Maintain their $50.00 target. GLTA
TRISURA GROUP LTD.
2024 Year-Ahead Outlook: Putting 2023 In The Rearview
Our Conclusion
Events of this past year seem to have cast doubt on the integrity and long-
term durability of the fronting model, and brought counterparty credit risk
exposure to the forefront of investor consciousness. In this note we identify a
series of key de-risking events that might be necessary to get the stock
working again. Given the non-zero probability of another write-down
occurring, we are not “pounding the table” on shares of TSU just yet.
However, the magnitude of any write-down (if it were to materialize at all)
would be more benign than the Q4 2022 experience and is unlikely to be a
capital-impairing event. Most importantly, we do not interpret recent events to
be an indictment of Trisura’s risk management practices, and we elaborate
on our reasoning herein.
Key Points
Recapping the chronology of a challenging year. After announcing the
delay of Q4 results in February, the company reported a sizeable write-down
in the US fronting entity. Around mid-year, investors were just beginning to
obtain comfort with the unique set of circumstances that led to the write-
down and look past the experience, when the Vesttoo situation emerged. It is
clear that the occurrence of these two unrelated events in the same year has
raised concerns around the integrity of fronting.
What it might take to get the stock working again. We believe there are a
handful of key de-risking events that need to happen in order to support a
sustained recovery in the stock and facilitate a shift in investor focus back to
fundamentals. We believe that Trisura needs to: 1) achieve some form of
resolution on the Vesttoo situation; 2) get the run-off program fully rolled off
the books; 3) see a revision in AM Best’s outlook back to stable; and 4)
demonstrate sustained earnings momentum. We like the stock for its strong
growth profile, healthy underwriting margins, top-quartile ROE and trough
valuation. For these reasons we remain at an Outperformer rating. However,
Trisura’s ability to avoid another write-down may depend on the fundraising
outcome of a third-party reinsurer. Given our lack of visibility on this process,
we are not “pounding the table” on shares of TSU just yet.
We do not interpret recent events as an indictment of Trisura’s risk
management practices. Some investors have become inclined to ask if
Trisura “grew too fast” and whether the company has failed to implement
appropriate risk management practices. We do not interpret recent events as
evidence that Trisura has sacrificed underwriting standards or compromised
its risk management practices in the pursuit of growth. The Q4 experience
was not the result of a mispricing of risk, and accepting LoCs issued by
China Construction Bank as a valid form of collateral was considered
standard industry practice. Reinsurance counterparty selection has also
been a subject of discussion, but TSU has arguably formed a more
traditional reinsurance panel than many of its fronting peers.