Genworth MI Canada Inc
Annual Report 2013

Plain-text annual report

G e n w o r t h M I C a n a d a I n c . 2 0 1 3 A n n u a l R e p o r t A digital copy of this Annual Report and of Genworth Canada’s 2013 Public Accountability Statement are available on our website at www.genworth.ca. Print copies are available upon request. Genworth MI Canada Inc. 2013 Annual Report delivering exceptional value Genworth MI Canada Inc. 2060 Winston Park Drive, Suite 300 Oakville, Ontario L6H 5R7 Phone: 905-287-5300 Fax: 905-287-5472 www.genworth.ca GEN2677 English AR 2013_CvrPGs.indd 1 14-05-05 4:35 PMMon, May 5, 2014 shareholder information Exchange listing The Toronto Stock Exchange: Common shares (MIC) Common shares As at December 31, 2013, there were 94,910,880 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 investor@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 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 5, 2014 Time: 10:00 AM Location: TMX Broadcast Centre The Exchange Tower 130 King St West, Toronto, Ontario 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. 2014 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.) 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 The issuer ratings of Genworth MI Canada and financial strength ratings of Genworth Financial Mortgage Insurance Company Canada reflect each rating agency’s opinion of the Company’s financial strength, operating performance and ability to meet obligations to policyholders. Credit ratings Dividend declaration dates Issuer rating S&P DBRS Declared 10/29/13 Genworth MI Canada Inc. A-, Stable AA (low), Stable 07/30/13 Financial strength Genworth Financial Mortgage Insurance Company Canada Senior unsecured debentures AA-, Stable AA, Stable 04/30/13 02/05/13 Genworth MI Canada Inc. A-, Stable AA (low), Stable Record 11/15/13 08/15/13 05/15/13 02/15/13 Payable 11/29/13 08/30/13 05/31/13 03/01/13 Amount per common share $0.35 $0.32 $0.32 $0.32 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 GEN2677 English AR 2013_CvrPGs.indd 2 14-05-05 4:35 PMMon, May 5, 2014 C o n t e n t S 2 Corporate profile 3 Letter to shareholders 6 Financial and insurance portfolio highlights 8 Management’s discussion and analysis 45 Consolidated financial statements 46 Management statement on responsibility for financial reporting 47 Independent auditors’ report 53 Consolidated financial statements and notes 97 Glossary 98 Five-year financial review 99 2012 and 2013 quarterly information 100 Board of Directors IFC Shareholder information genwor th MI Ca na da In C . 2013 annUaL report 1 corporate profile Genworth MI Canada Inc. (TSX: MIC) through its subsidiary, Genworth Financial Mortgage Insurance Company Canada (Genworth Canada), is the largest private residential mortgage insurer in Canada. The Company provides mortgage default insurance to Canadian residential mortgage lenders, making homeownership more accessible to first-time homebuyers. Genworth Canada differentiates itself through superior customer service, innovative processing technology and a robust risk management framework. For almost two decades, Genworth Canada has supported the housing market by providing thought leadership and a focus on the safety and soundness of the mortgage finance system. As at December 31, 2013, Genworth Canada had $5.7 billion in total assets and $3.1 billion in shareholders’ equity. 2013 financial and operating highlights $ 512 million net premiums written $ 349million net operating income 12% operating return on equity 44% combined ratio $ 3.60 operating diluted earnings per share $ 1.31 dividends paid per common share book value per share (diluted, including AOCI) operating earnings per share (diluted) operating return on equity (%) 13 12 11 10 09 1 2 $32.53 $30.62 $26.94 $24.44 $22.40 13 122 11 10 091 $3.60 $3.43 $3.08 $3.02 $2.67 13 122 11 10 091 12% 13% 13% 14% 13% 0 7 14 21 28 35 0.0 1.0 2.0 3.0 4.0 0 5 10 15 20 13 excludes $100 million impact of change in premium recognition curve for the quarter ended March 31, 2009. Including the impact of changes to the premium recognition curve, for the year ended december 31, 2009, operating earnings per share (diluted) would have been $3.23 and operating return on equity would have been 16%. 12 adjusted for the impact of the government guarantee fund exit fee reversal in 2012. Including the impact of the government guarantee exit fee reversal, operating return on equity and operating earnings per share (diluted) were 17% and $4.67, respectively. 11 12 13 12 13 11 11 note: 2009 amounts are based on Canadian gaap measures; 2010, 2011, 2012 and 2013 amounts are presented on an IFrS basis. For further information refer to the Md&a. 10 09 10 09 10 09 0 7 14 21 28 35 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 0 5 10 15 20 2 "13" "12" "11" "10" "09" 32.53 30.62 26.94 24.44 22.4 genwo rth MI C anada I n C . 20 13 annUaL rep ort "13" "12" "11" "10" "09" 3.6 3.43 3.12 3.01 2.67 "13" "12" "11" "10" "09" 13 13 13 14 13 35 28 21 14 7 0 incl. AOCI 5 4 3 2 1 0 20 16 12 8 4 0 08 09 10 11 12 08 09 10 11 12 08 09 10 11 12 Dear Fellow Shareholders: In 2013, the Company delivered solid financial returns for our shareholders. We achieved these results by remaining focused on our three strategic priorities – top-line growth, diligent risk management and financial strength. And as we enter our fifth year as a Canadian public company, we are well-positioned for continued growth. Executive Team: Clockwise from left – standing: Philip Mayers, Stuart Levings, Brian Hurley, Winsor Macdonell, Craig Sweeney; Seated from left: Debbie McPherson, Rhonda Lawson genwor th MI Ca na da In C . 2013 annUaL report 3 Letter to Shareholders 2013 Performance enhanced service value to our customers, operational efficiencies, and strengthened credit quality in our insurance portfolio were the hallmark characteristics of 2013. our approach to service drove a number of strategic wins with key lenders and contributed to top-line results. we also continued to build loyalty and awareness among important influencer groups across the country. our focus on providing added value to our partners has further reinforced our position as the industry’s private mortgage insurer of choice. this approach will help drive business growth over the coming years. In the area of operational efficiencies, we continue to make enhancements to the overall customer experience. this includes implementing innovative technology-based solutions to increase underwriter productivity and improve turnaround time. It also includes building on our human capital by expanding our regional underwriting presence. we remain committed to our prudent approach to risk management and continue to see the strength of our portfolio improve as a result. our risk managers across the country provide real-time monitoring of regional developments allowing us to stay ahead of emerging risks. their expertise, combined with our proactive monitoring of economic and housing market indicators, allows us to effectively manage our risk exposure. this strategy has led to a consistent improvement in credit quality, resulting in decreased delinquencies which drove a low loss ratio of 25% for 2013. In 2013 we insured 70,000 high loan-to-value mortgages, wrote a total of $35 billion in new insurance written, and generated $512 million in net premiums written from insuring high and low loan-to-value mortgages. we delivered a net operating income of $349 million, and a solid return on equity of 12%. we also continued to give back to shareholders through various capital initiatives. these actions included a dividend increase of 9% in the fourth quarter, and a $105 million share buy-back through a normal course issuer bid. even with this active capital management, we ended the year with capital levels well above our internal target. Active in our communities at genworth Canada, we also believe in giving back to the communities where we work and live. In 2013 we renewed our three-year commitment to habitat for humanity Canada which includes several initiatives to support habitat builds across the country. we also sponsored our annual “Meaning of home” writing contest which received a record number of entries in 2013 from primary school students in every province and territory. In addition, community engagement among our employees is very high. Last year our people volunteered time to more than 40 charitable organizations across Canada. this is a proud accomplishment for the entire genworth Canada team. Outlook on our industry Canada’s housing market performed well in 2013. and with steady employment levels, continued low interest rates and improving consumer confidence, we expect it to remain stable through 2014. these factors are of particular importance to our target market of first-time homebuyers. delivering exceptional value to shareholders Increase in diluted operating earnings per share +5% Increase in quarterly dividends +9% Increase in diluted book value per share +6% 4 genwo rth MI C anada I n C . 20 13 annUaL rep ort the government has taken several steps in recent years to maintain the strength and stability of the Canadian housing finance system. In addition, these initiatives have helped generate borrowers with stronger credit quality and provided additional support for the private mortgage insurance sector. the housing and regulatory environment we are operating in is favorable, and we are capitalizing on this momentum to grow our business. Well-positioned for the future In order to maintain our track record of performance, we are committed to continuing to invest in our Company, our customers and our people. our relationships with our customers are the centerpiece of our strategy. we bring together all facets of our business – underwriting, sales, operations and risk – in our customer consultations. this holistic approach enables us to better understand and respond to customer needs. while we pride ourselves on having customer survey satisfaction ratings of 97%, we continue to strive for a customer experience that remains best in class. In addition, our strong capital position supports our growth and keeps us well-positioned to pay our claims, even in severe stress scenarios. Balancing capital strength with flexibility remains a priority and we expect to continue to execute on a variety of strategic capital actions going forward. Finally, we recognize that our people are our greatest asset and we believe in fostering a culture of learning, development and collaboration. we have an energized culture that makes working at genworth Canada both challenging and rewarding. Our 2014 Priorities as we look ahead to 2014, our goal is to further strengthen our industry position, while providing shareholders with consistent performance and value. our strategy to achieve these goals is to: • remain focused on our customers by continuing to raise the bar on service • maintain capital strength and flexibility • continue to closely monitor current and emerging risks • remain active in shaping our industry’s future. genworth Canada has a solid business model and we are well positioned. we will remain sharply focused on our key business priorities and continue to execute on our high impact strategy. thank you for your confidence and continued support. Best regards, Brian Hurley Chairman and Ceo genwor th MI Ca na da In C . 2013 annUaL report 5 demonstrated financial strength net premiums written (millions) net premiums earned (millions) net operating income (millions) 13 12 11 10 09 $512 $550 $533 $552 $360 13 12 11 10 09 $573 $589 $612 $621 $610 13 12 11 10 09 $349 $3391 $318 $343 $307 0 200 400 600 0 200 400 600 800 0 100 200 300 400 1 Adjusted to exclude the impact of the government guarantee fund exit fee reversal in 2012. Including this adjustment, net operating income was $462 million. loss ratio combined ratio minimum capital test ratio (MCT) 13 13 12 12 11 11 10 10 09 09 25% 33% 37% 33% 42% 13 13 12 12 11 11 10 10 09 09 44% 51% 13 13 12 12 Net Premiums Written 2013 512 2012 550 53% 2011 533 2010 552 11 11 2009 360 50% 57% 10 10 09 09 Net Premiums Earned 2013 573 2012 589 2011 612 223% 170% 162% 2010 156% 621 149% Net Operating Income 2009 610 2013 349 2012 339 2011 318 2010 343 2009 307 0 0 200 400 10 20 30 40 600 50 0 0 200 25 400 600 50 800 75 0 0 100 200 300 100 200 400 300 13 high-quality and diversified insurance portfolio 11 12 10 0 10 20 09 “Genworth remained focused on building a high-quality, well-diversified portfolio in 2013. We take a prudent 30 approach to growing our business, with disciplined underwriting and vigilant risk management.” – Craig Sweeney, CRO 40 50 geographical dispersion (% as at december 31, 2013) credit score dispersion1 13 Quebec 12 16% 11 10 09 Ontario 45% 0 Saskatchewan 3% Other 1% Alberta 17% 2011 37% British Columbia 13% Loss Ratio 2013 25% 2012 33% 25 50 75 Manitoba 2% New Brunswick 1% Nova Scotia 2% 13 12 11 >700 2010 – 33% 66% 10 09 0 Combined ratio 2009 42% 2013 44% Average Credit Score 2012 720 51% no score 3% >0<600 1% MTC ratio 2011 53% >600<660 2010 – 50% 11% 2013 2009 223 57% 2012 170 2011 162 2010 156 2009 149% 100 200 300 >660<700 – 19% ¹ Based on insurance written between 1995 and 2013. 6 genwo rth MI C anada I n C . 20 13 annUaL rep ort Saskatchewan 3% Quebec 16% Ontario 45% Alberta 17% British Columbia 13% Manitoba New Brunswick Newfoundland Nova Scotia 2% 1% 1% 2% Geographical dispersion QC – 15% ON – 45% NS – 2% NB – 1% MAN – 2% BC – 13% AB – 17% Other – 1% SASK – 3% 13 12 11 10 09 0 100 200 300 Adjusted investment income 2013 215 178 37 2012 201 189 12 2011 179 174 5 2010 183 179 4 2009 189 186 3 assets (millions) shareholders’ equity (including AOCI) (millions) total investment income (millions) 13 12 11 10 09 $5,691 $5,734 $5,393 $5,398 $5,210 13 12 11 10 09 $3,087 $3,037 $2,683 $2,589 $2,643 13 12 11 10 09 $215 $1811 $179 $183 $189 0 2,000 4,000 6,000 0 1,000 2,000 3,000 4,000 0 100 200 300 solid colour: investment income screen: realized investment gains ¹ Adjusted to exclude the impact of the government guarantee fund exit fee reversal in 2012. Including this adjustment, total investment income was $367 million. Investment portfolio 13 Federal 35% 12 11 10 Corporate 09 42% total: $5.4 billion Provincial 16% Cash 4% Common equity 3% 13 12 11 10 09 Assets 2013 5,691 13 Shareholders' Equity (Including AOCI) “2013 was another year of solid financial results driven by an improved credit profile in our insurance portfolio, a strong 2013 capital base and a high-quality investment portfolio. Our 12 3,087 $1.7 billion of unearned premiums and the strength of our business model position Genworth to continue to deliver attractive shareholder returns.” – Philip Mayers, CFO 10 2012 3,037 2011 2,683 2010 2,589 11 11 10 13 2009 12 2,643 2012 (2) 5,734 2011 5,393 2010 5,398 2009 (1) 5,210 0 2000 4000 6000 0 1000 2000 3000 4000 09 0 100 200 300 average credit score on new insurance written effective loan-to-value (LTV) 13 12 11 10 loan-to-value on new insurance written in 2013 100 200 300 09 0 Realized Investment gains Investment income 727 727 729 733 750 700 650 600 13 12 11 10 09 08 07 06 & prior 10 11 12 13 0 25 >90<95 – 63% 91% 91% 90% 87% 90% 81% 91% 77% 91% 70% 92% 71% 91% 65% 90% 39% 100 Cash and other Prov fixed income Fed government 50 75 Note: All portfolio data is based on high loan-to-value mortgage insurance portfolio (individually insured mortgages) genwor th MI Ca na da In C . 2013 annUaL report Common shares Original LTV Effective LTV Corp fixed income <80 – 9% >80<85 – 4% >85<90 – 24% 7 750 700 Portfolio Distribution Corporate Fixed Income Federal Government Provincial Fixed Income Cash and Other Common Shares Total 600 Total $5.4 billion Federal Government-Government Guarantee 650 13 12 11 10 12/31/12 2,241,661 838,306 9 8 949,037 743,921 278,307 7 328,411 6 effective loan to value original LTV effective LTV Rounded Percentages in Chart 06 & prior 90% average credit score* 2010 IIF (as at Dec13) NIW (2013) 719 727 2011 719 727 41.7% 15.6% 17.6% 13.8% 5.2% 6.1% 7 8 2012 9 720 10 729 11 12 13 91% 42% 92% 2013 16% 91% 720 17% 91% 733 14% 90% 90% 5% 91% 6% Total Flow 90% 100% 13 12 11 10 39% 65% 71% 70% 77% 81% 87% 91% 57% 13 12 11 10 5,379,642 0 25 100.0% 50 75 100 400 500 600 700 800 720% 733% 720% 729% 719% 727% >90-95 719% 727% >85-90 >80-85 <=80 Loan to value by book year (NIW) <=80 > 80–85 > 85–90 > 90–95 09 5% 7% 29% 58% 10 6% 8% 34% 53% 11 6% 15% 29% 51% 12 7% 15% 21% 57% 13 9% 4% 24% 63%  Management’s Discussion and Analysis For the year ended december 31, 2013 As of December 31, 2013 the fourth quarter and full year results and prior-period comparative results for genworth MI Canada Inc. (“genworth Canada” or 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 the provision of 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”) on February 18, 2014 is prepared for the year ended december 31, 2013. the audited consolidated financial statements of the Company were prepared in accordance with International Financial reporting Standards (“IFrS”). this Md&a should be read in conjunction with the Company’s 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 IFrS 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-IFRS financial measures to supplement the Company’s consolidated financial statements, which are prepared in accordance with IFrS, the Company uses non-IFrS financial measures to analyze performance. non-IFrS financial measures include net operating income, operating earnings per common share (basic), operating earnings per common share (diluted), shareholders’ equity excluding accumulated other comprehensive income (“aoCI”), operating return on equity and underwriting ratios such as loss ratio, expense ratio and combined ratio. non-IFrS financial measures used by the Company to analyze the impact of the reversal of the government guarantee fund exit fee include adjusted net investment income, adjusted net income, adjusted earnings per common share (basic), adjusted earnings per common share (diluted), adjusted net operating income, adjusted operating earnings per common share (basic), adjusted operating earnings per common share (diluted), and adjusted operating return on equity. other non-IFrS measures used by the Company to analyze performance include insurance in force, new insurance written, minimum capital test (“MCt”) ratio, delinquency ratio, severity on claims paid, investment yield, book value per common share (basic) including aoCI, book value per common share (basic) excluding aoCI, book value per common share (diluted) including aoCI, book value per common share (diluted) excluding aoCI, and dividends paid per common share. the Company believes that these non-IFrS financial measures provide meaningful supplemental information regarding its performance and may be useful to investors because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision making. non-IFrS financial measures do not have standardized meanings and are unlikely to be comparable to any similar measures presented by other companies. In addition, where applicable, non-IFrS measures used by the Company have been adjusted to analyze the impact of the reversal of the government guarantee fund exit fee. 8 genwo rth MI C anada I n C . 20 13 annUaL rep ort See the “non-IFrS financial measures” section at the end of this Md&a for a reconciliation of net operating income to net income, operating earnings per common share (basic) to earnings per common share (basic), operating earnings per common share (diluted) to earnings per common share (diluted), and shareholders’ equity excluding aoCI to shareholders’ equity. definitions of key non-IFrS financial measures as well as an explanation of why these measures are useful to investors and the additional purposes for which management uses the measures can be found in the Company’s “glossary for non-IFrS financial measures,” in the “non-IFrS financial measures” section at the end of this Md&a. 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 tend to be relatively more 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, due primarily to an increase in frequency, and decrease during the spring and summer months. Overall performance the Company reported 2013 fourth quarter net income of $93 million or $0.98 per common share (diluted), and net operating income of $85 million or $0.90 operating earnings per common share (diluted). as compared to the fourth quarter in the prior year, net income this quarter decreased by $133 million, or 59%, and net operating income decreased by $141 million or 62%. the decrease was primarily the result of the $137 million after-tax impact of the reversal of the government guarantee fund exit fees in the fourth quarter of 2012. excluding the $137 million, net income increased by $4 million, or 4%, to $93 million as higher net gains on investment and lower losses on claims were partially offset by lower earned premiums, higher expenses and a higher effective tax rate. the loss ratio in the fourth quarter of 2013 was 22%, as compared to 31% in the fourth quarter of 2012. Outlook the mortgage insurance business is affected by changes in economic, employment and housing market trends as well as changes in government policy. the housing market is affected by trends in interest rates, home price changes, mortgage origination volume, government regulation and mortgage delinquencies. the Company expects that the macroeconomic environment in 2014 will be characterized by the following factors: • Canadian gross domestic product (“GDP”) is expected to grow from 1.6% in 2013 to 2.3% in 2014 based on the Bank of Canada forecasts. • The unemployment rate is expected to decline slightly from the December 2013 rate of 7.2% based on the consensus economic forecast. • Interest rates should remain relatively low by historical standards, even after factoring in the potential for a rate increase by the Bank of Canada in 2014. genwor th MI Ca na da In C . 2013 annUaL report 9 Management’s discussion and analysis (continued) For the year ended december 31, 2013 • Housing resale activity should increase modestly from the 455,000 units in 2013 based on the Canadian Real Estate association’s forecast. • National home prices should remain flat or increase modestly in 2014. while these macroeconomic factors are supportive of a relatively stable housing market, the 2012 product changes have resulted in a smaller high loan-to-value mortgage origination market, since the second half of 2012. the Company believes that the high loan-to-value mortgage market has normalized, and going forward, the growth rate of the high loan-to-value market should keep pace with the overall housing resale market. In summary, the Company expects that the 2014 residential mortgage insurance premium opportunity for high loan-to-value mortgages will be modestly higher than in 2013, in line with the expected increase in housing resale activity. the Company remains focused on continuing to grow its market share for high loan-to-value mortgages by executing its customer- focused sales and service strategies. the Company also insures portfolios of low loan-to-value mortgages. demand for portfolio insurance fluctuates based on the specific needs of each lender. For both the core high loan-to-value and low loan-to-value portfolio insurance segments, the Company intends to maintain a high-quality insurance portfolio through active risk management. Based on the expected market conditions, the Company expects that its full year loss ratio for 2014 should be generally in the 25% to 35% range, as compared to its 35% to 40% long-term target loss ratio range. the Company continues to actively manage its approximately $5.4 billion investment portfolio, which consists primarily of highly rated fixed income securities. the Company’s asset mix includes a small allocation to dividend-paying common shares, which currently offer higher pre-tax equivalent yields. the investment portfolio has a relatively short portfolio duration of 3.7 years, including cash and cash equivalents of $214 million and approximately $735 million of maturities in 2014. Interest rates have increased modestly from the end of the second quarter of 2013, and the Company’s investment portfolio yield is 3.7% as at december 31, 2013. Current market yields on securities similar to the investment portfolio remain below the current investment portfolio yield, and in the current low interest rate environment the Company’s investment yield will continue to be impacted by the relatively low reinvestment rates. the Company manages its capital base to maintain a balance between capital strength, efficiency and flexibility. as at december 31, 2013, the Insurance Subsidiary’s MCt ratio was 223%, or 38 percentage points higher than its internal target of 185%. the Company plans to operate with an MCt ratio above 190% in order to provide the flexibility necessary to support its in force insurance, to fund new insurance written growth opportunities that may become available, to maintain strong credit ratings and to optimize returns to shareholders. with $1.7 billion of unearned premiums and $3.1 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. Regulatory environment Government guarantee legislation on January 1, 2013, the Protection of Residential Mortgage or Hypothecary Insurance Act (Canada) (“prMhIa”) came into force and established a legislative framework that replaced the guarantee agreement that the Company had with the federal government of Canada (the “guarantee agreement”). private mortgage insurers pay a risk fee of 2.25% of the gross premiums written to the government under prMhIa. 10 genwo rth MI C anada I n C . 20 13 annUaL rep ort Mortgage insurance eligibility rules Under prMhIa the government established regulations that set out the criteria that a mortgage has to meet in order to be insured. Some of these factors for high loan-to-value mortgages are: • • • • • A maximum mortgage amortization of 25 years. Refinanced mortgages limited to a loan-to-value of 80% or less. Capping the maximum gross debt service ratios at 39% and total debt service ratios at 44%. Capping home purchase price at less than $1 million. Setting a minimum credit score of 600. Low loan-to-value mortgages In the 2013 federal budget, the government of Canada proposed to gradually limit the insurance of low loan-to-value mortgages to only those mortgages that will be used in CMhC securitization programs. In addition, the government has indicated an intention to prohibit the use of any taxpayer-backed insured mortgage, both high and low loan-to-value, as collateral in securitization vehicles that are not sponsored by CMhC. the Company is in dialogue with the government of Canada as it designs the structure to implement the proposed changes. the final impact of these proposed changes on the business of the Company cannot be assessed at this time. OSFI Corporate Governance Guideline oSFI’s revised Corporate governance guideline came into force January 1, 2014. the guideline addresses Board and committee responsibilities and competencies, the development of a risk appetite framework and the overall internal control framework. to the extent the Company has deemed appropriate, it has made enhancements to its corporate governance structure to align with this guideline. Draft Own Risk and Solvency Assessment Guideline on november 11, 2013, oSFI published the final version of guideline e-19 – own risk and Solvency assessment (the “orSa”), with an effective date of January 1, 2014. an orSa project plan must be submitted to oSFI by March 31, 2014 and the final report must be approved by the Board of directors no later than december 31, 2014. this new guideline sets out oSFI’s expectations with respect to an insurer’s own view of its risks and solvency requirements. the prime purpose of the orSa is for an insurer to identify material risks, and to assess the adequacy of its risk management and the adequacy of its current and likely future capital needs and solvency positions. the orSa should be forward looking and be congruent with an insurer’s business and strategic planning. the Company does not anticipate a significant impact on its capital position from the implementation of the orSa. B-21 – Mortgage Insurance Underwriting Guidelines the Company expects that oSFI will publish mortgage insurance underwriting guidelines in the first half of 2014 that will be based on the principles in its guideline B-20, residential Mortgage Underwriting practices and procedures. It is the Company’s expectation that the new mortgage insurance specific guideline will generally be aligned with the Company’s existing practices, and as a result, should not have a significant impact on its operations. Proposed Changes to the Regulatory Capital Framework on June 25, 2013, oSFI released a discussion paper on proposed Changes to the regulatory Capital Framework for Federally regulated property and Casualty (“p&C”) insurers. the purpose of the proposed changes is to ensure that p&C insurers continue to have a robust risk-based capital test. oSFI noted that it has commenced an internal process aimed at developing a new capital framework for mortgage insurers. the Company believes that this new capital framework for mortgage insurers may differ in structure from the current MCt and expects that the earliest effective date of the new test will be in 2015. the Company is in dialogue with oSFI on the development of the new test. at this time, there are insufficient details available to estimate the impact of any new test on the capital requirements of the Company. genwor th MI Ca na da In C . 