TSU - Trisura

[Broeb22]

Snowball,

 

Hey, this is a marketplace of ideas. I just put forward some ideas on how I view the company and valuing it.

 

Instead of offering retorts, how about you provide some original thoughts about the business? By not offering any real ideas about valuing the business, you are implicitly saying valuation doesn't matter, and if you believe that to be true in a very mature business such as insurance where there are few if any free lunches or enduring moats, then you're going to get hurt badly.

 

It's fine to be long-term oriented. In fact, I believe I am as well. I've owned several portfolio companies for at least 3 years and a handful for 5 years or more, with no plans to sell out of the position entirely (though I do modestly trim occasionally).

 

I think you have to have some understanding of the valuation in order to set yourself up for long-term success. I've earned 44% compound returns since 2017 owning this stock. Has the value grown at the same rate? Was it very cheap to start with? If you don't have some answer to these questions, you aren't really an investor.

 

If you don't know where you are in terms of valuation, even directionally, you may be disappointed (and sell out) if the stock treads water (or worse) for years despite consistently improving results.

 

 

[snowball82]

The forum here is fantastic. Nobody is censured, everyone can share ideas and get respectful feedback. Congratulations for your very high returns. I encourage you to continue with the same successful strategy. I like others point of view. Please don’t take offence from my previous answer.

[Broeb22]

What part of the Cormark or other analyst reports with C$90 price targets do you agree/disagree with? Have you even read their reports or studied their models? Or would there be too much accounting in that report? Would it be easier if they just told a story of global domination and consolidation by this tiny Canadian insurance company without any support as to why that’s reasonable or even possible?

 

By the way, which bank do you think helped Trisura raise capital most recently? Ding, ding, ding...Cormark. They might do good work but I’ll keep my own counsel rather than some bank trying to earn the next round of juicy underwriting fees.

[snowball82]

What part of the Cormark or other analyst reports with C$90 price targets do you agree/disagree with? Have you even read their reports or studied their models? Or would there be too much accounting in that report? Would it be easier if they just told a story of global domination and consolidation by this tiny Canadian insurance company without any support as to why that’s reasonable or even possible?

 

By the way, which bank do you think helped Trisura raise capital most recently? Ding, ding, ding...Cormark. They might do good work but I’ll keep my own counsel rather than some bank trying to earn the next round of juicy underwriting fees.

 

Do you have information about collusion with analysts following TSU and fees / price target ?

 

I hope Pedro didn’t erase his message because of you and you are not trying to bullies us. This community merits much more.

 

 

[Broeb22]

Apparently you don’t like having your ideas challenged, and when you do, you resort to name-calling.

 

So we return to value. What do you think is an appropriate range of values for this business 5 years from now, and why?

 

 

 

 

 

[Jurgis]

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.

 

Thanks for posting your valuation thoughts.  8)

[snowball82]

Apparently you don’t like having your ideas challenged, and when you do, you resort to name-calling.

 

So we return to value. What do you think is an appropriate range of values for this business 5 years from now, and why?

 

Edit : I should also have said I don’t know at this point, I think it is a challenge to estimate. It is very difficult to value right now as we don’t know much about the admitted market sales traction and the combine ratio. Consensus estimates is likely a good guideline. Sorry for the original message. It wasn’t a good response at all. My bad.

 

[Pedro]

My deleted post was not a result of the comments made here. I make my living working in the same space as what TSU does. My employer & colleagues check this forum so I need to be careful with what I write; sometimes I'm a bit impulsive and need to be careful with what I say. I love what I do & where I work so I dont want negative reprocusions. 

 

I believe their platform is unique in the market & I believe capacity not price is king.  I won't be suprised if you see large jumps in their BV in 2020, infact I'm expecting it as I believe mr market is too.

 

That should be PG enough to not get me in hot water lol

 

 

[EricSchleien]

My deleted post was not a result of the comments made here. I make my living working in the same space as what TSU does. My employer & colleagues check this forum so I need to be careful with what I write; sometimes I'm a bit impulsive and need to be careful with what I say. I love what I do & where I work so I dont want negative reprocusions. 

