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mortgage insurance

Genworth expects the new mortgage insurance rules will cause a drop in premiums.JENNIFER ROBERTS/The Globe and Mail

Finance Minister Jim Flaherty's moves to tame the housing market are taking a bite out of Genworth MI Canada Inc.'s business, but the company is optimistic that mortgage delinquencies are ticking down and its business is sound.

Genworth Canada chief executive officer Brian Hurley hosted an investor day Wednesday to illustrate why he believes the mortgage insurer's prospects are good, a message he's been hammering as fears about the health of the real estate market have risen.

Indeed, a few housing bears have been telling investors that shorting Genworth's shares (i.e., placing a financial bet that their price will fall) could be one of the best ways to gamble on the possibility that the market is poised for a dive.

It's a risky bet. "Providing the fundamentals perform as expected (generally flat housing prices with no steady change in current delinquency rates as unemployment essentially remains steady), Genworth should continue to be a low-volatile stock with steady earnings," BMO Nesbitt Burns analyst Tom MacKinnon wrote in a note to clients on Wednesday.

Mr. Hurley is contending with many challenges as he seeks to get his views across, not the least of which is that many Canadians don't know what mortgage insurance is.

"I bet you that still one in two think it's something that you buy in case of death, truthfully, which is unfortunate," he said in a recent interview at the company's Oakville, Ont., headquarters.

Unlike creditor insurance, which pays off a consumer's debt if they lose their job or die, mortgage insurance pays the bank if the consumer defaults on their mortgage. The mortgage insurer, such as Genworth or its major competitor, Canada Mortgage and Housing Corp., recoups some money through the sale of the foreclosed home.

The claims that Genworth receives basically depend on two factors, unemployment and house prices.

"The company ran an interesting stress scenario with a 15-per-cent decline in housing prices and a 300-basis-points increase in unemployment, similar to what happened in the early 1990s," Mr. MacKinnon noted. The drop in the housing market would increase Genworth's loss ratio to 46 per cent from 35 per cent, but combined with a jump in unemployment to 11 per cent from 8 per cent, the claims frequency would double and the loss ratio rise to 92 per cent.

The scenario illustrates that unemployment is the biggest risk, Mr. MacKinnon said.

Genworth is ensuring that mortgage borrowers will be able to handle interest rate shocks, Mr. Hurley stressed, as policy makers have become increasingly concerned about consumer debt levels.

The company expects that the new mortgage insurance rules that Mr. Flaherty put in place in July to curb the growth of debt levels, including cutting the maximum length of an insured mortgage to 25 years, will cause a 15- to 20-per-cent drop in premiums on its core high loan-to-value business. (Insurance is mandatory for high loan-to-value mortgages, when the consumer is borrowing more than 80 per cent of the house's value).

Mr. Hurley knows mortgage insurance as well as anybody. He worked his way up the ranks of General Electric, landing a senior job at NBC in the storied 30 Rock building.

"You work such long hours in New York and I spent about five years literally leaving at 6 a.m. getting home at 8 p.m.," he said. "And I'm thinking 'this is wacko.' So I asked to move, I said I need to get somewhere where there's a little more life and family balance. And literally when you take out the map and you see where GE is, I looked and said 'how about North Carolina? I hear that's nice.' That's how we picked it. And that's where mortgage insurance is headquartered."

Barely into his thirties, he became chief financial officer of GE's mortgage insurance business. "A lot of my time was interfacing with Fannie and Freddie, who mandated the product back in the day," he said.

From that role he led the company's expansion into Canada. "This was when GE was pushing to go global and if you were in finance every year you had to go up there and interface with [then CEO Jack] Welch. And he'd always say 'what are your plans to go global?' And I was like 'it's mortgage insurance, come on.' And he wouldn't take no for an answer."

In 1994, Genworth, then known as GE Capital Mortgage Insurance, struck a deal to take over the seriously ailing Canadian mortgage insurer MICC Investments Ltd. At that time the company was the only competitor to CMHC. There are now three players in the market (the third is Canada Guaranty), with other competitors having come and gone.

Genworth found itself at a disadvantage because Ottawa guarantees 100 per cent of CMHC's insurance, but only 90 per cent of the amount held by the Crown corporation's private sector competitors. The discrepancy became an issue when the financial crisis hit and banks decided they needed all the extra assurance they could get.

"This is what hurt us the last couple years, the concerns around the economy, the concerns around what if there really is going to be some trouble," Mr. Hurley said.