Genworth MI Canada's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 5.14 | About: Genworth MI (GMICF)

Genworth MI Canada Inc. (OTC:GMICF) Q4 2013 Earnings Call February 5, 2014 10:00 AM ET

Executives

Brian Hurley - Chairman, Chief Executive Officer

Stuart Levings - Senior Vice President, Chief Operating Officer

Philip Mayers - Senior Vice President and Chief Financial Officer

Craig Sweeney - Senior Vice President, Chief Risk Officer

Samantha Cheung - Vice President, Investor Relations

Analysts

Tom Mackinnon - BMO Capital Markets

Shubha Khan - National Bank Financial

Paul Holden - CIBC World Markets

Phil Hardie - Scotia Capital

Evan Minsky - Canaccord Genuity

Geoffrey Kwan - RBC Capital Markets

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Genworth MI Canada, Inc. 2013 fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. (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

Good morning, everyone, and welcome to our fourth quarter and 2013 year-end earnings conference call. Joining me today are Brian Hurley, our Chairman and CEO; Philip Mayers, our CFO; Stuart Levings, our Chief Operating Officer; and Craig Sweeney, our Chief Risk Officer. Brian will give his view on our performance from the full year perspective and Phil will provide detail into the financial results related to the quarter and Brian will wrap up with a review of our strategic priorities. We will start with our prepared remarks followed by an open Q&A session.

Our news release including our review on performance, the financial statements and financial supplements were released last night and are now posted on our website at www.genworth.ca. A link to a 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 these cautionary notes. As well some of the financial metrics presented on today's call are non-IFRS measures and as such do not have standardized meanings and are unlikely to be comparable to similar measures by other companies.

I will now like to turn the call over to Brian to begin his remarks. Brian?

Brian Hurley

Thanks, Samantha, and thank you all again for joining the call. This morning I am going to walk you through some key financial highlights from our full year performance in 2013. In addition, I will share our perspectives on the housing market, including first time home buyers trends and the impact those trends have on our business. Phil will then walk us through a deeper dive on the fourth quarter results and we will wrap up and cover our strategic priorities for the year and highlight precisely what we will be focusing on.

But first of all I would like to say that we are pleased with our strong performance in 2013. Not only did we deliver some solid financial results, but we positioned the business well for continued success in 2014. Last year we earned net operating income of $349 million, up about 3% over adjusted net income in 2012. This generated a strong return on equity of 12% and diluted earnings per share of $3.60. The EPS performance represented an increase of 5% over 2012. We insured 70,000 mortgage loans across Canada in 2013 resulting in $20 billion in new insurance written. We saw 6% growth in book value per share and we continued to pay attractive dividend to our shareholders. We have increased our dividend in each of the last four years to $1.31 per share in 2013.

For us, continuing to build shareholder value is always a key focus. While regulatory changes have reduced the high loan to value premium opportunity, the quality of loans we insure has improved. This continued to have a positive impact on our loss performance. And when it comes to recent book performance, we are encouraged with our outlook and how we expect those books to develop. Of particular note, we saw a significant improvement in our loss ratio in 2013, down from 33% to 25% year-over-year. Strong borrower quality and stable economic conditions across most regions are the main factors that drove this improvement.

Aside from loss performance another important contributor to our profitability is our investment strategy. We have generated steady income from our investment portfolio by effectively balancing quality with yield. In addition to those dynamics, our solid capital position gives us the confidence and flexibility to capitalize on opportunities. A good illustration of this was the execution of a normal course issuer bid last year during which we opportunistically repurchased $105 million in shares at market prices. This strategy had a positive impact on our earnings per share and was received well by the market.

Another example of capital utilization and building out our skill set was the execution of a small reinsurance transaction in the fourth quarter. We did this with our PMI license that we acquired in 2012. While this transaction was not financial material either from a capital utilization or profitability perspective, we fell that it leveraged existing skills and maybe an important step towards diversifying our revenue stream and risk going forward. The degree of success this transaction has will help us guide us on the future potential of our broader strategy in this regard.

