DBRS Morningstar Changes Canada Guaranty Mortgage Insurance Company’s Trend to Stable from Negative; Confirms Ratings at AA (low)

DBRS Limited (DBRS Morningstar) confirmed the Financial Strength Rating and Issuer Rating of Canada Guaranty Mortgage Insurance Company (Canada Guaranty or the Company) at AA (low). DBRS Morningstar changed all trends to Stable from Negative.

KEY RATING CONSIDERATIONS
The trend change to Stable from Negative reflects the Company’s strong financial performance during 2020, as evidenced by low loss ratios, proactive risk management, and a material increase in new business volumes. DBRS Morningstar’s concerns regarding higher defaults resulting from elevated unemployment levels have reduced primarily as a result of government actions intended to prevent homeowner defaults, including the Canada Emergency Response Benefit and the Canada Emergency Wage Subsidy. The trend change also reflects the improvement in Canada’s economic conditions in recent months, including a reduction in unemployment levels and a more positive GDP outlook compared with a year ago, combined with strong housing market conditions. Nonetheless, while risks are significantly reduced compared with the prior year, uncertainty remains regarding future economic conditions particularly as stimulus measures intended to protect the economy from the negative impacts of the ongoing Coronavirus Disease (COVID-19) pandemic slowly wind down. As a result, losses may be elevated in the near- to mid-term as government support measures end. It is important to note, however, that current delinquency levels are still very low relative to the historical norm and compared with peers, and the Company maintains an adequate amount of capital to protect itself against any unexpected losses. In our view, Canada Guaranty’s fundamentals, including excellent financial metrics and a sizable market share, remain strong, providing strength to its ratings assessment and positioning it well to handle any unexpected developments regarding the length and nature of the eventual economic recovery.

RATING DRIVERS
Barring any significant deterioration in economic conditions or the housing market, a ratings upgrade would result from continued demonstration of the Company’s ability to navigate the current economic climate while maintaining solid levels of regulatory capital. A ratings downgrade would result from a material and sustained deterioration of loss ratios combined with capital adequacy weakening substantially, causing a reduced buffer over regulatory capital requirements.

RATING RATIONALE
Canada Guaranty has maintained strong results throughout the past year, continuing with its disciplined underwriting practices and taking a prudent approach to growing its franchise. Indeed, the Company has improved its market shares significantly in 2020 as it continued to diversify its lender base and gain business allocations from lenders that it had historically derived less of its business volumes from. Canada Guaranty also benefitted from market opportunities arising from the Canada Mortgage and Housing Corporation’s decision to tighten its underwriting criteria and consequently reduce its borrower base, allowing private mortgage insurers to gain a significant amount of new business volumes in a short period of time. The Company’s financials have remained very strong, with very low loss ratios (10.3% for F2020), an increase in premiums written, and a Mortgage Insurer Capital Adequacy Test (MICAT) ratio that is currently elevated at 185%.

Canada’s strong housing market have bolstered the Company’s excellent financials. The housing market has remained resilient in the past year, supported by fiscal stimulus, lower interest rates, and a strengthened consumer balance sheet. By and large, homeowners that had initially opted to defer their mortgage payments have resumed making payments, eliminating the risk of delinquencies sharply rising as the deferral period from most lenders expires. While the recent runup in home prices increases the risk of a housing market bubble, it can also provide a greater equity cushion and result in lower average loan-to-value ratios, providing protection against steep financial losses.

Some regulatory risk remains on the horizon, as a heated housing market and rapid price increases in many parts of Canada may pressure governmental authorities to take certain actions, such as further tighten underwriting requirements to reduce the risk to the overall economy. Depending on future government actions, such measures may result in lower sales and consequently, less new business volumes for mortgage insurers, including Canada Guaranty.

Throughout its years of operation, Canada Guaranty has consistently demonstrated improved financial metrics. Prudent underwriting practices are reflected in the Company’s excellent combined ratios and net income and its portfolio of largely high-quality borrowers with smaller mortgages relative to the overall population of homebuyers, and high average credit scores. As a more recent entrant in the Canadian mortgage insurance space compared with its two competitors, Canada Guaranty has also benefitted from underwriting with the more stringent qualifying requirements for mortgage insurance in recent years, resulting in an average borrower profile that is very high quality and loss ratios that are consistently the lowest in the industry.

As a monoline insurer, the Company has increased risk during periods of economic downturns, when there are typically weak economic growth prospects and high unemployment. Given the still-elevated unemployment rates in Canada, loss ratios could rise materially from current levels although this risk has declined significantly from a year ago. Mitigating the possibility of a material rise in losses is Canada Guaranty’s strong insurance portfolio. Other mitigating factors include various government programs that have been implemented to reduce the impact of the coronavirus on the Canadian economy, which will likely remain in place until the economy recovers. Additionally, Canadian mortgage insurers are highly regulated, with insurers subject to stringent underwriting criteria and minimum regulatory capital levels. Canada Guaranty maintains a strong MICAT ratio, providing a good buffer against unexpected increases in losses. Based on current assumptions, DBRS Morningstar expects future increases in claim losses to be manageable for Canada Guaranty. In our view, the Company is well positioned to cope with a substantial downturn in the housing market.

ESG CONSIDERATIONS
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/373262.

Notes:
The principal methodology is the Global Methodology for Rating Mortgage Insurance Companies (January 13, 2021; https://www.dbrsmorningstar.com/research/372309), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are 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 or contact us at info@dbrsmorningstar.com.

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