2013 annUaL report 11 Management’s discussion and analysis (continued) For the year ended december 31, 2013 Results of operations the following table sets forth certain financial information for the fourth quarter and full year of 2013 and 2012. (In millions of dollars, unless otherwise specified) 2013 2012 2013 2012 For the three months ended december 31 For the twelve months ended december 31 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(1) Impact of reversal of government guarantee fund exit fees Interest expense Income before income taxes net income(1) net operating income(1),(2) $ $ 129 142 $ $ 117 147 $ $ 512 573 $ $ 31 33 64 78 56 — (6) 128 93 85 $ $ 46 28 74 73 47 186 (6) 300 226 226 $ $ 142 113 255 319 215 — (23) 511 375 349 $ $ $ $ 550 589 194 105 298 291 181 186 (23) 635 470 462 Weighted average number of common shares outstanding Basic diluted 94,904,567 94,907,933 98,695,175 98,836,531 97,049,781 97,067,722 98,684,587 98,806,915 Earnings per common share ratios earnings per common share (basic)(1) earnings per common share (diluted)(1),(3) Selected non-IFRS financial measures(2) 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 operating earnings per common share (basic)(1) operating earnings per common share (diluted)(1),(3) $ $ 0.98 0.98 $ $ 2.29 2.29 $ $ 3.86 3.86 $ $ 4.77 4.76 $ 316,702 7,693 $ 22% 23% 45% 12% 223% 0.12% 29% 0.90 0.90 $ $ $ 301,456 8,472 $ 31% 19% 50% 33% 170% 0.14% 34% 2.29 2.28 $ $ $ 316,702 34,985 $ 25% 20% 44% 12% 223% 0.12% 30% 3.60 3.60 $ $ $ 301,456 41,286 $ 33% 18% 51% 17% 170% 0.14% 32% 4.68 4.67 $ $ Note: Amounts may not total due to rounding. (1) Excluding the impact of the government guarantee fund exit fee reversal in investment income of $186 million in the fourth quarter of 2012, adjusted IFRS and non-IFRS financial measures for the fourth quarter of 2012 would have been adjusted net investment income $47 million, adjusted net income $89 million, adjusted net operating income $89 million, adjusted earnings per common share (basic) $0.90, (diluted) $0.90, adjusted operating earnings per common share (basic) $0.90, (diluted) $0.90 and adjusted operating return on equity 13%. Excluding the impact of the government guarantee fund exit fee reversal in investment income of $166 million related to 2011 and prior years, adjusted IFRS and non-IFRS financial measures for the full year of 2012 would have been adjusted net investment income $201 million, adjusted net income $348 million, adjusted net operating income $339 million, adjusted earnings per common share (basic) $3.53, (diluted) $3.52, adjusted operating earnings per common share (basic) $3.44, (diluted) $3.43, and adjusted operating return on equity 13%. (2) These financial measures are not calculated based on IFRS. See the “Non-IFRS financial measures” section at the end of this MD&A for additional information. (3) The difference between basic and diluted number of common shares outstanding is caused by the potentially dilutive impact of share-based compensation awards. 12 genwo rth MI C anada I n C . 20 13 annUaL rep ort Fourth quarter highlights Compared to the fourth quarter of 2012: • Net income decreased by $133 million, or 59%, to $93 million and net operating income decreased by $141 million, or 62%, to $85 million, primarily the result of the $137 million after-tax impact of the reversal of the government guarantee fund exit fees into investment income that occurred in the prior year’s period. excluding the $137 million, net income increased by $4 million, or 4%, to $93 million, as higher net gains on investments and lower losses on claims offset lower earned premiums, higher expenses and a higher effective tax rate. • Net premiums written increased by $13 million, or 11%, to $129 million, primarily the result of higher levels of premiums written on high loan-to-value mortgages due to a larger mortgage origination market for purchase transactions, partially offset by lower demand for portfolio insurance on low loan-to-value mortgages. • Premiums earned decreased by $5 million, or 3%, to $142 million, primarily due to a $5 million lower earnings curve adjustment as compared to the fourth quarter of 2012. • Losses on claims decreased by $15 million, or 33%, to $31 million, primarily due to an overall decrease in new reported delinquencies, as well as a shift in mix, including fewer delinquencies from the alberta 2007 and 2008 books, where the severity on claims paid has typically been higher than severity on claims paid in other provinces. • Expenses increased by $5 million, or 19%, to $33 million, primarily due to an increase in share-based compensation expense as a result of a 22% increase in the Company’s share price. 2013 highlights Compared to the twelve months ended december 31, 2012: • Net income decreased by $95 million, or 20%, to $375 million and net operating income decreased by $113 million, or 24%, to $349 million, primarily the result of the $137 million after-tax impact of the reversal of the government guarantee fund exit fees into investment income. excluding the $137 million, net income increased by $41 million, or 12%, to $375 million and net operating income increased by $24 million, or 8%, primarily due to lower losses on claims and higher investment income, partially offset by higher expenses, lower earned premiums and a higher effective tax rate. • Net premiums written decreased by $38 million, or 7%, to $512 million, primarily the result of lower levels of premiums written on high loan-to-value mortgages due to a smaller refinance market related to the change to the government guarantee eligibility rules and lower demand for portfolio insurance on low loan-to-value mortgages. • Premiums earned decreased by $16 million, or 3%, to $573 million, primarily due to a $15 million lower earnings curve adjustment as compared to the twelve months ended 2012, as well as the aging of the larger 2007 and 2008 books, partially offset by the elimination of the risk premium related to the guarantee agreement. • Losses on claims decreased by $52 million, or 27%, to $142 million, due to an overall decrease in new reported delinquencies, as well as a shift in mix, including fewer from the alberta 2007 and 2008 books, where the severity on claims paid has typically been higher than severity on claims paid in other provinces. genwor th MI Ca na da In C . 2013 annUaL report 13 Management’s discussion and analysis (continued) For the year ended december 31, 2013 Fourth quarter performance the following table sets forth the quarterly results of operations for the Company’s business: For the three months ended december 31 Increase (decrease) and percentage change (In millions of dollars, 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 investment gains government guarantee fund earnings Impact of the reversal of government guarantee fund exit fees total net investment income(1) Interest expense Income before income taxes provision for income taxes net income(1) adjustment to net income: net investment gains, net of taxes net operating income(1),(2) effective tax rate Selected non-IFRS financial measures(2) Loss ratio expense ratio Combined ratio operating return on equity(1) Investment yield 2013 129 142 $ $ 2012 117 147 $ $ $ $ Q4’13 vs. Q4’12 13 (5) (15) 5 (10) 6 5 11 (7) (186) (177) — (172) (39) (133) 31 33 64 78 44 11 — — 56 (6) 128 35 46 28 74 73 39 1 7 186 233 (6) 300 74 93 $ 226 $ $ $ (8) (0) (8) 85 $ 226 $ (141) 27.5% 24.7% 22% 23% 45% 12% 3.6% 31% 19% 50% 33% 3.8% — — — — — — 11% (3)% (33)% 19% (14)% 8% 12% nM nM nM (76)% 0% (57)% (52)% (59)% nM (62)% 3% (10) pts 4 pts (5) pts (22) pts (0.2) pts Notes: Amounts may not total due to rounding. The Company defines NM as “not meaningful” for increases or decreases greater than 100%. (1) Excluding the impact of the government guarantee fund exit fee reversal in investment income of $186 million in the fourth quarter of 2012, adjusted IFRS and non-IFRS financial measures for the fourth quarter of 2012 would have been adjusted net investment income $47 million, adjusted net income $89 million, adjusted net operating income $89 million and adjusted operating return on equity 13%. (2) The financial measures are not calculated based on IFRS. See the “Non-IFRS financial measures” section at the end of this MD&A for additional information. 14 genwo rth MI C anada I n C . 20 13 annUaL rep ort Fourth quarter 2013 compared to fourth quarter 2012 new insurance written on high loan-to-value mortgages increased by $0.8 billion, or 19%, to $5.2 billion in the fourth quarter of 2013 as compared to the prior year’s period, primarily due to a $0.9 billion increase in new insurance written on purchase transactions, partially offset by a $0.1 billion decrease in new insurance written on refinance transactions. the Company believes the increase in high loan- to-value new insurance written on purchase transactions was primarily the result of a larger market size as compared to the prior year’s period. the Company expects refinance transactions to represent a small portion of new insurance written in the foreseeable future as a result of the change made by the government to the mortgage insurance eligibility rules, which took effect in July 2012 and which reduced the maximum loan-to-value on refinance transactions from 85% to 80%. new insurance written on low loan-to-value mortgages was $2.5 billion in the fourth quarter of 2013, as compared to $4.1 billion in the prior year’s period, as a result of a decrease in demand for low loan-to-value mortgage insurance. net premiums written increased by $13 million, or 11%, to $129 million in the fourth quarter of 2013 as compared to the prior year’s period, primarily the result of $17 million of higher premiums from high loan-to-value new insurance written and $2 million from the elimination of the risk premium related to the government guarantee agreement partially offset by $6 million from reduced low loan-to- value new insurance written. Compared to the prior year’s period, the increase in premiums from high loan-to-value new insurance written was the result of a larger high loan-to-value mortgage origination market partially offset by a higher mix of 25-year amortization mortgages, which have a lower premium rate compared to mortgages with a 30-year amortization period. premiums from low loan-to-value mortgages were $11 million in the fourth quarter of 2013, as compared to $17 million in the prior year’s period, as a result of a decrease in low loan-to-value mortgage insurance opportunities. the Company is proactively managing its total exposure and believes there is ample room within the $300 billion private insurers’ cap to continue to write its anticipated levels of both high and low loan-to-value volumes of insured mortgages into the foreseeable future. net premiums earned decreased by $5 million, or 3%, to $142 million in the fourth quarter of 2013 as compared to the prior year’s period. the decline was primarily the result of a smaller earnings curve adjustment in the fourth quarter of 2013 of $3 million as compared to $8 million in the prior year’s period. reduced earnings from the large 2007 and 2008 books of business were offset by the elimination of the risk premium in the fourth quarter of 2013 as compared to a $2 million risk premium in the prior year’s period. the risk premium was replaced by a risk fee equal to 2.25% of gross premiums written, which was $3 million in the fourth quarter of 2013. the risk fee is accounted for as a premium acquisition expense and is initially deferred and then expensed in proportion to and over the period in which premiums are earned. Losses on claims decreased by $15 million, or 33%, to $31 million in the fourth quarter of 2013 as compared to the prior year’s period. the decrease was primarily due to strong portfolio quality, declining unemployment rates and modest home price appreciation, which led to an overall decrease in new reported delinquencies, as well as a shift in mix, including fewer delinquencies from the alberta 2007 and 2008 books, where the severity on claims paid has typically been higher than severity on claims paid in other provinces. the Company continues to realize savings from its loss mitigation programs, including workout and asset management initiatives which also contributed to lower losses on claims. as compared to the prior year’s period, the loss ratio declined by 10 percentage points to 22% for the fourth quarter of 2013, primarily due to the $15 million decrease in losses on claims. expenses increased by $5 million, or 19%, to $33 million in the fourth quarter of 2013 primarily due to an increase in share-based compensation expense, as compared to the prior year’s period. Share-based compensation of $6 million in the fourth quarter of 2013 was higher by $5 million, as compared to the prior year, primarily due to the increase in the Company’s share price from $28.97 at September 30, 2013 to $36.63 at december 31, 2013. the expense ratio increased 4 percentage points to 23% for the fourth quarter of 2013, with approximately 3 percentage points due to the higher expenses and approximately 1 percentage point due to the lower earned premium, as compared to the prior year’s period. genwor th MI Ca na da In C . 2013 annUaL report 15 Management’s discussion and analysis (continued) For the year ended december 31, 2013 excluding the $186 million1 reversal of the government guarantee fund exit fees in the fourth quarter of 2012, interest and dividend income from the investment portfolio, inclusive of the government guarantee fund earnings, decreased $2 million, or 5%, to $44 million in the fourth quarter of 2013, as compared to the prior year’s period. the $2 million decrease was primarily the result of a $1 million reduction in dividend income consistent with the decrease in common equities held in the portfolio and a $1 million reduction in interest income due to low reinvestment rates, partially offset by higher assets, as compared to the prior year’s period. the investment yield declined 0.2 percentage points to 3.6, as compared to the prior year’s period, primarily related to the decline in fixed income investment yields. the Company recorded $11 million net investment gains in the fourth quarter of 2013, primarily from the sale of equities, as compared to $1 million in the prior year’s period. Interest expense remained flat at $6 million in the fourth quarter of 2013 as compared to the prior year’s period. the effective tax rate of 27.5% in the fourth quarter of 2013 increased by approximately 290 basis points as compared to the prior year’s period. the fourth quarter of 2013 includes approximately $1 million of additional taxes related to higher share-based compensation expense, a significant portion of which is non-deductible, and approximately $1 million of additional taxes from a decrease in non-taxable dividend income, as compared to the prior year’s period. additionally, the prior year’s period included $2 million of tax benefits from the recognition of tax losses available for carryforward relating to pMI Mortgage Insurance Company Canada, a subsidiary acquired by the Company, in the fourth quarter of 2012. the combined basic federal and provincial income tax rate of 26% was relatively unchanged as compared to the prior year’s period. the MCt ratio increased approximately 53 percentage points to 223% in the fourth quarter of 2013 as compared to the prior year’s period. of the 53 percentage point increase, approximately 40 percentage points were due to the elimination of the government guarantee fund and the reversal of the exit fees previously accrued. the remaining increase was related primarily to an increase in retained earnings from the Company’s continued profitability, net of dividends paid and the decline in unrealized investment portfolio gains. net income decreased by $133 million, or 59%, to $93 million, and net operating income decreased by $141 million, or 62%, to $85 million, primarily the result of the $137 million after-tax impact of the reversal of the government guarantee fund exit fees into investment income that occurred in the prior year’s period. excluding the $137 million, net income increased by $4 million, or 4% to $93 million, due to higher net gains on investments and lower losses on claims, partially offset by lower earned premium, higher expenses and a higher effective tax rate. excluding the $137 million, net operating income decreased by $4 million, or 4%, due to lower earned premium, higher expenses and a higher effective tax rate, partially offset by lower losses on claims. (1) The impact of the government guarantee fund exit fee reversal resulted in $186 million of additional investment income in the fourth quarter of 2012, consisting of $166 million related to exit fees accrued in 2011 and prior years and a further $20 million accrued for the first nine months of 2012. 16 genwo rth MI C anada I n C . 20 13 annUaL rep ort Full year performance the following table sets forth the year to date results of operations for the Company’s business: For the twelve months ended december 31 Increase (decrease) and percentage change 2013 vs. 2012 (In millions of dollars, 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 investment gains government guarantee fund earnings Impact of the reversal of government guarantee fund exit fees total investment income(1) Interest expense Income before income taxes provision for income taxes net income(1) adjustment to net income: net investment gains, net of taxes net operating income(1),(2) effective tax rate Selected non-IFRS financial measures(2) Loss ratio expense ratio Combined ratio operating return on equity(1) Investment yield 2013 512 573 $ $ 2012 550 589 $ $ $ $ 142 113 255 319 179 37 — — 216 (23) 511 136 194 105 298 291 162 12 7 186 367 (23) 635 164 $ 375 $ 470 $ (38) (16) (52) 8 (44) 28 17 25 (7) (186) (152) — (124) (28) (95) (26) (9) (17) $ 349 $ 462 $ (113) 26.7% 25.9% 25% 20% 44% 12% 3.7% 33% 18% 51% 17% 4.0% — — — — — — (7)% (3)% (27)% 8% (15)% 10% 10% nM nM nM (41)% 0% (19)% (17)% (20)% nM (24)% 1% (8) pts 2 pts (6) pts (5) pts (0.3) pts Notes: Amounts may not total due to rounding. The Company defines NM as “not meaningful” for increases or decreases greater than 100%. (1) Excluding the impact of the government guarantee fund exit fee reversal in investment income of $166 million, related to 2011 and prior years, adjusted IFRS and non-IFRS financial measures for the year 2012 would have been adjusted net investment income $201 million, adjusted net income $348 million, adjusted net operating income $339 million, and adjusted operating return on equity 13%. (2) These financial measures are not calculated based on IFRS. See the “Non-IFRS financial measures” section at the end of this MD&A for additional information. genwor th MI Ca na da In C . 2013 annUaL report 17 Management’s discussion and analysis (continued) For the year ended december 31, 2013 2013 compared to 2012 new insurance written on high loan-to-value mortgages decreased by $1.4 billion, or 7%, to $20 billion in the twelve months ended december 31, 2013, as compared to the prior year’s period, primarily due to a $2.0 billion decrease in new insurance written on refinance transactions partially offset by a $0.6 billion increase in new insurance written on purchase transactions. the Company believes the increase in high loan-to-value new insurance written on purchase transactions was primarily the result of a slightly larger mortgage originations market in 2013, after the impact of the July 2012 change in the government guarantee eligibility rules that reduced the maximum amortization from 30 to 25 years, as compared to the prior year’s period. the decrease in refinance transactions was also due to the July 2012 change in the government guarantee eligibility rules, which reduced the maximum loan-to-value on refinance transactions from 85% to 80%, as compared to the prior year’s period. the Company expects refinance transactions to represent a small portion of new insurance written in the foreseeable future. new insurance written on low loan-to-value mortgages was $15.5 billion in the twelve months ended december 31, 2013, as compared to $20.4 billion in the prior year’s period, as a result of fewer low loan-to-value mortgage insurance opportunities. net premiums written decreased by $38 million, or 7%, to $512 million in the twelve months ended december 31, 2013 as compared to the prior year’s period, primarily the result of $36 million in lower premiums from high loan-to-value new insurance written, and $13 million of lower low loan-to-value new insurance written, partially offset by $10 million from the elimination of the risk premium related to the government guarantee agreement. Compared to the prior year’s period, the decrease in premiums from high loan-to- value new insurance written was the result of a smaller high loan-to-value mortgage origination market for refinance transactions and a higher mix of 25-year amortization mortgages, which have a lower premium rate compared to mortgages with a 30-year amortization period, partially offset by a slightly larger high loan-to-value mortgage originations market for purchase transactions. premiums from low loan-to-value mortgages were $65 million in the twelve months ended december 31, 2013, as compared to $77 million in the prior year’s period, as a result of fewer low loan-to-value mortgage insurance opportunities. the Company is proactively managing its total government guarantee exposure and believes there is ample room within the $300 billion private insurers’ cap to continue to write its anticipated levels of both high and low loan-to-value volumes of insured mortgages into the foreseeable future. net premiums earned decreased by $16 million, or 3%, to $573 million in the twelve months ended december 31, 2013 as compared to the prior year’s period. the decline was primarily the result of smaller earnings curve adjustments. earnings curve adjustments in the twelve months ended december 31, 2013 were $12 million as compared to $27 million in the prior year’s period. reduced earnings from the large 2007 and 2008 books of business were offset by the elimination of the risk premium in the twelve months ended december 31, 2013 as compared to a $10 million risk premium in the prior year’s period. the risk premium was replaced by a risk fee equal to 2.25% of gross premiums written, which was $12 million in the twelve months ended december 31, 2013. the risk fee is accounted for as a premium acquisition expense and is initially deferred and then expensed in proportion to and over the period in which premiums are earned. Losses on claims decreased by $52 million, or 27%, to $142 million in the twelve months ended december 31, 2013 as compared to the prior year’s period. the decrease in losses on claims was primarily due to strong portfolio quality, declining unemployment rates and modest home price appreciation. this led to an overall decrease in new reported delinquencies, as compared to the prior year’s period, as well as a shift in mix, with fewer new reported delinquencies from the alberta 2007 and 2008 books, where the severity on claims paid has typically been higher than severity on claims paid in other provinces. the Company continues to realize savings from its loss mitigation programs, including workout and asset management initiatives, which also contributed to lower losses on claims. as compared to the prior year’s period, the loss ratio decreased 8 percentage points, to 25%, primarily due to the decrease in losses. 18 genwo rth MI C anada I n C . 20 13 annUaL rep ort expenses increased $8 million, or 8%, in the twelve months ended december 31, 2013, primarily due to an increase in share-based compensation expense, as compared to the prior year’s period. Share-based compensation expense of $11 million in 2013 was $8 million higher as compared to the prior year due to the increase in the Company’s share price from $22.59 at december 31, 2012 to $36.63 at december 31, 2013. as compared to the prior year’s period, the expense ratio increased 2 percentage points to 20%, approximately 1 percentage point due to the higher expenses and approximately 1 percentage point due to the lower earned premium, as compared to the prior year’s period. excluding the $186 million1 reversal of the government guarantee fund exit fee in the fourth quarter of 2012, interest and dividend income from the investment portfolio, inclusive of government guarantee fund earnings, increased by $10 million, or 6%, to $179 million in the twelve months ended december 31, 2013 as compared to the prior year’s period. the $10 million increase was primarily the result of the elimination of $20 million of exit fees related to the government guarantee fund, partially offset by $10 million lower net investment income resulting from lower fixed income investment yields, as compared to the prior year’s period. dividend income of $9 million in the twelve months ended december 31, 2013 was $3 million lower than in the prior year’s period, consistent with the decrease in common equities held in the portfolio. the pre-tax equivalent investment yield declined 0.3 percentage points, to 3.7, as compared to the prior year’s period, primarily related to the decline in fixed income reinvestment yields and lower common equity holdings. the Company recorded $37 million net investment gains in the twelve months ended december 31, 2013, primarily from the sale of equities, as compared to $12 million in the prior year’s period. Interest expense remained flat at $23 million in the twelve months ended december 31, 2013 as compared to the prior year’s period. the effective tax rate of 26.7% increased by approximately 80 basis points in the twelve months ended december 31, 2013, as compared to the prior year’s period. In the twelve months ended december 31, 2013, additional taxes of approximately $2 million resulted from higher share-based compensation expense, a significant portion of which is non-deductible, and additional taxes of approximately $1 million from lower non-taxable dividend income, as compared to the prior year’s period. the twelve months ended december 31, 2012 included $2 million of tax benefits from the recognition of tax losses available for carryforward related to pMI Mortgage Insurance Company Canada, a new subsidiary acquired in the fourth quarter of 2012, offset by a $2 million increase in taxes in 2012 related to the impact of an increase in the ontario provincial tax rate on the Company’s cumulative deferred income taxes which was comprised primarily of timing differences associated with the government guarantee fund. the combined basic federal and provincial income tax rate of 26% was relatively unchanged as compared to the prior year’s period. the MCt ratio increased approximately 53 percentage points to 223% in the fourth quarter of 2013 as compared to the prior year’s period. of the 53 percentage point increase, approximately 40 percentage points were due to the elimination of the government guarantee fund and the reversal of the exit fees previously accrued. the remaining increase was related primarily to an increase in retained earnings from the Company’s continued profitability, net of dividends paid and the decline in unrealized investment portfolio gains. net income decreased by $95 million, or 20%, to $375 million, and net operating income decreased by $113 million, or 24%, to $349 million, in the twelve months ended december 31, 2013, primarily the result of the $137 million after-tax impact of the reversal of the government guarantee fund exit fee into investment income, as compared to the prior year’s period. excluding the $137 million, net income increased by $41 million, or 12%, to $375 million and net operating income increased by $24 million, or 8%, primarily due to lower losses on claims and higher investment income partially offset by higher expenses, lower earned premiums and a higher effective tax rate. (1) The impact of the government guarantee fund exit fee reversal resulted in $186 million of additional investment income in the fourth quarter of 2012, consisting of $166 million related to exit fees accrued in 2011 and prior years and a further $20 million accrued for the first nine months of 2012. genwor th MI Ca na da In C . 2013 annUaL report 19 Management’s discussion and analysis (continued) For the year ended december 31, 2013 Statement of financial position highlights and selected financial data (In millions of dollars, unless otherwise specified) 2013 2012 2013 vs. 2012 As at December 31 as at december 31 Increase (decrease) and percentage change Investments: general portfolio government guarantee fund other assets Subrogation recoverable total assets Unearned premium reserves Loss reserves Long-term debt other liabilities total liabilities Shareholders’ equity excluding aoCI(1) accumulated other comprehensive income (“aoCI”) Shareholders’ equity total liabilities and shareholders’ equity Selected non-IFRS financial measures(1) MCt ratio Book value per common share number of common shares outstanding (basic) Book value per common share including aoCI (basic) Book value per common share excluding aoCI (basic) number of common shares outstanding (diluted) Book value per common share including aoCI (diluted)(2) Book value per common share excluding aoCI (diluted)(2) Dividends paid per common share during the year(3) $ $ 5,375 — 241 76 5,691 1,724 117 423 340 2,604 2,963 124 3,087 5,691 $ $ 4,400 979 264 91 5,734 1,785 139 422 351 2,697 2,816 221 3,037 5,734 $ $ 975 (979) (23) (16) (43) (61) (22) 1 (11) (93) 147 (97) 50 (43) 22% nM (9)% (17)% (1)% (3)% (16)% 0% (3)% (3)% 5% (44)% 2% (1)% 223% 170% — 53 pts 94,910,880 32.53 $ 31.22 $ 98,698,018 30.77 $ 28.53 $ (3,787,138) 1.76 $ 2.69 $ 94,918,169 32.53 $ 31.22 $ 1.31 $ 99,174,050 30.62 $ 28.40 $ 1.19 $ (4,255,881) 1.91 $ 2.82 $ (4)% 6% 9% (4)% 6% 10% Note: Amounts may not total due to rounding. The Company defines NM as “not meaningful” for increases or decreases greater than 100%. (1) These financial measures are not calculated based on IFRS. See the “non-IFRS financial measures” section at the end of this MD&A for additional information. (2) The difference between basic and diluted number of common shares outstanding is caused by the potentially dilutive impact of share-based compensation awards. (3) Dividends paid per common share reflect payment for the full year of 2013 and 2012. 