Genworth MI Canada Inc. (GMICF) Q2 2015 Earnings Conference Call August 5, 2015 10:00 AM ET
Executives
Lisa Azzuolo - Director of Communications
Stuart Levings - President and Chief Executive Officer
Philip Mayers - Chief Financial Officer
Analysts
Geoff Kwan - RBC Capital Markets
Shubha Khan - National Bank Financial
Paul Holden - CIBC World Markets
Graham Ryding - TD Securities
Operator
Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Genworth MI Canada Inc. 2015 Second Quarter Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today.
I will now turn the conference over to Ms. Lisa Azzuolo, Director of Communications. Ms. Azzuolo, you may proceed.
Lisa Azzuolo
Thank you. Good morning everyone and welcome to our second quarter 2015 earnings call. Leading today's call is Stuart Levings, our President and CEO; followed by Philip Mayers, our CFO. We will start with our prepared remarks, and then open to Q&A session. Our news release including our management discussion and analysis, the financial statements and financial supplements were released last night and are 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 in the press release and will also be available on our website following today's presentation. The call will be available online for approximately 45 days following today.
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 the cautionary note 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 a standardized meaning and are unlikely to be comparable to similar measures by other companies.
I’ll now turn it over to Stuart.
Stuart Levings
Thanks, Lisa. Good morning and thank you for joining us on our second-quarter earnings call. We are pleased with our results this quarter, both the solid profitability and the strong growth in premiums written. Our core growth strategy continues to yield improved market share. This together with higher premium rates and a larger originations market are the key drivers of our 28% year-over-year growth in premiums written, resulting in a total of CAD205 million for the quarter.
We delivered net operating income of CAD92 million, flat to the prior quarter after excluding the favorable Q1 tax adjustment. This result reflects our consistent revenue model combined with good loss performance. At 17%, down 5 points versus the prior quarter, our loss ratio continues to demonstrate the benefits of a high-quality insurance portfolio in an evolving housing and labor market. That said, we maintain our view that losses in the second half will begin to reflect the economic pressure evident in the oil dependent regions, and expect our full year loss ratio to be in the 20% to 30% range. This solid profitability drove a 12% ROE for the quarter consistent with the prior quarter, and earnings per share of CAD0.99. Year to date, we've delivered earnings of CAD2.02 per share, up CAD0.02 over the prior year.
Our book value continues to grow, up 6% year-over-year ending the quarter at $36.18 per share. As indicated earlier this year, we plan to operate at a moderately higher capital level, given the current economic environment. Accordingly, we ended the quarter with a MCT of 231% after completing a share repurchase of CAD50 million during the quarter. We continue to balance capital strength with efficiency and flexibility, and prioritize core growth and ordinary dividends over other capital uses. Our insurance portfolio continues to perform well. We saw a decline of 126 delinquencies over the prior quarter, largely due to typical seasonality. For the most part, delinquencies remain low with ongoing pressure in the Quebec and Atlantic provinces. We believe the weaker Canadian dollar should support economic conditions in manufacturing regions like Quebec and Ontario, which should bode well for these areas.
When we consider the environment in which we operate today, we focus on three key aspects: our target segment, the first-time homebuyer; the associated housing market; and the state of employment. In our business losses are highly correlated with unemployment. Housing values influence frequency of loss to some degree, but are more directly related to severity of loss. If the
borrower has the means to pay, they rarely default, so house prices begin to matter when employment comes under.
With respect to our target audience, the first time homebuyer, it is clear that this segment of the market continues to be very stable. Our average price at CAD313,000 is 29% below the market average and reflects very modest appreciation over the past few years, up only 4% since 2012. At the same time, as approximately two-thirds of our borrowers are double-income families, our average household income tends to be strong, resulting in a very prudent gross debt ratio. Averaging 24%, this ratio has remained stable within a 2-point band and well below the industry maximum of 39%. Furthermore, as seen in prior quarters, the quality of our segment continues to improve, with average credit scores of 742 in the second quarter. We continue to monitor housing markets very closely and observe that while values continue to show some growth year-over-year, they remain roughly flat year to date supporting our view that much of the Canadian market continues to see a soft landing.
