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Executives

Samantha Cheung - VP, IR

Brian Hurley - Chairman & CEO

Philip Mayers - CFO

Stuart Levings - COO

Craig Sweeney - CRO

Analysts

Geoff Kwan - RBC Capital Markets

Christopher Giovanni - Goldman Sachs

Paul Holden - CIBC World Markets

Evan Minsky - Canaccord Genuity

Tom Mackinnon - BMO Capital

Genworth MI Canada, Inc. (OTC:GMICF) Q2 2014 Earnings Call July 30, 2014 10:00 AM ET

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Genworth MI Canada, Inc. 2014 Second 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 second quarter 2014 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. We will start with our prepared remarks followed by an open Q&A session.

Our news release including our management discussion and analysis, the financial statements and financial supplements were released late yesterday 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 there for approximately 45 days following today.

As a reminder, our presentation and discussion today contains a disclaimer on forward-looking statements and non-IFRS statements on disclosure. We note that our actual results may differ from statements which we make, which are forward looking. We advise you to read these cautionary notes regarding these forward-looking statements. As well, some of the financial metrics presented on this call today 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 would now like to turn the floor over to Brian to begin his remarks. Brian?

Brian Hurley

Thanks, Samantha. And good morning again. Continuing our consistent financial performance, the second quarter was another strong quarter for us.

Our net operating income was $99 million, up $11 million or 12% from the same quarter last year. The top-line was strong. Our premiums written were $160 million, $23 million or 17% higher than the same quarter last year. And in addition, our loss performance continued to be favorable driving increased profitability this quarter. All these elements combined for a second quarter earnings per share $1.04, up 17% from the prior year. And overall, these results help drive our ROE at one point to 13%.

We're quite pleased with our second quarter performance. But as they say, it's all in the detail. And it's the details of the quarter that were particularly rewarding. In fact, we felt positive momentum on all our key line items. We had a balance mix of business with some solid progress on core, high loan-to-value market penetration. And we executed some key strategic portfolio insurance transactions. We made progress with our customers, keeping long-term relationships and winning with newer partners and opportunities.

We kept our eye on insurance quality improving the profile of or risk in force. We continued our loss mitigation efforts, favorably impacting our claims and loss performance. And we drove productivity, effectively managing our expenses in a period of high volume.

I can go on, but the point I'm trying to make is that it's not just one line item, such as low losses driving our results. We have good momentum across the board and delivered improving results across every key metric. And you'll view a more granular view of these areas on this call today.

It's encouraging for us to deliver these strong financial results, especially in the balanced manner I just discussed. And when we look at the economic and market backdrop that influences our business, we believe we will continue to support our consistent performance.

As you heard a few weeks back, the interest rate environment is stable and looks to stay that way for a while. And when interest rates do increase, we anticipate a gradual movement rather than a rapid one and this will help to market adapt and absorb any change in an orderly way.

The economy remained solid with unemployment continuing to be stable. And the housing market is performing well with overall home price appreciation in our expected range in most areas and some appropriate cooling occurring in others.

Our borrower profile is very solid, predominantly made up of first-time home buyers. Our insured borrowers are buying homes that they can afford and afford to stay in even in times of potential stress. These borrowers are clearly financially savvy and responsible and they are performing quite well from a risk perspective. And in addition, we're feeling the positive effects of the premium increase we implemented on May 1. And this will certainly have a more powerful financial impact in the second half of the year.

So overall, I hope what you are hearing that we feel good. We feel good about our performance, good about our positioning and good about our market.

With that, let me turn it over to Stuart Levings to share some more specific insight in the key aspects of the business. Stuart?

Stuart Levings

Thanks, Brian. We are pleased to see our first quarter momentum continue in the second quarter with strong gains and higher ratio and new insurance written, compared to both the prior quarter and the prior year. The increase reflects a modestly large and higher ratio market together with improved share penetration across the number of key customer accounts.

From a new insurance applications perspective, we were pleased with the volume we saw on the second quarter. Mortgage insurance approvals were up 12% year-over-year, despite the later start to the spring housing market. This together with the premium rate increase should bode well for written premiums.

