TSU - Trisura

[snowball82]

Highlights

 

Gross and net written premiums growth of 108.8% and 46.1% in Q1, supported by continued momentum in our US operations and continued growth in Canada.

 

Net income of $8.4 million vs. $2.5 million in Q1 2019, driven by strong underwriting performance and investment income in Canada, and growing profitability in the US. We also recognized a gain related to the recognition of previously generated tax losses.

 

EPS of $0.94 in Q1 2020, compared to $0.37 in Q1 2019.

 

Book value per share of $21.23, a 1.6% decrease from $21.58 at December 31, 2019 as a result of unrealized losses in the investment portfolio.

 

Industry-leading results from our Canadian business, achieving a combined ratio of 82.0% in the current quarter vs. 83.5% in Q1 2019, and producing a 19.3% LTM ROE.

 

Continued acceleration in our US. operations, producing $120.7 million in GPW in the quarter vs. $41.9 million in Q1 2019; $2.6 million in net income, and a 9.3% LQA ROE demonstrate the potential of our maturing platform.

 

https://www.globenewswire.com/news-release/2020/05/06/2028945/0/en/Trisura-Group-Reports-First-Quarter-2020-Results.html

[gary17]

up more than 17% today :)

[Broeb22]

I have a limited understanding of surety insurance.  This type of event if it was to prolong could be brutal on the surety lines, correct?

 

If contractors went bankrupt, yes. I found data stating surety combined ratio went to 140% in Canada in the '90-92 CRE crisis.

 

30 years ago I was a young man. Maybe some things changed in this industry over time too.

 

Strong quarter from Trisura. Also, unless you have specific information about why the CRE crisis during 90-92 is not a relevant data point, it's probably better not to make snide comments to people adding to the conversation. For instance, a relevant data point would be Trisura's assertion that their surety business is focused in infrastructure so the government will almost certainly pay. I'm not sure if Trisura focuses on contractor surety or project surety. Usually, project surety is the lower risk of the two because the exposure has a more defined scope, and is less likely to be  subject to some kind of cascading set of claims. But I'm not really a pro at surety.

[kab60]

What is like their secret sauce? Last time I looked at fast growing insurers they got creamed (AFH, PIH).

[Broeb22]

What is like their secret sauce? Last time I looked at fast growing insurers they got creamed (AFH, PIH).

 

They are a fronting insurer which doesn't take the responsibility to write profitable insurance away from them because they retain 5% of the risk, and offshore reinsurers take the remainder because offshore reinsurers are desperate for onshore non-cat exposure. There are only a handful currently offering fronting.

 

I would review State National Companies (now part of Markel) as a decent comp for their US-based fronting business.

 

I think Brookfield's leadership's indirect involvement through their PVI stake is also valuable because this is not some fly-by-night company. The company has been around for a while and operated successfully in Canada for many years. Admittedly, these are different waters they're fishing in, so the risk of huge underwriting losses is real and would not only affect the profitability the significantly premium multiple the company now has.

[Pedro]

Before the hard market hit, ofsi was concerned about this offshore capacity. Their happy to take the premium but I think the concern was whether financial capacity was there to pay the losses. I believe they avoid the oversight of osfi.

 

I hope fronting for these players works out well and this isn't a house of cards. TRU is in my coffee can mulit bagger portfolio. Letting it ride

 

[snowball82]

Very strong quarter !

 

The growth rate in USA is very high. Only $ 54 M gross premiums written for 2018 and BMO expects $ 520 M for 2021... Consolidated, they forecast $ 728 M GPW for 2021. Likely this should include some new revenues in the admitted market. 

 

I own a position

[snowball82]

They don't plan to stay a microcap

 

http://www.globenewswire.com/news-release/2020/05/11/2031205/0/en/Trisura-Group-Ltd-Announces-Increase-to-Previously-Announced-Bought-Deal-Public-Offering-to-C-52-5-Million-and-Concurrent-Private-Placement-of-C-7-5-Million.html

[Broeb22]

They don't plan to stay a microcap

 

http://www.globenewswire.com/news-release/2020/05/11/2031205/0/en/Trisura-Group-Ltd-Announces-Increase-to-Previously-Announced-Bought-Deal-Public-Offering-to-C-52-5-Million-and-Concurrent-Private-Placement-of-C-7-5-Million.html

 

How do you evaluate the underwriting of the fronting platform? That is the major risk to this company and its hard to handicap.

[Jurgis]

They don't plan to stay a microcap

 

http://www.globenewswire.com/news-release/2020/05/11/2031205/0/en/Trisura-Group-Ltd-Announces-Increase-to-Previously-Announced-Bought-Deal-Public-Offering-to-C-52-5-Million-and-Concurrent-Private-Placement-of-C-7-5-Million.html

 

How do you evaluate the underwriting of the fronting platform? That is the major risk to this company and its hard to handicap.

