MARC affirms Danajamim’s AAA rating, outlook stable

KUALA LUMPUR (Dec 16): Malaysian Rating Corporation has affirmed its
AAA insurer financial strength (IFS) rating on Danajamin Nasional Bhd
(Danajamin) with a stable outlook.

The rating agency said on Friday the affirmed rating reflected
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,” it said.

To recap, Danajamin was set up in May 2009 with a paid-in capital of
RM1.0 billion. It has reasonable single-risk capacity and considerable
liquidity resources.

Over the past two years, 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 also noted 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 expected 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.

MARC added that 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,” it
said.

In the first six months to June 30, 2011 (1H2011), it reported higher
net earned premiums of RM4.36 million 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 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 said Danajamin’s capital position remained sound relative to the
underlying quality of its insured portfolio based on its review of the
FGI’s insured portfolio.

The FGI did 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 was invested would be primary drivers of its internal capital
generation capacity going forward.

That said, the rating agency derived considerable comfort from its
belief that maintaining its ‘AAA’ rating and its capital strength would
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 would 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 said the overall effectiveness of Danajamin’s
risk management function had 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 reflected 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.