The Toronto and Vancouver single-family detached markets remain the exception, driven by ongoing demand and very tight supply. That said, given the higher price points in these cities, we tend to see more first-time homebuyer activity in the neighboring suburbs versus the core. On the employment front outside of the oil-producing regions, job gains have been positive, albeit modestly so, and the overall employment rate remains fairly stable. As discussed earlier this year, we have taken a number of underwriting actions to address the increased risk of unemployment in oil-exposed regions, and are comfortable with the loans we have insured to date.
While we have seen very strong top line momentum this year, we continue to focus on portfolio quality, ensuring that the additional loans we insure are of the same or higher quality as our insurance in force. When we look at our underwriting scorecard, we are pleased with the overall quality of our new insurance written, the prudent characteristics of our borrowers, and the properties they are purchasing. Based on the strength of our target segment, our modest house price appreciation and state of employment, we feel good about the market we serve. We also feel good about our business model.
We are in the business of evaluating mortgage default risk, and do so in a very dynamic, sophisticated manner. Our underwriting systems and proprietary scoring model are built from years of data and experience, and encompass a wide array of risk evaluation technology supported by our skilled underwriters and quality assurance teams. We conduct regular audits on our lenders to ensure compliance with our underwriting and document due diligence requirements, as laid out in our master policy. Of late, there has been a fair bit of attention on mortgage origination practices. In our experience, because of our prime loan focus, our underwriting technology and discipline, our valuation routines and quality assurance process, we see consistent performance across all loan origination channels. Regulations such as the B20 and B21 guidelines further reinforce the prime quality focus and underwriting discipline in our market.
Furthermore, as we reflect on the current economic environment and the increased level of uncertainty, I wanted to highlight an important tenet of our risk management strategy, specifically portfolio diversification. We benefit from having a high quality, well-diversified portfolio both geographically as well as across different book years. As books season and principal is paid down, the effective loan-to-value of the insured loans decreases, representing embedded equity which acts as a buffer against economic pressure. As I look ahead, I recognize that the economy is in a transition and we could see additional economic pressure, particularly in the oil-producing regions. At the same time, I know that our business model with its high-quality, well- diversified insurance portfolio, steady revenue stream and conservative investment portfolio is built to withstand these pressures. We remain confident in our loss ratio range for this year and believe that the recent premium rate increases, together with our sound risk measure and discipline will position us well for the business performance next year and beyond.
Now I will turn it over to Phil for a deeper look at our financial results.
Philip Mayers
Thanks, Stuart, and good morning. Second quarter results were strong on multiple fronts. Overall, core net operating income of CAD92 million was flat sequentially after excluding the favorable CAD5 million nonrecurring tax item in the first quarter. Premiums written were particularly strong in the second quarter at CAD205 million representing a 28% increase compared to 2014. Transactional or high loan-to-value insurance contributed CAD183 million of premiums written, an increase of CAD55 million or 43% year-over-year. This increase was primarily due to a 16% higher average premium rate and 22% higher new insurance written. The higher new insurance written was driven by several points in market share gains and a modestly larger origination market.
While not a factor in the second quarter, the 2015 price increase should be a catalyst for further premiums written growth in the coming quarters. Portfolio insurance contributed CAD22 million of premiums written on CAD4 billion of new insurance written. As noted previously, portfolio insurance volumes fluctuate from quarter-to-quarter, and we saw lower demand this quarter. Premiums earned were CAD1 million higher sequentially at CAD144 million. While this increase was modest, we expect sequential quarterly increases in premiums earned in the coming quarters following the higher level of premiums written in recent years.
Also, our loss performance continues to be strong with a 17% loss ratio. Quarter-over-quarter we saw fewer new delinquencies net of cures, consistent with seasonality. This translated into losses on claims of CAD25 million, lowered by CAD7 million sequentially. As noted by Stuart, the majority of net and new delinquencies continue to be from the Atlantic and Quebec regions, while the level of delinquencies from the Alberta and prairie regions were relatively flat. Total expenses this quarter were CAD29 million, and the resulting 20% expense ratio is consistent with our target.