 

This. You basically have to trust management to have tight controls and not go off the rails. By the time you can notice something, this could implode. This is especially true because of rapid growth. So, basically, trust management.

 

I reduced my position in this significantly. I am just not sure how I can evaluate this beyond trusting management. I'd appreciate ideas.

[Pedro]

Just spitballing some procedures that would be ideal. I'm sure TRU management is smarter than me but something like the 3 below would make me happy:

 

1) No one offshore capacity re insurer takes more than a $1M line in any file. So if your putting up $30M, thats 30 players on the backend. If one doesn't pay or goes belly up, it shouldn't be a terrible hit to your bottom line. Spread your risk among-st the offshore players looking to get non cat exposure

 

2) A bond or some sort of reinsurance arrangement is purchased in the event one player doesn't pay. Reinsurance protection from Berkshire would be nice. Protect your downside.

 

3) Sufficient collateral exists for at TRU to ensure these guys dont screw you and not pay claims. Everyone accepts premium, not everyone pays and not everyone pays timely.

 

4) Standardized wordings so someone doesn't say "I didn't know i was covering that". An agreement on the wordings ahead of time would be prudent.

 

There's steps you can take to mitigate your risk but I'm lazy and haven't dug deep into TRU reporting to see what exists or whether this is made clear.

 

There are many fronting departments at insurers & everyone is giving capacity to MGAs. Some have tight constraints on who they front for - others less so.

 

 

 

 

[snowball82]

They don't plan to stay a microcap

 

http://www.globenewswire.com/news-release/2020/05/11/2031205/0/en/Trisura-Group-Ltd-Announces-Increase-to-Previously-Announced-Bought-Deal-Public-Offering-to-C-52-5-Million-and-Concurrent-Private-Placement-of-C-7-5-Million.html

 

How do you evaluate the underwriting of the fronting platform? That is the major risk to this company and its hard to handicap.

 

I think you are right, this is a risk and you don't have a long track record for the USA. We have to look the management and the track record in Canada over last + 10 years. If you believe they can get the same combined ratio in USA (different biz) you will do well + the fees add significant revenues.  If not, you have to look with another perspective.

[snowball82]

$ 60 M and the BAM's guys are there again for $ 7.5 M. Interesting microcap.

 

https://www.globenewswire.com/news-release/2020/05/15/2034253/0/en/Trisura-Group-Completes-C-60-Million-Upsized-Bought-Deal-Public-Offering-and-Concurrent-Private-Placement-of-C-7-5-Million.html

[snowball82]

New investor presentation, AGM 2020. M&A is a short time goal, vision to consolidate the specialty insurance industry.

 

 

https://www.trisura.com/wp-content/uploads/2020/06/Trisura-2020-AGM-Draft_FINAL.pdf

[Sunrider]

$ 60 M and the BAM's guys are there again for $ 7.5 M. Interesting microcap.

 

https://www.globenewswire.com/news-release/2020/05/15/2034253/0/en/Trisura-Group-Completes-C-60-Million-Upsized-Bought-Deal-Public-Offering-and-Concurrent-Private-Placement-of-C-7-5-Million.html

 

Still kicking myself for selling at about $30. Yet, at what(?) 2x book they seem rather pricy now for an insurer? What am I missing?

Thank you.

[valueinvestor]

$ 60 M and the BAM's guys are there again for $ 7.5 M. Interesting microcap.

 

https://www.globenewswire.com/news-release/2020/05/15/2034253/0/en/Trisura-Group-Completes-C-60-Million-Upsized-Bought-Deal-Public-Offering-and-Concurrent-Private-Placement-of-C-7-5-Million.html

 

Still kicking myself for selling at about $30. Yet, at what(?) 2x book they seem rather pricy now for an insurer? What am I missing?

Thank you.

 

I don’t know anything about the company - in fact, passed because Brookfield is involved.

 

However it maybe trading 2x book because the increase per bvps may reduce the multiple considerably. Second is cash-flow, many times, I’ve invested in insurers and financials  that are trading at 1.5x+ book because they are expected to produce a lot of cash flow via M&A or scaling of their product offerings. Only time you make money on 0.5x book is when the multiple reverts or you got a 2008 tailwind for all banks.

[Broeb22]

If you think their business model has similar economics to a traditional insurer, think of them as more akin to an asset manager than a pure insurance underwriter. Their underwriting still matters, no doubt about that, but they earn nice fees for the premiums they underwrite from the offshore re-insurers who purchase the premiums from them.

