SMARTER MI
P E O P L E P O W E R E D
D A T A D R I V E N
A N N U A L R E P O R T 2 0 1 6
GENWORTH ANNUAL REPORT / 2016
2
At Genworth Canada, we employ 280 of the smartest and most dedicated people in the mortgage default insurance industry. We support them with smart technology that taps into our proprietary database to enable evidence based decision making.Why does this matter? Because in our business, Smarter MI means faster, better growth at lower risk.And that matters to all of us. FIVE YEAR FINANCIAL HIGHLIGHTS
($ millions, except per share data or otherwise noted)
2016
Financial results
Premiums written
Premiums earned
Net operating income
Net income
Total assets
Total shareholders’ equity
Other financial measures
Loss ratio
Expense ratio
Combined ratio
Minimum Capital Test ratio
Operating return on equity
Per share data
Book value per share (diluted, incl. AOCI)
Operating earnings per share (diluted)
Dividends per share
760
638
388
417
6,612
3,649
22%
19%
41%
245%
11%
39.28
4.23
1.70
2015
809
586
375
398
6,239
3,420
21%
18%
39%
234%
12%
36.82
4.05
1.59
2014
640
565
366
377
5,770
3,271
20%
19%
39%
225%
12%
35.02
3.86
1.87
2013
512
573
349
375
5,691
3,087
25%
20%
44%
223%
12%
32.53
3.60
1.31
2012
560
589
462
470
5,734
3,037
33%
18%
51%
170%
17%
30.62
4.67
1.19
1
1
1
1 Adjusted for the impact of the government guarantee fund exit reversal fee, net operating income, operating return on equity, and operating earnings per share (diluted) would have been $339 million, 13%, and $3.43, respectively.
Book Value per share ($)
2
0
5
3
.
.
2
8
6
3
.
8
2
9
3
3
5
2
3
.
.
2
6
0
3
2012
2013
2014
2015
2016
Dividends ($)
)
3
(
3
4
0
.
1
3
.
1
4
4
.
1
9
1
.
1
0
7
.
1
9
5
.
1
Net operating income ($M)
9
3
3
9
4
3
6
6
3
5
7
3
8
8
3
2012
(2)
2013
2014
2015
2016
2012
2013
2014
2015
2016
Premiums earned ($M)
9
8
5
3
7
5
5
6
5
6
8
5
8
3
6
Loss ratio (%)
3
3
5
2
1
2
2
2
0
2
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
2 Adjusted for the impact of the government guarantee fund exit fee reversal in 2012. Including the impact of the government guarantee exit reversal fee, net operating income was $462 million.
3 Special dividend.
GENWORTH ANNUAL REPORT / 2016
1
LETTER TO
SHAREHOLDERS
Stuart Levings
President and CEO
Dear Fellow Shareholders,
PEOPLE POWERED
At Genworth Canada, our people are one of the Company’s critical
competitive strengths. Over our 22 year history, we have developed
a culture of collaboration, innovation and customer centricity which
has greatly contributed to our success.
Our leadership team has extensive experience managing a mortgage
insurance business through varying economic cycles. Equally
2016 was a year of significant change, both in terms of
important, our 280 employees are very dedicated and engaged
the economic environment, but also from a regulatory
and mortgage rule perspective. Oil prices declined from
relative stability in 2015 to a low of US$27 per barrel in
early January, before bouncing back to the US$45 to
US$50 per barrel range. Alberta’s unemployment rate hit
a 22 year high at 9.0% as the low oil prices continued to
impact investment and employment in that region. At the
same time, housing markets across Canada continued
to diverge, with the Vancouver and Toronto markets
reaching new highs, as the rest of the country remained
as reflected in our employee engagement score, which came in at
above 80% for each of the last four years. This high level of employee
engagement compares favourably to the global benchmark for high
performing companies of 69%.
The Genworth Canada team is committed to providing a superior
customer experience in an ever changing, competitive, economic
and regulatory landscape. We continue to be agile by leveraging
our deep expertise in mortgage originations, underwriting, risk
flat to modestly up from the prior year. We saw a renewed
management and loss mitigation. An experienced employee base is
focus on the part of the government to address growing
concerns around consumer indebtedness, taxpayer
exposure to mortgage risk and overheated housing
markets. This focus resulted in a number of changes in the
rules that determine which loans are eligible for mortgage
insurance, as well as the introduction of a new, more risk
sensitive capital model from our regulator.
Despite these challenges, the business was able to deliver
strong results, demonstrating the resilience of our proven
business model, focused on prudent risk management,
a high quality, well diversified insurance portfolio and a
critical to our success, and we are proud that 55% of our employees
have been with the Company over seven years and almost 40% have
been with the Company more than 10 years.
The Genworth Canada culture uniquely positions the Company
to be a thought leader on housing and mortgage related issues
and a valued business advisor for our customers. In the past
year, we demonstrated our thought leadership as we navigated
the many regulatory and market changes during the course of
2016. Specifically, we have been actively engaged with both
best-in-class customer experience philosophy. In this letter,
the Department of Finance and OFSI regarding the government
I address some performance highlights and share insights
guarantee mortgage rule changes, new regulatory capital framework
into our current outlook, opportunities and strategic
and the government’s risk sharing consultation.
priorities for 2017.
I trust this information provides you with a deeper
understanding of our business and instills in you the same
level of confidence and trust that I have in the strength,
profitability and long-term sustainability of Genworth
Canada.
In summary, we are truly “People Powered” and greatly value the
contributions of our people in making Genworth Canada a success.
GENWORTH ANNUAL REPORT / 2016
2
DATA DRIVEN
At Genworth Canada, our decisions are informed and driven by
rich mortgage performance data. With over 20 years of this data,
Delivering consistently strong performance
Performance can be measured by a number of factors, including
top-line growth, loss ratio, return on equity and book value
per share. In 2016, we took a number of targeted underwriting
we continue to develop new applications, extract new insights and
actions to drive the appropriate balance between our risk
create value.
Our risk management, actuarial and modeling teams are at the
forefront of our data analytics and predictive modeling efforts. We
are focused on using data driven analysis on multiple fronts to drive
continuous improvement in our business performance, including:
• Understanding underlying drivers of loss performance;
•
•
•
•
•
•
Forecasting loss performance;
Stress testing under a variety of economic scenarios;
Enhancing our risk selection process in our underwriting function;
Developing new loss mitigation strategies;
Targeting our sales efforts to maximize our sales effectiveness;
Pricing portfolio insurance; and
• Managing capital efficiency.
appetite and commercial objectives that resulted in a smaller, but
higher quality total transactional insurance volume for the year. At
the same time, certain mortgage rule changes referenced earlier
drove an increase in demand for portfolio insurance on high
quality, well diversified pools of low loan-to-value mortgages,
which helped to offset some of the lower transactional insurance
premium volumes. For the year, we wrote a total of $63.1 billion in
new insurance and ended the year with $6.6 billion in total assets
and $3.6 billion in shareholders’ equity.
Overall, robust housing markets, a strong market share
position and higher transactional premium rates helped drive
$760 million in net premiums written from transactional and
portfolio mortgage insurance.
Our 2016 results provided tangible value to our shareholders.
Compared to 2015, we delivered increases across a number of
key metrics, including:
We believe that our data driven approach is a key competitive
• 4 per cent higher operating earnings per share
differentiator that contributes to our role as a thought leader in the
• 7 per cent increase in book value per share, and
mortgage space. Recognizing the importance of data analytics, Genworth
Canada continues to invest in this area and to proactively share our
insights with our customers, regulator and other key constituents.
While most companies rely solely on technology and tools, we
understand that it is our people power that translates the data and
statistics into insights and trends that lead to tangible business results
• 7 per cent increase in annual dividends paid
to shareholders
Our comprehensive risk appetite framework and rigorous
underwriting approach helps to reduce performance volatility
and during favourable economic environments, delivers very
positive results, as evidenced by our 22 per cent loss ratio
for the year. As a result of our risk management focus, we
in the form of market share gains, reduced losses on claims and an
continued to see improved quality and diversification in our
enhanced customer experience. As a data driven organization, we
select the right tools, people and performance metrics to maintain a
data driven culture to maximize our business potential.
portfolio, with high credit scores and stable debt service ratios
among our insured borrowers. Our 2016 loss ratio result also
reflects the important contribution from our proactive loss-
mitigation programs, particularly in the oil-exposed regions.
Part of our success must be attributed to our customer-
centric culture, bolstered by our employees’ in-depth industry
knowledge. Our people, and a focus on innovation and
collaboration, have made Genworth Canada a well-recognized
thought leader in the housing and mortgage market. Our
business is powered by our team of talented and dedicated
people, and will be for years to come.
GENWORTH ANNUAL REPORT / 2016
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Adapting to varying economic conditions
and Ontario governments, aimed at stabilizing
Our business is built to perform well over a long-
term business cycle. We manage our risk extensively
local housing markets and improving long term
affordability.
and perform regular stress tests to evaluate our
This past February, Genworth Canada responded
performance under a variety of economic scenarios
to a request for comment from the Department
in order to validate our risk appetite. We invest
of Finance with respect to a risk sharing proposal,
time and resources in the monitoring and analytics
whereby lenders would be required to retain a
needed to help mitigate the effects of potential or
portion of any loss on an insured mortgage. In
emerging risks.
There are a number of key themes that define our
current environment. On the economic front, we see
cautious optimism as it relates to economic growth,
with early signs of stabilization in Alberta, positive
our response, we noted that the wide-ranging,
significant structural changes being proposed are
not likely to strengthen the stability and efficiency of
the market and as such, recommended that they not
be implemented.
momentum in Quebec and on-going strength in
That said, we are pleased to see that all levels
Ontario and British Columbia. We recognize that the
of government acknowledge the importance of
housing market remains trifurcated, with weakness
keeping a close watch on the housing market, and
in oil-producing regions, on-going appreciation in
we will continue with our proactive government
the Greater Toronto Area and relative stability in the
relations strategy to maintain and strengthen our
rest of the country. We’re beginning to see signs
position as a leading industry expert and advisor
of a much needed slow-down in the Vancouver
to government officials and policy makers.
region, where resales have slowed following the
introduction of the foreign buyer’s tax. Generally,
first-time homebuyers continue to face affordability
pressure in the major housing markets, caused by
rising prices and changes in mortgage qualifying
criteria. As housing markets begin to slow and the
economy continues to perform, we expect these
pressures to ease somewhat over the next few years.
We are uniquely positioned to analyze, monitor
and adapt to the macroeconomic environment as
evidenced by the financial and operational success
we’ve enjoyed over the past number of years. Our
decisions are data driven, supported by a sound
understanding of our market and backed by over
twenty years of mortgage performance data. This
data represents the key input in modeling mortgage
performance for stress testing, risk selection and
pricing purposes.
Supporting sound regulatory policy
The mortgage finance market has been subjected to
a great deal of regulatory review and oversight in the
last decade. Since 2008, a number of policy actions
have been taken to reduce government and taxpayer
risk. The impact of these changes is a higher-quality
insurance portfolio in a smaller mortgage insurance
market. The mortgages we insure today reflect
more fiscally prudent borrowers with stronger
credit profiles. We are pleased that policy makers
In the first quarter of 2017, the Company announced
premium rate increases for transactional mortgage
insurance products, reflecting higher regulatory
capital requirements which became effective at the
beginning of 2017. The average transactional premium
rate increase is approximately 18% to 20% and should
have a positive impact on our operating ROE.
Building stronger communities across Canada
The success of our business stems from
collaboration and long-standing relationships with
lenders, mortgage brokers, realtors, builders and
industry associations across Canada. An underlying
theme binds us together: our passion for helping
Canadians achieve responsible homeownership and
for helping build stronger communities in all parts of
the country.
I am proud to say that Genworth Canada promotes
a culture of giving and active volunteerism that is
embraced by our people.
In 2016 Genworth Canada donated over $800,000
in contributions to support affordable housing, food
and shelter, medical research, financial literacy and
other important causes. In addition, our employees
volunteered more than 3,500 hours in support
of charities across the country, and raised more
than $75,000 through fundraising and personal
donations.
continually review the safety and soundness of
You can find out more about our commitment to
the nation’s diverse housing markets, and applaud
building stronger communities across Canada
the recent measures taken by the British Columbia
in our 2016 Public Accountability Statement.
GENWORTH ANNUAL REPORT / 2016
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Leadership Team, Genworth Financial Mortgage Insurance Company Canada:
From left to right: Philip Mayers, Senior Vice President, Chief Financial Officer; Debbie McPherson, Senior Vice President, Sales & Marketing;
Stuart Levings, President and CEO; Mary-Jo Hewat, Senior Vice President, Human Resources and Facilities;
Winsor Macdonell, Senior Vice President, General Counsel and Secretary; Craig Sweeney, Senior Vice President, Chief Risk Officer
Looking forward to the future
Our proven business model positions us well for the
future. As we strive to deliver solid returns to our
shareholders, we remain focused on the following key
strategic priorities in 2017:
• invest in process innovation to drive prudent
market share expansion,
• continue to exercise dynamic risk management
and proactive loss mitigation,
The cornerstone of our success can be attributed to
the depth and breadth of experience of our leadership
team, the knowledge, skills and commitment of our
employees and the trust and loyalty of our customers
and stakeholders.
Thank you for your ongoing confidence and support.
• leverage our data and wealth of mortgage
experience to influence our regulatory environment,
Stuart Levings
President and Chief Executive Officer
• maintain an efficient capital structure to ensure
capital strength while maximizing ROE, and;
• enhance the overall customer experience.
GENWORTH ANNUAL REPORT / 2016
5
Brian Hurley
Executive Chairman
To all of our stakeholders,
experienced management team,
We appreciate your continued
support. As your Board of Directors,
we take great pride in our successful
mortgage insurance business which
has served Canadians well for over
two decades. Genworth Canada has
helped over one million households
achieve responsible homeownership
during this period. As well, we
continue to provide unique value to
our customers and key stakeholders.
The Board functions to serve all key
constituents, and provides a critical
stewardship role to the business.
Corporate governance focus
and we continued our oversight role,
reviewing and shaping the business’
strategic objectives and focus. Our
Board continues to be bolstered
by seasoned professionals. We
recently welcomed Neil Parkinson
to our Board. Neil brings over
three decades of experience in the
insurance and financial services
field, most recently having served
as a senior executive with a major
accounting firm. He has also had
senior roles with vital regulatory
advisory committees. We also look
forward to Sharon Giffen joining
the Board, as she brings a wealth of
Housing markets continued to
actuarial experience, having served
be at the forefront in the media
in senior actuarial positions in the
in 2016, with numerous pertinent
private sector as well as in leadership
housing policies under review. As
roles with the Canadian Institute of
a meaningful component of the
Actuaries. Finally, I want to extend
nation’s GDP, housing has remained
sincere gratitude to Heather Nicol
a top priority for government and
and John Walker for their years of
private sector stakeholders. Our
dedicated service with the Board.
business remained agile throughout,
with a rigorous focus on continuing
to provide a best-in-class mortgage
insurance experience for all key
stakeholders. With this in mind,
corporate governance continues
to be a top priority for our Board
of Directors. The Board worked
in partnership with our deeply
Changing regulatory environment
In the latter half of 2016, we saw
numerous changes from both
the federal government and the
Company’s regulator, the Office
of the Superintendent of Financial
Institutions. The Board supported
management in their role and
GENWORTH ANNUAL REPORT / 2016
6
Directors of Genworth MI Canada Inc. and its operating subsidiary, Genworth Financial Mortgage Insurance Company Canada:
From left to right: Rohit Gupta, David Gibbins, Andrea Bolger, Jerome Upton, Sidney Horn, Leon Roday,
Brian Kelly, Heather Nicol, Brian Hurley, Sharon Giffen, Stuart Levings, Neil Parkinson and John Walker
also leveraged their relationships
Risk management focus
Sustainable stakeholder value
with regulatory and government
stakeholders for the advancement of
the Company’s objectives. The Board
operates in an oversight capacity,
and remains particularly focused
on monitoring progress rather than
dictating policy to management and
employees. While business can often
be affected by short-term volatility,
both senior management and the
Board are well-aligned in the view that
the business should be managed for
the long-term. Together, we have a
clear emphasis on delivering value for
all stakeholders.
Risk management remains at the
We remain highly focused
forefront of our business, and we
on generating and sustaining
constantly sharpen our approach
shareholder value. This will continue
with respect to this critical element.
to be our focus in 2017. I would like
Last year was no different as we
to thank my fellow Board members
continued to refine our appetite
and senior management for all their
for various risks. As a business, we
hard work throughout the year. In
improved the overall quality of our
addition, I’d like to thank all our
insurance portfolio which will have
customers, key stakeholders and
a lasting benefit for years to come.
employees, who will power this
In my view, the Board must continue
Company for years to come.
to take both a prudential and
proactive role in terms of discerning
the appropriate balance between
risk appetite and commercial goals.
Brian Hurley
Executive Chairman
GENWORTH ANNUAL REPORT / 2016
7
Shareholder Information
Exchange listing
The Toronto Stock Exchange:
Common shares (MIC)
Common shares
As at December 31, 2016, there were 91,864,100 common
shares (basic) outstanding.
Independent auditors
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:
Jonathan A. Pinto
Vice-President, Investor Relations
investor@genworth.com
Additional financial information has been filed electronically
with various securities regulators in Canada through the System
for Electronic Document Analysis and Retrieval (SEDAR) and
with the Office of the Superintendent of Financial Institutions
(OSFI) as the primary regulator for the Company’s subsidiary,
Genworth Financial Mortgage Insurance Company Canada.
The Company holds a conference call following the release of
its quarterly results. These calls are archived in the Investor
section of the Company’s website.
Annual general meeting of shareholders
Date: Thursday, June 8th, 2017
Time: 10:00 AM
Location: Fairmont Royal York (Salon 1, 19th Floor)
100 Front Street W, Toronto, ON M5J 1E3
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
GENWORTH ANNUAL REPORT / 2016
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.
Common share dividend policy
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 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.)
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
Genworth MI Canada Inc.
Management’s Discussion and Analysis
For the year ended December 31, 2016
Genworth MI Canada Inc.
Interpretation
MD&A-Year ended December 31, 2016
The current 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 6, 2017 is prepared for the three and twelve months ended December
31, 2016. 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.
Caution regarding forward looking information and 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 (as defined herein) and legislation introduced in connection with the Protection of Residential
Mortgage or Hypothecary Insurance Act (“PRMHIA”) (as defined herein) and the effect of changes to the government guarantee
mortgage eligibility rules, and the Company’s beliefs as to housing demand and home price appreciation, unemployment rates, the
Company’s future operating and financial results, sales expectations regarding premiums written, capital expenditure plans, dividend
policy and the ability to execute on its future operating, investing and financial strategies.
The forward-looking statements contained herein are based on certain factors and assumptions, certain of which appear proximate
to the applicable forward-looking statements contained herein. Inherent in the forward-looking statements are known and unknown
risks, uncertainties and other factors beyond the Company’s ability to control or predict, that may cause the actual results,
performance or achievements of the Company, or developments in the Company’s business or in its industry, to differ materially
from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements.
Actual results or developments may differ materially from those contemplated by the forward-looking statements.
The Company’s actual results and performance could differ materially from those anticipated in these forward-looking statements
as a result of both known and unknown risks, including: the continued availability of the Canadian government’s guarantee of private
mortgage insurance on terms satisfactory to the Company; the Company’s expectations regarding its revenues, expenses and
operations; the Company’s plans to implement its strategy and operate its business; the Company’s expectations regarding the
compensation of directors and officers; the Company’s anticipated cash needs and its estimates regarding its capital expenditures,
capital requirements, reserves and its needs for additional financing; the Company’s plans for and timing of expansion of service and
products; the Company’s ability to accurately assess and manage risks associated with the policies that are written; the Company’s
ability to accurately manage market, interest and credit risks; the Company’s ability to maintain ratings, which may be affected by
the ratings of its majority shareholder, Genworth Financial, Inc.; interest rate fluctuations; a decrease in the volume of high loan-to-
value mortgage originations; the cyclical nature of the mortgage insurance industry; changes in government regulations and laws
mandating mortgage insurance; the acceptance by the Company’s lenders of new technologies and products; the Company’s ability
to attract lenders and develop and maintain lender relationships; the Company’s competitive position and its expectations regarding
competition from other providers of mortgage insurance in Canada; anticipated trends and challenges in the Company’s business
and the markets in which it operates; changes in the global or Canadian economies; a decline in the Company’s regulatory capital or
an increase in its regulatory capital requirements; loss of members of the Company’s senior management team; potential legal, tax
Page 2 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
and regulatory investigations and actions; the failure of the Company’s computer systems; and potential conflicts of interest between
the Company and its majority shareholder, Genworth Financial, Inc.
This is not an exhaustive list of the factors that may affect any of the Company’s forward-looking statements. Some of these and
other factors are discussed in more detail in the Company’s Annual Information Form (the “AIF”) dated March 16, 2016. Investors
and others should carefully consider these and other factors and not place undue reliance on the forward-looking statements. Further
information regarding these and other risk factors is included in the Company’s public filings with provincial and territorial securities
regulatory authorities (including the Company’s AIF) and can be found on the System for Electronic Document Analysis and Retrieval
(“SEDAR”) website at www.sedar.com. The forward-looking statements contained in this 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 are presented for the purpose of assisting the Company’s security holders in understanding management’s current views
regarding those future outcomes and may not be appropriate for other purposes. While the Company anticipates that subsequent
events and developments may cause the Company’s views to change, the Company does not undertake to update any forward-
looking statements, except to the extent required by applicable securities laws.
Non-IFRS financial measures
To supplement the Company’s consolidated financial statements, which are prepared in accordance with IFRS, the Company uses
non-IFRS financial measures to analyze performance. The Company’s key performance indicators and certain other information
included in this MD&A include non-IFRS financial measures. Such non-IFRS financial measures used by the Company to analyze
performance include interest and dividend income, net of investment expenses, net operating income, operating earnings per
common share (basic) and operating earnings per common share (diluted).
Other non-IFRS financial measures used by the Company to analyze performance for which no comparable IFRS measure is available
include insurance in-force, new insurance written, loss ratio, expense ratio, combined ratio, operating return on equity, investment
yield and Minimum Capital Test (“MCT”) ratio. The Company believes that these non-IFRS financial measures provide meaningful
supplemental information regarding its performance and may be useful to investors because they allow for greater transparency
with respect to key metrics used by management in its financial and operational decision making. Non-IFRS financial measures do
not have standardized meanings and are unlikely to be comparable to any similar measures presented by other companies.
See the “Non-IFRS financial measures” section at the end of this MD&A for a reconciliation of net operating income to net income,
investment income to interest and dividend income, net of investment expenses, operating earnings per common share (basic) to
earnings per common share (basic) and operating earnings per common share (diluted) to earnings per common share (diluted).
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 “Non-IFRS financials measures glossary”, in the “Non-IFRS financial measures” section at the end of this
MD&A.
Page 3 of 51
Genworth MI Canada Inc.
Table of contents
MD&A-Year ended December 31, 2016
Business profile ........................................................................................................................................................................................ 5
Overview .................................................................................................................................................................................................. 6
Fourth quarter financial highlights...................................................................................................................................................... 6
2016 performance against strategic priorities .................................................................................................................................... 8
Recent business and regulatory developments ................................................................................................................................ 10
Economic environment ..................................................................................................................................................................... 15
2017 objectives ................................................................................................................................................................................. 16
Fourth Quarter Review ..................................................................................................................................................................... 17
Summary of annual information ....................................................................................................................................................... 23
Summary of quarterly results ........................................................................................................................................................... 25
Reserve development analysis .......................................................................................................................................................... 26
Financial condition ................................................................................................................................................................................. 27
Financial instruments ........................................................................................................................................................................ 27
Liquidity ............................................................................................................................................................................................. 30
Derivative financial instruments ....................................................................................................................................................... 31
Capital expenditures ......................................................................................................................................................................... 32
Capital management .............................................................................................................................................................................. 32
Minimum capital test ........................................................................................................................................................................ 32
Debt ................................................................................................................................................................................................... 33
Credit facility ..................................................................................................................................................................................... 33
Financial strength ratings .................................................................................................................................................................. 34
Capital transactions........................................................................................................................................................................... 34
Restrictions on dividends and capital transactions ........................................................................................................................... 35
Outstanding share data ..................................................................................................................................................................... 35
Risk management .................................................................................................................................................................................. 36
Enterprise risk management framework .......................................................................................................................................... 36
Governance framework .................................................................................................................................................................... 36
Risk appetite framework ................................................................................................................................................................... 37
Risk controls ...................................................................................................................................................................................... 38
Risk categories .................................................................................................................................................................................. 38
Financial reporting controls and accounting disclosures ....................................................................................................................... 41
Disclosure controls and procedures and internal controls over financial reporting......................................................................... 41
Changes in accounting standards and future accounting standards ................................................................................................ 41
Significant estimates and judgments ................................................................................................................................................ 43
Non-IFRS financial measures.................................................................................................................................................................. 46
Non-IFRS financial measures glossary ............................................................................................................................................... 47
Other Glossary ....................................................................................................................................................................................... 48
Page 4 of 51
Genworth MI Canada Inc.
Business profile
Business background
MD&A-Year ended December 31, 2016
Genworth Canada is the largest private-sector residential mortgage insurer in Canada and has been providing mortgage default
insurance in the country 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 transactional and portfolio mortgage insurance.
