Morningstar DBRS Confirms Sagen Mortgage Insurance Company Canada's Financial Strength at AA and Sagen MI Canada Inc.'s Issuer Rating at A (high); All Trends Are Stable

DBRS Limited (Morningstar DBRS) confirmed the Financial Strength Rating of Sagen Mortgage Insurance Company Canada at AA and the Issuer Rating of Sagen MI Canada Inc. (Sagen or the Company) at A (high). In addition, Morningstar DBRS confirmed the credit ratings on Sagen's Senior Debt at A (high), Preferred Shares at Pfd-2 (high), and Fixed-to-Fixed Rate Subordinated Notes at A (low). All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations and Stable trends reflect the Company's consistently strong financial results, including its high return on equity (ROE). The risk of a materially weaker outlook for economic growth, employment, the housing market, and borrower credit quality is manageable in the context of Sagen's comprehensive risk management framework. Nonetheless, Morningstar DBRS expects some adverse impact on the combined ratio and earnings although robust capital levels are maintained. The financial market volatility presents another important risk to Sagen's investment portfolio that warrants monitoring.

Financial results in 2024 were very strong. Lower interest rates since mid-2024 have helped reduce potential payment shock concerns, especially in recent vintages. Transaction volumes, earnings, and ROE have improved slightly compared with the prior year. The outstanding balance of insured mortgages saw a small uptick in 2024, reversing the longstanding declining trend. However, the recent change in the economic prospects for Canada amid the U.S. tariff turmoil will likely result in higher mortgage defaults than seen in the past several years. Mitigating some of the expected weakness in the macroeconomic environment are recently amended insurance mortgage rules that have increased the addressable insured mortgage market through an increase in (1) the maximum purchase price to $1.5 million from $1.0 million and (2) the maximum amortization term to 30 years from 25 years for a subset of qualifying mortgages.

CREDIT RATING DRIVERS
A credit ratings upgrade is unlikely given the current high credit rating. Conversely, a material deterioration in capitalization levels and profitability or a significant weakening of its investment risk profile would result in a credit rating downgrade.

CREDIT RATING RATIONALE
Franchise Strength Building Block Assessment: Strong/Good
Sagen has a considerably long history of operations, mortgage insurance expertise, and an extensive distribution network. Morningstar DRBS expects Sagen's longer-term market share to be approximately equal to that of its competitors and sustainable over the medium term. The mortgage insurance business is Sagen's main source of earnings and the Company continues to invest in technology platforms to enhance operational effectiveness.

Earnings Ability Building Block Assessment: Very Strong/ Strong
The Company has demonstrated consistently strong financial results over the last few years, including improved earnings in 2024 and an increase in business volumes. Investment income contribution to earnings has also improved because of higher reinvestment bond yields but may not last given the easing of monetary policy since mid-2024. Because of the deteriorating macroeconomic outlook and recession concerns driven by U.S. tariff uncertainty, Morningstar DBRS expects Sagen's overall financial performance to deteriorate in 2025 relative to the very strong results of the past few years.

Risk Profile Building Block Assessment: Strong/Good
The risk of a recession, a higher unemployment rate, and a weakness in housing markets adversely affect mortgage insurance risk. Mitigating this risk, the Company insures mortgages with the partial Government of Canada guarantee, which provides 90% protection to private-sector mortgage lenders. The Company does not invest in equities but has been enhancing its investment returns through a higher proportion of alternative fixed-income assets, including high-yield bonds, emerging market debt, and private loans. These assets are riskier compared with the plain vanilla bonds that made up the majority of its invested assets a few years ago. However, the Company has robust risk management capabilities and the resources to closely monitor and manage its insurance and investment risks.

Liquidity Building Block Assessment: Strong/Good
Sagen's stress and scenario testing demonstrate that the Company holds sufficient assets in low-risk and liquid investments to meet the liquidity needs arising from its liabilities under the more adverse market conditions driven by the ongoing trade conflict. The high amount of cash and other marketable bonds, as well as Sagen's access to its liquidity facility, are viewed positively. Once a mortgage default occurs, it takes approximately 12 months to 18 months until it is concluded and payment becomes due to the lender.

Capitalization Building Block Assessment: Strong/Good
Sagen's leverage remains contained and its fixed-charge coverage is very strong. At FY2024, the Company's regulatory capital ratio was 177% which is above the Company's operating target of 160% to 165%. Positively, interest rate cuts have reduced the risks associated with variable-rate mortgages and the amount of capital allocated to this risk; however, the general worsening of economic expectations supports prudent capital holdings.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant 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 Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

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

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (September 10, 2024), https://dbrs.morningstar.com/research/439195. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781 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.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

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

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

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