Trisura Group Ltd T.TSU

RBC

[retiredcf]

Their upside scenario target is $50.00. GLTA

February 9, 2024

Outperform

TSX: TSU; CAD 36.79

Price Target CAD 44.00 ↑ 40.00

Trisura Group Ltd.

Canadian operation continues to outperform, Growth remains healthy

Our view: Trisura's Q4 results were led by the Canadian unit, which continues to perform well both from a top and bottom-line standpoint. The U.S. segment reported some deceleration in premium growth while profitability was impacted by a few notable items. Potential impacts from the large program put into runoff a year ago are largely over. We think the growth outlook for Trisura remains healthy across their businesses in 2024. Investment income remains a significant earnings driver. Capital and debt ratios remain well above required ranges. We remain at Outperform.

Key points:

Estimates & price target: We are revising our 2024 EPS forecast to $2.70 (from $2.75) on slight changes in our retention and combined ratio assumptions. Our 2025 EPS forecast of $3.05 remains unchanged. We are raising our price target to $44 (from $40), which is now based on 3.0x our ending 2024 book value per share forecast (previously based on 2.7x our ending '24 BV/share forecast). We believe the higher multiple is warranted given the solid premium growth and profitability outlook.

Q4 results: Trisura reported Q4/23 operating EPS of $0.54 (ex an impact from a run-off program/adjustments) vs. $0.51 in Q4/22, which was $0.01/ share ahead of the consensus but trailed our $0.59 estimate. The difference to our estimate mainly resided in the U.S. segment (mostly the earned premium assumption).

Key takeaways: The Q4 combined ratio was 85.8% vs. 83.5%. While Canada’s combined ratio was slightly higher than the past few quarters, Q4 is often seasonally the highest for its surety operation. The U.S. fronting operational ratio was 143.0% (or 106.0% ex runoff and other non-recurring items) and included some provisioning impacts in reinsurance (mid single digit MMs) and cleanup of a few programs exited in past years. The company noted that loss ratios in its core programs are at targeted levels (mid to high 60s) and are comfortable with a U.S. operational fronting ratio in the low 80s/high 70s. Gross written premium growth rose 25.7% y/y in Canada to $274.0 mm and was +4.1% in the U.S. to $465.1 million. U.S. expansion remains a focus for Trisura and management noted that the objective is for the U.S. surety book to be as large as the Canadian surety book in the next 3-4 years (their recent U.S. surety acquisition received regulatory approval on 2/7/24). Overall net investment income grew 71% y/y to $16.2 million from $9.5 million.

Positives: 1) Strong premium growth in Canada: 2) Strong net investment income growth; and 3) a mid-80s combined ratios in the Canada segment.

Negatives: 1) Run-off impact on GAAP results; 2) U.S. operations premium growth rate moderated; and 3) U.S. operations core profitability trailed our forecast.

Key takeaways for the quarter

•  Canada segment: Overall profitability for the Canada segment was solid in our view with Q4 operating income improving to $19.4 mm from $13.7 million (RBC assumption was $20.9 million). The Q4 combined ratio was 85.8% vs. 83.5%. While Canada’s combined ratio was slightly higher than the past few quarters, Q4 is often seasonally the highest for its surety operation. Notably, the loss ratio for the Canada unit was still a low 20.6% in the quarter. Gross written premium growth remained strong and rose 25.7% y/y to $274.0 mm from $218.0 million, reflecting strong growth in Canadian fronting and surety. We are upbeat on the Canadian fronting growth opportunities as this area continues to ramp up. The net/gross retention ratio for the Canada segment was 51.6% in the quarter (RBC estimate was 47.0%).

•  U.S. segment: Overall profitability fell in the U.S. segment with operating income for the U.S. segment at $5.8 mm vs. $11.1 million. These totals exclude the impacts from the run- off unit and there was a reported loss including the run-off results. The U.S. fronting operational ratio was 143.0% (or 106.0% ex runoff and other non-recurring items) vs. 241.7% (or 82.2% ex run off) and included some provisioning impacts in reinsurance (mid single digit MMs) and cleanup of a few programs exited in past years. The company noted that loss ratios in its core programs are at targeted levels (mid to high 60s) and are comfortable with a U.S. operational fronting ratio in the low 80s/high 70s. Gross written premium growth in the U.S. was a bit slower than recent quarters at +4.1% y/y to $465.1 mm vs. $446.8 million while net written premiums were down 21.3% y/y to $141.5 mm (RBC estimate was -0.5%). The main reason for the shortfall to our estimate was net earned premiums totaled $31.5 million vs. our $45.0 million assumption (we had assumed higher retention ratios). U.S. expansion remains a focus for Trisura and management noted that the objective is for the U.S. surety book to be as large as the Canadian surety book in the next 3-4 years.

•  Higher yields driving investment income growth: Overall companywide net investment income grew 71% y/y to $16.2 million from $9.5 million (RBC assumption was $13.9 million), reflecting higher reinvestment yields. The overall investment portfolio remains relatively short in duration with 46% of its FI securities having maturities of 3 years or less. Cash and cash equivalents remain high at roughly 41% of invested assets as of Q4/23. Alts are modest at 3.8% of invested assets. A total of just 6.8% of invested assets were rated BB and lower, which has been falling all year and is down from 9.0% in Q4/22.

•  Other items of interest: Trisura announced that it received regulatory approval for the previously announced acquisition of a Treasury-listed U.S. surety company on 2/7/24. In our view, this acquisition both expands the U.S. surety book and also allows the company the ability to participate on insuring government projects. The minimum capital test ratio of the regulated Canadian subsidiary was 251% at YE’23 (vs. 233% as of 12/31/22), which is well above the 150% minimum regulatory requirement. The risk-based capital ratio for Trisura is above minimum levels. The debt/cap. ratio ended the year at 10.8% while the premiums/capital ratio in the U.S. was 6.1x vs. 6.8x in Q3/23 and 6.5x at this time a year ago. Trisura reiterated the target of reaching $1 billion in equity by the end of 2027 (vs. $619 mm at YE’23).