20 genwo rth MI C anada I n C . 20 13 annUaL rep ort 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 of dollars, unless otherwise specified) total loss reserves, at the beginning of the year Loss reserves for prior years’ delinquent loans, remaining at the end of the year (a) Change in loss reserves for prior years’ delinquent loans paid claims for prior years’ delinquent loans Favourable (unfavourable) development as a percentage of total loss reserves, at the beginning of the year 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 2013 as at dec. 31 2012 as at dec. 31 2011 as at dec. 31 2010 $ 139 $ 169 $ 207 $ 236 $ 10 129 (139) 26 143 (193) 45 162 (214) 67 169 (200) $ (10) $ (51) $ (52) $ (31) $ as at dec. 31 2009 172 71 101 (160) (59) (7)% (30)% (25)% (13)% (34)% $ $ 108 118 $ $ 113 139 $ $ 124 169 $ $ 140 207 $ $ 166 236 the Company’s loss-reserving methodology, including reserve development, is reviewed on a monthly basis and incorporates the most current available information. the Company’s outstanding reserves represent the Company’s current best estimate of the ultimate cost of settling claims, in each case as of the date such reserves are established and based on the information available at such time. the Company experienced modest adverse reserve development in 2013 of $10 million, or 7% of the total loss reserves at the beginning of the year. the Company uses third party appraisals to determine the expected net property proceeds, and has observed that the initial appraisal value often exceeds the ultimate sales price. the province of Québec and the atlantic provinces accounted for the majority of the adverse development in 2013. another contributing factor was a settlement related to a small number of claims in alberta. the Company regularly reviews the underlying drivers of its loss reserves development and adjusts its reserving practices accordingly. as a result of these adjustments, the adverse development in 2013 was the lowest level the Company has experienced in the past five years. genwor th MI Ca na da In C . 2013 annUaL report 21 Management’s discussion and analysis (continued) For the year ended december 31, 2013 Financial instruments Portfolio of invested assets effective January 1, 2013, the investment portfolio reflects the combination of assets from the general portfolio and the previous guarantee fund portfolio, and for comparative purposes the below table includes assets from the government guarantee fund of $949 million. as of december 31, 2013, the Company had total cash, cash equivalents and invested assets of $5.4 billion in the portfolio. all of the Company’s invested assets are classified as available-for-sale (“aFS”). Fair value measurements for aFS securities are based on quoted market prices for identical assets when available. In the event an active market does not exist, estimated fair values are based on recent transactions or current prices for similar securities. Unrealized gains on aFS securities in the portfolio were $177 million. the Company’s investment yield for the full year 2013 was 3.7%, which includes the favourable impact of non-taxable dividend income. the following table presents the Company’s invested assets by asset class for the portfolio. Asset class As at December 31, 2013 as at december 31, 2012 (In millions of dollars, unless otherwise specified) Fair value % Unrealized gains Fair value asset-backed fixed income $ 8 0% $ 0 $ 65 Corporate fixed income Financials energy Infrastructure all other sectors total corporate fixed income government fixed income Canadian short-term federal t-bills Canadian federal fixed income Canadian provincial fixed income Canadian federal fixed income – government guarantee fund total government fixed income Common shares energy Financials Communication all other sectors total common shares total invested assets Cash and cash equivalents Cash and cash equivalents – government guarantee fund $ 1,281 311 230 451 2,272 40 1,810 846 — 2,696 38 47 21 78 184 5,161 214 — accrued income – government guarantee fund Mortgage Insurance Company Canada liability $ 5,375 — — 24% 6% 4% 8% 42% 1% 34% 16% — 50% 1% 1% 0% 1% 3% 96% 4% — — — — 47 10 9 9 75 — 43 35 — 78 4 5 5 9 $ 24 177 — — $ 1,172 315 260 430 2,177 90 748 744 949 2,531 92 44 71 121 328 5,101 248 41 $ 177 $ 5,390 — — 3 (14) % 1% 22% 6% 5% 8% 40% 2% 14% 14% 18% 47% 2% 1% 1% 2% 6% 95% 5% 1% — — — total invested assets and cash $ 5,375 100% $ 177 $ 5,380 100% Note: Amounts may not total due to rounding. 22 genwo rth MI C anada I n C . 20 13 annUaL rep ort the Company assigns credit ratings based on the asset risk guidelines as outlined in the minimum capital test guideline published by oSFI in January 2013. Based on this guideline, the Company assigns ratings from dBrS when available. the majority of the assets in the Company’s current investment portfolio have a dBrS rating. In the absence of a dBrS rating, the Company assigns the higher of Standard & poor’s or Fitch rating Services ratings. the following table presents the Company’s invested assets by credit rating for the portfolio. Credit rating (excluding common shares) As at Dec. 31, 2013 Unrealized gains (losses) as at dec. 31, 2012 Fair value (In millions of dollars, unless otherwise specified) Fair value Cash and cash equivalents Cash and cash equivalents – government guarantee fund aaa aaa – government guarantee fund aa a BBB Below BBB $ 214 — 1,935 — 1,016 1,665 353 7 % 4% — 37% — 20% 32% 7% — $ $ — — 47 — 47 59 1 (1) total invested assets and cash (excluding common shares) $ 5,190 100% $ 153 $ 248 41 1,110 949 1,252 1,289 173 — 5,062 Note: Amounts may not total due to rounding. Investment portfolio management the Company manages its 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. the Company also holds short-term investments and common shares. In all cases, investments are required to comply with restrictions imposed by law and insurance regulatory authorities as well as the Company’s own 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 three 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, the 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. Asset-backed fixed income securities the Company held $8 million in asset-backed securities as of december 31, 2013, as compared to $65 million, or 1%, of consumer finance securitizations as of december 31, 2012. the decrease is primarily the result of the maturities of asset-backed securities during the period. genwor th MI Ca na da In C . 2013 annUaL report 23 Management’s discussion and analysis (continued) For the year ended december 31, 2013 Corporate fixed income securities as of december 31, 2013, approximately 42% of the investment portfolio was held in corporate fixed income securities, up 2 percentage points, from 40% at the end of 2012. Securities rated below a were $360 million, or 7% of invested assets, as of december 31, 2013. 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 24% of the investment portfolio, or approximately 56% 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. Canadian 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, 2013, 34% of the portfolio was invested in federal securities, as compared to 34% at the end of 2012. provincial holdings increased to 16% of the portfolio, as compared to 14% at the end of 2012. Short-term federal treasury bills held by the Company consist primarily of short-term investments with original maturities greater than 90 days and less than 365 days. the Company held 1% in Canadian short-term treasury bills in the investment portfolio as of december 31, 2013, as compared to 2% at the end of 2012. Common shares the Company had $184 million invested in high dividend-yielding, relatively low-volatility Canadian common shares as of december 31, 2013, representing 3% of the investment portfolio. the energy and financial sectors represent approximately 46% of the common shares held by the Company and the remaining holdings are diversified across the other sectors of companies listed on the toronto Stock exchange. 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 in the investment portfolio decreased from $289 million, which included $41 million related to the government guarantee fund, as of december 31, 2012 to $214 million as of december 31, 2013. the decrease in cash is partially the result of the repurchase of approximately $105 million worth of common shares under the normal course issuer bid (“nCIB”) and net bond purchases during the period. 24 genwo rth MI C anada I n C . 20 13 annUaL rep ort Summary of annual information the table shown below presents select income statement line items and certain key performance indicators for the last three years. (In millions of dollars, unless otherwise specified) net premiums written net premiums earned Losses on claims net underwriting income total investment income (including impact of reversal of exit fees)(1),(3) Impact of the reversal of government guarantee fund exit fees net income(3) adjustment to net income: net gains in investments, net of taxes net operating income(2,(3) Earnings per common share ratios earnings per common share (basic)(3) earnings per common share (diluted)(3) Selected non-IFRS financial measures(2) Loss ratio expense ratio Combined ratio operating earnings per common share (basic)(3) operating earnings per common share (diluted)(3) operating return on equity(3) 2013 2012 2011 $ $ $ $ $ $ 512 573 142 319 216 — 375 $ 550 $ 589 194 291 367 166 470 (26) (9) 349 $ 462 $ 3.86 3.86 $ $ 4.77 4.76 $ $ 25% 20% 44% 3.60 3.60 12% $ $ 33% 18% 51% 4.68 4.67 17% $ $ 533 612 225 287 179 — 323 (5) 318 3.18 3.13 37% 17% 53% 3.13 3.08 13% Includes net realized (gains) losses on sale of available-for-sale investments and change in unrealized losses of fair value through profit or loss (“FVTPL”) investments. Note: Amounts may not total due to rounding. (1) (2) The financial measures are not calculated based on IFRS. See the “Non-IFRS financial measures” section at the end of this MD&A for additional information. (3) Excluding the impact of the government guarantee fund exit fee reversal of $166 million, related to 2011 and prior years, non-IFRS financial measures for the full year of 2012 would have been net investment income $201 million, adjusted net income $348 million, adjusted net operating income $339 million and operating return on equity 13%. the table shown below presents additional annual information for the years ending 2013, 2012 and 2011. (In millions of dollars, unless otherwise specified) total invested assets and cash total assets total liabilities total shareholders’ equity dividends paid per common share as at december 31 2013 2012 $ 5,375 $ 5,380 $ 5,691 2,604 3,087 5,734 2,697 3,037 $ 1.31 $ 1.19 $ 2011 5,063 5,393 2,710 2,683 1.57 genwor th MI Ca na da In C . 2013 annUaL report 25 Management’s discussion and analysis (continued) For the year ended december 31, 2013 Summary of quarterly results the table shown below presents select income statement line items and certain key performance indicators for the last eight quarters. See “outlook” and “Seasonality” sections at the beginning of this Md&a for further details. (In millions, unless otherwise specified) Q4’13 Q3’13 Q2’13 Q1’13 Q4’12 Q3’12 Q2’12 Q1’12 net premiums written $ 129 $ 161 $ 137 $ 84 $ 117 $ 178 $ 176 $ 79 net premiums earned Losses on claims net underwriting income total investment income (including impact of reversal 142 31 78 143 32 84 143 35 82 144 44 74 147 46 73 147 44 77 148 48 76 147 56 65 of exit fees)(1) 56 51 59 50 233 44 40 50 Impact of reversal of government guarantee fund exit fees net income(1) adjustment to net income: net investment gains, net of taxes — 93 (8) — 96 — 98 (5) (10) — 88 (3) 186 226 — — 85 (4) net operating income(1),(2) $ 85 $ 91 $ 88 $ 85 $ 226 $ 81 $ — 79 — 79 $ — 81 (5) 76 Earnings per common share ratios earnings per common share (basic)(1) earnings per common share (diluted)(1),(3) $ 0.98 $ 0.98 $ 0.99 $ 1.00 $ 0.89 $ 2.29 $ 0.86 $ 0.80 $ 0.82 $ 0.99 $ 1.00 $ 0.89 $ 2.29 $ 0.86 $ 0.79 $ 0.82 Selected non-IFRS financial measures(2) Loss ratio expense ratio Combined ratio operating earnings per common share (basic)(1) operating earnings per common share (diluted)(1),(3) operating return on equity(1) 22% 23% 45% 22% 19% 41% 25% 18% 43% 31% 18% 49% 31% 19% 50% 30% 18% 48% 32% 17% 49% 38% 18% 56% $ 0.90 $ 0.94 $ 0.90 $ 0.86 $ 2.29 $ 0.82 $ 0.80 $ 0.77 $ 0.90 12% $ $ 0.94 13% $ 0.89 12% $ 0.86 12% 2.28 33% $ 0.82 12% $ 0.79 12% $ 0.77 12% Note: Amounts may not total due to rounding. (1) Excluding the impact of the government guarantee fund exit fee reversal into investment income of $186 million in the fourth quarter of 2012, adjusted IFRS and non-IFRS financial measures for the fourth quarter of 2012 would have been adjusted net investment income $47 million, adjusted net income $89 million, adjusted net operating income $89 million, adjusted earnings per common share (basic) $0.90, adjusted earnings per common share (diluted) $0.90, adjusted operating earnings per common share (basic) $0.90, adjusted operating earnings per common share (diluted) $0.90, and adjusted operating return on equity 13%. These financial measures are not calculated based on IFRS. See the “Non-IFRS financial measures” section at the end of this MD&A for additional information. The difference between basic and diluted earnings per common share and basic and diluted operating earnings per common share is caused by the potentially dilutive impact of share- based compensation awards. (2) (3) 26 genwo rth MI C anada I n C . 20 13 annUaL rep ort 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 following table provides a summary of the Company’s cash flows: (In millions of dollars, unless otherwise specified) Cash provided by (used in): operating activities Financing activities Investing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period Note: Amounts may not total due to rounding. December 31 december 31 2013 2012 $ $ 366 (231) (170) (34) 248 $ 214 $ 186 (117) 107 176 72 248 the Company generated $366 million of cash flows from operating activities in the twelve months ended december 31, 2013, as compared to $186 million in the prior year’s period, primarily the result of lower claims paid, lower taxes paid and cash holdings obtained from the reversal of the government guarantee fund. the Company utilized $231 million of cash flows for financing activities in the twelve months ended december 31, 2013, primarily for the repurchase of common shares under a normal course issuer bid (see “Share repurchase” section for further details) and payment of dividends as compared to the utilization of $117 million of cash flows for the payment of dividends in the prior year’s period. the Company utilized $170 million of cash flows for investing activities, primarily for the purchase of additional fixed income assets in the twelve months ended december 31, 2013, as compared to having generated $107 million in the prior year’s period. the Company maintains a portion of its investment portfolio in cash and liquid securities to meet working capital requirements and other financial commitments. as of december 31, 2013, the Company held liquid assets of $949 million maturing within one year, comprised of $214 million in cash and cash equivalents, and the remaining in bonds and debentures and short-term investments in order to maintain financial flexibility. as at the end of the fourth quarter of 2013, the duration of the fixed income portfolio was 3.7 years. 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. Including securities and cash, 54%, or $2,910 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. potential liquidity risks are discussed in more detail in the “risk Factors” section of the Company’s annual information form (“aIF”) dated March 18, 2013. genwor th MI Ca na da In C . 2013 annUaL report 27 Management’s discussion and analysis (continued) For the year ended december 31, 2013 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, long-term debt and loss reserves consist of the following at december 31, 2013: Contractual obligations (In thousands) Long-term debt(1) operating leases Loss reserves payment dates due by period total Less than 1 year 1–3 years 4–5 years after 5 years $ 425,000 7,803 117,388 $ — 2,347 67,034 $ 150,000 4,043 50,354 $ — $ 275,000 — — 1,413 — total contractual obligations $ 550,191 $ 69,381 $ 204,397 $ 1,413 $ 275,000 (1) See “Debt outstanding” section below for more details. operating lease expense for the year ended december 31, 2013 was $3 million, consistent with $3 million for the prior year. Off-balance sheet arrangements derivative financial instruments are used by the Company for hedging purposes and for the purpose of modifying the risk profile of the Company’s investment portfolio, as long as the resulting exposures are within the Company’s investment policy guidelines, which have been approved by the Board of directors. during the year ended december 31, 2013, the Company used derivative financial instruments in the form of foreign currency forwards to mitigate foreign currency risk associated with bonds denominated in U.S. dollars and australian dollars pledged to collateralize reinsurance obligations. Foreign currency forwards are contractual obligations, with a Schedule I Canadian bank, to exchange one currency for another at a predetermined future date. the following table shows the fair value and notional amounts of the derivatives by terms of maturity, in Canadian dollars. notional amount (In thousands) Fair value 1 year or less 1–3 years 3–5 years over 5 years total december 31, 2013: Foreign currency forwards december 31, 2012 : Foreign currency forwards $ (2,668) $ 28,500 — — $ — — $ 13,710 — $ 133,580 $ 175,790 — — Debt outstanding the following table provides details of the Company’s long-term debt: Contractual obligations (In thousands) Long-term debt payment dates due by period total Less than 1 year 1–3 years 3–5 years after 5 years $ 425,000 $ — $ 150,000 $ — $ 275,000 date issued Maturity date principal amount outstanding (in millions) Fixed annual rate Semi-annual interest payments due each year on debenture ratings Standard & poor’s (“S&p”) dBrS 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 a- (Stable outlook) aa (Low) a- (Stable outlook) aa (Low) 28 genwo rth MI C anada I n C . 20 13 annUaL rep ort 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. 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 if 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. 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 fourth quarter of 2013 and the twelve months ended december 31, 2013, the Company invested $1 million and $3 million, respectively, for underwriting, loss mitigation and risk management technologies. the Company expects that future capital expenditures will continue to be focused on underwriting, loss mitigation, and risk management technology improvements. the Company expects that capital expenditures in 2014 will be in the $3 million to $5 million range and it is anticipated that such expenditures will be funded primarily from operating cash flows. 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%. when prMhIa came into force on January 1, 2013, the government guarantee fund was eliminated in favour of a higher MCt ratio. previously, the government guarantee fund was accounted for as an asset on the Company’s balance sheet and was excluded from the calculation of regulatory capital available. the Minister of Finance advised the Company on december 19, 2012 that under prMhIa and the Insurance Companies Act (Canada) (“ICa”), the minimum MCt ratio for the Insurance Subsidiary will be 175%. In conjunction with this new requirement, the Insurance Subsidiary increased its internal MCt target capital ratio on January 1, 2013 to 185% and expects to operate with an MCt above 190% in the normal course. genwor th MI Ca na da In C . 2013 annUaL report 29 Management’s discussion and analysis (continued) For the year ended december 31, 2013 the Insurance Subsidiary’s regulatory capital available increased on January 1, 2013 by approximately $678 million from the elimination of the government guarantee fund and the reversal of the exit fees previously accrued, net of the related income tax effect. the regulatory capital required increased by approximately $61 million related to capital required for interest rate risk. this increase relates to the addition of the fixed income securities previously held in the government guarantee fund to interest-sensitive assets and the increase of the interest rate shock from 50 basis points to 75 basis points effective January 1, 2013. as a result of these events, the MCt ratio of 170% as at december 31, 2012 increased by approximately 40 percentage points to 210% as at January 1, 2013. the table below illustrates the MCt at december 31, 2012, adjusted for the impact of the new guarantee framework and the increase in capital required for interest rate risk as at January 1, 2013, as well as the MCt at december 31, 2013. Minimum capital test (In millions of dollars, unless otherwise specified) Capital available Capital required MCt ratio as at december 31 adjustments as at January 1 As at December 31 $ $ 2012 2,339 1,375 170% $ $ 678 61 $ $ 2013 3,017 1,436 210% $ $ 2013 3,197 1,436 223% as at december 31, 2013, the MCt ratio of the Insurance Subsidiary was approximately 223%, up 13 percentage points from January 1, 2013, which is the result of the Company’s continued profitability, net of dividends paid, partially offset by a decrease in unrealized investment gains. Capital above the amount required to meet the Insurance Subsidiary’s MCt ratio targets could be used to support organic growth of the business or declaration and payment of dividends or other distributions, and if distributed to genworth Canada, to repurchase common shares of the Company, for acquisitions, for repayment of debt, or for such other uses as permitted by law and approved by the Board. as part of an ongoing effort to improve the estimate of outstanding insurance exposure, the Company surveys its largest customers, on a quarterly basis, to obtain the amount of the outstanding balances. as a result, the Company estimates that the outstanding balance of insured mortgages was approximately $160 billion as at September 30, 2013. this is based on the extrapolation of the amounts reported by lenders surveyed, which represent approximately 90% of the entire insured population. the Company believes that this does not have an impact on the premium recognition curve, which is based on the pattern of loss emergence. Under prMhIa, the cap for all private mortgage insurers is $300 billion as set by the Minister of Finance. Share repurchase In april 2013, the Board authorized an nCIB to purchase up to 4,937,078 common shares of the Company, representing approximately 5% of its outstanding common shares. Under the terms of the nCIB, the Company may purchase common shares for cancellation on the open market, including from the Company’s majority shareholder, genworth Financial, Inc. during the twelve months ended december 31, 2013, the Company completed the purchase and cancellation of 3,903,117 common shares under the nCIB for $105 million, consisting of 2,240,996 common shares from genworth Financial, Inc. and 1,662,121 common shares from the general public. there were 94,910,880 common shares issued and outstanding at december 31, 2013. purchases of common shares may continue until the earlier of May 2, 2014 and the date on which the Company has purchased the maximum number of shares under the nCIB. the Company’s majority shareholder, genworth Financial, Inc., has maintained and is expected to continue to maintain its 57.4% ownership interest in the Company throughout the course of the nCIB. Shareholders may obtain a copy of the nCIB notice, without charge, by contacting the Company. 30 genwo rth MI C anada I n C . 20 13 annUaL rep ort Restrictions on dividends and capital transactions the Company’s Insurance Subsidiary is subject to certain restrictions with respect to dividends 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 the 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 stable outlook, by S&p, and aa (Superior), with a stable outlook, by dBrS. the ratings from S&p were affirmed in June 2013 and the outlook remained stable, reflecting current macroeconomic considerations. the ratings from dBrS were confirmed in September 2013. 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 for 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. Significant new accounting policies Risk fee the following accounting policy pertains to the risk fee, which became applicable to the Company when the prMhIa became effective on January 1, 2013. In conjunction with receiving credit support in the form of the government of Canada guarantee, as prescribed in the prMhIa, the Company is subject to a risk fee equal to 2.25% of gross premiums written. the Company records the risk fee in premium taxes and underwriting fees in the consolidated statement of income. the risk fee relates directly to the acquisition of new mortgage insurance business. accordingly, it is deferred and expensed in proportion to and over the period in which premiums are earned. Derivative financial instruments derivative financial instruments are financial contracts whose value is derived from an underlying interest rate, foreign exchange rate, equity or commodity instrument or index. derivative financial instruments are classified as fair value through profit or loss (“FVtpL”) and are recognized in the consolidated statement of financial position as assets when their fair value is positive and as liabilities when their fair value is negative. while the Company has the ability to net settle multiple financial derivative instruments under a master netting arrangement, the Company does not meet the accounting requirements to offset derivative assets and liabilities. accordingly, each derivative financial instrument is presented as an asset or a liability based on the fair value of the individual instrument. Changes in fair value of derivative financial instruments are recognized in the consolidated statement of income in net investment gains (losses) during the period in which they arise. genwor th MI Ca na da In C . 2013 annUaL report 31 Management’s discussion and analysis (continued) For the year ended december 31, 2013 Reinsurance reinsurance contracts are those contracts under which the reinsurer agrees to indemnify the cedant against all or part of the primary insurance risks underwritten by the cedant under one or more insurance contracts. during the three months ended december 31, 2013, the Company has assumed the role of a reinsurer in the reinsurance agreement. reinsurance premiums are taken into underwriting revenues over the terms of the related reinsurance agreements. reinsurance premiums are reported in gross and net premiums written and premiums earned in the condensed consolidated interim statement of income. Unpaid reinsurance premiums, if any, are reported in accrued investment income and other receivables on the condensed consolidated interim statement of financial position. Changes in accounting policies the Company has adopted the following new and revised standards, along with any consequential amendments, effective January 1, 2013. these changes were made in accordance with the applicable transitional provisions. IAS 1 – Presentation of financial statements (“IAS 1”) the Company has adopted the amendments to IaS 1 effective January 1, 2013. these amendments required the Company to group other comprehensive income items by those that will be reclassified subsequently to profit or loss and those that will not be reclassified. the Company has reclassified comprehensive income items of the comparative period. these changes did not result in any adjustments to other comprehensive income (“oCI”) or comprehensive income. IAS 19 – Employee benefits (“IAS 19”) IaS 19 (amended in 2011) amends certain accounting requirements for defined benefit plans and termination benefits. IaS 19 (amended in 2011) requires the net defined benefit liability to be recognized on the statement of financial position without any deferral of actuarial gains and losses and past service costs as previously allowed. past service costs are recognized in net income when incurred. remeasurements consisting of actuarial gains and losses are recognized in oCI. the Company’s accounting policy in the most recent annual financial statements as at and for the year ended december 31, 2012 was to recognize actuarial gains and losses immediately in oCI and to report them in retained earnings. the Company had recognized all prior service costs incurred to date prior to the IFrS transition date of January 1, 2010, as all the Company’s prior service costs are fully vested. IaS 19 (amended in 2011) also clarifies that benefits are classified as long-term employee benefits if payments are not expected to be made within the next 12 months. the Company has reviewed the classification of its benefits and has determined that no benefits other than those recognized in the accrued net benefit liabilities under employee benefit plans should be classified as long-term benefits as the Company does not have an unconditional right to defer settlement for more than 12 months. the standard also requires termination benefits to be recognized at the earlier of when the entity can no longer withdraw the offer of the termination benefit or recognizes any related restructuring costs. the Company has not incurred such termination benefits during the three and twelve months ended december 31, 2013. the adoption of IaS 19 (amended in 2011) did not result in any measurement adjustments to the Company’s employee benefits. 