Philip Mayers, CFO June 12, 2014

Genworth MI Canada Inc.

Mortgage Market Highlights
Mortgage Market

1.23 trillion of outstanding mortgages

68% home ownership rate
60% of all mortgages are insured against borrower default

Mortgage Insurance Industry

CMHC Crown Corporation

Private Mortgage Insurers with 90% government guarantee
o Genworth TSX Listed
o Canada Guaranty

Mortgage Defaults Driven By Inability to Pay not Unwillingness

1990 to 2015
% in arrears looks like a normal distribution (skewed to the right)
Employment rate looks like a normal distribution (skewed to the left)
Negatively correlated with each other
Fundamentally the risk that we are predicting is that Canadians will keep their jobs
If Canadians lose their jobs, we can potentially lose money

Genworth Canada Summary (as of Dec, 31, 2013)

MIC
3.6 billion market capitalization
Current debt 12%
Total assets 5.7 billion
Shareholder's equity 3.1 billion
Minimum capital test ratio 229%
Well-established relationships with mortgage lenders and originators across CAN
o Strong market presence
Innovative and customized service and technology
o Service excellence
Rigorous and detail-oriented RM framework
o Prudent risk management
Proprietary mortgage scoring and underwriting model
o Proprietary underwriting
Extensive asset management and homeowner assistance programs
o Proactive loss mitigation
Fundamental risk taken is based on the economy
How do you protect yourself against these risk?
What are the drivers behind people not being able to pay their mortgages?

Philip Mayers, CFO June 12, 2014

o

Things to think about:

What type of history does the person have with their credit?
Credit history
Get data from all the lenders rate how good you are at repaying banks
Credit score predicts the probability of you repaying your obligations
Do they have an above average probability of repaying? Or below average?
Can they afford it? (think about typical Canadians banks will allow you to
borrow if no more than 40% of your income goes towards paying back any form
of debt)
If it's more than 40% of your income, it's more than likely you may not
be able to pay back

What is Mortgage Insurance?

Mandatory for federally regulated lenders on high-ratio mortgages (<20% down payment)
We insure 100% of mortgage for lender
Lender purchases mortgage insurance and borrower reimburses lender for the cost
Premiums normally added to borrowed amount and paid over length of the mortgage
Upfront premium initially deferred and recognized into revenues based on loss emergence

pattern (primarily over first 5 years)

Lenders required to report 90 day delinquencies monthly
MIC actively engages in loss mitigation (workouts, sale of real estate)
Price isn't really the tool you use frequently there's a lot of risk in playing a price strategy
o i.e. I lower price competitors lower price, but if I increase price uncertain if

competition will do the same

o You play more of a service strategy
o If I can't change price often, I can still differentiate myself through the service I provide
Differentiate my offering from that of a lender
Most borrowers in Canada, put down the minimum down payment
o Genworth will charge premium to that amount
o When things do go bad how big of a loss do I suffer?
Real estate will always have a residual value
Pay lender any loss of value, legal fees, real estate fees and taxes
Reality is in Canada, the average CAN cannot afford the house
Important thing how do we insure we maintain standards so people don't stretch too far?

Stakeholders

Lenders
o Claim paying ability
o Regulatory capital
o Service levels/product availability
Canadian Public
o Headliners

Philip Mayers, CFO June 12, 2014

o Access to homeownership
o Housing affordability
o Housing market stability
Federal Government
o Safety & soundness of financial institutions
o Housing market stability
o Access to homeownership
o They compete against the government
o In case of Genworth's insolvency
Government pay 90% of Genworth's debt to investors
That's why they're a great stakeholder
Mortgages are the largest component of loans of a bank's balance sheet
Regulator
o Safety & soundness of financial institutions
o Strong claim paying ability
o Large part of Philip's role work externally with regulators and investors to educate
and influence
Rating Agencies
o Strong claim paying ability

How We Make Money

Premiums
o Market forces pricing (price taker), housing activity
o Core competencies customer service, sales & marketing
Losses on claims
o Market forces macroeconomic factors, unemployment, housing prices
o Core competencies RM, underwriting, portfolio analytics
Expenses
o Core competencies process automation
Underwriting income
Investment income
o Market forces financial markets
Where is the risk in our insurance business?
o Trying to make RM position to have a balanced portfolio
Don't have problem with asset part/liability part of BS

Performance Drivers

Unemployment is forecasted to be rather flat

o Positive
Home prices
o Increasing
o Positive
US example:

Philip Mayers, CFO June 12, 2014

o Unemployment doubled (rate spiked)

o Home prices dropped 30%
o Delinquencies rose to 18%
o Mortgage insurers lost ~ 15 billion
Competition meant that everyone went away growth
o Reduce price to provide incentives
Big banks
Market share is not always a good measure of future profitability
o In insurance business, when you are gaining market share it's because:
Lower prices
Uncompetitive incentives

Delivering Value Beyond Mortgage Insurance

Customer segments
o Big 6 banks
o Regional lenders
o Mortgage banks
o Credit unions
Key lender stakeholders
o Branches, specialists, underwriting centres
o Mortgage business line
o Risk and treasury
o C-suite
Genworth team support
o Underwriting
o Operations
o Sales
o Risk
o Senior leadership
Value proposition is the same how does each function interact with the bank?
o Core business operation based on analytics

How do we Manage Risk

Identify and assess key performance risks

o Macro-economic environment
o Housing market trends
o Regional risk factors
Manage and control quality of new business
o Underwriting guidelines/policy
o Risk limits and triggers
o Robust quality assurance
Monitor and communicate on portfolio performance
o Portfolio analytics

Philip Mayers, CFO June 12, 2014

o Identifying emerging loss trends

o Dynamic underwriting policies
Using understanding of drivers to adjust to the future context you'll be facing

Strong Insurance Portfolio Quality

Credit above 680 above average borrower

Monitors home prices if something goes up rapidly, it usually goes down rapidly
o Making sure there's no bubbles
Asset prices that are above their fundamental level
Are the prices sustainable
Factors such as low interest rate and inflation
o Looking at someone's obligation relative to their income
Look at all those metrics and look at finance skill set
o Finance person can understand driver and participate

Investment Management

Have diversified portfolio

Focusing on investment quality
Corporate debentures/bonds
o Higher yields
Trying to monitor the risks
o Looking at economic sectors
Profit driven by deep understanding of drivers

Strong Balance Sheet

Unearned premiums deferred revenue that will be profits

Strong Capital

Balancing 3 elements
o Capital strength how good of a balance sheet
o Capital efficiency
o Capital flexibility
To have strong capital

Keys to Success

Stable housing and mortgage markets

Well-established relationships with mortgage lenders
Prudent risk management