encompasses mortgage portfolio risk management, underwriting policies and guidelines, product development, regulatory compliance,
investment portfolio management and liquidity risk. The Company’s risk management framework facilitates the assessment of risk by
acting as a proactive decision-making tool to determine which risks are acceptable and to monitor and manage the Company’s risks in an
ongoing manner. The Company’s risk management framework and internal control procedures are designed to reduce the volatility in its
financial results.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
27
Management’s discussion and analysis
For the fourth quarter and year ended December 31, 2011
Mortgage portfolio risk management
The Company’s mortgage portfolio risk management involves actively managing its borrower credit quality, product, and geographic
exposures. The Company carefully monitors portfolio concentrations by borrower credit quality, product, and geography against
predetermined risk tolerances, taking into account the conditions of the housing market and the economy in each region of Canada.
The Company’s underwriting policies and guidelines are reviewed and updated regularly to manage the Company’s exposures and to
address emerging trends in the housing market and the economic environment. For example, in view of economic conditions in the
early part of 2009, the Company took a number of actions focusing on its new insurance written to reduce the overall risk profile of its
mortgage portfolio, such as more stringent requirements on borrowers’ total debt service ratios, credit scores and loan-to-value ratios in
economically sensitive areas.
In addition to these internal actions, the Company has supported the Government of Canada’s decisions from 2008 to 2011 to introduce
restrictions on insured mortgages. In 2008, the government eliminated insurance products for mortgages with loan-to-value ratios of
greater than 95%, interest-only mortgages, and amortization periods greater than 35 years.
On April 19, 2010, the Government of Canada implemented additional changes to the rules for government guaranteed mortgages,
which (i) required that all borrowers seeking mortgages of a term less than five years or seeking a variable rate mortgage must qualify
for the five-year fixed rate mortgage posted by the Bank of Canada, (ii) lowered the maximum amount that borrowers can withdraw
in refinancing their mortgages to 90%, from 95%, of the value of their homes, and (iii) required a minimum down payment of 20% on
non-owner-occupied properties purchased for speculation. These rules were formalized in an amendment to the Government Guarantee
Agreement between the Government of Canada and the Insurance Subsidiary.
On March 18, 2011 the Government of Canada implemented additional changes to the rules for government guaranteed mortgages,
which (i) reduced the maximum amortization period to 30 years from 35 years for high loan-to-value mortgages, (ii) lowered the
maximum amount that borrowers can withdraw in refinancing their mortgages to 85%, from 90%, of the value of their homes, and
(iii) eliminated mortgage insurance on mortgages that do not have scheduled principal and interest payments (e.g., lines of credit). The
changes were effective on April 18, 2011. These rules were formalized in an additional amendment to the Government Guarantee
Agreement between the Government of Canada and the Insurance Subsidiary.
The Company supports the implementation of these changes and views them as prudent steps taken to protect and maintain the health
and stability of the housing market.
The Company’s extensive historical database and innovative information technology systems are important tools in its approach to
risk management. The Company utilizes components of its proprietary high loan-to-value mortgage performance database to build and
improve its mortgage scoring model. The Company’s mortgage scoring model employs a number of evaluation criteria to assign a score
to each insured mortgage loan and predict the likelihood of a future claim. These evaluation criteria include borrower credit score, loan
type and amount, total debt service ratio, property type, and loan-to-value ratio. The Company believes that these factors, as well as
other considerations, significantly enhance the ability of the mortgage scoring model to predict the likelihood of a borrower default, as
compared to reliance solely on borrower credit score. The Company’s mortgage portfolio risk management function is organized into
three primary groups: portfolio analysis, underwriting policies and guidelines, and risk technology and models. The risk management
team analyzes and summarizes mortgage portfolio performance, risk concentrations, emerging trends and remedial actions, and the
reports are reviewed with the Company’s management-level risk committee on a monthly basis.
28
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
Transactions with related parties
Following the closing of the Company’s IPO on July 7, 2009, the Company and the Insurance Subsidiary entered into a Transition
Services Agreement with Genworth Financial, Inc., the Company’s indirect majority shareholder. The agreement prescribes that
these companies will provide certain services to one another, with most services being terminated if Genworth Financial, Inc. ceases
to beneficially own more than 50% of the common shares of the Company. The services rendered by Genworth Financial, Inc. and
affiliated companies consist of information technology, finance, human resources, legal, investment, compliance and other specified
services. The services rendered by the Company and the Insurance Subsidiary relate mainly to financial reporting and tax compliance
support services. These transactions are in the normal course of business and are measured at the transaction value. Balances owing
for service transactions are non-interest bearing and are settled on a quarterly basis. The Company incurred net related party charges of
$1 million for the three months ended December 31, 2011, and $6 million for the twelve months ended December 31, 2011.
Special note regarding forward-looking statements
Certain statements made in this MD&A contain forward-looking information within the meaning of applicable securities laws (“forward-
looking statements”). When used in this MD&A, 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 Canadian government’s proposed changes to the guarantee regime regarding residential
mortgages, and the Company’s beliefs as to housing demand and home price appreciation, unemployment rates, future operating and
financial results, 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, including the economic assumptions described in the “Outlook” section
of this MD&A. 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 risks related to changes in government regulation; competition from other providers
of mortgage insurance in Canada; a downturn in the global or Canadian economies; a decline in the Company’s regulatory capital or an
increase in its regulatory capital requirements; changes to laws mandating mortgage insurance; a decrease in the volume of high loan-
to-value mortgage originations; ineffective or unsuccessfully implemented risk management standards by the Company; a downgrade or
potential downgrade in the Company’s financial strength ratings; interest rate fluctuations; the 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.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
29
Management’s discussion and analysis
For the fourth quarter and year ended December 31, 2011
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 (“AIF”) dated March 18, 2011. 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 and can be found on the SEDAR website at www.sedar.com, including the AIF. The forward-looking statements contained in
this MD&A represent the Company’s views only as of the date hereof. Forward-looking statements contained in this MD&A 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; therefore, they are presented for the purpose of assisting the Company’s security holders
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.
Non-IFRSs financial measures
To supplement the Company’s consolidated financial statements, which are prepared in accordance with IFRSs, the Company uses a
non-IFRSs financial measure called net operating income. 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 net operating income. Other non-IFRSs measures include shareholders equity excluding AOCI, insurance in force,
new insurance written, MCT ratio, delinquency ratio, severity on claims paid, operating earnings per common share (basic and diluted),
book value per common share (basic and diluted; including and excluding AOCI), dividends paid per common share, 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 meaning and are unlikely to
be comparable to any similar measure presented by other companies.
30
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
The table below shows the Company’s net operating income and operating earnings per common share for the periods specified
and reconciles these figures to the Company’s net income and operating earnings per common share in accordance with IFRSs for
such periods.
(in millions, unless otherwise specified)
Net income
Adjustment to net income:
Net gains on investments, net of taxes
Net operating income
(in dollars)
Earnings per common share
Adjustment to earnings per common share:
Net gains on investments, net of taxes
Operating earnings per common share
(in dollars)
Earnings per common share
Adjustment to earnings per common share:
Net gains on investments, net of taxes
Operating earnings per common share
For the three months ended
December 31
For the twelve months ended
December 31
2011
2010(1)
2011
2010(1)
79
$
85
$
323
$
348
—
79
(1)
(5)
$
84
$
318
$
(5)
343
$
$
For the three months ended
December 31
For the three months ended
December 31
2011
2010(1)
Basic
Diluted
Basic
Diluted
$
0.80
$
0.80
$
0.81
$
0.80
—
—
—
$
0.80
$
0.80
$
0.81
$
—
0.80
For the twelve months ended
December 31
For the twelve months ended
December 31
2011
2010(1)
Basic
Diluted
Basic
Diluted
$
3.18
$
3.17
$
3.08
$
3.05
(0.05)
(0.05)
(0.04)
$
3.13
$
3.12
$
3.04
$
(0.04)
3.01
Note: Amounts may not add due to rounding.
(1)
Certain accounting and measurement methods previously applied under Canadian GAAP were amended to comply with IFRSs. The comparative figures for 2010 have been restated to
reflect these adjustments. A detailed discussion of the impact of transition from Canadian GAAP to IFRSs can be found in the “Changes in Accounting Policies” section of this MD&A.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
31
Genworth MI Canada Inc.
Consolidated Financial Statements
For the fourth quarter and year ended December 31, 2011
33
Management statement on responsibility for
financial reporting
34
Independent auditors’ report to the shareholders
35 Consolidated statements of financial position
36 Consolidated statements of income
37 Consolidated statements of comprehensive income
38
Consolidated statements of changes in equity
39 Consolidated statements of cash flows
40 Notes to consolidated financial statements
32
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
Management statement on responsibility for financial reporting
Management is responsible for the preparation and presentation of the consolidated financial statements of Genworth MI Canada
Inc. (the “Company”). This responsibility includes ensuring the integrity and fairness of information presented and making appropriate
estimates based on judgment. The consolidated financial statements are prepared in conformity with International Financial Reporting
Standards.
Preparation of financial information is an integral part of management’s broader responsibilities for the ongoing operations of the
Company. Management maintains an extensive system of internal accounting controls to ensure that transactions are accurately
recorded on a timely basis, are properly approved and result in reliable financial statements. The adequacy of operation of the control
systems is monitored on an ongoing basis by management.
The Board of Directors of the Company (the “Board”) is responsible for approving the financial statements. The Audit Committee of
the Board, comprising directors who are neither officers nor employees of the Company, meets with management, internal auditors,
the actuary and external auditors (all of whom have unrestricted access and the opportunity to have private meetings with the Audit
Committee), and reviews the financial statements. The Audit Committee then submits its report to the Board recommending its
approval of the financial statements.
The Company’s appointed actuary is required to conduct a valuation of policy liabilities in accordance with Canadian generally accepted
actuarial standards, reporting his results to management and the Audit Committee.
The Office of the Superintendent of Financial Institutions Canada (“OSFI”) makes an annual examination and inquiry into the affairs of
the insurance subsidiary of the Company as deemed necessary to ensure that the Company is in sound financial condition and that the
interests of the policyholders are protected under the provisions of the Insurance Companies Act (Canada).
The Company’s external auditors, KPMG LLP, Chartered Accountants, conduct an independent audit of the consolidated financial
statements of the Company and meet both with management and the Audit Committee to discuss the results of their audit. The
auditors’ report to the shareholders appears on the following page.
Brian Hurley
President and Chief Executive Officer
Philip Mayers
Senior Vice-President and Chief Financial Officer
Toronto, Canada
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
33
Independent auditors’ report to the shareholders
To the Shareholders of Genworth MI Canada Inc.
We have audited the accompanying consolidated financial statements of Genworth MI Canada Inc., which comprise the consolidated
statements of financial position as at December 31, 2011, December 31, 2010 and January 1, 2010, the consolidated statements of
comprehensive income, changes in equity and cash flows for the years ended December 31, 2011 and December 31, 2010, and notes,
comprising a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the
preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in
accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and
plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant
to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.
An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made
by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of
Genworth MI Canada Inc. as at December 31, 2011, December 31, 2010 and January 1, 2010, and its consolidated financial performance
and its consolidated cash flows for the years ended December 31, 2011 and December 31, 2010 in accordance with International
Financial Reporting Standards.
Chartered Accountants, Licensed Public Accountants
Toronto, Canada
February 23, 2012
34
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
Consolidated statements of financial position
(In thousands of Canadian dollars)
Assets
Cash and cash equivalents (note 9)
Short-term investments (note 9)
Accrued investment income and other receivables
Bonds and debentures:
Fair value through profit or loss (“FVTPL”) (note 9)
Available-for-sale (“AFS”) (note 9)
Bonds and debentures under securities lending program (AFS) (note 9)
Equity investments (AFS) (note 9)
December 31, December 31,
January 1,
2011(1)
2010(1)(2)
2010(1)(2)
$
72,244
45,723
38,155
$ 351,136
6,988
32,270
$ 377,512
253,527
28,869
—
3,712,077
277,418
224,764
38,290
3,629,494
268,442
195,186
34,485
3,420,567
323,300
423
Total invested assets, accrued investment income and other receivables
4,370,381
4,521,806
4,438,683
Income taxes recoverable
Subrogation recoverable (note 6(c))
Government guarantee fund (note 10)
Prepaid assets
Property and equipment (note 16)
Intangible assets (note 17)
Deferred policy acquisition costs (note 6(d))
Goodwill (note 18)
Total assets
Liabilities
Accounts payable and accrued liabilities
Income taxes payable
Loss reserves (note 6(b))
Share-based compensation liabilities (note 15)
Long-term debt (note 21)
Unearned premium reserves (note 6(a))
Accrued net benefit liabilities under employee benefit plans (note 14)
Net deferred tax liabilities (note 11)
Total liabilities
Shareholders’ equity
Share capital (note 20)
Retained earnings
Accumulated other comprehensive income
Total shareholders’ equity
Total liabilities and shareholders’ equity
(1) Refer to note 23 for a presentation of assets and liabilities expected to be recovered or settled after 12 months.
(2) Refer to note 24 for the effects of adopting IFRSs.
See accompanying notes to the consolidated financial statements.
On behalf of the Board:
2,625
106,557
731,130
3,391
2,651
11,561
154,009
11,172
7,505
40,393
645,733
2,019
2,836
14,119
152,618
11,172
—
13,646
576,417
3,017
3,844
16,307
146,840
11,172
$ 5,393,477
$ 5,398,201
$ 5,209,926
$
44,750
—
169,008
3,170
421,945
1,823,678
16,315
231,484
$
46,132
—
206,611
5,412
421,566
1,902,164
12,368
215,281
$
28,586
116,230
236,181
1,668
—
1,971,396
9,473
203,204
2,710,350
2,809,534
2,566,738
1,462,994
1,005,276
214,857
1,553,463
910,835
124,369
1,734,376
811,888
96,924
2,683,127
2,588,667
2,643,188
$ 5,393,477
$ 5,398,201
$ 5,209,926
Brian Hurley
Director
Brian Kelly
Director
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
35
Consolidated statements of income
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31
Gross premiums written (note 6(a))
Net premiums written (note 6(a))
Net premiums earned (note 6(a))
Fees and other income
Underwriting revenue
Losses on claims (note 6(b))
Expenses:
Premium taxes and underwriting fees
Employee compensation
Office expenses
Professional fees
Promotional expenses and travel
Other
Total expenses
Net change in deferred policy acquisition costs (note 6(d))
Net underwriting income
Investment income:
Interest
Dividends
Net realized gains on sale of investments
Decrease in unrealized loss on FVTPL investments
Guarantee fund earnings (note 10)
Total investment income
General investment expenses
Interest expense (note 21)
Income before income taxes
Income taxes (note 11):
Current
Deferred
2011(1)
2010(1)
$ 544,577
$ 564,415
$ 533,400
$ 551,602
$ 611,886
547
$ 620,834
95
612,433
224,510
620,929
206,410
35,580
34,030
20,458
5,747
5,777
1,081
102,673
(1,391)
101,282
286,641
164,706
8,935
5,287
1,878
2,834
183,640
(4,393)
179,247
(22,884)
443,004
109,025
10,788
119,813
37,149
36,193
20,554
7,252
5,428
2,067
108,643
(5,778)
102,865
311,654
173,512
2,816
3,735
3,806
3,692
187,561
(4,442)
183,119
(8,322)
486,451
124,776
13,693
138,469
Net income attributable to owners of the Company
$ 323,191
$ 347,982
Earnings per share (note 22):
Basic
Diluted
(1) Refer to note 24 for the effects of adopting IFRSs.
See accompanying notes to the consolidated financial statements.
$
$
3.18
3.17
3.08
3.05
36
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
Consolidated statements of comprehensive income
(In thousands of Canadian dollars)
Years ended December 31
Net income
Other comprehensive income:
Net change in fair value of AFS financial assets net of tax of $36,587 (2010 – $13,663)
Gains on AFS financial assets realized and reclassified to consolidated statement of income
net of tax recovery of $2,030 (2010 – $3,773)
Defined benefit plan actuarial losses net of tax recovery of $582 (2010 – $415)
Total other comprehensive income attributable to owners of the Company
net of tax of $33,975 (2010 – $9,475)
Total comprehensive income attributable to owners of the Company
2011
2010(1)
$ 323,191
$ 347,982
95,803
37,916
(5,315)
(1,679)
(10,471)
(1,195)
88,809
26,250
$ 412,000
$ 374,232
(1) Refer to note 24 for the effects of adopting IFRSs.
See accompanying notes to the consolidated financial statements.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
37
Consolidated statements of changes in equity
(In thousands of Canadian dollars)
Balance at January 1, 2011
Comprehensive income:
Net income
Other comprehensive income
Total comprehensive income
Transactions recognized directly in equity:
Quarterly dividends on common shares(2)
Special dividend on common shares(3)
Issuance of common shares
Repurchase of common shares (note 20)
Defined benefit plan actuarial losses, net of tax recovery
Total transactions recognized directly in equity
Accumulated
other
Total
Retained comprehensive shareholders’
equity
income
earnings
Share
capital
$ 1,553,463
$ 910,835
$ 124,369
$ 2,588,667
—
—
—
323,191
—
323,191
—
88,809
88,809
323,191
88,809
412,000
—
—
764
(91,233)
—
(108,757)
(49,333)
—
(68,981)
(1,679)
(90,469)
(228,750)
—
—
—
—
1,679
1,679
(108,757)
(49,333)
764
(160,214)
—
(317,540)
Balance at December 31, 2011
$ 1,462,994
$ 1,005,276
$ 214,857
$ 2,683,127
Balance at January 1, 2010(1)
Comprehensive income:
Net income
Other comprehensive income
Total comprehensive income
Transactions recognized directly in equity:
Quarterly dividends on common shares(2)
Repurchase of common shares (note 20)
Defined benefit plan actuarial losses, net of tax recovery
Impact from adjustments of prior period financing costs(1)
Total transactions recognized directly in equity
Accumulated
other
Retained comprehensive
income
earnings
Total
shareholders’
equity
Share
capital
$ 1,734,376
$ 811,888
$
96,924
$ 2,643,188
—
—
—
347,982
—
347,982
—
26,250
26,250
347,982
26,250
374,232
—
(182,333)
—
1,420
(104,531)
(143,309)
(1,195)
—
(180,913)
(249,035)
—
—
1,195
—
1,195
(104,531)
(325,642)
—
1,420
(428,753)
Balance at December 31, 2010(1)
$ 1,553,463
$ 910,835
$ 124,369
$ 2,588,667
(1) Refer to note 24 for the effects of adopting IFRSs.
(2)
The Company paid dividends of $0.26 per common share in the first, second and third quarters of 2011 and $0.29 per common share in the fourth quarter of 2011 ($0.22 per common share
in the first, second and third quarters of 2010 and $0.26 per common share in fourth quarter of 2010).
(3) The Company paid a special dividend of $0.50 per common share in the fourth quarter of 2011.
See accompanying notes to the consolidated financial statements.
38
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
Consolidated statements of cash flows
(In thousands of Canadian dollars)
Years ended December 31
Cash provided by (used in):
Operating activities:
Net income
Adjustments for:
Depreciation of property and equipment and amortization of intangible assets
Expensing of deferred policy acquisition costs
Income taxes
Interest income
Dividend income
Net realized gains on sale of investments
Change in unrealized loss on FVTPL investments
Interest expense
Guarantee fund earnings
Issuance of common shares on vesting or exercise of share-based compensation
Change in non-cash balances related to operations:
Government guarantee fund
Accrued investment income and other receivables
Prepaid assets
Subrogation recoverable
Deferred policy acquisition costs
Accounts payable and accrued liabilities
Loss reserves
Share-based compensation liabilities
Unearned premium reserves
Accrued net benefit liabilities under employee benefit plans
Cash generated from (used in) operating activities:
Interest paid on long-term debt
Interest received from bonds and debentures
Income taxes paid
Dividends received from equity investments
Net cash generated from operating activities
Investing activities:
Purchase of short-term investments
Proceeds from sale of short-term investments
Purchase of bonds and debentures
Proceeds from sale of bonds and debentures
Purchase of equity investments
Proceeds from sale of equity investments
Purchase of property and equipment and intangible assets
Net cash used in investing activities
Financing activities:
Net proceeds from long-term debt issuance
Dividends paid
Repurchase of common shares
Proceeds from exercise of share-based compensation
Net cash used in financing activities
Decrease in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
2011
2010(1)
$ 323,191
$ 347,982
6,018
47,278
119,813
(164,706)
(8,935)
(5,287)
(1,878)
22,884
(2,834)
764
336,308
(56,618)
(8,583)
(1,372)
(66,164)
(48,669)
(1,410)
(37,603)
(2,242)
(78,486)
3,947
39,108
(22,856)
174,704
(132,808)
8,935
67,083
(45,723)
6,988
(924,807)
968,094
(140,446)
111,260
(3,275)
5,749
45,524
138,469
(173,512)
(2,816)
(3,735)
(3,806)
8,322
(3,692)
—
358,485
(59,148)
(1,918)
998
(26,747)
(51,302)
16,559
(29,570)
3,744
(69,232)
2,895
144,764
(7,232)
179,775
(257,940)
2,816
62,183
(6,988)
253,527
(1,044,282)
911,465
(193,117)
2,099
(2,553)
(27,909)
(79,849)
—
(158,090)
(160,214)
238
(318,066)
(278,892)
351,136
421,463
(104,531)
(325,642)
—
(8,710)
(26,376)
377,512
$
72,244
$ 351,136
(1) No significant presentation differences have been made to the statement of cash flows upon transition to IFRSs. Refer to note 24 for the effects of adopting IFRSs.
See accompanying notes to the consolidated financial statements.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
39
Notes to consolidated financial statements
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
1. Reporting entity
Genworth MI Canada Inc. (the “Company”) was incorporated under the Canada Business Corporations Act on May 25, 2009 and
is domiciled in Canada. Its shares are publicly traded on the Toronto Stock Exchange under the symbol “MIC.” The Company’s
registered office is located at Suite 300, 2060 Winston Park Drive, Oakville, Ontario, L6H 5R7, Canada.
