Transcript - Genworth MI Canada

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MIC.TO - Q1 2015 Genworth MI Canada Inc Earnings Call
EVENT DATE/TIME: APRIL 29, 2015 / 2:00PM GMT
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APRIL 29, 2015 / 2:00PM, MIC.TO - Q1 2015 Genworth MI Canada Inc Earnings Call
CORPORATE PARTICIPANTS
Samantha Cheung Genworth MI Canada Inc. - VP of IR
Stuart Levings Genworth MI Canada Inc. - President & CEO
Philip Mayers Genworth MI Canada Inc. - SVP & CFO
CONFERENCE CALL PARTICIPANTS
Shubha Khan National Bank Financial - Analyst
Geoff Kwan RBC Capital Markets - Analyst
Paul Holden CIBC World Markets - Analyst
Tom MacKinnon BMO Capital Markets - Analyst
Marko Kais TD Securities - Analyst
Asim Imran Macquarie Capital Markets - Analyst
PRESENTATION
Operator
Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Genworth MI Canada Inc. 2015 first-quarter earnings
conference call. (Operator Instructions). I would like to remind everyone that this conference call is being recorded today. I will now turn the
conference over to Samantha Cheung, Vice President Investor Relations. Ms. Cheung, you may proceed.
Samantha Cheung - Genworth MI Canada Inc. - VP of IR
Good morning, everyone, welcome to our first-quarter 2015 earnings call. Joining me today are Stuart Levings, President and CEO; Philip Mayers,
our CFO; and Craig Sweeney, our Chief Risk Officer. We will start with our prepared remarks by Stuart and Phil followed by an open
question-and-answer session.
Our news release, including our management's discussion and analysis, the financial statements and the financial supplement were released last
night and are posted on our website at www.Genworth.ca. A link to our live webcast and the slides for today's discussion are also posted on our
website.
A replay of this call will be available via the number noted on the press release and will also be available on our website following today's presentation.
The call will remain available on our website for approximately 45 days following today.
As a reminder, our presentation and discussion today contain a disclaimer on forward-looking statements and non-IFRS statements on disclosure.
We note that our actual results may differ from statements that we make which are forward-looking. We advise you to read the cautionary note
regarding these statements.
As well, some of the financial metrics presented on this call today are non-IFRS measures and as such do not have standardized meaning and are
unlikely to be comparable to similar measures by other companies. I would now like to turn the call over to Stuart to begin his remarks. Stuart?
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Stuart Levings - Genworth MI Canada Inc. - President & CEO
Thanks, Samantha. Good morning to everyone and thanks for joining us on our first-quarter earnings call. Today I'm going to cover some key
financial highlights from our strong performance this quarter as well as a few perspectives on the housing and labor markets before handing it
over to Phil for a deeper look at our first-quarter results. Before going to Q&A I will wrap up with an updated view on Alberta, oil and the related
impact in our business.
We are very pleased with our results this quarter, particularly the year-over-year growth in premiums written, the solid loss ratio and strong operating
income. We continue to see great momentum in our top line and we are encouraged by the strong application volumes received year to date as
the spring market gets underway.
For the quarter we delivered net operating income of CAD97 million inclusive of a one-time favorable tax item representing an increase of 15%
over the prior quarter. This generated a solid return on equity of 12% and diluted earnings per share of CAD1.03, up 16% over Q4 2014. Net premiums
written totaled CAD130 million, up CAD46 million or 55% over the prior year.
This quarter saw strong gains in both our transactional and portfolio insurance volumes. Once again this growth was driven by three key factors:
increased market share; a larger market size; and higher premium rates driven by the 10% increase effective May 1 last year.
Our market share continues to improve as application volumes from key customer wins in the prior year translate into funded loans. We estimate
our current market share at approximately 30%, up 2 points from a year ago.
Regarding market size, resale volumes in the quarter were up approximately 4% over the prior year. That said, the spring market had a delayed
start last year and we expect full-year volumes to be more or less flat to 2014.