Turning to the housing market. Canada's housing market performed well in 2013 and we expected to remain stable through 2014. The market remains balance with flat originations and with some marginal price gains in a few markets, and all this is supported by strong fundamentals, stable unemployment levels and modest increases in mortgage interest rates. More importantly, we do not expect any significant changes to these key market drivers in 2014. We continue to monitor select regional markets that are on our watch list. These areas include Toronto condominiums and the Quebec region as a whole. And although performing well, we will continue to enhance our metrics and apply additional risk and underwriting rigor to these two markets.

Together with our focused business execution, we expect stable market dynamics to be a solid foundation for us going forward. And as you can appreciate, when it comes to home prices and unemployment, stable is good for our business. On a related note, it's clear that the government policy and regulatory oversight have a significant impact on the housing and mortgage market. We believe it's important that we participate in shaping the regulatory and legislative environment. And as such, we remain active in discussions related to potential changes for the industry.

Our view is that the regulatory changes implemented today have been positively [ph] increasing the safety and soundness of the market. And more importantly for us, there seem to be some market consensus that no further changes are needed with respect to our targeted demographic, the first time home buyer. This view is supported by our borrowers profile. Our fundamental goal is to make home ownership more accessible to qualified first time home buyers. The overall results are evident by the improvement in our portfolio quality. In fact over the last few years, we have seen a 13 point increase in the average credit scores of our insured borrowers.

Also worth noting is that the average home price of a Genworth insured mortgage is consistently below the national average. This keeps us more insulated from some price fluctuations we have seen historically in more volatile high-end properties. In addition, the gross debt ratios of our insured borrowers remain stable and significantly lower than the national average. This profile not only further supports our position that the market we serve is performing well but also demonstrates that the first time home buyers are financially responsible and well positioned to take on the level of mortgage debt we insure.

These factors are reflected in our delinquency rates which continue to decline. The number of delinquencies in our books are down by 15% from 2012. As you know closely monitoring our delinquencies is critical, not only are they a key indicator of our business quality but they also give us helpful insights into specific regional trends, performance and potential actions. Our delinquency trends continue to be positive and while we experienced a modest increase in fourth quarter delinquencies due to typical seasonality, total delinquencies decreased by 15% year-over-year, driven by a 35% decline in Alberta.

With the outlook for soft landing for housing and flat unemployment, we expect that delinquencies should be flat to modestly lower as we move into 2014. To summarize, looking forward to the remainder of the year, we expect to see modest growth in premiums written and strong underwriting results driving another year of solid loss performance. I will now turn over to Phil who will provide a more detailed look at our quarterly financial results and share his views on our performance. Phil?

Philip Mayers

This quarter's financial results continued to highlight our strong loss performance underpinned by a quality insurance portfolio. We delivered net operating income of $85 million in the fourth quarter, primarily driven by the relatively low loss ratio of 22%. That said, net operating income was $6 million lower quarter-over-quarter as marginally lower losses and claims were offset by higher expenses.

Net premiums written were $129 million with $119 million coming from high loan-to-value business. While high loan-to-value premiums were lower by 17% quarter-over-quarter due to typical seasonality, they were 15% higher year-over-year. This increase reflected normalization of the high loan-to-value market size following the government changes in 2012. Portfolio insurance and low loan-to-value mortgages contributed a further $11 million in premiums written. Lower by $17 million sequentially. This reflects lower demand which fluctuates based on the needs of lenders.

Premiums earned were essentially flat at $142 million quarter-over-quarter and we ended 2013 with unearned premiums of $1.7 billion. Losses on claims were marginally lower by $1 million sequentially at $31 million. In line with typical seasonality, the number of reported delinquencies rose modestly by 50 cases. This was offset by a favorable shift in geographic book year mix along with an ongoing success of our loss mitigation programs. These factors resulted in a 5% reduction in the average reserve to delinquency. Expenses this quarter were $33 million, representing a $6 million in quarter-over-quarter. The strong share price performance in the fourth quarter resulted in a higher share-based compensation expense. That said, the run rate for other expenses was generally in line with the prior quarter.

The net result was underwriting income of $78 million, lower by $6 million sequentially but higher year-over-year by $6 million. We are focused on maintaining a high quality investment portfolio and total investment income excluding net gains was $44 million, essentially flat to the prior quarter. We also earned $11 million in net gains primarily from our equity holdings. Overall, net operating income of $85 million translates into operating EPS of $0.90, which was lower by $0.04 sequentially and flat year-over-year.

Turning to premiums written. On a positive note, high loan-to-value premiums in the fourth quarter were higher by 16% year-over-year. With the forecast of slightly higher housing resale activity in 2014 we believe that our high loan-to-value volume should also be modestly higher with a potential for further increases from market share growth. We continue to closely monitor the government's proposal to gradually limit the insurance on low loan-to-value mortgages to only those mortgages used in government securitization programs. Currently, the vast majority of portfolio insured mortgages are used in these programs, but this proposed change may results in lower portfolio insurance volumes in 2014 as compared to the $65 million of premiums written in 2013. Further clarification on this is expected before the end of the first quarter.

The trend of strong underwriting performance continued with the 22% loss ratio. This represents a 9 point improvement year-over-year. As Brian noted, the full year loss ratio in 2014 should be around the 25% to 35% range consistent with a stable economic and housing market outlook. That said, delinquencies in the first quarter are typically higher due to seasonality and the regional variation in housing trends and delinquency patterns may also impact the quarterly loss trends.

In total net premiums written for the full year were $512 million with premiums earned declined modestly to $573 million. We expect premiums earned to decline further in 2014 given that the majority of premiums earned will come from the 2010 to 2013 books, which average approximately $550 million in premiums written. As noted earlier, we experienced a higher expense ratio of 23% this quarter. That said, we expect the expense ratio should trend back towards the 19% to 20% range in 2014 consistent with our full year expense ratio of 19% in 2013.

Overall, we are encouraged by business trends. In light of our 2013 combined ratio of 45% and a stable outlook for the housing market, we believe that the future profits embedded in our $1.7 billion of earned premiums will drive solid underwriting results in 2014. As well, we are pleased with the consistent contribution to earnings of our $5.4 billion investment portfolio, which consists primarily of investment grade fixed income securities. We ended 2013 with a 3.7% book yield and unrealized gains of $177 million, both of which were relatively unchanged from the third quarter. The size of our investment portfolio will decline by approximately $200 million in the first quarter as we pay the final income tax installment for accrued taxes resulting from the termination of the government guarantee fund in 2013.

This reduction in portfolio size along with the impact of a low interest rate environment will pressure our investment income in 2014. We continue to look for opportunities to maintain the portfolio's yield around the current level. That said, we intend to maintain our quality focus and be very disciplined in managing our investment portfolio.

Turning to capital. We ended 2014 with a very strong capital position. Our mortgage insurance business is currently self-funding and we grew our minimum capital test ratio by 12 points during the year to 222%. Even with this higher capital level we were able to achieve a 12% return on equity, reflecting the strength of our business model. Furthermore, we also delivered on a number of capital management priorities this year. We completed $105 million in common share buyback and increased the quarterly dividend by 9% in the fourth quarter. As noted previously, OSFI is working a new capital test for mortgage insurers and we are actively participating in this initiative. While originally scheduled to take effect in 2015, implementation may be delayed due to the regulatory process. Until there is further clarity on the potential impact of this new capital test, we will continue to operate above 190% MCT in the near term.

Similar to 2013, our focus for 2014 will continue to be on balancing capital strength and capital efficiency. In conclusion, 2013 was another strong year financially and we are well positioned to deliver a strong performance again in 2014. With that, I will now turn it back to Brian.

Brian Hurley

Thanks, Phil. When we look ahead to 2014 from a high level perspective, our strategy is to focus on our core strengths. To build in those areas that make a difference to our customers and add value to all our stakeholders. But our specific focus areas for the year are to, number one, maintain the high quality of our portfolio through continuing our disciplined underwriting approach. We are going to deepen our customer relationship through better service and more product innovation. And to capitalize on our sales momentum we exit the year with some key wins and we hope to carry that momentum into 2014.

As Phil described, we are going to ensure our capital strength and efficiency by continuing to pursue prudent capital actions. We are going to maintain a positive consulting role with the government and continue to foster and engage a dedicated workforce. And this focus will promote and encourage innovation through our organization and capitalize on our market momentum. In summary, we remain focused on service differentiation, strong profitability and most importantly, building long-lasting shareholder value.

Thanks for listening this morning and with that I will now turn the call back to Samantha for Q&A.

Samantha Cheung

Thank you, Brian. We are now ready to take our questions. Luke, please open up the call for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question today comes from the line of Tom Mackinnon of BMO Capital Markets. Please go ahead.

Tom Mackinnon - BMO Capital Markets

Brian, my question has to do with your statement on the outlook for the loss ratio being in the range of 25% to 35% for 2014. I am wondering what's driving that given that it was 25% in 2013 and trending in the last couple of quarters in the 22% range. Are you seeing -- would it be geographic regions that are driving that increases in delinquencies? I mean it still looks like it's going to be still below your 35% to 40% long-term target. But why you see an increase in 2014 over the levels that you had in 2013?

Brian Hurley

Thanks, Tom. I think there is a couple of things to note. First of all, we are expecting some normal seasonality. Phil described that although it was softer, we didn’t see that pressure in the fourth quarter. First quarter is typically one that we see some pressure on delinquencies and we anticipate that for the first quarter of this year. From a regional perspective, we are seeing some pressure come from Quebec, also, although early. We know about some unemployment pressure in that area. We are seeing some slowing growth for that market place so it's something that we are watching very closely. I would characterize that as potentially evolving but we don’t know enough yet to really revise our estimate that that could be a market that sees some additional delinquency pressure. So those would be the two principal drivers.

Your observation is right there. I mean, our anticipation is we should be well below that 35% range. It's just where is it going to be in that range and that’s why we are keeping it rather broad between 25% and 35% for the moment.

Tom Mackinnon - BMO Capital Markets

Okay. Is there any other areas? I mean you continue to see the benefits from the Alberta book, or should they start being diminished to some extent as that some of those older books of business run off.

Brian Hurley

Yes. You are spot on. We saw Alberta led the charge in 2013 when it came to delinquency improvement. That continues actually. It's a very very well performing region for us now. So I see no other specific geographic areas and as we have discussed, the books from these last three years or so are very very high quality. So we are anticipating them to perform quite well. Just not quite ready to sharpen up that high end of loss ratio.

Operator

Your next question will come from the line of Shubha Khan of National Bank Financial. Please go ahead.

Shubha Khan - National Bank Financial

So just wondering, could you give us some color on the strong growth year-over-year in insurance written on high ratio mortgages? Now Phil suggested that this was a reflection of normalization of mortgage volumes. But you know insurance written was up 15% which appears to be significantly stronger than any of the housing market data would suggest. So I am just wondering whether you get the sense that the growth was more attributable to market share gains than it was to a larger origination market.

Brian Hurley

Yes, Shubha, there is multiple drivers as you mentioned. I will have Phil walk us through a couple of key components there.

Philip Mayers

Shubha, good morning. I think the key element here is to remember that the fourth quarter of 2012 was the softest quarter for MI and that it was unusually soft. So what we are seeing here is a little bit a rebound and part of it relates to the MI penetration rate. I mean MI penetration bottomed in terms of the penetration of the overall housing resale activity. And what we saw in there was more normalization. I mean we got down to, about 27% of all real estate transactions required mortgage insurance. And I think we saw a little bit of a rebound of that as the 2012 changes worked their way through the system and now we are seeing a little bit of a normalization there. So we would characterize it largely as it relates to the market on a year-over-year basis we certainly did have some wins in 2013, but the bigger factor would have been the market size.

Shubha Khan - National Bank Financial

Okay. That’s helpful. Just one another question with respect to capital deployment. So you are sitting at an MCT ratio of 222% at year-end. Would it be fair to expect Genworth to be more active in buying back shares in 2014 whether it's through the NCIB or special buybacks. I know you are exercising a little bit of caution because the MCT framework is being revised, but what sort of buffer do you feel you need to carry ahead of the new framework being put in place.

Brian Hurley

Shubha, it's a bit early to declare that. We are still in the middle of discussions with OSFI, and they are combing over a bunch of different scenarios and a bunch of different data from the industry. So it's going to take a while. And because of that lack of clarity, we are going to be a big cautious there. But we do have a capital plan laid out for 2014. We looked at all our options similar to what we did in 2013 and as we get clarity you will see us leaning towards executing towards that capital plan that we have laid out for the year. But right now we are hoping to get a little bit more insight from OSFI as they refine their perspective.

Shubha Khan - National Bank Financial

So the MCT may well hover well above 200% even though your internal target is 190ish?

Brian Hurley

It could for the short term, yes.