Federally regulated lenders are required to purchase transactional mortgage insurance in respect of a residential mortgage loan
whenever the loan-to-value ratio exceeds 80%. The Company’s transactional mortgage insurance covers default risk on mortgage
loans secured by residential properties to protect lenders from any resulting losses on claims. By offering insurance for transactional
mortgages, the Company plays a significant role in providing 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 portfolio mortgage insurance to lenders for loans with loan-to-value ratios of 80% or less. Portfolio
insurance is beneficial to lenders as they provide the ability to manage capital and funding requirements and mitigate risk. The
Company views portfolio mortgage insurance as an extension of its relationship with existing transactional customers. Therefore, the
Company carefully manages the level of its portfolio mortgage insurance relative to its overall mortgage insurance business. Premium
rates on portfolio mortgage insurance have historically been lower than those on transactional mortgage insurance due to the lower
risk profile associated with portfolio loans.
Seasonality
The transactional mortgage insurance business is seasonal. Premiums written vary each quarter, while premiums earned, investment
income, underwriting and administrative expenses tend to be relatively stable from quarter to quarter. The variations in premiums
written are driven by mortgage origination activity and associated transactional new insurance 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,
changes in employment levels 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 new insurance written from portfolio mortgage insurance varies from period to period based on a number of factors
including: the amount of portfolio mortgages lenders seek to insure; the competitiveness of the Company’s pricing, underwriting
guidelines and credit enhancement for portfolio insurance; and the Company’s risk appetite for such mortgage insurance.
Distribution and marketing
The Company works with lenders, mortgage brokers and real estate agents across Canada to make homeownership more accessible
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
have been the largest mortgage originators in Canada and provide the majority of financing for residential mortgages.
Page 5 of 51
Genworth MI Canada Inc.
Overview
Fourth quarter financial highlights
Table 1: Selected financial information
(in millions of dollars, unless otherwise specified)
Premiums written
Premiums earned
Losses on claims
Expenses
Total losses on claims and expenses
Net underwriting income
Interest and dividend income, net of investment
expenses
Net investment gains
Investment income
Interest expense
Income before income taxes
Net income
Net operating income 1
Weighted average number of common shares
outstanding
Basic
Diluted 2
Earnings per common share
Earnings per common share (basic)
Earnings per common share (diluted) 2
$
$
$
$
$
$
MD&A-Year ended December 31, 2016
Fourth Quarter
2016
171 $
164 $
29
33
62
103
46
47
93
6
190
140 $
105 $
2015
213 $
151 $
35
27
62
90
44
3
47
6
131
98 $
95 $
Full Year
2016
760 $
638 $
139
124
263
375
176
38
214
23
566
417 $
388 $
2015
809
586
122
108
230
356
169
32
201
23
534
398
375
91,856,165
92,266,264
91,795,125
92,218,209
91,828,701
91,874,244
92,296,521
92,771,849
1.52 $
1.52 $
1.06 $
1.03 $
4.54 $
4.54 $
4.32
4.22
$
$
$
$
$
1.15 $
1.14 $
464,291 $
5,120 $
4,918 $
Selected non-IFRS financial measures 1
Operating earnings per common share (basic)
Operating earnings per common share (diluted) 2
Insurance in-force 3
Transactional new insurance written
Portfolio new insurance written
Loss ratio
Expense ratio
Combined ratio
Operating return on equity
MCT ratio
Delinquency ratio 4
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, basic and diluted earnings per common share, and basic and diluted operating earnings per common
4.23 $
4.23 $
464,291 $
21,171 $
41,881 $
22%
19%
41%
11%
245%
0.10%
4.07
4.05
404,963
25,243
25,696
21%
18%
39%
12%
234%
0.10%
1.04 $
1.03 $
404,963 $
6,231 $
9,595 $
18%
20%
38%
12%
245%
0.10%
23%
18%
41%
12%
234%
0.10%
share is caused by the potentially dilutive impact of share-based compensation awards.
3 The Company estimates that the outstanding balance of insured mortgages was approximately $223 billion as at December 31, 2016.
4 Based on original insured loans in-force for which coverage terms have not expired and excludes delinquencies that have been incurred but not reported.
Page 6 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
Key fourth quarter financial metrics:
The Company reported net income of $140 million and net operating income of $105 million in the fourth quarter of 2016, as
compared to $98 million and $95 million, respectively, in the same quarter in the prior year.
Premiums written of $171 million decreased by $42 million, or 20%, as compared to the same quarter in the prior year. Premiums
written from transactional insurance of $149 million were lower by $32 million, or 17%, from the prior year’s period due to an
18% decrease in new insurance written, primarily as a result of targeted underwriting changes in select markets and a smaller
transactional insurance market size. Premiums written of $22 million from portfolio insurance were lower by $10 million, or 32%,
from the prior year’s period. The volume of portfolio insurance varies from quarter to quarter based on lender demand.
Premiums earned of $164 million were $13 million, or 9%, higher than the same quarter in the prior year due to the relatively
larger contributions from premiums written in the 2015 and 2016 books of business.
Losses on claims of $29 million were $6 million, or 17%, lower than the same quarter in the prior year, primarily due to strong
economic conditions in the Pacific region and favourable development from Québec case reserves, partially offset by pressure
in oil-producing regions. The loss ratio was 18% for the quarter as compared to 23% in the same quarter in the prior year.
Expenses of $33 million were $6 million, or 22%, higher than the same quarter in the prior year, primarily due to higher share-
based compensation expense. The expense ratio for the quarter was 20%, as compared to 18% in the same quarter in the prior
year, consistent with the Company’s expected operating range of 18% to 20%.
Investment income, excluding net investment gains, of $46 million was $2 million, or 4%, higher than the same quarter in the
prior year, primarily due to an increase in the amount of invested assets.
Net investment gains of $47 million, primarily from net gains on derivatives and foreign exchange, are $44 million higher than
the same quarter in the prior year. The increase is primarily from the impact of movement in interest rates on the Company’s
interest rate swaps, as well as movement in foreign exchange rates on the Company’s invested assets denominated in U.S.
dollars. These gains are largely offset by decreases in fair value of available for sale assets in other comprehensive income (“OCI”).
Key 2016 financial metrics:
The Company reported 2016 net income of $417 million and net operating income of $388 million, as compared to $398 million and
$375 million, respectively, in the prior year. The prior year’s net income and net operating income included a non-recurring favourable
tax item of $5 million.
Premiums written of $760 million decreased by $49 million, or 6%, in 2016 as compared to the prior year. Premiums written
from transactional insurance of $619 million were lower by $86 million, or 12%, primarily due to a 16% decrease in new insurance
written, as a result of targeted underwriting changes in select areas and a smaller transactional insurance market size. This was
partially offset by a 5% increase in the average transactional insurance premium rate resulting from the June 2015 premium rate
increase. Portfolio insurance premiums written of $140 million were higher by $37 million, which was driven by higher demand
from lenders prior to the July 1, 2016 regulatory changes, which generally limits portfolio insurance to only those mortgages that
will be used in government securitization programs.
Premiums earned of $638 million increased by $52 million, or 9%, in 2016 as compared to the prior year due to the relatively
larger contributions from premiums written in the 2015 and 2016 books of business. The unearned premiums reserve was $2.1
billion at December 31, 2016, up $122 million, or 6%, from December 31, 2015.
Losses on claims of $139 million were $17 million, or 14%, higher in 2016 as compared to the prior year, primarily due to an
increase in new delinquencies, net of cures, and an increase in the average reserve per delinquency in oil-producing regions.
Expenses of $124 million increased by $16 million, or 14%, in 2016 as compared to the prior year primarily due to share-based
compensation expense. The expense ratio was 19% as compared to 18% in the prior year, consistent with the Company’s
expected operating range of 18% to 20%.
Page 7 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
Investment income, excluding net investment gains, of $176 million was $7 million, or 4%, higher than the prior year due to an
increase in invested assets. The Company’s investment portfolio had a market value of $6.2 billion at December 31, 2016 and
earned an investment yield of 3.2% in 2016.
The regulatory capital ratio or MCT ratio was approximately 245%, 11 percentage points higher than the prior year’s period and 25
percentage points higher than the Company’s operating MCT holding target of 220%.
2016 performance against strategic priorities
The Company met or exceeded the majority of its key strategic priorities for the year ended December 31, 2016 highlighted by the
following accomplishments:
Maintained strong insurance portfolio quality with an average transactional credit score of 751;
Grew net operating income by 3.4%; and
Achieved an operating return on equity of 11%.
The following table summarizes the Company’s performance in comparison to the objectives:
2016 Objective
Premiums Written and Premiums Earned
Performance
Flat or modestly lower premiums written from transactional
insurance compared to 2015 as the full year impact of the June 2015
price increase partially offsets the impact of an expected decline in
mortgage originations.
Total premiums written moderately higher compared to 2015,
primarily due to higher portfolio insurance volumes.
Transactional premiums written decline: 12%
Premiums written from transactional insurance declined by
12% year-over-year primarily due to a 5% – 10% smaller high
loan-to-value mortgage originations market as estimated by
the Company and a modestly lower market share resulting
from targeted underwriting actions in select markets.
Total premiums written decline: 6%
Total premiums written declined by 6% year-over-year as the
36% increase in premiums written from portfolio insurance was
more than offset by the decrease from transactional insurance.
Moderate growth in premiums earned of 5% or greater for the full
year.
Losses on Claims
Proactive risk management and focused loss mitigation strategies:
Workout penetration rate greater than 55%
Loss ratio range of 25% to 40%
Premiums earned growth: 9%
Loss ratio: 22%
Workout penetration rate: 57%
The Company achieved a loss ratio of 22%, 3 percentage points
below the lower end of the Company’s anticipated range of 25
to 40% for 2016. The loss ratio performance was favorably
impacted by strong home price appreciation, stable
unemployment, resilience
in oil-producing regions and
continued strong underwriting discipline. The workout
penetration rate of 57% was 2 percentage points higher than
the target of 55%.
Page 8 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
2016 Objective
Portfolio Quality and Risk Management
Performance
Maintain a high quality insurance portfolio through prudent
underwriting guidelines, proactive risk management and
disciplined underwriting:
Average transactional credit score of greater than 735
Average transactional gross debt service ratio of less than 26%
Average transactional credit score below 660 of less than 5%
Capital Management
Proactively manage capital to balance capital strength, flexibility
and efficiency:
Ordinary dividend payout ratio of 35% to 45%
Debt-to-total capital ratio of less than or equal to 15%
MCT ratio modestly above 220%
Investments Management
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.
Average transactional credit score: 751
Average transactional gross debt service ratio: 24%
Average transactional credit score below 660: 3%
The Company originated a high quality insurance portfolio with
an 8-point average credit score year-over-year improvement to
751 primarily due to a smaller proportion of credit scores below
660. Gross debt service ratio was stable at 24%.
Ordinary dividend payout ratio: 40%
Debt-to-total capital ratio as at December 31, 2016: 11%
MCT ratio as at December 31, 2016: 245%
The Company maintained a strong and efficient capital base
with an MCT ratio of 245%, 25 percentage points above the
holding target, increased ordinary dividends by 5%, and
maintained capital flexibility through $180 million in liquid
investments and entering into a $100 million undrawn credit
facility. On January 1, 2017, a new regulatory capital
framework took effect and the pro forma MCT ratio under the
new regulatory capital framework is 158% to 162% compared
to the new PRMHIA minimum and regulatory supervisory ratio
of 150%. The Company has established an internal target of
157% under the new regulatory capital framework.
See “Recent business and regulatory developments” for further
information.
The Company maintained a high quality investment portfolio
including an allocation of 91% to investment grade bonds and
debentures and a modest increase in preferred shares. Overall,
the Company achieved an average investment yield of 3.2%.
Page 9 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
Recent business and regulatory developments
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 January 17, 2017, the Company announced it will increase its transactional mortgage insurance premium rates for homebuyers.
The new pricing is a reflection of higher regulatory capital requirements that came into effect on January 1, 2017 and supports the
long-term safety and sustainability of the Canadian housing finance system.
The new premium rates on transactional new insurance written for standard owner-occupied purchase applications submitted on or
after March 17, 2017 are as follows:
Transactional New Insurance Written
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%
90.01% to 95% (Non-Traditional
Payment Program)
Standard Premium
(Prior to March 17, 2017)
0.60%
0.75%
1.25%
1.80%
2.40%
3.60%
Standard Premium
(Effective March 17, 2017)
0.60%
1.70%
2.40%
2.80%
3.10%
4.00%
3.85%
4.50%
Based on the expected loan-to-value mix, the average transactional premium rate increase is approximately 18% to 20% and is
expected to result in an average transactional premium rate of 330 to 335 basis points for 2017, compared to 293 basis points in
2016. The average transactional premium rate after 2017 is expected to be 345 to 350 basis points. The Company believes the new
premium rates adequately reflect the increased capital requirements and allows the Company to earn the targeted operating return
of equity of 13% on new business.
Similarly, the Company has increased its premium rates for portfolio insurance as a result of the higher regulatory capital that came
into effect on January 1, 2017. There may be a one-time increase in portfolio insurance volumes in the first quarter of 2017, as the
Company ended 2016 with a number of pending portfolio applications which are expected to close in early 2017.
Changes to the mortgage insurance rules
On October 3, 2016, the Minister of Finance announced a number of changes in the Canadian housing finance system. Building on
measures announced in late 2015, the government will:
Bring consistency to mortgage insurance rules by standardizing eligibility criteria for high- and low- loan-to-value ratio insured
mortgages, including a mortgage rate stress test;
Improve tax fairness by closing loopholes surrounding the capital gains tax exemption on the sale of a principal residence; and
Consult on how to better protect taxpayers by ensuring that the distribution of risk in the housing finance system is balanced.
Key changes to the mortgage insurance rules are described below.
Applying a Mortgage Rate Stress Test to All Insured Mortgages
Effective October 17, 2016, all insured homebuyers must qualify for mortgage insurance at an interest rate that is the greater of their
contract mortgage rate or the Bank of Canada's conventional five-year fixed posted rate, which is currently 4.64%. This requirement
Page 10 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
was already in place for high loan-to-value ratio insured mortgages with variable interest rates or fixed interest rates with terms less
than five years. To qualify for mortgage insurance, borrower debt-servicing ratios cannot exceed the maximum allowable levels of
39% and 44%, for gross debt service ratio and total debt service ratio, respectively.
Changes to Low-Ratio Mortgage Insurance Eligibility Requirements
Effective November 30, 2016, for insured mortgages with a loan-to-value ratio less than or equal to 80%, the following mortgage
insurance criteria applies to both transactional mortgage insurance loans and portfolio mortgage insurance loans:
1. A loan whose purpose includes the purchase of a property or subsequent renewal of such a loan;
2. A maximum amortization length of 25 years commencing from when the loan was originally made;
3. A property value below $1,000,000;
4. For variable-rate loans that allow fluctuations in the amortization period, loan payments that are recalculated at least once
every five years to conform to the established amortization schedule;
5. A minimum credit score of 600 at the time the loan is approved;
6. A maximum gross debt service ratio of 39% and a maximum total debt service ratio of 44% at the time the loan is approved,
calculated by applying the greater of the mortgage contract rate or the Bank of Canada conventional five-year fixed posted
mortgage interest rate; and,
If the property is a single unit, it must be owner-occupied.
7.
Impact of Changes Related to Mortgage Rate Stress Tests and Low-Ratio Mortgage Insurance Eligibility Requirements
Based on the Company’s review of the mortgage insurance eligibility rule changes announced October 3, 2016, it expects that the
transactional market size and its transactional new insurance written in 2017 may decline by approximately 15% to 25%, reflecting
expected changes to borrower home buying patterns, including the purchase of lower-priced properties and/or larger
downpayments.
The Company also expects that portfolio new insurance written in 2017 may decline by approximately 25% to 35% as compared to
the normalized run rate after the July 1, 2016 regulatory changes for portfolio insurance. The new mortgage rules prohibit insuring
low loan-to-value refinances and most investor mortgages originated by lenders on or after October 17, 2016.
The impact on any future premiums written from the smaller market size will be partially offset by the premium rate increase in
March 2017, in response to the higher capital requirements arising from OSFI’s new capital framework. With an unearned premiums
reserve of $2.1 billion as at December 31, 2016, premiums earned in the next 12 to 18 months will continue to benefit from the
relatively higher level of premiums written in 2014 through 2016. As a result, there should be limited near-term impact on the level
of premiums earned.
Forthcoming Consultation on Lender Risk Sharing
On October 21, 2016, the government launched a public consultation on a policy option that would require mortgage lenders to
manage a portion of loan losses on insured mortgages that default, known as “lender risk sharing”. This could transfer some risk
borne by mortgage insurers to lenders. The comment period for this consultation ends on February 28, 2017. The Company will
participate in the consultation; however, the Company believes it is premature to determine the potential impact of this process and
its ultimate outcome.
Portfolio mortgage insurance
Effective July 1, 2016, portfolio mortgage insurance is only available on mortgages used in CMHC securitization programs and is
prohibited on mortgages used in private securitizations after a phase-in period for existing private securitizations. The government
announced these amendments on February 3, 2016 in the “Eligible Mortgage Loan Regulations” and the “Insurable Housing Loan
Regulations” also referred to as the “Portfolio Insurance Purpose Test”. Although it is difficult to determine the long term impact of
these changes at this time, the Company believes that the regulations may result in a decrease in demand for portfolio mortgage
insurance.
Page 11 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
Changes to the regulatory capital framework
On December 15, 2016, OSFI released the final capital advisory titled “Capital Requirements for Federally Regulated Mortgage
Insurers”. This advisory provides a new standard framework for determining the capital requirements for residential mortgage
insurance companies. The new framework is more risk sensitive and incorporates additional risk attributes, including credit score,
remaining amortization and outstanding loan balance. The advisory came into effect on January 1, 2017, replacing OSFI’s advisory,
“Interim Capital Requirements for Mortgage Insurance Companies”, which had been in effect since January 2015.
The advisory focuses on capital requirements for insurance risk, which consists primarily of:
i. A base requirement that applies to all insured mortgages at all times; plus
ii. A supplementary requirement that applies only to mortgages originated during periods when the housing market for the
region that corresponds to the mortgage has a house price-to-income ratio that exceeds a specified threshold (with this
supplementary requirement not applying to mortgages insured prior to January 1, 2017); less
iii. Premium liabilities, consisting of unearned premiums reserve and the reserve for incurred but not reported (IBNR) claims.
The advisory states that:
i. By using outstanding loan balance as the exposure measure, a mortgage’s actual pay down rate is captured and capital is
only held against insured mortgages that are still outstanding;
ii. By using a modified loan-to-value ratio (outstanding loan balance/original property value), the borrower’s equity position in
the property is better captured;
iii. Differentiating requirements by borrower credit score ensures that more capital is held for borrowers who have a greater
risk of default;
iv. Differentiating requirements by remaining amortization recognizes the importance of the expected future pay-down rate
and progression of the borrower’s equity position.
Supplementary capital will be tied to the behavior of property prices, both in terms of recent housing price trends and the behavior
of housing prices relative to household incomes. The Teranet – National Bank House Price IndexTM (“Teranet Index”) is used to
measure house prices and Statistics Canada household disposable income and population data are used to measure per capita
income. The Supplementary Capital Requirement Indicators (“SCRIs”), based primarily on the ratio of the Teranet Index for a
metropolitan area index to the national per capita income, is compared to a prescribed threshold value for that particular area. For
a mortgage loan originated in any period after January 1, 2017, where the SCRI exceeds the threshold value for a metropolitan area,
supplementary capital applies for the life of that mortgage. SCRI thresholds are calculated on a one quarter lag based on availability
of household disposable income and population data.
The Company has reviewed the methodology for calculating SCRIs and observed that Calgary, Edmonton, Toronto, Vancouver and
Victoria are breaching their SCRI thresholds, as prescribed by OSFI, at the end of the third quarter of 2016. These metropolitan
areas represented approximately 35% - 40% of transactional new insurance written in 2016.
The advisory also includes a phase-in period to allow for a smooth transition to the new standard framework. For the segments of
Genworth Canada’s insurance in-force listed below, these transition arrangements will keep the required capital unchanged from the
2016 MCT guideline level at 220% MCT ratio at December 31, 2016 until such time as the required capital under the new standard
framework at the OSFI Supervisory MCT Target of 150% is less than the aforementioned required capital at a 220% MCT ratio:
Transactional insured mortgages originated prior to December 31, 2016 with original amortizations greater than twenty-five
years; and
Portfolio insured mortgages for which the application for portfolio insurance was received prior to December 31, 2016 and
the effective date of insurance is prior to March 31, 2017.
Additionally, the advisory provides for a three year phase-in period of the rising impact on capital required for operational risk.
Under the new capital framework, the holding target of 220% has been recalibrated, under PRMHIA, to the OSFI Supervisory MCT
Target of 150% and the minimum MCT under PRMHIA has been reduced to 150%. Based on the new framework, the Company
estimates that its pro forma MCT ratio as at December 31, 2016 would have been in the range of 158% to 162%. As a result, the
Company was compliant with the new framework upon its implementation on January 1, 2017.
Page 12 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
It is important to note that further changes to the new standard framework may be made by OSFI as a result of comments and input
it receives in the future. The Company continues to work with OSFI to further refine this new standard framework in specific areas,
including the proposed, but deferred, requirement to update credit scores.
Additional property tax on purchases of residential property in Metro Vancouver by foreign buyers
In order to help improve housing affordability, on July 25, 2016, the British Columbia government introduced a four-pronged plan
that includes an additional land transfer tax on foreign buyers. As of August 2, 2016, foreign individuals and corporations are subject
to an additional 15% land transfer tax on the purchase of residential property in Metro Vancouver. The Company does not expect
these changes to have a material impact on its business, as foreign borrowers are typically not eligible for high loan-to-value mortgage
insurance.
Financial strength ratings
On August 18, 2016, Standard & Poor’s (“S&P”) affirmed the Insurance Subsidiary’s A+ rating with a stable outlook and the Company’s
BBB+ rating with a stable outlook.
On May 17, 2016, DBRS confirmed the Insurance Subsidiary’s AA financial strength rating with a stable trend. DBRS downgraded the
Company’s issuer rating and senior unsecured debentures rating one notch to A (high) with a stable trend citing “DBRS's concern that
there is now a greater risk that OSFI, in a stressed mortgage market situation, may place restrictions on dividend payments from
the Insurance Company." 1
Dividends
On November 25, 2016, the Company paid a quarterly dividend of $0.44 per common share.
Share repurchase
On April 28, 2016, 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 4,589,958 shares representing
approximately 5% of its outstanding common shares as of April 25, 2016. Purchases of common shares under the NCIB may
commence on or after May 5, 2016 and will conclude on the earlier of May 4, 2017 and the date on which the Company has purchased
the maximum number of shares under the NCIB.
The Company’s prior NCIB, which commenced on April 28, 2015, expired on May 4, 2016. The Company did not purchase any shares
under either NCIB during the three and twelve months ended December 31, 2016. The Company had made purchases of $50 million
in 2015 pursuant to the NCIB.
E-21 – Operational Risk Management Guideline
In June 2016, OSFI released its E-21 Operational Risk Management Guideline (the “E-21 Guideline”). In the E-21 Guideline, OSFI
defines operational risk “as the risk of loss resulting from people, inadequate or failed internal processes and systems, or from
external events. This includes legal risk but excludes strategic and reputational risk”. The E-21 guideline sets out four principles: i)
integrated and documented operational risk management framework; ii) support of a corporate governance structure including a
risk appetite statement; iii) use of a “three lines of defense” approach to ensure accountability; and iv) comprehensive identification
and assessment process. The E-21 Guideline is generally consistent with the Company’s current operational risk management
framework.
1 DBRS May 17, 2016 press release: DBRS Confirms Ratings on Genworth Financial Mortgage Insurance Company Canada and Downgrades Genworth MI Canada Inc.
Page 13 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
Maximum outstanding insured exposure for all private insured mortgages
The Company estimates that its outstanding insured mortgage balances as at December 31, 2016 was $223 billion, or 48% of the
original insured amount. On December 15, 2016, the maximum outstanding insured exposure for all private insured mortgages
permitted by PRMHIA was increased to $350 billion from the previous maximum of $300 billion. The Company estimates, that as at
September 30, 2016, the outstanding insured mortgage balances for all privately insured mortgages was $282 billion.
Credit facility
During the second quarter of 2016 the Company entered into a $100 million senior unsecured revolving credit facility, which matures
on May 20, 2019. The Company has not drawn on the credit facility as at December 31, 2016. The credit facility provides further
financial flexibility in an efficient and cost effective manner.
Genworth Financial, Inc. transaction
On October 21, 2016, Genworth Financial, Inc., the Company’s majority shareholder, entered into a definitive agreement with China
Oceanwide Holdings Group Co., Ltd., a limited liability company incorporated in the People’s Republic of China (“China Oceanwide”),
under which China Oceanwide has agreed to acquire all of the outstanding shares of Genworth Financial Inc. through a merger. Upon
completion of the transaction, Genworth Financial, Inc. will be a standalone subsidiary of China Oceanwide. The transaction is subject
to approval by the shareholders of Genworth Financial Inc. as well as other closing conditions, including the receipt of required
regulatory approvals.
Page 14 of 51
Genworth MI Canada Inc.
Economic environment
MD&A-Year ended December 31, 2016
The mortgage insurance business is influenced by macroeconomic conditions. Specifically, the level of premiums written is influenced
by economic growth, interest rates, unemployment, housing activity, home prices and government policy among other factors. Losses
on claims are primarily impacted by unemployment rates, home prices and housing activity.