The recently announced premium increase of approximately 15% on loans with a down payment less than 10% will add additional upside support
to premiums written effective June 1 this year. This increase reflects the strong level of capital being held in the mortgage insurance segment and
supports the overall safety and soundness of the mortgage financing system.
Given the modest impact on borrowers' monthly payments we don't expect this increase to affect the size of the insured market. Although this
price change will not be a significant contributor to our 2015 earnings, it helps our earnings profile in the years to come. Phil will walk us through
a specific look at this in a moment.
As mentioned already, another highlight this quarter was our solid loss ratio of 22%, down 4 points over the prior quarter. Generally speaking our
loss performance continues to reflect the quality of our insurance portfolio together with the continued strength in the Canadian housing and
labor markets.
Our book value, at CAD36.07 per share, continues to grow, up 7.6% over the prior year driven by ongoing profitability and balance sheet strength.
At an MCT ratio of 233% we believe we have an appropriate level of capital prudence within the current economic environment, while balancing
capital efficiency at the same time.
That said, we continue to generate excess capital. And as part of our ongoing strategy to maintain this efficiency, we recently took steps to renew
our normal course issuer bid program. This allows us the flexibility to selectively purchase shares in the open market over the next 12 months. So
overall we are pleased with our first-quarter results.
We are also comfortable with the environment in which we operate today, including the underwriting measures we took in the softer oil exposed
regions. Outside of these regions stable employment and a balanced housing market should bode well for our loss performance.
On the house price front, values continue to show some growth year over year, however remain roughly flat year to date, supporting our position
that much of the Canadian market continues to see a soft landing. The exceptions continue to be the Toronto and Vancouver single-family detached
markets driven by ongoing demand and very tight supply.
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As one would expect, these cities have a relatively smaller high ratio segment given those higher price points. The ongoing low interest rate
environment should support valuations at the current level while helping to maintain stable debt ratios.
In our recent national survey of first time home buyers, the Genworth Canada Annual Homeownership Study, results indicated that first-time
homebuyers feel more confident about their purchase of a home, financial fitness and value of home ownership as a whole. While affordability
remains somewhat pressured, first-time homebuyers in today's market represent a financially prudent high-quality subset as demonstrated by our
credit and loan characteristics.
Average credit scores in the first quarter remained high at 737 while the average loan and debt service ratio saw marginal increases reflecting shifts
in business mix. Average debt ratios have remained stable within the 2 point band around 23% to 25%, well below the industry maximum of 39%.
This is largely due to the profile of our insured borrowers, specifically dual income families purchasing entry-level homes. And since the majority
of these applicants take three to five year fixed-rate terms they are better insulated from the impact of rising interest rates in the early years of their
mortgage.
In all the major markets where we operate our average home price continues to reflect a discount to the market average as a whole with as much
as a 43% discount in the Vancouver market. On the delinquency front we saw a modest increase of 36 delinquencies over the prior quarter, a result
of typical seasonality as it takes longer to sell foreclosed properties in the winter months.
For the most part this increase was driven by Quebec and the Atlantic provinces where we continue to see some pressure. As noted during our
last call, we believe the current economic environment should bode well for manufacturing in tense regions like Quebec and Ontario and believe
this should help to ease some of the pressure during the year.
Now I will turn it over to Phil for a deeper look at our financial results, following which I will wrap up with an updated you on Alberta including my
observations from a recent visit to that region. Phil?
Philip Mayers - Genworth MI Canada Inc. - SVP & CFO
Thanks, Stuart. we started 2015 with good business fundamentals highlighted by a strong top line, a 22% loss ratio and a 15% price increase for
greater than 90% loan to value mortgages. Overall, net operating income was CAD97 million, CAD11 million higher than the prior quarter. These
results include a favorable tax item of CAD5 million related to the 2013 reversal of the government guarantee fund.
