GENWORTH MI CANADA INC.

Transcription

1 Condensed Consolidated Interim Financial Statements (In Canadian dollars) GENWORTH MI CANADA INC.

2 Condensed Consolidated Interim Statements of Financial Position (In thousands of Canadian dollars) Assets Notes June 30, 2017 December 31, 2016 Cash and cash equivalents 5 $ 169,041 $ 126,072 Short-term investments 5 148, ,099 Accrued investment income and other receivables 30,415 47,337 Derivative financial instruments 5 90,396 38,787 Bonds and debentures and other 5 5,509,576 5,468,170 Preferred shares 5 473, ,819 Total invested assets, accrued investment income and other receivables 6,421,552 6,312,284 Subrogation recoverable 4(c) 62,510 67,242 Prepaid assets 3,580 2,730 Property and equipment 1,533 1,683 Intangible assets 9,099 10,070 Deferred policy acquisition costs 4(d) 205, ,810 Goodwill 11,172 11,172 Total assets $ 6,714,715 $ 6,611,991 Liabilities and Shareholders' Equity Liabilities: Accounts payable and accrued liabilities $ 44,244 $ 64,987 Income taxes payable 20,637 19,329 Loss reserves 4(b) 133, ,467 Share-based compensation liabilities 7 15,967 16,069 Derivative financial instruments 5 31,999 42,838 Long-term debt 9 433, ,891 Unearned premiums reserve 4(a) 2,104,110 2,142,903 Accrued net benefit liabilities under employee benefit plans 43,209 41,710 Deferred tax liabilities 45,446 39,217 Total liabilities 2,872,057 2,963,411 Shareholders' equity: Share capital 11 1,371,801 1,368,658 Retained earnings 2,362,245 2,186,988 Accumulated other comprehensive income 108,612 92,934 Total shareholders' equity 3,842,658 3,648,580 Total liabilities and shareholders' equity $ 6,714,715 $ 6,611,991 See accompanying notes to the condensed consolidated interim financial statements. On behalf of the Board: (signed) "Stuart Levings" (signed) "Neil Parkinson" Director Director 1

3 Condensed Consolidated Interim Statements of Income Three months ended Six months ended June 30, June 30, Notes Premiums written 4(a) $ 169,516 $ 248,690 $ 296,725 $ 365,706 Premiums earned 4(a) $ 168,464 $ 157,753 $ 335,518 $ 311,616 Losses on claims 4(b) 5,514 32,486 31,124 69,378 Expenses: Premium taxes and underwriting fees 13,383 18,792 23,377 28,358 Employee compensation 10,604 12,139 24,317 23,288 Office 5,284 4,736 10,409 9,282 Professional fees 1, ,099 1,945 Promotional and travel 1,144 1,093 2,523 2,277 Other Total expenses 31,740 37,673 63,372 65,536 Net change in deferred policy acquisition costs 4(d) (835) (7,705) 1,541 (7,090) 30,905 29,968 64,913 58,446 Net underwriting income 132,045 95, , ,792 Investment income: Interest 41,293 40,041 82,508 79,324 Dividends 5,285 5,207 10,131 8,589 Net realized gains (losses) on sale of investments 1,252 (169) 2,681 (29) Net gains (losses) on derivatives and foreign exchange 29,641 (8,575) 26,468 (13,495) Impairment loss (2,505) (2,505) Total investment income 77,471 33, ,788 71,884 General investment expenses (1,217) (1,127) (2,544) (2,304) 76,254 32, ,244 69,580 Interest expense 9 5,825 5,743 11,585 11,424 Income before income taxes 202, , , ,948 Income taxes: Current 54,335 33,236 85,042 59,660 Deferred (1,567) (1,321) 6,151 3,866 52,768 31,915 91,193 63,526 Net income for the period attributable to owners of the Company $ 149,706 $ 90,513 $ 255,947 $ 178,422 Earnings per share: 8 Basic $ 1.63 $ 0.99 $ 2.78 $ 1.94 Diluted $ 1.61 $ 0.99 $ 2.78 $ 1.94 See accompanying notes to the condensed consolidated interim financial statements. 2

