Have a $50.00 target. GLTA
TRISURA GROUP LTD.
Laying The Groundwork For A Recovery
Our Conclusion
Trisura reported strong Q3 results driven by an exceptionally low loss ratio
on the Canadian side of the border. Although our earnings estimates have
not changed too dramatically, we believe that the solid print helps move the
Q4 write-down further into the rear view and represents a constructive step
forward. In our view, there are a few key things that need to happen to
support a sustained recovery in the stock (please see below), and we believe
there is a reasonable line of sight to all of them occurring over the course of
the next 12 months or so. We continue to rate shares of TSU Outperformer.
Key Points
Strong earnings beat driven by a low loss ratio in the Canadian lines.
Operating EPS exceeded our estimate by 26%, driven by a period of benign
claims activity in the Surety and (perhaps more surprisingly) Corporate
Insurance lines. The pace of top-line growth also accelerated to 35% in the
Canadian segment, and continues to trend well above the long-term growth
expectations of the mid-teens to low 20% range. U.S. segment results were
slightly below expectations, but this was greatly outweighed by the strong
print on the Canadian side of the border. Despite the healthy magnitude of
the earnings beat, our forward earnings estimates have not changed too
dramatically. The primary source of the beat was an abnormally low loss
ratio in the Canadian lines, and in this context we would not advocate
extrapolation as a forecasting technique. We continue to model loss ratios
based on a “through-the-cycle” average, while accepting the prospect of
some natural variability quarter to quarter (both favourable and
unfavourable).
Laying out the roadmap for a sustained recovery. Trisura’s share price
continued to grind steadily higher throughout the trading day as investors
digested the encouraging Q3 results. Looking a bit further out, we believe
there are a handful of things that need to happen to support a sustained
recovery in the stock. For one, Trisura needs to get the southeast
homeowners’ property program fully rolled off the books by year-end, without
any material slippage in the earnings/book value impact. Second, the
company needs to report a few clean, uneventful quarters (ideally
characterized by an earnings beat). Third, the letter of credit issued by China
Construction Bank to collateralize a fronted platform needs to be replaced.
Lastly, AM Best needs to move off its negative outlook (which we consider
likely to happen, but are not expecting imminently). Overall, we think there is
a reasonable line of sight towards all of these events materializing over the
next 12 months or so, but acknowledge that some of them will take more
time than others. After reporting strong Q3 results, we believe TSU is one
step closer to putting the Q4 experience in the rear view, and has restored
some optimism that investor focus will once again shift towards the growth
profile, earnings momentum and underlying fundamentals