Excluding the increase in share-based compensation expense, other operating expenses were relatively flat. Investment income excluding realized gains is generally stable and was flat quarter-over-quarter at CAD42 million. In addition, we realized CAD17 million of gains as we reduced common shareholdings and increased the allocations of preferred shares. In total, net operating income was CAD92 million, generating an ROE of 12% and an operating EPS of CAD0.99 for the quarter. These results are in line with management’s expectations and reflect the generally strong business fundamentals.
Turning to the top line growth story. For the first half of 2015, premiums written from transactional insurance increased by 44% to CAD335 million. As a result, unearned premiums which represented future revenues grew to CAD1.85 billion. Relative to the 2014 new insurance written base of CAD22 billion, we estimate that the 2014 and 2015 price increases should translate into a higher annual run rate for premiums written in the range of CAD125 million to CAD135 million. Specifically, the June 1, 2015 price increase should contribute CAD25 million to CAD30 million in premiums written in the second half of 2015 or CAD55 million to CAD60 million on a full year basis.
The impact of premiums earned is not immediate but will be gradual, given that premiums written are earned into revenues based on the loss emergence pattern. The price increases should translate into year-over-year premiums earning growth of approximately CAD50 million in 2015, with a further CAD25 million in each of 2016 and 2017. We believe that the combination of premium rate increases and market share gains provide a strong tailwind for both premiums written growth in 2015 and premiums earned growth going forward. In turn, these higher levels of premiums earned should improve profitability and enhance returns over time and lead to a higher book value per share, all other things being equal.
Underwriting profitability remains strong with a combined ratio of 37% this quarter. Our 2015 year-to-date loss ratio of 19% is slightly below our full-year range of 20% to 30%. This is to be expected, given the strong housing markets in Toronto and Vancouver. Housing prices and unemployment in Alberta are being pressured by lower energy prices, although we have not seen a significant increase in new delinquencies to date. We continue to closely monitor performance in Alberta and other oil-producing regions, and while year-to-date performance has been strong, we could see pressure on the loss ratio in the second half of the year. We still anticipate ending the year with a full-year loss ratio in the 20% to 30% range previously disclosed. This reflects our strong portfolio quality, generally stable housing market, and our proactive loss mitigation strategies.
The investment portfolio is a consistent contributor to our net operating income, given our focus on investment grade bonds. As expected, the low rate environment will continue to pressure the investment yield. In response, we are actively managing the portfolio to maintain the book yield around its current level of 3.3%. Recent portfolio actions include adding preferred shares with after-tax dividend yields above 4%, which will partially offset some of this rate pressure. We are committed to maintaining the high-quality investment portfolio and will continue to adjust allocations to optimize investment income within our risk appetite.
On the capital management front, we ended the quarter with an MCT ratio of 231%, and holding capital cash and liquid investments of CAD105 million. With the increase in economic uncertainty, we continue to stress our insurance portfolio on a number of different scenarios in decision-making regarding capital management actions. Overall, we will exercise prudence while balancing capital strength, flexibility and efficiency. As a result of our organic growth and transactional new insurance written, we expect to utilize more capital to support this core growth. That being said, we intend to operate with an MCT ratio moderately above our current holding target of 220% and significantly above our internal target of 185%.
In summary, we are pleased with this quarter’s results and continue to be well positioned for solid financial performance. That concludes our prepared remarks and we are now ready to take your questions. Operator, please open up the call for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Geoff Kwan of RBC Capital Markets. Please go ahead.
Geoff Kwan
Hi, good morning. There's been obviously some sensitivity around underwriting in Canada and what not in light of the new head of Home Capital Group. So I was just wondering if you can kind of talk about how you guys underwrite your mortgage insurance policies. And then also specific to, in terms of this talk of fraud, kind of how you try to catch and prevent this sort of stuff, the internal controls that you have in place. And then maybe tagging along on the end of this question is if you'd talk about how often you reject applications.
