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www.genworth.ca
Genworth MI Canada Inc.
2014 Annual Report
Genworth-Cover-AR-Financials.indd 1
15-04-23 4:33 PM
Co rpo rate profI Le
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.
As at December 31, 2014, Genworth Canada had $5.8 billion in total assets and $3.3 billion in shareholders’ equity.
2014 Financial and Operating Highlights
$
640 million
net premiums written
$
366 million
net operating ncome
12%
operating return on equity
39%
combined ratio
$
3.86
operating diluted earnings
per share
$
1.87
dividends paid
per common share
14
13
12
11
10
1
Book value per share
(diluted, including AOCI)
Operating earnings per share
(diluted)
Operating return on equity
(%)
$35.02
$32.53
$30.62
$26.94
$24.44
14
13
12(1)
11
10
$3.86
$3.60
$3.43
$3.08
$3.02
14
13
12(1)
11
101
12%
12%
13%
13%
14%
0
7
14
21
28
35
0.0
1.0
2.0
3.0
4.0
0
5
10
15
20
14
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
earnings per share (diluted) and operating return on equity were $4.67 and 17%, respectively.
13
14
14
13
13
note: for further information refer to the Md&a.
12
Contents
12
12
11
ifc Corporate profile and financial and operating highlights 1 Ceo Letter to Shareholders 5 executive Chairman Letter to Shareholders
7 executive team and Board of directors 8 demonstrated financial Strength and high-Quality and diversified Insurance portfolio
10 Community Impact highlights 11 Management’s discussion & analysis 55 Consolidated financial Statements 109 glossary
110 five-Year financial review 111 2013 and 2014 Quarterly Information 112 Board of directors 114 Shareholder Information
15
10
10
14
28
10
35
21
20
10
0
7
0
2
5
4
1
5
3
0
11
11
“14”
"13"
"12"
"11"
"10"
35.02
32.53
30.62
26.94
24.44
“14”
"13"
"12"
"11"
"10"
3.86
3.60
4.67
3.08
3.02
“14”
"13"
"12"
"11"
"10"
13
13
13
14
genwo rth MI C anada I nC. 20 14 annUa L rep ort
Ceo Letter to S harehoL derS
Building on Growth Momentum
Dear Fellow Shareholders,
As I take on the role as your President and CEO, I am excited by the opportunities and
challenges that lie ahead for our business. 2014 was a milestone year for Genworth Canada
on many fronts. We celebrated our fifth year as a public company, delivered outstanding
results for our shareholders and continued to increase our market share with key customers.
In 2015 we embarked on our 20th year of helping Canadians achieve their homeownership dreams and I am proud
to have been involved in various facets of the business for the majority of those years. A chartered accountant by
profession, I spent five years in the CFO role before diversifying my experience through leadership roles in risk,
operations and sales management. What I learned in that time is that our success is a result of a combination of
four factors: a solid business model; a prudently regulated industry; collaborative customer relationships; and most
importantly, passionate employees with a shared commitment to excellence.
Our success is driven by our people. In-depth expertise and a customer-comes-first culture have helped us build and
maintain our position as Canada’s leading private mortgage insurer.
As I meet with many shareholders, customers, regulators and other key stakeholders, I remind them our goal moving
forward is to solidify our position as the mortgage insurer of choice across the industry.
Stuart Levings, President and Ceo
genwor th MI Ca na da InC. 2014 annUa L report
1
Ceo Le tter to S harehoL derS (continued)
When we look at our financial performance in 2014, the competitive landscape and economic environment we
operate in, along with our continued focus on driving an innovative workforce, it’s clear that we have what it takes
to grow – strategically and prudently – in the years ahead.
Strong performance in 2014
Our fifth year as a public company was a successful one on many fronts. We outpaced general market growth with
very strong top line results. We met or exceeded market expectations across the board, delivering increases of
+25%
net
premiums written
+5%
net
operating income
+7%
earnings
per share
+8%
book value
per share
Throughout the year we also delivered a 12 per cent operating return on equity and increased our ordinary
dividend by 11 per cent in the fourth quarter, representing our fifth increase in five years. In addition, we
repurchased shares through our share buy-back program, contributing to management and the Board’s objective
to maximize shareholder value and improve capital efficiency.
Notable in 2014 was our strong loss performance, driven mainly by our solid portfolio quality and a healthy
housing and labour market across the country. Regulatory changes in recent years combined with our prudent
and dynamic approach to risk management continue to drive improvements in our portfolio quality. In fact this
past year we saw average credit scores at their highest ever, at 737, and very healthy debt servicing ratios among
our target market of first-time homebuyers. Our proactive loss-mitigation programs also continue to help mitigate
losses while providing a value-add service to our customers and homeowners.
What we see on the horizon
First-time homebuyers
The target market we serve is made up primarily of first-time buyers and what we see within this segment are
fiscally prudent consumers. The average purchase price of a home in the market we serve is approximately
$315,000. Even though that number varies from one city to another, our averages remain well below the average
price seen in the same market. Also, according to our data, new homeowners are dedicating, on average, about
26 per cent of their income to carrying the cost of their mortgage – a very reasonable ratio. Even in the higher
priced markets of Toronto and Vancouver, those ratios are approximately 30 per cent and 29 per cent respectively.
This demonstration of rational purchasing habits among first-time homebuyers, combined with solid credit
profiles and our own diligent underwriting processes, gives us confidence that the quality of our books moving
forward will continue to be strong. The homebuyers we insure have the capacity to withstand gradual interest rate
increases should they occur.
2
genwo rth MI C anada I nC. 20 14 annUa L rep ort
Economic landscape
We actively monitor the local economic factors that impact Canada’s
housing market and consider it our responsibility to make sure our actions
support the safety and soundness of this important sector.
Based on the data we see today and the trends we are watching, we
expect Canada to enjoy ongoing growth, both in housing prices and sales,
albeit at a slower pace than that witnessed in recent years. A stable and
slower housing market is good for our business and good for the market
overall as it allows affordability to improve.
With respect to the impact of lower oil prices, while we can’t predict how
long this will last or how low prices will go, we do know that Alberta’s
housing market was in a very healthy and balanced state as we entered
this phase which should help to reduce potential economic pressure.
While some markets face pressure, others, such as Ontario and Quebec,
will benefit as the lower dollar and oil prices help boost manufacturing
and overall consumer spending.
Finally, we believe that Government policy and regulatory actions taken
during the past few years have helped to moderate risk and increase the
safety and soundness of the Canadian housing market.
All these factors, combined with an overall healthy employment market
nationally, support a positive outlook on the health and balance of the
market we operate in.
Commitment to our communities
An overview of the year would not be complete without a mention of
some of the many ways our engaged and compassionate workforce
makes a difference in communities where we work and live.
In 2014 we helped Habitat for Humanity Canada launch a new initiative –
as founding partner of the Canada Builds program. This program brings
the concept of Habitat Global Villages to Canadian soil with the intention
of helping build, or re-build, communities in need coast to coast. The
initiative launched with a build of 7 homes in a part of Calgary ravaged by
the floods of 2013 and we were proud to have members of our leadership
team and staff participate in that inaugural build.
2015 Key
Strategic priorities
Expand
Market Share
Proactive Risk
Management
Strong Government
Relations
Efficient Capital
Structure
Adjacent
Opportunities
genwor th MI Ca na da InC. 2014 annUa L report
Employ and Engage
Top Talent
3
Ceo Le tter to S harehoL derS (continued)
This is but one example of the many ways our charitable efforts – which in 2014 totaled $750,000 in corporate
donations, $50,000 in employee fundraising efforts and 2,520 volunteer hours – help build stronger communities
across the nation.
This commitment to our people and our communities is not only the right thing to do, it also strengthens our
reputation and our industry relationships across the country.
Well-positioned for prudent growth
My mission is to make Genworth Canada the mortgage insurer of choice for lenders – and homebuyers – coast
to coast. We will achieve this by focusing on our key strategic priorities, balancing growth with prudent risk
management, active government relations and efficient use of capital.
I believe that investing in resources to enhance our service levels, expand our value proposition and drive
innovation in our industry, will drive market share growth within our core business over the next 3 to 5 years.
We have the momentum to grow and I intend to seize on the right opportunities to not only grow our footprint in
this industry but also expand into adjacent opportunities that align with our vision and strategy.
Through a continued focus on delighting our customers with a better customer experience, capacity to take
on more volumes and desire to become a broader mortgage services provider, the prospects for the future of
Genworth Canada are exciting.
Thank you to our employees, our customers, our promoters, our shareholders, our dedicated Board of Directors
and all those who take an interest in our business, for your ongoing trust and support.
Stuart Levings
president and Ceo
4
genwo rth MI C anada I nC. 20 14 annUa L rep ort
exeC UtI ve ChaIrM an Letter to S harehoL derS
Dear Fellow Shareholders,
As I pass on the reigns to our new President and CEO, Stuart Levings, I feel very good about
the current state of our business and our prospects for continued success and growth.
Leading Genworth Canada through its first five years as a public company has been a tremendous experience.
We set out to focus on execution and relentlessly deliver on our promises to both our customers and shareholders.
Our strategy has proved effective. Since our initial public offering we improved our position in the market, delivered
greater than 100 per cent total shareholder return, increased awareness on the value and benefits of a regulated
mortgage insurance industry and set a precedent for greater industry disclosure and transparency.
The Board’s Role
The Board plays an active role helping the Company pursue growth opportunities while remaining focused on
core strengths and disciplined risk management.
Ongoing change and evolution in the economy, regulatory landscape and housing market require that we remain
nimble and open to exploring new ways of doing business. To that end the Board invests significant time in
fully understanding all facets of the business landscape and mortgage insurance industry. This helps ensure the
guidance we bring is based on in-depth knowledge of the business as well as our varied expertise.
As a Board, we are focused on making sure Genworth Canada continues to create value for shareholders as it
establishes and delivers on its strategic priorities. Our 5 years of consistent dividend increases demonstrate our
confidence in ongoing business growth, prudent risk management and capital efficiency.
Brian Hurley, executive Chairman
5
exeC UtI ve ChaIr M an Letter to S harehoL derS (continued)
Risk management
The industry, including customers and regulatory bodies, has come to rely on Genworth Canada for strategic
perspectives and best practices, especially in recent years of increased regulatory interest and oversight. As your
Board Chair, I am committed to making sure the Board actions support and strengthen this reputation through sound
governance and oversight.
In 2014, your Board introduced some new practices to help enhance the long-term value of the Company to its
shareholders. In December, we approved the documentation of a process we refer to as “Own Risk and Solvency
Assessment” (ORSA). ORSA is a process that links the Company’s risk management framework to its business strategy
and decision-making processes. Throughout the year, the ORSA management committee led working sessions with our
Board that included the identification, assessment, measurement and risk quantification of each of the Company’s
material risks.
We continue to bring a variety of perspectives to senior management, to ensure that all options and all stakeholders
are considered. Diligent corporate governance plays an important role in the Company’s overall performance and helps
ensure that we remain well-positioned for long term sustainability and continued strong performance.
Positive momentum
The Board is proud of being part of the leading private mortgage insurer in Canada. We recognize and respect
the passion and skills of the employees who make it all happen. We look forward to helping guide the business
towards many more decades of delivering strong value to all our stakeholders.
I’d like to take this opportunity to thank Robert Gillespie and Angel Mas, who will be leaving our Board this year, for
their insight and assistance in building the business. And thank you, our shareholders. Your confidence in the Board,
and in the business, helps fuel our momentum for continued growth and for this I am grateful.
Brian Hurley
executive Chairman
6
genwo rth MI C anada I nC. 20 14 annUa L rep ort
exeCUtI ve teaM
Executive Team:
Clockwise from left – standing: Philip Mayers, Chief
Financial Officer; Stuart Levings, President and
Chief Executive Officer; Brian Hurley, Executive
Chairman; Winsor Macdonell, SVP, General Counsel
and Corporate Secretary; Craig Sweeney, Chief Risk
Officer; Seated from left: Debbie McPherson, SVP,
Sales and Marketing; Rhonda Lawson, SVP, Human
Resources and Facilities
Bo ard of dI reC to rS
Board of Directors:
From left to right: Sidney Horn; Heather Nicol; John Walker; Brian Kelly; Jerome Upton; Leon Roday;
Angel Mas; Robert Gillespie1; Brian Hurley and Samuel Marsico. Absent from photo: David Gibbins1
(1) Directors of Genworth Financial Mortgage Insurance Company Canada
genwor th MI Ca na da InC. 2014 annUa L report
7
deM onS trated fInanCIaL Strength
Net premiums written
(millions)
Net premiums earned
(millions)
Net operating income
(millions)
Assets
(millions)
14
13
12
11
10
$640
$512
$550
$533
$552
14
13
12
11
10
$565
$573
$589
$612
$621
14
13
12
11
10
$366
$349
$3391
$318
$343
14
13
12
11
10
$5,770
$5,691
$5,734
$5,393
$5,398
0
130
260
390
520
650
0
200
400
600
800
0
100
200
300
400
0
2,000
4,000
6,000
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
Shareholders’ equity
(including AOCI)
(millions)
14
14
13
13
12
12
11
11
10
$3,271
$3,087
$3,037
$2,683
14
14
13
13
12
12
11
11
10
Net investment income
(excluding gains)
(millions)
Net Premiums Written
$173
$179
2014
640
2013
512
2012
550
2011
533
$2011
10
0
130
260
390
520
650
$2,589
10
0
200
400
600
0
1,000
2,000
3,000
4,000
0
100
200
300
400
$172
800
$175
14
14
13
13
12
2010
552
12
11
11
10
10
0
0
Net Premiums Earned
2014
565
2013
573
2012
589
20%
25%
33%
2011
612
37%
100
200
300
33%
400
10
20
30
40
50
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
14
Shareholders' Equity (Including AOCI)
13
Minimum capital test ratio
(MCT)
14
14
13
13
12
12
11
11
10
10
0
0
2013
Federal
3,087
34%
225%
223%
170%
162%
13
2014
3,271
12
11
10
2012
3,037
2011
2,683
12
2010
2,589
11
10
total:
$5.4 billion
09
400
0
14
13
12
11
10
100
0
10
Provincial
17%
Cash
3%
Common
equity
3%
30
200
20
1000
2000
3000
4000
156%
100
200
300
0
100
200
300
13
12
11
Corporate
43%
Realized Investment gains
Investment income
12
2010
621
11
Net Operating Income
2014
366
2013
349
2012
339
39%
44%
51%
2011
318
53%
Assets
2010
343
2014
5,770
2013
5,691
2012 (2)
2011
2010
5,734
5,393
5,398
14
14
13
13
12
11
10
10
0
0
14
13
100
13
12
11
10
09
0
2000
4000
6000
50%
25
50
75
200
300
Adjusted investment income
Loss Ratio
2013
215
178
37
2012
201
189
12
300
40
50
12
2011
179
11
174
5
10
0
2010
183
2013
25%
2009
189
2012
33%
2011
37%
2010
33%
Combined ratio
2009
42%
2013
44%
2012
51%
2011
53%
2010
50%
2009
57%
179
4
25
186
3
50
75
(1) Adjusted for the impact of the government guarantee fund exit fee reversal in 2012. Including the impact, net operating income would have been $462 and
10
net investment income $355.
14
13
12
11
10
MTC ratio
2013
223
2012
170
2011
162
2010
156
2009
149%
8
0
100
200
300
genwo rth MI C anada I nC. 20 14 annUa L rep ort
Cash and other
Prov fixed income
Fed government
Corp fixed income
Common shares
Portfolio Distribution
Corporate Fixed Income
Federal Government
Federal Government-Government Guarantee
Provincial Fixed Income
Cash and Other
Common Shares
Total
Total $5.4 billion
12/31/12
2,241,661
838,306
949,037
743,921
278,307
328,411
41.7%
15.6%
17.6%
13.8%
5.2%
6.1%
5,379,642
100.0%
Rounded Percentages in Chart
42%
16%
17%
14%
5%
6%
100%
hIgh-QUa LItY an d dI verSIfI ed InSUranC e po rtfoLIo
Geographical dispersion
(% as at december 31, 2014)
Book Year
(% as at december 31, 2014)
Quebec
15%
Ontario
39%
2006 and prior
6%
2007
7%
2008
7%
2009
6%
2014
17%
2013
15%
2010
13%
2012
15%
2011
14%
Saskatchewan
4%
Alberta
23%
British
Columbia
12%
Manitoba
2%
New
Brunswick
1%
Other
2%
Nova Scotia
2%
Note: Data is based on high loan-to-value outstanding balance of insured mortgages.
Credit score dispersion on
new insurance written in 2014
Loan-to-value on new insurance
written in 2014
Saskatchewan
3%
Quebec
16%
>700
–
79%
Ontario
45%
Average
Credit Score
737
Alberta
17%
>0<600
0%
British
Columbia
13%
>600<660
–
6%
Manitoba
>660<700
2%
–
New Brunswick
15%
1%
Newfoundland
1%
Nova Scotia
2%
Nova Scotia
Other
>90<95
–
65%
New Brunswick
Manitoba
BC
Alberta
Sask
Quebec
Ontario
<80
–
7%
>80<85
–
4%
>85<90
–
23%
Average credit score on
new insurance written
Effective loan-to-value (LTV)1
Ontario
Quebec
39
15
Sask
4
Alberta
750
23
BC
12
727
729
Manitoba
2
733
737
700
650
600
11
12
13
14
genwor th MI Ca na da InC. 2014 annUa L report
750
700
650
600
New Brunswick
1
Other
2
Nova Scotia
14
2
13
12
11
10
09 &
prior
94%
91%
93%
86%
93%
81%
93%
76%
93%
72%
93%
54%
0
25
50
75
100
Original LTV
Effective LTV
1 overall estimated effective loan-to-value is calculated by weighting
the book year estimated effective loan-to-value percentages
9
91
86
81
76
72
54
effective
original
"14"
"13"
"12"
"11"
"10"
"9"
13
12
94
11
93
93
93
93
10
93
720%
733%
720%
729%
719%
727%
719%
727%
14
13
12
11
719
727
10
9
0
average credit score* 2010
IIF (as at Dec13)
NIW (2013)
2011
719
727
2012
720
729
2013
720
733
original
effective
11
12
13
14
25
50
75
100
400
500
600
700
800
CoM MUn ItY IMpa Ct hI ghLI ghtS 1995- 2015
1.5 million:
the number of families across Canada
who have achieved homeownership with
our help
12,000+
hours of volunteer service by Genworth
Canada employees
29,000:
the number of families we helped
through our Homeowner Assistance
Program
$5.2 million
donated to 78 charities nationwide
270 EMPLOYEES
80 EMPLOYEES with 10+ years
of service who bring more than
1,000 YEARS of experience
to the business
HABITAT FOR HUMANITY CANADA:
$2.8 million
donated in support of 45 Habitat for
Humanity affiliates across Canada
JUVENILE DIABETES RESEARCH
FOUNDATION:
$198,000 raised by employees
through Ride for Life challenges across
Canada
1,000s of volunteer hours on Habitat
build sites – impacting1,800 families
35,000+ children engaged in
supporting Habitat via Genworth Canada’s
Meaning of Home contest
OAKVILLE:
$250,000 donated to the new
Oakville Hospital
$250,000 donated to Wellspring
$500,000+ donated to the
United Way of Oakville
Visit www.powerofhome.ca for more information on Genworth Canada’s contributions
to communities across Canada.
10
genwo rth MI C anada I nC. 20 14 annUa L rep ort
Management’s discussion and analysis
for the year ended december 31, 2014
Interpretation
the fourth quarter and full year results for 2014 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.
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 9, 2015 is prepared for the three and twelve months ended december 31, 2014.
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.
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.
$250,000 donated to Wellspring
genwor th MI Ca na da InC. 2014 annUa L report
11
Management’s discussion and analysis (continued)
for the year ended december 31, 2014
Special note regarding 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.
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, the impact of proposed
guideline changes by oSfI, and the effect of changes to the government guarantee mortgage eligibility rules, and the Company’s
beliefs as to housing demand and home price appreciation, unemployment rates, the Company’s future operating and financial results,
sales expectations regarding premiums written, capital expenditure plans, dividend policy and the ability to execute on its future
operating, investing and financial strategies.
the forward-looking statements contained herein are based on certain factors and assumptions, certain of which appear proximate to
the applicable forward-looking statements contained herein. Inherent in the forward-looking statements are known and unknown risks,
uncertainties and other factors beyond the Company’s ability to control or predict, that may cause the actual results, performance or
achievements of the Company, or developments in the Company’s business or in its industry, to differ materially from the anticipated
results, performance, achievements or developments expressed or implied by such forward-looking statements. actual results or
developments may differ materially from those contemplated by the forward-looking statements.
the Company’s actual results and performance could differ materially from those anticipated in these forward-looking statements
as a result of both known and unknown risks, including the continued availability of the Canadian government’s guarantee of private
mortgage insurance on terms satisfactory to the Company; the Company’s expectations regarding its revenues, expenses and
operations; the Company’s plans to implement its strategy and operate its business; the Company’s expectations regarding the
compensation of directors and officers; the Company’s anticipated cash needs and its estimates regarding its capital expenditures,
capital requirements, reserves and its needs for additional financing; the Company’s plans for and timing of expansion of service and
products; the Company’s ability to accurately assess and manage risks associated with the policies that are written; the Company’s
ability to accurately manage market, interest and credit risks; the Company’s ability to maintain ratings, which may be affected by the
ratings of its majority shareholder, genworth financial, Inc.; interest rate fluctuations; a decrease in the volume of high loan-to-value
mortgage 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 annual Information form (the “aIf”) dated March 17, 2014. 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
12
genwo rth MI C anada I nC. 20 14 annUa L rep ort
appropriate for other purposes. while the Company anticipates that subsequent events and developments may cause the Company’s
views to change, the Company does not undertake to update any forward-looking statements, except to the extent required by
applicable securities laws.
Non-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 (excluding fees on
early redemption of debt, as applicable), interest and dividend income, net of investment expenses, 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, pro-forma 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.
See the “non-IfrS financial measures” section at the end of this Md&a for a reconciliation of net operating income to net income,
total net investment income to interest and dividend income, net of investment expenses, operating earnings per common share (basic)
to earnings per common share (basic), operating earnings per common share (diluted) to earnings per common share (diluted), and
shareholders’ equity excluding aoCI to shareholders’ equity.
definitions of key non-IfrS financial measures and explanations of why these measures are useful to investors and management
can be found in the Company’s “glossary for non-IfrS financial measures”, in the “non-IfrS financial measures” section at the end of
this Md&a.
genwor th MI Ca na da InC. 2014 annUa L report
13
Management’s discussion and analysis (continued)
for the year ended december 31, 2014
Business profile
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.
the Company offers both high loan-to-value and low loan-to-value mortgage insurance.
