Genworth MI Canada Inc. (OTCPK:GMICF) Q4 2015 Results Earnings Conference Call February 5, 2016 10:00 AM ET
Jonathan Pinto - Vice President, Investor Relations
Stuart Levings - President and Chief Executive Officer
Philip Mayers - Senior Vice President, Chief Financial Officer
Tom MacKinnon - BMO Capital Markets
Jeff Fenwick - Cormark Securities
Shubha Khan - National Bank Financial
Paul Holden - CIBC
Graham Ryding - TD Securities
Dan Furtado - Philadelphia Financial
Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Genworth MI Canada Inc. 2015 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 is being recorded today.
I will now turn the conference over to Jonathan Pinto, Vice President, Investor Relations. Mr. Pinto, you may proceed.
Thank you. Good morning everyone and thank you for joining Genworth Canada's fourth quarter 2015 earnings call. Leading today's call are Stuart Levings, our President and Chief Executive Officer and Philip Mayers, our Chief Financial Officer.
We will start with our prepared remarks, followed by an open question-and-answer session. Our news release including our management's 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 our webcast and the slides for today's discussion are also posted on our website. A replay of this call will be available via the other 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 would now like to turn the call over to Stuart to begin his remarks. Stuart?
Thanks, Jon. Good morning and thanks for joining our call. Today I am going to walk you through some key financial highlights on our strong performance in 2015. Then I will share my perspectives on the key themes facing our industry today and the implications for our business in 2016, including updated guidance on our loss ration range.
Phil will then discuss some of the highlights from our fourth quarter results. I will wrap up with some summary comments and a reminder of our key strategic priorities for the year focused on prudent risk management in a more challenging economic environment.
Let me start by saying we are very pleased with our strong performance in 2015. For the year, we delivered net operating income of $375 million, up 3% over the prior year. This generated a solid return on equity of 12%, flat to the prior year and diluted earnings per share of $4.05, up 5% over 2014. We saw healthy topline progression with net premiums written were $809 million, up 26% over the prior year.
Our core transactional business represented 87% of that total or $705 million, up 27% over 2014. This growth was driven by three key factors, higher premium rates, improved market penetration and higher volumes of mortgage originations.
At 21%, our loss ratio came in at the low end of our guidance range and up one point from the prior year. This performance reflects the impact of our high quality insurance portfolio together with the overall strength and resilience of the Canadian housing and labor markets in 2015.
We ended of the year with a strong MCT ratio of 233%. This ratio was positively impacted by a number of factors which Phil will describe in more detail. While seasonal variation in new insurance written influences the level of our MCT ratio, our goal as noted on prior calls is to maintain a modest level of capital in excess of our holding target that reflects the current economic environment while balancing capital strength with efficiency and flexibility. For now, our capital priorities remain focused on funding our transactional insurance business volumes and ordinary dividends.
Our book value at $36.82 per diluted common share continues to grow, up 5% over the prior year driven by ongoing profitability. Looking back on our key accomplishments in 2015, we clearly capitalized on our strong market momentum growing market share by approximately four percentage points over the prior year. This growth, combined with a premium rate increase, drove our very strong topline results, which will, boy, earn premiums for years to come.
In addition to growing the topline, we improved the overall quality of our new insurance written with very strong credit scores and a well diversified portfolio. Our comprehensive risk appetite framework and approach to building a high quality portfolio helped to reduce performance volatility and a strong macroeconomic environment delivers very positive results as evidenced by our 21% loss ratio.
When I think about the key themes facing our industry today, it's clear we are on a very fluid environment with a higher level of economic volatility. Low oil prices, while not a new development may well be lower for longer. Economic growth forecast have been the lower, both for Alberta and the country as a whole. The impact on housing and labor markets could be more pronounced, particularly in the oil-producing regions.
In our view, this has implications to both our loss ratio outlook as well as our expectations around housing values and new mortgage originations. We believe house price appreciation will slow in 2016 and the volume of new loan originations maybe smaller than in the prior year. Overall this will put some pressure on topline growth and we are expecting total premiums written in 2016 to be modestly lower than in 2015.
That said, regarding the weaker outlook for growth in Alberta and other oil-producing regions, we do not expect to see material contagions to the rest of Canada. While potentially more pronounced, we continue to view the current environment as a rebalancing of economic growth. We expect that the impact of low oil prices on Alberta's economy will be partially offset by the positive impact from a weaker Canadian dollar, low interest rates and gas prices in other provinces such as Ontario and Quebec and BC, even though it may take some time for these factors to gain traction.
In addition, given the ongoing focus on quality within the industry, our underwriting discipline and strong regulatory oversight, we expect the quality of our new insurance written to remain very strong. Another key theme facing the industry is a focus on capital with a new regulatory capital framework under development for 2017. We are working closely with the regulator on this initiative and generally view the increased focus on a more risk sensitive approach as a positive development.
As we evaluate the housing versus labor market risk in today's environment, we see some offset and mitigants across the various regions. For example, while housing valuation risk may be more elevated in the greater Toronto area, the strong diversity of employment in this region reduces the risk related to unemployment. Alberta, on the other hand, will likely see more unemployment pressure this year. However, house prices are more in line with long-term valuation levels.
On balance with the exception of the Toronto and Vancouver markets, the Canadian housing market has been relatively flat year-over-year and in our view continues to see a soft landing. Overall Canada's housing market performed very well in 2015 and with the exception of the oil exposed regions, we expect it to remain relatively stable through 2016.
As noted in the past, regulatory changes together with sound risk management routines have driven an ongoing trend in improving portfolio quality. Strong credit characteristics, debt servicing attributes and regional dispersion serve as key risk mitigants in the event of an economic downturn. This is one of our core risk strategies and helps to land stability in terms of overall loss performance.
In addition to building a regionally diversified portfolio, we continued our focus on driving down exposure to lower scoring loans which helped drive our average credit score to a new high of 743 in 2015. In addition, home price appreciation in our segment has been more muted compared to the overall market and in our view remains fairly valued. Furthermore, debt service ratios remained largely unchanged and well within our expected ranges. This profile continues to reflect our target market of fiscally prudent first-time homebuyers and supports our view that the market we serve remains a very high quality segment of the overall market.
On the outstanding front, we saw a modest increase of 73 delinquencies over the prior year. This increase was driven by ongoing pressure in Quebec and some emerging activity in Alberta during the fourth quarter, in line with our expectations. This increase was partially offset by continuous strength in BC and Ontario. Overall, our delinquency rates remain relatively flat over the prior year for both transactional and portfolio insurance.
As noted on prior calls, we believe we are well-positioned to manage through economic pressure in oil exposed regions, largely due to the improvements in both the product suite and portfolio quality evident in the business written over the past few years versus that written in the years preceding the 2008, 2009 recession. In addition, we benefit from portfolio seasoning which lowers effective loan-to-value's, thereby reducing the risk in prior books of business. However, we do recognize that the difference in the current environment is the outlook for oil and the potential for a more prolonged period of depressed oil prices.
As you know, we took a number of proactive responsible underwriting actions during the course of 2015 to reduce exposure to stack risk factors in oil dependent regions. Those actions are part of our dynamic approach to risk management whereby we constantly adjust our risk appetite and underwriting rules based on the prevailing economic conditions. While we continue to make prudent underwriting adjustments, I want to reiterate that we remain committed to our customers across Canada and will continue to support access to responsible homeownership in all regions.
Given the recent round of oil price declines along with updated forecast for slower economic growth, we revisited our economic assumptions around house prices and unemployment for 2016. Based on our market observations, we modeled our portfolio performance under a variety of updated scenarios including a more severe oil price environment with some contagions to the rest of Canada. Our updated scenarios contemplate an unemployment rate of 7.8% to 9% and house price declines of 8% to 12% for Alberta with flat to modestly negative house prices and an uptick in the unemployment rate for the rest of Canada. In our view, these scenarios contemplate U.S. dollar oil prices in the $20 to $40 per barrel range for 2016.