32 genwo rth MI C anada I n C . 20 13 annUaL rep ort IFRS 13 – Fair value measurement (“IFRS 13”) IFrS 13 provides a single framework for measuring fair value. the measurement of the fair value of an asset or liability is based on assumptions that market participants would use when pricing the asset or liability under current market conditions, including assumptions about risk. the Company adopted IFrS 13 on January 1, 2013 on a prospective basis. the adoption of IFrS 13 did not require any adjustments to the valuation techniques used by the Company to measure fair value and did not result in any measurement adjustments as at January 1, 2013. IaS 34 Interim Financial reporting requires the fair value hierarchy described in IFrS 13 to be applied to financial instruments. For the twelve months ended december 31, 2013, disclosure of the fair value hierarchy for financial instruments is included in note 9 of the Company’s financial statements. Fair value of the Company’s long-term debt is disclosed in note 20 of the Company’s financial statements. IFRS 10 – Consolidated financial statements (“IFRS 10”) IFrS 10 replaces the guidance on control and consolidation in IaS 27 – Consolidated and separate financial statements (“IaS 27”), and Standing Interpretation Committee-12 – Consolidation – Special purpose entities (“SIC-12”). IFrS 10 requires consolidation of an investee only if the investor possesses power over the investee, has exposure to variable returns from its involvement with the investee and has the ability to use its power over the investee to affect its returns. detailed guidance is provided on applying the definition of control. the accounting requirements for consolidation have remained largely consistent with IaS 27. the Company reassessed the control conclusion for its investees at January 1, 2013 and identified no changes to the previous conclusions on whether control exists and no changes affecting the consolidation structure of the Company. Future accounting standards IFRS 4 – Insurance contracts on June 20, 2013, the International accounting Standards Board (“IaSB”) issued a revised exposure draft: Insurance Contracts (the “revised ed”) as part of its ongoing insurance contracts project. the revised ed takes into account the re-deliberations by the IaSB since its July 2010 exposure draft: Insurance Contracts ( the“2010 ed”). the issuance of the revised ed forms part of the IaSB’s efforts to eliminate the current diversity that exists in insurance contract accounting. the insurance contract measurement principles that are set out in the revised ed are similar to those in the 2010 ed: a current measurement model comprising the expected present value of future cash flows, a risk adjustment and a contractual service margin (referred to as “residual margin” in the 2010 ed). however, the IaSB made several key changes in response to comments received on the 2010 ed. Some of the most prominent changes relate to addressing the concerns for earnings volatility; for example, how to present the effect of changes in discount rates. Under the 2010 ed, changes in discount rates related to insurance contracts measured at present value were recorded in earnings. the revised proposals also represent a major change for the presentation of insurance contracts in the statement of comprehensive income. the transitional provisions have been amended to include a contractual service margin for existing business when implementing the future insurance standard, thereby permitting insurers to carry forward an unearned profit amount on transition. Comments on the key areas of change in the revised ed were due october 25, 2013. Based on this timeline, it is expected that a final standard will be issued in 2015, with implementation not expected before 2018. the Company is currently monitoring the development of this standard and assessing the impact of its adoption. Significant judgments and estimates the preparation of consolidated financial statements in accordance with IFrS 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. genwor th MI Ca na da In C . 2013 annUaL report 33 Management’s discussion and analysis (continued) For the year ended december 31, 2013 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 quarterly based on the most current available historical loss data and economic assumptions and updated as required. the impact of the experience update for the fourth quarter of 2013 was an increase in premiums earned of $3 million, as compared to an increase in premiums earned of $8 million in the fourth quarter of 2012. the Company will continue to assess its loss experience on a quarterly basis and make adjustments as appropriate to the premium recognition curve. Deferred policy acquisition costs deferred policy acquisition costs are comprised of premium taxes, appraisal costs, risk fee, 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. 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. 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 reporting 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. 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, adjusted for seasonality. 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. 34 genwo rth MI C anada I n C . 20 13 annUaL rep ort 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. Share-based compensation Stock options with tandem stock appreciation rights (“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 that 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. 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. Employee future benefits actuarial valuations of benefit liabilities for pension and non-pension post-retirement benefit plans are performed as at december 31 of each year based on the Company’s assumptions, including assumptions on discount rate, rate of compensation increase, 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. Utilization of tax losses as at december 31, 2013, the Company had recognized $9.1 million of tax losses (2012 – $10.7 million). Management considers it probable that future taxable profits will be available against which these tax losses can be utilized. Accounting judgments Objective evidence of impairment as of each reporting 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. genwor th MI Ca na da In C . 2013 annUaL report 35 Management’s discussion and analysis (continued) For the year ended december 31, 2013 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. Risk management risk management is a critical part of genworth Canada’s business. the Company has an enterprise risk management framework that encompasses mortgage portfolio risk management, underwriting policies and guidelines, product enhancement, regulatory compliance, general portfolio management and operational 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. 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 pre- determined risk tolerances, taking into account the conditions of the housing market and 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 economic environment. For example, in view of housing market conditions in the greater toronto area in 2012 and 2013, the Company took a number of actions focusing on its new insurance written to reduce the overall risk profile of its mortgage portfolio, including more stringent requirements for refinance transactions, and greater scrutiny on the marketability of high-rise condominium projects in this region. 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. this 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. the Company believes 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, which are reviewed with the Company’s management-level risk committee on a monthly basis. the Company also employs a quality assurance team to ensure that policies and guidelines established by the Company’s mortgage portfolio risk-management function are adhered to both internally within the Company and by lenders submitting applications to the Company. the quality assurance team conducts daily audits of a random sample of loans adjudicated by the Company’s underwriters. Similarly, lender audits are conducted on a routine basis, using a statistically relevant sample of approved loans. In addition, the quality assurance team also audits the loss reserving and mitigation functions to ensure compliance with relevant Company policies and accounting standards. audit results of all three areas are reviewed by management on a monthly basis. Investment portfolio financial risk management the Company monitors and manages the credit risk, liquidity risk and market risk, including interest rate risk, equity price risk and currency risk of its investment portfolio. 36 genwo rth MI C anada I n C . 20 13 annUaL rep ort 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 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 dBrS, S&p, or Moody’s. Credit risk from derivative transactions reflects the potential for the counterparty to default on its contractual obligations when one or more transactions have a positive market value to the Company. therefore, derivative-related credit risk is represented by the positive fair value of the instrument and is normally a small fraction of the contract’s notional amount. to mitigate credit risk related to derivative counterparties, the Company has adopted a policy whereby, upon signing the derivative contract, the counterparty is required to have a minimum credit rating of a-. Liquidity risk 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. to ensure liquidity requirements are met, the Company holds a portion of investment assets in liquid securities. adverse capital and credit market conditions and the MCt requirements of the Insurance Subsidiary may significantly affect the Company’s access to capital and may affect its ability to meet liquidity or debt refinancing requirements in the future. potential liquidity risks are discussed in more detail in the “risk Factors” section of the Company’s annual information form (“aIF”) dated March 18, 2013 and the “Liquidity” section in this Md&a. Market risk 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, equity price risk and currency risk. 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. 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. the Company has policies to limit and monitor exposures to individual equity investment issuers and its aggregate exposure to equities. Currency risk Currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. the Company is exposed to currency risk arising from investments and receivables denominated in U.S. and australian dollars. the Company uses foreign exchange forward contracts to mitigate currency risk. genwor th MI Ca na da In C . 2013 annUaL report 37 Management’s discussion and analysis (continued) For the year ended december 31, 2013 Transactions with related parties the Company enters into related party transactions with genworth Financial, Inc. and its subsidiaries. the services rendered by genworth Financial, Inc. and affiliated companies consist of information technology, finance, human resources, legal and 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 at terms and conditions no less favourable than market. 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 fourth quarter of 2013, and $6 million for the twelve months ended december 31, 2013, which was comparable to the prior year’s period. on december 20, 2013, the Company, through its indirect subsidiary pMI Mortgage Insurance Company Canada (“pMI Canada”), entered into a retrocession agreement with Merrill Lynch reinsurance under which the Company assumed reinsurance risk for approximately 25% of the retroceded liabilities on claims paid by genworth Financial Mortgage Insurance pty Limited, an australian company (“genworth australia”), in excess of $700 million australian within any one year up to a maximum exposure to the Company of $30 million australian less claims paid by the Company in prior years. the term of the agreement is three years. genworth australia has the right to terminate the agreement after the first year of coverage. Under the excess of loss reinsurance agreement, the Company is required to collateralize its reinsurance obligations by posting cash collateral equal to the maximum exposure under the agreement. as at december 31, 2013, the Company has posted $30 million australian, equivalent to $28.5 million Canadian, under the agreement. Outstanding share data the following table presents changes in the number of common shares outstanding at december 31, 2013, december 31, 2012 and december 31, 2011. Common shares, January 1 Common shares issued in connection with share-based compensation plans Common shares retired, repurchased and cancelled 98,698,018 115,979 (3,903,117) 98,666,796 31,222 — 104,789,394 31,248 (6,153,846) Common shares, december 31 94,910,880 98,698,018 98,666,796 2013 2012 2011 at december 31, 2013, subsidiaries of genworth Financial, Inc. owned approximately 54,469,098 common shares of the Company or approximately 57.4% of the Company’s outstanding shares. Disclosure controls and procedures and internal controls over financial reporting as required by the national Instrument 52-109, the Company has in place disclosure controls and procedures and internal controls over financial reporting, designed under the Committee of Sponsoring organizations of the treadway Commission (“CoSo”) Framework (1992), to ensure the disclosure of all material information or changes relating to the Company to all members of the public in a fair and timely manner. Such controls and procedures ensure that all relevant material is gathered and reported to senior management (including the Chief executive officer (“Ceo”), Chief Financial officer (“CFo”) and general Counsel) and the Company’s management- level disclosure committee on a timely basis so that appropriate decisions can be made regarding public disclosure. an evaluation and certification of the Company’s disclosure controls and procedures and internal controls over financial reporting is done regularly under supervision by the Company’s Ceo and CFo in accordance with the requirements of national Instrument 52-109 of the Canadian Securities administrators, and is available with the Company’s filings on the Sedar website at www.sedar.com. these certifications confirm that the Ceo and CFo have concluded that the design and operation of the disclosure controls and procedures and internal controls over financial reporting were effective, as at december 31, 2013. there were no changes in the Company’s internal controls over financial reporting during the year that have materially affected, or are reasonably likely to materially affect, the Company’s controls over financial reporting. 38 genwo rth MI C anada I n C . 20 13 annUaL rep ort 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 effect of the Canadian government guarantee legislative framework and the effect of changes to the government guarantee mortgage eligibility rules, and the Company’s beliefs as to housing demand and home price appreciation, unemployment rates, the Company’s future operating and financial results, sales expectations regarding premiums written, capital expenditure plans, dividend policy and the ability to execute on its future operating, investing and financial strategies. the forward-looking statements contained herein are based on certain factors and assumptions, certain of which appear proximate to the applicable forward-looking statements contained herein. Inherent in the forward-looking statements are known and unknown risks, uncertainties and other factors beyond the Company’s ability to control or predict that may cause the actual results, performance or achievements of the Company, or developments in the Company’s business or in its industry, to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements. actual results or developments may differ materially from those contemplated by the forward-looking statements. the Company’s actual results and performance could differ materially from those anticipated in these forward-looking statements as a result of both known and unknown risks, including the continued availability of the Canadian government’s guarantee of private mortgage insurance on terms satisfactory to the Company; the Company’s expectations regarding its revenues, expenses and operations; the Company’s plans to implement its strategy and operate its business; the Company’s expectations regarding the compensation of directors and officers; the Company’s anticipated cash needs and its estimates regarding its capital expenditures, capital requirements, reserves and its needs for additional financing; the Company’s plans for and timing of expansion of service and products; the Company’s ability to accurately assess and manage risks associated with the policies that are written; the Company’s ability to accurately manage market, interest and credit risks; the Company’s ability to maintain ratings; interest rate fluctuations; a decrease in the volume of high loan-to-value mortgage orientations; the cyclical nature of the mortgage insurance industry; changes in government regulations and laws mandating mortgage insurance; the acceptance by the Company’s lenders of new technologies and products; the Company’s ability to attract lenders and develop and maintain lender relationships; the Company’s competitive position and its expectations regarding competition from other providers of mortgage insurance in Canada; anticipated trends and challenges in the Company’s business and the markets in which it operates; changes in the global or Canadian economies; a decline in the Company’s regulatory capital or an increase in its regulatory capital requirements; loss of members of the Company’s senior management team; potential legal, tax and regulatory investigations and actions; the failure of the Company’s computer systems; and potential conflicts of interest between the Company and its majority shareholder, genworth Financial, Inc. this is not an exhaustive list of the factors that may affect any of the Company’s forward-looking statements. Some of these and other factors are discussed in more detail in the Company’s aIF dated March 18, 2013. Investors and others should carefully consider these and other factors and not place undue reliance on the forward-looking statements. Further information regarding these and other risk factors is included in the Company’s public filings with provincial and territorial securities regulatory authorities (including the Company’s aIF) and can be found on the Sedar website at www.sedar.com. 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, and therefore 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. genwor th MI Ca na da In C . 2013 annUaL report 39 Management’s discussion and analysis (continued) For the year ended december 31, 2013 Non-IFRS financial measures to supplement the Company’s consolidated interim financial statements, which are prepared in accordance with IFrS, the Company uses non-IFrS financial measures to analyze performance. Such non-IFrS financial measures used by the Company to analyze performance include net operating income, operating earnings per common share (basic), operating earnings per common share (diluted), shareholders’ equity excluding aoCI, operating return on equity and underwriting ratios such as loss ratio, expense ratio and combined ratio. other non-IFrS financial measures used by the Company to analyze performance include insurance in force, new insurance written, MCt ratio, delinquency ratio, severity on claims paid, book value per common share (basic) including aoCI, book value per common share (basic) excluding aoCI, book value per common share (diluted) including aoCI, book value per common share (diluted) excluding aoCI, and dividends paid per common share. the Company believes that these non-IFrS financial measures provide meaningful supplemental information regarding its performance and may be useful to investors because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision making. non-IFrS financial measures do not have standardized meaning and are unlikely to be comparable to any similar measure presented by other companies. In addition, where applicable, non-IFrS measures used by the Company have been adjusted to analyze the impact of the reversal of the government guarantee fund exit fee. the table below reconciles the Company’s net operating income, operating earnings per common share (basic), operating earnings per common share (diluted) and shareholders’ equity excluding aoCI for the periods specified to the Company’s net income, earnings per common share (basic), earnings per common share (diluted) and shareholders’ equity in accordance with IFrS for such periods. (In millions of dollars, unless otherwise specified) net income adjustment to net income: net investment gains, net of taxes net operating income(1) earnings per common share (basic) adjustment to earnings per common share: net investment gains, net of taxes For the fourth quarter For the year 2013 2012 2013 $ 93 $ 226 $ 375 $ (8) (0) (26) $ 85 $ 226 $ 349 $ 2012 470 (9) 462 $ 0.98 $ 2.29 $ 3.86 $ 4.77 operating earnings per common share (basic)(1) $ 0.90 $ 2.29 $ 3.60 $ (0.08) (0.00) (0.26) (0.09) 4.68 earnings per common share (diluted)(2) adjustment to earnings per common share: net investment gains, net of taxes operating earnings per common share (diluted)(1),(2) Shareholders’ equity adjustment to shareholders’ equity: accumulated other comprehensive income (“aoCI”) $ 0.98 $ 2.29 $ 3.86 $ 4.76 $ $ (0.08) (0.00) (0.26) 0.90 $ 2.28 $ 3.60 $ (0.09) 4.67 3,087 $ 3,037 $ 3,087 $ 3,037 (124) (221) (124) (221) Shareholders’ equity excluding aoCI(1) $ 2,963 $ 2,816 $ 2,963 $ 2,816 Note: Amounts may not total due to rounding. (1) The financial measures are not calculated based on IFRS. (2) The difference between basic and diluted number of common shares outstanding is caused by the potentially dilutive impact of share-based compensation awards. 40 genwo rth MI C anada I n C . 20 13 annUaL rep ort Government guarantee fund exit fee reversal: Reconciliation of adjustments to IFRS and non-IFRS financial measures the impact of the 2012 government guarantee fund exit fee reversal of $186 million ($137 million after income taxes), consisting of $166 million ($122 million after income taxes) related to exit fees accrued in 2011 and prior years and a further $20 million ($15 million after-tax) accrued for the first nine months of 2012, resulted in $186 million of additional investment income in the fourth quarter of 2012 and $166 million for the year 2012. the table below summarizes the impact of the 2012 government guarantee fund exit fee reversal on the Company’s key IFrS measures including net investment income, net income, earnings per common share (basic), earnings per common share (diluted) and non-IFrS financial measures including net operating income, operating return on equity, operating earnings per common share (basic), operating earnings per common share (diluted): For the fourth quarter For the year (In millions of dollars, unless otherwise specified) 2013 2012 2013 2012 Adjusted net investment income Impact of reversal of government guarantee fund exit fee net investment income Adjusted net income Impact of reversal of government guarantee fund exit fee net income Adjusted net operating income Impact of reversal of government guarantee fund exit fee net operating income Adjusted operating return on equity Impact of reversal of government guarantee fund exit fee operating return on equity Adjusted earnings per common share (basic) Impact of reversal of government guarantee fund exit fee earnings per common share (basic) Adjusted earnings per common share (diluted) Impact of reversal of government guarantee fund exit fee earnings per common share (diluted) Adjusted operating earnings per common share (basic) Impact of reversal of government guarantee fund exit fee operating earnings per common share (basic) Adjusted operating earnings per common share (diluted) Impact of reversal of government guarantee fund exit fee operating earnings per common share (diluted) Note: Amounts may not total due to rounding. genwor th MI Ca na da In C . 2013 annUaL report $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 56 — 56 93 — 93 85 — 85 12% — 12% $ $ $ $ $ $ 47 186 233 89 137 226 89 137 226 13% 20% 33% $ $ $ $ $ $ 215 — 215 375 — 375 349 — 349 12% — 12% $ 0.98 — $ 0.90 1.39 $ 3.86 — 0.98 $ 2.29 $ 3.86 $ $ 0.98 — $ 0.90 1.39 $ 3.86 — 0.98 $ 2.29 $ 3.86 $ $ 0.90 — $ 0.90 1.39 $ 3.60 — 0.90 $ 2.29 $ 3.60 $ $ 0.90 — $ 0.90 1.39 $ 3.60 — 0.90 $ 2.28 $ 3.60 $ 201 166 367 348 122 470 339 122 462 13% 5% 17% 3.53 1.24 4.77 3.52 1.24 4.76 3.44 1.24 4.68 3.43 1.24 4.67 41 Management’s discussion and analysis (continued) For the year ended december 31, 2013 the table below shows the Company’s non-IFrS financial measures for which no comparable IFrS measure is available. For a more meaningful description of the measure, refer to the “glossary for non-IFrS financial measures” at the end of this Md&a. (In millions of dollars, unless otherwise specified) Selected non-IFRS financial measures(1) Insurance in force new insurance written Loss ratio expense ratio Combined ratio operating return on equity(2) MCt ratio delinquency ratio Severity on claims paid Investment yield Book value per common share number of common shares outstanding (basic) Book value per common share including aoCI (basic) Book value per common share excluding aoCI (basic) For the fourth quarter For the year 2013 2012 2013 2012 $ 316,702 7,693 $ 22% 23% 45% 12% 223% 0.12% 29% 3.6% $ 301,456 8,472 $ 31% 19% 50% 33% 170% 0.14% 34% 3.8% $ 316,702 34,985 $ 25% 20% 44% 12% 223% 0.12% 30% 3.7% $ 301,456 $ 41,286 33% 18% 51% 17% 170% 0.14% 32% 4.0% 94,910,880 32.53 $ 31.22 $ 98,698,018 30.77 $ 28.53 $ 94,910,880 32.53 $ 31.22 $ 98,698,018 30.77 $ 28.53 $ number of common shares outstanding (diluted)(3) Book value per common share including aoCI (diluted)(3) Book value per common share excluding aoCI (diluted)(3) Dividends paid per common share(4) 94,918,169 32.53 $ 31.22 $ 0.35 $ 99,174,050 30.62 $ 28.40 $ 0.32 $ 94,918,169 32.53 $ 31.22 $ 1.31 $ 99,174,050 30.62 $ 28.40 $ 1.19 $ (1) The financial measures are not calculated based on IFRS. (2) Excluding the impact of the government guarantee fund exit fee reversal in investment income of $186 million in the fourth quarter of 2012, adjusted operating return on equity would have been 13%. Excluding the impact of the government guarantee fund exit fee reversal in investment income of $166 million related to 2011 and prior years, adjusted operating return on equity for the year 2012 would have been 13%. (3) The difference between basic and diluted number of common shares outstanding is caused by the potentially dilutive impact of share-based compensation awards. (4) Dividends paid per common share reflect payment for the fourth quarter and year ended 2013 and 2012. 42 genwo rth MI C anada I n C . 