Q3/24: LARGELY IN LINE QUARTER; TOP LINE SLOWING; ROE SUPPORTS SOLID BV GROWTH
THE TD COWEN INSIGHT
TSU beat our estimate on better U.S. Programs adjusted underwriting income, supported by good growth in fee income. However, top line growth in the U.S. slowed at a faster clip than expected. Growth should remain weak in this business until the effects of exiting certain relationships passes. We expect U.S. top line growth to resume in H2/25.
Impact: POSITIVE
Modest EPS Beat: TSU reported Q3/24 operating EPS of $0.68, up 1% y/y reflecting 20% growth in net investment income, offset by lower adjusted net underwriting income in Trisura Specialty. EPS was higher than our estimate of $0.64 (consensus: $0.67) reflecting better net earned premium and fee growth in U.S. Programs and a slightly lower tax rate.
Top line momentum in Surety. Total underwriting revenue (includes fees) was up 20% reflecting strong growth in Surety, mostly from the expansion into U.S. Surety (including a new relationship) as well as Canadian fronting (distribution expansion). In the U.S., the exit of certain relationships that did not meet TSU's risk appetite reduced gross written premium by 7%, but earned premium and fee growth was better than expected.
Adjusted net underwriting income was down 7% y/y. On an adjusted basis, Trisura Specialty net underwriting income was down 13% reflecting a higher loss ratios in Surety and Corporate insurance. In U.S. Programs, adjusted net underwriting income was up 11% as good growth in fee income (up 13% y/y) offset a 440bps increase in the operating loss ratio. The operating fronting operational ratio, which captures the benefit of fee growth, was up 140bps y/y.
Growth in investment income expected to slow. Strong growth in investment income (20% y/y) reflects the benefit of higher rates and growth in the portfolio. We expect growth in investment income to slow to 15% in 2025.
Earnings quality. Reported earnings were 9% higher than operating as realized securities gains offset claims on exited programs and other smaller charges.
Uses of capital largely unchanged. Debt to capital dropped to 11.6% from 12.4% last quarter and remains well below the long-term target of 20%.
BV/share (ex. AOCI) was up 18% y/y, driven by strong ROE (ex. AOCI) which reached 18.5% on TTM basis. Our estimates are largely unchanged. Our 17%-18% ROE continues to support our 2.9x target P/B multiple and target price of $52.00 (unchanged).