As Stuart noted, we are pleased with the 55% year-over-year growth from premiums written to CAD130 million. The high loan to value or transactional
insurance segment accounted for CAD104 million of premiums on CAD3.9 billion of new insurance written. The resulting 47% increase in transactional
premiums primarily reflects improved market penetration and the CAD[15] million impact from the 2014 price increase.
Portfolio insurance added CAD26 million of premiums written, this represents a significant quarter-over-quarter increase related to the typical
fluctuation in linear demand for portfolio insurance. Premiums earned were essentially flat quarter over quarter at CAD143 million. With the trend
of higher premiums written in recent years we expect modest sequential increases in premiums earned over the remainder of 2015 and into 2016.
Losses on claims was CAD31 million, lower by CAD6 million compared to the fourth quarter of 2014. While we typically see seasonally higher losses
in the first quarter, strong housing markets and stable economies in Ontario and BC contributed to 12% lower new delinquencies net of [cures].
This was partially offset by higher average reserve per delinquency primarily reflecting market conditions in Quebec and the Atlantic provinces.
To date we have not seen any material change in the level of delinquencies in Alberta but expect that the second half of 2015 will be impacted by
the rise in unemployment and moderating home prices in Alberta.
This quarter's expenses of CAD24 million were CAD5 million lower sequentially and resulted in an expense ratio of 17%. This decrease is primarily
due to lower share-based compensation expense.
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Investment income excluding net gains was down slightly to CAD42 million due to lower interest rates. As well, we realized CAD15 million in net
gains primarily from the sale of common equities. Overall first-quarter results were strong with operating EPS of CAD1.03, up CAD0.14 from the
prior quarter.
Turning to the top line, we continue to target premiums written growth in the transactional segment. Where market penetration has improved,
we are capitalizing on this momentum while maintaining strong credit quality. In addition, the 2014-2015 price increases should lead to significant
top-line growth, improved profitability and enhanced returns over time.
The most recent price increase of 15% on greater than 90% loan to value mortgages impacts 60% to 65% of transactional volumes. On a full year
basis this should translate into approximately CAD55 million to CAD65 million of incremental premiums written on CAD22 billion of new insurance
written, or CAD25 million to CAD30 million of additional premiums written for the 2015 calendar year.
On the other hand, we may see lower demand for portfolio insurance from big banks going forward. This is due to a significant increase in guaranty
fees when banks issue more than CAD6 billion of government guaranteed mortgage-backed securities annually. This should not impact midsize
lenders and credit unions that consistently use portfolio insurance as part of their funding strategies.
Overall, premiums written in 2015 should be modestly higher with the anticipated growth in the transactional segment more than offsetting the
smaller market size for portfolio insurance. Similarly, we expect modestly higher premiums earned in 2015.
The favorable impact of the 2014 and 2015 price increases should add approximately CAD15 million to premiums earned in 2015 growing to around
CAD40 million in 2016. For these reasons we are optimistic that our growth momentum will translate into lower combined ratios, higher underwriting
margins and enhanced returns over time all other things being equal.
Turning our attention to underwriting results. Our combined ratio of 39% highlights the sequential 4 point improvement in our loss ratio of 22%.
Despite the overall decrease in new delinquencies net of cures, Quebec and Atlantic provinces continue to contribute a disproportionate amount
of delinquencies due to relatively soft labor and housing markets.
That said, recent housing and employment trends have generally stabilized in these regions and this should be a positive factor for loss performance
in these regions. Overall, our loss ratio target range for 2015 remains unchanged at 20% to 30% including any impact from low oil prices on Alberta.
Also, we have expanded the disclosure in our quarterly financial supplement on our Investor Relations website to include new delinquency and
cure activity to geographic and loan to value distribution on outstanding insured mortgage balances and the delinquency rate based on outstanding
insured mortgages.
For example, our delinquency rate on outstanding insured balances of CAD169 billion is 22 basis points at the end of 2014 as compared to the
Canadian banking average of 29 basis points. Our CAD5.6 billion investment portfolio has a running book yield of 3.4% and duration of 3.8 years.
