Q2 2020 Genworth MI Canada Inc Earnings Call
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Good morning, ladies and gentlemen, thank you for something like.
Welcome to Genworth and like Canada incorporate it's pretty tricky second quarter, earning conference call.
This time, all participants are in listen only mode.
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I'll now turn the conference over to host extra Erinn Williams, Vice President Finance Investor Relations Mr. Williams you May proceed. Thank you.
Good morning, Thank you for joining Genworth, Canada as second quarter 2020 earnings call.
Leading today's call or Stewart, Lettings, our president and Chief Executive Officer, and Philip Mayors, our Chief Financial Officer.
We will start with our prepared remarks, followed by an open question and answer session.
Our news release, including our management's discussion and analysis financial statements and financial supplement released last night and are posted on our website at www Dot Genworth dossier.
Linked 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 in the press release and will also be available on our website following today's presentation.
The call will be available online for approximately 45 days following today.
Our presentation and discussion today contain a disclaimer on forward looking statements and non IRS statements.
We note that our actual results may differ from statements, we make which are forward looking.
We advise you to read cautionary note regarding these forward looking statements.
Well some of the financial metrics presented on this call today, our non IRS measures and as such do not have a 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.
Thanks, Eric Good morning, and thanks for joining our call.
Overall, we're pleased with our second quarter results, including positive topline momentum, 27% loss ratio and 11% operating return on equity while the environment continues to evolve in line with our base case expectations. The remaining some economic uncertainty as governments and businesses navigates through the challenges of the cobot 19 pandemic.
And reopening of the economy.
That said, we take comfort in the strength of our business model and couple of position along with our disciplined risk management and proven loss mitigation strategies to manage through this period economic stress.
For the quarter were delivered net operating income of $101 billion down 16% over the prior year period, and 14% over the prior quarter largely due to an increase in losses on claims.
This resulted in fully diluted operating earnings per share a $1.17 cents down 15% over the prior year period and 13% over the prior quarter.
Premiums written totaled $227 million up 17% over the prior year period. This increase was driven by significant demand for portfolio insurance, which totaled $13.4 billion for the quarter.
The growth in portfolio insurance premiums more than offset the decline in transactional insurance premiums, resulting from the covered 19 environment unrelated economic shutdown the increase in demand for portfolio insurers was largely due to the introduction of a number of liquidity programs by the Governor candidate along with a temporary exception so now for the insurance.
Refinance and extended amortization mortgages originated prior to March 20th this year.
We were pleased with the opportunity to bid on a number of mortgage portfolios and applied our disciplined risk management framework to select mortgages that align with our risk appetite adjusted to account for the current pandemic environment and related economic uncertainty.
Our average portfolio insurance premium rate increased 12 basis points over the prior year as a result of shifts and portfolio mix as well as the inclusion of some refinance and extended amortization mortgages.
While the transactional market slowed during April and May as noted on our first quarter earnings call. We've seen a strong recovery and first time home by activity in June and July as buyers. We remain confident about the employment status took advantage or very low interest rates to compete for entry level homes in a more rational marketplace and our view.
This recovery reflects a degree of pent up demand essentially a delays free market and therefore activity may taper off somewhat in the second half a year.
That said, we're very encouraged by the strength and quality of the recovery to date provided this trend continues we should see a positive impact on new insurance written in the second half a year.
In addition, there's been a shift in the competitive landscape that will influence the size of our addressable market going forward.
On June 4th CMHC announced that effective July Onest 2020, it would implement a number of product changes effectively reducing the scope of mortgages on what should we be willing to provide default mortgage insurance.
These changes include the elimination of any non traditional sources of down payment.
Requiring mortgages to have a minimum credit score of 680 as compared to the Permian minimum of 600 for LTV is greater than 80% limiting the GDS ratio to 35% of annual income as compared to the premier limit of 39% and limiting the Tds ratio to 42% of annual income as compared to the Permian and.
44%.