Gains in market penetration reflects an ongoing efforts to drive an exceptional customer experience across every available touch point, working as business partners across multiple fronts, sales, risk management, treasury and loss mitigation. In addition, we continue to partner with customers on their portfolio insurance needs and remain committed to working with them on niche product ideas and the sharing of pertinent market data.

For the second quarter, we insured a total of $8.2 billion in low loan-to-value mortgages, up $5 billion over the prior quarter. Demand for portfolio insurance fluctuates over time and is driven by individual lender, capital and liquidity needs.

During the quarter, a competitor withdrew a number of products from the market, including insurance on secondary home financing and self-insured borrowers with limited income validation.

Based on our comfort level with both our underwriting expertise and the loss performance of these products together with feedback from our customers, we kept our product offerings unchanged. In supporting our customers with this important albeit small segment of the market, we continue to demonstrate value by providing prudent solutions to their lending needs.

Our customer service strategy includes innovation in both products and services. We continue to build capabilities around this strategy through innovation in our underwriting process, including a recently introduced customer dashboard. This tool provides our underwriters with an expanded sale of transaction data enabling them to enhance the quality of interaction during customer conversations.

As noted on prior calls, the quality of our insurance portfolio continues to improve with an average credit score of 737 for this quarter. At the same time, debt service ratios and average loan amounts remained largely unchanged and well within our expected ranges. This profile reflects our target market of financially prudent first-time homebuyers.

As Brian noted, the macro economy continues to perform well as well. Employment remains relatively stable across most regions of the country. Our home prices continue to appreciate albeit at more moderate levels than before. Overall, we rate the Canadian housing market as balanced with pockets of affordability pressure in single-family detached homes within Toronto and Vancouver.

The strong credit quality, loan and debt servicing attributes of or portfolio together with a stable macroeconomic environment produced another quarter of very low losses as highlighted by Brian.

Delinquencies were down 8% quarter-over-quarter with strong declines in British Columbia, Alberta, and Ontario. This decline, together with improving loss of severities and higher tier rates drove the 12% loss ratio for the quarter.

The problems in Quebec continues to be a watch area for us as employment pressure and a slower housing market impact the ability of borrowers to find new jobs or sell their home. As a result, delinquencies in this area remained elevated relative to the rest of the country.

That said we are comfortable with our underwritten routines and loss mitigation efforts, which helped to mitigate the impact of these economic pressures. And we remained confident in our ability to write prudent business in this province.

In summary, we remained optimistic about our future as we continue to operate in a positive economic environment supported by a balanced housing market and positive consumer attitudes towards home ownership.

Now, I'll turn it over to Phil for an overview of our financial results.

Philip Mayers

Thanks, Stuart. We delivered net operating income of $99 million this quarter, which is our highest level since going public five years ago. This represents a sequential increase of $8 million, which was driven primarily by lower losses in claim and results in 12% loss ratio. In addition, our top-line was strong with premiums written totaling $160 million.

Our high loan to value business contributed $128 million resulting in 17% year-over-year growth. The main first price increase averaged 15% but it had a very limited impact on this quarter's premiums written given the typical 60 to 90 day lag between mortgage insurance approvals and mortgage closing. That said we expect this price increase to contribute between $35 million to $40 million of incremental premiums written in the second half of 2014 as compared to the prior year.

Also, portfolio insurance contributed a further $32 million in premiums written which was $19 million higher than the previous quarter. While volumes vary from quarter to quarter participation portfolio insurance continues to enhance overall lender relationships.

Premiums earned continue to be relatively stable quarter-over-quarter at $141 million. This reflects the single upfront premium model and the related earnings curve that matches premiums earned to loss emergence pattern.

A key driver this quarter were losses on claims at $17 million which were lower by $11 million sequentially. This decrease reflects 8% fewer reported delinquencies and a slightly lower average reserve for delinquency. As Stuart noted, we continue to see fewer delinquencies in Alberta, Ontario and BC given the favorable economic and housing market conditions in these regions.