Operator

Your next question will come from the line of Paul Holden of CIBC. Please go ahead.

Paul Holden - CIBC World Markets

So I look at the way the new purchase volume shaped up for 2013, I think it probably exceeded your original expectations quite significantly. So I am wondering what your thoughts are on that. Like why the better than expected strength in housing demand in 2013 and sort of what are the implications for 2014 related to that?

Brian Hurley

Paul, I think you are right. We started with quite a pessimistic outlook only because of those changes that we saw around amortization and around refinances, were having an initial, quite a hard impact on the markets. As the year progressed, we noticed a few things. Number one, some borrowers around the sidelines coming off the sidelines primarily to lock down interest rates. There was some noise throughout the year that interest rates could go up, and when we talked to those borrowers that’s why they were locking in. They were fully qualified, they just got a little bit nervous about some rate movement. So they came off.

And secondly, I think it was more around home prices. Earlier in 2013, there was still some scattered commentary around bubbles. And as people got more comfortable, as people saw home prices slow down but nothing more than slow down, I felt they jumped back into the market. They feel that this is a very good asset to invest in. So as we do our profiling as to what happened and what emerged last year, those are two dynamics that drove a little bit better outlook than we thought. And that does carry through to 2014. I mean we are seeing it already, although it's early in the year, our underwriting center is busy. Similar type of borrower characteristics. So those who were looking to get good rates and those who feel confident that the housing market has stabilized and there could be some home price appreciation down the road.

Paul Holden - CIBC World Markets

Okay. Are you concerned at all that if the market stays on its current path through the spring season, that the federal government could take further action to tighten up the mortgage market?

Brian Hurley

You know there has been an awful lot to the high loan-to-value space and that’s where all the attention has been over the last few years. And as Phil mentioned, I would say a typical component of the market that was above 80% loan-to-value was in the 35% to 40% range, and now that’s trending, went as low as 27% as Phil indicated, now probably around 30%-31%. So our take is, they have done a lot to the high ratio space and as we walk through today in previous quarters, the high ratio component of the market is performing very very well. So I guess, I am windily saying that our view is that there has been enough done to the above 80% space. And if you look to the below 80% component, maybe that’s an area where we could anticipate some changes.

Paul Holden - CIBC World Markets

Okay. And then in terms of the reinsurance contract you entered into in Q4. Interesting to see that pop up and I imagine implications for premiums written are pretty small. But would you say that you have an appetite perhaps to enter into more of these reinsurance agreements, and is there an opportunity to do so in other geographies or with other companies?

Brian Hurley

You know I would characterize that transaction as a smart one for us but a small one. But we went and searched this capacity back in 2012. That was one of the reasons we acquired PMI Canada because it did give us the opportunity to explore reinsurance. This one here, it met our criteria that we were looking for, a risk that we understood, well within our risk appetite and it had market terms in pricing. Acceptable returns and maybe more importantly, it was a very small, bite sized transaction for us to learn. The Australian market where this involved is something that we were quite familiar with but it's a chance for us to get a little bit deeper on reinsurance and make sure we are leveraging our strength there. So wait and see. I think this is a first step, maybe first of many, but it's too early to tell right now.

Paul Holden - CIBC World Markets

Okay. And with the profitability on that contract be, or expected profitability be in the range of what you are underwriting in Canada, so sort of mid-teens ROE?

Brian Hurley

It's going to be a profitable transaction, there is no doubt it. And if you look at the structure, especially at the loss criteria, that would be a very dramatic event in Australia if we didn’t see some profit come out of this relationship.

Paul Holden - CIBC World Markets

Final question from me with respect to premiums earned and how we think about that heading into 2014. So premiums earned has exceeded premiums written in each of the last five years, at some point it was about to, those have to converge. So as we think about 2014, do they converge in 2014 or is that somewhere where it's more of a 2015 type scenario?

Brian Hurley

Yes. Probably, I will have Phil field that one, Paul.

Philip Mayers

Yes. Paul, as I noted in my remarks, the last four books of business have averaged around $550 million of premiums written. And I think you are absolutely right that at some point of time the two have to converge. We certainly have been benefiting from the larger books of business written prior to '08. Having said that, we think that the convergence will continue and I think 2014 will be a key year of that conversion.

Operator

Your next question will come from the line of Phil Hardie of Scotia Bank. Please go ahead.