4 Condensed Consolidated Interim Statements of Comprehensive Income (In thousands of Canadian dollars) Three months ended Six months ended June 30, June 30, Net income $ 149,706 $ 90,513 $ 255,947 $ 178,422 Other comprehensive income: Items that may be reclassified subsequently to income: Re-measurement of employee benefit obligations (a) Net change in fair value of Available-for-Sale ("AFS") financial assets (b) (23,023) 32,651 17,170 25,226 Gains (losses) on AFS financial assets realized and reclassified to income (c) (933) 2,759 (1,492) 2,444 Total other comprehensive income for the period attributable to owners of the Company (d) (23,742) 35,410 15,892 27,670 Total comprehensive income attributable to owners of the Company $ 125,964 $ 125,923 $ 271,839 $ 206,092 (a) Net of income tax of $79 for the three and six months ended June 30, 2017 (three and six months ended June 30, nil). (b) Net of income tax of $8,533 for the three months ended June 30, 2017 (June 30, $12,010) and net of income tax of $6,188 for the six months then ended (June 30, $9,763 ). (c) Net of income tax of $334 for the three months ended June 30, 2017 (June 30, $1,043) and net of income tax of $539 for the six months then ended (June 30, $946). (d) Net of income tax of $8,946 for the three months ended June 30, 2017 (June 30, $13,053) and net of income tax of $6,806 for the six months then ended (June 30, $10,709). See accompanying notes to the condensed consolidated interim financial statements. 3

5 Condensed Consolidated Interim Statements of Changes in Equity Accumulated other Total Share Retained comprehensive shareholders' capital earnings income equity Balance at January 1, 2017 $ 1,368,658 $ 2,186,988 $ 92,934 $ 3,648,580 Comprehensive income: Net income 255, ,947 Other comprehensive income 15,892 15,892 Total comprehensive income 255,947 15, ,839 Total transactions recognized directly in equity: Dividends on common shares (1) (80,904) (80,904) Issuance of common shares 3,143 3,143 Re-measurement of employee benefit obligations 214 (214) Total transactions recognized directly in equity 3,143 (80,690) (214) (77,761) Balance at June 30, 2017 $ 1,371,801 $ 2,362,245 $ 108,612 $ 3,842,658 Accumulated other Total Share Retained comprehensive shareholders' capital earnings income equity Balance at January 1, 2016 $ 1,366,374 $ 1,926,949 $ 126,570 $ 3,419,893 Comprehensive income: Net income 178, ,422 Other comprehensive loss 27,670 27,670 Total comprehensive income 178,422 27, ,092 Total transactions recognized directly in equity: Dividends on common shares (1) (77,112) (77,112) Issuance of common shares 1,597 1,597 Total transactions recognized directly in equity 1,597 (77,112) (75,515) Balance at June 30, 2016 $ 1,367,971 $ 2,028,259 $ 154,240 $ 3,550,470 (1) The Company paid dividends of $0.44 per common share in the first and second quarter of 2017 ($0.42 per common share in the first and second quarter of 2016). See accompanying notes to the condensed consolidated interim financial statements. 4

6 Condensed Consolidated Interim Statements of Cash Flows (In thousands of Canadian dollars) Cash provided by (used in): Six months ended June 30, Operating activities: Net income $ 255,947 $ 178,422 Adjustments for non-cash items in net income: Amortization of intangible assets and depreciation of property and equipment 1,929 1,402 Expensing of deferred policy acquisition costs 33,313 30,679 Income taxes 91,193 63,526 Interest income (82,508) (79,324) Dividend income (10,131) (8,589) Net realized (gains) losses on sale of investments (2,681) 29 Net (gains) losses on derivatives and foreign exchange (26,468) 13,495 Impairment loss 2,505 Interest expense 11,585 11,424 Net share-based compensation expense 2,751 1, , ,356 Change in non-cash balances related to operations: Accrued investment income and other receivables (516) (805) Prepaid assets (850) (985) Subrogation recoverable 4,732 (1,789) Deferred policy acquisition costs (31,772) (37,769) Accounts payable and accrued liabilities (19,187) (17,997) Loss reserves (30,113) 16,360 Unearned premiums reserve (38,793) 54,090 Accrued net benefit liability under employee benefit plans 1,793 1, , ,214 Cash generated from (used in) operating activities: Interest received from bonds and debentures 85,794 84,687 Dividends received from preferred shares 10,663 7,445 Interest paid on long-term debt (11,204) (11,204) Income taxes paid (89,385) (56,810) Share-based compensation awards settled in cash (3,052) (2,070) Derivative financial instruments (6,225) (1,717) Net cash generated from operating activities 146, ,545 Financing activities: Dividends paid (80,904) (77,112) Proceeds from exercise of stock options 1,588 1,140 Net cash used in in financing activities (79,316) (75,972) Investing activities: Purchase of short-term investments (256,975) (248,365) Proceeds from sale or maturities of short-term investments 315, ,082 Purchase of bonds (701,186) (631,794) Proceeds from sale or maturities of bonds 632, ,313 Purchase of preferred shares (14,243) (85,673) Proceeds from sale of preferred shares Purchase of intangible assets and property and equipment (807) (3,325) Net cash used in in investing activities (24,530) (292,539) Increase (decrease) in cash and cash equivalents 42,969 (119,966) Cash and cash equivalents, beginning of period 126, ,796 Cash and cash equivalents, end of period $ 169,041 $ 270,830 See accompanying notes to the condensed consolidated interim financial statements. 5