Both the GDS and tedious ratios are calculated using the banker, Canada qualifying rate, which was 4.94% as of June thirtyth, representing a buffer of approximately 200 to 250 basis points above the average contract rate a new insurance written in the second quarter of 2000 and train.
As noted in our press release on June eight this year, we've confirmed that we would not be making these changes to our eligible mortgage loan requirements and now analysis of our current exposure to the announced changes and the relative performance of these zones, we determined that our risk management framework dynamic underwriting policy and current risk limits together with Andre monitoring of.
Conditions and market development allow us to prudently adjudicated and manage our exposure to these loans.
Non traditional sources are down payment and loan to the maximum credit score below 680 represent a very small proportion of our in force portfolio and within our risk appetite limits the higher debt service, Russia business represented approximately 30% to 35% on our second coda, new insurance written driven by the prevailing compliance rate.
And concentration of these letters in economically diverse, but more expensive urban areas, including Toronto and Vancouver.
As a result of not making similar product changes, we believe we will likely see an increase in our market share over the next few quarters.
Given the recent timing of these changes it is too early to determine the long term impact on transactional new insurance written.
That said these changes may help to offset any tapering of market demand in the second half of this year in the month of July our transactional mortgage insurance commitments increased by approximately 75% compared to the same month in 2019, reflecting both the strong housing recovery and the seamlessly product changes.
This has helped to close the gap, resulting from the lower year over year volumes in April and May driving our year to date commitment volumes slightly ahead of the prior year at the end of July.
As a result, we have updated outlook for total premiums written to be moderately higher than the prior year with growth in both portfolio and transactional insurance volumes.
While our loss ratio increased to 27% for the quarter, we're encouraged by the prudent and gradual reopening of provincial economies and the beginning of a job recovery. The loss ratio is largely influenced by our resilient approach, which includes encouraged by not reported amount to reflect losses embedded in the most of hurdles. Given these loans are not in a delinquent status.
The level of reported mortgage deferrals peak in the high teens during the second quarter before declining to 13.7% by the end of June inline with the level reported at the end of March provided the current economic trends continue we expect the level of reported mortgage deferrals to decline over the second half of the year.
System with the first quarter approximately 65% of these loans had an effective loan to value less than 80% representing an equity buffer in the event. They face ongoing income challenges, we continue to collaborate closely with our customers and other industry participants on the poster from a loss mitigation strategy to implement a number.
Measures aimed at reducing the potential for mortgage delinquencies from this population.
We remain confident that the vast majority will resume mortgage payments at the end of the deferral period.
Based on this along with the current economic trends, we are lowering the top end of our full year estimated loss ratio range by five points to 25% to 35% for 2020.
We ended the quarter with an estimated market ratio of 169% four points above the upper end of our target operating range as noted during our first quarter Cole capital redeployment is on hold for the remainder this year outside of ordinary dividends as we continue to assess the economic environment and our revised topline capital requirements.
Book value at $41, a 97 cents per share is up 6% over the prior quarter driven by ongoing profitability with that I'll turn it over to fill in for a deeper look at our financial results.
Thanks dirt and good morning.
We think the emergence of several important developments and trends in the second quarter as discussed by story.
Against this backdrop, we posted solid financial results, including year over year growth from premiums written of 17%.
Net operating income of $101 million operating our leave 11% and a strong capital position with a my count ratio of 169%.
Premiums there were modestly higher by 1 million at $172 million with our current outlook of moderately higher total premiums written for the full year as Stuart noted, we now expect premiums earned to be flat to modestly higher in 2020.
The loss ratio this quarter with 27% losses and claims to $46 million, resulting $22 million sequential increase primarily reflects the higher incurred but not reported reserve.
Yes, I being our reserve includes our estimate of the anticipated losses from default that would have otherwise occurred in the quarter had mortgage payment deferrals not being in place.
In addition, we experienced modest adverse reserve development during the quarter.