Key Macroeconomic Factors Influencing Business Performance
Full Year 2016 or as at December 31, 2016
Housing Resales Y/Y: 6.3%1
National Composite House Price Index change: 12.3%2
Average Oil Price: US $433
5 year Government of Canada Bond Yields: 1.11%4
GDP Estimate 1.3%5
Average Unemployment 7.0%6
Full Year 2017 or as at December 31, 2017 Estimate
Housing resales Y/Y: (3.3)%1
National Composite House Price Index change: -1% to +1%2
Average Oil Price: US $50 to $603
5 year Government of Canada Bond Yields: 1.30% to 1.50%4
GDP Estimate 2.1%5
Average Unemployment 7.0% to 7.5%6
Macroeconomic environment
The Bank of Canada estimates economic growth, as measured by real Canadian Gross Domestic Product (“GDP”), to be 1.3% in 2016
and 2.1% in 2017. The expected improvement in GDP reflects higher oil prices, stronger exports related to a weaker Canadian dollar,
steady consumer spending and increased government investment on infrastructure projects, partially offset by lower residential
housing demand.
The overnight interest rate in Canada remained flat at 0.50% in 2016 and is not expected to increase in 2017. The 5-year Government
of Canada bond yield has risen approximately 50 basis points since October, to 1.11% as at December 2016 in response to global
economic events and is expected to continue to rise modestly in 2017.
Canada’s unemployment rate was at 6.9% at the end of the fourth quarter of 2016 and averaged 7.0% in 2016. The average oil price
for 2016 was US$43, recovering from its historic low in early 2016. The Company estimates that the average unemployment rate will
be between 7.0% and 7.5% for 2017 and oil prices will be in the range of US$50 and US$60 for the year.
Housing market
Home resales for the full year 2016 were up 6.3% as compared to the prior year and the National Composite House Price Index
increased by 12.3% in 2016. These increases were driven primarily by strong housing markets in British Columbia and Ontario,
partially offset by continued weakness in the oil-producing regions.
The Canadian Real Estate Association expects housing resales to decline by 3.3% in 2017 and the Company expects the National
Composite House Price Index for 2017 to be in the range of 1% to -1%. Recently announced federal mortgage rule changes with
respect to mortgage insurance qualification and a modest increase in mortgage rates are expected to adversely impact first time
homebuyers.
1 Canadian Real Estate Association (“CREA”)
2 Teranet – National Bank Home Price Index (2016); Management estimate (2017)
3 U.S. Energy Information Administration - WTI Light Crude Oil US$/barrel (2016); Management estimate (2017)
4 Bloomberg
5 Monetary Policy Report, January 2017; 2016 Real GDP quarter over quarter percentage change at annual rates and 2017 estimate
6 Statistics Canada – Labour Force Survey (2016); Management estimate (2017).
Page 15 of 51
Genworth MI Canada Inc.
2017 objectives
MD&A-Year ended December 31, 2016
In pursuit of being Canada’s mortgage insurer of choice, the Company seeks to enhance stakeholder value through working with its
lender partners, regulators and influencers to:
Maintain strong claim paying ability and financial strength;
Help Canadians responsibly achieve and maintain homeownership;
Advance prudent risk management practices to enhance the safety and soundness of the mortgage finance system.
Promote strong and sustainable communities across Canada; and
The Company’s long term objective is 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 below:
2017 Objectives
Premiums Written and Premiums Earned
Moderate decline in premiums written despite expected higher premium rates.
The Company expects that the transactional market size and its transactional new insurance written in 2017 may decline by
approximately 15% to 25% as a result of regulatory changes that took effect in the fourth quarter of 2016. Transactional premiums
written are expected to be moderately lower compared to 2016, primarily due to a smaller mortgage originations market partially
offset by the average transactional premium rate increase of approximately 18% to 20% which is expected to result in an average
transactional premium rate of 330 to 335 basis points for 2017, compared to 293 basis points in 2016.
Portfolio insurance premiums written are expected to be significantly lower compared to 2016, primarily due to the prohibition
on government guaranteed mortgage insurance on refinance mortgages originated after November 30, 2016 and the impact of
the July 1, 2016 regulatory change, or purpose test rule, which restricts the use of portfolio mortgage insurance.
The Company expects that the average premium rate for portfolio insurance will increase substantially as a result of the new capital
framework that became effective January 1, 2017.
Modest increase in premiums earned due to seasoning of recent books of business
Given the single upfront premium model, the Company is generally able to reliably estimate the proportion of unearned premiums
that will be earned into revenues as premiums earned as long as there are no significant changes to the Company’s current
premiums recognition curve. The Company expects to earn between $615 and $625 million of premiums earned in 2017 from the
unearned premiums reserve of $2.1 billion as at December 31, 2016. In addition, premiums earned in 2017 will benefit from the
portion of 2017 premiums written that will be earned in 2017.
Losses on Claims
Proactive risk management and focused loss mitigation strategies:
Loss ratio range of 25% to 35%
Workout penetration rate greater than 55%
Portfolio Quality and Risk Management
Maintain a high quality insurance portfolio through prudent underwriting guidelines, proactive risk management and disciplined
underwriting:
Average transactional credit score of greater than 735
Average transactional credit score below 660 of less than 5%
Capital Management
Prudently manage capital to balance capital strength, flexibility and efficiency:
Ordinary dividend payout ratio of 35% to 45%
Debt-to-total capital ratio of less than or equal to 15%
MCT ratio in the range of 160% to 165%
Investment Management
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.
Investment income expected to be modestly higher as a result of higher average assets
Page 16 of 51
Genworth MI Canada Inc.
Fourth Quarter Review
Table 2: Results of operations
MD&A-Year ended December 31, 2016
Fourth Quarter
Full Year
(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
Investment income
Interest expense
Income before income taxes
Provision for income taxes
Net income
Adjustment to net income, net of taxes:
Net investment (gains) losses
Net operating income 1
$
$
$
$
2016
2015
Change
2016
2015
Change
171 $
213 $
(42)
(20)% $
760 $
809 $
(49)
(6)%
164 $
151 $
29
33
62
103
35
27
62
90
46
47
93
6
190
50
140 $
44
3
47
6
131
34
98 $
13
(6)
6
-
13
2
44
45
-
58
16
42
9% $
638 $
586 $
(17)%
22%
-
15%
139
124
263
375
122
108
230
356
4%
NM
96%
-
44%
48%
43% $
176
38
214
23
566
149
417 $
169
32
201
23
534
136
398 $
(35)
105 $
(3)
95 $
(32)
10
NM
11% $
(29)
388 $
(23)
375 $
52
17
16
33
19
7
6
13
-
31
13
19
(6)
13
9%
14%
14%
14%
5%
4%
20%
6%
-
6%
10%
5%
25%
3%
Effective tax rate
26.1%
25.6%
-
0.6 pts
26.3%
25.4%
-
0.9 pts
Selected non-IFRS financial
measures 1
Transactional new insurance written
Portfolio new insurance written
Loss ratio
Expense ratio
Combined ratio
Operating return on equity
Investment yield
Note: Amounts may not total due to rounding. NM means Not Meaningful.
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.
(18)% $ 21,171 $ 25,243 $
(49)% $ 41,881 $ 25,696 $
(5) pts
2 pts
(3) pts
- pts
(0.1) pts
(1,111)
(4,677)
-
-
-
-
-
18%
20%
38%
12%
3.2%
22%
19%
41%
11%
3.2%
21%
18%
39%
12%
3.3%
23%
18%
41%
12%
3.3%
6,231 $
9,595 $
5,120 $
4,918 $
$
$
(4,072)
16,185
-
-
-
-
-
(16)%
63%
1 pts
1 pts
2 pts
- pts
(0.1) pts
Page 17 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
Table 3: New insurance written, premiums written and premiums earned
(in millions of dollars, unless
otherwise specified)
New insurance written
Transactional
Portfolio
Total
Premiums written
Transactional
Portfolio
Total
Average premium rate (in basis
points)
Transactional
Portfolio
Total
$
$
$
Fourth Quarter
Full Year
2016
2015
Change
2016
2015
Change
5,120 $
4,918
10,038 $
6,231 $
9,595
15,826 $
(1,111)
(4,677)
(5,787)
(18)% $
(49)%
(37)% $
21,171 $
41,881
63,051 $
25,243 $
25,696
50,938 $
(4,072)
16,185
12,113
(16)%
63%
24%
149
22
171 $
181
32
213 $
(32)
(10)
(42)
(17)%
(32)%
(20)% $
619
140
760 $
705
104
809 $
(86)
37
(49)
(12)%
36%
(6)%
292
45
171
290
34
135
2
11
36
1%
33%
27%
293
34
121
279
40
158
14
(7)
(38)
5%
(17)%
(24)%
Premiums earned
$
164 $
151 $
13
9% $
638 $
586 $
52
9%
Note: Amounts may not total due to rounding.
Current quarter
Transactional new insurance written was $5.1 billion in the fourth quarter of 2016, representing a decrease of $1.1 billion, or 18%,
as compared to the same quarter in the prior year. This decrease resulted primarily from targeted underwriting changes in select
markets and a smaller transactional insurance originations market. New insurance written from portfolio insurance was $4.9 billion
in the fourth quarter of 2016, as compared to $9.6 billion in the prior year. The volume and mix of portfolio insurance varies from
quarter to quarter based on lender demand.
Premiums written from transactional insurance were $149 million in the fourth quarter of 2016, a decrease of $32 million, or 17%,
as compared to the prior year’s period. The $32 million decrease was primarily due to lower volumes of transactional insurance
business. Premiums written from portfolio insurance were $22 million in the fourth quarter of 2016 as compared to $32 million in
the prior year’s period.
Premiums earned increased by $13 million, or 9%, to $164 million in the fourth quarter of 2016, as compared to the prior year’s
period due to the relatively larger contributions from premiums written in 2015 and 2016.
Full year
In 2016, transactional new insurance written was $21.2 billion, a decrease of $4.1 billion, or 16%, as compared to the prior year
primarily as a result of targeted underwriting changes in select markets and a smaller transactional insurance originations market.
New insurance written from portfolio insurance was $41.9 billion in 2016, as compared to $25.7 billion in the prior year. This increase
was driven by higher demand from lenders prior to the July 1, 2016 regulatory changes which generally limits portfolio insurance to
only those mortgage that will be used in government securitization programs.
Premiums written from transactional insurance were $619 million for the full year of in 2016, a decrease of $86 million, or 12%, as
compared to the prior year. The $86 million decrease was primarily due to lower volumes of transactional insurance, partially offset
by a 5% increase in the average premium rate to 2.93% as a result of the June 2015 premium rate increase. Premiums written from
portfolio insurance were $140 million in 2016, an increase of $37 million or 36%, due to higher volumes of portfolio insurance. The
average portfolio insurance premium rate of 0.34% in 2016 reflects the high quality portfolio and higher proportion of portfolio
insured mortgages with loan-to-values below 65%.
Page 18 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
Premiums earned increased by $52 million, or 9%, to $638 million in 2016, as compared to the prior year due to higher premiums
earned from the relatively larger contributions from the 2014, 2015 and 2016 books of business.
Table 4: Losses on claims
New delinquencies
Cures
New delinquencies, net of cures
Average reserve per delinquency
(in thousands of dollars)
Losses on claims (in millions of
dollars)
Loss ratio
Note: Amounts may not total due to rounding.
$
$
Current quarter
2016
Fourth Quarter
2015
1,198
711
487
1,228
792
436
Full Year
Change
30
81
(51)
3%
11%
(10)%
2016
4,940
3,091
1,849
2015
4,466
2,788
1,678
Change
474
303
171
11%
11%
10%
79 $
72 $
7
10% $
79 $
72 $
7
10%
29 $
35 $
18%
23%
(6)
-
(17)% $
(5) pts
139 $
22%
122 $
21%
17
-
14%
1 pts
New delinquencies, net of cures, of 436 were 51 lower than the same quarter in the prior year primarily due to a decrease of 65
largely from non-oil producing regions of Canada, partially offset by a modest increase of 14 in Alberta. The decrease of 65 new
delinquencies net of cures included 28 in Québec, 18 in the Pacific region and 14 in Ontario, which was consistent with strong or
improving economic conditions in these regions. The Atlantic region decreased marginally by 5 and the Prairies region did not change.
The increase of 14 delinquencies in Alberta consisted of an increase in new reported delinquencies of 127 due to economic and
housing market pressure which was largely offset by an increase in cures of 113.
Average reserve per delinquency increased by approximately $7 thousand primarily due to a shift in regional mix towards oil-
producing regions with higher average insured amounts and modest declines in house prices.
The resulting loss ratio was 18% in the fourth quarter of 2016, 5 percentage points lower than the same period in the prior year due
to lower losses on claims and higher earned premium.
Full year
In 2016, new delinquencies, net of cures, of 1,849 were 171 higher than the prior year primarily due to pressure in oil-producing
regions with an increase of 391 in Alberta, 82 in the Prairies region, and 2 in the Atlantic region, partially offset by a decrease of 137
in Ontario, 99 in Québec and 68 in the Pacific region consistent with strong or improving economic conditions in these regions.
Average reserve per delinquency increased by approximately $7 thousand primarily due to a shift in regional mix towards oil-
producing regions with higher average insured amounts and modest declines in house prices, partially offset by favourable
development from Québec case reserves related to improving economic conditions in this region.
The resulting loss ratio was 22% in 2016, 1 percentage point higher than the prior year due to higher losses on claims partially offset
by higher earned premium.
Page 19 of 51
Genworth MI Canada Inc.
Table 5: Expenses
(in millions of dollars, unless otherwise specified)
Expenses
Premium taxes and
underwriting fees
Employee compensation
Other
Expenses before net change in
deferred policy acquisition costs
Net change in deferred policy
acquisition costs
Total
Expense ratio
Note: Amounts may not total due to rounding.
Current quarter
MD&A-Year ended December 31, 2016
Fourth Quarter
2015
2016
Change
Full Year
2016
2015
Change
$
$
13 $
12
9
15 $
9
8
(2)
3
1
(13)% $
36%
10%
58 $
49
30
60 $
40
29
(2)
9
1
(3)%
23%
4%
34
32
(1)
33 $
(5)
27 $
2
4
6
6%
138
129
9
7%
(75)%
22% $
(14)
124 $
(21)
108 $
7
16
(34)%
14%
20%
18%
-
2 pts
19%
18%
-
1 pts
Expenses, before net change in deferred policy acquisition costs, increased by $2 million, or 6%, to $34 million in the fourth quarter
of 2016 as compared to the same quarter in the prior year. The increase was primarily due to a $3 million increase in employee
compensation, including higher share based compensation, and a moderate increase in other expenses of $1 million, which consists
primarily of professional fees and office expenses, partially offset by a $2 million decrease in premium taxes and underwriting fees
related to lower levels of premiums written. Total expenses increased by $6 million primarily due to a $4 million increase in the net
change in deferred policy acquisition costs, largely from the amortization of previously deferred policy acquisition costs in line with
higher premiums earned and the increase in non-deferrable expenses including share based compensation in the current quarter.
The expense ratio increased 2 percentage points to 20% for the fourth quarter of 2016, as compared to the same quarter in the prior
year due to higher expenses, partially offset by higher earned premium.
Full year
Expenses before net change in deferred policy acquisition costs increased by $9 million, or 7%, to $138 million in 2016 as compared
to the prior year. The increase was primarily due to a $9 million increase in employee compensation, including higher share based
compensation, and a moderate increase in other expenses of $1 million, which consists primarily of professional fees and office
expenses, partially offset by a $2 million decrease in premium taxes and underwriting fees related to lower levels of premiums
written. Total expenses increased by $16 million due to a $7 million increase in the net change in deferred policy acquisition costs,
largely from the amortization of previously deferred policy acquisition costs in line with higher premiums earned and the increase in
non-deferrable expenses including share based compensation expense.
The expense ratio increased 1 percentage point to 19% in 2016 as compared to the prior year due to higher expenses partially offset
by higher earned premium.
Page 20 of 51
Genworth MI Canada Inc.
Table 6: Investment income
(in millions of dollars, unless otherwise
specified)
Interest and dividend income, net of
investment expenses
Net realized gains /(losses) on sale of
investments
Net gains on derivatives and foreign
exchange
Impairment loss
Investment income
Invested assets, end of period
Investment yield, average over period
$
$
MD&A-Year ended December 31, 2016
Fourth Quarter
Full Year
2016
2015
Change
2016
2015
Change
$
46 $
44 $
4% $
176 $
169 $
7
4%
1
(2)
46
-
93 $
5
-
47 $
2
3
41
-
45
NM
NM
3
38
NM
95% $
(3)
214 $
-
201 $
23
(20)
(87)%
9
29
(3)
13
NM
NM
6%
6,226 $
3.2%
5,917 $ 309
-
3.3%
5% $
(0.1) pts
6,226 $
3.2%
5,917 $
3.3%
309
-
5%
(0.1) pts
Note: Amounts may not total due to rounding. NM means Not Meaningful.
Current quarter
Interest and dividend income, net of investment expenses, increased by $2 million, or 4%, to $46 million in the fourth quarter of
2016, primarily due to an increased level of invested assets and higher dividend income, partially offset by the impact of the low
interest rate environment on the reinvestment of fixed income maturities. The average investment yield for the quarter was 3.2%,
as compared to 3.3% in the prior year’s period. Invested assets increased by $309 million as a result of premiums written in 2016.
The Company recorded $1 million of net realized gains in the fourth quarter of 2016 primarily due to the sale of fixed income securities
as compared to $2 million of net realized loss in the same period in the prior year.
Net gains on derivatives and foreign exchanges were $46 million in the fourth quarter of 2016, as compared to $5 million in the same
period in the prior year, an increase of $41 million. The increase is primarily from the impact of movement in interest rates on the
Company’s interest rate swaps as well as movement in foreign exchange rates on the Company’s invested assets denominated in U.S.
dollars partially offset by foreign exchange-related derivatives activity. These gains are largely offset by decreases in fair value of
available for sale assets in OCI.
Full year
Interest and dividend income, net of investment expenses, increased by $7 million, or 4%, to $176 million in 2016, primarily due to
an increased level of invested assets and higher dividend income, partially offset by the impact of the low interest rate environment
on the reinvestment of fixed income maturities as compared to the prior year. The average investment yield for 2016 was 3.2%, as
compared to 3.3% in the prior year. Invested assets increased by $309 million as a result of premiums written in 2016.
The Company recorded $3 million of realized gains in 2016 primarily from the sales of fixed income securities as compared to $23
million of realized gains, primarily from the sale of its common shares holdings, in the prior year.
Net gains on derivatives and foreign exchanges were $38 million in 2016, as compared to $9 million in the prior year, an increase of
$29 million. The increase is primarily from the impact of movement in interest rates on the Company’s interest rate swaps and foreign
exchange-related derivatives activity partially offset by movement in foreign exchange rates on the Company’s invested assets
denominated in U.S. dollars.
The Company also recorded an impairment loss of $3 million on a Brazilian bond.
Page 21 of 51
Genworth MI Canada Inc.
Table 7: Net Income
(in millions of dollars, unless
otherwise specified)
Income before income taxes
Provision for income taxes
Net income
MD&A-Year ended December 31, 2016
Fourth Quarter
Full Year
2016
2015
Change
2016
2015
Change
$
$
190 $
50
140 $
131 $
34
98 $
58
16
42
-
44% $
48%
43% $
566 $
149
417 $
534 $
136
398 $
31
13
19
6%
10%
5%
0.6 pts
26.3%
25.4%
-
0.9 pts
Effective tax rate
26.1%
25.6%
Note: Amounts may not total due to rounding.
Current quarter
The effective tax rate was 26.1% in the fourth quarter of 2016, an increase of approximately 0.6 percentage points from 25.6% in the
prior year’s period. The increase was primarily the result of an increase in tax rates in certain provinces and higher non-deductible
items partially offset by higher non-taxable dividend income in the current year’s period.
Net income increased by $42 million, or 43%, to $140 million, primarily as a result of higher investment income, higher earned
premium and lower losses on claims partially offset by higher expenses.
Full year
The effective tax rate was 26.3% in 2016, an increase of approximately 0.9 percentage points from 25.4% in the prior year. The
increase was primarily the result of an approximately $5 million favourable non-recurring tax adjustment related to prior years that
was recorded in the first quarter of 2015, an increase in tax rates in certain provinces in 2016, and higher non-deductible items
partially offset by higher non-taxable dividend income in 2016.
Net income increased by $19 million, or 5%, to $417 million, in 2016 primarily as a result of higher earned premium and higher
investment income, partially offset by higher losses on claims, higher expenses, and the prior period favourable tax adjustment.
Page 22 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
Summary of annual information
Table 8 presents select income statement line items and certain key performance indicators for the last three years.
Table 8: Summary of Annual Information
(in millions of dollars, unless otherwise specified)
Net premiums written
Net premiums earned
Losses on claims
Expenses
Net underwriting income
Investment income
Net income
Adjustment to net income net of taxes:
Fee on early redemption of long term debt
Net investment gains
Net operating income1
Earnings per common share:
Earnings per common share (basic)
Earnings per common share (diluted)
Selected non-IFRS financial measures1
Loss ratio
Expense ratio
Combined ratio
Operating earnings per common share (basic)2
Operating earnings per common share (diluted)2
Operating return on equity
2016
$760
638
139
124
375
214
417
-
(29)
$388
$4.54
$4.54
22%
19%
41%
$4.23
$4.23
11%
2015
$809
586
122
108
356
201
398
-
(23)
$375
$4.32
$4.22
21%
18%
39%
$4.07
$4.05
12%
2014
$640
565
111
107
346
195
377
5
(16)
$366
$3.97
$3.97
20%
19%
39%
$3.86
$3.86
12%
Note: Amounts may not total due to rounding
1The 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.
2The 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.
Page 23 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
Table 9: Statement of Financial Position Highlights
(in millions of dollars, unless otherwise specified)
2016
2015
Total investments
Other assets
Subrogation recoverable
Total assets
Unearned premiums reserves
Loss reserves
Long-term debt
Other liabilities
Total liabilities
Shareholders’ equity excluding Accumulated other
comprehensive income (“AOCI”)
AOCI
Shareholders’ equity
Total liabilities and shareholders’ equity
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) 1
Book value per common share including AOCI (diluted) 1
Book value per common share excluding AOCI (diluted) 1
$6,226
319
67
6,612
2,143
163
433
224
2,963
3,556
93
3,649
6,612
$5,917
261
61
6,239
2,021
132
433
234
2,819
3,293
127
3,420
6,239
2014
$5,443
260
67
5,770
1,799
115
432
153
2,499
3,086
185
3,271
5,770
91,864,100
$39.72
$38.71
92,885,377
$39.28
$38.28
91,795,125
$37.26
$35.88
92,872,626
$36.82
$35.46
93,147,778
$35.12
$33.13
93,403,036
$35.02
$33.04
Dividends paid per common for the full year ended
$1.70
$1.59
$1.87
Note: Amounts may not total due to rounding.
1 The difference between basic and diluted number of common shares outstanding, book value per common share including AOCI and book value per common share excluding AOCI is caused
by the potentially dilutive impact of share-based compensation awards.
Page 24 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
Summary of quarterly results
Table 10: Summary of quarterly results
(in millions of dollars, unless otherwise specified)
Q4'16
Q3'16
Q2'16
Q1'16
Q4'15
Q3'15
Q2'15
Q1'15
Premiums written
Premiums earned
Losses on claims
Expenses
Net underwriting income
Investment Income
Net income
Adjustment to net income net of taxes:
Net investment (gains) losses
Net operating income 1
Earnings per common share:
Earnings per common share (basic)
Earnings per common share (diluted) 2
$ 171
$ 164
29
33
103
93
140
$ 223
162
41
33
88
52
98
$ 249
158
32
30
95
33
91
$ 117
154
37
28
88
37
88
$ 213
151
35
27
90
47
98
$ 260
148
31
28
89
39
90
$ 205
144
25
29
90
58
103
$ 130
143
31
24
87
57
107
(35)
(5)
8
3
(3)
3
(12)
(11)
$ 105
$ 93
$ 99
$ 91
$ 95
$ 92
$ 92
$ 97
$1.52
$1.52
$ 1.07
$ 1.07
$ 0.99
$ 0.99
$ 0.96
$ 0.96
$ 1.06
$ 1.03
$ 0.98
$ 0.96
$ 1.12
$ 1.12
$ 1.15
$ 1.08
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
18%
20%
38%
25%
20%
45%
21%
19%
40%
24%
19%
42%
23%
18%
41%
21%
19%
40%
17%
20%
37%
22%
17%
39%
$1.15
$ 1.02
$ 1.07
$ 1.00
$ 1.04
$ 1.01
$ 0.99
$ 1.04
$1.14
$ 1.02
$ 1.07
$ 0.99
$ 1.03
$ 1.00
$ 0.99
$ 1.03
Operating return on equity
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.
12%
12%
11%
12%
12%
11%
12%
12%
The Company’s key financial measures for each of the last eight quarters are summarized in table 10 above. These highlights illustrate
the Company’s profitability, return on equity, loss ratio, expense ratio and combined ratio. The transactional mortgage insurance
business is seasonal. Premiums written vary each quarter, while premiums earned, investment income, underwriting and
administrative expenses tend to be relatively stable from quarter to quarter. The variations in premiums written are driven by
mortgage origination activity and associated mortgage insurance policies written, which typically peak in the spring and summer
months, in addition to changes in market share and premium rates. Portfolio mortgage insurance volume and mix varies from quarter
to quarter based on lender demand. 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 loan 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. In the third quarter of 2016, losses increased significantly from the prior quarter,
and the same quarter in the prior year, primarily due to an increase in new delinquencies in Alberta specifically related to wild fires
in the Fort McMurray area. In the fourth quarter of 2016 losses, decreased from the prior quarter, and the same quarter in the prior
year, primarily due to an increase in cures in Alberta.
