Q3 2020 Genworth MI Canada Inc Earnings Call
Good morning, ladies and gentlemen, thank you for standing by.
2023rd quarter earnings Conference call.
Time, all participants are in a listen only mode and following managements prepared remarks, we will conduct a question and answer.
And instructions will be provided at that time.
It's anyway.
The conference Please press star zero for operator assistance.
I would like to remind everyone that this conference is being recorded today.
I will now turn the conference over to Aaron Vice President Finance and Investor Relations.
Mr. Williams you May go ahead.
Good morning, and thank you for joining our third quarter 2020 earnings call.
During today's call our store in London.
President and Chief Executive Officer.
So there's a chief financial officer.
Let's start with our prepared remarks, followed by an open question and answer session.
Our news release, including our management's discussion and analysis of financial statements and financial supplement.
Well were released last night and are posted on our website at Www Dot Sei Jin stops you.
I went to our like what counts in 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.
Also be available on our website following todays presentation.
It will be available online for approximately 45 days following today.
Our presentation discussion today contains a disclaimer on forward looking statements and non paper statements.
Note that our actual results may differ from statements, we make which are forward looking.
We invite you to read the cautionary note regarding these forward looking statements.
Well some of the financial metrics presented on this call today are non player for us measures have been 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 begins his remarks Stuart.
Thanks, Aaron good.
Good morning, and thanks for joining our call we.
We were pleased with our third quarter results, including positive topline momentum.
<unk> sure and 13% operating return on equity while the economic environment continues to evolve in line with our expectations. There remains a high degree of uncertainty that's the country interest of second wave has 19 pandemic.
That said the pace of economic recovery trend to the housing market downward trend. The most prudent to Charles should help us manage through this period, even as the mortgage payment deferral and government wage subsidy programs one in Dallas are becoming much more.
For the quarter were delivered net operating income of $119 million.
4% over the prior year period, and 18% over the prior quarter largely due to a decrease in losses long clinch.
This resulted in fully diluted operating earnings per share of one dollar and 38 cents up 3% over the prior year period and 18% over the prior quarter net.
Net premiums written totaled $291 million.
7% over the prior year period. This growth was driven by a significant increase in transactional motor insurance volumes largely due to the strength of the housing market and increased market share offset by a smaller more traditional that whole portfolio insurance policy.
The housing market has continued to benefit from strong demand due to low interest rates and pent up demand coming out of that much snow was pretty much.
In addition, the moisture deferral program has helped to bridge borrowers in financial difficulties, thereby avoiding an increase in supply due to full sales. These doctors have resulted in a strong sellers market in most parts of the country.
Let's turn to the housing market. There's also a functional disproportionate impact of unemployment amongst the service and entertainment such as the CRO or typically under represented about home buyers in.
In line with seasonal patterns, we expect demand what you use over the winter months and supply May increase if somebody is looking to sell their home when they reach the end of the mortgage payment deferral.
I will make for a softer Mcdonald's housing market in 2021.
Our market share increased during the quarter as lenders I looked at it more business to the private sector in response to the underwriting changes implemented by pretty much it.
We were pleased with the quality of mortgage insurance applications, we sold during the quarter they modestly higher average credit score of 752.
The proportion of new insurance written with gross debt service ratios above 35%, what total debt service ratios about 42% increase from approximately 35% prior to July two approximately 41% in the third quarter remains within our risk appetite hi.
Hi, its debt service ratios on these loans are largely due to the prevailing qualifying rate the concentration economically diverse, but most bench suburban areas, including Toronto and Vancouver.
We continue to limit our exposure to low into the high debt service ratios and credit score below seven traded and disproportion remained low at just over 3%.
As a reminder, well could you, yes actually its Richard well calculated using the banks extended a qualifying rate, which was 4.79% as of September thirtyth, representing a buffer of approximately 200 to 250 basis points above the average contract rate a new insurance written during the quarter.
We did not see a material increase in the volume of non traditional sources of down payment loans or the credit score below six.