20 13 annUaL rep ort Glossary for non-IFRS financial measures “book value per common share” is a measure of the carrying value of each individual share of the Company and is a key metric used by investors in assessing the market value of the Company. “book value per share including AOCI (basic)” means the per share amount of shareholders’ equity to the number of basic common shares outstanding at a specified date. “book value per share excluding AOCI (basic)” means the per share amount of shareholders’ equity excluding aoCI to the number of basic common shares outstanding at a specified date. “book value per share including AOCI (diluted)” means the per share amount of shareholders’ equity including aoCI to the number of diluted common shares outstanding at a specified date. diluted common shares outstanding takes into account all of the outstanding dilutive securities that could potentially be exercised. “book value per share excluding AOCI (diluted)” means the per share amount of shareholders’ equity excluding aoCI to the number of diluted common shares outstanding at a specified date. diluted common shares outstanding takes into account all of the outstanding dilutive securities that could potentially be exercised. “combined ratio” means the sum of the loss ratio and the expense ratio. the combined ratio measures the proportion of the Company’s total cost to its premium earned and is used to assess the profitability of the Company insurance underwriting activities. “delinquency ratio” means the ratio (expressed as a percentage) of the total number of delinquent loans to the total original number of policies in force at a specified date. the delinquency ratio is an indicator of the emergence of losses on claims and the quality of the insurance portfolio and a useful comparison to industry benchmarks and internal targets. “dividends paid per common share” means the portion of the Company’s profits distributed to shareholders during a specified period, and measures the total amount distributed by the Company to shareholders. “expense ratio” means the ratio (expressed as a percentage) of sales, underwriting and administrative expenses to net premiums earned for a specified period. the expense ratio measures the operational efficiency of the Company and is a useful comparison to industry benchmarks and internal targets. “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. Insurance in force measures the maximum potential total risk exposure under insurance contracts at any given time and is used to assess potential losses on claims. “investment yield” means the net investment income before investment fees and excluding net realized gains (losses) tax affected for dividends for a period divided by the average of the beginning and ending investment’s book value for such period. For quarterly results, the investment yield is the annualized net investment income using the average of beginning and ending investment’s book value for such quarter. “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. the loss ratio is a key measure of underwriting profitability and the quality of the insurance portfolio and is used for comparisons to industry benchmarks and internal targets. “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 an MCt ratio of regulatory capital available to regulatory capital required using a defined methodology prescribed by oSFI in monitoring the adequacy of a company’s capital. the MCt ratio is a key metric of the adequacy of the Company’s capital in comparison to regulatory requirements and is used for comparisons to other mortgage insurers and internal targets. genwor th MI Ca na da In C . 2013 annUaL report 43 Management’s discussion and analysis (continued) For the year ended december 31, 2013 “net operating income” means net income excluding after-tax net realized gains (losses) on sale of investments and unrealized gains (losses) on fair value through profit or loss (“FVtpL”) securities. net operating income estimates the recurring after-tax earnings from core business activities and is an indicator of core operating performance. “new insurance written” means the original principal balance of mortgages, including any capitalized premiums, insured during a specified period. new insurance written measures the maximum potential risk exposure under insurance contracts added during a specific time period and is used to determine potential loss exposure. “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. operating return on equity is an indicator of return on equity from the core business activities. “severity on claims paid” 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 (original balance of a mortgage loan divided by the original value of the mortgaged property), age of the mortgage loan, the value of the underlying property, accrued interest on the loan, expenses advanced by the insured and foreclosure expenses. Severity on claims paid ratio measures the size of the average loss on a paid claim relative to the original insured mortgage amount and is used to assess the potential loss exposure related to insurance in force and for comparison to industry benchmarks and internal targets. the Company’s full glossary 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. 44 genwo rth MI C anada I n C . 20 13 annUaL rep ort Genworth MI Canada Inc. Consolidated Financial Statements For the years ended december 31, 2013 and 2012 46 Management statement on responsibility for financial reporting 47 Independent auditors’ report 48 Consolidated statements of financial position 49 Consolidated statements of income 50 Consolidated statements of comprehensive income 51 Consolidated statements of changes in equity 52 Consolidated statements of cash flows 53 Notes to consolidated financial statements genwor th MI Ca na da In C . 2013 annUaL report 45 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 Canadian generally accepted accounting principles. 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 professional 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 46 genwo rth MI C anada I n C . 20 13 annUaL rep ort Independent auditors’ report 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, 2013 and 2012, the consolidated statements of income, comprehensive income, changes in equity and cash flows for the years then ended, 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, 2013 and 2012, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial reporting Standards. Chartered Professional Accountants, Licensed Public Accountants February 18, 2014 toronto, Canada genwor th MI Ca na da In C . 2013 annUaL report 47  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 (note 9) Bonds and debentures under securities lending program (note 9) government guarantee fund (note 10) equity investments (note 9) Collateral receivable under reinsurance agreement (note 6(e)) total invested assets, accrued investment income and other receivables Income taxes recoverable Subrogation recoverable (note 6(c)) prepaid assets property and equipment Intangible assets (note 16) deferred policy acquisition costs (note 6(d)) goodwill (note 18) total assets Liabilities and shareholders’ equity Liabilities: accounts payable and accrued liabilities Loss reserves (note 6(b)) Income taxes payable Share-based compensation liabilities (note 15) derivative financial instruments (note 9) Long-term debt (note 20) 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 19) retained earnings accumulated other comprehensive income total shareholders’ equity total liabilities and shareholders’ equity (1) Refer to note 22 for a presentation of assets and liabilities expected to be recovered or settled after 12 months. See the accompanying notes to the consolidated financial statements. on behalf of the Board: December 31, december 31, 2012(1) 2013(1) $ 213,692 39,649 31,561 4,694,002 243,141 — 184,422 28,482 $ 247,856 90,014 27,526 3,525,109 208,765 979,196 328,411 — 5,434,949 5,406,877 — 75,454 3,136 735 7,314 158,427 11,172 59,595 91,260 1,914 1,578 9,740 152,311 11,172 $ 5,691,187 $ 5,734,447 $ 31,219 117,388 224,810 14,317 2,668 422,767 1,723,768 26,519 40,413 $ 22,707 139,398 — 4,875 — 422,345 1,785,141 26,719 296,298 2,603,869 2,697,483 1,408,213 1,555,062 124,043 1,463,612 1,352,456 220,896 3,087,318 3,036,964 $ 5,691,187 $ 5,734,447 Brian Hurley director 48 Brian Kelly director genwo rth MI C anada I n C . 20 13 annUaL rep ort 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)) Losses on claims (note 6(b)) expenses: premium taxes and underwriting fees employee compensation office professional fees promotional and travel other total expenses net change in deferred policy acquisition costs (note 6(d)) net underwriting income Investment income: Interest dividends net investment gains government guarantee fund earnings (note 10) Impact of the reversal of the government guarantee fund exit fee (note 10) total investment income general investment expenses Interest expense (note 20) Income before income taxes Income taxes (note 11): Current deferred net income attributable to owners of the Company earnings per share (note 21): Basic diluted See the accompanying notes to the consolidated financial statements. 2013 2012 $ 511,844 $ 560,203 $ 511,844 $ 550,485 $ 573,217 141,867 $ 589,040 193,770 41,516 46,125 19,719 5,417 5,110 1,023 118,910 (6,116) 112,794 318,556 174,046 9,168 36,792 — — 220,006 (4,549) 215,457 22,926 511,087 33,386 38,510 20,278 4,460 5,783 503 102,920 1,698 104,618 290,652 154,692 12,125 12,103 7,107 185,843 371,870 (4,872) 366,998 22,966 634,684 375,902 (239,472) 99,387 64,875 136,430 164,262 $ 374,657 $ 470,422 $ $ 3.86 3.86 4.77 4.76 genwor th MI Ca na da In C . 2013 annUaL report 49 Consolidated statements of comprehensive income (In thousands of Canadian dollars) Years ended december 31 net income other comprehensive income: Items that will not be reclassified subsequently to income: re-measurement of employee benefit plan obligations, net of income tax of $899 (2012 – $2,067) Items that may be reclassified subsequently to income: net change in fair value of available-for-sale (“aFS”) financial assets, net of income tax of $27,057 (2012 – $7,034) gains on aFS financial assets realized and reclassified to income, net of income tax of $9,510 (2012 – $5,553) total other comprehensive income (loss) attributable to owners of the Company net of income tax of $35,668 (2012 – $586) total comprehensive income attributable to owners of the Company See the accompanying notes to the consolidated financial statements. 2013 2012 $ 374,657 $ 470,422 2,518 (5,807) (71,666) 20,766 (25,187) (14,727) (94,335) 232 $ 280,322 $ 470,654 50 genwo rth MI C anada I n C . 20 13 annUaL rep ort Consolidated statements of changes in equity (In thousands of Canadian dollars, except per share amounts) Balance at January 1, 2013 Comprehensive income (loss): net income other comprehensive loss total comprehensive income (loss) transactions recognized directly in equity: dividends on common shares(1) Issuance of common shares repurchase of common shares (note 19) re-measurement of employee benefit obligations, net of income tax Share capital Retained earnings Accumulated other comprehensive income (loss) Total shareholders’ equity $ 1,463,612 $ 1,352,456 $ 220,896 $ 3,036,964 — — — 374,657 — 374,657 — (94,335) 374,657 (94,335) (94,335) 280,322 — 2,500 (57,899) — (127,368) — (47,201) 2,518 — — — (2,518) (127,368) 2,500 (105,100) — total transactions recognized directly in equity (55,399) (172,051) (2,518) (229,968) Balance at December 31, 2013 $ 1,408,213 $ 1,555,062 $ 124,043 $ 3,087,318 Balance at January 1, 2012 Comprehensive income: net income other comprehensive income total comprehensive income transactions recognized directly in equity: dividends on common shares(1) Issuance of common shares Share capital retained earnings accumulated other comprehensive income total shareholders’ equity $ 1,462,994 $ 1,005,276 $ 214,857 $ 2,683,127 — — — — 618 — 618 470,422 — 470,422 (117,435) — (5,807) (123,242) — 232 232 — — 5,807 5,807 470,422 232 470,654 (117,435) 618 — (116,817) re-measurement of employee benefit plan obligations, net of income tax total transactions recognized directly in equity Balance at december 31, 2012 $ 1,463,612 $ 1,352,456 $ 220,896 $ 3,036,964 (1) The Company paid dividends of $0.32 per common share in the first, second and third quarters of 2013 and $0.35 per common share in the fourth quarter of 2013 ($0.29 per common share in the first, second and third quarters of 2012 and $0.32 per common share in the fourth quarter of 2012). See the accompanying notes to the consolidated financial statements. genwor th MI Ca na da In C . 2013 annUaL report 51 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: amortization of intangible assets and depreciation of property and equipment expensing of deferred policy acquisition costs Income taxes Interest income dividend income net investment gains Interest expense government guarantee fund earnings Impact of the reversal of the government guarantee fund Share-based compensation expense Change in non-cash balances related to operations: government guarantee fund net cash resulting from termination of the government guarantee fund accrued investment income and other receivables Collateral receivable under reinsurance agreement prepaid assets Subrogation recoverable deferred policy acquisition costs accounts payable and accrued liabilities Loss reserves Unearned premium reserves accrued net benefit liabilities under employee benefit plans Cash generated from (used in) operating activities: Interest received from bonds and debentures dividends received from equity investments Interest paid on long-term debt Income taxes paid Stock options settled in cash net cash generated from operating activities Financing activities: dividends paid repurchase of common shares Issuance of common shares net cash used in financing activities Investing activities: purchase of short-term investments proceeds from sale of short-term investments purchase of bonds proceeds from sale of bonds and bond maturities purchase of equity investments proceeds from sale of equity investments purchase of intangible assets and property and equipment Investment in subsidiary, net of cash acquired net cash generated from (used in) financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year See the accompanying notes to the consolidated financial statements. 52 2013 2012 $ 374,657 $ 470,422 6,269 46,058 136,430 (174,046) (9,168) (36,792) 22,926 — — 11,232 377,566 — 30,159 (7,636) (28,482) (1,222) 15,806 (52,174) 8,091 (22,010) (61,373) 3,217 6,813 47,469 164,262 (154,692) (12,125) (12,103) 22,966 (7,107) (185,843) 3,302 343,364 (47,622) — 9,603 — 1,477 15,297 (45,771) (22,104) (29,610) (38,537) 2,493 261,942 188,590 190,523 9,722 (22,505) (72,243) (1,178) 366,261 (127,368) (105,100) 1,888 (230,580) (182,470) 232,835 (1,672,158) 1,283,327 (85,739) 257,360 (3,000) — 166,192 10,929 (22,905) (155,849) (787) 186,170 (117,435) — — (117,435) (262,220) 217,929 (591,931) 818,754 (206,830) 134,320 (3,919) 774 (169,845) 106,877 (34,164) 247,856 175,612 72,244 $ 213,692 $ 247,856 genwo rth MI C anada I n C . 20 13 annUaL rep ort  Notes to consolidated financial statements (In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2013 and 2012 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 57.4% 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 e Company (“eco”). during the year ended december 31, 2013, MIC holdings d Company (“dco”) was wound up as part of a corporate reorganization undertaken by the Company. 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 and for the 12 months ended december 31, 2013 reflect the consolidation of the Company and these subsidiaries. additional details on the reporting and consolidation structure are disclosed in note 12(b). the Insurance Subsidiary is engaged in mortgage insurance in Canada and owns all of the issued and outstanding shares of pMI Mortgage Insurance Company Canada (“pMI Canada”). pMI Canada is licensed to service mortgage insurance policies originated prior to its acquisition by the Company in 2012, and to underwrite reinsurance limited to the class of mortgage insurance. the Insurance Subsidiary and pMI Canada are regulated by the office of the Superintendent of Financial Institutions Canada (“oSFI”), as well as applicable provincial financial services regulators. 2. Basis of preparation (a) Statement of compliance these consolidated financial statements were prepared in accordance with International Financial reporting Standards (“IFrS”), as issued by the International accounting Standards Board (“IaSB”). these consolidated financial statements were approved by the Board of directors on February 18, 2014. (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 statements of financial position: (i) available-for-sale (“aFS”) short-term investments, bonds and debentures and equity investments 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) derivative financial instruments, which are comprised of foreign currency forwards, are measured at fair value; (v) accrued benefit liabilities under employee benefit plans are recognized at the present value of the defined benefit obligations; (vi) Liabilities for cash-settled share-based compensation are measured at fair value; and (vii) Loss reserves are discounted and include an actuarial margin for adverse deviation. genwor th MI Ca na da In C . 2013 annUaL report 53 notes to consolidated financial statements (continued) (In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2013 and 2012 2. Basis of preparation (continued) (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. (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 dates of the consolidated financial statements and the reported amounts of income and expenses during the years. 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: Business combinations are accounted for using the acquisition method as at the acquisition date, when control is transferred to the Company. the Company adopted IFrS 10 – Consolidated Financial Statements (“IFrS 10”), effective January 1, 2013. IFrS 10 replaces the guidance on control and consolidation in IaS 27 – Consolidated and separate financial statements (“IaS 27”), and Standards Interpretation Committee 12 – Consolidation – Special purpose entities (“SIC-12”). as a result of the adoption of IFrS 10, the Company changed its accounting policy with respect to determining whether it has control over and consequently whether it consolidates its investees. Under IFrS 10, control has been transferred if an entity has power over an investee, is subject to the variability of returns of the investee, and can exercise its power to influence the returns of the investee. the Company reassessed the control conclusion for its investees at January 1, 2013 and identified no changes to the previous conclusions on whether control exists or other changes affecting the consolidation structure of the Company. 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. when the excess is negative, a bargain purchase gain is recognized immediately in income. transaction costs, other than those associated with the issue of debt or equity securities, that the Company incurs in connection with a business combination are expensed as incurred. Interest in consolidated subsidiaries is disclosed in note 12(b). (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, subrogation recoveries, deferred policy acquisition costs and reinsurance. each of these items is described below. (i) premiums written, premiums earned and unearned premium reserves: 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 are based on the loss emergence pattern in each year of coverage. the Company performs actuarial studies 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. 54 genwo rth MI C anada I n C . 20 13 annUaL rep ort (ii) risk fee: In conjunction with receiving credit support in the form of the government of Canada guarantee, as prescribed in the Protection of Residential Mortgage or Hypothecary Act (“prMhIa”), the Company is subject to a risk fee equal to 2.25% of gross premiums written (note 10). the Company records the risk fee in premium taxes and underwriting fees in the consolidated statement of income. the risk fee relates directly to the acquisition of new mortgage insurance business. accordingly, it is subsequently deferred and expensed in proportion to and over the period in which premiums are earned (note 3(b)(v)) and reflected in deferred policy acquisition costs. the risk fee became applicable to the Company when prMhIa became effective on January 1, 2013. prior to the enactment of prMhIa, premiums written were recorded net of risk premiums related to the terms of the government guarantee agreement (note 10). (iii) 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 developed 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. (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. (v) deferred policy acquisition costs: deferred policy acquisition costs comprise premium taxes, appraisal costs, risk fee, 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. (vi) reinsurance: reinsurance contracts are those contracts under which the reinsurer agrees to indemnify the cedant against all or part of the primary insurance risks underwritten by the cedant under one or more insurance contracts. during the year ended december 31, 2013, the Company has assumed the role of a reinsurer in the reinsurance agreement described in note 6(e). reinsurance premiums are taken into underwriting revenues over the terms of the related reinsurance agreements. reinsurance premiums are reported in gross and net premiums written and premiums earned in the consolidated statement of income. Unpaid reinsurance premiums, if any, are reported in accrued investment income and other receivables on the consolidated statement of financial position. (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. genwor th MI Ca na da In C . 2013 annUaL report 55 notes to consolidated financial statements (continued) (In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2013 and 2012 3. Significant accounting policies (continued) Financial assets and liabilities are offset and the net amount is presented in the statements 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 other 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. (ii) Financial assets at fair value through profit and loss: a financial asset is classified as fair value through profit and loss (“FVtpL”) if it is considered to be held for trading or it is designated as such upon initial recognition. the Company has classified its derivative financial instruments as FVtpL at december 31, 2013 (note 3(e)). 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. (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. as at december 31, 2013 and 2012, the Company classified bonds and debentures, including bonds and debentures in the government guarantee fund, short-term investments and equity investments, 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 in investment income. Investment gains or losses on sale of investments are measured at the difference between cash proceeds received and the amortized cost of a fixed income investment or the cost of an equity investment. transaction costs are capitalized as part of the carrying value of the aFS financial assets. re-measurement adjustments arising on translation of aFS bonds denominated in U.S. dollars to Canadian dollars are recognized in net investment gains in accordance with the accounting policy for foreign currency translation in note 3(n). (iv) Loans and receivables: Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. Loans and receivables comprise cash and cash equivalents, accrued investment income and other receivables and collateral receivable under reinsurance agreement. (v) 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 20) and accounts payable and accrued liabilities including balances due to the Company’s majority shareholder and companies under common control (note 12(c)). 56 genwo rth MI C anada I n C . 20 13 annUaL rep ort (d) Securities lending Securities lending transactions are entered into on a fully collateralized basis. the transfer of the securities themselves is not derecognized on the consolidated statements 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 statements 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 statements 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. (e) Derivative financial instruments derivative financial instruments are financial contracts whose value is derived from an underlying interest rate, foreign exchange rate, equity or commodity instrument or index. derivative financial instruments are classified as FVtpL and are recognized in the consolidated statement of financial position as assets when their fair value is positive and as liabilities when their fair value is negative. while the Company has the ability to net settle multiple financial derivative instruments under a master netting arrangement, the Company does not meet the accounting requirements to offset derivative assets and liabilities. accordingly, each derivative financial instrument is presented as an asset or a liability based on the fair value of the individual instrument. Changes in fair value of derivative financial instruments are recognized in the consolidated statements of income in net investment gains during the period in which they arise. (f) Interest income Interest income from fixed income investments including short-term investments and 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 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. (g) Dividend income dividends on equity investments are recognized when the shareholders‘ right to receive payment is established, which is the ex-dividend date, and are reported as dividends in investment income. (h) Property plant 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. genwor th MI Ca na da In C . 2013 annUaL report 57 notes to consolidated financial statements (continued) (In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2013 and 2012 3. Significant accounting policies (continued) (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. (i) Intangible assets (i) goodwill: 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(j)(ii) for the policy on measurement of impairment losses on non-financial assets, including goodwill. (ii) other intangible assets: (a) 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. (b) 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. (c) 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. (j) 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 includes 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 or prolonged decline in fair value of an equity investment 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 from accumulated 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 time value 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 investment is recognized in other comprehensive income (“oCI”). 58 genwo rth MI C anada I n C . 20 13 annUaL rep ort (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. 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. For purposes of goodwill impairment testing, comparison of the estimated recoverable amount to the carrying amount is performed on the Company’s single cash-generating unit (“CgU”), which is its mortgage insurance business. 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. (k) Income taxes Income taxes are comprised of current and deferred taxes. Current and deferred taxes associated with items recognized in equity are recognized directly in equity. taxes on fair value gains and losses and actuarial gains and losses from re-measurement of defined benefit plans 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 taxes are recognized in income. (i) Current tax: Current 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 taxes payable and current 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. (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. the measurement of deferred tax reflects the tax consequences that would follow the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. 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. genwor th MI Ca na da In C . 2013 annUaL report 59 notes to consolidated financial statements (continued) (In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2013 and 2012 3. Significant accounting policies (continued) 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. (l) Employee benefits the Company adopted the amendments to IaS 19 – employee benefits (“IaS 19”) (amended 2011) on January 1, 2013. IaS 19 (amended 2011) requires the net defined benefit liability to be recognized in the statement of financial position without any deferral of actuarial gains and losses and prior service costs as previously allowed. prior service costs are recognized in net income when incurred. re-measurements consisting of actuarial gains and losses are recognized immediately in oCI. IaS 19 (amended 2011) clarifies that benefits are classified as long-term employee benefits if payments are not expected to be made within the next 12 months. the standard also requires termination benefits to be recognized at the earlier of when the entity can no longer withdraw the offer of the termination benefit or recognizes restructuring costs within the scope of IaS 37 – provisions, contingent liabilities and contingent assets (“IaS 37”). the Company did not incur such termination benefits in the year ended december 31, 2013. the adoption of IaS 19 (amended 2011) did not result in any measurement adjustments to the Company’s employee benefits or changes in the classification of employee benefits on the Company’s consolidated statement of financial position. (i) defined contribution pension plan: the defined contribution pension plan is a post-employment benefit plan under which the Company pays fixed contributions into the plan (that is a separate legal entity), which are held in trust 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 currently maintains two defined benefit plans: a Supplemental executive retirement plan (“Serp”) and a plan for non-pension post-retirement 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 non-pension post-retirement benefit plans are performed as at december 31 of each year using the projected unit credit method and based on management’s assumptions including assumptions on the discount rate, rate of compensation increase, 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 non-pension post-retirement 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 eligible for benefits under the plan. actuarial gains and losses arising from changes in actuarial assumptions used to determine the benefit obligations or experience adjustments are recognized in oCI in the period in which they arise and reported in retained earnings. prior service costs arising from plan amendments are recognized in expense in the period in which the plan amendments are introduced. the Company recognizes gains or losses on settlement of a defined benefit obligation when a 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. (iii) Short-term employee compensation and benefits: Short-term employee compensation and benefit obligations, including the Company’s short-term bonus, are measured on an undiscounted basis and are expensed as the related service is provided. 