DBRS Morningstar Confirms Sagen Mortgage Insurance Company Canada’s Financial Strength Rating at AA and Sagen MI Canada Inc.’s Issuer Rating at A (high); All Trends Are Stable
Mortgage InsuranceDBRS Limited (DBRS Morningstar) confirmed the Financial Strength rating of Sagen Mortgage Insurance Company Canada (previously Genworth Financial Mortgage Insurance Company Canada) at AA with a Stable trend. In addition, DBRS Morningstar confirmed the Issuer Rating and Senior Unsubordinated Debt rating of Sagen MI Canada Inc. (Sagen or the Company) at A (high), the Preferred Shares rating at Pfd-2 (high), and the Fixed-to-Fixed Rate Subordinated Notes rating at A (low). All trends are Stable. DBRS Morningstar assessed these ratings under its “Global Methodology for Rating Insurance Companies and Insurance Organizations,” which is replacing the prior “Global Methodology for Rating Mortgage Insurance Companies.”
KEY RATING CONSIDERATIONS
The rating confirmations and Stable trends reflect the Company’s continued strong financial performance, including underwriting profitability and capitalization levels. Sagen continues to perform well in H1 2022 with a very low combined ratio of around 15% and its highest ever recorded return on equity (ROE), which exceeded 20%. However, the Company’s financial strength is also related to the overall Canadian economy because increased job losses have the potential to cause a spike in defaults, especially among borrowers with higher levels of indebtedness. Over the last several months, the benchmark overnight interest rate increased rapidly to 3.25% presently, from 0.25% prior to March 2022. During this period, the housing market experienced a decline in prices and in the volume of units sold. This housing market slowdown is reflected in lower gross written premiums, although profitability still remains very strong. Macroeconomic fundamentals in Canada, including the low unemployment rate, remain resilient, which support continuing strong performance for the mortgage insurance sector. Moreover, because the majority of the written premiums are amortized into earnings over a five-year period, mortgage insurance companies should continue to show strong performance.
The Company is well equipped to deal with more adverse macroeconomic conditions given its strong financial fundamentals, including a 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 that should limit potential losses.
RATING DRIVERS
Given Sagen’s already high rating, an upgrade is unlikely in the short term. Conversely, a downgrade would occur if Sagen’s capital adequacy substantially deteriorates and it experiences significantly higher loss ratios.
RATING RATIONALE
Sagen’s ratings benefit from its strong market position and a well-established distribution network. Sagen has a comprehensive risk management framework in place that is focused on identifying, monitoring, and managing current and emerging risks, including those related to the macroeconomic environment, housing prices, portfolio quality, investment risk, and other types of operational and strategic risks stemming from the environment in which it operates.
Sagen’s credit risk profile is conservative. Bonds constitute over 85% of the investment portfolio, and the Company does not invest in equities. The investment portfolio has been a steady source of dividend and interest income and, given its relatively short duration, is expected to benefit from higher reinvestment yields in the current rising interest rate environment.
Strong underwriting results, including in H1 2022, have contributed to the ROE exceeding 20%. Nonetheless, a slowing housing market and economic activity may temper results going forward.
In addition to the investment portfolio that consists primarily of highly liquid fixed income securities, the Company also has access to a credit facility of up to $300 million, which remains fully available as of June 30, 2022.
Sagen is well capitalized based on its regulatory capital ratio of close to 180%, which is above the Company’s operating target and significantly higher than the regulatory target ratio of 150%. However, the capital ratio is expected to decline in 2023 with the adoption of IFRS 17 and as the housing market adjusts in light of higher interest rates. The Company’s capital structure has undergone a significant change with the leverage ratio (calculated by DBRS Morningstar as debt plus preferred shares to total capital) increasing following the acquisition by Brookfield Business Partners L.P. in April 2021. The Company introduced additional debt in the form of preferred shares, hybrid bonds, and senior debt. Sagen’s net income and cash flow can comfortably support this higher level of debt, although the increased leverage reduces some of its financial flexibility.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).
The Grid Summary Grades for Sagen are as follows: Franchise Strength – Strong; Risk Profile – Strong; Earnings Ability – Very Strong/Strong; Liquidity – Strong; Capitalization – Strong/Good.
Notes:
All figures are in Canadian dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (August 31, 2022; https://www.dbrsmorningstar.com/research/402220).
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.
The conditions that lead to the assignment of a Negative or Positive trend are generally 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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