Trisura Group Ltd

TSX:TSU

Earnings Call Transcript 2024-Q1

[Operator]

Good morning. Welcome to Trisura Group Limited's First Quarter 2024 Earnings Conference Call. On the call today are David Clare, Chief Executive Officer and David Scotland, Chief Financial Officer. David Clare will begin by providing a business and strategic update, followed by David Scotland, who will discuss financial results for the period.

Following formal comments, lines will be open for analyst questions. I'd like to remind participants that in today's comments, including in responding to questions and in discussing new initiatives related to financial and operating performance forward-looking statements may be made including forward-looking statements within the meaning of applicable Canadian and U.S. securities law. These statements reflect predictions of future events and trends and do not relate to historic events. They're subject to known and unknown risks, and future events and results may differ materially from such statements.

For further information on these risks and their potential impacts, please see Trisura's filings with the securities regulators. [Operator Instructions] please be advised that today's conference is being recorded.

Thank you. I'll now turn the call over to David Clare.

[David Clare, executive]

Thank you, operator. Good morning, everyone, and welcome. Trisura began 2024 on strong footing. Insurance revenue grew 17% in the first quarter, and we reported a 20% operating return on equity at the same time as reaching record equity capital of $662 million. Our momentum has continued as we scale an increasingly diversified North American specialty insurance platform.

In Canada, each line of business contributed to growth over the prior year fronting and surety led the way, growing 31% and 27%, respectively. Fronting grew as a result of a more mature platform and new program additions, while surety growth was driven by increased market share, expansion in the U.S., and increased construction values. Corporate insurance grew 14% due to new business growth, stable policy retentions, and continued support from our distribution partners despite balancing market conditions in certain segments.

Finally, Risk Solutions Warranty grew 10% as a result of new programs and normalizing auto sales. The strong growth in Canada was complemented by consistently profitable underwriting with a combined ratio of 82% in the period, in line with the prior year. The combination of growing and profitable underwriting with enhanced investment income, which grew 74%, supported a 23% increase in operating net income and a 28% operating return on equity.

In U.S. fronting, insurance revenue grew 14% to $522 million as programs mature, despite nonrenewing a few programs, which either did not achieve scale or no longer within our risk appetite. Our admitted capabilities continued to grow as we added $92 million in admitted insurance revenue in the quarter. The market continues to drive opportunities to excess and surplus lines, and we are well positioned to capture business in both segments. U.S. fronting generated $22 million in fees, a 23% increase and recorded $40 million of deferred fee income indicative of future fees to be earned.

Operating results in the quarter were strong and demonstrate progress made on improved profitability in our U.S. platform. When excluding nonrecurring items, our loss ratio and fronting operational ratio improved to 67% and just under 85%, respectively.

Our fronting operational ratio has started to move down as operations normalized in U.S. fronting despite continued investments in infrastructure. We reiterate our target of a low 80s to high 70s fronting operational ratio in the medium term. Continued growth and improved loss ratio and an increase in investment income, which grew 53% in the period, contributed to a 30% increase in operating net income and supported a 14% operating ROE.

On an annualized basis, U.S. Fronting operating ROE was 19% in the quarter. We observed healthy, albeit stabilizing pricing trends across most lines and continue to expect hardening trends in certain lines to balance, although not reversed this year. This will be informed by the state of the reinsurance market as well as economic and interest rate trends, and we feel well equipped to navigate this environment.

Across the group, net investment income grew 66% as a result of a larger portfolio and higher yields. We have experienced striking changes in the contribution to earnings from our investment portfolio and maintain a more defensive and higher-quality portfolio than almost any time in our history.

Our growth and profitability has been significant in the context of a higher rate environment, meaning we benefit from a larger portfolio invested at higher rates working now to secure those rates for years to come. We are excited to have closed our U.S. treasury-listed surety acquisition in the quarter. This acquisition further confirms Treasurer's commitment to the U.S. surety market and is an important step in achieving our long-term growth plans of becoming a significant participant in the North American surety space.

We anticipate expanding licenses through the latter half of this year and expect the acquisition will be impactful to growth in the long term. We are happy to report our first U.S. corporate insurance policy was written in April, an exciting initial step for the expansion into the U.S.