Phil Hardie - Scotia Capital

A quick question for Phil. Maybe we can just clarify this quickly. Average pay claims and average reserve per delinquent diverged this quarter. Is that again the trend where it's really kind of more reflecting geographical mix or is there something else to that?

Philip Mayers

It certainly is driven by mix. We see in the average reserve per delinquency, we see lower mix coming from Alberta, BC, Ontario, where they have had very strong housing market and as a result you are seeing lower average reserve per del coming from those. And then with the lower mix element also coming from those, it translates into a good performance in average reserve per del. When you look at the claim paid mix, the mix has shifted somewhat there as well, but what we see is really no underlying sort of trends that are worrisome at this point in time. As Brian noted, certainly Quebec is one where on a relative basis the delinquency mix has increased in Quebec, and we will continue to monitor that. But I think if you look at the overall loss ratio, it's really reflected in the improvement in Ontario west, and if anything we continue to watch the Quebec market.

Phil Hardie - Scotia Capital

And then the outlook. Looking into 2014 again I think we touched an earlier question with the loss ratio, I think you expected in the 25% to 35% range, delinquencies likely to be flat to modestly down. So does that suggest the average reserve per delinquency in terms of reserving climbs up or that stays stable, or how does the development look on that side?

Philip Mayers

Well, I think it should stay relatively stable because we expect the mix, now we have seen the improvement in Alberta and BC, we would expect the mix to stay relatively constant. And assuming home prices stay flat to modestly up, that would suggest that the average reserve for dels should be relatively stable.

Phil Hardie - Scotia Capital

Okay. Great. And then maybe if we can just talk a little bit about the seasoning profile of some of the books by vintage. In 2008, still kind of interesting to look at. It still looks like they have the highest delinquency rate. It's now five years out and the younger books certainly seem to be experiencing much, I can say more attractive looking profile. And then on slide five you have got differing credit scores and you talked about the qualities of book, but then there is also the aspect of home price appreciation back over that time period, kind of been a bit of an offset. And maybe you could just talk a little bit about maybe kind of what was unique about 2008, kind of why kind of five years out it still is relatively high and then again more recent books and outlook is going to change?

Brian Hurley

You know if you go back to 2008, Phil, I think the biggest driver to that would be the product mix. That had some more refinance and that was, I would tell you, some of those cash out refinances would typically have some performance challenges. That was before there was a cap on mortgage size of a million dollars. Not that we did a lot in that space but those types of changes were really post-2008. So 2008 was the last year where we had let's say some products that were typically, slightly more risky than the plain vanilla thing that we are seeing now.

Phil Hardie - Scotia Capital

Okay. Great. And then changing the subject a little bit, you mentioned in the commentary as well, focus on actively consulting with the government. Maybe I can just ask, relative to other years, how much time are you spending in dialog with Ottawa these days? And maybe you can just give a little bit of a hint in terms of kind of what area of the industry you feel they are focused on the most these days?

Brian Hurley

You know one thing we have is a lot of history here and one thing that we do quite well as an organization is to comb over our database. That’s primarily our role. It's bringing data to bear from our perspective, helping them validate what they are seeing with the banks, and help them validate some of their assumptions of where they are going. So by active dialog we are trying to show them, I think a good example would be the changes that were made over the last few years have made a big difference. And they are sticking and it's improved the quality. We are also trying to show them that our capital base can support more volume. So we are ready to take on some additional market share if that opportunity comes up. So I would say it's multifaceted and it's ongoing. Truthfully, it's a very regular rhythm. But I would also say that they are wrestling through a lot of big issues there. Some that we are privy to and some that we are not. We just try to reach out and help where possible and see if there is a chance for us to shape their perspective on our part of the industry.

Operator

Your next question will come from the line of Evan Minsky of Canaccord Genuity. Please go ahead.

Evan Minsky - Canaccord Genuity

Just looking at Quebec, you mentioned that it continues to be a watch area. I'm just wondering how you guys have responded there maybe in terms of writing new business?