The Company’s financial results for the fourth quarter of 2016 were driven by increasing premiums earned in recent quarters, a
relatively consistent expense ratio and a lower loss ratio compared to the prior year.
Page 25 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
Reserve development analysis
Table 11 below shows the one-year development of the Company’s loss reserves for the five most recent completed years.
Table 11: Reserve Development Analysis
(in millions, unless otherwise specified)
2016
As at December 31
2014
2015
2013
2012
Total loss reserves, at the beginning of the year
$132
$115
$118
$139
$169
Loss reserves for prior years’ delinquent loans, remaining at the end of the year (A)
22
23
16
10
26
Change in loss reserves for prior years’ delinquent loans
109
93
101
129
143
Paid claims for prior years’ delinquent loans
(91)
(82)
(94)
(139)
(193)
Favourable (unfavourable) development
$18
$11
$7
($10)
($51)
As a percentage of total loss reserves, at the beginning of the year
14%
10%
7%
-7%
-30%
Loss reserves for current year’s delinquent loans, at the end of the year (B)
141
109
99
108
113
Total loss reserves at the end of the year (A+B)
Note: Amounts may not total due to rounding.
$163
$132
$115
$118
$139
The Company’s loss-reserving methodology, including reserve development, is reviewed on a quarterly 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 favourable reserve development in 2016 of $18 million, or 14% of the total loss reserves at the beginning
of the year. The province of Québec experienced $11 million of the favourable development due to improving economic conditions.
Favourable development also occurred in Ontario and the Pacific and Atlantic regions offsetting modest unfavorable development in
Alberta and the Prairies.
The Company regularly reviews the underlying drivers of its loss reserves development and adjusts its reserving practices accordingly.
Page 26 of 51
Genworth MI Canada Inc.
Financial condition
Financial instruments
MD&A-Year ended December 31, 2016
As at December 31, 2016, the Company had total cash and cash equivalents and invested assets of $6.2 billion in its investment
portfolio. All of the Company’s invested assets are classified as available-for-sale (“AFS”) with the exception of cash and cash
equivalents, and accrued investment income and other receivables which are classified as loans and receivables, and derivative
financial instruments which are classified as Fair Value through Profit and Loss. 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.
Table 13: Invested assets by asset class for the portfolio
As at December 31, 2016
As at December 31, 2015
Fair
value
%
Unrealized
gains 2 (losses)
Fair
value
Unrealized
gains 2 (losses)
%
Asset Class
(in millions of dollars, unless otherwise specified)
Collateralized loan obligations
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 1
Canadian provincial and municipal governments
Total government bonds and debentures
Preferred shares:
Financial
Energy
All other sectors
Total preferred shares
Total invested assets
Cash and cash equivalents
Total investments
$
207
3% $
27 $
178
3% $
910
356
101
930
2,297
206
206
1,976
988
2,964
247
80
99
426
$ 6,100
126
$ 6,226
15%
6%
2%
15%
37%
3%
3%
32%
16%
48%
4%
1%
2%
7%
98% $
2%
100% $
24
19
5
56
105
923
264
117
733
2,037
16%
4%
2%
12%
34%
-
-
78
78
1%
1%
45
55
100
1,963
1,023
2,986
33%
17%
50%
3%
1%
1%
4%
155
(16)
33
1
59
(4)
248
(19)
212 $ 5,527
391
212 $ 5,917 100% $
93% $
7%
-
47
39
Accrued investment income and other receivables
Derivative financial instruments (assets)
Total Invested assets, accrued investment income
and other receivables
Derivative financial instruments (liabilities)
Total Invested assets, accrued investment income
and net derivative financial instruments
Note: Amounts may not total due to rounding.
1 Canadian federal government bonds and treasury bills includes $3 million (December 31, 2015 - $85 million) in collateral posted for the benefit of the Company's counterparties to its
derivative financial instrument contracts.
2 Unrealized gains include unrealized foreign exchange gains of $79 million (December 31, 2015- $97 million).
- $ 5,946
(84)
-
$ 6,312
(43)
- $ 5,862
$ 6,269
28
-
-
-
-
-
-
-
-
-
-
-
-
-
32
33
18
7
65
124
-
-
79
74
152
(20)
(6)
(7)
(33)
276
-
276
-
-
-
-
-
Page 27 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
Unrealized gains on AFS securities in the portfolio were $212 million, which included $79 million of unrealized foreign exchange gains.
Unrealized gains decreased by $64 million from the end of 2015 primarily as a result of rising interest rates during 2016 leading to a
decline in the value of fixed income securities partially offset by an increase in preferred share values.
The Company’s average investment yield for the fourth quarter of 2016 and full year was 3.2%, which included the favourable impact
of non-taxable dividend income from its preferred shares.
The Company assigns credit ratings based on the asset risk guideline as outlined in OSFI’s Interim Capital Requirements for Mortgage
Insurance Companies, Minimum Capital Test Guideline effective January 1, 2015. 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 S&P or Moodys ratings.
Table 14: Invested assets by credit rating for the portfolio
Credit Rating
As at December 31, 2016
As at December 31, 2015
(in millions of dollars, unless otherwise specified)
Cash and cash equivalents
AAA
AA
A
BBB
Below BBB
Total investments (excluding preferred
shares)
Preferred shares
P2
P3
Total Preferred shares
Total invested assets and cash and cash
equivalents
Note: Amounts may not total due to rounding.
Investment portfolio management
$
Fair value
126
2,262
1,164
1,687
539
22
%
2% $
39%
20%
29%
9%
0%
Unrealized
gains
(losses)
- $
49
75
66
37
4
Fair
value
391
2,160
1,024
1,703
387
5
%
7%
38%
18%
30%
7%
-
$
5,800 100% S
231 $
5,670 100%
338
88
79%
21%
426 100%
(19)
-
(19)
227
92%
20
8%
248 100%
$
6,226
212 $
5,917
Unrealized
gains
(losses)
-
90
93
87
37
1
308
(32)
(1)
(33)
276
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, corporate bonds and preferred shares. The Company
also holds short-term investments. 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 five 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.
Page 28 of 51
Genworth MI Canada Inc.
Collateralized loan obligations
MD&A-Year ended December 31, 2016
The Company held $207 million in asset-backed bonds as of December 31, 2016, up from $178 million as of December 31, 2015.
These securities are floating rate collateralized loan obligations (“CLOs”) denominated in U.S. dollars, of which 89% are rated AA and
above and 11% are rated A.
Corporate bonds and debentures
As of December 31, 2016, approximately 37% of the investment portfolio was held in corporate bonds and debentures, up from 34%
at December 31, 2015. 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 15% of the investment portfolio,
or approximately 40% of the corporate bonds and debentures. The Company continuously monitors and repositions its exposure to
the financial sector, which represents greater than 35% of the corporate issuances of fixed income securities in the Canadian
marketplace. Energy sector exposure through corporate bonds and debentures represents $356 million or 6% of the investment
portfolio, of which approximately $104 million, or 29%, are energy producers who have a direct price movement correlation to the
underlying movement of energy pricing.
Securities rated BBB and below were $561 million, or 9% of invested assets, as of December 31, 2016.
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, 2016, 48% of the investment portfolio was invested in sovereign fixed income securities, consisting of
32% in federal fixed income securities and 16% in provincial fixed income securities, as compared to 50% as of December 31, 2015.
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 $206 million in Canadian federal government short-term treasury
bills in the investment portfolio as of December 31, 2016 as compared to $78 million as of December 31, 2015.
Preferred shares
As of December 31, 2016, the Company held $426 million of preferred shares, of which the financial sector represented 58%. The
Company believes that preferred shares have a comparable dividend yield to common shares and offer a more attractive risk and
capital adjusted return profile to that of common shares under the current MCT guidelines. As a result of an increase in interest rates
in 2016, the unrealized loss of $33 million at the end of December 31, 2015 declined to $19 million at the end of December 31, 2016.
Energy sector exposure through preferred shares represents $80 million or 1% of the investment portfolio, of which approximately
$11 million, or 13%, are energy producers who have a direct price movement correlation to the underlying movement of energy
pricing.
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 $126 million as of
December 31, 2016, a decrease of $265 million from the $391 million in cash holdings as of December 31, 2015. The decrease was
primarily due to cash holdings in the fourth quarter of 2015 being higher as a result of the timing of investment maturities.
Page 29 of 51
Genworth MI Canada Inc.
Liquidity
MD&A-Year ended December 31, 2016
The purpose of liquidity management is to ensure there is sufficient cash to meet all of the Company’s financial commitments and
obligations. The Company has six primary sources of funds, consisting of premiums written from operations, investment income,
cash and short-term investments, investment maturities or sales, proceeds from the issuance of debt and equity and a revolving
credit facility. 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 in the future financial years.
Table 15: Summary of the Company’s cash flows
(in millions of dollars)
Cash provided by (used in):
Operating activities
Financing activities
Investing activities
Change 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.
Twelve months ended December 31,
2016
2015
$ 544
(155)
(654)
(265)
391
$ 126
$ 653
(195)
(258)
200
190
$ 391
The Company generated $544 million of cash flows from operating activities in 2016, as compared to $653 million in the prior year.
Cash flow from operations in the current period were primarily the result of strong levels of premiums written, and interest income
and dividends received on invested assets. As compared to the prior year, premiums written were moderately lower.
The Company utilized $155 million of cash flows for financing activities in 2016, primarily related to the payment of ordinary dividends
of $1.70 per common share in 2016 as compared to $195 million primarily related to the payment of ordinary dividends of $1.59 per
common share in 2015 as well as a $50 million repurchase of common shares under its NCIB in the prior year’s period.
The Company utilized $654 million of cash flows from investing activities in 2016, primarily from the purchase of bonds and
debentures, preferred shares and short-term investments, as compared to $258 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, 2016, the Company held liquid assets of $821 million, comprised of $126 million
in cash and cash equivalents, and $695 million in bonds and debentures maturing within one year in order to maintain financial
flexibility. Of the $821 million liquid assets, $180 million were held outside of the Insurance Subsidiary. As at December 31, 2016, the
duration of the fixed income portfolio was 3.8 years.
In addition to cash and cash equivalents, 51%, or $3,170 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.
Page 30 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
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, 2016:
Table 16: Summary of the Company’s contractual obligations
Long-term debt1
Accounts payable and accrued liabilities
Operating leases
Loss reserves
Total contractual obligations
Note: Amounts may not total due to rounding.
1 See “Debt outstanding” section below for more details.
1 year or less
—
$65
$3
$135
$203
Payment dates due by period (in millions)
1–3 years
—
—
$10
$29
$39
3–5 years
$275
—
—
—
$275
Over 5 years
$160
—
—
—
$160
Total
$435
$65
$12
$163
$676
Operating lease expense for 2016 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, subject to exposure limits specified within the Company's investment policy guidelines, which
have been approved by the Board.
The Company uses foreign currency forwards and cross currency interest rate swaps to mitigate foreign currency risk associated with
bonds and collateralized loan obligations denominated in U.S. dollars. Foreign currency forwards and cross currency interest rate
swaps are contractual obligations to exchange one currency for another at a predetermined future date.
The Company uses 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 in relation to risks associated with share-based compensation expense.
The Company uses fixed for floating interest rate swaps in conjunction with the management of interest rate risk related to its fixed
income securities. The interest rate swaps are derivative financial instruments in which the Company and its counterparty agree to
exchange interest rate cash flows based on a specified notional amount from a fixed rate to a floating rate.
Table 17: Fair value and notional amounts of derivatives by terms of maturity, in Canadian dollars
Derivative
Asset
Derivative
Liability
Net Fair
value
Notional Amount (in millions)
3–5
years
Over 5
years
1–3
years
1 year or
less
December 31, 2016
Foreign currency forwards
Cross currency interest rate swaps
Equity total return swaps
Interest rate swaps
Total
December 31, 2015
Foreign currency forwards
Cross currency interest rate swaps
Equity total return swaps
Total
-
-
$1
$38
$39
-
-
-
-
$(35)
$(7)
-
-
$(43)
$(45)
$(37)
$(2)
$(84)
$(35)
$(7)
$1
$38
$(4)
$(45)
$(37)
$(2)
$(84)
$161
$19
$21
-
$201
$14
$144
$20
$177
$50
$24
$71
$39
-
-
- $2,000
$63 $2,121
$26
$28
-
$54
$36
$19
-
$55
$187
$142
-
-
$329
$213
$34
-
$247
Total
$422
$271
$21
$2,000
$2,714
$289
$225
$20
$533
Page 31 of 51
Genworth MI Canada Inc.
Note: Amounts may not total due to rounding.
Capital expenditures
MD&A-Year ended December 31, 2016
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 2016, the Company invested approximately $5 million
in underwriting, loss mitigation and risk management technologies enhancements. The Company expects that future capital
expenditures will continue to be allocated to underwriting, loss mitigation, and risk management technology improvements. The
Company expects that capital expenditures in 2017 will be in the $3 million to $5 million range and it is anticipated that such
expenditures will be funded primarily from operating cash flows.
Capital management
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 regulatory capital available, as defined for MCT
purposes, to capital required.
Under PRMHIA, the minimum MCT ratio for the Insurance Subsidiary was 175% for 2016. In conjunction with this requirement, the
Insurance Subsidiary established an internal MCT target capital ratio of 185%. The Company manages its capital base to maintain a
balance between capital strength, efficiency and flexibility. As at December 31, 2016, the Insurance Subsidiary’s MCT ratio was
approximately 245%, 25 percentage points higher than the Company’s holding target of 220%.
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.
Table 18: MCT as at December 31, 2016 and as at December 31, 2015
(in millions, unless otherwise specified)
Minimum Capital Test
Capital available
Capital required
MCT ratio
As at
December 31, 2016
$3,827
$1,560
245%
As at
December 31, 2015
$3,633
$1,552
234%
The Company’s MCT estimate as at December 31, 2016 of 245% was 11 percentage points higher than the MCT as at December 31,
2015. The increase to capital available in 2016 was due primarily to the profitability which was partially offset by the Insurance
Subsidiary’s dividends and a decrease in unrealized gains in the investment portfolio. The increase in capital required in 2016 was
primarily due to an increase in insurance margin risk from premiums written partially offset by a decrease in required capital for
interest rate risk, as the Company entered into $2.0 billion of interest rate swaps. The Company uses fixed for floating interest rate
swaps in conjunction with the management of interest rate risk related to its fixed income securities.
On December 15, 2016, OSFI released the final capital advisory titled “Capital Requirements for Federally Regulated Mortgage
Insurers”. This advisory provides a new standard framework for determining the capital requirements for residential mortgage
insurance companies. The proposed framework is more risk sensitive and incorporates additional risk attributes, including credit
score, remaining amortization and outstanding loan balance. The finalized advisory came into effect on January 1, 2017, replacing
OSFI’s current advisory, “Interim Capital Requirements for Mortgage Insurance Companies”, which had been in effect since 2015.
Under the new capital framework, the holding target of 220% has been recalibrated to the OSFI Supervisory MCT Target of 150% and
the minimum MCT under PRMHIA has been reduced to 150%. Based on the new framework, the Company has established an internal
Page 32 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
MCT target of 157% for 2017 and estimates that its pro forma MCT ratio as at December 31, 2016 would have been in the range of
158% to 162%.
Debt
The Company proactively manages capital to balance capital strength, flexibility and efficiency. The Company currently has $433
million in long-term debt, issued in two series, with a debt-to-capital ratio as at December 31, 2016 of 11%.
Table 19: Details of the Company’s long-term debt
(in millions unless otherwise specified)
Series
Timing of maturity
Principal amount outstanding
Date issued
Maturity date
Fixed annual rate
Semi-annual interest payments due each year on
Series 1
3–5 years
$275
June 29, 2010
June 15, 2020
5.68%
June 15, December 15
Series 3
After 5 years
$160
April 1, 2014
April 1, 2024
4.242%
October 1, April 1
Debenture Ratings
S&P1
DBRS1
BBB+, (Stable)
A (High), Stable
BBB+, (Stable)
A (High), Stable
1 See “Financial Strength Rating” section of this MD&A for additional information.
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; and
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.
Credit facility
On May 20, 2016, the Company entered into a $100 million senior unsecured revolving credit facility, which matures on May 20,
2019. Any borrowings under the credit facility will bear interest at a rate per annum equal to, either a fixed rate based on a spread
over Bankers’ Acceptance or a variable rate based on a spread over the Lender Prime Rate. The Company will also pay a standby fee
Page 33 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
based on the unused amount of the commitments. The credit facility includes customary representations, warranties, covenants,
terms and conditions for transactions of this type.
As at December 31, 2016 there was no amount outstanding under the credit facility and all of the covenants were fully met.
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.
On August 18, 2016, Standard & Poor’s (“S&P”) affirmed the Insurance Subsidiary’s A+ rating with a stable outlook and the Company’s
BBB+ rating with a stable outlook. S&P noted that the Company had a strong competitive position, low industry risk due to the
Company's strong portfolio quality, tight regulation, extremely strong earnings and capitalization and adequate financial flexibility
with a moderate risk due to monoline focus in a sector prone to capital and earnings volatility.
On May 17, 2016, DBRS confirmed the Insurance Subsidiary’s AA financial strength rating with a stable trend citing “the Insurance
Company’s solid market position, seasoned insurance portfolio and advanced risk analytics, as well as its strong capital position
relative to the capital required to meet insurance claim obligations. The confirmation also reflects the Company's strong capital
adequacy as assessed through the application of the DBRS residential mortgage-backed securities (RMBS) model, assuming a runoff
scenario." DBRS downgraded the Company’s issuer rating and senior unsecured debentures rating one notch to A (high) with a stable
trend citing “DBRS's concern that there is now a greater risk that OSFI, in a stressed mortgage market situation, may place restrictions
on dividend payments from the Insurance Company.”2
Ratings Summary
Issuer Rating
Company
Financial Strength
Insurance Subsidiary
Senior Unsecured Debentures
Company
S&P
DBRS
BBB+, Stable
A (High), Stable
A+, Stable
AA, Stable
BBB+, Stable
A (High), Stable
Capital transactions
Share repurchase
On April 28, 2016, the Company received approval by the Toronto Stock Exchange for the Company to undertake an NCIB. Pursuant
to the NCIB, the Company can purchase, for cancellation, up to 4,589,958 shares representing approximately 5% of its outstanding
common shares as at April 25, 2016. Purchases of common shares under the NCIB may commence on or after May 5, 2016 and will
conclude on the earlier of May 4, 2017 and the date on which the Company has purchased the maximum number of shares under
the NCIB.
The Company’s prior NCIB which commenced on April 28, 2015, expired on May 4, 2016. The Company did not purchase any shares
under either NCIB during the three and twelve months ended December 31, 2016. The Company had made purchases of $50 million
in 2015 pursuant to the NCIB.
The Company’s major shareholder, Genworth Financial, Inc., intends to participate proportionately to maintain its approximately
57.2% ownership interest in the Company throughout the course of the NCIB, if any shares are purchased. Shareholders may obtain
a copy of the NCIB notice, without charge, by contacting the Company.
2 DBRS May 17, 2016 press release: DBRS Confirms Ratings on Genworth Financial Mortgage Insurance Company Canada and Downgrades Genworth MI Canada Inc.
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Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
Restrictions on dividends and capital transactions
The Insurance Subsidiary is subject to certain restrictions with respect to dividend and capital transactions. The Insurance Companies
Act (“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.
Outstanding share data
Table 20: Changes in the number of common shares outstanding at December 31, 2016 and December 31, 2015
Common shares, beginning of period (January 1)
Common shares issued in connection with share-
based compensation plans
Common shares repurchased and cancelled
Common shares, end of period
December 31, 2016
91,795,125
December 31, 2015
93,147,778
68,975
-
91,864,100
101,543
(1,454,196)
91,795,125
At December 31, 2016, Genworth Financial, Inc. beneficially owned 52,562,042 common shares of the Company, or approximately
57.2% of the Company’s outstanding common shares, through its wholly-owned subsidiaries, Genworth Financial International
Holdings LLC (“GFIH”), Genworth Mortgage Insurance Corporation (“GMIC”) and Genworth Mortgage Insurance Corporation of North
Carolina (“GMICNC”) which held approximately 40.6%, 14.9% and 1.7% of the common shares of the Company, respectively.
Page 35 of 51
Genworth MI Canada Inc.
Risk management
Enterprise risk management framework
MD&A-Year ended December 31, 2016
Risk management is a critical part of Genworth Canada’s business. The Company’s Enterprise Risk Management (“ERM”) Framework,
comprises the totality of the frameworks, systems, processes, policies, and people for identifying, assessing, mitigating and
monitoring risks. The key elements of the ERM Framework are illustrated in the diagram below.
Governance framework
The Company’s governance framework is designed to ensure the Board and management 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’s oversight of risk and risk management practices;
II. Management’s oversight of risks; and
III. The “three lines of defense” operating model.
The Board is responsible for reviewing and approving 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
and operational risks.
The Company’s management is responsible for risk management under the oversight of the Board and fulfills its responsibility
through several risk committees, as noted in the chart below. The Chief Risk Officer (“CRO”), who oversees the Risk Management
Group, reports to the Chief Executive Officer (“CEO”) but has direct access via in-camera sessions with the Risk, Capital and
Investment Committee of the Board.
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Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
The Board and the board of directors of the Insurance Subsidiary use 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 outlined in the chart
below.
Board of Directors
Risk, Capital &
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
Operational leaders and
support functions
Accountable for:
Identification
Assessment
Mitigation, and
Reporting of risk against
approved policies
Risk Oversight
Risk Management, Finance &
Compliance functions
Establish risk management
practices and provide risk
guidance
Independent oversight of risk
management practices
Independent Assurance
Internal audit
Independent assurance to
management and the Board on
the effectiveness of risk
framework
Risk appetite framework
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 Risk Appetite Framework is to provide a framework for management 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, meeting customer needs 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 scenarios.
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 across the organization through its policies, limit structures and operating procedures.
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Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
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 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, return, capital, and liquidity in order to meet policyholder obligations and
maximize shareholder value throughout economic cycles;
Ensure business decisions are based on an understanding of risk;
Ensure a deep understanding of risk drivers as they relate to our key objectives;
Employ a “Three Lines of Defense” risk governance model, which ensures that a responsibility for risk management is shared
across the business;
Proactively address emerging risks as they arise; and
Ensure strict adherence to legal, compliance and regulatory requirements.
The Company’s ERM framework and internal control procedures are designed to reduce the level of volatility in its financial results.
The Company’s ERM framework is linked to its business strategy and decision making framework. One of the key tools is the Own
Risk and Self-Assessment (“ORSA”) framework. The key elements and considerations of ORSA include: the comprehensive
identification and assessment of risks and the adequacy of the Company’s risk management; the assessment of the Company’s
current and likely future capital needs and solvency positions in light of its risk assessments; the distinguishing of Board oversight
and management responsibility for such processes; detailing related monitoring and reporting requirements; and detailing the
Company’s internal controls and objective review process and procedures for such risk assessments. The Company’s ORSA is forward
looking and is undertaken in conjunction with the Company’s business and strategic planning.
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:
ERM 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; and
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
Genworth Canada’s mortgage insurance 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. For Genworth Canada-insured transactional mortgages in 2016, the average credit score increased 8 points to 751 and the
average home price has increased to $325,000, or 1%, over the prior year. The average gross debt service ratio for the 2016 was
stable at 24%, over the prior year, and is well below the new mortgage stress test threshold of 26%.
Page 38 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
To the extent that home prices appreciate over time and/or the principal amount of the loan is paid down, the effective loan-to-value
of the Company’s insurance written in a given year decreases.
Table 21: Estimated effective loan-to-value % of the Company’s outstanding mortgage insurance balances1 by book of business
As at December 31, 2016
As at December 31, 2015
Transactional
Portfolio
Total
Transactional
Portfolio
Total
2009 & prior
2010
2011
2012
2013
2014
2015
2016
44
61
65
70
74
79
84
90
21
27
34
34
39
44
50
53
41
55
59
53
56
62
64
64
49
67
71
76
81
87
92
-
Total
72
1 This is based on the amounts reported by lenders surveyed, which represents the vast majority of insurance in-force.
69
58
46
25
32
41
42
46
53
59
-
49
45
61
65
59
62
69
72
-
62
Genworth Canada’s extensive historical database and innovative information technology systems are important tools in its approach
to risk management. The Company utilizes its proprietary transactional insurance 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 which is an indicator of 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. The Company also utilizes internally developed stochastic modelling to
estimate projected losses on claims and to measure the severity of loss and delinquency rate sensitivity to both changes in the
economic environment as well as individual loan or borrower attributes.
The Company’s mortgage portfolio risk management function is organized into three primary groups: portfolio analysis, underwriting
policies and guidelines, and risk technology and actuarial modeling. The risk management team analyzes and summarizes mortgage
portfolio performance, risk concentrations, emerging trends and remedial actions which are reviewed with the Company’s
management-level Risk Committee on a monthly basis. The Company closely monitors the delinquency performance as a key
indicator of insurance portfolio performance.
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 reviews of a random sample of loans adjudicated by the Company’s
underwriters. Similarly, external lender audits are conducted on a routine basis, using a statistically relevant sample of approved
loans. In addition, the quality assurance team also reviews the Company’s loss reserving and mitigation functions to ensure
compliance with relevant Company policies and accounting standards. Audit results of all three areas are reviewed by management
on a monthly basis.
