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

DBRS Limited (DBRS) has today confirmed both the Financial Strength Rating and Issuer 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 continued strong underwriting and financial results, as well as its growing franchise in the mortgage insurance space. The confirmation also reflects the Company’s strong capitalization, which is reflected in its minimum capital test (MCT) ratio (183%, Q1 2017) under the new capital framework for mortgage insurers, “Capital Requirements for Federally Regulated Mortgage Insurers,” effective January 2017. DBRS also takes into consideration the Company’s shorter track record, as well as the uncertainty surrounding the potential consequences of recent regulatory actions and government intervention in the housing market, which will have an impact on the Company’s future earnings.

Canada Guaranty’s credit profile has consistently improved in recent years, as demonstrated by the increasingly high quality of its insured mortgage portfolio and its low loss ratios. As the Company continues to diversify its portfolio across origination years and generate capital on a more self-sustaining basis as accrued revenues grow, its credit profile will continue to strengthen. Premium increases over the past few years, including the high-ratio insurance premium increases effective March 2017, are expected to reduce the need for capital injections going forward and will partially offset a forecasted reduction in future insurance volumes. Actions 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 private mortgage insurers should help the Company 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 direction of the Canadian housing market and the economy, particularly unemployment, will be important for the mortgage insurance industry’s claims experience and subsequent financial performance, particularly for Canada Guaranty given the Company’s shorter track record. Risks remain in the Ontario and British Columbia housing markets, which have seen rapid price increases in the past several years, and as a result, have valuations that are widely perceived to be elevated, particularly for the Toronto and Vancouver metropolitan regions. However, government interventions to cool the housing market may have unanticipated consequences. Growth of premiums may also be negatively affected 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 given the price limit of $1 million. The recently implemented Fair Housing Plan in Ontario has also had an impact on overall housing market activity. Nonetheless, one of Canada Guaranty’s strengths lies in its insured portfolio, which generally has less risk than the overall housing market for Ontario and British Columbia. The Company’s insured portfolio comprises mortgages on homes that are typically below the average market price and reflects its selection of generally higher-quality borrowers to insure.

The Company’s insurance portfolio has benefited from higher underwriting standards and stricter government regulations in the past few years, as well as from its relative underrepresentation in riskier areas of the Canadian housing market, such as Québec, which has historically had higher delinquency rates than the national average, and the freehold homes in the Vancouver and Toronto city cores, which are now very expensive relative to historical price levels. Maintaining excellent underwriting results, as well as strong capitalization and high asset quality, is prudent in this environment. The Company has had to adjust to more stringent regulatory capital requirements with the implementation of the new Office of the Superintendent of Financial Institutions (OSFI) capital framework for mortgage insurers in January 2017. Risks remain in the overall Canadian housing market, and there is the possibility that recent rapid house price appreciation and stretched affordability levels in the Greater Toronto Area and Greater Vancouver Area may negatively affect future premium growth for mortgage insurers. A slowing of the Canadian economy may result in a deterioration in house prices and employment that may consequently increase delinquency levels and negatively affect earnings.

Signs of deterioration in Canada Guaranty’s Alberta portfolio have yet to appear in any meaningful way. The Albertan housing market has been more resilient than anticipated, and the expected impact caused by the sustained weakness in oil prices and subsequent job losses has not materialized in the insurance portfolio in a significant way. A softer-than-expected impact from its exposure in Alberta can be partially attributed to good housing market appreciation in the years prior to the oil price crash, resulting in the build up of an equity cushion that has served to mitigate the impact of the weaker economy on mortgage performance.

RATING DRIVERS

The Stable trend considers the Company’s conservative insurance portfolio and excellent asset quality. Negative ratings pressure could arise from a sustained increase in loss ratios, as well as from capital adequacy deteriorating below a level supportive of its rating category. Conversely, positive ratings pressure could arise if the Company exhibits sustained profitability through the cycle.

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 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.