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

DBRS Limited (DBRS) confirmed the Financial Strength Rating (FSR) of Genworth Financial Mortgage Insurance Company Canada (Genworth or the Company) at AA. DBRS also confirmed the Issuer Rating and Senior Unsubordinated Debt rating of Genworth MI Canada Inc. (Genworth MI Canada), Genworth’s holding company, at A (high). All trends are Stable.

KEY RATING CONSIDERATIONS
The confirmation of Genworth’s FSR reflects the Company’s strong market position, good risk underwriting, excellent management expertise and strong capital position relative to the capital required to meet insurance-claim obligations. DBRS also considers Genworth’s structural competitive disadvantage to the Canada Mortgage and Housing Corporation (CMHC; rated AAA with a Stable trend by DBRS). The Company’s ratings benefit from its high-quality insurance portfolio with lower loss ratios than historical averages. The Stable trend reflects Genworth’s conservative risk management, consistently strong financial metrics and its proven expertise in navigating downturns in the Canadian housing market.

RATING DRIVERS
Positive ratings pressure may arise from a significant improvement in market share while maintaining a conservative risk profile or from a substantial increase in available capital levels relative to the risks underwritten. Conversely, negative ratings pressure may arise if capital adequacy deteriorates below a level supportive of the current rating category, resulting in a limited buffer over regulatory capital requirements, or if there is a material and sustained deterioration in the loss ratio.

RATING RATIONALE
Genworth is an established player in the Canadian mortgage insurance market with a significant market share of the transactional mortgage insurance space (32% at year-end 2018), excluding the multi-unit residential market, in which it does not participate. Genworth is the largest private-sector mortgage insurer in Canada’s three-player mortgage insurance market, ranking behind CMHC, a Crown corporation. Over the years, the Company has developed strong distribution relationships with a wide breadth of lenders, providing a consistent and diversified source of revenue.

Genworth’s ratings benefit from a comprehensive enterprise risk management program, a robust capital management framework and a conservative invested assets portfolio. The Company is well capitalized as evidenced by a strong Mortgage Insurer Capital Adequacy Test ratio of 170% at Q2 2019 relative to the Office of the Superintendent of Financial Institutions’ supervisory target capital ratio of 150%. DBRS also assesses the risk inherent in Genworth’s insurance portfolio under its residential mortgage-backed securities (RMBS) model, which determines capital adequacy under a stressed, runoff scenario. The Company has sophisticated modelling capabilities and a good understanding of the risks it faces. Genworth maintains enough capital to pay off all policyholder claims in an adverse runoff scenario according to Genworth’s management as well as DBRS’s RMBS model.

Genworth’s ratings also benefit from its conservative insurance portfolio. Increasingly stringent underwriting criteria for mortgage insurance in recent years have served to decrease risk in the insurance portfolio, particularly compared with policies underwritten prior to 2009. Genworth’s insurance portfolio is well diversified by both geographical region and by origination year, a positive for the ratings. The Company’s disciplined underwriting, combined with good overall cure activity, is reflected in a loss ratio that remains below the historical average. The loss ratio (defined as claim losses over earned premiums) was 15% at Q2 2019, which is stable and reflective of the Company’s disciplined approach to underwriting, continued high levels of cure activity in Ontario and British Columbia as well as a still-healthy Canadian economy. Some weaknesses remain in the portion of the portfolio originated in Canada’s oil-producing regions as economies in those areas have not yet fully recovered to their prior strength.

The Company’s insurance portfolio is not reflective of the overall housing market. Indeed, Genworth’s client base primarily comprises first-time homebuyers that demonstrate good credit quality. The average home price for new transactional insurance written by Genworth was $331,000 at Q2 2019 – lower than the average sale price for the overall Canadian housing market. The Company is relatively insulated from the current elevated levels of house-price risks in the Greater Toronto Area and Greater Vancouver Area, given its manageable exposures to the market segments which have experienced the greatest price increases.

Conditions vary across Canada’s housing markets, improving in Quebec, normalizing in Ontario and British Columbia and remaining pressured in Alberta. The Company would be negatively affected by a slowdown in the overall Canadian economy, resulting in increased unemployment and, consequently, delinquency levels. Genworth expects its loss ratio to normalize from current lows, but remain at the lower end of the historical average.

The housing market has tempered in the past two years as government regulations, intended to reduce risk in the marketplace, have proven to be effective thus far. The slowdown in the pace of housing market activity has resulted in a lower-growth mortgage origination market. The portfolio insurance space has also been significantly affected by changes in eligibility criteria. First-time homebuyer activity may be expected to modestly increase from current levels as more buyers enter the market from the sidelines with encouragement based on low interest rates and a less competitive market.

On August 13, 2019, Genworth Financial, Inc., Genworth MI Canada’s parent company, announced an agreement for Brookfield Business Partners L.P. (Brookfield) to purchase its majority interest in Genworth MI Canada for a transaction valued at approximately $2.4 billion. The recently announced acquisition by Brookfield is viewed positively by DBRS as it reduces the likelihood that Genworth will be affected by the weaknesses of its parent. Brookfield’s acquisition is not expected to affect the Company’s day-to-day operations.

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

The applicable methodologies are Rating Mortgage Insurance Companies (December 2018), DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (November 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.

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