DBRS Morningstar Confirms Ratings on Canada Guaranty Mortgage Insurance Company at AA, Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Financial Strength rating and Issuer Rating of AA with Stable trends on Canada Guaranty Mortgage Insurance Company (Canada Guaranty or the Company). 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 AA ratings and Stable trends reflect the Company’s continued strong financial performance and considerable market share gains over the past couple of years, which DBRS Morningstar expects to be largely maintained. The Company continues its strong performance as of H1 2022, producing very low combined ratios and its highest ever recorded return on equity (ROE). 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
A ratings upgrade is unlikely given the recent upgrade and high rating. Conversely, a material deterioration in capitalization levels and profitability would result in a ratings downgrade.

RATING RATIONALE
Canada Guaranty is 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 Company reported strong financial results as of H1 2022, and has continued with its disciplined underwriting practices.

The Company has well-defined risk limits in place and takes a dynamic approach to setting its risk appetite, including taking evolving economic conditions into consideration. It also has a conservative credit risk profile. Its exposure to credit and market risk is low and commensurate with its high credit rating. Cash and short-term investments are a very significant portion of the investment portfolio. All of its fixed income holdings are rated “A” or higher. The Company does not invest in equities.

The Company demonstrated strong underwriting results, including a very strong combined ratio (and a negative loss ratio stemming from reserve releases), in H1 2022. The expense ratio has been trending downward for several years, including in the most recent period. The ROE is at an all-time high. Nonetheless, a slowing housing market and economic activity may temper results going forward.

The Company holds a high-quality investment portfolio, and a large proportion of cash and short-term investments provide ample liquidity for its liabilities.

Canada Guaranty is well capitalized based on its regulatory capital ratio and also enjoys strong financial support from its two shareholders. The regulatory capital ratio, at 195% in H1 2022, is well above the Company’s operating target of 160% to 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 the housing market adjusts in light of higher interest rates. Its strong earnings over the years have led to substantial organic capital generation.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 Canada Guaranty Mortgage Insurance Company are as follows: Franchise Strength – Strong/Good; Risk Profile – Strong; Earnings Ability – Very Strong/Strong; Liquidity – Very Strong/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.

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