In April, we also announced the appointment of Lilia Sham, to our Board of Directors and the candidacy of Sacha Haque for election at this year's Annual General Meeting. Ms. Sham and Ms. Haque have enjoyed long and successful careers in the financial services industry and we are excited to benefit from their contributions going forward.

On June 3, we will host our AGM and Investor Day. As part of the Investor Day, we will be highlighting the management teams of our Canadian and U.S. entities in a fireside chat format driving the opportunity for investors to meet a broader group of Trisura members. This event will be in-person as well as streamed online.

We remain committed to specialized underwriting as well as conservative reserving. It is our hope that volatility will continue to provide opportunities to win business and strengthen our reputation. We are planning for growth, and with a strong capital base and greater scale, we feel optimistic for the years ahead.

With that, I'd like to turn the call over to David Scotland for a more detailed review of the financial results.

[David Scotland, executive]

Thanks, David. I'll now provide a walk through of financial results for the quarter. Insurance revenue was $744 million in the quarter, reflecting growth of 17% over the prior year. Insurance service expense, which consists of amortization of insurance acquisition cash flows such as commissions, claims and other operating costs, increased in the quarter, primarily as a result of growth in the business, leading to an increase in volume of claims and commissions.

Net expense from reinsurance contracts, which includes both premium paid to reinsurers as well as recoveries from reinsurers increased in the quarter as a result of growth in the business, which has led to more reinsurance ceded particularly from fronting.

Insurance service results in Canada for the quarter was greater than the prior year as a result of growth in the business and continued strong underwriting profitability. Insurance service result in the U.S. for the quarter was greater than the prior year, primarily as a result of the impact of the 2023 runoff cost.

Excluding the 2023 runoff cost, insurance service result in the U.S. was still greater compared to the prior year as a result of growth in the business and improved profitability in 2024. The combined ratio in Canada for the quarter was 82%, which is approximately the same as the prior year, driven by a low loss ratio of 16% in the quarter.

The fronting operational ratio in the U.S. for the quarter without the impact of the runoff was 85%, which is lower than the prior year, primarily as a result of a lower loss ratio mitigated by increased investments in internal infrastructure.

Net investment income increased by 66% in the quarter as a result of an increase in the size of the investment portfolio, but also benefiting from higher risk-adjusted yields. Net gains from investments was $12 million in the quarter, primarily as a result of unrealized gains on equity investments held at fair value through profit and loss under IFRS 9 as well as foreign exchange gains as a result of strengthening of the U.S. dollar in the quarter.

The investment portfolio also saw unrealized gains in the quarter recorded due to other comprehensive income, primarily related to increase in the value of preferred shares. Other operating expense, excluding the impact of share-based compensation, which is medicated through a hedging program, increased 37% for the quarter, reflecting growth in the business.

Net income for the group was $36 million in the quarter. Operating net income, which adjusts for certain items to reflect income from core operations and excludes the impact of nonrecurring items, including the runoff business was $33 million in the quarter, which is greater than the prior year as a result of growth in the business, continued strong underwriting performance in Canada, improved profitability in U.S. fronting and growth in net investment income.

Diluted EPS was $0.75 a share in Q1, which was higher than the prior year, primarily as a result of the runoff costs. Operating EPS, which reflects core operations and excludes the impact of nonrecurring items and unrealized gains was $0.68 a share in the quarter, reflecting growth of 12% over the prior year. Consolidated ROE on a rolling 12-month basis was 15% at Q1 2024, which improved over the prior year due to improved profitability in the U.S.

Operating ROE, which was approximately -- was 20%, which is approximately the same as the prior year. Equity at March 31, 2024, was $662 million and is greater than the prior year as a result of positive net income in the period as well as unrealized gains on the investment portfolio and an increase in the U.S. dollar in the period. Book value per share was $13.89 at March 31, 2024, and is greater than December 31, 2023, as a result of profit generated from insurance and investment income in the period, unrealized gains on the investment portfolio, and foreign exchange gains.

As of March 31, the debt-to-capital ratio was 10.2%, which was lower than December 31, 2023, as a result of an increase in equity during the period. The company remains well capitalized, and we expect to have sufficient capital to meet our regulatory requirements.

David, I'll now turn things back over to you.

[David Clare, executive]

Thank you, David. Operator, we take questions now.

[Operator]

[Operator Instructions] Our first question comes from the line of Nik Priebe with CIBC Capital Markets.

[Nikolaus Priebe, analyst]

I just wanted to drill into the expansion of surety into the U.S. You pointed out how deepening your relationships with brokers is an important first step. Can you just talk about your strategy as it relates to growing your presence in the U.S.? Like are there certain states you expect to get a bit more traction in? Do you have relationships you can lean on from the U.S. fronting entity to help you grow in that market? Just where would you hope to achieve a bit more traction with that initiative?

[David Clare, executive]

Thanks Nik. It's a good question. The expansion of our U.S. surety program will look a lot like the build-out of our Canadian surety business many years ago when we started in Canada. So what that involves is hiring groups of people in the U.S. who have established relationships. So we've got a great leader in the U.S., leading that practice, who comes with a lot of really strong relationships with brokers in the U.S. And as you know, those broker relationships are critical for us to build out that practice.

That U.S. Surety business includes a number of regional offices across the U.S., and we continue to build out those relationships, have been doing that since about 2021. So this is not a new effort for us, nor a new business for the marketplace. That practice, those relationships that come with these U.S. hires is monitored and administered and candidly underwritten in combination with head office functions here in Canada.

So what we're looking to do is expand the underwriting expertise and experience we have in the Canadian organization with the local expertise and relationships of our U.S. colleagues. It's a really powerful combination as we build this out, and it takes some time to build those relationships. So that's why you see us now in 2024, having started this practice way back in 2021.

[Nikolaus Priebe, analyst]

Okay. That's good. And then can you also talk just about how you manage underwriting risk associated with the expansion of that line into new geography? Like this is a counterparty credit risk type of business. So how do you get comfortable with a new set of counterparties? Is the underwriting very similar to your Canadian business? Can you just explain about how about that?

[David Clare, executive]

Yes, it's an interesting nuance, Nik. Surety is analogous to credit underwriting and the types of things, the types of underwriting metrics, the types of decisions that we're making are very comparable to the history of underwriting expertise that we have in Canada. So every jurisdiction has some nuances. But the underwriting decisions, the framework, the infrastructure that we have to adjudicate those risks, look very similar in Canada and the U.S.

And as we build out that practice, obviously, we're very focused on growing that practice profitably. And so that means that we're very considered and measured in how we build that out. That's why you've seen us invest in for a number of years to grow this in a very measured way. So that practice, it's had great momentum. We wrote about $20 million in the business last year. We expect that to continue to grow, but it's growing in an area of business and a type of product that we have a lot of expertise in here in Canada. So it's something we feel very strongly about and very confident about.

[Nikolaus Priebe, analyst]

Okay. That's good. And then just turning to Canadian fronting, still continued strong growth in that business line. I'm just wondering, how does the composition of the reinsurance panel in Canadian fronting compared to that of the U.S.? Like is it balanced in a similar way between rated and unrated capacity? Or are there any differences to highlight there?

[David Clare, executive]

Yes, it is an interesting difference, I would say. Our Canadian fronting business is a little bit different structurally than our U.S. fronting business. Most of our partners in the Canadian business, if not the vast majority are a large, established and rated reinsurers who just don't have operations here in Canada.

So they need a partner here to participate in this market. It's a less MGA-driven market in Canada and more a partnership model that exist between us and reinsurers who want to access this Canadian space. So for the most part, these reinsurers are very large, very significant, often cases are rated. But in the Canadian landscape from a regulatory perspective, you are still getting collateral even from these rated entities.

So structurally, it's a bit different, a bit different drivers of the business in Canada, but a very healthy business and a very profitable one now that we've seen that scale.

[Operator]

Our next question comes from the line of Doug Young with Desjardins.

[Doug Young, analyst]

Maybe can you, maybe just start talk a bit about what you're seeing pricing-wise in the Canadian surety, the resolution warranty, and the corporate insurance markets in Canada. I'm kind of interested to see if any of your outlook has changed. I'm just trying to get a feel where we stand with the hard market and whether you're seeing any cracks, and if you are, where? And how is the competitive landscape here in Canada on the specialty line side?

[David Clare, executive]

Thanks, Doug. Yes, it's probably best, as you say, to walk through these on a line-by-line basis. I would say the messaging that we've had around these lines hasn't really changed from what we've seen in the first quarter of this year. Surety continues to be a very competitive marketplace. I would say that's a business line that did not benefit from the hard market trends you see in other parts of the commercial insurance space. So surety all the way through the last 2 years has been a competitive space where we're not benefiting from hard market trends, and that continues. It is a competitive marketplace that we continue to navigate.