60 genwo rth MI C anada I n C . 20 13 annUaL rep ort (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”), directors’ deferred Share Units (“dSUs”) and executive deferred Share Units (“edSUs”). recipients of options have the choice of settlement in cash or shares of the Company. rSUs, dSUs, and pSUs are settled in cash or shares of the Company at the discretion of the Company’s Board of directors. edSUs are settled in cash. the fair value of options, rSUs, pSUs, dSUs and edSUs 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 are exercised. options are measured at fair value using the Black-Scholes valuation model. rSUs, pSUs, dSUs and edSUs are measured at fair value using the quoted market price of the Company’s shares at the end of each reporting period. rSUs, pSUs, dSUs and edSUs 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, dSU or edSU account. 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. (m) Share capital Common shares are classified as equity on the consolidated statements 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. (n) 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. the Company does not have any non-monetary assets or liabilities denominated in foreign currencies. (o) Fair value measurement the Company adopted IFrS 13 – Fair value measurement (“IFrS 13”), effective January 1, 2013. IFrS 13 establishes a single framework for measuring fair value when such measurements are required or permitted by other IFrS. It unifies the definition of 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. the application of the new fair value measurement guidance had no significant impact on the measurement of the Company’s assets and liabilities. IFrS 13 also requires the fair value hierarchy, which was introduced by IFrS 7 – Financial instruments: disclosures (“IFrS 7”), 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 consolidated statements of financial position. the Company’s fair value hierarchy is disclosed in note 9(d)). (p) 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, and by adjusting net income for the period by the share-based compensation re-measurement amount, if the impact of such an adjustment is dilutive. genwor th MI Ca na da In C . 2013 annUaL report 61 notes to consolidated financial statements (continued) (In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2013 and 2012 4. Future accounting standards the following new standards and amendments to existing standards have been issued by the IaSB and are not effective for the fiscal year beginning January 1, 2013. the Company has not early adopted any of the new standards and amendments. (a) Amendments to IAS 32 – Offsetting financial assets and financial liabilities In december 2011, the IaSB amended the requirements for offsetting financial assets and financial liabilities in IaS 32 – Financial Instruments: presentation (“IaS 32”). the amendments to 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 that right is enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all counterparties. the effective date for the amendments to IaS 32 is for annual periods beginning on or after January 1, 2014. the amendments are to be applied retrospectively. the Company does not expect the amendments to IaS 32 to have a significant impact on its financial statements. (b) IFRS 9 – Financial instruments (“IFRS 9”) IFrS 9 (2009) introduces new requirements for the classification and measurement of financial assets. Under IFrS 9 (2009), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. IFrS 9 (2010) introduces additional changes related to financial liabilities. the IaSB currently has an active project to make limited amendments to the classification and measurement requirements of IFrS 9 and add new requirements to address the impairment of financial assets and hedge accounting. the effective date for IFrS 9 (2010) and (2009) has been deferred pending the finalization of the impairment and classification and measurement requirements, with early adoption permitted. the Company is currently evaluating the impact of IFrS 9 on its financial assets and liabilities. (c) IFRS 4 – Insurance contracts (“IFRS 4”) the IaSB issued a revised exposure draft ed/2013/7 – Insurance Contracts (the “revised ed”) on June 21, 2013. the revised ed builds upon proposals published in 2010 and proposes a new standard for insurance contracts, which would replace IFrS 4. the revised proposals represent the first comprehensive accounting model for insurance contracts and aim to provide a consistent basis for accounting for insurance contracts and to eliminate the current diversity that exists in insurance contract accounting. the final standard is expected in 2015, with implementation not expected before 2018. the Company continues to monitor and assess the impact of adoption of the revised standard. 5. Significant judgments and estimates (a) Judgments Significant judgments made in applying accounting policies are as follows: (i) objective evidence of impairment of aFS financial assets: as of each reporting 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. 62 genwo rth MI C anada I n C . 20 13 annUaL rep ort  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. (b) Estimates Information about assumptions and estimation uncertainties that have a risk of resulting in material adjustment within the next 12 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. (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 reporting 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. 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, adjusted for seasonality. 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 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. genwor th MI Ca na da In C . 2013 annUaL report 63 notes to consolidated financial statements (continued) (In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2013 and 2012 5. Significant judgments and estimates (continued) (iv) deferred policy acquisition costs: deferred policy acquisition costs are comprised of premium taxes, appraisal costs, risk fee, 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, 2013, the Company had recognized $9,149 of benefits related to tax losses (2012 – tax losses of $10,709). 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 with tandem stock appreciation rights (“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 Company’s average historical volatility and the mean volatility of the general index of Canadian financial companies. the volatility of Canadian financial companies is used to supplement the volatility calculation given that 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. 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 service and performance conditions. (vii) employee benefit plans: actuarial valuations of benefit liabilities for pension and non-pension post-retirement benefit plans are performed as at december 31 of each year based on the Company’s assumptions, including assumptions on discount rate, rate of compensation increase, 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. 6. Insurance contracts (a) Premiums and unearned premium reserves Changes in unearned premium reserves recorded in the consolidated statements 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 premiums acquired in business combination Unearned premium reserves, end of year December 31, december 31, 2012 2013 $ 1,785,141 511,844 (573,217) — $ 1,823,678 550,485 (589,040) 18 $ 1,723,768 $ 1,785,141 net premiums written of $550,485 and net premiums earned of $589,040 for the year ended december 31, 2012 are recorded net of risk premiums related to the government guarantee agreement of $9,718. Under prMhIa, the risk premium was replaced by the risk fee (note 10). the risk fee is accounted for as an expense in accordance with the accounting policy described in note 3(b)(ii). accordingly, there is no difference between gross and net premiums written in the year ended december 31, 2013. 64 genwo rth MI C anada I n C . 20 13 annUaL rep ort 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 premiums 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, 2013 and 2012 identified a surplus in the Company’s unearned premium reserves and thus no premium deficiency reserves are required at these reporting dates. (b) Losses on claims and loss reserves Loss reserves are comprised of the following: Case reserves Incurred but not reported reserves discounting provision for adverse deviation Loss reserves the following table presents movement in loss reserves and its impact on losses on claims: 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 acquired in business combination Loss reserves, end of year Claims development: December 31, december 31, 2012 2013 $ $ 75,100 37,038 (2,238) 7,488 92,735 41,413 (2,890) 8,140 $ 117,388 $ 139,398 December 31, december 31, 2012 2013 $ 139,398 (163,877) $ 169,008 (224,126) 132,299 9,568 — 142,640 51,130 746 $ 117,388 $ 139,398 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). genwor th MI Ca na da In C . 2013 annUaL report 65 notes to consolidated financial statements (continued) (In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2013 and 2012 6. Insurance contracts (continued) the following table demonstrates the development of the estimated loss reserves for the ten most recent default years. 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 total development: Claims incurred at the end of the default year $ 43,825 $ 52,845 $ 70,994 $ 102,549 $ 148,493 $ 196,586 $ 175,189 $ 172,200 $ 143,388 $ 132,299 Claims incurred one year later Claims incurred 22,727 29,670 46,971 106,468 200,807 218,890 193,820 193,226 141,957 two years later 21,397 30,542 54,352 112,224 204,706 247,663 217,034 196,377 Claims incurred three years later 21,210 31,485 55,461 115,632 209,850 252,041 218,884 Claims incurred four years later 21,001 31,431 56,072 115,816 212,615 255,282 Claims incurred five years later 20,807 31,245 55,701 118,427 212,595 — — — — — — — — — — — — — — — Current estimate of claims incurred $ 20,807 $ 31,245 $ 55,701 $ 118,427 $ 212,595 $ 255,282 $ 218,884 $ 196,377 $ 141,957 $ 132,299 $1,383,574 Cumulative payments to date 20,807 31,245 55,701 118,344 212,205 253,677 218,352 195,151 128,257 32,447 1,266,186 Current loss reserves $ — $ — $ — $ 83 $ 390 $ 1,605 $ 532 $ 1,226 $ 13,700 $ 99,852 $ 117,388 Current estimate of surplus (deficiency) $ 23,018 $ 21,600 $ 15,293 $ (15,878) $ (64,102) $ (58,696) $ (43,695) $ (24,177) $ 1,431 $ — Surplus (deficiency) of initial gross loss reserve 53% 41% 22% (15)% (43)% (30)% (25)% (14)% 1% — 66 genwo rth MI C anada I n C . 20 13 annUaL rep ort 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 deducted. 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 incurred but not reported delinquencies by applying average delinquency-to-paid-claim ratios to historical reported delinquencies, derived from tracking and analyzing policyholder behaviour over time. (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 incurred but not reported delinquencies 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 income before income taxes 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 are changed on an individual basis. December 31, 2013 Sensitivity factor Claim frequency Claim severity december 31, 2012 Sensitivity factor Claim frequency Claim severity Change in assumptions Impact on income before income taxes Impact on shareholders’ equity +10% -10% +10% -10% $ 23,945 (23,945) 23,945 (23,945) $ 17,648 (17,648) 17,648 (17,648) Change in assumptions Impact on income before income taxes Impact on shareholders’ equity +10% -10% +10% -10% $ (27,709) 27,709 (27,709) 27,709 $ (20,435) 20,435 (20,435) 20,435 genwor th MI Ca na da In C . 2013 annUaL report 67 notes to consolidated financial statements (continued) (In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2013 and 2012 6. Insurance contracts (continued) (c) Subrogation recoverable the following table presents movement in subrogation recoverable during the year: real estate owned, beginning of year real estate assets acquired as a result of settling claims during the year at fair value Change in market value for real estate on hand real estate assets sold real estate owned, end of year Borrower recoveries, beginning of year estimated borrower recoveries recognized Borrower recoveries received Borrower recoveries, end of year Subrogation recoverable, end of year December 31, december 31, 2012 2013 $ 66,890 $ 85,310 271,885 (14,719) (268,088) 55,968 24,370 1,818 (6,702) 19,486 327,349 (28,066) (317,703) 66,890 21,247 8,779 (5,656) 24,370 $ 75,454 $ 91,260 the Company applies expected recovery rates based on historical experience of successful recoveries from borrowers to past claims paid and current loss reserves to establish a recovery accrual. the Company reviews the expected recovery rate quarterly to ensure it reflects the most current historical experience of successful recoveries. (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, 2012 2013 $ 152,311 52,174 $ 154,009 45,771 (46,058) 6,116 (47,469) (1,698) $ 158,427 $ 152,311 effective January 1, 2013, in conjunction with receiving credit support in the form of the government of Canada guarantee, as prescribed in prMhIa, the Company is subject to a risk fee equal to 2.25% of gross premiums written, as disclosed in note 10. the Company records the risk fee in premium taxes and underwriting fees in the consolidated statement of income. (e) Reinsurance on december 20, 2013, the Company, through its indirect subsidiary pMI Canada, entered into a retrocession agreement with Merrill Lynch reinsurance under which the Company assumed reinsurance risk for approximately 25% of the retroceded liabilities on claims paid by genworth Financial Mortgage Insurance pty Limited, an australian company (“genworth australia”), in excess of $700,000 australian within any one year, up to a maximum exposure to the Company of $30,000 australian less claims paid by the Company in prior years. the term of the agreement is three years. genworth australia has the right to terminate the agreement after the first year of coverage. Under the excess of loss reinsurance agreement, the Company is required to collateralize its reinsurance obligations by posting cash collateral equal to the maximum exposure under the agreement. as at december 31, 2013, the Company had posted $30,000 australian, equivalent to $28,482 Canadian, under the agreement. the collateral is recorded as collateral receivable under reinsurance agreement on the Company’s consolidated statement of financial position. re-measurement adjustments arising on translation of collateral receivable under the reinsurance agreement and any reinsurance premium receivable balances from australian dollars to Canadian dollars are recognized in income. 68 genwo rth MI C anada I n C . 20 13 annUaL rep ort 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 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. there were no significant changes to the Company’s exposure to insurance risk or the framework used to monitor, evaluate and manage risks at december 31, 2013 compared to december 31, 2012. the Company has identified pricing risk, underwriting risk, claims management risk, loss reserving risk, insurance portfolio concentration risk and reinsurance 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. (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 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. genwor th MI Ca na da In C . 2013 annUaL report 69 notes to consolidated financial statements (continued) (In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2013 and 2012 7. Financial risk management (continued) 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 a 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. (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. additional scrutiny is given to geographic regions where property values are particularly sensitive to an economic downturn. the following table presents the Company’s concentration of insurance risk by region based on gross premiums written. gross premiums written ontario alberta Quebec British Columbia other $ 195,873 124,591 68,026 56,742 66,612 2013 38% 24% 14% 11% 13% $ 222,356 119,102 79,388 66,642 72,715 2012 40% 21% 14% 12% 13% $ 511,844 100% $ 560,203 100% 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. (vi) reinsurance risk: the Company is exposed to reinsurance risk through the excess of Loss reinsurance agreement described in note 6(e). Under the reinsurance agreement, the Company has maximum liability exposure of $30,000 australian or $28,482 equivalent Canadian dollars at december 31, 2013 (december 31, 2012 – nil). 70 genwo rth MI C anada I n C . 20 13 annUaL rep ort (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 invested assets. as at January 1, 2013, prMhIa became effective and the government guarantee agreement (the “agreement”) was terminated, as described in note 10. Upon termination of the agreement, all investments and monies held in the government guarantee fund reverted to the Company and became part of the general investment portfolio. the total credit risk exposure at december 31, 2013 was $5,112,289 (2012 – $3,942,674) and comprised $39,649 (2012 – $90,014) of short-term investments, $31,561 (2012 – $27,526) of accrued investment income and other receivables, $4,937,143 (2012 – $3,733,874) of bonds and debentures, $75,454 (2012 – $91,260) of subrogation recoverable and $28,482 (2012 – nil) of collateral receivable under reinsurance agreement. the total credit risk exposure in the government guarantee fund at december 31, 2012 was $951,705 and comprised $2,668 of accrued investment income and $949,037 of bonds and debentures. 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 dBrS, Standard & poor’s, or Moody’s. the breakdown of the Company’s bonds and debentures and short-term investments by credit ratings is presented below: Credit rating aaa aa a BBB BB December 31, 2013 december 31, 2012 Amount Carrying value % amount Carrying value % $ 1,935,374 1,016,365 1,664,517 353,199 7,337 38.9 20.4 33.4 7.1 0.2 $ 1,109,865 1,252,399 1,288,958 172,666 — 29.0 32.8 33.7 4.5 — $ 4,976,792 100.0 $ 3,823,888 100.0 as at december 31, 2013, 92.7% of the Company’s investment portfolio was rated ‘a’ or better, compared to 95.5% at december 31, 2012. as at december 31, 2012, $949,037 or 100% of the bonds and debentures in the government guarantee fund were rated ‘aaa.’ the Company did not hold any impaired financial assets at december 31, 2013 and 2012. (i) Concentration of credit risk: Concentration of credit risk exists where a number of borrowers or counterparties are engaged in similar activities, are located in the same geographic area or have comparable economic characteristics. their ability to meet contractual obligations may be similarly affected by changing economic, political or other conditions. the Company’s investments could be sensitive to changing conditions in specific geographic regions or specific industries. the Company has invested 24.7% (december 31, 2012 – 27.6%) of its invested assets in the financial sector. this risk concentration is closely monitored by the Company and adjusted through periodic portfolio rebalancing as deemed necessary. genwor th MI Ca na da In C . 2013 annUaL report 71 notes to consolidated financial statements (continued) (In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2013 and 2012 7. Financial risk management (continued) the following table presents the Company’s concentration of credit risk within its bond and debenture and short-term investment portfolio by geographic region and by industry. By country of issuance: Canada other By industry: government Bank, insurance, and other financial institutions energy Infrastructure all other sectors December 31, 2013 december 31, 2012 $ 4,829,666 147,126 97% 3% $ 3,823,888 — $ 4,976,792 100% $ 3,823,888 $ 2,696,097 1,280,776 310,682 229,607 459,630 54% 26% 6% 5% 9% $ 1,582,227 1,171,976 314,880 259,844 494,961 100% — 100% 41% 31% 8% 7% 13% $ 4,976,792 100% $ 3,823,888 100% (ii) derivative related risk: Credit risk from derivative transactions reflects the potential for the counterparty to default on its contractual obligations when one or more transactions have a positive market value to the Company. therefore, derivative-related credit risk is represented by the positive fair value of the instrument and is normally a small fraction of the contract’s notional amount. to mitigate credit risk related to derivative counterparties, the Company has adopted a policy whereby, upon signing the derivative contract, the counterparty is required to have a minimum credit rating of a-. netting is a technique that can reduce credit exposure from derivatives and is generally facilitated through the use of netting clauses in master derivative agreements. the netting clauses in a master derivative agreement provide for a single net settlement of all financial instruments covered by the agreement in the event of default. however, credit risk is reduced only to the extent that the Company’s financial obligations towards the counterparty to such an agreement can be set off against obligations such counterparty has towards the Company. the Company uses netting clauses in master derivative agreements to reduce derivative-related credit exposure. the Company also uses collateral to manage derivative-related counterparty risk. Mark-to-market provisions in the Company’s agreements with counterparties provide the Company with the right to request that the counterparty collateralize the current market value of its derivative positions when the value passes a specified threshold amount. the Company had no derivative-related credit risk at december 31, 2013 (december 31, 2012 – nil) as all of its derivative financial instruments were in a liability position. (iii) Collateral receivable under reinsurance agreement: to mitigate credit risk related to collateral under reinsurance agreement, the Company transacts with high-credit-quality issuers. the funds held as collateral under reinsurance agreement are deposited in a trust account in favour of the Company and restricted solely for the payment of reinsurance obligations under the agreement. 72 genwo rth MI C anada I n C . 20 13 annUaL rep ort (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. as at January 1, 2013, prMhIa became effective and the agreement was terminated, as described in note 10. Upon termination of the agreement, all investments and monies held in the government guarantee fund reverted to the Company and became part of the general investment portfolio. 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 income, investment asset maturities and financing activities. Cash provided from these sources is used primarily for loss and loss adjustment expense payments, operating expenses, payment of dividends and funding of share repurchase transactions. to ensure liquidity requirements are met, the Company holds a portion of investment assets in liquid securities. at december 31, 2013, the Company has cash and cash equivalents of $213,692 (2012 – $247,856) and short-term investments of $39,649 (2012 – $90,014). at december 31, 2012, the government guarantee fund had $41,187 of cash and cash equivalents. 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 2013 2012 $ 734,901 $ 1,262,241 $ 1,120,057 $ 1,339,983 $ 519,610 $ 4,976,792 $ 453,867 $ 1,094,967 $ 961,246 $ 829,674 $ 484,134 $ 3,823,888 the table below summarizes the carrying value by the earliest contractual maturities of the Company’s bonds and debentures in the government guarantee fund at december 31, 2012: 2012 $ 24,657 $ 309,307 $ 321,044 $ 115,947 $ 178,082 $ 949,037 within 1 year 1–3 years 3–5 years 5–10 years over 10 years total the table below shows the expected payout pattern of the Company’s financial liabilities: within 1 year 1–3 years 3–5 years 5–10 years over 10 years total 2013: non-derivative financial liabilities: accounts payable and accrued liabilities Loss reserves (at actuarial present Value) Long-term debt derivative financial liabilities: Foreign currency forwards 2012: non-derivative financial liabilities: accounts payable and accrued liabilities Loss reserves (at actuarial present Value) Long-term debt derivative financial liabilities: Foreign currency forwards genwor th MI Ca na da In C . 2013 annUaL report $ 31,219 $ — $ — $ — $ — $ 31,219 67,034 — 50,354 150,000 — — — 275,000 15 — 362 2,291 — — — 117,388 425,000 2,668 $ 22,707 $ — $ — $ — $ — $ 22,707 84,018 — 55,380 150,000 — — — — — — 275,000 — — — — 139,398 425,000 — 73 notes to consolidated financial statements (continued) (In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2013 and 2012 7. Financial risk management (continued) (d) Market risk 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, equity price risk and currency risk. as at January 1, 2013, prMhIa became effective and the agreement was terminated, as described in note 10. Upon termination of the agreement, all investments and monies held in the government guarantee fund reverted to the Company and became part of the general investment portfolio. (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, 2013, management estimates that an immediate hypothetical 100 basis point, or 1%, increase in interest rates would decrease the market value of the aFS bonds and debentures and short-term investments by approximately $173,000, representing 3.48% of the $4,976,792 fair value of these investments, and decrease the value of loss reserves by $899. Conversely, a 100 basis point, or 1%, decrease in interest rates would increase the market value of the aFS bonds and debentures and short-term investments by approximately $187,000, representing 3.76% of the fair value, and increase the value of loss reserves by approximately $917. as at december 31, 2012, management estimated that an immediate hypothetical 100 basis point, or 1%, increase in interest rates would decrease the market value of the aFS bonds and debentures and short-term investments by approximately $132,000, representing 3.45% of the $3,823,888 fair value of these investments, and decrease the value of loss reserves by $1,005. Conversely, a 100 basis point, or 1%, decrease in interest rates would increase the market value of the aFS bonds and debentures and short-term investments by approximately $141,000, representing 3.69% of the fair value, and increase the value of loss reserves by approximately $1,024. as at december 31, 2012, management estimated that an immediate hypothetical 100 basis point, or 1%, increase in interest rates would decrease the market value of the aFS bonds and debentures in the government guarantee fund by approximately $37,000, representing 3.90% of the $949,037 fair value of the government guarantee fund investment portfolio. Conversely, a 100 basis point, or 1%, increase in interest rates would decrease the market value of the aFS bonds and debentures in the government guarantee fund by approximately $41,000, representing 4.32% of the fair value. 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 investments 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 equity investments 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, 2013, the Company had a total investment in common shares of $184,422. Management estimates that a 10% increase in the equity price index would increase the market value of the common shares by $12,725 and that a 10% decrease in the equity price index would decrease the market value of the common shares by the same amount. 74 genwo rth MI C anada I n C . 20 13 annUaL rep ort  as at december 31, 2012, the Company had a total investment in common shares of $328,411. Management estimates that a 10% increase in the equity price index would increase the market value of the common shares by $23,317 and that a 10% decrease in the equity price index would decrease the market value of the common shares by the same amount. the Company had policies to limit and monitor exposures to individual equity investment issuers and its aggregate exposure to equities. (iii) Currency risk: Currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. the Company is exposed to currency risk arising from investments denominated in U.S. dollars and from reinsurance collateral denominated in australian dollars pledged to collateralize reinsurance obligations. the Company uses foreign exchange forward contracts to mitigate currency risk. the following table presents the foreign-denominated financial assets and the derivative financial instruments used to reduce currency risk: Collateral receivable under reinsurance agreement denominated in australian dollars Bonds denominated in U.S. dollars total financial assets exposed to currency risk Less forward exchange contract notional amount total net currency exposure on financial assets $ $ 2013 28,482 147,126 175,608 175,790 $ (182) $ 2012 — — — — — 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 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 175% under the provision of prMhIa (note 10) (2012 – 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 target for the Insurance Subsidiary of 185% (2012 – 145%). the MCt is conducted for the Insurance Subsidiary on a consolidated basis and includes the MCt results of pMI Canada. as at december 31, 2013, the Insurance Subsidiary had an MCt ratio of 223% (2012 – 170%) 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. genwor th MI Ca na da In C . 