While mortgage payment deferrals help or is bridge income interruptions, a subset of these deferrals will likely end up in default after the deferral period, and therefore payment deferrals will delay the timing of delinquency for this subset.
Isn't the company's internal loss forecasting model, the IB and our reserve has been calculated based on the probability weighted projected losses on claims under a day downsizing upside scenarios for regional unemployment rate at home prices.
The most probable base case, there theres a U shape recovery starting in the third quarter, while the downside scenario assumes that prolong recovery fallen a second wave for closing 19 cases in the second half of 2020.
This IB in our reserve is expected to build through the course of 2020, reflecting the typical time lag of one to six months between a border become an unemployment in the mortgage going into arrears as a result or current outlook for the full year loss ratio is a range of 25, 35% as compared to the reported loss ratio of 21% the first half.
Of this year.
It's important to note that the loss ratio in the second half of 2020 is expected to be similar to a higher than the second quarters loss ratio of 27%.
With respect to delineate the activity for a number of utilities net of cures increased by 207 to 491 sequentially and the number of a standalone basis also increased by 220 to 1974.
But the only see rate was marginally higher 22 basis points geographically, Ontario, Alberta in Qubec accounted for most of the increases.
With lenders the mortgage insurance temporarily suspended most collection activities. After the onset of Kogan 19, the number of cures declined by 117 as a result portfolio insurance accounted for 100 as the total increase in net new drilling scene, but it did not significantly contribute to losses in the quarter due to the lower effective loan to values.
At the same time, the average reserve for doing see increased by approximately 8% to $85000. Several factors contributed this increase first or base. There it assumes softer house and market conditions in the second half 2022nd longer anticipated claim settlement periods due to process delays translates into higher Ed.
That hit interest property management and property tax costs on existing delinquency and lastly, or total IB in our reserve increased modestly.
Expenses in the quarter totaled $32 million as a result in expense ratio, 19% was consistent with our targeted range of 18% to 20%.
Expect to be around the high end of the trade for the full year, including a onetime transition costs relate to our infrastructure and financial systems.
We earned $48 million of operating investment income, which was lower sequentially by 6 million, primarily due to the impact of a lower interest rate environment.
In total we generate a fleet diluted operating EPS of $1.17 cents and our diluted book value per share now stands at $41.97.
Turning to investment.
The market value of our investment portfolio $6.5 billion, an increase of approximately 350 million, including the meaningful recovery in the market value of our fixed income securities and preferred shares.
During the quarter credit spreads narrowed significantly the preferred share index improved by approximately 13% on government rates remain level as a result, the mark to market of the investment portfolio in derivatives has moved from an unrealized gain of 48 million from an unrealized loss of 229 million at the end of the first quarter.
Portfolio quality remains strong with a.
With 93% in investment grade fixed income securities and cash and 7% highly rated preferred shares you see no defaults in the portfolio and our below investment grade holders early 6 million.
While we continue to emphasize portfolio quality. We're also focused on optimizing portfolio yield within our risk appetite that being the case the low rate environment will continue to pressure. The current pretax equivalent book yield of 3%. Accordingly, we continue to expect operating investment income to be moderately lower for the full year as compared to 2019.
Overall, the company remains well capitalized as the Mike at ratio of 169% holding company cash and investments of 108 million a modest debt to total capital ratio, 15% and a 300 million dollar Undrawn credit facility.
A number of factors contributed to the my count ratio remained comfortably above our targeted operating range of 160% to 165%.
First the improvement in the Mark to market the investment portfolio led to an increase in a regulatory capital available second the strong portfolio insurance volumes contributed to increased regulatory capital requirements and lastly, the capital runoff from the aging of the 2018 and prior books, especially the larger 2015 2016 book, partially offset the incur.
Recent capital required.
In light of the ongoing economic uncertainty regulatory considerations as a positive top line momentum, we expect to operate at or above the high end of our targeted Mike CATT operating range of 165% for the remainder of 2020 in summary, the company is well positioned financially with high quality investment.
