Morningstar DBRS Confirms Canada Guaranty Mortgage Insurance Company's Financial Strength Rating and Issuer Rating at AA, Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Financial Strength rating and Issuer Rating at AA with Stable trends on Canada Guaranty Mortgage Insurance Company (Canada Guaranty or the Company).

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations and Stable trends reflect the Company's continuing strong financial performance and higher market share position. The Bank of Canada overnight interest rates increases since March 2022 and throughout 2023 contributed to a slowdown in the housing market resulting in lower transactional insured volumes for Canada Guaranty. However, higher reinvestment bond yields in combination with the short duration of the bond portfolio have benefitted the Company through substantial increases in investment income, which has more than doubled. As such, profitability metrics remain resilient with the return on equity (ROE) reaching a new record high.

Delinquency rates remain at below pre-pandemic levels and lower than long-term averages, but are trending higher with the loss ratio increasing slightly in 2023. Borrowers are experiencing the strain from significantly higher interest rates in combination with housing market depreciation, which will lead to more insured losses. Given this backdrop, we expect delinquency rates to rise from their very low levels, but at a slow and gradual pace that will be manageable for the Company. Resilient macroeconomic fundamentals in Canada, including low unemployment rate, growth in GDP and housing prices supported by a constrained housing supply are going to mitigate the expected weaker financial performance. An economic slowdown or a recession resulting in a high unemployment rate in combination with a housing market decline presents a notable risk to this outlook.

The Company is well positioned to deal with more adverse macroeconomic conditions given its strong financials: high ROE, robust capitalization, significant unearned premium reserves, a liquid and high-quality investment portfolio, as well as homeowner assistance programs offering an extended amortization period for the most vulnerable customers. Additionally, the Canadian mortgage market is regulated with very robust underwriting standards, which should limit potential losses.

CREDIT RATING DRIVERS
A credit ratings upgrade is unlikely given the current high credit rating level. Conversely, a material deterioration in capitalization levels and profitability would result in a credit ratings downgrade.

CREDIT RATING RATIONALE

Franchise Strength Building Block Assessment: Strong/Good
Canada Guaranty has maintained very strong financial results over the recent period, continuing with its disciplined underwriting practices while growing its market share by increasing business allocations from new and existing lenders. Its market share is now comparable to its peers, which is a testament to its strategic growth and operational excellence. Moreover, the Company has significantly diversified its lender base.

Risk Profile Building Block Assessment: Strong
Canada Guaranty has a conservative credit risk profile coupled with high levels of liquidity. Cash and short-term investments are a significant portion of its investment portfolio, with the remainder comprised of high-quality fixed-income assets. The Company does not invest in common shares, and has a short duration fixed income portfolio thereby minimizing its market risk exposure.

Earnings Ability Building Block Assessment: Very Strong/Strong
The Company has demonstrated strong underwriting results, including an industry-leading combined ratio and a record-high ROE, surpassing the previous peak reached in 2022. Higher reinvestment bond yields and the short duration fixed income portfolio resulted in a substantial increase in investment income over the past couple of years.

Liquidity Building Block Assessment: Strong
Canada Guaranty holds sufficient assets in low-risk and liquid investments to meet the liquidity needs arising from its liabilities. The investment portfolio consists of only liquid assets that are of high credit quality. Various leading indicators are available to the Company to monitor delinquency formation. Once a mortgage default occurs, it takes approximately 12-18 months until it is concluded and payment becomes due to the lender.

Capitalization Building Block Assessment: Strong/Good
Canada Guaranty is well capitalized. The Company also enjoys strong financial support from its two shareholders. The capital ratio is well above the regulatory target and the Company's operating target. Strong earnings of the past several years have also led to substantial organic capital generation, alleviating any need for capital injections by its shareholders.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, or Governance factors that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030

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

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (April 15, 2024) https://dbrs.morningstar.com/research/431180. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

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 dbrs.morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's outlooks and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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