DBRS Confirms Ratings Genworth Financial Mortgage Insurance Co. Canada at AA and Genworth MI Canada Inc. at A (high), Stable Trends

DBRS Limited (DBRS) confirmed the Financial Strength Rating (FSR) of Genworth Financial Mortgage Insurance Company Canada (Genworth or the Company) at AA. DBRS also confirmed the Issuer and Senior Unsubordinated Debt ratings of Genworth MI Canada Inc. (Genworth MI Canada), Genworth’s holding company, at A (high). All trends are Stable.

KEY RATING CONSIDERATIONS
The confirmation of Genworth’s FSR reflects the Company’s strong market position, good risk underwriting and management expertise, high-quality insurance portfolio and its strong capital position relative to the capital required to meet insurance-claim obligations. In confirming the ratings, DBRS also considers the Company’s structural competitive disadvantage to Canada Mortgage and Housing Corporation. Managing the impact of regulatory changes on business volumes is key to maintaining Genworth’s market share. The Company may also be affected by ongoing activities of its U.S. parent, Genworth Financial Inc., even as the Canadian mortgage insurance subsidiary operates largely independently. The Stable trend reflects the Company’s conservative risk management and its proven expertise in navigating downturns in the Canadian housing market.

RATING DRIVERS
The rating is well placed within its rating category with upward pressure unlikely in the near term, given the current uncertain state of the Canadian housing market. However, there may be positive ratings pressure in the long term if the Company experiences significant improvement in its market share while maintaining a conservative risk profile or if there is a substantial increase in available capital levels. Conversely, negative ratings pressure may arise if capital adequacy deteriorates below a level supportive of its rating category or if there is a material and sustained deterioration of loss ratios.

RATING RATIONALE
Genworth’s ratings reflect its low losses resulting from a conservative insurance portfolio. At 14% at Q2 2018, the loss ratio (defined as claim losses over earned premiums) reflected the Company’s high-quality insurance portfolio and disciplined approach to underwriting, high levels of cure activity in Ontario and British Columbia as well as a healthy Canadian economy. Delinquencies across Genworth’s portfolio and the industry continue to be low by historical standards. Conditions in Alberta appear to be relatively stable and Quebec’s housing-activity levels have increased, reducing some risk in the portfolio. The Company expects its loss ratio to increase closer to the historical average from current lows. Regulatory moves, the most significant of which is the implementation of the revised B-20 guideline in January 2018, have been effective so far in dampening upward pricing trends and overall housing-market activity. Genworth is relatively insulated from the current elevated levels of house-price risks in the Greater Toronto Area (GTA) and Greater Vancouver Area (GVA), given that the Company’s insured portfolio differs significantly from the overall housing market as Genworth’s client base of mainly first-time homebuyers demonstrates good credit quality and a median home purchase price that is lower than the overall market. Genworth has manageable exposure to the segments of the GTA and GVA markets that have seen the greatest price increases.

Genworth is well capitalized as evidenced by a strong minimum capital test (MCT) ratio of 170% as estimated at Q2 2018 relative to the Office of the Superintendent of Financial Institutions supervisory minimum target of 150%. The risk inherent in Genworth’s insurance portfolio is also assessed by DBRS through the application of its RMBS model. The Company has sophisticated risk-modelling capabilities and a good understanding of the risks it faces. Genworth maintains enough capital to pay off all policyholder claims in an adverse, runoff scenario.

Genworth Financial Inc. in the United States is continuing to make progress toward finalizing its acquisition by China Oceanwide Holdings Group Co., Ltd. (Oceanwide) in a transaction valued at USD 2.7 billion. The regulatory hurdles to gaining approval for the transaction are high as the Company still needs additional regulatory approvals from both U.S. and Chinese regulators. If the deal is successful, Genworth’s parent will be closer to its goal of improving funding flexibility for the top holding company and providing the cash necessary to reduce debt and further capitalize its U.S.-insurance businesses. The acquisition by Oceanwide is not expected to affect the day-to-day operations of the international mortgage insurance subsidiaries.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at www.dbrs.com.

The applicable methodologies are Rating Mortgage Insurance Companies (January 2018) and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (December 2017), which can be found on our website under Methodologies.

Lead Analyst: Stewart McIlwraith, Senior Vice President, Head of Insurance - Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com.