Trisura Group Ltd T.TSU

RBC Initiate Coverage

[retiredcf]

Their upside scenario target is $45.00. GLTA

December 6, 2023

Outperform

TSX: TSU; CAD 33.03

Price Target CAD 40.00 

Trisura Group Ltd.

North American specialty insurer positioned for growth; Initiating at Outperform 

Our view: Canadian-based specialty insurer Trisura has been a growth story in recent years through its Canadian operations as well as its expanding U.S. presence. We expect the company to deliver healthy premium and fee growth in targeted traditional lines and its fronting fee-based business (both in the U.S. and Canada) over the next few years in what remains an attractive operating environment. Trisura’s recent ROEs have been near the 20% range and we see mid-to-high teens ROEs or better as sustainable near term. We initiate coverage at Outperform with a $40 price target.

Key points:

Canada business is highly profitable and well positioned: We view Trisura’s Canadian operation as well positioned with a solid market position in key lines and established distribution relationships. The combined ratios in this unit have been excellent, averaging around 80% in the past seven quarters. We believe that P&C market conditions and pricing are conducive to continued healthy premium growth trends continuing in 2024. We are modeling in net written premium growth of 22% for the Canadian operation for 2024.

Fee income model (fronting operation) is another meaningful source of growth: Trisura has established itself as one of the largest fronting companies in the U.S. where the company acts as an intermediary amongst risk bearers for a fee. Trisura’s U.S. fronting operations is larger and more developed, but the company is expanding its Canadian fronting operation as well. We see further opportunities for growth on the fee side and its U.S. fronting operation could also open the door for expansion into traditional U.S. insurance lines.

A high-teen ROE business with room to grow earnings: The company has been generating ROEs at or near the 20% range in recent quarters. We see good leverage to earnings as earned premium and fee growth continues. Investment income should also remain a tailwind to EPS due to rising yield environment and we are modeling in 20% net investment income growth for 2024.

Valuation supported by returns and growth prospects: While there doesn't appear to be a good comp for Trisura, we think the current price/ book valuation of 2.7x is reasonable for a company that we expect to generate strong EPS and top-line growth over the next few years (as well as mid-to-high teens ROEs). Our price target is more conservative than the Street due to some uncertainties related to a writedown in Q4/22, of which there still appear to be some minor concerns (we aren't calling for charges in 2024). Likewise, our target also reflects our view that P&C insurance market pricing for the sector may decelerate slightly (but still remain positive) in 2024.