CIBCHave a $55.00 target. GLTA
EQUITY RESEARCH
March 30, 2023 Company Update
TRISURA GROUP LTD.
A Closer Look At The Q4 Write-down
Our Conclusion
The write-down of reinsurance recoverables in the U.S. fronting entity was a
fairly complex event that has unnerved investors and catalyzed a negative
re-rating. TSU shares have underperformed specialty P&C insurance peers
by 34% on a year-to-date basis, and the stock now trades near its trough
pandemic multiple. In that context, we felt compelled to publish a deeper dive
exploring the unique set of circumstances that led to the write-down and our
interpretation of the event. Key takeaways from the note are distilled below.
Key Points
Takeaway #1: We feel comfortable that reinsurance pricing is unlikely
to result in further write-downs. The set of circumstances that led to the
Q4 write-down were unique in nature and unlikely to impact the small handful
of other property programs that require catastrophe reinsurance. Considering
that quota share partners on other property programs are large, rated
reinsurers (not subject to collateral requirements), we feel comfortable that
the recent shock to reinsurance pricing is unlikely to result in further write-
downs.
Takeaway #2: Renewal risk may exist, but this is more benign in nature.
For the other property programs that require CAT covers, the escalation of
pricing in the property CAT market has undoubtedly pressured underwriting
margins for reinsurers participating in those programs. If a reinsurer elected
to walk away from a program at renewal, it would have implications for the
growth trajectory of the U.S. entity but would not be expected to result in a
chunky write-down or impact to regulatory capital.
Takeaway #3: Most importantly, the Q4 write-down was not the result of
a mispricing of risk. If, for example, a program broke down because it was
experiencing a loss ratio of 60% when Trisura had expected 40%, we might
have more pressing concerns around program selection, risk pricing or the
adequacy of reserving. “Fortunately”, the write-down in Q4 was not related to
inaccurate loss picks (i.e., expected losses), but rather a dramatic increase in
the cost of obtaining third-party catastrophe reinsurance.
Takeaway #4: This event was a stark reminder that collateral
requirements do not fully immunize TSU against counterparty credit
risk. Adverse circumstances (be it a dramatic spike in catastrophe
reinsurance pricing or escalating claims activity) can indeed erode collateral
and leave Trisura “holding the bag”. Counterparty credit risk has always been
(and always will be) the primary source of left-tail risk associated with the
U.S. fronting entity. However, we feel comfortable that the specific set of
circumstances which led to the Q4 write-down is unlikely to reoccur.