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

DBRS Limited (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). All trends are Stable.

The rating confirmation reflects the Company’s strong underwriting and financial results, including a low loss ratio of 12.6% and good return on equity of 11.4% at YE2015, as well as its growing franchise in the mortgage insurance space. 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. DBRS also takes into consideration the risks associated with the Company’s relatively unseasoned insurance portfolio as well as 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 recent high ratio mortgage insurance premium increases (cumulatively approximately 25%) will reduce the need for capital injections going forward and shorten the time to capital self-sustainability. Moves taken by Canada Mortgage and Housing Corporation (CMHC) to reduce its market share and allow more of the mortgage insurance market to be underwritten by the balance sheets of private mortgage insurers should help the Company to increase its market share. The Company also benefits from supportive owners that have been providing capital on a regular basis to support the Company’s growth, although future capital support is not guaranteed.

The future direction of the Canadian housing market and unemployment will be important for the mortgage insurance industry’s claims and subsequent financial performance, particularly for Canada Guaranty given the Company’s shorter track record. Relative to its peer mortgage insurers that possess more diversified portfolios across origination years, Canada Guaranty’s mortgage insurance portfolio is more heavily weighted toward recent origination years, although less so than prior years. Nonetheless, the Company’s insurance portfolio has benefited from the higher underwriting standards and stricter government regulations in the past few years as well as from its relative lack of concentration in riskier areas of the Canadian housing market. Excellent underwriting results as well as strong capitalization and high asset quality are prudent, as the Company might have to adjust to the possibility of potentially more stringent regulatory capital requirements. However, risks remain in the overall Canadian housing market, and there is the possibility that recent rapid house price appreciation and stretched affordability levels may negatively affect future premium growth for mortgage insurers. A slowing Canadian economy may also result in a deterioration in unemployment and consequently increased delinquency levels, negatively affecting earnings.

Signs of deterioration in Canada Guaranty’s Alberta portfolio have yet to appear in any meaningful way. It is expected that the impact caused by the current weakness in oil prices and subsequent job losses will work its way into the books of mortgage insurers and loan originators by late 2016. Canada Guaranty has taken steps to mitigate the impact on its performance of a slowing economy and softer housing market in oil-dependent regions.

The Stable trend considers the Company’s conservative insurance portfolio and excellent asset quality. 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. Conversely, positive ratings pressure could arise as the Company exhibits sustained profitability through the cycles.

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 methodology is Rating Mortgage Insurance Companies (December 2015), which can be found on our website under Methodologies.

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