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

DBRS Limited (DBRS) confirmed the Financial Strength Rating and Issuer Rating of Canada Guaranty Mortgage Insurance Company (Canada Guaranty or the Company) at AA (low). All trends are Stable.

KEY RATING CONSIDERATIONS
The rating confirmation reflects the Company’s continued strong underwriting and financial results, including an industry-leading combined ratio as well as its growing franchise in the mortgage insurance space. The confirmation is also based on Canada Guaranty’s strong capitalization under a runoff scenario, which is reflected in its minimum capital test (MCT) ratio of 171% as estimated at Q2 2018, providing an adequate buffer above the regulatory supervisory level of 150%. In confirming the ratings, DBRS also considers the structural competitive disadvantage of the private mortgage insurers to Canada Mortgage and Housing Corporation, the Company’s shorter track record and relative inexperience managing a severe market downturn, the relative (although improving) concentration of its lender base as well as the consequences of regulatory actions on the housing market in the past two years, which continues to have an impact on the Company’s (and the overall industry’s) future earnings. The Stable trend reflects Canada Guaranty’s strong financial metrics, underwriting expertise and prudent risk-taking.

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, positive ratings pressure may arise over time as the Company demonstrates a longer track record of effectively managing mortgage risk through different economic cycles, continued diversification of lender origination and geographical areas as well as sustained internal-capital generation. Conversely, negative ratings pressure may result from: capital adequacy deteriorating below a level supportive of the rating category; a lack of adequate internal-capital generation or capital support from owners to fund organic growth or deal with capital declines; or material and sustained deterioration of loss ratios.

RATING RATIONALE
Canada Guaranty’s ratings reflect its excellent insurance portfolio. There continue to be risks present in the Canadian housing market, including the high valuation of properties in the Greater Toronto Area (GTA) and Greater Vancouver Area (GVA), high average debt-to-income levels as well as the rising interest-rate environment. These risks, although meaningful, are not wholly applicable to the Company’s portfolio as it is not representative of the overall housing market. Canada Guaranty’s insurance portfolio has benefited from higher underwriting standards and stricter government regulations in the past few years. The more stringent underwriting is reflected in the Company’s average customer credit score, which has increased significantly from prior years, and in debt-servicing levels, which have remained steady. A large portion of Canada Guaranty’s portfolio comprises first-time homebuyers that, on average, have bought properties priced lower than the general market. The excellent selection of risk has led to Canada Guaranty’s industry-leading loss ratios and a consistent improvement in earnings through the years. DBRS expects Canada Guaranty to continue its prudent underwriting practices.

The Company benefits from supportive owners that have been providing capital on a regular basis to support its growth, although future capital support is not guaranteed. As Canada Guaranty continues to diversify its portfolio across origination years and increase the diversification of its lender base, its credit profile will continue to strengthen. In the past few years, the Company’s need for capital injections has materially reduced. Canada Guaranty is currently self-sustaining in terms of capital generation and paid a dividend in 2017.

Maintaining good underwriting results as well as strong capitalization and high asset quality is prudent in this environment. Risks remain in the overall Canadian housing market and it is probable that stretched affordability levels in the GTA and GVA may continue to negatively affect future premium growth for mortgage insurers. A slowdown in the Canadian economy may result in deteriorating house prices and employment, which may consequently increase delinquency levels and negatively affect earnings. The direction of the Canadian housing market and the economy, particularly unemployment, will be important for the mortgage insurance industry’s claims experience and subsequent financial performance.

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 methodology is Rating Mortgage Insurance Companies (January 2018), which can be found on our website under Methodologies.

Lead Analyst: Komal Rizvi, Assistant Vice President - 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.