Genworth Financial Inc., a public company listed on the New York Stock Exchange, indirectly holds approximately 57.5% of the
common shares of the Company.
The Company holds a 100% ownership interest in the holding companies Genworth Canada Holdings I Limited (“Holdings I”),
Genworth Canada Holdings II Limited (“Holdings II”), and MIC Holdings C Company (“Cco”). The Company also holds an indirect
100% ownership interest in Genworth Financial Mortgage Insurance Company Canada (“Genworth Mortgage Insurance Canada” or
“the Insurance Subsidiary”) through Holdings I and Holdings II. These consolidated financial statements as at December 31, 2011
reflect the consolidation of the Company and these subsidiaries.
The Insurance Subsidiary is engaged in mortgage insurance in Canada and is regulated by the Office of the Superintendent of
Financial Institutions Canada (“OSFI”), as well as financial services regulators in each province.
2. Basis of preparation
(a) Statement of compliance
These consolidated financial statements were prepared in accordance with International Financial Reporting Standards (“IFRSs”),
as issued by the International Accounting Standards Board (“IASB”). The Company’s consolidated financial statements were
previously prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”). Canadian GAAP
differs in some areas from IFRSs. In preparing these consolidated financial statements, management has amended certain
accounting and measurement methods previously applied in the Canadian GAAP financial statements to comply with IFRSs. The
comparative figures for 2010 have been restated to reflect these adjustments. The initial adoption of IFRS accounting policies
generally requires retrospective application to determine the Company’s opening statement of financial position under IFRSs.
However, IFRS 1 – First‑time Adoption of International Financial Reporting Standards (“IFRS 1”) provides a number of elective
exemptions and mandatory exceptions to this general principle. In preparing these consolidated financial statements, management
has elected selected transitional exemptions.
The effect of the transition to IFRSs is disclosed in note 24 with reconciliations and descriptions of the impact of transition from
Canadian GAAP to IFRSs on the Company’s financial position, financial performance and cash flows.
These consolidated financial statements were approved by the Board of Directors on February 23, 2012.
(b) Basis of measurement
These consolidated financial statements have been prepared on the historical cost basis except for the following material items in
the consolidated statement of financial position:
(i) Available for sale (“AFS”) and Fair Value Through Profit or Loss (“FVTPL”) financial assets are measured at fair value;
(ii) Real estate and other assets recorded as subrogation recoverable are measured at the fair value of the asset at the reporting
date less costs for obtaining and realizing the asset;
(iii) The government guarantee fund, which is comprised of net AFS financial assets, is measured at fair value;
(iv) Accrued benefit liabilities under employee benefit plans are recognized at the present value of the defined benefit obligations;
(v) Liabilities for cash-settled share-based compensation are measured at fair value; and
(vi) Loss reserves are discounted and include an actuarial margin for adverse deviation.
(c) Functional and presentation currency
These consolidated financial statements are presented in Canadian dollars, which is the Company’s functional currency. All financial
information presented in Canadian dollars has been rounded to the nearest thousand, except per share amounts.
40
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
(d) Use of estimates and judgments
The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the
application of accounting policies and the reported amounts of assets and liabilities at the date of the consolidated financial
statements and the reported amounts of income and expenses during the year. Actual results may differ from estimates made.
See note 5 for a description of the significant judgments and estimates made by the Company.
3. Significant accounting policies
(a) Basis of consolidation
(i) Business combinations
For acquisitions on or after January 1, 2010, the Company measures goodwill at the acquisition date as the fair value of
consideration transferred less the net recognized amount of the identifiable assets acquired and liabilities assumed.
As part of its transition to IFRSs, the Company elected not to restate its business combinations that occurred prior to January 1,
2010. In respect of these acquisitions, goodwill represents the amount recognized under the Company’s previous accounting
framework.
(ii) Subsidiaries
Subsidiaries are entities controlled by the Company. The financial statements of subsidiaries are included in the consolidated
financial statements from the date that control commences until the date control ceases. Intra-group balances and transactions
are eliminated in preparing consolidated financial statements.
(b) Insurance contracts
The items in the Company’s consolidated financial statements that are derived from insurance contracts are premiums, losses on
claims, deferred policy acquisition costs, and subrogation recoveries. Each of these items is described below.
(i) Premiums written, premiums earned and unearned premium reserves
Premiums written are recorded net of risk premiums related to the terms of the Government Guarantee Agreement (note 10).
Mortgage insurance premiums are deferred and then taken into underwriting revenues over the terms of the related policies.
The unearned portion of premiums is included in the liability for unearned premium reserves. The majority of policies to date
have been written for terms of 25 to 35 years. The rates or formulae under which premiums are earned relate to the loss
emergence pattern in each year of coverage. The Company performs actuarial studies of its multi-year loss experience on a
quarterly basis and adjusts the formulae under which premiums are earned in accordance with the results of such studies. This
includes adjustments to earnings from premium written in respect of prior periods.
A premium deficiency provision, if required, is determined as the excess of the present value of expected future losses on
claims and expenses (including policy maintenance expenses) on policies in force (using an appropriate discount rate) over
unearned premium reserves.
(ii) Losses on claims and loss reserves
Losses on claims include internal and external claims adjustment expenses and are recorded net of amounts received or
expected to be received from recoveries.
Loss reserves represent the amount needed to provide for the expected ultimate net cost of settling claims including
adjustment expenses related to defaults by borrowers (both reported and unreported) that have occurred on or before
each reporting date. Loss reserves are discounted to take into account the time value of money. The Company records a
supplemental provision for adverse deviation based on an explicit margin for adverse deviation determined by the Company’s
actuary.
Loss reserves are derecognized after a claim has been paid and the Company’s obligation under the policy has been fulfilled, or
after a borrower has remedied a delinquent loan and management estimates that no loss will be incurred under the policy.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
41
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
3. Significant accounting policies (continued)
(iii) Deferred policy acquisition costs
Deferred policy acquisition costs are comprised of premium taxes, appraisal costs, certain employee compensation, and other
expenses that relate directly to acquisition of new mortgage insurance business. Policy acquisition costs related to unearned
premiums are deferred to the extent that they can be expected to be recovered from the unearned premium reserves and are
expensed in proportion to and over the periods in which the premiums are earned.
(iv) Subrogation recoveries and subrogation recoverable
Real estate and other collateral acquired as a result of settling claims are carried in subrogation recoverable at the fair value of
the collateral less costs for obtaining and realizing the collateral.
Estimated borrower recoveries related to claims paid and loss reserves are recognized in subrogation recoverable net of
estimated administrative fees associated with collection.
(c) Financial instruments
The Company recognizes financial assets on the trade date, at which the Company becomes a party to the contractual provisions of
the financial asset contract.
The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers
the rights to receive contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards
of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the
Company is recognized as a separate asset or liability.
Financial assets and liabilities are offset and the net amount is presented in the statement of financial position when the Company
has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability
simultaneously.
(i) Cash and cash equivalents
Cash and cash equivalents are comprised of deposits in banks, treasury bills, and highly liquid investments, with original
maturities of three months or less, that are readily convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value.
The Company has classified its financial assets as financial assets at FVTPL and AFS financial assets as described below:
(ii) Financial assets at FVTPL
A financial asset is classified as FVTPL if it is considered to be held for trading or it is designated as such upon initial recognition.
The Company’s financial assets at FVTPL are its European Credit Luxembourg bonds.
The issuer of the European Credit Luxembourg bonds uses the net proceeds of the offering to buy fixed income investments
of European origin and credit risk. The result is a diversified portfolio of European fixed income investments. Since the bond
collateral is likely to contain embedded derivatives which are not readily identifiable, the investments are considered to be held
for trading and have been classified as FVTPL at initial recognition. The European Credit Luxembourg bonds were sold during
the year ended December 31, 2011.
FVTPL financial assets are recorded at fair value with realized gains and losses on sale and changes in the fair value recorded in
investment income. Transaction costs related to FVTPL financial assets are recognized in income as incurred.
42
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
(iii) AFS financial assets
AFS financial assets are non-derivative financial assets that are designated as AFS and are not classified in any other specific
financial asset category. The Company classifies bonds and debentures, including bonds and debentures in the government
guarantee fund, short-term investments, equity investments, and cash and cash equivalents in the AFS financial asset category.
These financial assets are designated as and qualified to be AFS because they are traded in an active market.
AFS financial assets are recorded at fair value with changes in the fair value of these assets recorded in other comprehensive
income. Cumulative realized gains and losses on sale and cumulative realized gains and losses on AFS instrument derecognition, as
well as impairment losses are reclassified from accumulated other comprehensive income and recorded on investment income.
Transaction costs are capitalized as part of the carrying value of the AFS financial assets.
(iv) Securities lending
Securities lending transactions are entered into on a collateralized basis. The transfer of the securities themselves is not
derecognized on the statement of financial position given that the risks and rewards of ownership are not transferred from the
Company to the counterparties in the course of such transactions. The securities are reported separately on the consolidated
statement of financial position on the basis that counterparties may resell or re-pledge the securities during the time that the
securities are in their possession.
Securities received from counterparties as collateral are not recorded on the consolidated statement of financial position given
that the risk and rewards of ownership are not transferred from the counterparties to the Company in the course of such
transactions and because cash collateral is not permitted as an acceptable form of collateral under the program.
(v) Interest income
Interest income from fixed income investments including bonds and debentures is recognized on an accrual basis using the
effective interest method and reported as interest in investment income.
Lending fees received under the Company’s securities lending program are recognized on an accrual basis and reported as
interest in investment income.
Interest income from impaired fixed income investments is recognized using the rate of interest used to discount the future
cash flows for the purpose of measuring the impairment loss. Such interest is recognized only if the Company expects the
interest to be received based on the financial condition of the fixed income investment issuer.
(vi) Dividend income
Dividends on equity investments are recognized when the shareholder’s right to receive payment is established, which is the
ex-dividend date, and are reported as dividends in investment income.
(vii) Non-derivative financial liabilities
All non-derivative financial liabilities are recognized initially on the date that the Company becomes a party to the contractual
provisions of the financial instrument.
The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire.
The Company classifies all non-derivative financial liabilities into the Other Financial Liabilities category. Such financial liabilities
are recognized initially at fair value along with any directly attributable transaction costs. Subsequent to initial recognition, these
financial liabilities are measured at amortized cost using the effective interest method.
Non-derivative financial liabilities are comprised of the Company’s long-term debt (note 21) and accounts payable and accrued
liabilities including balances due to the Company’s majority shareholder and companies under common control (note 12).
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
43
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
3. Significant accounting policies (continued)
(d) Property and equipment
(i) Recognition and measurement
Property and equipment are recorded at cost less accumulated depreciation and accumulated impairment losses. Cost includes
all expenditures that are directly attributable to acquiring the asset and preparing it for its intended use.
When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major
components) of property and equipment.
Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal
with the carrying amount of the property and equipment, and are recognized on a net basis in income.
The Company classifies computer software that is part of an operating system or is an integral part of related hardware as
property and equipment.
(ii) Subsequent costs
Property and equipment replacements are recognized in the carrying amount of property and equipment if they embody future
economic benefit to the Company and the carrying amount of the replaced part is derecognized. The costs of day-to-day
servicing of property and equipment are expensed as incurred.
(iii) Depreciation
Depreciation on property and equipment, except for leasehold improvements, is recognized in income on a straight-line basis
over the estimated useful lives of each component of an item of property and equipment from the date it is available for use.
Straight-line depreciation most closely reflects the expected pattern of consumption of the future economic benefits embodied
in the property and equipment. Leasehold improvements are depreciated over the terms of the related leases.
The estimated useful lives for the current and comparative periods are as follows:
Computer software
Computer hardware and other
Furniture and equipment
Leasehold improvements
(e) Intangible assets
Goodwill
3–5 years
3 years
5 years
Term of related lease
Goodwill arises upon the acquisition of subsidiaries. See note 3(a)(i) for the policy on measurement of goodwill on initial recognition.
Subsequent to initial recognition, goodwill is measured at cost less accumulated impairment losses. See note 3(f)(ii) for the policy
on measurement of impairment losses on non-financial assets.
Other intangible assets
(i) Recognition and measurement
Intangible assets are recorded at cost less accumulated amortization and accumulated impairment losses. The Company’s
intangible assets consist of computer application software that is not an integral part of related hardware.
(ii) Subsequent expenditures
Subsequent expenditures that increase application software functionality are recognized in the carrying amount of intangible
assets if they embody future economic benefit to the Company. All other costs including the costs of day-to-day servicing of
intangible assets are expensed as incurred.
(iii) Amortization
Amortization is recognized in expense on a straight-line basis over the estimated useful lives of intangible assets from the date that
they are available for use, since this most closely reflects the expected pattern of consumption of the future economic benefits
embodied in the assets. The estimated useful lives for the current and comparative periods range from three years to five years.
44
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
(f)
Impairment
(i)
Impairment of financial assets
A financial asset not carried at FVTPL is assessed at each reporting date to determine whether there is objective evidence
that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial
recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can
be estimated reliably.
Objective evidence that financial assets are impaired include default or delinquency by the debtor, indications that the issuer of
a security will enter bankruptcy, economic conditions that correlate with defaults or the disappearance of an active market for a
security, a significant prolonged decline in fair value of an equity security below its cost, or lack of intent to hold the investment
for a period of time sufficient to allow for any anticipated recovery.
Impairment losses on AFS financial assets are recognized by reclassifying losses accumulated in other comprehensive income
(“AOCI”) to income. The cumulative loss that is reclassified from AOCI to income is the difference between the acquisition
cost, net of any principal repayment and amortization, and the current fair value, less any impairment loss recognized previously
in income. Changes in impairment provisions attributable to application of the effective interest method are reflected as a
component of investment income. If, in a subsequent period, the fair value of an impaired AFS debt security increases and
the increase can be related objectively to an event occurring after the impairment loss was recognized in income, then the
impairment loss is reversed, with the amount of the reversal recognized in income. However, any subsequent recovery in fair
value of an impaired AFS equity security is recognized in other comprehensive income (“OCI”).
(ii) Impairment of non-financial assets
The carrying amounts of the Company’s non-financial assets are reviewed at each reporting period to determine whether there
is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. An impairment loss is
recognized if the carrying amount of an asset exceeds its estimated recoverable amount.
Goodwill is tested for impairment on an annual basis regardless of whether an indication of impairment exists.
For purposes of goodwill impairment testing, the comparison of estimated recoverable amount to carrying amount is performed
on the Company’s single cash generating unit (“CGU”), which is its mortgage insurance business.
The recoverable amount of an asset is the greater of its value in use and its fair value less expected selling costs. In assessing
value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks specific to the asset. Impairment losses are recognized
in income in the period in which the impairment is determined. Impairment losses recognized in respect of a CGU are allocated
first to reduce the carrying amount of goodwill and then to reduce the carrying amounts of the other assets in the CGU on a pro
rata basis. An impairment loss in respect of goodwill is not reversed.
The assessment of impairment of non-financial assets excludes assessment of deferred policy acquisition costs. The ability
of the Company to recover its deferred policy acquisition costs is assessed as part of the Company’s overall insurance liability
adequacy testing. In the event that a provision for premium deficiency is required based on this test, the deferred policy
acquisition cost asset is reduced with a corresponding charge recognized as deferred policy acquisition expense.
(g) Income taxes
Income taxes are comprised of current and deferred taxes. Current and deferred income taxes associated with items recognized in
equity are recognized directly in equity. Taxes on fair value gains and losses included in OCI are charged or credited directly to OCI.
Otherwise, except to the extent that they relate to a business combination, current and deferred income taxes are recognized in
income.
(i) Current tax
Current income taxes are recognized for estimated income taxes payable or recoverable for the current year and any
adjustments to taxes payable in respect of prior years. The tax rates and laws used to compute these amounts are those that
are enacted or substantively enacted at the date of the consolidated financial statements. Current income taxes payable and
current income taxes recoverable are offset when they relate to income taxes imposed by the same taxation authority for the
same legal entity and the taxation authority permits making or receiving a single net payment.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
45
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
3. Significant accounting policies (continued)
(ii) Deferred tax
Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for taxation purposes.
Deferred tax is not recognized for temporary differences on the initial recognition of assets or liabilities in a transaction that
is not a business combination and that affects neither accounting nor taxable income or loss, temporary differences related
to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future, and taxable
temporary differences arising on the initial recognition of goodwill.
Deferred taxes are measured using currently enacted or substantively enacted income tax rates expected to apply to taxable
income in the periods in which the temporary differences reverse. The most significant temporary differences relate to policy
reserves and the government guarantee fund.
Deferred tax assets are recognized for unused tax losses, tax credits and deductible temporary differences to the extent that
it is probable the Company will have sufficient taxable income against which they can be used. The deferred tax assets are
reviewed each reporting period and are reduced to the extent that it is no longer probable that the benefit arising from the
deductible temporary difference will be realized.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax liabilities and
assets and they relate to income taxes imposed by the same taxation authority for the same legal entity.
(h) Employee benefits
(i) Defined contribution pension plan
The defined contribution plan is a post-employment benefit plan under which the Company pays fixed contributions into the
plan (that is a separate legal entity) for the benefit of its employees and will have no legal or constructive obligation to pay
further amounts. The obligation for contributions to the defined contribution pension plan is recognized as an expense in the
period during which services are provided by employees.
(ii) Defined benefit plans
A defined benefit plan is a post-employment plan other than a defined contribution plan. The Company maintains two defined
benefit plans: a Supplemental Executive Retirement Plan (“SERP”) and a plan for other non-pension post-employment benefits.
The Company’s obligation in respect of each plan is calculated separately. For each plan, the Company has adopted the
following policies:
Actuarial valuations of benefit liabilities for pension and other post-employment benefit plans are performed as at December 31
of each year using the projected unit credit method based on management’s assumptions on the discount rate, rate of
compensation increase, retirement age, mortality and the trend in the health care cost rate. Obligations for the SERP are
attributed to the period beginning on the employee’s date of joining the plan and ending on the earlier of termination, death
or retirement. Obligations for other non-pension post-employment benefits are attributed to the period beginning on the
employee’s date of hire to the date the employee reaches the age of 55 and is entitled to benefits under the plan.
All actuarial gains and losses at January 1, 2010, the date of transition to IFRSs, were recognized in retained earnings.
Subsequent actuarial gains and losses arising from changes in actuarial assumptions used to determine the benefit obligations
are recognized in other comprehensive income in the period in which they arise, and reported in retained earnings.
Prior service costs arising from plan amendments are recognized in expense over the employee benefit vesting period or in the
period in which the plan amendments are introduced if immediately vested.
Settlements occur when benefit liabilities for plan participants are settled, usually through lump sum cash payments, and as
a result the Company no longer has a liability to provide the affected employees with benefit payments in the future. The
Company recognizes gains or losses on settlement of a defined benefit obligation when the settlement occurs. The gain or loss
is comprised of any change in the present value of the defined benefit obligation and any changes in actuarial gains and losses
that had not been previously recognized.
46
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
(iii) Short-term employee benefits
Short-term employee benefit obligations, including the Company’s short-term bonus, are measured on an undiscounted basis
and are expensed as the related service is provided.
(iv) Share-based compensation
The Company’s share-based awards include stock options with tandem stock appreciation rights (“Options”), Restricted Share
Units (“RSUs”), Performance Share Units (“PSUs”) and Directors’ Deferred Share Units (“DSUs”). Recipients of these awards
are entitled to the option of settlement in cash or shares of the Company.
The fair value of Options, RSUs, PSUs and DSUs is recognized as compensation expense over the relevant vesting period,
with a corresponding entry to share-based compensation liabilities. The liability is re-measured at each reporting date and
the settlement date. Any changes in the fair value of the liability are recognized as compensation expense. Share-based
compensation is reclassified from liability to equity if employees choose shares when these awards vest.
Options are measured at fair value using the Black-Scholes valuation model. RSUs, PSUs and DSUs are measured at fair value
using the quoted market price of the Company’s shares at the end of each reporting period.
RSUs, PSUs, and DSUs may participate in dividend equivalents at the discretion of the Company’s Board of Directors. Dividend
equivalents are calculated based on the fair value of the Company’s shares on the date the dividend equivalents are credited to
the RSU, PSU or DSU account and are recorded as additional compensation expense.
Share-based awards are recorded as expense only to the extent that management expects such awards to vest based on
service and performance conditions attached to the share-based awards.
(i) Share capital
Common shares are classified as equity on the consolidated statement of financial position. Incremental costs directly attributable
to the issue of common shares are recognized as a deduction from equity, net of any tax effects.
(j) Foreign currency translation
Transactions in foreign currencies are translated to Canadian dollars at the date of the transactions. Monetary assets and liabilities
denominated in foreign currencies at the reporting date are translated to Canadian dollars at period end rates. Foreign currency
differences arising on translation are recognized in income.
(k) Earnings per share
The Company presents basic and diluted earnings per share for its common shares. Basic earnings per share are calculated by
dividing the Company’s net income for the period by the weighted average number of shares outstanding during the period. Diluted
earnings per share are determined by adjusting the weighted average number of shares outstanding for the effects of all dilutive
potential shares, which are comprised of share-based compensation awards granted to employees and directors of the Company.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
47
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
4. Future changes in accounting policies
(a) IAS 1 – Presentation of financial statements (“IAS 1”)
In June 2011, the IASB published amendments to the requirements for presentation of items of OCI in IAS 1. The amendments
require that an entity present separately the items of OCI that may be reclassified to income in the future from those that would
never be reclassified to income. Entities will continue to have a choice of whether to present components of OCI before or after
tax. Those that present components of OCI before tax will be required to disclose the amount of tax related to the two groups
separately. The amendment is effective for annual periods beginning on or after July 1, 2012 and is to be applied retrospectively.
Early adoption is permitted.