Lenders are required to purchase high loan-to-value mortgage insurance in respect of a residential mortgage loan whenever the
loan-to-value exceeds 80%. the Company’s high loan-to-value mortgage insurance covers default risk on mortgage loans secured by
residential properties to protect lenders from losses on claims resulting from default on any type of residential mortgage loan instrument
that the Company has approved. By offering insurance for high loan-to-value mortgages, the Company plays a significant role in increasing
access to homeownership for Canadian residents. homebuyers who can only afford to make a smaller down payment can, through the
benefits provided by mortgage insurers such as genworth Canada, obtain mortgages at rates comparable to buyers with more substantial
down payments.
the Company also provides low loan-to-value mortgage insurance to lenders for loans with loan-to-value ratios of 80% or less. these
policies are beneficial to lenders as they provide the ability to manage capital and funding requirements and mitigate risk. the Company
views low loan-to-value mortgage insurance as an extension of its relationship with existing high loan-to-value customers. therefore,
the Company carefully manages the level of its low loan-to-value mortgage insurance relative to its business. premium rates on low
loan-to-value mortgage insurance are significantly lower than those on high loan-to-value mortgage insurance due to the lower risk profile
associated with such loans.
Seasonality
the high loan-to-value mortgage insurance business is seasonal. premiums written vary each quarter, while premiums earned,
investment income, 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 new delinquencies, and decrease during the spring
and summer months.
the Company’s insurance written for low loan-to-value mortgages varies from period to period based on a number of factors including:
the amount of low loan-to-value mortgages lenders seek to insure; the competitiveness of the Company’s pricing, underwriting
guidelines and credit enhancement for low loan-to-value loans; and the Company’s risk appetite for such mortgage insurance. as such,
demand for low loan-to-value mortgages fluctuates based on the specific needs of each lender.
Distribution and marketing
the Company works with lenders, mortgage brokers and real estate agents across Canada to make homeownership more affordable
for first-time homebuyers. Mortgage insurance customers consist of originators of residential mortgage loans, such as banks, mortgage
loan and trust companies, credit unions and other lenders. these lenders typically determine which mortgage insurer they will use for
the placement of mortgage insurance written on loans originated by them. the five largest Canadian chartered banks are the largest
mortgage originators in Canada and provide the majority of financing for residential mortgages.
14
genwo rth MI C anada I nC. 20 14 annUa L rep ort
Overview
Financial highlights for 2014
the following table sets forth certain financial information for the fourth quarter and full year of 2014 and 2013.
(In millions of dollars, unless otherwise specified)
Income statement data
premiums written
premiums earned
Losses on claims and expenses
Losses on claims
expenses
total losses on claims and expenses
net underwriting income
net investment income
Interest expense
fee on early redemption of long term debt
Income before income taxes
net income
net operating income(1)
Weighted average number of common shares outstanding
Basic
diluted(2)
Earnings per common share ratios
earnings per common share (basic)
earnings per common share (diluted)(2)
Selected non-IFRS financial measures(1)
Insurance in force(3)
new insurance written total
new insurance written high loan-to-value
new insurance written low loan-to-value
Loss ratio
expense ratio
Combined ratio
operating return on equity
MCt ratio
delinquency ratio
Severity on claims paid
operating earnings per common share (basic)
operating earnings per common share (diluted)(2)
2014
Quarter
2013
2014
full Year
2013
$
$
178
143
$
$
129
142
$
$
640
565
$
$
37
30
66
76
47
6
—
117
86
84
$
$
31
33
64
78
56
6
—
128
93
85
$
$
$
$
111
107
219
346
195
24
7
511
377
366
$
$
512
573
142
113
255
319
215
23
—
511
375
349
94,239,672
94,284,878
94,904,567
94,907,933
94,787,064
94,966,380
97,049,781
97,067,722
$
$
0.92
0.91
$
$
0.98
0.98
$
$
3.97
3.97
$
$
3.86
3.86
$ 356,318
8,785
$
6,193
$
2,593
$
26%
21%
47%
11%
225%
0.10%
29%
0.89
0.89
$
$
$ 316,702
7,693
$
5,175
$
2,519
$
22%
23%
45%
12%
223%
0.12%
29%
0.90
0.90
$
$
$ 356,318
42,153
$
22,112
$
20,041
$
20%
19%
39%
12%
225%
0.10%
29%
3.86
3.86
$
$
$ 316,702
34,985
$
19,502
$
15,483
$
25%
20%
44%
12%
223%
0.12%
30%
3.60
3.60
$
$
Note: Amounts may not total due to rounding.
(1)
(2)
(3) The Company estimates that the outstanding balance of insured mortgages was approximately $166 billion as at September 30, 2014. Outstanding balances are reported on a quarter lag.
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 number of common shares outstanding is caused by the potentially dilutive impact of share-based compensation awards.
genwor th MI Ca na da InC. 2014 annUa L report
15
Management’s discussion and analysis (continued)
for the year ended december 31, 2014
on a full year basis, the Company reported 2014 net income of $377 million and net operating income of $366 million, as compared to
$375 million and $349 million in the prior year, respectively.
the Company reported fourth quarter of 2014 net income of $86 million or $0.91 per diluted common share and net operating income of
$84 million or $0.89 per diluted common share, as compared to $93 million and $85 million in the prior year, respectively.
Key 2014 financial metrics:
• Net premiums written were $640 million, representing an increase of $128 million, or 25% higher as compared to 2013. The
premiums written growth was primarily attributed to higher volumes of mortgage originations, premium rate increases, and market
penetration.
• Net premiums earned for the year was $565 million, representing a decrease of $8 million, or 1%, as compared to 2013, primarily
due to lower net premiums written in recent book years.
•
The loss ratio was 20%, consistent with the Company’s anticipated 2014 range of 15–25%. The full year loss ratio was lower by
5 percentage points when compared to 2013. the improvement in loss ratio was primarily due to strong insurance portfolio quality
and stable economic conditions.
•
The expense ratio was 19%, in line with the Company’s expectations.
• Net investment income, excluding realized gains, was $173 million, lower by $6 million as compared to the income contribution in
2013, primarily due to the low interest rate environment.
Key fourth quarter financial metrics:
• Net premiums written of $178 million, represented an increase of $49 million, or 38%, as compared the same quarter in the prior
year. the year-over-year increase was primarily the result of higher volumes of mortgage originations and premium rate increases.
• Net premiums earned of $143 million were relatively flat as compared to the same quarter in the prior year. The unearned premium
reserve was $1.8 billion at the end of the quarter, consistent with the prior quarter.
•
Losses on claims of $37 million were $6 million higher than the same quarter in the prior year due to a higher number of new
reported delinquencies, net of cures from the Quebec and atlantic regions. the resulting loss ratio was 26% for the quarter, as
compared to 22% in the same quarter in the prior year.
•
The expense ratio was 21%, 3 percentage points lower than the same quarter in the prior year, driven by share price fluctuations
which impacted employee share-based compensation.
• Net Investment income, excluding realized gains, of $43 million was essentially flat to the same quarter in the prior year.
•
The regulatory capital ratio or Minimum Capital Test (“MCT”) ratio was approximately 225%, 1 percentage point higher than the
prior quarter, 40 percentage points higher than the Company’s internal target MCt ratio of 185% and 5 percentage points higher
than the Company’s operating MCt holding target of 220%. the Company currently intends to operate with a MCt modestly above
its operating MCt holding target.
Recent business developments
as at december 31, 2014, the Company had $1.8 billion of unearned premiums, $3.3 billion of shareholders’ equity, $5.4 billion in
invested assets and as at September 30, 2014, approximately $166 billion outstanding balance of insured mortgages. the Company is
well positioned as the leading private mortgage insurer in Canada through its significant scale, execution of customer-focused sales and
service strategies, proactive risk management of its insurance portfolio, and prudent investment management.
16
genwo rth MI C anada I nC. 20 14 annUa L rep ort
Debt issuance
on april 1, 2014, the Company completed an offering of $160 million principal amount of senior “Series 3” unsecured debentures. the
debentures bear interest at a fixed annual rate of 4.242% until maturity on april 1, 2024, payable in equal, semi-annual installments
commencing on october 1, 2014.
Debt redemption
on May 1, 2014, in connection with the april 1, 2014 debt issuance “Series 3”, the Company redeemed all of its existing “Series 2”
senior unsecured debentures with a principal amount of $150 million bearing a fixed annual interest rate of 4.59%, in accordance with
the terms of such debentures, and in advance of their maturity on december 15, 2015. the Company incurred a $7 million one-time fee
on the early redemption of long term debt in the second quarter of 2014.
Price increase
the Company reviews its underwriting, pricing and risk selection strategies on an annual basis to ensure that its products remain
competitive and consistent with its marketing and profitability objectives. the Company’s pricing approach takes into consideration 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. on May 1, 2014, the Company increased its mortgage insurance premium rates on high loan-to-
value mortgages by an average of 15%.
the new premium rates for standard owner-occupied purchase applications effective May 1, 2014 were as follows:
Loan-to-value ratio
Up to and including 65%
Up to and including 75%
Up to and including 80%
Up to and including 85%
Up to and including 90%
Up to and including 95%
Standard
premium
(prior to
May 1, 2014)
Standard
premium
(effective
May 1, 2014)
0.50%
0.65%
1.00%
1.75%
2.00%
2.75%
0.60%
0.75%
1.25%
1.80%
2.40%
3.15%
the incremental premiums written, as a result of this price increase, were approximately $21 million for the quarter ended december 31,
2014 and approximately $43 million for the year ended december 31, 2014. during the fourth quarter of 2014, approximately 94% of the
new insurance written was at the new premium rates with the remaining 6% reflecting mortgage insurance approvals prior to May 1,
2014, primarily related to new construction properties which typically take longer to close.
Renewal of shelf prospectus
In the ordinary course of business, the Company renewed, on June 18, 2014, its short-form base shelf prospectus for the offering of up
to $1.5 billion of the Company’s securities, either in the form of debt, preferred shares, common shares, subscription receipts, warrants
or units. the shelf prospectus remains available for a period of 25 months from the date of the prospectus.
Standard and Poors (“S&P”)
during the fourth quarter of 2014, the Company noted that S&p had revised its rating of genworth financial group’s U.S. life insurance
operations following the release of the genworth financial, Inc. 2014 third quarter financial results. as a result of this downgrade, S&p
also lowered its financial strength rating on the Insurance Subsidiary from aa- to a+ and the Company’s issuer and credit ratings on its
senior unsecured debentures from a- to BBB+, in each case as a result of S&p’s group rating methodology.
genwor th MI Ca na da InC. 2014 annUa L report
17
Management’s discussion and analysis (continued)
for the year ended december 31, 2014
DBRS
the Insurance Subsidiary is rated aa (Superior) and the Company’s issuer rating is aa (Low), with a stable outlook, by dBrS. the
ratings from dBrS were confirmed in november 2014. dBrS applies a one-notch differential between the Insurance Subsidiary and
the Company to reflect the structural subordination of the Company’s financial obligations relative to those of the regulated Insurance
Subsidiary.
Dividends
on november 28, 2014, the Company paid a quarterly dividend of $0.39 per common share and a special dividend of $0.43 per common
share. the quarterly dividend represented an increase of $0.04 or 11% from the third quarter.
Share repurchase
during the fourth quarter of 2014, the Company purchased 1,873,023 shares for cancellation, representing approximately 2% of its
outstanding common shares, for an aggregate amount of approximately $75 million. the share repurchases were executed pursuant to
the Company’s normal Course Issuer Bid, which expires on the earlier of May 4, 2015 and the date the maximum number of shares are
repurchased.
Regulatory capital
the Company manages its capital base to maintain a balance between capital strength, efficiency and flexibility. as at december 31,
2014, the Insurance Subsidiary’s MCt ratio was approximately 225%, or 40 percentage points higher than the Company’s internal
target of 185%. the Company regularly reviews its capital levels. In the second quarter of 2014, the Company established an operating
MCt holding target of 220% after reviewing stress testing results and consulting with oSfI. this holding target is in place pending the
development by oSfI of a new regulatory test for mortgage insurers which is targeted for implementation in 2017. while the Insurance
Subsidiary’s internal capital target of 185% MCt is calibrated to cover the various risks that the business would face in a severe
recession, the holding target of 220% MCt is designed to provide a capital buffer to allow management time to take the necessary
actions should capital levels be pressured by deteriorating macroeconomic conditions. Under this framework, capital in excess of the
operating holding target may be redeployed.
Management changes
effective January 1, 2015, Brian hurley, transitioned from Chairman and Chief executive officer to the newly created role of executive
Chairman. Concurrently, Stuart Levings, previously Chief operating officer of genworth Canada, succeeded Mr. hurley, assuming the
role of president and Chief executive officer. to assist with the transition, Mr. hurley will work with Mr. Levings on corporate strategy,
overall business performance, board relations and leadership succession. genworth Canada will continue to have a Lead director on the
Board to provide leadership to the Board of directors.
Objectives and focus for 2015
In pursuit of being Canada’s mortgage insurer of choice, the Company seeks to enhance stakeholder value through working with our
lender partners, regulators and influencers to:
• Maintain strong claim paying ability and financial strength;
• Help Canadians responsibly achieve and maintain homeownership;
•
•
Promote strong and sustainable communities across Canada; and
Advance prudent risk management practices to enhance the safety and soundness of the financial system.
the Company’s long-term objectives are to enhance shareholder value by achieving a return on equity that exceeds its cost of capital
and by increasing net income over time.
the Company’s priorities to achieve its long-term objective are identified in the following chart where “a” represents an actual result
and “e” represents an estimate.
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genwo rth MI C anada I nC. 20 14 annUa L rep ort
Priorities
2015 objectives
Related indicators
Key performance metrics
Top Line Growth
Loss Performance
Portfolio Quality and Risk
Management
Capital Management
Investment Management
achieve moderate growth in
net premiums written through
customer-centric product
and service strategies and
successful sales execution.
target a loss ratio range of
20 to 30% through proactive
risk management and focused
loss mitigation strategies.
Maintain a high quality
insurance portfolio through
prudent underwriting
guidelines, proactive risk
management and disciplined
underwriting.
proactively manage capital
to balance capital strength,
flexibility and efficiency:
• MCT modestly above 220%
• Debt to total capital ratio of
less than 15%.
optimize investment portfolio
to maximize investment
yield while maintaining a
high quality investment
portfolio to minimize the
correlation of risk with our
insurance in force.
Housing resales:
2014A – 481,150(1)
2015E – 485,200(1)
Net premiums written
2014A – $640 million
Loss ratio
2014A – 20%
Workout penetration rate
2014A – 56%
Credit score
2014A – 737
Gross debt service (GDS)
2014A – 24.3%
Ordinary dividend payout
ratio
2014A – 36%
Debt to total capital
2014A – 12%
MCT
2014A – 225%
Investment yield
2014A – 3.5%
Percentage of investment
grade fixed income
2014A – 92%
GDP:
2014E – 2.4%(2)
2015E – 2.1%(2)
National unemployment:
2014A – 6.6%(3)
2015E – 6.9%(3)
National home price
appreciation:
2014A – 4.9%(4)
2015E – 0 to 1.5%(5)
5 year
government
of Canada
Bond
Yields:(6)
5 year
government
of Canada
Bond
Yields:(6)
Q1’14a
1.69%
Q2’14a
1.63%
Q3’14a
1.56%
Q4’14a
1.47%
Q1’15e
0.80%
Q2’15e
0.85%
Q3’15e
0.90%
Q4’15e
0.95%
(1) CREA – CREA Monthly Data (SA), January 15, 2015 & CREA Quarterly Forecast, December 15, 2014
(2) Bank of Canada – Monetary Policy Report, January 2015
(3) Statistics Canada – Labour Force Survey: Year-end review, 2014
(4) Teranet – National Bank Home Price Index January 14, 2015
(5) Management Estimate at January 2015 Based on Consensus Forecast Using Expected Year Over Year Exit Rates
(6) Bloomberg Forward Curve, January 2015 and Management Interpolation for 2015 by Quarter
genwor th MI Ca na da InC. 2014 annUa L report
19
Management’s discussion and analysis (continued)
for the year ended december 31, 2014
Economic environment
the mortgage insurance business is affected by changes in economic, employment and housing market trends as well as changes in
government policy.
Housing market
Canada’s housing market outperformed expectations in 2014, buoyed by the persistence of ultra-low interest rates that have
maintained affordability in the face of high home prices. with the decrease in the overnight interest rate to 0.75% in January 2015, and
the expectation of the low rate environment to continue through 2015, the Company expects this to support continued housing demand
in 2015.
nationwide, home sales increased approximately 5% in 2014, with tight supply continuing to pressure prices in select urban markets
with the resale market remaining at or near balanced market conditions. the Canadian real estate association’s 2015 forecast calls for a
0.8% increase in resale activity as the housing market is expected to moderate in 2015 with national home prices expected also to post
a stable increase of 0.9% for 2015. going forward, the growth rate of the high loan-to-value market should keep pace with the change in
housing resale activity and home price appreciation.
Macroeconomic environment
economic growth as measured by real Canadian gross domestic product (“gdp”) is expected to grow by 2.1% in 2015 based on the
recent Bank of Canada forecast, as released in the Monetary policy report in January 2015, down from an estimated 2.4% in 2014. gdp
growth in 2015 is forecast to be fueled by a stronger U.S. economy and a weaker Canadian dollar that benefits exports in central Canada
and British Columbia, offset by the negative impact of lower oil prices.
the recent decline in oil prices is an emerging risk due to its potential impact on employment and housing, especially in the provinces
of alberta, newfoundland & Labrador, and Saskatchewan. the general economic forecasts anticipate oil prices to be in the U.S.
$60 to U.S. $65 range by the end of 2015. the Company will continue to monitor the impact of oil prices as part of its proactive risk
management strategy to ensure the quality of its insurance portfolio remains strong.
Canadian employment data was generally positive in 2014 with the unemployment rate closing the year at 6.6%. Looking ahead, job
creation is expected to remain steady but modest, with unemployment expected to marginally increase to 6.9% in 2015, an increase
driven primarily by concerns regarding decreasing oil prices and its impact on the oil producing provinces of Canada.
overall, we expect relatively stable housing markets in ontario, Quebec and British Columbia with modest pressure in the oil producing
regions, specifically alberta, newfoundland & Labrador, and Saskatchewan.
Regulatory environment
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, and oSfI noted that it has commenced an internal process aimed at developing a new capital
framework for mortgage insurers expected to be effective in 2017.
during the third quarter of 2014, oSfI released an advisory guideline, Interim Capital Requirements for Mortgage Insurance Companies,
which will be used on an interim basis for 2015. this guideline was developed by adjusting the 2015 guideline, Minimum Capital Test
for Federally Regulated Property and Casualty Insurance Companies to reflect the specific characteristics of the mortgage insurance
business until the new capital guideline for mortgage insurance companies is developed. the Company used this guideline to calculate
a pro forma MCt ratio as at december 31, 2014 and compared the result to its estimated MCt ratio using the existing calculation for the
same time period. Based on this comparison, the Company believes that the implementation of the 2015 MCt guideline will not have a
material impact on its MCt ratio.
20
genwo rth MI C anada I nC. 20 14 annUa L rep ort
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. orSa is a process that links the Company’s risk management framework to its business strategy
and decision-making framework. embedding risk and solvency into the decision-making process is a key priority for the business and is
supported by the Company’s enterprise risk Management (“erM”) framework and risk appetite framework (“raf”). the Company’s
orSa provides a baseline assessment of identified risks and the supporting risk management activities. furthermore, orSa documents
the Company’s risk exposure relative to its raf framework and calculates the capital required to support those risks under certain
predefined stress events.
during the year ended december 31, 2014, the Company developed and implemented orSa. the implementation of orSa did not
result in a significant change to the Company’s practices of maintaining, evaluating and managing risks.
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.
B-21 – Mortgage Insurance Underwriting Guideline
on november 6, 2014, oSfI published the final B-21 Residential Mortgage Insurance Underwriting Practices and Procedures
Guideline. In the guideline, oSfI set out principles that promote and support sound residential mortgage insurance underwriting.
these six principles focus on three main themes: (i) governance, development of business objectives and strategy, and oversight;
(ii) interaction with lenders as part of the underwriting process; and (iii) internal underwriting operations and risk management. the
guideline also enhances disclosure requirements, which will support greater transparency, clarity and public confidence in mortgage
insurers’ residential mortgage insurance underwriting practices. the Company is well positioned to comply with the guideline by the
implementation deadline of June 30, 2015.
Low loan-to-value mortgages
on december 1, 2014, CMhC announced a price increase to its national housing act Mortgage Backed Securities guarantee fees
effective april 1, 2015. Under the nha MBS program, CMhC guarantees timely payment of principal and interest to purchasers of the
MBS securities backed by pools of eligible insured mortgages. the nha MBS fees are in addition to the mortgage insurance premium.
for example, the guarantee fee for a nha MBS with a 5 year term will increase from 20 to 30 basis points for annual lender issuance of
less than $6 billion and from 20 to 60 basis points for annual lender issuance which exceed $6 billion. this two-tier pricing structure may
impact lenders’ demand for portfolio insurance as the majority of mortgages that are portfolio insured by the Company are then pooled
and securitized through the nha MBS program.