7 Notes to Condensed Consolidated Interim Financial Statements 1. Reporting entity: Genworth MI Canada Inc. (the "Company") was incorporated under the Canada Business Corporations Act on May 25, 2009 and is domiciled in Canada. The Company's shares are traded publicly on the Toronto Stock Exchange under the symbol "MIC". The Company's registered office is located at Suite 300, 2060 Winston Park Drive, Oakville, Ontario, L6H 5R7, Canada. Genworth Financial Inc., a public company listed on the New York Stock Exchange, indirectly holds approximately 57.2% (December 31, %) of the common shares of the Company. On October 21, 2016, Genworth Financial Inc., the Company s majority shareholder, entered into a definitive agreement with China Oceanwide Holdings Group Co., Ltd., a limited liability company incorporated in the People's Republic of China ( China Oceanwide ), under which China Oceanwide has agreed to acquire all of the outstanding shares of Genworth Financial Inc. through a merger. Upon completion of the transaction, Genworth Financial Inc. will be a standalone subsidiary of China Oceanwide. On March 7, 2017, stockholders of Genworth Financial Inc. voted on and approved the transaction. The transaction is subject to other closing conditions, including the receipt of required regulatory approvals. Genworth Financial Inc. has announced that the timing of the regulatory reviews will likely delay the completion of the transaction to later than the originally targeted time frame of the middle of Genworth Financial Inc. has also announced that it and China Oceanwide are discussing an extension of the August 31, 2017, deadline set forth in the merger agreement and that the parties remain committed to satisfy the closing conditions under the merger agreement as soon as possible. The Company holds a 100% ownership interest in the holding companies Genworth Canada Holdings I Company ("Holdings I"), Genworth Canada Holdings II Company ("Holdings II"), MIC Holdings H Company ("Hco") and MIC Holdings I Company ("Ico"). The Company also holds an indirect 100% ownership interest in Genworth Financial Mortgage Insurance Company Canada (the "Insurance Subsidiary") through Holdings I and Holdings II. These condensed consolidated interim financial statements as at and for the three and six months ended June 30, 2017, reflect the consolidation of the Company and these subsidiaries. The Insurance Subsidiary is engaged in mortgage insurance in Canada and owns all of the issued and outstanding shares of MIC Insurance Company Canada ("MICICC"). MICICC is licensed to service policies originated prior to its acquisition by the Company in The Insurance Subsidiary and MICICC are regulated by the Office of the Superintendent of Financial Institutions Canada ("OSFI") as well as applicable provincial financial services regulators. The Insurance Subsidiary is also subject to regulation under the Protection of Residential Mortgage or Hypothecary Insurance Act ("PRMHIA"). Under the terms of PRMHIA, the Canadian federal 6

8 1. Reporting entity (continued): government guarantees the benefits payable under eligible mortgage insurance policies issued by the Insurance Subsidiary, less 10% of the original principal amount of each insured loan, in the event that the Insurance Subsidiary fails to make claim payments with respect to that loan due to its bankruptcy or insolvency. 2. Basis of presentation: (a) Statement of compliance: These condensed consolidated interim financial statements were prepared in accordance with International Accounting Standard 34 - Interim Financial Reporting. Accordingly, the condensed consolidated interim financial statements contain selected explanatory notes to the financial statements and do not include all the disclosures required by International Financial Reporting Standards. Full disclosures were included in the Company's annual consolidated financial statements for the year ended December 31, These condensed consolidated interim financial statements were approved by the Board of Directors on July 31, (b) Use of estimates and judgments: The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities at the date of the condensed consolidated interim financial statements and the reported amounts of income and expenses during the period. Actual results may differ from these estimates. These significant judgments and estimates made by the Company in preparing these condensed consolidated interim financial statements were the same as those applied to the consolidated financial statements as at and for the year ended December 31, (c) Seasonality: The mortgage insurance business is seasonal in nature. While net premiums earned, investment income and underwriting and administrative expenses are relatively stable from quarter to quarter, premiums written and losses may vary each quarter. These variations are driven by the level of mortgage originations and related mortgage policies written, which typically peak in the spring and summer months. Delinquencies and losses on claims vary from quarter to quarter primarily as the result of prevailing economic conditions as well as the characteristics of the insurance in-force portfolio, such as size and age. 7