Which continued to represent a very small proportion of our enforced portfolio.
No risk appetite limits.
As a result of our strong transactional insurance premiums written this quarter, along with a higher than expected portfolio insurance volumes earlier in the year. We've updated our 2020 outlook, what total premiums written to be significantly higher than the prior year.
On the economic front, we are encouraged by the ongoing recovery, albeit at a slower pace well recognizing that the risks related to the second wave remain uncertain and the potential for further restrictions on each one of your activity may put more pressure on climate change over the coming months.
Our loss ratio continues to be influenced by our economic assumptions and disturbing approach, which includes an incurred but not reported amount to restrict potential losses embedded in the most deferrals given these loans are not in a delinquent status.
So whether it's a very low loss ratio of 13% for the third quarter was largely a function of the very strong housing market, which drove significant favorable development on our existing case reserves, Judy a higher number of cures as borrowers were able to sell their house and pay up in bullish.
Absence of this factor that our loss ratio would have been 23% more in line with the prior quarter.
The level of reported mortgage referrals continues to decline ending the quarter at 5.9% down from 13.7% at the end of June.
Consistent with prior quarters, approximately 66% of these laws how does it affect your loan to value less than 80%, representing an equity buffer innovative ongoing income challenges. We continue to collaborate closely with our customers and other industry participants on the poster pool loss mitigation strategy to implement measures aimed at <unk>.
Do seem potential delinquencies from this population.
We remain confident that the vast majority of what was divorced parents at the end of the deferral period.
Based on this along with the current economic trends and assumptions, we are lowering our full year estimated loss ratio range from 25% to 35% to 15% to 25% for 2012.
As is typically the case during an economic downturn, we do expect to see a lag effect on new delinquencies potentially exacerbated by the slow economic recovery softer housing market with the result that losses on planes will likely be higher next year.
We ended the quarter with an estimated might hit ratio of 179% well above the upper end of our targeted operating range as noted during our second quarter call capital redeployment is on hold for the remainder of this year outside of ordinary dividends.
Book value at $43.39 per share is up 3% over the prior quarter driven by ongoing profitability.
With that I'll turn it over to Phil, but you can look at our financial results.
Thanks, Stuart and good morning.
Our third quarter results were particularly strong with premiums written of 297 billion net operating income of $119 million a loss ratio of 13%.
This relatively low loss ratio benefited from $16 million the favorable development from the second quarter loss reserves.
The main drivers of this favorability were the strong housing market rebound employment levels.
Excluding the favorable development the loss ratio would have been 23% as compared to the prior quarters loss ratio up 27%.
Premiums earned for the quarter were modestly higher at $173 million, a 23% year over year growth and year to date premiums written should provide a tailwind for premiums are in the coming quarters.
Losses, and claims were 23 million were lower sequentially by 23 million, primarily due to the favorable development noted earlier.
In order to estimate the anticipated losses from default that would have otherwise occurred in the quarter at mortgage payment deferral, but have been in place for using our internal lots forecasting model in multiple forward looking economic scenarios to determine or incurred but not reported or IDN our reserve.
Although we remain cautious and the ultimate pace of the recovery remains uncertain overall, the current macroeconomic outlook has improved relative to the prior quarter. This contributed approximately 4 million and favorable development from the second quarter I being or any further 12, Lily primarily related to a higher level of cure.
The reported delinquencies.
As noted previously the idea in our reserve is expected to build through the course of 2020, reflecting the typical time lag of one to six months between the end of deferrals of emergence of delinquencies.
It's most payment deferrals and due to the fourth quarter, we expect that the vast majority of these mortgages will reveal making monthly mortgage payments in the fourth quarter.
We're working closely with lenders get screened the population of mortgage deferrals for worked out opportunities.
That said, we expect an increase in reported delinquencies starting in the fourth quarter. It continuing into the first half of 2021, especially in Alberta, and the periods, where house prices and employment continues to be pressured.
As Jeff noted our current outlook for the full year loss ratio ranges. They revised the 15% to 25% in comparison to the reported year to date loss ratio of 18%.
