DBRS Confirms Ratings on Genworth Financial Mortgage Insurance Co. Canada at AA and Genworth MI Canada Inc. at A (high), Stable Trends

DBRS Limited (DBRS) has today confirmed the Financial Strength Rating of Genworth Financial Mortgage Insurance Company Canada (Genworth or the Company) at AA. The Issuer and Senior Unsubordinated Debt ratings of Genworth MI Canada Inc. (Genworth MI Canada), the holding company of Genworth, were confirmed at A (high). All trends are Stable. The Financial Strength Rating confirmation of Genworth reflects the Company’s solid market position, high-quality insurance portfolio and advanced risk analytics, as well as its strong capital position relative to the capital required to meet insurance claim obligations.

The Company continued to see strong financial results in 2016, including a good return on equity. Underwriting results at the Company continued to be strong in Q1 2017, with Genworth having a low loss ratio as delinquencies across the Company’s portfolio and the industry continued to be low by historical standards. Genworth is well capitalized, as evidenced by a strong minimum capital test (MCT) ratio of 162% (Q1 2017) under the new capital framework for mortgage insurers relative to the Office of the Superintendent of Financial Institutions (OSFI) supervisory minimum target of 150%.

Future premiums may be negatively impacted by the decrease in demand for portfolio insurance resulting from recent changes in government regulations, lower transactional insurance volumes resulting from federal changes to qualifying criteria for mortgage insurance, higher premium rates providing an incentive for homebuyers to avoid insurance and a smaller pool of houses priced below the $1 million limit. The recently implemented Fair Housing Plan has also had an impact on overall housing market activity in Ontario. House price risks are elevated in the Greater Toronto Area (GTA) and Greater Vancouver Area (GVA) housing markets, as house prices remain high; however, Genworth’s insured portfolio differs significantly from the overall housing market, with the Company’s client base of mainly first-time homebuyers demonstrating good credit quality and a low median home purchase price of approximately $300,000 for new insurance written. If a severe fall in house prices does occur accompanied by a general rise in unemployment, the Company is viewed as having a lower risk position compared to the overall national mortgage portfolio, which has a larger exposure to the segments of the GTA and GVA markets that have seen the greatest price increases.

Genworth Financial Inc. in the United States has agreed to be acquired by China Oceanwide Holdings Group Co. (Oceanwide), in a transaction valued at USD 2.7 billion that is expected to close in 2017. If the deal is successful and acquires the necessary regulatory approvals to be completed, the Company’s parent will be closer to its goal of reorganizing the corporate structure of its U.S. life insurance business, improving funding flexibility for the top holding company and having the cash necessary to reduce debt and further capitalize its life insurance businesses. Genworth Financial Inc. has already taken some capital initiatives, including selling business units and closing capital-intensive product lines to new sales. There is a possibility of further capital initiatives, if Genworth Financial Inc. is not able to achieve the desired financial outcome. The acquisition by Oceanwide is not expected to impact the day-to-day operations of the mortgage insurance subsidiaries.

On a stand-alone basis, Genworth MI Canada has good debt service coverage and enjoys a healthy dividend flow from the 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 Company has a board comprised of a majority of independent directors. Furthermore, the Company is regulated by OSFI and is therefore subject to the powers that OSFI has to maintain protection for policyholders.

RATING DRIVERS
The Stable trend for the Company considers its resilient fundamentals and conservative risk profile. Negative ratings pressure could arise from a sustained deterioration in its loss ratios, as well as from a deterioration in its capital adequacy below a level supportive of its rating category. The Stable trends for Genworth MI Canada are based on expectations of a regular dividend flow from the Company at amounts that are at prudent levels to maintain the Financial Strength Rating 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 2016) and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (December 2016), which can be found on our website under Methodologies.

Lead Analyst: Stewart McIlwraith, Senior Vice President, Head of Insurance, Global Financial Institutions Group
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global Financial Institutions Group and Sovereign Ratings.

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.