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) 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 holding company of Genworth Canada, were also confirmed with Stable trends.

DBRS notes the reported loss in the Q3 2014 financial results of Genworth Financial Inc. (Genworth Financial), the U.S. corporation that owns 57.3% of Genworth MI Canada. DBRS does not anticipate that the weakening of Genworth Financial will have a material impact on the ratings of either of the Canadian entities, given that the financial performance and funding of the Canadian business is highly independent from that of Genworth Financial. Furthermore, regulatory restrictions on capital at the operating company limits the subsidiary’s ability to upstream dividends that would drive capital below conservative levels. As a result, DBRS assesses Genworth MI Canada and Genworth Canada primarily on a stand-alone basis, decoupled from the credit profile of the parent, Genworth Financial.

Nonetheless, the weakening of Genworth Financial does expose the two subsidiaries to certain risks, including the effects of a weakening brand. DBRS will continue to monitor these risks, including whether weakness at Genworth Financial flows through to the profile of Genworth MI Canada and Genworth Canada in any way.

The rating profile of Genworth Canada continues to be driven by its market position, seasoned insurance portfolio and advanced risk analytics as well as its strong capital position. The single-notch differential between the Financial Strength rating of Genworth Canada and the Issuer Rating of Genworth MI Canada reflects the strong debt service coverage of Genworth MI Canada, the holding company, as well as its liquid asset reserve, on a stand-alone basis, which provides extra security to cover interest payments if dividends from the operating were halted for any reason.

The operations of the U.S. entity, Genworth Financial, are largely autonomous from the operations of Genworth Canada. The main linkage that Genworth Canada benefits from in its relationship with the parent Genworth Financial is the information sharing of knowledgeable peers within the Genworth Financial group who draw on diverse international market experiences. Employees of Genworth Financial provide valuable insight and input into the Canadian operation, drawing on experiences in their own market, including risk practices. Genworth Financial and its employees, however, cannot dictate policy or make operational actions at Genworth Canada. Other linkages between Genworth Financial and Genworth Canada include sharing a common brand name, sharing certain information technology infrastructure and Genworth Financial having restricted board nomination powers related to the Canadian entities. DBRS has considered the aforementioned connections between the U.S. and Canadian entities and notes that each could cause issues within Canada if the relationship deteriorated. In their current form, however, none of these issues appears large enough to cause material rating weakness, although the situation will be monitored to assess whether the materiality of these items or others increase in magnitude.

DBRS takes comfort in specific items that create separation between the two entities, despite 57.3% ownership, as well as items that limit the extent of actions that Genworth Financial could hypothetically take to extract capital from the Canadian entities. These include: the lack of commonality of management between the two entities; the Office of the Superintendent of Financial Institution’s oversight of Genworth Canada that limits dividend payment to the parent if it lowers capital beyond conservative levels; Genworth Canada’s operating Minimum Capital Test capital level holding target of 220%; Genworth Canada’s board of directors’ being composed of a majority of independent directors as defined in National Instrument 58-101; and Genworth MI Canada’s policy of holding at least $100 million in cash and liquid securities, which can be used to service debt.

DBRS will continue to monitor the situation and its potential impact on the two rated Canadian entities, Genworth MI Canada and Genworth Canada, to assess whether potential impacts are deviating from expectations.

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 by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

The applicable methodologies are Rating Canadian Mortgage Insurance Companies (December 2013) and Rating Holding Companies and Their Subsidiaries (January 2014), which can be found on our website under Methodologies.

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.