Expenses were essentially flat quarter-over-quarter $27 million resulted in an expense ratio of 19% which is in line with our target range.

In summary, net underwriting income was strong at $97 million and in investment income excluding realized gains was flat quarter-over-quarter at $42 million. Investments consistently contributed approximately one third of our net operating income and this trend continues. We incurred a one-time $7 million fee related to the early redemption of the debt in the quarter. Given that this is a non-recurrent item it has been excluded from the calculation of net operating income and operating EPS.

Overall net operating income increased by 9% quarter-over-quarter resulted in operating EPS of $1.04. At the end of the second quarter book value per share was $34.17 higher by 10% compared to a year ago. We are pleased with these results and expect 2014 to be another solid year for Genworth Canada.

Now, let me turn to underwriting performance. Our loss ratio has declined in each of the last six quarters and this quarter's loss ratio is exceptionally low at 12%. In the coming quarters our loss ratio may vary depending on housing and economic conditions. Overall, we now expect the full year loss ratio for 2014 in the range of 15% to 25% given the stable economic conditions and the strong credit quality of recent books. Based on these loss trends and the relatively stable premiums earned, we expect strong underwriting performance continue for the remainder of 2014.

Our $5.3 billion investment portfolio is managed to provide a stable income stream. Portfolio consists primarily of investment grade fixed income securities with 3% allocations to equity. The current book yield 3.6% and we have approximately $300 million of fixed income maturities in the second half of 2014. As a result, the low interest environment may marginally pressure the overall portfolio yield in the coming quarters.

We continue to actively manage our investment portfolio to optimize the yield and to diversify risk while maintaining our quality focus. For example, we started to add U.S. floating rate collateralized loan obligations rated single A bonds which currently yield approximately 3%. These returns compare favorably to those of five-year Canadian single A bonds with the added benefit of geographic diversification.

Overall, the investment portfolio is expected to be a solid contributor to net income going forward.

Our capital position continues to be very strong with a minimum capital tax ratio of 230% and holding company cash of $115 million. 2013 OSFI commence working on a new capital framework for mortgage insurance with implementation likely in 2017. For 2015, OSFI has decided to use a modified version of the 2015 MCT that reflects the specific characteristics of mortgage insurance.

The final 2015 MCT guideline is expected to be published in September and the company believes that there will not be a material impact on the calculation of the company's MCT ratio. As well, the company has established an operating whole new target of 220% MCT after a comprehensive review of stress testing results and consultations with OSFI.

Capital in excess to the holding target may be redeployed and, therefore, we expect the transition to operating closer to 220% MCT in the coming quarters. And as usual, we will review all potential uses in capital including organic growth and return on capital alternatives.

In summary, our business fundamentals are solid, a growing top line of premiums written, strong insurance portfolio quality, balance housing market, stable unemployment and strong business execution. Taken together, these fundamentals should continue to translate into forward business performance in the coming quarters.

With that, I will turn it back to Brian.

Brian Hurley

Thanks, Phil. And before wrap up for Q&A I would like to make a few comments outside of our quarterly results. Although we have been operating for 20 years in Canada earlier this month we reached the five year mark as a public company. And as you can imagine, that's a bit milestone for us and a bit of a cross roads for the business. We set out to execute and relentlessly deliver on our promises to the market and then I'd give us pretty good grade there. For example, we delivered over 150% total return from our shareholders since our IPO and this compares quite favorably to total return of 78% to TSX, S&P index experienced over the same period.

We want to retool our approach to risk and have more sophisticated models and feedback mechanisms and there is no doubt we have improved our risk management and our portfolio.

We wanted to raise market awareness about who we are and what we do and to provide insight into how our business model works and on this front I want to thank all of you on this call for taking the time to deeply understand to think of mortgage insurance, for supporting us, help the markets across Canada and for challenging us with thoughtful questions and analytics that only made us better. So we appreciate your support over the last five years. Looking forward to the next decade. And thanks for your time and energy and guidance. And with that, let's go to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Geoff Kwan from RBC Capital. Please go ahead sir.