Our goal is to maintain the pretax equivalent yield of around 3.5% as we manage the reinvestment of CAD280 million of bond maturities over the
remainder of 2015.
We continue to assess the risk/reward trade-offs and adjust for portfolio allocations. For example, we are adding to our preferred share holdings
given the available dividend yield around 4%.
At the same time we plan to further reduce our holdings of common equities given the significant increase in regulatory capital requirements for
common equities under the 2015 MCT deadline. We will continue to proactively manage the portfolio with a sharp focus on maintaining a high-quality
investment portfolio.
Our disciplined approach to capital management continues and we ended the quarter with an MCT ratio of 233% and holding company cash and
liquid investments of CAD158 million. The MCT ratio improved by 8 points reflecting ongoing profitability and the adoption of the 2015 MCT
guidelines for mortgage insurers.
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With the increase in economic uncertainty from low oil prices we continue to [stress] our insurance portfolio on a number of different scenarios to
inform our decision-making regarding capital management. Overall, we will exercise prudence while balancing capable strength, flexibility and
efficiency.
That being said, we intend to operate with an MCT ratio moderately above our current holding target of 220% and significantly above our internal
target of 185%.
As Stuart noted, we recently renewed our normal course issuer bid with proportional participation by our majority shareholder. This permits the
Company, if advisable, to repurchase up to 5% of the outstanding common shares over the next 12 months. With that I will now to the call back
to Stuart for some concluding remarks. Stuart?
Thanks, Phil. I wanted to take a moment to provide an update on the evolving environment in Alberta and its impact on our business. Craig Sweeney,
our Chief Risk Officer, and I spent some time there recently speaking with a number of industry experts including economists, lenders, realtors and
appraisers.
What we heard supported the consensus view of a lower for longer oil scenario with obvious impacts to the housing and labor markets. There
were, however, some important counterbalances such as the current strength in the neighboring lumber and agricultural industries. Another
positive is the recurring theme of labor rate reductions versus layoffs.
Our homeownership assistance programs work extremely well in cases of reduced income versus unemployment. Based on our discussions and
observations, we made a few adjustments to our base case scenario which now reflects a house price adjustment of 5% to 8% this year and an
employment rate of 5.5% to 6% by the end of the year.
Stress testing our portfolio against these assumptions produces a loss ratio range consistent with our earlier guidance of 20% to 30% for 2015. We
continue to monitor the situation closely, focusing on a number of early housing and employment indicators, and remain confident in the quality
of both our in force portfolio and in current originations in these regions.
In summary, we remain optimistic about the outlook for our business performance this year as we continue to build on our positive growth
momentum focusing on confident, financially prudent first-time homebuyers and sound risk management albeit in a modestly softer economic
environment.
Thank you for listening. That concludes our prepared remarks. I will now turn the call back to Samantha for the Q&A.
Samantha Cheung - Genworth MI Canada Inc. - VP of IR
Thank you, Stuart. We are now ready to take your questions. Operator, please open the call up for questions. Thank you.
QUESTIONS AND ANSWERS
Operator
(Operator Instructions). Shubha Khan, National Bank Financial.
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Shubha Khan - National Bank Financial - Analyst
So the first question I had was with respect to the mix of new business and there I notice Alberta accounted for about 26% of new insurance written
in the quarter. That's been pretty flat over the last four or five quarters if I am not mistaken. But it is significantly higher than the insurance -- in
force exposure to Alberta which is at 18% or thereabouts.
I'm just trying to square that with the fact that housing market activity in Alberta has come off quite a bit, at least relative to other provinces. And
that underwriting has very likely been tightened in that market as well -- at least that is what you suggested in your prepared remarks. So how
should we interpret the high proportion of new insurance coming out of Alberta?