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. to implement these changes, the government of Canada passed amendments to protection of residential
Mortgage or hypothecary Insurance act (“prMhIa”) in 2014 to make the necessary changes to the regulations. the Company
anticipates the related legislation will be introduced in 2015. although it is difficult to determine the full impact of this change until all the
legislation has been introduced, the Company believes it may result in a decrease in demand for low loan-to-value mortgage insurance.
genwor th MI Ca na da In C . 2014 annUaL report
21
Management’s discussion and analysis (continued)
for the year ended december 31, 2014
Financial performance
the following table sets forth the quarterly results of operations for the Company’s business:
(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
net investment income:
Interest and dividend income, net of investment expenses
net investment gains
total net investment income
Interest expense
Income before income taxes
provision for income taxes
net income
adjustment to net income, net of taxes:
net investment gains
net operating income(1)
effective tax rate
Selected non-IFRS financial measures(1)
new insurance written
new insurance written high loan-to-value
new insurance written low loan-to-value
Loss ratio
expense ratio
Combined ratio
operating return on equity
Investment yield
$
$
$
$
$
$
$
Quarter
2013
129
142
$
$
$
$
31
33
64
78
44
11
56
6
128
35
2014
178
143
37
30
66
76
43
4
47
6
117
31
86
$
93
$
$
$
$
$
$
$
$
$
(3)
84
26.3%
8,785
6,193
2,593
26%
21%
47%
11%
3.4%
(8)
85
27.5%
7,693
5,175
2,519
22%
23%
45%
12%
3.6%
Increase (decrease) and
percentage change
Q4’14 vs. Q4’13
49
0
6
(4)
2
(2)
(2)
(8)
(9)
(0)
(11)
(5)
(7)
5
(1)
—
1,092
1,018
74
—
—
—
—
—
38%
0%
20%
(11)%
4%
(3)%
(4)%
(68)%
(17)%
(1)%
(9)%
(13)%
(7)%
(66)%
(2)%
(1.3) pts
14%
20%
3%
4 pts
(3) pts
2 pts
(1) pts
(0.2) pts
Note: Amounts may not total due to rounding.
(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.
22
genwo rth MI C anada I nC. 20 14 annUa L rep ort
Fourth quarter review
new insurance written on high loan-to-value mortgages increased by $1.0 billion, or 20%, to $6.2 billion in the fourth quarter of 2014 as
compared to the prior year’s period. the Company believes the increase in high loan-to-value new insurance written was primarily the
result of stronger real estate activity, as compared to the prior year’s period.
new insurance written on low loan-to-value mortgages was $2.6 billion in the fourth quarter of 2014, relatively unchanged as compared
to the prior year’s period. demand for low loan-to-value mortgage insurance may fluctuate from quarter to quarter.
premiums written increased by $49 million, or 38%, to $178 million in the fourth quarter of 2014 as compared to the prior year’s period.
the $49 million increase was comprised of approximately $24 million from higher volumes of high loan-to-value business, approximately
$23 million from the May 1st price increase on high loan-to-value premiums and $2 million from higher premiums of low loan-to-value
business.
premiums earned were $143 million in the fourth quarter of 2014, relatively unchanged as compared to the prior year’s period.
approximately $4 million increase in premiums earned was from the relatively larger 2013 and 2014 books of business, which was
offset by an approximate $4 million decrease in premiums earned from the relatively smaller books of business in prior years.
Losses on claims increased by $6 million, or 20%, to $37 million in the fourth quarter of 2014 as compared to the prior year’s period.
the $6 million increase was primarily due to an increase in new delinquencies net of cures of 19% in the fourth quarter of 2014 as
compared to an increase of 7% in the prior year’s period as the strong housing market in BC, ontario and alberta muted the typical
seasonal increase. the resulting loss ratio is 26%. the Company continues to realize savings from its loss mitigation programs, including
workout and asset management initiatives which also contribute to lowering losses on claims.
expenses decreased by $4 million, or 11%, to $30 million primarily due to a decrease in share-based compensation and office expenses,
as compared to the prior year’s period. the expense ratio decreased 2 percentage points to 21% for the fourth quarter of 2014, as
compared to the prior year’s period.
Interest and dividend income, net of investment expenses, decreased $2 million, or 4%, to $43 million in the fourth quarter of 2014,
as compared to the prior year’s period. the $2 million decrease was primarily the result of persistent low reinvestment rates and the
investment yield of 3.4% was marginally lower than the prior year’s period. the Company recorded $4 million net investment gains in
the fourth quarter of 2014, primarily from the sale of equities, as compared to $11 million, also from the sale of equities, in the prior
year’s period.
the effective tax rate of 26.3% in the fourth quarter of 2014 decreased by approximately 130 basis points from the 27.5% in the prior
year’s period. the decrease was primarily the result of higher non-deductible expenses in the prior year’s period.
net income decreased by $7 million, or 7%, to $86 million, in the fourth quarter of 2014 primarily the result of $6 million higher losses
on claims, $8 million lower investment gains and $2 million lower interest and dividend income, net of investment expenses which was
partially offset by $4 million lower expenses. net operating income was $84 million, in the fourth quarter of 2014, or $3 million lower
than net income as a result of an adjustment to net income, net of taxes, from the exclusion of net investment gains.
genwor th MI Ca na da InC. 2014 annUa L report
23
Management’s discussion and analysis (continued)
for the year ended december 31, 2014
the following table sets forth the year to date results of operations for the Company’s business:
(In millions of dollars, unless otherwise specified)
premiums written
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
total net investment income
Interest expense
fee on early redemption of long term debt
Income before income taxes
provision for income taxes
net income
adjustment to net income, after taxes:
fee on early redemption of long term debt
net gains on investments
net operating income(1)
effective tax rate
Selected non-IFRS financial measures(1)
new insurance written
new insurance written high loan-to-value
new insurance written low loan-to-value
Loss ratio
expense ratio
Combined ratio
operating return on equity
Investment yield
Year
2013
Increase (decrease) and
percentage change
Q4’14 vs. Q4’13
$
$
512
573
$
$
128
(8)
$
$
2014
640
565
111
107
219
346
173
22
195
24
7
511
134
142
113
255
319
179
37
216
23
—
511
136
$
377
$
375
$
5
(16)
—
(26)
$
366
$
349
$
(31)
(5)
(36)
28
(6)
(15)
(20)
(1)
(7)
(1)
(2)
2
5
10
17
25%
(1)%
(22)%
(5)%
(14)%
9%
(3)%
(41)%
(9)%
3%
—
(0)%
(2)%
1%
—
(39)%
5%
26.3%
26.7%
—
(0.4) pts
$
$
$
$
$
$
42,153
22,112
20,041
20%
19%
39%
12%
3.5%
$
$
$
34,985
19,502
15,483
25%
20%
44%
12%
3.7%
7,168
2,610
4,558
—
—
—
—
—
20%
13%
29%
(5) pts
(1) pts
(6) pts
— pts
(0.2) pts
Note: Amounts may not total due to rounding.
(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.
24
genwo rth MI C anada I nC. 20 14 annUa L rep ort
Full year review
new insurance written on high loan-to-value mortgages increased by $2.6 billion, or 13%, to $22.1 billion in 2014 as compared to the
prior year’s period. the Company believes the increase in high loan-to-value new insurance written was primarily the result of stronger
real estate activity and an increase in market share penetration, as compared to the prior year’s period.
new insurance written on low loan-to-value mortgages was $20.0 billion in 2014, as compared to $15.5 billion in the prior year’s period,
as a result of an increase in demand for low loan-to-value mortgage insurance.
premiums written increased by $128 million, or 25%, to $640 million in 2014 as compared to the prior year’s period. premiums
written on high loan-to-value mortgages increased by $110 million, or 24%, to $555 million and premiums written on low loan-to-value
mortgages increased by $18 million, or 28%, to $83 million as compared to the prior year’s period. an additional $2 million was received
from reinsurance premiums in 2014 as compared to less than $1 million in the prior year’s period. the $110 million increase in premiums
from high loan-to-value new insurance written included approximately $60 million from higher volumes and approximately $48 million
from the May 1st price increase on high loan-to-value premiums.
premiums earned decreased by $8 million, or 1%, to $565 million in 2014 as compared to the prior year’s period. the decrease was
primarily due to the lower premiums received from the relatively smaller 2010 and subsequent books of business partially offset by
$2 million from reinsurance premiums in 2014.
Losses on claims decreased by $31 million, or 22%, to $111 million in 2014 as compared to the prior year’s period. the decrease was
primarily due to the strong credit quality of recent books and a stable economic environment which has led to fewer new delinquencies.
on a regional basis, the decrease reflects lower losses in ontario, British Columbia and alberta. 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. the loss ratio declined by 5 percentage points to 20% in 2014, as compared to the prior year’s period.
expenses decreased by $5 million, or 5%, to $107 million in 2014 primarily due to lower share-based compensation expense and
professional fees, as compared to the prior year’s period. the expense ratio was 19% in 2014, down 1 percentage point, as compared
to the prior year’s period.
Interest and dividend income, net of investment expenses, decreased $5 million, or 3%, to $173 million for in 2014, as compared
to the prior year’s period. the decrease was primarily the result of $3 million lower dividend income due to lower equity balances.
Low reinvestment rates persist and the investment yield of 3.5% declined by 20 basis points as compared to the prior year’s period.
In addition, the Company recorded $22 million net investment gains in 2014, primarily from the sale of equities, as compared to
$37 million, also from the sale of equities, in the prior year’s period.
Interest expense increased by $1 million, or 3%, to $24 million in 2014, as compared to the prior year’s period. the increase was
primarily the result of additional expense from the 30-day intervening period between the new debt issuance “Series 3” on april 1, 2014
and the early redemption of existing debt “Series 2” on May 1, 2014. In addition, the Company incurred a $7 million fee on the early
redemption of such long term debt in the second quarter of 2014.
the effective tax rate was marginally lower in 2014 at 26.3% as compared to the prior year’s tax rate of 26.7%.
net income increased by $2 million, or approximately 1%, to $377 million in 2014 primarily the result of $31 million lower losses on
claims, and $5 million lower expenses partially offset by $15 million lower net investment gains, a $7 million one-time fee on the early
redemption of long term debt, $8 million lower earned premium, $5 million lower interest and dividend income, net of investment
expenses, and $1 million higher interest expense, in each case as compared to the prior year’s period. net operating income was
$366 million in 2014, or $11 million lower than net income as a result of an adjustment to net income, net of taxes, from the exclusion
of net investment gains and a fee on early redemption of long term debt.
genwor th MI Ca na da InC. 2014 annUa L report
25
Management’s discussion and analysis (continued)
for the year ended december 31, 2014
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, 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)(2)
net income(2)
adjustment to net income net of taxes:
fee on early redemption of long term debt
net gains in investments
net operating income(1)(2)
Earnings per common share ratios
earnings per common share (basic)(2)(3)
earnings per common share (diluted)(2)(3)
Selected non-IFRS financial measures:(1)
Loss ratio
expense ratio
Combined ratio
operating earnings per common share (basic)(2)(3)
operating earnings per common share (diluted)(2)(3)
operating return on equity(2)
$
2014
2013
2012
$
640
565
111
346
195
377
5
(16)
$
512
573
142
319
216
375
—
(26)
550
589
194
291
367
470
—
(9)
$
$
$
$
$
366
$
349
$
462
3.97
3.97
$
$
3.86
3.86
$
$
20%
19%
39%
3.86
3.86
12%
$
$
25%
20%
44%
3.60
3.60
12%
$
$
4.77
4.76
33%
18%
51%
4.68
4.67
17%
(1) 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.
(2)
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, adjusted operating earnings per common share basic and diluted
$3.44 and $3.43, and operating return on equity 13%.
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.
(3)
the table shown below presents additional annual information for the years ending december 31, 2014, 2013 and 2012.
(In millions, unless otherwise specified)
total invested assets and cash
total assets
total liabilities
total shareholders’ equity
dividends paid per common share
as at december 31
2014
2013
$
5,443
$
5,375
$
5,770
2,499
3,271
5,691
2,604
3,087
$
1.87
$
1.31
$
2012
5,380
5,734
2,697
3,037
1.19
26
genwo rth MI C anada I nC. 20 14 annUa L rep ort
Summary of quarterly results
the table shown below presents select income statement line items and certain key performance indicators for the last eight quarters.
In millions, unless otherwise specified)
Q4’14
Q3’14
Q2’14
Q1’14
Q4’13
Q3’13
Q2’13
Q1’13
net premiums written
$ 178
$
217
$
160
$
84
$
129
$
161
$
137
$
84
net premiums earned
Losses on claims
net underwriting income
total investment income
net income
adjustment to net income
net of taxes:
fee on early redemption
of long term debt
net investment gains
143
37
76
47
86
140
30
87
51
98
141
17
97
49
97
141
28
86
49
95
142
31
78
56
93
143
32
84
51
96
143
35
82
59
98
—
(3)
—
(6)
5
(4)
—
(4)
—
(8)
—
(5)
—
(10)
net operating income(1)
$
84
$
93
$
99
$
91
$
85
$
91
$
88
$
144
44
74
50
88
—
(3)
85
Earnings per common
share ratios
earnings per common
share (basic)
earnings per common
share (diluted)(2)
Selected non-IFRS
financial measures:(1)
Loss ratio
expense ratio
Combined ratio
operating earnings per
common share (basic)
operating earnings per
common share (diluted)(2)
operating return on equity
$ 0.92
$ 1.03
$ 1.02
$
1.00
$
0.98
$ 0.99
$ 1.00
$ 0.89
$ 0.91
$
1.01
$ 1.02
$
1.00
$ 0.98
$ 0.99
$ 1.00
$ 0.89
26%
21%
47%
21%
17%
38%
12%
19%
31%
20%
19%
39%
22%
23%
45%
22%
19%
41%
25%
18%
43%
31%
18%
49%
$ 0.89
$ 0.97
$ 1.04
$
0.96
$ 0.90
$ 0.94
$ 0.90
$ 0.86
$ 0.89
11%
$ 0.97
12%
$ 1.04
13%
$
0.96
12%
$ 0.90
12%
$ 0.94
13%
$ 0.90
12%
$ 0.86
12%
Note: Amounts may not total due to rounding.
(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 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.
genwor th MI Ca na da InC. 2014 annUa L report
27
Management’s discussion and analysis (continued)
for the year ended december 31, 2014
Financial condition
Statement of financial position highlights and selected financial data
As at
December 31
as at
december 31
(In millions of dollars, unless otherwise specified)
total invested assets, accrued investment income and other receivables
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)(2)
Book value per common share including aoCI (diluted)(2)
Book value per common share excluding aoCI (diluted)(2)
2014
5,443
260
67
5,770
1,799
115
432
153
2,499
3,086
185
3,271
5,770
$
$
2013
5,375
241
75
5,691
1,724
117
423
340
2,604
2,963
124
3,087
5,691
$
$
$
Increase (decrease) and
percentage change
2014 vs. 2013
68
19
(8)
79
75
(2)
9
(187)
(105)
123
61
184
79
1%
8%
(11)%
1%
4%
(2)%
2%
(55)%
(4)%
4%
49%
6%
1%
225%
223%
—
2 pts
93,147,778
35.12
$
33.13
$
93,403,036
35.02
$
33.04
$
94,910,880
32.53
$
31.22
$
94,918,169
32.53
$
31.22
$
(1,763,102)
2.59
$
1.91
$
(1,515,133)
2.50
$
1.82
$
(2)%
8%
6%
(2)%
8%
6%
Dividends paid per common share during the year
$
1.87 $
1.31
Note: Amounts may not total due to rounding.
(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.
28
genwo rth MI C anada I nC. 20 14 annUa L rep ort
Reserve development analysis
the table below shows the one-year development of the Company’s loss reserves for the five most recent completed years.
as at december 31
(In millions, unless otherwise specified)
2014
2013
2012
2011
total loss reserves, at the beginning of the year
$
118
$
139 $
169
$
207
$
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)
16
101
(94)
10
129
(139)
26
143
(193)
45
162
(214)
$
7
$
(10)
$
(51)
$
(52)
$
7%
99
(7)%
(30)%
(25)%
(13)%
108
113
124
total loss reserves at the end of the year (a+B)
$
115
$
118
$
139
$
169
$
2010
236
67
169
(200)
(31)
140
207
Note: Amounts may not total due to rounding.
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 favourable reserve development in 2014 of $7 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 was lower than the ultimate sales price of the Company’s subrogation rights to real estate due to strong home
price appreciation. additionally, cures were higher than originally estimated and new reported delinquencies were lower than estimated.
the provinces of alberta and ontario accounted for the majority of the favourable development in 2014, offsetting modest unfavorable
development in Québec and the atlantic provinces.
the Company regularly reviews the underlying drivers of its loss reserves development and adjusts its reserving practices accordingly.
as a result of these adjustments, reserve development pertaining to the prior years in 2014 was the lowest level the Company has
experienced in the past five years.
genwor th MI Ca na da InC. 2014 annUa L report
29
Management’s discussion and analysis (continued)
for the year ended december 31, 2014
Financial instruments
as at december 31, 2014, 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”) with the exception of cash and Canadian federal government
treasury bills. 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 obtained primarily from industry-standard pricing sources using market
observable information and through processes such as benchmark curves, benchmarking of like securities and quotes from market
participants. Unrealized gains on afS securities in the portfolio were $289 million. the Company’s investment yield for the fourth quarter
of 2014 was 3.4%, which included the favourable impact of non-taxable dividend income from its equity investments.
the following tables present the Company’s invested assets by asset class for the portfolio.
Asset class
As at December 31, 2014
as at december 31, 2013
Unrealized
(In millions of dollars, unless otherwise specified)
Fair value
%
gains
fair value
asset backed bonds and debentures(2)
$
125
2% $
5
$
8
Corporate bonds and debentures:
financial
energy
Infrastructure
all other sectors
total corporate bonds and debentures
Short term investments:
Canadian federal government treasury bills(1)
total short term investments
government bonds and debentures:
Canadian federal government
Canadian provincial and municipal government
total government bonds and debentures
equity investments:
energy
financials
Communication
all other sectors
total equity investments
total invested assets
Cash and cash equivalents
total invested assets and cash
accrued investment income and other receivables
Collateral receivable under reinsurance agreement
total invested assets, accrued investment income
and other receivables
1,142
252
241
569
2,205
85
85
1,770
898
2,667
29
45
17
80
170
5,253
190
5,443
30
28
$
21%
5%
4%
10%
41%
2%
2%
33%
16%
49%
1%
1%
0%
1%
3%
$
97%
3%
100%
—
—
46
18
14
37
115
—
—
73
68
141
7
2
2
17
28
289
—
289
—
—
$
1,281
311
230
451
2,272
40
40
1,810
846
2,656
38
47
21
78
184
5,161
214
5,375
32
29
%
0%
24%
6%
4%
8%
42%
1%
1%
34%
16%
49%
1%
1%
0%
1%
3%
96%
4%
100%
—
—
$
5,502
100%
$
289
$
5,435
100%
Note: Amounts may not total due to rounding.
(1)
Canadian federal government bonds includes $22,418 in collateral posted for the benefit of the Company’s counterparties to its derivative financial instrument contracts. In the year ended
December 31, 2013 Canadian federal government treasury bills included $3,108 in collateral posted for the benefit of the Company’s counterparties to its derivative financial instrument
contracts.
(2) As at December 31, 2014, asset backed bonds includes $117,342 of collateralized loan obligations.
30
genwo rth MI C anada I nC. 20 14 annUa L 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
S&p or fitch rating Services ratings.
the following table presents the Company’s invested assets, comprised primarily of fixed income securities, by credit rating for the
portfolio.
Credit rating
(In millions of dollars, unless otherwise specified)
Cash and cash equivalents
aaa
aa
a
BBB
As at December 31, 2014
as at december 31, 2013
Unrealized
gains
fair value
$
Fair value
190
1,947
1,099
1,700
337
%
4%
37%
21%
32%
6%
$
$
—
80
67
94
20
214
1,935
1,016
1,665
360
5,190
%
4%
37%
20%
32%
7%
100%
total invested assets and cash (excluding common shares)
$
5,273
100% S
261
$
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 expertise, the Company has split these assets primarily among four external
investment managers. the Company works with these managers to optimize the performance of the portfolios within the parameters
of 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 bonds and debentures
the Company held $125 million in asset-backed bonds and debentures as of december 31, 2014, up from $8 million as of december 31,
2013. these securities are primarily aa rated and floating rate. during the second and third quarters of 2014, the company purchased
$90 million and $22 million, respectively, of floating rate collateralized loan obligations (“CLos”) denominated in U.S. dollars, consistent
with the Company’s diversification and yield objectives.
genwor th MI Ca na da InC. 2014 annUa L report
31
Management’s discussion and analysis (continued)
for the year ended december 31, 2014
Corporate bonds and debentures
as of december 31, 2014, approximately 41% of the investment portfolio was held in corporate bonds and debentures, relatively
unchanged from 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 through corporate bonds and debentures represents 21% of the investment
portfolio, or approximately 52% of the corporate fixed income securities. the Company continuously monitors and repositions its
exposure to the financial sector, which represents greater than 50% of the corporate issuances of fixed income securities in the
Canadian marketplace. energy sector exposure through corporate bonds and debentures represents 5% of the investment portfolio,
of which approximately 75% is to pipelines and distribution companies that are primarily regulated entities with stable cash flows. the
remaining 25% of the Company’s energy sector exposure is integrated oil and gas companies with large capitalizations. Securities rated
below a were $337 million, or 6% of invested assets, as of december 31, 2014.
Government bonds and debentures
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, 2014, 49% of the investment portfolio was invested in sovereign fixed income securities, including 33%
in federal fixed income securities and 16% in provincial fixed income securities, relatively unchanged from the prior year.
Canadian federal government 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 $85 million, or 2%, in Canadian short-term treasury bills in the
investment portfolio as of december 31, 2014, up from $40 million, or 1%, as of december 31, 2013.
Equity investments
as of december 31, 2014, 3%, or $170 million, of the Company’s investment portfolio was held in high dividend yielding, relatively
low volatility Canadian common shares as compared to 3%, or $184 million, as of december 31, 2013. the financial sector represents
approximately 26% of the common shares held by the Company, relatively unchanged from the 25% as of december 31, 2013. 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 were $190 million as of december 31, 2014,
a decrease of $23 million from the $214 million as of december 31, 2013. the decrease was primarily the result of a $226 million tax
payment in the first quarter of 2014 related to the reversal of government guarantee fund, which was partially offset by an increase in
cash from operating and investing activities.
32
genwo rth MI C anada I nC. 20 14 annUa L 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 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.