Geoff Kwan - RBC Capital Markets

Hi, good morning. First question I had was just around the disclosure on the OSFI capital level and I just wanted to get your thoughts on whether or not that changes your view with respect to the potential for further price increase to achieve the ROEs that you are looking for? And then also, similarly, does that impact how you think about dividend growth and share buybacks?

Brian Hurley

Hey, Geoff, it's Brian. We worked out with OSFI and we worked hard stressing our portfolio, as Philip described, and this is the level that we are comfortable at the new level of 220.

And no, I do not think it's going to impact any of those elements you describe. It's a matter of fact it gives us some more capital flexibility as we are going to operate close into the 220 level. And as Phil mentioned, we will look at alternatives such as deploying within the business or returning of capital whatever mechanism that may be and we are evaluating those right now. It shouldn’t hurt our flexibility in any of those areas.

So I would perceive this is good news. It's an interim step; we worked hard internally stressing out models. We worked hard in dialog with OSFI to come up with a level that we are comfortable with. It's an interim level. Our hope is that it's going to continue to move down and give us even more flexibility in the future but, right now, it's the bright line which we haven't had for a while.

Geoff Kwan - RBC Capital Markets

Thanks. And then the second question I had was you were talking about housing affordability in Toronto on the single family side. And I was just curious from your perspective, when you take a look at a market like Vancouver I mean the general view is housing affordability is much worse in Vancouver than it is in Toronto. Is there an argument to be made that given Vancouverites have dealt with housing unaffordability for such a long time that may be Toronto relatively historical may be at high levels but might be able to support a higher level of housing affordability or worsening housing affordability versus Toronto's historical metrics.

Brian Hurley

I'll let Stuart Levings take that one, Geoff.

Stuart Levings

Yes, thanks. Geoff, I think for the last – first of all, just as a reminder we really don't see a lot of that kind of business in our portfolio only because first time homebuyers are typically buying those single family detached in Toronto. That said, I think there is some element of truth what you're saying and that there is a level of accommodation that eventually commence with the level of prices we see today.

The question really becomes what happens as interest rate starts to increase? Does that put more pressure on the affordability and that slows the demand a little bit. Probably it wouldn’t be a bad thing for that market to see a little bit of that come up in the future, but again at something we watch but we know that it doesn’t have a direct impact on our portfolio or our market.

Operator

Your next question comes from the line of Christopher Giovanni from Goldman Sachs. Please go ahead, sir.

Christopher Giovanni - Goldman Sachs

Thanks so much. Good morning. Brian, just following up on the capital question, you in the past you held sort of buffers against both internal and regulatory capital targets. Was that just because of the uncertainty and now that you have a little bit more definitive requirement at least for the next few years that we should think that you will run sort of on top of that $220 million or would you think may be there still would be a bit of a buffer?

Brian Hurley

Yes, Chris, you recollection and your observation is spot on. We are running a little bit north of our MCT targets just because weren't sure where the regulator was comfortable. And truthfully, we finished our exhaustive stress testing. So this $220 million is, I'd say, at the level that we will be operating very close to. We probably won't shave it down to the wire, but not too far out. So this is what we will for an interim level as we can get our capital organized over the next quarter or so.

Christopher Giovanni - Goldman Sachs

Okay. And then in the past you have talked about using the low LTV business capacities negotiating factor to pick up some share in your core markets. Wondering has this lead to some incremental client relationships anyway to quantify maybe the share you picked up, and then along those lines current thinking on how the government is kind of one Q amendment to the low LTV market could play out?

Brian Hurley

Yes, if you look at our quarter we have been quite active in that market. I will let Stuart Levings to give us some insight on the customer translation.

Stuart Levings

Yes, Chris, as noted in the prepared comments I think the share gain over the last year is really a combination of a number of things, predominantly our ongoing servicing on the flow side or high ratio side the commitment to customer experience there. But no doubt our partnering with them on portfolio insurance does help to move the needle and it's the combined effect of all those things that make us the valuable partner that we are.

Regarding the changes in the legislation, again, nothing in that has come out yet. We're still waiting to see what might come from that. At this point, we expect it might be something between now and the end of the year and that remain to be seen how that impacts the demand for both going forward.