This amendment will have minimal impact to the Company’s consolidated financial statements.
(b) IAS 19 – Employee benefits (“IAS 19”)
In June 2011, the IASB published an amended version of IAS 19. The amendments require:
•
•
•
•
•
the elimination of the corridor method with actuarial gains and losses recognized immediately in OCI;
recognition of prior service costs in full immediately in income;
the expected return on plan assets recognized in income to be calculated based on the rate used to discount the defined
benefit obligation;
additional disclosures that explain the characteristics of the entity’s defined benefit plans and risks associated with them, as well
as disclosures that describe how defined benefit plans may affect the amount, timing and uncertainty of future cash flows; and
the recognition of termination benefits at the earlier of when the entity recognizes costs for a restructuring within the scope
of IAS 37 – Provisions, contingent liabilities and contingent assets and when the entity can no longer withdraw the offer of the
termination benefits.
The amendment is effective for annual periods on or after January 1, 2013 and is to be applied retrospectively. Early adoption is
permitted.
Upon IFRS transition on January 1, 2010 (note 24), the Company has elected to recognize actuarial gains and losses immediately in
OCI. Furthermore, the Company has recognized all prior service costs to date fully in income as the prior service costs were fully
vested at the date of transition. The Company’s recognition of defined benefit plans is not impacted by changes in the calculation
of expected return on plan assets as its defined benefit plans are unfunded. The only impact from this amendment to the Company
upon adoption of the revised standard will be the requirement for additional disclosure related to its defined benefit plans.
(c) IFRS 13 – Fair value measurement (“IFRS 13”)
In May 2011, the IASB published IFRS 13 as a replacement of the fair value measurement guidance contained in individual IFRSs.
IFRS 13 explains how to measure fair value when it is required or permitted by other IFRSs but the standard does not introduce
new requirements to measure assets or liabilities at fair value, nor does it eliminate the practicability exceptions to fair value
measurements that currently exist in certain standards.
IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date (i.e. an exit price). The standard requires the fair value hierarchy, which was
introduced by IFRS 7 – Financial Instruments – Disclosures, to be applied to all fair value measurements, including non-financial
assets and liabilities that are measured at or based on fair value in the statement of financial position. IFRS 13 also expands
disclosure requirements for fair value measurements to provide information that enables financial statement users to assess the
methods and inputs used to develop fair value measurements and, for recurring fair value measurements that use significant
unobservable inputs, the effect of the measurements on income or OCI.
IFRS 13 is applicable prospectively for annual periods beginning on or after January 1, 2013. Earlier application is permitted.
The adoption of IFRS 13 may result in additional disclosure to the Company relating to inputs used to develop fair value
measurements.
48
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
(d) Scope of the reporting entity and consolidation
In May 2011, the IASB published five new and revised standards that address the scope of the reporting entity and consolidation.
The new standards are IFRS 10 – Consolidated financial statements (“IFRS 10”), IFRS 11 – Joint arrangements (“IFRS 11”) and
IFRS 12 – Disclosure of interests in other entities (“IFRS 12”). The revised standards are IAS 28 – Investments in associates and
joint ventures (“IAS 28”) and IAS 27 – Consolidated and separate financial statements (“IAS 27”).
(i)
IFRS 10 introduces a single consolidation model that uses the same criteria to determine control for entities of all types,
irrespective of whether the investee is controlled by voting rights or other contractual arrangements. The principle that a
consolidated entity presents a parent and its subsidiaries as a single entity remains unchanged, as do the mechanics of
consolidation. IFRS 10 supersedes existing guidance under IAS 27 and SIC-12 – Consolidation – Special Purpose Entities.
(ii) IFRS 11 establishes principles for financial reporting by parties to a joint arrangement, and only differentiates between joint
operations and joint ventures. The option to apply proportionate consolidation when accounting for joint ventures has been
eliminated. Equity accounting is now required in accordance with IAS 28. IFRS 11 supersedes existing guidance under
IAS 31 – Interests in joint ventures and SIC-13 – Jointly controlled entities – non‑monetary contributions by venturers.
(iii) IFRS 12 sets out the disclosure requirements under IFRS 10, IFRS 11, and IAS 28. The enhanced disclosures in the new
standard are intended to help financial statement users evaluate the nature, risks and financial effects of an entity’s interests in
subsidiaries, associates, joint arrangements and unconsolidated structured entities.
(iv) IAS 28 has been amended in accordance with the changes to accounting for joint ventures in IFRS 11. The amended standard
prescribes the accounting for investments in associates and provides guidance on the application of the equity method when
accounting for investments in associates and joint ventures.
(v) IAS 27 has been amended to provide guidance on the accounting and disclosure requirements for investments in subsidiaries,
associates and joint ventures when an entity prepares separate financial statements. The amended standard requires an entity
preparing separate financial statements to account for investments at cost or in accordance with IFRS 9 – Financial Instruments.
These standards are applicable for annual periods beginning on or after January 1, 2013. Earlier application is permitted so long
as all of these new standards and changes in the existing standards are applied at the same time.
The adoption of these standards and amendments of standards will result in additional disclosure requirements for the
Company. There will be no change to the Company’s current requirements to consolidate subsidiaries or changes in methods
of consolidation applied.
(e) IFRS 9 – Financial instruments (“IFRS 9”)
In November 2009 the IASB issued IFRS 9 (IFRS 9 (2009)) and in October 2010 the IASB published amendments to IFRS 9
(IFRS 10 (2010)).
IFRS 9 (2009) replaces the guidance in IAS 39 – Financial instruments – recognition and measurement (“IAS 39”), on the
classification and measurement of financial assets. The Standard eliminates the existing IAS 39 categories of held to maturity,
available-for-sale and loans and receivables. Financial assets will be classified into one of two categories on initial recognition:
• financial assets measured at amortized cost; or
• financial assets measured at fair value.
Gains and losses on remeasurement of financial assets measured at fair value will be recognized in income, except that for an
investment in an equity instrument which is not held-for-trading, IFRS 9 (2009) provides, on initial recognition, an irrevocable
election to present all fair value changes from the investment in OCI. The election is available on an individual share-by-share basis.
Amounts presented in OCI will not be reclassified to income at a later date.
IFRS 9 (2010) added guidance to IFRS 9 (2009) on the classification and measurement of financial liabilities, and this guidance is
consistent with the guidance in IAS 39 except as described below.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
49
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
4. Future changes in accounting policies (continued)
Under IFRS 9 (2010), for financial liabilities measured at fair value under the fair value option, changes in fair value attributable
to changes in credit risk will be recognized in OCI, with the remainder of the change recognized in income. However, if this
requirement creates or enlarges an accounting mismatch in income, the entire change in fair value will be recognized in income.
Amounts presented in OCI will not be reclassified to income at a later date.
IFRS 9 (2010) also requires derivative liabilities that are linked to and must be settled by delivery of an unquoted equity instrument
to be measured at fair value, whereas such derivative liabilities are measured at cost under IAS 39.
IFRS 9 (2010) also added the requirements of IAS 39 for the derecognition of financial assets and liabilities to IFRS 9 without
revision to these requirements.
The IASB has deferred the mandatory effective date of the existing chapters of IFRS 9 to annual periods beginning on or after
January 1, 2015.
IFRS 9, when initially applied, will have a significant impact on the Company’s financial statements, since it will be required to
be applied retrospectively. The Company is not able at this time to estimate reasonably the impact that IFRS 9 will have on the
financial statements.
(f)
IFRS 7 – Financial instruments – disclosures (“IFRS 7”)
In October 2010 the IASB issued Amendments to IFRS 7 Disclosures – Transfers of financial assets.
The amendments to IFRS 7 require disclosure of information that enables users of financial statements:
•
to understand the relationship between transferred financial assets that are not derecognized in their entirety and the
associated liabilities; and
•
to evaluate the nature of, and risks associated with, the entity’s continuing involvement in derecognized financial assets.
The amendments define “continuing involvement” for the purposes of applying the disclosure requirements.
The amendments to IFRS 7 are effective for annual periods beginning on or after January 1, 2012.
The application of the amendments to IFRS 7 may result in additional disclosure to the Company relating to transfers of financial
assets under its securities lending program.
(g) Amendments to IAS 32 and IFRS 7 – Offsetting financial assets and financial liabilities
In December 2011, the IASB published Offsetting Financial Assets and Financial Liabilities and issued new disclosure requirements
in IFRS 7.
The amendments to IAS 32 – Financial instruments – disclosure (“IAS 32”) clarify that an entity currently has a legally enforceable
right to set-off if that right is:
• not contingent on a future event; and
•
enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all
counterparties.
The amendments to IAS 32 also clarify when a settlement mechanism provides for net settlement or gross settlement that is
equivalent to net settlement.
The amendments to IFRS 7 contain new disclosure requirements for financial assets and liabilities that are:
• offset in the statement of financial position; or
• subject to master netting arrangements or similar arrangements.
The effective date for the amendments to IAS 32 is annual periods beginning on or after January 1, 2014. The effective date
for the amendments to IFRS 7 is annual periods beginning on or after January 1, 2013. These amendments are to be applied
retrospectively.
The Company does not expect the amendments to IAS 32 to have a material impact on the financial statements. The amendments
to IFRS 7 may result in additional disclosure to the Company related to assets and liabilities that are offset in the Company’s
financial statements.
50
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
5. Significant judgments and estimates
(a) Judgments
Significant judgments made in applying accounting policies are as follows:
Objective evidence of impairment of AFS financial assets.
As of each balance sheet date, the Company evaluates AFS financial assets in an unrealized loss position for objective evidence of
impairment.
For investments in bonds and debentures, evaluation of whether impairment has occurred is based on the Company’s best
estimate of the cash flows expected to be collected at the individual investment level. The Company considers all available
information relevant to the collectability of the investment, including information about past events, current conditions, and
reasonable and supportable forecasts. Estimating such cash flows is a quantitative and qualitative process that incorporates
information received from third party sources along with certain internal assumptions and judgments regarding the future
performance of any underlying collateral for asset-backed investments. Where possible, this data is benchmarked against third
party sources. Impairments for bonds and debentures in an unrealized loss position are deemed to exist when the Company does
not expect full recovery of the amortized cost of the investment based on the estimate of cash flows expected to be collected or
when the Company intends to sell the investment prior to recovery from its unrealized loss position.
For equity investments, the Company recognizes an impairment loss in the period in which it is determined that an investment
has experienced significant or prolonged losses and is not expected to recover its cost within a reasonable period. The Company
determines what constitutes a reasonable period on an investment-by-investment basis based upon consideration of all the
evidence available, including the magnitude of an unrealized loss and its duration. In any event, this period does not exceed
eighteen months.
(b) Estimates
Information about assumptions and estimation uncertainties that have a risk of resulting in material adjustment within the next
twelve months are as follows:
(i) Premiums earned
Mortgage insurance premiums are deferred and then taken into underwriting revenues over the terms of the related policies.
The rates or formulae under which premiums are earned relate to the loss emergence pattern in each year of coverage. In
order to match premiums earned to losses on claims, premiums written are recognized as premiums earned using a factor-
based premium recognition curve. In constructing the premium recognition curve, the Company applies actuarial forecasting
techniques to historical loss data to determine expected loss development and the related loss emergence pattern. The
actuarial forecasting techniques incorporate economic assumptions that impact future losses and loss development including
unemployment rates, interest rates and expected changes in house prices. The premium recognition curve is reviewed
quarterly based on the most current available historical loss data and economic assumptions and updated as required. See
note 6(a) for disclosure of the impact of the current and comparative periods’ premium recognition curve updates.
(ii) Losses
Loss reserves represent the amount needed to provide for the expected ultimate net cost of settling claims including
adjustment expenses related to defaults by borrowers (both reported and unreported) that have occurred on or before the
balance sheet date. Loss reserves are discounted to take into account the time value of money and include a supplemental
provision for adverse deviation. Loss reserves are recognized when the first scheduled mortgage payment is missed by
a mortgage borrower. In determining the ultimate claim amount, the Company estimates the expected recovery from the
property securing the insured loan and the legal, property maintenance and other loss adjustment expenses incurred in the
claim settlement process. Loss reserves consist of individual case reserves, Incurred But Not Reported (“IBNR”) reserves and
supplemental loss reserves for potential adverse deviation.
For the purpose of quantifying case reserves, the Company analyzes each reported delinquent loan on a case-by-case basis and
establishes a case reserve based on the expected loss, if any. The ultimate expected claim amount is influenced significantly
by housing market conditions, changes in property values, and the condition of properties in default. Accordingly, case reserves
include a provision for adverse development, primarily to address potential decline in property values.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
51
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
5. Significant judgments and estimates (continued)
The Company establishes reserves for IBNR based on the reporting lag from the date of first missed payment to the reporting
date for mortgages in default that have not been reported to the Company. IBNR is calculated using estimates of expected
claim frequency and claim severity based on the most current available historical loss data.
In order to discount loss reserves to present value, the Company’s actuary determines a discount rate based on the book yield
of the Company’s general investment portfolio.
The Company’s actuary develops a margin for adverse deviation based on assessment of the adequacy of the Company’s
loss reserves (derived from an independent calculation of the reserves) and with reference to the current and future expected
condition of the Canadian housing market and its impact on the expected development of losses. The Company determines a
supplemental provision for adverse deviation (“PFAD”) based on the margin developed by the actuary.
The process for the establishment of loss reserves relies on the judgment and opinions of a number of individuals, on
historical precedent and trends, on prevailing legal and economic trends and on expectations as to future developments. This
process involves risks that actual results will deviate, perhaps substantially, from the best estimates made. These risks vary in
proportion to the length of the estimation period and the volatility of each component comprising the liability.
(iii) Subrogation recoverable
The Company estimates the fair value of real estate owned included in subrogation recoverable based on third party property
appraisals or other types of third party valuations deemed to be more appropriate for a particular property.
The Company estimates borrower recoveries related to claims paid and loss reserves included in subrogation recoverable based
on historical recovery experience.
(iv) Deferred policy acquisition costs
Deferred policy acquisition costs are comprised of premium taxes, appraisal costs, certain employee compensation, and other
expenses that relate directly to acquisition of new mortgage insurance business. Deferred policy acquisition costs are deferred
and expensed in proportion to and over the periods in which premiums are earned. The Company estimates expenses eligible
for deferral based on the nature of expenses incurred and results of time and activity studies performed to identify the portion
of time the Company’s employees incur in the acquisition of new mortgage insurance business.
(v) Utilization of tax losses
As at December 31, 2011, the Company has recognized $9,900 of tax losses (December 31, 2010 – $2,336; January 1, 2010 –
nil). Management considers it probable that future taxable profits will be available against which these tax losses can be utilized.
(vi) Share-based compensation
Stock options (“Options”) are measured at fair value using the Black-Scholes valuation model. Inputs to the Black-Scholes
valuation model are share price on the measurement date, exercise price of the instrument, expected volatility, weighted
average expected life of the instrument, expected dividend yield and the risk-free rate. Expected volatility is estimated based
on the mean volatility of the general index of Canadian financial companies and the Company’s average historical volatility. The
volatility of Canadian financial companies is used to supplement the volatility calculation given the Company has limited share
price history. The weighted average expected life of the instrument is estimated based on historical experience of affiliated
companies. Dividend yield is estimated based on historical dividends and the Company’s long-term expectations. Risk-free rate
is determined with reference to Government of Canada bonds.
Service and performance conditions attached to Options, RSUs and PSUs are not taken into account in determining fair value.
However, the Company records share-based compensation expense only to the extent that the share-based awards are
expected to vest based on management’s best estimate of the outcome of the service and performance conditions.
(vii) Employee future benefits
Actuarial valuations of benefit liabilities for pension and other post-employment benefit plans are performed as at December 31
of each year based on the Company’s assumptions on the discount rate, rate of compensation increase, retirement age, mortality
and the trend in the health care cost rate. The discount rate is determined by the Company with reference to AA credit-rated
bonds that have maturity dates approximating the Company’s obligation terms at period end and are denominated in the same
currency as the benefit obligations. Other assumptions are determined with reference to long-term expectations.
52
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
6.
Insurance contracts
(a) Premiums and unearned premium reserves
Changes in unearned premium reserves recorded in the consolidated statement of financial position and their impact on net
premiums earned are as follows:
Unearned premium reserves, beginning of year
Net premiums written during the year
Net premium earned during the year
Unearned premium reserves, end of year
December 31, December 31,
2010
2011
$ 1,902,164
533,400
(611,886)
$ 1,971,396
551,602
(620,834)
$ 1,823,678
$ 1,902,164
Gross premiums written of $544,577 for the year ended December 31, 2011 (year ended December 31, 2010 – $564,415) are
recorded net of risk premiums related to the Government Guarantee Agreement of $11,177 (December 31, 2010 – $12,813) in
accordance with the requirement described in note 10.
The Company performs actuarial studies of its multi-year loss experience on a quarterly basis. These studies have indicated a change
in the Company’s loss emergence pattern, reflecting a pattern of loss occurrence earlier in an insurance policy’s life. Changes in the
loss emergence pattern have resulted in the corresponding acceleration of premium recognition for the years ended December 31,
2011 and 2010. The cumulative impact of the experience updates for the year ended December 31, 2011 was an increase of earned
premium and corresponding decrease in unearned premium reserves of $39,256 (December 31, 2010 – $48,454).
Key methodologies and assumptions
Premiums written are recognized as premiums earned using a factor-based premium recognition curve that is based on the
Company’s expected loss emergence pattern. The principal assumption underlying the formation of the premium recognition curve
is that the Company’s future claims development will follow a similar pattern to past claims emergence patterns. Approximately
80% of the Company’s premiums written are recognized as premium earned within the first five years of policy inception based
on the current premium recognition curve. A shift in the Company’s loss emergence pattern could change the timing of the
Company’s recognition of earned premium and impact the Company’s financial performance for a period. The actuarial forecasting
technique used to establish the loss emergence pattern also incorporates economic assumptions that impact future losses and loss
development including unemployment rates, interest rates, and expected changes in house prices. There is inherent risk that future
economic conditions could differ, perhaps significantly, from the best estimates made.
The Company’s actuary performs a liability adequacy test on the Company’s unearned premium reserves using a dynamic regression
model that is in accordance with accepted actuarial practice. The purpose of the test is to ensure the unearned premium liability at
year end is sufficient to pay for future claims and expenses that may arise from unexpired insurance contracts. The liability adequacy
test for the years ended December 31, 2011 and December 31, 2010 and as at January 1, 2010 identified a surplus in the Company’s
unearned premium reserves and thus no premium deficiency reserves are required at these reporting dates.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
53
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
6.
Insurance contracts (continued)
(b) Loss reserves
Loss reserves are comprised of the following:
Case reserves
IBNR
Discounting and provision for adverse deviation
Total loss reserves
December 31, December 31,
2010
2011
January 1,
2010
$ 123,289
40,469
5,250
$ 156,766
43,523
6,322
$ 187,815
41,359
7,007
$ 169,008
$ 206,611
$ 236,181
Changes in loss reserves recorded in the consolidated statement of financial position and their impact on losses on claims are
as follows:
Loss reserves, beginning of year
Claims paid during the year
Net losses on claims incurred during the year:
Losses on claims related to the current year
Losses on claims related to prior years
Loss reserves, end of year
Claims development
December 31, December 31,
2010
2011
$ 206,611
(262,113)
$ 236,181
(235,980)
172,200
52,310
175,189
31,221
$ 169,008
$ 206,611
Loss reserves are established to reflect an estimate of the ultimate cost of claim settlement as at the reporting date. Given the
uncertainty in establishing the outstanding loss reserves, it is likely that the final outcome will be different than the original liability
established. Claims development refers to the financial adjustment in the current period relating to claims incurred in previous
periods because of new and more up to date information that has become available and to reflect changes in assumptions. The
information is presented on a default year basis (claims are related to the period in which the insured event occurred and not the
period in which the policy was underwritten).
54
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
The following table demonstrates the development of the estimated loss reserves for the ten most recent default years.
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Total
Development:
Claims incurred
at the end of
the default year
$ 30,991 $ 34,523 $ 35,262 $ 43,825 $ 52,845 $ 70,994 $ 102,549 $ 148,493 $ 196,586 $ 175,189 $ 172,200 $
Claims incurred
one year later
15,204
10,557
18,968
22,727
29,670
46,971
106,468
200,807
218,890
193,820
Claims incurred
two years later
14,607
9,684
21,355
21,397
30,542
54,352
112,224
204,706
247,663
Claims incurred
three years later
13,856
10,039
20,877
21,210
31,485
55,461
115,632
209,850
Claims incurred
four years later
13,828
10,004
20,868
21,001
31,431
56,072
115,816
Claims incurred
five years later
13,814
10,002
20,866
20,807
31,245
55,701
Current estimate
of claims incurred
13,814
10,002
20,866
20,807
31,245
55,701
115,816
209,850
247,663
193,820
172,200
1,091,784
Cumulative payments
to date
13,814
10,002
20,866
20,807
31,245
55,701
115,723
206,301
240,990
159,148
48,179
922,776
Current loss reserves
—
—
—
—
—
—
93
3,549
6,673
34,672
124,021
169,008
Current estimate
of surplus
(deficiency)
$ 17,177 $ 24,521 $ 14,396 $ 23,018 $ 21,600 $ 15,293 $ (13,267) $ (61,357) $ (51,077) $ (18,631) $
— $
—
% surplus (deficiency)
of initial gross
loss reserve
55%
71%
41%
53%
41%
22%
(13)%
(41)%
(26)%
(11)%
—
—
Conditions and trends that have affected the development of liabilities in the past may or may not occur in the future and,
accordingly, conclusions about future results may not necessarily be derived from the information presented in the table above.
Key methodologies and assumptions
The establishment of loss reserves is based on known facts and interpretation of circumstances. The principal methodologies and
assumptions underlying loss reserve estimates are as follows:
(i)
Claim frequency
Claim frequency is the portion of delinquencies (both reported and unreported) that are expected to result in paid claims, after
estimated cures have been removed. A cure is defined as a reported delinquency that closes with no claim payment or only
nominal loss adjustment expenses. Claim frequency is influenced by labour market performance and changes in house prices.