 

I believe their platform is unique in the market & I believe capacity not price is king.  I won't be suprised if you see large jumps in their BV in 2020, infact I'm expecting it as I believe mr market is too.

 

That should be PG enough to not get me in hot water lol

 

Pedro, the beauty of this board is you can come and go as you choose and post or remove things as you choose. If you share something that you later regret, you are always more than welcome to remove and it's totally okay. Like any community I am apart of whether online or in person, you're invited to come and go as you'd like - contribute as much or as little as you like.

 

Thanks for your sharing and contributions.

 

Best,

Eric

[John Hjorth]

True, but with one material catch : Other board members quoting you.

[EricSchleien]

True, but with one material catch : Other board members quoting you.

 

Well in that case, Pedro, if someone else is quoting you - I'd invite you to make a request to ask the other person to remove the post. I've been a member of this board for nearly 10 years and my commitment is that this is a safe and welcoming community for all, where people have the freedom to share, express, and contribute fully. I've learned a ton from other members over the years, have made some pretty incredible friendships in real-life from on here. I would never want you or anyone else ever hold back or feel hesitant to share out of a concern they won't be able to remove something or anything else.

 

Glad you're part of the community Pedro and just make the request if you ever see yourself quoted and want something removed.

 

[snowball82]

« Gross and net written premiums growth of 85.4% and 26.3% for Q2 »

 

https://www.globenewswire.com/news-release/2020/08/05/2073728/0/en/Trisura-Group-Reports-Second-Quarter-2020-Results.html

 

[villainx]

Is there a place that explains what Trisura does to a beginner?  From the spin, I had to decide whether to materially add or exit, and I exited.  Mainly because - while I was liked management - I had no idea what fronting or surety was.  I've tried Googling many times to get a better sense, but couldn't find anything. 

 

I'm at a point where Trisura has run so far that I wouldn't be buying no matter how comfortable I was in understanding the business.  But it's been gnawing at me what fronting, surety, etc is and how it is different from what "normal" insurance does.

 

Edit:  Also, I was way too embarrassed to ask prior, but at this point, why not.

[snowball82]

Is there a place that explains what Trisura does to a beginner?  From the spin, I had to decide whether to materially add or exit, and I exited.  Mainly because - while I was liked management - I had no idea what fronting or surety was.  I've tried Googling many times to get a better sense, but couldn't find anything. 

 

I'm at a point where Trisura has run so far that I wouldn't be buying no matter how comfortable I was in understanding the business.  But it's been gnawing at me what fronting, surety, etc is and how it is different from what "normal" insurance does.

 

Edit:  Also, I was way too embarrassed to ask prior, but at this point, why not.

 

Yes, I encourage you to read the annual report, the  MD&A and the annual notice (2020 May). You can find those documents on the website or SEDAR.

 

Edit : don’t be shy to ask questions we are here to help each other.

[Broeb22]

I was trying to find a presentation that was very helpful to me when looking at this back in 2017, and no luck.

 

So I’ll try to give my two cents on the business, and you can do your own due diligence from there.

 

Fronting to me is analogous to asset management. Like in asset mgmt. the manager does not own the assets but simply manages them for a fee. In a similar way, fronting providers issue insurance policies and then “sell” 90%+ of the risk to another party in exchange for a fee. The question is, who are those parties, and why are they willing to pay a fee to someone to “buy” the policies the fronting carrier is writing.

 

The way I understand it, offshore insurers/reinsurers are highly exposed to catastrophe risks which are obviously very lumpy, and they have a desire to “own” insurance risk that is less correlated to catastrophes. For reasons I’m less knowledgeable about, the offshore capacity is kind of locked out of the onshore market, so this arrangement is a way to get around that by keeping the risk technically on Trisura’s balance sheet, but the offshore insurer holds most of the risk.

 

Trisura’s underwriting is still vitally important. Going back to asset mgmt., asset managers are a dime a dozen, but good ones who protect and grow capital are rare. And also like asset mgmt, I would bet the money can flow in and flow back out very quickly if performance isn’t good. The jury is still out on Trisura in this regard, but I think their backing from Partners value investments is a positive, particularly after reading the Brass Ring. This type of arrangement fits squarely in the mold of many Jack Cockwell schemes, where the objective is control but limited exposure to downside, which echoes the way in which Brookfield is structured.

