2018 Financial Commentary
2018 experienced slowing global growth, increased trade tensions and geopolitical risks. The volatile capital markets led to a weak overall financial performance for Tarion – primarily due to the lower investment returns. Tarion focused on prudent spending and sought operating cost savings while continuing to deliver its consumer protection mandate and 2018 business plan.
Tarion’s Guarantee Fund grew $8.8 million in the year to $592.3 million through investment of surplus cash from operations and reinvestment of investment returns, partially offset by capital losses primarily in the equity portfolio. The Guarantee Fund returned -0.4% in 2018 and incurred a loss of $2.6 million. High volatility in the stock markets was a result of increased uncertainty and markets revising assumptions about the future concerning interest rate hikes, fading U.S. stimulus and rising trade protectionism.
Rising interest rates, mortgage stress tests and affordability softened the housing market in Ontario and across Canada. The year ended with total enrolment levels at 63,009 compared to 68,945 in 2017, mainly driven by lower enrolment levels of freehold units. Nevertheless, increase in the average sales price and enrolment fee per unit led to higher enrolment fees received, despite the reduced number of units enrolled. Enrolment fees earned were up $2.0 million from 2017, primarily from the emergence of prior years’ deferred enrolment fees and an update in the earnings pattern leading to accelerated fee recognition for freehold enrolments in their fifth year of coverage.
The 2018 net claims experience of $10.5 million was $3.9 million higher than 2017 due to higher claims activities during the first half of 2018 and the failure of a freehold project resulting in higher deposit claims. In the year, Tarion paid out $17.4 million (2017: $13.6 million) to new home owners for settlement of warranted claims. The increase in claims payment was mainly driven by higher warranty claims, deposit refunds, and higher expert fees to assess complex construction deficiencies.
Total operating expenses (excluding net claims incurred) increased by $2.8 million to $44.8 million. The company undertook several key strategic initiatives and technology projects such as the financial management system upgrade and customer relation management system replacement during the year. A key part of the 2018 business plan was to modernize our technology platform to improve customer experience while increasing flexibility in our workforce. At the same time, the company reduced its discretionary expenditures in the latter half of the year to help offset the losses incurred in the claims and investments.
Tarion ended the year with the Guarantee Fund growing to $592.3 million (2017: $583.5 million), of which $274.1 million (2017: $258.0 million) supports warranty liabilities for the benefit of new home owners. The company’s ending equity position of $266.4 million (2017: $275.2 million) is available for future warranty and service improvements and protection against possible catastrophic warranty losses.