A strong capital position and growth opportunities going forward I'll now turn the call back to start to wrap it up.
Thanks, Phil from an operational perspective, we continue to function well in a remote work environment notwithstanding the significant increase in mortgage insurance applications. We have hired a number of additional people to ensure that we continue to maintain our underwriting. So the standards. We continue to make good progress on our strategic initiatives in treating the transition of our infrastructure.
And financial reporting systems from the US Canada. In addition, we're excited to launch on new brand during the fourth of this year, we recognize that the covered 19 pandemic and economic environment continues to evolve and while the risk of second wave and potential economic impact our real we remain encouraged by the prudent reopening of businesses across the country.
As well as the ongoing support from the federal and provincial governments.
In closing, we will now more optimistic about our business prospects for this year as demonstrated by our updated outlook.
Thanks for listening that concludes our prepared remarks, I'll now turn the call back to the operator to commence acuity.
Thank you my Sir.
Ladies and gentlemen will now conduct a question answer session.
As a reminder conference is being recorded for replay purposes, we're asking shall refrain from new cell phones speaker phones or has sensor issue and a portion of today's call.
If your question. Please press the star, although digital one touchtone telephone here's what are the coaching request.
Your question would be colgan, nor do they received and one more piece for your first question.
Today's first question is coming from Mr., Tom Mackinnon, calling from BMO capital. Please go ahead. Your line is open.
Yeah, Thanks, very much good morning.
Just with respect to the.
Your comment about more optimistic outlook I can understand that with respect to the topline, but if I look on slide four year base assumptions I don't believe that they changed since yeah, you laid them out in the first quarter.
It's a happy points really the which one it was that's changed the housing market doesn't look like year assumption on that is changing around unemployment rate.
Nor the GDP so.
Maybe you can tell us what's in terms of the economic environments, Youre actually more optimistic about and.
And following on to your combined mid year loss ratio assumption change for 2020.
Simply because you.
You had a better Q2, then what was anticipated.
And Tom good bonus true here. Thanks for the question I think the none of it is we're more optimistic about the overall business prospects given the change in top line given the strength of what we're seeing the housing market recovery overall, yes, we haven't really updated our economic assumptions I think they stand as they are but our view is that there.
Manageable and when you look at our loss ratio guidance, you know, we do think Thats a.
A fairly strong outcome, even if you consider where the economy is where it's gone on what yeah pandemic has done to.
To to get through this year with a 25 to 30 fives in loss ratio. We feel is pretty good on the reason we did bring it down a bit from the top end is the fact that we are now here in a in early August and we have seen continued recovery ongoing job recovery and business reopening. So we feel more confident about the trajectory for this year.
We're still of the view that you know losses and loss ratio is typically peak about a year or two after the economic shock. So we still think 2021, we'll have a higher loss ratio.
At this plant will you know, we're not going to speculate on what that will be but we'll give that guidance closer to the end of this year, but for sure. We feel more positive about the path of 2020 than we did back in the first quarter.
Thanks, and just as a follow on some of the bank to push there a.
Deferral deadline that to September thirtyth.
And what happens if we had further push out in terms of the mortgage deferral deadline.
With that change Youre, a you are I DNR, how would that look how would that impact your loss ratio and what are some concerns or implications of that push out in the mortgage to for low at night.
I think the important piece to note here is that where we're really not relying on the actual number of deferrals or or mental deferrals to forecast or reserve for losses were ready are relying on our last forecasting models and the assumptions that we have used as you saw in the presentation. There so that the only thing, though should really affect them.
Level, our losses this year as the.
Assumptions, we make around the economy, so to the extent, we changed those economic assumptions that could influence the loss outcome, but in terms of where deferrals are.
Headwind or when they will come to an end is really more of an impact on the lag effect on the actual delinquencies.
That may now be pushed further out into 2021, but we are in theory reserving for those now by virtue of our loss forecasting model approach.
Thanks very much.
Thank you much.