9 2. Basis of presentation (continued): All revenue and expenses are recognized when they occur in accordance with the accounting policies referred to in the Company's annual consolidated financial statements. No revenue or expenses are anticipated or deferred for interim reporting purposes if anticipation or deferral would not be appropriate at the end of the Company's financial year. 3. Significant accounting policies: The Company's complete accounting policies have been included in the consolidated financial statements for the year ended December 31, Accounting policies and methods of computation followed in the preparation of these condensed consolidated interim financial statements were the same as those applied by the Company in the annual consolidated financial statements as at and for the year ended December 31, 2016, except for the amendment described below. (a) Changes in accounting policies: The Company has adopted the disclosure requirements in Disclosure initiative - Amendments to IAS 7 on January 1, Consequently, the Company has provided additional disclosure in relation to the changes in liabilities arising from financing activities for the six months ended June 30, The amendments do not require comparative information to be presented (note 9). (b) Future accounting standards: On May 18, 2017, the International Accounting Standards Board issued IFRS 17 - Insurance contracts ( IFRS 17 ). IFRS 17 requires retrospective application and is effective for annual periods beginning on or after January 1, IFRS 17 replaces the interim accounting standard IFRS 4: Insurance contracts. Under the IFRS 17 model, insurance contract liabilities will be calculated as the present value of future insurance cash flows with provisions for risk and profit at contract inception. The provisions for risk and profit will be amortized over the life of the contract. Unprofitable contracts at inception, will be recognized immediately. There will also be a new income statement presentation for insurance contracts and additional disclosure requirements. The Company is assessing the impact of IFRS 17. 8

10 4. Insurance contracts: (a) Premiums and unearned premiums reserve: The following table presents movement in unearned premiums reserve and the impact on premiums written and earned: Six months ended June 30, Unearned premiums reserve, beginning of period $ 2,142,903 $ 2,020,993 Premiums written during the period 296, ,706 Premiums earned during the period (335,518) (311,616) Unearned premiums reserve, end of period $ 2,104,110 $ 2,075,083 Premiums written are recognized as premiums earned using a factor-based premium recognition curve that is based on the Company's expected loss emergence pattern. (b) Losses on claims and loss reserves: Loss reserves comprise the following: June 30, December 31, Case reserves $ 88,485 $ 102,753 Incurred but not reported reserves 38,898 53,305 Discounting (1,596) (1,940) Provision for adverse deviation 7,567 9,349 Total loss reserves $ 133,354 $ 163,467 9

11 4. Insurance contracts (continued): (b) Losses on claims and loss reserves (continued): The following table presents movement in loss reserves and the impact on losses on claims: Six months ended June 30, Loss reserves, beginning of period $ 163,467 $ 131,577 Claims paid during the period (61,237) (53,018) Losses on claims incurred during the period 31,124 69,378 Loss reserves, end of period $ 133,354 $ 147,937 The carrying value of loss reserves reflects the present value of expected claims costs and expenses and provisions for adverse deviation and is considered to be an indicator of fair value. There is no ready market for the trading of loss reserves and the value agreed between parties in an arm's-length transaction may be materially different. (c) Subrogation recoverable: The following table presents movement in subrogation recoverable during the period: Six months ended June 30, Subrogation rights related to real estate, beginning of period $ 51,225 $ 43,223 Subrogation rights related to real estate acquired as a result of settling claims, at fair value 107,110 97,577 Change in market value of real estate on hand 3,545 (941) Subrogation rights related to real estate disposed of during the period (114,612) (94,347) Subrogation rights related to real estate, end of period 47,268 45,512 Borrower recoveries, beginning of period 16,017 18,021 Net estimated future borrower recoveries recognized 1,553 1,724 Borrower recoveries received (2,390) (2,288) Discounting (101) 25 Provision for adverse deviation Borrower recoveries, end of period 15,242 17,521 Subrogation recoverable, end of period $ 62,510 $ 63,033 10

12 4. Insurance contracts (continued): (c) Subrogation recoverable (continued): The Company applies an expected recovery rate based on historical experience of successful recoveries from borrowers to past claims paid and current loss reserves to establish a recovery accrual. The Company reviews the expected recovery rate quarterly to ensure it reflects the most current historical experience of successful recoveries. Borrower recoveries are discounted to take into account the time value of money and include an explicit margin for adverse deviation. (d) Deferred policy acquisition costs: The following table presents movement in deferred policy acquisition costs and the impact on total expenses: Six months ended June 30, Deferred policy acquisition costs, beginning of period $ 206,810 $ 193,070 Policy acquisition costs deferred during the period 31,772 37,769 Deferred policy acquisition costs expensed during the period (33,313) (30,679) Net change in deferred policy acquisition costs during the period (1,541) 7,090 Deferred policy acquisition costs, end of period $ 205,269 $ 200,160 11

