INTRO: This is Canadian Mortgage Trends, bringing you the inside take from Canada’s mortgage leaders.
CMT: We’re here with Andy Charles, President and Chief Executive Officer of mortgage default insurer Canada Guaranty.Andy, we appreciate you being here today.
ANDY: My pleasure.
CMT: Let’s get right into the thick of it, with an obvious and honest question. Canada Guaranty has two formidable competitors. There’s debatably only small differences in service levels, and as far as I know virtually no pricing advantage. How does allocating insurance business to Canada Guaranty add to a lender’s bottom line?
ANDY: I think first and foremost, recent events that have occurred in our industry have driven home to lenders the importance of diversifying their insurer mix, and I think that there’s general recognition that the potential risk associated with any one reliance, or a heavy reliance on any one single provider, represents a fair amount of supplier risk. And I think Canada Guaranty, what we’ve been able to effectively position is that we’re a choice, we’re a Canadian-owned choice, and we’ve been well-received from the lenders that we do business with and prospective lenders. And a lot of that has to do with the fact we are 100% Canadian and that our ownership is well-known and well-capitalized.
CMT: Speaking of lender partners, can you talk a bit about maybe some of the key lender partners that Canada Guaranty has brought on board recently, or is maybe about to bring on board?
ANDY: Pleased to do so, Robert. If we go back to January, we’re pleased to announce ING Direct coming on board, and that happened in January of 2012, and we’re very delighted to have ING on board. And the big announcement is really today (April 2, 2012), and after a lot of energy and effort, we’re ecstatic to welcome Bank of Nova Scotia and all their origination channels to Canada Guaranty. We’re very pleased with the opportunity that the Bank of Nova Scotia represents for our company, and just absolutely delighted.
Furthermore, given the progress that we’ve been making against our targeted customer group, we anticipate having other material announcements to make pertaining to new customers later on this year as well.
CMT: Well congratulations on ING and Scotiabank, two top-notch lenders. Are there any niches where Canada Guaranty has maybe more flexibility in underwriting guidelines than its competitors?
ANDY: You know Robert, the Department of Finance, the sandbox, is fairly limiting to the types of mortgages that we can and do insure. And my observation, it’s pretty appropriate for the housing market in the overall Canadian economy. So that’s sort of principal number one, that we are governed by the Department of Finance sandbox. Two, I would say, Rob, we don’t compete on underwriting guidelines. So we’re generally restricted to the sandbox and quite honestly very comfortable operating within that sandbox.
CMT: Fair enough. Now CMHC obviously has recently started rationing bulk insurance, which lenders use to lower their risk and funding costs. Is it fair to say that CMHC’s action has jumpstarted Canada Guaranty’s bulk insurance business?
ANDY: I think it would be fair to say, Robert, that it certainly acted, if you go back to my earlier point, it’s acted as a stimulus to look at a variety of different mortgage default insurer options that are available. It hasn’t jumpstarted our bulk insurance business, but certainly our high-ratio volumes have significantly increased over the past, over the past 2-3 months. And if you think about bulk insurance, historically it’s been priced very thinly in the market, and while the risk associated with the lower loan-to-value mortgages is certainly understood, the overall economic returns on the bulk business could be a bit better. So our approach is that we offer portfolio insurance within the context of an overall relationship with lenders where we receive material high-ratio volumes. But to answer your question directly, I would say we’ve certainly seen an increase in our overall high-ratio volumes, which as I indicated is our primary focus.
CMT: Gotcha. And now were you in the bulk insurance business prior to this year?
ANDY: Very limited, and certainly not in any material way at all.
CMT: Ok. Now when securitizing privately insured mortgages, there are sometimes liquidity premiums that lenders incur. Would you, or what would you say rather to investors buying Canada Guaranty-insured paper in terms of how capably you guys can weather a severe housing downturn compared to your 100% guaranteed government-backed competitor?
ANDY: Rob, I would say the following: 1) we’re an OFSI-regulated entity and with stringent capital requirements, and that’s well-documented for any OFSI-regulated entity. Secondly, we have a financial strength rating from DBRS, who is our rating agency and that’s at a level consistent with the Canadian banks. Thirdly, we have no exposure, indirectly or directly, to any housing market outside Canada. We can say fourth, I would say that when the company does significant stress testing, that indicates we’ve performed well and can withstand a variety of adverse scenarios. And I think lastly, what I would say to potential investors is the quality and the reputation of our ownership team.
CMT: Fantastic. Now in terms of that guarantee difference, you know you’re at 90%, and CMHC is at 100%. How important is that difference between private insurers and CMHC?
ANDY: You know that’s certainly been a well-discussed and well-debated industry issue, and I would say that that’s really up to the Department of Finance. This is a public policy decision for the Department of Finance to opine on. What I would say, even independent of recent market developments, there has been an appetite within the mortgage industry and a willingness among lenders to partner with Canada Guaranty that is based really on the strength of our ownership and supplier diversification. So, even independently of recent developments, we have made good progress in the marketplace against our target group, and I think at the end of the day, a lot of it has to do with just being 100% Canadian-owned with well-known owners.
CMT: Excellent, now does being Canadian-owned and owned by Ontario Teachers’ Pension Plan offer benefits to lenders who insure with Canada Guaranty? I mean, essentially it’s the knowledge and the security that you guys are really not going anywhere and can probably weather adverse circumstances.
ANDY: Rob, you’re absolutely right. I think there are really two overriding benefits that a lender could derive or should derive from doing business with Canada Guaranty. One is, I referenced it, the owners aren’t going anywhere…they know the industry and are exceptionally well-known as strong counter-party support. And I think the other benefit that comes out of it, being 100% Canadian-owned, any decisions we need to make here are made here. Any sort of market reaction or change, it doesn’t require to go to any other jurisdiction, and all decisions are made locally, and I would see that as a benefit from a timing point of view, and from an understanding of the business.
CMT: OK. And here’s the last question and it’s a general question about the housing market. The housing market is on reasonably sound footing overall, I think most would agree. But some would argue that there are certainly exceptions. As an insurer, are there any types of mortgages or locations in the country where risk currently seems above normal?
ANDY: There certainly has been a lot of focus both with the insurers and I would say with general media, Robert, as it relates to specific markets, whether it’s Vancouver or Toronto, but market where there’s potential imbalance in the supply and demand. The fact of the matter is, we don’t like any sudden moves in the marketplace, up or down. We much prefer a boring, steady marketplace without a lot of volatility. Doesn’t necessarily make us exciting, but that’s the type of market that we much prefer.
CMT: Understood, now are there particular locations in the country where you might be a little bit more, or have a little more scrutiny on an application?
ANDY: I think there are regional areas. We certainly look at the Vancouver market and the Toronto market and we need to stay on top of it. I think what I see happening, Robert, is the draft guidelines that OSFI has recently published, I think they’ll prove to be, they will assist in moderating the overall housing market. But I remain cautiously optimistic for the market overall.
CMT: Fantastic. Well, that’s a wrap for today. Andy, I want to thank you again for sharing these thoughts, and I know folks appreciate your insights very much.
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