Desjardins Initiate Coverage Desjardins Securities analyst Doug Young initiated coverage of Trisura Group Ltd. with a “buy” recommendation on Tuesday, pointing to its “Canadian specialty businesses, zero exposure to Canadian personal auto insurance, and potential to organically deploy excess capital and debt capacity (in the U.S. surety and corporate insurance business) to drive operating EPS growth and ROE expansion.”
“In our opinion: 1. TSU has a very attractive Canadian specialty insurance business which has generated above-average-industry growth and ROE, coupled with consistently positive PYRD [prioryear reserve development], ROE on this business is likely to normalize over time, but we believe 20 per cent or more is achievable in 2024/25 (vs 29 per cent in 2023 and 31 per cent in 2022; 2. It does not operate in the Canadian personal auto insurance market; 3. Hard market conditions across most of its businesses will likely persist; 4. It has a conservative 11-per-cent debt-to-capital ratio, and putting its US$59-million of excess debt capacity to work (in the U.S. surety and corporate insurance markets) could add 5–10 per cent to operating EPS and 1–2 percentage points to ROE over 3+ years,” he said.
Mr. Young acknowledged concerns about its U.S. fronting business, including the level of growth through managing general agents (MGAs) and the steady increase in negative PYRDs (for risks retained) over the past three years.
“There were hiccups at this division in 2022/23 ... However, TSU is working to high-grade the business, growth should slow and it is focused on profitability over growth,” he noted.
With his bullish view, he set a target of $48 per share, which is below the average on the Street of $54.50.
“Valuation seems interesting,” he said. “TSU trades at 13.5 times our 2025 operating EPS estimate (vs 14.2 times for IFC and 15.8 times for DFY) and 3.2x book value—yes, a premium to IFC and DFY, but we believe this is warranted given TSU’s ROE outperformance vs these Canadian comps. We see three near- to mid-term catalysts that could drive multiple expansion: (i) the recent (April 18) AM Best outlook change to stable (from negative) should help; (ii) a few quarters of clean results at its U.S. fronting business; and (iii) less US fronting industry noise.”