 

As far as valuation, I haven’t combed through this report, but I would encourage you to look at incremental margins in the fronting business over time to get more comfortable with the steady-state profitability of the company. Likewise, you can use a 4-5x multiple of equity to understand the annual gross premiums that can be written off the current equity base, and as additional equity is retained to remove the noise of the equity raises. I don’t really know how I feel about the equity raises. The equity raises help TSU get to “scale” faster but as an equity owner, I might rather keep all the equity even if the growth and steady state profitability takes a little longer.

 

I would conclude by saying I worry a lot about competition. Reading through press releases, more than a few pure fronting companies have been created in the last few years. Strong underwriting is still a skill but Trisura doesn’t have any better record in its US business than any other upstart.

 

[snowball82]

Few points about the Q2 and see the attached (MD&A)

 

 

ROE : 19.7 %

Combined ratio : 78.9 %

 

ROE : 9.5 %

Fronting operational ratio : 68 %

 

Fees income : + 235 %

GPW : + 161 %

NPW : + 42 %

 

Programs : 38

 

Revenues from admitted market still to come.

[Jurgis]

I was trying to find a presentation that was very helpful to me when looking at this back in 2017, and no luck.

 

So I’ll try to give my two cents on the business, and you can do your own due diligence from there.

 

Fronting to me is analogous to asset management. Like in asset mgmt. the manager does not own the assets but simply manages them for a fee. In a similar way, fronting providers issue insurance policies and then “sell” 90%+ of the risk to another party in exchange for a fee. The question is, who are those parties, and why are they willing to pay a fee to someone to “buy” the policies the fronting carrier is writing.

 

The way I understand it, offshore insurers/reinsurers are highly exposed to catastrophe risks which are obviously very lumpy, and they have a desire to “own” insurance risk that is less correlated to catastrophes. For reasons I’m less knowledgeable about, the offshore capacity is kind of locked out of the onshore market, so this arrangement is a way to get around that by keeping the risk technically on Trisura’s balance sheet, but the offshore insurer holds most of the risk.

 

Trisura’s underwriting is still vitally important. Going back to asset mgmt., asset managers are a dime a dozen, but good ones who protect and grow capital are rare. And also like asset mgmt, I would bet the money can flow in and flow back out very quickly if performance isn’t good. The jury is still out on Trisura in this regard, but I think their backing from Partners value investments is a positive, particularly after reading the Brass Ring. This type of arrangement fits squarely in the mold of many Jack Cockwell schemes, where the objective is control but limited exposure to downside, which echoes the way in which Brookfield is structured.

 

As far as valuation, I haven’t combed through this report, but I would encourage you to look at incremental margins in the fronting business over time to get more comfortable with the steady-state profitability of the company. Likewise, you can use a 4-5x multiple of equity to understand the annual gross premiums that can be written off the current equity base, and as additional equity is retained to remove the noise of the equity raises. I don’t really know how I feel about the equity raises. The equity raises help TSU get to “scale” faster but as an equity owner, I might rather keep all the equity even if the growth and steady state profitability takes a little longer.

 

I would conclude by saying I worry a lot about competition. Reading through press releases, more than a few pure fronting companies have been created in the last few years. Strong underwriting is still a skill but Trisura doesn’t have any better record in its US business than any other upstart.

 

I am not insurance company expert, but I have to say I was surprised that Trisura managed high growth and high profitability so far. It seemed to me that insurance is an old and competitive business field. So I'd thought profitable/growth niches should have been filled and picked by now. In fact, insurance and reinsurance field is extra picked over by people wanting to recreate Berkshire/Markel - with most failing quite badly. So for me it was/is very surprising that Trisura can apparently achieve high growth and profitability entering US and seemingly easily picking profitable business. Any ideas how come this niche still existed and nobody filled it by now? It might be that Trisura is lucky and/or knowledgeable. Still I thought it was/is rather amazing.

[snowball82]

New all time high this morning at $ 90.65

 

There is now 7 analysts following the company. This is rare for a recent microcap company.

