Have a $60.00 target. GLTA
Growth Trends Accelerate in Q2 Our Conclusion
Earnings were in line with consensus, but Trisura experienced accelerating
top line growth across both of its core segments, which was the key
operating highlight in our view. “Canadian” underwriting margins moderated
a bit in the quarter, but this was attributed to some non-recurring expenses
and natural variability of the loss ratio (neither of which is a concern to us).
Perhaps most importantly, Q2 results were relatively clean (once again) and
free of any chunky adjustments to earnings or sources of negative surprise.
Key Points
Operating EPS in line. Trisura reported operating EPS of $0.65 which was
directly in line with the consensus average and a few cents above our
estimate at $0.63. Book value per share increased 4.8% sequentially and
was favourably impacted by a $3.1 million cumulative translation gain (driven
by the stronger U.S. dollar).
Growth accelerates in the Canadian segment (now renamed “Trisura
Specialty”). Gross premiums written increased 31% Y/Y, reflecting an
acceleration from 25% in the prior quarter. Warranty and Canadian fronting
stood out as the more meaningful growth drivers in the quarter. The Q2
combined ratio came in at 89.8%, which was generally a bit higher than
recent experience (i.e., in the low-80s). Underwriting margins were impacted
by some one-time costs associated with a restructuring that was completed
on certain reinsurance programs in the quarter (which inflated the ratio by
~2.5%) as well as the drag of expenses associated with the buildout of US
Surety and Corporate Insurance. The loss ratio was also a bit elevated, but
this appeared to be the product of normal course claims activity.
US fronting growth accelerates as well. In the US fronting entity, gross
premiums written (GPW) increased 14% Y/Y versus 4% in the prior quarter.
Management had previously signaled an improving growth trajectory in the
second half of the year, so the Q2 print looks a little better than expected
from a top line standpoint. The adjusted fronting operational ratio (FOR)
came in at 85.5% which was up slightly from the prior period and a bit higher
than management is targeting (i.e., in the low-80s). However, the company
indicated that it has increased retention on certain fronted programs which
inflates the reported FOR despite having favourable implications for
underwriting income on a dollar basis. The loss ratio was 68% in the quarter
which is squarely in line with target.
Net investment income was relatively unchanged. Net investment income
came in at $16.9 million, virtually unchanged from $16.8 million the prior
quarter. Trisura initially entered the rising interest rate environment with a
shorter duration fixed income portfolio. This enabled the company to more
quickly take advantage of rising market yields (and avoid more severe mark-
to-market adjustments), but also means the growth of net investment income
may plateau a bit faster than for insurers who had a longer duration book.