Stuart Levings
Sure, Jeff. Good morning to you. This is Stuart here. Yes, there has been a lot of attention on this issue recently. For us in Canada specifically, I think we have a very strong underwriting model. We use a lot of sophisticated technology. We use a lot of skilled underwriters. We back that up with a very dedicated quality assurance team, a special investigations unit. And we use a lot of third-party tools as well to help us in terms of catching red flags and identifying potential fraud. That's important to remember, that there really is a second set of eyes here in Canada. The lender underwrites their loans thoroughly, then we underwrite the loans thoroughly. And I think as a result of that, you see the overall preponderance of fraud and misrepresentation in the industry here as quite low relative to some other countries around the world.
We certainly have seen the incidence of fraud getting through to the approval process decline over time, especially if you look at the pre-global financial crisis years and the post-global financial crisis years, and I think that's a function of how the industry as a whole has collaborated. We are certainly sharing data with our lenders. They are sharing data with us. We are talking around trends we are seeing in the industry, things that would be new red flags that might crop up. And at the same time, we don't see a lot of it getting through to the approval process, as I said.
You want to catch it at the front door, and that's where we catch the majority of it today. That's really reflected in our early term delinquency rates which we monitor very closely. That is something that goes delinquent in the first 12 months of a loan's life. Typically, if something goes delinquent in that timeframe, you are considering it as potentially an underwriting miss or potentially something to do with misrepresentation. That level of delinquency now is quite significantly lower than it used to be in the earlier years leading up to the global financial crisis.
We don't reject a lot of loans upfront. I think the quality of loans in the industry as a whole today is very strong. A lot of that is due to the B20, B21 guidelines, the sandbox rules. So we see probably in the range of 7% to 10% rejection outright. Of course there are a lot of loans in between that that we will go back and forth on with lenders to find a way to mitigate any identified risks. But on balance, the quality of loans in the market as a whole is very strong in today's environment.
Geoff Kwan
And maybe if I can just tack on to it. Sometimes when I find talking with people in the industry is there's often a view or at times that the insurers underwrite more tightly relative to the lenders. Just was wondering if you have any comments on that.
Stuart Levings
I think it varies, Geoff. Each lender has their own policy essentially that for the most part complies with B20 as it is required to. And some lenders take a slightly different approach in certain areas or certain types of loans, certain types of borrowers. I would say that the standard as a whole is very high on both the lender side and the insurer side, and I don't think there is any generic differences in level of scrutiny. Again, it might vary by some loan characteristics.
Geoff Kwan
Okay. And maybe I'll ask one last question before I go back into the queue. But if you can kind of remind us what would be some examples where you would be able to void mortgage insurance policies? In other words, some people might view it as being a put back. Is it? Employee involvement I think is one instance there. And then generally speaking, things that lenders should have caught, and then specifically, would income verification count as one of those things?
Stuart Levings
Geoff, ultimately the lender is always responsible for the integrity of the information they send us during that underwriting process. And in the event of any claim, we follow a very thorough analysis to review all the factors related to that delinquency before making any final decision on claim payment. As a rule and as a stance, we pay all valid claims and view claim certainty as a very important tenet of the MI industry in Canada. But having said that, we always retain the right to adjust a claim if there is evidence of what I would consider to be unmitigated recurring material deficiencies in the underwriting process or material misrepresentation causing delinquency. Outside of that, the industry as a whole continues to see a very high level of underwriting. So this is a very rare occurrence where we might see a situation where we need to adjust like that.
Geoff Kwan
Okay, great. Thank you.
Stuart Levings
You’re welcome.
Operator
Thank you. Your next question comes from Shubha Khan of National Bank Financial. Please go ahead.
Shubha Khan
Thanks, good morning. I appreciate all the color you gave us on the risk management process. So I guess all the questions have been answered on that front. Just to turn my attention to top line growth here, new transactional insurance written in the quarter up 24%. So clearly much stronger than home sales, and you are obviously gaining market share. I'm just curious what the source of the strong growth was, particularly whether it I guess coincides with CMHC's decision to pull back from certain types of mortgage insurance. So if I'm not mistaken, it was self-employed borrowers and/or second homes and what have you. So can you give us an idea of where you saw the strongest growth? Was it things like business for self or second homes; basically, businesses that CMHC seems to have curtailed?
