INITIATING COVERAGE
INITIATE AT BUY: CANADA PROVIDES CAPITAL TO EXPLOIT DE NOVO US GROWTH PLATFORMS
THE TD COWEN INSIGHT
Trisura provides a unique investment opportunity in a pure-play specialty insurer in Canada, one capable of materially outgrowing the larger P&C and life insurance companies. The stable, high ROE and strong capital generation engine in Canada as well as U.S. Fronting, support what we view as TSU's key growth story - de novo expansion in the U.S. including Surety and Corporate Insurance.
While Trisura's businesses and risks are different and more complex than a traditional standard P&C insurer, the key drivers of the stock's performance over the next few years are straight forward. We see solid upside under the following scenarios: 1) Canada continues to generate a ROE that is 500bps-1000bps higher than the average ROE in Canada's P&C sector, 2) the company exploits the significant growth opportunities in the U.S. through market share gains and de novo expansion in other product sets; and 3) the business avoids large hits to book value like the Q4/22 write-down to insurance recoverable.
The complexity and tailored nature of the specialty insurance market lends itself to materially better profitability metrics like combined ratio and ROE. We forecast an operating ROE of ~18%-20% over the next three years.
We forecast top line growth of consistently better than 15%-plus as the company gains market share in U.S. Fronting and expands into other product suites in the US including Corporate Insurance and Surety. Note that the U.S. Surety business is currently reported in Trisura Specialty. Modest market share gains and selective acquisitions should drive strong top line growth in the U.S., in our view.
Top line growth and ROEs well above 15% should drive 15%-plus book value per share growth, well above the other P&C and life insurance companies in Canada, provided there are no material charges. We believe the circumstances that led to the material charge in Q4/22 have been addressed through the write-downs and changes in the business model.
Our target price of $52.00 drives a total return of ~27% and supports our BUY rating. The target price is based on a healthy target P/B of 3.0x, above the target P/B we apply for the standard P&C insurers we cover; which we believe is supported by strong long-term book value growth, operating earnings growth, and a superior ROE.