Danajamin Nasional Bhd - 2012

MARC has affirmed its AAA insurer financial strength (IFS) rating on Danajamin Nasional Berhad (Danajamin) with a stable outlook. The affirmed IFS rating continues to reflect Danajamin’s status as a government-sponsored and owned financial guarantee insurer (FGI) and perceived high support from the government in view of its public policy objective of facilitating greater corporate access to the domestic sukuk and bond markets. The IFS rating on Danajamin incorporates MARC’s assessment of the FGI’s willingness to pay financial guarantee claims on a timely basis.

Since its establishment in 2009, the FGI has underwritten 20 transactions, one of which was fully redeemed in 2012 and another in the midst of early redemption. Danajamin’s new business generation slowed down in 2012 from the previous year; it issued four new policies in 2012 compared to 12 the year before. Compared to 2011, the transaction size was larger on average and the FGI exhibited higher tolerance of risks in respect of its recent IPP-related power and concession financings. Three of four of its most recent deals involved principal exposures between RM400 million and RM500 million or 40% to 50% of its paid-in capital. As Danajamin’s own credit rating is contingent upon minimal exposure to low investment grade and higher risk credits, management’s ability to grow the insured portfolio through disciplined investment-grade underwriting will be fundamental to the preservation of its financial strength.

The rating agency also observes that FGI has made further progress in terms of sector diversification during 2012. By industry sector, real estate represents Danajamin’s single largest sector exposure based on amount approved at 20%, followed by power and consumer related products at 15% and 14% respectively as at December 31, 2012. In 2012, the FGI has also expanded its underwriting activities to include securitization, mergers and acquisition, mezzanine, refinancing and cross border transactions. In the same year it successfully co-guaranteed a sale-and-leaseback transaction involving a portfolio of properties. Notwithstanding the more diversified business written over the past year, Danajamin’s book of business still exhibits high sector and single name concentrations. This is due mostly to the modest number of transactions underwritten in a year and the low base on which the FGI is building its insured portfolio. MARC will continue to monitor changes to Danajamin’s mix of business and the credit quality of new business written.

As at December 31, 2012, Danajamin’s RM4.8 billion outstanding insured portfolio translates to a leverage ratio of 4.4x on its RM1.1 billion shareholders’ fund. The FGI’s qualifying capital, as required pursuant to its licensing by Bank Negara Malaysia (BNM), stood at RM2.06 billion as at end-June 2012 and remains in compliance with BNM’s qualifying capital requirements. Of the RM2.06 billion, RM1.0 billion is capital on call. To the extent that regulatory capital requirements are likely to become significantly more risk-sensitive over time to reflect the risk profile of individual transactions and potential claims patterns among others, MARC believes that investment grade underwriting standards and Danajamin’s underwriting performance will be key drivers of its ability to maintain strong regulatory capital measures and support healthy internal capital generation. Support from the government is evidenced by its recently announced RM400 million capital allocation for Danajamin, which will increase the FGI’s capital base and claims paying resources.

As at September 30, 2012, Danajamin’s investment profile remained conservative with short-term fixed deposits and money market instruments comprising 67.5% of investment assets and AAA-rated securities and government-guaranteed securities accounting for the balance. Danajamin’s current investment policy limits the company’s investments to fixed income securities (low-risk assets and selected AAA-rated securities only) and short-term fixed deposits and money market instruments.

The company’s reported net earned premiums increased to RM24.4 million in the first six months to June 30, 2012 (1H2011: RM4.4 million) in line with the increase in its insured portfolio. Its net earned premiums for 1H2012 was higher than its investment income of RM19.0 million, in contrast to earlier periods when investment income accounted for the greater part of Danajamin’s earnings. No claims have been incurred to date and MARC notes an improvement in Danajamin’s return on assets to 6.31% in 1H2012 on an annualised basis, up from 4.10% for the full year 2011. The risk profile of Danajamin’s insured portfolio and overall pricing adequacy will be key drivers of its ability to generate sufficient and sustainable earnings. 

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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