That's expected Pim thrilled to have contributed to a significant decline in your reported delinquencies, which dropped sequentially by 187 756.
At the same time, the number of Jersey increased substantially by three ended in 12 and 764, reflecting the rebound in housing activity and employment.
The net result was a negative number of new delinquencies net of cures of negative eight.
Correspondingly the number of outstanding links <unk> decreased by 205 sequentially to 1769, and the delinquency rate was marginally lower at 20 basis points geographically, a cheerio l. burden comeback accounted for most of this decrease.
But the model I'd be and are being responsible for approximately 40% of total loss reserves. We caution that gets placed into let's say, it's getting from the 19% increase in the average reported reserve per delinquency to 100 to $1000.
Expenses in the quarter totaled $33 million or the results of the expense ratio was 19% was consistent with our targeted range of 18% to 20% we.
We expect to be around the high end of that range for the full year include the onetime transition costs related to our infrastructure and financial systems.
We earned $48 million, the operating investment income, which was flat sequentially EPS growth in invested assets generally offset the impact of the lower interest rate environment.
In total we generated a fully diluted operating EPS of $1.38 cents and our diluted book value per share, including AOCI I now stands at $43.39.
Turning to investments.
The market value of our investment portfolio at $6.7 billion, an increase of over 200 million sequentially, reflecting the strong cash flows in the quarter and an improvement in overall market Livewatch fixed income securities and preferred shares.
Portfolio quality remains strong with approximately 92% in cash and investment grade fixed income securities at 8% and highly rated preferred shares you see no defaults in the portfolio and our below investment grade holdings are only $9 million.
While we continue to emphasize portfolio quality. We're also focused on optimizing the portfolio yield within our risk appetite that being the case below raising the bar and will continue to pressure the current pretax equivalent book yield of 3%. According.
Accordingly, we continue to expect operating the best when it comes to be moderately lower for the full year as compared to 2019.
Overall, the company's capital position is very strong with a my cat ratio one as you would 79% holding company cash and investments of 123 million and a modest debt to total capital ratio of 14%.
The 10 point quarter over quarter improvement isn't my cat ratio reflects continued growth in capital available lower required capital as the runoff from the age of the 2018 and prior books, especially the larger 2015, and 2016 bucks more than offset the capital required for this quarter than it does as well.
Over the medium term, we expect to operate at or above the high end of our targeted my cat operating range of 160% to 165% in light of regulatory considerations. The positive top line momentum and ongoing economic uncertainty in closing the company is well positioned going forward I'll now turn the call back to the <unk>.
So to wrap up.
Thanks, Bill we.
We continue to make good progress on our strategic initiatives, including the transition of our infrastructure and financial reporting systems from the U.S., Canada, which we completed during the month of October.
On October 26, we announced that the company has entered into a definitive arrangement agreement its way into with Brookfield business partners together was its affiliates and institutional partners will purchase all the outstanding common shares not already owned by that.
In our view the transaction together with our Companys recent rebranding as stage antibody candidate represents an exciting new chapter for the company.
We look forward on the Brookfields ownership to continuing to work with lenders regulators and most professionals to help people responsible to achieve and maintain the dream of homeownership. Thanks for listening that concludes our prepared remarks, I will now turn the call back to the operator, she mentioned Q and a.
Thank you and ladies and gentlemen.
And then to answer.
As a reminder.
Yeah.
Thanks.
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No.
And your questions.
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Okay.
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And the first question comes from Jeff.
Hi, Mark.
Yes.
Hi, good morning.
I was just looking at some quarter I mean, it was a higher than normal number of cures, which maybe isn't all that surprising.
Given everything that's been going on and how the banks and insurers in response.
And do you have a ballpark he didn't like what percentage of those would have been.
And shared by either the homeowners selling or would have been a power of sale and how would that percentage compared to on a more normal quarter.
