Press Release

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

Insurance Organizations
October 01, 2012

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 AA (low) Issuer Rating and corresponding AA (low) rating on the Senior Unsubordinated Debt of Genworth MI Canada Inc. (Genworth MI or the Parent), the ultimate holding company of Genworth Canada, were also confirmed. The rating confirmation at current levels reflects the Company’s strong capital position relative to the capital required to meet its insurance claim obligations under a severe economic slowdown that has had adverse implications for the Canadian housing market. In addition, the Company continues to report a satisfactory level of profitability. The single-notch differential between the Financial Strength rating of the Company and the Issuer Rating of Genworth MI in turn reflects the Parent’s conservative balance sheet and strong debt service coverage ratios of about 20 times.

The Issuer Rating on the Parent follows from the application of the DBRS holding company methodology. The structural subordination of the Parent’s financial obligations, relative to those of the regulated operating subsidiary, suggests that a one-notch rating differential is appropriate for a company of this strong credit quality and with only a modest level of holding company debt at less than 14% of capitalization. As the 100% owner of the Company, the Parent has access to all of the Company’s free cash flow, subject to regulatory capital requirements. The current estimated level of dividends received from the Company provides excellent coverage of the Parent’s debt service obligations, which are complemented by the Parent’s intention to hold unencumbered cash at the holding company level of close to $100 million.

The DBRS methodology for rating mortgage insurance (MI) companies places primary emphasis on the insurer’s capital adequacy under a worst-case runoff scenario, which is consistent with that used by DBRS in assigning ratings to Canadian residential mortgage-backed securities (RMBS) transactions. Under the MI methodology, DBRS finds that, given the size and parameters of the Company’s MI liabilities, the Company presently has capital that is consistent with at least the assigned AA Financial Strength rating. Moreover, the inherently stable profitability of the Company is expected to generate sufficient capital to fund expected organic growth at the current rating while maintaining regulatory capital, even as the Company budgets to pay out between 30% and 40% of earnings to its Parent.

Loss ratios remain steady as the Company continues to actively work with delinquent accounts in order to mitigate losses. Recent loss ratios of approximately 35% are consistent with the Company’s pricing assumptions, which assume a 35% to 40% loss ratio. Falling expense ratios to about 17% over the past five years reflect the benefits of economies of scale and continued spending on technology to enhance productivity and efficiency. Correspondingly, combined ratios have hovered just over 50% for the past 18 months. This strong underwriting result, combined with investment income earned on the Company’s $4.3 billion investment portfolio, yields a solid return on equity (ROE) of close to 12% for recent periods. These returns continue a secular decline as the Company has increased its regulatory capital while reducing financial leverage. The Company reported a Minimum Capital Test (MCT) ratio of 160% at June 30, 2012, well above the Company’s target of 145% and the OSFI requirement for the Company of 120%, and well above the mid-120% level reported prior to the onset of the financial crisis.

DBRS believes that Canada has avoided the adverse consequences of the extreme housing market deterioration that has been experienced in the U.S. Specifically, the Canadian residential mortgage market is fundamentally conservative, with more borrower recourse, fewer tax incentives to remain fully leveraged against property values and lower penetration of the more aggressive mortgage products that hurt the U.S. MI and housing industries. Canada also has a more rational banking industry, a more prudent RMBS market and strict oversight by the Office of the Superintendent of Financial Institutions (OSFI) of both lenders and MI providers. To reinforce this conservatism, the federal Minister of Finance continues to modify the criteria for MI products as a way of containing Canadian consumer credit expansion, albeit at the cost of slowing the Company’s organic growth potential.

Against this risk-mitigated industry background, the Company has a proven track record of conservative underwriting and effective risk management, which has supported its strong financial performance despite the low point experienced in the housing cycle during 2009.

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

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

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

Ratings

Sagen MI Canada Inc.
Sagen Mortgage Insurance Company Canada
  • US = Lead Analyst based in USA
  • CA = Lead Analyst based in Canada
  • EU = Lead Analyst based in EU
  • UK = Lead Analyst based in UK
  • E = EU endorsed
  • U = UK endorsed
  • Unsolicited Participating With Access
  • Unsolicited Participating Without Access
  • Unsolicited Non-participating

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.