In our other business lines, so Risk Solutions warranty, this is a relatively structured product. So again, less movement being driven by those hard market trends, and we continue to see pretty consistent margins, pretty consistent structures in those products. Corporate Insurance is probably the one that we started talking about, I'd say about 12 months ago, where we're seeing a little bit more balance into that line. So anecdotally, there's a few lines across the corporate insurance space. That's a line that's benefited from very strong hard market trends probably for the last 3 years, but we are seeing competition in that line. So a little bit more balance in those lines of business.

Anecdotally, some of those lines of business are still seeing rate increases. Some of those are seeing more balanced pricing trends. And we are anecdotally seeing some where, where that balance is likely a precursor to some softening. But at this stage, nothing really that moves our forecast for that line in aggregate.

[Doug Young, analyst]

And where in corporate are you seeing more of the softness or the balance, specifically?

[David Clare, executive]

Yes, I would say D&O as a line of business is a little bit softer than our other lines of business. It's important to note, we don't write really public company D&O. So the trends you're seeing in the public market space really aren't impacting us. But we do see more competition in the private and nonprofit D&O product than some other lines.

[Doug Young, analyst]

Okay. And then just a second question. I mean, you've talked about improving the profitability of the U.S. fronting, you've exited certain programs. You're moving away from cat risk prone areas pushing through pricing. Can you talk a bit about -- I mean these were good results in Q1. But what inning are you in terms of that transformation with U.S. fronting?

[David Clare, executive]

I would say we're probably in the fourth inning of that transformation. I think last year was a transition year for that business. I think obviously, that business has grown very quickly and showing a ton of potential. We're very excited to see where it goes. But there was some reset last year as we went through that runoff that we're very happy now to have behind us and are seeing very, very strong early green shoots in the trajectory for that business, both from a stability perspective, but also from a profitability standpoint.

I think what's important to note here in Q1, you are seeing very strong ROE potential for that business, which is as a result of both stronger loss ratio and some consistent sort of operational trends. I think there's still some way to go there, and I do want to see that operating leverage and that fronting operational ratio start to come down into that low 80s target. But I'm very happy with the progress we've seen to date.

[Doug Young, analyst]

I guess, in the quarter, you put up -- I think you mentioned the 19% ROE. You talked about, I think, 15% or high teens. Is this sustainable? Or do you expect a little weakness? Or can this push into the 20% within U.S. fronting this year?

[David Clare, executive]

Yes. We'd be very happy to see this in the high teens on a sustainable basis. I think there's precedent for that to be above and below it. But from our perspective, I think if we continue to deliver on the trends that we've seen in Q1 that mid- to high teens ROE is very achievable.

[Operator]

Our next question comes from the line of Jeff Fenwick with Cormark Securities.

[Jeff Fenwick, analyst]

Maybe some follow-ups here on the U.S. side of the business. Noticed in the quarter, the fee rate came in a little bit. The retention percentage stepped up a little bit. Maybe you could offer us a little color there, Dave, on just the dynamics between across those 2 factors. You haven't, for example, retained towards 10% in a little while. So maybe just some color commentary there would be helpful.

[David Clare, executive]

Yes. I think the comparisons you see now year-over-year are a little obfuscated by some of the purchases and runoff trends we had last year. So I do want to highlight that these retention rates you're seeing in the business, sort of between that average 7% to 10%, that's been pretty consistent on a portfolio basis for the last couple of years, but you're seeing it come through a little bit now because we've rationalized some of those reinsurance and runoff costs. That retention, I think you should continue to expect being in that high single-digit range.

You might poke into the low double digits as we see anecdotal evidence, candidly, if some opportunities for us to take participation of on programs, we have established profitability and strong comfort in. That fee rate should just be below 5%. I think in aggregate, most of our programs are at 5% or above. There's a little bit of nuance here in reinsurance purchases that we make that again, move around that reported fee income ratio. But from what we're seeing, it's been very standard, very consistent in the fees that we're getting from our clients.

