DBRS Morningstar Upgrades Canada Guaranty Mortgage Insurance Company to AA, Stable Trends

DBRS Limited (DBRS Morningstar) upgraded the Financial Strength rating and Issuer Rating of Canada Guaranty Mortgage Insurance Company (Canada Guaranty or the Company) to AA from AA (low). Both ratings have Stable trends.

KEY RATING CONSIDERATIONS
The rating upgrades and Stable trends reflect the Company’s continuing strong financial performance and considerable market share gains over the recent period. Throughout 2021, Canada’s economic recovery benefitted from Coronavirus Disease (COVID-19) pandemic-related government support programs leading to stronger consumer balance sheets and significant housing market price appreciation. These trends, and disciplined underwriting, contributed to Canada Guaranty’s excellent profitability and capitalization levels in 2021, resulting is some of the strongest performance metrics for the Company in recent history.

The outlook for the housing market remains positive despite the anticipated monetary policy tightening cycle, which began with a 25-basis point interest rate increase in March 2022. Supporting the housing price appreciation is the housing supply, which will likely remain limited into 2023 as current shortages are not easily alleviated, net migration is expected to contribute to increased demand, and inflation is raising the cost of labour and materials needed to increase the housing stock. Housing is also considered a hedge against inflation, which may prompt investors to further increase allocations to this asset class. However, there are risks. In particular, consumers are facing headwinds in the forms of higher inflation and interest rates that are eroding consumers’ purchasing power and disposable income at a time when government is winding down support programs. Housing affordability will deteriorate in light of the expected monetary policy tightening. Additionally, the war in Ukraine is contributing to financial market volatility, supply chain challenges, higher commodity prices, and overall increased inflationary pressures. Countering the higher inflation rates through interest rate increases is not without risks because an overshoot may lead to an economic slowdown or even a recession with ensuing negative effects on the unemployment rate. Nonetheless, the Company is well equipped to deal with more adverse macroeconomic conditions given its strong financials: high ROE, strong capitalization, significant unearned premium reserves, a liquid and high-quality investment portfolio, as well as homeowner assistance programs. Additionally, the mortgage market is regulated with very robust underwriting standards, which should limit potential losses.

RATING DRIVERS
A rating upgrade is unlikely given the recent upgrade and high rating. Conversely, a material deterioration in capitalization levels or profitability would result in a rating downgrade.

RATING RATIONALE
The Company maintained strong financial results throughout 2021, continuing with its disciplined underwriting practices while growing its market share by increasing business allocations from new and existing lenders. Canada Guaranty is now the second largest of the three mortgage insurers, based on the premium volume of insured residential mortgages (excluding multi-unit residential and portfolio insurance).

The credit profile of the portfolio strengthened as a result of the economic recovery that took hold in 2021. Delinquency ratios are down compared with 2020 and relative to pre-pandemic levels. Mortgage payments that were deferred at the height of the market uncertainty in 2020 have resumed, allowing the Company to release its reserves (that were set up in 2020) and resulting in a negative loss ratio in 2021.

Canada’s strong housing market has had a positive impact on the insured portfolio risk metrics by lowering average loan-to-value ratios, while higher household savings rates since the onset of the pandemic have contributed to increasing average credit scores. The current tight housing market supply makes any imminent material housing price declines unlikely. However, expected increases in interest rates will lower housing affordability and may even lead to an economic slowdown.

The regulatory capital ratio increased to 226%, which is well above the Company’s operating target of 160%–165% and significantly higher than the regulatory target ratio of 150%. However, Canada Guaranty’s capital ratio is expected to decline in 2023 with the adoption of IFRS 17 and as market conditions begin to stabilize in light of higher interest rates.

Premiums written increased by $195 million in 2021 relative to the prior year. Since the majority of premiums are amortized into earnings over a five-year period, net income is expected to remain strong in the near future barring a severe recession. The ROE in 2021 was substantially higher than the average over the last five years, making 2021 one of the most profitable years on record. Likewise, the combined ratio is much stronger than the historical experience, although DBRS Morningstar does not expect it to stay at the current levels going forward.

The Company has no debt, and its investment portfolio is highly liquid and of very high quality. The fixed income portfolio entirely consists of investment-grade bonds.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is the Global Methodology for Rating Mortgage Insurance Companies (December 7, 2021; https://www.dbrsmorningstar.com/research/389321). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577