Based on the results of our scenario testing, our estimated 2016 loss ratio range is 25% to 40%. We recognize that this is a wider range than we traditionally provide, however we believe it to be more appropriate given the current level of economic volatility. That said, the current external consensus forecast for the economy should result in a 2016 full year loss ratio in the lower half of this range. We will continue to refine and communicate this range as new market data emerges.
At this point, I will turn the call over to Phil for a more detailed review of our fourth quarter results before wrapping up and going to Q&A.
Thanks Stuart and good morning. We ended 2015 with strong net operating income of $95 million. This was higher by $3 million quarter-over-quarter, primarily due to a modest increase in investment income and a relatively flat underwriting income. Consistent with typical seasonality, total premiums written declined in the quarter by $47 million to $213 million.
Of this total, transactional insurance contributed $181 million on over $6 billion of new insurance written. Resulting average premium rate improved by seven basis points quarter-over-quarter to 290 basis points.
Portfolio insurance added $32 million in premiums written on $9.6 billion of new insurance written. This represented a sequential increase in new insurance written of $3.5 billion, driven primarily by higher demand from banks.
In turn, premiums earned increase sequentially by $4 million to $151 million as a result of the relatively larger 2013, 2014 and 2015 books of business written. This growth trend is expected to continue in the coming quarters.
During the quarter, losses on claims were $35 million and the loss ratio was 23%. The resulting $4 million sequential increase was driven by a seasonal increase in new delinquencies net of cures of 487 and a modest increase in the average reserve per delinquency.
Expenses of $27 million were down slightly from the prior quarter and the resulting expense ratio of 18% remained consistent with management's expected range of 18% to 20%.
Investment income from interest and dividend was relatively stable quarter-to-quarter and was $44 million this quarter. The modest sequential increase primarily reflects the higher level of invested assets. Overall, net operating income of $95 million generated a solid operating return on equity of 12% and a fully diluted operating EPS of $1.03. We are pleased with both our full year net operating income of $375 million and the resulting 5% increase in the book value per share to $36.82.
Let's take a more in-depth look at the underlying business drivers, starting with the topline. The key catalyst for future business performance is the level of quality of our transactional insurance. We have been focused on improving the portfolio quality over the past several years and have built a high quality insurance portfolio that is well diversified geographically.
The $25 billion of transactional new insurance written in 2015 generated $703 million of premiums written which was 27% higher the prior year. The 2014 and 2015 premium rate increases represented 25% in cumulative increase. This has contributed $67 million of incremental premiums in 2015. As a result, the average transactional premium rate rose steadily in February 2015 and is expected to be marginally higher in 2016, as compared to the fourth quarter's average of 290 basis points.
As noted by Stuart, mortgage originations in 2016 are likely to be modestly lower given the slow growth outlook. In this environment, we are targeting to maintaining our market share while continuing to focus on risk management and portfolio quality. Overall, lower expected transactional volume should be partially offset by higher average premium rate resulting in flat to modestly lower premiums written from transactional insurance.
While transactional insurance is our core business, portfolio insurance is a key part of our value proposition to lenders. While demand varies based on lender's balance sheet needs, we underwrote $25.7 billion of portfolio insurance on prime low loan-to-value mortgages in 2016 which generated $104 million of premiums written.
Press mentioned the 2013 federal budget. The government has proposed a change that would require portfolio insured mortgages to be securitized in the government mortgage backed securities program. Implementation of this change will likely occur sometime in 2016 and may result in lower portfolio insurance volumes once implemented. Overall total premiums written from transactional and portfolio insurance are expected to be moderately lower in 2016, primarily due to lower portfolio insurance volumes.
With over $2 billion of unearned premiums of the end of 2015, we have a good visibility into premiums earned for 2016 and subsequent years. For example, unearned premiums have increased by $222 million or 12%, compared to the end of 2014 and this year-over-year growth points to future increases in premiums earned. This growth has been primarily driven by the last five books of business which should be the biggest contributors to premiums earned in 2016.
