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CMHC has been setting aside money as a cushion against future losses.

Deborah Baic/The Globe and Mail

When it comes to bringing Canada's mortgage insurance behemoth down to size, Jim Flaherty gets all the headlines. The Finance Minister has made a series of big changes – effectively killing the 30-year insured mortgage, among others – all to keep the country's housing market from overinflating.

Inside Canada Mortgage & Housing Corp., however, there are more subtle signs that changes in the boardroom are leading to a more conservative culture.

Mr. Flaherty's major moves have led to well-publicized declines in the size of the business at CMHC. The book of insurance is shrinking. At the same time, even while writing fewer policies, CMHC has been setting aside more money as a cushion against any future losses, financial reports show.

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The timing suggests a change in risk management driven by both internal governance and external oversight. CMHC's board, which had long been criticized not having enough financial savvy, got a new chairman in May in former Bank of New York Mellon chief executive Bob Kelly. Soon after, the directors voted for the second time in less than two years to bump up a key internal capital threshold.

And in the little more than a year since CMHC has been regulated explicitly by the Office of the Superintendent of Financial Institutions (OSFI), overall capital levels have turned sharply higher.

CMHC doesn't say that this increase in its capital cushions is driven by any particular concerns about the housing market or demands from regulators. Reading CMHC's latest earnings report, there is no visible reason to worry about a big increase in losses on mortgage insurance. The percentage of mortgages in arrears is low and flatlining. The stockpiling of capital simply reflects the profitability of the business, CMHC says.

Money pouring in from unexpected profits can account for the higher capital totals in the short-term, but the trend has clearly been upward for a year now. And windfall profits do not explain the board's decision to increase the so-called internal capital target twice since early 2012.

The insurer has long sought to run its business at two times the minimum capital level set by OSFI using the so-called minimum capital test. But CMHC is exceeding that level lately, by a large amount.

The company's insurance unit was holding 243 per cent of its minimum as of Sept. 30, up from 233 per cent just three months prior. A year ago, it was 222 per cent. In the last quarter before OSFI took over as regulator, it was 215 per cent.

Prior to that, the numbers are fuzzier; CMHC's financial reporting was not as good. In its 2009 annual report it said only that it held "approximately twice the level of capital reserves recommended by OSFI" in 2008 and 2009.

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If CMHC sticks with these elevated capital levels in coming quarters, that will be a stronger signal that there has been a re-evaluation in Ottawa about what is appropriate.

CMHC has also cranked up what it calls its internal capital target yet again. That is the level at which a yellow flag goes up that a capital fix is needed but there is "adequate time for management to resolve financial problems that may raise, while minimizing the need for regulatory intervention." Three years ago, that level was set at 150 per cent. In early 2012, just before Mr. Flaherty announced he was putting OSFI in the oversight role, the board raised the level to 175 basis points.

In August, a little more than three months after Mr. Kelly was named chairman, the board of directors reviewed the capital issue and moved the internal capital target up again, to 185 per cent. The change came in the wake of economic and business stress tests, a CMHC spokesperson said. The effect is to give CMHC more runway to fix any problems should they arrive.

CMHC says that it "constantly reviews and updates its models, taking into account advancement in industry leading practices associated with capital modelling and reduced, new or emerging risk issues and trends."

CMHC now reports $11.37-billion of retained earnings set aside for capitalization, up from $10.73-billion a year earlier. (That's also not all the capital CMHC has, but it is the biggest chunk. For example, there is another $6.7-billion of what CMHC calls "unearned premium and fees" that are in the bank but not yet recognized as revenue.)

By most any measure, CMHC has a more prudent balance sheet than even a few months ago, and certainly much more heavily fortified than two or three years ago.

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Given the level of public concern about the housing market, it doesn't really matter what is driving the changes. A little extra caution can't go amiss.

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