2014
2013
$
$
199
(242)
19
(24)
214
$
290
$
366
(231)
(170)
(34)
248
214
the Company generated $199 million of cash flows from operating activities in 2014, as compared to $366 million in the prior year’s
period. the decrease in cash flows from operating activities was primarily the result of $226 million in higher taxes paid in the first
quarter of 2014, related to the reversal of the government guarantee fund. excluding the $226 million tax payment, cash flows
generated from operating activities would have been $425 million or an increase of $59 million primarily related to higher gross
premiums written.
the Company utilized $242 million of cash flows for financing activities in 2014, as compared to $231 million in the prior year’s period.
the Company utilized cash flows in 2014 primarily for the payment of ordinary and special dividends of $178 million, issuance and
redemption of debt and $75 million for repurchase of common shares of the Company. In the prior year’s period, the Company utilized
$231 million of cash flows primarily for the payment of ordinary dividends of $127 million and $105 million for the repurchase of
common shares of the Company.
the Company generated $19 million of cash flows from investing activities, primarily from the sale and maturities of fixed income assets
in 2014, as compared to the utilization of $170 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, 2014, the Company held liquid assets of $821 million maturing within one year, comprised
of $275 million in cash and cash equivalents, and $546 million in bonds and debentures and short-term investments in order to maintain
financial flexibility. as at december 31, 2014, 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. In addition to cash and cash
equivalents, 51%, or $2,752 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 aIf.
genwor th MI Ca na da InC. 2014 annUa L report
33
Management’s discussion and analysis (continued)
for the year ended december 31, 2014
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, accounts payable and accrued liabilities and
loss reserves consist of the following at december 31, 2014:
Contractual obligations
(In thousands)
Long-term debt(1)
accounts payable and accrued liabilities
operating leases
Loss reserves
total contractual obligations
(1) See “Debt” section for more details.
total
$ 435,000
41,557
6,622
115,493
Less than
1 year
$
—
41,557
2,542
58,413
payment dates due by period
1–3
years
4–5
years
After 5
years
$
—
—
4,080
57,080
— $ 435,000
—
—
—
—
—
—
$ 598,672
$ 102,512
$ 61,160
— $ 435,000
operating lease expense for 2014 was $3 million, consistent with the prior year.
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.
the Company uses derivative financial instruments in the form of foreign currency forwards, cross currency interest rate swaps, and
equity total return swaps to mitigate foreign currency risk associated with bonds denominated in U.S. dollars, australian dollars pledged
to collateralize reinsurance obligations, and changes in the fair market value of the Company’s common shares.
the following table shows the fair value and notional amounts of the derivatives by terms of maturity, in Canadian dollars.
notional amount
(In millions)
December 31, 2014
foreign currency forwards(1)
Cross currency interest rate swaps(1)
Total
december 31, 2013
foreign currency forwards(1)
Cross currency interest rate swaps
total
Net
fair value
1 year
or less
1–3
years
3–5
years
Over 5
years
$
(15) $
(8)
$
29
—
6
121
$
(23) $
29
$
126
$
$
(3) $
—
(3) $
29
—
29
—
—
—
$
total
255
121
$
$
$
17
—
17
14
—
14
$
203
—
$
$
203
$
375
$
134
—
$
176
—
$
134
$
176
(1)
As at December 31, 2014, all foreign currency forwards and cross currency interest rate swaps were in a liability position of approximately $15 million and approximately $8 million
respectively. As at December 31, 2013, all foreign currency forwards were in a liability position of approximately $3 million.
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. In 2014, the Company invested approximately $4 million in
underwriting, loss mitigation and risk management technologies enhancements. 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 2015 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.
34
genwo rth MI C anada I nC. 20 14 annUa L rep ort
Capital management
Minimum capital test
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%.
Under prMhIa and the Insurance Companies Act (Canada) (“ICa”), the minimum MCt ratio for the Insurance Subsidiary is 175%. In
conjunction with this requirement, the Insurance Subsidiary has set its internal MCt target capital ratio to 185%. the Company manages
its capital base to maintain a balance between capital strength, efficiency and flexibility. as at december 31, 2014, the Insurance
Subsidiary’s MCt ratio was approximately 225%, or 40 percentage points higher than the Company’s internal target of 185%. the
Company regularly reviews its capital levels, and after reviewing stress testing results and after consulting with oSfI, the Company
established an operating MCt holding target of 220% pending the development by oSfI of a new regulatory test for mortgage insurers
which is targeted for implementation in 2017. while our internal capital target of 185% MCt is calibrated to cover the various risks
that the business would face in a severe recession, the holding target of 220% MCt is designed to provide a capital buffer to allow
management time to take the necessary actions should capital levels be pressured by deteriorating macroeconomic conditions. Under
this framework, capital in excess of the operating holding target may be redeployed.
Capital above the amount required to meet the Insurance Subsidiary’s MCt operating 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.
during the third quarter of 2014, the oSfI released an advisory guideline, Interim Capital Requirements for Mortgage Insurance
Companies, which will be used on an interim basis for 2015. this guideline was developed by adjusting the 2015 guideline, Minimum
Capital Test for Federally Regulated Property and Casualty Insurance Companies (“2015 MCT Guideline”), to reflect the specific
characteristics of the mortgage insurance business until the new capital guideline for mortgage insurance companies is developed. the
Company used this guideline to calculate a pro-forma MCt ratio as at december 31, 2014 and compared the result to its estimated MCt
ratio using the existing calculation for the same time period. Based on this comparison, the Company believes that the implementation
of the 2015 MCt guideline will not have a material impact on its MCt ratio.
the table below illustrates the MCt at the end of december 31, 2014, under the 2014 MCt guideline and a pro-forma MCt at the end
of december 31, 2014 under the 2015 MCt guideline which will come in effect on January 1, 2015.
(In millions of dollars, unless otherwise specified)
Capital available
Capital required
MCt ratio
(1) Company estimate
Minimum
2015 MCt
capital test guideline pro-forma
as at
December 31, 2014 december 31, 2014
As at
3,295
1,464
225%
3,445(1)
1,513(1)
228%(1)
on a pro-forma basis, using the 2015 MCt guideline, the Company estimates that MCt ratio would increase modestly to approximately
228%. Under the 2015 MCt guideline, Capital available on a pro-forma basis is expected to increase by $150 million as deferred
acquisition costs originating from expenses, other than premium tax, would no longer be deducted from capital available. Capital required
on a pro-forma basis is expected to increase by $49 million due to an increase in interest rate risk margin, the introduction of an operational
risk margin, and higher capital required on equities and other assets, all of which would be partially offset by lower capital required on
fixed income. the impact of higher capital required on equities was not significant given the Company’s small allocation to equities.
genwor th MI Ca na da InC. 2014 annUa L report
35
Management’s discussion and analysis (continued)
for the year ended december 31, 2014
Debt
Debt issuance
on april 1, 2014, the Company completed an offering of $160 million principal amount of senior unsecured debentures “Series 3”. the
debentures were issued for gross proceeds of $160 million before issuance costs of $1 million. the debentures bear interest at a fixed
annual rate of 4.242% until maturity on april 1, 2024, payable in equal semi-annual installments commencing on october 1, 2014. the
debentures are redeemable at the option of the Company, in whole or in part, at any time in accordance with the indenture governing
the debentures. for more specific details on the terms and conditions of the debentures, please see the prospectus supplement of the
Company dated March 26, 2014, a copy of which is available on the System for electronic document analysis and retrieval (“Sedar”)
website at www.sedar.com. the debentures are currently rated aa (low) by dBrS and BBB+ by S&p.
Debt redemption
on May 1, 2014, in connection with the above offering, the Company redeemed its existing “Series 2” senior unsecured debentures
with a principal amount of $150 million bearing a fixed annual interest rate of 4.59%, in accordance with the terms of such debentures,
and in advance of their maturity on december 15, 2015. the Company repaid the principal amount plus accrued and unpaid interest to
the redemption date of $3 million. In addition, the Company paid a one-time early redemption fee to existing debt holders of $7 million.
the redemption payment was recorded as a fee on the early redemption of long-term debt in the statement of income in the second
quarter of 2014, when the redemption occurred.
the following tables provide details of the Company’s long-term debt:
Contractual obligations
(in millions)
Long-term debt
date issued
Maturity date
principal amount outstanding (in millions)
fixed annual rate
Semi-annual interest payments due each year on
debenture ratings
S&p(1)
dBrS
(1)
See “Financial Strength Rating” Section for additional information
payment dates due by period
total
Less than
1 year
$
435
—
1–3
years
—
3–5
years
After 5
years
— $
435
Series 1
Series 3
June 29, 2010
June 15, 2020
275
5.68%
June 15, december 15
$
april 1, 2014
april 1, 2024
160
4.242%
october 1, april 1
$
BBB+ (negative outlook) BBB+ (negative outlook)
aa (Low)
aa (Low)
36
genwo rth MI C anada I nC. 20 14 annUa L rep ort
the principal debt covenants associated with the debentures are as follows:
•
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.
•
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.
•
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 and 2014, the aggregate
unpaid principal amount of such debentures, together with all accrued and unpaid interest thereon and any other amounts owing with
respect thereto, shall become immediately due and payable. the events of default that would trigger such an acceleration of payment
include if the Company takes certain voluntary insolvency actions, such as instituting proceedings for its winding up, liquidation or
dissolution, or consents to the filing of such proceedings against it; or if involuntary insolvency proceedings go uncontested by the
Company or are not dismissed within a specified time period, or the final order sought in such proceedings is granted against the
Company.
for more specific details on the terms and conditions of the Company’s debentures, please see the relevant prospectus, copies of which
are available on the Sedar website at www.sedar.com.
Capital transactions
Share repurchase
on april 29, 2014, the Company received approval from the toronto Stock exchange allowing the Company to undertake a normal
Course Issuer Bid (“nCIB”). purchases of common shares under the nCIB may continue up to the earlier of May 4, 2015 or the date
on which the Company has purchased up to 4,746,504 of its common shares, the maximum number of common shares available
for purchase under the nCIB, representing approximately 5% of the Company’s outstanding common shares. during the year ended
december 31, 2014, the Company purchased 1,873,023 common shares for cancellation, representing approximately 2% of its
outstanding common shares. the Company’s major shareholder, genworth financial Inc., participated proportionately to maintain its
57.3% ownership interest in the Company throughout the course of the nCIB. during the year ended december 31, 2014 there were
no purchases made by the Company under its prior normal course issuer bid, which was in place January 1 to May 4, 2014. genworth
financial Inc. also maintained its proportionate ownership interest in the Company throughout the course of the prior normal course
issuer bid. Shareholders may obtain a copy of the nCIB notice, without charge, by contacting the Company.
Restrictions on dividends and capital transactions
the Insurance Subsidiary is subject to certain restrictions with respect to dividend and capital transactions. the ICa prohibits directors
from declaring or paying any dividend on shares of an insurance company if there are reasonable grounds for believing that 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.
genwor th MI Ca na da InC. 2014 annUa L report
37
Management’s discussion and analysis (continued)
for the year ended december 31, 2014
Outstanding share data
the following table presents changes in the number of common shares outstanding at december 31, 2014 and 2013.
Common shares, January 1
Common shares issued in connection with share-based compensation plans
Common shares retired, repurchased and cancelled
Common shares, december 31
2014
2013
94,910,880
109,921
(1,873,023)
98,698,018
115,979
(3,903,117)
93,147,778
94,910,880
at december 31, 2014, subsidiaries of genworth financial, Inc. owned 53,395,420 common shares of the Company or approximately
57.3% of the Company’s outstanding shares.
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 may influence the confidence in an insurer and its products.
during the fourth quarter of 2014, the Company noted that S&p had revised its rating of genworth financial group’s U.S. life insurance
operations following the release of the genworth financial, Inc. third quarter of 2014 earnings. as a result of this downgrade and S&p’s
group rating methodology, S&p also lowered its financial strength rating on the Insurance Subsidiary from aa- to a+ and the Company’s
issuer and credit ratings on its senior unsecured debentures from a- to BBB+. S&p’s group rating methodology states that the insulated
Canadian businesses are capped at three notches above the group credit profile. S&p maintained its standard notching criteria of three
notches between an operating company and a holding company, for the Insurance Subsidiary and the Company, respectively. S&p
noted in their press release of november 6, 2014 that the Canadian mortgage insurance businesses continue to have a very strong
capital and earnings profile and they expect the Insurance Subsidiary to maintain regulatory capital of more than 220% of the minimum
capital test ratio. In addition to the rating change, S&p also revised its outlook for the Company and the Insurance Subsidiary from stable
to negative, reflecting their outlook on genworth financial, Inc. the ratings from S&p are a function of financial strength, operating
performance and ability to meet obligations to policyholders.
the Insurance Subsidiary is rated aa (Superior) and the Company’s issuer rating is aa (Low), with a stable outlook, by dBrS. the
ratings from dBrS were confirmed in november 2014. dBrS applies a one-notch differential between the Insurance Subsidiary and
the Company to reflect the structural subordination of the Company’s financial obligations relative to those of the regulated Insurance
Subsidiary. the rating from dBrS is a function of the financial strength, operating performance and ability to meet obligations to
policyholders.
ratings summary
Issuer rating
Company
Financial strength
Insurance subsidiary
Senior unsecured debentures
Company
S&p
dBrS
BBB+, negative
aa (Low), Stable
a+, negative
aa, Stable
BBB+, negative
aa (Low), Stable
38
genwo rth MI C anada I nC. 20 14 annUa L rep ort
Risk management
Enterprise risk management framework
risk management is a critical part of genworth Canada’s business. the Company has an enterprise risk management framework
(“erM”) that comprises the totality of the frameworks, systems, processes, policies, and people for identifying, assessing, mitigating
and monitoring risks. the Company’s erM 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 key elements of the erM
framework are outlined in the subsequent paragraphs and represented in the diagram below.
Governance Framework
Governance, Oversight, Culture
Stategic Planning Process
Business Environment, Strategic Plans and Objectives, Management Philosophy, Stakeholder Expectations
Risk Appetite Framework
Risk Management Principles, Risk Tolerance and Limits, Scenario Testing
Risk Management Processes
Risk Identification & Assessment
Identify New or Emerging Risks
Risk Control
Policies, Processes, Procedures
Risk Measurement
Quantification, Economic Capital
Risk Management
Risk Responses, Actions
Risk Monitoring & Reporting
Clear, Comprehensive, Consistent
Insurance
Market
Credit
Strategic
Legal &
Compliance
Model
Operational
genwor th MI Ca na da InC. 2014 annUa L report
39
Management’s discussion and analysis (continued)
for the year ended december 31, 2014
Governance framework
the Company’s governance framework is designed to ensure the Board of directors (“Board”) and the Senior Leadership team (“SLt”)
have effective oversight of the risks faced by the Company with clearly defined and articulated roles and responsibilities and inter-
relationships. the governance framework is comprised of three core elements:
I. Board oversight of risk and risk management practices;
II. SLt management oversight of risks; and
III. the “three lines of defense” operating model.
Board of Directors
Risk, Capital and Investment
Committee
Audit
Committee
Compensation and
Nominating Committee
Conduct Review
Committee
CRO
Senior Leadership Team
Management
Committee
Insurance risk
Committee
Operational Risk
Committee
Investment Risk
Committee
ERM
Committee
Model Steering
Committee
First Line of Defense
Second Line of Defense
Third Line of Defense
Risk Owner
Risk Oversight
Independent Assurance
•
•
Operational leaders and support
functions
Accounts for:
•
Identification
• Assessment
•
•
Mitigation and
Reporting of risk against
approved policies
•
•
•
Risk Management, Finance and
Compliance functions
Establish risk management
practices and provide risk guidance
Independent oversight of risk
management practices
•
•
Internal and external audit
Independent assurance to
management and the Board of
Directors on the effectiveness
of risk framework
40
genwo rth MI C anada I nC. 20 14 annUa L rep ort
the Board, in collaboration with the Chief executive officer (“Ceo”), Chief risk officer (“Cro”) and Chief financial officer (“Cfo”),
is responsible for setting the Company’s risk appetite and ensuring that it remains consistent with the Company’s short and long-term
strategy, business and capital plans. the Board carries out its risk management mandate primarily through its committees, with the risk,
Capital and Investment Committee having responsibility for oversight of Insurance, Investment, operational risks.
the SLt, consisting of the Ceo, Cro, Cfo and general Counsel, is responsible for risk management under the oversight of the Board
and fulfills its responsibility through several risk committees, as noted in the chart above. the Cro, who oversees the risk Management
group (“rMg”), reports to the Ceo but has direct access via in-camera sessions with the risk, Capital and Investment committee of
the Board.
genworth Canada uses a ‘three lines of defense’ approach to risk management, which serves to allocate accountability and
responsibility for risk management within the various business functions, as are outlined in the chart on page 40.
Risk appetite framework (“RAF”)
risk appetite is the maximum amount of risk that the Company is willing to accept in the pursuit of its business objectives. the objective
in managing risk is to protect the Company from unacceptable loss or an undesirable outcome with respect to earnings volatility, capital
adequacy, liquidity or reputation, while supporting the Company’s overall business strategy.
the purpose of the raf is to provide a framework for the SLt and the Board for understanding the ultimate level of risk the Company is
willing to undertake in pursuit of its strategic objectives with due regard to its commitments and regulatory boundaries. It articulates the
desired balance between risk objectives and profitability objectives, and is a key communication tool that enables the Board to cascade
key messages throughout the organization. It establishes a common understanding around the acceptable level of variability in financial
performance and answers the question of how much risk the Company is willing to take under expected and extreme conditions.
where possible the Company has set risk limits and tolerances that guide the business and ensure that risk taking activities are within
its risk appetite. the Company’s risk tolerances and limits will be assessed for appropriateness no less than annually and on a more
frequent basis if there is a major change to the economic or business environment. the Company communicates risk tolerances and
limits through its policies, limit structures and operating procedures.
where possible, the Company’s risk appetite is subject to stress and scenario testing and can be expressed as the tolerance with
respect to acceptable variances for earnings, liquidity and capital to deviate from their target levels under adverse scenarios.
Risk appetite
the Company has five risk appetite priorities that form the basis of its qualitative risk appetite statements and corresponding risk
appetite tolerances and limits.
i. Maintain new insurance written (“nIw”) quality and avoid imprudent portfolio risk concentrations.
ii.
Balance capital strength, efficiency and flexibility while complying with regulatory requirements and with due regard to the
Company’s desired rating.
iii. Minimize earnings and dividend volatility while pursuing long-term shareholder value.
iv. Maintain a high quality investment portfolio and sound management of liquidity risk.
v. ensure sound management of regulatory compliance risk, model and operational risk.
the above priorities are utilized in a holistic fashion and contemplate the interaction of these priorities.
genwor th MI Ca na da InC. 2014 annUa L report
41
Management’s discussion and analysis (continued)
for the year ended december 31, 2014
Risk principles
the Company employs the following methods of managing risk that originate from the business objectives of the Company:
•
•
•
•
•
•
ensure the expected outcomes of risk taking activities are consistent with the Company’s strategies and risk appetite;
ensure there is an appropriate balance between risk and reward in order to maximize shareholder value;
ensure a deep understanding of risk drivers as they relate to our key objectives;
ensure responsibility for risk management is shared across the business (by employing “three lines of defense” risk governance
model);
proactively address emerging risks as they arise; and
ensure strict adherence to legal, compliance and regulatory requirements.
Risk controls
the Company’s erM approach is supported by a comprehensive set of risk controls. the controls are embedded through its
erM framework and risk-specific frameworks. these frameworks lay the foundation for the development and communication of
management-approved policies and the establishment of formal review and approval processes. the Company’s risk management
framework and policies are organized as follows:
•
Enterprise Risk Management Framework: provides an overview of the enterprise-wide program for identifying, measuring,
controlling and reporting of material risks the Company faces.
•
Risk-Specific Frameworks: provides an overview of the Company’s program for identifying, measuring, controlling and reporting for
each of its material risks.
•
Company-wide Policies and Procedures: governs activities such as product risk review and approval, project initiatives, stress
testing, risk limits and risk approval authorities.
Risk categories
Insurance risk
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 unemployment and housing market
conditions in Québec and the atlantic provinces, the Company took a number of underwriting actions to reduce the overall risk profile of
its mortgage portfolio, including more stringent credit criteria in these regions. the Company is currently monitoring effects of oil prices
in the province of alberta and is taking the necessary actions to stay within our risk appetite.
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. this evaluation criteria includes 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.
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genwo rth MI C anada I nC. 20 14 annUa L rep ort
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 loss 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.
Market and credit risk
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.
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 and credit
analysis completed by the Company and its investment managers.
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 aIf 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.
genwor th MI Ca na da InC. 2014 annUa L report
43
Management’s discussion and analysis (continued)
for the year ended december 31, 2014
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 and cross-currency interest rate swaps to mitigate currency risk.
Financial reporting controls and accounting disclosures
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
(2013) 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 Ceo, 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 such certifications are available with
the Company’s filings on the Sedar website at www.sedar.com. the certifications filed in connection with certain interim and annual
financial disclosure documents 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, for such periods. there were no changes in the Company’s
internal controls over financial reporting during the quarter ending december 31, 2014 that have materially affected, or are reasonably
likely to materially affect, the Company’s controls over financial reporting.
Changes in accounting policies and future accounting standards
The Company adopted amendments to IAS 32 – Financial instruments: presentation and IAS 36 – Impairment of assets in 2014. The
adoption of the amendments to these accounting standards did not have a material impact on the Company’s financial statements. a
description of the amendments is included in the Company’s annual consolidated financial statements.
IFRS 9 – Financial instruments
IFRS 9, published on July 24, 2014, replaces the existing guidance in IAS 39 – Financial instruments: recognition and measurement
(“IaS 39”). the new standard includes revised guidance on the classification and measurement of financial assets, including impairment,
and supplements the new hedge accounting principles published in 2013.
Recognition and derecognition
IfrS 9 retains, largely unchanged, the requirements of IaS 39 relating to scope and recognition and derecognition of financial
instruments.
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Classification and measurement of financial assets and financial liabilities
Although the permissible bases for financial assets – amortized cost, Fair Value Through Other Comprehensive Income (“FVOCI”)
and fair value through profit or Loss (“fvtpL”) are similar to IaS 39, the criteria for classification into the appropriate measurement
categories are significantly different. financial assets that are debt instruments are classified and measured at amortized cost, fvoCI or
fvtpL based on the business model in which they are held and the characteristics of their contractual cash flows. If classifying a debt
instrument at amortized cost or fvoCI would create or enlarge an accounting mismatch in income, an entity can make an irrevocable
election to classify it at fvtpL if this would eliminate or significantly reduce the mismatch.
all equity investments are classified and measured at fvtpL. however, for an equity investment that is not held for trading, an entity
may elect to irrevocably present subsequent changes in fair value (including foreign exchange gains or losses) in oCI. these changes in
fair value are not subsequently reclassified to income under any circumstances.
IfrS 9 retains almost all of the existing requirements from IaS 39 for the classification and measurement of financial liabilities. however,
the gain or loss on a financial liability designated at fvtpL that is attributable to changes in an entity’s own credit risk is presented in
oCI, unless presentation in oCI creates or enlarges an accounting mismatch. Changes in fair value attributable to a financial liability’s
credit risk are not subsequently reclassified to income.
