Danajamin Nasional Bhd - 2013

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 also incorporates Danajamin’s strong risk controls, which help temper its exposure to a number of large single risks, its favourable financial flexibility and demonstrated credit discipline with regard to new business production in 2013.

Danajamin’s new business continued to decline for the 11 months ended November 2013 (11M2013); the FGI only insured three issuances with guaranteed value between RM260 million and RM300 million. As at end-November 2013, the total number of issues insured by Danajamin stood at 22 with one issuance fully redeemed. The decline in the demand for bond and sukuk insurance in 2013 will constrain Danajamin’s ability to write new business. Single-risk concentration continues to be viewed with some concern given the size of such exposures relative to Danajamin’s capital base. The real estate sector represents Danajamin’s single largest sector exposure at 22% of its insured portfolio, up from 20% in 2012 following a new guarantee issued during the period for construction of a retail mall. The power and property development sectors each constituted 14% of the insured portfolio.

MARC observes that collaborations with banks to provide credit enhancement increased to 11 issuances, primarily in the form of co-guaranteeing and fronting bank-guaranteed bond issuances. New issuances during 11M2013 were co-guaranteed with commercial banks with Danajamin assuming 37% of the risk of the total financing amount on average. MARC views such collaborations with banks positively as it promotes risk sharing and additional scrutiny by the counter party banks.

Danajamin’s regulatory capital stood at RM2.18 billion as at 1H2013, including RM1 billion in capital on call. The leverage ratio stood at 4.3x on the shareholder’s fund as at end-June 2013, which is still within the FGI’s intended maximum leverage ratio of 7.5x of its equity value. Going forward, the leverage ratio is expected to be maintained between 5x and 6x. Danajamin received a RM100 million capital infusion that is currently taken up as a liability pending the issuance of new ordinary shares. The remaining RM300 million of the RM400 million committed by the government in 2012 is expected to be received in 2014. Danajamin’s capital requirement will likely be more stringent going forward given the Bank Negara Malaysia’s intention to implement a more comprehensive and risk-sensitive capital framework specific to the FGI. Aside from the new capital, Danajamin’s claims-paying resources have also grown through the growth in its insured book of business and profitability.

Danajamin’s investment portfolio continues to be comprised of investments in short-term fixed deposits and money market instruments, AAA-rated securities and government-guaranteed securities. As at end-June 2013, the allocation in fixed deposits and short-term money market instruments increased to 68% of investment assets (2012: 58%) while the allocation of low-risk assets and AAA-rated papers decreased to 16% (2012: 24%) and 16% (2012: 17%) respectively. MARC believes that Danajamin’s future liquidity needs are well supported by its conservative investment strategy.

Danajamin’s total revenue improved to RM60.9 million for the first half of 2013 (1H2012: RM47.1 million) on the back of the larger insured portfolio and investible assets. In 1H2013, net earned premiums and investment income increased by 58.1% and 9.2% to RM38.6 million and RM20.7 million respectively. The higher pace of growth in net earned premium resulted in the contribution of net earned premium to total income improving to 64% in 1H2013 from 57% in 2012. No claims have been incurred to date and the cost-to-income ratio declined to 23.1% in 1H2013 (2012: 26.2%) due to an improvement in total revenue. Return on assets increased to 5.06% on an annualised basis in the first half of 2013 from 4.62% in 2012. Going forward, MARC’s outlook for Danajamin’s profitability is tempered by the lack of new business volume; however, the rating agency is comforted by the insurer’s net unearned premium reserves of RM513.5 million as of end-June 2013 (which were up from RM478.6 million six months earlier) and Danajamin’s sizeable investment income which will provide some visibility to the FGI’s earnings. Given the FGI’s potential high loss exposure, its earnings are highly susceptible to guarantee claims. MARC views the credit quality of business written as a key driver of its underwriting earnings performance.

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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