[Jeff Fenwick, analyst]

Okay. Good. That's helpful color. And I do know, I think you said the high end now could be as high as 15. And again, I appreciate it's probably line by line there. So you're suggesting -- I guess given the capital position you have, you can retain some more and maybe be a bit more opportunistic as you go over the course of the year, fair to say.

[David Clare, executive]

Yes, it's very program by program, right, the size of the program, the line of business, the profitability and the history we have, all informs that. But I can't say unequivocally, having more history, more data, a larger capital base, and a pretty healthy pricing environment, all gives us confidence around those decisions.

[Jeff Fenwick, analyst]

And then maybe a question on ratings agency movement here. So you did highlight you had your outlook upgraded. Maybe a bit of a comment there on how that benefits you going forward? And I guess maybe one other area we could think about here is your size rating. We haven't talked about that in a while, but what's the next window for that maybe to take place as the capital base of the business continues to scale?

[David Clare, executive]

Yes. It is nice to see that AM Best outlook stabilized. It will be more impactful for our U.S. business. That's an area where certainly from a fronting perspective, a U.S. surety perspective, a U.S. corporate insurance perspective, that rating outlook and size matters quite a bit. So we should see higher quality of submissions, more volume of submissions as that's now rationalized. That's just a strong positive across the board from a market-facing standpoint. So we're excited to have that now rationalize.

You're right, we haven't really talked about size categories in some time. The last size category we achieved with size 9, which is over USD 250 million in equity capital. We're now approaching the next size category, which is size 10 and that's USD 500 million in consolidated equity capital. So there are not many competitors, especially in the U.S. fronting space at that size category. There is not that many candidly at size 9, and there's fewer at size 10.

So as we look to achieve and step up in that category, I think it will be impactful again in the types of counterparties and the types of partners we can target in the U.S.

[Operator]

Our next question comes from the line of Stephen Boland with Raymond James.

[Stephen Boland, analyst]

Just, I guess, a question around the Canadian fronting. Continue to see good growth in the premiums. Maybe, David, if you could just talk about where can this business scale to what size of programs, maybe how many programs you're in right now in Canada and where you think you can take this business over the next couple of years?

[David Clare, executive]

Thanks, Stephen. It's always tough to estimate the addressable market in this business because it's really a function of appetite and partnerships who want to access this Canadian space. We do still think there's healthy growth available in this space, and we continue to see that coming through.

This business is a little bit less MGA-driven than, let's say, our U.S. business. So it's a bit nuanced to talk about partners or programs. But if you look across our portfolio, there's probably 40 to 50 different types of business lines, not business lines, but types of relationships that we have in this Canadian fronting practice.

So it is quite diversified, but at a little bit different setup than our U.S. business. The trajectory of this business, again, is tough to talk to in aggregate, but we do continue to believe on a bottoms-up basis. There's a good trajectory of growth here. And those are the rates that you've heard us talk about in quarters past.

[Stephen Boland, analyst]

Is there any lines of business that you're avoiding? Like obviously, everyone's trying to void U.S. property. Is there anything like East Coast property or West Coast property? Like what lines are you kind of trying to avoid right now in Canada?

[David Clare, executive]

Yes. Our lines of business that we write are probably about 50% property, 50% casualty. The lines of business we avoid candidly are the lines of business that we'll underwrite directly. So we don't want to cannibalize or compete with our primary underwriting practice. And as you know, we're very niche specialty commercial underwriters. So we're generally staying away from, for example, fronting surety products or fronting corporate insurance products. We'll be more likely to front for the lines of business that we don't write. And that does inform how we access the market.

[Operator]

Our next question comes from the line of Jaeme Gloyn with National Bank.

[Jaeme Gloyn, analyst]

Yes. Just wanted to dig in on the surety growth. Quite impressive in the quarter, in the MD&A kind of talked about higher construction values. But maybe if you could provide a little bit more color in terms of breaking out the contribution from that driver and the contribution from the U.S. and then potentially, I guess, unit growth or new clients that are coming on board?

[David Clare, executive]

Yes. The U.S. business in the quarter added about $8 million of premium. So we wrote CAD 8 million in that U.S. practice. So it's not huge yet, but it is increasing very, very nicely, and we're very proud of how that team is building out. .

The other factors that we talk about candidly have been a combination of strong navigation of the team in this market. We've continued to see a benefit from the integration of that sovereign acquisition. So this is just giving us more touch points across the brokerage community, more market share in our established lines.