Impairment
IfrS 9 replaces the “incurred loss” model in IaS 39 with an “expected loss” model. the new model applies to financial assets that are
not measured at fvtpL with the exception of equity investments. the model uses a dual measurement approach, under which a loss
allowance is measured as either 12-month expected credit losses or lifetime expected credit losses. the measurement basis generally
depends on whether there has been a significant increase in credit risk since initial recognition. Special rules apply to assets that are
credit-impaired at initial recognition.
Hedge accounting
the general hedge accounting requirements of IfrS 9 retain the three types of hedge accounting mechanisms in IaS 39. however,
greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of
instruments that qualify as hedging instruments and the types of risk components of nonfinancial items that are eligible for hedge
accounting. In addition, the effectiveness test has been overhauled and replaced with the principle of an “economic relationship”.
retrospective assessment of hedge effectiveness is no longer required. the work on macro hedging by the IaSB is still at a preliminary
stage. a discussion paper was issued in april 2014 to gather preliminary views and direction from constituents with the comment period
having ended october 17, 2014.
IfrS 9 is effective for annual periods beginning on or after January 1, 2018 with earlier adoption permitted.
the Company does not currently expect to early adopt IfrS 9 and is evaluating the impact of the standard on its financial assets and
financial liabilities.
IFRS 4 – Insurance contracts
on June 21, 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.
genwor th MI Ca na da In C . 2014 annUaL report
45
Management’s discussion and analysis (continued)
for the year ended december 31, 2014
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.
In the first quarter of 2014, the IaSB conducted its first set of re-deliberations on the revised ed. Based on these re-deliberations, key
decisions were made relating to the unlocking of the contractual service margin, including the requirement to adjust the contractual
service margin for changes in risk adjustment that relate to coverage and other services in the future. additionally, the use of oCI to
present the effects of changes in discount rates has been made optional.
In the second quarter of 2014, the IaSB discussed the remaining issues not targeted by the revised ed. a clarification was issued
indicating that, for certain contracts, the service represented by the contractual service margin would be insurance coverage that is
provided on the basis of passage of time and reflects the number of contracts in force. guidance was issued to address determining
discount rates when an insurance contract extends into a period for which there is a lack of observable data. the IaSB also decided on
an exception to the subsequent measurement principle for reinsurance contracts to better reflect the economic relationship with the
underlying insurance contracts. finally, the IaSB discussed the level of aggregation of insurance contracts and decided that entities
could use a higher level of aggregation of insurance contracts in certain circumstances.
In the third quarter of 2014, the IaSB continued its analysis of respondents’ feedback on the model for non-participating insurance
contracts proposed in the ed and decided that the locked-in interest rate at the inception of an insurance contract would be used for
accreting interest on the contractual service margin and calculating the change in the present value of expected cash flows that adjust
the contractual service margin.
In the fourth quarter of 2014, the IaSB concluded its re-deliberations on non-participating contracts by reviewing and reconfirming
the transition requirements for non-participating contracts proposed in the 2013 ed, and commenced re-deliberations on participating
contracts.
throughout its re-deliberations, the IaSB has considered whether the accounting for insurance contracts would be consistent with other
existing or future standards including the new revenue recognition standard – IFRS 15 – Revenue from contracts with customers.
It is expected that re-deliberations will be completed in mid-2015 and a final standard will be issued in late 2015, with implementation
not expected before 2019. the Company is currently monitoring the development of this standard and assessing the impact of its
adoption.
Significant estimates and judgments
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 on page 47 as accounting estimates and judgments. actual results may differ from the
estimates used, and such differences may be material.
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genwo rth MI C anada I nC. 20 14 annUa L rep ort
Accounting estimates
Information about assumptions and estimation uncertainties that have a risk of resulting in material adjustment within the next
12 months are as follows:
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.
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 appointed actuary determines a discount rate based on the market
yield of the Company’s investment portfolio.
the Company recognizes a provision 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 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.
Subrogation recoverable
the Company estimates the fair value of subrogation rights related to real estate 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.
genwor th MI Ca na da InC. 2014 annUa L report
47
Management’s discussion and analysis (continued)
for the year ended december 31, 2014
the Company estimates borrower recoveries related to claims paid and loss reserves included in subrogation recoverable based on
historical recovery experience.
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.
Utilization of tax losses
As at December 31, 2014, the Company has recognized $10 million of benefits related to tax losses (2013 – tax losses of $9 million).
Management considers it probable that future taxable profits will be available against which these tax losses can be utilized.
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 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 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.
Employee defined benefits 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.
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Accounting judgments
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 investments. where possible, this data is benchmarked against third party sources. Impairments for bonds and debentures in an
unrealized loss position are deemed to exist when the Company does not expect full recovery of the amortized cost of the investment
based on the estimate of cash flows expected to be collected or when the Company intends to sell the investment prior to recovery
from its unrealized loss position.
for equity investments, the Company recognizes an impairment loss in the period in which it is determined that an investment has
experienced significant or prolonged losses.
Transactions with related parties
Services
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 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 $5 million in 2014 which was comparable to the prior year’s period.
Share repurchase
During the year ended December 31, 2014, the Company repurchased 1,873,023 (2013 – 3,903,117) of its own common shares for
cancellation on the open market for an aggregate purchase price of $75 million as compared to $105 million in the prior year. genworth
Financial Inc., through its subsidiaries, participated proportionately in the share purchase transaction and maintained a 57.3% (2013 –
57.4%) ownership interest in the Company.
genwor th MI Ca na da InC. 2014 annUa L report
49
Management’s discussion and analysis (continued)
for the year ended december 31, 2014
Reinsurance
effective december 1, 2014, the Company, through its indirect subsidiary MIC Insurance Company Canada (“MICICC”), formerly pMI
Insurance Company, entered into a retrocession agreement with a third party reinsurance company 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 dollars within any one year up to a maximum
exposure to the Company of $30 million australian dollars less claims paid by the Company in prior years. the premiums under the
new agreement are equal to 6.75% of the maximum exposure in the first year of coverage and 8.75% of the maximum exposure in the
second and third years of coverage. these premiums are consistent with current reinsurance market rates.
Concurrently, the retrocession agreement signed in 2013 was terminated.
Under the 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, 2014, the Company had posted $30 million australian dollars,
equivalent to $28 million, under the agreement (December 31, 2013 – $30 million Australian dollars, equivalent to $28 million).
re-measurement adjustments arising on translation of the collateral and any reinsurance receivable balances from australian dollars
to Canadian dollars are recognized in investment gains (losses).
the Company earned $2 million in reinsurance premiums in 2014 and did not earn significant reinsurance premiums in 2013.
Non-IFRS financial measures and glossary
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 (excluding fees on early retirement of debt, as applicable), interest and
dividend income, net of investment expenses, 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.
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genwo rth MI C anada I nC. 20 14 annUa L rep ort
the table below reconciles the Company’s net operating income, interest and dividend income, net of investment expenses, 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)
total net investment income
adjustment to total net investment income:
net gains on investments
Interest and dividend income, net of investment expenses
net income
adjustment to net income, net of taxes:
fee on early redemption of long term debt
net gains on investments
net operating income(1)
earnings per common share (basic)
adjustment to earnings per common share, net of taxes:
fee on early redemption of long term debt
net investment gains
operating earnings per common share (basic)(1)
earnings per common share (diluted)(2)
adjustment to earnings per common share, net of taxes:
fee on early redemption of long term debt
net investment gains
operating earnings per common share (diluted)(1)(2)
Shareholders’ equity
adjustment to shareholders’ equity:
accumulated other comprehensive income (“aoCI”)
for the three months ended
december 31,
for the twelve months ended
december 31,
2014
2013
2014
$
47
$
56
$
195
$
(4)
43
86
—
(3)
84
0.92
—
(0.03)
0.89
0.91
—
(0.03)
0.89
3,271
$
$
$
$
$
$
$
$
(11)
44
93
—
(8)
85
0.98
—
(0.08)
0.90
0.98
—
(0.08)
0.90
3,087
$
$
$
$
$
$
$
$
(22)
173
377
5
(16)
366
3.97
0.06
(0.17)
3.86
3.97
0.06
(0.17)
3.86
3,271
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2013
216
(37)
179
375
—
(26)
349
3.86
—
(0.26)
3.60
3.86
—
(0.26)
3.60
3,087
(185)
(124)
(185)
(124)
Note: Amounts may not total due to rounding.
(1)
(2)
These financial measures are not calculated based on IFRS.
The difference between basic and diluted number of common shares outstanding is caused by the potentially dilutive impact of share-based compensation awards.
genwor th MI Ca na da InC. 2014 annUa L report
51
Management’s discussion and analysis (continued)
for the year ended december 31, 2014
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
MCt ratio(2)
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 three months ended
december 31,
for the twelve months ended
december 31,
2014
2013
2014
2013
$ 356,318
8,785
$
26%
21%
47%
11%
225%
0.10%
29%
3.4%
$ 316,702
7,693
$
22%
23%
45%
12%
223%
0.12%
29%
3.6%
$ 356,318
42,153
$
20%
19%
39%
12%
225%
0.10%
29%
3.5%
$ 316,702
34,985
$
25%
20%
44%
12%
223%
0.12%
30%
3.7%
93,147,778
35.12
$
33.13
$
94,910,880
32.53
$
31.22
$
93,147,778
35.12
$
33.13
$
94,910,880
32.53
$
31.22
$
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)
93,403,036
35.02
$
33.04
$
94,918,169
32.53
$
31.22
$
93,403,036
35.02
$
33.04
$
94,918,169
32.53
$
31.22
$
Dividends paid per common share
$
0.39 $
0.35
$
1.87
$
1.31
(1) These financial measures are not calculated based on IFRS.
(2) The MCT ratio for December 31, 2014 is a Company estimate.
(3) The difference between basic and diluted number of common shares outstanding is caused by the potentially dilutive impact of share-based compensation awards.
In the first quarter of 2014, the Company revised its definition of net operating income (loss) to exclude after-tax fees on early
redemption of debt to better reflect the basis on which the performance of the Company’s business is internally assessed and to reflect
management’s opinion that they are not indicative of overall operating trends. the change in the definition did not have an impact on net
operating income (loss) for prior periods.
“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 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 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.
“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 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.
52
genwo rth MI C anada I nC. 20 14 annUa L rep ort
“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.
“credit score” means the lowest average credit score of all borrowers on a mortgage insurance application. average credit scores, in
most instances, are calculated by averaging the score obtained from both equifax and transUnion for each borrower on the application.
this is a key measure of household financial health.
“debt to total capital” means the Company’s long-term debt divided by its total capital. total capital includes the Company’s
shareholders’ equity and long-term debt. this is a measure of financial leverage that the Company considers in capital management
planning.
“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 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 is a measure of the total amount distributed by the Company to shareholders.
“dividend payout ratio” means the ratio (expressed as a percentage) of the dollar amount of ordinary dividends paid during a specified
period on net income over the same period. this is measure of how much cash flow is being returned for each dollar invested in an
equity position.
“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.
“gross debt service ratio” means the percentage of borrowers’ total monthly debt serving costs, in respect of the debt in question, as
a percentage of the borrower’s monthly gross income. this is a key measure of household financial health.
“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.
“Interest and dividend income, net of investment expenses” means the total net investment income excluding investment gains
(losses). this measure is an indicator of the core operating performance of the investment portfolio.
“investment yield” means the net investment income before investment fees and excluding net investment 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.
“Minimum Capital Test” or “MCT” means the minimum capital test for certain federally regulated insurance companies established
by oSfI (as defined herein). Under MCt, companies calculate a 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 . 2014 annUaL report
53
Management’s discussion and analysis (continued)
for the year ended december 31, 2014
“net operating income” means net income excluding after-tax net investment gains (losses) and after-tax fees on early redemption
of debt. net operating income estimates the recurring after-tax earnings from core business activities and is a better 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 earnings per common share (basic)” means the net operating income divided by the basic average common shares
outstanding at the end of period.
“operating earnings per common share (diluted)” means the net operating income divided by the diluted average common shares
outstanding at the end of period. the Company believes that excluding the impact of the share based compensation re-measurement
amount from operating earnings per share (diluted) is a better indicator of core operating performance.
“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.
“share based compensation re-measurement amount” means the impact of revaluation of stock option liability as required under
IfrS due to the cash settlement option. the Company believes that excluding this impact from operating earnings per share (diluted) is
a better indicator of core operating performance.
“workout penetration” means the ratio (expressed as a percentage) of the number of total workouts approved, including shortfall
sales, over total workout opportunities. total workout opportunities include all new and re-delinquencies reported plus total workouts
approved over the same period. workout penetration ratio measures the number of workouts performed relative to the number of
existing workout opportunities and is used to assess the success of the loss mitigation homeowner’s assistance program.
the Company’s full glossary is posted on the Company’s website at http://investor.genworthmicanada.ca.
54
genwo rth MI C anada I nC. 20 14 annUa L rep ort
Genworth MI Canada Inc.
Consolidated financial Statements
(In Canadian dollars)
Years ended december 31, 2014 and 2013
56
Management statement on responsibility for
financial reporting
57 Independent auditors’ report
58 Consolidated statements of financial position
59 Consolidated statements of income
60 Consolidated statements of comprehensive income
61
Consolidated statements of changes in equity
62 Consolidated statements of cash flows
63 Notes to consolidated financial statements
genwor th MI Ca na da InC. 2014 annUa L report
55
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.
Stuart Levings
president and Chief executive officer
Philip Mayers
Senior vice-president and Chief financial officer
toronto, Canada
56
genwo rth MI C anada I nC. 20 14 annUa L 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, 2014 and 2013, 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, 2014 and 2013, 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 9, 2015
toronto, Canada
genwor th MI Ca na da InC. 2014 annUa L report
57
Consolidated statements of financial position
(In thousands of Canadian dollars)
Assets
Cash and cash equivalents
Short-term investments
accrued investment income and other receivables
derivative financial instruments
Bonds and debentures
Bonds and debentures under securities lending program
equity investments
equity investments under securities lending program
Collateral receivable under reinsurance agreement
total invested assets, accrued investment income and other receivables
Income taxes recoverable
Subrogation recoverable
prepaid assets
property and equipment
Intangible assets
deferred policy acquisition costs
goodwill
total assets
Liabilities and shareholders’ equity
Liabilities:
accounts payable and accrued liabilities
Loss reserves
Income taxes payable
Share-based compensation liabilities
derivative financial instruments
Long-term debt
Unearned premium reserves
accrued net benefit liabilities under employee benefit plans
deferred tax liabilities
total liabilities
Shareholders’ equity:
Share capital
retained earnings
accumulated other comprehensive income
total shareholders’ equity
total liabilities and shareholders’ equity
(1) Refer to note 21 for a presentation of assets and liabilities expected to be recovered or settled after 12 months.
See accompanying notes to the consolidated financial statements.
on behalf of the Board:
notes
December 31, december 31,
2014(1)
2013(1)
9
9
9
9
9
9
9
6(e)
6(c)
15
6(d)
17
6(b)
14
9
19
6(a)
13
10
18
$ 190,375
84,933
30,099
303
4,630,169
367,190
106,703
63,753
28,446
$ 213,692
39,649
31,561
—
4,694,002
243,141
184,422
—
28,482
5,501,971
5,434,949
6,465
66,976
2,924
1,335
7,461
172,289
11,172
—
75,454
3,136
735
7,314
158,427
11,172
$ 5,770,593
$ 5,691,187
$
41,557
115,493
—
16,764
23,298
432,137
1,798,568
36,307
35,122
$
31,219
117,388
224,810
14,317
2,668
422,767
1,723,768
26,519
40,413
2,499,246
2,603,869
1,384,558
1,701,707
185,082
1,408,213
1,555,062
124,043
3,271,347
3,087,318
$ 5,770,593
$ 5,691,187
Brian Hurley
director
58
Brian Kelly
director
genwo rth MI C anada I nC. 20 14 annUa L rep ort
Consolidated statements of income
(In thousands of Canadian dollars, except per share amounts)
Years ended december 31
premiums written
premiums earned
Losses on claims
expenses:
premium taxes and underwriting fees
employee compensation
office
professional fees
promotional and travel
other
total expenses
net change in deferred policy acquisition costs
net expenses
net underwriting income
Investment income:
Interest
dividends
net investment gains
total investment income
general investment expenses
Interest expense
fee on early redemption of long-term debt
Income before income taxes
Income taxes:
Current
deferred
net income attributable to owners of the Company
earnings per share:
Basic
diluted
See accompanying notes to the consolidated financial statements.
notes
6(a)(e)
6(a)(e)
6(b)
2014
2013
$ 639,761
$ 511,844
$ 564,961
$ 573,217
111,110
141,867
49,417
44,063
16,275
4,382
5,667
1,473
121,277
(13,862)
107,415
346,436
171,582
6,010
21,875
199,467
(4,345)
195,122
23,686
7,249
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
—
510,623
511,087
137,536
(3,457)
134,079
375,902
(239,472)
136,430
$ 376,544
$ 374,657
$
$
3.97
3.97
$
$
3.86
3.86
6(d)
19
19
10
20
genwor th MI Ca na da InC. 2014 annUa L report
59
Consolidated statements of comprehensive income
(In thousands of Canadian dollars)
Years ended december 31
net income
other comprehensive income (loss):
Items that will not be reclassified subsequently to income:
re-measurement of employee benefit obligations,
net of income tax of $1,834 (2013 – $899)
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 $24,919 (2013 – $27,057)
gains on afS financial assets realized and reclassified to income,
net of income tax of $3,718 (2013 – $9,510)
total other comprehensive income (loss) for the period attributable to owners
of the Company, net of income tax of $19,367 (2013 – $35,668)
total comprehensive income attributable to owners of the Company
See accompanying notes to the consolidated financial statements.
2014
2013
$ 376,544
$ 374,657
(5,079)
2,518
71,743
(71,666)
(10,704)
(25,187)
55,960
(94,335)
$ 432,504
$ 280,322
60
genwo rth MI C anada I nC. 20 14 annUa L rep ort
Consolidated statements of changes in equity
(In thousands of Canadian dollars, except per share amounts)
Balance at January 1, 2014
Comprehensive income:
net income
other comprehensive income
total comprehensive income
Share
capital
Retained
earnings
Accumulated
other
comprehensive
income
Total
shareholders’
equity
$ 1,408,213
$ 1,555,062
$ 124,043
$ 3,087,318
—
—
—
376,544
—
376,544
—
55,960
55,960
376,544
55,960
432,504
total transactions recognized directly in equity:
dividends on common shares(1)
Issuance of common shares
repurchase of common shares (note 18)
re-measurement of employee benefit obligations, net of income tax
total transactions recognized directly in equity
—
4,186
(27,841)
—
(177,652)
—
(47,168)
(5,079)
(23,655)
(229,899)
—
—
—
5,079
5,079
(177,652)
4,186
(75,009)
—
(248,475)
Balance at December 31, 2014
$ 1,384,558
$ 1,701,707
$ 185,082
$ 3,271,347
Balance at January 1, 2013
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 (loss)
total
shareholders’
equity
$ 1,463,612
$ 1,352,456
$ 220,896
$ 3,036,964
—
—
—
374,657
—
374,657
—
(94,335)
(94,335)
374,657
(94,335)
280,322
—
2,500
(57,899)
—
(127,368)
—
(47,201)
2,518
(55,399)
(172,051)
—
—
—
(2,518)
(2,518)
(127,368)
2,500
(105,100)
—
(229,968)
repurchase of common shares (note 18)
re-measurement of employee benefit plan obligations, net of income tax
total transactions recognized directly in equity
Balance at december 31, 2013
$ 1,408,213
$ 1,555,062
$ 124,043
$ 3,087,318
(1)
The Company paid dividends of $0.35 per ordinary common share in the first, second and third quarters of 2014 and $0.39 per common share in the fourth quarter of 2014 and a special
dividend of $0.43 per ordinary common share in the fourth quarter of 2014 ($0.32 per ordinary common share in the first, second and third quarters of 2013 and $0.35 per common share in
the fourth quarter of 2013).
See accompanying notes to the consolidated financial statements.
genwor th MI Ca na da InC. 2014 annUa L report
61
Consolidated statements of cash flows
Genworth MI Canada Inc.
(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
Share-based compensation expense
Change in non-cash balances related to operations:
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:
net proceeds from issuance of long-term debt
repayment of long-term debt
dividends paid
repurchase of common shares
proceeds from exercise of stock options
net cash used in financing activities
Investing activities:
purchase of short-term investments
proceeds from sale or maturities of short-term investments
purchase of bonds
proceeds from sale or maturities of bonds
purchase of equity investments
proceeds from sale of equity investments
purchase of intangible assets and property and equipment
net cash generated from (used in) investing activities
decrease in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
See accompanying notes to the consolidated financial statements.
2014
2013
$ 376,544
$ 374,657
3,638
53,050
134,079
(171,582)
(6,010)
(21,875)
23,686
6,305
397,835
—
(1,155)
—
211
8,478
(66,912)
7,787
(1,895)
74,800
2,830
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
421,979
261,942
184,615
6,057
(21,598)
(390,013)
(1,752)
199,288
158,635
(150,000)
(177,652)
(75,009)
1,924
(242,102)
190,523
9,722
(22,505)
(72,243)
(1,178)
366,261
—
—
(127,368)
(105,100)
1,888
(230,580)
(317,096)
271,812
(1,371,268)
1,405,182
(58,126)
93,378
(4,385)
(182,470)
232,835
(1,672,158)
1,283,327
(85,739)
257,360
(3,000)
19,497
(169,845)
(23,317)
213,692
(34,164)
247,856
$ 190,375
$ 213,692
62
genwo rth MI C anada I nC. 201 4 annUa L rep ort
notes to Consolidated financial Statements
(In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2014 and 2013
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 57.3% of the
common shares of the Company.
the Company holds a 100% ownership interest in the holding companies genworth Canada holdings I Company (“holdings I”),
formerly genworth Canada holdings I Limited, genworth Canada holdings II Company (“holdings II”), formerly genworth Canada
holdings II Limited and MIC holdings f Company (“fco”). during the year ended december 31, 2014, MIC holdings e Company
(“eco”) 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 year ended
december 31, 2014 reflect the consolidation of the Company and these subsidiaries. additional information on the reporting and
consolidation structure is disclosed in note 11(b).
the Insurance Subsidiary is engaged in mortgage insurance in Canada and owns all of the issued and outstanding shares of MIC
Insurance Company Canada (“MICICC”), formerly pMI Mortgage Insurance Company. MICICC is licensed to service policies
originated prior to its acquisition by the Company in 2012, and underwrite reinsurance limited to the class of mortgage insurance.
the Insurance Subsidiary and MICICC are regulated by the office of the Superintendent of financial Institutions Canada (“oSfI”) as
well as applicable provincial financial services regulators.
effective January 1, 2013, the Company is subject to regulation under the protection of residential Mortgage or hypothecary
Insurance act (“prMhIa”), a legislative framework that replaced the government guarantee agreement. Under the terms of
prMhIa, the Canadian federal government guarantees the benefits payable under eligible mortgage insurance policies issued by
the Company, less 10% of the original principal amount of each insured loan, in the event that the Company fails to make claim
payments with respect to that loan due to its bankruptcy or insolvency. this level of guarantee remains unchanged from the level of
guarantee provided under the government guarantee agreement.