The Company estimates claim frequency for case reserves by analyzing individual reported delinquencies. The Company
estimates claim frequency for IBNR by applying average delinquency-to-paid-claim ratios to historical reported delinquencies,
derived from tracking and analyzing policyholder behaviour over time.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
55
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
6.
Insurance contracts (continued)
(ii) Claim severity
Claim severity is influenced by the performance of the housing market and will increase in a period of property value declines.
The Company estimates claim severity for case reserves by analyzing individual reported delinquencies, including obtaining
valuations for the properties securing claims. The Company estimates claim severity for IBNR based on historical claim amounts.
Variables that affect the determination of loss reserves are the receipt of additional claim information and other internal and
external factors such as the performance of the housing market, changes in claims handling procedures, significant claim
reporting lags, and uncertainties regarding the condition of properties at the time of initial loss reserve quantification.
Sensitivities
Sensitivity analyses are conducted to quantify the exposure to changes in key loss assumptions. The change in any key assumption
will impact the Company’s performance and financial position for a period. The following sensitivity analyses are performed for
reasonable possible movements in key loss assumptions with all other assumptions held constant, showing the impact on pre-
tax income and shareholders’ equity. The correlation of assumptions will have a significant effect in determining ultimate claims
liabilities, but to demonstrate the impact due to changes in assumptions, assumptions had to be changed on an individual basis. It
should be noted that movements in these assumptions are non-linear.
December 31, 2011
Sensitivity factor
Claim frequency
Claim severity
December 31, 2010
Sensitivity factor
Claim frequency
Claim severity
(c) Subrogation recoverable
The following table presents movement in subrogation recoverable during the year:
Subrogation recoverable, beginning of year
Real estate assets acquired as a result of settling claims
Change in market value for real estate on hand
Real estate assets sold
Estimated net borrower recoveries recognized
Subrogation recoverable, end of year
Impact on net
Impact on
Change in income before shareholders’
equity
income taxes
assumptions
+10%
-10%
+10%
-10%
$
(34,088)
34,088
(34,088)
34,088
$
(24,543)
24,543
(24,543)
24,543
Change in
assumptions
Impact on net
income before
income taxes
Impact on
shareholders’
equity
+10%
-10%
+10%
-10%
$
(31,149)
31,149
(31,149)
31,149
$
(21,804)
21,804
(21,804)
21,804
December 31, December 31,
2010
2011
$
40,393
220,647
(13,270)
(162,460)
21,247
$
13,646
86,982
(13,086)
(47,149)
—
$ 106,557
$
40,393
When claims are paid, the Company typically obtains a legally enforceable judgment against the borrowers for the amount of the loss
incurred. The Company actively engages in collection activities to recover monies from the borrowers under the judgments. During the
year ended December 31, 2011, management determined that there was sufficient historical experience of successful recoveries from
borrowers in order to establish an expected recovery rate and to record a recovery accrual related to past claims paid and current loss
reserves. This resulted in a $21,247 decrease to losses on claims and corresponding increase to subrogation recoverable.
56
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
(d) Deferred policy acquisition costs
The following table presents movement in deferred policy acquisition costs and the impact on total expenses:
Deferred policy acquisition costs, beginning of year
Policy acquisition costs deferred during the year
Deferred policy acquisition costs expensed during the year
Net change in deferred policy acquisition costs during the year
Deferred policy acquisition costs, end of year
December 31, December 31,
2010
2011
$ 152,618
$ 146,840
48,669
(47,278)
1,391
51,302
(45,524)
5,778
$ 154,009
$ 152,618
The Company’s quarterly actuarial studies of multi-year loss experience have resulted in acceleration of premium recognition.
Expensing of deferred policy acquisitions costs is accelerated in proportion to the additional premiums recognized. The experience
update for the year ended December 31, 2011 resulted in additional expensing of deferred policy acquisition costs of $2,857
(December 31, 2010 – $3,348).
7. Financial risk management
(a) Insurance risk
The Company is exposed to insurance risk from underwriting of mortgage insurance contracts. Mortgage insurance contracts
transfer risk to the Company by indemnifying lending institutions against credit losses arising from borrower mortgage default. Under
a mortgage insurance policy, a lending institution is insured against risk of loss for the entire unpaid principal balance of a loan plus
interest, customary mortgage enforcement and selling costs, and expenses related to the sale of the underlying property. Insurance
risk impacts the amount, timing and certainty of cash flows arising from insurance contracts. The insurance risk that the Company
is exposed to is of a short-tail nature as the average duration of claims liabilities is 2.64 years (December 31, 2010 – 2.51 years;
January 1, 2010 – 2.38 years).
The Company’s risk management framework facilitates the identification and assessment of risks, and the ongoing monitoring and
management of these risks. The objective of the framework and related internal control procedures is to ensure risks are within the
Company’s defined risk appetite and tolerance and to achieve profitable underwriting results and other long-term financial goals.
There have been no significant changes to the Company’s exposure to insurance risk or the framework used to monitor, evaluate
and manage risks at December 31, 2011 compared to December 31, 2010 and January 1, 2010.
The Company has identified pricing risk, underwriting risk, claims management risk, loss reserving risk, and insurance portfolio
concentration risk as its most significant sources of insurance risk. Each of these risks is described separately below:
(i) Pricing risk
Pricing risk arises when actual claims experience differs from the assumptions included in pricing calculations. The Company’s
premium rates vary with the perceived risk of a claim on an insured loan, which takes into account the Company’s long-term
historical loss experience on loans with similar loan-to-value ratios, terms and types of mortgages, borrower credit histories and
capital required to support the product.
Before the Company introduces a new product, it establishes specific performance targets, including delinquency rates
and loss ratios, which the Company monitors frequently to identify any deviations from expected performance so that it
can take corrective action when necessary. These performance targets are adjusted periodically to ensure they reflect the
current environment.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
57
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
7. Financial risk management (continued)
(ii) Underwriting risk
Underwriting risk is the risk that the Company’s underwriting function will underwrite mortgage insurance under terms that
do not comply with the Company’s pre-established risk guidelines, resulting in inappropriate risk acceptance by the business.
The underwriting results of the mortgage insurance business can fluctuate significantly due to the cyclicality of the Canadian
mortgage market. The mortgage market is affected primarily by housing supply and demand, interest rates, and general
economic factors including unemployment rates.
The Company’s risk management function establishes risk guidelines based on the Company’s underwriting goals. The
underwriting process enables assessment of high loan-to-value applications on a loan-by-loan basis, taking into account a broad
range of factors and ensuring compliance with the risk guidelines. The risk guidelines are reviewed and updated regularly
to manage the Company’s exposures and to address emerging trends in the housing market and economic environment.
Authority levels for underwriting decisions are also assigned and monitored by the risk management function. Underwriters are
given authority to approve mortgage insurance applications based on their experience and levels of proficiency. Underwriter
performance is reviewed continuously to facilitate continuous improvement or remedial action where necessary.
(iii) Claims management risk
Claims management risk is the risk that loss mitigation efforts will be unsuccessful, resulting in larger than anticipated losses to
the Company.
Claims submitted by lending institutions are subject to the Company’s review, appraisal, and possible adjustment. Loss
mitigation officers with the requisite degree of experience and competence have authority to approve claim payments up
to a maximum dollar amount based on their experience and level of proficiency. The Company enforces a policy of actively
managing and promptly settling claims in order to reduce exposure to unpredictable future developments that can adversely
impact losses.
The Company has two primary loss mitigation programs. The Homeowner Assistance Program is designed to help
homeowners who are experiencing temporary financial difficulties that may prevent them from making timely payments on
their mortgages. Initiatives currently employed under the Homeowner Assistance Program include capitalizing arrears, deferring
payments for a specified period, arranging a partial payment plan, and increasing the mortgage amortization period.
The Asset Management Program is designed to accelerate the conveyance of real estate properties to the Company in select
circumstances. This strategy allows for better control of the property marketing process, reduction of carrying costs and
potential of realization of a higher property sales price.
In addition to its current loss mitigation programs in place, under its agreement with lending institutions, the Company has the
right to recover losses from borrowers once a claim has been paid. The Company actively pursues such recoveries.
(iv) Loss reserving risk
Loss reserving risk is the risk that loss reserves differ significantly from the ultimate amount paid to settle claims, principally
due to additional information received and external factors that influence claim frequency and severity (including performance of
the Canadian housing market).
The Company reviews its case reserves on an ongoing basis, updates the case reserves as appropriate and maintains a
supplemental loss reserve for potential adverse development that may occur during the period from borrower default date to
the claim settlement date. Management has established procedures to evaluate the appropriateness of loss reserves, which
include a review of the loss reserves by the Company’s actuary at least annually.
58
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
(v) Insurance portfolio concentration risk
A national or regional economic downturn may increase the likelihood that borrowers will not have sufficient income to pay
their mortgages and can also adversely affect home values, which increases the severity of the Company’s losses. Portfolio
concentration risk is the risk that losses increase disproportionately where portfolio diversification is inadequate.
The exposure to insurance portfolio concentration risk is mitigated by a portfolio that is diversified across geographic regions.
The Company monitors the conditions of the housing market and economy in each region of Canada against pre-determined
risk tolerances and utilizes this data to customize underwriting guidelines and loss mitigation initiatives by region.
The following table presents the Company’s concentration of risk by region based on gross premiums written.
Gross premiums written
Ontario
Quebec
Alberta
British Columbia
Other
December 31, 2011
December 31, 2010
Amount
$ 207,922
86,100
119,787
68,614
62,154
%
38%
16%
22%
13%
11%
Amount
$ 214,452
105,527
109,356
80,490
54,590
%
38%
19%
19%
14%
10%
$ 544,577
100%
$ 564,415
100%
The Company is exposed to changes in housing market performance and trends by geographic region and the concentration of
geographic risk may change over time.
(b) Credit risk
Credit risk is the risk that one party to a financial instrument fails to discharge an obligation and causes financial loss to another
party. The Company is exposed to credit risk principally through its investment assets.
The total credit risk exposure at December 31, 2011 is $4,202,949 (December 31, 2010 – $4,093,016; January 1, 2010 –
$4,074,817) and comprises $3,989,495 (December 31, 2010 – $3,936,226; January 1, 2010 – $3,778,352) of bonds and debentures,
$23,019 (December 31, 2010 – $77,139; January 1, 2010 – $423) of preferred shares, $45,723 (December 31, 2010 – $6,988;
January 1, 2010 – $253,527) of short-term investments, $38,155 (December 31, 2010 – $32,270; January 1, 2010 – $28,869) of
accrued investment income and other receivables, and $106,557 (December 31, 2010 – $40,393; January 1, 2010 – $13,646) of
subrogation recoverable.
The Company is indirectly exposed to credit risk through its proportionate interest in the investment assets of the government
guarantee fund under the Government Guarantee Agreement (notes 7(e) and 10).
The Company’s investment management strategy is to invest primarily in debt instruments of Canadian government agencies and
other high-credit-quality issuers and to limit the amount of credit exposure with respect to any one issuer, business sector, or credit
rating category, as specified in its investment policy. Credit quality of financial instrument issuers is assessed based on ratings
supplied by rating agencies Dominion Bond Rating Service, Standard and Poor’s, or Moody’s.
The breakdown of the Company’s bonds and debentures, preferred shares, and short-term investments by credit ratings is
presented below:
Credit rating
AAA
AA
A
BBB
Lower than B and unrated
December 31, 2011
December 31, 2010
January 1, 2010
Carrying value
Carrying value
Carrying value
Amount
$ 1,253,706
1,508,484
1,140,721
155,185
141
%
30.9
37.2
28.1
3.8
—
Amount
$ 1,337,237
1,426,779
1,134,426
121,756
155
%
33.3
35.5
28.2
3.0
—
Amount
$ 1,614,360
1,344,137
1,017,783
55,924
98
%
40.1
33.3
25.2
1.4
—
$ 4,058,237
100.0
$ 4,020,353
100.0
$ 4,032,302
100.0
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
59
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
7. Financial risk management (continued)
As at December 31, 2011, 96.2% of the Company’s investment portfolio was rated ’A’ or better, compared to 97.0% at December 31,
2010 and 98.6% at January 1, 2010.
The following AFS investments were in an unrealized loss position:
Government bonds
Corporate bonds
Preferred shares
Common shares
Total
December 31, 2011
December 31, 2010
January 1, 2010
Carrying Amortized Unrealized
loss
cost/Cost
value
Carrying Amortized Unrealized
loss
cost/Cost
value
Carrying Amortized Unrealized
loss
cost/Cost
value
$ 46,382 $ 46,392 $
(10) $ 28,511 $ 28,910 $
(399) $ 136,208 $ 138,674 $
(2,466)
23,678
13,671
95,163
25,326
14,277
104,940
(1,648) 118,055 120,523
(2,468)
329,438 340,743
(11,305)
(606) 28,666 29,051
(385)
(9,777) 35,192 36,732
(1,540)
—
—
—
—
—
—
$ 178,894 $ 190,935 $ (12,041) $ 210,424 $ 215,216 $ (4,792) $ 465,646 $ 479,417 $ (13,771)
As at December 31, 2011, the cost of 38 AFS investments exceeded their fair value by $12,041 (December 31, 2010 – 75 AFS
investments exceeded their fair value by $4,792; January 1, 2010 – 40 AFS investments exceeded their fair value by $13,771).
This unrealized loss is recorded in AOCI as part of unrealized gains on AFS investments. In the year ended December 31, 2011,
unrealized losses on investments arose primarily from volatility in the equity markets. In the year ended December 31, 2010,
unrealized losses on fixed income investments arose primarily from higher prevailing interest rates compared to the prior year. At
January 1, 2010, unrealized losses on fixed income investments arose primarily from an increase in credit spreads. The Company
has the ability to hold these investments until there is a recovery of fair value and these unrealized losses are considered to be
temporary in nature. The Company conducts a monthly review to identify and evaluate investments that show objective evidence of
impairment. There are no significant or prolonged declines in value for all AFS investments.
At December 31, 2011, $141 of the Company’s investments were impaired, compared to $155 at December 31, 2010 and $98 at
January 1, 2010. The breakdown of the Company’s impaired investments is presented below:
December 31, 2011
December 31, 2010
January 1, 2010
Carrying
value Cumulative
prior to impairment
loss
impairment
Credit
rating
Carrying
value Cumulative
Carrying
prior to impairment Carrying
value impairment
loss
value impairment
Carrying
value Cumulative
prior to impairment
loss
Lehman Brothers Holdings Inc. bond
Unrated
$
$
590 $
(541) $
141 $
590 $
(541) $
155 $
590 $
(541) $
590 $
(541) $
141 $
590 $
(541) $
155 $
590 $
(541) $
Carrying
value
98
98
Total interest income earned on impaired investments held at December 31, 2011 was nil (December 31, 2010 – nil).
(c) Liquidity risk/maturity analysis
Liquidity risk is the risk of having insufficient cash resources to meet financial commitments and policy obligations as they fall due
without raising funds at unfavourable rates or selling assets on a forced basis.
Liquidity risk arises from the Company’s general business activities and in the course of managing its assets, liabilities and
externally imposed capital requirements (note 8). The liquidity requirements of the Company’s business have been met primarily
by funds generated from operations including investment asset maturities and other returns received on investments and financing
activities. Cash provided from these sources is used primarily for loss and loss adjustment expense payments, operating expenses
and payment of dividends. To ensure liquidity requirements are met, the Company holds a portion of investment assets in liquid
securities. At December 31, 2011, the Company has cash and cash equivalents of $72,244 (December 31, 2010 – $351,136;
January 1, 2010 – $377,512) and short-term investments of $45,723 (December 31, 2010 – $6,988; January 1, 2010 – $253,527).
60
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
The table below summarizes the carrying value by the earliest contractual maturity of the Company’s bonds and debentures and
short-term investments:
Within 1
year
1–3
years
3–5
years
5–10
years
Over 10
years
Total
As at December 31, 2011:
$ 378,613
$ 1,072,348
$ 1,070,995
$ 951,332
$ 561,930
$ 4,035,218
As at December 31, 2010:
$ 467,544
$ 809,867
$ 1,299,013
$ 789,679
$ 570,123
$ 3,936,226
As at January 1, 2010:
$ 291,569
$ 979,151
$ 1,169,790
$ 618,344
$ 719,498
$ 3,778,352
The table below shows the expected payout pattern of the Company’s financial liabilities:
As at December 31, 2011:
Loss reserves
Long-term debt
As at December 31, 2010:
Loss reserves
Long-term debt
As at January 1, 2010:
Loss reserves
Long-term debt
(d) Market risk
Within 1
year
1–3
years
3–5
years
5–10
years
Over 10
years
Total
$
94,598
—
$ 108,924
—
$ 170,349
—
$
$
$
72,408
—
95,685
—
59,249
—
$
$
$
2,002
150,000
$
—
275,000
2,002
150,000
—
$
275,000
6,583
—
$
—
—
$
$
$
—
—
—
—
—
—
$ 169,008
425,000
$ 206,611
425,000
$ 236,181
—
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, equity market
fluctuations, foreign currency exchange rates and other relevant market rate or price changes. Market risk is directly influenced by
the volatility and liquidity in the markets in which the related underlying assets are traded. The market risks to which the Company
is exposed are interest rate risk and equity price risk.
(i)
Interest rate risk
Fluctuations in interest rates have a direct impact on the market valuation of the Company’s fixed income investment portfolio.
Short-term interest rate fluctuations will generally create unrealized gains or losses. Generally, the Company’s interest income
will be reduced during sustained periods of lower interest rates as higher-yielding fixed income investments are called, mature
or are sold and the proceeds are reinvested at lower rates, and this will likely result in unrealized gains in the value of fixed
income investments the Company continues to hold, as well as realized gains to the extent that the relevant investments are
sold. During periods of rising interest rates, the market value of the Company’s existing fixed income investments will generally
decrease and gains on fixed income investments will likely be reduced or become losses.
As at December 31, 2011, management estimates that an immediate hypothetical 100 basis point, or 1%, increase in interest
rates would decrease the market value of the AFS fixed income investments, short term investments and preferred shares
by approximately $147,000, representing 3.62% of the $4,058,237 fair value of these investments, and decrease the value of
loss reserves by $1,301. Conversely, a 100 basis point, or 1%, decrease in interest rates would increase the market value of
the AFS fixed income investments and preferred shares by approximately $157,000, representing 3.87% of the fair value, and
increase the value of loss reserves by approximately $1,328.
As at December 31, 2010, management estimated that an immediate hypothetical 100 basis point, or 1%, increase in interest
rates would decrease the market value of the AFS fixed income investments and preferred shares by approximately $146,000,
representing 3.67% of the $3,982,063 fair value of these investments, and decrease the value of loss reserves by $1,582.
Conversely, a 100 basis point, or 1%, decrease in interest rates would increase the market value of the AFS fixed income
investments and preferred shares by approximately $157,000, representing 3.94% of the fair value, and increase the value of
loss reserves by approximately $1,614.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
61
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
7. Financial risk management (continued)
As at January 1, 2010, management estimated that an immediate hypothetical 100 basis point, or 1%, increase in interest
rates would decrease the market value of the AFS fixed income investments by approximately $138,000, representing 3.45%
of the $3,997,394 fair value of the AFS fixed income investment portfolio, and decrease the value of loss reserves by $1,810.
Conversely, a 100 basis point, or 1% decrease in interest rates would increase the market value of the AFS fixed income
investments and preferred shares by approximately $138,000, representing 3.45% of the fair value, and increase the value of
loss reserves by approximately $1,847.
During the year ended December 31, 2011, the Company sold its FVTPL investment in European Credit Luxembourg bonds.
As at December 31, 2010, management estimated that a 100 basis point, or 1%, increase in interest rates would decrease the
market value of the FVTPL investments by approximately $1,800, representing 4.70% of the $38,290 fair value of the FVTPL
fixed income investment portfolio. Conversely, a 100 basis point, or 1%, decrease in interest rates would increase the market
value of the FVTPL investments by approximately the same amount.
As at January 1, 2010, management estimated that a 100 basis point, or 1% increase in interest rates would decrease the
market value of the FVTPL investments by approximately $1,500 representing 4.35% of the $34,485 fair value of the FVTPL
fixed income investment portfolio. Conversely, a 100 basis point, or 1% decrease in interest rates would increase the market
value of the FVTPL investments by approximately the same amount.
Computations of the prospective effects of hypothetical interest rate changes are based on numerous assumptions and should
not be relied on as indicative of future results. The analysis in this section is based on the following assumptions: (a) the
existing level and composition of fixed income security assets will be maintained; (b) shifts in the yield curve are parallel; and
(c) credit and liquidity risks have not been considered.
(ii) Equity price risk
Equity price risk is the risk that the fair values of equities will decrease as a result of changes in the levels of equity indices and
the values of individual stocks. Equity price risk exposure arises from the Company’s investment in common shares.
As at December 31, 2011, the Company had a total investment in common shares of $201,745. Management estimates that
a 10% increase in the equity price index would increase the market value of the common shares by $14,123 and that a 10%
decrease in the equity price index would decrease the market value of the common shares by the same amount.
As at December 31, 2010, the Company had a total investment in common shares of $118,047. Management estimated that
a 10% increase in the equity price index would increase the market value of the common shares by $8,617 and that a 10%
decrease in the equity price index would decrease the market value of the common shares by the same amount.
As at January 1, 2010, the Company did not hold any common shares.
The Company has policies to limit and monitor exposures to individual equity investment issuers and its aggregate exposure to
equities.