Market and credit risk
The Company monitors and manages the credit risk, liquidity risk and market risk, including interest rate risk, equity price risk,
currency risk, emerging markets risk and counterparty risk of its investment portfolio.
Page 39 of 51
Genworth MI Canada Inc.
Credit risk
MD&A-Year ended December 31, 2016
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 and 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- and to collateralize their derivative obligations.
Liquidity risk
Liquidity risk is the risk of having insufficient cash resources to meet policy obligations and other financial commitments 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, currency risk, emerging markets risk and counterparty 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. To mitigate interest rate risk, the Company uses fixed for floating interest rate
swaps to hedge a portion of the interest rate risk.
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 did
not hold any common shares as at December 31, 2016 and 2015.
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. The Company uses
foreign exchange forward contracts and cross-currency interest rate swaps to mitigate currency risk.
Page 40 of 51
Genworth MI Canada Inc.
Emerging markets risk
MD&A-Year ended December 31, 2016
Emerging markets risk relates to international investment grade bond holdings which are exposed to greater market volatility, have
less availability of reliable financial information, carry higher transactional and custody costs, are subject to taxation by foreign
governments, have decreased market liquidity and may be exposed to political instability.
Counterparty risk
Counterparty risk relates to the risk that a counterparty will fail to discharge its obligation related to a bond, derivative contract or
other trade or transaction.
Financial reporting controls and accounting disclosures
Disclosure controls and procedures and internal controls over financial reporting
As required by 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 or year ending December 31, 2016 that have
materially affected, or are reasonably likely to materially affect, the Company’s controls over financial reporting.
Changes in accounting standards and future accounting standards
The following amendment to existing standards has been issued by the IASB and is effective for annual periods beginning on or after
January 1, 2016.
Amendments to IAS 1 - Presentation of financial statements ("IAS 1"):
In December 2014, the IASB issued certain narrow focus amendments to IAS 1 to clarify existing presentation and disclosure
requirements. Amendments include the requirement to disaggregate line items on the Statement of Financial Position, Statement of
Income and Statement of Comprehensive Income if disaggregation is helpful to users of the financial statements and to aggregate
line items on the Statement of Financial Position if immaterial.
Adoption of the amendment on January 1, 2016 did not have a significant impact on the Company's consolidated financial statements.
Page 41 of 51
Genworth MI Canada Inc.
Future accounting standards
IFRS 17 - Insurance contracts
MD&A-Year ended December 31, 2016
IFRS 17 (previously IFRS 4 phase II) is intended to replace IFRS 4: Insurance contracts. Under the IFRS 17 model, insurance contract
liabilities will be calculated as the present value of future insurance cash flows with a provision for risk. The discount rate will reflect
current interest rates. If the present value of future cash flows would produce a gain at the inception of the contract, the model will
also require a “contractual service margin” to offset the day one gain. The contractual service margin will amortize over the life of
the contract. Certain types of contracts will be permitted to use a simplified unearned premium liability model until a claim is
incurred. Additionally, for the contracts in which the cash flows are linked to underlying items, the liability value will reflect that
linkage. There will also be a new income statement presentation for insurance contracts and additional disclosure requirements.
IFRS 17 is anticipated to be released in the first half of 2017 and has an expected effective date of January 1, 2021.
The Company is assessing the impact of IFRS 17.
IFRS 9 - Financial instruments
In July 2014, the IASB published the final version of IFRS 9, which replaces IAS 39 - Financial instruments: recognition and
measurement, and includes guidance on the classification and measurement of financial instruments, impairment of financial assets,
and a new general hedge accounting model. Financial asset classification is based on the cash flow characteristics and the business
model in which an asset is held. The classification determines how a financial instrument is accounted for and measured. IFRS 9 also
introduces a single impairment model for financial instruments not measured at Fair Value through Profit or Loss that requires
recognition of expected credit losses at initial recognition of a financial instrument and the recognition of lifetime expected credit
losses if certain criteria are met. The new model for hedge accounting aligns hedge accounting with risk management activities.
While the new standard is generally effective for years beginning on or after January 1, 2018, on September 12, 2016, the IASB issued
amendments to IFRS 17 Insurance Contracts, which permits eligible insurer optional transitional relief until the forthcoming insurance
accounting standard is available for implementation. The options permit (a) entities whose predominant activity is issuing insurance
contracts within the scope of IFRS 17 a temporary exemption to defer the implementation of IFRS 9, which may allow alignment of
the implementation of IFRS 9 with the forthcoming insurance accounting standard, or alternatively (b) give entities issuing insurance
contracts the option to remove from profit or loss the incremental volatility caused by changes in the measurement of specified
financial assets upon application of IFRS 9. Entities that apply either of the options will be required to adopt IFRS 9 on the earlier of
the date that IFRS 17 is effective and annual periods beginning on or after January 1, 2021. The Company has concluded that it is an
eligible insurer that qualifies for the transitional relief.
The Company is evaluating the impact of IFRS 9 on its financial assets and financial liabilities and the optional transitional relief that
permits deferral of the adoption of IFRS 9.
IFRS 16 - Leases
IFRS 16 was issued on January 13, 2016. The new standard will replace existing lease guidance in IFRS and related interpretations,
and requires companies to bring most leases on-balance sheet. A lessee recognizes a right-of-use asset representing its right to use
the underlying asset and a lease liability representing its obligation to make lease payments. Short-term leases and leases of low
value items are optional exemptions under the standard. Lessor accounting remains similar to the current standards, where lessors
classify leases as finance or operating leases. The new standard is effective for years beginning on or after January 1, 2019.
The Company is assessing the impact of IFRS 16.
Page 42 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
Amendments to IFRS 2 – Share-based payments (“IFRS 2”)
Amendments to IFRS 2 were published in June 2016, which clarify how to account for certain types of share-based payment
transactions.
The amendments provide requirements on the accounting for:
the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments
share-based payment transactions with a net settlement feature for withholding tax obligations; and
a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from
cash-settled to equity-settled
The amendments are effective for annual periods beginning on or after January 1, 2018, with early adoption permitted if information
is available without the use of hindsight.
The Company is currently assessing the impact of the amendments to IFRS 2.
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 below as accounting estimates and judgments. Actual
results may differ from the estimates used, and such differences may be material.
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.
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.
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.
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Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
IBNR is the Company's best estimate of losses that have been incurred but not reported from the time the first scheduled mortgage
payment has been missed by a mortgage borrower. 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 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.
The Company estimates borrower recoveries related to claims paid and loss reserves included in subrogation recoverable based on
historical recovery experience. Borrower recoveries are discounted to present value and include an actuarial margin for adverse
deviation.
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.
Accounting judgments
Objective evidence of impairment of AFS financial assets
As of each reporting date, the Company evaluates AFS financial assets for objective evidence of impairment.
For investments in bonds and preferred shares, evaluation of whether impairment has occurred is based on the Company’s
assessment that a loss event has occurred and the Company’s best estimate of the cash flows 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. Impairment assessment is a qualitative
and quantitative 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. Impairment for bonds
and preferred shares is 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 to be collected or when the Company intends to sell the investment prior to recovery from its
unrealized loss position.
Page 44 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
For common shares, 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 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 approximately $6 million in 2016, relatively unchanged as compared to in the prior
year.
Reinsurance
During the year ended December 31, 2015, the Company, through its indirect subsidiary MIC Insurance Company Canada, terminated
its retrocession agreement with a third party reinsurance company that commenced on December 1, 2013, under which the Company
assumed reinsurance risk for approximately 33% of the retroceded liabilities on claims paid by Genworth Financial Mortgage
Insurance Pty Limited, an Australian company.
During the year ended December 31, 2016, the Company did not participate in reinsurance transactions and therefore no premiums
were recognized or losses incurred in conjunction with reinsurance arrangements. During the year ended December 31, 2015, the
Company recognized premiums of $2 million and incurred no losses.
Page 45 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
Non-IFRS financial measures
To supplement the Company’s consolidated financial statements, which are prepared in accordance with IFRS, the Company uses
non-IFRS financial measures to analyze performance. The Company’s key performance indicators and certain other information
included in this MD&A include non-IFRS financial measures. Such non-IFRS financial measures used by the Company to analyze
performance include net operating income, operating earnings per common share (basic), operating earnings per common share
(diluted). 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.
Table 22: Non-IFRS financial measures reconciled to comparable IFRS measures for such periods
(in millions of dollars, unless otherwise specified)
Investment income
Adjustment to investment income:
Net investment (gains)
Interest and dividend income, net of investment
expenses
Net income
Adjustments to net income, net of taxes:
Net investment (gains)
Net operating income
Earnings per common share (basic)
Adjustment to earnings per common share, net of taxes:
Net investment (gains)
Operating earnings per common share (basic)
Earnings per common share (diluted) 1
Adjustment to earnings per common share, net of taxes:
Share based compensation re-measurement amount
Net investment (gains)
Fourth Quarter
2016
2015
Full Year
2016
93 $
47 $
214 $
(47)
46 $
140
(35)
105 $
(3)
44
98
(3)
95 $
(38)
176 $
417
(29)
388 $
2015
201
(32)
169
398
(23)
375
1.52 $
1.06 $
4.54 $
4.32
(0.38)
(0.03)
(0.31)
1.15 $
1.04 $
4.23 $
(0.25)
4.07
1.52 $
1.03 $
4.54 $
4.22
$
$
$
$
$
$
0.00
(0.38)
0.03
(0.03)
0.00
(0.31)
Operating earnings per common share (diluted) 1
Note: Amounts may not total due to rounding.
1The difference between basic and diluted number of common shares outstanding is caused by the potentially dilutive impact of share-based compensation awards.
1.14 $
1.03 $
4.23 $
$
0.08
(0.25)
4.05
Page 46 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
Other non-IFRS financial measures used by the Company to analyze performance for which no comparable IFRS measure is available
include insurance in-force, new insurance written, loss ratio, expense ratio, combined ratio, operating return on equity, investment
yield and MCT ratio.
Table 23: Non-IFRS financial measures for which no comparable IFRS measure is available
For a more meaningful description of the measure, refer to the “Non-IFRS financial measures glossary”.
Fourth Quarter
2016
2015
Full Year
2016
2015
$
(in millions of dollars, unless otherwise specified)
Selected non-IFRS financial measures
Insurance in force1
Transactional new insurance written
Portfolio new insurance written
Loss ratio
Expense ratio
Combined ratio
Operating return on equity
Investment yield
MCT ratio
404,963 $
6,231
9,595
23%
18%
41%
12%
3.3%
234%
1 The Company estimates that the outstanding balance of insured mortgages was approximately $223 billion as at December 31, 2016.
464,291 $
5,120
4,918
18%
20%
38%
12%
3.2%
245%
464,291 $
21,171
41,881
22%
19%
41%
11%
3.2%
245%
404,963
25,243
25,696
21%
18%
39%
12%
3.3%
234%
Non-IFRS financial measures glossary
“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.
“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.
“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 annualized investment income before investment fees and excluding net investment gains (losses) tax
affected for dividends for such 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 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.
Page 47 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
“net operating income” means net income excluding after-tax net realized gains (losses) on sale of investments, unrealized gains
(losses) on FVTPL securities and the cost of interest rate swaps representing the difference between the fixed rate and floating rate.
Net operating income estimates the recurring after-tax earnings from core business activities and is an indicator of core operating
performance.
“portfolio new insurance written” means the original principal balance of mortgages, insured during a specified period as part of a
portfolio of mortgages that have a loan-to-value ratio equal to or less than 80% at the time the loan is insured. 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 during the period.
“operating earnings per common share (diluted)” means the net operating income divided by the diluted average common shares
outstanding during the period. The Company excludes the impact of the share based compensation re-measurement amount from
operating earnings per share (diluted) as it believes this results 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 invested capital in the core business activities.
“transactional new insurance written” means the original principal balance of mortgages, including any capitalized premiums,
insured during a specified period predominantly on mortgages with a loan-to-value ratio of greater than 80% at the time the loan is
originated. 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.
Other Glossary
“accumulated other comprehensive income” or “AOCI” is a component of shareholders’ equity and reflects the unrealized gains and
losses, net of taxes, related to available-for-sale assets. Unrealized gains and losses on assets classified as available-for-sale are
recorded in the consolidated statement of comprehensive income and included in accumulated other comprehensive income until
recognized in the consolidated statement of income.
“available-for-sale” or “AFS” means investments recorded at fair value on the balance sheet, using quoted market prices, with
changes in the fair value of these investments included in AOCI.
“average reserve per delinquency” means the average reserve per delinquent loan calculated by total loss reserves in dollars divided
by the number of outstanding delinquent loans reported by lenders. Average reserve per delinquency measures the potential size of
the average loss, including delinquent loans with no expected loss, and is used for trending purposes and comparisons against internal
targets.
“average premium rate” means the average premiums written collected divided by the new insurance written
“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
in assessing the market value of the Company.
“book value per common share excluding AOCI (basic)” means the per common share amount of shareholders’ equity excluding
AOCI to the number of basic common shares outstanding at a specified date.
Page 48 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
“book value per common share excluding AOCI (diluted)” means the per common 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 common share including AOCI (basic)” means the per common share amount of shareholders’ equity including AOCI
to the number of basic common shares outstanding at a specified date.
“book value per common share including AOCI (diluted)” means the per common 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.
“case reserves” means the expected losses associated with reported delinquent loans. Lenders report delinquent loans to the
Company on a monthly basis. The Company analyzes reported delinquent files on a case-by-case basis and derives an estimate of the
expected loss. Case reserve estimates incorporate the amount expected to be recovered from the ultimate sale of the residential
property securing the insured mortgage.
“claim” means the amount demanded under a policy of insurance arising from the loss relating to an insured event.
“common shares” means the issued and outstanding common shares of the Company.
“credit score” means the lowest average credit score of all borrowers on a mortgage insurance application. Average credit scores 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.
“cures” means previously reported delinquent loans where the borrower has made all scheduled mortgage payments or a successful
workout has been completed and the loan is no longer considered a delinquent loan.
“debt-to-capital ratio” means the ratio (expressed as a percentage) of debt to total capital (the sum of debt and equity). This is a
measure of financial leverage that the Company considers in capital management planning.
“deferred policy acquisition costs” means the expenses incurred in the acquisition of new business, comprised of premium taxes
and other expenses that relate directly to the acquisition of new business. Policy acquisition costs are only deferred to the extent
that they are in excess of the service fees and can be expected to be recovered from unearned premium reserves. Deferred policy
acquisition costs are amortized into income in proportion to and over the periods in which premiums are earned.
“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.
“delinquent loans” means loans where the borrowers have failed to make scheduled mortgage payments under the terms of the
mortgage and where the cumulative amount of mortgage payments missed exceeds the scheduled payments due in a three-month
period.
“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.
“effective loan-to-value” means a Company estimate based on the estimated balance of loans insured divided by the estimated fair
market value of the mortgaged property using the Teranet - National Bank Home Price Index Composite 11.
“effective tax rate” means the ratio (expressed as a percentage) of provision for income taxes to income before income taxes for a
specified period. The effective tax rate measures the actual amount of pre-tax income the Company pays in taxes and is a useful
comparison to industry benchmarks and prior periods.
Page 49 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
“Fair Value through Profit or Loss” or “FVTPL” means investments recorded at fair value on the statement of financial position with
changes in the fair value of these investments recorded in income.
“gross debt service ratio” or “GDSR” means the percentage of borrowers’ total monthly debt servicing costs, in respect of the debt
in question, as a percentage of borrowers monthly gross income. This is a key measure of household financial health.
“incurred but not reported” or “IBNR” reserves means the estimated losses on claims for delinquencies that have occurred prior to
a specified date, but have not been reported to the Company.
“investment portfolio” means invested assets (including cash and cash equivalents, short-term investments, bonds or other fixed
income securities and equity investments.
“loan-to-value ratio” means the original balance of a mortgage loan divided by the original value of the mortgaged property.
“loss adjustment expenses” means all costs and expenses incurred by the Company in the investigation, adjustment and settlement
of claims. Loss adjustment expenses include third-party costs as well as the Company’s internal expenses, including salaries and
expenses of loss management personnel and certain administrative costs.
“losses on claims” means the estimated amount payable under mortgage insurance policies during a specified period. A portion of
reported losses on claims represents estimates of costs of pending claims that are still open during the reporting period, as well as
estimates of losses associated with claims that have yet to be reported and the cost of investigating, adjusting and settling claims.
“loss reserves” means case reserves based on delinquencies reported to the Company, an estimate for losses on claims based on
delinquencies that are IBNR, supplemental loss reserves for potential adverse developments related to claim severity and loss
adjustment expenses representing an estimate for the administrative costs of investigating, adjusting and settling claims. Loss
reserves are discounted to take into account the time value of money.
“market share” or “share” of a mortgage insurer means the insurer’s gross premiums written as a percentage of the reported gross
premiums written of the Canadian mortgage insurance industry.
“net investment gains or losses” means the sum of net realized gains or losses on sales of investments, net gains or losses on
derivatives and foreign exchanges and impairment losses.
“net underwriting income” means the sum of premiums earned and fees and other income, less losses and sales, underwriting and
administrative expenses during a specified period.
“ordinary dividend payout ratio” means the ratio (expressed as a percentage) of the dollar amount of ordinary dividends paid during
a specified period to shareholders as a percentage of net operating income over the same period. This is a measure of the proportion
of net operating income returned to shareholders in the form of ordinary dividends.
“portfolio insurance” means mortgage insurance covering an individual mortgage that is underwritten as part of a portfolio of
mortgages that have a loan-to-value ratio equal to or less than 80% at the time the loan is insured.
“premium tax” means a tax paid by insurance companies to provincial and territorial governments calculated as a percentage of
gross premiums written.
“premium written” means gross payments received from insurance policies issued during a specified period.
Page 50 of 51
Genworth MI Canada Inc.
MD&A-Year ended December 31, 2016
“sales, underwriting and administrative expenses” means the cost of marketing and underwriting new mortgage insurance policies
and other general and administrative expenses, including premium taxes, risk fee and net of the change in deferred policy acquisition
costs.
“severity” means the dollar amount of losses on claims.
“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.
“total debt service ratio” or “TDSR” means the borrowers’ monthly debt servicing costs as a percentage of borrowers’ monthly gross
income.
“transactional insurance” means mortgage insurance covering an individual mortgage that typically has been underwritten
individually, and which is predominantly a mortgage with a loan-to-value ratio of greater than 80% at the time the loan is originated.
“underwriter” means an individual who examines and accepts or rejects mortgage insurance risks based on the Company’s approved
underwriting policies and guidelines.
“unearned premiums reserve” or “UPR” means that portion of premiums written that has not yet been recognized as revenue.
Unearned premium reserves are recognized as revenue over the policy life in accordance with the expected pattern of loss emergence
as derived from actuarial analysis of historical loss development.
“workout penetration rate” 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 rate 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 Assistance Program.
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 link under the Investor Resources heading on the bottom navigation bar.
Page 51 of 51
Consolidated Financial Statements
(In Canadian dollars)
GENWORTH MI CANADA INC.
Years ended December 31, 2016 and 2015
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. This responsibility includes ensuring the integrity and
fairness of information presented and making appropriate estimates based on judgment. The
consolidated financial statements are prepared in conformity with International Financial Reporting
Standards.
Preparation of financial information is an integral part of management's broader responsibilities
for the ongoing operations of the Company. Management maintains an extensive system of internal
accounting controls to ensure that transactions are accurately recorded on a timely basis, are
properly approved and result in reliable financial statements. The adequacy of operation of the
control systems is monitored on an ongoing basis by management.
The Board of Directors of the Company is responsible for approving the financial statements. The
Audit Committee of the Board, comprising of independent 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 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
February 6, 2017
Toronto, Canada
KPMG LLP
Bay Adelaide Centre
333 Bay Street, Suite 4600
Toronto ON M5H 2S5
Canada
Tel 416-777-8500
Fax 416-777-8818
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, 2016 and 2015,
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.
KPMG LLP, is a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
KPMG Canada provides services to KPMG LLP.
Page 2
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, 2016 and 2015, 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 6, 2017
Toronto, Canada
GENWORTH MI CANADA INC.
Consolidated Statements of Financial Position
(In thousands of Canadian dollars)
December 31, 2016 and 2015
Assets
Cash and cash equivalents
Short-term investments
Accrued investment income and other receivables
Derivative financial instruments
Bonds and debentures
Preferred shares
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
Income taxes payable
Loss reserves
Share-based compensation liabilities
Derivative financial instruments
Long-term debt
Unearned premiums reserve
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
Notes
2016 (1) (2)
2015 (1) (2)
$
9
9
9
9
9
$
126,072
206,099
47,337
38,787
5,468,170
425,819
390,796
78,178
28,130
—
5,200,715
247,717
6,312,284
5,945,536
6(c)
15
6(d)
17
6(b)
14
9
19
6(a)
13
10
18
—
67,242
2,730
1,683
10,070
206,810
11,172
15,670
61,244
2,456
1,088
9,084
193,070
11,172
$
6,611,991
$
6,239,320
$
$
64,987
19,329
163,467
16,069
42,838
432,891
2,142,903
41,710
39,217
2,963,411
1,368,658
2,186,988
92,934
3,648,580
65,750
—
131,577
8,496
83,861
432,504
2,020,993
37,241
39,005
2,819,427
1,366,374
1,926,949
126,570
3,419,893
Total liabilities and shareholders' equity
$
6,611,991
$
6,239,320
(1)
Refer to note 22 for a presentation of assets and liabilities expected to be recovered or settled after 12 months.
(2)
Refer to note 9 for the invested assets that have been loaned under the Company's securities lending program
See accompanying notes to the consolidated financial statements.
On behalf of the Board:
(signed) "Stuart Levings"
Director
(signed) "Andrea Bolger" Director
1
GENWORTH MI CANADA INC.
Consolidated Statements of Income
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
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 underwriting income
Investment income:
Interest
Dividends
Net realized gains on sale of investments
Net gains on derivatives and foreign exchange
Impairment loss
General investment expenses
Notes
6(a)(e)
6(a)(e)
$
$
2016
759,806
637,896
$
$
2015
808,621
586,196
6(b)
139,023
121,910
6(d)
58,462
49,308
18,725
5,221
4,856
1,177
137,749
(13,740)
124,009
59,968
40,239
17,382
4,818
5,319
1,420
129,146
(20,781)
108,365
374,864
355,921
162,226
18,055
3,127
37,720
(2,505)
218,623
(4,769)
213,854
164,864
8,435
23,089
8,898
—
205,286
(4,396)
200,890
Interest expense
19
23,194
22,774
Income before income taxes
565,524
534,037
Income taxes:
Current
Deferred
Net income for the year attributable to owners of the
Company
Earnings per share:
Basic
Diluted
See accompanying notes to the consolidated financial statements.
10
21
$
$
$
148,146
486
148,632
132,595
3,140
135,735
416,892
$
398,302
4.54
4.54
$
$
4.32
4.22
2
GENWORTH MI CANADA INC.
Consolidated Statements of Comprehensive Income
(In thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
Net income
$
416,892 $ 398,302
2016
2015
Other comprehensive loss:
Items that will not be reclassified subsequently to income:
Re-measurement of employee benefit obligations,
net of income tax of $274 (2015 - $743)
Items that may be reclassified subsequently to income:
(747)
2,028
Net change in fair value of Available-for-Sale ("AFS") financial assets,
net of income tax of $11,733 (2015 - $12,101)
(33,543)
(31,523)
Gains on AFS financial assets reclassified to income, net of income tax
of $33 (2015 - $9,939)
Total other comprehensive loss for the period attributable to owners of the
Company, net of income tax of $12,040 (2015 - $21,297)
(93)
(26,989)
(34,383)
(56,484)
Total comprehensive income attributable to owners of the Company
$
382,509 $ 341,818
See accompanying notes to the consolidated financial statements.
3
GENWORTH MI CANADA INC.
Consolidated Statements of Changes in Equity
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
Share
capital
Retained
earnings
Accumulated
other
comprehensive
income
Total
shareholders'
equity
Balance at January 1, 2016
$ 1,366,374
$
1,926,949
$
126,570
$
3,419,893
Comprehensive income:
Net income
Other comprehensive loss
Total comprehensive income
Total transactions recognized directly in
equity:
Dividends on common shares(1)
Issuance of common shares
Re-measurement of employee benefit
obligations, net of income tax
Total transactions recognized directly
in equity
—
—
—
416,892
—
416,892
—
(34,383)
(34,383)
416,892
(34,383)
382,509
—
2,284
—
(156,106)
—
(747)
2,284
(156,853)
—
—
747
747
(156,106)
2,284
—
(153,822)
Balance at December 31, 2016
$ 1,368,658
$
2,186,988
$
92,934
$
3,648,580
Share
capital
Retained
earnings
Accumulated
other
comprehensive
income (loss)
Total
shareholders'
equity
Balance at January 1, 2015
$ 1,384,558
$
1,701,707
$
185,082
$
3,271,347
Comprehensive income:
Net income
Other comprehensive loss
Total comprehensive income
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
—
—
—
398,302
—
398,302
—
(56,484)
(56,484)
398,302
(56,484)
341,818
—
3,437
(146,702)
—
(21,621)
(28,386)
—
—
—
(146,702)
3,437
(50,007)
—
2,028
(2,028)
—
(18,184)
(173,060)
(2,028)
(193,272)
Balance at December 31, 2015
(1) The Company paid dividends of $0.42 per common share in the first, second, and third quarters and $0.44 per common share in the fourth
quarter of 2016 ($0.39 per common share in the first, second and third quarters of 2015 and $0.42 per common share in the fourth quarter
of 2015).