Shubha, good morning, it's Stuart here. Thank you for that. Yes, the way I would suggest you think about it is the fundings that occurred in this
quarter were largely the result of originations or sales in the last half of last year because there is always a delay between when we get the actual
application and when the deal closes and it reflects in our NIW and NPW.
When we looked at new applications, for example, in the first quarter they work much more and that 18%, 19%, 20% range. So we are seeing that
drop in both the volume from the market and on the margin some of the underwriting actions that we are taking that you referred to.
Okay, so it is a timing thing really. And so, in Q2-Q3 we should see Alberta drop off in terms of new insurance written?
Absolutely.
Okay. And the second question I had was -- and I apologize if this has already been addressed in your prepared remarks. But delinquencies in
Alberta seem to be or have continued to moderate. When do you expect the trend to reverse? I mean, what might the timeline between slumping
oil prices, job losses in the oil patch and related sectors and then rising mortgages and delinquency, what might that look like?
We typically see anywhere from six to nine months as a delay. We saw that in the last downturn in 2008-2009. And it is a function of people getting
some benefit when they get laid off, working through that before they would become delinquent.
Obviously we do monitor early recorded delinquencies and we are very active in our homeownership assistance program. But to your point, we
haven't seen actual delinquencies rising yet and we think that would be more of a second half 2015 event.
Okay, got it. I will re-queue. Thank you.
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Operator
Geoff Kwan, RBC Capital Markets.
Geoff Kwan - RBC Capital Markets - Analyst
First question I had was just you have got a couple of price increases in the industry this year and last year. You have got the OSFI capital requirements
in place, there may be some more coming down the pipe.
What do you think, with the price increases, where you think now the peak operating ROE might be? Is that 13%, 14%, 15%? And then how much
of that would come from a normalization of interest rates in terms of like how much of that ROE, how many basis points?
Yes, Geoff, good morning. It is Stuart. I would say that when we look at the price increase we just achieved this year, that adds about another point
of ROE on a fully earned basis. So not immediately obviously, but as that earns into premium down the road.
So you would sort of look at about a 13% ROE on new business fully earned. And then beyond that, if you do get some interest-rate increases, we
would look at about a 50 basis point rise in yields, it's probably about 50 basis points on ROE. So you are anywhere between that 13% and 14%
ROE on a long-term fully earned basis at this point.
Okay. And then you have talked about expectations that probably it will be towards the later part of this year on seeing the impact of oil and -- on
the loss ratios and delinquencies. With Q2 and Q3 typically being quarters where you have seen either the loss ratio at least not get worse or usually
get better, do you feel from what you see right now over the next quarter or two that that's likely what will happen in 2015?
Yes, I think typically our seasonal patterns do reflect a low point in the second quarter because of the housing market, seasonal employment, tax
return refunds in April, etc. And then generally speaking into the third quarter you normally see a bit of a pickup and then further into the fourth
quarter.
So I think you will see the same pattern this year. The obvious add to that will be more pressure from Alberta, but that is going to be somewhat
offset again by what we are seeing in Quebec, Ontario and BC which are all performing fairly strongly at this point.
Okay, last question I had was I know you guys have talked about with the MCT and the capital requirements from OSFI operating -- I think the term
used was moderately above the [220]. Is that running at about a [225] or how do you kind of think about what that level is that you feel comfortable?
Yes, that is about right. We would say 225 to [230]-ish and that range is in our view a conservative position given the circumstances and the
environment.
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Okay, great. Thank you.
Operator
Paul Holden, CIBC.
Paul Holden - CIBC World Markets - Analyst
The first question is relating to the Q-over-Q change in the loss ratio. So in the prior two quarters we had seen it trending up due to loss pressure
in Quebec and the Atlantic provinces. You suggested that was also the case in Q1, but then the loss ratio came down. So kind of trying to isolate
the factor that led to a lower loss ratio there.
Paul, it is Phil. If you look at our supplement we now disclose our loss roll in terms of new delinquencies as well as cure activity. When you look at
the numbers we actually saw a net reduction of about 60 new delinquencies net of cures.
