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

DBRS Limited (DBRS) has today confirmed the Financial Strength Rating of Genworth Financial Mortgage Insurance Company Canada (Genworth or the Insurance Company) at AA. The Issuer and Senior Unsubordinated Debt ratings of Genworth MI Canada Inc. (Genworth MI Canada), the holding company of Genworth, were downgraded to A (high) from AA (low). All trends are Stable.

The Financial Strength Rating confirmation of Genworth reflects the Insurance Company’s solid market position, seasoned insurance portfolio and advanced risk analytics, as well as its strong capital position relative to the capital required to meet insurance claim obligations. The confirmation also reflects the Company’s strong capital adequacy as assessed through the application of the DBRS residential mortgage-backed securities (RMBS) model, assuming a runoff scenario.

Underwriting results at the Insurance Company continued to be strong in Q1 2016, with Genworth having a favourable loss ratio of 24% as delinquencies across the Company’s portfolio and the industry continued to be quite low by historical standards. However, risks are evident in the Canadian housing market with low interest rates fueling strong price appreciation over the past number of years and, more recently, with the weakness in oil prices negatively impacting the Western Canadian economy, including employment. Economic pressure as a result of oil price weakness has yet to flow through to meaningfully elevated delinquency levels at Genworth or other mortgage insurers, although higher delinquency levels in Alberta and the Prairie provinces (where Genworth has approximately 20% and 5% of its insurance in-force, respectively), are expected to be seen by late 2016. The impact of oil price weakness on the Canadian consumer and the extent to which weakness leads to defaults and housing price pressure will continue to be monitored.

The Insurance Company continued to see strong financial results in Q1 2016, including a good return on equity of 10.2%. Genworth is well capitalized, as evidenced by a high minimum capital test (MCT) ratio of 234%. The MCT ratio is temporarily higher than usual as the Insurance Company awaits the possibility of potentially higher regulatory capital requirements by the Office of the Superintendent of Financial Institutions (OSFI). Future earnings may be negatively impacted by a potential long-term decrease in demand for portfolio insurance resulting from recent government regulations, a slowing Canadian economy, as well as by a housing market that is expected to appreciate at a pace that is modest compared to previous years.

The downgrade of one notch for Genworth MI Canada is influenced by DBRS’s concern that there is now a greater risk that OSFI, in a stressed mortgage market situation, may place restrictions on dividend payments from the Insurance Company. OSFI may employ greater caution since Genworth MI Canada’s majority shareholder, Genworth Financial Inc., has a weakened financial condition. As a result, Genworth Financial Inc. is constrained in its ability to provide funding support for the subsidiary should the need arise. Genworth Financial Inc. in the United States is in the midst of reorganizing the corporate structure of its U.S. life insurance business, selling business units and closing product lines to new sales in an effort to improve the funding flexibility for the top holding company. There is a possibility of further capital initiatives if Genworth Financial Inc. is not able to achieve the desired financial outcome. Genworth Financial Inc. has stated it wishes to grow its mortgage insurance businesses.

On a standalone basis, Genworth MI Canada has good debt service coverage and enjoys a healthy dividend flow from the Insurance Company. Genworth MI Canada has appropriately organized its governance, employing both parent nominee and independent directors to protect the interests of its Canadian business. The Insurance Company has a board comprised of a majority of independent directors. Furthermore, the Insurance Company is regulated by OSFI and is therefore subject to the powers that OSFI has to maintain protection for policyholders.

The Stable trend for the Insurance Company considers its resilient fundamentals and conservative risk profile. Negative ratings pressure could arise from a sustained deterioration in loss ratios, as well as from capital adequacy deteriorating below a level supportive of its rating category as assessed by the DBRS RMBS model. The Stable trends for Genworth MI Canada are based on expectations of a regular dividend flow from the Insurance Company at amounts that are at prudent levels to maintain the Financial Strength of Genworth.

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 on the issuer page at www.dbrs.com.

The applicable methodologies are Rating Mortgage Insurance Companies (December 2015) and Rating Holding Companies and Their Subsidiaries (January 2016), which can be found on our website under Methodologies.

For additional information on this rating, please refer to the linking document under Related Research.

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

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.