$ 1,366,374
3,419,893
1,926,949
126,570
$
$
$
See accompanying notes to the consolidated financial statements.
4
GENWORTH MI CANADA INC.
Consolidated Statements of Cash Flows
(In thousands of Canadian dollars)
Years ended December 31, 2016 and 2015
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 realized gains on sale of investments
Net gains on derivatives and foreign exchange
Impairment loss
Interest expense
Net share-based compensation expense
Change in non-cash balances related to operations:
Cash collateral received from the termination of reinsurance agreement
Accrued investment income and other receivables
Prepaid assets
Subrogation recoverable
Deferred policy acquisition costs
Accounts payable and accrued liabilities
Loss reserves
Unearned premiums reserve
Accrued net benefit liabilities under employee benefit plans
Cash generated from (used in) operating activities:
Interest received from bonds and debentures
Dividends received from preferred shares and common shares
Interest paid on long-term debt
Income taxes paid
Share-based compensation awards settled in cash
Settlement of derivative financial instruments
Net cash generated from operating activities
Financing activities:
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 preferred shares
Proceeds from sale of preferred shares
Purchase of common shares
Proceeds from sale of common shares
Purchase of intangible assets and property and equipment
Net cash used in investing activities
Increase (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.
5
2016
2015
$ 416,892
$ 398,302
3,286
62,980
148,632
(162,226)
(18,055)
(3,127)
(37,720)
2,505
23,194
6,142
442,503
—
(3,367)
(274)
(5,998)
(76,720)
(1,475)
31,890
121,910
3,448
511,917
171,298
16,764
(22,407)
(101,332)
(2,107)
(29,979)
544,154
(156,106)
—
1,599
(154,507)
2,370
58,120
135,735
(164,864)
(8,435)
(23,089)
(8,898)
—
22,774
(309)
411,706
28,224
(1,087)
468
5,732
(78,901)
9,965
16,084
222,425
3,703
618,319
176,484
9,028
(22,407)
(119,760)
(1,849)
(6,983)
652,832
(146,702)
(50,007)
1,843
(194,866)
(590,135)
462,868
(1,525,517)
1,162,922
(161,378)
1,737
—
—
(4,868)
(654,371)
(264,724)
390,796
(336,517)
343,272
(1,392,154)
1,241,414
(290,539)
11,292
(8,953)
178,386
(3,746)
(257,545)
200,421
190,375
$ 126,072
$ 390,796
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
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. The Company's shares are traded
publicly 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 57.2% (December 31, 2015 - 57.3%) of the common shares of the Company.
On October 23, 2016, Genworth Financial Inc., the Company’s majority shareholder, entered into a
definitive agreement with China Oceanwide Holdings Group Co., Ltd., a limited liability company
incorporated in the People's Republic of China (“China Oceanwide”), under which China Oceanwide
has agreed to acquire all of the outstanding shares of Genworth Financial Inc. through a merger.
Upon completion of the transaction, Genworth Financial Inc. will be a standalone subsidiary of China
Oceanwide. The transaction is subject to approval by the shareholders of Genworth Financial Inc.
as well as other closing conditions, including the receipt of required regulatory approvals.
The Company holds a 100% ownership interest in the holding companies Genworth Canada Holdings
I Company ("Holdings I"), Genworth Canada Holdings II Company ("Holdings II"), and MIC Holdings
H Company ("Hco"). During the year ended December 31, 2016, MIC Holdings G Company ("Gco"),
a wholly owned subsidiary of the Company, 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 (the "Insurance Subsidiary") through
Holdings I and Holdings II. These consolidated financial statements as at and for the year ended
December 31, 2016 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"). MICICC is licensed to
service policies originated prior to its acquisition by the Company in 2012.
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.
The Insurance Subsidiary is also subject to regulation under the Protection of Residential Mortgage
or Hypothecary Insurance Act ("PRMHIA"). Under the terms of PRMHIA, the Canadian federal
government guarantees the benefits payable under eligible mortgage insurance policies issued by
the Insurance Subsidiary, less 10% of the original principal amount of each insured loan, in the event
that the Insurance Subsidiary fails to make claim payments with respect to that loan due to its
bankruptcy or insolvency.
6
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
1. Reporting entity (continued):
The maximum outstanding insured exposure for all private insured mortgages, including those
insured by other private mortgage insurance companies, under PRMHIA was increased from $300
billion to $350 billion during 2016.
2. Basis of presentation:
(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
6, 2017.
(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 preferred
shares are measured at fair value;
(ii) Derivative financial instruments, which are comprised of foreign currency forwards, cross
currency interest rate swaps, interest rate swaps and equity total return swaps are measured
at fair value;
(iii) 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;
(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
7
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
2. Basis of presentation (continued):
(b) Basis of measurement (continued):
(vi) Loss reserves and borrower recoveries included in subrogation recoverable are discounted
and include an actuarial margin for adverse deviation.
(c) Functional and presentation currency:
These consolidated financial statements are presented in Canadian dollars, which is the
Company's functional currency. All financial information presented in Canadian dollars has been
rounded to the nearest thousand, except per share amounts.
(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).
8
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
3. Significant accounting policies (continued):
(a) Basis of consolidation (continued):
(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 premiums reserve:
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 premiums reserve. 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 premiums earned 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 the unearned premiums reserve.
(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 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 and reflected in Deferred Policy Acquisition Costs.
9
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
3. Significant accounting policies (continued):
(b) Insurance contracts (continued):
(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. 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 premiums
reserve and are expensed in proportion to and over the periods in which the premiums are
earned.
10
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
3. Significant accounting policies (continued):
(b) Insurance contracts (continued):
(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.
The Company does not have any reinsurance contracts in force at December 31, 2016 and
2015.
(c) Financial instruments:
The Company recognizes financial assets on the trade date, at which it becomes a party to the
contractual provisions of the financial asset contract.
The Company derecognizes a financial asset when the contractual rights to the cash flows from
the asset expire or it transfers the rights to receive contractual cash flows on the financial asset
in a transaction in which substantially all the risks and rewards of ownership of the financial
asset are transferred. Any interest in transferred financial assets that is created or retained by
the Company is recognized as a separate asset or liability.
Financial assets and liabilities are offset and the net amount is presented in the 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.
11
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
3. Significant accounting policies (continued):
(c) Financial instruments (continued):
(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 derivative financial instruments as FVTPL at December 31, 2016 and 2015.
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, 2016 and
2015, the Company classifies bonds and debentures, preferred shares and short-term
investments in the AFS financial asset category.
AFS financial assets are recorded at fair value with changes in their fair value 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
bond or preferred share or the cost of a common share. 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 gains or losses on derivatives and
foreign exchange in accordance with the accounting policy for foreign currency translation
in note 3(l).
(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.
12
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
3. Significant accounting policies (continued):
(c) Financial instruments (continued):
(iv) Loans and receivables (continued):
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 and accrued investment income and other receivables.
(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 and
accounts payable and accrued liabilities including balances due to the Company's majority
shareholder and companies under common control.
(d) Securities lending:
The Company includes its invested assets 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 disclosed separately in
note 9 of the consolidated financial statements 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.
13
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
3. Significant accounting policies (continued):
(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, interest rate swaps and equity total return swaps.
Changes in fair value of derivative financial instruments are generally recognized in net gains
or losses on derivatives and foreign exchange 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 preferred and common shares 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.
14
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
3. Significant accounting policies (continued):
(h) Impairment:
(i)
Impairment of financial assets:
Financial assets not carried at FVTPL are assessed at each reporting period to determine
whether there is existence of objective evidence of impairment.
Bonds and debentures and preferred shares are assessed for impairment if objective
evidence indicates that a loss event has occurred after the initial recognition of the asset.
Loss events include default or delinquency of the debtor, indications that the issuer of a
security will enter bankruptcy, significant deterioration of credit quality and economic
conditions that correlate with defaults or the disappearance of an active market for a security.
Impairment is 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.
Common shares are deemed to be impaired when it is determined that the common shares
have experienced significant or prolonged losses.
Impairment losses on AFS financial assets are recognized by reclassifying losses from 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 bond or preferred
share 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 common share is recognized in other comprehensive income
("OCI").
(ii) Impairment of non-financial assets:
The carrying amounts of the Company's non-financial assets are reviewed at each reporting
period to determine whether there is any indication of impairment. If any such indication
exists, the asset's recoverable amount is estimated. An impairment loss is recognized if
the carrying amount of an asset exceeds its estimated recoverable amount. The recoverable
amount of an asset is the greater of its value in use and its fair value less expected selling
costs.
15
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
3. Significant accounting policies (continued):
(h) Impairment (continued):
(ii) Impairment of non-financial assets (continued):
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.
(i)
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 recognized directly in 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. 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.
16
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
3. Significant accounting policies (continued):
(i)
Income taxes (continued):
(ii) Deferred tax:
Deferred tax is recognized in respect of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used for taxation
purposes.
Deferred tax is not recognized for temporary differences on the initial recognition of assets
or liabilities in a transaction that is not a business combination and that affects neither
accounting nor taxable income or loss, temporary differences related to investments in
subsidiaries to the extent that it is probable that they will not reverse in the foreseeable
future, and taxable temporary differences arising on the initial recognition of goodwill.
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.
(j) Employee benefits:
(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.
17
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
3. Significant accounting policies (continued):
(j) Employee benefits (continued):
(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 ("NPPRB").
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 NPPRB 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. For the NPPRB
plan, membership data is updated every three years.
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 NPPRB 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.
18
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
3. Significant accounting policies (continued):
(j)
Employee benefits (continued):
(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 Company has adopted
liability settlement treatment for all of its share-based compensation awards because all
such awards are either settled in cash or provide employees or the Company with the option
of settlement in cash or shares of the Company.
The fair value of the share-based awards 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.
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 equity total
return swaps are recognized in employee compensation expense in the statements of
income.
19
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
3. Significant accounting policies (continued):
(j)
Employee benefits (continued):
(v) Termination benefits:
Termination benefits are recognized at the earlier of when the Company can no longer
withdraw the offer of the termination benefit or the Company recognizes restructuring costs
within the scope of IAS 37 - Provisions, contingent liabilities and contingent assets ("IAS
37").
(k) 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.
(l) 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.
(m) 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. A fair
value hierarchy is 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 23.
(n) 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.
20
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
4. Changes in accounting standards:
(a) Changes in accounting standards effective January 1, 2016:
The following amendment to existing standards has been issued by the IASB and is effective for
annual periods beginning on or after January 1, 2016.
(i) Amendments to IAS 1 - Presentation of financial statements ("IAS 1"):
In December 2014, the IASB issued certain narrow focus amendments to IAS 1 to clarify
existing presentation and disclosure requirements. Amendments include the requirement
to disaggregate line items on the Statement of Financial Position, Statement of Income and
Statement of Comprehensive Income if disaggregation is helpful to users of the financial
statements and to aggregate line items on the Statement of Financial Position if immaterial.
Adoption of the amendment on January 1, 2016 did not have a significant impact on the
Company's consolidated financial statements.
(b) Future accounting standards:
The following new standards have been issued by the IASB and are effective after December 31,
2016.
(i) Amendments to IAS 7 - Disclosure Initiative ("IAS 7"):
Amendments to IAS 7 were published in January 2016, which add disclosure requirements
that enable users of financial statements to evaluate changes in liabilities arising from
financing activities, including both changes arising from cash flow and non-cash changes.
The amendments are effective for annual periods beginning on or after January 1, 2017,
with early adoption permitted.
The Company does not expect the amendments to have a material impact on the financial
statements.
21
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
4. Changes in accounting standards (continued):
(b) Future accounting standards (continued):
(ii) Amendments to IAS 12 - Recognition of deferred tax assets for unrealized losses ("IAS 12"):
Amendments to IAS 12 were published in January 2016, which clarify the existence of a
deductible temporary difference depends solely on a comparison of the carrying amount of
an asset and its tax base at the end of the reporting period, and is not affected by possible
future changes in the carrying amount or expected manner of recovery of the asset.
The amendments also clarify the methodology to determine the future taxable profits used
for assessing the utilization of deductible temporary differences.
The amendments apply retrospectively for annual periods beginning on or after January 1,
2017, with early adoption permitted.
The Company does not expect the amendments to have a material impact on the financial
statements.
(iii) Amendments to IFRS 2 - Share-based payments ("IFRS 2"):
Amendments to IFRS 2 were published in June 2016, which clarify how to account for certain
types of share-based payment transactions.
The amendments provide requirements on the accounting for:
•
•
•
the effects of vesting and non-vesting conditions on the measurement of cash-
settled share-based payments;
share-based payment transactions with a net settlement feature for withholding
tax obligations; and
a modification to the terms and conditions of a share-based payment that changes
the classification of the transaction from cash-settled to equity-settled.
The amendments are effective for annual periods beginning on or after January 1, 2018,
with early adoption permitted if information is available without the use of hindsight.
The Company is currently assessing the impact of the amendments to IFRS 2.
22
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
4. Changes in accounting standards (continued):
(b) Future accounting standards (continued):
(iv) IFRS 9 - Financial instruments ("IFRS 9"):
In July 2014, the IASB published the final version of IFRS 9, which replaces IAS 39 - Financial
instruments: recognition and measurement. IFRS 9 consists of three parts which include
guidance on the classification and measurement of financial instruments, impairment of
financial assets, and a new general hedge accounting model.
(a) Classification - financial assets:
The Classification of financial assets is based on the cash flow characteristics and
the business model in which an asset is held. The classification determines how a
financial instrument is accounted for and measured. Financial assets can be classified
as amortized cost when the objective of a business model is to receive contractual
cash flows of principal and interest; fair value through other comprehensive income
("FVOCI") when the objective of the business model is to equally receive contractual
cash flows of principal and interest and realize cash flows from the sale; or fair value
through profit or loss ("FVTPL") for all other financial assets or when specified elections
are made. For equity investments that are not held for trading, an irrevocable election
can be made at initial recognition to present fair value changes permanently in OCI,
meaning gains or losses are not reclassified to income when the investment is
disposed of. Derivatives embedded in contracts where the host is a financial asset in
the scope of the standard are never bifurcated. Instead the hybrid financial instrument
as a whole is assessed for classification and measurement.
(b) Impairment - expected credit loss:
IFRS 9 introduces a single forward-looking expected credit loss model for financial
instruments not measured at FVTPL. Under the expected credit loss model, loss
allowances will be measured by either 12-month expected credit losses that result
from possible default events within 12 months after the reporting date or lifetime
expected credit losses that result from all possible default events over the expected
life of a financial asset. Lifetime expected credit loss measurement applies if the credit
risk of a financial asset has increased significantly since initial recognition and 12-
month expected credit loss measurement applies if it has not.
23
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
4. Changes in accounting standards (continued):
(b) Future accounting standards (continued):
(iv) IFRS 9 - Financial instruments ("IFRS 9") (continued):
(c) Classification - financial liabilities:
IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial
liabilities. However, under IAS 39, all fair value changes of liabilities designated at FVTPL
are recognized in income, whereas under IFRS 9 these fair value changes are generally
presented as follows:
•
the amount of change in the fair value that is attributable to change in the credit risk
of the liability is presented in OCI; and
•
the remaining amount of change in the fair value is presented in income.
(d) Hedge accounting:
The new model for hedge accounting aligns hedge accounting with risk management
objectives and strategy. An entity may choose to adopt the requirements under IFRS 9
or maintain the existing requirements of IAS 39.
While IFRS 9 is generally effective for years beginning on or after January 1, 2018, on September
12, 2016, the IASB issued amendments to IFRS 17 - Insurance contracts ("IFRS 17), which
permit eligible insurers optional transitional relief until the forthcoming insurance accounting
standard is available for implementation.
The options permit (a) entities whose predominant activity is issuing insurance contracts within
the scope of IFRS 17 a temporary exemption to defer the implementation of IFRS 9, which may
allow alignment of the implementation of IFRS 9 with the forthcoming insurance accounting
standard, or alternatively (b) give entities issuing insurance contracts the option to remove from
profit or loss the incremental volatility caused by changes in the measurement of specified
financial assets upon application of IFRS 9. Entities that apply either of the options will be required
to adopt IFRS 9 on the earlier of the date that IFRS 17 is effective and annual periods beginning
on or after January 1, 2021. Additional financial statement disclosures will be required for insurers
that apply either of the options. The Company has concluded that it is an eligible insurer that
qualifies for the transitional relief. The Company intends to apply the optional transitional relief
that permits deferral of the adoption of IFRS 9 . The Company is currently assessing the impact
of IFRS 9 on its financial assets and financial liabilities.
24
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
4. Changes in accounting standards (continued):
(b) Future accounting standards (continued):
(v) IFRS 17 - Insurance contracts:
IFRS 17 (previously referred to as IFRS 4 phase II) is intended to replace IFRS 4: Insurance
contracts. Under the IFRS 17 model, insurance contract liabilities will be calculated as the
present value of future insurance cash flows with a provision for risk. The discount rate will
reflect current interest rates. If the present value of future cash flows would produce a gain
at the inception of the contract, the model will also require a "contractual service margin" to
offset the day one gain. The contractual service margin will amortize over the life of the
contract. Certain types of contracts will be permitted to use a simplified unearned premium
liability model until a claim is incurred. Additionally, for contracts in which the cash flows are
linked to underlying terms, the liability value will reflect that linkage. There will also be a new
income statement presentation for insurance contracts and additional disclosure
requirements.
IFRS 17 is anticipated to be released in the first half of 2017 and has an expected effective
date of January 1, 2021.
The Company is currently assessing the impact of IFRS 17.
(vi) IFRS 16 - Leases ("IFRS 16"):
IFRS 16 was issued on January 13, 2016. The new standard will replace existing lease
guidance in IFRS and related interpretations, and introduces a new accounting model which
requires companies to bring most leases on-balance sheet. A lessee recognizes a a right-
of-use asset representing its right to use the underlying asset and a lease liability
representing its obligation to make lease payments. Short-term leases and leases of low
value items are optional exemptions under the standard. Lessor accounting remains similar
to the current standard, where lessors classify leases as finance or operating leases.
The new standard is effective for years beginning on or after January 1, 2019.
The Company is currently assessing the impact of IFRS 16.
25
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
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 for objective evidence
of impairment.
For investments in bonds and preferred shares, evaluation of whether impairment has occurred
is based on the Company’s assessment that a loss event has occurred and the Company’s best
estimate of the cash flows 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.
Impairment assessment is a qualitative and quantitative 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.
Impairment for bonds and preferred shares is 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
to be collected or when the Company intends to sell the investment prior to recovery from its
unrealized loss position.
For common shares, 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.
26
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
5. Significant judgments and estimates (continued):
(b) Estimates (continued):
(i) Premiums earned (continued):
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.
(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. 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.
IBNR is the Company's best estimate of losses that have been incurred but not reported
from the time the first scheduled mortgage payment has been missed by a mortgage
borrower. 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.
27
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
5. Significant judgments and estimates (continued):
(b) Estimates (continued):
(ii) Losses (continued):
The Company recognizes a provision for adverse deviation based on assessment of the
adequacy of the Company's loss reserves and with reference to the current and future
expected condition of the Canadian housing market and its impact on the expected
development of losses.
The 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(b) for sensitivity analyses that quantify
the exposure to changes in key loss assumptions.
(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. Borrower
recoveries are discounted to present value and include an actuarial margin for adverse
deviation.
(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.
28
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
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
Premiums written during the year
Premiums earned during the year
$
2,020,993 $
759,806
1,798,568
808,621
(637,896)
(586,196)
Unearned premium reserves, end of year
$
2,142,903 $
2,020,993
2016
2015
Key methodologies and assumptions:
Premiums written are recognized as premiums earned using a factor-based premium recognition
curve that is based on the Company's expected loss emergence pattern. The principal
assumption underlying the formation of the premium recognition curve is that the Company's
future claims development will follow a similar pattern to past claims emergence patterns.
Approximately 80% of the Company's premiums written are recognized as premium earned
within the first five years of policy inception based on the current premium recognition curve.
The effective risk of loss diminishes significantly subsequent to the first five years after policy
inception due to normal amortization of the loan's principal balance from mortgage payments
and potential home price appreciation that would require a significant stress event to cause the
home price to drop below the outstanding loan balance and result in a loss to the insurer. 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 Company's appointed actuary performs a liability adequacy test on the Company's unearned
premiums reserve 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, 2016 and 2015 identified
a surplus in the Company's unearned premiums reserve and thus no premium deficiency reserve
is required at these reporting dates.
29
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
6.
Insurance contracts (continued):
(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
Total loss reserves
2016
$
102,753 $
53,305
(1,940)
9,349
2015
83,962
41,591
(1,502)
7,526
$
163,467 $
131,577
The following table presents movement in loss reserves and the 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
Recoveries on claims related to prior years
2016
2015
$
131,577 $
(107,133)
115,493
(105,826)
156,910
(17,887)
132,945
(11,035)
Loss reserves, end of year
$
163,467 $
131,577
Claims development:
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).
30
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
6.
Insurance contracts (continued):
(b) Losses on claims and loss reserves (continued):
The following table demonstrates the development of the estimated loss reserves for the ten most recent default years.
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Total
Claims incurred at the end of
the default year
$ 102,549
$ 148,493
$ 196,586
$ 175,189
$ 172,200
$ 143,388
$ 132,299
$ 118,498
$ 132,945
$ 156,910
Claims incurred one year later
106,468
200,807
218,890
193,820
193,226
141,957
128,042
112,834
119,428
Claims incurred two years later
112,224
204,706
247,663
217,034
196,377
140,572
126,540
109,894
Claims incurred three years later
115,632
209,850
252,041
218,884
195,903
140,196
126,293
Claims incurred four years later
115,816
212,615
255,282
218,088
194,969
139,809
Claims incurred five years later
115,427
212,595
254,725
217,036
194,383
Claims incurred six years later
115,427
212,595
253,795
217,624
Claims incurred seven years later
115,427
212,595
252,995
Claims incurred eight years later
115,427
212,595
Claims incurred nine years later
115,427
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Current estimate of claims incurred
$ 115,427
$ 212,595
$ 252,995
$ 217,624
$ 194,383
$ 139,809
$ 126,293
$ 109,894
$ 119,428
$ 156,910
$1,645,358
Cumulative payments to date
$ 115,427
$ 212,595
$ 252,995
$ 216,877
$ 194,225
$ 139,557
$ 126,101
$ 106,780
$ 95,691
$
21,643
$1,481,891
Current loss reserves
$
— $
— $
— $
747
$
158
$
252
$
192
$
3,114
$ 23,737
$ 135,267
$ 163,467
Current estimate of surplus
(deficiency)
$ (12,878)
$ (64,102)
$ (56,409)
$ (42,435)
$ (22,183)
$
3,579
$
6,006
$
8,604
$ 13,517
$
Surplus (deficiency) of initial gross
loss reserve
(13)%
(43)%
(29)%
(24)%
(13)%
2%
5%
7%
10%
—
—
31
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
6.
Insurance contracts (continued):
(b) Losses on claims and loss reserves (continued):
Conditions and trends that have affected the development of liabilities in the past may or may
not occur in the future and, accordingly, conclusions about future results may not necessarily
be derived from the information presented in the table above.
Key methodologies and assumptions:
The establishment of loss reserves is based on known facts and interpretation of circumstances.
The principal methodologies and assumptions underlying loss reserve estimates are as follows:
(i) Claim frequency:
Claim frequency is the portion of delinquencies (both reported and unreported) that are
expected to result in paid claims, after estimated cures have been deducted. A cure is
defined as a reported delinquency that closes with no claim payment or only nominal loss
adjustment expenses. Claim frequency is influenced by labour market performance and
changes in house prices. The Company estimates claim frequency for case reserves by
analyzing individual reported delinquencies. The Company estimates claim frequency for
incurred but not reported delinquencies by applying average delinquency-to-paid-claim
ratios to historical reported delinquencies, derived from tracking and analyzing loss
development 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.
32
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
6.
Insurance contracts (continued):
(b) Losses on claims and loss reserves (continued):
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. Losses are the product of frequency and severity. Therefore,
changes in either frequency or severity of the same magnitude result in the same dollar
impact on losses.
2016
Sensitivity factor
Claim frequency
Claim severity
Change in
Impact on income
assumptions before income taxes
Impact on
shareholders' equity
+10% $
-10%
+10%
-10%
(28,748) $
28,748
(28,748)
28,748
(21,043)
21,043
(21,043)
21,043
33
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
6.
Insurance contracts (continued):
(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
2016
2015
$
43,223 $
46,195
204,800
195,703
(1,077)
(4,718)
(195,721)
(193,957)
Subrogation rights related to real estate, end of year
51,225
43,223
Borrower recoveries, beginning of year
Net estimated borrower recoveries recognized
Borrower recoveries received
Discounting
Provision for adverse deviation
Borrower recoveries, end of year
18,021
4,486
(4,439)
(752)
(1,299)
16,017
20,781
5,086
(5,625)
(775)
(1,446)
18,021
Subrogation recoverable, end of year
$
67,242 $
61,244
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 to ensure it reflects the most current
historical experience of successful recoveries.
34
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
6.
Insurance contracts (continued):
(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
$
193,070 $
172,289
2016
2015
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
76,720
78,901
(62,980)
(58,120)
13,740
20,781
Deferred policy acquisition costs, end of year
$
206,810 $
193,070
(e) Reinsurance:
During the year ended December 31, 2016, the Company did not participate in reinsurance
transactions and therefore no premiums were recognized and no losses were incurred in
conjunction with reinsurance agreements.