Now, we'll go to Graham writing, calling in from TD Securities. Please go ahead.
Hi, good morning.
The.
Need the new delinquencies net of cures the increase there it seems to be more about low there curious as opposed to hire new delinquencies.
Drove lower curious if you just that could dynamic and could be 19.
Operationally greatly yeah, Graeme itself and that's exactly it I'm joined covert 19, a number of the banks slowed down there collection activities. As a result that number bores that would have keywords through the interaction through the club with the collection staff those interactions were delayed and therefore the number cures.
Were lower in particular, you saw that the utilities native cures for portfolio insurance increased by 100, and we know that they do not represent significant loss exposure because of the embedded equity, but that's just a reflection of you know the impact of slower collection activities.
Okay.
Got it and then just the.
The 27% loss ratios driven by your.
I'd be and our reserving and you said it was you try to reflect what.
What has been sort of the default situation the deferrals, we're not in place.
Should we assume.
Right.
You shouldn't assume that you know your factory in a default rate of 14% I imagine you're assuming only a small portion of those deferrals, where you'll actually default is that accurate.
That's totally accurate we do expect the vast majority of those deferrals will become perform in mortgages as input as businesses reopen people get back to work one thing we wouldn't notice that we saw a higher level of deferral mid quarter and we've seen an improvement in the.
The number of.
Loans that are under the payment deferrals as we move from mid quarter to the ended the quarter. So we think that trend will continue.
And what do you think is realistic in terms of the delinquency rate building you know as we move into late 2020 to 2021.
Is two to three times over the next 12 months, we've got a reasonable expectation and what are you thinking on delinquencies.
I think more more likely around sometimes but that all depends on the timing of the end of the deferral and what happens is the employment picture, but I think our base case was to make during that time, but we would be reflected that in losses through the course of the next couple of quarters.
That's it for me thank you.
Thank you much sir.
Ladies and gentlemen, if there are any additional questions for this time. Please press star with digital one as your mine a few speakerphone. Please lift your handset for pressing the keys.
Once again, please press star one.
When I look to Geoffrey Dunn, calling in from Delving partners. Please go ahead.
Thanks, Good morning.
So I wanted to understand a little bit more about quote numbers urban mechanics I.
I guess first off.
Given the mix, you're seeing on the portfolio business coming in.
When is the severity factor on your comment on reserve and still I mean kind of the 8-K plus area or is there the lower consideration on average.
It is still similar to around 80000, and that's driven primarily because the delinquencies tend to be more focus from the transition of transactional book and then necessarily the portfolio insurance book.
Okay.
And the reason I asked that is it looks I'm trying to get at the incidence assumption you're making on b.
Payments for all loans.
And it seems like it wants to be confirm it seems like maybe it's around 50 basis points.
We can probably follow up on that Jeff the specific numbers, but I think the way. We're looking at it is generally speaking what do we use these would have otherwise occurred in the corner as the result of the prevailing economic scenarios both.
Employment and home prices.
I think you know what you're describing is a reasonable or posted a lot more granular and we sort of build it bottoms up based on you know regional forecast for unemployment in home prices.
Just to add to that I think as we talked a bit about on the first quarter. We definitely have a anecdotal evidence that many people who took the deferral did sort of more for safety and convenience of them because they absolutely needed. It. So we chose not to build our loss reserving approach often the for population just for that very reason and.
Rather would stick to what we've seen before from a loss forecasting model using the real drivers of losses, which is the based economic assumptions.
Okay. Thank you.
Thanks, so much sooner.
Ladies and gentlemen, once again as a reminder, if you wish to ask any questions. Please press star one at this time.
Since there are no further questions I kind of conference back over to Mr. Lettings. Please go ahead Sir.
Thank you very much and I'd like to thank everyone for joining us today. We appreciate your time as always and this concludes our second quarter 2020 earnings call May now disconnect.
Thank you my Sir ladies and gentlemen, there was due to this conference having what's your tenants you may now disconnect have a good day.