13 5. Investments: The investments presented in the table below are carried at fair value: Fair value June 30, 2017 December 31, 2016 Amortized cost Unrealized gain (loss) % total fair value Fair value Amortized cost Unrealized gain (loss) % total fair value Cash and cash equivalents: Canadian federal government treasury bills $ 95,697 $ 95,697 $ 1.5 $ 50,407 $ 50,407 $ 0.8 Cash 73,344 73, ,665 75, , , , , AFS investments: Short-term investments: Canadian federal government treasury bills 148, , , , Government bonds and debentures: Canadian federal government (1) 1,934,642 1,897,788 36, ,976,304 1,931,558 44, Canadian provincial and municipal governments 976, ,886 50, , ,399 55, ,910,642 2,823,674 86, ,964,008 2,863, , Corporate bonds and debentures: Financial 884, ,039 17, , ,780 23, Energy 351, ,158 18, , ,422 19, Infrastructure 109, ,081 5, ,069 95,791 5, All other sectors 962, ,545 49, , ,466 56, ,307,837 2,217,823 90, ,297,025 2,192, , Collateralized loan obligations 291, ,165 (3,068) , ,394 26, Total AFS bonds and debentures 5,509,576 5,335, , ,468,170 5,236, , Preferred shares: Financial 276, , , ,649 (15,594) 4.0 Energy 89,653 82,961 6, ,518 78, All other sectors 107, ,422 4, , ,167 (3,921) , ,908 11, , ,783 (18,964) 6.9 Total investments $ 6,300,741 $ 6,115,084 $ 185,657 (2) $ 6,226,160 $ 6,013,764 $ 212,396 (2) (1) As at June 30, 2017, the Company had no collateral (December 31, $2,682) posted for the benefit of the Company's counterparites to its derivative financial instrument contracts, as described in the derivative financial instruments section of note 5. (2) As at June 30, 2017, unrealized gains include unrealized foreign exchange gains of $31,203 (December 31, $79,271). 12

14 5. Investments (continued): The fair value of investments, excluding preferred shares and cash and cash equivalents, are shown by contractual maturity of the investment. Terms to maturity: Federal, provincial and municipal bonds and debentures and short-term investments: June 30, December 31, year or less $ 403,517 $ 456, Years 739, , Years 720, , Years 1,015, ,797 Over 10 Years 178, ,960 3,059,115 3,170,107 Corporate bonds and debentures and collateralized loan obligations: 1 year or less 347, , Years 454, , Years 595, , Years 944,712 1,001,922 Over 10 Years 256, ,124 2,598,934 2,504,162 $ 5,658,049 $ 5,674,269 (a) Investments denominated in foreign currencies: Collateralized loan obligations ("CLOs") of $291,097 (December 31, $207,137) are denominated in U.S. dollars. The CLOs are structured credit securities, collateralized by U.S. bank loans with an average AA credit rating that pay interest based on floating interest rates indexed to the London Interbank Offered Rate. Additionally, corporate bonds and debentures includes $416,515 (December 31, $407,200) of emerging market bonds and $113,210 of European bonds (December 31, $65,441) denominated in U.S. dollars. (b) Investment impairment assessment: For investments in bonds and debentures and preferred shares, evaluation of whether impairment has occurred is based on the Company s best estimate of the cash flows expected to be collected at the individual investment level. No impairment losses were recognized during the six months ended June 30, 2017 (June 30, $2,505). 13

15 5. Investments (continued): (c) Derivative financial instruments: Derivative financial instruments are used by the Company for economic hedging purposes and for the purpose of modifying the risk profile of the Company's investment portfolio, subject to exposure limits specified within the Company's investment policy guidelines, which have been approved by the Board of Directors. The Company uses derivative financial instruments in the form of foreign currency forwards and cross currency interest rate swaps to mitigate foreign currency risk associated with bonds and collateralized loan obligations denominated in U.S. dollars. Foreign currency forwards and cross currency interest rate swaps are contractual obligations to exchange one currency for another at a predetermined future date. The Company uses equity total return swaps to hedge a portion of its economic exposure from the changes in fair market value of the Company's common shares in relation to risks associated with share-based compensation expense. Additional disclosure of the Company's equity total return swaps is included in note 7. The Company uses fixed-for-floating interest rate swaps in conjunction with management of interest rate risk related to its fixed income investments. The fixed for floating interest rate swaps are derivative financial instruments in which the Company and its counterparty agree to exchange interest rate cash flows based on a specified notional amount from a fixed rate to a floating rate. 14

