Danajamin Nasional Bhd - 2014

MARC has affirmed its AAA insurer financial strength (IFS) rating on Danajamin Nasional Berhad (Danajamin) with a stable outlook. The affirmed IFS rating is premised on the status of Danajamin as a government-sponsored and -owned financial guarantee insurer (FGI) and the perceived high government support owing to the FGI’s role in the domestic sukuk and bond markets. The IFS rating also incorporates Danajamin’s strong risk controls, its conservative investment management and strong liquidity position. 

MARC observes that the outstanding amount of Danajamin’s insured portfolio, which stood at RM5.7 billion as at end-June 2014 (end-2013: RM5.8 billion), has continued to decline due to low deal flows and redemptions outpacing new drawdowns. For 1H2014, Danajamin provided a guarantee for only one new deal with an approved limit of RM170 million as compared to four new deals with a total approved limit of RM1.2 billion in 2013. Redemptions amounted to RM255 million while new drawdowns were RM90 million in 1H2014. The slower business growth reflects the prevailing weak domestic market conditions for private debt securities issuances. MARC observes that all of Danajamin’s new guarantee business in 2013 and 1H2014 have been in collaboration with banks: four of the five new deals were co-guarantees while one was a club deal arrangement. 

MARC notes that in the co-guarantee arrangements, Danajamin provided guarantees on the longer-tenured tranches while banks guaranteed the shorter tenures. For the club deal, the issuer raised debt simultaneously from the bank and capital market with Danajamin providing the guarantee for the latter. The risk-sharing with banks is viewed positively as it strengthens Danajamin’s risk profile while the additional monitoring provided by the banks on the issuers will further improve the overall surveillance process. MARC also observes that the FGI’s guarantee portfolio is skewed towards the property sector: real estate (held for property investment) and property development accounted for 23% and 13% of the total insured portfolio respectively; more than 50% of the newly approved insured amount in 2013 and 1H2014 were from these sectors. This concentration risk is mitigated by Danajamin’s stringent surveillance policy.

Danajamin’s regulatory capital remains strong at RM2.3 billion as at end-June 2014 (2013: RM2.2 billion), including RM1.0 billion capital on call. The FGI’s leverage ratio improved to 4.4x as at end-June 2014 (end-2013: 4.7x), well below its maximum leverage ratio of 7.5x of its equity value, providing comfortable headroom for further growth. Nonetheless, Danajamin’s capital requirement framework will be revised in compliance with BNM’s new guidelines for the FGI which is anticipated to be unveiled in early 2015. 

MARC notes that the FGI recorded higher investment income due to investment in relatively higher-yielding asset classes such as government-guaranteed securities. In addition, investment income, which grew by 14.1% year-on-year in 2013, was also supported by the RM100 million capital infusion from the government in 2013. The FGI continues to exhibit a conservative investment strategy and has high liquidity position as reflected by its investment portfolio which comprised investments in short-term fixed deposits and money market instruments, AAA-rated securities and government-guaranteed securities. 

The slower inflow of new deals has resulted in a decline in gross written premiums since its peak in 2011 of RM331.7 million to RM154.1 million in 2013. The growth in earned premiums tapered sharply to 35.0% year-on-year (y-o-y) in 2013 compared to 157.9% in 2012, which was due in part to the low portfolio base effect during the FGI’s early years of operations. The growth could further decrease in 2014 based on the modest new business volume in 1H2014. Nonetheless, net earned premiums remained sizeable at RM79.1 million in 2013 and RM45.9 million in 1H2014, supported by an increase in the approved guarantee portfolio (1H2014: RM6.9 billion; 2013: RM6.5 billion). Danajamin registered a 35.9% rise in net profits to RM103.1 million which contributed to higher return on asset and equity measures of 5.4% and 8.3% respectively in 2013 (2012: 4.6%; 6.7% respectively).

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.

Major Rating Factors

Strengths

• Government-sponsored and sole financial guarantee insurer;
• Sound governance structure; and
• Strong liquidity position and conservative investment policy.

Challenges

• Increasing guarantee business volumes; and
• Managing higher issuer credit risk in challenging economic environment.