And that's all being written with the backdrop of an inflationary environment, higher construction value. So it's tough, James, for me to segment exactly the contribution from, let's say, higher construction values versus better market share, but we are seeing candidly contribution from both of those. So our practice today, it continues to be a leader in that Canadian surety market, and we're keen to grow that position, but it's firing across a lot of cylinders right now.

[Jaeme Gloyn, analyst]

Okay. Understood. On the corporate insurance growth profile, a couple of quarters in a row now of down 3%, 4%. You've -- in previous questions, you sort of described some of the factors that are driving that. Do you get the sense that this has stabilized at these levels? Or do you -- would you think to see some more headwinds in the corporate insurance profile?

[David Clare, executive]

Yes. I think corporate insurance will -- we've talked about will likely be our lowest growing line of business in Canada. Part of that's candidly the strength of growth we've seen in the last 3 years, right? There's been a huge beneficiary of a very hard market. But anecdotally, what you're seeing in those aggregate numbers is probably not as indicative of what we're seeing on the front line.

So there's some obfuscation of those top line numbers by a partnership that's relatively highly reinsured. That partnership, given the nuance of the business line that it's in, it's seen a little bit less momentum in its top line than others and candidly, a little bit more reduction in the top line. The core business lines, the business lines that really drive the bottom line and the underwriting income of the organization, those are continuing to see that low single-digit growth in. I think that is likely where we sit for the remainder of the year, but this market is evolving. So we'll keep you posted as we see any evolution there.

[Jaeme Gloyn, analyst]

Okay. Understood. Shifting to the U.S. It looks like one new program was added in the quarter, I believe, if I have that right. Maybe if you could just sort of talk about how you're thinking about onboarding new programs and new clients in the U.S. business? Obviously, '23, you mentioned transition year. Focus was on high grading the portfolio. Are you in a position now, you feel comfortable where you can increase that program count more materially? And how are you feeling about that outlook?

[David Clare, executive]

Yes. I think we've seen a marked change in caliber and a number of submissions in the last couple of months. So what we saw last year was, as there's a real strong internal focus at Trisura as we navigated 2023, as we optimize what we viewed as the right portfolio for us going forward.

You're seeing some of the benefit of that now in the operating results. And as you continue that navigation, we've seen now some external factors that are driving a little bit higher quality submissions to Trisura, which makes us excited about that going forward.

We continue to have the same sort of target for program adds. We want to see average about 10 program adds a year. That's on a gross basis. So sometimes you'll have a few program reductions as a result of not achieving scale or appetite decisions, but we are feeling pretty confident in that outlook for this year. And certainly, AM Best outlook rationalizing this new higher equity base, this position of Trisura as a permanent capital vehicle in that market. All of those are real differentiators for us, and I think it bodes well for the trajectory of that business.

[Jaeme Gloyn, analyst]

So in that vein, just listening to some of the U.S. peers that play in the E&S lines. It sounds like competition is increasing, and it's increasing from the MGAs. And that potentially maybe on the pricing side. So I guess the question for you is how much can you influence your MGAs. How involved in the pricing and distribution of the programs is Trisura. Maybe talk through some of those industry dynamics and what you're seeing from your relationships?

[David Clare, executive]

Yes. I would say from our side, at a high level, we're still seeing fairly healthy pricing trends in the U.S. E&S market. This is obviously a nuanced answer because this differentiates line by line. But in aggregate, if we look across, let's say, our portfolio or the industry as a whole, we're still seeing pretty healthy trends in that market. It's worth remembering the E&S market today is of a materially different size than it was even 5 years ago.

So the complexity, risk that these groups are putting on, the permanence of this part of the market and participating in this industry has changed. And I think it's changed fairly permanently. Our relationships with our MGAs are -- we view as a very much partnership-based relationship, and we are stewards of both our own capital and reinsurance capital. And so we care very much about what those pricing environments and trends look like. So we strive to partner with groups who are rational and intelligent about how they price that business. And we'll be very vocal about situations or examples where we feel the trend is not in the direction that we want. We haven't seen candidly, behavior that we don't agree with in our MGAs. And we feel very good about the partnerships that we have going forward.