And I think what we did see was pressure coming from Atlantic and Quebec that built through the early part of the third quarter into the fourth
quarter. And then what we saw generally speaking especially in Quebec is that the number of new delinquencies in Quebec actually moderated
down and we were able to realize a higher cure rate in Quebec in the quarter.
So I think what we are seeing is a little bit of a stabilization in the overall Quebec market and that was favorable. And I would say the other thing
was we saw earlier pressure than typical in the fourth quarter. So a little bit of a pull forward and we benefited from that in the first quarter.
Okay. And has that change in Quebec -- is that due to your loss mitigation strategy, i.e. the cures versus necessarily improvement in the market
itself?
Well, I think- - I mean our loss mitigation strategy has been in full effect for the past year, but I think it will be more a little bit of favorable items in
the marketplace more so than changes in our loss mitigation practice. We continue have a very high penetration rate of our loss mitigation strategy
so that is unchanged.
And then next question is, talking about the seasonal pattern and the loss ratio and then your guidance range of 20% to 30%. Given that Q1 came
in at 22% and that is typically a higher loss quarter that implies -- it implies higher loss ratios in the back half of the year, that is for sure. Is that
correct? Like you're still comfortable with the 20% to 30% guidance range?
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Yes, Paul, we are. I think as I was saying earlier, the seasonal pattern would expect to see a little bit of a pickup in loss ratio from the second into
the third and the third into the fourth. As we say, it is a range. It could be that we end the year in the midpoint of that range, it all depends on how
the second half of the year develops. But we are still very comfortable with that range for this year.
Okay. And then I know you officially don't have any guidance for 2016 on the loss ratio. But given the typical time lag between job loss and
delinquency, and given what we are seeing in Alberta, I mean is it fair to say that the loss ratio most likely will be higher in 2016 versus 2015 all else
being equal?
It is difficult to say. I think a lot of that depends on what actually happens to oil in the second half of this year. A lot of the consensus view is that
oil starts to show recovery in the second half. So depending on where it actually ends up will be very, very influential on what happens at 2016.
So at this point I think we would say it is too early to tell. But all else being equal, we would hope that the 2016 loss ratio is in a similar level as 2015.
But, I think the only thing to add to that, Paul, is with the increase in our premiums earned that will also have an effect of mitigating some of the
loss ratio pressure as we move into 2016.
Yes, got it. And would you have -- or can you provide any color or opinion on how much you think current mortgage rates are having an impact
on the housing market, particularly Ontario and BC where things are quite hot?
I think when we look at our market, Paul, we definitely still see similar activity in the first-time homebuyer segment. I think the low rates have
certainly helped to continue to spur the market on the move up segment and the high-end segment. And that is where you see a lot of the price
pressure in Toronto and Vancouver.
When you come to the first time homebuyer market they are still constrained by the basics of what they earn and the qualifying criteria, which are
fairly stringent by now, as you know, as it relates to high ratio loans.
So I think there is some help there and certainly it has kicked the spring market off to a nice start. But I would not say that there has been a huge
impetus to affordability pressure for the first time homebuyer. It has probably had a much bigger impact on the move up and higher end buyer.
Okay, okay, that is helpful. Thanks for your answers.
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Operator
Tom MacKinnon, BMO.
Tom MacKinnon - BMO Capital Markets - Analyst
A question about the outlook for that new insurance written. First of all great job with this enhanced disclosure. But if we talk about the new
insurance written here on the transactional, it seems to be up -- in terms of volume up 25% year over year. And obviously when we look at this
thing that doesn't take into account the increase in pricing.
So, I mean what is kind of driving that? We've got market penetration and we've got activity. Maybe you can talk a little bit about your outlook for
this going forward and how much the market penetration may have increased. Any feeling here as to what your market share might be?