16 5. Investments (continued): The following table shows the fair value and notional amounts of the derivatives by terms of maturity, in Canadian dollars: Notional amount June 30, Derivative Derivative Net 1 year Over asset liability fair value or less years years years Total Foreign currency forwards $ 8,440 $ (29,726) $ (21,286) $ 230,852 $ 33,734 $ 67,669 $ 161,764 $ 494,019 Cross currency interest rate swaps 3,876 (2,273) 1,603 45,889 55,906 91, , ,022 Equity total return swaps 2,714 2,714 20,096 20,096 Interest rate swaps 75,366 75,366 3,500,000 3,500,000 Total $ 90,396 $ (31,999) $ 58,397 $ 296,837 $ 89,640 $ 3,659,125 $ 332,535 $ 4,378,137 Notional amount December 31, Derivative Derivative Net 1 year Over asset liability fair value or less years years years Total Foreign currency forwards $ 219 $ (35,497) $ (35,278) $ 161,066 $ 24,391 $ 50,288 $ 186,599 $ 422,344 Cross currency interest rate swaps 83 (7,333) (7,250) 18,810 38,963 70, , ,852 Equity total return swaps 702 (8) ,812 20,812 Interest rate swaps 37,783 37,783 2,000,000 2,000,000 Total $ 38,787 $ (42,838) $ (4,051) $ 200,688 $ 63,354 $ 2,120,877 $ 329,089 $ 2,714,008 15

17 5. Investments (continued): The Company enters into collateral arrangements with its derivative counterparties that require the posting of collateral to its derivative financial instruments upon certain net exposure thresholds being met. As at June 30, 2017, the Company has accepted collateral of $39,042 from its counterparties in the form of Canadian federal and provincial government bonds and has no collateral posted to its counterparties. At December 31, 2016, the Company posted $12,752, in the form of Canadian federal government bonds for the benefit of its counterparties and accepted collateral of $10,070 from its counterparties in the form of Canadian federal and provincial government bonds. (d) Securities lending: The Company had loaned the following investments under its securities lending program: June 30, December 31, Cash equivalents $ 42,305 $ 31,207 Short-term investments Bonds and debentures 403, ,490 Preferred shares 16,910 9,186 $ 462,539 $ 470,883 As at June 30, 2017, the Company has accepted eligible securities as collateral with a fair value of $487,593 (December 31, $496,211). (e) Fair value measurements: Fair value measurements are based on a three-level fair value hierarchy based on inputs used in estimating the fair value of financial instruments. The hierarchy of inputs is summarized below: Level 1 - inputs used to value the financial instruments are unadjusted quoted prices in active markets for identical assets or liabilities; Level 2 - inputs used to value the financial instruments are other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly; and Level 3 - inputs used to value the financial instruments are not based on observable market data. 16

18 5. Investments (continued): The following tables set forth inputs used in valuing the Company's financial instruments carried at fair value: June 30, 2017 Level 1 Level 2 Level 3 Total Bonds and debentures $ $ 5,509,576 $ $ 5,509,576 Preferred shares 473, ,651 Short-term investments 148, ,473 Net derivative financial instruments 58,397 58,397 $ 622,124 $ 5,567,973 $ $ 6,190,097 December 31, 2016 Level 1 Level 2 Level 3 Total Bonds and debentures $ $ 5,468,170 $ $ 5,468,170 Preferred shares 425, ,819 Short-term investments 206, ,099 Net derivative financial instruments (4,051) (4,051) $ 631,918 $ 5,464,119 $ $ 6,096,037 During the period ended June 30, 2017 and the year ended December 31, 2016, the Company did not hold any investments measured at fair value using unobservable inputs (Level 3). Transfers between levels of the fair value hierarchy may occur if the inputs used to value the investments change. Any transfers between the levels are deemed to have occurred at the end of the reporting period. Given the types of assets classified in Level 1, which are short-term investments and preferred shares, the Company does not typically have any transfers between Level 1 and Level 2 of the fair value hierarchy, and there were no such transfers during the period ended June 30, 2017 and the year ended December 31, Valuation of Level 2 financial instruments: Fair values of bonds and debentures, including CLOs, are obtained primarily from industrystandard pricing services and third party brokers utilizing market observable inputs. Fair value is assessed by analyzing available market information through processes such as benchmark curves, benchmarking of like securities and quotes from market participants. 17

19 5. Investments (continued): Observable information is compiled and integrates relevant credit information, interest rates of the underlying investment, perceived market movements and sector news. Market indicators, industry and economic events are also monitored as triggers to obtain additional data. The primary inputs used in determining fair value of bonds and debentures are interest rate curves and credit spreads. Derivative financial instruments are non-exchange traded foreign currency forwards, cross currency interest rate swaps, equity total return swaps and interest rate swaps. The value of these derivative financial instruments is determined using an income approach in which future cash flows expected from the contracts are discounted to reflect the current value of the derivative financial instruments. The primary inputs used in determining fair value of foreign currency forwards and cross currency interest rate swaps are interest rate yield curves and foreign currency exchange rates. The primary inputs used in determining fair value of equity total return swaps are market prices for referenced assets and interest rate yield curves. The primary inputs used in determining fair value of interest rate swaps are interest rate yield curves. 18