Stuart Levings
Hi, Shubha, Stuart here. Thank you for the question. Yes, absolutely, the strong growth is broad-based. So what we are seeing is our share level with certain lenders that originate very good quality prime business has increased, and so we are just getting a larger proportion of that prime business. There roughly is probably less business for self business we are seeing in our own portfolio over time just by virtue of some of the underwriting changes we have made in that space. There's very little second home business, always has been. So the majority of the share is good purchase, owner-occupied prime business, and you see that in our credit score averages that have gone up. So we are thrilled.
Obviously, that share is coming from our two competitors; the majority of that I would say from the Crown Corporation as you pointed out. They have been looking to withdraw from the market to some extent over time. And in addition, we continue to service our customers and provide them the best possible experience that they can get, we continue to meet their portfolio insurance needs and it's that strong partnership that has seen us grow our penetration with some of those big lenders, and that has helped us to grow that top line.
Shubha Khan
Okay, perfect. That's helpful. And then just a question on capital. I guess towards the end of July, OSFI introduced amended or draft MCT rules, which will be effective early next year. I don't think they have specifically announced anything with respect to mortgage insurance – correct me if I'm wrong there. But I'd imagine that something is in the pipeline. So could you give us a sense of what do you think the MCT ratio impact might be going forward for Genworth?
Stuart Levings
Phil, do you want to take that?
Philip Mayers
Shubha, it’s Phil. The draft [ph] 2016 MCT did not contain any specific provisions for mortgage insurance. And as a result, we would expect to be on a similar test to 2015 and therefore would not expect any material changes in the MCT ratio because of changes to the capital formulae. OSFI has said that they are working on a new capital test for mortgage insurers, but that is more a 2017 implementation. That’s the best of our knowledge today. But in the interim, we don't anticipate any changes in terms of the capital form that was under the existing MCT for mortgage insurers.
Shubha Khan
Got it, thanks. That's all my questions.
Operator
Thank you. We will now take our next question from Paul Holden of CIBC. Please go ahead.
Paul Holden
Thank you. Good morning. I want to ask you with respect to Alberta delinquencies, we really haven't seen any uptick to date there, despite lower oil prices. And you continue to guide to higher claims losses out of Alberta in the second half of the year. What's the chances that we actually don't see much of an uptick in Alberta delinquencies in the second half of 2015; that becomes more of a 2016 type event?
Stuart Levings
Good morning, Stuart here. I would say that there is obviously a lag effect and we know that unemployment has occurred in Alberta. We know that there's possibly some further unemployment to occur. So the question is, as you say, when will we start to see these delinquencies? We still fully expect we will start to see them in the latter half of this year. It might be concentrated towards the fourth quarter. But whatever happens, the 2016 year is going to have more of the losses related to this event than 2015, that’s clear to us as well. And I think we are watching early term indicators to try and glean that same information looking at the level of EI claims, looking at what's happening on auto loans and credit cards.
So to your point, consumers have been hanging in quite strongly. The housing market has been hanging in there quite strongly. Our view is that there's still some resources that they have that they've built up that they've been more cautionary of, given that they went through a similar event not that long ago. But eventually, there will be pressure on delinquencies. And again, we think that that's towards the fourth quarter this year 2016. We will provide more guidance on what we think happens in that year in the fourth quarter this year as we have a more comprehensive picture of where the economy is going and how the oil producers react to the current level of oil prices.
Paul Holden
Okay, great. And then you continue to have a lot of success with your cure rates. Wondering if that success rate would be influenced at all by a softer job market; i.e., to what extent are you helping borrowers bridge an employment income gap?
Stuart Levings
I think the cure rate is always a function of the economy and when we see very strong housing markets, we do see higher cure rates. But the thing to remember is that, on top of cure rates, we introduce our workouts and the workouts sort of come in to start bridging those that may not be able to cure themselves. So to your point about bridging employment income over a period of economic pressure or at a time when someone has had a temporary disruption to their employment, that's where we actually get very actively involved. And even in a softer economy or a softer housing market, we are able to do a lot in terms of workouts and to remedy what we consider to be temporary financial difficulties to get borrowers through and avoid the full blown foreclosure. So you will see that activity pick up in Alberta. We are very actively looking to be involved there, and we've certainly alerted our lenders and our borrowers to the availability of those programs. And you will typically see that kind of activity pick up in a softer economic environment.
