DBRS Morningstar Changes the Trends on Canada Guaranty Mortgage Insurance Company's Ratings to Positive from Stable; Confirms Ratings at AA (low)

DBRS Limited (DBRS Morningstar) changed the trends on Canada Guaranty Mortgage Insurance Company’s (Canada Guaranty or the Company) ratings to Positive from Stable, and confirmed the Company’s Financial Strength Rating and Issuer Rating at AA (low).

KEY RATING CONSIDERATIONS
The Positive trend reflects the Company’s strong financial performance in the latter half of 2020 and in the first nine months of 2021 (9M 2021) as well as its substantial market share gains. Canada Guaranty’s underwriting profitability is excellent and its overall risk metrics are stronger as its insured book matures. Mortgages in arrears are at multi-year lows, supported by increased consumer savings, a reduction in the unemployment rate since the peak of the Coronavirus Disease (COVID-19) pandemic, and a strong housing market. DBRS Morningstar remains cognizant that unprecedented government support and stimulus, which are now abating, helped support these strong metrics over the course of the pandemic reducing any potential adverse impact on the Company. Moreover, uncertainty remains regarding the nature of the economic recovery and the risks posed by the coronavirus and its variants. Nonetheless, DBRS Morningstar views the Company as well-positioned to handle a recessionary scenario if it arises given its solid capitalization, strong risk management and a liquid and high-quality investment portfolio.

RATING DRIVERS
The ratings would be upgraded if the Company continues to show strong underwriting profitability while maintaining a similar risk profile, market position, diversified lender base, and capital buffer.

Given the change in the trend to Positive, a rating downgrade is unlikely. However, a material deterioration in capitalization levels, profitability and lender base would result in a downgrade.

RATING RATIONALE
The Company has maintained strong financial results throughout the 9M 2021, continuing with its disciplined underwriting practices while growing its market share by increasing business allocations from new and existing lenders. Canada Guaranty is now the second-largest of the three Canadian mortgage insurers, based on the premium volume of insured residential mortgages.

The Company’s Mortgage Insurer Capital Adequacy Test stood at 217% in Q3 2021, demonstrating a strong capital cushion above the regulatory target of 150%. The Company’s underwriting profitability is excellent and its earnings in the 9M 2021 are higher than the annual earnings in any of the previous five years, benefiting from the continued high demand for housing.

Canada’s strong housing market has had a positive impact on the insured portfolio risk metrics by lowering average loan-to-value ratios, especially in the major urban areas which account for a large portion of the insured portfolio. Consumer savings rates have increased relative to pre-pandemic levels thereby contributing to the downward trend in delinquencies which are currently at multi-year lows. Nonetheless, economic recovery is fragile and uneven, and subject to the risk that new coronavirus variants could potentially threaten its trajectory. Additionally, higher inflation rates that are not matched by increasing wages negatively affect disposable incomes while the Bank of Canada’s actions to bring down inflationary expectations may lead to higher interest rates, with negative implications for housing market dynamics. These risks are mitigated through the highly regulated mortgage lending market that incorporates higher interest rate scenarios when underwriting mortgages, as well as other factors that improve the resilience and quality of the underlying mortgage.

Despite the downside risks, in DBRS Morningstar’s view, the Company is well positioned to continue its strong financial performance given its strong risk management capabilities.

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).

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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