Christopher Giovanni - Goldman Sachs

And Stuart, are those in terms of the low LTV combined with the high, are those new customers are those incremental just kind of building out of existing relationships?

Stuart Levings

It's absolutely the latter. We pretty much deal with all customers in the market today and it's really building out those relationships further.

Christopher Giovanni - Goldman Sachs

Thanks so much.

Operator

And your next question comes from the line of Paul Holden from CIBC. Please go ahead, sir.

Paul Holden - CIBC World Markets

Thank you, good morning. I will continue with the pattern and ask a couple of questions on capital requirements at the start. So Brian, when you say it's an interim level, I'm assuming that's an interim level until the MCT framework is completely rebuilt. And do we have an estimated time line for that new framework?

Brian Hurley

Hey Paul, it's an interim level that I am hoping and very optimistic that we can continue to reevaluate. I mean, a lot has changed to when this level was established. Pricing is a good example which is a big impact on the business and there is other things going on the market place could change this thing. So our hope and our dialog with the regular is we can wait to have long periods of time before we revisit this level. We need to do it sooner versus later. So I am hoping this is a regular rhythm and process we are going to have.

And secondly, I think that the final MCT rules won't be here for a while. So that sort of emphasis the importance of keeping up the dialog and in keeping up the analytics in the business to see if we can get this down to a more reasonable level in the short term, not the long term.

Paul Holden - CIBC World Markets

Okay. And I guess so the driver of any potential change on the operating target would be the results of your stress testing?

Brian Hurley

Stress testing I think is the principal driver and we have been exhaustive here. National regional, sub-regional, looking at heads, what's happened in market A, B, C round the globe and why would it translate to here in Canada. So the good news is comforting and that it justifies and supports our capital level. The good news we got pretty good at it. So when we do new iterations it does not slow down the business too much but that's the driver it is to making sure that we got it and making sure that we have our arms around any stress that could impact our claims paying ability.

Stuart Levings

And if I might add, Paul, the other related factor is the price increase. Clearly the price increase is going to add more claim paying assets without added risk. So as we run stress testing in the future one would expect that for the similar risk we would show that a larger proportion of the stress losses would be funded by premiums and hence, therefore, a lower need for capital. So clearly, that would be one of the key factors that we consider as we move forward.

Paul Holden - CIBC World Markets

Right, okay. And that will obviously just work its way in over time. My other question on the capital requirement and the rate increase, was the 15% average rate increase in consideration of a 190% target ratio or in consideration of a 220%?

Philip Mayers

Well, I would say that if you remember the price increases led by the government sector player and their stated holding target is 200%. So while we are not necessarily the price maker in the marketplace, clearly the overall level of capital is reflected in the price. So we continue to do our analysis to see what long-term returns look like at 220%, and we would expect that overtime the industry in general, will reevaluate capital levels and pricing will follow suit.

Brian Hurley

I would say one thing to build on Phil's thought is there is not going to be a long lake before revisiting capital in this industry. There is going to be a very regular rhythm only because of the capital changed so much, there is lot of catching up to do possibly and we want to see the big gap like we saw over the last many years.

Paul Holden - CIBC World Markets

Okay. One final question on this topic. Do you know if CMHC has already gone through the same stress testing as you had to go through, i.e., is that 200% for CMHC based on their own internal stress tests? Any idea?

Brian Hurley

The regulators keep it pretty close to the vest, Paul. We know what our stresses were and what our requirements are. I'm sure they're making the rounds. So we don't have a status.

Paul Holden - CIBC World Markets

Okay, okay. And then one last question on premiums written. If we assume sort of a similar volume increase in Q2, which was roughly 15%, plus the full impact of the 15% rate increase in Q3, if we take those two together, I mean we get to an implied growth rate of somewhere around 30% in Q3. Is that a fair way to look at it?

Philip Mayers

I think Paul clearly the price increase will play out in the third quarter. We don't provide forward-looking on -- in terms of overall volume. I mean, Stuart, in his note did comment that mortgage insurance approvals are 12% and we will leave it at that.