Paul Holden
Okay. So you’re suggesting that your success rate with the cures and workouts should stay roughly the same, even if the job market softens?
Stuart Levings
It will come down a little bit as you would expect it to. But I think what we are already seeing is that even though the natural cure rate will come down more, the workouts will help somewhat but they won’t fully offset a softer economic environment.
Paul Holden
Got it. Okay. And then when I look at the regional mix of premiums written, Alberta has come down as you suggested it would, and it looks like the pickup regionally has come in Quebec. Does that then suggest that you think the worst of the delinquency pressure from Quebec perhaps is in the past, or maybe you can explain the regional pickup in Quebec premiums written?
Stuart Levings
Yes, Paul. The intent with Alberta certainly was to underwrite to a more strict standard to sort of take off some of those stack risk factors we've talked about in previous calls. The Quebec pickup is really a seasonal issue. Quebec always sees a spike in the second quarter because of the way their rental contracts renew June 30 and everybody times their purchase or closings of a home in the second quarter, and just around that time the third quarter as well. So you will see that level will probably come back off again in the third quarter, and it's an annual event that we see every year.
Paul Holden
Okay, got it. Then last question, I'm just trying to circle the square on the higher reserve per delinquent loan. So you attribute that to the regional mix. Now the growth in delinquencies is mostly coming from Quebec and Atlantic Canada regions where I traditionally think of having, say, lower to average home prices. So just trying to figure that one out.
Stuart Levings
I’m going to ask Phil to handle that one.
Philip Mayers
I think the regional mix we’ve seen in Atlantic and Quebec but the mix is largely being driven because we have such strong performance in Ontario. The level of delinquencies coming out of Ontario are suppressed because of the strong employment and housing market conditions. But I think while we see the increase coming from those two regions, it's primarily because those are the only two regions that are experiencing soft labor markets and soft housing markets outside of the Alberta market, which we previously talked about.
So we would expect that to begin to normalize as we move through the second half of the year as you see some firming up of the employment conditions in those two provinces. But we are not overly concerned about that given the proportion of our business and you can certainly see from a loss ratio that as being the major contributor to our loss ratio, but our loss ratio continues to be slightly below our expected range. And the other thing I would note is that we build our business geographically to [indiscernible] and we recognize that we will have some regions that are going through stress at different points in time and its all within the expected range of outcomes for mortgage insurer business model.
Paul Holden
So the higher reserve for delinquency in Quebec and Atlantic would be related to what factors specifically?
Philip Mayers
I think the biggest factor that we relate to large number of delinquencies in those two markets are coming outside the major centers. So therefore, you’re in centers where the housing market is a little softer and therefore the price discount to sell a foreclosed property is higher than it would be would be in a very active market say for example of a Montreal or a Halifax. And what we are seeing is that the communities outside those major centers in those two provinces really don’t have a stronger bid and therefore you are seeing a larger severity and that's largely what's driving it. Plus as you go through the winter months of those two provinces, certainly you're incurring more expenses in terms of property and maintenance because of the harsh winter that they both had.
Paul Holden
Okay, understand. Thank you. That's all the questions I had.
Operator
Thank you. Your next question comes from Graham Ryding of TD Securities. Please go ahead.
Graham Ryding
Hi, good morning. Just maybe I'd like to touch on the market share trends. Did you notice any difference between Q2 and Q1 with respect to market share? And I just want to get a feel for your expectation going forward. I think previously, you suggested you could possibly gain another 3% to 5% share, but the message coming out of the CMHC is that they are quite happy with the current level. So I just want to get your view on how to balance those two points.
Stuart Levings
Yeah, certainly Graham. The market share for us is being gradually increasing. We are probably just north of a third of the market right now. The reason you see it increase is because when we gain market share with a big lender, the application start to come in at that higher share level but of course each loan takes time to fund, make itself into NIW and premium, and that's where you start to see, as we record that the premium gains, the market share gains. So we did see some gain Q2 over Q1, and you will probably see a bit more of that momentum continue, and you’re right, we did say we could add two to three points. I think we publicly stated we were targeting around 35%. That’s still our target. We still believe there is opportunity to grow our core business based on the momentum we have today, but admittedly we are pretty close to that at this time. And we can’t comment on competitive actions or strategies, but our view is to continue to focus on providing our customers the best possible customer experience of being the leading mortgage insurer of choice in Canada.