 

I think when you do an analysis of the fronting business' run-rate profitability coupled with the fact they can grow that business organically in the low double-digits right now (w/o new capital), a 2x multiple is reasonable.

 

Finally, State National Company which was acquired by Markel at 2.7x book (if memory serves me correctly), operated similar model, so I think there is precedent for multiples like this for businesses such as this.

[Sunrider]

If you think their business model has similar economics to a traditional insurer, think of them as more akin to an asset manager than a pure insurance underwriter. Their underwriting still matters, no doubt about that, but they earn nice fees for the premiums they underwrite from the offshore re-insurers who purchase the premiums from them.

 

I think when you do an analysis of the fronting business' run-rate profitability coupled with the fact they can grow that business organically in the low double-digits right now (w/o new capital), a 2x multiple is reasonable.

 

Finally, State National Company which was acquired by Markel at 2.7x book (if memory serves me correctly), operated similar model, so I think there is precedent for multiples like this for businesses such as this.

 

Thank you - that’s helpful context

[snowball82]

From Insurer.com, more growth coming in USA

 

https://www.theinsurer.com/program-manager/upsized-trisura-specialty-targets-business-with-larger-wholesalers/9661.article

[snowball82]

TSU is up +/- 75 % YTD and if GMP ($ 95) / Cormark ($ 90) are right we should soon get a close to 4 baggers since the spin-off. Not a too bad return as BAM announced the completion of the spin-off during June 2017.

 

https://thefly.com/landingPageNews.php?id=3128965&headline=TRRSF-Trisura-Group-price-target-raised-to-C-from-C-at-Stifel

 

https://www.marketbeat.com/stocks/TSE/TSU/price-target/

 

 

[Broeb22]

It’s trading at 3x book, which is almost certainly above fair value.

[snowball82]

It’s trading at 3x book, which is almost certainly above fair value.

 

Can we really say it is above fair value only based on book value ??

[Broeb22]

I feel comfortable using book value because I've done my homework on what is possible for this. Also, book value is kind of important because it limits any financial company's growth. Ultimately, you have to make an educated guess on what earnings will be for the fronting business which is hard. State National, which is the 800 lb gorilla in the space, only earned high-teens ROEs (though they had other businesses).

 

If I assume Trisura's fronting business hit an ROE of 20% TOMORROW and assume all earnings generated from other segments feed the fronting business AND no additional capital is raised, Trisura will generate more earnings from fronting in 2025 than State National did in its last year before acquisition after being in the business for decades.

 

If we assume more normal but still high ROEs of 15% on fronting and a 20x multiple of 2025 earnings, there is essentially 0 upside from today's price. If investors value it at 25x, the upside is just under 50% over 5 years.

 

This assumes they never screw up in fronting or that there is never any setbacks in the surety business which has massive hiccups from time to time.

 

Also, raising equity is great because it gets Trisura to maturity faster, but the fronting market is not infinitely large and at some point those equity raises begin to steal your increasingly long-duration upside because growth in book value won't be as impressive.

 

So, yeah 3x book value is pretty rich if you ask me.

[gary17]

in a zero interest environment !

[snowball82]

I feel comfortable using book value because I've done my homework on what is possible for this. Also, book value is kind of important because it limits any financial company's growth. Ultimately, you have to make an educated guess on what earnings will be for the fronting business which is hard. State National, which is the 800 lb gorilla in the space, only earned high-teens ROEs (though they had other businesses).

 

If I assume Trisura's fronting business hit an ROE of 20% TOMORROW and assume all earnings generated from other segments feed the fronting business AND no additional capital is raised, Trisura will generate more earnings from fronting in 2025 than State National did in its last year before acquisition after being in the business for decades.

 

If we assume more normal but still high ROEs of 15% on fronting and a 20x multiple of 2025 earnings, there is essentially 0 upside from today's price. If investors value it at 25x, the upside is just under 50% over 5 years.

 

This assumes they never screw up in fronting or that there is never any setbacks in the surety business which has massive hiccups from time to time.

 

Also, raising equity is great because it gets Trisura to maturity faster, but the fronting market is not infinitely large and at some point those equity raises begin to steal your increasingly long-duration upside because growth in book value won't be as impressive.

 

So, yeah 3x book value is pretty rich if you ask me.

 

I like your mindset but you think like an accountant not like a long term investor.

 

IMO the key point isn’t if the ROE will be 15 or 18 %. It is more about capital allocation and how they will deploy capital in the specialty insurance, consolidate the market and expand globally. We aren’t looking a regional bank in USA having limited geography expansion and capital restrictions.

 

The capital base isn’t something limited for a company with managers close to Brookfield assets management. My humble 2 cents. That said I’m not telling you it is cheap like it was at $ 26.