20 6. Related party balances and transactions: The Company enters into related party transactions with Genworth Financial Inc. and its subsidiaries. Services rendered by Genworth Financial Inc. and affiliated companies consist of information technology, finance, human resources, legal and compliance, and other specified services. The services rendered by the Company and the Insurance Subsidiary relate mainly to financial reporting and tax compliance support services. These transactions are in the normal course of business and are at terms and conditions no less favourable than market. Balances owing for service transactions are non-interest bearing and are settled on a quarterly basis. The Company incurred net related party charges of $1,608 and $3,175 for the three and six months ended June 30, 2017, (June 30, $1,446 and $3,094, respectively). The balance payable for related party services at June 30, 2017 is $294 (December 31, $44 receivable) and is reported in accounts payable and accrued liabilities in the condensed consolidated interim statements of financial position. 7. Share-based compensation: The Company provides long-term incentive plans for the granting of stock options ("Options"), restricted share units ("RSUs"), directors' deferred share units ("DSUs"), performance share units ("PSUs"), and executive deferred share units ( EDSUs ). The Company has reserved 3,000,000 common shares of its issued and authorized shares for issuance under these long-term incentive plans. As at June 30, 2017, the Company has 1,237,379 common shares remaining that are available for distribution. Disclosure of long-term incentive plans is included in the Company's annual consolidated financial statements for the year ended December 31, The Company enters into equity total return swaps to hedge a portion of its economic exposure from the changes in fair market value of the Company's common shares. Equity total return swaps are contracts by which one counterparty agrees to pay or receive from the other cash amounts based on changes in the value of a referenced asset or group of assets, including any returns such as interest earned or dividends accrued on these assets in exchange for amounts that are based on prevailing market funding rates. Changes in fair value of the equity total return swaps are recognized in employee compensation expense in the condensed consolidated interim statements of income. 19

21 7. Share-based compensation (continued): The following table summarizes information about the Company's share-based compensation plans: Number of share-based awards outstanding as at June 30, 2017 Fair value of share-based awards as at June 30, 2017 Share-based compensation expense for three months ended June 30, 2017 Share-based compensation expense for six months ended June 30, 2017 Options 933,363 $ 9,144 $ (509) $ 2,714 RSUs 128,143 4, DSUs 69,557 2, PSUs 89,072 3, EDSUs 46,430 1,657 (11) 185 1,266,565 $ 21,033 $ 73 $ 4,505 Effect of equity total return swaps 463 (1,754) Net share-based compensation expense $ 536 $ 2,751 Total share based compensation liability as of June 30, 2017 was $15,967 (December 31, $16,069). 20

22 8. Earnings per share: Basic earnings per share have been calculated using the weighted average number of shares outstanding of 91,947,700 and 91,925,180 for the three and six months ended June 30, 2017 ( ,807,935 and 91,802,793 respectively). Diluted earnings per share have been calculated using the diluted weighted average number of shares outstanding of 92,349,039 and 92,095,869 for the three and six months ended June 30, 2017 ( ,842,106 and 91,853,661 respectively). The following units were excluded from the diluted weighted average number of shares since their effect would have been anti-dilutive due to the cash settlement option: Three months ended Six months ended June 30, June 30, Options 69, , , ,638 RSUs 41,919 41,919 DSUs 57,473 54,825 PSUs 95,873 35,709 33,853 Total 69,600 1,172, ,072 1,108,235 21

23 8. Earnings per share (continued): Basic and diluted earnings per share: Three months ended June 30, Six months ended June 30, Basic earnings per share: Net income $ 149,706 $ 90,513 $ 255,947 $ 178,422 Diluted earnings per share: Re-measurement amount net of income taxes (677) (160) Earnings for purposes of diluted earnings per share $ 149,029 $ 90,514 $ 256,048 $ 178,262 Basic common shares outstanding, beginning of period 91,947,700 91,799,159 91,864,100 91,795,125 Effect of share-based compensation exercised during the period 8,776 61,080 7,668 Weighted average basic common shares outstanding, during the period 91,947,700 91,807,935 91,925,180 91,802,793 Basic earnings per share $ 1.63 $ 0.99 $ 2.78 $ 1.94 Diluted earnings per share: Basic weighted average common shares outstanding during the period 91,947,700 91,807,935 91,925,180 91,802,793 Effect of share-based compensation during the period 401,339 34, ,689 50,868 Diluted weighted average common shares outstanding, during the period 92,349,039 91,842,106 92,095,869 91,853,661 Diluted earnings per share $ 1.61 $ 0.99 $ 2.78 $

