DBRS Confirms Ratings on Genworth Financial Insurance Company Canada and Genworth MI Canada Inc.

DBRS has today confirmed the Financial Strength rating of Genworth Financial Mortgage Insurance Company Canada (Genworth or the Company) at AA with a Stable trend. The AA (low) Issuer Rating and corresponding AA (low) rating on the Senior Unsubordinated Debt of Genworth MI Canada Inc. (Genworth MI Canada), the ultimate holding company of Genworth, were also confirmed with Stable trends. The rating confirmation reflects the Company’s solid market position, seasoned insurance portfolio and advanced risk analytics, as well as its strong capital position. The single-notch differential between the Financial Strength rating of the Company and the Issuer Rating of Genworth MI Canada reflects the strong debt service coverage of Genworth MI Canada, the holding company, as well as its liquid asset reserve, on a standalone basis, which provides extra security to cover interest payments if dividends from the operating were to be halted for any reason.

Genworth has an opportunity for market share expansion, as the Government of Canada continues its focus on de-risking its exposure to the real estate market through the Canada Mortgage and Housing Corporation (CMHC). CMHC has gradually scaled back its market share over the past few years, allowing the private mortgage insurers, of which Genworth is the largest, to pick up extra business, and it would appear that this will continue. As Genworth continues to expand its market share, the continuation of conservative underwriting standards will be key to maintaining sound asset quality.

In an effort to align pricing with the increased capital requirements that have been introduced over the past number of years, on May 1, 2014, CMHC increased the price of premiums by roughly 15% across all products. With CMHC being the price setter in the industry, this allowed the private mortgage insurers to raise their prices to the same extent. This price increase provides a material lift to the earnings profile of Genworth, with written premiums expected to be lifted by approximately $70 million annually, while continuing to underwrite the same business.

Notwithstanding the government’s conservative regulatory adjustments to the mortgage market, the Canadian housing market has gone through a period of strong price appreciation, with Canadians accumulating a historically high amount of debt, which creates risk in the system. To date, low interest rates and a stable economy have allowed Canadian consumers to service their debt and have kept delinquency rates historically low, which has been reflected in Genworth’s results. If a recession or housing correction were to occur in Canada, it would strain Genworth’s capital level and would weaken the Company’s financial profile in line with the magnitude of the downturn.

DBRS will continue to monitor housing market conditions. Genworth’s proprietary OmniScore credit assessment system and underwriting policies are stated to be done with the full economic cycle in mind, in order to allow for reasonable financial results measured over the full cycle.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Canadian Mortgage Insurance Companies (December 2013) and Rating Holding Companies and Their Subsidiaries (January 2014), 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.

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