CIBCThinking along the same lines as TD. GLTA
EQUITY RESEARCH
February 11, 2022 Earnings Update
TRISURA GROUP LTD.
Looking Through Volatile Claims Activity In Q4
Our Conclusion
Trisura reported a headline earnings miss in Q4, driven by a higher loss ratio in the Canadian and U.S. segments. For both franchises, however, we believe this result was idiosyncratic, unique to Q4, and has no read-through for 2022 or beyond. The trajectory of top-line growth remains intact, which is the most influential driver of long-term earnings. A volatile loss ratio should be expected over time, particularly in lines like Surety, which is a severity business. No change to our thesis and we continue to promote TSU as the top pick in our coverage universe.
Key Points
Headline earnings miss on a transient uptick in Q4 loss ratio. Trisura
reported adjusted diluted EPS of $0.31, below our estimate of $0.40 and
consensus at $0.37. The headline miss can be largely attributed to a higher- than-expected loss ratio in both the Canadian and U.S. segments. In Surety, a single contractor insolvency pushed the accident year loss ratio higher in Q4. In the U.S. fronting platform, the higher loss ratio was driven by one of the programs that TSU had previously declined to renew as well as certain weather events that more often would have occurred in Q3. In both cases, we believe the higher loss ratio was a product of idiosyncratic factors unique to Q4 with no implications for 2022 and beyond.
Growth trajectory remains intact in Canada. An elevated level of top-line
growth persisted into Q4, with GPW increasing 85% Y/Y (versus a
particularly strong quarter in Q4/20). Growth continues to be driven by strong momentum in Risk Solutions, where GPW increased 123%. Our forecast for 2022 implies an abrupt deceleration of Canadian premium growth (i.e., 20%), reflecting a conservative stance. The combined ratio came in at 91%, compared to a trailing three-year average of 83.5%. This was driven by a chunky claim in Surety and a higher expense ratio (a product of business mix). The Canadian segment produced an impressive ROE of 30% in 2021.
Top-line growth also exceeds our expectations in the U.S. franchise.
GPW amounted to $293 million in Q4, reflecting 39% growth Y/Y and above our forecast of $280 million. The growth was largely driven by existing programs and E&S lines. Admitted programs generated premiums of $23 million in Q4, reflecting a very modest sequential increase versus $19 million in Q3. We continue to expect E&S lines to generate the preponderance of submission flow, but acknowledge that any business written in the admitted space will be incremental to whatever level of organic growth is achieved in E&S markets. The fronting operational ratio came in at 79% in Q4, versus 69% one year ago. The increase was related to a higher loss ratio, as discussed previously. Positively, management indicated that there are no programs that it would consider non-renewing based on performance in the fourth quarter