We also made some portfolio adjustments in March, exiting a couple of names: K-Bro Linen Inc. (TSX: KBL) and Transcontinental Inc. (TSX: TCL/A) in order to redeploy capital to more promising opportunities.
We are always on the lookout for quality compounders trading at reasonable valuations, and one such opportunity presented itself when Trisura Group Ltd. (TSX:TSU), a leading speciality insurance provider, got put in the penalty box by the market on reporting a bad quarter. The company reported an unexpected write-down of $82 million on reinsurance recoverables in its US business. This provided an opportunity for the Fund to initiate a position in a stock that we have been closely monitoring for a few months and have owned in the past. Trisura’s management believes the write-down to be a one-time loss since exposure to similar homeowners’ insurance is limited to less than 6% of the US gross written premium. Also, management believes remaining reinsurance recoverables are high quality – 83% are represented by rated reinsurers and the remainder are appropriately collateralized.
Trisura operates in a niche market, relying on specialized underwriting knowledge and structuring expertise to offer commercial products not provided by most insurers. It has a 16-year history in Canada, having grown revenue and book value at a CAGR of 29%, over the last eight years, with ROE in the high double digits (30% in each of the last two years). Trisura entered the US market in 2018 and has rapidly grown its fee-based fronting model that originates premiums and cedes the majority of underwriting risk to reinsurance partners for a fee. The US business reported an adjusted ROE (excluding the reinsurance write down) of 14% in 2022 and the ROE has been on an upward trend as the business has gained scale. We expect growth in both the Canadian and US markets to continue as the company expands its distribution relationships in existing lines of business and continues to grow the fronting model.
We are excited about the future potential of Trisura and see compelling value in the portfolio of businesses we own today. Uncertainty in the macro environment has created opportunities at the company level to make attractive investments in high quality compounding businesses in our view. These businesses will again have their day in the sun and we will continue to closely watch their progress along the way.
David Barr, CFA
April 21, 2023