(e) Government guarantee fund
(i) Credit risk
The total credit risk exposure for the government guarantee fund at December 31, 2011 is $911,586 (December 31, 2010 –
$782,649; January 1, 2010 – $701,275) and comprises $891,566 of bonds and debentures (December 31, 2010 – $703,542;
January 1, 2010 – $663,161), $17,354 of short-term investments (December 31, 2010 – $75,309; January 1, 2010 – $35,291),
and $2,666 (December 31, 2010 – $3,798; January 1, 2010 – $2,823) of accrued investment income.
62
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
The Company limits credit exposure relative to the government guarantee fund by investing 100% of the portfolio into
investments issued by the Government of Canada or agencies unconditionally guaranteed by the Government of Canada. The
breakdown of the Company’s government guarantee fund investment portfolio by credit rating is presented below:
Credit rating
AAA
Total
December 31,
2011
December 31,
2010
January 1,
2010
Carrying
value
%
Carrying
value
%
Carrying
value
$ 908,920
100.0
$ 778,851
100.0
$ 698,452
$ 908,920
100.0
$ 778,851
100.0
$ 698,452
%
100.0
100.0
As at December 31, 2011, the cost of 5 AFS bonds exceeded their fair value by $82 (December 31, 2010 – the cost of five AFS
bonds exceeded their fair value by $495; January 1, 2010 – the cost of 6 AFS bonds exceeded their fair value by $246). This
unrealized loss is recorded in AOCI as part of unrealized gains on AFS investments. Due to the fact that the bond issuers are
either the Government of Canada or agencies unconditionally guaranteed by the Government of Canada, the Company expects
that future interest and principal payments will continue to be received on a timely basis. Since the Company has the ability and
intent to hold these investments until there is a recovery of fair value, which may be at maturity, these unrealized losses are not
considered to be an indication of impairment.
The following AFS bonds were in an unrealized loss position:
December 31, 2011
December 31, 2010
January 1, 2010
Carrying Amortized Unrealized
loss
value
cost
Carrying Amortized Unrealized
loss
value
cost
Carrying Amortized Unrealized
loss
value
cost
Government bonds
$ 32,584 $ 32,588 $
(4) $ 16,968 $ 17,312 $
(344) $ 3,230 $ 3,298 $
(68)
Agencies unconditionally guaranteed by
the Government of Canada
58,131
58,209
(78) 29,399 29,550
(151)
56,836 57,014
(178)
Total
$ 90,715 $ 90,797 $
(82) $ 46,367 $ 46,862 $
(495) $ 60,066 $ 60,312 $
(246)
(ii) Liquidity risk/maturity analysis
The table below summarizes the carrying value by the earliest contractual maturity of the government guarantee fund bonds
and debentures and short-term investments:
As at December 31, 2011
As at December 31, 2010
As at January 1, 2010
$
Within 1
year
96,607
128,700
45,896
1–3
years
3–5
years
5–10
years
Over 10
years
Total
$ 171,675
128,452
178,785
$ 355,620
248,344
126,725
$ 107,607
80,953
192,639
$ 177,411
192,402
154,407
$ 908,920
778,851
698,452
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
63
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
7. Financial risk management (continued)
(iii) Market risk
The market risk to which the government guarantee fund investments are exposed is interest rate risk.
As at December 31, 2011, management estimates that an immediate hypothetical 100 basis point, or 1%, increase in
interest rates would decrease the market value of the AFS fixed income investments in the government guarantee fund by
approximately $45,000, representing 4.95% of the $908,920 fair value of the government guarantee fund investment portfolio,
and decrease the value of the exit fee and liability to the Mortgage Insurance Company of Canada (“MICC”) by $9,481
(note 10). Conversely, a 100 basis point, or 1%, decrease in interest rates would increase the market value of the government
guarantee fund investments by approximately $56,000, representing 6.16% of the fair value, and increase the value of the exit
fee and liability to MICC by $11,726.
As at December 31, 2010, management estimated that an immediate hypothetical 100 basis point, or 1%, increase in
interest rates would decrease the market value of the AFS fixed income investments in the government guarantee fund by
approximately $35,000, representing 4.49% of the $778,851 fair value of the government guarantee fund investment portfolio,
and decrease the value of the exit fee and liability to MICC by $7,112. Conversely, a 100 basis point, or 1%, decrease in interest
rates would increase the market value of the government guarantee fund investments by approximately $40,000, representing
5.14% of the fair value, and increase the value of the exit fee and liability to MICC by $7,945.
As at January 1, 2010, management estimated that an immediate hypothetical 100 basis point, or 1%, increase in interest rates
would decrease the market value of the AFS fixed income investments in the government guarantee fund by approximately
$32,000, representing 4.58% of the $698,452 fair value of the government guarantee fund investment portfolio, and decrease
the value of the exit fee and liability to MICC by $6,191. Conversely, a 100 basis point, or 1%, decrease in interest rates would
increase the market value of the government guarantee fund investments by approximately $36,000, representing 5.15% of the
fair value, and increase the value of the exit fee and liability to MICC by $6,903.
Computations of the prospective effects of hypothetical interest rate changes are based on numerous assumptions and should
not be relied on as indicative of future results. The analysis in this section is based on the following assumptions: (i) the existing
level and composition of the government guarantee fund investments will be maintained; (ii) shifts in the yield curve are parallel;
and (iii) credit and liquidity risks have not been considered.
8. Capital management and regulatory requirements
Capital comprises the Company’s shareholders’ equity.
The Company’s objectives when managing capital are to maintain financial strength and a strong external financial strength rating,
to protect its loss-paying abilities, and to maximize returns to shareholders over the long term.
The Insurance Subsidiary is a regulated insurance company governed by the provisions of the Insurance Companies Act (“the Act”),
which is administered by OSFI. As such, the Insurance Subsidiary is subject to certain requirements and restrictions contained in
the Act. The Act limits dividends to shareholders under certain circumstances.
The Insurance Subsidiary is required under the Act to meet a minimum capital test (“MCT”) to support its outstanding mortgage
insurance in force. The MCT ratio is calculated based on a model developed by OSFI. The statutory minimum is 100%, and OSFI
has established a supervisory MCT ratio for the Insurance Subsidiary of 120% (December 31, 2010 – 120%; January 1, 2010 –
120%). To measure the degree to which the Insurance Subsidiary is able to meet regulatory capital requirements, the Company’s
actuary must present an annual report to the Audit Committee and management on the Insurance Subsidiary’s current and future
solvency under various projected scenarios. In addition, the Company has established an internal capital ratio for the Insurance
Subsidiary of 145% (December 31, 2010 – 145%; January 1, 2010 – 135%).
As at December 31, 2011, the Insurance Subsidiary had an MCT ratio of 162% (December 31, 2010 – 156%; January 1, 2010 –
149%) and has complied with the regulatory and internal capital requirements.
The Company’s Board of Directors has adopted a capital management policy for the Company and its Insurance Subsidiary. The
policy identifies sources of capital, establishes a capital adequacy target for the Insurance Subsidiary and sets a financial leverage
target and dividend policy for the Company. As part of its ongoing management of capital, the Company prepares capital forecasts
and regularly compares actual performance with forecasted results.
64
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
9.
Investments
Investments are carried at fair value. The Company’s investments, excluding the government guarantee fund, are summarized as
follows:
December 31, 2011
December 31, 2010
January 1, 2010
Fair Amortized Unrealized
value cost/cost gain (loss)
% Fair
value
Fair Amortized Unrealized % Fair
value
value cost/cost gain (loss)
Fair Amortized Unrealized % Fair
value
value cost/cost gain (loss)
AFS investments:
Cash and cash
equivalents:
Government
treasury bills $
69,256 $ 69,256 $
—
1.6 $ 339,093 $ 339,093 $
—
7.6 $ 231,519 $ 231,519 $
—
Bankers’
acceptances
Time deposits
—
—
—
—
Cash
2,988
2,988
72,244
72,244
Short-term investments:
Canadian federal
government
—
—
—
—
—
—
0.1
1.7
—
—
—
—
—
—
64,898
64,898
—
—
65,943
65,943
12,043
12,043
351,136
351,136
—
—
0.2
7.8
15,152
15,152
377,512
377,512
—
—
—
—
5.3
1.5
1.5
0.3
8.6
treasury bills
45,723
45,723
—
1.1
6,988
6,988
—
0.2
144,109
144,109
—
3.3
Canadian provincial
government
treasury bills
Government bonds:
Canadian federal
—
—
—
—
—
—
—
—
109,418
109,418
45,723
45,723
—
1.1
6,988
6,988
—
0.2
253,527
253,527
—
—
2.5
5.8
government
808,522 771,885
36,637
18.6
943,858
924,887
18,971
21.0
929,008
909,398 19,610
21.0
Canadian provincial
government
810,150 744,673
65,477
18.7
606,978
581,687
25,291
13.5
528,184
505,229 22,955
1,618,672 1,516,558
102,114
37.3
1,550,836 1,506,574
44,262
34.5
1,457,192 1,414,627 42,565
12.0
33.0
Corporate bonds:
Financial
Energy
1,253,093 1,180,742
72,351
28.9
1,231,336 1,170,706
60,630
27.5
1,420,446 1,370,884 49,562
32.2
308,417 286,798
21,619
Infrastructure
257,489 236,859
20,630
All other sectors
384,099 360,037
24,062
7.1
5.9
8.9
301,623
288,719
12,904
252,292
239,966
12,326
309,415
299,527
9,888
6.7
5.6
6.9
230,456
220,195 10,261
206,310
199,534
6,776
175,425
166,394
9,031
5.2
4.7
4.0
2,203,098 2,064,436
138,662
50.8
2,094,666 1,998,918
95,748
46.7
2,032,637 1,957,007 75,630
46.1
167,725 159,013
8,712
3.9
252,434
245,187
7,247
5.6
254,038
252,116
1,922
5.8
Asset backed
bonds
Total AFS
bonds and
debentures
$ 3,989,495 $ 3,740,007 $ 249,488
92.0 $ 3,897,936 $ 3,750,679 $ 147,257
86.8 $ 3,743,867 $ 3,623,750 $ 120,117
84.9
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
65
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
9.
Investments (continued)
December 31, 2011
December 31, 2010
January 1, 2010
Fair Amortized Unrealized % Fair
value cost/cost gain (loss) value
Fair Amortized Unrealized % Fair
value
cost/cost gain (loss)
value
Fair Amortized Unrealized % Fair
value
cost/cost gain (loss)
value
Preferred shares:
Financial
$
11,817 $ 12,409 $
(592)
0.3 $
67,009 $
66,717 $
292
1.5 $
423 $
421 $
Industrial
Energy
1,414
9,788
1,406
9,699
8
89
0.0
0.2
1,412
8,718
1,406
8,630
23,019
23,514
(495)
0.5
77,139
76,753
6
—
88
386
Common shares:
Energy
Financial
65,296
65,088
208
26,363
27,609
(1,246)
Communications
39,620
39,868
(248)
All other sectors
70,466
68,110
2,356
201,745 200,675
1,070
1.5
0.6
1.0
1.6
4.7
45,222
42,601
2,621
18,840
18,185
22,074
22,468
31,911
31,464
655
(394)
447
118,047
114,718
3,329
0.2
1.7
1.0
0.4
0.5
0.7
2.6
—
—
—
—
423
421
—
—
—
—
—
—
—
—
—
—
2
—
—
2
—
—
—
—
—
Total AFS
equities
224,764 224,189
575
5.2
195,186
191,471
3,715
4.3
423
421
2
FVTPL investments:
European Credit
Luxembourg Bonds:
—
—
—
—
—
—
—
—
—
—
Financial
—
—
— —
38,290
50,000
(11,710)
0.9
34,485
50,000
(15,515)
0.7
Total
investments
$ 4,332,226 $ 4,082,163 $ 250,063
100.0 $ 4,489,536 $ 4,350,274 $ 139,262
100.0 $ 4,409,814 $ 4,305,210 $ 104,604
100.0
The fair value of investments, excluding the government guarantee fund, equity investments, and cash and cash equivalents are
shown by contractual maturity of the investment. Yields are based upon fair value.
December 31, 2011
December 31, 2010
January 1, 2010
Terms to maturity
Fair value
Yield %
Fair value
Yield %
Fair value
Yield %
Bonds and debentures and
short-term investments issued
or guaranteed by the
Government of Canada:
1 year or less
1–3 years
3–5 years
5–10 years
Over 10 years
Corporate bonds and debentures
and short-term investments:
1 year or less
1–3 years
3–5 years
5–10 years
Over 10 years
$ 162,097
440,888
539,434
433,209
88,767
1,664,395
216,516
631,459
531,562
518,123
473,163
2,370,823
5.2
3.6
3.1
4.7
4.7
3.9
5.4
4.9
4.7
5.0
5.5
5.0
$ 208,244
236,155
740,893
267,808
104,724
1,557,824
266,288
573,712
558,120
521,871
465,399
2,385,390
4.6
4.8
3.1
4.9
4.6
4.0
5.2
5.0
4.8
5.1
5.5
5.1
$ 397,527
432,129
645,613
155,254
80,196
1,710,719
147,569
547,022
524,177
463,090
639,302
2,321,160
$ 4,035,218
4.6
$ 3,943,214
4.6
$ 4,031,879
1.8
4.3
3.7
5.1
4.8
3.6
4.9
5.0
5.3
5.2
5.9
5.3
4.6
66
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
Securities lending
The Company participates in a securities lending program through an intermediary that is a financial institution for the purpose of
generating fee income. Non-cash collateral, which exceeds the fair value of the loaned securities by at least 105%, is retained by
the Company until the underlying securities have been returned to the Company.
The fair value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the fair value of
the underlying securities fluctuates. While in the possession of counterparties, the loaned securities may be resold or re-pledged by
such counterparties. The intermediary indemnifies the Company against any shortfalls in collateral.
These transactions are conducted under terms that are usual and customary to security lending activities as well as requirements
determined by exchanges where a financial institution acts as an intermediary.
As at December 31, 2011, the Company had loaned AFS bonds and debentures with a fair value of approximately $277,418
(December 31, 2010 – $268,442; January 1, 2010 – $323,300) and has accepted eligible securities as collateral with a fair value of
approximately $295,178 (December 31, 2010 – $283,424; January 1, 2010 – $341,756).
Fair value measurements
Fair value measurements are based on a three-level fair value hierarchy based on inputs used in estimating the fair value of financial
instruments. The hierarchy of inputs is summarized below:
Level 1 – inputs used to value the financial instruments are unadjusted quoted prices in active markets for identical assets or
liabilities
Level 2 – inputs used to value the financial instruments are other than quoted prices included in Level 1 that are observable for the
asset or liability either directly or indirectly
Level 3 – inputs used to value the financial instruments are not based on observable market data
The following tables set forth inputs used as of December 31, 2011 and 2010 and January 1, 2010 in valuing the Company’s
financial instruments carried at fair value:
December 31, 2011
Bonds and debentures:
AFS
Preferred shares
Common shares
Short-term investments
Bonds and debentures in the government guarantee fund
Short-term investments in the government guarantee fund
December 31, 2010
Bonds and debentures:
AFS
Bonds and debentures:
FVTPL
Preferred shares
Common shares
Short-term investments
Bonds and debentures in the government guarantee fund
Short-term investments in the government guarantee fund
Total
Level 1
Level 2
Level 3
$
$ 3,989,495
23,019
201,745
45,723
891,566
17,354
$
—
23,019
201,745
45,723
—
17,354
$ 3,989,495
—
—
—
891,566
—
$ 5,168,902
$ 287,841
$ 4,881,061
$
—
—
—
—
—
—
—
Total
Level 1
Level 2
Level 3
$ 3,897,936
$
—
$ 3,897,936
$
—
38,290
77,139
118,047
6,988
703,542
75,309
—
—
118,047
6,988
—
75,309
—
77,139
—
—
703,542
—
38,290
—
—
—
—
—
$ 4,917,251
$ 200,344
$ 4,678,617
$
38,290
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
67
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
9.
Investments (continued)
January 1, 2010
Bonds and debentures:
AFS
Bonds and debentures:
FVTPL
Preferred shares
Short-term investments
Bonds and debentures in the government guarantee fund
Short-term investments in the government guarantee fund
Total
Level 1
Level 2
Level 3
$ 3,743,867
$
—
$ 3,642,737
$ 101,130
34,485
423
253,527
663,161
35,291
—
—
253,527
—
35,291
—
423
—
663,161
—
34,485
—
—
—
—
$ 4,730,754
$ 288,818
$ 4,306,321
$ 135,615
During the years ended December 31, 2011 and 2010, the reconciliation of investments measured at fair value using unobservable
inputs (Level 3) is presented as follows:
2011
Beginning balance, January 1, 2011
Investment sales
Change in fair value through income
Ending balance, December 31, 2011
2010
Beginning balance, January 1, 2010
Transfers out of Level 3
Change in fair value through income
Ending balance, December 31, 2010
AFS
bonds and
debentures
FVTPL
bonds and
debentures
$
$
—
—
—
—
$
$
$
38,290
(40,168)
1,878
Total
38,290
(40,168)
1,878
—
$
—
AFS
bonds and
debentures
FVTPL
bonds and
debentures
Total
$
$ 101,130
(101,130)
—
34,485
—
3,805
$ 135,615
(101,130)
3,805
$
—
$
38,290
$
38,290
As at December 31, 2011, the Company does not hold any level 3 financial instruments. As at December 31, 2010, the Level 3
instruments comprise $38,290 European Credit Luxembourg bonds classified as FVTPL. As at January 1, 2010, the Level 3
instruments comprise $101,130 commercial mortgage backed bonds classified as AFS and $34,485 European Credit Luxembourg
bonds. The European Luxembourg bonds are not externally rated but have been given an internal rating of BBB.
During the year ended December 31, 2010, $101,130 of bonds and debentures classified as AFS were transferred from Level 3.
The transfers from Level 3 resulted primarily from observable market data now being available, thus eliminating the need to
estimate data beyond observable data available.
No sensitivity analysis for valuing Level 3 financial instruments was performed as at December 31, 2011 as no financial instruments
were classified in this category. At December 31, 2010, the potential impact of using reasonable possible alternative assumptions
for valuing Level 3 financial instruments would increase their fair value by approximately $1,800 or decrease their fair value by
approximately the same amount. At January 1, 2010, the potential impact of using reasonable possible alternative assumptions
for valuing Level 3 financial instruments would increase their fair value by approximately $5,500 or decrease their fair value by
approximately $5,300.
68
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
10. Government guarantee fund and Government Guarantee Agreement
The 1988 Bank for International Settlements (“BIS”) agreement signed by the Government of Canada introduced risk-related
capital adequacy guidelines for Canadian chartered banks. Qualifying residential mortgages carried a 50% risk weighting, while
mortgages insured by Canada Mortgage and Housing Corporation (“CMHC”), an agency of the Government of Canada, carried no
risk weighting. The BIS capital guidelines did not provide a reduced risk weighting for residential mortgages insured by a private
mortgage insurer, thereby putting private mortgage insurers at a disadvantage to CMHC. In 1988, MICC was such an insurer.
In 1995, the Company acquired certain assets and assumed certain liabilities from MICC related to MICC’s residential mortgage
insurance line of business.
Effective January 1, 1991, MICC entered into an agreement with the Government of Canada to ensure that it could effectively
compete with CMHC. This agreement (“the Agreement”) provided MICC with a Government of Canada guarantee of its obligations
under eligible residential mortgage insurance policies. In the event of wind-up, the Government of Canada will pay an amount of
claims less 10% of the original insured amount. As a result of the credit support provided by the Government of Canada guarantee,
the risk weighting for eligible insured mortgages was reduced from 50% to 5%.
The Agreement requires:
(a) contribution of 10.5% of premiums written on eligible insured mortgages over the next 25 years to a guarantee fund, which
could be used in the event that the guarantee is called; and
(b) payment of an annual risk premium equal to 1% of the estimated Government of Canada net exposure.
Monies could be withdrawn from the government guarantee fund if the dollar value of the government guarantee fund was at
least equal to the sum of the estimated Government of Canada gross exposure on the guarantee plus the greater of 15% of the
estimated Government of Canada gross exposure and $10 million. Upon withdrawal of the monies from the government guarantee
fund, an exit fee of 1% of the amount of the fund for each year from the effective date of the Agreement (February 1992) to the
date of the withdrawal up to a maximum of 25% is required to be paid to the Government of Canada.
In conjunction with the acquisition of MICC’s residential mortgage insurance business, the Government Guarantee Agreement had
been assigned to the Company with the consent of Her Majesty In Right of Canada. The mortgage insurance policies issued by
MICC prior to the assignment of the Government of Canada Guarantee Agreement continue to be covered by the guarantee. MICC
assigned its interest in the assets held in the government guarantee fund to the Company, and the Company agreed to pay MICC
the value of MICC’s proportionate interest in the government guarantee fund when the value of MICC’s proportionate interest in
the government guarantee fund was at least equal to the sum of MICC’s estimated Government of Canada gross exposure on
the guarantee plus the greater of 15% of MICC’s estimated Government of Canada gross exposure and $10 million. Effective
2004, given that the threshold had been reached, the Company commenced payment to MICC under the terms of the agreement,
increasing the Company’s interest in the government guarantee fund.
The government guarantee fund is recorded in the consolidated statement of financial position at fair value and is comprised of the
following components:
Invested assets at fair value
Accrued contribution and accrued income
Accrued exit fee and MICC liability
December 31, December 31,
2010
2011
January 1,
2010
(a)
(b)
(c)
$ 909,527
15,889
(194,286)
$ 789,869
18,201
(162,337)
$ 699,207
14,700
(137,490)
$ 731,130
$ 645,733
$ 576,417
(a) Investments including government bonds and bonds unconditionally guaranteed by the Government of Canada and cash; plus
(b) the Company’s accrued contributions of 10.5% of premiums written on insured mortgages for the last quarter of the year and
accrued interest on invested assets; less
(c) the cumulative exit fee applicable to the fair value of the Company’s proportionate interest in investments and accrued
contributions, and the Company’s liability for MICC’s net proportionate interest in the government guarantee fund.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
69
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
10. Government guarantee fund and Government Guarantee Agreement (continued)
On June 26, 2011, the Protection of Residential Mortgage or Hypothecary Insurance Act (“PRMHIA”) was passed by the Canadian
Parliament. The stated purposes of the PRMHIA are “(a) to authorize the Minister to provide protection in respect of certain
mortgage or hypothecary insurance contracts in order to support the efficient functioning of the housing finance market and the
stability of the financial system in Canada; and (b) to mitigate the risks arising from the provision of that protection.” While the
PRMHIA does not change the level of government guarantee provided on privately insured mortgages, it formalizes in legislation
existing mortgage insurance arrangements with private mortgage insurers.
