Setting Up For A Cleaner 2024 Our Conclusion
After cleaning up a few legacy/run-off programs in Q4 and adopting a more
conservative stance towards provisioning, Trisura appears poised for a
cleaner set of results in the year ahead. We believe the company will make
further inroads on the expansion of Surety and Corporate Insurance lines
into the U.S. on a primary basis, and see potential for AM Best to revise its
negative outlook back to stable in 2024 (i.e., something that could be
perceived as an important de-risking event). Reported margins in the U.S.
entity should normalize fairly quickly, and the run-off experience will no
longer produce a drag on book value growth. In the context of this outlook,
we are raising our price target to $55 (from $50 previously) reflecting a
higher target multiple.
Key Points
Earnings Summary
Setting up for a cleaner 2024. Operating EPS came in at $0.54, slightly
below our prior estimate of $0.56. The variance was largely related to a bit of
earnings noise in the U.S. fronting entity and some one-time expenses that
should set the company up to deliver a cleaner set of results in 2024. The
U.S. loss ratio was temporarily elevated, but margins should normalize
quickly as these non-recurring expenses (i.e., higher provisioning under
IFRS 17 and the clean up of a pair of legacy programs) do not appear
symptomatic of anything structural in nature. Importantly, the “gross loss
ratio” (which informs the experience of third-party reinsurers) continues to
run in the targeted range of the mid- to high-60s. Despite the headline noise
in the quarter, management continues to expect a low-80s to high-70s
fronting operational ratio going forward.
A few bright spots in Canadian fronting and expansion of primary lines.
Canadian fronting has demonstrated solid momentum and produced a larger
contribution to net underwriting income than the Surety and Corporate
Insurance lines in the quarter. The company also indicated that it recently
received regulatory approval for its U.S. treasury-listed surety platform. This
acquisition will help accelerate the longer-term growth trajectory of the Surety
business by supporting the expansion into the U.S. market on a primary
basis. Management indicated that its goal is to scale the U.S. Surety lines to
become as large as the Canadian practice over the next three to four years.
U.S. corporate insurance lines are also expected to bind their first premium
in 2024. Trisura has been staffing up, filing rates and forms, and establishing
a presence in the market. The ramp-up might not have a material impact on
the top line this year, but the longer-term goal is to scale that business to be
comparable in size to its Canadian counterpart over the next four to five
years.