Operator

Your next question comes from the line of Evan Minsky from Canaccord Genuity. Please go ahead sir.

Evan Minsky - Canaccord Genuity

Hi, good morning, guys and thanks for taking my questions. Looking at the quarter, the premiums written, on a year-over-year basis, they were up $23 million, $15 million of which relates to higher volumes on the high LTV site. Is it possible for you to break that number down further by market share gains versus general growth in the market?

Brian Hurley

Stuart, you want to take that?

Stuart Levings

Yes, absolutely. Evan, I would say that there was a couple of points up in terms of year-over-year market share. So you would probably say in terms of market size. Market size is up about half, market share up about half, that's how we would look at it right now. And going forward into the third quarter we will have to see what happens. Not every approval translates into a premium written. But we would expect positive results in premium written in the third quarter as well.

Evan Minsky - Canaccord Genuity

Okay. Was there an abnormal deferral of approvals from Q1 that were funded in Q2?

Stuart Levings

There was a little bit, the cold winter as we all experienced definitely pushed people in terms of closings into the second quarter, rather than the first. So we did see that in terms of our sequential quarter-over-quarter premium increase and that was reflected in the comment as well today. But definitely the winter impacted some of the fundings in the first quarter, yes.

Evan Minsky - Canaccord Genuity

Okay. I'm looking at the changes that CMHC has made to their product lineup. Has that impacted your application volume at all?

Stuart Levings

Very little. The premium, at least the product changes where niche products that accounted for very little of the overall market volume. We have seen a very slight pickup in those products of course but nothing in meaningful given the overall impact on the market size.

Brian Hurley

In terms of those products, Evan, we the first thing we do is talk to our customers. And there were still in need for those products. So that was one of our first data points to be a full service provider, and secondly, we are on internal data. These products have performed very well for us and they still continue to perform very well for us so with some rationale there for us to continue offering these to the markets.

Evan Minsky - Canaccord Genuity

Okay. And last question, looking at the loss ratio guidance for the year, given that in the first half the loss ratio came in around 16%, are there any factors that you're concerned with that may lead to a deterioration relative to the first half?

Philip Mayers

Well, I think our year-to-date loss ratio is 16% as we standout for six months. And clearly there is always a potential for regional variation based on weather, its regional economic scenarios. So I think we've provided a broad range. What we're seeing from a quality of business is very strong portfolio quality. So we don’t necessarily see any change on the quality side, but there is substantial for some regional variation. And as well, I mean, we certainly saw very strong performance in the first half, 12% with an exceptional loss ratio. And it's not something that one would expect to persist for long periods of time.

Operator

(Operator Instructions)

Your next question will come from the line of Tom Mackinnon from BMO Capital. Please go ahead.

Tom Mackinnon - BMO Capital

Yes, thank you very much. I guess just one more question on this capital issue here. If you can just kind of take us through some of the discussions that you may have had with OSFI? And as result of looking at some of your stress test, why you end up moving the internal capital, your target up from $185 million to $220 million? And over what timeframe do you think just Brain that this might actually come -- move down over time. So are to assume that this $220 million is a conservative stance for now that might actually end up coming down a little bit? And I have one more follow-up.

Philip Mayers

Tom, its Phil. So I think the first thing to note is our internal target is still $185 million. The holding target is distinct from the internal target. The $220 million is essentially there to say you can mange to a $220 million level so that there is a appropriate buffer between your internal target so that if there were any economic shock you could still continue to operate without being in danger or breaching your $185 million. So that's really the differential between the two.

The second part of the question in terms of how often will we review it, clearly, we believe that with the improved quality of the recent books of business along with the price increase that internal substantially influence stress testing results on a go forward basis as older books of business with not a strong credit profile age. So therefore, we would see a review at least annually, perhaps more frequent than that.

Tom Mackinnon - BMO Capital

Okay. And as a follow-up, Phil, it looks like the required capital doesn't really -- haven't' really moved much over the last six months. What's driving that? And then, how much MCT points do you think you actually pickup each year over a sort of an -- under these new -- under this capital test assuming the loss ratios kind of remain somewhat kind of where they've been over the last year and a half?

