Alberta’s housing market weighs heavily on Genworth’s outlook

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As Canada's largest private-sector mortgage insurer, Genworth MI Canada Inc. has often served as a barometer for sentiment about the country's housing market.

Given the company's share price has slid more than 25 per cent over the past year – even as it has beat earnings estimates for the past three quarters – the sentiment these days has been decidedly negative.

Genworth's stock likely has even further to fall as pain in the energy patch from low oil prices continues to spread to Alberta's housing market, CIBC World Markets analyst Paul Holden writes. Alberta represents roughly one-fifth of Genworth's mortgage-insurance business.

Mr. Holden cut his price target for the company to $25.50 from $31.50 ahead of the company's fourth-quarter earnings release on Feb. 4, a target that factors in a 10-per-cent to 15-per-cent housing-price correction in Alberta. Calgary's benchmark housing price fell 3 per cent in December from a year earlier, according to the Teranet-National Bank house-price index.

"Unemployment in Alberta continues to climb higher, housing volumes remain soft and house prices are starting to crack," Mr. Holden writes. "We maintain our view that higher losses from Alberta are coming, it's just a matter of when."

While Genworth is well prepared to absorb higher losses in Alberta, in large part because of the strength of the housing market outside the Prairies, Mr. Holden expects Alberta to weigh on the company's earnings.

He predicts earnings will drop by 8 per cent this year as the company's loss ratio – a measure that compares claims paid with new premiums written – jumps to 33 per cent from an estimated 22 per cent for 2015. Genworth's loss ratio peaked at 42 per cent in 2009 during the global financial crisis.

In November, Genworth said it was considering a debt offering, an indication the company is looking to raise more regulatory capital. "A shrinking capital cushion at a time when earnings risk is increasing is not a good combination for the stock," Mr. Holden writes.