[Broeb22]

Great questions, Jurgis, and very legitimate concerns about insurance in general. I have looked for information on why Trisura is special in some regard and I honestly cannot find anything publicly available for why their offering is more highly-regarded in the market than other products. I think I need to try to find some more industry insider perspectives on what they do so well that allows them to grow, because you're correct that a company should not be able to go from $0 to $1 billion CAD in GPW (which will be their run-rate after recent capital raise) without some hiccups or worse. It made a lot of sense to me to buy at a small premium to book way back when but since they have vastly exceeded my upside view of their potential (largely due to multiple, significant secondary offerings) when I purchased back in 2017, I feel I can't be as ignorant of the risks. It's tough because this is not my full-time job so scouring the world for someone that wants to talk fronting may be challenging. I would be interested in any insights others may glean.

 

Management's MD&A has an outlook and strategy section which, while not directly addressing your concerns gives some insights:

 

  Our Company has an experienced management team with strong industry relationships and excellent reputations with rating agencies,

insurance regulators and business partners. We have operated in the Canadian specialty P&C insurance market for more than 14

years and in the international specialty reinsurance market for over 18 years, establishing a conservative underwriting and investing

track record.

 

In Canada, we have built our brand through serving our clients, brokers and institutional partners as a leading provider of niche

specialty insurance products. We will continue to build out our product offerings in existing and new niche segments of the market

with suitably skilled underwriters and professionals. We remain committed to our broker distribution channel to promote and sell

insurance products. We are selective in partnering with a limited brokerage force, focusing its efforts on leading brokerage firms in

the industry with expertise in specialty lines. This distribution network currently comprises over 150 major international, national and

regional brokerage firms operating across Canada in all provinces and territories as well as boutique niche brokers with a focus on

specialty lines.

 

Our US business is now fully operational and demonstrating scale and profitability. It is licensed as a domestic excess and surplus lines

insurer in Oklahoma operating as a non-admitted surplus lines insurer in all states, and as an admitted carrier in 30 states. We are in

the process of obtaining admitted licenses in all remaining states. It is our belief that conditions are favourable for the continued

growth of our US platform, which operates as a hybrid fronting carrier using a fee-based business model. Our focus is to source high

quality business opportunities by partnering with a core base of established and well-managed program administrators. From our

experience to date these program administrators welcome our new capacity as there is currently a lack of fronting carriers and the

products and arrangements currently offered to them by the existing market do not always meet the needs of their business and

clients.

 

Furthermore, we continue to benefit form a strong supply of highly rated international reinsurance capacity keen to partner with us

to gain exposure to this business, allowing us to cede the majority of the risk on policies to these reinsurers on commercially favourable

terms. This belief has been supported by our experience in the market through 2019 and Q2 2020 YTD. We are confident that this

platform will generate attractive, stable fee income while maintaining a small risk position, right-sizing underwriting risk and aligning

our interests with our program distribution partners and capacity providers. Our US business is already the largest component of

GPW, and as we continue to grow, we expect that it will become an increasingly significant contributor to profitability.

We will continue to develop our distribution network, building on our existing partner network in Canada and our core base of program

administrators in the US. Our Company will strive to increase the penetration of our products with our partners by providing the

support they require to enhance the effectiveness of their sales and marketing efforts.

 

We also intend to consider acquisitions on an opportunistic basis and pursue those that fit with our strategic plan. Building on the

knowledge and expertise of our existing operations, we intend to initially target businesses in the US that operate in similar niches of

the specialty insurance market, or that can expand our licensing. The closing of 21st Century Preferred is a demonstration of the

willingness and capabilities our team has to pursue these acquisitions. Additionally, our reinsurance business has commenced writing

new business in support of our US operations.

[snowball82]

I was trying to find a presentation that was very helpful to me when looking at this back in 2017, and no luck.

 

So I’ll try to give my two cents on the business, and you can do your own due diligence from there.

 

Fronting to me is analogous to asset management. Like in asset mgmt. the manager does not own the assets but simply manages them for a fee. In a similar way, fronting providers issue insurance policies and then “sell” 90%+ of the risk to another party in exchange for a fee. The question is, who are those parties, and why are they willing to pay a fee to someone to “buy” the policies the fronting carrier is writing.

