DBRS Confirms Canada Guaranty Mortgage Insurance Company at AA (low)

DBRS has today confirmed both the Issuer Rating and Financial Strength ratings of Canada Guaranty Mortgage Insurance Company (Canada Guaranty or the Company) at AA (low). The trends are Stable. The confirmation reflects the Company’s substantial capital adequacy as assessed through the application of the DBRS residential mortgage-backed securities (RMBS) model, assuming a runoff scenario. The RMBS capital adequacy rating attachment level is adjusted down in setting Canada Guaranty’s rating as a result of its relatively unseasoned insurance portfolio and the absence of a longer-term track record of sustained profitability. Additionally, capital injections will likely be needed to support its growth trajectory. As the Company continues to underwrite higher quality borrowers, generate capital on a more self-sustaining basis and diversify its portfolio across origination years, its credit profile will strengthen. A recent price increase of 15% on average within the mortgage insurance industry will reduce the need for capital injections going forward and shorten the time to capital self-sustainability.

Canada Guaranty has seen its market share of new insurance written increase from roughly 1% in 2010 to approximately 10 to 12% in 2013, providing diversification benefits through new originator connectivity and volume opportunities through increased mortgage insurance allocation from lenders. Canada Guaranty has increased its penetration with large originating lenders partially as a result of moves taken by Canada Mortgage and Housing Corporation (CMHC) to reduce its market share. Federal government-owned CMHC is the dominant market share leader in Canada. The federal government has been positive towards allowing more of the mortgage insurance market to be underwritten by the balance sheets of private mortgage insurers as opposed to being taxpayer-backed through CMHC. Accordingly, new mortgage insurance written by Canada Guaranty is of high quality, as their business model targets only well-established lenders with a proven track record of originating high quality mortgages and there have been several rounds of mortgage qualification tightening by the federal government. These factors have created, on average, a more conservative borrower profile.

The Stable trends on the ratings reflect an assumption that the Company will maintain capital adequacy supportive of its rating profile as assessed by the DBRS RMBS model.

Notes:
The applicable methodology is Rating Canadian Mortgage Insurance Companies dated December 2013, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The sources of information used for this rating include company documents. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.