Yeah. Good morning, it's true here, we don't get that level of detail at this point I mean, obviously, if we do the cure ourselves we know about it but if these are self cures, which a large proportion of them were then it is not known and whether or not it was through you know you, though those two methods I would imagine there just given the market that we've all seen a lot of those.
People were just able to sell their homes, you know by themselves without much trouble.
So I guess it didn't we didn't would it be fair to say that there was probably a higher than normal number of cells cures and then what you might have been in a typical quarter.
Yeah absolutely.
Okay and.
And then how subs in terms of making that determination I guess, how much would.
Would be required to book in the in our reserves or that's.
Okay.
Jeff Good morning, Jeff itself the way we approach. It is we look at the prevailing economic assumptions and we estimate what with losses be.
Given the fundamental economics as related to unemployment and home prices by region and then what we do it so that would tell us here's what the expected losses should be and then what we would do is that with established what our losses incurred would be and then to the extent, we get reported delinquencies, we would offset that and the residual would be our income.
But not reported we honestly forecasts economics Ford as we disclosed in the Mdna and the reason to do that as we know that there's a lag between the event and necessarily delinquency. So by forecasting forward recently looking at what losses would occur and what would have occurred occurred within a specific period.
Got it Okay and just my last question is is there any color or clarity that you've gotten some lenders on what she picked up in market share.
Some Q3, obviously did you need to see decision.
But just wondering if there's any color you can slide.
Yeah, Jeff I mean, we've had obviously a number of conversations with lenders, it's hard to put the absolute tolls together until we see the results from the other two mortgage insurers, but I would estimate were probably in the high Thirtys said market share at this point.
Okay. Okay. That's it thank you.
Our next question.
No.
Yes.
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Yeah, Thanks, very much morning.
Just looking at the my Cat ratio, we had a you know 10 point quarter over quarter jump in the number or in that ratio and it looks like even the required capital kind of went down 3% quarter over quarter you.
Despite a really strong transactional volume.
Yes.
It would we expect that trend to continue as long as you have that kind of topline growth I would have expected. It would have been some constraint on your required capital, but it seems like that the impact of the runoff.
Run off of the aging books is more than offsetting this the increasingly required capital others. All of this strong top line growth.
Yeah, maybe you can give us some of the comments as to what how do you think this will continue do you think we should probably be looking at that my cat ratio going up like another five or six or seven points each quarter, how should we be thinking about that.
Tom I think there's some onetime factors that played into our favor and that was largely related to the 2015 and 2016 Bucks as you can imagine they're coming up in their five year anniversary. Those boards are seeing significant interest savings and as a result of that it would appear that a number of them may have refinancing we came off risk. So I think there were some.
Temporary phenomena are related to the prevailing low mortgage rates and as it impacted the large books that we wrote in 2015 2016. If you remember back in 2015 2016 portfolio insurance, we did large amounts of portfolio insurance and if you look at our quarter over quarter run off and they have stayed imbalances in those two book years, we saw about 6 billion come.
Well I would say that you know what we saw this quarter isn't necessarily trendable and we would expect that we'll return to a more normal cadence where you know the knew the topline will generally be funded by the run off and not necessarily have a significant excess like we saw this quarter.
Okay, and that's great and is there any kind of update you're hearing about the oxys timing with respect to its restriction on Devon increases and specials and share buybacks.
No. It's all unfortunately, not Oh, no further information on that area.
Okay. Thanks.
And ladies and gentlemen.
No questions at this time, please press star followed by one as a reminder.
Yes.
<unk>.
Our next question will come from.
Right.
Sorry.
Hi, good morning.
Maybe I'll start with you just see.
C O you're also on the board can you talk about the.
Awful place 40 through 50 from from Brookfield, and why the special Committee was comfortable that it's that it's viewed as a fair price.
Yeah, I would say on that the real answer that you're looking for will be evident in the circular that will be disclosed later on in this month that'll be of course as you know a very very comprehensive report with the special committees report the valuation that Scotiabank did so I think.
Thats ready the the documents that we should wait for before discussing whether or not and how the price was agreed to.
Okay.