Brian Hurley

Evan, it hasn’t changed our approach yet. It's a market that’s performs and still performs pretty good. We have seen some unemployment challenges, mostly outside of the Montreal area, on the suburbs around Montreal. And because of that we have seen some pressure on delinquencies. But overall the quality is strong enough that we haven't sharpened up the pen when it comes to underwriting. Maybe a little bit more work when it comes to home appraisals and valuations, but so far it is literally a watch area. And we have a weekly rhythm to keep track of it and we touch base with our field people who are base in Montreal to get there color and flavor, but we haven't taken a more aggressive tack when it comes to underwriting yet.

Evan Minsky - Canaccord Genuity

Okay. I see. Flipping over to maybe the low loan-to-value business. You mentioned there's lower demand in the quarter for portfolio insurance. Can you talk a bit about what you aren't seeing there? Just how it reflects maybe a decline in the non-government programs?

Philip Mayers

It's Phil, Evan. I don’t think it's necessarily a decline in the non-government programs. But if you think about where the demand, how it ebbs and flows across the year. The bank year ends in October, anything that would have been done in the big bank space would have been dealt with more in our third quarter. And really the fourth quarter tends to be lighter in terms of activity. Once again, it really depends a lot on the balance sheet needs lenders. And demand fluctuates greatly. There is consistent demand from the non-banking sector but any spikes or low points in our volumes really reflect the participation in big bank deals on our part.

Evan Minsky - Canaccord Genuity

Okay. Thanks. And then maybe just lastly, can you provide an update on where your market share is in the target market and where you might see it go over the next year or so?

Brian Hurley

Yes. We mentioned, Evan, in the opening comments that we did see some wins there which was encouraging. Those wins came later in the year so we didn’t feel the impact in 2013 as much as we would have liked, but as we have described, it's been a good momentum entering 2014. All that said, I would say our market share is still roughly about a third of the market as best as we can tell, and as you know we get that information from our customers and that’s how we validate it. So there is no real sanction measurement because of some of the reporting issues coming from, out of CMHC. But our best estimate is that we are about a third of the market and hopefully moving that needle this year with some more product innovation and a couple of other customer wins in the works.

Operator

(Operator Instructions) Your next question will come from the line of Geoff Kwan of RBC Capital. Please go ahead.

Geoffrey Kwan - RBC Capital Markets

Just had a couple of questions around the whole reinsurance, I know it's a small part of your business right now. But just kind of expanding on, I think it was Paul's question, if you're able to go with this and it makes sense and you're getting the returns that you're looking for, is this something that you would look to do more maybe with some of the other competitors in Australia, given that scenario that in particular, Brian, you're very familiar with? And would you consider looking at doing this in other countries?

Brian Hurley

Yes, that may be getting ahead of ourselves a little bit, Geoff. I mean, again, we bought the PMI license to give us this opportunity. So have set out pretty specific parameters. If you remember how we approached the bulk market a few years back, we stuck to those parameters around risk. Risk that we understand and well within our risk appetite that we laid out. Market terms and condition was important to us. So this was truly a start. Right now we don’t have any longer view beyond this transaction. We are going to learn from it. We are going to profit from it, which is great. But continue to measure to see if this does have a broader implication for us to expand either in this market or another markets. But the paint is still wet on this one. It's a little early to tell.

Geoffrey Kwan - RBC Capital Markets

Okay. And then just the other question I had was on the regulatory side. Is there any considerations around -- I know that you guys have said that you've put the kind of the $30 million against what your potential liability is. Is that really kind of the main thing there or are there other factors from a regulatory standpoint that we need to consider?

Philip Mayers

Geoff, it's Phil. On that note, the $30 million is sort of our maximum risk exposure. And given that PMI, this is a major transaction with PMI, that $30 million translates into capital. So beyond that there is really no other regulatory implications. And the thing to remember is, PMI is a separate from our core Genworth Mortgage Insurance Company, and therefore there is segregated capital for the Australia risk, separate and apart from our government guarantee business.

Geoffrey Kwan - RBC Capital Markets

Correct. No, that's what I was kind of getting at, is if you guys did more, would that be kind of how you guys would need to approach? In other words, if you did another $30 million, it's just we put another $30 million into PMI subsidiary.

Philip Mayers

That’s absolutely correct. Further transaction require more capital being allocated to the PMI entity.

Operator

And ladies and gentlemen since there are no further questions, this concludes today's conference call. Thank you for your participation in Genworth MI Canada Inc. 2013 fourth quarter earnings conference call. You may now disconnect.

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