24 9. Long-term debt: The following table provides details of the Company's long-term debt: Series 1 Series 3 Date issued June 29, 2010 April 1, 2014 Maturity date June 15, 2020 April 1, 2024 Principal amount outstanding $275,000 $160,000 Fixed annual rate 5.68% 4.242% Semi-annual interest payment due each period on: June 15 October 1 December 15 April 1 The Company's long-term debt balances are as follows: June 30, 2017 Series 1 Series 3 Total Carrying value $ 274,076 $ 159,015 $ 433,091 Fair value 296, , ,912 December 31, 2016 Series 1 Series 3 Total Carrying value $ 273,937 $ 158,954 $ 432,891 Fair value 297, , ,193 The Company incurred interest expense of $5,825 and $11,585 for the three and six months ended June 30, 2017, (June 30, $5,743 and $11,424) with accrued interest payable of $2,398 at June 30, 2017 (December 31, $2,490) recorded in accounts payable and accrued liabilities in the condensed consolidated interim statements of financial position. 23

25 9. Long-term debt (continued): Reconciliation of movements of liabilities to cash flows arising from financing activities: Long Term Debt Interest Payable Balance at January 1, 2017 $ 432,891 $ 2,490 Amortization of discount and capitalized borrowing costs 200 Interest expense on long-term debt 11,112 Interest paid (11,204) 200 (92) Balance at June 30, 2017 $ 433,091 $ 2, Credit Facility: On May 20, 2016, the Company entered into a $100 million senior unsecured revolving credit facility, which matures on May 20, Any borrowings under the credit facility will bear interest at a rate per annum equal to either a fixed rate based on a spread over Bankers' Acceptance or a variable rate based on a spread over the Lender Prime Rate. The Company also pays a standby fee based on the unused amount of the commitment which is recorded in interest expense in the condensed consolidated interim statements of income. The credit facility includes customary representations, warranties, covenants, terms and conditions for transactions of this type. As at June 30, 2017 there was no amount outstanding under the credit facility and all of the covenants were fully met (December 31, nil). 24

26 11. Share capital: On May 2, 2017, the Company received approval by the Toronto Stock Exchange for the Company to undertake a normal course issuer bid ("NCIB"). Pursuant to the NCIB, the Company can purchase, for cancellation, up to 4,597,385 shares representing approximately 5% of its outstanding common shares. Purchases of common shares under the NCIB may commence on or after May 5, 2017 and will conclude on the earlier of May 4, 2018 and the date on which the Company has purchased the maximum number of shares under the NCIB. Genworth Financial Inc. has advised that it intends to participate proportionately in the NCIB. On April 28, 2016, the Company received approval by the Toronto Stock Exchange for the Company to undertake a NCIB. Pursuant to the NCIB, the Company could purchase, for cancellation, up to 4,589,958 shares representing approximately 5% of its outstanding common shares. This NCIB expired on May 4, The Company did not purchase any shares under either NCIB during the three and six months ended June 30, 2017 (June 30, nil). 12. Capital management and regulatory requirements: On January 1, 2017, the Company implemented a new regulatory capital framework based on OSFI s advisory for capital titled Capital Requirements for Federally Regulated Mortgage Insurers. The new framework is more risk sensitive and incorporates additional risk attributes, including credit score, remaining amortization and outstanding loan balance. The new regulatory framework focuses on capital requirements for insurance risk which consist primarily of: (a) (b) (c) A base requirement that applies to all insured mortgages at all times; plus A supplementary requirement that applies only to mortgages originated during periods when the housing market for the region that corresponds to the mortgage has a house price-to-income ratio that exceeds a specified threshold (with this supplementary requirement not applying to mortgages insured prior to January 1, 2017); less Premium liabilities, consisting of unearned premiums reserve and the reserve for incurred but not reported ( IBNR ) claims. Supplementary capital will be tied to the behavior of property prices, both in terms of recent housing price trends and the behavior of housing prices relative to household incomes. OSFI s advisory includes a phase-in period to allow for a smooth transition to the new regulatory capital framework. 25

27 12. Capital management and regulatory requirements (continued): Under the new regulatory capital framework, the Company s holding target at December 31, 2016 of 220% has been recalibrated, under PRMHIA, to the OSFI Supervisory MCT target of 150% and the minimum MCT under PRMHIA has been reduced to 150%. The Company has also established an internal MCT ratio target of 157%. The Company s MCT under the new regulatory capital framework at June 30, 2017 is approximately 167% and management has determined that the Company has complied with its regulatory capital requirement and its internal MCT target ratio. 26