During the year ended December 31, 2015, the Company recognized permiums of $1,802 and
incurred no losses.
During the year ended December 31, 2015, the Company, through its indirect subsidiary,
MICICC, terminated its retrocession agreement with a third party reinsurance company that
commenced on December 1, 2013, under which the Company assumed reinsurance risk for
approximately 33% of the retroceded liabilities on claims paid by Genworth Financial Mortgage
Insurance Pty Limited, an Australian company (“Genworth Australia”).
35
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
7. Financial risk management:
The Insurance Subsidiary maintains 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 Company's risk management framework facilitates compliance with ORSA through the
identification and assessment of risks, and the ongoing monitoring and management of 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, 2016 compared to December 31, 2015.
(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 has identified pricing risk, underwriting risk, claims management risk, loss
reserving risk, insurance portfolio concentration risk and reinsurance risk as its most significant
sources of insurance risk. Each of these risks is described separately below.
(i) Pricing risk:
Pricing risk arises when actual claims experience differs from the assumptions included in
pricing calculations. The Company's premium rates vary with the perceived risk of a claim
on an insured loan, which takes into account the Company's long-term historical loss
experience on loans with similar loan-to-value ratios, terms and types of mortgages, borrower
credit histories and capital required to support the product.
36
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
7. Financial risk management (continued):
(a) Insurance risk (continued):
(i) Pricing risk (continued):
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.
The Company is subject to capital requirements imposed under Canadian law including the
Insurance Companies Act and PRMHIA (note 8). If changes in regulatory capital requirements
do not reflect historical pricing, the Company's financial performance could be adversely
impacted and pricing could be inadequate relative to the Company's regulatory capital
requirements.
(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.
37
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
7. Financial risk management (continued):
(a) Insurance risk (continued):
(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, potential 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 and updates the case reserves
as appropriate. Management has established procedures to evaluate the appropriateness
of loss reserves, which include a review of the loss reserves by the Company's appointed
actuary.
(v) Insurance portfolio concentration risk:
A national or regional economic downturn may increase the likelihood that borrowers will
not have sufficient income to pay their mortgages and can also adversely affect home values,
which increases the severity of the Company's losses. Portfolio concentration risk is the
risk that losses increase disproportionately where portfolio diversification is inadequate.
38
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
7. Financial risk management (continued):
(a) Insurance risk (continued):
(v) Insurance portfolio concentration risk (continued):
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 premiums written.
Premiums written
Ontario
Alberta
British Columbia
Quebec
Other
$
2016
343,158
119,356
111,924
89,312
96,056
45% $
329,904
16%
15%
12%
12%
176,213
108,061
92,995
99,646
2015
41%
22%
13%
12%
12%
$
759,806
100% $
806,819
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:
As at December 31, 2016 and December 31, 2015, the Company has no reinsurance risk.
(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.
39
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
7. Financial risk management (continued):
(b) Credit risk (continued):
The total credit risk exposure at December 31, 2016 is $6,253,454 (2015 - $5,615,984) and
comprises $206,099 (2015 - $78,178) of short-term investments, $47,337 (2015 - $28,130)
of accrued investment income and other receivables, $5,468,170 (2015 - $5,200,715) of bonds
and debentures, $425,819 (2015 - $247,717) of preferred shares, $38,787 of derivative
financial instruments in an asset position (2015 - the Company did not have any credit risk
exposure to derivative financial instrument assets) and $67,242 (2015 - $61,244) of
subrogation recoverable.
The Company's investment management strategy is to invest primarily in financial 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, preferred shares and short-term
investments by credit rating is presented below.
Credit rating
Bonds and debentures and short-
term investments:
AAA
AA
A
BBB
BB
Preferred Shares
P2
P3
2016
2015
Carrying value
Carrying value
amount
%
amount
%
$
2,262,080
39.9 $
2,159,848
1,164,483
1,687,011
538,540
22,155
20.5
29.7
9.5
0.4
1,024,168
1,703,236
386,749
4,892
40.9
19.4
32.3
7.3
0.1
5,674,269
100.0
5,278,893
100.0
337,607
88,212
79.3
20.7
227,369
20,348
91.8
8.2
425,819
100.0
247,717
100.0
$
6,100,088
$
5,526,610
40
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
7. Financial risk management (continued):
(b) Credit risk (continued):
As at December 31, 2016, 90.1% of the Company's bonds and debentures were rated 'A' or
better, compared to 92.6% at December 31, 2015. As at December 31, 2016 and December
31, 2015, all of the Company's preferred shares were rated P3 or better.
The Company did not hold any impaired financial assets at December 31, 2016 and 2015.
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, short-term investment and preferred share portfolios by geographic region and by
industry.
2016
2015
By country of issuance:
Canada
Other
By industry:
Government
Bank, insurance, and other financial
institutions
Energy - Direct (1)
Energy - Indirect (1)
Infrastructure
All other sectors
$
$
$
5,420,310
88.9% $
5,041,102
91.2%
679,778
11.1%
485,508
8.8%
6,100,088 100.0% $
5,526,610 100.0%
3,170,107
51.8% $
3,064,625
55.4%
1,157,523
19.0%
1,077,846
19.5%
114,290
320,857
101,069
1.9%
5.3%
1.7%
82,611
214,842
116,669
1.5%
3.9%
2.1%
1,236,242
20.3%
970,017
17.6%
(1) Direct Energy securities have direct business correlation to the underlying commodity price movements and issuers of these securities are
integrated oil and gas companies with large market capitalizations. Indirect energy securities have issuers that are pipelines and distribution
companies that are primarily regulated entities with stable cash flows.
$
6,100,088 100.0% $
5,526,610 100.0%
41
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
7. Financial risk management (continued):
(b) Credit risk (continued):
Exposures to the financial and energy sectors 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 as
governed by the International Swaps and Derivatives Association ("ISDA") agreement between
the Company and its counterparties. Mark-to-market provisions in the Company's ISDA
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, 2016, the Company's net derivative
obligations were $4,051 (2015 - $83,861) and the Company has pledged a net amount of $2,682
(2015 - $85,296) of Canadian federal government securities as collateral under the master
derivative agreements.
42
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
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, 2016, the Company has cash and cash
equivalents of $126,072 (2015 - $390,796) and short-term investments of $206,099 (2015 -
$78,178).
The table presented below summarizes the carrying value by the earliest contractual maturity
of the Company's bonds and debentures and short-term investments.
The Company's preferred shares have been excluded from this table because they do not have
a fixed contractual maturity. The Company owns two types of preferred shares, 5-year reset
preferred shares and perpetual preferred shares. The 5-year reset preferred shares are shares
whose dividends are set for a 5-year term based on a spread over the 5-year Government of
Canada rate. These preferred shares reset every 5 years where the issuer has the option to call
them at fair value or roll them over for another 5 years at a pre-determined spread plus the
prevailing Government of Canada 5-year rate. The perpetual preferred shares are the traditional
form of preferred shares in which the Company receives a fixed dividend either in perpetuity or
until redeemed by the issuer according to a redemption schedule.
Within 1
year
1 - 3
years
3 - 5
years
5 - 10
years
Over 10
years
Total
694,553 $ 1,239,332 $ 1,397,581 $ 1,933,719 $
409,084 $ 5,674,269
587,560 $ 1,181,669 $ 1,517,124 $ 1,503,156 $
489,384 $ 5,278,893
2016
2015
$
$
43
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
7. Financial risk management (continued):
(c) Liquidity risk/maturity analysis (continued):
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
2016:
Non-derivative financial
liabilities:
Accounts payable and
accrued liabilities
$
64,987 $
Income taxes payable
19,329
— $
—
Loss reserves (at
Actuarial Present Value)
134,890
28,577
— $
— $
— $
64,987
—
—
—
—
—
—
—
19,329
163,467
435,000
Long-term debt
—
—
275,000
160,000
4,006
4,521
9,095
25,216
—
42,838
Derivative financial liabilities:
Derivative financial
instruments
2015:
Non-derivative financial
liabilities:
Accounts payable and
accrued liabilities
$
65,750 $
Income taxes payable
—
— $
—
Loss reserves (at
Actuarial Present Value)
56,234
75,343
— $
— $
— $
65,750
—
—
—
—
—
—
—
—
131,577
435,000
Long-term debt
—
—
275,000
160,000
Derivative financial liabilities:
Derivative financial
instruments
33,707
6,900
6,659
36,595
—
83,861
44
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
7. Financial risk management (continued):
(d) Market risk:
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as
interest rates, equity market fluctuations, foreign currency exchange rates and other relevant
market rate or price changes. Market risk is directly influenced by the volatility and liquidity in
the markets in which the related underlying assets are traded. The market risks to which the
Company is exposed are interest rate risk, equity price risk and currency risk.
(i) Interest rate risk:
Fluctuations in interest rates have a direct impact on the market valuation of the Company's
interest-sensitive assets. Short-term interest rate fluctuations will generally create unrealized
gains or losses. Generally, the Company's investment income will be reduced during
sustained periods of lower interest rates as higher-yielding 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 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 interest-sensitive assets will
generally decrease and gains on investments will likely be reduced or become losses.
As at December 31, 2016, 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, short- term investments and preferred shares by approximately $222,571,
representing 3.65% of the $6,100,088 fair value of these investments, and decrease the
value of loss reserves by $1,087. Conversely, a 100 basis point, or 1%, decrease in interest
rates would increase the market value of the AFS bonds and debentures, short-term
investments and preferred shares by approximately $231,232 representing 3.79% of the fair
value, and increase the value of loss reserves by approximately $1,107.
Effective in the year ended December 31, 2016, the Company uses fixed for floating interest
rate swaps in conjunction with the management of interest rate risk related to its fixed income
investments.
45
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
7. Financial risk management (continued):
(d) Market risk (continued):
(i) Interest rate risk (continued):
As at December 31, 2015,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, short- term investments and preferred shares by approximately $203,720,
representing 3.69% of the $5,526,610 fair value of these investments, and decrease the
value of loss reserves by $878. Conversely, a 100 basis point, or 1%, decrease in interest
rates would increase the market value of the AFS bonds and debentures, short-term
investments and preferred shares by approximately $212,843 representing 3.85% of the fair
value, and increase the value of loss reserves by approximately $894.
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 interest-sensitive assets will be maintained; (b) shifts in the yield curve are parallel; and
(c) credit and liquidity risks have not been considered.
(ii) Equity price risk:
Equity price risk is the risk that the fair values of equity investments will decrease as result
of changes in the levels of equity indices and the values of individual stocks. Equity price risk
exposures arises from the Company's investment in common shares.
The Company did not hold any common shares at December 31, 2016 and December 31,
2015.
(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. The Company uses foreign
currency forward contracts and cross currency interest rate swaps to mitigate currency risk.
46
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
7. Financial risk management (continued):
(d) Market risk (continued):
(iii) Currency risk (continued):
The following table presents the foreign-denominated financial assets and the derivative
financial instruments used to reduce currency risk.
2016
2015
Bonds and debentures denominated in U.S. dollars (1)
679,778
485,508
Less: foreign currency forward contract notional amount
cross currency interest rate swap notional amount
Total derivative financial instrument notional amount
422,344
270,852
693,196
288,856
224,665
513,521
Net currency exposure from financial instruments
$
(13,418) $
(28,013)
(1) Bonds and debentures denominated in U.S. dollars consists of $407,200 of emerging market debt (2015-
$307,941), $207,137 of collateralized loan obligations (2015- $177,567) and $65,441 of European bonds (2015 -
nil).
47
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
8. Capital management and regulatory requirements:
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
requirements and restrictions are aimed at protecting policy holders and creditors rather than the
insurer and include:
•
restrictions on the amount of outstanding mortgages insured by the Company;
•
restrictions on the types of insurance products that may be offered;
•
establishment of mortgage insurance eligibility criteria;
•
restrictions on the distribution of the Company's products;
•
restrictions on types of invested assets;
•
•
the requirement to maintain a required level of regulatory capital including adequate
margins for unearned premiums reserve and unpaid claims;
the examination of insurance companies by regulatory authorities, including periodic
financial and market conduct examinations; and
•
limitations on dividends and transactions with affiliates.
Capital management:
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.
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 as at December 31, 2016,
the Department of Finance has established a minimum MCT ratio of 175% for the Insurance
Subsidiary under PRMHIA (2015 - 175%). In addition, as at December 31, 2016, the Company has
established an internal capital ratio target for the Insurance Subsidiary of 185% (2015 - 185%).
Pending the development of the new regulatory capital framework for mortgage insurers, the
Insurance Subsidiary had established an operating MCT holding target of 220% in 2014.
48
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
8. Capital management and regulatory requirements (continued):
As at December 31, 2016, the Insurance Subsidiary had an MCT ratio of 245% (2015 - 234%) and
has complied with regulatory capital requirements as well as its MCT holding target.
On December 15, 2016, OSFI released the final advisory for capital titled "Capital Requirements for
Federally Regulated Mortgage Insurers". This advisory provides a new standard framework for
determining the capital requirements for residential mortgage insurance companies. The new
framework is more risk sensitive and incorporates additional risk attributes, including credit score,
remaining amortization and outstanding loan balance.
The advisory comes into force on January 1, 2017, replacing OSFI's advisory, "Interim Capital
Requirements for Mortgage Insurance Companies", which has been in effect since January 1, 2015.
The advisory focuses on capital requirements for insurance risk, which will consist primarily of:
(a) A base requirement that applies to all insured mortgages at all times; plus
(b) A supplementary requirement that applies only to mortgages originated during periods
when the housing market for the region that corresponds to the mortgage has a house
price-to-income ratio that exceeds a specified threshold (with this supplementary
requirement not applying to mortgages insured prior to January 1, 2017); less
(c) Premium liabilities, consisting of unearned premiums reserve and the reserve for incurred
but not reported ("IBNR") claims.
Supplementary capital will be tied to the behavior of property prices, both in terms of recent
housing price trends and the behavior of housing prices relative to household incomes. The
advisory includes a phase-in period to allow for a smooth transition to the new regulatory capital
framework.
Under the new regulatory capital framework, the holding target of 220% has been recalibrated,
under PRMHIA, to the OSFI Supervisory MCT Target of 150% and the minimum MCT under
PRMHIA has been reduced to 150%. The Company expects to be compliant with the new
regulatory capital framework at January 1, 2017.
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 appointed
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.
49
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
8. Capital management and regulatory requirements (continued):
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.
50
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
9. Investments:
The investments presented in the table below are carried at fair value:
2016
2015
Fair value
Amortized
cost
Unrealized
gain (loss)
% total fair
value
Fair value
Amortized
cost
Unrealized
gain (loss)
% total fair
value
Cash and cash equivalents:
Canadian federal government treasury bills
Cash
AFS investments:
Short-term investments:
$
50,407 $
75,665
126,072
50,407 $
75,665
126,072
Canadian federal government treasury bills (1)
206,099
206,099
Government bonds and debentures:
Canadian federal government (1)
Canadian provincial and municipal governments
Corporate bonds and debentures:
Financial
Energy
Infrastructure
All other sectors
1,976,304
987,704
2,964,008
910,468
355,629
101,069
929,859
2,297,025
1,931,558
932,399
2,863,957
886,780
336,422
95,791
873,466
2,192,459
—
—
—
—
44,746
55,305
100,051
23,688
19,207
5,278
56,393
104,566
Collateralized loan obligations
207,137
180,394
26,743
Total AFS bonds and debentures
5,468,170
5,236,810
231,360
Preferred Shares:
Financial
Energy
All other sectors
Total investments
247,055
79,518
99,246
425,819
262,649
78,967
103,167
444,783
$ 6,226,160 $
6,013,764 $
(15,594)
551
(3,921)
(18,964)
212,396 (2)
0.8
1.2
2.0
3.3
31.8
15.9
47.7
14.6
5.7
1.6
14.9
36.8
3.3
87.8
4.0
1.3
1.6
6.9
$
274,166 $
116,630
390,796
274,166 $
116,630
390,796
78,178
78,178
1,963,176
1,023,271
2,986,447
922,532
264,033
116,669
733,467
2,036,701
177,567
177,567
5,200,715
155,314
33,420
58,983
247,717
1,884,347
949,623
2,833,970
889,277
245,599
109,803
668,099
1,912,778
145,539
145,539
4,892,287
175,137
38,975
66,437
280,549
100.0
$ 5,917,406 $
5,641,810 $
—
—
—
—
78,829
73,648
152,477
33,255
18,434
6,866
65,368
123,923
32,028
32,028
308,428
(19,823)
(5,555)
(7,454)
(32,832)
275,596 (2)
4.6
2.0
6.6
1.3
33.2
17.3
50.5
15.6
4.5
1.9
12.4
34.4
3.0
3.0
87.9
2.6
0.6
1.0
4.2
100.0
(1) As at December 31, 2016, Canadian federal government bonds and treasury bills includes $2,682 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 (December 31, 2015 - $85,296).
(2) As at December 31, 2016, unrealized gains include unrealized foreign exchange gains of $79,271 (December 31, 2015 - $97,019).
51
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
9.
Investments (continued):
The fair value of investments, excluding preferred shares 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 collateralized loan
obligations:
1 year or less
1 - 3 years
3 - 5 years
5 - 10 years
Over 10 years
2016
2015
$
456,092 $
723,451
871,807
931,797
186,960
383,164
579,194
1,089,309
822,535
190,423
3,170,107
3,064,625
238,460
515,882
525,774
1,001,922
222,124
204,396
602,475
427,815
680,621
298,961
2,504,162
2,214,268
$
5,674,269 $
5,278,893
Investments denominated in foreign currencies:
Collateralized loan obligations ("CLOs") of $207,137 (2015 - $177,567) are 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. Additionally, corporate bonds and debentures includes $407,200 of
emerging market bonds (2015 - $398,035) and $65,441 of European bonds (2015 - nil)
denominated in U.S. dollars.
The CLOs, emerging market and European bonds 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 gains
or losses on derivatives and foreign exchange on the consolidated statements of income.
52
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
9.
Investments (continued):
Derivative financial instruments:
Derivative financial instruments are used by the Company for economic 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. Foreign currency forwards and cross currency interest rate swaps are
contractual obligations to exchange one currency for another at a predetermined future date.
The Company uses 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 in relation to risk associated with
share-based compensation expenses. 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 fair
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 notes. Additional disclosure of the Company's equity total return swaps is included in note
14.
During the year ended December 31, 2016, the Company entered into interest rate swaps. The
Company uses fixed-for-floating interest rate swaps in conjunction with management of interest rate
risk related to its fixed income investments. The fixed-for-floating interest rate swaps are derivative
financial instruments in which the Company and its counterparties agree to exchange interest rate
cash flows based on a specified notional amount from a fixed rate to a floating rate.
53
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
9.
Investments (continued):
The following table shows the fair value and notional amounts of the derivative financial instruments
by terms of maturity, in Canadian dollars:
December 31,
Derivative Derivative
Net
2016
asset
liability
fair value
1 year
or less
1 - 3
years
3 - 5 Over 5
years
years
Total
Notional Amount
Foreign currency
forwards
Cross currency
interest rate swaps
$
219 $ (35,497) $ (35,278) $ 161,066 $ 24,391 $
50,288 $ 186,599 $ 422,344
83
(7,333)
(7,250)
18,810
38,963
70,589
142,490
270,852
Equity total return
swaps
702
Interest rate swaps
37,783
(8)
—
694
20,812
—
—
—
20,812
37,783
—
— 2,000,000
— 2,000,000
Total
$ 38,787 $ (42,838) $
(4,051) $ 200,688 $ 63,354 $ 2,120,877 $ 329,089 $ 2,714,008
December 31,
Derivative Derivative
Net
2015
asset
liability
fair value
1 year
or less
1 - 3
years
3 - 5 Over 5
years
years
Total
Notional Amount
Foreign currency
forwards
Cross currency
interest rate swaps
Equity total return
swaps
Interest rate swaps
$
— $ (44,886) $ (44,886) $ 14,351 $ 26,412 $
35,558 $ 212,535 $ 288,856
—
—
—
(37,461)
(37,461)
143,590
27,680
19,376
34,019
224,665
(1,514)
(1,514)
19,558
—
—
—
—
—
—
—
—
—
19,558
—
Total
$
— $ (83,861) $ (83,861) $ 177,499 $ 54,092 $
54,934 $ 246,554 $ 533,079
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, 2016, the
Company had posted collateral of $2,682 in the form of Canadian federal government bonds and
treasury bills for the benefit of its counterparties to its derivative financial instruments (2015 -
$85,296).
54
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
9.
Investments (continued):
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, which is an AA - rated financial institution, 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.
As at December 31, 2016 and 2015 the Company had loaned the following investments under its
securities lending program:
Cash equivalents
Short-term investments
Bonds and debentures
Preferred shares
2016
2015
31,207 $
$
—
430,490
9,186
28,648
3,823
435,357
2,206
$
470,883 $
470,034
As at December 31, 2016, the Company has accepted eligible securities as collateral with a fair
value of $496,211 (2015 - $495,671).
55
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
10. Income taxes:
The provision for income taxes comprises the following:
Current tax:
Current income taxes
Current income tax adjustments in respect of prior years
Deferred tax:
Origination and reversal of temporary differences
Impact of changes in income tax rates
2016
2015
$
148,056 $
137,108
90
148,146
(4,513)
132,595
486
—
486
2,448
692
3,140
Total income tax expense
$
148,632 $
135,735
Income taxes recognized in OCI comprise the following:
2016
2015
Income tax recovery related to net losses on AFS
financial assets
Income taxes (income tax recovery) related to re-
measurement of employee benefit plan obligations
Total income tax recovery recognized in OCI
$
$
(11,766) $
(22,040)
(274)
743
(12,040) $
(21,297)
56
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
10. Income taxes (continued):
Income taxes reflect an effective tax rate that differs from the statutory tax rate for the following
reasons:
2016
2015
Income before income taxes
$
565,524
$
534,037
Combined basic Canadian federal
and provincial income tax rate
26.80%
26.55%
Income tax expense based on statutory income tax rate
$
151,560
$
141,787
Increase (decrease) in income tax resulting from:
Non-taxable income
Effect of increases in income tax rates
Income tax adjustments in respect of prior years
(3,035)
—
107
(2,927)
1,362
(4,487)
Income tax expense
$
148,632
$
135,735
The difference in the effective income tax rate of 26.28%, implicit in the $148,632 provision for
income taxes in 2016 from the Company's statutory income tax rate of 26.80%, was primarily
attributable to non-taxable dividend income.
The difference in the effective income tax rate of 25.42%, implicit in the $135,735 provision for
income taxes in 2015 from the Company's statutory income tax rate of 26.55%, was primarily
attributable to income tax adjustments in respect of prior years and higher non-taxable income
partially offset by a higher income tax rate applicable to deferred income.
57
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
10. Income taxes (continued):
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
Deferred tax liabilities:
Investments
Policy reserves
Property and equipment and intangible assets
Financing costs
2016
2015
$
13,460 $
2,190
11,802
27,452
(1,170)
(62,552)
(2,593)
(354)
(66,669)
11,579
1,763
10,679
24,021
(1,404)
(59,304)
(2,062)
(256)
(63,026)
Net deferred tax liability
$
(39,217) $
(39,005)
The net change in the composition of the net deferred tax liabilities is as follows:
Deferred tax liability, beginning of year
Expense for the year
OCI recognized for the year
Deferred tax liability, end of year
2016
2015
39,005 $
486
(274)
35,122
3,140
743
39,217 $
39,005
$
$
All deferred tax assets have been recognized as at December 31, 2016 and 2015 as the Company
has assessed it is probable that future taxable profits will be available against which the deferred
tax benefits can be utilized and appropriate tax planning is in place to ensure all tax losses available
for carry forward will be utilized.
58
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
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 managers'
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, the 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. The
Company's incentive compensation plans are subject to the Company's compensation
recoupement policy, which can be applied in limited circumstances at the discretion of the
Company's Board of Directors.
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 five years from 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.
59
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
11. Related party transactions and balances (continued):
(a) Transactions with key management personnel and Company directors (continued):
Compensation for the Company's seven key management personnel and seven
independent directors (2015 - seven key management personnel and eight independent
directors) is comprised of the following:
Short-term employee benefits
Post-employment benefits
Share-based compensation
Director fees
Total compensation
$
$
2016
4,250 $
813
2,000
809
7,872 $
2015
3,888
751
1,075
704
6,418
(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 H Company ("Hco")
Genworth Financial Mortgage Insurance
Company Canada ("the Insurance
Subsidiary")
Direct
Direct
Direct
Indirect through Holdings I
and Holdings II
MIC Insurance Company Canada
Indirect through
("MICICC")
the Insurance Subsidiary
100%
100%
100%
100%
100%
60
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
11. Related party transactions and balances (continued):
(b)
Interest in consolidated subsidiaries (continued):
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 $6,055 for the year ended
December 31, 2016, recorded in office expenses in the consolidated statements of income
(2015 - $6,458). The balance receivable for related party services at December 31, 2016
is $44 (2015 - $228) and is reported in accounts payable and accrued liabilities in the
consolidated statements of financial position.
61
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
11. Related party transactions and balances (continued):
(c) Other related party transactions (continued):
During the year ended December 31, 2016, the Company did not repurchase any of its
common shares. During the year ended December 31, 2015, the Company repurchased
1,454,196 of its own common shares for cancellation on the open market for an aggregate
purchase price of $50,007. Genworth Financial Inc., through its subsidiaries, participated
proportionately in the share purchase transaction and maintained a 57.3% ownership
interest in the Company. See note 18 for additional disclosure on the share repurchase
transaction.