Philip Mayers

Well, first part of the question. The required capital hasn't changed materially because we have the older books of business that are aging. And therefore, there are -- the capital is reduced in the older books of business and the newer books of business is just consuming that capital. Having said that, as we continue to see the top-line grow, we will see the capital required increase in coming quarters. Basically, as Stuart mentioned, with our strong year-over-year growth rates and approvals that will translate into higher required capital over time.

The second part of the question as it relates to what do we generate. If you look at our quarterly earnings and you analyze them, essentially we are reducing the capital in the insurance company by approximately $200 million on an annual basis just through regular dividends from the operating company and those were being used to fund the public company dividend and interest expense and operating expenses. So net-net we are probably adding somewhere between $150 million to $200 of additional capital available in the operating company. That would translate roughly into 10 to 15 points of MCT on an annualized basis. Now, having said that, as we look to grow some of that will be utilized for organic growth.

Tom Mackinnon - BMO Capital

Okay. So over next couple of years we could certainly see this MCT drift 20 points higher?

Philip Mayers

It could. But I think in our comments we certainly noted that the intention would be to operate closer to the 220.

Tom Mackinnon - BMO Capital

Okay.

Philip Mayers

And not necessarily allow it to drift.

Brian Hurley

What it does, Tom, really give us some available capital to deploy for organic growth or return of capital as we continue to operate towards that 220 on an interim basis and at capital build. So we see this flexibility.

Tom Mackinnon - BMO Capital

And that 10 to 15 points, was that after the dividend, after paying the dividend?

Philip Mayers

That would be generally after paying the dividend Tom.

Tom Mackinnon - BMO Capital

Okay. So this is additional capital even after the dividend that you could use to fund growth or whatever?

Philip Mayers

Yes, in time. And if you look at our history in last two years where we've gone 2013 we started the year at 218 and we're not at 230. So now the thing to remember is as we move into 2015 MCT there are some changes required capital in 2015 as it relates to items like your holdings in equity and layer for operational risk. So you also have to consider the potential impact of regulatory changes how it might impact required capital on a go forward basis.

Tom Mackinnon - BMO Capital

And what is your best guess at those, the impact that those items might have?

Philip Mayers

Well, we don’t anticipate that they will be material given or predominance where investment portfolio being in fixed income, but clearly as we continue to reassess our investment portfolio if we choose to increase our equity back to the 5% or 6% we're at before that will absorb higher required capital.

Brian Hurley

Tom, getting back to the initial part of your question is as we see our portfolio perform extremely well and nothing on arising to give us too much of a bump there as we impact of pricing flow through, we're hopeful that these translates to a more favorable level of capital, not a more onerous level of capital.

Operator

And your next question Mr. Paul Holden from CIBC. Please go ahead, sir.

Paul Holden - CIBC World Markets

Thank you. I have one sort of follow up question. I mean, you mentioned that loss ratios aren’t expected to stay at 12% I don’t think anyone would expect them to say that low. So have you given any contemplation to say, trying to smooth the earnings by using sort of a general reserve type account so that you don’t get as big a swings in a last ratio and earnings? I know you use specific provisioning today but to be given any contemplation to building results for future periods?

Philip Mayers

Paul, its Phil. I think with the sort of Canadian IFRS accounting for mortgage insurance there is not that concept of general reserve. We provide for our best estimate of losses related to doing things that have occurred. So we don’t provide loss results for future delinquency. So I would not anticipate the use of a general reserve. It's just not consistent with our accounting policy.

Paul Holden - CIBC World Markets

Okay. So, you don’t have the flexibility you do that?

Philip Mayers

No.

Operator

Since there are no further questions, this concludes today's conference call. Thank you for your participation in Genworth MI Canada, Inc. 2014 second quarter earnings conference call. You may now disconnect.

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Source: Genworth MI Canada's (GMICF) CEO Brian Hurley on Q2 2014 Results - Earnings Call Transcript
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