The Agreement will terminate when the provisions of PRMHIA come into force. Upon termination of the Agreement, all investments
and monies held in the government guarantee fund will revert to the Company. Any balances owing to MICC will be paid. It is
anticipated that the Company will pay a fee to the Government of Canada similar to the risk premium under the existing agreement.
Contributions of assets to the government guarantee fund and the income on such assets have resulted in a tax deferral to the
Company. Upon termination of the Agreement, the withdrawal of these assets from the government guarantee fund will result in a
current tax obligation to the Company.
For purposes of the Insurance Subsidiary’s Minimum Capital Test (“MCT”), the government guarantee fund (net of related deferred
tax impact) is deducted from capital available. Upon termination of the Agreement, the legislation gives the Minister of Finance the
ability to require the Insurance Subsidiary to maintain capital above that required to be maintained under the Insurance Companies
Act (“the ICA”).
The Company recorded the results of income from the fund of $27,055 (December 31, 2010 – $26,530) less exit fees of $24,221
(December 31, 2010 – $22,838) for a net amount of $2,834 (December 31, 2010 – $3,692) in guarantee fund earnings.
Risk premium
The Company calculates risk premium in accordance with the formula prescribed in the Government Guarantee Agreement and
accrues the balance in the consolidated statement of financial position. The risk premium recorded in the consolidated statement of
income for the year ended December 31, 2011 is $11,177 (December 31, 2010 – $12,813). The risk premium payable recorded in the
consolidated statement of financial position at December 31, 2011 is $2,634 (December 31, 2010 – $3,192; January 1, 2010 – $3,370).
11. Income taxes
The provision for income taxes is comprised of the following:
Current tax:
Current income taxes
Current tax adjustment in respect of prior years
Deferred tax:
Origination and reversal of temporary differences
Impact of change in income tax rates
Total income tax expense
Year ended
Year ended
December 31, December 31,
2011
2010
$ 109,097
(72)
$ 127,732
(2,956)
109,025
124,776
10,788
—
10,788
15,573
(1,880)
13,693
$ 119,813
$ 138,469
70
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
Income taxes charged to OCI are comprised of the following:
Tax related to net gains on AFS financial assets in the general investment portfolio
Tax related to net gains on AFS financial assets in the government guarantee fund
Tax related to defined benefit plan actuarial losses
Total income taxes charged to OCI
Year ended
Year ended
December 31, December 31,
$
2011
28,560
5,997
(582)
$
2010
9,272
618
(415)
$
33,975
$
9,475
During the year ended December 31, 2010, the Company credited $1,420 of income taxes directly to share capital.
Income taxes reflect an effective tax rate that differs from the statutory tax rate for the following reasons:
Income before income taxes
Combined basic Canadian federal and provincial income tax rate
Income tax expense based on statutory tax rate
Increase (decrease) in income tax resulting from:
Non-deductible expenses (non-taxable income)
Effect of increase (decrease) in tax rates on deferred income taxes(1)
Adjustment for prior periods
Income tax expense
Year ended
Year ended
December 31, December 31,
2011
2010
$ 443,004
28%
$ 486,451
30%
$ 124,041
$ 145,935
(3,214)
248
(1,262)
251
(4,599)
(3,118)
$ 119,813
$ 138,469
(1)
The passage of PRMHIA by the Canadian Parliament on June 26, 2011 will result in the termination of the Government of Canada Guarantee Agreement and the return of the
government guarantee fund to the Company, as described in note 10. Consequently, the deferred tax liability related to the government guarantee fund is expected to reverse into
current income taxes earlier than previously estimated. As a result, the deferred tax liability related to the government guarantee fund increased by $1,828 to reflect the income tax
rates expected to apply when the guarantee fund is returned, and income tax expense increased by $1,696 for the year ended December 31, 2011.
The difference in the effective income tax rate of 27.0% implicit in the $119,813 provision for income taxes in 2011 from the
Company’s statutory income tax rate of 28.0% was primarily attributable to an increase in non-taxable dividend income.
The difference in the effective income tax rate of 28.5% implicit in the $138,469 provision for income taxes in 2010 from the
Company’s statutory income tax rate of 30.0% was primarily attributable to a decrease in federal and provincial income tax rates and
income tax favorability relating to the 2009 taxation year which was realized upon completion of the Company’s 2009 tax returns.
The decrease in statutory income tax rates from 30% in 2010 to 28% in 2011 and from 32% in 2009 to 30% in 2010 resulted from
legislated decreases in the Canadian federal income tax rate and income tax rates of certain provinces.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
71
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
11. Income taxes (continued)
The following table describes the components of the net deferred tax liability on the Company’s consolidated statement of financial
position:
Deferred tax assets:
Employee benefits
Loss reserves
Tax losses available for carryforward
Financing costs
Deferred tax liabilities:
Investments including unrealized gains on government
guarantee fund AFS investments
Government guarantee fund reserve
Policy reserves
Property and equipment and intangible assets
Net deferred tax liability
The net change in the composition of the net deferred tax liabilities is as follows:
Balance, beginning of year
Expense for the year
Other comprehensive income for the year
Share capital adjustment
Balance, end of year
December 31, December 31,
2010
2011
January 1,
2010
$
$
4,706
2,176
9,900
555
17,337
$
3,485
2,671
2,336
893
9,385
2,895
3,070
—
—
5,965
(16,207)
(176,390)
(53,117)
(3,107)
(13,052)
(159,481)
(49,547)
(2,586)
(15,221)
(144,594)
(46,929)
(2,425)
(248,821)
(224,666)
(209,169)
$ (231,484)
$
(215,281)
$
(203,204)
December 31, December 31,
2010
2011
$ 215,281
10,788
5,415
—
$ 203,204
13,693
(196)
(1,420)
$ 231,484
$ 215,281
Management reviews the valuation of deferred tax assets on an ongoing basis to determine if a valuation allowance is necessary.
It is probable that the Company will fully utilize the benefits available from existing deferred tax assets. No valuation allowance is
required for the year ended December 31, 2011 (December 31, 2010 – nil; January 1, 2010 – nil).
72
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
12. Related party transactions and balances
Transactions with key management personnel and Company directors
Key management personnel are those persons having authority and responsibility for planning and directly controlling the activities
of the Company.
Key managements’ compensation includes both fixed elements (base salary, benefits, retirement benefit plans, executive
allowances) and performance-based elements (short-term incentive compensation and long-term share-based compensation).
The short-term incentive compensation is dependent on how well the Company performs and how well a key manager performs
in his or her role. Long-term share-based compensation grants may consist of any combination of Options, RSUs, and PSUs (see
note 15). In addition to the defined contribution retirement benefit plan, a defined benefit supplemental executive retirement plan
(“SERP”) is maintained to provide pension benefits to key management in excess of the amounts payable under the Company’s
registered defined contribution plan.
The Company has standard policies in place to cover various forms of termination. Key management is subject to the same
terms and conditions as all other employees of the Company for resignation and termination for cause. In such situations, key
management is not eligible for short-term incentives, unvested Options expire, and unvested RSUs and PSUs are forfeited. In the
case of a termination that is not for cause, unvested Options, RSUs and PSUs expire. In addition, the Company has entered into an
agreement with certain executive officers that provides specific protection in the event that their employment with the Company
is terminated without cause due to a change in control within 36 months of the Company’s IPO. If there is termination due to a
change of control or termination without cause, key management is entitled to termination benefits of up to 24 months of gross
salary, depending on his or her number of years of employment.
Directors must take 50% of their annual retainer in the form of DSUs and may elect to take the remaining portion in DSUs.
Independent directors are required to own at least three times their annual retainer in common shares or DSUs by the later of
five years from July 7, 2009, the date of the Company’s IPO or the individual’s appointment date. If a director has not met the
Company’s ownership guideline within the prescribed period, then 100% of the director’s annual retainer will be paid in DSUs until
such time as the guidelines are met.
Compensation for the Company’s five key managers and four independent directors is comprised of the following:
Short-term employee benefits
Post-employment benefits
Share-based payment
Other long-term benefits
Termination benefits
Director fees
Total compensation
Other related party transactions
December 31, December 31,
2010
2011
$
$
3,121
1,044
803
—
—
438
3,501
892
1,552
—
—
276
$
5,406
$
6,221
Following the closing of the Company’s IPO on July 7, 2009, the Company and the Insurance Subsidiary entered into a Transition
Services Agreement (“TSA”) with Genworth Financial Inc., the Company’s majority shareholder. The agreement prescribes
that these companies will provide certain services to one another, with most services being terminated within twelve months
if Genworth Financial Inc. ceases to beneficially own more than 50% of the common shares of the Company. The services
rendered by Genworth Financial Inc. and affiliated companies consist of information technology, finance, human resources, legal
and compliance, investment and other specified services. The services rendered by the Company and the Insurance Subsidiary
relate mainly to financial reporting and tax compliance support services. These transactions are in the normal course of business.
Accordingly, they are measured at the transaction value. Balances owing for service transactions are non-interest bearing and are
settled on a quarterly basis.
The Company incurred net related party charges of $5,775 for the year ended December 31, 2011 (December 31, 2010 – $6,155).
The balance owed for related party services at December 31, 2011 is $916 (December 31, 2010 – $260; January 1, 2010 – $775)
and is reported in accounts payable and accrued liabilities in the consolidated statement of financial position.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
73
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
13. Commitments
The Company’s commitments are comprised of operating leases and expenditures relating to property and equipment and
intangible assets. Information on the Company’s operating leases is presented below. Information on expenditures relating to
property and equipment and intangible assets is presented in notes 16 and 17.
The Company leases office space, office equipment, computer equipment and automobiles. Leases of office space have initial
lease terms between 5 to 7 years with the right to extend the initial term of the lease for an additional 5 years.
Future minimum lease commitments at December 31, 2011 and December 31, 2010 are as follows:
No later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
December 31, December 31,
2010
2011
$
$
2,223
6,645
1,307
2,197
6,766
3,081
$
10,175
$
12,044
Lease payments recognized as operating lease expense for the year ended December 31, 2011 were $2,890 (December 31,
2010 – $2,754).
14. Pensions and other post-employment benefits
(a) Defined contribution pension benefit plan
The Company’s eligible employees participate in a registered defined contribution pension plan. The plan provides pension benefits
to employees of the Company with two years of service with the exception of Quebec employees, who are entitled to pension
benefits after one year of service. As plan sponsor, the Company is responsible for contributing a predetermined amount to an
employee’s retirement savings, based on a percentage of that employee’s salary.
The cost of the defined contribution pension plan is recognized as compensation expense as services are provided by employees.
(b) Defined benefit pension and other post-employment benefit plans
The Company maintains two types of defined benefit plans: the SERP and a defined benefit plan for other non-pension post-
employment benefits.
The SERP is a supplemental plan that provides pension benefits in excess of the amounts payable under the Company’s registered
defined contribution plan. The other non-pension post-employment benefits provide medical and life insurance coverage upon
retirement.
The benefit liabilities represent the amount of pension and other employee post-employment benefits that employees and retirees
have earned as at period end. The Company’s actuaries perform valuations of the benefit liabilities for pension and other employee
post-employment benefits as at December 31 of each year.
Plan membership data includes the number of plan members and the average age, service period, and pensionable earnings of
plan members. For the SERP, actuarial valuations for the years ended December 31, 2011 and 2010 and as at January 1, 2010 are
based on plan membership data as at the respective period ends. For the other post-employment benefits, actuarial valuations for
the years ended December 31, 2011 and 2010 and as at January 1, 2010 are based on plan membership data as at January 1, 2009.
The next membership data update will occur as at January 1, 2012.
74
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
The Company is the sponsor of these plans. The SERP and other post-employment benefit plans are unfunded. Pension and benefit
payments related to these plans are paid directly by the Company. The benefit liabilities in respect of the plans are recorded in the
Company’s consolidated statement of financial position as follows:
SERP
Other
post-employment
benefits
December 31, December 31,
2010
2011
January 1, December 31, December 31,
2010
2010
2011
January 1,
2010
Accrued net benefit liabilities
under employee benefit plans
$
9,006
$
6,422
$
5,495
$
7,309
$
5,946
$
3,978
Pension and other post-employment benefits are recognized in employee compensation in the consolidated statement of income
and are determined as follows:
Defined benefit expense:
Benefits earned by employees
Interest cost on accrued benefit liability
Defined benefit expense for the year
Defined contribution expense for the year
Total pension and other employee future benefit expenses
recognized in the consolidated statement of income
2011
394
390
784
2,846
$
$
$
SERP
2010
402
412
814
2,665
Other
post-employment
benefits
2011
2010
$
$
$
613
376
989
—
$
$
$
440
308
748
—
3,630
$
3,479
$
989
$
748
$
$
$
$
The actuarial losses recognized in the consolidated statement of OCI relating to the SERP are $1,863 at December 31, 2011
(December 31, 2010 – actuarial losses of $390). The actuarial losses recognized in the consolidated statement of OCI relating to
other post-employment benefits are $398 at December 31, 2011 (December 31, 2010 – actuarial losses of $1,220).
Changes in the estimated financial positions of the SERP and other employee post-employment benefit plans are as follows:
Accrued net benefit liabilities under employee benefit plans
beginning of year
$
Benefits earned by employees during the year
Interest cost on accrued liability incurred during the year
Benefits paid to pensioners and employees during the year
Actuarial losses
$
2011
6,422
394
390
(63)
1,863
SERP
2010
5,495
402
412
(277)
390
Other
post-employment
benefits
2011
2010
$
$
5,946
613
376
(24)
398
3,978
440
308
—
1,220
Accrued net benefit liabilities under employee benefit plans, end of year $
9,006
$
6,422
$
7,309
$
5,946
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
75
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
14. Pensions and other post-employment benefits (continued)
The weighted average assumptions used to determine benefit liabilities are as follows:
SERP
Other
post-employment
benefits
December 31, December 31,
2010
2011
January 1, December 31, December 31,
2010
2010
2011
Discount rate, end of year
Rate of compensation increase
Average retirement age
Assumed overall health care trend rate(1)
5.50%
3.50%
62
n/a
5.75%
3.50%
62
n/a
7.00%
4.25%
62
n/a
5.50%
3.50%
59
7.47%
5.75%
3.50%
62
7.60%
(1) Grading to 4.50% by 2029.
Sensitivity of assumptions
January 1,
2010
7.00%
4.25%
62
7.71%
Sensitivity analyses of changes in the assumed health care cost trend rate for the years ended December 31, 2011 and 2010 are as
follows:
2011
Assumed overall health care trend rate (%):
Impact of:
1% increase
1% decrease
2010
Assumed overall health care trend rate (%):
Impact of:
1% increase
1% decrease
Other
post-employment
benefits
Benefit
liability
Benefit
expense
$
1,298
(966)
$
194
(162)
Other
post-employment
benefits
Benefit
liability
Benefit
expense
$
1,012
(761)
$
139
(103)
This sensitivity analysis is hypothetical. Actual experience may differ from expected experience. For the purpose of this analysis, all
other assumptions were held constant.
76
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
The benefit obligation and the actuarial gains or losses for the current annual period and the previous four annual periods are as
follows:
SERP:
Accrued benefit liability as at December 31
Actuarial (gain) loss
Non-pension post-employment benefits:
Accrued benefit liability as at December 31
Actuarial (gain) loss
Cash flows:
$
$
2011
9,006
1,863
2011
7,309
398
$
$
2010
6,422
390
2010
5,946
1,220
$
$
2009
5,495
322
2009
3,978
(258)
$
$
2008
4,487
(1,488)
2008
3,622
(2,268)
$
$
2007
5,239
(739)
2007
5,041
(358)
Cash payments made by the Company during the year in connection with employee benefit plans are as follows:
Benefits paid on defined benefit plans
Contributions to defined contribution plans
Total
Pension plans
$
2011
63
2,846
$
2010
277
2,665
$
$
2,909
$
2,942
$
Other
post-employment
benefits
2011
2010
24
—
24
$
$
—
—
—
The Company expects to contribute $68 to the SERP and $59 to the other post-employment benefit plan during the annual period
beginning after December 31, 2011.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
77
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
15. Share-based compensation
The Company provides long-term incentive plans for the granting of Options, RSUs, PSUs, and DSUs.
Options are granted to employees with an exercise price equal to the Company’s share price at the date of grant. Options vest
over a period of three years (50% on each of the second and third anniversaries of the grant date or equally over three years).
The Options expire ten years from the date of grant and provide employees with the choice of settlement in either cash or shares
of the Company. The range of exercise prices for the year ended December 31, 2011 is $19.00 to $27.12 (December 31, 2010 –
$19.00 to $27.12).
RSUs entitle employees to receive an amount equal to the fair value of the Company’s shares. The RSUs vest no later than
December 1 in the third calendar year following the calendar year in respect of which the RSUs are granted and provide employees
with the choice of settlement in either cash or shares of the Company. The RSUs may participate in dividend equivalents at the
discretion of the Company’s Board of Directors.
PSUs entitle employees to receive an amount equal to the fair value of the Company’s shares if certain performance conditions
are met. Performance conditions are measured over a three year performance period and payouts are settled at the end of the
period. The awards paid out may vary, based on the Company’s performance, from zero to one and one-half times the initial grant
of PSUs. The performance measures associated with PSU grants include earnings growth, return on equity, contribution margin,
underwriting income and investment income.
DSUs entitle eligible members of the Company’s Board of Directors to receive an amount equal to the fair value of the Company’s
shares. The number of DSUs granted is based on the fair value of director services provided during the period and is calculated
using the Company’s average share price in the five days immediately preceding the period end. The DSUs vest immediately on the
date of grant and must be redeemed no later than December 15 of the calendar year commencing immediately after the Director’s
termination date. The DSUs provide directors with the choice of settlement in either cash or shares of the Company. The Board of
Directors may elect to pay dividend equivalents on DSUs.
The Company has reserved 3,000,000 common shares of its issued and outstanding shares for issuance under these long-term
incentive plans.
The following table presents information about these share-based compensation plans:
Weighted
average fair
Weighted
average
value at
exercise Number December 31,
2011
of RSUs
price
Number
of
Options
Weighted
average fair
value at
Weighted
average fair
value at
Number December 31, Number December 31,
2011
of DSUs
of PSUs
2011
Granted
Dividend equivalents granted
Exercised
Forfeited
984,200
194,500
—
(12,500)(1)
(13,750)
$ 20.70
26.80
—
19.00
19.00
123,780
35,900
3,853
(54,278)(2)
(5,785)
$
2,537
736
79
(1,113)
(119)
9,831
10,238
368
—
—
$
202
210
8
—
—
18,496
18,000
974
—
—
$
379
369
20
—
—
Outstanding, as
at December 31, 2011
1,152,450
$ 21.77
103,470
$
2,120
20,437
$
420
37,470
$
768
Exercisable, as
at December 31, 2011
436,813
$ 20.35
—
$
—
20,437
$
420
—
$
—
Weighted average
remaining contractual
life (years)
7.9
—
1.3
—
—
—
1.6
—
(1) During the year ended December 31, 2011, a total of 12,500 Options were exercised, of which 11,250 were settled in cash and 1,250 were settled in shares of the Company.
(2) During the year ended December 31, 2011, a total of 54,278 RSUs were exercised, of which 35,530 were settled in cash and 18,748 were settled in shares of the Company.
78
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
2011
Outstanding, as
at January 1, 2011
Number
of
Options
Weighted
average
exercise
price
Weighted
average fair
value at
Number December 31,
2010
of RSUs
Weighted
average fair
value at
Number December 31,
2010
of DSUs
Weighted
average fair
value at
Number December 31,
2010
of PSUs
2010
Outstanding, as
at January 1, 2010
Granted
Dividend equivalents granted
Exercised
Forfeited
810,000
191,700
—
—
(17,500)
$ 19.16
27.07
—
—
(19.00)
84,406
42,450
4,082
—
(7,158)
$
2,329
1,171
113
—
(198)
3,257
6,366
208
—
—
$
90
176
6
—
—
—
18,000
496
—
—
$
—
497
14
—
—
Outstanding, as
at December 31, 2010
984,200
$ 20.70
123,780
$
3,415
9,831
$
272
18,496
$
511
Exercisable, as
at December 31, 2010
3,333
$ 24.26
—
$
—
9,831
$
272
—
$
—
Weighted average
remaining contractual
life (years)
8.7
—
1.7
—
—
—
2.1
—
The fair value of Options is measured using the Black-Scholes valuation model as at the end of each reporting period. The fair value
of the RSUs, PSUs and DSUs is measured at the quoted market price of the Company’s shares at the end of each reporting period.
The weighted average fair value of the Options is $1,554 as at December 31, 2011 ($5,440 as at December 31, 2010).
12,500 Options have been exercised during the year ended December 31, 2011 (December 31, 2010 – nil).
