DBRS Morningstar Confirms Canada Guaranty Mortgage Insurance Co. Rating; Revises Trend to Negative

DBRS Limited (DBRS Morningstar) confirmed the Financial Strength Rating and Issuer Rating of Canada Guaranty Mortgage Insurance Company (Canada Guaranty or the Company) at AA (low). All trends have been revised to Negative.

KEY RATING CONSIDERATIONS
The change of the trend to Negative recognizes the ongoing uncertainty regarding future economic conditions resulting from the ongoing Coronavirus Disease (COVID-19) pandemic, rather than any significant change in the Company’s operations. Additionally, the Negative trend reflects the potential risk arising from a steep, sustained increase in losses should the economy deteriorate more than expected. While the Company is not expected to be affected in any significant manner in the near term, as the anticipated increase in mortgage delinquencies will take some time to be processed and government actions are likely to ameliorate the immediate impact of the downturn, it is expected that the Company’s claims and losses will increase in the next 12-18 months given expectations of negative economic growth in 2020 and very elevated unemployment levels through 2021. Adding to this stress is the high degree of uncertainty surrounding the length of the downturn and the nature of the eventual recovery, which could result in a much weaker outcome for the economy. The change from a Positive trend reflects the dramatic deterioration in the prospects for the economy that raise risks that more than offset the improvement that the Company had been making in its market position, distribution strength and diversification, and underwriting performance. Canada Guaranty’s fundamentals, including excellent financial metrics and a sizeable market share, remain strong, providing strength to its rating assessment and positioning it well to handle the current crisis.

RATING DRIVERS
An upgrade is unlikely in the near term, given the negative trend and the uncertainty surrounding future economic conditions. Evidence of the Company’s ability to navigate the current economic climate while maintaining solid levels of regulatory capital would likely see the trend move to Stable. Conversely, a ratings downgrade could result from a material deterioration of loss ratios combined with capital adequacy weakening substantially, causing a reduced buffer over regulatory capital requirements.

RATING RATIONALE
Throughout its years of operation, Canada Guaranty has consistently demonstrated an improving trend in its financial metrics. Prudent underwriting practices are reflected in the Company’s excellent combined ratios and net income. As a more recent entrant in the Canadian mortgage insurance space compared with its two competitors, Canada Guaranty has also benefitted from an insurance portfolio that was primarily underwritten under the more stringent qualifying requirements for mortgage insurance in recent years, resulting in an average borrower profile that is of very high quality. Nonetheless, while the Company is well-positioned to handle severe recessionary impacts, the unusual nature of the current economic climate, particularly the unprecedented high levels of unemployment that are being reported, is creating additional risk that may result in very high claims and losses in the event that economic conditions worsen further and the economy takes longer to recover than expected.

Canadian mortgage insurers are highly regulated, with insurers subject to stringent underwriting criteria and minimum regulatory capital levels. The credit profile of the Company’s average borrower is strong and is reflected in its loss ratios, which are the lowest in the industry. As a monoline insurer, risk increases during periods of economic downturns, where there are typically weak economic growth prospects and high unemployment. Generally, changes in unemployment levels are strongly correlated with default rates, hence, the possibility that claims may rise markedly in 2020 and 2021, increasing loss ratios from their current low levels, has also increased substantially when compared to before the coronavirus outbreak. Mitigating the possibility of a material rise in losses is Canada Guaranty’s strong insurance portfolio comprised largely of high-quality borrowers with smaller mortgages relative to the overall population of homebuyers. Other mitigating factors include offsetting impacts from various programs that have been implemented to reduce the impact of the coronavirus on the Canadian economy, including the allowance of mortgage deferrals by most lenders and the payment of the Canada Emergency Response Benefit to eligible unemployed workers. Canada Guaranty also maintains high levels of regulatory capital, providing a good buffer against unexpected increases in losses. Based on current assumptions, DBRS Morningstar expects future increases in claim losses to be manageable for Canada Guaranty.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

DBRS Morningstar notes that this press release was amended on July 6, 2020, to incorporate the link to the methodology.

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

The principal methodology is Rating Mortgage Insurance Companies (December 13, 2019; https://www.dbrsmorningstar.com/research/354607/rating-mortgage-insurance-companies).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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.dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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 resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

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