As a reminder, premiums written are recognized as premiums earned based on the historical loss emergence pattern resulting in approximately 80% of premiums written been recognized as revenues over the first five years of coverage. As a result, we expect 2016 premiums earned to increase year-over-year by 5% or greater after growing by 4% in 2015. This growth in underwriting revenues will be a meaningful contributor to earnings in the coming years.
We continued to deliver strong underwriting income in 2015 with a full-year loss ratio of 21% and a combined ratio of 39%. While our combined ratio was stable year-over-year, our loss ratio in 2016 maybe adversely impacted by lower oil prices and the potential for slowing economic growth, as noted by Stuart. That being said, the expected increase in premiums earned from higher premium rates and improved portfolio quality should partially offset the economic pressure on the 2016 loss ratio. Overall, as Stuart noted, we expect the 2016 full year loss ratio to be between 25% and 40% which is still below the peak loss ratio of 42% experienced in 2009.
While underwriting income may be pressured, investment income from our $5.7 billion portfolio offers a measure of stability to our income profile. Investment portfolio continues to be of a high credit quality and has a current pretax equivalent book yield of 3.1%. With the largest rate environment expected to continue throughout 2016, we expect investment income to be flat or modestly lower year-over-year as the expected growth in invested assets of 3% to 5% should largely offset this rate pressure.
Our capital management plan is centered around balancing capital strength, flexibility and efficiency. Our capital position continues to strong with our minimum capital test ratio improving sequentially by five points to 233%. This improvement was driven by lower transactional new insurance written in the quarter and the decision not to renew our participation in the Australian assumed reinsurance.
Compared to the prior year, the 2015 transactional book is $3 billion larger and this is the primary driver behind the year-over-year increases in capital required. We expect to see a similar level of increase in required capital in 2016 which will be funded by internally generated funds.
In December, OSFI reiterated that it will introduce a new regulatory standardized approach to update the capital requirements for mortgage insurance. This new approach will include a requirement to hold additional capital in new business when the ratio of regional house prices to borrower's income exceeds an OSFI defined threshold. Overall, this new standardized approach will be more risk sensitive and may incorporate several risk attributes such as credit scores, debt service ratio in addition to loan-to-value ratio.
We expect OSFI to hold private consultations with respect to the new capital framework in the first half of 2016, prior to releasing the draft guideline in the second half of the year for implementation in 2017. We are confident that the final outcome will be generally consistent with our current capital levels, given that our 220% holding target is calibrated based on stress testing for a range of adverse scenarios. In light of these ongoing developments, we intend to operate with our MCT ratio modestly above 220% in 2016, in the range of 225% to 230% and do not anticipate for any additional financing to maintain our desired MCT level.
In closing, our 2015 results confirm that our business model remains sound and we are confident that track record of solid profitability will continue in 2016.
I will now turn the call back to Stuart to conclude our prepared remarks.
Thanks, Phil. Given the changing economic environment, I would like to take a moment to revisit some of the themes and priorities we discussed during our Annual Investor Day in December last year.
In our view, we have a sound business model, operating in a very supportive regulatory environment. Our diversified portfolio and strong risk management routines position us well to manage through variability in economic performance. Looking ahead in 2016, our strategy will be focused primarily on prudent risk management, while continuing to meet the needs of our customers and first-time homebuyers with the best in class customer experience.
Our key strategic priorities are therefore as follows, maintain our transactional insurance market share albeit in a smaller mortgage originations market, continue to exercise prudent risk management and proactive loss mitigation, continue to deepen our government and regulatory relations to help shape our environment and capital regime through the sharing of data and experience, maintain an efficient capital structure to ensure capital strength while maximizing ROEs and invest in risk analytics decisioning technology and customer experience initiatives. We remain confident in our business model and sustainable presence as we continue to benefit from our positive growth momentum focusing on strong fiscally prudent first-time buyers and sound risk management albeit in a slower economic environment.
In summary, we believe execution on our priorities will preserve portfolio quality, drive solid underwriting results within our loss ratio guidance range, producing another year of profitability and most importantly, building sustainable shareholder value.
Thanks for listening. That concludes our prepared remarks. I will now turn the call back to the operator to commence with Q&A.
