(The following statement was released by the rating agency)
-- Macroeconomic concerns weighed heavily in our considerations against positive rating movement.
-- The company's loss experience has been somewhat volatile since the outlook was revised to positive in June 2010.
-- We expect Genworth Canada's prospective operating performance and capital position to remain supportive of the current ratings.
-- We are revising the outlook to stable from positive and affirming the 'AA-' ratings on Genworth Financial Mortgage Insurance Co. and the 'A-' rating on Genworth MI Canada Inc. Rating Action On June 5, 2012, Standard & Poor's Ratings Services revised the outlook to stable from positive on Genworth Financial Mortgage Insurance Co. of Canada (Genworth Canada) and Genworth MI Canada Inc. At the same time, Standard & Poor's affirmed its 'AA-' counterparty credit (CCR) and financial strength ratings on Genworth Canada and its 'A-' CCR on Genworth MI Canada. Rationale Macroeconomic considerations weighed heavily in our decision to revise the outlook. The previous positive outlook anticipated default rates and loss ratios trending to historical levels benefiting from the improving economy and resilient housing market. At the same time, we believed that any upward movement could be constrained by an economic slowdown and weakness in the housing market. Canadian GDP is settling into a slower growth pattern, with personal income growth slowing and slack labor demand keeping Canada's unemployment rate above pre-recession lows. Slowing income growth may alter consumer spending patterns and result in pull-back in demand for credit. The household accumulation of debt is moderating but the consumer leverage remains high and is vulnerable to changes in interest rates. With higher interest rates, debt servicing may come under pressure, especially for high loan to value borrowers. The combination of macroeconomic factors may begin to weigh on housing prices. In fact, the pace of price appreciation has slowed in most major real-estate markets across Canada (on an inflation-adjusted basis). We are projecting a mid-single-digit decline in average house prices in the near term. In essence, with personal income growth slowing, high consumer indebtedness, and slack labor demand, Canadian borrowers in general are more susceptible to weakness in the economy or increase in interest rates. In our view, a sharp increase in either interest rates or unemployment could be the catalyst for higher defaults and a hard landing in house prices that erodes household net worth and destabilizes consumer confidence. Such risks could also come from contagion from the Eurozone sovereign debt crisis, slowdown in the global economy, and oil price shocks from geopolitical tensions. In our view, the company's loss experience on its mortgage portfolio has benefited from the improved Canadian economy but the loss experience has been somewhat volatile since third-quarter 2010, and remains higher than anticipated. Whereas the default frequency has improved (especially for 2007-2008 vintages), the higher loss severity--primarily stemming from Alberta--offset the gains. The combined ratio of 53.2% in 2011 (inclusive of benefit from change in the premium recognition curve) was higher than about 50% for 2010. Nevertheless, as the riskier vintages from the 2007-2008 season further and newer business perform better helped by tighter underwriting guidelines, we anticipate further improvements in the aggregate default frequency. At the same time, however, we also anticipate softness in housing prices, which could serve to pressure loss severity. Over the past few years, the Canadian government has introduced a number of product changes for insured mortgage products and underwriting guidelines to manage the risk in mortgage/consumer credit. We believe that the cumulative impact of these changes, along with macroeconomic concerns, may result in contraction in the insured mortgage market and, hence, Genworth Canada's business growth. At the same time, with Canada Mortgage and Housing Corp.'s (AAA/Stable/A-1+) recent pull-back on portfolio insurance, there could be an opportunity for Genworth Canada to increase its market share, which could offset the decline. In the absence of major shocks described above, we expect Genworth Canada to sustain its robust operating performance, which will be commensurate with the existing ratings. Outlook The stable outlook reflects our expectation that Genworth Canada will continue to maintain its strong market position and robust operating performance despite expected softness in housing prices and slower economic growth. We expect some contraction in the insured mortgage segment, which could affect Genworth Canada's business growth. However, better market penetration by the company could offset the decline. We expect Genworth Canada's gross premiums written to remain flat or marginally decline for 2012 and marginally increase in 2013. We further expect the underwriting performance in 2011 and 2012 to remain reasonably strong with a combined ratio in the 53%-58% range and return on revenue excluding realized gains/losses in 55%-60% range. We also expect the company to maintain an adjusted debt leverage ratio below 25%. We could lower the ratings if Genworth Canada's operating performance declines significantly (in our view, if the trajectory suggests the full year loss ratio could exceed 50%) as a result of deterioration in the economy leading to higher unemployment, a material increase in interest rates, or a significant drop in housing prices. Furthermore, deterioration in capitalization to a level that is not supportive of the 'AA' rating category or an increase in leverage beyond our expectations could result in lower ratings as well. We do not anticipate raising our ratings in the near term. But we could raise the rating by one notch if we see significantly more stability in the housing and macroeconomic environment leading to the company's operating performance reverting to historical levels on a sustainable basis along with capital levels supportive of higher ratings. Related Criteria And Research
-- Group Methodology, April 22, 2009
-- Interactive Ratings Methodology, April 22, 2009
-- Holding Company Analysis, June 11, 2009 Ratings List Ratings Affirmed; CreditWatch/Outlook Action
To From Genworth Financial Mortgage Insurance Co. Canada Counterparty Credit Rating Local Currency AA-/Stable/-- AA-/Positive/-- Financial Strength Rating Local Currency AA-/Stable/-- AA-/Positive/-- Genworth MI Canada Inc. Counterparty Credit Rating A-/Stable/-- A-/Positive/-- Ratings Affirmed Genworth MI Canada Inc. Senior Unsecured A- (Caryn Trokie, New York Ratings Unit)