The inputs used in the measurement of the fair values of the Options are as follows:
Share price at reporting date
Exercise price
Expected volatility
Option life (years)
Expected dividend yield
Risk-free interest rate
December 31, December 31,
2010
2011
January 1,
2010
$
$
20.50
21.77
19.13%
6.0
5.72%
1.11%
$
$
27.59
20.70
13.42%
6.0
3.75%
2.60%
$
$
27.10
19.16
22.00%
6.0
4.00%
3.00%
The following table provides information about the expenses and liabilities arising from share-based compensation:
Expense arising from:
Options
RSUs
DSUs
PSUs
Total recognized as share-based compensation expense
December 31, December 31,
2010
2011
$
$
(1,712)
606
148
199
2,077
1,346
183
138
$
(759)
$
3,744
December 31, December 31,
2010
2011
January 1,
2010
Total carrying amount of liabilities for cash-settled arrangements
Total intrinsic value of liability for vested benefits
$
$
3,170
961
$
$
5,412
283
$
$
GENWOR TH MI C ANA DA I NC . 2011 FI NANCIAL REPORT
1,668
—
79
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
16. Property and equipment
The Company’s property and equipment is summarized as follows:
Cost
Balance at January 1, 2010
$
Additions
Disposals
Balance at December 31, 2010
Additions
Disposals
Computer
software
Furniture and
Leasehold
equipment improvements
Computer
hardware
and other
$
$
905
68
—
973
—
—
$
2,618
163
—
2,781
64
—
2,383
46
—
2,429
21
—
2,664
289
—
2,953
899
—
$
Total
8,570
566
—
9,136
984
—
Balance at December 31, 2011
$
973
$
2,845
$
2,450
$
3,852
$
10,120
Depreciation and
impairment losses
Balance at January 1, 2010
Depreciation for the year
Impairment loss
Disposals
Balance at December 31, 2010
Depreciation for the year
Impairment loss
Disposals
Computer
software
Furniture and
Leasehold
equipment improvements
Computer
hardware
and other
$
$
$
92
166
—
—
258
196
—
—
$
$
1,659
553
—
—
2,212
227
—
—
1,172
353
—
—
1,525
363
—
—
1,803
502
—
—
2,305
383
—
—
Total
4,726
1,574
—
—
6,300
1,169
—
—
Balance at December 31, 2011
$
454
$
2,439
$
1,888
$
2,688
$
7,469
Carrying
amounts
At January 1, 2010
At December 31, 2010
At December 31, 2011
Computer
software
Furniture and
Leasehold
equipment improvements
Computer
hardware
and other
$
$
813
715
519
$
959
569
406
1,211
904
562
$
861
648
1,164
$
Total
3,844
2,836
2,651
As at December 31, 2011, the Company has no contractual commitments relating to property and equipment (December 31,
2010 – $1,700).
80
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
17. Intangible assets
The Company’s intangible assets are summarized as follows:
Cost
Balance at January 1, 2010
Acquisitions – externally purchased
Disposals
Balance at December 31, 2010
Acquisitions – externally purchased
Disposals
Balance at December 31, 2011
Amortization and
impairment losses
Balance at January 1, 2010
Amortization for the year
Impairment loss
Disposals
Balance at December 31, 2010
Amortization for the year
Impairment loss
Disposals
Balance at December 31, 2011
Carrying
amounts
At January 1, 2010
At December 31, 2010
At December 31, 2011
Computer
Software
$
25,133
1,987
—
27,120
2,291
—
$
29,411
Computer
Software
$
8,826
4,175
—
—
13,001
4,849
—
—
$
17,850
Computer
Software
$
16,307
14,119
11,561
As at December 31, 2011, the Company has no contractual commitments to purchase intangible assets (December 31, 2010 –
$2,800).
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
81
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
18. Goodwill
On January 17, 1995, the Company acquired certain assets and assumed certain liabilities from MICC related to MICC’s residential
mortgage insurance line of business. The excess of the purchase price over the estimated fair value of the net assets was recorded
as goodwill.
Goodwill impairment test
Goodwill is considered impaired to the extent that its carrying amount exceeds its recoverable amount. The recoverable amount of
the Company’s single CGU was determined based on its value in use. Value in use was calculated by discounting the future cash
flows generated from continuing use of the CGU. The calculation of value in use incorporated five years of cash flow estimates and
was based on the following key assumptions:
•
•
•
The Company’s multi-year plan was used as a proxy for five years of future cash flow estimates. The multi-year plan represents
the Company’s best estimate of future income and cash flows and is approved by the Company’s board of directors. The plan
incorporates assumptions regarding premium growth rate, loss development and relevant industry and economic assumptions.
Terminal value incorporated into the value in use calculations was estimated by applying a growth rate of 1.8% (December 31,
2010 – 1.8%; January 1, 2010 – 0%) to the last year of the multi-year plan cash flow estimate. The growth rates at December 31,
2011 and December 31, 2010 reflect the Canadian 5 year historical average core inflation rate which does not exceed the long
term average growth rate for the industry.
A pre-tax discount rate of 12.5% (December 31, 2010 – 11.7%; January 1, 2010 – 12.5%) was applied in determining the
recoverable amount of the unit. The discount rates as at December 31, 2011 and December 31, 2010 were based on the
Company’s weighted average cost of capital, adjusted for liquidity and a risk premium. The discount rate as at January 1, 2010
was based on the Company’s estimated incremental borrowing rate, adjusted for variability in cash flow estimates and liquidity.
Based on the value in use calculation, the recoverable amount of the unit was determined to be higher than its carrying amount. No
goodwill impairment charge has been recognized in the year ended December 31, 2011 (December 31, 2010 – nil).
19. Transactions with lenders
Gross premiums written from 2 major unrelated lenders (defined as lenders that individually account for more than 10% of the
Company’s gross premiums written) were $228,694, representing 41% of the Company’s total gross premiums written for the
year ended December 31, 2011 (2010 – gross premiums written from one major lender that accounted for more than 10% of the
Company’s gross premiums written were $211,285 or 37%).
82
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
20. Share capital
The share capital of the Company comprises the following:
Authorized:
Unlimited common shares with nominal or no par value(1)
1 special share(2)
Issued:
98,666,796 common shares (104,789,394 at
December 31, 2010; 117,100,000 at January 1, 2010)
1 special share (1 at December 31, 2010
and January 1, 2010)
Share capital
December 31, December 31,
2010
2011
January 1,
2010
$ 1,462,994 $ 1,553,463 $ 1,734,376
—
—
—
$ 1,462,994 $ 1,553,463 $ 1,734,376
(1)
(2)
All issued shares are fully paid. Holders of common shares will, except where otherwise provided by law and subject to the rights of the holder of the Special Share, be entitled to
elect a portion of the Board of Directors, vote at all meetings of shareholders of the Company, and be entitled to one vote per common share. Holders of common shares are entitled
to receive dividends as and when declared by the Board and, upon voluntary or involuntary liquidation, dissolution or winding-up of the Company, the holders of common shares are
entitled to receive the remaining property and assets of the Company available for distribution, after payment of liabilities.
Only one special share may be authorized for issuance. The special share is held by the Company’s majority shareholder, Genworth Financial Inc. The attributes of the special share
provide that the holder of the special share will be entitled to nominate and elect a certain number of directors to the Board, as determined by the number of common shares that
the holder of the special share and its affiliates beneficially own from time to time. Accordingly, for so long as Genworth Financial Inc. beneficially owns a specified percentage of
common shares, the holder of the special share will be entitled to nominate and elect a specified number of the Company’s directors as set out in the table below:
Common share ownership
Greater than or equal to 50%
Less than 50% but not less than 40%
Less than 40% but not less than 30%
Less than 30% but not less than 20%
Less than 20% but not less than 10%
Less than 10%
Number of directors
5/9
4/9
3/9
2/9
1/9
None
Under the shareholder agreement, the selling shareholder will agree that the special share may not be transferred except to and
among affiliates of Genworth Financial Inc. Subject to applicable law, the special share will be automatically redeemed for $1.00
immediately upon (a) any transfer to a non-affiliate of Genworth Financial Inc., (b) the time that any affiliate of Genworth Financial
Inc. who, at the relevant time, holds the special share is no longer an affiliate of Genworth Financial Inc., (c) the time that Genworth
Financial Inc. first ceases to beneficially own at least 10% of the outstanding common shares, or (d) demand by the holder of the
special share.
The following table presents changes in the number of common shares outstanding that occurred during each year:
Common shares, January 1
Common shares issued in connection with share-based compensation plans
Common shares retired under share repurchase
Common shares, December 31
2011
2010
104,789,394 117,100,000
—
(12,310,606)
31,248
(6,153,846)
98,666,796 104,789,394
At December 31, 2011, subsidiaries of Genworth Financial Inc. owned 56,710,094 common shares of the Company or approximately
57.5% (December 31, 2010 – 60,247,996 or approximately 57.5%; January 1, 2010 – 67,325,900 or approximately 57.5%).
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
83
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
20. Share capital (continued)
Share repurchase
On May 9, 2011, the Company made an offer to repurchase up to $160 million of its common shares validly tendered to the offer.
On June 30, 2011, in accordance with the terms of the offer, the Company repurchased 6,153,846 common shares at a price of
$26.00 per common share, representing 5.87% of the public float, for an aggregate of approximately $160 million in cash.
On July 19, 2010, the Company made an offer to repurchase up to $325 million of its common shares validly tendered to the offer.
On August 27, 2010, in accordance with the terms of the offer, the Company repurchased 12,310,606 common shares at a price of
$26.40 per common share, representing 10.5% of its public float, for an aggregate of approximately $325 million in cash.
Genworth Financial Inc., through its indirect wholly owned subsidiary Brookfield Life Assurance Limited participated in the offers
by making proportional tenders and continued to own approximately 57.5% of the Company subsequent to the share repurchase
transactions.
Upon completion of the offers, the Company’s share capital was reduced by an amount equal to the average carrying value of the
shares repurchased for cancellation. The excess of the aggregate purchase price over the average carrying value, together with the
incremental after-tax costs associated with the transaction, was recorded as a reduction to retained earnings.
21. Long-term debt
On June 29, 2010, the Company completed an offering of $275,000 principal amount of senior unsecured debentures (“Series 1”).
The Series 1 debentures were issued for gross proceeds of $274,862 or a price of $99.95, before approximate issuance costs
of $2,413.
On December 16, 2010, the Company completed an additional offering of $150,000 principal amount of senior unsecured
debentures (“Series 2”). The Series 2 debentures were issued at par, before approximate issuance costs of $986.
The issuance costs and discount are amortized over the respective terms of the debentures using the effective interest method.
The following table provides details of the Company’s long-term debt:
Date issued
Maturity date
Principal amount outstanding
Fixed annual rate
Semi-annual interest payment due each year on:
The Company’s long-term debt balances are as follows:
Series 1
Series 2
June 29, 2010
June 15, 2020
$275,000
5.68%
June 15, December 15
December 16, 2010
December 15, 2015
$150,000
4.59%
June 15, December 15
December 31, 2011
December 31, 2010
January 1, 2010
Series 1
Series 2
Series 1
Series 2
Series 1
Series 2
Carrying value (amortized cost)
Fair value
$ 272,744
287,064
$ 149,201
154,610
$ 272,545
278,451
$ 149,021
150,806
$
$
—
—
—
—
The fair value of the debt is determined using quoted market prices at the end of the reporting period.
The Company incurred interest expense of $22,884 and $8,322 for the years ended December 31, 2011 and 2010, with accrued
interest payable of $1,015 at December 31, 2011 (December 31, 2010 – $987; January 1, 2010 – nil).
84
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
22. Earnings per share
Basic and diluted earnings per share have been calculated using the weighted average and diluted weighted average number of
common shares outstanding during the year ended December 31, 2011 of 101,686,715 (2010 – 112,850,311) and 102,003,573
(2010 – 113,940,471), respectively. The difference between basic and diluted earnings per share is caused by the grant of share-
based compensation.
Earnings per share are computed below:
Basic earnings per share:
Net income
Common shares outstanding, beginning of year
Effect of share-based compensation exercised during the year
Effect of repurchase of common shares during the year
Weighted average common shares outstanding during the year
Basic net earnings per common share
Diluted earnings per share:
Basic weighted average common shares outstanding during the year
Effect of share-based compensation during the year
Diluted weighted average common shares outstanding during the year
Diluted net earnings per common share
December 31, December 31,
2010
2011
$ 323,191
$ 347,982
104,789,394
16,394
(3,119,073)
117,100,000
—
(4,249,689)
101,686,715
112,850,311
$
3.18 $
3.08
101,686,715
316,858
112,850,311
1,090,160
102,003,573
113,940,471
$
3.17 $
3.05
At December 31, 2011, 396,200 Options were excluded from the diluted weighted average number of common shares calculation
as their effect would have been anti-dilutive. At December 31, 2010, no exclusions were made from the diluted weighted average
number of common shares calculation.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
85
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
23. Non-current assets and liabilities
The following table presents financial assets and liabilities the Company expects to recover or settle after 12 months at December 31,
2011, December 31, 2010 and January 1, 2010:
Assets:
Bonds and debentures: FVTPL
Bonds and debentures: AFS
Equity investments
Government guarantee fund
Subrogation recoverable
Total assets
Liabilities:
Long-term debt
Loss reserves
Total liabilities
December 31, December 31,
2010
2011
January 1,
2010
—
$
3,656,605
224,764
812,313
16,064
$
38,290
3,468,682
195,186
645,733
—
$
34,485
3,486,783
423
576,417
—
4,709,746
4,347,891
4,098,108
421,945
74,410
496,355
421,566
97,687
519,253
—
65,832
65,832
Net assets due after one year
$ 4,213,391
$ 3,828,638
$ 4,032,276
24. Transition to IFRSs
The Company has adopted IFRSs effective January 1, 2010 (“the transition date”) and has prepared its opening IFRS consolidated
statement of financial position as at that date. Prior to the adoption of IFRSs the Company prepared its consolidated financial
statements in accordance with Canadian GAAP.
The Company’s consolidated financial statements for the year ended December 31, 2011 are the first annual financial statements
that comply with IFRSs.
(a) Elected exemptions from full retrospective application
In preparing these consolidated financial statements in accordance with IFRS 1 – First‑time Adoption of International Financial
Reporting Standards (“IFRS 1”), the Company has applied an optional exemption from full retrospective application of IFRSs. The
Company has applied the business combinations exemption in IFRS 1 to not apply IFRS 3 – Business Combinations (“IFRS 3”)
retrospectively to past business combinations. Accordingly, the Company has not restated business combinations that took place
prior to the transition date.
(b) Mandatory exception to retrospective application
In preparing these consolidated financial statements in accordance with IFRS 1, the Company has applied a mandatory exception
from full retrospective application of IFRSs. Hindsight was not used to create or revise estimates and, accordingly, the estimates
previously made by the Company under Canadian GAAP are consistent with their application under IFRSs.
(c) Recognition and measurement of insurance contracts
The objective of IFRS 4 – Insurance Contracts (“IFRS 4”) is to provide guidance for the measuring and recording of insurance
contracts by an entity that issues such contracts until the IASB completes its continuing project for the implementation of a revised
standard for insurance contracts. Except for limited requirements specified in this provisional standard, the standard prescribes
that an insurer may change its accounting policies for insurance contracts if, and only if, the change makes the financial statements
more relevant to the economic decision-making needs of users and no less reliable, or more reliable and no less relevant to
those needs. Consequently, until the revised standard is issued, the Company will continue its current practice for measuring and
recording insurance contracts.
86
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
(d) Reconciliation of consolidated shareholders’ equity as reported under Canadian GAAP and IFRSs
In preparing its first annual consolidated financial statements in accordance with IFRSs, the Company has adjusted amounts
reported previously in accordance with Canadian GAAP. An explanation of how the transition from Canadian GAAP to IFRSs has
affected the Company’s financial position, financial performance and cash flows is set out in the following tables and the notes that
accompany the tables.
Reconciliation of consolidated statement of financial position:
As at January 1, 2010
As at December 31, 2010
Note
Canadian
GAAP
Effect of
transition to
IFRSs
IFRSs
Canadian
GAAP
Effect of
transition to
IFRSs
Assets:
Cash and cash equivalents
Short-term investments
Accrued investment income
and other receivables
Bonds and debentures: FVTPL
Bonds and debentures: AFS
Bonds and debentures under
securities lending program: AFS
Equity investments: AFS
Income taxes recoverable
Subrogation recoverable
Government guarantee fund
Prepaid assets
Property and equipment
and intangible assets
Deferred policy acquisition costs
Goodwill
$ 377,512
253,527
$
28,869
34,485
3,420,567
323,300
423
—
13,646
576,417
3,017
20,151
146,840
11,172
$ 5,209,926
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$ 377,512
253,527
$ 351,136
6,988
$
28,869
34,485
3,420,567
32,270
38,290
3,629,494
323,300
423
—
13,646
576,417
3,017
20,151
146,840
11,172
268,442
195,186
7,505
40,393
645,733
2,019
16,955
152,618
11,172
$ 5,209,926
$ 5,398,201
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
IFRSs
$ 351,136
6,988
32,270
38,290
3,629,494
268,442
195,186
7,505
40,393
645,733
2,019
16,955
152,618
11,172
$ 5,398,201
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
87
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
24. Transition to IFRSs (continued)
Reconciliation of consolidated statement of financial position (continued):
As at January 1, 2010
As at December 31, 2010
Note
Canadian
GAAP
Effect of
transition to
IFRSs
IFRSs
Canadian
GAAP
Effect of
transition to
IFRSs
IFRSs
$
$
28,586
116,230
236,181
—
—
—
$
28,586
116,230
236,181
$
46,132
—
206,611
$
—
—
—
$
46,132
—
206,611
c
1,798
—
1,971,396
(130)
—
—
1,668
—
1,971,396
6,240
421,566
1,902,164
(828)
—
—
5,412
421,566
1,902,164
Liabilities:
Accounts payable and accrued
liabilities
Income taxes payable
Loss reserves
Share-based compensation
liabilities
Long-term debt
Unearned premium reserves
Accrued net benefit
liabilities under employee
benefit plans
a,b
Net deferred tax liabilities
9,290
203,218
183
(14)
9,473
203,204
10,835
215,428
1,533
(147)
12,368
215,281
2,566,699
39
2,566,738
2,808,976
558
2,809,534
Shareholders’ equity:
Share capital
Retained earnings
Accumulated other
d
f
1,734,376
811,927
—
(39)
1,734,376
811,888
1,552,043
912,813
1,420
(1,978)
1,553,463
910,835
comprehensive income
96,924
—
96,924
124,369
—
124,369
2,643,227
(39)
2,643,188
2,589,225
(558)
2,588,667
$ 5,209,926
$
—
$ 5,209,926
$ 5,398,201
$
—
$ 5,398,201
88
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
Reconciliation of consolidated net income and comprehensive income:
Net premiums earned
Fees and other income
Underwriting revenue
Losses on claims
Expenses:
Premium taxes and underwriting fees
Employee compensation
Office expenses
Professional fees
Promotional expenses and travel
Other
Change in deferred policy acquisition costs
Net underwriting income
Investment income
Interest expense
Income before income taxes
Income taxes
Net income
Other comprehensive income:
Net change in fair value of AFS financial assets
Gains on AFS financial assets realized
Defined benefit plan actuarial losses
Total other comprehensive income
Total comprehensive income
Earnings per share:
Basic
Diluted
Note
a,b,c
d,e
b
Year ended
December 31, 2010
Effect of
transition
to IFRSs
—
—
—
—
—
(958)
—
—
—
—
(958)
—
(958)
958
—
—
958
1,702
IFRSs
$
620,834
95
620,929
206,410
37,149
36,193
20,554
7,252
5,428
2,067
108,643
(5,778)
102,865
311,654
183,119
(8,322)
486,451
138,469
$
Canadian
GAAP
$ 620,834
95
620,929
206,410
37,149
37,151
20,554
7,252
5,428
2,067
109,601
(5,778)
103,823
310,696
183,119
(8,322)
485,493
136,767
$ 348,726
$
(744)
$ 347,982
$
$ 37,916
(10,471)
—
27,445
—
—
(1,195)
(1,195)
$
37,916
(10,471)
(1,195)
26,250
$ 376,171
$
(1,939)
$ 374,232
$
3.09
$
(0.01)
$
3.06
(0.01)
3.08
3.05
(e) Material adjustments to the consolidated statement of cash flows
There are no material differences between the consolidated statement of cash flows presented under IFRSs and the consolidated
statement of cash flows presented under Canadian GAAP.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
89
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
24. Transition to IFRSs (continued)
(f) Notes to the reconciliations
(a) Prior service costs relating to pension benefits
Under Canadian GAAP, prior service costs relating to plan amendments to a defined benefit plan are deferred and amortized
over the average service lives of active employees. Under IAS 19, prior service costs are recognized as an expense on a
straight-line basis until the benefits are vested. To the extent that the benefits are vested upon introduction of amendments to
a defined benefit plan, the prior service costs are expensed immediately. At January 1, 2010, all prior service costs relating to
plan amendments to the Company’s defined benefit pension plan were fully vested. Upon transition to IFRSs, these previously
deferred prior service costs were fully recognized as an adjustment to retained earnings.
The impact arising from the change is summarized as follows:
Consolidated statement of income:
Employee compensation
Adjustment before income taxes
Consolidated statement of financial position:
Accrued net benefit liabilities under employee benefit plans
Related tax effect
Adjustment to retained earnings
As at
January 1,
2010
Year ended
December 31,
2010
$
$
$
—
—
(2,502)
651
$
$
$
245
245
(2,257)
588
$
(1,851)
$
(1,669)
(b) Actuarial gains relating to pension and other post-employment benefits
Under Canadian GAAP, the Company deferred net actuarial gains or losses relating to its defined benefit plans within a 10%
corridor of the defined benefit obligations. At the date of transition, all previously unrecognized cumulative actuarial gains
were recognized in retained earnings in accordance with the Company’s new accounting policy under IAS 19 to immediately
recognize net actuarial gains or losses in OCI and report these gains or losses in retained earnings.