Certainly, Tom, it is Stuart here. I would say first off that when we look at our overall NIW on the transactional business we are very pleased with
the year-over-year growth which, as I said in the commentary, relates mostly to market share and market size. Sequentially obviously it is down
from the fourth quarter because of normal seasonal pressures in the winter months when fewer homes do get sold or closed.
As far as market share is concerned, we would say we are approximately 30% of the market right now which is about up 2 points versus a year ago.
And our expectation for the remainder of this year is that we will continue to see some market momentum. In aggregate on a premium written
point of view we expect to be moderately up from the prior year. But now that will take into account both the gains in NIW and the price increase
as we refer to taken on June 1.
In terms of premium written, so if we're going to look at the premiums written were up 47% year over year. So I mean I am trying to get a feel for
your outlook here. Obviously the premiums written are going to have to be up to reflect the price hikes.
Yes. So what I was saying, Tom, is that in aggregate for the year we would expect to be modestly higher in premium written versus 2014. Remember
that you've got two parts here. You've got the portfolio insurance side that we don't expect to see as much volume in this year, that it will be offset
by more transactional NIW and therefore premium written which also has the price increase attached to it.
So when you look at it like that you are going to see more NIW on the transactional side year over year buoyed by the price increase that will help
to offset the weaker portfolio insurance which, as you know, comes and goes from a demand point of view. And that is where we expect overall
for the year to see premium written in total modestly up over 2014.
So I am only -- my questions were only really with respect to the transactional piece. So I am just trying to get a feel for what should we be looking
at for growth in the transactional piece in terms of -- in terms of NIW for 2015. I mean it was up 25% year over year in the first quarter. Would we
expect to see an NIW trend for the transactional like that for the remainder of the year?
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No. I would say that again if you look at the first quarter there was two components, one was definitely market size and we know that the spring
market got off to a very slow start last year. So I think you can look at 7% to 8% perhaps on a year basis of NIW on the transactional side.
And that when you compound that with the price increase, etc., etc., will help to offset the weaker portfolio insurance, as I said. But don't expect
25% NIW growth for a full year on the transactional side.
Yes, that is NIW, that is not premiums written?
Correct.
Okay. All right, so if you want to work out premiums written we just work the price increase on top of that?
Yes. And then don't forget to take into account the weaker portfolio insurance side.
Absolutely. Okay, thank you very much.
Operator
(Operator Instructions). Marko Kais, TD Securities.
Marko Kais - TD Securities - Analyst
Just wondering, do you feel that the June 1 premium increase adequately offset the recent increases in capital requirements? And then how much
room do you see for another round of pricing increases over the next few years?
Marko, Stuart here. I would say that given the current set of circumstances, in other words, where our capital levels are today, where the expense
load is and where we see the economic outlook, we would feel that the price increase is adequate at this time. However, there is an annual review
for a reason and that is because things can always change.
And we will continue that discipline of reviewing prices on an annual basis to evaluate against what capital levels are in the future and what the
outlook is for the economic future. So it is possible that pricing will change again in the future, but for now we feel that it is adequate.
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Okay, thank you, that is helpful. And then in order for losses to reach the higher end of your 20% to 30% range target, what kind of losses and
delinquency rate would we have to see in [all] producing regions specifically if we were to hold the rest of the country constant?
Marko, it is Phil. When we think about that, if you go back and you look at Alberta back in the 2009 scenario, the loss ratio within the province of
Alberta certainly was probably in the mid-30%s to high 40%s as it moved through the cycle. So I think you would need to see something to that
extent.
Loss dollars -- if you translate that into loss dollars you are probably looking at loss dollars incremental over and above the current run rate somewhere
in the neighborhood of CAD25 million coming out of Alberta. Having said that, as Stuart mentioned, we have looked at a number of [derivative]
scenarios and we believe that 20% to 30% encompasses or a base case scenario and also modestly adverse scenario.
Okay, that is helpful. And are you able to translate that into unemployment rates and housing prices?