[Operator Instructions]. Your first question comes from Tom MacKinnon from BMO Capital Markets. Please go ahead.
Yes. Thanks very much. Just a couple quick questions here. And for Stuart, if you can help us really with respect to this lower for longer oil price, we haven't really seen all through 2015 any real significant hit to your loss ratio and if we look forward you have got this bigger guide, you have got 25% to 40% guidance for 2016 and really in terms of when do you think the decline in the oil price will really start to take a significant impact on delinquencies and loss ratios in Alberta in particular, because we seem to just keep waiting for this to happen to some extent?
Yes, Tom. Thanks for the question. I think it's fair to say that we were expecting, as we discussed, the impact the start last year and for a variety of reasons it really got delayed. What I look at now is the unemployment rate is up to, in fact today it's 7.4%. So to me, the trigger have occurred. The delinquencies are going to start rising and I would expect them to gradually build as we go through this year. Typically we do see more seasonal impacts as well, such as a heavier delinquency push in the winter months, some relief in the summer months and then a pickup again in the fall and the winter months. But I would expect to now start seeing a gradual build in delinquencies out of Alberta, given where unemployment is and given the fact that most of the measures that delayed it last year were really time bound. They can only go on for so long. So they will run out of those options as well.
Okay. Thanks for that. And then, with topline growth now appearing to be perhaps flattening going forward, your capital position seems strong and I think the capital position when you sell opportunities to sort of increase market share, that would have put a little bit of pressure on the capital. But if you are just going to maintain market share going forward here in what would appear to be perhaps a flattening of topline growth environment, why not buy back some of your stock, especially at these kind of prices?
Yes, Tom. As I said in our comments, we really are maintaining a view that we need a modest level of capital overall holding target, 225% to 230% MCT feels right given the economic environment we are in. As you know, we do take a very proactive approach to planning for capital and it is a regular discussion at the Board. I think in this environment, we would say we need certainty around a couple of things before we would consider something like that and certainly one of those things is the economy, but the other one is the actual OSFI capital test that's coming out in 2017. And it's just too early at this point to make a call on that. I think we are going to have wait a little bit to get more sense around those areas.
And I think you used to mention that you were generating a significant amount of excess capital when you had a bit more muted growth. I am trying to recall that kind of numbers that was in the area of about 10% MCT points annually. I can't seem to recall the dollar amount, but if we looked at the current MCT framework in what would be a maintain rather than a grow market share environment, what will we expect the growth in annual MCT to be and in dollar amounts as well?
I will ask Phil to take that.
Tom, if you recall from Investor Day, one of the things that we know is that the current level of new insurance written in the transactional space is $25 billion in 2015. That's about $3 billion higher than it was in prior year. So as the older books mature and release capital, we are releasing capital at a run rate that is $3 billion lower than the current run rate. And even though volumes are modestly lower, we are still going to be not necessarily generating substantial amounts of capital from earnings because of the investment in new business.
To put in perspective, that 10 points MCT you mentioned was around $150 million. If you look at our common dividend and you look at the capital required to fund $3 billion of incremental business, you are getting back pretty much to a capital neutral situation from operating earnings. To that I would add though, we are looking on number of initiatives to continue to optimize our capital structure. There is some we hold a significant amount of capital relates to interest rate risk and there are ways that you can hedge that risk.
So we continue to look at ways to optimize capital and as I noted in my prepared remarks, we expect to fund any growth through internally generated capital and as Stuart noted, we believe that over time, as we get more clarity around the capital framework that we can come back and take a look at other capital initiatives that may be appropriate.
Okay. Thanks for that.
And our next question will come from the line of Jeff Fenwick of Cormark Securities. Please go ahead.
Hi. Good morning. Just wanted to follow-up my questions. We talk a lot about the Alberta market, but when you look at your delinquencies and where they are coming from, you mentioned Quebec, obviously as a source where there is some pressure there. I am just wondering your outlook, how you are viewing the Quebec market there and if the economy in Canada generally is a little weaker than we thought as maybe the bigger risk in absolute term is going to be in the Quebec market and central Canada if things slow down?
Yes, Jeff, it's Stuart here. Quebec has been under pressure for some time now. In fact, since the global financial measure crisis pretty much we haven't seen the economy there perform as strongly as it has in other parts of the country. In addition, the housing market there has been a bit strained, particularly once you get outside the major urban areas. We know for a fact that in certain rural parts that it is really harder to sell properties and when you end up with a court-approved sale process in a foreclosure and a long sales cycle, you add a lot of pressure to our severity and that's why you see the loss pressure there.
To get to your point on whether we see improvement there, we remain of the belief that this economic environment will benefit manufacturing environments like Ontario and Quebec. Quebec has seen some job gains just as last job day that came out, we saw some job gains. The question is how long does it take for the traction to really gain hold in that economy and we are of the view that this year, we will start to see improvements there and I will add we have also seen some improvements in our underwriting in that area. We made some changes to our underwriting over the last few years and really do believe that this will be the year that we start to see some improvement in the performance of our book, but also the economy in general in Quebec.
And I want to switch over to maybe focusing in a little on reserve development here. I mean that was a positive factor through 2015 and that number has been improving over the last several years when you look at your financials here. How should we be thinking about reserve development as we are going through the cycle year and will that trend continue, do you think, to be positive and what's driving that?
Jeff, it's Phil. On the reserving front, yes, we have taken a number action to try to ensure that our case reserves reflect the best available information, but also recognizing any inherent limitations in appraisal. So we have been aggressively working behind the scenes to enhance our reserving methodology hence leading to the favorable development you have seen over the last couple of years. We believe our reserves will adequately continue to update the reserves for any emerging trends. So that would be inclusive of Alberta emerging delinquency.
So we believe our reserves are solid. If you notice our favorable development in 2015 was about $11 million. All total wise, we expect our reserving to be within 5% to 10% of the ultimate settlement cost. And we know that while we may anticipate deteriorating commissions in Alberta to the extent that conditions have the potential to be worse, there could be marginal adverse development. But we generally feel very good about our reserves and we do not anticipate a significant impact in 2016 losses from any development.
Okay. Thank you. I will requeue.
Your next question will come from the line of Shubha Khan of National Bank Financial. Please go ahead.
Thanks. Good morning. So delinquencies in Alberta during the quarter, new delinquencies, that is, I believe there were only 14. How does that compare with more recent quarters? Is it ticking up ever so slowly, or has there been no impact really from the weaker economic conditions right now?
No. As I said earlier, Shubha, we are starting to see and as you noted there in the fourth quarter, we definitely did see a start in the pickup because clearly prior to that, Alberta had been incredibly strong with very low delinquency rates. So you are coming off a low base but there is no doubt there has become a transition now to what you would expect and that is that the delinquencies are going to stop picking up and we expect that will continue through the winter months here, as I said and definitely an ongoing trend throughout 2016, as you effectively take account of what's happened in the job market there. They went from 4.7% unemployment at the end of 2014 to now 7.4%. That's going to have an impact for sure and hence our guidance range and hence our view that we are going to see a steady increase in delinquencies and losses from that region.
Okay. On that guidance range, so you have provided a firmer target range, I guess, 25% to 40%. Just looking at the assumptions behind the range and I think it was on slide nine of the presentation, the chart on the top right seems to suggest that you would get to the top end of that range if delinquency rates returned to levels, I think, last seen in 2011, I believe. In other words, a nationwide delinquency somewhere in the 40 to 45 to 50 basis point range, at least as measured by CBA. So am I interpreting the chart properly? Or should I be thinking about the underlying assumptions differently?
Yes. I think one has to look at it a little differently. That was obviously the scenario back in the 2007, 2008, the global financial crisis that drove probably more pronounced national rise in delinquencies and that's why you saw the CBA delq rate get up to almost 40 basis points or just over 40 basis points. Alberta went up five times from its then low at roughly 15 basis points. Alberta is starting already at about 27 basis points now. So their delinquency rate is already higher than it was back in that timeframe.