The impact arising from the change is summarized as follows:
Consolidated statement of income:
Employee compensation
Adjustment before income taxes
Consolidated statement of other comprehensive income:
Defined benefit plan actuarial losses
Adjustment before income taxes
Consolidated statement of financial position:
Accrued net benefit liabilities under employee benefit plans
Related tax effect
Adjustment to retained earnings
As at
January 1,
2010
Year ended
December 31,
2010
$
$
$
$
$
—
—
—
—
2,319
(603)
$
$
$
$
$
15
15
1,610
1,610
724
(192)
$
1,716
$
532(1)
(1)
Total impact to retained earnings reflects $1,716 opening adjustment to retained earnings at January 1, 2010 (net of tax of $603), $15 adjustment to income for the year ended
December 31, 2010 (net of tax of $4) and $(1,610) adjustment to OCI at December 31, 2010 (net of tax of $(415)).
90
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
(c) Share-based compensation
The Company grants share-based compensation benefits to certain employees that provide the choice of settlement in cash or
shares of the Company. The Company accounted for these share-based payment arrangements by reference to their intrinsic
value under Canadian GAAP based on the assumption that these benefits will be settled in cash. Under IFRS 2 – Share‑based
compensation (“IFRS 2”), the related liability has been adjusted to reflect the fair value of the outstanding shared-based
payment liabilities.
The impact arising from the change is summarized as follows:
Consolidated statement of income:
Employee compensation
Adjustment before income taxes
Consolidated statement of financial position:
Share-based compensation liabilities
Related tax effect
Adjustment to retained earnings
(d) Income taxes
As at
January 1,
2010
Year ended
December 31,
2010
$
$
$
$
$
$
$
—
—
130
(34)
698
698
828
(249)
96
$
579
Under Canadian GAAP, previously unrecognized tax benefits for the year ended December 2009 related to financing costs
incurred in connection with the Company’s IPO were recognized in consolidated net income when the benefits met recognition
criteria in the year ended December 31, 2010. These tax benefits would have been recognized directly in share capital if they
met the recognition criteria at the time of the IPO. IAS 12 – Income Taxes (“IAS 12”) requires backward tracing of tax expenses
or benefits. Accordingly, the Company reclassified the benefits from consolidated income to consolidated share capital in the
period in which the benefits met recognition criteria.
The impact arising from the change is summarized as follows:
Consolidated statement of income:
Deferred income tax expense
Consolidated statement of financial position:
Share capital
Adjustment to retained earnings
(e) The impact arising from changes in taxes is summarized as follows:
Consolidated statement of income:
Impact from pension and other post-employment benefits
Impact from share-based compensation
Impact from adjustments of prior period financing costs
Adjustment to taxes
As at
January 1,
2010
Year ended
December 31,
2010
$
$
$
—
$
(1,420)
—
—
$
$
(1,420)
(1,420)
Year ended
December 31,
2010
Notes
$
a, b
c
d
(67)
(215)
(1,420)
$
(1,702)
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
91
Notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended December 31, 2011 and 2010
24. Transition to IFRSs (continued):
(f) The impact arising from changes in retained earnings is summarized as follows:
Pension and other post-employment benefits
Share-based compensation
Taxes
Adjustment to retained earnings
Notes
a, b
c
a, b, c, d
As at
January 1,
2010
Year ended
December 31,
2010
$
$
(183)
130
14
(1,533)
828
(1,273)(1)
$
(39)
$
(1,978)
(1)
Total impact of taxes on retained earnings reflects $14 opening adjustment to retained earnings at January 1, 2010, $(1,702) adjustment to income for the year ended
December 31, 2010 and $415 adjustment to OCI at December 31, 2010.
92
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
Glossary
Certain terms and abbreviations used in this annual information form are defined below.
“90% Guarantee” means the guarantee of the Canadian government
of the benefits payable under eligible mortgage insurance policies
issued by the Company, less 10% of the original principal amount of
each insured loan, in the event that Genworth Mortgage Insurance
Canada fails to make claim payments with respect to that loan due to
its bankruptcy or insolvency. Currently the 90% Guarantee is provided
under the terms of the Government Guarantee Agreement. The 90%
Guarantee will continue to be provided for under the terms of PRMHIA,
after PRMHIA comes into force and the Government Guarantee
Agreement is terminated pursuant to such legislation.
“accumulated other comprehensive income” or “AOCI” is a
component of shareholders’ equity and reflects the unrealized gains
and losses, net of taxes, related to available-for-sale investments.
Unrealized gains and losses on investments classified as available-for-
sale are recorded in the consolidated statement of comprehensive
income and included in accumulated other comprehensive income until
recognized in the consolidated statement of income.
“Alt A mortgages” means mortgages provided to self-employed
borrowers with strong credit and reduced income documentation.
Specific loan qualification criteria apply, including down payment
documentation, assessment of income reasonableness and a
650 minimum credit score for mortgages with loan-to-value ratios
exceeding 85%.
“available-for-sale” or “AFS” means investments recorded at fair
value on the balance sheet, using quoted market prices, with changes
in the fair value of these investments included in AOCI.
“book yield” means the ratio (expressed as a percentage) of interest
income to the average amortized cost for all or a given portion of
invested assets during a specified period.
“case reserves” means the expected losses on claims associated
with reported delinquent loans. Lenders report delinquent loans to
the Company on a monthly basis. The Company analyzes reported
delinquent files on a case-by-case basis and derives an estimate of
the expected loss. Case reserve estimates incorporate the amount
expected to be recovered from the ultimate sale of the residential
property securing the insured mortgage.
“claim” means the amount demanded under a policy of insurance
arising from the loss relating to an insured event.
“combined ratio” means the sum of the loss ratio and the expense
ratio. The combined ratio provides a measure of the Company’s ability
to generate profits from its insurance underwriting activities.
“compound annual growth rate” or “CAGR” means the annualized
year-over-year growth rate of the applicable measure over a specified
period of time.
“credit score” means the lowest average credit score of all borrowers
on a mortgage insurance application. Average credit scores, in most
instances, are calculated by averaging the score obtained from both
Equifax and TransUnion for each borrower on the application.
“debt-to-capital ratio” means the ratio (expressed as a percentage) of
debt to total capital (the sum of debt and equity).
“deferred policy acquisition costs” means the expenses incurred in
the acquisition of new business, comprised of premium taxes and other
expenses that relate directly to the acquisition of new business. Policy
acquisition costs are only deferred to the extent that they are in excess
of the service fees and can be expected to be recovered from unearned
premium reserves and are amortized into income in proportion to and
over the periods in which premiums are earned.
“delinquency rate” means the ratio (expressed as a percentage) of
the total number of delinquent loans to the total number of policies
in-force at a specified date.
“delinquent loans” means loans where the borrowers have failed to
make scheduled mortgage payments under the terms of the mortgage
and where the cumulative amount of mortgage payments missed
exceeds the scheduled payments due in a three-month period.
“effective loan-to-value” means a Company approximation based on
the estimated balance of loans insured (original balance less principal
repayments on a standard amortization schedule) divided by the
estimated fair market value of the mortgaged property (original value
plus or minus adjustments for changes in home prices for the province
in which the property is located).
“expense ratio” means the ratio (expressed as a percentage) of sales,
underwriting and administrative expenses to net premiums earned for a
specified period.
“Government Guarantee Agreement” means the agreement
Genworth Mortgage Insurance Canada has with the Canadian
government pursuant to which the Canadian government guarantees
that lenders will receive the benefits payable under eligible mortgage
insurance policies issued by Genworth Mortgage Insurance Canada,
less 10% of the original principal amount of an insured loan, in the
event that Genworth Mortgage Insurance Canada fails to make claim
payments with respect to that loan due to its bankruptcy or insolvency.
“government guarantee fund” means a trust account which is
intended to provide the Canadian federal government with a source of
funds in the event it is required to make a guarantee payment.
“general portfolio” means invested assets (including cash and
cash equivalents, short-term investments, bonds or other fixed
income securities and equity investments) excluding the government
guarantee fund.
“gross premiums written” means gross payments received from
insurance policies issued during a specified period.
“guarantee fund earnings” means the investment income from the
cash and invested assets held in the government guarantee fund, net
of applicable exit fees.
“high loan-to-value mortgage insurance” means mortgage
insurance covering an individual mortgage that typically has a loan-to-
value ratio of greater than 80% at the time the loan is originated.
“incurred but not reported” or “IBNR” reserves means the
estimated losses on claims for delinquencies that have occurred prior
to a specified date, but have not been reported to the Company.
“insurance in-force” means the amount of all mortgage insurance
policies in effect at a specified date, based on the original principal
balance of mortgages covered by such insurance policies, including any
capitalized premiums.
“loan-to-value ratio” means the original balance of a mortgage loan
divided by the original value of the mortgaged property.
“loss adjustment expenses” means all costs and expenses incurred
by the Company in the investigation, adjustment and settlement of
claims. Loss adjustment expenses include third-party costs as well as
the Company’s internal expenses, including salaries and expenses of
loss management personnel and certain administrative costs.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
93
“premium tax” means a tax paid by insurance companies to provincial
and territorial governments calculated as a percentage of gross
premiums written.
“PRMHIA” means the Protection of Residential Mortgages Hypothec
Insurance Act (Canada).
“residential mortgage insurance market” means the mortgage
insurance market for residential properties, including properties with
one to four residential units or individual condominium units, but
excluding multi-family units.
“sales, underwriting and administrative expenses” means the cost
of marketing and underwriting new mortgage insurance policies and
other general and administrative expenses, including premium taxes
and net of the change in deferred policy acquisition costs.
“severity” means the dollar amount of losses on claims.
“severity ratio” means the ratio (expressed as a percentage) of the
dollar amount of paid claims during a specified period on insured loans
to the original insured mortgage amount relating to such loans. The
main determinants of the severity ratio are the loan-to-value, age of the
mortgage loan, the value of the underlying property, accrued interest on
the loan, expenses advanced by the insured and foreclosure expenses.
“Shareholder Agreement” means the agreement between Genworth
Financial, Brookfield Life Assurance Company Limited and Genworth
Canada dated July 7, 2009 entered into in connection with the closing
of the initial public offering of Genworth Canada.
“shortfall sale” means a sale of a property by the owner for less than
the amount owing on the mortgage.
“total debt service ratio” or “TDS” means the percentage of
borrowers’ monthly debt servicing costs as a percentage of borrowers’
monthly gross income.
“underwriter” means an individual who examines and accepts or
rejects mortgage insurance risks based on the Company’s approved
underwriting policies and guidelines.
“unearned premium reserves” or “UPR” means that portion of
premiums written that has not yet been recognized as revenue.
Unearned premium reserves are recognized as revenue over the policy
term in accordance with the expected pattern of loss emergence as
derived from actuarial analysis of historical loss development.
Glossary
Certain terms and abbreviations used in this annual information form are defined below.
“losses on claims” means the estimated amount payable by an
insurer under mortgage insurance policies during a specified period. A
portion of reported losses on claims represents estimates of costs of
pending claims that are still open during the reporting period, as well as
estimates of losses associated with claims that have yet to be reported
and the cost of investigating, adjusting and settling claims.
“loss ratio” means the ratio (expressed as a percentage) of the total
amount of losses on claims associated with insurance policies incurred
during a specified period to net premiums earned during such period.
“loss reserves” means case reserves based on delinquencies
reported to the Company, an estimate for losses on claims based on
delinquencies that are IBNR, supplemental loss reserves for potential
adverse developments related to claim severity and loss adjustment
expenses representing an estimate for the administrative costs of
investigating, adjusting and settling claims.
“low loan-to-value” or “conventional” mortgage insurance mean
mortgage insurance covering an individual mortgage that has a loan-to-
value ratio equal to or less than 80% at the time the loan is insured.
“market share” or “share” of a mortgage insurer means the insurer’s
gross premiums written as a percentage of the reported gross
premiums written of the Canadian mortgage insurance industry.
“Minimum Capital Test” or “MCT” means the minimum capital test
for certain federally regulated insurance companies established by OSFI
(as defined herein). Under MCT, companies calculate a ratio of capital
available to capital required using a defined methodology prescribed by
OSFI in monitoring the adequacy of a company’s capital.
“multi-family” means dwellings with five or more units, including
apartment buildings and long-term care facilities, but excluding
individual condominium units.
“net operating income” means net income excluding after-tax net
realized gains (losses) on sale of investments and unrealized gains
(losses) on held for trading securities.
“net premiums earned” means the portion of net premiums written
from current and prior periods that is recognized as revenue in a
specified period. Premiums written are initially deferred and recorded
as unearned premium reserves and then recognized in revenue as
premiums earned over the term of the related policies based on the
expected pattern of loss emergence.
“net premiums written” means gross payments received from
insurance policies issued during a specified period, net of the risk
premiums payable pursuant to the Government Guarantee Agreement
in respect of those policies.
“net underwriting income” means the sum of net premiums earned,
fees and other income, less losses on claims, sales, underwriting and
administrative expenses during a specified period.
“new insurance written” means the original principal balance of
mortgages, including any capitalized premiums, insured during a
specified period.
“NHA” means the National Housing Act (Canada).
“operating return on equity” means the net operating income
for a period divided by the average of the beginning and ending
shareholders’ equity, excluding AOCI, for such period. For quarterly
results, the operating return is the annualized operating return on
equity using the average of beginning and ending shareholders’ equity,
excluding AOCI, for such quarter.
94
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
Five-year financial review
Key financial metrics
Years ended December 31
(in millions, unless otherwise specified)
Income statement data
Gross premiums written
2011
2010
2009
2008
2007
$
545
$
564
$
374
$
722
$
Net premiums earned
Impact of change in premium recognition curve
612
621
Underwriting revenues
Losses
Expenses
Investment income
Interest expense
Pre-tax income
Net income
Net operating income
Balance sheet data
Cash and investments
Total assets
Unearned premium reserves
Debt
Total liabilities
Shareholders’ equity
AOCI
Shareholders’ equity, excluding AOCI
Key ratios and other items
Loss ratio
Expense ratio
Combined ratio
Operating return on equity
MCT ratio
Delinquency rate
Severity ratio
Leverage
Operating earnings per share (diluted)
Book value per share (diluted, exc. AOCI)
Book value per share (diluted, incl. AOCI)
612
225
101
179
(23)
443
323
318
5,063
5,393
1,824
422
2,710
2,683
215
2,468
37%
17%
53%
13%
162%
0.20%
32%
14%
3.12
24.78
26.94
$
$
$
621
206
103
183
(8)
486
348
343
5,135
5,398
1,902
422
2,810
2,589
124
2,464
33%
17%
50%
14%
156%
0.26%
27%
14%
3.01
23.27
24.44
$
$
$
610
100
710
256
98
189
(1)
544
379(1)
371(1)
4,986
5,210
1,971
—
2,567
2,643
97
2,546
36%(2)
14%(2)
50%(2)
16%(3)
149%
0.28%
27%
0%
3.23(4) $
$
$
21.58
22.40
$
$
$
518
518
160
78
200
(3)
477
337
324
4,698
4,915
2,322
67
2,826
2,089
(15)
2,104
31%
15%
46%
17%
127%
0.25%
26%
3%
2.91
18.79
18.65
$
$
$
997
424
424
79
60
148
(3)
430
308
310
4,102
4,291
2,133
67
2,525
1,766
19
1,747
19%
14%
33%
20%
125%
0.19%
24%
4%
2.95
15.98
16.15
(1)
(2)
(3)
(4)
Excluding the impact of changes to the premium recognition curve, net income and net operating income for the year ended December 31, 2009 would have been $315 million and
$307 million, respectively.
Excluding the impact of changes to the premium recognition curve, loss ratio, expense ratio and combined ratio for the year ended December 31, 2009 would have been 42%,
15% and 57%, respectively.
Excluding the impact of changes to the premium recognition curve, operating return on equity for the year ended December 31, 2009 would have been 13%.
Excluding the impact of changes to the premium recognition curve, operating earnings per share (diluted) would have been $2.67.
GENWOR TH MI C ANA DA I NC . 2011 FINANCI AL REPORT
95
2010 and 2011 quarterly information
(For the quarter ended, in millions, unless otherwise specified)
Q4’11
Q3’11
Q2’11
2011
Q1’11
Q4’10
Q3’10
Q2’10
2010
Q1’10
Net premiums written
$
123 $
160 $
149 $
101 $
134
$
166 $
157 $
94
Net premiums earned
Impact of change in
net premium
recognition curve
Underwriting revenues
Losses on claims
Expenses
Net underwriting income
Investment income
Interest expense
Net income
Adjustment to net income:
Losses/(gains)
on investments,
net of taxes
Net operating income
Loss ratio
Expense ratio
Combined ratio
Operating earnings
per share diluted
156
149
151
155
156
155
154
156
156
62
26
68
43
(6)
79
(0)
79
39%
17%
56%
149
54
24
71
45
(6)
81
(1)
80
36%
16%
52%
151
50
25
77
45
(6)
83
(2)
81
33%
16%
49%
155
59
26
71
46
(6)
80
(2)
78
38%
17%
55%
156
50
28
78
44
(4)
85
(1)
84
32%
18%
50%
155
47
26
83
49
(4)
94
(3)
91
30%
17%
47%
154
49
24
80
41
—
85
1
86
32%
16%
48%
156
59
26
71
49
—
84
(3)
82
38%
16%
55%
$
0.80 $
0.81 $
0.77 $
0.74 $
0.80 $
0.80 $
0.72 $
0.69
m
o
c
.
r
i
m
b
.
w
w
w
o
s
s
e
d
a
r
I
s
l
l
i
M
n
a
y
r
B
r
i
m
b
y
b
d
e
n
g
i
s
e
D
96
GENWO RTH MI C ANA DA I NC . 20 11 FINANCIAL REP ORT
Shareholder information
Genworth MI Canada Inc.
2060 Winston Park Drive
Suite 300
Oakville, Ontario L6H 5R7
Tel: 905-287-5300
Fax: 905-287-5472
www.genworth.ca
Exchange listing
The Toronto Stock Exchange:
Common shares (MIC)
Common shares
As at December 31, 2011, there were
98,666,796 common shares outstanding.
Independent auditor
KPMG LLP
Bay Adelaide Centre
333 Bay Street, Suite 4600
Toronto, Ontario M5H 2S5
Registrar and transfer agent
Canadian Stock Transfer Company, Inc.
320 Bay Street, P.O. Box 1
Toronto, Ontario M5H 4A6
Tel: 416-643-5000
Fax: 416-643-5570
www.canstockta.com
All inquiries related to address changes,
elimination of multiple mailings, transfer of
MIC shares, dividends or other shareholder
account issues should be forwarded to the
offices of Canadian Stock Transfer Company.
Investor relations
Shareholders, security analysts and
investment professionals should direct
inquiries to:
Samantha Cheung
Vice-President, Investor Relations
samantha.cheung@genworth.com
Additional financial information has been
filed electronically with various securities
regulators in Canada through the System
for Electronic Document Analysis and
Retrieval (SEDAR) and with the Office of
the Superintendent of Financial Institutions
(OSFI) as the primary regulator for the
Company’s subsidiary, Genworth Financial
Mortgage Insurance Company of Canada.
The Company holds a conference call
following the release of its quarterly results.
These calls are archived in the Investor
section of the Company’s website.
Annual general meeting of shareholders
Date: Thursday, June 14, 2012
Time: 10:30 a.m. (EST)
Location: Le Meridien King Edward Hotel
The Belgravia Room
37 King Street East
Toronto, Ontario M5C 1E9
Board of Directors
2011 common share dividend dates
The declaration and payment of dividends
and the amount thereof are at the discretion
of the Board, which takes into account
the Company’s financial results, capital
requirements, available cash flow and other
factors the Board considers relevant from
time to time.
Eligible dividend designation
For purposes of the dividend tax credit rules
contained in the Income Tax Act (Canada)
and any corresponding provincial or territorial
tax legislation, all dividends (and deemed
dividends) paid by Genworth MI Canada Inc.
to Canadian residents are designated as
eligible dividends. Unless stated otherwise,
all dividends (and deemed dividends) paid
by the Company hereafter are designated
as eligible dividends for the purposes of
such rules.
Information for shareholders outside
of Canada
Dividends paid to residents in countries
with which Canada has bilateral tax
treaties are generally subject to the 15%
Canadian non-resident withholding tax.
There is no Canadian tax on gains from
the sale of shares (assuming ownership
of less than 25%) or debt instruments of
the Company owned by non-residents
not carrying on business in Canada. No
government in Canada levies estate taxes
or succession duties.
Complaints about the Company’s internal
accounting controls or auditing matters
or any other concerns may be addressed
directly to the Board of Directors or the Audit
Committee at:
Board of Directors
Genworth MI Canada Inc.
c/o Winsor Macdonell, Secretary
2060 Winston Park Drive
Suite 300
Oakville, Ontario L6H 5R7
Tel: 905-287-5484
Corporate ombudsperson
Concerns related to compliance with
the law, Genworth policies or government
contracting requirements may be
directed to:
Genworth ombudsperson
2060 Winston Park Drive
Suite 300
Oakville, Ontario L6H 5R7
Tel: 905-287-5510
Canada-ombudsperson@genworth.com
Disclosure documents
Corporate governance, disclosure and other
investor information is available online
from the Investor Relations pages of the
Company’s website at http://investor.
genworthmicanada.ca.
Cautionary statements
The cautionary statements included in
the Company’s Management’s Discussion
and Analysis and Annual Information Form,
including the “Special note regarding
forward-looking statements” and the
“Non-IFRS financial measures,” also
apply to this Annual Report and all
information and documents included
herein. These documents can be found
at www.sedar.com.
Dividend declaration dates
Declaration date
Record date
Date payable
Amount per
common share
Regular dividend February 1, 2011
February 15, 2011 March 1, 2011
Regular dividend May 2, 2011
May 16, 2011
June 1, 2011
Regular dividend July 27, 2011
August 15, 2011
September 1, 2011
Regular dividend November 3, 2011 November 15, 2011 December 1, 2011
Special dividend November 3, 2011 November 15, 2011 December 1, 2011
$0.26
$0.26
$0.26
$0.29
$0.50
FSC logo here
Genworth MI Canada Inc.
2060 Winston Park Drive
Suite 300
Oakville, Ontario L6H 5R7
Phone: 905-287-5300
Fax:
905-287-5472