DBRS Confirms Ratings on Genworth Financial Mortgage Insurance Company Canada and Genworth MI Canada Inc.

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 Canada), the ultimate holding company of Genworth Canada, were also confirmed with Stable trends. The rating confirmation reflects Genworth Canada’s strong capital position relative to the capital required to meet the Company’s insurance claim obligations under a severe economic slowdown, incorporating adverse implications for the Canadian housing market, as well as its strong market position, seasoned insurance portfolio and advanced risk analytics. The single-notch differential between the Financial Strength rating of the Company and the Issuer Rating of Genworth MI Canada reflects Genworth MI Canada’s conservative balance sheet and strong debt service coverage ratios of approximately 20 times.

The overall market for high-ratio mortgage insurance has continued to shrink following changes in government policy, resulting in lower written premiums. Going forward, the high loan-to-value (LTV) insurance market is estimated to decline by 15% relative to the 2012 market size as a result of federal government changes to residential mortgage lending criteria, which only partially affected 2012 volumes. Furthermore, in the 2013 federal budget, the Government of Canada proposed to limit the use of insured mortgages in securitization vehicles to only those vehicles sponsored by Canada Mortgage and Housing Corporation (CMHC) and to limit the insurance of low LTV mortgages to only those that will be used in CMHC securitization programs. These changes continue the government’s efforts to reinforce the quality of mortgage lending and to contain any speculative excess in the Canadian housing market while limiting growth in consumer debt.

Genworth Canada’s opportunity for market share expansion is enhanced by the federal government’s decision to not increase the existing $600 billion limit on CMHC’s insurance-in-force. The limit on additional capacity at CMHC will inevitably redirect lenders to increase volumes with the two private mortgage insurance companies in Canada, one of which is Genworth Canada. 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.

Earned premiums continue to shrink as the relatively large contribution associated with the 2007 and 2008 banner years has largely been incorporated into revenues in line with the earned premium recognition curve. The smaller net written premiums associated with subsequent years will put downward pressure on revenues going forward as mortgage regulation dampens the opportunity to write premiums at the same pace as strong historical periods.

The Issuer Rating on Genworth MI Canada follows from the application of the DBRS holding company methodology. The structural subordination of Genworth MI Canada’s financial obligations relative to those of the regulated operating subsidiary suggests that a one-notch rating differential is appropriate for a company with such strong credit quality and with only a modest level of holding company debt.

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 Genworth Canada’s MI liabilities, the Company presently has capital that is consistent with at least the assigned AA Financial Strength rating. The inherently stable profitability of the Company is moreover expected to generate sufficient capital to fund expected organic growth at the current rating while maintaining regulatory capital, even as the Company has paid out between 45% and 55% of earnings to Genworth MI Canada.

The methodology also takes into account business risk factors such as an issuer’s market presence and scale, distribution capabilities and diversification by product and market. Additionally, an issuer’s financial risk is evaluated to assess financial risk factors such as asset quality, earnings profile, funding and capital adequacy on a stand-alone basis. The overall assessment of the issuer’s credit quality is obtained by linking these different pieces into an overall profile of the organization.

DBRS believes that Canada has avoided the adverse consequences of the extreme housing market deterioration that has been experienced in the United States. 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 to contain Canadian consumer credit expansion, albeit at the cost of slowing the Company’s organic growth potential.

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 to be of satisfactory quality.