I don't think we are saying, I know we are not saying you have to look for the same circumstances to occur before we hit the top end of our range. What we are saying is that if you look at our assumptions, if unemployment hits that 9% level in Alberta and prices do come up around 12% in Alberta, that is going to represent the higher end of our range for 2016. And for us to see unemployment accelerated, if you will, from 7.4% to 9%, I think we would all agree oil would probably have to be in that low end of what I talked about in my script which is the $20 to $40 range. You have to see oil really get down to that $20 level and stay there again through the course of 2016.
We don't think our loss ratio guidance in terms of delinquency rates as much because delinquency rates are really a point in time measurement and they are dependent on a number of other factors. For us it's really the economic drivers and in particular unemployment that really does correlate to our loss performance and you would need to look for unemployment to really get up to that 9% before you start to see our losses approaching the high end of the guidance.
Your next question will come from the line of Paul Holden of CIBC. Please go ahead.
Thank you. Good morning. I wanted to go back to the discussion on the reserve development. So if I recall correctly, in prior years, that's kind of more of a once-a-year type review and so would benefit the last quarter of the years. Is that still the case? Or was the reserve development spread out more through 2015?
Paul, it's Phil. The reserve development was spread out throughout 2015. We have a regular rhythm at least quarterly reviewing reserves development looking at conditions in various regions across the country, looking at home price trends and therefore adjusting the recovery values associated with the underlying collateral of the real estate. So that is something that was spread out throughout 2015. It was not really a significant impact in the fourth quarter.
Got it. Okay. And then in terms of the increase in the MCT ratio Q-over-Q, there was a jump in capital available. Is that just due to internally generated capital at the regulated company? Or is there some kind of drop-down of capital from the HoldCo?
There was no capital drop down from the HoldCo. I think part of what you see being reflected there is essentially the cancellation of the Australian reinsurance capital that was otherwise designated in support of that business, which is in the subsidiary of our main operating company. That capital freed up and that's probably accounts for about two points of MCT growth.
Got it. Just putting that down. Okay.
And the other thing to note is that typically fourth quarter volumes are lower than third quarter volumes. So you consume less capital for new business and that also contributed to the growth.
Got it. Okay. And then, I think, Stuart you kind of addressed this question, but I was getting more at the change in your assumptions regarding Alberta on the unemployment rate and the home prices. You have taken a little bit more of a negative view now in terms of the potential ranges there versus prior guidance, but didn't really change your loss ratio guidance at all. You are suggesting that's simply because you need to still be at the upper end of those ranges in terms of unemployment and home prices to get to a loss ratio of closer to 40%. Is that how we should be reading that?
Yes. That's about right, Paul. I think while we did update those assumptions, as you say, I think we were at 8.5% unemployment before, now 9%. I think the reality is you have to see those assumptions get right up to the top end of that range in 2016 before we start to see the loss ratio guidance gain to the top.
Okay. But if we were to see those assumptions, say, change any further in terms of the top end of the range, maybe the top end of the loss ratio guidance range would also have to change. Is that a fair assumption?
Yes. If we decide, based on what we see in the market and as I committed to in my comments, we will be updating our guidance as market data emerges. If we think that the risk of unemployment in Alberta is going to be material higher than that, we would obviously update both our assumptions and likely revisit our range. At this point, though, we feel that because it is a fairly wide range, we have built in a fair amount of room for volatility and if anything, I would like to be revisiting that range and tightening it up sometime during the year as we get more clarity on where the economy is going.
Okay. That sounds great. Thanks for your time.
Your next question will come from the line of Graham Ryding of TD Securities. Please go ahead.
Hi. Good morning. You gave some color at your Investor Day around potential adjustments to the MCT calculation in 2017, but you thought it would be relatively manageable. And then we saw sort of an update from OSFI saying they were going to look to be a little bit more dynamic with how they approach capital requirements. So is it fair to say then or am I hearing your message correctly that there is now a bit more uncertainty with respect to what that requirements are going to be like and the impact on your business for 2017?