2013 annUaL report 75 notes to consolidated financial statements (continued) (In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2013 and 2012 9. Investments Investments are carried at fair value. the Company’s investments, excluding the government guarantee fund, are summarized as follows: December 31, 2013 december 31, 2012 Fair value Amortized Unrealized gain cost/cost % of total fair value Fair value amortized cost/cost Unrealized gain % of total fair value Cash and cash equivalents: Canadian federal government treasury bills Cash AFS investments: Short-term investments: Canadian federal government treasury bills(1) government bonds and debentures: Canadian federal government Canadian provincial and municipal governments Corporate bonds and debentures: Financial energy Infrastructure all other sectors asset-backed bonds and debentures total aFS bonds and $ 194,372 $ 194,372 $ 19,320 19,320 213,692 213,692 39,649 39,649 39,649 39,649 — — — — — 3.6 $ 242,273 $ 242,273 $ 0.4 5,583 5,583 4.0 247,856 247,856 0.7 0.7 90,014 90,014 90,014 90,014 — — — — — 5.5 0.1 5.6 2.0 2.0 1,809,970 1,766,510 43,460 33.7 748,292 724,820 23,472 17.0 846,478 811,667 34,811 15.7 743,921 685,715 2,656,448 2,578,177 78,271 49.4 1,492,213 1,410,535 1,280,776 310,682 229,607 451,382 1,233,476 300,509 220,788 442,795 47,300 10,173 8,819 8,587 23.8 5.8 4.3 8.4 1,171,976 314,880 259,844 429,936 1,099,581 294,991 240,717 402,256 58,206 81,678 72,395 19,889 19,127 27,680 2,272,447 2,197,568 74,879 42.3 2,176,636 2,037,545 139,091 8,248 8,248 8,076 8,076 172 172 0.2 0.2 65,025 65,025 64,254 64,254 771 771 16.9 33.9 26.6 7.2 5.9 9.8 49.5 1.5 1.5 debentures 4,937,143 4,783,821 153,322 91.9 3,733,874 3,512,334 221,540 84.9 equity investments: energy Financial Communications all other sectors total aFS equity investments 38,322 46,662 21,432 78,006 34,006 41,432 16,551 68,866 4,316 5,230 4,881 9,140 0.7 0.9 0.4 1.4 92,471 43,959 70,636 121,345 86,261 41,873 63,993 107,726 6,210 2,086 6,643 13,619 184,422 160,855 23,567 3.4 328,411 299,853 28,558 total investments $ 5,374,906 $ 5,198,017 $ 176,889 100.0 $ 4,400,155 $ 4,150,057 $ 250,098 2.1 1.0 1.6 2.8 7.5 100.0 (1) Canadian federal government treasury bills include $3,108 in collateral posted for the benefit of the Company’s counterparty to its derivative financial instrument contracts as of December 31, 2013 as described in the “Derivative financial instruments” section of note 9. 76 genwo rth MI C anada I n C . 20 13 annUaL rep ort  the fair value of investments, excluding equity investments and cash and cash equivalents, is shown by contractual maturity of the investment. Investments at december 31, 2012 exclude investments in the government guarantee fund. terms to maturity Federal, provincial and municipal bonds and debentures and short-term investments: 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 December 31, 2013 december 31, 2012 Fair value Fair value $ 439,368 760,917 531,238 746,184 218,390 $ 164,323 485,199 448,842 395,383 88,480 2,696,097 1,582,227 295,533 501,324 588,819 593,799 301,220 289,544 609,768 512,404 434,291 395,654 2,280,695 2,241,661 $ 4,976,792 $ 3,823,888 (a) Investments denominated in foreign currencies during the year ended december 31, 2013, the Company invested $149,189 Canadian in emerging market bonds denominated in U.S. dollars. these bonds are classified as aFS and changes in the fair value of the bonds are recorded in oCI. re-measurement adjustments on translation of the bonds from U.S. dollars into Canadian dollars are recognized in net investment gains (b) Derivative financial instruments derivative financial instruments are used by the Company for hedging purposes and for the purpose of modifying the risk profile of the Company’s investment portfolio, as long as the resulting exposures are within the Company’s investment policy guidelines, which have been approved by the Board of directors. In the year ended december 31, 2013, the Company used derivative financial instruments in the form of foreign currency forwards to mitigate foreign currency risk associated with bonds denominated in U.S. dollars and reinsurance collateral denominated in australian dollars pledged to collateralize reinsurance obligations. Foreign currency forwards are contractual obligations to exchange one currency for another at a predetermined future date. the following table shows the fair value and notional amounts of the derivatives by terms of maturity, in Canadian dollars. Fair value 1 year or less 1–3 years 3–5 years over 5 years total notional amount december 31, 2013: Foreign currency forwards $ (2,668) $ 28,500 $ — $ 13,710 $ 133,580 $ 175,790 december 31, 2012: Foreign currency forwards — — — — — — genwor th MI Ca na da In C . 2013 annUaL report 77 notes to consolidated financial statements (continued) (In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2013 and 2012 9. Investments (continued) the Company enters into collateral arrangements with its derivative counterparties that require the posting of collateral upon certain net exposure thresholds being met. as at december 31, 2013, the Company had posted collateral of $3,108 in the form of Canadian federal government treasury bills for the benefit of its counterparty to the foreign currency forwards (2012 – nil). (c) 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 is equal to at least 105% of the fair value of the loaned securities, 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. In addition to earning fee income under the securities lending program, the Company continues to earn all interest and other income generated by the loaned securities while the securities are in the possession of counterparties. 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, 2013, the Company had loaned aFS bonds and debentures with a fair value of $243,141 (december 31, 2012 – $208,765) and has accepted eligible securities as collateral with a fair value of $257,443 (december 31, 2012 – $221,050). (d) Fair value measurements Fair value is defined 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. 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; and Level 3 – inputs used to value the financial instruments are not based on observable market data. 78 genwo rth MI C anada I n C . 20 13 annUaL rep ort the following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value. 2013 Carrying amount Fair value Available- for-sale Fair value through profit or loss Loans and receivables Other financial liabilities Level 1 Level 2 Level 3 Financial assets measured at fair value: Short-term investments $ 39,649 $ — $ — $ — $ 39,649 $ — $ Bonds and debentures equity investments 4,937,143 184,422 5,161,214 Financial assets not measured at fair value: Cash and cash equivalents accrued investment income and other receivables — — Collateral receivable under reinsurance agreement — Financial liabilities measured at fair value: derivative financial instruments Financial liabilities not measured at fair value: accounts payable and accrued liabilities Long-term debt — — — — — — — — — — — — — 213,692 — — — 31,561 28,482 273,735 (2,668) (2,668) — — — — — — — — — — — — — — — — — (31,219) (422,767) (453,986) — 184,422 4,937,143 — 224,071 4,937,143 — — — — — — — — — — — — — (2,668) (2,668) — (456,185) (456,185) total $ 5,161,214 $ (2,668) $ 273,735 $ (453,986) $ 224,071 $ 4,478,290 $ — — — — — — — — — — — — — — during the years ended december 31, 2013 and 2012, the Company did not hold any investments measured at fair value using unobservable inputs (Level 3). transfers between levels of the fair value hierarchy may occur if the inputs used to value the investments change. any transfers between the levels are deemed to have occurred at the end of the reporting period. given the types of assets classified in Level 1, which are short-term investments and equity investments, the Company does not typically have any transfers between Level 1 and Level 2 of the fair value hierarchy, and there were no such transfers during the years ended december 31, 2013 and 2012. genwor th MI Ca na da In C . 2013 annUaL report 79 notes to consolidated financial statements (continued) (In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2013 and 2012 9. Investments (continued) Valuation of Level 2 financial instruments: Fair values of bonds and debentures are obtained primarily from industry-standard pricing sources utilizing market observable information. Because many fixed income investments do not trade on a daily basis, fair value is assessed by analyzing available market information through processes such as benchmark curves, benchmarking of like securities and quotes from market participants. observable information is compiled and integrates relevant credit information, interest rates of the underlying investment, perceived market movements and sector news. Market indicators and industry and economic events are also monitored as triggers to obtain additional data. the primary inputs used in determining fair value of bonds and debentures are interest rate curves and credit spreads. derivative financial instruments are non-exchange-traded foreign currency forwards. the value of these derivative financial instruments is determined using an income approach in which future cash flows expected from the contracts are discounted to reflect the current value of the derivative financial instruments. the primary inputs used in determining fair value of the derivative financial instruments are interest rate yield curves and foreign currency exchange rates. the Company’s long-term debt is a financial liability that is not carried at fair value on the Company’s consolidated statement of financial position, for which fair value is disclosed in the notes to the consolidated financial statements (note 20). Fair values are obtained from independent pricing sources utilizing market observable information. the primary inputs used in the valuation of the long-term debt are interest rate curves and credit spreads. 10. Government guarantee fund and Government of Canada 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, the Mortgage Insurance Company of Canada (“MICC”) was such an insurer. 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 lenders with a government of Canada guarantee of MICC’s obligations under eligible residential mortgage insurance policies. In the event of MICC’s wind-up, the government of Canada would pay an amount of claims less 10% of the original insured amount to lenders. 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 required: (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 was 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 $10,000. 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 to the date of withdrawal, up to a maximum of 25%, would be required to be paid to the government of Canada. In 1995, the Company acquired certain assets and assumed certain liabilities from MICC related to MICC’s residential mortgage insurance line of business. In conjunction with the acquisition of MICC’s residential mortgage insurance business, the agreement had been assigned to the Company with the consent of her Majesty In right of Canada. MICC assigned its interest in the assets held in the government guarantee fund to the Company. on June 26, 2011, the Protection of Residential Mortgage or Hypothecary Insurance Act (“prMhIa”) was passed by the Canadian parliament. the stated purposes of 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 prMhIa does not 80 genwo rth MI C anada I n C . 20 13 annUaL rep ort change the level of government guarantee provided on privately insured mortgages, it formalizes in legislation existing mortgage insurance arrangements with private mortgage insurers. during the year ended december 31, 2012, regulations that prescribed the implementation of prMhIa and established an effective date of January 1, 2013 were issued. on January 1, 2013, prMhIa became effective. the agreement was terminated on this date. Upon termination of the agreement all investments and monies held in the government guarantee fund reverted to the Company. Bonds and debentures of $949,037 and cash and cash equivalents of $41,187 were reclassified from government guarantee fund assets to bonds and debentures and cash and cash equivalents on the consolidated statement of financial position. these investments continue to be classified as aFS. accrued investment income of $2,668 was reclassified from government guarantee fund assets to accrued investment income and other receivables on the consolidated statement of financial position. during the year ended december 31, 2013, the Company’s liability to MICC of $13,696 was settled. payment of the exit fee under the agreement was required in the event that assets were withdrawn from the government guarantee fund. the Company had not withdrawn any assets from the government guarantee fund at december 31, 2012, as the conditions for withdrawal had not been met. therefore, no exit fees would be paid prior to the enactment of prMhIa on January 1, 2013. accordingly, in the year ended december 31, 2012, the Company reversed the cumulative exit fees which had offset the government guarantee fund in the consolidated statement of financial position and recorded income of $185,843. the government guarantee fund recorded in the consolidated statements of financial position at fair value is comprised of the following: Invested assets at fair value (a) accrued income (b) accrued exit fee (c) MICC liability (d) December 31, december 31, 2012 2013 $ $ — — — — — $ 990,224 2,668 — (13,696) $ 979,196 (a) Investments including government bonds and bonds unconditionally guaranteed by the government of Canada of $949,037, and cash and cash equivalents of $41,187; plus (b) 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; less (d) the Company’s liability for MICC’s net proportionate interest in the government guarantee fund. Upon the termination of the agreement, the annual risk premium was replaced by a risk fee equal to 2.25% of gross premium written. See note 3(b)(ii) for the accounting policy applied to the risk fee. the risk fee recorded in premium taxes and underwriting fees in the consolidated statement of income for the year ended december 31, 2013 is $11,513 (the annual risk premium recorded in the year ended december 31, 2012 was $9,718). Contributions of assets to the government guarantee fund and the income on such assets had resulted in a tax deferral to the Company. Upon termination of the agreement on January 1, 2013, the withdrawal of these assets from the government guarantee fund resulted in a current tax obligation of approximately $256,636 for the Company. For the purposes of the Insurance Subsidiary’s MCt, the government guarantee fund (net of related deferred tax impact) was deducted from capital available. Upon termination of the agreement, the assets previously held in the government guarantee fund reverted to the Company and are no longer deducted from capital available. accordingly, the Minister of Finance has established a minimum capital ratio of 175% under the provisions of prMhIa. as a result, the Insurance Subsidiary has increased its internal capital ratio target from 145% to 185% effective January 1, 2013. In the year ended december 31, 2012, the Company recorded the results of income from the government guarantee fund of $26,875 less exit fees of $19,768 for a net amount of $7,107 in government guarantee fund earnings. In accordance with the provisions of prMhIa, the cumulative exit fee of $185,843 was reversed in the year ended december 31, 2012. genwor th MI Ca na da In C . 2013 annUaL report 81 notes to consolidated financial statements (continued) (In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2013 and 2012 11. Income taxes the provision for income taxes comprises the following: Current tax: Current income taxes Current income 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 Income taxes credited to oCI comprise the following: Income tax (income tax recovery) related to net gains on aFS financial assets Income tax (income tax recovery) related to net gains on aFS financial assets in the government guarantee fund Income tax (income tax recovery) related to re-measurement of employee benefit plan obligations total income taxes recovered in oCI 2013 2012 $ 375,370 532 $ 375,902 (241,561) 2,089 (239,472) 99,980 (593) 99,387 61,750 3,125 64,875 $ 136,430 $ 164,262 2013 2012 $ (36,567) $ (525) — 899 2,006 (2,067) $ (35,668) $ (586) 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 statutory income tax rate Income tax expense based on statutory tax rate Increase (decrease) in income tax resulting from: non-taxable income effect of increase in income tax rates on deferred income taxes recognition of tax losses available for carry-forward(1) other Income tax expense 2013 2012 $ 511,087 26.30% $ 634,684 26.25% $ 134,416 $ 166,605 (220) 2,089 — 145 (3,514) 3,442 (2,520) 249 $ 136,430 $ 164,262 (1) In the year ended december 31, 2012, oSFI approved the acquisition of pMI Canada. Subsequent to the acquisition date, $2,520 of previously unrecognized tax losses were recognized as management considers it probable that future taxable profits will be available against which they can be utilized. the difference in the effective income tax rate of 26.69% implicit in the $136,430 provision for income taxes in 2013 from the Company’s statutory income tax rate of 26.30% was primarily attributable to a higher income tax rate applicable to deferred income. the difference in the effective income tax rate of 25.88% implicit in the $164,262 provision for income taxes in 2012 from the Company’s statutory income tax rate of 26.25% was primarily attributable to non-taxable dividend income and the recognition of tax losses available for carry forwards partially offset by a higher income tax rate applicable to deferred income. 82 genwo rth MI C anada I n C . 20 13 annUaL rep ort the increase in statutory income tax rate from 26.25% to 26.30% in 2013 resulted from legislated increases in the income tax rates of certain provinces. the following table describes the components of the net deferred tax liability on the Company’s consolidated statements of financial position: deferred tax assets: employee benefits Loss reserves tax losses available for carry-forward Financing costs deferred tax liabilities: Investments 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 (recovery) for the year other comprehensive income charge (recovery) for the year Balance, end of year December 31, december 31, 2012 2013 $ 8,949 1,714 9,149 34 19,846 $ 8,086 1,866 10,709 340 21,001 (1,896) (2,211) — — (56,041) (2,322) (15,803) (240,733) (55,656) (2,896) (60,259) (317,299) $ (40,413) $ (296,298) 2013 2012 $ 296,298 (239,472) (16,413) $ 231,484 64,875 (61) $ 40,413 $ 296,298 all deferred tax assets have been recognized as at december 31, 2013 and 2012 because management has assessed it is probable that future taxable profits will be available against which the deferred tax benefits can be utilized. 12. Related party transactions and balances (a) 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 management’s compensation includes base salary, benefits, retirement benefit plans, and executive allowances. additionally, it includes performance-based compensation consisting of short-term incentive compensation and long-term share-based compensation. Short-term incentive compensation is dependent on how well the Company performs against metrics that have been approved by the Company’s Board of directors and how well a key manager performs against his or her personal goals and objectives. Long-term share-based compensation grants may consist of any combination of options, rSUs, pSUs and edSUs (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. genwor th MI Ca na da In C . 2013 annUaL report 83 notes to consolidated financial statements (continued) (In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2013 and 2012 12. Related party transactions and balances (continued) the Company has standard policies in place to cover various forms of termination. Key management are subject to the same terms and conditions as all other employees of the Company for resignation and termination for cause. 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, 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 seven key management personnel and six independent directors (december 31, 2012 – six key managers and four independent directors) was comprised of the following: Short-term employee benefits post-employment benefits Share-based compensation termination benefits director fees total compensation (b) Interest in consolidated subsidiaries December 31, december 31, 2012 2013 $ $ 4,397 697 3,411 — 548 $ 9,053 $ 3,283 448 1,235 979 481 6,426 the following table identifies all of the investees in the Company’s reporting structure and the Company’s percentage of direct and indirect ownership of the investees. all of the investees have been incorporated in Canada. Investee genworth Canada holdings I Limited (“holdings I”) genworth Canada holdings II Limited (“holdings II”) MIC holdings e Company (“eco”) genworth Financial Mortgage Insurance Company Canada (“the Insurance Subsidiary”) pMI Mortgage Insurance Company Canada (“pMI Canada”) type of ownership ownership interest direct direct direct Indirect through holdings I and holdings II Indirect through the Insurance Subsidiary 100% 100% 100% 100% 100% through its sole ownership interest in these investees, the Company has absolute discretion to make decisions on behalf of the investees and has control of the investees. as control has been established, the Company is required to consolidate the investees. the Insurance Subsidiary and pMI Canada are regulated insurance companies governed by the provisions of the Insurance Company Act (“the act”), which is administered by oSFI. as such, these investees are subject to certain requirements and restrictions contained in the act. the investees are required under the act to meet a minimum capital test (“MCt”) to support their outstanding mortgage insurance policies in force. In addition, internal capital ratio targets have been established for the investees by their respective Board of directors with which they must comply (note 8). accordingly, these investees must limit dividends and other distributions to the Company to the extent that they are required to comply with the MCt and internal capital ratio targets. Furthermore, any dividends or capital distributions from these investees are subject to formal regulatory approval from oSFI. 84 genwo rth MI C anada I n C . 20 13 annUaL rep ort (c) Other related party transactions the Company enters into related party transactions with genworth Financial, Inc. and its subsidiaries. Services rendered by genworth Financial, Inc. and affiliated companies consist of information technology, finance, human resources, legal and 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. Balances owing for service transactions are non-interest-bearing and are settled on a quarterly basis. the Company incurred net related party charges of $5,673 for the year ended december 31, 2013 (december 31, 2012 – $5,613). the balance payable for related party services at december 31, 2013 is $312 (december 31, 2012 – $108) and is reported in accounts payable and accrued liabilities in the consolidated statements of financial position. during the year ended december 31, 2013, the Company repurchased 3,903,117 of its own common shares for cancellation on the open market for an aggregate purchase price of $105,000. genworth Financial, Inc., through its subsidiaries, participated proportionately in the share purchase transaction and maintained a 57.4% ownership interest in the Company. See note 19 for additional disclosure on the share repurchase transaction. on december 20, 2013, the Company, through its indirect subsidiary pMI Canada, entered into a retrocession agreement with Merrill Lynch reinsurance under which the Company assumed reinsurance risk for approximately 25% of the retroceded liabilities on claims paid by genworth Financial Mortgage Insurance pty Limited, an australian company (“genworth australia”), in excess of $700,000 australian within any one year, up to a maximum exposure to the Company of $30,000 australian, less claims paid by the Company in prior years. additional information about the reinsurance agreement is disclosed in note 6(e). 13. Commitments the Company’s commitments are comprised of operating leases. the Company leases office space, office equipment, computer equipment and automobiles. Leases of office space have initial lease terms between five to seven years with the right to extend the initial term of the lease for an additional four years. Future minimum lease commitments at december 31, 2013 and 2012 are as follows: Less than 1 year Later than 1 year but less than 5 years Later than 5 years December 31, december 31, 2012 2013 $ $ 2,347 5,456 — $ 7,803 $ 2,401 7,418 — 9,819 Lease payments recognized as an expense for the year ended december 31, 2013 were $3,087 (2012 – $2,925). 14. Employee benefit plans (a) Defined contribution pension benefit plan the Company’s eligible employees participate in a registered defined contribution pension plan. the plan provides benefits to employees of the Company immediately upon hire. 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. Contributions are made on a bi-weekly basis. the cost of the defined contribution pension plan is recognized as compensation expense as services are provided by employees. the registered defined contribution pension plan is subject to legislation under the Pension Benefits Act (ontario) and the Canadian Income Tax Act. genwor th MI Ca na da In C . 2013 annUaL report 85 notes to consolidated financial statements (continued) (In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2013 and 2012 14. Employee benefit plans (continued) (b) Defined benefit plans the Company maintains two types of defined benefit plans: a Supplemental employee retirement plan (“Serp”) and a defined benefit plan for non-pension post-retirement benefits. the Serp is an unregistered, non-contributory supplemental pension plan that supplements the registered defined contribution plan. Benefit entitlement under the Serp is based on a final average earnings target. the non-pension post-retirement benefit plan provides medical and life insurance coverage to employees after retirement. Certain employees are also entitled to dental benefits under this plan. the benefit liabilities for these plans represent the amount of pension and non-pension post-retirement benefits that employees and retirees have earned as at year end. the Company’s actuaries perform valuations of the benefit liabilities for these plans as at december 31 of each year. plan membership data used in the valuations 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, 2013 and 2012 are based on plan membership data as at the respective period ends. the weighted average duration of the Serp is 20 years. For the non-pension post-retirement benefits, actuarial valuations for the years ended december 31, 2013 and 2012 are based on plan membership data as at January 1, 2012. the weighted average duration of the non-pension post-retirement benefit plan is 23 years. the plans are unfunded with no specific assets backing the plan. the Company is the sponsor of these plans. pension and benefit payments related to these plans are paid directly by the Company at the time the benefits are due. the Serp and non-pension post-retirement benefit plans are unregistered and are not subject to specific legislation. (c) Benefit plan governance the Company’s Board of directors has oversight of the pension and post-retirement benefit plans. the pension Committee, which is comprised of executive-level employees of the Company, reports to the Board of directors on all pension-related matters. part of the pension Committee’s broader mandate is to identify risks associated with the pension plans and to recommend appropriate policies and procedures to mitigate and manage these risks to the Board of directors for approval. once approved by the Board of directors, the policies and procedures are implemented by the Company. the benefit liabilities in respect of the plans are recorded in the Company’s consolidated statements of financial position as follows: 2013 Serp 2012 non-pension post-retirement benefits total benefit liabilities 2013 2012 2013 2012 accrued net benefit liabilities under employee benefit plans $ 13,830 $ 14,728 $ 12,689 $ 11,991 $ 26,519 $ 26,719 the maturity profile of the plans is demonstrated in the following table: accrued net benefit liabilities of active plan members accrued net benefit liabilities of retirees and deferred vested benefit recipients accrued net benefit liabilities under 2013 Serp 2012 non-pension post-retirement benefits total benefit liabilities 2013 2012 2013 2012 $ 9,332 $ 10,568 $ 10,974 $ 10,451 $ 20,306 $ 21,020 4,498 4,160 1,715 1,540 6,213 5,700 employee benefit plans $ 13,830 $ 14,728 $ 12,689 $ 11,991 $ 26,519 $ 26,719 86 genwo rth MI C anada I n C . 