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 9, 2015.
(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) Subrogation rights related to real estate included in subrogation recoverable are measured at the fair value of the real estate
assets at the reporting date less costs for obtaining the rights to and selling the real estate;
(iii) derivative financial instruments, which are comprised of foreign currency forwards, cross currency interest rate swaps, and
equity total return swaps are measured at fair value;
(iv) accrued benefit liabilities under employee benefit plans are recognized at the present value of the defined benefit obligations;
(v) Liabilities for cash-settled share-based compensation are measured at fair value; and
(vi) Loss reserves and borrower recoveries included in subrogation recoverable are discounted and include an actuarial margin for
adverse deviation.
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notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2014 and 2013
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 date of the consolidated financial statements
and the reported amounts of income and expenses during the year. actual results may differ from estimates made. See note 5 for a
description of the significant judgments and estimates made by the Company.
3. Significant accounting policies
(a) Basis of consolidation
(i) Business combinations:
Business combinations are accounted for using the acquisition method as at the acquisition date, when control is transferred to
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 11(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.
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(ii) risk fee:
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 excluding assumed reinsurance
premiums. the Company records the risk fee in premium taxes and underwriting fees in the consolidated statements 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.
(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
appointed 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:
Subrogation rights related to real estate are carried in subrogation recoverable at the fair value of the real estate assets less
costs for obtaining the rights to and selling the real estate.
estimated borrower recoveries related to claims paid and loss reserves are recognized in subrogation recoverable net of
estimated administrative fees associated with collection. Borrower recoveries are discounted to take into account the time
value of money and include an explicit margin for adverse deviation.
(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.
reinsurance premiums are taken into underwriting revenues over the terms of the related reinsurance agreements.
reinsurance premiums are reported in premiums written and premiums earned in the consolidated statements of income.
Unpaid reinsurance premiums, if any, are reported in accrued investment income and other receivables on the consolidated
statements 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.
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notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2014 and 2013
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 legally enforceable 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, 2014 and 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
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, 2014 and 2013, the Company classifies bonds and debentures, short-term
investments and equity investments in the afS financial asset category.
afS financial assets are recorded at fair value with changes in the fair value of these assets recorded in other comprehensive
income (“oCI”). 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 (“aoCI”) 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 or losses 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 19) and accounts payable and accrued
liabilities including balances due to the Company’s majority shareholder and companies under common control (note 11(c)).
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(d) Securities lending
the Company includes bonds and debentures and equity investments in its securities lending program. Securities lending
transactions are entered into on a fully collateralized basis. the transferred securities themselves are 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 statements 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 settle multiple financial derivative instruments on a net basis 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 liability based on the fair value of the individual instrument. derivative
financial instruments include foreign currency forwards, cross currency interest rate swaps and equity total return swaps.
Changes in fair value of derivative financial instruments are generally recognized in net investment gains or losses during the
period in which they arise. however, when an economic hedge relationship has been established between the derivative financial
instruments and certain expenses, the changes in fair value are recognized in expenses 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 shareholder’s 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.
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notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2014 and 2013
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 period to determine whether there is objective evidence
that it is impaired. a financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial
recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can
be estimated reliably.
objective evidence that financial assets are impaired include default or delinquency by the debtor, indications that the issuer
of a security will enter bankruptcy, economic conditions that correlate with defaults or the disappearance of an active market
for a security, a significant 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”).
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(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, the comparison of estimated recoverable amount to carrying amount is performed on the Company’s single
cash-generating unit (“CgU”), which is its mortgage insurance business. 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 difference relates to policy
reserves.
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
unused tax loss, tax credit or deductible temporary difference will be realized.
deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax liabilities and
assets and they relate to income taxes imposed by the same taxation authority for the same legal entity.
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notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2014 and 2013
3. Significant accounting policies (continued)
(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 adoption of IaS 19 (amended 2011) at January 1, 2013 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 statements 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.
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(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 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 liabilities are re-measured at each reporting date
and the settlement date. any changes in the fair value of the liabilities 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.
the Company economically hedges the impact of the change in fair value of its common shares by entering into equity total
return swaps. Changes in fair value of the total return swaps are recognized in employee compensation expense in the
statement of income.
(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 IfrSs.
IfrS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. the application of the new fair value measurement guidance had no 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 22.
(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.
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notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2014 and 2013
4. Changes in accounting standards
(a) Changes in accounting standards effective January 1, 2014
the following amendments to existing standards have been issued by the IaSB and are effective for annual periods beginning on or
after January 1, 2014.
(i) Amendment to IAS 32 – Financial instruments: presentation (“IAS 32”):
the amendment to IaS 32 clarifies the requirements relating to the offset of financial assets and financial liabilities. Specifically,
the amendment clarifies that an entity has a legally enforceable right to set-off if that right is not contingent on a future event
and 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 adoption of the amendments to IaS 32 did not have a material impact on the Company’s consolidated financial statements.
(ii) Amendment to IAS 36 – Impairment of assets (“IAS 36”):
the amendment to IaS 36 introduces additional disclosure requirements, which are applicable when the recoverable amount
of an asset or a CgU is measured at fair value less costs of disposal. these new disclosures include the fair value hierarchy,
key assumptions, and valuation techniques used which are in line with the disclosures required by IFRS 13 – Fair value
measurements. the amendment requires retrospective application.
the adoption of the amendments to IaS 36 did not have a material impact on the Company’s consolidated financial statements.
(iii) International Financial Reporting Interpretation Committee 21 – Levies (“IFRIC 21”):
IfrIC 21 addresses the issue of when to recognize a liability to pay a levy. the interpretation defines a levy, and specifies
that the obligating event that gives rise to the liability is the activity that triggers the payment of the levy, as identified by the
legislation. the interpretation provides guidance on how different levy arrangements should be accounted for, in particular, it
clarifies that neither economic compulsion nor the going concern basis of financial statement preparation implies that an entity
has a present obligation to pay a levy that will be triggered by operating in a future period. IfrIC 21 requires retrospective
application.
the adoption of IfrIC 21 did not have a material impact on the Company’s consolidated financial statements as the Company
has not incurred levies.
(b) Future accounting standards
the following new standards have been issued by the IaSB and are effective after december 31, 2014.
(i)
IFRS 9 – Financial instruments (“IFRS 9”):
IFRS 9, published in July 2014, replaces the existing guidance in IAS 39 – Financial instruments: recognition and measurement
(“IaS 39”). the new standard includes revised guidance on the classification and measurement of financial assets, including
impairment, and supplements the new hedge accounting principles published in 2013.
Recognition and derecognition:
IfrS 9 retains, largely unchanged, the requirements of IaS 39 relating to scope and recognition and derecognition of financial
instruments.
72
genwo rth MI C anada I nC. 20 14 annUa L rep ort
Classification and measurement of financial assets and financial liabilities:
financial assets that are debt instruments are classified and measured at amortized Cost, fair value through other
Comprehensive Income (“fvoCI”) or fvtpL based on the business model in which they are held and the characteristics of
their contractual cash flows. If classifying a debt instrument at amortized cost or fvoCI would create or enlarge an accounting
mismatch in income, an entity can make an irrevocable election to classify it at fvtpL if this would eliminate or reduce the
mismatch.
all equity investments are classified and measured at fvtpL. however, for an equity investment that is not held for trading, an
entity may elect to irrevocably present subsequent changes in fair value (including foreign exchange gains or losses) in oCI.
these changes in fair value are not subsequently reclassified to income under any circumstances.
IfrS 9 retains almost all of the existing requirements from IaS 39 for the classification and measurement of financial liabilities.
however, the gain or loss on a financial liability designated at fvtpL that is attributable to changes in an entity’s own credit risk
is presented in oCI, unless presentation in oCI creates or enlarges an accounting mismatch. Changes in fair value attributable
to a financial liability’s credit risk are not subsequently reclassified to income.
Impairment:
IfrS 9 replaces the “incurred loss” model in IaS 39 with an “expected loss” model. the new model applies to financial assets
that are not measured at fvtpL with the exception of equity investments. the model uses a dual measurement approach,
under which a loss allowance is measured as either 12-month expected credit losses or lifetime expected credit losses. the
measurement basis generally depends on whether there has been a significant increase in credit risk since initial recognition.
Hedge accounting:
the general hedge accounting requirements of IfrS 9 retain the three types of hedge accounting mechanisms in IaS 39.
however, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically
broadening the types of instruments that qualify as hedging instruments and the types of risk components of non-financial
items that are eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with the
principle of an “economic relationship”. retrospective assessment of hedge effectiveness is no longer required. the work on
macro hedging by the IaSB is still at a preliminary stage.
IfrS 9 is effective for annual periods beginning on or after January 1, 2018 with earlier adoption permitted.
the Company is currently evaluating the impact of IfrS 9 on its financial assets and financial liabilities.
(ii) 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 that 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.
during 2014, the IaSB conducted re-deliberations on the revised ed and made a number of key decisions to address concerns
and incorporate feedback of constituents and other stakeholders. the final standard is expected in 2015, with implementation
not expected before 2019.
the Company continues to monitor and assess the impact of adoption of the revised standard.
genwor th MI Ca na da In C . 2014 annUaL report
73
notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2014 and 2013
5. Significant judgments and estimates
(a) Judgments
Significant judgments made in applying accounting policies are as follows:
objective evidence of impairment of afS financial assets:
as of each 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.
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.
74
genwo rth MI C anada I nC. 20 14 annUa L rep ort
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 appointed actuary determines a discount rate based on the
market yield of the Company’s investment portfolio.
the Company recognizes a provision 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 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. refer to note 6 for sensitivity.
(iii) Subrogation recoverable:
the Company estimates the fair value of subrogation rights related to real estate included in subrogation recoverable based on
third party property appraisals or other types of third party valuations deemed to be more appropriate for a particular property.
the Company estimates borrower recoveries related to claims paid and loss reserves included in subrogation recoverable based
on historical recovery experience.
(iv) deferred policy acquisition costs:
deferred policy acquisition costs are comprised of premium taxes, appraisal costs, 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.
genwor th MI Ca na da In C . 2014 annUaL report
75
notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2014 and 2013
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 premiums
earned are as follows:
Unearned premium reserves, beginning of year
net premiums written during the year
net premium earned during the year
Unearned premium reserves, end of year
Key methodologies and assumptions:
2014
2013
$ 1,723,768
639,761
(564,961)
$ 1,785,141
511,844
(573,217)
$ 1,798,568
$ 1,723,768
premiums written are recognized as premiums earned using a factor-based premium recognition curve that is based on the
Company’s expected loss emergence pattern. the principal assumption underlying the formation of the premium recognition curve
is that the Company’s future claims development will follow a similar pattern to past claims emergence patterns. approximately
80% of the Company’s premiums written are recognized as premium earned within the first five years of policy inception based
on the current premium recognition curve. a shift in the Company’s loss emergence pattern could change the timing of the
Company’s recognition of earned premium and impact the Company’s financial performance for a period. the actuarial forecasting
technique used to establish the loss emergence pattern also incorporates economic assumptions that impact future losses and loss
development including unemployment rates, interest rates, and expected changes in house prices.
there is inherent risk that future economic conditions could differ, perhaps significantly, from the best estimates made.
the Company’s actuary performs a liability adequacy test on the Company’s unearned premium reserves using a dynamic
regression model that is in accordance with accepted actuarial practice. the purpose of the test is to ensure the unearned premium
liability at year end is sufficient to pay for future claims and expenses that may arise from unexpired insurance contracts. the
liability adequacy test for the years ended december 31, 2014 and 2013 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
the carrying value of loss reserves reflects the present value of expected claims costs and expenses and provisions for adverse
deviation and is considered to be an indicator of fair value. there is no ready market for the trading of loss reserves and the value
agreed between parties in an arm’s-length transaction may be materially different.
Loss reserves comprise the following:
Case reserves
Incurred but not reported reserves
discounting
provision for adverse deviation
Loss reserves
$
$
2014
75,178
35,365
(1,936)
6,886
2013
78,100
37,038
(2,238)
7,488
$ 115,493
$ 117,388
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genwo rth MI C anada I nC. 20 14 annUa L rep ort
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 (recoveries) on claims related to prior years
Loss reserves, end of year
Claims development:
2014
2013
$ 117,388
(113,005)
$ 139,398
(163,877)
118,498
(7,388)
132,299
9,568
$ 115,493
$ 117,388
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).
the following table demonstrates the development of the estimated loss reserves for the ten most recent default years.
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
total
Claims incurred
at the end of
the default year
$ 52,845 $ 70,994 $ 102,549 $ 148,493 $ 196,586 $ 175,189 $ 172,200 $ 143,388 $ 132,299 $ 118,498
Claims incurred
one year later
29,670
46,971 106,468
200,807
218,890
193,820
193,226
141,957
128,043
Claims incurred
two years later
30,542
54,352 112,224
204,706
247,663
217,034
196,377
140,572
Claims incurred
three years later
31,485
55,461 115,632
209,850
252,041
218,884
195,903
Claims incurred
four years later
31,431
56,072 115,816
212,615
255,282
218,088
Claims incurred
five years later
31,245
55,701 115,427
212,595
254,725
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Current estimate
of claims incurred $ 31,245 $
55,701 $ 118,344 $ 212,759 $ 254,725 $ 218,088 $ 195,903 $ 140,572 $ 128,043 $ 118,498 $ 1,473,878
Cumulative payments
to date
31,245
55,701 118,344
212,182
254,307
217,863
195,432
138,001
113,670
21,640 1,358,385
Current loss reserves $
— $
— $
— $
577 $
418 $
225 $
471 $
2,571 $ 14,373 $ 96,858 $ 115,493
Current estimate
of surplus
(deficiency)
$ 21,600 $ 15,293 $
(15,795) $ (64,266) $ (58,139) $
(42,899) $ (23,703) $
2,816 $
4,256 $
—
Surplus (deficiency)
of initial gross
loss reserve
41%
22%
(15)%
(43)%
(30)%
(24)%
(14)%
2%
3%
—
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.
genwor th MI Ca na da InC. 2014 annUa L report
77
notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2014 and 2013
6.
Insurance contracts (continued)
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.
Sensitivity:
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.
2014
Sensitivity factor
Claim frequency
Claim severity
Change in
assumptions
Impact on
income before
income taxes
Impact on
shareholders’
equity
+10%
-10%
+10%
-10%
$
(22,822)
22,822
(22,822)
22,822
$
(16,820)
16,820
(16,820)
16,820
78
genwo rth MI C anada I nC. 20 14 annUa L rep ort
(c) Subrogation recoverable
the following table presents movement in subrogation recoverable during the year:
Subrogation rights related to real estate, beginning of year
Subrogation rights related to real estate acquired as a result of settling claims, at fair value
Change in market value of real estate on hand
Subrogation rights related to real estate disposed of during the year
Subrogation rights related to real estate, end of year
Borrower recoveries, beginning of year
net estimated borrower recoveries recognized
Borrower recoveries received
Borrower recoveries, end of year
Subrogation recoverable, end of year
2014
2013
$
55,968
211,140
(10,168)
(210,745)
$
66,890
271,885
(14,719)
(268,088)
46,195
55,968
19,486
8,036
(6,741)
20,781
24,370
1,818
(6,702)
19,486
$
66,976
$
75,454
the Company applies an expected recovery rate 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
2014
2013
$ 158,427
66,912
(53,050)
$ 152,311
52,174
(46,058)
13,862
6,116
$ 172,289
$ 158,427
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 excluding assumed
reinsurance premiums as disclosed in note 3(b)(ii). the Company records the risk fee in premium taxes and underwriting fees in the
consolidated statements of income. the risk fee is a deferrable expense which is deferred and expensed in proportion to and over
the periods in which premiums are earned.
genwor th MI Ca na da InC. 2014 annUa L report
79
notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2014 and 2013
6.
Insurance contracts (continued)
(e) Reinsurance
effective december 1, 2013, the Company, through its indirect subsidiary MICICC, entered into a retrocession agreement (“the
agreement”) with a third party reinsurance company, 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 dollars within any one year up to a maximum exposure to the Company of
30,000 australian dollars less claims paid by the Company in prior years.
Under the agreement, the Company received premiums equal to 7% of the maximum exposure of 30,000 australian dollars in the
first year of coverage and 9% of the maximum exposure in the second and third years of coverage.
the term of the agreement was 3 years. genworth australia had the right to terminate the agreement after the first year of
coverage. the Company was required to collateralize its reinsurance obligations by posting collateral equal to the maximum
exposure of 30,000 australian dollars.
effective december 1, 2014, the agreement was terminated and replaced with a new agreement that has the same terms as
the terminated agreement except that premiums under the new agreement are equal to 6.75% of the maximum exposure of
30,000 australian dollars in the first year of coverage and 8.75% of the maximum exposure in the second and third years of
coverage. these premium rates are consistent with current reinsurance market rates.
during the year ended december 31, 2014, the Company recognized $2,086 of premiums and incurred no losses under the
reinsurance agreements (2013 – $171 of premiums recognized and no losses incurred).
as at december 31, 2014, the Company has posted collateral equal to the maximum exposure of 30,000 australian dollars,
equivalent to $28,446 under its reinsurance agreement (2013 – 30,000 Australian dollars, equivalent to $28,482). The collateral is
recorded as collateral receivable under reinsurance agreement on the Company’s consolidated statements of financial position.
re-measurement adjustments arising on translation of the collateral and any reinsurance receivable balances from australian dollars
to Canadian dollars are recognized in net investment gains (losses).
7. Financial risk management
during the year ended december 31, 2014, the Company developed and implemented an own risk and Solvency assessment
framework (“orSa”) in accordance with oSfI guideline e-19: own risk and Solvency assessment. the prime purpose of orSa
is for an insurer to identify material risks, and to assess the adequacy of its current and likely future capital needs and solvency
position relative to these risks. the implementation of orSa did not result in a significant change to the Company’s practices of
monitoring, evaluating and managing risks.
(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 have been no significant
changes to the Company’s insurance risk management policies at december 31, 2014 compared to december 31, 2013.
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.
80
genwo rth MI C anada I nC. 20 14 annUa L rep ort
(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:
the Company enforces a policy of actively managing and promptly settling claims in order to reduce exposure to unpredictable
future developments that can adversely impact losses.
the Company has two primary loss mitigation programs. the homeowner assistance program is designed to help
homeowners who are experiencing temporary financial difficulties that may prevent them from making timely payments on
their mortgages. Initiatives currently employed under the homeowner assistance program include capitalizing arrears, deferring
payments for a specified period, arranging a partial payment plan, and increasing a mortgage amortization period. the asset
Management program is designed to accelerate the conveyance of the rights to 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.
genwor th MI Ca na da In C . 2014 annUaL report
81
notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2014 and 2013
7. Financial risk management (continued)
(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
British Columbia
Quebec
other
$ 246,560
165,908
75,428
70,742
81,123
$ 639,761
2014
39%
26%
12%
11%
12%
$ 195,873
124,591
56,742
68,026
66,612
2013
38%
24%
11%
14%
13%
100%
$ 511,844
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 reinsurance agreements described in note 6(e). as at december 31,
2014, the Company has maximum liability exposure of 30,000 Australian dollars or $28,446 (2013 – 30,000 Australian dollars or
$28,482).
(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.
The total credit risk exposure at December 31, 2014 is $5,208,116 (2013 – $5,112,289) and comprises $84,933 (2013 – $39,649)
of short-term investments, $30,099 (2013 – $31,561) of accrued investment income and other receivables, $303 (2013 – nil) of
derivative financial instrument assets, $4,997,359 (2013 – $4,937,143) of bonds and debentures, $66,976 (2013 – $75,454) of
subrogation recoverable and $28,446 (2013 – $28,482) of collateral receivable under reinsurance agreement.
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 and poor’s, or Moody’s.
the breakdown of the Company’s bonds and debentures and short-term investments by credit rating is presented below.
Credit rating
aaa
aa
a
BBB
BB
82
2014
Amount
Carrying value
%
$ 1,946,510
1,098,982
1,690,528
346,272
—
$ 5,082,292
2013
Carrying value
%
38.9
20.4
33.4
7.1
0.2
amount
$ 1,935,374
1,016,365
1,664,517
353,199
7,337
38.3
21.6
33.3
6.8
—
100.0
$ 4,976,792
100.0
genwo rth MI C anada I nC. 20 14 annUa L rep ort
as at december 31, 2014, 93.2% of the Company’s investment portfolio was rated ‘a’ or better, compared to 92.7% at
december 31, 2013.
the Company did not hold any impaired financial assets at december 31, 2014 and 2013.
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 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
2014
$ 4,735,080
347,212
93.2%
6.8%
$ 4,829,666
147,126
2013
97.0%
3.0%
$ 5,082,292
100.0%
$ 4,976,792
100.0%
$ 2,752,370
1,142,371
252,453
240,940
694,158
54.1%
22.5%
5.0%
4.7%
13.7%
$ 2,696,097
1,280,776
310,682
229,607
459,630
54.2%
25.7%
6.3%
4.6%
9.2%
$ 5,082,292
100.0%
$ 4,976,792
100.0%
The Company has invested 22.5% (2013 – 24.7%) 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.
Derivative-related credit risk:
Credit risk from derivative transactions reflects the potential for the Company’s counterparty to its derivative transactions 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 toward the counterparty to such an agreement can be set off against obligations
such counterparty has toward 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 credit 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 exposure threshold. as at december 31, 2014 the Company’s
net derivative obligations were $22,995 (2013 – $2,668) and the Company has pledged a net amount of $22,418 (2013 – $3,108) of
Canadian federal government securities as collateral under the master derivative agreements. the Company had minimal derivative-
related credit risk at December 31, 2014 (2013 – nil) as the majority of its derivative financial instruments were in a liability position.
genwor th MI Ca na da InC. 2014 annUa L report
83
notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2014 and 2013
7. Financial risk management (continued)
(c) Liquidity risk/maturity analysis
Liquidity risk is the risk of having insufficient cash resources to meet financial commitments and policy obligations as they fall due
without raising funds at unfavourable rates or selling assets on a forced basis.