Fair enough and then Ah Phil I'll jump to just within the I'd be in our reserving or I guess what percentage of the deferrals.
Do you assume couldn't move into delinquency you know once these are all fully expire and then what does that imply for a potential range for your delinquency rate looking into 2021.
I would say Graeme that you know we continue to test the IB and our reserve for Reasonability looking at you know anything from you know a 5% to 10% dealt to claim roll rate related to deferrals.
The one thing of note as you know we saw the deferral population come down substantially over the third quarter and clearly a lot of deferrals ended on September Threerd. If so I think we'll begin to see reported delinquencies as we go through the fourth quarter into the first quarter 2021, but all the reasonability sets and we have done have indicated that or.
You know or reserve, which is about $70 million out of the 179 million of overall loss reserves is adequate when it comes to the delinquency rate links to raise the point in time rates. So we could see than legacy rates were to edge up towards 25 to 30 basis points, but that's because all the deferrals or indeed any similar time.
Great and then you'll see that unwind over the course of 2021. So we would expect to doing sea ray to build but having said that you know we think that the provision that we provided is more than adequate to cover those doing sees when they do occur.
Understood and that I'd be in our reserving are you looking forward sort of.
I've got one to six month lag it's out how you're trying to you know forecast how much he was really looking beyond that.
Well as we noted previously we expect the I'd be in our reserve to build so its bills from the second whereas the third quarter, we would still expect it to build through the fourth quarter. The expectation is most of the reported delinquencies should be received as we go through the first quarter and second quarter next year. So we'll continue to build through the end of this year and likely into the first.
Your next year, and then begin to diminish thereafter as the doing C population is realized and we resolve those delinquencies.
Okay understood and my last question if I could is just.
Yeah, It looks like a bird as the the calls are these cells and delinquencies are showing up but what is your view on that and the tone or condo market in terms of portfolio risk given we're seeing some increased listings in that area, where rents are seeing some downward pressure.
Yeah Graham absolutely that's an area that we are watching closely its always been a special product type we've underwritten condos and this is the exact scenario, where you worry about where you might have more investors looking to sell assets or investment.
Rents are under pressure as you noted so I would say likely we've always taken a careful stands to this.
And our exposure to condominiums as measured but that said its an area that we'll continue to watch closely because in any pockets of the housing market today, that's one area that we'll see some pressure.
That Tiffany thank you.
And our final question.
So.
Please go ahead.
Yeah. Thanks, I just want to dig in on the 6%, though deferrals Romanian are you able to give us a little more color as to perhaps and when those deferrals came and how much time is left on the on your deferral program.
Are there any second deferrals ours to fall extensions acquitted to that number.
Jay Mr. here I would say that you know those stole represent most of the initial deferrals that took place obviously I love the big banks did six months out the gays and as you know people started to really take up the deferral program over the months of April may so those those are likely still.
At a month or so to go and we should see them come to the end of the deferral within the next quarter.
At this point that would be none of those that would have had a second differ already as they no longer allow to extend that so.
This would just be the remaining cohort if you will from a predominantly those I've got six months initially.
Okay, and and that the the ones that have come off and they come off and.
Turning to normally a normal regular regular scheduled payments or has there been other forms of walk out related to the default so I'm off.
Well that remains to be seen so the ones you know that the drop represents those who have come to the end of that payment deferral arrangement.
As to whether they are now paying that mortgage or in the process of being a worked out what they lend or through one of the strategies and our playbook remains to be seen we will get a reporting on delinquencies. Obviously as we go forward here and we'll get a better picture on that but there is certainly some risk that those who have come to the end may not have that be able to make there.
Most payments these are not in a way that we're absolutely not saying that every one of those has come off is now making that EM is because we don't have that information yet so that'll be something that becomes clearer to us over the next couple of months.
I see thank you.
And with no further questions.
Mr.
Thank you again for joining US today, we do appreciate your time and this concludes our third quarter 2020 are in school.
And this concludes todays.
Thank you for your participation and you may now.
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