20 13 annUaL rep ort pension and non-pension post-retirement benefits are recognized in employee compensation in the consolidated statements of income and are determined as follows: defined benefit expense: Benefits earned by employees plan settlements Interest cost on accrued benefit liability defined benefit expense for the year defined contribution expense for the year 2013 Serp 2012 non-pension post-retirement benefits 2013 2012 2013 $ $ 870 — $ 579 206 $ 1,200 — $ 894 — $ 2,070 — 675 1,545 2,567 525 1,310 2,575 606 1,806 — 510 1,404 — 1,281 3,351 2,567 total benefits 2012 1,473 206 1,035 2,714 2,575 total pension and non-pension post-retirement benefit expense for the year $ 4,112 $ 3,885 $ 1,806 $ 1,404 $ 5,918 $ 5,289 the actuarial gains recognized in the consolidated statements of comprehensive income relating to the Serp are $2,364 at december 31, 2013 (2012 – actuarial losses of $4,485). the actuarial gains recognized in the consolidated statements of comprehensive income relating to the non-pension post-retirement benefits are $1,052 (2012 – actuarial losses of $3,354). Changes in the estimated financial positions of the Serp and non-pension post-retirement benefits are as follows: 2013 Serp 2012 non-pension post-retirement benefits total benefit liabilities 2013 2012 2013 2012 accrued net benefit liabilities under employee benefit plans, beginning of year Benefits earned by employees during the year Interest costs on accrued liability incurred during the year plan settlements recognized during the year Benefits paid to pensioners during the year actuarial losses (gains) from plan re-measurement accrued net benefit liabilities under $ 14,728 $ 9,006 $ 11,991 $ 7,309 $ 26,719 $ 16,315 870 675 — 579 525 206 1,200 606 — 894 510 — 2,070 1,473 1,281 1,035 — 206 (149) (79) (73) (56) (76) (135) (2,364) 4,485 (1,052) 3,354 (3,416) 7,839 employee benefit plans $ 13,830 $ 14,728 $ 12,689 $ 11,991 $ 26,519 $ 26,719 genwor th MI Ca na da In C . 2013 annUaL report 87 notes to consolidated financial statements (continued) (In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2013 and 2012 14. Employee benefit plans (continued) the actuarial gains or losses categorized between experience gains or losses and changes in assumptions are presented in the following table: 2013 Serp 2012 non-pension post-retirement benefits total benefit liabilities 2013 2012 2013 2012 actuarial (gains) losses: experience (gains) losses Changes in assumptions $ (966) (1,398) $ 285 4,200 $ 58 (1,110) $ 1,380 1,974 $ (908) (2,508) $ 1,665 6,174 $ (2,364) $ 4,485 $ (1,052) $ 3,354 $ (3,416) $ 7,839 (d) Defined benefit plan assumptions the significant weighted average assumptions used to determine benefit liabilities are as follows: discount rate Change in rate of compensation increase Mortality assumed overall health care trend rate (1) Grading down to 4.50% per year in and after 2029. 2013 5.00% 3.00% 75% of male rates and 92% of female rates from the CPM RPP 2014 private sector table with improvement scale CPM-A n/a Serp 2012 non-pension post-retirement benefits 2013 2012 4.60% 3.50% Up94 generational 5.00% 3.00% CPM RPP 2014 private sector table with improvement scale CPM-A 4.60% 3.50% Up94 generational n/a 8.33%(1) 7.11%(1) the following sensitivity analysis demonstrates the impact of a reasonable possible change in each significant valuation assumption as at december 31, 2013 on the benefit obligations. Increase (decrease) in benefit obligations: discount rate: Impact of 1% increase Impact of 1% decrease Change in salary scale: Impact of 1% increase Impact of 1% decrease Mortality rate: Impact of 1 additional year of life expectancy Impact of 1 less year of life expectancy assumed overall health care trend rate: Impact of 1% increase Impact of 1% decrease $ Serp (2,515) 3,283 1,588 (1,422) 294 (318) n/a n/a non-pension post-retirement benefits $ (2,370) 3,104 n/a n/a 197 (186) 976 (989) 88 genwo rth MI C anada I n C . 20 13 annUaL rep ort these sensitivity analyses as hypothetical. actual experience may differ from expected experience. For the purpose of this analysis, all other assumptions were held constant. (e) Benefit plan cash flows the Company makes contributions to the defined contribution pension plan on a bi-weekly basis. the Serp and non-pension post- retirement benefits plans are unfunded. the Company pays these benefits as they become due. Cash payments made by the Company during the year in connection with employee benefit plans are as follows: Benefits paid for defined benefit plans Contribution to defined contribution plan pension plans $ 2013 79 2,567 $ 2012 73 2,575 $ $ 2,646 $ 2,648 $ non-pension post-retirement benefits 2013 2012 56 — 56 $ $ 76 — 76 the Company expects to contribute the following amounts to its employee benefit plans during the annual period beginning after december 31, 2013: defined contribution plan Serp non-pension post-retirement benefit plan total 15. Share-based compensation $ 2,198 193 104 $ 2,495 the Company provides long-term incentive plans for the granting of stock options with tandem stock appreciation rights (“options”), restricted Share Units (“rSUs”), performance Share Units (“pSUs”), executive deferred Share Units (“edSUs”) and directors’ deferred Share Units (“dSUs”). options are granted to employees with an exercise price equal to the Company’s closing 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, 2013 is $19.00 to $27.12 (2012 – $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 equally over three years. 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 in each year 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 average annual earnings growth, return on equity, underwriting income, investment income and earnings per share. during the year ended december 31, 2013, the Company introduced edSUs as part of its share-based compensation plans. the Company’s Board of directors, at its sole discretion, may grant edSUs to the Company’s executive-level employees. edSUs entitle employees to receive an amount equal to the fair value of the Company’s shares. the Board of directors determines the vesting and performance conditions as well as the number of edSUs to be granted. edSUs may be redeemed only upon termination of employment. 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. genwor th MI Ca na da In C . 2013 annUaL report 89 notes to consolidated financial statements (continued) (In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2013 and 2012 15. Share-based compensation (continued) employees receive settlement of rSUs, pSUs and dSUs in either cash or shares of the Company at the discretion of the Company’s Board of directors. edSUs are settled in cash. the rSUs, pSUs, edSUs and dSUs may also participate in dividend equivalents at the discretion of the Company’s Board of directors. the Company has reserved 3,000,000 common shares of its issued and authorized shares for issuance under these long-term incentive plans. the following table presents information about these share-based compensation plans: 2013 Options price Options of RSUs RSUs of DSUs DSUs of PSUs PSUs of EDSUs EDSUs Weighted Weighted Number average average fair Weighted average fair Weighted average fair Weighted average fair Weighted average fair of exercise value of Number value of Number value of Number value of Number value of outstanding as at January 1 granted dividend equivalents granted exercised Forfeited Changes in fair value Outstanding, as at December 31 exercisable, as at december 31 weighted average remaining contractual life (years) 2012 outstanding as at January 1 granted dividend equivalents granted exercised Forfeited Changes in fair value outstanding, as at december 31 exercisable, as at december 31 weighted average remaining contractual life (years) 1,027,130 $ 21.89 $ 2,173 — 100,200 23.79 96,216 $ 2,173 1,236 51,832 34,412 $ 8,515 778 241 46,756 $ 1,056 1,093 45,221 — $ 20,153 — (91,572) (48,850) — — 20.62 23.50 — — 5,290 (942) (45,717) (2,307) (453) — 8,420 124 (1,146) (56) 1,527 1,809 — — — 42 — — 578 3,635 (20,440) (3,634) — 88 (510) (88) 981 — — — — — 636 — — — 102 986,908 $ 22.12 $ 9,198 105,314 $ 3,858 44,736 $ 1,639 71,538 $ 2,620 20,153 $ 738 749,813 $ 21.56 $ 7,331 — $ — 44,736 $ 1,639 — $ — — $ 6.5 — — 1.4 — — — 1.9 — 3.8 — — weighted weighted number average average fair weighted average fair weighted average fair weighted average fair weighted average fair of exercise options price value of options number of rSUs value of number value of rSUs of dSUs dSUs number of pSUs value of number value of pSUs of edSUs edSUs 1,152,450 $ 21.77 $ 1,554 — 152,080 — — (499) (103) (180,000) (97,400) 22.61 — 19.00 26.96 — 1,221 103,470 $ 2,120 1,211 60,263 162 6,907 (1,333) (67,555) (176) (6,869) 189 — 20,437 $ 12,424 1,551 — — — — 420 245 36 — — 77 37,470 $ 17,654 3,147 — (11,515) — 768 366 81 — (310) 151 — $ — — — — — 1,027,130 $ 21.89 $ 2,173 96,216 $ 2,173 34,412 $ 778 46,756 $ 1,056 — $ 730,508 $ 20.75 $ 1,747 — $ — 34,412 $ 778 — $ — — $ 7.2 — — 1.6 — — — 1.2 — — — — — — — — — — — 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, dSUs and edSUs is measured at the quoted market price of the Company’s shares at the end of each reporting period. the aggregate fair value of the options outstanding is $9,198 as at december 31, 2013 (december 31, 2012 – $2,173). 90 genwo rth MI C anada I n C . 20 13 annUaL rep ort the inputs used in the measurement of the fair values of the options are as follows: Share price at reporting date weighted average exercise price per share expected volatility option life (years) expected dividend yield risk-free interest rate $ $ 2013 36.63 22.12 13.21% 6.0 3.82% 1.21% $ $ 2012 22.59 21.89 19.56% 6.0 5.14% 1.31% the following table provides information about the expenses and liabilities arising from share-based compensation: expense arising from: options rSUs pSUs edSUs dSUs total recognized as share-based compensation expense total carrying amount of liabilities for cash-settled arrangements total intrinsic value of liability for vested benefits 16. Intangible assets the Company’s intangible assets are summarized as follows: Cost Balance at January 1, 2012 acquisitions – externally purchased Balance at december 31, 2012 acquisitions – externally purchased Balance at December 31, 2013 2013 2012 $ $ 6,773 2,314 1,237 47 861 $ 11,232 $ 933 1,618 393 — 358 3,302 December 31, december 31, 2012 2013 $ $ 14,317 14,257 $ $ 4,875 2,721 Computer software $ 29,411 3,853 33,264 3,001 $ 36,265 genwor th MI Ca na da In C . 2013 annUaL report 91 notes to consolidated financial statements (continued) (In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2013 and 2012 16. Intangible assets (continued) amortization and impairment losses Balance at January 1, 2012 amortization for the year Balance at december 31, 2012 amortization for the year Balance at December 31, 2013 amortization of intangible assets is included in office expenses in the consolidated statements of income. Carrying amounts at december 31, 2012 At December 31, 2013 17. Transactions with lenders Computer software $ 17,850 5,674 23,524 5,427 $ 28,951 Computer software $ 9,740 7,314 gross premiums written from two major lenders (defined as lenders that individually account for more than 10% of the Company’s gross premiums written) was $152,444, representing 29.8% of the Company’s total gross premiums written for the year ended december 31, 2013 (2012 – gross premiums written from one major lender that accounted for more than 10% of the Company’s gross premiums written was $189,230 or 34%). 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, which is its mortgage insurance business, 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 1.3% (2012 – 1.7%) to the last year of the multi-year plan cash flow estimate. the growth rates at december 31, 2013 and 2012 reflect the Canadian five-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 14.1% (2012 – 10.6%) was applied in determining the recoverable amount of the unit. the discount rates as at december 31, 2013 and 2012 were based on the Company’s weighted average cost of capital, adjusted for liquidity and a risk premium. 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 was recognized in the year ended december 31, 2013 (2012 – nil). 92 genwo rth MI C anada I n C . 20 13 annUaL rep ort 19. 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: 94,910,880 common shares (2012 – 98,698,018) 1 special share Share capital 2013 2012 $ 1,408,213 — $ 1,463,612 — $ 1,408,213 $ 1,463,612 (1) 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. All issued shares are fully paid. (2) 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 2013 2012 98,698,018 98,666,796 115,979 (3,903,117) 31,222 — 94,910,880 98,698,018 at december 31, 2013, subsidiaries of genworth Financial, Inc. owned 54,469,098 common shares of the Company or approximately 57.4% (2012 – 56,710,094 or approximately 57.5%). genwor th MI Ca na da In C . 2013 annUaL report 93 notes to consolidated financial statements (continued) (In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2013 and 2012 19. Share capital (continued) Share repurchase: during the year ended december 31, 2013, the Company’s Board of directors authorized a normal course issuer bid (“nCIB”) to purchase up to 4,937,078 shares, representing approximately 5% of its outstanding common shares. purchases of common shares commenced on May 17, 2013 and will expire on the earlier of May 2, 2014 and the date on which the Company has purchased the maximum number of shares under the nCIB. during the year ended december 31, 2013, under the terms of the nCIB, the Company purchased 3,903,117 common shares for cancellation on the open market for an aggregate price of $105,000. the Company’s majority shareholder, genworth Financial, Inc., through its subsidiaries, participated proportionately in the share purchase transaction and maintained a 57.4% ownership interest in the Company. the nCIB is recognized as a reduction to share capital equal to the average carrying value of the common shares purchased for cancellation. the excess of the aggregate purchase price over the average carrying value, together with the incremental costs associated with the transaction, are recognized as a reduction to retained earnings 20. 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: Carrying value Fair value Carrying value Fair value 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, 2013 Series 1 Series 2 Total $ 273,181 300,152 $ 149,586 156,033 $ 422,767 456,185 december 31, 2012 Series 1 Series 2 total $ 272,956 297,721 $ 149,389 153,497 $ 422,345 451,218 94 genwo rth MI C anada I n C . 20 13 annUaL rep ort the Company’s long-term debt is classified as a Level 2 financial instrument at the end of the reporting period, as described in note 9(d), as the fair value of the debt is determined using observable market inputs. the Company incurred interest expense of $22,926 and $22,966 for the years ended december 31, 2013 and 2012, with accrued interest payable of $1,076 at december 31, 2013 (2012 – $1,076). 21. Earnings per share during the year ended december 31, 2013, basic earnings per share were calculated using the weighted average number of shares outstanding of 97,049,781 (2012 – 98,684,587). diluted earnings per share have been calculated using the diluted weighted average number of shares outstanding of 97,067,722 (2012 – 98,806,915); 986,908 options, 105,314 rSUs, 31,394 pSUs and 40,781 dSUs (2012 – 1,027,130 options, 36,835 rSUs, 15,062 pSUs and 9,353 dSUs) were excluded from the diluted weighted average number of common shares calculations. their effect would have been anti-dilutive, due to the cash settlement option. earnings per share are computed below: Basic earnings per share: net income diluted earnings per share: re-measurement amount earnings for the purpose of diluted earnings per share Basic 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 basic common shares outstanding, end of year Basic net earnings per common share diluted earnings per share: Basic weighted average common shares outstanding effect of share-based compensation during the year diluted weighted average common shares outstanding, end of year diluted net earnings per common share December 31, december 31, 2012 2013 $ 374,657 $ 470,422 17 (270) $ 374,674 $ 470,152 98,698,018 62,011 (1,710,248) 98,666,796 17,791 — 97,049,781 98,684,587 $ 3.86 $ 4.77 97,049,781 17,941 98,684,587 122,328 97,067,722 98,806,915 $ 3.86 $ 4.76 genwor th MI Ca na da In C . 2013 annUaL report 95 notes to consolidated financial statements (continued) (In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2013 and 2012 22. Non-current assets and liabilities the following table presents assets and liabilities the Company expects to recover or settle after 12 months, at december 31, 2013 and 2012: assets: Collateral under reinsurance agreement Bonds and debentures government guarantee fund equity investments Subrogation recoverable total assets Liabilities: Loss reserves derivative financial instruments accrued net benefit liabilities under employee benefit plans Long-term debt total liabilities net assets due after one year December 31, december 31, 2012 2013 28,482 $ 4,241,891 — 184,422 13,366 $ — 3,370,021 924,380 328,411 17,881 4,468,161 4,640,693 50,354 2,653 26,222 422,767 501,996 55,380 — 16,140 422,345 493,865 $ 3,966,165 $ 4,146,828 96 genwo rth MI C anada I n C . 20 13 annUaL rep ort “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 an MCt ratio of regulatory capital available to regulatory capital required using a defined methodology prescribed by oSFI in monitoring the adequacy of a company’s capital. the MCt ratio is a key metric of the adequacy of the Company’s capital in comparison to regulatory requirements and is used for comparisons to other mortgage insurers and internal targets. “net operating income” means net income excluding after-tax net realized gains (losses) on sale of investments and unrealized gains (losses) on Fair Value through profit or Loss (“FVtpL”) securities. net operating income estimates the recurring after-tax earnings from core business activities and is an indicator of core operating performance. “new insurance written” means the original principal balance of mortgages, including any capitalized premiums, insured during a specified period. new insurance written measures the maximum potential risk exposure under insurance contracts added during a specific time period and is used to determine potential loss exposure. “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. operating return on equity is an indicator of return on equity from the core business activities. “severity on claims paid” 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 (original balance of a mortgage loan divided by the original value of the mortgaged property), age of the mortgage loan, the value of the underlying property, accrued interest on the loan, expenses advanced by the insured and foreclosure expenses. Severity on claims paid ratio measures the size of the average loss on a paid claim relative to the original insured mortgage amount and is used to assess the potential loss exposure related to insurance in force and for comparison to industry benchmarks and internal targets. the Company’s full glossary 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. glossary Certain terms and abbreviations used in these documents are defined below. “book value per common share” is a measure of the carrying value of each individual share of the Company and is a key metric used by investors in assessing the market value of the Company. “book value per share including AOCI (basic)” means the ratio of shareholders’ equity to number of basic common shares outstanding at a specified date. “book value per share excluding AOCI (basic)” means the ratio of shareholders’ equity excluding aoCI to number of basic common shares outstanding at a specified date. “book value per share including AOCI (diluted)” means the ratio of shareholders’ equity including aoCI to number of diluted common shares outstanding at a specified date. diluted common shares outstanding takes into account all of the outstanding dilutive securities that could potentially be exercised. “book value per share excluding AOCI (diluted)” means the ratio of shareholders’ equity excluding aoCI to number of diluted common shares outstanding at a specified date. diluted common shares outstanding takes into account all of the outstanding dilutive securities that could potentially be exercised. “combined ratio” means the sum of the loss ratio and the expense ratio. the combined ratio measures the proportion of the Company’s total cost to its premium earned and is used to assess the profitability of the Company’s insurance underwriting activities. “delinquency ratio” means the ratio (expressed as a percentage) of the total number of delinquent loans to the total original number of policies in force at a specified date. the delinquency ratio is an indicator of the emergence of losses on claims and the quality of the insurance portfolio and is useful for comparison to industry benchmarks and internal targets. “dividends paid per common share” means the portion of the Company’s profits distributed to shareholders during a specified period and measures the total amount distributed by the Company to shareholders. “expense ratio” means the ratio (expressed as a percentage) of sales, underwriting and administrative expenses to net premiums earned for a specified period. the expense ratio measures the operational efficiency of the Company and is a useful comparison to industry benchmarks and internal targets. “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. Insurance in force measures the maximum potential total risk exposure under insurance contracts at any given time and is used to assess potential losses on claims. “investment yield” means the net investment income before investment fees and excluding net realized gains (losses) tax affected for dividends for a period divided by the average of the beginning and ending investments book value for such period. For quarterly results, the investment yield is the annualized net investment income using the average of beginning and ending investments book value for such quarter. “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. the loss ratio is a key measure of underwriting profitability and the quality of the insurance portfolio and is used for comparisons to industry benchmarks and internal targets. genwor th MI Ca na da In C . 2013 annUaL report 97 Five-year financial review Key financial metrics Years ended December 31 (in millions, unless otherwise specified) Income statement data gross premiums written net premiums earned 2013 2012 2011 2010 2009 $ 512 $ 560 $ 545 $ 564 $ 374 Underwriting revenues Losses expenses Investment income Impact of the reversal of government guarantee fund exit fees 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 adjusted operating return on equity MCt ratio delinquency ratio Severity ratio Leverage operating earnings per share (diluted) adjusted operating earnings per share (diluted) Book value per share (diluted, exc. aoCI) Book value per share (diluted, incl. aoCI) $ $ $ $ 573 573 142 113 215 0 (23) 511 375 349 5,375 5,691 1,724 423 2,604 3,087 124 2,963 25% 20% 44% 12% 12% 223% 0.12% 30% 12% 3.60 3.60 31.22 32.53 $ $ $ $ 589 589 194 105 181 186 (23) 635 470 462 5,380 5,734 1,785 422 2,697 3,037 221 2,816 33% 18% 51% 17% 13% 170% 0.14% 32% 12% 4.67 3.43 28.40 30.62 $ $ $ 612 612 225 101 179 (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 $ 621 621 206 103 183 (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 24.78 26.94 $ $ 23.27 24.44 $ $ $ 610 710 256 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 (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. 98 genwo rth MI C anada I n C . 20 13 annUaL rep ort 2012 and 2013 quarterly information (For the quarter ended, in millions, unless otherwise specified) Q4’13 Q3’13 Q2’13 2013 Q1’13 Q4’12 Q3’12 Q2’12 net premiums written $ 129 $ 161 $ 137 $ 84 $ 117 $ 178 $ 176 $ 142 142 31 33 78 56 143 143 32 27 84 51 143 143 35 26 82 59 144 144 44 26 74 50 (6) 93 (6) 96 (6) 98 (6) 88 147 147 46 28 73 233 186 (6) 226 2012 Q1’12 79 147 147 56 26 65 50 147 147 44 26 77 44 148 148 48 25 76 40 (6) 85 (6) 79 (6) 81 (8) 85 22% 23% 45% (5) 91 22% 19% 41% (10) 88 25% 18% 43% (3) 85 31% 18% 49% 0 226 31% 19% 50% (4) 81 30% 18% 48% 0 79 32% 17% 49% (5) 76 38% 18% 56% $ 0.90 $ 0.94 $ 0.89 $ 0.86 $ 2.28 $ 0.82 $ 0.79 $ 0.77 $ 0.9 net premiums earned Underwriting revenues Losses on claims expenses Net underwriting income Investment income Impact of the reversal of government guarantee fund exit fees 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 adjusted operating earnings per share diluted genwor th MI Ca na da In C . 2013 annUaL report 99 Genworth MI Canada Inc. the board of directors Our Board of Directors has the mandate to supervise the management and affairs of the Company. The Board, directly and through its committees, provides direction to ensure the best interests of the Company and its shareholders are maintained. Brian Hurley Chairman, Ceo Sidney Horn(1)(2)(4)(5) Angel Mas Mr. hurley is Chairman of the Board and Chief executive officer of the Company. previously, he was president, genworth International, with responsibility for genworth businesses around the globe. he joined general electric in 1981 and held various management positions in numerous ge divisions 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. Mr. Mas is president & Ceo of genworth Financial’s european Mortgage Insurance business and is responsible for genworth’s MI business in Mexico. prior to this role, Mr. Mas was Managing director & Commercial Leader of genworth’s Lifestyle protection business. he joined genworth’s former parent company, ge, in 1996. 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 1998, Mr. Kelly held various financial management positions within several general electric businesses, including Chief Financial officer of two general electric Canada businesses. he is a member of the Board of directors of peterborough & district affiliate of habitat for humanity. Mr. Marsico is the Senior Vice-president and Chief risk officer for genworth Financial Inc., global Mortgage Insurance. he joined genworth Financial Mortgage Insurance in august 1997 as Chief Financial officer and has held various senior management positions. Mr. Marsico is Chair of the risk, Capital and Investment Committee. he holds a Cpa designation. Leon Roday(2) Jerome Upton(3) John Walker(5) Mr. roday is the executive Vice-president, general Counsel and Secretary of genworth Financial Inc. Mr. roday is also a director of genworth Financial Mortgage Insurance pty Limited in australia. 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 Financial & operations officer, global Mortgage Insurance, genworth Financial, Inc. he joined genworth in 1998 from KpMg peat Marwick and has held various senior financial management positions within the company. 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. (1) audit Committee (2) Compensation and nominating Committee (3) risk, Capital and Investment Committee (4) Lead director (5) Independent 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 below individuals are also directors of Genworth Financial Mortgage Insurance Company Canada: 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. 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 for Chapters online, as well as Vice-president for BMo nesbitt Burns. She is 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 greenfield Financial group, a Canadian listed public company involved in asset-based lending, and also sits on the boards of two private corporations. he has held senior management positions with rBC Capital Markets. 100 genwo rth MI C anada I n C . 20 13 annUaL rep ort shareholder information Exchange listing The Toronto Stock Exchange: Common shares (MIC) Common shares As at December 31, 2013, there were 94,910,880 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 investor@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 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 5, 2014 Time: 10:30 AM Location: TMX Broadcast Centre The Exchange Tower 130 King St West, Toronto, Ontario 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. 2014 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.) 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 The issuer ratings of Genworth MI Canada and financial strength ratings of Genworth Financial Mortgage Insurance Company Canada reflect each rating agency’s opinion of the Company’s financial strength, operating performance and ability to meet obligations to policyholders. Credit ratings Dividend declaration dates Issuer rating S&P DBRS Declared 10/29/13 Genworth MI Canada Inc. A-, Stable AA (low), Stable 07/30/13 Financial strength Genworth Financial Mortgage Insurance Company Canada Senior unsecured debentures AA-, Stable AA, Stable 04/30/13 02/05/13 Genworth MI Canada Inc. A-, Stable AA (low), Stable Record 11/15/13 08/15/13 05/15/13 02/15/13 Payable 11/29/13 08/30/13 05/31/13 03/01/13 Amount per common share $0.35 $0.32 $0.32 $0.32 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 GEN2677 English AR 2013_CvrPGs.indd 2 14-05-05 4:35 PMMon, May 5, 2014 G e n w o r t h M I C a n a d a I n c . 2 0 1 3 A n n u a l R e p o r t A digital copy of this Annual Report and of Genworth Canada’s 2013 Public Accountability Statement are available on our website at www.genworth.ca. Print copies are available upon request. Genworth MI Canada Inc. 2013 Annual Report delivering exceptional value Genworth MI Canada Inc. 2060 Winston Park Drive, Suite 300 Oakville, Ontario L6H 5R7 Phone: 905-287-5300 Fax: 905-287-5472 www.genworth.ca GEN2677 English AR 2013_CvrPGs.indd 1 14-05-05 4:35 PMMon, May 5, 2014 

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