Have a $55.00 target. GLTA
TRISURA GROUP LTD.
Solid Operating Performance in Q2
Our Conclusion
Operating EPS came in at the high end of the previously indicated range,
driven by solid margins on both sides of the border. The trajectory of top-line
growth continues to normalize, but remains generally more resilient than
management may have contemplated (or guided to) at the outset of the year.
Importantly, we believe there do not appear to be any issues stemming from
the Vesttoo/China Construction Bank situation that cannot be navigated or
that pose a material risk to TSU.
Key Points
Operating earnings at the high end of the previously indicated range.
Last week Trisura indicated that it expected Q2 operating EPS to be in the
range of $0.53 - $0.56. Operating EPS landed at the top of that range. The
~14% beat relative to our prior estimate of $0.49 appears attributable to
better-than-expected margins on both sides of the border.
Growth remains generally more resilient than expected. In the Canadian
segment, top-line growth came in at 24% Y/Y, down slightly from 27% in Q1.
Similarly, the U.S. fronting entity experienced slower growth at 25% (down
from 41% in Q1). On a year-to-date basis, however, the pace of top-line
growth across both entities has exceeded expectations that were established
at the outset of the year (i.e., high-teens). The growth trajectory appears to
be normalizing, but perhaps at a more moderate pace than initially expected.
No major issues stemming from the Vesttoo situation. In the subsequent
events section, Trisura noted that it holds certain letters of credit from China
Construction Bank which were provided by one of the US reinsurance
partners. We connected with management on this topic. Trisura feels that the
exposure is very manageable and it is working with the reinsurance
counterparty to replace the collateral. The reinsurance counterparty is not a
captive, and the program collateralized by the LoC issued by China
Construction Bank is performing as expected. We suspect that the industry in
general may become more reluctant (at least in the immediate future) to
accept LoCs issued by this particular financial institution considering some of
the public allegations that have been levelled. We would venture to guess
that these LoCs held by Trisura should not influence AM Best’s outlook on
the company, particularly if they can be replaced with another version of
collateral in relatively short order. Over time we wonder if the composition of
the reinsurance panel in the U.S. fronting entity may be steered away from
unrated capacity considering the events of the past few quarters. This might
already be happening to some degree (at least on the margin). Trisura
reduced its aggregate exposure to captive reinsurers in the first half of the
year from $44 million to $12 million, which is a level so trivial/immaterial, in
our view, that the risk of write-downs is not necessarily zero, but substantially
lower than it would have been one year ago.