Liquidity risk arises from the Company’s general business activities and in the course of managing its assets, liabilities and
externally imposed capital requirements (note 8). the liquidity requirements of the Company’s business have been met primarily by
funds generated from operations including investment 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 its invested
assets in liquid securities. At December 31, 2014, the Company has cash and cash equivalents of $190,375 (2013 – $213,692) and
short-term investments of $84,933 (2013 – $39,649).
the table presented 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
2014
2013
$ 546,316
$ 1,208,632
$ 1,269,674
$ 1,418,274
$ 639,396
$ 5,082,292
$ 734,901
$ 1,262,241
$ 1,120,057
$ 1,339,983
$ 519,610
$ 4,976,792
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
2014:
non-derivative financial liabilities:
accounts payable and
accrued liabilities
Loss reserves (at
actuarial present value)
Long-term debt
derivative financial liabilities:
2013:
non-derivative financial liabilities:
accounts payable and
accrued liabilities
Loss reserves (at
actuarial present value)
Long-term debt
derivative financial liabilities:
$
41,557
$
—
$
—
$
—
$
—
$
41,557
58,413
—
57,080
—
—
—
—
435,000
derivative financial instruments
—
8,678
1,192
13,349
$
31,219
$
—
$
—
$
—
$
—
$
31,219
67,034
—
50,354
150,000
—
—
—
275,000
derivative financial instruments
15
—
362
2,291
—
—
79
115,493
435,000
23,298
—
—
—
117,388
425,000
2,668
84
genwo rth MI C anada I nC. 20 14 annUa L rep ort
(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.
(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, 2014, 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
$178,000, representing 3.50% of the $5,082,292 fair value of these investments, and decrease the value of loss reserves by
$896. 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 $192,000 representing 3.78% of the fair value, and increase the value
of loss reserves by approximately $913.
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.
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, 2014, the Company had a total investment in common shares of $170,456. Management estimates that
a 10% increase in the equity price index would increase the market value of the common shares by $12,102 and that a 10%
decrease in the equity price index would decrease the market value of the common shares by the same amount.
as at december 31, 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.
the Company has 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 collateral pledged under its reinsurance agreement denominated in australian dollars. the Company uses foreign
exchange forward contracts and cross currency interest rate swaps to mitigate currency risk.
genwor th MI Ca na da InC. 2014 annUa L report
85
notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2014 and 2013
7. Financial risk management (continued)
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 and debentures denominated in U.S. dollars(1)
$
total financial assets exposed to currency risk
Less: foreign exchange forward contract notional amount
Less: cross currency interest rate swap notional amount
derivative financial instrument notional amount
total net currency exposure on financial assets
2014
28,446
347,212
375,658
254,607
120,558
375,165
$
2013
28,482
147,126
175,608
175,790
—
175,790
$
493
$
(182)
(1) Bonds and debentures denominated in U.S. dollars consists of $229,870 of emerging market debt and $117,342 of collateralized loan obligations (“CLOs”).
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 financial strength credit rating, to support its claim-paying ability and to maximize returns to shareholders over
the long term.
the Insurance Subsidiary is a regulated insurance company governed by prMhIa and 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 prMhIa and the act. the act limits dividends to shareholders under certain circumstances.
Under prMhIa and the act, the Insurance Subsidiary is required to meet a minimum capital test (“MCt”) to support its outstanding
mortgage insurance in force. the MCt ratio is calculated based on methodology prescribed by oSfI. the statutory minimum is
100% and the department of finance has established an MCt ratio of 175% for the Insurance Subsidiary under prMhIa in order
for the Insurance Subsidiary to be able to write new business (2013 – 175%). In addition, the Company has established an internal
capital ratio target for the Insurance Subsidiary of 185% (2013 – 185%).
In June 2013, oSfI communicated that it has commenced an internal process aimed at developing a new capital framework
for mortgage insurers expected to be effective in 2017. the Company regularly reviews its capital levels and, after reviewing
stress testing results and consulting with oSfI, the Company established an operating MCt holding target of 220%, pending the
development of the new capital framework for mortgage insurers. while the Company’s internal capital target of 185% is calibrated
to cover the various risks that the business would face in a severe recession, the holding target of 220% MCt is designed to
provide a capital buffer to allow management time to take necessary actions should capital levels be pressured by deteriorating
macroeconomic conditions.
In September 2014, oSfI published an interim MCt guideline for mortgage insurers effective January 1, 2015. this guideline was
developed by adjusting the 2015 MCt guideline applicable to property and Casualty insurers to reflect the specific characteristics of
the mortgage insurance business until the new capital framework for mortgage insurers is developed. the implementation of the
interim MCt guideline in 2015 will not have a significant impact to the Company’s MCt.
As at December 31, 2014, the Insurance Subsidiary had an MCT ratio of 225% (2013 – 223%) and has complied with regulatory and
internal capital requirements as well as its MCt holding target.
In addition to requirements to maintain specified levels of capital, to measure the degree to which the Insurance Subsidiary is able
to meet regulatory requirements, the Company’s actuary must present an annual dynamic Capital adequacy test to the Board of
directors and management on the Insurance Subsidiary’s current and future solvency under various projected scenarios.
the Company’s Board of directors has adopted a capital management policy for the Company and the Insurance Subsidiary. the
policy identifies sources of capital, establishes a capital adequacy target and capital holding 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.
86
genwo rth MI C anada I nC. 20 14 annUa L rep ort
9.
Investments
the investments presented in the table below are carried at fair value:
December 31, 2014
december 31, 2013
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
government
Corporate bonds and
debentures:
financial
energy
Infrastructure
all other sectors
asset backed bonds(2)
total afS bonds and
$ 135,628 $ 135,628 $
54,747
54,747
190,375
190,375
84,933
84,933
84,933
84,933
—
—
—
—
—
2.5 $ 194,372 $ 194,372 $
1.0
19,320
19,320
3.5
213,692
213,692
1.6
1.6
39,649
39,649
39,649
39,649
—
—
—
—
—
3.6
0.4
4.0
0.7
0.7
1,769,540
1,696,877
72,663
32.5
1,809,970
1,766,510
43,460
33.7
897,897
829,461
68,436
16.5
846,478
811,667
2,667,437
2,526,338
141,099
49.0
2,656,448
2,578,177
1,142,371
252,453
240,940
568,746
1,096,582
234,335
226,616
532,185
45,789
18,118
14,324
36,561
2,204,510
125,412
2,089,718
119,930
114,792
5,482
21.0
4.6
4.5
10.4
40.5
2.3
1,280,776
310,682
229,607
451,382
1,227,442
300,509
220,788
442,795
2,272,447
8,248
2,191,534
8,076
34,811
78,271
53,334
10,173
8,819
8,587
80,913
172
15.7
49.4
23.8
5.8
4.3
8.4
42.3
0.2
debentures
4,997,359
4,735,986
261,373
91.8
4,937,143
4,777,787
159,356
91.9
equity investments:
energy
financial
Communications
all other sectors
total afS equity
investments
28,756
45,074
16,562
80,064
26,924
37,088
14,823
63,821
1,832
7,986
1,739
16,243
0.5
0.8
0.3
1.5
38,322
46,662
21,432
78,006
34,006
41,432
16,551
68,866
4,316
5,230
4,881
9,140
170,456
142,656
27,800
3.1
184,422
160,855
23,567
0.7
0.9
0.4
1.4
3.4
total investments
$ 5,443,123 $ 5,153,950
289,173(3)
100.0 $ 5,374,906 $ 5,191,983
182,923(3)
100.0
(1)
As at December 31, 2014, Canadian federal government bonds includes $22,418 in collateral posted for the benefit of the Company’s counterparties to its derivative financial
instrument contracts, as described in the derivative financial instruments section of note 9. As at December 31, 2013, Canadian federal government treasury bills included $3,108 in
collateral posted for the benefit of the Company’s cournterparties to its derivative financial instrument contracts.
(2)
As at December 31, 2014, asset backed bonds includes $117,342 of collateralized loan obligations (December 31, 2013 – nil).
(3) Unrealized gains include unrealized foreign exchange gains of $30,044 as at December 31, 2014 (December 31, 2013 – $6,034).
genwor th MI Ca na da InC. 2014 annUa L report
87
notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2014 and 2013
9.
Investments (continued)
the fair value of investments, excluding equity investments and cash and cash equivalents, are shown by contractual maturity of
the investment.
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 asset backed bonds:
1 year or less
1–3 years
3–5 years
5–10 years
over 10 years
2014
2013
$ 288,499
675,912
768,565
777,605
241,789
$ 439,368
760,917
531,238
746,184
218,390
2,752,370
2,696,097
257,817
532,720
501,109
640,669
397,607
295,533
501,324
588,819
593,799
301,220
2,329,922
2,280,695
$ 5,082,292
$ 4,976,792
(a) Investments denominated in foreign currencies
Corporate bonds and debentures and asset backed bonds include $229,870 (2013 – $147,126) of emerging market bonds and
$117,342 of collateralized loan obligations (“CLOs”) (2013 – nil) denominated in U.S. dollars. The CLOs are structured credit
securities, collateralized by U.S. bank loans with an average aa credit rating, that pay interest based on floating interest rates
indexed to the London Interbank offered rate.
the emerging market bonds and CLos are classified as afS and changes in the fair value of the investments are recorded in oCI.
re-measurement adjustments arising on translation of the investments 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, subject to exposure limits specified within the Company’s investment policy guidelines, which
have been approved by the Board of directors.
the Company uses derivative financial instruments in the form of foreign currency forwards and cross currency interest rate swaps
to mitigate foreign currency risk associated with bonds denominated in U.S. dollars and reinsurance collateral denominated in
australian dollars. foreign currency forwards and cross currency interest rate swaps are contractual obligations to exchange one
currency for another at a predetermined future date.
88
genwo rth MI C anada I nC. 20 14 annUa L rep ort
total
2013
the following table shows the fair value and notional amounts of the derivative financial instruments by terms of maturity, in
Canadian dollars:
2014
foreign currency forwards(1)
Cross currency interest rate swaps(1)
equity total return swaps(2)
$
Net
fair value
(14,902)
(8,249)
156
$
1 year
or less
29,322
—
—
1–3
years
3–5
years
Over 5
years
Total
$
5,752
120,558
—
$ 16,500
—
—
$ 203,033
—
—
$ 254,607
120,558
—
Notional amount
$
(22,995)
$
29,322
$ 126,310
$ 16,500
$ 203,033
$ 375,165
Net
fair value
1 year
or less
foreign currency forwards(1)
Cross currency interest rate swaps
$
(2,668)
—
$
28,500
—
$
total
$
(2,668)
$
28,500
$
notional amount
3–5
years
Over 5
years
total
$ 13,710
—
$ 133,580
—
$ 175,790
—
$ 13,710
$ 133,580
$ 175,790
1–3
years
—
—
—
(1)
As at December 31, 2014, foreign currency forwards includes $15,049 derivative financial instrument liabilities and $147 derivative financial instrument assets. (December 31, 2013
– all foreign currency forwards were in a liability position). As at December 31, 2014, all cross currency interest rate swaps were in a liability position.
(2) Details of equity total return swaps are disclosed in note 14.
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, 2014, the Company had posted collateral of $22,418 in the
form of Canadian federal government bonds for the benefit of its counterparties to the foreign currency forwards and cross
currency interest rate swaps (2013 – $3,108 in the form of Canadian federal government treasury bills posted for the benefit of
counterparties to the foreign currency forwards).
(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, in the form of U.S. or Canadian government securities, 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, dividends 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.
during the year ended december 31, 2014, the Company added equity investments to its securities lending program.
As at December 31, 2014, the Company had loaned AFS bonds and debentures with a fair value of $367,190 (2013 – $243,141)
and equity investments with a fair value of $63,753 (2013 – nil) and has accepted eligible securities as collateral with a fair value of
$455,029 (2013 – $257,443).
genwor th MI Ca na da InC. 2014 annUa L report
89
notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2014 and 2013
10. 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 charged (credited) to oCI comprise the following:
Income taxes related to net gains or losses on
afS financial assets
Income taxes related to re-measurement
of employee benefit plan obligations
total income taxes charged (credited) in oCI
2014
2013
$ 137,605
(69)
$ 375,370
532
137,536
375,902
(3,816)
359
(3,457)
(241,561)
2,089
(239,472)
$ 134,079
$ 136,430
2014
2013
$
21,201
$
(36,567)
(1,834)
899
$
19,367
$
(35,668)
Income taxes reflect an effective tax rate that differs from the statutory tax rate for the following reasons:
Income before income taxes
Combined basic Canadian federal
and provincial income tax rate
Income tax expense based on statutory rate
Increase (decrease) in income tax resulting from:
non-taxable income
effect of increase in income tax rates on deferred income taxes
other
Income tax expense
2014
2013
$ 510,623
$ 511,087
26.30%
26.30%
$ 134,294
$ 134,416
(343)
359
(231)
(220)
2,089
145
$ 134,079
$ 136,430
the difference in the effective income tax rate of 26.26%, implicit in the $134,079 provision for income taxes in 2014 from the
Company’s statutory income tax rate of 26.30%, was primarily attributable to non-taxable dividend income and adjustments relating
to prior years, partially offset by non-deductible share-based compensation expenses and a higher income tax rate applicable to
deferred income.
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.
90
genwo rth MI C anada I nC. 20 14 annUa L rep ort
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
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
recovery for the year
oCI recovery for the year
Balance, end of year
2014
2013
$
11,917
1,666
10,079
916
24,578
(1,619)
(56,002)
(2,079)
(59,700)
$
8,949
1,714
9,149
34
19,846
(1,896)
(56,041)
(2,322)
(60,259)
$
(35,122)
$
(40,413)
$
2014
40,413
(3,457)
(1,834)
2013
$ 296,298
(239,472)
(16,413)
$
35,122
$
40,413
all deferred tax assets have been recognized as at december 31, 2014 and 2013 because management has assessed it is probable
that future taxable profits will be available against which the deferred tax benefits can be utilized.
genwor th MI Ca na da InC. 2014 annUa L report
91
notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2014 and 2013
11. 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 personnel’s compensation includes base salary and performance-based compensation consisting of short-term
incentive compensation and long-term share-based compensation benefits, retirement benefits and executive allowances.
Short-term incentive compensation is dependent on the Company’s performance against metrics that have been approved by
the Company’s Board of directors and each manager’s performance 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 14). 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 personnel in excess of the amounts payable under the Company’s registered
defined contribution plan. In the year ended december 31, 2014, the Company added a compensation recoupement policy to its
incentive compensation plans, providing for the full or partial forfeiture and recoupement of incentive compensation awarded and
outstanding or paid to incentive compensation plan participants, including key management personnel. this policy will be applied at
the discretion of the Board of directors in circumstances that may include a material financial restatement, other than a restatement
caused by a change in applicable accounting rules or interpretations, the result of which was that any incentive compensation
provided to senior executives or officers would have been a lower amount had it been calculated based on such restated results,
or where a participant has been determined by the Board of directors to have engaged in misconduct, regardless of the need for a
financial restatement.
the Company has standard policies in place to cover various forms of termination. Key management personnel 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 as cash.
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 Initial public offering 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 (2013 – seven key management
personnel and six independent directors) is comprised of the following:
Short-term employee benefits
post-employment benefits
Share-based compensation
termination benefits
director fees
total compensation
$
$
2014
4,911
700
2,207
—
617
$
8,435
$
2013
4,397
697
3,411
—
548
9,053
92
genwo rth MI C anada I nC. 20 14 annUa L rep ort
(b) Interest in consolidated subsidiaries
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
type of ownership
ownership interest
genworth Canada holdings I Company
(“holdings I”)
genworth Canada holdings II Company
(“holdings II”)
MIC holdings f Company (“fco”)
genworth financial Mortgage Insurance Company
Canada (“the Insurance Subsidiary”)
MIC Insurance Company
Canada (“MICICC”)
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 the ability 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 MICICC are regulated insurance companies governed by the provisions of the Insurance Company
act (“the act”), which is administered by oSfI. the Insurance Subsidiary is also subject to legislation under prMhIa.
as such, these investees are subject to certain requirements and restrictions contained in prMhIa and the act. the Investees are
required under the act to meet an MCt to support their outstanding mortgage insurance policies in force. In addition, internal capital
ratio targets and capital holding targets have been established for the Insurance Subsidiary by the Board of directors with which it
must comply (note 8). accordingly, the payment of dividends and other distributions by the Insurance Subsidiary to the Company
are subject to compliance with MCt internal capital ratio targets, MCt holding targets and other applicable regulatory requirements.
(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 its subsidiaries 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 $5,247 for the year ended december 31, 2014, recorded in office expenses in
the consolidated statements of income (2013 – $5,673). The balance payable for related party services at December 31, 2014 is
$317 (2013 – $312) and is reported in accounts payable and accrued liabilities in the consolidated statements of financial position.
During the year ended December 31, 2014, the Company repurchased 1,873,023 (2013 – 3,903,117) of its own common shares for
cancellation on the open market for an aggregate purchase price of $75,000 (2013 – $105,000). Genworth Financial Inc., through
its subsidiaries, participated proportionately in the share purchase transaction and maintained a 57.3% (2013 – 57.4%) ownership
interest in the Company. See note 18 for additional disclosure on the share repurchase transactions.
effective december 1, 2014, the Company, through its indirect subsidiary MICICC, entered into a retrocession agreement with a
third party reinsurance company under which the Company assumed reinsurance risk for approximately 25% of the retroceded
liabilities on claims paid by genworth australia in excess of 700,000 australian dollars within any one year up to a maximum
exposure to the Company of 30,000 australian dollars, less claims paid by the Company in prior years. additional information about
the reinsurance transaction is disclosed in note 6(e).
genwor th MI Ca na da InC. 2014 annUa L report
93
notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2014 and 2013
12. Commitments
the Company’s commitments comprise 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, 2014 and 2013 are as follows:
Less than 1 year
Later than 1 year but less than 5 years
2014
2,542
4,080
$
6,622
$
2013
2,347
5,456
7,803
$
$
Lease payments recognized as an expense for the year ended December 31, 2014 were $3,127 (2013 – $3,087).
13. Employee benefit plans
defined contribution pension benefit plan:
the Company’s eligible employees participate in a registered defined contribution pension plan. the plan has no vesting period.
employees are entitled to accumulated pension benefits 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 defined contribution pension plan is subject to regulation under the pension Benefits act (ontario) and the Canadian Income
tax act.
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 Serp has no vesting period. employees
eligible for Serp participation are entitled to accumulated pension benefits immediately upon hire. 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 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.
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, 2014 and 2013 are
based on plan membership data as at the respective period ends. the weighted average duration of the Serp is 22 years. for
the non-pension post retirement benefits, actuarial valuations for the years ended december 31, 2014 and 2013 are based on plan
membership data as at august 1, 2012. the weighted average duration of the non-pension post-retirement benefit plan is 27 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.
94
genwo rth MI C anada I nC. 20 14 annUa L rep ort
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:
2014
Serp
2013
non-pension
post-retirement benefits
total
benefit liabilities
2014
2013
2014
2013
accrued net benefit liabilities under
employee benefit plans
$
19,908
$
13,830
$
16,399
$ 12,689
$
36,307
$
26,519
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
2014
Serp
2013
non-pension
post-retirement benefits
total
benefit liabilities
2014
2013
2014
2013
$
14,738
$
9,332
$
14,278
$ 10,974
$
29,016
$
20,306
5,170
4,498
2,121
1,715
7,291
6,213
employee benefit plans
$
19,908
$
13,830
$
16,399
$ 12,689
$
36,307
$
26,519
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
2014
Serp
2013
non-pension
post-retirement benefits
2014
2013
2014
$
$
705
—
$
870
—
$
1,179
—
1,200
—
$
$
1,884
—
687
1,392
2,646
675
1,545
2,567
630
1,809
—
606
1,806
—
1,317
3,201
2,646
total
benefits
2013
2,070
—
1,281
3,351
2,567
total pension and non-pension
post-retirement benefit expense
for the year
$
4,038
$
4,112
$
1,809
$
1,806
$
5,847
$
5,918
the actuarial losses recognized in the consolidated statements of comprehensive income relating to the Serp are $4,905 for the
year ended December 31, 2014 (2013 – actuarial gains of $2,364). The actuarial losses recognized in the consolidated statements of
comprehensive income relating to the non-pension post-retirement benefits are $2,008 (2013 – actuarial gains of $1,052).
genwor th MI Ca na da InC. 2014 annUa L report
95
notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2014 and 2013
13. Employee benefit plans (continued)
Changes in the estimated financial positions of the Serp and non-pension post-retirement benefits are as follows:
2014
Serp
2013
non-pension
post-retirement benefits
total
benefit liabilities
2014
2013
2014
2013
$
13,830
$
14,728
$
12,689
$ 11,991
$
26,519
$
26,719
705
870
1,179
1,200
1,884
2,070
687
—
(219)
675
—
(79)
630
—
(107)
606
1,317
1,281
—
(56)
—
—
(326)
(135)
4,905
(2,364)
2,008
(1,052)
6,913
(3,416)
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
employee benefit plans
$
19,908
$
13,830
$
16,399
$ 12,689
$
36,307
$
26,519
the actuarial gains or losses categorized between experience gains or losses and changes in assumptions are presented in the
following table:
actuarial losses (gains):
experience losses (gains)
Changes in assumptions:
financial assumptions
demographic assumptions
total changes in assumptions
2014
Serp
2013
non-pension
post-retirement benefits
total
benefit liabilities
2014
2013
2014
2013
$
1,210
$
(966)
$
(46)
$
58
$
1,164
$
(908)
3,577
118
3,695
(2,294)
896
(1,398)
2,639
(585)
2,054
(1,379)
269
(1,110)
6,216
(467)
5,749
(3,673)
1,165
(2,508)
$
4,905
$
(2,364)
$
2,008
$
(1,052)
$
6,913
$
(3,416)
96
genwo rth MI C anada I nC. 20 14 annUa L rep ort
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 cost trend rate
(1) Grading down to 4.50% per year in and after 2029.
