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

DBRS has today confirmed both the Issuer Rating and Financial Strength rating of Canada Guaranty Mortgage Insurance Company (Canada Guaranty or the Company) at AA (low). The trends are Stable. The confirmation reflects the Company’s substantial capital adequacy as assessed through the application of the DBRS residential mortgage-backed securities (RMBS) valuation model, assuming a runoff scenario mitigated somewhat by qualitative factors. Factors affecting the rating include the Company’s unseasoned insurance portfolio and the absence of a longer-term track record of sustained profitability. Additionally, strategic capital is necessary for ongoing expected growth. As such, there has been a multiple-notch adjustment to the capital adequacy model result to arrive at the final AA (low) ratings.

The ability of Canada Guaranty to increase its penetration with large originating lenders is enhanced by the federal government’s decision not to raise the existing $600 billion limit on Canada Mortgage and Housing Corporation’s (CMHC) insurance-in-force. The limited additional capacity of CMHC will inevitably redirect lenders to increase volumes with the two private mortgage insurance companies in Canada, one of which is Canada Guaranty. As of January 1, 2013, the Canadian private mortgage insurers had their combined insurance-in-force limit raised from $250 billion to $300 billion, which leaves considerable room for volume expansion. Additionally, Canada Guaranty has made material progress in increasing its connectivity and allocation of volume from the major banks, which has provided diversification benefits and additional volume opportunities. This is a core strategic development that management had sought to achieve.

The Stable trends on the ratings reflect an assumption that the Company will maintain healthy capital adequacy, under the DBRS RMBS valuation methodology and the federal regulator’s minimum capital test, to support the existing portfolio and organic growth.

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

The applicable methodology is Rating Canadian Mortgage Insurance Companies (March 2011), 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.