TRISURA GROUP LTD. A Noisy Quarter For The U.S. Fronting Entity
Conclusion: Trisura reported a bit of a noisy quarter in Q4, particularly for
the U.S. fronting entity where a variety of non-recurring items adversely
impacted profitability. Margins are expected to recover fairly quickly and
management believes that some of the actions taken in Q4 will set the stage
for a cleaner set of results in 2024. The top-line growth trajectory also
appears to have moderated in the U.S., but should normalize a bit later this
year. Overall, results were noisy but operating earnings were only a few
cents below our estimate and the run-off program is now essentially
complete.
Key Takeaways
Earnings were a few cents below our estimate: Operating EPS came in at
$0.54 versus our estimate of $0.56. The source of the variance appears
attributable to weaker-than-expected results in the U.S. fronting entity.
Bit of a noisy quarter for the U.S. fronting entity: Both the adjusted and
unadjusted fronting operational ratios came in above 100% in Q4. On an
unadjusted basis, a lot of the noise is related to the run-off program which
created a ~$15 million earnings drag in the quarter (slightly above the prior
guidance range of $11MM-$14MM). Excluding the run-off experience,
however, profitability was still weaker than would have been expected.
Management indicated that many items impacting U.S. operating earnings in
Q4 were considered one-time in nature and not indicative of any underlying
trends (even though they were not adjusted for). There were a couple items
that Trisura “cleaned up” in the quarter that will set the company up for a
cleaner 2024. Despite the weaker print, management is not changing its
expectation or guidance range for the loss ratio or fronting operational ratio
going forward. Margins are expected to normalize fairly quickly in early 2024.
U.S. top-line growth moderates in H2 2023: Gross premiums written in the
fronting entity increased 4% Y/Y in Q4. Trisura indicated that this is partly
related to the rationalization of certain programs. Management expects a
tempered pace of growth to continue in the first half of 2024 before
normalizing in the second half. This is about ensuring that the portfolio
consists of the right mix of programs.
Claims activity normalized in Canadian lines following an abnormally
benign experience in Q3: The Canadian combined ratio was 86% in Q4,
reflecting a more normalized level of underwriting profitability versus a
combined ratio of 75% in the prior period. As we’ve stated in the past, the
pattern of claims emergence in specialty lines can be lumpy and episodic.
We tend to model a mid- to high-80s combined ratio in the Canadian
segment as a realistic estimate of normalized profitability.
Price Target Calculation
Our price target of $50.00 is based on 17x our two-year forward EPS estimate, reflecting a positive re-rating from the current P/E multiple of 15x and back towards historical levels.