Yes, I think, as I said, when we look at our scenarios we basically are expecting anywhere between 5% to 8% house price correction this year and
employment sort of in the 5.5% to 6% range. So that would be sort of our base case.
When you start to look at the sort of more severe scenario you could see unemployment up higher and house prices down 10%-ish. And that is
sort of the boundary post of our range I would guess and that we put you in that loss ratio range of 20% to 30% for 2015.
Okay, so when we model losses the delta in unemployment matters actually more than the absolute level, is that correct?
Could you repeat that question, Marko?
When we model the losses does the change in unemployment rates matter more than the absolute level of that?
Yes, absolutely. So it is really -- I mean Alberta will still have probably an unemployment rate lower than the national unemployment rate even by
the end of this year. But it's the absolute change in that unemployment rate that matters most and then beyond that house price change as well.
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Okay, thank you. And just a final question. How should we think about the uptick in the portfolio insurance this quarter? Is this a result of increased
demand or just a reflection of the inherent lumpiness there?
I would say it was probably the lumpiness along with increased demand. I think the thing that I would emphasize is there has been a substantial
change in the guarantee fees for government backed MBS. And as a result of that that may influence demand for big banks going forward. So when
we look at it we would expect that the second quarter through the end of the year may see lower demand relative to what we saw last year.
Okay, thank you.
Operator
Asim Imran, Macquarie Capital Markets.
Asim Imran - Macquarie Capital Markets - Analyst
Just a more philosophical question on pricing following generous matching of recent premium rate hikes by the CMHC. I was just wondering if
there is a certain scenario with respect to market share or other factors that will come about over time where Genworth can actually start leading
changes at premium prior rates or offering differentiated pricing as opposed to just largely being a price follower.
Yes, Asim, absolutely, I would say right now it is sort of a function of the dominant player in the market. And as you know, in this market the pricing
differential is not something that gets maintained because of the borrower paid premiums.
But it is perhaps a scenario where either we are offering products that the other players are not where we would have pricing preference over. And
by the players that could be just at CMHC is not offering it as the private sector does and/or there is a time where our dominance in the market is
such that we feel comfortable leading pricing changes.
But at this time we all perform an annual review to make sure that we feel comfortable with our pricing. And on an annual basis I'm going to say
CMHC will make changes as they see fit and the rest of us will evaluate to see if we agree with it and then follow as -- if appropriate.
And just an added question related to that. So you noted a 2 point increase in the market share. Would you feel that's an appropriate number on
an annual basis going forward or was this a special year in terms of market share gains?
I would say this is a very long sale cycle and a business where you don't see big jumps in market share year-to-year. I think looking at 1 point to 2
points a year is probably about right. But it is going to be a function of market dynamics for sure.
14
As we stated during our earnings or investor call last year, we do anticipate growing market share 3 to 5 points over the next three to five years.
So 1 point a year, 1 point to 2 points a year, that would be sort of our goal.
Okay, perfect. Thank you so much.
Operator
Tom MacKinnon, BMO.
Phil, just a question on your arithmetic here for your -- in response to the question of what sort of loss ratios we need in Alberta to take you to the
top end of your 20% to 30% range. I mean and I think your answer is mid 30%s to high 40%s.
And if the simple math is even if Alberta is 20% of your book it sounds like -- and the rest of the country is obviously around 80% of the book. And
if the rest of the country comes in at a 25% loss ratio, in order to hit a 30% you are going to need a 50% loss ratio from that Alberta book.
So I am just -- I just wanted to make sure that -- I am not sure if you did that quick math, but that is what I just did there and that seems to be the
way the arithmetic would work.
I would agree with that arithmetic, Tom. I mean my comments were more referring to what it would take to move through the upper half of that
range, not necessarily the upper limit.
Okay. So to hit the top it sounds like it might be more like a 50%. Okay, thank you for that.
Operator
As there are no further questions, this concludes today's conference call. Thank you for your participation in the Genworth MI Canada Inc. 2015
first-quarter earnings conference call. You may now disconnect.
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