DBRS Confirms Ratings on Canada Guaranty Mortgage Insurance Company at AA (low); Changes Trend to Positive

DBRS Limited (DBRS) confirmed the Financial Strength Rating and Issuer Rating of Canada Guaranty Mortgage Insurance Company (Canada Guaranty or the Company) at AA (low). DBRS also changed all trends to Positive from Stable.

KEY RATING CONSIDERATIONS
The rating confirmation reflects the Company’s continued strong underwriting and financial results, including an industry-leading combined ratio as well as its growing franchise in the mortgage insurance space. Canada Guaranty’s insurance portfolio is of excellent quality, with the Company benefiting from prudent underwriting practices as well as from the increasingly conservative qualifying regulatory requirements for mortgage insurance. The confirmation is also based on Canada Guaranty’s strong capitalization under a runoff scenario, which is reflected in its estimated Mortgage Insurer Capital Adequacy Test ratio of 165% at Q2 2019, providing an adequate buffer above the regulatory supervisory target level of 150%. The ratings also consider the structural competitive disadvantage of private mortgage insurers relative to the Canada Mortgage and Housing Corporation (rated AAA with a Stable trend by DBRS) as well as the Company’s shorter track record in the Canadian mortgage insurance market.

The Positive trend reflects Canada Guaranty’s increasingly diversified lender mix, growing market share, consistently strong financial metrics and improving capital-generation capabilities.

RATING DRIVERS
A rating upgrade is likely if the Company continues to demonstrate effective management of mortgage risk, continued diversification of lender origination and geographical areas, as well as sustained internal capital generation. Conversely, negative ratings pressure may arise from capital adequacy deteriorating below a level supportive of the rating category, resulting in a limited buffer over regulatory capital requirements; a lack of adequate internal capital generation or capital support from its owners to fund organic growth or to deal with capital declines; or a material and sustained deterioration of loss ratios.

RATING RATIONALE
Over the past few years, Canada Guaranty has demonstrated consistent improvement in several areas based on DBRS’s assessment under its “Rating Mortgage Insurance Companies” methodology. The Company has consistently grown its market share to reach approximately 17% at year-end 2018 based on premiums written for new transactional insurance, excluding multi-unit residential. DBRS views this increased market share as sustainable, given Canada Guaranty’s good operating performance, as well as the high barriers to entry in the Canadian mortgage insurance market. As the Company continues to add more volume from different lenders to its distribution network, market share may further improve. Canada Guaranty has significantly improved the diversification of its lender base in recent years, improving the outlook for volumes of future business, as well as reducing lender concentration risk.

Canada Guaranty’s excellent financial metrics are reflective of its high-quality insurance portfolio. The Company’s portfolio benefits from prudent underwriting practices as well as increasingly higher underwriting standards implemented across the industry in recent years. As a result, the Company’s average borrower credit score has increased from prior years while debt-servicing levels have remained steady. As the youngest player in Canada’s mortgage insurance market, Canada Guaranty’s portfolio has a lower concentration of policies underwritten prior to 2010 when underwriting standards were more relaxed. Due to its geographic footprint, the Company also benefits from a lower proportion of policies underwritten in rural areas of the country where delinquencies are generally higher, although this benefiting factor is likely to lessen as the Company increases its lender diversification. As a faster-growing player than its competitors, Canada Guaranty has a higher proportion of policies originated in the last two years which, although of good quality, increase the risk of delinquencies because most defaults generally occur in the first three years of a policy’s issuance.

Contributing to the Positive trend is the Company’s improving internal capital generation. Canada Guaranty reached self-sufficiency in 2017; its earnings are now sufficient to maintain its current growth and it no longer requires capital injections from its parent. The Company benefits from owners that provided capital on a regular basis to support its growth, although future capital support is not guaranteed.

Risks persist in the Canadian housing market, including the high valuation of properties in the Greater Toronto Area and Greater Vancouver Area as well as high average debt-to-income levels. While these risks are meaningful, they are not wholly applicable to the Company’s portfolio as it is not representative of the overall housing market. A large portion of Canada Guaranty’s portfolio comprises first-time homebuyers that, on average, have bought properties at lower price points where there is still considerable demand. Risks also remain in the oil-producing regions of Canada as these areas are experiencing elevated unemployment levels and house prices that remain below peak levels. DBRS will continue to monitor ongoing weaknesses in these regions.

Maintaining good underwriting results with strong capitalization and high asset quality is prudent in this environment. Stretched affordability levels as well as the impact of regulatory changes will likely continue to negatively affect future premium growth for mortgage insurers. A slowdown in the Canadian economy may also result in deteriorating house prices and employment levels, which would likely increase delinquency levels and negatively affect earnings. 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.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Mortgage Insurance Companies (December 2018) and Rating Canadian Residential Mortgages, Home Equity Lines of Credit and Reverse Mortgages (November 2018), which can be found on our website under Methodologies & Criteria.

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS’s outlooks and ratings are monitored.

For more information on this credit or on this industry, visit www.dbrs.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada