Morningstar DBRS Confirms Canada Guaranty Mortgage Insurance Company's Financial Strength Rating and Issuer Rating at AA, Stable Trends
Mortgage InsuranceDBRS Limited (Morningstar DBRS) confirmed Canada Guaranty Mortgage Insurance Company's (Canada Guaranty or the Company) Financial Strength Rating and Issuer Rating at AA with Stable trends.
KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations and Stable trends reflect the Company's strong financial performance, significant unearned premium reserves, a liquid and a high-quality investment portfolio, and a favorable market position. The Company saw an increase in earnings in 2024 compared with the prior year resulting in a return on equity (ROE) close to the prior year's record high. The combined ratio and delinquency rates remain low supporting resilient profitability metrics but are marginally higher relative to the prior year. While we expect further deterioration because of weakening macroeconomic conditions, the impact on earnings should be manageable. A deep recession resulting in a high unemployment rate in combination with a prolonged housing market decline presents a notable risk for the mortgage insurance sector outlook. Mitigating some of the headwinds are recently amended insurance mortgage rules that have increased the addressable insured mortgage market by (1) increasing in the maximum purchase price to $1.5 million, from $1.0 million and (2) raising the maximum amortization term to 30 years, from 25 years, for a subset of qualifying mortgages. Lower interest rates since mid-2024 have reduced the mortgage renewal risk for variable mortgages, which is viewed positively. The outstanding insured mortgage balance has also increased in 2024, reversing the declining trend of the past two years. However, the recent change in the economic prospects for Canada, amid the U.S. tariff turmoil, will likely mute much of the expected positive impact of the changes in the insured mortgage rules.
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's strong financial performance is underpinned by its disciplined underwriting practices and a market share that represents about a third of the transactional insured mortgage market. In addition, the Company has a more diversified lender base compared with a few years ago, which is consistent with its quest for operational excellence. However, as a pure Canadian monoline insurer, it lacks diversification by product and business type.
Earnings Ability Building Block Assessment: Very Strong/Strong
The Company has demonstrated strong underwriting and ROE results in the high 20%s, over the recent history. Its higher reinvestment bond yields and short duration fixed income portfolio have substantially increased investment income over the past couple of years. However, Morningstar DBRS expects the deteriorating economic fundamentals and financial market volatility to negatively affect earnings in 2025.
Risk Profile Building Block Assessment: Strong
The Company 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 composed 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. The risk of a recession, higher unemployment rate, and 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.
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, even under more adverse market conditions. 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 with a MICAT ratio of 204% at FY2024, which is significantly above OSFI's minimum supervisory requirement of 150% and the Company's operating target of 165-170%. The Company also enjoys strong financial support from its two shareholders. Consistently strong earnings have also led to substantial organic capital generation. Capital requirements for variable rate mortgages have declined as short-term interests have decreased, leading to improved capital ratios, which Morningstar DBRS expects to stay in place to cushion against the higher risk of a recession.
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 https://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' trends and credit ratings are under regular surveillance.
For more information on this credit or on this industry, visit https://dbrs.morningstar.com.
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