Graham Ryding
Great. Just to be clear, when you talk about one-third to 35%, you are talking about the premiums written for the transactional side. Is that correct?
Stuart Levings
Yes, that’s correct, on the transactional side.
Graham Ryding
Great, and then have you noticed any change in activity? Your pricing increase, the most recent round by the industry was as of June 1. Did you notice any activity getting in front of that and then maybe some softer activity in June or was that really a nonevent?
Stuart Levings
It was a fairly non-event. There was a very modest uptick in applications in the week leading into the price increase but I would say hardly noticeable.
Graham Ryding
Great. And then on the portfolio insurance side, you said you are expecting some lower demand this year due to regulatory change and also some caps around any GMBS volume limits – or pricing, sorry for the guarantee fees. Are you seeing any of that play into the demand for portfolio insurance or is that more of a 2016 event?
Stuart Levings
Graham, it’s probably partially a 2016 event. As you will see in our MD&A we noted the draft regulations the Department of Finance have published and they clearly are moving towards restricting portfolio insurance to only those loans that will go into the government securitization programs. The target implementation date indicated was January 1, 2016. So I think 2015 is materializing in a similar fashion to 2014. So I think the changes that we thought that may have taken effect sometime in 2015 are now looking like they will take primarily take effect in 2016.
Graham Ryding
And was that more of the issue versus the guarantee fees on the portfolio insurance demand?
Stuart Levings
I think the guarantee fees can have an impact, but through the first half of the year I wouldn’t believe lenders are going to the level where they'd be paying the higher level of guarantee fees because if you remember the guarantee fees, the differential kicks in and I believe it after CAD6 billion of issuance. So if anything, that would be a second half 2015 impact, but it is too early to tell how lenders will view that.
Graham Ryding
Great. And then just my last question, if I could. The 1.5 million shares that you bought back in the quarter, did your U.S. parent participate on a pro rata share?
Stuart Levings
Yes, they did.
Graham Ryding
Thank you.
Operator
Thank you. [Operator Instructions] Your next question comes from Geoff Kwan of RBC Capital Markets. Please go ahead.
Geoff Kwan
Just had one follow-up question. I can appreciate if you can't talk about the Home Capital Group situation specifically, but could you talk about generally if you had one of your lender clients that flagged an issue that they were dealing with on a specific kind of book of business, like how you would go about handling that? Like would you go in and take a look at all the affected mortgages or would you only look at part of it? And then would you ever be in a position where you might give some sort of opinion on if there were any potential future claims that you would definitely pay out on it?
Stuart Levings
Geoff, this is Stuart here. We prefer not to talk about specific customer issues but what I will say to that is in any scenario where we get advice, tips, we uncover something ourselves, we are always doing a bit of an analysis to understand the full circumstances surrounding that processes that lenders have taken to mitigate any potential weaknesses. And then as I mentioned before, if ever there is any claims, look at them on a case-by-case basis fully evaluate the factors involved and what caused the delinquency before making a claim payment decision. And that will be no different in this case here. When we QA our lenders, we are always looking for ways to help them with improving their processes if we identify opportunity. We provide red flag training to help their underwriters better identify potential misses or fraudulent documents. And that’s something that the industry as a whole is taking quite seriously. The industry take misrep very seriously. And I think as a group, we've all taken some very strong actions over the last few years to reduce the incident of misrepresentation and fraud in the industry.
Geoff Kwan
Okay, sorry, and just to clarify. You would make the decision if and when a claim were to come up. You wouldn't provide some indications before that; is that correct?
Stuart Levings
That’s correct.
Geoff Kwan
Okay. Thank you.
Operator
Thank you. Since there are no further questions, this concludes today's conference call. Thank you for your participation in the Genworth MI Canada, Inc. 2015 second quarter earnings conference call. You may now disconnect your lines and have a great day.
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