DBRS Confirms Financial Strength Rating of Genworth Canada

DBRS has today confirmed the Financial Strength rating of Genworth Financial Mortgage Insurance Company Canada (Genworth Canada or the Company) at AA with a Stable trend.

The DBRS methodology for mortgage insurance companies places a great deal of emphasis on the insurer’s capital adequacy under a worst-case run-off scenario that is consistent with that used by DBRS in assigning ratings to Canadian RMBS structured finance securities. Under this methodology, DBRS finds that, given the size and parameters of the Company’s mortgage insurance liabilities, the Company presently has capital which is consistent with the assigned AA rating.

While the Company has maintained a 30% share of the new mortgage insurance written in the Canadian market, volumes in the first part of 2009 are off 50% reflecting the slowdown in the economy and in housing activity, tighter underwriting criteria, as well as a loss of market share to Canada Mortgage and Housing Corporation (CMHC) as certain lenders have become more averse to non-government sponsored counterparties in the current stressed environment. Nevertheless, earned premium is expected to accrue at levels similar to 2008, which should maintain a reasonable level of profitability and internal capital generation for Genworth Canada even as loss ratios increase.

Following the peak underwriting year of 2007, the Company has now experienced an increase in its loss ratio which is in line with the expectation that the typical mortgage default occurs in the second to fifth year. The adverse claims experience is also being aggravated by the weak economy, the increase in recent years of more affordability features such as long amortization and higher loan-to-value (LTV) ratios, and falling housing prices in certain high cost markets such as Calgary and Vancouver (on average by 10% over the past 12 months), which have eroded what little homeowner equity there may have been under some of the Company’s newer policies. While such deterioration in loss ratios is to be expected at some point in the housing cycle, Genworth Canada continues to be profitable, having priced for loss ratios well in excess of its average recent experience. Expense ratios have continued to improve as the Company has leveraged its larger scale, having invested in technology to enhance productivity and efficiency. Investment income remains steady, tied as it is to a conservatively invested fixed income portfolio. Therefore, the inherently stable profitability of the Company continues to support internal capital generation and a stable outlook.

DBRS believes that the Company should successfully avoid the adverse consequences of the extreme housing market deterioration which has been experienced by U.S. mortgage insurance (MI) companies. Specifically, the Canadian residential mortgage market is fundamentally more conservative than the United States, reflecting a less competitive financial services market generally, more conservative mortgage product design, strict oversight by the Office of the Superintendent of Financial Institutions (OSFI) of both lenders and MI companies, and a more prudent RMBS market.

The recently announced IPO by the Company’s parent will result in the Company having to meet the additional demands of being a public company, which may alter its culture albeit while gaining a certain amount of financial flexibility. The Company will nevertheless continue to be the beneficiary of the conservative risk management culture which it shares with Genworth Financial.

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

The applicable methodology is Rating Mortgage Insurance Companies in Canada which can be found on our website under Methodologies.

This is a Corporate rating.