Danajamin Nasional Bhd - 2011

MARC has affirmed its AAA insurer financial strength (IFS) rating on Danajamin Nasional Berhad (Danajamin) with a stable outlook. The affirmed rating reflects Danajamin’s strong capital resources and claims-paying resources relative to its risk exposure, and its status as a government-sponsored financial guarantee insurer (FGI). The IFS rating is driven by MARC’s perception of high support from the Malaysian government stemming from Danajamin’s public policy objective of facilitating market access for financially viable domestic issuers of bonds and sukuk which would otherwise be under-served or served inefficiently without the benefit of credit enhancement. The insurer financial strength rating on Danajamin also incorporates MARC’s assessment of the FGI’s willingness to pay financial guarantee claims on a timely basis.

Established in May 2009 with a paid-in capital of RM1.0 billion, Danajamin has reasonable single-risk capacity and considerable liquidity resources. In its short two-year history of operations, the FGI has underwritten 14 transactions with a total insured value of up to RM3.7 billion. Danajamin has been gradually gaining traction in the domestic bond and sukuk markets and has made measured progress in terms of underwriting sector diversification. MARC takes note of the FGI’s plan to expand the scope of its underwriting activity beyond corporate debt obligations and project finance transactions to include securitisation transactions of loan portfolios and real estate, albeit in the medium term. The rating agency expects more substantial progress to be made in terms of sector diversification with regard to written premiums and the insured portfolio as the FGI matures to lessen its susceptibility to industry sector-specific or transaction-specific credit stress.

Danajamin’s success as a FGI ultimately rests with the company’s ability to establish itself as a complementary institution in the national financial system while maintaining an acceptable risk profile and profitability. The premium rates charged by the FGI are likely to stay competitive relative to prevailing credit spreads to ensure product and pricing acceptance; notwithstanding, the FGI will still have to ensure that only issues with acceptable risk-reward characteristics are underwritten to protect shareholders’ capital and the insurer’s ongoing solvency.

The company reported higher net earned premiums of RM4.36 million in the first six months to June 30, 2011 (1H2011) in line with the increase in its insured portfolio. Investment income continues to account for the greater part of Danajamin’s earnings given that its business has yet to be fully ramped up. Danajamin’s return on assets improved to 2.45% in 1H2011 on an annualised basis, up from 1.02% for the full year 2010 (FY2010). As Danajamin’s insured portfolio expands and the invested premiums generate investment income, overall profitability of the FGI should show further improvement, assuming its underwriting performance remains satisfactory. Danajamin’s underwriting performance would, nonetheless, remain sensitive to the domestic economic environment. 

As at end-June 2011, Danajamin’s liquidity resources totalled RM1.05 billion. Danajamin’s conservative investment and liquidity strategies should ensure the availability of sufficient liquidity resources relative to potential payments arising from a default or defaults by issuers. MARC opines that Danajamin’s capital position remains sound relative to the underlying quality of its insured portfolio based on its review of the FGI’s insured portfolio. The FGI does not expect to pay dividends for some time in order to preserve its capital for statutory reserve requirements and business growth needs. The quality of the insured portfolio, the earnings power of the FGI and the manner in which its capital base along with accumulated cash flow is invested will be primary drivers of its internal capital generation capacity going forward. That said, the rating agency derives considerable comfort from its belief that maintaining its ‘AAA’ rating and its capital strength will be of paramount importance to Danajamin, added to which is the government’s stated readiness to increase the FGI’s paid-up capital by another RM1.0 billion.

Key considerations in MARC’s assessment of Danajamin’s credit profile going forward will be the FGI’s progress made in executing its financial guarantee business plan and building the requisite underwriting and risk management capabilities to support its expanding insured portfolio. In this regard, MARC opines that the overall effectiveness of Danajamin’s risk management function has yet to be tested by the seasoning of the insured portfolio and/or broad-based stress across the entire economy as is typical in an economic downturn.

The stable rating outlook reflects MARC’s belief that the persisting importance of Danajamin’s public policy function should ensure a high degree of government support to sustain the rating in the foreseeable future. 

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