June 5, 2012 / 5:47 PM / 5 years ago

TEXT-S&P revises Genworth Canada outlook to stable

 (The following statement was released by the rating agency)	
 Overview	
  -- 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)	
 

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