During the year ended December 31, 2016, the Company did not participate in any
reinsurance transactions with related parties. Effective November 30, 2015, the Company,
through its indirect subsidiary MICICC, terminated a retrocession agreement that
commenced on December 1, 2013 with a third party reinsurance company. Under the
Agreement the Company assumed reinsurance risk for approximately 33% 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).
12. Commitments:
The Company's commitments comprise of operating leases. The Company leases office space,
office equipment, computer equipment and automobiles. Leases of office space have initial
lease terms between five to seven years, with the right to extend the initial term of the lease
for an additional three or five years.
Future minimum lease commitments at December 31, 2016 and 2015 are as follows:
Less than 1 year
Later than 1 year but less than 5 years
2016
2015
2,692 $
9,761
2,704
9,914
12,453 $
12,618
$
$
Lease payments recognized as an expense for the year ended December 31, 2016 were $3,166
(2015 - $3,032).
62
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
13. Employee benefits:
Defined contribution pension benefit plan:
The Company's eligible employees participate in a registered defined contribution pension plan.
The plan has immediate vesting. 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.
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 SERP and a NPPRB.
The SERP is an unregistered, non-contributory supplemental pension plan that supplements the
registered defined contribution plan for certain employees. Benefit entitlement under the SERP is
based on a final average earnings target. The SERP has immediate vesting. Employees eligible
for SERP participation are entitled to accumulated pension benefits immediately upon hire. The
NPPRB plan provides medical and life insurance coverage to employees after retirement. Certain
employees are also entitled to dental benefits under this plan. Participation in the NPPRB plan is
limited to employees who joined the Company before January 1, 2016.
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.
63
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
13. Employee benefits (continued):
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, 2016 and 2015 are based on plan membership data as at the
respective period ends. The weighted average duration of the SERP is 22 years. For the NPPRB
plan, actuarial valuations for the years ended December 31, 2016 and 2015 are based on plan
membership data as at June 1, 2015. The weighted average duration of the NPPRB plan is 25
years.
The plans are unfunded with no specific assets backing the plans. 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 NPPRB plans are unregistered and are not subject to specific legislation.
64
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
13. Employee benefits (continued):
Benefit plan governance:
The Company's Board of Directors has oversight of the SERP and NPPRB 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:
Accrued net benefit
liabilities under employee benefit plans
$
23,390
$
21,052
$
18,320
$
16,189
$
41,710
$
37,241
SERP
NPPRB
Total
benefit liabilities
2016
2015
2016
2015
2016
2015
The maturity profile of the plans is demonstrated in the following table:
SERP
NPPRB
Total
benefit liabilities
2016
2015
2016
2015
2016
2015
Accrued net benefit
liabilities of active plan members
Accrued net benefit
liabilities of retirees and deferred vested
benefit recipients
Accrued net benefit
liabilities under employee benefit plans
$
$
$
17,890
$
15,635
5,500
$
5,417
23,390
$
21,052
$
$
$
14,781
$
12,997
3,539
$
3,192
18,320
$
16,189
$
$
$
32,671
$
28,632
9,039
$
8,609
41,710
$
37,241
65
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
13. Employee benefits (continued):
Pension and non-pension post retirement benefits are recognized in employee compensation in the consolidated statements of income and
are determined as follows:
SERP
NPPRB
Total
benefit liabilities
2016
2015
2016
2015
2016
2015
$
$
994
899
—
$
1,029
820
92
$
1,206
692
—
$
1,435
678
—
$
2,200
1,591
—
2,464
1,498
92
1,893
1,941
1,898
2,113
3,791
4,054
2,399
2,635
—
—
2,399
2,635
Defined benefit expense:
Benefits earned by
employees
Interest costs on accrued benefit liability
Plan settlements
Defined benefit
expense for the year
Defined contribution
expense for the year
Total pension and non-pension
post-retirement benefit expense
for the year
$
4,292
$
4,576
$
1,898
$
2,113
$
6,190
$
6,689
The actuarial losses recognized in the consolidated statements of comprehensive income relating to the SERP are $730 for the year ended
December 31, 2016 (2015 - actuarial gains of $513). The actuarial losses recognized in the consolidated statements of comprehensive income
relating to the NPPRB plan are $291 (2015 - actuarial gains of $2,257).
66
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
13. Employee benefits (continued):
Changes in the estimated financial positions of the SERP and NPPRB plans are as follows:
SERP
NPPRB
2016
2015
2016
2015
Total
benefit liabilities
2015
2016
$ 21,052
$ 19,908
$ 16,189
$ 16,399
$ 37,241
$ 36,307
994
1,029
1,206
1,435
2,200
2,464
899
—
820
92
692
—
678
—
1,591
1,498
—
92
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
(285)
(284)
(58)
(66)
(343)
(350)
Actuarial losses (gains) from
plan re-measurement
Accrued net benefit liabilities
under employee benefit
plans
730
(513)
291
(2,257)
1,021
(2,770)
$ 23,390
$ 21,052
$ 18,320
$ 16,189
$ 41,710
$ 37,241
The actuarial gains or losses categorized according to experience gains or losses and changes
in assumptions are presented in the following table:
SERP
NPPRB
Total
benefit liabilities
2016
2015
2016
2015
2016
2015
Actuarial losses (gains):
Experience
losses (gains)
$
(435) $
(41)
$
(122) $ (1,884)
$
(557) $ (1,925)
Changes in assumptions:
Financial assumptions
1,165
(508)
Demographic
assumptions
—
Total changes in assumptions
1,165
36
(472)
413
—
413
(343)
1,578
(851)
(30)
(373)
—
1,578
6
(845)
$
730
$
(513)
$
291
$ (2,257)
$ 1,021
$ (2,770)
67
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
13. Employee benefits (continued):
Defined benefit plan assumptions:
The significant weighted average assumptions used to determine benefit liabilities are as follows:
SERP
NPPRB
2016
2015
2016
2015
Discount rate
4.10%
4.30%
4.10%
4.30%
Change in rate of
compensation
increase
Mortality
3.00%
3.00%
3.00%
3.00%
75% of male
rates and 92%
of female
rates from the
CIA Private
Sector Table
with
generational
mortality
improvements
using CIA
CPM-B Scale
75% of male
rates and 92%
of female
rates from the
CIA Private
Sector Table
with
generational
mortality
improvements
using CIA
CPM-B Scale
CPM2014
Private
Sector Table
with
generational
mortality
improvement
s scale
CPM-B
CPM2014
Private
Sector Table
with
generational
mortality
improvement
s scale
CPM-B
Assumed overall
health care cost trend
rate
n/a
n/a
6.15%
6.24%
(1)
(1) Grading down to 4.50% per year in and after 2029.
68
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
13. Employee benefits (continued):
The following sensitivity analyses demonstrate the impact of a reasonable possible change in each
significant valuation assumption as at December 31, 2016 and 2015 on the benefit obligations.
2016
SERP
NPPRB
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
$
$
$
$
$
$
(4,123)
5,394
1,887
(1,670)
417
(453)
n/a
n/a
$
$
$
$
$
$
(3,756)
4,488
n/a
n/a
310
(294)
962
(1,429)
69
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
13. Employee benefits (continued):
2015
SERP
NPPRB
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
$
$
$
$
$
$
(3,804)
4,973
1,855
(1,650)
368
(400)
n/a
n/a
$
$
$
$
$
$
(3,118)
3,791
n/a
n/a
264
(250)
706
(1,041)
This sensitivity analysis is hypothetical. Actual experience may differ from expected experience.
For the purpose of this analysis, all other assumptions were held constant.
70
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
13. Employee benefits (continued):
Benefit plan cash flows:
The SERP and NPPRB 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
NPPRB
2016
2015
2016
2015
$
285
$
284
$
58
$
2,399
2,635
—
$
2,684
$
2,919
$
58
$
66
—
66
The Company expects to contribute the following amounts to its employee benefit plans during
the annual period beginning after December 31, 2016:
Defined contribution plan
SERP
NPPRB plan
Total
$
$
2,566
477
221
3,264
71
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
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 at the earlier of 10
years and employee's termination, 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, 2016 is $19.00 to $32.88 (2015 - $19.00 to $32.88).
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. Starting in 2014 RSU grants issued 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
return on equity and basic earnings per share. PSU grants issued vest at the end of a three-year
period. 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.
The Company's Board of Directors, at its sole discretion, may grant EDSUs to the Company's
executive-level employees. EDSUs entitle employees to receive an amount equal to the fair value
of the Company's shares. The Board of Directors determines the vesting and performance conditions,
as well as the number of EDSUs to be granted. EDSUs may be redeemed only upon termination of
employment.
DSUs entitle eligible members of the Company's Board of Directors to receive an amount equal to
the fair value of the Company's shares. The number of DSUs granted is based on the portion of the
Board member's annual retainer earned in the period. 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.
72
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
14. Share-based compensation (continued):
Employees and directors 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.
The Company's incentive compensation plans, including its share-based compensation plans, are
subject to the Company's compensation recoupement policy, which can be applied in limited
circumstances at the discretion of the Company's Board of Directors.
The Company enters 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 in relation to risk associated
with share-based compensation expense. 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.
73
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
14. Share-based compensation (continued):
The Company has reserved 3,000,000 common shares of its issued and authorized shares for issuance under these long-term incentive plans.
As at December 31, 2016, the Company has 1,285,028 common shares remaining that are available for distribution (2015 - 1,407,972) .
The following table presents information about these share-based compensation plans:
2016
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)
Weighted
average
exercise
price
Number of
Options
Fair value
of Options
Number of
RSUs
Fair value
of RSUs
Number of
DSUs
Fair
value of
DSUs
Number of
PSUs
Fair
value of
PSUs
Number of
EDSUs
Fair value of
EDSUs
955,237 $
24.08 $
2,649
95,928 $
2,552
53,316 $
1,418
97,635 $
2,597
31,317 $
94,600
23.47
—
(64,941)
(27,833)
—
—
24.62
20.41
—
—
—
(579)
(240)
5,972
55,822
1,341
8,901
287
57,948
1,366
11,598
7,185
(16,896)
(4,609)
208
(402)
(127)
—
1,054
3,132
(1,135)
—
—
84
(35)
—
407
5,190
150
2,368
(59,847)
(1,424)
(3,548)
—
(97)
686
—
—
—
833
272
70
—
—
349
957,063
24.09 $
7,802
137,430 $
4,626
64,214 $
2,161
97,378 $
3,278
45,283 $
1,524
795,725 $
23.46 $
6,943
— $
—
64,214 $
2,161
— $
—
— $
—
4.8
—
—
1.8
—
—
—
1.9
—
2.2
—
74
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
14. Share-based compensation (continued):
Number of
Options
Weighted
average
exercise
price
Fair value
of Options
Number of
RSUs
Fair value
of RSUs
Number of
DSUs
Fair value
of DSUs
Number of
PSUs
Fair value
of PSUs
Number of
EDSUs
Fair value
of EDSUs
2015
Outstanding as at
January 1
1,001,764 $
23.48 $ 10,289
105,983 $
3,919
53,717 $
1,986
96,600 $
3,572
21,149 $
Granted
53,100
31.90
Dividend equivalents
granted
Exercised
Forfeited
—
(87,960)
(11,667)
—
20.96
32.38
—
—
39,200
1,246
10,639
312
28,185
883
8,600
5,307
162
3,038
79
5,258
(293)
(40,196)
(1,289)
(14,078)
(377)
(19,630)
(34)
(14,366)
(445)
—
(12,778)
—
—
152
(619)
(386)
1,568
—
—
—
Changes in fair value
—
—
(7,313)
—
(1,041)
(582)
—
(1,005)
782
274
50
—
—
(273)
Outstanding as at
December 31
Exercisable as at
December 31
Weighted average
remaining contractual
life (years)
955,237
24.08 $
2,649
95,928 $
2,552
53,316 $
1,418
97,635 $
2,597
31,317 $
833
805,833 $
22.86 $
2,391
— $
—
53,316 $
1,418
— $
—
— $
—
5.3
—
—
1.8
—
—
—
1.6
—
2.6
—
75
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
14. Share-based compensation (continued):
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 fair value of the Options are as follows:
Share price at reporting date
Weighted average exercise price per share
Expected volatility
Expected option life (years)
Expected dividend yield
Weighted average risk-free interest rate
$
$
$
$
2016
33.66
24.09
24.19%
9.0
5.23%
1.00%
2015
26.60
24.08
25.53%
8.0
6.44%
0.62%
Expected volatility is estimated based on the Company's average historical volatility. The weighted
average expected life of the instrument is estimated based on the Company's expectations about
the timing of option exercises. Dividend yield is estimated based on historical dividends. Risk-free
rate is determined with reference to Government of Canada bonds that have maturity dates
approximating the estimated remaining terms of the share-based awards.
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
compensation expense only to the extent that the share-based
awards are expected to vest based on the Company's best estimate of the outcome of service and
performance conditions.
76
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
14. Share-based compensation (continued):
The following tables provide information about the expenses and liabilities arising from share-based
compensation:
Expenses arising from:
Options
RSUs
PSUs
EDSUs
DSUs
Effect of equity total return swaps
Net share-based compensation expense (recovery)
2016
2015
$
5,840 $
(6,086)
1,688
1,311
746
781
360
811
281
(191)
$
$
$
10,366 $
(4,825)
(4,224) $
6,142 $
4,516
(309)
Total carrying amount of liabilities for cash-settled
arrangements
Total intrinsic value of liability for vested benefits
$
$
2016
16,069 $
11,079 $
2015
8,496
4,432
77
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
15.
Intangible Assets:
The Company's intangible assets are comprised primarily of computer software and are summarized
as follows:
Cost
Balance at January 1, 2015
Acquisitions - externally purchased
Balance at December 31, 2015
Acquisitions - externally purchased
$
39,603
3,564
43,167
3,852
Balance at December 31, 2016
$
47,019
Amortization and impairment losses
Balance at January 1, 2015
Amortization for the year
Balance at December 31, 2015
Amortization for the year
$
32,142
1,941
34,083
2,866
Balance at December 31, 2016
$
36,949
Amortization of intangible assets is included in office expenses in the consolidated statements of
income.
Carrying amounts
At December 31, 2015
At December 31, 2016
$
9,084
10,070
78
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
16. Transactions with lenders:
Gross premiums written from one major lender (defined as a lender that individually accounts for
more than 10% of the Company's gross premiums written) was $132,966, representing 17.5% of
the Company's total gross premiums written for the year ended December 31, 2016 (2015 - gross
premiums written from two major lenders that accounted for more than 10% of the Company's
gross premiums written was $189,482 or 23.4%).
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 1.7% (2015 - 1.7%) to the last year of the multi-year plan cash flow estimate. The growth
rates at December 31, 2016 and 2015 reflect the Canadian five year historical average core inflation
rate, which does not exceed the long-term average growth rate for the industry.
A pre-tax discount rate of 14.2% (2015 - 13.7%) was applied in determining the recoverable amount
of the unit. The discount rates as at December 31, 2016 and 2015 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, 2016 (2015 - nil).
79
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
18. Share capital:
The share capital of the Company comprises the following:
2016
2015
Authorized:
Unlimited common shares with nominal or no par value(1)
1 special share(2)
Issued:
91,864,100 common shares (2015 - 91,795,125)
1 special share
Share capital
$
$
1,368,658 $
1,366,374
—
—
1,368,658 $
1,366,374
(1)
Holders of common shares will, except where otherwise provided by law and subject to the rights of the holder of the
special share, be entitled to elect a portion of the Board of Directors, vote at all meetings of shareholders of the Company
and be entitled to one vote per common share. Holders of common shares are entitled to receive dividends as and when
declared by the Board 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.
(2)
Only one special share may be authorized for issuance. The special share is held by the Company's majority shareholder,
Genworth Financial Inc. The attributes of the special share provide that the holder of the special share will be entitled to
nominate and elect a certain number of directors to the Board 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 commons shares, the holder of the special share will
be entitled to nominate and elect a specified number of the Company's directors, as set out in the table below.
Common share ownership
Greater than or equal to 50%
Less than 50% but not less than 40%
Less than 40% but not less than 30%
Less than 30% but not less than 20%
Less than 20% but not less than 10%
Less than 10%
Number of directors
5/9
4/9
3/9
2/9
1/9
none
Under the shareholder agreement, the selling shareholder will agree that the special share may not be transferred except
to and among affiliates of Genworth Financial Inc. Subject to applicable law, the special share will be automatically
redeemed for $1.00 immediately upon (a) any transfer to a non-affiliate of Genworth Financial Inc., (b) the time that any
affiliate of Genworth Financial Inc. who, at the relevant time, holds the special share is no longer an affiliate of Genworth
Financial Inc., (c) the time that Genworth Financial Inc. first ceases to beneficially own at least 10% of the outstanding
common shares, or (d) demand by the holder of the special share.
80
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
18. Share capital (continued):
The following table presents changes in the number of common shares outstanding that
occurred during each year:
2016
2015
Common shares, January 1
91,795,125
93,147,778
Common shares issued in connection with share-
based compensation plans
Common shares retired under share repurchase
68,975
—
101,543
(1,454,196)
Common shares, December 31
91,864,100
91,795,125
At December 31, 2016, subsidiaries of Genworth Financial Inc. owned 52,562,042 common shares
of the Company or approximately 57.2% (2015 - 52,562,042 or approximately 57.3%).
Share repurchases:
Shares purchased by the Company for cancellation are recognized as a reduction to share capital
equal to the average carrying value of the common shares. Any difference between the aggregate
purchase price and the average carrying value of the common shares is recorded in retained
earnings. Expenses incurred in connection with the share purchases are recorded in retained
earnings.
2016:
During the year ended December 31, 2016, 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 4,589,958 shares representing
approximately 5% of its outstanding common shares. Purchases of common shares under the
NCIB may commence on or after May 5, 2016 and will conclude on the earlier of May 4, 2017 and
the date on which the Company has purchased the maximum number of shares under the NCIB.
During the year ended December 31, 2016, the Company did not purchase any shares under the
NCIB.
81
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
18. Share capital (continued):
2015:
During the year ended December 31, 2015, 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 could purchase, for cancellation, up to 4,658,577 shares representing
approximately 5% of its outstanding common shares. Purchases of common shares under the
NCIB commenced on May 5, 2015 and concluded on May 4, 2016.
During the year ended December 31, 2015, under the terms of the NCIB, the Company purchased
1,454,196 shares for cancellation on the open market for an aggregate price of $50,007. 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.
82
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
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 April 1, 2014, the Company completed an 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.
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 3
June 29, 2010
June 15, 2020
$275,000
5.68%
June 15
December 15
April 1, 2014
April 1, 2024
$160,000
4.242%
October 1
April 1
The Company's long-term debt balances are as follows:
2016
Carrying value
Fair value
Series 1
Series 3
Total
$
273,937 $
297,289
158,954 $
162,904
432,891
460,193
83
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
19. Long-term debt (continued):
2015
Carrying value
Fair value
Series 1
Series 3
Total
$
273,670 $
299,489
158,834 $
159,662
432,504
459,151
The Company's long-term debt is classified as a Level 2 financial instrument, as described in
note 23, as the fair value of the debt is determined using observable market data.
The Company incurred interest expense of $23,194 and $22,774 for the years ended December 31,
2016 and 2015, respectively, with accrued interest payable of $2,490 at December 31, 2016 (2015-
$2,429).
20. Credit Facility:
On May 20, 2016, the Company entered into a $100 million senior unsecured revolving credit facility,
which matures on May 20, 2019. Any borrowings under the credit facility will bear interest at a rate
per annum equal to either a fixed rate based on a spread over Bankers' Acceptance or a variable
rate based on a spread over the Lender Prime Rate. The Company pays a standby fee based on
the unused amount of the commitment. The credit facility includes customary representations,
warranties, covenants, terms and conditions for transactions of this type.
As at December 31, 2016 there was no amount outstanding under the credit facility and all of the
covenants were fully met.
84
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
21. Earnings per share:
Basic earnings per share have been calculated using the weighted average number of shares
outstanding of 91,828,701 (2015 - 92,296,521). Diluted earnings per share have been calculated
using the diluted weighted average number of shares outstanding of 91,874,244 (2015 -92,771,849).
957,063 Options (2015 - 155,933 Options), 96,017 RSUs (2015 - nil), 57,172 DSUs (2015 - nil), and
73,940 PSUs (2015 - nil) 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 presented below:
Basic earnings per share:
Net income
Diluted earnings per share:
Re-measurement amount net of income taxes
Earnings for purposes of diluted earnings per share
Basic weighted average 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
during the year
Basic earnings per share
Diluted earnings per share:
Basic weighted average common shares
outstanding during the year
Effect of share-based compensation during the year
Diluted weighted average common shares outstanding
during the year
Diluted earnings per share
$
$
$
$
2016
2015
416,892 $
398,302
(77)
(7,166)
416,815 $
391,136
91,795,125
93,147,778
33,576
64,941
—
(916,198)
91,828,701
92,296,521
4.54 $
4.32
91,828,701
92,296,521
45,543
475,328
91,874,244
92,771,849
4.54 $
4.22
85
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
22. Non-current assets and liabilities:
The following table presents assets and liabilities the Company expects to recover or settle after
12 months at December 31, 2016 and 2015.
2016
2015
Assets:
Derivative financial instruments
$
38,051 $
Bonds and debentures
Preferred shares
Subrogation recoverable
Total assets
Liabilities:
Loss reserves
Derivative financial instruments
Accrued net benefit liabilities under employee
benefit plans
Long-term debt
Total liabilities
4,979,717
425,819
11,477
5,455,064
28,577
38,832
41,012
432,891
541,312
—
4,691,333
247,717
12,637
4,951,687
75,343
50,154
36,764
432,504
594,765
Net assets due after one year
$
4,913,752 $
4,356,922
86
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
23. 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 assets and liabilities. The hierarchy of inputs is summarized below:
•
•
•
Level 1 - inputs used to value the financial assets and liabilities are unadjusted quoted prices
in active markets for identical assets or liabilities;
Level 2 - inputs used to value the financial assets and liabilities 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 assets and liabilities are not based on observable
market data.
87
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
23. Fair value measurement (continued):
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.
2016
Financial assets measured
at fair value:
Short-term investments
Derivative financial instruments
Bonds and debentures
Preferred shares
Financial assets not measured
at fair value:
Cash and cash equivalents
Accrued investment income
and other receivables
Financial liabilities measured
at fair value:
Derivative financial instruments
Financial liabilities not
measured at fair value:
Accounts payable and accrued
liabilities
Long-term debt
Carrying amount
Fair value
AFS
FVTPL
Loans
and
receivables
Other
financial
liabilities
Level 1
Level 2
Level 3
$
206,099 $
— $
—
5,468,170
425,819
6,100,088
38,787
—
—
38,787
— $
—
—
—
—
— $
—
—
—
—
206,099 $
— $
—
—
425,819
631,918
38,787
5,468,170
—
5,506,957
—
—
—
—
—
—
—
—
—
—
126,072
47,337
173,409
(42,838)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(42,838)
(64,987)
(432,891)
(497,878)
—
—
—
—
(460,193)
(460,193)
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
$ 6,100,088 $
(4,051) $
173,409 $
(497,878) $
631,918 $ 5,003,926 $
88
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
23. Fair value measurement (continued):
2015
Financial assets measured
at fair value:
Short-term investments
Derivative financial instruments
Bonds and debentures
Preferred shares
Financial assets not measured
at fair value:
Cash and cash equivalents
Accrued investment income
and other receivables
Financial liabilities measured
at fair value:
Derivative financial instruments
Financial liabilities not
measured at fair value:
Accounts payable and accrued
liabilities
Long-term debt
Carrying amount
Fair value
AFS
FVTPL
Loans
and
receivables
Other
financial
liabilities
Level 1
Level 2
Level 3
$
78,178 $
—
5,200,715
247,717
5,526,610
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
(83,861)
—
—
—
— $
—
—
—
—
— $
—
—
—
—
78,178 $
—
—
247,717
325,895
— $
—
5,200,715
—
5,200,715
390,796
28,130
418,926
—
—
—
—
—
—
—
—
(65,750)
(432,504)
(498,254)
—
—
—
—
—
—
—
—
—
—
(83,861)
—
(459,151)
(459,151)
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
$ 5,526,610 $
(83,861) $
418,926 $
(498,254) $
325,895 $
4,657,703 $
89
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
23. Fair value measurement (continued):
The fair value of cash and cash equivalents, accrued investment income and other receivables and
accounts payable and accrued liabilities approximates fair value due to the short term nature of
these items.
During the years ended December 31, 2016 and 2015, 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 assets or liabilities 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 preferred shares, 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, 2016 and 2015.
Valuation of Level 2 financial instruments:
Fair values of bonds and debentures, including CLOs, are obtained primarily from industry standard
pricing services 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 and preferred shares are interest rate
curves and credit spreads.
Derivative financial instruments are non-exchange traded foreign currency forwards, cross currency
interest rate swaps, equity total return swaps and interest rate 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 equity total return swaps are market prices for referenced assets and
interest rate yield curves. The primary inputs used in determining fair value of interest rate swaps
are 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.
90
GENWORTH MI CANADA INC.
Notes to Consolidated Financial Statements (continued)
(In thousands of Canadian dollars, except per share amounts)
Years ended December 31, 2016 and 2015
24. Comparatives:
Investment gains in the statement of income and certain items in the statement of cash flows have
been reclassified to conform to the financial statement presentation adopted in the current year.
91
genworth.ca