DBRS Limited (DBRS Morningstar) confirmed the Financial Strength Rating of Sagen Mortgage Insurance Company Canada (previously Genworth Financial Mortgage Insurance Company Canada) at AA with a Stable trend.
In addition, DBRS Morningstar confirmed the Issuer Rating and Senior Unsubordinated Debt rating of Sagen MI Canada Inc. (Sagen or the Company) at A (high), the Preferred Shares rating at Pfd-2 (high), and the Fixed-to-Fixed Rate Subordinated Notes rating at A (low). All trends are Stable.
KEY RATING CONSIDERATIONS
The rating confirmations and Stable trends reflect Sagen's leading market share position for mortgage insurance in Canada, which is accompanied by strong financial performance and a high-quality mortgage portfolio. Throughout 2021, Canada's economic recovery benefitted from Coronavirus Disease (COVID-19)-related government support programs leading to stronger consumer balance sheets and significant housing market price appreciation. These trends, and disciplined underwriting, contributed to a release of reserves (that were set up in 2020) leading to a negative loss ratio for 2021. In addition, Sagen's mortgage portfolio quality improved as a result of faster paydown rates, lower delinquencies, and lower effective loan-to-value ratios (LTVs).
The outlook for the housing market remains positive despite the anticipated monetary policy tightening cycle, which began with a 25-basis-point interest rate increase in March 2022. Supporting the housing price appreciation is the housing supply, which will likely remain limited into 2023 as current shortages are not easily alleviated, net migration is expected to contribute to increased demand, and inflation is raising the cost of labour and materials needed to increase the housing stock. Housing is also considered a hedge against inflation, which may prompt investors to further increase allocations to this asset class. However, there are risks. In particular, consumers are facing headwinds in the form of higher inflation and interest rates that is eroding their purchasing power and disposable income at a time when government is winding down support programs. Housing affordability will deteriorate in light of the expected monetary policy tightening. Additionally, Russia's invasion of Ukraine is contributing to financial market volatility, supply chain challenges, higher commodity prices, and overall increased inflationary pressures. Countering the higher inflation rates through interest rate increases is not without risks since an overshoot may lead to an economic slowdown or even a recession with the ensuing negative effects on the unemployment rate. Nonetheless, the Company is well equipped to deal with more adverse macroeconomic conditions given its strong financials: high ROE, strong capitalization, significant unearned premium reserves, a liquid and high-quality investment portfolio, and homeowner assistance programs. Additionally, the mortgage market is regulated with very robust underwriting standards, which should limit potential losses.
RATING DRIVERS
Sagen is well placed in its current rating category. Given Sagen's already high rating, an upgrade is unlikely in the short term. Conversely, a downgrade would occur if Sagen's capital adequacy substantially deteriorates or it experiences significantly higher loss ratios.
RATING RATIONALE
Sagen is the largest of the three mortgage insurers in Canada, as measured by the 2021 volume of residential mortgages (excluding multi-unit residential and portfolio insurance). The Company started to grow its market share rapidly after the Canadian Mortgage and Housing Corporation (CMHC) introduced more stringent underwriting criteria in July 2020 and eventually overtook CMHC as the largest mortgage insurer in Canada. Throughout this period, the Company maintained conservative underwriting criteria. The credit profile of the portfolio was strengthened as a result of the economic recovery that took hold in 2021. Delinquency ratios are down compared with 2020 and relative to pre-pandemic levels while mortgage payments that were deferred at the height of the market uncertainty in 2020 have resumed, allowing the Company to release its reserves and achieve a negative loss ratio.
Canada's strong housing market has had a positive impact on the insured portfolio risk metrics by lowering average loan-to-value ratios while higher household savings rates since the onset of the pandemic have contributed to increasing average credit scores. The current tight housing market supply makes any imminent housing price declines unlikely. However, expected increases in interest rates will lower housing affordability and may even lead to an economic slowdown.
Sagen's capitalization levels were further strengthened in 2021 with its regulatory capital ratio increasing by 10 percentage points to 197%, relative to 2020, which is well above its operating target of 165%-170% and significantly higher than the regulatory target ratio of 150%. However, Sagen's capital ratio is expected to decline in 2023 with the adoption of IFRS 17 and as market conditions begin to stabilize in light of higher interest rates.
Premiums written increased to $1.2 billion in 2021, from $993 million in 2020 and $701 million in 2019. Since the majority of premiums are amortized into earnings over a five-year period, net income is expected to remain strong in the near future barring a severe recession. The return on equity (ROE) in 2021 was substantially higher than the average over the past five years, making 2021 one of the most profitable years on record. Likewise, the combined ratio of 13% (as a result of a negative loss ratio) is much stronger than the historical range of 30%-40%, although we don't expect it to stay at the current levels going forward.
The Company's leverage ratio (calculated by DBRS Morningstar as debt plus preferred shares to total capital) increased from prior levels of approximately 10%-15% to 27% at FY 2021 and it is expected to remain at this level. Nonetheless, the fixed charge coverage ratio remains very strong allowing the Company to comfortably meet its debt obligations. Additionally, the Company has demonstrated good capital flexibility, through its proven ability to access the capital markets as well as its strong cash flow generating ability. Sagen has a $300 million revolving credit facility that was undrawn as at FY 2021, while there are additional liquid sources at the holding company level consisting of $387 million in cash, cash equivalents and short-term investments as well as a large pool of government securities. Approximately 95% of its bond portfolio is held in marketable investment grade bonds.
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:
All figures are in Canadian dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Mortgage Insurance Companies (December 7, 2021; https://www.dbrsmorningstar.com/research/389321). 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 on the issuer page at www.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.
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Ratings
Sagen MI Canada Inc.
Date Issued Debt Rated Action Rating Trend Attributesi
US = Lead Analyst based in USA
CA = Lead Analyst based in Canada
EU = Lead Analyst based in EU
UK = Lead Analyst based in UK
E = EU endorsed
U = UK endorsed
Unsolicited Participating With Access
Unsolicited Participating Without Access
Unsolicited Non-participating
04-Apr-22 Issuer Rating Confirmed A (high) Stb CA
04-Apr-22 Senior Unsubordinated Debt Confirmed A (high) Stb CA
04-Apr-22 Fixed-to-Fixed Rate Subordinated Notes Confirmed A (low) Stb CA
04-Apr-22 Preferred Shares Confirmed Pfd-2 (high) Stb CA
Sagen Mortgage Insurance Company Canada
Date Issued Debt Rated Action Rating Trend Attributesi
US = Lead Analyst based in USA
CA = Lead Analyst based in Canada
EU = Lead Analyst based in EU
UK = Lead Analyst based in UK
E = EU endorsed
U = UK endorsed
Unsolicited Participating With Access
Unsolicited Participating Without Access
Unsolicited Non-participating
04-Apr-22 Financial Strength Confirmed AA Stb CA
SAGEN MI CANADA 