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

DBRS Limited (DBRS) has today confirmed the Issuer and Financial Strength ratings of Canada Guaranty Mortgage Insurance Company (Canada Guaranty or the Company) at AA (low) with Stable trends. The confirmation reflects the Company’s strong capital adequacy as assessed through the application of the DBRS residential mortgage-backed securities model, assuming a runoff scenario. The rating also considers Canada Guaranty’s strong and growing franchise in the mortgage insurance space as well as the Company’s relatively unseasoned insurance portfolio and the absence of a longer-term track record of profitability through cycles.

As the Company continues to underwrite higher-quality borrowers, generate capital on a more self-sustaining basis and diversify its portfolio across origination years, its credit profile will continue to strengthen. The May 2014 high ratio mortgage insurance price increase of 15% will reduce the need for capital injections going forward and shorten the time to capital self-sustainability. Canada Guaranty has seen its market share of new insurance written increase with indications that the Company captured roughly 3% of the 6% of market share that the Canada Mortgage and Housing Corporation (CMHC) shed in 2014. Canada Guaranty has continued to expand its customer footprint through the addition of customers with a proven track record of quality mortgage originations and through increasing its penetration with large existing customers, partially as a result of moves taken by CMHC to reduce its market share. The federal government has been positive toward allowing more of the mortgage insurance market to be underwritten by the balance sheets of private mortgage insurers as opposed to being taxpayer-backed through CMHC.

The future direction of the Canadian housing market and unemployment will be particularly important to Canada Guaranty’s claims and subsequent financial performance, given that the majority of its insurance in force has been originated in the past three years, albeit at high credit quality standards. If the housing market and employment were to deteriorate, thus increasing delinquency levels, Canada Guaranty would have a mortgage insurance portfolio more heavily weighted toward recent origination years relative to peer mortgage insurers who possess more diversified portfolios across origination years. Canada Guaranty’s financial results in 2014 were particularly strong with favourable underwriting results because of an industry-leading loss ratio of 13.2%. Signs of deterioration in the Company’s Alberta portfolio have yet to appear given the initial impact caused by recent weakness in oil prices and subsequent job losses that will likely not work their way into the books of mortgage insurers and loan originators until mid-to-late 2015. Canada Guaranty has taken steps to mitigate the impact of a slowing economy and softer housing market in oil-dependent regions on its performance.

Notes:
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.

The applicable methodology is Rating 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.

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.