CIBCEQUITY RESEARCH
March 27, 2022 Earnings Update
TRISURA GROUP LTD.
Refreshing Our Thesis Following the Recent Sell-off
Our Conclusion
We were more surprised by the market reaction to Q4 results than the results themselves. We interpreted the elevated claims activity that drove the miss to be transient in nature with no impact to 2022 or beyond. Specialty lines like Surety tend to demonstrate strong underwriting margins in the long-term, but volatile claims activity in the short-term. Fundamentally, nothing that emerged from Q4 results leads us to believe that earnings should be
structurally lower going forward. We continue to like TSU for its strong growth trajectory, healthy underwriting margins and positioning as a specialty insurer benefitting from hard market conditions. We maintain our Outperformer rating but lower our price target to C$50.00 from C$61.00.
Key Points
Refreshing our thesis following a period of underperformance. Since
reporting a Q4 earnings miss in early February, Trisura’s stock has declined
31%. The miss was largely driven by a single contractor insolvency in Surety
and some weather-related impacts in the U.S. fronting platform (both of
which we interpreted as idiosyncratic in nature and unique to Q4 with no
read-through for 2022 or beyond).
Looking through volatile claims activity in Q4. The chunky claim in Surety
and corresponding uptick in the loss ratio is not abnormal in the context of
historical claims activity. The segment produced a comparable loss ratio as
recently as Q3 and Q4 of 2019. The frequency of claims can be low in this
segment, but high in severity. This is why the pattern of losses is volatile over
time. For the full year, Surety printed a 16% loss ratio versus a 14% average
in the preceding five years. The expectation (or hope) is for claims activity to
normalize in early 2022 back towards historical averages.
Valuation should be a less prominent source of pushback. Trisura now
trades at 19.0x 2022E P/E versus 26.5x prior to reporting fourth quarter
results. In our view, the recent sell-off provides an opportunity to obtain
exposure to a name that is fundamentally no different from early February,
but at a more attractive valuation. TSU is trading much closer to the specialty
P&C peer group average despite experiencing industry-leading growth in
2021.
Early thoughts on Q1 results. We are forecasting a normalization of the
loss ratio back towards historical averages, but also a moderation of top-line
growth owing to a slower seasonal period. In addition, volatile capital markets conditions may dampen BVPS growth. For these reasons we are not necessarily expecting a “blowout” quarter in Q1, but remain constructive from a longer-term perspective and believe the thesis remains intact. Ultimately, demonstrating stability in underwriting margins in Q1 could be construed as a positive. We are also hoping to see progress on the expansion of U.S. surety in 2022, as well as greater traction on admitted lines.