2014
4.15%
3.00%
Serp
2013
5.00%
3.00%
non-pension
post-retirement benefits
2014
4.15%
3.00%
2013
5.00%
3.00%
75% of male rates 75% of male rates CPM RPP 2014 CpM rpp 2014
Private table private sector
and 92% of female and 92% of female
table with
rates from the
improvement
CpM rpp 2014
private sector
scale CpM-a
table with
improvement
scale CpM-a
n/a
rates from the
CPM RPP 2014
Private table with
generational mortality
improvements using
Scale CPM-B
n/a
with
generational
mortality
improvements
using Scale
CPM-B
8.33%
8.33%(1)
the following sensitivity analyses demonstrate the impact of a reasonable possible change in each significant valuation assumption
as at december 31, 2014 and 2013 on the benefit obligations.
2014
Increase (decrease) in benefit obligations:
discount rate:
Impact of 1% increase
Impact of 1% decrease
Change in rate of compensation increase:
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 cost trend rate:
Impact of 1% increase
Impact of 1% decrease
non-pension
post-retirement
benefits
Serp
$
(3,757) $
4,956
(3,084)
4,387
1,980
(1,747)
462
(498)
n/a
n/a
n/a
n/a
296
282
1,183
(948)
genwor th MI Ca na da InC. 2014 annUa L report
97
notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2014 and 2013
13. Employee benefit plans (continued)
2013
Increase (decrease) in benefit obligations:
discount rate:
Impact of 1% increase
Impact of 1% decrease
Change in rate of compensation increase:
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 cost trend rate:
Impact of 1% increase
Impact of 1% decrease
Serp
non-pension
post-retirement
benefits
$
(2,515) $
3,283
(2,370)
3,104
1,588
(1,422)
294
(318)
n/a
n/a
n/a
n/a
197
(186)
976
(989)
this sensitivity analysis is hypothetical. actual experience may differ from expected experience. for the purpose of this analysis, all
other assumptions were held constant.
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
non-pension
post-retirement benefits
2014
219
2,646
$
2013
79
2,567
$
2014
107
—
$
2,865
$
2,646
$
107
$
$
$
2013
56
—
56
the Company expects to contribute the following amounts to its employee benefit plans during the annual period beginning after
december 31, 2014:
defined contribution plan
Serp
non-pension post-retirement benefit plan
total
termination benefits:
$
2,177
298
129
$
2,604
termination benefits are required to be recognized at the earlier of when the Company can no longer withdraw the offer of the
termination benefit or recognizes restructuring costs within the scope of IaS 37. the Company has not incurred such termination
benefits in the years ended december 31, 2014 and 2013.
98
genwo rth MI C anada I nC. 20 14 annUa L rep ort
14. Share-based compensation
the Company provides long-term incentive plans for the granting of options, rSUs, pSUs, edSUs and 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 10 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, 2014 is $19.00 to $32.88 (2013 – $19.00 to $27.12).
rSUs entitle employees to receive an amount equal to the fair value of the Company’s shares. rSU grants issued prior to 2014 vest
equally over three years. rSU grants issued in 2014 vest at the end of a three-year period.
pSUs entitle employees to receive an amount equal to the fair value of the Company’s shares if certain performance conditions are
met. performance measures associated with pSU grants include average annual earnings growth, return on equity, underwriting
income, investment income and basic earnings per share. the average of the performance measures taken over the three-year
performance period is used to determine the extent to which performance conditions are met.
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 edSU units 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. 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.
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 receive dividend
equivalents at the discretion of the Company’s Board of directors.
during the year ended december 31, 2014, the Company added a compensation recoupement policy to its incentive plans,
including its share-based compensation plans, providing for the full or partial forfeiture and recoupement of incentive compensation
awarded and outstanding or paid to incentive compensation plan participants. this policy will be applied at the discretion of the
Board of directors in circumstances that may include a material financial restatement, other than a restatement caused by a
change in applicable accounting rules or interpretations, the result of which was that any incentive compensation provided to senior
executives or officers would have been a lower amount had it been calculated based on such restated results or where a participant
has been determined by the Board of directors to have engaged in misconduct, regardless of the need for a financial restatement.
during the year ended december 31, 2014, the Company entered into equity total return swaps to hedge a portion of its economic
exposure from the changes in fair market value of the Company’s common shares. equity total return swaps are contracts by which
one counterparty agrees to pay or receive from the other cash amounts based on changes in the value of a referenced asset or
group of assets, including any returns such as interest earned or dividends accrued on these assets, in exchange for amounts that
are based on prevailing market funding rates. Changes in fair value of the equity total return swaps are recognized in employee
compensation expense in the consolidated statements of income.
the Company has reserved 3,000,000 common shares of its issued and authorized shares for issuance under these long-term
incentive plans.
genwor th MI Ca na da InC. 2014 annUa L report
99
notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2014 and 2013
14. Share-based compensation (continued)
as at december 31, 2014, the Company has 1,741,938 common shares remaining that are available for distribution.
the following table presents information about these share-based compensation plans:
2014
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)
2013
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)
986,908 $ 22.12 $ 9,198
114,500
—
—
—
32.88
—
20.57
23.49
—
105,314 $ 3,858
1,480
45,000
142
4,921
(1,678)
—
117
—
—
44,736 $ 1,639
244
58
—
—
45
6,620
2,361
—
—
—
71,538 $ 2,620
1,228
37,922
128
4,733
(586)
(17,593)
—
182
—
—
(1,099) (49,252)
(73)
2,263
(93,494)
(6,150)
—
—
996
—
—
—
20,153 $
738
—
31
—
—
13
1,001,764 $ 23.48 $ 10,289
105,983 $ 3,919
53,717 $ 1,986
96,600 $ 3,572
21,149 $
782
775,798 $ 22.13 $ 8,497
— $
—
53,717 $ 1,986
— $
—
— $
6.0
—
—
1.8
—
—
—
1.7
—
3.3
—
—
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
pSUs
of edSUs
value of
edSUs
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
—
—
(942)
(453)
8,420
5,290
(45,717)
(2,307)
—
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
—
—
the fair value of options is measured using the Black-Scholes valuation model as at the end of each reporting period.
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
$
$
2014
36.98
23.48
22.41%
6.0
3.79%
1.02%
$
$
2013
36.63
22.12
13.21%
6.0
3.82%
1.21%
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 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.
100
genwo rth MI C anada I nC. 20 14 annUa L rep ort
The aggregate fair value of the Options outstanding is $10,289 as at December 31, 2014 (2013 – $9,198).
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 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.
the following tables provide information about the expenses and liabilities arising from share-based compensation:
expense arising from:
options
rSUs
pSUs
edSUs
dSUs
net effect of equity total return swap
net share-based compensation expense
total carrying amount of liabilities for
cash-settled arrangements
total intrinsic value of liability for vested benefits
15. Intangible assets
the Company’s intangible assets are summarized as follows:
Cost
Balance at January 1, 2013
Acquisitions – externally purchased
Balance at december 31, 2013
Acquisitions – externally purchased
Balance at December 31, 2014
amortization and impairment losses
Balance at January 1, 2013
amortization for the year
Balance at december 31, 2013
amortization for the year
Balance at December 31, 2014
2014
2013
$
$
$
$
2,923
1,461
1,462
267
348
(156)
6,305
$
$
6,773
2,314
1,237
47
861
—
11,232
2014
2013
$
$
16,764
13,509
$
$
14,317
14,257
Computer software
$
33,264
3,001
36,265
3,338
$
39,603
Computer software
$
23,524
5,427
28,951
3,191
$
32,142
Computer software
$
7,314
7,461
amortization of intangible assets is included in office expenses in the consolidated statements of income.
Carrying amounts
at december 31, 2013
At December 31, 2014
genwor th MI Ca na da InC. 2014 annUa L report
101
notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2014 and 2013
16. Transactions with lenders
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 $166,924, representing 26.1% of the Company’s total gross premiums written for the year ended
December 31, 2014 (2013 – gross premiums written from two major lenders that accounted for more than 10% of the Company’s
gross premiums written was $152,444 or 29.8%).
17. Goodwill
on January 17, 1995, the Company acquired certain assets and assumed certain liabilities from the Mortgage Insurance Company
Canada (“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 1.6% (2013 – 1.3%) to the
last year of the multi-year plan cash flow estimate. the growth rates at december 31, 2014 and 2013 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 13.8% (2013 – 14.1%) was applied in determining the recoverable amount of the unit. The discount
rates as at december 31, 2014 and 2013 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 has been recognized in the year ended December 31, 2014 (2013 – nil).
18. 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:
93,147,778 common shares (2013 – 94,910,880)
1 special share
2014
2013
$ 1,384,558
$ 1,408,213
—
—
$ 1,384,558
$ 1,408,213
(1)
(2)
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 of Directors 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.
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 of Directors, 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.
102
genwo rth MI C anada I nC. 20 14 annUa L rep ort
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
2014
2013
94,910,880
98,698,018
109,921
(1,873,023)
115,979
(3,903,117)
93,147,778
94,910,880
at december 31, 2014, subsidiaries of genworth financial Inc. owned 53,395,420 common shares of the Company or
approximately 57.3% (2013 – 54,469,098 or approximately 57.4%).
Share repurchase:
2014:
during the year ended december 31, 2014, the Company received approval by the toronto Stock exchange for the Company to
undertake a normal course issuer bid (“nCIB”). pursuant to the nCIB, the Company can purchase, for cancellation, up to 4,746,504
shares representing approximately 5% of its outstanding common shares. purchases of common shares under the nCIB may
have commenced on or after May 5, 2014 and will conclude on the earlier of May 4, 2015 and the date on which the Company has
purchased the maximum number of shares under the nCIB.
during the year ended december 31, 2014, under the terms of the nCIB, the Company purchased 1,873,023 common shares for
cancellation on the open market for an aggregate price of $75,009. the Company’s majority shareholder genworth financial Inc.
through its subsidiaries, participated proportionately in the share purchase transaction and maintained a 57.3% ownership interest
in the Company.
2013:
during the year ended december 31, 2013, the Company received approval by the toronto Stock exchange for the Company to
undertake an nCIB. pursuant to the nCIB, the Company could purchase, for cancellation, up to 4,937,078 shares representing
approximately 5% of its then outstanding common shares.
purchases of common shares under the nCIB may have commenced on or after May 17, 2013 and concluded on the earlier of
May 2, 2014 and the date on which the Company had 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 $105,100. 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.
genwor th MI Ca na da InC. 2014 annUa L report
103
notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2014 and 2013
Shares purchased under the nCIBs were recognized as a reduction to share capital equal to the average carrying value of the
common shares repurchased for cancellation. any difference between the aggregate purchase price and the average carrying value
of the common shares was recorded in retained earnings. Certain expenses incurred in connection with the nCIBs were recorded
in retained earnings.
19. 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.
on april 1, 2014, the Company completed an additional offering of $160,000 principal amount of senior unsecured debentures
(“Series 3”). the Series 3 debentures were issued at par, before approximate issuance costs of $1,365.
on May 1, 2014, the Company redeemed its existing Series 2 senior unsecured debentures with a principal amount of $150,000.
the Company repaid the principal amount plus accrued and unpaid interest to the redemption date of $2,584. In addition, the
Company paid an early redemption fee to existing debt holders of $7,249.
all debentures issued are redeemable at the option of the Company in whole or in part, at any time subject to an early
redemption fee.
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
fixed annual rate
Semi-annual interest payment due each period on:
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
Series 3
april 1, 2014
april 1, 2024
$ 160,000
4.242%
october 1
april 1
the Company’s long-term debt balances are as follows:
Carrying value
fair value
Carrying value
fair value
Series 1
Series 2
Series 3
Total
$ 273,418
310,896
$
—
—
$ 158,719
165,579
$ 432,137
476,475
Series 1
Series 2
Series 3
total
$ 273,181
300,152
$ 149,586
156,033
$
—
—
$ 422,767
456,185
the Company’s long-term debt is classified as a Level 2 financial instrument, as described in note 22, as the fair value of the debt is
determined using observable market data.
the Company incurred interest expense of $23,686 and $22,926 for the years ended december 31, 2014 and 2013, respectively,
with accrued interest payable of $2,429 at December 31, 2014 (2013 – $1,076).
104
genwo rth MI C anada I nC. 20 14 annUa L rep ort
20. Earnings per share
Basic earnings per share have been calculated using the weighted average number of shares outstanding of 94,787,064 (2013 –
97,049,781). diluted earnings per share have been calculated using the diluted weighted average number of shares outstanding
of 94,966,380 (2013 – 97,067,722). 1,001,764 Options, 4,346 RSUs and 17,845 PSUs (2013 – 986,908 Options, 105,314 RSUs,
31,394 pSUs, 40,781 dSUs and 20,153 edSUs) were excluded from the calculation of diluted weighted average number of shares
since 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 net of income taxes
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 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 share
2014
2013
$ 376,544
$ 374,657
106
17
$ 376,650
$ 374,674
94,910,880
73,071
(196,887)
98,698,018
62,011
(1,710,248)
94,787,064
97,049,781
$
3.97
$
3.86
94,787,064
179,316
97,049,781
17,941
94,966,380
97,067,722
$
3.97
$
3.86
21. 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, 2014
and 2013.
assets:
Collateral under reinsurance agreement
Bonds and debentures
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
2014
2013
28,446
$
4,535,976
170,456
14,324
$
28,482
4,241,891
184,422
13,366
4,749,202
4,468,161
57,080
23,298
35,880
432,137
548,395
50,354
2,653
26,222
422,767
501,996
$ 4,200,807
$ 3,966,165
genwor th MI Ca na da InC. 2014 annUa L report
105
notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2014 and 2013
22. Fair value measurement
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.
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.
2014
Carrying amount
Fair value
AFS
FVTPL
Loans
and
receivables
Other
financial
liabilities
Level 1
Level 2
Level 3
financial assets measured
at fair value:
Short-term
$
84,933
$
—
$
—
$
—
$ 84,933
$
—
$
investments
derivative financial
instruments
Bonds and
debentures
4,997,359
equity investments 170,456
5,252,748
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
—
—
—
—
—
303
—
—
303
—
—
—
—
—
190,375
—
30,099
—
—
28,446
248,920
—
—
—
—
—
—
—
—
—
303
—
170,456
4,997,359
—
255,389
4,997,662
—
—
—
—
—
—
—
—
—
(23,298)
—
—
—
(23,298)
—
—
—
—
—
—
—
—
—
(41,557)
(432,137)
(473,694)
—
—
—
—
(476,475)
(476,475)
total
$ 5,252,748
$
(22,995)
$ 248,920
$ (473,694)
$ 255,389
$ 4,497,889
$
106
genwo rth MI C anada I nC. 20 14 annUa L rep ort
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2013
Carrying amount
fair value
afS
fvtpL
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 —
—
—
—
—
—
—
—
—
213,692
—
—
—
31,561
28,482
273,735
—
—
—
—
—
—
—
—
184,422
4,937,143
—
224,071
4,937,143
—
—
—
—
—
—
—
—
financial liabilities measured
at fair value:
derivative financial
instruments
financial liabilities not measured
at fair value:
accounts payable and
accrued liabilities
Long-term debt
—
(2,668)
—
—
—
(2,668)
—
—
—
—
—
—
—
—
—
(31,219)
(422,767)
(453,986)
—
—
—
—
(456,185)
(456,185)
total
$ 5,161,214
$
(2,668)
$ 273,735
$
(453,986)
$ 224,071
$ 4,478,290
$
—
—
—
—
—
—
—
—
—
—
—
—
—
genwor th MI Ca na da InC. 2014 annUa L report
107
notes to consolidated financial statements (continued)
(In thousands of Canadian dollars, except per share amounts) Years ended december 31, 2014 and 2013
22. Fair value measurement (continued)
during the years ended december 31, 2014 and 2013, 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, 2014 and 2013.
valuation of Level 2 financial instruments:
fair values of bonds and debentures, including CLos, are obtained primarily from industry standard pricing services and third party
brokers utilizing market observable inputs. 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, 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, cross currency interest rate swaps and equity
total return swaps. 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 foreign currency forwards and cross currency swaps are interest rate yield curves
and foreign currency exchange rates. the primary inputs used in determining fair value of total return swaps are market prices for
referenced assets and interest rate yield curves.
the Company’s long-term debt is a financial liability that is not carried at fair value on the Company’s consolidated statements of
financial position, for which fair value is disclosed in the notes to the consolidated financial statements (note 19). 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.
108
genwo rth MI C anada I nC. 20 14 annUa L rep ort
glossary
Certain terms and abbreviations used in these documents are defined below.
“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 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.
“book value per share including AOCI (basic)” means the per share
amount of shareholders’ equity including 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.
“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 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 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 investment 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 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.
“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” or “severity ratio” means the ratio
(expressed as a percentage) of the dollar amount of paid claims during
a specified period on insured loans to the original insured mortgage
amount relating to such loans. the main determinants of the severity
ratio are the loan-to-value (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” link under Investor resources in the bottom footer of
the homepage.
genwor th MI Ca na da InC. 2014 annUa L report
109
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
$
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)
$
$
$
$
2014
2013
2012
2011
2010
640
565
565
111
107
195
0
(31)
511
377
366
5,443
5,770
1,799
432
2,499
3,271
185
3,086
20%
19%
39%
12%
12%
225%
0.10%
29%
12%
3.86
3.86
33.04
35.02
512
$
560
$
545
$
564
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
5,379
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
0
(23)
443
323
318
5,063
5,393
1,824
422
2,710
2,683
215
2,468
37%
17%
53%
13%
13%
162%
0.20%
32%
14%
3.08
3.08
24.78
26.94
$
$
$
$
621
621
206
103
183
0
(8)
486
348
343
5,135
5,398
1,902
422
2,810
2,589
124
2,464
33%
17%
50%
14%
14%
156%
0.26%
27%
14%
3.02
3.02
23.27
24.44
110
genwo rth MI C anada I nC. 20 14 annUa L rep ort
2013 and 2014 quarterly information
(For the quarter ended, in millions,
unless otherwise specified)
Q4’14
Q3’14
Q2’14
2014
Q1’14
Q4’13
Q3’13
Q2’13
net premiums written
$
178
$
217
$
160
$
84
$
129
$
161
$
137
$
net premiums earned
Underwriting revenues
Losses on claims
expenses
Net underwriting income
Investment income
fee on early retirement
of long term debt
Interest expense
Net income
adjustment to net income
net of taxes:
143
143
37
30
76
47
(6)
86
fee on early retirement of long term debt
net investment gains
Net operating income
Loss ratio
expense ratio
Combined ratio
operating earnings
per share diluted
(3)
84
26%
21%
47%
140
140
30
24
87
51
(6)
98
(6)
93
21%
17%
38%
141
141
17
27
97
49
(7)
(7)
97
5
(4)
99
12%
19%
31%
141
141
28
27
86
49
(6)
95
142
142
31
33
78
56
(6)
93
(4)
91
20%
19%
39%
(8)
85
22%
23%
45%
143
143
32
27
84
51
(6)
96
(5)
91
22%
19%
41%
143
143
35
26
82
59
(6)
98
(10)
88
25%
18%
43%
2013
Q1’13
84
144
144
44
26
74
50
(6)
88
(3)
85
31%
18%
49%
$
0.89
$
0.95
$
1.04
$
0.96
$
0.9
$
0.94
$
0.89
$
0.86
genwor th MI Ca na da InC. 2014 annUa L report
111
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 executive Chairman
Sidney Horn(1)(2)(4)(5)
Angel Mas
Mr. hurley is past-president and Ceo of genworth
Canada and currently the Company’s executive
Chairman. he joined general electric in 1981 and
held various senior management positions in
numerous ge divisions, including president and Ceo
of genworth financial Mortgage Insurance Company
Canada and president, genworth International.
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.
Brian Kelly(1)(3)(5)
Samuel Marsico(3)
Heather Nicol
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.
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.
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.
Genworth Financial Mortgage
Insurance Company Canada Board
Members
All of the people listed as being directors of Genworth MI
Canada Inc. are also directors of Genworth Financial Mortgage
Insurance Company Canada. In addition to such people the
following individuals are also directors of Genworth Financial
Mortgage Insurance Company Canada:
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.
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.
Robert Gillespie(1)(2)(5)
David Gibbins
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. 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.
(1) audit Committee (2) Compensation and nominating Committee (3) risk, Capital and Investment Committee (4) Lead director (5) Independent
112
genwo rth MI C anada I nC. 20 14 annUa L rep ort
Sh ar ehoL der Info rM atIon
Annual general meeting of shareholders
date: thursday, June 4, 2015
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.
2015 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
Exchange listing
the toronto Stock exchange:
Common shares (MIC)
Common shares
as at december 31, 2014, there were
93,147,778 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.
Credit ratings
Dividend declaration dates
S&p
dBrS
Issuer rating
genworth MI Canada Inc.
BBB+, Stable
aa (low), Stable
Financial strength
genworth financial Mortgage
Insurance Company Canada
Senior unsecured debentures
a+, Stable
aa, Stable
genworth MI Canada Inc.
BBB+, Stable
aa (low), Stable
declared
11/05/14
07/29/14
04/29/14
02/04/14
record
11/17/14
08/15/14
05/15/14
02/14/14
payable
11/28/14
08/29/14
05/30/14
02/28/14
amount per
common share
$0.39
$0.35
$0.35
$0.35
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.
genwor th MI Ca na da InC. 2014 annUa L report
113
Genworth MI Canada Annual Report
To view or download our complete Annual Report, including MD&A and financial statements,
visit the Investors section at www.genworth.ca.
All dollar amounts in this report are in Canadian dollars unless stated otherwise. This Annual Report is published for the financial year ended December 31, 2014.
Contact:
Investor Relations
Email: investor@genworth.com
Genworth MI Canada
2060 Winston Park Drive, Suite 300
Oakville, Ontario L6H 5R7
Tel: 905.287.5300
Fax: 905.287.5472
www.genworth.ca
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GEn WOR TH MI CAn ADA I nC. 201 4 AnnUAL REP ORT
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Genworth MI Canada Annual Report
To view or download our complete Annual Report, including MD&A and financial statements,
visit the Investors section at www.genworth.ca.
All dollar amounts in this report are in Canadian dollars unless stated otherwise. This Annual Report is published for the financial year ended December 31, 2014.
Contact:
Investor Relations
Email: investor@genworth.com
Genworth MI Canada
2060 Winston Park Drive, Suite 300
Oakville, Ontario L6H 5R7
Tel: 905.287.5300
Fax: 905.287.5472
www.genworth.ca
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Genworth MI Canada Inc.
2014 Annual Report
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