 

The way I understand it, offshore insurers/reinsurers are highly exposed to catastrophe risks which are obviously very lumpy, and they have a desire to “own” insurance risk that is less correlated to catastrophes. For reasons I’m less knowledgeable about, the offshore capacity is kind of locked out of the onshore market, so this arrangement is a way to get around that by keeping the risk technically on Trisura’s balance sheet, but the offshore insurer holds most of the risk.

 

Trisura’s underwriting is still vitally important. Going back to asset mgmt., asset managers are a dime a dozen, but good ones who protect and grow capital are rare. And also like asset mgmt, I would bet the money can flow in and flow back out very quickly if performance isn’t good. The jury is still out on Trisura in this regard, but I think their backing from Partners value investments is a positive, particularly after reading the Brass Ring. This type of arrangement fits squarely in the mold of many Jack Cockwell schemes, where the objective is control but limited exposure to downside, which echoes the way in which Brookfield is structured.

 

As far as valuation, I haven’t combed through this report, but I would encourage you to look at incremental margins in the fronting business over time to get more comfortable with the steady-state profitability of the company. Likewise, you can use a 4-5x multiple of equity to understand the annual gross premiums that can be written off the current equity base, and as additional equity is retained to remove the noise of the equity raises. I don’t really know how I feel about the equity raises. The equity raises help TSU get to “scale” faster but as an equity owner, I might rather keep all the equity even if the growth and steady state profitability takes a little longer.

 

I would conclude by saying I worry a lot about competition. Reading through press releases, more than a few pure fronting companies have been created in the last few years. Strong underwriting is still a skill but Trisura doesn’t have any better record in its US business than any other upstart.

 

I am not insurance company expert, but I have to say I was surprised that Trisura managed high growth and high profitability so far. It seemed to me that insurance is an old and competitive business field. So I'd thought profitable/growth niches should have been filled and picked by now. In fact, insurance and reinsurance field is extra picked over by people wanting to recreate Berkshire/Markel - with most failing quite badly. So for me it was/is very surprising that Trisura can apparently achieve high growth and profitability entering US and seemingly easily picking profitable business. Any ideas how come this niche still existed and nobody filled it by now? It might be that Trisura is lucky and/or knowledgeable. Still I thought it was/is rather amazing.

 

 

Jurgis, if you have the chance to get the analysts reports you should particularly like BMO, TD an NB. One of them sees its economic moat as a specialty insurer in niche markets. They see that as a high barriers to entry. Tom Mackinnon (BMO) compared TSU GPW growth/valuation with PLMR, TIG and KNSL.

 

The average price target for all (7) is $ 105.

 

 

[snowball82]

CIBC is initiating a coverage.

[snowball82]

Very impressive Q3 and all organic .. no significant acquisition

 

Gross and net written premiums growth of 109.5% and 72.4%

 

 

https://www.globenewswire.com/news-release/2020/11/04/2120561/0/en/Trisura-Group-Reports-Third-Quarter-2020-Results.html

[snowball82]

Very impressive Q3 and all organic .. no significant acquisition

 

Gross and net written premiums growth of 109.5% and 72.4%

 

 

https://www.globenewswire.com/news-release/2020/11/04/2120561/0/en/Trisura-Group-Reports-Third-Quarter-2020-Results.html

 

Admitted licenses now in 42 states and .. in Q3 admitted premiums accounted for only +/- 1 % of GPW. So much more growth to come

[drzola]

This is what you call a Homerun annual earnngs report just Wow!

[snowball82]

This is what you call a Homerun annual earnngs report just Wow!

 

Well said !

 

“Net income of $10.9 million in the quarter and $32.4 million in full year 2020 grew 162.4% and 536.9% compared to prior year

 

ROE of 13.4%, compared to 3.5% in 2019, approaching our mid-teens target despite dilution”

 

https://www.globenewswire.com/news-release/2021/02/11/2173652/0/en/Trisura-Group-Reports-Fourth-Quarter-and-2020-Annual-Results.html