[Jaeme Gloyn, analyst]

Okay. Great. Last one then for me. Just looking at the U.S. business still in terms of leverage, premiums to capital, running at 6.2% this quarter, kind of flat quarter-over-quarter, a little bit down. But how should we be thinking about leverage in the U.S. business is around 6% to target? Would you take it up closer to 7%, obviously, the AM Best rating moving it to stable or the outlook -- moving the outlook to stable, does that have an impact on your ability to put a little bit more leverage on? Just some comments around that.

[David Clare, executive]

Yes. I think we're generally comfortable in that 6% range. So it doesn't have to be exactly 6%, but in and around that 6% range. It's worth noting we're now starting to write some primary lines of business on those platforms. So those reported leverage ratios may start to move around a little bit, but we're feeling very comfortable with the capital base in that U.S. platform. We're also acknowledging that we've got quite a lot of excess capital at the holding company as well as a pretty healthy -- a pretty healthy debt-to-capital ratio. So the levers we have to pull here are quite a bit larger than they've been in the past and quite a bit more varied.

So I think a short way to answering your question is we feel very comfortable with the leverage in the U.S. that may bounce around. But what we've got now is quite a few levers at the holding company to sustain and navigate that growth.

[Operator]

[Operator Instructions] Our next question comes from the line of Tom MacKinnon with BMO Capital.

[Tom MacKinnon, analyst]

My question is with respect to fronting fee written as a percentage of the ceded premium. Historically, if you look back like prior to 2019, that was in the high 4s -- in 2020, 2021, 2022, well above 5% kind of maybe more in the heyday of the E&S market. 2023, you can't really look at it because of all the noise associated with the ceded premium level as you bought kind of coverages. But it's 4.7% now. So maybe you could talk about what you're seeing in the market. Is it -- it sounds like it's becoming more competitive from that perspective, i.e., you're just getting lower fees for the business that you're ceding off now. Or is it a function of a mix as well? How should we be thinking about that trend because it is a good driver of the fee income that you're going to be getting?

[David Clare, executive]

Yes. I would say, Tom, we're seeing competition, but it is not arriving in the form of lower fronting fees. I think there's a cost of capital for this business and to acknowledge -- and acknowledged fee rate that is required to run this business.

Most of our programs, if not all of our programs are at 5% or above. Where you see that reported rate coming in a little bit below is that we continue to have some reinsurance purchases at the corporate level that lower that reported figure. So in those early years, our corporate reinsurance programs were a little bit less significant. That allows you to probably have a little bit more visibility on the actual program by program, fronting fees. Those economics have not changed for us. So there's been a little bit larger our reinsurance purchases, which continue to amortize through the book. Most of those relate to ramping to corporate reinsurance programs. Those are sort of [ balanced ] centers of protection for us. But I don't want to imply in any way that competition that we're seeing or fronting fees that we require are moving down. Those are pretty stable in our book.

[Tom MacKinnon, analyst]

Is the 4.7 that we had in the quarter, a good way of thinking about what this could look at going forward? Or could it be a little bit lower?

[David Clare, executive]

Yes, I think that's a good rate. A caveat always being the timing of certain reinsurance purchases can move that around as up and down quarter-to-quarter. But I think if you're looking at your modeling, that 4.7% going forward is a good baseline.

[Tom MacKinnon, analyst]

And then just one other question. Am I correct in saying that the cost of the build out in the U.S. to be away from solely being a fronting model is borne by the Canadian operations. Am I correct in that statement?

[David Clare, executive]

Yes. The vast majority of that is borne by the Canadian operation. And you're seeing that -- you're seeing that already, right? Those costs are being borne by Canada. And what's nice is Canada continues to put up very, very strong results in the context of those investments. So you're not seeing that as much in the U.S. We have a little bit of shared resources across the organization, but the materiality in the vast majority of costs continue to be borne in the Canadian entity because those primary lines are run out of the Canadian group.

[Tom MacKinnon, analyst]

And is it -- how much does it skew say, the combined ratio in Canada materially?

[David Clare, executive]

It's tough to stay off hand. I'd probably say it's not hugely material, but it's -- there's an impact there that is not accretive, if I can say it that way.

[Operator]

That concludes today's question-and-answer session. I'd like to turn the call back to David Clare for closing remarks.

[David Clare, executive]

Thanks very much, everyone, for joining. And again, as always, if you have any questions after this call, don't hesitate to reach out.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.