Graham, it's Phil. Clearly the December announcement regarding the potential for a supplemental capital was new information for us and at this stage we do not have enough information to fully assess that. So it does introduce some uncertainty, but having said that, as I mentioned we certainly trust us or our portfolio under a number of scenarios, the 220% holding target encompasses a wide range of scenarios. Clearly we are looking forward to getting more granular information regarding how the supplemental capital may be calculated as well as getting the full information regarding this standardized test in the ordinary course. So as we go through the first half of 2016, we expect to get greater clarity around that and than that will then form our decision thereafter.
Perfect. The workout penetration target for 2016 has moved up to 55% from 50%. Can you just provide a little bit of color around what that reflects? Are you having greater success than you maybe expected? And just a little bit of color behind that increase?
Yes, Graham, it's Stuart. Essentially whenever you have a more economic pressure you see more opportunities for a workout and as a result you can see an increase in yield penetration rate. So I think we are going to see both an opportunity to increase our penetration rate and in Alberta, you might see a slightly lower success rate. And that's because obviously when economic pressure persists, it's harder to find a solution, however that said, the workouts that do will likely yield more savings because you are going to have more reserves on those files. So when you do do a workout, you actually are going to avoid more losses. So it's a combination of more opportunities, given the economic environment which will probably be met with a slightly lower success rate but net net more dollars savings in the lower end.
And lastly, if I could, just Phil, your outlook for your investment income or your effective investment yield, are you expecting that to stabilize at current levels for 2016?
The investment yield is going to have a little more pressure as it relates to rate. We continue to the low rates, five year Canada bonds, 70 basis points or thereabout. That will continue to pressure. We have about $600 million of maturities throughout the course of this year. You have seen that we have increased our preferred shareholdings and that's partially because of the attractive dividend yields at the same time decent quality. But there is limit to what you can invest in segments such as preferred shares. So we will continue to be very dynamic in our portfolio management, but rest assured that our focus will remain on quality. We may suffer a little bit of yield pressure but at the same time, because of the premium increases in the higher level of volumes compared to, let's say, 2013, clearly we would expect to see the assets rise something 3% to 5% asset growth should largely offset that rate pressure. But we may feel a little bit more rate pressure.
Great. Thank you.
[Operator Instructions]. And we will go ahead with your next question from Dan Furtado of Philadelphia Financial. Please go ahead.
Good morning. Thank you for taking my question. I just had a couple of quick ones. Specifically generally speaking in Ontario, but specifically in Toronto, are you seeing any change in defaults in terms of the severity of defaults in those markets?
In Ontario and Toronto, no. I think the answer is our severities have been low for some time there and they remain low. Our expectation is that they will continue to be low. The markets there have done so well in terms of housing over time. There is so much diversification. If you look at our chart, I think we have on risks across the various provinces and the way we look at both employment risk versus housing risk, the whole Ontario and Greater Toronto area market is so diversified that while house prices have seen a stronger run up there, we don't see as much employment risk there and therefore aren't expecting to see any real expansion about severity at least in 2016 here.
Understood. Thank you. And then my other question is, in the mid to late summer, there was, for lack of a better word, a fraud flare up in the space that kind of roiled the entire market there on the mortgage side. And I am just wondering if you are seeing any fallout from that incident in terms of the performance or market behavior? How has that chapter of the Canadian mortgage story evolved?
Yes. I think as we mentioned in some discussions last year, there was really a flare up more in the media than in reality because it wasn't anything new in our world. It's something we deal with all the time. We indicated then and we still believe that it's a very small percentage of fraud that gets into our portfolio. So no, we have not seen any fallout in terms of performance in our portfolios. And no, we have not seen any real change or dynamics in the market as a result of that, I would say, issue or disclosure or event because really its business is usual. We were always well prepared in terms of how we go about defending ourselves as an industry against fraud and we continue to do so. It was really a matter actually of explaining and educating stakeholders and people in the media around what it is, how it happens, what we did to protect ourselves and that's what we continue to do.
Understood. Thank you for the time. I appreciate it.
As there are no further questions, this concludes today's conference call. Thank you for your participation in the Genworth MI Canada Inc. 2015 fourth quarter earnings conference call. You may now disconnect.
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